Types of Forex Charts and How to Read Them
A chart, or more specifically, a price chart, happens to be the first tool that every trader using technical analysis needs to learn. The chart is simply a visual representation of a currency pair’s price over a set period of time. A price chart depicts changes in supply and demand. A chart aggregates every buy and sell transaction of that financial instrument (in our case, currency pairs) at any given moment. A chart incorporates all known news, as well as traders’ current expectations of future news. When the future arrives and the reality is different from these expectations, prices shift again.
Line chart – A simple line chart draws a line from one closing price to the next closing price.
When strung together with a line, we can see the general price movement of a currency pair over a period of time. The line chart also shows trends the best, which is simply the slope of the line.
Bar chart – A bar chart is a little more complex. It shows the opening and closing prices, as well as the highs and lows. Bar charts help a trader see the price range of each period. The bottom of the vertical bar indicates the lowest traded price for that time period, while the top of the bar indicates the highest price paid. The vertical bar itself indicates the currency pair’s trading range as a whole. As the price fluctuations become increasingly volatile, the bars become larger. As the price fluctuations become quieter, the bars become smaller. The fluctuation in bar size is because of the way each bar is constructed. The vertical height of the bar reflects the range between the high and the low price of the bar period. The price bar also records the period’s opening and closing prices with attached horizontal lines. The horizontal hash on the left side of the bar is the opening price, and the horizontal hash on the right side is the closing price.
Candlestick charts show the same price information as a bar chart but in a prettier, graphic format. Candlestick bars still indicate the high-to-low range with a vertical line. However, in candlestick charting, the larger block (or body) in the middle indicates the range between the opening and closing prices. Candlesticks help visualize bullish or bearish sentiment by displaying “bodies” using different colors. Traditionally, if the block in the middle is filled or colored in, then the currency pair closed LOWER than it opened. In the following example, the ‘filled color’ is black. For our ‘filled’ blocks, the top of the block is the opening price, and the bottom of the block is the closing price. If the closing price is higher than the opening price, then the block in the middle will be “white” or hollow or unfilled.