Despite the popular belief, there are very few traders who really know how to read forex charts. Sure, plenty of people know how to interpret them, and those who do not can always rely on someone else crunching their numbers for them – at their own peril, of course.However, forex charts analysis is not something that should be left to other people.
After all, it is not their dime being wasted, is it? Plus, where is the fun in having your forex charts explained to you every single time? Well, maybe just this once.First things first, forex charts are essentially summaries of every single piece of information that is statistically relevant for an average trader.
It pays off to have a visual representation of the situation in the field – or forex market, anyway. This is where forex charts come in. Now, learning how to read all those forex charts is no easy task. So, let us look at some basic types of forex charts first.
Types of FX Charts
To sum it up, there are three types of charts an average trader will encounter in his or her forex trading career. Others are essentially variations of these basic types. If a new and superior type pops up, there will be a special article on it in due time. In the meantime, all those budding forex traders better learn how to read the three basic types of forex charts that exist at this point:
- line charts
- bar charts
- candlestick charts
The most rudimentary type of forex charts is just a line that connects the dots representing closing prices of a particular financial instrument – currencies, in this case. The thing about forex charts is that they all show the same data cluster. The difference is the format in which it is done. The aforementioned line charts use a single line, and it is relatively easy to deduce the general direction of a trend. However, it is not enough for some people. After all, speed and transparency are the key things when it comes to forex markets.
While learning how to read line forex charts is the simplest process in comparison to the other two types, actually reading the darn things is potentially the riskiest and time-consuming of them all. While it shows almost as much as any other type of forex charts, the way in which this is done leaves a lot to be desired. Otherwise, bar charts would have never been invented.
Learning to read bar forex charts takes a bit more time and practice, but the process is rewarded with additional reaction time, as this process is generally much faster than with regular line charts. The reason is that bar charts feature bars, whose size, color and location all convey a certain meaning. Even though learning about those meanings and their interpretation is troublesome to say the least, once a degree of mastery has been achieved, trades will be smoother than ever. In other words, by the time one forex trader has finished with his or her line chart, the one with a bar chart will have made their trades already and move on to other ventures.
Needless to say, not all bar charts are equal. Some feature way more details than others, and it is up to the trader to pick the one that suits their trading style the best. Still, there are some traders that find this level of details intimidating, as they are unable to keep up. Those people might be better off doing something else with their lives, or they need to learn how to read forex charts faster. Or, they just need a bar chart with less detail. Some of them omit little hashes on the side, but then traders would have to manually look up opening and closing prices. The length of the bars is an indicator of their trading range. The longer the bar, the bigger the trading range and vice versa.
Who needs boring rectangles when they can learn how to read candlestick forex charts? Even their name is much more appealing, and mysterious. Their name does not come from a crime novel or anything like that. Their unabbreviated name is "Japanese candlestick charts", and they have been around for much longer than one might expect. Their first recorded use dates back to 18th century Japan, and their application was originally limited to rice trading. After their debut on modern financial markets, they have taken them by the storm.
Owing their name to a physical similarity to a type of a candlestick traditionally used in Japan, these charts offer an even simpler way to represent various data parameters, including opening prices, closing prices, highs and lows. Of course, this takes some time getting used to, especially if a trader has already invested a considerable amount of time and resources into learning how to read other forex charts, but rookies are better off learning about these from the start.
While there is little empirical data to indicate candlestick charts are superior to other types of charts, they have attained a certain reputation that makes them extremely popular these days. This means a lot of tutorials, articles and analysis are likely going to feature them in one form or another. Learning how to read this type of forex charts is definitely worth the effort. If nothing else, even learning about them and the meaning they convey in the broadest possible terms could make a difference in the long run.
Other than their popularity and visual appeal, there are few reasons why this type of forex charts merits the attention of a prospective trader. The plus side is that their apparent similarity to bar charts. Negative transfer is the only thing experienced traders need to worry about. Well, that and the color pattern, but we will come to that soon enough.
The main body of an individual segment in a candlestick chart is similar to a segment in a bar chart. Both are rectangular in shape, and showcase basically the same date in a slightly different package. One notable feature is that some of these segments are 'filled', while others are 'hollow', depending on whether the closing price is higher than the opening one or not. In reality, this means some "candlesticks" will be in one color and others will be in a different color. In other words, some of them will be red, and others will be either green or blue. Or black and white, it does not really matter.
What could matter, however, is the fact that in some parts of East Asia they use the opposite color patterns than the rest of us. This could cause some serious confusion if traders are not careful. Usually, a red "stick" indicates lower closing price and blue or green means the closing price is higher than the opening price.
This is especially the case with live forex charts, as these are done in real time and every second counts. Lately, even bar charts have adopted this approach, so the race in popularity continues. Which type of forex charts will win? The one that offers the highest speed and greatest reliability! One thing is for certain: none of these types of charts is letting up and they all have a certain role to fill.
What makes learning how to read bar and candlestick forex charts so valuable is that this will enable a trader to gauge the situation on the market with a single glance. Of course, this also leaves some room for error, so maybe a little more attention would not hurt either. If green or blue dominate the chart, the trend is upward, and if most of it is red, the trend is going down. On a line chart, things are even simpler, as the line itself shows the direction of price movement.
A Word of Caution
While learning how to read forex charts is important, it should be noted that it is by no means enough for someone to become a full-fledged trader. In fact, relying solely on forex charts can prove to be a downfall for any trader, and even if they are read properly. Why? They only represent historic data. By treating these charts as a foolproof way to predict the future, traders are playing a dangerous game.
Those who win, get to figure out the key moments in the price movement and get in on the action before it is too late. However, as most critics would point out, by the time traders receive and interpret these charts, the trend is already underway. And unless they close positions on time they may pay dearly for their delay.