Forex trading requires sufficient practice and learning. A basic skill needed for this type of trading is understanding the forex charts (technical analysis). Most forex traders rely on real-time charts to keep themselves informed of the ongoing market situation and trade according to how the market moves. It's a practice that makes online trading a whole lot easier. However, comprehension and interpretation of forex charts requires skills and experience.
Significance of Forex Charts
Visual chart patterns enable the trader to remain focused on price movement without evaluating the reasons responsible for movement of the price (fundamental analysis).
The quick emergence of patterns in price movements enables the trader to watch not just the news, but also the reaction of other traders to news that is released.
Trends are measurable and cyclical. A forex trader who understands the imputed information in price movements can evaluate trends from the previous periods (weeks, months, or years) and trade accordingly.
Line Chart
Line charts are perhaps the simplest of forex charts, focusing on the closing prices of any given currency. (Note that forex values are always quoted in pairs, such as GBP/USD or USD/JPY. In every forex exchange transaction, you are simultaneously buying one (base) currency and selling another (quote currency)). You just need to draw a straight line from one closing price to another to understand the movement in price of a given currency over a defined period of time.
Bar Chart
Though slightly more difficult to read and comprehend than the line chart, a bar chart displays a more precise representation of price movements. Apart from the closing and opening prices, it also shows the low and high price of the currency pair you may be trading in. It is comprised of vertical lines, each line showing the price variation (lowest and highest prices) over a unit of time, from ticks (individual trades) to weeks, or more. The corresponding forex charts have tick marks, projecting out from each end of the line to indicate the opening price. For example, if it were a daily bar chart, it would indicate the opening price for that day on the left while the closing price for that time period would be shown on the right. The bars are usually shown in different colors to show if prices went up or down in that period.
Candlestick Chart
Candlestick price charts were developed by Japanese rice traders over 150 years ago. This kind of chart is as accurate as the bar chart but displays information in a more helpful manner. Many traders appreciate its convenient patterns that facilitate estimation of trends and likely changes in prices. This chart combines a line chart and a bar chart, with each bar representing all the four significant pieces of information for any chosen day: the open, the close, the high, and the low.
The hollow or filled portion of the candlestick is called "the body" (also referred to as "the real body"). The long thin lines above and below the body represent the high/low range and are called "shadows" (also referred to as "wicks" and "tails"). The high is marked by the top of the upper shadow and the low by the bottom of the lower shadow. If the stock closes higher than its opening price, a hollow candlestick is drawn with the bottom of the body representing the opening price and the top of the body representing the closing price. If the stock closes lower than its opening price, a filled candlestick is drawn with the top of the body representing the opening price and the bottom of the body representing the closing price.
Sample Sample forex charts are available on the internet for uploading for your personal training. Use these sample data sets to gain familiarity with real-life scenarios. Only after thorough preparation should you begin to use forex charts as a key analytic tool in your trading arsenal.
