What is a forex chart?
A forex chart also referred to as a price chart, is a visual (graphical) representation, indicating how the exchange rate of a currency pair has changed over various periods of time, usually varying from a few seconds to a week. The time frames could even stretch over longer time frames, such as a few years, depending on the charting system.
The utilisation of forex charts
Price charts are powerful tools for executing technical analysis because they allow analysts to predict future price movements based on past performances of the exchange rates of currency pairs.
Learning how to analyse (read) forex charts is one of the first steps a forex trader will need to take when embarking on forex trading.
On forex charts, the vertical y-axis indicates the price scale, while the horizontal x-axis shows the time scale. Typically, prices are plotted from left to right across the x-axis.
Usually, the price can be presented as a line, a bar, or a candlestick.
The main types of forex charts
Typically, forex charts are categorised into three main types of price charts, namely:
- Line charts.
- Bar charts also called HLOC charts.
- Candlestick charts.
Line charts
Line charts are the most basic type of forex charts used by forex traders.
A line chart is created by plotting the closing prices for specific trading periods such as an hour or a trading day, drawing a line from one closing price to another.
The drawn line enables analysts and traders to identify the general price movement of a currency pair over a certain time frame.
Advantages of a line chart
- By indicating the closing price for each time frame, a line chart simplifies the way a price is displayed. This makes it easy for traders to follow price trends by visually comparing the closing price from one trading period to the next one.
- Line charts are useful to identify ‘big picture’ trends of price movements of currency pairs.
- Enable forex traders to assess long-term trends without all the additional data provided by other types of forex charts.
Disadvantages of line charts
- The line chart provides the least amount of information of the three types of forex charts.
- It lacks in-depth information about price behaviour, such as highs, lows and price fluctuations within a given trading period.
Example of a line chart
Bar charts
Bar charts enable forex traders to see the price range of a currency pair of each particular trading period. Put differently, a bar chart allows traders to see the price movement (up and down) of a currency pair during a trading period. For example, on a daily bar chart, each vertical bar shows the result of one day’s trading.
Bar charts are also called HLOC charts because they indicate the high (H) price, the low (L) price, the open (O) price, and the close (C) price for a particular currency pair.
A bar chart consists of a series of bars where a bar represents a certain length of time, such as one hour, a trading day, or a week of trading.
Bars explained
A bar in forex trading is explained in light of the following illustration.
- The high (H) price is indicated by the top of the vertical line.
- The low (L) price is defined by the lowest point of the vertical line.
- The open (O) price is represented by the little horizontal line on the left.
- The close (C) price is indicated by the little horizontal line on the right.
- Typically, the bars are either green or red in colour.
- Green bars, called increasing or bullish HLOC bars, indicate that a currency pair’s price increased over the given trading period, closing at a higher price than it opened. Green bars are also referred to as buyer bars, indicating that buyers are in control of the market.
- Red bars, called decreasing or bearish HLOC bars, are indications that the closing price of a currency pair is lower than the opening price. They are also called seller bars, showing that sellers are in charge of the market.
- The height of the vertical bar indicates the trading range between the high and low prices of a currency pair during the bar period.
- The size of a bar may increase or decrease from one bar to the next one. The sizes of bars may also change over a range of bars.
- The more volatile the price fluctuations become, the larger the bars.
- Contrarily, quieter price fluctuations give rise to smaller bars.
Example of the bar chart
Candlestick charts
Candlestick charts originated in the 18th century in Japan when Japanese rice traders started to use them to track the market prices of rice.
A candlestick chart enhances a bar chart (HLOC chart) in the sense that it presents the information of a bar chart in candlestick patterns, making it a more visual, easier-to-read, format.
Hence, it is the most preferred forex chart by forex traders and analysts because it presents price information in a more visually appealing format. In addition, their popularity can be ascribed to the variety of price action patterns provided by them.
Each candlestick indicates the price movement of a currency pair over the time period selected by a forex trader. For instance, in a 30-minute time frame, each candlestick will indicate how prices moved over a 30-minute period.
Candlestick bars explained
A candlestick chart provides a forex trader with the open, high, low, and close prices of a currency pair during a specific trading period in the form of a candlestick bar. Contrarily to a bar on a bar chart, a candlestick bar also composed of a wick and a body, displaying the price movements of a particular currency pair.
The illustration below is used to explain a candlestick bar.
The body of a candlestick
Contrary to an HLOC bar, a candlestick bar has a larger block, called the body, in the middle, indicating the difference between the opening and closing prices.
If the price of a currency pair increases during a trading period, the opening price is indicated at the bottom of the body of the candlestick bar and the closing price at the top of the body.
Vice versa, if a currency pair is in a downward trend, the opening price is at the top of the body and the closing price at the bottom of the body.
Generally, the longer the body of the candlestick, the stronger the buying or selling pressure. By contrast, short candlesticks are indications of limited price movement, signalling consolidation of the price.
Traditionally, the upward and downward price movements are indicated as follows:
- If a currency pair moves up in price over the specific trading period, the body will be white or unfilled.
- If a currency pair’s price is in a downward trend, the body is coloured in black.
Nowadays, the bodies of candlestick bars are respectively coloured in green and red to distinguish between increases and decreases in the prices of currency pairs.
- A green coloured candlestick body represents an upward price movement. A candlestick bar with a green body is referred to as a bullish candlestick or buyer candle, indicating that buyers’ sentiment prevailed over sellers’ sentiment during the given trading period.
- A candlestick bar with a red body, called a bearish candlestick or seller candle, indicates a decrease in the price of a currency pair with the price closing below the opening price. A bearish candlestick signals that the sellers were in command of the specific time frame of trading.
The length of the body of a candlestick is also an indication of the comprehensiveness of the selling or buying pressure in the market. Long green body candlesticks may signal considerable buying pressure, while candlesticks with long red bodies may indicate substantial selling pressure. (See illustration below.)
The wicks of a candlestick
A candlestick bar has lines that appear above and below its body. The lines are called wicks or shadows. Sometimes, the shadow below the candlestick body is also referred to as the tail.
A wick indicates price action outside the candlestick body where the price of a currency pair has fluctuated relative to the opening and closing prices.
Basically, the length of a candle wick (shadow) shows the high and low of price movement within a given trading period. In other words, upper shadows indicate the high price of a trading session, and the lower shadows the low price of the session.
When the wick is long, it is an indication that prices have cut across the levels of the opening and closing prices. Conversely, a short wick signals that trading was mostly executed between the open and close prices of the specific trading period.
Candlesticks comprising a long (tall) upper shadow (wick) and short lower shadow indicate that buyers mostly controlled the trading session, affecting increasing prices. However, sellers ultimately pushed prices down from their high levels, which is a bearish signal.
Contrariwise, candlesticks that have a long (tall) lower wick (shadow) and short upper wick signal that sellers predominated the specific trading session, driving prices lower. Nonetheless, buyers came back strongly to push prices higher by the end of the trading session, which is a bullish signal.
Furthermore, candlesticks consisting of a long shadow but a short body, signal significant price pressure in one direction, but that the price was forced back before the close of the given trading session. For instance, in the illustration below, the long upper shadow in the bearish (red) candlestick indicates there was downward price pressure but it was forced back. Conversely, the long lower shadow in the bullish (green) candlestick shows upward price pressure occurred, but it was restrained and pushed back.
Doji candlestick patterns
A Doji candlestick is formed when the price of a currency pair opens and closes at practically the same level within the designated period of time of the forex chart on which the Doji occurs. (Doji means ‘same [time]’ in the Japanese language.)
A Doji candlestick is considered to be a transitional formation, signalling indecision in the market, where neither buyers nor sellers are able to establish sufficient control over the direction of price movements.
By itself, a Doji is a neutral pattern, neither bullish nor bearish. However, a Doji candlestick analysed in light of preceding candles (bullish or bearish), can enable traders to determine a potential change in price movement. (Keep in mind, a potential change in price direction is not necessarily a guaranteed change in direction.)
A Doji candlestick is dominated by wicks (shadows) with a body that is nothing but a line, indicating that the opening and closing prices of a currency pair are virtually equal.
Different types of Doji candlestick patterns
Depending on the length of its shadows, a Doji candlestick can be classified into different types of patterns such as the Standard Doji, the Long-Legged Doji, the Dragonfly Doji, the Gravestone Doji, and the 4 Price Doji.
Standard Doji
A Standard Doji also referred to as a Neutral Doji, is indicated with a black cross. This type of Doji does not represent much on its own and is basically a neutral pattern. The price action prior to the Doji must be taken into consideration to understand what the Doji signifies.
Long-Legged Doji
The Long-Legged Doji shows a greater extension of the vertical lines above and below the horizontal line. This is an indication that, during the trading period of the candle, the price significantly increases and decreases but eventually closed at the same level as the opening price. This Doji pattern indicates indecisiveness among buyers and sellers.
Dragonfly Doji
The Dragonfly Doji can occur at either the top of an uptrend or at the bottom of a downtrend, indicating the potential for a reversal in price direction.
The Dragonfly Doji represents a ‘T’ shape. The absence of a line above the horizontal bar signals that prices did not exceed the opening price. A distinctly extended lower wick on a Dragonfly Doji at the bottom of a bearish trend is a significantly bullish signal.
Gravestone Doji
The Gravestone Doji appears when the price of a currency pair opens and closes at the lower end of the trading range. After the opening, buyers were able to increase the price but by closing could not sustain the bullish momentum.
This type of Doji is the opposite of the Dragonfly Doji and signals a bearish signal when it appears at the top of an upward price movement.
4 Price Doji
The 4 Price Doji is indicated by a horizontal line with no vertical line above or below the horizontal one. This is a unique candlestick pattern, indicating unparalleled indecision by traders since all 4 prices (high, low, open, and close) represented in the candle are equal.
Advantages of candlestick charts
- Candlestick charts are easy to interpret and understand
The colour and length of a candlestick enable forex traders to determine immediately the price trend of a currency pair – upwards (bullish) or downwards (bearish).
- Useful tool to identify market turning points
Candlestick charts display specific turning points – reversals from an uptrend to a downtrend (bearish reversal pattern) or a downtrend to an uptrend (bullish reversal pattern). These reversal patterns are not displayed on other charts.
- Enable traders to confirm the direction of the market more easily
The colour and shape of a candlestick allow traders to determine if an upward trend is part of bullish momentum or only a bearish spike.
Some disadvantages of candlestick charts
- A candlestick pattern is a lagging indicator
Most forex traders enter a trade after the close of a candle. This has the disadvantage that the trade is executed only based on previous results, compelling traders to estimate the next price or speculate on the next price movements.
- A candlestick can look dissimilar on every time frame
A candlestick pattern can appear different on different time frames, making it difficult to trust the message of a candlestick 100 percent when multiple time frames are used, causing doubt for traders when executing trades.
In conclusion
Analysing forex charts provides enough opportunity for forex traders to trade more effectively. Traders are enabled to usually determine the right time to enter and exit a trade (buy and sell). In addition, being able to recognise price trends and early trade signals are some of the biggest advantages of forex chart analysis.
Considering which type of forex chart is the most appropriate one, choose the one you feel comfortable with. However, considering all the advantages and possibilities, most forex traders use the candlestick chart.
Note: This article does not intend to provide investment or trading advice. Its aim is solely informative.
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