Forex charts are the very first thing you need to learn in order to start trading. They’re a Forex trader’s most essential tool, as the majority of analysis and exchange rate forecasting is done on the basis of Forex charts. In this article we’ll learn what Forex charts are, how to read currency quotes, what timeframes are, and what types of Forex charts exist.
How to read a currency quote
You’ve probably noticed how currencies are quoted at money changers or in the news. There are always two currencies in a currency quote, called a currency pair, where the first currency is called the base currency, and the second the counter currency. A currency quote simply tells us the price of the base currency, expressed in terms of the counter currency. Let’s take a look at an example to get a better understanding:
The EURUSD currency pair is one of the most traded pairs on the Forex market. In this example, the euro (EUR) is the base currency, and the US dollar (USD) is the counter currency. A quote of EURUSD = 1.1850 means that in order to buy one euro, you need to pay 1.1850 USD, i.e., one euro costs 1.1850 USD.
Once you know the price of one euro in US dollars, it’s simple to calculate the price of one US dollar in euros. Simply calculate the reciprocal value, by dividing 1 by the EURUSD quote:
USDEUR = 1 / 1.1850 = 0.8439
In order to buy one US dollar at the current market rate, you need to pay 0.8439 EUR.
What is a Forex chart?
Now that you know what a currency quote is, how to read it, and how it’s calculated, let’s move on to Forex charts. A Forex chart is a graphical representation of currency quotes over a period of time. Forex charts are extremely important for Forex traders, as they reveal how currency pairs have performed over time.
The prices of currency pairs are usually charted with so-called “candlesticks”, which include the opening, high, low, and closing price for each period they represent. The height of the candlestick shows the trading range for that period (High-Low), while the “body” shows the distance between the opening and closing price.
The following picture shows what a daily candlestick chart on the EURUSD pair looks like. Note that each candlestick represents one trading day.
Forex charts are the basis for a discipline called “technical analysis”, which aims to anticipate future exchange rate movements by analysing historical price data, recurring chart patterns, etc.
Every Forex chart represents one currency pair, such as the EURUSD chart, USDJPY (US dollar/Japanese yen) chart, or GBPUSD (British pound/US dollar) chart.
How do Forex Chart Timeframes Work?
In the example above, we showed you a daily candlestick Forex chart. However, charts can also be represented on other timeframes, which can be as short as one minute and as long as a year. However, the most popular timeframes are the 5-minute, 15-minute, 30-minute, 1-hour, 4-hour, daily, weekly, and monthly ones.
Simply said, the timeframe of the chart determines which data the candlesticks use for their graphical representation. While a 5-minute chart shows candlesticks that include the opening, high, low, and closing price over a 5-minute period, the monthly chart’s candlestick includes the opening, high, low, and closing price over a period of one month. Shorter timeframes basically “zoom in” the price action of longer timeframes. The following chart shows how the 4-hour timeframe zooms into the daily.
It’s important to note that shorter timeframes show more market noise than longer timeframes, and are basically more difficult to trade. Beginners make the typical mistake of trading on very short timeframes, such as the 1-minute one. As timeframes this short are of little use for most types of analysis, it is best to start with longer ones.
Types of Forex charts
Up until now, we’ve mostly talked about candlestick charts. The reason for this is that candlestick charts are the most popular type of chart among Forex traders, as they represent the price action in an aesthetically pleasing way, which makes it easy to analyse the chart, identify chart patterns, and so on.
However, there are also other types of charts, such as the line chart, bar chart, or point & figure chart. Let’s take a look at them.
The line chart is the most basic of all chart types. It simply connects the closing prices of periods with a line, and doesn’t take into account the opening, high, or low price as bar or candlestick charts do.
However, the simplicity of line charts is also their advantage. If you’re interested to see just the closing prices of a currency pair, the peaks and throughs of trends, or simply want to see the performance over a longer period of time, you can use line charts without the distractions that other types of charts have.
A bar chart more resembles a candlestick chart, with the main difference being that a bar chart has no solid body like a candlestick. It shows the opening, high, low, and closing price of a period. The vertical bar shows the trading range of the pair (from low to high), the left dash shows the opening price and the right dash the closing price. The following chart is a bar chart. Notice both the similarities and differences compared to candlestick charts.
Point & Figure Chart
A point & figure chart doesn’t take into account the passage of time. It consists of a series of stacked Xs and Os that are placed into columns. If the price rises by a predetermined level (called the box size), an X will be added to the columns, and if the price falls by the same level, an O will be added to the following column. This chart type is rarely used in Forex trading. A point & figure chart is shown on the next picture.
In this article, we’ve covered the basics of Forex charts and how exchange rates are presented in graphical form on the Forex market. You need to fully understand all the concepts presented above before you go on with your learning, because this is the basis of all further Forex learning.