To make successful trades, forex traders need specific tools. These tools keep clients up to date on current forex market events that may affect their trades, assist in protecting their funds from risks, and may provide a chance to increase their lot position while trading.
Some of these tools are required for profitable trades since they provide traders with a larger view of the market and aid in accurately forecasting currency pair movement. The forex chart is one of these tools.
Knowing how to read forex charts is vital in every trader’s arsenal, whether experienced or novice since it gives more precise and thorough information about the market than other trading tools. Here’s how to read forex charts.
Forex charts are essential for traders who prefer using technical analysis to decide their trading strategies. A forex chart is a price chart that allows a trader to get historical data for a currency pair to forecast its future price movements, particularly when paired with other technical analysis tools. It is a visual depiction of a currency pair’s movement over a specific time; therefore, any asset with price data may have a chart created for analysis purposes.
Most forex trading platforms provide many kinds of forex trading charts to their clients, as well as additional technical indicators such as moving averages, the relative strength index, and Bollinger Bands.
Do you use the 5-minute chart to trade? Or how about the daily chart? But why do time frames limit us?
Is it possible to visualise price data in different ways? Do they provide useful perspectives? Here are ten different sorts of price charts to satisfy your curiosity.
We use the same two trading sessions as examples for each chart type for easy comparison. The first chart depicts a definite trend, whereas the second depicts a trading range.
Before discussing various chart types, it must be clear that not every trading platform has all those charts to offer. But, some trading platforms compatible with mac offers the full range.
All illustrative chart images below were captured at the same time, demonstrating the same historical price movement, yet they all look very different. This shows us that each chart gives a different visual view of price movement although they are identical in data.
These three chart types are often plotted using a time base. It signifies that each data point on the graph is from a specific time period. For instance, if the time base is daily, each data point will represent each trading day’s price level(s). The charts below depict the 5-minute time period.
Price chart analysis started before technology could instantly transmit market (tick) data. It was not feasible to create charts using continuous price data. As a result, time-based charts have become the industry standard in technical analysis.
These three chart types, however, are not typically plotted using a time base. You may also plot them using a tick or volume base, as we’ll see in the next section.
The first is a forex line chart, which displays the various closing prices of currency pairs. It represents an asset’s several closing price points, which are connected to create a continuous line.
Line charts are the easiest to read and are useful for recognising trends or viewing “the big picture.” However, since it just displays the various closing prices, it does not offer much information about the currency pair’s behaviour within that time period.
Line charts are the simplest to read since they create a straight line from one closing price to the next. They represent the rise and fall of a currency pair over time when strung together with a line.
A line chart does not provide much information since it just shows the closing price of each period. On the other hand, line charts are more aesthetically pleasing than other chart types.
As a result, they are ideal for:
We’ll need the following price data from each time period to create a bar chart:
We can build a price bar for each time period using this information. These four pieces of information explain why some traders refer to them as OHLC bar charts.
Bar charts are more complicated, but they are perfect for when you require more information. They display a currency pair’s opening and closing prices and highs and lows.
The lowest traded price for that period is shown at the bottom of a vertical bar, while the highest is shown at the top. The vertical bar indicates the total trading range of the currency pair.
The horizontal hash on the left side of a bar chart displays the opening price. A horizontal hash with the closing price is shown on the right.
A bar chart contains key facts that are critical for timing our transactions. We may study the relationship between the highs, lows, closes and opens of different bars using a bar chart to derive a variety of bar patterns. Bar patterns are useful timing tools that allow us to enter trades with low risk.
A candlestick has the same price data as a price bar. They are comparable except for a larger area between the opening and closing prices. The body of the candlestick, which is its defining feature, is the range between each candlestick’s opening and closing price.
Like other forex charts, Candlestick charts use a vertical line to indicate high-to-low trading ranges. They also employ blocks in the middle to indicate the price range between the opening and closing prices for the data-hungry among us.
If the middle block is filled or coloured, the currency pair closes at a lower price than it opened. An unfilled or differently coloured middle block indicates that the closing price exceeded the opening price.
It is hardly surprising that candlestick charts have been the preferred option for most traders. Aside from the ability to add various candlestick patterns to their arsenal, a candlestick chart does not dilute our ability to recognise bar patterns. A once-in-a-lifetime opportunity to have the best of both worlds.
Candlestick patterns rely heavily on the relationship between the bodies of the candlesticks. Candlestick charts make it simple to spot gaps between bodies. (A “star” candlestick has a body that does not overlap with the body of the preceding candlestick.)
A slight drawback of the candlestick chart is that candlesticks occupy considerably more space than OHLC bars. In most charting platforms, the most you can display with a candlestick chart is less than what you can with a bar chart.
Time might pass when there is no market activity. This complicates time-based price charts. Regardless of the level of market activity, the chart continues to print new bars or candlesticks over time. In such cases, time-based charts exaggerate the impression of market activity.
To solve this issue, some traders sample price data based on market activity (measured by volume or ticks) rather than time.
An important caveat applies to activity-based charts. Tick and volume charts from different data feeds cannot be ideally matched. This is due to your feed provider filtering market data and potential issues with your internet connection and computer performance. However, whether these issues outweigh the potential benefits of utilising tick and volume charts depends on your trading style and evaluation.
Be careful if you use volume or tick charts for spot forex trading. Because there is no centralised market for spot forex trading, the volume or tick data is limited to your liquidity pool, which is only available to your forex broker’s clients in some instances. As a result, the volume or tick data for the instrument you are trading may not reflect the entire market.
The number of contracts or shares traded is referred to as volume. It is the most straightforward technique for measuring market activity.
Instead of utilising OHLC data from fixed time periods, we use OHLC data from a volume block. As a result, on volume charts, each bar (candlestick) represents a fixed volume. A 233-volume chart, for instance, will display the OHLC of a 233-volume block for each bar.
Volume charts may be drawn in the style of a bar chart or a candlestick chart. Are you unsure about the setting to use for your volume chart?
Use the average volume of your regular trading time frame as a starting point. In the examples, we got 28000-volume charts by measuring the long-term average volume of 5-minute ES bars.
When market activity is low, a volume chart shows less sideways movement. As a result, it exhibits smoother price waves that are more conducive to trading. This is the main advantage of a volume chart.
In general, bar patterns and candlestick patterns may still be used in volume charts.
On the other hand, using a volume chart has major implications for traditional volume analysis.
A trader employing volume charts may no longer:
However, if you understand the underlying concepts of the techniques described above, you may adapt them for trading volume charts. Look for price thrusts with consecutive bars moving in the same direction, for instance, to detect high volume breakouts. The consecutive bars represent a high volume swing since each bar represents a fixed volume.
A basic volume overlay, of course, is useless. Consider utilising a time overlay to show how long it took to complete each volume bar.
A tick, in this context, refers to a transaction. The number of transactions, like the volume traded, measures the level of market activity. (Do not confuse this with the NYSE $TICK.) However, the volume of each transaction differs. As a result, a tick chart does not replicate a volume chart.
On a tick chart, each bar/candlestick represents the OHLC of a given number of ticks. The tick setting is determined by market volatility. When first starting off, measure the average range of your usual trading time frame. Then, change the tick setting to get a chart with similar volatility. Fibonacci numbers such as 144-tick and 233-tick are other popular choices for tick charts.
Short-term price patterns, like volume charts, are still effective with tick charts. The preceding example shows that tick charts function effectively in trending markets. Do not interpret this as a suggestion that tick charts offer the Holy Grail. Many trading methods perform like a charm in trending markets.
While volume analysis is possible with tick charts, the volume of each tick bar will have less variation since both tick and volume are measures of market activity.
The following five price charts are simply priced charts. They share a simple characteristic. They move only when the price moves. If you are a price action trader, you will love reviewing the following chart types.
However, out of the five chart types below, the range bar chart is the only one that is plotted without any regard for time.
The other four chart types (P&F, Renko, Kagi, and Three-Line Break) are built using a time-based chart that defines the chart update frequency. This is not surprising, considering traders built them back in the days when continuously updating price charts could not be done. We utilised a 5-minute bar chart as the underlying time-based chart for the examples below.
Hence, only the range bar chart shows the precise price action. The other four price charts filter out “noise” using different techniques and do not show precise market prices.
First, define a range. Every bar in a range bar chart will end when the range between its high and low equals the chosen range. As a result, each bar will have the same bar range. Furthermore, each bar will shut at either its high or low point.
Many bars and candlestick patterns disappear from a range chart as a result of the forced break after a fixed bar range. For instance, Harami patterns and inside bars will never show on a range bar chart. Of course, patterns such as ID/NR4 and NR7 go extinct.
Some patterns may still be seen in range charts, and the most prominent ones are:
A range chart combined with volume analysis is an interesting approach. Because every bar has the same range, you can quickly identify the bars that attract a high volume. These bars represent potential levels of support and resistance.
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The box size is the initial input of a P&F chart. Let’s take four ticks as an example.
We draw a rising column of “X” as the market rises. Each “X” represents four ticks.
We draw a falling column of “O” as the market falls. Each “O” represents four ticks.Minimum deposit for forex - Not what you expect — 2023
When the market reverses, we draw a new column. As a result, you will never see “X” and “O” in the same column.
How can we tell whether a market has reversed around?
This question brings us to the second input of a P&F chart. We must choose a reversal amount. The standard reversal amount is three boxes. This indicates that the market must decrease by 12 ticks for a rising column to cease and a falling column to begin (3 box times 4-tick box size).
Our examples are based on the closes of 5-minute bars. This indicates that the chart is updated using the closing prices of 5-minute bars. (Another option is to use each bar’s high/low prices.)
Our examples use intraday charts to facilitate comparison with other chart types. However, P&F charts are more commonly utilised in daily and higher time frames.
There are chart patterns that are specific to point and figure charting. While these are simple breakout patterns, you will need to practise to recognise them. The good news is that P&F chart patterns have clearer definitions than bar chart counterparts. Furthermore, P&F charts provide distinct methods for projecting targets. Trading using P&F charts is a complex subject, so it is a must-read some good books on that.
Renko is derived from the Japanese word meaning “brick.” To begin, we must determine the size of the brick.
The chart prints a new brick when the market moves more than the brick size away from the preceding brick. (Like the P&F chart, we may limit our attention to the underlying time chart’s closing prices or high/low prices.)
As a result, a Renko chart does not display the exact price activity. It screens out whipsaws that are smaller than the size of a brick.
A Renko chart does not allow for bar/candlestick patterns analysis. It excels at highlighting trends, though, since it ignores “noise” movements smaller than the brick size.
As a result, Renko charts may be used for two reasons:
The P&F chart we touched on earlier is the closest Western cousin to the Japanese Kagi chart.
A box size is not required for a Kagi chart. It just needs the reversal amount, which may be specified in the absolute price range or percentage change. The chart will change direction whenever the price heads in the opposite direction by the set reversal amount.
The varying line widths on a Kagi chart are a distinguishing characteristic. The line thickens as the market rises over a previous swing high (shoulder) (Yang line). The line thins (Yin line) as the price falls below a previous swing low (waist).
Using the Yin and Yang lines, a Kagi chart highlights swing highs and lows breakout. As a result, relying on it in a sideways market when most breakouts fail is risky.
It is, however, precious for tracking swing highs and lows market structure. As a result, a Kagi chart is useful for identifying support/resistance and tracking market bias.
A Three-Line Break chart is comprised of “lines.” These lines are plotted based on the underlying time chart’s closing prices. (The underlying chart in the first example is the 5-minute chart.)
When the underlying time-based chart closes beyond the preceding line in the same direction, a new line in the same direction is drawn.
When the underlying time-based chart closes beyond the last three lines in the opposing direction, a new line in the opposite direction is drawn. This is where the name came from.
On Three-Line Break charts, standard trend line and support/resistance analysis will function well (if not better).
While bar and candlestick patterns are ineffective, Three-Line Break charts provide an applicable trading signal comprised of three lines (black shoes, suits, and necks). A white suit indicates purchase, whereas a black suit indicates sale.
Using a new type of price chart has big ramifications on your trading. Make sure you know what will happen if you put it into your market analysis.
Remember that most technical analyses was made with time-based charts in mind and still is. This means that they might not work well in different charts. Of course, when you try them out, you might also find pleasant surprises.
A good way to start exploring a new price chart is to use it as a supplement to the type of chart you already use. You can not only get a second opinion, but you can also compare how well they work.
It’s interesting to try out new types of charts. At first, it might even look like it could be the Holy Grail. But at some point, you’ll realise that every type of chart has its drawbacks.
Most charting platforms offer time-based charts, but other types of charts may or may not be available. Also, since these alternative chart types aren’t as common, they might not be used in the same way every time.
For instance, NinjaTrader’s range bar charts have a space between each bar, but QuoteTracker’s range bar charts do not.
Read the documentation for your charting software. Make sure you understand how the chart is made on your charting platform and that you are comfortable with the formula behind the chart plot.
First, you must decide what chart you want to use. Three basic types of charts are usually available on all trading platforms: a line chart, a bar chart, and a candlestick chart. All three give traders different sorts of data to trade with.
A line chart draws a line based on the closing prices, one at a time. A bar chart shows the prices of financial instruments at the opening and closing of the day, as well as their highs and lows. A candlestick chart is prevalent to a bar chart, but it is easier to see whether the market is bullish or bearish at the sentiment.
Once you’ve determined which chart you like best, you can move on to technical analysis. Adding multiple technical analysis tools to the chart allows you to determine whether to buy or sell an asset on any good platform.
Learning about the different types of charts can help you trade better because they offer many benefits, such as:
Learning the forex charts is handy in predicting a specific asset’s price movement, specifically for beginners. Many forex charts may confuse you for where to begin. In reality, you have to invest some time in learning all those charts if you want to be a professional trader. For scalping and day trading, candlestick forex charts are enough to understand.
Forex charts make you aware of the market conditions, buyer/seller behaviour, the strength of buying and selling, and a lot more, which helps build a reliable forex trading strategy.