If you’re starting out in forex or FX trading, you’ll soon discover that charts are an invaluable resource. They provide a comprehensive snapshot of your trades, illustrating prices, sales, fluctuations, and trends.
However, while integral, these charts might seem complex to novices. Here’s a simplified guide to understanding what forex charts entail, a breakdown of the different types, and pointers on how to interpret them.
Line Chart:
A universal chart type, the line chart is not exclusive to forex trading. Like a heartbeat monitor, the line fluctuates to depict price increases or decreases. Simply put, you need to watch for the undulating line on a graph with time and price axes.
Bar Chart:
Stepping up in complexity is the bar chart, offering a more insightful overview. Bar charts display the opening and closing prices of a currency pair, with the bar’s extremities representing the highest and lowest traded prices. The rich cluster of data from each bar combined gives an integrated understanding of your trades.
Candlestick Chart:
Comparable to bar charts, yet with a more reader-friendly design, are candlestick charts. Each candlestick features a body and two tails indicating the high and low. With color coding, red means the closing price was below the opening and green vice versa, facilitating easier comprehension at a glance.
Average Lines:
Tracking along with the chart elements is the “average line” – a moving line reflecting the average price and movement over a time span. It’s a handy tool to swiftly evaluate currency pair performance.
Bollinger Bands:
In conjunction with average lines, Bollinger Bands depict market volatility. Standard-sized bands suggest steady markets; narrowing bands point towards a steep price hike or drop, while unusually broad bands signal amplified volatility and possible trend shifts.
Relative Strength Index:
This comparative tool weighs the currency’s strength on days when prices escalated against those when they dipped. Traders can leverage this to forecast a pair’s performance.
Price & Time:
On any chart, the price-time axes are essential metrics. While professional traders may require further detail, for beginners, it’s a useful quick view of currency pair performance.
Timeframes:
Charts allow you to adjust for specific time periods – hourly, daily, weekly, and monthly. The timeframe selection adapts to your trading style, be it a minute-by-minute break up for scalp traders or larger scale trends for position traders.
Keep it Simple:
An easy trap for new traders is overloading their charts with information, which can lead to confusion. Remember, not all indicators and tools equate to success. Simplicity is key – use average lines and longer period filters for mean reversion trading and only supplement with indicators as required.
