How to Read Forex Charts

What are Forex Charts?

Forex Charts are important tools for all traders, especially new ones.  They offer an insight into the market – most of all, historical information on trends on commodities and prices.  This enables a trader to look at the information and make investment decisions accordingly.  It is very important to make informed decision as the Forex market is fraught with risk.

How does a trader prepare before commencing trading?

When a trader is ready to participate in the market, it is a must for the person to know a few basics in advance to make it easier to understand what is happening in the market.

The Basics:

  • Know Symbols: One has to learn currency symbols.  The letters denote country and currency – the currency.  For instance USD – US dollar, AUD – Australian Dollar, CHF- Swiss franc and so on.
  • Know Currency Pairs: Forex trading involves buying and selling currencies in pairs.  Major currencies are the most traded and the USD is almost always in play.  The minors have the Euro, GBP or Yen paired with another currency – something other than USD.  There are also some exotic combinations where the US dollar is paired with currencies of an emerging market – i.e. Brazil.
  • Learn to Read Quotes:  This is very important. Take for instance – USD-GBP=1.4682.  The base currency is the US Dollar, the Quote Currency is the Pound and the exchange rate is listed last.  People buy in anticipation that the base currency will increase in value over the quoted currency and sell when they anticipate that the base currency will decrease in value.

Now that this aspect is clear the next step, which is very important, is to learn how to read charts.  This will take a while to learn – and this is also a tool that will be used for as long as the trader is in business.  This is because no one can retain that much information and also that trends never remain the same.  Here are a few pointers on how to read charts effectively and quickly to get the most information out of them. 

The Forex market has developed quite well and there is a lot more information available now.  Several software packages are available in the marketplace, which are designed to offer the latest information to traders.  The three most popular and easy charts are:

  • The Line Chart
  • The Bar Chart, and
  • The Candlestick Chart

Here is a brief explanation of what the charts are and how they present information. 

The Line Chart: This one is very easy to read.  Lines are drawn between closing prices to indicate the trend.  When it is strung out in a line, we can see the general trend and how the price of a currency pair has behaved over a period of time.

Bar Charts:  This is a little more complex.  We can see the opening and closing prices, highs and lows.  The bottom of the vertical bar shows the lowest price for a particular period and the top shows the highest price – paid for a currency pair.  The vertical bar is the range indicator for the currencies.

A Bar on the chart is shows a segment of time and it could be a day, week or month.  Make sure that you note the time frame when you are reading this chart.  These are also called OHLC Charts because they show the opening, high, low and closing price for a particular currency.  An example:

Forex Charts

Open: The little horizontal line on the left is the opening price
High: The top of the vertical line defines the highest price of the time period
Low: The bottom of the vertical line defines the lowest price of the time period
Close: The little horizontal line on the right is the closing price