To analyze how the price of a currency pair fluctuates, you must first examine its historical and current price behavior. A chart, or more precisely, a price chart, is the first tool that every trader who does technical analysis must master. A chart is basically a visual representation of the price of a currency pair over a certain time period.
It depicts the trading activity that occurs during a particular trading session (whether that time is 10 minutes, 4 hours, one day, or one week). Any financial asset with price data over time can be utilized to create an analysis chart.
Price movements are a succession of mostly random events, therefore our goal as traders is to control risk and gauge probability, and charting can help with that. Charts are user-friendly since it is very simple to understand how price movements are portrayed over time due to their visual nature.
A chart makes it simple to detect and evaluate the movements, patterns, and tendencies of a currency pair.
The y-axis (vertical axis) on the chart indicates the price scale, while the x-axis (horizontal axis) represents the time scale.
Prices are plotted across the x-axis from left to right. The most current price is represented in the far right corner.
What does a Price Chart Represent?
A price chart displays supply and demand variations. At any given time, a chart aggregates every purchase and sell transaction of that financial instrument (in our example, currency pairs).
A chart combines all existing news with traders’ present forecasts of future news. When the future arrives and the reality differs from predictions, prices shift once more. The “future news” is now “known news,” and traders change their expectations for future news in light of this new information. And the cycle continues.
Charts combine all activity from millions of market players, whether humans or algorithms.
Whether the transaction was caused by an exporter’s actions, a central bank’s currency intervention, transactions performed by an AI from a hedge fund, or discretionary trading by ordinary traders, a chart brings ALL of this information together in a visual manner that technical traders can study and understand.
Types of Price Charts
Let’s take a look at the three most popular types of price charts:
1. Line chart
2. Bar chart
3. Candlestick chart
Now, we’ll explain each of the forex charts, and let you know what you should know about each of them.
Line Chart
A simple line chart draws a straight line from one closing price to the next.
We can visualize the overall price movement of a currency pair over time by stringing it together with a line.
The line chart is straightforward to understand, but it may not give the trader with much data regarding price behavior over the period. All you know is that the price ended the time at X. You have no idea what else occurred.
However, it allows the trader to more quickly spot trends and graphically compare the closing price from one period to the next. This chart type is typically used to gain a “big picture” view of price changes.
The line chart also best displays trends, which are just the slope of the line.
Some traders believe that the closing level is more important than the open, high, or low level. Price variations within a trading session are overlooked by focusing just on the closure.
Here is an example of a line chart for EUR/USD:
Bar Chart
Unfortunately, this is not a bar chart. A bar chart is more complicated. It displays the highs and lows, as well as the opening and closing prices.
A trader can see the price range of each period using bar charts.
The size of the bars can vary from one to the next or across a range of bars. The bottom of the vertical bar represents the lowest traded price during that time period, while the top represents the highest price paid.
The vertical bar represents the currency pair’s overall trading range.
The bars grow larger as the price variations become more volatile. The bars become smaller as the price swings become quieter. The variation in bar size is caused by the way each bar is built. The vertical height of the bar represents the price range between the top and low of the bar period.
The price bar also records the period’s opening and closing prices with attached horizontal lines.
The horizontal hash on the left side of the bar is the opening price, and the horizontal hash on the right side is the closing price.
Here is an example of a bar chart for EUR/USD:
A bar is simply a unit of time, whether it is a day, a week, or an hour. When you see the term ‘bar’ in the future, be sure you understand what time frame it refers to.
Bar charts are also known as “OHLC” charts since they show the Open, High, Low, and Close for a certain currency pair.
The OHLC chart (open, high, low, and close) can display volatility, which distinguishes it from a line chart.
Here’s another example of a price bar:
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
Candlestick Charts
The candlestick chart is a type of bar chart. Candlestick charts display the same price information as bar charts, but in a more visually appealing manner.
Many traders prefer this chart since it is not only more visually appealing, but it is also easier to interpret.
Candlestick bars still use a vertical line to represent the high-to-low range. In candlestick charting, however, the larger block (or body) in the middle represents the price range between the opening and closing values.
Candlesticks aid in visualizing bullish or bearish sentiment by exhibiting “bodies” in various hues. Historically, if the center block is filled or colored in, the currency pair closed LOWER than it opened.
The ‘filled color’ in the following example is black. The top of our ‘filled’ blocks represents the beginning price, while the bottom represents the closing price.
If the closing price is higher than the beginning price, the center block will be “white,” hollow, or unfilled.
Because a color television is superior to a black and white television, why not add some color to those candlestick charts?
We just replaced green for white and red for black. This suggests that if the price closed higher than it opened, the candlestick would be green.
If the price closed lower than it opened, the candlestick would be red.
In later classes, you will discover how using green and red candles allows you to “see” things on the charts much faster, such as uptrends/downtrends and likely reversal points.
For the time being, remember that on FX charts, we use red and green candlesticks rather than black and white, and we will continue to utilize these colors.
Because the identical information shows on an OHLC bar chart, the sole function of candlestick charting is to provide as a visual help.
The following are the benefits of candlestick charting:
Here is an example of a candlestick chart for EUR/USD. Isn’t it pretty?
- Candlesticks are easy to interpret and are a good place for beginners to start figuring out chart analysis.
- Candlesticks are easy to use! Your eyes adapt almost immediately to the information in the bar notation. Plus, research shows that visuals help with studying, so it might help with trading as well!
- Candlesticks and candlestick patterns have cool names such as the “shooting star,” which helps you to remember what the pattern means.
- Candlesticks are good at identifying market turning points – trend reversals from an uptrend to a downtrend or a downtrend to an uptrend. You will learn more about this later.
There are numerous sorts of charts available, and one is not necessarily superior than another.
The data used to make the chart may be the same, but how that data is presented and perceived will differ.
Each chart will have its own set of benefits and drawbacks. For technical analysis, you can use any sort of chart or a combination of charts. It all comes down to personal preference.
Now that you understand why candlesticks are so awesome, it’s time to inform you that we will be using candlestick forex charts for the majority, if not all, of the forex chart examples on this site.
Putting it Together
Price charts of various forms can be used by traders to monitor the FX market.
As you begin reading price charts, keep things simple.
Look for the correct balance of having enough information on the chart to make smart trading decisions, but not too much information that your brain is paralyzed and can’t make ANY decision as you locate your chart preferences.
Finding the right balance is unique to each trader, thus it’s critical to start with the fundamentals before moving on to employing technical indicators.
Next Lesson: What is Support and Resistance?
