Some of the most essential and popular technical analysis tools in forex trading are trading charts. In technical analysis, charts provide the foundation for price volatility and movements. Moreover, they are the easiest to understand even for forex trading beginners, and you can set them up in varying styles showing differing timeframes.
If you are a long-term forex trader, you can choose to track the currency market using a weekly or monthly trading chart. If you are a short-term forex trader, 60-minute trading charts to 5-minute trading charts are ideal for you. You can also choose to look at several charts showing varying timeframes depending on your trading horizon.
The most popular visual representation of the currency movement is line charts, bar charts, and candlesticks. The three chart types come with their benefits and limitations, but forex day traders prefer candlesticks and bar charts to line charts as they provide more information. Irrespective of the type used, the charts help traders to identify-
- Consolidation periods
- If the market is trending or ranging
- Reversal signals
Candlestick charts date back to the 18th century, and they are a favorite with forex day traders because of their clarity and ease of understanding. The charts are a combination of colored Japanese candles with a body- the filled part, and a shadow, which is the long thin line above or below the body.
The shadows upper part represents the maximum while the lower part shows the minimum prices. Candlestick charts depict specific periods, 1 minute, 1 hour, one day, one week, one month, or 1 one year.
- Provide a clear visual representation of the market, which is easier to read even for first-time traders
- More detailed and better at determining the future currency movement
- Show the changes in the market values without any human psychological influence
- Traders have to wait until the close of a candle before making any trading moves
- The candlestick pattern is not 100% reliable, as it looks different on each timeframe
Also called the Open-High-Low-Close charts, bar charts are another popular tool day traders use to analyze and visualize the currency price change over a period. Traders use the created bar chart models to predict future price changes and interpret daily market sentiments. A bar chart representation shows four price value bars on a single column.
The four values are Open, High, Low, and Close. The lowest traded price for that period shows on the bottom of the vertical bar, while the highest-paid shows on the top bar. You can assign different colors to each of the bars for better understanding and convenience.
- Displayed price movement information is easy to interpret
- The chart provides traders with the ability to determine trade ranges
- It is difficult to determine whether a currency’s value has gone up or fallen over a certain period
- The chart has an overabundance of information, which might be confusing, especially to new traders
Compared to the bar chart and candlestick chart, a line chart, represented by a line connecting a series of data points, is fundamental and compatible with any timeframe. Forex day traders use line charts to track the r closing currency prices. Understanding a day’s price movement using a line chart is not sufficient because the pattern only focuses on closing prices.
However, this does not prevent many forex traders from choosing a line chart over all the others because they do not consider the opening price to be as important as the closing price. The line has a Y and X-axis where the Y represents the price scale while the X represents the time scale. Moreover, a line chart is the most appropriate trading tool to determine graphical models, trend lines, and support and resistance levels.
- One of the most straightforward and simple charts to read and understand
- The easiest to use even for new forex traders
- Traders using the chart can quickly identify support and resistance levels
- They contain very vague information
Irrespective of the forex charts you use to determine and analyze the currency price dynamics, one thing remains clear. It all comes down to using the best technical analysis tool to provide you with all the information you need on the currency movement over time. Charts are easy to understand, and even though they have different time intervals and graphics used to build them, they are not too distant.