The success of forex traders, whether they are just starting out or have been trading for a long time, lies in the ability to interpret charts, and in an interview with Ethan Featherly, a representative from Admiral Markets, shared several methods to effectively read and interpret Forex charts.
"The foundation of Forex is conversion," he wrote, and "one of the most straightforward charts is the Exchange Rate chart," which shows traders how the rates of their selected currency pair have changed over time.
Illustrating how currency pairing works, Ethan explained that "the pair represents the base, while the second represents the quote."
Traders "can plot charts for the main eight currency pairs usually traded (with EUR/USD being the most popular one), and for other minor pairs available," and then select the desired time frames, although most charts show traders the evolution of currency rates for one day.
Some of the more advanced platforms can show timeframes spanning from 1 minute to 1 month, he added.
Ethan highlighted: "Charts depict trading data, and they usually come in three main shapes: line charts, bar charts, and candlestick charts."
"A line chart," he explained, "displays a line uniting one closing price to the next one, showing (in a timeframe) the overall price evolution of a currency pair in a given amount of time."
"The timeframe is crucial in determining the entry of a trade, as most trading systems use multiple timelines."
"For some moves," Ethan said, traders "may need a four-hour period of analysis and the use of specific indicators, while for other steps, "a limited 5 minutes interval" might be required "to take advantage of a temporary high rise or a deep low in rates," adding that "time is crucial in Forex trading."
"While often traders rely only on the closing price as the most decisive element of trend analysis, a line chart says nothing about trading ranges," he added.
A bar chart, said Ethan, "displays the highs and the lows of the trading period, as well as the opening and closing prices," and represents "a sequence of vertical lines (in different colors, such as green, black or blue) where each line represents a chunk of trading information."
He added: "What is significant to understand when reading a bar chart is that every “bar” is a segment of time, be it an hour, a day, or a month." When traders read books on Forex or participate in training, they will come across a term called "OHLC charts," or Open High Low Close charts, which "enable technical analysts to evaluate intraday volatility and see where prices opened and closed."
A candlestick chart, which relies on "rely on the elegant science of mathematics and statistics," according to Ethan, displays the "same information" as a bar chart, but "in a more aesthetic manner."
Candlestick charts are particularly valuable for "price action understanding" among Forex traders, he added.
Each candlestick in a chart represents a specific timeframe (as a bar does) and comprises of four different values:
- The opening price when the period begins;
- The closing price when the period ends;
- The highest price point reached during the period;
- The lowest price point reached during the period.
"The candlestick charts not only help you develop technical analysis skills but also allow you a better understanding if the session ended in a bull or a bear form.
"In a candlestick chart," said Ethan, traders "will see different colored bodies of the candles (color depends from broker to broker) or hollow bodies."
"For instance, a hollow candle means that the closing price is higher than the opening price," which indicates the right time for a trader to buy. Similarly, "when the candlestick’s body displays colour," Ethan recommends selling, as "the closing price is smaller than the opening one."
Additionally, he also recommended paying attention to the "Doji" part of candlestick charts, as "Dojis are essential facets" of such charts and will help traders to "understand patterns, consolidation, and more." If one is interested to know more, one could read more about it here at a candlestick chart tutorial here.
Overall, Ethan concluded, Forex charts will assist traders in analysing "the behavior of currency" and assist traders in determining "the future position of currency in the future," adding that "however, there are no charts without indicators to help," as "they are, by the hundreds, if not the thousands, built to cover every aspect and corner of Forex, from means, reverse means, trend following, market feelings, and more."