The purpose of Forex charts is to keep traders updates on the market. Charts usually include the different currency pairings and their prices. Reading Forex charts is a necessary part of trading, so you will need to learn. There are 3 main types of Forex charts: line, bar and candlestick.
Forex charts use pips as a form of measurement. A pip is simply a unit you count profit or loss in. Typically, forex pairs are quoted to four decimal places (0.0001). The ‘1’, four spaces after the 0, is what is referred to as a pip.
Japanese candlesticks are one great form of measuring appreciation or depreciation of a currency. Candlestick charts are the most commonly used in Forex trading as they are the most detailed. To produce a candlestick chart, you need to have data set that contains open, high, low and close values for each time period you want to display. The hollow or filled portion of the candlestick is called “the body”.
The long thin lines above and below the body represent the high/low range and are called “shadows” (also referred to as “wicks” and “tails”). The high is marked by the top of the upper shadow and the low by the bottom of the lower shadow. If the stock closes higher than its opening price, a hollow candlestick is drawn with the bottom of the body representing the opening price and the top of the body representing the closing price. If the stock closes lower than its opening price, a filled candlestick is drawn with the top of the body representing the opening price and the bottom of the body representing the closing price.
Compared to traditional bar charts, many traders prefer candlestick charts as they are quick and easy to understand. Immediately a trader can see the difference between the open and close as well as the high and low. Hollow candlesticks, where the close is greater than the open, indicate buying pressure. Filled candlesticks, where the close is less than the open, indicate selling pressure.
While the candlestick chart provides the same information, the bar chart has a little less flare. The bar chart clearly displays the open and the close as well as the high and low but lacks the color. Some traders who feel the high / low information is key but doesn’t want the color coding bias stick with the bar chart to find simple patterns they can trade. Traders often look at bar charts to observe range comparisons.
Line charts are great for the trader who wants simple results. Even though price action may seem difficult to follow and price patterns hard to spot and interpret on a candlestick or similar chart, on a simple line chart such things as price patterns and price direction simply jump off the screen. Traders usually do not resort to a line chart because they consider them exceedingly simple and “lacking” in the amount of information they give them regarding price action movements but the truth is that line charts offer you one of the clearest pictures of overall market action and – most importantly to new traders – it is the most intuitive chart to interpret.
While spotting trends and support and resistance levels on a candlestick chart can be harder, doing so in a line chart is totally easy as these things are evident most of the time. For this reason I have found that for traders suffering from paralysis by analysis, the line chart provides an extremely valuable tool to get rid of all the analysis tools and come back to what actually matters in trading, price action.
Hopefully this information on different Forex charts has allowed you to understand the differences between them. Remember to choose the chart type that suits you and your trading style.