When you trade in the forex market, you’ll need to know a few things, including how to read forex pairs and forex chart patterns.
Forex pairs display the exchange rate between two currencies, indicating how much of the second currency is required to buy one unit of the first currency.
To begin your journey as a forex trader, you’ll need to learn how to read the price charts of currency pairs.
In this article, we’ll cover:
* What a forex chart is
* Candlestick charts
* Bar charts
* Line charts
What is a forex chart?
A forex chart is a visual representation of the exchange rate of a currency pair. Each point represents a currency pair’s price movement over a time period, and is used to identify trends and patterns. On Deriv MT5, there are three ways you can view a forex chart — with a candlestick chart, a bar chart, and a line chart.
What is a candlestick chart?
A candlestick chart utilises candlesticks, which graphically depict price movements in financial markets by illustrating the opening, closing, high, and low prices within a designated time frame.
Candlesticks have three main components:
- The body, representing the price range between the opening and closing prices.
- The wicks or shadows, showing the highest and lowest prices reached.
- The colour, indicating whether the sentiment of the candles are bullish (closing price is higher than opening price, often green or white) or bearish (opening price is higher than closing price, often red or black).
Candlestick charts are the most popular for forex trading because they provide more information than line or bar charts. This gives more insight into price action and more complex trend analysis.
What is a bar chart?
A bar chart, also known as a HLOC (high, low, open, close) chart, employs vertical bars to represent the trading activity within a designated time frame. Unlike candlestick charts, bar charts lack filled bodies, aiding traders who primarily focus on price movements.
The bars have distinct features:
- The top of the vertical line represents the highest price reached. It indicates the peak price that traders were willing to pay.
- The bottom of the vertical line represents the lowest price reached. It shows the lowest point at which traders were willing to sell.
- A short horizontal line extending to the left of the vertical line indicates the opening price. It signifies the price at which the market started trading during that period.
- Another short horizontal line extending to the right of the vertical line indicates the closing price. It shows the price at which the market concluded trading during that period.
- The line’s colour is indicative of the price’s movement: green or white for an upward shift (closing price is higher than opening price), and red or black for a decline (opening price is higher than closing price).
Bar charts are easier to interpret than candlesticks for beginner traders, as they have less visual clutter, making them valuable for simpler trend analysis.
What is a line chart?
A line chart connects the closing prices of a forex pair in a continuous line for a specified timeframe. It filters out the price fluctuations that occur during the opening, highest, and lowest points of trading. As a result, line charts are particularly useful for identifying medium- to long-term trends and patterns.
An extension of the line chart is called a mountain (or area) chart. Mountain charts are essentially the same, but there is shade in the space below the line and, hence, put less emphasis on individual data points.
Line charts are the simplest way to visualise price movement over time. They can be advantageous for identifying macro trends, smoothing noise, and incorporating volumes or moving averages. They can also be used alongside candlestick or bar charts.
Conclusion
Once you have understood how to read forex charts, the next step is learning about technical indicators, fundamental analysis, and risk management strategies. This will aid you in identifying trends, support and resistance levels, as well as candlestick and chart patterns. Beginner traders may choose to start with a demo account to practise your analysis without real money. Open a risk-free demo account with Deriv and check out the different types of charts today.
Disclaimer:
The information contained in the Blog is for educational purposes only and is not intended as financial or investment advice.
Deriv MT5’s availability might depend on your country of residency.
