One of the most important tools a trader has in his or her toolbox is the currency trading chart. The price charts forms the basis for technical analysis, regardless of what market is traded.
The price chart tracks movement of historical price and allows assumptions about what price may do in the future based on past price movement. Using the price chart we can build trading models and systems and trade them.
Studying price movement via charts rather than economic models forms the basis of technical analysis in trading. A majority of forex traders prefer technical analysis over fundamental analysis. Technical analysis does not require any special knowledge or training in economics but does require education in technical analysis.
Charts display price movement over a given period of time, which is referred to as the look back period. You can view the price for a currency pair over a period of a few minutes, to hours, days, weeks or even years.
Charts most commonly are used in conjunction with technical indicators displayed either over price itself or displayed in a separate window below price. A technical indicator is a graphical representation of price based on some mathematical formula.
The charting platforms offered through most forex brokers offer a wide array of technical indicators ranging from moving averages to pivots and numerous oscillators. Indicators can be helpful in identifying trend, and in supporting or confirming trade setups or decisions.
Most forex charting platforms support displaying price in a number of different formats. Even though there are many different ways to represent price, three of the most popular forms are the bar chart, line chart and candle stick chart.
1. The Bar Chart
A bar chart uses four price points to construct each bar: opening price, highest price reached, lowest price reached and the closing price. Even though referred to as a bar chart, price more accurately looks like a vertical line, which represents the time interval of trading.
The top of the line marks the high and the bottom represents the price low. A short line on the left side of the vertical bar indicates the opening price and a short line on the right shows the closing price.
Both lines could be in at the same level, indicating that opening and closing price were the same for the time period. More frequently however the two lines are found at different heights along the vertical bar.
The advantage of the bar chart is that it shows you how wide the fluctuations were during the trading period, indicating the level of volatility for a currency pair.
2. The Line Chart
A line chart plots the closing prices at the end of each trading period, which could be anything from one minute to one day or one month, depending on the time intervals selected. The resulting data points are simply connected with a line which creates the line chart.
The line chart does not tell you anything about what happened at different times during the time interval; no price highs nor price lows.
The chart is simply based on closing prices and ignores all other trading activity. By using the line chart format, you can drown out noise and perhaps see price action in a different light.
3. The Candlestick Chart
While the candle stick chart is still the new kid on the block for most westerns it’s been used in Asia for many, many years. It has gained popularity and today is widely used, particular in the forex market.
A candle stick chart gives you all the same information as the bar chart but does it in a format that is very visual and hence easy to read. Most candle stick charts can be displayed using different color schemes which make the identification of patterns or reversal signals much easier.
A graphic looking similar to a candle is used to represent price. As with real candles there is a wick at the top of the trading candle, representing price high for the time interval. The candle most often also has a wick on the bottom, representing the price low for the time interval.
The space between top and bottom wick make up the body of the candle. The candle body usually is filled with color, often red if price is falling and green or blue if price is rising.
Since candle stick charts use colors you get an instant view of whether prices rose or fell during the trading period. This makes candlesticks quicker to read at a glance than a bar chart.
That is why candlesticks are the favorite type of currency trading chart for many traders today.