From here, we have only one more topic to cover before getting into the analysis behind the movements in the foreign exchange markets — we need to cover charts!
Luckily, this part of the foreign exchange market is very easy to understand.
You have probably seen all these charts from stock quote sites, or even in your own forex trading.
There are three different types of charts:
- Line Charts
- Bar Charts (also known as OHLC charts)
- Candlestick charts
These three charting types are important to forex traders because each displays market data differently. As a general rule, you should try each of them out on your own, and pick your favorite. We think you’ll probably settle into bar charts or candlestick charts, as they provide the most information.
Here’s the quick guide to the different types of forex charts:
Line charts are very simple charts that show the price of a currency pair over time. Line charts are smoother than other charts in that they link different points together to show the price of a currency pair at one time.
Take a look at this line chart of the EUR/USD pair:
The price of the currency pair is quoted only at certain points, and then the points are connected with straight lines.
Advantages: Easy to read, very clear, and great for seeing the “big picture” of the forex market.
Disadvantages: Fewer points show the price at certain times, not all the time.
Bar charts are best explained by their other name “OHLC charts.” OHLC stands for Open, High, Low, Close, as the bars that make up the chart show all of this data for a particular timeframe.
This is best understood by looking at the diagram of a bar in a bar chart below:
The bar chart tells us more than the line chart. Whereas the line chart would reflect only the prices selected at certain times, a bar chart shows us all activity that happens during the timeframe. For any one bar, we can know the high, low, open, and closing price of the particular timeframe.
Advantages: More datapoints and information for better analysis.
Disadvantages: Bar charts can be hard to read on long-term charts with many, very small, bars.
Candlestick charts show more information than line charts and bar charts combined. Candlestick charts work much like an open, high, low, and close chart, since they show all relevant data about the price, but they add one more unique advantage: an easy to read, graphical representation of the market movement.
When we look at a candlestick chart, we see several candlesticks:
To interpret these candlesticks, we have to know a few things about the candlesticks themselves:
- The color indicates a rise or fall. Some traders use green and red to show up and down movements, while others use black and white. Regardless of the color, we have to know that two two colors do mean up or down.
- The “wicks” at the top and bottom of a candlestick show the high and low. At the top of a candlestick, the tip of a wick is the high price during that trading period. At the bottom of a candlestick, the tip of a wick is the low price during that trading period.
- The “body” of the candlestick show us the move in price, and also the direction (as defined by the color of the body.)
If the color indicates an upward movement, then we know that the bottom of the body is the open, and the top of the body is the current price, or the closing price for the particular timeframe. Likewise, if the color indicates a downward movement, then the top of the body is the open, and the bottom of the body is the closing price, or the current price.
We suggest that you use candlestick charts because they are the best way to quickly assess market movements with color. The candlestick color makes it really easy to find the direction of the market for one time frame.
Candlesticks are truly the best choice, and in the following tutorials we will work exclusively with candlestick charts. Additionally, candlestick charts are the basis for “candlestick analysis,” which is one of the most basic forms of analyzing forex market movements.
Please proceed to the next tutorial about our words on forex analysis.