How to Analyse Forex Charts?
In this article
Forex trading is a platform for exchanging currencies that also offers the traders profits for it. Forex Trading is done in multiple ways, and whatever the strategy the traders opt they still have to learn how to analyse Forex charts to become a pro trader.
The analysis of Forex charts seems complicated to beginners because of the intricate details that the charts hold about the market trends and prices. This article will provide you with a comprehensive insight into Forex charts and the approach to analysing them.
Forex price charts
Currency charts or price charts are both the names of Forex charts. It depicts the changing patterns of the prices by analysing past trading activity. In addition, these charts offer updated information about currency rates, interest rates, stock prices, etc.
It operates on nearly 27-time frames while offering a long list of technical indicators for interpreting the graphical data depicted on the charts. These indicators can be RSI (Relative Strength Index), CCI (Commodity Channel Index), or ADX, to name some.
Forex price charts are one of the most recommended tools for traders as it provides a wide view of the whole market in several ways. Not only this, but Forex charts also offer historical trading data to anticipate the asset’s value in the possible future.
It can further help the traders in identifying the possible risk of loss or gain beforehand. Moreover, it is free of cost and aims to aid traders in trading professionally by providing all the required information.
The Forex charts are also customised. It means that you can select what type of graph, asset information, and trading history you need, along with the time frame. Once you are done with the configuration, you can save it for later use or set your preferred indicator for analysis.
Now, you would have gotten a slight idea about what forex price charts hold in themselves to offer the best benefits to their traders. So, let’s learn about the different types of forex charts, the types of analysing these charts, and find out the easiest way to read the forex charts.
Types of Forex charts
There are several different types of charts falling into two categories of time constructive and time isolated charts. Yet, the three most common and most used Technical forex charts are given below:
A line graph is one of the types of forex charts that help traders in finance. A line graph is a chart that connects a series of data points with a continuous line. This series of data points connect to assets of historical price action, which is represented with the help of a graph.
Comparatively, this chart is easy to understand because it mainly includes continuous lines. Above all, line charts are very useful for traders because traders can employ these in all timeframes.
Moreover, daily closing prices of a security are displayed on this. The line graph consists of two-axis, the x-axis and the y-axis. X-axis components fall into the horizontal axis, while Y-axis components are called the vertical axis.
For example, you draw a graph on a line chart that consists of a horizontal axis and a vertical axis. The horizontal axis of the graph shows the weekdays, and the vertical axis depicts the daily earnings.
Parts of a line graph
A line graph consists of five parts:
1. The label
It refers to the subtitle which describes what is in the graph.
2. The phenomenon
A phenomenon tells what each line is representing in the graph.
3. The reference
The reference indicates the location from where the graph’s material is derived.
4. The data
Data gives detailed information about the graph.
The X-axis and Y-axis represent the direction of the graphic lines indicating prices.
- A line graph is very easy to use as it only contains continuous lines.
- It is easy to manifest minor variations in the line graph as compared to other charts.
- It can be read easily by a trader as the axis in the graph indicates all the values, greater and less than zero, separately.
- These graphs can easily compare multiple datasets at a time.
- If data is not on grid lines, then it is difficult to read the line graph. A line graph does not show the whole percentage.
- In a line graph, the scale should be small, or else it can create difficulty for you if the scale is extensive.
- Sometimes, it doesn’t show interception with the axis.
- It is difficult to use to compare a line graph with mismatched categories of data.
Bar charts consist of rectangular bars which show the values of various categories of data. You can plot these bars in two directions: vertically and horizontally. A bar graph is based on numerical values.
The left side of the bar graph shows purchases, and the right side depicts the cost of purchases. The purpose of the bar chart is to compare different things in groups. So, these charts are highly favourable for traders when the charges are higher.
Furthermore, the bar chart also has two axes. The vertical line shows the y-axis, while the horizontal line shows the x-axis. This is because bars are drawn on a horizontal scale. However, these bars should be of equal distance. Otherwise, they can show the wrong price value.
Types of bar charts
Following are the four main types of bar charts:
1. Vertical bar graph
Vertical bar graphs are used to display the measurement of data vertically.
2. Horizontal bar graph
Horizontal Bar graphs are used to display the measurement of data horizontally.
3. Stacked bar graph
Stacked Bar graphs are used to identify different categories either horizontally or vertically.
4. Grouped bar graph
Grouped Bar graphs are used to compare two or more categorical data to show discrete values. It also can either be in the horizontal direction or vertical direction.
- It is convenient to prepare a bar graph as the traders can understand it easily.
- It summarises a large set of data visually.
- It can be used with both numerical and categorical data.
- Moreover, the traders can easily compare two or more sets of data in the bar graph.
- Only frequencies of elements of the data set can be seen on the bar graph.
- It can only be used on discrete data.
- We can not use it for percentage representation.
- If the bars get over the line, it becomes difficult to read the bar graph.
- The biggest drawback of a bar graph is that it is more prone to false impressions.
The candlestick charts were invented in the 18th century by a Japanese Munehisa Homma. Thus, the candlestick chart is also known as the Japanese candlestick chart. The main purpose of this chart is to explain the price movements of a security.
It is similar to the bar chart. The candlestick chart shows the same data as in the bar graph but uniquely. Moreover, there are 30 types of candlestick chart patterns in the stock market. It also offers a range between open and close, which is known as the real body.
There are two types of real bodies. The white body’s for the buyer’s market, and the black body is for the seller’s market. They are very useful for trading because they show all high, low, open, and close price points.
The candlestick charts are one of the most successful and profitable for trading. A candlestick chart mainly consists of candlestick patterns. The candlestick patterns are used to predict the upside or downtime of prices in the stock market.
- Traders can use this chart in whatever time frame they want.
- These charts provide more detailed information than other charts.
- They provide simple information which is easy to understand.
- These charts can identify market patterns very quickly.
- They can observe the condition of the market very quickly.
- It is a perfect match for many indicators.
- Sometimes a lot of important price information is missing.
- It can be used in any timeframe that you want but, each time frame doesn’t need to look the same, which can be dangerous.
- Keeping track of momentum is hard in the candlestick graph.
- There are unknown movements in the candlestick chart.
Approaches for analysing forex charts
Analysing Forex charts seems technical when you are first introduced to them. However, it is not that ambiguous. In fact, if the traders learn to analyse it, they can make their forex trading more profitable. Following are three basic techniques for analysing Forex charts:
Fundamental analysis of Forex charts includes the in-depth examination of measuring all the micro and macroeconomic factors that can influence currency values. In addition, it usually examines the factors that can affect the price or value of any asset.
For instance: Fundamental analysis may examine the changes in GDP, interest rate, state’s financial statements, or market trends. Precisely, fundamental analysts analysing the EUR/USD cross-currency pair find more informative data in the Eurozone than the US data.
Fundamental analyst deals with the extrinsic factors affecting the intrinsic value of the assets. The traders doing fundamental analysis search for a final number and compare it with the recent price to examine if the asset is overbought or oversold or if its value has changed or not.
It can be done in two different ways, either in the top-down or bottom-up direction. Bottom-up considers the stocks and the factors affecting their prices. Top-down fundamental analysis studies the overall economy of the markets ranging from the larger to the lower companies.
Types of fundamental analysis
The fundamental analysis is further divided into two types.
Qualitative fundamental analysis examines the asset’s value, the effectiveness of the company’s financial management, and its overall performance in the market to identify the former and the present value.
Quantitative analysis, as referred to by the name, deals with numerical. This type of fundamental analysis observes the financial statements to extract the details of the company’s shares and the numerical value to compare with the present one.
- Fundamental analysis provides information about the stocks. It aids in distinguishing stocks having different price value than the actual one to indicate whether it is undervalued or overvalued. It further helps in deciding the profitable market positions to invest in and earn capital.
- As fundamental analysis offers information regarding the asset’s value instead of identifying the ideal entry and exit point, it becomes easier for the fundamental analyst to view the overall market trends with bigger lenses.
- This product data also assists in finding the exact value of the asset by comparing the previous asset value with the present one. Thus, it further helps in making calculated decisions about the investment.
- It often consumes more time in extracting price data from various areas of the market. In addition, analysing Forex charts is complicated compared to other types as it gathers information about the asset’s numerical value.
- As fundamental analysis offers information of both the present and the future, it might not aid traders who have to make quick decisions regarding investment. But, on the other hand, such results usually give a wide view of things that must be narrowed down to decide.
- Fundamental analysis is for traders who prefer to examine the entry and exit market points in less time. The results of the Fundamental analysis might not be as productive if the market suffers from a sudden or surprising economic or political decline.
The traders can operate technical analysis either manually or automatically. Both of these forms offer almost similar results. Technical Forex analysis utilises historical data about the prices to determine the future value.
If the technical trader analyses the charts manually, he will examine indicators to interpret the extracted data into buying or selling. On the other hand, the automatic system offers assistance to the software to identify the signals and translate them into the required decisions.
In other words, technical analysis is a strategy that searches for trading opportunities by examining the charts indicating the investments and market trends. It relies on historical trading activities and fluctuations in prices to identify the possible asset’s value.
The technical analyst uses indicators to analyse trading trends. Many indicators ease this process, like RSI( Relative Strength Index), etc. These technical indicators are of two types: Overlays and Oscillators that indicate price patterns and signals.
- Technical analysis, unlike fundamental analysis, examines the price or value trends to study the asset’s value. In addition, it evaluates the buying and selling data to understand if the prices are changing or the volatility risk as a whole.
- Data acquired from the technical analysis is reliable and is easy to interpret. It also provides information related to ideal entry and exit market points. Thus, it aids in making quick investment decisions.
- Technical analysis isn’t time-consuming and doesn’t even call for extensive knowledge for basic analysis. The traders can quickly learn the basics and employ them on their forex charts to make trading easier and more profitable.
- Technical analysis is not suitable for long-term investment traders. Only an expert technical analyst can earn profit through it, as he can determine the exact movement of the market trends.
- As technical analysts use indicators to determine buying and selling, the generated signals misguide or confuse the traders. The outcomes can also differ if multiple technical analysts are on duty as the opinion varies from one person to another.
- Another disadvantage of technical analysis is that the possible trading results may fail in providing maximum profit if the market undergoes a sudden downfall or unexpected decrease in asset value.
Unlike technical and fundamental analysis, weekend analysis enables traders to track their weekly trading activity to plan for the upcoming weekend beforehand. In addition, it allows you to look at your weekly profits and losses by summing up your overall trading performance.
The traders can track their trading strategy to counter-check if they have followed it or fulfilled their weekly investment goal. They can also compare their previous trading history with the present to find possible shortcomings or treat themselves to any additional profit.
As all the market sectors are interconnected, it is significant to keep an eye on the activities every weekend to avoid risk. You must check the fluctuations in prices, the liquidity and volatility of the market, and the constant areas of trading activities to identify the ideal points.
The right time for analysing the forex charts or market is when the trading is closed, as then you can get accurate information without being influenced by the movement in the markets. Moreover, it enables the traders to be as prepared for the next week as possible with a peaceful mind.
Trading is a fun game for people who aren’t emotionally consumed or have control over their emotions which isn’t even in the hands of an individual. However, by being prepared for the whole week beforehand, you can free yourself from the stress of making quick decisions.
- The weekend analysis allows traders to prepare a strategic trading plan for the next week, which is the key to successful trading.
- Through weekend analysis of the Forex charts, the traders get enough time to process the shortages and learn from them.
- It is easy to do and is less time-consuming as the traders only have to analyse the trading charts of the week.
- With weekend analysis of the Forex charts, you won’t have to spend the entire working day in front of the screen, especially when you are a part-time trader.
- Other than this, traders can examine the pitfalls of their trading strategies with the help of weekly analysis. They can also try to improve them for a better experience in the future.
- As the forex market usually closes on weekends, the weekend analysis of the charts may not detect the possible changes that can occur on a Monday morning.
- The traders have to employ several indicators to read the charts weekly, which at times may become tough.
- Weekends are usually considered resting days. So, taking out extra time for analysis usually becomes difficult.
- Interpreting, analysing, and trading altogether can be more profitable than examining for the upcoming week beforehand.
- Weekend analysis of the Forex charts doesn’t guarantee the same results due to any surprise downfall in the market.
How to read forex charts?
From the above introduction about the Forex charts and their types, we already know that charts are the foremost tools for technical analysis in the Forex market. This is because the Forex price charts generally offer a complete visual representation of the activities in the market.
The generated data is similar in all the types of Forex charts. Yet, the method of interpreting and visualising it differentiates all the forms from each other. So, you can choose any chart type as per your preference.
Professional Forex traders suggest beginning with simple tools rather than complex indicators for analysis of the Forex charts to make trading easy for yourself. But, apart from this, it all depends on your choice and use of strategies.
Now, apply any of the above-mentioned analysing strategies, either fundamental, technical, or weekend as per your comfort zone to begin trading. First of all, choose the currency pair that you want to analyse after choosing the chart style.
Then, determine the time frame, like 24 hours. That means each line, bar, or candlestick will show the opening and closing prices in 24 hours. Following this, you have to differentiate the graphs into bullish and bearish to identify the relation between the starting and closing prices.
Forex charts are considered the most vital aspect of successful trading. These are of different types employed for different perspectives, either individually or collectively. The traders can also analyse the Forex charts in different ways.
The fundamental analysis employs historical data and indicators to identify an asset’s value. Technical analysis uses charts to indicate ideal entry and exit points for trading, and weekend analysis is an overall package to analyse the activities of the entire market every weekend.
Jason Morgan is an experienced forex analyst and writer with a deep understanding of the financial markets. With over 13+ years of industry experience, he has honed his skills in analyzing and forecasting currency movements, providing valuable insights to traders and investors.
Forex Content Writer | Market Analyst