What Are the Benefits Of Using Forex Charts?
Forex trading charts have been in the market for centuries, tracing their origins back to the 1700s as Japanese people came up with the idea of candlestick charts to track the price of rice and later on it became the standard chart type used by forex traders. Despite their ancient roots, their significance remains undiminished in today’s digital age. You must know your way around forex charts to make an informed trading decision. In this article, we will discuss how you can rely on forex charts for profitable trading.
Understanding the Basics of Forex Charts
Forex trading is no mere guesswork. Traders invest significant effort in predicting price movements using forex analysis. But how is this achieved? The answer lies in forex charts. You get access to these charts on the MT4/M5 trading platform.
These charts encapsulate both the historical and real-time price movements of currency pairs, showcasing how they have fluctuated over various time frames. Be it years, months, or days. Every movement is recorded on these charts. But you might wonder why reading these charts is so crucial.
The reason is simple: the foundation of technical analysis is rooted in charts, operating on the principle that history tends to repeat itself. You have to analyse these charts, searching for underlying trends in the data, which will allow you to predict future price movements based on past patterns. Learning how to reach charts and derive useful information from them is a skill in itself.
Analysing the Charts
Forex charts are essential tools for market analysis. When you examine a forex chart, you are observing the historical movement of a currency pair, represented through plotted prices. This visual representation allows traders to understand the past behaviour of currency pairs, which can be instrumental in predicting future movements. If you are new to the market, you should know what charts look like. Though we will discuss this ahead in the article, you should check charts supported by the MT5 trading platform for better understanding. In case, you are looking for a reliable broker that offers the MT5 platform, then here are a few options you can consider:
It offers several types of charts. But here are the most common ones –
- Line charts: These provide a simple visual representation of the closing prices of a currency pair over a specific period.
- Bar Charts: You get more information on bar charts than line charts. Traders can get precise information about the opening, closing, and high & low prices for a particular period.
- Candlestick Charts: Widely used due to the depth of information they provide, these charts display the opening, closing, high, and low prices. But you can see them visually, with the added distinction of colour-coding to indicate whether the currency pair’s closing price is higher or lower than its opening price.
When analysing these charts, you have to pay close attention to these points:
- Highest Close Price: This refers to the highest price at which a currency pair closed during a specific period.
- Highest Open Price: You get to know the price at which the currency pair first opened for trading during a specific period.
- Lowest Price: It indicates the minimum price reached by the currency pair during the period in question.
- Highest Price: Conversely, this denotes the maximum price achieved by the currency pair during that period.
Furthermore, as you become more adept at reading forex charts, you will begin to identify patterns within the price movements. These patterns can be indicative of the potential future behaviour of the currency pair. You should know them well, as they can provide insights into potential market trends and shifts. Patterns can range from simple to complex. However, each has its significance in the analytical process, which can help you make informed decisions based on historical data.
Top Forex Chart Patterns and How to Trade Them
Below are some of the top chart patterns that can give you a hint about currency movements and what you can expect from these patterns if you spot them –
- Head and shoulders:
Imagine you’re looking at a hill with a tall peak in the middle, flanked by two shorter peaks on either side. That’s the “head and Shoulders” pattern. The middle peak is the “head,” and the two side peaks are the “shoulders.” If you spot this pattern, it often signals a reversal in the current trend. So, if prices were rising before this pattern appeared, they might start to decline afterwards, and vice versa.
- Double Top:
Double Top looks like two mountain peaks of nearly the same height standing next to each other. It looks like the letter ‘M’. If you see this pattern after a prolonged upward trend, it can be a warning sign that the currency pair might start to decline. It suggests that the pair tried to surpass a certain level twice but failed, indicating potential weakness.
Triangles in forex trading are like slices of pie. They can be ascending, descending, or symmetrical. The price moves within the converging lines of the triangle until it breaks out. If you spot a triangle, watch closely! The direction in which the price breaks out of the triangle can indicate the future direction of the trend, either upward or downward.
- Flags and Pennants:
Imagine you see a sharp price movement followed by a more subdued, narrow consolidation, looking like a rectangle (flag) or a small triangle (pennant). That’s the “Flags and Pennants” pattern. If you spot this, it often suggests a continuation of the current trend. So, if the sharp price movement was upward, you can expect the price to continue rising after the consolidation. However, in the case of a downward trend, it might continue to decline.
Tips for Analysing Forex Charts Like a Pro
I wish analysing charts was all about identifying patterns. But sadly, it’s not as simple as it sounds. Some traders are great at pinpointing these patterns on charts. However, they falter when it comes to making the right trading decisions based on them. So, even if you spot the “X” marking the spot, you might still end up digging in the wrong place.
Here are a few methods that you can use to trade forex charts like a pro:
Look for the trend
Look for the trend! You’ve probably heard traders swear by this phrase. But what exactly does “the trend” mean? Let’s break it down. A trend is the direction your currency pair moves. Essentially, you can expect your charts to move in one of three primary directions:
- Uptrend: Picture a hill sloping upwards. When prices are consistently rising over time, creating higher highs and higher lows, you’re witnessing an uptrend. It’s like watching a hiker climb a mountain, taking occasional breaks but always reaching higher altitudes. This indicates that the currency pair is in demand and buyers are in control.
- Downtrend: Now, imagine the opposite – a hill sloping downward. In a downtrend, prices are consistently falling, creating lower highs and lower lows. It’s like watching that same hiker descend the mountain, moving steadily downward. This suggests that sellers have the upper hand. And there’s prevailing selling pressure in the market.
- Sideways (or Range-bound): It’s more of a flat plateau. Sometimes, prices don’t show a clear upward or downward movement. Instead, they move horizontally, oscillating between two horizontal lines known as support (the floor) and resistance (the ceiling). It’s as if our hiker is walking on flat ground, neither ascending nor descending. This indicates a balance between buyers and sellers, with neither group having a decisive advantage.
Spot Support and Resistance:
Your price movements are never abrupt unless some major news has caused chaos in the market. They tend to move within certain limits. These limits? They’re known as support and resistance. Support is like the floor, where the price seems to bounce off, indicating a level where buyers often step in. Resistance, on the other hand, acts like a ceiling, where the price tends to pull back, signalling a point where sellers typically take charge. Identifying these levels should be your first job. Because they can provide insights into potential price reversals or continuations, you can use them to make more informed decisions.
Note Candlestick Patterns:
There are various charts in the forex market, but none quite like candlesticks. Why the preference? Because they pack a wealth of information in a compact form. Resembling a candle, each candlestick provides four crucial data points: the opening price, closing price, highest price, and lowest price.
This comprehensive view of price movement is why traders often favour candlestick charts. They offer a deeper insight into market sentiment, so you can spot potential trend reversals or continuations more effectively.
Use Indicators Carefully:
To get to the heart of your chart’s movements, indicators come into play. They don’t predict the future but offer additional information that can be invaluable in decision-making.
For instance, the Moving Average helps smooth out price data to create a single flowing line. This makes it easier to identify the direction of the trend. The Relative Strength Index (RSI), on the other hand, measures the speed and change of price movements – often used to identify overbought or oversold conditions.
However, a word of caution: indicators aren’t infallible. It’s essential to cross-check their signals with other tools to ensure you’re making the most informed trading decisions. You should also use different trading calculators to have a decent idea about the lot size, margin and other parameters because you don’t want to risk more than what you can afford to lose and a trading calculator will be of great help in ensuring that. Here are some easy-to-use trading calculators that you can use:
Analysing the forex market goes beyond just glancing at charts; you should learn how to make decisions based on the information they provide. They offer numerous benefits, including spotlighting trends and revealing currency pair patterns. But charts could also lie. So, always verify before making your trading decisions. To make their best use, you should have a macro view, like spotting overarching trends, and a micro perspective, like diving into specific market nuances using indicators.