Essential Forex Chart Types to use when Trading in Forex

2017-09-03 12:07    forextraders

Price charts have been used by technical analysts operating in a variety of financial and commodity markets for many years. In the forex market, traders will typically plot the exchange rate of a particular currency pair as it evolves over time. The way in which the trader chooses to do so will usually determine the type of forex chart they use.

Although such charts were formerly drawn by hand on graph paper, today’s forex traders often plot them using computers running special technical analysis software that incorporates historical exchange rate data for the currency pairs of interest.

Historical Data Commonly Kept for Charts

The historical data kept for displaying on forex charts drawn for a particular currency pair will generally include the following items for each time period made available for analysis:

  • O = Opening price

  • H = High price

  • L = Low price

  • C = Closing Price (or the Last Price for the most recent set)

  • V = Volume or the number of trades occurring

Nevertheless, not all chart types require all of this data in their construction.

Also, many technical analysis systems compile information on the open interest in the relevant currency futures contract.

Furthermore, some technical analysts prefer to consult several different types of charts, depending on their intended purposes. As a result, most charting software intended for use by forex traders will include all or most of the popular chart types described in the following sections.

Tic Charts

Tic charts plot the price action on a very short term basis. They usually use lines to connect every movement in the price action that happens over time, and usually as each tic of the exchange rate occurs in real time.

Forex traders that seek to profit from very short term price movements, such as scalpers for instance might find tic charts useful, as would a longer term trader looking to time their imminent entry into the market.

Line Charts

Line charts are similar to tic charts, but they allow traders to plot the price action over much longer time frames since not every tic is plotted. Instead, a representative price data point gets graphed for each time period.

For example, traders using line charts for technical analysis might plot the exchange rate from close to close, or from open to open, etc. They would also usually do so for each of the periodicities that they might be interested in analyzing in order to look at the market from several different time frame perspectives.

Overall, this process helps smooth out the price action in line charts considerably relative to that seen in tic charts which can help traders better identify market trends.

Bar Charts

Bar charts are one of the more popular chart types in use by forex traders today, and provide considerably more information than simple line charts. Another name for the Bar chart is the Open, High, Low and Close or OHLC chart.

Typically, bar charts will consist of lines or bars that extend vertically between the high and the low of the period to illustrate the extremes of the trading range seen for that period.

In addition, the bars have two small vertical lines or hashes that show the relevant opening price on the left and the closing price on the right for each period plotted.

Candlestick Charts

Originally hailing from Japan, candlestick charts plot the High, Low, Open and Close for each time period much like bar charts. Nevertheless, these highly informational charts also have a solid candle or body drawn from the market’s opening price to its close.

The candle also has a different color depending on whether the market moved up during the period in question, in which case the body will usually be white, or down during the period, when a black candle would instead be drawn.

Candlestick charts tend to exhibit a large set of well defined patterns, often with colorful Japanese names, that knowledgeable forex traders can use to forecast future exchange rate movements.

These candlestick patterns can involve one or more candles, and they usually tend to fall into the categories of bullish or bearish continuation or reversal patterns.

Point and Figure Charts

Another interest chart type is the so-called Point and Figure chart. This type of chart seems especially popular among professional forex traders who often create them by hand as they observe exchange rates move.

These special charts have the unique characteristic of focusing solely on price action. As a result, they help traders remove the sometimes distracting element of time from the plotted image and resulting analysis.

In general, moves on Point and Figure charts will be plotted in columns of X’s if they are rising, or in O’s if they are falling. Furthermore, each box on these charts has a certain Box Size or Point that is often defined as 30 pips for the major currencies, and only price reversals of a set size known as the Reversal Amount will be plotted.

As seen with Candlestick Charts, a number of useful Point and Figure chart patterns exist that can help forex traders predict future rates. These charts also tend to produce very clear trend lines that traders often use when deciding when to trade on observed patterns.

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