Technical, Fundamental, Quantitative. There are several methods that forex traders use to predict the movements of currency pairs. Some traders focus on news, interest rates, and economic variables, while others prefer charting tools and indicators to guide their trading decisions.
Regardless of your forex trading method, however, you need to know how to read a forex chart - there is no escaping it. Fortunately, we've created this detailed guide to get you started.
You have to crawl before you can run. And forex charting is no different - you need to understand the basics before moving on to more advanced things.
Let's get started.
1. What is Forex?
Forex is short for ‘foreign exchange’ – the game of buying and selling various currencies in the foreign exchange market.
In the global foreign exchange market, retailers, investors, speculators, and institutions determine the relative value for converting one currency to another via buying and selling currency pairs.
It’s a dynamic, liquid marketplace with a daily turnover predicted to be more than 5.3 trillion dollars.
The trade-in Forex occurs between two currencies because one currency is being bought and another is sold simultaneously.
2. How to Read a Currency Quote?
Forex is the business of conversion, and since you are constantly comparing the value of one currency to another, forex is always quoted in pairs.
For example, the quote of EUR/USD shows how many US dollars you will get for one Euro.
The first currency is called the base; the second is called the quote. When you buy a currency pair, you buy the base currency and sell the quote currency. Simple.
MAJORS are widely traded by beginners and professionals alike. This is because they have the most liquidity, lowest spreads, and the broadest range of movements. Unlike minor currencies, majors are generally more stable. The economic and political institutions of these nations are usually long-established and predictable compared to other countries.
MAJORS pairs: EUR/USD, USD/CHF, GPB/USD, USD/JPY, EUR/JPY, USD/CAD
THE CROSSES are any currency pair that doesn’t feature the USD, and they do not hold any less profit potential than the majors. Too much US Dollar exposure can lead to all your trades heading in the same direction, a big problem if that direction is against you.
Popular Crosses pairs: GBP/JPY, EUR/GBP, CAD/JPY, AUD/CAD, EUR/AUD, NZD/JPY.
THE "EXOTIC" currency pairs are less traded and so much more costly to buy or sell. Don’t let the cost put you off because many of the greatest traders of all time made their fortunes with exotics. For example, one of the five greatest forex traders, George Soros, gained $800 million in profit from selling Thai Baht (THB) in the 1997 Asian crisis.
Popular Exotic pairs: USD/TRY, EUR/TRY, USD/ZAR, USD/MXN, USD/SGD, EUR/SEK
3. What is a Pip?
The most famous piece of the terminology used by forex traders has got to be the humble ‘pip.’
A pip is simply a unit you count profit or loss in.
Typically, forex pairs are quoted to four decimal places (0.0001). The ‘1’, four spaces after the 0, is referred to as a pip.
The number '7' in red shows the decimal unit of a pip.
If a trader buys GBP/USD for 1.6000 and then, later on, sells it for 1.6020, that's a difference of 0.0020 or 20 pips.
The exception is Yen pairs ( i.e., USD/JPY), which are only quoted to two decimal places. In this case, the second spot after the 0 is referred to as a pip.
Now that you're up to speed let's move on to what you really came for, how to read a forex chart.
4. What is a Forex Chart?
A forex chart is simply a graphical depiction of the exchange rate between two currencies.
It shows how the exchange rate of currency pairs has changed over time.
For example, the chart above (Euro vs. U.S. Dollar) shows how the exchange rate between Euros and US dollars has fluctuated over time.
Forex charts can be plotted for various currency pairs, from major pairs like EUR/USD and GBP/USD to minor pairs like AUD/CAD and NZD/JPY.
5. How do Forex Chart Timeframes work?
The amount of time shown on the chart depends on the particular timeframe you select.
By default, our forex charts are set to daily (1D) timeframes.
This means that each point on the graph, whether it be a line, candle, or bar, represents the trading data for one day.
If you changed the timeframe to a 60-minute chart, each point would now represent 60 minutes worth of trading data.
With most free forex charting tools, you can choose to display timeframes from as low as 1 minute all the way up to one month. If you get more advanced charting software, you can view lower timeframes.
6. Types of Forex Charts
Forex traders have developed several types of forex charts to help depict trading data. The three main chart types are line, bar, and candlesticks. For forex traders, candlestick charts seem to be the crowd favorite, and it’s easy to see why.
6.1 Line charts
In forex, a line chart is the most basic and simplest price representation. Basically, it marks different price points of a particular asset on the chart and then connects the neighboring points with a solid line.
Well, while line charts are straightforward to understand, they are actually too simple. That's because they only represent the closing prices of currency pairs. The line chart would not provide the necessary details for traders who want to get more complex information like opening or highest / lowest prices.
6.2 Bar charts
Bar charts are more complex than the line FX chart types and offer even more prices than the previous ones. Basically, this bar shows four different currency pair prices in a certain period of time - either minutes, hours, days or higher.
Here are these four prices: The top and bottom of the bar represent the high and low prices of the asset over the period. A short vertical line on the left shows the opening price, and the same one on the right shows the closing price.
Bar charts are far more complex than line charts for obvious reasons: while the line chart represents one price, the bar chart does that for four different prices. But when it comes to the most complex chart type, even the bars aren’t enough.
6.3 Candlestick - Most popular forex chart
Candlestick charts basically combine the two previous types. A candlestick chart is the most popular method for visualizing Forex price movements in a given period of time.
Compared to a line chart, which shows the price close to close, candlestick charts show four times the amount of information, displaying the close, open, low, and high price of a given period.
With these additional details, you can examine "how" the price has moved over a period of time, compared to see where the price was closed.
The red and green parts of a candle are called the "body."
The body of a candle represents the difference between the opening and closing price of the currency for a certain period of time.
If the candle's opening price is lower than the closing price, the candlestick color is green. If the opposite happens and the opening price is higher than the closing price, the candlestick color is red.
The black lines above and below the candles are called ‘wicks’ or ‘shadows.’
Wicks represent the highest and lowest prices reached during the given time period.
7. An Overview of Forex Indicators
Currency charts help traders evaluate market behavior and help them determine where the currency will be in the future.
To help make sense of the currency movements depicted on a chart, traders have developed several different visual guides to assist them – indicators.
There are hundreds of trading indicators developed to cover every aspect of forex trading, from trend following to mean reversion.
Below we cover some of the most popular indicators used by currency traders.
7.1 Bollinger Bands
Bollinger Bands are volatility bands placed x standard deviations around a moving average. Developed by John Bollinger, the bands widen in periods of increased volatility and narrow when volatility decreases.
Traditionally, the bands are used to highlight potential oversold and overbought areas. For example, if a price move breaks the upper band, then the price can be expected to return to its mean, or in this case, the mean moving average.
- Middle Moving Average = 20-period simple moving average (20 SMA).
- Upper Band = 20 SMA plus the 20-period standard deviation multiplied by 2.
- Lower Band = 20 SMA minus the 20-period standard deviation multiplied by 2.
7.2 Relative Strength Index (RSI)
Developed by J. Welles Wilde,r the Relative Strength Index (RSI) is a momentum oscillator that measures price movements' direction and velocity.
The indicator compares upward price movements in the closing price to downward movements in the closing price over specific time periods. The default period, suggested by Wilder, is 14 periods.
RSI = 100 – 100 / (1 + RS)
Where RS equals Average Gain divided by Average Loss
- Average Gain = [(Sum of gains over previous 14 periods / 14) * 13 + current gain] / 14
- Average Loss = [(Sum of losses over previous 14 periods / 14) * 13 + current loss] / 14
7.3 Simple Moving Average Line
SMA or simple moving average is the most common indicator plotted on forex charts.
Moving averages are used to help smooth price fluctuations over a certain period, giving the trader a clearer picture of the direction of the price movement.
SMA = Sum of the closing prices/number of periods.
8. Top 3 Forex Trading Strategies
8.1 Support & Resistance
Preferable timeframe: 1h
This strategy follows the old business cliché, “buy low and sell high.” Forex traders quantify how low a price’s low and how high it is by analyzing areas where prices have stopped and changed direction.
The support refers to the level where the price rarely falls below before turning around, and the number of buyers exceeds that of sellers hence causing the price to rise.
On the other hand, the resistance is the level where price rarely exceeds, and the number of sellers exceeds that of buys hence lowering the price. In both cases, the price stops and turns around.
Check our article on how to trade using support and resistance zones.
8.2 Pinocchio Strategy
Preferable timeframe: 1h, four h
A Pinocchio bar is a candlestick bar with a tiny body and a very long wick (nose). It is also called Shooting Star, Hanging Man, and Gammer. You may remember that Pinnochio's nose grew long when he was lying.
The same happens with this strategy: when the wick is longer than the body, this tells us that the market is deceiving us and that we should trade the opposite way.
The entry point varies: some traders prefer to wait for the next candle to retrace to the 50% Fibonacci level of the Pin bar, while others enter immediately after the Pin bar closes. A long wich indicated strong selling pressure; a long tail suggests intense buying power.
8.3 The Double Red Strategy
Preferable timeframe: 5min
The double-red strategy is a short-term reversal system based on price action and resistance. The trade is planned on a 5-minute chart and signaled when two bearish candles follow a resistance test.
How to profit?
Choose an asset and watch the market until you see the first red bar. Then wait for a second red bar. If the second red bar closes lower than the first red bar, then it's a jackpot. Usually, what happens is that the third bar will go even lower than the second bar. This is the point where you should open a short position.
9. Choose a Forex Broker to start trading
Now that you know the forex market, how to read the charts, and are armed with three forex trading strategies, it's time to start trading. For this, you need to signup with a forex broker.
Many forex brokers have different specs, and I will cover this topic in a separate guide. Check this article to learn how to choose a forex broker that will meet your expectations. In a nutshell, you should make sure the forex broker you chose it's regulated, offers you a demo account to start with, has small fees, and provides good support.
For now, I will show you several forex brokers that are beginner-friendly so you can start trading.
- XM Trading Point: Best No Deposit Bonus
- XTB (UK): Best for UK Traders
- Markets.com: Best for CFD Traders
- Pepperstone: Best Execution
- AvaTrade: Best for Beginners
- FXCM: Best for US Traders
- iTrader: Best Free Resources
After you signup with your preferred forex broker, make sure to give trading a trial run before committing any serious time or dollars. Practice making trades without saying goodbye to your hard-earned money.
Not yet convinced to start with a demo account? Check here our article on the PROs and CONs of forex demo accounts.
Congratulations on reaching the end of our guide. Now you know what the forex market is, what a currency pair is, the most important pairs, and most importantly, how to read a trading chart and three strategies you can use in your trading schedule to benefit from the FOREX market.
What about you? For how long time are you trading the Forex market? What tips can you offer to newbies?
Or do you have questions?
Let me know in the comments form below, and I will swiftly answer them.