Chapter 1 : Types of Forex Charts


By now you have an arsenal of weapons to use for when it’s time to battle the market. And now, you will add yet another weapon to your collection: FOREX CHARTS!

Think of Forex charts as a land mine detector because once you finish this blog, you will be able to use all Forex charts and spot explosions on the charts before they even happen, potentially making you LOTS of money in the process.

But first things first…In order to study how the price of a currency pair moves, you need some sort of way to look at its historical and current price behaviour.

What are Forex charts?
A chart, or more specifically, a price chart, is a visual representation of currency quotes over a period of time. Forex charts are extremely important for Forex traders, as they reveal how currency pairs have performed over a set period of time (whether it’s 10 minutes, 4 hours, a day, or a week).

No matter your preferred trading method, you’ll need to know how to read Forex charts – there really is no escaping it.

Even though charts may seem somewhat of a science at first glance, they’re really not that bad. They are user-friendly and it’s pretty easy to understand how price movements are presented over time since it’s all visual.

On the Forex price charts, the y-axis (vertical axis) represents the price scale and the x-axis (horizontal axis) represents the time scale.Prices are plotted from left to right across the x-axis. The most recent prices are plotted furthest to the right.

Why do we need Forex charts?
Forex charts are your key to making it in the Forex market. Chart formations will help us spot conditions where the market is ready to break out.

And that’s the whole point. To spot big movements before they happen so that we can ride them out and rake in the cash.

But before we dig deeper into chart patterns, let’s look at the three most popular types of price charts that traders can use to monitor the Forex market: 

  • Line chart
  • Bar chart
  • Candlestick chart
  • Heikin-Ashi chart



Chapter 2 : Line Charts in Forex


With the advances in technology, Forex traders have developed highly complicated trading methods, with sophisticated graphs. But let me tell you something, some of the most successful traders believe that the best methods are the more simple ones.

Why?

Because simple methods are easier to understand and therefore easier to use.Speaking of simple, do you know what the simplest type of chart is?

A Line Chart.

What is a line chart?
A line chart is the simplest type of chart that draws a line from one closing price to the next closing price. Over a long period of many closing prices, this forms a coherent line in which trading information can be gathered.

This type of chart provides traders with a clean, easy-to-understand view of the instrument’s price as it filters out all the noise.

But a picture speaks a thousand words so let’s take a look at what a Line chart looks like.

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The line chart is simple to follow, but it does not provide the trader with much detail about price behaviour within the period.

All it shows is that the price closed at X at the end of the period. You have no clue what else happened.

That’s why this type of chart is usually used to get the bigger picture view of price movements.

Should you be using a Line chart to trade?

Advantages of using Line Charts:
  • Line charts filter the market noise.
  • The simplicity of line charts make the markets appealing and easy to follow.
  • The simplicity of line chart also help in determining support and resistance level, turning points and chart patterns.
Disadvantages of using Line Charts:
  • Line charts do not provide enough price information.
  • Its simplicity is also its greatest weakness as it misses out on key data that otherwise would have influenced trading decisions. 
  • Line charts can generate a lot of false signals on lower time frames if used incorrectly.



Chapter 3 : Bar Charts in Forex


It is nothing like a chart at a bar and it has absolutely nothing to do with ANYTHING bar related.

A bar chart in Forex is a bit more complex. Bar charts are the workhorse of technical analysis. 

Seriously, there would be no technical analysis or technical traders without a bar chart.

What is a bar chart?
A bar chart is a collection of price bars, with each bar showing the price movements for a given period of time. 

Each bar has a vertical line that shows the highest price reached during the period, and the lowest price reached during the period.

The opening price is marked by a small horizontal line on the left of the vertical line, and the closing price is marked by a small horizontal line on the right of the vertical line.

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If the close price is above the open price, the bar will be coloured black or green. 

If the close is below the open, which means that the price dropped during that period, it will be coloured red.

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Colour coding the price bars depending on whether the price moved up or down helps Forex traders to see price movements and trends more clearly.

How do I read a bar chart?
Bar charts are often called OHLC (or HLC) Bar Charts because they indicate the pen (O), high (H), low (L), and close (C) for that particular currency pair.

What does that mean? Keep on reading and you’ll soon find out. 

Open
The open is the first price traded during the bar and is indicated by the horizontal foot on the left side of the bar. Usually the open is the same or super close to the previous close.

High
The high is the highest price traded during the bar and is indicated by the top of the vertical bar.

Low
The low is the lowest price traded during the bar and is indicated by the bottom of the vertical bar.

Close
The close is the last price traded during the bar and is indicated by the horizontal foot on the right side of the bar.  It is the most important data point on the bar because it summarises the final sentiment of the given period.

Okay, so now that you know what all the lines mean, let’s take a look at what an actual bar CHART looks like. 

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Time Periods of a Bar Chart
As you can see in the example above, a bar chart is composed of vertical bars that show a currency’s trading range for whatever period you may be analysing.

You can have 5-minute bars, 15-minute bars, 1-hour bars, 4-hour bars, etc. In Forex, the most commonly used bars are the 15-minute, 1 and 4-hour, and daily. 

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It is completely up to you and your trading strategy to decide which time period you want to analyse. A 1-minute bar chart, which shows a new price bar each minute, would be useful for a day trader but not an investor. A weekly bar chart, which shows a new bar for each week of price movement, may be appropriate for a long-term investor, but not so much for a day trader.

Bar charts also show the direction of movement—upward or downward—in the price, as well as how far the price moved during the bar. Day traders can then assess how the price is moving based on the bar chart. When a trader makes trading decisions based on those price bars, they are called price action traders. 

Bar Size Matters
In addition to the placement of the components, the size of the bar matters, too. The size of bars changes according to the economic pressures that affect the supply and demand for a currency pair.

A tiny bar (small distance between high and low) means a lack in interest by both buyers and sellers. 

A tall bar, with a wide distance between the high and the low, means a lot of buying and selling interest.

The distance between the high and low is named the trading range and an oddball bar that is different in size or component configuration from the bar preceding it should get attention.

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When it is interpreted correctly, this simple symbol can be used to show turning points, trend lines and support and resistance levels.

While bar charts are not absolute in their ability to predict currency movements, they provide you with an important tool to better understand market movements.




Chapter 4 : Candlestick Charts


Now that you’ve mastered the Line and Bar charts, it’s time we covered another super popular Forex chart – (Japanese) Candlestick Chart.

What is a Candlestick Chart?
A candlestick chart (also called Japanese Candlestick Chart) is a type of price chart used in technical analysis that displays the high, low, open, and closing prices for a specific period of time.

I know what you’re thinking — how is this any different from a bar chart?The truth be told, it’s not THAT different.

The candlestick chart is pretty much a variation of the bar chart.

Think of it as your cousin that looks a bit like you, but you’re obviously the better-looking one. 

While candlestick charts show the same price information as bar charts, they are presented in a more appealing format. 

And not only do many traders prefer this type of Forex chart because it is sexier, but it is also easier to interpret. 

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History of Japanese Candlestick Charts
Back in the old days when Godzilla was still a cute little lizard, the Japanese created their own version of technical analysis to trade rice.That’s right, RICE. Traders were hustlin’ back then too.

One beautiful day in 1870, a fella from a country in the far West called Steve Nison came across a secret technique called “Japanese candlesticks” by a Japanese rice merchant Munehisa Homma.

Steve researched, studied, lived, breathed, ate candlesticks, and began to write about how it could be used in the Forex markets. 

Slowly, this secret technique was not so much a secret anymore. By the ‘90s, traders all over the world had heard of the candlestick chart.Long story short, without Steve Nison, candlestick charts would have most likely remained a buried secret.

Japanese Candlesticks Anatomy
A candlestick is composed of three parts; the upper shadow, lower shadow and body.

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Candlestick Bodies
When it comes to Forex trading, there’s nothing naughtier than checking out the bodies of candlesticks!

Why?
Because the bodies represent the price range between the open and close of that day’s trading. 

When the real body is filled in or black, it means the close was lower than the open. 

If the real body is empty, it means the close was higher than the open.

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And since everything is better in colour, traders can alter their candlestick colours in their trading platform too. 

A colour telly is much better than a black and white telly, so why not splash some colour on those candlestick charts too, right?

Traders can simply substitute green instead of white, and red instead of black.

This means that if the price closed higher than it opened, the candlestick would be green.

If the price closed lower than it opened, the candlestick would be red.

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Not only the bodies can be different colours, but just like humans, candlesticks have different body sizes. 

Long bodies indicate strong buying or selling. The longer the body is, the more intense the buying or selling pressure. This means that either buyers or sellers were stronger and took control.

Short bodies imply very little buying or selling activity.

The Mysterious Shadows
The candlestick shadows (also known as wicks or tails) are depicted as thin lines on the top and bottom of a candlestick.

These upper and lower shadows provide important clues about the trading session.

  • Upper shadows signify the session high.
  • Lower shadows signify the session low.

Candlesticks with long shadows show that trading action occurred well past the open and close.

Candlesticks with short shadows indicate that most of the trading action was confined near the open and close.

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  • If a Japanese candlestick has a long upper shadow and short lower shadow, this means that buyers flexed their muscles and bid prices higher. However, sellers came in and drove prices back down to end the session back near its open price.

  • If a Japanese candlestick has a long lower shadow and short upper shadow, this means that sellers flashed their washboard abs and forced the price lower. However, buyers came in and drove prices back up to end the session back near its open price.

How to read Candlestick Charts
The candlestick chart summarises the executed trades during a specific period of time.

For example:

A 5-minute candle represents 5 minutes of trading data.

A 4-hour candle represents 4 hours of trading data.

1-week candle represents 1 week of trading data. 

And so on. You get the point.

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There are many chart time frames to choose from and it is completely up to you to decide which one suits you and your trading style best. 

The most common chart time frames are:

  • 1-minute (M1)
  • 5-minute (M5)
  • 15-minute (M15)
  • 30-minute (M30)
  • 1-hour (H1)
  • 4-hour (H4)
  • Daily (D1)
  • Weekly (W1)
  • Monthly (M1)

The smaller chart time frame you choose, the closer you look into price action. It is like you are zooming in the chart.




Chapter 5 : Different Forex Charts – Pros and Cons


Unfortunately, Forex charts are not the holy grail.

Line charts, Bar charts, Candlestick Charts are definitely ain’t no Ed Sheeran song.  They ain’t perfect.

And just like any other tool used for technical analysis, Forex charts are super useful but they do have some weaknesses or limitations.

Let’s go over these advantages and disadvantages together. 

Line Charts – Pros and Cons

Advantages of Line Charts

✅ Most basic, simple and clear type of a Forex chart

✅ Easy to understand for novice traders

✅ Useful for quick identification of the trend of a currency pair

✅ Excludes all market noise

✅ Suited for updates on developments when you are on the go

✅ Easy to identify support & resistance levels and graphical models


Disadvantages of Line Charts

❌ Insufficiently informative and does not contain complete information compared to other charts

❌ Only suitable for the superficial study of price 

❌ Many price movements are overlooked

❌ Uses the closing price only

❌ Does not show price extrema and opening prices


Bar Charts – Pros and Cons

Advantages of Bar Charts

✅ An upgraded version of line charts

✅ Offers a range of useful information

✅ You can see all four prices over a period

✅ Simple to search for simple patterns in shorter timeframes

✅ Visually compact and exact, which allows traders to analyse the current market situation, trends, and price levels


Disadvantages of Bar Charts

❌ Visually not as easy to read as Candlestick charts

❌ No explicit colouration

❌ Visually less convenient to determine whether the asset has grown in value over a certain period or has fallen

❌ Can be hard for a newbie to understand which bar is growing and which is falling


Candlestick Charts – Pros and Cons

Advantages of Candlestick Charts

✅ Considered the most convenient and popular among traders

✅ Highly informative

✅ Visually easy to read

✅ Displays the full information of each time frame

✅ Offers a deeper insight into price action 

✅ Flexible and can be used alone or in combination with other technical analysis tools


Disadvantages of Candlestick Charts

❌ Doesn’t show the exact price movements

❌ Doesn’t present the bigger picture

❌ Fewer candlestick charts on the screen in comparison with bar charts, which means that you have less information to do an analysis

❌ Comes with a gap

❌ Does not tell you which came first, the high or the low

❌ Doesn’t display the long-term trend

❌ Looks different in every time frame

❌ Laggs an indicator