How to Analyse Forex Charts : A Comprehensive Guide
Oct 24 2024
If you want to know the general direction or momentum of a forex pair’s market value, the best way to do so is to read forex charts. Within this guide, we’ll explore the different types of forex charts and graphs, what they represent, and how you can use industry leading indicators to inform your forex trades.
Types of Forex Charts
The ability to read forex charts is vital for efficient and accurate technical analysis. There are many types of forex charts offering a graphical picture of a currency’s price moves, empowering traders to spot short and long-term patterns and trends. Below, we explain the three most popular formats used for a forex graph and how they work.
Line Charts
In forex trading software, line charts can be useful to provide a quick and clear representation of price movements over time. They plot the closing price of a currency at every set timeframe. The line then connects each closing price to demonstrate an overall trend. It’s one of the easiest visual indicators to spot whether a currency’s value is flat or moving up or down.
Bar Charts
A bar chart displays slightly more data on a currency over time than a line chart. It doesn’t just show the closing price of a currency at each set timeframe. It also marks the opening price, as well as the highest and lowest available prices for each timeframe.
The black, vertical line displays the range between the highest and lowest traded prices. The small line which appears on the left-hand side of the vertical bar indicates the opening price, while the small line to the right-hand side of the vertical bar shows the closing price. It helps to determine short-term volatility for forex pairs.
Candlestick Charts
Candlestick charts are an advanced version of a bar chart. It showcases virtually the same price information as a bar chart. However, it’s displayed in a more colorful format that many consider to be easier to read once they get to grips with it.
The body (candle) of a candlestick is used to show the opening and closing prices. The top and bottom wicks demonstrate the highest and lowest price traded. Typically, when the candle of a candlestick is colored in red, the currency pair closed lower than it opened. If the candle is green, the currency pair closed higher than it opened.
Key Components of Forex Charts
When you’re learning how to analyse forex charts, there are several fundamental elements to grasp to interpret forex charts and make better trading decisions.
Price Trends
Many of the leading forex charts are used to portray the general price direction of a currency pair over a set timeframe. There are three types of price trends which can be ascertained from a forex chart or graph:
- Uptrends: These occur when a currency pair’s price is consistently rising, making higher highs and higher lows. It’s the number-one price trend for a bullish market.
- Downtrends: These occur when a currency pair’s value is consistently falling, making lower highs and lower lows. This occurs when selling pressure dominates, pushing the price down.
- Sideways trends: Also known as ranging markets, these reflect currency pairs whose values are neither rising or falling, merely fluctuating within a tight price range.
Support and Resistance Levels
It’s easy to use forex charts to find support and resistance levels for a forex pair. These are horizontal indicators or lines where the price continually “bounces”.
If it bounces down from the top, this suggests a resistance level. If it bounces up from the bottom, this suggests a support level. Resistance levels occur when the number of sellers greatly outweighs the number of buyers. At the other end of the spectrum, support levels occur when the number of buyers outweighs the number of sellers.
Chart Patterns
Using forex graphs and charts, you can start to visualize patterns which can signal the possible direction of a forex pair. The ‘head and shoulders’ pattern is very popular as traders will look for this to anticipate a reversal in a price move. ‘Double tops’ or ‘double bottoms’ are also commonly used to anticipate strong areas of support and resistance.
Meanwhile ‘triangles’ can also pinpoint possible breakouts for a forex pair from its current trading range.
Popular Technical Indicators for Forex Chart Analysis
Forex traders lean on historical price data, as well as chart patterns and indicators to anticipate future market moves. The most popular technical indicators can help to pinpoint trends which can be used to inform entry and exit points. Below, we’ll explore four of the most used forex charts in today’s state-of-the-art forex trading software.
Moving Averages
Many forex traders will have a moving average indicator within their trading software. This type of indicator can smooth out price data over a set timeframe, with a view to identify trends and possible price reversals. The benefit of a moving average indicator is that it filters out most of the market noise and focuses on the average prices. Simple and exponential moving averages are the most popular types of moving average indicators.
Relative Strength Index (RSI)
Price momentum as a trading indicator is just as beneficial in forex trading as it is in equities trading. Leading forex trading software will usually offer indicators known as momentum oscillators to gauge the speed and change of price movements on an instrument. The RSI indicator is one of the most popular for identifying overbought and oversold forex pairs.
An overbought forex pair is one that’s now overpriced, while an oversold forex pair is one that’s now undervalued. It helps traders to pinpoint likely price points to gauge market strength and a possible reversal.
Moving Average Convergence Divergence (MACD)
The MACD trading indicator works in forex by plotting the relationship between two moving averages. The indicator often tracks exponential moving averages (EMAs) spanning 12 and 26 days. The indicator displays a MACD line, signal line and histogram. The aim being to locate underlying buy or sell signals and changes in market momentum.
Bollinger Bands
Bollinger Bands were conceived in the 1980s by John Bollinger, an American financial analyst passionate about using volatility to inform his options trading.
This indicator features a central moving average line, with two outer bands positioned two standard deviations away from the middle point. In forex trading, it demonstrates volatility and the possibility of a currency reaching overbought or oversold territory. If a currency’s price hits or breaks through either band, it can either point to a reversal or the continuation of an existing trend.
Forex Chart Analysis Techniques
Trend Lines
Trend lines are one of the most common techniques used to analyse forex charts and define trading plans. It’s easy to draw your own trend lines just by connecting multiple price points – usually the lows of a forex pair in an uptrend or the highs of a forex pair in a downtrend.
Volume Analysis
Trading volumes are typically used to validate the movement of a forex pair’s price. The higher the trading volume, the greater the confirmation of a trend or price move. If a forex pair’s price is volatile with very little traded volume, it’s an indication that its next trend or direction remains uncertain.
Fibonacci Retracement
Fibonacci retracement levels are positioned at each stage of the Fibonacci sequence on a forex chart. It’s possible to use these levels to spot likely price reversals since Fibonacci levels usually define strong areas for support and resistance.
Practical Tips for Analysing Forex Charts
- Combine Technical Indicators Wisely
Try to use complementary indicators to confirm your trading signals. - Don’t Overcomplicate Levels
Focus on the main support and resistance levels to frame your trades as a novice. - Keep the Emotion Out of Your Decisions
Don’t try to use forex charts to find something that doesn’t exist. Don't chase losses and stick to your trading plan. - Stay Abreast of Real-World Events
Monitor the latest economic and geopolitical news to inform your technical analysis with dynamic, fundamental analysis.
Reading Forex Charts for the South African Rand (ZAR)
If you’re considering trading forex pairs involving ZAR, be mindful that the rand is considered an “exotic” forex currency. This is because South Africa’s economy is still considered an emerging market. That’s why ZAR pairs often exhibit periods of high volatility, so moving average indicators and RSI are invaluable for confirming the strength of trends.
ZAR also has a strong correlation to precious commodities like platinum and gold, which makes it sensitive to geopolitical events. Fundamental analysis is equally as important as reading and understanding ZAR forex charts.
Practice Forex Chart Analysis with FX Broker Demo Accounts
If you’re keen to master a forex chart before placing trades with your own money, it’s a good idea to open demo accounts with reputable forex brokers first. The likes of Land Prime, FxPro and AvaTrade, three of our most recommended forex brokers, all offer demo accounts to allow you to practice your technical analysis using a virtual money balance.
Don’t forget to check out our latest cashback promotions to earn bonuses just for registering an account with any of our partnered brokers!
In Summary
It’s important to dedicate time to understanding what forex charts and graphs are telling you. You should also pick technical indicators which suit your trading style best to find your next viable entry into the forex market.
Thirsty for more beginner-friendly forex trading guides? Try these for size:
Forex Graph FAQs
How do I identify trends using a forex graph?
There are various ways to spot trends on a forex graph. Observe price movements and look for currencies to make higher highs or lower lows to signal a new breakout or trend. You can also use moving average indicators to confirm trend strength or seek out chart patterns like double tops or head and shoulders to signify momentum shifts.
What role do support and resistance levels play in forex graph analysis?
Support and resistance levels play an integral role for forex traders in determining the next trend or price move. If a price is on an uptrend but appears to have reached a resistance level, it could be ripe for a reversal. If a price has been on a downward trend but appears to have fallen to a support level, it could also trigger a price reversal.
Why is a candlestick chart given its name?
As candlestick chart is an advanced bar chart which plots the opening and closing price of a forex pair, as well as the highest and lowest price achieved within a set timeframe. The middle bar shows the opening and closing price at the top and bottom, appearing like a candle. The top ‘wick’ is the highest price and the bottom ‘wick’ is the lowest price.