If you are new to Forex trading, one of the most important skills you’ll need to learn is how to read Forex charts. Forex charts display the price movements of different currency pairs over time, and understanding how to read them can give you a better idea of where the market is headed and help you make more informed trading decisions.
In this article, we’ll cover everything you need to know about reading Forex charts, including how to access live Forex charts, the different types of Forex charts, and how to identify trading patterns on candlestick charts. We’ll also discuss some of the most popular technical indicators used by traders to help predict market trends.
How to Access Live Forex Charts
Before we dive into the details of how to read Forex charts, let’s first discuss how to access them. Several websites and platforms offer live Forex charts, but one of the most popular is TradingView.
TradingView is a web-based charting platform that provides real-time data for stocks, Forex, and other financial markets. The platform offers a wide range of charting tools and indicators, making it a favorite among traders of all experience levels.
To access live Forex charts on TradingView, simply create a free account and select the Forex pair you want to track.
You can then choose from a variety of chart types, including line charts, bar charts, and candlestick charts.
What is a Pip in Forex Trading?
Before we start discussing how to read Forex charts, let’s define some basic terminology. One of the most important terms in Forex trading is “pip.”
A pip is the smallest unit of measurement in Forex trading and stands for “percentage in point.” It represents the smallest change in price that a currency pair can make. For most currency pairs, a pip is equal to 0.0001, although some pairs have different pip values.
Understanding pips is crucial for reading Forex charts, as most charts display price movements in terms of pips rather than raw currency values.
Types of Forex Charts
There are several different types of Forex charts, each with its own strengths and weaknesses. The most common types of charts are line charts, bar charts, and candlestick charts.
How to Read a Line Chart
A line chart is the most basic type of Forex chart and is created by plotting a line between the closing prices of a currency pair over a given period of time. Line charts are useful for providing a general overview of a currency pair’s price movements but do not provide much detail.
One of the most important things to keep in mind when reading a line chart is that it only shows the closing price. This means that you will not be able to see the highs and lows of the currency pair during the period being charted.
How to Read a Bar Chart
A bar chart, also known as an OHLC (open, high, low, close) chart, provides more detail than a line chart. Each bar on a bar chart represents a specific time period and displays the opening and closing prices of the currency pair, as well as the highs and lows.
On a bar chart, the opening price is represented by a horizontal line on the left side of the bar, while a horizontal line on the right side of the bar represents the closing price.
The high and low prices are represented by vertical lines extending from the top and bottom of the bar.
How to Read a Candlestick Chart
A candlestick chart is similar to a bar chart but is easier to read and provides more information. Each candlestick on a candlestick chart represents a specific time period and displays the opening and closing prices, as well as the highs and lows.
Candlesticks are made up of two parts: the body and the wick.
The body of the candlestick represents the difference between the opening and closing prices, while the wick represents the highs and lows.
On a bullish (upward) candlestick, the bottom of the body represents the opening price and the top of the body represents the closing price. On a bearish (downward) candlestick, the top of the body represents the opening price and the bottom of the body represents the closing price.
Candlestick charts are particularly useful for identifying trading patterns, which we’ll discuss in more detail later in this article.
How to Read Heiken Ashi Charts
Heiken Ashi charts are a variation of candlestick charts that are used to filter out market noise and provide a clearer picture of market trends. Rather than displaying the actual price movements of a currency pair, Heiken Ashi charts display “average” price movements based on a formula that takes into account the opening, closing, high, and low prices.
One of the main benefits of using Heiken Ashi charts is that they can help traders identify trend changes more quickly than traditional candlestick charts.
Identifying Forex Trading Patterns on Candlestick Charts
Candlestick charts are one of the most popular types of Forex charts, in part because they are particularly useful for identifying trading patterns. Here are some of the most common trading patterns that traders look for on candlestick charts:
High Volume Moves
A high volume move occurs when a currency pair experiences a significant increase in trading volume. This often indicates that there is strong buying or selling pressure and can be a good indicator of a trend reversal.
When a currency pair experiences a high volume move, it means that there is a significant increase in the number of traders buying or selling that particular currency pair. This can happen for a number of reasons, such as a major news event, a change in market sentiment, or a sudden shift in economic fundamentals.
A high volume move is often seen as an indication that there is strong buying or selling pressure in the market. If the currency pair is experiencing a bullish trend, a high volume move to the upside can be a sign that the trend is about to continue.
On the other hand, if the currency pair is experiencing a bearish trend, a high volume move to the downside can be a sign that the trend is about to continue.
However, it’s important to note that not all high volume moves lead to trend reversals. In some cases, a high volume move may be a temporary spike in trading activity that does not indicate a significant change in market sentiment.
Traders should always seek confirmation before making trading decisions based on high volume moves.
To confirm a high volume move, traders can look for other indicators of market sentiment, such as technical analysis patterns or fundamental data. For example, if a currency pair experiences a high volume move to the upside, traders may want to look for other bullish indicators, such as a bullish candlestick pattern or positive economic news, to confirm that the trend is likely to continue.
Corrections
A correction is a temporary reversal in the overall trend of a currency pair. Corrections are a normal part of market movements and can provide opportunities for traders to enter or exit positions at more favorable prices.
Corrections can be caused by a variety of short-term market factors, such as profit-taking, changes in market sentiment, or unexpected economic news. In most cases, corrections are not strong enough to reverse the overall trend of a currency pair, but rather serve to adjust prices to a more sustainable level.
Traders can identify corrections by looking for a temporary reversal in the price movement of a currency pair. For example, if a currency pair is experiencing a bullish trend, a correction would involve a temporary decrease in price before the trend resumes.
During a correction, traders may choose to enter or exit positions at more favorable prices. For example, if a trader has been waiting to buy a currency pair that is experiencing a bullish trend but has been too expensive, a correction may provide an opportunity to buy at a lower price.
Double Tops and Bottoms
A double top or bottom is a common technical analysis pattern that can indicate a potential trend reversal in a currency pair. A double top occurs when a currency pair reaches a high price, experiences a temporary reversal, and then reaches the same high price again before reversing again. This creates a pattern that resembles two peaks with a valley in between. A double bottom is the same pattern but in reverse.
Double tops and bottoms can be identified by looking at a currency pair’s price chart and identifying the two peaks (or two valleys) that are roughly the same height. This pattern suggests that there is significant resistance (or support) at that price level, and that the currency pair may be unable to continue moving in the same direction.
When a double top or bottom is identified, traders should wait for confirmation before taking any trading action. This confirmation can come in the form of a break below the valley (in the case of a double top) or a break above the valley (in the case of a double bottom).
A break below the valley indicates that the currency pair is likely to reverse and move in a bearish direction, while a break above the valley indicates that the currency pair is likely to reverse and move in a bullish direction.
Traders may use other technical analysis indicators to confirm a double top or bottom pattern, such as trend lines or moving averages. It’s important to note that not all double tops or bottoms lead to a significant trend reversal, and traders should always look for additional confirmation before making any trading decisions.
Head and Shoulders
A head and shoulders pattern occurs when a currency pair reaches a high price (the “head”), experiences a temporary reversal, reaches a slightly lower high (the “left shoulder”), reverses again, reaches a higher high than the left shoulder (the “head”), and then reverses again to a lower low (the “right shoulder”).
A head and shoulders pattern is a strong indication that a trend is about to reverse, but traders should wait for confirmation before taking action.
Rejection Areas
A rejection area is a price level on a currency pair’s price chart where the price has previously failed to break through multiple times. Rejection areas can occur at both support and resistance levels and can indicate strong levels of support or resistance.
When a currency pair approaches a rejection area, traders often look for opportunities to enter or exit positions. If the rejection area is a resistance level, traders may look for an opportunity to sell the currency pair as it approaches that level, anticipating that the price will be unable to break through and will reverse. On the other hand, if the rejection area is a support level, traders may look for an opportunity to buy the currency pair as it approaches that level, anticipating that the price will bounce off of the support level and reverse direction.
Rejection areas can be identified by looking at a currency pair’s price chart and identifying the price level where the price has failed to break through multiple times in the past. Traders may use other technical analysis indicators, such as trend lines or moving averages, to confirm that the rejection area is a strong level of support or resistance.
Consolidation
Consolidation is a period of time during which a currency pair moves within a relatively narrow range, typically between established support and resistance levels. Consolidation can occur for various reasons, such as decreased trading activity, low market volatility, or uncertainty in the market.
Consolidation can be frustrating for traders, as it can be difficult to predict when the currency pair will break out of the range and begin trending again. However, consolidation can also provide opportunities for short-term trades, such as scalping or range trading. Traders may look for buy or sell signals within the range, such as bullish or bearish candlestick patterns, to identify short-term trading opportunities.
Breakouts
A breakout occurs when a currency pair moves beyond a previously established support or resistance level. Breakouts can indicate a strong trend and can be good entry points for traders. Traders may look for a breakout to confirm that the currency pair is likely to continue trending in the same direction.
Fakeouts
Fakeouts, also known as false breakouts, occur when a currency pair briefly breaks through a support or resistance level before reversing again. Fakeouts can be frustrating for traders, as they can lead to false signals and losses. Traders may use other technical analysis indicators, such as volume or trend lines, to confirm a breakout before entering a trade.
Using Technical Indicators
In addition to reading Forex charts and identifying trading patterns, many traders also use technical indicators to help predict market trends. Here are some of the most popular technical indicators used by Forex traders:
MACD
The Moving Average Convergence Divergence (MACD) indicator is a trend-following momentum indicator that helps traders identify changes in momentum and trend direction. The MACD is calculated by subtracting a long-term moving average from a short-term moving average.
When the MACD line (the shorter moving average) crosses above the signal line (the longer moving average), this can indicate a bullish trend. When the MACD line crosses below the signal line, this can indicate a bearish trend.
Stochastics
The Stochastic oscillator is a momentum indicator that compares a currency pair’s closing price to its price range over a given period of time. The Stochastic oscillator can help traders identify overbought and oversold conditions and can be a good indicator of trend reversals.
When the Stochastic oscillator is above 80, this indicates that the currency pair is overbought and may be due for a price correction. When the Stochastic oscillator is below 20, this indicates that the currency pair is oversold and may be due for a price rebound.
RSI
The Relative Strength Index (RSI) is a momentum oscillator that measures the strength of a currency pair’s price movements over a given period of time. The RSI can help traders identify overbought and oversold conditions and can be a good indicator of trend reversals.
When the RSI is above 70, this indicates that the currency pair is overbought and may be due for a price correction. When the RSI is below 30, this indicates that the currency pair is oversold and may be due for a price rebound.
Moving Averages
Moving averages are trend-following indicators that smooth out price movements over a given period of time. There are several different types of moving averages, including simple moving averages and exponential moving averages.
When a shorter-term moving average crosses above a longer-term moving average, this can indicate a bullish trend. When a shorter-term moving average crosses below a longer-term moving average, this can indicate a bearish trend.
Bollinger Bands
Bollinger Bands are volatility indicators that measure the standard deviation of a currency pair’s price movements over a given period of time. Bollinger Bands consist of a moving average and two bands that are plotted two standard deviations away from the moving average.
When a currency pair’s price moves outside of the Bollinger Bands, this can indicate a trend reversal or a period of increased volatility.
Average Directional Index
The Average Directional Index (ADX) is a trend strength indicator that measures the strength of a currency pair’s trend over a given period of time. The ADX can help traders identify strong trends and can be a good indicator of trend reversals.
When the ADX is above 25, this indicates a strong trend. When the ADX is below 20, this indicates a weak trend.
Conclusion
Learning how to read Forex charts and identify trading patterns is a crucial skill for anyone interested in Forex trading.
By understanding the different types of Forex charts and the trading patterns that can be identified on candlestick charts, you can better understand where the market is headed and make more informed trading decisions.
In addition to reading Forex charts, many traders also use technical indicators to help predict market trends.
Incorporating popular indicators such as the MACD, Stochastics, RSI, moving averages, Bollinger Bands, and ADX into your trading strategy can improve your chances of success in the Forex market.