To begin the journey towards trading successfully, it is essential to acquire knowledge and comprehension of trading charts. These charts hold immense significance for traders of all levels, offering valuable market insights and information on price movements. Recognizing and understanding the complexities of these is the key factor to obtaining an edge in pre-prepared trading strategies. Before executing trades, traders make informed decisions with the aid of Forex charts. This blog delves into the multiple facets of chart types.
Understanding Trading Charts
These visually represent the price movements in the foreign exchange market. Traders can identify patterns on these charts to predict market trends, reversals, and continuations. These patterns are formed by connecting major price points like highs, lows, and consolidations with lines, which create repeating forms or patterns over time. As trading platforms like MT4 or MT5 trading platform help carry out trades, traders use these patterns to find trading opportunities.
Types of Charts
There are various types of charts used in Forex trading, but the major ones can be listed as follows:
Line Charts
A line chart is a basic type of forex trading chart that connects selected price data points with line plots, creating a single line that shows the highs and lows of price activity. Traders use these charts to view historical pricing of a currency pair, but they are not highly informative. However, they can still provide some insight into relative pricing and patterns in the financial markets.
Candlestick Charts
Japanese candlestick charts, invented by Munehisa Honma, are popular among traders worldwide for forex chart analysis. The chart shows the same information as a bar chart, including trading range, bullish/bearish attitude, and high, low, opening, and closing prices. Candlestick charts go further by displaying each candlestick’s “body,” indicating where most trades occurred. Forex trading techniques often focus on local candlestick patterns, wicks, and bodies.
A green candlestick shows an increase in price, while a red one shows a decrease, with each displaying four prices:
- Open: Beginning cost
- Close: Ending cost
- High: Highest price during the time
- Low: Lowest trade price during the time
Bar Charts
A bar chart is a type of trading chart that displays the periodic behaviour of a currency pair. It is commonly known as an OHLC chart and provides more information about the price for each interval than a line chart does.
Bar charts are preferred by many forex traders for determining market direction and analyzing regular price fluctuations. The bars in the chart represent open, high, low, and close prices. The chart turns red when the price drops and green when it increases.
Heikin Ashi
The Heikin Ashi chart is a candlestick chart variation that uses average price data to create a smoother and more consistent trend line. It eliminates the noise and oscillations of standard candlestick charts, making it easier to identify market direction. By assisting traders to follow the trend and make informed decisions on entry and exit positions, it is useful in trending markets.
The chart uses averages instead of actual prices to create bars, with the midpoint of the preceding bar representing the open price and the current bar’s average price representing the close. The averaging process creates smoother connections between the candlesticks, facilitating the reading of long-term trends. Traders often pair this type of chart with traditional candlesticks to gain more insights.
Renko
Renko charts are unique in a way that they are based purely on price movement, unlike most charts. The charts show price fluctuations using brick-like patterns, with each new “brick” appearing only when the price moves by a set amount. This allows traders to identify important support and resistance levels and significant trends while ignoring minor price fluctuations.
Renko charts do not consider time or volume, which helps remove noise and show a clearer picture of pure price movement.
Conclusion
Forex traders use technical analysis to predict future market trends on terminals like MT4 and MT5 trading platform, which requires reading diverse types of charts like line, bar, candlestick, Heikin Ashi, and Renko charts. Each chart provides varying amounts of data for different trading approaches, such as long-term trend analysis or intraday scalping. A trader’s strategy should align with the type of chart they use.
