Investing > How to Read Forex Charts

How to Read Forex Charts

Charts are the one and only thing that can tell you where currency prices are going.

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Updated January 10, 2022

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Have you ever driven down a dark road, in the middle of the night, with a really dirty windshield—so you could hardly see anything at all?

Me neither.

But if you can image what it would be like, then you can understand the importance of forex charts. These charts are the key indications that tell you what’s going on with a currency pair—whether there’s danger ahead, or an upcoming climb. 📈

Unfortunately, many traders want quick profits and never even learn the basics properly. There are about 9.6 million forex traders worldwide, and about 70% to 80% lose money—but don’t worry, making a buck is not hard once you’ve got the know-how.

Although the pandemic has decimated the world’s economies, the forex market has never felt better—we have seen 300% growth in trading accounts since the outbreak began. Needless to say, there is more opportunity here than ever, but only for those with forex literacy.

In this article, we’ll cover the five most common types of forex charts and how to interpret them— these charts are not overly complicated and can be used for all kinds of trading. So, let’s get started, get the basics down, and you’ll be one step ahead of the competition in no time.

What you’ll learn
  • How to Read a Forex Chart
  • Price and Time Axis
  • Understanding Pips in a Chart
  • Line Charts
  • Bar Charts
  • Tick Charts
  • Point and Figure Charts
  • Candlestick Charts
  • Bearish Sentiment
  • Bullish Patterns

What Does a Forex Chart Show? 💹

A forex chart shows changes in the exchange rate of a currency pair over time. This is the exchange rate anyone will pay.

Traders who buy and sell currencies through their forex broker’s trading platforms all look at the same charts and draw conclusions from them. These might seem dry at first, but once you figure out how to make money from them, they can quickly become exciting.

Each chart shows the exchange rate of a currency pair. For example, some of the most common currency pairs are EUR/USD and JPY/USD—beginners learning to trade forex usually trade these major pairs due to their stability and predictability.

The EUR/USD chart will show exactly how many dollars you could buy with one Euro. The first currency is called the “base” currency and the second is called the “quote” currency, and the wiggly line on the chart tells you how much 1 EUR costs in USD over a selected period.

When the line goes up, that means that a Euro will cost more USD to buy and when it goes down, that means EUR is cheaper compared to the US dollar. Logically, the chart tells you when it is time to buy and when it’s time to sell.

While you can compare historical prices by looking at forex quotes, it’s much easier to view a chart that you can set up to display the time frame of your choice. What kind of chart you need depends on your trading style—some traders like to bet on daily price fluctuations, while others play the long game.

How to Properly Read a Forex Chart 👨‍🏫

If you have ever taken a trip to Europe or any other part of the world, you probably had to exchange, or trade currencies. It’s no different here, but we are using it to our advantage this time.

Even if you are new to forex trading, you are probably familiar with the pricing shown on these graphs. This is the exchange rate between two currencies, as simple as that.

In general, reading a forex chart is about understanding the relationship between two currencies. These charts will show you information such as the open, high, low, and close prices of a currency pair—these are important because knowing what they are means you know when you can buy low and sell high.

A typical forex candlestick chart
A typical forex candlestick chart, courtesy of TradingView.
  • Open: the price at the start of a period.
  • High: the highest price traded during a period.
  • Low: the lowest price traded during a period.
  • Close: the price at the end of a period.

As you get more familiar with these charts, you will be able to identify patterns in the charts, like whether a price is trending up or down or if it is stagnant. Eventually, this will help you find opportunities and shape your forex trading strategy in the best way possible.

Price and Time Axis 💱

Forex charts work much like other charts you may have seen. There is an X-axis (horizontal), which represents time, and the Y-axis (vertical), which represents the price.

That said, not every chart is the same. Some types of forex charts don’t have the time on the X-axis. Maybe they forgot to wear their watch?

Forex charts will always have a price on the Y-axis, though. You will also see markings on the X and Y-axes to show the time and price for that specific chart.

Understanding Pips in a Chart ➗

For forex traders, price changes are expressed in pips. That may sound like some fancy British term or something, but it stands for “percentage in point.”

A pip is just the smallest price change a currency pair can have—this depends on the currency pair, but in almost all cases, 1 pip equals 0.0001 units of currency. On these charts, your exchange rates usually have several decimal places, allowing you to follow fine price movements.

Understanding Pips in a Chart
A pip is 0.0001 in all currency pair that don’t include the JPY.

For example, EUR/USD has been in a steady decline for a while now—it was recently at 1.2248 but fell to 1.2226, which was a drop of 22 pips. The only case where a pip is at a different decimal point is the Japanese yen. In pairs that contain the JPY, 1 pip equals 0.01 units of currency, so don’t get confused if you see this—it’s not a bug.

Pips are also important because they tell you how much money you’ll make. That is, before you include your broker’s fees and commissions

Now that we have an idea of how pips work, we can cover the five different types of charts. We’ll also determine how to understand pips in a chart. Then, we’ll see how this actually looks as we go through our examples of different charts.

Line Charts 📉

A line chart is simply a chart with a line drawn from one closing price to the next. They sort of look like one of those lie detector graphs—except line charts always tell the truth. 😉

A typical line chart
A typical line chart, courtesy of TradingView.

This is the simplest kind of chart and isn’t very useful for identifying short-term trends. You could even call them boring, but line charts can still be useful!

Line charts can be used to identify long-term trends like the growth of AUD compared to the USD. Traders can use a line chart if they want to “zoom out” on a currency and easily see the big picture. And if traders are especially concerned with the closing prices, line charts may be useful because they tell you how much the prices were higher or lower at the beginning of the trading day.

However, if traders want to know more about what happened during the trading day and see the price fluctuations in clear detail, line charts just don’t cut it. If you just want a broad overview, line charts work, but for more information, you need to look at another type of chart.

Bar Charts 📊

Bar charts add more granular detail about opening and closing prices. They allow you to see high, low, open, and close prices. They are sometimes referred to as OHLC charts for that reason.

bar chart
Bar chart example. Image by TradingView.

Because we need another acronym, right? Fortunately, this one is pretty simple—OHLC stands for “Open, high, low, and close”, and this type of chart shows you all 4 major data points over a selected period.

The bars will also be different colors depending on the price trend—you will often see a red bar if the price is falling or a green bar if it’s rising. The entire bar represents the price range, where the top is the high and the bottom is the low. On the left side of the bar is a horizontal line to indicate the opening price; on the right side is the closing price.

👉 Important note: If an exchange rate is currently rising, the bar indicating the opening price will be below the one indicating the closing price. The opposite is true if the price is falling. This is why it helps to know which side of the bar shows open vs. close.

Tick Charts 🧮

Tick charts primarily show changes in the price of a single currency pair. These changes are indicated by “ticks” which is where the chart gets its name.

tick chart
Tick chart set at 1000 ranges. Image by TradingView.

Unlike line charts, which are time-based, a new tick only appears after a certain number of transactions. This might be 100 transactions, 1,000 transactions, or 10,000—basically, the more ticks there are, the more popular this currency pair is at the moment.

Because tick charts are transaction-based, rather than time-based, they might better illustrate the interest in a particular currency pair than it’s price history. Several upward ticks may suggest a possible uptrend, making these charts useful when you’re deciding whether to buy or sell.

Point and Figure Charts ✖️⭕

Point and figure chart
Point and figure chart, courtesy of TradingView.

Point-and-figure charts are similar to tick charts in a few ways. First, they are not fixed to a specific interval on the x-axis, and they also illustrate the number of transactions.

Also like tick charts, you see movement on point and figure charts only after a certain number of transactions. These charts look slightly different though, filling an X in a rising column of boxes and an O in a falling column.

It might make more sense to call these tick charts because the X and O marks are like what you see in a friendly game of Tic-Tac-Toe. As you might expect, that rising X and falling O correspond to changes in price.

Each box indicates a specific price. Thus, these X and O marks are not made on the chart unless the price rises or falls enough to justify making a mark.

Point-and-figure charts have a reversal requirement as well. A reversal is set at three boxes, and the price must change at least that much before switching from X to O or vice versa. In other words, you won’t see a reversal unless there is enough trading activity.

This is helpful because it means there must be a clear and pronounced change in price before it is marked on the chart. All in all, this type of chart is less detailed but also easier to understand than a tick chart and gives you a broad overview of a currency pair’s movement.

Candlestick Charts 🕯️

Japanese candlestick chart
The candlestick is the most commonly-used type of chart by traders. Image by TradingView.

Candlestick charts are somewhat similar to bar charts but build on the idea. They work similarly, too, with each “candle” having a body and a wick above and below the body. 

You could say that candlestick charts—which were originally referred to as Japanese candlesticks—are “lighting the way,” because they show so much information. They show detailed price changes in a clear way and are very easy to get used to—all the popular forex brokers for beginners show these in their ads because they’re the most accessible to new traders. 

Candlestick Anatomy ✔️

The candlestick’s body shows the open and close prices, whereas the wick shows the high and low prices for the specified time period. Much like bar charts, the bottom of the body will be open if the price is rising; if the price is falling, the bottom will be the closing price.

However, the bottom of the wick will always be the low price, and the top will always be the high price—these candlesticks can reveal a lot more detail, too, which is why they are popular with many traders. For example, if the candle’s body is short, but the wick is long, it could mean there was a lot of pressure in one direction but it was pushed back before close.

A long, green body could indicate that there was a lot of buying pressure for that day, while a long, red body could indicate significant selling pressure. More often than not, when there’s a strong push in one direction, the price is bound to swing in the opposite direction just as much.

Another benefit of candlestick charts is the shading of the candle’s body. These charts have a larger body in the middle which indicates the difference between the opening and closing prices.

CANDLESTICK
Due to its many components, the Japanese candlestick offers more info than any other type of chart.

If the body is filled in, the closing price was lower than the opening. If it’s not filled in, the closing price was higher than the opening. Because candlesticks can show so much about market activity, there is terminology specific to things you may see with these charts.

The Doji Candlestick Pattern ➕

One phenomenon that can sometimes occur is that the opening and closing prices are nearly equal. It’s a Japanese word, and I like how one some forex traders describe it: “Think Homer Simpson’s ‘Doh!’”

A Doji is something that isn’t supposed to happen. It means neither buyers nor sellers were able to noticeably affect the price that day. Thus, the open, close, high, and low are nearly identical—you can’t turn a big profit while this is going on.

A recent example is what happened to EUR/USD no long ago when talks of a new stimulus package kicked off in the US. The injection of money meant more investment from American forex traders, which boosted the confidence in the USD, stopping its decline.

A morning star Doji pattern.

On a chart, this will appear as a cross or a plus sign—it is rare to see this happen on the open market, but it can happen at times. If you see a Doji occur during an uptrend or downtrend, it may indicate there will soon be a reversal, so be prepared whenever you see a big plus.

Bearish Sentiment 🐻

Knowing when to buy is important, but knowing when to get out of bounds is probably even more crucial—you don’t want to be left with money that you can only sell at a lower price than the one you bought it at. Luckily, spotting bearish patterns isn’t hard, so you won’t have a problem knowing when to sell.

Hanging Man 🦥

Similarly, some patterns signal a bearish sentiment—for example, a hanging man occurs when there is a possible reversal in an upward trend. This will be indicated by a small body with a large upper wick and a small lower wick.

Hanging Man
The hanging man commonly indicates that an upward trend is over.

This formation could indicate that traders are selling the currency you are analyzing like hotcakes. Buyers may have brought the price to near where it opened, but buyer confidence is generally falling, which means that the price is about to drop or stagnate.

Thus, what you may well be seeing here is a currency that is losing its strength, and the uptrend may have disappeared.

Shooting Star ✨

Another bad omen, the so-called shooting star, is indicated by a small candle body, large upper wick, and little to no lower wick. This means the candle body will appear near the bottom—a shooting star is also known as an inverted hammer for obvious reasons.

SHOOTING STAR
The shooting star indicates a very imminent trend reversal.

So, what actually happened here? It means the price opened low, shot up high during the day, then later closed near the opening price. This could indicate a bearish outlook as sellers push back against a rising price. This certainly isn’t as exciting as a real shooting star. But it’s not too far off. 🙂

Bearish Harami and Engulfing ✅

The bearish Harami has a large green candle body with small lower and upper wicks followed by a smaller red candle body, again with small wicks. This suggests buyers are indecisive and there may soon be a reversal to the downside.

Bearish Harami and Engulfing
Harami and engulfing are some of the most common price patterns.

The bearish engulfing is just the opposite, still with small wicks. In this case, there is a strong possibility of a downward trend to follow.

Bullish Patterns 🐂

Some patterns will indicate a bullish sentiment, and here is the most prominent example. A hammer is just the inverse of a shooting star—in other words, sellers pushed the price to a low during the day before sellers pushed it back up. This could indicate a bullish outlook as buyers push back against a falling price.

Bullish Patterns
Bullish patterns indicate that a price will start to trend upwards.

You may also see a bullish harami or bullish engulfing pattern—and as you might expect, each is just the opposite of their bearish counterparts. The bullish harami has a large red candle body followed by a small green candle body. This means a bearish trend may be coming to an end, and it’s time to buy, buy, buy.

Then, the bullish engulfing has a small red candle body followed by a large green one. This second candle totally engulfs the previous one, indicating a strong sign of a shift to the upside—if nothing else, you have to admit these names are kind of descriptive 🤷. 

Forex Indicators 🎯

Forex indicators help us interpret forex charts and identify trends. Here are some of the more popular indicators.

Relative Strength Index (RSI) ☑️

Relative strength index (RSI) looks to identify overbought and underbought positions in the market. This isn’t “relative” like your uncle, though—it compares currencies.

Each currency gets a range from 0 to 100. 0 is the most underbought, and 100 is the most overbought. Of course, most currencies will fall somewhere in between on the RSI. 70 and above is generally considered overbought, while 30 and below is underbought.

Consequently, traders should generally consider selling positions over 70 and buying those under 30. Remember, buy them while they’re cheap and sell when they’re expensive.

Bollinger Bands ☑️

Bollinger bands examine momentum in the market. They help identify whether the market is relatively volatile or relatively stable—and, like RSI, Bollinger bands can help determine which positions are overbought or oversold.

If the bands are close together, this is called a squeeze, which indicates decreased volatility. However, this also may suggest a change in momentum and potential buying opportunities.

On the other hand, volatility is increased when the bands are far apart. Basically, Bollinger bands act like rubber bands. And just like real rubber bands, you don’t want these ones to get stretched out.

Simple Moving Average ☑️

The simple moving average (SMA) shows the average price of a currency pair over a certain period. As with any average, this is determined by adding up all of the prices and then dividing by the time period—pretty simple indeed.

For example, to find the average price for the week, you would add up the closing price for each day and then divide the sum by seven. These averages are helpful because they can help determine the support and resistance prices for a currency pair.

In case you’re wondering, support refers to a downward trend slowing, while resistance refers to an upward trend slowing. In theory, a price shouldn’t go over the resistance line or below the support line—if it does, it won’t stay there for long, so be prepared to buy or sell should that happen.

Slow Stochastic ☑️

Like RSI, Slow Stochastic is an oscillator that ranges from 0 to 100. In this case, the oscillator shows the closing price relative to the high/low range over a set period of time.

Why is this helpful? Because the closing price will be close to the low during a downtrend and close to the high during an uptrend. And as we see the closing price move away from its highs and lows, we can start to see shifts in momentum.

Conclusion

Due to the unpredictable nature of the world economy amidst COVID-19, forex trading opportunities are more plentiful than ever. This has many newer traders eager to learn how to trade.

If you want to trade forex, learning how to read forex charts is key to success. These charts reveal powerful clues about potential price changes and where the momentum is shifting.

Some of these charts may seem overwhelming at first, but they aren’t too complicated once you familiarize yourself. Although each type of chart is useful in its own right, candlestick charts are what experts most often study. Simply put, these charts reveal the most about the forex market and where things are headed.

As you get better at reading forex charts, you will get better at predicting where the market is going. Ultimately, this is how you will find success trading forex.

Forex Charts FAQs

  • What’s the Best Volume Indicator?

    There is no single “best” volume indicator, but there are a few that are more popular than others. The most widely-used indicators include the Chaikin Money Flow (CMF), On Balance Volume (OBV), and the Killinger Oscillator.

  • Is it Easy to Identify Trends on a Forex Chart?

    To the trained eye, it can be easy to identify trends on a forex chart. It may not be as simple for beginners, but it should get easier the more you study the different types of patterns.

  • How Many Pips in a Day is Good?

    Seasoned traders can generate a profit equal to 20-50 pips per day, on average. Remember, one pip is equal to the smallest price change of a given currency pair—the more you invest, the more each pip is worth.

  • Which Candlestick Pattern is Most Dependable?

    Two patterns that are generally considered dependable are the hammer/hanging man and engulfing candlestick. That being said, which candlestick pattern is most dependable is somewhat subjective. Every trader has their own style and will have different strategies that work for them.

  • Which Forex Chart is Best for a Beginner?

    Bar charts and line charts are probably the best for a beginner. That is because these are some of the simplest charts and thus the easiest to understand initially. However, once you become more familiarized with forex, candlestick charts will likely become the most useful kind of chart overall.

  • How Do You Read One Minute Candlesticks?

    One way to read one-minute candlesticks is to look for Dojis. These Dojis can help you identify possible price trends. Thus, they can be a quick way to identify opportunities. The most opportune time to trade forex using a one-minute strategy is between 8 a.m. and noon EST when both the NYSE and London FTSE are open.

  • How Do You Read a Forex Chart Like an Expert?

    Your best way to read forex charts like an expert is to get to know candlestick charts. These are what professionals analyze the most because they contain a ton of information.

All reviews, research, news and assessments of any kind on The Tokenist are compiled using a strict editorial review process by our editorial team. Neither our writers nor our editors receive direct compensation of any kind to publish information on tokenist.com. Our company, Tokenist Media LLC, is community supported and may receive a small commission when you purchase products or services through links on our website. Click here for a full list of our partners and an in-depth explanation on how we get paid.

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