How to Read Forex Charts: A Beginner's Guide

How do you read a trading chart?

Reading a trading chart is akin to understanding a unique language spoken by the currency markets. It begins with recognizing the types of charts available and their distinct features.

Forex charts typically come in three forms:

• Bar charts are simple yet informative, representing the opening, high, low, and closing prices (OHLC) of a currency pair within a specific timeframe.

• Candlestick charts, originating from Japan, offer a more detailed view, with each 'candle' depicting the same OHLC information but in a visually intuitive manner.

• Professional footprint charts, commonly used in futures markets, provide an even deeper analysis, showing detailed price and volume data at each price point.

Footprints allow you to "see the contents" of classic candlestick charts

Key elements such as the OHLC are crucial in understanding market dynamics. The 'Open' denotes the price at the beginning of the trading period, 'High' indicates the highest price reached, 'Low' is the lowest price, and 'Close' is the price at the end of the period. This data, combined with the volume indicator, which shows the trading activity during a period, gives traders insights into market sentiment.

Timeframes are another essential component. These charts can range from very short (like 1-minute charts) to much longer (like daily, weekly, or monthly charts). Selecting the right timeframe depends on a trader's strategy, whether they are a day trader, swing trader, or long-term investor.

In addition to understanding the structure of charts, recognizing trends is vital. Trends in Forex charts are generally categorized into three types:

1. Uptrend - where the market consistently creates higher highs and higher lows

2. Downtrend - characterized by lower highs and lower lows

3. Sideways trend - where the market is relatively flat, indicating indecision among traders

Understanding these trends is critical as they provide a snapshot of market sentiment and potential future price movements. This knowledge, combined with the chart types and key elements mentioned above, forms the foundation of reading and interpreting Forex charts.

Using technical analysis to read Forex charts

Technical analysis is an indispensable tool for interpreting Forex charts. This method relies on historical price data and statistical trends to forecast likely future market behavior. It helps traders identify potential turning points in the market, empowering them with the foresight needed for strategic trading decisions.

Key concepts of technical analysis include:

• Trendlines are straight lines drawn on charts that connect a series of prices. They help visualize and define the direction of a trend. An upward trendline connects the lows in an uptrend, while a downward trendline connects the highs in a downtrend. These trendlines can act as indicators for potential market reversals.

• Support and resistance levels are another critical aspect. 'Support' refers to a price level where a downtrend can be expected to pause due to a concentration of demand. In contrast, 'Resistance' is a price level where a trend can stall temporarily due to a concentration of selling interest. Understanding these levels helps traders anticipate where prices might reverse or continue their trend.

• Candlestick patterns are specific formations created by the movement of prices on a candlestick chart, which can signal potential market movements. Some common patterns include 'Doji,' 'Hammer,' and 'Engulfing' patterns, each indicating different market sentiments and potential price movements.

Using indicators to read Forex charts

Indicators are mathematical calculations based on a currency pair's rate, volume, or open interest and are used to forecast future price movements. These tools are essential for traders as they can provide insights into market trends, momentum, volatility, and market strength.

The number of classic indicators of technical analysis is measured in many dozens. Among the most popular are:

• Moving Averages smooth out price data to create a single flowing line, making it easier to identify the direction of the trend.

• The Relative Strength Index (RSI) measures the magnitude of recent price changes to evaluate overbought or oversold conditions in the price of a currency pair.

• The MACD is used to spot changes in the strength, direction, momentum, and duration of a trend in a currency's price.

The following indicators have been added to the chart: MACD, RSI, Delta, Volume Profile

Modern advanced indicators, such as Delta and Market Profile indicators, offer more advanced insights. Delta refers to the difference in the volume of trades executed at bid and ask prices and can provide an understanding of market direction. Profile indicators, like Market Profile or Volume Profile, provide a visual representation of trading activity over a specific time period at certain price levels, highlighting areas of high and low trading activity.

Read our guide on How To Use Technical Indicators To Analyze Forex Charts to learn valuable tips on how to use indicators.

Best Forex brokers

1

9.4/10

Go to broker

eToro is a multi-asset investment platform. The value of your investments may go up or down. Your capital is at risk. Don’t invest unless you’re prepared to lose all the money you invest.

Minimum deposit:

$50, $100 (for UK clients)

Bonus for deposit:

0%

Regulation:

CySEC, FCA, ASIC

Review

The eToro broker was founded in 2007. The company promotes itself as a social trading platform working with traders from over 140 countries. The broker has several divisions operating under different jurisdictions and licensed by different regulators. For example, eToro (Europe) is licensed by the Cypriot regulator CySEC (109/10) and eToro (UK) is licensed by the British regulator FCA (583263). The broker also has a representative office in Australia and the USA. eToro Profile Details

Pros/Cons

•the minimum transaction amount for copying is $1;

•handy functionality for passive investing;

•regulated by independent monitors;

•it is possible to purchase contracts for fractional shares (that is, to invest amounts less than the cost of one share);

•it is possible to buy shares at once (not CFDs) on the US stock exchanges.

•high spreads;

•periodic technical failures in order execution;

•lack of the most popular platforms such as MetaTrader 4 and MetaTrader 5 in Europe and the CIS;

•no access to ECN systems, orders are processed only according to the STP (straight-through processing) scheme with access to specific liquidity providers;

•there is a commission for withdrawing funds;

•impolite support staff;

•inconvenient website.

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2

9.2/10

Go to broker

Your capital is at risk.

Minimum deposit:

No minimum

Bonus for deposit:

0%

Regulation:

FSC (BVI), ASIC, IIROC, FCA, CFTC, NFA

Review

The name OANDA is an acronym for “Olsen & Associates” or “Olsen AND Associates”. It is registered in the United States and provides its clients with a wide range of financial services in most countries of the world. The company was founded in 1996 and is currently regulated in four jurisdictions. The main regulator of the broker is the UK Financial Conduct Authority (FCA). Oanda Canada is licensed by IIROC. The company has several significant awards to its credit, including a victory in the category "Best Forex Trading Technologies" from the UK Forex Awards, "Best Trading Platform" from FX Week, as well as "Best Customer Service" from the US Foreign Exchange Report.

Pros/Cons

•Minimum deposit from 1 dollar.

•A large selection of the most popular trading instruments.

•Several reliable and reputable financial regulators.

•Inconvenient and poorly functioning site.

•Lack of cent accounts.

•Lack of bonus programs.

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Tips for reading the Forex charts

Mastering the art of reading Forex charts is a blend of science and intuition, demanding both technical skills and a keen market sense. Here are some invaluable tips for beginners to navigate through the intricate world of Forex charts:

• Use multiple timeframes: Analyzing a currency pair across different timeframes offers a more comprehensive view of the market. For example, while a daily chart may show a long-term trend, a 1-hour chart can provide insights into the intraday market dynamics. This multi-timeframe approach helps in making more balanced and informed trading decisions.

• Analyze market reactions to news: Forex markets are highly sensitive to global events and economic news. Understanding how prices react to positive or negative news can offer clues about market sentiment and potential future movements. This analysis can help traders anticipate volatile market conditions and adjust their strategies accordingly.

• Backtest your strategies: Before applying any trading strategy in live markets, it’s crucial to backtest it using historical data. This practice helps in understanding the effectiveness of the strategy and in identifying any potential flaws or improvements.

• Use simulators for training: Practicing with Forex simulators is a great way to gain experience without risking real money. Simulators offer a realistic trading environment, enabling beginners to hone their chart reading skills and test trading strategies in real-time market conditions.

• Stay informed and keep learning: The Forex market is dynamic, and continuous learning is key. Stay updated with the latest market trends, economic news, and technical analysis methods. Regularly revisiting and refining your trading strategies based on new knowledge and market conditions is crucial for long-term success.

You’d do well to remember that there is never a 100% guarantee when Forex trading, and you must always keep the risks in mind. With that said, our list of tips should serve as a good starting point and increase the likelihood of your success in Forex markets.