To understand forex and the movement of price over a period of time you need to have a basic knowledge of the most common charts that are used for this purpose. These charts are used to keep track and analyze the current price movements in order to take positions in the future. They are also used to observe and deeply analyze the previous price patterns and do further research on the movement of a currency pair at a certain point in time. 3 types of forex charts that are commonly used by forex traders are: line chart, bar chart, and a candlestick chart which are explained in detail in this article.
These charts, like every other chart, have x and y-axis. The x-axis shows time which increases from left to right and the y-axis shows price, which increases from bottom to top.
Out of these 3 types of forex charts, a line chart is the most basic one. This is because this chart simply draws a line which connects the closing prices over a set period of time, hence showing only one piece of trading information. Some people like to observe and make their trading decisions on the basis of the closing price information available on these line charts because of its simplicity. Whereas, others believe that it lacks information regarding the price range which makes it insufficient to take an accurate position in the market.
A bar chart is a little complex than a line chart. It shows the closing price along with the highs and lows of that particular trading session or day. The open price is also available although it is not mandatory. The bottom point of the vertical line indicates the lowest price for that session whereas the top point indicates the highest price. A small horizontal hash extending to the left of the vertical line is the opening price and the one extending to the right of the vertical line is the closing price. Because of these prices, these charts are also known as ‘OHLC’ charts.
These charts can be of any time period, for example, a day’s chart would show high, low, open, and close of that day, but a week’s chart would show Monday’s open and Friday’s close with high and low for that week.
These charts originated from Japan, therefore they are also known as Japanese Candlestick charts. They are similar to bar charts as these also indicate the open, high, low, and close of a particular period. But these are more sophisticated and are displayed in a graphics format.
This is because they also show the vertical bar or the candle to be colored in green (white) or red (black). When colored in green or white, it indicates an upward price movement when the opening is smaller than closing price. And when colored in red or black, it means a downward price movement, when the opening is greater than the closing. This vertical colored portion is known as the body of the candle and the lines above and below it are the shadows which represent the highs and lows of that period.