Forex Trading Charts - How to Read Forex Charts
Trading the world's foreign exchange market can seem daunting, at first, to beginner traders. With the help of certain tools, decisions about what to trade and when start to become a lot more simple. There is, however, one trading tool that trumps them all - live forex charts.
Live forex charts help traders analyse what is currently happening in the market. They also give special clues and insights into what could happen next - but only for those well versed in how to read forex trading charts.
In this article, we cover all you need to know about how to read forex charts, how to identify signals from different types of live forex trading charts, how to access free forex charts to trade from and why learning how to read candlestick charts could be the best thing you do this year.
Table of Contents
How to Access Live Forex Charts
Before you can learn how to read forex charts, you first need to be able to access them. Viewing live forex charts is essential to making trading decisions as they show all the buying and selling activity currently happening in a market. The MetaTrader platform is one of the best trading platforms used by financial market traders. Admirals offers the following trading platforms, which all come with free forex charts:
- MetaTrader 4
- MetaTrader 5
- MetaTrader WebTrader
- MetaTrader Supreme Edition (A custom plugin for MetaTrader 4 and MetaTrader 5, created by Admirals and professional trading experts)
Most forex traders start with MetaTrader 4, which you can download for free to start viewing free forex charts. One of the main benefits of these platforms is the fact you can trade directly from the chart you are viewing. So, once you are well versed in how to read forex trading charts and can identify possible signals to trade, you can easily access a live order ticket to buy or sell.
Disclaimer: Charts for financial instruments in this article are for illustrative purposes and does not constitute trading advice or a solicitation to buy or sell any financial instrument provided by Admirals (CFDs, ETFs, Shares). Past performance is not necessarily an indication of future performance.
The above screenshot shows a price chart of the EUR/USD currency pair from the MetaTrader platform, with a selection of currencies that are available for trading on the left-hand side. MetaTrader will show you live forex pricing for the currency pair you are viewing. Typically, your broker receives market prices from the interbank market and their top-tier liquidity providers - ensuring you are truly connected to the global marketplace.
So, what do these free forex charts tell us and how do we read them? Let's find out!
How to Read Trading Charts
In this section, we will cover the basic elements of reading a chart, before moving to some advanced chart reading in the next section.
1. The Price & Time Axis
All trading charts have 'time' along the horizontal x-axis and 'price' on the vertical y-axis. This means we can view historical prices as we move to the left of the chart. The dates and times shown will vary depending on how zoomed in or out you are on the chart. The more zoomed out you are, the more historical price action you will see.
In forex trading charts, the vertical y-axis shows the 'exchange rate' pricing for the market you are viewing. Based on this simple understanding of price and time we can deduce a few scenarios that help traders make decisions on what to trade and when:
- If from the left side of the chart to the right side of the chart, the exchange rate has fallen we can deduce that over that period of time the market is in a downtrend - or, that sellers are in control.
- If from the left side of the chart to the right side of the chart, the exchange rate has risen, we can deduce that over that period of time the market is in an uptrend - or, that buyers are in control.
This may sound simple to some but is actually quite important. Why? Because once a trend is set in motion, it could stay so for an extended period of time. To calculate how much a market moves up or down, we need to look at exchange rate pricing and what 'pips' are.
2. Exchange Rate Pricing - Pips
The movement of a currency pair is often referred to in 'pips', which stands for percentage in points. Essentially, it is just a unit of measurement of price movement. Most currencies are measured in four decimal places. However, any Japanese yen (JPY) currency pairings are measured in two decimal places.
Nowadays, due to algorithmic trading, most platforms offer precision pricing for trading robots to execute transactions within nanoseconds. This is why there is often another number in the exchange rate. However, it can be ignored when calculating pip movements. Let's view an example:
In the screenshot above of part of a forex trading chart, the highest price level on the chart is 1.13385. The lowest price on this chart is 1.12893. This means the market declined, over time by 49 pips, as 1.1338 minus 1.1289 equals 0.0049.
This is important, as it can determine your monetary profit or loss. When you open a trading ticket to place a trade you must fill out the volume, or position size, of your trade. This is measured in lots where one lot is equal to $10 per pip. This could mean two things from a monetary perspective:
- If you bought at 1.1338 and sold at 1.1289, you will have lost 49 pips. If one pip is worth $10, then you have lost $490 (49 pips * $10).
- If you sold at 1.1338 and bought back at 1.1289, you will have gained 49 pips. This means you could have made a profit of $490.
This is a very simplified example and figures will vary according to the currency pairs you are trading and the position size you are using. However, risk management is an essential component of long term trading success. To make it simpler for traders, Admirals offers a free trading calculator, which may prove to be very handy!
3. Chart Types - Line, Bars and Candles
When viewing the exchange rate in live forex charts, there are three different options available to traders using the MetaTrader platform: line charts, bar charts or candlestick charts. When in the MetaTrader platform you can toggle between these different chart types by selecting View -> Toolbars -> Standard option. In the toolbar at the top of your screen, you will now be able to see the box below:
The first option is to view your chart using OHLC bars, the second option offers candlestick charts and the third option offers line charts. Let's look at each of these in more detail.
A line chart connects the closing prices of the timeframe you are viewing. So, when viewing a daily chart the line connects the closing price of each trading day. This is the most basic type of chart used by traders. If you are using a Forex daily chart trading system with a line chart, you will mainly be able to identify bigger picture trends. Line charts do not offer much else, unlike some of the other chart types.
OHLC Bar Charts
An OHLC bar chart shows a bar for each time period the trader is viewing. So, when looking at a daily chart, each vertical bar represents one day's worth of trading. The bar chart is unique as it offers much more than the line chart such as the open, high, low and close (OHLC) values of the bar.
The dash on the left represents the opening price and the dash on the right represents the closing price. The high of the bar is the highest price the market traded during the time period selected. The low of the bar is the lowest price the market traded during the time period selected.
- The green bars are known as buyer bars as the closing price is above the opening price.
- The red bars are known as seller bars as the closing price is below the opening price.
In either case, the OHLC bar charts help traders identify who is in control of the market - buyers or sellers. These bars form the basis of the next chart type called candlestick charts which is the most popular type of forex charting.
Candlestick charts were first used by Japanese rice traders in the 18th century. They are similar to OHLC bars in the fact they also give the open, high, low and close values of a specific time period. However, candlestick charts have a box between the open and close price values. This is also known as the 'body' of the candlestick.
Many traders find candlestick charts the most visually appealing when viewing live forex charts. They are also very popular as they provide a variety of price action patterns used by traders all over the world which we discuss in more detail in the next section.
When viewing live forex charts, there are multiple timeframes you can use. Typically, there is no best time chart for Forex trading. The time frame chosen by a trader will depend on their overall style, for example:
- The monthly, weekly and daily forex charts, tend to suit traders who hold positions for long periods of time or use swing trading or positional trading styles.
- The four-hour, hourly and thirty-minute forex charts, tend to suit traders who like to trade intraday and hold positions for a few hours to a few days.
- The 15-minute, five-minute and one-minute forex charts, tend to suit traders who hold positions for very short periods of time such as day traders and scalpers.
When in the MetaTrader platform you can toggle between these different timeframes by selecting View -> Toolbars -> Timeframes. In the toolbar at the top of your screen, you will now be able to see the box below:
When viewing OHLC bar charts or candlestick charts, a new bar, or candle, will form once the chosen time period ends. For example, when on a 5-minute chart (M5), a new bar, or candle, will form every five minutes. Within one hour's worth of trading, 12 M5 bars or candles will have formed.
Now you understand some of the details involved in how to read forex charts, let's look at some of the ways traders use these charts to make trading decisions on when and what to trade.
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How to Read Candlestick Charts
I'll now discuss Forex trading chart analysis in detail. Below is an example of the two most basic types of candlestick formations: the buyer candle and the seller candle.
Both candles give useful information to a trader:
- The high and low price levels tell us the highest price and lowest price made within the timeframe selected.
- The seller candle, shown by a red, or sometimes black body tells us that sellers won the battle during the selected time period. This is because the closing price level is lower than the opening price level.
- The buyer candle, shown by a green, or sometimes white body tells us that buyers won the battle during the selected time period. This is because the closing price level is higher than the opening price level.
How would traders use this information? In two ways:
- If after the seller candle, the next candle goes on to make a new low then it is a sign that sellers are willing to keep on selling the market. This weakness will cause some traders to initiate short (sell) positions, or hold on to the short positions they already have.
- If after the buyer candle, the next candle goes on to make a new high then it is a sign that buyers are willing to keep on buying the market. This strength will cause some traders to initiate long (buy) positions, or hold on to the long positions they already have.
The usefulness of candlestick charts does not stop there. When learning how to read candlestick charts it is also worthwhile looking at some of the major types of unique patterns they make, as they help traders in their decision-making process.
Bullish Candlestick Chart Patterns
Here are just a few examples of bullish candlesticks:
The hammer candle shows sellers pushing the market to a new low and then the buyers pushing it all the way back up. With the open and close price levels in the upper half of the candle, it represents a rejection of the downside and possible strength to the upside in the future.
The bullish harami is a red candle followed by a green candle pattern which represents indecision in the market and the possibility of a breakout from it. These are also called 'inside candle' formations as one candle forms inside the previous candle's high to low price range.
The bullish engulfing is a red candle followed by a green candle pattern which represents a strong shift in sentiment in the market. Essentially, a candle totally engulfs the previous candle's high to low price range suggesting a continuation to the upside is likely.
Bearish Candlestick Chart Patterns
Here are just a few examples of bearish candlesticks:
The inverted hammer, also known as a shooting star, candle shows buyers pushing the market to a new high and then the sellers pushing it all the way back down. With the open and close price levels in the lower half of the candle, it represents a rejection of the upside and a possible move to the downside next.
The bearish harami is a green candle followed by a red candle pattern which represents indecision in the market and the possibility of a breakout from it. These are also called 'inside candle' formations as one candle forms inside the previous candle's high to low price range.
The bearish engulfing is a green candle followed by a red candle pattern which represents a strong shift in sentiment in the market. Essentially, a candle totally engulfs the previous candle's high to low price range suggesting a continuation to the downside is likely.
Identifying Forex Trading Patterns on Candlestick Charts
Now you know more about how to read candlestick charts, can you spot any candlestick patterns below?
These are just some of the patterns you can typically find on candlestick charts. It doesn't highlight all of them but is a great foundation to build upon. What you may notice is that sometimes these patterns start at the beginning of a prolonged directional move. In fact, looking back it is clear to see the market cycles of the chart more clearly.
Identifying market cycles can be useful when analysing forex trading charts, as they can help determine the overall trend or future directional bias of a market. Of course, it doesn't tell us how many pips the market will move by but can certainly help form part of the picture when reading forex charts.
Trading With A Demo Account
A great way to put some of this knowledge you've learned in this article is via a FREE demo account. With the most powerful trading platform in the world at your fingertips, viewing free forex charts has also never been easier.
This means that traders can avoid putting their capital at risk, and they can choose when they wish to move to the live markets.
Admirals' demo trading account enables traders to gain access to the latest real-time market data, the ability to trade with virtual currency, and access to the latest trading insights from expert traders. To open your FREE demo trading account, click the banner below:
When first looking at forex trading charts, it can seem daunting. However, understanding the price and time axis helps to determine what has happened historically, which could help to identify what is more likely to happen next. Understanding the exchange rate and how to calculate pips helps traders analyse risk, especially when used with the Admirals trading calculator.
All three different chart types have unique characteristics, with candlestick charts the most popular among traders around the world. Identifying patterns from candlestick charts - such as a bearish harami or bullish engulfing - can help traders identify possible turning points and the beginning, or end of, market cycles.
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This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.