What Is a Forex Chart?
A forex chart graphically depicts the historical behavior, across varying time frames, of the relative price movement between currency pairs. Technical analysts and day traders will look at such charts in order to identify trends and various patterns that can signal reversals, continuations, entry points, and exits.
Many traders use forex charting software packages to determine the likely direction on a given currency pair in conjunction with other technologies such as predictive forecasting software and online trading to get an edge in forex markets.
Key Takeaways
- A forex chart is the graphical representation of the relative price performance of a currency pair or pairs.
- Technical analysts and day traders look to such charts for signals and patterns to inform their trading decisions.
- The most common types of forex charts are line, bar, and candlestick charts; and the normal time frames that most platform’s charting software provides range from tick data to yearly data.
- Forex charting software comprises a powerful set of digital tools to make technical trading and analysis more streamlined and efficient.
Understanding Forex Charts
A forex chart, essentially, allows a trader to view the past, which, according to technical analysts, can be a predictor of future price movement. Most forex brokers will provide free forex charting software for clients who have open and funded trading accounts. Forex charts, like those available for other securities, present information useful for the technical analysis of a specific forex (FX) pair.
Forex charts are essential tools for forex traders who wish to incorporate technical analysis to determine where to invest their funds as they can reveal the existence of trends. Technical analysis is the review of past market prices and technical indicators to predict the future movements of an investment. These technicians believe that short-term price movements are the result of supply and demand forces in the market for a given security. Thus, for technicians, the fundamentals of the asset are less relevant than the current balance of buyers and sellers.
Forex charts can utilize line, bar, and candlestick chart types and the normal time frames that most platform’s charting software provide range from tick data to yearly data. A typical forex chart will show the time period on the x-axis and the exchange rate on the y-axis.
Forex charting software can be a powerful tool that users can customize and also trade directly from in electronic forex markets.
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Forex Charting with Technical Indicators
Forex charts will have customizable settings for technical indicators, such as price, volume, and open interest. Active traders commonly use these indicators, since they are designed to analyze short-term price movements.
There are two basic types of technical indicators:
- Overlays: These indicators do just what the name implies. They may use the same scale as prices and plot over the top of the prices on a stock chart. Examples include moving averages and Bollinger Bands®.
- Oscillators: Technical indicators that oscillate, or change, between a local minimum and maximum, and will plot, or display, above or below a price chart. Examples include the moving average convergence divergence (MACD) or the relative strength index (RSI).
Most charting software will have many types of technical indicators from which to choose. So, with thousands of options, a trader must select the ones that work best for them. Also, these indicators can, in most cases, become part of an automated trading system.
Forex charting software might also be available from a broker through the use of a demo or trial account. It is advisable that new traders experiment with a couple of different brokers and chart offerings before deciding where to open their accounts.
While there are a number of forex chart patterns of varying complexity, there are two common chart patterns that occur regularly and provide a relatively simple method for currencies trading. These two patterns are the head and shoulders and the triangle.
Forex Charting and the Dow Theory
Traders and investors have engaged in technical analysis of investments for as long as there have been markets, but no person did more to popularize it than Charles Dow, the American journalist and founder of the Dow Jones Company, the Dow Jones Industrial Average (DJIA), and The Wall Street Journal.
Dow published hundreds of editorials in The Wall Street Journal, many of which espoused his theories on the technical analysis of equity price movements. Today, many forex traders follow his theories as they trade the foreign exchange market (FX).
The Dow theory, as codified by his successors at The Wall Street Journal, is composed of six tenets, which argue that asset prices move based on trends that result from the dissemination of new information. Dow theory values the study of trading volume in understanding the underlying dynamics of a market, and forex traders who heed its advice will usually discount changes in exchange rates that result from a low volume of trades.
Forex Chart FAQs
What Is a Forex Chart?
A forex chart is a price chart showing the historical price and volume data on one or more currency pairs. A forex chart, thus, graphically depicts the historical behavior of a currency across various time frames, along with technical patterns & indicators and overlays.
How Do I Find Forex Charts?
Forex charts are readily found online through financial portals, online brokerage platforms, or sites specializing in forex information.
How Do You Make a Forex Chart?
Interactive charts that use technical overlays and tools can be made using your broker’s online toolkit. Forex-specific platforms and charting software can also be used by more advanced traders in need of greater functionality.
What Is a Currency Chart?
A currency chart is simply another term for a forex chart.
