How to Read and Identify Trends Using Forex Charts

Learning the major forex charts, calculations and understanding the results and relationships of live data is incredibly important if you are looking to get into the industry. Much like any trading industry forex trading is risky so preparing yourself with a background of knowledge of the various apparatus that can be used to improve your chances of success is much needed. Understanding forex charts allows a trader to make educated predictions for the market and furthermore enables a trader to identify the signals that cause change in the market prices and reasons for low and high volatility. Discovering why changes occur in forex opens the door for traders to trade successfully. 

What is a forex chart and why should you use them?

First of all it is important to understand what forex charts are and the purpose they serve. A forex chart shows how two currencies fair over a period, graphically depicting the relative price movements between the two. You can choose whichever pair of currencies you would like to compare and then analyse their movements over time. This offers an indication of how the currencies may change in the future by monitoring the signals and patterns in forex charts. 

Forex charts give traders the opportunity to analyse and determine where to invest their funds. Using a range of charts and interpretations, forex traders can review and reveal trends that can be exploited to present good investment opportunities. 

How to read forex charts  

Being able to read and interpret forex charts accurately is vital if you want to successfully trade in forex markets. Learning how to read live forex charts, as well as real-time trading charts, will enable you to take control and spot trends, allowing you to make calculated moves to seize opportunities to make money. Forex charts show a period depending on the time frame you select, most forex charts default to a daily time span showing trading data over a 24-hour period. But this can be changed to time frames that represent minutes or even months depending on your requirements. This ability to transverse forex charts over both short and long periods of time enables you to fully monitor the fluctuations in currency rates.  

The different types of forex charts

Forex charts can be presented in multiple different ways, from line charts and bar charts to candlestick charts. This section will run through what you need to know about each.  

A typical forex chart will present the time on the x-axis and the exchange rate on the y-axis. 

Line Charts- 

• Line charts are the simplest to interpret. They show a line from one closing price to the next, and when put together they show the peaks and troughs of the currency pair over time.

Bar Charts- 

• Bar charts are more complex to read but provide more information compared to a line forex chart. They enable you to see the opening and closing prices of a currency pair, and the highs and lows of the specific currencies.
• The bottom of a bar represents the lowest traded price in that specific period whilst the top shows the highest. The bar indicates a full overview of the pair’s overall trading range.
• The left side of the chart represents the horizontal hash, showing the opening price and on the right is a horizontal hash showing the closing price.

How to identify Forex Trading Patterns on forex charts / forex indicators  

Forex indicators enable traders to explain some of the reasons why currency movements may appear on a forex chart. There are a multitude of forex indicators that can be used, but these are some of the most reliable and popular: 

Simple Moving Average Line- 

• This is the most common forex indicator. SMA is an indicator that is calculated by adding up the closing prices of a set period and dividing this by the time within the period.
• A simple moving average is used to show a security’s price trend (The direction and momentum of the price of a security or other asset). If the simple moving average is trending upwards, for example, this indicates its price is rising. The opposite is true if a security’s price trend is declining. 

Bollinger Bands- 

• Bollinger bands are used as an indicator to tell you how volatile the market may be.
• When the bands come together this is called a squeeze. These squeezes represent increased volatility and potential trading opportunities could soon appear.
• If the bands are wider apart it represents a decrease in volatility and an increased likelihood of exiting a trade.
• These changes and predictions for high and low volatility are visually presented on the graphs.
• There are three calculations behind changes in bollinger bands: The first or middle bollinger band is the moving average of the closing price, the second line is the upper line is calculated by taking the moving average line of the close and adding the standard deviation to it, and the final third line is the lower bollinger band and is calculated by taking the moving average line and subtracting the standard deviation from it.

Relative Strength Index- 

• RSI is used to identify oversold conditions in the market.
• The scaling goes from 0-100. A reading below 30 represents a signal that the market is oversold and indicates the trader should look to buy.
• A reading above 70 represents a signal that the market is overbought and that traders should start to look to sell. 

Being able to learn and understand the basics around the standard ways to use forex charts and the various ways they are visualised will allow you to begin to look at trends between a pair of currencies. Furthermore, the ways to identify these trends by using forex indicators allows you to understand the signals for changes in the market, especially when trying to predict periods of high and low volatility. 

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