Currency Trading Chart: What is it?

The currency trading chart is one of the most important tools for the forex trader. Charts are at the root of forex technical analysis, which forms trading systems based on studying price movements rather than economic forecasts which are the basis of fundamental analysis in forex trading. Most traders these days prefer technical analysis which does not require any special knowledge or training in economics.

Any currency trading chart will show price movements. Usually you can track these over a variable period of time. You can look at the last few minutes, hours, days or longer. Using a chart in conjunction with the mathematical indicators provided by most brokers and charting services, you can identify emerging tendencies and trends that can signal a trading opportunity.

Forex charts come in three formats.

1. The Line Chart

A line chart plots the closing prices at the end of each trading period, which could be anything from one minute to one day, you can set this. These are joined with a line to show the direction of movement. However, a line chart does not tell you anything about what happened at different times during the time period, only the final closing price.

2. The Bar Chart

A bar chart gives you four prices for each period: opening, high, low and closing price. You will see a vertical line for each period. The top of the line marks the high and the bottom is the low. A notch on the left side shows the opening price and a notch on the right shows the close. Usually these are at different levels but they could be the same. Either one of them could be the same as the opening or closing price but more commonly they are somewhere between.

The advantage of the bar chart over the line chart is that it shows you how wide the fluctuations were during the period, giving you an idea of the volatility of the pair at a glance.

3. The Candlestick Chart

This last type of chart gives you all of the same information as the bar chart but in a coloured format which many people find easier to take in.

Again a vertical line marks the high and low prices during a period, but there is also a wider block that runs between the opening and the closing price. This block will be filled with colour, usually red if the price is falling (opening price is the high end of the block, closing price is the low end) and green or blue if it is rising (closing price is the high end of the block, opening price is the low end). If shown in black and white you will see black for a falling price and white for a rising price.

The colours give you an instant view of whether prices rose or fell during the period. This makes candlesticks quicker to read at a glance than a bar chart. You can immediately see a reversal, which will show up as a series of green blocks marking the trend followed by one red marking the reversal, or vice versa. That is why candlesticks are the favorite type of currency trading chart for many traders.