Forex Trading Charts

The process of technical analysis for the purpose of foreign currency trading is based on the use of forex trading charts. There are really two basic types of forex trading charts: bar charts and candlestick charts. (You'll also sometimes see line charts, which are really just a more basic form of bar charts.) Candlestick charts were invented centuries ago by Japanese rice traders in order to keep track of rice prices, and they are still referred to today as Japanese candlestick charts, even though they are now used to chart more than just rice, including forex prices.

The purpose of this short article is just to explain the difference between these two types of forex trading charts.

Bar Charts

The diagram on the left shows a close-up of a single bar. Here's what the different parts mean:

The top of the vertical bar is the high, meaning the highest price traded for the currency during the time period being charted.

The horizontal bar to the right of the vertical represents the closing price of the currency.

The horizontal bar to the left of the vertical represents the opening price of the currency.

The bottom of the vertical bar is the low, meaning the lowest traded price for the currency during this trading period.

If you've ever wondered what an OHLC chart is, you've now seen one --- the letters simply stand for Open, High, Low and Close.

When you put all these little bars together to make a chart, it can be a little difficult to read because of all the lines and the small size of the chart.

Generally, when the chart is moving upwards, so is the price of the currency being tracked, while a downward movement of the chart indicates a downward trend in the currency price. Online charting programs add colour for ease of reading. Upward trends are green, while red is used to show a downward trend.

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Japanese Candlestick Charts

Many forex traders prefer the candlestick type of forex trading charts, largely because they are easier to read. Simply put, the coloured section, or body, of the candlestick represents the open/close range of the currency price, while the lines above and below (called shadows) show the high and low range.

Here's a close-up of the two types of candlesticks. (Traditionally, before we had colour in charts, the red candlestick was shown in black and the green candlestick in white or unfilled.)

In the red candlestick, the top shadow shows the range between the open and the high, while the bottom shadow shows the range between the low and the close.

In the green candlestick, the top shadow shows the range between the close and the high, while the bottom shadow shows the range between the low and the open.

When the closing price is higher than the opening price, the price is trending upward and the candlestick is green. When the candlestick is red, the closing price is lower than the opening price and the price is trending down. So when you look at a Japanese candlestick chart, the upward or downward trends are easily seen by the colour of the candlesticks.

Another easily read part of a candlestick chart is the amount of trading going on in the currency: long bodies indicate intense trading activity. Very short bodies with long shadows, sometimes called spinning tops, suggest indecision in the market as to buying and selling.

Many forex traders find candlestick charts much easier to read than bar charts.

Whichever one you prefer, forex trading charts are an essential tool for your foreign currency trading activities, and you'll need to learn about them in depth.

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