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How to Read a Forex Chart

By Megan Doyle

Forex charts – also known as currency charts – are essential tools for finance professionals engaging in cross-border business. Before the internet, when currency exchange rate quotes were periodically established by governments, businesses obtained currency exchange rate information from banks via telephone. Online currency charts have since changed the game, allowing large corporations, small- and medium-sized enterprises (SMEs), and even individuals to view instant, real-time FX market data.

Forex charts can seem complex at first glance but reading them can provide international businesses and forex traders with valuable currency insights. This article discusses how to read them, focusing on free, publicly available forex charts. For those looking to dive deeper into currency exchange rate charts, a multitude of pay-to-use online charting platforms are available.

 

What is a Forex Chart?

 

A forex chart is a graphical representation of the currency exchange rate between two currencies. They can depict either real-time or historical data. Forex charts are an essential tool for conducting technical analysis of currency exchange data and history.1

 

Currency exchange rate charts are most often used by those who seek to evaluate and predict market behavior. This includes companies that conduct international trade, since making and receiving payments in foreign currencies is a core requirement of global business. Forex charts can help businesses manage FX risks and liquidity while offering insights into potential future FX tailwinds.2

 

In addition, forex traders – who buy and sell currencies for profit – often make use of forex charts.

 

Currency Pairs are Forex Chart’s Fundamental Element

 

Currency pairs are the backbone of a forex chart, and therefore must first be understood. Currency pairs express the value of an exchange rate by quoting one currency against another. As such, the pair is comprised of two parts: the “base” and the “quote.” The base is the first currency listed in the pair, and the quote is the second. The quote indicates how much of the second currency is needed to purchase one unit of the base currency.3

 

All three forex charts below present the pairing of GBP/USD. In it, GBP is the base and USD is the quote. If the pair quoted at GBP/USD=1.32, for example, $1.32 would be needed to “buy” 1 GBP (£1).

 

Types of Forex Charts

 

There are three main types of forex charts that depict currency data in different ways: candlestick, bar, and line. Candlestick charts tend to be used most often because they readily show the most amount of data, while line charts are the simplest.4

 

No matter the type, all forex charts allow users to set the time frame. Each point typically represents one day, one hour, or even one minute. All forex charts also have X- and Y-axes. The X-axis will always show a sliding scale of historical time, while the Y-axis always shows the quoted currency’s rate fluctuations.5

 

Below are depictions of each type of forex chart and how to understand them. Each sample chart shows a GBP/USD pair with daily FX data ranging between February and mid-April 2018.

 

Forex Candlestick Chart: Most Data At a Glance

 

Forex Candlestick Chart: Most Data At a Glance

 

Candlestick forex charts use individual “candlesticks” as a visual aid to show the relationship between the high, low, opening, and closing prices for any given period. The “high” is the highest price the currency went to for the specified time frame, and “low” is the lowest. The “opening” price is the exchange rate at which the currency opened for the time frame, and the “close” is the price at which it closed.

 

The green or red portion of a “candlestick” is called the “body,” which represents the difference between the opening and closing price for the currency within the selected time period. If the closing price is higher than the opening price, the candle body color is typically green, or in some cases, black. If the closing price is lower, the body color is red.

 

The fine lines extending from above and below the body are known as “wicks” or “shadows.” These wicks represent the highest and lowest prices the currency reaches during the selected time period.

 

By depicting open, high, low, and closing prices all in one place, candlestick forex charts can, at quick glance, show how currency exchange rates for a pair have changed over time.

 

For example, March 19th in the above chart shows a candle with a green body, meaning the closing price for the GBP/USD currency pair (1.4025) was higher than the opening price (1.3943). The wicks indicate the highest and lowest points (1.4088 and 1.3913, respectively).6

 

Forex Bar Chart: A Different Perspective

 

Forex Bar Chart: A Different Perspective

 

Bar forex charts (also known as open-high-low-close or OHLC charts) are similar to candlestick charts in that they also show the open, high, low, and closing prices. The primary difference is that bar charts use a different approach that results in a far different look, with no wicks or shadows.7 Instead, bar charts use horizontal lines to depict open and closing prices, placing greater emphasis on their relationship.8 Thus, bar charts readily depict opening versus closing price without the need for colors, unlike candlestick charts. However, colors are often used for quick reference, as in the bar chart example shown.

 

Each segment shows data for a specific time frame, just like the candlestick chart. For example, the vertical height of the bar for February 19th shows the full range between the highest and lowest prices (1.4050 and 1.3959, respectively) for that day, encompassing what in the candlestick chart would include the main body plus the wicks above and below.9

 

The horizontal lines poking out of either side of the bar indicate the opening and closing price for each day. Looking at the same February 19th example, the horizontal line extending from the left side of the vertical line indicates the opening price (1.4027) and the line extending from the right side indicates the closing price (1.3995).10 Since the closing price is lower than the opening price, the bar is red. Otherwise, a green (or sometimes black) bar indicates a closing price that is higher than the opening.

 

Forex Line Chart: A Simpler View

 

Forex Line Chart: A Simpler View

 

Line charts, the simplest form, only show the closing price for the currency pair, based on the selected time period. Line charts do not typically use colors as indicators and are more often used for quick historical reference of currency fluctuations.

 

For example, looking at the line chart, March 26th closed at 1.4228 whereas March 1st closed at 1.3775, but no other data is offered by the graphical representation.11

 

The

Takeaway:

Understanding how to read forex charts is an important skill for those who often deal in foreign currencies. Thanks to the internet, real-time forex charts are available for public use, making it easier for businesses and individuals to make currency exchange analyses.

Megan Doyle - The Author

The Author

Megan Doyle

Megan Doyle is a business technology writer and researcher based in Wantagh, NY, whose work focuses primarily on financial services technology.

Sources

1. “How to Read Forex Charts: The Ultimate Guide for Beginners,” My Forex Chart; https://www.myforexchart.com/how-to-read-forex-charts
2. “Forex market: Who trades currency and why,” Investopedia; https://www.investopedia.com/articles/forex/11/who-trades-forex-and-why.asp
3. “How to Read Forex Charts: The Ultimate Guide for Beginners,” My Forex Chart; https://www.myforexchart.com/how-to-read-forex-charts
4. Ibid.
5. Ibid.
6. “GBPUSD Chart,” DailyFX; https://www.dailyfx.com/gbp-usd
7. “OHLC Chart,” Investopedia; https://www.investopedia.com/terms/o/ohlcchart.asp
8. “Technical Analysis: Bar Charts vs. Candlestick Charts,” The Blue Collar Investor; https://www.thebluecollarinvestor.com/technical-analysis-bar-charts-vs-candlestick-charts/
9. “GBPUSD Chart,” DailyFX; https://www.dailyfx.com/gbp-usd
10. Ibid.
11. Ibid.

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