A forex chart shows the historical performance of a given currency relative to another currency. For example, the U.S. dollar (USD) is compared to the Japanese yen (JPY). These charts help traders identify trends, volatility, and other factors that may influence the direction of a currency pair.
There are several different types of charts used in forex trading, and each one serves a different purpose. Together, they help traders gain a deeper understanding of how currencies are performing. In turn, this knowledge helps them make smarter trades.
This guide will explain the four basic charts used in forex trading as well as the purpose of each one. Keep in mind that although there are four basic charts, not all online forex trading platforms offer all types. Those that do usually allow traders to configure the charts to display data however they want.
Chart Type 1: The Daily Chart
Chart Type 2: The Weekly Chart
Chart Type 3: The 4 Hour Chart
Chart Type 4: The 1 Minute Chart
A daily chart shows the performance of a currency over the course of a single day. It shows information such as opening and closing prices, highs and lows, and the intraday price movement of a currency pair. Daily charts are useful for predicting the direction of a currency based on the momentum of its performance.
A daily candle represents the price action of a currency over the course of a single day. This is indicated by the long wick above the body, which appears white since the price moves in the opposite direction from most candles. The closing price is indicated by the smaller size body, located at the bottom of the candle.
On a daily chart, two parallel lines known as the trend lines help identify the overall bullish or bearish trend of a currency pair. The strong momentum of a trend can continue as long as each new candle continues to move towards the trend line. However, traders should be aware that every now and then, the currency will reach a point where it comes in contact with the trend line. This often indicates a weakening in the trend, which could lead to a reversal.
As the name implies, weekly charts show the performance of a currency pair over the course of a week. This allows traders to identify patterns that are much more complex than those found on daily charts.
Just like with daily charts, weekly candles represent the price action of a currency pair. The closing price of these candles is located at the end of the week, unlike daily candles that end at noon.
On weekly charts, Fibonacci retracements serve as helpful tools for identifying potential price reversals. The most common reversal points are located at 38.2 percent, 50 percent, and 61.8 percent retracement levels. However, it’s important to note that the price needs to find resistance at one of these points before a retracement can take place. Otherwise, the price could continue climbing in an uptrend or falling in a downtrend.
Also, it’s worth noting that bulls need to see the price touch the 0 percent line of the chart before they’ll get overly optimistic and start buying in large numbers. Similarly, bears will start to increase their momentum once the price reaches the 100 percent line of the chart. An important note: These lines are real and carry real value, but they don’t appear on the same exact spot on every weekly chart. So before trading in a new currency pair, traders need to check the values of the 0 percent and 100 percent lines on their particular weekly chart.
Ministry of Interiors Charts
Also known as milestone charts, these offer a longer period view of the performance of a currency pair. Minitoring these charts helps identify Patterns that emerge over days, weeks, or even months.
Similar to daily and weekly charts, milestone charts feature a lot of data, so it’s easier to pick out major price movements than it is to pick out specific prices.
The major price movement seen in the opening price of a currency pair is called the opening gap. Gaps can appear in different sizes depending on the currency pair. Smaller gaps occur when the price opens within 10 pips (points) of the closing price of the previous day. Larger gaps occur when the price opens more than 10 pips away from the previous day’s closing price. However, not all gaps are created equal, and not all gap plays will succeed. Traders need to ensure that there’s valid reason for trading a gap before jumping in.
While daily, weekly, and milestone charts offer a ton of information, there’s still a lot more information available on even more complex charts liketick chartsand volume-weighted average contract duration (CVH) charts (VWAP) .
With tick charts, each box represents one trade. The length of the chart depends on the number of trades taken place over the period viewable in the chart. Because of this, it’s possible for the price of the currency pair to appear sideways while still showing a lot of activity in the chart.
While it’s difficult to pick out specific prices on tick charts, traders can still use the charts to identify patterns that represent typical price movements within a given range.
Volume-Weighted Average Contract Duration (CVAD) Charts
These charts measure the weighted average of all contracts traded within a given period. In other words, the longer the time frame of the chart viewable, the more important each trade is to the movement of the currency pair’s price.
Tracking the length of contracts gives traders insight into how long market players are willing to hold a position in a given currency. longer-term contracts indicate that players are holding positions for an extended period of time. shorter-term contracts indicate that players are entering and exiting positions more frequently.
The following chart shows how CVAD charts can be used to identify the typical length of positions being taken in the same currency pair. In this case, note the gap between the yellow and blue lines, indicating a change in contract length.
Traders also use chart patterns to identify predictable price movements within a defined range. There are a variety of patterns that can be applied to any forex market chart. Candle patterns work well on daily charts, buticket patterns work well on tick charts.
While there’s no guarantee that a pattern will play out as expected, traders will usually take advantage of a pattern if it appears while following the technical structure of the trade described in the pattern overview. For example, a double bottom suggest entering a trade whenthe price reaches the previous bottompointon