Whenever discussing a Forex chart, it means technical analysis is part of the trading decision. Technical analysis is widespread among traders and used to forecast future prices based on previous patterns. More about technical analysis to be found in our next article. As for this one, I would like to present the types of different Forex charts that exist, their advantages and disadvantages, and what are the most popular ones. The Forex market is ruled by the general supply and demand balance. If there are more sellers (in volume) at any one level, the market will move to the downside, or if the buying volume is bigger at a specific level, the prices for that respective currency pair will rise. It is as simple as that, and this general supply and demand balance influences the way any financial product is moving. To find out where these supply and demand levels are, or where price is hesitating, or whether the price is accumulating energy to continue the previous trend, technical charts are being used. These charts are not suitable for all trading strategies, as some are simply having no use in specific interpretations. For example, if one is using a bar chart when counting waves under the Elliott Waves principle, will find out soon that it is a bad idea.
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Most Popular Forex Charts
The MetaTrader is offering by default three types of Forex charts: bar chart, candlesticks chart, and line chart. The tabs to choose the type of the chart are visible and intuitive, and with a simple click, the desired option can be picked.
The image above marks with a black rectangular where the three types of Forex charts are on the MetaTrader. In this case, the one in the middle, the candlesticks chart, is the one that is selected.
Candlesticks Charts
Candlesticks charts are the favorite way to look at the moves a currency pair makes. They are so popular because of the Japanese candlestick techniques now famous around the world. Traders are using these techniques to spot reversal patterns, continuation patterns, to see when and if a trend is losing its strength, and, in general, to place a stop loss and a take profit of the trade. Japanese candlestick techniques are going to be treated here in our project in greater details. For now, just remember that the most popular ones are the hammer and hanging man, the bullish and bearish engulfing, the piercing and the dark-cloud cover patterns, the Doji candle, and much more. The only way to interpret them is if you use a candlestick chart. Below you see how a regular candlestick is looking like. It has an opening and closing price, a green body and a shadow.
Depending on the type of the candlesticks that keep forming, traders have an idea if the trend is going to continue or a reversal pattern is going to appear. This is enough to trigger the decision to stay in the trend still, or to close it and reverse the initial position. Candlestick charts are used with major technical analysis theories, like the Elliott Waves theory, Gartley, and even when trading with basic Fibonacci retracement levels. It is when measuring the start and end of a move where this type of chart makes the difference. In the example illustrated above, the timeframe is the hourly chart. This means that every candle represents one hour, so in a time frame of twenty-four hours, there are twenty-four candles to open and close. Things are getting a bit more complicated the bigger the time frame becomes. On the monthly chart, twenty-four candles represent two years, so a reversal pattern forming on a monthly chart might signal a major top or bottom for the period ahead.
Bar Charts
Another type of Forex chart offered by MetaTrader is the so-called bar chart. This is the first option out of the three available. In a way, a bar chart is somewhat similar to a candlestick chart, only that candlestick techniques cannot be used here. What I did in the image bellow was simply clicking on the bar chart tab while keeping the same conditions from the previous candlesticks chart. The result can be seen below. Look where the previous candlestick was, and see that things are not that different.
We still have the low of the bar, its opening, and closing levels, and the distance traveled. However, we cannot benefit from the juice of the candlestick techniques using a bar chart. Nevertheless, many traders prefer this kind of chart because of its simplicity. It takes less space as well, and this means that there are more bars that fit into a screen than candlesticks.
Line Charts
Using the same chart and picking the line chart option, the outcome can be seen below. What would you do with this kind of chart?
The right answer is, not much. Look where the candlestick from the first candlesticks chart used to be.If on the candlesticks chart it shows a potential bullish engulfing that eventually was confirmed by the move the market made following the close of the candle, in this case, there is little information the chart provides. This is the main reason why line charts have little or no use and traders simply ignore them. These three types of charts are the ones offered by the MetaTrader, and, as mentioned earlier in this article, the candlesticks one is by far the most preferred. It doesn’t mean that the other ones are ignored, only that they are not so popular. However, these are not the only type of charts that can be used. Depending on the strategy and technique to analyze markets, there are other types of charts that can be imported on the MetaTrader platform or are offered by other trading platforms. Such charts are, for example, the Renko chart and the Point and Figure chart. Both belong to two separate trading theories and when using them the price action and interpretation is subject to different rules than when looking at a classical bar or candlesticks chart. In the end, no matter the type of a chart one uses, what matters is to be right in the trading decision and to make a profit. It is not possible to have only profitable trades, but it is important to have a strategy that allows the account the grow. One may have a bad period, due to various factors, but if the analysis is right, profits can be made. The type of a chart used is only one tool of the many successful traders use to analyze and interpret the currency market.
Recommended Further Readings
- Why Trading Forex?
– Advantages and disadvantages of trading the currency market, what are trader’s expectations and what is a realistic approach to follow - What is a Forex Broker and Types of Brokerage houses
– Explaining what a Forex broker is and does, how the business should be organized, and how many types of Forex brokers exist. - Forex Trading Sessions and Their Importance
– Explaining the differences between the three Forex trading sessions, what are their importance, ranking, etc. - Forex Brokers Types – ECN or STP?
– What is ECN, STP, how d- brokers deal with client’s orders, advantages, and disadvantages of the tw- types.
Other Educational Materials
- Hidden markov models for Forex trends prediction. Lee, Y., Ow, L.T.C. and Ling, D.N.C., 2014, May. In Information Science and Applications (ICISA), 2014 International Conference on (pp. 1-4). IEEE.
- “A novel FOREX prediction methodology based on fundamental data.” Nassirtoussi, Arman Khadjeh, Teh Ying Wah, and David Ngo Chek Ling. African Journal of Business Management 5, no. 20 (2011): 8322.
