Traders who use technical strategies, like price charts, believe that news, market sentiment, supply and demand, and other fundamental factors that move forex markets are reflected in chart patterns and graphs of market data.
Here is a closer look at the types of charts in forex trading and how to read them.
All these charts have pricing data and timeframes. In most cases, the price is vertical (y-axis), while the timeframes are horizontal (x-axis). Timeframes can be seconds, minutes, hours, or days. Most forex traders rely on one and 5-minute charts for shorter-term trades and 15-minute to 1-hour charts for longer-term strategies. MT4 allows you to select any timeframe you want.
Below are the different forex trading charts and how to use them.
The data for each point typically comes from the price at the very end of the timeframe. For example, on a 5-minute chart, the point would reflect the price at the end of each 5-minute interval.
The drawback of line charts is that they do not contain any information about what happens between the 5-minute intervals. The price could rise or fall significantly within a timeframe, but the line chart would not capture that movement.
These charts are the ideal choice if you are trading shares or indices and want information about market direction.
The graph has the same x and y-axis setup as line charts, but traders create “X” marks to show a rising price and “O” marks for falling prices. The chart can have multiple “Xs” and “Os” in a vertical line for each time unit. The line goes from the lowest to the highest price during the timeframe.
Traditionally, traders would use point and figure charts for one-day timeframes, meaning each line of Xs or Os would represent one day.
A point and figure chart is useful to traders looking to hand-draw charts or get basic insights about intra-day price movement.
Some traders prefer this design because it is easier to read than a line graph. However, mountain charts aren't ideal for day trading because it does not display price action for each time unit. Many traders use it to define long-term trends, which can help analyse other charts or confirm fundamental indicators.
Each bar also has a horizontal notch on the left and another one on the right. The one on the left side of the bar is the opening price for the period, while the one on the right is the closing price.
This extra information is important for price action trading strategies, as a combination of bars can produce a pattern that shows the market is moving in a certain direction.
For example, a long bar with both opening and closing notches near the bottom, followed by a shorter bar with progressively lower opening and closing notches, can signal a downturn. Meanwhile, several bars with the same size and similarly spaced opening and closing notches could signal that a trend will continue.
Traders often use bar charts with overlays like Bollinger Bands or moving averages, which help predict momentum. In addition to forex, these charts are popular among cryptocurrency traders.
If a trader is looking for an all-encompassing system, they may use the Candlestick chart and learn the patterns developed in that system.
MetaTrader 4 allows traders to easily use and formulate any chart time they want with just a few clicks.