How to read Forex graph is almost the same as how to read the stock market graph.
If you want to trade Forex or in any market, the basic of the basic is to understand and learn how to read the Forex graph.
So what is a Graph?
The Forex Chart or Graph is the same as the normal graph as we learn in school.
From the dictionary, the more detailed explanation on a graph is:
The Definition of Graph
“A diagram showing the relation between variable quantities, typically of two variables, each measured along one of a pair of axes at right angles.”
For the two variables stated in the definition, they are shown in the two axis – the X-axis (vertical axis) and Y-axis (horizontal axis).
The Y-axis variables is stand for the price of the Forex Pairs; The X-axis variables is stand for the time.
When the price is increased compared to previous price, we will plot the new price higher in the Y-axis than the original place. So the location of price in Y-axis will move higher as the price increased.
On the other hand, when the time goes on, the new time will placed at the right side on the X-axis.
The point of the crossing of the axis is the zero point, when the price is zero and time is zero. But in the real world, the price and time will not be in zero.
The Price in the Y-axis is the Exchange rate for the currency, which is located on the Y-axis. for the price, it is normally having more decimals than the money that we use.
The exchange of currency is called as pairs.
The exchange rate of the currencies will normally in five decimal places.
E.g. for the Pair of EURUSD, it has five decimals. Compare to the money we use, they are just two decimals.
In the Forex Trading, you need to know that, the Pairs movement is counted on the last digit in the decimal.
They are called as Pips.
What is Pip?
The last digit of the pair is called as Pip. E.g. the moving of exchange rate in EURUSD from 1.1000 to 1.1001 is the moving of 1 pip.
So, every increasing of a pip in the price will move the position in Y-axis upward; every decrease of a pip will also move the position of price downward.
After the Y-axis, now we are going to talk about the X-axis.
For the X-axis, it is more simple than the Y-axis. X-axis is defined as the flow of time flow.
One unit of time in the X-axis can be 1 minute, 5 minute, 1 hour, 4 hours, daily and etc.
Diagram above shows that the units in the graph can be different when adjusted. The price movement of one unit in the 5 minutes time frame is five units in the 1 minute time frame.
Thus, the price movement in 5 minutes is occurred in 5 units of 1 minute time-time frame or 1 unit in 5 minute time-frame.
For the Y-axis, it is adjustable when a trader choosing a different Time-Frame Chart to trade on.
Combine the X and Y axis
When combine the X and Y axis, our graph is form.
In the graph, many presentations can be made using different forms.
The different forms of Graph or Chart are changing the presentation of the price and the changing of the Time-Frame.
From the changing of the price performance, we will have several types of Trading Chart form.
Type of Price Form
Dots chart is the most simple chart. It pointing out a single location for the past prices.
The prices that form the dots is the closing price for every of the period. E.g. In the 5 minute time frame chart, the last dot in the chart is 1.5024. This is mean that the end price in the past 5 minute period is 1.5024 before the new dot is appear.
For a beginner, it is very difficult to analyze the chart only having dots. Other than that, it is also very messy if the whole chart is just dots.
The dots in the Dots Chart doesn’t have different color to differentiate the current price condition. Whether it is bullish or bearish. So there is less analysis can be made for the dots chart.
But for the traders with some experience, they can know that where is the trend, support and resistance. But he simple analysis can be made is only like finding the support and resistance level and the trend direction.
For a more detailed trading analysis, it is not advisable to use the dots chart.
Line chart is a chart that form based on the Dots Chart. It is a continuous line shows in the chart.
The Line is formed by connecting all the points of price in the past together.
The points of price connected is the closing price of each period of time.
Lines chart is good to identify the trend and make the basic analysis about the market.
It is the most basic chart in investing and trading. It is simple, so it will not have so much of information like the Japanese Candlestick Chart that we will talk about later.
But the benefit of this chart is it’s simple to look at and to analyze.
When you are confused about the price movement and the market price. You can switch to the line chart for a more simple analysis first.
When you do this, it can give you a big picture about the condition of the market. Sometimes, I tend to overlook or over analyze in the chart. To make my mind clear, I will switch to the line chart and let myself to fully understand the big picture of the current market price first then just enter a more detailed analysis and look at the Japanease Candlestick Chart.
Easier To Find Support And Resistance
It is easier and simpler to find out the trend and analyze the Support and Resistance with the line chart. From the above diagram you can see that it is very simple with just a line, it is unlike the Japanese Candlestick and the Bar chart having many different shapes and color.
You can easily find the support by looking at the “V” shape part at the line chart.
It is much simpler since there is no Shadow for the price.
Other than that, if you are starting to learn about the Price Pattern, it is suitable to look at the line chart to start. It will not confuse you with the difficult shapes. After you try it, you will feel much simpler to recognize a pattern. Then you can compare the “Shape” in the Line Chart with the Japanese Candlestick Chart. When you already master the recognition in Price Pattern in the line chart u can turn to using Japanese Candlestick Chart fully for your analysis.
Japanese Candlesticks Chart is the most commonly used form to represent the price in Trading and Investing.
One Japanese Candlesticks stand for the price movement in that particular time unit. E.g. one Japanese Candlestick can be represented as the price movement in an hour in the one hour time frame chart; one Japanese Candlestick can be represented as the price movement in 5 minute in the 5 minute time frame chart.
Did you notice there are two big standing rectangle with one “hair” and one “tail” each?
These two are the Japanese Candlesticks. The green colored is called Bullish Candlestick; the red colored is called Bearish Candlestick.
The Body of Candles
The thick rectangle in the middle is the “Body” of the candle.
In Bullish Candlestick referring the diagram above, the bottom of the rectangle means where the starting price is (the open price for the candle). The top of the rectangle is the end price (the closing price) when that period ends.
The Bearish Candlestick has a different position for the opening and closing of the price. It is the reverse location for the Bearish Candlestick. The opening price of the candle is on the top of the triangle and the closing price is on the lower part of the rectangle.
When the price starts its movement from a lower point and end at the higher point, then it is a GREEN Bullish Candlestick; when the price starts its movement from a higher point and end at the lower point, then it is a RED Bearish Candlestick.
What about the lines on top and below the Body?
The Shadow of Candles
The top line is called the Upper Shadow; the bottom line is called the Lower Shadow.
The forming of the Upper shadow means that the price has moved higher than the opening and closing price during a certain period of time.
It is the same concept for the Lower Shadow, the bottom line is where the lowest the price gone in that period of time.
So that’s the basic of how to read a Japanese Candlestick.
When the Japanese Candlestick place in a graph, it will look something like this.
Japanese Candlestick is the most popular chart that is used by the traders. It provides large information and and many ways for the traders to analyze the market.
Every Candle represent the movement in that period of time, to understand more about the price behavior, you will need to learn to analyze Candlestick pattern. This is a more in depth topic, which we will discuss in the other time.
Candlestick Pattern Analysis
The example of analysis that the traders used in trading is the Candlestick Pattern Analysis. It is used to analyze the current price behavior – whether the price will continue to rise, fall or reverse.
Normally this type of analysis is done by using at least two Candlestick.
From the analysis, it can give you the information example like when to enter the trend and what is the strength of current price level.
Direction of the price
Candlestick is form with two types of color. By identifying the numbers of the same color Candlestick, we can know that what is the current direction that the price goes.
E.g. when the Candlestick having 15 green color Candlestick and 5 red color Candlestick in the 20 period of time, that’s mean in the 20 period of time, the market is in the bullish condition.
Other than that, we can look at the body length of the Candlestick to know the current trend of the price.
The taller the Candlestick means the market get more aggressive and the price will go higher or lower with a faster rate.
E.g. when you see three green and tall Candlestick appear consecutively, that’s mean by the price is currently going up.
Japanese Candlestick Is Very Useful
Learning how to use and analyze the Japanese Candlestick is very very helpful in trading and investing. If you are a beginner, you can take your time to understand the Line Chart first before going to the Japanese Candlestick Chart.
After you have understand how to read the Line Chart, then just continue to learn how to read the Candles.
Bar Chart is very similar to the Japanese Candlestick Chart. A single Bar is having the same characteristics as a Candlestick.
The Bar Chart has another name which is Open-High-Low-Close Chart (OHLC Chart).
It showing recent high and recent low of the price in a certain period of time. It is like the Top Shadow and Bottom Shadow to the Candlestick.
Other than that, it also shows the opening and the closing price of the period of time.
The difference is just it don’t have the Rectangle Body between the opening and the closing price.
It is just like the simplified type of Candlestick.
Normally the Bullish Bar will indicated in green color and the Bearish Bar will indicated with red color.
The benefit of using Bar Chart is it is much more simplified to look at if compared to the Candlestick. It also have the same characteristics as the Candle to do the analysis.
The things that I personally don’t like the Bar Chart is because it has many lines in the chart and very hard to identify the body part from the Bar Chart.
It is difficult to perform the Candlestick Pattern-like analysis because it is hard to notice at.
If your trading plan not including the Candlestick Pattern Analysis, then the Bar
Chart may help you in your trading.
After we select the type of chart we want to trade (Candlesticks Chart, Bar Chart, etc), we need to select the time frame we want to trade on. By bring back the topic in the X-axis…
Selecting the Time-Frame of the chart means selecting a sensitivity that is suitable for our trading plan.
Example using the Candlestick Chart, the smaller the time frame, the faster the new Candle will be form.
E.g. In One-Minute-Time-Frame Chart, one new Candlestick will be form in every minute. In the One-Hour-Time-Frame Chart, one new Candlestick will be form in every Hour.
When the new Candles form fast, we will also need to complete the analysis faster. That’s mean, you will have to choose a larger time frame if you are a beginner. Larger time frame allow you to have time to complete your analysis.
There are a several of Chart shown in the above. I will want to introduce you to use the Japanese Candlestick Chart to start your trading journey if your are a beginner in trading.
Japanese Candlestick Chart gives enough information than most of the chart. So, using the Japanese Candlestick Chart from the beginning will make your trading journey easier.
Learning to read the Chart is not difficult, but to analyze and master it is a long journey for traders.
If you are a new trader, this post may help you to know what is the basic of reading the chart. If you want to know more about Forex Trading I have also a post that introducing the things you need to know about Forex Trading. Or if you want to start learning how to trade Forex, the post about Trend Trading will be suitable for you to start.
Learning is a part of the trader’s life. It takes time and experience.
Good luck and have fun in the journey.
Thanks for spending your precious time together.
Let us grow and learn together.