Trading currencies on the foreign exchange, or forex, is all about rate change — traders make money on incremental differences in exchange rates. To monitor these changes, forex traders analyze charts that show trading patterns over time. While a number of different types of charts exist, candlestick and bar charts are the most common and the principles from these charts carry over into other charts. Proper understanding of chart fundamentals is key to spotting trends and making smart trade decisions.
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Locate a currency chart to analyze. You can find free charts online or you can use those available through your forex trading platform.
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Find the range. Currency charts reflect both very short periods, like 12 to 24 hours, or long periods of weeks and months. Beginning traders may find it easier to understand charts that show a range of at least one day, but no more than a week.
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Identify the chart type. It is a bar chart if price ranges are indicated with vertical bars, and a candlestick chart if price ranges are identified by vertical rectangles. If there are no bars or rectangles, you have a line graph. Most charts are available in several forms, so switch to the bar or candlestick mode for easiest interpretation.
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Begin with a single data bar to understand the information provided. Every bar or candlestick chart has a single vertical line that shows the highest rate of the day at the top point and the lowest rate of the day at the bottom point. Most charts show these values as you mouse over the top and bottom of the bar.
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Locate the open and close prices indicated by horizontal “pegs” on the bar chart and by the top and bottom of the rectangle on a candlestick chart. If the open rate is lower than the close rate, the rate is trending up and the bar or rectangle will usually be green. If the open is higher than the close, the rate is trending down — typically indicated by red. Colors may vary somewhat, but you’ll always have one color for upward movement and a different one for downward movement. This makes it easier to spot trends.
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Pull out from your single-point view and look at the chart as a whole. You’ll now notice groups of mostly green bars moving in an upward direction and groups of red bars moving in a downward direction. These are trends, and they can help you determine when to buy and sell.
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Note places where the chart hits a low several times, but does not drop below a certain rate. These are places of support, where market forces keep a rate from plunging.
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Locate places in the chart of several highs in the same range, but do not go above a particular point. These indicate resistance, or rates that the market senses are too high. Note that both support and resistance can break, but it usually requires a change in some external factor, like negative or positive economic news.