Every successful Forex trader uses something called price charts. If you’re new to Forex, you might have come across this term a few times. But what are price charts – and why are they important?
Well, it’s actually very simple. A price chart displays real-time and historical movements in price for a financial instrument. This includes stocks, currency pairs and precious metals.
Price charts in Forex
In Forex trading, a price chart plots the price moves for a specific currency pair.
There are many ways to try and predict how the price of a currency pair might move. Very often, retail traders use the data on price charts to predict future price movements. This process is called technical analysis.
However, using technical analysis to determine future price movements can lead to mixed results. It’s one of the most common mistakes first time traders make. You should view technical analysis as a means of how price is currently moving – not why. Technical analysis is also limited in its ability to predict future price movements.
Knowing how price is moving is very valuable information – but it should not be your primary method of making trading decisions.
Combine fundamental & technical analysis
You should make your trading decisions by combining fundamental and technical analysis. Remember, fundamental analysis helps you to understand why price is moving. If you are unfamiliar with fundamental analysis, please read my introductory article.
Retail traders can sometimes overuse price charts to try and determine price movements. This often leads to frustration and inconsistent trading results. However, when you appreciate their place, price charts can be extremely useful.
Accessing price charts
You can access price charts from multiple sources online.
For example, most brokers will provide you with a price chart free of charge as part of their service to you. In addition, there are many websites that provide charts for you to use freely. A few examples include TradingView and FXstreet.
Using price charts
Price charts can seem intimidating to first time traders. But they’re actually very simple to use. Let’s run through how to use them.
The first step in using a price chart is to select the currency pair you would like view. Next, you then need to select the format of your price chart. There are several formats available, but the most common formats include:
Candlestick charts are one of the most common forms of price chart. Each candlestick communicates four important pieces of information: open price, close price, highest price and lowest price (over a particular timeframe).
Line charts are also a popular form of price chart. Any point on the plotted line represents a currency pair’s price at a specific time and date.
Bar charts are similar to candlestick charts – they visually communicate the open price, close price, highest price and lowest price (over a particular timeframe).
Range bars help traders visualise predefined ranges of price movements. For example, a trader could define 10 pips as their predefined range. This means a bar will only appear on the chart when price moves 10 pips or more in either direction. For this reason, range bars do not represent time.
The purpose of these formats is to give you a clear visual aid that you can use when managing trades.
Price charts also display times and dates across the horizontal axis. This allows traders to identify the exact price at any given time and date. Along the vertical axis, price charts display a price range for a currency pair.
Furthermore, traders can select different timeframes in which to view price charts. This can range from 15 minutes to multiple years. Technical analysts use this historical information to identify price trend patterns.
Technical indicators on price charts
Most price charts allow you to overlay a variety of technical indicators. These tools are designed to help traders identify entry and exit points for trades. They are also used to identify price trend patterns.
Price trend patterns assume that the price of a financial asset moves in cyclical patterns. Using this principle, a trader can identify where the current price is in a cycle, before determining how price will move next.
Despite sounding feasible, this approach leads to inconsistent trading results. The truth is that price movements are dictated by real world events. There’s no logical reason why price should move in cyclical patterns. Should you try technical analysis to determine future price movements – you may find that it occasionally works. However, keep in mind that institutional traders use fundamental analysis to form their trading decisions.
Technical-based trading has become popular because many traders like the idea of letting technology do most of the hard work. Ask yourself, would you rather invest years in honing your analytical skills, or use technical indicator that told you how to trade immediately?
Understandably, most people try the easier option first. But if something sounds too good to be true, it often is. Forex trading is just like any other skill. It requires practice and persistence to master.
What are price charts?
In summary, a price chart is a very simple (but powerful) tool that lets you track the current and historical price of a currency pair. These charts, which you can view in different formats, are accessible online free of charge.
However, price charts should not be used as a means to determine future price direction. You should use fundamental analysis to make your trading decisions.
I hope you’ve found this article useful. If you have any questions, please leave them in the comments below. I’ll do my best to reply to as many as I can.