Forex technical analysis is one of two ways to analyze the foreign exchange markets. It works by studying the movement of prices, while the other method, forex fundamental analysis, looks at external economic factors such as the strength of the national economy, political events and so forth.

Studying price movement with forex technical analysis involves currency trading charts. The theory of it is that if you look at the historical records of how prices have moved in the past, you can identify tendencies and trends which will mean that you can predict how the prices will move in the future. Then as soon as you spot an emerging pattern that fits your system, you have a trading opportunity.

There are three types of forex charts:

1. Line charts

Line charts simply plot each closing price and join them with a line. The rise and fall of the line shows the general movement of a currency pair. However, it does not show movements within the trading period, only the close.

2. Bar charts

A bar chart will show a series of vertical lines or bars. The top of the line represents the highest price during that time period. The bottom of the line represents the low. A short horizontal bar on the left side indicates the opening price and a short horizontal bar on the right side indicates the closing price.

Since they show the open, high, low and close, bar charts are also sometimes called OHLC charts.

3. Candlestick charts

Forex candlestick charts show all of the same information as a bar chart, but presented in a different way which most people find easier to read at a glance.

You have the same vertical line with the high at the top and the low at the bottom, but there is also a wide block in the middle showing the gap between the opening and closing price. The blocks will be filled white (for a rising price) and black (for a falling price) or more often these days they are colored. Colors can vary but a common combination is green or blue for rising and red for falling.

Most people prefer candlestick charts over bar charts because they are easier to interpret. It is much easier to see turning points in the market using candlestick charts. You can immediately see where the market reversed from an upward to a downward trend and vice versa.

When you see a trend forming, you can make money by trading in the same direction as the emerging trend. ‘The trend is your friend’, as currency traders say. For this reason, identifying the trend is the most important thing to learn in forex technical analysis and using candlestick charts is probably the easiest way to do this.

Learn more about forex technikal analysis

The currency trading chart is one of the most important tools for the forex trader. Charts are at the root of forex technical analysis, which forms trading systems based on studying price movements rather than economic forecasts which are the basis of fundamental analysis in forex trading. Most traders these days prefer technical analysis which does not require any special knowledge or training in economics.

Any currency trading chart will show price movements. Usually you can track these over a variable period of time. You can look at the last few minutes, hours, days or longer. Using a chart in conjunction with the mathematical indicators provided by most brokers and charting services, you can identify emerging tendencies and trends that can signal a trading opportunity.

Forex charts come in three formats.

1. The Line Chart

A line chart plots the closing prices at the end of each trading period, which could be anything from one minute to one day, you can set this. These are joined with a line to show the direction of movement. However, a line chart does not tell you anything about what happened at different times during the time period, only the final closing price.

2. The Bar Chart

A bar chart gives you four prices for each period: opening, high, low and closing price. You will see a vertical line for each period. The top of the line marks the high and the bottom is the low. A notch on the left side shows the opening price and a notch on the right shows the close. Usually these are at different levels but they could be the same. Either one of them could be the same as the opening or closing price but more commonly they are somewhere between.

The advantage of the bar chart over the line chart is that it shows you how wide the fluctuations were during the period, giving you an idea of the volatility of the pair at a glance.

3. The Candlestick Chart

This last type of chart gives you all of the same information as the bar chart but in a colored format which many people find easier to take in.

Again a vertical line marks the high and low prices during a period, but there is also a wider block that runs between the opening and the closing price. This block will be filled with color, usually red if the price is falling (opening price is the high end of the block, closing price is the low end) and green or blue if it is rising (closing price is the high end of the block, opening price is the low end). If shown in black and white you will see black for a falling price and white for a rising price.

The colors give you an instant view of whether prices rose or fell during the period. This makes candlesticks quicker to read at a glance than a bar chart. You can immediately see a reversal, which will show up as a series of green blocks marking the trend followed by one red marking the reversal, or vice versa. That is why candlesticks are the favorite type of currency trading chart for many traders.