What Is a Forex Chart?

A forex chart graphically depicts the historical behavior, across varying time frames, of the relative price movement between two currency pairs.

Key Takeaways

  • A forex chart graphically depicts the historical behavior, across varying time frames, of the relative price movement between two currency pairs.
  • A forex chart, essentially, allows a trader to view the past, which, according to technical analysts, can be a predictor of future price movement.
  • The most common types of forex charts are line, bar, and candlestick charts and the normal time frames that most platform's charting software provides range from tick data to yearly data.

Understanding Forex Charts

A forex chart, essentially, allows a trader to view the past, which, according to technical analysts, can be a predictor of future price movement. Most forex brokers will provide free forex charting software for clients who have open and funded trading accounts. Forex charts, like those available for other securities, present information useful for the technical analysis of a specific forex (FX) pair.

Forex charts are essential tools for forex traders who wish to incorporate technical analysis to determine where to invest their funds as they can reveal the existence of trends. Technical analysis is the review of past market prices and technical indicators to predict the future movements of an investment. These technicians believe that short-term price movements are the result of supply and demand forces in the market for a given security. Thus, for technicians, the fundamentals of the asset are less relevant than the current balance of buyers and sellers.

The most common types of forex charts are line, bar, and candlestick charts and the normal time frames that most platform's charting software provide range from tick data to yearly data. A typical forex chart will show the time period on the x-axis and the exchange rate on the y-axis.

Forex Charting with Technical Indicators

Forex charts will have customizable settings for technical indicators, such as price, volume, and open interest. Active traders commonly use these indicators, since they are designed to analyze short-term price movements.

There are two basic types of technical indicators:

  1. Overlays: These indicators do just what the name implies. They may use the same scale as prices and plot over the top of the prices on a stock chart. Examples include moving averages and Bollinger Bands®.
  2. Oscillators: Technical indicators that oscillate, or change, between a local minimum and maximum, and will plot, or display, above or below a price chart. Examples include the MACD (moving average convergence divergence) or RSI (relative strength index).

Most charting software will have many types of technical indicators from which to choose. So, with thousands of options, a trader must select the ones that work best for them. Also, these indicators can, in most cases, become part of an automated trading system.

Forex charting software might also be available from a broker through the use of a demo or trial account. It is advisable that new traders experiment with a couple of different brokers and chart offerings before deciding where to open their account.

Forex Trading and the Dow Theory

Traders and investors have engaged in technical analysis of investments for as long as there have been markets, but no person did more to popularize it than Charles Dow, the American journalist and founder of the Dow Jones Company, the Dow Jones Industrial Average (DJIA), and The Wall Street Journal.

Dow published hundreds of editorials in The Wall Street Journal, many of which espoused his theories on the technical analysis of equity price movements. Today, many forex traders follow his theories as they trade the foreign exchange market (FX).

Dow theory, as codified by his successors at The Wall Street Journal, is composed of six tenets, which argue that asset prices move based on trends that result from the dissemination of new information. Dow theory values the study of trading volume in understanding the underlying dynamics of a market, and forex traders who heed its advice will usually discount changes in exchange rates that result from a low volume of trades.