How to Use Forex Charts to Predict Market Movements

A forex chart is a graphical representation of the past price movements of the currency pairs over a period of time. Analysts use the past performance of the prices to predict future price movements. There are patterns, signals and other indicators that forex traders need to look for before making informed decisions.

What is forex chart?

Forex chart illustrates historical price movements of the currency pairs over a specified period of time. How to read forex charts? Prices are plotted in on the vertical axis and time is plotted on the horizontal axis. Forecasting future trends is impossible without analyzing the past price performance.

What are the different types of forex charts?

There are various types of charts used in forex trading where each of them provides unique insights.

Line Chart

Simplest chart pattern that uses only the closing prices of the currency pairs to represent the price movement. It is the oldest chart pattern and less informative.

Bar Chart

Bar chart pattern provides more detailed data by showing open and close prices with high and low for a specified time period.

Candlestick chart

This is the most popular chart with more visual format than the bar chart pattern. Candlestick charts are color-coded to show the bullish and bearish direction of the market.

Essential technical indicators in forex chart

Forex technical indicators help traders to measure the strength of the underlying trend and forecast the potential continuation of the trend. Traders use common indicators such as:

Moving averages

This is the most common type of simple moving average and exponential moving average. Moving averages generally smooth out the price data in order to identify trends.

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Relative strength index – RSI

RSI helps in measuring the speed and change of the price movements. It also indicates overbought and oversold regions thereby suggesting potential trend reversals.

Moving average convergence and divergence – MACD

MACD is a trend following momentum indicator that depicts the relationship between two moving averages of the currency prices.

Bolinger bands

Bolinger bands adjust on market volatility to show potential overbought or oversold conditions.

Key chart patterns for traders

Forex trading charts form specific patterns that can indicate future price movements. There are numerous chart patterns that help traders forecast the upcoming trend. Few common patterns are:

Head and shoulders

Market forms three peaks, two smaller ones on the sides and one larger one in the middle. Usually head and shoulders pattern indicate a reversal of an uptrend. Similarly, an inverse head and shoulders pattern indicates a reversal of a down trend. Traders watch for a break out below or above the neckline to initiate a new position or exit the current position.

Double top or double bottom

Similar to head and shoulders pattern, double top and double bottom formations are reversal patterns. They are formed at a very strong and powerful support or resistance levels, a breakout of which indicates a potential trend reversal.

Triangles

Formation of a triangle pattern indicates either a continuation or a reversal of an underlying trend. Triangle patterns are generally formed in a consolidating market before a breakout. When a breakout occurs in the direction of the existing trend, traders continue with their current position. When a breaout occurs in the direction opposite to the existing trend, it indicates a reversal and traders exit their current positions.

The three types of triangle patterns are:

Ascending triangle – bullish continuation pattern

Descending triangle – bearish continuation pattern

Symmetric triangle – can breakout either direction.

Flags and pennants

Flags and pennants are small consolidation patterns, a break out of which indicate trend continuation. Flags are rectangular shaped patterns that slopes against the existing trend. Pennants are small symmetrical triangles that forms after a strong price movement.

Wedges

Converging trendlines form wedge patterns, thereby indicating reduction in volatility. Wedges are usually reversal patterns when they are formed after significant trends. Rising wedges indicate bearish pattern and falling wedges indicate bullish pattern.

Rectangles

Rectangle patterns are formed when currency pair prices range within a defined region, support and resistance. A breakout above the resistance or below the support indicate the next directional move.

Cup and handle

This is a bullish continuation pattern that resembles a tea cup. Cup and handle pattern occurs during a bull trend, where a breakout above the handle’s resistance signal a continuation of the trend.

Rounding bottom

Rounding bottom forms between two parallel trendlines and a breakout above the resistance level changes the direction of the trend from bearish to bullish.

Channel patterns

Channel patterns can be either continuation or reversal. They are formed when price moves in sideways trend. Upward channel indicates a strong uptrend and downward channel indicates a strong downtrend, a breakout of which can signal the start of a new trend.

Gaps

A gap in a forex trade chart occurs when the currency price jumps significantly without any trading. Types of gaps are

Breakaway gaps – occur at the beginning of a trend

Runaway gaps – occur during a strong trend

Exhaustion gaps – occur at the end of the trend signalling a reversal

How to analyze forex trade charts effectively?

There are best ways to avoid losses in forex trading. It is very essential to learn to read price action of the currency pairs to analyze the forex charts effectively. Focusing on the key price movements help in making buying or selling decisions at the right levels. The important price movements to watch for are:

Trends

Indicates the over all direction of the market, namely, bullish, bearish or side-ways.

Support and resistance

Support is the price level where excessive buying happens and resistence is the level where excessive selling takes place. Trends generally take reversal at the support and resistance of the currency pairs. Traders wait for the buying or selling interest to emerge at the support or resistance levels to initiate new positions either side.

Breakouts

Breakouts occur usually from a sideways movement within a fixed price range. Typically, a breakout signals a start of a new trend, bearish or bullish.

Conclusion

Why most forex traders fail and lose money? Understanding the forex trading chart patterns and explore how they function will allow traders to make informed decisions in the forex market. Before entering into a trade, it is essential for the traders to confirm with the indicators and do a volume analysis. Also setting a stop loss helps traders to minimize potential risk of losses.