Saxo Group
If you want to trade forex but don’t know how to identify trends and how to use them, then this guide is for you. Although forex trading charts and patterns aren’t foolproof, they can help you decide when it might be optimal to buy and sell currency pairs.
Forex trading involves speculating on currency pairs. This means you’re converting one currency for another. Within a forex pair, you have the base currency and the quote currency, e.g. USD/EUR. When you trade forex, you’re looking at how much of the quote currency (listed to the right of the /) you need to buy one unit of the base currency (listed to the left of the /).
Therefore, when you trade forex, you’re simultaneously buying one currency and selling another. The relative value of the base and quote determines the value of your currency pair and whether you make a profit or loss on a trade.
A forex chart shows the price movement and trading volume of a currency pair over time. It shows the cost of a currency pair and how much trading activity there has been.
Charts are used in forex trading to show the movement of a currency pair over time. This allows traders to track historical price data and trading volume. From this, it’s possible to identify indicators and technical patterns. These patterns are used to determine when it might be optimal to buy or sell a currency pair.
As it is with all things in trading, nothing is guaranteed. Using a forex chart to track price data and identify patterns doesn’t mean you’ll make a profit. However, charts do give you the ability to carry out technical analysis, which can provide information that’s useful when making decisions about buying and selling.
Forex charts can come in a variety of forms. However, three charts are commonly used among experienced traders. The forex charts you can use are:
Line charts are the simplest way to track forex price data. These charts draw a line from the previous day’s closing price to the current day’s closing price. When this is done over several days, you get a chart that shows the rise and fall of the currency pair’s price.
Bar charts in forex show the opening and closing price for a currency pair, as well as the day’s high and low prices. This information is denoted by a bar. A bar consists of a vertical line with two horizontal lines splitting off it.
The line starts at the bottom with the pair’s daily low price. It extends up to a point that marks the daily high price. A horizontal line on the left side of the vertical bar (as you look at it) is marked at the daily opening price. A horizontal line on the right side of the vertical bar (as you look at it) marks the daily closing price.
These bars show a price range. The longer the vertical bar, the greater the range between the low and high price. This information can be useful when assessing how much trading activity there has been, as well as how volatile the price is.
Candlestick charts are among the most commonly used charts in forex trading. They’re a type of bar chart, which means the candlesticks show the opening and closing prices, as well as the day’s price range.
You can read our guide to candlestick charts for a comprehensive breakdown of these price markers. However, in terms of the basics, it has:
The size of the body is determined by the daily opening and closing price. If the body is black or filled with colour, it means the daily closing price was lower than the opening price. If the bar is white or hollow, it means the closing price was higher than the opening price.
Finally, the upper shadow shows the daily high, while the lower shadow shows the daily low. Thus, from a candlestick, you can see the opening price, the closing price, the daily highs and lows, whether the price is closing higher or lower, and the range between the day’s price data.
The last thing to cover is reading charts:
The type of chart you use will depend on the trading platform’s capabilities and your preferences. Saxo Bank’s trading platform gives you the ability to assess price data using line charts and candlesticks.
Identifying patterns using a line chart isn’t possible because there isn’t enough data to conclude from. So if you want to look for patterns and conduct what’s known as technical analysis, use candlestick charts.
From a candlestick chart, there are ten patterns you can identify when you’re trading forex. These patterns are identified by drawing lines between price points. These lines form distinct shapes that are used to signal when a bullish or bearish trend might be forming.
The shapes and patterns that commonly form on forex price charts are:
When a price chart shows a peak, a retracement (the price going down) back to a support level, then a second peak and retracement, this is a double peak. This pattern suggests a trend reversal is about to happen because, after the second peak, the price continues to go against the previous bullish trend.
A double bottom is the opposite of a double top. Selling activity causes the price to drop below the support level (i.e., the current average price) before it returns. The price then drops again before going back to the support level and continuing upwards. This forex chart pattern suggests that a bullish trend is taking hold.
A rounding bottom is when the low prices gradually decrease before gradually increasing. There are no quick price drops or spikes, which results in a gradual trend reversal that creates a curved line.
This forex pattern is when a temporary retracement follows a rounded bottom. The quick retracement leads to a short price spike/drop. Two angled lines can be drawn around these movements. These lines look like the handle of a cup. The thinking here is that the price will reverse out of a handle.
This chart pattern looks like a head in the middle of two shoulders. It consists of:
Followed by…
Followed by…
The price will continue to fall after the third retracement, signalling a bearish trend.
Wedges occur when price peaks and troughs gradually move closer together. Technically speaking, wedges are formed when support and resistance levels move closer together. Wedges can rise or fall. A rising wedge shows that a bearish trend is forming, while a falling wedge signals the start of a bullish trend.
When peak prices are reaching even points and the troughs are gradually getting shallower, it’s possible to draw what looks like a triangle. This pattern looks like a triangle because the resistance line (above the price peaks) is straight.
The support line is slanted upwards (i.e. the line under the price lows is moving up towards the resistance line). When you draw a vertical line through a point on the chart, it creates a triangle that’s tilting upwards. This pattern signifies a bullish trend.
A descending triangle is the opposite of an ascending triangle pattern. This means the low points are linear, but the highs are gradually coming down. Therefore, the support line is horizontal while the resistance line is moving in a downward direction toward the support line. This creates a triangle that’s aiming downwards. This signals a bearish trend.
A symmetrical triangle can show a bullish or bearish trend. A series of candles that have highs and lows that are even mark this pattern. So, if the price is bullish, the highs and lows gradually increase at an even pace over a set period.
For example, the price might flow in the following way:
As you can see, the highs and lows mirror each other and, overall, the highs are getting higher. Thus, if you were to draw lines on a chart, these price movements would form a symmetrical triangle.
Pennants (which can also look like flags) are formed when a currency pair’s price moves in a bullish or bearish direction before hitting a point of consolidation. In simple terms, this means the price goes through a rapid period of growth/decline before the trend slows down.
For example, if it’s a bullish pennant, the price will spike and stay high for a brief period before the spikes start to get smaller. As the spikes get smaller, pennant forms. Even though the spike slowly declines, the point of consolidation is higher than the starting price. That means you can use pennants to detect bullish trends if the consolidation point is higher and bearish trends if the bearish trend is lower.
Identifying forex chart patterns is one thing, as is knowing what they signal. For example, as we’ve said, an ascending triangle suggests the price is bullish or moving into a bullish state. However, and this is important, patterns aren’t perfect.
Just because an ascending triangle is regarded as a bullish pattern, this doesn’t mean the currency pair’s price will adopt a bullish position or trend. It might, but it’s not guaranteed. You can’t use charts and technical analysis to say with 100% certainty what a currency pair is going to do.
Trading is a game of imperfect or incomplete information. Some variables are known, but some aren’t. For example, an economic disaster might happen out of the blue and cause the markets to crash. You can’t predict future events like this, which means you can never say for certain what’s going to happen.
Therefore, you simply have to work with the information you’ve got and do the best you can. And that’s why forex charts and technical analysis can be useful. Making the most of the known variables and thinking critically about what they’re suggesting is regarded as a useful way to make trading decisions. So, if you can draw lines on a forex chart and create an ascending triangle, you can take it as a sign that a bullish trend may have formed.
Does that mean you should buy a currency pair? No.
Technical analysis is just one way to analyse the value of a financial instrument. It’s a useful tool, but it’s not the only one. For example, you can also conduct fundamental analysis or quantitative analysis. There is value in analysing the market and the thing you’re trading (forex in this case) from different angles.
Learning to read forex trading charts is one angle and, for some people, it’s the only one they care about. However, there is value in learning other ways to analyse forex. Doing this will help you become a more effective and versatile trader.
The best way to master the art of reading forex charts, as well as other types of analysis, is to create a demo account. Doing this allows you to look at charts and practice spotting patterns with a virtual bankroll. Then, once you’re comfortable using this type of analysis, you can switch to a live market and make real-money investments.
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As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
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