Learn what exchange rates mean and how to read and interpret currency charts. Here are the basics to help you read and interpret currency charts.
Exchange rates are constantly fluctuating. Traders in the foreign exchange market are trying to make money by considering these fluctuations and anticipating trends.
A trader follows political and economic news, including factors affecting exchange rates, such as interest rates, employment and inflation. At the same time, each trader can read and interpret the graphs showing the current exchange rate information.
If you want to make money in the foreign exchange market, you should be able to do what other traders do. The first thing you need to do is to learn to read and interpret the currency charts. Here is the basic information that will help you with this and allow you to easily read and interpret currency charts.
Learn What Exchange Rates Mean
All currencies are traded in pairs. The first currency in a currency pair is called Base Currency. The second of the pair, that is, the variable currency is called Counter Currency. For example, the base currency in USD / TRY parity is US Dollar and the counter currency is Turkish Lira.
So let’s take an example: EUR / USD 1,0995. Since the euro was first issued, it is called the base currency, where the counter currency is the US dollar. Base currency is always a unit. Thus, the EUR / USD 1.0995 example shows how many US Dollars are required to buy a Euro.
For another example, let’s look at the USD / TRY exchange rate: USD / TRY 5,7264. This example shows that we need to give 5,7264 Turkish Liras to get a US dollar. That is, 1 American dollar equals 5,7264 Turkish Liras.
Interpret Changes in Exchange Rates
Let’s say the EUR / USD was at 1.5500 while it was 1.6500. This means that we will now give more US Dollars to get a single Euro, which can be interpreted as strengthening the euro against the dollar.
In the same assumption, if the exchange rate had fallen to 1.4000, we would need less dollars to buy a euro, which would allow us to comment that the dollar has strengthened or the euro has weakened against the dollar.
Start Reading Graphics
In case of price changes in currencies, you may see three different types of charts on financial sites. These are line, bar and candlestick charts.
A simple line chart draws a line from one closing price to the next closing price. When aligned with a line, it is possible to see the overall price movement of a currency pair over a period of time.
Example of line chart for EUR / USD:
A bar chart may seem a little more complicated to the eye in the first place than a line chart. Bar charts show the opening and closing prices as well as the highest and lowest prices.
The bottom of the vertical bar shows the lowest traded price at that time and the top of the bar shows the highest price. The vertical bar itself indicates the range of transactions of the currency pair as a whole. The horizontal hash shows the opening price on the left and the horizontal hash shows the closing price on the right.
Example of bar chart for EUR / USD:
Commonly used candlestick charts show the same information you can see on bar graphs, but candlestick charts have an advantage in reading and interpretation because they have the option of coloring.
Candlestick charts consist of two different parts called body and shadow. In candlestick chart, opening and closing prices are formed by the body and the lines showing the highest and lowest levels are called shadows.
While short-bodied candles indicate that the market is a shallow market during that period, long-bodied candles symbolize the power of sellers or buyers by color. In these graphs, the fact that the shadows started to form longer on the body is interpreted as the sellers are strong; otherwise, it is interpreted that the recipients are strong during that time.
Example of a candlestick for EUR / USD: