It is very important for a trader to go through the charts before placing any trade. If you are new to the forex market and are learning the basic skills, it is important for you to know how to read the forex charts correctly.
Probably, most of you have taken a course or studied the use of charts in the past. However, I am penning down my thoughts keeping in mind someone who has just started trading in the forex markets. Once you up skill yourself and are adequately trained to read a forex chart, it will be a lot easier and quicker when the time comes for you to learn an actual forex trading system.
In this article, you will learn the basic steps required to read the charts especially if you have not traded forex before.
When you are using charts to make trading decisions, you can choose between different time frames. Many trading systems will use multiple time frames to determine the entry of a trade. Monitoring multiple time frames can give you greater perspective on the direction of the currency pair.
For example: The smaller timeframes such as 5 minutes and 15 minutes are best suited for day traders looking for scalping and making quick pips . 1Hr chart is best suited for swing traders and for long term traders looking to catch the momentum. On the other hand the 4Hr charts are used to determine the overall trend of the currency pair. One can also plot indicators such MACD, Pivot Points, Support and Resistance lines on any of these time frames above. 4H Chart is also extremely useful for traders who are waiting to take pin pointed entries while studying the daily charts. On the flip side the daily chart is suitable for setting up long term positions on a currency pair.
There are different methods for plotting the price on the charts. The most commonly used method is Japanese candlesticks. There are many types of using candlestick patterns each with a different interpretation which is used to study the price action. On the flip side it can also be displayed as line chart. Line charts is a good way to simplify price display. You can plot the line chart based on closing, opening, high or low prices of a particular time frame. An additional method to display price is by using a bar chart. It is very similar to the candlestick chart.
Forex charts have several different display options for showing the price. There are 3 types of price: Ask Price, Bid Price and Spreads. The choice you make will depend on the direction in which you want to trade. Ask price is the price at which sellers offer to sell currencies to buyers. Bid price is the price at which the buyers offer to buy currencies from sellers. Spread is the difference between the bid price and ask price.
The time shown on the bottom of the forex chart is set by your broker. He can select any time zone – GMT, NY, CST. Therefore it is handy to have a world clock available on your system to convert the different time zones. This is important when you are trading on major news announcements.
The principle behind technical analysis is that there are certain patterns which are formed by the transactions of thousands of market participants and these patterns repeat themselves over and over again. Traders with practice, learn to recognize such chart patterns.
Understanding how the price moves and getting an edge to trade in any market in the world relies on how connected you are with the price action and how accurately you can judge its direction. Charts form a very important part of your visual arsenal which is required to trade in the market effectively