NOV 21: Forex Charts – What Are They and How Do You Read Them

by David Jenyns on November 21, 2006

When learning to read forex charts, remember that there are two basic approaches for online forex trading. They are fundamental analysis and technical analysis. Fundamental analysis doesn’t rely on forex charts. It uses both political and economic factors to help determine trades. Charts here are only used as a reference. Technical analysis on the other hand will try to predict where the prices are going by analysis of historical price activity. Those who use technical analysis study the relationship between price and time.

The most traded pair of currencies is the Euro and the US dollar, so we will use them in our example. The dollar is on the right hand side of the chart and the Euro is on the left hand side. The currencies are expressed in relationship to each other in pairing. Forex charges will always display how much of the currency on the right hand side is necessary to buy a unit of the currency on the left hand side. Looking at the chart you will notice the last price displayed on a given date. This number is always highlighted. The time is recorded horizontally across the bottom of a chart and the price scale is displayed vertically along the right hand edge of the chart. The time and the price are often in all caps to help the trader remember that technical analysis is about the relationship between time and price. That is a fundamental rule of this type of relationship.

There are many ways to observe the price and time movement on a chart. These include bars, lines, point and figure, and Japanese candle sticks, the most popular method. With the candlestick method there is a fat, red section that is the body of the candlestick.

Lines protrude from the top and bottom and they are the upper and lower wicks. When you look at al the candles on a chart it is clear that bodies can be difference sizes and sometimes there is no body at all. The same is true with wicks. Candle wicks can be of many difference sizes, or there may be no wick at all. The length of the body and the length of the wick are determined by the price range for the candle. Longer candles will have had more price movement during the time that they were open. The top of a candle wick is the highest price for that currency while the wick’s bottom is the lowest price. A candle or currency is bullish when the close of the candle is higher than the open. In English this means that there were more buyers than there were sales during the opening time period. Sometimes the candles will not have wicks. The price opened and it dropped off until it closed.

Forex charts are not a sure fire method, but they are a tool that can help a trader. Many forex traders use charts on a regular basis. Historical trends do have their place in forex trading as most traders will admit, and using the charts to track historical trends can assist a trader in making a decision today.

Often the charts are online rather than on paper. By joining a service that provides the charts via the internet a trader is able to stay very current indeed on currency activity. Charts can be checked on a minute to minute basis. For those who primarily do their trading based on historical accuracy this can be a true help. Most forex traders however use a combination of the two approaches. They may chart historical trends, but they will also pay close attention to political, cultural and economic events within a nation. They may also use charts or other methods to check and see if a particular political event as a recent historical parallel that can be checked to determine how the currency behaved in past times. Simply following a system usually is not enough. A trader should also be, somewhat at least, a student of history and of economics. Using all the tools at your disposal will make you a better and stronger forex trader.

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