Before you begin to trade in Forex you need to learn some basic skills that is of course if you want to be a profitable Forex trader..
One of the most essential skill you require is the ability to be able to know to read forex charts correctly.
Because once you have acquired this vital skill you will find that it will be a lot easier and quicker when the time comes for you to learn and practice an actual forex trading system.
By the end of this article, you will have learned how to read forex charts plus you will also be more aware of the many pitfalls that can occur when reading them. Particularly if you haven’t traded Forex before.
Before we start in earnest let us take a look at some of the basics of forex trading as they relate directly on how to read Forex charts. I the example below I shall be using the currency pair of EUR/USD.
You will find that each currency pair is always quoted in the same way. For instance, the EUR/USD currency pair is always shown as EUR/USD, with the EUR being the base currency, and the USD being the terms currency, not the other way round with the USD first. Therefore if the chart of the EUR/USD shows that the current price is fluctuating around 1.4119, this means that 1 EURO will buy around 1.41119 US dollars.
And your trade size (face value) is the amount of base currency that you are going to be trading. In this example, if you want to buy 100 000 EUR/USD, you’re buying 100 000 EUROs.
So with the basics behind us, we will now take a look at the 5 crucial steps on you need to know to be able to read a forex chart correctly:
1.When you buy the currency pair, that is, you are long in the position, therefore your aim is that you are looking for the chart of that currency pair to go upwards, so as to make a profit on the trade. In other words you want the base currency to strengthen against the terms currency.
There again other hand if you sell the currency pair to short the position, then you are looking for the chart of that currency pair to go downwards, to make a profit. That is, you want the base currency to weaken against the terms currency.
So far so good.
2. Remember to always check the time frame displayed. Some trading systems will use multiple time frames to ascertain the entry of a trade. For example, a system may use a 4 hour and a 30 minute chart to determine the overall trend of the currency pair by using the indicators such as MACD, momentum, or support and resistance lines, and then a 5 minute chart to look for a rise from a temporary dip to determine the actual entry.
It is most essential to ensure that the chart you are looking at has the correct time frame for your analysis. The most effective way for you to to do this is to set up your charts with the correct time frames and indicators on them for the system you’re trading, and to save and reuse this layout.
3. On just about all of the Forex charts, it is the BID price rather than the ask price that’s displayed on the chart. Remember that a price is always quoted with a bid and an ask (or offer). For example, the current price of EUR/USD may be 1.4119, bid and 1.4125, ask (or offer). When you buy, you buy at the ask, which is the higher of the 2 prices in the spread, and when you sell, you sell at the bid, which is the lower of the two prices.
When you use the chart price to ascertain an entry or exit, recognise that when you place an order to sell when the chart price is say 1.330, then this is the price that you’ll sell at assuming that there is no slippage.
On the other hand if you place an order to buy when the chart price is the same price, then you’ll actually buy at 1.3333. A forex system will often determine whether your orders will be placed simply according to the chart price or whether you need to add a buffer when buying or selling.
You may find that on many of the platforms when you are placing stop orders (to buy if the price rises above a certain price, or sell when the price falls below a certain price) you can choose either “stop if bid” or “stop if offered”.
4. Remember that the times shown at the bottom of Forex charts are always set to that particular time zone that the Forex provider’s charts are set to. It could be either GMT, New York time, or possibly other time zones depending when and where you are trading..
It could be a good idea to have a world clock nearby on your computer desktop in order tohelp you to convert the different time zones. This can be particularly crucial when you’re trading major economic announcements.
You will find that you need to convert the time of an announcement to your own local time, and the chart time as well. That way you will know when the announcement is going to happen, and therefore you will then know the correct time as to when need to put on your trades.
5. Lastly always check whether the times on your Forex charts corresponds to when the candle opens or when the candle closes. Your charting software may be different to someone else’s in this way.
The main reason that I am mentioning this is because if you want to trade using major economic announcements, either by entering a trade based on the movements that happen after the announcement, or to exit a trade before the announcement so as to avoid getting stopped out during it, then you need to be exact (to the minute!) as these trades are performed according to what happens at the 1 minute interval immediately after the announcement, not the candle afterwards!
So all you need to do now is to practice regularly looking at Forex charts with each of these 5 points above in min, and hopefully you will become more proficient and therefore more profitable in your Forex trading.
Chris Strudwick is a successful share trader on the Australian Stock Market Visit his weblogs at both http://www.asxnewbie.com AND http://www.aussie-retiree.com/ for more free articles and useful information about the stock market.
