When reading forex charts, remember the two fundamental approaches to online forex trading: fundamental analysis and technical analysis.
Fundamental analysis is not based on forex charts. It examines political and economic indicators to determine transactions. The charts here are used as a secondary reference.
Technical analysis, on the other hand, attempts to predict price movements by analyzing historical price activity. Those who use technical analysis study the relationship between price and time.
The most actively traded currency pair is the Euro and the US dollar, so we will use them in our example. The dollar is on the right side of the chart and the Euro is on the left side. Currencies are expressed with each other in pairs. The exchange rates will always show how much of the currency on the right side is needed to buy one unit of the currency on the left side. Looking at the typical EU-US, the chart will show the last price shown by a certain date. This number is always emphasized. The time is tabulated horizontally along the bottom of a chart and the price scale is displayed vertically along the right edge of the chart. Time and price are fixed in all caps to help the trader remember that technical analysis relies on the relationship between time and price.
The trader observes the movement of price and time on a chart. These include bars, lines, points and figures, and Japanese candlesticks – the most favored method. With the candlestick method, there is a large red section that is the body of the candlestick. Lines protrude from the top and bottom and are the upper and lower wicks. When you look at all the candles in a chart, it is clear that the bodies come in different sizes. Sometimes there is nobody at all.
The same is true of the wicks. The wicks of the candles come in many different sizes; there may be no wick at all. The length of the body and the length of the wick are determined by the price range of the candle. Longer candles will have had more price movement during the time they were open. The top of a candle wick is the highest price for that coin while the bottom of the wick is the lowest price. A coin is bullish when the close of the candle is higher than the open candle. In simple terms, this means that there were more buyers than sellers during the opening period. Sometimes candles have no wicks. The price opened and fell until it closed.
Forex charts do not offer bulletproof trading clues, but they can help a trader. Past trends have their place in forex trading, as most traders will admit, and using charts to track historical trends can help a trader make a quick decision.
The online trader usually joins a service that provides real-time charts that update forex activity. The charts can be checked on a minute-by-minute basis. For those who do their trading primarily based on historical accuracy, this can ease the burden of forecasting.
However, most forex traders use a combination of fundamental and technical analysis. They may chart historical trends, but they also pay close attention to political, cultural, and economic indicators within a region. They may use charts and other techniques to check the correlation between the political climate and currency fluctuations. But even the most sophisticated technical analysis software or tool has its limitations. A trader must be prepared to take risks…and invest money that is not needed for the immediate future.