Forex trading is all about knowing when to buy or sell a stock or commodity. As a trader, there are various considerations that you will need to focus on. However, it is vital to understand why these are important in the first place. Forex is driven by changes in news, trader speculation, financial projects, and a myriad of other variables. Inherently, market principles such as the demand and supply concept and related connotations remain the same. Verily, it is critical to know how to interpret and analyse the information provided.
Expert traders know that the graphs they spend most of their day observing hold the answers to their questions. While a technical graph might not hold much value for laypersons and would downright confuse them, it is exactly where one can spot data trends to make the right decisions. That said, identifying a trend isn’t the same as stretching past trends into the future. It must not be forgotten that the forex market is highly volatile, and historical projections may not hold. By default, you need to understand when a certain price will spike or dump as this is essential to turn a profit.
Forex Charts 101
The coveted forex chart is where all the action happens. This chart presents exchange rates between currency pairs by tracking their movements over time. In fact, every single element on this chart explains what the market is doing currently and how it may go from there. First and foremost, you need to set the chart to the pair of your liking. One of the most common ones is EUR/USD, which can be used as a standard to read the chart like a professional.
Similarly, you need to set a specific time frame. By default, this is typically set to a period of 24 hours which is useful for a general analysis. To actively trade and navigate trends over shorter periods, you can change the setting to minutes or hours. Since the information is updated in real-time, you get to see possible developments play out as they occur and avail opportunities by making the right decisions.
Types of Charts
1. Bar Charts
Although best suited for experts, these charts show a great deal of information. Currency pairs’ opening and closing values as well as their daily/hourly highs and lows, are clearly presented. The vertical bars visible on the screen elucidate the trading range. When it comes to the hash, the horizontal left is considered the opening, whereas the horizontal right is considered the close.
2. Candlestick Charts
Just as bar charts, candlestick charts also show the high and low values of the currency pairs being traded. These are compact rectangular blocks cut through with a vertical line that reveals whether the market is bullish or bearish at a current point in time. It must be kept in mind that the colors of the candle’s body serve as key indicators. If the latter is colored, this means that the close was on the lower side. However, if the block is empty or white, that means that the stock closed higher.
3. Trend lines
The zig-zag pattern observed on the overall chart shows the price movement across a specified path. There is only one horizontal direction, whereas the vertical front reveals dips and spikes in price. In that, the trend itself can be spotted and elaborated using this trend line. The connection of consistent trading highs and lows shows the trader whether it’s the right time to enter in a trade or exit it. For instance, if multiple candlesticks are consistently closing on a high and this is supported by the trend line, most traders would expect the price to go up. Of course, this is still subject to change if some unexpected news hits the market.
For most beginners, understanding the concept of resistance is crucial to successful training. Essentially, resistance can be thought of as a ceiling whereby the price of a stock or commodity can’t penetrate it. This is the point where a price may touch the level. However, it subsequently falls below afterward. Regardless, it doesn’t mean that a price cannot break the resistance. When prices are perpetually expected to increase, they break the resistance and continue in an upward trajectory. Naturally, you want to know how to spot the resistance. To do this, you need to see if the price has reached the same or almost the same peak level multiple times in the past. Then, you draw a horizontal line across these points, and if they touch, that’s your resistance level.
On the other hand, support is the exact opposite of resistance. In that, whereas a resistance indicates that the price will fall, support shows that it won’t. Applying the same concepts as before, one can say that a support level is a point from which traders expect the price to go. When minor dumps and corrections occur, stable currencies are very less likely to go below their established support levels. Moreover, to spot a support level, simply turn the chart upside down and do what you did for the resistance.
6. Head and Shoulder Patterns
Most commonly seen in upward trends, this type of pattern forms a reversal that is a critical indicator of market movements. These are used to predict whether the market will shift from bullish to bearish or vice versa. First and foremost, you need to understand that the head is basically a higher level of prices, whereas the shoulder represents relatively lower prices. Imagine two shoulders with a head in between connected by a neckline. This is to say that there is a higher point in the middle of two lower points. In forex, when this pattern forms, the price is likely to plummet thereafter. However, if the formation is inverse, the price is typically expected to rise, and that’s where most traders enter the market.
Mehvish is a versatile content writer and strategist. A writer by day and a reader by night, she loves to make a positive contribution by her writing skills. She has been providing copywriting, Amazon affiliate content marketing, ghost-writing, technical SEO services in different niches like Forex trading, Cryptocurrency, home improvement and maintenance, Business, Tech, Health and Fitness, IT, Fashion, marketing, food, and Lifestyle.
When she is not writing, she loves reading books, cooking, and travelling.