Forex Charts – A Simple Explanation for Dummies
So, you’re taking that chance and entering the wonderfully fruitful world of Forex? Well done! Forex trading is one of the easiest and most profitable forms of investment. Many have made their money trading currencies but their success has a lot to do with what they know.
While Forex trading is rather easy once you get going, those first steps are always the most difficult. When starting out, there is so much to learn and research, and so many new terms to understand, that it can seem like a daunting, near impossible task to make sure that you have hit on all the right resources.
From gaining a better understanding about what this trade is all about, to reading those all-important Forex charts successfully, the more you know, the less of a struggle you will have to get things right the first time.
Like all investments, success comes down to making the right decisions. Forex traders rely on reading the news, following interest rates and even taking into consideration the various economic variables, before committing any money to an investment.
And all will use Forex Charts
You cannot avoid using these charts even if you are using other means to make your investment decisions.
Learning how to correctly read a Forex chart is one of the first things you will need to do when you enter this particular world. And in this guide, we’re going to make doing this as simple as possible by breaking down the complicated stuff and giving you the information you actually need.
What is a Forex Chart?
Simply put, a Forex chart is literally a chart which displays the rate of exchange between two currencies. Remember, currencies are traded in pairs, so the chart provides a visual representation of how the two currencies compare with one another over a period of several months.
This kind of chart highlights fluctuations and as such it highlights trends, allowing traders to pick up a pattern. These charts can display major and minor pairs, providing the trader with detailed information that is easy to extract.
Forex Chart Timeframes
The timeframes are basically the amount of time the chart displays. This is depicted on the bottom of the chart and can be customised to showcase the exact time period you select.
Depending on the type of chart you are using, a line, bar or candle used on each point, can be representative of a single day.
The timeframe can be changed from daily to become more exact by displaying the exchange rate every 60 seconds. The benefit of this is that you as the trader can enjoy having access to real-time data which in turn allows you to make profitable decisions within seconds.
The kind of timeframes you can select will greatly depend on the type of chart you choose to work with. The free versions are pretty good at providing timeframes that are as low as 60 seconds but if you want to take your trading to the next level, you might want to buy high quality software which will be able to provide you with that immensely useful real-time information at a much lower timeframe.
How to Read a Forex Chart
· Types of Charts
When it comes to selecting the type of chart you’d like to work with, you will need to have a good understanding of what your informational needs are. To know this, you will need to make sure that you have a good understanding of Forex.
Currently, traders have 3 chart options: candlesticks, line and bar.
Some are easier to read than others and at the moment, it is the candlestick chart that is the most popular because it is capable of providing extra information. A candlestick chart displays the closing and opening as well as the high and low prices over a specific period.
This simply makes comparison not only much easier but also more accurate.
When looking at such a chart, the body displays the opening and closing while the top of the candlestick represents the high price and the bottom the low. The currencies are displayed in two different colours which makes them really stand out and easy to read.
The line chart is used to create a connection between the closing prices, so it is generally generated at the end of each day when markets close. The chart is very basic and can be useful for identifying big trends.
Finally, the bar chart is used to showcase the timeframe. It offers a little more information than the line chart, and similar to the candlestick, openings, closings and highs and lows are shown. The bar chart can help to decide who is in control of the market at any given moment.
· Price and Time
The time is displayed on the horizontal axis (the bottom) while the price is on the vertical axis (the side).
Should the exchange rate have fallen, when reading from the left to the right, you can determine that the market is experiencing a downtrend. This means the sellers have the control.
Should the exchange rate have risen, again when reading from the left to the right, it means the market is enjoying an uptrend, which means the buyers have control.
Once a trend is set, it can remain that way for a period of time so to determine by how much the market will move, you need to know about exchange right pricing and pips.
· Pricing and Pips
The movement of the currencies is known as pips. This stands for “percentage in points”. This movement of the currencies is measured in nanoseconds, by advanced software bots, which is why the chart moves so much.
Even the slightest of change in the pip unit can result in a profit or a loss. The currency pairs are normally traded in four decimal places. For instance, in a decimal of 0.0001, the unit featured four spaces after the 0 is the pip.
Charts are excellent sources of information and they are quite easy to read once you get the hang of it. As a trader new to Forex it is wise to take your time and get to know as much as you possibly can about these charts.