Learning the basic skills in forex, such as how to read forex charts, is really important.
This is because once you have this vital skill under your belt,
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 time you finish this article, you'll learn how to read
forex charts, as well as know the pitfalls that can occur when reading
them, especially if you haven't traded forex before.
Firstly, let's revise the basics of a forex trading as this relates directly to how to reade forex charts.
Each currency pair is always quoted in the same way. For
example, the EURUSD currency pair is always as EURUSD, 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
EURUSD shows that the current price is fluctuating around 1.2155, this
means that 1 EURO will buy around 1.2155 US dollars.
And your trade size (face value) is the amount of base
currency that you're trading. In this example, if you want to buy 100
000 EURUSD, you're buying 100 000 EUROs.
Now let's have a look at the 5 important steps on how to read a forex chart:
1. If you buy the currency pair, that is, you're long the
position, realise that you're looking for the chart of that currency
pair to go up, to make a profit on the trade. That is, you want the
base currency to strengthen against the terms currency.
On the other hand if you sell the currency pair to short the
position, then you're looking for the chart of that currency pair to go
down, to make a profit. That is, you want the base currency to weaken
against the terms currency.
Pretty simple so far.
2. Always check the time frame displayed. Many trading systems
will use multiple time frames to determine 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 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
So ensure that the chart you're looking at has the correct
time frame for your analysis. The best way 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 most 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 EURUSD may be 1.2055 bid and 1.2058 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.
If you use the chart price to determine an entry or exit,
realise 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 no
If on the other hand, 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.
Also note that on many platforms, when you're 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 select either "stop if
bid" or "stop if offered".
4. Realise that the times shown on the bottom of forex charts
are set to the particular time zone that the forex provider's charts
are set to, be it GMT, New York time, or other time zones.
It's handy to have a world clock available on your computer
desktop in order to convert the different time zones. This is important
when you're trading major economic announcements.
You'll need to convert the time of an announcement to your
local time, and the chart time, so you'll know when the announcement is
going to happen, and therefore when you need to trade.
5. Finally, 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 reason I mention this, is that if you need to trade 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 in avoid getting stopped out during it, then you need
to be precise (to the minute!) as these trades are performed according
to what happens at the 1 minute immediately after the announcement, not
the candle afterwards!
So there you have it.
You now have the 5 essential keys to how to properly read forex
charts, which will help you to avoid the common mistakes which many
forex beginners make when looking at charts, and which will speed up
your progress when you're looking at forex charting packages, and forex
trading systems that you want to trade!
Now that you know this, practice looking at forex charts with each of these 5 points in mind.
So get to it!
by Mark Hamburg