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How To Read Forex Charts
Chart is a graphic expression of everything that is happening at the Forex exchange market. We often see them in the example articles, news updates, TV commentaries and so on. For new traders charts do not make much sense at all, while experienced market participants often admit to seeing a certain beauty in the price movement process. Today we are going to talk about how to read Forex charts and how to use them in your trading process.
How to start trading
When you first consider trading on Forex, you will most likely start by learning as much as possible about the matter. And that is the rightest thing to do. However, it is also important to mention that there are a great variety of things to learn. Even to the point of confusion.
That’s why you will need to come up with a structure for learning how to trade and get to know Forex one concept at a time. If you start with the very basics, one of the first things you will need to grasp is how to read Forex charts in order to better understand how to start trading. To give you a brief overview, here are short summaries of the three most common Forex chart types and their elements:
Line chart. This type is considered the most basic way of displaying the price movement, however it proves to be very useful on a number of occasions. There are two primary reasons to use the line chart in your analysis: to see the trend dynamic over larger periods of time and to evaluate a currency’s strength by comparing several charts, featuring pairs that share the currency in question. As you might have guessed from the name, line chart consists of a single line that crosses the chart screen horizontally connecting only the closing prices for the currency over a selected period of time. The basic analytical needs can easily be fulfilled with the default line chart setting. However, if you need to observe the prices other than the closing ones you can change the setting of the chart to represent either of the following: opening price, the highest points or lowest points. There are also options to combine the data for example the high and the low together and divided by two.
Bar chart. Bars carry more info than the line and are a very popular choice for the market analysis process. Each bar is a vertical line with two horizontal markings on each side. This combination represents four elements: the top of each bar is the highest value, the bottom is the lowest, the marking on the left is the price at the open and the marking on the right is the price at the close. Trends can be identified by the location of the bars, for example an uptrend is a series of higher highs. We can also refer to bars as either bullish or bearish, by checking the relationship between the open and the close. If the price closes lower than it opened it is a bearish bar and if the bar indicates that closing value rises above the opening one - bullish. Knowing how to differentiate the two is very important for predicting trend reversals and judging the market’s characteristics.
Candlestick chart. Candlesticks are the most common approach to interpreting Forex data and it is very easy to see why. The elements of each candle are similar to the bar ones: we’ve got the open and the close, the high and the low. High and low are represented in a form of two vertical lines at the top and the bottom of the body respectively, they can be referred to as wicks or shadows. And the candle itself is a vertical rectangle or in some cases just a horizontal line. The main difference from the bars is that open and close can switch places depending on which was higher. Additionally, the candle body gets colored in accordingly - usually green for bullish and red for bearish.
It is important to keep in mind that both bars and candles tend to form patterns and knowing how to identify and read them can be very helpful for a successful trading experience. Speaking of the patterns, let’s discuss some ways of how to predict Forex movement.
How to predict Forex movement
The thing about predicting the Forex market is that there is no one single solution. Truth is, no matter how well calculated your forecasting approach is, it will never be 100 percent correct. But the good news is the more you commit to the same technique and the more experience you get the more accurate your predictions will be.
We won’t go too deep into all the ways to predict the next move of the price, just for the sake of keeping this to the point. But as general knowledge you will need to know that all forecasting techniques on Forex can be categorized into two major sections: technical and fundamental.
Technical analysis focuses on dry data - exact numbers over exact time periods. There are numerous tools and strategies when it comes to technical analysis. From simple trading indicators applied to the chart to complex mathematical algorithms that process large amounts of data instantaneously. The pattern identification we have mentioned earlier would also fall into the technical analysis category.
One of the ways to deal with chart patterns during technical analysis is to learn how to use fractals in trading. Fractals are chart elements that predict the trend reversal. They can be expressed in a form of a candle, a bar or a combination of candles or bars. Since Forex traders can benefit from both uptrends and downtrends, knowing how to use fractals in trading correctly is very important.
Fundamental analysis is slightly more abstract as it is primarily based on subjective opinions on factors that are believed to have impact on the Forex market. Those factors include social, political and economical events around the world. By judging the event’s outcome analysts make assumptions on how the market will be affected. This way of how to predict Forex movement is also often referred to as trading on news and it has a significant amount of followers.
How to start trading
After you got a good idea of how to read Forex charts, it is time to put that knowledge to work. At first, start small and focus on analyzing over acting. Get to know the market in general and the specific currency pairs in particular. It is always a good idea to try out your chart reading skills in the free demo account - a training tool that uses real market’s data to simulate trading process for educational purposes.
As you get more and more comfortable using and reading the charts, you will find new ways to benefit from various timeframe settings and choose the visualization that is best for you. Then it is just the question of time before you become a professional and profitable Forex trader and chart analyst.
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