Learning how to read Forex chart is challenging. They look complicated on the first sight, but once you get to know about it, it can help you a lot with analyzing and foreseeing your trade strategies.
Basically, charts are prepared based on the timeframe and price fluctuation that you opt to observe. The timeframes depend on charting system, and it ranges from 1 sec to 10 years. Price can generally be demonstrated as a bar or a line.
For making trading decisions, traders select between different time spans. Observing multiple timeframes provides you a vast perspective on the traits of preferred currency pair.
The four hour daily chart is good for long traders, which gives them sufficient room to make carefully timed entries. Multiple timeframes give you details about trading pair qualities like whether the pair tends to move steadily during the daily sessions, or will it be a volatile or sound through the week. Thereby, allowing you to calculate effective entry & exit times.
For displaying prices, Forex charts have different options like ask price, bid price and average price. Pricing option will depend on your favouritism or trading style.
- Ask price - The price you desire to sell the currency pair is called 'ask price'.
- Bid price - The price you want to buy a currency pair is called 'bidding price'.
- Average price - The price between ask and bid price is called 'average price'. You cannot trade with average price, but it is an unbiased view between selling and buying. Displaying it on the chart will provide a balanced price action view.
- The spread - Difference between ask and bid price is called 'spread'. The Forex brokers do not charge commission, but make money on the spread. The seller pays ask price and bidder pays bid price. The broker keeps the difference as his commission.
Charts can be display prices in different modes. The most common displaying methods are:
- Candlestick charts - Commonly used display method
- Line charts - Displays each period closing price in a simple way
- Bar charts - It represents the opening price, closing price and price fluctuations
Technical analysis will depend on your trading style, approach, and the price chart. Most charting systems allow you to include technical analysis tools analyze your chart. For more information, you could also go through iForex Traderbase website.
Insight of support and resistance
It is a simple concept. Floor is the support and ceiling is the resistance for price level. When price penetrate through resistance level, it becomes the latest support level and vice versa.
The best application of support & resistance is during trend periods. If trend is up, go along with the support and take earnings at resistance. On the other hand, if trend goes down, go short with resistance and earn revenues at support.
Support & resistance must be looked as reference points, to make a decision while reading the Forex charts. It gives you an idea on where to take profit orders or put stop loss.
In Forex trading, moving averages are commonly known as technical indicators. Moving average can be set according to trader's suitability. Simple moving average and weighted moving average are the options that you can use.
These basic steps can be helpful in avoiding the pitfalls, while reading currency charts.