The forex charts that you’ll be using for your trading, depending on the forex system that you’re using, may be either line charts, OHLC charts, and probably most commonly, Japanese candlestick charts.
Remember that any currency pair is always quoted in the same order. For example, the USDCHF is always quoted as the USDCHF, with the USD being the base currency and CHF being the terms currency, and not the other way around.
So on a chart of the USDCHF, when you see on a chart that the current 1 minute candle is fluctuating around 1.3127, this means that 1 USD is equivalent to around 1.3127 Swiss Francs:
Note that more than one time frame may be used in combination when trading a forex system. For example, you many need to use a 4 hour chart, a 1 hour chart and a 5 minute chart. Many systems will use multiple time frames to confirm a trend as a part of the set up for a trade.
Let’s have a further look now on how to read forex charts...
How to Read Forex Charts
Especially if you’re new to forex trading, you’ll need to know some more detail about reading forex charts.
Now we've seen an uptrending chart of CHF already, so let's have a look at a downtrending chart of GBP as our example now:
Note these 5 points about how to read these typical forex charts:
Realise that if you go long (that is, buy) the currency pair, that the trade will go in your direction if the chart goes up, that is the base currency is strengthening against the terms currency.
On the other hand, if you short (that is, sell) the currency pair, then you’ll want the currency price to go fall, that is, for the chart to trend down, for the trade to go in your direction.
Have a look at the time frame displayed. In this example, it is a 5 minute chart of the USDCHF. Some of your trading systems will look at a few times frames, not just one. For example, you may need to look at the daily, 4 hour, 1 hour, 5 minute or even 1 minute charts. So make sure that the chart you’re looking at has the right time frame.
Realise that for most forex charts that you’ll read, that it is the BID price that is plotted on a OHLC or candlestick chart, rather than the ask price. Take this into account when placing buy orders based on looking at the prices on the chart, because when you buy, you buy at the ask (offer), not the bid.
So when you buy at market, you’re actually buying at the offer which is the chart price plus the spread.
Also keep this in mind when you’re placing stop orders as well, because most platforms will ask whether you want to place stop orders as “stop if bid”, or “stop if offered”. If you place a “stop if bid” order at “x” price, then you’ll get out when the chart price reaches that “x” price, but if this is a “stop if bid” buy order (as a stop loss for a long position), rather than a stop sell order, then the price you actually get out at will be that price plus the spread. Your trading system will have rules for how to place stop orders, that is whether to place buy stop orders as “if bid” or “if offered”.
Realise that the times on the bottom of the chart will be displayed in the time zone that the forex charting software is set to. Some are set to Greenwich Mean Time (GMT), while others are set to New York time, or other time zones as well.
What this means is that if there’s a major economic announcement that you want to trade, or exit a trade beforehand, that you’ll have to convert the time of the announcement, which may be in GMT for example, to both your time and the chart time, so you know when the announcement is actually going to happen.
Fifthly, check to see if the times on the bottom of the chart correspond to when the candle opens, or when the candle closes. On the above charts, the times corresponding to the candles are the times that the candles closed, at GMT time. Different charts are different in this regard, so see if you can find out. This is especially important if you’re trading systems which rely on the precise price action in relation to major economic announcements.
Continue this tutorial on reading charts at...
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