How to Read a Forex Chart
Forex traders have developed several methods for attempting to figure out the direction of a currency pair. Fundamental traders may read news sources such as DailyFX.com to see how interest rates, economic growth, employment, inflation, and political risk affect the supply and demand for currencies. Technical traders use charting tools and indicators to identify trends and important price points of where to enter and exit the market.
But no matter what type of trader you are, you'll need to learn how to read forex charts...
Opening a price chart
To get started, click on the ‘create marketshot' button at the top of the trading station. Next, you need to pick a currency pair, select the period, and specify the data range.
The period is the time interval that the chart updates. For example, a period set to one day (d1) means that each point on the chart represents one trading day of data. A period set to five minutes (m5) means that each point on the chart represents five minutes of data. The data range is the amount of data you want the chart to populate. If you want to look at a full year of data, you'd set the data range to one year.
Using candlestick charts
The default chart type is called a ‘candlestick' chart. This chart type is used frequently in the forex market. A bar on a candlestick chart shows the open, close, high and low prices for the selected period. The body of the candle shows the open and close prices where the wicks show the high and low prices.
If the closing price is higher than the opening price of the previous candle, then the candlestick will be blue. If instead the closing price is lower than the opening price of the previous candle, then the candlestick will be red. Candlesticks simply make it easier to see if the trading period ended up or down.
Adding an indicator
Just looking at forex charts can be helpful in making a trading decision, but many traders also use technical indicators to help them make more informed trading decisions. These tools help a trader locate price trends and predict future price movements. The trading station is equipped with over thirty popular pre-loaded indicators. Over six hundred popular and custom indicators are downloadable online. To add an indicator to a chart, right click on the chart and select ‘add indicator.'
Drawing a trend line
Prices trend in one of three ways: up (bull market), down (bear market) or sideways (range bound market). A trend line is used to help a trader visually recognize which trend direction is in place. Until the trend is "broken," a trader can reasonably expect the trend to continue. Trend lines are drawn with the ‘pencil' tool. Typically, when you draw a trend line, you want to connect two or more extreme high or low prices that define the trend. Here are a few examples: