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Forex Charts

As a forex trader, forex charts are the most important tool in your toolbox. In fact, it’s positively foolish to start trading forex with real money until you can read forex charts with a decent amount of familiarity and skill.

At the same time, there are traders who overestimate the accuracy of forex charts, or at least our distinctly human interpretations of them.

A “doji” on a Japanese candlestick chart, for example, looks like a cross, and typically indicates that buyers and sellers of a particular currency pair are uncertain of the price.

When traders see a doji, we start thinking here comes a reversal of the price trend. But this is not always the case. Forex chart beliefs are not gospel and should not be viewed as such. Being able to read a chart does not mean that you have mastered forex exchange rates.

Nevertheless, we would have to agree that if there is one area where studying forex really pays off, it is in the area of forex charts. These pictures are not just worth thousands of words, they are worth thousands of dollars—which makes these portraits very beautiful indeed when you are trading through major online brokers like ForexYard.

Different Kinds of Forex Charts

There are many different forex charts that you can use, and all of them can have value for you as a trader. Overall, there are two forex chart principles that you will definitely want to be familiar with from day on: price and momentum.

Price-based charts, such as bar charts, line charts, and candlestick charts, focus on the price action of currency pairs, which is, after all, the most vital knowledge that any forex trader can possess. If you don’t know where prices have been, you can’t surmise where they’re going. Bar charts, line charts, and candlestick charts show price info clearly.

Bar charts, for instance, are the usual starting point for a new foreign currency trader. Basically a bar chart is an up and down line that shows the price of a currency pair during a predetermined time period—a day, hour, minute—and then also contains two horizontally markings that tell you where the price opened and where it closed.

When you are just starting out with foreign exchange currency charts, consider using these simple charts so that you are not overwhelmed with data points that you may not be able to make heads or tails of as a beginner.

Even if you are a beginner, though, think about adding a momentum indicator to your bar or line chart. There are many versions of momentum indicators—Stochastics, MACD, RCI—but the vital thing to realize no matter which one you apply at any given time, is that momentum indicators show you the velocity of price movement, not just price.

In trading the foreign exchange markets, this added window of insight into how quickly or slowly other traders are piling into or out of currency pairs can be extremely valuable. For this reason, most traders include a momentum indicator on their forex charts.

Japanese Candlestick Charts Are the Best Forex Charts

Once you get your feet wet with bar and line charts, it’s time to start using the best forex charts ever invented: Japanese candlestick charts. Nothing against bar chart fans, but for our money, nothing beats the market portrayals offered by candle charts.

First developed in ancient times by Japanese rice farmer/merchants seeking to know how much they should pay for rice, candlestick charts are by far the most popular form of forex chart in the world. All the real forex pros know these like the back of their hand.

At first, dealing with candlestick charts can be confusing. But once you get familiar, you’ll be dreaming about red and green candles growing and shrinking.

The basic idea of candlestick charts is that each candle represents a given time period: a day, an hour, a minute, etc., as the case may be. During that specified time period, the candle either grows up as price goes up, or grows down as price goes down.

Candle sizes and shapes, then, change as the price of the currency pair changes.

More illustrative yet, candles have “wicks” that show the extremes to which price went during the specified time period, before settling back to the “body” of the candle, whose outer extremities represent the open and the close of the currency pair price.

As noted, it’s a bit confusing at first. Luckily, the candlestick system is color-coded. Time periods where price went up result in green-colored candles. Time periods where price went down appear as red candles (or black, on some charts).

Why Forex Charts Are So Right So Much of the Time

It is often said that the foreign currency markets are the most “technical” of all financial markets. That is, the forex markets respond well to “technical analysis,” which is really just another way of saying chart analysis, as opposed to analysis of news headlines.

Generally speaking, this commonplace holds true. In the stock market, for example, chartists are frequently dead wrong. A piece of harmful news about a company may come out, or a company may fail to meet its quarterly earnings estimates, and the stock can take a nosedive, no matter how the chart was looking the day before.

In the world of FX trading, chartists have much more success. Why is this?

The first reason has to do with the innate nature of the forex markets. These markets are global, run 24/7, and see incredible daily trading volume on a daily basis. Banks, governments, and individuals are all participating at once.

With so many millions of buyers and sellers buying a selling so often and in such huge amounts, the price of a currency pair at any given moment gains added weight and meaning. Literally every pip either way is an opportunity for a trader to jump in and buy or sell that currency pair. And jump in traders do, by the millions, 24/7, all around the world, from Los Angeles to Dubai to China, Australia, and everything in between.

The second factor that makes studying forex charts a worthwhile and necessary endeavor for every forex trader is that, well, every other forex trader is studying forex charts. In this sense, there is a self-fulfilling prophecy aspect to forex charts.

The best example of this is the classic “Fibonacci Retracement” level. Fibonacci numbers are based on the work of medieval Italian mathematician Leonardo Fibonacci, who observed mathematical patterns that apply to natural phenomenon.

As it turns out, Fibonacci’s work applies quite well to the forex markets—or at least millions of trader think so and act accordingly. When traders see, then, a currency pair “retracing” (moving back) to a Fibonacci level of 38.2 percent—that is, the price of the pair has moved back 38.2 percent from a previous level—you can bet that there will be some heavy buying and selling as the price moves towards that magic number.

The Bottom Line About Forex Charts

As you can see, we could go on about forex charts for many, many pages.

Suffice it to say, for the purposes of this summary, that learning how to read and, more importantly, learning how to make trading decision based upon forex charts is a form of homework that can pay off most handsomely over the life of your forex trading career.

Important Forex Information

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