To be a professional trader you need to be able to read Forex charts and understand the psychology behind chart patterns.
Once you have an understanding how to read a Forex chart, you’ll no longer need to guess at future market movements. You only need to follow what the charts are telling you to do. The patterns become a map that dictates how you should trade.
Technical traders are good at reading charts, and knowing how to trade the patterns. They don’t try to predict what will happen, only but react to what is currently happening in the chart data.
The most popular forex charts are the bar chart, candlestick chart, and line charts. These are simple illustrations so you can see the immediate differences between them.
The Forex Price
The price on any particular Forex chart displays the activity of all market participants. The interaction between the buyers and sellers, or the supply and demand side of the market, is what generates the price changes.
By analyzing price charts, you’re able to get a snapshot of the total market psychology. Through this, you are able to identify the best moments to buy or to sell currency pairs.
Overlaying technical analysis tools on charts, helps us determine what will happen to the price in future. They also give us an insight into the market direction and the strength of the trend.
With a bar chart, all currency pair price information for any one day is shown on a vertical line. The first price on a bar chart is the open price and it’s marked as a little node on the left of the bar. The closing price is marked as a second node on the right of the bar. The ceiling the price reached during a day is the high price, and the price floor or the low price is also shown.
The bar chart is a pretty widespread charting method. Technical analysis is involved in the studying of these prices.
Total volume is the sum of all orders – both buying and selling. If there’s more buying volume than selling volume, the value of the currency will increase and the price of the currency will go up. However, if there’s more selling volume than buying volume the value of the currency will decrease and the price of the currency will fall.
If the currency price is rising but volume is decreasing, this can be an early sign that the trend is losing momentum and could reverse. And the opposite is true if it the currency price is falling, but volume is decreasing.
Note, however, that because the Forex market is a global and decentralized market, thus the trade volume data is not perfectly accurate. That said, is no a perfect measure of the actual volume traded, so volume data is only considered as indicative of actual volumes.
A price bar is a linear representation of a period of time. There are many different time frames used in the analysis of the Forex market. All Forex charting platforms offer charts starting from the 1 minute, to the weekly, or even monthly time frames. There is no one best time frame to analyze a currency pair.
Higher time frames, such as the daily chart, provide a better perspective on the most relevant support and resistance levels.
Choosing the right time frame depends on what kind of trader you are. If you’re a day trader you need to use short time frames to capture the small trends. If you’re a swing trader you need to use larger time frames to capture the biggest swings in Forex.
Time Frame Comparisons
Depending on the kind of trader you are, you can use these different time frames to achieve your goals. All time frames have advantages and disadvantages.
There are plenty of time frames used for scalping. The most common one is the 1 minute and 5-minute charts. The 5-minute chart will help you to hold your winners for longer than the 1-minute chart because you have a more macro perspective.
A good choice for day traders is the 15-minute chart and 1-hour chart. While the best time frame for swing traders is the daily chart.
If you are going to be doing technical analysis on your charts, keep in mind that this kind of analysis works better on the larger time frames. A good example of this case is in the second part of this article about how to trade double tops and double bottoms.