How To Read Forex Trading Charts?

There are two main approaches applied in the attempt to forecast prices of currencies on the foreign exchange currency market (FOREX).

The fundamental approach uses news and predictions about market reactions to upcoming economic data releases to form opinions.

The technical approach uses grid charts to arrive at price predictions.

Most traders combine the two approaches to some degree and arguments in favor of one or the other approach serve no productive purpose.

New traders that lean towards a technical approach will use Forex price charts to understand where prices have been in the hopes of accurately speculating where they will go, and learning to read Forex trading charts is of paramount importance.

On the price chart, the horizontal axis depicts time. The vertical axis displays price. Forex trading platforms supply the opportunity to choose different time periods, or time frames, in order to permit traders to gauge market direction and momentum objectivity. For example, a one minute chart might seem to indicate that the market is in an uptrend, but examining that same market on a 15 minute chart might reveal that the overall trend is down, but that one minute chart had only enough space to display a temporary correction to the overall trend.

An important observation to make when looking at a chart is the distance between the horizontal grid lines that show the distance between price levels. Most charting software will automatically adjust this distance in order to display price data in a clear, efficient, easy to read manner. Because of this, it will sometimes appear that price activity is high, when in fact the horizontal grid lines represent only a five pip differential. At other times, price activity seems low, but a closer look shows a 20 pip differential between grid lines.

Most trading software will make available several or more different ways of handling the vertical, or price axis.

Two of the most popular are the OHLC and the candlestick price bar. The main difference between the two is that the candlestick bar displays a hollow rectangle depicting the change between the opening and the closing price of a selected timeframe, whereas the OHLC bar is a narrow, solid line.

Traders who prefer candlestick price bars usually have the option of choosing a color to fill in the rectangle formed by the opening and closing prices. They will frequently choose red to indicate a bar where the closing price was below the opening price and green where the closing price was higher than the opening price.

The graphic patterns formed by displaying price changes over time resemble certain shapes. Technical traders strongly believe that these patterns occur over and over again. The patterns are ultimately a reflection of trader sentiment regarding price. The patterns have many names such as flag, head and shoulders, pennant and 1 – 2 – 3, to name a few. These patterns can occur in both uptrending and downtrending markets.

The most important consideration to be made when basing trading decisions on a pattern being formed on a chart is that all traders using charts can see the same patterns, so the patterns are never perfect or 100% accurate. That is to say, there will always be variations in the patterns that will make them different every time, just as no two snowflakes are identical.

For extensive information on interpreting Forex price charts, visit Lucror FX at www.lucrorfx.com. It takes only minutes to register for a free simulated trading account and begin the learning process of using charts to forecast currency prices.

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