Make no mistake about it. To excel in Forex trading (or any form of trading for that matter), you need the right tool. Charts and graphs are your best weapons against the volatility of the money markets.
Charts and graphs? Why?
Currency trading has a lot to do with speculation but that is easier said than done if you have not done any homework. The only way to do this is by carrying out some analysis. Forex trading is very fast paced and it is difficult to get a grip of anything unless you are prepared. Here are 5 crucial tips on reading charts for Forex trading.
Buying and selling
In buying a currency pair, you want to find the part in the chart where the currency pair is going up. This means you will be profiting from this transaction. In other words, you are hoping that the base currency will become stronger against the latter. If you are the seller, you are looking for the part of the chart that goes the other way.
Timing is everything
The time frame is very crucial. Some systems adopt multiple time frames before the trade happens. When you are looking at the chart, you want to ensure that you are looking at the correct time frame before carrying your analysis. Ensure that there are indicators that help you on this.
When you look at Forex charts, you are always looking at the Bid price and not the ask price. For instance, the current price of USD/EUR might be 1.3333 for bid and 1.3336 for ask. When you are buying, you are looking at the ask price.
The time that are shown at the bottom part of Forex charts are usually determined via a certain time zone. This is set by the Forex provider. It could be a GMT or any other time zone. So, make sure that you have a world clock at hand so that you know what you are looking at.
Candle opens and closes
Always check and see if the times on your charts are correct with the open and close of the candles. This is very important because you need to ensure that your software corresponds with this. Otherwise, you will be analyzing all wrongly. It makes perfect sense to always double check this before you proceed or your homework will all be futile.
Some other tips
As suggested by the name, momentum is meant to verify on weakness or strength of trend as it vary according to time. The theory recommended that momentum reaches the highest point when trend begins while drop to the lowest when it starts to change. Volatility is the scale of daily price fluctuations and lastly, cycle indicators identify timing for market pattern. Moving on, novice traders must also learn other indicators such as average directional movement index (ADX), moving average convergence and divergence (MACD) and relative strength indicator (RSI).
Average directional movement index (ADX) assists investors to read and foresee the changes in market. Besides, it helps to indicate the strength of the trend. It is one of the most helpful tools for forex trading strategies. MACD clearly draws out relation between moving averages as it enable traders to conclude on momentum of the market. RSI ranging between 1 and 100 allows trader to make comparison on high and low prices of the currency. When RSI increase to 70, traders usually perceived it as overbought while those less than 30 are considered oversold. Bear in mind that these indicators may help you to form successful and valuable Forex trading strategies.