How to read Forex Charts

Learning how to read forex charts is an essential part of mastering the art of forex trading. There is no point in jumping into forex trading until you understand exactly how the forex trading charts work. You could probably try, but mistakes cost money when it comes to forex trading, so it is a far more sensible idea to get to grips with learning how to read forex charts first!

There are three main types of forex charts: line charts, bar charts, and candlestick charts; the latter being the most popular. The horizontal axis represents time and the vertical axis represents price.

To understand the basics of how to read forex charts, you need to be familiar with how currency pairs are listed. Currency pairs are always quoted in the same way with the base currency listed first. For example, USD/HKD shows that the USD is the base currency and the HKD is the terms currency. This means that if a forex chart of USD/HKD listed the current price at 12.43, 1 USD would buy 12.43 HK Dollars. Your trade size is the amount of base currency you will be trading in.

The first important step in learning how to read forex charts is an understanding that the currency pairs go up as well as down, which is how you make a profit. If you want to buy a currency pair, you will be looking for the forex chart to show that the currency pair is going up and the base currency has strengthened. This will allow you to make a profit on the transaction. Conversely, if you want to sell your base currency, you need the currency pair to go down and the base currency to weaken in order to make a profit.

Lines on the chart going up mean that you should consider buying, whereas lines heading down indicate that it is time to sell. Thankfully, unlike other markets, forex allows you to make money in either direction!

Forex charts use different time frames, so make sure the time frame you are working from is the correct one for your analysis. To avoid any mistakes in your calculations, it is usually better to set your charts up with the time frames and indicators of the system you are trading from. That way you can save and reuse the layout again.

There are two prices for currency pairs, a bid price and an ask price. Most forex charts only have a bid price listed. A currency price is usually quoted with a bid and an ask price. Currency is bought at the ask price, which is always the higher of two prices. Currency is sold at the lower bid price.

Always remember that the time at the bottom of a forex chart will be set to the particular time zone of the forex chart provider. If you are trading against major economic announcements, you will need to convert the time difference to ensure accuracy.

Practice reading the charts and you will soon be able to see how major news stories affect the currency fluctuations!

Introduction to Forex

Trading on foreign exchange rates is known as Forex Trading. A good introduction to forex is crucial for novices who are eager to make some money using this highly lucrative method, as while forex currency trading is fairly easy to get the hang of once you have familiarized yourself with the basics there are a few pitfalls you need to watch out for along the way.

To begin with, it makes sense to start off with a demo account at the broker of your choice. This is the best introduction to forex trading as it gives you the opportunity to play around while cushioned from the possibility of losing a huge amount of your family savings. You can use a demo account to accustom yourself with the trading platform software at the same time as learning how the markets operate on a daily basis.

Once you think you know how to read forex charts, it is time to begin trading using real currency. However, before you re-mortgage the house to raise capital, slow down and take a deep breath. It is far better to start off at the shallow end of forex trading, as opposed to diving in at the deep end, only to realise that you can’t swim!

In your introduction to forex, begin with a small account and learn patience. You might not see much in the way of returns initially, but this is far better than losing the family inheritance and having to explain exactly how it happened to your other half. Once you have grasped the basics and you are making regular successful trades, you can gradually increase the level of your trading.

Rather than constantly chop and change the currency pairs you work with, make a resolution to stick to one pair. The longer you work with one currency pair, the more familiar you will become with the minute variations and how they react with one another as well as to the world at large.

Speaking of which, what happens in the news often has a direct affect on the currency markets. Any major events, for example financial catastrophes in the banking sector, can cause a great deal of volatility. Beginners might prefer to cease trading in times of turmoil as it can be very difficult to predict the ensuing currency fluctuations. Make sure you keep an eye on news announcements and take note of how the currency market is subsequently affected.

When you begin forex trading with real money, one important piece of advice you should always heed is to stay calm. It is all too easy to be swept up in the drama of the moment and make decisions which, in the cold light of day, you would never have made. Just remember, you cannot win every trade. If things appear to be going wrong, take a step back and leave it for a day. In all likelihood you will recoup your losses the next time you trade. As you gain experience, you will see more consistent results, so do not despair!

Forex Backtesting

For beginners to the foreign exchange trading markets, forex backtesting refers to the use of historical data to work out trading strategies. A computer program is employed to test your trading system over a historical period of time. This allows you to test how effective your system is against historical data.

A forex backtest program is the easy way to play around with your trading techniques. You can experiment to your heart’s content, safe in the knowledge that you are in no danger of throwing your life savings down the drain.

However, there are few things to watch out for when using forex backtesting. For one thing, a strategy that works brilliantly when tested against historical data might not be anywhere near as good when used in the current foreign exchange markets. The forex market today is inevitably different to the forex market of two years ago for example. This is because the foreign exchange markets are continuously evolving due to many variables and the past is never going to be replicated exactly in the future.

It is very easy to get all excited when you think you have discovered a trading system that is foolproof, but if backtesting was the simple way to creating a great trading strategy, we would all be billionaires by now!

So remember, you need to beware of assuming that your brilliant and innovative forex trading strategy is the golden ticket to a lifetime of Ferraris and glamour models. The reality is that your strategy might not work half as well when used in the current prevailing foreign exchange markets.

Many people sell forex trading systems claiming that they have great backtesting results. If you are considering buying one, make sure you check whether or not the results are hypothetical or actual. If the results are hypothetical, then they are purely based on backtesting using historical data, which means that the system might be worthless when used today.

There are many different versions of forex backtesting software available for the budding forex trader. The good news is that some are very inexpensive or even free. Of course, you can spend thousands of dollars on a fancy forex backtesting software package if you prefer, but why bother when you can use a program like excel for peanuts?

You will need historical data to work with while you are playing around testing your trading systems. You can obtain historical data from a variety of sources, including brokers you trade with, so ideally make sure the data you end up with is complete and preferably free. If you do decide to buy historical data off the Internet, check it out thoroughly to make sure there are no big time gaps or gigantic holes in the data. If there are, it will be useless.

When you have your backtesting software and data, you can spend as long as you like perfecting your systems and playing around with the charts and results. Once you think you might have found a reliable trading strategy, the time has come to test it out for real!

« Previous Entries — Next Entries »