By Danielle Franklin – Forex trading requires a lot of learning and practice. One of the basic and necessary skills in Forex is charting. Why are charts so important in trading? How to read forex charts? How to make charting a useful tool? Are forex charts reliable and what are the pitfalls?
A successful technical trader relies on real time charts in order to understand Forex market and plan trades according to the information obtained. The skill to interpret and comprehend Forex charts effectively comes with experience. It is a learned skill and every beginner in Forex can master it.
Why are Forex charts important?
* Visual chart patterns allows technical trader to focus only on price action without analyzing the reason behind the price movement.
* Fundamentals appear quickly in price movements, therefore by observing the charts a trader is able to monitor not only the news, but also how other traders react to each news release.
* Trends are visible and repetitive. Once you learn the set ups, a Forex trader can analyze trends from last week/month/year and place the trades accordingly.
Here are some tips in using forex charts:
1. When you long the position (aka buying), you have to figure out when the currency pair goes up. In order to make profits, the base currency has to become stronger then the term currency.
When you short the position (aka selling), you have to spot when the currency pair goes down. To make a winning trade, you need to catch the base currency becoming weaker than the term currency.
2. Make sure to check the time frame. It can be 4 hour, 30 minute, or even 1 minute charts. Sometimes you need to use several time frames in order to determine the overall trend. The useful indicators are MACD, support and resistance lines, momentum etc. The long-term frames show the overall direction of the price movement, while short-term frames (for example, 5 minute frames) are useful to spot a rise to determine the trade entry.
3. Understand that there are no scientific laws behind Forex chart indicators. If we knew the price in advance, there wouldn’t have been any market at all! Forex market is all about uncertainty, so don’t waste the time trying to define Forex with scientific theories.
4. Don’t try to predict. Every time you catch yourself hoping and guessing, stop trading immediately, otherwise you will lose money. Instead of predicting, act on confirmation and learn about momentum oscillators, since this is the basic instruments for forex trading success. Without the knowledge of price momentum, you are doomed.
Forex is not a guessing game. It is a game of odds! The words that will kill you are: WISH, HOPE and PRAY.
5. Learn to use indicators the right way. Here are couple of common Forex charting mistakes a lot of beginners make:
* Buying dips according to moving average. (No!) * Using outer Bollinger bands to set stops. (No-No!) * Using pivot points on meaningless data, for example, on short time frame. Remember that all volatility in daily periods is random and there is no technical indicator that can give you any hints.
6. Make it SIMPLE! Using all indicators available is not the right way to go. Simple strategies based on support, resistance and few momentum indicators are all you need to make profits.
Forex trading is not about showing off your IQ. You win when you are right, so the simple it is, the better.
7. Stay disciplined and emotionless. When used correctly, forex charts can lead you to success and a lot of money, but you have to follow the trading rules.
8. Always check the times of your forex charts. The times have to correspond to the opening/closing of the candle. Different charting software can vary from one another, therefore it is your responsibility to double check.
Forex charts are the primary tool for technical analysis. With forex charts, you can analyze the price patterns along the time history of forex market and forecast the potential move in the near future. Don’t be lazy and invest enough time in learning and understanding the basics. With forex charts you will become a successful trader.
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