Forex Trading Basics Tutorial 5 -- Forex Chart Trading Basics

In this chapter, the technical analysis for a Forex application will be discussed as well as various techniques using chart time perspective short term scalping.  Adding technical analysis can augment a Forex trading program.

Technical Analysis is Spotting Forex Trading Trends

When a trader views technical analysis, he is following the basic herd instinct.  When the Forex markets show a visible trend based on the technical analysis of a currency pair, that trend will continue in the same direction for some length of time.  A good example is AUD/USD trade pair when a pattern emerges and continues.  The AUD/USD may be going up which indicates the economies of those countries using the AUD are getting stronger verses the United States dollar. As noted in the chart below, the AUD/USD trend is heading upwards along the chart line, thus “trending up”.

As Forex Patterns Develop, Other Forex Traders will Take Notice

Once a pattern develops over a short timeframe, the traders of Forex begin to take notice.  They’ll see a trending up pattern and will plan on “throwing” their trades into the “long” AUD/USD more frequently.  This means a large sums of capital will head out of the USD and flow into AUD, which in turn causes the value of the AUD to go up further, while pushing USD downwards.  If a trader takes a long view, as far out as week over week, the AUD/USD chart can climb higher.  Taking the long term look on data trends is the core of technical analysis.

Matching the Timeframe of Your Forex Charts to Your Forex Trading Timeframe is Key

Charting your preferred currency pairs is simple.  The software from your trading platform can easily track these trends for you.  Simply select the currency pair you would like to analyze and set the “timeframe” to the longest setting available.  The presets in your platform may go to up to 5 seconds or even weekly charts.  By looking at the longest charting times, a general pattern will emerge.  Traders will notice which direction the pair is heading towards, either upwards or downwards.  Basing their analysis on a pattern generated from days, weeks or month long time frames, will give the trader a better idea of what to expect and how to handle their new trades.

Switch Timeframes of Your Forex Technical Analysis Charts

Another way to enhance your technical analysis of a currency pair is to use the chart as a picture of the general market direction of the pair. Then, change out the timeframe of the original chart to complement your ideal timeframes for your own trades. Let’s say the trader is looking at GBP/USD currency pair in a “scalping” situation with a 15 minute timeframe.  The trader would look at a 1 minute chart.  Quick movements in the currency pair pricing are easy to see when viewing the 1 minute or even 30 second chart.  A 1 minute or 30 second chart will be updated accordingly (either to the 1 minute or 30 second setting).  As a trader watches a bar chart, the up or downward movement will be shown in an “uptick” or “downtick” of the line.  In 30 second increments, a trader will be able to watch for micro term patterns and trends to emerge on his chosen currency pair.

Let’s say the traders will view chart data and follow an upward trend.  They will jump into trade with a long GBP/USD trade, stick to it as it rises until the upward movement hesitates, slows or even reverses course downwards.  It is at this point the trader will “close out the trade”.  Known as scalping, it can be very effective over a short period of time to net very high profits.  Scalping has limited trading times, often taking 15 minutes to look for a set up, then having only a few minutes of being a “live trade”.  Considered a low risk style of trading, scalping is a very safe method of Forex trading.  Using the technical analysis to locate upwards or downward trends then subsequently committing your Forex capital for a limited brief interval of time, make your profit, then close out the trade swiftly when the trend slows or weakens.  By using a short time frame and getting in and out quickly, this method offers a lower risk option of Forex Trading.  Keep in mind, the shorter the time you are in the market, the shorter the time you are in a trade, the less chance for problems with huge swings in the marketplace going against you.

Using Technical Analysis to Follow Upticks and Downticks for Forex Profit

Some traders prefer faster action.  Try the software trading platform settings for a 5 or 10 second interval chart.   Traders watch their screens for the next wave of data, either in the form of a sudden upswing or downward movement, ride the wave for a few seconds only, then they wrap up and close their trade out when the pause in the markets come back.  Trades such as these are best kept under close watch and avoiding any distractions until the close is final.  Even 5 seconds can upset a trader’s profits if not watched closely while active.  Trades like these are also done best when executed with a pre-set amount of trade in one direction on the order entry screen.  Ideally, the Forex trader will check all technical analysis charts, spots a trend or motion of the currency pair they are interested in for the night’s (or day’s) trade, and then place a very short timeframe trade.  These Forex traders watch one currency pair at a time and prepare for the trade ahead of time by getting their entry order screen ready by filling in the amount of the trade they want, direction of the trade, and any stops.  When a Forex trader has all of his Forex platform information ready to go at a second’s notice, he will be able to buy or sell a currency at a moment’s notice.  During trading sessions like these, the Forex trader might have 1/3 of his trading capital on the line at any one trade.  He also might sit and wait for 15 minutes to a half an hour before the perfect time to trade.  This is known as “waiting for the setup” and usually takes a great amount of patience as the market will be moving up and down.  Generally, a Forex trader will wait for a strong direction in the market on a short term chart, then a pause, and then use a form of “Trend Following” once the FX pair continues in the same direction.  Once the pause ends, and the pair starts to move in that direction, the Forex trader will enter his order, and ride the trade.  He will then close out his order, and jump out of the trade once the second pause in the Forex pair’s price starts.  The trader watches the chart, notes the timing of the sudden large shifts, then waits until the next open interval to place their trade by riding the next upward movement in the price of the FX pair. Most Forex traders will only be long or short a FX pair in any one trading session, as switching between long and short can cause a whipsaw action to the trader’s Profit and Loss.  This example shows how effective scalping a trade can be for Forex traders to quickly grow their accounts.


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