Forex Trading Basics Tutorial 7 -- Basics on Forex Charts and Chart Reading

This tutorial will show how powerful Forex charting tools can be for a trader to utilize.  Also, this section will offer graphic examples to illustrate two of the most common charts used in currency trading, such as the Fibonacci Series lines and a sample of a moving average convergence.

Charts are Graphic Price Pairs

By definition, technical analysis occurs when a trader views a chosen currency pair using a chart or graph and lines that are drawn across the chart showing the hills or valleys of the specific pair the trader is quantifying.  An analysis that includes statistics and regression with a goal of estimating the value in the currency pair’s trend is also used frequently.

The key is to have excellent trading software to set up a solid Forex chart.  The best platforms are the ones that are streamlined to allow complex analytics on your pc without taking up too much screen space or computing power.  When there are too many options or functions available on a platform program, traders can run the risk of too much information, or running a system that is too complicated to get an accurate read on the data.  Many of the more complicated programs used by Hedge Funds and institutional trading firms may have been created use a specialized computer language that is not easy to navigate.  However, Basic Forex Technical Analysis using charts and building them properly can give a trader a very effective analysis of trade setups, directions, and timeframes.  A trader following their gut instinct is one thing, but the Best Forex Trades are made when a Forex Trader has the fundamental analysis to back him or her up and adds Technical Analysis with a chart that offers mathematical evidence that supports a trader’s original instinct. By far FX trading is best when the Forex trader utilizes all the data from all available resources including the Fundamental Analysis and Technical Analysis.

Building Charts into Forex Trading

An Example of Charts and Indicators

Below is a chart from a Forex broker that examines 15 minute intervals of the Euro/Swiss France currency pair.  For this specific pairing, the EUR is listed in the quote first, while the Swiss franc is second.  It is written in short hand (EUR/CHF).  Notice that when the EUR (the first currency in the pair) gets stronger in value versus the CHF (the second pair); the chart begins to track upwards from left to right.

This information proves that the EUR is getting stronger versus the CHF and has been for some time.  A seasoned Forex trader will also notice a long history trend the chart produces, with some very large climbs in brief timeframes.  Finally, a trader will recognize that the chart has produced a recent flat trend, indicating that during the last few trading sessions, there has been almost no upward movement, but has remained flat across the chart.

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200 Day Moving Average

This chart highlights the 200 day moving average against the EUR/CHF pair.  Essentially a year-long rolling average of the price of the pair, a trader can see it shows a strong upward trend of the EUR against the CHF, but at the same time shows a slowing and bottoming out of the EUR/CHR pair, right up to a flattening of the chart.  The red 200 day moving average line is nearly straight across. This gives a trader the heads up to the fact that this trade is no longer moving in either direction, and a signal to look deeper into reasons as to why.  Tapping resources such as the European Central Bank’s website at http://www.ecb.int/ and the Swiss National Bank at http://www.snb.ch/en can offer more detailed information that may answer this question.  Not only may the trader find out a reason for the current halt in movement, he or she may find new information to add in for future analysis.  There might have been a number of issues that can affect the currency pair, such as matching interest rates are canceling one another out.  Perhaps it is an economic issue such as European and Swiss growth rates slowly becoming equal:  the exchange rate would thus be affected.

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Fibonacci Series Lines

This trading software has applied the Fibonacci Series Lines as a yellow fan burst.

The Three Theories behind Technical Analysis

  • Crowd Psychology = Crowds move in the same direction
  • Efficient Market Hypothesis = All information is reflected in currency pair’s exchange rate
  • Pairs revert to the mean = History repeats itself

The above three theories represent the majority of ideas behind the usage of the charts for effective Forex trading.

Combining Moving Average Timeframes for Effective Trading

The above chart highlights one of the best methods for using moving averages to combine timeframes on the same chart.  The yellow line is a 50 day moving average and the orange shows a 200 day moving average.  The key is to find where the two lines intersect to combine the two moving averages.

At this key intersection of where the 50 day line and the 200 day lines meet, a trader will notice the EUR/CHF will go in the opposite way that it was heading before the intersection.  As you can see, where the second intersection is seen, the EUR/CHF value goes down.  This downward trend continues until the third intersection of the 200 day and 50 day lines, which shows the EUR/CHF going up in value.  An experienced trader will be able to draw lines on the Forex Charts for the two intersections, like the 200/50 day and the 50/20 day.   These two points will mark good entry and exit points for this currency pair.

In the next tutorial, topics included will be an overview of the US and other countries economic indicators and how to construct a trading plan based on this information.  Leading types of economic indicators and what their data means will be outlined and show how this can give insight to a Forex trader on making more profitable currency trades.

About The Author

tothetick

Professional team of writers/analysts analyzing the financial markets.

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