Learning All About Forex Charts Before You Start Trading
Forex Charts are based on the forex market action involving price. Charts are a major tool in forex trading. There are many kinds of charts, each will help to visually analyze the forex market conditions, assess and create better forecasting, and identify forex market patterns and behavior.
Forex charts and spreads weigh heavily on the return on your trading strategy (this can have a huge affect on your profit or loss). As a trader, you are solely interested in buying low and selling high (like futures and commodities trading on Wall Street). Wider Forex charts and spreads means buying higher and having to sell lower. A half-pip lower spread does not necessarily sound like much, but it can easily mean the difference between a profitable trade and one that losses money.
The tighter the spread is the better things are going to be for you (Happy Days). Nevertheless, tight Forex charts and spreads are only meaningful when they pair up with good execution of a well laid out trading strategy. A good example of this is, as you analyze your forex chart it shows a tight spread, but your trade shows it has filled, or mysteriously rejected.
When this occurs repeatedly, it means that your broker is showing tight Forex charts and spreads but is effectively delivering wider Forex charts and spreads. Rejected forex trades, delayed execution, slipping, and stop-hunting are strategies that some brokers use to get rid of the promise of tight Forex charts and spreads (so be on the look out for this type of activity and run fast if you notice it).
Both the technical and fundamental forex analyst uses Forex charts. The technical analyst analyzes the “micro” movements, trying to match the actual occurrence with known patterns. The fundamental analyst on the other hand tries to find correlation between the trend seen on the chart and “macro” events occurring parallel to that like (political and other events).
As you can imagine, reading and understanding forex charts can get confusing for the inexperienced trader. You can get most charts now online, as part of a subscription service, and they most often include frequent updates. Because technical analysis is such a popular method of forecasting and predicting movements in the forex market, there are many services available online.
If you would like to become more proficient in Forex chart techniques (and I highly recommend you do), joining a service that provides charts via the Internet, and assistance in reading and analyzing the chart information, this can be very helpful and profitable in the end.
So let us not talk a little about the different types of Forex Charts
Line Charts
The simplest form, based upon the closing rates (in each time unit), forming a homogeneous line. (Such charts, on the 5 minutes scale, will show a line connecting all the actual rates every 5 minutes). This forex chart does not show what happened during the time unit selected by the viewer, only closing rates for such a time. Line Charts are the best simple way to chart for support and resistance levels.
Point and figure charts
Point and Figure Charts are charts based on price without time. Unlike most investment charts, point and figure charts do not present a linear representation of time. Instead, they show trends in price. A rising stack of Xs represents increases, and a declining stack of Os represents decreases. This type of chart used to filter out non-significant price movements, and enable you (the trader) to determine critical support and resistance levels quickly.
Bar Chart
This chart shows three rates for each time unit selected: the high, the low, the closing (HLC). There are also bar charts including four rates (OHLC, which includes the opening rate for the period). This chart provides clearly visible information about trading prices range during the time period (per unit) selected (very valuable information).
Candlestick Chart
Kind of chart based on an ancient Japanese method. The chart represents prices at their opening, high, low, and closing rates, in a form of candles, for each time unit selected. The empty (transparent) candles show increase, while the dark (full) candles represent decrease.
The length of the body shows the range between opening and closing, while the whole candle (including top and bottom wicks) show the whole range of trading prices for the selected time unit. Pattern recognition is a field within the area of “machine learning”. Alternatively defined as the act of take in raw data and taking an action based on the category of that data.
As such, it is a collection of methods for “supervised learning”. A complete pattern recognition system consist of a sensor that gathers the observations to be classified or described; a feature extraction mechanism that computes numeric or symbolic information from the observations; and a classification or description scheme that does the actual job of classifying or describing observations, relying on the extracted features.
In general, the forex market uses the following patterns in candlestick forex charts:
Note: Keep in mind these are just general and not all-inclusive as the forex market is huge and are so with the charts and techniques.
Let us now look at the 5 top errors made where forex charts are concerned and why you should stay away from them.
1. Predicting with Forex Charts
A common mistake made by inexperienced forex traders (and some more seasoned), traders think they need to predict to get profitable results - but of course this is simply hoping or guessing and is destined to see you lose. If you use charts the correct way, you will trade using the price changes and trends, you will not need to predict There is a big industry in forex trading that says prices move to a scientific theory and you know what will happen next - but of course, if prices did move to science, we would all know the price in advance and there would be no market.
Do not set yourself up and believe the prediction nonsense - make all your trades using the reality of price change i.e. if a price comes to support, don't predict support will hold, wait for it to move the other way and trade based on the fact it has held. Another great way to trade is to trade now breakouts to new highs or lows - it is a proven fact that most big moves start from these breakouts, so you should make breakouts consistent part of your forex trading strategy.
2. The More Inputs the Better
You may think five or six indicators must be better than one or two - very wrong! The more inputs the more chances are the system will break. Simple forex trading systems work best, have for many years, and will continue to work. All you need is support, resistance, a few indicators, and you are all set.
3. Using unverified Data
You need to use technical analysis on valid data, in order for you to have the odds in your favor. Do not try to use forex day trading or scalping systems the data is to short to for trading. All volatility is random and you cannot use it, so do not - Forex swing trade or Trend follow.
4. Using Indicators in the Wrong Way
Many traders do this. They use lagging indicators such as moving averages to enter price, or Bollinger bands are stops. This is not what they were intended to do! Use an indicator for what it was intended and understand its limitations.
5. Curve Fitting
To succeed with forex charts we have said you need to keep your system simple and if you do, you will avoid another common mistake curve fitting. With powerful software packages, it is tempting to back test and bend the rules to fit the data to make a profit - known as curve fitting. If you do this, the system will collapse in real time trading, as no two segments of data repeat themselves identically in the same way again.
To avoid curve fitting - keep it simple (hint, hint I know this is not the first time I said it but I will say it again KEEP IT SIMPLE) and make sure the rules you use to execute your trading signal(s) are the same for all currencies and all market conditions.
A Simple Route to Profits
Forex charting is essentially simple - You need to use support and resistance and a few confirming indicators and to trade the reality of price change either, with breakouts or shifts in price momentum near support and resistance tests. If you do take the above, understand and implement what you learn you can build your own forex trading system in about a week and you could soon be making profits, big ones, in less than 30 minutes a day.
As you can see from Above Charting as we have said is not a guarantee but more of an odds game that we play and not of certainties - it is a unique art and you have to learn the right information, and formulas on how to time you are trading signals. This knowledge only comes with trial and error, best gained using a practice account. You also only need a simple system based upon support and resistance and a few timing indicators to do well when trading forex. Simple trading systems work best; in forex trading so do not be fooled by the bells and whistles of robust forex trading systems.
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