Before you start practicing real forex trading, it is very important to learn to read forex charts. This article will provide you some basic information about forex trading and will help you read forex charts.
All currency pairs are always denoted in the same way e.g. EURUSD is denoted as EURUSD and means that EUR is the base currency and USD is the terms currency. If the chart indicates that the price is fluctuating between 1.2155, it would reflect that 1 EURO will purchase 1.2155 USD. Also, the trade size denotes the quantity of base currency that you intend to trade. For example, a 100,000 EURUSD suggests that you will purchase 100,000 EUROs.
5 important steps are involved while reading forex chart.
1. If you have bought the currency pair, to make a profit, you would want your base currency to increase against the terms currency. Similarly, when you are selling the currency, and you will profit if the base currency decreases as compared to the term currency.
2. Many charts show multiple time frames. Consider this, a chart may use 4 hours and 30 minutes to show the overall trend of the currency pair. However, it may also use a 5 minute chart to depict an increase from a temporary decline to show the actual result. So you need to use the right time frame for your analysis.
3. All prices are denoted in ‘bid’ and ‘ask’ price and forex charts show bid price rather than asked price, generally. For example, the price of EURUSD might be 1.2055 bid and 1.2058 ask. Buyers purchase at the ask price and sellers use the bid price to sell.
When you are selling using a forex chart at a chart price of 1.330, your final selling price will be the same. But, when you are buying at the chart price of 1.330, then you will actually be buying at 1.3333.
4. The time shown in the forex chart depicts the time zone that the chart provider has selected. So, convert the time to your time zone for convenience. This will help you trade efficiently when major international announcements are made.
5. Also ensure what your forex chart relates to in terms of candle opening or closing. If you are trading after or before a major announcement, the timing of the trade needs to be precise. A trading done after one candle may cost you lots of money.
These essential elements to reading a forex chart will assist you in reading the chart efficiently and preventing common mistakes.