Chart-reading in the foreign exchange market, otherwise known as forex, can be particularly challenging for chart analysts. Chart readers typically analyze the relationship between price and volume. Forex trading is decentralized with trade transactions taking place at various centers around the world. As a result, volume data is unreliable and forex analysts are forced to focus entirely on price action.
Forex traders trade currency pairs as opposed to individual currencies. The value of a single currency, such as the dollar, is meaningless unless it is compared to another country's currency. Thus, various world currencies are paired with one another. For example, the dollar can be paired with the euro, creating a USD/EUR pair that can be traded much like a stock.
Set the chart time frame. Day traders typically use intraday price charts with trade intervals set anywhere from one to 30 minutes.
Choose price measurement type. Japanese candlestick charts generally work better for forex traders, as they allow analysts to see the open, close, high and low information for each price interval.
Measure price support. Use your chart-drawing tools and draw a line connecting price lows on the chart. This will give you an idea where buyers have recently supported the price.
Measure price resistance. Draw a line on your chart connecting price tops. This will help you determine the price area where a supply of sellers resides.
Determine whether there is a price trend or a trading range. If the price support line you drew is generally angled higher from left to right, it is safe to assume that the price is in an uptrend. If the support line is flat, the currency pair is likely randomly trading in a range.
Tips
Adding a technical indicator to your chart, such as an overbought/oversold oscillator like stochastics, can vastly improve your price analysis. For example, if the price is trading back at the support line you have drawn and the stochastics indicator shows the price is oversold, you can be reasonably sure the price is ready to reverse higher.
Warnings
Chart reading is not a hard science. Past performance is not necessarily a good predictor of future price action. Chart-trading strategies sometimes work and sometimes fail. It takes a great deal of experience trading many different types of market conditions before an analyst can consistently profit from price analysis.
References
Tips
- Adding a technical indicator to your chart, such as an overbought/oversold oscillator like stochastics, can vastly improve your price analysis. For example, if the price is trading back at the support line you have drawn and the stochastics indicator shows the price is oversold, you can be reasonably sure the price is ready to reverse higher.
Warnings
- Chart reading is not a hard science. Past performance is not necessarily a good predictor of future price action. Chart-trading strategies sometimes work and sometimes fail. It takes a great deal of experience trading many different types of market conditions before an analyst can consistently profit from price analysis.
Writer Bio
Donald Harder has been writing financial-related articles since 2000 when he founded the firm Securities Research Services. He has worked as a speech writer for the U.S. Department of Justice and written white papers and studies for the U.S. Department of Housing and Urban Development. Harder holds a Master of Arts in international affairs from George Washington University.