When it comes to stock market or foreign exchange trading, you can’t ignore the importance of reading the market chart. The main purpose of reading the chart is to know the market trend; whether there is an upward trend or a downward trend in the market. It helps traders knowing the market breath.
Chart reading is required in the stock market and as well as in Forex market. However, if you consider foreign market, then reading market charts for Forex is more challenging than that of stock market. With a market chart, you can analyze the relation between the volume and price. Foreign currency trading is distributed amongst various centers across the world. Consequently, information regarding volume is unreliable, and the Forex analysts are often forced to emphasize fully on the price action.
The traders in Forex traders trade the currency pairs instead of individual currencies. The value of any single currency, like a dollar, makes no sense unless it can be compared with currency of another country. Therefore, in Forex market, different currencies from various nations are paired with one another. For instance, USD can be paired with euro resulting in a USD/EUR pair which can be traded almost like a stock.
Here are the steps towards reading the price action in the Forex market charts.
• Set the time frame for the chart – At the outset, you need to set the time frame for the chart. Day traders of foreign exchange market usually depend on the intraday price chart the trade intervals set somewhere between 1 hour and 30 minutes.
• Select price measurement type – Being a Forex traders, you can use Japanese candlestick charts because these charts allow the analysts to watch the information on the opening price, closing price, high price, low price for every price interval.
• Evaluate the price support – As the next step, you need to evaluate the price support. You may use chart drawing tools to draw a line connecting the price- lows on the chart. It would provide you an idea about where the price has got the support.
• Know the price resistance – Know what the price resistance is. Draw a line on the chart to connect the price tops. It would help you understand the price where the supply of sellers inhabits.
• Understand the price trend – Understand whether there is an upward or downward trend in the market. You should also understand if there is a trend at all, or the market is range bound. If the support line drew is angled high the left to the right, it would be safe for you to assume the market is in uptrend. If the line of support is flat, then your chosen currency pair is very likely to trade within a particular range.
Discussed above are the steps that you may observe to understand the price action in the foreign exchange market.
Now, here are some important points that you must keep in mind while trading in the foreign exchange market.
• Add a technical indicator – You should add any of the technical indicators like an oversold/overbought oscillator, for example – stochastic, as they help you analyze the price better.
• Learn chart reading – This is not a hard science; the strategy sometimes works, sometimes fails. It needs a good deal of experience. So be patient and learn the subject to trade successfully.
Author Bio – Sam is a famous for his finance related write-ups. He writes for leading financial websites like Forex Loft and others.