Reading of chart is really a crucial part of Trading. Forex traders use number of methods to estimate the movements of currencies ratio. These methods includes Fundamental Analysis, Technical Analysis, Trend Trading, Range Trading, Momentum Trading, and Swing Trading. For all these methods, chart reading is very important part. In this blog, we will light the basics of FOREX Charts which could help you in Forex Trading.
Table of Contents
What is Forex?
Reading a Forex Quotes.
What is Bid Price and Ask Price?
What is Pip and Spread?
Types of Forex Charts.
What is FOREX?
Overview of Indicators
What is Forex?
Forex or FOReign EXchange is most liquid financial market in the world where currencies are traded. Simply, we can say, Forex trading is the act of buying and selling currencies. Because, you are always buying one currency using another currency, you trade "Currency Pairs".
One unique aspect of this International Market is that there is no central marketplace for foreign exchange. another one is, the Forex Market can be extremely active any time of the day, with the price quotes changing constantly.
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Reading a Forex Quotes
When a currency is quoted, it is done in relation to another currency, so that the value of one is reflected through the value of another. In Forex we always trade in "Currency Pairs". In Currency pair, the first currency is called BASE currency and second one is called QUOTE currency.
The base currency (in this case, the Great Britain Pound) is always equal to one unit and the quoted currency (in this case, the US Dollar) is what that one base unit is equivalent to in the other currency. The quote means that 1 GBP = 1.4245 US Dollar.
What is Bid Price and Ask Price?
Bid price and ask price are in relation to the base currency.
Case 1-Long or Buying a Currency Pair: In this case, the ask price refers to the amount of quoted currency that has to be paid in order to buy one unit of the base currency.
Case 2- Short or Selling a currency pair: In this case, the quoted currency will be obtained when selling one unit of the base currency.
What is PIP and SPREAD?
PIP: The pip is the smallest amount a price can move in any currency quote. In above example, i.e, in GBP/USD = 1.4245, one pip would be 0.0001. With the Japanese yen, one pip would be 0.01, because this currency is quoted to two decimal places.
SPREAD: The difference between the bid price and the ask price is called a spread. for example, in GBP/USD = 1.4245/49, the spread would be 4 points or 4 pips and pip would be 0.0001.
Types of Forex Charts
Overview on Forex Charts
Forex Chart is simply graphical Representaion of exchange rate between currencies.It shows how the exchange rate of currency pair has changed over time.
Forex traders have developed several types of forex charts to help depict trading data. The three main chart types are
Compared to a line chart, which shows the price close to close, candlestick charts show four times the amount of information, displaying the close, open, low and high price of a given period.
By having this extra information, you can study ‘how’ price has moved over a period of time compared to just seeing where the price closed.
The red and green portions of a candle are termed the ‘body’. If the opening price of the candle is lower than the closing price, the candle body color is green. If the opposite occurs, and the opening price is higher than the closing price then the candle body color is red.
The black lines above and below the candles are called ‘wicks’ or ‘shadows’.
Wicks represent the highest and lowest prices reached during the given time period.
OVERVIEW OF INDICATORS
Currency charts help traders evaluate market behaviour, and help them determine where the currency will be in the future.
To help make sense of the currency movements depicted on a chart, traders have developed a number of different visual guides to assist them – indicators.
There are hundreds of different types of trading indicators developed to cover every aspect of forex trading, from trend following to mean reversion.
Below we cover some of the most popular indicators used by currency traders.
Bollinger Bands are volatility bands placed x standard deviations around a moving average. Developed by John Bollinger, the bands widen in periods of increasing volatility and narrow when volatility decreases.
From a traditional perspective, the bands are used to highlight potential oversold and overbought areas.
For example, if a price move breaches the upper band, it might be expected that the price would then revert back to its mean, or in this case the middle moving average.
Middle Moving Average = 20 period simple moving average (20 SMA).
Upper Band = 20 SMA plus the 20 period standard deviation multiplied by 2.
Lower Band = 20 SMA minus the 20 period standard deviation multiplied by 2.
Relative Strength Index (RSI)
Developed by J. Welles Wilder the Relative Strength Index (RSI) is a momentum oscillator which measures the direction and velocity of price movements.
RSI = 100 – 100 / (1 + RS)
Where RS equals Average Gain divided by Average Loss
Average Gain = [(Sum of gains over previous 14 periods / 14) * 13 + current gain] / 14
Average Loss = [(Sum of losses over previous 14 periods / 14) * 13 + current loss] / 14
Simple Moving Average Line
SMA or simple moving average is the most common indicator plotted on forex charts.
Moving averages are used as they help smooth price fluctuations over a certain period, giving the trader a clearer picture of the direction of the price movement.
SMA = Sum of the closing prices / number of periods.