Understanding Forex Chart and it's influence

How to Read a Forex Chart

Forex traders have developed several methods for attempting to figure out the direction of a currency pair. Technical traders use charting tools and indicators to identify trends and important price points of where to enter and exit the market. But no matter what type of trader you are, you'll need to learn how to read Forex charts...

Using Candlestick Charts 

The default chart type is called a ‘candlestick' chart. This chart type is used frequently in the Forex market. A bar on a candlestick chart shows the open, close, high and low prices for the selected period. The body of the candle shows the open and close prices where the wicks show the high and low prices. 

If the closing price is higher than the opening price of the previous candle, then the candlestick will be blue. If instead the closing price is lower than the opening price of the previous candle, then the candlestick will be red. Candlesticks simply make it easier to see if the trading period ended up or down.

Adding an Indicator

Just looking at Forex charts can be helpful in making a trading decision, but many traders also use technical indicators to help them make more informed trading decisions. These tools help a trader locate price trends and predict future price movements. The trading station is equipped with over thirty popular pre-loaded indicators. Over six hundred popular and custom indicators are downloadable online. To add an indicator to a chart, right click on the chart and select ‘add indicator.

Drawing a Trend Line 

Prices trend in one of three ways: up (bull market), down (bear market) or sideways (range bound market). A trend line is used to help a trader visually recognize which trend direction is in place. Until the trend is "broken," a trader can reasonably expect the trend to continue. Trend lines are drawn with the ‘pencil' tool. Typically, when you draw a trend line, you want to connect two or more extreme high or low prices that define the trend. Here are a few examples:

 UP TREND
                                                                                                                    

DOWN TREND

   

HORIZONTAL TREND












How Currency Exchange Rate affects a nation - 

Currency Exchange rates play a vital role in a country's level of trade, which is critical to most every free market economy in the world. For this reason, exchange rates are very popularly analyzed and government manipulated economic steps. Currency Values change due to several factors. Sometimes they may change due to political and economic factors, and sometimes they react to other external changes as well. But before going into the factors, we must know how a movements in Exchange Rate influence a country's trading relationship with other country. A higher Currency rate makes a nation's exports more expensive and and Import's cheaper in the Foreign Market and vice verse. A higher exchange rate lowers the country's Balance of Trade and Balance of Payment, while a lower exchange rate would increases them.

Why does Currency Value change? 

• Inflation Levels- A country with lower Inflation Rate have rising value in Currencies as the power of purchasing increases relatively as compared to countries that are exhibiting higher Inflation Rate and vice verse. 

• Interest Rates - Interest Rates, Inflation & Exchange Rates are highly co-related with each other. Higher interest rates offer lenders in an economy a higher return compared to other countries. Thus, higher interest rates attract foreign capital and cause the exchange rate to rise and vice verse.

• Debts and Debtors - A large Debt rises Inflation levels and we know what effect does rise in Inflation levels have with Exchange Rate. A large debt usually means that the debt will be paid off with cheaper price and thus countries having large debts are less attractive to Foreign Investors.

• Trading Terms - By trading terms, we mean the ration between export price to import price. If a country's exports increase at a greater rate than it's imports, then it means that the trading terms have done well and is favorable. Hence, an increase in country's terms of trade shows a greater demand for exports, and thus increased demands for country's currency and subsequently Currency Value.

• Political Stability and Economic Performance -  Foreign investors inevitably look out for politically and economically sound countries to invest their capital. A country with such positive factors will draw more investment funds and away from other countries which are perceived to have greater political and economic risk and turmoil. 

How Currency Trading (Forex) works?

The currency exchange rate is the rate at which one currency can be exchanged for another currency. Currency market trading symbols are constructed using the two currencies that are being traded. For example, the trading symbol for the Euro to US Dollar market would be EUR/USD. Each currency market has a minimum price change (tick size), and a minimum trading amount, with which the value per minimum price change can be calculated. It is always quoted in pairs like the EUR/USD (the Euro and the US Dollar).

For example, The GBP/USD rate represents the number of US Dollars one GBP ( British Pound) can purchase. If we think that the GBP ( British Pound) will increase in value against the US Dollar, we will buy British Pounds with US Dollars. If the exchange rate rises, we will then sell the British Pounds back, making a profit. 

How risky is currency trading ? 

Currency trading can be very risky indeed. 

Currencies tend to be very volatile compared to other markets. The real key to success with currency trading is to use efficient risk management strategies to keep a control of the above mentioned factors that influences exchange rates. There are many components to effective currency risk management, but the bottom line is to use caution and have a trading plan.

Thank You !