15 LESSON OF FOREX

LESSON #5:
Charting Your Way to Success: FOREX Price Charts, What They Mean and How to Use Them "What's the difference between the speculative winner and the ignorant loser in FOREX?" my silver-tongue friend asked.

When I thought about it, numerous things came to mind - such as discipline, trading rules, not being greedy etc., but what came out of my mouth was really no big surprise:

"Understanding the charts... they represent so, so much. Ya gotta know they represent the lifeblood of the market. Know them well and you'll be head-and-shoulders above the rest."

We at RapidForex.com will be the first to admit that reading charts, and interpreting patterns, are more an art form than a skill; however, knowing you'll have to be personally in- tune and subjectively-creative with the charts (basing your entry and exit decisions on YOUR OWN combined methods of technical analysis) doesn't mean you should run-for-the- hills.

Nope, don't be scared...

The beauty of FOREX charts, as opposed to charts used for, say, daytrading stocks, is that they are pretty easy to interpret and use. They're a reflection of a slower-moving, stable economy (the one of a country) compared to the future and daily drama of company reports, Wall street analysts and shareholder demands.

And, don't forget...unlike stocks, currency charts rarely spend much time in tight trading ranges and have the tendency to develop strong trends (even though the FX market may be volatile, it's more predictable). And, rather than tens of thousands of stocks to analyze, you only have a few mayor currencies to trade.

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The complimentary charting software provided by any one of our recommended brokers will be absolutely sufficient for you to put your finger (eye) on the pulse of the market for any one currency pair.

Understanding just a few basic points, below, of the technical analysis of currency chart reading can lead to increased profit potential that far exceed the hazards of other markets.

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Pricing - Price reflects the perceptions and action taken by the market participants. It is the urgency between buyers and sellers in the Over-The-Counter (OTC) or 'interbank' market that creates price movement. Thus, all fundamental factors are quickly discounted in price. Therefore, by studying the price charts, you are indirectly seeing the fundamental and market psychology all at once - after all the market is fed by two emotions - Greed and Fear - and once you understand that, then you begin to understand the psychology of the market and how it relates to the chart patterns.

Data Window - Most FX online charting stations ,when you click on a price bar or candlestick, will display a small box of data usually called a display window which will contain the following items:

H = Highest_Price

L = Lowest_Price

O = Opening_Price

C = Close_Price (or Last_Price)

The most common types of price bars, used in FOREX trading, are the Bar Chart and the Candlestick chart:

Bars Charts - Price bars are a linear representation (a line) of a period of time. This enables the viewer to see a graphic representation summarizing the activity of a specific time frame. As an example, we use one minute and five-minute time intervals for our system. Each bar has similar characteristics and tells the viewer several important pieces of information. First, the highest point of the bar represents the highest price that was achieved during that time period. The lowest point of the bar represents the lowest price during the same period. Regular bars display a small dot on the left side of the bar which represents the opening price of the period and the small dot on the right side represents the closing price of the period.

Candlesticks - Japanese Candlesticks, or simply Candlesticks as they are now known, are used to represent the same information as Price bars. The only difference is that the difference between the open and close form the body of a box which is displayed with a color inside. A red color means that the close was lower than the open, and the blue color represents that the close was higher than the open. If the box has a line going up from the box it represents the high and is called the wick. If the box has a line going down from the box, it represents the low and is called the tail. Many interpretations can be made from these "candlesticks" and many books have been written on the art of interpreting these bars (you'll find a few links in our Resources Section).

So, the main thing to keep in mind between the two types of price charts is this:

Candlestick charts are similar to bar charts in that the top tip of a vertical line represents the high and bottom tip represents the low. However, market activity between the OPEN and the CLOSE is represented differently by the use of candlestick bodies.

Because of their colored bodies, candles provide greater visual detail in their chart patterns than bar charts. Which is why we recommend you become intimately familiar with Candlestick charts or, as we like to call them, "bar charts on steroids."

Chart Intervals & Time Frames:
A chart Time Scale & Period, or timeframe, basically refers to the duration of time that passes between the OPEN and the CLOSE of a bar or candlestick.

While most of our trading methods, outlined in our course packages, will have you viewing the 5-min and 1-min candle charts, it is often useful to look at larger time frames (like the 1-hour or Daily chart).

For instance, with your broker software, you will be able to view a currency pair, in a 1-hour timeframe over a 2-day period, 5-day period, 10-day period, 20-day period and 30- day period.

Most of the short-term time intervals (5-min and 1-min charts) are used for entry and exit points and the longer- term time intervals (1-hour and daily charts) are used to gauge where the CORRECT trend is (we teach this extensively in our course titled "Rapid Forex Surfing").