How to Read a Forex Trading Chart

In order to actively trade in the Foreign Exchange (forex) currency market, you must be able to read a forex trading chart.  The first currency listed in a pair is called the base currency.  For example in EUR/USD the first term, Euros, is the base currency.  The second term, in this case dollars, is called the term currency.  When you are buying a pair, you are buying the base currency.

When you are buying a pair, it is called being long in the position.  You want the base currency to increase in value versus the term currency.  This way you will make a profit buying.  If you are selling a pair, you are short in the position.  You want the base currency to weaken in value versus the term currency.

This is how you make a profit selling.  Many forex charts display the bid or selling price instead of the ask or buying price.  Check closely to make sure you don’t mix these two up.  The higher of the two prices is usually the ask price, while the lower is the bid.

The time frame displayed informs you of how the currency pair is currently doing.  Be careful to watch the time frame closely as different systems use different time lapses.  Anywhere from a four hour chart to a fifteen minute chart is available and can greatly affect whether you are looking at a temporary spike or dip or a longer term development.

Different time zones can also affect what chart you are looking at, so make sure you set the chart to your current time zone.  A world clock is handy to convert time announcements so you know when a major buying or selling date is approaching.

Another important tip is to check whether the times on your chart corresponds to the individual point, called a candle, on the graph.  This is vital because forex trading is a real-time, to the minute type trading.  If you are making a trade based on a market announcement, it is vital to be in the right time or else you will likely lose money.

Practicing reading forex charts is essential for ensuring you understand how they work.  If you can master reading a forex chart, you are well on your way to competing in this very fast-paced market.

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Forex Currency Pairs

Foreign Exchange trading, or forex, is made up of simultaneously buying one currency and selling another.  The two currencies being traded are called a currency pair.  When a currency pair is listed in shorthand with a line between them it is called the currency quote.  For example, USD/EUR is dollar and Euros.  Since there are so many various currencies available in the world, they are divided into major and minor currencies.

Major currencies include the seven most frequently traded.  These are the US dollar, Euro, Japanese Yen, British Pound, Swiss Franc, Canadian dollar, and Australian dollar.  Any other currency is considered minor and is generally harder to profit from due to greater differences in the exchange rates.  Any currency pair that does not include the US dollar is called a cross currency.
Historically, money was always converted to dollars before being converted again into the desired currency.  Cross-trading was a way to eliminate the extra practice of conversion.

The most commonly traded forex pairs are considered to be the EUR/USD (the Euro vs. the US dollar), GBP/USD (the British pound vs. the dollar), USD/JPY (you should know the first one by now vs. Japanese Yen), and USD/CHF (Swiss Franc).  The first currency quoted is known as the base currency.  The base currency is always equal to one unit of exchange: one dollar, one Euro, etc.  The second, the quote currency, is the price needed to get the base currency.

Typically, it will look something like this: USD/EUR = 1.2345.  This means that $1 = 1.2345 Euros.  If you are buying this trade, you are speculating that the base currency, in this case dollars, is going to increase in value.  If you are selling this pair, you are assuming Euros are going to be more valuable.  Not so difficult, huh?

Understanding forex pairs is the basis for trading currencies.  For a beginner, choosing just one or two of the commonly traded pairs will both ensure simplicity and give you a greater understanding and confidence of how the market works.  Forex trading is a twenty-four hour, exhilaratingly fast paced market.  In order to make it a profitable venture, make sure you understand how the system works.

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