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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What is a Forex Trailing Stop?

What is a forex trailing stop?  A trailing stop order is used in addition to a regular stop-loss.  Every time you place a trade, you always add a stop-loss.  This means when the price reaches your desired level, your trading software will automatically close out the trade.  A trailing stop edits the stop-loss to move forward by a certain amount in the same trade.  Confused?

If you see a strong trend upwards on a forex graph and you buy into that pair, you should add a stop-loss to ensure you don’t lose money if the pair suddenly falls.  However, you also don’t want to put a ceiling on your profits, so you can add a trailing stop order.  At first glance, it seems like if you use a trailing stop you are ensured a profit, but that isn’t always the case.  Here’s an example:

Assume you are buying dollars for Japanese Yen (USD/JPY) at 45.00 with a stop at 50.00. If you add in a 20 pip trailing stop to that, each time the pair moves 20 pips from where you entered the trade, then the stop-loss also advances by 20 pips.  As a result if the pair moves from 45.00 to 45.20, then our stop-loss moves from 50.00 to 50.20. The stop shifted, but notice that it didn’t ensure you a profit on the trade.

When is the best time to use trail stops?  The optimum time to use a trail stop is when you see a strong upward trend.  In other words, the angle of the graph is very steep.  If a pair is in a mild trend or not moving much at all, trail stops won’t do you much good.  Trail stops are for making a profit in a very short amount of time.  This means a “fast-moving” pair is perfect for using trail stops.

Pounds and Yen (GBP/JPY) is often a rapid mover. It can change by hundreds of pips each day over the course of a few hours.  Conversely, the Swiss Franc and Japanese Yen don’t change very quickly, so it’s not a good choice for trail stops.  Practicing trail stops on a demo will give you a chance to understand trail stops in a more hands on way and keep you from losing money.

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