It is important to remember that when reading Forex charts, that there are two basic approaches for online Forex trading. These approaches are known as the fundamental analysis approach and the technical analysis approach. The fundamental analysis approach does not rely on the standard Forex charts that one often sees on Forex Websites. This type of analysis relies on both political and economic factors to help determine which trades to make.
Charts used for fundamental analysis are only used as a point of reference, and not a means of making a decision. Technical analysis on the other hand will try to forecast where the prices are going by analysis of historical price activity. In essence, those traders who use technical analysis study the relationship between the price of currency and the time of that price.
The commonest traded pair of currencies are the common European currency, the Euro, and the American dollar. So by way of an example, we will use this pairing to help us illustrate how Forex Traders look at this information. In this example, the dollar is on the right hand side of the chart and the Euro is on the left hand side. The currencies being traded are expressed in relationship to each other in a pairing.
Forex charges will always show how much of the currency on the right hand side is necessary to buy a unit of the currency on the left hand side. Looking at the chart you will notice that the number which is highlighted is the last price displayed on a specified date. The time of a change is recorded along the horizontal axis, at the bottom of a chart and the price scale is displayed along the vertical axis along the right hand edge of the chart. The time and the price are often in all caps to help the trader remember that technical analysis is about the relationship between the time and price of the currency at that time.
There are many ways to observe the price and time movement on a Forex chart. Some of these include bars, lines, point and figure, as well as Japanese candle sticks, which is the most popular charting method. With the candle stick method the body of the candle is represented by a fat, red section. Lines project from the top and bottom which are the upper and lower wicks. When you look at all the candles on a chart it is clear that bodies can be different sizes and, occasionally, there is no body at all!
The same approach is used with wicks. Candle wicks can be of many different sizes, or there may be no wick at all. The length of the body of the candle and the length of the wick are decided by the price range for the candle. An illustration showing longer candles indicates more price movement during the time that they were open. The pinnacle of a candle wick is the highest price for that currency while the bottom of the wick is the lowest price.
A currency (or candle) is bullish when the size of the candle at the close is higher than it was at the open. In plain language this means that there were more buyers than there were sales during the opening time period. On the occasions that candles have no wicks at all, the indication is that the price of the currency opened but then dropped off consistently until it closed.
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