When it comes to trading strategies there are two fundamental approaches for online forex trading: fundamental analysis and technical analysis.
Fundamental analysis scrutinizes political and economic indicators to determine trades. It doesn’t rely on forex charts but rather uses the charts as a secondary reference.
The charts are used in technical analysis. It attempts to predict price swings by studying the historical price activity. Technical analysis involves the study of the relationship between price and time.
For our example we are going to use the Euro and the US dollar. With the dollar is on the right hand side of the chart and the Euro on the left hand side. The currencies are shown in relationship to each other in a pairing. The forex chart will display how much of the currency on the right hand side is necessary to buy a unit of the currency on the left side. Looking at a typical chart you will notice the last price displayed per given date. This number is always highlighted. The time will be tabbed horizontally across the bottom of a chart and the price scale is displayed vertically along the right hand edge of the chart. Because technical analysis rests upon the relationship between time and price the time and the price are set in all caps.
The price and time movement on a chart is what the trader is observing. The charts used include bar graphs, lines, point and figure, and Japanese candle sticks. With the candlestick method there is a large, red section that is the body of the candlestick. Lines protrude from the top and bottom and they are the upper and lower wicks. When you look at all the candles on a chart it is apparent that bodies come in different sizes. Sometimes no body exists at all and the same is true with wicks. Candle wicks come by many different sizes and there may be no wick at all. The price range determines the length of the body and the length of the wick. More price movement during the time they were open will be represented by a longer candle with the top of a candle wick representing the highest price for that currency and the bottom of the wick the lowest price. A currency is bullish when the close of the candle is higher than the open. In simple terms this means that there were more buyers than there were sales during the opening time period. If the price opened and it dropped off until it closed the candle won’t have a wick.
Forex charts can help a trader by allowing the trader to view past trends. Many online traders join a service that providesreal-time charts that updates on currency activity. These charts can be checked on a minute to minute basis allowing those that primarily do their trading based on historical accuracy easing the burden of prediction.
It is most common to see a forex traders using a combination of fundamental and technical analysis. They chart historical trends and pay close attention to political, cultural and economic indicators within a region. Charts and other techniques may be usedto check correlation between political climate and currency fluctuations. Even the most sophisticated technical analysis software has its limitations. A trader must be prepared to take risk and only invest money that is not needed for the immediate future.