Too often in the world of trading, new investors rush into a trading system without having the basic skills, like reading forex charts, mastered. Maybe they heard about forex trading as an exciting new way to turn a quick profit, or maybe they are just trying out different investment options as they learn how trading works in general. But in order to get the most out of forex trading, it’s important to gain an understanding of things like reading forex charts, so that you can accurately use the trading system in order to turn a profit.
Think of this way: if you tried to play baseball without knowing what a bat was, or what to do with it, you wouldn’t get very far, would you? A forex chart is an essential tool to master, so let’s examine two very important things you need to know about reading them.
1. What do you want?
When you trade a currency pair, they are always listed the same way. The base currency is listed first. That’s the currency that you are buying or selling – for example, if your trade size, or face value, is 1,000 on the GBPJPY pair, you’re buying 1,000 GBP.
The price that is shown on the chart, then, is how many of the terms currency, or the second currency listed (JPY for our example) you can buy with one of the base currency. So if the price on our GBPJPY pair is listed at 1.4321, this means you could physically go to a currency exchange location right now, hand over one British pound, and receive 1.4321 Yen in return.
So, knowing that, what do you want? If you are buying the pair, you want the pair to go up. You want the base currency to become stronger than the terms currency. The more Yen you can buy with that single GBP, the stronger your GBP is, and that means that you just came out ahead. So if you’re buying the trade, watch for that 1.4321 to increase in order to turn a profit.
If you are selling the currency pair, you want the currency to decrease. You need the GBP to be worth less and the Yen to be worth more to make a profit in selling.
2. Understand Bid price vs. Ask price.
Most forex charts show the bid price more prominently. This is the lower price, and is how much you’ll sell the trade at if you sell. The ask price (or offer price) is always higher, and is how much you’ll buy at.
Understanding these two prices helps forex traders place stop orders, which is an essential money management tool. It allows you to automate your buying and selling. In a fast moving market such as forex trading, there’s almost no other way to turn a profit. So, a “stop bid” is an order placed to buy if a currency rises above a specific price, or to sell if it dips below a specific price. You may also see the “stop bid” option listed on charts as “stop if offered”.
There are quite a few other things that need to be understood about forex charts, such as time zones, entry time frames, and correspondence to candlesticks; but just knowing these two things can make a huge difference for your forex trading. Once you understand what you are looking for, and what you’ll actually be paying out or earning when you buy or sell, the rest takes only a little bit of time to get used to.