Currency trading charts otherwise known as forex charts are the primary tool used in the technical analysis component of forex trading. Although differing markets behave in very different ways, for example, the fx market and the commodities or stock market behave in different ways and they have different outside influences affecting their behaviour, they all demand fundamental and technical analysis in order to provide a profitable trading strategy.
So technical analysis is concerned with the technical properties of the currency such as historical price, support, resistance, demand and momentum but to name a few.
In order for any technical analysis to be undertaken the information regarding the currency in question is displayed on a trade price chart. This way a trader or analyst can simply interpret the data being viewed as well as account for any supplementary influences they may think will impact the currency’s movement. Those who believe that technical analysis is the most effective method to compute a winning strategy utilize fx charts extensively to recognize previous market behavior in an attempt to predict with a reasonable amount of certainty the future behavior of the foreign exchange market.
An important feature of the charts that are used in forex trading is their capacity to be set up to present information relevant to the viewers needs. For example a chart can be set to display 4 hours worth of data or 3 years, entirely dependent on the traders requirements. It doesn’t matter if a trader needs to view the currency movement over seconds and minutes or hours and days, a chart can be configured to present the exact time periods needed. This is the reason that charts are so powerful, they can be set up to analyse and display a broad range of variables as well as aim at specifics depending on the requirements of the viewer.
Once you have configured the chart to show you the data you require this is just the first step as now you need to analyse the data in order to make an informed trading decision. The technical trader is looking to obtain data regarding the currency’s movement and what influences are causing that movement. Technical indicators are needed for this purpose and they mostly fall into:-
1) Volume Indicators
2) Momentum Indicators
3) Moving Average Indicators
1) – Volume indicators concentrate on showing how big or small the strength is behind a price move and from this strength whether the price move will hold or fall away. Volume can be used to confirm a price trend and mostly speaking, volume is usually calculated in terms of the ‘On Balance Volume’ or OBV
2) Widely used momentum indicators include stochastics, Relative Strength Index or RSI and the Moving Average Convergence/Divergence or MACD. Momentum indicators chiefly signal trend strength This will highlight overbought and oversold regions on the chart and here the viewer needs to focus on the divergence concept for signals of future direction
3) The moving average represents price demand averages and is a clear trend following indicator.
This is just the surface of the technical analysis that can be performed with charts. Traders and analysts invest a great deal of effort learning the indicators and signals and improving their technical abilities.
The other aspect to trading analysis is fundamental analysis. Rather than look at past events as in technical analysis, fundamental analysis looks at events and actions now and in the future that will affect or possibly alter currency prices. The primary tool used here is the economic calender, a list of dates when important financial decisions and statements are made by people of significant influence mainly that of the USA, Eurozone, UK and Japan. Such decisions and announcements would include interest rate decisions, GDP figures, unemployment figures and national budgets etc. These announcements and decisions will affect the currency prices to varying degrees as well as key worldwide events like war, natural disasters and terrorism.
Many traders consider fundamental analysis a smaller part of their trading strategy and place more emphasis on technical trading and the use of the currency chart. There are those people out there who claim they are a purely technical trader or a purely fundamental trader however if you want to make forex trading a profitable and lasting endeavour then you must learn to use trading charts thoroughly and effectively and then place into context your findings with fundamental analysis. Rely solely on price charts at your peril, you have been warned.