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Five Things Every Trader Needs To Know

Charting forex entails both observing and understanding--and then, and this is important, taking action to make trades.

The difficulty with the second part of that equation--understanding--is that there are simply too many forex charts available for any single human brain to comprehend. It is easy to get lost in the charts and then ten hours later you still have no good trade ideas.

The bottom line is that you want to generate trading opportunities from forex charts, not just stare at charts all day for no purpose other than to ruin your eyes.

To that end, of using forex charts to create profit for yourself, here are five things that every FX trader needs to know about how to use foreign exchange charts to make trades:

1. Candlestick Charts Are Awesome

Candlestick charts are derived from Eastern philosophy, and provide a uniquely visual representation of buying and selling sentiment in the forex markets. Especially if you are a frequent trader, it is smart to look at candlestick charts for the one hour, one day, one week, and one year time periods before placing any trade.

Candle charts talk to those who understand the language.

2. Support and Resistance Is Key

When you look at a forex chart of any time frame, you must automatically be searching for lines of support and resistance. Draw a straight line showing where the currency pair has not gone below, and a straight line showing where the currency pair has not gone above. Now you know that if those lines are crossed, something big is happening.

3. Know Your Reversal Patterns

Reversal patterns on a forex chart are the classic case of what came first, the chicken or the egg. For example, if a currency pair hits a "double bottom," that currency will likely bounce off that bottom; whether because of some other reason or just because forex traders know that double bottoms indicate an impending bounce is forever unclear.

Nevertheless, either way you slice it, you need to know how to spot reversal patterns on a forex chart if you are going to have any success trading forex. Double tops, double bottoms, head and shoulders patterns need to be a part of your vocabulary ASAP.

Because when you see those things, that currency pair may change directions ASAP.

4. Continuation Patterns Can Be Even More Profitable

Currency pairs tend to trend, so you want to be on the lookout for chart signals that show a currency pair that is in trending mode. Symbols to watch for include flags, pennants, and triangles.

And again, whether or not these continuation patterns are valid in and of themselves, or powerful merely because other traders recognize them, is not nearly so important as the fact that if you do see a flag, then a currency keep trending, that matters.

5. Pivot Points Are Pivotal

Beyond the basic drawing of lines at points of support and resistance, charting forex effectively is about finding less momentous chart points where price seems to turn--in other words, pivot points.

There are many potential pivot points on any given forex chart, so you really need to identify your preferred trading  time frame before acting upon pivot point philosophy. For instance, if your trades typically last half a day, you may want to chart the pivot points for a four hour chart.

Whenever you're looking at a forex chart, you must be looking for points on that chart where traders change their mind as to a currency pair's value.

In the End, It's All About the Trend

If there is one general principle to focus on when seeking to both observe and understand forex charts, it is the idea of identifying trends. Currencies, of all financial instruments, are the most prone to trend in one direction or the other.

The point at which the trend changes direction, then, is the best opportunity to make tremendous profits trading foreign currencies. The forex chart tips above are signals that the train may be leaving the station, and you may want to hop aboard.

That's great information to have.

And it's readily available to those who know how to read forex charts.

Important Forex Information

The most important step in currency trading is finding the right broker; our forex experts can help. See our
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