Forex Charts: How to Make Sense out of Mountains of Data

Prepared by:  Tom Cleveland, July 13, 2010

Client:              tradingeducationprogram.org

Every newcomer to the forex arena is confronted by information overload.  Every tutorial councils that to be successful you must have knowledge, experience and a disciplined approach to the market, free from emotional influences, but all of these efforts require an investment of time.  The fact is that forex trading requires specialized training and hours of practice to gain important experience before committing real money to the market.  There are no shortcuts in this business.  Preparation can begin with websites, articles, charts, tutorials, demo accounts, and training classes of all types and sizes.

One of the most important tools for forecasting financial market behavior is technical analysis, which is the chart study of past pricing movements in order to forecast their future direction.  Although the ability to use chart analysis has increased greatly over the past few years, it is anything but new.  Forex charts come in a variety of styles and types, most two-dimensional, some even three.  Let’s keep it simple and use the figure below as our guide, courtesy of one of many free educational papers on the web.

This chart, from a few years back, tracks the daily price activity for the British Pound (GBP) versus the U.S. Dollar (USD).  Notice the nice wave pattern of the red and blue “candlesticks”.  The candlestick symbol presents the high, low, open and close for the day.  The little box represents the open and close value range, and in this case, it is Blue if the closing price was higher than the opening, and vice-versa for Red.  The price figures on the right of the chart represent the conversion from Pounds to the Dollar.  The order of the currency pair, in this case “GBPUSD”, determines the axis scale.

The chart also illustrates a common forex trading strategy that uses indicators to determine prudent entry and exit points.  The “RSI” on the bottom of the chart stands for “Relative Strength Index”, one of a variety of “momentum” indicators.  A momentum indicator is designed to communicate when the market is overbought, a “sell” signal, or oversold, a “buy” signal, by analyzing the magnitude of recent gains and losses.  In this case, the chart uses an 8-day prior period RSI, the blue line, and also inserts an 8-day Moving Average curve, the red line, in the chart.  When these lines crossover, the trader is advised to buy or sell as represented by the purple and green shaded areas.

The trading strategy presented above is one of the most basic ever conceived, i.e., buy on the lows and sell on the highs.  In forex, trading strategies can often be much more complex than this straightforward case.  Indicators are not infallible.  A trader’s ability to interpret indicator signals in the context of market trends is a skill that improves with time.

Foreign exchange trading is a popular and high-risk business.  Forex charts sort through layers of pricing information to allow a trader to focus on his main objective, making money.