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What are forex charts?

Reading forex charts is the most important thing you will do as a trader.

The key question is: what is the overall trend?

The trend can be read as to whether price is rising or falling. Simply put: If the chart is rising from the lower left to the upper right, it’s in an uptrend. If the chart is falling from the upper left to the lower right, it’s in a downtrend.

Instead of overcomplicating the entire situation, you are better off looking at weekly trends to determine what the overall trend is.

Many retail traders get caught up in the idea of the weekly, daily, four-hour, one hour, etc. trend. In fact, forex tends to trend for a couple years at a time. Knowing the trend can quite often be half the battle to becoming profitable. In other markets, trends tend to be a bit choppier.

Ultimately, there are a multitude of ways to read forex charts, but determining the trend is going to be what possibly makes you the most money. You should learn about reversal candles, not necessarily to try and ‘outsmart the market’, but to understand that they can be used as clues as to when you should be taking profits, or on a pullback possibly adding to a position that is with the longer-term trend.

Far too many retail traders get caught in the trap of trying to catch the exact top or bottom of the market. This is foolhardy, and most professional traders will tell you that this rarely happens.

Beyond that, even if you did catch the exact top or bottom of a market, it’s very difficult to ride out the massive volatility that a trend change typically brings on. It should be noted that there is almost always another opportunity to join the move once it happens.

Trendlines also can give you a glimpse into whether or not there is some type of dynamic support coming into play. Moving averages are also used for this exact same reason by some traders as well.

As a general rule, the longer you trade, the fewer markings you will have on a chart as you realise that there are a handful of truly important spots on a chart. An overreliance on indicators can quite often cause major issues. This is what is known as ‘paralysis by analysis’. The more indicators you use, the more likely you are to get conflicting signals.

Speaking of indicators, quite a few traders use oscillators to determine the momentum of the market. These include the Relative Strength Index, the Commodity Channel Index, the Moving Average Convergence Divergence, and many others.

Quite often, traders will only trade a position that is going with the overall momentum on one of these indicators. They also look for something called divergence, which can present a reversal trading opportunity in and of itself. Note that the oscillator is typically a lagging indicator, meaning that although it can be predictive, it is simply showing you the momentum that has already been forming.

Candlestick patterns can be crucial as to whether or not you should be in a position, add to it, or keep an eye out for a potential reversal. Some of these include the bullish/bearish flag, head and shoulders pattern, triangles, wedges, cup and handle, and a multitude of literally thousands of other formations.

That being said, most traders will use just a couple of patterns in order to place positions. These patterns can suggest momentum shifting in one direction or the other, consolidation, or even breakouts. In fact, one of the first places that most traders find success is using candlestick patterns to their benefit, as it suggests that the market is moving for or against them and can give some notice as to the future direction of the market.

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