Whether you trade options, binary options, or forex, if you use forex charts, you may notice a couple strange things at first. Here we will look at some simple concepts to help you better understand the forex market and forex charts.
Pairs and Trend Direction
Currencies always trade in pairs – the EUR/USD, AUD/CAD etc. So if you pull up a chart of the EUR/USD, and the chart shows the price is moving higher, what does that mean? In simple terms you can think of the first currency as the directional currency. So in this case, the EUR is rising, relative to the USD. If you pull up a chart of the AUD/CAD and the price of the pair is falling, that means the price of the AUD is declining relative to the CAD.
If you buy the EUR/USD you are expecting that the EUR will rise relative to the USD, and therefore will want to see the price move higher on your chart.
If you sell the EUR/USD you are expecting that the EUR will decline relative to the USD, and therefore will want to see the price move lower on your chart.
A few years ago most pairs were quoted at four decimal places, now they are typically quoted at five. The forth decimal place represents 1 pip, while the firth decimal place represents 1/10 of a pip, or a “fractional pip.”
For example the EUR/USD may be trading at 1.38056, and will constantly fluctuate throughout the trading week…providing profit potential. But what does this price mean? Think of the first currency as “1.” The second currency is the price “1.38056”, and is how much it costs of the second currency to buy the first. So in this case, it costs 1.38056 USD to buy 1 EUR.
Yen (JPY) Pairs are typically quoted to three decimal places, such as 101.654 for the USD/JPY.
Time Frames and Indicators
When you view forex charts, there are multiple timeframes you can look at. Popular time frames are 1, 5, 15, 30-minute charts, hourly, 4-hour, daily and weekly. Each bar on the chart represents the timeframe. So 1-minute charts will show 1-minute price bars, and is useful for seeing very short-term price action and trading opportunities. Each bar on a daily chart is one day, and shows trends and opportunities for longer-term trades, or shows the overall trend which can be used to filter out trades on a shorter time frame (see: The Two Time Frame Approach to Trade Selection).
When you apply an indicator to the chart, it will automatically adjust to the timeframe you have chosen. For example, a 50-period moving average will work on a 1-minute chart as well as a daily chart. With the daily chart the moving average will show the average price over the last 50 days. With the 1-minute chart the moving average will show the average price over the last 50 minutes.
The Bid and Ask on the Chart
In the forex market there are always two prices at any given time–the Bid and Ask/Offer. Forex charts by default show the Bid price. This varies from stock charts which typically show the last price a transaction occurred at.
In forex there is usually a spread, so the ask price–the price you can buy at right now–is always going to be slightly higher than the (bid) price on the chart. If you are selling, you can sell to the bid price and the price on the chart is accurate. For example, if the EURUSD chart shows a price of 1.38056, that is the price you can sell at right now. The offer could be 1.38066 (1 pip higher), so if you market buy, this is the price you get, not the price shown on the chart. The spread can vary drastically from broker to broker. If you are just using forex charts for informational purposes, or to trade options or binary options, this may not matter as much. But if you are trading forex, the spread is a major factor. The smaller the spread the better.
Forex brokers are all over the world, and typically the charts they offer will align with their home time zone. That means daily price bars may start and end at different times. This means if you compare the daily bars of one broker to another, they may have different highs and lows as well as different opening and closing prices. One broker may operate from midnight to midnight EST, while another operates from midnight to midnight GMT. Have a world clock handy or get used to converting time zones if your broker is in a different time zone than you. Also, if you are comparing charts on different platforms, make sure the time zones are the same, so you can accurately compare the charts.
Also keep in mind that information sites also have a time zone attached to them. Say you want to know what economic news releases are coming out today. The times given could be EST, MST, GMT or any other time frame. Make sure you know which it is, and account for it.
Many sites and platforms allow you to change the time zone. When applicable use this feature to avoid making mistakes on time zone conversion.
You’ll also want to know when different markets around the world are open. The forex market is open 24-hours during the week, but is most active when major markets are open. See Making Sense of Forex Market Hours for more on this topic.
The Final Word
The forex market and forex charts can be a bit confusing at first, but eventually you get used to it and it becomes second nature. When trading forex, keep these points in mind, as they will make your path a bit easier.