Page 69 - Ultimate Guide to Currency Trading

currency traders jump-in and place their trading bets in the same direction. This has the effect of
pushing the FX pair further into the direction, which further strengthens the idea of the movement in
the minds of the FX traders, who in turn pile on more currency bets in that pair's direction. This
constant addition will go on and on until a change in the crowd psychology comes along, whether
based upon fundamental or technical information. The crowd will all get the same idea at once and
the FX pair will begin to reverse itself (the idea that pairs revert to the mean), and begin to pick up
steam moving in the opposite direction. This movement will continue until the process repeats, and
the crowd, again, goes in the opposite direction.

With a few charts and these theories, you can use the technical data like a form of magic to
help you determine if and when to enter into a trade. You can predict when the trade is about to
reverse, and when it is a good time to take your profits and run (before the crowd shifts its sentiment
of the currency pair you are trading).

Candlestick and Line Charts

When you are first getting ready to build a FX technical chart you will need to choose the currency pair.
Say, for example, you are going to look for indicators in the EUR/CHF pair. You have read the brokers'
reports and finished studying the fundamentals. Some of the fundamental indicators that helped you
decide on a long EUR/CHF trade were a reading of the Swiss National Bank (www.snb.ch) website and
a reading of the news reports on the web-site DailyFX (www.dailyfx.com). You have decided that the
Swiss franc has appreciated quite a bit against the euro, and that the euro will regain strength, if even
for the short term.

In order to look at this EUR/CHF pair on a chart, you would first have to draw one. Most Forex
brokers will allow you to call up either a candlestick chart or a bar chart. Some will allow you to do
both. If that is the case, you can go ahead and switch between the two at the click of a mouse, and
then you can decide which one best works for you.

The candlestick chart, also known as a Japanese candlestick chart, appears as a series of
vertical lines on the graph, representing prices, and time of days across the bottom of the chart. For
example, if you are going to draw a fifteen-minute EUR/CHF candlestick chart, the computer software
of your trading platform will show the prices of the pair up and down on the chart and the time over
several days in fifteen-minute intervals along the bottom of chart. Additionally, the actual prices of the
EUR/ CHF pair will show up, one for every fifteen minutes of trading. Small lines of red and green will
indicate not only the price of the pair for each fifteen minutes, but also the range of the trading, which
will be indicated by the length of the red and green lines. A red line indicates that it moved down, and
a green line indicates that the pair moved up during those fifteen minutes.

Line charts are a bit easier and more intuitive to use than a bar chart. With a fifteen-minute
line chart, each open and close of those fifteen minutes will be indicated by a notch at the left and
right of the longer up and down line. If the pair had moved up and down along that opening price, the
line will show its range by being longer or shorter to cover the prices that the pair was at during those