While the forex market is certainly driven by fundamental economic  factors, commonly known as the fundamentals, most traders prefer to make their trading decisions on the basis of charts and indicators, since these are open to anybody and do not require a deep understanding of global economics, these traders are known as technical traders or chartists.

The overall style of this type of trading is technical analysis.

The first point in lining up your technical analysis tools is to ensure that you are using the type of forex chart that suits you best. All currency trading charts show price movements for a currency pair but you can change how you view them. There are three basic types of chart:

1. Line charts

Line charts simply show the closing price for each period. You could set this to show the closing price at the end of every minute, the end of every day or many different periods between. This will give one point for each period and these are joined by a line to show the direction of the price movement.

Line charts can be useful if you want a quick overview of a trend. However, they do not give much information so  very few traders would base a trading system on line charts.

To pick up some more knowledge on using trading charts click here

2. Bar charts

Bar charts give four times as much information as a line chart. As well as the closing price, given as a notch on the right of the bar, they show the opening price with a notch on the left, and the high and the low (top and bottom points of a vertical line).

Being able to see the range of movement within a period can be very useful. It can give an indication of volatility of the currency pair, and in some cases, indicate when a retracement may be about to take place.

3. Candlestick charts

Candlesticks are the most popular type of forex chart. They show the high and low for the period in the same way as a bar chart, but the open and close prices are shown by the range of the candle body. If the open is higher than the close, i.e. the price fell during the period, the candle will be shaded in a white/shaded system or red in a green/red colored system. If the close was higher than the open, i.e. the price increased during the period, the body of the candle will be white or green.

The shading or color makes it easy to see the direction of price movement at a glance. The size of the candle body makes it equally easy to see the range of movement between the open and close. This is very helpful when looking for patterns in currency price movements. It makes it simple to spot trends, choppy markets and retracements.

Whatever type of forex chart you use, you will be able to alter the time period that point, bar or candle covers. This allows you to see price movements over a longer period or focus in to view the changes every minute. Many traders will use a second time period in the chart to check that their signal is not contradicted with a different chart setting. Of course, you can also use other technical analysis tools such as indicators to verify your decision before placing an order on the basis of your forex chart reading.

To pick up some more knowledge on using trading charts click here

It was quickly found that this method of recording price values could also give rise to various techniques for predicting future demand, that is, whether the price is going to rise or fall in the near future. Clearly, this information is invaluable for a trader in any commodity, as well as for stocks and currency trading. Seeing the potential, Charles Dow of the Dow Jones company picked up the method around 1900 and introduced it to the American stock market.

One of the most popular Japanese candlestick charting techniques uses what are called support and resistance lines. These lines are most useful when the price is fluctuating in relatively steady waves.

So at a time when there is no real upward or downward trend, but the price is moving between certain parameters, you can draw a line through the top point of the highest candlesticks on the one hand, and through the bottom point of the lowest candlesticks on the other. In this situation these two lines will be more or less horizontal and parallel.

You can then expect that for as long as current market conditions continue, the price will remain within these boundaries. You can therefore trade on this basis.

Candlestick Trading

In a different situation where there is a steady trend, you may still be able to use support and resistance lines to gauge the fluctuations within the trend. Even in the steadiest of upward trends there will be moments when the price falls a little, and vice versa. In this situation the support and resistance lines will be sloping, but provided they are more or less parallel, they can be used in the same way as if they were horizontal.

In Candlestick Trading where support and resistance lines are converging, that is, they are not parallel but are closing together as if to join at a point, then a breakout is indicated. In this situation you should not trade on the basis that the price will always bounce back from the lines. It is usually better to wait for the breakout and go with the emerging trend that it indicates.

On the other hand if the lines diverge, this suggests a market that is becoming more unstable. It may be better to stay out of this market for a while.

Support and resistance lines can be very useful but they should not be your only indicator. Be sure to consult other signals before opening a trade, and try out your system in demonstration mode for a reasonable amount of time before going live. Remember, prices can always behave in unpredictable ways that can unseat even the best Japanese candlestick charting techniques.

There are many free forex charts available through brokers or charting services, enabling the foreign exchange trader to compare different indicators on which to base his trades. One of these indicators is known as the Parabolic Stop and Reverse which when applied correctly can help you with your swing trading decisions. Free forex charts are available from many spread betting companies, foreign exchange brokers or currency exchange brokers.

This indicator was developed by J. Welles Wilder Jr better known as just plain Welles Wilder who is a well known technical analyst. ‘Parabolic’ is a reference to the mathematical shape of the parabola which is like a cone with a rounded tip. It is not necessary to understand the calculations that produce this, since you can see the result clearly in your free forex charts package.

This is fortunate because they are too complex to do easily by hand. For tips about technical analysis using free forex charts click on this link: Forex Chart: Technical Analysis where you will be taken to a page within the Great Forex World web site under the technical analysis category.

Free Forex Charts: Stop and Reverse

SAR stands for Stop And Reversal. As you might expect, this relates to the moment when a price stops moving in one direction and reverses to move the other way. Clearly it is very useful to know when this is about to happen so that you can close out successful trades at the peak of their profits. This is what the Parabolic Stop and Reverse on free forex charts aims to tell you.

So you would not normally use it to signal the beginning of a trend. You would consult other indicators for the best moment to open your trade, and then use the Parabolic SAR to indicate the best moment to close it.

The indicator appears as a series of dots above or below the  of current prices shown on my free forex charts. Usually it is used in conjunction with a candlestick chart, so you will see the dots below the candles during an upward trend and above the candles during a downward trend.

If you have an open trade following a trend into profit and you are watching for the best moment to close it, you will be waiting for the dots to cross the line of candles. This is the indication that the trend is beginning to reverse and you should exit the market swiftly.

The image you see on the right was taken from a free forex charts package by the spread betting company I use but I also get free forex charts from my currency broker too.

Free Forex Charts: Parabolic SAR

Alternatively you can use the Parabolic SAR to place stops, especially if you use the trailing stop. You simply set your stop at the point indicated by the current dot. When the trend is strong, this will be a long way from the current price so your stop will not easily be triggered. As the trend slows, the dots approach the current price, tightening up the gap.

When a reversal is indicated the stop will be triggered by just a small movement. When the Parabolic SAR is accurate this pattern can bring you greater profits than simply setting your stop at a constant distance from the current price. Parabolic charts can be turned off in your free forex charts package to give a clearer view which is what I do then I turn them on again and watch the direction of the trade develop.

This is not a tool for scalpers. It is not so useful for short term fluctuations in a choppy market. The indicator is most reliable over real trends lasting several hours or days. If your system is based around this type of trend trading, you will find the Parabolic Stop and Reverse a useful tool to maximize your profits with free forex charts.

The study of charts has become big business in Forex Trading and this is explained very well in the Ed Ponsi book “Forex Patterns and Probabilities” which is published by Wiley Trading and is available from Amazon in the US by clicking here: USA or Amazon in the UK by clicking here United Kingdom.

Ed Ponsi is a forex trader and educator and the forex patterns and probabilities that he reviews in his book are as a result of him trading the currency markets using his real-world specifics rather than some general concepts
of FX strategy.

Do not shy away from Ed Ponsi’s real-world strategies that he applies to foreign exchange risk management as when you learn how to apply them when trading forex will reward you

Forex Patterns And Probabilities: Forex Pips, Forex Charts And Forex Trends

• Forex Trends

The Forex markets have been studied for over 100 years and over that time trends have repeated themselves and patterns have become consistent and fairly reliable. It is very important to understand that prices move in trends and those traders who trade with the trend are more successful. Finding the trend will help you become more aware of the market direction and is a fundamental element to the forex patterns and probabilities you will use to formul

ate your trading strategies as a professional trader in currency trading.

Always find the trend and trade with it, not against it. This applies even if it takes days or weeks for a new trend to become obvious.

Looking at the charts and drawing trend lines is the most common form of technical analysis. A trend is usually when 3 or more lows line up. A market that is trending up is making a series of higher highs and higher lows and you can draw a line connecting the bottoms roughly, this is a support line.

The market is trending down when it is making lower lows and lower highs, if you draw a line connecting the tops you have drawn a resistance line, which will be shown in the forex patterns and probabilities book.

• Forex Time Based Charts

Traders have different times they wish to trade in, some are comfortable using 1 and 5 minute time frame charts others prefer 15 min or 1 hour charts placing 4 to 10 trades daily and others prefer to place a trade and let it run for several days, weeks or longer. This is a personal decision. There is not one time period that makes more money than the others.

When reading the charts it is a good idea to look at 3 different time frames. The reason for this is the largest time gives a general over view of what is happening, the direction of the market, then zooming in to the next level shows what is going on more recently and when you should enter the market and the third and closest time frame is the one where you would actually monitor your trade.

The 3 different time frames can be any combination depending on your chosen trading time and this will affect your forex patterns and probabilities.

A daily chart might show a downward trend but the 5 minute charts could show an upward trend and the 1 minute charts show a downward trend, these charts would be of no interest to anyone leaving a trade to run for weeks. Again there are software programs available to help identify trends and placement of orders which will be discussed in forex patterns and probabilities.

Having some knowledge I believe is useful even with automated programs.

Forex Patterns And Probabilities: Time Based Forex Charts

There are 3 main types of charts, the candlestick chart, bar charts and line charts.

They all come in many different time periods, 1 minute, 5 minutes,10 minutes,30 minutes, 1 hour, 2 hours, 4 hours, 1 day, 1 week and 1 month plus others.

With the bar chart each bar represents one period of time (as above) and on each bar there are 4 marks. The highest point reached in that time frame, the lowest point, the opening point and the closing point. Those 4 points tell you what has happened in the market for that time.

The candlestick charts give exactly the same information with the candlestick body changing colour on a high (bullish) and changing back on a low (bearish) market

The line charts simply chart the direction of the market moving up, down or sideways. You usually have a choice of what sort of chart you want from the broker of your choice.
Trade in the time frame you feel comfortable with. There is no right or wrong time frame.

Forex Pips

This is the smallest increment the value of the currency can change by. The pricing of the currency is always showing the value of one currency against another. For example EUR: USD 1.4443 ( 1 Euro is worth USD 1.4443). The last number shown on a price (for example the 3 in the following price 1.4443 ) is known as a pip. If the value of the Euro went up 20 pips it would be shown as EUR : USD 1.4463. All value changes are referred to as pip changes.

The main objective of trading is to gain as many profitable pips as possible. The more dollars you are trading and the higher your leverage the higher the value of the pip is worth to you. Trading a full lot of 100,000 with leverage the pip value is around $10 however with a mini account you are trading 1/10th of the size therefore a pip is worth $1.00.

Traders have different goals depending on their   forex patterns and probabilities short term traders might look at gains of 20 pips per trade, for a longer term traders will be looking at 100 plus pips.