Venturing into Forex trading can be a daunting endeavor, but it doesn’t have to be.
The Forex market offers a lot of advantages over other markets such as stocks, bonds or futures trading, and the main advantage is the very low barrier to entry. Almost anyone can trade Forex, but traders who understand how to read Forex chart patterns — and most importantly, how to interpret those charts — possess a distinct and sizable advantage. Below are some tips for reading Forex chart patterns which will hopefully help you profit from the largest market in the world.
Tips for Reading Forex Chart Patterns
Markets Move in Waves – One of the first things traders must understand is that markets move in waves. While we love the idea of buying a currency and then watching it move straight to our profitable exit point, the market does not work like that. Even during a strong trend the market moves in a “two steps forward, one step back” fashion. Most traders miss out on the bulk of profit potential because they fail to realize that markets never move straight in one direction. Ranges also develop, which is equivalent to taking one step forward, and then one step back. Being able to identify trends and ranges in real-time is pivotal. Then, when trends are present you’ll realize that to make the big money the market is going to move forward, then pull back, and then move forward again.
Get Out When the Trend Reverses – Trends are where most traders make money. Much of this money is given back, though, when the trend reverses and the trader fails to realize it. As mentioned above we must realize that the market trends in a see-saw motion and we can’t panic every time a pullback occurs. At the same time, though, we must exit when the trend is reversing. One of the easiest ways to determine when a trend is reversing is to use a trend line. In an uptrend trend, we create a trend line by drawing a straight line along the lows (price dips) which have occurred as the price moves higher. This is extended out to the right. If the price drops below that line in the future it is a signal the trend could be over. In a downward trend the line is drawn along the price highs (rallies) which occurred as the price moves down. Trend lines are useful tools but at times can be inaccurate. That said, draw a trend line on each trend and then determine if it looks to be useful — keeping in mind that very flat or very steep trend lines are rarely useful.
Beware of the Coiled Spring – Currency pairs, like any market, often go from volatile to sedate and then back to volatile. These sedate times often lull traders in to making lower profit potential trades as volatility dries up. Eventually, the market becomes like a coiled spring; so many traders are trying to nibble at small profits that a big move eventually ensues wiping out many of the traders. A triangle Forex chart pattern exhibits this perfectly and is where we can see the price action of a currency funnel into a narrower and narrower range (creating a triangle like appearance. Avoid trading when this occurring; the profit potential is not there and it is hard to gauge in which direction the market will break. Instead, wait for a breakout to occur, and then trade with that momentum. Draw lines along the bottom and top of the narrowing price action to determine when the breakout occurs.
Realize the Impact of the Spread – In the Forex market you will always have to pay the spread. As mentioned above, when volatility dies the spread essentially becomes more expensive because with less volatility there is less profit potential. Therefore, if a currency pair is very quiet and moves very little, avoid trading it.
Not all Times of Day are the Same – The Forex market is open 24 hours a day for 5 1/2 days during the week. If you pay close attention though to your intra-day forex chart patterns you will see some times have lots of action, while other times of the day are very quiet. Trade during the busy times; for example, the EUR/USD currency pair has its busy time while the US or European markets/banks are open. When banks close in the US the pair gets quieter and more difficult to forecast. Trade in pairs where at least one of the countries (or zones) involved in the pair is open for business, and avoid trading during “dead” times where there is little volume and little interest in the pair.
Forex trading involves being able to isolate trends and then enter and profitably exit those trends. Traders will benefit from avoiding meandering markets which have little conviction in one direction or another and which lack volatility. Trading currencies which don’t move simply becomes too expensive when paying the spread. Also, traders should realize that different times of day present different opportunities. Most opportunities arise once major markets/banks are open and actively trading a currency pair.