By Sean Hyman Reading currency charts may be second nature to some of you. But I remember the day I came over to currency trading from the stock market – I was completely lost. Suddenly, I had a whole new trading language to learn, with pairs, lots, pips, etc.

What the heck was a currency pair? Looking at the symbols for AUD/USD or GBP/USD was a far cry from the IBM, Google, GE, and Apple stocks I used to trade.

And what was going on with these currency charts? I was used to stock charts – which told me in a second if my stocks were going up or down.

In fact, I remember looking at a chart for the USD/JPY in those early days of trading. At first, I had no idea what I was seeing. I didn’t know if the dollar was going up or down. I couldn’t even tell if the chart was based in dollars or yen.

So if you’re just starting out in currency trading, please don’t be frustrated if you don’t understand this all right away. There’s a learning curve for anyone who comes over to Forex from another market.

Let’s start at the beginning. In the next five minutes, I’m going to tell you exactly what you’re seeing when you look at a currency chart, so you can get more acquainted with this market.

The Golden Rules of Forex Chart Reading

1. You’re watching the first currency listed in the pair rise or fall. You can tell what currencies are being charted by looking at the currency pair listed. For example, below you’re watching the U.S. dollar fall versus the Japanese yen, because it’s listed first in the pair.

The U.S. Dollar is Losing Strength to the Yen

All currency pairs are always listed the same in a standardized way. For instance, when you’re comparing the Japanese yen to the U.S. dollar, the symbol is always listed as USD/JPY, and not JPY/USD.

Always remember the first currency in the pair is being charted. Knowing this, you can look at the chart above and determine that the U.S. dollar is dropping in value versus the Japanese yen. But you can also tell the Japanese yen is rising in value versus the U.S. dollar.

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You can look at that downtrend either way…U.S. dollar weakness or JPY strength. But either way, it’s important to remember that the USD/JPY is in a downtrend. In the Forex market, you could trade off this trend by shorting the pair (or hitting the Sell button on the USD/JPY pair in your trading station).

Or if you saw the U.S. dollar about to reverse its trend, then you would buy the USD/JPY pair.

Tip: Trends don’t change often, so stick to trading with the trend and not against it! As you start trading currencies, you’ll notice that trends simply don’t change very often. For instance, you’re looking at a year’s worth of trading in the daily chart above. So more often than not, the USD/JPY pair has trended lower. Therefore your best bet is to place a trade that assumes the continuation of that trend.

2. Understand Candles and You Understand the Chart Itself

Forex traders often talk about “candles.” Candles simply refer to a unit of trading time on a chart.

This is a daily chart above, so each candle equals one day’s, or 24 hours worth of activity in the Forex market. A day’s candle stops at 5 pm EST and starts a new candle. So one candle shows 24 hours worth of trading from 5 PM EST to 5 PM EST the next day. Now, if we’d switched to an hourly candle chart, a new candle would be produced at the beginning of each hour of the day.

But as you’ll notice above, these candles are also color-coded to give you even more information. A red candle tells you that the currency pair closed lower than what it opened at. If the candle is blue, then it means that the currency pair closed higher than it opened (showing that the currency pair gained some ground since it opened).

While candles can be in different colors, usually a red or black candle indicates a downtrend while a blue, white or green candle typically indicates an uptrend.

A candle opens up at the far left side of the fat body of the candle and it closes at the far right side of the candle’s body. The wicks simply represent the highs and lows of the candle. See the down candle to the left and the up candle to the right below.

Which Chart Should I Be Looking At Anyway?

In Forex, there are short-term day traders and longer-term intermediate speculators. This distinction dictates which chart you should be looking at.

If you’re interested in trading off long-term trends, you should check out charts with a longer timeframe (weeks to months to years), so you can look at real longer-term trend direction. On the other hand, if you’re interested in more short-term trading, you should look at hourly charts so they can zoom in on the most recent activity.

For instance, if I switch to an hourly, 30-day chart…that would be the equivalent on the daily chart of 30 daily candles. The difference is that the trading activity is chopped up into hourly increments rather than the longer-term daily charts. Therefore it lets me see shorter-term, detailed movements.

Once you have these few concepts down, you should be able to read a currency chart, and you’ll be well on your way to trading Forex. You know which currency is going up or down on the chart, You know whether the current candle is up or down and you can get a big picture overview of how the price has traded over long periods of time by looking to the daily, one year chart or to micro levels by looking to a smaller timeframe like the hourly, 30 day chart.

That’s all there is to it. Now you’re a chart reader.

Best Regards,
Sean

EDITOR’S NOTE: Just starting out in the Forex market? Click here to get the guidance you need to start trading with confidence as early as next week.

Sean Hyman, “Professor FX” and Long-Time Currency Analyst Explaining How You Can Succeed in the Currency Markets.
Sean Hyman spends his days teaching his fellow professionals in the industry how to trade the $4 TRILLION currency market. Now he brings his 15 years of financial experience to you. From long-term currency strategies, to quick FX-trading moves usually reserved for the professionals, Sean will tell you everything you need to know to succeed in the currency markets.