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FX SCHOOL (3) : Charts & Pips

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Old 15-08-2009, 06:55
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Default FX SCHOOL (3) : Charts & Pips


In Forex trading, charts are a visual representation of price. By price, we mean the exchange rate. It tells us how much a currency is worth compared to another currency.

Here is a closer example of a chart, for the Euro / US Dollar (EUR/USD).

Charts can be viewed in different timeframes, such as the one minute (M1), five minute (M5), fifteen minute (M15), thirty minute (M30), one hour (H1), four hours (H4), daily (D1), weekly (W1) and monthly (MN). Which timeframe is best? Well, that can depend on how many “pips” you’re looking to make. Short-term traders prefer the M1, M5, M15 charts, and long-term traders prefer the D1, W1, MN. Many traders use the M30, H1 and H4 charts for intra-day trading. Your “system” will determine what timeframe charts you need to be observing. More on what a system is later.

This above chart is a D1 (daily) chart on EUR/USD. The horizontal line tells us what price the EUR/USD is currently trading at, which in the chart above, it’s at: 1.2827. This means for every Euro, you’d get approximately 1.28 US Dollars in return. This means the Dollar is weaker than the Euro, or if you like, the Euro is stronger than the Dollar.

You need charts to help you determine the potential trend. A chart simply contains a representation of “price action”, i.e. those bars going up and down. Those bars you see are known as “candlesticks”, and because price fluctuates up and down constantly, you’ll see that the candlesticks are going up and down constantly.

Also, as you can see, the black candlesticks are going up, and the white ones are going down. (These colors can be changed if you so wish). So in the chart above, if a candlestick is black, what this means is, is that on that particular day (because it’s a D1 chart), the overall price of the EUR/USD moved upwards. If the candlestick is white, this means on that day, the overall direction of price was downwards. The bits sticking out of each candlestick (also known as the “wick”) just tell us how far high & how far down price actually went to.

You should know that a currency pair can only be ever in one of two states. The first state is in a “trending” state. This means that there is a clear direction of the currency (i.e. it can be clearly seen that it’s in upward or downward trend). When a particular currency is gaining strength, i.e. going upwards, it’s known as a “bullish trend”, and when a currency is weakening, i.e. going downwards, it’s known as a “bearish trend”. The second state is in a “ranging” state. This means that currency has no clear direction, and that the market is very choppy.

The number of points how far a currency has moved (against another currency) is known as “pips”. The term pip just stands for “percentage in point” and is the smallest price change that a given exchange rate can make. The smallest change in price is that of the last decimal point. So for example, take the GBP/USD (£/$). This pair might be currently trading at 1.4421. What does this mean? It means, that, for every Great British Pound (£1), you will get $1.4421 US Dollars in return. Which means around $144 for every £100. The next minute, the GBP/USD might be trading at 1.4435. So it’s jumped from 1.4421 to 1.4435. What does this mean? It means the GBP has got stronger in comparison to the USD. By how many points? Well, it was initially at 1.4421, but now it’s 1.4435. So it’s increased by 14 pips.

How about USD/JPY? It might be trading at around 90.86. Which means for every US Dollar, you’d get 90.86 Japanese Yen in return. Now, if the USD/JPY starts a “bearish trend”, and starts going down, then we might see it trading at 90.16. This means that the USD/JPY has gone down by 70pips. Beginning to get the picture?

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