Technical Analysis - an Introduction to FOREX Charts

When dealing with international money transfers, fluctuations in exchange rates can significantly impact the value of your transactions. To effectively manage this risk it's important to have a clear understanding of the relationships between foreign currencies.

To get a good insight into these dynamics, there are two distinct but overlapping methods you can use; fundamental and technical analysis.

Fundamental analysis focuses on how macroeconomic indicators affect exchange rates - things like interest rates, inflation rates and political shifts.

Technical analysis, on the other hand, uses charting to condense large amounts of market data into graphs to help pick trends in currency movements.

One benefit of charting is the ability to incorporate information from your business into the graphs, such as purchase and shipping cycles, to show how currency trends are impacting your bottom line.

This information can then be used to set short, medium and long term foreign exchange strategies.

Candlestick Charts

Candlestick charts use a simple graphic, which resembles the body and wick of a candle, to capture the open, close, high and low prices for a particular period.

The body of the candle represents the open and close price for the currency, while the wick extending from each end of the candle is the high and low price.

If the exchange rate has risen for the day, the candle will be blue (or white). The bottom of the candle's body marks the open price and the top represents the close.

But if the price has fallen, the candle will be red (or black), and the top of the candle's body marks the open price and the bottom is the close.

Moving Averages

The moving average displays the average price of a currency pair over a period of time. This average can be based on any period of time, but industry standard is to use 50, 100 and 200 period moving averages.

This information is typically displayed as a line drawn over another chart, such as a candlestick chart, to help show the trend of the data being displayed.

For example, an investor may observe the price of a currency pair has fallen below the 200-day moving average and take it as a buy indicator.

Bollinger Bands

Bollinger bands calculate upper and lower bands for a particular exchange rate, which wrap around the moving average of the price.

This data helps foreign exchange traders pick patterns and identify when prices are out of sync with longer term trends, for example when the price breaks through the upper or lower band.

Fibonacci Retracement

Fibonacci retracement is based on the broad concept that price trends 'retrace' their movements before continuing in the direction of the longer term trend.

Of course, the sheer volume of charting information means it can be hard to know which way to turn, so it helps to have a foreign exchange expert to steer you in the right direction.

Talk to American Express today to see how our specialised charting software and tools can benefit your business.