Foreign exchange market data is a powerful tool in developing an international payments strategy: businesses must know how to organize and interpret forex charts to take advantage of them.
Fluctuations in foreign currency exchange rates are a daily occurrence when working with International Money Transfers, and they can significantly impact the value of the transactions. It is important to properly manage this risk, and one of the ways to accomplish this is through the proper use and interpretation of foreign exchange charts (forex charts). Forex charts can help to gain a clearer understanding of the relationship between foreign currencies, which in turn helps to better understand and Manage risk, as well as maximizing the value of currency exchanges.
In order to gain a solid insight into the risk and dynamics of currency exchanges, there are two distinct, yet overlapping, methods which can be used: fundamental and technical analysis. These two methods have corresponding forex charts, as well.
Fundamental Analysis vs. Technical Analysis
Fundamental analysis focuses on how macroeconomic indicators affect foreign currency exchange rates: things such as interest rates, inflation rates, and political changes within a country.
Technical analysis utilizes forex charts to condense large amounts of market data into graphs to help find observable trends in currency exchange rate movements.
One of the greatest benefits of forex charts is the ability for a business to incorporate its own information into the graphs, such as purchasing plans, supply chain management needs, projected sales, accounts payable receipts or other projected foreign currency receipts or disbursements. In this way, forex charts enable a business to forecast how its foreign currency needs may align with more favorable foreign currency exchange rates. This means if the business is planning the purchase of parts or supplies from a foreign supplier, it can use a forex chart to plan the payment to coincide with a more favorable foreign currency exchange rate. Conversely, if a client or buyer in a foreign market will be paying the business for a contract or invoice in the near future, it can use a forex chart to also project the most favorable time to request the payment, actually increasing the realized value of the contract through a favorable foreign currency ex change rate. The information gleaned from forex charts can be used to help a business set short, medium, and long-term foreign exchange strategies, to maximize value for the business.
Candlestick forex charts use a simple graphic image, which resembles the body and wick of a candle, to visualize the opening price, closing price, high price and low price of a currency for a particular period. The “body” of the candle represents the opening and closing price for the currency, while the wick extending from each end of the candle represents the high and low price for the currency, for that particular time period. If the exchange rate rose for the day, the candle will be blue (or white) in the forex chart. The bottom of the candle’s body marks the open price, while the top represents the closing price, of the currency for that time period. If the price has fallen, the candle will be red (or black) and the top of the candle’s body will mark the open price and the bottom the closing price.
Within the forex chart, the next tool to understand is the moving average display. The moving average displays the average price of a currency pair over a period of time. The average price of a currency pair shows the average foreign exchange rate for the particular currencies, over a period of time. For example, the moving average may display the average foreign exchange rate of the U.S. Dollar (USD) vs. the Japanese Yen (JPY) over a period of time. This average can be based on any period of time, but the industry standard is to use a time period of 50, 100, and 200 moving averages within the forex chart (i.e., the last 50 days of trading between the USD and JPY).
For example, an investor may observe that the price of the USD and JPY currency pair has fallen below the 200-day moving average, and interpret this as a signal that it is time to execute their foreign currency transaction.
Bollinger bands are used in forex charts to calculate the upper and lower bands for a particular currency exchange rate, which help to visualize the average volatility of a foreign currency over a period of time. Bollinger bands consist of three graphic lines in a forex chart: the middle band is a generally representative of a simple moving average of the currency exchange rate, and serves as a baseline for the upper and lower bands. The interval between the upper and lower bands, above and below the middle band, visually represents the volatility in the average foreign exchange rates of a currency over time. Generally, the upper and lower bands are a 20 day / two-standard deviation calculation. The closer together the upper and lower band are, the lower the observed volatility is within the forex chart. The farther apart the bands are, the greater the observed volatility is within the forex chart.
Fibonacci retracement is based on the concept that price trends “retrace” their movements in a forex chart before continuing in the direction of a longer-term trend, in effect mirroring their previous price increases and decreases. On a forex chart, the Fibonacci retracement is calculated based on the Fibonacci sequence, a set of ratios (the key Fibonacci ratios are 0%, 23.6%, 38.2%, 61.8%, and 100%). These ratios are represented on a forex chart by horizontal lines, and the price highs and lows are predicted to touch the charted Fibonacci lines for a period of time before proceeding to increase or decrease in future trading.
Forex charts can help inform robust international payments strategies for businesses with currency exchange needs.