Have you ever seen a forex chart before? Chances are you have, either in a newspaper, on some website, or on the evening news. Different charts have different formats, but all serve a single purpose: To plot the exchange rate of a currency over a period of time.
Needless to say, the actual period of time is entirely variable, and you can find forex charts that span a decade just as easily as you could find those that span 3 hours.
Undoubtedly, you'd have noticed that most active forex players spend hours pouring over these charts and analyzing their data. If you've paused to ask yourself why they do so, you'd have probably guessed the answer rather immediately: They’re looking for trends.
Consider this: Let’s say you’re looking at a 5 year chart of the US$ to the Euro. First of all, you’ll probably notice the high and low points, since they do sort of stand out. As such, you’ll instantly be able to know the highest exchange rate and the lowest exchange rate over the past 5 years.
Let’s just say that the highest exchange rate was way back in early 2005, at $1.8. After that, it has steadily decreased and over the last 2 years, the highest was 1.4-ish at various points in time.
Knowing that, what do you think the chances of the exchange rate going back up to $1.8 would be? Pretty astronomical, right? Well, truth be told it is a long shot and it isn’t likely to happen at all barring some drastic occurrence, considering that the highest point over the last 2 years is a lot lower.
Due to this, if you’re trading between Euros and US$, you would now know that as the exchange rate approaches 1.4-ish, it is starting to hit the point where it would probably taper off, and then begin to fall.
Based on that, you can make a good judgment call of when to sell your Euros into US$, before that actual fall occurs!
Although this is only one trend-spotting method that we’ve just discussed, it should help you to see how you can get valuable information from forex charts and use that information to make even more valuable decisions.
All said and done, your decisions are going to determine whether or not you profit and so you want to make them based on as much cold, hard, solid information as you can.
Other trends to look out for are fluctuation trends, whereby you should identify where a currency tends to fluctuate, and how much it tends to fluctuate. In itself, this can be tricky, but if you’re willing to look closely enough, you can probably spot at least a couple of trends that would be of use to you.
Every little bit counts!