Which Charts Should Forex Traders Use?
The position traders enter trades for longer periods of time, often for weeks or months. These individuals expect to find mispriced assets and gain from their long-term rise back to their intrinsic values.
Meanwhile, the swing traders usually expect their trades to last for up to few days. Often these traders choose securities, or currency pairs, that have been quite active lately. Finally, there are day traders, looking to enter and exit their trades the same day.
When looking at charts, traders use multiple time frames, but each of the three types of traders uses a predominant time frame.
Using Charts To See Developing Trends
The position traders look at long-term trends, so they will look at long-term charts such as a daily chart where each bar (or candlestick) in it represents a day. A chart like this shows a year worth of price action. Long-term traders also look at more detailed charts such as a 4-hour chart which goes back several weeks.
On the other hand, the swing traders look at one-hour or 15-minute charts. These go back several days and are good for seeing intermediate trends (smaller trends within long-term trends).
When it comes to day traders, one-minute and 5-minute charts are used. These go back several hours in time and indicate very short-term fluctuations, while potentially being an indicator of a change in intermediate-term trend.
Many traders use multiple time frames. For example, a day trader, while focusing on one-minute charts, will at times look at one-hour chart to see if there’s a bigger trend developing that can potentially affect his or her day trade.
Using Charts To Manage Risk
Charts are not only used to predict trends. Charts also show support and resistance points. A trader often places a stop order to protect the account from large losses. If buying, the stop order is placed below the current price. But exactly where?
Often, a chart will show support points where the price of an asset, or currency pair, bounces back. In that situation, the stop is placed below that support level. But, there may be multiple support levels which differ depending on the time frame of a chart.
For instance, long-term charts are likely to show support levels that are lower than in short-term charts as over longer periods of time the asset prices are likely to fluctuate more.
Effectively, long-term traders put their stops at lower levels than day or swing traders. This means that long-term traders are more willing to accept larger losses, but also hope for bigger wins.
Using Moving Averages
When it comes to moving averages, these will differ as well. First, if a trader uses a simple moving average, it will be different from an exponential moving average.
Moreover, even the same kind of a moving average will look different depending on how many time periods are used in the calculation of the moving average.
A 200-day moving average will look different from the one that uses 50 periods on a 5-minute chart (effectively, spanning 250 minutes).
Thus, there are long-, intermediate-, and short-term moving averages. Some traders use all three, while others use some other technical indicators, such as MACD, which seek to combine the three.
Moving averages of various time frames serve as a tool to tell if there’s a price momentum or if the trend is changing. If a short-term moving average crosses above a longer term counterpart, it may mean there’s a rising trend.
Forex traders should have enough charts and technical tools to observe price action, but if there’s to much information, then this is likely to end up in confusion.
Imagine using four different charts for EUR/USD pair. Now, let’s say that in addition you watch EUR/GBP, GBP/USD, USD/JPY, and AUD/USD.
Overall, you’re watching five currency pairs and are using four charts per pair. That’s 20 charts overall. May be too much unless you have multiple screens.
What you need to do is figure out the bare minimum you really need for your trading, then perhaps add some other charts or indicators.