Chapter 1 Forex Basics Chapter 2 Fundamental Factors Chapter 3 Technical Tools

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Setting Up An Example

This lesson is designed for a novice that has never traded using an online charting software. We will open a couple of sample trades and follow their progress over several days to see how positions change in value.

First, we are going to look at the USD/JPY pair which means we are trading the US Dollar against the Japanese Yen. Second, we will trade the EUR/USD pair which means we will be speculating on the value of the Euro against the US Dollar.

Reading Candlesticks

Each "candlestick", the individual blue and red shapes, represents price activity for a certain amount of time. The body of the candlestick bar is comprised of the difference between the open and close price. If the opening price was lower then the closing price or the given currency pair gained value, then the body of the bar is blue. To contrast, if the opening price was higher than the closing price or the given currency pair lost value, then the body of the bar is filled red. If the high and low prices for the period are located outside of the open-close range they are marked off by two lines known as the upper and lower shadows. The upper shadow protrudes from the top of the candlestick's body and marks the high price for the given time period represented by the bar. Conversely, the lower shadow protrudes from the bottom and marks the low price. The red box on the bottom left-hand side of our graph below shows the currency pair and the length for the period. Here, each candle is equivalent to 30 minutes of market activity.

USD/JPY - October 24th, 2006 - 1:00 PM

When the value of the Dollar is rising the graph will be moving upwards. This means that the Dollar is appreciating, or in other words it takes more Yen to buy the same amount of Dollars. The situation is reversed if the Japanese currency is doing better. It now takes less Yen to buy the same amount of Dollars. The graph in this example starts from October 20th.

So with all that said, we are looking at a 30 minute chart of the USD/JPY pair. The chart encompasses the price activity for about three trading sessions. Each session is more easily identified by the high-low zones, which separates the current graph into three distinct sections. A trader should do extensive analysis before placing a trade, which we will not do here. For instance one should see how the short term outlook compares to the long term outlook. We will focus on the short term right now.

We can gather from the short term information that the Dollar has been rising for the past 3 trading sessions. The last 6 candles bucked the trend as the Yen gained in strength against the Dollar. The position that a trader will open depends on what the trader speculates will happen next.

If he or she believes that the recent downward move is the beginning of a new short term downward trend, he or she would sell the pair (sell the Dollar/buy the Yen). The trader would then make money if price action continues to head downward. If the Dollar recovers and starts heading up again this trader would be wrong and lose money on his or her position. If the trader believes that the Yen's strength was an anomaly from the upward trend, they would buy the pair (buy the Dollar/sell the Yen).