The day is quickly approaching when even more people will be looking at Forex charts, and you’ll need to know the ins and outs of the market. Not everyone is born with this skill, and to improve your skills, it takes a lot of investment in journaling and practice. Check out Invezz for more information on the various types of forex charts.
There are three major tool sets that are used when analyzing the forex market.
- The order book
- Price action
- Volume
Reading forex charts using the order books
If you want to read charts like a pro, start with reading the order book. The order book will give you a sense of balance in the marketplace and help you intuit why prices move in which direction.
The order book consists of bid, ask, size, and price columns. Reading the order book can be best done by looking at one currency pair at a time. Start by determining the bid price. The bid will be found at the bottom of the order book. The ask price is found towards the top of the order book. You can close down gaps between demand and supply by looking for orders that aren’t filled right away so you can see what happens to prices over time.
The next thing to look at is the size of the orders. The size of the order will give you an idea of how much volume or weight is behind each bid or each ask. A trader can use this information to gauge volatility in the marketplace.
Bids and asks work like teeter-totters, when one side goes up, the other goes down. The size shows you how much weight supports each price point.
Reading forex charts through the price action
The final piece to read when analyzing an order book is price itself. The price column will help you read support and resistance levels.
On the x-axis of the chart are the buyers, and on the y axis are the sellers. By looking at these two columns, you can see how much of an imbalance there is in the marketplace.
While reading an order book, if you notice something out of balance, you may want to take action in order to capitalize on this information. Some traders will use a moving average of a certain number of periods in order to see if the market will rise or fall over time. If your background is finance, you might use synthetic indicators based on momentum oscillators to help you time your entries and exits. The more technical approach to reading an order book is to go back and forth between the bid-ask prices and compare them to the price bar.
To read an order book, you’ll need to understand market volatility. If it’s high, there’s more buying, and if it’s low, there’s more selling. By reading price action, you can get a sense of how significant any given move in the marketplace is.
Reading charts through price action
There are two types of price action: high volume and low volume. Volume is the term used to describe the number of trades that take place in a given period of time. A maximum volume day will show a very high level of activity on a chart. This is often seen as a period of high volatility, and you should never invest money during these periods.
High and low volume can be seen as a bell curve. Low volume periods can be extremely misleading because the moves will appear to be volatile, but you could be looking at a very small sample size.
High volume periods are usually highly predictable because there are so many people involved in the marketplace. A trade must normally make money for everyone to take part in it. During high volume periods, you should always be careful about the market because there are so many people trying to make money at the same time. You can use this same logic when looking at low volume days as well.
How the price action works
So, how do you read price action? First and foremost, you identify what kind of action it is. After which you will identify what signal level was used. This will help you decide if that particular move was sustainable. This is where the order book can come into play. If you see that there’s a lot of volume on the ask side, then it’s unlikely that the price is sustainable.
The next thing to look for when reading price action is where the support and resistance lines are. Resistance is usually seen in the form of a valley or peak in price action and support is usually seen in the form of a peak or hill. When the price hits a resistance level, this is a good time to look for a pull back or a bounce. You can also use this time to get out of your position. The price will eventually get to the point where you want it to be and if it falls below support, you can expect a bounce from this area as well.
Final words
Using the order book and reading price action is how professional traders predict where prices will go next. They also make decisions on when to buy or sell based on how price moves.
Next time you watch the markets, take a few minutes to read the order book and make sure you are not standing on quicksand.
Story by Miriam Jensen
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