FOREX CHARTING

On this page I present a small FOREX Charting course, going through the most basic elements of FOREX Charting. The charts here are courtesy of Dukascopy, a broker I am NOT in any way affiliated with. I neither endorse or reject Dukascopy, although they are generally considered a top-notch FOREX broker.


I will first explain a few thing about the way Dukascopy charts work:

• The chart defaults to EURUSD, 1 min bars, 100 bars.


• Moving your cursor on to the chart brings up two buttons in the top-right corner of the chart - Detach and Options.


• Detach opens a new window for the chart so that you can resize it to your taste.


• Options opens a small new window with chart options

The Options are as follows:

• Currency Pair


• Bar Frequency


• Number of bars on the chart


• Chart Types


• Osc - Add an Oscillator, opens list box of oscillators


• Values - Shows values on axes


• Rfi - Remove weekends and holidays
  

The available oscillators are:

• Volume


• MACD, use 13, 26, 6


• RSI, use 14


• Stochastic, use 14


• Slow Stochastic, use 14


• Momentum, use 9


• UOS (Ultimate), use 7, 14, 28


• CCI, use 14


• Simple, use 3, 10


• ADX, use 14


• MA, use 20

Be patient, because the charts are slow to refresh. Also they don't automatically update when you have selected an oscillator. Now when you know how to use the charts I will show you how to take advantage of the information presented to you from the chart and indicators. See the chart below:

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If you haven't already, choose Chart Type Candlestick. Study it closely and try to memorize the shape of the curve. Now choose Chart Type P&F (Point & Figure) instead. You probably need to have 3-400 bars on the chart to make it look right. Toggle between the two Chart Types and notice the differences. The reason they are so different are the basis of the Chart Type. A candlestick chart is a time based bar (in this case) and the P&F is price based. Think of the P&F as square building blocks (boxes) that you put on top or below each other as price moves. The advantage with this approach is that it disregards time and focuses entirely on price. The problem with time is that is has nothing to do with trading activity, only in the sense that certain announcements are made at specific times of the day. I personally trade activity based bars (tick bars) for this reason, but since they are not widely available on Forex Charting platforms, P&F can be an alternative and advantage.

I will now continue to show you an example of a Trading System with time based bars, simply because very few Forex Charting platforms (if any) allow to plot an oscillator based on P&F.

What every trader is looking for is a reliable and robust Trading System. As you should have understood by now, there is no 100% profitable Trading Systems. A brilliant system will get you 70% profitable trades and a reasonable drawdown and these types of systems are very hard to develop. What I will show you here is a system that performs decently just in order to show you how FOREX Charting works.

Now, first detach the chart and then maximize it - it will resize the bars automatically. Add RSI of 9 bars. Choose a time frame of 10 min and 400 bars to display. Due to the limitations of these charts we can only work with divergences. A divergence occurs when either:

• Price makes a higher High but the oscillator (RSI in our case) makes a lower High, i.e a bearish divergence.


• Price makes a lower Low but the oscillator makes a higher Low, i.e a bullish divergence.

Remember that the RSI works on the Close, so we are not interested in the High or Low. Look at the image below and the orange lines representing the three divergences that occurs in the chart below (based on the Close).

The first divergence will be difficult to trade, but with some experience you should come out at breakeven. The other two should net you a decent profit, nothing spectacular but still. This Trading System is perfectly tradeable but needs a fairly cool head and cold nerves, because you will have difficult to make any profit from about half the trades. This type of Trading System generates profit only when the trader is very good at Risk Management. On the other hand it is supremely easy to trade.