A prerequisite for trading the forex market is the ability to read a currency chart. In this article we cover the basics of forex charts – what the chart measures and what it can reveal about the relative strength of a currency.
To begin, a chart is simply a historical representation of the price of a security over a given period of time. Simply put, a chart shows how price of the currency (reflected on the vertical axis) has fluctuated over time (captured on the horizontal axis).
Let us take the example of a EUR USD chart to make this more specific. Remember, currencies trade in pairs so the exchange rate reflects how many dollars can be purchased with one euro. The current exchange rate is roughly 1.29, which means each euro is worth 1.29 dollars.
Markets celebrated throughout the world last week when the European Central Bank decided to follow the lead of the US and the UK by printing money by the bucketload.
The euro, since it has existed, has been a strong and reliable currency. This isn’t because of the underlying governments, which are as bad as governments anywhere. Nor is it because the economies have been strong or weak. It’s because the Germany’s influence on the ECB prevented it doing anything idiotic, such as printing money, buying sovereign junk debt, or keeping interest rates at absurdly low levels.
As a result, the US dollar fell from 1.07 euro at the start of Bush Jr’s term to 0.77 at the end. The result: a 28% decline in the value of the US dollar. It would have been over 40% if the financial crisis hadn’t been engineered.