The initial step in technical analysis would be to learn to read the charts. Here are some basic lessons to guide your early attempts.
When first analyzing a currency pair, search for the prevailing trend. Begin with the long-term charts (monthly, weekly, and daily), returning for several years. Because these charts have a greater amount of data, they offer a clearer picture of what the currency pair is doing compared to short-term charts (hour, half-hour, 15-minutes, or 5-minutes). The additional data also makes exactly what the indicators are telling you more reliable.
Identifying the popularity is simple: just look at the chart and choose if the graph is going more up than down, or even more down than up. Trends could be steep or shallow, years long or weeks short. Practice identifying them, and locating the points where they change direction. The longest-term trend may be the strongest, which is another reason for taking a look at those charts first.
Even when youâre scalping or day trading and donât plan to hold a position longer than an hour or so, youâll do better by trading within the same direction as the prevailing trend. So take time to identify it on a minimum of the daily charts before beginning. Thereâs an old traderâs saying: âThe trend is the friend.â Itâs not a lie.
Once youâve identified the popularity in the long-term charts, compare by using what you see in the short-term charts. Youâll discover that there can be any number of intermediate-term and short-term trends inside the path set by the prevailing trend. The graph will waver down and up but overall it will stick to the path set by the longest-term trend.
Next, discover the support and resistance levels, what are âfloorâ and âceilingâ points on the graph, respectively. They are key points on the chart in which the price repeatedly refuses to break through, or simply peeks through then gives up your dream. The price will go just so high approximately low, but no further; it reaches that time then changes direction. The greater times that happens, the stronger the support and resistance are.
Draw a straight line, in both your mind or on the chart, passing through the majority of the support points. Then draw another passing through the majority of the resistance points. This gives a picture of the path the currency pairâs trend is following, known as a price channel, and itâs an easy but powerful tool to assist determine how that path continues.
When support and resistance are strong, the graph from the currency pair seems to bounce along sideways between the above lines like a pinball. When this happens, the currency pair has been said to be range-bound. As this happens 80% of times, many people simply trade within channels, even though this technique doesnât deliver any jackpot profits.
Wrinkles donât have to be level. Sometimes the currency pair is trending down or up, but still moving within that channel. However itâs slanted, you are able to still trade within that range.
Whenever a currency pair breaks from a price channel, sometimes it falls into the channel, and sometimes it gains momentum and keeps moving. This last is known as momentum market, and itâs another way to trade the range: set an entry order for that price to break out, either below or above the channel, then relax and let it ride.
Congratulations-you i can say that the most important elements of basic technical analysis!