Learning how to analyze forex charts is essential for forex traders including beginners to be successful.
After going through this article, you’ll be able to predict the direction of the forex market more accurately using basic price action.
You will also get rid of the doubts you face when you choose to share your analysis in public spaces, as your charts will look more professional.
We will now provide you with a simplified step-by-step guide that you can also use to analyze various forex charts.
Get ready to read Forex charts like a pro!
How to analyze a forex pair using Price Action
Price Action is a powerful tool that is a part of Technical analysis. Technical Analysis involves using various price indicators, forex chart patterns, and candlesticks to predict the direction of the market.
We have broken down the process of analyzing the forex charts using price action into 8 steps. Following these steps properly could help beginners learn how to analyze forex charts. They are:
- Look at the bigger picture of the chart
- Identify the current phase(trend) of the market
- Identify Major Price Structures
- Identify Minor Structures
- Confirm these structures with previous data
- Wait for the price to reach your zones
- Confirm your entry
- Place Take Profit and Stop Loss orders
Now these steps do not cover all there is to technical analysis but it covers a lot of the basics.
With these steps, traders can identify the overall trend direction and watch out for the zones that are most likely to hold. This means you can avoid entering positions at zones that can be manipulated.
We will analyze the AUDUSD pair following these steps and use the FXCM Trading Station App for our analysis.
You can use any trading software of your choice such as Metatrader 4 Software or the Tradingview Super Charts.
Now we discuss these steps below.
#1. Look at the Bigger Picture of the Chart
Switching to the daily timeframe to analyze the chart can be very important. This is because you get to see the “bigger picture”. That is, you get to see the trend, support, resistance, and all other technical indicators on a larger view.
Why? You don’t want to find yourself entering a long position when the price is at a daily resistance just because you did not see it.
The same goes for selling at a daily or monthly support.
The chart below shows the AUDUSD pair on the daily timeframe.
It’s important to view all these structures to ensure you aren’t trading against a major trend.
It may also help you identify the direction of the market. Now to the next step:
#2 Identify the current trend of the market
Identify the trend direction. Is it an uptrend, downtrend, or sideways correction?
The trend of the market has a huge role in whatever trading strategy is being used. For example, as seen in the chart below, in a trending market (uptrend or downtrend), continuation trading strategies are more likely to work.
But in a ranging market, reversals occur more often and have a higher chance of giving profits.
If you trade reversals, you will like to be in a ranging market, or at the peak or end of a trending market.
You identify the trend direction by observing the market moving sequence. An uptrend consists of higher highs and higher lows.
You can also identify the trend by looking at the chart with your eyes. But if you can’t do that, then you can make use of indicators like the moving average.
Now that you are done with identifying the market trend, you have to identify the major structures in the daily timeframe.
#3. Identify Major Price Structures
To analyze the higher timeframes (daily, monthly) you identify the market structures around the current price. You do not need to do lots of analysis here as you just want to ensure you aren’t trading against a major zone.
Mark out the closest zones that may affect the current price movement. It could be support or resistance, trend lines, Fibonacci levels, forex chart patterns, etc.
As the higher timeframes show more history, it will be easier to go back in time and validate structures. That is manual backtesting.
Because we told you that support and resistance do stuff doesn’t mean you assume it is automatically true. As you trade, learn the habit of validating public opinions on the charts.
Now that you are done with the daily timeframe, you switch to the lower timeframes. Most trading platforms save chart analysis. This means your structures on the daily timeframe will remain saved.
#4. Identify Minor Structures and Trends
Just as you did with the daily timeframe, you will analyze structures in your preferred timeframe of analysis now.
Switch to a lower timeframe (preferably 4hr or 1hr timeframe). The daily timeframe analysis you did has given you structures to watch out for and possibly the overall direction of the market.
But don’t forget, the forex market is fractal. That is, inside a bullish daily candle may contain various uptrends and downward corrections in lower timeframes. And it continues the same downwards.
This simply means an overall uptrend on the daily chart will contain downtrends.
So, you don’t go ahead and buy because you saw a bullish engulfing candle on the daily. You may just lose your capital on your first trade. This is quite common among beginners and even professional traders.
Mark out the nearby market structures, and identify the trend of the market just as you did above.
As you can see in the image above, the price is in a downtrend.
Now your charts may be getting messy if there are lots of zones. It may also get confusing. To get around this you may remove some indicators and replace them with a line.
For example, the Fibonacci retracement indicator can be removed and replaced with a line of any color to remind you that there is a Fibonacci level at that point.
You can also remove extra coloring, unnecessary lines, and visual effects added to indicators or analysis tools. This will make your chart appear neater and clearer.
#5. Confirm these structures with the previous data
Just as you did in the higher timeframes. Scroll back on the chart of the current pair you are trading.
Then check the zones that were respected the most. Was it Fibonacci levels, Support, and Resistance, or trend lines? Or does the pair do whatever it wants whenever it likes? This will help you understand the market better.
So, scroll back till you can’t. Look at various zones and levels. Retracements. You should notice Price respected some and did not respect others.
Does price do a lot of fakeouts (manipulation)? Are Fibonacci levels respected? What support and resistance zones are respected?
These are the kinds of things to check out for while back-testing manually. These groups of structures you have confirmed will make up your trading strategy.
Now that you have known the zones that matter for your currency pair, you move to the next step
#6. Wait for the price to reach your zones
Now in this guide, we use the basic market structures to analyse the chart. In most trading plans or strategies, there is usually an overall market definition. That is a detailed description of how the market should move at certain points.
For the scope of this article, we don’t make use of such trading strategies.
We simply observe price action and enter according to it. Don’t forget, it’s not about predicting the direction of price. It’s about making money from the market.
You can predict the direction of the forex market accurately and still lose a trade. This can be caused by many reasons.
Now watch your zones. When the price reaches a support, it should reverse and move up. Observe as the Price reaches your support or resistance zones, trend lines, etc.
#7. Confirm your entry
As the price reaches your zones, you can decide to place orders at those zones or you can decide to wait for further confirmation. Confirming your entry increases your chances of landing a winning trade. The candlestick is a very powerful tool for confirmation.
Since the candlestick shows the value of the price with more detail, we use it for confirmation. As the candles approach your zones, watch out for the candlestick patterns. For example, when you see a doji at your support, it shows that the price is reacting to that zone.
A subsequent bullish candle after the doji is a confirmation of a long trade. A bullish engulfing candle, hammer, and other reversal candle stick patterns can also serve as confirmation.
Price Action indicators such as Moving averages crossover and RSI can also serve as confirmation.
The downside to waiting for confirmation is being left out of successful trades. The price might move so fast without giving your confirmation signal.
Now even with confirmation, your trades could still go wrong.
It explains why professional forex traders take risk management very seriously.
That’s where the final step comes in.
#8. Determine your Take Profit and Stop Loss Levels
You have to prevent extreme losses that can wipe your account. But losses are a part of forex trading. Every forex trader will experience losses regularly. You can only minimize them. You can do this using a proper risk management system.
That is with your set risk-reward ratio system. With a proper risk-reward system, say 1:3, you can minimize losses.
A 1:3 risk-reward system means that your potential profit for each trade should always be 3 times greater than your potential loss when measured in pips. If a trade has a stop loss of 20 pips, then your take profit should be at least 60 pips.
With such a system, one win can cover up for 3 losses.
You should also consider your setup when placing stop loss and take profit orders.
For beginners,
A stop loss is placed at a level that invalidates your setup. For example, if the price breaks a support you expected to hold, your setup is invalidated. It’s best to place a stop loss below that zone to protect your money. The take profit works similarly.
You place the take profit at or before levels that are most likely to reverse a trade against you. You can also place it at a level where you feel you are satisfied with your profit.
Now you have learned how to analyze forex charts using technical analysis and basic price action.
Summary of How to analyze Forex Charts using Technical Analysis
Now that you are done with analyzing your pair, let’s give you a summary of the steps you just took.
You first switched to higher timeframes to view the overall picture of the market. There you marked out the important zones and determined the trend direction.
You did this to ensure you do not trade against any major zone that you would not have noticed on the smaller timeframes. You also scrolled back to ensure that the forex pair has respected the marked-out zones before.
After that, you went to the lower timeframes, marked your zones, and waited for the price to reach them. When that happened, you made use of confirmation signals to enter a trade.
Your entry was done while sticking to proper risk management rules.
We selected all these steps such as confirming the efficiency of your zones, waiting for confirmation, and using risk management to increase the chances of landing a winning trade in your favor.
This means you can still lose a trade after following these steps. But the chances are lesser when compared to trading like a beginner.
Frequently Asked Questions About How to analyze Forex charts
What are the three types of analysis in forex?
The three types of forex market analysis are Fundamental, Technical, and Sentiment Analysis. Algorithmic analysis is also used among forex traders.
How do you predict forex charts Accurately?
You can predict forex charts accurately if you can practice forex market analysis regularly. As the saying goes, practice makes perfect.
How do you master a forex chart pattern?
To master a forex chart pattern, you should go back on your charts and backtest that forex chart pattern over many timeframes and for different pairs. This will help you identify the pattern easily and know its strengths and weaknesses.
What is the best time frame to analyse Forex charts?
The best timeframe to analyze the forex charts is the 4-hour timeframe. This is because it filters all the noise experienced in the lower timeframes. Also, technical and fundamental analysis work better in the higher timeframes.
Conclusion
Finally, this is a guide for beginners to learn how to analyze forex charts using Multiple Timeframes and Technical Analysis. It helps traders understand the fractal nature of the forex market and how to use this in their favor. It also helps to understand the importance of backtesting and how to accurately predict the forex market movements.
References
Currency Manipulation – BabyPips.com
Manual Backtesting of A Strategy – FBS.com
Tips for Eye Health – WedMD.com
Forex Entry Methods – Trading Strategy Guides
Top Risk Management Strategies – IG.com