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Thursday, July 19, 2012

How to do technical chart analysis

When you here the term fundamental analysis you should be aware that it is mostly connected to various fundamental economic and financial indicators that show general health of a given economy. If you here the term ’technical analysis’ you can be pretty sure that the matter will definitely include technical charts of stocks, commodities or Forex paris. If you want to be a good technical analyst and a day, swing or trend trader you will have to learn to read the charts of securities you are trading. That will involve seeing major trend, major support and resistance areas, various major and minor ranges, reversal and continuation patterns and etc.  

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When doing any technical analysis you should start from longer term charts: monthly, weekly and daily. These will help you to identify major trends and even current trend a security is in. So, if we look at eur/usd monthly chart we will see that for many years it was in a bullish market. However, starting from 2008 we saw sharp reversals and the pair failed to make new highs. On the opposite, it started making lower highs and bombarding major support area of 1.2400-1.2000. 

If you look at weekly chart of the pair you will see that since November of 2008 it has been in wide ranges and the best way was to trade swings in the pair from the top of the range to the bottom of it. Knowledge about various reversal patterns would be of great use here. You know that you have to wait till the security gets to the top, forms a reversal pattern and you short below the pattern of candle formation. The same is true when the security visits the bottom. 

Now, if you go to daily charts you will see even smaller type of ranges (mid term ranges) that would enable you to trade more often as those present you more opportunities at shorter time intervals. Looking at the same eur/usd pair you will see break of a channel and possibility to go long and break of support and possibility to go short. 

You then go on to hourly charts: 4 and 1 hour charts. These help you to see small daily range breaks, short term support and resistance levels and various opportunities connected with that. You would either look for a level to hold (support and resistance not broken) or you would look for a breakout of a level. Hourly charts have more noises and a lot more false signals than longer time charts. 

You would then go to minute charts: 30, 15 and 5 minute charts. These are good for scalping and also for determining your entry and exit points. Even if you are a trend trader it is good to be as exact about your entries as possible and these small time frames will help you to achieve it. You also have to remember that these are full of various daily market noises and give you a lot of false signals. 

You should follow this top-bottom approach in your trades if you want to become a good technical analysis expert. You always start from longer time frames and go to shorter ones. 

Hope that was helpful.

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Trading financial markets carries a high level of risk, and may not be suitable for all investors. All information on the blog is of educational nature and cannot be considered as advice, recommendation or signals to trade in any financial markets.