Have you ever been forced to change your trading strategy? Are you still looking for a technique to analyze price charts? Do you have uncertainties about using analytical tools? Most traders don’t pay much attention to their technique and constantly change their analytical tools, without knowing how to find trading opportunities. They just search for signals and hope for the best. In this article you will learn how to analyze price charts efficiently with just 8 methods. These 8 methods will help you understand each price chart. Remember that you don’t need to apply all 8 methods at once. Choose two or three and try to combine them.
Pay attention to longer timeframes
If you are looking for a trading opportunity in the 4-hour or hourly timeframe, it’s best to start analyzing from weekly or daily timeframes to have a long term overview. What seems to be a strong trend in the hourly timeframe, might just be a slight movement in the 4-hour timeframe. Addtionally, traders who don’t pay attention to longer timeframes usually neglect some important resisting and supporting zones, hence they face problems later.
The zoom level and chart scaling is also important. Zooming to an appropriate level could help you have a big picture of the market. In the figure below, a head and shoulders pattern has formed in the hourly timeframe, which is formed on point 4 in the daily timeframe. You can easily find key levels by checking longer timeframes and find the best spot to open a position.
Highs and lows
Identifying highs and lows could be advantageous for many reasons. First of all these price levels are identified by most traders whether they are technical or fundamental. They use these highs and lows to find reversals and trends and to enter trades. Traders also use them to place stop loss and take profit. In addition, all price chart patterns could be found with these highs and lows.
Supports and resistances
Traders tend to draw a lot of resisting and supporting zones, which is a common mistake. Focus on reversal points and update your charts constantly. You could also mark key levels close to the current price and don’t get obsessed with every little movement. If you draw a lot of lines on your chart, you will get confused.
Channels and trendlines
Channels and trendlines are essentially similar to supports and resistances and are the essence of many price chart patterns such as corner and triangle. Trendlines can be drawn in upward and downward directions. They can also be used to measure the strength of ongoing trends. When the price breaks an ascending or descending trendline, it shows the strength of market’s movement. The break of a trendline also indicates the beginning of another trend, in case the price isn’t able to continue the last trend.
As you may already know, moving average is a powerful analytical tool, and can be used in several situations. First of all, you have to identify on which side of the moving average, the current price is located. If the price is above the moving average, the market is in an uptrend, but if the price is located below the moving average you are probably in a downtrend. In most strategies, moving averages can be used as directional filters. You would also want to take the distance between the current price and the moving average under consideration.
The more distant the price is from the moving average, it usually is a sign of more powerful trend. Traders also use moving average for generating signals. The break of a moving average or several moving averages intersecting usually shows that the market is reversing. Moving average could be considered a support or resistance.
To understand the market condition better, you have to specify the market fluctuation levels. There are three methods to analyze fluctuations:
- Price information: Are candles short or long? Do they have long shadows? Longer bodies and shadows for candles means more volatile market.
- ATR indicator: This indicator analyzes the prices. If the ATR indicator is high, it shows the strength of the last movement. On the other hand if the ATR is low, it shows a range trend.
- Bollinger band: If the Bollinger band is wide, it shows the growth of fluctuations. But if Bollinger bands get close together and become narrow, they show that fluctuations are damping. The relation between the price and outer Bollinger bands is also important. If the price is able to exceed the outer bands, it could be a sign of a strong trend.
Generally, traders use market fluctuations to manage their positions. When the market is volatile, traders usually place their stop loss and take profit widely. On the other hand, when the market is calm, traders place their stop loss and take profit closer, since the price variations are smaller.
Trend strength and momentum
It is important to understand the strength of a movement in market. To predict whether the trend will go on or change, you must have a solid understanding of market’s momentum. You should know when to keep a position open, close it or even add to it. There are three tools for analyzing the market’s momentum:
- RSI indicator: This indicator compares the strength of movements in the market. If the RSI indicator is above 50, it shows a strong uptrend and if it’s below 50 it indicates a strong downtrend.
- ADX indicator: This indicator is probably one of the most common indicators to study the strength of market movements. If ADX is below 25, the market is in a range trend. If ADX fluctuates between 25 and 50, it is a sign of strong trend forming. If ADX moves above 50, it indicates a very strong uptrend or downtrend.
- Stochastic indicator: Although some believe that Stochastic indicator is an oscillator, but it also gives us information about the market’s momentum. If Stochastic stays above 80 or below 20 for too long, it is a sign of a strong trend. Despite what most traders think, this indicator doesn’t show the overbought and oversold levels, but it shows market trends.
Divergences and reversals
Divergence is a powerful concept, since it provides information about the future. Divergence shows momentum reduction in the market, even if the price is at its highest or lowest levels. When the market’s momentum decreases, divergences usually are a sign of the end of a trend. The below chart shows that although the market was in a downtrend, the RSI indicator has predicted it accurately that the downward momentum is reducing and an upward divergence has formed between points 18 and 32.
There are numerous ways to analyze a price chart. But the most important thing is to choose the ones that suit your strategy best and master them. Knowing two or three analytical methods completely is better than knowing ten methods not knowing how to use them practically. And as always practice makes perfect. Try to practice technical analysis. You could also create a demo account and practice your strategy and your technical analysis knowledge at the same time.
In Aron Groups Broker, traders are allowed to trade several financial instruments such as energy, commodity, metals, cryptocurrency and currency pairs. Traders are allowed to create a completely free demo account to practice the art of trading and master their abilities before entering the real market. This way you could minimize your potential loss from financial markets.
Written by: Mohsen Mohseni (Aron Groups).