How To Do Technical Analysis

How to learn Technical Analysis in forex?

There are many ways to do technical analysis in forex, as explained many times throughout this course, there is no one way to do something in forex. What speaks volumes is the results of what you are trying to achieve; especially if the method(s) that you use works (complements) your trading strategy.

In forex trading, it’s advisable to do certain things before placing an order (trade). In fact, the list of things that needs to be done are all entailed in doing a complete technical analysis.

Video: How to Do technical analysis in forex pt.2

 

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Technical analysis in forex for beginners

Doing technical analysis in forex involves:

  1. Highlighting important structure mostly on higher timeframes (W1/ D1/ H4)
  2. Using rectangle tool to highlight supply and demand zones
  3. Observe where the price is currently at, and where it is going.
  4. Highlight price action patterns to add confluence to your technical analysis
  5. Color code you structure based on the respective time frames.
  6. Take note of how price is reacting to the structure its currently at in the form of a candlestick reversal patterns
  7. Update your technical analysis periodically
  8. Use price alerts
  9. Make use of the best trading tools available to you.
  10. Start from the highest timeframe down to the lowest (top-down analysis)
  11. Identify the primary and secondary trend

 Step by step guide on how to do Technical Analysis

Step 1: Highlighting important structure mostly on higher timeframes

Market Structures are an important variable in trading that should not be ignored. This is because market structures are the areas where price may reverse and change direction, as such, market structures are the areas best suited for entering trades and placing stop levels.

Horizontal line
Horizontal line

Step2: Using rectangle tool to highlight supply and demand zones

Supply and demand zones are market structures but are more prominent (important) than regular structures. Price tends to have sharp reversals after approaching these areas, as a result, more emphasis should be placed on highlighting supply and demand zones.

technical analysis in forex
Supply and demand zones

Step 3: Observe where the price is currently at, and where it is going.

Observing where price is currently at is important as this could prevent you from entering a bad trade. Remember, it’s a bad idea to enter a buy right below a resistance, and a sell right about a support. Likewise, knowing the intended direction of the market price is equally important as this can prevent you from doing counter-trend trades.

Step 4: Highlight price action patterns to add confluence to your technical analysis

Price action patterns are patterns formed based on how price reacted to the enclosing structures (ie: support below and resistance above). As such, these patterns are important to know as they can increase the probability of price going in a certain direction.

Ascending Triangle Price action patterns
Ascending Triangle

Step 5: Color code your structure based on the respective time frames.

Since technical analysis usually involves multiple timeframes, then it’s important to know which structure was formed on what respective timeframe. This is essentially important because structures on smaller timeframes are easier to break when compared to structures on larger timeframes.

Technical Analysis in forex
BLACK = D1 structure; GREEN = H4 structure

Step 6: Take note of how price is reacting to the structure its currently at in the form of candlestick reversal patterns

As explained in chapter 12: Candlestick reversal patterns, candlestick patterns are just as important as price action patterns especially since they work together in indicating the direction of price.

Price rejection in forex
price rejection at structure

Step 7: Update your technical analysis periodically

As price moves continuously, structures are created, broken, and retested. As a result, some market structures become irrelevant as time passes, while some others start requiring more attention.

Step 8: Use price alerts

Price alerts are used to “keep an eye” on the market while you are away from the charts. They give notifications via phone, email, or desktop whenever the market is at a price of your interest. This eliminates the need to constantly monitoring a chart.

Step 9: Make use of the best trading tools available to you.

Depending on the platforms you are using for your analysis, a wide range of trading tools should be available to use to assist you with your technical analysis. In fact, tradingview.com is the best forex charting platform due to the wide range of free trading tools that are available to you. On tradingview, you may even set price alerts on various trading tools (objects) such as trendlines, arrows, price channels, rectangles, etc.

technical analysis in forex
Trading tools

Step 10: Start from the highest timeframe down to the lowest (top-down analysis)

This method of technical analysis in forex has proven to be the best and most effective. This allows a trader to filter the excessive noise created by the market price movement while knowing what exactly price is intended on doing. Continue reading to know what is and how to do top down analysis in this chapter.

Step 11: Identify the primary and secondary trend

These refer to the impulsive and corrective move of the market price. Know the difference tells you which to follow. As such, tells you what type of position to open and where. The primary and secondary trend is the next topic for the following chapter in this online forex course for beginners.

What is top down analysis?

Top down analysis is the method of doing technical analysis in forex starting from the higher timeframes to the lower timeframe and is the best way of doing technical analysis. Top down analysis is the breaking down of chart data by analyzing The higher time frames down to the smallest.

Video: Top Down analysis trading strategy

What are the advantages of doing top down analysis?

Doing top down analysis allows a trader to see and understand what is happening in the market. This gives a future insight into what price may do, and where it may go in the future.

this goes without saying that top down analysis enables a trader to better estimate what price is doing (or will do) in the short run as well as what it may do (or will do) in the long run.

How to do top down analysis?

To do top down analysis, you should have at least two different timeframes that are important to your trading strategy. But for the sake of this forex course for beginners, a total of four timeframes will be used:

  1. Start with the higher timeframes. This will be your trend timeframe (D1).
  2. Move down to the immediate lower timeframe which will be your structural timeframe. (H4)
  3. Next is your behavioral timeframe (H1)
  4. Finally, look for entries on your entry timeframe (m15)

How to do Top down analysis step by step

Step 1. Do technical analysis on the “Trend timeframe”

The first time frame should be the biggest. Experiments show that using the larger timeframe as your trend following timeframe increases your consistency by at least two folds. You may use a bigger or smaller timeframe to suit your trading strategy. The principles in doing top down analysis are all the same. The trend on this timeframe is what you would want to follow. Any trades against the direction of your “trend timeframe” should be considered as counter trend trades.

Highlighting about two to four (2 – 4) structures on this timeframe should be enough. Of course, that doesn’t include the trendline. Two structures above price and two structures below price, along with the trendline (or price channel) properly drawn.

Step 2. Do technical analysis on the “Structural timeframe”

The immediate timeframe that follows should be your structural timeframe and is where most structures are identified. In this example, the H4 would be just that. About three to five (3-5) structures above and below that of price should be enough.

NB: You do not want to make your chart over crowed with unnecessary lines to the point it becomes confusing. That is defeating the purpose of technical analysis.

The structures being highlighted should be the immediate ones next to price. In other words, if the price is going up, the next resistance it hits should be one of your highlighted structures.

At this point, it should be noted that two horizontal (or diagonal) structures should not be overlapped. To put it differently, an H4 horizontal structure should not be where a D1 horizontal structure is already at.

Notably, when a horizontal and a diagonal structure cross each other, this is called an area of confluence. Continue reading to know more about area of confluence.

Technical analysis in forex
Area of Confluence

Step 4. Look for price action patterns on “behavioral timeframe”

The behavioral timeframe is self explanatory, as this is the timeframe where you would most spend time observing the behavior of price as it moves. On this timeframe price actions patterns are more abundant compared to the H4 and D1 but are not as reliable as explained in chapter 11: price action patterns

Not many structures are highlighted on this timeframe, and even if there are, the lifespan of these structures does not last long. Meaning the highlighted structures on this timeframe are more of “in the moment“. After the passing of the moment, the structure becomes irrelevant and can be deleted (should be deleted to avoid a crowded chart).

Step 4. Always enter on your “entry timeframe”

When all the “stars are aligned” (D1, H4, and H1), finally you move on down to your entry timeframe which should be your lowest timeframe. In this example, it would be the m15 timeframe. When all the technical analysis on the different timeframes indicating price is going up (or down), then move down to the entry timeframe, and look for the most recent broken structure, and wait for the retest of that structure.

This is how you get sniper entry which is a topic that is presented in detail with tutorial videos in a later chapter in this free online forex course.

What is an Area of Confluence?

An area of confluence is the area where multiple structures of different or same timeframes meet (converge). To clarify, when a horizontal D1 structure crosses a diagonal H4 structure, this area is called an area of confluence.

Technical analysis in forex
Area of confluence

How to find high probability confluence zones?

You can find high probability confluence trading zones by simply drawing a (diagonal) trendline and a (horizontal) structure. The point (or area) where these lines meet are identified as high probability confluence zones (or area of confluence).

How to trade area of confluence in forex?

The best way to trade area of confluence is by looking at the market from different perspectives.

For example, there will be traders trading the break and retest of the horizontal structure, and another set of traders trading the retest of the trendline. As a result, multiple trades will be entered in that area of confluence by different traders around the world, which will give an increase in the probability of price going in the respective direction.

Video: Area of High Confluence

Forex trading: Area of High Conflue...
Forex trading: Area of High Confluence | How to find high probability trading zones

Important things to know about area of confluence

  1. Doing technical analysis allows you to find an area of confluence.
  2. Price has a very high probability of reversing at these zones.
  3. The more structures converge at this area, the stronger the area, likewise, the higher the probability of price reversing
  4. Areas of confluence are potential reversal zones, where counter trend trades have a high probability of success.
  5. There can only be one horizontal structure, but multiple diagonal structures in the area.
  6. The higher the timeframe of the structures in that area, the stronger the area of confluence. For example, an area with 4 structures mainly from the higher time frames (2x D1 + 1x H4 + 1x H1) is stronger than an area with 6 structures that are mainly from the lower timeframes (4x m15 + 1x H1 + 1x H4)

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