How to analyze forex charts – step by step

So you want to learn how to analyze forex charts. Well it really isn’t a complex and difficult process as you might think. A forex chart mainly consists of time, price and usually candle stick bars. Which indicate the high, low, closing and opening price. You might be used to something like this.

 

Example of a forex chart and how to analyze it

Example of a forex chart and how to analyze it

Can seem a bit daunting when you first look at it, but it is actually very simple. Green bars means bullish price action, Red bars means bearish price action. For those who do not know bullish price movement means the price is going up and if it’s bearish it’s going down. The reason these particular bars are called candles is because they have wicks or tails as they are most commonly called.

In this example we see that the there are various levels which the candle stick can show.

How to analyze forex charts

How to analyze forex charts

You will see above the close, high, open and low price with the various parts of the candle stick. This can help you determine where price has been. There are many different methods to analyzing forex charts one of them is using what I like to call points of interest. These points of interest is where price has made the turn from up to down and down to up. Where price has topped dead in it’s tracks. These are usually the points I like to analyze my chars for because these are points I want to take trades from.

How to analyze forex charts – My Setup

So I am a core trend trader with a few additional filters in my strategy. I have a few basic rules. Here they are:

  1. Always trade with the trend never against
  2. Look for support or resistance near trend lines.
  3. Look for price to be near horizontal support and resistance.
  4. Qualify an overbought or oversold condition.
  5. Check news events to make sure nothing is conflicting within the next 2 days.

How to analyze forex charts – Applying the rules

So you may ask what all this is well I am going to show you over the next few screenshots. What all this is. I am going to look at the pair.  GBPAUD. So firstly I will move over to the 4 hours chart. So as of the 29 Jan 2018. This is what I have got on my chart.

So what i will look for is inflection points. Where price has turned around here below I will just draw some of them for you to make it obvious.

Inflection points on GBPAUD

Inflection points on GBPAUD

So you will see it’s a low in the period and the high in the period drawn in red. What I like to do is draw a trend line from the low going forward through at least three other points like in the below illustration.

Example trend line 4 hour GBPAUD

Example trend line 4 hour GBPAUD

So above I have drawn my line. So the trend I would be trading in is the uptrend. Now what you will see later on is what we call a break of structure or support. In this instance we need to question the trend. Surely if you think about it logically if the trend was really so strong in the upward direction wouldn’t it have bounced and continued. Well most likely yes.

So it hasn’t let’s move on to a different pair. This one just seems way to unpredictable at this point in time. You could go and drill down into lower time frame charts, but for me this is a quick and easy filter to decide if this pair is worth trading or not. So let’s look at something a bit more volatile with a bit more volume. I am going to head over to GPBJPY. So the current chart looks like this.

How to analyze forex charts – Moving over to GBPJPY

Example chart of GPBJPY

Example chart of GPBJPY

So let’s do the same with this char find the inflection points and draw our trend line. So here are the inflection points I identified.

Inflection points GBPJPY

Inflection points GBPJPY

So with these points I was not satisfied that i will be drawing an accurate trend line so I zoomed out a bit and ended up with this instead.

GBPJPY trend line setup

GBPJPY trend line setup

So thus far there has been no break of the trend. So at this point I am confident this trend is still strong in the upward direction. Also if you look at an earlier point in the chart there was a portion where the price could not even move back down to the trend line. I have circled it for you in the next screenshot if you have missed it.

Example of lower price rejection

Example of lower price rejection

This is all up to interpretation but this sort of move shows me that there is a strong up trend. So great the first confirmation is there. Let’s move on to my 2nd rule. We want to look for support and resistance. Of the horizontal variety. So I will draw them in and show it to you below. Horizontal support and resistance is just a point in the price action where price has reversed frequently.

So you will see there are a few of these. So this is where beginners just get so confused. Remember support and resistance provides no guarantee that price will change there. It just provides a place of high probability where price can reverse. So don’t say well it’s on support and a uptrend let’s buy into this sucker. You need more than that to be even more certain. Here is a typical point which I would look at, at this stage for a trade without bringing any of my other rules into play as of yet.

Circled area of GBPJPY

Circled area of GBPJPY

How to analyze forex charts – Points of interest

In this scenario the reasoning behind this is that there are 2 points of interest where the circle has been placed. If you had to assign 10% to the horizontal resistance and 10% chance to the trend line that this sucker is going up so far you would be 20% certain as opposed to the 10% you would have been if you take the trade at the current price. So which brings me to my next rule look for price to be near horizontal and trend line support and resistance. So at the circled point we got both so we so far half way through the rules. We now need to confirm an overbought or over sold condition. Well there are a few ways I like to do this for added confirmation.

How to analyze forex charts – overbought and oversold

So there are two ways how i determine this one is with an indicator called the RSI and the other is using price action(more advanced so will discuss this a little later on in this article).

So the RSI (Relative Strength Index) is an indicator which can show overbought and oversold conditions. For us to want to buy in we need oversold conditions. Which effectively means the market has no more sellers left so there are no sellers to compete with so the price will rise. So usually I would use a 9 period RSI as a standard and look at where the RSI value drops below 30. If it drops below 30 I deem the market to be oversold. If it’s above 70 I deem the market to be overbought. So this indicator has some merit but should never be used on it’s own. It really is just a quick and easy indicator to just give you that added bit of confidence.

So the next way I like to determine overbought and oversold conditions is using price action. How I spot this is by looking at the size of the candles. If they start to get smaller and smaller and price is moving less aggressively I will deem this as a slowing of the market which means the direction it’s going in in the short term is losing steam. An example of this will look something like this.

Flattened market

Remember this rule is only applicable in the opposite direction of the trend. If you see this in an uptrend and the previous movement was up this likely means it will continue to go up. If this is in an uptrend and the short term movement is down this might mean slowing. So make sure to distinguish between the two.

How to analyze forex charts – looking at news

So I like to look at the news. Just to be safe. I like a site called forexfactory.com. They provide all sort of news. Well for this pair GBPJPY I would want to check the major news events that might be coming in over the next two days before making any final decisions.

Source forexfactory.com

Source forexfactory.com

So the only big GBP news is 10:30 Tuesday. So that might be a huge concern because it is a BOE announcement which usually has fast moving price action. You could trade in the short term if the price is right at this point in time. However the price is not yet at the level I have chosen where I have circled. There could be two things that can happen the price will be slow up until the announcement and will shoot down to that level on the day of the news or it will reach that level and probably break that support level. Remember the news is uncertain and so is the direction of the price with these events. So exercise caution around news releases at all times.

My setup for the trade

So for this trade I would look at going long at around about : 152.00 flat. With a 200 pip stop I will scale my risk according to that to stay within a 2% total account risk level and my target will be 156.00 flat with take profit target of 400 pips. So this carries a decent risk to reward ratio.

Disclaimer

Quick disclaimer: Forex carries a high level of risk. The opinions expressed on my website and content on my YouTube channel are my opinions I am not a trained professional and you should seek professional help when making financial investing decisions. This article is purely educational.

Summary
How to analyze forex charts
Article Name
How to analyze forex charts
Description
How to analyze forex charts, I take you through my rules and strategy and how I go about anyalyzing my forex charts and trades on a day to day basis. How I decide which trades to take and more.
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TangentLife
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