Let’s discuss how we can make use of the information gleaned from a forex chart for trading decisions. Of course we can’t examine every single detail of this process in this article, but it’s possible to create a brief outline of what we need to do in general.
1. Determine the trend or the range
The first that you must do while examining a chart is determining the underlying pattern. If there’s none available (in the sense that it’s too complicated or difficult to analyze), you should shorten the timeframe covered by your analysis. By drawing support and resistance lines, noting the strongest ones that resist the greatest number of trials, and creating trend lines, we can eventually isolate a section of the market that we’d like to trade. This method is valid regardless of whether you’re a swing trader, long term analyst, or a scalper, because in each case you’ll make use of the same formations for profiting.
2. Draw the indicators
Once you decide the nature of the pattern that you desire to trade, you can pick your choice indicators from the toolbox that is suitable to the type of market examined – range indicators for range trading, and moving averages, MACD, and others for trend action. You can determine which of the indicators generate the clearest signals from your point of view. It is crucial to keep in mind at this stage that there is no right or wrong indicator in technical analysis. None of them provides error-proof signals, so choosing the easiest to evaluate signal is much better than trying to determine which one is correct with regard to the future. There is no way, after all, of knowing this in advance.
3. Pick your trade
At this stage there will be more than one opportunity available for exploitation. It is time to decide which one you would like to pick. This decision should depend mostly on your risk control strategy above anything else. Choose the option that presents the lowest risk/reward ratio.
It is not hard to read the charts, but a period of practice is necessary before you can make use of them with efficiency and speed. But reading charts and creating strategies with them should be one of the first things to learn as a trader.
Next step: Support and Resistance