What we know as Forex chart analysis has come from stock traders. It is the result of decades of struggling, blood and tears of stock traders who invented a science that now works for us and enables us to locate buy/sell signals on markets’ price charts. Fortunately, you can now learn all chart analysis techniques through one article. Spend a few minutes to read this article entirely and start analyzing the charts with the techniques you learn here, and you will see that you can also locate the trade setups. In this article, I have tried to keep the work as simple as possible. Complicated chart analysis techniques and systems can only make you lose money.
What Is Forex Chart Analysis?
Chart analysis which is also know as technical analysis is not different in Forex trading. Therefore, there is no such a thing as Forex chart analysis. As I explained above, what we know about chart analysis has come from stock trading and have been invented by stock traders because stock trading has been introduced to public several decades ago, but Forex trading, the way we are doing it from home and using our personal computers, became accessible to public since the Internet entered our homes, which cannot be more than 25 years ago. Even at that time, we couldn’t trade currencies using the Internet and our computers because trading platforms were invented years later and people could open live accounts with Forex brokers since about 20 years ago. However, it won’t create any problems if Forex traders think that there are special chart analysis techniques for Forex trading.
So, what is Forex chart analysis?
Forex chart analysis is the science of analyzing the Forex market’s price charts to guess or forecast their next direction. For example, let’s say you want to know whether Euro’s value will go up against US dollar or not. You refer to the EUR/USD price chart that shows the fluctuations of Euro to USD rate. You apply some chart analysis techniques to analyze this price chart to come to one of these conclusions:
- Euro’s value will go up against USD.
- Euro’s value will go down against USD.
- Euro’s value will go up and down against USD, within a special range.
- I don’t know and I cannot make any forecast or conclusion.
All of the above conclusions are good when they are correct. The first one tells you to buy and the second one tells you to sell Euro against USD. The third one tells you either to stay away from this market, or buy and sell inside the range when there is a buy and sell signal inside the range. The last one tells you to sit on the fence and wait for the market to form a buy or sell signal that you can locate and distinguish. Among the above conclusions, the last one is the wisest and has no risks. When a Forex trader comes to this conclusion that they must wait, it means they have also developed the discipline they need to trade. Forex trading is not just the chart analysis techniques. It is more psychological than technical. So, when you learn to stick to your rules and wait when the techniques and science tell you to wait, it means you are becoming a good and disciplined trader that will become consistently profitable eventually.
Now… before we start our Forex chart analysis lesson here in this article, if you are really new to Forex trading and you don’t know what Forex is all about and how it makes money for Forex traders, please read these articles and then come back to read the rest of the current article:
- What Is Forex and How Do Forex Traders Make Money?
- Is Forex Trading a Good Way to Make Money?
- Is Forex a Pyramid Scheme or Has Nothing to Do With It?
- Is Forex a Ponzi Scheme? Are They Linked to Each Other?
You can also watch this video to learn about Forex in just one video and start demo trading right away to get ready to trade with real money.
What Are the Most Important Components of Forex Chart Analysis?
As I mentioned above, I always try to keep this so simple. You must keep the Forex chart analysis simple, otherwise you will lose more than what you gain:
Price chart is the most important part of Forex chart analysis:
There are different kinds of price charts:
- Point & Figure
Do we need all of these to trade Forex?
No. We only use candlesticks and sometimes line chart. That’s all. Remember that we wanted to keep everything simple because simplicity works. Those who try to follow too many things, they lose more.
When it comes to price chart, there is another thing that you must know: time frames
In Forex trading, each price chart is linked to a special time frame. There are one minute to 30-minute time frames, and then one hour, four hours, daily, weekly and monthly time frames. Time frame is the period of the time that the price chart shows the price fluctuations in it. For example, in a one-minute line chart, a line connects each point that the price has closed, at the end of every minute. Connecting these points to each other by a line creates a line chart. This is the EUR/USD line chart:
In other time frames, just the length of the time is different. For example, in a one hour line chart, a line connects the points that are the market’s close price, at the end of every hour. As you can see in the chart above, connecting these points creates a line chart that shows lots of ups and downs, highs and lows, or peaks and valleys. These highs and lows are the things we needs to analyze the charts.
There is another kind of price chart which is the most favorite for Forex traders. It is called candlestick chart. Candlesticks have to be discussed in different articles because they have several different shapes and patterns that have to be explained in detail. However, in Forex chart analysis, we just need to know that each candlestick shows four prices: open, close, high and low
In each time frame, each candlestick shows these four prices for every unit of the time frame. For example, when the chart time frame is set to one hour, each candlestick shows the open price at the moment that the candlestick was opened, the high and low price while the candlestick was forming, and the close price at the moment that one hour was over and the candlestick closed.
Trend is one of the most frequent terms in Forex chart analysis because many of the successful Forex traders follow the trends. They say, “no trend, no trade.”
There are two kinds of trends:
There is a third kind of market, when we take the term “trend” into consideration: sideways market
So, the Forex market either goes up and forms uptrend, or goes down and forms downtrend, or goes sideways.
Uptrends form when the price goes up and forms higher lows or higher valleys:
Downtrends form when the price goes down and forms lower highs or lower peaks:
Support and Resistance
When you learn about trends, you can understand the meaning of support and resistance lines too. Support and resistance are the lines that show us the way in Forex chart analysis.
A support line is the level that doesn’t allow the price to go down. When the price reaches this line, it usually bounces up. However, if the price succeeds to break below this line, it is a sell signal or short trade setup. We usually plot the support lines under uptrends. We do it by connecting the higher lows of uptrends. When a candlestick closes below a support line, you can take a short position or sell:
A resistance line is the level that doesn’t allow the price to go up. When the price reaches this line, it usually bounces down. However, if the price succeeds to break above this line, it is a buy signal or long trade setup. We usually plot the resistance lines above downtrends. We do it by connecting the lower highs of downtrends. When a candlestick closes above a resistance line, you can take a long position or buy:
You should connect the most visible lows and highs to plot the support and resistance lines respectively. This is where you become a Forex chart analysis expert. Novice traders try to connect all highs and lows to plot too many support and resistance lines that many of them are invalid and too weak, and therefore, their breakouts form false sell and buy signals. To avoid making these kinds of mistakes, first you must avoid overanalyzing. Second, you must zoom out on the price chart to see the bigger picture of the markets. Many traders are used to zoom in a lot, so that even candlesticks get deformed. This mistake makes you plot wrong and invalid lines on price charts. The magnification that you see on the charts above is the best for analyzing and seeing the correct support and resistance lines.
Plotting support and resistance lines is the foundation of Forex chart analysis. Now that you know these lines and you know how to plot them, you can go to the next step which is learning the chart patterns.
As you saw in the charts above, the price doesn’t go up and down in a direct and straight course. It doesn’t move up and down, even when the overall direction of the market is up or down and the market is trending up or down. When markets move sideways, they form ups and downs too. These ups and downs and highs and lows form chart patterns. When the market is trending, it sometimes moves sideways to take a rest and form a correction or consolidation, and then it will continue the trend. That is the time that you can locate the consolidations or corrections to follow the trend, when the market wants to continue the trend.
In Forex chart analysis, usually we don’t know when the market wants to trend, unless it forms a too strong trade setup before it starts the trend, which is something that rarely happens. However, we can wait for the markets to start a strong movement and then slow down to form a consolidation. Then we can wait for the consolidation breakout to follow the trend. This is where knowing the chart patterns helps because consolidations or corrections are where the chart patterns form. Some traders focus a lot on knowing the chart patterns, their names and the related rules. But you will only lose money if you do so because the Forex market doesn’t care about the chart patterns you locate and the rules that you have memorized. It moves on its own way. All you must know is to locate the proper and valid support and resistance lines, and then waiting for their breakout and retesting. I will explain this more here in this article. Just make sure to read this article to the end before other so-called Forex traders or technical analysis gurus make you waste lots of time and money.
Here are the most famous chart patterns in Forex chart analysis:
- Double Tops
- Triple Tops
- Double Bottoms
- Triple Bottoms
- Head and Shoulders
- Ascending, Descending, Symmetrical Triangles
- Ascending and Descending Wedge
- Flags or Pennants
- Cup and Handle
- Christmas Tree
I can waste years of your life on learning these patterns and the related trading rules. But I don’t want to do it because I have simplified my own trading style and I only focus on the things that matter in Forex trading. Keep in mind that you trade Forex to make money, not to get a Forex PhD and become a Forex professor in the university. Most people learn Forex chart analysis in a way as if they are supposed to get a Forex PhD and become a Forex professor. They do it in a way that they forget the main and initial purpose of learning Forex. Didn’t they start learning Forex to make money? Most of the things they learn will result in nothing but continuous losses.
So, let’s keep everything simple because simplicity in Forex trading has worked for me. I have seen Forex and stock traders who have been losing money for over 25 years and they are still losing money, but they still buy and read 3000 page books about chart patterns, indicators, candlesticks, etc. Don’t be one of them if you don’t want to be a loser like them.
In the chart below, you can see most of the chart patterns I have listed above. But it doesn’t matter if you cannot distinguish them in this chart. All you need to do to become able to trade is to locate support and resistance lines. It doesn’t matter what chart pattern is below or above the lines. You just need to plot the lines and wait for their breakouts. If a candlestick closes above a resistance line, you will have a buy signal or long trade setup. If a candlestick closes below a support line, you will have a sell signal or short trade setup. This is the essence of Forex chart analysis. You don’t need anything more than this if you really want to trade Forex to make money:
Support/Resistance Breakout and Retesting
When a candlestick closes above a resistance line, it is called resistance breakout and you will have a long trade setup or buy signal formed on the chart, and visa versa. After the breakout, sometimes the price reverses to retest the broken line and then it follows the breakout direction. Here below is the example of a resistance breakout and retesting:
Stop Loss and Target
Stop loss and target are the topics that have to be discussed in other articles because they cannot be placed under the “Forex chart analysis” title. However, to give you a clue, I have shown the stop loss level in some of the charts above. In general, stop loss has to be placed at the level that it becomes triggered by the market only when your analysis is 100% wrong or the market’s conditions have completely changed. Therefore, I usually place my stop loss below the last low or valley, in case of a resistance breakout, or above the last high or peak, in case of a support breakout. Such a stop loss is a must, no matter what Forex trading strategy you are following.
I will explain about these topics in some other articles. Just make sure to submit your email address using the form above to get notified when we publish new articles.
Forex chart analysis analysis is about the price chart only. Indicators have nothing to do with chart or technical analysis. Some Forex traders add too many indicators to their charts which is another big mistake most Forex traders make. I have never seen a winning Forex trader among those who have more than one or two indicators on their charts.
I usually have two indicators on my charts. One is Bollinger Bands, and the other one usually is RSI(9). I don’t look at the second one most of the time. But I am used to have the first one on my charts, although I can trade without it too. I use Bollinger Bands for two reasons. When a strong candlestick reversal pattern, like Engulfing Pattern forms on the chart, I take it as a trade setup only when there is a strong Bollinger Bands breakout by the candlesticks that have formed the Engulfing Pattern. Additionally, I take a pattern that is known as Bollinger Bands Squeeze which is a strong pattern that helps me to follow the trends (read this).
I have RSI(9) on my charts just to follow RSI Divergence and Convergence, although they are risky chart patterns if you don’t know how to use them because they are reversal patterns that taking them is usually risky. I am mainly a trend follower. Reversal signals and chart patterns like RSI Divergence and Convergence are risky because the price can keep following the trend’s direction even when these patterns and signals form on the charts.
Start Analyzing the Forex Charts
What you learned above was the essence of Forex chart analysis, the way that professional and consistently profitable traders do. If you really want to make money through Forex trading, you must follow what you read above. But if you want to waste time and lose money, then you can google for different Forex trading strategies, indicators, robots, etc. that are developed and published on the Internet by marketers who pretend to be Forex traders but they are scams. You will come back to this site after wasting lots of time and money if you don’t listen to this advice. Forex chart analysis is a science and Forex trading is a skill. It is not a get-rich-quick scheme. Choose the right track from the beginning.