When I am approached by traders for forex mentoring I have noticed that many seem to have issues in how to break a chart down.
Chart analysis is the basis of dynamic trading and if a trader is unaware of this process in their trading routine then it is likely to throw the rest of their analysis off and subsequently give false reading.
The technical trading approach to analyzing charts is to identify which direction is the price moving. The steps below is a procedure you may wish to follow.
1. Identify the major trend.
2. Identify the minor trend.
3. Identify the support levels.
4. Identify the resistance levels.
There are many ways to identify trends but a simple process is to look for higher highs and higher lows for an up trend and lower lows and lower highs for a downtrend.
Once you have determined the direction of the trend you need to analyze an entry point to trade in the direction of the trend. Trading against a trend is risky and should only be executed by experienced traders. New traders trading against the longer term trend will find they will tend to lose money fast. Trading against a trend is like driving in the wrong direction up a motorway.
Indicators such as RSI, MACD, Stochastics, Moving Averages and Bollinger Bands can all help in trading but this can also cause what is known as paralysis of analysis. Too much information will only lead to confusion. Keep trading simple and follow rules.
