Strategizing and laying in wait for the right time to strike a good trade on a forex currency pair does not come easy. It is even more difficult when you do not know where to start from with respect to analysis. New traders mostly rely on experienced traders for the outlook of a forex currency pair; but who would not like independence on such a topic.
Analyzing a currency pair to strike good trades only comes to you simpler when you put in the effort and do it repeatedly. The sole aim of this website is to make you an independent trader, hence this post is aimed towards assisting you in printing out analysis that brings out good outcomes on your own.
In price action analysis; a lot of work must be put in when analyzing a forex currency pair with consideration to the timeframe, view of the chart, market type, price level, history of the currency pair and upcoming economic news.
Timeframe of the forex currency pair matters!
You need to know the kind of trader you are and which timeframe suits you best to start with. Your most comfortable timeframe may come to you through making a firm decision or through trial and error.
My most comfortable timeframe which is the 4H, came through trial and error. That said, multi-timeframe analysis is the most recommended. This way, if a forex currency pair is trending lower in say the 1H timeframe but trending higher in the Daily timeframe, you get to know the overall trend of the pair.
In multi timeframe analysis however; it is worthy to note that you need to double the effort of analysis in the timeframe you would be taking a trade. After you’ve discovered your most suitable chart, the view of the chart is the next thing in line.
Chart view. Wide or narrow?
This would mostly be dependent on the device that you are using. Wider screens are always recommended for price action forex currency pair analysis. A small screen from a device like a 5-inch screen phone, may hinder your progress when trying to perfect the act of analysis.
Important market structures may stay hidden since a small screen will not show you enough to give you a validation of the structure. As widely known PC’s give the best screen size available with added functionality.
As you can see from the two EURUSD snapshots above; analysis on PC would give us a better chart view for price action analysis. Not only does the PC chart go further in history but the view is also cleaner!
Use the ‘zoom’ button as and when needed when trying to analyze a particular pair on the market. Sometimes, you may need to ‘zoom in’ in order to see that candlestick clearly and other times; you may need to ‘zoom out’ to get the whole picture of the story the chart is telling.
Current level of price.
A very important question you need to give an answer to when analyzing is; “What level is the pair currently at?” The two most important levels in price action analysis are the support and resistance levels. Knowing which of these levels a currency pair is trading at cuts the complexity of analysis into half.
After identifying the level, you would need to strike your trade plan. That is, what you would do if any there’s any sort of price reaction on those levels.
Suppose EURUSD was at a support level; you can decide to sell if the support is broken or buy if it holds on the support. Conversely, if it was at a resistance level; you can decide to buy if resistance is broken or sell if it holds on the resistance.
One thing you also need to note is that, you can’t try and apply all the above scenarios to your trading else you would fail woefully. You would have to decide whether you are a breakout trader or a reversal trader and use one scenario at a single level at a time.
Using all would only cause you to be good at analysis and bad at trading.
Going on, If you do not know anything about the type of market you are trading; you are setting yourself at a huge disadvantage. With respect to how a forex currency pair moves, there are solely two market types.
A currency pair is either trendy or rangy. You have everything to do with a trendy market and you ought to have nothing doing with a rangy market. In trending markets, the currency pair is either on a downtrend or on an uptrend.
Trending markets provide a smooth and a fair amount of movement. Once you have figured out the direction of the trend, the plan is to trade with it to put yourself at an advantage. The alternative plan is to be on the lookout for a break in the trend and time where the trend will reverse.
Ranging markets should be avoided at all cost unless you are the exception (strictly a range trader). A forex currency pair ranges because neither buyers nor sellers are in control so there’s a struggle to gain momentum.
Markets that are ranging tend to be choppy so if you place a trade in one, you may find yourself in a locked position. You need to always wait for a range to break and turn into a trend to trade. It is worthy to note that all chart patterns are different kinds of ranges; that is why you wait for a chart pattern to break before trading and not trade within it.
History of the forex currency pair.
The history of the currency pair matters a lot; and it is part of the reasons why you need a wider screen to trade price action. Always look back to the left of the chart to see what the market did in the past depending on your timeframe.
From lower timeframes; you need to observe the history in the past days and from the higher timeframes; you need to observe it in the past weeks or months. Below is why you need to do this.
A market that has been trending for a while may be setting up for the next phase which is a range. A ranging market will also possess a high probability to breakout and turn into the trending phase. Once you figure out the history of the market you put the odds in your favor.
Fundamental analysis should be done.
Avoiding upcoming economic news is uprightly dangerous for your forex trading account. Fundamentals of a forex currency pair is the basic reason why the forex market moves. It can be highly unpredictable, and it can also move the market monstrously within a shorter period. Although, it hardly does so these days.
Knowing what is next on the economic calendar will guide you on whether it is safe to trade a pair or not. When high impact economic news is up next and you have factored it into your analysis; you are fully prepared for this market.
You may choose to reduce your risk or avoid trading altogether in uncertain economic situations.
Factoring in all the points above when hunting for potential trades will help you to see improvement in your trading over a period. Do due diligence in order not to come a point short. Your comments and questions are very welcome in the comment box below.