Paralysis by analysis! - read that one more time and take it in.
Either you are new to trading or have been trading for some time, reading a price chart shouldn't be too hard.
There is no single right way to make an technical analysis, which can be hard to understand if you are new to technical trading. It's important to understand that you are mapping out what has happened historical, to be able to predict what might happen in the future.
When making your technical analysis you should try to keep it as simple as possible.
Start looking for what's obvious, like the up/down trend and support & resistance lines.
Then take a closer look on what has happened on these areas.
Bellow we will guide you through, step by step on how you could map out your chart, and how to read it. We will be looking for a trade here, and we want to see how price behaves. Maybe we can find a way to make a strategy for future trades from our findings as well.
Let's take a look at the currency pair GBP/JPY (British pound vs Japanese Yen) also known as "The Beast" among Forex traders. We will be looking for a trend, price zones, and what has happened on these zones.
This is what a clean chart would look like when you start in the weekly time frame just to see the chart from a bird's eye view.
Let's find the overall trend, and some support and resistance lines on this weekly chart.
We'll mark support with green, and resistance with red.
We now see a trend channel and the support and resistance lines. The overall trend is up, and the price is approaching our green lines. This could be a potential buy trade.
From this information we now want to look on a smaller time frame. We'll open the daily chart.
As you can see in this daily chart "The Beast" is behaving like a good boy these days. It has a beautiful trend channel, and is politely respecting the support and resistance lines from the weekly chart.
Let's break the chart down and look for other behaviors. We'll start with the areas around the lines.
Looks like we have a lot of engulfing candles on our lines. This tells us that byers and sellers are active in these areas, and that we should be on the look out for similar behavior in the future.
A deeper look could tell us if there are any more information to be collected.
The chart is now just as beautiful as a surreal Salvador Dali painting. It's messy, but we have the information we need.
As you can see, we have three hits on a supply zone, printed by one hammer and two engulfing candles.
From the supply zone, price falls back to the floor of the trend channel, where byers are waiting, this is shown by two bullish engulfing candles.
The fourth time price returns to the supply zone it breaks through, heading straight for the rooftop of the trend channel, where a bearish engulfing is printed.
The Beast is in a good mood, and just like all rule books tells us, -supply becomes demand.
We see two hits on our new demand zone, making a nice double bottom, price then heads for the rooftop of the trend channel again. From here price travels back to our demand zone where it breaks through, but our trend line is strong. Another bullish engulfing sends The beast back up again.
We also found a minor supply zone and a minor support line, we want to keep these on the chart just to be on the alert when prices reach these areas.
Let's clean this chart up, then it's easier to read.
We now have our zones, and we have our trend channel.
The minor support line looks like it will be broken by today's candle, so we will wait and see what happens when price reaches the demand zone which is combined with the floor of the trend channel.
History has shown us that the trend channel is strong, and that supply and demand zones has been respected many times over.
If a hammer or a engulfing candle would be printed in our demand zone, which now also will be combined with the trend floor, we could get a beautiful trade going long on this currency pair, with a very good risk to reward.
The most importen part before taking a position is to wait for a confirmation. We know that trends don't last forever, and the chart has also made a lower high since it last reached the trend-roof top, with tells us that sellers have shown some strength.
"A disciplined mind leads to happiness, and an undisciplined mind leads to suffering." Dalai Lama XIV