How to analyse a strong Forex chart breakdown
Use a top-down strategy for a thorough Forex chart breakdown, beginning with a monthly chart and plotting support and resistance levels, then moving down to acquire more detailed recent information on a currency pair.
While there are various trading methods and ways to break down a chart, we have discovered that starting with the higher timeframes is the best approach. When undertaking a top-down study, we normally start on a monthly chart. This enables us to search for overall momentum and larger trends that have developed over the last few months or years.
To begin, we plot two to three key levels at the immediate support and resistance levels. Make sure to round these levels to the nearest level or half-level and mark them as monthly support or resistance, depending on where they are in relation to the current market price. This guarantees that the levels are psychologically attractive to the currency pair.
Most Forex traders will also put their stops at these round levels. You’ll have a precise trading aim in mind, knowing exactly where the levels are and how the market is moving.
Move to the weekly Forex chart
Then we go down to the weekly to acquire more up-to-date information on the currency pair’s performance. Even on a weekly basis, candlesticks have a lot of weight when it comes to predicting future results. Weekly candlesticks may carry a lot of momentum and move a currency pair a number of pips, so it’s crucial to look at the latest 5 to 20 candlesticks and see how they played out.
We can allocate up to two more key levels throughout this timeframe; be sure to round these levels to keep them clean, and identify them as weekly levels for future reference. This will help you distinguish the levels and comprehend their impact on the lesser timeframes as you step down the timeframes.
The more organized and tidy the chart is, the easier it will be to traverse, and you won’t have to undertake another thorough top-down analysis for weeks or months, depending on the quality of your analysis. As you gain more chart time and experience, you will notice that you are not rebuilding your analysis as frequently as you once were, owing to the market repeatedly using your key levels.
Step down to the daily Forex chart
We may then move down to the daily chart to see more detail about where a currency pair might be headed in the next one to four weeks.
On the daily chart, we can assign up to two more critical level zones, which will be labelled as daily. In order to trade within the overall direction of the chart, we should also search for Fibonacci movements within the trend and extension possibilities between the retracement and goal levels. Look for trendline bounces and breaks as well, as the daily can offer some excellent setups.
On the daily and weekly timeframes, you should be able to recognize the overall trend and set one or two strong targets, as these are the import destinations where we believe the market will end up. The most critical aspect of a currency trade is the destination; otherwise, you will have no idea or strategy for exiting positions.
Find setups on the 4-Hour Forex chart
Finally, we reach the 4-Hour Forex chart. Some traders might want to also utilise the 2-Hour Forex chart and 1-Hour chart. We recommend traders not to go below the 1-Hour timeframe as this can increase chances of profitability and not result in a charting mess.
We want to try to discover our entry point into the Forex market as we continue to analyse the 4-Hour Forex chart. Using more trendlines and breakout ideas, momentum should begin to build in regions where we can discover strong risk-to-reward trades that we can trade towards our overall targets found on higher timeframes.
You will also need to think about allocating a stop loss in a safe place where you believe your bias will change. If the Forex market does go against your bias and it reaches your stop loss, then the market will likely continue in that direction and your trade will be stopped out.
You may be exposed to contradicting information as you progress through the different timeframes, which can be confusing to a trader. Always consider the higher timeframe as more solid information because the movements will be more reliable than shorter-term chaotic swings. If you’re ever confused or need more clarity, go back to a longer time frame to gain a better image.
To get your head straight, you might want to delete some of the analysis tools. On the other hand, if you need require more information or a more precise structure, you should certainly reduce the period. Learning the best strategies for scaling timeframes takes time, and each Forex trader has their own method.