Here we are going to look at some proven ways of analyzing forex charts and some great indicators.
You can then use them to generate trading signals, to zero in on the low risk high profit opportunities all traders want.
1. Trend Lines
You need to start and learn to draw basic trend lines to spot opportunities, it may sound old fashioned but it's the best way to spot trends.
2. Support and Resistance
The basis of most of the top trading systems.
Support and resistance is simply defined as levels where prices move to and then reverse.
In a rising market prices rise to resistance levels and fall while the exact opposite occurs in a bear market.
When prices break above or below significant support or resistance, a good trending move could be on the way - especially if the resistance or support is valid.
So how do you know if support or resistance is valid?
Look for lots tests - and look for how many different time periods tests have occurred in - by looking back at your Forex charts and also the distance in time between them.
3. Breakouts
If prices break through important support or resistance, then the odds are that the supply and demand position is changing and a new trend will develop.
Trading with breakouts, and trading in the direction of the break is profitable but most traders can't do it.
Why?
Because most traders like to buy low and sell high.
They wait for a pullback to buy at a better price - and it doesn't come and the move is missed.
Most major currency trends start from new market highs - NOT market lows.
To catch the trend you need to go with the break and forget about buying low, however not every breakout will work but how do you spot the ones that do?
You need to watch price changes in terms of momentum and volatility.
Volatility Changes
Volatility is a term used to describe the magnitude, or size, of day-to-day price fluctuations - regardless of their direction.
Generally, changes in volatility give clues to changes in price. A breakout that is accompanied by high volatility, is the ideal set up.
An indicator you should look at to determine volatility is the Bollinger band.
Bollinger bands can also help you identify support, resistance and targets for the move and are an essential indicator.
Price Momentum
Momentum is a general term used to describe the speed at which prices move over given time-periods. Momentum indicators can therefore determine the strength or weakness of a trend by looking at shifts in price momentum.
If price momentum increases on a break, then the odds are that the break will continue and a new trend will develop.
There are two good indicators for looking at changes in momentum:
The Stochastic and Relative Strength Index (RSI).
There is not enough room here to go into how they work simply see our other articles or look them up on the net, both give a highly visual picture of changes in price momentum and are easy to use.
Finally
If you can draw trend lines, spot breakouts and use volatility and momentum indicators that we have outlined above you could soon be on your way to making big consistent profits with your forex charts.
