My Approach To Market Analysis
Tuesday, August 11th, 2009I am a technical trader–I look at price action on charts to try and predict what the markets will do next. I am not particularly interested when economic reports are released or what they say, because from my view, the news will either cause price to bounce off support or resistance or break through them. It’s at those support and resistance prices that I am either taking profit or adjusting my stop loss to minimize risk. As for unanticipated news–well, that’s what stop losses are for.
Before I even consider placing a trade, I assess what the market condition is like in various time frames. I look at the charts to determine whether the market is trending or consolidating in the monthly, weekly, daily and smaller time frames. I need this market assessment to decide what techniques will be applicable in the present market conditions and decide a good price to get in at and a good price (or prices) to get out at.
The following is my routine. Each weekend, I take a step back and look at the daily and weekly charts to assess how the market behaved during the previous week and what it may do during the next trading week. Each day, sometime after the New York close at 5pm EDT, I’ll assess what happened the previous day in the smaller time frames (4-hour, hour, 30 minute) and what is likely to come. It’s at the daily assessment where I decide whether or not I will trade a particular pair and if so, what it will take for me to take the trade in either direction. I usually take a look at the markets at the start of each session, but I usually make a mental assessment at those times rather than spend the time documenting them.
To assess the market, I use moving averages and trendlines. There are other tools for performing market analysis, such as Fibonacci retracment lines, pivot points and Elliot waves, but for me, moving averages and trendlines do a pretty good job of depicting significant levels of support and resistance.
As a word of caution, my charts might look different from yours for a variety of reasons. Prices differ by broker (Forex doesn’t have a central exchange and thus a set of agreed upon prices) so expect the indicators to tell slightly different stories from your own charts. Also, Forex is a 24-hour market and some brokers have radically different concepts of what constitutes the close of the daily (or even weekly candle). Needless to say, it’s important that you test how well these market analyses work on your own charts before making any trading decisions.