The primary skill of forex technical analysts consists of knowing how to go about reading forex charts and indicators quickly and appropriately in order to make timely and accurate forecasts of a currency pair’s future direction.
Of course, such a lofty goal as an accurate forex market prediction may not often be met in reality, but learning how to start reading forex charts can at least bring a trader closer to that goal and can also increase their probabilities of long term success when trading forex.
Recognizing Trends and Channels
“The trend is your friend”, as the old trading adage goes, so the ability of forex charts to indicate the direction and strength of the prevailing trend is considered an especially useful benefit of learning to read them.
Many technical analysts will draw trend lines through at least two successively lower highs to indicate a downward trend, while a line might be drawn through at least two successive higher lows to indicate an upward trend.
Another very useful observation occurs when parallel trend lines can be drawn above the current price action between a pair of successive highs and below the price between successive lows. Such lines form a pattern known as a channel that can be used to trade trending markets and trend reversal breakouts.
Identifying Support and Resistance
The first thing that most novice technical analysts will usually learn about reading forex charts is how to identify levels of support and resistance that appear on a chart of a currency pair’s exchange rate.
Most analysts will use bar or candlestick charts for this purpose that are drawn using a periodicity that is one or two steps shorter than their usual trading horizon. Accordingly, a day trader would tend to use a one or four hour bar chart, while a weekly trader might use a daily or four hour chart.
Next, they will look for key reversal levels where the market either peaked or made a trough in a significant way. The peaks and troughs that are located above the current exchange rate level represent resistance points or levels, while the peaks and troughs located below the current level are called support points.
These support and resistance levels respectively show a trader the market determined exchange rates where buyers tend to overwhelm sellers and where sellers tend to overwhelm buyers. This represents very important information that can be used by forex traders to set order levels in such a way that the market will often protect their stop loss orders and yet fill their take profit orders.
Looking for Price Patterns
Another important thing to learn about reading forex charts is that market driven pricing tends to form recognizable chart patterns. Furthermore, these patterns are thought by technical analysts to have a very useful predictive value due to the repeatability of the behavior of humans acting in groups.
The various forex chart patterns used by technical analysts often have differing average probabilities of successful completion. Nevertheless, they all have breakout points and measuring objectives that can be computed at the point of breakout and which allow a forex trader to set their order levels objectively when trading based on the price breaking out of such a well established chart pattern.