Good chart reading and technical analysis do not have to be complicated. A trader should focus on a few key principles when trying to understand a price chart.
In my trading (Tradeciety Pro Trading), I have stripped away everything that doesn’t provide value and I have optimized the points on my checklist that I use to read price charts. Below you see the current EUR/USD chart on the Daily timeframe and it offers a great learning opportunity because it shows us that ‘something’ is happening here.
Price is/was in a strong uptrend and now things are slowly turning. The amateur/losing trader will make the mistake of jumping in too early because he ‘feels’ that something is happening here but he is too early. Price is NOT yet ready to move lower and it’s too early to jump on the signal. But let’s start at the beginning and let me give you a few key principles that will help you understand trends and consolidations better:
- Count of bearish vs. bullish candles
When you suddenly see that price is showing more bearish candles after an uptrend and the ratio between bullish and bearish candles changes, it can be a first important signal that a trend is losing momentum
- Ratio between wicks and bodies
During a trend, there are usually smaller wicks and larger bodies as the price keeps trending into the direction of the trend. When candles start to show longer wicks and smaller bodies, something is happening and momentum might be fading.
- Length of trendwaves
When the trendwaves lose strength, they become shorter. Before a market turns, you can often see that the final trendwave is becoming much shorter
- Support and resistance barriers
Once price starts breaking the “higher high / higher low” or “lower high / lower low” sequence that describe healthy trends, you know that something big is happening. When, like in the EUR/USD example, price breaks the blue marked level, price will make the first lower low for the first time in over 4 months. Putting it all together with the previous points, we can then see that the trend is likely going to reverse.
When it comes to ‘keeping it simple’ this is a good basis for your price analysis and you can get so many information from your charts by just looking at those 4 principles. Most traders use too many tools, indicators and concepts that they overlook what is really important and then miss the clues that the charts are telling them.
Listen to the buyer-seller dynamic, understand how the power balance is behaving and you will do well when it comes to technical analysis.
Indicators are definitely worth exploring and they can be a great addition. However, after a few years, you’ll be able to read the indicator information from your charts directly because you understand how the indicator interprets price information. I don’t use a lot of indicators in my own trading, but I know how certain price moves affect an indicator.
When it comes to ‘market indicators’ there are a few interesting one in this context:
- ATR – Average True Range
It shows how far price has traveled during a specific period. We can see below that when the ATR is high, it usually shows a turning point. During the trending periods, the ATR tends to be lower. At those turning points, volatility often picks up and the ATR can show it.
- Historic Volatility (HV)
The same principle applies to HV as well and often we can see an uptick in volatility when a market is reaching a tipping point. Of course, this won’t happen every time a market turns, but it’s a good tell.
- Bollinger Bands
In my trading, I use BB a lot and they provide many signals at the same time, be it volatility, extremes or exhaustion signals.
Again, do not overcomplicate things, don’t throw on 10 indicators and then try to make sense of them, but understand the few key principles that make up our price charts, namely: volatility, momentum, speed and acceleration/deceleration.