4 Step To Making A Living Trading Forex

How To Analyze The Market

 

When analyzing the market always start from the largest time frame, that is the monthly time frame. Draw your trend lines and identify the major Fibonacci levels as well as the major levels of support and resistance, is the market in a up trend on this time frame or is it in a downtrend. Is the market approaching a trend line, has the market broken a trend line or has the market recently bounced off a trend line. The next step is to analyze the weekly, four hour and 1 hour time frame in the same fashion as highlighted above .

When determining the direction of the trend on a particular time frame use a larger time to get a better insight into the direction of the trend. Use the daily charts to determine the direction on the 4hr chart and trade in the position of perhaps 1-4 weeks. Use a 4hr chart to determine the direction on the 1hr time frame an trade in the position of perhaps 1-4 days. Use the  1 hr chart to determine the direction on 15 minute time frame and trade in positions of perhaps 1-24 hours

Once you have determined the direction of the trend you should now analyze the chart for signs of weakness( signs of supply entering the market) and signs of strength (signs of demand entering the market). You should begin by analyzing the background of the chart, remember cause and effect, future market moves are often easily predicted by proper analysis of the background.

The background is the area to the left of the current price, on most occasions it is only necessary to analyze a few hours to a few days of background information. Ask your self is the background showing signs of strength or signs of weakness. If the background is showing signs of strength we say the background is strong and if the background is showing signs of weakness we say the background is weak.

The next step is to confirm the signs of strength /weakness that we have observed. First start by identifying the signs on the 1 hour time frame, next go to the 15 and 5 minute time frames to confirm the signs on the 1 hour . If you  notice an high volume upthrust on the 1 hour time frame with the highest volume at the high. Then as you move to the 15 and 5 minute time frames you observe that the highest volume is not  present at the high of the market. This mean that the upthrust you observed on the 1 hour time frame is not confirmed and even though it is still a valid sign of weakness, the signal is not as strong as it would be were the signs confirmed on the smaller time frame.

Its imperative that the high volume is observed at the high or top of the market when confirming signs of weakness. If the high volume observed was as a result of increase buying, increased effort to go up, we would expect the increase effort to result in higher prices. If it does not, then there must have been something wrong. The increase volume then must have been as a result of increase selling. The same goes for signs of strength where it is important that the high volume is confirmed at the lows and market bottoms.

Analyzing volume signals can prove to be a bit tricky at times as you might observe a low volume reading on the hour time frame only to observe a high volume reading when you switch to a smaller time frame. In these cases its important to draw you Fibonacci levels to see if the market is at a Fib zone, it is also important to note the trend the market is in. Trading with the trend requires less volume than trading against the trend especially when you are trading off a Fib level.

Volume reading is also relative, what may seem like a fairly low volume reading may still move the market. You must look at volume reading in regards to the volumes that you have observed over a particular time period. This mean that the highest volume of the day however low it may seem is of great significance

Its also important to note that on most occasions the very high volume signal that you observe on a chart are due to fundamental announcements. Therefore it is of extreme importance to pay keen attention to very high volume signals that are not as a result of fundamental announcements. Its also imperative that you understand that increasing volume is a significant signal  even if it is low volume. Increasing volume signifies an increase in activity hence its always worthy of note