How to Apply Technical Analysis Step by Step

Every morning I scan the charts in search of opportunities in the Forex market place. I review various time frames and currency pairs and narrow down the list of potentially tradable pairs for that day and week. Then when I write this post I show you the finalized version of my analysis and (potential) trade setups.

This post will be drastically different!

This time around I will randomly pick a currency pair and show you the process of analysis and not the outcome or end result. Therefore I have no idea whether or not this pair will be interesting or have an actual setup now or soon (contrary to the usual post when I show you the pairs that are most interesting).

STEP 1 IDENTIFY TREND

For this exercise I will choose the GBPCHF currency pair. Let us start with a blank 4-hour chart and try to examine it.

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What do you think?

Overall price action looks pretty flat and sideways to me and there is no bigger trend driving this pair up or down. More recently I noticed a strong bearish impulse but a recent attempt to climb back up as price is making higher highs and higher lows, so let us add those lines.

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The purple trend lines indicate the uptrend channel with 2 hits on the bottom, 2 hits on the middle line, and 2 hits on the top. The channel will become a confirmed uptrend channel when a 3rd hit is recorded on the bottom.

As long as price stays within or above this channel the environment is bullish and as soon as price breaks out of it (below channel) then the environment is bearish.

STEP 2 MARK SUPPORT AND RESISTANCE

The next step is review what major support and resistance levels stand in the way of the trend. By connecting the tops and bottoms I can quickly add very important trend lines. Also by adding a Fibonacci retracement tool on the last bearish swing high and swing low potential support and resistance spots can be identified. These are levels which can be used as filters, bounce and break spots.

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STEP 3 SEARCH FOR PATTERNS

Patterns are not visible on this 4-hour chart. The green support and red resistance line could hint at a potential bull flag pattern on a higher time frame like the weekly chart. On the 4-hour chart I see a strong impulse up (blue arrow) followed by slow price action back down (blue trend line) which could be small bull flag. Of course looking at other time frames for more candle stick or chart patterns make sense but for this example I want to keep things simple and focus on single time frame analysis.

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STEP 4 SETUP WITH HIGH PROBABILITY

The total market structure of the GBPCHF 4-hour chart is not fantastic and I would not see a setup with a very high probability. But a decent opportunity could be a long at the confluence of support at the middle of the trend channel, trend line support, bull flag bottom and 38.2 Fib (magenta circle).

The specifics: long setup at +/-1.5137 with a stop loss below the bullish candle (red circle) at 1.5017 and a target at the 61.8 Fibonacci retracement at 1.5258 (green circle).

The risk and reward are both +/- 120 pips making it an even 1:1 reward to risk setup.

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What do you think of this step by step guide?

Does it help you seeing the process instead of only the end analysis?

Is there something that you would like to add to the analysis?

Let us know down below!

Thank you for sharing and Happy Hunting!

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  • Chris

    Trade closes for a +120 pip win. If trail stop loss is used, then trade closed for break even or -20 pips.

  • Chris

    SL could be moved now to 1.5113, thereby reducing the risk by 80% of the original risk. This is an option but it is not a must if you prefer set and forget setups.

    The target was nearly hit so just one more small push up and 120 pips are in the pocket!