The financial markets involve buying or selling one instrument against another. It involves a deep analysis of the price action charts with appropriate risk management and psychology to generate profits in the long run. While it may seem challenging at first, the learning process is overall easy. Sticking to the basics is a sound way to become a consistently profitable trader.
Plotting market movements is one of the simple steps in trading which can be accomplished via three types of analysis:
• Fundamental • Sentimental
Out of the three, technical analysis is commonly used to plot support/resistance, supply/demand zones, Fibonacci intervals, market structure, etc. Our article will cover how traders can efficiently plot various movements on the charts and use them to their advantage.
Types of Charts
Trading charts come in various formats such as Bar, Renko, Line, and candlesticks. These can relay important information on the
current trend and future market movement.
Image 1. The daily Renko chart on EURUSD displays a clean picture of the current downtrend. Renko candlesticks are formed when the price moves in a certain direction over a specified period. A wick is displayed if the price retraces after completing the next block before the chart timeframe.
The general trading community most commonly uses candlestick charts due to their simplicity and high win rate. A bullish engulfing candle predicts that the next market movement is towards the long side, whereas the bearish state otherwise.
For plotting accurate market movements, take a not of the following bullish candlesticks:
- Inverse hammer
- Morning star
- Three white soldiers
- Bullish engulfingWhereas the bearish are:
- Three black crows
- Bearish engulfing
- Evening star
- Hanging man
Image 2. The yellow highlighted part on the EURUSD daily chart shows the formation of successive bearish engulfing candles. The market finally gives in to the pressure from the sellers and drops several 100 pips in the next couple of days.
Price Action Terminologies
As mentioned before, support/resistance, supply/demand, Fibonacci intervals, market structure, and trend lines are frequently used to analyze price action charts. It does not matter if you stand as a swing trader or a scalper, as different time frames are available to help each form of trading.
Let us go through each of the terminologies and explain how you can use them to plot the next market movement:
Support and resistance are the potential points where the markets face huge difficulties in crossing. They can act as a barrier causing the price to range to and forth between two areas. Systems that use averaging strategies profit the most from such situations as they place respective buy/sell orders when the market goes against the initial trade direction.
Fibonacci intervals and market structure go hand in hand in plotting market movements. Whenever the price trends in one direction, it is accompanied by retracements which can be observed by drawing the Fibs. The most common support or resistance levels in case of a pullback are 38.2% and 61.8%.
Image 3. For the current downtrend on USDCAD, the market pullback to 61.8% Fibonacci retracement. After consolidating for a while, it moves over to its initial bear run.
Market structure can help you determine the current trend of any instrument in a certain time frame. Keep in mind that higher time frames are dominating on the lower ones. For example, a bearish trend on the daily chart is more presiding over the H4 or H1.
To analyze the uptrend, determine the higher highs or lows and vice versa. Plotting trend lines can help with your analysis.
Image 4. The lower high and lower lows indicate the current downtrend on GBPCHF.
Fundamentals and Market Sentiment
News trading is common amongst traders who look to trade the markets for the long term. While it is not possible to plot fundamentals on the charts creating a rough idea in your mind or writing it down can be fruitful.
To understand better, let us consider an example where the forecast for the interest rate is positive. To curb inflation, the central banks plan to increase the value of IR. The currency’s value is likely to strengthen, which paints the current roadmap of future investment for traders.
Feeling the market pulse is important as it can help traders understand the current sentiment. This can be developed over time with the right tools and proper trading.
Supply and demand zones are places where most buyers and sellers are concentrated. The first is situated on the top, while the latter is at the bottom of the price action chart. Use your analysis and plot it on the chart to determine the areas of possible deflection.
Image 5. The supply zone serves as support once the price breaks it in the bullish direction.
Combining technical, fundamental, and sentimental analysis can provide more confluence on your trades, increasing the overall win rate and risk-reward ratios. Mapping the current flow of markets requires time and patience. Once perfected, it can limit your drawdown and make you a consistently profitable trader.