Investing: 101 Breaking down FX chart analysis
Updated: Mar 30
Hello everyone and welcome to the last article on Forex technicals. As mentioned in the previous release, today I will be going over analysis on trades I have personally taken. However, I had to make slight adjustments as this week (15/03-19/03) had too much volatility for intraday trading and I ended up in loss for the week. As transparent as I want to be, I thought there is no use of me covering analysis which hasn’t led to successful results for your own trading. Instead, I’ll go over a couple of examples I posted on my tradingview account in the past couple of weeks. These examples will help you understand how I implement previously discussed tools to decide whether I go long or short on a particular currency pair. Let’s get into it!
Above we can see a chart of XAU/USD on a weekly timeframe. I identified major support zones and trend lines. As you can see, this pair created a descending channel, respecting the trendlines on many occasions. Two major things to recognise here is that, firstly, this is a weekly chart - the higher the time frame, the more accurate the signal. Secondly, before the signal, there were at least three weekly candles which ended with a wick rejection (exhaustion of further upside). Unless there was huge fundamental news which shook up the market, this was an inevitable collapse. My first take-profit (TP) target was set at the 1745 level. The reason for this was the possibility of the pair creating a flag pattern and then bouncing off this support level to create a higher high. The plan was to see how the market reacts to that level and then make further decisions from there.
Two weeks later we can see continuation of the downtrend with a huge weekly candle breaking through the resistance zone. This was another strong sell signal with the next target projection at 1680 - convergence of the support level and a trendline. As you can see in 2020, the price ranged between these two levels for almost three months, suggesting that buyers and sellers both agreed that this zone is a reasonable price range for XAU/USD. For this reason, and the fact that during large collapses like that, retracements are inevitable, I was expecting a retracement back to the previous level - support now turned resistance. However, further trades should’ve been based on how the price reacted to this level - react, don’t predict.
A week later, the price did bounce off our previously identified level. Working with higher time frames until this point, it was very clear that the downward momentum was extremely strong, so any bounces to the upside could have easily been fake-outs. To be able to account for that possibility, I changed my timeframe to 1 hour. As you can see the price bounced enough to reach its previous lower high. From staring at charts for the past year and a half, for me this was sufficient to recognise that the market structure is gaining a new momentum - back to its previous lower high, new higher low, new higher high and so on. My target was the 1740 level, however, I planned to closely trail my stop loss with the possibility of rejection of the 1723 level (both support turned resistance).
After reaching our previous target at 1740, the pair retraced and if you worked with any level below daily on this one, you would’ve been easily faked-out - just look at those daily wicks. This is what I referred to when I said the week from 15/03-19/03 was very volatile. However, if you were to trade off the daily chart, the huge daily wick rejecting further downside would be sufficient for entry, with the next projection at 1757 (resistance convergent with trend line). For further confirmation, we can see a moving average crossover on the MACD indicator at the bottom. The price is currently at 1755.
From analysis of XAU/USD on a monthly chart, I began messing up any further trading decisions by being biased; looking for sell opportunities instead of following the market. When the price reached the 1755 level and then went down to 1722, I thought this was sufficiently close to the target at 1757 and perhaps bearish continuation was resuming. On this hourly chart, I saw big downward momentum and then what seemed a retracement that broke through a trend line. I used this as a sell signal with my decisions being further clouded by a streak of losses this week. The price retraced to 1743 before collapsing once more and now it has been in a ranging environment for the past week. Hoping to see some movement next week!
Hope you enjoyed this article! You can connect with me on tradingview by clicking here. This page is a place for discussion, share your ideas and don’t take my signals blindly. I do happen to be wrong many times, even after a streak of successful trades. Remember, losses are part of the game, as long as they’re within your risk management limits. Work on your strategy, connect with fellow traders and don’t blow your account if you can. Finally, best of luck on your trading journey!
Next month, we’ll have a Q&A covering fundamental factors with a stock-broker experienced in the foreign exchange department - don’t forget to tune in!