Learn how to read the charts. This is the first step in technical analysis. Here are a few simple tips that will help you get started.
Look for the trend when you first look at a currency pair. Start with the monthly, weekly, and daily charts that go back a few years. Because these charts have more information, they show what is going on with the currency pair more clearly than the short-term charts (hour, half-hour, 15-minutes, or 5-minutes). The more information you have, the more you can trust what the indicators are telling you.
It's easy to figure out what the trend is. Just look at the chart and decide if it's going up more than down or down more than up. Trends can be steep or flat, last for years or just a few weeks. Practice figuring out what they are and where they change direction. The trend that has been going on for the longest time is the strongest, which is another reason to look at those charts first.
Even if you're scalping or day trading and don't plan to hold a position for more than an hour, you'll do better if you trade in the same direction as the trend. Before you start, take the time to find it on at least the daily charts. "The trend is your friend" is an old saying among traders. It's the truth.
Compare what you see in the long-term charts with what you see in the short-term charts once you've found the trend. You'll find that the path set by the prevailing trend can be followed by a number of short-term and medium-term trends. The graph will go up and down, but overall it will follow the path set by the longest-term trend.
Next, find the "floor" and "ceiling" points on the graph. These are the support and resistance levels. These are important points on the chart where the price keeps getting stuck or just peeks through before giving up. The price will go only so high or so low, then stop. When it gets to that point, it changes direction. The support and resistance are stronger the more times this happens.
Draw a straight line through most of the support points, either in your mind or on the chart. Then, draw another line that goes through most of the points of resistance. This gives you a picture of where the trend of the currency pair is going. This is called a "price channel," and it's a simple but powerful way to figure out where the trend will go next.
When both support and resistance are strong, the currency pair's graph seems to bounce like a pinball between these two lines. When this happens, people say that the currency pair is "range-bound." Since this happens 80% of the time, many people just trade within the same channel, even though this doesn't lead to any jackpot profits.
They don't have to be straight. The currency pair sometimes moves up or down, but still stays in that channel. You can still trade within that range, no matter how it leans.
When a currency pair breaks out of a price channel, it can go back into the channel or pick up speed and keep going. This last one is called a momentum market, and it's the other way to trade in a range: set an entry order for the price to break out, either above or below the channel, then sit back and let it ride.
Congratulations, you now know the most important parts of basic technical analysis.
