Whiteboard Wednesday - 3 Simple Steps To Help Master Reading The Charts

By GKFX Team  |  30/03/2017 13:59

Step 1 Identify the Key levels.

The reason that TA is so popular is because it allows you to second guess market movements and helps us to predict future movement. However, we must remember nothing is full proof and there is no magic system. 

Step 2 Confirm the fundamental news

There are two types of analysis, fundamental and technical and no one strategy should be used alone. Use the charts to confirm your finding from other forms of analysis. 

Step 3 Identify levels; for your stop losses and limit orders

We can use Technical Analysis for a whole range of different things but finding levels for stops and levels is an incredibly important one. Use support and resistance, the most basic form of TA  to choose levels that indicate a change in trend to use as levels for your stop losses and limit orders. Always use the risk management tools.

Video Transcript:
 

Hello and welcome to Whiteboard Wednesday, this week we're going to look at 3 simple steps to master reading the charts. Now, reading the charts, or as it's also known, technical analysis, is an absolutely enormous subject and we could talk for hours and hours about the various different points, but we'll just highlight 3 simple steps which will help you when looking at the charts and making trading decisions.

Number 1: Identifying the key levels. The premise of technical analysis dictates that levels that were important in the past will become important again in the future. If we look at how the markets have moved this week, and we look at the volatility we had from the trigger of Article 50 and from a lot of the economic data from the GDP that's been released, we can see that the volatility we get stops and holds up at various different levels; these key levels are known as support and resistance, and the easiest way to identify some important levels is just to look at the daily highs and lows and weekly highs and weekly lows. They are key levels when you look towards your trading range and when looking to make your trading decisions, so look to trade around those daily and weekly highs and lows and look to those levels as important points within your entire trade. If you keep that in mind and stick to this simple rule of looking at daily highs and lows, you'll find it a very simple and effective step to identifying the key levels in these volatile markets. 

Number 2: Use technical analysis to confirm the fundamental news. There are two types of analysis when it comes to financial trading; there is technical analysis, which is the study of the charts, and there is fundamental analysis, which is the study of the news flow. Now, no single strategy is sufficient on its own, you have to use a combination of the two in your trading which is why, when we look at technical levels and we find various different levels in the chart, we have to use those levels to confirm the knowledge we've gained from the fundamental news that's already happening. A perfect example of which is Brexit this week, with the triggering of Article 50. We've seen some huge moves within the market and we've seen the news flow, which was that Article 50 was triggered this week. Now, during this session, we saw a big movement, but we can confirm that news by looking at the major levels and looking at where the markets turn around. The move on the back of Brexit was a positive one for the pound, and we can see that because the technical levels held us up at the lower point and the fundamental news confirmed it by moving higher from there. So, always use the two bits of analysis to confirm one another, this will help you within the trade rather than simply relying on one or the other, always combine the two.

Number 3: Identify levels for you stop losses and limit orders. We know that risk management is the most important part of trading, without using stops and limit orders, you're opening yourself up to losses on your trading account. So you must make sure you use those risk management tools which you can place through the trading platform. Using technical analysis and those very same support and resistance levels and trendlines, we can find various different points to put our stops and limit orders. The most frequent question I receive is where do I place my stop? If I'm entering the market, where should I place my stop? Identify the key levels, find your daily highs and daily lows, find your support and resistance and find where the market is turning around. Remember: levels that were important in the past will be important in the future, this is what technical analysis dictates, so we have to make sure that when we use those levels, we then put our stop losses around the big important ones. We see an important support level, we see an important resistance level, place your stop around those levels. Always remember to give the market a little bit of breathing space; as we said, technical analysis is an enormous subject, but just because something looks complicated, it doesn't mean it works; the best piece of advice I can give therefore, is to just keep things simple.