In this post we will go over Forex Market Structure, this will help you understand how to read a chart and become more profitable in your trading. Looking at charts sometimes can be a daunting task especially as the different timeframes tend to tell different stories. The information below should assist with clearing some of that up.
Support and Resistance: Spotting Key Decision Zones
The first critical step to understanding the market structure like a pro is plotting key Support and Resistance (S&R) on the chart. The reason is straightforward: the price will often respect, stop, or reverse at these S&R zones. This tends to happen especially when:
- There is confluence of levels at or near a price zone.
- The price is approaching a respected and recent S&R level for the first or even second time.
Traders need to be aware of the major price zones to avoid trading into keys levels and perhaps even be prepared to trade away from those levels (i.e., taking a long at support if higher time frames are in an uptrend).
Key S&R levels can be very diverse, and, ultimately, it’s up to each trader to show the preferred tools. Keep in mind that adding too many S&R levels, however, will clutter the chart. Here are a few important examples:
- Round psychological levels, such as 1.10 or 1.25;
- Fibonacci retracements, or target levels;
- Bands like Keltner or Bollinger Bands;
- Pivot Points;
- Other S&R levels like Fractals and moving averages.
Up and Downtrend: Defining the Price Direction
The concept of trend indicates the overall direction of the chart. Is the price moving up, down, or sideways?
The chart is considered to be trending when the price is moving up (bullish) or down (bearish), whereas sideways movement is known as a range, or non-trending chart. Trend is an important aspect of reading the chart as it offers traders the ability to understand which direction is stronger because the trend is likely to continue unless there are visible reversal patterns (see next subsection).
The trend can be best captured by trend channels and a long-term moving average (MA) like 100, 150, or 200 sma, or Fibonacci MAs, such as 89 and 144 ema. (The example below shows a chart with 2 Moving averages 9 and 14)
Price Patterns: Understanding the Market Psychology
Patterns are repetitive price movements that provide more information to the trader. They provide more information about potential reversals, trend corrections, trend continuations, ranges, and breaks out of ranges.
For instance, bull flag chart patterns indicate that the price is much more likely to continue with the trend, especially, if the price manages to break flag resistance with strong candlesticks (indicating that the bulls are holding control).
There are many discovered and surely undiscovered patterns for traders to find and use, but be aware of patterns that lack internal logic. For example, expecting a bullish day on the GBP/USD just because your favourite football club won a match on Sunday is probably a random pattern.
Here is a list of some of useful and tested patterns:
- Chart patterns;
- Candlestick patterns;
- Divergence patterns;
- Break, pullback, and continuation patterns;
- Wave patterns.