There are an infinitesimal amount of methods which you can use to technically analyse the FX markets. You can concentrate on one specific time-frame and use a multitude of technical indicators and candlestick price-action, in an attempt to gauge the direction of price. Alternatively, you could use a stripped-down minimalist technique with very few technical indicators on your chart and observe price-action on several time-frames.
There is no right or wrong method of
technical-analysis if you can prove that your: method, strategy and edge works.
If you’re banking profits continually and in a consistent manner underpinned by
a repetitive methodology, then how you have arrived at that situation is
irrelevant. There are no text-book proven methods to trade the FX and other
markets, strategies are highly personal, if it works for you through all market
conditions then carry on. However, there are certain methods that many
experienced traders will continually recommend, therefore, on the basis of the
wisdom of crowds there must be validity to certain methods.
One constant remains in all forms of
analysis; traders want to identify precisely when a trend began, or when market
sentiment has changed. The most obvious and preferred method is to drill down
through the time-frames to pinpoint the exact time when that change occurred.
You might be a swing-trader who witnesses a price-action change in behaviour on
the 4hr chart, who then begins to analyse lower time frames in an attempt to
determine the nucleus of the change in sentiment. You may be a day-trader who
observes change on the 1hr chart, who then drills down to the five minute chart
and moves up through the gears to analyse the higher time-frames such as the
daily chart, to attempt to establish if there’s any obvious signs of movement
on both higher and lower time-frames.
What to look for
As an example, if you’re a day-trader
who is looking to go long on a security such as EUR/USD, you should be
searching for evidence that bullish price-action has or is occurring across
several time-frames. This bullish price action displayed by candlestick
patterns will be different on the various time-frames, in as much as it will
have subtle differences. On the daily time frame and the 4hr time frame you may
see evidence of a turn in sentiment by way of, for example, various forms of
doji candlesticks being created.
These classic candlesticks can
indicate a perfectly balanced market in which traders are collectively weighing
up their options and considering their positions. The doji candlesticks can
also illustrate a change, in this instance it could be a change from bearish
sentiment or a market trading sideways, until the weight of sentiment causes
price direction to alter to become bullish.
On lower time frames you might be
looking for a consistent candlestick pattern which is clearly illustrating that
price is developing a bullish momentum. This could be classic engulfing
patterns being observed, or you may clearly see bullish price action in the
form of pattern such as three white soldiers. You might also observe a bearish
trend ending on a specific time-frame as higher lows are recorded.
It’s incumbent on the individual
trader to experiment and practice with various time frames by employing a
backtesting protocol, to establish if a change in sentiment has occurred. If
you can clearly see a change on the 1hr time frame you should analyse the
higher and lower frames to see if you can identify various patterns to support
your theory. Once you believe you’re competent you’ve begun to develop an
important aspect of your price action analysis, you’re then in a perfect
situation to put your theory into practice in the live markets.