How to Perform Technical Analysis – Introduction
Financial instruments move up and down mostly because of financial news and economic data. Investors and traders use this data to forecast the future situation of the stocks, currencies, indices, futures, and commodities.
The use of news and economic data is the most important part of any analysis. Let us use the example of country A that is undergoing significant economic issues. Its exports are failing and the foreign reserves declining. In the country, there is war and political instability. Will investors seek to invest in such a country? The answer is no and this is likely to lead to lead to less demand for its currency.
The second most important part of any financial instrument is the emotions among investors. All investors have some fear amongst themselves. They often don’t know who is buying or who is selling the financial instruments. As a result, the role of emotions is very important. To learn from the crowd, traders use technical analysis to predict the likely and unlikely scenarios.
Here is the best way to perform technical analysis. In this article, I will use the EUR/USD currency pair.
- Step One: Study the Chart Visually
The first step for any technical analysis is to study the chart visually. This is where you look at the chart and look to understand its movements. You do this by adjusting the chart times. I recommend you start from a ten-year chart to the 30-minute chart. For active day traders, you can even go down to 5 minutes. In this step, you simply want to learn how the chart is moving and potentially, why it has moved like that.
- Step Two: Draw Support and Resistance Zones
The next step is to draw the support and resistance zones in your favorite chart timeframe. In the chart below, I used our EUR/USD 30-minute chart to draw valuable support and resistance areas. These are areas the pair is likely to touch or test.
The best way to draw the support and resistance areas is to do it visually. An alternative method which is also good is to use the Fibonacci Retracement. As shown below, the areas the Fibonacci Retracement tool shows are similar to those we found visually.
As shown in the chart, the Fibonacci Retracement tool identifies the support and resistance levels. What this means is, if there is a reversal, traders should watch out for the Fibonacci Retracement levels.
- Step Three: Apply Technical Indicators
You should take note of the support and resistance levels. I recommend that you either take a screenshot or write them down on a piece of paper.
There are many indicators but I prefer using the RSI which shows whether a financial instrument is overbought or oversold. I also like to use the Moving Averages. In the chart below, I have applied the default RSI and Moving Averages.
As shown above, the RSI is showing an oversold position while the pair is trading a bit lower than the 14-day moving average.
After using the RSI and MA, I like using the Elliot Wave to forecast the future price movements. In this chart, I drew the pink line to show the area where the pair established a significant support location. I then used the inbuilt tools to draw the Elliot Waves.
By combining these technical tools, I am able to predict the next movements for the pair. As shown, the chart is moving low which is expected as the Elliot Wave reversal wave (ABC) starts to take shape. This correction is often short and happens before an upward trend starts to form.