Introduction to Technical Analysis for FX

Probability on a pair, not a crystal ball.

Intermediate 5 min read Course 9 of 60

Course 9 of 60 in the forex hub. I use charts on a currency pair to find where I'd act and where I'm wrong, and I name the session before I draw a line. The stop in pips is what turns that into a size.

Probability on a Pair

Technical analysis is reading price history to decide where you'd act. On a currency pair that usually means levels: yesterday's high and low, round numbers, the place the last swing turned. It's good at one job in particular, which is picking the spot where your idea is plainly wrong. It's much worse at guessing the next candle.

Forex charts have a quirk worth knowing early. There's no single exchange, so the volume on your chart is your dealer's tick count rather than the whole market's. Futures traders get real exchange volume, and the futures course covers that side.

1. What TA can do here

A chart shows you where price has turned before, so you can say where you'd buy or sell and, more to the point, where you'd get out if you're wrong. That exit in pips is the number your whole position size hangs on.

It can't tell you the next print, or the fill you'll get when the spread widens on a release. A level that held three times in London can mean very little late in the New York afternoon, when the book thins out. I put the dollars on every idea through the P&L calculator before deciding whether the setup is worth it.

TA is a probability language on a pair — not a crystal ball Can name locationname invalidationsize the stop in pips Cannot know the next printreplace a session mapprint the fill Required session firstpip stop secondclick last

2. When the stop is smaller than the event

A scheduled release is the usual place a chart stop gets run. Central bank decisions and big data prints can move a pair further in a minute than it moves in a normal hour, and a stop sized for a quiet chart sits right inside that swing.

Chart stop: 35 pips. A big release can swing 80 pips. 35 is less than half of 80, so the release noise alone can hit the stop, and $131 risked there is a bet on the news.

The 35-pip mark came off a quiet chart. On a release day that mark sits inside the swing, so it is not the price that proves the chart idea wrong. Wait until the release has printed, then draw the level again.

Once it's redrawn, check the new stop's dollar cost with the stop calculator.

3. Confluence vs clutter

Confluence means separate reasons pointing at the same level. A round figure sitting on yesterday's low, in the session you trade, is a decent setup. If the daily chart leans your way as well, better. Four oscillators agreeing is usually one reason counted four times, since they're all built from the same prices.

My limit is one oscillator on the screen, if any. When a chart has so many lines on it that the stop ends up 'somewhere below the cloud', the stop never gets placed. A stop has to be a price you can type in.

Two agreeing reasons beat eight indicators Confluence Session + figure + HTF biasOne oscillator maxInvalidation in pips Clutter RSI + MACD + stoch + BBNo session namedStop is 'the cloud'

4. Session first

I name the session first because the Asian hours, London and the New York morning don't trade alike on most pairs, and volume and spreads change from one to the next. A breakout level drawn on a quiet Asian range means something else once London opens on top of it.

Write the session into the plan next to the level and the stop. If the trade only made sense in London and it's now the New York afternoon, the trade's gone.

5. Invalidation

Every chart idea needs a price where it's wrong. Once you have it, sizing is arithmetic: lots equal your dollar cap divided by the stop in pips times the pip value per lot. With a $131 cap and a 35-pip stop on EUR/USD, a standard lot of 100,000 makes a pip worth 100,000 times 0.0001, or $10, so the stop costs 35 times $10, or $350. Lots are 131 / 350 = 0.37. A mini lot is 10,000 units, a tenth of a standard lot, so that's 3.7 minis. Round down to three, which risk 3 times $35, or $105.

If you skipped it, the lesson on beginner forex mistakes comes right before this one.

If you cannot name the pip that kills the idea, you do not have one lots = dollar cap ÷ (stop pips × pip value) Invalidation a price, not a feeling Session which book you are in If they fight no trade Clutter is how people skip the stop

6. Where chart traders trip up

Treating indicators as permission to ignore the spread is the first. A setup with a 10-pip target and a 2-pip spread gives up a fifth of the target before it starts. Others: copying levels from a stream without knowing whose session they were drawn in, and drawing every pair the same way, as if the yen trades like the euro.

Moving averages come next, in the lesson on moving averages. Treat them like everything here: a tool for picking locations, with a stop attached.

Start with plain levels

If you're new to charts, start with the plainest levels there are: the prior day's high and low and the nearest round number, such as 1.1000 on EUR/USD. Lots of other traders are watching the same ones, which is part of why they matter.

Keep a screenshot of each setup with the level, the session and the stop marked on it. After fifty of those you'll know more about which levels work for you than any indicator will tell you.

Where charts help and where they don't

  • Use the chart to find the level where you'd act and the price where you're wrong.
  • Name the session before you draw.
  • Size from the stop in pips and your dollar cap.
  • On a release day, wait for the number to print, then redraw the level and the stop.

Next time a setup looks perfect, find the stop first and see if it still does. Educational only. Not a recommendation to buy, sell, or hold any contract or pair.