Thursday, January 24, 2019

Technical Analysis for Beginners Part 1: Identifying the Market’s Movement/Trend

This month of January 2019 so far is really a quiet market for me. My set ups are not showing up in the chart. Because of this, boredom strikes and I don’t like it. I want to be productive as always that’s why I am motivated to impart to you readers my knowledge and understanding about forex trading.

I have decided to write about technical analysis since I based my trading set ups using price action. I believe what I’m about to write is a good foundation to all the starting traders so pay attention and take notes if you want.

This is the first part of the 6 article series about technical analysis that I will be writing dedicated to all the newbie traders out there.

This article is all about how to identify the 3 movements/trends of the market and I will give also some examples on how to trade them. 

  1. the uptrend, 
  2. downtrend and 
  3. the consolidation.
Let us begin by answering the question why we need to identify the current trend or movement of the market?

We need to identify it so that we can have an idea of what kind of trade set up we are going to look for in the market.

Like for example, the current trend is uptrend. Should you be looking to go short/sell or should be looking to go long/buy? Of course you’re going to look for set up to buy. Knowing that it’s an uptrend it would be stupid to go short when everyone is buying.

“The trend is your friend so go with the trend”

As you go along with your trading you will be hearing that phrase all the time.

An uptrend or a downtrend is like an unstoppable moving train that losses its brake system and is very hard to stop. It has a snowball effect to it and just gets bigger and bigger until such time that it will finally hit a solid wall and halt its momentum.

This halting period is what we call the CONSOLIDATION. It is the time when the market is exhausted and prepares again for its next move. The market in this state is undecided and needs a significant catalyst before it starts to move again.

How do we identify the market trend and use it on our favor?

In my case since I am trading the 4 hour time frame. I always look at the daily time frame in identifying the current trend of the forex pair that I am eyeing to trade on.

By looking at the daily time frame I can have a bigger picture of what’s really happening in the market. It gives me a bird’s eye view to which direction the market will try to go to.


Let’s take a look at  how an uptrend market looked like.

Click the image to zoom in

An uptrend market looks like this as viewed in the daily time frame of the USDCAD forex pair. We would know that it’s a valid uptrend when its shows a series of HIGHER HIGHS (HH) and HIGHER LOWS (HL) as indicated in the image above.

What’s the reason behind an uptrend and how can we ride the trend?

In this pair it is very clear that the USD is strengthening across the board while the CAD is weakening. In my own opinion uptrends happens because the economy of a country is improving and investors are coming in to buy their currency relative to its paired currency.

To those of you who don't know, we can actually ride the trend by waiting at the pullback point of the market.

 Where can we find a set up for the pull back and join the trend?

If we look at the 4 hour time frame we can see the pullback of the market and we can actually make a valid entry and join the uptrend by using my PRICE ACTION STRATEGY as seen in the image below.

Click the image to zoom in

This is how it looks like in the 4 hour time frame chart when we zoom in from the daily chart. This is where we can see clearly the pull back. 

As you can see here there are 3 engulfing candles formed in this support area that I put on a horizontal red line. This candle stick formations here is my go signal to execute a trade.  This is the beauty of my price action strategy in the 4 hour time frame it shows very clearly that the market bias is going up. 

To those who didn't know whats my trading set up is CLICK HERE.

The best time to enter this trade would be after the formation of the 3rd bullish engulfing candle.

So what do you think happened after that entry? Lets take a look at it below.

Click the image to zoom in

Wow! Can you see how powerful my price action strategy is? Anyway lets not talk about it here. We are here to talk about the market's trends and movement.
So far we have identified what an uptrend market looks like through the series of higher highs and higher lows. 

We have also identified how to look for an entry to join the uptrend movement by using the 4 hour time frame pull backs.


Lets move on and see now how a downtrend market looks like 

This is how a down trending market looks like. It is basically the exact opposite of an uptrending market.

Looking at this AUDCAD forex pair in the daily time frame, we could clearly say that its a downtrend because of its LOWER HIGHS (LH) and LOWER LOWS (LL) formations.

Finding a trade to join the downward trend is just the same with how I explained in the uptrend. 

That steps would still be going to the 4 hour time frame and look for the set up there.

When you see a trend like this, be sure that you are only looking for a selling set up to make your winning probability more higher.


Last but not the least, a consolidating market

Click the image to zoom in

A consolidating market looks exactly like this.
 In this example we will be using the EURGBP forex pair  as viewed in the daily time frame. 

We can say that the market is consolidating when price movement can be enclosed inside a rectangle or a square depends on the structure of the price. Or we can also say that the price just keeps on moving in a horizontal way as seen in the above image. 

Unlike the downtrend and uptrend it does not create any higher highs and lower lows. The market just seems to be in equilibrium.

What does it indicates when prices are just moving in this sinusoidal way?

 Well in my own opinion, this just means that the market is indecisive at the moment. But you need to watch out for this because usually when the price broke from its consolidation it will continue moving towards the direction it broke out as I will show you later on.

So how do I trade or plan my trade in a consolidating market?


I don't want to complicate my life. So the way I trade this kind of market is still the same with how I traded the uptrend and downtrend.

Let's take a look at this image

Click the image to zoom in

This how the EURGBP consolidating market looks like when zoomed in the 4 hour time frame.

We need to look for a strong and solid set up here so that we can join in and trade the consolidation.

As you noticed, we have here a strong signal that the price would go down as highlighted and numbered by 1, 2 and 3. A combination of an engulfing candle and a pin bar candle was formed.

Lets assume that we have entered a short trade after the bearish pin bar formation which is labeled 3.

Now see what happened to the market after we executed a bearish trade.

 Click the image to zoom in


The market just crashed after that bearish pin bar and bearish engulfing candle combination formed.

Noticed also that the second bearish candle after our entry closed below the consolidation. The one that I encircled. Which to me suggests that the consolidation is over and the market would then be going down and that's what exactly happened!

To summarize the three movements of the market

  • Uptrend Market - The price movement is going upward. A series of higher highs and higher lows was formed in the market.

  • Downtrend Market - The exact opposite of an uptrend. The price movement is going down. A series of lower highs and lower lows was formed in the market.

  • Consolidating Market - The price movement of the market is bouncing around a support and resistance ( which I will be writing next ) line almost equally.

This ends the first part of the six article series about the basics of technical analysis especially made for beginners trader. Keep practicing and keep learning until you get it right.

Until next time, bye for now!

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