Particularly when the novice trader first enters the forex trading market, there’s a tendency to feel overwhelmed by a blank chart, such as the current four-hour EUR/CHF, below:

However, there’s a simple process that can be followed to analyze a chart. To more experienced traders, this may seem a simple exercise; however, the process brings to the surface and illustrates a chart’s hidden messages. For intraday trading, this is best done on a four-hour chart; for swing trading, use the daily chart, and for position trading, daily or monthly charts can serve.

First, find long-term support and resistance levels and insert a horizontal line at each one. Many experienced traders claim that the market has a memory—and even if it doesn’t, forex traders as a group most certainly do—and observing where the market has paused or turned in the past may indicate levels where it will repeat those actions in the future. These are most visible as target levels when plainly marked on the chart, as shown below:

Note that the price has currently paused at one of these support levels, one which previously served as a resistance level for several heikin ashi average price bars back in late April. Also notice that the support and resistance levels are never so far apart that they cannot be reached during a single day, meaning these stripes across the chart can serve as price targets during intraday trading.

Once the support and resistance levels are clearly marked, the next step is to identify the overall or long-term trend. A good exercise, should this not be immediately apparent, is to draw a line from the opening price on the earliest visible price bar on the chart, to the closing price on the most current one, and judge trend from the slope of the line. On the four-hour EUR/CHF under discussion, although there are several short-term trends rolling up and down across the chart, each new high is higher than the previous one and the overall trend is clearly to the upside.

Next, try identifying any potential chart patterns that may be forming. Look for double or triple bottoms or tops, head and shoulders formations, or consolidating pennants or triangles. Try running a Fibonacci retracement from the most recent lowest low to the current highest high, and see if any of the major Fib levels match up with any of the previously-marked support or resistance lines, strengthening that point.

On the four-hour EUR/CHF, removing some of the air from the chart shows the current pattern to be the stuttering at the end of a sustained climb since 14 March 2008, although not yet to historic highs (the Euro has been as high as 1.9151 against the Swissie). Despite the deep dip in early May, there is nothing on the surface to show this uptrend is ending:

There is the possibility those twin peaks on the far right are a double top in formation; however, this cannot be confirmed until the support level at 1.6094, the lowest green line, has been decisively broken.

The solution to this forex trader’s dilemma is to trade the current downtrend, which is so strong the heikin ashi are closing outside of the moving average five-day price channel, until the trend gives clear confirmation of reversal, or the uptrend resumes.