Many traders would like to have a magic wand that would enable them to make a profit just like that, with no effort. However, if it were so simple, we’d all be millionaires; trading, first and foremost, is an intellectual work. Although there’s no magical solution, traders always have reliable helpers—market analysis methods—at their disposal. When used correctly, these methods can help you stop doing guesswork and start making profit.
The price movement of currency pairs depends on a number of economic, political, and social factors whose close interaction exerts a complex influence on the market that is often hard to predict. Hard, but not impossible. Enter the time-tested market analysis methods, without which trading would be reduced to a guessing game. Let’s take a look at the most popular ones.
Fundamental analysis: following Warren Buffett
Fundamental analysis pertains to the old school that counts Warren Buffett among its practitioners—one of the richest and famous investors. It must be said, though, that the market (represented by major investors) follows Warren Buffett as much as Warren Buffett follows the market.
The movement of currencies in the market is a reflection of the constantly changing supply and demand. That’s why the primary goal of fundamental analysis is to track the political and economic state of countries whose national currencies the trader is interested in.
Experts don’t recommend limiting your analysis to this method only, especially if you’re a beginner, since the large volumes of information are hard to interpret, and too many factors must be taken into account. On the other hand, this painstaking labor can be avoided with the help of resources that provide a ready analysis of the information—for example, trading recommendations posted daily on Grand Capital blog are based precisely on fundamental analysis.
Technical analysis: Fibonacci retracement
What do math, rabbits, and financial market trading have in common? It’s the tools named after the Italian mathematician Leonardo of Pisa, commonly known as Fibonacci. As traders, we should be particularly interested in his “rabbit problem”. If one rabbit couple produces one more couple each year, how many rabbits will we have in a year? The correct answer is 233.
Thus, he discovered a sequence which is known today as Fibonacci numbers. It’s a sequence of numbers, where each number equals the sum of the two preceding ones: 0, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233…
We won’t delve into mathematical studies, though, but rather let’s focus on how traders can benefit from it.
Fibonacci indicators includes retracement levels, channel, arcs, extensions, fan, time zones. Using all these tools allows quickly predicting the price movement quickly and with minimum error.
Fibonacci retracement levels are the most widely used indicator from this toolset: they are, for example, available in MetaTrader 4.
First off, it’s necessary to determine the general direction of the price movement of an asset: the trend. Then we should find its maximum and minimum values, choose the retracement levels from the Fibonacci tools and drag them in the direction of the price movement.
A level is the point of entry or exit. As can be seen from the chart, the price reverses around the level of 61.8, it lacks sufficient momentum: this means we should consider selling at this level. Among other things, Fibonacci retracement levels can determine the trend’s depth of correction. Level 38.2 signals a slowdown of the movement, level 61.8—trend reversal.
It’s recommended to apply several indicators on the chart at once. This will allow registering both global movement of the price, and its behavior in the particular period when a trading activity is planned for.
Japanese candlesticks are a versatile indicator suitable for all types of trading activity in the financial markets. They show the asset’s history, which helps traders form a strategy.
There are also candlestick patterns—a kind of harbingers of change in a trend, or vice versa, signals of its further development.
Candlestick patterns can be bearish or bullish. The most common are the bullish engulfing, bearish engulfing, hammer, hanging man, morning star, evening star, doji, piercing, dark cloud cover. Each of them demonstrates the struggle between the sellers and the buyers. The trader’s task is to determine the winner based on the candlestick patterns on the chart and make the right decision.
An example: hanging man is a single-candlestick pattern that completes an uptrend, signaling a reversal.
Professional traders don’t recommend building a strategy exclusively around candlestick patterns. According to statistics, they indicate the correct direction only in half of cases. That’s why candlestick-based strategies should be combined with technical analysis.
Elliott Wave Theory
Elliott Wave Theory and Elder’s Triple Screen are suitable for all markets. The method is based on analyzing the chosen instrument on three charts with different timeframes. The trader filters trading operations by the oldest period and determines the correct entry points by the most recent one. Such an approach allows for higher profits with the lowest risks. Elder’s Triple Screen trading system combines trend indicators and oscillators, providing more reliable entry points and casting away the false ones.
The creator of Triple Screen strategy Alexander Elder compared the market to an ocean: its waves form high and low tides (uptrends and downtrends). A time of prevailing uptrend is a time to buy. When the downtrend dominates, it’s time to sell. A period of calm is when the market is trading flat. The system’s author recommends to avoid trading in a flat market.
All aforementioned states of the market are reflected on the first screen. The second one is for determining the initial wave movement in the current trend. In other words, it helps find the correction’s end and the start of the next trend movement.
The third screen is used to determine the precise entry point and the minimum stop loss order.
Elder’s Triple Screen on a weekly, daily, and four-hour timeframe
Larry Williams’s three bars strategy
Born in Montana in 1942, Larry R. Williams is a famous stock trader known for the many indicators he created.
Larry R. Williams analyzed the market and visualized prices as bars. Many market professionals prefer this method, although bars aren’t much different from candlesticks. Any Japanese candlestick is based on a bar with four indicators: open price, close price, maximum and minimum values.
Using Williams’s trading method means buying and selling instruments at the price of three-bar moving average minimum. He developed a theory of local maximums and minimums based on three-bar patterns to determine open and close points.
A local maximum is the bar with the highest maximum value compared to the previous and the following one; a local minimum with the lowest minimum value compared to the two surrounding ones.
Local minimums and maximums with 3 candlesticks pattern
Finding the peak positions of candlesticks in several patterns allows forming a medium-term local minimum and maximum, while it’s possible to get long-term data by combining several medium-term data sets.
The most common chart patterns are three-bar diamond, downward and upward breakout, smash day, oops. These figures shouldn’t be considered as absolute trading algorithms, since even the creator himself combines them with other popular indicators, including his own ones.
We’ve just barely scratched the surface of the key methods of market analysis. Those already familiar with everything on our list can use it as a check themselves. In-depth posts dedicated to each of these indicators will follow. To those only learning the ropes of the market analysis, Grand Capital recommends opening a Standard account with deposits from $100: it allows operating small sums of money, yet gives access to all trading instruments.