How To Properly Analyse a Chart

Follow this step by step process to analyse your charts

Chart Analysis

You’re a trader, of course you know how to analyse a chart! Draw some squiggly lines, make some notes, and bosh. Expert chartist level unlocked… But then so does everyone else.

Drawing support lines, trend lines, and adding a few fibs doesn’t equal an edge. So what does?

Here’s a process that I like to use when doing my analysis (technical).

Decide on your objective

Huh?

It might seem obvious, but ask yourself…

  • Why am I analysing this chart?
  • What’s the goal here?

Am I generating trade ideas or am I just getting a general feel for the levels and price structure?

Those are two very different objectives. Looking for trade ideas and places to position requires more detail, forward-thinking, and planning for various scenarios. Marking off some levels and getting a feel for the rhythm is a simpler process.

Talking about process, I believe you should have a set process you follow each time you analyse a chart.

That way nothing is missed, you learn and improve your analytical skills. More importantly, you see how your analysis translates to the bottom line.

Process Idea

#1 Check your higher timeframe.

You might love the 1-minute chart, or you might even be an aggressive scalper but context is king.

Sure, you may not be trading the higher timeframe, but the context of how price has got to this point matters.

A lot.

Example:

Let’s say we have this nice 3-day range on the 5-minute.


You could be marking off your key levels, drawing your highs and lows and getting all excited about the next trade. But without context, you’re only getting half the picture…

This is USDJPY

  • It’s been on a huge rally the past few months.
  • BOJ has been known to intervene at these levels
  • And we have Non-Farm Payrolls the next day after the screenshot

You can do all the TA you want, and you’ll get smashed to smithereens without context. Even just one of those affects your decision.

  • Higher TF trend – Maybe a short at the highs isn’t such a great idea
  • NFP the next day – Do you really want to be taking breakouts before then?

You get the idea. So it’s the following steps:

  1. Higher timeframe trend
  2. Upcoming news flow
  3. Market engine or story

I know the technical purists are screaming. “News! Never! Everything you need is in the chart”. Maybe – but you don’t need to be obnoxious about it… A cursory scan of upcoming data and what the mainstream financial press cares about is all you need as a trader. Usually, it’s the big stuff that matters.

Central banks

  • FOMC – US
  • ECB – EU
  • BOJ – Japan
  • BOE – UK

Etc.

FOMC is the biggest, but others will drive local markets and currency pairs. Then Non-farm payrolls, CPI, and GDP are all potential market movers.

#2 Your timeframe chart analysis

Right, now you’ve done your higher TF and context work. Now you want to study your chart with a repeatable process you can improve on.

Here’s an example you could try:

  1. Key levels – Mark off your key levels.
  2. Prune the key levels – Decide on the most important.
  3. Market character – The rhythm, the feel, and the structure.
  4. Clues – Have we rejected highs aggressively? Rallied on bad news? These are poker tells.
  5. VWAP – I just like this as a reference for where the crowd is positioned. Remove if you prefer.

Key Levels

These are either:

  1. Multiple touches of the same price point
  2. Intraday highs and lows
  3. Sometimes whole numbers

I like to only leave the big ones, remove the minor ones, and if needed create rectangles to cover key levels that are close to each other.

Eg this recent chart of Nasdaq.

High and close are very close. There’s no need to separate these.

Use a zone of interest.


#3 Market character categorisation

I appreciate this is a bit subjective, but it’s important. What’s the market doing? It’s usually one of these three things:

  1. Trending
  2. Choppy
  3. Rotational

What’s the difference between choppy and rotational markets? Choppy to me is directionless slop. Low-volume, dirty candles. Just random trade. Rotational is range-bound but with some rhythm, range, and volume in between levels.

 
Like I say, it’s subjective but the important thing is to create a filter to determine when you will or won’t get involved.

So this is where we are so far:

We’ve looked at context, by assessing the higher TF, market driver, and upcoming news flow.

We’ve analysed the timeframe we are trading, removed the noise, and kept the most important levels.

What now?

Now it’s either trade ideas or set some alerts. You have your levels, understand the context, and categorised the rhythm. This is a much better place to come up with some trade ideas from.

Are you looking for mean reversion plays?

Momentum ignition?

Breakout?

Context helps with this.

Then where?

What do you need to see first?

  • A break and retest?
  • A test and reject?
  • A breakout and flag?

I could go on, but you get the idea. When generating trade ideas you’re putting everything together and coming up with ways to express an idea.