One of the most popular methods of trading forex markets is the use of technical analysis and charting. This involves mapping the historic path of a currency in order to make an informative decision about where it’s going to head in the future. The MetaTrader 4 platform makes charting and analysis simple, with trading and charting functions all right there in the one package.
Gone are the days of having to pay one company for trading and another company for your charting package. In this piece we will discuss two of the more popular and effective forms of technical analysis, as well as what many traders consider the ‘holy grail’.
Mapping Price on the MT4 Platform Using Trend-Lines
Trend-lines are likely the most popular and widely recognized form of charting and technical analysis. The trader draws a line connecting the swing lows / highs of a market and uses these lines in an attempt to determine where price is heading. Trend-lines are a great way of determining market direction at a glance and also provide dynamic support and resistance levels where the trader can look to enter or exit a trade.
Why do trend-lines work? It’s a matter of physics: if an object is falling, the laws of physics state it will keep falling until an equal and opposite force stops it from doing so (the object hits the ground, or someone catches it). Trend-lines help you determine whether a market is rising or falling, at which point you can deduce that the market will continue to do so until something changes.
In general a trend-line doesn’t exist, or more accurately, isn’t valid until price reacts to it three times. There is a saying amongst technical analysts “Two touch doth not make a trend-line”. Once you have identified a valid trend-line you can A) look for price to touch and respect the trend-line a 4th / 5th / etc time, or B) wait for the market to change direction and break through the trend-line. Both methods are entirely valid, but it is important to remember trend-lines are just a guide, there can often be a little noise (wicks / tails) around a trend-line. As such many breakout traders will wait for a close above / below the trend-line, or even a re-test before entering a trade.
Support and Resistance Zones
Support and resistance zones are becoming increasingly popular among forex chartists and traders. We rarely saw them a few years ago, but these days every trader and his dog has them on their MT4 platform. You might have heard them called ‘Supply & Demand Zones’ or ‘Order Blocks’ depending on which guru is teaching the concept. Traditionally, analysts would draw a single line to denote a level of support or resistance, the problem here was just like trend-lines, there would always be a lot of noise and false signals. Eventually some smart cookie realized support and resistance was better thought of as a zone, rather than a simple line in the sand.
To draw these zones on your chart in the MT4 platform, you will have to modify the toolbar. Simply right click on the toolbar where you see trend-lines, the fibonacci tool etc and click Customize. Now you just need to find the Rectangle in the left panel and click Insert to add it to your charting tool bar.
Now as to where to draw your zone, just like with the old-style single lines, the opens and closes of bars are extremely important. The idea is to draw a rectangle around the body of the last bar in the trend (or sometimes the first bar in a new trend). If you are drawing a resistance zone, you will extend the rectangle to the high of that candle. If you are drawing a support zone, you will extend the rectangle to the low of that candle.
Now you simply wait for price to react at your zone. Note sometimes price will react just before your zone, other times price will trade deep within the zone before turning and at other times price will break straight through – all of these are valid signals. Zones also provide clear levels at which you can place your stop: if selling into a resistance zone, you place your stop above the upper bound, and if you’re buying into a support zone; place your stop below the lower bound.
You will probably want to select a light neutral colour for your zones as solid, bright, or dark colours can make for very messy charts.
The Holy Grail: Precision Trading Using Technical Confluence on MT4
Though there is no ‘holy grail’ secret strategy to beating the markets each and every time, lots of traders swear by technical confluence. So what is confluence? Confluence is where you have more than one technical element indicating an area of a chart is important. For example, the point where trend-line support crosses through a support zone. If this occurs, it is much more likely the market will turn at this point. This is because both trend-line traders and zone traders will have identified the level which means there will be a significant amount of buying / selling interest as price approaches.
The more technical factors suggesting a level is important, the more likely the rest of the market has noticed the level too. Combining various forms of technical analysis in this manner is extremely powerful and confluence is one of the most important tools in any technical trader’s arsenal. When a market approaches or touches a significant area of technical confluence, there will often be a very strong reaction.
We hope you have enjoyed this brief discussion on trend-lines, support and resistance zones and the ‘holy grail’, technical confluence. Remember, we have only discussed two popular methods of technical analysis in this piece; other methods include the use of technical indicators like RSI or MACD and levels derived using mathematical calculations like Fibonacci and Measured Moves. More importantly, all of these methods can be used to find important points in a market using technical confluence.