There are an infinitesimal amount of methods which you can use to technically analyse the FX markets. You can concentrate on one specific time-frame and use a multitude of technical indicators and candlestick price-action, in an attempt to gauge the direction of price. Alternatively, you could use a stripped-down minimalist technique with very few technical indicators on your chart and observe price-action on several time-frames.
There is no right or wrong method of technical-analysis if you can prove that your: method, strategy and edge works. If you’re banking profits continually and in a consistent manner underpinned by a repetitive methodology, then how you have arrived at that situation is irrelevant. There are no text-book proven methods to trade the FX and other markets, strategies are highly personal, if it works for you through all market conditions then carry on. However, there are certain methods that many experienced traders will continually recommend, therefore, on the basis of the wisdom of crowds there must be validity to certain methods.
One constant remains in all forms of analysis; traders want to identify precisely when a trend began, or when market sentiment has changed. The most obvious and preferred method is to drill down through the time-frames to pinpoint the exact time when that change occurred. You might be a swing-trader who witnesses a price-action change in behaviour on the 4hr chart, who then begins to analyse lower time frames in an attempt to determine the nucleus of the change in sentiment. You may be a day-trader who observes change on the 1hr chart, who then drills down to the five minute chart and moves up through the gears to analyse the higher time-frames such as the daily chart, to attempt to establish if there’s any obvious signs of movement on both higher and lower time-frames.
What to look for
As an example, if you’re a day-trader who is looking to go long on a security such as EUR/USD, you should be searching for evidence that bullish price-action has or is occurring across several time-frames. This bullish price action displayed by candlestick patterns will be different on the various time-frames, in as much as it will have subtle differences. On the daily time frame and the 4hr time frame you may see evidence of a turn in sentiment by way of, for example, various forms of doji candlesticks being created.
These classic candlesticks can indicate a perfectly balanced market in which traders are collectively weighing up their options and considering their positions. The doji candlesticks can also illustrate a change, in this instance it could be a change from bearish sentiment or a market trading sideways, until the weight of sentiment causes price direction to alter to become bullish.
On lower time frames you might be looking for a consistent candlestick pattern which is clearly illustrating that price is developing a bullish momentum. This could be classic engulfing patterns being observed, or you may clearly see bullish price action in the form of pattern such as three white soldiers. You might also observe a bearish trend ending on a specific time-frame as higher lows are recorded.
It’s incumbent on the individual trader to experiment and practice with various time frames by employing a backtesting protocol, to establish if a change in sentiment has occurred. If you can clearly see a change on the 1hr time frame you should analyse the higher and lower frames to see if you can identify various patterns to support your theory. Once you believe you’re competent you’ve begun to develop an important aspect of your price action analysis, you’re then in a perfect situation to put your theory into practice in the live markets.