The first step to good market analysis is the easiest of the steps to do, yet it is surprising how few traders actually do it. The first step to analyzing a market is to determine where the market is relative to where it has been.
In other words you need to get a “feel” for where the market is right now. Trying to use your trading software without doing this first step is equivalent to trading in a vacuum.
When most traders analyze a chart, they begin by devoting the majority of their attention to the daily chart. A few of them might occasionally consult a long term chart out of curiosity without paying too much attention to the information presented therein. Their reasoning is that the information from the daily charts eventually makes up the data on the weekly and monthly charts anyway; therefore the daily chart is where their attention should be.
While it is true that the data on the daily chart does eventually make up the weekly and monthly charts, what these traders fail to realize is that the longer term charts “drive” the short term charts. Gaining a longer term view has a way of smoothing out the fluctuations experienced in the short term to give you a better idea of what is really happening in the marketplace. Therefore it is vital to consider the longer term charts before beginning any analysis.
Consequently the correct way to analyze a market is the exact opposite of what most traders do. Instead of starting with the daily chart and working to the longer term, it is important to begin with the longest term perspective and work back to the shortest. For position traders this is normally means beginning with the monthly chart and working through the weekly to the daily. Day traders on the other hand, might begin with the daily chart and make their way through the 30 minute chart, eventually ending up at the 5 minute chart.
It is important to take in the whole picture when first examining a chart. Don’t make the mistake of immediately zooming in on the last few bars, look at the whole chart.
Ask yourself the same questions you did when using your indicators to examine the longer term charts:
Once you have gained an overall “feel” for the market you will be in a much better frame of mind to begin the actual market analysis. Including this one simple step will place you above the majority of losing traders that fail to consider the big picture before making their decisions.
Don’t let the simplicity of this first step fool you. It is important.
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