Today we are going to take a look at the daily chart of Gold. In this chart we will look at identifying some of the most important aspects of technical analysis. In the order of importance with technical analysis or the hierarchy of importance, we will look at our evaluation in the following way.
Price action
Trend
Support and Resistance
Other
Let’s begin with the first item on the list – Price action. This is the most important thing we can look at when we beginning our evaluation of a chart. Price is king and if we do not place the right emphasis on it, we are likely to misunderstand what everything else it trying to tell us. It really does not matter what indicators tell us if the price does not confirm what the indicator is saying. Knowing what the price is doing will put us in the correct mindset for the direction we should be trading.
When we are evaluating the chart for price action, we will want to take everything else off the chart. This will allow us to only look at price, without the distraction of something else. In this chart above you can see that the price action on it has been mostly bearish. The longer term direction as well as the current momentum has been going down.
Once we have seen the bigger picture by looking at price action, we will then want to get some confirmation of the trend. This can be done by simply looking at the highs and lows and determining if they are making lows or highs. This price pattern is the most important way to identify trends but we can use other indicators that might make the trend more visual for us. An example of this would be to use a moving average such as the 40 period SMA. This is an easy way to see what the trend is doing. If the 40 period SMA is going up, the trend is bullish and if it is going down then the trend is bearish.
Next, we will want to identify the key levels of support and resistance. This, in combination with the trend will help us identify where the best areas are to enter a trade. If the trend is up and we are near support, you would be looking to buy. If the trend is down and we are near resistance, you would be looking to short.
Finally, after we have identified these things, we can look to apply other indicators that might help us in our determination of when we will be pulling the trigger to buy or sell.
So as we look at the chart of gold, we should see that the overall price action, as well as the trend are bearish but that we are sitting near the area of support. This would give us the impression that we may see the price slow at this area, then begin to move as it bounces up or breaks through this area of support. Once it confirms the direction, we can then make our decision as to how we are going to enter the trade.
Take some time to review how you evaluate your chart to make sure you are focusing in on the most important things.
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