How to Read the Market: Key Factors for Analysis
1. Technical Analysis of Charts
Support and Resistance Levels
Support and resistance levels serve as the foundation for any price forecasts. Support is the area where buying pressure exceeds selling pressure, while resistance is the point where the supply limits price increases. Identifying these zones begins with analyzing the Daily chart, where the most significant extremes are marked. These levels are then refined on H4 and H1 intervals: narrow corridors of 10-20 pips account for market noise and help avoid false signals when testing the level.
Horizontal and Dynamic Levels
Horizontal lines are drawn through the high and low points, while dynamic levels are established using moving averages (SMA50, EMA200). Price intersections with dynamic levels serve as signals for continuation or reversal. An experienced trader uses both approaches: horizontal levels capture psychological boundaries, while SMAs react to medium-term trends.
Candlestick Patterns at Levels
Touching a support or resistance zone is confirmed by candlestick patterns. A pin bar with a long shadow, hammer, and inverted hammer at the support level signals buyers' readiness to defend the position. Similarly, engulfing and "star" patterns at resistance indicate the strengthening of sellers. Volume during this should be above the average of the last 20 bars — this adds reliability to the signal.
2. Trends and Channels
Determining the Trend
A trend is the direction in which the market has been moving for an extended period: up, down, or sideways. To determine it, the sequence of highs and lows is employed: if each new low is higher than the previous one, the trend is upward; if each new high is lower, the trend is downward. A sideways market is characterized by alternating movements without a clear direction.
Drawing Trend Lines
Trend lines are drawn through at least two significant extremes: the first point is connected to the second, and the line is then extended. If the price touches the line a third time and rebounds — the trend is confirmed. For channels, a parallel line is drawn through the opposite end of the price movement to visualize the boundaries of price movement.
Combining with Levels
Connecting trend lines with horizontal levels provides powerful signals. Touching the intersection of a trend line and a support zone during upward movement is a high-probability entry area. Traders deliberately seek such points as they combine the strength of two different analytical methods.
3. Volumes and Signal Confirmation
The Role of Volumes in Analysis
Trading volumes reflect the activity of participants and confirm the strength of movements. An increase in volume upon breaking a level indicates real interest and high pressure, whereas a breakout on low volume often reverses back. The analysis involves total volume and volume profile by levels (Volume Profile), showing at which prices the most trades have occurred.
Volume Indicators
Popular tools include On Balance Volume (OBV), which accumulates volume based on price direction, and VWAP — volume-weighted average price. They help identify divergences between price and volume, often preceding reversals.
Volumes on Different Timeframes
For intraday strategies, volumes on M15 and H1 are crucial for evaluating the authenticity of breakouts. Large institutional trades manifest themselves in volumes and influence smaller timeframes. Correlating H4 volumes with local M15 provides an advantage in perceiving significant movements and precise entries.
4. Fundamental Factors
Macroeconomic Indicators
Currency and commodity markets are sensitive to GDP data, Consumer Price Index (CPI), interest rates, and unemployment figures. The release of such reports triggers spikes in volatility. Traders utilize an economic calendar to track dates and expected values, and trading during news periods requires pre-established pending orders and fixed stop-losses.
Company Reports and Dividends
In the stock market, quarterly reports, analyst forecasts, and dividend announcements are key. Surprises that exceed expectations usually lead to price increases, while disappointments trigger sharp sell-offs. Analyzing P/E ratios, revenue, and inventory levels (such as EIA reports for oil) helps forecast industry dynamics.
5. Sentiment and Market Psychology
Fear and Greed Indices
The VIX reflects the expected volatility of S&P 500 options: high values (>30) signal panic, while low values (<15) indicate excessive confidence. The CNN Fear & Greed Index combines several metrics to assess phases of the market cycle. Counter-trend entries are effective at extreme fear or greed levels.
COT Reports
Commitments of Traders publishes data on positions of commercial participants and speculators in futures. An increase in long positions by speculators indicates trend strength, while a rise in short positions by commercial traders suggests expectations of a correction. Combining COT reports with technical levels helps identify overbought and oversold conditions.
6. Correlations and Algorithmic Analysis
Asset Correlations
Some assets move synchronously or inversely: gold and the US dollar often show negative correlation, while the euro and pound demonstrate positive correlation. Static correlations on the Daily can change intra-day. Dynamic correlations and pairs trading allow risk hedging and finding arbitrage opportunities.
Auto-Strategies and Scanners
Automated scanners on TradingView and specialized terminals respond instantly to signals based on levels, volume, and patterns, eliminating human error and emotional interference. The trader controls parameters and overall risk.
7. Liquidity and Market Structure
Order Book and Market Depth
The order book displays buy and sell orders at price levels: large "walls" can delay movement or cause a reversal. Market depth reflects the volume of liquidity around the current price: low depth increases the risk of slippage.
Spread and Slippage
The spread — the difference between the buy and sell price — increases during low liquidity and high risk. Slippage occurs during sharp movements: an order is executed at a worse price. For active trading, choose instruments with a narrow spread and proven liquidity.
8. Multi-Timeframe Analysis
Top Down
Start by analyzing the trend on Daily and H4, then move to H1 for retracement opportunities and M15/M5 for precise entries. This approach helps avoid the "noise" of smaller intervals and enter in the direction of the main trend.
Bottom Up
Sometimes traders find signals on smaller timeframes and then validate them on higher timeframes. For example, local engulfing on M15 can be confirmed by Daily levels. Matching signals across different intervals increases the likelihood of successful entry.
9. Tools and Resources
Platforms
TradingView offers custom indicators, an economic calendar, and social signal audits. MetaTrader 5 supports volume profiles and automated scripts. Bloomberg Terminal provides detailed fundamental information and corporate news.
Online Resources
Investing.com — economic calendar and real-time news. CFTC.gov — official COT reports. Quandl and FRED — databases of macroeconomic indicators with API access.
Conclusion
Reading the market is the art of synthesizing technical, fundamental, and sentiment factors. A comprehensive approach utilizing levels, trends, volumes, macroeconomics, and participant psychology enables the development of sustainable strategies tailored to any market conditions, minimizing risks and identifying optimal entry and exit points.
