Applying Technical Analysis to Forex

First Officer · C05: Markets in Practice · About 25–30 minutes

Safety rule: The chart's candle value is not automatically the Ask price for a Buy or the Bid price for a Sell.

Your mission today

By the end you can apply a risk-first chart routine to a forex pair using the correct pip, quote and session rules.

Before you start

Complete C04, read the exact product specification, and have a demo chart and calculator. All examples are imaginary.

1. Understand this market

What does EURUSD actually show?

EURUSD is the price of one euro measured in US dollars. If EURUSD is 1.0850, one euro is quoted at approximately 1.0850 US dollars. A rising EURUSD quote means the euro is strengthening relative to the US dollar, the dollar is weakening relative to the euro, or both. A buy position and a short sell position are different directional exposures.

Structure first, then the session

Find the larger price pattern on H4. On H1 mark recent highs, lows and trading ranges. On M15 inspect only the local price behaviour relevant to the plan. Forex activity changes across Asian, European and US trading periods, but the busiest hours depend on the pair and daylight-saving changes. Do not assume every session has the same volatility.

2. Worked example: loss before gain

An imaginary EURUSD Bid is 1.08502 and Ask is 1.08512. The spread is 0.00010 = one conventional pip. A Buy at 1.08512 that immediately closes at unchanged Bid 1.08502 loses one pip. At $2 per pip, that is −$2 before commission. A later 5-pip favourable close could yield +$10, but the executable side must be checked.

Imagine EURUSD Bid 1.08502 and Ask 1.08512. A 0.00010 difference equals 1 pip in this conventional quote. A newly opened buy must overcome that gap before showing a positive gross mark-to-market result, even if mid-price has barely moved.

Original Black Box Journey educational diagram. No real market data or profit guarantee.

3. Follow a clear trading-analysis routine

Label the exact product, contract size and profit currency. Note the broker's daily trading window and upcoming events. Read H4 first, H1 second, then M15. Reconcile pips versus platform points; for a five-decimal EURUSD quote, ten display points usually equal one pip. Record spreads in the same units as the stop.

Pips, points and spread

For many major currency pairs quoted to five decimals, a pip is 0.0001 and one platform point is 0.00001. The price difference 1.08512 − 1.08502 is 0.00010, or 1 pip. You usually buy at the Ask and close that buy at the Bid. You usually open a short sell at the Bid and close it at the Ask. Broker specifications and additional commissions can change the full cost.

A breakout can still fail

If price moves above a visible high, that proves the quoted market traded above that high. It does not prove a lasting trend. Observe whether completed bars hold the new area, whether a retest stays above it, or whether price falls back inside. Decide the evidence you need before seeing the next candles.

4. Know when the assumptions fail

Treating broker points as pips, ignoring the Ask line on a bid-based chart, or assuming a London-session pattern always works the same way across currencies and seasons.

No timeframe, calendar, indicator or contract label guarantees an outcome. Stop if product rights, quote sides, cash risk or time-of-decision data are unknown.

5. Practise using actual specifications

Practical forex preflight

Before considering a demo trade, verify symbol name and currency pair, the spread, the current market session, nearby scheduled announcements, available margin, and position size. One pair’s spread and contract size cannot automatically be copied to another pair.

On a demo EURUSD chart, record H4 condition, H1 condition, M15 condition, current Bid and Ask, spread in pips, and one event that could make you wait.

6. Check the actual quote side on two opposite trades

Synthetic EURUSD quote: Bid 1.09004 and Ask 1.09016 give a 1.2-pip spread, because (1.09016 − 1.09004) / 0.00010 = 1.2. A hypothetical long opens at Ask 1.09016. If its protective stop fills at Bid 1.08896, the price distance is 12 pips. At an invented $1 per pip, planned loss is −$12, before commissions and worse fills.

The same quote creates a different risk for an imaginary short. It opens at Bid 1.09004 and plans a stop at Ask 1.09096. That is 9.2 pips of price risk, or −$9.20 on the same assumed size. These are separate examples, not a hedge that cancels risk. A later executable price must be on the correct side of the quote before any profit figure is meaningful.

Practice record: In your demo platform, find the displayed Bid, Ask and last completed candle's data convention. Write both hypothetical order tickets and calculate their stop distances. If the platform only shows one line or the symbol contract is unclear, write UNKNOWN and do not invent an executable entry price.

Common mistake

Treating broker points as pips, ignoring the Ask line on a bid-based chart, or assuming a London-session pattern always works the same way across currencies and seasons. Fix it by documenting the exact symbol and timestamp before each calculation.

Plain-English glossary

• Pip: Conventional forex price increment.
• Bid: Executable sell-side quote under the platform's rules.
• Ask: Executable buy-side quote under those rules.
• Spread: Ask minus Bid.

Try it yourself

On a demo EURUSD chart, record H4 condition, H1 condition, M15 condition, current Bid and Ask, spread in pips, and one event that could make you wait. Record your inputs, source, risk calculation and NO TRADE condition.

What you can now do

• Apply a risk-first chart routine to a forex pair using the correct pip, quote and session rules.
• Explain the product's specific execution limitations.
• Compute a hypothetical adverse result before considering a reward.

Next lesson

C05.3 · Reading Gold Charts and Volatility.