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Currency Strength
How to read a chart
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What is the Matrix Chart reading is the foundation of all technical analysis and reading a chart incorrectly will mean all analysis
How to read a chart thereafter on that chart will also be incorrect. So how do you read a chart? Well the simple answer is to identify
its trend and to do this we must identify the cycles on the chart by finding its highs and lows, but how do you
How to score a chart do that? Well, ask 100 professional traders to read a chart and they would have no problem marking the highs
MetaTrader Indicators and lows for you, but ask them why they marked those particular highs and lows and they probably couldn’t tell
you because its based on their experience and discretion, which unfortunately is of little help to you when
Market Seasonality starting out on your trading journey.
Markets Covered It is for that reason we developed a set of
Brokers comprehensive rules for determining
whether or not a high is a high and a low is a
Coaching low. These rules allow you to identify the
cycles on the chart and in particular, every
high and low that connect the cycles together
and whether they are higher or lower than
the previous one high or low.

Sounds simple right, well let’s look at a chart

of AUDUSD in Figure 2.1 as an example. The
red arrows shown, clearly mark each high and
low and as they are getting higher each time,
we can easily determine that this chart is
making higher highs and higher lows and
therefore in an uptrend. This example is very
straight forward and if you were to mark this
chart yourself you would most likely mark the
highs and lows in the same place. Unfortunately however not every chart is made up of cycles that are as clear as
this.

The next example in Figure 2.2 of GBPUSD tells a much different story. We have marked all the highs and lows
again but you can see how much harder it is to read when compared to our previous AUDUSD chart example.
This chart goes through periods of up-trend and down-trend and also at times no trend at all. It’s also not clear
where all the highs and lows are which makes it easy to misread this chart and find yourself entering the
wrong trade because you convinced yourself you saw something that wasn't there.

To stop this from happening we have developed the following 6 simple rules to remember when reading a
chart. These rules work on any market using daily or weekly charts. Note: In all out examples we will be using
'Candlestick charts' if you are not familiar with candlesticks, please click here before proceeding further.
 Rule 1 – 5 bars minimum
The underlying principal behind reading a chart is that one complete cycle
must contain a minimum of 5 bars as shown in Figure 2.3. Within a cycle there
will either be 2 lows and 1 high, as presented here, or 2 highs and 1 low. There
is no maximum number of bars in a cycle however within FX markets a
common cycle length typically contains 12 – 18 bars.

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Rule 2 – Two higher bars confirm a low

A low can only be confirmed as a low once at least 2 subsequent bars have ‘taken out’ the
high of the previous higher bar. In Figure 2.4 you can see how during the formation of bar
2, price moved up through the blue line representing the highest price traded on the
previous day, bar 1, and in the process ‘taking out’ bar 1’s high. Bar 3 then proceeded to
pass up through the blue line representing the highest price traded in day 2, ‘taking out’
day 2’s high and establishing a 2nd higher bar. It’s only at this point that the low of bar 1
can be confirmed as a low.
It is also important that during the formation of bars 2 and 3 that the low of these bars
does not take out the lowest price traded on day 1. If this happens then the count must
start again from this new low bar.

Rule 3 – Bars do not need to be consecutive

The sequence illustrated in figure 2.4 will not always be present. It will not always
happen that the two higher bars will be consecutive. This is fine but there still
needs to be two higher bars out of the total number of bars following the low.
Figure 2.5 shows how it has taken 4 bars to give us 2 higher bars. Bar 2 started
the sequence by taking out the high of bar 1, but bars 3 and 4 did not take out
the high of bar 2 meaning the low is still not yet confirmed. It is only when bar 5
takes out the high of bar 2 that this low is confirmed.
Again notice that none of bars 2, 3, 4 or 5 moved lower than the low of bar 1, this
is important.

Rule 4 – Two lower bars confirm a high

As with confirming a low, the same is also true for confirming a high, just in reverse. In this instance we need 2
bars to ‘take out’ the low of the previous bars low. Figure 2.6 shows how it took 3 bars to produce 2 lower bars.
Bar 2 does not take out the low instead this is done by bar 3. Bar 4 then also takes out the low price of bar 3 and
at this point we can confirm the high at bar 1.
When establishing a high it is important that the bars following bar 1 do not take out its high. See how bars 2, 3
and 4 have a lower highest trading price than bar 1.
 Rule 5 – Adapt to new price action
There will be times when you will need to
be flexible and adapt as the chart unfolds.
Figure 2.7 shows how a previous low (A)
can be invalidated and a new low
confirmed in its place (C). You can see
how bars 2 and 3 produce higher highs
and therefore bar 1 could be confirmed as
a low. However bar 4 then gives us one
lower bar that produces a new low before
price moves higher again through bars 5
and 6. As there is only one lower bar
following bar 3, bar 3 cannot be
confirmed as a high. Without a high at B
we cannot have a low at A. These two
points are therefore invalidated and a
new low is confirmed at C.

Rule 6 - Oversized bars

On occasion, there will be events that cause a market to behave abnormally and produce what is known as
‘oversized bars’. Oversized bars are defined as any bar being 3 times larger than the average bar on a typical
chart. (you may wish to use an indicator such as ATR (average true range) to help calculate this)
Caused during extreme market volatility, these bars cause the normal structure of a chart to be interrupted, and
a separate rule is therefore required to account for these.

There are two ways to deal with oversized bars.

1. Oversized bar ignored.

If price continues to move as it was prior to the
oversized bar occurred, then the current
market structure remains intact and the
oversized bar is ignored, as is the case in Figure
2.8. Notice how price had been moving up from
the confirmed low prior to the oversized bar,
then broke the high of the oversized bar (blue
line) immediately afterwards and continued
moving up. It is for this reason we can ignore
the bar, as it has had no impact on this market.

2. Restart cycles after oversized bar.

If on the other hand, price stalls as a result of the oversized bar, and price remains inside the oversized bar for an
extended period, then the structure (cycles) are reset and we must wait for the new structure to be confirmed
 after the bar, as is the case in Figure 2.9.
Notice how price has stayed within the
oversized bars high and low (blue lines) but
has produced a new cycle, confirming new
highs and lows in the process. It is from
these new highs and lows we will base our
analysis of this market.

Thankfully these do not happen very often

but it is important you know how to deal
with oversized bars as reacting to them
incorrectly can be very costly.

Next: How to score a chart

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