Plain Price Action

• Figure 1: Head and shoulders pattern
  
  The charting technique closest to price action is one that shows only price bars, Japanese candlesticks or a line chart. The chart contains no other indicators. Traders using this chart technique forecast price direction and momentum by reading single price bars and groups of bars.
  
  Such traders may make trade decisions based on pattern analysis. One type of pattern is called a head and shoulders. When a pattern trader sees this pattern, she senses that the former uptrend is about to end. When price pushes below the "neckline" of the completed head and shoulders, she'll enter a short position.
  
  

A Technique One Step Removed from Raw Price Action

• Charts with one or more moving averages are one step removed from plain charts. A moving average, which courses around the price bars, is the recent average price of the currency pair you're trading, updated as each new price bar prints on your chart.
  
  You can use the moving average to determine if price is trending up, down, or moving sideways, also known as ranging. Ranging is when price oscillates around the moving average. Trend traders avoid trading ranges. Compared to trending environments, price in a range is less likely to move from a trader's entry to his takeprofit levels.
  
  

Charts with Oscillators

• Charting techniques based on oscillators take yet another step away from raw price action.
  
  Charts with oscillators typically include RSI (relative strength index). You watch RSI for signals that price is overbought (too high) or oversold (too low). When you see either extreme, you take the opposite trade position. When RSI indicates price is overbought, for example, you take a short position.
  
  You can enhance an oscillator's performance by changing the number of periods it looks back to do its calculation. Many traders use a period of 14 with RSI. This means that RSI will make its calculation from the previous 14 price bars. A 1-hour chart will thus look back to the previous 14 hours; a one-minute chart will look to the previous 14 minutes.
  
  The more periods the oscillator includes in its calculation, the smoother the indicator's line will be. With a smoother indicator, you have fewer chances of being "whipsawed." A whipsaw happens when you place a trade because an indicator moves in one direction; the indicator then moves in the opposite direction, causing you to exit the first trade and enter another in the opposite direction; then, the indicator reverses yet again.
  
  But, increasing the oscillator's period reduces whipsaws at a cost: the smoother indicator will be slower to produce trading signals because it's factoring in older data. In other words, a higher period will cause greater signal lag time.