If a trader spends a few weekends reading some of the trading books from the early 1900s (specifically, books by Richard D. Wyckoff and Richard W. Schabacker), it is eye-opening to see that, even though we have the technology of today — computers, the Internet, instant quotes and charts — the nature of the market has changed little, if at all. And, that's because the motives and emotions that rule the market have not changed.

While indicators are extremely helpful in forecasting a market, analyzing price action using the "classic" tools is a tried-and-true formula. That's not to say indicators are not powerful assets — I use a set of Moving Averages, as well as the CCI, to add depth to my analysis.

Let's focus on the three tools that start my analysis of any market: Minor Highs and Lows, Fibonacci Levels and Trendlines.

While the charts in this article will show how a "three-step analysis" would work in the Forex market, this three-step process can and does work on everything from stocks to E-Minis, intraday and end-of-day.

Let's begin.

Step One: Finding the Trend
Many times, traders enter positions without respecting the current market direction. Knowing whether a trade is with or against the trend is a simple, but important key to successful trading.

The levels in the previous chart show three downtrend lines. While the major downtrend line is a thicker blue line, it is important to note the minor downtrends as well, marked in the thin blue lines. We can also see the maroon support line. Trendlines, support and resistance are all related and are the building blocks of chart patterns. If you find these levels, you will also find any relevant charting patterns.

Step Two: Finding the Minor Highs and Lows on the Chart

Minor Highs and Lows are patterns helpful to locate because there is a short-term trading pattern that can develop from these. More importantly, using Minor Highs and Lows is the easiest way to methodically locate the last major swing to mark Fibonacci levels from. (See "Using Minor Highs and Minor Lows to Pinpoint Reversals" on the eSignal Learning website.)

Finally, Step Three: Drawing the Most Relevant Fibonacci Retracements
The most common Forex trading time frames tend to be the 60-minute, the 240-minute and the daily chart. Using Minor Highs and Lows, a trader can accurately draw the most relevant Fibonacci Retracements. The result is a set of support and resistance levels that will be in play until the next major rally or decline.

The analysis on the chart shows that the 0.618 and .786 levels acted as resistance. The 1.000 level was briefly supported before prices fell through 1.272 and 1.618. While the 1.886 level (See "The Origin of the 0.886 Retracement" on the eSignal Learning website.) wasn't hit, prices did stop just above it. Now, we see that the 1.618 level is resistance.

Each one of these steps unveils an important piece of the analysis "puzzle". Trendlines without Fibonacci levels would only show the trend yet would not reveal all relevant support and resistance levels. Fibonacci levels without trendlines would not show potential trendline breaks and current strength or weakness of the market or a specific time frame. Putting these two tools together yields the two most important facets of any trade: Where to enter and where to exit. Everything outside of those two facets is extraneous.

If traders want to know if a trend is weakening, they need only see if the trendline is flattening out. If traders want to know where to take profit out or even where to potentially place a stop loss, they need only see what levels the Fibonacci Retracement has plotted.

If we zoom into the 60-minute chart, we can see the same downtrend lines that were plotted on the 240-minute chart. However, we can also see a new resistance level in purple. One important thing to note is that, as you move from longer time frames to shorter ones, you will often see short-term levels that can set up breakouts and breakdowns.

If we zoom out the daily chart, we can see a congestion pattern forming, in this case a pennant.

The power of using multiple time frames (in this case, the 60- and 240-minute and daily charts) can open up the possibilities of many trading set-ups, thus giving us the choice of picking the set-up that suits our risk tolerances and trading style best. Just remember that each chart is analyzed with the same tools and same methodology. The key to trading success is analysis using tried-and-true tools and a consistent approach.

*Reprinted (and modified) with permission from Raghee Horner