How To Trade 50% Trade Retracement Strategy With Price Action Analysis

Don’t worry! We’re not going to learn how to retrace your footsteps to recover lost cash. Instead, we are going to learn how to to trade the  50% retracement strategy with price action analysis to make a lot of cash. Makes sense doesn’t it? By the way the 50% trade retracement strategy is one of the most powerful trading strategies you’ll ever trade with. You most certainly need to learn this pattern like the back of your hand if you want to rake in the moolah.

So we are going to three things: As usual,we are going to define what the 50% retracement strategy is.  Next , we’ll learn how to find the 50% retracement strategy

But first things first: and finally, how to trade the 50% retracement strategy.

What on Earth is a Retracement?

Well a retracement is a temporary reversal in the prevailing trend. It could be a pull back in an uptrend or a strong rally in a downtrend. As I’m sure you’re all aware by now, the market rarely moves higher or lower in a straight line. Look up any price action chart,and the evidence is abundantly clear. So once the market triggers the initial surge, a reversal  takes places. By the way, a retracement is a regular event on the forex market.And this regular occurrence gives you free passage into the market and partake in the huge surge.

To help you understand how  a retracement works, let me paint this nice picture. A group of investors  have this gnawing feeling in your gut that the bulls are heading for the mountains. So they put in a bid to buy higher. Of course, the investors’  decision to buy higher causes the market to  push higher also. Traders also  notice this spike  and are  like”Heck,we’re going to jump on this gravy train also.”Why? Because they figure they will miss out big time,if they don’t get in on the act immediately.

These investors then close out their positions  thinking “We’ve made enough money.Let’s getout while the iron is still hot.” So what  do they do?  They decide to sell to the very investors who jumped on their gravy train. It’s at this juncture that the market starts pulling back. Once the market pulls back about halfway, these investors then huddle up and as themselves”How about we cash in again since the other traders are exiting like flies because their stop orders have taken massive hits?” Once these investors have made up their minds, to cash in some more, they start adding to their already bulging  profits. Their already bulging prosperity sends the market surging one last time,  causing the process to restart.That’s how the retracement pattern works.

I guess the next  question we need to ask ourselves is

How Do We Find  50% Retracement Level?

First identify whether the move starts with a high or a low. Now once you have identified the Genesis of the price move, we then apply a very popular tool  called the Fibonacci tool to click and drag the other end of the Fibonacci tool to the end of the price move, where the price move terminated. You should find “100.0” in the top right hand of the Fibonacci tool  and “0.0” at the bottom of the tool.” Some of you are probably going “This confusing. Why is 100.00 starting at the beginning of a price move?” Well retracement basically means pullback.  Meaning, that by the time the market goes into reversal mode, it goes back to where it started from. And if it retraces back up or down on the same move, it would have retraced to 100% . Let’s take a look at a 50% retrace in action on the EUR -USD pair

Image result for Forex - How to use Fibonacci tool to find 50% retrace in eur/usd pair

This, ladies, and gentlemen is an illustration of how to find the 50% retracement level  of the EUR/USD pair in a downtrend. Now as you can see,  the line is dragged with the assistance of the Fibonacci tool from the 100% level(as indicated by the orange line) all the way to the end of the price move. Now notice the price signal forming at the 50% retrace level.  This signal takes place after the temporary reversal when price hits 1.4023.

Now let’s look at the drawing of the 50% retracement level on the uptrend using  the USD/JPY pair.Image result for Forex - Drawing 50% retrace with fibonacci tool

Here is another illustration of finding the 50% retrace  pattern, this time,on the uptrend. The Fibonacci tool draws the line from 100.0 all the way up to 0.0 where the trend ends. Notice the temporary  reversal  at the 50% retracement level where price finds support.

Now that we’ve identified how to find the 50% retrace, I guess the logical question will be:

How Do We trade price action signals from 50% Retracement Level?

Well, the moment your eyes tell you ” Hey  we see a price signal on the chart” just use the Fibonacci tool to connect the signal to the 50% retracement level. So long as both scenarios match, you  got yourself a trade. Now if you can also spot a key level of resistance also that should make you say “This is great confluence going on here.”After spotting the price signal, you have two options. You can can enter at market prices, or wait for a pullback to tighten up your stop loss and reduce general risk to your trading position. Let’s take a look at a USD/CHF graphic

 

Image result for how to trade price signal on 50 retracement

As you can see, price slides down to previous resistance level. See  coincidence of the previous resistance level with the 50%  Fibonacci level, which of course translates to confluence.

Now if you ‘ve forgotten what confluence is all about, check out my post  Something Called Confluence.

If you’ve stumbled in here looking to join the forex trade bandwagon, here is what you need to do. First,  look up Why Forex Trade Is So popular.  Next, you learn the fundamentals of forex trading by reading  Forex Trading Basics – Top To Bottom Part I  and Forex Trading Basics – Top to Bottom Part II .

To be able to interpret what the candlesticks are telling you, You Need to Know Ten of These Candlestick Patterns . if you want to give your trading skills an edge by relying on pure price action trading/analysis,  instead of fancy forex robots and fancy indicators,,  get started with What is Price Action Trading?

However, if you only want to trade once a month and watch your entry rack up huge profits over a stretch  of several weeks, consult  How to Spot High Probability Trades.  Don’t let me stop you from reading the other posts as well. But the  suggested posts above are the most important posts to get  you started.

 

That’s  a wrap for ” Trade 50% Trade Retracement Strategy With Price Action Analysis”   I hope you now have a clear understanding on how to find and trade 50% retracement patterns Just remember that whenever you spot 50% retracement patterns in a prevailing trend, it makes sense to label them on your chart and then be on the look out for any juicy price signals.  You could make some huge moolah from these setups.

Til next time, take care.

Looking to open a forex trading account?

Sign up with EasyMarkets and Get a free eBook- The Beginners Guide to Forex Trading

 

 

 

 

 

 

 

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Playing With Pivots

This week we’re  playing with pivots. No, we’re  not talking fancy gadgets here.. We’re going to  learn how to make use of  technical indicators called  pivots when making our trades. Pivots  play a crucial role as far as identifying support and resistance levels on the charts. They’re more like robots with the mentality of sniffer dogs  as their job is to ascertain the overall trend direction of the market.

So we’re going to breakdown the pivots three way.We’ll explain what pivots are.Then we’ll learn how to caculate the pivots, and finally we’ll learn how to trade the pivots.

First off:

What really are Pivots?

Well,pivots are these indicators that help the trader determine the overall trend in a market over different time frames. The pivot points simply average the points from the previous trading day. These pivot points are absolutely immense.Why? because they’re the means by which forex traders support and resistance areas. In plain English,  the pivot points  and their surronding support/resistance levels are most likely to experience change in the direction of price movement.

This then begs the question.

Why are forex traders so crazy about pivots?

Well, it’s very simple. They tell things as they are on the charts.You don’t get any pussy footing or any discretionary moves from pivots.They just give it to you straight as far as the happenings on the charts are concerned. Because so many people have their eagle eyes set  on these support/resistance levels, these zones confirm the traders worst suspicions. However,  pivots  can be a bit subjective as far as spotting the highs and lows are concerned.

Pivot points are also valuable to short term traders.Why? Because they create opportunities to cash in on price movements. Also, forex traders have the luxury  of choosing to trade the bounce or break like  normal support and resistance levels. Those who trade range-bound markets use reversals.They see zones as great opportunities to place their orders. While breakout traders use pivot points to detect key levels that must be broken or penetrated.pivotex

This is a beautiful illustration of pivots at work. Notice how the support and resistance levels and pivot point are nicely labelled  on the chart. Doesnt  get any better than this. Now before I continue let me give you a run down on  the meaning  behind those acronyms on the charts. Not to worry!They’re not CB radio signals.

PP = Pivot Point

S = Support

R = Resistance.

Which brings us to:

How to Calculate Pivot Points

Boys and girls grab your calculators because we’re going to do a little Math. We ‘are going to learn how to calculate pivot points. But before I  get started, let me say this: If you have a phobia, about algebra,or you hate algebra with a passion, not to worry! In most cases, the software behind the charts does the calculations. You don’t need to crack your brains too much.  But for you Math nuts, let’s get cracking.

Basically, we are calculating the pivot point and the surrounding support and resistance levels. And do to accomplish this task, we make use of the previous trading session’s open, high, low and closing prices.

To calculate the pivot point the formula goes like this:

Pivot Point (PP) = (High + Low + Close) / 3

You then calculate the support and resistance levels off the pivot point in this direction:

First level support and resistance:

First Resistance (R1) = (2 x PP) – Low

First Support (S1) = (2 x PP) – High

Second level of support and resistance:

Second Resistance (R2) = PP + (High – Low)

Second Support (S2) = PP – (High – Low)

Third level of support and resistance:

Third Resistance (R3) = High + 2(PP – Low)

Third Support (S3) = Low – 2(High – PP)

Quick alert!Some price chart software plot intermediate levels, or what we call midpoint levels. Here is how they look like on the chartspivot-midpoint

As you can see all the levels are nicely labelled for you comfort, thanks to the backend workings of  the software. Most forex charts software  automatically calculate these points like clock work for you. The only thing you have to do is just configure your settings  for the software to deliver to you the closing time and price. See how stressless this is?

You may also want to arm yourself with pivot calculator . You will definitely need it especially when it comes to backtesting to check prices reaction to pivot points. You’ll be amazed at how honest the pivot points are. They just tell you exactly how the prices  react to their presence on the charts. Getting a pivot calculator is not that difficult. I believe most brokers provide you with one. Or if you prefer,you can download it online. Just  Google pivot calculator and Google’s search spiders will be only too glad to oblige.

Now that we’ve gotten the math out of the way, let’s get to the most exciting part – THE TRADING!

We’re  going to cover three parts . The first part is

How Do I  Use Pivots to Trade Ranges?

Well the easiest way to use pivots as part of your forex trades is to treat them like typical support and resistance levels.  And if you know prices as well as I do, when they see support and resistance levels, they hit them repeatedly in their attempt to break through and head for the hills. And if these levels are able to  withstand  a currency pair’s constant barrage,then it means these levels have a strong backbone. So applying the description of the support/resistance levels to the pivot point, your pivot level is able to withstand the currency pair’s onslaught this creates great opportunities for you. And these opportunities could come in the following waves:

  • If a price is closing in on the resistance level, sell the pair and put a stop loss just above the resistance
  • If you see the price inches ever closer to the  to the support level, buy the pair and put a stop just below the support level.

Nothing to it at all. Let’s  see the actual representation of this range tradepivotrange

As you may have noticed, price is testing the resolve of S1(Support Level 1). If you believe in your heart of hearts that S1 can repulse the price, put in your buy order just  above S1. Of course  you want to safeguard your trading position,  so you put in a stop loss past the next support level.

If you want to play it safe,  you can set a wide stop just below S2. However,if price  breaches the barriers of S2,the probability of i turning around and going uphill is unlikely as both SI and S2 would have converted from support to resistance levels. But if you want to be bold, and you are 100 percent certain  S1 will hold its ground, just place your wide stop loss just below S2.

Some of you are wondering”Where do we place our take profits?” Well, you could place your profit targets , you could aim at PP or R1. Then again these two levels could put up some resistance. So watch out for that. Anyways let’s see how the market looks when you place your buy order.PPR1

Voila! S1 survived the onslaught! And if your “Take Profit” is PP it means “Take the money to the bank” However, a  little news flash! It’s not always that straight forward. You shoudn’t always put all your pivot point eggs in one basket. Make sure  your pivot  point levels are parallel with the previous support and resistance levels. To  help you get confirmation of a trade, just fall back on your candlestick analysis. And if you’re not sure about your candlestick knowledge read up on You Need To Know Ten of These Candlestick Patterns.

Last but not least:

How Do I trade Breakout with Pivots?

First you need to support the support and resistance levels. As  I’m sure you know by now, support/resistance  levels can’t sustain a rearguard action forever. At some point, they’re bound to cave in. And when that happens, you get to work with your trades. As we found out earlier, you can trade it safe, or you can go aggressive. However,for those who like to play it play it safe,you ;d be better off taking advantage of the initial breakout.  Why? because if you’re waiting for a retest of the support/resistance barriers, you may end up missing out   on huge trading opportunities. Let’s see how pivots points scout potential trades in this graphicpivot-breakout

We see price surge above PP before cooling down at R1. Eventually the resistance barrier at R2 caveS  in, giving the bulls free passage to surge  by a further 50  pips. This shows the dividends of trading the aggressive way if your eyes are sharp enough to catch the initial price action. However, if you’re sitting there waiting for price to  take a second bite at the cherry(or retest), you’d be waiting in vain. As you can see,price chose not to come back. It continued on upwards.

See how the bulls try to attack the resistance barrier at R3.   You do not want to adopt the same aggressive posture here like you did at PP. Why?because this is false break territory. Failure to take heed could result in a huge loss for your trading position, not to mention,spike your blood pressure.   And if your stop loss is too close for comfort, you’d most certainly get swamped. So your best option would be to take the safe option.

If you want to learn how the false break strategy works read up on Trade The False Break

Notice how  the bulls break out after the initial resistance by the bears. Also pay attention to how  the bulls make a U-turn and break down past R3. You could go short(or put in a sell entry) at the retest of the broken line.

Last but not least:

Where Do I place Stop Losses And Profit Targets In Breakouts

Hmmm……placing stop losses and profit targets in breakouts is not an exact science. Why?because unlike range trades where your focus is on breaks of support and resistance, you are looking  for strong fast Usain Bolt-like surges in the breakout. It’s like keeping up with the speed of light. If you choose to go long(buy) and price fizzles out at R1, you could place a stop below R1. Let’s take a look at the previous graph again.pivot-breakout

As you can see price slightly cooled at R1. In this scenario,you place your stop loss at R1.  Better safe than sorry if you ask me.

Speaking of setting targets, here is what you do. Aim for the next pivot point support or resistance level.By the way if you’re expecting price to break through at all levels, DREAM ON! The  only time  this miracle happens is when a major economic event or surprise news occurs. Whether this news is good news,your guess is as good as mine. Let’s take a look at the previous graphic and see where the stops are placed.pivot-stops

As you can see, the bulls break through at R1. In that case you place your stop just below R1 to protect your position from nasty unexpected U-turn. Keep vigil over your position and move your stop to see if the pattern continues.

If you’ve stumbled in here looking to join the forex trade bandwagon, here is what you need to do. First,  look up Why Forex Trade Is So popular.  Next, you learn the fundamentals of forex trading by reading  Forex Trading Basics – Top To Bottom Part I  and Forex Trading Basics – Top to Bottom Part II .

To be able to interpret what the candlesticks are telling you, You Need To Know Ten Of These Candlestick Patterns . if you want to give your trading skills an edge by relying on pure price action trading/analysis,  instead of fancy forex robots and fancy indicators,,  get started with What is Price Action Trading?

However, if you only want to trade once a month and watch your entry rack up huge profits over a stretch  of several weeks, consult  How to Spot High Probability Trades.  Dont let me stop you from reading the other posts as well. But the  suggested posts above are the most important posts to get  you started.

 

That’s  a wrap for “Playing With Pivots ” Pivots can be trade with. They help catch  profitable trades that the naked eye misses.   If you place them properly on your chart, you could have yourself a major harvest.

Til next time,take care.

Looking to open a forex trading account?

Sign up with EasyMarkets and get a free ebook- The Beginners Guide to Forex Trading

 

 

Price Confirmation Signals: How To Weed the Chaff From The Good

signals-confluenceToday we’re going to look at confirmation signals and how to weed the chaff from the good using price action analysis. Confirmation signals are  the alerts of price action analysis. They gives you the thumbs up when your trading edge is present. You know, searching for confirmation signals can be an almighty struggle, especially when you’re trading for the first time. You’re so scared  of going for the bull’s eye because you’re not sure whether the signal is a good one or a bad one. Well,  newsflash!If you want to perfect the art of catching confirmation signals,  you need to be clear in your mind what you’re looking for and what the signals look like. If you can get these two figured out, it’s 80% of the job done.

So  here is what we’re going to do.We ‘re going to define what price confirmation signals and then decide how to filter them.

What are Price Confirmation Signals?

Well,like I said earlier, price confirmation signals reflect the  presence of a price action setup on the forex chart. They’re also known as  price action signals,  so when you hear of price confirmation signals, think of price action signals.  To put it mildly price confirmation signals are simply obvious price setups that form in the forex market.  You can find these signals along the level of support or resistance or in the trends. In other words, price confirmation signals can also be described as a perfect alignment of factors on the charts. In other words, there must be a confluence of  events on the charts for your trading edge,or strategy to unfold. If you want to understand the workings of confluence, Go to Something Called Confluence

Let’s get on thing perfectly clear here.  You are not going to get two trading situations looking the same on the market. Why is that so? Because each trade and each chart representation is different. They have their own weirdness points. So what you have to do is to approach your trades based on your own discretion and your perception of the chart. Just make sure your perception matches with the market’s perception or else your forex account will shedding a lot of tears.

Let’s take a look at some confirmation signals on an EUR/USD chart

confirmation - eurusd

 

See the first hammer confirmation at the  bottom of the uptrend. That’s a good sign. The bullish candlestick triggers the beginning of the u trend. Once you  get confirmation of a second bullish candle with a bigger and fuller body,then you make you trade. Don’t make the mistake of jumping in the moment you spot a bullish candlestick. Get confirmation from the candlestick with a bigger fuller body and then make your entry.  You use the same strategy when trading support/resistance.  Just hang on for the confirmation candle to announce itself  after the breakout and then make your entry.

 

Let’s take another look at confirmation signals at work  at support/resistance levels.confirmation-supportresistance

 

Right in front of us are confirmation signals along the lines of support and resistance. We two confirmation opportunities along the lines of support. Those are engulfed candles with the bearish candle eclipsing the bullish candles. The bigger bearish candles act as confirmation candles by way of their fuller bodies that I talked about earlier. Up top at the line of resistance is another engulfed  situation kicking of the bearish trend.That setup also signals the possibility of a decent trade.but  it took the appearance of a third candle that is bigger and fuller to confirm the existence of a trading opportunity.

So the moral of the story is this. Get confirmation from a second, and in some cases  third candle before you make trade entry. Jumping into the fray at the sight of just one candle may cause you a lot of grief later..

Now that we’ve gotten the  introduction out of the way the next question  we should be concerning ourselves with is:

How Do We Weed The Chaff From The Good?

Before we get started , I just want you to know that the tips I’m about to dish out can be utilized on any trade set up.  But for purposes  of illustration, we’re going to use the Inside Bar Pattern. So off we go.

Look For A Signal Whose Protruding Tail Creates A False Break.

Assuming you’re looking for an inside bar, make sure   the tail juts out from a key level in the market. And when we say key level,you should know that  we’re referring to support and resistance levels. When an Inside Bar puts on its protruding disposition it can only mean one thing –FALSE  BREAK.  A false break adds more credibility to a confirmation signal in that it illustrates the market’s inability to maintain its momentum.  consequentially the possibility of a sharp reversal becomes ever so real.

confirmation-falsebreak

Right in front of us is the inside bar false  breakout at the support level. Labelled in pink and turquoise  with the protruding tails are the small bullish and bearish inside bars.Their  little prank in misdirecting  anxious traders expecting a bearish trend seems to have worked. Now what we have here is a bearish dive for the hills.So in case you get the urge to get in on the prank,  make sure your inside bar’s tailis jutting out of the level of support

Now let’s take another look at another inside bar false break at the level of resistance.confirmation-falsebreak2

Up top is the inside bar false break. Just like the false break at the  Just like the false break at the support level,  anxious traders have been tricked into believing the uptrend was going to sustain itself only to be sucked into a sharp bearish inside bar false break. Notice the tail of the bullish and the bearish inside bars jut out. When you see this set up,it means the false break for the valley is on. If you don’t understand how the false break works, read up on Trade The False Break

Wait For Confirmation

Instead of hedging your bets on a breakout wait for confirmation instead. The last thing you want is to put all your eggs in a breakout basket only for the market to do a 360 U-Turn and go on the dreaded false break. Sure, it hard to tell a genuine breakout from a fakeout. However, you’ll be committing suicide if you trade straight into  a support  or resistance level. You risk losing a ton of money that way.  Imagine driving straight into a huge hurricane. That’s exactly how it will feel like when you trade into the path of a key level. So how do you avoid such a calamity? Wait for the  price to close above or below the key level(support or resistance). Then once the price breaks out of either of the key levels, you then make your trade entry. Let’s take a look at an illustration of this scenarioinsidebar-breakout

As you can see,the resistance line has been breached by the bulls, triggering a false break for the hills. Like I said,earlier, don’t trade on a whim before the breakout happens. Wait for the breakout to take shape. Just wait for the price to get close or above the key level before you make your move.

Look For Continuation Signals After Pull Backs

One effective filter you could use is to look forcontinuation signals after  pull backs in support or resistance levels in trending markets. There are times when the pull back is pretty small,but the trend is on the up with the inside bar in confluence with a key level  at the market. In the downtrend, the pull backs are more  elaborate with the key resistance facing strong opposition. This can also present great trading opportunities. Let’s take a look at both scenarios

 

Inside-Pullback

Here is the inside bar pull back at  the resistance level. Notice the slight pullback just before the resistance level.  And the inside bar signal along the resistance level  has buy written all over it.

Now let’s look at the downtrend continuation setup.

Insidebar-downtrend

 

As you can see up top, there are major pull backs around the line of resistance. Notice the huge rejections along the line of resistance just before the continuation. Of course, the major players are taking a breather through the period of consolidation before they continue with their journey.

Don’t Trade in Choppy Waters

Don’t ever trade in choppy waters or you’ll drown. Put it simply,you are not going to  find any  In case some of you have forgotten, choppy waters is my apt description of range-bound markets. Just because you see long periods of consolidation, then all of a sudden, you spot a trading signal in the midst of the confusion does not make  the signal valid. You need to have at least three confirmations in order to make the signal valid. Besides, confirmation signals rarely reveal themselves in choppy waters due to the heavy contraction in range bound markets.  Let’s see what range-bound markets look like

range

The choppy waters are within the two dark lines as labelled. As you can see there is so much confusion in these waters such that you’d  be crazy to risk your money in this situation. Wait for an upward trend to breakout of this confusion, and then you make your trade. If you want to understand the personality of choppy waters, check out Forex Market Goes Sideways.

 

Look For Signals with  Confluence  Levels

If you’re counting for areas with great trading possibilities ,look for signals with confluence levels. In case, some of you have forgotten, confluence levels are levels with supporting factors behind them. These factors could be a simple support or resistance level with a dynamic EMA level(Exponential Moving Average) or a 50% retrace(pull back).signals-confluence

This confluence in action along the support/resistance zone which is labelled green.. At the far left corner  the 200 EMA (Exponential Moving Strategy) manages to catch  bulls breaking through the resistance level. This,on my opinion, is a hot trading opportunity. And in case you’ve forgotten,  the EMA averages prices of the recent trading period. In fact  the EMA carries more weight since it measures the most  recent prices. If you ‘re sure about moving averages,check out We’re Moving Averages Part I and We’re Moving Averages Part II.

If you’re not sure about your moving averages knowledge visit my posts, We’re Moving Averages Part I and We’re Moving Averages Part II. Even better, to understand how confluence works, read up on Something Called Confluence

If you’ve stumbled in here looking to join the forex trade bandwagon, here is what you need to do. First,  look up Why Forex Trade Is So popular.  Next, you learn the fundamentals of forex trading by reading  Forex Trading Basics – Top To Bottom Part I  and Forex Trading Basics – Top to Bottom Part II .

To be able to interpret what the candlesticks are telling you, You Need To Know Ten Of These Candlestick Patterns . if you want to give your trading skills an edge by relying on pure price action trading/analysis,  instead of fancy forex robots and fancy indicators,,  get started with What is Price Action Trading?

However, if you only want to trade once a month and watch your entry rack up huge profits over a stretch  of several weeks, consult  How to Spot High Probability Trades.  Dont let me stop you from reading the other posts as well. But the  suggested posts above are the most important posts to get  you started.

 

That’s  a wrap for “Price Confirmation Signals: How To Weed the Chaff From The Good.”  Hopefully you would have deciphered how to tell a a great price confirmation signal from a lousy one. I know it can be scary sometimestrying to tell the difference.But once you get the hang of it, it’s a breeze.

Til next time,take care.

Looking to open a forex trading account?

Sign up with EasyMarkets and get a free handbook – The Beginners Guide to Forex Trading

 

 

 

Let’s Trade Flags

Today I say Let’s trade flags.  And  no, I’m not saying you should swap flags among your flags. The flags I’m referring to are chart patterns used in price action analysis. Sure, they are less popular than triangles wedges, and other price action patterns. but they’re just as reliable as the other patterns. So we’re gong to do as we always do. We’ll find out what these flag patterns are and how to trade them. So of we go.

First up is:

What are Flags?

A flag is a continuation pattern where a strong primary trend is followed by a period of consolidation before it resumes in the direction of the dominant trend. Shaped like  a rectangle,the flag is formed by parallel lines that slope  against breakouts emanating from support or resistance levels. Once the flag takes shape,an upward or downward trend,courtesy of the bulls and the bears,respectively suggests that the previous trend is about to resume.

When it comes to identification, the flag can be very difficult to spot. flags can form whenever a currency pair’s price consolidates. However,the most important factor to watch out for is a strong breakout above or below support and resistance levels. They may not completely eliminate the possibility of a reversal,but they do lower the odds.

Let’s take a look at illustrations of bullish and bearish flags.

bullishflag-bearishflag

As you can see,both the bullish and bearish patterns exhibit continuation patterns at the resistance and support levels.  Notice the tall poles that form after breakouts  at both resistance/support levels of the uptrend and downtrend. They help lower the possibility of a reversal.

Next we’re going to look at three Components of a Flag Pattern

First:

Flag  Pole

The flag pole is the main facilitator as far as price action goes.  It is represented quite well by both the uptrend and downtrend. The question bugging most people is “How do you calculate the flag pole’s price move?” Well, calculate the previous swing high or low from the current swing high or low. Let’s  see an illustration below.

flag-pole

Keep watch over the  tall flag pole you see to your left in the bullish pattern. Like I said in my description, the flag pole is the main initiator in the price movement.  Wondering about measuring the price movement?Just calculate the last high/low to the current high/low.

Flag

At the risk of repeting myself, the flag is the real McCoy in this pattern. Like we said earlier, it starts with a strong trend  followed by a period of consolidation where the main players take a breather before resuming hostilities regardless of whether it’s an uptrend or downtrend. Just to refresh your memory,let’s take a look at another illustration of the flag in action.

flag2

 

This is a classic flag move. You have a classic bullish move followed by a period of consolidation, as indicated by the two trend lines. After taking a huge breather, the bulls resume their journey. It goes without saying that long breathers,or long periods of consolidation can lead to aggressive breakouts. It’s like the calm before the storm.

Last but not least:

The Continuation 

This is where the main actors have finished taking a breather and are resuming their journey. In other words, the market  has finished consolidating and the main players are continuing to follow the trend-  whether it’s an uptrend or downtrend.

continuation

This is what  a continuation looks like.  After a taking huge breather(my short for consolidation), the bulls march on upwards. The blue and red trend lines represent  the period of consolidation. Nice looking trend if you ask me.

Now to  the burning question of the day

How Do We Trade Flag Pattern?

Well,

Trading Signal

Just like any other trade,look for a trading   signal. You  can find this trading signal in the breakout. If you are trading the bullish flag, make sure you make your buy trade when the candle closes above the upper side. If  you are trading the bearish flag, place your sell entry on the lower side of the bearish flag pattern.

Stop Loss

Of course, after you make your entry you put in a stop loss. You’d be crazy not to do that. Wouldn’t you?Anyways,for the bullish flag,place the stop loss below the lowest bottom in the flag. Conversely, for the bearish,flag,place your stop loss at the  highest top.

Take Profits

Close out 1/3of your position size and take the profits. This to protect your trade against  any unexpected U-turn by the market.. Also to protect your position, raise your stop loss target just above the initial  profit target. So that if the price reaches your second profit target, you will close another 1/3 of your trading position and lock in with further profits. No what do we do with the remaining trade? You readjust your stop loss just below the second profit target. If the price continues to soar, keep watch over the price action and hold the last 1/3 of your trading position for as long as you see fir.

Let’s take a look at the GBP/USD chart.

Technical-Analysis-Using-Flag-Patterns

As you can see the green circle represents th moment the price broke through the upper  part of the flag. BINGO! That will be the perfect time to make your entry trade. Once you execute the trade you put in your stop loss as shown in S/L1.  Then with each target, you move the stop loss upwards, locking in profits,as price surges on. The magenta nd purple arrows  show the size of the flag and size of the pole. And as each target is hit, the stop loss is adjusted to protect the trading position.

The end comes when the price breaks the third stop order(S/L3).  As I’m sure you’ve noticed,the price reverses, creating unpleasant consequences for the long trade. Now I hope you’re sensible enough by then to get out while you cano r else…….Kum ba yah.

If you’ve stumbled in here looking to join the forex trade bandwagon, here is what you need to do. First,  look up Why Forex Trade Is So popular.  Next, you learn the fundamentals of forex trading by reading  Forex Trading Basics – Top To Bottom Part I  and Forex Trading Basics – Top to Bottom Part II .

To be able to interpret what the candlesticks are telling you, You Need To Know Ten Of These Candlestick Patterns . if you want to give your trading skills an edge by relying on pure price action trading/analysis,  instead of fancy forex robots and fancy indicators,,  get started with What is Price Action Trading?

However, if you only want to trade once a month and watch your entry rack up huge profits over a stretch  of several weeks, consult  How to Spot High Probability Trades.  Dont let me stop you from reading the other posts as well. But the  suggested posts above are the most important posts to get  you started.

That’s wrap for “Let’s Trade Flags.”  I hope you make significant profits with this flag pattern, Till next time take care.

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Find, Enter,Manage

Don’t let the title scare you.This is not a shrink session. We’re just going to take a walk on how to find,enter,and manage our forex trades. We’re going to hold each other’s hand and try to find a trade signal, set the profit margin, et the stop lossand   Hopefully, by the time this session is over, there will be no clouds left as to how to trade price action setups on the charts.

First up:

How Do I Find A Trade Signal?

Where else would you find a trade signal? On the price charts of course.  You need scan through your price charts to look for possible trade signals. While you look for your signals, you should have at the back of your mind which currency pairs you’re comfortable trading with. Make sure to do this everyday at the same time. I suggest you do your analysis between the time that the New York session goes to sleep and the European session wakes up. Why this time window? because this is when market activity from the previous day tapers off, and Asian traders take over. By the way, Asian market session is not as feverish at the New York or Europe.The more reason why you stick with the former.

Now where are the best areas to look for trade signals? Conventional trading  wisdom has it that you point your focus at the following places:trends,levels, and good old price action. These three areas is where the action is. The trend lookout can be tricky,but to make life less  complicated for yourself, just look for higher highs/higher lows and lower lows. I hope you remember these two. If not, quickly refer to Trade Trends With Price Action Analysis. You can also apply moving averages by looking out specifically for the 8 and 21 EMA’S(Short for Exponential Moving Averages).If you’re not sure about your moving averages, get with We’re Moving Averages Part I and We’re Moving Averages Part II.  Let’s take a look at illustrations of the above:

Starting with Finding An entry signal on a Trending Market

Long_short

As you can see there are entry signals for long position on the uptrend and short position to sell on the downtrend. So long as you’re clear in your mind of a  trend developing,you can jump in with your entries.

Next is:

Support/Resistance

support.resistance

 

As you can see,the bull and the bears are bouncing and breaking out all over the place .  Keep your focus on the breakouts at the support and resistance  levels. Because that’s where you’ll make you trade entries.

Next up is:

How  do I Place A Stop Loss?

Again,as conventional trading wisdom would have it, place your stop loss at the most logical level.  Some you’re probably murmuring among yourselves”What does he mean by ‘Place Your Stop Loss At The Most Logical Level’?” Well, basically you want the market to tell you tha your trading position is in danger of taking a hit.You can do this through a strategy known as ‘Set and Forget.” You just set your stop loss and go enjoy life while the market does the dirty work.

Now why in the world would I want to trigger a stop loss against my trading position? Because you want to protect your trading position from sustaining a massive hit in case the direction of the prevailing market trend does a 360 on you. I mean look at it this way: You want to give your trade enough room to breathe.In so doing , you put your stop loss at a level that is not too close,and not too far from your trading position  – talk about walking a fine line.

And you definitely do not want to commit trading suicide by placing your stop loss to close to your trading position in a desperate attempt to make a humongous profit. That’s not a trading mentality, that’s a gambler’s mentality. You’re building a business, and so must be disciplined and patient in your trading decisions. You place your stop loss based on the trading signal and prevailing market conditions. You can’t let greed override your sense of logic.

Now that we’ve let of some steam, let’s take a look at a few illustrations of placing stop losses.We’re going to use a few of the most popular trading strategies out there.

Starting with:

Pin Bar Stop Placement

 

pinbar_setups

Notice the little black arrow pointed at the pinbar in the bullish trend. You place your stop loss below the pinbar’s long stick-or higher low. See the same black arrow pointing at the pin bar in the bearish trend. The difference here is that the pin bar in this instance is standing on its head with the long thick stick pointing upwards.To protect your short position, just above the high of the pin bar’s tail.

Next up is:

Inside Bar  Stop Loss At Bullish Trend

bullish-insidebar

Notice the inside bar at the beginning the bullish trend. The inside bar is characterized by a higher low(The long tail) and a lower(high) the small tail. The stop loss is always inserted at the lower high end of the inside bar.  Insert the stop loss anywhere else, and you risk singing kum ba yah for a very long time.

Now let’s move on to:

Placing Stop Loss on Inside Bar on Bearish Trend

bearish- insidebar

As I’m sure,you geniuses have deduced by now, the inside  bar can also be spotted at the bearish trend, except that they look different.  Unlike the uptrend,where it looks thin and skinny,this inside bar here,is bigger and full with smaller wicks at the high and low ends. If you don’t want to be singing kum ba yah over your trading account, I’d strongly suggest that you place your stop loss just above the upper wick. This way you save your  selling position from  sustaining a major hit.

How Do I Place My Profit Target?

When placing your profit target,  aim for a risk ratio of 1:2. Let  say your initial risk is 100 pips. You then look place a reward distance of say 200 pips. Let’s get one thin straight. You should think  measurement not risk.You’re spreading the pips around to offset any major losses.

Then check to make sure they’re no support or resistance levels in the way of  your  profit target. The last thing you want is to  get caught up in any bull/bear conflict. You want to make sure the coast clear for you to make your profits without any hustles. In any case, even if there is the whiff of a bull/bear tussle,just use your discretion as to whether you want to take the trade or not. Left to me alone I’ll let it go.

Let’s take a look at how placing a profit target is done

profit-target

As you can see,  the profit target is as far away  from bull/bear conflict as possible.  It’s in a very good place,minding its own business. The last thing you want is dodge bullets from bull/bear consolidation at the support/resistance levels. You’d be better off erring on the side of safety here.

 

A word of warning though: Don’t get greedy here: Take more than your 1:2 profit ratio ONLY if it exists on the chart. If  you start imagining things, kum ba yah will be weighing on your conscience again.. If you’ve inserted a trail stop in the hopes of racking a huge profit based on what is really showing on the market. Just don’t get the urge of setting a new profit target once price closes in on it, or even worse,you develop this delusion that the market will always have our back forever. The forex  market has no friends,and it’s not a Santa Claus either. So you need to get your signals ,stops, and profit targets straight before making your entry.

If you’ve stumbled in here looking to join the forex trade bandwagon, here is what you need to do. First,  look up Why Forex Trade Is So popular.  Next, you learn the fundamentals of forex trading by reading  Forex Trading Basics – Top To Bottom Part I  and Forex Trading Basics – Top to Bottom Part II .

To be able to interpret what the candlesticks are telling you, You Need To Know Ten Of These Candlestick Patterns . if you want to give your trading skills an edge by relying on pure price action trading/analysis,  instead of fancy forex robots and fancy indicators,,  get started with What is Price Action Trading?

However, if you only want to trade once a month and watch your entry rack up huge profits over a stretch  of several weeks, consult  How to Spot High Probability Trades.  Dont let me stop you from reading the other posts as well. But the  suggested posts above are the most important posts to get  you started.

 

That’s a wrap for “Find, Enter, Manage”.  Hopefully, you’ve learnt that you don’t just jump into the market. You need to identify certain conditions before you trade-depending on your trading strategy of course Till next time take care.

Looking to open a forex trading account?

Sign up with EasyMarkets and Get a Free eBook- Beginners Guide to Forex Trading

 

 

 

 

 

You Need To Sharpen Your Trading Edge

If you want  to rake  in the cash as a forex trader, you need to sharpen your trading edge. And no, I’m not saying  act like you’re the hottest thing since Muhammed Ali.  Having a trade edge requires you to identify conditions in the forex market that enhances the probability of you making a winning  trade. And please,forget about using indicators,or any kind of weird gizmo to develop your trading edge – They are  not going to help you. You need a deadly combination of knowledge of the market and plain old instincts to develop your trading edge.

We’ll  look at what a trading edge really is and then learn how to sharpen our trading edge.

I guess the first question we need to ask is:

What is A Trading Edge?

Well, a trading edge is basically a set of conditions  in the forex market that increases the probability of you chalking  a winning trade.  These conditions must be present in the market in order for your entry trade to be a winnable one. if  you are able to recognize these conditions, you have the edge over everybody else especially those  traders who have the gamblers mentality rather than the  traders mindset. If the conditions aren’t present, DO NOT BOTHER ENTERING A TRADE. Failure to listen to that still small voice could be fatal for your  trading account.

 

Can You Give Us Examples Of A Trading Edge Please?

Sure. For instance could base your trading edge on identifying the when the market is trending. You want to look to look out for the bulls heading for Mount Everest or the Bears heading for the Grand Canyon. For those of you wondering”What is he talking about?” The bulls represent the bullish  trend initiating a strong upward surge  when price goes up.While the bears represent the  bearish trend heading downwards after the price takes a tumble. Just in case some of you have completely forgotten what trending markets look like?Let’s take a look at a graph of the aforementioned.

bullishbearish-trend

These,ladies and gentlemen  are two illustrations of  bullish and bearish trends   In the bullish chart, the blue candlesticks surging upward represent the bullish trend.  Whenever you get a bullish candlestick engulfing a bearish candlestick(black..But could be any other color depending on platfom).( That’s means a bullish trend is developing or the bulls are heading for the hills.  Please make sure you get at least two more bullish candlestick confirmations before you enter your trade. If you jump in straight away, you risk losing some much needed cash

In the bearish chart pattern,the black  candlesticks heading downwards  represent a bearish trend. This is where the bears take over and force the price to take a tumble. And, the bearish trend kicks off a bearish candlestick engulfs a bullish candlestick. Make sure you get at least 2-3 bearish candlestick confirmations to establish a bearish trend. And please, look to sell on a bearish trend NOT BUY.(You only buy on a bullish trend). You make the mistake of making entering to buy,that will be your own massive headache.

So if your trading edge is bullish and bearish trends,this is what you need to identify when looking for trades.

Another example of a trading edge is support and resistance levels. If you’re the type who gets a huge thrill from trading support and resistance levels, this is for you. .  Again,in case some of you have forgotten, the support level  catches price as it falls. Meaning that it bounces of this level  rather than break through it .  So basically it acts as a trampoline of sorts. But in case price breaks through this support level, it continues dropping until it bounces off another support level.

The resistance level is the complete opposite.It rather acts as a barrier against price as it rises.But once price breaches this level, it heads for the hills until it runs into another resistance level. Now let’s take a look at illustrations of both levels

support_resistance

 

Ladies and gentlemen,this is an illustration of support and resistance levels in action in the USD/JPY session.  At the resistance level,the bears are playing trampoline as they try to break through the support level. However, when the bears do break through, don’t forget put in a trade.Will you? But , at the resistance level, the bulls basically tell  the bears”Get out of our way” as they breach the resistance barrier and head for the hills.

So  if you   prefer trading as support and resistance level as your trading edge, these are the conditions that must be present on the market for you to trade these levels. If anybody is seeking information on trading support and resistance levels, get in touch with my Identify Support and Resistance Levels With Price Action Analysis post.

Let’s get one thing straight. The above strategies are just two examples  that you could use as your trading edge. You could use any of  the other trading strategies that we’ve discussed on this blog as your trading edge.Just make sure the conditions for these strategies are present in the market for you to trade them That is assuming you really care about not blowing trading account to smithereens.

Now that we’ve identified what a trading edge, how do we sharpen our trading edge?

Well, there are a few ways  of getting your trading edge sharpened like a knife. Starting With:

Pay Attention To The Price Action

As a price action trader, naturally you need to pay attention to the price action – no ifs,no buts. You  need to watch what’s happening on your price action chart like a hawk.  Be on the look out for trading opportunities in conditions such as support and resistance levels, trends, and general trade behavior. Let’s take a look at the graphic below.

price_action

This is an illustration of what you will be staring at. As you can see, there are so many trading opportunities along the support level that you can take advantage of. You just need to keep your eyes wide open.

Some of you may be wondering “I thought pattern trading was also part of price action trading.?” Sure it is.But you’re only looking at  the last two candlestick entries as signals. Besides,these candlesticks are  a few of several candlesticks on the charts. Now I’m not saying ditch pattern trading altogether -absolutely not! I’m just saying you need to be more holistic in your analysis.

Learn One Price Action Setup At A Time

If  you want to maintain your sanity as a price action trader, learn one price action setup at a time. If you think cramming all the price action setups  all at once, you’ll suffer mental meltdown. You see the way a nuclear reactor melts down after overheating. That’s exactly how your brain will react when you try to force it to cram  every price action setup. Just allow your brain to digest one price action setup at a time,and you’ll eventually ease into the flow of the forex trading process

Once you’ve perfected  your chosen setup,you can then  look to make your entry. Like I said earlier, As I said earlier look at strong trends,whether price is rejecting support or resistance, and   whether there is leg room for price to maneuver,et,c.

Not sure of which price action setup to work with?Let me give you  two setups you can work with. We’ve dealt with these setups already on this blog in the not too distant pat.,but this is to refresh your memory.

First:

Pin Bar Reversal

pinbar_setups

As you already know, the pin bar is characterized by a long stick, popularly known as a wick. Anytime you see this candlestick, think sharp reversal or rejection of price. The bullish trend suggests a  continuation after the bulls take a breather from butting heads with the bears.

The same scenario  pertains in the bearish trend. and   The pin bar in this scenario also   represents a sharp reversal or rejection of price by the bears. The same continuation pattern also exists in the bearish pattern with the bears heading down south after taking a breather from butting heads with the bulls.

So if  you want to make the pin bar reversal your trading cup of tea,these are the conditions to look out for. For more information on the pin bar, look up Pin Bar Strategy – How To Trade It

Next is:

Inside Bar

insidebar_setup.jpg

As you can see the inside bar is a two bar situation where the smaller bar(inside bar) is within the higher to lower range of the previous bar. The candlesticks  encased in the squares in both the bearish and the bullish trends represent the inside bar  setup. The bigger candlestick is affectionately called the mother bar.(Almost like mother hen).  Whenever you see such a setup,- whether bullish or bearish,it’s time to enter a trade.

If you want to know more about Inside Bar strategy, look up Trading The Inside Bar.

Less Is More

There is a painful reality you need to accept in forex trading. It is basically this:LESS IS MORE. The notion that trading more  makes your forex account looks good completely baseless.. If anything, it puts your account in harm’s way especially when you make losing trades. Picture this scenario: You enter an average  trade without thinking it through.  You then recognize a juicy trade,and you say to yourself”..Hmmmm time to make up for a lost trade.” Luckily for you, you make a decent profit,which excites you to no end.

I have a huge problem with this trading mentality. Why? Because you lost an average trade, you’re then forced to jump back into the market  just to break even. I have traded like that in the past. And believe me,it;s not fun at all. You’re stressed out, struggling to look out for what you believe to be the best trade out there to make up  for lost money. Not only are you putting your blood pressure in harm’s way trading this way, but you’re also puting your trading account under pressure . Imagine if your forex account could talk. It’ll probably be screaming in your face saying”YOU DONT KNOW WHAT YOU’RE DOING.” Now that will be very humiliating. Wouldn’t it?

The morale of the story is just concentrate on one trade that will bring you maximum profits. All you have to do is develop the sniper mentality where you lie in wait for the best trade to come along. Once the trade shows up on your charts, you pounce like a lion,make your trade and earn some  nice profits. Just make sure the trade has a high probability of sucess. If you want to know how to identify high probability trades, refer to  How To Spot High Probability Trades.

If you’ve stumbled in here looking to join the forex trade bandwagon, here is what you need to do. First,  look up Why Forex Trade Is So popular.  Next, you learn the fundamentals of forex trading by reading  Forex Trading Basics – Top To Bottom Part I  and Forex Trading Basics – Top to Bottom Part II .

To be able to interpret what the candlesticks are telling you, You Need To Know Ten Of These Candlestick Patterns . if you want to give your trading skills an edge by relying on pure price action trading/analysis,  instead of fancy forex robots and fancy indicators,,  get started with What is Price Action Trading?

However, if you only want to trade once a month and watch your entry rack up huge profits over a stretch  of several weeks, consult  How to Spot High Probability Trades.  Dont let me stop you from reading the other posts as well. But the  suggested posts above are the most important posts to get  you started.

 

That’s a wrap for “You Need To Sharpen Your Trading Edge.”.  Hopefully, you’ve learnt that you don’tjust jump into the market. You need to identify certain conditions before you trade-depending on your trading strategy of course Till next time take care.

Looking to open a forex trading account?

Sign up with EasyMarkets and Get a Free eBook – The Beginners Guide To Forex Trading

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Forex Trading Basics – Top To Bottom Part I

Ever since I started this forex trading blog, I’ve gotten some amazing feedback from you readers. Infact, some of the  reviews of my  have been so tremendous I’ve felt my head expanding  as big as cyberspace itself. Now I don’t want to jump ahead of myself, but I’ve a feeling some of you would like to join the forex trade bandwagon. But you don’t know how. So,being the nice guy that I am,  going to do a two part series on Forex Trading Basics-Top To Bottom Part I. It’s my version of Forex Trading 101 where you’ll be fed the fundamentals of forex trading. I basically want to feed you the milk before you start chewing the bones of the forex trade.  You’d be tak  crazy to take  the plunge without the necessary tools right?

So let’s get started with:

Exchange One Currency For Another

The only motivation behind forex trading is to exchange one currency for another. That’s all!- Nothing sinister going on here. By exchanging one currency for another, you’re hoping that the price will change so tha the currency that you bought  initially will shoot up in value as against the currency that you sold.  Let’s take a look at the little graph below:

Trader’s Action EUR USD
You purchase 10,000 euros at the EUR/USD exchange rate of 1.1800 +10,000 -11,800*
Two weeks later, you exchange your 10,000 euros back into U.S. dollar at the exchange rate of 1.2500 -10,000 +12,500**
You earn a profit of $700 0 +700

** EUR 10,000 x 1.25 = US $12,500

 

What you see here is the exchange rate in action. The exchange rate is simply the ratio of one currency  valued against another currency. Per this definition, the USD/CHF shows how many U.S dollars need to buy one Swiss franc or how many Swiss Francs you need to buy one U.S dollar.

You Need To Know How To Read A Forex Quote

If you want to make it as a forex trader,you need to know how to read a forex quote.  There is no getting around this one. If you can’t do this,you’re in trouble. Seriously though, currencies have always been quoted in pairs since time memorial. I’m sure you’re aware of famous partners such as GBP/USD AND  USD/JPY . They’re perfect examples of a forex quote. Now why’re they quoted in pairs? Because in every forex transaction, you’re doing two things at the same time – buying one currency and selling the other. Let’s take a look at British Pound/U.S.Dollar

GBP-USD

 

The first currency listed to the left of the slash symbol is termed the base currency(In this case the British Pound). While the second currency on the right  is labelled the counter or quote currency(In this case U.S.dollar).

When you buy, the exchange rate lets you know how many units of the quote currency you need to pay to get one unit of the base currency. So going by the above example, you have to pay 1.51258 U.S. dollars to buy 1 British pound.

But it’s a little bit different when you sell.  Here, the exchange rate lets you know how many units of the quote currency you get for selling the base.  Again going by the GBP/USD pair, you will receive 1.51258 U.S. dollars when you sell 1 British pound.

And please get this once and for all. the base currency is the main catalyst for the buy or sell routine. For instance if you buy EUR/USD, you’re buying the base currency and selling the quote currency at the same time, In Tarzan talk, “Buy EUR, sell USD.”  You buy the pair if your trading instincts tell you that the base currency(EUR) will gain in value as against the quote currency (USD). You sell the pair when those same trading instincts scream in your head that the base currency will take a dip as against the quote currency.

 

Know How To Go Long/Short

You need to know how to go long or short. In other words, you must decide whether you want to buy or sell. If you want to buy(buy the base currency and sell the quote currency), let the base currency rise in value and then sell it back at a higher price. And if you want to sell(sell base currency/buy quote currency), the value of the base currency must drop  for you sell it back at a lower price. So  remember these two formulas: long=buy. short=sell . Let’s take a look at theAUD/JPY graphic below.

Long-short

This is a classic illustration of entering long/short using AUD/JPY in the 1hr time frame.  You go long when you spot engulfed candlesticks. By engulfed candlesticks,when a bull(strong candlestick) engulfs a bear(white candlestick. This suggests the value  has risen,and it’s time tobuy.This is exactly the case at the lines of support and resistance where the strong bull(white candlestick) engulfs  the bear(blue candlestick). The bulls are basically saying  the value of the currency has risen,and so they’re putting in a bid to buy. When you see something like this,why waste time?

As the short entries suggest,the value of the currency has dropped enough in value. So it’s time to sell. That’s according to the bears. Since they helped drive the price down,they’re now in the driver’s seat calling the shorts.

Know How To Ask/Bid

Not only should you know how to ask/bid as a trader,but you should know the difference between these two terms. For the record,all forex quotes are quoted with two prices –  The bid and the ask. Let’s see the graphic showing both terms.

bid-ask

This EUR/USD graphic illustrates the bid/ask scenario.. The bid is the price at which you’re willing to buy the base currency in exchange  for the quote currency. It is the best currency at which you(the trader) will to sell to the market.

Th ask is the price at which the broker is willing to sell the base currency in exchange for  the quote currency. It is the best currency at which you(the trader) will buy from the market. The ask is also known as the offer price. After all,if you want something you ask for it.Right? Also,let’s make one thing absolutely clear: The bid price  is  usually lower than the ask  price. Try do it the other way round, and you’re sure to get a massive rejection from your MT4 software.

Wanna know the difference between the bid and the ask price? It’s popularly known as the spread. On the EUR/USD quote above, the bid price is 1.34568 and the ask price is 1.34588 The ten pip difference is known as the spread, which we will be getting to next..

What Do We Mean by Pips In Forex Trade?

A pip is a popular acronym for price interest  point. Basically the pip measures the amount of change in the exchange rate for a currency pair.Most currency pairs are rounded up to four decimal places, so that one pip is 0.0001. The only exception is the yen,which is rounded up to two decimal places(0.01). So keep that in mind in case you decide to experiment.

However, forex  brokers are getting sexy these days.  They’re now offering fractional pips called pipettes to add extra precision when quoting  exchange rates for certain currency  pairs. Just so, you know a fractional pip is equivalent to 1/10 of a pip.So for instance, you can round  EUR/USD currency pair to five decimal places while the yen moves up a notch to three decimal places. Makes life more   for you  yen traders out  there . Doesn’t it?

Forex traders also use pips to make reference to gains and losses they’ve sustained in their trades. So when you hear a trader say “I made 40 pips in this trade,” he’s basically saying “ he profited by 40 pips.  However, the actual cash representation of these pips depends squarely on their value.

Speaking of which:

How Do I Determine Monetary Value Of Pip?

“How Do I Determine Monetary Value Of Pip” translates into “How Do I Calculate Profits.”Well, the monetary value of a pip is dependent on three crucial factors: the currency pair being  traded, the size of the trade, and the exchange rate. Let’s say a $300,000 trade between the USD/CAD pair closes at 1.0568. Here is how the profit is calculated.

  1. Determine the number of CAD each pip represents by multiplying the amount of the trade by 1 pip as follows:

300,000 x 0.0001 = 30 CAD per pip

 

  1. Divide the number of CAD per pip by the closing exchange rate to arrive at the number of USD per pip:

30 ÷ 1.0568 = 28.39 USD per pip

 

  1. Multiply the number of pips gained, by the value of each pip in USD to arrive at the total loss / profit for the trade:

20 x 28.39 = $567.80 USD profit

Seems fairly straight forward isn’t it?

Just to solidify your understanding of the calculation process, let me show you another example using the EUR/GBP pair and   using the same steps above.

Currency Pair Exchange Rate at Close Pip Change Trade Amount
EUR/GBP 0.8714 +29 350,000 EUR
  • Number of GBP per pip: 350,000 × 0.0001 = 35
  • Per Pip Value: 35 ÷ 0.8714 = 40.17 EUR per pip
  • Trade Profit / (Loss): 29 pips × 40.17 = 1, 164.93 Euros

Hopefully this example helped smooth things.

If you want to find why the forex trade is the biggest industry on the planet refer to Why Forex Trade Is So Popular?

 

If you’ve stumbled in here looking to join the forex trade bandwagon,  look up Why Forex Trade Is So popular.  Next,if you want to give your trading skills an edge by relying on pure price action trading/analysis,  instead of fancy forex robots,  get started with What is Price Action Trading?    And to be able to analyze/trade  with price action data, You Need To Know Ten of These Candlestick Patterns.  If you can’t interpret what your candlesticks are telling you, you cannot trade  with price action data.

However, if you only want to trade once a month and watch your entry rack up huge profits over a stretch  of several weeks, consult  How to Spot High Probability Trades.

That’s a wrap for “Forex Trading Basics From Top To Bottom Part I.” Hopefully you now have a feel for what you need to know to get started as a forex trader.. Next I’ll share with you more things you need to know  to make money as a forex trader in “Forex Trading Basics From Top To Bottom Part II.” Till then,take care.

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