FOREX

In order to be a successful trader, you need to understand what you are trading. You can do this by expanding your Forex knowledge through education as well as keeping up with the latest global Forex events. At bforex we understand the importance of Forex education and as such, we are pleased to present to you the Forex Basics ± seven easy lessons covering everything you need to know to begin trading. The Forex Basics covers everything from definitions of the main terms used, how to place orders and the fundamentals of reading Forex charts. There are also lessons on how to make money trading Forex as well as the advantages of trading Forex versus stocks. At bforex we aim to ensure that you can confidently trade Forex ± and importantly, that you can trade YOUR way. Once you understand the basics of Forex trading you can begin to customize your trading platform layout as well as your trading strategies and practices. In addition, understanding the basics of Forex will allow you to understand details about global events which significantly impact the Forex market. The Forex Basics is a great chance for beginners to learn all they need to know about Forex, while intermediate and expert traders can use it as an opportunity to refresh their FX knowledge.

Fundamentals of Forex Trading 1. Basics of Forex Trading ± What actually is Forex? What is a currency pair? What currencies are traded? This section will provides answers to these and other basic Forex trading questions.

2. How You Make Money Trading Forex ± It is not enough just to know what Forex is. In this section we will explain how to begin to profit when trading Forex.

3. Pips, Lots, Leverage & Margins- Offers an explanation for some of the basic terms in Forex trading, and how these terms are applied.

4. Placing Orders ± All you need to know about the different types of orders and how to place them when trading Forex.

5. Forex Versus Stocks ± Still not sure whether or not to trade Forex? Take a look at this section to see the advantages of trading Forex over trading stocks.

6. Basic Forex Definitions ± Definitions of some of the main words and terms that you will come across when following the Forex market.

7. Charts 101 ± An introductory guide to Forex charting, when charts are used and how to understand them. For more advanced information about Forex charts please click here. Basics of Forex Trading If you are new to Forex trading, then this is where your education should begin. At bforex we provide you with the answers to all your Forex questions, no matter how basic they may be. So start from the beginning and learn the basics of Forex trading to provide you with a strong foundation to understanding the principles of Forex. What is Forex? Forex, also known as Foreign Exchange or FX, are all terms used to describe the trading of world currencies. The Forex market is the largest and most liquid in the world, with a volume of over USD $1.5 trillion per day. What is traded on the Foreign Exchange Market? Essentially the answer is money. Forex trading is the simultaneous buying of one currency and the selling of another, and all world currencies are traded on the Forex market. As the Forex market has no physical location or centralized exchange, it is considered to be an Over-the-Counter (OTC) or ³Interbank´ market since the entire market is run electronically within a network of banks, 24 hours a day. Essentially, the exchange rate of a currency versus other currencies is a reflection of the condition of that country's economy, compared to the other countries' economies. Think of buying a currency like buying a share in a particular country. When you buy, for example, Swiss Francs, you are essentially buying a share in the Swiss economy as the price of the Swiss Franc is a direct reflection of what the world market thinks about the health of the Swiss economy. What is a Currency Pair? On the Forex market, the world¶s in pairs e.g. USD/JPY. If you buy a currency pair, you buy the base currency and sell the quote currency. The bid (buy price) represents how much of the quote currency is needed for you to get one unit of the base currency. Conversely, when you sell the currency pair you sell the base currency and buy the quote currency. The ask (sell price) for the currency pair represents how much you will get in the quote currency for selling one unit of the base currency. Example:

. then the price of the GBP/USD pair will drop as fewer US dollars are required to buy each Pound. the Great British Pound is quoted as GBP. you purchase (receive) 1 British Pound.16).5 US dollars that you sell.5347).5 US Dollars for every British Pound you sell.5000. So too if the Pound rises in value. there are obviously currencies that are more popularly traded in the Forex market. If the Pound drops in value. USD/JPY = 93. the GBP/USD price will also rise as more US dollars are required to buy each Pound. If you sell GBP/USD currency pair quoted at the same price. EUR/USD = 1. where the first two letters identify the name of the country and the third letter identifies the name of that country¶s currency (See above for a table of the most popularly traded currencies). For more information on this please see Pips. Below is a list of the 11 most commonly traded currencies. this means that for every 1. Each currency pair rate is quoted up to four decimal points (e. The only exception to this rule is any currency pair that contains the Japanese Yen (e.If you buy GBP/USD currency pair which is quoted at 1. What Currencies Are Traded? Whilst all currencies have the opportunity to be traded. For example.g. you would buy (receive) 1. the Norwegian Krone is quoted as NOK and the Canadian Dollar is quoted as CAD. in descending order: Symbol USD EUR JPY GBP CHF AUD CAD SEK HKD NOK NZD Country United States Euro Members Japan Great Britain Switzerland Australia Canada Sweden Hong Kong Norway New Zealand Currency Dollar Euro Yen Pound Franc Dollar Dollar Krona Dollar Krone Dollar How are Currencies Quoted? Forex currency symbols are always quoted in three letters.g.

a profit was made through the exchange rate difference.5666 for a date 2 months from today. A spot trade involves the purchase or sale of a foreign currency for immediate delivery.400 -10.000 x 1.000 USD -15.5666. What is a Forward Trade? In a Forward trade (sometimes called a Forward Contract). dollar. payment is actually made two days later). The date can be a few days or months in the future.100 GBP + 10.S.61 = 16. Going Long /Short . a buyer and seller agree on an exchange rate for any date in the future and the transaction occurs on that date at the pre-agreed rate.100 0 + 700 In this example.5400 Three weeks later you decide to change your Pounds back into US dollars at the exchange rate of 1.54 = 15. regardless of whether the EUR/USD rates go up or down.What is a Spot Trade? Spot trades account for almost one-third of all transactions in the Forex market. regardless of what the market rates are at that time.400 GBP 10. Spot trades are settled ³on the spot´ as opposed to a set date in the future (Note: By convention in the Forex market. The spot market is concerned with transactions dealing with the current price of an instrument.000 x 1.6100 You earn a profit of $700 Calculation GBP 10. The exchange rate is simply the ratio of one currency valued against another currency.000 + 16. in order that the currency you bought will increase in value compared to the one you sold. at that date in 2 months time the transaction will be processed at the agreed rate of 1. How You Make Money Trading Forex Exchange Rate The object of Forex trading is to exchange one currency for another in the expectation that the price will change. In the example above the GBP/USD exchange rate indicates how many British Pounds can purchase one U. if you trade $1000 EUR/USD at 1. Here is an example of making money by buying Pounds: Your Actions You buy 10000 Pounds at a GBP/USD exchange rate of 1. For example.

(You would then execute a sell order at a later date when the Euro value has risen. the price at which you (as the trader) will sell. then you want the base currency to rise in value so that you can then sell it back at a higher price. the price at which you (as the trader) will buy. Bid/Ask Spread All Forex quotes include a two-way price ± the Bid and the Ask. If you think that the US economy will continue to weaken after the market crash then you would execute a SELL USD/CHF order. USD/CHF In this currency pair the USD is the base currency and is therefore the ³basis´ for the buy/sell. The bid is always lower than the ask. If you believe that the US economy will strengthen and the Euro will weaken against the dollar. The ask price is the price at which the dealer is willing to sell the base currency in exchange for the quote currency i. making a profit on the exchange rate difference). (You would then execute a sell order at a later date when the value of the US dollar has indeed increased. (You would then execute a buy order at a later date when the Euro value has fallen. then you would execute a BUY EUR/USD order. making a profit on the exchange rate difference). If you want to sell (which actually means you would sell the base currency and buy the quote currency).S. If you believe that the US economy will continue to weaken.Before placing a trade. If you want to buy (which actually means you want to buy the base currency and sell the quote currency). Here are some examples of deciding whether to buy or sell (using fundamental analysis): EUR/USD In this currency pair the Euro is the base currency (as it is quoted first) and is therefore the ³basis´ for the buy/sell. The difference between the bid and the ask is known as the spread. you need to determine whether you want to buy or sell a currency. The bid is the price at which the dealer is prepared to buy the base currency in exchange for the quote currency i.e. By doing this you will have bought Euros in the expectation that their value will rise versus the US dollar. If you believe that the Swiss Franc is overvalued then you would execute a BUY USD/CHF order. then you would execute a SELL EUR/USD order. By doing this you will have bought U. making a profit on the exchange rate difference.e. By doing so you have sold US dollars in the expectation that . By doing this you will have sold Euros in the expectation that their value will fall relative to the US dollar. then you want the base currency to drop in value so that you can then buy it back at a lower price. which will in turn weaken the US dollar. This is called ³going short´ or taking a ³short position´. dollars in the expectation that they will appreciate in value versus the Swiss Franc. In Forex lingo this is called ³going long´ or taking a ³long position´.

(You would then execute a buy order at a later date when the value of the US dollar has indeed decreased. Lots.g.3681. and stands for ³percentage in point´. Lots Since pips are the smallest increment of a currency. Pips.01. making a profit on the exchange rate difference). and a mini lot is 10. This allows you to become familiar with the platform and how the trading process looks in reality. Pips A pip is the smallest price unit for a currency. There are exceptions to this rule. A pip is displayed as the last decimal point in every exchange rate or currency pair.0001. meaning that one pip = 0. As such. . While these amounts are fine for banks and liquidity providers. the most common one being trades including the Japanese Yen (e. meaning that one pip = 0. Demo Trading At bforex. Leverage Leverage allows Forex traders to control a large amount of money using very little of their own money and effectively ³borrowing´ the rest.000 units. with the standard lot being 100.they will depreciate against the Swiss Franc. if you bought EUR/USD for 1. If you are a new trader and are nervous about beginning trading with real money. The Demo account also allows you to trade Forex in a riskfree environment until you feel comfortable enough to begin trading in your Live Account. Practically what this means is that you can control more money in a trade than you actually have in your trading account. in order to make trading Forex more accessible to the average trader.000 units of the currency being traded. It is these definitions of one pip that are used to calculate profit and loss. the average trader would never be able to afford to trade at lots this high. then you made 13 pips profit. Pips are also sometimes referred to as ³points´. this would be the fourth decimal point. in order to take advantage of the pips you would need to trade large amounts of a particular currency in order to see any significant profit or loss. USD/JPY). Forex brokers introduced a concept called leverage. For example. Spot Forex is traded in lots. Leverage and Margins Understanding the concepts of pips and leverage is essential in order to be able to make money while trading Forex. For most currency pairs. These currency pairs are quoted to two decimal places only. then you should begin trading on our Demo Account. we offer a free demo trading account in addition to your live trading account.3668 and you sold at 1.

So if the EUR/USD pair increases by 10 pips (10 x $1) from 1.3010 would equate in a $100 increase. Limit Order/Entry Order . Trading on Margin Margin is the amount of collateral required by a Forex trader in order maintain open positions in the Forex market. you would only need 1000 units. If your account falls below the required margin requirements then all open positions are closed automatically. For example. then your account equity would increase or decrease by $10 with each pip movement.3000 to 1. If the market moves against you by 10 pips. Example: If you buy one mini lot of EUR/USD. then you will need $130 dollars in your account in margin in order to keep the position open.000 would only take 100 units. Below are some of the main orders you might come across: Market Order A market order is an order to buy or sell at the current market price.000. meaning that you need one unit of currency in order to control 100 units in the Forex market. E.5452 ± if you wanted to buy at this exact price. and the trading platform would instantly execute a Buy order at that price. If the price moves against you by one pip. If you decide that you want to trade at the price currently quoted. since there are no margin calls in Forex. you can control $100. if you buy one mini lot (10 000) of EUR/USD for 1.3010 with mini lots.3000 to 1. This allows access to the Forex market for anyone who wants to trade. then your account equity will increase or decrease by $1 for each pip of movement. For example. Placing Orders The term ³order´ refers to how you will enter or exit a trade. This would mean that in order to control a standard lot of 100. So too with standard lots. If you buy one standard lot.g. you would click Buy.3000 at 1:100 leverage. In this section we will present you with the different types of orders that can be placed into the foreign exchange market. then this would equate to a $10 increase. you will need $140 to be in your account. you can simply click on the quote and Sell or Buy at the quoted price.At bforex we offer 1:100 leverage.000 with only a $1000 deposit. then you will need there to be $131 in your account. and controlling a mini lot of 10. GBP/USD is currently trading at 1. a 10 pip increase from 1.

5472.5472.e. so that the order will be placed only when the specified price has been reached.5400. a take profit order protects your profits by ensuring that your position is closed if your target price is reached and you are either unavailable or in a fast market where the price touch might be too fast for you to react to. This closes out your position for a 30 pips loss. then your Stop would be placed somewhere above your entry.5452. just in case the market has a sudden unexpected pick-up. with the purpose of preventing additional losses if a price goes against you.5472 (i. then no order will be executed.5472.5400. Take Profit A take profit order is the reverse of a stop-loss order. So you essentially have 2 options ± you can sit and wait for the market price to reach 1. and below the entry price if you are in a short position (selling).5400.A limit order is an order placed to buy or sell at a certain price. your trading platform will automatically execute a buy order at that exact price. For example: GBP/USD is trading currently at 1. You want to go long (buy) only if the price reaches 1. but actually falls instead. then you would set the Stop somewhere beneath your entry in order to protect yourself from a sudden drop in the market. You can preselect both of these variables in advance. dropping the GBP/USD rate to 1. If you are entering a long position (buying) then you normally set the target price for the take profit above the current price. A Stop placed over a short position is executed when the price is touched by the ask price.5430 and you decided to limit your maximum loss potential by setting up a stop-loss order at 1. Stop-Loss Order A stop-loss order is essentially a limit order that is linked to an open trade. For example: You bought (went long) GBP/USD at 1. goes up another 20 pips). thus protecting you from further losses had you not placed the stop-loss order. This means that if the market does not get stronger as you predicted. it is always a good idea to have both a stop and take profit target. The order essentially contains two variables. Forex versus Stocks . Whilst a stop-loss order protects you from future losses. If the price does not reach 1. If you are selling a short position. A Stop under a long position is automatically closed if the price is touched by the bid price. If the price rises up to 1.5472 or alternatively you can set a buy limit order at 1. When entering a new position. your trading platform will automatically execute a sell order at 1. duration and price. If you are buying a long position.

24 Hour Trading Whereas the stock market is only open for trading for approximately 7 hours per day five days a week. This means you can enter and exit the market whenever you want. Thousands of Stocks Vs Six Major Currency Pairs Between the New York Stock Exchange and the NASDAQ there are over 8000 stocks that are tradable. Stability and Predictability Forex is generally a more predictable instrument than stocks.. so how do you choose which particular ones to follow? With great difficulty! In the Forex market there are 6 majorly traded currency pairs and about 34 second-tier currencies. the Forex market is open 24 hours a day five days a week. This makes it a lot easier not only to stay educated about the products you are trading. As a Forex trader. Forex prices have historically followed well-established trends. Instant Execution of Market Orders In the Forex market. Commission-Free Trading In the Forex market you do not need to pay any charges. However with the Forex market now the largest financial market in the world with around $1. You see the rates in real-time and can execute directly off real-time streaming prices. so you can keep track of where every dollar is going. All you pay is on the spread. This makes the costs of the Forex market lower than any other market. all you need to do is design your trading strategy based on a combination of technical and fundamental analysis in order to maximize profits. under normal conditions. and less predictability. commissions or brokerage fees as is the case with trading on the stock market. In the Forex market what you see is what you get. Stock markets have historically tended to suffer from ³insider-trading´ scandals. With the ability to trade during the U.S. but also to manage your trading portfolio. your trades are executed instantaneously. It would be very difficult to stay educated about every single stock. there are many advantages to trading Forex over stocks. Asian and European market hours.5 trillion dollars being transacted daily. when trading Forex you can customize your trading schedule to trade when it is convenient for you. Basic Forex Definitions Minor and Major Currencies .Stocks (otherwise known as Equities or Shares traded in the Equity or Share Market) have been a popular investment product for hundreds of years.

there is now no need to trade via the USD. GBP) into USD. and then convert from USD to the second currency (JPY).g. however for currency pairs involving JPY. one pip = 0. The primary exceptions to this rule are the British Pound (GBP). if the bid rate for EUR/USD is 1. if you wanted to trade one currency for another where neither currency was the USD. In cross currency pairs. There are seven currencies that are generally referred to as major currencies (USD.0765 CHF (Swiss Francs). GBP. Historically. Pip A pip is the smallest unit by which a cross price changes. EUR. you would be required to convert the first currency (e.0001 for most currencies.3498 and the ask rate is 1. Australian Dollar (AUD) and New Zealand Dollar (NZD). Cross Currency Trading A cross currency is a traded currency pair that does not include the US dollar e. Bid Rate The bid rate is the price at which you can sell a currency.e. the Euro (EUR).0765 then 1 USD is worth 1. For more on pips please see here.01. CHF. CAD and AUD). Ask Rate The ask rate is the price at which you can buy a currency. GBP/JPY. Spread The spread is the difference between the bid and the ask rate i. It shows how much the base currency is worth as compared to the Quote Currency (also called the Second Currency or Pip Currency). if the USD/CHF rate is 1. the USD is usually considered the base currency for most currency quotes. Generally this is 0. but also tend to be more stable.g. Base Currency The base currency is the first currency quoted in a currency pair. For example.The major currencies are those that are not only more popularly traded. with less fluctuation. The minor currencies are all currencies outside these eight and they tend to be less powerful with greater fluctuations.3501 then the spread is 3 pips. JPY. As a general rule in the Forex market. .

Bull Market A bull market is a market in which prices are rising or expected to rise. and is a market in which prices are falling or expected to fall. it is assumed that their currency is doing well also since the better a country¶s economy.e. and which does not look like it will recover any time soon. the more trust other countries have in that economy. A bear market is one in which there has been a sustained fall in prices. It looks at the economic. It is in technical analysis that charts are therefore used to look at historical price movements in order to identify patterns and . The US dollar gets stronger because the US economy gets stronger. it is important to know what the charts are generally used for ± and the answer is Analysis. Bear Market A bear market is the opposite of a bull market. Technical analysts believe that historical performances of markets are indications of future performance. A liquid market is one in which there is enough activity to satisfy both buyers and sellers. I. The idea behind this type of analysis is that if a country¶s economy is doing well. Essentially fundamental analysis involves: Good Economy = Higher Currency Value Bad Economy = Lower Currency Value In the Advanced Forex section we will go into more details about which specific news events drive currency prices the most. A bull market is characterized by enthusiastic and sustained buying. There are two basic types of analysis generally used when approaching Forex trading: Fundamental Analysis Fundamental analysis of Forex is a way of analyzing a currency through the strength of that country¶s economy. Charts 101 Before we begin going through the basics of chart reading.Liquidity Liquidity is the capacity to be converted into cash easily and with minimum loss. social and political forces that affect supply and demand. Technical Analysis Technical analysis is the study of price movement.

Traditionally. Each time period shows a vertical line or bar. However the candlestick chart displays the opening and . monthly and even yearly time scale. which gives us a better idea about where it will go. Bar Charts A bar chart also shows closing prices (like a line chart) however it also simultaneously displays opening prices as well as highs and lows. The line graph can track price movement on a daily. it is important to take into account both types of analysis when determining trading strategy.trends which can assist you in determining good trading opportunities. the line chart displays the quote price on the right hand axis and the time scale on the bottom axis. So which type of analysis is better??? Whilst you will always find people who believe that one type of analysis is better than the other. Candlestick Charts Candlestick charts display the same information as a bar chart with a more appealing layout. the vertical lines coming out of the candlestick indicate the highest and lowest prices paid during that time period. A basic line chart draws a line from one closing price to the next closing price. The horizontal hash on the right-side of the vertical bar indicates the closing price while the horizontal hash on the left-side of the bar indicates the opening price. The charts allow us to visually see where the market has gone. Technical analysis can help you to determine market trends in their early stages and therefore provide you with potentially profitable trading opportunities. while the bottom of the vertical bar indicates the lowest price paid during that time period. which displays the currency pair¶s trading range as a whole. Like the bar chart. CHARTS There are three main types of charts used in Forex analysis: Line Charts The popularity of line charts stems from the fact that they are the easiest to read. When the closing prices are strung together with a line. we can get an idea of the general price movement of a currency pair over a period of time. weekly. The top of the line indicates the highest paid price for that time period.

Candlestick charts are easy to interpret and are good at identifying market turning points such as reversals from a downtrend to an uptrend.closing prices in the body of the candlestick itself. downtrends and ranges. 2. 5. in the colored-in portion. as well as developing strategies to analyze and predict market behavior. Fibonacci ± Fibonacci plays an important role in Forex analysis. Understanding some of the advanced principles of Forex trading will greatly assist your trading potential by providing you with the tools you need in order to predict future market behavior. News & Events Affecting the Forex market ± A more detailed looking into Fundamental Analysis. 3. this section will provide a look into advanced chart reading including understanding support. Advanced Principles of Forex 1. as well as an explanation on how to use trendlines for Forex trading. Oscillators & Indicators ± Offers an explanation of various types of oscillating indicators that help in analyzing price movements during Forex trading. Trends and Trendlines ± Provides details on up-trends. red indicates that it closed lower. In addition. 4. . resistance and moving averages. this section provides an overview of the types of news & events worth following that may impact on the Forex market. This section will provide you with an understanding of Fibonacci retracement and extension levels. Advanced Charts & Analysis ± A deeper look into Technical Analysis. Welcome to Advanced Forex! This section follows on from the Forex Basics and aims to provide intermediate and experienced traders with educational tools to assist in understanding the Forex market. the color of the candlestick indicates whether a currency closed higher or lower than it opened ± green indicates that it closed higher.

interest rates. then a change in Japanese economy could have a devastating effect on your trading results. The USD is the most traded currency in the world by volume. for example. dollar as the base currency.. and capital flows. unemployment levels. inflation. you are mainly trading EUR/USD. then be sure to keep an eye out for economic reports about the US economy specifically.S. it is important to keep the information in mind relative to the currencies you are trading. you can expect that there will be an effect on the Forex market. Therefore. But if. These are key indicators of the strength and state of a country¶s economy and as such. The basis of fundamental analysis is that a nation¶s economic position will have an effect on the value of that country¶s currency. looking at the economic. but not immediately and most probably you will not have enough time to take appropriate action. Developments such as very strong or poor financial results in other powerful countries such as Japan will still affect the EUR and USD eventually. no matter what currencies you trade. their release could cause price changes in the Forex Market. then it is important to stay aware of events in the USA and Europe. social and political forces that affect supply and demand. However if you are trading in USD/JPY. Currency Pair When looking at events and news affecting the economy of a country. so it is always a good to keep an eye on US data. Trading Systems & Strategies ± Why is having a trading strategy so important? Some tips and ideas for creating and implementing a successful trading strategy We learnt in the Basic Forex lessons that Fundamental Analysis is a way of analyzing a currency through the strength of that country¶s economy. retail sales. The main financial statements that will impact the Forex market include reports on a nation¶s GDP (Gross Domestic Product). .6. The Economy A dynamic economy equates to a strong currency. If you are mainly trading currency pairs with the U. So what kind of events and forces should you be looking out for? Which news should you be tracking? This section will provide you with the answers to these questions«. any news or event related to a particular country can potentially provide useful information about that country¶s economy. Economic/Financial Reports Any time that a key financial or economic statement is due out from one of the major players in the global economy.

S. fiscal debt. earthquakes and volcanic eruptions can cause fluctuations in the Forex market. we will go through some advanced indicators used for analyzing Forex charts. higher spending on U. civil unrest. The basics of support & resistance can be seen in the diagram below. For example: The September 11th terrorist attacks on the United States was a major global event that was followed by unprecedented geopolitical consequences ² war in Afghanistan and Iraq. you will recall reading that most charts are used as part of Technical Analysis.S. Examples of such events include country elections.Many of these reports and statements are released on a regular basis on prearranged days. predicted and actual results. war budget and a higher U. which is the study of price movement. Certain Social and Political events of significant importance can also have a strong influence on a nation¶s currency. In this section. but will also display the previous. terrorist attacks and even natural disasters such as floods. In the Charts 101 lesson in Forex Basics. which will not only tell you month-by-month which reports are due out. . While some of these events can be hard to predict. it will give you an idea of what might happen in a future event. and can cause fluctuations in the Forex market. you can still reach assumptions about their impact on the market after the event based on your experience. All these events in turn caused the EUR/USD trends to reverse in September from a bearish to a bullish market. By looking at what happened to the market and currencies last time a similar event happened. Social and Political Events It is not only the economy. Support & Resistance Support & resistance is one of the most widely used concepts in Forex trading. At bforex you can track the release of this information through the Economic Calendar. and economic factors that affect the Forex market.

as the market begins moving up again the lowest point it reaches is called the support. These sellers will eventually need to cover their positions and buy and so when the number of buyers outnumbers the sellers. Line charts are the most useful chart for determining support and resistance zones as they simply display the closing price with no reflex movements. A moving average indicator is used to help predict future prices ± by looking at the slope of the moving average you can make general assumptions about which direction the price will go. the highest point it reaches before pulling back is called the resistance. a support level is formed.In the diagram you can see that when the market moves up and then pulls back. a resistance level is formed. When the value being plotted is a straight average with no modifications. Moving Averages A moving average is a way of smoothing out price action over time. These buyers will eventually need to sell and so when the number of sellers eventually outnumbers the buyers. there is the potential to confuse a forming trend with a price spike. When the barrier stops the price getting any higher then it is called resistance. The downside of this is that since the price is responded to so quickly. the stronger the area of support or resistance is. it means that more people are buying than selling. SMA versus EMA ± which is better? Exponential moving averages respond to price action very quickly. then it is known as support. there will be more sellers than buyers. thus resulting in higher profit. The pattern constantly repeats itself over time. which can help you catch trends rather quickly. Another way of thinking about it is as barriers ± If a barrier keeps a price from dropping any lower. it is known as a Simple Moving Average (SMA) and is usually tracked over a longer period of time. So too when a price is moving down. In an Exponential Moving Average (EMA) more weight is given to the latest data which is usually tracked over a shorter period of time. . After pulling back. So what causes Support and Resistance? When the price is moving up. The more often price tests a level of support or resistance without breaking it. by taking the average closing price of a currency for the last µX¶ number of periods.

with higher highs and higher lows.e. There are three directions in which a market trend can move in: up. they can provide the trader with an accurate picture of market movement. Trendlines Drawing trendlines can be very useful in predicting future price levels. If drawn correctly. By connecting the previous peaks or lows and extending the line. the situation is reversed. the price is said to be in range. you can get an idea of where the future support and resistance levels are likely to be. When a trend moves sideways (i. It is best to use pivot points after previously determining the direction of the trend. Pivot points are a technique used by professional traders to determine exit and entry points for the trading day based on the previous day¶s trading activity. as well as the resistance levels. Since the SMA is smoother and slower to respond to price actions. not up or down). potentially causing you to miss out on a good trading opportunity. you are saved from responding to many ³false´ trends. Pivot Points Pivot points can be used to identify important support and resistance levels. Trendlines are created by drawing lines connecting the tops of support levels. in an uptrend the base currency is going up in value. with lower highs and lower lows. Conversely. in order to effectively predict future price movement.With a simple moving average. . As you can see from the above graphs. down or sideways. Forex pivot points are calculated in order to determine levels in which the sentiment of the market could change from "bullish" to "bearish´. Trendlines are one of the most common and basic forms of technical analysis. However the downside is the potential to delay too long. Pivot points can be very useful as many currency pairs usually fluctuate between these levels. in a downtrend the base currency is going down in value.

Fibonacci Retracements Fibonacci retracement involves anticipating changes in trends as prices approach the lines created by the Fibonacci studies.Channels More specific than trendlines. 2. You can create a descending channel by drawing a parallel line at the same angle as the downtrend line and then moving that line to a position where it touches the most recent valley. 0. 34. the support and resistance levels become a self-fulfilling expectation. Traders can use the Fibonacci retracement levels as support and resistance levels. 13. 0. 144 «« Calculating the ratios can be completed.382. 1. as they assist in identifying entry and exit points in the trade. After a significant price move (either up or down). utilizing channels is a good tool for identifying key buying and selling areas. The ratios arise from the following number series: 1. prices will often retrace a significant portion (if not all) of the original move. It is more important to simply remember these numbers: 0. What is Fibonacci? Leonardo Fibonacci was a famous Italian mathematician who discovered a simple series of numbers that created ratios describing the natural proportions of things in the universe. You can create an ascending channel by drawing a parallel line at the same angle as an uptrend line and then moving that line to a position where it touches the most recent peak. 89. 5. so it is important to have at least a basic understanding of what they are and where they come from. 55. support and resistance levels often occur at or near the Fibonacci Retracement levels. and most charting software (including that of bforex) will do the calculations for you. 3. Fibonacci ratios are common in Forex trading. When prices hit the upper trend line this may be used as a selling area. As the prices retrace.500. Drawing a parallel line at the same angle of the uptrend or downtrend will create a channel. 8. . Since so many traders watch these same levels and place buy and sell orders on them to enter trades or place stops. 21.618 Fibonacci retracement and extension levels are useful for all Forex traders. When prices hit the bottom trend line this may be used as a buying area.

When the moving average lines are below 20. this tool usually works due to self-fulfilling expectations. Stochastics are scaled from 0 to 100. Parabolic SAR The Parabolic SAR (Stop and Reversal) can also help us determine where a trend might be ending. then it means that the market is oversold and we should look to buy. Traders use the Fibonacci extension levels as profit taking levels. Since so many traders are watching these levels and placing buy and sell orders to take profits. When the moving average lines are above 80. A Parabolic SAR places points or dots on a chart that indicate potential reversals in price movement. This is the earliest indicator to interpret because it only gives bearish and bullish signals. and help us to determine where a trend might be ending. . Oscillating Indicators Stochastics Stochastics are used to indicate overbought and oversold conditions.Fibonacci Extensions There are times when a pullback in the market can retrace beyond the original starting point and exceed 100 percent of the initial wave or trend. A Fibonacci extension is essentially a correction that exceeds the low of the initial trend. This is known as a Fibonacci extension. it means that the market is overbought and we should look to sell.

RSI is a popular tool because it can also be used to confirm trend formations. which measures the distance between the two moving averages. The downside of MACD is its lag due to using so many moving averages. or RSI. When the points are below the candles in the chart. it is a sell signal.When the points are above the candles in the chart. The MACD is used to identify moving averages that are indicating a new trend. one slow) and vertical lines called a histogram. Momentum Indicators MACD MACD stands for Moving Average Convergence Divergence. These are best used in market trends that consist of downturns and long rallies. is similar to stochastics in that it indicates overbought and oversold conditions. and readings below 30 indicating that the market is oversold and we should look to buy. wait for the RSI to go above or below 50 (depending on whether you are looking at a downtrend or an uptrend) before you enter a trade. it is a buy signal. MACD consists of 2 moving averages (one fast. It is also scaled from 1 to 100. RSI Relative Strength Index. with readings above 700 indicating that the market is overbought and we should look to sell. . since the moving average lines are actually moving averages of other moving averages. whether it¶s bullish or bearish. If you think a trend is forming. not of the price. It can also help spot trend reversals.

to then be caught up in the moment and forget everything that you have planned. What is the purpose of a trading system? While the most obvious answer to the above question might be ± to make money. . then it definitely will not be able to make you money. There are many things to consider when developing a trading strategy that is right for you.Moving Averages For information on moving averages please see Advanced Charts & Analysis. The most important part of a trading system is the stick to the rules and criteria that you put in place. Having a trading strategy in place rather than placing random and spontaneous trades is an important way of maximizing trading potential. this is not actually the correct answer! The aim of your trading system should be: 1. We aren¶t going to provide you with a fool-proof strategy ± because that doesn¶t exist. To be able to find indicators to confirm your trends If your trading system cannot fulfill these two criteria. What should I consider in my trading system? There are six important criteria that should be considered when developing your trading system: 1. What we can do is give you an idea of the things to take into account in order to develop your personal strategy. Time Frame ± Are you a day trader or a swing trader? Do you look at charts daily or weekly? Knowing the type of trader you are will determine the time frame you should use when looking for trade signals. To be able to identify trends as soon as possible 2. There is no point in spending time and effort creating your system.

. Indicators to Identify Trends ± It is important to select the appropriate indicators for identifying new trends. You are much more likely to be a successful trader if you have a trading plan and stick to it! What is involved in a trading strategy? The main part of your trading strategy will be your trading system that you created. Define Your Risk ± It is important to determine your own personal level of risk i. You can do this by first looking at charts for previous time periods. 5. but you should plan your system to act within your risk limit. It lays down all the technical details of how and when you will trade. and waiting until the fast one crosses over or under the slow one) are a useful one. to ensure you aren¶t acting on a ³false´ trend. You should also keep in mind in the trading system things like your preferred currency pairs you wish to trade and how much risk you can afford per trade and in total.2. your weaknesses and your goals. In addition to the trading system. it is important to consider factors such as your trading routine (determines when and how often will you be analyzing the market). Define Entries & Exits ± Knowing when you will enter and exit the market is very important. 4. It is then a good idea to try out your system in a Demo account until you are confident it is working. Indicators to Confirm Trends ± Just as important as indicators to identify trends is finding indicators that confirm these new trends. your mindset (forcing you to stay unemotional). and assists you in sticking with the trading rules that you have laid out for yourself. and then move to a live account. Each person¶s risk will be different. Will you act as soon as your indicators line up or will you wait until the candle closes? How can I test my system? It is important to test your trading system before launching straight into live trading under the system. 3. Moving Average Crossovers (using both a fast and slow MA. following your trading rules and simulate where you would enter or exit trades. What is a trading strategy? A trading strategy keeps your trading consistent. how much you are prepared to lose.e.

.Considering all these factors together will provide you with an excellent overall plan for successful trading in the Forex market.