What is forex?

What is forex? Why trade forex? 

 

The foreign exchange market – or forex for short – is the buying and selling of currencies, and it’s one of the fastest growing markets in the world. From 2007 to 2010, forex market activity increased by 20%, with average daily turnover reaching nearly $4 trillion in April of 2010.

 

 

Forex trading works much like it does with stocks, you buy low and you sell high. The benefit of trading forex is that you don’t have to choose from thousands of companies or sectors. Plus, you can make things even simpler than choosing which company to buy.

For example, most people, even those that are new to forex, have an opinion on the US dollar and the US economy. They can easily take their opinions and translate them into a forex trade. Buying or selling US Dollars as simple as they buying or selling a company’s stock.

Also, another advantage of the FX market is that it doesn’t begin at 9AM and end at 4PM. Trading takes place 24 hours a day, 5 days a week. For most people 24 hour trading means they can trade before or after work. Plus, you have the flexibility to make your trades online.

 

 

Plus, you can buy and sell at any time, in up trends (also called bull markets) and in down trends (also called bear markets).

Technical Analysis, Reversal Chart Patterns

Double Top

The double top is made up by two extreme peaks like the illustration below:

[Image 3]

After the first peak, there must be a decline of no more than 25% of the uptrend. (This decline makes up a support that must be broken for the pattern to be complete). Then the price rallies again to the resistance made by the first peak. Highs should be roughly equal. Then the price falls back down from resistance to support, and finally breaks the support (yellow box).

This type of patterns can be used during trending markets signaling a possible reversal or during trendless markets, to signal a possible change in the direction of the market.

Double Top in Action

[Chart 1]

See top #1 and top #2 have similar highs. The pattern is not valid until the market breaks the main support which happens in the yellow box. Notice also how the support zone becomes a resistance and stopped the market from reaching higher levels.

Double top commonly used target

Measure the amount of pips from the first peak to the support line (where it bounced back up to the second peak). Subtract the same amount of pips from the support line. This last quote will give us the target price.

Double Bottom

The double bottom pattern is made up by two extreme lows like the illustration below:

[Image 3]

After the first low, there must be a rally of no more than 25% of the downtrend. (This rally makes up the main resistance that must be broken for the pattern to be complete). Then the price drops again to the resistance made by the first low. Lows should be roughly equal. Then the price rallies again from the second low to the main resistance, and finally breaks the main resistance zone (yellow box).

This type of pattern can be used during trending markets signaling a possible reversal or during trendless markets, to signal a possible change in the direction of the market.

Double Bottom in Action

[Chart 2]

Lows #1 and #2 have similar levels. The pattern not considered valid until the market breaks the main resistance zone. Notice how the resistance zone becomes a support zone preventing prices from falling below those levels.

Double bottom commonly used target

Measure the amount of pips from the first low to the resistance line. Add the same amount to the resistance line; this last quote will give us the target price.

Both patterns reflect changes in supply and demand. In a double top, it reflects the inability of buyers to take the prices to new highs and trade above them. In a double bottom, the inability of sellers to break the lows and pull the prices further down.

Remember: The resistance/support made after the first peak/sell off could act as a support/resistance after the price breaks the zone.

Triple Top

The triple top is similar to double tops, but has three peaks (instead of two):

Triple Top

[Image 6]

Same mechanics are followed here. A prior trend has to be reversed, three peaks reasonably equivalent to each other, and an important support to be broken in order to complete the pattern. In this pattern the changes in supply and demand take a little longer to change the perspective of traders about the markets.

Triple top in Action

[Chart 3]

Three peaks form the triple top, the pattern becomes valid when the market breaks the main support area. Notice how the market retraces back to the resistance zone (previously a support zone) to test it.

The mechanics to get the target price for these patterns are the same as the double top and bottom.

Triple Bottom

The triple bottom is similar to double bottoms, but has three troughs (instead of two):

Triple Bottom

[Image 8]

Same mechanics are followed here, a prior trend has to be reversed, three troughs reasonably equivalent to each other, and an important resistance to be broken in order for the pattern to be complete. In this pattern the balance in supply and demand take a little longer to change the perspective of traders and investors about the markets.

Triple Bottom in Action

[Chart 4]

This triple bottom becomes valid when the market breaks through the main resistance area (yellow box).

The mechanics to get the target price for these patterns are the same as the double top and bottoms.

Head & Shoulders Top

The pattern is formed by three successive peaks:

[Image 4]

The second peak or the “head” must be the highest peak. The two other peaks or “shoulders” should be roughly equal. A support is made by the first and second bounces from the first and second peaks; this is commonly named as a neckline. The pattern is completed after the neckline is broken through and the price trades below it. The neckline becomes an important resistance once it has been broken.

Head and Shoulders in Action

[Chart 5]

This is a head & shoulders pattern under development, the market has not been able to break the neckline, thus it isn’t a valid head and shoulders pattern yet. Why did we use this one? Because it is important to track them when they are forming (not after the fact, when we know what happened) and see how they look like. This is the GBPJPY weekly chart, so if this pattern proves to be valid, it has a potential of more than 2,000 pips.

Head and shoulders top commonly used target

Measure the amount of pips from the highest peak (head) to the neckline. Subtract the same amount from the neckline; this final price will give you the target price.

Head & Shoulders Bottom

This pattern is made off three consecutive lows.

The second low is the deepest low (head), while the other two lows are roughly equal (shoulders). The pattern is considered complete when the neckline is broken.

Head and Shoulders in Action

Notice here the neckline is similar to a trendline (instead of a resistance).

Head and shoulders bottom commonly used target

Measure the amount of pips from the lowest low reached (head) to the neckline, and add this amount to the neckline to get the target price.

price action trading signal

• What is a price action trading signal?
Next, let’s discuss how we can use price action analysis to find entries into the Forex market from a raw price chart. As a result of years of trading the markets I have boiled down all I have learned into my own unique method of trading with price action. This method consists of a handful of very specific price action entry triggers that can provide you with a high-probability entry into the market. Essentially, what we are looking for is reoccurring price patterns that tell us something about what the market might do in the near-future.
For purposes of brevity and out of respect for my paid members, I won’t give away all of my trading strategies and entry triggers here, but you can learn more about the trading strategies that I teach in my trading course. In the chart below, we are going to look at a particularly good price action signal for trading with trends; the inside bar strategy.
In the example chart below, we can see one price action trading signal that I like to use in trending markets; the inside bar setup:
• How to use price action analysis to determine a market’s trend
You will probably come across many different indicators designed to tell you what the trend of a market is. However, the most time-tested and trusted way for determining a market’s trend is simply to look at the daily charts and analyze the market’s price action. To identify a downtrend, we look for patterns of lower highs and lower lows, sometimes annotated by “LH and LL”. To identify an uptrend, we look for patterns of higher highs and higher lows, sometimes annotated by “HH and HL”.
In the example chart below, we can see examples of a downtrend, an uptrend and an uptrend changing to a downtrend:

• Where and when should you trade a price action signal?
In my trading course I focus heavily on teaching my members how to trade with “confluence”. When I say “trading with confluence” I am basically referring to looking for areas or levels in the market that are clearly significant. Confluence means when things come together or intersect. Thus, when we are looking to “trade with confluence” we are trying to put together an obvious price action signal with a significant level in the market. There are different factors of confluence that we can watch for, but in the chart below I am showing you price action setups that formed at key support and resistance levels in the market; support and resistance are each a factor of confluence. Note, I have shown you two more price action setups in the chart below; the pin bar strategy and the fakey trading signal.
In the example chart below, we are looking how to trade price action setups from confluent levels in the market:
In closing…
This lesson gave you a basic overview of what price action analysis is and how to use it in the markets. From here, you should proceed to the next part of this beginner’s course and continue learning about Forex and price action trading.