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Beginners Tutorials |
Written by ActionForex.com |
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The Foreign Exchange Market is an over-the-counter (OTC) market, which means that there is no central exchange and clearing house where orders are matched. With different levels of access, currencies are traded in different market makers: |
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Beginners Tutorials |
Written by ActionForex.com |
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The recently technology advancement has broken down the barriers that used to stand between retail clients of FX market and the inter-bank market. The online forex trading revolution was originated in the late 90's, which opened its doors to retail clients by connecting the market makers to the end users. |
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Beginners Tutorials |
Written by ActionForex.com |
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The table presents the comparison of various financial markets and some of their basic features. |
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Beginners Tutorials |
Written by ActionForex.com |
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In margin forex trading, there are two prices for each currency pair, a "bid" (or sell) price and an "ask" (or buy) price. The bid price is the rate at which traders can sell to the executing firm, while the ask price is the rate at which traders can buy from the executing firm. |
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Beginners Tutorials |
Written by ActionForex.com |
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The forex market provides different kinds of orders for trading. The following are some major types of orders that can be found on forex trading stations. |
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Beginners Tutorials |
Written by ActionForex.com |
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Margin is the amount of equity that must be maintained in a trading account to keep a position open. It acts as a good faith deposit by the trader to ensure against trading losses. A margin account allows customers to open positions with higher value than the amount of funds they have deposited in their account. |
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Beginners Tutorials |
Written by ActionForex.com |
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There are two major approaches to analyzing the currency market, fundamental analysis and technical analysis. The fundamental analysis focuses on the underlying causes of price movements, such as the economic, social, and political forces that drive supply and demand. The technical analysis focuses on the studies of the price movements themselves. Technical analysts use historical data to forecast the direction of future prices. |
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Beginners Tutorials |
Written by ActionForex.com |
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A chart is the most important tool for understanding the total sum of what is going on in the market. Almost all traders today, particularly those who trade actively, use their favourite types of charts to analyse the market. In the end, a chart is a visualised representation of the price movements, a reflection of the psychology of the market and a visualization of the interaction between buyers and sellers in the market. |
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Beginners Tutorials |
Written by ActionForex.com |
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Support levels essentially give the market a 'floor', since they are areas where buyers tend to be strong. If the price falls to a strong support level, traders should expect buyers to step in and drive the price up, or at least keep it from moving any lower. |
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Beginners Tutorials |
Written by ActionForex.com |
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A trend represents a general direction of the market. Dow Theory asserts that major trends have three distinct phases: accumulation, public participation and distribution. The accumulation phase represents the first part of the trend in which those who are well-informed buy or sell. In other words, if the well-informed recognize that the recent downtrend is soon coming to an end, they would buy, and vice versa. |
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Beginners Tutorials |
Written by ActionForex.com |
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The existence of a trend in any market depends on a series of relative highs and lows. Two consecutive relative highs, each above the previous relative high, and two relative lows above the previous low would be constitute a tentative up-trend. A third relative high would confirm the trend. |
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Beginners Tutorials |
Written by ActionForex.com |
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Trend lines are lines drawn on the historical price levels that depict general direction of where the marking is heading, and provide indications of support or resistance. Drawing trend lines is a highly subjective matter. The best test of whether a trend line is a valid one is usually whether it looks like a good line. In an up trend, a trend line should connect the relative low points on the chart. A line connecting the lows in a longer-term rally will be a support line that can provide a floor for partial retracements. The down trend line that connects the relative highs on the chart will similarly act as resistance to shorter moves back higher. |
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Beginners Tutorials |
Written by ActionForex.com |
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Only one of two things can happen when a price approaches support or resistance: the price can break through it, or it can bounce off and reverse direction. The same is of course true for trend lines. If a chart is trending in a clear direction, and a trend line can be drawn connecting a series of relative highs or relative lows, trading opportunities exist when the price approaches the trend line. |
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Beginners Tutorials |
Written by ActionForex.com |
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A trending market can move between parallel support and resistance levels. A price channel between two parallel lines can often be drawn in a trending market. The key to a price channel is that the lines be parallel to each other. The value of the price channel in predicting the ongoing speed of a trend depends on the lines being parallel. |
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Beginners Tutorials |
Written by ActionForex.com |
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Candlestick charts shows information about the price action and the movement of the currency price over a specified period of time. It contains the market's open, closing, low and high of that specific time frame. Below is an analysis of a candlestick chart and its components. |
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Beginners Tutorials |
Written by ActionForex.com |
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A spike high is a period whose high is sharply above both the high of the previous period as well as the high of the following period. Conversely, a spike low is a day whose low price is sharply below both the low of the following period as well as the low of the previous period. Spikes can often signal reversals of the most recent trends and they can often look similar to hammers and hanging man. |
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Beginners Tutorials |
Written by ActionForex.com |
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A reversal high day is a day in which the high price reaches a level higher than the previous high, and then reverses to close below the previous close. Like spike days, a reversal high day's mirror image is a reversal low day, in which the market sets a new low before reversing to close above the previous close. Also like spike days, the significance of reversal days increases when there is a preceding up trend (for reversal high days) or a preceding downtrend (for reversal low days). |
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Beginners Tutorials |
Written by ActionForex.com |
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An up-thrust day is when the close for the current period surpasses the previous period's close. A down-thrust day is when the close for the current period is below the previous period's close. Similar to spike and reversal days, thrust days signify both the strength in the market as well as the possibility of directional reversals. A series of up-thrust days would suggest a pronounced up trend, while a series of down-thrust days would indicate a downtrend dictated by seller dominance in the market. |
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Beginners Tutorials |
Written by ActionForex.com |
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In a range bound market - meaning a market that does not possess a clear directional trend, but rather moves back and forth between support and resistance - traders are essentially looking to short at the top of the range, and buy at the bottom of the range. It is worth noting that this strategy often results in limited profits, as it does not seem to rely on identifying a trend. Nevertheless it can be useful in capturing many small moves for the trader who can maintain discipline and self-control while trading this strategy. |
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Beginners Tutorials |
Written by ActionForex.com |
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The candlestick pattern serves to confirm the fact that the market is acknowledging the importance of the retracement level. Traders should look to enter the position just outside of the reversal candle's range. At that point, there is sufficient reason to believe that the retracement is over and that the primary trend is ready to resume. |
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Beginners Tutorials |
Written by ActionForex.com |
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Candlestick patterns are used to confirm reversals. Often when a price moves towards a support or resistance level, it is unclear for several periods on the chart whether it is going to break through or reverse. Intraday penetrations of important technical levels are often misleading signals, but quick bounces off support can be false signals as well. Candlestick patterns offer a means of confirming that a price has reversed itself at a key technical level. They also provide a precise entry point and ensure that the market's momentum is in the direction of the trader's position at the time of entry. |
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Beginners Tutorials |
Written by ActionForex.com |
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There are two major ways to trade the financial markets: swing trading and trend following. Swing traders use technical analysis to look for short-term price movement and capture gains in a relative short-term period. They look for the price patterns that hint for a reversal, in order that they can pick the tops and bottoms of the trend. Trend followers pay attention to the general direction of the price movement and enter trades by following the current direction. They would look for continuation patterns on the price charts to predict the future direction of the trend, or exit the trade until the reversal patterns appear. |
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Beginners Tutorials |
Written by ActionForex.com |
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The following are the three basic tenets about identifying reversal patterns. While they may seem obvious and even simplistic, they are important for successfully using these patterns. A Trend Must Exist - A trend must exist before a reversal of the trend. There can be no reversal if a trend does not exist in the first place. A reversal pattern that follows a large trend will have much more movement to retrace, and so the strength of the move after the reversal pattern will likely be stronger. |
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Beginners Tutorials |
Written by ActionForex.com |
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The Head and Shoulders pattern is one of the most famous reversal patterns and one that gives a clear signal and entry point. The head and shoulders in an uptrend consists of three relative highs: the first and last peaks are of nearly equal size and are the shoulders of the formation. The middle peak is greater than the other two and forms the head of the pattern. The relative lows in between the head and shoulders form a neckline at the base of the pattern. Once the pattern is completed, the neckline becomes a key support level; the market can bounce off it and reverse, or it can break through it and gather momentum. |
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Beginners Tutorials |
Written by ActionForex.com |
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The double top formation is a straightforward pattern that is easy to recognize on a chart. One of the features of a market in an uptrend is a series of increasing highs and relatively higher lows. If the market on one of its high points fails to break above the previous high, but instead stalls at the same price, this is an indication that the trend is weakening and may reverse. A double top is therefore a simple horizontal line that connects two relative highs at the same price. |
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Beginners Tutorials |
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A triple top is the same charting pattern as the double top with an extra relative high that touches the same resistance level. A triple top creates a strong resistance level and a neckline connecting the two relative lows in the middle of the pattern. A trader should enter a short position when the daily candle closes below the neckline of the triple top. |
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Beginners Tutorials |
Written by ActionForex.com |
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The Saucer Bottom is a very slow developing pattern that does not have a clear entry point in most cases. It becomes the foundation for a long term uptrend, but it often gives no direct signal to buy. The saucer represents a gradual loss of momentum in a downtrend, followed by consolidation in a sideways market, and an eventual return of the trend higher. A saucer may only be visible on a weekly chart, because the time it takes to develop is so long. |
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Beginners Tutorials |
Written by ActionForex.com |
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Triangles can best be defined as converging trendlines. Based on this fact alone, traders can draw two immediate conclusions regarding triangles: As they converge, volatility contracts; this suggests a breakout is on the horizon. Once one of the triangle's trend lines is broken, traders can expect the market to breakout in that direction. Triangles can be divided into three main types: ascending, descending and symmetrical. |
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Beginners Tutorials |
Written by ActionForex.com |
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The converging triangles, no matter descending or ascending, represents the psychology of traders on the market. Before the breakout, traders are not sure which direction the price will go, they are trading with great caution, and thus, reflected by the narrow trading range before the breakout. The range will get narrower as traders are getting more cautious before the final breakout. Once the direction of breakout is conformed, the followers will enter the market following the direction, which forms the strong momentum after the breakout. |
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Beginners Tutorials |
Written by ActionForex.com |
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The symmetrical triangle has two equal sides sloping towards each other at the same angle. It favors neither a downside nor an upside breakout. As a result, traders should look for it to signal a continuation of the move in the original direction; or, in other words, the move of the overall trend. |
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Beginners Tutorials |
Written by ActionForex.com |
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Flags and pennants are very short consolidation periods that appear within a fast moving trend. Both are preceded by a sharp move that is nearly a vertical line, and both show consolidation against the direction of the trend. The flag is a pattern formed by two parallel lines sloping against the trend, while the pennant is a pattern of two converging lines that appear very similar to the triangle or the wedge formation. |
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Beginners Tutorials |
Written by ActionForex.com |
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The formation of wedges can signal breakouts in upward or downward trending markets. They are similar to triangles in terms of their application. The Wedge formation is a variation on the ascending or descending triangle in which both the angled sides of the triangle are sloping against the dominant trend in the market. The wedge formation is used in the same manner as the triangle formations discussed in the previous articles. It shows consolidation of the market in either an up or down trend, and once the support or resistance provided by the wedge is broken, it most often signals a continuation of the trend in its original direction. |
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Beginners Tutorials |
Written by ActionForex.com |
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The rectangle formation is often a very simple one to recognize. It is essentially a market that is trading in a range between two horizontal lines. The rectangle formation represents consolidation of the move that preceded it, creating a foundation for a continuation of a further move in the same direction. |
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Beginners Tutorials |
Written by ActionForex.com |
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The price movement of any financial market is in wave format. Suppose a currency pair is on an up-trend, going from 1.0000 to 1.1000. After reaches certain top "boundary", 1.1000 for instance, it will retrace - meaning pull back down - before resuming its initial up-trend. Fibonacci Retracements are levels at which the market is expected to retrace to after a strong trend. |
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Beginners Tutorials |
Written by ActionForex.com |
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The charts below show sample trades using the Fibonacci retracement. GBP/USD was going on an up-trend from November 2003. During an up-trend, traders would look for pullback and buy in. In January 2004, GBP/USD reached its first top at 1.8580 and started pullback. The pullback was until 1.7820 which was the 38.2% retracement of the up-trend. A bullish engulfing pattern at the 38.2% retracement level confirmed the pullback. The trend resumed its upward momentum and reached 1.9140 in Feburary. |
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Beginners Tutorials |
Written by ActionForex.com |
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Technical indicators are statistics of past market data base on different mathematical calculations. Traders use technical indicators extensively in technical analysis to predict the continuance and the reversals in currency trends. |
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Beginners Tutorials |
Written by ActionForex.com |
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Moving average is the average rate of a currency pair over a set period. For example, if you conduct a 20-day moving average (20 day MA), you simply add the close price of the past 20 days and divide it by 20. This is called a simple moving average (SMA). |
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Beginners Tutorials |
Written by ActionForex.com |
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The theory behind Bollinger Bands is that, in a normal distribution data set, 68% of data should fall within one standard deviation and that roughly 95% should fall within two standard deviations. So 95% of the price should fall within the 2-width standard deviation, which is within the upper and lower band. |
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Beginners Tutorials |
Written by ActionForex.com |
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The moving average envelope is a variant application to the moving average. It is a trading band composed of two moving averages, which attempts to determine the range of market should be trading in. Traders can choose their period of MA, then form the upper line of the envelope by shifting the MA upwards and the lower line of the envelope by shifting the MA downwards. |
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Beginners Tutorials |
Written by ActionForex.com |
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Moving Average Convergence Divergence (MACD) shows the difference of two moving averages - EMA12 and EMA26, and a 9-day EMA of the difference is plotted against it to trigger buy or sell signal. |
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Beginners Tutorials |
Written by ActionForex.com |
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Relative Strength Index (RSI) measures the strength of all upward movement against the strength of all downward movement in a specified time frame. The most common parameter for RSI is period 14, although users can pick their favorite period of time if they wish. It is one of the most popular oscillators that works well in range-bound market. |
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Beginners Tutorials |
Written by ActionForex.com |
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When momentum reaches upper boundary level, the pair is considered to be overbought. If momentum reaches lower boundary level, the pair is consider to be in oversold condition. Since momentum has no fix range, there is no standard value for the upper and lower boundary. Traders may consider different boundary values for different currencies after a while of observation. |
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Beginners Tutorials |
Written by ActionForex.com |
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Stochastic is an oscillator that determines where the most recent closing price is relative to its price range over a given time period. It is one of the most popular oscillators that traders use in range-bound market. |
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Beginners Tutorials |
Written by ActionForex.com |
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We have gone through some of the most common indicators in the previous articles. Traders may actually find that there are many other technical indicators in their charting software. There is no single indicator can do all the work, traders may pick a few of their favorites under different market situation. |
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This section aims at providing the basic knowledge for the beginning forex traders. More tutorials will be published every weeks. Come back often!