Archive for February, 2017

Forex Daily Support Resistance Levels. What Are They?

If you are new to Forex trading you may never of heard of one of the most important tools in our trading toolbox, support and resistance levels.

Please let me try to explain what Forex daily support resistance levels are.

If you trade using Japanese Candlesticks as I do, and I strongly recommend that you do the same, then you will begin by looking at a trading chart that looks something like this.

Now that is all very pretty and colourful but what is it telling us about the current state of the market price?

Well, if you are using the same colour coding as I recommend then you can see when the market price is rising, green candles and when it is falling with the red candles. Apart from that not much else which will help us make a trading decision.

When you are just using a chart like this then trading opportunities do not jump out at you from the screen. What you need are some tools to make what is happening with the price movement make a little bit more sense.

This is where support and resistance levels come into play.

As the name would suggest these levels highlight on the chart where the price has reached around about the same price at the bottom of the market, we call this support and at the top of the market which we call resistance. This is shown in the diagram below.

 

 

So How Do They Actually Work?

Now, if we look at this chart in more detail, reading from left to right as time progresses, we can see the following:

The price rose up to the price shown by number 1 then fell back again. It then rose again to almost exactly the same price and stalled again at number 2. It then recovered and passed straight through and reached price point 3 before falling back.

The price found what we term resistance at points 1 and 2 at different times.

As the price continued to fall from point 3 it stopped falling and rose again at point 4, it then briefly rose again before returning to the same price shown by point 5.

This time the price found what we call support at points 4 and 5. Please note the very important fact that the resistance met at points 1 and 2 and support found at points 4 and 5 all happened at almost exactly the same price.

This is no coincidence!

Now, once support has been found at point 5 the market price shoots off upwards passing straight through the previous level of resistance at point 3 before reaching a new high price.

The price then falls again before once again interacting with a previous level of resistance at point 3 to find support at point 6.

To finish up with this very good and typical example points 7 and 8 interact with previous levels of support and resistance.

The reason this is so important to us as traders is that we are looking at potential breaks of these support and resistance levels as trading opportunities.

Just by adding 2 lines to this one chart we can see that 4 potential trading opportunities presented themselves.

A break of the support level after point 2.

A break of support level at point 3 between points 5 and 6.

A break of previous support/resistance level at points 3 and 6.

A break of that same level as the price moved back up after point 7.

Now you have to understand that these support and resistance levels do not actually exist in reality, they are artificial lines which we draw onto the chart to highlight recurring price levels.

However, despite that fact that they do not exist pretty much every trader trading at the time will be using them as a trading tool.

That is what makes some so important.

Now I realise that I may have gone into a lot of detail there trying to explain fully what the chart in the example was showing us as traders.

The bottom line is that we begin by looking for points where the price stalls, either when rising or falling, a number of times at the same price. We then draw a line on our chart showing either resistance, support or both.

We then watch the price action for confirmed breaks of these lines which will present us with a potential trading opportunity. You will notice I hope that I always refer to them as potential trading opportunities.

Sometimes the price will pass through either a support or resistance level a small amount but then move back inside. What we are looking for is a confirmed break of one of these levels. That is when we get interested in placing a trade.

I really hope that at least some of this has made sense to you. As always please feel free to comment or ask any questions that crop up.

 

 

Best Currency Pair Trade. Is There A Best Pair?

Is There Such a Thing As A Best Currency Pair Trade?

With so many different currency pairs available to trade in the Forex market how do we decide which is the best currency pair trade when we first start?

It will probably help if we start by breaking them down into three basic groups, this will help to get rid of some of the currency pairs straight away and make our decision a little easier to make.

Majors, Minors and Exotics.

Virtually all of the currency pairs we can Forex trade in belong to one of these three groups.

Majors.

 

The Major currency pairs are the ones which include the US dollar, or USD as it is known, in the pair. For example USD/EUR (Euro) or USD/GBP ( Great British Pound) and so on. These are the most traded pairs and therefore the currency pairs with the most market movement each trading day. As they are so active they also attract the smallest spreads which is important to us as traders and something I will explain in more detail later.

Minors.

 

The Minor Forex currency pairs, sometimes also called cross currency pairs, are the more widely known currencies apart from the USD. These would include EUR/GBP or GBP/CHF (Swiss Franc) EUR/AUD ( Australian Dollar) and so on. These currency pairs do not have as much trading action on a daily basis but are still worth looking at as there are some good profits to be made for the trader prepared to look into them fully. The spread on these pairs is usually larger than the Major pairs due to the decreased market movement.

Exotics.

The Exotic Forex currency pairs are formed from the currencies of emerging and smaller countries, in financial terms, such as Brazil, South Africa, Mexico and Korea for example. These currencies are not traded that heavily and are best avoided by all but the most experienced traders.

My advice to anyone just beginning to trade in the Forex markets would be to stick to working with 3 or 4 of the more active currency pairs until they have gained more experience. Indeed it is perfectly possible to make a very good income just from trading from a few of the Forex currency pairs exclusively.

What Is The Spread And Why So Important?

The spread is basically the way that your on line trading platform makes its profit.

Similar to the way you buy and sell currency for your annual vacation there is a difference between what you pay for your vacation money and what the actual current price is, that is the spread in trading terms.

To explain this lets take a look at the Forex prices as shown on IGIndex, my preferred trading platform, today as I write this:

GBP/USD spread with IGIndex is quoted as sell at 1.2379.1 and buy at 1.2480.0 a difference of 9 pips as we call them.

EUR/USD spread is currently sell at 10669.5 and buy at 10670.1 a difference of 6 pips.

EUR/GBP spread is now sell at 8620.9 and buy at 8621.8 again a difference of 9 pips.

The actual current price of whichever currency we are looking to trade will be in the middle of the price range shown above. The amount either side of that real price is the margin of profit which the trading platform makes on each trade.

So What? What Does That Mean To Me And My Trading?

What this means to us in real terms is that we need to build in that additional number of pips into our profit target calculations. If we are trading EUR/USD for instance then, once we open our trade, the market needs to move 3 pips in out chosen direction before we break even on the trade.

So if our profit target is 15 pips we would be looking for the market to move at least 18 pips in reality.

OK, So I Have Read All Of This. When Are You Going To Answer The Question?

Fair point!

Well, we have ruled out any currency pair classed as Exotic as best being left well alone so that has narrowed it down a little bit.

For the time being at least we will also stay clear of the Minor or cross currencies pairs, apart from EUR/GBP, so that just leaves us with the Major currency pairs to choose from, which if you remember are the pairs which all include the USD as one of the pair.

Out of these I would recommend leaving the main currency pair EUR/USD alone as a novice, especially when you are just starting out with trading.

So to finally answer the original question, the Forex currency pairs I would suggest looking into starting your Forex trading career with are the following:

Major pairs GBP/USD, AUD/USD, USD/CAD along with EUR/GBP from the Minor currency pairs.

By focusing on just these few currency pairs we will have more than enough to keep us busy for quite some time. Watch the markets as they progress, apply whichever analysis tools and strategies we choose to use and then start trading.

I understand that you may have to read this through a couple of times to really understand what I am trying to say but it will be worth it in the end.

As always, please comment or ask any questions and I will do my very best to answer them for you.