Tools and Strategies Archives

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.

 

 

What Is A Forex Trading Plan?

What is a Forex Trading Plan and why is it important?

A Forex trading plan is probably the most important tool in your trading arsenal and, in my opinion, essential if you want to have any measure of long term success.

So what exactly is it?

It is a plan which you create by combining all of the necessary elements required of a successful trader, tailored to your personal preferences, personality and situation to give you a sort of road map to allow you to trade consistently in the long term.

It is not a set of rigid rules which you dare not deviate from at any time, more a solid foundation from which you can build your own style of trading safe in the knowledge that you have considered everything that you need to before you place any trade.

What are these elements?

These elements include such things as what time you have available to actually trade. Will you be part time, full time, evenings only? How much money are you prepared to allocate to your trading bank to finance your trading?

What do you hope to gain from your trading activity? A bit of extra vacation cash, the odd luxury item or a full time income to replace your current day job? What type of personality do you have? Risk taker, totally risk averse or somewhere down the middle?

Which analysis method will you use to help you make your trading decisions? Fundamental analysis, technical analysis neither or a combination of both?

Will you choose to trade intra day, in and out quickly for smaller profits or let your trades run for days, weeks or even longer for hopefully larger profits?

Which on-line platform will you choose to execute your trades?

All of these things need to be taken into account before you even begin to trade for real and must be done if you wish to be successful at all.

Putting your Forex trading plan together.

To begin with lets address when you will actually be trading. Where in the world will you be trading from? As you may well be aware the markets open in Asia and throughout the day pass through Europe, UK and USA before beginning in Asia the next day. In reality the UK and USA trading periods are the most active so will be best suited to intra day trading where you are placing short trades lasting from a matter of minutes or hours. The Asia trading period is usually quieter and often not active enough to trade intra day. If you are planning to trade over longer time periods of days or weeks then it does not matter when you trade as all trading periods will pass while the trade is in progress.

 

If you live in a country where the more active trading periods are when you are asleep or at work you may find it difficult to trade intra day.

Although it is perfectly possible to trade with a small trading bank to begin with I do not recommend it for reasons stated elsewhere on this website. This means that you need to be able to set aside at least $1000 which you do not need to pay your bills to place with your broker as your trading bank.

Next you need to consider what it is that you wish to gain from your trading. Are you looking for financial freedom, whatever that means to you? Do you just want some extra income to pay for a holiday, car payments or to treat yourself and your family once in a while? Or do you want to replace your current salary from your trading activity and trade full time?

Are you the type of person who will happily take a risk, albeit a controlled and well thought out risk in this case, or do you worry about taking risks in life generally? Are you a person who gets emotional when things go against you or can you keep a level head and ride the storm, coming back a stronger person next time?

I cover the different types of trading analysis here. Which will you choose to use if any? Which one suits your personality best, Technical or Fundamental?

There are many different on-line trading platforms happy to take your money to trade with them. Which one will you choose? Will you take recommendations from others or do your own research? Will you just pick the first one you come across? As with almost everything else in life some trading platforms are much better than others and you would be wise to choose carefully.

Once you have gone through the decision making process with all of these questions you will be a long way down the road in creating your very own trading plan ideally suited to your needs and personality.

Complete this exercise before you ever place a real trade.

As I have covered earlier in this piece it is essential to ask yourself all of these questions and actually answer them before you even consider placing a trade. You are doomed to fail otherwise. There is no other way if you want to be successful short or long term.

Once you complete this you may discover that you do not want to be a trader in the Forex markets after all. That is fine and may well have saved you a lot of misery and wasted cash.

Once you have gone through this process however you will have a much better understanding of your own preferences regarding Forex trading and this will stand you in good stead moving forward.

You will have bad runs of trades, all of us do and it is how we deal with them which separates the successful from the non successful. However bad your last trade was there will always be another one tomorrow.

Having a robust plan of action based largely on your personality, aims and aspirations and personal circumstances will help you to improve and gain more confidence as you go along. As I said it is not a set of rigid rules which you must adhere to at all times but a solid foundation on which you can rely and base each trading decision upon.

I hope you have found this information useful and as always I welcome any thoughts or comments you may have.

 

Do People Make Money Trading Forex?

Do People Make Money Trading Forex?

This is a very common question that I often hear and a very sensible one if trading Forex is something you are considering beginning. So you would be perfectly within your rights to ask do people make money trading Forex?

Anyone who has been around the internet and make money online sector for any length of time will be only too aware of all of the BS out there.

Mocked up screenshots of untold wealth at the touch of a button.

Endless shots of fancy cars and exotic holiday destinations.

You get the picture 🙂

This sort of hype is not yet so evident in the trading world where many people prefer not to flaunt their financial situation be that good or bad. Yes people do make money trading Forex and other financial markets but even more people lose money trying so what is the difference?

What Is Required To Be Successful?

 

Training and Understanding.

As I have said many times on other areas of this website you are asking to fail if you do not undertake some type of proper training, delivered by someone who knows what they are talking about and have the proven track record to back it up. This will be the foundation stone which will sustain you through both the good and the bad trading times.

You must also have a clear understanding of that training, how it relates to each market you intend to trade and the part it plays in every trading decision that you make.

A Clear Action Plan.

To be successful in both the short and long term you must have a clear action plan which you follow on a daily basis. This plan will guide you through the decision making process with the aim of making as automatic a process as is humanly possible in the trading environment. This automation serves to take as much of the emotional side of things out of the decision making process. Allowing emotion of any sort to influence your decision making will only end in disaster and loss of money.

A Large Enough Trading Bank And Proper Risk Management.

Although it is possible to begin trading for £1 per point I would not advise taking this approach. The main reason for this is to give your trades sufficient room to move. It is not practical to expect every trade you enter to only move in the direction you want much less to expect that every trade you enter will even be successful. To be practical you need to have a trading bank of at least £500 and preferably £1000 or more. For each trader you should never be risking more than 5% of your trading bank. If your availbale bank is too small then this 5% figure makes it very difficult to trader successfully in the long term.

The Forex market fluctuates almost constantly up and down, some moves are small but some are more dramatic. To be successful we need a tool to nullify as much of this fluctuation as we can.

Enter the good old Stop Loss Order

Whenever we place any trade, in whichever direction we believe the market will move, we will have decided both our intended profit margin and where our stop loss order will be set. Most successful traders work on a 1:2 risk reward ratio. This means that they plan to make 2 pips profit for every 1 pip they risk. This can seem a bit much as a beginner and the temptation to reduce this ratio will be strong however, losing trades have to be factored into any risk management system and your overall profit potential will suffer if you deviate too far from 1:2 ratio. If you have chosen a profit target of 50 pips then you would place your stop loss order at least 25 pips in the opposite direction to your trade. This will allow the market to move up and down but not affect your trade most of the time.

You can read more about Stop Loss orders here.

So This Is How People Make Money Trading Forex.

So the answer to the initial question is a resounding yes!

Anyone can make money trading Forex if they follow the points made above as a starting point. Essential requirements for a successful Forex trader are training, patience, focus, discipline, a clear plan of action which is executed with every trade and a trading bank large enough to allow then to trade without compromising their risk/reward ratio.

As always I hope that you have found this information useful. I have only scratched the surface in order to answer the original question so if you have any thought please feel free to comment.

Stop Loss Definition. Your Best Trading Friend!

What is a stop loss?

This is my stop loss definition. A stop loss is probably the most important tool to learn how to use and something which will turn out to be your best friend in your trading world.

I have said in previous posts that you should never ever enter a trade without knowing exactly how much you are going to lose in a worst case scenario. The way we do that is by using a stop loss order.

When you place a trade you have already decided which way you believe the market is going to move, up or down based on your trading method and thought process. For this example we will say that we believe the market will go up.

Although I haven’t covered this yet we will have a target in mind for the amount of market movement which will produce the amount of profit we have planned for this particular trade. Lets say 20 points or pips as they are more commonly known.

We have placed a trade, what happens next?

We have clicked the trade button and we are live in the market. Just because we believe that the market price will rise, it does not mean that it will happen straight away or even happen as we believe at all. To guard against the market moving in the opposite direction to the way we would like we use a stop loss tool. For this example, to try to keep this as simple as I can I will use a scale of 0-100 instead of an authentic market price.

The market price when we entered the trade was 50. We are looking for a 20 point/pip trade profit so would like the market price to rise to 70 or above.

Looking at the previous time period we can see that the lowest the market price has been recently is 38 a while back and it has not been lower for quite some time. To begin the trade we would look to set our stop loss just below that low point, maybe at 35.

We make that decision based on 2 things.

  1. We believe that the market is going to rise not fall.
  2. If the market does begin to fall, recent trading activity strongly suggests that it will not go lower than it has in the recent past.

That means that we could lose a maximum of 15 points/pips. If we were trading at £1 per point that would mean a maximum loss of £15.

In this simplified example, if we had read the market completely incorrectly and the market went down our trade would automatically be closed out by our trading platform when the market hit 35 and met our stop loss.

This trade would result in a £15 loss. We knew that was the worst case at the start of the trade and we were happy to take that amount of risk.

What is a trailing stop loss? How does it work?

If however we have read the market correctly and the market price begins to rise then we have an option to reduce our potential loss by using another tool called a trailing stop loss.

As the name would suggest this is a moving version of a stop loss and follows, or trails the market price. These trailing stop losses can be either automatic or manual. I always prefer to use a manual trailing stop loss which I alter myself.

In our example the market price was at 50 when we entered the trade and it has now risen to 60. As the market has risen by 10 points/pips we can move our trailing stop loss to mirror this rise. We move it up 10 points/pips from 35 to 45. We now stand to lose only 5 points/pips if the market goes against us, the difference between the staring point of the trade of 50 and our current stop loss of 45. Our maximum loss is now reduced to £5 instead of £15.

Look to reach break even point as soon as possible.

In an ideal world every trade that we enter will be successful and net us the intended profit target. We do not however live in an ideal world.

The best that we can do as a Forex trader is to attempt to reduce our potential losses to a minimum as soon as possible. A trailing stop loss allows us to do this when the market is moving in our favour.

In our example here as soon as the market price hits 65 we could move our trailing stop loss to 50 and ensure that at worst we break even if the market suddenly reverses on us. If or when the market reaches 70 we could happily close our trade out and take our 20 points/pips profit and either stop trading for the day or begin looking for our next potential trade.

There is clearly a temptation to move the trailing stop loss too quickly to get to the break even point as soon as the market starts to go in our favour. The risk with that is that the markets do not move only in one direction at a time. The price action ebbs and flows and those who believe that the market will rise fight against those who believe the opposite will occur.

If we have moved our stop loss too early then one of these ebb and flow movements may end our trade early. True we have not lost as much as we could have but we will also have cut down our chance of a fully successful trade too,

As a result of this we always keep a healthy gap between the current trading price and our stop loss. This allows the market room to move up and down and as long as it moves more in our direction we are fine.

 

Mistakes to avoid if you wish to be a trader long term.

If you have done your research, used the information given to you by your preferred trading analysis method and stayed focused and disciplined many of your trades could work out in the way I have just described.

If that is the case why do so many people lose money with Forex trading?

Lack of discipline, greed and letting in emotion are the main culprits here.

Lack of discipline.

Discipline is an essential tool in your Forex trading toolbox. Without it you are lost and destined to fail and fail pretty quickly.

Assuming that you have followed your plan, used your preferred analysis method and entered a trade with your stop loss in position then you should be OK. If however you lose that discipline and alter something about your trade once it is open, change the profit target, second guess the market or move a stop loss in an incorrect way then you risk ruining the trade which you so carefully set up in the first place.

Greed.

This is a killer. You think you are onto a winner, you think you are a better trader than you actually are. You trade with a bigger % of your trading bank than you planned to because this trade is the one. The price goes in your direction and hits your target price. You want more, you take that risk and can see the £ signs hitting your trading account. You are so confident that you do not move your stop loss. Suddenly the market reverses against your forecast. 10 minutes ago you could have been out of your trade with your profit target safely banked but now you have lost it all.

To compound this result you now decide to move your stop loss further away. You knew you were right and this is just a blip, the price will go back up again soon. We call moving your top loss like this giving the market room.

You may be right of course but you may also be wrong and moving your stop loss has just caused you to take an even bigger loss than you planned.

Don’t ever let greed take over your trading. Set a plan and a profit target and stick to it.

Emotion.

The market does not have feelings, It is a mechanical machine which responds to traders betting on which way the market will move and sheer weight of money. Nothing more.

It does not know exactly where you have placed your stop loss or what your profit target is and it doesn’t care.

Trust me, the market will go against you at times, far more often than you would like. That is why we incorporate stop losses as our most important tool, to limit the damage done to our trading bank.

I know only to well that the price will move just enough to take out your stop loss and close your trade before shooting off in the direction you wanted it to and soaring past your intended profit target.

These are the trades you remember only to well. You seem to forget the ones which struggled then suddenly went your way and made a nice little profit.

Never take anything that happens in the market personally. Keep emotion out of it. It will only affect your decision making in the future.

Summing it all up.

I accept that this has been a very simplistic view of how a trade works. I just wanted to give you a simple example of what happens. There are far more parts involved in a trade but that does not have to make it any more complicated or difficult.

I hope that I have pointed out a few of the reasons why you should not be afraid to start trading Forex and also described some of the pitfalls of not doing it properly.

Please feel free to comment or ask further questions on the subject of stop losses.

Start Trading Forex: Understanding Candles

What are Candlesticks?

One of the first things you will have to learn to read on your trading charts are a signal called candlesticks.

These are the signals which mark price ranges for the chosen trading period.

Each candle signifies four price points. These are the opening price, the closing price, the highest price during that period and the lowest price.

Below is an illustration of a trading candlestick. The solid part in the middle is known as the body and the thin points are known as wicks. We will assume for this explanation that this is a candle from a rising market. The bottom of the body section is the opening price, the top of the body section is the closing price. The end of the lower wick is the lowest price and the top of the upper wick is the highest price.

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How do we tell the difference?

Clearly if all of the candles on the trading chart are the same colour then we will have no idea in which direction the market is moving. To solve this issue we edit our charts to give the rising candles one colour and the falling candles a different colour. My preference is to use green for rising and red for falling, this makes it easy to read the chart at a glance.                                                                 ©image copyright averych/shutterstock.

Different Types of Candles.

Depending on the size of the body section and its position in the price range there are different names given to different types of candles. A standard size candle in a rising market is called a bullish candle and a standard size candle in a falling market is called a bearish candle.

Candles with a very small body and one wick much longer than the other is called a Hammer candle at the bottom of the market and a shooting star at the top of the market.                                                       © image copyright Pavlo S/Shutterstock.com

 

I will cover other candle names and patterns in a later post. This should be enough to get you started for the time being.