Category: Forex Course

Forex course starting from the basics and up to advanced topics. This course will consist of 11 modules for a total of over 300 lessons. Each lesson will cover one short topic and in the end it will include a quiz to self-test the knowledge of the student.
Course 01 – Forex basics.
Course 02: Brokerages
Course 03; Charts, Support/Resistance, Candlesticks, FIbonacci, Moving Averages, Popular indicators
Course 04: Oscillators, chart patterns, pivots
Course 05: Elliott Wave, Harmonic Patterns
Course 06: DIvergences, market envoronment, Breakouts, multiple timeframe analysis
Course 07: Market Sentiment, Trading the News, carry trade
Course 08: The US Index, Intermarket Correlations, Using equities, Contry profiles
Course 09: Developing a trade plan, Find which trader you are, the trading system, trading journal, Metatrader 4
Course 10: Risk management, Leverage, Position sizing, Stop losses, Scaling in and out, currelations
course 11: Trading mistakes, Forex scams, personality quizes, The last words.

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Forex Course

161. Learning To Trade Interest Rate Differentials

Introduction In forex trading, every trader anticipates the upcoming price of a currency pair in several ways. Traders and analysts use market analysis tools like capital flows or price action to predict the currency pair’s future direction. However, some use interest rate differentials to predict the upcoming price movement of a currency pair. What is […]

Introduction In forex trading, every trader anticipates the upcoming price of a currency pair in several ways. Traders and analysts use market analysis tools like capital flows or price action to predict the currency pair’s future direction. However, some use interest rate differentials to predict the upcoming price movement of a currency pair. What is […]

Introduction

In forex trading, every trader anticipates the upcoming price of a currency pair in several ways. Traders and analysts use market analysis tools like capital flows or price action to predict the currency pair’s future direction. However, some use interest rate differentials to predict the upcoming price movement of a currency pair.

What is the Interest Rate Differential?

In trading a currency pair, buying towards the currency with a higher interest rate and selling the currency with a lower interest rate is a way to make money from the forex market, which is known as interest rate differential or price appreciation.

The interest rate differential makes the forward point that makes up a forward currency rate. The forward rate is created by adding or subtracting the current exchange rate and making a new rate. At that rate, traders can buy or sell a currency pair in the future. Let’s have a look at the example of interest rate differential.

If we want to sell the USDJPY 10 year in the future, we have to make a payment to the buyer. The amount should be based on the difference between the US interest rate and the Japanese interest rate. Later on, we will make payment to the buyer at the current spot rate plus interest rate differential between the US interest rate and the Japanese interest rate.

How to Make Profit from Interest Rate Differential

The higher interest rate of a country has a higher demand for holding currencies than the country with a lower interest rate. The main reason behind the differential is that it costs a trader to hold on to a currency that has a lower interest rate.

Using this concept, we can predict the future price of a currency pair. If the US interest rate goes higher or the Japanese interest rate goes lower, the USDJPY price will move towards the direction of interest rate differential. Similarly, if the US interest rate goes lower or the Japanese interest rate increases, the USDJPY price will likely move lower.

Conclusion

In forex trading, we take trading decisions based on probabilities, and interest rate differential is one of these probabilities. Traders can take the ultimate trading decision by considering this element besides the fundamental and technical analysis.

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Forex Course Forex Daily Topic

160. What are Currency Crosses and Why Should You Trade Them?

Introduction

Introduction

Introduction

Currency crosses are currency pairs from major and commodity currencies eliminating the US Dollar. Trading cross currency pairs require knowledge of the two countries’ economic conditions, which is not related to the USA.

Major Vs. Cross Currencies

More than 80% of the forex market transactions happen through the US Dollar as it is the reserve currency in the world. Most of the commodities and agricultural products are valued in US dollars.

Therefore, if we want to buy something from a country, we should exchange the currency into the US Dollar to make the transaction. As a result, most of the countries keep the US Dollar as the reserve currency. In particular, China, Japan, and Australia are the largest importer of oil; therefore, they keep a vast number of US Dollars in their central banks.

Because of the massive demand for the US dollar, major currency pairs have a higher trading volume, allowing it to have a decent movement. On the other hand, if we eliminate the US dollar from the major currencies, we will find cross pairs, which is also profitable.

Why Trade Currency Crosses?

Instead of trading at major Dollar based currency pairs, we can profit from trading cross pairs. The most significant features of cross currency pairs are that they are not bound to US Dollars and can make a decent move without any intervention of the US economy.

As a result, many traders trade in currency crosses to diversify their portfolio. Cross pairs can make a decent movement, while dollar-based pairs remain corrective. At that time, it is better to go with the moving market than sit back and watch the corrective price.

Moreover, trading cross pairs might be profitable if the trading session is favorable. For example, we can profit from the GBPJPY pair at Asian and London sessions rather than trading in the US session.

Summary

Based on the above discussion, let’s point the core parts of cross-currency trading:

  • Cross currency trading is similar to major currency trading.
  • There is no US dollar in cross currency pairs.
  • Cross currencies are from major and commodity currencies.
  • Cross currency pair can make a decent move without US session.
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Forex Course

159. Understanding Forex Assets Classes

Introduction

Introduction

Introduction

The forex market is the world’s biggest financial market, where daily turnover is more than 6 trillion dollars. The most exciting feature of the forex market is that it has an enormous number of trading instruments that allow traders to diversify their portfolio. Besides significant currency pairs, cross pairs are very profitable as it can make e decent move.

What is the Currency Pair?

In the stock market, investors’ trade in a particular stock of a company. This is not similar to the currency market. In the forex market, traders usually trade on a currency pair instead of a single currency.

The combination of two currency indicates the economic condition of two separate countries. Therefore, if we want to trade on a currency pair, we should know at least two countries’ economic conditions. For example, if we want to buy EURJPY pair, our analysis should indicate that the European economy will be more durable than the Japanese economy.

Major vs. Cross Currency Pair

US Dollar is the most traded currency in the world. Therefore, any currency pair from the developed country with the US Dollars will represent the major currency pair.

A list of 6 major currency pairs are mentioned below:

  1. EURUSD
  2. GBPUSD
  3. USDJPY
  4. USDCAD
  5. USDCHF
  6. AUDUSD

If we eliminate the USD from these major pairs, we will find the cross currency pairs. Let’s say the value of EURUSD is 1.0850, and the value of AUDUSD is at 0.7150. Therefore, the value of EURAUD would be 1.39 (1/1.085X 1.085/0.7150).

Other examples of Cross currency pairs are EURGBP, EURCAD, GBPCHF, GBPAUD, CADJPY, EURJPY, etc.

The condition for cross currency pairs are-

  • The currency should be from the major pairs.
  • The cross pair should eliminate the US dollar.

Is Cross Currency Pair Trading Profitable?

Trading cross currency pairs is similar to trading major currency pairs as both technical and fundamental analysis work well in cross currency pairs.

For example, we can make a decent profit from the GBPJPY pair if we can evaluate the UK and Japan’s economic condition.

Conclusion

Trading in a currency pairs means to anticipate the price based on the technical or fundamental analysis. Therefore, if we know the two countries’ economic conditions, we can make a decent profit from cross-currency pairs.

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158. Where to Find Authentic Forex News and Market Data?

Introduction

Introduction

Introduction

Fundamental analysis is an integrated part of forex trading. It provides an exact logic and reason behind the movement of a currency pair. However, the fundamental analysis depends on several fundamental releases and news. Therefore, it is evident for a trader to know the source of this news.

What is Forex News and Market Data?

Forex news is economic, geopolitical, and financial news that may directly affect the price of a currency pair. Moreover, fundamental data are economic releases that show the current and upcoming economic conditions of a country.

The price of currency pairs depends on many factors, and traders evaluate it to anticipate the market movement. For example, if a country achieved its targeted inflation rate, and the central bank raised the interest rate, it will indicate stronger economic conditions that may influence traders to take traders in a specific direction.

However, it is essential to find the source where the forex news and market data are available.

Where to Find Forex News and Market Data

Forex trading becomes very easy nowadays as most economic news and market data are available on the internet as soon as it releases. Therefore, forex trading becomes very attractive to retail traders as they can operate all their activities from home with a computer and a stable internet connection.

Let’s have a look where we can find this information:

Forex Brokers

Many forex brokers provide integrated market news and an economic calendar where the upcoming economic releases and events are scheduled. It will update as soon as the news comes and will provide historical data. Some brokers provide exclusive technical and fundamental analysis based on forex news and market data, which is also helpful for traders.

News Portal

Besides the forex broker, there are many websites where forex economic calendar and events are released. It also provides technical and fundamental analysis based on the available information. However, some trading portals offer live charts with economic data.

Image Source: www.forexfactory.com

Forex Indicator

Besides the MT4 and MT5 trading platform’s stock indicator, several custom-based indicators show the upcoming news in a box within the price chart. When the news comes, it shows the result immediately on the chart. On the other hand, MT4 and MT5 have a built-in economic and fundamental news service, which is very useful.

Conclusion

It is not very hard to find forex news and market data as it is available publicly, and anyone can access it. However, the challenging part is getting the news immediately after release. The news’s timing may differ based on the quality of the internet connection and execution speed of the news providing website.

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Forex Course

157. What Expectations Do Forex Market Have On The Financial News?

Introduction

Introduction

Introduction

Economic releases and news are essential for traders who make trading decisions based on fundamental analysis. Economic news is publicly available as soon as it releases. Therefore, traders can access it from any internet connection enabled device. As economic releases directly affect the currency market, traders must understand how to use it.

Types of Economic News

There are three types of economic news for the currency market- low impact, medium impact, and high impact. Among these types, the high impact news is essential as it immediately impacts a currency pair. Some example of high impact economic news is-

  • Interest rate decision
  • Inflation report
  • Retail Sales
  • PMI
  • GDP
  • Export and Import
  • Foreign Currency Reserve

Besides, the high impact news, medium, and low impact news often create a good movement in the market, which is not very frequent. Therefore, we should stick to high and medium impact news only.

How Economic News Affect the Currency Pair?

There are three significant elements of the economic news that a trader should consider while doing analysis. They are:

  • Previous Release- Previous data is the most recent release used to compare with the current data.
  • Expectation- Before releasing every news, analysts project the data. If the news comes better than expected, it will be shown in green and indicate a positive effect on the currency.
  • Current Release- It is the most important part as trading decisions depend on it. The current release is the data that usually release on a particular day.

Let’s have a look at how to read the news:

  • The current release is better than the Previous release- Good for the currency
  • The current release is better than the expectation- good for the currency
  • The current release is worse than the previous release- bad for the currency
  • The current release is worse than the expectation- bad for the currency.

Image Source: www.forexfactory.com

In the above image’s marked area, we can see that the US monthly retail sales came at 1.2%, where the previous data was 8.4%, and the expectation was 2%. As the news massively declined from 8.4% to 1.2%, the US Dollar became weaker than the Euro as indicated in the image below:

Conclusion

As of the above discussion, we can say that better than expected and previous data may positively impact the currency, and weaker than expected data will negatively impact a currency. However, we should consider the overall fundamental outlook of a country to take the ultimate trading decision.

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Forex Course

156. Why Interest Rates Matter While Trading Forex Currency Pairs

Introduction

Introduction

Introduction

The interest rate is one of the major fundamental indicators of a currency pair. Any increase in interest rate is a positive sign for an economy. However, there are some other factors that a trader should know.

What is the Interest Rate?

The interest rate is the charge that the Central Bank takes on loans and advances to control the money supply. The interest rate is usually revised quarterly based on the economic condition of a country.

The main aim of changing the interest rate is to control inflation and stabilize the country’s currency exchange rate. The interest rate is one of the most significant fundamental indicators for a country that directly affects the country’s economy both inside and outside.

Image Source: https://www.ecb.europa.eu/

When the country’s economic condition is excellent, and the targeted inflation is achieved, the central bank tries to discourage people from taking loans from the Central by increasing the interest rate.

On the other hand, when the economic condition is not right, Central Bank tries to expand the country’s economic activity by attracting people to take more money from the bank with a cheaper interest rate.

How interest Rate Impact on a Currency Pair?

In the forex market, traders usually trade in currency pairs instead of a single currency. Therefore, they should evaluate two separate countries’ economic conditions to determine which country is more reliable. Based on this knowledge, we can say that increasing the country’s interest rate will influence the currency to be strong against other currencies.

For example, we want to take a trade in the USDCHF pair, and we are waiting for the USD’s interest rate decision. When the news came, we saw that the Federal Reserve increased the interest rate from 2% to 2.5%. As a result, the USD became stronger immediately against the CHF, and the USDCHF goes up.

This is how the interest rate impacts on a currency. However, the opposite reaction might happen when the Federal Reserve decreases the interest rate from 2 % to 1.5% instead of increasing. In that case, the EURUSD might be stronger and move higher.

How to Make a Profit from the Interest Rate Change?

Making money from interest rates is an effective and solid way to trade based on the fundamental analysis. However, as a trader, we should focus on other fundamental releases and events to understand a currency pair’s overall structure. The significant economic releases of a country are interrelated. For example, if the inflation and GDP are good, an increase in interest rate is evident for the central bank.

Therefore, before taking a trade based on the interest, we should focus on what the other fundamental releases are telling about the currency.

Conclusion

After the above discussion, we can say that the interest rate is the most significant fundamental indicator of a currency pair. However, as the forex market consists of several uncertainties, we should focus on money management strongly. We may face some market conditions where the price might react against our expectations. So, the only way to make a consistent growth of our trading balance is to follow strong trade management.

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Forex Course

155. Getting Started With Forex Fundamental Analysis

Introduction

Introduction

Introduction

Fundamental analysis and technical analysis are an essential part of Forex trading. A Forex trader cannot be a profitable trader unless he knows this analysis. Fundamental analysis provides a logical reason for the upcoming movement of a currency pair based on economic releases. Traders evaluate these releases to determine the exact movement of a currency pair.

What is Fundamental Analysis?

According to finance and accounting, Fundamental analysis is the process of analyzing the business’s financial statement, including the competitor and market analysis. Moreover, it considers the core feature of a country’s macroeconomic factor, including the interest rate, inflation, GDP, manufacturing index, export, import, etc.

However, in forex trading, the fundamental analysis focuses on macro-economic factors mostly. The currency pair in a forex market represents the economy of two separate countries. In fundamental analysis, traders usually focus on major economic events and releases and their impact on a currency pair. Moreover, most professional traders consider both technical and fundamental analysis to get the best output from the market.

Elements of Fundamental Analysis

The fundamental analysis has two major elements- the fundamental releases and the fundamental events.

The Fundamental Releases

Fundamental releases are economic news of releases of a country that is published at regular intervals. Among the fundamental releases, the primary 4 economic releases are most important as it creates an immediate impact on a currency pair. Let’s have a look at four major economic releases:

  • Interest rate: The interest rate is how much we have to pay to the central bank if we take any loan. Central banks raise the interest rate if the economic condition is excellent. On the other hand, the central bank reduces interest rates if the economic condition is terrible.

Image Source: https://www.ecb.europa.eu/

  • Inflation Rate: Inflation is the buying power of the money. The increase in inflation indicates a rise in the consumer product’s price that reduces the buying power of money. Any increase in the inflation rate is terrible for the economy.

Image Source: RBA

  • Gross Domestic Product: Gross Domestic Product or GDP refers to the country’s products and services’ total value. Any increase in GDP is positive for a particular currency.
  • Employment: The number of employed and unemployed persons for a country works as a crucial fundamental indicator. Any decrease in employment is bad for the economy, and any increase in employment is reasonable.

Image source: https://www.bankofcanada.ca/

Fundamental Events

Besides fundamental releases, some essential fundamental events put a significant impact on a currency pair as mentioned below:

  • Central Bank Meeting: Central of a country meets once a quarter and discusses its economic condition. Any dovish tone negatively impacts the currency, while a hawkish tone creates a positive impact.
  • Geopolitical Events: There is some condition when one country meets another country to discuss the trade deal or conflict. Any positive news from a country’s geopolitical event may create a bullish momentum of the country’s currency.

In fundamental analysis, traders usually evaluate these releases and events to measure the strength and weaknesses of a currency pair.

Conclusion 

Traders usually gather recent economic releases and compare the result with the previous result. Any better than expected result indicates a buying opportunity on a particular currency. On the other hand, traders often evaluate fundamental releases to measure the volatility of a currency pair.

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Forex Course

154. Understanding Hawkish and Dovish Central Banks

Introduction

Introduction

Introduction

The movement in a currency pair depends on several factors. Hawkish and Dovish Central bank is one of them. Besides economic releases, there are some events where Central provides an outlook and projection of the economy. Therefore, if the projection is excellent, it will create a positive impact on the currency market. If the projection is terrible, it will create a negative impact on the currency market.

What is Hawkish Central Bank?

If the economic condition is good, the central bank will raise the interest rate to achieve the inflation target. The hawkish central bank means providing a positive statement regarding the country’s present and upcoming economic conditions, like the economy is getting stable or the inflation is under control.

Let’s say the US economy is getting stronger with a decreased unemployment rate and the controlled inflation target. In this situation, the central bank will provide an official statement saying that the economic condition is favorable, known as the hawkish tone.

What is the Dovish Central bank?

If the economic condition is wrong, the central bank will cut the interest rate and provide a dovish tone. The dovish central bank means providing an outlook of the economy, stating that the economy is facing difficulty to achieve the economic goal.

Let’s say that the European economy is struggling to achieve the targeted inflation level. Moreover, the unemployment rate is increasing. In this situation, the central bank is likely to provide a dovish tone starting that it is planning for a rate cut.

However, the dovish and hawkish tone might cover several factors, as mentioned in the table below:

Decision

Hawkish

Dovish
Objective Reduce inflation Stimulate the economy
Monetary Policy Tighten Loosen
Economic Growth Projection Strong Weak
Current Inflation increasing Decreasing
Interest Rate Increase Decrease
Currency Effect Strong Weak

How Hawkish and Dovish Tone Affect the Forex Market

The hawkish and dovish central bank has both long term and short term impact on the currency market. If the US Federal Reserve provides a hawkish tone, we might see the US Dollar become stronger against most currencies. Therefore, if we want to trade on a short term basis, we can move to the 5-minute chart and take trades based on a suitable trading strategy.

Moreover, the hawkish or dovish tone will indicate the overall outlook of a country’s economy that might help traders understand the upcoming market direction. For example, suppose the CPI, GDP, export-import, and other fundamental indicators are favorable. In that case, the central bank will provide a hawkish tone, and traders can take trades in a specific direction until there is a dovish tone.

Conclusion

Hawkish and dovish central banks directly affect the price of a currency pair; therefore, traders should keep an eye on the economic calendar to know when the event will happen. Moreover, during the central bank meeting and press conference, the market becomes volatile, affecting running trades. Moreover, the central bank releases a note after the website’s meeting where traders can read to know the dovish and hawkish tone.

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Forex Course

153. The Affect Of Monetary Policy On the Forex Market

Introduction

Introduction

Introduction

Fundamental analysis is one of the most reliable forex trading strategies in the world that considers economic releases and events. In fundamental analysis, many indicators provide a possibility of upcoming movement in a currency pair. Besides the economic release, some events like monetary policy decisions create an immediate impact on a currency pair.

What is Monetary Policy?

Monetary policy is an action or decision taken by the central bank to control the money supply and achieve the economic sustainability and macroeconomic goal. Every country has a strategic goal based on the current performance and upcoming economic growth of the economy. Therefore, most of the central bank changes the interest rate based on the economic condition.

Usually, the central bank sits quarterly for a monetary policy meeting to discuss the following four core areas:

  • Guideline for the money market
  • Interest rate decision.
  • Monetary policy measurement.
  • The outlook of the economic and financial developments.

How Monetary Policy Affects the Forex Market?

In a monetary policy meeting, the central bank discusses the present economic condition of a country. Therefore, any hawkish tone may create an immediate bullish impact on a particular currency. On the other hand, a dovish tone may create an immediate negative impact on a particular currency in any trading pair.

Besides the immediate effect, there is a long-term impact on the price of a currency pair. We know that any strength in an economy indicates a stronger currency. For example, if the ECB (European Central Bank) provides some consecutive outlook of the European economy saying that the inflation is under control, and the interest rate increased, which is likely to increase again in the next quarter. In that case, the influential European economy may create a Bullish impact on EURUSD, EURAUD, or EURJPY pair.

Moreover, there is some case where the central bank cut the interest rate where traders and analysts were expecting a rate hike. In this scenario, investors may shock at the news, and the effect might be stronger than before.

How to Trade Based on Monetary Policy Statement?

There is two way to trade based on the monetary policy decision. The first one is based on the immediate market effect, which is known as news trading. On the other hand, traders can evaluate the economic condition based on the recent monetary policy statement and see how the economy is growing in the long run. Based on this market scenario, traders can find a long term direction in the market based on economic performance as per the monetary policy statement.

Another way of trading based on the monetary policy decision is the fundamental divergence. If one fundamental indicator does not support another fundamental indicator, it creates fundamental divergence. For example, the US interest rate is increasing based on the strong employment report, but inflation does not support the rate hike. In this situation, traders can take trades with the possibility that the rate hike’s effect will not sustain.

Summary

Let’s summarize the effect of monetary policy in the forex market:

  • Monetary policy meeting happens quarterly where the central bank takes interest rate decision.
  • In the monetary policy meeting, the central bank provides an outlook of the economic and financial developments.
  • A hawkish tone makes the currency stronger, while the dovish tone makes the currency weaker.
  • Traders can identify the fundamental divergence based on the decision on monetary policy meeting.
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Forex Course

152. Knowing The Fundamental Factors That Affect The Currency Values

Introduction

Introduction

Introduction

Many fundamental factors affect currency value. Therefore, whether we trade based on technical analysis fundamental analysis, we should know these factors to understand the currency markets.

Important Fundamental Factors That Affect Currency Values

Fundamental factors are economic releases and events that have a direct impact on currency value. If we want to trade based on fundamental analysis, we should focus on these releases and make a decision based on the result. Let’s have a look at the important fundamental factors that affect currency values

Interest Rate

Interest rate is the amount that a central bank charges if anyone takes loans from the bank. Central banks change the interest rate to control the country’s money supply; therefore, it directly affects the currency value.

Inflation Rate

Inflation is the buying power of money. Lower inflation means higher buying power, and higher inflation, the lower buying power.

Consumer Price Index (CPI)

CPI or CPI inflation is the price of consumer needs. Any increase in CPI is bad for the currency, while a decrease in CPI is good for the currency.

Producer Price Index (PPI)

PPI is the price of products or elements of businesses. An increase in PPI means businesses need additional money to buy raw materials that may increase the finish product rate.

Retail Sales

Retail sales indicate the number of products and services bought by consumers. An increase in retail sales indicates higher consumer activity in the market that is good for the currency value.

Foreign Exchange reserve

Foreign exchange reserve is the amount of money that is reserved in the central bank. An increase in foreign reserves is positive for a country’s economy and currency value.

Non-Farm Payroll (NFP)

On the first Friday of every month, US Labor Statistics releases the number of unemployed persons in the USA. As the US dollar is the most used currency globally, any change in NFP affects the overall forex market.

Central Bank Meets

In every quarter, central banks of every country provide an outlook of the domestic and international economy. In this meeting, any hawkish tone creates a positive impact on the currency value, while any dovish tone creates a negative impact on the currency value. We should keep an eye on how central banks are reacting to the central banks meeting to get an outlook of the currency value.

Conclusion

Besides the above-mentioned fundamental factors, there is a political movement, trade natural disaster, etc. also impacts the currency market. Moreover, in an uncertain market condition, no trading strategy works well, whether based on technical or fundamental analysis. Let’s dig deeper into each of these fundamental factors and more interesting aspects in the upcoming lessons. Cheers.

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Forex Course Forex Daily Topic

150. The Easiest Way To Measure Market Volatility

Introduction

Introduction

Introduction

Measuring volatility enables traders to accurately identifying the significant trading opportunities in the currency pairs. An increase in the volatility of a currency pair occurs due to any of the major changes in the economy of that country. Market volatility measures the overall price fluctuations over a specific period, and this information is used to identify the potential breakouts.

In the Forex market, the higher the volatility, the riskier is the currency pair to trade. A higher volatility means that the asset value can be spread out over a larger range of values. A lower volatility means that an asset does not fluctuate dramatically and tends to be more steady. A few indicators help us in measuring the volatility of the currency. Using these indicators will show us the accurate representation of the market’s volatility when looking for trading opportunities.

Bollinger Bands

We have discussed a lot about Bollinger Bands in our previous course lessons. This indicator is specially designed to measure the volatility of an asset. In this case, any currency pair in the Forex market. This indicator consists of two lines (bands) plotted above and below the middle line, a moving average. The volatility representation is based on the standard deviation, which changes as an asset’s volatility increases and decreases. Both these bands contract and expand according to market volatility. When the bands’ contract, it tells us that the volatility is low, and when the bands widen, it represents an increase in volatility.

Moving Average

Moving Average is the most common indicator used by traders across the globe. It measures the average amount of market movement over a specific period. If we set the moving average to 30 periods, it shows us the last 30 days’ average movement. In short, any Moving average tells us the average price movement over a specific period. If the MA line is above the actual price, that implies the market is in a downtrend and vice versa.

Average True Range (ATR)

The ATR (Average True Range) is another reliable indicator used to measure market volatility. This indicator takes the currency price range, which is the distance between the high and low in the time frame, and then plots that measurement as a moving average.

If we set the ATR to 40 range, it will tell us the average trading range of the last 40 days. The lower the ATR reading means, the volatility is falling, and we can expect fewer trades. On the other hand, the higher the volatility means the ATR reading is rising. It is an indication that the volatility is on the rise, and by using any directional indicator, we can gauge the potential trading opportunities.

These are the three best tools you need in your arsenal to measure the market’s volatility accurately. Make sure to take the below quiz before you go. Cheers!

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Forex Course Forex Daily Topic

149. Trading The Fakeouts In The Most Conservative Way

Introduction

Introduction

Introduction

Breakout trading is prevalent among all types of traders. Professional traders make a lot of cash by trading these breakouts, while some novice traders fail to effectively trade them. While trading these breakouts, the pretty basic strategy is to pull the trigger when the price breaks above or below any significant level. But many times, the price tends to reverse its direction and cause immediate losses. This is one of the most frustrating experiences breakout traders go through.

Did this ever happen to you, and did you wonder why this happens? The reason is that you have no pre-planned entries. You are just reacting to the price action and chasing the markets purely based on your feelings, but you must accept that the market has no feelings.

How to Trade the fakeouts?

❶ Primarily, find the confluence level on the price chart. This is a place where most of the indicators point towards one direction.

❷ Avoid trading range breakouts as both the parties hold equal power when the market is ranging. In this state of the market, the chance of spikes is very high. So it is always advisable to trade breakouts only in a trending market.

❸ Wait for the price to break above any significant level in an uptrend and break below any major level in a downtrend.

❹ Right after the breakout, wait for the price to test above or below any major level to confirm the breakout’s authenticity.

Trading Strategies

Buy Example

The image below represents a breakout in the EUR/CHF Forex pair.

As you can see in the below chart, we waited for the price action to holds above the breakout line. We have only entered the market after we confirmed the breakout. If the price action fails to hold, it simply means that it was a fakeout, and we can ignore it completely.

In this example, prices held above the breakout, which confirms the validity of the breakout. We took entry at the breakout line and chose to go for a brand new higher high. The exit was purely based on the higher timeframe’s significant resistance area, and the stop loss was just below our entry.

Sell Example

The image below represents a sell breakout in the GBP/NZD forex pair.

In the below image, we can see the price holding below the significant resistance level, which confirms the breakout. Our entry was at the red candle at the significant resistance level. The price sharply rejects to go any higher. Now we can see a brand new lower low forming after our entry.

The stop-loss is placed just above the entry as the seller response was quite aggressive. When the price started to struggle and failed to go down further, we chose to close our trade.

This is one of the best ways to trade the fakeouts in the most conservative way. We hope you got a clear understanding of this concept. Please let us know if you have any questions in the comments below. Cheers!

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147. How To Detect A Fakeout like a professional Forex trader?

Introduction

Introduction

Introduction

It is a general perception among Forex traders that the fakeouts are caused by the banks and large institutional players to stop retail traders players from moving the market in their desired directions. Although there is no evidence to prove this theory, we believe it is true. The manipulation is done by the big players. A fakeout is simply a failed breakout, and most of the time, they occur at significant areas like support, resistance, trend lines, Fibonacci retracement levels, and chart patterns, etc.

Typically, fakeouts are the result of a battle between both the parties on the price chart. So if you are witnessing a range and if we see both the parties printing aggressive candles, we can expect more fakeouts. The same applies to the trending markets as well. The aggressive battle between the buyers and sellers for domination leads to frequent fakeouts.

Trading Fakeouts

It is a common perception that it is impossible to trade these fakeouts, but that is not true. We can trade fakeouts, but a lot of market understanding is required to do so.

#1 Strategy

The image below indicates a fakeout followed by an actual breakout in the EUR/GBP Forex pair.

As we can see below, when the price breaks above the breakout line, it started to hold there. If it didn’t hold, it means that the price goes above and came back into the range. So in our case, hold above the breakout line confirms that the price is not going to fake out, and riding the buy trade from here will be a good idea.

#2 Strategy 
Buy Example

The image below indicates a false breakout in this Forex pair.

As you can see below, we choose to enter a buy trade after the price action fakes below the major support area. We can see that it is eventually coming back and holding at the support area. This holding support clarifies that the sellers failed to move the market.

Now buyers are coming back and holding the market to go for a brand new higher high. We can see that price action respecting the trendline for a while, but then it breaks above the line, printing a brand new higher high.

Sell Example

The image below indicates the appearance of a faker on the EURGBP sixty-minute chart.

The image below represents our entry, exit, and stop-loss in this Forex pair. The pair was in an uptrend, and as it tries to go above the resistance line, it immediately came back and stated holding below the resistance line. This confirms the faker, and after our entry, prices go back to the most recent lower low.

That’s about identifying Fakeouts and how to trade them. Please be sure to trade these fakeouts only when you are absolutely sure about them. All the best.

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Forex Course

148. How To Fade The Breakout By Successfully Trading It?

Introduction Most retail traders have a greedy mentality, so they always prefer to trade the breakouts to catch the home run. They believe in considerable gains in huge moves. Trading smaller moves are something they are not interested in because it takes a lot of work and time to scan the market. The problem with […]

Introduction Most retail traders have a greedy mentality, so they always prefer to trade the breakouts to catch the home run. They believe in considerable gains in huge moves. Trading smaller moves are something they are not interested in because it takes a lot of work and time to scan the market. The problem with […]

Introduction

Most retail traders have a greedy mentality, so they always prefer to trade the breakouts to catch the home run. They believe in considerable gains in huge moves. Trading smaller moves are something they are not interested in because it takes a lot of work and time to scan the market. The problem with breakout trading is that the majority of the breakouts fail. To make consistent money from the market, professionals always prefers to fade the breakout. The fading breakout essentially means trading a false breakout.

Fading Breakouts = Successfully trading the False Breakout

The image above represents the formation of a false breakout, which gives us a potential sell opportunity. Experienced industrial traders are always interested in fading the breakout because they know the crux of it. Most of the time, when the price action attempts to fade the breakout, it fails and closes back inside any of the major levels. Therefore, fading the breakout is always a smarter move than avoiding it.

Trading Strategies

Always remember that fading the breakout is a short term strategy. Therefore, please do not expect a home run while taking these trades. What we are doing here is that we are trading the false breakout moves. During the fight between the buyers and sellers, we will witness the initial moves, often failing to give the breakouts.

We are just taking advantage of these exact moves. In the end, one party always wins, and we will eventually get the breakout on the price chart. Instead of waiting for the home run, it is always advisable to trade some smaller moves, and if the market allows the home run, we must definitely go for it.

Buy Trade

The price chart below represents a false breakout in the GBP/NZD Forex pair.

As we can see in the below chart, where the price action breaks below the channel, it came back right into the channel, indicating a false breakout. After the breakout, we can see the price action holding at the support zone. We decided to go long after we saw the red candles struggling to go down and when a clear big Green Candle is formed. Instead of being disappointed that the breakout didn’t happen to take the trade, these small trades inside the major areas come handy to make money.

Sell Trade

The image below represents the formation of a false breakout in the GBP/AUD Forex pair.

As you can see, the image below represents our entry, exit, and stop-loss in this pair. When the price failed to go above the major level, it is an indication for us to take a trade inside the triangle. Therefore, when the price came back, we took the sell entry to the most recent support area. The stops above the entry should be good enough.

Another Sell Trade

The image below represents a false breakout in the GBP/AUD Forex pair.

As you can see, when the prices failed to break the trend line and started to hold below the trend line, it was a sign that it is a failed breakout. It also indicates that the sellers are going to take over the market when we look-in the price action perspective. In this trade, we choose not to close our position at the most recent higher low. Instead, we went for the actual breakout. The holds below the support area is an additional confirmation for us to go to the most recent lower low area.

That’s about Fading the breakout, and we hope you find this lesson informative. Let us know if you have any questions in the comments below. Cheers!

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Forex Course

146. Measuring The Strength of a Breakout

Introduction

Introduction

Introduction

When you can see the momentum of the market slowing down, you can soon expect a reversal breakout in any underlying currency pair. Knowing this info will boost your confidence to pull the trigger, and to scale your positions without any hesitation.  Conversely, to trade the trend continuation breakout, knowing the strength of the breakout is also crucial.

In this course lesson, we will learn how to measure the breakout’s strength and take appropriate action according to the information which the market represents.

Using The MACD Indicator To Measure The Momentum

MACD is one of the most common momentum indicators in the Forex market. There are many different ways to use the MACD indicator, and in our case, we suggest you look at the histograms of the indicator to gauge the market strength. As the price moves, if the histograms get bigger, it is indicating that the market momentum is increasing. In this case, we can expect a breakout in the direction of the trend. Conversely, if the histogram gets smaller, it means the momentum is getting weaker, and we can soon expect a reversal in the currency pair.

Buy Example

The image below represents a buy trade in the EUR/GBP Forex pair.

Please observe the first arrow in the MACD histogram. The upsurge lines indicate the strong trend in this Forex pair. When the price action goes above the breakout line with the rising histogram bars, it is a sign of a strong breakout. After the breakout, we took a buy-entry, and the pair printed a brand new higher high.

Sell Example

The image below indicates a sell trade in the CHF/JPY Forex pair.

The image below represents the entry, exit, and stop-loss placements. The price action breaks below the significant level with the rising histogram lines. This shows the sellers are real, and they are ready to make a brand new lower low. After our entry, prices went down, making a brand new lower low. Therefore, when the breakout indicates strong strength, we must go for smaller stops and hunt significant returns.

Using The RSI Indicator To Measure Market’s Strenght

RSI stands for Relative Strength Index, and it is a popular indicator which oscillates between the 0 to 100 levels. When the indicator reaches the 70 levels, it means the market is overbought, and a reversal is expected. When it reaches the 30 levels, it means the market is oversold, and an upside reversal is expected.

In this article, we are not going to use the RSI indicator, like how it is typically used. Instead, we will use the RSI divergence to measure the strength of the trend. A divergence is when the price moves in one direction, and the indicator moves in another. Divergence shows that the indicator is not satisfied with the price action, so in this case, a reversal should be expected.

Buy Entry

  1. Find out the divergence in a downtrend.
  2. Wait for the price action to break above the significant resistance level.
  3. Wait for the hold above the breakout level to confirm the breakout.
  4. Hit Buy.
  5. Place the stop-loss below the breakout.
  6. Go for brand new higher high.

The image below indicates the buying trade in the GBP/CAD Forex pair.

The image below represents our entry, stop loss, and take profit in this Forex pair. As you can see, the trend was down, but on the other hand, the RSI indicator failed to make the higher high. This indicates that the buyers are strong, and after any breakout, we can confidently go long.

Sell Entry

  1. Find out the divergence in an uptrend.
  2. Wait for the price action to break below the significant support level.
  3. Wait for the hold below the breakout level to confirm the breakout.
  4. Hit sell.
  5. Place the stop loss above the breakout.
  6. Go for a brand new lower low.

The image below represents the selling trade in this Forex pair.

As you can see, when the price action and indicator gave the divergence, it means the indicator didn’t like the upward spiral anymore. Also, the buyers are exhausted, and we can expect a strong downward reversal. Soon after the breakout, we took short entry and exited our position when printing the brand new lower low.

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Forex Course

145. Trading The Triangle Pattern Breakouts

Introduction

Introduction

Introduction

Breakouts trading and trading the triangle chart pattern are two different trading tools. A breakout occurs when the price goes above or below the significant support resistance area. It indicates that the price is ready to move in the direction of the breakout, and any entry near the breakout will be fruitful. This is the reason why breakout trading is considered a leading method of trading in the industry as it helps the traders to anticipate the trend and ride the potential moves.

On the other hand, the Triangle is a technical chart pattern. The best description of the triangle chart pattern is as a horizontal continuation chart pattern, which helps the traders in finding the best entry on the price chart. At the beginning of the pattern, it is widest, and as the market continues the ranging move, the price starts to move in a limited, narrow range, and as a result, we witness the point of the Triangle on the trading chart.

The Trading Strategies

There are two types of triangle chart patterns. The first one is ascending chart pattern, and the second is the descending chart pattern.

Ascending Triangle Chart Pattern

Ascending Triangle is a bullish chart pattern that helps traders to take buy trade in an ongoing uptrend. The image below represents the formation of an Ascending Triangle chart pattern in the CAD/JPY Forex pair.

The image below represents our entry, exit, stop-loss, and take-profit in the CAD/JPY forex pair. As you can see, in an uptrend, when the price broke above the chart pattern line, it is a sign that the buyers are strengthening. Therefore, if the price is holding above the support line, it is an indication for us to go long in this pair.

Right after our entry, we can see that the price smoothly ran towards the north, and printed a brand new higher high. We can close our trade based on any nearest support area, and we also can use any indicator for the exit. The stop-loss order was placed just below the entry. In a strong trending market, the smaller stops are good enough to ride the trend.

Descending Triangle Chart Pattern

The Descending Triangle is a bearish chart pattern that helps traders in taking sell trades in an ongoing downtrend. The image below indicates the formation of a Descending Triangle pattern in the GBP/CAD Forex pair.

The below price chart of the GBP/CAD pair represents our entry, exit, and stop-loss. In a downtrend, when the price breaks below the support area, it’s a sign that the strong buyers failed to push the price higher, and any hold below the resistance line is an indication to go short. Soon after our entry, price blasted down south, printing a brand new lower low.

The descending Triangle is simple and easy to trade Forex chart pattern. Most of the time, this pattern offers excellent risk to reward entry trades. So when you see the pattern on the price chart, don’t forget to scale your position for more significant gains.

That’s about trading the ascending and descending Triangle chart pattern breakouts. Take the below quick quiz before you go. Cheers.

[wp_quiz id=”85881″]
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144. Trading The Channel Breakouts In The Forex Market

Introduction

Introduction

Introduction

Breakout trading is one of the easiest and most common and smartest ways to trade the market. It doesn’t matter whether you are a scalper, intraday trader, investor, or a swing trader; you can always make money in the market if you master the breakout trading only.

Breakout trading is an attempt to enter in the market when the price action moves outside the significant price range, most of the time it takes an immense amount of power to break the significant areas, and you will always witness the spikes, fake-outs near the breakouts, this is because both of the parties tries to dominate the shows.

What is a Price Channel?

A price channel is a state of the market that connects the swing high and swing higher lows in an uptrend. Conversely, in a downtrend, it connects the swing low and lower low. The upper trend lines act as a resistance to the price action, and the lower trend lines act as a support line on the price chart. The price respects these areas by staying inside the price channel. When the opposite party becomes dominates, then we witness the breakout in a channel.

Trading Channel Breakouts

Buy Trade 1

The price chart below represents a channel breakout in the CAD/JPY forex pair.

 

As we can see, the sellers are getting weaker in the channel, and as a result, soon after the breakout price action changed its trend. So, around 81.55, the price action broke to the north and printing a brand new higher high.

Buy Trade 2

The image below represents the formation of a price channel in the CAD/JPY forex pair.

As we can see, the below price chart represents our entry-exit and stop loss in this pair. So during the downtrend, both buyers and sellers were holding equal power. Near to the 78.00 area, price action broke to the north, and after the breakout, we took a buy-entry. After our entry, the price made a brand new higher high, but the hold at the most recent higher high convinced us to close our trade at the 88.37 level.

Sell Trade 1

The image below represents the formation of a Price channel in a downward trend.

 

The image below represents our entry, stop loss, and take profit in this Forex pair. The channel is typically formed when there is no trend, or when the trend is about to end. On a lower timeframe, we can trade inside the Channel, but on this timeframe, the break below the 78.30 level indicates that the sellers stole the show, and are ready for a brand new lower low.

Sell Trade 2

The image below represents a channel breakout in the AUD/JPY Forex pair.

Right after the price action approaches the most recent support area, it just got shot down and broke below the Channel. The strong red breakout candle is an indication for us to go short in this pair and right after our entry, we have witnessed a brand new lower low.

Trading channel breakouts is this simple. But minute details like drawing channel lines accurately is crucial. Let’s learn more breakout trading techniques in the upcoming lessons. For now, don’t forget to take the quiz.

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143. Trading Breakouts Using Trend lines

Introduction In our previous course lessons, we saw how to trade breakouts in an effective manner. As we know, Breakout trading is one of the most common ways of trading the financial markets. Most of the other trading tools tend to fail in accurately identifying a trading signal, or they lag a lot in doing […]

Introduction In our previous course lessons, we saw how to trade breakouts in an effective manner. As we know, Breakout trading is one of the most common ways of trading the financial markets. Most of the other trading tools tend to fail in accurately identifying a trading signal, or they lag a lot in doing […]

Introduction

In our previous course lessons, we saw how to trade breakouts in an effective manner. As we know, Breakout trading is one of the most common ways of trading the financial markets. Most of the other trading tools tend to fail in accurately identifying a trading signal, or they lag a lot in doing so. But that’s not the case with breakout trading. If done accurately, it helps traders in making consistent cash from the market.

In this lesson, let’s learn how to trade breakouts using trendlines. Trendlines are one of the simplest tools you can use to trade the breakouts on both lower and higher timeframes.

Trendline and it’s working!

A trend line highlights the ongoing trend by connecting the swing lower highs in an uptrend and swing higher lows in a downtrend. Just like S&R levels, trendlines also signify the appropriate areas to enter the market. The only difference is that support and resistance levels are horizontal areas while trendlines are sloping. Now let’s get to the topic.

Trading Breakouts Using Trendlines

Upward Trendline

An upward trend line connects a swing high to swing low from the lowest point to the highest point in an ongoing trend.

Buy Trade 1

The price chart below represents a trendline Breakout on the daily chart.

 

By looking at the market, it is clear that the sellers had a hard time going down as the buyers continue to give a strong fight. After a couple of months, sellers gave up, and buyers took the show to break above the trend line. The hold above the trendline confirms the buying entry in this pair. After riding the uptrend for a bit, we understood that the buyers got weak. Hence we decided to close our positions at the most recent higher high.

Buy Trade 2

The image below represents a trendline breakout in the CAD/JPY forex pair.

The pair was in a strong uptrend, and during the pullback phase, when the price action broke above the trend line, it indicates that the buyers are ready to lead the market again. The hold above the trendline confirms our buy entry. The original trend was quite strong, so the stop below the trend line was good enough to ride a new trend.

Downward Trendline

Downward trend line connects a swing low to swing high from the highest point in a trend to the lowest point in a trend.

Sell Trade 1

The chart below represents a trendline breakout in the GBP/USD Forex pair.

As we can see, the buying trend was quite strong, and the price action closely followed the trendline. A breakout below the trendline is a clear indication for us to go short in this pair.

Sell Trade 2

The price chart below represents the breakout of a trend line in the GBP/USD Forex pair.

We can see the pullback on a weekly chart, and during the pullback, the price broke below the trendline. This shows that the sellers are desperate to take the price down. After our entry, the price went down and turned sideways. After a few weeks, it again goes down, and we choose to close our trade at the most recent lower low.

This attempt is to give you an understanding of how to trade trendline breakouts in most of the scenarios. In our upcoming lessons, let’s delve deeper into this concept. Cheers!

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142. Different Types Of Breakouts & How To Trade them?

Introduction As discussed in the previous lesson, a breakout is the price action that goes above or below a significant level on the price chart. As a breakout trader, we must enter a long position after the price breaks above the resistance, and enter a short position after a price action breaks below the support. […]

Introduction As discussed in the previous lesson, a breakout is the price action that goes above or below a significant level on the price chart. As a breakout trader, we must enter a long position after the price breaks above the resistance, and enter a short position after a price action breaks below the support. […]

Introduction

As discussed in the previous lesson, a breakout is the price action that goes above or below a significant level on the price chart. As a breakout trader, we must enter a long position after the price breaks above the resistance, and enter a short position after a price action breaks below the support. After the breakout, the volatility of the price tends to increase as most of the traders prefer entering the market to ride the upcoming trend.

There are different types of breakouts, such as channel breakout, head and shoulder breakout, triangle breakout, flag pattern breakout, etc. In this lesson, we have shared a few of the breakout strategies that you can use to trade the Forex market effectively.

Resistance Breakout

The below price chart represents a Resistance breakout on the NZD/JPY Forex pair.

It is evident that the market was quite volatile, and after the breakout, it just goes down. So during the breakout, there was no entry. The price action then came back to the resistance area, and we ended up going short in this pair. The take-profit was placed at the most recent lower-low. We chose the most recent lower low because both the parties were strong, and we expected another buying push. You can go for a brand new lower low or higher high as well. Always place the stops just above the support area.

Support Line Breakout

The below charts represent our buy entry in the NZD/JPY Forex pair.

As you can see below, we took a buy entry when the price action broke above the significant support area. Right after our entry, the market just blasted to the north, printing a brand new higher high. The reason why the market moved so much is because of the overall buying trend being super strong.

It is a common perception that support and resistance are just significant levels, but they do not provide good trading opportunities, but this is not true. If we filter out all the bad signals and only trade the S/R signals when the price action is strong enough, those trades often provide an excellent risk to reward ratio trades.

Swing High Breakout

The image below represents a swing high breakout on the daily chart.

  

Swing high Forex strategy is specially developed for the higher timeframe traders. We look for the breakout of the most recent higher high. Most of the time, the higher timeframes takes nearly 2 to 3 months for a complete pullback. So to break the most recent higher high, the price action needs a lot of power in order to print a new higher high.

The moment we get a new higher high, it indicates the strength of the buyers, and we must expect the formation of a brand new higher high. In the below image, we took the trade at the breakout of the higher high, and trade it took nearly two months to hit the take profit.

 

Swing Low Breakout

The image below represents the breakout of the swing low on the AUDCAD Forex pair.

As you can see, we took a sell-entry in this pair when the price action broke the most recent lower low. After our entry, price action didn’t blast to the north. Instead, it goes sideways for a couple of months and finally printed a brand new lower low.

Flag Pattern Breakout

The image below represents the price breaking the Flag pattern in the EUR/CAD Forex pair.

The Flag pattern is the most common and widely used to trade potential breakouts. Basically, the appearance of Flag indicates a trending market situation, and a breakout of the pullback will be a great idea to go for the brand new higher high. As we can see, after our entry at breakout, price action went north and prints a brand new higher high.

Channel Breakout

The image below represents a channel breakout in the GBPUSD Forex pair.

We can see the price struggling to make any significant moves and hence formed a channel. After the buy-side breakout, the price went in the north direction, forming a brand new higher high. While trading channel breakouts, it is good enough to place the stops below the breakout line. Since the breakout line acts as a dynamic support and resistance level, the price it needs an immense amount of power to break that level. So placing our SL-order there, is a great idea.

That’s about different types of breakouts and how to trade them. If you have any questions, please let us know in the comments below. Don’t forget to take the quiz before you go!

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141. Understanding The Concept Of Breakout

Introduction

Introduction

Introduction

A price movement can be considered a breakout when the price clears any critical level on the price chart. These levels can be support/resistance, trend lines, Fibonacci levels, etc. Many professional traders wait for the price to hold above the breakout to take long positions. Conversely, they wait for the price to hold below the breakdown level to take short positions.

When the price confirms that the breakout is valid, volatility tends to increase as the price started to move in the direction of the breakout. The reason why breakout trading is popular among the traders is that it sets the future trend direction. This makes it easier for traders to make consistent profits from the market.

Breakout trading strategy is universal, and we can apply it to the hourly, daily, weekly, or even monthly timeframes. Investors, swing traders, and intraday traders prefer breakout trading the most compared to any other form of trading. The longer price action holds inside the breakout, the stronger breakout we must expect, and also, the longer time the price action moves in that direction.

During the consolidation phase, when the price is preparing to break out in any direction, we will notice a couple of price pattern formations such as channels, triangles, flags, etc. These patterns will give us the clues on which side the breakout may occur—using these signals to enter a trade before the breakout is crucial. But if you are a conventional trader, wait for the price to break above or below the price to take the trade.

Trading Various Breakouts 

Trend Line Breakout
Ascending Trend line Breakout

The below price chart represents an ascending trendline breakout on the NZD/CHF daily Forex chart.

As you can see in the below image, when price action broke below the ascending trend line, it is an indication of sellers stepping into the game. The hold below the trend line confirms the selling entry. We have placed our stop-loss at the previous high and rode the huge downtrend.

Descending Trend line Breakout

The image below represents the breakout of a descending trend line in the GBP/CHF Forex pair.

As you can see below, we took a buy entry when price action went above the trend line and started to hold above. The hold confirms that the buyers are in control, and they are ready to make a brand new higher high. After our entry, price action blasted to the north and printed a brand new higher high. We chose to close our trade at the most recent higher high. The stop-loss order placed just below the trend line is safe enough.

Range Breakout

The price chart below represents a Ranging market in the NZD/JPY Forex pair.

Most of the time, you would have observed traders taking buy/sell trades when the market moves in a range. But in this strategy, let’s trade the market only when the price breaks the range. Just like any other breakout, Range breakout also indicates the winning of one-party over the other.

The hold above the breakout confirms that the range is broken, and it is a good idea to go long. We choose smaller stops because the hold above the range gave additional confirmation.

That’s about breakouts and how to basically trade different breakouts in the market. In the upcoming lessons, we will be going through many of the concepts related to breakouts.

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Forex Course

140. Market Environment – Summary

Introduction

Introduction

Introduction

In a few of the past course lessons, we have discussed some of the most crucial topics related to the Forex market environment. Starting from the ‘state of the market,’ we have understood what trending and ranging markets are. We also have differentiated the concepts of retracements and reversals, which are vital for identifying accurate entries and exits.

One of the most valuable things we have comprehended is to identify ways for spotting potential market reversals. Finally, we understood how professional traders read different market environments and states. The fundamental purpose of this summary article is this – There is a possibility of you understanding these concepts better once you finish all the course lessons in this section.

Hence, this article will focus on summarizing everything we have learned till now regarding the Market Environment.

The Market States

We have discussed the different ways in which the market moves. Essentially, the price action of a particular asset class moves in three different ways.

Trend | Range | Channel

With clear examples, we have discussed how this movement happens and what we should understand when the price moves in a particular direction. More info related to this can be found here.

Trading the Forex market when it is trending!

In this chapter, we have taken you through the concept of trending market. Uptrend and downtrend concepts have been clearly explained. We also have used Indicators like ADX and Moving Averages to trade the trending market accurately. Please go through this to recall those strategies.

What should we do when the market is ranging? 

We have comprehended the various ways of identifying the ranging market. We also used the Support/Resistance strategy & ADX indicator to trade ranges effectively. Once you try trading a ranging market by yourself, the way you read this article will change, and it will all start making sense. Hence, going through it once again now is important.

Retracements & Reversals

In the next couple of articles, we have drawn down clear differences between Retracements and Reversals. Here, we understood what we must do in the situation of a reversal or a retracement. Then, we have moved on to learn how to trade a reversal in the most effective way possible. In this lesson, we have taken the help of Fibonacci Levels to identify potential market reversals and trade them accordingly.

Finally, we ended this course by understanding how most of the professional Forex traders read and trade different market states. We consider this one of the most useful and valuable articles in this course as we have shared some of the most simple yet effective trading techniques. We also used accurate risk management techniques to protect your capital while trading the market using these techniques. You can go through them again here.

We hope these techniques helped you in becoming a better trader. In our upcoming course lessons, we will be understanding Breakouts, Fakeouts, and everything related to these topics. Cheers!

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Forex Course

139. How Professionals Trade The Different Market States?

Introduction

Introduction

Introduction

In this series of different states of the market, we understood the terminology and the concepts involved. However, in the forex market, if we do not go practical, there is the least use to the concept. In other words, one must understand how to trade in the market, knowing its state. In this final lesson of the series, we shall dive deep into the topic and understand how to apply them in the market.

Trading a Trend

Trading a trending market is the simplest and safest way to trade in the market. This is because, in a trend, it is evident on which party is dominating the market. For example, in an uptrend, it is clear that the buyers are more powerful than sellers. And hence, we look for buying opportunities rather than selling.

In a trend, the market makes higher highs and higher lows. In other words, the market moves in one direction with temporary pullbacks in the opposite direction. These pullbacks (retracements) typically turn around to the original trend direction at the support and resistance levels. So, to trade a trend, we wait for the market to make a higher high / lower low and retrace to the S&R level, before triggering the buy or sell.

Consider the below chart of USD/CAD. The market is in a clear downtrend. The market made a new lower low by breaking below the grey ray. It then retraced back to the S&R area (grey ray) and is currently moving sideways. And this sideways movement in the market has high significance.

After the sellers made a new low, the buyers began to show up. They made it until the S&R level. And the market is currently in a range. As per the definition of a range, we know that there is strength from both the parties. In other words, the buyer who was temporarily dominating the market is slowing down as they are unable to make a higher high. And this price action is happening in the S&R area of the sellers. Therefore, we can conclude that the sellers are here to continue their downtrend.

One can enter when the price is at the top of the range (resistance) or when it starts to fall from the resistance. Placing the stop-loss few pips above the S&R level, and a take profit at the Low, is the safest approach to trade a trend.

Trading a Range

In a range, the market moves between levels – Support and Resistance. In this type of market, there is power from both buyers and sellers. Typically, the market shoots up from the support and drops from the resistance. However, randomly buying at support and selling from resistance is not the right way to trade a range like a professional. To trade a range with high odds in your favor, you must be aware of the overall trend. And you place your bets on the direction of the overall trend.

Consider the below chart of NZD/CAD. We can clearly see that the market is in a range. But, looking from the left, the market is in a strong uptrend, and the price is holding above the S&R level (grey ray). In the current market, we see that the price dropped below the bottom of the range, touched the S&R level, and shot right back up into the range. Thus, confirming that the big buyer is preparing to do the buys.

Since the price strongly reacted off from the S&R level and held above the support of the range, we can prepare to go long on the market. Stop-loss from this trade would be below the S&R level, while the target point would be at the top of the range. In hindsight, the buyers were able to push the market above than the resistance.

This brings us to the end of this series. We hope you found this lesson and the previous chapters interesting and informative. Stay tuned until we release our new set of lessons.

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138. How to Identify Potential Market Reversals?

Introduction

Introduction

Introduction

In the previous lesson, we discussed the concept of retracement and reversal. We also understood how they are different from each other. However, just knowing if the terminology will not help in the forex market. Being able to predict if the price is retracing or reversing is the name of the game because this will significantly bring down your losing trades and increase the number of winning trades.

Retracement or Reversal?

In technical analysis, there are several ways to predict if the market is undergoing a retracement or a reversal. Here are some of the ways to differentiate between the two.

Fibonacci Retracement

Fibonacci retracements are very popular in technical analysis space. They are based on a sequence of key numbers identified by Leonardo Fibonacci, a mathematician.

In technical analysis (trading), Fibonacci retracement is drawn by taking two extreme points on a price chart, which results in different levels or ratios – 23.6%, 38.2%, 50%, 61.8%, and 100%. These Fibonacci ratios are used by traders to determine possible support and resistance levels in the market. Typically, these are the level where the price tends to hold and reverse from the current direction. Having that said, the price does not hold at every Fibonacci level. It holds perfectly only when it is combined with the price action on the charts.

Consider the below chart of EURCAD. In the recent chart, we see that the market is in an uptrend. The grey ray represents the support and resistance level. After making a higher high, the price has retraced to the S&R level.

Now the question arises if this retracement is a pullback to the uptrend or a potential reversal. To figure this out, we shall apply the Fibonacci retracement to the chart.

In the below chart, we have incorporated the Fibonacci retracement onto the price chart. If we look at the same S&R level, we see that the price is also holding at the 38% level. Hence, this gives us double confirmation that the market is preparing to head north. And in hindsight, the price does make a higher high.

Market Transition

Traders, especially Price Action traders, study the movement in the prices to determine if the market is preparing for a possible reversal. If a market is going for a reversal, the market gives simple yet effective hints and clues about it. The violation from the definition of a trend is the clue that the market is possibly going to turn around for a reversal.

Let us consider the example of a reversal to the upside. Initially, the market will be in a downtrend, making lower lows and lower highs. But, when it retraces and tries to make a new lower low, it leaves equal low. This becomes our first clue on a market reversal. From the point of the equal low, it rallies up but fails to make a lower high.

Instead, it makes an equal high. These two hints are an indication that the price is not moving according to the definition of a downtrend, and there could be a possible reversal. To confirm the same, we wait for the price to make a higher low. If it does make a higher low, instead of a lower low, we can predict that the market is preparing to head north.

Below is a self-explanatory illustration for the above explanation.

Take the below quiz to check if you have got the concepts correctly. Cheers!

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137. Differentiating between a Retracement and a Reversal

Introduction

Introduction

Introduction

Broadly speaking, there are three states in the market – trend, range, and channel. If we were to go a little more in detail, a market has components like retracement and reversal. Identifying and differentiating between a retracement and reversal is a skill in itself. In this lesson, let’s go and understand what these terms mean and how to differentiate them.

What is Retracement?

Retracement is the terminology usually associated in a trending market. We know that in a trending market, the price moves in one specific direction. For instance, an uptrend is defined as a sequence of higher highs and higher lows. As per the definition of an uptrend, the prices do not keep moving higher and higher continuously.

After trending up to a certain point, the price temporarily moves in the opposite direction. This movement against the original trend is referred to as retracement. Technically, the price action from a higher high to the higher low is called a retracement.

Uptrend Example

Downtrend Example

What is a Reversal?

A reversal can be defined as the overall change in the direction of the market. A market can reverse from an uptrend to a downtrend, or from a downtrend to an uptrend.

Reversal to the Upside

In this type of reversal, initially, the market trends in a downtrend making lower lows and lower highs. Later, the market goes into a transition state where the price typically ranges for a while. In other words, the price stops making lower lows and lows highs. Instead, it makes equal lows or higher lows. Finally, the market starts to trend north by making higher highs and lower lows.

Reversal to the Downside

This reversal happens when the market transits from an uptrend to a downtrend. In an uptrend, the price makes higher highs and higher lows. But, when the trend begins to diminish, the higher highs turn into equal highs, and higher lows start to become equal lows. Finally, when the seller’s pressure comes in, the price begins to make lower lows and lower highs, forming a downtrend. Thus, the complete scenario is referred to as a reversal.

Predicting a possible reversal or retracement in the market is pretty challenging. If you’re stuck in a position and unsure if it is a retracement or a reversal, you may try the following options to manage the trade:

  • Hold onto your positions by keeping the stop loss as it is. If it is a retracement, you can ride the trade, else get stopped if it is a reversal. This is the simplest approach.
  • If you are more inclined towards a reversal than a retracement, then you may close your positions. Based on where the market breaks through, you can look for re-entry. But, you might have to compromise on the risk: reward.
  • You could close the entire position and stay away from the pair and look for other opportunities. This is the safest option possible, especially for conservative traders.
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136. Learning To Trade The Ranging Market?

Introduction

Introduction

Introduction

A Range is a state of the market where the prices move back and forth between the upper bound and the lower bound. A ranging market is also referred to as a choppy, sideways, or a flat market. Unlike a trend, the prices do not move in one specific direction for a long time. A range on a time frame, when looked on a smaller time frame, the price trends in one direction for a while, reverses its direction, and trends in the opposite direction.

Understanding Support and Resistance

Knowing support and resistance is an essential concept to understand a range. These two terms form the basis of a range.

Support

In simple words, support is the level in the market where the prices tend to go up. It is the region where the buyers are interested to aggressively buy the security, causing the prices to shoot up. In other words, it is an area where there is a high demand for the currency pair. A level can be regarded as support when the price reacts multiple times (with power) from that area.

Resistance

Resistance is a level in the market where the prices tend to drop. It is the price where sellers are willing to sell or short sell the asset. They prevent the market from going higher from a specific level. Resistance is no different from that of supply.

Resistance can be understood in terms of buyers. It is an area in the market where the buyers are not interested in buying at that price as they find it expensive. Since there is no demand from the buyers, the prices drop. And when it drops to the support area, the buyers show up again. Thus, due to a higher demand than supply at the support region, the prices rise.

The combination of both support and resistance makes a range. For instance, let’s say the market drops to the $5 mark every time it touches the $10 price. Visually, the market is moving sideways, and such a market is referred to as a range. Here, the $5 price is the support level, and the $10 price is the resistance. A similar example of the same is illustrated below.

ADX indicator for ranging markets

The Average Directional Index indicator can be applied to determine if the market is trending or ranging. A value above 25 indicates that the market is in a strong trending state, while a value of less than 25 signifies that the market is in a consolidation (range) state.

Below is the live chart of AUD/CAD on the 4H time frame. Looking at the chart from a bird’s eye perspective, the market started as an uptrend, held for a while, continued with the same trend, and is currently ranging again. In this sequence, we can observe that the ADX was below the 25-mark line when the market was consolidating, and greater than 25 when it was trending upwards.

We hope you found this lesson on ranging markets interesting and informative. In the next lessons, we shall get into more detail and understand concepts like retracements and reversal. Happy learning!

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135. All About The Trending Market

Introduction

Introduction

Introduction

In the previous chapter, we understood the different states that exist in the market, which were trends, ranges, and channels. In this and the upcoming lessons, we shall go over each one of the types in detail.

What is a Trending Market?

A trending market is the type of market where the prices move in one specific direction. Of course, the prices change the direction temporarily, but the overall direction will still be in one direction.

Since there are two directions in the market, there are two types of trends: one facing upward and the other facing downward. The former is referred to as an uptrend, and the latter is called a downtrend. Having that said, there are some rules and criteria to confirm a market is trending.

How to Identify a Trend?

There are quite a number of ways to identify and confirm a trend. One can use price action patterns or technical indicators to identify if a market is trending.

Price Action pattern

The concept of highs and lows on the price charts is used to determine if the market is trending upwards or downwards.

Uptrend

In an uptrend, the market makes higher highs and higher lows. Multiple sequences of this pattern confirm that the market is trending up.

Downtrend

In a downtrend, the price makes multiple sets of lower lows and lower highs.

ADX Indicator

Another way to determine if a market is trending is by applying the Average Directional Index (ADX) indicator. It was created by J. Welles Wilder, where the indicator has values between ranging between 0 and 100. The magnitude of the value determines the strength of the trend. The larger the number is, the stronger the trend.

Typically, a value greater than 25 indicates that the market is in a strong trend, either uptrend or downtrend. It is a non-directional indicator, where the value is always positive irrespective of the direction.

Note that ADX is a lagging indicator and does not really determine the future of the market. Thus, it cannot be employed for timing your entries and exits.

Moving Average

Simple moving averages can also be used to determine if the market is in a trending state. Add the 7 period, 20 period, and the 65-period MAs on the price chart. When all three MAs compresses and fans out, and if 7 period MA is below the 20-period MA and 20 period MA is below the 65-period MA, then it confirms that the market is in a downtrend.

Conversely, if the 7 period MA is above the 20 period MA and the 20 period MA is above the 65-period MA, then the market is officially in an uptrend.

These were some of the most popular techniques to identify and verify whether the market is trending. However, they are not strategies to trade a trend. Nonetheless, they can be used to give heads up to any trend trading strategies.

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134. Knowing the State of the Market

Introduction

Introduction

Introduction

Many newcomers and novice traders believe that the market moves in a random direction. They think it is all about the fundamental factors that keep the market going. In reality, the market does move based on fundamental factors, but it doesn’t imply that the prices move in random directions. The prices on the charts move in a specific direction as they are nothing but the past transactions of the big institutional players.

Charts tell a lot about the market environment. It clearly determines who is in control of the market – the buyer or the sellers. Based on this, there are three states of the market:

  • Trend
  • Range
  • Channel

Broadly speaking, in any market, be it Stock, commodity, currency, or cryptocurrency, the prices move only these three states. Let us understand each of them.

Of course, there are several types of chart patterns, but they all fall in one of the types on a bigger picture. All technical traders must have an understanding of the market environment. Whatever be the strategy, it will work applied in the right state of the market. Also, every type of market has its own concepts to trade.

Trend

The most evident type of market is a trending market. At the same time, it is one of the most confusing states to understand. A trending market is a type where the prices make Higher High & Higher Low sequences or Lower Low & Lower High sequences. In other words, in a trending market, the prices make a Higher High / Lower Low, retrace to the Support & Resistance, and continue with the same pattern.

A trending market is a type that can be found in any type of market. That is, even in ranges and channels, trends can be spotted (in a miniature picture).

Based on the direction of the market, we can divide trends into two types –

Uptrend (Bullish) – A market that faces upwards is an uptrend. The price makes Higher Highs and Higher Lows. It is a market where the buyers (bulls) are in control of the market. Note that a Higher High alone cannot be regarded as an uptrend.

Downtrend (Bearish) – A market whose trajectory is downwards is referred to as a downtrend. The price moves by making Lower Lows and Lower Highs. In this market, the sellers (bears) dominate the market.

Range

A ranging market is a type where the price does not create Higher Highs of Lower Lows. Thus, it moves sideways. There is a certain price shoots up and a price where it drops. It moves within these two prices. In this market, both buyers and sellers are strong. For example, if we say the market is ranging between 0.1200 and 0.2400, it means that the buyers are pushing up the market to 0.2400 from 0.1200, while the sellers are hitting it right back down to 0.1200.

Channel

A channel is basically a tilted channel. In other sense, a channel is a trend that is quite weak. In a channel, the price does try to make a Higher Highs or Lower Lows but retraces deeply before going for the next set. In a trend, the market respects the Support & Resistance, but the channel does not.

We hope you were able to get a gist on the states of the market. In the coming article, we shall elaborate on each of the types and understand how to trade them.

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133. Divergence Cheat Sheet and Summary

Introduction

Introduction

Introduction

The previous chapters dealt with the interpretation of divergence, its types, strategies, and the rules involved in it. In this article, we have provided a cheat sheet that will cover all the divergence topics in short.

Divergence: This a concept in technical trading that determines if the market is going to reverse or continue the trend. It is identified when the price and the indicator move in opposite directions.

Based on the direction it will prevail in, there are two types of divergence:

  1. Regular Divergence
  2. Hidden Divergence

Each of them is divided into types – Bullish and Bearish, based on the direction they are biased. Here is a quick cheat sheet for trading Regular and Hidden Divergence.

Regular Divergence

Regular divergence is divergence, which indicates a reversal in the market. These occur during the end of a trend and are quite easy to spot.

Hidden Divergence

Hidden divergence indicates a possible trend continuation. These usually occur at the beginning of a new trend and are comparatively tricky to spot.

Not all indicators can be used to spot divergence. Only momentum oscillators indicate a divergence in the market. Some of the most used momentum oscillators to determine divergence include Commodity Channel Index (CCI), Relative Strength Index (RSI), Stochastic, and William %R.

Divergence is a trading concept that works exceptionally well in some cases but fails to give the right indication sometimes. Thus, traders must follow every rule that is discussed in the previous article. We hope you found this course of Divergence trading informative and useful. Happy trading!

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132. Rules Of Trading Divergence

Introduction

Introduction

Introduction

Divergence is used by traders to determine if there is going to be a reversal or a trend continuation. They sometimes work exceptionally well and, at times, goes entirely in the anticipated direction. Thus, to increase the consistency of divergence, we have listed out some rules for trading divergence.

#1 Focus only on four price patterns

For legitimate divergence to exists, their price pattern must be either of the following:

If spot a divergence on the indicator that does not have either of the above price action, then the divergence will not work.

Several times, the price consolidates and shows divergence on the indicator. But there will not be any proper top or bottom to confirm that the divergence is real. Thus, such divergence must be ignored.

#2 Connect the lines only for significant highs and lows

Now that you know, we are concerned with one of the four patterns – higher high, lower low, equal high, and equal low. When it comes to drawing the trend lines, you must make sure the highs and lows are major enough to be considered. A little bump up or dips that may look like a higher high or lower low must be ignored.

#3 Mark the corresponding highs and low

Always start by drawing the highs and lows from the price charts. Then you mark the highs and lows on the indicator corresponding with the highs and lows with the price.

Pro tip: Draw two vertical lines to perfectly mark the corresponding highs and lows.

#4 Compare the length and strength of the pushes

This is one of the most important points to consider. In a trending market, the price makes higher highs or lower lows. But, when there is a divergence for a particular push, you must make sure that the momentum is weaker, and length is smaller than the previous trend sequence.

In the above chart, we can clearly ascertain that the lower low, which had divergence was much weaker and shorter than the previous push. As a result, the market reversed and had a big bull run.

#5 Do not try catching a falling knife

There are times when the market does not consolidate before reversing its direction. There could not be any entry for such trades. But there are traders who chase the market and end up buying at very high prices, which could be bad for business. Thus, you be patient and wait for the right opportunity, because buying at higher prices, could hinder the risk to reward ratio, leading to a high risk for small profits.

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131. Timing Your Entry While Trading Divergence

Introduction

Introduction

Introduction

Divergence is a powerful tool in trading. It works like a charm when used correctly. However, traders enter right after they spot a divergence, which is an incorrect method to trade it. Early entry can lead to spikes or wrong comprehension; as a result, executing your stop loss. Thus, precise entries are as crucial as understanding divergence. This shall go over some tips and tricks to not enter early in a trade.

The Double Confirmation Rule

When we spot a regular divergence, the market does not reverse immediately. The majority of the time, it goes through a consolidation phase. And patiently waiting through the price action is necessary. Here is an example that explains how long a trader must wait before taking the trade.

Below is the chart of GBP against CAD on the 15mins time frame. Reading from the left, the market was in a downtrend, making lower lows and lower highs. In the second lower low, we see that the indicator failed to make a lower low but made a higher low instead. There are several ways through which the market can reverse its direction. The double confirmation rule is for the situations when the market holds above the S&R level (purple ray).

According to the rule, the price must successfully hold above the S&R level two times. This is a confirmation that the S&R level has potentially turned into Support. So, when the rule is satisfied, you can place a buy order right at the S&R level. A logical Stop Loss must be maintained a few pips below the start of the buyer who broke above the S&R. Whereas a safe Take Profit can be at a strong Supply area.

The Spike confirmation

The previous case dealt when the scenario when the market held above the S&R level. Conversely, this is a scenario when the market holds below the S&R. Let us understand the spike confirmation entry with an example from real charts. Below is the chart of EUR against USD on the 15mins time frame. Initially, the market was trending down with lower lows. From the most recent low, we see that the price moved down, but the MACD indicator is faced up, indicating divergence.

When the buyers began to pull back, they were unable to pass through the S&R level (purple line), unlike the previous example. Thus, we cannot apply the double confirmation rule. Instead, the spike confirmation is applied. The spike confirmation is applied for scenarios when the market holds below the S&R level. According to it, one must wait until the market attempts to make a lower low and fails. After the failure, one can prepare to go long.

The Logic

When the market holds below the S&R level, it means that the sellers are not done with their business. The job of a seller is to make lower lows by holding below the S&R. So, though there is divergence, we cannot ignore the fact that the sellers are still in the game. Thus, we must wait for the sellers to attempt to make a lower low. And if the price shoots right back up, it signifies that the sellers are done with their business, and the buyers have taken over the market.

Once the buyers come up strong, you can trigger a buy at the most recent S&R (dotted line). The Stop Loss will go right below the area where the sellers had failed. Take Profit can be at a potential supply area. But in this case, we see a divergence when the price made a higher high. Thus, the positions must be liquidated in the area shown in the chart.

Note that the same principles can be applied to an uptrend as well. These were only a couple of effective ways to enter using divergence. As you gain experience, you come with your own rules too.

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130. How to Effectively Trade Regular Divergence?

Introduction

Introduction

Introduction

The occurrence of divergence is considered by all types of traders, including traders who do not analyze charts without indicators. This is because divergence gives an edge to their trading strategy. In the previous lessons, we interpreted the meaning of divergence and also its different types. In this lesson, we shall put this knowledge into action, where an effective strategy will be discussed.

Trading a regular divergence

To recap a real quick, regular divergence is a type of divergence which indicates a reversal in the market. If it indicates a reversal to the upside, it is referred to as bullish divergence and bearish divergence for a reversal to the downside.

Spotting regular divergence

  1. Find the overall trend of the market.
  2. Mark the lower lows for a downtrend and higher highs for an uptrend on the price charts.
  3. Draw the corresponding movement on your choice of oscillator indicator.
  4. Determine if both prices and indicators are making the same sequences. If they are moving apart from each other, then we conclude that divergence has occurred.

Trade Example

Consider the below chart of AUD/JPY on the 15mins time frame. We can see that the market is in a downtrend making lower lows. For the first lower low in the price, the MACD had a lower low as well. But, for the second lower low in price, the indicator made a higher low. Thus, showing divergence in the market.

Since this is a regular bullish divergence, it indicates a reversal in the market. But, note that divergence does not give a trading signal to buy the security. An indication of a reversal must be based on the strategy. Here are some compelling points to confirm the legitimacy of a divergence.

When divergence occurs in a pair, the first factor is to measure the length and momentum of the down pushes. Comparing the first down push to the second, it is observed that the latter is smaller in length and also took a greater number of candlesticks than the former. This is a considerable indication that the downtrend is weakening.

Secondly, observe what the price does when it reaches the Support & Resistance level (purple ray). We can see that the price touched the purple ray, tried to go below the recent low, but failed to do so. This is another indication of the sellers’ weakening.

Now that the sellers are losing strength, we wait for the other party (buyers) to kick in. In the below chart, we can see the entry of the buyers with one massive bullish candlestick. This becomes our first confirmation that the big buyers are in the market.

However, it is not ideal to buy right when the buyers show up because, at times, the sellers could take over and continue to make lower lows. Thus, to confirm the reversal, the buyers must hold above the S&R level (purple ray). In the below chart, we see that the price came down, tried to go lower the S&R, didn’t succeed, and held above it. Hence, this confirms that the market has prepared for a reversal, and we can go long when the candlestick closes above the purple ray, as shown by the black arrow.

As a result, we see that the market successfully reversed its direction and began to make higher highs.

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129. Learning The Concept Of Hidden Divergence

Introduction

Introduction

Introduction

In the previous lesson, we discussed regular divergence and its types. In this lesson, we shall continue with the second type of divergence – hidden divergence. The concept of divergence in this type remains the same but differs in the indication it provides.

What is the Hidden Divergence?

In a trending market, the prices make higher highs or lower lows. In addition to that, it sets in higher lows or lower highs as well. When the market prepares to reverse, the lower low or higher high turns to equal high or equal low.  The higher lows or lower highs become the other way round. And in the new leg of the trend, if there is divergence, it is referred to as hidden divergence.

In simple terms, hidden divergence is used to indicate trend continuation in the middle of a trend or typically at the beginning of a new trend.

Types of Hidden Divergence

There are two types of Hidden divergence based on the direction it indicates:

  • Hidden Bullish Divergence
  • Hidden Bearish Divergence

Let’s understand how each of them is formed with examples as well.

Hidden Bullish Divergence

In a downtrend, the market makes lower lows and lower highs. In preparation for a reversal, it leaves a higher low instead of a lower low. Also, there could be a higher high or equal high. In this price action, if there is a lower low in the oscillator, it indicates a hidden bullish divergence. It signals that the price could continue to go north.

In the above chart of AUD/USD, we can see that the market is coming from a downtrend. Later, the market does not hold at S&R to make a new lower low but makes a higher low. Looking at the indicator, it leaves a lower low. Hence, showing divergence and indicating that the market has turned into an uptrend and will possibly continue its move up.

Hidden Bearish Divergence

In the market goes into a transition from an uptrend to a downtrend, the price which was making higher highs now starts to make lower highs. In addition, the oscillator puts in a higher high for the lower high in the price chart. Thus, showing a hidden bearish divergence. It is an indication that the market is going to continue in a downtrend.

In the above chart of AUD/USD, the market was initially coming from an uptrend making higher highs. Later, it turned directions and made a higher low instead of a higher high. But the RSI made a higher high for the same move. Thus, indicating divergence and most probable continuation of the downtrend.

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128. Interpreting Regular Divergence

What is Regular Divergence?

What is Regular Divergence?

What is Regular Divergence?

Markets move in trend, channels, and ranges. For any market to undergo a change in the direction, it must happen as a transition. For example, a market that has to transit from an uptrend to a downtrend, it has to go from an uptrend to a channel, to a range, and then begin the downtrend. That is, at one point in time, the market does not hold at support & resistance, and stops making higher highs. And this market reversal is indicated by the regular divergence.

Types of Regular Divergence

There are two types of regular divergence:

  • Regular Bullish Divergence
  • Regular Bearish Divergence

Let’s understand each of them with the help of live charts

Regular Bullish Divergence

This type of divergence is used to give a bullish signal in the market. When the market is in a downtrend, making lower lows and lower highs, the oscillator follows the same path. At one point, the price chat makes a lower low, but the oscillator makes a lower high. The oscillator does the opposite of what the price did. And this referred to as bullish divergence. Here is an example of the same.

In the above chart of EUR/AUD, reading the market from the left, we see that it was in a downtrend. As the prices were making lower lows, the indicator followed the same. But later, when it made another lower low, the MACD made a higher low, indicating divergence in the market. When it left higher low, we see that the price did not make any lower low from the S&R level. And finally, the market reversed and began to move north.

Regular Bearish Divergence

Regular bearish divergence is used to forecast bearishness in the market. In an uptrend, the market makes higher highs and higher lows. The oscillator indicators follow the same trajectory as well. But, if the price makes a higher high and oscillator does the opposite (lower high), then it is referred to as a bearish divergence. It is an indication that something is not right with the uptrend, and there are possibilities of a trend reversal.

In the above chart of AUD/CAD, we see that the market made a higher high, and the MACD indicator made a higher high as well, indicating that the uptrend is still intact. But the second time when the market made a higher high, the indicator put a lower high—indicating that there is something wrong with the uptrend and could be a possible reversal. In hindsight, we infer that the market failed to make higher highs and then reversed.

Note that divergence provides an indication that there could be a possible reversal in the market. It does not give a signal to buy or sell. The reversal must be solely based on your strategy. Divergence is only used to confirm the strategy and increase odds in your favor.

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127. Getting started with ‘Divergence Trading’

Introduction

Introduction

Introduction

There are several types of technical traders in the forex industry. Some trade based on price action while some trade using indicators. Price action traders typically do not use any indicator, but the Divergence is an exception to it. Divergence is an indicator concept that can yield immense risk to reward if used correctly. It is a powerful tool that helps traders catch the absolute peak and trough of the market.

What is Divergence?

Generally, the meaning of Divergence is to move apart. And the meaning of trading is no different. In forex, Divergence is a scenario when the price charts do not agree with the movement of the indicator. In a sense, if the price moves in one direction, the indicator moves in the other direction.

Formation of Divergence

Divergence can be found by comparing the price action on the charts with an oscillator indicator. Typically, Divergence is formed in trending markets. That is, they occur in markets that move making higher highs and or lower lows.

Consider a market a market making higher highs and higher lows. The job of an oscillator indicator is to follow the price action. Thus, the indicator should also follow an upward trajectory. But, if the charts make higher highs and the indicator makes an equal or higher low, then we conclude that there is a divergence in the market.

Significance of Divergence

Divergence is used to signify that there is something not right in the market and the uptrend. In an uptrend, for instance, the market breaks above the recent resistance (high), makes a new high, retraces to the Support & Resistance level, and continues the same cycle. But when the market makes a higher high with Divergence, there is a high possibility that the market might not hold at the S&R level. The market could reverse or might drop slightly below the S&R and then continue the uptrend.

Indicators used to Identify Divergence

Divergences can be identified using oscillator indicators. An oscillator, going by the name, moves between two levels – overbought and oversold. Typically, a level above 70-80 is considered overbought, and a level below 20-30 indicates an oversold market.

Following are the most commonly used indicators to identify Divergence

  1. Relative Strength Index (RSI)
  2. Stochastic Indicator
  3. Moving Average Convergence Divergence (MACD)

Types of Divergence

Based on the direction of the market, there are two types of Divergence:

Regular Divergence

This is the most used type of Divergence and very easy to spot. They are found at the top or bottom of a trend and are used to give a reversal signal. Regular Divergence can again be split into two types: Bullish Divergence | Bearish Divergence.

Hidden Divergence

Hidden divergences are relatively trickier to spot. Converse to regular Divergence, hidden Divergence is used for a trend continuation indication. They are typically found in the middle of a trend. Hidden divergences, too, can be divided into two types: Hidden Bullish divergence | Hidden Bearish Divergence.

That’s about the introduction to divergences. In the next lesson, we shall elaborate on each of the divergence types.

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126. Trading Harmonic Patterns – Detailed Summary

Introduction 

Introduction 

Introduction 

We have discussed all the major Harmonic trading patterns in our previous course lessons. The purpose of this article is to provide a comprehensive summary so that it will easy to navigate for you. Although you have a fair idea on how to trade these patterns, it is essential to practice them over and again to master them. From our personal experience, we can say that Harmonic patterns are THE most difficult patters to trade, and there are many reasons for it.

One of the critical reasons why it is so difficult to trade these patterns is because of its lack of appearance on the price charts. That is, we hardly be able to see these Harmonic patterns forming in any of the currency pairs. Having said that, once we identify and trade them correctly, we can easily make a massive sum of profits when compared to trading other Forex patterns. Hence, as a technical Forex market analyst, you must be able to identify and trade these patterns with the utmost accuracy.

In our previous course lessons, we have mentioned detailed ways to identify these patterns on the price charts using Fibonacci levels. Each of the pattern legs needs to respect specific Fibonacci extensions and retracement levels in order to confirm their formation. So make sure to take the help of these Fib ratios for easy identification. As always, keep practicing the trading of these patterns in a demo account until you master them.

Below are the links for the course lessons related to the Harmonic Patterns.

Introduction To Harmonic Pattern – Link

Trading The AB=CD Pattern – Link | Extended Trading Strategy – Link

Trading The Crab Pattern – Link | Extended Trading Strategy – Link

Trading The Butterfly Pattern – Link | Extended Trading Strategy – Link

Trading The Bat Pattern – Link | Extended Trading Strategy – Link

Trading The Gartley Pattern – Link | Extended Trading Strategy – Link

The only thing that is crucial while trading or identifying these patterns is to be patient. As you all are aware by now, it takes a lot of time for a Harmonic pattern to form. There will be many cases where three legs of the pattern will be formed accurately, but the final leg rules won’t be met, and as a result, the entire pattern gets invalidated. Don’t be disappointed or impatient at that point. After all, trading is a game of skill and patience; the more patient you are, the better results you will see. All the best!

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125. Trading The ‘Crab’ Pattern Like A Pro

Introduction

Introduction

Introduction

Crab is the last pattern that we are going to discuss in the harmonic group. Just like other patterns, the Carb is also identified and traded using the Fibonacci levels in order to determine the precise turning points. The Crab is a reversal pattern and is composed of four legs – XA, AB, BC, and C-D. Let’s understand them in detail below.

The Four Legs Of Crab Pattern

XA – In its bullish version, the first leg forms when the price action rises sharply from the point X to point A.

AB – The AB move goes against the actual market direction and retraces between 38.2% to 61.8% of the distance covered by the XA leg.

BC – In the BC leg, the price action resumes its original direction and retraces between 38.2% to 88.6% of the distance covered by the AB leg.

CD – The CD is the final leg that confirms the formation of the Crab pattern. Place the sell order when the CD leg reaches the 161.8% Fibs extension of the AB leg.

Trading The Crab Pattern

Bullish Crab Pattern

In the below GBP/USD Forex pair, we have identified the formation of the Crab pattern. The first movement XA can be considered any random bullish move. The second leg AB was a counter-trend, and it reached the 61.8% Fib leg of the XA leg. For the third move, price action goes up, and it retraces 38.2% of the XA leg. The last leg was the CD move, which 161.8% of the AB leg. The fourth leg confirms the pattern formation on the price chart.

We activated our trade at point D with stops below point D and taking profit at point A.

Bearish Crab Pattern

The price chart below represents the formation of a bearish crab pattern on the price chart. The first leg XA was the random move, and second leg AB goes up, and it retraces at 38.2% of the XA leg. The next third leg was the BC move, and it retraces 88.6% of the AB move. The last leg CD was the decision-making move, and it closes at 161.8% of the AB leg.

The trade activation was at point D, and the stop was a bit above the trade, and to book profits, we opted out for the most recent lower low.

Conclusion

The Crab pattern rarely appears on the price chart, but when it does, it provides excellent risk to reward ratio trades. If you are new to harmonic trading, practice trading this pattern on a demo account first and only then trade on the live account. Always remember to trade the Bearish Crab pattern in an uptrend, and Bullish Crab patterns in a downtrend only. Cheers!

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124. Trading The Bullish & Bearish Butterfly Pattern

Introduction

Introduction

Introduction

Bryce Gilmore and Larry Pesavento are the ones to first discovered the Butterfly pattern. It is a harmonic reversal pattern, and it is composed of four legs. The trading of this pattern is similar to the trading of Gartley and Bat patterns that we have learned in previous lessons. The Butterfly pattern helps us in identifying the end of the current move so that we can take the trade. There are both bullish and bearish Butterfly patterns, and we must be going long if we find a bullish butterfly and vice-versa.

Four legs of the Butterfly Pattern

XA – In its bearish version, the first leg of the pattern forms when the price action drops from the point X to A.

AB – The AB leg reverses its direction and retraces to 78.6% Fib level of the distance covered by XA.

BC – In the BC leg, the price action changes its direction and moves back down. It then retraces between 38.2% and 88.6% Fib levels of the distance covered by AB.

CD – This is the final leg of the pattern, and if this leg goes wrong, we can consider the pattern formed till now as invalid. The CD leg must reach between 127% and 161.8% Fib extension of the AB leg. Take the sell trade at point D.

How To Trade The Butterfly Pattern?

Bullish Butterfly Pattern

We have identified the formation of the Butterfly pattern in the USD/JPY Forex pair. The first push ‘XA’ was a random leg on the price chart. The second leg is a countertrend move, and it retraces to the 78.6% Fib level of the XA leg. For the third leg, price action goes up, and the BC leg reaches 88.6% of the AB move. Finally, the CD leg enabled the price to the 161.8% level of BC move.

Since all the legs are formed according to the instructions, we can consider this a Bullish butterfly pattern. When price action completed the last leg, we activated our buy trade in this pair. The stops are placed below the trade, and the take profit was placed at point A.

Bearish Butterfly Pattern

The chart below represents the formation of a bearish butterfly in a downtrend. The first XA bearish leg was any random move in the market. The AB leg goes countertrend, and it retraces 78.6% of the XA leg. The BC move was bearish again, and it retraces to 38.2% of the AB move. Now that the three legs are completed, all we need is to confirm the last leg to ho short in this pair. For printing the last leg, price action again goes back up, and it reached the 161.8% of the BC move.

After all these legs, price action prints a bearish butterfly pattern, and the trade activation was at point D. The first take-profit was at point C, and the second take profit was at point A. We have placed the stop-loss order below the point D. The reason for shallow stops is that if the price goes above point D, the pattern itself becomes invalid.

Conclusion

Placing stop-loss and take-profit order is subjective. If you are an aggressive trader, place your take-profit at point C and for conservative targets place the take profit at point A. For your information, trading the Butterfly is almost as same as trading the Bat pattern. The only difference is the final CD leg. It makes a 127% Fib extension of the initial XA leg in this pattern, rather than the retracement of it. Cheers!
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123. Trading The Bullish & Bearish Bat Pattern

Introduction

Introduction

Introduction

The BAT is a harmonic pattern that appears in both up and downtrend. This pattern occurs when the trend temporarily reverses its direction and before continuing on its original course. As soon as this pattern ends, the markets resume it’s original direction, giving us an opportunity to enter the trade.

The Characteristics of the BAT Pattern

X-A – In its bullish version, the first leg forms when the price rises sharply from the point X to point A.

A-B – The AB leg retraces back between the 38.2% and 50% Fibonacci levels to the distance covered by XA leg.

B-C  – For BC leg, price changes its direction again and retrace anything between the 38.2% and 88.6% of the distance covered by the AB leg.

C-D – The CD leg is the final and most important part of the pattern. If this leg goes wrong, then the pattern can be considered invalid. We can go long when the CD leg has achieved 88.6% retracement of the XA leg.

Below is how both Bearish and Bullish Harmonic Bat pattern would look like when Fib levels are applied to it.

Trading the Bullish Bat pattern

The below price chart represents the formation of a Bullish BAT pattern on the USD/CHF forex price chart.

The below image represents our entry and exit while trading the Bullish Bat pattern. At first, we can see the price action printing the XA leg on the chart. Followed by that, the counter-trend AB move has retraced to 38.2% Fib level of the XA move. The BC leg followed the trend and retraced back to 88.6% of the AB leg. The last leg was the CD leg, which reached the 88.6% Fib level of the XA move. The trade activation was at point D, and the stop-loss is placed little below the D point. To place the take-profit order, we chose point A, and we can see how that placement is respected.

Trading the Bearish Bat pattern

The image below represents the formation of a bearish bat pattern on the NZD/USD Forex price chart.

The formation of the pattern starts with the first leg at point X, and it ends at point A. The second leg AB was counter-trend, and it retraced back to 38.2% of the XA leg. The BC leg goes down, and even that retraced 38.2% of the AB leg. The last leg was the CD move, and if this leg doesn’t follow the rules, we shouldn’t consider the pattern valid. The CD leg goes up, and it retraces to 88.6% fib level. Hence, we can consider the pattern formed as valid. We have activated the trade at point D, and the stops were placed above point D. We have placed two take-profit orders – the first one was at point C, and the next one was at point A.

Conclusion

Bat is one of the most credible Harmonic patterns in the market. As the pattern ends at point D, our trade immediately resumes and often provides an excellent risk to reward ratio trades. Once you master trading the bullish pattern, the bearish one can easily be traded. The Bat is also considered one of the most reliable harmonic patterns; So whenever you identify this pattern, it is advisable to go big. Cheers!

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122. Harmonic Pattern Trading – Gartley Pattern

Introduction

Introduction

Introduction

The Gartley is one of the most traded harmonic patterns in the market. Just like the AB=CD pattern that we discussed in the previous course lesson, the identification and confirmation of the Gartley pattern are based on the Fibonacci levels. Technical traders use this pattern to trade the retracement and continuation that occurs when the trend temporarily reverses before continuing to move in its original direction. This pattern is also referred to as a Gartley222 because the inventor of this pattern, H.M Gartley, first described this pattern on page number 222 in his famous book ‘Profits in The Stock Market.’

Moves Involved In The Formation Of Gartley Pattern 

X-A – In the bullish version, the first leg forms when the price rises sharply from point X to point A.

A-B – The AB leg changes its direction and retraces to Fib level 61.8% of the XA leg.

B-C – In the BC leg, price action changes its direction and retraces from 38.2% to 88.6% of the distance that is covered by the AB leg.

C-D – This is the last leg of the pattern, and it reverses again to the downside. It must retrace to 78.6% of the XA leg.

Below is how the fully formed Bullish and Bearish Gartley Patterns look like:

Trading The Gartley Pattern

Bullish Gartley Pattern

The chart below represents the formation of a bullish Gartley pattern on the NZD/USD weekly chart.

In the below chart, the four swing highs and swing lows bind together to form the bullish Gartly pattern. It is crucial to validate the fibs ratios on the price chart. The first XA leg was the bullish move, and the successive AB leg was a bearish move. We can see that the AB move was close to the 61.8% level of the AB leg.

Furthermore, BC is a bullish move, and it is retracing close to the 88.6% fib level of the AB move. The last step was the CD leg, and if this one goes wrong, the whole pattern gets invalidated. However, the CD move was bearish, and it is close to the 161.8% fibs level of the BC leg. The trade activation was at point D, and we have placed the take profit order at Point A.

Bearish Gartley Pattern

The price chart below represents the formation of a bearish Gartley pattern on the EUR/USD 240 Forex pair.

We can observe that the first leg of this pattern was XA, which is a bearish move. It is followed by the reverse in trend printing the AB leg, which is close to the 61.8% extension of the XA leg. The third leg, BC move, was bearish again, and it is close to the 88.6% fibs of the AB move. The last leg is the CD move, and this leg is 161.8% fibs ratios of the BC. The activation was at Point D, and the stop-loss is placed above point D. For take-profit, we have gone for the Point A. You can also partially book your profit at point C and exit your positions at point A.

Conclusion

The confirmation of the Gartley pattern must be done using the fib ratios alone. In the beginning, it can be difficult for you to spot this pattern on the price chart, but you will eventually get used to it. Hence, in the beginning, try to identify & trade this pattern on a demo account. Once you master all the rules involved while trading this pattern, you can go ahead and trade it on the live markets. Cheers!

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121. Trading The Bullish & Bearish AB=CD Harmonic Pattern

Introduction

Introduction

Introduction

The ABCD is one of the most straightforward patterns in the Harmonic lot. There are two types of ABCD patterns – Bullish AB=CD & Bearish AB=CD. For both the bearish and bullish versions, the AB and CD lines are the legs, whereas the BC line is considered the Retracement or correction. To confirm the formation of this pattern, we use Fibonacci levels that we have discussed in the previous course lessons.

By using the Fibonacci tool on leg AB, see if the BC retracement is reaching the 0.618 level. Next, the line CD should be the extension of 1.272 Fibonacci extensions of BC. This rule applies to both bearish and bullish AB=CD patterns. We go long or short when the price action reaches the point D of the corresponding pattern formed.

How To Trade The ABCD Harmonic Pattern

Bullish ABCD Pattern

The chart that you see below represents the formation of a bullish AB=CD pattern. The CD leg of the pattern is equal to the size of the AB leg. The BC move, which is a pullback, is 61.8% retracement of the AB move. Likewise, the CD move is the 127% retracement, which confirms the formation of a bullish AB=CD pattern on the EUR/USD Forex pair.

We have entered the market at point D, and the stop-loss is placed just below the D point. As you can see, we went for smaller stops, and there is a reason behind it. If the price action goes below point D, the pattern automatically gets invalid.

There are two take-profit areas in the pair. The first one is at point C, and the second is at point A. It all depends on at what point you desire to close your position. It is always advisable to close your positions at higher targets because the end goal for us is to milk the market as much as we can.

Bearish ABCD Pattern

The below NZD/CAD Forex pair represents the formation of a bearish AB=CD pattern. The AB leg of the pattern is equal to the CD leg. Furthermore, the BC is respecting the 61.8% retracement of the AB move, and the CD move was close to 127% extension of the BC move. We have gone short at point D as the price breakout happened.

In this example, we went for deeper targets. If the momentum of the prevailing trend is strong enough, going for a new lower low will be a good idea. The key to winning in trading is to follow the rules and think according to the market situation. These Harmonic patterns require a lot of patience and effort to trade. So it is strongly recommended to master this pattern in a demo account than to trade it in a live market.

Conclusion

The AB=CD is a reversal pattern that indicates the market trend reversal. The AB=CD pattern consists of three legs, and they form the zig-zag shape. This pattern is also known as a lightning bolt, as it looks like one. The AB=CD pattern can be used in any financial market and also in any trading timeframe. Follow the rules, no matter what, to make consistent profits from this pattern. Always execute your trade at point D and ride for the brand new higher high/lower low. Cheers.

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120. Introduction To Harmonic Patterns

Introduction

Introduction

Introduction

In the previous course articles, we have been discussing a lot of concepts related to Technical Analysis. In that journey, we have learned the trading of some of the most significant chart patterns like Head & Shoulders, Triangle, Wedge, etc. The extension to the learning of these concepts is to know the process of identifying and trading of Harmonic Patterns. We want to mention that learning this part is a bit tricky as the concepts are advanced and require a lot of practice to master them. Let’s get into details.

Brief History

The discovery of these Harmonic patterns dates back to the 1930s. H.M.Gartley, an American author and technical analyst, mentioned the trading of these unique patterns in his book ‘Profits In The Stock Market.’ Later these patterns were highly improvised by ‘Larry Pesavento’ by adding Fib ratios to identify and confirm these patterns. Finally, ‘Scott Carney’ discovered more Harmonic patterns and published them in his most famous book ‘Harmonic Trading.’

What Are Harmonic Patterns?

Harmonic Chart Patterns are nothing but the same kind of Forex chart patterns that we have learned in our previous lessons. But the shapes of these patterns look similar to the real-life birds and animals. For instance, one of the very well known harmonic chart patterns is the Butterfly pattern. That is, when this pattern is complete, we will be able to see a butterfly-like structure on the price charts formed by the price action.

All the Harmonic patterns are both bullish and bearish in nature. That is, these patterns can be identified and traded in both up trending & down trending markets. Also, some of the Harmonic patterns indicate that the current market trend is going to continue, and some of them indicate a market reversal. Hence we can consider Harmonics as both trend continuation and reversal patterns.

Why is it important to know them?

The harmonic patterns levels-up the pattern-based trading as it involves an additional technical tool to confirm and trade them. And that tool is none other than the well known Fibonacci levels. The harmonic patterns can only be confirmed by analyzing at what levels the price action turning its directions. Only if these levels are in line with the predefined Fibonacci levels, we can confirm and trade these patterns. The harmonic trading enables traders in predicting the future price movements of an asset more accurately than any other form of trading.

How many Harmonic Patterns are there?

In total, there are nine Harmonic patterns out of which six are used frequently by the traders to trade the Forex market. The ideology behind trading any of these patterns is the same; we must wait for a particular Harmonic pattern to form completely on the price chart and then take long or short positions accordingly. In the upcoming course lessons, we will be discussing the six Harmonic patterns that we have mentioned below.

The other three less used Harmonic patterns are Shark Pattern, Cypher Pattern, and the ABC Pattern. Stay tuned to learn the trading of these patterns in the easiest way possible. Cheers!

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117. How to Trade the ‘Head and Shoulders’ Forex Chart Pattern?

Introduction

Introduction

Introduction

The Head and Shoulders formation is a popular Forex chart pattern, which is pretty easy to recognize on the price charts. There are both bullish and bearish Head and Shoulders patterns, and both indicate potential market reversals. This pattern consists of three peaks, which is developed after a strong bullish trend. The first and third peaks are of the same height, and they are classified as shoulders. The second peak of the pattern is the highest and hence classified as the head.

There are both bullish and bearish Head and Shoulder patterns. The appearance of bullish Head and Shoulder pattern on the price chart indicates that the momentum is transferring from the sellers to buyers. Likewise, the appearance of the Bearish Head and Shoulder pattern indicates the momentum is transferring from the buyers to sellers. While trading the Bearish Head and Shoulders pattern, it is advisable to go short when the price breaks below the neckline. Contrarily, go long when the price goes above the neckline while trading the Bullish pattern.

How To Trade The Head And Shoulders Pattern?

It is advisable not to wait for the perfect pattern instead look for the good entry/exits when you spot the pattern on the price chart. Sometimes the left shoulder will be bigger than the right shoulder and vice-versa. Please do not focus on minute details. Instead, our focus must be on deciding if the pattern looks reliable enough to trade or not. If the answer is yes, only then take entries.

Trading The Bearish Head And Shoulders Pattern

The below chart represents the formation of the Head and Shoulder pattern on the NZD/JPY forex pair.

As you can see, in the below NZD/JPY chart, the formation of the pattern doesn’t look perfect, but the overall pattern looks reliable to trade. We went short as soon as the price action broke below the neckline. The stop-loss order was placed above the second shoulder. For TP, we went double the size of the pattern. We had exited the market when the price got consolidated, as it implies the opposite party is gaining strength.

Trading The Bullish Head And Shoulders Pattern

In the below chart, we have identified the Bullish Head and Shoulder pattern in the EUR/CHF Forex pair.

In a choppy downtrend, a bullish Head and Shoulder pattern is formed. When the price goes above the neckline, it is an indication for us to go long. The take-profit is again placed two times the size of the pattern, and the stop-loss is just below the second shoulder.

In the above chart, we can clearly see that the Bullish Head and Shoulder pattern is not perfect, like the ones we see in textbooks. But still, our trade worked beautifully. So it is crucial to bends our rules here and there; we will hardly find such kind of perfect patterns. If we just wait for them, we will hardly get to trade. Also, once you gain some experience in trading this pattern, you will automatically be able to decide which pattern works and which will not. Mastering any pattern requires tons of practice and patience.

That’s about identifying and trading the Head and Shoulders pattern. Advanced strategies related to this pattern can be found in our trading strategies section. Please feel free to explore. Cheers!

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119. Learning To Trade The Wedge Chart Pattern

Introduction

Introduction

Introduction

The Wedge is a technical chart pattern that is commonly used by the traders, market technicians and chartists to find the upcoming market trend. This pattern is always formed at the bottom/top of the trend, indicating a potential change in the market’s direction. In short, the Wedge is a trend reversal pattern. One key benefit of the Wedge pattern is they it is comparatively easy to identify on the price charts. This pattern is traded by most of the technical traders as it provides precise entries and exits.

There are two types of Wedge patterns – The Rising Wedge & the Falling Wedge.

The Rising Wedge

The Rising Wedge is a bearish reversal pattern, and it appears in an uptrend. This pattern seems to look wide at the bottom and contracts as the price move higher. To form a Rising Wedge pattern, two higher highs must touch the upper line; likewise, two reaction lows to the lower line. The point at which the upper and lower lines merge indicates the completion of the pattern.

The Falling Wedge

This pattern is just opposite to the Rising Wedge pattern. It appears in an ongoing downtrend, and it is a bullish reversal pattern. The appearance of these patterns is an indication for us to go long. This pattern begins wide at the top and contracts as the price moves lower. To form this pattern, the two lower lows must react with the support line, and the two higher lows must react with the resistance line. When both the lines converge, we can say that the pattern is complete.

Trading The Wedge Chart Pattern

The Rising Wedge 

The below chart represents the formation of a Rising Wedge chart pattern on the GBP/CAD Forex pair.

There are two ways to trade the Rising Wedge pattern. We can go short when the price hits the upper resistance line, and if the price breaks the below line, holding our positions for longer targets is a wise thing to do. The second and the conventional way is to wait for the price action to break below the support line and take the sell position only after the confirmation.

In the example below, we took sell entry when the price action broke the support line. Place the stop-loss just above the recent high and ride the markets for deeper targets. We had booked our profits when the price action started to struggle as it is an indication of a market reversal soon.

The Falling Wedge Pattern

The image chart represents the formation of the Falling Wedge pattern in the GBP/NZD Forex pair. We can see that both the parties were fighting in a downtrend and when the market prints a Falling Wedge pattern, it is an indication for us to go long.

At the beginning of March, the price broke above the Falling Wedge pattern, and we end up entering for a buy. The stop-loss was placed just below the support line, and the take profit was at the major resistance area.

That’s about Raising & Falling Wedge pattern and how to trade them. If you have any questions, please let us know in the comments below. Also, to learn advanced trading strategies related to this pattern, you can follow this link. Cheers.

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118. Using Rectangle Chart Patterns to Trade Breakouts

Introduction

Introduction

Introduction

The Rectangle is a technical chart pattern that is described by two horizontal lines acting like potential support and resistance levels on the price chart. Trading this pattern is similar to buying at the support and selling at the resistance level. Conventional traders can trade this pattern only after the appearance of the breakout.

The Rectangle represents a trading range, which indicates the fight between the two parties – buyers & sellers. As the price reaches the support level, buyers step in and push the price higher. And when the price reaches the resistance level, bears take over and force the price lower.

In this fight, one party will eventually get exhausted, and the winner will emerge when the price breaks out in any direction. So we can say that the Rectangle is a neutral pattern as either trend continuation or reversals may happen after the formation of this pattern.

Rectangle Chart Pattern – Trading Strategies

Buy Example

The below chart represents the formation of a Rectangle pattern in the GBP/CAD pair.

As we can see in the below chart, the market just started its uptrend, and during the pullback, it turned into the consolidation phase forming a range. This consolidation phase eventually forms the Rectangle pattern.

This pattern is very easy to spot and trade. We can wait for the pattern to break the range to enter the market. If you are an active trader, you can even take a couple of buy/sell trades in a lower timeframe. In the example shown below, we have decided to go long as soon as the price action broke the pattern from the upside. The stop-loss order is placed just below the Rectangle, and the take-profit is at the recent high.

Sell Example

The image below represents the formation of a Rectangle pattern in a downtrend.

The below chart represents the entry, exit, and the placement of stop-loss & take-profit orders in the GBP/NZD Forex pair. In an ongoing downtrend, when the prices reached the significant support zone, it started to hold. The sideways movement of the price shows that both the parties are super strong, and the breakout to any side will be a good trade.

After the battle, prices broke towards the downside, which is a clear indication for us to go short. The stop-loss order is placed just above the pattern. Because, in a downtrend, if the price breaks the Rectangle pattern’s resistance, it must be considered invalid. Hence there is no need to go for deeper stop-loss. We would always recommend placing the stops just above or at least at the same height as the pattern.

For booking profits, we didn’t choose any specific location. Instead, we were watching the price action keenly and chose to close our full positions when the sellers started to die. We can close our positions in different ways, depending on the market situation. For instance, we can exit the trade when prices approach the significant support area. We can even take the help of technical indicators to close our positions. Technical traders are also using price action techniques these days to exit their running positions.

That’s about the Rectangle chart pattern and how to trade it. If you have any queries, let us know in the comments below. Cheers.

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116. Trading The Ascending & Descending Triangle Chart Patterns

Introduction

Introduction

Introduction

The Triangle Chart pattern is one of the most frequently found Forex patterns on the price charts. Technical traders prefer trading this pattern as it provides greater insight into the future price movement and the upcoming resumption of the current trend. This is a consolidation pattern that occurs in the midway of the trend, and it signals the continuation of the existing trend.

The Triangle pattern is formed between the two converging trend lines as the price temporarily moves into a small range. We must wait for the breakout to happen in an existing trend to take a trade. There are three types of Triangle chart patterns, and they are the Ascending Triangle, Descending Triangle, and The Symmetrical Triangle.

Ascending Triangle

It typically appears in a bullish trend. When the price action breaks the upper horizontal trend line with increased volume, it indicates a buy signal.

Descending Triangle

It is a bearish continuation pattern, and it appears in a downtrend. When the price action breaks the lower horizontal trend line with increased volume, it implies that the original sellers are back in the show, and it is an indication for us to go short.

Symmetrical Triangle

It is composed of diagonally falling upper trend line and diagonally rising lower trend line. When the price action reaches the apex, the price can break out from any side. We must be taking our positions depending on the price momentum and strength.

How To Trade The Triangle Chart Pattern?

Trading The Bullish or Ascending Triangle Pattern

The below chart represents the formation of an Ascending Triangle chart pattern in the AUD/NZD forex pair.

In the below Ascending Triangle pattern, we can see that both buyers and sellers are super strong. When the buyers break above the resistance line, it indicates that the game is finally in the hand of buyers. Hence, this is the perfect time to go long. The stop-loss was placed just below the pattern, and we book the profit when price action reached the previous significant high.

Trading The Bearish or Descending Triangle Pattern

The below chart represents the formation of a Descending Triangle chart pattern in the GBP/NZD Forex pair.

As we can see in the below chart, the pair was in an overall downtrend. When the price action reached a significant support area, the market started to move in a range. This range eventually has turned into a Descending Triangle chart pattern. As discussed, this pattern indicates that buyers and sellers are aggressive in taking the lead.

But the breakdown towards the sell side shows that the sellers have finally won the battle. We have placed the sell order right after the breakout, and stop-loss was placed just above the recent higher low. You can observe from the below chart that after going short, the price action started to move smoothly in our direction. We have closed our entire position when the price is started to struggle going down.

That’s about Ascending and Descending Triangle chart patterns. There are many strategies we can use to maximize profits while trading this pattern, and they can be found in the Basic Strategies section. All the best.

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114. How To Trade Bearish & Bullish Pennant Patterns

Introduction

Introduction

Introduction

The Pennant is both a bullish and bearish continuation pattern that is used by technical analysts across the globe. This pattern can easily be identified on the price chart and is typically used for trading the upcoming price movements. In an ongoing trend, when the instrument experiences a significant upward or downward movement, followed by a brief consolidation, the Pennant pattern is formed.

Pennant Pattern’s Key Characteristics

A Flagpole – The Pennant pattern always begins with a flagpole, and that is the initial strong move.

Breakout Level – Two breakouts should occur in this pattern. The first one will be at the end of the flagpole, and the second one should be after the consolidation period.

The Pennant Itself – A triangular pattern is formed when the market consolidates between the flagpole and the breakout, and we call that a Pennant.

How To Trade The Pennant Pattern?

The Pennant is a relatively simple and easy-to-spot pattern on the price charts. We will find this pattern on all the timeframes, and the strategies that we are going to discuss will work on any timeframe you trade. In the below examples, we have used 15 minutes, Daily, and Weekly charts to prove the same. All you need to do is to train your eyes well to spot the pattern. Once we master this pattern, we can easily increase the probability of our winning trades.

Trading The Bullish Pennant Pattern

Example 1

In the below EUR/GBP chart, we have identified the formation of a Bullish Pennant Pattern.

We must always look to take long or short positions depending on the breakout in the Pennant chart pattern. If we find a bullish Pennant pattern, we must wait for the price action to break out in the north direction to take a buy trade.

In the below chart, you can see that when have placed a buy order after the price action broke the Pennant’s upper trend line. The take-profit should be placed at the higher timeframe’s resistance area, whereas the stop-loss order should be below the lower trend line. The best part about trading this pattern is that it offers a good risk to reward ratio, and most of the trades hit the targets within a few hours.

Example 2

In the below AUD/NZD chart, we have found another Bullish Pennant pattern.

Here, we can see the market has started a new downtrend, and we have placed a buy order right after the price broke the upper trend line. We can see our trade hitting the TP within a few hours. If we find this pattern in active trading hours, or when any trading session is about to begin, it is advisable to take bigger trades because opening trading hour breakouts have higher chances of succeeding.

Trading The Bearish Pennant Pattern

In the image below, you can see that we have identified a Bearish Pennant pattern on the GBP/NZD pair.

In the below chart, we can see that a brand new downtrend has just begun. The first leg of the pattern (flagpole) was quite strong. When the price action broke below the lower trend line, it is an indication for us to go short in this pair. The take-profit is as placed as same as the size of the flagpole, and stop-loss was just above the pattern formation.

That’s about Bullish and Bearish Pennant pattern and how to trade them along with appropriate risk management. Following money management principles is as crucial as entering the market at the right time. If you have any questions, let us know in the comments below. Cheers!

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115. Trading The Double Tops and Double Bottom Chart Patterns

Introduction

Introduction

Introduction

We will be discussing many Forex chart patterns in the upcoming course lessons that are widely used by traders around the world. But none of those patterns can beat the popularity of Double Bottom and Double Top chart patterns. This pattern can be seen frequently in not just the Forex market but all types of markets.

This pattern is independent of timeframes, i.e., it appears on all the time frames and the strategies that we are going to discuss work on all the trading timeframes too. Fundamentally, the Double Top and Double Bottom are reversal patterns, and they consist of two price swings approximately the same size on the same price level.

Double Top Chart Pattern

The Double Top chart pattern typically appears in an uptrend. It is formed when a bullish trend is interrupted at some point, and as a result, the price action tends to range. If that range consists of two swing tops, we can consider that as the formation of a Double Top chart pattern. After the second top, the price action drops and starts a new bearish trend.

Double Bottom Chart Pattern

The Double Bottom chart pattern typically appears in a downtrend. It is formed when the downtrend is interrupted at some point, which results in the price action to form a range. In the consolidation phase, if the range consists of two swing lows, and if the second low is struggling to reach the BottomBottom of the range, we can confirm the formation of the Double Bottom chart pattern. When the second Bottom is printed, we can expect the price to print a brand new higher high.

Neckline

The Double Top and Double Bottom patterns consist of a neckline. The Neckline is often used to confirm the pattern. The Neckline in a Double Top pattern is the horizontal level at Bottom where the two tops converge. Likewise, Neckline in a Double Bottom pattern is the horizontal level at the top where the two bottoms converge.

How To Trade The Double Top & Double Bottom Patterns? 

Double Top Pattern

The below charts represents the formation of a Double Top pattern on the AUD/JPY daily Forex chart.

In the below chart, we had activated a sell trade when the price action broke below the Neckline. The stop-loss is placed just above the Double Top pattern. It is advisable to set the take-profit order two times below the size of the pattern. Activating our trades at the Neckline is the safest and most professional way of trading this pattern; because it shows that the last buyers are out of the league, and going short positions from here is a good idea.

Double Bottom Pattern

The chart below represents the formation of a Double Bottom chart pattern on the GBP/AUD Forex pair.

As we can clearly see below, when the price action is closed above the Neckline, it indicates a buy signal.  We can see the most recent leg of the buyers being very strong, which indicates the buyers’ strength. Hence, in this case, we have decided to place the stop-loss just below our entry. For placing TP, we chose the previous recent high, and we can see how perfectly the price respected our placement.

This ends our discussion on Double Top & Double Bottom Forex chart patterns. We, at Forex Academy, have provided a lot of strategies to trade this pattern in the Basic Strategies section. You can check them out to get a deeper insight into these patterns. Cheers!

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113. Introduction To Forex Chart Patterns

Introduction

Introduction

Introduction

We have learned a lot of concepts related to technical analysis in the past few course lessons. Starting from Moving Averages, we have extended our discussion to Fibonacci Trading, Candlestick Patterns, and Indicator based analysis. We have also gone through some of the advanced technical trading concepts like Pivot Trading and Elliot Wave Theory.

We hope you have understood these concepts and started to apply them in a demo account. If you have any queries, please post them in the respective lesson comments so that we can address them in the right place. However, this is not the end of the technical analysis basics. We must go through one most crucial concept before going further. And that is to learn the trading of Forex Chart Patterns.

What are Forex Chart Patterns?

Do not mistake these Forex chart patterns with the Candlestick Patterns that we have learned before. Two or more candlesticks form candlestick patterns. And the maximum number of candlesticks in a single candlestick pattern is not more than four. But when it comes to Forex Chart Patterns, there are more candlesticks involved. The number can range from 50 to 500 and beyond.

To explain in simple terms, we know the price action moves in three different stages – Trends, Channels, and Ranges. When moving in these stages, the candlesticks follow specific patterns at times. Primarily, these patterns are formed by a group of candlesticks, and they look similar to the shapes that we see in real life. For instance, below is the snapshot of one of the very well known Forex chart patterns known as Cup & Handle Pattern.

(Image Taken From – Forex Academy)

In the above image, we can see how candlesticks combined to form a Cup & Handle Pattern.

Why is it important to know them?

We can consider these Forex Chart Patterns as land mine detectors. Because, when mastered, we will be able to detect the market explosions before even they occur. Hence any technical trader needs to learn to identify and trade these chart patterns. Forex chart patterns are given the highest importance because of one simple reason – high probability performing trades.

For technical analysts and price action traders, these chart patterns offer reliable clues to make their moves in the direction in which the price might go in the future. The reason behind this is that these patterns have the potential to push the price in a specific direction. There is a logical reason behind the formation of every single chart pattern, and why the price will go in a particular direction after the formation of these patterns.

Types of Forex Chart Patterns

Just like what we have learned in the Candlestick pattern lessons, there are three different types of Forex Chart Patterns.

Continuation Patterns – The appearance of these patterns indicates that the underlying trend will continue, and the price will continue moving in the direction that it is currently moving.

Examples – Pennant Chart Pattern and Rectangular Chart Pattern

Reversal Patterns – If we have identified these kinds of patterns on the price chart, it is an indication that the market is about to reverse its direction. Hence the name – Reversal Patterns.

Examples – Wedge Pattern, Head & Sholders Pattern, and Double Tops & Bottoms.

Neutral Patterns – These patterns are termed neutral because the price can move in either of the directions after the formation of these patterns. So we must be careful while trading these kinds of patterns.

Example – Symmetric Triangle Pattern

We will be covering a combination of these in the upcoming articles so you will get a holistic knowledge of trading Forex patterns. Stay Tuned!

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112. Summary – Elliot Wave Theory

Introduction

Introduction

Introduction

Over the last six lessons, we discussed the Elliot Wave Theory from understanding the basics of applying it in the financial markets. In this article, we shall have a quick summary of the previous learnings.

The Elliot wave theory was discovered by a professional accountant named Ralph Nelson, who claimed that markets don’t move in random directions, but recurring swings called waves. Most importantly, Elliott stated that the waves are fractals. That is, each swing or wave in the market can be broken into smaller and smaller waves of the same type.

The market moves in the 5-3 Elliot pattern. This pattern is appliable on uptrend and downtrend. Also, it occurs in every timeframe.

Impulse Waves

In the 5-3 wave pattern, 5 refers to the impulse waves. The 5-wave pattern is a trending wave pattern that moves along the overall trend. It is made up of 5 waves where Wave 1, 3, and 5 are impulse waves towards the trend, while waves 2 and 4 are retracements to the impulse waves. Out of the three impulse waves, wave 3 is usually the strongest and the longest and is ideal for trading.

  • Wave 1 is where only a small number of people take positions.
  • Wave 2 is where the institutional traders and some smart retail traders enter.
  • Wave 3 is where the mass public enter, while smart & professional traders exit their positions.

Corrective Waves

For every trending market, there is a pullback. And this retracement corresponds to corrective waves. The corrective waves are a 3-wave pattern that moves against the overall trend. It is denoted as wave ABC or abc, depending on the timeframe. The first corrective wave begins after the end of the impulse wave. Note that, the corrective wave pattern should not go beyond the area of wave 1 impulse wave. If it does happen, the waves must be counted from the beginning.

There are 21 types of corrective patterns based on their design. The three basic ones include

  • The Zig-Zag Formation
  • The Flat Formation
  • The Triangle Formation

Rules in Elliot Wave Theory

There are three rules in the Elliot wave pattern to confirm the legitimacy of the pattern. The strategies will hold true only if the following strategies are satisfied.

  • Rule 1: Wave 3 must never be the shortest impulse wave.
  • Rule 2: The Wave 2 must hold above Wave 1.
  • Rule 3: Wave 4 must never cross in the price area of Wave 1.

Even if one of the rules is not satisfied, waves must be recounted from the start.

We have also discussed different ways of trading the Forex market using the Elliot wave theory, and that lesson can be found here.

Final words

The Elliot Waves are a great tool in determining the direction of the market. One can get a clear understanding of if the market is trending or retracing. Accordingly, one can take a trading decision by adding other tools which will help in precise entries.

We hope you found the Elliot Wave theory course informative and useful. Do try this out for yourselves as well. Happy trading!

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111. Trading Forex Market Using Elliot Wave Theory

Introduction

Introduction

Introduction

In all the previous lessons, we understood the terminology and interpretation of the popular Elliot Wave theory. Now we are well-versed with the subject to apply it to the forex market.

The Elliot Wave Theory is a wide concept and can be traded in several different ways. In this lesson, we shall analyze the forex currency pairs using Elliot wave concepts by combining it with some price action.

The best way to trade the Elliot waves

We know that according to the Elliot wave theory, there are two types of waves. There is an impulsive wave pattern made of 5 waves, and a corrective wave made of 3 waves. The impulsive wave is towards the trend, while the corrective wave is basically a pullback for the overall trend.

As a trader, we need to look for trades that payout well along with less risk. So, it is not ideal to trade all the impulsive waves and corrective waves.

Trade setup 1

The setup is to trade the impulsive waves. In the 5-wave impulsive pattern, three waves are along with the trend and two against it. Out of those three impulse waves, the ideal wave to catch is Wave 2. This is because, the Wave 2 is usually the strongest out of the three impulse waves, which significantly reduces the risk on the trade.

Trade Example

After the market makes the first wave, the price starts to pullback. But while the market is retracing, we won’t know where the market will hold and complete its second wave. So, we make use of other tools to determine where the market will resume its trend.

Consider the below price chart. As represented, the market made its first wave. Then, wave 2 began, where the market started to retrace. But, note that, at this point in point, we cannot confirm the end of wave 2. So, to determine the completion of wave 2, we shall be applying the Fibonacci retracement.

In the below chart, the fib retracement has been applied. We can see that the market began to hold at the 50% level. This hence confirms that wave-2 leg has come to an end. Thus, we can prepare to go long in anticipation of wave 3.

In the following chart, we can clearly see that the market held at the 50% fib level and ended up making a higher high, i.e., wave 3.

Trade setup 2

This is the type of setup where we consider the complete 5-3 wave pattern. In the below chart, the 5-wave impulsive pattern is represented with the black trend lines, while the 3-wave corrective pattern is represented by the red trend lines. Since in an Elliot wave pattern, the high of the third corrective wave must be below low of the first wave in the impulsive wave pattern, we can trigger the sell at the area shown in the chart.

This hence concludes our discussion on the Elliot Wave theory. In the next lesson, we’ll summarize this topic for your better understanding and then pick another interesting course.

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