what is forex and how to trade forex


Forex, or FX, is an abbreviation for foreign exchange and is the largest financial market of the world. Unlike other markets the FX market is open 24 hours a day and has an estimated $4 trillion in turnover per day. This tremendous turnover is more than the combined turnover of all world’s stock market on any given day. This tends to lead a very liquid market and thus a desirable market to trade.

FX is decentralized over the counter market. It does not have a fixed exchange. It is primarily traded through Banks, Brokers, Financial Institution, Dealers and Individual Traders.

Forex is the mechanism of exchanging one currency for another. This exchange rate is the basis of Forex trading and you can take a position in expectation of the exchange rate increasing or decreasing.

Foreign exchange (forex or FX for short) is one of the most exciting, fast-paced markets around. Until recently, trading in the forex market had been the domain of large financial institutions, corporations, central banks, hedge funds and extremely wealthy individuals. The emergence of the internet has changed all of this, and now it is possible for average investors to buy and sell currencies easily with the click of a mouse.

FOREX trading is one of the few ways to start with small stakes and build wealth quickly. The good news is that everything about successful Forex Trading can be learned by those willing to put in the time and effort.

You will often hear the word INTERBANK discussed in the FX terminology. This originally as the name implies was simply banks and large institutions exchanging information about the current rate at which their clients or themselves were prepared to buy and sell currencies.INTER meaning between an BANK meaning deposit taking institutions normally made up of banks, large institutions, brokers and even government. The market has moved to such a degree now that the term interbank now means anybody who is prepared to buy or sell a currency.

Please don't post in this thread, if you have any questions, pm me only.


Why is trading Forex so lucrative? Let’s take a look…

1. Leverage

Leverage is the ability to trade more funds than you actually have and if you use it correctly, you can make huge gains and build wealth quickly.

For example, if you deposit $5,000 with a FOREX broker they will allow you to trade with a leverage of at least 100:1. This gives you the ability to trade $1 million and considerably enhances your profit potential.

Leverage of course can work for or against you. If however you can keep losses small and run profits then you can build wealth quickly

A PROVEN Forex trading system with good money management, combined with leverage, is the secret of making long term capital gains.

2. Profit Opportunities in Bull or Bear Markets

As one currency rises another must be falling and vice versa, this gives profit potential in ANY economic climate. Currencies are volatile and trading opportunities emerge somewhere in the world every day.

3. Currencies Trend

Currencies reflect the overall health of a country's economy and these economic trends last for months or even years. If you can spot and lock into these long term trends, you can build significant long term wealth.

4. Liquidity

The currency markets are the world's largest investment medium and trillions of dollars are traded daily. This volume of transactions and liquidity means traders are able to open and close positions quickly, to lock in profits, or cut losses.

24-Hour Market Action

The Forex currency markets are a 24-hour marketplace, starting from 5 p.m. ET Sunday to 5 p.m. ET on Friday. This gives you the flexibility to trade the Forex markets full-time or part-time, whenever your schedule or lifestyle permits.

Worldwide Forex Trading

Forex trading opens in Asia with Japan, New Zealand, and Australia (with Japan being the biggest player), then in the Middle East, followed by Europe (primarily London) and the U.S.

Approximate Worldwide Forex Trading Hours:

Asia: 4:30 a.m. – 1:30 p.m. IST

Europe: 12:30 p.m. – 8:30 p.m. IST

USA: 7:30 p.m. – 1:30 a.m. IST

These hours are usually the time when the Forex markets are the most active, have the largest volume of trades and the biggest price movements. Notice that these market hours will overlap and trading activity can increase during these overlapping periods. Quiet market conditions typically occur from 4 p.m. to 6 p.m. ET when no major financial centers are active.

Turning Opportunity Into Profit

Forex trading is perhaps the ultimate home business and has more profit potential than any other including:

• You can trade from Home in just an hour a day

• You only need a computer and an internet connection

• Money you invest in your business can be leveraged 100 times or more

• You don’t need staff or stock and you don’t need to market your business

• There is never a bear market

• There are opportunities all the time to make profit

• Anyone can learn this business

• You can take holidays when you want

• You can build wealth quickly

8 Major Currencies Of The World.

Euro (EUR)

Dollar (USD)

Pound (GBP- Great Britain Pound)

Swiss Franc (CHF)

Japanese Yen (JPY)

Canadian Dollar (CAD)

Australian Dollar (AUD)

New Zealand Dollar (NZD)


I am familiar with what is forex but "how to trade forex" section is most useful for me. Thanks to share your suggestion on it.


Reading a Quote

When a currency is quoted, it is done in relation to another currency, so that the value of one is reflected through the value of another. When you buy or sell in the cash Forex market, you are anticipating that the value or exchange rate of a specific currency is going to increase or decrease in relation to that of a different currency. There are dozens of unique currency pairs that you can trade. In order to fully appreciate this concept, it is important to understand the nature of cash Forex pair symbols.

Base Currency – (EURUSD)

The base currency in a Forex symbol is the first symbol notated. In the case of EURUSD, the base currency is EUR (euro). This is the currency you are buying or selling. For example, if your trade size is 100,000, you are buying or selling 100,000 Euros against U.S. dollars.

Quote Currency – (EURUSD)

The quote currency, sometimes called the secondary or terms currency, is the second symbol notated in a Forex symbol. In the case of EURUSD, the quote currency is USD (U.S. dollars). This is the currency price being quoted

All Forex trades involve the simultaneous buying of one currency and selling of another, but the currency pair itself can be thought of as a single unit, an instrument that is bought or sold. If you buy a currency pair, you buy the base currency and sell the quote currency

For example, if EURUSD is currently quoted at 1.2510, then you would pay $1.25120U.S. dollars to buy 1 euro/ receive $1.2510 U.S. dollars to sell 1 euro.

Most Forex symbols are quoted out to four decimal places, with the primary exception of the Japanese yen, which is quoted out to two decimals.

Direct Quote vs. Indirect Quote There are two ways to quote a currency pair, either directly or indirectly. A direct quote is simply a currency pair in which the domestic currency is the base currency; while an indirect quote, is a currency pair where the domestic currency is the quoted currency. So if you were looking at the Canadian dollar as the domestic currency and U.S. dollar as the foreign currency, a direct quote would be CAD/USD, while an indirect quote would be USD/CAD.

Cross Currency When a currency quote is given without the U.S. dollar as one of its components, this is called a cross currency. The most common cross currency pairs are the EUR/GBP, EUR/CHF and EUR/JPY. These currency pairs expand the trading possibilities in the forex market, but it is important to note that they do not have as much of a following (for example, not as actively traded) as pairs that include the U.S. dollar, which also are called the majors.

Bid-Ask Spread

The bid and ask prices/rates determine the entry and exit prices for each trade. Entering a new long BUY order or closing an existing short position with a BUY order is executed at the ASK price. A new short SELL order or closing a long position with a SELL order is executed at the BID price. The difference between the bid and ask prices is called the spread, and is the transactional cost of a Forex trade.


If we were to look at the following quote: EUR/USD = 1.2500/03, the spread would be 0.0003 or 3 pips.

A pip is the smallest price/rate change movement.

Example 1 – (EURUSD)

1 pip in EURUSD is quoted as .0001 U.S. dollars; if you are trading 100,000 units that would make one pip worth 10 U.S. dollars. (100,000 X .0001) = $10.

Example 2 – (USDJPY)

1 pip in USDJPY is quoted as .01 Japanese yen; if you are trading 100,000 units that would make one pip worth 1,000 Japanese yen. (100,000 X .01) = 1,000 yen.

Note: If the quote currency of the trading symbol is not in your native account currency (e.g., U.S. dollars), a balance in this quote currency is generated in your account. This balance is automatically exchanged into your native account currency at the end of the trading session using a conversion factor. In example 2 above, any realized profit or loss trading USDJPY would be in yen. However, this profit or loss is automatically exchanged or converted back into U.S. dollars and placed in your account at the end of the trading session.


Forex Margin Calculations

In order to place a Forex trade, your broker will set aside a portion of your account funds to guarantee payment for any potential loss of the position. Margin can be thought of as a good faith deposit required to maintain an open position. This is not a fee or a transaction cost.

Example 1: USD – Base Currency

Based on a 2% margin requirement, the margin for each dollar-based currency pair, where USD is the base currency (first part) of the symbol, is generally 2%, or $200 for every $10,000 U.S. dollars traded.

In this example, if 100,000 units are traded, since USD is the base currency the trade value equals $100,000 U.S. dollars. So with a 2% initial margin requirement, this trade would require approximately $2,000 of margin.

Example 2: USD – Quote Currency

The margin required for each non-dollar based currency pair, where USD is NOT the base currency (first part) but is the quote currency (second part) of the symbol, is 2% of the value of the base currency times the current price.

In this example,(EURUSD = 1.33003) if 100,000 units are traded, the trade value equals 100,000 X 1.33003 = $133,003 U.S. dollars, so with a 2% initial margin requirement, this trade would require approximately $2,660 of margin.

Example 3: Cross-Currency Pairs

The margin required for a non-dollar cross-currency pair is the same calculation as in Example2 above, which is 2% of the value of the base currency times the base currency’s exchange rate to U.S. dollars, or to your native account currency.

In this example,(EURJPY= 135.161) if 100,000 units are traded, the trade value equals 100,000 X 135.161 (EURJPY) = 13,516,100 yen. Then converted back to U.S. Dollars, 13,516,100 / 101.569 (USDJPY) = 133,073 U.S. dollars. So with a 2% initial margin requirement, this trade would require approximately $2,661 of margin.

Calculating Forex Trading Profit and Loss

Although all trading platform automatically does the estimated profit and loss calculations for you in real time, it is important to understand how these P&L equations are derived.

Forex Profit and Loss Long Trade = (Closing Price - Opening Price) * Conversion Factor * Trade Size

Forex Profit and Loss Short Trade = (Opening Price - Closing Price) * Conversion Factor * Trade Size

Sample P&L Scenarios:

Example 1: Long 100,000 EURUSD at 1.23200 – U.S. Dollar Native Account Currency

The above position is closed at: 1.24350

(Closing Price - Opening Price): 1.24350 - 1.23200 = .01150 (Profit)

(Profit X Conversion Factor): .01150 X 1.0 = .01150 (Conversion Profit)

(Conversion Profit * Trade Size): .01150 X 100,000 = $1,150.00 (Total Profit)

Example 2: Short 100,000 USDJPY at 89.200 – U.S. Dollar Native Account Currency

The above position is closed at: 89.550

(Opening Price - Closing Price): 89.200 - 89.550 = - .350 (Loss)

(Loss X Conversion Factor): -.350 X .01145 = -0.0040075 (Conversion Loss)

(Conversion Loss * Trade Size): -0.0040075 X 100,000 = -$400.75 (Total Loss)

Example3: Long 100,000 EURJPY at 88.200 – U.S. Dollar Native Account Currency

The above position is closed at: 88.350

(Closing Price - Opening Price): 88.350 - 88.200 = .150 (Profit)

(Profit X Conversion Factor): .150 X .01145 = 0.0017175 (Conversion Profit)

(Conversion Profit * Trade Size): 0.0017175 X 100,000 = $171.75 (Total Profit)

Example 4: Short 100,000 GBPCHF at 1.60400 – U.S. Dollar Native Account Currency

The above position is closed at: 1.61050

(Opening Price - Closing Price): 1.60400 - 1.61050= - .00650 (Loss)

(Loss X Conversion Factor): -.00650 X .95963 = -0.006237595 (Conversion Loss)

(Conversion Loss * Trade Size): -0.006237595 X 100,000 = -$623.76 (Total Loss)



Currencies in Forex are traded in Lots.

A standard lot size is 100 000 units.

Units refer to the base currency being traded. For example, with USD/CHF the base currency is US dollar, therefore if to trade 1 standard lot of USD/CHF it would be worth $100 000.

Another example: GBP/USD, here the base currency is British Pound(GBP), a standard lot for GBP/USD pair will be worth £100 000.

There are three types of lots (by size):

Standard lots = 100 000 units

Mini lots = 10 000 units

and micro lots = 1000 units.

Mini and micro lots are offered to traders who open mini accounts (on average from $200 to $1000). Standard lot sizes can be traded with larger accounts only (the requirements for a size of standard account vary from broker to broker).

The different types of FOREX orders

A trader has at his disposal different types of orders to make FOREX trades.

Market Order – is an order to buy or sell at the current market price. They can be used to enter or exit a trade. Market orders should be used with care because in fast-moving markets there may be a difference between the price seen at the time a market order is given and the actual price of the transaction. This is due to slippage – the amount the market moves in the few seconds between giving an order and having it executed. Slippage could result in a loss or gain of several pips

Limit Order – is an order to buy or sell at a certain limit. They can be used to buy currency below the market price or sell currency above the market price. When buying, your order is executed when the market falls to your limit order price. When selling, your order is executed when the market rises to your limit order price. There is no slippage with limit orders

Stop-Loss Order

A stop-loss order is a type of order linked to a trade for the purpose of preventing additional losses if price goes against you. REMEMBER THIS TYPE OF ORDER. A stop-loss order remains in effect until the position is liquidated or you cancel the stop-loss order.

For example, you went long (buy) EUR/USD at 1.2230. To limit your maximum loss, you set a stop-loss order at 1.2200. This means if you were dead wrong and EUR/USD drops to 1.2200 instead of moving up, your trading platform would automatically execute a sell order at 1.2200 the best available price and close out your position for a 30-pip loss

One Cancels the Other (OCO) – this order is used when placing a take-profit order and a stop-loss order at the same time. If either order is executed the other is cancelled, allowing the trader to make a transaction without monitoring the market. If the market falls, the stop-loss order will be executed, but if the market rises to the level of the take-profit order, the currency will be sold at a profit.

Example OCO Transaction:

Buy: 1 standard lot EUR/USD @ 1.3228 = $132,280

Pip Value: 1 pip = $10

Stop-Loss: 1.3203

TP: 1.3328

This is an order to buy US dollars at 1.3328 and to sell them if they fall to 1.3203 (resulting in a loss of 25 pips or $250) or to sell them if they rise to 1.3328 (resulting in a profit of 100 pips or $1,000).

Here's another example:

The current bid/ask price for US dollars and Canadian dollars is USD/CAD 1.2152/57

...meaning you can buy $1 US for 1.2152 CAD or sell 1.2157 CAD for $1 US.

If you think that the US dollar (USD) is undervalued against the Canadian dollar (CAD) you would buy USD (simultaneously selling CAD) and wait for the US dollar to rise.

This is the transaction: Buy USD: 1 standard lot USD/CAD @ 1.2157 = $121,570 CAD

Stop-Loss: 1.2147

Margin: $1,000 (1%)

You are buying US$100,000 and selling CAD$121,570. Your stop loss order will be executed if the dollar falls below 1.2147, in which case you will lose $100.

However, USD/CAD rises to 1.2192/87. You can now sell $1 US for 1.2192 CAD or sell 1.2187 CAD for $1 US.

Because you entered the transaction by buying US dollars (buying long), you must now sell US dollars and buy back CAD dollars to realize your profit.

You sell US$100,000 at the current USD/CAD rate of 1.2192, and receive 121,920 CAD for which you originally paid CAD$121,570. Your profit is $350 Canadian dollars or US$287.19 (350 divided by the current exchange rate of 1.2187)


Market Participants

Governments and Central Banks

Some of the most influential participants involved with currency exchange are the central banks and federal governments. Central banks are often involved in manipulating reserve volumes in order to meet certain economic goals. For example, ever since pegging its currency (the yuan) to the U.S. dollar, China has been buying up millions of dollars worth of U.S. treasury bills in order to keep the yuan at its target exchange rate. Central banks use the foreign exchange market to adjust their reserve volumes. With extremely deep pockets, they yield significant influence on the currency markets.

Banks and Other Financial Institutions In addition to central banks and governments, some of the largest participants involved with forex transactions are banks. Most individuals who need foreign currency for small-scale transactions deal with neighborhood banks. The interbank market is the market through which large banks transact with each other and determine the currency price that individual traders see on their trading platforms. These banks transact with each other on electronic brokering systems. Banks, in general, act as dealers in the sense that they are willing to buy/sell a currency at the bid/ask price. One way that banks make money on the forex market is by exchanging currency at a premium to the price they paid to obtain it. Since the forex market is a decentralized market, it is common to see different banks with slightly different exchange rates for the same currency.

Hedgers Some of the biggest clients of these banks are businesses that deal with international transactions. Whether a business is selling to an international client or buying from an international supplier, it will need to deal with the volatility of fluctuating currencies. For example, if a European company wants to import steel from the U.S., it would have to pay in U.S. dollars. If the price of the euro falls against the dollar before payment is made, the European company will realize a financial loss. As such, it could enter into a contract that locked in the current exchange rate to eliminate the risk of dealing in U.S. dollars. These contracts could be either forwards or futures contracts.

Speculators Another class of market participants involved with foreign exchange-related transactions is speculators. Rather than hedging against movement in exchange rates or exchanging currency to fund international transactions, speculators attempt to make money by taking advantage of fluctuating exchange-rate levels.


Types of Analysis Used in Forex

Forex analysis is used by the retail Forex day trader to determine whether to buy or sell a currency pair at any one time. Forex analysis could be technical in nature, using charting tools, or fundamental in nature, using economic indicators and/or news based events. The day trader's currency trading system use analysis that create buy or sell decisions when they point in the same direction. Forex trading strategies that use this analysis are available for free, for a fee or are developed by the trader themselves.

Fundamental Analysis

Fundamental analysis is often used to analyze changes in the forex market by monitoring factors, such as interest rates, unemployment rates, gross domestic product (GDP) and many other economic releases that come out of the countries in question. For example, a trader analyzing the EUR/USD currency pair fundamentally, would be interested in the interest rates in the Eurozone, compared to those in the U.S. They would also want to be on top of any significant news releases coming out of each country in relation to the health of their economies.

Technical Analysis

Technical analysis is a common method to evaluating securities and determining the next

direction of the price through using chart patterns and mathematical indicators or a

combination of both. Many believe that it is the most reliable way to find out how supply and

demand is going to be changed and what is the latest decision made by market participants.

As a matter of fact a large portion of market traders prefer to use technical indicators to

confirm suggested chart patterns or trading opportunities.

Technical analysis can be either manual or automated and is a system that uses past price movement to determine where a given currency may be headed. A manual system involves a trader analyzing technical indicators and interpreting whether to buy or sell. An automated trading analysis, involves the trader "teaching" the software what signals to look for and how to interpret them. Automated analysis takes out the human element of psychology that is detrimental to a lot of traders.

Forex Chart Types

There are three main types of charts that are used by most traders in the forex market. Two of them, bar charts and candlestick charts, display basically the same information in a different visual mediums. The other type of chart, perhaps the most common in finance and trading in general, is the simple line chart.

Line Chart

Sometimes the line chart represents the day's average price for a particular currency pair. Still other times it is the closing price. It is useful for looking at long term direction of prices and for the correlation of a currency pair with other variables, such as commodity prices or trade defects.On most good websites, any number of different variables can be grouped together to see how they correlate in the real world.

click file named linechart in attachment

Bar Chart

The next type of chart is the bar chart. Like most charts, it has two notches on it, one representing opening and one representing closing costs. The one on the left represents the opening cost, the one on the right represents the closing. The edges of each bar represent the highs and lows for the day.

click file named bar in attachment

Candlestick Chart

Candlestick charts are perhaps the most popular type of chart for the forex market and forex websites in general. They instantly let a reader know what's gone on that day and where the market has moved. For more information on how to read candlestick charts, see the article, “candlestick patterns

click file name candlestick in attachment

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Shadow and Tail

The shadow is the portion of the trading range outside of the body. We often refer to a candlestick as having a tall shadow or a long tail.

A tall shadow indicates resistance;

A long tail signals support.

Long Lines

The long white line is a sign that buyers are firmly in control - a bullish candlestick.

A long black line shows that sellers are in control - definitely bearish.


Marubozu do not have upper or lower shadows and the high and low are represented by the open or close. A White Marubozu forms when the open equals the low and the close equals the high. This indicates that buyers controlled the price action from the first trade to the last trade. Black Marubozu form when the open equals the high and the close equals the low. This indicates that sellers controlled the price action from the first trade to the last trade.


Doji form when a security's open and close are virtually equal. The length of the upper and lower shadows can vary and the resulting candlestick looks like a cross, inverted cross or plus sign.

Long-legged doji

Long-legged doji have long upper and lower shadows that are almost equal in length. These doji reflect a great amount of indecision in the market. Long-legged doji indicate that prices traded well above and below the session's opening level, but closed virtually even with the open. After a whole lot of yelling and screaming, the end result showed little change from the initial open.

Dragon fly doji

Dragon fly doji form when the open, high and close are equal and the low creates a long lower shadow. The resulting candlestick looks like a "T" with a long lower shadow and no upper shadow. Dragon fly doji indicate that sellers dominated trading and drove prices lower during the session. By the end of the session, buyers resurfaced and pushed prices back to the opening level and the session high.

Gravestone doji

Gravestone doji form when the open, low and close are equal and the high creates a long upper shadow. The resulting candlestick looks like an upside down "T" with a long upper shadow and no lower shadow. Gravestone doji indicate that buyers dominated trading and drove prices higher during the session. However, by the end of the session, sellers resurfaced and pushed prices back to the opening level and the session low.

As with the dragon fly doji and other candlesticks, the reversal implications of gravestone doji depend on previous price action and future confirmation.


The hammer is not as strong as the dragonfly candlestick, but also signals reversal after a down-trend: control has shifted from sellers to buyers.

Hanging Man

A hammer that occurs after an up trend is called a 'hanging man' and is a bearish signal.


An inverted hammer is identified by open and close near the bottom of the trading range. The candlestick is the converse of a hammer and signals reversal when it occurs after an up-trend.

Shooting Star

An inverted hammer that occurs after an up trend is called a shooting star and is a bearish signal.

Morning Star

The Morning Star pattern signals a bullish reversal after a down-trend. The first candlestick has a long black body. The second candlestick gaps down from the first (the bodies display a gap, but the shadows may still overlap) and is more bullish if hollow. The next candlestick has a long white body which closes in the top half of the body of the first candlestick.

Evening Star

The Evening Star pattern is opposite to Morning Star and is a reversal signal at the end of an up-trend. The pattern is more bearish if the second candlestick is filled rather than hollow.

Doji Star

A Doji Star is weaker than the Morning or Evening Star: the doji represents indecision. The doji star requires confirmation from the next candlestick closing in the bottom half of the body of the first candlestick.

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Choosing Timeframe.

whatever out of these four you choose, please stick to it, don't change it based on market conditions. you WILL lose a LOT.

The Long-Term Trader

This trader will hold almost all trades for a matter of weeks, many trades for months and will even have some trades that are left open for a year or more. Since trades are held for long durations, this trader usually places fewer trades – maybe only 5 to 10 a month. A long-term trader makes most of his decisions based on monthly and weekly charts; however, daily and 4-hour charts may be used to choose precise entry points.

The Swing Trader

A swing trader is a medium-term trader who holds positions for at least a few days, maybe a week or two, but is usually in and out of positions within a month’s time. This trader will generally place more trades than a long-term trader; however, will still be very selective. To make trading decisions, a swing trader will consider monthly and weekly charts, like the long-term trader, but will also put more emphasis on daily, 4-hour and even 1-hour charts. Monthly and weekly charts help the trader establish a long-term view, and smaller time frame charts are key for choosing the best entry and exit points.

The Day Trader

The typical day trader is usually in and out of a position within a day, although some trades may last 2 to 3 days at most. An intelligent day trader won’t completely ignore monthly and weekly charts; however, these larger time frames are much less important and are only reviewed occasionally to establish the “big picture.” Day traders establish their views based on daily charts (as they plan to be out of the trade by day’s end), and choose entry points based on 1-hour, 30-minute, 15-minute and even 5-minute charts.

The Scalper

One can think of a “scalper” as an ultra-short-term day trader. These traders only hold a position for 30 seconds to a few minutes. The profit targets for these very short-term trades may only be 5-10 pips, but if this can be accomplished 10-20 throughout a trading day, the scalper could profit by 100-200 pips, which is what a day trader might expect from one or two trades. To trade at this ultra-short-term level, a scalper rarely looks at charts with time frames higher than an hour, instead focusing on 15-minute, 5-minute, 1-minute and tick charts.


When utilizing technical analysis, it's important to remember that almost all technical indicators are lagging events - meaning they are simply conveying information about an event that has already occurred. it's your interpretation of these technicals that seperates the loser 95% from the winner 5% of the people!

However, through technical analysis, we hope to achieve two things:

1. Understand what the broader investing public is thinking.

2. Find reliable indicators that not only show us what has transpired, but give us some insight to what could take place in the future.

When we utilize technical analysis, the indicators become "self fulfilling prophecies", meaning that enough people are watching - and acting on - the same information, so as to make an event occur.

Two key concepts in technical analysis are support and resistance.

Support and Resistance

Support: A certain price level that shows significant ability to hold the currency above

Resistance: A certain price level that shows significant ability to hold the currency below.

Support and Resistance is generally thought of as a horizontal line drawn on a chart that coincides with multiple historical highs and lows, or significant price level, like a whole number.

How to Calculate Pivot Points

There are several different methods for calculating pivot points, the most common of which is the five-point system. This system uses the previous day's high, low and close, along with two support levels and two resistance levels (totaling five price points) to derive a pivot point. The equations are as follows:

R2 = P + (H - L) = P + (R1 - S1)

R1 = (P x 2) - L

P = (H + L + C) / 3

S1 = (P x 2) - H

S2 = P - (H - L) = P - (R1 - S1)

Here, "S" represents the support levels, "R" the resistance levels and "P" the pivot point. High, low and close are represented by the "H", "L" and "C" respectively. Note that the high, low and close in 24-hour markets (such as forex) are often calculated using New York closing time (4pm EST) on a 24-hour cycle.

Interpreting and Using Pivot Points

When calculating pivot points, the pivot point itself is the primary support/resistance. This means that the largest price movement is expected to occur at this price. The other support and resistance levels are less influential, but may still generate significant price movements.

Pivot points can be used in two ways. The first way is for determining overall market trend: if the pivot point price is broken in an upward movement, then the market is bullish, and vice versa. Keep in mind, however, that pivot points are short-term trend indicators, useful for only one day until they need to be recalculated. The second method is to use pivot point price levels to enter and exit the markets. For example, a trader might put in a limit order to buy 100 shares if the price breaks a resistance level. Alternatively, a trader might set a stop-loss for his active trade if a support level is broken.

Round Numbers

Another common characteristic of support/resistance is that an asset's price may have a difficult time moving beyond a round price level such as 1.4500. Most inexperienced traders tend to buy/sell assets when the price is at a whole number because they are more likely to feel that a stock is fairly valued at such levels. Most target prices/stop orders set by either retail investors or large investment banks are placed at round price levels rather than at prices such as 1.4505. Because so many orders are placed at the same level, these round numbers tend to act as strong price barriers. If all the clients of an investment bank put in sell orders at a suggested target, a level of resistance would be created and vice-a-versa.

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