Technical Analysis VII: Trading the Trend Lines

Only one of two things can happen when a price approaches support or resistance: the price can break through it, or it can bounce off and reverse direction. The same is of course true for trend lines.

1. Trading on a Pullback

If a chart is trending in a clear direction, and a trend line can be drawn connecting a series of relative highs or relative lows, trading opportunities exist when the price approaches the trend line. If the price bounces off the trend line and resumes the trend in the original direction, this can be an excellent opportunity to enter the market in the direction of the dominant trend. This is often referred to as buying on a pullback in an up trend or selling into strength in a downtrend.

Read the rest of this entry »

Popularity: 8% [?]

Technical Analysis VI: Trend Lines

What are Trend lines?

Trend lines are lines drawn on the historical price levels that depict general direction of where the marking is heading, and provide indications of support or resistance.

Drawing trend lines is a highly subjective matter. The best test of whether a trend line is a valid one is usually whether it looks like a good line. In an up trend, a trend line should connect the relative low points on the chart. A line connecting the lows in a longer-term rally will be a support line that can provide a floor for partial retracements. The down trend line that connects the relative highs on the chart will similarly act as resistance to shorter moves back higher.

Read the rest of this entry »

Popularity: 6% [?]

Technical Analysis V: Trending and Ranging Markets

In Trending Markets

The existence of a trend in any market depends on a series of relative highs and lows. Two consecutive relative highs, each above the previous relative high, and two relative lows above the previous low would be constitute a tentative up-trend. A third relative high would confirm the trend.

The chart below illustrates a up-trend of EUR/USD:

Read the rest of this entry »

Popularity: 4% [?]

Technical Analysis IV: Identify the Market Trend

Three Phases of Major Trends

A trend represents a general direction of the market. Dow Theory asserts that major trends have three distinct phases: accumulation, public participation and distribution. The accumulation phase represents the first part of the trend in which those who are well-informed buy or sell. In other words, if the well-informed recognize that the recent downtrend is soon coming to an end, they would buy, and vice versa.

The public participation phase involves the masses following the major trend. This occurs as prices begin to accelerate rapidly and there is news supporting the trend.

Read the rest of this entry »

Popularity: 6% [?]

Technical Analysis III: Support and Resistance

What are support and resistance?

Support levels are prices where buyers have shown or are likely to show strength. Resistance levels are prices where sellers are likely to be strong.

Support

Support levels essentially give the market a ‘floor’, since they are areas where buyers tend to be strong. If the price falls to a strong support level, traders should expect buyers to step in and drive the price up, or at least keep it from moving any lower.

Read the rest of this entry »

Popularity: 6% [?]

Technical Analysis II: What are Charts?

A chart is the most important tool for understanding the total sum of what is going on in the market. Almost all traders today, particularly those who trade actively, use their favourite types of charts to analyse the market. In the end, a chart is a visualised representation of the price movements, a reflection of the psychology of the market and a visualization of the interaction between buyers and sellers in the market. Because it is a reflection of all the activity that has taken place for a particular traded instrument, a chart also shows how the market values a particular asset based on all the information available. And because a chart has the potential to offer such insight and to accurately reflect the entire perspective of the market, it is an indispensable tool in the arsenal of any trader.

There are three major kinds of charts: bar charts, candlestick charts, and line charts. These charts are described below. Within the articles, we will use primarily candlestick charts, because they are the most commonly used charts amongst active traders.

Read the rest of this entry »

Popularity: 7% [?]

Technical Analysis I: Introduction

There are two major approaches to analyzing the currency market, fundamental analysis and technical analysis. The fundamental analysis focuses on the underlying causes of price movements, such as the economic, social, and political forces that drive supply and demand. The technical analysis focuses on the studies of the price movements themselves. Technical analysts use historical data to forecast the direction of future prices.

The premise of technical analysis is that all current market information is already reflected in the price movement. By studying historical price movements, investors can make informed trading decisions. The following articles aim to give a thorough presentation of technical analysis tools and theories.

Read the rest of this entry »

Popularity: 4% [?]

Basic Concepts VII: Margin

What is Margin?

Margin is the amount of equity that must be maintained in a trading account to keep a position open. It acts as a good faith deposit by the trader to ensure against trading losses. A margin account allows customers to open positions with higher value than the amount of funds they have deposited in their account.

Trading a margin account is also described as trading on a leveraged basis. Most online forex firms offer up to 200 times leverage on a mini contract account. The mini contract size is usually 10,000 currency unit, 1/200th of 10,000 equals to 50 currency unit, meaning only 0.5% margin is required for open positions. Compare to future contracts, which require 10% margin for most contracts, and equities require 50% margin to the average investor and 10% margin to the professional equity traders, foreign exchange market offers the highest leverage among the other trading instruments.

Read the rest of this entry »

Popularity: 14% [?]

Basic Concepts VI: Types of Orders

The forex market provides different kinds of orders for trading. The following are some major types of orders that can be found on forex trading stations.

Market orders - A buy or sell order in which the forex firm is to execute the order at the best available current price. It is also called at the market.

Entry orders - A request from a client to a forex firm to buy or sell a specified amount of a particular currency pair at a specific price. The order will be filled once the requested price is hit.

Read the rest of this entry »

Popularity: 4% [?]

Basic Concepts V: Spreads

What is a spread?

In margin forex trading, there are two prices for each currency pair, a “bid” (or sell) price and an “ask” (or buy) price. The bid price is the rate at which traders can sell to the executing firm, while the ask price is the rate at which traders can buy from the executing firm.

Bid/Ask

For example, when you see the price quote of EUR/USD is 1.2881/1.2884 as in the above picture, the bid is 1.2881 whereas the ask is 1.2884. That means traders looking to sell must do so at 1.2881, those looking to buy must do so at 1.2884.

Read the rest of this entry »

Popularity: 9% [?]