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How to Trade Forex Using the Support and Resistance Forex Trading Techniques

Wednesday, December 29th, 2010

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Many professional forex traders have been using support and resistance levels as part of their forex trading strategies to trade the currency market. Besides currency trading, there are other financial instruments like stocks which also use support and resistance. It is considered to be one of the most powerful ways to trade forex as it is based on price actions itself.

Support and resistance trading is understood as once the price reaches a certain level, it may stop, find it hard to break through that level and then reverses. When traders are able to identify these activities, they will be able to gain huge profits from the forex financial market. Support levels are identified when buyers push the price up when price reaches a certain level which finds it hard to break through. Vice versa for resistance levels.

We will now look at how we spot resistance and support levels on the forex charts. There are a few forex trading techniques to spot those levels but I will list those that are more commonly and effectively used. The top five are Moving Averages, Trend Lines, Pivot Points, Chart Patterns and Fibonacci Levels.

Moving Averages: Some moving averages value may have an impact on the currency market and they are the 200 EMA (Exponential Moving Average), 100 EMA, 62 EMA and 23 EMA. When price reaches the EMA levels, sometimes it tests the levels, bounces off and reverses. That is why they are used as support and resistance levels and even used for forex day trading strategy.

Trend Lines: We draw trend lines to give us an idea on how trendy the market is when the price travels up or down. This is also known as channels and let us predicts how the price will move. For example, when the price is trending up, we draw a up trend line, so when the price breaks below the trend line significantly, we know that it is a breakout and the trend will change. Vice versa for trending down.

Pivot Points: This is one of the forex indicators that is based on previous period. It can be used by breakout traders or range-bound traders. For breakout trades, prices which are above the pivot are considered bullish while below are pivot are bearish. Using pivot in forex trading systems, after the range-bound traders identify the upper resistance or lower support levels, they will place sell or buy orders, and target profit at S1, S2 or R1, R2 respectively.

Chart Patterns: Some of the examples are ascending/descending triangles, double top/bottom, head and shoulders and reverse H & S. You can find examples in some of the few forex ebooks and learn how to identify the patterns from there.

Fibonacci Levels: When we draw swing low to high or swing high to low, we use the Fibonacci levels of 23.6%, 38.6%, 50.0% and 61.8% as support and resistance levels. For example, when it is swing low to high, traders may buy when the price hit one of the levels, as that is support in this case. Some traders may only trade when the price went out of the 61.8%, which means a reversal of trend.

The key to master these forex trading techniques mentioned above is to experience it yourself. You can start by doing demo trading before going live. Practice makes perfect.



By: Daniel S.

About the Author:

To learn how to trade forex successfully using a simple, time-tested and proven forex trading system, download my FREE 56-page “Forex Trading To Riches” ebook at http://www.forextradingpower.com.

The author, Daniel Su, is the owner of http://www.ForexTradingPower.com where you can get free premium forex trading tips and resources. Daniel Su specializes in teaching real people how to trade the Forex market for long term financial success.



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Adx – Average Directional Movement Index

Tuesday, December 28th, 2010


The ADX (Average

Directional movement Index) Indicator

The ADX is part of the direction movement system introduced

by J.Welles Wilder in his book New Concepts in Technical Trading Systems.

It comprises of the Directional Movement lines – the plus DMI line

and the minus DMI line – and the ADX line (the Average Directional

Movement Index)

ADX is created with reference to both positive and negative

directional movement and identifying sustained movement in one direction.

When this occurs ADX will rise (irrespective of whether the trend is higher

or lower). Trend direction is identified by whether positive movement

(DMI+) is above or below negative movement (DMI-). Once ADX rises above

a certain level a trend can be said to have been established.

Although the average directional movement index (ADX) isn’t used as frequently as some of the popular technical indicators the ADX line has definite advantages because it filters out a lot of the false oscillator signals which are frequently given early in a move.

A trader can stay with trending positions longer by following the simple guidelines for the ADX line. A climb by the ADX line above 40 followed by a downturn, signals an imminent end to the current trend (whether up or down).

The ADX is less helpful during sideways markets. During extended consolidation periods the ADX line will slip toward 10. When ADX approaches 10, a major move is usually about to take place. But the ADX line doesn’t tell you which direction it will go. You have to rely on other indicators for the probable direction of the next move.

In short, if the market is trending, the ADX line should be

rising. During an extended consolidation period the ADX line will slip

toward a low number.

To sum it up –



When the ADX starts rising from a low level it signals the beginning of a trend.

The trend is confirmed when the ADX has risen above the 20-25 value and the +DMI line has crossed the –DMI line (in case of an uptrend)

When the ADX has reached an overbought level of 40-50 and starts consolidating or turning down it can signals the end of the current trend.

The decline of the ADX signals the consolidation or indecision of the market.



The optimum use of this indicator would be to consider trades only when the ADX has started to rise from a low level, as it indicates that a sideways basing pattern has been formed and trends usually emerge from extended sideways periods giving highly profitable trades.

he chart example shows how the ADX effectively indicates a range bound area and the breakout forming the subsequent trend.

View Chart

Trading With The Trend – ADX Strategy

The currency markets are known to trend well. At the same time, catching a trend and staying with it, is not as easy as it seems.

Price always moves in wave motion, forming impulsive and corrective waves and many a times a major retracement could be interpreted as a reversal, only to see the trend continue.

The market saying of “trading the pullback” would fit this situation well.

Hence, if we can identify a strong trend and correctly interpret the corrective waves of the trend as a retracement, it would make trading more profitable.

With this in mind, we shall make a system that gives us the ability to trade pullbacks in the direction of the main trend by combining 2 technical indicators.

The advantage is that the unique characteristic of each, gives us the

combined interpretation that we are looking for.

The first indicator is the ADX with the standard setting of 14. It is

a trend indicator, which identifies a sustained movement in one direction.

Once the ADX rises above a certain level a trend is said to have been

established. You stay with trending positions longer, simply by observing

that the ADX is not declining. An ADX reading of above 30 indicates that

a strong trend is in place and we shall use this parameter for our strategy.

The second indicator is the Exponential moving average with a look back period of 21. The basic use of the EMA 21 is that it often acts as a dynamic barrier of support and resistance. In an uptrend price will remain above the 21EMA and more often than not, find support on the average in a continuing trend.

By combining these unique characteristics of the above two indicators we now define our parameters for the system. We will define a long trade and the same rules apply for a short trade by reversing the parameters.

Initially an ADX reading of above 30 is needed, which indicates that a strong trend is in place.

Once this parameter has been met and price retraces back to the 21 EMA we have a buy signal.

We enter the trade on the break of the high of this pullback bar, and place the stop below the low of the entry bar. The exit would be when prices cross the 21EMA down.

View Chart

And as we can see in the chart we have both long and short trades completed successfully. It is a very simple strategy with a high probability of success. Since we are going with the trend we are waiting for price to confirm our trades. The basic drawback is that it works only in trending markets and should not be used when price is range bound.

Good Trading

Mark McRae



By: Mark Mcrae

About the Author:



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Technology and Stock Trading

Monday, December 6th, 2010


In the 1920s, the United States experienced a big blow when the stock market crashed. This event is now known as Black Tuesday. This started a series of problems for the country and created widespread social problems. The Great Depression, this period is commonly called, lasted for almost a decade, was believed to have been caused by an extensive stock market speculation and the unequal distribution of wealth.

Before this historic market crash, different kinds of people were getting rich due to the high return of investment (ROI). The “roaring twenties” as the decade was termed, was a period of growth for the US. Unfortunately, with limited information, speculation on the stock market during this time was comparable to gossip, and this was the very reason why the Black Tuesday happened. Sure, people read the newspaper, but this wasn’t enough, as people didn’t have a good picture of the whole stock market.

Nowadays, trading in the stock market is both complex and simple. Before a traders and investors decide to invest in certain stocks, they need to know a lot of information. Firstly, they have to determine the trend that the stock market will take – whether the market will experience a period of growth (a bull market) or if it will experience a decline (a bear market). By knowing the trend of the market, the investor can then decide how long he will retain the investment and how much he will invest. To determine whether the stock market will continue its trend or it will reverse its course, investors use indicators such as the Simple Moving Average (SMA) or Exponential Moving Average (EMA), Relative Strength Index (RSI), Moving Average Convergence/Divergence (MACD), Bollinger Bands. These indicators use the price of stocks to determine the direction of the market.

Just like the market of goods and services, the stock market also relies on the price and demand, in this case, it is called volume. Price refers to the trend of prices of stocks while volume refers to the amount of stocks being traded. To determine the volume, traders and investors look at the daily volume of stocks sold in the stock market. In most cases, trading tools combine these two information to find out if there are more sellers than buyers in the stock market, which could then, inevitably affect the price of the stock and the amount sold each trading day.

There are cases when there is high volume of sales but the prices in the market have dropped. For some investors, this could mean that the bigger players have backed out and it is a sign of a downward trend. Smaller players will soon follow suit causing lower sales. On the other hand, a stock can also experience a high-volume day and high prices. This means that the stock is up and bigger investors such as institutional investors and mutual funds will buy more, thereby boosting the market even more.

High-volume, low-price days don’t always mean that the market is going to continue on a downward trend. These down days can sometimes be a precursor to a reversal of course. Institutional investors and mutual funds can sometimes take advantage of the low price of stocks to purchase at bigger volume. If this happens, the market can move to the opposite direction making stock prices to go up and the stock market starts a new cycle.

In order to trade in the stock market, one doesn’t have to know all of the technical details in buying and selling stocks, in most cases, a basic understanding of the stock market is more than enough. But due to the amount of information that one has to consider, stock trading requires a lot of time and effort in order to become a profitable activity. Thanks to technology, the transfer and retrieval of such information is so much easier. The Internet is a powerhouse of all sorts of information and is accessible at all times. There are a lot of sites like

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Currency Trading Strategy – How To Use The Fib 127 For Consistent Profits

Tuesday, November 30th, 2010


A solid currency trading strategy consists of entering a trade at the right place, having a stop that is properly calculated, and setting a reasonable profit target level that works time after time after time.

Many newer traders set too ambitious profit targets expecting the trade to be “the big one” and hoping it will help offset the losses they have accumulated.

However, a far more effective currency trading strategy is to set a reasonable profit target each time, not expecting the home run, and being satisfied with smaller profits which on a consistent basis will build the equity in the account surprisingly quickly once the compounding action kicks in.

Here is where the Fibonacci tool comes in.

This article assumes a trader knows how to use the Fibonacci tool which comes as a standard technical analysis tool on most charting software packages.

While the key retracement levels are 38, 50, 62 and 70 percent, two extension levels are commonly used – 1.27 and 1.62 percent.

The Importance Of Fib 127

It is the 1.27 level we are interested in.

Why?

Because price regularly gets to the 1.27 level, or at least within a few pips of it. Price also gets to the 1.62 level fairly often but not nearly as often as the 1.27 level.

So if you are trading with the trend, always a safe currency trading strategy, and price has pulled back to the 50 or 62 retracement levels, there is a very reasonable chance price will reach the 1.27 target.

If price pulls back to the 79 retracement level it may not go so far. If you trade from that retracement, you will want to take the first profit at the end of the swing as price may not extend beyond that point to the 1.27 or 1.62 level.

Some traders just focus on this currency trading strategy when going with the trend:

In at the Fib 50 retracement Out at the Fib 127 extension

Why is this such a sound currency trading strategy?

Because the Fib 38 retracement level does not offer such a good risk reward ratio many times. There is always the risk price will pull back further and take out your stop.

On the other hand, price frequently fails to reach the 62 or 79 retracement levels so the trader is left on the sidelines as the trade fails to get filled.

The 50 level is frequently reached so the trader has a good chance of getting his order filled.

On the other hand, the 127 extension is not too ambitious. In at 50 and out at 127 will often net a profit of somewhere between 25 and 40 pips. With a 20 to 25 pip stop the risk reward ratio is satisfactory.

How To Use Fib 127

Here are some other factors to consider when using the Fib 127 extension:

Look to see if this level coincides with other factors such as

A previous key level of support or resistance on the higher time frames such as 1 hour, 4 hour, daily, or even weekly.The 200 EMA (Exponential Moving Average) on the 1 hour or 4 hour. This often provides quite a strong level of support and resistance.A pivot point (Central Pivot Point, R1, R2, S1, S2, or M1-4 levels ) calculated from the previous day’s High, Low and Close.


Even when targeting the Fib 127 as the profit taking point, it is wise to trim a couple of pips of the limit order. So often price will nearly reach Fib 127 and pull back.

Yes it might go on to touch it later but in the meantime price retraces and you have to have the mental stamina to be able to handle that.

Many traders would rather just take a slightly smaller profit and save themselves one or two hours of price consolidation with the risk they may lose the profit altogether.

A solid currency trading strategy develops over time. A key ingredient is not being too ambitious. The Fib 127 extension level is a reasonable profit target you can use regularly to extract your wages from the Forex market!

By: Michael A Jones

About the Author:
For a free Fibonacci calculator, pivot point calculator, and the best free economic calendars click here:

http://www.vitalstop.com/Forex/tools.html

For a free candle & chart pattern recognition reference tool click here:

http://www.vitalstop.com/Forex/Candle-Chart-Patterns

See how to use trendlines to get an optimum trade entry point:

http://www.vitalstop.com/Forex/trendline.html



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