How to Determine Support and Resistance.

What Is Support?

Support is the price level at which demand is thought to be strong enough to prevent the Forex Market price from declining further. The logic dictates that as the Forex Market price declines towards support and gets cheaper, buyers become more inclined to buy and sellers become less inclined to sell. By the time the Forex Market price reaches the support level, it is believed that demand will overcome supply and prevent the Forex Market price from falling below support. Support levels are usually below the current Forex Market price.

Note: When Support level is broken, then technically it will become Resistance level. And vice versa.

What is Resistance?

Resistance is the price level at which selling is thought to be strong enough to prevent the Forex Market price from rising further. The logic dictates that as the Forex Market price advances towards resistance, sellers become more inclined to sell and buyers become less inclined to buy. By the time the Forex Market price reaches the resistance level, it is believed that supply will overcome demand and prevent the Forex Market price from rising above resistance. Resistance levels are usually above the current Forex Market price.

Note: When Resistance level is broken, then technically it will become Support level. And vice versa.

There are loads of ways in determining support and resistance level. In this section, we’re going to discuss about the two ways. First: Using Forex Market Price chart and past Forex Market Price history. Second: Using Pivot Points.

The first method of determining support and resistance levels is to look at a bar chart and its past price history and then see at what Forex Market price levels the highs, lows and closes seem to be touching the most. This method of determining support and resistance levels works on any bar chart time frame--hourly, daily, weekly or monthly.

Now, let’s see the chart below. This is GBP/USD at 15M of time scale: (I deleted some part of the picture to help you understand the concept)

Let’s start from 27/04/2007 8:00 PM. You know the definition of support and resistance, then we might draw first support level at 1.9922 because market Forex Market price couldn't break below this level.

Now, we have resistance level at 2.0039, where Forex Market price didn’t go up further than that level

And now, take a look at what happened on 30/04/2007 between 4:30AM and 8:15 AM, Forex Market Price move Upward and give us a new resistance level at 1.9969.

And now, take a look at what happened on 30/04/2007 near 12:15 PM, Forex Market price broke below our support level at 1.9922 and our support level was no longer considered to be support level. It became resistance level. (When resistance level is broken, then technically it will become support level. And vice versa, when support level is broken, then technically it will become resistance level. )

Here we got new Support level at 1.9890, because Forex Market price couldn’t break below this level.

Again, take a look at what happened on 30/04/2007 near 12:30 PM, Forex Market Price broke below our resistance level at 1.9922 and our resistance level was no longer considered to be resistance level. It became support level. (When resistance level is broken, then technically it will become support level. And vice versa, when support level is broken, then technically it will become resistance level. )

And so on, we’ll have support and resistance levels like picture below. Again look at horizontal lines 1.9969 and 1.9988, it was resistance line, but Forex Market Price broke above our resistance and it became support level. Flag indicate respects to our support / resistance line (A line confirms its validity when the price respects this line. The more times Forex Market Price touches and bounce back, the stronger it becomes.)

Remember this Rule:

“When resistance level is broken, then technically it will become support level. And vice versa, when support level is broken, then technically it will become resistance level.”

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Moving Average and Bollinger Bands

Moving Average:

Moving averages are one of the most popular and easy to use tools available to the technical analyst. Moving average Forex indicator is the average price for a given time interval in relation to other prices during the similar time periods. For instance the closing prices over a 5-day period would have a moving average of the total of the five closing prices divided by five.

The two most popular types of moving averages are the Simple Moving Average (SMA) and the Exponential Moving Average (EMA).

A Simple moving average is calculated by adding the prices over a given number of periods, then dividing the sum by the number of periods. For example, a nine-day simple moving average would add together the closing prices for the last nine days, and then divide that number by nine.

An Exponential moving average gives more weight to recent prices, and is calculated by applying a percentage of today's closing price to yesterday's moving average. The longer the period of the exponential moving average, the less total weight is applied to the most recent price. The advantage to an exponential average is its ability to pick up on price changes more quickly.

How to use?

If the price rises above the moving average it can be considered a bullish signal, and if the price dips below the moving average, it can be considered a bearish signal. This "crossover" or "penetration" will not be at the top or bottom, but normally shortly after the price bottoms out or tops out.

Longer-term and shorter-term moving averages can be compared to each other, and generate signals when they cross. When a shorter term MA moves across a longer term MA and both slopes go up, it can be considered a bullish signal. When a shorter term MA moves across a longer term MA and both slopes go down, it's can be considered a bearish signal.

An Example of using Longer-term and shorter-term moving averages to generate signals.

You can use this technique for any currency at 1H or 1 Day time frame. We have to use 7 SMA (Green Line), 14 SMA (Red Line), and 21 SMA (Blue Line).

Entry Rules for Short: Sell when 7 SMA (Green Line) goes through 14 SMA (Red Line) and continues through 21 SMA (Blue Line) in downward direction.

Entry Rules for Long: BUY when 7 SMA (Green Line) goes through 14 SMA (Red Line) and continues through 21 SMA (Blue Line) in upward direction.

Exit rules: Exit when 7 SMA (Green Line) goes back and touches 21 SMA (Blue Line).














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Bollinger Bands:

Developed by John Bollinger, Bollinger Bands are considered some of the most useful bands in technical analysis, for they vary in distance from the moving average of a Forex Market Price based on the security's volatility and relative price levels over a period time. The indicator consists of three bands designed to encompass the majority of a Forex Market Price action.

1. A simple moving average in the middle
2. An upper band (SMA plus 2 standard deviations)
3. A lower band (SMA minus 2 standard deviations)

During periods of increased fluctuation, the bands widen to take this into account, and when the fluctuation decreases, the bands are tapered for a narrower focus to the price range. The upper band is the standard deviation multiplied by a given factor above the simple moving average, and the lower band is the standard deviation multiplied by the same given factor below the simple moving average.

How to use?

In addition to identifying relative price levels and volatility, Bollinger Bands can be combined with price action and other indicators to generate signals and foreshadow significant moves.

Example:

You can use this technique for any currency at 1H or 30M time frame. We have to use 14 EMA (Green Line), 21 EMA (Red Line), 50 EMA (Blue Line) , Bollinger Band (20, 2) (Brown and Yellow Lines).

Entry Rules for Short: if 14 EMA (Green Line) is below 21 EMA, then if both 14 EMA (Green Line) and 21 EMA (Red Line) are below 50 EMA (Blue Line), then if 50 EMA (Blue Line) is within the Bollinger Bands borders (Brown and Yellow Lines).

Entry Rules for Long: BUY if 14 EMA (Green Line) is above 21 EMA (Red Line), then if both 14 EMA (Green Line) and 21 EMA (Red Line) are above 50 EMA (Blue Line), then if 50 EMA (Blue Line) is within the Bollinger Bands borders (Brown and Yellow Lines).

Exit rules: Exit when any of the conditions is violated.

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Relative Strength Indicator (RSI) & Stochastic Oscillator

Relative Strength Indicator (RSI):

Relative Strength Index (RSI), an oscillator introduced by J. Welles Wilder. The RSI is based upon the difference between the average of the Forex closing price on up days vs the average closing price on the down days over a given period, and is plotted on a vertical scale of 0 to 100.

Wilder advocated a 14-day RSI, although shorter and longer periods have gained popularity when the market exhibits certain characteristics. Generally, RSI is measured in a period between 5 and 25.

How to use it?

Wilder recommended using 70 and 30 and overbought and oversold levels respectively. Generally, Forex Buy signals are triggered when RSI is in oversold (20-30) area, potentially meaning that the stock is about to reach its low for this trend, and Forex Sell signals are triggered when RSI is in overbought (70-80) area, potentially signaling a Forex market top.

Try to combine it with EMA and you’ll get great result on your trades.

You can use this technique for any currency at 1 Day time frame. We have to use 5 EMA (Green Line), 12 EMA (Red Line), and RSI 21.

Entry Rules for Short: Sell when 5 EMA (Green Line) crosses down and below 12 EMA (Red Line) and RSI is below 50.

Entry Rules for Long: Buy when 5 EMA (Green Line) crosses up and over 12 EMA (Red Line) and RSI is above 50.

Exit rules: Exit when 5 EMA (Green Line) and 12 EMA (Red Line) cross again or when RSI crosses back through 50.

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Stochastic Oscillator:

The Stochastics oscillator, a popular and dynamic indicator developed by Dr. George Lane, is based on the premise that during an upward trading Forex market, Forex prices tend to close near their high and during a downward trading market, Forex prices tend to close near their low.

Typically used to identify overbought and oversold conditions the indicator consists of two lines: % K and %D. The range of the Stochastics is between 0 and 100. With a price range of ten to twenty, ten would be given a 0 designation, fifteen would be at 50, and a price of twenty would be at the 100th percentile. The values of the stochastics calculations are dependent on the parameters given to %K and %D.

Readings below 20 are considered oversold and readings above 80 are considered overbought. However, Lane did not believe that a reading above 80 was necessarily bearish or a reading below 20 bullish. A Forex Market Price can continue to rise after the Stochastic Oscillator has reached 80 and continue to fall after the Stochastic Oscillator has reached 20. Lane believed that some of the best signals occurred when the oscillator moved from overbought territory back below 80 and from oversold territory back above 20.

How to Use?

When the faster %K line crosses above the slower %D line and the lines are below 20, a Forex buy signal is generated. When the %K lines crosses below the %D line and the lines are above 80 a Forex sell signal is generated.

Click Here>> Moving Average and Bollinger Bands >>

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Calculating Forex Profits and Losses.

A Guide To Calculating Forex Profits and Losses.
By David Shephard

The first thing that the newcomer to the world of Forex needs to realize is that in Forex trading currencies are traded in much smaller divisions than is the case for normal cash transactions. Although the smallest cash division in the US is the penny (US $0.01), US currency can be traded on the Forex market in divisions of as low as US $0.0001. This smallest division is known as the pip, which is short for Price Interest Point and is also sometimes referred to as 'points'.

As currencies are traded in large lots (typically US $100,000), small movements in the value of the currency can produce substantial profits and losses. For example, in a lot of US $100,000 one pip is worth $10 so an increase of just 40 pips (or 4/10 of one cent) can generate a profit or loss of US $400.

Although the standard lot in Forex trading is 100,000 units of the base currency, currencies can be traded in lots of various sizes. When talking about a lot, the term ‘unit' is the currency name, so that for the US dollars one unit is one dollar.

Different currencies also have different sized pips. The US dollar, for example, is expressed in pips of 0.0001 while the Japanese yen is expressed in pips of 0.01. The value of a pip will depend on the currency pair being traded and the size of the lot. Currency pairs involving the US dollar (USD) with USD as the quote, or second, currency (for example CAD/USD) always have a pip value of $10 for a standard lot. For other currencies a pip value calculator should be used.

There are various different types of order that can be placed by a Forex trader and these order types will have an effect on the profit of loss made in each transaction.

Market Order. A market order is an order to buy or sell at the current market price and be used to either enter or exit a trade. Market orders need to be used carefully because, in fast-moving markets, there can be a significant difference between the price displayed at the time a market order is made and the actual price when the transaction is made. This gives rise to slippage, which is the amount by which the market moves in the time (often just a few seconds) between placing an order and its execution. Slippage can result in a gain or loss of several pips.

Limit Order. A limit order is an order to buy or sell when a certain limit is reached. Limit orders are often used to either buy a currency below the market price or to sell a currency above the market price. If you are buying, your order is executed only when the market falls to the price stated in your limit order. Similarly, if you are selling, your order is executed when the market rises to the price specified in your limit order. In the case of limit orders there is no slippage.

Stop Order. A stop order is an order to buy above the market or to sell below the market. They are most frequently used as stop-loss orders to limit losses if the market moves against the trader's expectation. A stop-loss order will sell the currency if the market falls below the point set by the trader.

One Cancels the Other (OCO). An OCO order is used when placing a limit order and a stop-loss order at the same time and simply means that if either order is executed the other is cancelled. This is useful as it allows a trader to make a transaction without having to monitor the market. Should the market fall, the stop-loss order will be executed, but if the market rises to the level specified in the limit order, the currency will be sold at a profit.

Here is an example of an OCO Transaction:

Buy: 1 standard lot EUR/USD @ 1.3248 = $132,480

Pip Value: 1 pip = $10

Stop-Loss: 1.3223

Limit: 1.3348

This is an order to buy US dollars at 1.3348 and to sell them if they fall to 1.3223 (resulting in a loss of 25 pips or $250) or to sell them if they rise to 1.3348 (resulting in a profit of 100 pips or $1,000).

Let's look at another example:

The current bid/ask price for US dollars and Canadian dollars is

USD/CDN 1.2152/57

This means that you can buy $1 US for 1.2152 CDN or sell 1.2157 CDN for $1 US.

Now, if you believe that the US dollar is undervalued against the Canadian dollar, you will buy US dollars (at the same time selling Canadian dollars) and wait for the US dollar to rise.

Here is the transaction:

Buy USD: 1 standard lot USD/CDN @ 1.2157 = $121,570 CDN

Pip Value: 1 pip = $10

Stop-Loss: 1.2147

Margin: $1,000 (1%)

In this standard lot transaction you are buying US $100,000 and selling CDN $121,570. If the price of the dollar falls below then your stop-loss order will be executed and you will lose $100.

However, let's assume that the USD/CDN rises to 1.2192/87. You may now sell US $1 for CND $1.2192 or sell CDN $1.2187 for US $1.

Because you entered the transaction by buying US dollars, you must now sell US dollars and buy back Canadian dollars to realize your profit. So, you sell US $100,000 at the current USD/CDN rate of 1.2192, and receive CDN $121,920 for which you originally paid CDN $121,570. Your profit is CDN $350 or US $287.19 (350 divided by the current exchange rate of 1.2187).

About Author:
To learn Forex trading online and to look at the possibility of opening your own mini forex online account please visit ForexOnlineTradingSystem.info
Article Source: http:/ezinearticles.com

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MACD Chart

Moving Average Convergence Divergence ( MACD ) Charts

MACD was originally constructed by Gerald Appel an analyst in New York. It is one of the simplest and most reliable indicators available.

The MACD is basically a refinement of the two moving averages system and measures the distance between the two moving average lines.

MACD Indicator normally shows up as two lines (MACD line and Signal Line) plotted on an open scale against the zero line. These two lines will normally be of different color or one line a solid line and the other a dotted line. Forex Signals are taken when MACD crosses its signal line.

The most popular formula for the "standard" MACD is the difference between a Forex Market prices 26-day and 12-day Exponential Moving Averages (EMAs), for this you should set indicator settings to 12 and 26 period exponential moving averages with 9 period exponential moving average as the signal line.

How to use MACD?

When the MACD falls below its signal line, it can be considered a sell signal. Similarly, a Forex buy signal can be interpreted when the MACD rises above its signal line. It is also used as an overbought and oversold indicator. The higher above the zero both lines are the more overbought it becomes and the lower below the zero line both lines are the more oversold it becomes. It may also lead to a stronger Forex signal if the signal line crosses down when it is overbought and crosses up when it is oversold.

When the MACD is making new highs or lows, and the price is not also making new highs and lows, it signals a possible trend reversal and this can be verified with an overbought/oversold oscillator like RSI or Stochastic Oscillator.

Try to combine it with parabolic SAR and you’ll get great result on your trades.

You can use this technique for any currency at any time frame. We have to use Parabolic SAR with default settings (0.02, 0.2) and MACD with 12,26,9

Entry Rules for Short: Sell When Parabolic SAR gives sell signal and MACD falls below its signal line

Entry Rules for Long: Buy when Parabolic SAR gives buy signal and when the MACD rises above its signal line.

Exit rules: At the next MACD lines crossover or if the market starts trading sideways for some time.

Note: Green cross indicate not to enter Forex Market because MACD had not confirmed it and blue check mark indicate enter to market

Click Next>> Scothastic Oscillater & RSI >>

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Trading Techniques / Tricks

Fibonacci Trading

Leonardo Fibonacci da Pisa was a prominent mathematician and is credited with the discovery of what we now call the Fibonacci series. Those ratios appear from the next numbers: 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, ..., and according to these calculations: 1+2=3, 2+3=5, 3+5=8 etc.

The Fibonacci ratios we shall use are 0.236, 0.382, 0.500, 0.618, and 0.764. But 0.382, 0.500 and 0.618 — are the most important to watch for, and how we can use them in our day to day trading is explained below.

To set up Fibonacci on the chart we need to find out:
1. Is it uptrend or downtrend?
2. Highest and lowest swings in the chart formation (A, B points) and go with the trend!

In below example I will show you how to calculate Fibonacci Level. Below you can see a chart of the 4H GBP/USD. (I deleted some part of the picture to help you understand the concept). Now determine Point A and Point B.

Point A is 1.9213 and Point B is 1.9827.

Now Calculate difference between Point A and Point B. (i.e. B-A)

1.9827 – 1.9213 = 0.0614

Now Calculate 38.2% of 0.0614

0.0614 * 38.2 / 100 = 0.0234548

(To Calculate 50% or 61.4% just replace 38.2 with 50 or 61.4)

Now minus your answer (0.0234548) from Point B.

1.9827 – 0.0234548 = 1.9592

Here we get 38.2% retracement as 1.9592.

Similarly you can calculate for Downtrend, only difference is instead of subtracting result of 38.2% / 50% / 61.4% form Point B we ADD it to Point B.

How to I Use?

As soon as you can see that there is going to be a retracement, calculate my retracement levels and do the following.

Entry Rule: Enter at the 38.2% retracement level and place Stop Loss behind the 61.8% retracement level.

Exit Rule: Exit at Point B but if Forex market is strong then you can use formula 1:1, it means AB = CD (where D is our target), formula is calculate difference between A and B and add it to the C. For downtrend A-B+C, uptrend B-A+C.

For Stop Loss If the difference between the 38.2% and 61.8% level is too great a risk then drop down a time frame and use the same technique but get a much tighter stop.

Looking at any chart it's obvious that the best entry position would be at the lowest possible swing e.g. at 0.618 retracement level. But Forex Market Price can hit 0.382 and go straight back, sometimes it gets to 0.500,and at times even pierces deep to the 0.618 level. But still, you can determine best entry point by get an indication that the strength and momentum of the market is also in favors with our theory. For this, we could have a slow stochastic oscillator, a MACD and a RSI just as an example to give us an indication of the weight of our reentry into the trade or late entry based on the retracement idea.

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