If you’ve been involved in the investment world for any length of time, I’m sure you’ve heard the term Forex thrown around, but what exactly is Forex?

Forex stands for FOReign EXchange. In the simplest of definitions, it is the simultaneous buying and selling of a currency pair (e.g. EUR/USD), hence the term currency trading. It is a continuous physical occurrence taking place in the global economic system.

For example, when a tourist travels from Europe to the USA and exchanges euros for dollars, he becomes a potential trader of Forex.

Similarly, when a US company needs to exchange dollars before exporting goods to Europe or Japan, it too takes an active role in the foreign exchange market.

With this in mind, every currency pair has a price which is determined by the law of supply and demand, globally. If the demand for a particular currency is high then it gains value. Conversely, if a currency is in abundant supply, its value declines.

Currently, Forex is the most liquid of all markets with trading volumes surpassing the 3 trillion dollar mark, every single day. To put things in perspective, this is more than the NYSE and the NASDAQ combined!

Until recently, currency trading was confined to banks and large financial institutions. However, since the advent of the internet, many OTC brokerage firms have sprung up allowing the everyday trader, or speculator, to actively participate in this market.

Due to its large trading volumes, Forex has become a very popular investing opportunity. The potential for profit is enormous, but as with anything involving large gains, the risks are equally amplified. This is what makes this type of investment so attractive to some, whereas others clearly shy away from it.

A thorough evaluation of the system’s inner workings must be undertaken by anyone who’s hoping to profit from Forex. This involves sound education, discipline, and most of all practice.

With these three things combined, and the right mentor, anyone can learn to consistently make money from the frequent and often “wild” swings, of our global economy.

To learn more about how you can start profiting from Forex trading, be sure to read the rest of the articles in this section.

To your trading success,
Louizos Alexander Louisos

The name of this formation is given after its shape. This formation looks like a head and shoulders. It consists of three consecutive rallies all based in the same support line named neckline. The two shoulders should be almost equal on height and head should be the highest. You may enter the market during retest of broken neckline. The most significant head and shoulders pattern is in weekly or monthly or daily charts. Head and shoulders on lower time frame are unreliable. Price target is the length between top of head and neckline.

A head and shoulders pattern in a daily chart.

In real market environment head and shoulders almost never appears as clean as the schematic. Trader must be careful not to misinterpret false head and a shoulder keeping in mind that neckline is seldom a perfect horizontal line although the significant point of the formation should be tangential to the neckline. The same applies to inverse head and shoulders

Inverse head and shoulder pattern.

Look at the above market examples carefully. Then check the schematic below. Practice a lot. In order to recognize head and shoulders in market environment your eye should be flexible enough.

Schematics of head and shoulders pattern

Watch the video below to visualize head and shoulders pattern

Flags signal the continuation of the previous trend in Forex. Unlike trend reversal patterns they consist of short consolidation periods. They look like a flag. They consist of a steep upward or downward trend (flagpole) and a brief consolidation period which tends to be sloped in the opposite direction of the trend or it is simply flat. Consolidation is bordered by support and resistance lines which are parallel or mildly converging to each other. These lines give the flag. When price breaks out of consolidation price target is the length of the flagpole measured from the point of breakout. The higher the time period of flag formation the more valid the signal. Beware of false breakouts from the flag.

Watch the videos below to visualize the use of flags in your Forex analysis

We will refer to the most common of candlesticks which you should use in order to identify trends.

DOJI
When the opening and closing price are identical we have a Doji candlestick. These candlesticks have no body (or almost no body) at all. They may mean the end of a trend. Market reverses but may not reverse immediately due to pressures to the opposite side that after a while lose their steam.

In order for Doji To have reversal significance:
 Doji should be drawn on daily chart
 It must occur on relative low or high of the market
 If it occurs in the midway of a trend the signal is neutral(rickshaw man candlestick)
 We should have confirmed signals of other indicators such trendline resistance etc

A Doji candlestick signaling reversal

HANGMAN
The signal is “sell at top”. It is called hangman because traders that haven’t seen it will be hanged that is caught to the violent reversal of the market. Signal is sell at top

A hangman candlestick

HAMMER
Same as hangman, but with black body. Occurs at the bottom of the trend and “hammers” all the traders that missed the market reversal. Signal is buy at the bottom.
EXTRA CAUTION: The same as dojis apply but you should also remember that the body of the candlestick is relatively small. (not bigger than one half or one third of the shadow).

A hammer candlestick

Let’s now look some combinations of candlesticks that give us extra signals.

KENUKI (TWEEZERS) CANDLESTICK
Here the two consecutive candlesticks have the same high or the same lows. In an upward trending market tweezers top occurs when highs are the same. The opposite happened in a tweezers bottom. EXTRA CAUTION: Wait and see interpretation changes to reversal when the pattern occurs after an extended move. The figures below shows tweezers candlestick in real market.

Great breakthroughs have surfaced with electronic trading and certain technical indicators are widely used. Nevertheless an affluent trader should be very skilled with trendline analysis in order to correctly predict Forex price movements. “Trend is my friend” is commonly said among traders. In this chapter you will learn how to correctly apply trendline analysis, one of the most important tools in your trading analysis.
Market moves following some patterns. Movement of the market is either up (upward market), down (downward market) or sideways (flat or non trending market). Always avoid flat markets because market is fighting to make a decision and trading signals are cancelled because of the market sentiment. Watch bellow a real market example of flat type of movements. Remember: the longer the flat market the greater the outbreak will be because when market decides the next direction then a new trend evolves and many traders follow this trend.

This figure shows a flat market

This figure displays a downtrend market environment

Always remember: the longer the time period the most accurate your analysis will be. Always look the longer time charts and transfer your analysis to shorter time period. This last tip is something that is only referred in this book and can only be acquired through experience in trading. For example in a daily chart market may look flat and non decisive and in 1 hour chart you may recognize a trading signal. In this occasion you should be very skeptical. Or worst, daily charts shows downward trend and 1 hour chart shows a trading signal to get long. This way you may be caught up in the wrong direction. Continue reading to learn exactly how to avoid these traps.

SUPPORT AND RESISTANCE LEVELS
Market prices move in zig zag fashion. Peaks represent the price where more people sell than buy so market couldn’t overcome this price. These prices are called resistance levels. The troughs on the other hand represent the price where buying pressure was higher than selling. These troughs are called support levels. Connecting consecutive peaks a trader has a resistance line and connecting resistance levels a trader has support line.
The first you have to learn is to draw support or resistance lines correctly and how to evaluate the significance of each line whether it is support or resistance.
When you realize that the market is upward trending you should draw a resistance line. To draw a resistance line pick up two peaks and draw the line connecting these peaks. See figure below. When a third contact point occurs then trendline is confirmed. Generally currency markets maintain its direction of trend.

A resistance line in an uptrend

Follow these rules to see whether your trendline is significant:
1) At least two peaks are connected. More connecting peaks confirm the trend line.
2) Most significant trend lines occur around the angle of 45 degrees. Trendline at sharper angles are indicating that trend is strong. Lower level trendlines indicate that trend is close to reversal.
3) Longer period trendlines should be given increased weight. Day charts trendlines are more significant that 1 hour charts.
4) Minor trendline penetrations (as long as 1%) should and may be disregarded. When connecting two peaks never mind about a peak penetrating a bit the trendline.
5) When you draw a trendline in candlestick or bar charts and connect two peaks or troughs and there is an intermediate shadow over the trendline this is not considered a break as long as the closing price is below the trendline See figure 2.13
The same apply for connecting two troughs although the trendline is named support. Support lines are drown in downtrend markets

Support line is drown is a downtrend market

The most important thing about support and resistance lines is that when a confirmed support or resistance is broken then broken trend line is retested and support line becomes resistance and resistance becomes support. Notice below how the support line when broken became resistance.

A broken resistance line is broken then retested and became support
This way you already have the first prediction utility of market movement. Watch carefully market when it reaches significant support of resistance levels.
Test a lot with trend line support and resistance and channel designing (see below for channels). These are one of the most important tools you will ever use so it is very crucial to know how to use them correctly.

In this tutorial you will learn how to implement fundamental analysis in your trading style. This is what some people called institutional Forex trading system.
You should learn the basic macroeconomic factors that influence global market. This is called fundamental analysis.

There is a great controversy between traders that use only technical analysis and traders that use only fundamental analysis. For me this is only academic. If there is information out there you should carefully watch it. Do not rely only in technicals or fundamentals. Use both. When you have a solid technical pattern that is supported by fundamentals then the chance that you are right is imminent. When technicals and fundamentals show in different directions then you should watch out. Do not be trigger happy with your Forex trading. Wait and see. Forex is not for prophets. You use scientific analysis in order to maximize the chance that you correctly recognize what the market has to give you. Analyze thoroughly, have a solid technical pattern, know the fundamental support of your analysis and you have a nice trading decision. Seize your risk tolerance and you will be a winner.

Every nation has it’s central bank which is responsible for the well being of the economy. Central banks watch some economic factors that affect the economy and adjust their economic policy accordingly. These factors are announced regularly and the exact time of the announcement is known in advance. These factors are the fundamental indicators of the economy. The most important central banks are FED of USA, ECB of European Union, BOJ of Japan and BOE of United Kingdom. There are many fundamental indicators but there are few of them that are called the “market movers”. They are called so because when they are announced they provide to the market the necessary steam to move. That happens because they have a great impact on economy and to traders’ positions also.

The most important thing you have to know about fundamental analysis is the market expectation of an indicator. Some analysts provide a probable number of the indicator to be announced. This has an impact to the market and traders are positioned accordingly. When the indicator is announced it affects the market only when it is much different that the market expected. That happens because every available to the public information is already taken into account. When the new information is announced then it has impact on the market only if it is different than expected.

Build up your plan. Know in advance what important fundamental indicators are to be announced the following week. Learn the expected number if it is available and try to forecast what will happen if it comes in better of worse figure. This is difficult for the beginners but after studying it will be easy.

There are many fundamental indicators. US indicators have the greatest impact on market. European Union’s indicators have less impact unless they are much different than expected. Watch out for central banks head officers speaking out and giving clues about inflation and interest rates. Today these are the two drivers of the economy. Words like vigilant or very vigilant about inflation from central bank’s heads have great impact on the currencies.
When the inflation is up central banks try to keep it low by leveraging interest rates. When interest rates are up then the currency is supported. Learn what economic indicators reflect the inflation and the decision of central bank about interest rates and you have an extra tool in your arsenal in order to trade.

Always watch out what the market already knows because all these information are reflected to the prices of the market. When fresh important information comes out learn it and position accordingly.

There is plentiful information about fundamental indicators in the internet. Visit Bloomberg economic calendar and Yahoo economic calendar. Use keywords like “Forex fundamentals”, or “Forex economic calendars” and you will find what you need. Study the meaning of these indicators and the relationships between them. Most Forex providers have a built in economic calendar with their trading platforms. The time on these economic calendars is frequently GMT. Learn your time zone and the difference between your zone and GMT and you will know the exact time the indicator will be announced. In these economic calendars market consensus, if available, is already reported. Study carefully the economic indicators.
The most important economic indicators (market shakers or movers) are:

Gross Domestic Product (GDP): The sum of all goods and services produced either by domestic or foreign companies. GDP indicates the pace at which a country’s economy is growing (or shrinking) and is considered the broadest indicator of economic output and growth.

Non-farm payrolls: A feature report released on Friday of the first week of each month that indicates the number of new jobs generated by the economy during the previous month and the percentage of workers seeking employment that remain unemployed. This is a heavy fundamental indicator that caused a lot of moves in forex market.

Industrial Production: Chain-weighted indicator measuring the change in production of the nation’s factories, mines and utilities. Usually associated with capacity utilization, a measure of industrial capacity and how many available resources among factories, utilities and mines are being used. The manufacturing sector accounts for one-quarter of the U.S. economy. The capacity utilization rate provides an estimate of how much factory capacity is in use.

Purchasing Managers Index (PMI): The Institute of Supply Management, formerly called the National Association of Purchasing Managers (NAPM), releases a monthly composite index of national manufacturing conditions, constructed from data on new orders, production, supplier delivery times, backlogs, inventories, prices, employment, export orders and import orders. It is divided into manufacturing and non-manufacturing sub-indices.

Producer Price Index (PPI): A measure of price changes in the manufacturing sector. PPI measures average changes in selling prices received by domestic producers in the manufacturing, mining, agriculture and electric utility industries for their output. PPI figures most often used for economic analysis are those for finished goods, intermediate goods and crude goods.

Consumer Price Index (CPI): A measure of the average price level paid by urban consumers (80% of population) for a fixed basket of goods and services. CPI reports price changes in more than 200 categories. It also includes various user fees and taxes directly associated with the prices of specific goods and services.

Durable Goods Orders: Measures new orders placed with domestic manufacturers for immediate and future delivery of factory hard goods. A durable good is defined as a good that lasts an extended period of time (more than three years) during which its services are extended.

Employment Cost Index (ECI): Payroll employment is a measure of the number of jobs in more than 500 industries in all states and 255 metropolitan areas. The employment estimates are based on a survey of larger businesses and counts the number of paid employees working part-time or full-time in the nation’s business and government establishments.

Retail Sales: A measure of the total receipts of retail stores from samples representing all sizes and kinds of business in retail trade throughout the nation. It is the timeliest indicator of broad consumer spending patterns and is adjusted for normal seasonal variation, holidays and trading-day differences. Retail sales include durable and nondurable merchandise sold and services and excise taxes incidental to the sale of merchandise. Excluded are sales taxes collected directly from the customer.

Housing Starts: Measures the number of residential units on which construction is begun each month. A start in construction is defined as the beginning of excavation of the foundation for the building and is comprised primarily of residential housing. Housing is very interest rate sensitive and is one of the first sectors to react to changes in interest rates. Significant reaction of start/permits to changing interest rates signals interest rates are nearing a trough or peak. To analyze, focus on the percentage change in levels from the previous month. The report is released around the middle of the following month. Existing home sales and new home sales are other significant reports that reflect how the housing market is doing, one of the most important aspects of the economy.

Analyze the basic support and resistance lines before the announcement, watch the fundamental announcement and enter the market after the announcement is made knowing the way it will move and the extend it will reach.

Watch the video below to visualize the use of this trading system.

You sure have heard of Fibonacci levels in Forex. You do not have to know why markets react on these Fibonacci levels nor what Fibonacci sequence is in order to apply it in your trading. If you wish to learn more about these matters type “Fibonacci sequence” in your favorite search engine.

Every charting package offers the option to automatically calculate Fibonacci levels.
These levels seem to act as support or resistance levels. Market reacts when approaching these levels and either bounces or stops for a while (consolidates) and breaks them if there is enough steam.

The most important Fibonacci retracements are 31,8%, 50% and 61,8%. In an uptrend you should use the starting point of the uptrend (the low) as the 100% point and the high point (where market starts reversing) as the 0.0% point. The opposite applies in a downtrend. (Look the figures below)

Market seems to bounce on these levels of Fibonacci retracements. But these retracements are not a Holy Grail. When market approaches a Fibonacci Level this does not automatically mean that it will reverse. Use Fibonacci retracements carefully and apply them with caution.

Below are the rules that you have to consider in order to validate a Fibonacci retracement.
 The longer the time value of the chart the more important the retracement as support or resistance.
 Fibonacci retracement is more valid when is at the same point with other resistance or support signals such as valid trendlines, candlestick reversal signals, 200 day simple moving average etc.
 Do not be trigger happy with your Fibonacci retracement. In real market environment market may test this retracement and have a false break (the closing value will be inside the Fibonacci retracement which validates the false break). Funds and smart money wait before minor trader’s stop losses just below retracement are triggered and then enter the market just below a major Fibonacci retracement. Think like a pro! Be calm like a cardio surgeon. Do not be hasty!

Fibonacci retracements in an uptrend

Fibonacci retracements in a downtrend

There are a lot of embedded Fibonacci Relationships in Forex market. The thorough study of these relationships may enhance a lot your trading profits. These patterns are price patterns which include special Fibonacci relationships. The proper use of these patterns, which are not widely known, could give you great trading potential.

One of the most important elements of trendline resistance is channels.
Channels are two parallel lines that restrict price action. In order to draw a channel you should first draw a support or resistance line.

To draw a support or resistance line select an obvious trend and connect two hi or low points of price action. Then draw a parallel to the first line that restricts price movements. That is the channel line. When price fails to reach support or resistance and is closer to channel line then we may see acceleration of the trend. When price fails to reach channel line then the ongoing trend may be weakening. Channel breakout means that the prices retest the broken channel line. After successfully retesting of channel lines we have a price target at least equal to the channel width.

Channel lines act as resistance and support. When broken they are usually retested. This test gives us a trade entry point. If channel lines are at the same level as a Fibonacci retracement level then price reversal is imminent because Fibonacci resistance gives extra support to price action. Look at the figure below.

Look how the broken channel line is retested and then price action reverses. Watch the price target or the broken channel line equal to the width of the channel. Also notice how the channel line with added Fibonacci 50% support line restricted price action. This trade setup may be used as a trading system. Feel free to use it and see profits come. This setup is one of the favorites for professional fund managers.

RSI is a popular oscillator. It measures relative changes between the higher and lower closing prices. Its author used 14 days but a 9 day period is most popular today.
RSI can be used as an overbought/oversold indicator. Levels of 70 or more (bearish signal) are overbought and 30 or less (bullish signal) are oversold.
RSI’s advantage unfolds using it as a divergence indicator. If the price is making new highs but RSI fails to surpass previous high this may be an indication of a forthcoming reversal. When the RSI then turns down and falls below it most recent trough it is said to have completed a “failure swing” which serves as a confirmation of the forthcoming reversal.

Illustration of RSI divergence

Illustration of RSI overbought levels

Illustrations of RSI oversold levels

Watch the video to visualize the use of RSI divergence.

Trendline analysis is the method of analysing the trend in forex charts. Trendline analysis is one of the most powerful analytic tools you will ever learn in Forex. To draw a trendline simply connect two consecutive tops of bottoms in a price swing. The line that is extended should limit the price movement as support or resistance. In an uptrend you draw a resistance line connecting two consecutive tops and in a downtrend you draw a support line connecting two consecutive bottoms. When a resistance or support line is broken it is usually retested. This gives an entry trade point. You could draw many trendlines in many time frames. The bigger the time frame the most reliable a trendline is.

The most reliable trendlines are in a daily time frame or more. The lower the time frame the more easy is for the price to break the trendline without much resistance. Always look at the higher time frame before trading. Look at the bigger picture recognize the trend and apply extra caution when you decide to enter the market counter the trend.

Watch the videos below to visualize the use of trendlines.