4What is Forex

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 Trading Education
 What is Forex

The foreign exchange or 'Forex Market' is the world's largest financial market. It is a non-stop cash market
where currencies of nations are traded off-exchange through brokers.

It is estimated that, on average, $3.6 trillion is traded each day in the world Forex markets. The vast majority
of Forex trading does not occur on any one centralized or organized exchange but through brokers on the
interbank currency market. The interbank currency market is a twenty four hour market that follows the sun
around the world. Opening in Australia and closing in the U.S. Whilst the market exists for organizations with
exchange risk, speculators also participate in the Forex markets in an effort to profit from their expectations
regarding shifts in exchange rates.

Who trades Forex

In the early part, the Forex market was used by institutional investors that transacted large amounts for
commercial and investment purposes. Today however, importers and exporters, international portfolio
managers, multinational corporations, speculators, day traders, long term holders and hedge funds all use the
Forex market to pay for goods and services, transact in financial assets and speculate or to reduce the risk of
currency movements by hedging their exposure or increasing their exposure through speculation.

In today's information superhighway the Forex market is no longer solely for the institutional investor. The
last 10 years have seen an increase in non-institutional traders accessing the Forex market and the benefits it
offers. Trading platforms such as MetaQuotes MetaTrader have been developed specifically for the private
investor and educational material has become more readily available. These have all added to the
attractiveness of the Forex market for the private investor.

The growth in the Forex market over the last decade has led to a number of advantages for the private
investor. Trading material to educate the trader has become far more readily available. Support services via
forums have become increasingly popular and in the event that you the private investor no longer wish to
trade the account yourself, you have professional money managers that will take-over via managed accounts.
In brief the main advantages for the private investor and the shorter term trader are:

24 hour trading, 5 days a week with 24 hour cover provided by the broker.

 HFM provides 24 hour cover for its clients

 Cover from Sunday night through to Friday night.

An enormous liquid market.

 $3.6 trillion traded daily

Market volatility.

 The Forex market is constantly moving providing volatility. It is this volatility that provides both long
and short term traders the opportunity to profit from the Forex market.

Products that are traded

 With over twenty products being offered there are always opportunities in the market.
The ability to go long or sell short.

 You are not restricted to long positions only. If you believe that a currency pair is going down you
have the ability to take a short position.

Low margin requirements.

 With the low margin requirement you are able to leverage your account up to 400.

A Wealth of Trading Resources & Forums

Understanding Forex Pricing

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 Trading Education
 Understanding Forex Pricing

The Spread
Forex prices are displayed in the form of a Bid/Ask spread. The spread is the difference between the Bid and
the Ask. The Bid and Ask serve as the prices that similar to other financial products. The Bid is the price at
which a trader is able to sell a currency pair. The Bid price or sell price of a currency pair is always the lower
price in a quote. The Ask, also sometimes referred to as the 'Offer', is the price at which traders are able to buy
a currency pair.

The difference between the Bid and Ask is called the "Spread" and is effectively the cost of trade. There are
typically no additional broker commissions involved in trading the Forex market, although we are witnessing
a move towards commission based trading due to market execution.

Pips
Market increments are measured in 'Percentage in Point' or Pips for short. A pip is the 4th digit in the value of
a currency pair (if you are trading from a 5 digit price feed); EURUSD 1.10872, GBPUSD 1.28653 etc. All
Forex currency pairs, except for the Japanese Yen, measure the pip from the 4th decimal place, while the JPY
and HUF currency pairs is on the 2nd decimal.

Price Quotes: What do they mean?

Reading a Forex quote may seem a bit confusing at first. However, it's really quite simple if you are able to
remember two things:

 The first currency listed is the base currency

 The value of the base currency is always 1 (one)

A quote of GBP at 1.28653 is to say that 1 Sterling Pound (GBP) = 1.28653 US Dollar (US). When the
Sterling Pound is the base unit and a currency pair's price increases, comparatively the Sterling Pound has
appreciated and the other currency in the pair (usually known as the quote currency) has weakened. Using the
above GBPUSD example as a reference, if the GBPUSD increases, from 1.28653 to 1.29653 (100 pips or
1000 points), the GBP is stronger because it will now buy more USD than before.

There are four currency pairs involving the US dollar in which the US dollar is not the base currency. Some
exceptions are the Australian dollar (AUD), the British Pound (GBP), the Euro (EUR), the New Zealand
dollar (NZD) etc. A quote on the GBPUSD of 1.28765 would mean that one British Pound is equal to 1.28765
US dollars. If the price of a currency pair increases the value of the base currency in comparison to the quote
currency thus increases. Conversely, if the price of a currency pair decreases, such is to say that the value of
the base currency in comparison to quote currency has weakened.

What Influences Price?

Forex markets and prices are mainly influenced by international trade and investment flows. It is also
influenced, but to a lesser extent, by the same factors that influence the equity and bond markets: economic
and political conditions, especially interest rates, inflation, and political stability, or as is often the case,
political instability. Though economic factors do have long term effects, it is often the immediate reaction that
causes daily price volatility, which makes Forex trading very attractive to intra-day traders.

Currency trading can offer investors another layer of diversification. Trading currencies can be viewed as a
means to protect against adverse movements in the equity and bond markets, movements that of course also
impact mutual funds. You should bear in mind that trading in the off-exchange foreign currency market is one
of the riskiest forms of trading and you should only invest a small portion of your risk capital in this market.

Understanding Currency Pairs

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 Understanding Currency Pairs

The Majors
Most currency transactions involve the 'Majors', consisting of the British Pound (GBP), Euro (EUR), Japanese
Yen (JPY), Swiss Franc (CHF) and the US Dollar (USD). Whilst these are the key five currencies, the
Canadian Dollar (CAD) and the Australian Dollar (AUD) are starting to be considered as additional 'major'
currencies.

Currencies in Pairs
The logic for currency pairing, is that if we had a single currency alone, we would have no means to measure
its relative value. By pairing two currencies against each other a fluctuating value can be established for one
versus the other.

Currency Pairs that do not include the US dollar are commonly referred to as Cross Currency Pairs. Cross
Currency trading can open a completely new aspect of the Forex market to speculators. Some cross currencies
move very slowly and trend very well. Other cross currency pairs move very quickly and are extremely
volatile with daily average movements exceeding 100 pips

The SWAP
When we execute a Forex transaction, we essentially borrow one currency and lend another. This borrowing
and lending is like any other banking transaction and therefore subject to interest rates. The interest is referred
to as the SWAP rate in the currency markets. The Swap is a credit or debit as a result of daily interest rates.
When traders hold positions overnight, they are either credited or debited interest based on the rates at the
time.

Introduction to Margin
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 Introduction to Margin

What is FX Margin?
The Forex market offers its participants the potential to trade on margin. The ability to trade on margin is one
of the attractive - but at the same time risky- features of forex trading. Essentially trading on margin allows
the forex trader to trade on borrowed funds. The degree to which the trader can borrow will depend on the
broker they are using and the leverage or gearing they offer.

In the Forex market the term margin is the amount of money required to open a leveraged position, or a
contract in the market.

Without leverage a trader placing a standard lot trade in the market would need to post the full contract value
of $100,000 in order to have his or her trade executed. Leverage allows a trader to place the same $100,000
contract for an amount of margin (determined by the set level of leverage). For example, an account at 1:100
leverage would require $1,000 of margin to place a $100,000 trade.

By offering leverage to the trader, the brokerage is essentially allowing the trader to open a contractual
position with considerably less initial capital outlay. Without leverage, a trader placing a standard lot trade in
the market would need to post the full contract value of $100,000. With a leverage of 1:100, the trader can in
fact open the position with an initial margin of USD $1,000.

Trading Forex on margin should be used wisely as it magnifies both your potential profits and potential losses.
Remember, the higher the leverage, the higher the risk.

Forex traders are subject to the margin rules set by their chosen brokers. In order to protect themselves and
their traders, brokers in the Forex market set margin requirements and levels at which traders are subject to
margin calls. A margin call would occur when a trader is utilizing too much of their available margin. Spreads
across too many losing trades, an over margined account can give a broker the right to close a trader's open
positions. Every trader should be clear on the parameters of their own account, i.e. at what level are they
subject to a margin call. Be sure to read the margin agreement in the account application when opening a live
account.

Traders should monitor margin balance on a regular basis and use stop-loss orders to limit downside risk.
However, due to the extreme volatility that can be found in the Forex market, stop-loss orders are not always
an effective measure in limited downside risk. There is still the possibility of losing all, or more, of your
original investment.

Leveraging
Every trader should know what level of risk they wish to take. Whilst the attraction of taking on a big position
to receive increased profits is quite clear, it should also be noted that a slight movement in the market will
result in a much higher loss in an overly leveraged account.

Traders always have the option of applying a lower level of leverage to an account or transaction. Doing so
may help manage risk, but bear in mind that a lower level of leverage. will mean that a larger margin deposit
will be required in order to control the same size contracts.

Working Example of Margin

To calculate the margin required to execute 1 mini lots of USD/CAD (10,000 USD) at 1:100 leverage in a
$500 mini account, simply divide the deal size by the leverage amount e.g. (10,000 / 100 = 100). Therefore,
$100 margin will be required to place this trade, leaving an additional $400 marginable balance in the trading
account.

Most Forex trading software platforms automatically calculate FX margin requirements and check available
funds before allowing a trader to enter a new position.

Free Margin and Used Margin

In the above example we had a $500 account. In order to open the position above we were required to have
initial margin of $100. This is referred to as used margin. The remaining $400 is known as the free margin.
All things being equal, the free margin is always available to trade upon.

The Trading Platforms used have become very sophisticated calculating these figures in real time so there is
no need to calculate them manually.

Contract Sizes
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 Trading Education
 Contract Sizes

Each standard lot traded in the Forex market is a 100,000 (of the base currency) contract. In other words,
when trading one lot in a standard account, a trader is essentially placing a $100,000 trade in the market.
Without leverage, many investors would not be able to afford such a transaction. Leverage of 1:100 would
allow a trader to place the same one lot ($100,000) trade by posting $1,000 in margin.

Many retail Forex brokers also offer the ability to trade mini lots. Mini lots essentially allow the trader to trade
one tenth of a standard lot. Trading in this size is often referred to as trading a mini lot. Mini lot contracts are
$10,000 (of the base currency). A trade of one mini lot would be a $10,000 trade. Trading with 1:100 leverage
would mean that $100 of margin would control a $10,000 contract.

Here at HFM, you can also trade on the Micro Account, which offers 1:1000 leverage and a minimum trade
size of 1 micro lot or $1,000.

Majors and Currency Pairs Revisited

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 Trading Education
 Majors and Currency Pairs Revisited

Currency Acronyms
Since foreign currencies are quoted in terms of value of one currency against another, a Forex currency pair
consists of an acronym for both currencies, separated by a slash '/'. The acronyms used were established in
1947 and we have listed a few below:

Currency Acronyms:

 GBP = Great British Pound

 EUR = Euro
 CHF = Confoederatio Helvetica Franc (Swiss Franc)
 USD = United States Dollar
 CAD = Canadian Dollar
 JPY = Japanese Yen
 AUD = Australian Dollar
 NZD = New Zealand Dollar

Currencies are always traded in pairs, for example EUR/USD, USD/JPY. Every position requires the buying
of one currency and selling of another. When someone says they are 'buying the EUR/USD', they are buying
Euros and selling Dollars.

There are many other Forex currency pairs available to trade, such as the Danish Krone, Mexican Peso, and
Russian Ruble. However, these currency pairs are generally traded less, and are not considered major
currencies.

Major Forex Currency Pairs

Some Forex currency pairs are traded more heavily than others. The currency pairs that have the most volume
consist of the 'majors'. It is widely agreed that the following 6 pairs are considered the majors:

For example, let's assume a Forex trader buys 1 standard lot of GBP/USD. The current exchange rate is
1.9615. Essentially this trader is buying 100,000 Pound in exchange for $196,150. Again, for example's sake,
assume the Forex market rate rose 15 PIPs to 1.9630 and the trader liquidates the position. The same 100,000
Pound is now worth $196,300, the trader realizing a $150 profit.

 EUR/USD
 GBP/USD
 USD/JPY
 USD/CHF
 USD/CAD
 AUD/USD

Nicknames are sometimes used for currency pairs. Here is a list of Forex currency pairs and commonly used
nicknames for each:

 GBP - Pound, Cable, or Sterling

 EUR - Euro
 CHF - Swissy, or Franc
 USD - Greenback
 CAD - Loonie
 AUD - Aussie
 NZD - Kiwi
 JPY - Yen

Understanding Risk
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  Trading Education
 Understanding Risk

Introduction
In order to trade successfully you must fully understand the risks involved. Each trader will approach the
market slightly differently, underlying the fact that there is no right or wrong way to trade the market. Instead
each trader must know the risk that they can comfortably take on.

Establishing the type of trader you are is very important. Are you a systematic trader or do you prefer being in
the market during periods of volatility. Are you looking to be constantly involved or are you looking to
smooth out the short term noise to capitalise on long term gains.

What is Risk?
Risk is 'The variability of returns from an investment or the chance that an investment's actual return will be
different than expected. This includes the possibility of losing some or all of the original investment. It is
usually measured using the historical returns or average returns for a specific investment. The greater the
variability of an investment (i.e. fluctuation in price or interest), the greater the risk.'

The volatility we see in daily prices, combined with the leverage available in the off-exchange retail foreign
currency (or Forex) market compared to other financial instruments- like stocks- is the reason why Forex is
categorized as highly risky. As investors are generally averse to risk, investments with greater inherent risk
must promise higher expected yields to warrant taking on additional risk. Others add that higher risk means a
greater opportunity for high returns or a higher potential for loss. However, a higher potential for return
doesn't always mean that it must have a higher degree of risk.

What risks do you face trading currencies?

There are two basic classifications of risk:

 Systematic Risk - also sometimes called market risk, aggregate risk, or undiversifiable risk, is the risk
associated with overall aggregate market returns. Systematic risk is a risk of security that cannot be
reduced through diversification.
 Unsystematic Risk - Sometimes referred to as 'specific risk'. An example is economic news that affects
a specific country or region. Diversification across multiple non-related currency pairs is the only way
to truly protect the portfolio from unsystematic risk.

Now that we've determined the two main classifications of risk let's take a closer look at more specific types
of risk.

Country Risk

This refers to the risk that a country won't be able to honor its financial commitments. When a country
defaults, it can harm the performance of all other financial instruments in that country as well as other
countries, it has relations with. Country risk applies to stocks, bonds, mutual funds, options, futures and most
importantly the currency that is issued within a particular country. This type of risk is most often seen in
emerging markets or countries that have a severe deficit.

Forex Risk

When investing in foreign currencies you must consider that the currency exchange rate fluctuations of closely
linked countries, can drastically move the price of the primary currency as well. For example, economic and
political events directly tied to the British Pound (GBP) have an effect on the Euro's trading (i.e. the
EUR/USD might have similar reaction as GBP/USD even though they are both separate currencies and are not
in the same currency pair). Knowing what countries effect the currency pairs you trade is vital to your long-
term success.

Interest Rate Risk

A rise or decline in interest rates during the term a trade is open, will affect the amount of interest you might
pay per day until the trade is closed. Open trades at rollover are assessed either an interest charge or interest
gain depending upon the direction of the open trade and the interest rate levels of the corresponding countries.
If you sell the currency with the higher interest rate you will be charged daily interest at the time of rollover
based on your broker's rollover/interest policy. For more specifics on understanding your interest risk, please
consult your broker for complete details of their policy including time of rollover, interest price (also called
swap) and account requirements to receive interest paid to your account.

Political/Economic Risk

This represents the risk that a country's economic or political events will cause immediate and drastic changes
in the currency prices associated with that country. Another example of this risk is government intervention
that we typically see with Japan and the need to maintain low currency prices to bolster their exports.

Market Risk

This is the most familiar of the risks we have discussed, and according to some, really the main risk to
consider. Market risk is the day to day fluctuations in a currency pair's price; also referred to as volatility.
Volatility is not so much a cause but an effect of certain market forces. Volatility is a measure of risk because
it refers to the behavior, or 'temperament', of your investment rather than the reason for this behavior. Because
market movement is the reason why people can make money, volatility is essential for returns, and the more
unstable the currency pair, the higher the chance it can go dramatically either way.

Technology Risk

This is a particular risk that many traders don't think much about. However, with the majority of individual
Forex traders executing trades online, we are all technology reliant. Are you protected against technology
failure? Do you have an alternative internet service? Do you have back-up computers that you could use if
your primary trading computer crashes?

As you can see, there are several types of risk that a smart investor should consider and pay careful attention
to in their trading.

The Risk Reward Balance

The risk/return balance could easily be called the iron stomach test. Deciding what amount of risk you can
take on while allowing yourself to walk away from your computer without worrying and to get sound rest at
night while you have long-term trades open is a trader's foremost important decision. The risk/return balance
is the balance a trader must decide on between the lowest possible risk for the highest possible return.
Remember to keep in mind that low levels of uncertainty (low risk) are associated with low potential returns
and high levels of uncertainty (high risk) are associated with high potential returns. Trading is all about risk
and probabilities. Understanding the inner functions of your Forex trading strategy(s) and proper placement of
entry and exit orders will assist in limiting your risk exposure while maximizing your profit potential.

What about how much of your account to place on each trade, or in other words the number of lots per trade?
How much of your account have you lost in a single trade? Was it too much to swallow? If so, you might not
have utilized proper risk management and over leveraged your trade. Establishing the right level of leverage
and corresponding margin requirements are a big part of managing risk.

There is Not One Correct Risk Level

Just as there is no single favorite food for everyone, there is no right risk level for everyone. Only you can
determine what level of risk is right for you. You need to find the right balance between the amount of risk
you think you are willing to take, and the amount of risk you can actually stomach. All too often investors
think they are willing to take risk, but when the worst happens, they find out they aren't.

You will likely lose money during this learning process, but if this loss helps you achieve this level of
understanding then you can financially afford the loss. It is important to identify in advance the amount you
are willing to 'pay' for this education. This financial and emotional tuition is a valuable trading resource and
something most experienced investors have paid through the process of trial and error.

In Conclusion
Different individuals will have different tolerances for risk. Tolerance is not static; it will change along with
your skills and knowledge. As you become more experienced, tolerance to risk may increase. Don't let this
fool you into not adhering to and thinking about proper money management practices.

Diversification
We all hear diversification is the best policy for an overall investment portfolio. This is also true amongst our
currency focused investments as well. To be well diversified, we should master the use of multiple trading
strategies and multiple currency pairs to equalize our overall return. Some trading strategies boast 80%
accuracy in specific market conditions. However, a full-time trader must utilize more than this single strategy
as many times there are long periods of time when the trading conditions are not met, such intervals can last
anywhere from a few days to several months. What good is a single strategy that can yield profits for only a
small portion of the year? Diversification may be the answer.

Diversifying your investment is not the most popular of investment topics. In fact many people believe
diversifying dilutes trading profits. But most investment professionals agree that while it does not guarantee
against a loss, diversification is the most important component to helping you reach your long-term financial
goals while minimizing your risk. But, remember that no matter how much diversification you do, it can never
reduce risk down to zero.

A Well Defined Portfolio

What do you need to have a well diversified portfolio? Three aspects to ensure the best diversification:

 Your portfolio should be spread among many different trading strategies

 Your trades should vary in risk and time held. Picking different trade opportunities with different
potential rates of return will help the gains offset losses of other trades. Keep in mind that this doesn't
mean blindly placing trades all across the spectrum!
 Your currency pairs should vary by region and crosses, minimizing unsystematic risk to small groups
of countries

Another question people always ask is how many currency pairs they should trade to reduce the risk of their
portfolio. One portfolio theory for stocks tells us that after 10-12 diversified stocks you are very close to
optimal diversification. However, in the currency market this doesn't mean buying 12 currency pairs will give
you optimal diversification, instead, it has been recommended to trade currencies of different regions and
importance levels (i.e. majors, crosses and more exotic currencies).

Approaches to Trading the Market

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 Approaches to Trading the Market
Technical analysis
Technical analysis is the method of evaluating traded products by analyzing statistics generated by market
activity, such as past prices and volume. Technical analysts believe that the price contains all known
information and therefore technical analysts do not attempt to measure a security's intrinsic value, but instead
use charts and other tools to identify patterns that can suggest future activity.

With wonderful sounding names such as Elliot Wave Theory, Candlestick Charts, Moving Average
Convergence Divergence or Bollinger Bands they all have the common aspect of presenting us with a visual
approach to market analysis.

In the section we introduce you to a handful of methods that are currently applied to the market.

Support and resistance

Support is the price level at which demand is thought to be strong enough to prevent prices from declining
further. Support levels are below the current price, though it is not uncommon for prices to dip below support
briefly signaling a false breakout. With a support level broken, the market will move lower indicating that the
sellers have overwhelmed the buyers. Once a support level has been broken, another support level will be
established at a lower level and the tendency is that support level that was breached, will now become a
resistance level.

Resistance is the price level at which demand is thought to be strong enough to prevent prices from rising
further. Resistance levels are usually above the current price. A clear break above the resistance level signals
that the buyers are in control. In this instance there are fewer sellers and the price tendency is to move further
up. Once a resistance level has been broken, another resistance level will be established at a higher level and
as with the support level, when the resistance level is breached, this will now become the new support level.

Moving Averages

Moving averages are very popular tools used by technical traders to measure momentum. They are usually the
first tool that technical analysts are introduced to as they are simple to apply and are building blocks to more
complicated moving average theories. The main purpose of these averages is to smooth price data so traders
can be in a better position to gauge the likelihood that a current trend will continue. Moving averages are
commonly used to predict areas of support and resistance and are also used in conjunction with other
indicators to help give more accurate entry and exit signals. There are different types of averages that vary in
popularity but, regardless of how they are calculated, they are all interpreted in the same manner

We have simple moving averages, weighted moving averages and exponential moving averages.

A very simple theory is the moving average crossover. This is where you combine two moving averages with
differing time frames. Where they cross will indicate the entry and exit points to a trader.

Fundamental Analysis
Fundamental analysis is the study of the core underlying elements that influence and impact on the underlying
price of a security or a country's economic well being. This method of study attempts to predict price action
and market trends by analyzing economic indicators, government policy and other factors. Whilst fundamental
analysis may help you forecast an underlying real value for a stock or share, when it comes to fundamental
analysis for the foreign exchange markets, the analysis is carried out to forecast economic conditions and
underlying direction. Therefore for the currency markets, fundamental analysis is not an exact science to
predict price. For example, you might get a clear understanding of the health an economy by studying an
economist's forecast of an upcoming economic release but that will not give you entry and exit points, simply
price direction.
Fundamental analysis and the resulting figures will involve interest rates, central bank policy, political figures
or events, employment reports; whether seasonal or unemployment figures, gross domestic product (GDP),
etc. These economic indicators are snippets of financial and economic data published by various agencies of
the government or private sectors for each country. These statistics, which are made public on a regularly
scheduled basis, help traders monitor the health of the economy.

Fundamental analysts broadly label economic data and news releases into three categories. The release is
either there to reflect the current state of the economy which is referred to as a coincident indicator, is
alternatively known as a leading indicator as the release will look to predict future conditions or is finally
known as a lagging indicator.

Some Basic Trading Concepts and Additional

Strategies
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 Trading Education
 Some Basic Trading Concepts and Additional Strategies

Trading Breakouts in Forex

Many traders spend a lot of time looking for potential breakout situations when trading the forex markets.
This is because when these breakouts occur, they very often yield a lot of points. Here we discuss three simple
trading strategies designed to catch these breakouts.

The first method makes use of Bollinger Bands. This technical indicator is very useful in displaying areas of
support and resistance, which is marked by the two outer lines of the Bollinger Band range. Therefore when
one of these outer limits is breached, you very often get a breakout, in the same direction.

So to trade this breakout, you ideally want to wait for a period where the outer lines of the Bollinger Bands
indicator have narrowed because this indicates a period of tight consolidation. This means that a breakout, will
usually have momentum when it does break out of this tight range. Then when the price does break through
one of the outer lines you can either jump in straight away or wait for a pullback to a short-term Exponential
Moving Average, for example, for a better entry point.

The second method you can use involves using multiple Exponential Moving Averages, and in particular the
5, 20 and 50 period EMA's. You may also like to add the 100 or 200 period EMA to your chart as well.

Then you simply wait until all of these indicators have flattened out and are trading very close to each other,
along with the price. Then you wait for the shorter term EMA, ie the EMA (5) to break out strongly from this
narrow range, before taking a position in the same direction as the breakout, and close to the EMA (5) for
maximum value.

Finally you can use a price-based system to trade breakouts. There are various ways you can do this. The
simplest systems involve waiting until the price has started trading in a very narrow range, and then taking a
position when the price breaks out of this range.

Another common system involves noting the high and low point from the previous day and then waiting for
the price to break out of this range the following day. Indeed this can be a very effective way of trading the
major currency pairs.

So overall there are a few ways in which you can trade forex breakouts. Of course like all trading methods
none of these methods, work 100% of the time, and you will need to adopt a good stop loss strategy.

Pivot Points
In recent years pivot points have become a very well known and widely used technical analysis tool. To
understand pivot point levels you need to understand the ideas behind support and resistance. Support and
resistance levels give traders a visual gauge of pressure points within the market, specifically at certain price
levels.

Summary of Support and Resistance:

In short, support levels are considered levels at which price decline is continually rejected. Conversely,
resistance levels are considered levels at which price increase is continually rejected. Traders looking at a
support level and resistance level in conjunction with one another are essentially examining what is referred to
as a channel. It is very common to see price trends within the bounds of trading channels; meaning that for
hours, or perhaps days at a time, a currency may trade within the bounds of support and resistance levels.
Many times throughout a trend the price may test either the support or resistance level, but ultimately if the
price is to remain within the channel, the support and resistance levels will be tested, but not pushed through

Just the opposite of what is explained above, if a support or resistance level is tested for hours or days on end
without a breakout, and finally the price does push through the bounds of this channel, it may be considered a
strong indication that the price will take on an entirely new direction / trend.

Using Support and Resistance to Trade:

Traders watching support and resistance levels are generally looking for one of the following trading
opportunities:

A chance to buy after the support level has been pushed, but not broken through several times. The trader's
entry would likely be at the end of a strong bullish candle that began with a touch of the support level.

The alternative scenario is a chance to buy after a previously tested resistance level is finally pushed through
with a strong bullish candle. In other words, buyers in the market have tried numerous times to push prices
above a resistance level, yet have failed. Finally prices breakthrough in the form of a strong up-candle,
indicating that perhaps, buyers will finally have their way and push the price higher.

A chance to sell after a previously tested support level is finally pushed through with a strong bearish candle.
In other words, sellers in the market have tried numerous times to push prices below the support level, yet
have failed. Finally prices breakthrough in the form of a strong down-candle, indicating that perhaps, sellers
will finally have their way and push the price lower.

Understanding the Pivot Point Difference:

There are multiple scenarios in which a trader might utilize support and resistance levels as a means to
identify key entry and exit points. Pivot points are simply a series of support and resistance levels, with the
inclusion of a median price level. Standard pivot points include 5 levels (levels that are represented as distinct
lines on your charts). The median level, or middle line of the 5, is called the 'pivot point'. The other 4 levels
are found above and below the pivot point in the form of 2 support lines (S1 and S2) and 2 resistance lines
(R1 and R2).

Using the previous trading session's open, high, low and close in order to calculate these pivot levels gives
traders an added advantage beyond simply looking at one support level and one resistance level. Through the
use of pivot points, traders are able to gauge support and resistance levels on a scale in relation to an average
price range (the pivot point or line itself) for the trading session.

Always bear in mind, the crucial importance of market sentiment; mathematically pivot points may or may not
correlate with future price movement, but because pivot points are now very widely used by technical traders -
their potential to impact price direction is certainly worth considering. Said another way, if millions of
technical traders are all watching the same support and resistance levels and buying and selling in accordance
with those levels; market sentiment can quickly become market reality. Pivot points may be as effective as
they are at times simply because so many traders are basing trades on the same levels.

Calculating Pivot Points:

Key figures are derived from the open, high, low and closing price of the previous day's trading session. These
figures should be based on trading days or sessions considered started and ended at 0:00 GMT (Greenwich
Mean Time). GMT is used because of the global aspect of currency trading; with various markets (Australia,
Asia, Europe, US) constantly opening and closing globally - a 24-hour-a-day market is created. GMT is used
to mark the start and end of trading days because it is considered a globally central time.

These calculations are shown for your reference. Most pivot products will draw these levels on your chart for
you.

Pivot Point (PP): High + Low + Close / 3

The calculations for support and resistance levels are based on the number calculated for the pivot point itself
and are as follows:

First Support (S1): (2 x PP) - High

Second Support (S2): PP - (High - Low)

First Resistance (R1): (2 x PP) - Low

Second Resistance (R2): PP + (High - Low)

As is the case with many technical analysis methods, strategies, and indicators - pivot points are far from an
exact science. Pivot points may be completely irrelevant technically when trading right after a major
fundamental news announcement. Traders should also consider other technical indicators, the overall trend of
the currency pair, and the time frame of the chart they are analyzing pivots on in correlation with how long
they plan to remain in an open position.

When to Use Pivot Points

Prices tend to volley between two pivot lines. If a price is right at S1 it is most likely to move back toward PP,
only a fairly strong bearish candle would indicate a further break and move towards S2. Conversely, if a price
is at R1 it is most like to move back towards PP and only a strong bullish candle would indicate a move
towards R2. When prices are trading at the pivot line itself, look for a strong series of bullish or bearish
candles to indicate a move back towards R1 or S1.

Pivot points seem to work the best in moderately sideways markets, or on a currency pair that is not
experiencing significantly strong bullish or bearish trend over the previous few days.

Prices within pivot points can move two or three lines at a time during major news announcements, or what is
more likely; pivot points may be completely irrelevant during news announcements.

Fibonacci
Fibonacci retracement is a very popular tool among technical traders and is based on the key numbers
identified by mathematician Leonardo Fibonacci in the thirteenth century. However, Fibonacci's sequence of
numbers is not as important as the mathematical relationships, expressed as ratios, between the numbers in the
series. In technical analysis, Fibonacci retracement is created by taking two extreme points (usually a major
peak and trough) on a stock chart and dividing the vertical distance by the key Fibonacci ratios of 23.6%,
38.2%, 50%, 61.8% and 100%. Once these levels are identified, horizontal lines are drawn and used to
identify possible support and resistance levels. Before we can understand why these ratios were chosen, we
need to have a better understanding of the Fibonacci number series.

The Fibonacci sequence of numbers is as follows: 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, etc. Each term in
this sequence is simply the sum of the two preceding terms and sequence continues infinitely. One of the
remarkable characteristics of this numerical sequence is that each number is approximately 1.618 times
greater than the preceding number. This common relationship between every number in the series is the
foundation of the common ratios used in retracement studies.

The key Fibonacci ratio of 61.8% - also referred to as 'the golden ratio' or 'the golden mean' - is found by
dividing one number in the series by the number that follows it. For example: 8/13 = 0.6153, and 55/89 =
0.6179.

The 38.2% ratio is found by dividing one number in the series by the number that is found two places to the
right. For example: 55/144 = 0.3819.

The 23.6% ratio is found by dividing one number in the series by the number that is three places to the right.
For example: 8/34 = 0.2352.

For reasons that are unclear, these ratios seem to play an important role in the stock market, just as they do in
nature, and can be used to determine critical points that cause an asset's price to reverse. The direction of the
prior trend is likely to continue once the price of the asset has retraced to one of the ratios listed above.

In addition to the ratios described above, many traders also like using the 50% and 78.6% levels. The 50%
retracement level is not really a Fibonacci ratio, but it is used because of the overwhelming tendency for an
asset to continue in a certain direction once it completes a 50% retracement.

Advice on Using Trading Strategies

There are no strategies that can guarantee you positive returns in every trading scenario. Furthermore, not
every trader wishes to use the same strategy in the same way and may have their own set of constraints in
terms of time that they wish to be in the market, size of positions they can hold etc.

Adopting a certain trading strategy will ultimately depend on the trader and the trader should research the
strategy for themselves before implementing it. With this in mind, we have provided a list of common
strategies for you to research at your leisure.