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Support and Resistance

Support and Resistance

Support and resistance is among the most broadly used concepts in buying and selling. Oddly enough, everybody appears to obtain their own idea how you need to measure support and resistance.

Let us have a look in the fundamentals first.

support & resistance basics

Consider the diagram above. As you can tell, this zigzag pattern is making its in place (bull market). Once the market moves up after which pulls back, the greatest point arrived at before it drawn back has become resistance.

Because the market continues up again, the cheapest point arrived at before it began back has become support. In by doing this resistance and support are constantly created because the market oscillates with time. Overturn holds true for that downtrend.

Plotting Support and Resistance

One factor to keep in mind is the fact that support and resistance levels aren’t exact amounts.

Frequently occasions you will notice a support or level of resistance that seems damaged, but right after discover the market only agreed to be testing it. With candlestick charts, these “tests” of support and resistance are often symbolized through the candlestick shadows.

support holding

Notice the way the shadows from the candle lights examined the 1.4700 support level. At individuals occasions it appeared such as the market was “breaking” support. In hindsight we are able to observe that the marketplace was basically testing that much cla.

So how can we truly determine if support and resistance was damaged?

There’s no definite response to this. Some reason that a support or level of resistance is damaged when the market can really close past that much cla. However, you will notice that this isn’t always the situation.

Let us take our same example previously mentioned and find out what went down once the cost really closed beyond the 1.4700 support level.

support holds at 1.4700

Within this situation, cost had closed underneath the 1.4700 support level but wound up rising support above it.

Should you have had thought this would be a real breakout and offered this pair, you would have been seriously hurtin’!

Searching in the chart now, you are able to aesthetically see and are available towards the conclusion the support wasn’t really damaged it’s still greatly intact and today even more powerful.

That will help you remove these false outbreaks, you need to think about support and resistance much more of as “zones” instead of concrete amounts.

One method to assist you in finding these zones would be to plot support and resistance on the line chart as opposed to a candlestick chart. This is because line charts only demonstrate the closing cost while candlesticks add some extreme levels and lows towards the picture.

These levels and lows could be misleading because frequently occasions they’re only the “knee-jerk” responses from the market. It’s like if someone else does something really strange, however when requested about this, she or he simply replies, “Sorry, it is simply a reflex.”

When plotting support and resistance, you wouldn’t want the reflexes from the market. You simply want to plot its intentional actions.

Searching in the line chart, you need to plot your support and resistance lines around areas where one can begin to see the cost developing several peaks or valleys.

support resistance zones

Other interesting information about support and resistance:

Once the cost goes through resistance, that resistance may potentially become support.

The greater frequently cost tests an amount of resistance or support having to break it, the more powerful the region of resistance or support is.

Whenever a support or level of resistance breaks, the effectiveness of the follow-through move is dependent on how strongly the damaged support or resistance had been holding.

Example of Support resistance

After some practice, you’ll have the ability to place potential support and resistance areas easily. Within the next lesson, we’ll train you the way to trade diagonal support and resistance lines, also known as trend lines.

Freshest Forex Lingo

Forex Lingo – Only the Freshest Terms to Impress your Date

In every skill that you’ll learn, you also need to learn the language or lingo to be able to have a smoother communication. As a newbie, it is very imperative for you to learn and understand certain terms like the back of your hand before you go into trading forex. You have already learned some of these terms, but it would be a good idea to review & freshen up your minds and memories before dealing anything about forex trading.

Forex Lingo

Major and Minor Currencies in Forex

Among the most traded major currencies in forex also known as “majors” are USD, EUR, JPY, GBP, CHF, CAD, NZD, and AUD. They are considered to be the most liquid and sexiest currencies.  All of the other currencies in forex are referred to as minor currencies.

Base Currency in Forex

The first currency in any currency pair is called the base currency. The currency quote presents how much the base currency is worth as measured versus the second currency. Let’s take this as an example, if the USD/CHF rate equals 1.6350, then one USD is worth CHF 1.6350.

When we talk about the forex market, normally, the U.S. dollar is considered the “base” currency for quotes. This means that the quotes are expressed as a unit of 1 USD per the other currency quoted in the pair. British pound, the euro, and the Australian and New Zealand dollar are among the primary exceptions to this rule.

Quote Currency in Forex

The second currency in any currency pair is called the quote currency. This is also known as the pip currency. Remember that any unrealized profit or loss is expressed in this currency.

Pip in Forex

The smallest unit of price for any currency is called a pip. Nearly all currency pairs consist of 5 significant digits and most pairs have the decimal point immediately after the first digit, that is, EUR/USD equals 1.2538. In this situation, a single pip is equal to the smallest change in the fourth decimal place – that is, 0.0001. You have to remember that if the quote currency in any pair is USD, then one pip is always equal to 1/100 of a cent.

Pairs like  the Japanese yen where a pip equals 0.01 are considered to be the notable exceptions .

Pipette in Forex

Pip is a term used to describe one-tenth of a pip. In this instance, fractional pips, or pipettes, for added precision in quoting rates are being quoted by some brokers. For example, if EUR/USD moved from 1.32156 to 1.32158, it moved 2 pipettes.

Bid Price in Forex

If the market is prepared to buy a specific currency pair in the forex market, then they need to have a bid price.  At this price, the base currency can be sold by the trader. You can see it on the left side of the quotation.

Let’s take this as an example, in the quote GBP/USD 1.8812/15, 1.8812 is the the bid price. This means one British pound can be sold for 1.8812 U.S. dollars.

Ask/Offer Price in Forex

If the market is prepared to sell a specific currency pair in the forex market, then they need to have an ask or offer price. At this price, the base currency can be bought. You can see it on the right side of the quotation.

For example, in the quote EUR/USD 1.2812/15, 1.2815 is the the ask price. This means that one euro can be bought for 1.2815 U.S. dollars. The ask price is also called the offer price.

Bid/Ask Spread in Forex

The difference between the bid and ask price is called the spread. The first few digits of an exchange rate is a dealer expression called “big figure quote” . These digits are often omitted in dealer quotes. Let’s take this as an example, the USD/JPY rate might be 118.30/118.34, without the first three digits  it could be quoted as “30/34.” In this example, USD/JPY has a spread of 4-pip.

Quote Convention in Forex

Exchange rates in the forex market are expressed using the following format:
Base currency / Quote currency = Bid / Ask

Transaction Cost in Forex

The transaction cost for a round-turn trade is also considered as the the critical characteristic of the bid/ask spread . Round-turn means a buy (or sell) trade and an offsetting sell (or buy) trade of the same size in the same currency pair. Let’s take this as an example, in the case of the EUR/USD rate of 1.2812/15, the transaction cost is 3 pips.

The formula for computing the cost of transaction  is:

Transaction cost (spread) = Ask Price – Bid Price

Cross Currency in Forex

When neither currency is the U.S. dollar, it is called a cross currency. These pairs may show unpredictable changes in price behavior since the trader has, in effect, initiated 2 USD trades. Let’s take this as an example, initiating a long (buy) EUR/GBP is equal to buying a EUR/USD currency pair and selling GBP/USD. Cross currency pairs usually carry a transaction cost that is higher.

Margin in Forex

You must deposit a minimum amount with a broker to be able to open a a new margin account . This minimum deposit varies from one broker to another broker and can be as low as $100 to as high as $100,000.

Each time you make a new trade, a definite percentage of the account balance in the margin account will be set aside as the initial margin requirement for the new trade based upon the underlying currency pair, its current price, and the number of units (or lots) traded. The base currency always refers to the lots size.

Let’s take this as an example, if you are going to open a mini account which provides a 200:1 leverage or 0.5% margin. Mini accounts means trading mini lots as well. Let’s say one mini lot is equivalent to $10,000. If you decide to open a one mini-lot, then instead of providing the full $10,000, you would only need $50 ($10,000 x 0.5% = $50).

Leverage in Forex

The ratio of the amount capital used in a transaction to the required security margin is called the Leverage. It is considered to be a powerful process since it has the ability to control large amounts of dollars of a security with a relatively smaller amount of capital.  Leveraging varies significantly from one broker to another broker, ranging from 2:1 to 500:1.

These are just among the most common forex lingo. With that, I think it’s time to  learn the different types of trade orders?

Proceed to the Next Lesson: Different Types of Trade Orders

Go Back to the Previous Lesson: Trading Lots, Leverage, and Profit & Loss

Trading Lots, Leverage, and Profit & Loss

Trading Lots, Leverage, and Profit and Loss

Before now, spot forex was traded in specific amounts called lots. 100,000 is a standard size for a lot. In line with this, mini, micro, and nano lot sizes are considered to be 10,000, 1,000, and 100 units respectively.

Trading Lots

Pips is a term used to measure currencies in forex trading. It is also considered to be the smallest increment of that currency in trading forex. To be successful in taking these tiny increments, you as a market player needs to trade huge amounts of a particular currency in order to see any significant profit or loss.

Let’s make this as an example. We will be using a standard lot size which is 100, 000 unit. We will now recompute some examples to see its effects on pip value when trading.

  • USD/JPY at an exchange rate of 119.80 (.01 / 119.80) x 100,000 = $8.34 per pip
  • USD/CHF at an exchange rate of 1.4555 (.0001 / 1.4555) x 100,000 = $6.87 per pip

In cases where the U.S. dollar is not quoted first, the formula is slightly different.

  1. EUR/USD at an exchange rate of 1.1930 (.0001 / 1.1930) X 100,000 = 8.38 x 1.1930 = $9.99734 rounded up will be $10 per pip
  2. GBP/USD at an exchange rate or 1.8040 (.0001 / 1.8040) x 100,000 = 5.54 x 1.8040 = 9.99416 rounded up will be $10 per pip.

Brokers are different so as their ways of computing and recomputing pip value in relation to the lot size in trading. However, it needs to be made clear that whichever way they do it, they’ll be able to present you what the pip value is for the currency you are trading is a that specific time. Remember that when the market moves, pip value also moves depending on the current currency you are trading.

What is Leverage

I know you are wondering how come a small investor like yourself can trade such huge amounts of money.  Well, think of your broker who will serve as a transition and will front you $100,000  to buy currencies. When it comes to banks, a bank will ask you to give it $1,000 as a good faith deposit, which it will hold for you but necessarily keep. Doe it sound so good to be true? Well, that’s how trading forex using leverage works.

In line with this, the amount of leverage you will use in trading will depend on your broker and what you feel comfortable with.

Basically, a trade deposit is required by many brokers when trading. This trade deposit is known as ” account margin” or “initial margin”. You can start trading once you have deposited your money. Along with this, brokers will also specify how much position (lot) is required when trading.

Let say for example, if 100:1 (or 1% of position required) is the the allowed leverage is, and you wanted a position worth $100,000 to trade , but you only have $5,000 in your account. No worries! Your broker would set aside $1,000 as down payment, or the “margin,” and let you “borrow” the rest. However, you need to remember that any losses or gains will be deducted or added to the remaining cash balance in your account.

Also, you have to bear in your mind that the minimum security (margin) for each lot differs from one broker to broker. If you’ll look at the example above, a one percent margin was required by the broker. This means that for every $100,000 traded, the deposit on the position that the broker wants is $1,000.

How do I calculate profit and loss when trading forex?

After learning how to calculate leverage and pip value, it is now time to learn and understand how you compute your profit or loss.

In this example, we are going to buy US dollars and sell Swiss Francs. Let the trading begin!

1. The rate you are quoted is 1.4525 / 1.4530. Because you are buying U.S. dollars you will be working on the “ask”or sell price of 1.4530.

2. So you buy 1 standard lot, that is 100,000 units at 1.4530.

3. After a few hours, the price moves to 1.4550 and you decide to close your trade.

4. The new quote for USD/CHF is 1.4550 / 1.4555. Since you’re closing your trade and you initially bought to enter the trade, you now sell in order to close the trade so you must take the “bid” or buy price of 1.4550. The price traders are prepared to buy at.

5. The difference between 1.4530 and 1.4550 is .0020 or 20 pips.

6. Using our formula from before, we now have (.0001/1.4550) x 100,000 = $6.87 per pip x 20 pips = $137.40

One thing you need to remember when entering or exiting in  trading forex, you are subject to the spread in the quote of bid or offer. Therefore, if you plan to buy a currency, you will use the offer or ask price. On the other hand, when you sell, you will use the price of the bid.

In our next lesson, you will learn some of the freshest and famous forex lingos in trading.

Proceed to the next lesson: Freshest Forex Lingo in Trading Forex

Back to the Previous lesson: Pips & Pippetes