Forex Patterns, Charts and Trends

The trend is your friend has got be one of the most famous phrases in stock trading and the Forex market is no different and it relates to forex patterns and probabilities.

Forex Pips, Forex Charts And Forex Trends

  • Forex Trends

The Forex markets have been studied for over 100 years and over that time trends have repeated themselves and patterns have become consistent and fairly reliable. It is very important to understand that prices move in trends and those traders who trade with the trend are more successful. Finding the trend will help you become more aware of the market direction and is a fundamental element to the forex patterns and probabilities you will use to formul

ate your trading strategies as a professional trader in currency trading.

Always find the trend and trade with it, not against it. This applies even if it takes days or weeks for a new trend to become obvious.

Looking at the charts and drawing trend lines is the most common form of technical analysis. A trend is usually when 3 or more lows line up. A market that is trending up is making a series of higher highs and higher lows and you can draw a line connecting the bottoms roughly, this is a support line.

The market is trending down when it is making lower lows and lower highs, if you draw a line connecting the tops you have drawn a resistance line, which will be shown in the forex patterns and probabilities book.

  • Forex Time Based Charts

Traders have different times they wish to trade in, some are comfortable using 1 and 5 minute time frame charts others prefer 15 min or 1 hour charts placing 4 to 10 trades daily and others prefer to place a trade and let it run for several days, weeks or longer. This is a personal decision. There is not one time period that makes more money than the others.

When reading the charts it is a good idea to look at 3 different time frames. The reason for this is the largest time gives a general over view of what is happening, the direction of the market, then zooming in to the next level shows what is going on more recently and when you should enter the market and the third and closest time frame is the one where you would actually monitor your trade.

The 3 different time frames can be any combination depending on your chosen trading time and this will affect your forex patterns and probabilities.

A daily chart might show a downward trend but the 5 minute charts could show an upward trend and the 1 minute charts show a downward trend, these charts would be of no interest to anyone leaving a trade to run for weeks. Again there are software programs available to help identify trends and placement of orders which will be discussed in forex patterns and probabilities.

Having some knowledge I believe is useful even with automated programs.

Forex Patterns and Probabilities: Time Based Charts

There are 3 main types of charts, the candlestick chart, bar charts and line charts.

They all come in many different time periods, 1 minute, 5 minutes,10 minutes,30 minutes, 1 hour, 2 hours, 4 hours, 1 day, 1 week and 1 month plus others.

With the bar chart each bar represents one period of time (as above) and on each bar there are 4 marks. The highest point reached in that time frame, the lowest point, the opening point and the closing point. Those 4 points tell you what has happened in the market for that time.

The candlestick charts give exactly the same information with the candlestick body changing colour on a high (bullish) and changing back on a low (bearish) market

The line charts simply chart the direction of the market moving up, down or sideways. You usually have a choice of what sort of chart you want from the broker of your choice.
Trade in the time frame you feel comfortable with. There is no right or wrong time frame.

Forex Pips

This is the smallest increment the value of the currency can change by. The pricing of the currency is always showing the value of one currency against another. For example EUR: USD 1.4443 ( 1 Euro is worth USD 1.4443). The last number shown on a price (for example the 3 in the following price 1.4443 ) is known as a pip. If the value of the Euro went up 20 pips it would be shown as EUR : USD 1.4463. All value changes are referred to as pip changes.

The main objective of trading is to gain as many profitable pips as possible. The more dollars you are trading and the higher your leverage the higher the value of the pip is worth to you. Trading a full lot of 100,000 with leverage the pip value is around $10 however with a mini account you are trading 1/10th of the size therefore a pip is worth $1.00.

Traders have different goals depending on their   forex patterns and probabilities short term traders might look at gains of 20 pips per trade, for a longer term traders will be looking at 100 plus pips.

 

Forex Pivot Points

When you first learn forex trading there are many technical tools to master, but one of the simplest to use is the pivot point.

Pivot points work with support and resistance levels to give you an indication of entry and exit points for your foreign exchange trades. Here is a link to some forex fundamentalswithin the Great Forex World web site.

The first thing to do when you start to learn forex and decided when you plan to use this forex trading method is to identify whether the currency pair is currently in an upward or downward trend. This would mean you looking at patterns over several days or weeks. Of course, if you regularly trade the pair, then you probably already know which direction the trend is currently headed.

Once you know the trend, you will generally trade in that direction and that is a fundamental and should be a learn forex mantra, like “the trend is your friend”.

So as long as the pivots indicate a long or buy order  during an upward trend or a short or sell order during a downward trend, you can trade. But if they indicate the opposite, it is best to leave it well alone as it is extremely unpredictable at this stage and there would be too much risk of the trade going in the wrong direction in that scenario.

Learn Forex – Pivots

Pivot points are calculated from the last day’s trading high, low and closing prices. Most traders use the New York session closing time, but that would be a matter of your own preference. Whatever you choose to do you just must be consistent. So the pivot point is yesterday’s high plus low plus close, divided by 3. A very simple calculation, but it will be done automatically for you in your charting software.

Then the support and resistance lines are calculated in relation to that pivot point. You will see two of each on your chart. The first support line is twice the pivot point minus yesterday’s high. The second support level is the pivot point minus the high minus the low. Resistance lines are the equivalent in the other direction. Again, these calculations will be done for you.

You would then use that pivot point and levels for the whole of the current day’s trading, and recalculate tomorrow on the basis of today’s high, low and close. Support and resistance is the bedrock of any system to learn forex and this was endorsed by none other than David Jones of IG Index who has written a great book on trading forex, click here for more information.

Pivot points and their associated support and resistance lines are used in two main ways by forex traders. If you are trading within the range, you would enter a buy order at or near to the support level, and a sell order at or near to the resistance level. The levels can also be used with other indicators to identify a breakout.

Of course, when you begin to learn forex, as with any system, you should check your signal against at least one other indicator before trading. The MACD (Moving Average Convergence Divergence) crossover or stochastic overbought/oversold levels can be very valuable here. It is also a good idea to check several different time frames to ensure that the direction of the trend is clear.

The basis of pivot point trading is the assumption that prices will tend to fluctuate between the support and resistance levels, bearing in mind the effect of the current trend. The simplicity of this method can be very attractive when you are starting out to learn forex, and it can also be very effective. The above terms may take a while to sink in when you start to learn forex, but when they do they will become second nature to you. For more news and articles of an educational nature log in to the learn forex category.

Forex Patterns and Probabilities

As the common saying goes, when trading you have to buy low and sell high. However, you can also try to sell high and buy low. That may sound peculiar, but in currency trading when you sell a currency pair, you are essentially buying the second currency in the pair and selling the first currency. In this case, you are buying the quote currency and selling the base currency.

Short selling also occurs in the stock market as well as the commodity markets. A short seller “borrows” a stock from its broker and sells it. The idea is to be able to buy back the shares at a later point in time at a lower price. Profit is made on the difference between the buy price and the original sell price. We will now explore how profit is calculated in the Forex market and what risks you should take into account with your trading.

Lot Sizes & Contract Sizes

In Forex trading, a position is stated in terms of ‘Lots’. The most common types of lots to remember are ‘standard lots’ which represents 100,000 units, ‘mini lots’ representing 10,000 units, ‘micro lots’ consisting of 1,000 units and finally ‘nano lots’ of 100 units.

The larger the lots sizes with which you trade, the greater the potential for profit. However, this is also true with losses.

It is wise to use large lot sizes with the trading setups and strategies with which you feel comfortable. If not, you should be using smaller lot sizes to reduce your risk while you are still testing the waters. In the end, you shouldn’t be risking more money than what you feel comfortable with.

In general, a good rule of thumb is to risk less than 1.5% of your trading capital on any given trade. Once you have a solid grasp in trading than

Calculating Pip Values and Profit

Currency pairs are measured in pips and one pip is the smallest amount of a percent which a currency can move in relation to another currency. For most major currency pairs, they are priced to four decimal places, however, there are exceptions like the Japanese Yen pairs (they are priced to two decimal places).

  • Exchange Rate Example: EUR/USD = 1.30
  • This means 1 Euro = 1.3 US dollars (It takes $1.30 US dollars to buy one Euro)

In order to make money from these tiny movements in the currencies it becomes important to trade larger lot sizes and this is where leverage comes in handy. Please revisit the forex Market basics post if you are unsure as to what leverage is. Understanding how lot sizes are affected by one pip is a case of simple mathematics. Trading a standard lot size of 100,000 units we can see how one pip translates into profit.

$/Pip = (one pip/exchange rate) x Lot Size

  • AUD/USD at an exchange rate of 0.9020 = (0.0001 / 0.9020) x 100,000 = $11.09 per pip
  • USD/JPY at an exchange rate of 119.90 = (0.01 / 119.90) x 100,000 = $8.34 per pip

In other words, if you placed a trade to buy AUD/USD and made 110 pip profit, using the example above you will find that you have made $1,219.90 minus commissions.

Your next question might be how much does it cost to buy $100,000 with leverage? This depends on your broker’s leverage amounts, but if we can assume a leverage of 200:1 it will be equal to the following:

  • If the “Ask” price of AUD/USD = 0.9020. Then 100,000 units it will require $90,200 US dollars with no leverage or $451.00 with leverage! (90,200/200)

In the example above you would have made $1,219.90 with a $451.00 investment.

The power of leverage is a double-edged sword: if used properly it can substantially increase your account size. However, if it is not, it can, of course, destroy your account.

What are the Risks associated with Forex?

With the information above there are also other factors that you must consider when trading a lot size of 100,000 units. 

Even though it requires only $451.00 to trade a lot size of 100,000 (as in the example above), it would be foolish to do so if you had only a small account size, which would risk too much of your trading capital all at once.

As a general rule of thumb you should never risk more than 1.5-2% of your trading capital.

Now, the only way to determine an appropriate account size to trade 100,000 units will vary greatly depending on the type of Forex strategy you are implementing. Some strategies risk less than a few pips on any given trade while others risk much more than that.

PIP SL (Risk) SL Amount $ Min. Account Size
1 11.09 554.50
2 22.18 1,109.00
3 33.27 1,663.50
5 55.45 2,772.50
10 110.90 5,545.00
15 166.35 8,317.50
20 221.80 11,090.00
25 277.25 13,862.50
30 332.70 16,635.00
40 443.60 22,180.00
50 554.50 27,725.00
75 831.75 41,587.50
100 1,109.00 55,450.00

From the table above we can see how, depending on the Forex strategy you use, it will vary greatly on the amount of trading capital you require to trade a standard lot. Obviously, the larger the account size you have, the more pips you can risk without risking more than 1.5-2%.

On the contrary, if you already have an account and would like to know the lot size you should be trading without going over the 1.5-2% rule, we have created an Excel spreadsheet for you.

This is an excellent free trading tool that can be downloaded here. Follow the “free download link” on the menu panel. This tool inputs live Forex data from the internet to determine the current exchange rate and is in turn used to determine your lot size based on what you are risking without going over money management principles.

The 2% risk is in general a rule of thumb that should be used when you place trades, however it is not the only money management tool that you should be using. What will happen if you risk 2% per trade and have a losing streak of 10 consecutive trades in a row?

This will mean that now you have lost 20% of your entire account size. This is where trade probability and risk-to-reward will come in handy to create a profitable trading strategy, one that abides by proper risk and money management principles. More on this on a future lesson.