The wise men research the surroundings and they understand the conditions they are heading in to. They understand the factors that can affect the battle and they work with them.

Just like those in combat it makes a lot more sense to prepare properly before jumping in to a trade. We need to learn what the market is doing and stop blaming other factors other than poor preparation.

Sometimes it is the person’s system that is losing them money, but many times they just aren’t prepared enough. They haven’t done their research and are using their system at the wrong time or in the wrong market. It is important to make sure you strike at the right moment. Each trading system is highly situational and it is important to make sure the conditions are right for your system.

Experienced traders make sure they are using their system in the right environment, if the current conditions don’t work right for their system they wait or find a different one.

Just like a sports coach uses a different play depending on the game conditions, you need to be able to switch up your trading strategy based on the current market climate.

Knowing the market environment allows us to choose a suitable strategy. A range based strategy works best when the market is ranging and a trend based one works best with a trending market.

If your worried about not being able to test out that godly range based technique or never being able to use your perfect trend system, worry no more.

Forex will provide opportunities for both trending and ranging systems over different times. By learning when to use which strategy you will have a much easier time deciding on the indicators to use.

For example trend lines are the most useful when used during a trending market while support and resistance works best during a ranging market.

Before you are able to spot any of those opportunities you first need to know how to figure out the current market environment. The market can be placed in to three different categories.

• Up trending.
• Down trending.
• Ranging.

Let’s take a look at the basics first.

Let’s cover the basics to start.

Take a look at the above diagram, see the zigzag that is making its way up the chart?
When the chart moves up and then jumps back down, the peaks created are at a resistance point. The valleys created at the bottom points of the chart are the support.

Support and resistance lines are created by tracking all of these peaks and valleys, and the price tends to stay between the resistance and support lines.

How to Plot Support and Resistance Lines

A very important fact to remember is that resistance and support lines are not exact values. When looking at a support or resistance level you will often see breaks in the lines. This is just the market testing the levels. The upper and lower shadows are the resistance and support levels being tested on a candlestick chart.

See how the 1.47 support line was tested by the candles shadows. It looked like the support line was being broke apart at these points but it after looking back on it you can see that it was just being tested.

So how does anyone really know when a resistance or support has been broke?

There is no definite answer to this question. Some argue that a support or resistance level is broken if the market can actually close past that level. However, you will find that this is not always the case.

We don’t. Many people argue that if a price closes outside of one of these lines then they are broken. But there are many instances where that just isn’t the case. Looking back at our example we see that the price closed below the support level and the support held firm.

In this instance the price closed below the support and then rose back above it again. If you had assumed a breakout was coming and played off it you would have lost quite a bit.

Looking at the chart now, you can visually see and come to the conclusion that the support was not actually broken; it is still very much intact and now even stronger.

To help you filter out these false breakouts, you should think of support and resistance more of as “zones” rather than concrete numbers.

The best way to avoid any bad plays like that is by thinking of resistance and support lines as zones instead of concrete barriers.

A good way to pick out these zones is by plotting them over a line chart. By doing this you will getting rid of all the additional information and the lines will be much more stable. Often times the highs and lows just make things more confusing.

Many times the highs and lows are just natural reflexes of the economy and they should not be read in to too much.

When you are plotting the support and resistance lines you want to avoid any of the market reflexes. Only the intentional movements can be read in to.

When plotting support and resistance lines on a line chart only plot them in areas where there are several high points or low points.

few more interesting facts about support lines and resistance lines:

• Many times when a price moves up through a resistance level, that resistance will turn in to a support.
• The more a support or resistance line is tested without being broken, the stronger that line is.
• By looking at how strong a support or resistance line is, you can determine how far the price will move when the lines are finally broken.

With a little practice, you’ll be able to spot potential support and resistance areas easily. In the next lesson, we’ll teach you how to trade diagonal support and resistance lines, otherwise known as trend lines.

After you have had a little practice spotting support and resistance lines will come naturally. Our next lesson will go over using diagonal support and resistance lines, trend lines in other words.

Normally both the lows and the highs of a currency will be lower in a downtrend, and higher in an uptrend. Most of the time traders who decide to use a trend based strategy they focus on major currency pairs or pairs that have the US dollar. This is because these pairs are more prone to trending more often and they are more liquid than the other pairs.

The Liquidity of a currency pair is important when a trend based strategy is being used. The more liquid a pair is, the more we can expect it to move around. The more a pair moves around the better chance the price will actually change a large amount instead of just bouncing up and down.

Other than just watching the way the price is moving (the price action) you can also use a range of technical tools that you learned about earlier to find out if a pair is currently trending.

Using the Average Directional Index

The Average Directional Index indicator is one of the best ways to determine if the market is currently trending.

This indicator developed by J. Welles Wilder uses a range of values between 0 and 100 to figure out if a pair is trending or ranging. Values more than 25 usually indicate that price is trending or is already in a strong trend. When the number is higher than 25 it is a good indicator that the price is about to begin trending or is already trending strongly.

As the ADX value gets larger the strength of the trend increases.

Although the ADX indicator is great for determining if a market is trending it is a lagging indicator which means that it isn’t necessarily predicting the future. It is also not directional which means that it gives the same number values whether the trend is going up or down.

In the following example the trend is spiraling downward and the ADX number is higher than 25.

To Find out about Moving Averages, Bollinger Bands, and other market trends check out Market Trader’s Ultimate Traders Package: On Demand, which highlights these topics and much more. Click here to learn more.

The market is considered to be moving sideways instead of up or down.

Using Bollinger Bands in Market that is Ranging

Bollinger bands are a great tool to determine how volatile a market currently is. The wider apart the bands the more volatile it is. The closer together the less volatile the bands are. You can gather information supporting breakout strategies using Bollinger bands. The wider the bands are the greater the chance for a breakout.

For the most part good trading environments for range strategies occur when the bands are narrow, in the figure you can see that the bands come together as the price moves in a narrow range.

The basic strategy of range trading is that the price of a currency switches between a high point and a low point. The trader hopes to buy the currency at the low point and then resell it at the high point. Channels and Bollinger bands are popular tools to help with this type of trading.

By using an oscillator, like RSI you can improve your chances of finding a turning point in the currency. Oscillators show when a currency has been overbought or oversold.

Bonus: The currency pairs that work best for range trading are crosses. A currency cross is any pair that doesn’t contain USD in it. One of the most popular range trading currencies is EUR/CHF. The similar growth rate of the two countries keeps the exchange rate very stable.

Conclusion

No matter if you are trading in a ranging environment or a trending one you can make decent profits either way.

The most important thing is that you can recognize the difference between the two environments and know how to take advantage of the current one.

What if you understood the perfect place to get out of a long position and instead of sitting around while your profits vanish before your eyes – along with your dream of owning that shiny new Ferrari – you actually took charge of your money and started making the gains you have been looking for?

What if your get is telling you that a currency pair is going to keep falling but you want to have more proof and a better price to start at?

Believe it or not all of that is possible! It can be achieved with a method known as divergence trading. A divergence can be tracked by comparing a currency’s price movement and the changes in an indicator. Any indicator can be used so it is advisable to use the one you are most comfortable with.

The really nice thing about a divergence is that it is easy to spot and can be used to indicate future price changes. A divergence is a leading indicator.

After you master using divergences, you can use them to make consistent profits. Since divergences work near the highs or lows of a currency price there is very little risk involved.

The Oscillator and the Price Stick Together.

Just remember that the Oscillator and the Price stick together.

Normally price and momentum stick together like peanut butter and jelly, Bert and Ernie, Peaches and Cream . . . well you get what I’m saying.

As the price continues to go up to larger and larger highs the oscillator should follow along. As the price dips down to new lows the oscillator should follow along with that too. If however the oscillator is not sticking with the price then you know something is up. When the oscillator strays away from the price it is diverging from it. That is how you get a divergence.

Understanding how divergences work is a great way to improve all of your future trades. By looking out for divergences you’ll understand that something weird is going on.

Divergences are often present at a point when a trend is weakening or getting ready to turn around. There are even times when it will tell you that a trend is going to keep going in the same direction.

Two different types of divergences exist:

Standard divergences and hidden divergences.

Over the course of this grade you will learn about both of these divergences and what to do with them. You will even be presented with a cool surprise if you make it all the way to the end.

Moving averages are a tool used to take a set of jagged price actions and smooth them out in to a nice curvy line. The moving average is the average price of a currency closing over the last ‘X’ set of periods. When placed on a chart you get something like this:

Like every indicator, a moving average indicator is used to help us forecast future prices. By looking at the slope of the moving average, you can better determine the potential direction of market prices.

Just like any of the other indicators available, the moving average is useful when trying to forecast future currency prices. The easy curve makes it easier to see and to predict the direction the price is heading.

Moving averages work by smoothing out the price action.

There are a few different styles of moving average, and each one has a different level of smoothness.

Most of the time the moving averages that are the smoothest are those that react to price movement slower.

In contrast, the choppy moving averages react quicker to price changes. To make those choppier moving averages really smooth you need to get the average over a long period of time.

You’re probably growing impatient and wondering when we are ever going to get to how moving averages help with trading.

Before we can get to any of that it is important that you understand the two main types of moving averages. There are simple moving averages and exponential ones.

We will teach you the difference between the two and we will also teach how to calculate them and the positives and negatives to using them.

Before learning how to trade with moving averages you have to understand the basics.

After you have that down pat like Roger Federer’s forehand tennis stroke, we will move on to the different ways you can use them to support your trading system.

After you’ve finished with this lesson you’ll be able to give Federer a run for his money!

Are you prepared?

If you are give us a loud resounding “YEAH!”

If not, go back over what we talked about until you feel confident to move on.

First take a quick look at the man himself, here is Leonardo Fibonacci.

No, Leonardo Fibonacci isn’t some famous chef. Actually, he was a famous Italian mathematician, also known as a super duper uber ultra geek.

He had an “Aha!” moment when he discovered a simple series of numbers that created ratios describing the natural proportions of things in the universe.

No, he isn’t a famous cook. He was actually a famous mathematician from the lovely country of Italy.

He is renowned by geeks worldwide, and for good reason.

The ratios come from his number series 1,1,2,3,5,8,13,21 and so on and so forth.

This series of numbers is derived by starting with 1 followed by 2 and then adding 1 + 2 to get 3, the third number. Then, adding 2 + 3 to get 5, the fourth number, and so on.

This number series is created by beginning with 1 and then moving to 2 and then adding the last number in the series and the number before it to get the next number in the series.

For example the ratios between 13 and 21 and between 5 and 8 are both .618.

If you skip a number in the series and find the ratio between those two numbers you will get .382. The ratio between 8 and 21 for example is .382.

These ratios are called the “golden mean”. Okay that’s enough mumbo jumbo. With all those numbers, you could put an elephant to sleep. We’ll just cut to the chase; these are the ratios you HAVE to know:

These ratio numbers are known as the “golden numbers”. Now try to forget about all of those numbers and tricks that I mentioned and just remember that you have to know both of those ratios.

The Different Retracement Levels are

0.236, 0.382, 0.500, 0.618, 0.764

The Different Extension Levels
0, 0.382, 0.618, 1.000, 1.382, 1.618

It isn’t necessary to know how to calculate all of those numbers. Most platforms will do all of that work for you. It’s good to know the idea behind the indicator though. Fibonacci retracement levels are used by traders to determine possible resistance levels or support levels. Because so many of the traders expect levels to be at these specific areas they tend to make them come true.

On the other hand the extension levels are used to determine the areas where profits should be taken. Just like the other levels traders tend to make these levels more accurate than they otherwise would be. Most trade charting software out there includes both retracement and extension functions. To be able to use these tools you have to know where the swing high and swing low points are.

A Swing High is a candlestick with at least two lower highs on both the left and right of itself.

The swing high occurs when a candlestick has two highs on either side of it.

The swing low is when there are two higher lows on either side of the candlestick.

Make sense? Try not to worry too much, we will go over extensions and retracements in more detail, as well as how to cash in on the Fibonacci tool as well in the upcoming sections.

At the first screen that pops up after a login you will see an equity section in the information area.

Understanding Your Usable Margin

You should also notice that your used margin is 0 and your usable is the entire account balance.

The Usable Margin column should always be the equivalent of your total account balance with the Used Margin subtracted.

Usable Margin =Equity – Used Margin

Therefore it is the Equity, NOT the Balance that is used to determine Usable Margin. Your Equity will also determine if and when a Margin Call is reached.

Your Equity should always be used to determine when a Margin Call has been reached and your Usable Margin level.

As long as your Equity is greater than your used margin, you will not have margin call.

If you keep your Equity level above your used margin you will never run in to a margin call.

But as soon as your used margin is equal to or greater than your equity then you will get hit with a margin call.

Assume that your broker requires that you have at least 1% margin per lot. You take out a single lot of JPY/USD.

Your Equity will stay the same at $10,000. Your used margin is bumped up to $100 because you need at least $100 to take a lot out in a mini account. The margin you are allowed to use is now decreased to $9,900.

If you ended up selling your lot back at the exact same price you bought it for, your used margin would drop back down to 0 and your usable margin would be bumped back up to $10,000.

But instead of closing the 1 lot, you (the adrenaline-junkie, chop-socky retired spy that you are) got extremely confident and bought 79 more lots of EUR/USD for a total of 80 lots of EUR/USD because that’s just how you roll.

But you’re a spy who loves to live life on the edge. Instead of being safe and closing that lot out you buy an additional 79 more. Now you are in it for 80% of your total bankroll and you would be sweating balls if you were anyone else.

Your usable margin drops down to $2,000 and your used margin jumps up to $8,000.

If your currency were to increase from here your profits would be incredible. However this story has a slightly more depressing ending.

Let us paint a horrific picture of a Margin Call which occurs when EUR/USD falls.

Instead of being greeted with the enormous profits that you were expecting EUR/USD drops.

You are in it for 80 lots and your equity drops down with your currency.

Your used margin stays the same but as soon as your equity is below $8,000 you get slapped with a margin call.

If you were able to get all your lots at the same exact price your account only needs to move 25 pips before you are hit with a call.

If you are unfamiliar with price movements in forex, 25 pips is nothing it all. That kind of movement could happen in mere minutes, and if it went in the wrong direction you would be out $2,000.

But how did we figure out that you needed a 25 pip movement to stop your account in its tracks?

Every single pip is worth 1$ when it is in a mini lot. You have a total of 80 lots strapped to your account so each tiny wiggle of the market is worth $80 to you.

Your usable margin is only $2,000 now and $2,000/$80 is 25.

Your usable margin is now at $0.00 and you are slapped with a margin call!

Anyone with less training than you would be using their computer as a baseball bat at the moment, but you are sitting in the same spot as cool as the morning dew.

In mere moments your trading account dropped from $10,000 to $8,000. You blew through 20% of your trading account and you really don’t have much to show for it.

In reality, it’s normal for EUR/USD to move 25 pips in a couple seconds during a major economic data release, and definitely that much within a trading day.

If you were to try this stunt on a day with a major economic release you could end up losing all of that money in just a few seconds.

I don’t know about you but that would be the fastest I have ever blew through $2,000.

Oh Wait, we never included the spread!

We left out the spread to make the information easier to understand. We’ll throw that in now to really horrify you.

The spread for this example is 4 pips. That means that instead of moving 25 pips, JPY/USD only has to move 21 pips!

Let’s say the spread for EUR/USD is 3 pips. This means that EUR/USD really only has to move 22 pips, NOT 25 pips before a margin call.

This is what could happen if you don’t understand the mechanics of margin and how to use leverage.

This type of situation could become a reality if you don’t learn to understand how leverage and margin work.

However most new traders wouldn’t have even opened a mini account with the recommended amount of $10,000.

With just $1,000 less in your account your account would only be able to survive a drop of 10 pips!

As you have seen, many trade opportunities exist in the foreign market and you now understand how to locate them! Remember these few useful details and you will be doing yourself a big favor:

• Crosses create more opportunities for traders by giving them more currencies to trade.
• Typically trends and ranges are cleaner on currency crosses than they are on the major currency pairs.
• Trading crosses allows you to take advantage of differences in interest rates.
• Make sure to analyze any currency pair you plan to use, and match the strong against the week.
• Don’t worry if the pair of currencies you want to trade isn’t available at your broker, you can create a synthetic currency pair by taking to major pairs out at the same time to create the cross.

• Three of the most popular crosses involving the euro are EUR/CHF, EUR/GBP, and EUR/JPY.
• NZD/JPY, GBP/JPY, and AUD/JPY are the three most attractive currency pairs against the JPY. Each one creates the highest interest rate differential which means better profits.
• If you decide to trade more obscure currency crosses, look out for the unpredictable swings that you will often see.
• If you decide to stick to just the majors, crosses can still help you decide what pair to trade. Crosses help signal which currency is stronger.
• It is important to remember that any movement in cross pairs can affect the majors as well.
• Please also remember to pay attention to the pip value of any crosses you are trading. The value of crosses will range compared to the majors. The pip value will help you figure out any risk analysis.
• So, on those days that the majors just aren’t working for you, or you need to stay away from the USD because of a major event, give those crosses a shot. You may like what you find. The best of luck!

The three most prominent types of charts are line charts, bar charts, and candlestick charts.

Now that you know the different charts, let’s get to the importance of each.

Line Charts

A simple line chart draws a line from one closing price to the next closing price. When strung together with a line, we can see the general price movement of a currency pair over a period of time.

A very simple version of these charts draws a line that connects all of the various closing prices. The line is a great indicator of the price movement of a pair of currencies over time.

Here is an example line chart:

Bar Charts

A bar chart is a little more complex. It shows the opening and closing prices, as well as the highs and lows. The bottom of the vertical bar indicates the lowest traded price for that time period, while the top of the bar indicates the highest price paid.

A bar chart has a little more to it. Bar charts show both the opening and the closing prices of each day. They also show the highs and the lows. The bottom of the bar is the lowest price of a given time and the top is the highest.

The actual bar shows the whole range for any given time.

The small horizontal mark on the left of the bar is the opening price and the one to the right is the closing one.

Here is an example of a EUR/USD bar chart:

Remember that through all of the lessons to come the word bar will stand for a single unit of data on a chart.

Each bar is a simple segment of time, it could be a day or an hour. When you see the word bar mentioned make sure you understand what timeframe it is being used in.
OHLC charts are another name for bar charts. They have this name because they keep track of the opening price the high the low and the closing price.

Open: The line to the left of the bar is the opening price.
High: The tippy top of the bar is the overall high for that timeframe.
Low: The lowest point of the bar is the overall low for that timeframe.
Close: The little line off to the right is the closing price for that timeframe.

What are Candlesticks Charts?

Candlestick chart show the same information as a bar chart, but in a prettier, graphic format.

Candlestick charts are basically a nicer looking version of a bar chart.

They indicate all of the same things that bar charts do, a high a low and the opening and closing prices.

The actual body of the candlestick shows the opening and closing prices. If the body is black the opening was higher than the closing. If it is empty then the opening price was lower than the closing.

So if the body is black then the top line of the body is the opening price and the bottom is the closing. If it is clear or white then the bottom is the opening and the top is the closing.

Candlesticks show high and low prices with upper and lower vertical lines, also known as shadows. The upper shadow or the top vertical line is the high for the timeframe, and the lower vertical line or the lower shadow is the low for the timeframe.

As long time traders we have grown tired of the traditional black and white candle colors. Instead of the black color we have substituted red, and instead of the traditional white we used green. We thought these colors made fitting substitutions while helping keep things a little more interesting.

If the closing price is lower than the opening you will see a red candlestick. On the other hand a closing price higher than the opening will be connected to a green candlestick.

Later on you will come to realize that the colored charts are much faster and easier to read than the black and white ones are.

For the moment just keep in mind that green means white and red means black.

The purpose of candlestick charting is strictly to serve as a visual aid, since the exact same information appears on an OHLC bar chart. The advantages of candlestick charting are:

Now that you know why candlesticks are so cool, it’s time to let you know that we will be using candlestick charts for most, if not all of chart examples on this site.

Candlestick charts were created as a visual aid. They help you pick the important data out much faster than you would be able to with a bar chart. The advantages of candlesticks are as follows:

It is easy to interpret what a set of candlesticks means, which makes it easier for beginners to jump in to chart analysis.

Research has shown that the use of visual aids helps people study, the patterns jump out readily and it should be easier to understand what is going on.

Candlestick patterns have the coolest names (like shooting star) which make them more fun to use than traditional charts.