2Bull Forex Blog

Why are support and resistance levels crucial when participating in the Forex day trading market?

Simply put, they represent key, strategic price points at which traders processed orders involving millions or even billions of dollars. No wonder price at times has a hard time getting past a previous high or low. Those levels are being fiercely defended by traders who have large amounts of money at stake and who do not want to see price break those levels.

For this reason anyone who engages in Forex day trading should learn how to trade support and resistance. The following checklist provides crucial guidelines:

1. Support and resistance levels are much more significant on the higher time frames. Pay particular attention to price highs and lows on the daily chart as this time frame is commonly used by big traders.

2. A price high or low has more significance when it has a number of candles either side of it which are lower (in the case of a price high) or higher (in the case of a price low).

3. Before you consider Forex day trading at a support or resistance level, see if there are more factors that would indicate this is a key price level.

For example, does a trendline intersect at the same point? Does the support or resistance line match up with a Fibonacci level, either a retracement or an extension? Does the support or resistance level coincide with a pivot point if you are in the practice (and it’s a wise one) of calculating pivot levels when Forex day trading?

4. Has a key support resistance level been broken? Then look to see if price will come back to test that level. Remember, resistance once broken can become support in the future and support once broken can become resistance in the future.

These Forex day trading scenarios can present excellent trading opportunities as you put an entry order in at the key level and wait for price to come back and pull you in. Within a short time your dealing spread is covered and you are in profit.

5. The market spends most of its time in trading ranges or consolidation channels. You need to accept that this is a characteristic of Forex day trading and adjust your mindset accordingly. Identify the high and low of the trading channel and manage your trades accordingly.

6. After identifying a trading channel or range and you see a trading opportunity, set your entry level at the base of the channel if you are going long or at the top of the channel if you are going short.

Don’t chase after price once it breaks out of the channel (although many who engage in Forex day trading do so). You will not get the optimal entry point. Waiting for price to take you in either at the top or bottom of the channel means you can have a smaller stop and your price target is closer.

7. Pay particular attention to the previous day’s high and low. Price will often hesitate and retrace at these levels. If you are a Forex day trading scalper, you can often grab a nice pull back of 10 pips or more at these strategic levels.

Note: Although there are various ways to calculate the previous 24 hour period depending on where you live, using GMT as a standard is often beneficial. Midnight GMT is a time when the market is generally very quiet and unlikely to make new highs or lows.

Succeed Or Fail?

It is unlikely you will succeed at Forex day trading if you fail to understand or take into consideration support and resistance. This indicator is that crucial! Yes there may be fancy indicators out there with all the bells and whistles, but this simple indicator, marking where price reached a high or low during previous trading sessions, can be one of the most powerful and effective Forex day trading tools available.

Be sure you spend sufficient time studying it, examining your charts, marking off the key levels each time you begin a new Forex day trading session.

If you want good forex education forget buying an e-book from a vendor for $100 or so, who has never made money in his life and get down to your bookstore and get some forex education from traders who have walked the walk - rather than simply talk the talk!

Of over 600 books I read, I have picked six that are essential reading for any trader and you can get them for $100 bucks or so, which could be the best money you ever invested.

So check out the books below and make them part of your forex education.

1. Market Wizards - by Jack Schwager

Interviews with the top traders in the world. A look at everyday life of people who make a living trading – this is simply a classic and I still find myself visiting it after 20 years and re reading it.

If you can’t learn from such trading legends as Richard Dennis, Paul Tudor Jones, William O’Neil, and Marty Schwartz – then you can’t learn from anyone!

2. The New Market Wizards - by Jack Schwager

More interviews with top traders from around the world. This book is the same format as Market Wizards and brings together some top traders and again benefits from Schwager’s great interview technique.

3. Trader Vic–Methods of a Wall Street Master Victor Sperandeo

This is perhaps one of my favorite books and you will see why after reading it, he has been such a consistent trader and his focus on long term results, money management and long term trend following are essential reading - his “2B” test technique, it is worth the price of the book alone.

4. The Zurich Axioms: Investment Secrets of the Swiss Bankers – Max Gunter

I picked this book up and read it in one sitting - an absolutely fantastic, if un-conventional book!

If you have accepted investment wisdoms such as diversify to make gains be prepared to re consider your view.

It’s the type of book that is so easy to read, yet gets your adrenalin pumping with every page, until you’re buzzing at the end and want to turn on your computer and trade!

5. What I Learned Losing a Million Dollars (Hardcover) Jim Paul and Brendan Moynihan

An inspiring story of a real person who lost a million and a half bucks and tells his tale, with great insight including, even contemplating suicide at one point. If you don’t think emotions get the better of you in trading this book will show you how they can.

There are too few books that tell us how to avoid losing money they all ocncentrate on how easy it is to make money and thats what makes this book so unique.

All the mistakes that forex and other traders make are outlined, explained, and amusingly told in this boo.

The book gives you an affinity with the author which brings makes his message even more powerful.

This book is not an outline of how to trade, but how to get the right mindset.

These are lessons about how we accept a trading loss, how to learn from losing trades, and finally how each of us can be tempted to rationalize losses.

6. Technical Analysis - by Jack Schwager

There are loads of books on technical analysis and this is simply to most complete guide you can get.

It’s more of a reference book than an entertaining read, but as with all Schwagers books there is a wealth of knowledge you can tap into – Everything you need to know about technical analysis is here and the fact that I picked over John Murphy’s work shows how highly I rate it.

So there you have it six different but essential reading for all traders novice or pro.

These six books together, present a great mix of forex education and I personally feel all traders should read these books.

I hope you enjoy the above books as much as I did and that they give you some great forex education and a head start in your quest for currency trading success.

Many traders in their forex trading strategy simply pick levels and buy or sell into them and hope they hold. This simply sees them lose, as they are hoping levels will hold and NOT acting on confirmation of price momentum to put the odds in their favor.

Here we are going to look at the ultimate momentum indicator that will help you time your trading signals with laser accuracy.

The momentum indicator we are referring to is the stochastic and it simply should be considered by anyone serious about making money in forex trading.

The logic

Of the stochastic is based on the assumption, that when a market is rising, it will tend to close near the highs of the session - and when a market falls, it tends to close near the lows.

Lets look at the calculation – although you don’t need to understand just as you don’t need to understand an internal combustion engine to drive a car – you can look at it visually which we will return to in a minute first:

The Calculation

The stochastic oscillator is plotted as two lines called %K, a fast line and %D, a slow line.

• %K line is more sensitive than %D
• %D line is a moving average of %K
• %D line gives the trading signals

It’s actually similar to the way a moving average is plotted.

Therefore consider %K as a fast moving average, and %D as a slow moving average.

The lines are plotted on a scale of 1 to 100 scale.

“Trigger” lines are normally drawn on stochastics charts at the 80% and 20% level – this indicates when markets are overbought, or oversold and a trading signal maybe generated.

Using Stochastics

The best way to get a feel for stochastics and how they can help your forex trading strategy is to look at them – you can see them free on many services and a good one is futuresource.com

The 80% value is normally used as an overbought signal, while the 20% is used as an oversold signal.

The signals are even more reliable if a forex trader waits until the %K, and %D lines turn upward, below 5% before buying - and in conversely, above 95% before selling.

The most reliable way to trade stochastics is to use the above as a warning sign and wait for the stochastic lines to cross with bullish or bearish divergence.

For example, buy when the %K line rises above the %D line, and sell when the %K line falls below the %D line.

Beware of short-term crossovers these can generate a false signal and cause losses.

The best crossover is generated when the %K line intersects, “after” the peak of the %D line.

Don’t worry if it sounds confusing it becomes much easier when you look at the set up on a chart service such as the one we referred to earlier and you will soon be getting the hang of them.

Why they are so valuable

Because they allow you to shift the odds in your favor instead of relying on hope when you trade into support or resistance you will shift the odds in your favor by knowing the strength of price momentum.

Stochastics are the ultimate timing tool for traders and allow you to enter your trading signals with the odds on your side. In any forex trading strategy you need to trade the odds and the stochastic is a powerful weapon that you can use for currency trading success.

Discover the stochastic indicator and you may be glad you did.

Foreign exchange is market where exchange of currencies takes place for another currency. Foreign exchange is the exchange activity takes place between currencies and provides liquidity and accessibility to the traders availing the service provided. Foreign exchange is referred as a market or network which provides service to the customers or traders all over the world. Foreign exchange is the market where exchange of currencies takes place for more and different number of foreign county. Foreign exchange is nothing but buying and selling of foreign currencies in exchange of another. In the foreign exchange market, more of number of foreign currencies will be exchanged by the members and other traders with fluctuations of market price.

Foreign exchange is created to provide more useful services to the customer, traders and participants. Some of the participants or traders of foreign exchange market are commercial banks, central banks, investment banks, brokers, registered dealers, global money managers, option traders and speculators. The rate of exchange fixed for the foreign currency varies as per the demand and fluctuation of foreign exchange market. Foreign currencies will be exchanged based on the requirement and demand for other foreign currency. The difference in the rate of foreign currencies will be made on the political, economic factors and with reference to the stability of the market.

Since, the main purpose of foreign exchange market is buying and selling of foreign currencies, more county are coming forward to exchange their currency for another. The entry of any foreign currency is free and any number of counties can enter the foreign exchange market by buying and selling foreign exchange currencies. Nowadays, foreign exchange market becomes the general and common market for more number of buyers and sellers to buy and sell at a profit. Trading in a foreign exchange market helps the buyer and seller to come up with good foreign currencies and profits for the currencies. Sometimes, the foreign exchange market may finds fluctuations for the foreign currencies listed with respect to political and economic condition of the foreign currency in the market.

The main reason for the establishment of foreign exchange market is to have a uniform rate for the currency listed in the market. Foreign exchange is very similar to stock market, but the difference is that, here in the foreign exchange the exchange takes place with respect to the currencies. Though foreign exchange fetches the good demand in the market, the currency prices also finds fluctuation in the market. With more number of customers and traders, foreign exchange serves the purpose for which it is established and offer better opportunity to come up with different and more number of foreign currencies as per their requirement.