Price Action moves all time and no movement is the same. The following patterns are most common at the charts. Let’s learn how to look at them and how to use and combine their specific rules with other aspects of our technical analysis.
The Head and Shoulders Pattern and Techniques:
This head and shoulders patterns shown is a signal that indicates a certain pair is a setup to go down and repeat the same pattern. Mostly seen at the highest point of an upwards trend. Off course there is a second version as with a lot of techniques and patterns. Since we have to see the market as a big mirror. Everything that happens on the upside can occur on the downside as well. The second version is known as the head and shoulder bottom or reversed head and shoulders. The reverse head and shoulders patterns are simply the opposite the normal head and shoulders pattern and indicate a certain pair will move up and repeat the same pattern. Both times, the head and shoulders suggest a reverse meaning the pair will move against the ongoing trend.
Both of the head and shoulder patterns have a likewise construction. Four compounds will make the head and shoulder pattern complete: Two shoulders, a head, and a neck.
The pattern confirms a trade setup at the beginning of the neck/trend line, after the second shoulder has been formed.
For example A period of consecutive upwards highs and retracements is seen as an uptrend, while a downtrend consists of consecutive lower peaks and pullbacks.
The head and shoulder pattern illustrates the weakness of a certain trend.
Head and shoulders above:
– This pattern consists of four consecutive steps completing themselves to signalize the reverse.
– Left shoulder is formed when a pair reaches a new high and retraces to a new low.
– The head is formed when a pair reaches a new higher high and falls back around the level of the low formed at the left shoulder.
– Right shoulder is formed with a high a little lower than the high formed at the head. And again followed by fall back around the same low formed at the left shoulder.
– The Price breaks the neck/trend line. In other words the price drops under the Support and flows towards the level of the three lowest points before breaking through the head and left shoulder.
Head and shoulders bottom (Revearsed head and shoulders):
The reverse head and shoulder pattern is the exact opposite of the head and shoulder top, because it indicates the pair is setup to make an upwards move.
– Left shoulder is formed when a pair reaches a new low and pull back to a new high.
– The head is formed when a pair reaches a low that is lower than the low of the left shoulder and will pull back to the level of the around the latest high. This step towards the past high will create the neck for this pattern.
– The right shoulder is formed by a typical sell-off and is less bad as the low of the head. Followed by a pullback to the neck.
– The pair breaks above the neck/ trend line. The pattern is completed when the price above the neck breaks and creates an uptrend.
After the fourth step, when the neck is broken. The pair will most certainly move towards a new direction. It is that specific point that traders use to step in and open up a position.
The head and shoulders patterns are formed by three characteristics and can be spotted at multiple time frames. This setup achieves best results at the daily and H4 charts.
How to spot a head and shoulders formation:
Left shoulder: Going on trend has to be Bullish, with a price anticipating on the next movement at an important Resistance level. The Price action is often a bearish candlestick, as a catalyst for a deep pullback.
Head: Next wave will keep on going up till it reaches a new high before it forms a Bearish reversal. This peak is the highest point of this pattern.
Right shoulder: At the end, the price will move up a bit again. However, this time i won’t get higher as the head (past high).
What to do when Head and Shoulders occur?:
Once we’ve concluded the head and shoulder patterns is at the “neck” phase it’s now possible to predict a Bearish break out.
Reversed Head and shoulders:
The last shown pattern can also occur in a reverse aspect. Same rules are applied and it doesn’t matter if the state of the market is Bullish or Bearish. As long as you see the pattern and wait till the neck is broken to step in your good.
Once you’ve decided to setup a long term position, your Stop-loss has to be placed around the level of the right shoulder. Just like you’ve calculated the target level on the head and shoulder pattern, you should now measure the distance between the low of the head and neck. Don’t forget to duplicate it in the breakout point.
Underneath a clear example of the reverse head and shoulder formation.
Technical chart analysis is the multiple patterns the chart shows and all forms of price action. Also the overall analysis and the movement of the market over a certain time period. A soon you’ve learned to master the price action and how to determine the price action. You are ready to make a benefit of certain movements in the market.
Price Action is making the most of your trading decisions on a clean chart. Free of indicators and influences from the past. You could add the moving average for some extra help.
Since Price Action reflects al variables of a certain market over a certain period with the help of price indicators as Stochastic or MACD. You won’t need all the other indicators since they simply just distract you. Only the information you need to make a winning strategy is the raw movement of the market.
Price Action Analysis with TheForexScalpers
As told before, economic variables will move the market as well. Think of what I told you about fundamentals.
Movements like this are clearly recognizable. Just for the fun of it you should look up the chart of GBP/USD. Around the Brexit Referendum you will see a clear drop in the value of the GBP.
Price action analysis make use of the overall cure price data. That’s why this strategy could be used on every trade at the financial market. Before starting Price Action strategy make sure you start with a clean sheet. Remove all other distracting indicators in the past.
There is a big difference between charts with indicators and charts without. Example underneath will show you the difference. Take a look at both charts and tell me which one looks easier to analyze? Also charts with lots of indicators won’t give you more information. They only give you distracting information from the past that you really don’t want to know.
Before we move on training your technical skills it’s important knowing the different time frames. Which time frame to use and which one not to use.
The Top Down analysis is an interpretation of the components of the ‘bigger picture’ and there of you go look at the smaller components. The most common time frames used for a forex analysis:
For a trader it is really important looking at the long term. Is there a visible trend or did the pair stay still land stabile? Support and resistance levels and other patterns are important by analyzing the long term. For example: You start looking at the monthly and weekly charts before the market opens at Sunday night.
99% of the traders make mistakes. So here are the most common mistakes for you so you hopefully won’t make the same mistakes.
Losing trades are just another day at the office. It’s just that simple. Don’t let them get to you. Every trader on Wall Street or trading from his home office will face losing trades. A trader with a 80% success ratio will still lose 20 out of 100 trades he makes. Keep your risk tight, safe and disciplined.
Unfortunately 90% of all traders are losing traders. They lose their confidence, start doubting themselves. This encourages them to pay for bad Forex services or even desperately let other “winning” traders trade on their account. Again, there are many people with no winning track record willing to help you for a certain price. Don’t be desperate. Your will land power is all you need!
Most important reason for repetitive losing traders:
Losing Trades – Chart Loonatic:
There are lots of fundamental impacts that could easily distract a trader. Also there are a ridiculous amount of trading systems and trading software, which have lots of indicators and templates etc. As a trader you’ve got to filter these indicators and narrow them down to the ones that matter the most for your own strategy. WARNING: This could be difficult for a beginning trader.
It’s not necessary to spend hours and hours behind the screen analyzing the news or charts. Keep it simple and stick to what you need. Keep it organized.
Losing Trades – Over-Trading:
Most traders lose money simply because they trade too much. We call this over-trading. Over the years we have learned that traders succeed on their demo account but once the real game begins they start losing. Once your real money is on the line your emotions are kicking in. Prove that emotions can kill your account. Over-traders purely trade on emotions.
Everything comes down to your technical skills and not your emotions. So try to create an environment with little to no emotions for yourself. This is done be being organized and having a plan.
Losing Trades – Why Risk Management is so important:
Risk management is vital for success, safety and sustainability in Forex trading. Risk management won’t let you lose more on a trade than your comfortable with. Lots of traders forget about the chance of losing on a trade. Ask yourself this question: “Why would you take more risk than your comfortable with?”
Even if you are one of the best traders or you have this unique talent to see the right spot to step in a trade. Without good risk management you will never be a successfull trader on the long term. Basic knowledge is to always go for more PIPS as your willing to lose.
Remember Forex is a job not a casino. Traders who approach the Forex market as a gambler or as an addict to money won’t make the right decisions. He will start thinking irrational and make mistakes. So don’t think of in dollars but think in PIPS.
Let me break that down for you. When your mind is on the money and you think in dollars your risk management won’t work most of the time. There is always this voice of the devil in your head saying “What if…” Or “Maybe this or that will happen”. Stop thinking like this. Get these dollar signs out your eyes and start think like a real trader. It’s not that easy as use a couple of big lot sizes and flee the scene when your positions are positive. So always calculate your wins and losses in PIPS. Always trade with more or less the same volume. You trading plan has to have PIP goals and PIP risks. How many PIPS do I want to win? Or how many PIPS do I want to risk with this trade?
Losing Trades – No Game Plan:
Most common made mistake is not having a game plan at all. Traders just start out of the blue without a real strategy or plan. If your watching sports, do you think the athletes don’t have a game plan? I bet you a $100 that every team or individual athlete has a game plan. Don’t think like all the other traders “I’m going to make my plan after I’ve done a few trades”. You will end up with an empty account.
Right thing to do is keep track of your trades. Make reports of your trades (a trade journal) so you can look back at what you did and maybe change your tactics a little bit. Organized work like this will help keeping your emotions out of the game as well.
Remember that the game plan you started with doesn’t have to be the winning one, so call a time out, look back and adjust to a winning game plan. Pretty cool right! You can be the coach of your own professional sports team!
Losing Trades / From demo to a real account:
After a few successful trades on your demo account it’s tempting to switch directly to a real money account. We completely understand this hunger of you. And why wouldn’t you? After all you’ve just made a few winning trades. The Forex world is all yours baby! STOP right there! Don’t make this mistake unless you have a good strategy and master the strategy of price action trading. If you don’t? Keep playing on your demo account until you are consistently successful for 3 to 6 months. This is a really important lesson. You won’t dive in a deep swimming pool not being able to swim right?
It’s just a big difference between a demo and real account. Once your trading with your own real money emotions will get involved. That’s why you need to take your time and wait to your completely sure of yourself. If not, keep practicing. As told before: “Practice makes perfect”.
It is very important to understand the terminology in the Forex market. That’s way I need your full focus right now! Make your head clear, drink a cup of good coffee and start learning these important terms.
Forex terminology – PIP
You’ve met the PIP yet.
Cute little happy word isn’t it? Well that’s exactly what it is since this cute little word will make you very happy and rich if you use it the right way.
You need to completely understand how to calculate your wins and losses through the PIP.
Otherwise don’t even bother start trading.
The unit of measurement that indicates the change in value between two currencies is what you call a ‘pip‘.
If the EUR / USD pair rises from 1.2250 to 1.2251, then the .0001 USD increases in value 1 PIP. Simply, a pip is the last decimal figure of a quote. Most pairs are shown to four decimal places, but there are exceptions such as the Japanese yen (to two decimal places).
But watch out! There are brokers that show currency pairs different from the standard “4 and 2” decimal, but instead using’5 and 3′ number decimals.
What they actually do is showing fractional pips, “which are also called ‘pipettes.
Forex terminology For example: GBP / USD 1.51542 1.51543 moves, then it rises .00001 1 PIPETTE. As each currency has its own relative value the value of the pip must be calculated for a specific currency pair.
We give an example in which we use a ratio of 4 decimal places. In order to explain the calculations easier we exchange ratio set down like – so: EUR / USD at 1.2500 is “1 EUR / USD 1.2500.
Example exchange rate:USD/CAD = 1.0200; or 1 USD to 1.0200 CAD; or 1 USD/1.0200 CAD.
(The value change in the “counter currency”) X (the exchange ratio) = pip value (in terms of the base currency)
Continuing this example, if we sell 10,000 units USD / CAD, then one pip change of exchange rate changes of approximately 0.98 in the position value (10,000 units x 0.00009804 USD / unit).
We say “approximately” because when the exchange rate changes, the value of each pip move is also changing. Last important question that needs to be answered if you calculate the pip value of your position is: ‘What is the value of your pip in terms of your account currency?’ You’re trading at an international market you remember? So not everyone on the whole world has chosen the same currency for their account.
Shortly, the value of the pip needs to be converted to the currency used at your account.
Forex terminology – Spread.
Simply spread is the difference between bid and ask price. Spread is used by brokers to make money of every trade that takes place through their network. Example: Broker pays 1.3600 and sets the price at 1.3601 for you to buy. Spread will always be around the price the broker paid. Whenever your trade you’ve paid the spread. There is nothing you can do about it. That’s just the way brokers make their money. TIP: search for a website “broker” with the smallest spreads.
⦁ Cross Rate. ( Forex terminology )
The exchange rate between two random currencies that are not considered standard in the country where the pair is quoted. For example: the quote of the GBP/JPY pair would be considered a cross rate in the U.S. While EUR/USD is a cross rate in Japan.
In Forex trading the use of leverage is pretty common. Leverage needs to be completely understood because it plays an important role in the purchasing power of your account.When opening an account you have the option to chose your leverage. It simply gives you the opportunity to trade bigger positions than your real bankroll let’s you.
Just to give you an example:
Suppose you have a thousand euros on your account and you act with a leverage of 10: 1, you can then buy 10,000 EUR / USD. Then, when the price increases on the pair two cents per euro it means that you have earned 200 euros after you close the position. It can also happen that the price of a penny decreases and then you have a loss of two hundred euros when you close the position.Your profit or loss is actually the difference between the amount on your account and the outstanding gains and / or losses.
⦁ Margin. ( Forex terminology )
Margin is the ammount needed to buy a new position. With a margin balance of €1.000,- and a 1% margin requirement you can buy a maximum position of €100.000,- euro. With this given you are able to use a leverage of 100:1.
The higher your leverage the more margin you will need on your account. So, when you open to many positions or your losing position is going further down the balance on your account could be too low to meet your obligations. When this happens your broker will give you a so called “Margin Call”. This means you need more margin (account balance) to hold on to your position. Most of the time when the margin percentage gets under 50% your broker will close that particular position with a loss.
When you decide to trade with big leverages or open a lot positions simultaneously you have to be careful because you don’t want to get that Margin Call.
What type of trader you are? Scalpershold onto for a few seconds to a few minutes at the max. Their main objective is to grab very small amounts of pips as many times as they can throughout the busiest times of the day during the London open or us open or Asia open most loyalty hours from the day.
Day Trades – Beginners
Day Traders usually pick side at the beginning of the day, acting on their bias, and then finishing the day with either a profit or a loss. These kinds of traders do not hold their trades overnight they close every trade the same day.
Swing Traders – Trades For Several Days
Swing traders are for those people that like to hold on to trades for several days at a time. These types of traders can’t monitor their charts throughout the day so they dedicate a couple hours analyzing the market every night to make sound trading decisions this type of traders have a regular job near trading.
Position Traders – Several Weeks, Months, Or Even Years
Position traders are those that have trades that last for several weeks, months, or even years. These traders know that fundamental themes will be the predominant factor when analyzing the markets and therefore make their trading decisions based on them we call them the long term trader.
Want to know more about trading in forex / forex mistakes or do you want to join the forex group? The forex group is mainly in English! Please contact me so that I can explain to you much more about what we have to offer. And all your questions can be verbs.
IC Markets True ECN trading environment allows you to trade online on institutional grade liquidity from the worlds leading investment banks and dark pool liquidity execution venues, allowing you to trade on spreads from 0.0 pips. You can now trade along side the worlds biggest banks and institutions with your order flowing straight into our true ECN environment.Trade in a true ECN environment with no dealing desk or price manipulation. IC Markets is the online forex broker of choice for high volume traders, scalpers and robots.
For USA & Canada clients i recommend FXChoice which is also a very good broker.
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