FOREX TRADING TRAINING

DAY 11

*DAY 11: THE PHILOSOPHY, ART AND SCIENCE OF TECHNICAL ANALYSIS.*

Good morning members. Welcome to another day of our *FOREX TRADING TRAINING*.

Technical analysis is the framework in which traders study price movement.

The theory is that a person can look at historical price movements and determine the current
trading conditions and potential price movement.

Someone who uses technical analysis is called a technical analyst. Traders who use technical
analysis are known as technical traders.

The main evidence for using technical analysis is that, theoretically, all current market
information is reflected in the price.

Technical traders generally ascribe to the belief that “It’s all in the charts!”

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This simply means that all known fundamental information is priced into the current market
price.

If price reflects all the information that is out there, then price action is all one would really
need to make a trade.

Technical analysis looks at the rhythm, flow, and trends in price action.

Now, have you ever heard the old adage, “History tends to repeat itself“?

Well, that’s basically what technical analysis is all about!

If a certain price held as a major support or resistance level in the past, forex traders will keep
an eye out for it and base their trades around that historical price level.

Technical analysts look for similar patterns that have formed in the past and will form trade
ideas believing that price could possibly act the same way that it did before.

Technical analysis is NOT so much about prediction as it is about PROBABILITY.

Technical analysis is the study of historical price action in order to identify patterns and
determine probabilities of the future direction of price.

So how the heck does one “study historical price action“?

In the world of trading, when someone says “technical analysis”, the first thing that comes to
mind is a chart.

Technical analysts use charts because they are the easiest way to visualize historical data!

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Technical analysts live, eat, and breathe charts which is why they are often called chartists.

You can look at past data to help you spot trends and patterns which could help you find some
great trading opportunities.

What’s more is that with all the traders who rely on technical analysis out there, these price
patterns and indicator signals tend to become self-fulfilling.

As more and more forex traders look for certain price levels and chart patterns, the more likely
that these patterns will manifest themselves in the markets.

You should know though that technical analysis is VERY subjective.

Just because Michael, Don, Leonard, and Raphael are looking at the exact same chart setup or
indicators doesn’t mean that they will come up with the same idea of where price may be
headed.

The important thing is that you understand the concepts under technical analysis so that you
won’t get nosebleeds whenever somebody starts talking about Fibonacci, Bollinger Bands, or
pivot points.

I know you are thinking to yourself, “Ghai! These guy is smart. He is using crazy words like
‘Fibonacci’ and ‘Bollinger’. I can never learn this stuff!”

Don’t worry yourself too much. After you are done with our training, you too will be smart.

In the next few article, I would like us to finish the remaining 3 trading styles (Day Trading,
Swing Trading and Position Trading) from our yesterday`s lesson.

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*DAY TRADING*

Day trading is a popular trading strategy where you buy and sell a financial instrument over a
time frame of a single day’s trading with the intention of profiting from small price movements.

Day trading is another short-term trading style, but unlike scalping, you are typically only taking
one trade a day and closing it out when the day is over.

These traders like picking a side at the beginning of the day, acting on their bias, and then
finishing the day with either a profit or a loss.

They DON’T like holding their trades overnight.

Day trading is suited for forex traders that have enough time throughout the day to analyze,
execute and monitor a trade.

If you think scalping is too fast but swing trading is a bit slow for your taste, then day trading
might be for you.

*You might be a forex day trader if:*

*You like beginning and ending a trade within one day.

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*You have time to analyze the markets at the beginning of the day and can monitor it
throughout the day.

*You like to know whether or not you win or lose at the end of the day.

*You might NOT be a forex day trader if:*

*You like longer or shorter term trading.

*You don’t have time to analyze the markets and monitor it throughout the day.

*You have a day job.

*Some things to consider if you decide to day trade:*

*Stay informed on the latest fundamentals events to help you choose a direction*

You will want to keep yourself up-to-date on the latest economic news so that you can make
your trading decisions at the beginning of the day.

*Do you have time to monitor your trade?*

If you have a full-time job, consider how you will manage your time between your work and
trading. Basically…. don’t get fired from your job because you are always looking at your charts!

*TYPES OF DAY TRADING*

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Day traders looking to maximize intraday profits often use one or multiple of the following day
trading strategies.

*1. Trend Trading*

Trend trading is when you look at a longer time frame chart and determine an overall trend.

Once the overall trend is established, you move to a smaller time frame chart and look for
trading opportunities in the direction of that trend.

Using indicators on the shorter time frame chart will give you an idea of when to time your
entries.

First, determine what the overall trend is by looking at a longer time frame.

You can use indicators to help you confirm the trend.

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Once you determine the overall trend, you can then move to a smaller timeframe and look for
entries in the same direction.

Remember this? It’s called Multiple Time Frame Analysis!

*2. Countertrend Trading*

Countertrend day trading is similar to trend trading except that once you determine your
overall trend, you look for trades in the opposite direction.

The idea here is to find the end of a trend and get in early when the trend reverses. This is a
little riskier but can have huge payoffs.

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In this example, we see that there was a long and exhausted downtrend on the 4hr chart. This
gives us an indication that the market may be ready for a reversal.

Since our thinking is a “counter trend”, we would look for trades in the opposite direction of
the overall trend on a smaller timeframe such as a 15-minute chart.

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Traders who use this strategy need to be quick to spot the end of a trend in order to open a
position at the optimal entry point.

This strategy is fighting the trend and can work against traders at times.

Remember that going opposite of the trend is very risky, but if timed correctly, it can have huge
rewards!

Countertrend trading favors those who know recent price action really well and so know when
to bet against it.

*3. Range Trading*

Range trading, sometimes referred to as channel trading, is a day trading strategy that starts
with an understanding of the recent price action.

A trader will inspect chart patterns to identify typical highs and lows during the day while
keeping a close eye on the difference between these points.

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For example, if the price has been rising off a support level or falling off a resistance level, then
a trader might choose to buy or sell based on their perception of the market’s direction.

This is known as “trading in a range“, where each time price hits a high, it falls back to the low.
And vice versa.

A day trader who is using this strategy who is looking to go long will buy around the low price
and sell at the high price.

A day trader who is using this strategy who is looking to go short will sell around the high price
and buy at the low price.

Most range traders will use stop losses and limit orders to keep their trading in line with what
they perceive to be happening in the market.

A stop loss order is the point at which a position is automatically closed out if the price of the
security drops below the trader’s entry point.

A limit order is the automatic closing of a position at the point where the trader perceives a
profitable run could end.

Range trading requires enough volatility to keep the price moving for the duration of the day,
but not so much volatility that the price breaks out of the range and starts a new trend.

But if the price does break out, there’s a strategy for that as well…

*4. Breakout Trading*

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Breakout trading is when you look at the range a pair has made during certain hours of the day
and then placing trades on either side, hoping to catch a breakout in either direction.

This is particularly effective when a pair has been in a tight range because it is usually an
indication that the pair is about to make a big move.

Your goal here is to set yourself up so that when the move takes place you are ready to catch
the wave!

In breakout trading, you determine a range where support and resistance have been holding
strongly.

Once you do, you can set entry points above and below your breakout levels.

As a rule of thumb, you want to target the same amount of pips that makes up your determined
range.

*5. News Trading*

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News trading is one of the most traditional, predominantly short-term focused trading
strategies used by day traders.

Someone who is news trading pays less attention to charts and technical analysis. They wait for
information to be released that they believe will drive prices in one direction or the other.

This information could be a report releasing economic data, such as unemployment, interest
rates, or inflation, or simply breaking news or random presidential tweets.

To do well with news trading, day traders tend to have a solid understanding of the markets in
which they’re trading.

They develop the insights to determine how the news will be received by the market in
question in terms of the extent to which its price will be affected.

They will be alert to various different news sources at the same time and know when to enter
the market.

The drawback of news trading is that events that cause substantial movements in prices are
usually rare.

More often than not, the expectations of such events are factored into the price in the run-up
to the announcement.

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*SWING TRADING*

Swing trading refers to the medium-term trading style that is used by forex traders who try to
profit from price swings.

It is trading style requires patience to hold your trades for several days at a time. Swing trading
stands between two other popular trading styles: day trading and position trading.

Swing traders identify a possible trend and then hold the trade(s) for a period of time, from a
minimum of two days to several weeks.

It is ideal for those who can’t monitor their charts throughout the day but can dedicate a couple
of hours analyzing the market every night.

Swing trading is best suited for those who have full-time jobs or school but have enough free
time to stay up-to-date with what is going on in the global economy.

Swing trading strategies employ fundamental or technical analysis in order to determine

whether or not a particular currency pair might go up or down in price in the near future.

Swing trading attempts to identify “swings” within a medium-term trend and enter only when
there seems to be a high probability of winning.

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For example, in an uptrend, you aim to buy (go long) at “swing lows.” And conversely, sell (go
short) at “swing highs” to take advantage of temporary countertrends.

Because trades last much longer than one day, larger stop losses are required to weather
volatility, and a forex trader must adapt that to their money management plan.

You will most likely see trades go against you during the holding time since there can be many
fluctuations in the price during the shorter time frames.

It is important that you are able to remain calm during these times and trust in your analysis.

Since trades usually have larger targets, spreads won’t have as much of an impact on your
overall profits.

As a result, trading pairs with larger spreads and lower liquidity are acceptable.

*TYPES OF SWING TRADING*

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How do you swing trade?

There are several different trading strategies often used by swing traders.

Here are the four most popular: reversal, retracement (or pullback), breakouts, and
breakdowns.

*1. Reversal Trading*

Reversal trading relies on a change in price momentum. A reversal is a change in the trend
direction of an asset’s price. For example, when an upward trend loses momentum and the
price starts to move downwards. A reversal can be positive or negative (or bullish or bearish).

*2. Retracement Trading*

Retracement (or pullback) trading involves looking for a price to temporarily reverse within a
larger trend. Price temporarily retraces to an earlier price point and then continues to move in
the same direction later.

Reversals are sometimes hard to predict and to tell apart from short-term pullbacks. While a
reversal denotes a change in trend, a pullback is a shorter-term “mini reversal” within an
existing trend.

Think of a retracement (or pullback) as a “minor countertrend within the major trend”.

If it’s a retracement, price moving in against the primary trend should be temporary and
relatively brief.

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Reversals always start as potential pullbacks. The challenge is to know whether it is only a
pullback or an actual trend reversal

*3. Breakout Trading*

Breakout trading is an approach where you take a position on the early side of an UPTREND,
and looking for the price to “breakout”. You enter into a position as soon as price breaks a key
level of RESISTANCE.

*4. Breakdown Strategy*

A breakdown strategy is the opposite of a breakout strategy. You take a position on the early
side of a DOWNTREND and looking for price to “breakdown” (also known as a downside
breakout). You enter into a position as soon as price breaks a key level of SUPPORT.

*You might want to be a swing trader if:*

*You don’t mind holding your trades for several days.

*You are willing to take fewer trades but more careful to make sure your trades are very good
setups.

*You don’t mind having large stop losses.

*You are patient.

*You are able to remain calm when trades move against you.

*You might NOT want to be a swing trader if:*

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*You like fast-paced, action-packed trading.

*You are impatient and like to know whether you are right or wrong immediately.

*You get sweaty and anxious when trades go against you.

*You can’t spend a couple of hours every day analyzing the markets.

If you have a full-time job but enjoy trading on the side, then swing trading might be more your
style!

It is important to remember that every trading style has its pros and cons, and it is up to you
the trader, which one you will choose.

*POSITION TRADING*

Position trading is the longest-term trading and can have trades that last for several months to
several years!

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Position traders ignore short-term price movements in favor of pinpointing and profiting from
longer-term trends.

It is this type of trading that most closely resembles “investing”. The crucial difference is in
markets outside forex, “investing” usually means you hold positions that are long.

This kind of forex trading is reserved for super PATIENT traders and requires a good
understanding of the fundamentals.

Because position trading is held for so long, fundamental themes will be the predominant focus
when analyzing the markets.

Fundamentals dictate the long-term trends of currency pairs and it is important that you
understand how economic data affects countries and their future outlook.

Because of the lengthy holding time of your trades, your stop losses will be very large.

This means that your losses can end up being huge, but it also means your profits can be way
huge.

You must make sure you are well-capitalized or you will most likely get margin called.

Position trading also requires thick skin because it is almost guaranteed that your trades will go
against you at one point or another.

These won’t just be little retracements either.

You may experience huge swings and you must be ready and have absolute trust in your
analysis in order to remain calm during these times.

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*You might be a position trader if:*

You are an independent thinker. You have to be able to ignore popular opinion and make your
own educated guesses as to where the market is going.

You have a great understanding of fundamentals and have good foresight into how they affect
your currency pair in the long run.

You have thick skin and can weather any retracements you face.

You have enough capital to withstand several hundred pips if the market goes against you

You don’t mind waiting for your grand reward. Long-term forex trading can net you several
hundred to several thousands of pips. If you get excited about being up 50 pips and already
want to exit your trade, consider moving to a shorter-term trading style.

You are extremely patient and calm.

*You might NOT be a position trader if:*

You easily get swayed by popular opinions on the markets.

You don’t have a good understanding of how fundamentals affect the markets in the long run.

You aren’t patient. Even if you are somewhat patient, this still might not be the trading style for
you. You have to be the ultimate zen master when it comes to being this kind of patient!

You don’t have enough starting capital.

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You don’t like it when the market goes against you.

You like seeing your results fast. You may not mind waiting a few days, but several months or
even years is just too long for you to wait.

*WHAT TYPE OF FOREX TRADER ARE YOU?*

In the previous lessons, we have gone through a variety of trading styles.

Hopefully, you can identify which one may match you the best.

If you already forgot what trading style is which, fortunately, for you, it’s time to review!

There are four main types of trading styles:

1. The Scalper

2. The Day Trader

3. The Swing Trader

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4. The Position Trader

Scalpers hold onto for a few seconds to a few minutes at the most. Their main objective is to
grab very small amounts of pips as many times as they can throughout the busiest forex times
of the day.

Day traders usually pick a side at the beginning of the day, acting on their bias, and then
finishing the day with either a profit or a loss. These kind of traders do not hold their trades
overnight.

Swing traders are for those people that like to hold on to trades for several days to several
weeks at a time. These types of traders can’t monitor their charts throughout the day so they
dedicate a couple of hours analyzing the market every night to make sound trading decisions.

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.

No matter what style you choose, you have to make sure that it truly fits your personality.

Always changing your trading style can lead to trouble and is a sure-fire way to blowing your
account.

That said, if you try scalping and you realize after a week that it’s too fast or too draining, then
be flexible enough to switch it up.

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*SUPPORT AND RESISTANCE*

Let’s now get back to today`s topic, technical analysis.

To start your education on technical analysis, let's begin with the basics: support and
resistance!

“Support and resistance” is one of the most widely used concepts in trading.

Strangely enough, everyone seems to have their own idea of how you should measure support
and resistance.

Let’s take a look at the basics first.

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Look at the diagram above. As you can see, this zigzag pattern is making its way up (a “bull
market”).

When the price moves up and then pulls back, the highest point reached before it pulled back is
now resistance.

Resistance levels indicate where there will be a surplus of sellers.

When the price continues up again, the lowest point reached before it started back is now
support.

Support levels indicate where there will be a surplus of buyers.

In this way, resistance and support are continually formed as the price moves up and down
over time.

The reverse is true during a downtrend.

In the most basic way, this is how support and resistance are normally traded:

*Trade the “Bounce”*

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Buy when the price falls towards support.

Sell when the price rises towards resistance.

*Trade the “Break”*

Buy when the price breaks up through resistance.

Sell when the price breaks down through support.

A “bounce” and “break”? If you’re a little bit confused, no need to worry as we will cover these
concepts in more detail later.

*Plotting Support and Resistance Levels*

One thing to remember is that support and resistance levels are not exact numbers.

Often times you will see a support or resistance level that appears broken, but soon after find
out that the market was just testing it.

With candlestick charts, these “tests” of support and resistance are usually represented by the
candlestick shadows.

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Notice how the shadows of the candles tested the 1.4700 support level.

At those times it seemed like the price was “breaking” support.

In hindsight, we can see that the price was merely testing that level.

*So how do we truly know if support and resistance were broken?*

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

Let’s take our same example from above and see what happened when the price actually
closed past the 1.4700 support level.

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In this case, the price had closed below the 1.4700 support level but ended up rising back up
above it.

If you had believed that this was a real breakout and sold this pair, you would have been
seriously hurt!

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.

Support was “breached” but only temporarily.

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

One way to help you find these zones is to plot support and resistance on a line chart rather
than a candlestick chart.

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The reason is that line charts only show you the closing price while candlesticks add extreme
highs and lows to the picture.

These highs and lows can be misleading because oftentimes they are just the “knee-jerk”
reactions of the market.

It’s like when someone is doing something really strange, but when asked about it, he or she
simply replies, “Sorry, it’s just a reflex.”

When plotting support and resistance, you don’t want the reflexes of the market. You only
want to plot its intentional movements.

Looking at the line chart, you want to plot your support and resistance lines around areas
where you can see the price forming several peaks or valleys.

*Other interesting tidbits about support and resistance:*

When the price passes through resistance, that resistance could potentially become support.

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The more often price tests a level of resistance or support without breaking it, the stronger the
area of resistance or support is.

When a support or resistance level breaks, the strength of the follow-through move depends on
how strongly the broken support or resistance had been holding.

With a little practice, you’ll be able to spot potential forex support and resistance areas easily.

Later on, I will teach you how to trade diagonal support and resistance lines, otherwise, let
learn about trend lines in our next part.

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*TREND LINES*

Trend lines are probably the most common form of technical analysis in forex trading.

They are probably one of the most underutilized ones as well.

If drawn correctly, they can be as accurate as any other method.

Unfortunately, most forex traders don’t draw them correctly or try to make the line fit the
market instead of the other way around.

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In their most basic form, an uptrend line is drawn along the bottom of easily identifiable
support areas (valleys).

This is known as an ascending trend line.

In a downtrend, the trend line is drawn along the top of easily identifiable resistance areas
(peaks).

This is known as a descending trend line.

*How do you draw trend lines?*

To draw forex trend lines properly, all you have to do is locate two major tops or bottoms and
connect them.

What’s next?

Nothing.

Uhh, is that it?

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Yep, it’s that simple.

Here are trend lines in action! Look at those waves!

*Types of Trends*

There are three types of trends:

1. Uptrend (higher lows)

2. Downtrend (lower highs)

3. Sideways trend (ranging)

*Here are some important things to remember using trend lines in forex trading:*

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It takes at least two tops or bottoms to draw a valid trend line but it takes THREE to confirm a
trend line.

The STEEPER the trend line you draw, the less reliable it is going to be and the more likely it will
break.

Like horizontal support and resistance levels, trend lines become stronger the more times they
are tested.

And most importantly, DO NOT EVER draw trend lines by forcing them to fit the market. If they
do not fit right, then that trend line isn’t a valid one!

*TREND CHANNELS*

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If we take this trend line theory one step further and draw a parallel line at the same angle of
the uptrend or downtrend, we will have created a “channel”.

Trend channels are just another tool in technical analysis that can be used to determine good
places to buy or sell.

The upper trend line marks resistance and the lower trend line marks support. So both the tops
and bottoms of channels represent potential areas of support or resistance.

Trend channels with a negative slope (down) are considered bearish and those with a positive
slope (up) are considered bullish.

To create an up (ascending) channel, simply draw a parallel line at the same angle as an uptrend
line and then move that line to a position where it touches the most recent peak. This should
be done at the same time you create the trend line.

To create a down (descending) channel, simply draw a parallel line at the same angle as the
downtrend line and then move that line to a position where it touches the most recent valley.
This should be done at the same time you create the trend line.

When prices hit the LOWER trend line, this may be used as a buying area.

When prices hit the UPPER trend line, this may be used as a selling area.

*Types of Trend Channels*

There are three types of channels:

1. Ascending channel (higher highs and higher lows)

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2. Descending channel (lower highs and lower lows)

3. Horizontal channel (ranging)

Some traders prefer to use the terms “rising channel” for an ascending channel and “falling
channel” for a descending channel. Most likely, Millenials.

*Important things to remember about drawing trend channels:*

When constructing a trend channel, both trend lines must be parallel to each other.

Generally, the bottom of the trend channel is considered a “buy zone” while the top of the
trend channel is considered a “sell zone”.

Like in drawing trend lines, DO NOT EVER force the price to the channels that you draw!

A channel boundary that is sloping at one angle while the corresponding channel boundary is
sloping at a different angle is not correct and could lead to bad trades.

When this happens, this chart pattern is no longer a trend channel but a triangle. (which you
will learn about more later).

That said, trend channels don’t have to be completely parallel. Nor does 100% of price action
have to fit within the channel.

A common mistake many traders make is that they only look for textbook price patterns.

They miss important information about price action and close their eyes to other important
clues.

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Notice the channel drawings below…

Do they look perfect?

Waiting for picture-perfect textbook examples won’t help you in the real world because it’s
going to be pretty rare to see price action that fits perfectly within two perfectly parallel trend
lines.

It’s like trying to find the perfect man or woman in the real world.

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*HOW TO TRADE SUPPORT AND RESISTANCE*

Now that you know the basics of how to trade support and resistance, it’s time to apply these
basic but extremely useful technical tools in your trading.

Because i want to make things easy to understand, I have divided how to trade support and
resistance levels into two simple ideas: the Bounce and the Break.

*The Bounce*

As the name suggests, one method of trading support and resistance levels is right after the
bounce.

Many retail forex traders make the error of setting their orders directly on support and
resistance levels and then just waiting for their trade to materialize.

Sure, this may work at times but this kind of trading method assumes that a support or
resistance level will hold without price actually getting there yet.

You might be thinking, “Why don’t I just set an entry order right on the line? That way, I am
assured the best possible price.”

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When playing the bounce, we want to tilt the odds in our favor and find some sort of
confirmation that the support or resistance will hold.

For example, instead of simply buying right off the bat, we want to wait for it to bounce off
support before entering.

If you’ve been looking to go short, you want to wait for it to bounce off resistance before
entering.

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By doing this, you avoid those moments where price moves fast and breaks through support
and resistance levels. From experience, catching a falling knife when trading can get really
bloody!

*The Break*

Support and resistance levels don`t hold forever.

The fact of the matter is that these levels break… often.

So, it’s not enough to just play bounces. You should also know what to do whenever support
and resistance levels give way!

There are two ways to play breaks in trading: the aggressive way or the conservative way.

*1. The Aggressive Way*

The simplest way to play breakouts is to buy or sell whenever price passes convincingly through
a support or resistance zone.

The keyword here is convincing because we only want to enter when the price passes through a
significant support or resistance level with ease.

We want the support or resistance area to act as if it just received a Chuck Norris karate chop:
We want it to wilt over in pain as price breaks right through it.

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*2. The Conservative Way*

Imagine this hypothetical situation: you decided to go long EUR/USD hoping it would rise after
bouncing from a support level.

Soon after, support breaks and you are now holding on to a losing position, with your account
balance slowly falling.

Do you…

A. Accept defeat, get the heck out, and liquidate your position?

or

B. Hold on to your trade and hope the price rises up again?

If your choice is the second one, then you will easily understand this type of trading method.

Remember, whenever you close out a position, you take the opposite side of the trade.

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Closing your EUR/USD long trade at or near breakeven means you will have to short the
EUR/USD by the same amount.

Now, if enough selling and liquidation of losing positions happen at the broken support level,
the price will reverse and start falling again.

This phenomenon is the main reason why a broken support level becomes a resistance level
whenever it breaks.

As you would’ve guessed, taking advantage of this phenomenon is all about being patient.

Instead of entering right on the break, wait for the price to make a “pullback” to the broken
support or resistance level, and enter after the price bounces.

Today’s lesson was just an introduction to technical trading. As days go by we shall learn more
in-depth lessons on technical analysis.

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