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A Simple Introduction
Forex is an abbreviation of foreign exchange.
The foreign exchange market can also be referred to as a
financial market, a market being activity of goods bought and
sold. The goods in Forex being currencies.
The Forex market offers traders and investors an opportunity to
buy and sell currencies with the goal of making a profit.
Currency is traded by coupling a currency against another
currency. Coupling these currencies together creates a currency
pair. The EUR/USD (the Euro against the US Dollar),
GBP/USD (the Great British Pound against the US Dollar) and
the USD/JPY (the US Dollar against the Japanese Yen) are a
few examples of the currency pairs traded.
Price is determined by comparing the strength or value of a
currency against another, and is usually shown in magnified
detail down to a hundredth of a cent, penny or equivalent. For
example, the EUR/USD could have a current price of 1.3448,
meaning the exchange rate for every one Euro is 1.3448 US
Dollars. The GBP/USD could have a current price of 1.6911,
meaning the exchange rate for every Pound Sterling is 1.6911
US Dollars. Profit is made possible due to the fluctuation of
price within a currency pair. If traders buy the Euro when it is
worth 1.3448 against the US Dollar and sell the Euro when it is
worth more (1.3498 etc.) traders would make a profit.
Traders have the opportunity to take advantage of price when it
is appreciating (rising in price) or depreciating (declining in
price). Traders can buy currency (going long) and sell it
sometime in the future to make a profit or loss. Traders can also
sell currency first (going short) and buy it sometime in the
future to make a profit or loss.
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Price Behaviour
Firstly, thank you for taking the time to read my book on price
behavior.
Currency price does have behaviour, meaning price generally
acts or reacts in certain ways. These ways can be learnt and
applied to trading, which can help traders to have greater
probability of speculating future price correctly and
consequently make a profit.
So how does price behave? Lets first look at very simple price
movement. Some of you may know this already but knowing the
basics is absolutely crucial to your success as a trader (in fact a
lot my success as a trader has come from sticking to the basics).
Price trends up (moves in an upwards motion), trends down
(moves in a downwards motion) or ranges (moves in a sideways
motion). When price trends we usually get what I like to call a
stepping motion. Lets have a look at a few illustrations to make
this clearer.
a.
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Trend Momentum
The momentum of a trend will give us an indication whether a
trend will continue to trend or if the trend is likely to soon stop
trending. For example, the momentum of an uptrend can be an
indication if price will continue to uptrend in the near future or
if the uptrend will soon change direction, such as down
trending or being range bound (moving sideways).
To identify trend momentum we need to be able to recognize
the pushes and pullbacks of a trend as already taught.
Once we can recognize the pushes and pullbacks of a trend our
next step is to recognize the highs and lows of a trend. The
highs and lows of a trend is the area where price reverses from a
push to a pullback or when prices reverses from a pullback to a
push. On an uptrend the end of a push is identified as the high
and the end of a pullback is identified as the low. On a
downtrend the end of a push is identified as the low and the end
of a pullback is identified as the high.
Please see the next page for illustrations of highs and lows of a
trend.
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sideways direction).
Take a look at the illustration below. It is not uncommon to see
price behave like this.
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Range Tennis
As mentioned near the beginning of this book price does not
always trend, price can also range. When price ranges price
bounces between two areas of the market, creating a sideways
movement.
This price bouncing behaviour, from one area of the market to
another, could be compared to a game of tennis. Price is being
hit from one side of the court to the other, and then hit back
again.
Here is an illustration.
Unlike trends, where highs and lows can show us future price
movement, ranges work by areas of support and resistance.
These areas are where a significant amount of buyers or sellers
are waiting to open positions and push price in their favour.
The resistance area being where a significant amount of sellers
are waiting for price to move into their territory so they can
depreciate price and the support area being where a significant
amount of buyers are waiting to hit the price back to the sellers
just like tennis.
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that price is going to reverse and head back down to the buyers.
If price has reached the support area this can indicate to traders
that price is going to reverse and head back up to the sellers.
In ranging markets traders play tennis with price and they can
play on both sides of the court! Being a seller and pushing price
back down to the buyers and then becoming a buyer and hitting
price back to the sellers! It is important to note that this is not
always going to be the case. Eventually every range comes to an
end and either the support area or resistance area is not going
to hold, meaning price will break through it. This is referred to
as a breakout and can look something like this:
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