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FX SCHOOL (4ii) : TA Tools - Price Action

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Old 13-08-2009, 05:11
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Default FX SCHOOL (4ii) : TA Tools - Price Action

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THE T.A. TOOLS – PRICE ACTION


In this section, we will just highlight some of the different price action tools utilized by Forex traders. Whilst there are numerous price-action methods, we’re just going to focus on the main three.

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Candlestick Patterns


We briefly mentioned Candlesticks earlier above. Basically, candlesticks give us four main pieces of information. 1) The price at which the candle opened, 2) the price at which the candle closed, 3) the highest price the candle reached, and 4) the lowest price the candle reached. Potentially, candlesticks on their own have the ability to inform us, whether the market is bullish (moving in an upwards direction), or bearish (moving in a downwards direction).


Knowing how to read the different types candlestick takes time to learn, but can be very useful in gauging the market. In the figure below, the green candle is a bullish candle (i.e. going up), and the red candle is a bearish candle (i.e. going down).




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Support and Resistance


Often, you will get a few candles that hit a certain price point or price area, and this creates a potential barrier. This barrier (shown as the white line in the example below), is known as either Support or Resistance. The more candles that fail to break this barrier, the stronger the Support or Resistance could be. Depending on whether the barrier is above or below price determines on whether this barrier is called Support or Resistance. So if the barrier is above the price, the barrier is called Resistance, and if the barrier is below price, it’s called Support.

This example below is of Resistance:




As you can see, some resistance was formed at point 2, after price “tested” the initial area created by point 1. So price came back up a third time (at point 3), to test this resistance, but it failed to break past it. Sometimes, based on this alone, it’s actually possible to predict where price may be headed. So in this case, you might have predicted that the resistance would hold (signified by the white line that I’ve drawn), and you might have decided to “Sell EUR/USD” at point 3, which would potentially have made a lot of money, depending on your initial investment.


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Fibonacci


Fibonacci trading is named after the Italian mathematician, Leonardo Fibonacci, who lived during the 13th Century. He used a series of special numbers in his calculations. These same special numbers, or ratios, are used today in Forex trading. They allude to the fact that price reacts to certain numbers/ratios, and this reaction can be used to help traders to buy or sell a currency, and therefore profit from it. Hence, just as we’ve seen above where price reacted to the resistance; price can also react to Fibonacci ratios, as shown in the example below:




First, we have to establish that there is a definite trend. And in the example above, we can see there is a downwards (bearish) trend. So then, all we do is, using the Fibonacci tool (available in the forex platform), we draw a line from the high point (point 1) to the low point (point 2). If the trend was upwards (bullish), then we’d draw the line from low to high (instead of high to low). Finally, the Fibonacci tool will then automatically draw the special ratios, (i.e. those yellow horizontal lines) also known as “Fibonacci retracement levels”. So, after point 2, when price was starting to climb up, we already had an indication that price may react to the 23.6 Fibonacci level (point 3). And indeed it did, whereby price raced back down, potentially landing us a handsome profit, if we had anticipated this reaction and sold at point 3. Now, price doesn’t always react to the 23.6 level, it may react at the 38.2 level or the 50.0 level or the 61.8 level. Or it may not even react to either of those levels.


Fibonacci is one of the hardest aspect of Forex trading, and it would be impossible to do it justice unless a whole book (if not volumes of books) were to be written about it. However, suffice it to say, many traders use it, yet many traders don’t use it. Both sets of traders are successful.


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