Generic Trading Education

Ever travel abroad and exchange your money for the local currency? That's a tiny part of the giant foreign exchange market, also called forex!

Imagine a giant marketplace where people buy and sell currencies like US dollars, Euros, and Japanese Yen. They do this hoping the currency value will go up, allowing them to sell it later for more.

This marketplace is open 24/5, almost never sleeps! It's much bigger than the famous New York Stock Exchange, with trillions of dollars traded each day.

Here's a breakdown of what forex is all about:

• Buying and selling currencies: Just like exchanging money at the airport, forex lets you trade currencies with the hope their value will increase.
• Always on the move: Unlike stock markets that close at night, forex keeps going almost round the clock, following the sun as it moves across different time zones.
• A massive marketplace: The forex market is much bigger than any stock exchange, with trillions of dollars traded daily. However, the part most individual traders participate in is a smaller slice of this giant pie.

In the next part, we'll explore what exactly gets traded in this massive forex market.

Forex isn't about buying physical things, it's about buying and selling currencies like US dollars, Euros, or Japanese Yen. It can be confusing at first, so here's a simple analogy:

Imagine you're buying a tiny piece of a country's economy, like buying a small slice of a company (a stock). The value of that piece (the currency's exchange rate) reflects how well the country's economy is doing now and how traders think it will do in the future.

So, if you buy Japanese Yen, you're basically betting that Japan's economy is strong and will get even stronger. You hope to sell that Yen later for more money than you paid.

In general, a currency's value compared to others reflects how well its country's economy is doing.

Major Currencies

As a beginner, you'll likely focus on the most popular currencies, called "major currencies." These represent some of the world's biggest economies and are traded the most.

There's some debate about which currencies are truly "major," but we'll keep it simple and consider eight of them:

• USD (US Dollar): Used in the United States, often nicknamed "Buck"
• EUR (Euro): Used in the European Union, sometimes called the "Eurozone buck"
• JPY (Japanese Yen): Used in Japan
• GBP (British Pound): Used in the United Kingdom, also known as the "Cable" or "Sterling"
• CHF (Swiss Franc): Used in Switzerland, nicknamed the "Swissy"
• AUD (Australian Dollar): Used in Australia, sometimes called the "Aussie"
• NZD (New Zealand Dollar): Used in New Zealand, nicknamed the "Kiwi"
• CAD (Canadian Dollar): Used in Canada, often called the "Loonie"

These currencies all have 3-letter codes to make them easy to identify. For example, USD for US Dollar and NZD for New Zealand Dollar.

Navigating the Forex Market: Currencies and Pairs

The forex market lets you trade currencies, like US dollars (USD), Euros (EUR), and Japanese Yen (JPY). Imagine buying a currency is like buying a piece of a country's economy, hoping it gets stronger and you can sell it later for more.

Currencies are always traded in pairs, like EUR/USD (Euro vs US Dollar) or GBP/JPY (British Pound vs Japanese Yen). Think of it as a tug-of-war between two currencies, with their exchange rate showing which one is stronger at that moment.

Here's a breakdown of the different types of currency pairs:

• Major Pairs: These are the most popular and frequently traded pairs, all including the US dollar (USD) on one side. Examples include EUR/USD, USD/JPY, and GBP/USD. 

• Minors (Crosses): These pairs don't include the US dollar but involve other major currencies. Examples are EUR/GBP (Euro vs British Pound) and EUR/CHF (Euro vs Swiss Franc). They offer more trading opportunities than exotics but are less common than majors.

• Exotics: These pairs involve a major currency paired with a currency from a developing economy, like USD/BRL (US dollar vs Brazilian Real). They can be more volatile and have higher transaction costs because they're less traded.

Here are some other currency groups you might encounter:

• G10 Currencies: These are ten of the most heavily traded and stable currencies globally.

• Scandies (SEK, NOK): The currencies of Scandinavian countries (Sweden, Norway, Denmark) - Krone or Krona means "crown" in their languages!

• CEE Currencies: Currencies from Central and Eastern Europe (like Polish Zloty or Hungarian Forint).

• BRICS+ Currencies: Currencies of emerging economies like Brazil, Russia, India, China, and South Africa.

Remember, you don't need to memorize everything at once! As you explore forex trading further, you'll learn more about these different currencies and pairs.

The Enormous World of Forex Trading

The forex market is where currencies are traded, like US dollars (USD), Euros (EUR), and Japanese Yen (JPY). It's different from stock exchanges because it's not in one physical location. Instead, it's an electronic network of banks and other institutions that operate 24/5, all over the world. This means you can trade currencies almost anytime, anywhere with an internet connection!

The forex market is the biggest and most popular financial market in the world. It's like a giant marketplace where people and organizations can buy and sell currencies based on various factors. Unlike some other markets, participants can choose who they trade with based on things like price and reputation.

The Mighty US Dollar

You'll see the US dollar (USD) mentioned a lot in forex trading. Since it's in half of all major currency pairs, and those pairs make up most trades, it's a big deal! The USD is like the king of currencies. Here's why:

• Most traded: The USD is used in over 80% of all forex transactions!
• Reserve currency: Many countries hold USD as part of their reserves, similar to how you might keep savings in different currencies.
• Strong economy: The US has the world's largest economy, making its currency more stable.
• Stable government: A stable political system makes the USD more reliable.
• Military power: The US military strength adds to the USD's reputation.
• Global borrowing: Many countries and companies borrow money in USD.
• Oil and trade: Oil is priced in USD, so countries need USD to buy it.

Basically, the world relies on a steady supply of USD for trade, payments, and loans.

More than Just Business

The forex market serves several functions:

• Transferring money: This is how you might exchange your currency for another when traveling.
• Short-term credit: Businesses can use forex to get temporary loans for international trade.
• Hedging: This protects businesses from currency fluctuations that could hurt their profits.
• Speculation: This is where most of the trading volume comes in. Traders try to profit by buying and selling currencies based on short-term price movements.

Speculation makes up over 90% of forex trading! The huge volume of buying and selling creates a very liquid market. Liquidity means you can easily buy or sell a currency without affecting the price much. This makes forex trading efficient and allows for large trades with minimal impact on price.

However, liquidity can change depending on the currency pair and time of day. We'll explore this more in the forex trading sessions!

If you're serious about trading, a trading plan is your best friend. Think of it like a roadmap that helps you navigate the markets. Here are some key things your plan should cover:

• Are You Ready to Trade?
  • Practice Makes Perfect: Before risking real money, make sure you've tested your trading strategy thoroughly. Does it work consistently in practice? Are you comfortable following it without second-guessing yourself? If not, keep practicing and refining your strategy.
  • Mind Over Money: Trading can be stressful. Make sure you're in a good headspace before placing a trade. If you're dealing with personal issues or feeling overwhelmed, it's best to sit things out. Trade with a clear mind for better decision-making.
• Risk Management: How Much Can You Afford to Lose?
  • Set Your Risk Limit: Decide how much you're comfortable losing on any single trade. Professional traders typically risk between 1-5% of their capital. Choose a risk level that suits your trading style and risk tolerance.
• Setting Goals: Aim High, But Be Realistic
  • What Do You Want to Achieve? Set realistic goals for yourself, like weekly, monthly, and yearly profit targets. Also, consider your risk-to-reward ratio (potential profit compared to potential loss) for each trade. Regularly review your goals to see if you're on track.
• Pre-Trading Routine:
  • Get Informed: Before each trading day, establish a routine that prepares you for the market. This could involve researching upcoming news announcements, drawing support and resistance levels on your charts, or even reviewing your trading plan as a reminder.
• Entry and Exit Strategies: Knowing When to Get In and Out
  • Have a Plan: Before entering a trade, know exactly where you'll place your stop-loss order (to limit losses) and your profit target (to lock in gains). These should be based on your trading strategy.
  • Follow Your Rules: Your trading plan should outline your entry criteria. This could include specific indicator signals, price action patterns, or confirmations across different timeframes. Only enter trades that meet your criteria.
  • Discipline is Key: Once you enter a trade, stick to your plan and exit at your predetermined profit target. Don't get greedy and hold on hoping for more gains. Markets can reverse quickly.
• Learn from Every Trade: Record Keeping
  • Track Your Performance: Keeping a trading journal helps you analyze your strategy's effectiveness and identify areas for improvement. Record details like entry/exit prices, stop-loss/profit targets, position size, trade rationale, emotions during the trade, and profit/loss. You can even include screenshots of your charts.
  • Learn from Mistakes: By reviewing your trades, you can learn from both your wins and losses. This helps you avoid repeating mistakes and improve your trading over time.

Before you jump into a trade, it's crucial to figure out how much money you're willing to risk if things go south. This is called your risk tolerance.

• Think of it like a budget: Imagine you have $10,000 for trading. Maybe you decide you're only comfortable risking 2% of that on any single trade. That means your maximum potential loss on any trade would be $200.
• Stop-Loss Orders: Your Safety Net: A stop-loss order is like an insurance policy for your trade. You tell the trading platform to automatically sell your position if the price goes against you by a certain amount (protecting you from losing more than your $200).
• Stop-Loss Isn't Foolproof: Keep in mind, stop-loss orders aren't perfect. Sometimes, the price might jump dramatically (called a market gap) and your trade might not close out at the exact price you specified.
• Risk and Lot Size: The amount you risk per trade also depends on the currency pair you're trading and the size of your trade (lot size). For example, trading a mini lot (smaller size) of AUD/USD might allow you to set a wider stop-loss (more pips away from your entry price) compared to a standard lot, all while keeping your potential loss around $200.

Key Points:

• Always understand the risks involved in trading before placing a trade.
• Decide on your risk tolerance (how much you're comfortable losing) and stick to it.
• Use stop-loss orders to limit your potential losses.
• Be aware that stop-loss orders aren't perfect and might not execute at the exact price due to market gaps.
• Consider lot size when calculating your risk per trade.

Everyone wants to score that "big reversal trade," but it's important to be realistic. Many new traders get fixated on reversal patterns, hoping to catch a trend change before anyone else. However, this can lead to problems:

• Trading Against the Trend: If you trade a reversal against a strong trend, you're basically betting against the current momentum. This can lead to losses.
• Poor Exit Strategy: Even if you enter a reversal trade correctly, you might exit too early or move your stop-loss too tight, missing out on potential profits.

Trading Reversals the Smart Way:

If you're going to trade reversals, here are some tips:

• Follow the Trend: Always consider the overall trend (daily chart) before looking for reversal patterns on shorter timeframes (hourly chart). Look for reversal patterns that would get you back in line with the bigger trend. For example, if you're in a daily uptrend, look for bullish reversal patterns on the hourly chart.
• Wedges: These patterns form after a strong trend and show the price swings getting smaller. They can be a sign that the trend is losing momentum and might reverse. If the price breaks the wedge's trendline (like a broken support or resistance line), it can be a good entry point for a trade in the direction of the reversal. However, wedges don't always follow trendlines perfectly. Focus on the price action and the relationship between buyers and sellers to understand the shifting market forces.

Double/Triple Tops and Bottoms:

• These patterns can be tricky to trade because they can be messy and not always clear-cut.
• They can be helpful for identifying potential reversal zones and price targets.
• They serve as a warning that the trend might be losing strength (because the highs/lows are getting lower/higher).
• It's generally easier to enter a trade after the price breaks out of the pattern (confirmation).

Head and Shoulders (and Inverted Head and Shoulders):

• These patterns are stronger when the "right shoulder" is smaller than the "left shoulder."
• Similar to wedges, they can offer good entry opportunities if the price retests the broken trendline (neckline) after the breakout.
• Breakouts from head and shoulders can be strong and fast, especially in volatile markets. This can make it difficult to enter the trade at a good price due to potential slippage or gaps in price.
• It's often safer to confirm the pattern and then wait for a pullback (retracement) before entering in the direction of the breakout.

Continuation patterns might look simple and clear in textbooks with perfect charts, but real-life price charts are messier. The key is to understand the basic idea and adapt it to what you see on the chart.

• The Basics: Continuation patterns suggest the price will likely keep moving in the same direction it was trending in before entering the pattern.
• Finding Continuation Patterns:
  • Identify the Trend: First, use a higher timeframe chart (refer to lesson 1 if available) to identify the overall uptrend or downtrend.
  • Look for Patterns on Lower Timeframes: Then, switch to a shorter timeframe chart and look for continuation patterns that form within the trend.
• Triangles: These can be continuation patterns, but not always. For example, an ascending triangle might just show higher lows (support getting stronger) without necessarily breaking above resistance. The key is to use confirmation techniques (from previous lesson) before acting on these patterns.
• Symmetrical Triangles: These triangles get narrower as the price swings become smaller, indicating a potential continuation of the trend.
• Pennants and Flags: These are tricky patterns to trade profitably. I mainly use them to identify "phase 2" (retracements) within an existing trend, rather than relying on them for specific price targets. They can be helpful for gauging the extent of a pullback before the trend resumes.

So, you've spotted a chart pattern, but how do you know if it's a real signal or just a random squiggle? This is where pattern confirmation comes in. There are a few ways to confirm a pattern, and the best method depends on your trading style. Here's the thing: even with confirmation, there's no guarantee the price will follow the pattern. Confirmation just means there's a point on the chart where the pattern might play out if the price breaks past a certain level.

• Important Note: The word "confirmation" can be tricky. A confirmed pattern doesn't mean guaranteed profit. Sometimes, a pattern seems valid but then the price reverses, making it a "failed pattern."

Breakout vs. Close Confirmation:

• Breakout: This is a simple method where the price just needs to cross a specific line (similar to a trendline or support/resistance level). This is good for setting pending orders to catch a potential price move, but the price can (and often does) come back and invalidate the pattern.
• Close: This is a more cautious approach where you wait for the price to not only cross the line but also close a trading bar above it. This is more reliable than a breakout but you might miss out on the initial price move.

Multiple Closes and Throwbacks:

• Multiple Closes: Some traders wait for the price to close above the line two or three times for extra confirmation. This is very safe but you might miss profitable moves waiting for so much confirmation.
• Throwback: This is my preferred method. The price breaks out or closes above the line (confirming the pattern), then dips back towards the line. If the price bounces off that line (now acting as support or resistance), it can be a good entry point with a better chance of success. However, you might miss moves if the price doesn't retrace (dip back) to the line.

The Best Method for You:

There's no single "best" method. Choose the confirmation style that suits your trading personality. For example:

• Aggressive Day Trader: If you like to be in trades all the time, you might not have patience for throwbacks and prefer the breakout method to avoid missing opportunities.
• End-of-Day Trader: With more patience, you might be better suited for the throwback method for potentially better entry points.

Chart patterns can be like road signs, but instead of telling you where to go, they suggest whether the price might keep going in the same direction (continuation) or change direction (reversal).

• Continuation vs. Reversal:
  • Continuation patterns suggest the price will likely continue moving in the same direction it was before entering the pattern.
  • Reversal patterns suggest the price might change direction after entering the pattern.
• Bullish vs. Bearish:
  • Bullish patterns appear during uptrends and suggest the price might keep going up.
  • Bearish patterns appear during downtrends and suggest the price might go down.
• Important Note: This might seem confusing at first. Think of a bullish reversal as a pattern that appears during an uptrend, but it's actually a warning sign that the uptrend might be ending soon and the price might start going down (reversing). The opposite is true for bearish reversals in downtrends.

Using Trends with Patterns:

You learned about identifying trends in lesson one (link it if available). Here are some tips on using trends with chart patterns:

• Continuation Patterns: These are more likely to appear on shorter timeframes than the timeframe you used to identify the overall trend.
• Reversal Patterns: While trends eventually reverse, pinpointing the exact reversal point is difficult. Look for reversal signals on shorter timeframes that move in the opposite direction of the higher timeframe trend.

Some traders focus on just one type of technical analysis, but I recommend using both long-term and short-term patterns together. They work well as a team because each makes up for the other's weaknesses.

• Long-Term Patterns: These patterns can give you clues about the overall direction the price might be headed and where it might stop (targets). However, they might not tell you the exact moment to jump in or out for the best trade.

• Short-Term Patterns: These patterns can be great for pinpointing potential entry and exit points for your trades. However, they don't necessarily tell you where the price might be going in the bigger picture, and they don't always suggest profit targets.

The Big Picture:

By combining long-term and short-term analysis, you get a more complete understanding of what the price chart is telling you. Long-term patterns give you a sense of direction, while short-term patterns help you time your entries and exits more effectively. This can help you develop a more well-rounded trading strategy.

Short-term chart patterns develop quickly, sometimes using just one or a few price bars (like candlesticks) on your chart. They can appear on any time frame, from 1-minute charts to weekly charts. Just like long-term patterns, the higher the time frame, the more reliable the signal tends to be.

• What They Offer:
  • Spotting Turning Points: These patterns can help you identify potential turning points in a price trend, like the end of a price move up (phase 2) or the start of a price move down (phase 1). Certain candle formations can suggest these potential reversals.
  • Entry and Exit Signals: Some short-term patterns can suggest potential entry (buy) or exit (sell) points for your trades. However, it's important to consider the overall trend and support/resistance levels before acting on these signals for better confirmation.
  • Trade Management: These patterns can also help you manage your trades once you're in them. For example, if the price is moving in your favour and you see strong candles forming, you might adjust your stop-loss order to lock in some profits. Conversely, if you see a candle formation that suggests the price might reverse against you, you might tighten your stop-loss to limit potential losses.

Long-term chart patterns take more time to develop than short-term patterns, sometimes forming over weeks, months, or even years. They're also called "Western patterns" because they're widely recognized by technical analysts.

• Time Frame Doesn't Matter (Really): These patterns can appear on any chart time frame, from 1-minute charts to monthly charts. However, the general rule is that the higher the time frame, the more reliable the pattern tends to be. Lower time frames can generate more false signals. For example, you might see a similar pattern on a 1-minute chart that takes just minutes to form, while a monthly chart might show a pattern that developed over years. The concept is the same, but the time scale is different.
• The Benefits of Long-Term Patterns:
  • Structure: Once you understand these patterns and how they work with trends and support/resistance levels, they can help you understand where you might be in the price movement. This can help you plan your trades better.
  • Future Direction: When a pattern is confirmed (meaning it's completed its formation), it can give you a clue about whether the price is likely to continue moving in the same direction or reverse course.
  • Price Targets: These patterns can also suggest potential price targets (where the price might reach). If these targets line up with support/resistance zones, it strengthens the possibility of a price reaction in that area.
• Common Long-Term Patterns:
  • Reversal Patterns: Double Bottom (pictured), Triple Bottom, Double Top, Triple Top
  • Continuation Patterns: Wedge, Head & Shoulders, Symmetrical Triangle, Ascending Triangle, Descending Triangle, Pennant, Flag

Imagine a tug-of-war between buyers and sellers in a market. This battle between supply and demand is what ultimately determines the price.

• The Three Choices: At any given time, a market participant can either buy, sell, or wait on the sidelines. As the balance between these three groups changes, so does the overall supply and demand for a particular asset.

• Price Reflects the Battle: When there are more buyers than sellers (strong demand), the price tends to go up. Conversely, when there are more sellers than buyers (strong supply), the price tends to go down. This creates price movements, or trends, on charts.

• Patterns Emerge from the Battle: As this tug-of-war plays out over time, it can create repeating patterns on price charts. These patterns reflect past instances where the battle between buyers and sellers played out in a similar way.

• A Glimpse into the Future (Maybe): Technical analysts believe that by recognizing these patterns, they can gain some insight into where the price might go in the future. However, it's important to remember that these patterns aren't perfect predictors.

• Markets Always Change, But Patterns Remain: The people trading in a market are constantly changing, along with their opinions on where the price should be. Despite this constant change, technical analysts believe that the basic principles of supply and demand will always play a role in price movements. This is why these historical price patterns can still offer some value, even though the specific participants in the market may change.

This section might seem a little overwhelming, but don't worry! The world of chart patterns can be complex, but we'll focus on the basics to get you started. There are many fancy-named patterns out there, but for everyday trading, understanding the key concepts is more important.

Here's what we'll cover:

• Two Main Styles: There are two main types of chart patterns: long-term patterns and short-term patterns. Each has its strengths and weaknesses, and they work best when used together.

• Long-Term Patterns: These patterns take more time to develop and can signal bigger price moves.

• Short-Term Patterns: These patterns develop more quickly and can help you identify potential entry and exit points for trades.

• The Key Takeaway: The most important tip? Combine both long-term and short-term patterns in your analysis. This will give you a more complete picture of what's happening on the chart.

• The Bigger Picture: Once you understand patterns, combine them with other tools like trends, support, and resistance. This will help you develop a more comprehensive trading strategy and give you a fresh perspective on price charts.

Imagine a rocket blasting off, but this time, it's struggling to gain altitude. The bearish flag pattern appears during a downtrend (falling prices) and might signal the downtrend is continuing.

• Losing Momentum: The price drops sharply, then pauses and moves sideways for a bit in a channel. This channel looks like a flag on a pole, but tilted downwards.
• Flag Lines: Imagine drawing lines along the top and bottom of the sideways movement (flag).
• Breaking Through Support: If the price breaks below the bottom line of the flag (breakdown), it suggests the downtrend might keep going. Some traders wait for the price to touch the bottom line again (retest) before selling, for extra confirmation.

Setting Your Sights Lower:

• Imagine measuring the height of the initial price drop before the pause. This distance can be a rough estimate of how much the price might fall after the breakdown (target profit).

Can you spot the bearish flag?

Here it is.

Imagine a rocket blasting off. During an uptrend (rising prices), the price shoots up like a rocket. But even rockets need a short pause to gather fuel before going higher. The bullish flag pattern shows this pause.

• Price Takes a Break: The price makes a sharp jump up, then pauses and moves sideways for a bit in a channel. This channel looks like a flag on a pole.
• Flag Lines: Imagine drawing lines along the top and bottom of the sideways movement (flag).
• Liftoff After the Break: If the price breaks above the top line of the flag (breakout), it suggests the uptrend might resume. Some traders wait for the price to touch the top line again (retest) before buying, for extra confirmation.

Aiming High:

• Imagine measuring the height of the initial price jump before the pause. This distance can be a rough estimate of how much the price might move after the breakout (target profit).

Can you spot the bullish flag?

Here it is.

The double bottom pattern is the opposite of the double top. Imagine a downtrend as a sinking ship. The double bottom suggests the ship might be starting to rise again:

• Two Dips: The price makes two low points (troughs) that are around the same level. Imagine the ship hitting the bottom twice.
• Neckline: A line drawn across the tops of the two dips. This is like a resistance level where the price might struggle to go lower.
• Breakthrough: If the price rises above the neckline and closes completely above it, it suggests the downtrend might be weakening.

When to Jump In?

This part discusses entering trades, but entering and exiting trades involves real money and risk. If you're new to trading, focus on understanding the pattern first.

Here's a simplified idea for experienced traders:

• Neckline Break: If a candle closes completely above the neckline (resistance level), it might be a sign the downtrend is breaking. Some traders wait for confirmation from the next candle.
• Failed Retest (Optional): Sometimes, the price might touch the neckline again (retest) but fail to break back down, forming a higher trough. This can be an extra confirmation for some traders.

Can you spot the double bottom?

Here it is.

Imagine a chart as a climbing race. The double top pattern is a warning sign that an uptrend might be ending and a downtrend might be starting. Here's what to look for:

• Two Bumps: The price makes two high points (peaks) that are around the same level. Imagine two runners reaching almost the same height.
• Neckline: A line drawn across the bottom of the two bumps. This is like a support level where the price might bounce up from.
• Breakthrough: If the price dips below the neckline and closes completely below it, it suggests the uptrend might be weakening.

When to Jump In?

This part discusses entering trades, but entering and exiting trades involves real money and risk. If you're new to trading, focus on understanding the pattern first.

Here's a simplified idea for experienced traders:

• Neckline Break: If a candle closes completely below the neckline (support level), it might be a sign the uptrend is breaking. Some traders wait for confirmation from the next candle.
• Failed Retest (Optional): Sometimes, the price might touch the neckline again (retest) but fail to bounce back up, forming a lower peak. This can be an extra confirmation for some traders.

Can you spot the double top?

Here it is.

Imagine a chart as a mountain range. The head and shoulders pattern is a warning sign that a rising trend (uptrend) might be ending and a downtrend might be starting. Here's what to look for:

• Left Shoulder: The price makes a bump up like a small hill, then dips back down. This is the left shoulder.
• Head: The price climbs higher than the left shoulder, forming a bigger peak like the head of a person.
• Neckline: Imagine a line drawn across the bottom of the left shoulder. This is the neckline, a support level where the price might bounce up from.
• Right Shoulder: If the pattern continues, the price will try to make another bump up (right shoulder) but won't reach as high as the head. This weakness suggests the uptrend is losing momentum.

When to Enter and What to Aim For

This section talks about entering and exiting trades based on the head and shoulders pattern. Remember, trading with real money involves risk. If you're new to trading, focus on understanding the pattern first.

Experienced traders can consider these entry points:

• Neckline Break: If a candle closes completely below the neckline (support level), it might signal the uptrend is ending. Some wait for the next candle to confirm this move.
• Retest (Optional): Sometimes, the price dips below the neckline, then touches it again (retest) before going down. This isn't guaranteed, but some wait for it as extra confirmation.

Taking Profits:

• Imagine measuring the distance between the head and the neckline. This distance can be a rough estimate of how much the price might move in the future (target profit).

Inverted Head and Shoulders:

• The pattern can also appear upside down at the bottom of a downtrend (inverted head and shoulders).
• Similar entry ideas apply: wait for a confirmed neckline break or a possible retest.

Remember: There's no perfect entry or exit point. Always test any strategy with fake money before using real money. 

Head and Shoulders

Inverted Head and Shoulders

Can you spot the Head and Shoulders?

Here it is.

Can you spot the Head and Shoulders?

Here it is.

Imagine you're planning a long road trip (the daily trend). Looking at just the highway map (daily chart) gives you a general idea of the direction. But wouldn't it be helpful to also check the local traffic conditions (hourly chart)?

This is the idea behind using multiple timeframes in trend trading. Here's how it works:

1. Identify the Big Picture Trend (Daily): Use tools like higher highs, moving averages, and trendlines to see if the daily trend is up (bullish) or down (bearish).
2. Zoom In for Confirmation (Hourly): Once you know the daily trend, look at the hourly chart. If you see the hourly chart confirming the daily trend (higher highs in an uptrend), that's a good sign. Why? Because it takes more effort (and money) for the market to move prices significantly on the daily chart than the hourly chart.
3. Trade in the Same Direction (Optional): For even more confirmation, some traders only enter trades in the direction of an even bigger trend, like the weekly or monthly timeframe.

Basically, the higher the timeframe, the stronger the trend is likely to be.

Here's a simplified example:

• If the daily trend is bullish (upward) and just starting (phase 1), look for an entry point during phase 1 on the 1-hour chart (when the price starts moving up on the hourly chart).
• If the 1-hour chart is bearish (phase 1, downward), you might consider looking for a short trade (selling) on the 5-minute chart, where the price might be dipping even lower (but be careful, short-term trades can be risky).

Daily Chart

Identifying the daily trend (Currently in a down trend)

Zooming in to hourly Chart

Identify hourly trend (Uptrend broken, possible to wait for a retest before entering into a downtrend to trade in line with the daily down trend)

Okay, buckle up! We've talked about trends, but things can get a little more complex. Imagine the market is like an onion - it has layers. Each layer has its own trend, and these trends can influence each other. This is what can confuse new traders.

• Big Picture Trends (Primary): Think of these as the long-term direction of the market, like a major highway trip.
• Mid-Sized Trends (Secondary): These are smaller trends within the big picture, like detours or rest stops on your road trip.
• Short-Term Swings (Minor): These are the little ups and downs you experience along the way, like bumps in the road.

Why This Matters:

The key point is that markets are "fractal," meaning the same patterns repeat at different scales (like layers of an onion). A big trend can have smaller trends within it, which can be confusing. Prices rarely go in a straight line, so these smaller trends (corrections or retracements) can look like the main trend is changing direction, leading to choppy trading.

Big picture trend (Red Line)

Mid-sized trend (Orange Line)

Short term Swings (Green Lines)

This isn't a guide to trading reversals (we'll cover that later). However, it can help you identify signs that a trend might be weakening. Imagine you're riding a wave (the trend). While you're riding high, it's good to be aware of potential dips (reversals).

Catching the Warning Signs:

• Lower Highs (LH): This is the first clue. In an uptrend, if the price starts making lower highs (peaks) than before, it suggests the upward momentum is slowing.
• Potential High Low (HL): In a downtrend, if the price rallies but struggles to break significantly above a previous low (LH), it could be a sign of weakness.
• Confirmation is Key: A trend reversal isn't confirmed until the price breaks a key level. 
  • In an uptrend, a confirmed reversal happens when the price falls below the previous low (LH).
  • In a downtrend, a confirmed reversal happens when the price rises above the previous high (HH).

Putting it All Together:

Imagine you're in an uptrend. You see a lower high (warning sign), then the price dips but doesn't break below the previous low (potential weakness). But then, the price rallies and decisively breaks above the previous high (confirmation) - a new uptrend is underway!

But Wait, There's More:

Later, the price makes another high, but it fails to reach the very highest high we saw earlier (another warning sign). If the price then falls back but doesn't break the previous low (the one that held during the uptrend), the bullish trend might still be intact.

Trendlines are a simple tool to help you see if the market is trending up or down. Imagine a trendline as a straight line drawn connecting several highs (peaks) or lows (troughs) on the price chart.

• The 3-Touch Rule: A good trendline should touch at least 3 highs or 3 lows without the price breaking through the line in between. The more times the price touches the line without breaking it, the stronger the trendline is considered.
• Looking Ahead: You can extend the trendline (imagine pushing it forward) to guess where the price might go in the future, or to see potential support and resistance zones.
• Trendline Break = Potential Trend Change: If the price breaks decisively below an uptrend line or above a downtrend line, it could be a sign the trend is changing (reversal). This is especially true for well-established trendlines.

Imagine the market as a bumpy road trip. Moving averages are like tools that smooth out the bumps on the road trip chart, making it easier to see the overall direction you're headed (uptrend, downtrend, or sideways).

• The Moving Average (MA) Line: This line is like an average speed limit for the price. There are different MAs, like a 20-day or 50-day average, which show the average price over those time periods.
• Price and the MA: 
  • If the price is consistently above the MA, it suggests the trend is upward, and the momentum might be increasing (like putting your foot on the gas).
  • If the price is consistently below the MA (in an uptrend), it could be a sign of weakness (like slowing down or hitting a bump).
• Are the MAs Stacked? 
  • Sometimes, you'll see multiple MAs with shorter periods on top of longer periods (like a 20-day on top of a 50-day). This is called "fanning" and suggests all timeframes are pointing in the same direction (strong trend).
• The Slope of the MA: 
  • A steep slope on the MA indicates a faster-moving trend (like a steep uphill climb).
  • A flat slope indicates a slower trend (like cruising on flat ground).
• Popular Moving Averages: The 20-day, 50-day, and 200-day are common choices because they help identify short-term, medium-term, and long-term trends.
• Trading with MAs: Some traders only trade when the MAs are "in order" (stacked) and avoid trades when the price is stuck between them (like being stuck in slow traffic).

Combining MAs with Other Tools: When you use MAs with other techniques like looking for higher highs (HH) and lower lows (LL), you can increase your chances of spotting good trends and avoid trading during confusing times.

Imagine you're waiting for a bus (the trend). The bus stop (support and resistance) gives you an idea of where the bus might come from and go to, but it doesn't guarantee anything. Here's a way to wait a little more patiently:

• The Sideways Shuffle (1): The price bounces back and forth between a certain high (HH) and low (LL), but doesn't quite break out. This doesn't necessarily mean a trend is starting, it could just be the market taking a breather.
• A Potential Dip (2): The price dips below the recent low (LL) but then comes back up. This could be a sign of a trend, but it needs confirmation.
• The Confirmation Move (3): This is where the magic happens! The price breaks above the recent high (HH). This suggests a stronger move in the direction of the suspected trend (up or down).

Why Wait for 3?

Some traders only enter trades after this confirmation move (3). It's like waiting for the bus to actually pull up to the stop before you jump on. This might mean missing out on some trades, but it can also help you avoid getting fooled by false signals (1 & 2).

Instrument prices don't go up or down in a straight line. They bounce around, making highs (peaks) and lows (troughs) along the way. A trend is like a wave - a general direction the price is moving in.

• Upward Trend (Bullish): Imagine a climbing race. In an uptrend, the price keeps making higher highs (HH) and higher lows (HL). Each peak is higher than the last, and each dip bottoms out at a higher level than the previous one.
• Downward Trend (Bearish): Imagine a sinking ship. In a downtrend, the price keeps making lower highs (LH) and lower lows (LL). Each peak is lower than the last, and each dip falls further than the previous one.
• Sideways Movement: If the price keeps bouncing between similar highs and lows, it's not really trending. It's like the market is stuck, going nowhere.

Trends and Rest Stops: Understanding the Market Rhythm

Imagine a trend like a long walk. You wouldn't walk forever without stopping to catch your breath, right? Trends work similarly.

• The Big Push (Phase 1): This is the main part of the trend, where the price makes a strong move in the direction of the trend (upward for uptrends, downward for downtrends). Think of it as the actual walking part of your journey. This phase is usually longer in terms of price movement. The steeper the price movement, the stronger the trend is assumed to be.
• Quick Breaks (Phase 2): Even during a trend, the price takes short breaks and might move against the main trend for a bit. These are called corrections or retracements. Think of them as rest stops on your walk. They can be choppy and confusing, with the price bouncing around a bit (whipsaws). This can make technical indicators like moving averages less helpful during these times.

Important Points to Remember:

• Trends and rest stops (phases) keep repeating. It's like breathing - you inhale (phase 1) and exhale (phase 2).
• Identifying these phases perfectly in real-time is tricky. It's easier to see them in hindsight, looking back at historical charts.
• These phases can help you avoid jumping into a trend too late. However, catching the exact start of a trend (phase 1) can be difficult.
• To help identify trends and phases, consider using other technical analysis tools like support and resistance levels, or candlestick patterns, which we'll discuss later.

Imagine you're trying to understand why prices move. There are two main approaches:

• Technical Analysis: This focuses on the price itself. Technicians believe past price movements reflect everything that's known about a stock, including future expectations. They study price charts for patterns that might predict where prices are headed. It's like looking at a weather map to guess future weather patterns.
• Fundamental Analysis: This focuses on the reasons behind price movements. Fundamentalists study a company's financial health, industry trends, and economic factors to see if a stock is a good value. It's like researching a company to see if it's a good investment.

Which One is Better?

There's no right or wrong answer! Some traders use both methods, while others focus on one. The important thing is to choose a method you're comfortable with and that helps you create a solid trading plan.

Here's an Analogy:

Think of it like price vs. value. Technical analysts care about the current price, while fundamental analysts care about the underlying value of the company.

Imagine the stock market as a giant conversation about the future value of companies. Technical analysis is like trying to read the tea leaves of this conversation by looking at past prices.

• Focus on Price Action: Technical analysts believe that past price movements reflect everything everyone knows about a stock, including future expectations. They focus on the price chart itself, looking for patterns that might suggest where prices are headed.
• What Can Technical Analysis Do? 
  • Spot trends: Upward, downward, or sideways movements.
  • Guess when trends might change (anticipate a reversal).
  • Confirm a trend change that's already started.
  • Decide when to enter or exit a trade (buy or sell).
  • Figure out when the analysis might be wrong (cut your losses).

The Challenge: Timing is Everything

Making money in the market requires getting in on trends early but also avoiding getting stuck in losing trades. This can be tricky!

• Two Key Decisions: There are two main decisions a trader needs to make: 
  • When to enter a trade (buy)
  • When to exit a trade (sell) - for profit or to limit losses

Imagine a strong price move, like a wave. Fibonacci retracements are a tool that helps traders guess where that wave might take a breather before continuing.

• The Basic Idea: This method uses percentages (like 38.2%, 50%, and 62.8%) to identify potential stopping points for a price move that's already happening.

• How it Works: Let's say the price makes a big move up (phase 1). A retracement looks for areas where the price might pause or pull back a certain percentage (like 38.2% or 50%) of that move before continuing up (phase 2).

• Overlapping Signals Are Stronger: Just like other S/R tools, retracements are more likely to hold if they line up with other S/R signals, such as horizontal lines or trendlines. If a retracement level coincides with another area of support or resistance, it strengthens the possibility of a price reaction in that zone.

• Keeping it Simple: There are many Fibonacci levels, but for beginners, it's best to focus on the major ones like 38.2%, 50%, and 62.8%.

Imagine support and resistance as lines in the sand, but instead of straight lines, channels are like drawn-out trenches.

• Trendlines and Channels: A trendline is a line drawn along highs (for uptrends) or lows (for downtrends) to spot the overall price direction. A channel is like a tunnel made with two trendlines, one above and one below the price.

• Double the Power: The real value of channels comes when they line up with other S/R clues, like horizontal lines or pivot points (areas that acted as both support and resistance before). The more S/R signs that come together in one zone, the stronger the signal. The example shows a price hitting a channel line that also coincided with a Fibonacci retracement level (a common technical indicator). This confluence (meeting point) of S/R signals can be a powerful indicator.

• Channels Within Channels: Sometimes you can see smaller channels forming inside larger channels. While these can be helpful, by the time you draw them, the price movement might already be over. However, these inner channels can be handy for rough profit targets. In the example, the gold price reversed direction when it touched the top of each channel. The bottom line of the smaller channel also acted as resistance when the price came back down.

This method uses the shadows (also called wicks or tails) of candlesticks on a chart to identify S/R zones. Imagine a tug-of-war between bulls (traders who want prices to go up) and bears (traders who want prices to go down).

• Long Shadows: Look for candlesticks with long shadows, either at the top (upper wick) or bottom (lower wick) of the candle. These long shadows indicate areas where one side (bulls or bears) tried very hard to push the price in their direction, but the other side fought back and defended the price level.

• Why They Matter: These areas with long shadows become important because they highlight price levels that were previously under pressure but held strong. This can give you clues about where the price might face buying or selling interest again in the future.

• Not a Single Spike: Just seeing one candlestick with a long shadow isn't always enough. You're looking for multiple candlesticks with long shadows around the same price zone.

• Drawing the Zone: If you see several candlesticks with long shadows in a similar area, you can draw a box around them to create an S/R zone. This zone represents a price range that was previously challenged but held.

Support and resistance zones are similar to horizontal S/R levels, but with a bit more wiggle room. Instead of looking for an exact price point, we're looking for areas where the price might slow down, hesitate, or even reverse. These zones can be helpful for anticipating future price movements.

Here are three ways to identify S/R zones:

• Congestion Areas: Imagine a crowded train station. That's a congestion area on a chart! It's a zone where the price has been stuck going sideways for a while, bouncing around without a clear direction. These areas can turn into future support or resistance zones.

• Swing Points: These are basically high points (tops) and low points (bottoms) that the price has reached in the past. Traders who follow trends and use technical analysis often watch swing points closely. Even if the price doesn't hit the exact swing point again, it often pauses or reacts in some way when it gets close to that area.

There are many ways to find support and resistance (S/R) levels in the market, but here are a few of the easiest and most popular methods: These are the ones I use myself, and they work for any time frame (daily, hourly, etc.) on any market, as long as you have a charting tool. The idea is to find multiple S/R clues to feel more confident that a level will hold in the future. The more S/R signs you see grouped together, the stronger the signal.

Here are two common ways to find S/R levels:

• Horizontal Lines (Price Levels): This is the simplest and most common method. Imagine looking for price zones on the chart that have been touched multiple times in the past (the more times, the better). Ideally, these zones have acted as both support (bouncing the price up) and resistance (stopping the price from going higher). If a zone has worked as both support and resistance in the past, we call it a pivotal S/R level.

• How to Find Horizontal S/R: Most charting tools have a cursor tool. Move the cursor up and down the chart (without clicking) to find areas where the price has bounced or reversed before. These zones don't have to be perfect lines, and it's okay if the price touches them occasionally without breaking through.

Pro Tip: Always start by looking at higher time frame charts (daily, weekly) to find major S/R levels. Then, you can switch to lower time frames (hourly, etc.) and look for the same S/R zones to see if they hold up there as well.

Imagine the market is a tug-of-war, but sometimes the rope breaks! Here's what can happen with support and resistance levels:

• Support Becomes Resistance: If the bulls (traders who want prices to go up) break through a resistance level, the price might test that level again later. This time, if the bulls can hold the price up at that level (it doesn't fall back down), then guess what? That old resistance level has become a new support level! The bulls are now stronger at that price point.
• Resistance Becomes Support: The opposite can happen too. If the bears (traders who want prices to go down) break through a support level, the price might come back and test that level again. This time, if the bears can't push the price down any further, then that old support level has become a new resistance level! The bears are now stronger at that price point.

Key Points About S/R Flips:

• The Longer It Holds, The Stronger It Is: The longer a support or resistance level holds (doesn't break), the more important it becomes for traders. It's like a well-established boundary in the market battleground.
• S/R Levels Can Last a While: These levels can last for a short time (minutes) or a long time (years). Technical analysts (who study charts) don't worry too much about why a level breaks. They just focus on the fact that something has shifted in the market, making the bulls or bears stronger at that price point.

Imagine the market is a tug-of-war between bulls (traders who want prices to go up) and bears (traders who want prices to go down). Support and resistance are like lines drawn in the sand during this battle.

• Resistance: This is a price level where the bulls have struggled to push prices higher in the past. Think of it as a wall the bulls have a hard time climbing. As the price approaches this level, some bulls might get nervous and sell, which can slow down the price increase or even cause it to reverse.

Scenario 1: Resistance Holds

• The bulls push prices up, but as they get close to a previous resistance level: 
  • Some bulls sell to take profits.
  • Some bears see a chance to sell short (betting the price will go down).
  • With all this selling, the price might slow down or even fall.
  • If the price falls back below the resistance level, then the resistance level has "held."

Scenario 2: Resistance Breaks

• Sometimes, the bulls are stronger than expected: 
  • The price accelerates towards the resistance level.
  • More bulls than bears jump in, pushing the price through the resistance.
  • This can trigger stop-loss orders from bears who were betting on a price drop, forcing the price even higher.
  • Some bulls take profits, while some bears might also join in selling short.
  • The price might retrace a bit towards the old resistance level.
  • But, feeling more confident, the bulls buy more at this level, and the price starts to climb again.
• Importantly, the previous resistance level has now become a support level!

Key Points About Support and Resistance (S/R):

• They Flip-Flop: As we saw, support can become resistance and vice versa. It all depends on whether the bulls or bears are stronger at that particular time.
• Strength Matters: The longer an S/R level holds (either support or resistance), the more significant it becomes. Traders tend to trust these levels more.
• Breakouts Can Be Big: When a significant S/R level breaks, it can signal a bigger move in the market price.

Imagine two candles in a tug-of-war, representing buyers (bulls) and sellers (bears). Tweezers show a fight for control at a specific price level:

• Tweezer Tops: This appears at the peak of an uptrend. The first tall white candle reaches a high point, then a second candle opens at that same high. But instead of continuing up, the bulls lose strength and the price goes down throughout the day (bearish).
• Tweezer Bottoms: This appears at the bottom of a downtrend. The first long black candle reaches a new low, then a second candle opens at that same low. But instead of continuing down, the bears lose strength and the bulls push the price back up.

In both cases, the two candles share a key price level (the high for tweezers tops, the low for tweezers bottoms). This suggests a temporary victory for one side, but then a fightback from the other side.

Imagine a strong uptrend with happy little white candles everywhere. Then, three black crows appear, spoiling the party! This pattern suggests a possible trend reversal from up to down.

• Crashing the Party: These are three tall black candles that appear one after the other.
• Opening High, Closing Low: Each candle opens somewhere in the middle of the previous candle's body, but then plunges lower to close significantly below the previous day's close. This shows the bears (sellers) are gaining control and pushing prices down.
• Strength in Numbers: All three black crows need to appear together for the pattern to be valid.

If you see these three black crows showing up in an uptrend, it suggests the bulls (buyers) might be losing power and the bears are taking over, potentially reversing the trend to down.

Imagine a downtrend with a bunch of bearish candles. Three soldiers is a bullish pattern that signals a possible trend reversal. Here's what the three soldiers look like:

• Strong and Bold: All three candles should be tall bullish candles with little shadows (wicks), like brave soldiers marching forward.
• Opening Low, Closing High: Each candle opens somewhere in the middle of the previous candle's body, but then rallies to close near the day's high. This shows the bulls (buyers) are gaining control throughout the day.
• Teamwork Makes the Dream Work: All three soldiers need to appear together for the pattern to be valid.

If you see these three soldiers marching forward in a downtrend, it suggests the bears (sellers) might be losing power and the bulls are taking over, potentially reversing the trend to up.

This two-candle pattern shows a small candle completely engulfed by the bigger candle before it. It can mean two things:

1. Volatility is coming! Get ready for prices to swing more dramatically (up or down) in the future. This can be an opportunity to trade on those swings, without necessarily predicting which direction prices will go.
2. Trend reversal might be brewing. If this pattern appears in an uptrend or downtrend, it can be a sign that the trend is losing steam and a reversal might be coming. This is similar to other patterns we discussed before, like long-legged dojis and evening/morning star patterns.

Imagine a shooting star candle as a short body with a long spike pointing upwards. It appears at the peak of an uptrend, like a shooting star reaching its highest point before falling.

• The short body means the opening and closing prices are close together.
• The long spike shows the buyers (bulls) tried to push prices even higher, but they faced resistance (sellers pushing back).

This shooting star pattern suggests the uptrend might be losing momentum, and a reversal to a downtrend (bearish) could be coming.

Here's what to look for to confirm the reversal:

• The next candle after the shooting star should close lower than the shooting star's body. This is like the bulls failing to keep the price high, and sellers taking control.
• Sometimes, there's a gap between the previous candle and the shooting star, which strengthens the idea of a reversal.

Remember: The shooting star is a warning sign, not a guaranteed reversal. Look for the next candle's confirmation to make a trading decision.

Imagine three candles forming a story. The evening star pattern is a warning sign that a rising trend (bullish) might be ending and a downtrend (bearish) could be starting.

• Candle 1: This is a tall white candle, showing a strong uptrend.
• Candle 2: This is a short candle, either white or black, with a gap up from the previous candle. It suggests the bulls might be losing some momentum.
• Candle 3: This is a black candle that opens lower than the second candle and closes significantly lower than the first candle. It shows the bears (sellers) are gaining control.

For the evening star to be valid:

• You need these three candles in the exact order.
• The pattern needs to appear during an uptrend to signal a possible reversal.

Imagine three candles forming a story. The morning star pattern is a signal that a downtrend (bearish) might be ending and an uptrend (bullish) could be starting.

• Candle 1: This is a tall black candle, showing a strong downtrend.
• Candle 2: This is a short candle, either white or black, with a gap down from the previous candle (or it might just open lower). It suggests the bears might be losing some steam.
• Candle 3: This is a white candle that opens higher than the second candle and closes significantly higher than the first candle. It shows the bulls (buyers) are gaining control.

For the morning star to be valid:

• You need these three candles in the exact order.

The pattern needs to appear during a downtrend to signal a possible reversal.

• Imagine a doji candle as a little spinning top - the opening and closing price are almost exactly the same.
• This means the bulls (buyers) and bears (sellers) are fighting hard, but neither side can clearly push the price up or down.
• A doji in an uptrend might mean the bulls are losing some steam, while a doji in a downtrend could signal the bears are weakening.

Special Doji Types:

• Long-legged doji: This doji has long wicks on both ends, showing both bulls and bears are pushing and pulling the price aggressively, but neither side can gain control.
• Dragonfly doji: The price started low (long bottom wick) but the bulls fought back to close at the opening price. This could be a sign the downtrend might be losing momentum.
• Gravestone doji: The opposite of a dragonfly! The price started high (long top wick) but the bears pushed it back down to close at the opening price. This could hint at a possible trend reversal from up to down.

Remember: Dragonfly and gravestone dojis are stronger signals than regular dojis because they show a clear fightback from one side.

Imagine a hammer turned upside down - that's a hanging man candle! It appears during an uptrend, but unlike a hammer, it has a long shadow pointing down. This suggests sellers (bears) are starting to fight back against the rising prices.

The hanging man can be a sign that the uptrend might be losing steam, and a potential reversal could be coming. However, it's not a guaranteed signal.

For confirmation, look for:

• Another candle after the hanging man that closes lower (bearish bar). This strengthens the idea that sellers are gaining control.
• The price of the new candle reaching the "neckline." Imagine a line across the top of the hanging man's body (where the uptrend started). The new candle's closing price should touch or fall below this neckline for a stronger reversal signal.

Imagine a hammer candlestick as a short, stubby body with a long tail pointing down. It's like a hammer trying to break through the price floor but failing!

• The short body means the opening and closing prices are close together.
• The long tail shows the sellers (bears) tried to push prices even lower, but buyers (bulls) fought back.

This hammer pattern often appears at the end of a downtrend. It suggests the bears might be running out of steam, and the bulls are stepping in to push prices back up.

Here's what to look for to confirm the reversal:

• The next candle after the hammer should close higher than the hammer's tiny body. This is like the bulls successfully pushing the price floor up.

Tip: Sometimes traders look at the high price of the candle before the hammer (like a level to break) to see if the next candle goes above it for confirmation. But the main idea is the bulls are taking control!

Imagine a tall candle showing a strong uptrend. Now imagine a following candle that's so big it completely engulfs the candle! That's a bearish engulfing pattern.

• This big candle shows a surge in selling activity (bears), overwhelming the buying pressure (bulls).
• It suggests a possible shift in market sentiment, with sellers taking control and pushing prices down.

Remember: Like other patterns, this works best with a trend. A big candle engulfing a candle in an uptrend is a stronger sign that the uptrend might be ending, and a downtrend could be starting.

Imagine a black candle showing the bears pushing prices down. Now imagine a following white candle that's so big it completely engulfs the black candle! That's a bullish engulfing pattern.

• This big white candle shows a surge in buying activity (bulls), overwhelming the selling pressure (bears).
• It suggests a possible shift in market sentiment, with buyers taking control and pushing prices up.

Remember: Like other patterns, this works best when it appears in a downtrend. A big candle engulfing a candle in a downtrend is a stronger sign that the downtrend might be ending, and an uptrend could be starting.

Why are candlesticks so popular? They tell a quick story!

• Imagine each candle as a snapshot of the fight between buyers (bulls) and sellers (bears) throughout the day.
• A long, solid candle (no wicks) means one side clearly won the battle.
• A candle with a long wick on top shows the bulls tried to push prices higher, but the bears fought back by the end of the day.
• Over time, traders noticed these patterns appeared again and again, and they can be clues for what might happen next.
• This guide will show you some of these common patterns so you can understand the fight between bulls and bears and make better trading decisions.

Imagine a mini story for each trading day, told with a coloured box!

• These boxes are called candlesticks, and they show how an instruments’ price moved throughout the day.
• The chart tracks price on the right and time on the bottom.
• Each candlestick has a body and sometimes lines above and below.

What the candlestick tells you:

• Body colour: 
  • Green (or sometimes another color) means the price went up that day (closing price higher than opening).
  • Red (or sometimes another color) means the price went down (closing price lower than opening).
• Body size: 
  • A bigger body shows a bigger price change.
• Lines (wicks): These show the highest and lowest price the stock reached that day.
• Top of the body: This is the opening price.
• Bottom of the body: This is the closing price.

Reading the story:

• Look at a green candle with a long body and short wicks. This means the price jumped up at the start, maybe dipped a bit, but closed much higher than it opened (bullish sign).
• Now look at a red candle with a small body and long wicks. The price might have fluctuated a lot (long wicks) but ultimately closed lower than it opened (bearish sign).

Candlesticks help you see how the battle between buyers (bulls) and sellers (bears) played out each day.

Stop-Loss Orders: Limiting Your Risk

Imagine you're at a garage sale and find a great deal on a painting. You don't want to lose it, but you also don't want to pay more than you're comfortable with. A stop-loss order is like setting a limit for yourself in the trading world.

• How it Works: You set a price (your stop-loss) below your purchase price (entry price) for a long trade (buying) or above it for a short trade (selling). If the price falls (long trade) or rises (short trade) to your stop-loss price, your trade automatically closes at the next available market price. This helps you limit potential losses if the market moves against you.
• Important Note: Stop-loss orders aren't perfect. Sometimes, the market can jump up or down quickly (gapping) and your order might execute at a slightly different price.

Where to Place Your Stop-Loss:

• Risk Tolerance: This depends on how much risk you're comfortable with. Aim to place your stop-loss where you only risk a small percentage (1-5%) of your total trading capital.
• Support and Resistance: Experienced traders often place stops near support (buying) or resistance (selling) zones. These are areas where the price tends to bounce back, so your trade has some breathing room.

Trailing Stops: Locking in Profits

Imagine you buy that painting at the garage sale for $20. Wouldn't it be nice if the price automatically went up and you could sell it for more later? A trailing stop-loss helps you do this with trades.

• How it Works: You set a distance (e.g., 5 points) for the stop-loss to automatically move up (long trade) or down (short trade) as the price moves in your favour. This helps lock in profits as the price goes up and limits losses if it reverses.

Profit Targets: Taking Profits

Just like setting a limit price at the garage sale, you can also set a profit target for your trades.

• What it is: This is a pre-determined price at which you want to exit a winning trade.
• Why it's Important: It helps you automatically take profits at your target price, even if you're not watching the market constantly.

Placing Your Orders: Market Orders vs. Pending Orders

There are two main ways to enter a trade:

• Market Orders: This is like saying "Buy now!" or "Sell now!" at the current market price. It's fast and simple, but you don't have any control over the exact price you get. This is common for short-term traders who are constantly monitoring the market.
• Pending Orders: These are like setting instructions for your trade. You tell the market what price you want to buy or sell at, and the trade only happens if the price reaches that level. This is useful for: 
  • End-of-Day Traders: You can set your orders before the market closes and not worry about monitoring it all day.
  • Catching Breakouts: You can set an order to buy if the price breaks above a certain level (like a breakout trade).
  • Limiting Losses (Stop-Loss): You can set a sell order to automatically close your trade if the price goes against you, limiting your potential loss.
  • Buying at a Discount (Limit Order): You can set an order to buy only if the price falls to a certain level (like getting a sale price).

Stop vs. Limit Orders:

• Stop Orders: These tell the market to buy or sell once the price goes past a certain point. They can be used to limit losses or enter trades based on momentum. 
  • Buy Stop: Order to buy only if the price goes up past a certain point.
  • Sell Stop: Order to sell only if the price goes down past a certain point.
• Limit Orders: These tell the market to buy or sell only if the price reaches a specific price. They are useful for locking in profits or buying at a discount. 
  • Buy Limit: Order to buy only if the price goes down to a certain point.
  • Sell Limit: Order to sell only if the price goes up to a certain point.

The Trading Dashboard: Understanding Price Charts

Imagine a price chart as the control panel for your trading journey. It shows you two key things:

• Where the price has been (past): This can give clues about where it might go in the future.
• What the price is doing right now (present): This helps you track your current holdings and make trading decisions.

Breaking Down the Chart:

• The Time Machine (X-Axis): This runs horizontally, from left to right. The further left you go, the further back in time you're looking. Each little block (candle or bar) shows the price activity for a specific time period. You can adjust this timeframe (daily, hourly, etc.) depending on what you want to see.
• The Price Gauge (Y-Axis): This runs vertically, from top to bottom. The higher a candle or bar, the higher the price was during that time period. The lower it is, the lower the price.
• The Price Story (Candle/Bar): Each candle or bar tells a mini price story for that time period. It shows you four key things: 
  • Opening Price: This is the price when that time period started (like the odometer reading at the beginning of a trip).
  • High Price: The highest price it reached during that time period (like the highest speed you hit on your trip).
  • Low Price: The lowest price it reached during that time period (like the slowest you went).
  • Closing Price: The price when that time period ended (like the odometer reading at the end of your trip). The color of the candle can tell you if the closing price was higher or lower than the opening price.

Types of Price Charts:

There are three main types of price charts: line, bar, and candlestick. They all show the same basic information (time and price) but in slightly different ways.

Example of bar chart

Example of candlesticks chart

Example of line chart

Imagine you're buying groceries. There's a price tag, but the cashier might charge you a slightly higher price.

• In trading, there are two prices: the buy price (bid) and the sell price (ask). The difference between them is called the spread. It's like the cashier's little markup that covers their costs.
• A wider spread means it's more expensive to trade, like buying groceries at a small convenience store. A narrow spread is cheaper, like a big supermarket.
• Popular currencies like the US dollar usually have smaller spreads, while less common ones might have bigger ones.
• The spread matters more if you trade frequently, like buying and selling things throughout the day. For long-term trades, it's less important.

Here's how it works in your trading platform:

• You want to buy euros (EURUSD). The price shows two numbers: 
  • 1.36298 - This is the price someone would pay you if you sold euros.
  • 1.36301 - This is the price you would pay to buy euros.
• In either case, you pay a little extra (the spread) when you enter the trade.
• The price needs to move in your favour by at least the spread amount before you start making a profit.