BEGINNERS GUIDE LEVEL 2

 Forex mastery Academy @Zw:

Types of Forex Market Analysis

To begin, let’s look at three ways on how you would analyze and develop ideas to trade the market. There are three types of market analysis:
1) Technical Analysis - 

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

2) Fundamental Analysis - Fundamental analysis is a way of looking at the forex market by analyzing economic, social, and political forces that may affect currency prices.
3) Sentiment Analysis - Sentiment analysis is used to gauge how other traders feel about a particular currency pair.

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Technical analysis

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!” 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.

Fundamental analysis

It is supply and demand that determines price, or in our case, the currency exchange rate. Using supply and demand as an indicator of where price could be headed is easy. The hard part is analyzing all of the factors that affect supply and demand.
The idea behind this type of analysis is that if a country’s current or future economic outlook is good, its currency should strengthen. The better shape a country’s economy is, the more foreign businesses and investors will invest in that country. This results in the need to purchase that country’s currency to obtain those assets.

Sentiment Analysis

Each trader’s thoughts and opinions, which are expressed through whatever position they take, helps form the overall sentiment of the market regardless of what information is out there. The problem is that as retail traders, no matter how strongly you feel about a certain trade, you can’t move the forex markets in your favor. Even if you truly believe that the dollar is going to go up, but everyone else is bearish on it, there’s nothing much you can do about it (unless you’re one of the GSs – George Soros or Goldman Sachs!).
As a trader, you have to take all this into consideration. You need to perform sentiment analysis. It’s up to you to gauge how the market is feeling, whether it is bullish or bearish. Then you have to decide how you want to incorporate your perception of market sentiment into your trading strategy.

Which Type of Analysis for Forex Trading is Best?

Whereas technical analysis (TA) involves poring over charts to identify patterns or trends, fundamental analysis (FA) involves poring over economic data reports and news headlines.
Fortunately, the different types of market analysis complement each other. Even hardcore technical traders may find useful fundamental nuggets that can help with their technical analysis. And vice versa. In real-world markets, prices are constantly changing, and usually develop trends. Those changes in prices can and do affect fundamentals. This means that trends in prices affect fundamentals just as fundamentals affect prices.

✅To recap, technical analysis is the study of currency price movement on the charts while fundamental analysis takes a look at how the country’s economy is doing. Market sentiment analysis determines whether the market is bullish or bearish on the current or future fundamental outlook. Fundamental factors shape sentiment, while technical analysis helps us visualize that sentiment and apply a framework to create our trade plans.

Types of Forex Charts and How to Read Them

A chart, or more specifically, a price chart, happens to be the first tool that every trader using technical analysis needs to learn. The chart is simply a visual representation of a currency pair’s price over a set period of time. A price chart depicts changes in supply and demand. A chart aggregates every buy and sell transaction of that financial instrument (in our case, currency pairs) at any given moment. A chart incorporates all known news, as well as traders’ current expectations of future news. When the future arrives and the reality is different from these expectations, prices shift again.

Line chart

- A simple line chart draws a line from one closing price to the next closing price.
When strung together with a line, we can see the general price movement of a currency pair over a period of time. The line chart also shows trends the best, which is simply the slope of the line.

Bar chart

 - A bar chart is a little more complex. It shows the opening and closing prices, as well as the highs and lows. Bar charts help a trader see the price range of each period. The bottom of the vertical bar indicates the lowest traded price for that time period, while the top of the bar indicates the highest price paid. The vertical bar itself indicates the currency pair’s trading range as a whole. As the price fluctuations become increasingly volatile, the bars become larger. As the price fluctuations become quieter, the bars become smaller. The fluctuation in bar size is because of the way each bar is constructed. The vertical height of the bar reflects the range between the high and the low price of the bar period. The price bar also records the period’s opening and closing prices with attached horizontal lines. The horizontal hash on the left side of the bar is the opening price, and the horizontal hash on the right side is the closing price.

Candlestick chart
-Candlestick charts show the same price information as a bar chart but in a prettier, graphic format. Candlestick bars still indicate the high-to-low range with a vertical line. However, in candlestick charting, the larger block (or body) in the middle indicates the range between the opening and closing prices. Candlesticks help visualize bullish or bearish sentiment by displaying “bodies” using different colors. Traditionally, if the block in the middle is filled or colored in, then the currency pair closed LOWER than it opened. In the following example, the ‘filled color’ is black. For our ‘filled’ blocks, the top of the block is the opening price, and the bottom of the block is the closing price. If the closing price is higher than the opening price, then the block in the middle will be “white” or hollow or unfilled.

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

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.

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. There are 3 types of Trend lines
Uptrend - (higher lows)
Downtrend - (lower highs)
Sidewaystrend - (ranging)

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.” 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 first before entering.

The Break
In a perfect world, support and resistance levels would hold forever, McDonald’s would be healthy, and we’d all have jetpacks.
In a perfect forex trading world, we could just jump in and out whenever price hits those major support and resistance levels and earn loads of money.
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!

Fibonacci Trading
Fibonacci is a huge subject and there are many different Fibonacci studies with weird-sounding names but we’re going to stick to two: retracement and extension.
A Fibonacci sequence is formed by taking 2 numbers, any 2 numbers, and adding them together to form a third number. Fibonacci retracement levels work on the theory that after a big price moves in one direction, the price will retrace or return partway back to a previous price level before resuming in the original direction. Traders use the Fibonacci retracement levels as potential support and resistance areas. Since so many traders watch these same levels and place buy and sell orders on them to enter trades or place stops, the support and resistance levels tend to become a self-fulfilling prophecy.

✅Fibonacci retracement levels are horizontal lines that indicate the possible support and resistance levels where price could potentially reverse direction. The first thing you should know about the Fibonacci tool is that it works best when the market is trending. The idea is to go long (or buy) on a retracement at a Fibonacci support level when the market is trending UP. And to go short (or sell) on a retracement at a Fibonacci resistance level when the market is trending DOWN. Fibonacci retracement levels are considered a predictive technical indicator since they attempt to identify where price may be in the future. The theory is that after price begins a new trend direction, the price will retrace or return partway back to a previous price level before resuming in the direction of its trend. One thing you should take note of is that price won’t always bounce from these levels. They should be looked at as areas of interest,

✅While the Fibonacci retracement tool is extremely useful, it shouldn’t be used all by its lonesome self. One of the best ways to use the Fibonacci retracement tool is to spot potential support and resistance levels and see if they line up with Fibonacci retracement levels.
If Fibonacci levels are already support and resistance levels, and you combine them with other price areas that a lot of other traders are watching, then the chances of price bouncing from those areas are much higher. With traders looking at the same support and resistance levels, there’s a good chance that there are a ton of orders at those price levels.While there’s no guarantee that price will bounce from those levels, at least you can be more confident about your trade. After all, there is strength in numbers! Remember that trading is all about probabilities. If you stick to those higher probability trades, then there’s a better chance of coming out ahead in the long run.

✅Traders use the Fibonacci extension levels as potential support and resistance areas to set profit targets. Again, since so many forex traders are watching these levels and placing buy and sell orders to take profits, these levels can often become the end of the trend move due to self-fulfilling expectations. In order to apply Fibonacci levels to your charts, you’ll need to identify Swing High and Swing Low points. A Swing High is a candlestick with at least two lower highs on both the left and right of itself. A Swing Low is a candlestick with at least two higher lows on both the left and right of itself. When using Fibonacci tools, the probability of forex trading success could increase when used with other support and resistance levels, trend lines, and candlestick patterns for spotting entry and stop loss points.

What Are Moving Averages?

Moving averages are one most commonly used technical indicators. A moving average is simply a way to smooth out price fluctuations to help you distinguish between typical market “noise” and the actual trend direction. By “moving average”, we mean that you are taking the average closing price of a currency pair for the last ‘X’ number of periods. Like every technical indicator, a moving average (MA) indicator is used to help us forecast future prices. By not just look at the price to see what’s happening? The reason for using a moving average instead of just looking at the price is due to the fact in the real world, aside from Santa Clause not being real…..trends do not move in straight lines. Price zigs and zags so a moving average helps smooth out the random price movements and help you “see” the underlying trend.

✅A simple moving average (SMA) 

is the simplest type of moving average. Basically, a simple moving average is calculated by adding up the last “X” period’s closing prices and then dividing that number by X.  you plotted a 5 period simple moving average on a 1-hour chart, you would add up the closing prices for the last 5 hours, and then divide that number by 5. Voila! You have the average closing price over the last five hours! String those average prices together and you get a moving average! If you were to plot a 5 period simple moving average on a 30-minute chart, you would add up the closing prices of the last 150 minutes and then divide that number by 5. With the use of SMAs, we can tell whether a pair is trending up, trending down, or just ranging. There is one problem with the simple moving average: they are susceptible to spikes. When this happens, this can give us false signals. We might think that a new currency trend may be developing but in reality, nothing changed.

✅Exponential Moving Average!

Exponential moving averages (EMA) give more weight to the most recent periods.
In our example above, the EMA would put more weight on the prices of the most recent days, which would be Days 3, 4, and 5. This would mean that the spike on Day 2 would be of lesser value and wouldn’t have as big an effect on the moving average as it would if we had calculated for a simple moving average.
If you think about it, this makes a lot of sense because what this does is it puts more emphasis on what traders are doing recently.

Bollinger Bands

Bollinger Bands, 

-a technical indicator developed by John Bollinger, are used to measure a market’s volatility and identify “overbought” or “oversold” conditions. Basically, this little tool tells us whether the market is quiet or whether the market is LOUD! When the market is quiet, the bands contract and when the market is LOUD, the bands expand. The upper and lower bands measure volatility, or the degree in the variation of prices over time. Because Bollinger Bands measure volatility, the bands adjust automatically to changing market conditions. That’s all there is to it.

Keltner Channels

-is a volatility indicator that help identify overbought and oversold levels relative to a moving average, especially when the trend is flat. It can also provide clues for new trends. Think of the channel like an ascending or descending channel, except it automatically adjust to recent volatility and isn’t made up of straight lines. Keltner Channels show the area where a currency pair normally hangs out.The channel top typically holds as dynamic resistance while the channel bottom serves as a dynamic support.

MACD 

-is an acronym for Moving Average Convergence Divergence. This technical indicator is a tool that’s used to identify moving averages that are indicating a new trend, whether it’s bullish or bearish. After all, a top priority in trading is being able to find a trend, because that is where the most money is made. There is a common misconception when it comes to the lines of the MACD.The two lines that are drawn are NOT moving averages of the price. Instead, they are the moving averages of the DIFFERENCE between two moving averages. Because there are two moving averages with different “speeds”, the faster one will obviously be quicker to react to price movement than the slower one.When a new trend occurs, the fast line will react first and eventually cross the slower line.When this “crossover” occurs, and the fast line starts to “diverge” or move away from the slower line, it often indicates that a new trend has formed.

Parabolic SAR
Although it is important to be able to identify new trends, it is equally important to be able to identify where a trend ends. One indicator that can help us determine where a trend might be ending is the Parabolic SAR (Stop And Reversal). A Parabolic SAR places dots, or points, on a chart that indicates potential reversals in price movement. The nice thing about the Parabolic SAR is that it is really simple to use. We mean REALLY simple. Basically, when the dots are below the candles, it is a BUY signal. When the dots are above the candles, it is a SELL signal.

How to use Parabolic SAR to exit trades
You can also use Parabolic SAR to help you determine whether you should close your trade or not.
Check out how the Parabolic SAR worked as an exit signal in EUR/USD’s daily chart below.
Parabolic SAR exit
When EUR/USD started sliding down in late April, it seemed like it would just keep droppin’ like a rock.
A trader who was able to short this pair has probably wondered how low it’d continue to go.
In early June, three dots formed at the bottom of the price, suggesting that the downtrend was over and that it was time to exit those shorts. If you stubbornly decided to hold on to that trade thinking that EUR/USD would resume its drop, you would’ve probably erased all those winnings since the pair eventually climbed back near 1.3500.

Stochastic Indicator
The Stochastic oscillator is another technical indicator that helps traders determine where a trend might be ending. The oscillator works on the following theory: During an uptrend, prices will remain equal to or above the previous closing price. During a downtrend, prices will likely remain equal to or below the previous closing price. The Stochastic oscillator uses a scale to measure the degree of change between prices from one closing period to predict the continuation of the current direction trend. The 2 lines are similar to the MACD lines in the sense that one line is faster than the other.

How to Trade Forex Using the Stochastic Indicator

The Stochastic technical indicator tells us when the market is overbought or oversold. The Stochastic is scaled from 0 to 100. When the Stochastic lines are above 80 (the red dotted line in the chart above), then it means the market is overbought. When the Stochastic lines are below 20 (the blue dotted line), then it means that the market is possibly oversold. As a rule of thumb, we buy when the market is oversold, and we sell when the market is possibly overbought. Many forex traders use the Stochastic in different ways, but the main purpose of the indicator is to show us where the market conditions could be possibly overbought or oversold.Keep in mind that Stochastic can remain above 80 or below 20 for long periods of time, so just because the indicator says “overbought” doesn’t mean you should blindly sell! The same thing if you see “oversold”, it doesn’t mean you should automatically start buying!

Relative Strength Index, or RSI,

 is a popular indicator developed by a technical analyst named J. Welles Wilder, that help traders evaluate the strength of the current market. RSI is similar to Stochastic in that it identifies overbought and oversold conditions in the market. It is also scaled from 0 to 100. Typically, readings of 30 or lower indicate oversold market conditions and an increase in the possibility of price strengthening (going up). Some traders interpret that an oversold currency pair is an indication that the falling trend is likely to reverse, which means it’s an opportunity to buy. Readings of 70 or higher indicate overbought conditions and an increase in the possibility of price weakening (going down). Some traders interpret that an overbought currency pair is an indication that the rising trend is likely to reverse, which means it’s an opportunity to sell.

✅RSI can be used just like the Stochastic indicator. We can use it to pick potential tops and bottoms depending on whether the market is overbought or oversold. RSI is a very popular tool because it can also be used to confirm trend formations. If you think a trend is forming, take a quick look at the RSI and look at whether it is above or below 50. If you are looking at a possible UPTREND, then make sure the RSI is above 50. If you are looking at a possible DOWNTREND, then make sure the RSI is below 50. To avoid fakeouts, we can wait for RSI to cross below 50 to confirm our trend. Sure enough, as RSI passes below 50, it is a good confirmation that a downtrend has actually formed.

Williams %R (Williams Percent Range)
The Williams Percent Range, also called Williams %R, is a momentum indicator that shows you where the last closing price is relative to the highest and lowest prices of a given time period. As an oscillator, Williams %R tells you when a currency pair might be “overbought” or “oversold.” Think of it as a less popular and more sensitive version of Stochastic. As a momentum indicator, it also gives RSI-like vibes in that it measures the strength of a current trend. But while RSI uses its mid-point figure (50) to determine trend strength, traders use %R’s extreme levels (-20 and -80) for cues.

✅Did you know that Stochastic and %R use the same formula to pinpoint the relative location of a currency pair? The only difference is that Stochastic shows you a relative location by using the lowest price in a time range while %R uses the highest price to pinpoint the closing price’s position. In fact, if you invert the %R line, it will have the EXACT SAME LINE as Stochastic’s %K line! This is why Williams %R uses the 0 to -100 scale while Stochastic is scaled from 0 to 100. A reading above -20 is OVERBOUGHT. A reading below -80 is OVERSOLD. An overbought or oversold reading does NOT guarantee that the price will reverse. All “overbought” means the price is near the highs of its recent range. The same goes for oversold. All “oversold” means the price is near the lows of its recent range.

ADX (Average Directional Index)
When trading, it can be helpful to gauge the strength of a trend, regardless of its direction.
And when it comes to evaluating the strength of a trend, the Average Directional Index is a popular technical indicator for this purpose. The Average Directional Index, or ADX for short, is another example of an oscillator. ADX fluctuates from 0 to 100, with readings below 20 indicating a weak trend and readings above 50 signaling a strong trend. The ADX calculation can be complicated, but in a nutshell, the stronger the trend,  the higher ADX goes When the ADX is low, it highlights periods when the price is usually going sideways or trading in a range.

✅When the ADX has risen above 50, this indicates that the price has picked up momentum in one direction. Unlike Stochastic, ADX does NOT determine whether the trend is bullish or bearish. Rather, it merely measures the strength of the current trend. Because of that, ADX is typically used to identify whether the market is ranging or starting a new trend. ADX is considered a “non-directional” indicator. It is based on comparing the highs and lows of bars and does not use the close of the bar. The stronger the trend, the larger the reading regardless of whether it is an uptrend or downtrend.

When you’re using the ADX indicator, keep an eye on the 20 and 40 as key levels. here’s a little cheat sheet to help you interpret ADX values. If there’s one problem with using ADX, it’s that it doesn’t exactly tell you whether it’s a buy or a sell. What it does tell you is whether it’d be okay to jump in an ongoing trend or not. Once ADX starts dropping below 50 again, it could mean that the uptrend or downtrend is starting to weaken and that it might be a good time to lock in profits. DX can be used as confirmation whether the pair could possibly continue in its current trend or not. Another way is to combine ADX with another indicator, particularly one that identifies whether the pair is headed downwards or upwards. ADX can also be used to determine when one should close a trade early.

Ichimoku Kinko Hyo
Ichimoku Kinko Hyo (IKH) is an indicator that gauges future price momentum and determines future areas of support and resistance.
Now that’s 3-in-1 for y’all! Also, know that this indicator is mainly used on JPY pairs. So when CAN’T you use Ichimoku? When no clear trend exists. Basically, when the market is trading sideways, choppy, aka trendless. You’ll know it’s trendless when the price is oscillating on either side of the cloud.

✅Kijun Sen (blue line): Also called the standard line or base line, this is calculated by averaging the highest high and the lowest low for the past 26 periods.
Tenkan Sen (red line): This is also known as the turning line and is derived by averaging the highest high and the lowest low for the past nine periods.
Chikou Span (green line): This is called the lagging line. It is today’s closing price plotted 26 periods behind.
Senkou Span (orange lines): The first Senkou line is calculated by averaging the Tenkan Sen and the Kijun Sen and plotted 26 periods ahead.

How to Trade Using Ichimoku Kinko Hyo
Senkou Let’s take a look at the Senkou span first. If the price is above the Senkou span, the top line serves as the first support level while the bottom line serves as the second support level. If the price is below the Senkou span, the bottom line forms the first resistance level while the top line is the second resistance level. Got it?
Kijun Sen Meanwhile, the Kijun Sen acts as an indicator of future price movement. If the price is higher than the blue line, it could continue to climb higher. If the price is below the blue line, it could keep dropping.
Tenkan Sen The Tenkan Sen is an indicator of the market trend. If the red line is moving up or down, it indicates that the market is trending. If it moves horizontally, it signals that the market is ranging.
Chikou Span Lastly, if the Chikou Span or the green line crosses the price in the bottom-up direction, that’s a buy signal. If the green line crosses the price from the top-down, that’s a sell signal.

Best Forex Indicator
After all, forex traders don’t include these technical indicators just to make their charts look nicer. Traders are in the business of making money! If these indicators generate signals that don’t translate into a profitable bottom line over time, then they’re simply not the way to go for your needs! In order to give you a comparison of the effectiveness of each technical indicator, we’ve decided to backtest each of the indicators on their own for the past 5 years. Backtesting involves retroactively testing the parameters of the indicators against historical price action. You’ll learn more about this in your future studies. For now, just take a look at the parameters we used for our backtest.

✅ The result showed that not a single indicator is 100% successful, rather, this just goes to show that they aren’t that useful on their own.

Coming next we will be going to talk about:

1)Leading vs. Lagging Indicators

2)Chart Patterns

3)Head and Shoulders Pattern

4)Wedge Chart Patterns

5)Rectangle Chart Patterns

6)Bearish and Bullish Pennants

7)Triangle Chart Patterns

8)3 Main Groups of Chart Patterns

9)Forex Pivot Points

Stay tuned and remember to 👇

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