EU
Articles (24)
What is forex?
<p>In the world of financial markets, forex has a special place. It is the world's most popular and biggest financial market, and as of April 2022, it has an average daily trading volume of USD 7.5 trillion. But what does forex mean, and how can you trade it? In this article, we’ll walk you through the basics of the forex market and the terms you need to know to start forex trading. </p> <h2>What is forex, and what is forex trading?</h2> <p>Forex, commonly referred to as FX, stands for the foreign exchange market. It’s a global marketplace where dozens of currencies are converted into one another for various purposes, such as international trade, tourism or personal gain. Due to its nature, forex trading involves a wide range of participants in this exchange process – governments, banks, multinational corporations, institutional investors, retail traders and even regular people. In fact, anyone who has ever travelled abroad and exchanged their home country’s currency for a local currency of their destination has done a transaction on a foreign exchange market.</p> <h2>Why is the forex market so popular?</h2> <p>There are many reasons why the currency market is so popular among online traders. Here are some of its main benefits:</p> <h3>Easier to follow</h3> <p>There are only a few currencies that most traders follow – these include the US dollar, Euro, and British pound. Other favoured but less frequently traded currencies are the Canadian, Australian, and New Zealand Dollars, and the Japanese Yen. As there are only a handful of popular currencies to focus on, it can help make it easier for traders to develop a deeper understanding of their behaviour and the factors that influence their movements. </p> <h3>Liquidity</h3> <p>The large number of participants and transactions bring high liquidity to forex trading, resulting in very low trading costs. And the ever-present supply and demand makes trading on leverage highly accessible. The latter allows good traders even with a small amount of capital to extract value from the forex markets, something that’s difficult to do when trading stocks.</p> <h3>Volatility</h3> <p>Forex prices can be influenced by various factors, which often cause high volatility and, as a result, numerous trading opportunities. Take a value stock as a comparison, it may hardly move some days, making it difficult to day trade. This is not the case with Forex trading, and you can find opportunities anytime during the day, whether it be after, before, or during work hours. </p> <h3>Round-the-clock access five days a week</h3> <p>Due to its decentralisation, forex transactions can be carried out at any time, except during the weekend. There is no centralised exchange, instead central banks, large banks, hedge funds, and retail brokers have built electronic networks, and deal directly with each other to facilitate trading outside traditional trading hours.</p> <h3>How does forex work?</h3> <p>When a forex trader exchanges a currency, you sell it and buy another one. Since there are always two currencies involved in this process, forex instruments are quoted in pairs – for example, EUR/USD or GBP/USD. The first currency is referred to as the base, and the second one is called the quote.</p> <br /> <br /> <img alt="base currency EUR - USD Quote currency" src="/getmedia/6ce661c1-e988-483e-ad7a-39908fb6f085/what-is-forex-trading-image01.png" title="base currency EUR - USD Quote currency" /> <h2>Types of pairs in the forex market</h2> <p>Forex pairs are divided into three large groups depending on what currencies are included in them.</p> <h3>Major currency pairs</h3> <p>Major pairs include the currencies of the most developed countries traded against the USD. The US dollar is always present in these pairs as the base or quote currency because it is an official reserve currency worldwide, meaning it is widely used in international trade and held as a reserve by central banks across the world. It makes USD the dominant currency in forex and other markets like commodities that are also traded against it. Some of the most popular major pairs are EUR/USD, GBP/USD and USD/JPY.</p> <h3>Minor currency pairs</h3> <p>Minor pairs also include currencies of large economies but are not tied to the USD – EUR/GBP, EUR/CHF or GBP/CAD, for example.</p> <h3>Exotic currency pairs</h3> <p>Exotic pairs usually consist of one currency of a major economy traded against the currency of a developing country. Some examples are AUD/MXN, USD/HKD and GBP/ZAR.</p> <h2>How does currency trading work?</h2> <p>The value of a forex pair indicates the value of a base currency against the quote currency. In other words, it shows how many units of the quote currency you can get for 1 unit of the base currency. This is also called an exchange rate.<br /> For example, the EUR/USD currency pair exchange rate at the time of writing was 1.02839, which means for 1 euro, you would get 1.02839 US dollars.</p> <br /> <img alt="base currency EUR - USD Quote currency" src="/getmedia/b7de8307-5d14-4929-8cd6-d1aa06f5dc55/what-is-forex-trading-image02.png" title="base currency EUR - USD Quote currency" /> <p paraeid="{b45da9f9-ab40-462f-8ec2-c07bc0d46b8a}{75}" paraid="900764359">It is important to note that since the forex market is decentralised, the exchange rate may vary from one broker or bank to another. </p> <p paraeid="{b45da9f9-ab40-462f-8ec2-c07bc0d46b8a}{91}" paraid="1272472748">When it comes to online trading, brokers source their exchange rates from a group of establishments called liquidity providers – usually banks and other large financial institutions and display them as bid and ask prices.</p> <h2>What are bid and ask prices in forex?</h2> <p>In forex trading, you have probably come across "bid" and "ask" prices. Think of the "bid" as the price you'll receive when you want to sell a currency. The "ask" is the price you'll pay when you want to buy. For example, if you're looking at EUR/USD, the "bid" tells you how many US dollars you'll receive for selling 1 Euro, while the "ask" represents how many US dollars you need to spend to buy 1 Euro. As you can see in the image below, you would receive 1.02839 USD for selling one Euro, while if you were to buy one Euro, you would need to pay 1.02847. This buy price is slightly higher than the sell price because of the spread, which is the difference between the “bid” and “ask” prices. </p> <br /> <img alt="table with instrument sell buy columns" src="/getmedia/0dc1949c-bd93-47ef-a868-7acf8d50ef8f/what-is-forex-trading-image03.png" title="table with instrument sell buy columns" /> <h2>What is the spread in forex trading?</h2> <p paraeid="{b6259188-8ad3-442e-91ef-fc8790f06976}{19}" paraid="909016290">A spread in forex trades means the difference between the buy and sell prices that represents the transaction cost of every currency pair. Whether you buy or sell a currency, you will always be charged this amount upon opening a trade. The spread is what your broker earns for enabling you to trade. It is a markup, the same way as retailers adds a markup in any other product. However, the high competition in the forex markets ensures it’s the cheapest financial market to trade. </p> <p paraeid="{b6259188-8ad3-442e-91ef-fc8790f06976}{75}" paraid="1881540912">In the image below we see that the cost of trading is 0.8, for a 100,000 Euro transaction the cost would be 8 USD, making it unbeatably cheap. </p> <p paraeid="{b6259188-8ad3-442e-91ef-fc8790f06976}{95}" paraid="643707991">When you open a trade, the spread is deducted from the start. In a winning trade, the spread cost is deducted from a profit, and in a losing one, it is added to the loss. </p> <br /> <img alt="table with instrument sell buy columns" src="/getmedia/0d6ce7ac-c7be-40f0-82b6-4a292c3855ac/what-is-forex-trading-image04.png" title="table with instrument sell buy columns" /> <p>It’s important to note that a spread directly depends on the liquidity of a currency pair. For example, the most liquid pairs (majors) usually have very tight spreads, meaning traders can open positions at a lower cost and make a profit faster if the market moves in their favour. Minor pairs are traded less often and have wider spreads, slightly increasing the trading cost, and exotic currency pairs have the widest spreads.</p> <p>The spread amount also varies from broker to broker and can even be different depending on the account type within the same broker. For example, if you trade forex with ThinkMarkets, a Standard account will give you access to tight spreads – just a few pips, but if you choose a ThinkZero trading account, most pairs will have 0 spreads.</p> <h2>What are pips in forex?</h2> <p>In forex trading, pip stands for percentage in point or price interest point. It is the smallest one-digit movement of a currency’s price measured by the fourth decimal point and used to calculate a spread.</p> <p>Here is a little graphic to help you understand how the price of a currency works:</p> <br /> <img alt="EUR/USD" src="/getmedia/5a1f9093-0c16-4fcd-b1c7-7e8274bec12c/what-is-forex-trading-image05.png" title="EUR/USD" /> <p>Forex pairs that have Japanese yen as a quote currency are displayed only until the third decimal point, so the pip is measured by the second one.</p> <img alt="USD/JPY" src="/getmedia/5ee3c9cb-3972-4b49-b098-7c761624aefb/what-is-forex-trading-image06.png" title="USD/JPY" /> <p>To calculate a spread, you need to subtract the sell price from the buy price. In our previous example, the spread is:</p> <br /> <img alt="1.02847 - 1.02839 = 0.8 pips" src="/getmedia/72f5e4d8-fc4b-4dbe-aa5f-b081b3ec9fbd/what-is-forex-trading-image07.png" title="1.02847 - 1.02839 = 0.8 pips" /> <p>On ThinkMarkets’ proprietary platform, ThinkTrader, the spreads are displayed within each price quote for your convenience, so you don’t need to calculate them.</p> <p>Now, your next question may be how to calculate your profit or loss in pips when you trade forex and how to trade forex in the first place. Head over to our <a href="/en/trading-academy/forex/what-affects-forex-exchange-rates">next article</a>, where we discuss it in detail. You can also create a demo trading account on ThinkTrader to apply your newly obtained knowledge in practice.</p>
What affects foreign exchange rates?
<p>Financial markets' moves are difficult to predict. However, your chances of success are much higher when you understand how the markets work and what exactly affects the prices of financial instruments. Understanding these details can help you plan your trades strategically instead of randomly guessing your next step and hoping for good luck.<br /> <br /> When it comes to predicting currency exchange rates, it's important to understand that forex, like all financial markets, is heavily influenced by supply and demand. A decreasing supply paired with an increasing demand usually leads to rising prices. Similarly, an increased supply with decreased demand drives the prices down.<br /> <br /> Factors affecting supply and demand and, therefore, the exchange rate movements of every currency pair can vary depending on the main pillars of each country's economy. For example, Australian and Canadian economies rely on natural resources export, which affects the exchange rate of the Australian and Canadian dollar (AUD and CAD) against other currencies. On the other hand, the United Kingdom and the pound (GBP) are more sensitive to political developments and interest rate movements.<br /> <br /> Despite these differences, trading experts have identified the common factors affecting supply and demand on forex.<br /> <br /> <img alt="" src="/getmedia/f3d6d0f9-9b0d-468f-8431-0d3ee0757d1d/article-forex-what-affects-forex-rates.webp" /></p> <h2>Main factors affecting foreign exchange rates</h2> <h3>International trade</h3> <p>Trading activities between different countries directly affect the value of their currencies. When a country exports some goods, in many cases, a buyer pays for the products in the exporter's local currency. If a country's exports are higher than its imports, it creates a high demand for its currency and, as a result, increases its value.<br /> <br /> The amount of exports and imports of every country, in turn, depends on the country's needs and production structure. For example, the US and Brazil are long-term trading partners. Let's assume the US has been importing coffee from Brazil for USD 2 per kg, but suddenly Colombia offered a price of USD 1 per kg. If the US, one of the largest coffee importers, were to go for Colombian coffee instead of Brazilian because of more attractive import prices, it would decrease Brazilian exports significantly. As a result, the demand for the Brazilian real (BRL) and its exchange rate against a foreign currency, USD in this case, would also decline. At the same time, favourable export prices would increase demand for the Colombian peso (COP), strengthening it against USD.<br /> <br /> Some specific countries, like Australia and New Zealand depend strongly on exports, and there is a high correlation between the price of what they export and their currency. However, for most other large economies, the state of their trade balance has minimal impact on the currency exchange rate. This was not the case 30 or 40 years ago when capital restrictions limited capital flow. </p> <h3>Inflation</h3> <p paraeid="{94c33f92-f774-48ac-9997-dda5c9bbd5a4}{50}" paraid="2063613172">Inflation means a rise in prices of goods over time that leads to the decreasing purchasing power of a country's currency. For example. if inflation in the UK increases by 10% over a year, that means that the British Pound has dropped 10% in value compared to the year earlier. In terms of exchange rates, if inflation is at 2% in the USA, then the GBP/USD exchange rate should depreciate by 8% in favour of the US Dollar to compensate for the difference in inflation between the two countries. </p> <p paraeid="{94c33f92-f774-48ac-9997-dda5c9bbd5a4}{138}" paraid="1186889332">To track inflation rate changes, traders usually keep an eye on the Consumer Price Index (CPI) reports. Most countries release these reports monthly, except in Australia and New Zealand, which publish them quarterly. CPI is a widely considered measure of inflation because it tracks the percentage change in the price of a basket of goods commonly purchased by consumers. </p> <h3>Interest rates</h3> <p>High interest rates attract foreign capital to a country, promising foreign investors higher returns on their capital. With more investors entering the country's local market, the demand for its currency increases, driving its value higher. On the flip side, low interest rates make a country less attractive for foreign investment.<br /> <br /> Interest rates and inflation are directly correlated – growing inflation is usually followed by increasing interest rates as governments are trying to battle currency depreciation. This, in turn, strengthens the currency and affects exchange rates.<br /> <br /> In 2022 trading world witnessed a clear example of this process when the US Federal Reserve announced the sharpest interest rate hike since the 1980s, which resulted in the almost immediate US dollar strengthening while other currencies traded against it crashed.<br /> <br /> Experienced traders usually keep an eye on central banks’ interest rate decisions to find trading opportunities.</p> <h3>Economic indicators and political stability</h3> <p>Besides inflation and interest rates, it's worth watching Gross Domestic Product (GDP), which provides a snapshot of the economic conditions of a country, the balance of payments, government debt, the unemployment rate and other factors. All of them influence the country's currency value in one way or another. Traders are able to see a schedule of these releases in the economic calendar, which is a very popular tool for identifying potential trading opportunities.<br /> <br /> The number of different reports to check can get a little overwhelming for a new trader, but the good news is you don't have to check them all at once. Beginners tend to stick to the most important and self-explanatory ones. For example, GDP is the ultimate indicator of the economic health of any country. Fast GDP growth usually implies a strong economy and high demand for its currency, which in turn drives its price up.<br /> <br /> The political environment of a country also has a significant influence on its currency exchange rate. Similar to the low interest rates, political turmoil makes a country less appealing for foreign capital, resulting in a declining exchange rate of its currency.<br /> <br /> Both economic figures and political updates are usually heavily covered in the news, making news trading the most attractive trading strategy for beginners.<br /> <br /> Once you get more comfortable with the basic figures we discussed above, you can move on to an in-depth analysis of multiple numbers suggesting changes in exchange rates. Keep in mind that any of the factors mentioned above can rarely influence price movements on their own. A comprehensive approach requires comparing a few numbers and drawing a general conclusion based on your findings.</p> <h3>Market sentiment</h3> <p>In anticipation of a currency's rise or fall, many traders start buying or selling a currency before it changes its value. This, in turn, increases its demand or supply, resulting in price swings triggered solely by traders' activity. This factor is usually hard to predict as it depends only on the human factor and traders' perception of the upcoming events.<br /> <br /> This is where technical analysis with chart patterns and indicators come into play, which we will discuss in detail in our <a href="/en/trading-academy/what-is-technical-analysis-in-trading">Technical analysis in trading</a> blog.<br /> <br /> Before you dive deeper into analysing forex, it may be a good idea to practice your newly obtained knowledge on a <a href="/en/demo-account">risk-free demo account</a>. Our proprietary, award-winning trading platform ThinkTrader, for example, offers dozens of forex pairs and USD 10,000 of virtual money.</p>
How to trade forex
<p>Besides the obvious way of trading forex in the form of the physical foreign exchange transaction, a large part of forex transactions is executed by retail traders who trade forex pairs online for personal gain. As there is no physical exchange of currencies in online trading, forex pairs are traded via derivatives.<br /> <br /> One of the most popular ways to trade currency pairs online is via CFDs – contracts for difference. If you are not familiar with the concept of derivatives or CFD trading, check out our <a href="/en/trading-academy/cfds/what-are-cfds">CFD trading: a beginner’s guide</a>, where we explain it in detail.</p> <h2>How to trade forex with CFDs</h2> <p>When you trade forex with CFDs, you predict the direction of a future price movement of a currency pair. If the price moves according to your prediction, you gain a profit, and if the market moves against your prediction, you incur a loss. Let's see how it works following simple forex trading examples from the previous What is forex trading article.<br /> <br /> Imagine that the current buy price of the EUR/USD pair is 1.02839. Your research indicates that the euro will soon start strengthening against the US dollar, and the pair's price will go up.<br /> <br /> You open a long (buy) CFD position on the pair. If your prediction is correct and the price goes up to 1.03039, the price difference – 0.0020 or 20 pips, is your profit. If the price moves in the opposite direction and goes down to 1.02639 instead, the price difference becomes your loss.<br /> <img alt="" src="/getmedia/32be74e5-7189-44de-add9-f61a6f466526/article-how-to-trade-forex-long-cfd.webp" /><br /> <br /> In the opposite scenario, where you think the price of the pair will decrease, you open a short (sell) position. If your prediction is correct and the price drops to 1.02639, you gain a profit of 0.0020 or 20 pips. Should the market move against your prediction and reach 1.03039 instead, you lose.<br /> <br /> <img alt="" src="/getmedia/2a0c3c54-37cf-462d-a39a-ac653e6bad4b/article-how-to-trade-forex-short-cfd.webp" /><br /> <br /> The USD 0.0020 seems like a small amount to win or lose. However, this number applies only to 1 unit of a currency – 1 euro in this example, while in CFD trading, currencies are traded in lots.</p> <h2>What is a lot in forex trading?</h2> <p>A lot in CFD trading (whether it's forex or any other financial market) is a measurement of a contract size. It usually varies depending on the market and instrument. In forex, one standard lot of all currency pairs is 100,000 units of a currency. So, one lot of EUR/USD would mean EUR 100,000. Most brokers allow traders to open much smaller positions, also called mini and micro-lots. With ThinkMarkets, for example, you can trade as little as 1,000 units of EUR/USD or EUR 1,000, which is 0.01 lot.<br /> <br /> <img alt="" src="/getmedia/2b6dc4f9-9a54-4222-8318-0d87eaba69b2/article-how-to-trade-forex-lot.webp" /><br /> <br /> If you were trading one lot in our example, the amount of profit or loss – 0.0020 – would be multiplied by 100,000, resulting in a much bigger number:<br /> <br /> <img alt="" src="/getmedia/4c1103c3-3d42-40cc-9ee0-93b72af0becd/article-how-to-trade-forex-lot-formula-1.webp" /><br /> <br /> With this formula, you can always calculate your potential profit or loss:<br /> <br /> <img alt="" src="/getmedia/1ff7f27d-5dbb-408a-987f-1b7b65007ced/article-how-to-trade-forex-lot-formula-2.webp" /><br /> <br /> Now, if you trade one lot of EUR/USD, which means trading EUR 100,000, it may sound like a very large amount to open a trade with. However, when you trade CFDs, you don't need to pay the full amount to open a trade of that size because you trade with leverage.</p> <h2>What is leverage in forex?</h2> <p>Leverage is a term used to describe the process of borrowing funds from a broker to open trades larger than your capital. This term is not forex-specific and applies to any instrument and market traded with CFDs or other types of trading contracts that have this feature. We explain how it works in our <a href="/en/trading-academy/cfds/what-are-cfds">CFD trading: a beginner’s guide</a> too.<br /> To give a brief example based on our EUR/USD currency pair, let's assume you are trading 1 lot with 200:1 leverage. It means that you only need to pay 1/200th part, or USD 500, to open this trade. The higher the leverage, the smaller the amount you need to deposit to open a trade.<br /> <br /> <img alt="" src="/getmedia/15264210-73a6-4725-a562-a37415119a09/article-how-to-trade-forex-leverage-200-to-one.webp" /><br /> <br /> Please keep in mind that using risk management tools when trading with leverage is crucial for every forex trader because while leverage increases buying power, it can also increase losses if a trade happens to be losing.</p> <p paraeid="{22306c66-6283-487d-9399-a4aca021fe63}{241}" paraid="451896581">The maximum level of leverage depends on multiple factors, such as the broker's offering, account type, market, instrument, or country of trader's residence. For example, the maximum allowed leverage in the UK, Australia, and the EU is 30:1 due to regulating bodies within those regions, while in other parts of the world, it can be as high as 500:1. </p> <p paraeid="{250ca595-575b-4406-8923-97f21a83a46f}{2}" paraid="1503769214">However, there is a difference between maximum and optimal leverage, and very few people ever trade effectively at the maximum level, the same way you would not drive a sports car at top speed in a built-up area. </p> <p paraeid="{250ca595-575b-4406-8923-97f21a83a46f}{36}" paraid="1266073801">Instead, people will tend to trade with no more than ten times leverage. So, if a trader has deposited $10,000 to trade, they would rarely open positions larger than $100,000. </p> <h2>How to start trading the foreign exchange market</h2> <p>Here is a list of the first three important steps you need to do to start trading forex online:</p> <h3>Choose a forex broker</h3> <p>Most online trading brokers offer a variety of financial markets, not just currency trading, so you don't need to be focused on finding a forex-specific broker. It's crucial, however, to look for a well-regulated trading partner licensed by reputable regulators. ThinkMarkets, for example, has multiple licences and is regulated by the UK’s Financial Conduct Authority (FCA), the Australian Securities and Investments Commission (ASIC) and the Cyprus Securities and Exchange Commission (CySEC), among others.</p> <h3>Choose a trading platform</h3> <p paraeid="{250ca595-575b-4406-8923-97f21a83a46f}{138}" paraid="1017778112">Most forex brokers usually offer several trading platforms. Explore your options and compare trading account types associated with them to find the one you are most comfortable with. Pay attention to the ease of use, offered spreads and leverage. </p> <p paraeid="{250ca595-575b-4406-8923-97f21a83a46f}{144}" paraid="390720054">ThinkMarkets' proprietary trading platform, ThinkTrader, may be a good option if you are a manual trader. It offers a user-friendly, intuitive design, a wide variety of currency pairs, tight competitive spreads and fast execution. Available as a mobile and desktop app, as well as in a web browser, ThinkTrader is also equipped with a powerful suite of advanced tools to help you grow as a trader. Moreover, you can create a free demo account first and practise trading with virtual funds risk-free. </p> <p paraeid="{250ca595-575b-4406-8923-97f21a83a46f}{178}" paraid="1797459728">ThinkMarkets also offers MetaTrader 4 and 5 for traders who may prefer these platforms, and for their EA or custom indicator capability. </p> <p><br /> <br /> <img alt="" src="/getmedia/e77ab2f8-dd0c-4075-8a02-481d68a8d02f/article-how-to-trade-forex-platform.webp" /></p> <h3>Choose a currency pair to trade</h3> <p>Most new traders tend to start their forex trading journey with the most traded major currency pairs because there is more information about them, and they present diverse trading opportunities. Here are some of the most popular forex pairs among beginners and experienced forex traders:<br /> <br /> <img alt="" src="/getmedia/57fd89e8-5fff-4c02-a731-17275c6196e3/article-how-to-trade-forex-pairs.webp" /><br /> Keep in mind that there are quite a few factors that may cause price swings, so it is necessary to research before selecting a pair and placing a forex trade. In our <a href="/en/trading-academy/forex/what-affects-forex-exchange-rates">next article</a>, we'll find out what moves the forex market prices to help you identify potential trading opportunities. Once you have that knowledge, you can move on to getting to know trading strategies and building your own forex trading strategy.</p>
What is the Consumer Price Index (CPI), and how does it affect the markets?
<p>What is the Consumer Price Index (CPI), and how does it affect the markets?</p> <h2>Types of CPI</h2> <p>The BLS regularly produces official CPI estimates based on two population groups – CPI for all urban consumers (CPI-U) and CPI for urban wage earners and clerical workers (CPI-W).<br /> <br /> The CPI-U covers almost 93% of the entire US population and is the main report used by the Federal Reserve. As such, when we talk about the CPI in this article, we’ll be pertaining to the CPI-U data.<br /> <br /> On the other hand, the CPI-W covers the prices paid by urban wage earners, clerical workers, self-employed individuals, short-term workers, unemployed individuals, and retirees.</p> <h2>How is the CPI market basket determined?</h2> <p>The US Bureau of Labor Statistics (BLS) surveys consumers in private households nationwide as a reference population, collecting information on their spending habits and frequently purchased items. The data collected determines the weight of the item categories in the CPI index structure.</p> <h2>What goods and services are covered by the CPI?</h2> <p>The BLS classified the average American expenditure and consumption patterns into eight major categories.<br /> <br /> <img alt="" src="/getmedia/a8ab296c-c0f7-4830-a75a-e9f3738c5890/article-what-is-cpi-pie-diagram.webp" /></p> <ol> <li>Housing </li> <li>Food and beverages </li> <li>Transportation </li> <li>Commodities </li> <li>Healthcare </li> <li>Energy prices </li> <li>Education </li> <li>Other expenses</li> </ol> <p><br /> The change in price over time for each category is weighed and averaged to create the CPI data.</p> <h3>How is the CPI calculated?</h3> <p>The BLS enlists the help of price collectors to survey over 80,000 price data from 23,000 retail and service establishments throughout the country. They also monitor over 50,000 housing units to calculate the average price changes in rental properties.<br /> </p> <p>Below is the formula to calculate the annual CPI.</p> <br /> <br /> <strong>Annual CPI = (value of goods and services for the current year/value of goods and services in the previous year) x 100</strong><br /> <br /> Let’s look at an example to visualise it further. The price movements below are for illustrative purposes only, and the figures are oversimplified. Let’s assume that this table is the current total expenditure of an average urban consumer for 2021 and 2022.<br /> <br /> <img alt="" src="/getmedia/677c64a3-9049-4aa7-986f-26f99c025c46/article-what-is-cpi-table-expenditure.webp" /> <p>Below is the formula to calculate the CPI.</p> <img alt="" src="/getmedia/ec721e29-4b2e-4159-8d81-778949e8dd49/article-what-is-cpi-calculation-annual.webp" /><br /> <br /> Given this calculation, the annual <strong>CPI for 2022 is 112.31.</strong> <h2>How is the inflation rate calculated from the CPI report?</h2> <p>Inflation is the rise in prices of goods and services. The rate at which prices increase is called the inflation rate.<br /> <br /> A steady inflation rate is a significant economic indicator symbolising a country’s economic health. High inflation rates mean prices rise rapidly at the expense of the general public’s purchasing power. A low or negative inflation rate, called deflation, is also negative as the economy has become stagnant.<br /> <br /> <a href="/en/trading-academy/federal-reserve">The Federal Reserve</a> aims to keep the inflation rate at 2% in the US. The Fed uses the CPI published monthly by the BLS to measure inflation. Below is the formula to calculate the US inflation rate:<br /> <br /> <strong>Inflation rate = (current CPI – previous CPI) x 100</strong><br /> <br /> Let’s use the example above to illustrate. Let’s assume that the 2021 CPI is 101.4.<br /> <br /> <img alt="" src="/getmedia/e443f689-1573-4297-ac57-af171047ca19/article-what-is-cpi-calculation-inflation.webp" /><br /> <br /> Given this calculation, the inflation rate from 2021 to 2022 is 10.91%. That means the price of consumer goods and services rose by 10.91%.</p> <h2>How does the CPI affect the markets?</h2> <p>The release of CPI data is one of the most anticipated events by traders. It is normal to see volatility in charts before and after the release. However, one thing to note is that traders do not react to the CPI data. Traders react in anticipation of the Federal Reserve’s actions with regard to the CPI report.<br /> <br /> The Federal Reserve looks at the CPI report, the Price Producer Index (PPI), and the Personal Consumption Expenditures (PCE) price index to determine whether they should adjust the current monetary policy.<br /> <br /> The current mandate of the Federal Reserve is to keep inflation at a steady 2%. Suppose the rate falls below or above this level. In that case, the Fed may implement either an expansionary monetary policy, lowering the interest rates to stimulate the economy or a contractionary monetary policy, increasing interest rates to reduce the money supply in circulation.<br /> <br /> To find out how these policies affect the markets, read our article on the <a href="/en/trading-academy/federal-reserve">Federal Reserve</a>.</p>
Trading the Non-farm payroll NFP report
<h2>What is the NFP report?</h2> <p>Non-farm payroll (NFP) is a monthly report on nonfarm employment numbers in manufacturing, construction and goods, which totals to around 80% of US jobs. It contains information related to the unemployment rate, job growth, and other key employment statistics.</p> <p>The report does not include US jobs in private households, the federal government, nonprofit organisations, and as the name suggests, farm workers. Data within the Non-farm payroll report is measured by the <a href="https://www.bls.gov" target="_blank">Federal Bureau of Labor Statistics</a> through the Employment Situation report and is typically released on the first Friday of every calendar month.</p> <h2>Why is the Non-farm payroll important?</h2> <p>The report is an important economic indicator of how the US economy is performing, as it reports on the number of people employed or unemployed in the US. It is considered one of the most consistent news announcements that can cause large rate movements that result in volatile markets, particularly affecting major currency pairs in forex. As a stand-alone report, it is important in its own right, as an indication of whether the economy will strengthen or decline; for example, if the unemployment rate is high, it could indicate a declining economy.</p> <p>However, it is also an important piece of a jigsaw when looking at other key factors that influence the US economy, such as economic policy-making. Interest rates, for example, are set by the <a href="https://www.federalreserve.gov/monetarypolicy/fomc.htm" target="_blank">Federal Open Market Committee (FOMC)</a> in the monthly Federal Reserve meeting, and the board will look at the Bureau of Labor statistics NFP figures when deciding if they are going to lower or raise interest rates in their monetary policy. Changing interest rates will have a big impact on markets such as forex, commodities and stocks, and can cause big volatility.</p> <h2>Non-farm payroll report calendar</h2> <p>The NFP is released typically every first Friday of the calendar month at 13.30pm (GMT), below you can see the dates for 2024.</p> <p><img alt="NFP-calendar" src="/getmedia/7ade571b-7f2e-4ac4-acb2-32f69f83074d/NFP-calendar.png" title="NFP-calendar" /></p> <h2>How does the NFP affect the markets?</h2> <p>The NFP report is important to traders as it can be a cue to analyse how other factors will adapt, such as the Federal Reserve and other government agencies, to attempt to move the economy in a certain direction. It is just one factor of many that can act as a catalyst for volatility and market price changes.</p> <p>The government will adapt policies to combat issues within the economy such as inflation or recession. If the NFP report indicates employment is dropping, it could indicate that the economy is declining. This, in turn, will prompt the Federal reserve to adjust interest rates to restore balance. If rates adjust, this will trickle down into the markets.</p> <h5>Trading on Non-farm payrolls</h5> <p>Firstly, monitor the report. The primary focus of the NFP report are the employment figures, mainly on jobs added or reduced. However, there are smaller components you can also watch out for when trading.</p> <p><strong>Take note of sector specific data</strong></p> <p>If the NFP report shows a decline in employment, traders will monitor which industries or sectors this decline is coming from. It could indicate the sector itself is struggling, which can have a knock-on effect to stocks and shares.</p> <p><strong>Don't just focus on figures, also focus on earnings</strong></p> <p>If average hourly earnings have dropped, but the employment figures are stagnant, this could also indicate a decline. It could also point to trouble where we could see the workforce output fall as employees could leave the workplace due to declining earnings. On the other hand, higher earnings could indicate wage inflation.</p> <p><strong>Monitor previous reports</strong></p> <p>As the scale of the NFP report is so large, it is often subject to large revisions of the previous headline figures. If this happens, it could cause a sudden jolt in the markets.</p> <p>When trading on the Non-farm payroll report, economists will try to predict what the headline figures (or NFP number) will be on a monthly basis, while also monitoring other reports, rates and financial events. Trades will then be placed on whether they think this result will make markets go up or down. The markets most affected by the NFP report are forex, indices and commodities.</p> <p>A declining report may not be bad news for traders since it's possible to potentially benefit from this outcome with <a href="/en/trading-academy/cfds/what-are-cfds">contracts for difference (CFDs)</a>. CFDs allow you to trade volatile markets whether they go up or down; you just need to correctly predict which way the market will go by going long or short. You can use <a href="/en/trading-academy/cfds/risk-management-tools-in-cfd-trading">risk management tool</a> such as stop loss and take profit to minimise your risk, but as always with trading, act with caution. Plan your strategy, monitor reports such as the NFP and take advantage of our built-in economic calendar to monitor other major financial events on our award-winning app ThinkTrader.</p>
What is technical analysis in trading?
<p>The most important part of any trading strategy is knowing when to enter and exit the market. In our previous trading guides and articles, we covered various factors influencing price movements in financial markets, such as economic indicators and political climate.<br /> <br /> Analysing such factors is called fundamental analysis, and it is a very popular method to evaluate future price movements among traders.<br /> <br /> However, some traders consider insights found with the help of fundamental analysis insufficient to provide exact buy and sell levels. That’s where technical analysis can be useful.</p> <p>In this article, we’ll explain what technical analysis is, how it works, and its main types.</p> <h2>What is technical analysis?</h2> <p>Technical analysis is the process of evaluating past price movements of an instrument to determine its future moves. The reason it’s called technical is because it’s based purely on statistics and is not affected by news, economic or political factors.<br /> <br /> While this method is widely used by traders all over the globe, it’s important to understand that past prices don’t predict or dictate future prices, and all the insights gathered with the help of technical analysis are solely indicative.<br /> <br /> Technical analysis includes multiple tools. An experienced technical analyst usually uses various combinations of them to compare results and make an informed trading decision. These tools can be divided into three categories: trend lines, chart patterns and technical indicators.<br /> <br /> All three analyse price charts. So whichever type you choose, the single most important thing is to learn how to read price charts.</p> <h2>What is a price chart?</h2> <p>A price chart in trading is a graphic sequence of historical prices of an instrument. Charts are at the heart of trading as they help traders to monitor the value of their current positions, analyse past price movements and get cues as to where the price may move next. Understanding how to read a price chart is a key step in learning technical analysis.<br /> <br /> Each trading platform offers a different set of various chart types, and the choice depends purely on a trader’s personal preference. ThinkMarkets’ proprietary platform ThinkTrader, for example, has over 15 different charts to accommodate traders’ needs.<br /> <br /> <img alt="" src="/getmedia/6aae82dc-4ad4-43ba-9b7b-fdbf2373e549/article-what-is-technical-analysis-price-chart-1.webp" /><br /> <br /> Some popular ones are candlestick, bar and line charts:<br /> <br /> <img alt="" src="/getmedia/ffc042b3-bc5a-4a9e-81e8-da5cb1ba5b5c/article-what-is-technical-analysis-chart-types.webp" /><br /> <br /> As a candlestick chart is the most commonly used by traders, let’s see how it works in detail.</p> <h2>Candlestick chart</h2> <p>A candlestick chart is called so because each unit of it looks like a candle. The time frame of candles can be adjusted from one minute to one month, depending on the strategy:<br /> <br /> <img alt="" src="/getmedia/0f95f823-f6c9-42e1-a8f7-dcfb6ace79e7/article-what-is-technical-analysis-candlestick-chart.webp" /><br /> <br /> Regardless of the chosen time frame, each candle consists of two main elements: the wick and the body that represent four prices of an instrument:</p> <ul> <li>Opening price</li> <li>Highest price reached during the chosen period</li> <li>Lowest price reached during the chosen period</li> <li>Closing price</li> </ul> <p><br /> The candles are coloured depending on whether the market rose or fell during the selected timeframe. Green candles (white on some platforms) indicate rising or bullish prices, and red (black) represent falling prices, also called bearish.<br /> <br /> <img alt="" src="/getmedia/38272a03-b39f-4a17-85b3-e0377aacfc0a/article-what-is-technical-analysis-candlestick-wicks.webp" /><br /> <br /> In technical analysis, it is exactly the relationship between individual candlesticks that helps traders predict a future price movement.</p> <h2>Types of technical analysis</h2> <p>As we mentioned above, technical analysis tools can be segregated into three categories: trend lines, chart patterns and technical indicators.</p> <h5>Trend lines</h5> <p>Prices never move in straight lines. Influenced by many factors, they move up and down, forming highs and lows. A trend means the overall direction of the price movements. Trend lines are just straight lines that traders use to connect highs and lows on a price chart to identify a trend. Some trend lines, such as support and resistance, are used to identify an entry and exit level before opening a position.<br /> <br /> In one of our following articles, we’ll explain how trend analysis works and how to identify a trend in detail.</p> <h5>Chart patterns</h5> <p>A chart pattern is a graphic sequence of lines that can be identified on a price chart. Chart patterns are very popular among traders as they can often signal the beginning, end, strengthening or weakening of a trend.<br /> <br /> We’ll go through the most popular patterns in one of our next articles as well and explain how they work.</p> <h5>Technical indicators</h5> <p>Technical analysis indicators are mathematical calculations based on historical data and used to identify price action. As complex as it sounds, traders don’t need to do the actual math. Every trading platform offers technical indicators that can be simply applied to a price chart. The main goal for a trader is to learn how to read them.<br /> <br /> Depending on their types, technical indicators can analyse trend direction and strength and identify potential entry and exit points. We will cover this topic in detail in our following articles too.<br /> <br /> For now, to start getting familiar with technical analysis, we suggest creating a <a href="/en/demo-account">risk-free demo account</a> on ThinkTrader and studying various price charts. You will be able to use the same platform to continue your journey with technical analysis, as it offers an extensive suite of analytical tools.</p>
What are bullish and bearish Flag patterns?
<p paraeid="{a93e94ed-6fea-4c9f-a350-f7bc6677a4d1}{52}" paraid="1878194966">Multi-candle chart patterns work roughly the same way as one-, two- and three-candle formations covered in previous articles. However, these formations don’t have a defined number of candles and serve as an indication of either continuation of the preceding trend or its reversal. </p> <p paraeid="{a93e94ed-6fea-4c9f-a350-f7bc6677a4d1}{100}" paraid="120959535">Bullish and bearish flags are continuation candlestick patterns that suggest that the current trend will resume after a short consolidation period. </p> <h2 aria-level="2" paraeid="{a93e94ed-6fea-4c9f-a350-f7bc6677a4d1}{112}" paraid="424967598" role="heading">Bullish flag chart pattern structure </h2> <p paraeid="{a93e94ed-6fea-4c9f-a350-f7bc6677a4d1}{118}" paraid="1431684069">As the name suggests, a bullish flag looks like a flag on a pole. <br /> <br /> <img alt="A graphical representation of a bullish flag pattern with a clear upward pole, followed by a consolidation zone and an upward breakout." src="/getmedia/28d51a80-4048-4363-b2ef-3caeb2d92d3d/bullish-and-bearish-Flag-patterns.png" /><br /> <br /> </p> <p paraeid="{a93e94ed-6fea-4c9f-a350-f7bc6677a4d1}{151}" paraid="931113550">This pattern consists of a distinct pole comprising several candlesticks, a body in the opposite direction of the main trend and a breakout. To be considered a bullish flag, this formation needs to have the following characteristics: <br /> </p> <ul> <li paraeid="{a93e94ed-6fea-4c9f-a350-f7bc6677a4d1}{169}" paraid="1688653454">The “flagpole” is strongly bullish, with higher highs and higher lows; </li> <li paraeid="{a93e94ed-6fea-4c9f-a350-f7bc6677a4d1}{197}" paraid="2019845239">The “flag” is made up of candles with lower highs and lower lows that take place between two strictly parallel trend lines; </li> <li paraeid="{a93e94ed-6fea-4c9f-a350-f7bc6677a4d1}{216}" paraid="620551649">A breakout pierces the top line, resistance. </li> </ul> <h2 aria-level="2" paraeid="{a93e94ed-6fea-4c9f-a350-f7bc6677a4d1}{223}" paraid="266399962" role="heading">Bearish flag chart pattern structure </h2> <p paraeid="{a93e94ed-6fea-4c9f-a350-f7bc6677a4d1}{229}" paraid="1408549199">A bearish flag has exactly the same structure but upside down – a descending pole, an upward-facing flag and a breakout at the bottom. <br /> <br /> <img alt="Bear flag pattern" src="/getmedia/4dc5c5f8-956f-48a4-b982-bbf7008cc76f/Bear-flag-pattern.png" /><br /> <br /> </p> <p paraeid="{64733bf8-a523-4804-8c65-248371739895}{3}" paraid="1799856450">Similar to a bullish flag, a bearish version needs to follow certain characteristics to be considered a valid chart pattern: <br /> </p> <ul> <li paraeid="{64733bf8-a523-4804-8c65-248371739895}{15}" paraid="1789624376">A strongly bearish pole with lower highs and lower lows; </li> <li paraeid="{64733bf8-a523-4804-8c65-248371739895}{22}" paraid="1336922437">A bullish series of candlesticks with higher highs and higher lows between two parallel trend lines; </li> <li paraeid="{64733bf8-a523-4804-8c65-248371739895}{38}" paraid="59528530">A breakout through support – the lower line, in the flag. </li> </ul> <h2 aria-level="2" paraeid="{64733bf8-a523-4804-8c65-248371739895}{60}" paraid="1886371726" role="heading">How do flag chart patterns work? </h2> <p paraeid="{64733bf8-a523-4804-8c65-248371739895}{66}" paraid="1274548335">Both bullish and bearish flags indicate that the prevailing power is strong to form a trend. At some point, the opposing power gains enough control to try and push the price in the opposite direction from the main trend. However, it is not strong enough to reverse the trend, so the price starts trading mostly sideways. This allows the dominant power to consolidate their efforts and push the price into a breakout, continuing the main trend. </p> <h2 aria-level="2" paraeid="{64733bf8-a523-4804-8c65-248371739895}{84}" paraid="86664609" role="heading">How to trade with Flag chart patterns </h2> <p paraeid="{64733bf8-a523-4804-8c65-248371739895}{90}" paraid="2133208689">Like with any other candlestick pattern, a rule of thumb is to wait for it to be completed and only then enter the market. </p> <h3 aria-level="3" paraeid="{64733bf8-a523-4804-8c65-248371739895}{110}" paraid="1221579474" role="heading">Trading with a bullish flag pattern </h3> <p paraeid="{64733bf8-a523-4804-8c65-248371739895}{116}" paraid="1452446115">As a bullish flag is a bullish continuation pattern appearing in an uptrend, it suggests opening a long trade once the breakout occurs.<br /> </p> <p paraeid="{64733bf8-a523-4804-8c65-248371739895}{128}" paraid="1353678010">The most common way of placing a position when trading with this pattern is to use the closing price of the breakout candle as an entry level. Stop loss can be placed at any point in the body, as any movement within it would invalidate the pattern and indicate that it’s better to exit the market. To determine a suitable take-profit level, traders commonly calculate the price change from the flagpole's base to its peak and then add this measurement to the breakout point.<br /> </p> <p paraeid="{64733bf8-a523-4804-8c65-248371739895}{166}" paraid="1990545706">Keep in mind that this scenario may be a better fit for risk-prone traders who choose to not wait for additional candles to close after the breakout, confirming the trend. If you decide to wait a little longer, the entry, stop-loss and take-profit levels may be different and need to be identified individually.<br /> </p> <p paraeid="{64733bf8-a523-4804-8c65-248371739895}{188}" paraid="1425264249">On the image below, you can see that there was a small pushback from bears, and the second candle after the breakout is bullish. However, the price shot higher right after it, validating the pattern’s suggestion. <br /> <br /> <img alt="An example of trading financial markets with a bullish Flag pattern" src="/getmedia/f0a28f21-908e-49eb-b62d-49547334b7e5/An-example-of-trading-financial-markets-with-a-bullish-Flag-pattern.png" /><br /> <br /> </p> <h3 aria-level="3" paraeid="{64733bf8-a523-4804-8c65-248371739895}{217}" paraid="2059315071" role="heading">Trading with a bearish flag pattern </h3> <p paraeid="{64733bf8-a523-4804-8c65-248371739895}{223}" paraid="551449548">The appearance of a bearish flag in a downtrend suggests going short once the pattern is confirmed. Following the same logic, the closing price of a breakout candle can serve as an entry level.<br /> </p> <p paraeid="{64733bf8-a523-4804-8c65-248371739895}{229}" paraid="950932932">However, as you can see on the image below, a continuation of a trend indicated by a bearish flag can be short-lived. Shortly after the breakout, the price started moving sideways, eventually reversing into an uptrend. <br /> <br /> <img alt="An example of trading financial markets with a bearish Flag pattern" src="/getmedia/cfe88a51-3394-4aa8-ba27-60e03aa3d933/An-example-of-trading-financial-markets-with-a-bearish-Flag-pattern.png" /><br /> <br /> </p> <p paraeid="{64733bf8-a523-4804-8c65-248371739895}{246}" paraid="379789178">To decrease the risk of false signals when trading with chart patterns, it is essential to gather additional insights from the price chart.<br /> </p> <p paraeid="{4b648553-9ecc-4fa5-8c8e-d32926d71f8e}{5}" paraid="151789271">In the example above, you can see that only three bearish candles formed once the breakout happened. The fourth candle was strongly bullish, forming a <a href="/trading-academy/forex/analysis/bullish-bearish-engulfing-patterns">bullish Engulfing pattern</a> and indicating a potential upcoming price reversal.<br /> </p> <p paraeid="{4b648553-9ecc-4fa5-8c8e-d32926d71f8e}{27}" paraid="732672989">Additionally, many traders use technical indicators to compare and confirm their findings, as chart patterns alone only indicate a potential outcome but do not guarantee them.<br /> </p> <p paraeid="{4b648553-9ecc-4fa5-8c8e-d32926d71f8e}{33}" paraid="954863878">Another safety measure traders should always take is trading with a risk-free <a href="https://portal.thinkmarkets.com/account/individual/demo" target="_blank">demo account</a> first to hone their skills before trading with real money. Create one now and practise trading with bullish and bearish Flag chart patterns. To learn more about chart patterns, check out our next article, where we explain how <a href="/trading-academy/forex/analysis/what-are-bullish-and-bearish-pennant-patterns">Pennant patterns</a> work. </p>
What are bullish and bearish Pennant patterns?
Pennants are another type of multi-candle chart pattern. Like <a href="/trading-academy/forex/analysis/bear-bull-flag-pattern">Flag formations</a>, bullish and bearish Pennants are continuation patterns indicating that the prevailing trend will likely continue after a brief pause. <h2>Bullish Pennant chart Pattern structure</h2> A bullish Pennant pattern has a very similar structure to a bullish Flag – a pole, a body (pennant) and a breakout. The main difference is that while the Flag’s body is made of candles trading strictly within two parallel trendlines, the Pennant’s body looks more like a triangle. <br /> <br /> <img alt="A bullish Pennant chart pattern" src="/TMXWebsite/media/TMXWebsite/A-bullish-Pennant-chart-pattern.png" /><br /> <br /> In general, to be considered valid, bullish Pennant patterns need to have the following characteristics: <ul> <li>A bullish flagpole with higher highs and higher lows; </li> <li>A consolidation phase that takes place between the two converging trendlines;</li> <li>A breakout through the upper line.</li> </ul> <h2><br /> Bearish Pennant chart Pattern structure</h2> A bearish Pennant is a continuation pattern that resembles a bearish Flag as well, following the same logic – its body has the shape of a pennant instead of a flag. <br /> <br /> <img alt="A bearish Pennant chart pattern" src="/TMXWebsite/media/TMXWebsite/A-bearish-Pennant-chart-pattern.png" /><br /> <br /> The main characteristics of this pattern are: <ul> <li>A strongly bearish flagpole with lower highs and lower lows; </li> <li>A relatively short body between the two converging lines; </li> <li>A breakout through the bottom line. </li> </ul> <h2>How do Pennant chart patterns work? </h2> Both bullish and bearish Pennants can show us that the dominant power on the market had enough strength to push the price in their favour and create a trend. At some point, it weakens, allowing the opposing power to test its resistance, which sends the price sideways, bouncing back and forth between the two trendlines. <br /> <br /> Eventually, the previously dominant power consolidates its efforts to resist the attempts of price reversal and pushes for the trend’s continuation. <br /> <br /> If the breakout in any of the two Pennants happens in the opposite direction invalidating the pattern, it means that the dominant power lost its ground, and the trend may reverse. <h2>How to trade with Pennant chart patterns</h2> The first step in a trading strategy with Pennants is to wait for the pattern to be completed. This means that you need to be able to identify a clear breakout – the last element of the pattern. Once you have all the elements in place – you can open a position. <h3>Trading with a bullish Pennant pattern</h3> As a bullish Pennant suggests a continuation of an upward price movement, traders usually go long once they spot this formation. <br /> <br /> On the image below, you can see a clear example of a bullish Pennant chart pattern. <br /> <br /> <img alt="Trading example with a bullish Pennant pattern" src="/TMXWebsite/media/TMXWebsite/Trading-example-with-a-bullish-Pennant-pattern.png" /><br /> <br /> In this case, a rule of thumb for opening a position is to set the closing price of the breakout candle as an entry level and its opening price as a stop loss. However, if the opening price is just at the boundary of the breakout point, a stop should be placed slightly below this point. The general idea is that the price should not trade deeply into the pattern - if this happens, the pattern will fail, and the trader will generate a loss. <br /> <br /> For a target take-profit level, you can visually copy-paste the Pennant’s flagpole and place it at the breakout point. The end of it is where the uptrend will likely pause, stop or reverse. <br /> <br /> Risk-averse traders usually wait for one more bullish candle to close after the breakout to confirm the trend. This can mean a missed trading opportunity on the one hand, but on the other hand, it can prevent risk should the price move downward instead. The drawback with this approach is that the risk-to-reward ratio will be inferior. <h2>Trading with a bearish Pennant pattern</h2> A bearish Pennant works exactly the same way but in reverse. As a continuation chart pattern, it suggests a resumption of a downward price movement. Once the pattern is confirmed, traders tend to go short. <br /> <br /> The image below illustrates a bearish Pennant formed in a chart with a clear breakout through the bottom trendline. <br /> <br /> <img alt="Trading example with a bearish Pennant pattern" src="/TMXWebsite/media/TMXWebsite/Trading-example-with-a-bearish-Pennant-pattern.png" /><br /> <br /> Following a trading example with a bullish Pennant, risk-prone traders can use the closing price of the breakout candle as an entry and its opening price as a stop loss. The target price, or take profit level, can be set by copy-pasting the Pennant’s flagpole to the breakout point. <br /> <br /> If you study price charts, you will notice that quite often, the price breaks in the opposite direction – through the bottom trendline in a bullish Pennant or breakout through the upper trend line in a bullish version of it. When it happens, the patterns are considered invalid, as there is no clear indication of the price direction. <br /> <br /> That’s why it’s important to keep in mind that Pennant patterns, like any other chart pattern, don’t provide a guaranteed trading signal but only a suggestion. Experienced traders use additional tools, such as one- and two-candle patterns or technical indicators, to gain additional insights into the market conditions. It is also important to note that patterns in smaller timeframes, like the 5 or even 30 minute timeframes tend to have a lower success rate compared to a pattern formed on the 4-hour or daily chart. <br /> <br /> It can also be helpful to try trading with Pennants in a risk-free demo environment first and move to trading with real money when you gain confidence in your skills. Create a demo account now and start practising. If you want to know more about chart patterns, check out our next article, where we’ll talk about a unique pattern called a Cup and handle.
Trading The Morning and Evening Star Candlestick Patterns
<p dir="ltr">It is believed that there are more than 100 patterns based on Japanese candlesticks. We divide them into various categories, such as bullish vs. bearish, reversal vs. continuation, as well as simple and more complex formations.</p> <p dir="ltr">Both the morning and evening star patterns are considered to be more complex formations, mostly since they are based on three successive candles. As such, they occur more rarely than other patterns, especially the single-candle formations. <br /> </p> <h2 dir="ltr">Structures</h2> <p dir="ltr"><br /> The morning star is a bullish reversal pattern that occurs at the bottom of a downtrend. As other candlestick patterns, it only signals a potential reversal, an idea which should ideally be confirmed with other indicators</p> <h2>Four elements to consider for a morning star formation</h2> <ol> <li>A downtrend must be in place since a morning star is a bullish reversal pattern</li> <li>The first candle should be a bearish candle, preferably longer</li> <li>The second candle should be indecisive as the bulls and bears start to balance out over the session</li> <li>The third candle should be a strong bullish candle, which practically all but confirms the reversal</li> </ol> <p><br /> <img alt="morning star candlestick pattern" src="https://k13-dev.thinkmarkets.com/TMXWebsite/media/TMXWebsite/morning-star-pic-1.jpg" /><br /> <br /> </p> <p dir="ltr">Although some analysts prefer to have a gap down, it is extremely rare to have gaps in Forex. Thus, many analysts argue that as long as these four conditions are met, it is a valid morning star pattern. <br /> <br /> It is important to note here that the second candle is the most important one. It can be bearish or bullish, as the focus is on indecisiveness and uncertain outcome as to which out of two sides will come out on top. <br /> </p> <h2>The evening star formation</h2> The evening star, on the other hand, has the same structure and it is also a reversal pattern. Unlike the morning star, the evening star occurs at the top of an uptrend and it signals a potential change in the price direction. <p dir="ltr"><img alt="evening star candlestick pattern" src="https://k13-dev.thinkmarkets.com/TMXWebsite/media/TMXWebsite/evening-star-pic-2.jpg" /></p> <!--%3Cmeta%20charset%3D%22utf-8%22%20%2F%3E--> <p dir="ltr">All four conditions present in the morning star structure are valid here as well. Near the end of an uptrend, the first candle should be long and bullish, the second one should be at the top and signal indecision (green or red), while the third and final candle signals a reversal is starting, as the buyers are no longer in control over the price action. </p> <p dir="ltr">You can use the historic price action and analyse the structure and behaviour of the morning and evening star patterns on the MetaTrader 5 trading platform, which you can access <a href="/eu/metatrader5"><u>here</u></a>.</p> <h2>Trading the morning star candlestick pattern</h2> <p dir="ltr">As said earlier, the occurrence of a morning star pattern is not as frequent as those of a single-candle formation. They are harder to spot, aside from you practically needing to fulfil all four conditions before you can verify its presence. </p> <p dir="ltr">In this case, we have the AUD/USD daily chart. The price had been trading lower until the point where it created a new short-term low. Prior to this candle, there is a long bearish candle that signals a strong downtrend.</p> <br /> <img alt="how to trade an evening star candlestick formation" src="https://k13-dev.thinkmarkets.com/TMXWebsite/media/TMXWebsite/trading-an-evening-star-pic-3_2.jpg" /><br /> <br /> However, the sellers fail to force a close near the session’s low and the price rebounds higher to create a doji candle, which signals the indecision among the buyers and sellers. The next candle is a long bullish candle which forms the morning star pattern. We can now be almost certain that the bullish reversal is about to start taking place.
Technical indicators: beginner’s guide
<p>Technical indicators are powerful tools that complement <a href="/trading-academy/forex/analysis/support-resistance">trendlines</a> and chart patterns in technical analysis. They provide traders with a comprehensive view of price movements and potential trading opportunities in financial markets.<br /> <br /> Despite their popularity and effectiveness, many novice traders feel hesitant to use indicators due to the perceived complexity associated with the term "technical". While it's true that learning about trading indicators requires effort, dedicating time to studying and practising with them is usually beneficial and can ultimately improve your trading strategy.<br /> <br /> In this article, we will help you grasp the concept of technical indicators, understand their functionality, and explore the main types based on their functionality.</p> <h2>What are technical indicators?</h2> <p>Technical indicators are pre-made mathematical calculations that analyse an instrument’s performance to help predict its future price movements.<br /> <br /> As you probably know by now, it’s impossible to forecast financial markets’ behaviour with 100% accuracy due to their fluid nature and dependence on unpredictable factors. However, technical indicators can help you identify some tendencies and make an informed trading prediction.</p> <h2>How do technical indicators work?</h2> <p>You can apply technical indicators on your trading platform in just a couple of clicks. Most trading platforms offer a wide array of indicators, and ThinkMarkets' proprietary platform, ThinkTrader, stands out with its selection of 120+ indicators:<br /> <br /> <img alt="Technical indicators" src="/TMXWebsite/media/TMXWebsite/Technical-indicators.png" /><br /> <br /> Experienced traders often combine multiple indicators with chart patterns to gain deeper insights. However, as a beginner, it's crucial not to overload your charts with too many indicators, as it can create excessive noise and lead to conflicting signals.<br /> <br /> To start your journey with technical indicators, it's advisable to experiment with a few indicators within each group and determine which ones align with your trading style. Now, let's explore the main types of indicators that might suit your needs.</p> <h2>Types of technical indicators</h2> <p>It's worth noting that technical indicators can be categorised in various ways, and you may find the same indicator placed in different groups. This occurs because many indicators have overlapping functionalities, and the categorisation often relies on each trader's perception of the indicator's primary function.<br /> <br /> One common approach to differentiate indicators is by classifying them as either trend indicators or oscillators. While both types serve the purpose of identifying trend directions or reversals and providing buy or sell signals, they have distinct characteristics and applications. There are also other types as well below.<br /> <br /> <img alt="Types of technical indicators" src="/TMXWebsite/media/TMXWebsite/Types-of-technical-indicators.png" /></p> <h2>Trend indicators</h2> <p>In our <a href="/trading-academy/forex/analysis/support-resistance">Trendlines in technical analysis</a>: support and resistance explained article, we discussed how to draw trendlines in a price chart to identify a trend direction or potential reversal.<br /> <br /> Trend indicators work the same way. Their primary function is to identify whether the price is going to move up, down or sideways. The difference is that indicators’ lines aren’t necessarily straight, as they analyse different data, providing some additional trading insights.<br /> <br /> Some of the most popular trend indicators are:<br /> </p> <ul> <li>Simple Moving Average indicator</li> <li>Average Directional Index (ADX/DMS) indicator</li> <li>Ichimoku Cloud indicator</li> <li>Parabolic SAR indicator</li> <li>Alligator indicator</li> </ul> <p> </p> <h2>Support and resistance indicators</h2> <p>Similar to trend indicators, support and resistance indicators resemble the functionality of support and resistance levels but automatically detect them in a price chart.<br /> <br /> Here are some of the most commonly used support and resistance indicators:<br /> </p> <ul> <li>Pivot points</li> <li>Fibonacci retracement levels</li> <li>Bill Williams Fractals indicator</li> </ul> <p> </p> <h2>Volatility indicators</h2> <p>Volatility indicators can help traders identify the periods of high and low volatility of an instrument. This insight is valuable for traders because high volatility usually comes with big price swings that bring a lot of trading opportunities but also an increased risk of losses. When traders know what volatility to expect, it allows them to adjust their trading strategy according to their risk appetite.<br /> <br /> Some of the most popular volatility indicators are:<br /> </p> <ul> <li>Bollinger Bands indicator</li> <li>Average True Range (ATR) indicator</li> </ul> <p> </p> <h2>Volume indicators</h2> <p>direction of a price movement depends on how much bullish (buying) or bearish (selling) power is present in the market. If bulls overpower bears, the price moves up. In the reverse scenario, when bears outnumber bulls, the price goes down. Volume indicators help measure bullish and bearish movements to understand whether they are strong enough for the price to continue moving in the same direction or weak enough to expect a reverse.<br /> <br /> Check out these popular volume indicators:<br /> </p> <ul> <li>On-Balance Volume (OBV) indicator</li> <li>Volume Weighted Average Price (VWAP) indicator</li> <li>Chaikin Money Flow indicator</li> <li>Money Flow Index (MFI) indicator</li> </ul> <p> </p> <h2>Oscillators (Momentum indicators)</h2> <p>The second group, oscillators, works slightly differently than overlays. An oscillator is an indicator that swings between two boundaries and suggests the overbought or oversold levels of an instrument, which may indicate a trend reversal.<br /> <br /> Oscillators are not applied directly over the price chart but are usually at the bottom of it. They are also called momentum indicators because they may indicate momentum or how fast the price is moving in a particular direction.<br /> <br /> Check out these popular volume indicators:<br /> </p> <ul> <li>On-Balance Volume (OBV) indicator</li> <li>Volume Weighted Average Price (VWAP) indicator</li> <li>Chaikin Money Flow indicator</li> <li>Money Flow Index (MFI) indicator</li> </ul> <br /> <img alt="Oscillators" src="/TMXWebsite/media/TMXWebsite/Oscillators.png" /><br /> <br /> Here are some of the widely used oscillators:<br /> <ul> <li>Relative Vigor Index (RVI) indicator</li> <li>Moving Average Convergence Divergence (MACD)</li> <li>Momentum indicator</li> <li>Relative Strength Index (RSI)</li> <li>Force Index indicator</li> <li>Awesome Oscillator</li> </ul> <br /> <br /> The Bill Williams Awesome Oscillator is an oscillator that traders use to measure momentum in a Bill Williams Accelerator<br /> <ul> <li>Bill Williams Accelerator Oscillator</li> <li>Commodity Channel Index (CCI)</li> <li>DeMarker Indicator</li> <li>Gator Oscillator</li> <li>Stochastic Oscillator</li> <li>Williams Percent Range</li> </ul> <p> </p> <h2>How to choose a technical indicator</h2> <p>There are no good or bad indicators; they all provide different insights. The most important part of trading with indicators is to have a solid understanding of how they work and to be able to read the signals they provide.<br /> <br /> If you are a new trader, go through our list of indicators, study how they function and apply them using a demo account, comparing the findings. After some practice, you will have a better idea of which indicator fits your trading strategy.</p>
What are hammer and inverted hammer candlestick patterns?
<p paraeid="{a93e94ed-6fea-4c9f-a350-f7bc6677a4d1}{52}" paraid="1878194966"> The hammer and the inverted hammer candlestick patterns are among the most popular single-candle formations. They’ve been named as such because of their visual resemblance to a hammer – a short body on one end and a long wick on another.<br /> <br /> The hammers’ description may sound similar to a <a href="/eu/trading-academy/indicators-and-patterns/doji-candlestick-pattern/">Doji candle</a>. However, while the body of a doji candle is so short that it looks like a horizontal line, both hammer and inverted hammer have slightly longer, visible bodies. Let’s see how they look. </p> <h2 paraeid="{a93e94ed-6fea-4c9f-a350-f7bc6677a4d1}{52}" paraid="1878194966"> Hammer candlestick pattern </h2> In a hammer candle, the opening, closing and high prices are located near each other creating a body at the top, while a long wick extends lower. The wick is usually twice as big as the body.<br /> <br /> <img alt="Bearish and bullish Hammer candlestick pattern" src="/getmedia/4d7f35dd-f359-4793-90df-61e310983c66/Bearish-and-bullish-Hammer-candlestick-pattern.png" /><br /> <br /> Irrespective of the colour of the body, both examples on the image above are hammers. The green candle is usually considered a stronger signal as the close occurs at the top of the candle, signalling strong momentum. <h2>Inverted hammer candlestick pattern</h2> An inverted hammer is exactly what the name itself suggests – a hammer turned upside down. A long upper shadow (wick), accompanied by the closing, opening and low prices are all registered near the same level at the bottom. Again, the upper wick should be twice as big as the body.<br /> <br /> <img alt="Bullish and bearish Inverted Hammer candlestick pattern" src="/getmedia/d6575102-a644-49c1-b119-5e9d0d6b2389/Bullish-and-bearish-Inverted-Hammer-candlestick-pattern.png" /><br /> <br /> Like with a hammer, the green version of the inverted hammer is more bullish because of its higher close. <h2>How do hammer and inverted hammer candles work?</h2> As noted earlier, both of these patterns are considered to be powerful reversal patterns.<br /> <br /> At some point in a downtrend, the bulls increase their presence and push the price higher, causing a higher closing. That's when the hammer pattern occurs, signalling a potential trend, as the bears are unable to prevent a higher close.<br /> <br /> It is exactly the closing price at the top of a candle that signals that the bulls overpowered the bears and gained control over the market.<br /> <br /> The inverted hammer pattern also generates the same signal but in a different manner. This candle's opening and closing prices are at the bottom, indicating selling pressure and domination of bears. However, the long wick at the top of the candle means that bulls were powerful enough to push the price higher and suggests a potential reversal.<br /> <br /> The hammer candle, with its closing price at the top, is considered to provide a stronger bullish reversal pattern than the inverted hammer, with the closing price at the bottom. <h2>How to trade with a hammer and inverted hammer</h2> A trading strategy with hammer and inverted hammer candlesticks depends on a trader's risk appetite. As both candles are bullish signals, traders with a high risk appetite may open a position as soon as they see this pattern formed, anticipating trend reversal. In this case, the hammer's closing price often serves as an entry point, and its low price (the end of the wick) can suggest a stop loss.<br /> <br /> Risk-averse traders may wait for the other two-three candles to close for trend confirmation. In either scenario, most traders go long once they confirm a hammer or an inverted hammer.<br /> <br /> The image below shows an example of how the downtrend reversed and started moving upward right after the hammer appeared.<br /> <br /> <img alt="Hammer candle and trend reversal in a price chart" src="/getmedia/2f428ae5-c105-4678-9b38-90ecb94aa8ba/Hammer-candle-and-trend-reversal-in-a-price-chart.png" /><br /> On the other hand, if you have a short position open in a downtrend, both hammer candles may be considered an exit signal before the trend reversal.<br /> <br /> It is important to note that just like any other candlestick pattern, neither hammer nor inverted hammer is a direct trading signal but a suggestion. There is always a possibility that the market will move in the opposite direction of your prediction.<br /> <br /> Many traders use additional technical analysis tools to confirm their findings and get more trading insights. For example, trendlines can confirm the price breakout, as illustrated on the image below.<br /> <br /> <img alt="Hammer candle and trendlines in a price chart" src="/getmedia/bd60c4c1-e3f1-4f2e-9a16-9bb0f8de7a21/Hammer-candle-and-trendlines-in-a-price-chart.png" /><br /> <br /> Moreover, it can be helpful to determine horizontal support and resistance levels to place stop-loss and take-profit orders and update them as the market moves. Risk management tools are essential in every trading strategy.<br /> <br /> <img alt="Hammer candle and support and resistance in a price chart" src="/getmedia/9c94caa6-fcb5-4b54-b07d-875738df6044/Hammer-candle-and-support-and-resistance-in-a-price-chart.png" /> <h2>Hammers vs shooting star vs hanging man</h2> Traders who are more familiar with candlesticks may notice that both hammer and inverted hammer look exactly like the hanging man and shooting star patterns. They are, indeed, very alike. The main difference is that both the hanging man and shooting star occur in an uptrend, while both hammers take place in a downtrend.<br /> <br /> <img alt="Hammer vs Inverted Hammer vs Hanging Man vs Shooting Star" src="/getmedia/ac940462-55a2-4ce2-845a-4e21ab058a38/Hammer-vs-Inverted-Hammer-vs-Hanging-Man-vs-Shooting-Star.png" /> <p> In our next article, we'll explain how <a href="/eu/trading-academy/indicators-and-patterns/hanging-man-pattern/">hanging man and shooting star candlestick patterns</a> work and how you can identify trading opportunities with their help. </p> <p> Meanwhile, create a risk-free demo account and practise finding Hammer and Inverted Hammer candles in a chart. </p>
What is the Doji candle pattern?
<p paraeid="{a93e94ed-6fea-4c9f-a350-f7bc6677a4d1}{52}" paraid="1878194966">A doji candlestick is a short-term pattern made of a single candle. Doji translates as “the same thing” from Japanese. It’s the perfect name for a candle that has its open and close prices at the same or almost the same level, making the body of a doji candle very small.<br /> <br /> The reason for this is the balanced power of bulls and bears, with neither being in control. Dominated by wicks, a doji candle often indicates indecision in the market.<br /> <br /> This type of candlestick can be classified as both a reversal and continuation pattern. The signal doji provides depends on the shape of a candle and its positioning within the trend.</p> <h2 paraeid="{a93e94ed-6fea-4c9f-a350-f7bc6677a4d1}{52}" paraid="1878194966">Types of doji candles</h2> Analysts distinguish five types of doji patterns:<br /> <ul> <li paraeid="{baba8067-8a56-43db-9e63-3cfb447b3ed4}{152}" paraid="2026840356">Doji Star (Neutral) </li> <li paraeid="{baba8067-8a56-43db-9e63-3cfb447b3ed4}{163}" paraid="1061156071">Four-price doji </li> <li paraeid="{baba8067-8a56-43db-9e63-3cfb447b3ed4}{174}" paraid="1506677825">Long-legged doji </li> <li paraeid="{baba8067-8a56-43db-9e63-3cfb447b3ed4}{183}" paraid="1347664177">Gravestone doji </li> <li paraeid="{baba8067-8a56-43db-9e63-3cfb447b3ed4}{190}" paraid="1797960963">Dragonfly doji </li> </ul> <h2>Doji star candlestick pattern (neutral doji)</h2> <img alt="Doji Star candle" src="/getmedia/f06ed2c2-224a-4ec9-ad3d-d0b00f809296/Doji-Star-candle.png" /><br /> <br /> A doji star candle looks like a cross with a very short body in the middle and both wicks of similar length. This type of candlestick can occur at the end of the downtrend or in the closing stages of the uptrend. This may signal the trend weakening and a potential upcoming reversal. <h2>Four-price doji</h2> <img alt="Four-price Doji candle" src="/getmedia/21738b3c-89de-4037-9d05-8750295aac1c/Four-price-Doji-candle.png" /><br /> <br /> The four-price doji is a very rare formation that looks like a horizontal line with high, low, opening and closing prices at the same, or nearly the same, level. This doji pattern signals very low volatility and high indecisiveness in the market. Similar to the neutral doji, the four-price doji may indicate the trend weakening. <h2>Long-legged doji candlestick pattern</h2> <img alt="Long-legged Doji candle" src="/getmedia/540cf30b-9488-46c8-a9a6-bbe92e3e67bf/Long-legged-Doji-candle.png" /><br /> <br /> A long-legged foji, or a ‘rickshaw man’, is similar to a doji star but has longer wicks on either side. This type of candle also signals indecision as there is no clear indication about the future trend but with much higher volatility on the market.<br /> <br /> A long-legged doji candlestick formation can occur in both strong uptrends and downtrends, suggesting that the current trend may be in the closing stages, and a reversal may take place soon. <h2>Gravestone doji candlestick pattern</h2> <img alt="Gravestone Doji – a bearish reversal candlestick pattern" src="/getmedia/e9104f26-7bfc-4b19-9cdb-0b66743c996a/Gravestone-Doji-%e2%80%93-a-bearish-reversal-candlestick-pattern.png" /><br /> <br /> A gravestone doji candle has a very long upper wick and a considerably shorter lower wick, with the candle’s body located close to the bottom.<br /> <br /> It is a bearish reversal pattern that often takes place at the end of the uptrend. The gravestone doji suggests that the bulls have pushed the price higher but could not force a close near the candle’s high price. As a result, the bears were able to return the price lower, bringing the open, close, and low prices to almost the same level, which may indicate the impending reversal of the price direction.<br /> <br /> On the other hand, when found in the downtrend, the gravestone doji may indicate its continuation. <h2>Dragonfly doji candlestick pattern</h2> <img alt="Dragonfly Doji – a bullish reversal candlestick chart pattern" src="/getmedia/630b1b89-7ccc-4496-aa66-0af48ad588de/Dragonfly-Doji-%e2%80%93-a-bullish-reversal-candlestick-chart-pattern.png" /><br /> <br /> A dragonfly doji candlestick formation is the opposite of a gravestone doji.<br /> <br /> It’s a bullish signal with a very long lower wick, a much shorter upper wick, and the body located closer to the top. Thus, in a dragonfly doji candle, the open, high, and close prices are all very close to each other.<br /> <br /> This type of candle can occur in both uptrend and downtrend, but it is considered to be stronger when it takes place at the bottom of the downtrend and often suggests an upcoming price reversal.<br /> Found in the uptrend, a dragonfly doji may indicate its continuation. <h2>How to trade with the doji candlestick</h2> The doji candle alone is usually not strong enough to provide a definitive trading signal, so it is often used in combination with other technical analysis tools to support the findings.<br /> <br /> Support and resistance level are some of the most commonly used tools with a doji candle. For example, on the image below, you can see a gravestone doji that closed near the resistance level of the uptrend. It means that the higher price was rejected, and bears pushed the price to stay within the trend channel. Since bears had slightly more control over the market, they kept pushing the price down, causing the trend to change its direction.<br /> <br /> <img alt="Trading with a Doji candle and support and resistance levels" src="/getmedia/9c17bd9d-3e86-49de-8426-f5a9874cf14e/Trading-with-a-Doji-candle-and-support-and-resistance-levels.png" /><br /> <br /> Another way to trade with a doji candle is to spot two consecutive doji candles, which usually means even greater indecisiveness on the market. When two candles appear one after another in a trend channel, it often results in a trend reversal. <br /> <br /> <img alt="Trading with a double Doji candle" src="/getmedia/e1a02e93-7d33-4bdc-b100-5b9b7338f7cb/Trading-with-a-double-Doji-candle.png" /><br /> <br /> One more popular method of trading with a doji candle is to use it with the RSI oscillator. As you can see on the image below, doji candles appeared in the uptrend, signalling indecisiveness. At the same time, RSI suggests the instrument is overbought. These two factors resulted in the trend reversal. <br /> <br /> <img alt="Trading with a Doji candlestick and RSI indicator" src="/getmedia/ad2dabe0-1248-4e82-af28-d691c091705e/Trading-with-a-Doji-candlestick-and-RSI-indicator.png" /><br /> <br /> These are just a few examples of potential positions with doji candles. Keep in mind that the appearance of these candlestick patterns does not guarantee trend reversal or continuation – it is merely an indication. That’s why using risk management tools is crucial to prevent unexpected losses should the market move in the opposite direction of your prediction.<br /> <br /> Create a demo account to practise trading with doji candles, stop loss and take profit. Ready for more technical analysis tools? Move to our next article, where we explain how the <a href="hammer-and-inverted-hammer-candlestick-patterns">hammer and inverted hammer chart patterns work</a>.
Forex Trading Articles
Learn all about the forex market and how you can trade it with our in-depth articles.
