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Timezones and liquidity

<h2>Forex market hours and liquidity</h2> With indices, shares and most other financial products that are traded on various global exchanges, you can only make trades during the exchange’s business hours. Fortunately for forex traders, currencies are free of this restriction and can be traded day or night, with the forex market hours being open 24 hours a day, 5 days a week. <h2>Capturing trading opportunities around the clock</h2> Because the Forex market does not have a physical location or a central exchange, it is considered an Over-the-Counter (OTC), or "Interbank", market due to the fact that the entire market is run electronically, within a network of banks. This means that you can place trades through your broker 24 hours a day and trade at a time that’s convenient for you. Below you can see a 24 hour period which shows the active trading sessions of the Interbank and Retail FX markets, using London as the time zone as this is the central hub to Forex trading. <h2>Nylon session</h2> The highest volume of trading activity happens during the London session (as it also has Europe as well) but liquidity is at its highest when New York opens and overlaps with the London session. This is referred to as the ‘Nylon’ session (New York and London) when liquidity and trading volume is at its highest. Therefore we can expect larger moves and is an ideal time to trade breakout strategies. This is a popular time for intraday traders to participate as due to the higher volume and liquidity, spreads are at their tightest so transaction costs for the traders is lower. <img alt="timezones" src="/TMXWebsite/media/TMXWebsite/timezones_1.png" />   <h2>Asia Session</h2> Whilst New York and London are considered important trading centres the same can also be said for Tokyo, Hong Kong and Singapore. As London and New York banks close their official trading sessions, the Asian banks open and trade which is why Forex is seen as a 24 hour market. However the volume is not as high as the Nylon session which means we tend to see smaller price movements and wider spreads.   <h2>24-liquidity cycle</h2> The visually show you the changes in liquidity around a 24 hour period the chart below has a 14 period ATR indicator (Average True Range). This is a proxy for volume and each horizontal line represents 24hrs. We can see that during the Asian session volume and liquidity is at its lowest and increases when Europe and London opens, with the peak during the Nylon session. Whilst it is not precise to the hour or minute I hope this demonstrates the daily cycle of increasing and decreasing volume. <img alt="timezones" src="/TMXWebsite/media/TMXWebsite/timezones_2.png" />

6 min readBeginners

Forex Indicators and patterns

The Double Top Reversal Pattern

The double top pattern is a bearish reversal pattern that can be observed at the top of an uptrend and signals an impending reversal. Unlike the double bottom formation that looks like the letter “W”, the double top chart pattern resembles the letter “M”, due to the two equal highs.  In this blog post, we will describe how to correctly draw the double top, what its structure tells us, and how to make profit trading the double top pattern by sharing a simple trading strategy. <h2>What the Double Top pattern tells us</h2> The double top chart pattern is a bearish reversal pattern. As such, it can only occur in an uptrend as the buyers are successful in pushing the price action higher by creating a series of the higher highs and higher lows.  Their inability to extend this bullish series initiates the creation of the double top pattern as the second peak is not registered as a higher high, but rather as an equal high. This weakness is then used by the sellers to push the price action lower and erase previous gains.  <img alt="" src="/TMXWebsite/media/TMXWebsite/Double-top-Image1.jpg" /> In essence, there are three key elements of the double top chart pattern:   <ul> <li>Uptrend - The price action must trade in an uptrend for the double top to make sense. Remember, this is a reversal pattern. </li> <li>Two equal highs - Getting two exact same highs is hard to imagine. As long as we can see that the horizontal resistance that capped the earlier move higher stops the buyers once again, we register this as two equal highs.</li> <li>Neckline - The lowest point of a pullback following the first peak is called the “neckline”. A simple horizontal trend line is drawn through the lowest point of the pullback. </li> </ul>   The double top formation is active once the price action breaks below the neckline. The market moves from creating the higher highs and higher lows to the lower lows, as the break of the neckline brings us lower prices compared to the lowest point of the initial pullback (the neckline).  Ideally, a certain period of time should pass in between the two tops. In case the second peak occurs almost immediately after the first peak, with a minor pullback, there is a strong likelihood that the buyers will break above the first peak. In this case, the double top becomes a continuation pattern.    For this reason, the most effective double top patterns are those with a certain amount of time in between two lows. It is also absolutely crucial to wait for a break of the neckline before entering a market, to avoid situations where the double top formation becomes the continuation pattern. <h2>Strengths and weaknesses</h2> Similar to the double bottom formation, a double top pattern is one of the strongest reversal patterns out there. One of its greatest strengths is its efficiency and high likelihood of being successful in predicting a change in the trend direction.  The neckline existence equips the pattern with a clearly defined level to play against. The neckline marks the risk and it helps determine the take profit once the pattern is activated.  On the other hand, the biggest weakness of the double top pattern is that you are countering what is, to that point, a very powerful trend. For this reason, there is always a chance that this scenario could eventually result in a continuation of the bullish trend. Therefore, a trader should always consult other technical indicators before entering the market. <h2>Spotting the double top pattern</h2> The double top patterns are not so common in trading. However, once correctly identified, they become a powerful tool in the hands of a trader. A USD/CHF daily chart below gives us a great example of how to successfully counter the strong bullish trend.  An initial bullish move results in enormous gains of more than 500 pips for the buyers. The price action moves higher in an almost vertical manner, without any meaningful pullback. Following the first peak, the price action rotates lower in the first more significant pullback. <img alt="" src="/TMXWebsite/media/TMXWebsite/Double-top-Image-2.jpg" /> The buyers are then able to regroup and organise another assault at the same horizontal resistance level around the $1.0050 handle. However, they fail again at the same resistance, which prompts a deeper pullback. <h2>Trading the Double Top pattern</h2> The basic principles for trading the double top pattern are the same as for the double bottom pattern. Once again, the pattern is only activated once there is a clean break and a close below the neckline, preferably on a daily basis. This way, you protect yourself against the failed breakdowns, when the price action briefly trades below the neck line without actually breaking it.  Once the USD/CHF sellers bring the price action to the point where the previous pullback lower ended, their goal now is to create a lower low and initiate a new bearish trend. They become successful in their mission as there is a break of the neckline very quickly.  <img alt="" src="/TMXWebsite/media/TMXWebsite/Double-top-Image-3.jpg" />   Similar to the head and shoulders reversal pattern, the double top offers two types of entry. First is a more aggressive entry, as you enter the market as soon as the candle closes below the neckline.  The second route is based on a more conservative approach as traders wait for the price action to return higher to retest the broken neckline - a throwback - before entering the market at a higher (better price).  This approach offers a better risk-reward ratio, but the chance of you missing out on a trade is also higher as the move higher may never happen. On the other hand, the first option offers you a mandatory ride in a trend, however, the entry may be quite lower.   In this case, USD/CHF never offered us a second choice as the price action flushed lower. There was a minor rebound higher, but it never reached the broken neckline. In this case, our entry is at $0.9760, a level where the USD/CHF closed below the neckline for the first time.  The stop-loss should be placed above the neckline, allowing some space for a potential failed breakout, if the price action rebounds to retest the neckline. Thus, we put a stop-loss at $0.9820, around 30 pips above the broken neckline. Please remember that any move and close above the neckline invalidates the activated double top pattern. The take profit is calculated in the same manner as it is the case with the double bottom pattern i.e. measuring the distance between the resistance (double top) and the neckline. The same trend line is then copy-pasted from the point where the breakout occurred, with an end point of the trend line being our take profit. In our case, the trend line ends around $0.9530. The USD/CHF pulls back all the way to $0.9540, around 10 pips from our take profit. As with a stop loss, it is always advised to leave some room for the take profit, as some traders may exit their trades earlier. Ultimately, this trade banked us 220 pips while we risked only 30 pips.

6 min readBeginners

Forex Indicators and patterns

How do Heikin Ashi candles work?

Heikin Ashi is a Japanese term that means “average bar”. Heikin Ashi candles are a modified way of displaying data on your candlestick chart, most notably the ability to smooth out volatility of a currency pair - allowing you to build more sophisticated trading strategies. A typical candlestick chart will both show the overall trend and how volatile the markets were in a particular candlestick itself. Heikin Ashi smooths out the price action on a chart by displaying values using averages to create something that does look very similar to the candlestick, but without a lot of noise. The main purpose of using the Heikin Ashi indicator is to see past the choppiness and volatility that is so common in the markets. The Heikin Ashi candles will apply a mathematical formula in order to give a clear picture of whether or not the market is in a bullish or bearish trend. <h2>How Heikin Ashi is calculated</h2> While the traditional bar or candlestick chart plots the open, close, high, and low of a time period, the Heikin Ashi calculates these values slightly differently. The Heikin Ashi formula used to come up with the average values on each candle is:   <ul> <li>Open of candle: (open of previous bar + close of previous bar) / 2</li> <li>Close of candle: (open + high + low + close) / 4</li> <li>High of candle: the maximum value from the high, open, or even close of the current period</li> <li>Low of candle: the lowest value from the low, open, or close of the current period</li> </ul> As you can see, this is quite different from just plotting the values as usual. This helps slow down the churn and keeps the same trend visualised for longer. While the indicator is slow to change, it does help keep the trade going longer when on the correct side of it. <img alt="" src="/TMXWebsite/media/TMXWebsite/heikin_ashi_1.png" />

6 min readBeginners

Forex Indicators and patterns

What is a Rising Wedge?

The rising (ascending) wedge pattern is a bearish chart pattern that signals an imminent breakout to the downside. It’s the opposite of the falling (descending) wedge pattern (bullish), as these two constitute a popular wedge pattern. A rising wedge can be both a continuation and reversal pattern, although the former is more common and more efficient as it follows the direction of an overall trend.    In this blog post, we discuss the rising wedge formation, its main characteristics, how to spot it, and how to make sure that your trades involving the rising wedge pattern are profitable.  <h2 dir="ltr">Where does the falling wedge occur?</h2> Similar to <a data-di-id="di-id-d2dcb780-a21cf72e" href="/en/trading-academy/forex/falling-wedge-pattern">the bullish wedge</a>, the rising wedge consists of two converging trend lines that connect the most recent higher lows and higher highs. In a rising wedge, the lows are catching up with the highs at a higher pace, which means that the lower (supporting) trend line is steeper.   <img alt="rising wedge pattern" src="/TMXWebsite/media/TMXWebsite/Rising-wedge-image-1.jpg" />   A rising wedge can occur either in the downtrend, when it is seen as a continuation pattern as it seeks to extend the current bearish move. Or it can occur in an uptrend, ultimately resulting in a reversal pattern. The former is considered to be a more popular, and more effective form of a rising wedge.  As with the falling wedge, we note three key features of a rising wedge:   <ul> <li>The price action temporarily trades in an uptrend (the higher highs and higher lows)</li> <li>Two trend lines (support and resistance) that are converging</li> <li>The decrease in volume as the wedge progresses towards the breakout</li> </ul> The third point is seen more as a boost to the validity and effectiveness of the pattern, rather than a mandatory element. The decreasing volume suggests that the sellers are consolidating their energy before they start pushing the price action lower towards the breakout. <h2>Strengths and Weaknesses of the Pattern</h2> The main strength of an ascending wedge pattern is its ability to warn us of an imminent change in the trend direction. Despite the fact that the wedge captures the price action moving higher, the consolidation of the energy means the breakout is likely to happen soon.  Given that the lows are progressing faster than the highs, the wedge is squeezing towards the point where the two trend lines intersect. Despite a push from the downside, the buyers are finding it difficult to break out to the upside, which triggers a move in the opposite direction.  On the other hand, the rising wedge is still a technical indicator that only generates a signal. As every other indicator, it is not, and it can’t be 100% correct in predicting future price movements. Thus, it is best applied alongside other technical indicators.  The best possible way to identify the key strengths and weaknesses of a rising wedge is to start analysing the pattern yourself. For this purpose, <a data-di-id="di-id-555d44fe-1d3b3793" href="/en/metatrader5">MetaTrader 5 trading platform</a> offers a great trading environment which allows you to focus on the price action and get more familiar with this and other chart formations.  <h2>Spotting the rising wedge</h2> Identifying a rising wedge is not so difficult. As a first step, you should eliminate all types of wedges that are present in the sideways-trading environment. The ascending wedge occurs either in a downtrend as the price action temporarily corrects higher, or in an uptrend.   <img alt="rising wedge pattern" src="/TMXWebsite/media/TMXWebsite/Rising-wedge-image-2.jpg" /> Down here we have a USD/CHF daily chart. The price action is moving lower until a point when it creates a third in the series of the lower lows. Afterwards, the buyers start pushing the price again higher, creating a rising wedge.    Finally, we have a breakout to the downside, as the buyers were unable to capitalise on the positive momentum they had. This wedge is a bit narrower as two trend lines converge quite quickly, which is positive from the risk/reward perspective. <h2>Trading the Rising Wedge</h2> We will now use the same chart to show how you should trade the rising wedge. Of course, there are many rising wedges that we can use to show how to trade the ascending wedge, however, we use the same chart to provide a continuity and complete the process - from spotting the wedge to finalising the trade.   <img alt="Trading rising wedge pattern" src="/TMXWebsite/media/TMXWebsite/Rising-wedge-image-3.jpg" />   Hence, once we identify the wedge, we process towards the second stage when we look at the trade elements - possible entry, stop loss, and take profit. But first, pay more attention to two vertical red lines. In between these two, the volume is decreasing as the wedge progresses.  The moment the volume breaks the decreasing trend is when the candle breaks out of the wedge. A higher volume behind the break is a great evidence that the breakout is happening, as you can see a strong increase in volume figures once the breakout starts taking place.    We also have three horizontal lines:   <ul> <li>black (entry)</li> <li>red (stop loss)</li> <li>and green (take profit)</li> </ul>   <div dir="ltr">Entry is placed once we have a first daily close outside of the wedge’s territory. A stop-loss should be set inside the wedge’s territory as any return of the price action to the inside of the wedge invalidates the pattern.</div>   <div dir="ltr">In this particular case, the distance between the entry and stop loss is very short, since two trend lines have almost intersected. Hence, the risk in this trade is extremely low. As with the falling wedges, the take profit is calculated by measuring the distance (the short blue vertical line) between the two converging lines when the pattern is first formed.</div>   <div dir="ltr">Finally, we have our trade details: Entry - $0.9835, stop loss - $0.9855, take profit  - $0.9695. Thus, we are risking 20 pips to make 140 pips, which is an extreme scenario in the risk-reward context. </div>   Given the very small amount of pips that you risk with this scenario, you may also opt to decrease the amount of pips you are targeting from 140 pips to 70, given that a level of $0.9765 is where an important horizontal resistance is located. Choosing between these two options depends on your risk tolerance and overall trading approach.    You can also check how both of these approaches work by opening trades on the demo account, which you can do here. This way you start practising first and choosing the best trading approach that fits your skill set, as one size does not fit all.

6 Lectura mínimaBeginners

Forex Indicators and patterns

What is the ADX indicator?

The Average Directional Movement Index, also known as ADX, is used to measure the strength of a trend. The Average Directional Movement Index indicator represents an average of price ranges that are expanding. It features a line that moves up and down with several levels on a separate short window underneath a price graph, and measures the strength of price movement but doesn’t necessarily indicate the direction of movement.  In other words, it measures pure strength using a simple scale. <h2>Structure of the indicator and setting it up on MT4</h2> The ADX measures the moving average of expansion of a price during a given amount of time. While the default setting is the last 14 candles, some traders will adjust the input to their individual needs. It is nondirectional, meaning that it simply measures whether a trend is strong or weak, and nothing more. It is plotted using a single line with a range that measures from 0 to 100. It measures the trend whether it is up or down and gives the traders some confidence as to whether or not a trend is likely to continue. <img alt="" src="/TMXWebsite/media/TMXWebsite/ADX_1.png" />   Notice that the built-in indicator has three different lines. There are also parts of the indicator that were built into the original trading system but use the +DI and -DI calculations. However, forex traders typically only use the ADX indicator itself, ao the green and the red lines are often deleted. The easiest way to do this is to right-click on the chart and select the ‘Indicators List’ menu. After that, select the ‘Average Directional Movement Index’ indicator on the list, and then the ‘Colors’ tab. From there, you can change the colors to ‘None.’ At this point, you will not see the lines anymore as shown on the chart just below. <img alt="" src="/TMXWebsite/media/TMXWebsite/ADX_2.png" /> Now that we have eliminated the peripheral indicators, traders can focus directly on the ADX. The single line then will oscillate between 0 and 100, showing the strength of movement at that moment after calculating the average price expansion of the previous 14 candles. In other words, the more the price starts to expand per candlestick, and therefore showing a stronger move, the higher this line will move on the chart. Notice that there are spikes in the ADX value on both rallies and declines. <h2 dir="ltr">Calculating the ADX</h2> The ADX calculation is based on a moving average of a price’s expansion of price over the previous 14 candlesticks, or a period of your choice. There are a few general guidelines:   <ul> <li>Below 25: weak trend, or no trend at all</li> <li>Between 25 and 50: strong trend</li> <li>Between 50 and 75: very strong trend</li> <li>Between 75 and 100: extremely strong trend</li> </ul> By looking at the reading, you can verify whether or not a trend is established, and whether or not a potential set up makes sense. The ADX is typically used as a secondary indicator, but if a favourable candlestick set up that is during a reading that is relatively high, it only increases the odds in your favour. If the ADX reads relatively low, it typically means that a market is consolidating, biding its time before forming the next trend. Let’s look at the chart below. <img alt="" src="/TMXWebsite/media/TMXWebsite/ADX_3.png" /> Notice that the market had relatively lower readings before spiking where it is circled. You can see the market had formed three bullish candlesticks in a row as it broke out above a recent resistance level, but at the same time the ADX was strong. Shortly before that, the market had been going somewhat sideways with a relatively soft ADX reading. <h2 dir="ltr">Using the ADX </h2> One of the greatest advantages to using the ADX when trading forex is that it can set up a trader for a much larger run than they made you feel comfortable with. For example, the chart below shows that we had an extremely negative candlestick in the Canadian dollar/Swiss franc currency pair. That entry signal could have easily been taken, but the next several candlesticks were very choppy, and a lot of people may have been a bit nervous. However, if they were paying attention to the ADX indicator they would have seen that it continued to turn higher, showing that in fact the underlying negative trend is picking up momentum, not losing it. ADX traders would have stayed in the trade for quite some time, and then enjoyed the massive selloff that continued. Here’s another example: <img alt="" src="/TMXWebsite/media/TMXWebsite/ADX_4.png" /> This is a perfect example of how the ADX can be used with traditional candlestick analysis. This market formed a massive negative candlestick that would have attracted a lot of attention. However, the average trader that wasn’t using this indicator more than likely would have gotten out of the trade far too early. Notice that later on when the market broke down even further the ADX kept climbing. However, the ADX started to drop off again, signaling the trader that the trend may be running out of steam. This shows that not only is the ADX a good indicator to stay in a trade, but it also can serve as a signal as to when you want to tighten up your stop loss, or perhaps even leave a trade as the original trading conditions have faded. Warnings and divergence The ADX can also come into play when looking for divergence. This is different to most indicators, because this is a situation where the markets not only could be traded against but could also indicate a trend is ending. This means that you will be able to keep more of your profits if used properly. The underlying thesis is that momentum, and therefore price, is starting to calm back down in what has been a strong trend. While many traders will look at candlesticks, where the support and resistance breaks, and moving averages to determine the entry or exit, many of them don’t understand that one of the bigger factors to pay attention to is momentum. If the asset is moving slowly, this suggests that a currency pair is somewhat fairly valued, or at least not so much out of balance when it comes to pricing. However, when there is momentum that is strong and climbing, it means that prices are trying to get to a place where supply and demand equalises. In the chart below, notice the blue and red arrows. <img alt="" src="/TMXWebsite/media/TMXWebsite/ADX_5.png" /> The blue arrow shows that there was a large candle that traders could have taken as a buy signal, especially since the ADX started to rise higher. This shows not only does the market look like it is breaking out, but it also is gaining momentum. Later on, the red arrows point out where the market started to slow down as the markets leveled off, and the ADX started to turn later. The ADX started to paint the picture that the consolidation wasn’t going to continue the uptrend, and therefore the trader using ADX would have exited with more of the profits that the average trader would. Let’s take a look at another chart. <img alt="" src="/TMXWebsite/media/TMXWebsite/ADX_6.png" /> Divergence is when price is doing one thing, and momentum is doing the other. While most of the time traders will use oscillators to spot incidents of divergence, the ADX indicator also can be used as a sign when not to take a trade. The chart above shows the Australian dollar/New Zealand dollar pair shows that it was going higher for a while, while the ADX readings continued to make lower higher. This means that although the momentum was going back and forth, the price was giving no sense of the underlying uncertainty. If you use the ADX indicator, you probably know better than to get involved in the move to the upside. Shortly after this move was made, the market rolled right back over. This was a good warning for the trader to stay out in general. However, unlike some oscillators, divergence is typically used as a warning, not necessarily a trade signal.

6 min readBeginners

Forex Indicators and patterns

How to Use the DeMarker Indicator

The DeMarker indicator, better known as DeM, is a technical indicator that measures the demand for the underlying asset. It was named after a prominent technical analyst Thomas DeMark who created the indicator.  In this blog post, we will provide you with all the necessary information on the DeMarker indicator, how to identify potential changes in the trend direction, and share tips on how to incorporate the DeMarker indicator in your daily trading routine. Applying the DeMarker indicator into the <a data-di-id="di-id-1bc62d1f-8ec6ac8f" href="/en/metatrader5">MetaTrader5 (MT5) trading platform</a> is quite easy. Simply choose the indicator from the drop-down menu under indicators > Oscillators > DeMarker. <img alt="" src="/TMXWebsite/media/TMXWebsite/DeMarker-Image-1.jpg" />   <h2>What it looks like</h2> DeM compares the most recent maximum and minimum prices to the previous period's equivalent price. In essence, the indicator generates values to help you identify the directional bias of the market, and potential changes in the trend direction. Unlike some other oscillators, DeMarker consists of a single fluctuating curve. As it belongs to the family of oscillators, DeMarker generates values from 0 to 1, although some variants of the indicator have a 100 and -100 scale. In the standard setting, values closer to 0 show an extreme oversold condition while readings closer to 1 read extreme overbought market conditions.   In this setting, which is a default setting on MT4, the base value is 0.5, while the default time span for the calculation of values is 14 periods. The default setting has overbought and oversold lines set at 0.7 and 0.3, respectively. When the reading stays in between these two levels, DeM indicates that the market is likely trading sideways and implies lower volatility.  On the other hand, trips above 0.7 and below 0.3 indicate a more trending market. The closer the value gets to 0 or 1, the higher the change of a price turn as the market is trading in an extreme environment.  <img alt="" src="/TMXWebsite/media/TMXWebsite/DeMarker-Image-2.jpg" />   DeM works in a similar fashion as the Relative Strength Index (RSI), the leading oscillator indicator. However, DeM focuses on intra-period maximum recorded highs and lows, rather than closing levels.  DeMarker values are calculated by the following formula: DEM = SMA(DeMMAX) [SMA(DeMMAX) + SMA(DeMMIN)], where: DEM stands for DeMarker   <ul> <li>DeMMAX - records the difference between the current high and previous high over the number of X periods</li> <li>DeMMIN - records the difference between the current low and previous low over the number of X periods</li> </ul>   You may want to try trading using the MetaTrader 5 platform to get more familiar with the DeMarker indicator and how it’s best used, before you can start using its signals in your daily trading routine. <h2>Strengths and Weaknesses of This Indicator</h2> The main advantage of the DeM indicator is its reliability. DeMarker is probably less prone to distortions, compared to some other movement indicators. The indicator’s most important use case is informing the trader of an imminent change in the price direction, and hence offering a chance to capitalise on probable imminent price trends. Moreover, DeM is used by traders to identify market tops and bottoms, assess the volatility and associated risk, and most importantly, to inform us when the market trades in the overbought and oversold market conditions.  On the other hand, DeMarker shares the same weakness with other oscillators. Despite the fact that its readings are showing an overbought or oversold market, these readings can always get to more extreme levels.  For instance, if USD/JPY trades in an uptrend and DeM current value is 0.75, it signals that the market is overbought and a change in the trend direction is likely. However, USD/JPY may gain additional 200 pips and push DeM into 0.9, for instance, before starting to reverse.  Thus, signals from DeMarker are not enough to predict a reversal. For this reason, it is often used in combination with other technical indicators. <h2>How to use DeMarker in trading</h2> In essence, the DeMarker is a contrarian technical indicator. As we outlined earlier, it works to identify overbought and oversold market conditions, pointing towards potential changes in the price direction.    Thus, we are now deploying the DeMarker indicator to identify potential price levels where a change in the price direction may occur soon. Here we have a USD/JPY daily chart that trades in a downtrend as the price action has been creating a series of the lower highs and lower lows.  <img alt="" src="/TMXWebsite/media/TMXWebsite/DeMarker-Image-3.jpg" />   As noted earlier, DeM is best used in combination with other technical indicators. For this reason, we have the Fibonacci extensions deployed to identify support levels where the sellers may hit an impasse, providing the buyers with an opportunity to drive the price action higher.  The blue arrow shows the moment the price action touches the 127.2% Fibonacci extension support, signalling that the buyers are likely to step in at this price level, and drive the price higher. In addition, the sellers are likely to exit their profitable trades at this point as well.  In the meantime, we see that DeMarker has a reading of 0.277, which shows that the market has entered an oversold territory. At this moment, we have a confluence of two bullish signals - market is oversold according to DeMarker, and the price action has approached the first Fibonacci extension support.  Hence, this strategy is based on deploying additional indicators, alongside DeMarker, to identify spots where the price action may start reversing.  Entry should be placed at the point where 127.2% is first touched, while stop-loss is located around 40-50 pips below this level to protect against whipsaw losses resulting from knee-jerk market reactions.  Take profit is set at the starting point of the Fibonacci extension i.e. where the big horizontal support is located. From this point, the market had started moving higher, before the bears erased all gains and pushed the price action below this important support level.  Our assumption is that the market will want to return to the “crime scene” and retest the same level, but now in the context of resistance. This is what eventually happens and our trade is finally closed. We managed to bank in around 200 pips, while risking 50 or pips or less. This is a great risk-reward ratio. This example shows how to mix DeMarker with other technical tools. You may want to <a data-di-id="di-id-e6b992d-78cec0b5" href="https://portal.thinkmarkets.com/account/individual/demo">open a open a demo account</a>, and start using this simple, but effective trading strategy.  <h2>Summary</h2> The DeMarker indicator, or DeM, is a technical tool deployed by traders to measure the demand for the underlying asset. As an oscillator, it generates values from 0 to 1, where value of 0.7 or higher shows an overbought market while readings of 0.3 or below signal that the market is oversold and change in the price direction is imminent. DeM is designed to compare the most recent maximum and minimum prices to the previous period's equivalent price. This way, DeMarker helps you identify the directional bias of the market and potential changes in the trend direction. As other technical indicators, it is best used in combination with other tools.

6 min readBeginners

Forex Indicators and patterns

The Williams Percent Range Indicator for Metatrader

The Williams Percent Range, also known as the Williams %R, is a momentum indicator that traders use to identify overbought or oversold conditions. Like other oscillators, it appears in its own window at the bottom of the chart and has a scale that moves back and forth between 0 and minus 100. Quite often, the Williams Percent Ranges used to find entry and exit points in a market and is used very similarly to the stochastic oscillator.    The indicator was developed by a well-respected trader Larry Williams, and functions as a comparison tool of swords. It will compare the closing price of a financial instrument to the high/low range over a specific number of candles looking back. It’s typically used with the setting on 14. That being said, some traders have found other settings to be useful but for the purposes of this article we will use the standard settings.    <h2>Adding the Williams Percent Range indicator to your charts</h2> Adding this indicator to your charts in <a data-di-id="di-id-50880195-24d8837" href="/en/trading-platforms/">Metatrader</a> is quite simple. You simply need to click on Insert from the top of the platform, pull down the menu to Indicators, then look for Oscillators, and select Williams Percent Range.   When you do, you will notice that there are a few options that you can fix right away. Beside the usual display options such as colour and visualisation, there is the Period setting that by default is 14. Furthermore, you can choose a Fixed Minimum and Fixed Maximum. They are typically set at -100 for the minimum, and 0 for the maximum. By clicking Okay, the indicator will appear at the bottom of the trading platform, and the indicator is set up to start trading using this tool. <img alt="" src="/TMXWebsite/media/TMXWebsite/Williams-Percent-Range-Picture-1.jpg" /> <h2>Using the Williams Percent Range</h2> Trading with the Williams Percent Range indicator is relatively straightforward and is almost identical to using the <a data-di-id="di-id-bc07866b-514c0649" href="/trading-academy/forex/analysis/stochastic-oscillator">Stochastic Oscillator.</a> There is 20% on the top that represents overbought, which extends from the minus 20 level to the 0 level, and the bottom 20% that extends from the -80 level down to the minus 100 level offering an oversold condition.  It should be pointed out, though, that just because the line in the window goes into the overbought or oversold condition, it doesn’t necessarily mean that the market is ready to reverse. What it actually means is that an overbought condition is close to the top of the recent range, just as the indicator reaching into the oversold condition suggests that prices are close to the bottom of the recent range, meaning the last 14 candles if you are using the standard settings.  Using this thought process, once the price and indicator comes back from the overbought or oversold condition, then it signals a potential trade.   Because of this, the market is then expected to return to the middle of the range based upon a “reversion to the mean” strategy. In this sense, it should be noted that it becomes a reversal strategy, but only after you get the signal and then a pullback into the norm.    Take a look at the chart underneath. This is the standard use for the Williams Percent Range indicator, and as you can see there are red and blue arrows. The red arrows represent areas where the price and indicator line have reached into the overbought area, and then pulled back. This suggests that the market has fired off a sell signal and would be traded as such.   When you see the blue arrows, it represents areas where the price crossed over to the oversold condition, right along with the Williams Price Range indicator signal line. As the market has broken back above the minus 80 level, it fired off a buy signal. <img alt="" src="/TMXWebsite/media/TMXWebsite/Williams-Percent-Range-Picture-2.jpg" /> <h2>Using the Williams Percent Range indicator in a trend</h2> While the easiest way to use the Williams Percent Range indicator is as a strategy for reversals, and perhaps within a range, you can also use it right along with the overall trend to see when the trend may continue. It also can be used to pay attention for potential momentum failure in that same trend.  For example, if the market is in an uptrend, but starts to pull back, traders may be looking for an opportunity to join the longer-term trend. When the indicator dips below the -80 level and then pops back above it, it has reached the oversold indication, and then reentered the overall norm.   This means that buyers may be coming back to pick up the markets and by extension will continue to trend in the same uptrend it has been in. By extension, if the market has been in a longer term downtrend, it should be noted that a move above the minus 20 level and then a drop below it in the indicator window could signify that the sellers are starting to come back in and push the market lower. In this sense, it can be used as a continuation indicator.    In the chart below, notice that there are several blue arrows on the chart. You can see that the market had been in a bit of an uptrend, while the market had pulled back. In fact, the market had pulled back into the oversold condition on the Williams Percent Range indicator, and then moved back into normalcy. That continued the uptrend and offered a nice opportunity to start trading to the upside again. <img alt="" src="/TMXWebsite/media/TMXWebsite/Williams-Percent-Range-Picture-3.jpg" /> <h2>Adding a moving average to increase effectiveness</h2> One of the indicators that comes to mind when trying to use this indicator is the moving average. After all, it can give you an idea as to what the trend is. If you are looking to use the Williams Percent Range indicator in a trend, it makes quite a bit of sense to use a moving average on the chart to determine whether or not you have an opportunity to get long or short in a currency pair. Beyond that, it also can tell you when it’s time to use the Williams Percent Range indicator for a range bound trade as well.    Take a look at the chart and notice that there are red and blue arrows. The first arrow, the red one, shows when the indicator went up into the overbought condition as the market approached the 50 EMA.    Furthermore, the slope of the moving average had been lowering for quite some time, and as it went below the minus 20 level, it sent the market much lower. In fact, there was even a signal to get out of the short position due to the indicator dropping into the range below the minus 80 handle as it becomes oversold. After that, the market then broke above the 50 day EMA, which would have more than likely told most traders that perhaps they don’t want to start shorting the market as it is a trend determining indicator.   Beyond that, the most recent low was higher than the one before which is also another reason to believe that the trend is changing. After that, you can see that the market broke above to higher pricing, pulled back towards the 50 day EMA and at the same time the Williams Percent Range indicator dropped into the oversold area. At the same time, the 50 day EMA has started the slope higher, offering a buying opportunity. After that, we had seen another opportunity presented itself by the next set of blue arrows. <img alt="" src="/TMXWebsite/media/TMXWebsite/Williams-Percent-Range-Picture-4.jpg" />

6 min readBeginners

Forex Indicators and patterns

The Descending Triangle Candlestick Chart Pattern

The descending trendline is a bearish candlestick formation that occurs in a mid-trend. It usually takes place in a downtrend, and it signals that the impending breakdown will continue the overall downtrend. Similarly to the ascending triangle, the bearish triangle pattern consists of two simple trend lines that connect the lower highs and the horizontal support.   In this blog post we will discuss how the descending triangle is created, what the message that the market sends is, as well as share tips on a simple, but effective trading strategy based on descending triangles. <h2>What the Descending Triangle Shows Us</h2> As illustrated below, the descending triangle is a bearish continuation chart pattern. The price action trades in a clear downtrend, as there is a series of the lower lows and lower highs. The sellers, who are in control of the price action, take a temporary pause to consolidate their most recent gains before extending the downtrend lower.    Descending triangles usually take place in a mid-trend, as there is a first part of the trend - the start of a downtrend, while after the consolidation phase there is a continuation of the overall trend. Therefore, the descending triangle is usually in the middle of a bigger trend that helps the sellers to extend the downtrend. <img alt="" src="/TMXWebsite/media/TMXWebsite/the-descending-triangle-pattern-pic-1.jpg" />   Consolidation of the price action takes form in the context of a descending triangle. Two trend lines, that connect the lower highs and the horizontal support, converge until they intersect. The narrower the space between the two lines is, the stronger the breakout usually is. There are three key features of a descending triangle: <ul dir="ltr"> <li>Strong trend - In order for the descending triangle to exist in the first place, the price action must stem from a clear downtrend;</li> <li>Temporary pause - This element refers to the consolidation phase, which will help the sellers to consolidate their strength;</li> <li>Breakout - The break of the lower flat line marks the breakout, which activates the pattern. It also helps us determine the entry, take profit, and stop loss at a later stage.</li> </ul> Given that the descending triangle is a bearish formation, the likelihood of the trend continuing lower is higher than the chance of a reversal taking place. In this regard, the descending triangle acts as a conductor, or a tool for the sellers to help extend the downtrend.  Even the most aggressive moves in trading don’t occur in the vertical fashion. The dominant side, in this case sellers, need some breathing space to regroup for another push lower. These temporary pauses can take different forms, with the descending triangle being one of them. <h2>Strengths and Weaknesses</h2> The descending triangle shares the same set of strengths and weaknesses as the ascending triangle. As outlined earlier, it helps us define the trading environment as two trend lines provide us with levels to play against.  Although a failed break of the triangle to the downside can always happen, the likelihood of the trend continuing in the same direction is always higher than the reversal. For this reason, descending triangles are an effective tool that helps us better position our entry, take profit, and stop loss.  Contrarily, the failed breakouts are the biggest weakness of a descending triangle. The price action may breakout, and even close below the lower trend line, but still return to the inside of the triangle. In order to minimize the chance of a failed breakout, it is always advised to consult other <a href="/trading-academy/forex/analysis/rsi-indicator">technical indicators</a><a href="/trading-academy/forex/analysis/technical-indicators-beginners-guide"> </a>and confirm the breakout e.g. volume, <a href="https://www.thinkmarkets.com/en/learn-to-trade/indicators-and-patterns/indicators/relative-strength-index-rsi-indicator/">RSI</a> etc. <h2>Spotting the Descending Triangle Pattern</h2> We said earlier that the descending triangles usually occur in the mid-trend, as this helps extend the downtrend. In the chart below, EUR/USD trades lower in a continuous manner. You see that after a series of the lower lows, the price action makes two equal lows, allowing for the supporting trend line to be drawn.  Still, the sellers do not allow the buyers to break the series of the lower highs, which continues until the two trend lines come close to intersecting. Just before this happens, the sellers are successful in breaking the triangle to the downside, therefore securing a continuation of the downtrend. <img alt="" src="/TMXWebsite/media/TMXWebsite/the-descending-triangle-pattern-pic-2.jpg" />   Spotting the descending triangle is very straightforward and easy. The first step should be associated with identifying the downtrend. After that, you should be looking for at least two equal, or close to equal, lows that help draw the flat supporting line, while the opposite trend line should be extending lower to reflect the lower highs.  It is important to note that the lower trend isn’t always completely flat, as it is difficult to expect precise levels from volatile markets. As long as the lower trend line is nearly flat, we consider it legitimate. The break of this line marks the activation of the descending triangle pattern and the moment when we consider entering the market to capitalize on the next leg lower. <h2>Trading the Descending Triangle Pattern</h2> One of the biggest advantages of the descending triangle pattern is that it helps to format our trade as the breakout nears. A break of the supporting line activates the pattern and offers us two options for entry, as it is the case with all candlestick chart patterns.   We can either dip into the market immediately after the breakout candle closes, or wait for a potential throwback. We see that in this case the throwback - a retest of the broken trend line - never occurred. Hence, the end result proved that we only had a single chance to capitalize on the move lower. <img alt="" src="/TMXWebsite/media/TMXWebsite/the-descending-triangle-pattern-pic-3.jpg" /> Hence, the black horizontal line reflects the entry taken immediately after the breakout candle on the hourly chart closed. We said earlier that a move back to the inside of the triangle signals a failed breakout and invalidates our pattern. For this reason, we place the stop loss above the broken trend line to protect our capital and limit potential losses.  The take profit is measured by calculating the distance between the two trend lines when the triangle was first formed. The same line is then copied from the level where the breakout occurred, while the other end of the trend line signals a level where the pattern is completed. In our case, the take-profit order (the green line) was hit quite quickly as the sellers moved the price action lower without much resistance from the buyers. Finally, we booked 125 pips while we risked 45 pips on the other hand, which makes a very profitable R:R ratio of almost 1:3.

6 min readBeginners

Forex Indicators and patterns

A complete guide to reversal candlestick patterns

Taking advantage of trending movements is the overall goal of every trader. As a trader, you want to position yourself on the winning side and not get caught in a reversal that will hurt your portfolio and capital. Trending movements are usually initiated with market reversals. The sooner you get on the new trend, the higher the chance you will be profitable and, the better the R:R (risk-reward) ratio will look.  In this article, we will look at the definition of reversal candlestick patterns, how they work, and what the market is telling us. We will also share a simple trading strategy to demonstrate how you should take advantage of market reversals.   <h2>What reversal patterns show us</h2> Reversal patterns are the opposite of continuation candlestick patterns. While the latter signal that the prevailing trend is likely to continue after a temporary pause is finished and the breakout is confirmed, reversal patterns are pointing towards an impending change in the trend direction. Also, reversal patterns need more time to form than the continuation formations as it is easier for the market to continue in the same direction than change its course.    For instance, the sellers were successful in pushing the market lower up to a point where they started feeling exhausted, which provided the buyers with an opportunity to initiate a change in the trend direction. As such, they provide traders with an opportunity to initiate a new trade as the reversal will start a new trending movement. For the reversal to take place, the prerequisite is the existence of a previous trend, meaning we can’t classify a start of a new trend as a reversal if the market trades sideways prior to the reversal. You see in a photo below that the market changes the trend direction through the <a data-di-id="di-id-ac7aff17-3ac36973" href="/en/trading-academy/indicators-and-patterns/double-top-reversal-pattern/">double top</a> reversal pattern. <img alt="" src="/TMXWebsite/media/TMXWebsite/Double-top-pattern.jpg" /> Although reversals start with a breakout, usually of <a data-di-id="di-id-c33ed1c7-4d5f22e9" href="/en/trading-academy/technical-analysis/support-resistance/">a strong resistance/support,</a> there are signs prior to that point that signal an impending change in the trend direction. While the trend is characterised by a series of the lower highs and lower lows (downtrend), or the higher highs and higher lows (uptrend), we may see signs of weaknesses in the dying stages. For example, as <a data-di-id="di-id-ac7aff17-6040b682" href="/en/trading-academy/indicators-and-patterns/head-and-shoulders-bottom/">the head and shoulders pattern</a> forms, the series of the higher highs is broken with the third peak, which comes at a lower price than the previous one. Alternatively, in the case of a double bottom, the sellers fail to push through the support by creating the equal low and not the lower low. <h2>The significance of reversal patterns </h2> By definition, trading reversal patterns should be more risky than trading continuation patterns, as it is safer to bet on the winning side. However, reversal patterns are considered to be more powerful since the trends tend to be the strongest in their initial phases.  This is because initially one side of the market is more dominant, and therefore more successful in pushing the price into their desired direction. After some time, the balance becomes more even as the other side starts growing in the game. Finally, the change in the trend direction is taking place as the other side has now become more dominant.    Therefore, the market is telling us that the overall trend is nearing the end, and the price action is likely to change its course soon. Once the signals align and the likelihood of the market changing its course is high, reversal patterns offer a great R:R ratio.  The greatest limitation of reversal patterns is that you are still betting on the losing side so far. As an illustration, the buyers are in control in an uptrend. By hoping for a reversal, you are more inclined to put your faith in the sellers, which have been on the wrong side of the market so far. Thus, there is always a possibility of a market continuing in the same direction, despite signals that change is around the corner.  <h2>Types of reversal candlestick patterns</h2> There are different forms in which the reversal can take place. We make a general distinction between the bullish reversal patterns and bearish reversal patterns. Here, we take a look at some of the most popular reversal candlestick patterns from both categories. <h3>Bullish reversal candlestick patterns:</h3> <h4>Double bottom </h4> The <a data-di-id="di-id-3074e65-b7b0f7e2" href="/en/trading-academy/indicators-and-patterns/double-bottom-pattern/">double bottom</a> pattern is a bullish reversal pattern that occurs at the bottom of a downtrend and signals that the sellers, who were in control of the price action so far, are losing momentum. The pattern resembles the letter W due to the two-touched low and a change in the trend direction from a downtrend to an uptrend.  <img alt="" src="/TMXWebsite/media/TMXWebsite/Double-bottom-pattern.jpg" />   <h4>Triple bottom</h4> As the name itself says, the <a href="/en/trading-academy/indicators-and-patterns/triple-bottom-pattern/">triple bottom</a> consists of the three lows made at roughly the same price. It’s a bullish reversal pattern that can be detected at the end of a downtrend. The pattern suggests an impending change in the trend direction after the sellers failed to break the support in three consecutive attempts.  <img alt="" src="/TMXWebsite/media/TMXWebsite/Triple-bottom-pattern_1.jpg" />   <h4>Inverse head and shoulders</h4> The bullish version of the traditional head and shoulders pattern is called the inverse head and shoulders formation. It’s a bullish reversal pattern that can be seen at the end of a downtrend. The sellers have run out of gas as they were unable to continue the series of the lower lows, with the third low (the right shoulder) being at a higher level than the previous peak. <img alt="" src="/TMXWebsite/media/TMXWebsite/Inverse-head-and-shoulders-pattern-(1).jpg" /> After the creation of a first peak (the left shoulder), the price action rebounds modestly before continuing lower to create a lower low (the head). The price then again rebounds to a level similar to where the first rebound was finished, creating a base for the neckline to be drawn.  What follows is another pullback to create a third low (the right shoulder), before the price action finally bursts higher, breaking the neckline resistance, and activating the inverse head and shoulders pattern.    <h2>Strengths and weaknesses</h2> Both versions of the pattern share the same strengths and weaknesses, as they only differ in the context of structure. Arguably, the greatest advantage of the head and shoulders pattern is that it defines clear areas to set risk levels and profit targets.  Due to its design, the pattern offers a clearly defined stop loss, take profit, and entry levels. A trader should only follow the set of rules (described below) and make sure that they don’t “jump the gun” and enter a trade before the neckline is broken.  It's extremely important to stress that both the inverse and the traditional head and shoulders patterns only occur at the bottom of an uptrend or downtrend. This is a common mistake traders and analysts make. It doesn’t matter that you drew a perfect head and shoulders pattern, if there is no prior uptrend or downtrend as both versions are reversal patterns.    The key limitation of the head and shoulders pattern is that a strong trend sometimes causes the price action to continue in the same direction despite the third peak/low being a lower high or higher bottom. In this case, the head and shoulders, or inverse head and shoulders, are seen as continuation patterns as the prevailing trend has resumed after taking a short break. <h2 dir="ltr">Drawing the pattern</h2> Unlike some other chart patterns, trading the success of the head and shoulder formation rests very much on how well you draw the initial pattern. As outlined earlier, this pattern offers a set of predefined levels, as you are actually trading against the neckline. Thus, drawing the pattern and identifying three key elements is the crucial part of the entire trading process.  The daily chart of USD/CAD shows a head and shoulders pattern that helps reverse the direction of a trend. The price action pushes higher, creating three consecutive peaks with the right shoulder slightly lower than the left shoulder. Still, there are two clear peaks on each side of the centre peak, with a slightly ascending trend line connecting two shoulders.  <img alt="" src="/TMXWebsite/media/TMXWebsite/head-and-shoulders-pic-3-(1).jpg" /> You can see that we started in an aggressive uptrend and finished the pattern in a downtrend, with the bears ultimately erasing more than half of the earlier gains. A similar situation occurs with the inverse head and shoulders pattern lower. This is a NZD/USD daily chart where the sellers are pressing the price lower, creating a series of lows. The head is represented by a series of similar lows, while the two shoulders are sitting on each side of the head. Although the head usually consists of a single peak/low, we can also have rounded lows or peaks, as long as there are shoulders visible on each side of the head. You can see that we started in an aggressive uptrend and finished the pattern in a downtrend, with the bears ultimately erasing more than half of the earlier gains. A similar situation occurs with the inverse head and shoulders pattern lower. This is a NZD/USD daily chart where the sellers are pressing the price lower, creating a series of lows. The head is represented by a series of similar lows, while the two shoulders are sitting on each side of the head. Although the head usually consists of a single peak/low, we can also have rounded lows or peaks, as long as there are shoulders visible on each side of the head. <img alt="" src="/TMXWebsite/media/TMXWebsite/head-and-shoulders-pic-4-(2).jpg" /> You can see that the NZD/USD pair creates a new short term low (the lowest low of the head) before pushing higher to create a series of the higher lows before eventually surging higher above the neckline.   <h2>Trading the head and shoulders pattern</h2> We stated earlier that possibly the greatest advantage of this formation is that it offers precisely defined levels. The key is a neckline due to the three reasons:   <ol> <li>A break of the neckline activates the pattern. Before the neckline is broken, we consider the pattern to still be in the making. </li> <li>A neckline defines the stop loss i.e. after the breakout, any reverse move to the other side of the neckline activates the stop loss and automatically invalidates the pattern. </li> <li>A distance between the neckline and the head is measured to calculate the take profit. </li> </ol>   We will now use the same two examples to give you a step-by-step guide on how to trade the head and shoulders and inverse head and shoulders patterns. Once we have drawn the pattern and identified three key elements of the formation, we monitor the “draft” pattern closely and wait for the bears to potentially break the neckline and activate the formation. There are two options for the head and shoulders pattern as far as the entry is concerned.  <img alt="" src="/TMXWebsite/media/TMXWebsite/head-and-shoulders-pic-5-(1).jpg" />   The first option offers you a chance to enter a short trade as soon as the neckline is broken and the daily candle closes below the broken neckline. This option means that you can’t miss a trade.  However, this one is also riskier as this move lower can easily prove to be a failed breakdown. In this case, your stop-loss would be activated almost instantly.  The second option is prefered by the majority of the trading community. It's based on an idea that you should make an entry after the price action closes below the neckline and the breakdown is confirmed. Accordingly, the buyers will then push the price action to retest the neckline, the so-called “throwback”, before resuming lower. Thus, you should place the entry when the throwback occurs. Of course, the price action can still return above the neckline, however, the chances are smaller than with the first option. The limitation of the second option is that the price action can simply resume lower without performing a throwback i.e. a retest of the neckline is not guaranteed (see example 2 lower). USD/CAD closed below the neckline on a daily basis, then the buyers pushed the price higher the next day, before ultimately sliding lower. From the risk-reward perspective, this is a perfect scenario as you are given the opportunity to enter a trade on the retest.  Wherever you decided to place the entry, the stop-loss should be located above the neckline. You are advised to always allow for a cushion between the stop-loss and a neckline. As you can see in our example, the buyers were able to trade briefly above the neckline before getting rejected.  The take profit is calculated by measuring the distance between the head and a neckline (the green line), and then copy-pasting the same trend line starting from the neckline and extending lower. This way, you define the exact point at which the head and shoulders pattern should be completed.    Finally, our entry is at $1.2820, stop loss around $1.2860, while a take profit order is set at $1.2550. Hence, we risked 40 pips to make 270 pips, which is a phenomenal risk-reward ratio and the best evidence as to why the head and shoulders is such an effective reversal pattern.    We now move to our second example by explaining how to trade the inverse head and shoulders. In essence, we follow the same set of rules. Once we have drawn all the key elements, we are waiting for the NZD bulls to push the price higher. <img alt="" src="/TMXWebsite/media/TMXWebsite/head-and-shoulders-pic-6-(1).jpg" /> Earlier we discussed two options available to set your entry. This example belongs to the second option and it perfectly shows why this is a riskier option. As you can see, the bulls never returned to retest the broken neckline once the breakout occured. Hence, if you had opted to wait for a retest, you’d have missed the trade.  By choosing the first option, you’d enter a trade once the daily close above the neckline has been secured. The stop loss is again placed below the neckline, while the blue line measures the distance for a take profit order. A few weeks later, the inverse head and shoulders pattern is completed. In this case, we risked 70 pips to gain around 200 pips, which makes a nearly 1:3 risk-reward ratio, meaning this was a very good setup from the risk tolerance perspective.

6 min readBeginners

Forex Indicators and patterns

What is the Average True Range (ATR) indicator?

The Average True Range indicator, or ATR, is an indicator that measures the market volatility of a financial asset by analysing the range of price for a defined period of candles. It is used as a measure of volatility and is quite often used by traders to determine how far a particular move may go. While it can be used with any timeframe, the original form of ATR was used on a daily chart to analyse the range of the last 14 days. The ATR suggests if a market is overbought or oversold, specifically whether or not it has moved much further than it typically would. It is quite common for short-term prop traders to base their position on whether or not the market is likely to continue going forward before closing out to go home. Longer-term traders tend to use it on higher time frames to see when a potential pullback or bounce could occur. Adding the ATR to your charts on MT4 and MT5 In order to add the Average True Range indicator to your <a href="/trading-platforms/">charts</a>, you need to click the 'Insert' menu, the ‘Indicators’ submenu, the ‘Oscillators’ submenu, and then choose ‘Average True Range’. Once you do this, you will see the indicator open up on a window underneath the price, just as you would any other oscillator. In this example below, you can see that the ATR shows a signal line that goes up and down, in this case with the lowest band being the 0.0108 level, with the 0.0318 level above being the top range. <img alt="" src="/TMXWebsite/media/TMXWebsite/average_true-_range_1.png" /> Notice how the line goes up and down, and this is the crux of the indicator. At the top left corner of the ATR section, you can see that it has the reading of 0.0309, telling us that the GBP/AUD pair has an average range of 309 pips per candle over the last 14 candles. In this example, that means 309 pips per day: <img alt="" src="/TMXWebsite/media/TMXWebsite/atr_2.png" /> Now that the indicator is attached to your charting platform, we can start to discuss how this can become crucial information for those looking to trade the currency markets. <h2 dir="ltr">How to use the ATR</h2> The most common way is to pay attention to how big a move the market could potentially make during a given trading session. For example, think about the GBP/AUD pair mentioned previously. If the average range of trading during the previous 14 days was 309 pips, this is crucial information if you are trading short-term charts. For example, wouldn’t it be valuable information to know whether or not a market was likely to continue moving further after making an initial charge? If you find yourself in an uptrend that has already moved 290 pips, then you know it’s very unlikely that we will continue further, all things being equal. Obviously, this doesn’t have to be the case, but it is one way that short-term traders will gauge whether or not they should stay in a move. On the other hand, in that same scenario you may have seen that the market has rallied 45 pips, but has the ATR reading of 309. In that scenario, a short-term trader will typically look at this as an opportunity to hang onto the trade for a bigger move. Granted, some traders will use the five-minute chart to trade, and the one-hour chart for the ATR. Others will use the daily chart to figure this out, just as the example above shows. In the end, it comes down to your trading style.   <ul> <li>ATR can give you an idea of how far a move can go</li> <li>ATR does and can change in extreme conditions</li> <li>ATR measures the size of the range, not necessarily the direction</li> </ul> When you place a trade and the ATR is added at an extraordinarily low level, this tells you the trading opportunities are probably going to be short-term at best, and for small profits. Quite often, traders will scan multiple charts to see what the ATR reading is, and therefore look for those with larger readings. This means there are more possibilities and therefore more profits if you get it right. Some traders will also recognise that a reading that is expanding to the upside could also lead to longer term trades if so inclined. <h2 dir="ltr">The EMA and the ATR</h2> As with most indicators, the ATR should be used just on its own. Without a doubt, the most important thing on a chart is price. Furthermore, trends should be paid attention to as well. This is where the EMA comes and as it defines a trend quite plainly. Take a look at the chart below: <img alt="" src="/TMXWebsite/media/TMXWebsite/atr_3.png" /> Notice that the 20-day EMA has been sloping lower for several months. You can see clearly that the market had initially used it as support, but then found it to be rather resistive. Beyond that, the ATR reading was relatively low until the last couple of weeks. Notice how the ATR is expanding. This is crucial information for short-term traders, and they will certainly use this daily chart as a bit of a guideline for day trading the NZD/CHF pair. By paying attention to the overall trend in the fact that volatility is certainly growing, short-term traders will be able to sell this market on signs of exhaustion and take advantage of the downtrend overall. You can see clearly that sellers had been in control, even though there were times where the market rallied a bit, but they also sold after that short-term rally. For the shorter-term trader, this market has offered plenty of opportunities due to not only trading with the overall downtrend but recognising that the market is starting to expand its reach per session. In this particular example, the market had initially been moving at roughly 37 pips a day, but by the time the trader started to see extreme volatility, it had increased to an average of 107 pips a day. For those trading short-term charts, a range that is over 100 pips per session offered plenty of room for trades to move. In this sense, the ATR has nothing to do with your system, it just gives you an idea as to whether or not there is plenty of opportunity in the particular currency pair. For example, the trader that uses the ATR indicator to tell how far a market could move might be trading the five minute charts, shorting every shooting star candlestick formation that they see. They may also use something like a large, round, psychologically significant figure on that same short-term chart. By only selling and hanging onto trades for longer as the ATR has risen, they are on the right side of the trade, and are collecting more profits than they may have if they had not used the Average True Range indicator. The Average True Range indicator is also used for <a href="https://www.thinkmarkets.com/en/learn-to-trade/intermediate/stop-losses-and-take-profits/">stop loss placement</a>. For example, if the Average True Range is 100 pips, then those placing a trade off of the daily chart could for example place a stop loss 100 pips from the entry, knowing that if the market were to go 100 pips against you, something has certainly changed as far as volatility is concerned, and it most certainly is working against you. If that’s going to be the case, then it’s time to bail out of the marketplace. Depending on what your risk appetite is, you can adjust your position size to fit that 100 pip ATR. In other words, if you have a 2% risk appetite per trade, then you just make sure that the 100 pips that you are basing your trade off of as far as the stop loss is concerned, doesn’t measure more than 2% of your account. <h2 dir="ltr">Some things to pay attention to</h2> As mentioned in the bullet points above, the Average True Range indicator doesn’t tell you which direction the price of a security is going, only that it is moving more or less as opposed to the range. This is the range between the low and the high of the day and doesn’t take into account <a href="/trading-academy/forex/analysis/japanese-candlesticks">the shape of the candlestick</a>, as an example. The Average True Range indicator is used by a lot of professional traders. They don’t tend to hold trades over the longer term, unless they are part of some type of investment firm. Your typical prop trader or day trader is going to be flat overnight, so they don’t have to worry about positions while sleeping. Beyond that, the ATR gives them an idea of how much the market is going to move per session, so they can use that in the morning when they show up. A lot of the same traders will scan the charts first thing in the morning to get an idea as to which markets offer the most opportunity. Remember, as a trader you need to see volatility in order to make money. A currency pair that has a very low ATR typically is an offering much in the way of profits, unless of course you are looking for some type of grinding and range bound market, which there are strategies built for. Nonetheless, most traders don’t trade like that so the higher the ATR reading, the typically more attractive the pair will be. That being said, it also can suggest that there is more danger. Remember, where there is risk, there is reward but you need to do so in an intelligent manner, which is where using the ATR as an idea for the stop loss comes into play. Unlike other oscillators, ATR doesn’t necessarily offer much in the way of divergence trading, which is a standard of other ones such as:   <ul> <li>The MACD</li> <li>Stochastic Oscillator</li> <li>Commodity Channel Index</li> </ul> In the past few years, some traders have found that using a longer-term ATR as being effective. One of the more common readings is 20 candles, but the default reading is 14. Some longer-term trend traders will even use higher timeframe reading such as 50 on a daily chart. As the 50 day EMA is very common, quite often you will see a 50 ATR on a daily chart married with the 50-day EMA. In the chart below, you can see how the 50-day EMA keeps you on the right side of the trend, and the ATR tells you when it’s time to expect bigger moves and hanging onto that short-term trade a little longer. Notice how the ATR was relatively sideways for a while, right along with the 50 day EMA. As the 50 day EMA is starting to rollover, the ATR is climbing rapidly, which of course leads to trading opportunities. <img alt="" src="/TMXWebsite/media/TMXWebsite/atr_4.png" /> While the ATR isn’t necessarily the most sophisticated approach to technical analysis, it can keep you out of serious trouble. If you have missed a market move, you know it is very unlikely that entering a new trade would make sense. Another thing to think about is that algorithms tend to use ATR a lot as well, as they focus on short-term setups typically. Because of this, it can also keep you on the correct side of prop shops and larger short-term funds.

6 min readBeginners

Forex Indicators and patterns

What Forex Traders Need to Know About Parabolic SAR

Parabolic SAR, also known as Parabolic Stop and Reverse, is a common indicator mainly for short-term traders, although it can be used by longer-term traders, too.    This indicator is a bit different from many others as the idea is to stay in the marketplace all the time. That being said, though, it can be used however it suits the trader. As the Parabolic Stop and Reverse indicator is built into the <a data-di-id="di-id-b7a43191-be85d085" href="/metatrader-4/">MetaTrader platform</a>, a lot of traders have at least experimented with it. The indicator focuses on the direction of the price of a financial asset, and it gives a quick heads up as to when the market may be changing directions. The Parabolic SAR was developed by J Welles Wilder Jr., who also created the RSI, or the relative strength index. That being the case, the market took to this indicator relatively quickly, as the author is well known and respected. <h2>How to add Parabolic SAR to MetaTrader charts</h2> Adding Parabolic SAR to your MetaTrader charts is very simple. All you need to do is click on Insert, pull down the menu and click on Indicators, followed by Trend. After that you simply select Parabolic SAR to attach it to the chart. As it is built into the platform, there is no need to download from an external place. <img alt="" src="/TMXWebsite/media/TMXWebsite/Image-1-how-to-add.jpg" />   At this point, you have a couple of potential inputs, including the Step and Maximum indications, along with the style of the indicator itself. Most people will use the standard settings, so this is how we will present it in this article. If you don’t yet have MetaTrader, you may want to consider opening a <a data-di-id="di-id-6f6dc126-895442f8" href="https://portal.thinkmarkets.com/account/individual/demo">demo account</a> and learn how to trade using virtual funds before risking your own capital. <h2>How to read the indicator</h2> The Parabolic SAR plots dots on the chart, showing the direction of the short-term trend. When the dots are below the candlesticks, it suggests that there is buying pressure underneath, pushing the market higher. You will notice how these dots run in consecutive strings, keeping the trader in the trend longer than they may be willing to get involved in without them.  The idea is that the indicator tells you which direction the market is moving, but it also tells you where to put your stop loss. The stop loss goes at the dot, and if it gets hit you will notice that the dots switch sides, changing the overall trend. For example, if the dots are underneath candlesticks, then you are a buyer with your stop loss moving every time the new dot is presented. Eventually, the market hits that stop loss, and then flips the direction of the indicator, telling the trader to switch the direction in which they are trading. <img alt="" src="/TMXWebsite/media/TMXWebsite/PSAR-on-chart-image-2.jpg" /> There are a couple of things that should be noted here, for example that this is a trending type of indicator. It also gives a bit of a wide berth for stop losses, so it is easier to deal with this indicator and use it effectively on shorter-term charts. In fact, that’s how most traders use it.    Take a look at the following chart. It’s a 15 minute GBP/AUD pair chart and notice that although there were some whipped cells along the way, the trades that work out are quite explosive. On the chart, you can see that the market rallied quite significantly, then whipsawed a bit, only to rally again. In other words, you probably had two very small losses in comparison to a couple of decent gains. The rollover from the highs of the chart were a nice selling opportunity, followed by a relatively flat market that produced a couple of choppy moves that probably went against you before your stop loss was hit. In other words, it should become apparent that the indicator is not to be used in a range-bound type scenario. <img alt="" src="/TMXWebsite/media/TMXWebsite/image-3-PSAR-example.jpg" />   The one major advantage of this indicator, though, is that it’s completely mechanical, therefore, you know where your stop losses are and you know when it’s time to get out. In a sense, it can be thought of as an algorithm, but was calculated by the trader themselves, as it has been around since before algorithmic trading became really popular.    Quite often, a lot of the issues that you run into with the Parabolic SAR indicator can be smoothed out by following a couple of key points.. After all, the market tends to be very noisy, and does tend to be unidirectional most of the time. Granted, you will get the occasional pullback, but overall trends tend to last much longer than pullbacks do, and therefore most of the money is made hanging onto the trend. It’s in this scenario that the Parabolic SAR indicator shines. <img alt="" src="/TMXWebsite/media/TMXWebsite/PSAR-with-50-SMA-image-4.jpg" /> After that, the market broke above the 50 day SMA and once the Parabolic SAR dot was printed above the 50 day exponential moving average, or EMA, the trader using both of these indicators would have gone long. You can see that the trade lasted for quite some time, before pulling back towards the 50 day SMA again. This allows an opportunity to go long and once the indicator flashed all of the dots underneath, traders would have been buyers. Just as we saw with the big move higher, the indicator started to flash a sell signal before it crossed over the 50 day SMA, which was a confirmation that you should start selling again. As you can see, this combination can be quite useful. However, in general, moving averages tied into the Parabolic SAR tend to work better with longer-term charts, making it a bit of a hybrid system as the Parabolic SAR itself does well on a shorter time frame. Adding a moving average seems to be even more filtered and reliable, at least on longer time frames. Add a moving average to use Parabolic SAR longer term If you add a moving average to the chart, that can give you an idea about the overall trend. When used with the Parabolic SAR indicator, it helps you avoid potential losses. For example, look at the several red arrows at the beginning of the chart below on the AUD/NZD daily chart. The red arrow shows you when the market has broken below the 50 day simple moving average, or SMA, something that is quite often used to determine the overall trend. With the Parabolic SAR flashing a sell signal, and the dots sitting right around the moving average, this presents itself as a nice shorting opportunity. Designed as a system, yet not to be used on its own This indicator was originally designed to be a system, but quite frankly it’s not all encompassing. It’s very rare that a particular indicator can give you a reliable trading system by itself, and the Parabolic SAR isn’t going to be any different. It’s obvious that the indicator is very useful, but it does tend to need a little bit of hell. You can use the Parabolic SAR with the moving average as shown previously, but some traders will also use the indicator only when a particular candlestick pattern appears, perhaps something along the lines of a <a data-di-id="di-id-d9587a39-c31ca62b" href="/trading-academy/forex/analysis/shooting-star-candlestick-pattern">shooting star</a> or an <a data-di-id="di-id-44ad5a9-b8b72175" href="/trading-academy/forex/analysis/bullish-bearish-engulfing-patterns">engulfing candlestick</a>. That said, the indicator doesn’t perform as well in extraordinarily volatile markets, because it does not have time to react. What you are hoping to see is a steady trend in one direction or the other to take advantage of. Ultimately, the market conditions will dictate the tool you should use.   In short, the Parabolic SAR is useful, as it shows:    <ul dir="ltr"> <li role="presentation">         The overall trend</li> <li role="presentation">         Where to place your stop loss</li> <li role="presentation">         When to change direction </li> </ul> However, Parabolic SAR has some limitations as:    <ul dir="ltr"> <li role="presentation">         It needs a trend</li> <li role="presentation">         Sideways markets lead to losses </li> </ul> In summary, this is an indicator that traders should perhaps demo trade initially, using indicators with it to determine whether or not it’s a nice longer-term type trading environment, or whether it’s something you will be using for short-term trades. Remember, indicators don’t have to be used as initially designed, they are simply tools in your toolbox. It is not uncommon to see a professional trader take indicators and use them in a completely new way, and you would do well to experiment with different settings and environments for this indicator.

6 min readBeginners

Forex Indicators and patterns

Ways to Use the Relative Strength Index (RSI)

The relative strength index, or RSI for short, is one of the most popular technical indicators among the trading community. It belongs to the family of oscillators, or technical tools used to determine overbought or oversold conditions. It’s used to gauge the market sentiment.   Developed by J. Welles Wilder, the RSI measures the speed and change of price movements. A popular way of reading RSI values is to look for divergences that occur when a new high or a new low of the price isn’t confirmed by the RSI readings. <h2 dir="ltr">How it works </h2> The RSI is a momentum indicator. As such, it displays on a vertical range of 0 to 100. Readings close to 0 are viewed as “oversold”, while those closer to 100 are a sign of  “overbought” market conditions. Unlike some other momentum indicators, readings can’t go below 0 or higher than 100.   According to Wilder, the relative strength index formula is as follows:   RSI = 100 – [100 / (1 + (Average of Upward Price Change / Average of Downward Price Change)]   When the RSI displays readings higher than 70, it means the market is trading in the overbought, or overvalued, territory. On the other hand, a dip below 30 reflects an oversold market condition.    These two levels, 70 and 30, are the default values that can be modified as per the trader’s preferences. Some traders prefer to have values set at 80 and 20 to decrease the number of trips into the overbought or oversold territory and increase the effectiveness of the RSI. <h2>Strengths and weaknesses of the indicator</h2> In general, the RSI is considered to be an effective and useful technical indicator. It generates signals that are used by a trader to paint the full picture pertaining to market conditions. As such, the RSI is the strongest when the market shifts from bullish to bearish periods.   The RSI, though, has its limitations and weaknesses, same as any other indicator. Arguably, its biggest limitation is that an asset can trade for a long period of time in an overbought or oversold territory and still continue to make new highs and new lows.   For this reason, you should always cross-check signals from the RSI and compare them with other technical indicators. Overbought or oversold market conditions may overlap with signals from other indicators, creating a confluence of resistance/support with enough justification to open a trade.    To illustrate an overbought market, take a look at the EUR/USD daily chart: <img alt="" src="/TMXWebsite/media/TMXWebsite/Overbought-signal-RSI-pic-1.jpg" />   The pair had been trading into an uptrend, which makes the RSI cross into the overbought territory above 70. Despite the overbought market conditions, EUR/USD creates three additional bullish candles, pushing the price action almost 400 pips higher from the moment the RSI crossed 70.   Experienced traders tend to say that whenever the market is overbought or oversold, it can always be more overbought or more oversold. For this reason, it is not advised to open a trade that is based only on the RSI values, since they generate false signals.  In order to get more familiar with the relative strength index, its strengths and weaknesses, you may want to use the MetaTrader 5 trading platform. You can access the latest version <a data-di-id="di-id-50880195-98f211af" href="/metatrader5">here</a>. On this platform, you can use the historic price action to analyse the behaviour of the RSI and the signals it generates. <h2>RSI divergence signals</h2> The relative strength index also generates divergence signals, either bullish or bearish. The bullish RSI divergence occurs when the price action creates a new low, or a lower low, while the RSI diverges from the price action and creates a higher high. This way, the RSI leads the price action and it signals that the potential bullish reversal may take place soon.  On the other hand, the bearish divergence occurs when the price action is still trading in an uptrend, but the RSI has already started to come off the highs. As a result, the RSI signals the impending bearish reversal in the price. How to trade the RSI In order to avoid trading the false signals from the RSI, it is advised to cross-check signals against other technical indicators. In the example below, we have GBP/USD trading in an aggressive downtrend, on a daily chart. <img alt="" src="/TMXWebsite/media/TMXWebsite/Trading-the-RSI-picture-2.jpg" />   Similarly to the previous example involving EUR/USD, the RSI enters the oversold territory already in the first part of the downtrend. This happens as a result of a strong push lower as the bears completely overwhelm the bulls. As a result, readings are also decreasing in an accelerated fashion.    Our approach, in this case, is to use <a data-di-id="di-id-9164943b-24d004a1" href="https://www.thinkmarkets.com/uk/learn-to-trade/advanced/fibonacci-ratios/">Fibonacci extensions</a> to identify the 127.2% and 161.8% levels as potential support blocks. As you can see in the chart, a downtrend of around 1,800 pips stops at the first extension level.    Once we see that the bears are losing momentum, and we have a clearly identified level as a key factor for a slowdown, we check the RSI readings to get the confirmation that the market is oversold.    Given the magnitude of the move, you would expect the RSI to trade at extremely low levels. When the price action touches the 127.2% extension, the RSI trades around 15. This is not surprising given that this bearish move pushed GBP/USD towards the lowest levels since 2008.   If you go to a monthly GBP/USD chart, you will see that the last time RSI was trending around the 15 mark was in 2008. Although the RSI can always go lower until it reaches 0, a reading of 15 is quite low, especially for the higher time frames.   Hence, the RSI is best used as a confirmation indicator. You can also use other technical indicators, such as <a data-di-id="di-id-1f4e334f-6f4eda2d" href="https://www.thinkmarkets.com/uk/learn-to-trade/indicators-and-patterns/indicators/simple-moving-average-sma-indicator/">moving average</a>, Fibonacci retracements, trend lines etc., to identify important levels and then cross-check them with the RSI readings.    In this particular case, we are trading against the 127.2% extension. A stop-loss should be placed below the extension, while a profit-taking order depends on your risk sentiment and risk/reward ratio.    Practise trading of the RSI, and other technical indicators, by <a data-di-id="di-id-fd99886e-20c0aa3e" href="https://portal.thinkmarkets.com/account/individual/demo">opening a demo trading account</a>. This way, you can identify trading opportunities yourself, by applying RSI and other technical indicators to better understand their co-existence, as well as to protect your capital until you feel comfortable to trade live markets. <h2>Summary</h2> The relative strength index is a momentum indicator that identifies when the market is trading in the overbought or oversold conditions. The indicator gauges market sentiment by measuring the speed and change of price movements. As such, it is best used in trending markets, and when mixed with other technical indicators.   The RSI also displays bullish and bearish divergences, which happen when a new high or low isn’t confirmed by the RSI readings. Hence, divergences can lead the price action into a reversal, and generate a signal to the trader that the price may change its direction soon.

6 min readBeginners