<p>In the world of financial markets, forex has a special place. It is the world&#39;s most popular and biggest financial market, and as of April 2022, it has &nbsp;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&rsquo;ll walk you through the basics of the forex market and the terms you need to know to start forex trading.&nbsp;</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&rsquo;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 &ndash; 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&rsquo;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 &ndash; 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.&nbsp;</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&rsquo;s difficult &nbsp;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 &nbsp;anytime during the day, whether it be after, before, or during work hours.&nbsp;</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 &ndash; 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" style="display: flex; margin: 20px auto;" 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 &ndash; 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" style="display: flex; margin: 20px auto;" 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. &nbsp;</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 &ndash; 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 &quot;bid&quot; and &quot;ask&quot; prices. Think of the &quot;bid&quot; as the price you&#39;ll receive when you want to sell a currency. The &quot;ask&quot; is the price you&#39;ll pay when you want to buy. For example, if you&#39;re looking at EUR/USD, the &quot;bid&quot; tells you how many US dollars you&#39;ll receive for selling 1 Euro, while the &quot;ask&quot; represents how many US dollars you need to spend to buy 1 Euro. &nbsp;As you can see in the image below, you would receive 1.02839 USD for selling one Euro, while if &nbsp;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 &ldquo;bid&rdquo; and &ldquo;ask&rdquo; prices.&nbsp;</p> <br /> <img alt="table with instrument sell buy columns" src="/getmedia/0dc1949c-bd93-47ef-a868-7acf8d50ef8f/what-is-forex-trading-image03.png" style="display: flex; margin: 20px auto;" 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&rsquo;s the cheapest financial market to trade. &nbsp;&nbsp;</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.&nbsp;&nbsp;&nbsp;</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. &nbsp;</p> <br /> <img alt="table with instrument sell buy columns" src="/getmedia/0d6ce7ac-c7be-40f0-82b6-4a292c3855ac/what-is-forex-trading-image04.png" style="display: flex; margin: 20px auto;" title="table with instrument sell buy columns" /> <p>It&rsquo;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> &nbsp; <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 &ndash; 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&rsquo;s price measured by the fourth decimal point and used to calculate a spread.</p> &nbsp; <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" style="display: flex; margin: 20px auto;" 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" style="display: flex; margin: 20px auto;" 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" style="display: flex; margin: 20px auto;" title="1.02847 - 1.02839 = 0.8 pips" /> <p>On ThinkMarkets&rsquo; proprietary platform, ThinkTrader, the spreads are displayed within each price quote for your convenience, so you don&rsquo;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>

<p>Financial markets&#39; 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&#39;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&#39;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&#39;s local currency. If a country&#39;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&#39;s needs and production structure. For example, the US and Brazil are long-term trading partners. Let&#39;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. &nbsp;&nbsp;</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&#39;s currency. For example. &nbsp;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. &nbsp;</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.&nbsp;&nbsp;&nbsp;&nbsp;</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&#39;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 &ndash; 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&rsquo; interest rate decisions to find trading opportunities.</p> <h3>Economic indicators and political stability</h3> <p>Besides inflation and interest rates, it&#39;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&#39;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&#39;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&#39;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&#39; activity. This factor is usually hard to predict as it depends only on the human factor and traders&#39; 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="https://www.thinkmarkets.com/nz/trading-academy/technical-analysis/what-is-technical-analysis-in-trading/">Technical analysis in trading</a>&nbsp;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="~/nz/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>

<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 &ndash; 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&rsquo;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&#39;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&#39;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 &ndash; 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" style="width: 552px; height: 441px;" /><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" style="width: 552px; height: 443px;" /><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 &ndash; 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&#39;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" style="width: 552px; height: 343px;" /><br /> <br /> If you were trading one lot in our example, the amount of profit or loss &ndash; 0.0020 &ndash; 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" style="width: 439px; height: 21px;" /><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" style="width: 520px; height: 24px;" /><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&#39;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&rsquo;s guide</a> too.<br /> To give a brief example based on our EUR/USD currency pair, let&#39;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" style="width: 552px; height: 308px;" /><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&#39;s offering, account type, market, instrument, or country of trader&#39;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.&nbsp;</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.&nbsp;</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. &nbsp;</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&#39;t need to be focused on finding a forex-specific broker. It&#39;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&rsquo;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.&nbsp;&nbsp;</p> <p paraeid="{250ca595-575b-4406-8923-97f21a83a46f}{144}" paraid="390720054">ThinkMarkets&#39; 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.&nbsp;</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. &nbsp;</p> <p><br /> <br /> <img alt="" src="/getmedia/e77ab2f8-dd0c-4075-8a02-481d68a8d02f/article-how-to-trade-forex-platform.webp" style="width: 552px; height: 235px;" /></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" style="width: 552px; height: 300px;" /><br /> Keep in mind that there are quite a few factors that may cause price swings, so it is necessary to&nbsp;research before selecting a pair and placing a forex trade. In our <a href="~/nz/trading-academy/forex/what-affects-forex-exchange-rates">next article</a>, we&#39;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>

<p dir="ltr"><strong>Identifying a successful forex trading strategy </strong>is one of the most important aspects of <a href="/en/forex-trading/">currency trading</a>. In general, there are numerous trading strategies designed by different types of traders to help you make profit in the market.<br /> &nbsp;</p> <p dir="ltr">However, an individual trader needs to find the best forex trading strategy that suits their trading style, as well as their risk tolerance. In the end, no one size fits all.&nbsp;<br /> &nbsp;</p> <p dir="ltr">In order to make profit, traders should focus on eliminating the losing trades and achieving more winning ones. Any trading strategy that leads you towards this goal could prove to be the winning one.&nbsp;<br /> &nbsp;</p> <h2 dir="ltr">How to choose the best forex trading strategy</h2> <p dir="ltr">Before we proceed to discussing the most popular forex trading strategies, it&rsquo;s important that we understand the best methods of choosing a trading strategy. There are three main elements that should be taken into consideration in this process.<br /> &nbsp;</p> <h3 dir="ltr">Time frame&nbsp;</h3> <p dir="ltr">Choosing a time frame that suits your trading style is very important. For a trader, there&rsquo;s a huge difference between trading on a 15-min chart and a weekly chart. If you are leaning more towards becoming a scalper, a trader that aims to benefit from smaller market moves, then you should focus on the lower time frames e.g. from 1-min to 15-min charts.&nbsp;<br /> &nbsp;</p> <p dir="ltr">On the other hand, swing traders are likely to use a 4-hour chart, as well as a daily chart, to generate profitable trading opportunities. Hence, before you choose your preferred trading strategy, make sure you answer the question: how long do I want to stay in a trade?&nbsp;<br /> &nbsp;</p> <p dir="ltr">Varying time periods (<strong>long, medium, and short-term</strong>) correspond to different trading strategies.&nbsp;<br /> &nbsp;</p> <h3 dir="ltr">Number of trading opportunities</h3> <p dir="ltr">When choosing your strategy, you should answer the question: how frequently do I want to open positions? If you are looking to open a higher number of positions then you should focus on a scalping trading strategy.&nbsp;<br /> &nbsp;</p> <p dir="ltr">On the other hand, traders that tend to spend more time and resources on analysing macroeconomic reports and fundamental factors are likely to spend less time in front of charts. Therefore, their preferred trading strategy is based on higher time frames and bigger positions.<br /> &nbsp;</p> <h3 dir="ltr">Position size</h3> <p dir="ltr">Finding the proper trade size is of the utmost importance.<strong> Successful trading strategies</strong> require you to know your risk sentiment. Risking more than you can is very problematic as it can lead to bigger losses.&nbsp;<br /> &nbsp;</p> <p dir="ltr">A popular piece of advice in this regard is to set a risk limit at each trade. For instance, traders tend to set a 1% limit on their trades, meaning they won&rsquo;t risk more than 1% of their account on a single trade.&nbsp;</p> <p dir="ltr">&nbsp;</p> <p dir="ltr"><img alt="Forex trading - ThinkMarkets" src="/TMXWebsite/media/TMXWebsite/3-strategies-image-1.jpg" /></p> <p dir="ltr">For example, if your account is worth $30,000, you should risk up to $300 on a single trade if the risk limit is set at 1%. Depending on your risk sentiment, you can move this limit to 0.5% or 2%.&nbsp;<br /> &nbsp;</p> <p dir="ltr">In general, the lower the number of trades you are looking to open the bigger the position size should be, and vice versa.&nbsp;<br /> &nbsp;</p> <h2>Three successful strategies</h2> <p dir="ltr">By now, you have identified a time frame, the desired position size on a single trade, and the approximate number of trades you are looking to open over a certain period of time. Below, we share three popular forex trading strategies that have proven to be successful.&nbsp;<br /> &nbsp;</p> <h3 dir="ltr">Scalping</h3> <p dir="ltr"><strong>Forex scalping</strong> is a popular trading strategy that is focused on smaller market movements. This strategy involves opening a large number of trades in a bid to bring small profits per each.&nbsp;<br /> &nbsp;</p> <p dir="ltr">As a result, scalpers work to generate larger profits by generating&nbsp;a large number of smaller gains. This approach is completely opposite of holding a position for hours, days, or even weeks.&nbsp;<br /> &nbsp;</p> <p dir="ltr">Scalping is very popular in forex due to its liquidity and volatility. Investors are looking for markets where the price action is moving constantly to capitalise on fluctuations in small increments.<br /> &nbsp;</p> <p dir="ltr">This type of trader tends to focus on profits that are around 5 pips per trade. However, they are hoping that a large number of trades is successful as profits are constant, stable and easy to achieve.&nbsp;&nbsp;<br /> &nbsp;</p> <p dir="ltr">A clear downside to scalping is that you cannot afford to stay in the trade too long. Additionally, scalping requires a lot of time and attention, as you have to constantly analyse charts to find new trading opportunities.&nbsp;<br /> &nbsp;</p> <p dir="ltr">Let&rsquo;s now demonstrate how scalping works in practice. Below you see the EUR/USD 15-min chart. Our scalping trading strategy is based on the idea that we are looking to sell any attempt of the price action to move above the 200-period moving average (MA).&nbsp;</p> <p dir="ltr">&nbsp;</p> <p dir="ltr"><img alt="EUR/USD 15-Minute Chart" src="/TMXWebsite/media/TMXWebsite/EUR-USD-chart.jpg" /></p> <p dir="ltr">&nbsp;</p> <p dir="ltr">In about&nbsp;3 hours, we generated four&nbsp;trading opportunities. Each time, the price action moved slightly above the 200-period moving average before rotating lower. A stop loss is located 5 pips above the moving average, while the price action never exceeded the MA by more than 3.5 pips.&nbsp;<br /> &nbsp;</p> <p dir="ltr">Take profit is also 5 pips as we focus on achieving a large number of successful trades with smaller profits. Therefore, in total 20 pips were collected with a scalping trading strategy.&nbsp;<br /> &nbsp;</p> <h3 dir="ltr">Day trading</h3> <p dir="ltr"><strong>Day trading</strong> refers to the process of trading currencies in one trading day. Although applicable in all markets, day trading strategy is mostly used in forex. This trading approach advises you to open and close all trades within a single day.&nbsp;<br /> &nbsp;</p> <p dir="ltr">No position should stay open overnight to minimise the risk. Unlike scalpers, who are looking to stay in markets for a few minutes, day traders usually stay active over the day monitoring and managing opened trades. Day traders are mostly using 30-min and 1-hour time frames to generate trading ideas.&nbsp;<br /> &nbsp;</p> <p dir="ltr">Many day traders tend to base their trading strategies on news. Scheduled events e.g. economic statistics, interest rates, GDPs, elections etc., tend to have a strong impact on the market.&nbsp;&nbsp;<br /> &nbsp;</p> <p dir="ltr">In addition to the limit set on each position, day traders tend to set a daily risk limit. A common decision among traders is setting a 3% daily risk limit. This will protect your account and capital.<br /> &nbsp;</p> <p dir="ltr">&nbsp;</p> <p dir="ltr"><img alt="GBP/USD 1-Hour Chart" src="/TMXWebsite/media/TMXWebsite/GBP-USD-chart.jpg" /></p> <p dir="ltr">&nbsp;</p> <p dir="ltr">In the chart above, we see GBP/USD moving on an hourly chart. This trading strategy is based on finding the horizontal support and resistance lines on a chart. In this particular case, we are focused on resistance as the price is moving upward.&nbsp;<br /> &nbsp;</p> <p dir="ltr">The price movement tags the horizontal resistance and immediately rotates lower. Our stop loss is located above the previous swing high to allow for a minor breach of the resistance line. Thus, a stop loss order is placed 25 pips above the entry point.&nbsp;<br /> &nbsp;</p> <p dir="ltr">On the downside, we use the horizontal support to place a profit-taking order. Ultimately, the price action rotates lower to bring us around 65 pips in profits.&nbsp;<br /> &nbsp;</p> <h3 dir="ltr">Position trading</h3> <p dir="ltr"><strong>Position trading</strong> is a long-term strategy. Unlike scalping and day trading, this trading strategy is primarily focused on fundamental factors.&nbsp;<br /> &nbsp;</p> <p dir="ltr">Minor market fluctuations are not considered in this strategy as they don&rsquo;t affect the broader market picture.<br /> &nbsp;</p> <p dir="ltr">Position traders are likely to monitor central bank monetary policies, political developments and other fundamental factors to identify cyclical trends. Successful position traders may open just a few trades over the entire year. However, profit targets in these trades are likely to be at least a couple of hundreds pips per each trade.&nbsp;<br /> &nbsp;</p> <p dir="ltr">This trading strategy is reserved for more patient traders as their position may take weeks, months or even years to play out. You can observe&nbsp;the <strong>dollar index (DXY)</strong> reversing its trend direction on a weekly chart below.</p> <p dir="ltr">&nbsp;</p> <p dir="ltr"><img alt="DXY - the dollar index weekly chart" src="/TMXWebsite/media/TMXWebsite/USDX-US-Dollar-Index.jpg" /></p> <p dir="ltr">&nbsp;</p> <p dir="ltr">A reversal is a result of the huge monetary stimulus provided by the US Federal Reserve and the Trump administration to help the troubled economy. As a result, the amount of active dollars increases, which decreases the value of the dollar. Position traders are likely to start selling the dollar on trillion-dollar stimulus packages.&nbsp;<br /> <br /> <br /> Their target may depend on different factors: long-term technical indicators and the macroeconomic environment. Once they believe that the current bearish trend is nearing its end from a technical perspective, they will seek to exit the trade. In this example, we see the DXY rotating at the multi-year highs to trade more than 600 pips lower 4 months later (March - July).<br /> &nbsp;</p> <h2>Summary</h2> <ul dir="ltr"> <li role="presentation">Each trader needs to find the best forex trading strategy that suits their trading style;</li> <li role="presentation">Choose your own trading strategy by finding a preferred time frame, the desired position size and the number of trades you are looking to open;</li> <li role="presentation">Scalping is a popular trading strategy that involves opening numerous trades over a short period of time to capitalise on smaller market movements;</li> <li role="presentation">Day traders tend to open and close all trades within a single day;</li> <li role="presentation">Position trading is reserved for more patient traders with a background in finance and economics as they look to profit from long-term market trends.</li> </ul>

Forex signals are popular with&nbsp;beginner traders to improve their success rate and enrich their trading experience. Trading signals are generated either by a human analyst or trader or an automated platform on a forex signal service. <h2>What are forex signals?</h2> <p dir="ltr">Forex signals serve to <strong>determine the right forex trading opportunities at the right moment.</strong> By its very nature, a forex signal refers to a trading idea centred around a particular <a href="~/nz/forex-trading/">currency pair</a>, which should be implemented at a predefined price and time.&nbsp;</p> &nbsp; <p dir="ltr">Regardless of your trading expertise, using forex signals can significantly improve your trading performance. Furthermore, expert traders can utilise forex signals to expand their profitability scope and experience.&nbsp;</p> &nbsp; <p dir="ltr">As for novice traders, forex signals offer advantages as they allow them to make a profit while still gaining knowledge about the world of trading with currencies. Using the signals, traders can also speed up the learning process because it helps them gain full insight about which trading options the signal is built on.</p> &nbsp; <p dir="ltr">It&rsquo;s very important to know that a trading signal is useful only when used at the right time, especially in a volatile market such as forex. On the other hand, a signal can easily become useless if a trader gets it too late.&nbsp;</p> &nbsp; <p dir="ltr" style="text-align: justify;">To make sure traders receive trading signals at the right time, providers send the signals through multiple communication channels like SMS, e-mail, push notifications. Another option is to <a href="https://www.thinkmarkets.com/nz/thinktrader/">download platform add-ons</a> that allow traders to receive their signals directly on their trading platform. Some traders use social-trading communities&nbsp;to receive relevant forex signals.</p> &nbsp; <p dir="ltr">Simply put, f<strong>orex trading signals</strong> represent essential need-to-know info related to the market. In a lot of ways, a forex signal represents an immediate update that traders can incorporate into the trading decisions they execute.</p> <h2>Types of forex signals</h2> <p>Although a lot of signal services share some features, there is no universal signal service. In this article, we cover the four most common forex signal services.</p> <h3>Manual vs automated forex signals</h3> <p dir="ltr">This service is categorised based on the way the signals are generated. A manual Forex signal is created by an individual who&rsquo;s usually an analyst or an experienced trader. This is because with <em>manual signal trading</em>, the trader has to make the final decision and the human intelligence factor plays a major role.</p> &nbsp; <p dir="ltr">In contrast, automated trading signals are created by a computer or software that monitors and analyses price action based upon coded algorithms.&nbsp;</p> &nbsp; <p dir="ltr">The main benefit that comes with the automatic signal trading route is that it excludes emotion and provides increased execution trading speed. However, it also has a disadvantage because you rely very much on a computer, system, or individual and it excludes the decision-making process.</p> <p>&nbsp;</p> <h3>Paid vs free forex signals</h3> <p>This category is based upon the price of a signal service operator. Just as their name states, free forex signal providers offer signals without requesting payment, while paid forex signal providers offer signals but require money for that service. The latter category usually requests one-time payments or monthly subscriptions.<br /> &nbsp;</p> <h3>Entry vs exit forex signals</h3> <p dir="ltr">This is a category based on the amount of detail of a trade suggestion. There are signal services that provide only entry signals, that tell a trader when to enter the market, and there are other providers that offer only exit signals that tell traders to close their open position.</p> <p><br /> Most of the time this concerns long-term forex trading signals on financial products that trend for extended periods of time. <strong>When it comes to short-term trading signals</strong>, a trade idea usually takes into account both entry and exit signals.</p> <h2>What is copy trading?</h2> <p dir="ltr">Copy trading is a type of trading that became incredibly popular over recent years because it lets new traders make a profit. As a matter of fact, there are more and more traders who develop the <strong>&ldquo;people-based&rdquo; </strong>portfolios where the idea is to invest in other investors who conduct the trades for you, instead of trading currencies yourself.</p> &nbsp; <p dir="ltr">There are a number of ways copy trading can be performed <a href="https://www.thinkmarkets.com/nz/thinktrader/">based on the platform you select</a>. Whatever the platform, the main idea is the same - invest a part of your portfolio in a specific trader and copy all of their trades in a percentage-based way.</p> &nbsp; <p dir="ltr">Keep in mind that most platforms <strong>don&rsquo;t allow investing over 20% of your portfolio</strong> in a single trader, in order to encourage portfolio diversification. This is actually an efficient policy as sometimes investors appear more skilful than they actually are or they go through a rough streak. That&rsquo;s why it&rsquo;s wise not to have too much of your portfolio invested in one trader.</p> &nbsp; <p dir="ltr">When it comes to monitoring graphs and statistics, copy trading is just like normal trading. However, the main difference is that in copy trading you&rsquo;re monitoring actual people rather than market moves. That&rsquo;s why it&rsquo;s of utmost importance to check a trader&rsquo;s portfolio before copying them. Learn about their strategy, track record as well as risk management strategies they use.</p> &nbsp; <p dir="ltr">One thing is for sure, copy trading is great for novice traders. It&rsquo;s an easier way into the world of trading and it will let you make some money by generating trading opportunities from successful investors. Even if you start losing, you can&rsquo;t lose everything thanks to the portfolio diversification policy.</p> &nbsp; <p dir="ltr">Remember that no type of trading guarantees success, but at least it&rsquo;s a great way to gain trading experience. It&rsquo;s a great way to learn about trading since you&rsquo;re learning from more experienced and successful traders.</p> <h2><b>Who provides forex signals?</b></h2> <p dir="ltr">As we&rsquo;ve already mentioned, there are manual and automated signal providers. Manual providers are usually more experienced traders, market analysts and strategists. Manual providers provide trading opportunities that are derived from their trading experience, fundamental and technical analysis expertise as well as their trading strategies.</p> &nbsp; <p dir="ltr">On the other side, automated signal providers refer to computer software that is developed to create trading instructions when specific set parameters or conditions appear in the market.<strong> Expert Advisors (EA)</strong> is an example of automated signal providers as it utilises technical analysis techniques that are based on forecast indicators,<a href="https://www.thinkmarkets.com/nz/trading-academy/indicators-and-patterns/sma-indicator/">such as Moving Averages</a>, <a href="https://www.thinkmarkets.com/nz/trading-academy/indicators-and-patterns/analysis-fibonacci-ratios/">Fibonacci Levels</a>, and Stochastics.</p> &nbsp; <p dir="ltr">Alternatively, there are also other automated signal providers that use <a href="https://www.thinkmarkets.com/nz/trading-academy/technical-analysis/fundamental-analysis">fundamental analysis</a> methods, including monitoring economic news releases and market sentiment. You may prefer automated signal providers to manual signal providers, or the other way around, depending on what you are looking for.</p> <p><br /> You can also find platforms that collaborate with third-party signal providers for free on a daily and weekly basis through market review and analysis.</p> &nbsp; <p dir="ltr">One of the largest auto-trading communities in the world that&rsquo;s worth mentioning is <strong>MQL5.</strong> Anyone can become a signal provider in this community, however, there are a number of conditions to fulfill to make sure you can subscribe to a signal provider that will suit your requirements. MQL5 assesses the confirmed trading results of all providers and rates them.</p> &nbsp; <p dir="ltr">Additionally, you are able to use different filtering options that will let you choose your preferred signal providers based on their percentage development, drawdown and manual or algorithmic trading.</p> &nbsp; <p dir="ltr">Also, this community will warn you about any provider that still hasn&rsquo;t delivered enough forex signals or about new signal providers whose successful results could have happened by chance. Once you&rsquo;re subscribed to an MQL5 signal provider, you will be able to copy trades of the trader you&rsquo;ve selected.</p> <p>&nbsp;</p> <p>&nbsp;</p> <h2>How to use forex signals</h2> <p>First things first, make sure you choose a good broker. Reliable brokers use trustworthy platforms that are very important for providing signals in a reliable manner.</p> &nbsp; <p dir="ltr">Next, choose a proper provider. This is actually a more difficult task than it seems, even though there is a high number of choices for traders who want to use forex signal providers. This is one of the most important steps because executing trades based on unreliable signals can result in massive losses. You&rsquo;re putting a lot of faith in the provider, so make sure you choose wisely.</p> &nbsp; <p dir="ltr">That&rsquo;s why you should conduct a detailed research about available signal providers and choose a provider with a high reputation and reliability.</p> &nbsp; <p dir="ltr">Before you settle and choose a provider, learn about their trading performances and strategies. There are signal providers that offer a free trial period which you can subscribe to at a later stage in case you&rsquo;re pleased with the results.</p> &nbsp; <p dir="ltr">When it comes to automated strategies, you can usually conduct backtesting to see how the computer would have done in various market circumstances. Also, testing signal providers <a href="https://portal.thinkmarkets.com/account/individual/demo" target="_blank">on a demo account</a> before risking real capital would be a wise thing to do.</p> &nbsp; <p dir="ltr">It&rsquo;s also important to know that there are <a href="https://www.thinkmarkets.com/nz/thinktrader/">trading platforms</a> that offer high customisation features which can really make the difference since not all signal providers will enrich your trading experience. A customisable platform will make sure you can adjust a reliable signal to your investment objectives and aspirations.</p> <p>&nbsp;</p> <p>Don&rsquo;t forget trading with currency pairs can be short-term or long term. Short-term signals are used in day and intraday trading, while long-term signals are used for several days. Keep in mind that these signals are time-dependent so make sure you make use of a signal as soon as you get it.</p> <p>&nbsp;</p> <h2>Key takeaways</h2> <ul dir="ltr"> <li role="presentation">Trading signals are generated either by a human analyst or trader or an automated platform supplied to a subscriber of the forex signal service.</li> <li role="presentation">Forex signals offer advantages as they allow traders to make a profit while still gaining knowledge about the world of trading with currencies.</li> <li role="presentation">Copy trading allows for investing in other investors who conduct the trades for you, instead of trading currencies yourself.</li> <li role="presentation">There are signal providers that offer a free trial period which you can subscribe to later if you&rsquo;re pleased with the results.</li> <li role="presentation">Always conduct backtesting to check how the computer would have done in various market circumstances.</li> </ul>

<h2>What is a pip?</h2> <ul> <li>A &quot;pip&quot; is the smallest whole increment in any forex pair.</li> <li>For pairs quoted in 3 decimal points a pip increment is based on the second decimal.</li> <li>For pairs quoted in 5 decimal points a pip increment is based on the fourth decimal, like the EUR/USD below.</li> </ul> <p><img alt="pips" src="~/TMXWebsite/media/TMXWebsite/pips_1.png" /><br /> &nbsp;</p> <h2>Example</h2> <ul> <li>EUR/USD: A movement from 1.362(9)8 to 1.363(0)8 is a 1 pip move</li> <li>In USD/JPY, a movement from 104.4(7)1 to 104.4(8)1 is 1 pip</li> </ul> <p>So how much is a pip worth? This is determined by the currency of your account, the pair you are trading and the position size of your trade.</p>

<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 &ndash; 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&rsquo;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" style="width: 338px; height: 336px;" /></p> &nbsp; <ol> <li>Housing&nbsp;&nbsp;</li> <li>Food and beverages&nbsp;&nbsp;</li> <li>Transportation&nbsp;&nbsp;</li> <li>Commodities&nbsp;&nbsp;</li> <li>Healthcare&nbsp;&nbsp;</li> <li>Energy prices&nbsp;</li> <li>Education&nbsp;&nbsp;</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 /> &nbsp;</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&rsquo;s look at an example to visualise it further. The price movements below are for illustrative purposes only, and the figures are oversimplified. Let&rsquo;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" style="width: 427px; height: 467px;" /> <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" style="width: 552px; height: 104px;" /><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&rsquo;s economic health. High inflation rates mean prices rise rapidly at the expense of the general public&rsquo;s purchasing power. A low or negative inflation rate, called deflation, is also negative as the economy has become stagnant.<br /> <br /> <a href="https://www.thinkmarkets.com/nz/trading-academy/market-events/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 &ndash; previous CPI) x 100</strong><br /> <br /> Let&rsquo;s use the example above to illustrate. Let&rsquo;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" style="width: 277px; height: 232px;" /><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&rsquo;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="https://www.thinkmarkets.com/nz/trading-academy/market-events/federal-reserve/">Federal Reserve</a>.</p>

<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 2023.</p> <p><img alt="NFP-calendar" src="/getmedia/7ade571b-7f2e-4ac4-acb2-32f69f83074d/NFP-calendar.png" style="width: 552px; height: 760px;" title="NFP-calendar" /></p> &nbsp; <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&#39;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 style="text-align: justify;">A declining report may not be bad news for traders since it&#39;s possible to potentially benefit from this outcome with <a href="/nz/trading-academy/cfds/what-are-cfds">contracts for difference (CFDs)</a>. CFDs&nbsp;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="/nz/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>

<p>Every four years, the United States gears up for its presidential elections, with the whole world waiting in baited anticipation. Traders and investors across the globe closely monitor campaign trails, proposed policies, and public polls, not just for political curiosity, but for clues on how the elections and its eventual winner would affect the global financial markets.<br /> <br /> As the President of the United States, whoever wins can reshape the global economic landscape opening up opportunities for traders. In this article, we&rsquo;ll go through how US presidential elections can influence the forex market.<br /> <br /> US foreign policy decisions, often significantly influenced by the outcome of presidential elections, can have far-reaching effects on global economic relations, trade agreements, and geopolitical stability. These factors collectively play a crucial role in defining the strength and movement of major currencies, including the US dollar.<br /> <br /> For forex traders, it is extremely important to stay up to date with the news during election years. Historically speaking, the run-up towards the US elections have led to major price swings in currency pairs, such as EUR/USD, GBP/USD, and USD/JPY.</p> <h2>Historical impact of the US presidential elections on forex pairs</h2> <p>While historical data is not a sure guarantee that the market will move the same way, it is likely that prior circumstances will cause the same price movements. It&rsquo;s important to note that the price movements of currency pairs are caused by the accumulation of a multitude of factors, with the US presidential elections being one of the major reasons.<br /> <br /> Using EUR/USD and USD/JPY as examples, we&rsquo;ll look at the price movements in November 2016 and 2020, the pivotal month of the US presidential elections.</p> <h2>EUR/USD 2016</h2> <p>This pair often reacts to shifts in US-EU relations. Trade policies that lean towards protectionism or changes in NATO funding have historically caused volatility. Public sentiment on the candidate that&rsquo;s favoured to win, and their policies have led to fluctuations in this pair as traders speculated on the future of US-EU economic relations.<br /> <br /> <img alt="" src="/getmedia/037fbef6-8aa1-459e-803c-53ea783ca2df/market-events-fereign-policy-and-forex-chart-article-image.jpg" style="text-align: center;" /></p> &nbsp; <p style="text-align: center;">November 1-30, 2016</p> &nbsp; <p>Let&rsquo;s look at the price movements of EUR/USD in November 2016, when Donald Trump won with 304 votes as opposed to the 227 votes for the Democrat Hillary Clinton. The price of EUR/USD slipped from 1.1292 to 1.0515, showing a massive 7.4% decrease.<br /> <br /> Following Trump&#39;s victory over Clinton, there was an immediate weakening of the Euro and a strengthening of the US dollar. This can be attributed to various factors influenced by the election results, such as:&nbsp;</p> &nbsp; <ul> <li>Trump&#39;s victory added to the political uncertainty in the Eurozone. This uncertainty was expected to slow Eurozone growth and complicate the job of the European Central Bank (ECB), thereby undermining the Euro</li> <li>Trump&#39;s fiscal stimulus agenda, which proposed increasing government spending and significant tax cuts, particularly reducing corporate tax rates, was expected to alter the competitiveness of American businesses</li> <li>Trump&#39;s pledge to implement tariffs on imports was likely to lower the volume of imports into the US, supporting the US dollar&rsquo;s strength. Additionally, any reduction in immigration could impact remittances abroad</li> <li>With Trump&rsquo;s victory, experts expected the Fed to take a hawkish stance and hike interest rates in December 2016</li> </ul> <p>&nbsp;</p> <h2>EUR/USD 2020</h2> <p><br /> <img alt="" src="/getmedia/784d6b87-ae2d-44b4-999d-fbe3fa37240f/market-events-fereign-policy-and-forex-chart2-article-image.jpg" style="text-align: center;" /></p> &nbsp; <p style="text-align: center;">November 1 &ndash; 30, 2020</p> &nbsp; <p>In November 2020, Joseph Biden Jr. won the quadrennial presidential election. Biden&#39;s in the 2020 US presidential election was seen as a positive development for emerging markets and led to a weakening of the US dollar against these currencies. The market&#39;s reaction was influenced by expectations of normalised trade policies, improved global growth prospects, and uncertainties regarding future fiscal policies in the US.<br /> <br /> In the span of 5 weeks, the price of EUR/USD rose by 4.87%, from 1.1602 to 1.2167. Several reasons caused this reaction, including the factors below:</p> &nbsp; <ul> <li>The clarity that emerged with Biden&#39;s win improved global market sentiment. There were high expectations of US foreign policy and trade relations stabilising, easing tensions and boosting global economy. Wall Street had a strong performance during this period, marking its best week since early April at the time</li> <li>Biden&#39;s presidency was anticipated to mark a significant shift from the Trump administration&#39;s approach, especially in terms of foreign policy and trade relations. The prospect of a cooldown in trade tensions, particularly with China, was viewed positively by the markets</li> <li>The anticipation of reduced trade tensions under Biden&#39;s administration led to increased capital flow back into emerging markets. The MSCI Emerging Markets Index (EEM), for instance, closed at its highest point in over two years&nbsp;</li> <li>Biden&#39;s win raised expectations for fiscal stimulus, which was passed to support economic recovery in the US</li> </ul> <h2>USD/JPY 2016</h2> <p><br /> <img alt="" src="/getmedia/ad99ea26-7bf7-44ea-ae13-11618e18ec0f/market-events-fereign-policy-and-forex-chart3-article-image.jpg" style="text-align: center;" /><br /> <br /> In November 2016, USD/JPY rose from 101.75 to 118.691, recording a massive 17.31% jump in just one month. This major rise could be attributed to several factors, although experts note that Donald Trump&rsquo;s victory was a key driver. Here are some reasons why the USD was expected to strengthen following Trump&rsquo;s win:</p> &nbsp; <ul> <li>Trump&rsquo;s proposed policies during the 2016 debates were considered more likely to lead to fiscal expansion, higher inflation, and potentially more aggressive interest rate hikes by the Federal Reserve</li> <li>Trump&#39;s promises of significant infrastructure spending, tax cuts, and deregulation raised expectations of accelerated economic growth and higher inflation in the US</li> <li>The Federal Reserve was already on a path to tightening monetary policy in November 2016, whereas the Bank of Japan maintained an ultra-loose monetary policy to combat deflation</li> <li>The Japanese yen is often sought as a safe-haven asset in times of market uncertainty and turmoil. The initial reaction to Trump&#39;s win was uncertainty, but as markets began to focus on his pro-growth policies, there was a shift in sentiment that favoured riskier assets, leading to a decrease in demand for the yen</li> <li>As global markets absorbed the potential impacts of Trump&#39;s victory, there was a shift towards riskier investments. This change in sentiment often leads to reduced demand for safe-haven currencies like the yen and gold (XAUUSD)</li> <li>Trump&rsquo;s critical stance on trade agreements and potential changes to global trade policies created expectations of a stronger US economy, further supporting the dollar against the yen</li> </ul> <h2>USD/JPY 2020</h2> <p><img alt="" src="/getmedia/fdc90066-bc01-46d0-9efa-c49fc0cfbdba/market-events-fereign-policy-and-forex-chart4-article-image.jpg" style="text-align: center;" /><br /> <br /> Joe Biden&rsquo;s victory in 2020 caused a rise in the price of USD/JPY. This is primarily due to investors expecting an easing of trade tensions, encouraging riskier investments. Safe haven assets, such as the Japanese yen, were sidelined for high interest yielding assets.</p> <h2>Trading the US elections with ThinkMarkets</h2> <p>The US election opens a wide range of opportunities for traders. Whether you&rsquo;re trading forex pairs, commodities, stocks, indices, or even futures, it&rsquo;s important to rely on a data-driven strategy for better results.<br /> <br /> This is where ThinkMarkets comes in. We provide our traders with access to an extensive library of guides and feature-rich platforms designed to boost your trading.<br /> <br /> Stay ahead of the curve and create an account today!<br /> <br /> <i>Any opinions, news, research, analyses, prices or other information contained on this website is provided as general market commentary and does not constitute investment advice. ThinkMarkets will not accept liability for any loss or damage including, without limitation, to any loss of profit which may arise directly or indirectly from use of or reliance on such information.</i></p>

<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&rsquo;s where technical analysis can be useful.</p> <p>In this article, we&rsquo;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&rsquo;s called technical is because it&rsquo;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&rsquo;s important to understand that past prices don&rsquo;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&rsquo;s personal preference. ThinkMarkets&rsquo; proprietary platform ThinkTrader, for example, has over 15 different charts to accommodate traders&rsquo; needs.<br /> <br /> <img alt="" src="~/getmedia/6aae82dc-4ad4-43ba-9b7b-fdbf2373e549/article-what-is-technical-analysis-price-chart-1.webp" style="width: 552px; height: 464px;" /><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" style="width: 552px; height: 258px;" /><br /> <br /> As a candlestick chart is the most commonly used by traders, let&rsquo;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" style="width: 552px; height: 431px;" /><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" style="width: 552px; height: 327px;" /><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&rsquo;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&rsquo;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&rsquo;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="~/nz/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.<br /> &nbsp;</p>

<div dir="ltr"> <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> &nbsp; <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.&nbsp;<br /> &nbsp;</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> </div> <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 /> &nbsp;</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.&nbsp;<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.&nbsp;<br /> &nbsp;</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.&nbsp; <p dir="ltr"><img alt="evening star candlestick pattern" src="https://k13-dev.thinkmarkets.com/TMXWebsite/media/TMXWebsite/evening-star-pic-2.jpg" /></p> <meta charset="utf-8" /> <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.&nbsp;</p> &nbsp; <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&nbsp;<a href="https://k13-dev.thinkmarkets.com/en/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.&nbsp;</p> &nbsp; <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&rsquo;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.

<p paraeid="{a93e94ed-6fea-4c9f-a350-f7bc6677a4d1}{52}" paraid="1878194966">The hanging man and shooting star candles are often considered a part of the hammers group, along with the hammer and inverted hammer. All four patterns are indeed very alike in their structure and are single-candle reversal chart patterns.<br /> <br /> As we mentioned in our previous article about <a href="https://www.thinkmarkets.com/nz/trading-academy/indicators-and-patterns/hammer-candlestick-pattern/">hammer candle stick patterns</a>, the main difference is that the hanging man and shooting star appear in uptrends, while both hammers occur in a downtrend. Hence, the hanging man and shooting star patterns are considered bearish &ndash; the opposite of bullish hammers.<br /> <br /> <img alt="Hanging Man vs Shooting Star vs Hammer vs Inverted Hammer" src="~/getmedia/7bdfd60c-d229-4aa6-ade5-26a2e31a7679/Hanging-Man-vs-Shooting-Star-vs-Hammer-vs-Inverted-Hammer.png" /></p> <h2 paraeid="{a93e94ed-6fea-4c9f-a350-f7bc6677a4d1}{52}" paraid="1878194966">Hanging man candlestick pattern</h2> <br /> A Hanging man formation is the uptrend version of a hammer candlestick. Their structures are virtually the same &ndash; little to no upper shadow (wick), a small body with the high, closing and opening price close to each other and a long wick extending to the bottom. The lower wick is usually at least twice as long as the body.&nbsp;<br /> <br /> <img alt="Bearish and bullish Hanging Man pattern" src="~/getmedia/8c89ad4d-4b7e-43a4-bc9e-c257d070c474/Bearish-and-bullish-Hanging-Man-pattern.png" /><br /> <br /> A Hanging man candle can also be bullish (green) and bearish (red). Since this is a bearish reversal pattern, the red version of it is usually considered a stronger indication of the potential trend reversal.<br /> &nbsp; <h2>Shooting star candlestick pattern</h2> A shooting star candle is the uptrend version of the inverted hammer candlestick. Its short body is created by the closing, opening and high prices located near each other and a twice as long wick protruding upward. A lower shadow is usually either very short or doesn&rsquo;t occur at all.&nbsp;<br /> <br /> <img alt="Bearish and bullish Shooting Star candlestick pattern" src="~/getmedia/a10c2061-e0ae-4a23-a28f-01798e0bd049/Bearish-and-bullish-Shooting-Star-candlestick-pattern.png" /><br /> <br /> Similar to the hanging man candle, a bearish shooting star formation is considered stronger due to the overall bearish nature of the pattern.&nbsp; <h2>How do hanging man and shooting star candles work?</h2> <br /> Occurring in an uptrend, both hanging man and shooting star indicate that the trend is losing its momentum, and bears are trying to overpower the bulls.<br /> <br /> The hanging man candle tells us that, although bulls still have some power that helped them to achieve a high close, bears were powerful enough to push the price much lower to create a long wick at the bottom.<br /> <br /> The shooting star pattern is considered stronger than the hanging man candle because bears managed to push the closing price to the bottom despite the long wick at the top created by bulls. <h2>How to trade with a hanging man and shooting star</h2> When a hanging man and shooting star patterns occur, traders have two options. The first option is to go short right away, using the candle&rsquo;s closing price as an entry point and its high price as a stop loss. The second option is to wait for two to three candles to close and confirm a trend.<br /> <br /> There is no right or wrong decision, as it depends purely on the trader&rsquo;s perception and risk appetite. However, it is important to keep in mind that neither hanging man nor shooting star candles serve as a direct trading signal. Just like any other chart pattern or technical indicator, they only suggest that a bullish trend is weakening, and price reversal may occur. It doesn&rsquo;t necessarily mean that the price will reverse right after the hanging man or shooting star candle &ndash; it may take some back and forth between bulls and bears.<br /> <br /> As you can see on the image below, a shooting star was formed at the end of the uptrend. However, the price didn&rsquo;t reverse immediately. It took a hanging man and some side traction for bears to assume power and turn the trend downward.<br /> <br /> <img alt="Identifying Shooting Star and Hanging Man candlestick patterns in a price chart" src="~/getmedia/c3064b11-26bb-441e-979f-6e7c8351b039/Identifying-Shooting-Star-and-Hanging-Man-candlestick-patterns-in-a-price-chart.png" /><br /> <br /> It may also be helpful to confirm the trading signal you identified with other technical analysis tools, such as <a href="https://www.thinkmarkets.com/nz/trading-academy/technical-analysis/trendline-in-technical-analysis/">trendlines</a> and <a href="https://www.thinkmarkets.com/nz/trading-academy/indicators-and-patterns/technical-indicators-beginners-guide/">technical indicators</a>.<br /> <br /> Another important set of tools to use are risk management tools &ndash; stop loss and take profit. We suggest using them at all times to prevent larger than expected losses.<br /> <br /> Create a free demo account to practise identifying Hanging Man and Shooting Star candlesticks and opening positions in a risk-free environment. To discover more helpful chart patterns, head to our next article, where we will explain how a s<a href="https://www.thinkmarkets.com/nz/trading-academy/indicators-and-patterns/spinning-top-pattern/">pinning top candle</a> works.