Today I’m going to show you exactly how to use the Forex Factory calendar to improve your trading.

Plus, I’ll share one of my favorite trading strategies to use following news events. It’s a strategy I’ve used for over a decade and still works amazingly well today!

If you’re looking to master the best calendar in the forex market, you’ll love this guide. It’s the best tool to track upcoming economic events and make informed trading decisions. Best of all, it’s free.

Let’s get started!

Step 1: Navigate to the Forex Factory Calendar

The first step is to navigate to the Forex Factory calendar. There is only one forexfactory.com site, so be sure you aren’t visiting a competitor’s website.

Forex Factory pulls data from official sources, so you can rely on it when reviewing economic indicators and forecasts.

Once there, you should be presented with a screen similar to the one below.

Don’t be intimidated by all the activity on this page. By the end of the tutorial, it will all make sense.

Next, we will begin configuring the Forex calendar so that you can get the most out of the Forex market.

Pro Tip: In the left sidebar, you’ll see a window for “central bank rates.” These interest rates for popular currencies are beneficial if you’re using a carry trade strategy.

Step 2: Configure Your Time Zone

Now that you’re on the calendar tab, you want to set your time zone. To do this, simply click the time stamp in the upper right-hand corner.

After clicking the time stamp, you will be taken to a page where you can set your time zone. This will synchronize the time for each news event with your local time.

Don’t skip this step! If you do, it’ll be incredibly difficult to determine when these events are starting.

At this point, you also have the option to turn Daylight Saving Time (DST) on or off.

Lastly, you can toggle the time format to show either am/pm or 24-hour “military time.”

Once you are happy with the settings, click “Save Settings” to save yourself the trouble of doing this each time. One of my favorite features of the Forex Factory calendar is its ability to sync with your time zone.

This ensures you’re always aligned with real time economic data instead of guessing when important events will happen in your country.

After saving your settings, you should see the correct time displayed in the upper right-hand corner of the screen.

If not, repeat step 2 to ensure your settings were saved correctly.

Step 3: Set the Forex Factory Calendar Event Filter

At this point, you should have the Forex Factory economic calendar in front of you with each news event synchronized with your local time. 

Next, we will set the event filter to determine the type of news and currencies to display. This is convenient if you only want to display certain news events or are interested in specific currency pairs.

To set the filter, click the “Filter” icon in the upper right-hand corner while on the calendar tab.

After clicking “Filter”, you will get a screen like the one below.

This screen gives you the ability to filter events by expected impact, event type, and currency.

Market volatility often comes from interest rate decisions, employment reports, and other high-impact economic news. That makes this tool especially useful for forex trading.

Pro Tip: Hover your mouse over the colored boxes under “Expected Impact” to get an explanation of each one. In short, red equals high-impact, orange is medium-impact, and yellow represents low-impact news.

I like to focus on the medium and high-impact news events. This gives me a complete picture of what to expect over the coming days without cluttering the Forex Factory calendar with news that will have little impact on the markets.

By filtering by what’s relevant, you can focus on the events that actuallymove the financial markets.

Once you have everything set the way you want, click “Apply Filter” to begin showing only the events and currencies you selected. You can change this any time by repeating this step.

Step 4: Select Your Desired Dates

You should now have your time zone set and your filter configured the way you want.

Now it’s time to select the desired time frame. 

This is the span of time that will be shown on the calendar.

The navigation pane you see below will allow you to set any time frame you desire.

From this window, you can choose a single day, a week or even the entire month.

Also note that you can quickly select predetermined time frames in the bottom half of the navigation pane.

Pro Tip:* Choosing to see the entire week is often the best approach when trading the higher time frames. This allows you to prepare for the next few days rather than just the next 24 hours.*

This bigger picture helps traders and investors respond to market movements with a clear plan.

Step 5: Check the Forex Factory Economic Event Details

In addition to seeing the “surface content” such as the event name, expected impact and scheduled time, you can also expand each event to see additional information.

Be sure to use this feature with caution.

It can be far too easy to get caught up in the nuances of each event.

As price action traders, we need to be more concerned about what’s happening on the chart and less concerned about the fundamental significance of news.

The image below illustrates how you can expand the details of a given news event.

Once the icon above is clicked, you will see additional details of the Forex news event.

From the screen above, you can see additional details such as the source, frequency and history of the event to name a few.

This review of past data, inflation trends, and interest rates can give context. However, traders should remember the importance of sticking to price action first.

To close this window, simply click the “X” shown in the image above.

Before we move on, I want to reiterate how important it is to use these additional details sparingly, if at all.

The advantage to using the Forex Factory calendar as a technical trader lies in the scheduled time and expected impact of the news.

Anything more than that, and using a news calendar can become more of a distraction than an asset.

Choosing the Forex Factory Calendar Events to Watch

Knowing how to set up the Forex Factory calendar is one thing; knowing how to use it properly is quite another.

The first thing to understand is that you only want to focus on the market-moving events.

This means setting the filter to include only the medium and high-impact news events.

By doing this, you don’t have to sift through the low-impact news to find the economic events that are likely to cause increased volatility.

Here are some high-impact events to watch for:

• Federal Open Market Committee (FOMC)
• Nonfarm Payrolls (NFP)
• Unemployment rates
• Final Gross Domestic Product (GDP)
• Monetary policy announcements
• Any central bank rate decisions

These are the kind of economic events that trigger volatility in currency markets. They can also have lasting effects on market movements, so they’re worth watching.

The above list is an excellent baseline for you. Trading around these market moving events will help keep you out of trouble, but the list isn’t so exhaustive that you can’t find time to safely trade.

How to Trade Using the Forex Factory Calendar

We want to use the Forex Factory calendar to anticipate market-moving news and thereby avoid or prepare for periods of high volatility.

Forex traders who use the calendar correctly know how to manage risk while still capitalizing on the importance of high-impact news.

As such, I want to run through a few basic rules when it comes to trading around the news. All of the scenarios below assume that the news event in question would hypothetically impact your trade.

No open positions ahead of a news event

This is obviously the safest place to be with major news around the corner. You have nothing at risk, and you get to objectively analyze the price action that forms as a result of the news.

But what if the news isn’t just around the corner? How much time is needed between putting on a new position and a scheduled news event that could adversely affect that position?

This is a hard question to answer as it depends on a few factors.

• The trader – Every trader is different and, therefore, has different requirements regarding how risk-averse they are.
• The time frame – On average, a trade on the 1-hour chart will require less time between the entry and the pending news than a trade on the daily time frame.
• Distance to take profit – A trade with a 50 pip profit target will require less time than a trade with a 300 pip target, hypothetically speaking, of course. For more on how to hold winning trades longer, see these effective methods.

As a general rule, I don’t like to place trades within 24 hours of high-impact news.

Open position – small profit

This scenario involves an open position that is in profit but could turn negative if the news event adversely affects the position.

We’ve all been there – that point of indecision before a major news event is about to hit. Should you close the trade and book a small profit to be safe?

But then, what if the market moves in favor of your position? If you close it now, you risk missing out on potential profits.

In my experience, most traders fear a missed opportunity more than they fear losing capital. This couldn’t be more wrong. Remember, your number one job as a trader is capital preservation! Making money always comes second.

The path I choose 95% of the time in this situation is to take my small profit and get out. I can always get back in later if the market presents a favorable opportunity.

When in doubt, get out!

Open position – large profit

Of course, the last scenario we’re going to discuss is the second safest place to be after not having an open position. When a high-impact news event is around the corner and you have a position that is well into profit, you have more options.

It’s much easier to ride out a major news event if you know your position is 200 pips in the money. One thing that can influence your decision here is how far away your trade is from its profit target.

Let’s assume this position initially targeted a profit of 300 pips and is now just 40 pips from that target. In this case, I would likely close the trade before the news event to book profits.

To risk giving back 260 pips for an additional 40 pips isn’t very appealing.

You can also take a partial profit before the news event, leaving the remaining position open if the market reaches your final target. This is certainly a viable option, and one I choose often.

Frequently Asked Questions

Today, I’ll show you exactly how to trade bull flag and bear flag patterns for massive profits.

Are these flag patterns even worth it, you ask?

There was a time when I was profitable trading nothing but channels like the bull flag and bear flag patterns. So the answer is, yes, they are 100% worth your time.

If you’re ready to skyrocket your trading performance this year, you’ll love the actionable steps in this complete guide.

Let’s dive in!

What Are Bull and Bear Flags?

The first thing to understand about flag patterns is that they represent consolidation.

As such, they usually form after an extended uptrend or downtrend.
A bull flag forms within an uptrend, while a bear flag develops in a downtrend.

Simple enough?

What may be a little odd is that a bull flag forms “away” from the trend, and the same goes for the bear flag.

We’ll get into some examples below, so don’t worry if that’s confusing for now.

Now that you know what bull and bear flag patterns are, let’s dig into their characteristics.

Bull and Bear Flag Characteristics

1. The flagpole
2. The flag
3. The continuation

The illustration above shows a bullish flag pattern.

The bear flag has the same components, so let’s take a look at each one in detail.

The Flag Pole

The flag pole is the initial move in price. It’s either an uptrend in the case of a bullish flag pattern, or a downtrend in the case of a bearish flag pattern.

The angle of this move is irrelevant in terms of the validity of the flag pattern. However, a steeper, more aggressive angle of attack usually offers better follow-through later.

The distance of the flagpole is what we use for the measured objective.

The Flag

The flag formation is the key to this pattern.

It’s where the market takes a “breather” within the trend and consolidates for the next move.

The length of consolidation isn’t as important as the depth of the retracement, which shouldn’t be more than about 50% of the initial move.

The Continuation

At this point, the market has finished consolidating and is now trending in the original direction.

Using the distance we calculated above for the flag pole, we now have a measured objective for a possible target.

If this is unclear right now, don’t worry, it will all make sense once you see the illustrations below.

Flag Pattern Examples

Now that we have a good understanding of the different components, let’s take a look at a few real-life examples.

GBPUSD Bullish Flag

Notice in this example how the continuation is the exact same length as the flag pole.

The distance for the flag pole is measured from the swing low to the swing high of the flag pattern.

Similarly, we measure from the swing low of the flag pattern to the swing high of the continuation.

In the example below, both represented an equal distance of 500 pips.

 AUDCHF Bullish Flag

A bit different from the GBPUSD flag above, this bullish flag on AUDCHF extended almost an equal distance to that of the flag pole itself.

Furthermore, the flag pole was approximately 260 pips while the continuation only resulted in a 230 pip rally.

So while the two were very close in terms of distance traveled, there was a slight difference.

EURCAD Bearish Flag

Last but not least we have a bearish flag pattern on EURCAD.

Just like the bullish flags above, this bearish flag has a flag pole and continuation that are both equal distances of 580 pips.

The flag pattern isn’t as well-defined as the other examples, but it still gives us a nice channel with an accurate measured objective.

Summary

I hope this lesson has provided you with a blueprint of what to look for when identifying bullish and bearish flag patterns.

We’ll get into how to trade these price action patterns in a later lesson.

For now, just focus on being able to identify these patterns – they occur all the time and can be a powerful asset in your trading toolbox.

Today’s guide will teach you exactly what currency pairs are, including how and why they move.

I’ll also share my favorite pairs to trade, and which ones to avoid.

So if you’re trying to figure out which currency pairs you should be trading, this guide is for you.

Let’s begin!

What is a Forex Currency Pair?

Before we get into the nitty-gritty, it’s important that you understand what a currency pair is and how it moves.

As you might have guessed from its name, each pair involves two currencies. In this way, the value of one currency is compared to and is thus relative to the currency it’s paired against.

If that sounds confusing don’t worry, it will be abundantly clear by the time you finish this section.

The first currency in the pair is the “base currency” and the second is the “quote currency.”

This naming convention is the same regardless of the currency pair you’re trading.

You get the idea. Now let’s explore the two terms in greater detail.

Base currency

The base currency is the one that is quoted first in a currency pair.

Using EURUSD as an example, the Euro would be the base currency. Similarly, the base currency of GBPUSD is the British pound (GBP).

Quote currency

By process of elimination, you know that the quote currency is the one that comes second in a pairing.

For both the EURUSD and the GBPUSD, the US dollar is the quote currency.

How to Make Money From Forex Pairs

There are essentially two ways in which any currency pair can move higher or lower.

1. The base currency can strengthen or weaken
2. The quote currency can strengthen or weaken

Because the Forex market never sleeps and thus currency values are always changing, both the base currency and quote currency are in a constant state of flux.

In our example, if the Euro (base currency) were to strengthen while the US dollar remained static, the EURUSD would rise. Conversely, if the Euro weakened the pair would fall, all things being equal.

If on the other hand, the US dollar (quote currency) were to strengthen, the EURUSD would fall. And if the USD weakened, the currency pair would rally as the Euro would gain relative strength against its US dollar pairing.

All of the hypotheticals above assume that nothing else has changed for the pair.

Here’s a visual of the relationship. In this instance, the Euro is strengthening against the US dollar.

Not surprisingly, the next example is the EURUSD in a bear market. Here the Euro is weakening against the US dollar.

Pretty simple, right?

If you’re already familiar with the content so far, don’t worry, we’ll be getting into more advanced territory shortly.

As you can imagine, the velocity of any move depends on the relationship between the two currencies. For instance, if one is strengthening while the other is weakening, the move will be more pronounced than if only one currency is on the move.

Last but not least, it’s important to remember that the relationship between the base and quote currency is always changing. So just because the EURUSD is rallying in the current session doesn’t mean it will be tomorrow or even one hour from now.

Do You Buy or Sell Currencies?

One area that often confuses traders is the idea of buying and selling currencies.

In the stock market, you can either buy (and sometimes sell) shares of stock. There are no pairings, and the value of one stock is not dependent on that of another.

However, in the Forex market, all currencies are paired together. So when you’re ready to place a trade, are you buying or selling?

The answer is both.

For example, if you sell the EURUSD (also referred to as going “short”), you are simultaneously selling the Euro and buying the US dollar.

Conversely, if you buy the EURUSD (also referred to as going “long”), you are buying the Euro and selling the US dollar.

Make sense?

If not, feel free to review this section as many times as necessary.

To clarify, this does not mean you have to place two orders if you want to buy or sell a currency pair.

As a retail trader, all you need to know is whether you want to go long or short. Your broker handles everything else behind the scenes.

There’s also only one price for each pair. Remember that a currency’s value depends on the currency sitting next to it.

Alright, so we’ve breezed through several terms and concepts when it comes to trading Forex currency pairs.

At this point, you should have a firm understanding of what a currency pair is as well as the dynamics of buying and selling.

If not, feel free to review the material above as many times as necessary before moving on.

Now it’s time for the meat and potatoes of the lesson.

Currency Pairs List

This is my favorite part because now we get to dig into the various classifications of currency pairs. And later, I’ll uncover the pairs that are affected by changing commodity prices as well as a few of the safe haven currencies.

Don’t know what those are?

No problem. By the time you finish this section, you’ll be a currency guru!

Major Currency Pairs

Major currency pairs are to the Forex market what Apple and Amazon are to the stock market.

They are by far the most popular and therefore the most liquid.

Notice a trend?

Every major currency pair includes the US dollar. So if you ever see a pair that doesn’t involve the USD, it isn’t a major.

Everyone wants to trade the Forex majors listed above. Mostly because they’re the most popular, and who doesn’t want to put their money in the most traditional assets?

But here’s the thing…

The major pairs are not the end all be all when it comes to trading Forex.

It’s important to remember that there are dozens of pairs at your disposal.

While it is true that these are the most traded and are therefore the most liquid, popularity doesn’t pay the bills, favorable setups do. And unless your trading account is the size of Warren Buffett’s bank account, you don’t need the majors.

What in the heck am I talking about, you ask?

I’m referring to the well-known fact that everyone wants to trade the major currency pairs regardless of what the price action looks like at any given time.

For example, if the EURUSD has been choppy for weeks and isn’t producing anything favorable, you’re probably better off looking elsewhere.

But instead what I see quite often are folks trying to force trades on the EURUSD, GBPUSD, etc. simply because it’s what everyone else is doing.

This is one reason why I’m not an advocate of mastering one or two currency pairs at a time. In fact, making this mistake can quickly lead to forcing trades and overtrading.

I’ll expand on this idea shortly.

Minor Currency Pairs and Cross Currencies

So if the major pairs include the US dollar, we can infer that minor currency pairs are those that do not include the US dollar.

Pretty straight forward, right?

Now, here’s where some traders get confused. The truth is, there are far more currency crosses than there are minor pairs.

A lot of folks make the mistake of thinking that a minor to be any pair that doesn’t include the US dollar.

This is false.

A currency cross is any pair that doesn’t include the US dollar.

Minor currency pairs, on the other hand, make up a fraction of the crosses that are available for trading.

In other words, all minors are crosses, but not all crosses are minors.

Let’s define these two terms before we go on.

Currency Crosses

It’s time to clear up some confusion I see quite often around the web regarding minor pairs and currency crosses.

A currency cross is any pair that does not include the US dollar. As such, these pairings don’t offer nearly as much liquidity as the majors we discussed earlier.

A minor pair, on the other hand, is a major currency cross. As you now know, a cross doesn’t include the US dollar. Therefore, these minors are comprised of the Euro (EUR), British pound (GBP) and the Japanese yen (JPY).

Got it?

If it’s all a little fuzzy at the moment, don’t worry. The tables below should help to clear things up.

Euro Crosses

Japanese Yen Crosses

British Pound Crosses

Other Crosses

But if the major currency pairs get most of the attention and carry the most liquidity, why would anyone want to trade minor currency pairs and especially crosses?

Make no mistake, while the daily volume for these crosses is less than the majors, they are certainly not illiquid by any means.

In fact, many of the major crosses average more daily volume than some stock exchanges.

Remember that the foreign exchange market is the most liquid financial market in the world, so even some of the less popular currencies are extremely liquid.

Exotic currency pairs

The exotic currency pairs are the least traded in the Forex market and are therefore less liquid than even the crosses we just discussed.

And while the liquidity of the exotic pairs is more than enough to absorb most orders, the “thin” order flow often leads to choppy price action.

Additionally, the technical analysis we like to use here at Daily Price Action is less reliable. As a general rule of thumb, the more liquid a market is, the more you can rely on the technicals.

So what are these exotic currency pairs, you ask?

While the table above is fairly comprehensive, it is by no means a complete listing of every exotic currency in the world. However, it does cover some of the most popular of the less popular exotics.

But before you rush off to add this basket of currencies to your trading platform, there are a few things you should know.

Liquidity Concerns When Trading Exotic Pairs

As I mentioned earlier, these Forex exotics are less liquid than their more standard counterparts. And while most of them can easily support the majority of retail orders, the lack of volume can adversely affect the spread between the bid and the ask.

Also, in my experience, the study of technical analysis works best in highly liquid markets. This is one reason why I made the transition from equities to Forex in 2007.

Because the exotic currency pairs lack sufficient liquidity, at least compared to that of other pairs, the accuracy of technical analysis can suffer. So even if you find a pair that has a favorable spread, the lower volume may adversely affect your trading performance.

Limited Historical Data

At least two or three times a week I scan back several years on a particular currency pair. This is especially true if I’m on the fence about a key support or resistance level.

For those who have always traded the majors and crosses, the ability to view historical data is something you’ve come to expect.

However, if you trade the exotics listed above, you may not have that luxury.

Some of these currencies simply haven’t been around long enough to establish a significant track record.

In other cases, your broker may not offer the data. Remember that these exotics are far less popular than even the crosses, so some brokers decide that storing and updating the data simply isn’t worth their resources.

Choppy Price Action

This is perhaps the number one reason I avoid most exotic currency pairs like the plague.

While you may be able to find a few that have favorable movement, for the most part, they are extremely choppy.

They’re also the most volatile currency pairs to trade.

Here’s an example of ZARJPY. As you know from the currency tables above, that’s the South African rand versus the Japanese yen.

As you can see, the price action above is less than ideal. And keep in mind that the ZARJPY is relatively “mild” in terms of the chop you might see on any given day.

Opportunity Cost

Last but certainly not least is the opportunity cost associated with trading exotic currency pairs.

What does this mean, exactly?

It means that if you were to take a trade on the EURTRY (Euro / Turkish Lira), you’re tying up a portion of your capital that could be used elsewhere. You now have a level of exposure that you didn’t have 5 minutes ago.

As such, you are now somewhat limited in what you can do should a favorable setup arise on a more liquid pair such as the EURUSD or the USDCAD.

Of course, you could make the same case about any position, but with dozens of other currency pairs at your disposal, you certainly have to weigh the opportunity cost associated with trading a less liquid market.

The Three Commodity Pairs (What You Need to Know)

As the name implies, commodity currencies are those that rely on their respective country’s export activities.

Developing countries such as Burundi and Tanzania are among them. However, it also applies to countries such as Canada, Australia, and New Zealand.

Although there are several others on the list, the only commodity currency pairs that you need to know for this lesson are USDCAD, AUDUSD, and NZDUSD.

You should know that the Canadian, Australian and New Zealand dollar are also known as the commodity dollars, or “comdolls.”

Let’s take a look at each pair in detail.

USDCAD

The US dollar versus the Canadian dollar is one of the more sensitive commodity currency pairs. This sensitivity is due to the vast amount of natural resources that flow from Canada, much of which makes its way to the United States.

Among these natural resources is oil, which is a primary export for Canada and one that is vital to the health of the global economy.

In fact, Canada exports over 2 million barrels a day to the US alone. This high dependency on the commodity as an export makes the Canadian dollar vulnerable to fluctuations in the price of oil.

Although the correlation is never static, over the last ten to fifteen years, the Canadian dollar has held a positive correlation to oil of more than 75% on average.

Source: https://fred.stlouisfed.org

This relationship means that when oil rises the Canadian dollar strengthens. Conversely, when oil depreciates so too does the CAD.

Because the CAD is our quote currency in USDCAD (remember, it’s the second in the pairing), the currency pair has an inverse correlation to oil.

AUDUSD

Australia is one of the world’s largest exporters of gold. In fact, as of 2014 the country was the second largest gold producer only second to China.

Here’s a chart showing how the Aussie dollar has tracked gold prices over time.

Source: https://fred.stlouisfed.org

So as you might expect, just like oil exports heavily influence the Canadian dollar, the Australian dollar is at the mercy of the country’s gold exports.

Why does this matter?

It matters because investors tend to flock to gold during times of economic unrest. And if the Australian dollar tracks gold prices, then there’s a good chance that the Aussie will also capitulate during hard economic times.

But if this is true, why did the AUDUSD plummet during the 2008 global financial crisis?

That’s a great question, and we find the answer once we dig into the “safe haven” status that the US dollar often brings to the table.

During times of economic uncertainty or struggle, investors tend to favor the US dollar. So even though the Aussie was riding the gold wave at the time (which wasn’t very impressive as you’ll see below), the US dollar was strengthening at a faster pace.

The Australian dollar also tends to track equities, so when these markets began to capitulate back in 2008 so too did the AUD.

Remember, all value is relative in the currency market.

NZDUSD

Despite the small size of New Zealand, the small island nation has an abundance of natural resources. However, the country’s significant agricultural presence is what attracts the “commodity currency” label.

These resources combined with the massive international trade and it’s little wonder why the New Zealand dollar is affected by global commodity prices.

However, unlike the Canadian dollar or Australian dollar, the NZD isn’t typically tied to the fluctuations of one commodity.

Rather, the currency is affected by a basket of commodities and is one of the top exporters of milk, meat, and fruits.

Safe Haven Currencies

A safe haven is any asset that has a strong likelihood of retaining its value or even increasing in value during market downturns.

Gold

One of the most popular safe havens is in the form of a metal rather than a currency. But contrary to popular belief, gold isn’t a great performer during economic uncertainty or even recessionary periods.

During the 2008 global crisis, for example, gold was locked into a range and really only managed to move sideways with slight gains seen towards the end of the recession.

Note: The gray area represents the unofficial start and end of the 2008 crisis

Of course, as you can see from the chart above, the longer-term appreciation of gold as a safe haven can be quite considerable and should therefore not be underestimated.

Swiss Franc (CHF)

In the Forex market, the Swiss franc (CHF) is considered a safe haven currency, hence the reason the USDCHF experienced mixed results during the 2008 period.

Notice how although the US dollar gained against the franc in late 2008, the results weren’t nearly as substantial or lasting as something like the AUDUSD chart above or any one of the yen pairings below.

US Dollar (USD)

The US dollar often enjoys the same “safety net” status, however, when matched up against a more formidable safe haven, the currency tends to move lower during times of economic unrest. The USDJPY chart below is a perfect example.

Remember that if the quote currency experiences heavy appreciation, the pair is likely to move lower over time.

Japanese Yen (JPY)

Last but certainly not least is the Japanese yen, another currency that has a long history of safe haven status.

Notice how the yen crosses below fared during the 2008 meltdown.

USDJPY

GBPJPY

AUDJPY

As you can see, the Japanese yen appreciated massively against all three of its counterparts above.

Over the years the yen has been one of the more consistent safe haven currencies, which has made it my go-to currency when fear begins to grip global markets.

But just because an asset held its value or appreciated during the last market downturn does not mean it will behave in the same manner in the future.

The ever-changing nature of the financial markets doesn’t offer guarantees such as this. However, the assets mentioned above do have a history of retaining their value when things turn sour.

Forex Correlations

If you only remember one thing from this lesson, let this be it.

A currency pair’s correlation refers to the similarities shared by various pairings. These commonalities lead to both positive and negative associations.

For example, under normal circumstances, the EURUSD and the USDCHF are negatively correlated. In other words, if the EURUSD ends the day higher by 100 pips, chances are the USDCHF finished the day lower.

An example of two positively correlated pairs would be EURUSD and GBPUSD. In our previous example, if the EURUSD ends the session higher by 100 pips, it’s likely that GBPUSD also ended the day higher.

So you get the idea. Again, pretty basic stuff but yet essential knowledge if you wish you achieve consistent profits in the Forex market.

Why is it so important, you ask?

Because managing risk is your number one job as a trader. And if you aren’t familiar with these currency correlations, you can inadvertently double your risk.

For example, if you sell the EURUSD and buy the USDCHF, you have essentially doubled your risk.

At the same time, if you were to buy both currency pairs, you’ve contradicted yourself. For example, if you sell two negatively correlated pairs, chances are only one of the two trades will be successful.

So what is a Forex trader to do?

You should check the Forex correlations table before trading.

What’s nice about the chart above is that it’s divided into various time frames. This separation makes it easy to determine how one currency pair correlates to another and if you’re approach makes sense from a risk to reward perspective.

Most Popular Forex Currency Pairs

The most popular currency pairs are also the ones I trade the most.

And that’s by design, considering these pairs respect key levels the best and have the most liquidity.

The most popular Forex pairs are:

So which pair is my favorite to trade?

Honestly, I don’t have favorites. I’m an opportunist so rather than favoring particular currencies, I gravitate toward favorable technical patterns.

This is why you’ll often see me commenting on all of these pairs in the daily setups, including the occasional minor currency pair.

I enjoy trading the majors, but I certainly don’t discriminate should a compelling setup arise on something less liquid.

With that said, the pairs I started with back in 2007 are highlighted in the table above. These were my go-to currency pairs back then, and many still are today with a particular emphasis on the AUDUSD and the NZDUSD.

Final Words About Forex Currency Pairs

Wow, this lesson is now over 4,000 words. Who knew someone could write so much about Forex currency pairs?

But seriously, I’ve always said that the process of becoming a great Forex trader is more important than the destination. And if you want to become consistently profitable, it’s essential that you understand everything there is to know about the currency pairs you’re trading.

Many traders make the mistake of skipping these necessary steps before putting their hard-earned money at risk.

As they say, knowledge is power. And nothing is more powerful for a trader than understanding the currency pairs that make up the Forex market.

I sincerely hope this lesson has answered any question you may have had. As always, if I missed something, please let me know in the comments section below.

Frequently Asked Questions

Your Turn

What currency pairs do you trade? Did I miss anything?

I’d love to hear from you so be sure to drop me a line in the comments section below. I always make it a point to respond.

Today I’m going to show you step-by-step how to trade the inverse head and shoulders pattern.

It’s a chart pattern I’ve used for over a decade and is incredibly reliable when you follow the steps in today’s guide.

So if you’re ready to profit from inverse head and shoulders patterns in Forex, crypto, or any other market, you’ll love today’s post.

Let’s get started!

What is an Inverse Head and Shoulders Pattern?

Contrary to the head and shoulders pattern, the inverse head and shoulders pattern occurs after an extended move down.

It represents a possible exhaustion point in the market, where traders can begin to look for buying opportunities as the market establishes a bottom and starts to climb higher.

Inverse Head and Shoulders Characteristics

To kick things off, let’s take a look at the characteristics of an inverse head and shoulders pattern.

The illustration above shows the five characteristics of an inverse head and shoulders pattern. In order of occurrence, those characteristics are:

1. Downtrend
2. First shoulder
3. Neckline
4. Head
5. Second shoulder

The inverse head and shoulders pattern begins with a downtrend.

This is the extended move down that eventually leads to exhaustion and a reversal higher as sellers exit and buyers step up.

That downtrend is met by minor support, which forms the first shoulder.

As the market begins to move higher, it bounces off of strong resistance and the downtrend resumes.

This resistance level forms what is called the neckline.

After the market makes a lower low, it finds strong support which forms the head of the pattern.

The market finds resistance at the neckline once more, which forms the second shoulder.

At this point the inverse head and shoulders is taking shape but the pattern isn’t confirmed just yet.

Trading the Neckline Breakout

One area where a lot of traders go wrong is thinking that the pattern is confirmed as soon as the second shoulder forms.

Although the pattern begins taking shape at this stage, it isn’t confirmed until the market closes above neckline resistance.

A close on which time frame, you ask?

That depends on the time frame that is best respecting neckline resistance.

The example we’ll get to shortly shows an inverse head and shoulders that formed on the 4 hour chart.

In that case, we would need to see a 4 hour close above the neckline.

The illustration below shows the point at which the pattern is confirmed.

Notice how the market is now trading back above the neckline.

This break and close confirms the inverse head and shoulders pattern and also signals a breakout opportunity.

Note: The break of the neckline is only confirmed on a closing basis. So if the pattern forms on a 4 hour chart, you would need to wait for a 4 hour close above the neckline in order for it to become a tradable pattern. 

Inverse Head and Shoulders Examples

Now that you have a good understanding of the characteristics that form an inverse head and shoulders, let’s see how this pattern looks on a price chart.

The AUDUSD chart above shows an inverse head and shoulders pattern that formed on the 4 hour chart.

The pattern has a clear head and neckline as well as two shoulders.

You can see that the first shoulder has a steeper rise back to the neckline than the second shoulder.

This is okay. In fact most times these patterns will not be perfectly symmetrical.

Based on the chart above, at what point was the inverse head and shoulders confirmed?

See if you can identify the exact 4 hour candle before moving on to the next section.

The first 4 hour close above the neckline confirmed the pattern.

As soon as this candle closed, the pattern was confirmed and we could therefore begin watching for buying opportunities.

How to Trade an Inverse Head and Shoulders (Step-By-Step)

Now it’s time for the really fun part – how to trade (and profit) from this pattern.

But before we do that, let’s recap what we’ve covered thus far.

So far you’ve learned the five characteristics of the inverse head and shoulders.

You know how to identify the pattern as well as how to determine when the pattern is confirmed.

Now let me turn your attention to how you can actually profit from this pattern.

There are two schools of thought when it comes to trading the inverse head and shoulders.

The first says to use a buy stop order just above the neckline.

The idea here is to catch the market as it breaks through neckline resistance.

The problem with this approach is that there is an increased likelihood that you will experience a false break.

By using a buy stop order above the neckline, you aren’t waiting for the market to close above resistance.

This close is extremely important as it is what confirms the pattern. Without it, the pattern is untradable.

Without waiting for the close it’s possible for the market to spike above the neckline, trigger your buy order, and then settle back below the neckline without ever closing above it.

Now you have a losing position right from the start.

The second school of thought, and the one I use and teach, is to wait for a close above the neckline.

This ensures that the rest of the market is on-board with the breakout, which means you are less likely to experience a false break.

When using this approach, you have two options as to how and where you will enter the market.

The chart below shows both entry strategies.

The first option in the chart above illustrates what would be a market buy order as soon as the 4 hour candle closes.

Why the 4 hour time frame?

Remember that it’s all about which time frame is respecting our key level.

In this case it’s the 4 hour chart.

The second, and preferable, entry strategy shows a pending buy order on a retest of the broken neckline as new support.

Remember, “trading 101” says that old resistance becomes new support and vice versa, and that’s exactly what happened in the AUDUSD chart above.

Targeting Measured Objectives

Measured objectives are one of my favorite ways to identify profit targets.

But as much as I like them, they pale in comparison to using simple support and resistance levels. 

Which is why I’d like to start this last section by saying that you should always think of a measured objective as a guide and never a rule.

This method for finding profit targets can be extremely effective, but it isn’t without flaw.

Nor should it be used in place of key technical levels.

Instead it should be used in combination with key support and resistance levels.

With that out of the way, let’s get into how to identify a profit target using a measured objective.

The first thing to understand is that there is a difference between the measured objective and what’s called the measured move.

A measured move is simply the distance a market travels to reach the objective.

So how exactly do we find this objective? Let’s take a look…

Notice in the chart above, the distance from the head to the neckline is 175 pips. 

Once we know this distance, we simply project 175 pips above the neckline to find the objective.

In the case of the AUDUSD 4 hour setup above, the market moved 200 pips higher after confirming the inverse head and shoulders.

This would have made a take profit set at 175 pips above the neckline the ideal place to book profits.

Although using a measured objective can be quite accurate, it should never be used alone.

The best way to identify a profit target is by combining a measured objective with simple support and resistance.

Only then can you be sure a profit target is accurate.

Final Words

We have covered a lot of material in this lesson.

To wrap things up, let’s recap some of the more important points for you to keep in mind when trading the inverse head and shoulders pattern.

The very first thing to remember about it is that it is a reversal pattern.

It often occurs after the market has made an extended move down.

It signals a point in the market where buyers may begin to outweigh sellers and thus push prices higher.

The pattern is made up of five parts:

1. Downtrend
2. First shoulder
3. Neckline
4. Head
5. Second shoulder

Remember that the pattern can only be confirmed once the market makes a close above neckline resistance.

The time frame required for this close depends on which time frame is best respecting the neckline.

In the AUDUSD example above, the 4 hour chart was respecting the level and also displayed the most accurate rendition of the pattern, therefore we needed a 4 hour close above the neckline to confirm the pattern.

One method of finding a profit target is to use a measured objective.

To find the objective, you simple measure the distance in pips from the head to the neckline.

You then project that same distance from the neckline to a higher point in the market.

The measured move, on the other hand, represents the distance traveled from the neckline to the objective.

Although a measured objective can be a great way to identify a profit target, it isn’t the only way.

Nor should it be used alone.

The very best way to identify a profit target for an inverse head and shoulders pattern is through the combined use of a measured objective along with key support and resistance levels.

Frequently Asked Questions

Forex trading for beginners can be daunting, and getting lost along the way is easy.

So today I’m going to share with you three of my favorite Forex trading strategies.

But after more than ten years of Forex trading, I still use the three simple trading strategies in this post, so you know they’re good.

But the best part is they’re super easy to learn even if you have no trading experience.

So if you’re reading to learn a few simple Forex trading strategies to make more profit this year, you’ll love today’s blog post.

Let’s dive in!

1) Pin Bar Trading Strategy (Beginner-Friendly)

When it comes to Forex trading for beginners, the pin bar is king.

It’s one of the most profitable forex strategies, but it’s also very beginner-friendly since it’s easy to identify and trade.

Notice how the market came into resistance during a rally but was soon able to break through that resistance.

One of the basic principles of technical analysis is that former resistance becomes new support.

Sure enough the market found support at former resistance and formed a bullish pin bar in the process.

Let’s take a look at a bullish pin bar that formed on the GBPCAD daily chart.

In the chart above, GBPCAD met resistance after an extended move up.

Once the market broke through resistance, it found new support and formed two bullish pin bars.

Shortly after forming these pin bars, the market continued its rally for an additional 370 pips.

For more information on this particular strategy, see the lesson on the Forex pin bar trading strategy.

2) Inside Bar Trading Strategy

Another highly-effective Forex trading strategy for beginners is the inside bar strategy.

Unlike the pin bar, the inside bar is best traded as a continuation pattern. 

This means we want to use a pending order to trade a breakout in the direction of the major trend.

Below is an illustration of an inside bar during a rally.

Notice how the bar preceding the inside bar is much larger in size.

This bar is called the “mother bar” because it completely engulfs the inside bar.

The real magic to this strategy comes after the consolidation period, which is represented by the inside bar, on a break of the mother bar’s range.

Below is an inside bar that formed on the USDJPY daily chart during a strong rally.

Notice how USDJPY was coming off of a very strong rally when it formed the inside bar on the chart above.

These are the best inside bars to trade because it shows a true consolidation period which often leads to a continuation of the major trend, which in this case is up.

For more on this strategy, see the lesson on the inside bar trading strategy.

3) Forex Breakout Strategy

Forex trading for beginners isn’t easy.

But with the help of the breakout strategy below, you’ll be profiting in no time!

This strategy is different than most of the conventional breakout strategies out there.

Instead of simply trading the actual break of a level, we’re waiting for a pullback and retest before entering.

Another difference here is that we’re only interested in breakouts that occur from a wedge pattern rather than a horizontal level.

Here is an illustration of the Forex breakout strategy.

Notice how the market has worked itself into a terminal wedge, which simply means that the pattern must eventually come to an end.

The opportunity to trade this pattern occurs when the market breaks to either side and then retests the level as new support or resistance.

In the case of the illustration above, the entry would have come on a retest of support-turned-resistance.

Let’s take a look at the same breakout strategy but this time we’ll apply it to a USDJPY 4 hour chart.

Notice how in the USDJPY 4 hour chart above, the market touched the upper and lower boundaries of the wedge several times before eventually breaking lower.

As soon as the 4 hour bar closed below support, we could have looked for an entry on a retest of former support, which came just a few hours later.

Although the pin bar trading strategy is my favorite, I have had some of my largest trades using the Forex breakout strategy above.

The market will often react quite aggressively after the breakout occurs, allowing traders to secure a large profit in a relatively short period of time.

Final Words

So there you have it.

Three simple Forex trading strategies for beginners.

These strategies are by far my favorite and for good reason.

If used properly, they can quickly build your trading account into a sizeable amount.

The best part is, they are extremely simple to understand and are therefore easy to incorporate into your trading plan.

Here are a few key points from the lesson:

• The pin bar trading strategy is best traded as a reversal pattern in the direction of the major trend
• The inside bar trading strategy is best traded as a continuation pattern
• The Forex breakout strategy should be traded after a break and retest of either support or resistance
• All you really need to become profitable trading Forex is two or three great trading strategies

General FAQ

Metatrader 4, also known as “MT4”, is perhaps the most widely used Forex trading platform in existence. Even its successor, Metatrader 5, hasn’t quite gained the same level of popularity among the Forex retail crowd.

In this Metatrader 4 tutorial, we’re going to walk through the installation process. By the end of this tutorial, you will have a firm understanding of where to download the program as well as how to install it on your computer.

MT4 Installation

Metatrader 4 can be downloaded from one of two places. You can either download the program directly from MetaQuotes from their dedicated MT4 website (metatrader4.com). Or you can download it from your broker’s website, provided they support it of course.

In my opinion, the easiest way is to download it from your broker. This way you can be sure that it’s configured properly so you can get started trading right away.

For purposes of this tutorial, however, I will be downloading the platform directly from MetaQuotes. The process to download it from your broker will be the exact same.

Step 1: Download the application

You can safely download the MetaTrader 4 application here.

Once there, you should see a screen that looks similar to the image below.

The first thing you’re going to want to do is click the “Free Download” button. After clicking this button, a Metatrader 4 Setup window will appear, as shown in the image below. Check the box to agree to the license terms and click “Next”.

The next window will give you installation options, such as whether or not you want to include a desktop shortcut.

Depending on your operating system, you may or may not get this dialog box. For example, my system took me straight to the “installation progress” screen, as shown below.

After clicking “Finish” on the screen above, the application will launch with the default settings. Once launched, you will be prompted with the following screen.

Step 2: Select Your Preferred Broker

Select your preferred broker or choose the default setting and click “Next”. This will connect your MT4 platform with your broker’s demo feed.

After selecting “Next” from the screen above, you will be prompted with an option to either open a new demo account or login to an existing account.

You will want to choose “New demo account” and click “Next” as shown in the image below.

Step 3: Enter Personal Details

The very next screen will prompt you with several fields, most of which are mandatory. Here you will need to enter your name, address, phone number, email address as well as your account type and currency.

As for the deposit amount, I always recommend that traders choose an amount that they are likely to trade with in a live account. So if you expect to eventually start with $1,000 of real money, don’t trade with a $50,000 demo account. It may sound like fun to trade with such a large amount, but it isn’t going to simulate a real trading environment, which is the purpose behind demo trading.

See my blog post on transitioning from a demo trading account to a real-money account for more on that.

Lastly, don’t forget to check the box that says “I agree to subscribe to your newsletters”. The program will not allow you to advance until you have checked this box.

After you have completed all required fields, click the “Next” button. This will launch MT4 and present you with the default chart layout.

You have successfully installed Metatrader 4.

Perhaps one of the most important aspects of Forex trading is understanding supply and demand. These two terms will become your foundation as you begin to build an arsenal of trading strategies such as the pin bar and inside bar.

While certain topics in the world of Forex may be optional depending on your style of trading, your ability to properly identify areas of increased supply and demand is paramount to your trading success.

By the end of this lesson you will be able to define these two terms, why areas of increased supply and demand form as well as how to identify them to assist you on your journey to consistent profits.

Supply and Demand Explained

When explaining any new term, I always like to start with a simple definition. This definition is so simple in fact that one word can be used to describe each term.

Supply = selling

Demand = buying

Of course it isn’t quite that simple, but that’s the general idea. An area of increased supply refers to an area of increased selling pressure. This selling pressure causes a market’s price to fall.

The chart below shows a simple supply curve.

Notice how in the image above, as the price increases so does the number of units available. This is because as a market increases in price, participants find it more appealing to sell which in turn drives prices even lower.

On the other end of the spectrum is demand. An increase in demand refers to an area of increased buying pressure. In other words, an area of support. This area of increased buying pressure causes a market’s price to rise.

The chart below shows a simple demand curve.

Notice how in the image above, as the price increases the number of units available decreases. This occurs due to buyers stepping up and driving the market higher which in turn reduces the number of units available to other market participants.

The ever-changing balance between supply and demand is what causes a market’s price to fluctuate over time. As supply increases a market will decline while an increase in demand will trigger a rally back the other way.

Now that you have a good understanding of the two terms, it’s time to learn how to identify these areas on a price chart.

How to Identify Areas of Value

The most effective way to go about translating the concepts of supply and demand into actionable areas on your chart is to change the way you think about the two terms.

At the end of the day, an increase in demand is just another way of calling attention to an area of support. In the same way an area of supply can be thought of as an area of resistance.

We call these support and resistance levels. These are the levels that form on your chart from which you want to look for buying and selling opportunities.

The chart below is a great example of how support and resistance can be used to your advantage.

Notice in the chart above we have a key horizontal level that has formed due to tension between buyers and sellers. The level starts out acting as resistance (supply) and later begins acting as support (demand) after the market breaks to the upside.

These levels, or areas of value can also form at a diagonal. We call the diagonal levels trend lines. These can also be a great way to identify buying and selling opportunities at value.

The chart above shows a strong level of demand that has been carved out by an impressive rally in GBPUSD. Notice how each time the market reaches this level, buyers step up and drive the market even higher.

Areas such as the trend line above can be a great way to identify potential turning points in a market. Key levels like this are extremely advantageous for traders and are therefore considered the foundation for any good Forex trading strategy.

Final Words

Knowing how Forex supply and demand play a role in the market is extremely important to your trading success. It starts with understanding the concepts but the real value is knowing how to identify areas of value so you can begin capitalizing on them.

Like any financial market the Forex market has a bid ask spread. This is simply the difference between the price at which a currency pair can be bought and sold. This is what accounts for the negative number in the “profit” column as soon as you place a trade.

Before we go any further let’s define the two terms, “bid price” and “ask price”.

Bid Price – Used when selling a currency pair. It reflects how much of the quoted currency will be obtained if buying one unit of the base currency.

Ask Price -Used when buying a currency pair. It reflects the amount of quoted currency that has to be paid in order to buy one unit of the base currency.

Note: The bid price will always be smaller than the ask price.

Remember from the lesson on Forex currency pairs that the base currency is the one in front while the quote currency is the second. So using the example of EURUSD, the Euro is the base currency and the US Dollar is the quote currency.

It sounds tricky but it’s actually quite simple. It’s essentially how much of one currency you can get for the other and vice versa. The most important thing to remember is that the bid price is used for selling while the ask price is used when buying.

At the end of the day all of these intricacies are taken care of for you by your broker. All you need to know is whether you want to go short (sell) or go long (buy)and your broker does the rest.

Which Currency Pairs Have the Lowest Spreads?

It’s important to have an understanding of which currency pairs have the best (lowest) spreads when trading. While the major currency pairs and even some crosses have decent spreads, some of the more exotic currency pairs can have wide spreads, creating a large deficit as soon as you enter a trade.

The currency pairs with the lowest spreads are those with the largest daily volume. Essentially we’re talking about the major currency pairs, which are:

EURUSD,  USDJPY,  GBPUSD,  USDCHF,  AUDUSD,  USDCAD,  NZDUSD

These currency pairs typically have the lowest spreads, with EURUSD, GBPUSD and USDJPY being the lowest of them all.

One advantage to trading the higher time frames, which is what I teach on this site, is that the bid ask spread isn’t quite as important as if you were trading the lower time frames. This is because on the larger time frames we’re interested in the larger moves and also making fewer trades. Compare this to the day trader who can make dozens of trades in a single day and may only be in a trade for a matter of minutes.

Make no mistake though, the spread on some of the less-liquid currency pairs can be significant and should certainly be considered before taking a trade, even when trading the higher time frames.

The Bid Ask Spread During Different Trading Session

We all know that the Forex market is a global market consisting of different trading sessions. These sessions are:

• Sydney
• Tokyo
• London
• New York

The bid ask spread for a currency pair can vary depending on the current trading session. For the most part the bid ask spread will be the lowest during the London and New York sessions as these carry the largest trading volume.

However there is a three hour window that occurs immediately after the New York session closes and before Tokyo opens in which the spreads can considerable. This is especially true for some of the currency crosses and exotic currency pairs but can also effect the major currency pairs.

Although the Sydney session opens as soon as New York closes, it isn’t nearly as liquid as the New York session and therefore produces much larger spreads. It isn’t until Tokyo comes online three hours later that volume picks up and most spreads return to normal.

It’s important to keep this in mind if  you plan on trading during this three hour window. In fact as a general rule you should always check the bid ask spread before entering a trade regardless of the current trading session.

Summary

Before we close out this lesson, here are a few key points to keep in mind when it comes to the bid ask spread.

• The bid price is used when selling a currency pair
• The ask price is used when buying a currency pair
• The major currency pairs generally have the lowest spreads
• The bid ask spread for most pairs is considerably larger during the three hours immediately after the New York session
• Always check the bid ask spread before placing a trade

I hope this lesson has helped you to better understand the Forex bid ask spread as well as when to take extra care and watch for larger-than-usual spreads.

Now that we have a better understanding of the two prices that make up the Forex bid ask spread, let’s take a look at how the spread is represented in the next lesson.

General FAQ

Moving averages are one of the more popular technical indicators that traders use in the Forex market. In fact, moving averages are the only indicator I use as part of my trading strategy.

As popular as they are, one question remains at the top of the list for most traders – “how do I use moving averages?”

That’s exactly what you’re about to learn in this lesson. We will cover what moving averages are as well as the various ways to use them. We will also discuss some of the limitations that all traders should consider before adopting moving averages into their trading strategy.

What is a Moving Average?

The first thing to note about the moving average is that it’s a lagging indicator. This means that it’s based on past price action.

There are two basic types of moving averages – the simple moving average (SMA) and the exponential moving average (EMA). As the name implies, the simple moving average is a simple average of a currency pair’s movement over time. The exponential moving average on the other hand gives greater weight to more recent price action.

The moving averages that we will be looking at in this lesson are the 10 and 20 exponential moving averages. I prefer exponential over simple as I feel it gives a better indication of what is happening rather than what has happened.

Ways to Use Moving Averages

There are many ways in which to use moving averages, but the three methods below are my personal favorite.

One thing to keep in mind as we move through the lesson, is that a moving average or moving average combination should never be used alone. Because it is a lagging indicator, the moving average should always be used in combination with other price action patterns and signals to help put the odds in your favor.

Trend Analysis

The use of moving averages for trend analysis is arguably the most common use of the indicator. There are many variations of moving averages that a trader may use to analyze a trend, but my favorite combination is the 10 EMA and 20 EMA.

Like most things in the Forex market, using moving averages to analyze a trend isn’t a perfect science. Nor is it something you want to rely on by itself. However when used properly, these two moving averages can make identifying a trend much easier.

Let’s look at an example.

Notice in the AUDUSD daily chart above how we are only looking for buying opportunities when the 10 EMA is on top of the 20 EMA. Because the 10 EMA follows price action more closely than the 20 EMA, when it’s on top it’s signaling that the market is in an uptrend.

On the flip side, when the 10 EMA is below the 20 EMA, we only want to be looking for selling opportunities as this often represents a downtrend.

Dynamic Support and Resistance

These two moving averages can also be used as dynamic support and resistance. There are several moving averages which carry more weight than others in the market, and the 10 and 20 period moving averages are among them.

Here is a list of the five most common moving averages that Forex traders use:

• 10
• 20
• 50
• 100
• 200

Because the periods above are commonly used, the market tends to respect them more than others. It’s the same reason that support and resistance levels work in the market – if enough traders are using the same level to buy or sell a market, then the market is likely to react accordingly.

Let’s take a look at the 10 and 20 EMA acting as dynamic resistance during a downtrend.

Notice how once the 10 EMA crossed under the 20 EMA, it began to act as dynamic resistance. This type of dynamic resistance combined with a price action sell signal can be a powerful combination.

Identifying Overextended Markets

Last but not least is using moving averages to help determine if a market is overextended. One of the more common pitfalls among Forex traders is buying or selling too late. We want to avoid entering a market that has overextended itself, and moving averages can help us determine if this is the case.

What does it mean to be overextended you ask?

Simply put, all markets normalize after an extended move up or down. This may come in the form of sideways price action or even a retracement. By using the 10 and 20 EMA we can stay away from trying to join the trend too late.

It should be noted that this method goes hand in hand with using moving averages as dynamic support and resistance.

Here’s an example of how to use moving averages to avoid selling an overextended market.

In the NZDJPY daily chart above, the market made two extended moves down, away from the 10 and 20 EMA. As price action traders, we want to avoid entering a market that has made an extended move away from our moving averages.

Instead we want to wait for the market to normalize and come back to the moving averages before looking for a sell signal to join the trend.

Summary

I hope this lesson has given you some ideas about how to use moving averages. Although there are dozens of ways to use them as part of your trading strategy, the three methods detailed above are my personal favorite and have served me well over the years.

Let’s recap some of the more important points from the lesson.

• There are two basic types of moving averages – the simple moving average and the exponential moving average
• The exponential moving average gives greater weight to more recent price action
• Although useful, the moving average is a lagging indicator that should never be used by itself to enter a trade
• Moving averages can be used to quickly identify a trend, making it easier to know whether to look for buying opportunities or selling opportunities
• The 10, 20, 50, 100 and 200 period moving averages are the most common and can therefore be used as dynamic support or resistance
• The 10 and 20 exponential moving averages are great for identifying markets that may be overextended