Important Terms and Concepts
Going Long and Short
This is basic jargon in fx trading and is actually very simple.
Going long means buying.
Going short means selling.
If you are buying a currency pair, which means you are buying the base currency against the counter currency, you are ‘going long’.
On the other hand, if you are selling a currency pair meaning you are selling the base currency against the counter currency, you are ‘going short’.
Support and Resistance
Support and Resistance are mainly used in market analysis. Understanding these concepts will help you figure out whether to go long or short or do anything at all.
Support and Resistance are basically levels at which prices are expected to reverse.
Support is the lower level of price. This is the rate at which a trader will want to buy. It is the low bar that a currency will reach. It is the floor.
Resistance is the higher level of price. This is the rate at which a trader will want to sell. It is the high bar that a currency will reach. It is the ceiling.
When we say that they are levels at which prices will usually reverse, we really do mean the ‘usually’ bit. They depict a trend and nothing more. There is no guarantee that once a currency hits the resistance it will not go higher. They basically represent an average.
The mechanism governing these levels is that of supply and demand. At the Resistance level, the supply is very high. Everyone wants to sell at this high rate. When this everyone is not able to find a buyer, they will lower the price. If enough sellers do it, the price will reverse i.e. the rate will go down. Similarly, at the Support level the demand is high. Everyone wants to buy at this low rate. However, there are not enough sellers so the rate will begin to reverse.
A tip for those who are just starting out with this support and resistance analysis is to leave room for fluctuations.
If you buy at support, thinking the price will reverse and you will sell at a profit but the reverse happens and the price starts to go down even further, it is not always a good idea to sell at a small loss apprehending a bigger one. Sometimes, the market goes further down than the Support to test it; to see if business can be done at a still lower level. If the Support level has proven itself multiple times before (preferably at least 3 times), have faith. The prices will ‘probably’ come up. If the prices come up and you just sold for a loss, it will be a very frustrating situation to be. Give it a reasonable amount of time before rushing in with damage control.
Candlesticks and Bars
These are just two tools used for charting.
These candlesticks and bars provide information about the increase or decrease in the opening and closing prices during a set amount of time. These could cover a 15 min period, or they could be showing movement over an hour or a day. Whatever it is, it is a set amount of time so that with time as the constant, the variable (price) can be traced more clearly.
The main purpose of these charts and their analysis is to come up with an informed strategy to increase profits.
Bullish and Bearish
Bullish bars and candles are green or black/filled. They imply that for that time interval, the opening price was lower than the closing price. So in that interval the price went up.
Bearish bars and candles are red or white/empty. They imply that for that time interval, the opening price was higher than the closing price. So in that interval the price went down.
Gaps are when the market stops at a point and then picks up from another, causing a ‘gap’ or a discontinuity. No trade happens at the levels of the gap. This can usually be seen on the weekends because that’s when markets close. Another thing that can cause gaps is if an important event happens or a news or report comes out.
If you look at the direction of a gap, or the direction the price moved after the gap, you can get an idea of the way the market wants to move. After a gap, prices can either go up or down. If they go up it means that no one was willing to sell at the level of the gap. So they increased. If they go down, it means no one was willing to buy at the level of the gap, so the prices came down. The market, however, will probably try again to trade at those levels and so sometimes after a gap occurs, prices will go back and will fill the gap.
Market sentiment is exactly what it sounds like. It is the feeling most traders have about the position of a currency. This feeling is expressed through the trades they make.
Tracing market sentiment in forex is a little tricky because as explained earlier it is an OTC system. There is no centralized exchange that is recording how much trade is happening. The volume is not properly recorded. For those trading futures there is a report that shows them the volume of trades. It is the Commitment of Traders Report (COT) that is published by the Commodity Futures Trading Commission. Even though it does not deal with spot or day trades, it does provide a good sense of the direction market sentiment is going to take.
Trend lines and Channels
Trend lines help map out the general direction of a trade. These are important because if you look at a trade chart on its own you will mainly see a lot of zig zag movement that seems to be following no pattern. And yet there is a method to the madness, if you really look for it. These are the trend lines.
You’ve already learnt about support and resistance levels. If the support and resistance levels are both getting higher, meaning that the lowest prices (the support) is above where it was before and the highest prices (the resistance) keep getting broken to reach higher levels, the trend is up. If it’s the other way around, it will be a downwards trend i.e. the support and resistance both keep falling.
If you draw two parallel lines connecting the absolute highest and absolute lowest points, you get a frame of reference for your trade. Those are the possible levels you can and should be aiming to touch. The goal is to sell at the highest and buy at the lowest channels.
Pivot points are price indicators in technical analysis. A pivot point will show you the average price from the price action the day before (or the week or month before). This average is calculated through the highest resistance level, the lowest support level, and the closing level. This gives you a rough range for the next day; it is a point of reference.
If the price starts going below the pivot point, the trader knows that it is bearish and that we are entering the buying zone and those who were planning to go long can do that. On the other hand, rates above the pivot point indicate bullish market sentiment and entry into the selling zone and those who want to hold short positions can engage.
Together with other technical indicators, pivot points can give strong and potentially true suggestions to traders. However, it should be kept in mind that at the end of the day they are only a predictive tool and so there is always the chance of the market taking an unexpected turn.
Congratulations! You just covered a lot of very important Forex concepts. Now when you watch any instructional videos on YouTube, you will understand quite a lot of the jargon.
There’s still a way to go and so let’s swiftly move on ahead with Order types.