XTRADE ACADEMY COURSE:

Technical Trading

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Technical Trading Table of Contents

1. Reading Charts

2. Understanding Candlestick Charts & Candlesticks

3. Charting and Price Movement

4. Understanding Support and Resistance

5. Drawing Support and Resistance Lines Effectively

6. Trends – The Basis of Trading

7. Breakout vs. Range

Reading Charts

! There are several different types of charts from which you can view live prices in the forex market.

! The different types of charts are: Bar, Line and Candlestick

! As far as which type of chart to use, Candlestick charts have become the

industry standard for technical traders.

! Charts are a graphic display of price action

! Learning to read a chart is the basis of technical analysis

! The basis for reading charts is that they show technical traders all the information they need in order to decide what instrument (currency pair, commodity, etc.) to trade and when to get in and out of trades; develop a trading strategy.

! Technical traders are concerned with price and price movement, which is

reflected on the charts

! The way a trader decides to get in and out of trades is based on patterns, called trends that the charts show us. As traders, we must learn to use the charts to predict future prices based on past price activity.

! At any given time each instrument is at a particular given price. By looking at a

chart we are looking at the price over a specific period of time. We see what the price is in relation to this period of time we are looking at and we can visually see how it got to be at the price.

! So, we are looking at the history of the price over a period of time and watching the price move, predicting which way it will go.

! Essentially, the charts are illustrating the constant price movement and fluctuation so the trader can visualize the fluctuation, rather than just reading or hearing the price in an isolated context.

Notes Reading Charts

Understanding Candlestick Charts & Candlesticks

! Candlestick charts display price movement using a side-by-side series of

candlesticks (vertical rectangular shapes with a line or “wick” through the centre). The body of the candle is the difference between the open price and close price. The high or low price is displayed as the wick (thin line) on the top or bottom of the body.

! The candlestick closest to the right side of the chart indicates the current price, the

one that is moving “now”. The open price indicates the price at the start of the time frame (you can choose 5 minutes, 30 minutes, 1 hour, 1 day, etc.) and the close price indicates the current price. On previous candles, the close indicates the price at the end of the indicated time frame.

! Most charts, certainly the live charts accessible through xtrade.com, display “down” candles, those where the price dropped during the time period, in red. Red candlesticks mean that the price opened higher than it closed. Blue or green candlesticks indicate “up” movement. Meaning the price opened lower than it closed, an increase in price since the time period began.

! Using candlesticks to predict future price is all about patterns and trends.

Notes Understanding Candlestick Charts & Candlesticks

Charting and Price Movement

! Charting is about keeping track of past prices in order to predict future prices. Our

“technical indicators” and “trading strategies” courses will teach you how to use history to predict the future using candlestick charts and technical analysis.

! Price movement and knowing how to read and understand it, is the most crucial

knowledge of a technical trader. ! Price movement can be broken into periods or segments and these time periods

are displayed using candlesticks. ! So, if we are looking at a chart of 5 minute candlesticks then the candlestick chart

will break the ongoing price movement into 5 min periods. The candlestick will show all the activity within that five-minute period. So eg, if a candle starts at 2:00pm it will last for 5 mins and end at 2:05pm and then at 2:05pm a new 5 minute candle will start. A thirty minute candlestick chart for example, would be a series of candlesticks that each represent half an hour of price movement, the furthest right candlestick being right now, the live price (while you are looking at it) and the previous one over being half an hour ago, and so on.

! When we look at the chart we want to see the price in relation to the overall

picture. How high did the price reach or how low did the price reach. So, this way the price is not just a number but rather part of a bigger overall picture.

! The two most important levels we look at are the resistance level/price (the highest

price) and the support levels/price. Then we are able to see whether the current price is at a high level or a low level. As a technical trader this information will be necessary to make a decision about future price predictions.

Notes Charting and Price Movement

Understanding Support and Resistance

! Resistance, the high point, is the price level where the supply starts to become

greater than the demand. Sellers step in and resist the rise in prices. Essentially, the sellers are taking over from the buyers.

! Support is the price level where demand starts to become greater than the supply. Buyers step in and support the price from going lower. Here there are more buyers than sellers.

! Basically, resistance is the recent high price, relative to the current price. The support

is the recent low price relative to the current price. ! How far back to look for support or resistance must depend on the time frame. So,

when looking at a 5 minute chart then look back to the start of the session, Asian, European or North American session. When looking at the hourly chart, you can go back to the start of the trading day, i.e. the recent 5pm EST

Notes Understanding Support and Resistance

Notes Understanding Support and Resistance

Drawing Support and Resistance Lines Effectively

! Find the clear/obvious price levels, which were previous turning points. Either high

points (resistance) or low points (support).

! Majority rules – if you’re not sure, neither will anyone else be. ! The most important lines to note are those where support becomes resistance (or

resistance becomes support). ! Include the wicks (the high and low) when drawing in resistance and support levels.

If the price could not go higher than a certain price previously then we assume that it will not go higher than that same level when it is approached again. The same would apply at a support level and if a price could not go below that price on it’s previous attempt, it will not go below when tested again. When a resistance has been a previous support, or a support has been a previous resistance, these levels will usually prove to be significant and therefore effective when using these levels in your strategy

! Once we have drawn our resistance and support lines we have created a trend.

The trend is the trading area between the resistance and support lines and is the area in which the instrument/price has fluctuated. The trends will be different depending on the time frames we are working with.

! So, if we working on a 5 minute chart the resistance and support lines will be the

high and low price over the past hour or two as this is the area we are looking at. However if we are working with hourly charts the resistance and support lines will be drawn looking at an area that will go back 6 – 8 hours as the trading area is over a longer time frame. A daily chart can go back over a period of days or weeks. When we draw these trend lines we are drawing a line at the top of the candlestick at the highest point.

! This important information must be known as soon as we draw in our resistance and

support, which are now our trend lines. We are looking at whether the price is going up, going down or staying relatively the same and in a sideways trend.

Notes Drawing Support and Resistance Lines Effectively

Trends – The Basis of Trading

! There are basically 3 kinds of trends (you will learn all about using trends to make

educated trades in the strategies course):

! Uptrend: is when the high point is at the top of a succession of candles and the high point is higher than the previous candle. Higher highs and higher lows = the price is going up. There are more buyers than sellers.

! Downtrend: when the low point is at the bottom of a succession of candles and the low point is lower than the previous candle. Lower highs and lower lows in sequence. The price is going down. There are more sellers than buyers.

! Sideways: the high points and low points are at the same levels as previous candles and the candles are not moving higher or lower, but basically trading within a sideways range.

! The trend will be sideways when the buyers and sellers are the same and there aren't more buyers or sellers to make an uptrend or downtrend. There are always buyers and sellers in each currency pair. E.g. in the EUR/USD pair, there are people buying the euro and selling the USD; at the same time there are people buying the USD and selling the EUR. The trend will be determined by which is dominating. If neither dominates, the trend is sideways.

! The channel is the area between the resistance and support and the area in which the recent price activity h

! as taken place. There is an upper band, a lower band and the channel shows the recent activity in the form of price patterns.

! Candlestick patterns either signal trend reversals or trend continuations. To identify the pattern we look at the preceding trend/direction leading up to the pattern. This determines whether the formation is signaling that the pre-existing trend will continue or reverse and change directions.

! Candlesticks often reflect the sentiment of traders and the patterns, which they form, will signal the direction we expect the trend to move in.

Notes Trends – The Basis of Trading

Uptrend Downtrend Sideways Trend

Breakout vs. Range

! When price action is contained within resistance and support we call this a range. Range traders will trade within this channel, expecting that buyers will buy off support levels until the price reaches resistance. Then, sellers will take over and the price should come down until it reaches support. Hence, trading within the range between resistance and support.

! The breakout strategy is expecting the price will break through the resistance or support levels and continue it’s previous trend i.e. buying after price breaks above resistance or selling when the price breaks below support – breakout trading strategy.

Notes Breakout vs. Range