Fibonacci Who?

We will be using Fibonacci ratios a lot in our trading so you better learn it and love it like your mother's home cooking. Fibonacci is a huge subject and there are many different Fibonacci studies with weird-sounding names but we're going to stick to two: retracement and extension.

Let us first start by introducing you to the Fib man himself...Leonardo Fibonacci.

No, Leonardo Fibonacci isn't some famous chef. Actually, he was a famous Italian mathematician, also known as a super duper uber ultra geek.

He had an "Aha!" moment when he discovered a simple series of numbers that created ratios describing the natural proportions of things in the universe.

The ratios arise from the following number series: 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144...

This series of numbers is derived by starting with 1 followed by 2 and then adding 1 + 2 to get 3, the third number. Then, adding 2 + 3 to get 5, the fourth number, and so on.

After the first few numbers in the sequence, if you measure the ratio of any number to the succeeding higher number, you get .618. For example, 34 divided by 55 equals .618.

If you measure the ratio between alternate numbers you get .382. For example, 34 divided by 89 = 0.382 and that's as far as into the explanation as we'll go.

These ratios are called the "golden mean". Okay that's enough mumbo jumbo. With all those numbers, you could put an elephant to sleep. We'll just cut to the chase; these are the ratios you HAVE to know:

Fibonacci Retracement Levels
0.236, 0.382, 0.500, 0.618, 0.764

Fibonacci Extension Levels
0, 0.382, 0.618, 1.000, 1.382, 1.618

You won't really need to know how to calculate all of this. Your charting software will do all the work for you. Besides, we've got a nice Fibonacci calculator that can magically calculate those levels for you. However, it's always good to be familiar with the basic theory behind the indicator so you'll have the knowledge to impress your date.

Traders use the Fibonacci retracement levels as potential support and resistance areas. Since so many traders watch these same levels and place buy and sell orders on them to enter trades or place stops, the support and resistance levels tend to become a self-fulfilling prophecy.

Traders use the Fibonacci extension levels as profit taking levels. Again, since so many traders are watching these levels to place buy and sell orders to take profits, this tool tends to work more often than not due to self-fulfilling expectations.

Most charting software includes both Fibonacci retracement levels and extension level tools. In order to apply Fibonacci levels to your charts, you'll need to identify Swing High and Swing Low points.

A Swing High is a candlestick with at least two lower highs on both the left and right of itself.

A Swing Low is a candlestick with at least two higher lows on both the left and right of itself.

You got all that? Don't worry, we'll explain retracements, extensions, and most importantly, how to grab some pips using the Fib tool in the following sections.

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What is a Japanese Candlestick?

What is a Japanese Candlestick?

While we briefly covered candlestick charting analysis in the previous lesson, we'll now dig in a little and discuss them more in detail. Let's do a quick review first.

What is Candlestick Trading?

Back in the day when Godzilla was still a cute little lizard, the Japanese created their own old school version of technical analysis to trade rice. That's right, rice.

A westerner by the name of Steve Nison "discovered" this secret technique called "Japanese candlesticks", learning it from a fellow Japanese broker. Steve researched, studied, lived, breathed, ate candlesticks, and began to write about it. Slowly, this secret technique grew in popularity in the 90s. To make a long story short, without Steve Nison, candlestick charts might have remained a buried secret. Steve Nison is Mr. Candlestick.

Okay, so what the heck are forex candlesticks?

The best way to explain is by using a picture:

Candlesticks can be used for any time frame, whether it be one day, one hour, 30-minutes - whatever you want! Candlesticks are used to describe the price action during the given time frame.

Candlesticks are formed using the open, high, low, and close of the chosen time period.

• If the close is above the open, then a hollow candlestick (usually displayed as white) is drawn.
• If the close is below the open, then a filled candlestick (usually displayed as black) is drawn.
• The hollow or filled section of the candlestick is called the "real body" or body.
• The thin lines poking above and below the body display the high/low range and are called shadows.
• The top of the upper shadow is the "high".
• The bottom of the lower shadow is the "low".

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Support and Resistance

Support and resistance is one of the most widely used concepts in trading. Strangely enough, everyone seems to have their own idea on how you should measure support and resistance.

Let's take a look at the basics first.

Look at the diagram above. As you can see, this zigzag pattern is making its way up (bull market). When the market moves up and then pulls back, the highest point reached before it pulled back is now resistance.

As the market continues up again, the lowest point reached before it started back is now support. In this way resistance and support are continually formed as the market oscillates over time. The reverse is true for the downtrend.

Plotting Support and Resistance

One thing to remember is that support and resistance levels are not exact numbers.

Often times you will see a support or resistance level that appears broken, but soon after find out that the market was just testing it. With candlestick charts, these "tests" of support and resistance are usually represented by the candlestick shadows.

Notice how the shadows of the candles tested the 1.4700 support level. At those times it seemed like the market was "breaking" support. In hindsight we can see that the market was merely testing that level.

So how do we truly know if support and resistance was broken?

There is no definite answer to this question. Some argue that a support or resistance level is broken if the market can actually close past that level. However, you will find that this is not always the case.

Let's take our same example from above and see what happened when the price actually closed past the 1.4700 support level.

In this case, price had closed below the 1.4700 support level but ended up rising back up above it.

If you had believed that this was a real breakout and sold this pair, you would've been seriously hurtin'!

Looking at the chart now, you can visually see and come to the conclusion that the support was not actually broken; it is still very much intact and now even stronger.

To help you filter out these false breakouts, you should think of support and resistance more of as "zones" rather than concrete numbers.

One way to help you find these zones is to plot support and resistance on a line chart rather than a candlestick chart. The reason is that line charts only show you the closing price while candlesticks add the extreme highs and lows to the picture.

These highs and lows can be misleading because often times they are just the "knee-jerk" reactions of the market. It's like when someone is doing something really strange, but when asked about it, he or she simply replies, "Sorry, it's just a reflex."

When plotting support and resistance, you don't want the reflexes of the market. You only want to plot its intentional movements.

Looking at the line chart, you want to plot your support and resistance lines around areas where you can see the price forming several peaks or valleys.

Other interesting tidbits about support and resistance:

• When the price passes through resistance, that resistance could potentially become support.
• The more often price tests a level of resistance or support without breaking it, the stronger the area of resistance or support is.
• When a support or resistance level breaks, the strength of the follow-through move depends on how strongly the broken support or resistance had been holding.

With a little practice, you'll be able to spot potential support and resistance areas easily. In the next lesson, we'll teach you how to trade diagonal support and resistance lines, otherwise known as trend lines.

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Types of Charts

et's take a look at the three most popular types of charts:

1. Line chart
2. Bar chart
3. Candlestick chart

Now, we'll explain each of the charts, and let you know what you should know about each of them.

Line Charts

A simple line chart draws a line from one closing price to the next closing price. When strung together with a line, we can see the general price movement of a currency pair over a period of time.

Here is an example of a line chart for EUR/USD:

Bar Charts

A bar chart is a little more complex. It shows the opening and closing prices, as well as the highs and lows. The bottom of the vertical bar indicates the lowest traded price for that time period, while the top of the bar indicates the highest price paid.

The vertical bar itself indicates the currency pair's trading range as a whole.

The horizontal hash on the left side of the bar is the opening price, and the right-side horizontal hash is the closing price.

Here is an example of a bar chart for EUR/USD:

Take note, throughout our lessons, you will see the word "bar" in reference to a single piece of data on a chart.

A bar is simply one segment of time, whether it is one day, one week, or one hour. When you see the word 'bar' going forward, be sure to understand what time frame it is referencing.

Bar charts are also called "OHLC" charts, because they indicate the Open, the High, the Low, and the Close for that particular currency. Here's an example of a price bar:

Open: The little horizontal line on the left is the opening price
High: The top of the vertical line defines the highest price of the time period
Low: The bottom of the vertical line defines the lowest price of the time period
Close: The little horizontal line on the right is the closing price

Candlesticks Charts

Candlestick chart show the same information as a bar chart, but in a prettier, graphic format.

Candlestick bars still indicate the high-to-low range with a vertical line.

However, in candlestick charting, the larger block (or body) in the middle indicates the range between the opening and closing prices. Traditionally, if the block in the middle is filled or colored in, then the currency closed lower than it opened.

In the following example, the 'filled color' is black. For our 'filled' blocks, the top of the block is the opening price, and the bottom of the block is the closing price. If the closing price is higher than the opening price, then the block in the middle will be "white" or hollow or unfilled.

Here at BabyPips.com, we don't like to use the traditional black and white candlesticks. They just look so unappealing. And since we spend so much time looking at charts, we feel it's easier to look at a chart that's colored.

A color television is much better than a black and white television, so why not splash some color in those candlestick charts?

We simply substituted green instead of white, and red instead of black. This means that if the price closed higher than it opened, the candlestick would be green.

If the price closed lower than it opened, the candlestick would be red.

In our later lessons, you will see how using green and red candles will allow you to "see" things on the charts much faster, such as uptrend/downtrends and possible reversal points.

For now, just remember that we use red and green candlesticks instead of black and white and we will be using these colors from now on.

Check out these candlesticks...BabyPips.com style! Awww yeeaaah! You know you like that!

Here is an example of a candlestick chart for EUR/USD. Isn't it pretty?

The purpose of candlestick charting is strictly to serve as a visual aid, since the exact same information appears on an OHLC bar chart. The advantages of candlestick charting are:

• Candlesticks are easy to interpret, and are a good place for beginners to start figuring out chart analysis.
• Candlesticks are easy to use! Your eyes adapt almost immediately to the information in the bar notation. Plus, research shows that visuals help in studying, it might help with trading as well!
• Candlesticks and candlestick patterns have cool names such as the shooting star, which helps you to remember what the pattern means.
• Candlesticks are good at identifying marketing turning points - reversals from an uptrend to a downtrend or a downtrend to an uptrend. You will learn more about this later.

Now that you know why candlesticks are so cool, it's time to let you know that we will be using candlestick charts for most, if not all of chart examples on this site.

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The Big Three

Congratulations! You've gotten through the Pre-School and, with a few boo-boos here and there, you are ready to begin your first day of class!

You did go through the Pre-School, right????

By now you've learned some history about the forex, how it works, what affects the prices, blah blah blah.

ZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZ.

We know what you're thinking...

BORING!

SHOW

ME

HOW

TO

MAKE

MONEY

ALREADY!!!!

Well say no more friends because here is where your journey as a forex trader begins...

This is your last chance to turn back...

Take the red pill, forget everything, and we'll take you back to where you were before.

You can go back to living your average life in your 9-5 job and work for someone else for the rest of your life...

OR...

You can take the green pill, which is fully loaded with the dollar extract, and learn how you can make money for yourself in the most active market in the world, simply by using a little brain power.

Just remember, your education will never stop. Even after you graduate from the School of Pipsology, you must constantly pursue as much knowledge as you can, so that you can become a true FOREX MASTER! The learning never ends!

Are you ready to make that commitment?

Now pop that green pill in, wash it down with some delicious chocolate milk, and grab your lunchbox... the School of Pipsology is now in session!

Note: the green pill was made with a brainwashing serum. You will now obey everything that we tell you to do! Mwuahahaha! <--- evil laugh

Three Types of Market Analysis

To begin, let's look at three ways on how you would analyze and develop ideas to trade the market. There are three basic types of market analysis:

1. Technical Analysis
2. Fundamental Analysis
3. Sentiment Analysis

There has always been a constant debate as to which analysis is better, but to tell you the truth, you need to know all three.

It's kind of like standing on a three-legged stool - if one of the legs is weak, the stool will break under your weight and you'll fall flat on your face. The same holds true in trading. If your analysis on any of the three types of trading is weak and you ignore it, there's a good chance that it will cause you to lose out on your trade!

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How You Make Money in Forex

In the forex market, you buy or sell currencies.

Placing a trade in the foreign exchange market is simple: the mechanics of a trade are very similar to those found in other markets (like the stock market), so if you have any experience in trading, you should be able to pick it up pretty quickly.

The object of forex trading is to exchange one currency for another in the expectation that the price will change, so that the currency you bought will increase in value compared to the one you sold.

Example:

Trader's Action	EUR	USD
You purchase 10,000 euros at the EUR/USD exchange rate of 1.1800	+10,000	-11,800
Two weeks later, you exchange your 10,000 euros back into U.S. dollar at the exchange rate of 1.2500	-10,000	+12,500**
You earn a profit of $700	0	+700

*EUR 10,000 x 1.18 = US $11,800

** EUR 10,000 x 1.25 = US $12,500

An exchange rate is simply the ratio of one currency valued against another currency. For example, the USD/CHF exchange rate indicates how many U.S. dollars can purchase one Swiss franc, or how many Swiss francs you need to buy one U.S. dollar.

How to Read a Forex Quote

Currencies are always quoted in pairs, such as GBP/USD or USD/JPY. The reason they are quoted in pairs is because in every foreign exchange transaction, you are simultaneously buying one currency and selling another. Here is an example of a foreign exchange rate for the British pound versus the U.S. dollar:

The first listed currency to the left of the slash ("/") is known as the base currency (in this example, the British pound), while the second one on the right is called the counter or quote currency (in this example, the U.S. dollar).

When buying, the exchange rate tells you how much you have to pay in units of the quote currency to buy one unit of the base currency. In the example above, you have to pay 1.51258 U.S. dollars to buy 1 British pound.

When selling, the exchange rate tells you how many units of the quote currency you get for selling one unit of the base currency. In the example above, you will receive 1.51258 U.S. dollars when you sell 1 British pound.

The base currency is the "basis" for the buy or the sell. If you buy EUR/USD this simply means that you are buying the base currency and simultaneously selling the quote currency. In caveman talk, "buy EUR, sell USD."

You would buy the pair if you believe the base currency will appreciate (gain value) relative to the quote currency. You would sell the pair if you think the base currency will depreciate (lose value) relative to the quote currency.

Long/Short

First, you should determine whether you want to buy or sell.

If you want to buy (which actually means buy the base currency and sell the quote currency), you want the base currency to rise in value and then you would sell it back at a higher price. In trader's talk, this is called "going long" or taking a "long position." Just remember: long = buy.

If you want to sell (which actually means sell the base currency and buy the quote currency), you want the base currency to fall in value and then you would buy it back at a lower price. This is called "going short" or taking a "short position". Just remember: short = sell.

"I'm long AND short."

Bid/Ask

"How come I keep getting quoted with two prices?"

All forex quotes are quoted with two prices: the bid and ask. For the most part, the bid is lower than the ask price.

The bid is the price at which your broker is willing to buy the base currency in exchange for the quote currency. This means the bid is the best available price at which you (the trader) will sell to the market.

The ask is the price at which your broker will sell the base currency in exchange for the quote currency. This means the ask price is the best available price at which you will buy from the market. Another word for ask is the offer price.

The difference between the bid and the ask price is popularly known as the spread.

On the EUR/USD quote above, the bid price is 1.34568 and the ask price is 1.34588. Look at how this broker makes it so easy for you to trade away your money.

If you want to sell EUR, you click "Sell" and you will sell euros at 1.34568. If you want to buy EUR, you click "Buy" and you will buy euros at 1.34588.

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Trading Sessions

Now that you know what forex is, why you should trade it, and who makes up the forex market, it's about time you learned when you can trade.

Yes, it is true that the forex market is open 24 hours a day, but that doesn't mean it's always active the whole day.

You can make money trading when the market moves up, and you can even make money when the market moves down.

BUT you will have a very difficult time trying to make money when the market doesn't move at all.

And believe us, there will be times when the market is as still as the victims of Medusa. This lesson will help determine when the best times of the day are to trade.

Market Hours

Before looking at the best times to trade, we must look at what a 24 hour day in the forex world looks like.

The forex market can be broken up into four major trading sessions: the Sydney session, the Tokyo session, the London session, and the New York session. Below is a table of the open and close times for each session:

Time Zone	EST	GMT
Sydney Open Sydney Close	5:00 PM 2:00 AM	10:00 PM 7:00 AM
Tokyo Open Tokyo Close	7:00 PM 4:00 AM	12:00 AM 9:00 AM
London Open London Close	3:00 AM 12:00 PM	8:00 AM 5:00 PM
New York Open New York Close	8:00 AM 5:00 PM	12:00 PM 10:00 PM

You can see that in between each session, there is a period of time where two sessions are open at the same time. From 2:00-4:00 am EST, both the Tokyo and Sydney markets are open, and from 8:00-12:00 am EST, both the London and New York markets are open.

Naturally, these are the busiest times during the market because there is more volume when two markets are open at the same time. This makes sense because during those times, all the market participants are wheelin' and dealin', which means that more money is transferring hands.

Let's take a look at the average pip movement of the major currency pairs during each trading session.

Pair	Tokyo	London	New York
EUR/USD	76	114	92
GBP/USD	92	127	99
USD/JPY	51	66	59
AUD/USD	77	83	81
NZD/USD	62	72	70
USD/CAD	57	96	96
USD/CHF	67	102	83
EUR/JPY	102	129	107
GBP/JPY	118	151	132
AUD/JPY	98	107	103
EUR/GBP	78	61	47
EUR/CHF	79	109	84

From the table, you will see that the European session normally provides the most movement.

Let's take a more in depth look at each of the session, as well as those periods when the sessions overlap.

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