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Catching big reversals is something that many new traders day-dream about but rarely ever succeed in doing. However, the 5-0 pattern offers traders the opportunity to catch these types of market moves by finding a unique entry point.

Ok so, looking at the bullish version of the pattern first then. We want to initially identify a bearish drop in price which we call the 0X leg; this is the leg that leads into the setup of the pattern. From here we then need to identify a retracement higher which is the XA leg and the start of the pattern. Price then drops down from here to put in a new low below the X0 low, giving us our AB leg.

For a clean, textbook 5-0 pattern, this low needs to be between the 1.13 - 1.618 extension of the XA leg. This gives us our AB leg. From this low, we then need to see price reverse and trade sharply higher moving back up above the XA leg high to put in a new high between the 1.618 and 2.224 extensions of the AB leg. This gives us our BC leg. From here we then need to see one final retracement lower which completes into the 50% retracement of the BC leg. This gives us our CD leg and should be equal in length to the AB leg. The completion of the CD leg gives us our buying zone.

Let's now take a look at the bearish version of the pattern which follows exactly the same structure and parameters as the bullish version but obviously this time in reverse.

So, first of all, we want to identify a bullish move in price which leads into the setup of the pattern and gives us our 0X leg. From here we then want to see price retrace lower to give us our XA leg. From this point price will then reverse and trade back up to put in a new high above the XA high, which needs to complete between the 1.13 and 1.618 of the XA leg, giving us our AB leg. From this point price then needs to retrace sharply lower to give us our BC leg, which should complete between the 1.618-2.24 extension of the AB leg.

From here the pattern should see one final retracement higher, completing into the 50% retracement of the BC leg. This final CD leg should be equal in length to the AB leg. The completion of the CD leg gives us our selling zone

Trading The Pattern

With that in mind, let's now take a look at how these patterns present themselves on the charts. I've mentioned this before, but one of the key challenges that many traders face with harmonic patterns is getting used to the different ways the patterns can present themselves in practice. Obviously, when we're looking at diagrams, we're looking at nice smooth lines whereas on the charts the patterns can sometimes be a bit harder to spot because of the way that price moves.

So let's look at some examples starting with a bearish 5 - 0.

In this example, you can see we have a classic bearish 5-0 pattern, and this example really demonstrates beautifully just how fantastic this pattern is for picking out reversals.

You can see that we have our bullish swing in price initially which gives us our X0 leg before we get small retracement lower to give us our XA leg. From here we then get another push higher where price makes a new high above the initial 0X high. This high completes ahead of the 1.618 extension of the X leg and gives us our AB leg.

From this point, we then get a sharp reversal lower with price breaking down below the XA leg low. This gives us our RB leg. From here you can see that we then get a reversal higher to gives us our CD leg. Importantly, note how this pattern completes into the 50% retracement of the BC leg but is also equal in length to AB leg.

Remember, if you want to check that two price swings are of equal lengths you can simply draw a line in to measure the first one and then clone it and apply it to the second price swing.

So, the completion of the CD leg into this area gives us our sell zone where we can look to set short orders. In terms of how we trade this pattern, we have two options. We can look to capture a short-term reaction, or alternatively, we can look to enter and hold for a larger move.

In terms of capturing a short-term reaction, we want to enter short at the 50% retracement of the BC leg with a stop above the 61.8% retracement. We then look to target a move back down into the 23.6% retracement. This gives us a roughly 2:1 return. The beauty of trading the pattern in this way is that generally the reaction will happen very quickly and we are able to achieve a positive risk:reward result in a fairly quick manner, and we don't risk running into a reversal when price hits the BC low, which is the key pivot for the pattern when we are holding for a larger move.

While trading the pattern for a larger move, we would again enter at the 50% retracement but this time place our stop above the 78.6% retracement of the BC leg. From here we are then looking to target a move from the CD high that is equal in length to the BC leg. So, to find our target we can simply draw a line in over the BC leg, clone it and apply it from the CD high point.

Doing this put our target in down here, just slightly below the 0X low and gives us a roughly 3:1 return to risk. Once price hits this target point, traders can then decide whether to bank their position or hold for a larger trending move. If traders decided to hold for longer, it is prudent to trail their stops lower to make sure they lock in some profits in case price reverses on them.

As you can see, the 5-0 pattern can be an exceptional structure for catching reversals and helps traders enter these moves in a safe and methodical way.

Support and resistance levels or supply and demand levels are the backbones of technical trading. Regardless of the type of technical analysis methods used, be it an indicator based trading system or a price action based trading system, support and resistance levels plays a crucial role.

Although not evident immediately, the moving average crossovers or the overbought and oversold levels on the oscillators are often a product of the support and resistance levels, and in most cases, you can see the signals coinciding with the support and resistance levels.

Common knowledge dictates that traders should buy at support and sell at resistance. However, in some cases, you will find that the support or the resistance level that you were hoping to go long from or short from would be breached. In such cases, if you had a pending order, it would most likely be triggered and in some cases hit your stop loss as well.

This brings us to the question as to why support and resistance levels break and if there is a way to identify stronger levels from the weaker ones.

Why support and resistance levels become weak?

Without going too much into the details, support and resistance levels are areas or price zones where the buying or selling pressure overwhelms the other. Thus, price finds it harder to breach these levels and in most cases results in a reversal in the direction of prices.

But this is not always the case as time evolves, these concentrated areas of buying and selling pressure start to become diluted.

Once the levels are weak enough, the price is able to break out from these levels with relative ease.

There are many different ways price breaches or breaks a support or resistance levels. The most common ways are:

1. Price breaks the support/resistance level with a strong bullish or bearish candlestick
2. Price hovers around the support/resistance level, makes a fake breakout and then breaks the support/resistance level

The first example below shows two of the instances mentioned.

Example 1: Support and resistance levels break

There are a number of reasons why support and resistance level can be breached, but here are the most commonly occurring reasons.

Undiscounted news event

The markets typically tend to discount all the news there is to know. Thus, when some new information is revealed, the markets adjust accordingly. This leads to a strong bullish or bearish candlestick that break the most obvious or the nearest support and resistance levels.

In most of these cases, prices don't make a pullback when a support or a resistance level is breached strongly, and trends are often the strongest here at least for a few more sessions.

Price consolidation

When price consolidates around a support or resistance levels, investors start to accumulate prices. The longer price consolidates near a support or a resistance level, the weaker these levels become. Very often, all it takes is a mere market report or an economic release to break past the supply and demand zones.

Fresh versus stale support and resistance levels

Traders should know that a support level can act as resistance and vice versa when it is breached. Support or resistance level is known to be strongest on the first test, and there are higher chances that these levels will hold.

However, caution should be applied as this is not always the case. The next example shows how a freshly formed support level is eventually breached, despite the level staying relatively fresh (being tested just once as support).

Example 2: Freshly created support level is breached

As the above examples suggest, support and resistance levels continue to change as price continues to unfold and new information is digested by the markets. Once a support or resistance level is identified, it is always best to validate these levels with another indicator or with some fundamental analysis in order to ascertain whether the levels will hold or break.

As always, using a level of invalidation for the analysis as the stop loss level can be a simple yet objective way to not only protect the losses but also as a way to invalidate the analysis.

Scalping is an area of Forex trading that always appeals to new traders because of the potential to make big profits, quickly. However, with the high level of reward also comes a high level of risk, so it is super important that you take the time to properly understand scalping before applying it to live markets. As ever we are going to take things slow and steady and make sure that we cover everything so that you are really comfortable.

So, first of all then, what is scalping?

Instead of referring to a specific strategy, scalping refers more to a way of approaching the markets where the trader looks to exit trades as quickly as possible with the intention of capturing only very, very small moves in price. So, where a swing trader on the higher time frames will look to take a trade lasting anywhere between a day and several weeks, looking to capture percentage moves in price, a scalper will look to hold a position for anywhere from a few seconds to a few minutes looking to capture anywhere between 2 – 20 pips usually.

Objectives of Scalping

As scalpers are only targeting such small pip gains, they typically trade with a higher position size than a swing trader would, to make the trade more meaningful. This increased position sizing brings the potential for big profits, quickly, unless, traders are careful they can also expose themselves to large risks. This is why it is extremely important for traders to focus on risk management when trading scalping methods. Key among these is always trading with a stop.

As scalpers typically trade with relatively large position sizes, trading without a stop can quickly see losing positions escalate into unnecessarily large losses. However, if traders always apply a uniformed risk profile and make sure to trade with a stop loss, this creates plenty of room for achieving large trading profits without taking unnecessary risks.

Time Requirements For Scalping

Due to the nature of scalping, it is only suitable for those traders who have plenty of free time to focus on the markets as it can be an intense and time-consuming task. Despite the fact that trades are only held for very short durations, scalpers typically spend a great deal of time watching the markets waiting for trades to setup.

Because they are focusing on the lower time frames where the volatility is more pronounced, scalping is a task which requires a high level of focus. However, for traders who have the necessary time and are able to develop the skills and the discipline required, it can be an extremely rewarding way to approach the market.

Opportunistic Trading

The beauty of scalping is that it allows traders to operate opportunistically in the market, placing trades based on only very short term reactions, instead of a broader directional view. Scalpers typically use strategies that are based purely on technicals while longer term traders might combine technical analysis with fundamental inputs to arrive at a bias for a certain currency pair.

Due to the very short term nature of scalping and the fact that traders are only looking to achieve very small pip targets per trade, it is incredibly important for traders to find a good broker to deal with as unnecessarily wide spreads, as well as slippage, can have a damaging impact on a scalper's results over the long term. Fortunately, Orbex offers very tight spreads and traders rarely suffer any slippage, which makes us a perfect Broker for traders looking to operate a scalping approach.

A Moving Average is one of the most widely used indicators in the financial markets.

Like most indicators, it is very easy to apply on the price chart - you simply drag it onto the prices. Its interpretation is also fairly straightforward; buy above or sell below the moving average line. It's no wonder that so many technical traders, even fundamentalists, use it for their analysis and trading.

Of course, moving averages come in many 'flavours'. Simple Moving Average, Linear Weighted, Geometric, Exponential, Triangular, Volume Adjusted and Variable, to name a few.

If you are new to moving averages, you may be wondering which method is best.

Simple Moving Average (Arithmetic)

Most traders start experimenting with the Simple Moving Average (Arithmetic) in the early stages of their trading career.

This is calculated by adding the closing price of a number of candlesticks (equal to the time period of the moving average) and then dividing this number by the total number of prices. The result is known as the average. The oldest price is then dropped (i.e. discarded from the calculation) and the same formula is applied to the next prices. Therefore, it becomes the moving average.

For example, the calculation of a 5-period simple moving average begins with the prices from index 7 to 3, then the price of index 7 is dropped and the next average includes prices of index 6 to 2, after which the price of index 6 is discarded and the next calculation uses prices of index 5 to 1:

Here is the formula in the form of a mathematical notation:

Simple Moving Average = [Price(n) + Price(n-1) + Price(n-2) + … + Price(1)] / n

Where n is the period of the moving average.

However, when investors gain more trading experience, they start to understand the disadvantages of the simple moving average. Lagging, for example, takes into account only those prices in the time interval and assigns equal weight to all prices in the period. In an attempt to address these types of issues, technical analysts came up with other calculation methods, such as the Exponential Moving Average (EMA).

EMA

This method addresses the biases inherent in the simple moving average, specifically issues with equal weight, since it only accounts for the prices in the predefined period. As a matter of fact, EMA takes into account all available prices in its calculation and assigns more weight to the most recent prices. Lagging, though, remains a disadvantage.

Here is the EMA formula:

EMA = (Price(i)*P)+(EMA(i-1)*(1-P))

Where P is the period and i is the candlestick index.

This is a recursive formula that even the most experienced traders would have difficulty understanding. Perhaps, if we write the formula in a different way, it will be easier to understand. For example:

EMA = (Price current - EMA previous) * multiplier + EMA previous

Where multiplier = 2/Periods + 1

Let's take a look at the calculation of a 10-period Exponential Moving Average. Note that the oldest EMA (i.e. for index 10) is calculated as a Simple Moving Average of the previous prices.

Multiplier = 2/(Period+1)

= 2(10+1)

= 2/11

= 0.18182

Number of Periods

One of the biggest dilemmas a trader faces is deciding how many periods to use with the EMA.

There are a few variables to consider when deciding on the periodicity of a moving average, these include:

• Market Convention
• Constant
• Volatility
• Optimisation
• The predominant cycle

In the stock market, we notice that traders usually rely on moving averages that are 200 periods long. In the foreign exchange market, the period is much shorter; at times it's 50, 20 or 10. Another decisive factor may be the volatility in the specific market. Trending markets imply shorter periods, where low volatility suggests longer lengths to avoid whipsaws (false signals). Frequent optimisation is another way of identifying the "best" possible period. On the other hand, some traders use a constant period for all markets and all timeframes. The choice is yours!

Trend Analysis

Trend identification is one of the easiest ways to use a moving average. When prices rise above the line, then an upward movement could be in the making.

On the other hand, when prices fall below the line, then a downward movement could be starting.

Moving averages make extreme identification look very easy. When prices are far above the moving average, this may signal overbought trading. When prices are far below the moving average, it's an indication that oversold levels may have been reached.

Interpretation

Just like the Simple Moving Average, a buy signal is generated when prices move above the moving average. Similarly, a sell signal is generated when prices fall below the moving average. To avoid false signals, price confirmation is needed most of the time. For example, a buy signal would require a close above the moving average line. Similarly, a close below would be needed for a sell signal.

Undoubtedly, whipsaws or false signals remain one of the major disadvantages of moving averages. One way to reduce them, is by waiting for the 'tip' of the moving average line to turn upwards before placing a buy order, or to point downwards when placing a short position. Needless to say, all signals require confirmation by the price itself.

Of course, moving averages may be combined with other indicators and oscillators to provide traders with greater precision.

Conclusion

The Exponential Moving Average is a useful tool that is part of many traders' arsenals. Its simplicity in trend identification, as well as the fact that this method addresses both criticisms of the simple moving average, makes it the method of choice for many traders. Unfortunately, combined with the delay in signals, false signals can cause difficulties when caught in a sideways market.

Trader's looking to enter the market are often sent off on a journey to discover the 'holy grail' of market entries. They study numerous theories; Japanese candlestick reversals, contrarian theory, oscillator divergence, wave theory, and others. Traders who are just starting out, put their trust in indicators and oscillators and rely on them make the decisions on when to place an order - and the more indicators/oscillators they discover, the more they add into their strategy.

The most neglected indicator/oscillator is price. That's right, price! Price is superior to any indicator and all others come second. It's the only indicator that encompasses everything - economic factors, political and geographical. Novice traders often do not understand the importance of price and most of the time, they don't give it the attention it deserves.

The most effective market entry is trend reversal. After an ongoing trend towards one direction, the market eventually signals the end of that trend and begins a new one towards the opposite direction. In this article, we'll be focussing on a few of the most popular reversal patterns: head & shoulders, double top and triple top.

Head & Shoulders

Head & Shoulders have a reputation for being one of the most dependable reversal patterns. It's a pattern based on price movement and indicates the start of a new trend in one direction, after an ongoing trend in the other direction ends.

How to spot Head & Shoulders:

1. To have a reversal, an existing trend needs to exist, and head & shoulders is no different.
2. A prevailing uptrend (in this case) is made up of consequent higher tops and bottoms.
3. If volume is available, it signals alerts.
4. An upwards move to the Head often illustrates decreased volume (if available) and signals a warning.
5. The right Shoulder is lower than the Head and indicates a potential reversal.
6. A significant close below the neckline (with increased volume, if available) indicates the end of the uptrend and the start of a downtrend.
7. To calculate the minimum price target, project the height of the pattern to the neckline's breakout point.

Triple Tops

Similar to the Head & Shoulders, the Triple Top is made up of three (almost) equal tops and a significant close below the support (bottom) of the formation. It's important to have a break below the bottom in order to have a valid Triple Tops. The three tops on their own are not enough!

How to spot Triple Tops:

1. An existing trend (in this case an uptrend) is vital before you go looking for a reversal.
2. As with Head & Shoulders, the existing trend is marked by its consecutive higher tops and bottoms.
3. If volume is available, it signals alerts.
4. The upwards move to the resistance area indicates decreased volume (if available) and signals weakness to move higher.
5. Equal (or almost equal) tops make up the resistance area.
6. A significant close below the bottom (with increased volume, if available) indicates the end of the uptrend and the start of a downtrend.
7. To calculate the minimum price target, project the height of the pattern to the breakout point.

Double Tops

During an uptrend, a top might surpass a previous top if the demand exceeds the supply. When that trend runs out of gas, it will start showing signs (signals) of weakness. If volume is available, then a decrease in it will be the first signal as it moves upwards. Another signal is if the last top fails to go higher than the previous one. A reversal is confirmed if prices break below the bottom/support area.

How to spot Double Tops:

1. An existing trend (in this case uptrend) is necessary.
2. The existing uptrend is defined by consecutive higher tops and bottoms.
3. If volume is available, it signals alerts.
4. The upwards move to the resistance area indicates decreased volume (if available) and signals weakness to move higher.
5. The tops are equal (or almost).
6. A significant close below the bottom (with increased volume, if available) indicates the end of the uptrend and the start of a downtrend.
7. To calculate the minimum price target, project the height of the pattern to the breakout point.

Price rules supreme over oscillators and indicators. Price discounts for everything that affects the markets and reveals the crowd's (traders) psychology. There are many bearish or bullish trend reversal patterns, and traders should pay more attention to them rather than experimenting solely with candlestick reversals and oscillator signals. Available volume in combination with oscillator analysis, can confirm reversal patterns with higher potential accuracy.

Traders can spend countless hours and days looking for ways to enter the financial market. On their journey to discover the 'Holy Grail' of market entry, they explore Japanese candlestick patterns, contrarian concepts, the large variety of oscillators, the Elliot Wave theory, and a lot of other technical approaches. Beginners usually learn from oscillators and indicators how to identify entries into the market; the more indicators and oscillators get studied, the more they're used in trading.

However, a lot of novice traders neglect one of the most important indicators and oscillators out there - price! The price gives you the full picture of the market, factoring in economic, political and geographic variables. A lot of traders who are just starting out find it hard to use the price as an indicator because they don't have the experience, so they usually cast it aside and put less weight on it. The truth is, price is the greatest indicator - everything else comes second.

As far as the best market entry point goes, most experienced traders already know that it's the trend reversal. This is the point at which a dominating trend reverses course, signalling a shift in the opposite direction. While forex trading is filled with reversal patterns, for the purposes of this article, I will be discussing three types.

Reversal Pattern #1: Inverse Head & Shoulders

After a succession of lower tops and lower bottoms, there comes a moment when a bottom fails to go lower than the preceding one. This is the critical point when demand overpowers supply, and the market becomes crowded with buyers looking to enter aggressively and push the price higher.

Inverse Head & Shoulders: Seven Things You Need To Know.

1. A recognised downtrend needs to exist.
2. A downtrend means a succession of lower tops and lower bottoms.
3. Where available, volume indicates alerts.
4. Where available, decreased volume - associated with a downward move to the head - indicates a warning.
5. An imminent reversal is signalled when the right shoulder is greater than the previous bottom (or the head).
6. Where available, increased volume - associated with a decisive close above the neckline - indicates the end of a downtrend and the start of an uptrend.
7. By projecting the elevation of the inverse head and shoulders pattern to the breakout on the neckline, the minimum price target can be calculated.

Reversal Pattern #2: Triple Bottoms

Similar to the previous reversal pattern, triple bottoms indicate that a downtrend is ending and an uptrend is beginning. Three equal, or nearly equal, bottoms make up this price pattern - together with a definitive close above the resistance (the top) of the formation. It is imperative that prices break over the top of this pattern; otherwise it's not a triple bottom reversal.

Triple Bottoms: Seven Things You Need to Know

1. A recognised downtrend needs to exist.
2. A downtrend occurs with a succession of lower tops and lower bottoms.
3. Where available, volume indicates alerts.
4. Where available, decreased volume - associated with a downward move to the support - indicates a warning.
5. The pattern's support area is formed when the bottoms are equal or nearly equal.
6. Where available, increased volume - associated with a decisive close above the resistance - indicates the end of a downtrend and the start of an uptrend.
7. By projecting the elevation of the triple bottom pattern to the breakout point, the minimum price target can be calculated.

Reversal Pattern #3: Double Bottom

A downtrend will be in full force, as long as there is a succession of lower tops and lower bottoms reflected in the price action. In this scenario, supply overcomes demand and negative sentiment pushes the prices down to lower levels. Where available, volume would indicate the first sign of weakness if it decreases on its way down. A second warning is signalled when the last bottom fails to move lower than the preceding one. Once the price breaks over the resistance level with increased volume (where available), the double bottom reversal pattern is complete.

Double Bottom: Seven Things You Need to Know

1. A previously recognised downtrend needs to exist.
2. A downtrend occurs with a succession of lower tops and lower bottoms.
3. Where available, volume indicates alerts.
4. Where available, decreased volume - associated with a downward move to the bottom - foreshadows an imminent reversal.
5. The pattern's support area is formed when the bottoms are equal or nearly equal.
6. Where available, increased volume - associated with a decisive close above the resistance - indicates the end of a downtrend and the start of an uptrend.
7. By projecting the elevation of the double bottom pattern to the breakout point, the minimum price target can be calculated.

In Conclusion

There are multiple varieties of bullish trend reversals. Many traders, especially novices, tend to experiment with candlestick reversal patterns and oscillator signals, but they seldom explore reversal patterns that are dictated by price. In reality, price is boss and second to none. Price charts incorporate all external factors, including political, economic and environmental data.

Through price, one understands the psychology of the market and its participants. Thus, reversals with a high probability, are directly based on price patterns that are quickly spotted on the chart. For even better accuracy (and where available), volume - together with oscillator analysis - may be used as further confirmation of reversal patterns.

Pivot points are extremely popular with traders, they are used to spot direction, probable reversal points and potential support and resistance levels. It's a well-known tool that is of particular interest to novice traders, due to the simplicity of the mathematical formulas it incorporates.

In the past, pivot point calculations were used on daily, weekly and monthly timeframes. These days, new technology means we can calculate pivot points on smaller timeframes too.

Pivot points use the previous period's open, close, high and low prices to calculate the current period's direction and future support and resistance levels.

Formula

To identify possible turning points on current candlesticks, a pivot point calculation uses the formula below:

Resistance 3 = High + 2*(PP - Low)
Resistance 2 = PP + High - Low
Resistance 1 = 2*PP - Low

Pivot Point(PP) = (High + Low + Close) / 3

Support 1 = 2*PP - High
Support 2 = PP - (High - Low)
Support 3 = Low - 2*(High-PP)

After the main pivot point is calculated; using the most recent candlestick's typical price ((High + Low + Close) / 3), you can proceed with calculating possible support and resistance levels.

The pivot point, in combination with the support and resistance levels, is an intraday trader's 'guide' to the financial markets.

The concept states that, when prices float above the defined pivot point, the market is moving in a bullish direction and is likely to continue moving in an upwards direction, and vice versa. When the prices go below the pivot point, then the market is bearish and prices will probably move towards a downward direction.

Trading Pivot Points

Long positions opened above the pivot point can potentially meet resistance (R1-resistance level 1), which opens an opportunity for day-traders to lock in potential profits. A strong upwards surge above R1, could potentially open the path to more profit opportunities at higher resistance levels (R2 and R3). A protective stop-loss below the pivot point is recommended to avoid losses in case of unexpected volatility.

In the same way, short positions opened below the pivot point can potentially meet support (S1 - support level 1), opening the path for day traders to lock in potential profits. A strong downwards surge below S1 could can potentially lead to additional profit opportunities at lower support levels (S2 and S3). A protective stop-loss above the pivot point is recommended to avoid additional loses, in case of unexpected volatility.

Sideways movements are confined between the pivot point and R1, which are potential buying and selling opportunities for range traders, when prices bounce off the pivot point and rebound back from R1.

In case of a breakout above R1, prices could potentially be driven towards R2, and the pivot point will serve as support and vice versa. If a breakout below the pivot point occurs, then prises can potentially drop further towards S1 and the pivot point will act as resistance.

Additionally, if prices are under the pivot point they may meet support at S1 and bounce back up towards the pivot point.

When prices are confined between the pivot point and S1, also known as a range, potential trading opportunities can occur for buyers when prices bounce off S1 and for sellers when prices bounce back from the pivot point.

Techniques

In total, there are five pivot point techniques used for calculation - including the Standard technique which is the most popular.

1. Standard.

2. Fibonacci.

3. DeMark's.

4. Woodie's.

5. Camarilla.

All techniques, apart from the DeMark formula, use the previous period's high, low and close prices to calculate the pivot point. The DeMark formula uses the relationship between the open and close price, to define one of the three formulas that will be used to calculate X in the appropriate pivot point calculation. In addition, Camarilla uses the current period's open price in the pivot point calculation.

Pivot point calculation techniques vary in terms of the weight assigned to each pivot point level, these are - pivot point, support and resistance, and the distance between each pivot point.

Conclusion

The reason pivot points are still some of the most valuable tools in forex trading, is because they provide a simple way of understanding which direction the market is heading in.

Markets are bullish when prices are above the pivot point and bearish when prices are below.

This tool allows the trader to easily calculate potential support and resistance levels, where prices may halt before continuing to trade sideways, or break above or below a range depending on the supply or demand.

However, just like with any technical analysis tool, in order to give your trading strategy the best potential, pivot points should be combined with other indicators/oscillators and candlestick reversal patterns for extra confirmation.

Most traders, including novices, know that prices that reach the support line, bounce up and prices that reach the resistance line retract. This applies to price activity within a range. In fact, it taps into the very definition of range - price action within a bounded area on the chart. Due to this, range trading is very popular - so much so, that many systems have been designed around trading support and resistance and extracting the most out of the predetermined path of the price.

The problem is that it's difficult to know when the price will ultimately break free from the sideways movement of the range, particularly when volume isn't readily available.

What is Support?

The point when demand overcomes supply, right below the price in question, is known as the support. To put it another way, at this level prices are pushed higher because there's more pressure to buy than to sell.

Once prices reach this level, the dominant movement (downward) stops and the direction changes upward. Support is sometimes referred to as a bottom, or trough.

What is Resistance?

The point where supply overcomes demand, right above the price in question, is known as the resistance. To put it in another way, at this level, prices are pushed lower because there's more pressure to sell than to buy.

Due to this, once prices reach this level, the dominant movement (upward) stops and the direction changes downward. Resistance is sometimes referred to as top, or peak.

What is Uptrend?

A succession of higher tops (or peaks) and higher bottoms (or troughs) form a pattern known as the uptrend. During this type of trend, the levels of resistance are unable to withstand buying pressure as demand dominates supply. As a consequence, prices go through resistance levels and register higher highs on the chart.

What is a Downtrend?

A succession of lower tops and lower bottoms form a pattern known as the downtrend. During this type of trend, the levels of support are unable to withstand selling pressure, as supply dominates demand. As a consequence, prices break through support levels and register lower lows on the chart.

What are Uptrend Lines?

The uptrend line stands in for support during an upward price movement; i.e. it is the line at which prices usually bounce up. As with support, prices are forced higher because there's more pressure to buy than to sell.

What are Downtrend Lines?

The downtrend line stands in for resistance during a downward price movement; i.e. it is the line at which prices usually get pushed back down. As with resistance, prices are forced lower because there's more pressure to sell than to buy.

The Role of the Moving Average

If you want proof that support and resistance levels are not only marked by straight lines, you just need to look at moving averages. These curved trend lines also act as support and resistance.

During an upswing, the price moves away from the moving average and registers higher highs - indicating that demand is overcoming supply. Once the price retreats, it finds support by the moving average, as the pressure to buy becomes stronger than the pressure to sell.

The opposite is true during a downswing. Price moves away from the moving average and registers lower lows - indicating that supply is overcoming demand. Once the price bounces back up, it finds resistance by the moving average as the pressure to sell becomes stronger than the pressure to buy.

How to Trade Support

Most traders keep a very close eye on support and resistance levels during their trading. The logic is quite simple; since prices tend to bounce upward from the support line, the natural reaction is to find a reason to buy.

These reasons usually come in the form of a bullish pattern, such as a double bottom, inverse head and shoulders, or a triple bottom, to name a few examples.

Another reason to buy would be if a bullish candlestick formation like a hammer, is spotted for example.

How to Trade Resistance

Since prices tend to pull downward from the resistance line, the natural reaction is to find a reason to sell.

These reasons come in many shapes and sizes, including the presence of a double top, head and shoulders, or triple top formation.

Another reason to sell would be if a bearish candlestick formation, like a shooting star, is spotted for example..

What is Swing Trading?

Price action is often known to crack the support line and break through the resistance - going against the usual tendency of getting stopped by either level. This price movement can occur during either an uptrend or a downtrend.

In the case of an upward trend, traders tend to buy when the price action punctures through the resistance level. The same is true during a trend reversal; i.e. when a downtrend ends its trajectory and an uptrend starts to form.

In the case of a downward trend, traders usually sell when the price action goes beyond the support level. The same is true during a trend reversal; i.e. when an uptrend ends its trajectory and a downtrend starts to form.

In Conclusion

Many traders will look to support and resistance levels whenever they want to get the most out of a predefined pattern of behaviour, within a limited area on the chart, like a range.

Common practice sees buying at the point when the price bounces from support, and selling when it pulls back from resistance. Traders are warned to be cautious and not get too comfortable when trading support and resistance, but generally speaking, if this kind of behaviour becomes apparent, it's usually a sign of good trading opportunities.

When trading support, look for a solid technical reason to buy - don't just rely on the fact that the price reached the line. The same goes for selling at the resistance level.

In the event that resistance doesn't hold up during an upward movement, and prices burst through one resistance level after another, this becomes a trend-following opportunity to buy.

In the event that it doesn't hold up during a downward movement, and prices breach one support level after another, this becomes a trend-following opportunity to sell.

Ultimately, regardless of what some say, following support and resistance levels can be valuable for a trader, but they should not be relied on completely. Sometimes they hold and sometimes they don't! So trade wisely.

Next week's market movers

• The main event is probably the BoE gathering. We don't expect any action at this meeting, given the stagnant business investment for Q2.
• We expect the SNB to repeat that the franc remains significantly overvalued and that the Bank will remain active in the FX market as necessary in order to curb any gains in the currency.
• In the US, the core CPI rate is expected to have declined somewhat, which could drag further down the probability for another Fed rate hike by year-end to drop further.
• On the other hand, we see the case for both the headline and core CPI rates in the UK to have risen. One of the reasons for that may be the recent depreciation of the pound against the euro.
• We also get more key economic data from Sweden, Australia, the UK, the US, and China.

On Monday, there are no major events or indicators on the economic calendar.

On Tuesday, Sweden's CPI data for August are coming out. Expectations are not public yet, but we believe that both the headline CPI and CPIF rates may have pulled back. We base our view on the fact that since June, SEK has appreciated notably against both the dollar and the all-mighty euro, something that may have eventually weighted on Sweden's inflation. That said, we believe that market participants will place all their attention to the CPIF print, given that at its latest gathering, the Riksbank decided to adopt inflation measured in terms of the CPIF with the target staying at 2%, but with a variation band of 1-3%.

We get CPI data for August from the UK as well. With no forecast available yet, we believe that both the headline and the core rates may have rebounded somewhat. Our view is based on the nation's services PMI, which showed that firms increased their average prices charged in August at the highest rate since April. The recent depreciation of the pound against the euro supports further the case for accelerating inflation. Even though a rebound in the CPI rates could revive some speculation with regards to a BoE rate hike this year, we remain skeptical on that prospect. (See BoE policy meeting below).

On Wednesday, the UK employment report for July is coming out. No forecast is available at the moment, but we see the case for the unemployment rate to have fallen further. The services PMI showed that jobs growth rose to a 17-month high, while the Markit/REC report on jobs, showed that permanent placements increased to the greatest extent in 27 months. What's more, the Markit jobs report showed that starting salaries continued to rise in the month, with the rate reaching a 20-month record. This makes us believe that wages may have accelerated, which would be pleasant news for BoE Governor Carney, who a few months ago noted that a rate hike may depend mainly on firming wages and improving business investment. Having said that though, the fact that business investment was stagnant in both quarterly and yearly terms during Q2 will most probably keep BoE hands off the easing button on Thursday.

On Thursday, the main event will be the Bank of England policy decision. The consensus is for the Bank to keep its policy unchanged via a 6-2 vote. At its latest meeting, when alongside the rate decision and the meeting minutes, the BoE published its quarterly Inflation Report, the Bank reiterated that policy may need to be tightened to a somewhat greater extent over the next 3 years than what was implied by market pricing at the time. Nevertheless, it signaled little urgency for a hike in the next months, while it revised lower its inflation and economic growth forecasts.

Since then, CPI data showed that both the headline and core inflation rates remained unchanged in July, but as we noted above there is the possibility for a rebound in August's prints. Meanwhile, although we expect wages to have accelerated in July, the 2nd estimated of GDP confirmed that economic growth was only +0.3% qoq in Q2, and most importantly business investment prints for the quarter were stagnant in both quarterly and yearly terms.

As such, we don't expect the Bank to proceed with hiking rates at this meeting, neither at one of the remaining ones until the end of the year. At the time of writing, the UK Overnight Index Swaps (OIS) suggest that the probability for a hike by year-end is 24%. Even though this appears low at first glance, having the aforementioned economic developments in mind, we thing that it is still overly optimistic.

The key risk to our view remains the same as back in August. Despite economic developments suggesting a relatively low likelihood for a hike in the near-term, the BoE may want to revive speculation on that front in order to support the pound and thereby, curb inflation. In this case, Carney could say that the MPC discussed the prospect of a hike, but decided against it for now.

In Switzerland, the SNB will announce its rate decision as well. Economic developments have been somewhat decent since the Bank last met. On the inflation front, the CPI rate dropped notably in June, rebounded thereafter and in August it matched its May levels. The unemployment rate remained unchanged in July, while growth is expected to have accelerated, but slightly, in Q2. As for the all-important franc, it weakened notably against the euro, but it remained relatively unchanged against the dollar. However, the recent weakness against the euro has failed to boost Switzerland's economic outlook in a meaningful way, evident by the disappointing KOF indicator and Credit Suisse investor sentiment index, both for August.

Therefore, we don't expect the SNB to change tune. We think policymakers are likely to repeat the usual mantra – that the franc remains significantly overvalued and that the Bank will remain active in the FX market as necessary in order to curb any gains in the currency.

As for the economic indicators, during the Asian morning, Australia's employment data for August are due out. Our own view is that the labor market may have posted another month of solid employment gains, something supported by the ANZ job ads indicator, which showed advertisements rising for the 6th consecutive.

From China, we get retail sales, industrial production and fixed asset investment, all for August. Expectations are for retail sales as well as industrial production to have accelerated in yearly terms, while fixed asset investment is expected to have slowed somewhat. The forecasts for retail sales and industrial production are supported by the nation's official manufacturing PMI, which showed that output growth was faster compared to a year ago. What's more, the production sub-index was much higher than August 2016.

In the US, we get CPI data for August. Given the increasingly concerned remarks on Wednesday by Brainard and Kashkari over inflation and interest rates, this set of CPI data is likely to attract more attention than usual, as it could prove critical on whether the FOMC will indeed proceed with another rate hike this year. Expectations are for the headline rate to have ticked up, but for the core rate to have ticked down. This combination makes us believe that the rise in the headline rate may be owed primarily to movements in volatile items, such as energy-related products and food. Therefore, as long as core inflation remains subdued, we doubt that the headline print will be enough to drag forth expectations for the next Fed hike. Actually, we believe something like that may be the reason for the number of concerned policymakers around inflation to increase at the upcoming Fed meeting, and for the probability for another rate hike by year-end to drop further. According to the Fed fund futures, that probability currently stands at around 30%.

Finally on Friday, we get the US retail sales for August and expectations are for both the headline and core rates to have declined somewhat. That said, both the nation's consumer sentiment indices for the month did not paint a clear picture. Even though the U o M print declined, the Conference Board index continued to rise, making us hesitant to place too much faith in the forecast.

• Investors Beware: Risk Is Underpriced! - Peter Rosenstreich
• Draghi Passes The Hot Potatoe - Arnaud Masset
• JPY Ignoring North Korea - Peter Rosenstreich
• Cryptocurrency Miners

FX Market - Investors Beware: Risk Is Underpriced!

Central banks are suppressing the true price of risk in rates, which in turn are distorting all other risk measures. For instance, while Greece 2-year yields were at 9.5% seven months ago, now they stand at 2.67%. That is on par with dysfunctional Argentina's debt and only 60 basis points above that of AA-rated New Zealand's! Ok, the view is that Greece will be backstopped by the ECB (bolstered by German Chancellor Merkel's pro-EU election platform and French President Macron's speech yesterday in favour of EU integration). Nonetheless, investors should be wary of Central Banks 'miracle solution' for managing debt and avoiding default: the unadulterated creation of raw capital.

Concern about this is surprisingly low. The VIX index of volatility is trading at a modest 12, despite lingering concerns of nuclear war with North Korea. Capital continues to flow out of the USD and into emerging markets. The trend is accelerating, as Chinese trade data suggest, with a 5.5% year on year jump in exports and whopping 13.3% year on year surge in imports. This is boosting currencies such as the INR, SGD and IDR. However, we continue to "make hay while the sun is shining" however we are sensitive to the markets artificial comfort level.

So if there is no any longer credit risk, any return is a good return. Which is why shares in the Swiss National Bank stock (yes, the SNB is a publicly traded company) continues to rally. Printing francs to buy Euros and equities is a great business model.

Economics - Draghi Passes The Hot Potatoe

In spite of huge market expectations, Mario Draghi gave little information during the conference that followed the last ECB meeting, playing for time once again. As broadly anticipated by market participants the European Central Bank did not change the level of any of its three key interest rates. However, investors were hoping that Draghi will come with a plan regarding the future of the central bank's quantitative easing program. The ECB's president chose to leave this announcement for the end of the year as he declared the QE will run as such until December or even beyond if necessary.

Investors were also expecting a reaction to the euro appreciation of the last few months as it creates some significant downside risk for growth and inflation. Once again they were quite disappointed as Draghi only declared that the "euro volatility represents a source of uncertainty." He didn't appeared too worried about the recent euro strength and did not suggest it will interfere extensively on the central bank policy. Therefore investors will have to wait until the ECB next meeting in October or most likely in December to get answers to their questions regarding the EUR/USD spiked to $1.2059 during the press conference and continued to rally during the Asian session, consolidating at around $1.2050. The fact that Draghi appeared not too concerned about the euro strength was interpreted as a bullish signal by investors. They quickly forgot that he did not provide any hint about tapering, which is definitely not a sign of confidence in growth and inflation outlook but rather a hint that Draghi wants maximum flexibility.

With the ECB meeting behind us, investors will now focus on the next big event that is the FOMC meeting on September 20th. Although the Fed hiking cycle seems on pause for now, with investors not pricing any interest rate hike before next year, investors are impatiently awaiting the Fed to finally reveal the starting date of its balance sheet unwinding programme.

In the meantime, the US dollar may continue to lose ground as investors discount Trump's reflation trade and an aggressive pace of tightening from the Federal Reserve. However, the huge amount of short dollar position suggests that the downside is rather limited, especially considering that Yellen could hardly disappoint expectations since there is none. The risk is therefore skewed to the upside ahead of the FOMC meeting.

Economics - JPY Ignoring North Korea

We remain perplexed by the steady appreciation of the JPY. Tensions around North Korea remains at a worryingly high level. South Korean Prime Minister Lee has suggested that North Korea might be planning a missile launch test on Saturday, which follows last week's thermonuclear test. Judging from market volatility indicators there is minimal concern across markets. However, unnerved by the threat, South Korea took delivery and deployed of four THAAD anti-missile defense launchers. Clearly, South Korea has a different view of the situation. In the FX market, JPY shrugged off the news and led the week's FX outperformers.

Traders seems to continue to see JPY as a "safe-haven" trade despite Japan being clearly in North Korea's cross hairs. We are seeing slight JPY wobbles on geopolitical disturbances but the currency quickly recovers. Markets are blissfully unaware of the tails in these circumstances.

The yen has been trading on interest rate differential and markets are unwilling to release this driver in-spite of mounting risks. The BoJs strategy of yields curve control has been successful in yields pinned to a low level. All the while, US yields have been shifting lower, narrowing key interest rate differentials. Persistently low domestic yields should force Japanese investors to look abroad for opportunity, yet that is no longer happening. Domestically, there is increase probably that Prime Ministers Abe early resignation could derails the BoJ policy. Which could explain why we are not seeing aggressive rotation out of JGBs into foreign assets. However, Kuroda's doves control the BoJ, so while no additional easing is likely, the BoJ is not going to move-off their yield curve control. Given the current logic, the JPY trend will be dependent on foreign central banks normalization strategy.

While the Fed interest rate path has decelerated, we anticipate a policy hike in December. In our view, the miscalculations of risk emulating form North Korea combined with higher US rates should provide plenty of upside to USDJPY.

Themes Trading - Cryptocurrency Miners

The world of cryptocurrency is exploding. The utility of alt-coins has been exhaustively debated, with the overall result positive on the outlook for virtual currencies. While it remains uncertain which coin or token will become the dominant currency, what is clear is that the ecosystem will continue to thrive.

Cryptocurrencies might only exist virtually, but real-world technology is the driving force behind them. Mining, the process by which new coins enter the system, is very IT-intensive. Implemented in massive data centers with significant server computing power, mining demands the most innovative processors, graphics cards and memory chips available. The staggering price of Bitcoin and Ethereum, alongside numerous other alt-coins (Dash, LiteCoin, etc.), has led to a ground war for computing power, with miners competing for the biggest and best technology. This new client segment has pushed established vendors and FinTechs to create products to satisfy demand. AMD's Computing and Graphics segment, which includes its Ryzen processors and Vega graphics processors, saw revenues increase by 19% in Q2 2017, to $1.22 billion.