The forex broker acting as the market maker has to absorb all the buy/sell orders if there is so much market demand to buy above a resistance level or sell below the support. There must be a seller for each buyer and a buyer for each seller. However, you must know that the market maker is not a fool.

Most of the retail traders being new or inexperienced individual investor like to trade the breakouts! The new traders learn technical analysis. They tend to most eagerly follow trade recommendations based on certain chart patterns recommended in the technical analysis courses.

However, the seasoned traders prefer to fade breakouts. They do exactly the opposite of what the crowd is expected to do. Most of the successful traders have contrarian trading approach.

Most of the breakouts fail because the institutional or the seasoned traders take advantage of the crowd psychology of the retail or inexperienced traders and win at their expense. For every loser, there is a winner. Trading is a zero sum game.

Understand the tricks that can be played by the forex dealers and seasoned traders. Market makers, mostly the forex dealers and brokers can fade breakouts. Their game plan is simple. They will make money from the majority of the crowd. The crowd thinks that prices will rally happily after an upside breakout. Similarly, the crowd thinks that it will decline dangerously after a downside breakout.

Whether you like it or not, market makers have to take the opposite side of your trade. They are the pricing counterparties to the retail traders like you and me. Suppose most of the retail traders have placed their stop entry orders at a certain price above the resistance level anticipating a breakout.

Market makers reach into their pockets. They spend some of their money to bid up the price to that level where most of the stop entry levels have been placed. Now they can sell to most of the traders who are desperate to buy. Thus making some decent profits from this trick played on inexperienced traders.

By selling to the retail crowd, the market makers get the chance to close their long positions. Now they begin to short and try to overwhelm the buying crowd. This pushes the prices down, below the breakout level, where many stop loss orders have been placed by the retail traders who wanted to trade the upside breakout.

Market makers happily offload their short positions now by buying from the retail traders who are selling to close their losing breakout trades. Market makers have the information of their customers orders from their order book. Thus a potential conflict of interest exists and retail traders must know how to protect themselves.

Retail crowd thinks that the false breakout is due to the sudden turning of the market. Market makers often go on the stop hunting spree. False breakouts maybe the consequence of that! These false breakouts are most likely the direct result of the games market makers play.

Fading breakouts refers to trading against breakouts when you believe that the currency prices will not be able to follow through action in the direction of the breakout. We fade breakouts when we believe that breakouts from support and resistance levels to be false and unsustainable.

False breakouts are a bane for breakout traders but boon for breakout faders. False breakouts are also known as fakeouts. Fading breakouts tends to be more effective as a short term strategy. Fading breakout is not meant to be a long term strategy.

Support and resistance are seen as the price floor and the price ceiling respectively. Support level attracts the buyers enthusiasm for higher bids and prevents the price from falling further. The resistance level attracts the sellers enthusiasm for shorting. It prevents the price action from advancing higher.

The crowd likes to trade the breakout. The idea of trading breakouts appeals to many independent traders especially those new to currency trading. It is perfectly logical for the crowd to think that if the support level is penetrated, then the price action should move downward. The crowd is more likely to sell than to buy.

The opposite is true of a price break above the resistance level and the crowd usually concludes that if the resistance is broken, then the prices are more likely to advance higher in the rally. Hence, the crowd is more likely to buy than to sell when the price action breaks the resistance level from below.

Now you can understand why there tends to be large number of entry stop orders placed just above a resistance level and also placed below a support level. You will also find clusters of stop loss orders placed by traders who have brought near the support level or have sold near the resistance level.

Short positions will be stopped out when the price action breaks out above the resistance level. Similarly, when the currency prices crosses below the support level, long positions will be stopped out.

Why most breakouts fail? One of the most important reasons why most breakouts fail is due to the fact that smart traders need to take the money from the novice and inexperience traders. The majority will cash out of the trading game broke. Always remember, it does not always pay to have the same mentality as the crowd.

The crowd holds the dumb money with the weak hands. Smart money belongs to the big players who have a couple of tricks to sabotage the crowd. Money has to be made from the majority. Not from the minority who got it right.

The most money is made when the crowd turns out to be wrong. When the crowd scrambles to get out of their losing positions, it causes vertical rallies or declines. Read Part II for more.

Being new to FOREX trading? Dont worry, getting started in FOREX trading is easy and you can always test your skills first in a demo account before you go live with real money. To get started in FOREX trading, we have to get to know what FOREX is. For the inexperienced, FOREX trading involves buying and selling the different currencies of the world. A FOREX deal is made when one buys one currency and sells another at the same time. It is always traded in pairs, Euro/USD, CHF/USD, USD/JPYyou get short in a currency every time to buy another and the profit is made when you buy-low and sell-high.

Be on the FOREX market

FOREX market is the largest trading partner in the world. There is an average turnover of $ 1.9 trillion per day and the number is almost 30 times greater than the volume of shares trading in the United States. FOREX trading is very unique, because the transactions are between two partners over electronic network or telephone connections. There is no central place, such as equities or futures markets and trade around the clock. Everyday FOREX trading begins, if the financial centers in Sydney start their day, and moves around the globe in Tokyo, London and New York. Dealer may, at any time on the market, regardless of local time.

Although FOREX trading involves such a big volume of trades nowadays, it is not made available for the publics until year 1998. In the past, the FOREX market was not offered to small speculators or individual traders due to the large minimum business sizes and extremely strict financial requirements. At that time, only banks, big multi-national cooperation and major currency dealers were able to take advantage of the currency exchange market’s extraordinary liquidity and strong trending nature of world’s main currency exchange rates. Only until the late 90s, FOREX brokers are allowed to break huge sized inter-bank units into smaller units and offer these units to individual traders like you and me. Nowadays with the rapid growth of Internet and communications technology, FOREX trading has become one of the hottest make-money-at-home-businesses for those who wish to avoid conventional 9-5 day job.

As a fact in FOREX trading, FOREX is mainly traded in large international bank. According to Wall Street Journal Europe, 73% of the trade volume is covered by the major ten. Deutsche Bank, topping the table, had covered 17% of the total currency trades; followed by UBS in the second and Citi Group in third; taking 12.5% and 7.5% of the market. Other large financial cooperation in the list is HSBC, Barclays, Merril Lynch, J. P. Morgan Chase, Coldman Sachs, ABN Amro, and Morgan Stanley. For market participants segment, approximately half of the transactions done were strictly between dealers (i.e. Bank, or large currency dealer); others are mainly between dealer and non financial institutions.

Why FOREX is popular?

There are several reasons why FOREX had such a popular investment among world wide speculators.

In FOREX trading, you can always use technology for your own advantage. The FOREX market has made an amazing transformation since the advent of the internet. Technology has now made it possible for smaller investors to play on the same level as larger corporations and banks. Anyone with a computer and a will to succeed can start trading currencies from the privacy of their home or office. Online FOREX trading has changed the way that investors do business. With access to your portfolio 24-hours a day, it is really very simple to get started. You can choose whether to hire a professional to handle your transactions, or you could choose to do them yourself.

In addition, Forex trading provides relative large leverage rates to individual traders. FOREX traders can do business with a maximum of 200 to 1 leverage rates. With this advantage, ROI is increased dramatically and traders can always start small with a capital of up to $ 1,000.

Getting started in FOREX trading

You do not need much to work with FOREX trading. A computer with Internet access, a funded FOREX account with foreign currency exchange broker, and a trading system should be sufficient to start things.

To reduce the risk of losing money, some basic graphics are also recommended before you start trading FOREX. FOREX charts assist the investor by providing a visual representation of fluctuations in exchange rates. Many variables affect currency exchange rates, as interest rates, bank policies, geopolitics, and even the time of day may affect exchange rates. As stated by experts FOREX trader Peter Bain, is a graphical tool in Forex Trading. In his newsletter, he reveals that daily charts, hourly charts, and 15-minutes, while the charts are used in FOREX trading. As quoted from his newsletter – “Daily chart will help you define the general trend from a position trading point of view, and time (hour) chart will give you a feeling of intraday trend. The 15-minutes chart is used for entry and exit – with the help of five minutes chart, in which the price is moving quickly, and you need to be closer to the action. ”

Being one of the technical method, FOREX charting is based on the principal history repeats itself. FOREX traders who study charts predict the market future by evaluating past market performance. The time frame used for charting might differs for different traders, some analyze the past one week, some prefer six months analysis, and there are also traders who analyze the market for the past five to ten years before getting involved in a FOREX trade. A huge variety of FOREX charts are available in the market. Some charting methods are very simple, using a few FOREX indicators to show trading direction; other charts may include up to forty indicators and those are mainly for advance traders that are more skillful. MACD Divergence, RSI, RSI range, and price are some of the well known indicators in charting.

Choosing the right FX dealer is a way to avoid unnecessary risks. FOREX dealers are not all regulated the same way. Although FOREX dealers must be regulated by law, firms and individuals can solicit retail accounts for FOREX dealers and manage those accounts without being regulated. As a trader you should take up the responsibility of finding out if your FOREX dealers are regulated. If they are not, you may be exposed to additional risks. Also, beware of dealers with investment schemes that sounds too good to be true. Pay extra cautions to dealers that you first knew and always look into the investment offers. If you are from United States, you can always refer to CFTF (at http://www.cftc.gov) or NFA (at http://www.nfa.org) for further information.

Conclusions

You come to this article, probably because you are new to FOREX and were looking for some readings on the internet. To be honest, FOREX can be very profitable, but is below the risk is equally large. Remember to always trade with proper investment plan and strategy. Read books, attend courses, seminars, videos, read documents, or even practice first with a dealer demo account to get ready. Trade smartly, and gain maximum FOREX – good luck!

Based only on the market activity of the previous few days, most candlestick patterns are valid. Using one of these without knowing about the previous trends wouldn’t be very useful. For instance, some of the candlestick patterns indicate a change in trend.

What you should do based on that candlestick pattern depends on the context. Usually the context in which you find the candlestick pattern tells you a great deal about them. Lets consider simple candlestick patterns first.

The Bullish White Marubozu: A long white candle represents the day when bulls control the market. The bulls push prices higher from the opening to the closing. The longest white candle is the most bullish of the candlestick patterns. Chances are with the long white candle closing near the high, the bulls will be back for more buying the following day.

This means that buying has been taking place all the day. The low price on the candlestick is a good support level with the long white candle. One common feature of the long white candle is an opening price near the low of the day and a closing price near the high of the day.

The Bullish Dragonfly Doji: A Doji is formed when the opening and the closing prices are the same. So essentially there is no stick in the candlestick. For a Doji to be created, a day must begin and end with the same price.

Doji patterns are usually associated with a market turn. Doji depicts a day where the battle between the bulls and the bears has been fairly equal. A Doji may not look very exciting to you. But dont be fooled.

A Dragonfly Doji is unique in that three of the four candlestick patterns- the open, high and the close are all equal. The price action depicted by the Dragonfly Doji bodes very well for those hoping that prices go higher. The low of the Dragonfly Doji day is considered a near term support level. You can make smart trades based on the Dragonfly Dojis.

The Bearish Long Black Candle: A long black candle means that sellers take over at the beginning of the day and push prices lower and lower until the end of the day. The long black candle is the direct counterpart of the long white candle discussed earlier. The long black candle is as bearish as it gets.

Price sensitivity is very low for these sellers. These sellers are selling just to get out of their trades. Seeing this type of enthusiastic selling must give you the confidence after the appearance of the long black candle that the bears will be in control for a few more days. The long black candlestick pattern is a good bearish signal. You can capitalize on this fact.

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