Principles of the forex trading beginner strategy

The forex beginner strategy teaches you the basics of reading charts and gets you used to entering trades – it is an entry point into forex trading. You learn by doing and for this reason we have told you what to do, but not why you should do it.

For example, we make use of fractals to make decisions, but we do not tell you why we use fractals or what they really are. In this lesson we explain the principles and the idea behind the forex beginner strategy to give you a broader understanding of how the beginner strategy works

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Fractals signal a reversal

Fractals are an indicator and they signal that the market direction could reverse.

When a fractal appears on your chart, it is telling you that a particular type of price action has happened in the market and that a reversal is likely.

When an up fractal forms, it is because the following has happened:

  1. The price has made two highs – the buyers made two attempts at pushing the price up.
  2. The price has made a higher high – the buyers made a bigger attempt at pushing the price up.
  3. The price afterwards made two lower highs – the buyers made two further attempts at pushing the price up, but could not get the price as high as the three earlier attempts.

The following chart shows this price action on a chart:

Up fractal formed after two high, a higher high and then then two lower highs
number_1 Two highs
number_2 Higher high
number_3 Two lower highs

This pattern is common in the markets and when this happens, your trading software puts a fractal above the highest high.

The buyers in this case have attempted to push the price to a higher level no less than five times, however the selling pressure was too great, in which case this signals that the sellers are in control and so it is likely that the price will reverse to the downside.

When a down fractal forms, this is the other way around:

  1. The price has made two lows – the sellers made two attempts at pushing the price down.
  2. The price has made further low – the sellers made a bigger attempt at pushing the price down.
  3. The price has then made two higher lows – the sellers made two further attempts at pushing the price down, but could not get the price as low.

The following chart shows this price action on a chart:

Up fractal formed after two highs a higher high and then then two lower highs
number_1 Two lows
number_2 Lower low
number_3 Two higher lows

The sellers in this case have attempted to push the price to a lower level no less than five times, however the buying pressure was too great, in which case this signals that the buyers are in control and so it is likely that the price will reverse to the upside. When this happens, your trading software puts a fractal below the lowest low.

Trading platforms can jump the gun

Some forex trading software, such as MT4, will print a fractal when the pattern starts to form. It puts the fractal onto the chart at the time of the highest high or lowest low – it does not wait for the pattern to complete, but rather alerts you to the fact that the pattern is currently forming. However, because it is not complete, you have to wait for the last two candles to make sure that the pattern has finished forming and that the fractal does not disappear.

Why do we wait for the price to break the fractal?

Using the example of a down fractal, when it is printed, this means that a reversal could happen. That is, the sellers have attempted to push the price down, but the buying pressure was too strong.

Because of this, there are many traders that open buy positions in the market. This is logical, because the price behaviour has shown that a reversal to the upside is likely. Those traders that are opening buy positions are likely to be placing stop losses on various levels below the fractals and the lows of the candles.


Down fractal showing reversal and where stop losses could be placed

number_1 Fractal indicating a reversal to the upside
el2 Likely long entry after the fractal has appeared
sl3 Likely stop loss placement below the fractal.

When you buy, your stop loss is actually a sell order – it closes your position by selling the asset that you bought.

If the price was then to break below this level, then these stop losses will be triggered, adding additional selling pressure in the market. Under this selling pressure, the price is likely to fall.

Break through of down fractal

number_1 Down fractal that has been broken by the price
number_2 Under additional selling pressure, the price continues further.

So we wait for the fractal to be broken because the fractal itself provides a strong signal that the market may reverse, but a broken fractal gives an even stronger signal that the market will continue. This is why we use broken fractals to determine the market direction and to enter into the market.

If you would like to learn more about fractal, then you can visit our lesson:

Lesson
Learn how to use fractals to identify the market direction and help place stop losses.
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Pivot points are more than just random lines

Pivot points are price levels that have been calculated from price action that happened the day before. They are used by many traders, including banks and financial institutions to enter and exit the forex markets.

Pivot points are calculated from yesterday's data

To calculate pivot points, you take the average price between the previous day's highest price (H), lowest price (L) and closing price (C):

(H+L+C)/3

This gives you an average of the most significant prices from the previous day. If the price is trading above this average, then it stands to reason that there is a higher amount of buying pressure in the market and vice versa if the price is trading lower than the average of these prices.

For this reason, it is said that this price level – the main pivot or daily pivot – is the point at which the market “pivots” around, which is just another way of saying “centred” around. This is where the name pivot point comes from and so you can think of the daily pivot as the centre point of the market.

This means that when the price reaches the pivot point from below, sellers are likely to come in and push the price down and when the price reaches it from above, buyers are likely to come in and push the price back up. Of course, sellers and buyers can push the price below and above the daily pivot point respectively, however, it generally acts as a floor or a ceiling at which the price is likely to stop once the price has reached it.

The additional pivot points, R1, R2, R3 and S1, S2 and S3, and the mid-pivots, labelled as M1, M2 etc, are all calculated from the daily pivot.

The following chart shows the pivot points on a price chart:

Pivot points

Buyers and sellers use pivot points to enter

When the price reaches anyone of these price levels, then traders are likely to sell if the price has reached it from below, or buy if the price has reached from above.

The following chart demonstrates how in an up trend, the price reacts around the pivot point levels, because traders are selling or closing their buy positions. The green shaded areas in the chart show the point at which the price meets the pivot levels.

Pivot points

The pivot level at number_1 is stopping the price from going down any further. When the price moves up to the second pivot level, shown as number_2, you can see how the price seems to stop and struggle to get higher. This demonstrates that for a time, the sellers were entering the market at this level. When eventually the price moves up again and meets the third pivot level, shown as number_3, the price again stops as buyers close their positions and sellers open new positions.

If you know that the majority of traders are using pivot points to make trading decisions, that is, where they are buying and selling, then price is more likely to react around these price levels. Understanding this means that you know two things:

  1. When the price reaches a pivot point there is a chance that the price will not go any further.
  2. Other traders are likely to wait until the price reaches that price level before they make trades, which makes it even more likely .

For this reason, they make very good profit targets.

If you would like to learn more about pivot points in detail, then you can go to the following lesson:

Lesson
Pivot points make excellent support and resistance levels. Learn what they are and how you can use them for trading decisions.
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Multiple time frame analysis can enhance results

The forex beginner strategy uses the principle of multiple time frame analysis because of the benefits in reducing the risk as well as maximising the probability of the trade working out.

Increasing the probability

By understanding what is happening over a longer period of time, you can make more accurate decisions when looking for trading opportunities on the smaller time frames.

If there is a long-term trend on a higher time frame, then trading in the direction of that trend on the lower time frame is likely to produce a higher probability of winning trades.

That is the idea behind using multiple time frame analysis in the beginner strategy. When you look at the chart on a 30 minute time frame, you are not just looking at the price action over a thirty minute period, you are observing the price action of at least the last day or so.

This means that you can observe the general direction over the last few hours and then trade in that direction.

Of course it is not easy to always decide which way the market is trending, which is why we make use of the fractals that give a clearer indication when the price breaks through them.

The green shaded area is the same price and point in time on both the 30 minute chart and the 5 minute chart.

The following two charts show the same time and price action on the 30 minute chart and the 5 minute chart. The green shaded area highlights the exact point in time that we are observing. On the thirty minute time frame, you can observe that the trend is up. This is further confirmed by an up fractal, shown at number_1, being broken, shown at number_2.

Higher time frame 30 min

number_1 Up fractal being broken
number_2 Break of the up fractal indicating an upward direction in the trend

This means that if we now take long trades, we are trading in the direction of the trend and so the trades we take have a better chance of working. We can then go to the lower time frame and find more precise entries.

The following chart shows the same period in time on the five minute chart. Following the beginner strategy principles, we now look for a broken down fractal, shown as number_1, followed by a broken up fractal number_2, at which point we enter.

Lower time frame 5 min

number_1 Down fractal and the break
number_2 Up fractal and the break, at which point you would enter the long trade

This means that now you can trade in the same direction as the overall trend and maximise the potential for winning trades.

Reducing the risk

When you switch to the five minute time frame, the time period along the bottom stretches over a much smaller time period than it would on the thirty minutes.

You might also notice that the price moves further in a thirty minute period than it does in a five minute period. The candles on a five minute period will therefore be smaller than they would on a thirty minute period.

The beginner strategy instructs you to place a stop loss at the tip of a down fractal in a long trade and the tip of an up fractal in a short trade. Because the candles on a five minute chart will be smaller in comparison to the thirty minute chart (because the price does not move as far on the five minute chart), this means that the stop loss on a five minute chart will be closer to the entry than it would if you made an entry using the 30 minute chart alone and placed a stop loss on the thirty minute chart.

The green shaded area is the same price and point in time on both the 30 minute chart and the 5 minute chart.

The following two charts demonstrate this. The green shaded area is again the same price action and point in time on both the 30 minute chart and the 5 minute chart. On the 30 minutes chart, if you would have entered using the break of the an up fractal, shown as number_1. then the stop loss would be placed at the tip of the last down fractal, shown as number_2. As you can see, this is a considerable distance between the entry at number_1 and the stop loss at number_2, shown by number_3 – over 65 pips.

Reducing the risk 30 minute chart

number_1 Break of an up fractal
number_2 Most recent down fractal where the stop loss would been placed if the trade was taken on the 30 minute chart.

The following five minute chart demonstrates that by waiting for a good time to enter, you can trade in the current direction of the trade, but the entry, shown as number_2, is a much shorter distance to the last down fractal, shown as number_1, than on the 30 minute chart. The distance between them, shown as number_3 is just over 12 pips away, a much lower risk than over 65 pips on the 30 minute chart.

Reducing the risk 5 min chart

number_1 Most recent down fractal where the stop loss would be placed
number_2 Break of up fractal signalling the long entry

You have reduced the risk of the entry on the lower time frame, however you are trading in the direction of the over all market trend and so you have combined the benefits that both time frames offer


If you would like to continue learning more about multiple time frame analysis, then you can go to our following lesson:
Lesson
Learn how to use multiple time frame analysis to reduce risk and find more accurate entries.
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If you would like to continue with more forex beginner strategy concepts, then you can continue to our next lesson that shows you how to find hidden opportunities:

Lesson
When you switch to the five minute chart, you may be able to trade straight away. Learn how to spot the opportunities without having to wait for certain fractals to form.
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  • In the section "Fractals signal a reversal", under the chart for a low fractal shouldn't number 3 be "Two higher lows"?
  • Hi bencoy,

    Great, you´re very attentive!

    Thank you very much for your feedback happy yes, you are right. We will correct it asap.

    btw, how do you like the idea behind the beginner strategy?
  • MBranjo:
    Hi bencoy,

    Great, you´re very attentive!

    Thank you very much for your feedback happy yes, you are right. We will correct it asap.

    btw, how do you like the idea behind the beginner strategy?

    I really like the idea behind the beginner strategy. I've tried looking into trading before but its so overwhelming and difficult to know where to start. The beginner course really helps with this.

    I'm hoping there will be more information on the site on where to go next and what to learn after the beginner course.
  • I´m really glad that you like it. happy

    Yes, that´s the goal of the beginner strategy - to help you learn the basic principles on which you can build after you will be more experienced in trading. smile

    If you are interested in more chart analysis materials, I´m glad to to tell you that right now, we have 9 new chart analysis lessons now available for you!

    Enjoy. wink
  • Hey Branjo,
    Under the last chart of this page the numbers attached to the signals have been mixed up. It says:
    1. Break of up fractal singling the long entry
    2. Most recent down fractal where the stop loss would be placed
    While this has to be turned around right?
  • Hey,

    You are right, the numbers are mixed up. Thanks smile I will escalate it!
  • Hi Thom,

    The problem with numbers has been fixed. happy Thank you very much.

    I see that you started to be quite active but haven´t introduced yourself to the community yet. If you want to, you can do it here: Introduce yourself. smile

    Cheers and see you around!
  • Hey! I would like to know why the market trend is at M30 in direction of broken fractal, but at M5 broken fractal signals reverse of market (even stronger signal of reversal)? Why this the same indicator tells us opposit directions in those two time frame charts?
  • @kanper : Beginner here but allow me to give my answer to your question. At M5 the broken fractal signals a POSSIBLE reverse of market because the fractal may be the stop loss position for many traders and when it breaks a lot of pressure will be in the market. But actually if you see the beginner strategy, we do enter the market if after all it proves that market has not reversed by the broken fractal.
  • Hi,
    I would like to know what does mean a fractal which is up and down simultaneously ? Must we considere it and how ?
    (sorry if my english is not clear, i'm french :p )
    Thanks
  • effetjoul:
    Hi,
    I would like to know what does mean a fractal which is up and down simultaneously ? Must we considere it and how ?
    (sorry if my english is not clear, i'm french :p )
    Thanks
    I found the answer http://en.tradimo.com/forum/beginners/Up-and-down-fractal-on-the-same-bar_69111/ thank you !
  • Why does trading on the lower time frame reduce the risk? We are instructed to always risk only 2% on any trade, so the risk is always the same, right?
  • Blacer:
    Why does trading on the lower time frame reduce the risk? We are instructed to always risk only 2% on any trade, so the risk is always the same, right?

    Hi,
    Quite new here, but as far as i can understand it reduces the risk from a risk:reward point of view. The distance between ur entry point and stop loss is the risk, the distance between the entry pont and take profit is the reward. If u want to keep the value of the risk constant u have to tune down the size of ur trade as the risk gets bigger in terms of pips, but this will decrease the net expected value of the trade. At least this is how i see it.

    Anyways smile , juts wanted point it out that in the "Reducing the risk" section says "The following five minute chart demonstrates that by waiting for a good time to enter, you can trade in the current direction of the trade, but the entry, shown as 1, is a much shorter distance to the last down fractal, shown as 2, than on the 30 minute chart."

    1 and 2 is changed up in the text, i think.
  • good article, I clearly understand how the beginner strategy work
  • Why we have to wait a broken fractal, when we are looking for a trading opportunity if we follow the next amd newest fractals after the brake in the five minute chart when we are managing our pending order?
  • Why can we manage it without a new break?
  • Blacer:
    Why does trading on the lower time frame reduce the risk? We are instructed to always risk only 2% on any trade, so the risk is always the same, right?

    The idea is as Cernunnos86 said not to reduce the absolute risk but reduce the risk in pips.
    This way we get a better risk reward ratio and we need less winning trades to make a break even system.
  • pppktz:
    Why we have to wait a broken fractal, when we are looking for a trading opportunity if we follow the next amd newest fractals after the brake in the five minute chart when we are managing our pending order?

    Hey pppktz,

    I'm sorry but i don't really get your question?
    We wait for a broker fractal so we have the market direction confirmed on the 30 min chart.
    Then on the 5 min chart we wait for a fractal to break in the opposite direction for the trading opportunity because this gives us some sort of a slingshot to enter in the direction of the trend.
    Usually moves in the trend directuion are stronger than the ones against it.
  • It is okay, but we wait for the break on the 5 m chart and after that we set our pending order and manage it. Why can we manage our stop loss without a new break and why can we follow it until the market direction changed? How long can we follow it? If the market direction is not changng we don't have to view amy other signal?
  • Hey pppktz,

    We can manage our stop loss without the break of a fractal because we follow the "trend"with our stop loss.
    So we use the fractals which are pointing against the trend and are potential turning points to set the stop loss. So in a downtrend we use the upfractals because we think if price gets around this area it will turn back in the direction of the trend again. so no break is necessary because if it would break it could indicate price going further against the trend.

    And if you don't set a take profit, which is an option, you can follow the trend with your stop loss untill you get stopped out for a profit. So we use the fractals to make a trailing stop loss.

    As for the market direction not changing we keep looking for trade setups in the market direction.
    So if the market is down and we have a short trade up and are trailing it with our stop loss eventually we get stopped out(which means an upfractal has been broken). now we can set a new pending order for a short trade( after checking the 30 min chart ofc).

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