Trend, support and resistance
What you learn in 3 minutesThis lesson is about the two words you will see most often on a chart: trend and level. A trend is the direction price has been moving over a chosen period. A level is a price where price has turned before, so orders tend to sit there. On AUD/USD around 0.6640, one pip is 0.0001. On one standard lot of 100,000 units, one pip is worth 10 units of the quote currency, which is the US dollar, so the value in A$ depends on the AUD/USD rate itself. At 0.6640, one pip is about A$15.06, because 10 divided by 0.6640 is 15.06.
Three touches at 0.6640 and a stop at 0.6620
| Step | Amount | Note |
|---|---|---|
| Level price | 0.6640 | the price where price turned three times |
| Fourth touch entry | 0.6640 | the same level, tested again |
| Stop price | 0.6620 | placed below the level, not on it |
| Distance from entry to stop | 0.0020 | 0.6640 minus 0.6620 |
| Distance in pips | 20 pips | 0.0020 divided by 0.0001 |
| Position size | 0.10 standard lots | one tenth of a standard lot |
| Pip value at 0.10 lots | A$1.51 | A$15.06 per pip on one lot, divided by 10 |
| Risk on the trade | A$30.12 | 20 pips multiplied by A$1.51 |
Brokers vary in how they round pip values and in the spread they quote. Some also charge a commission. Check the contract specifications before you calculate.
The mistake people make here
The common mistake is to place the stop exactly on the level, at 0.6640. Price often moves a little past a level before turning, so a stop on the line can be hit while the idea is still valid. A better habit is to place the stop a clear distance beyond the level, such as 20 pips away, and then size the position so the risk in A$ is an amount you chose in advance. With 0.10 lots, 20 pips is A$30.12. If that is too much, use a smaller size rather than a tighter stop.Check yourself
Price touches 0.6640 three times. On the fourth touch you buy at 0.6640 with a stop at 0.6620. How many pips is the stop, and what is the risk on 0.20 standard lots?
The distance is 0.6640 minus 0.6620, which is 0.0020, or 20 pips. One pip on one standard lot is 10 units of the quote currency, about A$15.06 at 0.6640. On 0.20 lots that is A$3.01 per pip. 20 pips multiplied by A$3.01 is A$60.24.
If you wanted to risk about A$30 on the same 20-pip stop, what position size would you use?
A$30 divided by 20 pips is A$1.50 per pip. At about A$15.06 per pip on one standard lot, A$1.50 is roughly 0.10 standard lots.