forex by akinola macarthy

ONLINE FOREX TRAINING MANUAL

By:

INTERNET BUSINESS ACADEMY

An affiliate of :

De Kreator Consulting Limited,

#9A Post Office Road, Kano. E-mail: forextrainersinng@yahoo.ca Website: http://e-fxstrategies-review.blogspot.com

TABLE OF CONTENTS MODULE I UNDERSTANDING FOREX AND FOREX MARKETING SYSTEM 3 MODULE II FOREX CHARTING SYSTEM 40 MODULE III Money Management and Traders Psychology 56 MODULE IV Understanding Market Movements 70 MODULE V Forex Trading Systems

Appendix 1: Bunny Girl Trading System Appendix 2: Trading Rules Appendix 3: Tips for trading the major Currency Pairs 2

Appendix 4: When to Trade Appendix 5: Types of Orders MODULE I UNDERSTANDING FOREX AND FOREX MARKETING SYSTEM Introduction to Forex Description of the Forex The Forex market, established in 1971, was created when floating exchange rates began to materialize. The Forex market is not centralized, like in currency futures or stock markets. Trading occurs over computers and telephones at thousands of locations worldwide. The Foreign Exchange market, commonly referred as FOREX, is where banks, investors and speculators exchange one currency to another. The largest foreign exchange activity retains the spot exchange (i.e.., immediate) between five major currencies: US Dollar, British Pound, Japanese Yen, Euro, dollar and the Swiss Franc. It is also the largest financial market in the world. In comparison, the US stock market may trade $10 billion in one day, whereas the Forex market will trade up to $4 trillion in one single day. The Forex market is an opened 24 hours a day market where the primary market for currencies is the 24-hour Interbank market. This market follows the sun around the world, moving from the major banking centres of the United States to Australia and New Zealand to the Far East, to Europe and finally back to the Unites States. Until now, professional traders from major international commercial and investment banks have dominated the FX market. Other market participants range from large multinational corporations, global money managers, registered dealers, international money brokers, and futures and options traders, to private speculators. There are three main reasons to participate in the FX market. One is to facilitate an actual transaction, whereby international corporations convert profits made in foreign currencies into their domestic currency. Corporate treasurers and money managers also enter the FX market in order to hedge against unwanted exposure to future price movements in the currency market. The third and more popular reason is speculation for profit. In fact, today

it is estimated that less than 5% of all trading on the FX market is actually facilitating a true commercial transaction. The FX market is considered an Over The Counter (OTC) or ‘Interbank’ market, due to the fact that transactions are conducted between two counterparts over the telephone or via an electronic network. Trading is not centralized on an exchange, as with the stock and futures markets. A true 24-hour market, Forex trading begins each day in Sydney, and moves around the globe as the business day begins in each financial center, first to Tokyo, London, and New York. Unlike any other financial market, investors can respond to currency fluctuations caused by economic, social and political events at the time they occur - day or night. History of the Forex: Money, in one form or another, has been used by man for centuries. At first it was mainly Gold or Silver coins. Goods were traded against other goods or against gold. So, the price of gold became a reference point. But as the trading of goods grew between nations, moving quantities of gold around places to settle payments of trade became cumbersome, risky and time consuming. Therefore, a system was sought by which the payment of trades could be settled in the seller’s local currency. But how much of buyer’s local currency should be equal to the seller’s local currency? The answer was simple. The strength of a country’s currency depended on the amount of gold reserves the country maintained. So, if country A’s gold reserves are double the gold reserves of country B, country A’s currency will be twice in value when exchanged with the currency of country B. This became to be known as The Gold Standard. Around 1880, The Gold Standard was accepted and used worldwide. During the first WORLD WAR, in order to fulfill the enormous financing needs, paper money was created in quantities that far exceeded the gold reserves. The currencies lost their standard parities and caused a gross distortion in the country’s standing in terms of its foreign liabilities and assets. After the end of the second WORLD WAR the western allied powers attempted to solve the problem at the Bretton Woods Conference in New Hampshire in 1944. In the first three weeks of July 1944, delegates from 45 nations gathered at the United Nations Monetary and Financial Conference in Bretton Woods, New Hampshire. The delegates met to discuss the postwar recovery of Europe as well as a number of monetary issues, such as unstable exchange rates and protectionist trade policies. During the 1930s, many of the world’s major economies had unstable currency exchange rates. As well, many nations used restrictive trade policies. In the early 1940s, the United States and Great Britain developed proposals for the creation of new international financial institutions that would stabilize exchange rates and boost international trade. There was

also a recognized need to organize a recovery of Europe in the hopes of avoiding the problems that arose after the First World War. The delegates at Bretton Woods reached an agreement known as the Bretton Woods Agreement to establish a postwar international monetary system of convertible currencies, fixed exchange rates and free trade. To facilitate these objectives, the agreement created two international institutions: the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (the World Bank). The intention was to provide economic aid for reconstruction of postwar Europe. An initial loan of $250 million to France in 1947 was the World Bank’s first act. Under the Bretton Woods Exchange System, the currencies of participating nations could be converted into the US dollar at a fixed rate, and foreign central banks could convert the US dollar into gold at a fixed rate. In other words, the US dollar replaced the then dominant British Pound and the parities of the world’s leading currencies were pegged against the US Dollar. The Bretton Woods Agreement was also aimed at preventing currency competition and promoting monetary co-operation among nations. Under the Bretton Woods system, the IMF member countries agreed to a system of exchange rates that could be adjusted within defined parities with the US dollar or, with the agreement of the IMF, changed to correct a fundamental disequilibrium in the balance of payments. The per value system remained in use from 1946 until the early 1970s. The United States, under President Nixon, retaliated in 1971 by devaluing the dollar and forcing realignment of currencies with the dollar. The leading European economies tried to counter the US move by aligning their currencies in narrow band and then float collectively against the US dollar. Fortunately, this currency war did not last long and by the first half of the 1970’s leading world economies gave up the fixed exchange rate system for good and floated their currencies in the open market. The idea was to let the market decide the value of a given currency based on the demand and supply of the currency and the economic health of the currency’s nation. This market is popularly known as the International Monetary Market or IMM. This IMM is not a single entity. It is the collection of all financial institutions that have any interest in foreign currencies, all over the world. Banks, Brokerages, Fund Managers, Government Central Banks and sometimes individuals, are just a few examples. This is very much the present system of exchange of foreign currencies. Although the currency’s value is dependent on the market forces, the central banks still try to keep their currency in a predefined (and highly confidential) fluctuation band. They accomplish this by taking one or more of various steps. The International Trade Organization that had been planned in the Bretton Woods Agreement could not be realized in the form initially envisaged - the US Congress would not endorse it. Instead, it was created later, in 1947, in the form of the General Agreement

on Tariffs and Trade, which was signed by the US and 23 other countries including Canada. The GATT would later become known as the World Trade Organization. In recent years, the two international institutions created at Bretton Woods the World Bank and the IMF have faced a major challenge in helping debtor nations to get back on stable financial footing.

The Euromarket A major catalyst to the acceleration of Forex trading was the rapid development of the Eurodollar market; where US dollars are deposited in banks outside the US. Similarly, Euromarkets are those where assets are deposited outside the currency of origin. The Eurodollar market first came into being in the 1950s when Russia’s oil revenue - all in dollars - was deposited outside the US in fear of being frozen by US regulators. That gave rise to a vast offshore pool of dollars outside the control of US authorities. The US government imposed laws to restrict dollar lending to foreigners. Euromarkets were particularly attractive because they had far less regulations and offered higher yields. From the late 1980s onwards, US companies began to borrow offshore, finding Euromarkets a beneficial center for holding excess liquidity, providing short-term loans and financing imports and exports. London was, and remains the principal offshore market. In the 1980s, it became the key center in the Eurodollar market when British banks began lending dollars as an alternative to pounds in order to maintain their leading position in global finance. London’s convenient geographical location (operating during Asian and American markets) is also instrumental in preserving its dominance in the Euromarket.

UNDERSTANDING THE FOREX MARKET As with many markets, there are many derivatives of the central market such as futures, options and Spots. For the purpose of this training we will only be discussing the main market sometimes referred to as the Spot or Cash market. You will often hear the term INTERBANK discussed in FX terminology. This originally, as the name implies, was simply banks and large institutions exchanging information about the current rate at which their clients or themselves were prepared to buy or sell a currency. INTER meaning between and Bank meaning deposit taking institutions normally made up of banks, large financial institutions, brokers or even the government. The market has progressed to such a degree that the term interbank now means anybody who is prepared to buy or sell a currency. It could be two individuals or your local travel agent offering to exchange Euros for US Dollars. You will, however, find that most of the brokers and banks use centralized feeds to insure reliability of quote. The quotes for Bid (buy) and Offer (sell) will all be from reliable sources. These quotes are normally made up of the top 300 or so large institutions. This insures that if they place an order on your behalf that the institutions they have placed the order with is capable of fulfilling the order. Now, although we have spoken about orders being fulfilled, it is estimated that anywhere from 70%-90% of the FX market is speculative. In other words, the person or institution that bought or sold the currency has no intention of actually taking delivery of the currency. Instead, they were solely speculating on the movement of that particular currency.

Market Mechanics So now we know that the FX market is the largest in the world and that your broker or institution that you are trading with is collecting quotes from a centralized feed or individual quotes comprising of interbank rates. So how are these quotes made up. Well, as we previously mentioned currencies are traded in pairs and are each assigned a symbol.

Currency Pairs In the Forex market, trading is always in currency pairs, such as EUR/USD or USD/JPY.

Forex Symbol

Currency Pairs

EUR/USD

Euro / U.S. Dollar

Trading Terminologies Euro

GBP/USD

British Pound / U.S. Dollar

Cable or Sterling

USD/JPY

U.S. Dollar / Japanese Yen

Dollar Yen

USD/CHF

U.S. Dollar / Swiss Franc

Dollar Swiss

USD/CAD

U.S. Dollar / Canadian Dollar Dollar Canada

AUD/USD

Australian Dollar / U.S. Dollar Aussie Dollar or Aussie

EUR/GBP

Euro / British Pound

Euro Sterling

EUR/JPY

Euro / Japanese Yen

Euro Yen

EUR/CHF

Euro / Swiss Franc

Euro Swiss

GBP/JPY

British Pound / Japanese Yen Sterling Yen

The base currency-the first currency listed in the currency pair-is the basis for the buy or the sell. As an example, the US Dollar is the base currency for USD/JPY (US Dollar/Japanese Yen). The current bid/ask price for USD/JPY could be 107.20/107.23, which means you could buy $1 US for 107.23 Japanese Yen, or sell $1 US for 107.20 Japanese Yen.

For the Japanese Yen it is JPY, for the Pounds Sterling it is GBP, for Euro it is EUR and for the Swiss Frank it is CHF. So, EUR/USD would be Euro-Dollar pair. GBP/USD would be pounds Sterling-Dollar pair and USD/CHF would be Dollar-Swiss Franc pair and so on. You will always see the USD quoted first with few exceptions such as Pounds Sterling, Eurodollar, Australia Dollar and New Zealand Dollar. The first currency quoted is called the base currency. Have a look above for some examples. When you see FX quotes you will actually see two numbers. The first number is called the bid and the second number is called the offer (sometimes called the ASK). If we use the EUR/USD as an example you might see 0.9950/0.9955 the first number 0.9950 is the bid price and is the price traders are prepared to buy Euros against the USD Dollar. The second number 0.9955 is the offer price and is the price traders are prepared to sell the Euro against the US Dollar. These quotes are sometimes abbreviated to the last two digits of the currency such as 50/55. Each broker has its own convention and some will quote the full number and others will show only the last two. You will also notice that there is a difference between the bid and the offer price and that is called the spread. For the four major currencies the spread is normally 5 give or take a pip (we will explain pips later). To carry on from the symbol conventions and using our previous EUR quote of 0.9950 bid, that means that 1 Euro = 0.9950 US Dollars. In another example if we used the USD/CAD 1.4500 that would mean that 1 US Dollar = 1.4500 Canadian Dollars. The most common increment of currencies is the PIP. If the EUR/USD moves from 0.9550 to 0.9551 that is one Pip. A pip is the last decimal place of a quotation. The Pip or POINT

as it is sometimes referred to depending on context is how we will measure our profit or loss. As each currency has its own value it is necessary to calculate the value of a pip for that particular currency. We also want a constant so we will assume that we want to convert everything to US Dollars. In currencies where the US Dollar is quoted first the calculation would be as follows. Example JPY rate of 116.73 (notice the JPY only goes to two decimal places, most of the other currencies have four decimal places) In the case of the JPY 1 pip would be .01 therefore USD/JPY: (.01 divided by exchange rate = pip value) so .01/116.73=0.0000856 it looks like a big number but later we will discuss lot (contract) size. USD/CHF: (.0001 divided by exchange rate = pip value) so .0001/1.4840 = 0.0000673 USD/CAD: (.0001 divided by exchange rate = pip value) so .0001/1.5223 = 0.0001522 In the case where the US Dollar is not quoted first and we want to get to the US Dollar value we have to add one more step. EUR/USD: (0.0001 divided by exchange rate = pip value) so .0001/0.9887 = EUR 0.0001011 but we want to get back to US Dollars so we add another little calculation which is EUR X Exchange rate so 0.0001011 X 0.9887 = 0.0000999 when rounded up it would be 0.0001. GBP/USD: (0.0001 divided by exchange rate = pip value) so 0.0001/1.5506 = GBP 0.0000644 but we want to get back to US Dollars so we add another little calculation which is GBP X Exchange rate so 0.0000644 X 1.5506 = 0.0000998 when rounded up it would be 0.0001. By this time you might be rolling your eyes back and thinking do I really need to work all this out and the answer is no. Nearly all the brokers you will deal with will work all this out for you. They may have slightly different conventions but it is all done automatically. It is good however for you to know how they work it out. In the next section we will be discussing how these seemingly insignificant amounts can add up.

More On Market Mechanics Spot Forex is traditionally traded in lots also referred to as contracts. The standard size for a lot is $100,000. In the last few years a mini lot size has been introduced of $10,000 and this again may change in the years to come. As we mentioned on the previous page currencies are measured in pips, which is the smallest increment of that currency. To take advantage of these tiny increments it is desirable to trade large amounts of a particular

currency in order to see any significant profit or loss. We shall cover leverage later but for the time being let's assume we will be using $100,000 lot size. We will now recalculate some examples to see how it effects the pip value. USD/JPY at an exchange rate of 116.73 (.01/116.73) X $100,000 = $8.56 per pip USD/CHF at an exchange rate of 1.4840 (0.0001/1.4840) X $100,000 = $6.73 per pip In cases where the US Dollar is not quoted first the formula is slightly different. EUR/USD at an exchange rate of 0.9887 (0.0001/ 0.9887) X EUR 100,000 = EUR 10.11 to get back to US Dollars we add a further step EUR 10.11 X Exchange rate which looks like EUR 10.11 X 0.9887 = $9.9957 rounded up will be $10 per pip. GBP/USD at an exchange rate of 1.5506 (0.0001/1.5506) X GBP 100,000 = GBP 6.44 to get back to US Dollars we add a further step GBP 6.44 X Exchange rate which looks like GBP 6.44 X 1.5506 = $9.9858864 rounded up will be $10 per pip. As we said earlier your broker may have a different convention for calculating pip value relative to lot size but however they do it they will be able to tell you what the pip value for the currency you are trading is at that particular time. Remember that as the market moves so will the pip value depending on what currency you trade. So now we know how to calculate pip value lets have a look at how you work out your profit or loss. Let's assume you want to buy US Dollars and Sell Japanese Yen. The rate you are quoted is 116.70/116.75 because you are buying the US you will be working on the116.75, the rate at which traders are prepared to sell. So you buy 1 lot of $100,000 at 116.75. A few hours later the price moves to 116.95 and you decide to close your trade. You ask for a new quote and are quoted 116.95/117.00 as you are now closing your trade and you initially bought to enter the trade you now sell in order to close the trade and you take 116.95 the price traders are prepared to buy at. The difference between 116.75 and 116.95 is .20 or 20 pips. Using our formula from before, we now have (.01/116.95) X $100,000 = $8.55 per pip X 20 pips =$171 In the case of the EUR/USD you decide to sell the EUR and are quoted 0.9885/0.9890 you take 0.9885. Now don't get confused here. Remember you are now selling and you need a buyer. The buyer is biding 0.9885 and that is what you take. A few hours later the EUR moves to 0.9805 and you ask for a quote. You are quoted 0.9805/0.9810 and you take

0.9810. You originally sold EUR to open the trade and now to close the trade you must buy back your position. In order to buy back your position you take the price traders are prepared to sell at which is 0.9810. The difference between 0.9810 and 0.9885 is 0.0075 or 75 pips. Using the formula from before, we now have (.0001/0.9810) X EUR 100,000 = EUR10.19: EUR 10.19 X Exchange rate 0.9810 =$9.99($10) so 75 X $10 = $750. To reiterate what has gone before, when you enter or exit a trade at some point your are subject to the spread in the bid/offer quote. As a rule of thumb when you buy a currency you will use the offer price and when you sell you will use the bid price. So when you buy a currency you pay the spread as you enter the trade but not as you exit and when you sell a currency you pay no spread when you enter but only when you exit. MARKET PARTICIPANTS Private Banks play two roles in the Forex market. Firstly they facilitate transactions between two parties wishing to exchange currency, and secondly they speculate by buying and selling currencies. It has been estimated that international banks generate 70% of their revenues from currency speculation. Governments through their central banks also participate in the Forex market. Central banks such as the US Federal Reserve buy and sell currency in order to try to stabilize their own currency and therefore strengthen or weaken their country’s financial position. The Forex market is so large and is composed of so many participants that no one player, not even a government central bank, can control the market. Forex is not a “market” in the traditional sense. There is no centralised location for trading and there is no “exchange” like stocks or futures. Trading occurs over the phone and through computer terminals at many locations throughout the world. The bulk of the trading is done between approximately 300 large international banks, which process transactions for large companies, governments and their own accounts. These banks are continually providing prices for each other and the broader market as a buy or “bid” and a sell or “ask” The most recent quote from one of these banks is considered the markets current price for that currency. THE SIX FORCES OF FOREX Trading forex is like watching a school of fish move. One minute is total harmony, the next, complete chaos. As the observer of this school of fish, do you believe you can accurately predict the direction the school of fish will move each time? Would you bet on it? What causes the fish to move the way they do? Why do they work together in one moment, moving with force and precision, and move in what seems to be an infinite number of directions the next? There’s no way to know unless you can sense what the fish sense each time they move. The fish have an instinct about the nature of their environment. They 11

understand the context of all things around them – natively – and can react accordingly. Surely if you shared this understanding you’d be a much more accurate predictor of fish movement! Trading forex is not much different - we need to develop that keen sense of what is happening around us. Will we ever be able to predict every move in the forex markets? Absolutely not. But we can use our understanding of the context of the market – the six forces of forex – to make better, more profitable trading choices. Once we understand these forces, we can create and operate within a comprehensive trading plan: • • • • • •

Who trades forex? Understand who participates in the markets, why they are successful, and how you can emulate them. Why trade forex? There are superior returns in forex, but not for all investors. Are you one of them? Where should you trade? Choose to work with service providers who can efficiently enable your style of trading. What should you trade? Select the currency pair, entry, exit and money management methods that will maximize your returns. When should you trade? Trade when the environment is most likely to produce the best conditions for executing your system. How should you trade? Trade using methods that maximize your ability to emulate the proven winners.

Knowledge of these forces and how they work is a major determinant of your success as a trader. Figure 1 shows these 6 forces, their relative rarity, and their effect on profitability. Figure 1: The Forex Vortex Natural selection takes on a whole new meaning in the forex markets, where survival of the fittest is the only rule, and market action ruthlessly eliminates anyone who has not uncovered the context of the game.

WHO Far more important than knowing who trades forex is knowing who trades forex successfully, and how they do it. The players in the forex markets operate with widely varying perspectives. When one of these players enters the market, a force is created that is proportional to the perspective of the trade initiator. That force can play a role in the short term, creating radical price changes, and it can play a long term role, defining trends. Figure 2 shows the major perspectives in the forex markets. Figure 2: The Who’s Who of Forex Each perspective carries a different attitude, goal, investment horizon, and market impact.

They key difference among these market participants is their level of sophistication, where the elements of sophistication include: • • • • • •

Money management techniques Profit objectives Level of computerization Quantitative abilities Research abilities Level of discipline

Of course there are sophisticated and non-sophisticated banks, governments, corporations, investment funds, and traders. But among these segments it is the individual trader who has the least amount of external governance. Whereas governments, banks, corporations, and investment funds adhere to regulations and restrictions (to a certain extent), traders are only restricted by their level of capital. In the absence of these external restrictions, traders fall into two groups: those who can impose internal restrictions – discipline - on their trading strategies and those who cannot: the fence-swingers, et al. Those who can impose this discipline we will call the sophisticated investor. In the zerosum game of forex trading, the sophisticated investor uses tools and strategies that emulate those of the highly sophisticated institutional participants to extract profits from the novice participant. It is only the sophisticated investor who has the ability to extract positive returns from the forex markets.

WHY Forex trading has surged in recent years, as more individuals earn their living trading and the popularity of riskier investment vehicles like hedge funds has increased. The bottom line for these investors is superior returns, and in foreign exchange four major factors create a unique investment environment: • • • •

Liquidity Leverage Convenience Cost

In no other market can you find a playing field that is so biased to the investor, at least on the surface. But to take advantage of these factors you have to be constantly aware of their downside. Liquidity In a liquid market there is a high degree of transparency, even when large transactions change hands. The sophisticated investor understands what this means: forex attracts huge players. As a trader grows in sophistication, they understand that these huge players have significant price impact, and watch for their market entry. Leverage The low margin requirements in the forex markets make everyone’s what-if analysis yield forecasts with 1000% growth annually. What those forecasts fail to account for is the multiplying effect of leverage during periods of consecutive losses. Figure 3: The Leverage-Loss Matrix What’s the ultimate worst case scenario? Consecutive losses. Knowing how many consecutive losses your system is likely to sustain is the key to capital conservation. Examples of leverage: 1:1 = one $100K contract per $100K in capital. 20:1 = 20 $100K contracts per $100K in capital

Convenience The fact that you need to go to bed or spend time with your family does not stop the forex markets from operating. In other markets you can trade a specific window that usually lasts 6-10 hours, which is physically manageable. Forex, on the other hand, demands 24 hour monitoring. That can be accomplished through automated trading systems or, less optimally, through pre-set stop and limit orders or physical monitoring of a trade. Cost “No commission trading” is a marketing slogan many dealers offer as a perceived benefit of forex. But the fact that there is no commission does not change the high level of transaction costs paid to dealers through the bid-ask spread. There is no doubt that the liquidity, leverage, convenience, and transaction costs found in the forex markets are great tools for investors – but not always. Just as easily as these tools can be used for wealth creation, they can be misused for wealth destruction. The novice investor destroys wealth, and the sophisticated investor creates it. WHERE It is one thing to choose a dealer, and quite another to choose the correct dealer. Dealers’ service offerings can take many forms, and each dealer usually has one or two major features that they highlight above all others. When analyzing dealers, first understand and rank all of their service offerings, then apply those findings to your trading style to arrive at your optimal dealer. 16

Figure 4: The Dealer Comparison Matrix Comparing different dealers using common metrics helps to clarify where each dealer’s strength lies. Armed with that information, the trader is ready to choose the dealer who best fits his trading style.

Which dealer would you choose? Novice traders will often choose the dealer with the best marketing, simply because it’s the one they know. They learn about the dealer, visit the site, register for a demo, then scale the learning curve to grow comfortable trading with that dealer, using their charts, etc. Frequently, the dealer with the best marketing is not the best dealer for the trader, or perhaps, for any trader. Traders use systems that work in the short term, mid term, or long term, with varying holding times and strategies. The type of dealer needed for each approach is quite different. For every trader there is an optimal dealer. For many, the path of least resistance leads to the dealer who makes first contact, not the dealer who will provide the best trading outcome. The sophisticated investor optimizes returns by matching his trading style to his dealer. WHAT A comprehensive trading plan is framed by three main elements: the trading vehicle, or currency pair, the events that trigger market entry and exit, and the overall approach to trade management.

Figure 5: What to Trade Understanding the major components of a trading plan is a prerequisite for successful trading.

All of these factors work together. Trading a high spread currency using short interval entry signals and highly leveraged positions will probably be a failing strategy. Conversely, trading a tight spread currency using mid- to long-interval entry signals and little leverage has a better chance of success. In the final analysis, the currency, signals, and money management approach must all gel together and exist without contradictions. Novice investors make critical errors by trying to patch together strategies from various sources, rather than systematically building, testing, and deploying a comprehensive trading plan. The sophisticated investor, who does this difficult work, operates with a complementary trading plan that creates consistent profit opportunities. WHEN Forex is a 24/6 market – but is the market action the same at all times? Of course not, but not many traders stop to consider the impact of this fact on their trades. Studying historical price data reaching back to January 2000, the impact is clear, as shown in Figures 6 & 7. Figure 6: When to Trade - AM Give yourself a chance! Trade when the market is most likely to help you. Take a look at the average trading ranges for the four majors below.

Figure 7: When to Trade - PM The markets sleep when London and New York are off.

One of the best ways to validate a technical indicator is volume. When volume is strong, indicators tend to be more accurate. Unfortunately, there is no volume data available for the forex markets. Using trading ranges is the next best thing. Having this data in hand, the trader can more carefully evaluate when to trade. Not only will technical indicators generally have more accuracy at different points of the day, but there is both more profit potential and less loss potential at other times of the day. 19

Consider a trade in EURUSD at 10 AM EST vs. one at 10 PM EST. The first has an average trading range of 30 pips, the second, 10 pips. Entering the market during the morning trade creates some interesting possibilities – the market may go against you or with you, but you should be prepared for a ride in either case. On the other hand, if the market goes against you 10 pips at 10 PM, how concerned should you be? Probably not as much as if it was 4 AM.

ADVANTAGES OF FOREIGN CURRENCY In today's market place, the dollar relentlessly fluctuates against the other currencies of the world. A number of factors, such as the decline of worldwide equity markets and declining world interest rates, have forced investors to engage in fresh opportunities. The global escalation in trade and overseas investments has led to scores of national economies becoming consistent with one another. This interconnection, and the consequential fluctuations in exchange rates, has shaped a mammoth intercontinental market: Forex. For countless investors, this has fashioned exciting opportunities and the latest profit potentials. The Forex market offers unparalleled potential for rewarding trading in any market condition or any stage of the business cycle. These factors equate to the following advantages: � No commissions: No clearing fees, no exchange fees, no government fees, no brokerage fees. � No middlemen: Spot currency trading does away with the middlemen and allows clients to relate directly with the market maker in charge for the pricing on a specific currency pair. � No Fixed lot size: In the futures markets, lot or contract sizes are determined by the exchanges. In spot Forex you determine the appropriate lot size fitting for you. This allows traders to successfully partake with accounts of less than $1,000.00. � Small transaction cost: The retail transaction fee (the bid/ask spread) is as a rule less than 0.1 percent under regular market situations. At larger dealers, the spread could be as low as 0.07 percent. This will be described in detail later. � Superior liquidity: With a typical trading volume of over $1.95 trillion per day, Forex is, without doubt, the most liquid market on the planet. It means that you can enter or exit the market in practically any market condition. � Instantaneous transactions: This is a definite by-product of the high liquidity. � Low margin, high leverage: These issues enhance the potential for higher profits (and losses) and are discussed later on. � A 24-hour market: You may take advantage of every profitable market situation at any time of the day. � Online access: The big explosion in Forex came with the introduction of online (Internet) trading platforms.

� Not related to the stock market: Trading in the Forex market involves selling or buying one currency against another. Thus, there is no association between the Forex market and the stock market. � A bull market or a bear market for a Currency is defined in terms of the viewpoint for its relative value in contrast to another currency. If the view is positive, we have a bull market in which you can profit by buying the currency against another currency. On the other hand, if the outlook is pessimistic, we have a bull market for a currency and you can take profits by selling the Currency against another currency. In either case, there is habitually a good market trading opportunity for you. � Interbank market: The heart of the Forex market consists of an international network of dealers. They are largely key commercial banks that correspond and trade with one another and with their clients by way of electronic networks and by telephone. There are no organised exchanges to serve as a focal location to facilitate dealings the way the Australian Stock Exchange serves the equity markets. The Forex market operates in a manner similar to that of the NASDAQ market in the United States and is also referred to as an over-the-counter (OTC) market. � No one can corner the market: The Forex market is so enormous and has countless participants that no solitary entity, not even a central bank, can have power over the market price for an extended period of time. Even interventions by powerful central banks are becoming increasingly unsuccessful and short-lived. Therefore central banks are becoming less and less inclined to get involved in manipulating market prices. � No insider trading: Due to the Forex market’s size and non centralized environment, there is practically no chance for any ill effects caused by insider trading. Deception possibilities, at least against the system as a whole, are drastically less than in any other financial instruments. � Limited regulation: There is limited governmental weight via regulation in the Forex markets, chiefly because there is no central location or exchange. However, this is a sword that may cut both ways, but it is believed with a tough caveat emptor that less regulation is, on balance, a benefit. Nevertheless, most countries do have some regulatory say and more seems on the way. In spite of this, fraud is always fraud everywhere and subject to penalties in all countries. By tradition, an investors' solitary means of gaining entry to the Forex market was by way of banks that transacted sizeable amounts of currencies for commercial and investment purposes. Trading volume has increased quickly over time, particularly after exchange rates were allowed to float without restraint in 1971.

How Trading Works So how does the actual trading work? A complete transaction is the buying of one currency and selling of another at the same time. We will be focusing on spot transactions in these lessons and other forms of Forex transaction (i.e. futures, options) will not be covered in this lesson. A spot is a transaction at the current market rate with a settlement that takes place within two business days. The settlement constitutes both delivery and payment, which currently may or may not require the physical exchange of currencies, since the transfer is completed electronically.

Going Long or Short A long position is a situation in which one purchases a currency at a certain price and hopes to sell it later at a higher price. This is also referred to as the notion of "buy low, sell high" in other trading markets. In forex, there is no difference in trading a rising or falling market. If someone thinks a currency will fall he will sell it and hope to buy it back later at a lower price. This is considered a short position, which is in essence the opposite of long position. On every exchange, a trader has a long position on one currency and a short position on the other of the pair. A trader defines his or her position as an expression of the first currency of the traded pair. Let's say the trader buys the Dollar while selling Yen (buys the USD/JPY pair) at the price of 115.24. The trader essentially longs the dollar and shorts the yen. By taking a long position on the Dollar, the trader will wish to sell the Dollar back at a higher price. Since the Dollar's value was defined in terms of the Yen, then the trader, anticipating depreciation in the yen's value, will essentially exchange back the Yen (at a lower price) for the Dollar (at a higher price).

Trading Terminology The U.S. Dollar (USD) in the previous example is known as the base currency. That is because it is the first currency in the notation of the pair (USD/JPY). The second currency in the pair is called the counter currency. A bid is the highest rate that the seller would offer to pay for a currency. Similarly, an ask is the lowest rate at which a buyer is willing to buy a particular currency. The bid/ask combination comprises a price or in other words, a quotation, which is based on a floating exchange rate. The disparity between the bid and ask is known as the spread, which reflects the difference between the rate offered by a seller to get rid of a currency and the rate at which a seller is willing to recover it. Usually, the figure of the percentage spread is stated as the following: ask-bid/ask * 100. The value of the spread is greater for currencies that are traded less frequently on the market than for the cluster of the major trading currencies. Brokerage firms and banks earn their commission by applying the ideas of spread to trading. Contrary to stock market firms, they generally do not charge a commission for 22

every transaction, and by doing so they obtain their share from the spread. A point in the spread is referred to as a pip, and it is equivalent to the final number in a currency pair's price. For all pairs that don't involve the Japanese Yen a pip is the fourth decimal place, 1.3279. For pairs that involve the Yen, a pip is counted from the second decimal place, 145.49. Margin Trading Forex contracts involves trading on margin. Margin allows you to purchase a contract without the need to provide the full value of the contract. Margin requirements vary between market makers but typically range from 1-4%. For example, for $100,000 position on 1% margin you would be required to offer $1000 per as margin. This dollar amount is expressed in the base currency. The following examples will show you how your margin is calculated. A trader decides to go long JPY against USD by buying a 1,000,000 contract of USD/JPY. • for a 1% margin account: margin required 1,000,000 x 0.01 = $10,000 USD • for 2% margin account: margin required 1,000,000 x 0.02 = $20,000 USD A trader decides to go short EUR against USD by selling a 1,000,000 contract of EURUSD. • for a 1% margin account: margin required 1,000,000 x 0.01 = $10,000 EUR • for 2% margin account: margin required 1,000,000 x 0.02 = $20,000 EUR When you place an order to buy or sell a Forex contract, the margin required for the position is separated from the rest of your account balance. The remaining funds in your account are often referred to as your remaining margin. Spread Forex market makers quote foreign exchange rates by taking into consideration the current spot “inter bank” exchange rates. The price that you may deal at is presented to you as a bid and an offer, much like equities markets. The difference in price between the quoted bid and offer will include a spread in favour of the market maker. Forex market makers make their earnings from the spreads that are embedded in the currency rates, as the rates they deal in are more favourable. A Forex market maker acts as an aggregator, providing liquidity to many retail traders and offsetting the resulting risk in the inter-bank market at more favourable terms (smaller spreads). You will be quoted different spreads depending on the currency pair being traded. There is correlation between the liquidity of a currency pairs and the dealing spreads offered. The more liquid pairs generally have smaller dealing spreads.

A smaller spread means that if a position is taken, the price does not have to move in your favour as much until a position of breakeven is achieved. Spreads do vary in small amounts from one Forex market maker to another, but it is a relatively competitive business sector. The target bid/ask spreads are the best possible target spreads used in normal market conditions. In quiet market conditions, the spread may be even narrower but in periods of volatile markets, the spread may be increased.

Lots and Lot Sizes One of the first concepts you need to understand as part of your Forex trading training are lots and mini lots, their definition and the difference between them. When you start investing in Forex trading, and you open an account (preferably on one of the best websites for Forex trading), you will instantly get either a lot or a mini lot. What is a Forex lot? A Forex lot is used to measure the amount of a deal. The value of the deal consists of a certain number of lots or what we usually refer to as the contract size a trader is willing to trade per time. Usually, a standard Forex lot is worth $100 USD. The standard leverage for a lot is a margin of 100 to 1. Here is the formula if you want to calculate the pip value for a given currency. 1 pip, with proper decimal placement / currency exchange rate x Lot Size Here is an example using EURUSD: (.0001/1.2942) x EUR 100,000 = EUR 7.72 But we want the pip value in USD, so we then must multiply EUR 7.72 by the EUR/USD exchange rate. So 7.72 x 1.2942 = $10. The pip value is always $10.00 per 100,000 currency units. So $10 is the fixed value for 1 pip What is a Forex mini lot? A Forex mini lot is similar to a regular lot, only it is smaller in size. Usually a Forex mini lot is worth $100 USD. The leverage is commonly set at 100 to 1, same as for ordinary Forex lots. Now that you understand the meaning of Forex lots and mini lots, you will be able to understand how to set the lot when you get the Forex trading software online. For example, if you will decide to buy 5 lots, you'll know that this is worth $5,000. The lot and mini lot information will usually appear under the Forex quotes, so you'll be able to know exactly how much you invest, whether you buy or sell Forex currency.

Points (Pips) "Pip" stands for "price interest point" in the forex market, and it represents the smallest fluctuation in price for a given currency pair. It is arbitrary how many significant figures are used in an exchange rate quotation. The last decimal place to which a particular exchange rate is usually quoted is referred to as a “price interest point” or “pip”. For example: • In the quotation USD 1=AUD 0.7250, one point or one pip means AUD 0.0001. • In the quotation USD 1=JPY 102.50, one point or one pip means JPY 0.01. Of note, all points (or pips) are not of equal value. Forex traders typically talk about moves in a currency and the profit they make by using a term called pips. A pip refers to the last decimal digit of the quoted currency. For instance the USDYEN might be quoted at 124.57. The movement of the 2 nd decimal is referred to as a pip. If the USDYEN moves from 124.57 to 124.71 this represents a 14 pip move. Most other non yen quoted currencies like EURUSD, GBPUSD, USDCAD are quoted to 4 decimal numbers, thus this 4th digit is one pip. For example for the EURUSD the price might move from 0.8632 to 0.8639, a move of 7 pips. A movement in the GBPUSD from 1.4465 to 1.4520 is a 55 pip move. The dollar amount that relates to one pip for each of the currencies is listed below EURUSD, GBPUSD 1 pip = $10 USD per contract. (fixed) USDCHF 1 pip = $8.3 USD per contract. (approx) USDYEN 1 pip = $9 USD per contract. (approx) As will be explained later the spread between the bid and ask price is generally 3-5 pips. Therefore upon entering a position you are down 3-5 pips. In order to get to breakeven the currency must move 3-5 pips in your direction, and then profit is earned after that. So in order to earn a 10 pip profit from trading long the EURUSD (assuming a spread of 3 pips), it would need to move from 0.8977 to 0.8990 on the chart price. Here is the formula if you want to calculate the pip value for a given currency. 1 pip, with proper decimal placement / currency exchange rate x Lot Size Here is an example using EUR/USD: (.0001/1.2942) x EUR 100,000 = EUR 7.72 But we want the pip value in USD, so we then must multiply EUR 7.72 by the EUR/USD exchange rate. So 7.72 x 1.2942 = $10.

You will find that the pip value = $10 with any currency in which the first currency quoted under Cur1 (such as EUR/USD, GBP/USD, or AUD/USD) is not the USD but the second currency (Cur2) is. The pip value is always $10.00 per 100,000 currency units. So $10 is the fixed value for 1 pip when dealing with the US Dollar as the 2nd currency in the pair. Leverage Leverage financed with credit, such as that purchased on a margin account is very common in Forex. A margined account is a leverageable account in which Forex can be purchased for a combination of cash or collateral depending what your brokers will accept. The loan (leverage) in the margined account is collateralized by your initial margin (deposit), if the value of the trade (position) drops sufficiently, the broker will ask you to either put in more cash, or sell a portion of your position or even close your position. Margin rules may be regulated in some countries, but margin requirements and interest vary among broker/dealers so always check with the company you are dealing with to ensure you understand their policy. Up until this point you are probably wondering how a small investor can trade such large amounts of money (positions). The amount of leverage you use will depend on your broker and what you feel comfortable with. There was a time when it was difficult to find companies prepared to offer margined accounts but nowadays you can get leverage from as high as 1% with some brokerages. This means you could control $100,000 with only $1,000. Typically the broker will have a minimum account size also known as account margin or initial margin e.g. $2,500. Once you have deposited your money you will then be able to trade. The broker will also stipulate how much they require per position (lot) traded. In the example above for every $1,000 you have you can take a lot of $100,000 so if you have $5,000 they may allow you to trade up to $500,00 of forex. The minimum security (Margin) for each lot will very from broker to broker. In the example above the broker required a one percent margin. This means that for every $100,000 traded the broker wanted $1,000 as security on the position. Margin call is also something that you will have to be aware of. If for any reason the broker thinks that your position is in danger e.g. you have a position of $100,000 with a margin of one percent ($1,000) and your losses are approaching your margin ($1,000). He will call you and either ask you to deposit more money, or close your position to limit your risk and his risk. If you are going to trade on a margin account it is imperative that you talk with your broker first to find out what their polices are on this type of accounts. Variation Margin is also very important. Variation margin is the amount of profit or loss your account is showing on open positions. Let's say you have just deposited $10,000 with

your broker. You take 5 lots of USD/JPY which is $500,000. To secure this the broker needs $5,000 (1%). The trade goes bad and your losses equal $5001, your broker may do a margin call. The reason he may do a margin call is that even though you still have $4,999 in your account the broker needs that as security and allowing you to use it could endanger yourself and him. Another way to look at it is this, if you have an account of $10,000 and you have a 1 lot ($100,000) position. That's $1,000 assuming a (1% margin) is no longer available for you to trade. The money still belongs to you but for the time you are margined the broker needs that as security. Another point of note is that some brokers may require a higher margin at the weekends. This may take the form of 1% margin during the week and if you intend to hold the position over the weekend it may rise to 2% or higher. Also in the example we have used a 1% margin. This is by no means standard. I have seen as high as 0.5% and many between 3%-5% margin. It all depends on your broker. There have been many discussions on the topic of margin and some argue that too much margin is dangerous. This is a point for the individual concerned. The important thing to remember as with all trading is that you thoroughly understand your brokers policies on the subject and you are comfortable with and understand your risk. Rollover and Interest In the spot foreign exchange market, trades must be settled in two business days. For example, if a trader sells 100,000 EUR on Tuesday, the trader must deliver 100,000 EUR on Thursday, unless the position is rolled over. Most brokers will automatically roll over all open positions i.e. swaps the trade forward to the next settlement date (two business days) at 5:00 PM U.S. Eastern Standard Time. The swap rates are determined at the inter-bank level and are tradable instruments. In any spot rollover transaction there is a difference in interest rates between the two currencies that will be reflected in the overnight “loan.” If the trader is long the higher yielding currency in the pair, the trader should gain on the spot rollover through the premium relationship of the dollar to that short currency. The amount of the gain is determined by the interest rate differential between the two currencies, and fluctuates day to day with the movement of prices. For instance, on any given day, the rollover could be $1 per $100,000 contract for Great Britain Pound/U.S. Dollar and $15 per $100,000 contract for U.S. Dollar/Japanese Yen. Rollover fees are shown in USD and are posted in the “interest column” every day at 5:00 pm U.S. EST. on your trading platform. For day traders that never hold a position overnight, rollover will not affect trading. Note: For positions that are open on Wednesday and pass 5:00pm U.S. EST, the amount added or subtracted to an account as a result of rolling over a position tends to be around

three times the usual amount. This “3-Day” rollover accounts for settlement of trades through the weekend period. Brokers, Service In order to buy and sell currency, you will need to set up an account with a FX broker. There are many brokers online and across the world. You don’t physically need to visit a broker to open an account. It doesn’t matter which country your broker is based in. Money can always be transferred between your trading account and your bank account easily. When filling out the application form, you’ll need to specify what type of account you will require (regular, mini). You don’t need any previous trading experience to open a trading account. Remember to shop around for the best broker. Look for one who will offer you as many of the items listed below: • Low spreads for each currency • No commission (not many charge this nowadays as they make their money from the spread) • Universal Account allowing you to place either a mini or regular trade from the same account • See if they offer free training or training material • A good trading platform with lots of functionality (covered below) • A reliable service along with good customer service • Guaranteed fills on all the orders you place (covered later) • A good range of currencies which can be traded with that broker • Minimal slippage (covered later) Make sure your broker is reputable and has been around for some time. When you place an order to buy or sell a currency, this doesn’t mean that your order will be filled (executed and placed) automatically. There is the odd occasion when your order may not be executed at the price you want – it may be filled a pip or two away from the price you asked for. When this happens, it is known as slippage as the execution has slipped away from the price you wanted to be filled at.

Forex Quote How to read forex quotes It is important for an investor to understand how to interpret forex quotes as well as the basic terminology of the forex market, before he starts trading. Each foreign exchange transaction involves the simultaneous buying of one currency and the selling of another. It is said that both of these two currencies make up a specific currency pair. An example of a currency quote (exchange rate) of the dollar versus the yen is: USD/JPY = 105.24 The currency to the left of the forward slash ("/") is called the base currency and the one on the right is called the quote currency or counter currency. In the example above, the US Dollar is the base currency in the quote and the Japanese is the counter currency. The notation above means that 1 dollar is equal to 105.24 yen; in other words, one unit of the base currency is equal to 105.24 units of the counter currency (or whatever number is shown instead of the 105.24). If you are buying, the exchange rate specifies how much of the quote currency you have to pay to buy one unit of the base currency. For the example above, 1 US Dollar costs 105.24 Japanese Yen. On the other hand, if you are selling, foreign exchange quote specifies how much units of the counter currency you will receive if you sell one unit of the base currency. You will receive 105.24 yen when you sell one US Dollar. As with every financial commodity, a forex quote includes a bid price (or bid) and an ask price (or ask). Look at the example below that was taken from a live quote of our free forex trading software:

In the example above, the bid price is 114.84 yen and the ask price is 114.88 yen [the dark blue digits above represent the last two digits of the quote]. The dealers are willing to buy the base currency at the the bid price, so users of our software can sell at this price. Therefore, if an FX trader presses the "Sell" button, he would sell dollars at 114.84 yen. The ask price, on the other hand, is the price at which dealers are willing to sell the base currency and users of our software could buy it. By clicking "Buy," an investor would be buying dollars at 114.88 yen. 29

Despite the fact that there are many different currencies all over the world, 85% of all the daily trading volume is concentrated in a small group of currencies known as the "Majors." The "major" currencies include U.S. Dollar (USD), the Japanese Yen (JPY), the Euro (EUR), the British Pound (GBP), the Swiss Franc (CHF), the Canadian Dollar (CAD) and the Australian Dollar (AUD). The major currency pairs that are traded the most are EUR/USD, USD/JPY, GBP/USD, and USD/CHF. USD/CAD and AUD/USD are also actively traded, but not as much as the others mentioned. The major currency pairs (most liquid) are the ones that offer forex traders the best opportunities. Trading Sessions and Trading Times Since the FX market is open 24 hours a day, Sunday to Friday, it stands to reason that there must be traders trading all over the world at different times. For example, there may be Japanese traders trading whilst the European traders sleep. GMT = UK standard time. During the hours from midnight GMT until 9am GMT, the majority of trading takes place in Tokyo and that session is known as the Asian Session. During the hours from 8am GMT until 5pm GMT, the majority of trading takes place in London and that session is known as the European or London Session. During the hours from 1pm GMT until 10pm GMT, the majority of trading takes place in New York and that session is known as the New York Session. The majority of trading takes place during the London session and the first half of the New York session. You are also advised to trade during these times as price will move more during these periods than any other period. Forex Trading Orders When you are trading currencies via forex software or on the phone, there are different orders that you can place. In FX training, we teach our customers how to trade currencies using these. Market Orders A market order is an order to buy or sell a currency at the current market price. When placing a market order, the forex trader only has to specify the currency pair he wants to buy or sell (GBP/USD, USD/JPY, etc.) and the number of lots he is interested in buying or selling. The Ask price is the price the trader will pay when buying and the Bid price is the price he will receive when selling.

This is the simplest order to place. In our trading platform, to buy using a market order, simply click the "BUY" side of the quote and to sell, click the "SELL" side. Therefore, with a simple click of the mouse, you can buy and sell currencies almost instantly. Placing a market order over the phone is just as easy. A trader will ask the forex dealer to buy or sell a specific number of lots of a specific currency after obtaining a two-way quote from the dealer. To learn more about forex quotes and market orders, read "Forex quote how to read one." Limit Orders In a limit order, the trader not only specifies the currency he wants to buy or sell and the number of contracts, but also at which price he wants to do so; in other words, a limit is an order to buy or sell at a specified price or better. Example: Let's say that a trader places a limit order to buy 2 lots of GBP/USD at 1.9170. This means that the order can only be executed at a price equal to 1.9170 or lower (lower is always better for the buyer). Stop Orders The stop order is an order that is activated when a currency reaches a specified price called the "stop". This order becomes a normal market order when the quoted prices reaches a specified level. Stop orders can be used to enter the market on momentum (like when a resistance or support level is broken), to limit the potential loss after establishing a position, and to protect the profit of an existing position that has moved favorably in price. In forex trading, stop orders are very important. Consequently, all traders that want to participate in the forex market should learn how to use this order properly. Ex: Protecting an existing position with a stop order: A day trader buys 100,000 (1 lot) of EUR/USD at 1.1355 in anticipation of an expected 80 pip rally in the euro. In order to control his risk, the trader places a stop order 1.1335 (20 pips below the current price). If the price of the euro was to drop, the trader's loss would be limited to 20 pips ($200). Ex: Using a stop order to buy on momentum: A forex trader expects the U.S. dollar to rally against the Japanese yen, but does not want to buy yet because the USD/JPY is approaching a short-term resistance at 118.00. The forex trader instead places a buy stop order 10 pips above the resistance level. His stop is thus placed at 118.10. After this point, unless the USD/JPY goes to 118.10, the order won't be activated. By doing this, the trader is waiting for the resistance on the USD/JPY to be broken before entering the trade; i.e., he is waiting for the upward momentum on the dollar to be confirmed before buying. Trailing Stop Orders A trailing stop order is a stop order that adjusts itself whenever the price moves by a specified amount in the trader's favor.

Example: Let's say that an FX trader that has a long, profitable USD/JPY position, needs to leave his computer. He can do one of two things: 1. He can place a sell stop order a number of pips below the current market price (say 30 pips) or 2. He can place a trailing sell stop order using a 30 pip stop that adjusts itself every 30 pips. This means that every time the price moves up by 30 pips, the stop is automatically moved up 30 pips in order to protect 30 more pips of profit. It is true that both orders will protect the trader's existing profit, but only the trailing stop order allows the trader to continue participating in greater profits if they indeed occur.

UNDERSTANDING THE FX TRADING PLATFORM A good functional trading platform is more important than many other factors. A trading platform is a software package (normally provided by your broker) which contains charts, prices, news, and a whole host of other information which will allow you to make informed decisions and place trades directly from within that platform. The platform is an easy way to place trades without having to call your broker every time you need to open or close a position. Not every broker has a fully fledged platform. Some only offer prices on their platform whilst others offer much more. You don’t even have to use the platform provided by your broker. If you don’t like it, just use any other platform and when you’ve made a decision to place a trade, you can either place it through your own broker’s platform or call them via telephone. Sometimes, the data (prices and news) which is fed into the platform is provided by a third party which adds to the confusion. Therefore, it would be much easier and better if you got all the functionality of a good trading platform and a good brokerage service from the same place. This is why it’s important to spend some time researching which broker you’d like to sign up with. Platform description is a meta traders platform used by Interbanks Brokers. Please note all the various feature parts of a typical platform.

Overview This is the Meta Trader version 4 program window. The windows are anchored to each other by default but you can manipulate them in a variety of ways. Most windows are easily positioned anywhere on the screen.

1. Market Watch. Watch your list of currency pairs updating in real time. 2. Navigator. This window lists all of your accounts, indicators, and expert advisors 3. Terminal. The default view here is your open trades, but you can use the tab to access your account history, alerts, your mailbox, and a trade journal. 4. Charts. These robust yet flexible charts are the heart and soul of our technical analysis capability.

Market Watch The Market Watch window, also referred to as the Quotes Window, is a floating palette. You can drag it anywhere on the screen (even over other windows). You can toggle through the Market Watch window item by using the menu items View > Market Watch or by pressing the Ctrl + M key combination. The Market Watch button on the toolbar also shows or hides the Market Watch window. The Market Watch shows current prices of the traded currency pairs and also allows you to make quick transactions on any currency pair. To initiate a trade, double click the selected vehicle and the Order Form will open up. You can also access the Order Form by rightclicking your chosen currency pair and then choosing New Order.

Helpful Hint Right click the Market Watch window to add or remove currency pairs from your list, or to show High/Low and Time. Press F10 to get a popup price window.

Charts The charts are the heart of the FX Trader. To open a new chart you can: • • • •

Right-click the Market Watch window, then choose the Chart Window option Using the Ctrl + W key combination Using the menu options File > New Chart Or clicking on the New Chart button on the toolbar. 34

Each chart is highly customizable. Charts can be manipulated to appear in many different ways. Choose from three chart styles; Candlestick, Bar Chart or Line . Easily apply one of our standard indicators or download one from our library. Choose your own custom Chart Theme

Take a closer look You can control your chart by using "hot keys". For instance: • • • • • • •

"<-" and "->" cursor keys allow you to scroll the chart Home and end keys allow you to jump to the end of the beginning of the chart Alt+1, Alt+2, and Alt+3 key combinations switch the chart into Bar, Candlestick or Line presentations respectively Ctrl+G turns on and off the grid lines Ctrl+L switches on and off the volume Ctrl+S saves the chart in a file (*.HST, *.CSV, *.PRN, or *.HTM) Ctrl+P prints the chart in black and white mode

You can also control your chart using your mouse. For instance: • •

You can click and drag your chart horizontally to scroll your chart. You can change the vertical scaling by putting your cursor on the price scale, left clicking and dragging the scale up and down.

• • • •

You can change the horizontal scaling by putting your cursor on the time scale, left clicking and dragging the scale back and forth. Right-click on your chart to access the chart control window. Double-click any object on your chart to select and edit it. Easily create a parallel trendline by selecting your trendline, press the Ctrl key and then move your trendline. This will create a duplicate trendline that you can place wherever you like on your chart.

Order Form A position can be opened in several ways: • • • •

From the menu options Tools > New Order By pressing the F9 key on your keyboard By double-clicking a currency pair in your Market Watch window. By right-clicking the Trade Terminal window and choosing New Order

The Order Form window appears and you can open a position or place an order.

The order window will ask you to select a security symbol (Symbol), specify the number of lots (Volume), set up an optional Stop Loss (Stop Loss), set up an optional Take Profit (Take Profit), and select your order type (Instant Execution or Pending Order). You can then either click the Sell or Buy button to execute your order.

Take a closer look The Enable Maximum Deviation from Quoted Price enables or disables the use of deviation. 99% of our trades are executed in under 1 second. However there are times that the markets can move quite dramatically. The amount the market price moves between the time you click and the execution of your quote is called deviation. If the deviation is below

or equal to the specified parameter, the order will be executed at the new price without any additional notifying. Otherwise you will receive a new price confirmation window through which you can execute your order.

Navigator The Navigator provides quick and convenient access to various program resources. The Navigator can be activated using the menu items View > Navigator or by pressing the Ctrl + N key combination. This Navigator button on the toolbar can also be used to switch the Navigator on and off. The Navigator is organized visually in folders. These folders include: •

• • •

•

Account - The accounts folder will list all your accounts (both demo and live). To add a new account simply right-click the folder and choose Open a New Account. It is important to be aware of which account you are currently trading. Indicators - this will list the indicators that come standard with the Interbank FX Trader platform. If you double-click an indicator you will add it to the current chart. Expert Advisors - Your available CapFX/advice systems. Double-clicking an advisor will activate it for the current chart. Custom Indicators - Very similar to the Indicators folder, however this folder will hold all of your custom indicators as well as the library of indicators that we supply on our forum. Scripts - Scripts are programs destined for single execution of a given action. Unlike Expert Advisors, Scripts aren't fun tickwise and have no access to indicator functions.

Take a closer look You can easily add Indicators and Expert Advisors into your favorites from the Navigator window. Simply right click the one you like and choose Add to Favorites. You can also set up Hot Keys for your favorite Indicators, Expert Advisors, even scripts such as trade, or modify order. Right click in the Navigator window and choose Set HotKey.

Trade Terminal The Trade Terminal allows you to make trades and control your open positions in realtime. You can activate it through the menu opens View > Terminal or by pressing the Ctrl + T key combination. You can also use the Trade Terminal button on your toolbar. The Trade Terminal can be positioned anywhere on the screen. To move it, click the title bar and hold the left mouse button down to drag the window to where you want it.

Trade Tab Active currency positions are listed in the Trade tab window. Positions are managed through a context menu. To view the context menu's options right-click on any position.

Active Positions Context Menu - a synopsis: • • • • • • • • • •

New Order - will open order form window Close Order - will open the close order form window Modify or Delete Order - use this option to edit your stop-loss and take-profit orders Trailing Stop - you can select a predefined trailing stop or set up a custom one. Profit - Choose to show your profit as points, as term currency or as deposit currency Commissions - This toggles the Commissions fields on and off in your trade terminal Taxes - This toggles the Taxes field on and off in your trade terminal Comments - This toggles your Comments field on and off in your trade terminal Auto Arrange - When off, this allows you to rearrange your trade columns however you like (width, placement, etc.) Grid - show and hide the grid to separate the columns.

Account History Tab Information about all your trade operations is stored in the Accounts History tab.

News Tab Real time streaming news, right to your desktop and all completely free for Interbank FX customers and demo users.

Alerts Tab This tab contains information about any alerts that have been created. The alerts are generally for signaling events happening in the markets. You can set up your own alerts and the client terminal will automatically inform you of the server event.

Mailbox Tab The Mailbox is your Interbank FX internal mailing system. You will get important information from us about your registration, account and system.

Experts Tab The Experts tab contains all the information about an attached expert, including opening / closing of positions, the modification of orders, the experts own messages, etc.

Journal Tab The Journal tab contains a list of your actions within the current session.

Take a closer look • • • •

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At the trade tab. Right click on your trade to quickly set a trailing stop loss, view your comments, or to see your Profit at points, term currency or deposit currency At the Account History tab. To view different time periods, define your own time periods or to create reports. At the Alerts tab. Right click in alerts and create your own. It?s quick and easy At the Mailbox tab: Receive important platform updates from inside the Interbank FX Trader. You can also right click in the mailbox tab and create and send your own email messages. At the Experts tab: This tab contains a full history of all actions performed by your Expert Advisor. From application to removal, you?ll get the whole story. At the Journal tab: Here you will find a log of the "stated actions" that have happened in the current session

MODULE II FOREX CHARTING SYSTEM Forex Charts Over the years traders have developed a number of different types of charts in an effort to get a better view of price action. Old chart techniques are resurrected and new chart ideas devised, but the following types of charts continue to be the most widely used. Let’s start by looking at the different types of charts available. There are 3 different types of charts: The first one is a Line chart The second one is a Bar chart The third one is a Candlestick chart All three types represent price moving up, down or sideways. You can see the timeline at the bottom of the charts and the actual price at the right hand side of the chart. With this, you can determine where price was at any given date/time. Forex charts can be interpreted very easily. The Line chart is the least useful chart as it only shows us what price did without giving us any more information. The Bar chart gives us a little more information. Bar or line chart – Perhaps the most popular type of chart, the bar chart adds new information for the trader, showing the high and low prices for a time period in addition to a horizontal notch on the right side of the vertical bar indicating the close. Many chart services also show the opening price with a horizontal notch on the left side of the vertical price bar.

Source: VantagePoint Intermarket Analysis Software

CANDLESTICK CHART SYSTEM This concept was introduced to western traders in the late 1980s and adds yet another dimension to the standard open-high-low-close price data to make the price action during a period more visual at a glance. The open and close have the most significance with the difference between the two making up the “body” of the candle. If the close is higher than the open, the body is usually shown as clear or white and indicates the market gained strength during the period – the bulls won the day. If the close is lower than the open, the body is usually black or dark and indicates the market lost strength during the period – the bears won the day. Price action outside the range of the body is shown as “tails” or “shadows” and gives further clues about price movement during the time period specified.

Japanese Candlestick Charts: More Light on Price Action 41

(Input for this tutorial came from Robert W. Colby, author of The Encyclopedia of Technical Market Indicators, and the Technical Analysis Institute book, Japanese Candlestick Charts) Candlestick charts provide a more visual presentation of price action than traditional bar charts and have become the chart of choice for many technical analysts. One candlestick itself can provide important information about the strength or weakness of the market during a given day or other time period, depending where the close is relative to the open. However, a candlestick pattern usually takes several candlesticks to produce chart formations that give the best signals. The key in candlestick chart analysis is where a given candle or candlestick formation occurs during the market action. Candlesticks may look identical but have an entirely different meaning after an uptrend than they do after a downtrend. Because they can be used in analysis in much the same way as bar charts, candlestick charts have quickly become a favorite of traders and analysts since being introduced to the West in 1990. Candlestick analysts have also added a little mystique to candlestick charts by giving various patterns clever names and providing more descriptive characteristics for these patterns than is the case in typical bar chart analysis. Both types of charts have their double tops, inside days, gaps and other formations. But candlestick analysis ascribes more meaning to the candlestick “bodies” – price action between the open and close – and to the “shadows” or “tails” – price action that takes place outside of the open-close range for a period. Because of their popularity in recent years, you should become acquainted with the nuances and terms of candlestick charts if you aren’t already. Constructing Candlestick Charts Japanese candlestick charts can be drawn for any time period. The most popular time interval to plot is one day, with its obvious and readily available open, close, high and low prices. Short-term traders may choose to plot time intervals measured in minutes. For example, a 30-minute candlestick chart could divide the 6.5 hours of the New York Stock Exchange trading day into 13 intervals, using the first price in each half-hour interval as the open and the last price in each half-hour interval as the close. Longer-term investors consult weekly candlestick charts, using Monday's open and Friday's close to define a weekly candlestick chart’s real body. Monthly candlestick charts are constructed using the first trading day of the month’s open and the last trading day of the month’s close to define the monthly real body. Japanese candlestick charts are fully compatible with Western charting techniques because they are nearly the same as Western bar charts, except that the range between the opening and closing prices is highlighted and given special emphasis in candlestick chart

interpretation. The high and the low price for a period are represented exactly the same way in both Western bar charts and candlestick charts.

Source: VantagePoint Intermarket Analysis Software

The real body is the price range between the period's open and close. This is drawn as the widest part of the candlestick chart. The real body is either white or black, signifying buying or selling dominance after the open. (Of course, with some of today’s analytical software, you can choose any colors you wish.) The contrasting shading (white or black) helps traders perceive changes in the balance of market forces between buying (white) or selling (black) dominance. White candlestick: If the close is higher than the open, the real body is white. A white (Yang) candlestick indicates buying dominance after the open. Black candlestick: If the close is lower than the open, the real body is filled in black. A black (Yin) candlestick indicates selling dominance after the open. The real body is the most important part of each candlestick. The shade (white or black) and length of the real body reveals whether the bulls or bears are dominant during the main period of trading. A long white real body implies that the bulls are in charge. A long black real body implies that the bears are in charge. Candlesticks with very small real bodies, where the difference between the open and close are relatively tiny compared to normal trading ranges, imply that neither side is currently in charge and, furthermore, that the previous trend may be worn out.

Shadows are the part of the price range that lies outside the real body’s open-to-close price range. Shadows are represented as thin lines extending from the real body to the extreme high and low prices for the period, above and below the real body. The peak of the “upper shadow” is the high of the period, while the bottom of the “lower shadow“ is the low of the period. Marubozu lines lack shadows at one or both extremes: The open and/or the close is the extreme high or low price of the period. Major Yang Marubozu lines have the close equal to the extreme high and indicate extreme buying, which is bullish. Major Yin Marubozu lines have the close equal to the extreme low and indicate extreme selling, which is bearish. When the opening is the low, there is buying dominance during the period, which is bullish. When the opening is the high, there is selling dominance during the period, which is bearish. The length and position of the shadows are meaningful. A tall upper shadow implies that the market rejected higher prices and is heading lower. A long lower shadow implies that the market rejected lower prices and is heading higher. Very long shadows, both upper and lower, are known as high-wave lines, and these indicate that the market has lost its sense of direction. Multiple high-wave lines indicate trend reversal. Quick Guide to Main Patterns Candlestick charts give a more visual presentation of price action than traditional bar charts and have become the chart of choice for many technical analysts. One candle itself can provide important information about the strength or weakness of the market during a given day or other time period, depending where the close is relative to the open. However, a candlestick pattern usually takes several candles to produce chart formations that give the best signals. The key in candlestick chart analysis is where a given candle or candle formation occurs during the market action. Candlesticks may look identical but have an entirely different meaning after an uptrend than they do after a downtrend. The diagrams and descriptions below cover only some of the main candlestick patterns, showing the bullish version on the left and bearish version on the right. There are many other candlestick patterns with clever names that chart analysts use.

Bullish

Description

Bearish

“Doji stars” - Prices at the open and close of the period are at the same level, indicating indecisiveness about price direction. The signal tends to be more dependable when it appears at a top than at a bottom.

“Stars” - Stars are reversal patterns and come in several different forms. The pattern consists of three candles, the first usually a large candle at the end of an extended trend followed by a smaller candle that leaves a gap or window and then another large body candle in the direction of the new trend. Large volume would help to confirm the reversal signal.

“Piercing line” and “dark cloud cover” - These reversal patterns are mirror images of one another and are close relatives of the engulfing patterns except that the current candle’s body does not engulf the previous candle. Instead, the market has a gap opening, then moves sharply in the opposite direction and closes more than halfway through the previous candle’s body.

“Hammer” and “Hanging Man” - These two reversal patterns look very much alike, but their name and impact on prices depend on whether they occur at the end of a downtrend or an uptrend. The signal candlestick has a small real body and a long lower shadow, suggesting the previous trend is losing momentum. This pattern also requires confirmation by the next candle.

“Harami” - The harami is a reversal pattern following a trend. Rather than engulfing the previous candle, price action for the current candle is entirely within the range of the previous candle body. This pattern requires immediate follow-through for confirmation.

“Engulfing patterns” - Prices open below the previous close (bullish) or above the previous close (bearish) and then stage a strong turnaround, producing a candle body that totally engulfs the previous candle and suggesting a change in trend direction.

“Tweezers” - Tweezers are minor reversal signals that are more important if they are part of a larger pattern. A tweezer bottom has two or more candles with matching bottoms; a tweezer top has two or more candles with matching tops. They do not have to be consecutive candles. They do require follow-through for confirmation.

Indecision and Continuation Patterns Individual candlesticks or candlestick patterns tend to be most useful in helping to spot market reversal tops or bottoms, but they can also provide information as a trend is unfolding. Some candlesticks suggest that bullish and bearish traders may have achieved some kind of balance and the market can’t decide which way to go next, or the candlestick pattern may just be setting up to continue the trend that is already in place. “Windows” (gaps to Westerners) could indicate either.

Indecisive Candlesticks Perhaps the best-known candlesticks reflecting an indecisive market are a group of individual candlesticks known as doji. A doji has no real body – that is, the open and the close are equal. A doji indicates no net price movement from the first price to the last price recorded during the predefined time interval that formed the candlestick. A doji indicates a lack of progress, a standoff, and an equal balance Bullish between the forces of supply and demand. A doji also implies Bearish Doji uncertainty about the trend. Doji The bulls and bears are said to be in a "tug of war" that has reached a standstill. The implication is that whatever trend that existed before the doji now has lost momentum and is vulnerable to correction or reversal so it may be either a bullish or bearish candlestick, depending on its location on the chart. Doji are frequently seen as part of a larger pattern. Long-legged doji has very long upper and lower shadows and indicates a trend reversal. Rickshaw man is a specific type of long-legged doji where the open and close are in the middle of the price range.

Dragonfly doji has a long lower shadow and no upper shadow. Following an uptrend, it indicates a bearish trend reversal. Four price doji has only one price for the period – that is, the open, high, low and close prices are all the same. It indicates an unusually quiet market. Gravestone doji has a long upper shadow and no lower shadow – that is, the open and close are at the low of the period. Following an uptrend, the longer the upper shadow, the more bearish the indication. Following a downtrend, the gravestone doji can indicate an upside reversal, but that requires a bullish confirmation in the following period. Tri-Star is a rare but significant reversal pattern formed by three dojis, the middle one a doji star that gaps away from the previous period’s doji. Tri-Star often follows a trend of long duration that has run its course. The three dojis clearly indicate a loss of momentum and an exhaustion of the existing trend. Spinning Top A spinning top is similar to a doji, but it has a real body – that is, the open and close are not the same – and shadows that are longer than its real body. The shade (white or black) of the real body is unimportant. Spinning tops indicate indecision, a standoff of bullish and bearish forces. Several spinning tops together often mark a point of price trend change.

Continuation Patterns A continuation pattern suggests that the trend in place should stay in place or resume. Flag formations and triangles in Western analysis are pauses or consolidation areas where the market seems to take a little breather to let prices adjust to conditions. Candlestick charts also feature similar patterns. Rising Three Methods The rising three methods pattern occurs in an uptrend and is composed of five candlesticks. The first is a long white candle. The next three periods produce three small real bodies, two of which are black and all

of which are contained within the range of the first long white body. The fifth candlestick is another long white candlestick that closes at a new high and confirms resumption of the uptrend.

Falling Three Methods The falling three methods pattern occurs in a downtrend and is composed of five candlesticks. The first is a long black candle. The next three periods produce three small real bodies, two of which are white, and all of which are contained within the range of the first long black body. The fifth candlestick is another long black candlestick that closes at a new low and confirms resumption of the downtrend.

Separating lines bullish

Separating lines bearish Separating Lines Separating lines are a continuation pattern in either an uptrend or downtrend. In an uptrend, a black candlestick is followed by a white candlestick with the same opening price. In a downtrend, a white candlestick is followed by a black candlestick with the same opening price. In either case, the existing trend continues. Bullish on Neck Line and in Neck Line Bullish on neck line and in neck line candlesticks are small one-day contratrend reversals that do not amount to much. In an uptrend, there is a gap up open followed by some continuation up to a new high. A mild reversal by the close produces a black candlestick, but the downward movement is not enough to produce a negative net price change close to close. The uptrend resumes the next session. Bearish on Neck Line and in Neck Line Similarly, bearish on neck line and in neck line candlesticks are small one-day contratrend reversals that do not amount to much. In a downtrend, there is a gap down open followed by some continuation down to a new low. A mild reversal by the close produces a white candlestick, but the upward movement is not enough to produce a

positive net price change close to close. The downtrend resumes the next session. Candlestick Reversal Tops Candlesticks with similar appearances can signal much different outcomes, depending on whether the individual candle or candlestick formation occurs after an extended downtrend or uptrend or in the middle of a trend. Here are some candlestick signals at tops that suggest the previous uptrend may be ready to reverse into a bearish downtrend. Hanging Man The hanging man is a bearish reversal pattern occurring within an established uptrend. It has a small real body (white or black) at or near the high; therefore, it has little or no upper shadow. Although the color of the real body is not critical, black is more bearish than white. Also, it has a long lower shadow, like legs dangling down from the body. The hanging man's small real body implies the previous uptrend is losing momentum. The next period’s action would confirm the bearish implications of the hanging man if there is a downward window (gap) or a long black candlestick.

Bearish Engulfing Pattern The bearish engulfing pattern is defined as a current large real body enveloping a smaller white real body formed by price action during the previous period. Supply overwhelms demand. The bulls are immobilized.

Dark Cloud Cover The dark cloud cover is a decisive black candlestick following a strong white candlestick with an opening gap up to a new high, a reversal and weak close well into the previous white real body. The weaker the second black candlestick’s close, the more meaningful and bearish it is. For example, a close near the low of the current black candlestick and below the midpoint (or lower) of the previous white real body would be significant. This candlestick indicates bulls led a charge up the mountain to new price highs but could not hold the ground. Now the bears are pushing them back down the mountain. Dark cloud cover is the opposite of the piercing line. Stars Stars are reversal patterns. There are four main bearish stars that follow and reverse an uptrend.

The shooting star has a long upper shadow, a small real body at the lower end of the price range and little or no lower shadow. After an upward move in previous sessions, a strong rally from the open occurs, but the market rejects the high prices and prices collapse back down to close near the open. This means that after early buying enthusiasm on the open, the rally attempt proved unsustainable, an obvious failure of demand. It is more significant if the current open gaps up from the previous real body.

More significant is the more complex evening star, which comprises three candlesticks: First, a long white candle; second, a gap-higher open and a small real body (black or white), which should be completely above but not touching the real body of the first candle; and third, a black real body that closes well into the white body of the first candlestick. The longer this third black real body, the more meaningful it is. A volume surge on this third black real body would add power to the reversal signal. If the middle candle is a doji, the pattern is called an evening doji star, which is more significant than an ordinary evening star.

If the middle doji’s shadows are completely above and do not touch the shadows of the first and third candlesticks, the pattern is called an abandoned baby top and is even more significant.

Tri-Star is a rare but significant reversal pattern formed by three dojis, the middle one a doji star that gaps up and away from the previous period’s candlestick. Tri-star often follows a trend of long duration that has run its course. The three dojis clearly indicate a loss of momentum and an exhaustion of the trend. Bearish Harami The bearish harami is a reversal pattern following an uptrend, formed a long white real body during the previous period and a short black real body during the current period where the current close is relatively near the open, and both close and open are contained completely within the previous period’s long white real body. There should be immediate downside follow-through in the next period for confirmation.

Bearish harami cross is a major reversal pattern. In an uptrend, a long white real body is followed by a doji, and that doji is contained within the previous large white body.

Two Crows Two crows reverse an existing uptrend. First, there appears a relatively small black candlestick that signals a loss of upside momentum. That small black candlestick is immediately followed by a much more substantial black candlestick, which confirms a bearish change in momentum.

Three Black Crows Three black crows more decisively reverse an existing uptrend. Look for three relatively large, consecutive black candlesticks that close near or at their lows of the period. If the three candlesticks are identical, the pattern is called identical three black crows.

Belt Hold Belt hold, in an uptrend, forms when prices open much higher on a large window (gap) but close substantially lower, giving up most of the early gain.

Bearish Counterattack Line In an uptrending market, a large white candlestick is following by a large black candlestick that opens on a big gap higher and then slumps back during the period to close at the same price as the previous close. The bearish black candlestick needs followup action to the downside to confirm the turn to a downtrend. Tweezer Tops Tweezer tops are two or more candlesticks with matching tops. The tops do not have to be consecutive, and size and color are irrelevant. It is a minor reversal signal that becomes more important when part of a larger pattern. A sell signal is confirmed when the price falls below the intervening two minor pullback lows, preferably on a large black candlestick or a falling window (breakaway gap) and a 51

rise in trading volume to indicate serious selling.

Candlestick Reversal Bottoms In addition to depicting the trading action during a given time period more visually, candlestick charts also provide a more visual picture of price reversal patterns signaling the market may be ready to start a new trend. One candlestick itself can provide important information about the strength or weakness of the market during a given day or other time period and can suggest a price turn. However, it typically takes several candlesticks to produce chart formations that give the best candlestick signals. Of course, much depends on where a given candle or candlestick formation occurs during the market action, a point that cannot be emphasized too much, as candlesticks may look identical but have a different meaning after an uptrend than they do after a downtrend. Here are some candle signals at a bottom suggesting the previous downtrend should reverse into a bullish uptrend. Hammer or Shaven Head The hammer (takuri) is a bullish reversal pattern occurring within an established downtrend. It has a small real body (white or black) at or near the high (thus, little or no upper shadow), and it has a long lower shadow, which implies that extreme low prices were rejected by the market. The hammer's small real body implies the previous downtrend is losing momentum. The market can be said to be hammering out a base. Another name applied to a candlestick (white or black) with no upper shadow is shaven head. Inverted Hammer or Shaven Bottom The inverted hammer is a bullish reversal pattern that follows a downtrend. It has a small real body (white or black), long upper shadow (longer than the body) and little or no lower shadow. This pattern is confirmed the next day by a strong upside gap on the open followed by further substantial upside movement to form a large white real body. Another name applied to a candlestick (white or black) with no lower shadow is shaven bottom. Bullish Engulfing Pattern The bullish engulfing pattern is a major bottom reversal signal pinpointing a trend change from bearish to bullish. It is a two-candlestick pattern where a small black body for the previous period is followed by and contained within a large white body for the current period, which engulfs one or more previous candlesticks.

Piercing Pattern The piercing pattern (or piercing line) is similar to the engulfing pattern, but the signal candlestick does not engulf the previous candlestick. Following a long black candlestick for the previous period, the price gaps lower on the open for the current period, below the previous low. Later, the price reverses strongly upward to close above the midpoint of the previous period’s black real body. The higher the current close relative to the previous period’s black real body, the more meaningful is the piercing pattern. The strong price reversal demonstrates that the extreme low price on the open was rejected by the market and implies that the balance of power has shifted to the bulls. Stars Stars are reversal patterns that can signal either a top or bottom, depending on the previous price trend. There are three main bullish stars that follow and reverse a downtrend. The morning star is a major bottom reversal signal following a decline. It is comprised of three candlesticks: (1) a long black candle; (2) a gap-lower open and a small real body (black or white) that should be entirely below and not touching the real body of the first candlestick, and (3) a large white real body that closes well into the long black body of the first candlestick. The longer this third white real body, the more meaningful it is. Also, a volume surge on this white real body would add power to the reversal signal. If the middle candle is a doji, the pattern is called a morning doji star and is said to be more meaningful than an ordinary morning star.

If the middle doji’s shadows are completely below without touching the shadows of the first and third candlesticks, the pattern is called an abandoned baby bottom and is considered to be even more significant.

Bullish Harami The bullish harami, like the star, is a reversal pattern that can occur at either a top or bottom. The bullish version follows a downtrend with a long black real body for the previous period. The current period produces a short white real body, where the current close is relatively near the open, and both close and open are contained completely within the previous period’s long black real body. There should be immediate upside follow-through the next period for confirmation. Bullish Harami Cross The bullish harami cross is a major reversal pattern similar to the bullish harami, but in a downtrend, a long black real body is followed by a doji (open and close at the same price giving a cross-like appearance) that is contained within the large black body.

Three White Soldiers Three white soldiers reverse an existing downtrend. Look for three relatively large, consecutive white candles that close near or at their highs of the period.

Belt Hold The belt hold appears in a downtrend when prices open much lower on a large window (gap) but then close substantially higher, recovering most of the early loss.

Bullish Counterattack Line In a downtrending market, a large black candlestick is following by a large white candlestick that opens on a big gap lower and then rallies during the period to close at the same price as the previous close. The bullish white candlestick needs followup action to the upside to confirm the turn to an uptrend. Three Inside Up Three inside up is composed of three candlesticks. Following a prevailing downtrend, the first is a large black candle. This is followed by a short white candle that is contained entirely within the real body of the previous big black candle. This suggests some loss of downward price momentum. The third candlestick is a large white candlestick that closes above the highs of the previous two candlesticks, thus confirming a bullish change in trend direction. Three Outside Up Three outside up is also composed of three candlesticks following a prevailing downtrend. First look for a black candlestick. This is followed by a larger white candlestick that is an engulfing line – that is, its real body contains the entire first period’s price range. This alone suggests a change in downward price momentum. The third candlestick is a large white candle that closes above the highs of the previous two candlesticks, thus confirming a bullish change in trend direction. Ladder Bottom Ladder bottom reverses a bearish downtrend. After three consecutive and decisive selling sessions forming three substantial black candles, there may be some slowing of downward momentum in the fourth period. The trend change from bear to bull is confirmed in the fifth period by a relatively large white candlestick that closes on its high and at a new high relative to the most recent past three periods.

Kicking Kicking is a two-day bear trap. Following a decisive day of selling where prices open on their highs and close on their lows, forming a substantial black candlestick with no shadows, prices totally reverse on the open the very next day, forming a rising window on a large upside opening price gap. Prices close that day on their highs, forming a substantial white candlestick with no shadows. The bears can’t help but suffer big losses, and they are likely to be squeezed further in the days ahead, with the market showing no mercy. The bears suffer a severe kicking. Tweezer Bottoms Tweezer bottoms are two or more candlesticks with matching bottoms. The bottoms do not have to be consecutive, and size and color are irrelevant. It is a minor reversal signal that becomes more important when part of a larger pattern.

MODULE III Money Management and Traders Psychology Forex Money Management Money management is the process of analyzing trades for risk and potential profits, determining how much risk, if any, is acceptable and managing a trade position (if taken) to control risk and maximize profitability. Many traders pay lip service to money management while spending the bulk of their time and energy trying to find the perfect (read: imaginary) trading system or entry method. But traders ignore money management at their own peril. Money management is a critical point that shows difference between winners and losers. It was proved that if 100 traders start trading using a system with 60% winning odds, only 5 traders will be in profit at the end of the year. In spite of the 60% winning odds 95% of traders will lose because of their poor money management. Money management is the most significant part of any trading system. Most of traders don't understand how important it is. It's important to understand the concept of money management and understand the difference between it and trading decisions. Money management represents the amount of money you are going to put on one trade and the risk you are going to accept for this trade. There are different money management strategies. They all aim at preserving your balance from high risk exposure. 55

The good news is that for most traders, money management can be a matter of common sense rather than rocket science. Below are some general guidelines that should help your long-term trading success. Maximum Exposure Risk only a small percentage of total equity on each trade, preferably no more than 3% of your portfolio value. I know of two traders who have been actively trading for over 15 years, both of whom have amassed small fortunes during this time. In fact, both have paid for their dream homes with cash out of their trading accounts. I was amazed to find out that one rarely trades over 1,000 shares of stock and the other rarely trades more than two or three futures contracts at a time. Both use extremely tight stops and risk less than 1% per trade.

First of all, you should understand the following term Core equity. Core equity = Starting balance - Amount in open positions. If you have a balance of 10,000$ and you enter a trade with 1,000$ then your core equity is 9,000$. If you enter another 1,000$ trade, your core equity will be 8,000$ It's important to understand what's meant by core equity since your money management will depend on this equity. We will explain here one model of money management that has proved high annual return and limited risk. The standard account that we will be discussing is 100,000$ account with 20:1 leverage. Anyway, you can adapt this strategy to fit smaller or bigger trading accounts. Money management strategy Your risk per a trade should never exceed 3% per trade. It's better to adjust your risk to 1% or 2% we prefer a risk of 1% but if you are confident in your trading system then you can lever your risk up to 3% 1% risk of a 100,000$ account = 1,000$ You should adjust your stop loss so that you never lose more than 1,000$ per a single trade. If you are a short term trader and you place your stop loss 50 pips below/above your entry point. 50 pips = 1,000$ 1 pips = 20$ The size of your trade should be adjusted so that you risk 20$/pip. With 20:1 leverage, your trade size will be 200,000$ If the trade is stopped, you will lose 1,000$ which is 1% of your balance. This trade will require 10,000$ = 10% of your balance. If you are a long term trader and you place your stop loss 200 pips below/above your entry point. 200 pips = 1,000$ 1 pip = 5$. Diversification Trading one currency pair will generate few entry signals. It would be better to diversify your trades between several currencies. If you have 100,000$ balance and you have open position with 10,000$ then your core equity is 90,000$. If you want to enter a second position then you should calculate 1% risk of your core equity not of your starting balance! It means that the second trade risk should never be more than 900$. If you want to enter a 3rd position and your core equity is 80,000$ then the risk per 3rd trade should not exceed 800$ It's important that you diversify your orders between currencies that have low correlation. For example, If you have long EUR/USD then you shouldn't long GBP/USD since they have high correlation. If you have long EUR/USD and GBP/USD positions and risking 3% per trade then your risk is 6% since the trades will tend to end in same direction.

If you want to trade both EUR/USD and GBP/USD and your standard position size from your money management is 10,000$ (1% risk rule) then you can trade 5,000$ EUR/USD and 5,000$ GBP/USD. In this way, you will be risking 0.5% on each position. Stop Loss Order type whereby an open position is automatically liquidated at a specific price. Often used to minimize exposure to losses if the market moves against an investor’s position. As an example, if an investor is long USD at 156.27, they might wish to put in a stop loss order for 155.49, which would limit losses should the dollar depreciate, possibly below 155.49. Stop losses are instructions placed by the client with the provider to close out an open position if a market trades through a specific level. Stop loss orders are often used to attempt to limit the amount which can be lost on a position. Note that stop losses are not always guaranteed and the execution of such orders will depend on market volatility and liquidity. The operation of these order types should be discussed with your provider or representative. You should refer to your Client Agreement with respect to the operation of these order types.

MORE ON STOP LOSS IN THE ATTCHED APPENDIX

___________________________________________________________ ARTICLE BONUS THE ESSENTIALS OF WINNING PSYCHOLOGY by Ray Barros It is my belief that successful trading is a function of: • A written trading plan with an edge • Effective Money Management and • Winning Psychology In this essay I shall: 1. Identify the essential element of winning psychology. 2. Identify the personal attributes required. 3. Show the belief structure necessary to achieve and maintain essential element. 4. Identify the blocks to winning psychology, and 5. Mention some tools I found useful in this context. There are two concepts I should like to explore before beginning the article. The first has to do with the way I believe humans acquire knowledge. There is an objective reality which humans perceive through the filters of their values, beliefs and rules. This perception can and usually distorts our sense of reality. The extent to which we reduce or eliminate the distortion is the extent to which we will be successful in life. This is especially true for traders. The second idea I want to introduce is that of the evolution of a trader. For me the natural progression is: 1. The Rule Based Trader: "There is one rule: never break your rules" 2. The Subjective Trader: "There are two rules: - The first is never break your rules. - The second is know when to break the first". 3. The Intuitive Trader: "There are no rules. Whatever my intuition tells me is the right action on this trade is the correct action in the circumstances. This belief accords with reality more often than not". All types of traders can make money as long as they conform to the rules of that stage. e.g. a trader at the Rule Based Stage is more than likely to lose money in the long run if he breaks his rules.

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Finally, before I begin I should like to briefly explore what I consider the necessary empowering motivation to succeed. Trading success is simple to achieve but not easy. It is simple because the roadmap for success has been clearly laid out in all the three areas - written trading plan etc; it is not easy because following that roadmap is not easy. What motivation is necessary to get us through the rough patches? At some level we traders are attracted to this game because of the money we can earn. But, I have found that money alone is an insufficient motive. All good traders I know LOVE the game for itself. The fact that we get paid for it is merely a bonus. This love for the game is incorporated into the vision we want to achieve as a result of our trading and that vision is the zing that gets us through the rough patches. It goes without saying that for successful traders, trading is fun. I The Essential Element of Winning Psychology At its core, winning psychology has as its base the "acceptance of the outcome of a trade". By acceptance I mean the ability of being aware of an emotion without "buying into" its content; some may call this 'mindfulness'. e.g. Contrast: Imagine you have just entered a trade and the very next bar is a big range bar against your position: "My God here I go again! Can't I do anything right! What will my wife say if I take yet another losing trade! Maybe I should move my stop? No I can't do that - the last time it cost me my bank! But what about the other day when I got stopped out only to have it go my way? This is just too hard!!!!" etc, etc. With: Imagine you have just entered a trade and the very next bar is a big range bar against your position: "The market is approaching my stop. I feel uncomfortable with the price action and I can live with the discomfort". The first trader may think he has accepted the outcome but in fact he has failed to do so at the emotional level; the second trader has accepted the outcome at all levels.

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Online Forex Training Manual – By: Internet Business Academy This idea of acceptance applies not only to loses but to profits as well. The trader that "accepts" an outcome realizes that on an individual trade basis a positive outcome on one trade does not translate into a future of unlimited profits. At its core "acceptance" realizes that trading is based on probabilities, as such every trade is unique. In other words, the past does not equal the future. More on this in the section dealing with beliefs. II Identify the Personal Attributes Required If we are to acquire "Acceptance", then certain personal attributes are essential: • Awareness - the ability to step outside ourselves and observe. The more effectively we can do this, the easier our progress to "Acceptance". • Honesty - the ability to seek to perceive reality in spite of our filters. • Courage - the willingness to bear the pain brought about by our awareness and honesty. • Commitment - the willingness to do whatever is necessary to achieve our goals. In the words of Chin-Ning Chu author of "Thick Face, Black Heart": "Even though most people think they are trying to succeed, they are simply going through the motions. The last thing in the world they want is to get off the familiar treadmill and actually get somewhere". We cannot succeed in our journey to "Acceptance" unless we acquire these attributes. To the extent that we have them is the extent to which we will experience fulfillment. III The Belief Structure Necessary to Achieve and Maintain "Acceptance" Ultimately to succeed, we, as traders, need to adopt two apparently contradictory beliefs: "That the market is uncertain and unpredictable and that the market is relatively certain and predictable". The resolution of this apparent conflict is found in the timeframes that we hold the beliefs. At the trade-by-trade level, what Mark Douglas, calls the micro level, we hold the first belief. Because the market can and will probably do anything, we seek first to protect our capital in the execution of our trading plan. In other words, we must always have an exit strategy. At the level of a "large sample size" (the macro level), we hold the second belief. To the extent our trading plan has an edge, will be the extent to which the market will be predictable and certain. In short we accept that with trading we are dealing with probabilities and not certainties. It is of imperative importance we hold these beliefs not 61 http://e-fxstrategies-review.blogspot.com

Online Forex Training Manual – By: Internet Business Academy only at an intellectual level but also at every level of our being - especially the emotional level. As a trading coach I have seen, time and again, lip service acceptance to the idea of probability; but when it comes to actually trading, the traders behave as if each and every trade must be a winner - they have a need for certainty. How else can we explain the popularity of services advertising 90% hit rates? If the ads were not drawing an adequate response, they would disappear. Probability thinking leads to a host of other states and beliefs: 1. Because we know that we will succeed in the long run and because we know we will protect ourselves no matter what the market does, we acquire the state of "self trust" and the state of being "carefree". In turn these states allow us to remain.... 2. Focused, confident and carefree when we are experiencing the inevitable prolonged drawdown. 3. Because at the micro level we know that the market is random, we will not allow euphoria to set in and lead us to reckless trades. Each trade will only be one in a series of probabilities. 4. We will view market information not as a source of pleasure/pain but merely as data providing us with opportunities. This is not to say trading should not be fun; indeed not only should it be but for most traders it MUST be. However, the fun comes from the flawless execution of the rules appropriate to our stage of evolution and not from trade by trade results. IV Identify the Blocks to Winning Psychology The main enemy to "Acceptance" is Fear. The universal fears are: • The fear of being abandoned and • The fear of losing control. If we reflect for a moment, we'll see how the fear of being abandoned comes about. As young children, we are totally dependent on our parents. Very quickly we come to realize that if they ever abandon us, we shall be unable to care for ourselves. Most of us fail to confront this fear as we grow into adulthood. As a result we automatically deal with it by attempting to control our environment - the people, conditions and events that surround us. This tendency to control may or may not be appropriate in other areas of life but as a strategy for trading the markets it is a bust. Most of us are incapable of influencing the market even for the shortest moment, let alone control it. Mark Douglas's four fears are but an outgrowth of the two universal fears: 62 http://e-fxstrategies-review.blogspot.com

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1. Fear of loss 2. Fear of being wrong 3. Fear of missing out 4. Fear of leaving money on the table. These may be more familiar to the trader. I first gained an insight into effects of fear some years ago. At that time, I was trading futures through Jackson Futures. The company provided a trading room and I met a quiet chap. He came in a few minutes after the US Bonds opened and left just after the close. Given that trading opened (Aussie time) 12:30 am and closed 5:00 am, this was no mean effort. One morning I noticed he looked very distressed and I struck up a conversation with him. He told me he had bet the farm shorting a strong bull market. As his red- rimmed eyes stared off in the distance he said: "I don't know why I just didn't cut the position earlier; anyone would have seen the strength - why didn't I? I never saw him again. That is the effect of fear - it drives out knowledge; it leads to myopia; it immobilizes us and leads to inaction. The mirror image of fear is euphoria - the feeling that we can do no wrong. As much as fear, euphoria will ultimately lead to trading failure. Since trading is a game of probabilities, we will experience times when we can do no wrong. But these times will come to an end. The trader caught in the euphoric trance will not recognize this and taking one risk too many will eventually get caught in a heavy loss. If he is lucky, the loss will not be a catastrophic loss. Fear and Euphoria can catch not only newbies but also the most experienced and successful trader. Witness the demise of (Trader) Vic Sperandeo. Vic started trading public funds in 1972 and for over 25 years had a very successful career. His view on trading can best be summarized by the passage below: "I'm a market professional....and I am very good at what I do.... I never gamble more than I can afford to lose.... I think my unique strength is in my consistency.. I pride myself in my ability to successfully stay in the game..." (Trader Vic - Methods of a Wall Street Master page ix) This year Vic went bankrupt as a result of one trade. Euphoria or Fear? 63 http://e-fxstrategies-review.blogspot.com

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It doesn't matter. Whatever the reason, Vic lost a reputed US$50 million and is now out of the game. Two other factors impact on our fear or euphoria: * Our expectations. Rather than accept market information in its pure form, we impose our expectations. In turn these expectations impact on our fear and/or euphoria. * Our own psychosis. Each of us grows into adulthood with our psychosis - what Stephen Wolinsky calls "trances". Thus many times our responses to market information are not a response to present information but to past events. In other words, we are not trading in the NOW or with PRESENT TENSE INFORMATION. V Some Tools I Have Found Useful To achieve "Acceptance", we need to manage "Fear and Euphoria". For me the decisive tool was learning strategies to be aware, acknowledge, and manage the twin emotions of fear and euphoria. This meant starting with small pains and slowly becoming comfortable with my feelings. When I first started trading successfully, I used discipline as my main weapon. But when I started fund management in 1991, I found it inadequate. Dr George Lianos helped me discover the way of managing emotions - not eliminating, MANAGING. George taught me that a step-by-step approach was the best way for me. Learning to manage small fears, I slowly learnt to handle FEAR and EUPHORIA in my trading. I have developed a process based on the works of S. Wolinsky (Tao of Chaos) and C. Andreas (Core Transformation). Other tools I have found useful are: 1. Meditation and/or mindfulness. These techniques taught me how to remain unruffled and centered during the hurly-burly of real-time trading. More than any other tool I use, they teach me that AWARENESS is everything. They re long-term tools. 2. The ideas and distinctions of Mark Douglas. Another long-term technique. 3. Neuro Linguistic (NLP) techniques. Useful for absorbing pain. A medium term technique. 4. Breathe work and Posture. Learning to breathe, stand and/or sit properly are effective short term tools to remain calm in periods of stress. VI SUMMARY To succeed a trader must have a vision about where he is heading and must internalise that Winning Psychology rests on Acceptance of the trading outcome. This means managing Fear and Euphoria. To do this, we need to ACCEPT, with every fibre of our body the belief that at the micro level the market is uncertain and unpredictable and at the macro level is relatively certain and predictable. This article was reprinted with permission from the author. More articles and information on Mr. Barros can be found at www.adest.com.au 64 http://e-fxstrategies-review.blogspot.com

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______________________________________________ _ Handling Fear Understanding the Trader’s Fear of Risk, Fear of Loss Fear has the power to become your greatest trading liability if it is not understood. Most people are afraid of risk, not only because they are afraid of failure but more so because they are afraid of loss. Let’s look at what research tells us are the reasons that most traders fail. Successful traders agree that these are the things to justly be feared. The high rate of failure for beginner forex traders (as well as all other securities, stocks etc.) has been found to be directly due to these six things, in order of significance: Poor understanding and knowledge Undercapitalization Unrealistic expectations Lack of patience Lack of discipline High risk aversion As we look over this list, it becomes apparent that fear of failure and loss is the byproduct of trading without having in place a proper Forex Trading System – one that includes a high element of mind training and a high quality forex education. The last one on the list, high risk aversion, however, is not pointing not merely to a dysfunctional Trading System, it is talking about the need to understand risk in order to succeed... Clearly if the fear of loss is coming up for you because you are trading money that you cannot afford to lose, this type of fear is a healthy and sane response. If this is the case then forex trading is not the place for you. The Forex Market is considered a High Risk market. Every responsible forex training and trading site makes that same high risk disclaimer in no uncertain terms. That is why stringent risk management should be factored in every single trade you ever enter. However, it has often been said by successful traders that the Forex Market is one of the risk-management safe trading markets for many reasons, which are covered in the beginning chapters on ‘The Advantages of the Forex Market’. How Successful Traders Manage Fear of Risk and Loss The answer to the underlying question of fear can be seen in the differing conditioned behaviors, regarding fear of risk and fear of loss, between unsuccessful and successful traders. In referring back to ‘seeking what every successful trader has in common’, I am reminded of Charles Sanford, former Chairman of Bankers Trust, who gave the very 65 http://e-fxstrategies-review.blogspot.com

Online Forex Training Manual – By: Internet Business Academy insightful speech on how the successful view the fear of risk, excerpts of which I have loosely recalled here. I include this because it also serves as such a good example of ‘reframing’ a conditioned belief, and the benefits of proper mind training. From an early age, we are all conditioned by our families, our schools, and virtually every other shaping force in our society to avoid risk. My first observation is that successful people understand that risk, properly conceived, is often highly productive rather than something to avoid. They appreciate that risk is an advantage to be used rather than something to be avoided. Such people understand that taking calculated risks is quite different from being rash. The paradox is that playing it safe is dangerous. Far more often than you would realize, the real risk in life turns out to be the refusal to take a risk. In other words, the truly most threatening dangers usually arise when you shrink from confronting what only appear to be the most threatening dangers. What is widely regarded as playing it safe turns out not to be safe at all. As Heraclitus, the Greek Philosopher said, some 2,500 years ago: Nothing endures but change. Most of us have come to agree with this, but its consequences still deserve some reflection. Obviously, if change is the fundamental rule of life, then resistance is folly -- doomed to defeat. In other words, in a world of constant change, a world where Heraclitus said you can never step into the same river twice, taking risks is accepting the flow of change and aligning ourselves with it. Remember the paradox: Risk only looks and feels like endangerment. For those who understand reality, risk is actually the safest way to cope. To take a risk is indeed to step into circumstances you cannot absolutely control. There, again, is the paradox: In a world of constant change, risk is actually a form of safety, because it accepts that world for what it is. Conventional safety is where the danger really lies, because it denies and resists the world. I trust you understand that when I say risk is actually safety, I'm talking about a certain sort of risk. I'm not advising that you leap off tall buildings in the hope that the operation of constant change will reverse the law of gravity in mid-flight. I'm speaking rather of a sort of risk that actually aligns you with the direction of change and that the task then becomes learning how to take risks properly. To be more specific, I believe firmly that the sort of risks that put one in a position to control one's lot in a world of incessant change are the risks that attempt to add something of value to that world. To create value, to focus one's efforts on increasing the fund of that which is worthwhile, involves risk. And yet, paradoxically, it provides you with the greatest control over a changing world and maximizes your chances to achieve a truly meaningful personal satisfaction. 66 http://e-fxstrategies-review.blogspot.com

Online Forex Training Manual – By: Internet Business Academy This is a good opportunity to add a piece of ancient wisdom: Do not merely seek to follow in the footsteps of the successful. Seek what they sought. The Characteristics of a Successful Trader If we reframe the liabilities listed in trader failure list, we can clearly see that the Characteristics of a Successful Trader are: • Excellent trading knowledge and understanding • Adequate capitalization • Realistic expectations • Patience • Discipline • Understanding and Managing Risk If you look at the advice from the world’s most successful traders today, you’ll notice that they will all agree with this, each in their own way. Define first the level of risk you dare assume. Start with a small position, and then build it up if it works. -- George Soros, Currency Trader, Quantum Group of Funds. All it takes to become a successful forex trader is aptitude, training, and experience. – Rick Smith,(Forex Market Trader, Forex-Advisor.com).Spend your day making yourself happy and relaxed. Key is to play great defense, not great offense. Decrease trading size when you are doing poorly, increase when you are trading well. Place mental stops, price stops and time stops. Monitor your trading success in real-time. Do not be dwelling on mistakes made 3 seconds ago, but what you are going to do from the next moment on. Don't be a hero. Don't have an ego. Always learn, and question yourself and your ability. Don’t ever feel that you are very good. The second you do, you are dead. ---- Paul Tudor Jones, Future’s Trader, Tudor Futures Fund The first rule of trading is don’t get caught in a situation in which you can lose a great deal of money for reasons you don’t understand. A trader has to be patient and willing to make mistakes regularly. -- Bruce Kovner, Caxton Corporation GAMut Fund. When you earn the right to be aggressive, you should be aggressive. (A philosophy reinforced by Soros) The way to build long-term returns is through preservation of capital and home runs. -- Stanley Druckenmiller, Currency Trader, Quantum Fund. A Trader’s Advice from 1923 After reading quotes from today’s traders, it is even more illuminating to quote here a page from another successful trader in a very different time and place, whose advice is remarkably the same. This list of Characteristics of a Successful Trader is quoted from

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Online Forex Training Manual – By: Internet Business Academy Edwin Lefevre’s 1923 book, Reminiscences of a Stock Operator. It is even more poignant to remember that he wrote this book in the years before the 1929 Stock Market Crash, a time in America when it had become almost a craze to play the market. Why so poignant? Because 80 years later his advice offers the perfect antidote to the pitfalls Behavioral Finance Scientists have found in today’s burgeoning era of online trading. And as for forex traders today, his voice speaks to us across time to a modern age when online traders are now flocking to the Forex Market in droves – the most rapidly growing market in the world, in fact in the history of the world. Of course, it is also worth noting that every point he advises is a description of a mental trading tool achieved by mind training. 1. Caution. Excitement (and fear of missing an opportunity) often persuades us to enter the market before it is safe to do so. After a down-trend a number of rallies may fail before one eventually carries through. Likewise, the emotional high of a profitable trade may blind us to signs that the trend is reversing. 2. Patience. Wait for the right market conditions before trading. There are times when it is wise to stay out of the market and observe from the sidelines. 3. Conviction. Have the courage of your convictions: Take steps to protect your profits when you see that a trend is weakening, but sit tight and don't let fear of losing part of your profit cloud your judgment. There is a good chance that the trend will resume its upward climb. 4. Detachment. Concentrate on the technical aspects rather than on the money. If your trades are technically correct, the profits will follow. Stay emotionally detached from the market. Avoid getting caught up in the short-term excitement. Screen-watching is a tell-tale sign: if you continually check prices or stare at charts for hours it is a sign that you are unsure of your strategy and are likely to suffer losses. 5. Focus Focus on the longer time frames and do not try to catch every short-term fluctuation. The most profitable trades are in catching the large trends. 6. Expect the unexpected. Investing involves dealing with probabilities – not certainties. No one can predict the market correctly every time. Avoid gamblers’ logic.

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Online Forex Training Manual – By: Internet Business Academy

MODULE IV Understanding Market Movements Technical Analysis Chart 1 TRENDS The trend is the fundamental cornerstone of technical analysis. Adherence to the trend should be respected and conscientiously observed. The trend denotes the overall direction of the market at a given time over a given scope, showing the trader the tendency of change in market prices. More simply put, the trend shows the direction of the market. Thus it follows that all trends fall under one of the following three categories: upward, downward, and sideways. Trends may also be classified by their timeframes as long-term, medium-term and short-term trends. Any number of smaller trends can occur within a larger trend structure in the form of a sub-trend. Trend is simply, the overall direction prices are moving, UP, DOWN, OR FLAT.

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The direction of trend is absolutely essential to trading and analyzing the market.

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Online Forex Training Manual – By: Internet Business Academy

In the Foreign Exchange (FX) Market it is possible to profit from UP and Down movements, because of the buying of one currency and selling against the other currency e.g. Buy US Dollar Sell Japanese Yen ex. Up Trend chart.

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Online Forex Training Manual – By: Internet Business Academy TREND CLASSIFICATIONS

DRAWING TRENDLINES The basic trendline is one of the simplest technical tools employed by the trader, and is also one of the most valuable in any type of technical trading. For an up trendline to be drawn, there must be at least two low points in the graph where the 2nd low point is higher than the first. A price low is the lowest price reached during a counter trend move.

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Online Forex Training Manual – By: Internet Business Academy

TREND, ANALYSIS AND TIMING Markets don't move straight up and down. The direction of any market at any time is either Bullish (Up), Bearish (Down), or Neutral (Sideways). Within those trends, markets have countertrend (backing & filling) movements. In a general sense "Markets move in waves", and in order to make money a trader must catch the wave at the right time.

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Online Forex Training Manual – By: Internet Business Academy DRAWING TRENDLINES

Drawing Trendlines will help to determine when a trend is changing

Trendlines show support boundaries underprices. These boundaries may be used as buying areas.

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Online Forex Training Manual – By: Internet Business Academy

Temporary trendline penetrations are not as significant as a close beyond the trendline.

CHANNELS When prices trend between two parallel trendlines they form a Channel. When prices hit the bottom trendline this may be used as a buying area and when prices hit the upper trendline this may be used as a selling. 76 http://e-fxstrategies-review.blogspot.com

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SUPPORT Price supports are price areas where traders find that it is difficult for market prices to penetrate lower. Buying interest in the dollar is strong enough to overcome Selling interest in the dollar keeping prices at a sustained level.

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RESISTANCE Resistance is the opposite of support and represents a price level where Selling Interest overcomes Buying interest and advancing prices are turning back.

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Online Forex Training Manual – By: Internet Business Academy RETRACEMENTS

Technical Analysis Chart II 79 http://e-fxstrategies-review.blogspot.com

Online Forex Training Manual – By: Internet Business Academy

Trend Types Upward An upward trend is denoted by the systematic and extended rise in the price of given commodity over some prolonged period of time. This does not mean that price of the given commodity never recedes, but merely that in the overall picture prices rises more than it falls in the given timeframe and the terminal position of given chart shows the price as being higher than the initial.

the the the the

Downward A downward trend shares all the characteristics of the upward trend but in the reverse direction, thus denoting the fall in the price of a given commodity.

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Online Forex Training Manual – By: Internet Business Academy Sideways The sideways trend is also known as a trendless or flat market. Though similar to the other two types, the sideways trend shows no major difference in the price values of its terminal and initial chart positions. The sideways trend denotes market conditions in which no major changes in the price of the commodity are occurring.

Support and Resistance & Trendlines Support and Resistance The peaks within a trend are referred to as the trend's resistance levels. These alterations from upward to downward slope on a currency price chart signify market changes where the sellers begin to overpower the buyers. The troughs, on the other hand, represent price levels where the market changes direction as a reaction to the buyers overpowering the sellers. These lows within a trend are known as support levels.

Trendline

A trendline is a straight line connecting significant support or resistance levels. Just as the trends themselves, trendlines can be upward, downward or sideways. A trendline 81 http://e-fxstrategies-review.blogspot.com

Online Forex Training Manual – By: Internet Business Academy connecting a set of support levels is referred to as the line of support. Likewise, a trendline connecting resistance levels is referred to as a line of resistance. Trendlines are always drawn from left to right. Thus the trendline is also the line of support for upward trends, and the line of resistance for downward trends. Market volume and the timing of trendline penetrations and support and resistance level reversals can be significant factors in determining the market’s future direction. Higher volume at a given support/resistance level, extensive repetition of support/resistance levels on the trendline and prolonged duration of trendline adherence all signify the markets determination to obey the trend and thus strengthen it. Likewise, high volume on a trendline penetration or the failure of consecutive support/resistance levels to exceed each other would be characteristic of the market’s determination to break out of or even reverse the trend. Upon penetrating a firm line of resistance, the market often chooses to take up that very line of resistance as its new line of support. The reverse is also true, as lines of resistance often replace previous lines of support in cases of downward penetration. Generally, a trendline can be drawn from as few as two support/resistance levels. However, the more support/resistance levels you have touching your trendline, the more stable the trend is. Research has also shown that the more significant trends form at 45-degree angles. A sharper angle suggests an unsustainable rally and a shallower angle suggests that a trend may be close to reversal. Channel Line The channel line runs parallel to the basic trendline, joining the support levels in an upward trend and the resistance levels in a downward trend. If the price of the commodity continuously oscillates between the trendline and the channel line then one can assume that a valid channel exists. The channel is one of the most useful analytical patterns. Unlike the breaking of a trendline, which signifies a possible reversal in the trend, the penetration of the channel line is a common indicator of expected acceleration of the already prevalent trend. A failure to reach the channel line on the other hand is a good indicator that the trend is failing and that the price may break through the trend line on its next turn.

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Trend Reversal Patterns Trend Reversal Patterns indicate that the horizontal price action described by the pattern signifies a turnaround in the current price trend directions upon breaking out of the pattern. We will look at the following patterns that imply trend reversals: 1. Head and Shoulders 2. Double Tops and Bottoms 3. Triple Tops and Bottoms 4. V Formation 5. Diamond Formation

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Online Forex Training Manual – By: Internet Business Academy Head and Shoulders / Inverse Head and Shoulders

The Head and Shoulders pattern is one of the most classic and reliable patterns in a technical analyst’s toolkit. This three-peak formation is named for its resemblance to a head and two shoulders where the center peak protrudes above the remaining two, which are set at or close to identical levels. The common line of support for all three peaks is known as the Neckline. The final downward penetration of the neckline confirms the start of a new downward trend. The inverse Head and Shoulder pattern follows the same model and is often indicatory of market bottoms as a whole.

Various Tops and Bottoms Double Tops / Double Bottoms 84 http://e-fxstrategies-review.blogspot.com

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A Double Top is formed when prices rise to a horizontal resistance line, retreats and then subsequently returns to the resistance level only to fall away in a downward trend.

The same but opposite scenario occurs in the case of the Double Bottoms.

Triple Tops / Triple Bottoms In the typical Triple Top formation each one of the heads is about the same size. A horizontal line of resistance can be drawn connecting the three tops. A horizontal line of support can be draw connecting the four support levels. This line is referred to as the neckline. After the third head the price falls below the neckline. The market may rebound for a short attempt at breaking back past the neckline and touch the neckline as a momentary resistance only to be followed by a final downward trend.

Rounded Tops/ Rounded Bottoms 85 http://e-fxstrategies-review.blogspot.com

Online Forex Training Manual – By: Internet Business Academy The rounded top formation forms when the market gradually yet steadily shifts from a bullish to bearish outlook or in the case of a rounded bottom, from bearish to bullish.

The prices take on a pattern as the market casually changes from downward trend.

bowl shaped slowly and an upward to a

V and Diamond Formations V-Formations The V-Top and V-bottom formations are some of the hardest ones to analyze in real time. This is primarily due to their short duration and sudden turn around. In all other respects the V-formations are similar to the Rounded formations. The V-formations' sharp turn around is often characterized by a single sharp spike bottom or top of the formation.

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Diamond The Diamond formation is one of the less common formations we will discuss. The Diamond is formed by a combination of divergent and convergent trend lines and is usually located at the top of a trend. Once the price breaks out of the converging support it is estimated to drop in price equal to the high of the Diamond.

Continuation Patterns 87 http://e-fxstrategies-review.blogspot.com

Online Forex Training Manual – By: Internet Business Academy Continuation patterns indicate that the price action described by the pattern is merely a pause in the prevailing trend and that upon breaking out of the pattern the price trend will continue in the same direction. We will look at the following patterns that imply trend reversals:

1. Flags 2. Pennants 3. Rectangles 4. Triangles 5. Wedges Flags, Pennants and Rectangles Flags and Pennants Flags and Pennants are two types of short-term pauses in the dynamic and progressive movement of a market trend. Both the Flag and the Pennant are usually marked by a sharp, almost horizontal entry into the pattern. Flags are bound by parallel lines of support and resistance where as pennants are bound by converging lines. Both patterns are commonly followed by a sharp break back into the prevailing trend. Unlike pennants, flags have a tendency to form slanted in the direction opposite to the major market trend they inhabit.

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Rectangles A Rectangle is a period of consolidation within an existing trend where the price moves sideways, fluctuating between two horizontal lines before finally resuming its previous trended course. Such a pattern is not very significant to the trend's future course – a rectangle seldom accelerates the prevailing trend beyond its previous slope. Though not characteristic in determining any anomalous effects in the presiding trend, the Rectangle is an excellent formation to trade within, as one can easily open alternating positions as the prices repeatedly bounce from support line to resistance line and back.

Triangles and Wedges Triangles Triangle patterns are usually characteristic of a trend consolidation followed by an accelerated break out of Triangle pattern in the direction of the continuing trend. Triangles form in three basic categories: symmetrical, ascending and descending. A triangle is formed by the convergence of the trend's lines of support and resistance. Ascending and descending Triangles yield to a trend in the direction of the slope of the hypotenuse. The symmetrical Triangle yields to a breakout in the direction opposite of the trend's entrance into the pattern.

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Wedges The Wedge pattern shares most of its characteristics with the Symmetrical Triangle and the Flag. The Wedge forms much like the Triangle and signifies a sharp expected breakout in the direction of the prevailing trend. Much like the Flag, however, the Wedge itself forms at an inclination opposite to the direction of the trend before breaking out in the direction of the prevailing trend.

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BASIC TECHNICAL INDICATORS Trade Using Charts: The Most Popular Indicators Used in FX Moving Average Convergence/Divergence (MACD) What is it? The MACD is one of the most popular oscillator used by currency traders. This is a momentum indicator that can be used to confirm trends, while also indicating reversals, or overbought/oversold conditions. The MACD is calculated by taking the difference between the 2 exponential moving averages. The two that is usually used are the 26-day and 12-day moving averages. How can MACD be used for trading? Crossovers The most common way to use the MACD is to buy/sell a currency pair when it crosses the signal line or zero. A sell signal occurs when the MACD falls below the signal line, while a buy signal occurs when the MACD rallies above the signal line. Overbought/Oversold The MACD can also be used as an overbought/oversold indicator. When the shorter moving average moves away significantly from the longer moving average (i.e., the MACD rises), it is likely that the currency price’s movements are starting to exhaust and will soon return to more realistic levels. Divergences When the MACD diverges from the trend of the currency price, this may signal a trend reversal. In addition, if the MACD makes a new low while the currency pair does not also make a new low, this is a bearish divergence, indicating a possible oversold condition. Alternatively, if the MACD is making new highs while the currency pair fails to confirm these highs, this is a bullish divergence, indicating a possible overbought condition. 91 http://e-fxstrategies-review.blogspot.com

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Stochastics What is it? The stochastic oscillator is a commonly used momentum indicator that measures the current currency price compared to its historical price for a given time period. It looks to gage the strength and momentum of a currency pair's price action by measuring the degree by which a currency is overbought or oversold. The scale for the indicator is 0 to 100. Readings above 80 indicate overbought conditions, as it reflects the fact that the currency is strong and the price is closing near the high of the trading range. Readings below 20 indicate oversold conditions and reflects the fact that the currency is weak and is closing near the low of the trading range. How can stochastics be used for trading? Detect Overbought and Oversold Conditions The most common way to analyze stochastics is to sell when the reading is above 80, which implies overbought conditions and to buy when the reading is below 20, which implies oversold conditions. Divergence Buy and sell signals can also be given when stochastics show divergence, indicating a possible trend reversal. Divergence occurs when the stochastic values are moving in one direction and the price values are moving in the opposite direction.

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Relative Strength Index (RSI) What is it? The relative strength index or RSI is probably the most popular oscillator used by the FX trading community. It was developed by J. Welles Wilder Jr. to gage the strength or momentum of a currency pair. This indicator is calculated by comparing a currency pair’s current performance against its past performance, or its up days versus its down days. RSI is on a scale of 1-100, where any point above 70 is considered overbought, while any point below 30 is considered oversold. The standard time frame for this measure is 14 periods, although 9 and 25 periods are also commonly used. Generally, more periods tend to yield more accurate the data. How Can RSI be Used for Trading? RSI Can be Used to Identify Extreme Conditions or Reversals. RSI above 70 is considered overbought and indicating a sell signal. RSI below 30 is considered oversold which would imply a buy signal. Some traders identify the longterm trend and then use extreme readings for entry points. If the long-term trend is bullish, then oversold readings could represent potential entry points. RSI Can be Used to Indicate Divergence Trade opportunities can also be generated by scanning for positive and negative divergences between the RSI and the underlying currency pair. For example, a falling currency pair where RSI rises from a low point of 15 back up to 50. With RSI, the underlying pair will often reverse its direction soon after such a divergence. Consistent 93 http://e-fxstrategies-review.blogspot.com

Online Forex Training Manual – By: Internet Business Academy with this example, divergences that occur after an overbought or oversold reading usually provide more reliable signals.

Bollinger Bands What is it? Bollinger bands are very similar to moving averages. The bands are plotted at two standard deviations above or below the moving average. This is typically based off of the simple moving average, but an exponential moving average can be used to increase the sensitivity of the indicator. A 20-day simple moving average is recommended for the center band and 2 standard deviations for the outer bands. The length of the moving average and number of deviations can be altered to better suit trader preferences and volatility of a currency pair. In addition to identifying relative price levels and volatility, bollinger bands can be combined with price action and other indicators to generate signals and be a precursor to significant moves. How can Bollinger Bands be Used for Trading? Bollinger bands are typically used by traders to detect extreme unsustainable price moves, capture changes in trend, identify support/resistance levels and spot contractions/expansions in volatility. There are a number of ways to interpret Bollinger Bands. Breakouts Some traders believe that when the prices break above or below the upper or lower band, it is an indication that a breakout is occurring. These traders will then take a position in the direction of the breakout. Overbought/Oversold Indicators

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Online Forex Training Manual – By: Internet Business Academy Alternatively, some traders use Bollinger Bands as an overbought and oversold indicator. As shown in the chart below, when the price touches the top of the band, traders will sell, assuming that the currency pair is overbought and will want to revert back to mean or the middle moving average band. If the price touches the bottom of the band, traders will buy the currency pair, assuming that it is oversold and will rally back towards the top of the band. The spacing or width of the band is dependent on the volatility of the prices. Typically, the higher the volatility, the wider the band and the lower the volatility, the narrower the band.

Moving Averages. A moving average is an average price of a certain currency over a certain time interval (in days, hours, minutes etc) during an observation period divided by these time intervals. This averaged price is being determined for each regular interval beginning from the first. A moving average has a smoother line than the underlying currency because statistical ‘noises’ are excluded to provide more convenient visualization of the currency activity. A moving average may be used as a special indicator or to create an oscillator. The moving average may be based on the midrange level or on a daily average of the high, low, and closing prices. The charts of moving averages are being plotted within same coordinates with an underlying price chart. Technical analysis uses the next three types of moving averages: 1. The simple moving average or arithmetic mean (SMA). 2. The weighted moving average (WMA). This type of average assigns more weight to the more recent closings. This is achieved by multiplying the last day's price by one, and each closer day by an increasing consecutive number. In our previous example, the fourth day's price is multiplied by 1, the third by 2, the second by 3, and the last one by 95 http://e-fxstrategies-review.blogspot.com

Online Forex Training Manual – By: Internet Business Academy 4; then the fourth day's price is deducted. The new sum is divided by 9, which is the sum of its multipliers. 3. The exponentially smoothed moving average (EMA) which provides the best smoothing of data averaged taking into account the previous price information of the underlying currency. There are different types of moving averages. Trading signals of moving averages. Trade signals which occur by the use of one moving average is a buy signal by the crossing of the underlying price chart by the moving average chart from below up and a sell signal by the crossing of the underlying price chart by the moving average chart from above down For technical analysis application usually consists of two or three moving averages charts constructed for different periods – long term, middle term and short term. For example, to use two charts, a combination of moving averages for 4 and 9 days may be used and to use three charts, three moving averages – for 4, 9 and 18 days may be applied. Other often-applied combinations of three moving averages are 5, 20 and 60 days and 7, 21 and 90 days. A buying signal on a two-moving average combination, for example, for 4 and 9 days, occurs when the shorter term of two consecutive averages (4 days) intersects the longer (9 days) upward. A selling signal occurs when the reverse happens, and the longer of two consecutive averages intersects the shorter one downward. A signal involving three moving averages is generated by a moving averages combination of 4, 9, and 18 days. The buying warning occurs when the 4-day moving average crosses upward through both the 9-day and 18-day averages, and the buying signal is confirmed when the 9-day moving average also crosses upward through the 18-day average. The reverse is true for the selling signal. Pulling it All Together Alone, none of these indicators yield great results. However, when combined and used in unison, they can give traders the extra edge needed to better understand short term trading dynamics. Therefore it is important for traders to look for relationships between the different indicators as multiple signals can provide the most accurate trading predictions.

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Fundamental Analysis Definition In the currency market, there exist two basic types of analysis: fundamental analysis and technical analysis, which will be discussed in the next lesson. Fundamental analysis uses factors outside the currency market. It is impossible to consider all factors affecting the currency rate and for that reason fundamental analysts concentrate on only a few selected factors. Fundamental Factors News that has an impact on the economy both directly and indirectly is considered a fundamental factor. These fundamentals are separated into three major categories: economic factors, financial factors, and political factors which include crises. Economic and financial factors have the biggest impact on currencies movements. The reason that economic and financial data releases are watched is the uncertainty concerning the release's outcome or results. The fundamental reports are kept under strict secrecy up to the time of the actual occurrence. Central banks, for example, change the discount rate confidentially and even though the markets closely watch these events, sometimes the outcomes do not coincide with the predictions. The deciding factor in whether a fundamental release will have an effect on the currency market is how closely the actual results come to economists' predictions. If the fundamental release matches predictions then it should have already been "priced in" to the market beforehand. However, if the release strays from the anticipated numbers, then it will have a bigger impact on the market. The dates and times of economic data release are well known and are anticipated by the market. There are many resources available on the Internet concerning financial and economic indicators. CMS provides an Economic Calendar for the dates of critical fundamental announcements and events. Political factors can include elections, high level talks, and crises. Some political factors, such as a presidential election or a G-7 meeting are scheduled beforehand and can be anticipated. A political crises such as a nuclear test by a rouge nation such as N. Korea, or a terrorist attack such as 9/11 can have dramatic effects on the currency markets and are almost impossible to predict. However, only big political events that can affect the patterns of trade or working of an economy or group of economies will have an effect on the financial markets. Next we will look at an example of a fundamental release and a political crisis. Lets take one through an example of how to use a fundamental data release to trade Forex. Then we will show an example of a political crisis. 97 http://e-fxstrategies-review.blogspot.com

Online Forex Training Manual – By: Internet Business Academy Release of a Fundamental Indicator (Non-Farm Employment Change): On November 3rd, 2006, the United States Department of Labor released a monthly report called the Non Farm Payroll. This fundamental indicator (the term for a report or relea=se) measures the change in employment in the United States for the previous month, excluding the farming sector. For this release the figures came in above expectations of economists. As a result the Dollar strengthened that day as the data suggested that the labor sector of the US economy was doing better than expected.

This chart shows the EUR/USD pair, or the Euro vs the US Dollar. Each "candle" represents 30 minutes of market activity. When price moves upward it means the Euro is getting stronger, or that it takes more Dollars to buy one Euro (the numbers on the right hand side). When price moves downward it means that it now takes less Dollars to buy one Euro. As you can see, on November 3rd, there was a huge surge as price moved downward from around 1.2770 to 1.2680, a move of 90 points, or "pips" in forex lingo. There aren't any other candles in the surrounding time period where price moves as much as the 30 minutes after the release of the Non Farm Employment data.

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Online Forex Training Manual – By: Internet Business Academy A Political Crisis:

This figure shows the USD/JPY pair where each candle represents 2 hours of market activity. When the price of the pair goes up on the chart it means the Dollar strengthened against the Yen and vice versa. This chart shows the reaction of the currency market to a geopolitical crisis. In this crisis, North Korea detonated a nuclear weapon in a test of their nuclear capabilities. How a particular currency will respond to geopolitical dangers depends on many factors. Here, the Japanese Yen suffers because it is a neighbor of North Korea and because the two countries have tense relations they are opposed to each other militarily. Obviously, any attack by North Korea on Japan would damage the Japanese economy. When traders got wind of these developments on Friday, October 6th, they sold the Yen and bought the Dollar. The price changed around 100 pips, meaning the amount of Yen you needed to get one Dollar went up from 117.90 to 118.90. Or, in other words it now cost one more Yen to buy a US Dollar. Safe Haven: Since a nuclear test by North Korea is very Yen negative, the Dollar would do better since it's the opposite currency in this particular pair. The Yen's weakness withstanding, the Dollar would have still gained on this geopolitical event because it is considered a "safe haven" currency. During times of danger, investors will move their money out of riskier investments and put them into more stable ones. Since the US is the sole superpower left in the world, it naturally attracts those investors that want to park their money in a safer economy.

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Online Forex Training Manual – By: Internet Business Academy The US's "safe haven" status doesn't always work in times of danger in the world. If there is a geopolitical event that directly affects the United States, such as a terrorist attack, or something less immediate, such as military posturing against a state like Iran investors might sell the Dollar. Traders would be worried that the threats might come to action and there would be a war between the two countries. A war with Iran weakens the Dollar because the US economy is so tied to the oil market, of which a large proportion travels through the Persian Gulf. A military engagement against Iran would disrupt oil deliveries and cause hardship for the American economy in other ways. So, as we mentioned before, there are many factors to consider during a political crisis to see what effect it will have on a particular currency. In the Forex market, traders are speculating on the health of countries' economies. In order to have an understanding of an economy's "fundamentals", one needs to look at how productive and vibrant the different sectors of the economy are. This involves looking at data on manufacturing, retail sales, housing construction and sales, consumer spending and confidence, and the status of the labor market. Data on these different sectors can be found in reports released by government agencies, academic institutions, and private firms.

Economic Fundamental Indicators Gross Domestic Product (GDP) Gross Domestic Product is one of the major economic indicators that generally reflect the state of the economy of the whole country. GDP measures an economy's total expenditure on newly produced goods and services and the total income earned from the production of these goods and services. In particular, the GDP is the market value of all final goods and services produced within a country in a given period of time. The formula used to compute GDP is: GDP= Consumption spending + Investment spending + Government spending + Imports and Exports. GDP does not discriminate between those goods and services made by the people of that country or by foreigners. As long as the goods and services are made within that country's borders, it counts towards the GDP. Gross National Product (GNP) GNP is the total income earned by a nation's permanent residents. Whereas GDP is the total of all final goods and services made within an economy, GNP measures the goods and services made by a nation's residents throughout the world. If a Japanese car company opens a plant in Michigan, the value of the cars made and the money spent on investment, will count towards US GDP but also to Japanese GNP as they own the capital and profits. GNP and GDP are released every quarter, but preliminary measures come out in between those releases. The formula for GNP differs from GDP by including income that US citizens earn abroad and excluding income that foreigners earn within the US. 100 http://e-fxstrategies-review.blogspot.com

Online Forex Training Manual – By: Internet Business Academy New Durable Goods Orders Consumers primarily use these goods. New Durable Goods Orders measures the strength of manufacturing because durable goods are designed to last three years or more. These goods can include airplanes, machine parts for factories, cars and buses, cranes, appliances, etc... Since this fundamental indicator measures new orders, it will be an indication of how actual production will perform in the near future. Production firms will have to make the durable goods to fill all the new orders. New orders directly affect the level of both unfilled orders and inventories that firms monitor when making production decisions. The Conference Board attempts to take into account inflation when measuring. In the US, New Durable Goods Orders data uses price indexes constructed from various sources at the industry level and a chain-weighted aggregate price index formula to try and "deflate" the results. Retail Sales Indicator The retail sales indicator is released on a monthly basis and is important to the foreign exchange trader because it shows the overall strength of consumer spending and the success of retail stores. Retail Sales impart information on the economy because it measures the amount of shopping consumers are doing. If the consumers have enough income to purchase goods at stores, then more merchandise will be produced or imported. Retail Sales is a "seasonal" indicator, meaning that during certain months retail sales are always expected to be up, for example September (when kids are going back to school) and December (the holiday season). The Retail Sales indicator is particularly important in the US, where all business is aimed toward the consumer. Building Permits, Construction Spending, Housing Starts, New Home Sales, Existing Home Sales These indicators measure the vitality of an economy's housing sector. Building Permits, Construction Spending, and Housing Starts show respectively how many new homes are being planned to be constructed, how much construction is currently happening, and how many new homes have finished being built. New and Existing Home Sales show how the housing market is doing. If people are buying more homes, that means they have more money, and therefore the economy is doing better. When homes sales fall, the economy can weakens because housing is such a big sector. There are other indicators that deal with housing such as the change of prices of homes. Home price data is usually released side by side with home sales data. Stock Prices The stock market of a country reflects the price movements, and value of a country's biggest company's and firms. Increases (decreases) of a stock index can reflect both the general sentiments of investors and the movements of interest rates.

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Online Forex Training Manual – By: Internet Business Academy Interest rates and inflation are financial indicators, which are very important to future economic activity and to the foreign exchange market. We look at these indicators next. Inflation Inflation measures at what rate prices in an economy are rising. Inflation is tied directly to the purchasing power of a currency within its borders and affects its standing on the international markets. Prices of goods, houses, labor, production materials, etc., are all closely monitored to see if their prices are increasing or not, and at what speed. Inflation can come about for different reasons. Very Fast Growth in an Economy In one simple example, inflation can start rising as a result of unchecked growth in an economy. Fast economic growth increases the amount of money printed and circulated throughout the economy. Extra money is necessary because consumers are taking money out of their banks and purchasing products. If businesses and stores are bringing in larger revenue and profits, then it can be expected that workers' wages will increase as well. As wages increase, consumers go out and buy even more goods. Businesses that did not benefit from the initial extra economic activity see that the consumers, with their extra wages, have more money. They purchase more of other goods now expanding the economic activity to other sectors. In order to keep up with the extra demand the businesses may choose to raise their prices. If these cyclical prices changes are not contained, then it takes away from the actual economic growth of the economy, as on paper people have more money, but the money buys less goods due to higher prices. For example, a retired person with retirement funds in a bank will be adversely affected if prices start rising because that nest egg is not able to buy the same amount of goods prior to inflation. Volatile Items In a second example, inflation can be set off by an increase in the price of just one crucial item, such as energy. If the price of oil went up, many other items that use oil in their production process will increase in price. Not only that, but consumers and businesses have to spend more of their incomes and revenues to pay for the same amount of gasoline (a products that uses oil). Inflation erodes the purchasing power of their currency. Since an economy such as the US is heavily dependent on oil for its economic activity, a rapid rise in energy costs could begin a period of inflationary pressure. Curbing Inflation Inflation is troublesome. It is the job of the central bank of an economy to manage price stability. The main tool that central banks have is the power to set the country's base 102 http://e-fxstrategies-review.blogspot.com

Online Forex Training Manual – By: Internet Business Academy interest rate. If inflation is running high, a central bank would raise rates in order to cool economic activity, and hopefully stem inflation. If inflation is low and the central bank wants to stimulate economic growth, they might lower rates. Since inflation has such a direct impact on a country's interest rates policy it is very important in the currency markets. Inflation Indicators Consumer Price Index - The Consumer Price Index measures the average price level of a basket of goods and services that are purchased by consumers. Changes in the CPI represent the inflationary pressures surrounding the economy. The CPI figure is probably the most crucial indicator of inflation within the United States. Consumers buy goods and use services and the changes they experience in prices will reflect the inflation in the economy. Producer Price Index - Producer Price Index measures the average price level for a fixed basket of capital, rent and materials needed for producers to manufacture consumer goods. Just as the CPI measures the prices from a consumer perspective, the PPI measures the prices at the producer level. PPI can show inflation before CPI because it will influence consumers next as they purchase these more expensive goods and services. Part of the inflation at the producer level is passed onto the consumers and therefore influences the CPI figure Average Hourly Earnings - This indicator measures the change in worker's wages. It sheds light on consumers' disposable income and on the costs to firms for their labor. Changes in wages also highlight the tightness of the labor market, as firms will have to pay their skilled workers more to retain them. Employment Indicators Employment indicators reflect the overall health of an economy or business cycle. In order to understand how an economy is functioning, it is important to know how many jobs are being created, what percentage of the work force is actively working, and how many new people are claiming unemployment. We have already mentioned, on the previous page, that it is also important to monitor the speed at which wages are growing. Unemployment Rate The unemployment rate is released monthly and consists of surveys of both business firms and households. The business firms survey consists of the payroll, workweek, hourly earnings, and total hours of manufacturing, retail, government jobs, and others. The household survey shows the overall labor force, and the number of people employed and unemployed. A decrease in unemployment signifies a maturing business cycle while an increase in unemployment signals a bust cycle. The unemployment rate 103 http://e-fxstrategies-review.blogspot.com

Online Forex Training Manual – By: Internet Business Academy is slow to change however, so fundamental traders look at other indicators for more immediate insights. Non-farm Employment Change One of those indicators, which is released at the same time as the unemployment rate is the Non-farm Employment Change. It measures how many new jobs were created the previous month. It is an easier number than unemployment to gauge the latest changes for labor in the economy. The currency markets anticipate this release every month. Average Weekly Initial Claims for Unemployment Insurance This indicator is also more sensitive than the unemployment indicator. It becomes the flip side of the nonfarm payroll change as it shows when people are losing their jobs and need to apply for unemployment insurance. When employment conditions worsen, this will be one of the leading indicators to keep an eye on. It is released weekly, unlike most other indicators which are released monthly. Average Weekly Hours Average Weekly Hours is a sample of other employment indicators which are not as important, but can give clues to state of the economy. The average weekly hours put in by manufacturing workers, usually leads the business cycle since employers adjust work hours before changing the workforce. There are many other indicators worth learning about and following in order to trade fundamental news and releases. We have presented just a few, and explained why they are important to the currency markets.

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MODULE IV Our Recommended Forex Trading Systems

Bonus E-Books

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Tips for Trading the Major Currency Pairs Affluent Desktop Traders Emotion Free Trading Book Introduction-to-Forex-Trading Bunny Girl Cross System Day Trading the Currency Market: Technical and Fundamental Strategies By Kathy Lien

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