FxST Start Forex Now eBook - 2012 Edition

Copyright © 2009 -2012 World Currency Traders, LLC. All Rights Reserved Page 1 of 138 www.ForexSuccessfulTraders.com

“Dedicated to Making the Art and Science of Trading Forex Available to Anyone Who Has a Passion to Create

Their Own Financial Future”

ForexSuccessfulTraders™

2012

Start Forex Now FxST Beginner’s eBook Co-authors: Josh Wilson & Andy Garcia

Revised: February


Table Of Contents

Foreword: The Learning Strategies of Successful Traders

Section 1: Beginner

CHAPTER 1. How Successful Trading Starts!

CHAPTER 2. Open an FX Demo Account

CHAPTER 3. Analyzing FX

CHAPTER 4. Using Technical Charts

CHAPTER 5. Identifying Support & Resistance

CHAPTER 6. Types of FX Markets

CHAPTER 7. Learning Fundamental Analysis

CHAPTER 8. Styles of FX Trading

Section 2: Intermediate

CHAPTER 9. Secrets of Fibonacci

CHAPTER 10. Master Moving Averages

CHAPTER 11. Million Dollar Indicators

CHAPTER 12. Leading vs. Lagging Indicators

CHAPTER 13. USDX Explained


FOREWORD

By JoshWIlson FxST Senior Trader www.ForexSuccessfulTraders.com

Course Description:

You have just joined an elite group of underground professional traders looking to share their insight and what they have found over the last 30 years to be the most crucial in order to achieve success in the Forex market.

This course is designed to teach you exactly what you need to know in order to get started making money using a NEW strategy adapted by today’s most successful professional Forex traders.

The focus of this course is to help you develop a basic operation-knowledge of Forex and the currency markets that will give the exact strategy to start trading for Consistent Profits and Emotion Free Trading

Learning Objectives Include:

Gain understanding of fundamental and technical analysis

Building understanding of Market Flow

Ability to execute trades on popular trading platforms.

Most importantly, you will learn a NEW way to see and trade Forex, where you develop a powerful new “MINDSET” on how to trade Forex like a business – this is exactly how professional traders achieve consistent profits and emotion free trading.


Course Design and Layout

We have broken this course in to the following two sections:

Beginner (FxNewbie™) - In this section you will learn how the Forex market works and what we believe to be the most crucial information needed to give you the foundation to start trading on the right foot. Even if you have experience in the Forex market, it’s always good to go back and review the basics. Every chapter in this section should be fully understood and reviewed as necessary.

Intermediate (FxMechanic™) – This section is designed for the individual that wants to learn about the different strategies and methods that are used in the Forex market.

We are not suggesting you use all of these methods; however, it is good to be aware of what other traders are doing and something that could be used later on down the road.

Basically, we are adding tools to your tool box.

Remember, trading is a learning process just like anything else. Any successful trader has been through all different types of experiences and stages in order to get to where they are now.

At the FxST Professional Certification School, students are given some basic thinking challenges using simple diagrams that model an idea or concept. The diagrams or illustrations are called “Trader Perception Drills” (TPD’s).

The goal of these drills is to help students open their mind to go beyond superficial thinking and surface knowledge. In doing so, the student is able to align their own goals with the course objectives, and also increase their attention and focus on learning the foundational skills.

For example, below in Fig 0-1, you can see a diagram/matrix of the 4 different stages traders can be placed in.

FxMastery is where all traders want to end up. In order to be able to start generating consistent profits through emotion-free trading, you must go through each quadrant one at a time.

This course is going to walk you through exactly what you need to do to get started trading Forex.


Figure 0-1 FxPersonality Matrix

Next, it is important that students understand that not all successful traders (i.e. profitable trades) are good trades.

Sometimes, losing trades can be good trades. This is the Trading Paradox.

It is a concept that is often missed by amateur traders. Professional traders define good trades as “intentional trades that can be repeated”. As Mark Douglas states in the classic trader’s psychology book, “Trading in the Zone”:

“You don’t have to know anything about yourself or the markets to put on a winning trade, just as you don’t have to know the proper way to swing a tennis racket or golf club in order to hit a good shot from time to time... we need technique to achieve consistency”


Typical traders using traditional Forex education learn this lesson after 3 painful years of trading and the few lucky ones who make it this far finally realize the fundamental truth that not all profitable trades are good trades.

To help new students open their mindset to the different types of profits that apply to all financial markets, the FxST Certification School uses a second TPD called the FxProfit Matrix, see Fig 0-2.

The FxProfit Matrix makes a distinction between 4 Kinds of Profits and labels them in a way that should make it clear which profits are desirable and which ones to avoid like the plague!

Figure 0-2 FxProfit Matrix


Unlike other Forex beginner manuals that promote the “Junkie Profits” style of trading, the Start Forex Now ebook course will give you the foundation to build a Forex business through consistent and reliable trading.

The 5 Learning Stages Of Successful Traders

At the FxST Professional Certification School, we believe that “continuous learning” is a habit that makes the master.

This ebook is designed to give you “action steps” to not only learn the basic terms and concepts of trading, but also the “Mindset” of successful traders.

The traditional learning process of memorization of terms and theories of trading and regurgitating it on a test or exam is NOT what creates successful traders.

This is not to say it is not important to learn the mechanics of Forex, the assertion is that it is NOT enough.

Level 1 Learning – Content Memorization

Level 2 Learning – Gaining Understanding

Level 3 Learning – Building Understanding

Level 4 Learning – Building Capacity For New Understanding

Level 5 Learning – Building Capacity For Shared Understanding

This ebook is designed to take you through the first critical 4-Levels of learning to become a trader.

Unlike traditional learning models that most of us have experienced in primary and post-

secondary education systems, the best Forex education requires students to go beyond the

“mechanics” of skill and craft of trading. Specifically, traditional education often views

students as empty vessels into which knowledge and content is poured into the “empty”

minds. In this way students are seen as passively absorbing information and the

assumption is that students will move from theory to practice with relative ease.

“Memorizing” content, language/terms and processes is necessary, but insufficient for

traders who seek long term consistent profits (i.e. successful traders).


Memorizing Is Not Understanding

At the FxST Forex Certification School, we call this “Level 1″ learning.

Yes, Level 1 learning is important, but a huge mistake for many new traders since it is an

over focus on memorizing content. Some traders spend up to 3 years memorizing every

single charting technique and term thinking that the more they “memorize” the better

chance for success.

We call this kind of trader a “Forex Mechanic” because they depend on the static

element of Forex and develop an impressive ability to describe the events of a trading day

after they happen. What they fail to do is develop the trader skill of being able to make

decisions of when to enter and exit the market in real time.

The 3 biggest problems with Level 1 Learning for all Forex Traders are the effects of:

Knowledge Obsolescence

Forgetting

Contradiction

The most dangerous is when what you learn is no longer true. In today’s market, trader

knowledge becomes obsolete faster and faster due to a dynamic and new emerging global

economy.

Old trading rules simply do not apply.

Forgetting is common and expensive for new traders learning Forex. Many traders use

demo accounts to practice and to eliminate the effects of “forgetting” the so called “right

way”. Unfortunately, by the time a trader “gets it right”, often the knowledge is obsolete.

This is why you typically never see an “automatic Forex trading system” that actual

works for the long term. In the short term any system can get lucky and produce amazing

short-term results. Obsolescence and forgetting are opposite sides of the same coin.

Contradiction is that natural path where the trader believes that the more terms, indicators

and charts they learn the greater the chance for success.

To their surprise, Forex Mechanics discover that there are no universal agreement

indicators.


Habits Make The Master

Any high performance coach will often refer to the classic Ching Paradox “Try Not To Try…” principle. Yet in the trader world nobody states the obvious – specifically nobody clearly states a simple answer to the question.

Do you know what you’re doing?

Do have a documented theory and process of how to trade Forex that is supported with methods and tools that can be taught and shared with others who can repeat success?

Even the most successful of traders have no formal way to share what they know… they just know what to do through decades of experience.

I hope you truly appreciate how powerful this single question really can be!

So, do you know what you are doing?

By answering this one question all fear literally disappears. When you have a methodology you practice over and over, trust in what you do is earned by the results you achieve. Furthermore, discipline becomes a by-product of what I call operational-understanding, a natural consequence of level 3 learning. While you appear disciplined to others by the virtue of your ability to build your own understanding, in reality this may not be true discipline.

The key to successful level 3 learning requires a master teacher who creates and links together successive levels of understanding, like stacking pancakes, where each level of understanding matches the student’s level of experience. The teacher and student can re-build mental models, re-create insights, and re-trace steps in the anatomy of how a successful trade is executed in real-time.

“Operational-understanding,” which is different than the traditional education which focuses on correlation understanding, is a key characteristic of level-3 learning. Without getting technical, the easiest way to think about it is operational-understanding is how something works or functions and correlation understanding is nothing more than memorizing how certain parts relate to each other.

For example, a biology student can memorize the parts of a plant cell, but ask a student how the cell works, which places the student within the cell as “decision-maker” and they fall off the bike. When the student is asked questions like how do cell membranes repair themselves or how cells work to displace a toxin introduced to the cell they are lost.

Many students in subject areas have a lot of content knowledge and can relate the parts but what they are weak in is the understanding of the operation of systems.

Sound familiar? In Forex this is the crux of successful traders.


In Forex, students develop operational knowledge in two areas:

(Macro Level) on a higher level they need to understand how do Forex markets work

(Micro Level) on a micro level they need to understand the anatomy of a successful trade (i.e. what do all successful trade setups have in common)

For the purpose of brevity I will focus on one simple model we use at the FxST Forex Certification School to begin a new student’s journey into level 3 learning on the micro level.

The Trading Zone model provides a new student with the framework to start real learning into the craft and art of trading.

Fig1 shows the “Trading Zone” as an area that requires understanding of 3 spheres of competency:

Market Conditions

Technical Setup

Personal Mindset

All successful trades occur in the same zone. Just like a 3-legged stool, if you are missing one leg the whole foundation collapses.

FxPM Trading Zone represents the 3 areas of competencies that must be present for long term successful trading.


Figure 0-3 - Price Action Trading Zone

What Juggling Teaches Successful Traders

The trading zone is step one.

Under the skilled guidance of a Forex Mentor, the trading zone defines a very specific

and different starting point for each trader and reveals the optimal point at which to go

from newbie trader to successful trader.

Most traders fall victim to the FxMechanic mentality where they believe that the more

indicators they “memorize,” the better the chance to crack the consistency barrier.

However, without understanding those factors within specific market conditions and

personal trader mindset, learning falls back to level 1 and level 2 content knowledge.

Most new student traders at the FxST School are surprised at how little technical

knowledge is required and how simple it is to trade successfully within a level-3 learning

environment.

With the proper learning structure in place and with the right method and tools students

are able to build their own operational-understanding in real-time with very little risk,

anxiety or stress.


That is what the “Start Forex Now” ebook will provide.

This is done by selecting the safest and most cautious trades a new trader can take – these

high probability trades can be infrequent and so trader boredom becomes the biggest risk

if the objective is not connected to the bigger picture.

Just like learning to juggle 3 small-balls, you start with one ball tossing it from one hand

to another, and then add the second ball, and then the third. The key is to understand the

simple rules of how high to toss and where to toss the ball. The juggler can continually

practice each level until they can stand still and juggle with great speed and use different

objects like flaming torches or razor-sharp knives!

In corporate learning the “Just-Enough” principle is now a standard protocol for

employees who are expected to learn skills on the fly – the best learn just enough to get

the job done.

In trading, the same principle accelerates the learning curve so students can learn the

skills to make more money faster by hiding unnecessary complexity.

As you can see, the learning pathway is quite simple and eloquent. A common

expression used by the FxST traders in the Live Trading Room is “got to hit singles

before the home runs,” which grounds this concept in the most practical and common

sense way.

This leads me to identify another key characteristic of level 3 learning – one that adds the

most potent “consistent profits” catalyst – community learning!

Community learning not only offers a natural mentorship environment, but also new

students can watch other traders in real-time that have higher skills (i.e. Larger Trading

Zones) taking trades with more complexity and knowledge … they can be exposed to

dangerous pitfalls and mistakes and learn from others.

If you are not already a member, I strongly urge all readers to take advantage of the Free

Trial to the FxST Premium Membership and learn what a real community of traders can

give you.

In summary, I can only provide you a high overview into the world of level 3 learning. It

solves the biggest paradox of learning to trade Forex – how to remain discipline in the

face of constant uncertainty and provides the means for a student to build their own

understanding of how a successful or winning trade works.

At the core level 3 learning is about putting the “Just Do It” into a focused action plan…

trade the plan and if you can only take one thing away from this article let it be this –

never try to be disciplined! The act of trying is just another form of covering up fear.

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Be fearless by having a plan and most importantly have fun in the process!

Next, I will look inside Level 4 learning – Building the Capacity For Learning.

Failing Forward For Bigger Trading Profits

Level 4 Learning is where students begin to expand their view and are challenged to expand their learning zone.

One of the biggest threats to students’ profit potential as a trader is based on their attitude towards learning. Successful traders master the art of unlearning what they know and repeat it in a process of re-learning.

In the book, “Trading in the Zone,” Mark Douglas explains that trading consists of 5 fundamental truths:

Anything can happen

You do not need to know what is going to happen next in order to make money

There is a random distribution of wins and losses

“Traders Edge” is nothing more than a probability advantage

Every moment is unique

Many students only find real value in 5 Trading Truths after they have blown-up their accounts, believing that “Predicting” is the foundational skill of trading. It is rare that a Forex Newbie actually avoids the financial pain and emotional suffering of typical traders.

The alternative to “suffer and pain” learning is adopting the Trader Action Learning Cycle Success Formula, see Figure 0-4 .

Trader “Action Learning Cycle” Success Formula

The FxProfit Matrix is an example of Level 4 Learning exercise that gives every trader a

new way to look at the market, it forces the mind to expand its capacity for new learning

and through group and instructor facilitated discussions students are able to resume

trading with a new whole level of understanding.

Expanding the capacity for new learning means that you have to be willing to un-learn

what you know. It may sound strange at first, but if you simple see unlearning as a way to

constantly improve your understanding you may find it easier to accept.


The Trader Action Learning Cycle reveals 2 different learning arenas for each trader. In

this model, real learning (Level 3 Learning) happens in the Live Trading Account, it has

real consequences.

Level 4 Learning - Building Capacity For New Learning - is a zone that I call the un-

learning zone. As discussed earlier, Level 4 learning is achieved by providing students

“Thinking Challenges” like the FxProfit Matrix. It also happens in a student’s demo

account where they are encouraged to try and experiment and play with their active

learning concepts.

The goal in this zone is to push the boundaries of what they are trying to learn. In other

words, students are challenging what they know, they are un-learning so they can build

the capacity to learn even more – hence my favorite expression:

“Continuous Improvement Never Stops!”

Figure 0-4 Trader Action Learning Cycle


In the FxST Premium Online Training Course, students are constantly confronted with Level 3 and 4 Learning videos, including TPD exercises that are designed to be part of the Trader Learning Cycle of learn and un-learning.

Level-3 Learning moves the student into the real world trading. The role of the student changes from passively receiving theoretical knowledge into an active role.

The activity of building understanding of “how trading actually works” (i.e. operational understanding) is a key milestone of developing a traders skill where the mechanical and subjective skills of trading is developed.

In the classic trading book, “Trading In The Zone”, author Mark Douglas, defines 3 stages of trader development:

Mechanical Stage

Subjective Stage

Intuitive Stage

Each stage represents a set of skills to be mastered by the trader. Again, for the purpose of succinctness I will only expand upon Phase 1 where students need to master the “Flawless Execution” of their trading system.

The hidden lesson here is the opportunity for traders to learn how to “Fail Forward”.

Most typical traders quickly develop a fear for “Trading Failures.”

However, in the FxST Traders Learning Cycle, traders are given a safe learning environment in Level-4 Learning where failing is a not only encouraged, but is required – this is how students can test their limits of understanding.

More importantly, this is how students learn to build their own understanding and begin to take ownership of their own learning.

This is why the same students who go through the same foundational training in levels 1-4, emerge with their own unique trading style.

When failing is expected, and when there is a new lesson learned, this kind of failing becomes a positive learning experience that builds confidence in the trader. However, it is important to emphasize that “Failing Forward” is an active exercise requiring the student to document their results.

The biggest mistake in the implementation of the FxST Action Learning Cycle is attempting to rely on memory for past performance. Students must document each trade and review their trading plan as part of a daily ritual.

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The FxST Team have developed a trader journal called the ProfitProtectionSystem™ (PPS) that contains a structured outline required for a trader to:

Plan (FxCalculator – Generate a 52-Week Business Plan) Review (FxJournal – Document, Review & Analyze Trades) Optimize (FxOptimizer – Trading Audit & Trading Plan Revisions)

When a student is given the proper combination of theory, methods and tools the power of the FxST Action Learning Cycle keeps the trader in the “Trading Zone” where they learn to develop what Mark Douglas calls the “Traders Edge”.

Defining your ”Traders Edge” happens within in the 3rd and 4th Learning Levels – more importantly the Successful Trader develops the passion for “Life Long Learning” here and this passion is what brings the trader into Level 5 Learning.

Once again we would like to say congratulations; you are now on the path to achieving success as a Forex Trader!

Happy Trading,

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p.s.s. I also would like to invite you to stop by the FxST Online Live Training Room where you will see exactly how professional traders generate Consistent Profits and Emotion Free Trading.

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START FOREX NOW

BONUS

In addition, as a BONUS we have included another course, Economics 101. This will give you a deeper understanding of Economic news that drives the Forex market. CLICK HERE to Login & Download

MORE SUGGESTIONS FOR SUCCESS:

For most traders this will not be a "difficult" course. This course was built from over 30 years of trading experience and jam packed with quality content. Since there is a lot of information provided in this course, it is highly recommended to go one chapter at a time. After each chapter take the “Action Steps” and review anything unclear before moving forward.

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Risk Disclosure Statement

By your viewing and usage of the information contained in the following pages, you agree to the below terms, conditions and associated risks.

The risk of loss in trading can be substantial. You should therefore carefully consider whether such trading is suitable for you in light of your financial condition.

If you purchase of sell Equities, Futures, Currencies or Options you may sustain a total loss of the initial margin funds and any additional funds that you deposit with your broker to establish or maintain your position. If the market moves against your position, you may be called upon by your broker to deposit a substantial amount of additional margin funds on short notice, in order to maintain your position. If you do not provide the required funds within the prescribed time, your position may be liquidated at a loss, and you may be liable for any resulting deficit in your account.

Under certain market conditions, you may find it difficult or impossible to liquidate a position. This can occur, for example, when the market makes a “limit move.” The placements of contingent orders by you, such as a “stop-loss” or “stop-limit” order, will not necessarily limit your losses to the intended amounts, since market conditions may make it impossible to execute such orders.

The high degree of leverage that is often obtainable in equities trading can work against you as well as for you. The use of leverage can lead to large losses as well as gains. This brief statement cannot disclose all the risks and other significant aspects of the markets. You should therefore, carefully study this disclosure notice before you trade.

The mention or discussion of any securities within this report does not imply the purchase or sell of any securities or the recommendation to purchase or sell any securities. Any discussion is strictly for instructional and educational purposes only.

Notice: Intraday trading (day trading) is very risky, and is not suitable for everyone.


Disclaimer:

During an online training program, and/or on location, demonstrations may be provided. Hypothetical or simulated performance results have certain inherent limitations unlike an actual performance record; simulated results do not represent actual trading. Since the trades have not been executed, the results may have under or over compensated for the impact, if any, of certain market factors, such as lack of liquidity. Simulated trading programs in general are also subject to the fact that they are designed with the benefit of hindsight. No representation is being made that any account will or is likely to achieve profits or losses similar to those shown or implied in any of the Daily Trade Logs or training program.

No Advice:

You understand that we provide no tax, legal or investment advice of any kind, nor do we give advice or offer any opinion with respect to the nature, potential value or suitability of any particular securities transaction or investment strategy. You further understand that while you may be able to access investment research reports through the internet from the website, including computerized online services; the availability of such information does not constitute a recommendation to buy or sell any of the securities discussed therein. Any investment decisions you make will be base solely on your own evaluation of your financial circumstances and investment objectives.

No Claim, Solicitation, or Guarantee:

No representation is being made that an account will or is likely to achieve profits or losses similar to ones own shown or implied in any training program, or while as a user of our services. The student and/or user must carefully consider their suitability to trade and their ability to bear financial risk. The entire risk of use and consequences of use of the trading methods contained in this program fall completely on the student. The student should be aware that no guarantee of a profit has been said, made, or implied.

Paper/Demo Trading:

We recommend that all information contained in any program be thoroughly tested by the student via paper/demo trading (without the risk of real funds) until the student and/or user/member has learned the methodology and proved to themselves that the methodology can assist them in generating consistent profitable returns. The student, and/or user should be aware that paper trading is substantially different than trading with real funds. Slippage, fill prices, and fast market conditions cannot be accurately accounted for in paper trading. Therefore, it


is recommended that when paper/demo trading, the student uses a strategy of deducting from their paper trades, a minimum of 3 times the average round turn commission rate per contract. (Example- if the average round turn commission rate per contract is approximately $10, then the student can show consistent profits while deducting these hypothetical higher commission rates from their paper trades, then there is a higher probability that they will have similar profitable success when trading with real funds. This strategy will attempt to account for some of the slippage, but this strategy is not a guarantee of less risk nor does it account for all of the possibilities and risks that can occur when trading with real funds.

Changes in Strategy:

Due to ever changing market conditions, any program provided may expand, revise or alter its trading strategies. In the event that the student decides to take position in any market, any such changes in strategy may result in exposure of their account assets to additional risks that may be substantial.

Past performance is not necessarily indicative of future results.


FxNewbie™ (Beginner)

CHAPTER 1. WHAT IS FOREX?

Topics Covered

Forex Myths And Misconceptions

Real World Introduction Into Forex

Forex Mechanics & Beyond

Currency Pairs

Trading Sessions

Position Sizes

Value of a Pip

Calculating a Profit & Loss

Margin Trading

The Spread

Types of Orders

Traditional Forex Myths

In traditional education a “typical trader” will be given the theory on 3 pillars of Forex education.

Learn Charting & Analysis

Learn Mechanics of Forex

Learn Account Management

It takes about 3 years for a trader to realize that the Forex market is not play-pen or something you just try.


The few traders who make it this far will run into what is called the “Confirmation Fallacy.”

The “Confirmation Fallacy” is when you are always relying on something to confirm your theory. Typical traders rely only on lagging indicators and continuously find them self chasing the market!

In the end, the best way to describe the traditional Forex education can be captured by this quote from Chief-Master Trader Aramando Martinez:

“What you master is the ability to describe in detail what happened in the market/trade AFTER it has happen!”

How to Eliminate The “confirmation fallacy”

So the dilemma you face as a new trader starting out is how to learn Forex without first learning the basic terms.

Traditional success was exposed to only a few traders who were, as Mark Douglas, the famous author quotes, “Born in to a trading family, or had independent wealth and luck to find a mentor.”

3 Years Of Dedicated Study

Need to Select One Trading Style (Scalping vs Swing)

Find a Mentor Willing to Guide Your Progress

High Cost Entry Barrier:

Institutional Broker ECN

Multiple Monitors – (min 8)

High Tech Support and Overhead Cost

So can you see the problem? How does the average person get started?

The good news is that you have SFN and you have awareness on what you need to do to be successful.

The Typical Trader does not understand the basic operational-knowledge of Forex in its simplest form.


Operational-knowledge is simple a way to distinguish knowledge that simply places a name to an object, person or thing. Operational means that you have an understanding of the how the Forex Market cycles, just like the 4 seasons of the year: winter, spring, summer and fall!

Next you will learn that with very little “Mechanical Knowledge” and “Basic Operational Knowledge”.

You can start trading Forex with consistent results.

Real-World Introduction To Forex

Lesson Provided by Andy Garcia

You are looking at a simple price bar that represents the action in any market.

There is a lot that can be said.

If you are not looking at it very closely then you will miss the profound implications.

First, notice that with this simple image you can get a quick feel for the Open, High, Low and Close of the market for that time period.

As with other charts the timeframe can vary from long term to short term.

The price bar will tell you the open, high, low and close for the month, week, day, hour, 15 minutes or whatever you so choose. Indeed there are even timeframes that traders watch where this simple image can represent the price action for the past 15 seconds or 30 seconds. The timeframe does not matter. It still says the same.


There are charts that don't even track time, they track the number of transactions taking place in that market and use the bar to represent that configuration. For instance, let's say you want to track the past 1500 trades and want to represent that action with the bar chart. That is possible.

So the first trade will be represented by the opening price and the last trade during those 1500 trades will be shown by the closing price, while the low and high are respective of those prices placed as those transactions took place.

There is more...

Though the typical trader will get caught up in that, they overlook the subtle things that the price bar is trying to tell you. As you watch the price bar there are implications that take place as you establish the open, high, low and close.

As the bar is being formed it is important to associate the price action with the history being formed with the market and its overall energy. The price bar first of all represents the thoughts, beliefs, analysis, expectations, hopes, dreams, fears of the participants who are involved in that market.

In a sense, it is a simple representation of crowd psychology whether you choose to look at it that way or not. The price bar is not only formed by those conditions but to the core it can be said that it really represents the actions that were taken by those participants in that market on the behalf of all the notions mentioned.

As you are sitting at your trading terminal deciding to buy or sell any market, you will only act after you have gained the confidence in whatever your decision turns out to be. You will try to make the best decision that you can and that affects the nature of your trade. If you have more confidence then you will put on bigger size.

On the other side if you have less confidence then you will put less size on the trade or not take the trade at all. As more people have the same ideas for the outcome of the market, this will have a tendency to push the market in one direction versus another.

Let me clarify.

Markets Don't Move Based On Supply and Demand

There is a common fallacy that the market moves up because there are more buyers and

that the market moved down because there are more sellers.

This is not entirely true.


If there is only one buyer and there are two sellers, but the one buyer wants to purchase

all that is being offered by the sellers then after that buyer absorbs the inventory the

sellers will be satisfied. This will remove those sellers form the pool and the next higher

seller will emerge. The opposite is the same.

If there is one seller and there are two buyers but the seller is willing to sell to both of

those buyers, the one seller essentially satisfies the two buyers and thus removing that

inventory from the buying pool.

After the buyers are gone, if there are no more buyers step in at that price then the

subsequent buyers at the next lower price will be the current market bid. With that being

said it is not the fact that there were more buyers that moved the market up or more

sellers that moved the market price down, rather it was the intensity of the buyer that

absorbed the sellers’ inventory thus moving price higher. Conversely it was not that

there were more sellers who moved the market lower, it was the intensity of one seller

who actually moved the market lower by absorbing all of the buy orders at the bid price.

Creating the High and the Low price

Once the market starts to move the old laws of physics will have an effect on the distance

price can travel. As the saying goes, an object in motion will tend to stay in motion

unless an external force is applied to it.

When you are watching the price action throughout the day, it is important to pay

attention to the high and the low for that session. The high can be thought of as the

furthest to the upside that the bulls were able to push the price up. Conversely, the low of

the day can be thought of as the furthest to the downside that the bears were able to push

the price. Once the high and the low price are set, it is safe to say that there was an

external force that caused the prices to stop moving in those directions.

That at the high of the session, the bears decided to step in and put a stop to the upward

momentum that the bulls were creating.

Similarly at the low of the session, the bulls decided to step in and put a stop to the

downward momentum that the bears were creating. You have to remember that the

market oscillations are a constant tug of war between the fear of the bears and the greed

of the bulls.

When all is said and done it can be shown that the price bar shows a lot more than just the

open, high, low and close price of a particular session. It is a good representation of the

expectations of the market participants.


One important aspect about the price bar is that it shows you the truth about the activity

in the market.

You don't need to rely on economic reports or news that can be manipulated.

The price bar introduces the notion of history.

Once a price bar is formed there is no way of changing it. The events which occurred

during the formation of price bar will be a part of history that everyone can go back to.

Identifying Institutional Order Flow

A very important strategy is to trade with the trend.

There is a saying that the trend is your friend. By trading in the direction of the trend,

your odds of success will improve if you can trade in the same direction as big money.

The emphasis is to ride the coat-tails of the institutional order flow. At first every trader

wonders how to do that. Your trading will improve if you can identify what the

institutions are doing and trade in that direction.

Of course they are not going to tell you what direction they will trade. In fact the

institutions have a tendency to move the market in one direction only to get better

positioned for a move in the opposite direction.

So the fake out is a key nuance to watch out for when key levels are broken. Once the

train gets going everyone wants to take a ride. If the market gets going in one direction

you can bet that the institutions are involved.

The retail traders have neither the account size nor the staying power to push a market in

one direction and sustain that move.

The big boys are the ones who are able to stop a

market dead in its tracks.

The easiest way to identify if the institutions are

involved is to look at the continuation of a

move.

One favorite of mine is to look at the two bar

breakout or breakdown.


Once you identify the previous sessions high, you have identified the price where the

bulls were no longer able to continue the up move.

The idea is that if the market is able to go above that price then you know that the buyers

are more intense than the sellers and there is a heightened probability that the move may

continue.

The general nature for someone seeing this idea for the first time is to apply it on the one

minute chart not realizing that some moves are not going to be as strong as others.

That is why it is better to apply it on the daily chart.

When you pay attention to breaking the price action of the previous session high or low

there is a reason for that event happening.

Just know that only major order flow is able to push a market to news highs or lows.

This is the heads up that you


In the images shown, there are three different scenarios.

You have the break of the previous session high, the break of the previous session low,

and the inside day. The inside day shows the inability to break the levels. The difference

between being able to break the levels and not is a subtle sign that a majority of traders

miss, let alone the new or struggling trader. The typical trader will try to go long when

the market continues to make new low or try to go short when the market continues to

make new highs. When the market is showing that it cannot move outside of a range the

typical trader will try to muscle the market without realizing that there is no institutional

order flow. As there is generally an effort to inflict your will in the market, you must

realize that your orders will not be able to move price if it does not want to move. So

understanding the difference between these scenarios will make a world of difference.



The Great Correlation:

Skip this section if you’re a newbie, novice traders can now look at the relatioship between the USD Dollar Index (dx) and all the major currency pairs.

When The dx moves in a specific direction it , the major will generally (i.e. not all the time, but most of the time) will move in a predictible direction (see Fig 1.4).

Fig 1.4 The Great Corelation


ACTION LEARNING – EXERCISE:

Key Learning Concepts:

Market flow vs Market

Previous Day High & Low

Range Trading - Inside Day Trading

Trend Trading

Order Flow

Keywords: price bar, major currency pairs, price action, institional traders, retail traders, us dollar index, closing price, opening price, high price, low price

Test Questions:

What are the 4 parts of market anatomy?

What does the previous day session high and low tell you?

What are the 6 main currency pairs

Action Step Exercise:

Goal: Begin the foundational daily trader habit of doing “Profit Work” (i.e. this what successful traders call their homework!). You goal is to begin learning how to complete charting the previous day high and low (PDHL) on the EUR/USD currency pair.

1. Download Think or Swim Charting Software

2. Watch step-by-step video

3. Complete the exercise by charting the previous day low and high

4. Check you work: watch the www.TideTraders.com Forex Market Close Report were Andy Garcia (a.k.a WitchDoctor) does a complete market wrap on each currency pair

5. Repeat this step each day, and join the live training broadcast at www.TideTraders.com


The New Rules Of Forex

As a new trader starting out you will ultimately need to decide what kind of trader you will be.

The “typical trader” believes that he has to choose between being a scalper or swing trader (day trading)

In fact, when you are able to combine both types of trading, that is when you are able to maximize your profits and minimize your risk simultaneously.

FACT:

Essentially, every swing (medium term) trade starts with a scalp (short term).

In other words, every great swing starts with a great scalp trade….

For example a swing trader may be looking at a 4-hour chart and see there is an uptrend forming so they want to buy.

Well instead of buying based solely off what the 4-hour chart is telling you, the “Total Trader” will actually go look at a 1 minute chart to find a precise entry to scalp the market and then let the trade turn in to a swing with minimal risk.

The Mechanics and Key Concepts Of Forex

The Foreign Exchange Market is a decentralized over-the-counter financial market where currencies are traded. The FX market is used by businesses and individuals alike in order to conduct international trade and investment opportunities from around the world to convert one currency to another currency. Also, anytime you travel to a foreign country when you need to exchange your home currency for the foreign currency in order to purchase goods while abroad. For example if you live in the USA and you travel to Europe, you must exchange your US Dollars for Euros. Depending on the exchange rate you may receive more or less Euros for your US Dollar throughout the year. As a Forex trader you decide if that exchange rate will increase or decrease.

The Foreign Exchange Market, known as Forex or “FX,” is the largest financial market in the world and trades over $4 Trillion Dollars a day. Just so that you understand how large in fact the Forex market is the New York Stock Exchange trades $74 billion a day.


Benefits of Trading FX

Year after year, Forex is gaining popularity not only for beginners, but also for veterans that have been trading in other financial markets such as: Stocks, Futures, Options, etc. Some of the advantages of trading Forex are:

Open 24 Hours

Since the Forex market is worldwide, trading opportunities are continuous. As long as there is a market open somewhere in the world, trading Forex is possible. The trading day starts when the markets open in Australia on Sunday evening (5:00pm EST), and ends after markets close in New York on Friday (5:00pm EST).

Massive Liquidity

Liquidity is the ability of an asset to be converted into cash quickly and without any price discount. In Forex this means we can move large amounts of money into and out of foreign currency with minimal price movement. In contrast to the real-estate market where selling a property can be time consuming and require the seller to lower the ask price of a property, the Forex market provides ideal conditions. Since this market is so enormous, not even institutional traders can manipulate the FX market.


Low Transaction Cost

In Forex, typically the cost for a transaction is built into the price. This is called the spread. It is the difference between the price and it is the commission you must pay in order to participate and trade.

Leverage

In Forex trading, a small deposit can control a much larger total contract value. Leverage gives the trader the ability to make large profits and as well as lose large amounts of capital. There are actually some Forex brokers that allow you to open a trading account with as little as $100.

Unlike the stock market where you have hundreds of different companies to research and trade, the Forex market has what we call the Majors and Cross Currency Pairs.

Majors: The most traded pairs of currencies in the world are called the Majors. They constitute the largest share of the foreign exchange market, about 85% and therefore they exhibit high market liquidity.

EUR/USD “Euro/Dollar”

USD/JPY “Dollar/Yen”

GBP/USD “Pound/Dollar”, “Cable”, “Sterling”

AUD/USD “Aussie/Dollar”

USD/CHF “Dollar/Swiss”

USD/CAD “Dollar/Cad”, “Loonie”

NZD/USD “Kiwi”

Crosses: The currency pairs that do not involve the US dollar are called cross currency pairs.

EUR/JPY “Euro/Yen”

EUR/GBP “Euro/Pound”

GBP/JPY “Pound/Yen”

AUD/JPY “Aussie/Yen”

EUR/CHF “Aussie/Swiss”

CHF/JPY “Swiss/Yen”


Commodity Currencies: currencies of countries which depend heavily on the export of a certain raw material for income is called a commodity currency. In the foreign exchange market, commodity currencies generally refer to the Australian Dollar (AUD), Canadian Dollar (CAD), and New Zealand Dollar (NZD).

Structure of the FX market

Let us first examine the stock market and how it’s structured so that we can compare it to the Foreign Exchange Market.

Centralized Market (Stock Markets)

The New York Stock Exchange (NYSE) is considered a centralized market because orders are routed to the exchange and are then matched with an offsetting order. Since you have no choice but to go through the centralized market, it can be considered monopolistic.

On the other hand, there is not one “central” location where currencies are traded in the foreign exchange market which allows traders to find competing rates from various dealers around the world. Unlike in trading stocks or futures, you don't need to go through a centralized exchange like the New York Stock Exchange with just one price. In the Forex market there is no single price for a given currency pair at any time, which means quotes from different currency dealers, may vary.


In the FX market, not all the players are on the same playing field. On the contrary, the Forex market follows a hierarchy in terms of level of access. The level of access is determined by the amount of money each player is trading. At the top of the hierarchy is the inter-bank market which accounts for almost 53% of the total Forex transactions.

To better understand we have illustrated below:


At the very top of the Forex market ladder is the interbank market level, composed of the largest banks of the world. The participants of this market trade directly with each other electronically using the Electronic Brokering Services (EBS) or the Reuters Dealing 3000-Spot Matching.

The largest investment banking firms constitute the inter-bank market. Most of the trading is done for the bank’s account, though some is done on behalf of customers. All the banks comprise the interbank market can see the rates that each is offering, but this doesn't necessarily mean that anyone can make deals at those prices.

Now that you have a better overall grasp of the Forex market structure, let’s further examine the Forex market hierarchy ladder and analyze who these main players are.

FX Market Participants

Large Banks

Since the Forex spot market is decentralized, it is up to the largest banks in the world to determine the exchange rates. Based on supply and demand, they too are generally the ones that make the bid/ask spread.

These large banks, collectively known as the interbank market, take on an excessive amount of Forex transactions each day on behalf of their customers and themselves. A couple of these super banks include UBS, Barclays Capital, Deutsche Bank, and Citigroup.

Corporations

Another level in the hierarchy is composed of commercial and multi-national companies. The financial activity of these companies requires using the Forex to purchase for goods and services in foreign. While the trading need is not as demanding as those of banks, commercial and multi-national companies. Still play an important role in the market and contribute significantly to the total cash value traded daily.

Governments and Central Banks

Governments and central banks, such as the European Central Bank, the Bank of England, Bank of Japan, and the Federal Reserve, are regularly involved in the Forex market as well. Just like companies, national governments participate in the Forex


market when making, international trade payments, and handling their foreign exchange reserves.

In addition, central banks affect the Forex market when they adjust interest rates to control inflation; affecting currency valuation. There are also instances when central banks intervene, either directly or verbally, in the Forex market to realign exchange rates. Sometimes central banks believe that their currency is priced too high or too low so they begin massive sell/buy operations to alter exchange rates.

Forex Speculators

Speculators come in all shapes and sizes and make up close to 90% of all trading. A speculator can vary from a hedge fund to an individual retail trader like you.

The Evolution of Forex – History

After World War II, the economic status of the biggest nations changed dramatically. The UK in particular suffered an insurmountable financial blow, while the US remained unharmed and their financial state stable. The US dollar emerged as the new standard in the financial market. This international financial framework lead the dollar to become the new global reserve currency. This new settlement started the tracking and monitoring of currencies as well as the International Monetary Fund (IMF), and the launch of the World Bank. This aimed at setting up international monetary stability by means of preventing monies from taking flight across nations, along with constraining speculation in the world currencies. The Forex market as we know it today was actually established in 1971. The making of the market was to accommodate the floating exchange rates as they gradually materialized. By the year 1971, major countries had economical difficulties and generated the floating of their currencies. Another agreement was signed—the Smithsonian. This accord now meant having a more flexible movement for the currencies, thus allowing the currencies to vary and fluctuate further. With this agreement, the European market tried to detach itself from the US Dollar dependency. This was possible with the agreements of the currencies’ unlimited variety and flexibility. This gave way to the free-floating currency system. This free-floating system was officially mandated in 1978. Since then, prices were floated everyday along with volumes, speed and price volatility. This was the reason behind new financial instruments, market deregulation and trade liberalization.

During the 1990s tech bubble, banks began creating their own trading platforms. These platforms were designed to stream live quotes to their clients that they could instantly execute trades themselves. Meanwhile, some smart business-minded marketing machines introduced internet-based trading platforms for individual


traders. Known as "Retail Forex brokers", these entities made it easy for individuals to trade by allowing smaller trade sizes.

Forex Brokers

In the past, only the big speculators and highly capitalized investment funds could trade currencies but thanks to Retail Forex brokers and the Internet this is not the case anymore.

With hardly any barriers to entry, anybody can contact a broker, open an account, make deposit, and trade Forex from the comfort of their own home. Brokers come in two forms:

Market Makers - They make or set their own bid and ask prices themselves. Assume you wanted to go to France to eat some snails. In order for you to purchase anything in France, you will need to obtain Euros by going to a bank or the local foreign currency exchange office. For them to take the opposite side of your transaction you have to agree to exchange your home currency for Euros at the price they set. Retail market makers provide liquidity by "repackaging" large contract sizes from wholesalers into bite size pieces. Without them, it will be very hard for the average Joe to trade Forex.

Electronic Communications Networks (ECN) - Electronic Communication Network is the name given for trading platforms that automatically matches a customer's buy and sell orders to stated prices. These stated prices are gathered from different market makers, banks, and even other traders who use the ECN. Whenever a certain sell or buy order is made, it is matched up to the best bid/ask price in the market.

Main Trading Sessions While a 24-hour market offers considerable advantages for many institutional and individual traders because it guarantees liquidity and the opportunity to trade at any conceivable time, it also has its drawbacks. Although currencies can be traded at any time, a trader can only monitor a position for so long. This means that there will be times of missed opportunities, or worse, when a jump in volatility will lead the spot to move against an established position when the trader isn't around. To minimize this risk, a trader needs to be aware of when the market is typically volatile and decide what times are best for his or her strategy and trading style. Traditionally, the market is separated into 3 sessions during which activity peaks; the Asian-Tokyo; European-London; and North American-New York sessions. These names are used interchangeably as the three cities represent the major financial centers for each of the regions. The markets are most active when these three


powerhouses are conducting business as most banks and corporations make their day-to-day transactions and there is a greater concentration of speculators online. Now let's take a closer look at each of these sessions.

FX Market Hours

Below you can find a chart showing the 3 main trading sessions for the Forex market in Eastern Standard Time:

Asia Session

When liquidity is restored to the Forex (or, FX) market after the weekend passes, the Asian markets are naturally the first to see action. Unofficially, activity from this part of the world is represented by the Tokyo capital markets. However, there are many other countries with considerable pull that are present during this period including China, Australia, New Zealand and Russia, among others. Considering how scattered these markets are, it stands to reason that the beginning and end of the Asian session are stretched beyond the standard Tokyo hours.

The opening of the Asian session at 7:00 pm EST marks the start of the Forex clock. You should take note that the Tokyo session is sometimes referred to as the Tokyo session, because Tokyo is the financial capital of Asia.

One thing worth noting is that Japan is the third largest Forex trading center in the world.

This shouldn't be too surprising since the yen is the third most traded currency, partaking in 16.50% of all Forex transactions. Overall, about 21% of all Forex transactions take place during this session.

Here are a few things to keep in mind during the Asia Session:

Action isn't only limited to Japanese shores. Tons of Forex transactions are made in other financial hot spots like Hong Kong, Singapore, and Sydney.

The main market participants during the Tokyo session are commercial companies (exporters) and central banks. Remember, Japan's economy is heavily export


dependent and with China also being a major trade player, there are a lot of transactions taking place on a daily basis.

Liquidity can sometimes be very thin.

It is more likely that you will see stronger moves in Asia Pacific currency pairs like AUD/USD and NZD/USD as opposed to non-Asia Pacific pairs like GBP/USD.

During those times of thin liquidity, most pairs may stick within a range. This provides opportunities for short day trades or potential breakout trades later in the day.

Most of the action takes place early in the session, when more economic data is released.

Moves in the Tokyo session could set the tone for the rest of the day. Traders in later sessions will look at what occurred during the Tokyo session to help organize and evaluate what strategies to take in other sessions.

Typically, after big moves in the preceding New York session, you may see consolidation during the Tokyo session.

Most Active Currency Pairs:

Since the Tokyo session is when news from Australia, New Zealand, and Japan is released, it presents a good opportunity to trade news events. Also, there could be more movement in yen pairs as a lot of yen is changing hands as Japanese companies are conducting business.

Take note that China is also an economic super power, so whenever news comes out from China, it tends to create volatile moves. With Australia and Japan relying heavily on Chinese demand, we could see greater movement in AUD and JPY pairs when Chinese data comes in.

London Session

Later in the trading day, just before the Asian trading hours come to a close, the European session takes over in keeping the currency market active. This FX time zone is very dense and includes a number of major financial markets that could stand in as the symbolic capital, however, London ultimately takes the honors in defining the parameters for the European session. Once again though, this trading period is expanded due to other capital markets' presence (including Germany and France) before the official open in the U.K.; while the end of the session is pushed back as volatility holds until the London fix after the close.

Historically, London has always been at the center of trade thanks to its strategic location. It's no wonder that it is considered the Forex capital of the world with


thousands of businessmen making transactions every single minute. About 30% of all Forex transactions happen during the London session.

Here are a few things to keep in mind during the London Session:

Because the London session crosses with the two other major trading sessions--and with London being such a key financial center--a large portion of Forex transactions take place during this time, providing high liquidity and low spreads.

Most trends begin during the London session, and they typically will continue until the beginning of the New York session.

Due to the large amount of transactions that take place, the London trading session is normally the most volatile session.

Trends can sometimes reverse at the end of the London session, as European traders may decide to lock in profits.

Volatility tends to die down in the middle of the session, as traders often go off to eat lunch before waiting for the New York trading period to begin.


Because of the volume of transactions that take place, there is so much liquidity during the European session that almost any pair can be traded. Of course, it may be best to stick with the majors (EUR/USD, GBP/USD, USD/JPY, and USD/CHF), as these normally have the tightest spreads. Also, it is these pairs that are normally directly influenced by any news reports that come out during the European session. You can also try the yen crosses (more specifically, EUR/JPY and GBP/JPY), as these tend to be pretty volatile at this time. Because these are cross pairs, the spreads tend to be a little wider than the USD pairs.

New York Session

By the time the North American session comes on line the Asian markets have already been closed for a number of hours, but the day is only half through for European traders. The Western session is dominated by activity in the U.S. with few contributions from Canada, Mexico and a number of countries in South America. As such, it comes as little surprise that activity in New York City marks the high in volatility and participation for the session. Taking into account the early activity in financial futures, commodity trading and the concentration of economic releases the North American hours unofficially begin at 8AM EST


Here are a few things to keep in mind during the New York Session:

There is high liquidity during the morning, as it overlaps with the European session.

Most economic reports are released near the start of the New York session. Remember, 90% of all trades involve the dollar, so whenever big time U.S. economic data is released, it has the potential to move the markets.

Once European markets close shop, liquidity and volatility tends to die down during the afternoon U.S. session.

There is very little movement Friday afternoon.

Also on Fridays, there is the chance of reversals in the second half of the session, as U.S. traders close their positions ahead of the weekend, in order to limit exposure to any weekend news.


Take note that there will be a ton of liquidity as both the U.S. and European markets are open at the same time. You can bet that banks and multinational companies are burning up the telephone wires. This allows you to trade virtually any pair, although it would be best if you stuck to the major and minor pairs. Also, because the U.S. dollar is on the other side of the majority of transactions, everybody will be paying attention to U.S. data that is released. Should these reports come in better or worse than expected, it could dramatically shake up the markets, as the dollar will be jumping up and down.

When FX Sessions Overlaps:

If you look at the market hours diagram a few pages above, you can see that there are times when 2 sessions overlap.

Asia - London Overlap

Liquidity during this session is pretty thin for a few reasons. Typically, there is not as much movement during the Asian session relative to NY or London. With European traders just starting to get into their offices, trading can be slow as liquidity dries up. However, there can be days where there can be some nice movements.

London - New York Overlap

This is the busiest time of day, as traders from the two largest financial centers (London and New York). It is during this period where we can see increased


volatility, especially when economic news reports from the U.S. and Canada are released.

If any trends were established during the European session, we could see the trend continue, as U.S. traders decide to jump in and establish their positions after reading up what occurred earlier in the day.Caution, at the end of this session some European traders may be closing their positions which can lead to some choppy moves right before lunch time in the U.S. None the less, this is the most active time to trade in the Forex market!

When to Trade

When two sessions are overlapping of course! These are also the times where major news events occur and potentially spark some volatility and directional movements. The European session tends to be the busiest out of the three. The middle of the week typically shows the most movement, as the pip range widens for most of the major currency pairs.

When NOT to Trade

Fridays | Holidays | Economic News Releases

Making Money as a Forex Trader

Placing a trade in the foreign exchange market is simple: the mechanics of a trade are very similar to those found in other markets so if you have any experience in trading, you should be able to pick it up rather quickly.

The object of Forex trading is to exchange one currency for another in the expectation that the price will change, so that the currency you bought will increase in value compared to the one you sold.

Transactions GBP USD

You purchase 100,000 Pound at the GBP/USD exchange rate of 1.5000 +100,000 -150,000

Two weeks later, you exchange your 100,000 Pound back into U.S. dollar at the exchange rate of 1.6000

-100,000 +160,000**

You earn a profit of $10,000 0 +10,000


An exchange rate is the ratio of one currency valued against another currency. For example, the GBP/USD exchange rate indicates how many Great British Pound can purchase one US Dollar, or how many USD you need to buy one Great British Pound.

Reading Forex Prices

Currencies are always quoted in pairs, such as EUR/USD or USD/JPY. The reason they are quoted in pairs is because in every foreign exchange transaction, you are simultaneously buying one currency and selling another. Here is an example of a foreign exchange rate for the European Euro pound versus the U.S. dollar:

The first listed currency to the left of the slash ("/") is known as the base currency (in this example, the Euro), while the second one on the right is called the counter currency (in this example, the U.S. dollar).

When buying, the exchange rate tells you how much you have to pay in units of the counter currency to buy one unit of the base currency. In the example above, you have to pay 1.3005 U.S. dollars to buy 1 Euro.

When selling, the exchange rate tells you how many units of the counter currency you get for selling one unit of the base currency. In the example above, you will receive 1.3005 U.S. dollars when you sell 1 Euro.

If you buy EUR/USD you are buying the base currency and simultaneously selling the counter currency. "Buy EUR, Sell USD."


You would buy a specific currency pair if you believe the base currency will appreciate (gain value) relative to the counter currency. You would sell the pair if you think the base currency will depreciate (lose value) relative to the counter currency.

Long/Short

A Forex trader can enter the market by buying (long) and selling (short). You do not need

to own to be able to sell. This is a big advantage because you can buy the currency back

later at a lower price and make a profit from the difference. Also, you do not need to wait

until the trend goes up to buy or for it to decline in order to sell. Because of this, the

Forex market is a two way market that enables its investors to take profit regardless if the

trend is moving up or down.

If you want to buy (which means buy the base currency and sell the counter currency),

you want the base currency to rise in value and then you would sell it back at a higher

price. If you want to sell (which means sell the base currency and buy the counter

currency), you want the base currency to fall in value and then you would buy it back at a

lower price. As long as a trader sells at a high price and buys at a low price, profit is

guaranteed.

First, you should determine whether you want to buy or sell.

All Forex quotes are quoted with two prices: the bid and ask. For the most part, the bid is lower than the ask price.

The bid is the price at which your broker is willing to buy the base currency in exchange for the counter currency. This means the bid is the best available price at which you (the trader) will sell to the market.

The ask or offer is the price at which your broker will sell the base currency in exchange for the counter currency. This means the ask price is the best available


price at which you will buy from the market. The difference between the bid and the ask price is popularly known as the spread.

On the EUR/JPY quote above, the bid price is 110.57 and the ask price is 110.58. The difference would be 1 pip for the spread.

Understanding Margin

When you go to the store because you need a slice of bread, you can't just buy a single slice; you buy a loaf of bread.

There is no difference in Forex trading, it just does not make sense to buy or sell 1 Japanese yen, so they usually come in "lots" of 1,000 units of currency (Micro), 10,000 units (Mini), or 100,000 units (Standard) depending on your broker and the type of account you have. Do not worry we will cover more of this later… but you need to understand that trading FX is done in “lots”.

Since not everyone has $100,000 to trade, online brokers offer what is known as leverage or margin trading.

Margin trading means trading with borrowed capital. This is the reason individuals can open a trading account with as little as $100. You can conduct relatively large transactions, very quickly and cheaply, with a small amount of initial capital.

Learn more about this below in “Leverage”

Using Leverage

In FX, investors use leverage to amplify profit from the fluctuations in exchange rates between two different countries. The leverage levels that are achievable in the FX market are some of the highest that investors can obtain. Leverage is a loan that is provided to an investor, by the broker, that is handling his or her account. When an investor decides to invest in the forex market, he or she must first open up a margin account with a broker. Usually, the amount of leverage provided is either 50:1, 100:1 or 200:1, depending on the broker and the size of the position the investor is trading. Standard trading is done on 100,000 units of currency, so for a trade of this size, the leverage provided is usually 50:1 or 100:1. Leverage of 200:1 is usually used for positions of $50,000 or less. To trade $100,000 of currency, with a margin of 1%, an investor will only have to deposit $1,000. The leverage provided on a trade like this is 100:1. Leverage of this size is significantly larger than the 2:1 leverage commonly provided on equities and the 15:1 leverage provided by the futures market. Although 100:1 leverage may seem extremely risky, the risk is significantly less when you consider that currency prices usually change by less than 1% during intraday trading. If currencies


fluctuated as much as equities, brokers would not be able to provide as much leverage. Although the ability to earn significant profits by using leverage is substantial, it can also work against investors. For example, if the currency underlying one of your trades moves in the opposite direction of what you believed would happen, leverage will greatly amplify the potential losses. To avoid such a catastrophe, Forex traders usually implement a strict trading style that includes the use of stop and limit orders.

Rollover

Trades made with brokers in the spot Forex market are subject to receiving interest or being debited interest if positions are held overnight. This is known as rollover interest.

Rollover interest is paid or debited to traders who have open currency positions at 5pm EST each day the trade is open. Trades opened before 5pm EST and held until after this time are considered to be held overnight and thus are subject to interest credit or debits depending on the position the trader has open. Whether a credit or debit is applied to the trader's account it’s determined by which country's currency the trader bought or sold relative to another country's currency. For example the amount of interest received by the trader for holding the EUR/USD pair overnight will be determined by the difference in interest rates prevailing in each location when the rollover occurs.

It is also important to note that rollover is not a charge for using leverage. It is a common misconception that if rollover is debited from a trader this is the cost of the leverage that a broker provided for this trader. This is not the case. The debit or credit is based on the difference between the interest rates of the countries involved in the currency pair the trader is holding.

Receiving rollover is an additional income stream over and above regular capital gains. For this reason, trades can be set up not only to take advantage of capital gains, but also to interest income.

Measuring a Pip

The unit of measurement to express the change in value between two currencies is called a "Pip". If EUR/USD moves from 1.2250 to 1.2251, that is 1 PIP. A pip is the last decimal place of a quotation, given that four decimal places are used for pairs without the Japanese yen. If a pair does include the Japanese yen, then the currency quote goes out two decimal places.

http://www.investopedia.com/articles/forex/08/forex-rollover-credit-debit.asp

http://www.investopedia.com/articles/forex/08/forex-rollover-credit-debit.asp


In the past, spot Forex was traded in specific amounts called lots. The standard size for a lot is 100,000 units. There is also a mini and micro lot sizes that are 10,000 and 1,000 units respectively.

Lot Number of Units Average $/Pip

Standard 100,000 $10

Mini 10,000 $1

Micro 1,000 $0.1

As you already know, currencies are measured in pips, which is the smallest increment of that currency. To take advantage of these tiny increments, you need to trade large amounts of a particular currency in order to see any significant profit or loss.

How do I calculate profit and loss?

So now that you know how to calculate pip value and leverage, let's look at how you calculate your profit or loss.

Let's buy U.S. dollars and Sell Swiss francs.

The rate you are quoted is 1.4525 / 1.4530. Because you are buying U.S. dollars you will be working on the "ask" price of 1.4530, or the rate at which traders are prepared to sell.

So you buy 1 standard lot (100,000 units) at 1.4530.

A few hours later, the price moves to 1.4550 and you decide to close your trade.

The new quote for USD/CHF is 1.4550 / 1.4555. Since you're closing your trade and you initially bought to enter the trade, you now sell in order to close the trade so you must take the "bid" price of 1.4550. The price traders are prepared to buy at.

The difference between 1.4530 and 1.4550 is .0020 or 20 pips.

Using our formula from before, we now have (.0001/1.4550) x 100,000 = $6.87 per pip x 20 pips = $137.40


Types of Orders

The term "order" refers to how you will enter or exit a trade. Here we discuss the different types of orders that can be placed into the foreign exchange market.

Be sure that you know which types of orders your broker accepts, as different brokers accept different types of orders.

Market Order: An order to buy or sell a currency pair immediately at the best available current price.

For example, the bid price for EUR/USD is currently at 1.2140 and the ask price is at 1.2142. If you wanted to buy EUR/USD at market, then it would be sold to you at the ask price of 1.2142.

Limit Order: An order to buy or sell currency at a certain limit is called a Limit Order. When you buy, your order is carried out when the market reached down your limit order price. When you sell, your order is carried out when the market reaches up your limit order price. You can use it to buy currency below the market price or sell currency above the market price. There is no decrease with limit orders.

For example, EUR/USD is currently trading at 1.2050. You want to go short if the price reaches 1.2070. You can either sit in front of your monitor or wait for it to hit 1.2070 (at which point you would click a sell market order), or you can set a sell limit order at 1.2070.

Stop Order: The last one is Stop Order, which is an order to buy above the market or to sell below the market. It is usually used as a stop-loss order to diminish losses if the market behaves opposite to what the broker supposed. A stop-loss order lets sell the currency if the market goes below the point appointed by the broker. In Forex market there are four various types of stop orders.

A stop-entry order is an order placed to buy above the market or sell below the market at a certain price.

For example, GBP/USD is currently trading at 1.5050 and is heading upward. You believe price will continue with its direction if it hit 1.5060. You can do either one of these things: sit in front of your computer and buy at market when it hits 1.5060 OR set a stop-entry order at 1.5060. You use stop-entry orders when you feel that price will move in one direction!


Stop-Loss Order: An order to buy above the market or to sell below the market. It is usually used as a stop-loss order to diminish losses if the market behaves opposite to what the broker supposed. A stop-loss order lets sell the currency if the market goes below the point appointed by the broker. In Forex market there are four various types of stop orders.

A stop-loss order is a type of order linked to a trade for the purpose of preventing additional losses if price goes against you. A stop-loss order remains in effect until the position is liquidated or you cancel the stop-loss order.

For example, you went long (buy) EUR/USD at 1.2230. To limit your maximum loss, you set a stop-loss order at 1.2200. This means if you were dead wrong and EUR/USD drops to 1.2200 instead of moving up, your trading platform would automatically execute a sell order at 1.2200 the best available price and close out your position for a 30-pip loss.

Stop-losses are extremely useful if you don't want to sit in front of your monitor all day worried that you will lose all your money. You can simply set a stop-loss order on any open positions so you won't miss your underwater basket weaving class or elephant polo game.

Trailing Stop: A trailing stop is a type of stop-loss order attached to a trade that moves as price fluctuates.

Let's say that you've decided to short USD/JPY at 90.80, with a trailing stop of 20 pips. This means that originally, your stop loss is at 91.00. If price goes down and hits 90.50, your trailing stop would move down to 90.70.

Just remember though, that your stop will STAY at this price. It will not widen if price goes against you. Going back to the example, with a trailing stop of 20 pips, if USD/JPY hits 90.50, then your stop would move to 90.70. However, if price were to suddenly move up to 90.60, your stop would remain at 90.70.

Your trade will remain open as long as price does not move against you by 20 pips. Once price hits your trailing stop, a stop-loss order will be triggered and your position will be closed.

One-Cancels-the-Other (OCO): This is used in the case where one simultaneously places a limit order and a stop-loss order. If either order is carried out the other is abrogated which lets the broker to make a deal without supervising the market. Once the market reaches up the level of the limit order, the currency is sold at a profit but when the market falls, the stop-loss order is used.


General Facts about FX

All Forex traders, LOSE money sometimes. 97% of traders lose money, largely due to lack of planning, training, discipline, and poor money management skills.

If you hate to lose or are a perfectionist, you'll also probably have a hard time adjusting to trading because all traders lose on a trade at some point or another.

Before you think about diving in to Forex Trading, you MUST understand it is not for everyone. If you are unemployed and looking for a lottery ticket, this is NOT for you.

Don't expect to start an account with a few hundred dollars and expect to become a millionaire overnight. The 3 % of traders that do consistently make money treat FX trading like business and not gambling.

The problem is that many traders come with the misguided hope of making a gazillion bucks, but in reality, they lack the discipline required for really learning the art of trading. Most people usually lack the discipline to stick to a diet or to go to the gym three times a week.

A trading strategy that involves taking a massive degree of risk means suffering inconsistent trading performance and large losses.

Just like any other occupation or career, success doesn't just happen overnight. The truth is that even expert traders with years of experience still encounter periodic losses; however those losses are always manageable and can be recouped rather quickly.

If you have a foundation of how to trade, even when you do take a loss you know exactly how to get it back.

The key to finding and sustaining success in Forex is one committing to learning the business fundamentals and following the guidance of Forex mentors.


Insider Tip’s:

1. Best Time to Trade – The Best time to trade is when the London & New York Sessions Overlap. 8:00AM-11:30AM (EST)

2. Smallest Spreads – EUR/USD, USD/JPY, AUD/USD

Risks Involved

1. Using High Leverage – Trading with a high leverage presents the risk of losing a large portion of your trading account.

2. Over Trading – Since the market is open 24-hours/day, it can be very tempting to trade nearly all day long even after you have reached your daily profit goal. Remember to treat this as a business, not a game or hobby.

Action Steps

1. Become familiar with the Currency Pairs.

2. Determine what Trading Session works best for you.

3. Calculating Profits & Losses.


CHAPTER 2. OPEN AN FX DEMO ACCOUNT

Topics Covered

Open a Demo Account

Basic Functions of a Trading Platform

Place a “Real Time” Trade

Watch Opening a Demo Account Tutorial Video

http://www.forexsuccessfultraders.com/Members/tutorials/forex-introduction/3-open-a-demo-account/

http://www.forexsuccessfultraders.com/Members/tutorials/forex-introduction/3-open-a-demo-account/


CHAPTER 3. ANALYZING FX

Topics Covered

Fundamental Analysis

Technical Analysis

Types of Market Analysis

To begin, let's look at three ways how you would analyze and develop ideas to trade the market. There are a few basic types of market analysis we will cover in this chapter.

Fundamental Analysis

Fundamental analysis and technical analysis are the two most widely used methods for

making trade decisions in the Forex market. Fundamental analysis helps Forex traders

understand the “fundamental” characteristics of a currency. Analyzing fundamentals such

as interest rates, trade balance and monetary policy allows a trader to forecast future price

moves and make profitable trades. Technical analysis helps Forex traders understand the

past price action of a currency. By analyzing significant price changes of a currency, a

trader is better able to forecast future prices. Both types of analysis have advantages and

disadvantages – the key to profitable trading is in maximizing the positives, and

minimizing the negatives, of each.

You have to look at different factors to determine whose economy is strong, and whose economy is weak. You have to understand the reasons of how and why certain events such as an increase in unemployment affect a country's economy, and ultimately, the demand for its currency.

The idea behind this type of analysis is that if a country's current or future economic outlook is good, their currency should strengthen. The key word there is “should”. Just like with Technical Analysis, nothing is ever 100% right 100% of the time. The better shape a country's economy is, the more foreign businesses and investors will invest in that country. This results in the need to purchase that country's currency to obtain those assets.


In a nutshell, this is what fundamental analysis is:

Let’s say that the U.S. dollar has been gaining strength because the U.S. economy is improving. As the economy improves, raising interest rates may be needed to control growth and inflation.

Higher interest rates make dollar-denominated financial assets more attractive because investors receive a higher interest rate on their capital (money). In order to get their hands on these, traders and investors have to buy US Dollars first (USD). As a result, the value of the dollar will increase. Interest rate announcements and Non Farm Payrolls are the most important Economic News Releases in the Forex market.

Technical Analysis

If fundamental analysis attempts to answer “why,” technical analysis seeks to answer “where.” Where on a price chart did the Japanese Yen find the most resistance? In what price range did the Yen spend most of the day? Where did the Yen break out of congestion and start the most recent upward trend? Technical analysis uses price charts to better understand where price has been and where it could be going. By analyzing the price action of a currency a trader can see visually that.

While technical analysis gives us clues about future price moves, by examining past price

moves, it is not perfectly predictive. Just because a currency stalled at a particular price

several times in the past does NOT guarantee it will not rapidly break through that price

the next time. Technical analysis alone often fails to answer why a currency moved, only

where it has moved. So many factors contribute to why the price action occurred that it

can be difficult to interpret past price action in a way that predicts future price action.

As a Technical analysis trader, you assume the following:

All market fundamentals are reflected in price data. Moods, differing opinions, and other market fundamentals need not be studied.


History repeats itself in regular, fairly predictable patterns. These patterns, generated by price movements, are called signals. A technical analyst's goal is to uncover a current market's signals by examining past market signals.

Prices move in trends. Technical analysts believe price fluctuations are not random and unpredictable. Once an up, down or sideways trend has been established, it usually will continue for a period.

If a price level held as a key support or resistance in the past, traders will keep an eye out for it and base their trades around that historical price level.

Technical analysts look for similar patterns that have formed in the past, and will form trade ideas believing that price will act the same way that it did before.

Traders rely on price charts, to find the ideal entry and exit points for a trade. There are

various types of studies available, allowing you to identify a trend and determine the

strength and sustainability of that trend over time.

Technical analysis can help reinforce a traders discipline and minimize emotion in your

trading plan. While no system is perfect, technical analysis helps you see your trading

plan in a very visual format


Which Type of Analysis is Best?

While academic types may debate which type of analysis is superior, a profitable Forex

trader simply learns to apply the best aspects of fundamental analysis AND the best

aspects of technical analysis. Since fundamental analysis and technical analysis each

provide a unique view of the same picture, their use as complimentary methods can be

quite successful.

Fundamental analysis may suggest the British Pound is likely to crash due to several

aspects of a worsening economy. However, this move could happen in a day, a week, or a

month. Technical analysis may not explain why the Pound is likely to depreciate, but it

may indicate likely price levels where this could occur. If prices break lower through a

significant support level it may indicate that the crash, as suggested by fundamental

analysis, is likely to occur very soon! Many traders use fundamental analysis to establish

a “big-picture” forecast for the currency, and then rely on technical analysis to hone in on

the best entry and exit points that will increase the profitability of that big-picture view.

Those work hand-in-hand to help you come up with good trade ideas. All the historical Price Movement and economic figures are there - all you have to do is put on your thinking cap and put those analytical skills to the test! In order to become a true Forex master you will need to know how to effectively use these 2 types of analysis.

Insider Tip’s:

Technical Analysis – Can be used to help determine precise entry and exits. Best when used for shorter term trading

Fundamental Analysis – Help you determine long term price direction, but hard to use trading short term.

Risks Involved:

Which is the Best – Throughout your journey as an aspiring Forex trader you will find strong advocates for each type of analysis. Do not be fooled by these one-sided extremists! One is not better than the other. They are all just different ways of looking at the market.

Action Steps:

Look at ForexFactory.com to see schedules Fundamental News Events

http://forexfactory.com/


CHAPTER 4. USING TECHNICAL CHARTS

Topics Covered

Line Chart

Bar Chart

Candlestick Chart

Types of Charts

The three most popular types of charts used for technical analysis are:

Line Chart

Bar Chart

Candlestick Chart

Line Charts

Line charts are some the least used charts in all of trading. Though line charts are

incredibly simple to read and understand, they often do not show enough data to make

intelligible decisions. Though the use of these charts is not at all recommended, I will

explain what they are and how they work so you can make your own decision.

Line charts are generally calculated by using the open or close value of a currency pair,

then drawing a straight line to connect the points. What this does it show a relatively

smooth chart, factoring in only the values at which the currency was priced at certain

times.


Below you can see an example of a line chart:

Bar Charts

A bar chart also known as an OHLC chart is a type of chart typically used to illustrate movements in the price of a financial instrument over time. Each vertical line on the chart shows the price range (the highest and lowest prices) over one unit of time, e.g. one day or one hour. Tick marks project from each side of the line indicating the opening price (e.g. for a daily bar chart this would be the starting price for that day) on the left, and the closing price for that time period on the right. The bars may be shown in different hues depending on whether prices rose or fell in that period.


Below you can see an example of a bar chart:

Candlesticks Charts

Candlestick charts are the most popularly used charts. Candlesticks offer all the data of

bar (OHLC) charts, but in an easier to read graphical dataset. After learning the basics of

candlestick charts, you’ll be able to decipher data faster and make decisions quicker, a

valuable skill in the world of Forex trading.

Candlestick charts are arguably the best type of chart to use they allow you to easily understand the changes in price, because as well as allow you to employ candlestick analysis when deciding how to place your trade. Candlestick analysis is a very profitable and easy to learn method.


Here is how to read a candlestick:

Here is an example of a candlestick chart:


Insider Tip’s:

Candlestick Charts - These are the most used and recommended charts for traders that use technical analysis. Many candlestick patterns are also only available to see when using this type of chart!

Risks Involved:

Using High Leverage – Trading with a high leverage presents the risk of losing a large portion of your trading account.

Over Trading – Since the market is open 24-hours/day, it can be very tempting to trade nearly all day long even after you have reached your daily profit goal. Remember to treat this as a business, not a game or hobby.

Action Steps:

Open up all 3 different types of charts on your MT4 Demo Review candlestick Charts and become familiar with reading bullish &

bearish candles


CHAPTER 5. IDENTIFYING SUPPORT & RESISTANCE

Topics Covered

Characteristics of Support & Resistance

Creating Trend Lines & Channels

How to trade off Support & Resistance

Understanding Support & Resistance

Support and resistance are the focus of how supply and demand meets. In the financial

markets, prices are driven by excessive supply (down) and demand (up). Supply is

synonymous with bearish, bears and selling. Demand is synonymous with bullish, bulls

and buying. As demand increases, prices advance and as supply increases, prices decline.

When supply and demand are equal, prices move sideways as bulls and bears slug it out

for control.

Support is a level at which bulls take control over the prices and prevent them from

falling lower. Think of support as a floor, when we fall we hit the floor and most of the

time; we bounce back up, just like a stock. But sometimes, we fall through the floor, and

keep on falling until we hit another floor, just like a stock.

Resistance, on the other hand, is the point at which sellers take control of prices and

prevent them from rising higher. The price at which a trade takes place is the price at

which a bull and bear agree to do business. It represents the consensus of their

expectations.

Support levels indicate the price where the most of investors believe that prices will move

higher. Resistance levels indicate the price at which the most of investors feel prices will

move lower.

This is the most basic form of technical analysis. All you must do is determining where

the support line is and the resistance line is. However, when a price breaks through one of

them, you will see a rally based on whatever line was broken. When this happens it is a

good idea to stay out of the trade and wait for the price to determine the next support and

resistance line. A breakout above a resistance level is evidence of an upward shift in the

demand line as more buyers become willing to buy at higher prices. Similarly, the failure

of a support level shows that the supply line has shifted downward.


Support and Resistance is one of the most widely used concepts in trading. Strangely enough, everyone seems to have their own idea on how you should measure support and resistance.

Let's take a look at the basics first:

Look at the diagram above. As you can see, this zigzag pattern is making its way up (bull market). When the market moves up and then pulls back, the highest point reached before it pulled back is now resistance.

As the market continues up again, the lowest point reached before it started back is now support. In this way resistance and support are continually formed as the market oscillates over time. The reverse is true for the downtrend.

Often times you will see a support or resistance level that appears broken, but soon after find out that the market was just testing it. With candlestick charts, these "tests" of support and resistance are usually represented by the candlestick wicks.


Here is a real-life example of a candlestick chart with Support & Resistance:

Notice how the wicks of the candles tested the green Support level. At those times it seemed like the market was "breaking" support. In hindsight we can see that the market was merely testing that level.

There is no definite answer to this question to determine if support or resistance is broken. Some argue that a support or resistance level is broken if the market can actually close past that level. However, you will find that this is not always the case. These exceptions are known as False Breakouts as seen in the chart below.


Below is a chart of when it looked like support was being broken, but then quickly reversed:

In this case, the price had closed below the support level but ended up rising back up above it in a couple candles.

If you had believed that this was a real breakout and sold this currency pair, you would have been seriously hurt and lost money!

Looking at the chart now, you can visually see and come to the conclusion that the support was not actually broken; it is still very much intact and now even stronger to the upside.

To help you filter out these false breakouts, you should think of support and resistance more of as "zones" rather than concrete Price Levels. As you advance we will introduces the difference between Price Levels & Price Movement and why Price Movement actually provides a much higher success rate.

Characteristics of Support & Resistance

When the price passes through support, that support could potentially become resistance and vice versa.

The more often price tests a level of resistance or support without breaking it, the more important the level comes and more likely to be a pivotal level in the future.


When a support or resistance level breaks, the strength of the follow - through move depends on how strongly the broken support or resistance had been holding.

Understanding Trend Lines

Trend lines are probably the most common forms of technical analysis. They are probably one of the most underutilized ones as well.

If drawn correctly, they can be as accurate as any other method. Unfortunately, most traders don't draw them correctly or try to make the line fit the market instead of the other way around.

In their most basic form, an uptrend line is drawn along the bottom of easily identifiable support areas (floors). In a downtrend, the trend line is drawn along the top of easily identifiable resistance areas (ceilings).

Drawing Trend Lines

To draw trend lines properly, all you have to do is locate two major tops or bottoms and connect them.


Here are trend lines in action:

Understanding Trends

There are three types of Trends:

Uptrend (Higher Highs & Higher Lows)

Downtrend (Lower Highs & Lower Lows)

Range (Sideways Trend)

Understanding Channels

If we take this trend line theory one step further and draw a parallel line at the same angle of the uptrend or downtrend, we will have created a channel.

Channels are just another tool in technical analysis, which can be used to determine good places to buy or sell. Both the tops and bottoms of channels represent potential areas of support or resistance, allowing you to buy low and sell high.


Here are Channels in action:

To create an up-channel, simply draw a parallel line at the same angle as an uptrend line and then move that line to position where it touches the most recent peak. This should be done at the same time you create the trend line.

To create a down-channel, simply draw a parallel line at the same angle as the downtrend line and then move that line to a position where it touches the most recent valley. This should be done at the same time you create the trend line.

When prices hit the bottom trend line, this may be used as a buying area. When prices hit the upper trend line, this may be used as a selling area.

Types of Channels

There are 2 types of Channels:

Up-Channel (Higher Highs and Higher Lows)

Down-Channel (Lower Highs and Lower Lows)


Characteristics of Channels:

When constructing a channel, both trend lines must be parallel to each other.

Generally, the bottom of the channel is considered a buy zone while the top of the channel is considered a sell zone.

Like in drawing trend lines, DON’T EVER force the price to the channels that you draw! A channel boundary that is sloping at one angle while the corresponding channel boundary is sloping at another is not correct and could lead to bad trades.

Traditional Trading Strategy

Now that you know the basics, it's time to apply these basics but extremely useful technical tools in your trading. Here at FxST™ we have divided trading support and resistance levels into two simple ideas: the Bounce and the Breakout.

Traditional Bounce Trade

As the name suggests, one method of trading support and resistance levels is anticipating the price to bounce when it hits a support or resistance level.

Many retail traders make the error of assuming Price Levels will always hold and ignoring the fact the market is always evolving and changing directions. Price Movement takes in to account that there are too many variables such as Economic News, natural disasters, market sentiment and many other market conditions.

We do not promote this type of trading, but you should be aware how many tradition traders actually trade when anticipating support or resistance levels to hold.

When playing the bounce tradition look for some type of confirmation that the support or resistance will hold. Instead of simply buying or selling right off the bat, they make sure the level and then execute their position. The problem with that is that often times since you did not buy the low or sell the high; you have to use a larger stop loss in case it returns to test those levels.

You should have a system that quickly and easily allows you to analyze the market to find the most reliable Support and Resistance levels. By doing this, you avoid those moments where price moves fast and break through support and resistance levels.


The Traditional Breakout Strategy

In a perfect trading world, we could just jump in and out whenever price hits those major support levels (floors) and resistance levels (ceilings) and earn loads of money. The fact of the matter is that these levels break.

So, it's not enough to just play bounces. You should also know what to do whenever support and resistance levels give way! Anytime you ever take a trade you should always know where you want to get in, where you want to take profit, and where you will take a loss if the trade does not work. Let’s talk about the 2 traditional ways of trading breakouts.

The Traditional Aggressive Breakout Strategy

The aggressive approach to traditional breakout strategies is to buy or sell whenever price passes convincingly through a support or resistance zone. If price falls below support, these types of traders would want to sell or short the currency pair. Vice versa, if price rises above resistance they would buy the currency pair. The key word here is convincingly because we only want to enter when price passes through a significant support or resistance level with ease. This is commonly taught not only in Forex but also for all traded securities. However, when you take this risk your odds are just as good as going to a casino and gambling. Sure you may make a lot of money sometimes, but do you want to gamble with low odds that the market is ready to breakout or do you want to have a business with little draw drowns and consistent profit. The amount these traders are risking tends to be too high, also known as Junkie Profits™ because they are high risk and high return. The truth is professional traders are already in a trade before the market breaks out that way if the market does a false break out they can get out at Break-Even or a small loss. The difference is the professionals are risking very little for a high return, not the other way around.

The Traditional Passive Breakout Strategy

The conservative approach to traditional breakout strategies is after the price passes convincingly through a support zone you anticipate it to become resistance. On the flip side if a price passes through a resistance level, you anticipate it to become support. So if a currency pair fall below support, these traders would be looking to sell if the prices comes back to that level. The reason this approach tend to work is because of the Bounce traders. Remember, whenever you close out of a position, you take the opposite side of the trade. If you buy or go long, in order to close the position you must sell it back. However, if you sell or short a currency pair, to close the position you must buy it back.


Let’s use the following picture for an example:

Suppose you were a traditional bounce trader, immediately as the price reaches the green support level, you buy or go long the currency pair anticipating the support level will hold as it did before. However, the price continues moving down and you are now losing money. After being negative in the trade the price finally comes up to your entry point and you decide to close at break-even, so you don’t make or lose anything. Closing the long trade at or near breakeven means you will have to sell the back currency pair that you bough. Now, if enough selling and liquidation of losing positions happens at the broken support level, price will reverse and start falling again. This phenomenon is the main reason why broken support levels become resistance whenever they break.

As you would've guessed, taking advantage of this phenomenon is all about being patient. Instead of entering right on the break like aggressive breakout traders do, you wait for price to make a "pullback" to the broken support or resistance level allowing you. This helps lower the chances of trading false breakouts.


SUMMARY

When the market moves up and then pulls back, the highest point reached before it pulls back is now resistance.

As the market continues up again, the lowest point reached before it climbs back is now support.

One thing to remember is that horizontal support and resistance levels are not exact numbers.

To help you filter out these false breakouts, you should think of support and resistance more of as "zones" rather than concrete numbers.

One way to help you find these zones is to plot support and resistance on a line chart rather than a candlestick chart.

Another thing to remember is that when price passes through a resistance level, that resistance could potentially become support. The same could also happen with a support level. If a support level is broken, it could potentially become a resistance level.

Trend Lines

In their most basic form, an uptrend line is drawn along the bottom of easily identifiable support areas (floors). In a downtrend, the trend line is drawn along the top of easily identifiable resistance areas (ceilings).

There are three types of trends:

Uptrend (Higher Lows)

Downtrend (Lower Highs)

Range (Sideways Trend)

Channels

To create an up Up-Channel, draw a parallel line at the same angle as an uptrend line and then move that line to position where it touches the most recent peak.

To create a down Down-Channel channel, simple draw a parallel line at the same angle as the downtrend line and then move that line to a position where it touches the most recent valley.


Up-Channel (Higher Highs and Higher Lows)

Down-Channel (Lower Highs and Lower Lows)

Trading support and resistance levels can be divided into two methods: the bounce and the break.

When trading the bounce we want to tilt the odds in our favor and find some sort of confirmation that the support or resistance will hold. Instead of buying or selling right off the bat, wait for it to bounce first before entering. By doing this, you avoid those moments where price moves so fast that it slices through support and resistance levels.

As for trading the breakout, there is the aggressive way and there is the passive way. In the aggressive way, you simply buy or sell whenever the price passes through a support or resistance zone with ease. In the passive approach, you wait for price to make a "pullback" to the broken support and sell anticipating it will now be resistance or when resistance is broken and the currency pair pulls back to the price level you will buy anticipating it to now be used as support.

Insider Tip’s:

False Breakouts - To help you filter out these false breakouts, you should think of support and resistance more of as "zones" rather than concrete numbers.

Risks Involved:

Trend Lines – If drawn correctly, they can be as accurate as any other method. Unfortunately, most traders don't draw them correctly or try to make the line fit the market instead of the other way around.

Action Steps:

Draw 3 Horizontal Support and Resistance Lines

Draw 3 Up-Trend Lines

Draw 3 Down-Trend Lines


CHAPTER 6. TYPES OF FX MARKETS

Topics Covered

Trending Markets

Ranging Markets

Retracements

Reversals

All financial markets can be simply classified in to 3 different market conditions:

Up-Trends

Down-Trends

Ranges

Understanding Trending Markets

A trending market is one in which price is generally moving in one direction.

Trends are usually noted by "higher highs" and "higher lows" in an uptrend and "lower highs" and "lower lows" in a downtrend.


Here is an example of a down trend:

When trading a trend-based strategy, traders usually pick the major currencies as well as any other currency utilizing the dollar because these pairs tend to trend and be more liquid than other pairs.

Liquidity is important in trend-based strategies. The more liquid a currency pair, the more movement (a. k. a. volatility) we can expect.

The more movement a currency exhibits, the more opportunities there are for price to move strongly in one direction as opposed to bouncing around within small ranges.

Ranging Market

Understanding Ranges

A ranging market is one in which price bounces in between a specific high price and low price. The high price acts as a major resistance level in which price can't seem to break through.

Likewise, the low price acts as major support level in which price can't seem to break as well. Market movement could be classified as horizontal or sideways.


Retracement vs. Reversal

Understanding Retracements

A retracement is defined as a temporary Price Movement against the established trend. Another way to look at it is an area of Price Movement that moves against the trend but returns to continue the trend.


Here is an example of retracements in an Up-Trend:

Understanding Reversals

Reversals are defined as a change in the overall trend of price. When an uptrend switches to a downtrend, a reversal occurs. When a downtrend switches to an uptrend, a reversal also occurs.


Here is an example of reversal in an Up-Trend:

Because reversals can happen at any time, choosing how to trade reversals isn't always easy. This is why using trailing stop loss points can be a great risk management technique when trading with the trend. You can employ it to protect your profits.

Identifying Reversal

Properly distinguishing between retracements and reversals can reduce you're the number of losing trades and even set you up with some winning trades.

Classifying a price movement as a retracement or a reversal is very important.

There are several key differences in distinguishing a temporary price change retracement from a long-term trend reversal.


Here they are:

Retracements Reversals

Usually occurs after huge price movements. Can occur at anytime.

Short-term |Short-lived reversal Long-term price movement

Fundamentals don't change. Fundamental DO change, which is usually the catalyst for the long-term reversal.

In an uptrend, buying interest is present, making it likely for price to rally. In a downtrend, selling interest is present, making it likely for price rally.

In an uptrend, there is very little selling interest forcing the price to fall lower. In a downtrend, there is very little buying interest forcing the price to rise further.

While these methods can identify reversals, they aren't the only way. Some traders use other indicators we will touch on later on.

Insider Tip’s

Trading Trends - NEVER chase a trend!!! Wait for retracements allowing you to buy the lows and sell the highs

Risks Involved

Trends - The market can only move so far before it needs relax. Always be aware a trend can reverse quickly, so always be caution after a big move.

Action Steps

Find 3 Ranges on a 1 hour chart

Find 3 Trends on a 1 hour chart

Define the retracements in those trends

Find 3 Reversals, after trend line is broken


CHAPTER 7. LEARNING FUNDAMENTAL ANALYSIS

Topics Covered

Interest Rates

Real vs. Nominal

Types of Monetary Policy

Analyzing News Releases

Understanding Fundamental Analysis

Whenever you hear people mention fundamentals, they're really talking about the economic fundamentals of a currency's host country or economy.

Economic fundamentals cover a vast collection of information - whether in the form of economic, political or environmental reports, data, announcements or events.

Fundamental analysis is the use and study of these factors to forecast future price movements of currencies.

It is the study of what's going on in the world and around us, economically and financially speaking, and it tends to focus on how macroeconomic elements (such as the growth of the economy, inflation, unemployment) affect whatever we're trading.

Economic News Releases

In particular, fundamental analysis provides insight into how Price Movement "should" or may react to a certain economic event.

Fundamental data takes shape in many different forms.

It can appear as a report released by the Fed on U.S. existing home sales. It can also exist in the possibility that the European Central Bank will change its monetary policy.

The release of this data to the public often changes the economic landscape (or better yet, the economic mindset), creating a reaction from investors and speculators.

There are even instances when no specific report has been released, but the anticipation of such a report happening is another example of fundamentals.

Speculations of interest rate hikes can be "priced in" hours or even days before the actual interest rate statement.


In fact, currency pairs have been known to sometimes move 100 pips just moments before major economic news, making for a profitable time.

That's why many traders are often on their toes prior to certain economic releases and you should be too!

Generally, economic indicators make up a large portion of data used in fundamental analysis. Like a fire alarm sounding when it detects smoke or feels heat, economic indicators provide some insight into how well a country's economy is doing.

While it's important to know the numerical value of an indicator, equally as important is the market's anticipation and prediction of that value.

Understanding the resulting impact of the actual figure in relation to the forecasted figure is the most important part. These factors all need consideration when deciding to trade.

Fundamental analysis is a valuable tool in estimating the future conditions of an economy, but not so much for predicting currency price direction.

The market has a tendency to react based on how people feel. These feelings can be based on their reaction to economic reports, based on their assessment of current market conditions. This is also known as market sentiment as explained earlier. And you guessed it - there are tons of people, all with different feelings and ideas.

There's no way of knowing 100% where a currency pair will go because of some new fundamental data. That's not saying that fundamental analysis should be dismissed. Because of the sheer volume of fundamental data available, most people simply have a hard time putting it all together. They understand a specific report, but can't factor it into the broader economic picture. This simply takes time and a deeper understanding of the data. Also, since most fundamental data are reported only for a single currency, fundamental data for the other currency in the pair would also be needed and would then have to be compared to get an accurate picture. As we mentioned from the get-go, it's all about pairing a strong currency with a weak one. Technical analysis seems to be the preferred methodology of short-term traders, with Price Movement as their main focus. Intermediate or medium traders and some long-term traders like to focus on fundamental analysis too because it helps with currency valuation. A mix of technical and fundamental analysis covers all angles. You're aware of the scheduled economic releases and events, but you can also identify and use the various technical tools and patterns that market players focus on.


Understanding Interest Rates

It is important that novice or aspiring Forex traders should be familiar and learn how

interest rate influence on Forex market simply because this factor plays a great effect on

the foreign exchange market. Interest rate is classified as the amount of money that a

creditor must pay to the lender so that he can have the chance of holding the money. The

interest is basically in concurrence with the original amount borrowed from the lender.

Indeed, interest rate is one of the most essential and influencing factors that affect the

currency prices in the Foreign exchange market equation. Being conscious about how

interest rates go up and down can guide traders in making rational and commonsensical

decisions in trading.

A perfect example that should be observed closely by Forex traders interested to learn

how interest rate influence on Forex market is the moment a particular country’s central

bank increases interest rates, you will observe that interested investors are taking this

opportunity to shift their money and assets into the country. Why? Well, simply because

these capitalists want to grab the opportunity for possibilities of higher interest rate

returns for the primary purpose of earning higher profits. Interest rate is also considered

as a barometer to gauge the status of a country’s economy. The main reason why a

country with a rising interest rate as a result of strong economic growth most probably

would give way to an optimistic effect on how that certain country’s currency will play in

the Forex market.

Although there are other influential factors that affects how a country’s currency play on

the Forex market, it cannot be denied that interest rate has a bigger effect outstanding the

other factors like political and economical conditions of a certain country. Many

investors are in constant watch of interest rates by paying adequate attention to economic

inflation indicators to closely monitor if interest rates are either rising up or falling down.

Once noticed that a certain country’s currency is rising, it is believed that their currency

is much stronger than other currencies, and investors seek more of that currency in order

to generate and take advantage of more profits.


Below you can see the Central banks for the Main countries throughout the world, which

are in control of interest rates:

Country Central Bank

Australia Reserve Bank of Australia (RBA)

Canada Bank of Canada (BOC)

European Union European Central Bank (ECB)

Japan Bank of Japan (BOJ)

New Zealand Reserve Bank of New Zealand (RBNZ)

Switzerland Swiss National Bank (SNB)

United Kingdom Bank of England (BOE)

United States Federal Reserve (Fed)

In an effort to keep inflation at a comfortable level, central banks will mostly likely increase interest rates when inflation or economic growth begins to grow, resulting in lower overall growth and slower inflation.

This occurs because setting high interest rates normally forces consumers and businesses to borrow less and save more, putting a damper on economic activity. Loans just become more expensive while sitting on cash becomes more attractive.

On the other hand, when interest rates are decreasing, consumers and businesses are more inclined to borrow (because banks ease lending requirements), boost retail and capital spending, thus helping the economy to grow.


Here is an example of how Interest Rates affect an economy:

What does this have to do with the Forex market?

Well, currencies rely on interest rates because they dictate the flow of global capital in and out of a country. They're what investors use to determine if they'll invest in a country or go elsewhere.

The higher a country's interest rate, the more likely its currency will strengthen. Currencies surrounded by lower interest rates are more likely to weaken over the longer term.

The main point to be learned here is that domestic interest rates directly affect how global market players feel about a currency's value relative to another.

Pricing in Interest Rates

Markets are ever-changing with the anticipation of different events and situations. Interest rates do the same thing - they change - but they definitely don't change as often.


Most traders don't spend their time focused on current interest rates because the market has already "priced" them into the currency price. What is more important is where interest rates are expected to go.

It's also important to know that interest rates tend to shift in line with monetary policy, or more specifically, with the end of monetary cycles.

If rates have been going lower and lower over a period a time, it's almost inevitable that the opposite will happen.

Rates will have to increase at some point.

And you can count on that the speculators will to try to figure out when that will happen and by how much. The market will tell them; it's the nature of the beast. A shift in expectations is a signal that a shift in speculation will start, gaining more momentum as the interest rate change nears.

While interest rates change with the gradual shift of monetary policy, market sentiment can also change rather suddenly from just a single report. This causes interest rates to change in a more drastic fashion or even in the opposite direction as originally anticipated.

Indeed the influence of interest rate on the Forex market is obvious and clear; when the interest rate rises, the currency turns out to be strong and when it falls, it will produce a negative effect on the currency. It is essential especially for the aspiring currency trader to be watchful and observant of the rise and fall of the interest rates, to be able to come up with a sound trading decision.

Interest Rate Differentials

Many Forex traders use a technique of comparing one currency's interest rate to another currency's interest rate as the starting point for deciding whether a currency may weaken or strengthen.

The difference between the two interest rates, known as the "interest rate differential," is the key value to keep an eye on. This spread can help you identify shifts in currencies that might not be obvious. An interest rate differential that increases helps to reinforce the higher-yielding currency, while a narrowing differential is positive for the lower-yielding currency.

Instances where the interest rates of the two countries move in opposite directions often produce some of the market's largest swing. An interest rate increase in one currency combined with the interest rate decrease of the other currency is a perfect equation for sharp swings!


Nominal vs. Real Rates

When people talk about interest rates, they are either referring to the nominal interest rate or the real interest rate.

What's the difference?

The nominal interest rate doesn't always tell the entire story. The nominal interest rate is the rate of interest before adjustments for inflation.

Real interest rate = Nominal interest rate - Expected inflation

The nominal rate is usually the stated or is the base rate that you see (e.g., the yield on a bond).

Markets, on the other hand, don't focus on this rate, but rather on the real interest rate. If you had a bond that carried a nominal yield of 6%, but inflation was at an annual rate of 5%, the bond's real yield would be 1%. That's a huge difference so always remember to distinguish between the two.

Monetary Policy

Monetary policy is the process by which the monetary authority of a country controls the

supply of money, often targeting a rate of interest for the purpose of promoting economic

growth and stability. The official goals usually include relatively stable prices and low

unemployment. To achieve their goals, central banks use monetary policy mainly to

control the following:

Interest rates tied to the cost of money

Rise in inflation

Money supply

Reserve requirements over banks,

Discount window lending to commercial banks


Understanding Monetary Policy

Monetary policy can be referred to in a couple different ways:

Restrictive Monetary Policy takes place if it reduces the size of the money supply. It can also occur with the raising of interest rates. The idea here is to slow economic growth with the high interest rates. Borrowing money becomes harder and more expensive, which reduces spending and investment by both consumers and businesses.

Expansionary Monetary Policy, on the other hand, expands or increases the money supply, or decreases the interest rate. The cost of borrowing money goes down in hopes that spending and investment will go up.

Accommodative Monetary Policy aims to create economic growth by lowering the interest rate, whereas tight monetary policy is set to reduce inflation or restrain economic growth by raising interest rates.

Neutral Monetary Policy intends to neither create growth nor fight inflation. The important thing to remember about inflation is that central banks usually have an inflation target in mind, say 2%. They might not come out and say it specifically, but their monetary policies all operate and focus on reaching this comfort zone. They know that some inflation is a good thing, but out-of-control inflation can remove the confidence people have in their economy, their job, and ultimately, their money.

By having target inflation levels, central banks help market participants better understand how they (the central bankers) will deal with the current economic landscape.

Economies like stability. Knowing that inflation targets exist will help a trader to understand why a central bank does what it does.

Understanding Central Banks

A Central bank is a public institution that usually issues the currency, regulates the money supply, and controls the interest rates in a country. Central banks often also oversee the commercial banking system within its country's borders. A central bank is distinguished from a normal commercial bank because it has a monopoly on creating the currency of that nation, which is usually that nation's legal tender.

The primary function of a central bank is to provide the nation's money supply, but more

active duties include controlling interest rates, and acting as a lender of last resort to the


banking sector during times of financial crisis. It may also have supervisory powers, to

ensure that banks and other financial institutions do not behave recklessly or fraudulently.

Most developed nations today have an "independent" central bank, that is one which

operates under rules designed to prevent political interference. Examples include the

European Central Bank.

Economic News Releases

Where to find Market Information

Market news and data is made available to you through a multitude of sources. The internet is the obvious winner in our book, as it provides a wealth of options, at the speed of light, directly to your screen, with access from almost anywhere in the world. Individual traders will be amazed at the sheer number of currency-specific websites, services, and TV programming available to them. Most of them are free of charge, while you may have to pay for some of the others.

ForexFactory.com is a free website that you can find all of this information.

Understanding the Market Reaction

There's no one formula for success when it comes to predicting how the market will react to data reports or market events or even why it reacts the way it does.

You can draw on the fact that there's usually an initial response, which is usually short-lived, but full of action.

Later on comes the second reaction, where traders have had some time to reflect on the implications of the news or report on the current market. It's at this point when the market decides if the news release went along with or against the existing expectation, and if it reacted accordingly.

Was the outcome of the report expected or not? And what does the initial response of the market tell us about the bigger picture?

Understanding Forecasted Numbers

A consensus expectation, or just consensus, is the relative agreement on upcoming economic or news forecasts. Economic forecasts are made by various leading economists from banks, financial institutions and other securities related entities.


Your favorite news personality gets into the mix by surveying her in-house economist and collection of financial sound "players" in the market. All the forecasts get pooled together and averaged out, and it's these averages that appear on charts and calendars designating the level of expectation for that report or event. The consensus becomes ground zero; the incoming, or actual data is compared against this baseline number. Incoming data normally gets identified in the following manner:

"As expected" - the reported data was close to or at the consensus forecast.

"Better-than-expected"- the reported data was better than the consensus forecast.

"Worse-than-expected" - the reported data was worse than the consensus forecast.

Whether or not incoming data meets consensus it’s an important evaluation for determining Price Movement during some of the major news releases. To learn about these refer to the “Economics 101 Course” (your bonus with this beginner course) Just as important is the determination of how much better or worse the actual data is to the consensus forecast. Larger degrees of inaccuracy increase the chance and extent to which the price may change once the report is out.

Understanding Revised Data

Let's take the monthly Non-Farm Payroll employment numbers (NFP) as an example. As stated, this report comes out monthly, usually included with it are revisions of the previous month's numbers.

We'll assume that the U.S. economy is in a slump and January's NFP figure decreases by 100,000, which is the number of jobs lost. It's now February, and NFP is expected to decrease by another 50,000.

But the incoming NFP actually decreases by only 20,000, which is totally unexpected. Also, January's revised data, which appears in the February report, was revised downwards to show only a 20,000 decrease.


Here is a chart of the example:

As a trader you have to be aware of situations like this when data is revised. Not having known that January data was revised, you might have a negative reaction to an additional 20,000 jobs lost in February. However, taking into account the upwardly revised NFP figure for January and the better than expected February NFP reading, the market might see the start of a turning point. The state of employment now looks totally different when you look at incoming data and last month's revised data. Be sure not only to determine if revised data exists, but also note the scale of the revision. Bigger revisions carry more weight when analyzing the current data releases. Revisions can help to affirm a possibly trend change or no change at all, so be aware of what's been released.


Insider Tip’s

Trading the News - When trading near or during news we can see a lot of volatility & also uncertainty. As a new trader it’s better to NOT trade, and simply wait for conditions to calm down. Generally 15 minutes before and after should be NO TRADING.

Risks Involved

New Trading - If you do chose to trade the news events be prepared for larger spreads (commissions), not being able to get the price you want & a chance the market can move significantly against you in a matter of seconds!

Action Steps

Daily go to: www.forexfactory.com

Make sure you know when major news is being released on a daily basis.

http://www.forexfactory.com/


CHAPTER 8. STYLES OF FX TRADING

Topics Covered

Scalping

Day Trading

Swing Trading

Position Trading

Defining Your Style

There are over 8 billion people in the world and not one person is exactly the same as another. Even identical twins will have different fingerprints. Everyone has their own look, personality, talents, and pizza topping preferences. We all like different things and are unique in our own way.

Trading is the same way. Our unique personalities will lead us to trade differently from one another. Some may be aggressive, "type A" personality traders while others may be more relax, "type B" personality traders. Some may like taking small wins all the time, while others don't mind losing a bit in order to make those huge gains when they do win.

The point is that no two traders are alike. Even if a group of people were to trade the same system rules, each person's end results would be different from everyone else.

It's not a bad thing. Not at all! However, it's important to know your trading style so that it fits into your lifestyle and personality. Trying to force a trade that doesn't match your personality will result in frustration and can hinder you from making consistent profits.

Experience is Key

A common mistake by many new traders is that they think they can make money fast! While it's true you can make money in a short amount of time, it doesn't mean you will end up profitable in the long run.

A typical scenario is that a new trader reads a little bit about trading Forex, finds a system online that claims to make money quickly, and then jumps right into trading because he feels like he's got enough of a background to make millions of dollars.

Unfortunately after the "honeymoon" period is over and the excitement settles down, this new trader now realizes that trading isn't as easy as he thought. The


system doesn't seem to be working like it claimed it would and he has no idea why the market is doing what it's doing.

The most important thing you can invest in as a trader is your TIME!

Every single trading day is a learning experience and if you stop learning, then you will never become a truly successful trader.

Take into account how much time it will take you to learn the basics. Then consider how much time it will take in your daily routine to read charts, news reports, record your trades, and be in the markets.

Each day requires your time to analyze the market. Because news makes the market move, it's important to consider the economic developments going on around the world and to make it part of your daily routine.

Here are a few different tasks you should partake in:

Economic News Releases - Know what news reports are coming out each day and how they affect the markets. The more important the news report, the more movement you can expect to see in its currency.

This information can be found at: www.ForexFactory.com

Financial Market - The price of commodities, US equity Indexes or U.S. Treasury yields can affect the way currencies move so it's important to find out why these things are rising or falling and keep that in mind when trading currencies.

Media - Check out many news websites and get to know what is happening across the globe. Events such as major elections, military conflicts, and political scandals can all affect currency movements or global risk sentiment.

Finally, after going through your daily economic analysis, you have to look at the charts. Charts will give you insights into key support and resistance levels, trends, and possible price points in which to enter the market.

Understanding Scalping

Scalping is like those high action thriller movies that keep you on the edge of your seat. It's fast paced, exciting, and mind-rattling all at once. These types of trades are usually only held onto for a few seconds to a few minutes at the most! The main objective for scalpers is to grab small amounts of pips as many times as they can throughout the busiest times of the day, normally the New York trading session. Because scalpers are in and out so quickly, their entries have to be very precise and use tight stops. We have found if traders can master scalping, this can allow them to

http://www.forexfactory.com/


transition in to more longer term trading to make larger amounts of pips, but at the same time risking very little. Scalpers take advantage of quick Price Movements and are always in sync with the market, unlike many other types of traders.

It is not for those looking to double their account everyday, but rather for those who are looking to make a business out of Forex trading with consistent and emotion free profits. After you learn the foundation to Forex trading, it’s easy to make more profit. The hard part for many traders is they are greedy and are looking for all the shortcuts in Forex.

Tips for Scalping:

Trade only the Main Currencies

Pairs such as the EUR/USD, GBP/USD, USD/CHF, USD/CAD, USD/JPY, EUR/JPY, AUD/USD & AUD/JPY offer the tightest spreads because they tend to have the highest trading volume. You want your spreads to be as tight as possible since you will be entering the market frequently.

Trade the Overlaps

The most liquid times of the day are during the session overlaps. This is from 2:00 am to 4:00 am and from 8:00 am to 12:00 noon Eastern Time (EST).

Tight Spreads

Because you enter the market frequently, spreads will be a big factor in your overall profit. You will want to find a broker that offers you tight spreads and immediate execution.

Try focusing on one pair first

The best way to start becoming familiar with a scalping strategy is to simply pick one currency pair and stick with it. Many beginners decide to start with EUR/USD because of the tight spreads, and the consistency of this currency pair.

Money Management

This goes for any type of trading, but since you are making so many trades within a day it is especially important that you are sticking to good money management practices and have a business plan that shows exactly what your daily goals are and trading strategy in detail.

Avoid Economic News Releases

Because of slippage and high volatility, trading around highly anticipated news reports can be very dangerous. Consider staying out of the market 10 minutes before and after these times and focus on times when the market is more stable.


Understanding Day Trading

Day trading is another short term trading style, but unlike scalping, you are typically only taking one trade a day and closing it out when the day is over. These traders like picking a side at the beginning of the day, acting on their bias, and then finishing the day with either a profit or a loss. They DON'T like holding their trades overnight.

Day traders are suited for those that have enough time throughout the day to analyze, execute and monitor a trade. Day traders tend to risk more than scalpers because they do not have to be so precise on their entries, but they also have larger profit targets. Many successful day traders actually started as scalpers to build their foundation and then slowly start to transition in to holding on to their trades longer with a very minimal amount of risk because of their exact entries.

Tips for Day Trading:

You will want to keep yourself up-to-date on the latest economic news so that you can make your trading decisions at the beginning of the day.

If you have a full time job, consider how you will manage your time between your work and trading.

Understanding Swing Trading

Swing trading attempts to identify medium term trends. Because trades last much longer than one day, larger stop losses are required to weather volatility, and a trader must adapt that to their money management plan.

You will most likely see trades go against you during the holding time since there can be many fluctuations of the price during the shorter time frames. It is important that you are able to remain calm during these times and trust in your analysis. However we have found most traders become irrational after a trade starts to work against them. Traders are constantly fighting their emotions, whether it is greed or fear. Every trader that has been in this business for anytime at all can agree with that. Once again, that is why we suggest learning the foundation of scalping and learn how to execute precise entries risking very little, then transition in to this type of trading.

Since trades usually have larger targets, spreads won't have as much of an impact to your overall profits. As a result, trading pairs with larger spreads and lower liquidity is acceptable.


Understanding Position Trading

Position trading is the longest term trading and can have trades that last for several months to several years!

This kind of trading is reserved for the ultra-patient traders, and requires a firm understanding of the fundamentals. Because position trading is held for so long, fundamental themes will be the predominant focus when analyzing the markets. Fundamentals dictate the long-term trends of currency pairs and it is important that you understand how economic data affects your countries and its future outlook.

Because of the lengthy holding time of your trades, your stop losses will be very large. You must make sure you are well capitalized or you will most likely get margin called. This is not recommended for any beginner or intermediate trader, even many professional traders stay away from this type of strategy because of the large amount of money you must risk.

Position trading also requires thick skin because it is almost guaranteed that your trades will go against you at one point or another.

These won't just be little retracements either. You may experience huge swings and you must be ready and have absolute trust in your analysis in order to remain calm during these times.

Insider Tip’s

Inside Out Approach: Learn the foundation of scalping in order to have precise entry and exit points, while risking very little. Then transition in to day, swing or position trading if you chose to do so.

Risks Involved

Long Term Trading - Must be willing to be out of the money at some point in your trading. Know exactly when the trade is no longer good & do not allow it to continue to run against you.

Action Steps

Determine how much time you can devote to trading.

Determine if you want trade short term or long term.


Congratulations, you have now completed the FxNewbie course. You should know have a general understanding of the Forex market. Even though this is the first section in our FxST Beginner Course, we cannot stress enough how crucial this information will be as you continue learning more about FX. This section will build a foundation for what you will be introduced in FxMechanic’s, FxMindset and is required if you want to reach FxMastery. If any of these chapters are not clear take the time to review as necessary.

In this next section you will be introduced to generally accepted methods and strategies that are used not only in the Forex market, but the majority of all financial markets. This information is not meant to teach you a specific strategy inside and out. However, it is to make you aware of what is offered in this industry and what many traditional traders use today. If any of these strategies are a little confusing, don’t worry. Like I said our goal is not to teach you exactly how to use these strategies… that will come in further lessons.

Enjoy FxMechanic’s…


FxMechanic™ (Intermediate)

CHAPTER 9. SECRETS OF FIBONACCI

Topics Covered

What is Fibonacci

Fibonacci Retracements

Dynamic Support & Resistance

Adding Moving Averages on MT4

Understanding Fibonacci

Fibonacci Forex trading is the basis of many Forex trading systems used by a great

number of professional Forex brokers around the globe, and many billions of dollars are

profitable traded every year based on these trading techniques.

Fibonacci was an Italian mathematician and he is best remembered by his world famous

Fibonacci sequence, the definition of this sequence is that it’s formed by a series of

numbers where each number is the sum of the two preceding numbers; 1, 1, 2, 3, 5, 8,

13... But in the case of currency trading what is more important for the Forex trader is the

Fibonacci ratios derived from this sequence of numbers, i.e. .236, .50, .382, .618, etc.

These ratios are mathematical proportions prevalent in many places and structures in

nature, as well as in many manmade creations.

Forex trading can greatly benefit from this mathematical proportions due to the fact that

the oscillations observed in Forex charts, where prices are visibly changing in an

oscillatory pattern, follow Fibonacci ratios very closely as indicators of resistance and

support levels; maybe not to the last cent, but so close as to be really amazing.

Fibonacci price points, or levels, for any Forex currency pair can be calculated in advance

so that the trader will know when to enter or exit the market if the prediction given by the

Fibonacci Forex day trading system he uses fulfills its predictions.


Many people try to make this analysis overly complicated scaring away many new Forex

traders that are just beginning to understand how the Forex market works and how to

make a profit in it. But this is not how it has to be. I can’t say it's a simple concept but it

is quite understandable for any trader once he or she has grasped the basics and has had

some practice trading using Fibonacci levels along with other secondary indicators that

will help to improve the accuracy of the entry and exit point for every particular trade.

These ratios are called the "golden mean".

Fibonacci Retracement Levels:

0.236 (23.6%)

0.382 (38.2%)

0.500 (50.0%)

0.618 (61.8%)

0.764 (76.4%)

Traders use the Fibonacci retracement levels as potential support and resistance areas. Since so many traders watch these same levels and place buy and sell orders on them to enter trades or place stops, the support and resistance levels tend to become a self-fulfilling prophecy. Fibonacci is one of the most common types of technical analysis.

In order to apply Fibonacci levels to your charts, you'll need to identify High and Low points.

Understanding Fibonacci Retracements

The first thing you should know about the Fibonacci tool is that it works best when the market is trending. The idea is to go long (or buy) on a retracement at a Fibonacci support level when the market is trending up, and to go short (or sell) on a retracement at a Fibonacci resistance level when the market is trending down.


Here’s an example using Fibonacci in a Up-Trend:

As you can see from the chart, the retracement levels are (23.6%), (38.2%), (50.0%), (61.8%), and (78.6%).

Now, the expectation is that if it retraces from the recent high, it will find support at one of those Fibonacci levels because traders will be placing buy orders at these levels as price pulls back. The most respected levels tend to be the (38.2%), (50.0%) & (61.8%).

Price pulled back right through the 23.6% level and continued to shoot down until it tested the 38.2% level but was unable to close below it. Clearly, buying at the 38.2% Fibonacci level would have been a profitable trade as it used that level as support 3 times in this example!


Here’s an example using Fibonacci in a Down-Trend:

As you can see, we found our Swing High on and our Swing Low. The retracement levels are like always are (23.6%), (38.2%), (50.0%), (61.8%) and (76.4%). The expectation for a downtrend is that if price retraces from this low, it will encounter resistance at one of the Fibonacci levels because traders will be ready with sell orders there.

The market did it to rally from the low finding resistance levels on its way up. In this example the (23.6%), (38.2%), (50.0%) all provided opportunities to profit if you would have sold the first time it reached these levels. The more the price retraces the better chance the trade will work out and provide even more profit. If you compare how far the market fell after reaching these 3 levels, we can see the (50.0%) Fibonacci retracement provided the most pips.

One thing you should take note of is that price won't always bounce from these levels.

For now, there's something you should always remember about using the Fibonacci tool and it's that they are not always simple to use! If they were that simple, traders would always place their orders at Fib levels and the markets would trend forever.


When Retracements Break

As mentioned prior support and resistance levels eventually break. Well, seeing as how Fibonacci levels are used to find support and resistance levels, this also applies to Fibonacci!

While Fibonacci levels give you a higher probability of success, like other technical tools, they don't always work. You don't know if price will reverse at the 38.2% level before resuming the trend.

Sometimes it may hit 50.0% or the 61.8% levels before turning around.

Another common problem in using the Fibonacci tool is determining which Swing Low and Swing High to use.

People look at charts differently, look at different time frames, and have their own fundamental biases. The bottom line is that there is no absolute right way to do so, especially when the trend on the chart isn't clear. Sometimes it becomes a guessing game and that is why you should not trade only off Fibonacci, but be able to combine it with various methods to strengthen your Forex trading strategy.

Fibonacci with Support & Resistance

Using Fibonacci levels can be very subjective. However, there are ways that you can help tilt the odds in your favor.

While the Fibonacci tool is extremely useful, it shouldn't be used all by it lonesome self. The Fibonacci tool should be used in combination with other tools.

One of the best ways to use the Fibonacci tool is to spot potential support and resistance levels and see if they line up with Fibonacci retracement levels.

If Fib levels are already support and resistance levels, and you combine them with other price areas that a lot of other traders are watching, then the chances of price bouncing from those areas are much higher.

http://www.babypips.com/school/support-and-resistance.html



Below is an example of how to match support or resistance levels to your Fibonacci retracement levels:

Notice on the way down price found support at the green line, where the 50.0% retracement level also is. After support is broken it can become resistance, as it did in this case. By selling at this level, traders would have significantly profited as the price came back down near the original low.

You can do the same setup on an uptrend as well. The point is you should look for price levels that seem to have been areas of interest in the past. If you think about it, there's a higher chance that price will bounce from these levels.

Why?

First, previous support or resistance levels would be good areas to buy or sell because other traders will also be eyeing these levels like a hawk.

Second, since we know that a lot of traders also use the Fibonacci tool, they may be looking to jump in on these Fib levels themselves.

With traders looking at the same support and resistance levels, there's a good chance that there are a ton of orders at those price levels.

While there's no guarantee that price will bounce from those levels, at least you can be more confident about your trade. After all, there is strength in numbers!


Remember that trading is all about probabilities. If you stick to those higher probability trades, then there's a better chance of coming out ahead in the long run.

Using Fibonacci with Trend Lines

Another good tool to combine with the Fibonacci tool is trend line analysis. After all, Fibonacci levels work best when the market is trending.

Remember that whenever a pair is in a downtrend or uptrend, traders use Fibonacci retracement levels as a way to get in on the trend. So why not look for levels where Fib levels line up right smack with the trend?

Here's a 4-hour chart of GBP/USD:

As you can see, price has been respecting this downward trend line over a period of time.

You think to yourself, "Hmm, that's a nice downtrend right there. I want to get in on this trend and sell, even if it's just for a short-term trade. I think I'll sell once the pair hits the trend line again."

Before you do that though, why don't you reach for your Forex toolbox and get that Fibonacci tool out? Let's see if we can get a more exact entry price.

http://www.babypips.com/school/trend-lines.html


Example of Fibonacci Retracement Tool:

Here we plotted the Fibonacci retracement levels by using the Swing Low and Swing High. Notice how the 23.6% Fib level is intersected by the downward trend line. In this example we do see our short-term sell of allowing profit to be made before heading higher. Now if you recall price retraces there is a better chance of your trade working. If this trend line actually intersected the 38.2%, 50.0% or even better the 61.8%, we could expect that level to be even a stronger resistance level.

The combination of both a diagonal and a horizontal support or resistance along with Fibonacci retracement levels could mean that other traders are eying those levels as well. Take note though, as with other drawing tools, drawing trend lines can also get pretty subjective.

You don't know exactly how other traders are drawing them, but you can count on one thing - that there's a trend!



If you see that a trend is developing, you should be looking for ways to trade in the direction of the trend to give you a better chance of a profitable trade. You can use the Fibonacci tool to help you find potential entry points.

SUMMARY

The key Fibonacci retracement levels to keep an eye on are the 23.6%, 38.2%, 50.0%, 61.8%, and 76.4%. The ones that seem to hold the most weight are the 38.2%, 50.0%, and 61.8% levels. These are normally included in the default settings of any Fibonacci retracement software.

Traders use the Fibonacci retracement levels as potential support and resistance. Since plenty of traders watch these same levels and place buy and sell orders on them to enter trades or place stops, the support and resistance levels may become a self-fulfilling prophecy.

In order to apply Fibonacci levels to your charts, you'll need to identify High and Low points.

Because many traders use the Fibonacci tool, those levels tend to become self-fulfilling support and resistance levels or areas of interest.

When using the Fibonacci tool, probability of success could increase when using the Fib tool with other support and resistance levels, trend lines, and candlestick patterns for spotting entry and stop loss points.

Since the market is always moving, these Fibonacci levels change as new highs and lows are broken. Professional traders normally use software that automatically calculates this information for you, allowing them to focus more on trading than calculating these retracement levels.


Insider Tip’s

Fibonacci Retracements – Best when used on longer time frames because of the stronger support/resistance.

Risks Involved

Using Fibonacci – While Fibonacci levels give you a higher probability of success, like other technical tools, they don't always work. You don’t know if the price will stop at the 38.2%, 50% or even 61.8%.

Action Steps

Draw Fibonacci retracements on 3 different currency pairs using a 1-hour chart.

Take 3 trades using the Fibonacci retracement levels using 20 PIP stop losses & 20 PIP take profits.


CHAPTER 10. MASTERING MOVING AVERAGES

Topics Covered

Types of Moving Averages

Moving Average Strategies

Dynamic Support & Resistance

Adding Moving Averages on MT4

Understanding Moving Averages

A moving average is simply a way to smooth out Price Movement over time. By "moving average,” we mean that you are taking the average closing price of a currency pair for the last 'X' number of periods.

This is what a moving average looks like:


Like every indicator, a moving average indicator is used to help us forecast future prices. By looking at the slope of the moving average, you can better determine the potential direction of market prices.

As we said, moving averages smooth out Price Movement. In order for moving averages to be created they must use previous Price Movement making it a lagging indicator.

There are different types of moving averages and each of them has their own level of "smoothness.”

Generally, the smoother the moving average, the slower it is to react to the price movement.

There are 2 types of moving averages that are the most common in financial markets including:

Simple (SMA’s)

Exponential (EMA’s)

Understanding SMA’s

In this lesson we will examine, explain and apply the simple moving averages. Moving

averages are one of the most popular and easy to use technical tools available to the

average investor.

Averages smooth a data series and make it easier to spot trends, channels, something that

is especially helpful in volatile markets. Moving averages are also a great starter for

anyone who wants to expand their technical analytical knowledge in any market.

The simple moving average is formed by computing the price of a security over a

specified number of periods. Whenever you input a variable for a simple moving average

calculation, it is always the close price of the security that will be included in the

calculation. For example: a 5-day simple moving average is calculated by adding the

closing prices for the last 5 days and dividing the total by 5.

The averages are then joined which creates a curvilinear line, or the moving average line.

Continuing our example, if the next closing price in the average is 20, then this new

period would be added. As each days ends, a new day will be added and the oldest day

will be eliminated (15). Once a price has broken a moving average line, and depending

on what type of time frame, it might signal a shift upwards or downwards.

If you plotted a 5 period simple moving average on a 1-hour chart, you would add up the closing prices for the last 5 hours, and then divide that number by 5. You


have the average closing price over the last five hours. String those average prices together and you get a moving average!

If you were to plot a 5-period simple moving average on a 10-minute chart, you would add up the closing prices of the last 50 minutes and then divide that number by 5.

If you were to plot a 5 period simple moving average on a 30 minute chart, you would add up the closing prices of the last 150 minutes and then divide that number by 5.

Understanding how an indicator works means you can adjust and create different strategies as the market environment changes.

Now, just like almost any other indicator out there, moving averages operate with a delay. Because you are taking the averages of past price history, you are really only seeing the general path of the recent past and the general direction of "future" short term Price Movement.

Here is an example of how different moving averages smooth out the Price Movement depending on what periods are used:

On chart above, we've plotted three different SMAs on a chart. As you can see, the longer the SMA period is, the more it lags behind the price. Notice how the 65 SMA is farther away from the current price than the 30 and 14 SMAs. This is because the 65


SMA adds up the closing prices of the last 65 periods and divides it by 65. The longer period you use for the SMA, the slower it is to react to the price movement. The SMAs in this chart show you the overall sentiment of the market at this point in time. Here, we can see that the pair is trending. Instead of just looking at the current price of the market, the moving averages give us a broader view, and we can now gauge the general direction of its future price. With the use of SMAs, we can tell whether a pair is trending up, trending down, or just ranging. There is one problem with the simple moving average and it's that they are susceptible to spikes. When this happens, this can give us false signals. We might think that a new trend may be developing but in reality, nothing changed.

Understanding EMA’s

Spikes can distort simple moving averages. If only there was a way that you could filter out these spikes so that you wouldn't get the wrong idea. It's called the Exponential Moving Average!

Exponential moving averages (EMA) give more weight to the most recent periods. For example if we were using a 5 EMA it would put more weight on the prices of the most recent days, which would be Days 3, 4, and 5.

This would mean that a spike on Day 2 would be of lesser value and wouldn't have as big an effect on the moving average as it would if we had calculated for a simple moving average. If you think about it, this makes a lot of sense because what this does is it puts more emphasis on what traders are doing recently.


Let's take a look at this chart and compare how the SMA and EMA would look side by side on a chart:

Notice how the pink line (the 14 EMA) seems to be closer price than the blue line (the 14 SMA). This means that it more accurately represents recent Price Movement. You can probably guess why this happens.

It's because the EMA places more emphasis on what has been happening lately. When trading, it is far more important to see what traders are doing NOW rather what they were doing last week or last month.

SMA vs. EMA

By now, you're probably asking yourself, which is better? The simple or the exponential moving average.

First, let's start with the exponential moving average. When you want a moving average that will respond to the Price Movement rather quickly, then a short period EMA is the best way to go.

These can help you catch trends very early (more on this later), which will result in higher profit. In fact, the earlier you catch a trend, the longer you can ride it and rake in those profits (boo yeah!).


The downside to using the exponential moving average is that you might get faked out during consolidation periods.

Because the moving average responds so quickly to the price, you might think a trend is forming when it could just be a price spike. This would be a case of the indicator being too fast for your own good.

With a simple moving average, the opposite is true. When you want a moving average that is smoother and slower to respond to Price Movement, then a longer period SMA is the best way to go.

This would work well when looking at longer time frames, as it could give you an idea of the overall trend.

Although it is slow to respond to the Price Movement, it could possibly save you from many fake outs. The downside is that it might delay you too long, and you might miss out on a good entry price or the trade altogether.

SMA EMA

Pros Displays a smooth chart, which eliminates most fake outs.

Quick moving and is good at showing recent price swings.

Cons Slow moving, which may cause a lag in buying and selling signals

More prone to cause fake outs and give errant signals.

There are a number of trading strategies that are built around the use of moving averages.

Using SMA’s

The traditional way to use moving averages is to help you determine the trend.

The simplest way is to just plot a single moving average on the chart. When Price Movement tends to stay above the moving average, it would signal that price is in a general uptrend.

If Price Movement tends to stay below the moving average, then it would indicate that it is in a downtrend and you would want to be a seller. Once price breaks above the moving average this indicates a potential uptrend and you would want to be a buyer.


As you can see, this type of strategy does not work 100% of the time, but you can see the levels tend to hold if there actually is a follow through in the trend.

Let's say that EUR/USD has been in an uptrend, but a news report comes out causing it to surge higher.

Notice in the chart below, once the price breaks above the EMA, the price continues to trend up allowing these traders to profit very nicely:


The first 2 times the price came down to the EMA after the price broke above the line and began its uptrend responded very well:

As it turns out, traders just reacted to the news but the trend continued and price kept heading higher! What some traders do is that they plot a couple of moving averages on their charts instead of just one. This gives them a clearer signal of whether the pair is trending up or down depending on the order of the moving averages. In an uptrend, the "faster" moving average should be above the "slower" moving average and for a downtrend, vice versa. For example, let's say we have 3 MAs: the 10-period MA and the 20-period MA.


See the chart below:

The prior daily chart of USD/JPY, throughout the uptrend, the 14 SMA is crosses above and below the 30 SMA. However notice the down trend continued for as long as the 30 SMA was below the 65 SMA. As you can see, you can use moving averages to help show whether a pair is trending up or down. Combining this with your knowledge on trend lines, this can help you decide whether to go long or short a currency.

You can also try putting multiple moving averages on your chart. Just as long as lines are in order (fastest to slowest in an uptrend, slowest to fastest in an uptrend), then you can tell whether the pair is in an uptrend or in a downtrend.


Dynamic S/R Levels

Another way to use moving averages is to use them as dynamic support and resistance levels.

We like to call it dynamic because it's not like your traditional horizontal support and resistance lines. They are constantly changing depending on recent Price Movement.

There are many traders out there who look at these moving averages as key support or resistance. These traders will buy when price dips and tests the moving average or sell if price rises and touches the moving average

Here's a look at a downtrend, let's see if it serves as dynamic resistance as the price tests the moving average as it continues its trend lower:

It looks like it held fairly well! Where you see the red circles, you can see the price tested the dynamic resistance level and acted as resistance, bouncing the price back down.

One thing you should keep in mind is that these are just like your normal support and resistance lines.


This means that price won't always bounce perfectly from the moving average. Sometimes it will go past it a little bit before heading back in the direction of the trend.

There are also times when price will blast past it altogether. What some traders do is that they pop on two moving averages, and only buy or sell once price is in the middle of the space between the two moving averages.

Reversals using Moving Averages

Now you know that moving averages can potentially act as support and resistance. But you should also know that they could break, just like any support and resistance level!

Let's take another look at more information on the same chart:

In the chart above, we see that the SMA held as a strong resistance level for a while as EUR/USD repeatedly bounced off it and continued its downtrend.

However, as you can see after we found support down at the low and began to use the SMA as a dynamic support level as EUR/USD started to retrace. Moving averages can also act as dynamic support and resistance levels.


One nice thing about using moving averages is that they're always changing, which means that you can just leave it on your chart and don't have to keep looking back in time to spot potential support and resistance levels, unlike Fibonacci retracement levels.

You know that the line most likely represent a moving area of interest. The only problem of course is figuring out which moving average to use!

SUMMARY

There are many types of moving averages. The two most common types are a simple moving average and an exponential moving average.

Simple moving averages are the simplest form of moving averages, but they are susceptible to spikes. Exponential moving averages put more weight to recent price, which means they place more emphasis on what traders are doing now.

It is much more important to know what traders are doing now than to see what they did last week or last month.

Simple moving averages are smoother than exponential moving averages. Longer period moving averages are smoother than shorter period moving averages.

Using the exponential moving average can help you spot a trend faster, but is prone to many fake outs.

Simple moving averages are slower to respond to Price Movement but will save you from spikes and fake outs. However, because of their slow reaction, they can delay you from taking a trade and may cause you to miss some good opportunities.

You can use moving averages to help you define the trend, when to enter, and when the trend is coming to an end. Moving averages can also be used as dynamic support and resistance levels.

One of the best ways to use moving averages is to plot different types so that you can see both long - term movement and short - term movement.


Insider Tip’s

Moving Averages – When used on short term time frames, can help identify reversals and trends as they are happening. When using longer time frames you may miss the early stages, but less likely to have false signals of trends and reversals.

Risks Involved

Fake Outs – Should be used more as a zone that an exact price level. Using moving averages on smaller time frames can give false signals because the directions on the moving average can change very quickly.

Action Steps

Add 3 Moving Averages to your charts (SMA or EMA)

Take 3 trades using the aggressive trend strategy

Take 3 trades using the passive trend strategy


CHAPTER 11. MILLION DOLLAR INDICATORS

Topics Covered:

MACD

Stochastic

RSI

Strategies Used

Understanding (MACD)

MACD is a trend-following momentum indicator that shows the relationship between

two moving averages of prices. The MACD is calculated by subtracting the 26-day

exponential moving average (EMA) from the 12-day EMA. A nine-day EMA of the

MACD, called the “signal line”, is then plotted on top of the MACD, functioning as a

trigger for buy and sell signals.

There are three common methods used to interpret the MACD:

1. Crossovers – As shown in the chart above, when the MACD falls below the

signal line, it is a bearish signal, which indicates that it may be time to sell.

Conversely, when the MACD rises above the signal line, the indicator gives a

bullish signal, which suggests that the price of the asset is likely to experience

upward momentum. Many traders wait for a confirmed cross above the signal line

before entering into a position to avoid getting “faked out” or entering into a

position too early, as shown by the first arrow.

2. Divergence – When the security price diverges from the MACD. It signals the

end of the current trend.

3. Dramatic Rise – When the MACD rises dramatically – that is, the shorter

moving average pulls away from the longer-term moving average – it is a signal

that the security is overbought and will soon return to normal levels.

Traders also watch for a move above or below the zero line because this signals the

position of the short-term average relative to the long-term average. When the MACD is

above zero, the short-term average is above the long-term average, which signals upward

momentum. The opposite is true when the MACD is below zero. The zero line often acts

as an area of support and resistance for the indicator.


Here is an example of a candlestick chart with the MACD indicator:

With an MACD chart, you will usually see three numbers that are used for its settings:

The first is the number of periods that is used to calculate the faster moving average (Red Line).

The second is the number of periods that is used in the slower moving average (Green Line).

And the third is the number of bars that is used to calculate the moving average of the difference between the faster and slower moving averages (Blue Bars).

For example, if you were to see "12, 26, 9" as the MACD parameters (which is usually the default setting for most charting packages), this is how you would interpret it:

The 12 represents the previous 12 candles of the faster moving average.

The 26 represents the previous 26 candles of the slower moving average.

The 9 represents the previous 9 bars of the difference between the two moving averages. This is plotted by vertical lines, called histogram (the blue lines in the chart above).


There is a common misconception when it comes to the lines of the MACD. The two lines that are drawn are NOT moving averages of the price. Instead, they are the moving averages of the difference between two moving averages.

In our example above, the faster moving average is the moving average of the difference between the 12 and 26-period moving averages. The slower moving average plots the average of the previous MACD line. Once again, from our example above, this would be a 9-period moving average.

This means that we are taking the average of the last 9 periods of the faster MACD line and plotting it as our slower moving average. This smoothens out the original line even more, which gives us a more accurate line.

Using MACD Indicator

Because there are two moving averages with different "speeds", the faster one will obviously be quicker to react to price movement than the slower one.

When a new trend occurs, the fast line will react first and eventually cross the slower line. When this "crossover" occurs, and the fast line starts to "diverge" or move away from the slower line, it often indicates that a new trend has formed.


From the chart above, you can see that the fast line (red) crossed above the slow line (green) and correctly identified a new uptrend. Notice that when the lines crossed, the histogram temporarily disappears.

This is because the difference between the lines at the time of the cross is 0. As the uptrend begins and the fast line diverges away from the slow line, the histogram gets bigger, which is good indication of a strong trend.

In AUD/USD's 60-minute chart above, the fast line crossed above the slow line while the histogram disappeared. This suggested that the brief downtrend would eventually reverse.

From then, AUD/USD began shooting up as it started a new uptrend. Imagine if you went long after the crossover, you would've profited very nicely!

There is one drawback to MACD. Naturally, moving averages tend to lag behind price. After all, it's just an average of historical prices.

Since the MACD represents moving averages of other moving averages and is smoothed out by another moving average, you can imagine that there is quite a bit of lag. However, MACD is still one of the most favored tools by many traders.

Understanding Stochastic’s

The Stochastic is another indicator that helps us determine where a trend might be ending.

By definition, a Stochastic is an oscillator that measures overbought and oversold conditions in the market. The 2 lines are similar to the MACD lines in the sense that one line is faster than the other.


Using Stochastic Indicator

The Stochastic tells us when the market is overbought or oversold. The Stochastic is scaled from 0 to 100. When the Stochastic lines are above 80 (upper black line) then it means the market is overbought. When the Stochastic lines are below 20 (lower black line)), then it means that the market is oversold. As a rule of thumb, we buy when the market is oversold, and we sell when the market is overbought.

When the market is overbought for such a long period of time, a reversal is bound to happen eventually, stochastic can help you identify that potential reversal.

That is the basics of the Stochastic. Many traders use the Stochastic in different ways, but the main purpose of the indicator is to show us where the market conditions could be overbought or oversold.

Over time, you will learn to use the Stochastic to fit your own personal trading style.

Understanding RSI Indicator

Relative Strength Index, or RSI, is similar to the stochastic in that it identifies overbought and oversold conditions in the market. It is also scaled from 0 to 100. Typically, readings below 30 indicate oversold, while readings over 70 indicate overbought.

Using RSI Indicator

RSI can be used just like the stochastic. We can use it to pick potential tops and bottoms depending on whether the market is overbought or oversold.


From the example above notice the AUD/USD chart and where RSI rose above 70, signaling that there might be no more buyers left in the market and that the move could be over. Price then reversed and headed back down allowing RSI traders to profit from their sell position.

Spotting a Trend with RSI Indicator

RSI is a very popular tool because it can also be used to confirm trend formations. If you think a trend is forming, take a quick look at the RSI and look at whether it is above or below 50.

If you are looking at a possible uptrend, then make sure the RSI is above 50. If you are looking at a possible downtrend, then make sure the RSI is below 50.


SUMMARY

MACD Indicator

Used to catch trends early and can also help us spot trend reversals.

It consists of 2 moving averages (1 fast, 1 slow) and vertical lines called a histogram, which measures the distance between the 2 moving averages.

Contrary to what many people think, the moving average lines are NOT moving averages of the price. They are moving averages of other moving averages.

MACD's downfall is its lag because it uses so many moving averages.

One way to use MACD is to wait for the fast line to "cross over" or "cross under" the slow line and enter the trade accordingly because it signals a potential new trend.

Stochastic Indicator

Used to indicate overbought and oversold conditions.

When the moving average lines are above 80, it means that the market is overbought and we should look to sell.

When the moving average lines are below 20, it means that the market is oversold and we should look to buy.

Relative Strength Index (RSI) Indicator

Similar to the stochastic in that it indicates overbought and oversold conditions.

When RSI is above 70, it means that the market is overbought and we should look to sell. When RSI is below 30, it means that the market is oversold and we should look to buy.

RSI can also be used to confirm trend formations. If you think a trend is forming, wait for RSI to go above or below 50 (depending on if you're looking at an uptrend or downtrend) before you enter a trade.


Insider Tip’s

Combining Fibonacci retracement levels with these indicators can increase your overall trading probabilities

Risks Involved

MACD – its downfall is that it lags quite significantly because it uses so many moving averages.

Action Steps

Add MACD Indicator to a chart

Add Stochastic Indicator to a chart

Add RSI to a chart

Take 3 trades using the each indicator using 20 pip stop losses & 20 pip take profits


CHAPTER 12. LEADING VS LAGGING

Topics Covered:

Leading Indicators (Oscillators)

Lagging Indicators (Momentum)

There are two types of indicators: leading and lagging.

A leading indicator gives a signal before the new trend or reversal occurs.

A lagging indicator gives a signal after the trend has started and basically is a warning sign.

Lagging indicators only give signals after the price change is clearly forming a trend. The downside is that you'd be a little late in entering a position.

Often the biggest gains of a trend occur in the first few bars, so by using a lagging indicator you could potentially miss out on much of the profit!

For the purpose of this lesson, let's broadly categorize all of our technical indicators into one of two categories:

Leading indicators or oscillators

Lagging, trend-following, or momentum indicators

While the two can be supportive of each other, they're more likely to conflict with each other.

Understanding Leading Indicators

An oscillator, or leading indicator is any object or data that moves back and forth between two points.

In other words, it's an item that is going to always fall somewhere between point A and point B.

Think of our technical indicators as either being "on" or "off". More specifically, an oscillator will usually signal "buy" or "sell", with the only exception being instances when the oscillator is not clearly at either end of the buy/sell range.

Does this sound familiar? It should!


The Stochastic and Relative Strength Index (RSI) are all oscillators. Each of these indicators is designed to signal a possible reversal, where the previous trend has run its course and the price is ready to change direction.

As you can see on the chart below, all three indicators gave sell signals within a few candles. Notice our RSI was the first to indicate the market was overbought and a potential reversal was forming.

Then the Stochastic and RSI all gave sell signals. And, judging from that long drop afterwards, you would've made a whole lot of pips if you took that short trade.

As you could imagine when looking at multiple indicators you may find controversy. Many times you will find the more indicators you look at, they will start contradicting each other and not allowing you to quickly and easily decide how to profit of that information. Once again, this is where professionals usually use a software or tools to do all the work for them and simplify all of the information so they can easily decide if they should trade or not.

Understanding Lagging Indicators

So how do we spot a trend?


The indicators that can do so have already been identified as MACD and moving averages. These indicators will spot trends once they have been established, at the expense of delayed entry.

The bright side is that there's less chance of being wrong.

On EUR/USD's 15-minute chart below, we've put on two EMA’s and the MACD indicator:

The fastest EMA (Purple Line) crossed below the slower EMA (Pink Line), which is a bearish crossover. Similarly, the MACD made a downward crossover and gave a sell signal. If you jumped in on a short trade at the time they crossed, you would've enjoyed that nice downtrend that followed. However, like all indicators, these crossover signals can sometimes give false signals. We like to call them "fake outs."


Insider Tip’s

Find what type of indicator works the best for you! Give them all an equal chance before choosing one specifically.

Risks Involved

Leading Indicators – There can be numerous “Fake outs”, so you must always be ready to exit a position if the leading indicator quickly changes.

Action Steps

Record 5 trades taken with each Oscillator & Momentum Indicator using 20 Pip stop and take profit.

Practice closing “Fake outs” when using Leading Indicators.

Determine most consistent strategy.


CHAPTER 13. THE U.S. DOLLAR INDEX

Topics Covered

Components of USDX

Using USDX in Forex

How to read the dollar index

The US dollar index (USDX) is an important analytical tool for traders in just about any

market. The USDX is actually a futures contract which means that if you have a futures

trading account you could trade this instrument like corn, oil, gold or currency futures

contracts. However rather than trading the USDX most retail traders use it as way to

analyze the relative strength or weakness of the US Dollar in general.

The USDX compares the US dollar (USD) against a basket of other world currencies.

This basket represents most of the largest free floating, major currencies in the world on a

weighted average basis. The currencies included are the euro, yen, British pound,

Canadian dollar, Swedish krona and Swiss franc. Each of these currencies are given a

weight within the index with the largest weight given to the euro.

The euro is typically half the total weight included in the average the chart for the USDX

and will often look like a chart of the USD/EUR futures contract. Spot Forex traders will

notice that the USDX is very similar to an inverse of the EUR/USD spot Forex pair.

However, because the USDX includes 6 different currencies it is a better measure of

USD strength than any single currency pair including the EUR/USD.

The USDX was established in 1973 with a starting value of 100. That means that if the

USDX is measuring less than 100 the USD has lost relative value compared to what it

was worth in 1973 and if it is above 100 then the USD is stronger than it was in 1973.

Currently the USDX is hovering around 82, which means that it is 18% weaker than its

starting value. The dollar has not always been weaker than it was in 1973, the USDX

showed a 20% improvement in value in the USD in 2001 and 2002.

The USDX is particularly useful for traders in the bond, currency and gold markets. For

example, a strong USD is usually correlated with falling gold prices, which means that

gold traders are very interested in a break out on the USDX even though they may not be

trading the USD directly. Similarly, global crises often increase demand for the USD as

investors seek a shelter from uncertainty. This will drive the value of the USD up and

often bond yields will drop. These are just two examples of how the USDX is one more


inter-market tool you can use for evaluating capital flows and finding new trading

opportunities.

Charts for the USDX on the pairs analysis pages in the Forex section of the Learning

Markets website but if you are interested in trading the USDX you have two attractive

alternatives. First, you can open a futures account. There are futures and options on

futures available on the USDX that trade on the New York Board of Trade.

Just like any currency pair, the USDX even has its own chart. Let’s have a look at the U.S. Dollar Index:

Using the USDX in FX Trading

We all know that most of the widely traded currency pairs include the U.S. dollar. If you don't know, some that include the U.S. dollar are EUR/USD, GBP/USD, USD/CHF, USD/JPY, and USD/CAD.

In the wide world of Forex, the USDX can be used as an indicator of the U.S. dollar's strength. Because the USDX is heavily comprised by the Euro zone, EUR/USD is quite inversely related.

It's like a mirror image! If one goes up, the other most likely goes down. If the USDX makes significant movements, you can almost surely expect currency traders to react to the movement accordingly. Both the USDX and spot currency traders react to each other. Breakouts in spot USD pairs will almost certainly move the USDX in similar breakout fashion.


To sum it all up, currency traders use the USDX as a key indicator for the direction of the USD. Always keep in mind the position of the USD in the pair you are trading.

Insider Tip’s

Always be aware of what the USDX is doing. If you see the USDX in a strong uptrend, you should be looking to short the EUR/USD on any retracements

Risks Involved

USDX – When watching the Index, make sure you are not executing a trading simply off the USDX. Many traders over look the power of researching the individual currency pairs as well.

Action Steps

Watch the USDX while trading the USD currency pairs and get a feel for how they work together


Congratulations!!!

You have now completed the Start Forex Now course and are on your way to FxMastery! After completing this course you should have the foundation necessary to start trading in the Forex market.

The key to sustaining success as a trader is to continuously challenge oneself, furthering your education, and implementing the proper mindset.

If you are a FxST Trading System Member, start the next module of Forex training.

If you are NOT a Member, register for a Free 3-Day Trail Today!

To Your Success,

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