AnIntroductionto

ForexTrading–AGuideforBeginners

ByMatthewDriver

Editor:MatthewDriver

CoverDesignandIllustrations:MatthewDriver

PublishedbyWellsGrayPressGreatBritain

Copyright©MatthewDriver2011

Allrightsreserved.

Nopartofthispublicationmaybereproduced,storedinaretrievalsystem,or transmitted in any form or by any other means electronic, mechanical,photocopying or otherwise, without prior permission in writing from thepublisher.

Thisbookissoldsubjecttotheconditionthatitshallnot,bywayoftradeor

otherwise, be lent, re-sold, hired out or otherwise circulated without thepublisher’s prior consent in any form of binding or cover other than that inwhich it is published andwithout a similar condition including this conditionbeingimposedonthesubsequentpurchaser.

Disclaimer

Investmentsinfinancialproductsaresubjecttomarketrisk.Forexinvestmentsarehighlyspeculative

andanyinvestmentshouldonlybedonewithriskcapital.Pricesriseandfallandpastperformanceisnoassuranceoffutureperformance.Accordingly,theauthormakesnowarrantiesorguaranteesinrespectofthe content. You should obtain individual financial advice based on your own particular circumstancesbeforemakinganinvestmentdecisiononthebasisofinformationincludedinthisbook.

Investment lessons, comments and/or opinions presented in this publication are solely those of the

authorandcontributorsquoted.Youareadvisedtoconductyourownindependentresearchbeforemakingadecision.Inaddition,youareadvisedthatpastperformanceisnoguaranteeoffuturepriceappreciation.

While we have tried to ensure that all of the information provided in this book is up-to-date and

accurateweacceptnoresponsibilityforanyusemadeoftheinformationprovided.Youagreenottoholdtheauthororpublisherliablefordecisionsthatarebasedoninformationfromthisbook.

TableofContents

Chapter1:AnIntroductiontoForexTrading Chapter2:ForexEssentials Chapter3:AnalysingtheForexMarket Chapter4:ForexCharts Chapter5:TechnicalTradingTechniques Chapter6:CommonChartPatterns Chapter7:MovingAverages Chapter8:IndicatorsandOscillators Chapter9:Fibonacci Chapter10:TradingCycle Chapter11:AdvancedChartPatterns Chapter12:Timeframes Chapter13:TradingStrategy Chapter14:TheCarryTrade Chapter15:ReadytoTrade Chapter16:TradingSystems Chapter17:Somefinalthoughts

Chapter1:AnIntroductiontoForexTrading TheForexmarket canoffer fantasticopportunities to traders fromallwalksof life. It ispossible tomakegoodreturnsonyourinvestment,andmanypeoplesuccessfullymanagetoturntheirtradingactivityintofulltimejobsorgoodsecondincomes.

The chance to profit from the relatively small fluctuations and changes in the values of currencies

meansanyonecanhaveagoattradingandwiththevastarrayofconventionalandonlinetools/applicationsthatarecurrentlyavailable;itisrelativelyeasytogetstarted,andbegintrading.

Designed forForexbeginners, theaimof thisbook is toprovideacomprehensiveunderstandingof

howtheForexmarketworks,howit ispossible tomakeprofitablereturns,and to introducemanyof thetechnicaltermsandtoolsthatareessentialforeverydaytradingactivity.

1.1EarlyWarningItisbesttogetthewarningsoutoftheway,sothatyouareawareofthemandcanthendecidewhether

Forex trading is right for you. As with any type of financial trading there are risks involved and it isimportanttounderstandtheserisks,asyoucanthendevelopstrategiesandlearnmethodsthatcanhelptoreducethem.

‘Warning:ForexTradingcarriesahighlevelofrisktoyourcapitalwiththepossibilityoflosingmore

thanyourinitialinvestmentandmaynotbesuitableforallinvestors.Ensureyoufullyunderstandtherisksinvolvedandseekindependentadviceifnecessary’.

ItislikelythatanyoneconsideringtradingintheForeignExchange(Forex)Marketswillhavecome

acrosstheabovestatement,atonetimeoranotherandthosethathaven’tyet,soonwill.Itisawarningthatyouwillquicklycometorecogniseinthecourseofday-to-daytradinganditisalsoanextremelyimportantmessagetoremember.

The truth is that there are risks associatedwithForex trading, aswithany typeof trading, and it is

important to understand and accept these risks, before progressing. Failure to understand the risks andprepare for what is involved with trading is likely to lead to financial losses. However, by taking thenecessarytimetolearnandunderstandhowandwhythemarketworksasitdoes,andacquaintingyourselfwithessentialtradingknowledge,willconsiderablyincreasethechancesofsuccess.

Therearemanybooksandresourcesavailablethatwilltryandtellyouthattheyhavediscoveredthe

perfect tradingsetuporofferpromisesofguaranteedreturns.This isnotoneof thosebooks!There isno‘magicsetup’or‘guaranteedstrategy’outthere–asmuchasweallwishthattherewas!Eveninstitutionaltradinghouseswithadvancedquantificationstrategies,andteamsofanalystswillstruggletopredictmarketmovementscorrectly100%ofthetime.

Forextradingmustbeapproachedinthesamewayasonewouldapproachanyotherjob.Asuccessful

traderisdefinedas‘onewhoselossesoverthelong-termareoveralllessthantheirgains’.Lossesareafactoflifeandeverytraderatsometimeorotherwillexperiencethem.Thebesttoolavailableformaximisingreturnsandminimisinglossesis‘marketknowledge’,anditisthisthatwehavetriedtoencapsulatewithinthisbook.

1.2WhatistheForexMarket?TheglobalForeignExchangeMarketsalsoknownasForexorFX representstheplatformbywhich

currency from one country can be exchanged into the currency from another. The value of currenciesaroundtheglobeconstantlyfluctuatedependinguponawholevarietyoffactors,andwillrangeupwardsordownwards depending upon the economic stability or instability of the countrieswhich issue them. It isthesefluctuationsinvaluethatpresenttheopportunitiestomakemoney.

Putsimply,thismeansthatifacountrieseconomyisperformingwell,thenitislikelytoresultinan

increaseinthevalueofthecurrencyofthatcountry.Alternatively,ifaneconomyisperformingbadlythenthisislikelytoleadtoareductioninthevalueofthatcurrency.

KeyLesson:Whilst there are obviouslymany different factors that can influence currency values,

manyofwhichwewillconsiderlaterinthisbook,insimpletermstheaimfortradersistoidentifywhenandhowthesefluctuationsincurrencypricearelikelytooccur,andthentradeaccordingly.

1.3SizeoftheMarketTheForexmarketishugeinsize.Closeto$4trillionworthofcurrencyistradeddaily,makingitby

farthelargestfinancialmarketoperatingintheworld.Ofthis,approximately$1.5trillionistradedbyretailtraders,tradingtheForexspotmarket.

ThetotalForexmarketvaluerepresentsmanydifferentactivities,whichwillrequiretheexchangeof

one currency into another. Businessesmaking overseas purchases or dealingwith foreign suppliers andcustomers;internationalmergersandacquisitions;and,interbankdealingandtransfersallrequiremoneytobe transferredaround theglobeandconverted intodifferentcurrencies.This isachievedusing theForexmarkets.

1.4MarketStructureThe trading of stocks and shares is predominately conducted through centralised exchanges, which

means that theprice atwhich securities canbebought and sold, is controlledandmanipulatedbya fewdominantinstitutions.Thereis,therefore,littleopportunitytoseekarangeofpricesforbuyingandsellingwithinthemarketplace.

TheForexmarket,however,operatesusingadistinctlydecentralisedstructure.Manyinstitutionsand

organisationscanoffer currency transactionsat avarietyofdifferentprices.Thismeans that there is theopportunityforavarietyofquotationsamongstdealersandthechancetobuyandsellatarangeofprices.

Thistypeofdecentralisedorganisationcaninitiallyseemconfusing,however,byitsnature,itactually

provides considerable opportunity for retail traders. The competition that exists between institutions andmarketplayersactuallyensuresthatthebestpossiblepricingdealsareavailableallofthetime.

In the Forex market there is still a degree of structure amongst participants and it is useful to

understandhowthemainelementsofthemarketinteract:1.AtthetopoftheForexstructureistheInterBankMarket.Thiscomprisestheworld’slargestbanks

and some of the smaller regional institutions that trade directly between each other using two standardsystems;theElectronicBrokeringServices(ECB)ortheReutersDealing3000spotmatching.Boththesesystems allow the larger institutions to transact easily between themselves, with minimal costs andmaximumefficiency.

2. The next level of the structure comprises:Hedge Funds; Retail Market Makers; and, Business

Institutions.Thistierofparticipantsutiliseforeignexchangemechanisms,eitheraspartofglobalbusinessoperations,or for speculative investmentpurposes.Operatingat this level requires strategicpartnerships,where transactions will generally be directed through commercial banking partners. As such, the costsparticipantsincur,inordertotransact,arehigherthanthoseexperiencedattheinstitutionallevel,butstillmorefavourablethanthetermsavailabletomostretailtraders.

3.AtthelowerendoftheForexhierarchyaretheRetailTraders.Adiversegroup,retailtradersrange

fromdaytraderswhowilltradeeverydayplacingmultipletransactions,toirregularparticipantswhoonlytradenowand again.Thevalueof transactions at this level is equallyvaried, encompassing all budgets.Costsof tradingarehigherand the termsofactivity less favourable since thereare two levelsabove theretailtraderchargingfeesoneverytransaction.

Access to the currency markets in the past was much more complicated and costly, but with the

introduction of internet based retail brokerage it is now much easier to actively participate within themarketplace.ThismeansthattherehasneverbeenabettertimetobegintolearnhowtotradeForex.

1.5Forexv.StocksMany of the techniques used to trade the foreign exchange markets are equally applicable for the

tradingofstocksandshares.AsaForextraderyouwillfindthattheskillslearnedanddevelopedinordertoeffectivelytrade,canbeeasilyappliedtotradeotherfinancialsecurities.Despitethisthough,Forextrading

doeshavesomedistinctadvantagesoverthetradingofotherfinancialinstruments,particularlyintermsofthepossibilityforlargerreturnsoninvestments.

ThemaindifferencesoftradingForexoverstocksinclude:

-24hrmarket(NomatterwhatthetimeofdayornightyoucantradearoundtheclockowingtotheglobalnatureoftheForexmarket).-CommissionFreeTrading-Liquidity(TheForexmarketisextremelyliquidowingtoitssheersize.Thismeansthattherearealwaysbuyersandsellersactiveinthemarketplace).-Stops(Mostbrokersprovideguaranteedstopswhentrading).-Leverage(Traderscanapplyleveragetotradesinordertomaximisepotentialreturns).-IdentifiableTrends-EasyaccesstoMarketNews

1.6MakingMoneyfromForexTradingThe objective for anyone trading the foreign exchange markets is to exchange one currency for

another,inthehopethatthepriceofthecurrencyboughtwillincreaseinvalue,comparedtothevalueofthecurrencysold.

ThewaythisisachievedinForextradingisthroughtheuseofacurrencypair.Atradewillalwaysbe

basedupon two currencies, knownas thecurrencypair.This is because every timeyoumake a foreignexchangetransactionyouareessentiallybuyingonecurrencyandsellinganother.Eachpairwillalwaysbepresentedinasimilarformat.Thefirstcurrencyinthepairisknownasthebasecurrencyandthesecondknownasthequotecurrency.Togethertheseformthebasisoftheexchangeratesothatwhenbuying,thequotecurrencytellsyouhowmanyunitsofthatcurrencyarerequiredtobuyoneunitofthebasecurrency,andwhen selling the exchange rate tells youhowmanyunits of thequote currency you can receive foreveryoneunitofthebasecurrencysold.

Theexchangeratedescribedbythecurrencypairmeansthatthebasecurrencyprovidesthebasisfor

alltransactions.Therefore,ifyouweretoplaceabuyorderfortheGBP/USD(Britishpound/UnitedStatesdollar) youwould be buying thebase currency (GBP)whilst simultaneously selling thequote currency(USD).Conversely,ifyouweretosellthesamepairyouwouldbesellingthebasecurrency(GBP)whilstbuyingthequotecurrency(USD).

KeyLesson:Inordertomakeaprofitabletrade,youwouldbuythecurrencypairifyouthoughtthat

thebasecurrencywillincreaseorappreciateinvalueinrelationtothequotecurrencyovertheperiodthatyouholditfor,or,youwouldsellthecurrencypairifyouexpectedthatthebasecurrencywilldepreciateordecreaseinvaluerelativetothequotecurrency,overtheperiod.

1.7CurrencyPairsInpractice,whencurrenciesarepaired,thentheonethatperformsbetteroveragivenperiodwillrise

relative to theother. It is themovementof thesecurrencypairings that forms the foundation formakingprofitsorlossesoninvestments.

Theformatinwhichcurrencypairsarepresentedcanbeseenbelow:

1.8ForexMajors–TheCommonlyTradedPairsListedbelowaresomeofthemajorcurrencypairsandtheirabbreviations.Anumberhavealternative

‘nicknames’,whichareregularlyusedbyexperiencedtradersandareusefultoknow.

EUR:USDEuro-USDollar(SingleCurrency)GBP:USDPoundSterling-USDollar(Cable)USD:CHFUSDollar-Swiss(Swissy)USA:CADUSDollar-CanadianDollarUSD:JPYUSDollar-JapaneseYenEUR:GBPEuro-PoundSterlingEUR:CHFEuro-SwissFrancAUD:USDAustralianDollar-USDollarNZD:USDNewZealandDollar-USDollar1.9OfficialMarketOpenTimesTheForexmarketisatrulyglobalentityofferingtheopportunitytotrade24hoursaday.Thevarious

majormarketsaroundtheworldopeninaccordancewiththeirlocaltimezones.

1.10WhentoTradeDespitetheForexmarketbeingopen24hoursaday,therearetimeswhenitcanbemoreadvantageous

totradethanothers,particularlyasanewcomertothemarket.Thebesttradingtimesrelatetowhentherearehightransactionvolumesandintensivemarketactivity.

Optimumtimesforthistendtobemid-weekandwhenmultiplemarketsareopen.Forexample,itis

generallybettertobetradingwhenbothNewYorkandLondonmarketsareopenandoverlapping,ratherthantradingwhenthereisonlyaccesstooneofthelargermarkets.Thismeansthatitisimportanttopickboth the day of theweek and the time of day that you feelwill bemost favourable in terms ofmarketparticipantsandtransactions.

Thereareanumberoftimeswhenitcanbebesttoavoidtradingaltogether:-Mondays(Marketsoftenreactunpredictablytoweekendnewsandactivity).-Fridaysoftenproducelowvolumesandmarketparticipationastraderspreparefortheweekend).-Weekends(Therearevastlyreducedvolumelevelsatthistimeoftheweek.Itcanbeagoodtimeto

prepareforthefundamentalsoftheweekahead).-Holidays(Nationalholidayshavesimilarproblemstothoseexperiencedattheweekends).-SignificantNewsEvents (Although it is good tobeprepared to take advantageofnews releases,

tradingimmediatelyaftertheseeventsshouldbelimitedtomoreexperiencedtraders).1.11FindingaBrokerTogetstartedtradingForexitisfirstnecessarytofindabrokerandthismeansfindingacompanythat

suits your specific requirements. The final choice will ultimately depend upon your individual tradingneeds,but it is important tohavea fewkey thoughts inmindwhen initiallysearchingforanappropriatebroker.

AsaForexbeginner,yourbrokeragecompany shouldprovideanaccount thathas all thenecessary

toolsneededtolearn,understand,andpractisetradingstrategies.Itshouldalsoprovideanaccountthatwillallowyoutomaketradessuitedtoyourbudget.

Ultimately, finding a good Forex broker comes down to effective research. Try and get personal

recommendations from friends, colleagues or family who may already have accounts with a particularprovider.TheInternetisagreatplacetouncoverreviewsandrecommendationsfromfellowForextraders,whichcanhelpguideyouintherightdirection. Keythingstoconsiderwhenlookingforabrokerinclude:

-Spreads–Thetighter thespreadsofferedbybrokersthebetter thepotentialformakingprofitable

trades.-Accreditation–Itisimportanttolookforabrokerthatisaccreditedbynationalregulatorybodies.

Ideally,theyshouldalsoascribetoarecognisedcodeofconduct.-Terms&Conditions –You should fully familiarise yourselfwith theT&C’s of a broker before

signingupforanaccount. It isessential toknowhowabrokerwilladministeryouraccountand tofullyunderstandyourcommitmentstothem.

- Demonstration Accounts – Most brokers provide access to demonstration trading accounts and

educational facilities.Youshouldmakegooduseof theseand fullyunderstandhow the tradingplatformworksbeforemakinganyactualtrades.

-Reviews–There isanexpansivecommunityofForex tradersproviding informationandadvice to

beginners.Besuretoreadthereviewsandtestimonialsofexperiencedtradersmanyofwhichcanbefoundonline.

Mostbrokeragecompanieswillnowofferonlineplatformsdesigned tohelpadministeryour trading

activityand toprovideall thenecessarycharting tools,whichwillhelp identify transactionopportunitiesand trading strategy.Whilst it is stillpossible toadminister a tradingaccountwithout Internet resources,usingtelephonedealingetc,anonlineplatformisrapidlybecomingmoreandmoreessentialtobecomeasuccessfultrader.Thisismainlyowingtothesheervolumeofinformation,resourcesandhelpthattheWebcanofferbothnoviceandexperiencedtradersalike. The charting software that most brokers provide free of charge to clients will become a vitalapplication and provide the basis for all your subsequent trading strategy, so it is important to find asolution with which you are happy and comfortable. Having features that you can easily operate andunderstandwillgreatlyincreasethechancesofspottingsuccessfultradingopportunities.

1.11.1TypesofBrokerTherearetwomaintypesofForexbrokerprovidingaccesstothemarketplaceforretailtraders:MarketMakers-whodetermineandsettheirownbidandaskprices.ElectronicCommunicationsNetworks(ECN)-whousethebestbidandaskpricesavailablefrom

interbankinstitutions,atanygiventime.Formost retail traders amainstreamcommercialForexproviderwill provide the best solutionwith

toolssuitedforbothbeginnersandforthosewithincreasinglevelsofexperience.1.11.2RogueBrokersThelureofquickprofitsandthepromiseofmakingseriousmoneyisalwaysafactorformanypeople

whodecidetobegintradingforeignexchangemarkets.Itisimportant,however,tobeawareofsomeofthemoreunscrupulouspracticeswhichhavedevelopedinordertopartunsuspectingprivatetradersfromtheircash.ScamsanddodgypracticesinvolvingForextradinghavegrownexponentiallywiththesimultaneousdevelopmentof Internetbased trading.Problems tobeawareofvary fromsimple ‘transactionexecutionissues’involvingbrokersbeingunabletoexecuteyourorderrequirementswhenandhowyouwish,tomoreelaboratescamsandoutrighttheft.

Havinganawarenessof theseproblemsand thepotential risks that canarisewithbrokerswill help

ensurethatyouareprotectedinyoureverydaytradingactivities.Monitorreview/messagingboardsonlinesoyouareawareofanyproblemsthatothertradersmightbehaving,astheyhappen.Alwaysremembertheoldadagethatifsomethinglookstoogoodtobetrue,itoftenis-bewareofbrokersthatofferguaranteedprofitsordealsthatseemtoofferimplausiblereturns.Finally,ifyouaretradingonlineandfindthattradesareregularlyinaccuratelyexecutedowingto‘technicalorconnectionissues’thenthismaybeagoodsignthatitistimetochangebrokers.

Abovealltrustyourinstincts!In comparison to other financial market instruments, the retail foreign exchangemarkets are fairly

looselyregulatedandthelevelsofrelevantregulationvaryacrossdifferentregions.Despitemeasurestakenbyregulatorstotryandimprovethissituation,itisthelackofoperationaldirectivesthatcanleadtosomeof the problems traders encounter. It is important to know and understand the operating rules for yourspecificgeographicregionandtoensurethatyourbrokeriscoveredbythemeasures.

1.12OpeningaTradingAccountThere are 3 main types of trading account available: Standard Account,Mini Account, andMicro

Account. The type of account most suited to you will depend upon individual requirements. The maindifferencesbetweenaccounttypesarethelevelsofinvestmentneededtoinitiallyfundtheaccount,thesizeofcurrencyamountsthatcanbetraded,andasaresultofbothofthesefactorsthelevelofriskassociatedwitheachtrade.

StandardAccountAstandardaccountis,asthenamesuggests,themostcommonformofaccountandprovidesaccessto

standardsizelotsofcurrency($100,000),utilisingleverageofasmuchas100:1.ThismeansthatundertherulesofForextradingyouwillgenerallyberequiredtohaveanavailableminimumcapitalof$1,000tobeabletotakeadvantageofleverageat100:1.The$1,000capitalisthesumknownastheaccountmarginandwillenableyoutocontrolacurrencylotof$100,000.However,mostbrokerswillrequirethataccountsbeinitiallyfundedwithlevelsover$2,000.

Thestandardaccountmeansthatwhenyouenteratransactioneverypipofmovementcanbeworth

theequivalentof$10.Thislevelofgaincanseemveryattractivetonovicetraders,butsomecautionshouldbeexercised in theuseofastandardaccount.Whilstgainscanrapidlyaccumulate, this levelof leveragecansimilarlyquicklyreducecapitalreservesandleadtosubstantiallossesbeyondtheoriginalstake,shouldthemarketmoveagainstyou.

Standardaccountsarethereforegenerallymoresuitedforexperiencedtraders.MiniTradingAccountsAminitradingaccountsimplyreducesthelevelofcapitalrequiredtoinitiallyfundtheaccount,and

provides traderswith the ability to trade inmini-lots, thus reducing the exposure to potential gains andlosses.

Generally,amini-lot isequal to$10,000,which reduces the levelof investment required to initially

fundtheaccountaswellasreducingtheriskassociatedwitheachtrade.Mostminiaccountscanbefundedwithjust$500orlessandthelevelsofleveragecanbeashighas400:1.TheminiaccountisbettersuitedtotraderswhoarerelativelynewtotheForexmarketorfortraderswhoarehappytotestnewstrategieswithrelativelylowerlevelsofcapital.

MicroTradingAccountsMicroaccounts are the final typeofconventional self-tradingaccountavailable.Brokersoftenoffer

themasamethodofencouragingtraderstotryForextradingandtodosowithrelativelylowlevelsofrisk.Amicroaccountprovidestraderswiththeopportunitytotradeinmicro-lotsof$1,000.Thisfurtherreducesthelevelsofcapitalrequiredinordertofundandbegintrading.

ManagedAccounts

In addition to self-tradedForexaccounts, it is alsopossible to experience thepotential rewards thatforeign exchange currency speculation can provide without actively trading.Managed trading accountsprovideanoptiontohaveanaccountwhichiscentrallymanagedbyaFundManagerwhowillmakeday-to-daytradingdecisionsonyourbehalf,baseduponyourriskprofile,andprofit/strategicrequirements.

Chapter2:ForexEssentialsTherearemanytermsusedbytradersthatcanattimesmakeitseemlikethemarkethasa‘language’

ofitsown,andthesecanbeconfusingwhenstartingout.Anunderstandingofthisspecialistterminologyisavitalstartingpointforanytrader.

2.1PipsThetermpipisusedinForexasthemethodofdescribingthechangeinvaluebetweentwocurrencies

astheymoveeitherupordown.Forexample,where thevalueof theGBP/USDmoves from1.5125 to1.5126 then that incremental

movementrepresentsonepip.Themeasured value of a currency will be usually represented to four decimal places and it is the

movement of this fourthdecimal placedigit that is equal to onepip. Formost currencypairs this is theequivalent of 1/100 of one percent or one basis point. Some brokerswill report currency values to fivedecimal places and when this is the case then each movement will represent a tenth of a pip. This issometimesalsoknownasapipette.

Everycurrencyhasitsownvalue,andsotocalculatetheequivalentvalueofapipthereisasetprocess

tofollow:

.0001dividedbytheexchangerate=Pipvalue

Therearesomeexceptionsinthevaluingofpips,particularlyinthecaseofcurrencypairsthatincludetheJapaneseYenastheseareoftenonlyquotedtotwodecimalplaces.

Brokers will calculate the pip value on your behalf, but it is useful to understand the underlying

process,asitisultimatelythisaccumulationofpipsthatwillinfluencethecalculationoftradingprofitorloss.

2.2LeverageLeverageisthedouble-edgedswordofForextrading.Whilstontheonehanditprovidesretailtraders

withthechancetomakesubstantialprofitsfromthecurrencymarkets,byexploitingonlyrelativelysmallmovementsincurrencyprices,itcanequallyleadtosituationswherelosses,ifunchecked,canfarexceedoriginalinvestments.

Knowing the implications of leverage, how itworks, and how it can be used effectivelywill, over

time,provetobeextremelybeneficial.Thismeanslearningtomanageleverageinamannerthatwillgivethe best possible chance of making profits, but at the same time reducing the risks and possibilities ofaccumulatinglosses.

Leverage, by definition is the instrument that allows a trader to borrow and control much largeramountsofcollateral,usingonlyrelativelysmallpersonalinvestment.Traderscanentertransactionsusingthis personal investment, that when leveraged is multiplied to give control of a much larger stake ofcurrency.Thismeansthatprofitscanbemadefromrelativelysmallcurrencypricemovements.

Theimportantlessontorememberisthatleverageworksinbothdirections,thereforeinthesameway

thatleveragewillincreasethevalueofanyprofits;itcanalsorapidlymultiplyanylosses.Inpractice, leveragewillbeusedeverytimethatyouexecutea transactionorder.Whenenteringan

orderyouwillberequiredtoselectthelevelofleveragethatyouwishtoapplytothattransaction,andthiswill determine the amount of currency that you ultimately control. The amount of money that youpersonally have to put towards the transaction is known as the margin. This amount will have to beavailablewithinyouraccountbeforeabrokerwillexecutethetradeonyourbehalf.

Anexampleofleverageinaction:Imaginethatyouhave$1,000thatyouwishtoinvestinaparticularcurrencypairandyoudecideto

enter a buy transaction, also known as going long. As you place your order the brokerwill give you avarietyofleverageoptions,dependinguponthetypeofaccountyouhold.Forthisexample,wecanusealeveragelevelof100:1.Thismeansthatyourinvestmentof$1,000ismultipliedby100givingyoucontrolof$100,000ofcurrency.Itisthatlevelofcurrencythatisthenappliedtothetradeandyouenterthemarkettheoreticallyholdingthatamounttoinvest.Ifwhenyouclosethetradeyouhavejudgedcorrectlyandthepriceofthecurrencyhasincreasedovertheperiod,thenthatpriceriseisappliedtothe$100,000ratherthanyourmarginamountof$1,000,thusconsiderablyincreasingthelevelofprofitaccumulated.Conversely,ifyou have misjudged the market and the price closes lower over the course of the trade then the sameleverageissimilarlyappliedtoanylosses.Thiswouldmeanthatyouloseyourmargininvestmentandanyaccumulatedlossesoverandabovethelevelofthemargin.Stoporderscanbeusedtoreduceyourlossesshouldthemarketmoveagainstyou.Thistypeoforderwillbediscussedinmoredetailinlatersections.

KeyLesson:Astatementthatyouwillencounterregularlythroughoutyourtradingexperienceswill

bethefollowingwarning:‘Thisisaleveragedproductandcanresultinlosseswhichexceedyourinitialdeposit.TradingForex

maynotbesuitableforeveryone,sopleaseensurethatyoufullyunderstandtherisksinvolved’.Forgetthisatyourperil!Bykeepingthisassertionattheforefrontofyourmindandapplyingcaution

everytimeyoutrade,thenriskoffinanciallossesshouldbereduced.2.3LotsWhenitcomestoactualtradeorderstheSpotForexmarketistradedinLots.Lotscomeinavarietyof

sizesincluding:Standard,Mini,Micro,andNano,whichareeachmadeupofdifferentamountsofcurrencyunits.

Lotsworkusingtheprinciplesofleveragethatwehavealreadydiscussed.Theysimplystructurethe

specific amounts that can be applied to each trade. Each lot is constructed from currency units, whichsimply translates into real term values, therefore a standard lot consisting of 100,000 units can beequivalenttoacontrollingmonetaryvalueof$100,000,etc.

2.4MarginsAspreviouslymentionedinconnectionwithleverage,itisnotnecessarytohaveanaccountactually

fundedwith$100,000inordertocontrolalotofcurrencywiththatequivalentvalue.Instead,followingtheapplicationofleverageabrokersimplyrequiresyoutohaveapercentageordepositonaccount,towhichthisleveragewillbeappliedwhenyoutrade.ThispercentageordepositiswhatisknownastheAccountMargin. Thevalueof thisdepositwilldependon the typeofaccountheld, the specific requirementsofyourbroker,andyourindividualpreference.

Inthecaseofatradeusingleverageof100:1thentheaccountmarginrequiredwouldbeaminimum

ofonepercent.So,ifyouwishedtoexecuteanorderforastandardlot($100,000)at100:1thenyouwouldberequiredtohaveaminimumof$1,000asamargin inordertoproceed.Brokerswilloftenrequiretheaccounttobesufficientlyfundedabovetheaccountmarginsothatanysurplusamountcanbeavailabletofundpossiblelosses.

2.5Bids,OffersandSpreadsWhendealingwiththepricingofcurrencyintheSpotForexmarkettherewillalwaysbetwopricesat

any one time for every currency pair. These two prices are known as the bid and offer price, and thedifferencebetweenthemisknownasthespread.Itisimportanttounderstandthedifferencebetweenthesetwovalues,astheyareavitalelementofalltradingstrategy.

KeyLesson:Thebidpricewillbethepricequotedatwhichyoucansellcurrency,andtheoffer/askis

thepriceyouwillbequotedwhenyouwishtopurchasecurrency.Thebidpricewillalwaysbelowerthantheoffer/askpriceanditisthisspreadbetweenthetwoprices,

whichallowsbrokersandmarketmakerstoprofitfromtransactions.2.6LongandShortPositionsOne of themost attractive features of the Forexmarket is the opportunity tomake profitswhether

pricesgoupordown.Thismeansthat,asatrader,itispossibletoaccumulatepipsirrespectiveofwhetherthey come from upward or downward trends, greatly increasing the potential returns available andprovidingconsiderableflexibilityfordevelopingtradingstrategy.

Whenatradeismade,thetermusedtodescribethisisknownastakingaposition.Ifthetradeisbased

onatransactionwherethetraderispredictingthatthepriceofacurrencywillincreaseovertheduration,then this is known as a long position or going long. Conversely, when the trader makes a transactionwherebytheyarepredictingthatthepricewilldecreaseoverthedurationofthetrade,thenthisisknownasashortpositionorgoingshort.

2.7OrderTypesInordertoexecuteeitherthepurchaseorsaleofcurrencyitisnecessarytoprovideinstructionsasto

thequantityandmethodwithwhichatradeshouldbeconducted.Thecombinationoftheseinstructionsisknown as an order. There are four main types of order, and it is vital to be aware of the nature andimplicationsofeach.

MarketOrderThemarketorderalsosometimesknownasanunrestrictedorderisaninstructiontobuyorsellatthe

bestavailablecurrentprice.This means that a trade will be executed immediately at either the current ask price or bid price

depending onwhether the trade is for a purchase or a sale. Therefore, if thebid price forGBP/USD is1.5673andtheaskpriceis1.5675then,withamarketorderyouwouldbuyat1.5675andsellat1.5673.

Limit-EntryOrderThe limit-entryorder isaninstructiontobuyatacertainlevelbelowthecurrentmarketprice,oran

instruction to sell at a certain level above the current market price. Depending on the direction of theparticularorder,thenlimitorderscanbefurtherspecifiedaseitherabuylimitorderoraselllimitorder.

Thistypeofordercanbeusedtoensurethatyoudon’tmisstheopportunitytomakeatrade.Theyare

alsoespeciallyusefulforexecutingaspecifictradingstrategy,astheyensurethatentryandprofit targetscanbesetandexecutedaccordingly.

Limitordersgenerallycostmore touse thanmarketorders,however thebenefits to the traderoften

outweightheextracost.StopOrderThe stop order is an instruction to buy or sell when the price reaches a predetermined level. This

meansthatitcanbeusedtosetentryandexittargetsforthepurposesoflimitingpotentiallossesorlocking-in profitable gains. The stop order is often referred to as either just a stop or a stop loss. The specificmethodsforusingthistypeoforderwillbediscussedinmoredetaillater.

Stopordersarenotalwaysanabsoluteguaranteeofgettingspecificentryorexitpoints.Whenthere

aresuddenswingsinpricethenyourbrokermayonlybeabletopracticallyexecutethestoporderatlevelslowerorhigherthanthatwhichwasoriginallyexpected.

Itisimportanttoreadandunderstandthespecificguidelinesinrelationtotheexecutionofstoporders

foryourbroker,asthiswillultimatelyinfluencehowyouutilisetheminyourtradingstrategy.

KeyLesson:Inpractice,thestopordercanbeutilisedtohelpensurethatprofitsarecollectedpriortotrendreversals,orasanessential tool tolimit thepotentialriskassociatedwitheachtrade.Settingastoplossbelowanentrypointwhengoinglongonatradewillhelpensurethatshouldasituationarisewheretheprice reverses then losses are kept to the absoluteminimum. The opposite should be applied in a shorttradingscenario.

TradingStrategy:Theexactlocationsfortheplacementofstoporderswilldependuponthetrading

strategyemployed.However,itisworthbeingawarethatifthestoporderissettooclosetoanentrylevel,thensmalloscillationsinpricemayleadtoatradebeingclosedprematurely.Therefore,itissensibletosetstopordersjustbeloworabovesignificantlevelsofsupportorresistance.

TrailingStopThetrailingstopisaspecifictypeofstoporder,whichmovesinrelationtofluctuationsinprice.Atrailingstopadjustsaccordingtothedirectionofaparticulartrade,trackingthepriceofacurrency.

Theresultproducesastoplevelthatisconstantlychanginginrelationtopricemovementssothatthepointatwhichatradecouldcloseisadjusted.Thishelpstolock-inprofitsandautomaticallyreduceanylosseswhichmayoccurshouldthepriceundergoareversal.

KeyLesson:ThetrailingstoporderisanessentialtoolforForextradersandshouldbeconsideredas

anintegralpartofmanytradingstrategies.TradingStrategy:ShouldyoudecidetogolongontheGBP/USDandbuyatapriceof1.5780then

youcouldsetatrailingstopat20pips(initially1.5760).Thiswillmeanthat,shouldthepricemoveagainstyouanddropthroughthe1.5760value,thenyourstopwouldbeactivatedandthetradeclosed.However,shouldthepriceincrease,asyouhavepredicted,thenthetrailingstopshouldtrackthisvalueandincreasecorrespondingly.Shouldthepricecontinuetoreach1.5800thenthe trailingstopwouldnowbesetat20pips below this new level i.e. at 1.5780. The level of the stop will continue to rise proportionally tocorrespondwithanypricerises.Shouldatanypointthecurrencypricebegintofall,thenthetrailingstopdoesnotdropbackbutremainsatwhateverlevelitreachedpriortothereversal,inthiscase1.5780.Thetradewill remainopenas longas themarketdoesnotmoveagainstyoubymore than20pips,atwhichpointthetradewouldbeclosed.Theoverallresultisthatthemajorityofgainsaccumulatedduringthetradearelocked-in.

OtherOrderTypesInadditiontothefourmainordertypesthereareanumberofmoreunusualordercategoriesthatare

moresuitedtoexperiencedtraders.Itmaybethatyouneverhavetousetheseparticularordertypesbutitcanbeusefultobeawareofthem.Theyinclude:Good-UntilCancelled(GTC);Good-for-the-Day(GTD);One-Cancels-the-Other(OCO);One-Triggers-the-Other(OTO).

2.8PlacinganOrderTheexactproceduretofollowwhenplacinganorderwillvaryslightlybetweenbrokersanddifferent

tradingplatforms.However,irrespectiveoftheprecisemethod,wheneveryoudoplaceanorderyouwillneedtoconsideranumberofcommonfactorsthatwillformthebasisofyourtradingstrategy:

-Selectwhichcurrencypairyouwishtotrade.-Decidewhetheryouaregoinglongorshortonthetrade.-Checkyouranalysisandensurethatyouareconfidentofwherethepricecouldbegoing.-Checkindicatorsandtoolstoreinforcethestrategy.-Predetermineexitpoints(usingsupportandresistance).-Predetermineaprofittarget(don’tgetgreedy!).-Selectanordertype.-Selectthelotsize.-Managetheriskassociatedwiththetrade(thiswillbediscussedinmoredetailinlatersections).This,orasimilarchecklist,shouldbealwaysusedbeforeyoumakeanytransactions.Bygoingthrough

eachstagemethodicallyitwillhelpstructurethewayinwhichyouexecutetransactionsandhelppreventmakingmistakes. It servesasachecksandbalance systemwhichwillhelp toanalyseeach trade fromanumberofperspectivespriortomakinganycommitments.

Onceanorderhasbeenexecutedthenitisessentialtomonitorthetradeandimplementtoolswhich

willhelpanalysetheoverallperformance.EffectiveForextradingrequireskeepingacoolheadinordertotryandnotacttooimpulsively.

KeyLesson: It is important to stick toa strategy.Therewilloftenbesituationswhereyoumayhit

yourprofittargetandfeelthatbystayinginthetradeyouhavefurtherpotentialtomakemoney.Chasingprofits can be dangerous and by staying in a trade longer than planned it can increase the possibility ofbeinghitbypricereversals.Bycloselymonitoringtradesandsettingstoplossesatappropriatelevelstheseriskscanbereduced.

Similarsituationscanoccurinlossmakingtradeswhereitcanbetemptingtostickwithatradeinthe

hope that itwill ultimately reverse.Set astop loss and stickwith it.Losses are a factof life for regularForextraders,butbyensuringthattheyarekepttoanabsoluteminimum,overtime,willensurethatyouwinmoretimesthanyoulose.

Chapter3:AnalysingtheForexMarket Developingasuccessfultradingstrategyreliesuponcollectinginformationrelatingtothemarketsandunderstandingthecorrespondinginfluencethatthisinformationcanhaveoncurrencyprices.Thisrequireslearningmethodstoanalysethemarketandpriceconditions.

The common types of analysis available to a trader fall broadly into three categories:Fundamental

Analysis, Technical Analysis and Market Sentiment. Each provides a different perspective of marketconditions,usinginformationfromavarietyofsources.

3.1FundamentalAnalysisFundamentalanalysisistheprocesswherebytradingstrategyisdevelopedandtheninfluencedusing

itemsofnewsandinformation,whichhavedirectimpactoneconomicactivity.Theprinciplebehindthistypeofanalysisfollowsthatwhenacountry’seconomyisdoingwellthen

this success should generally be reflected by an equally strong currency. Similarly, when a country’seconomyappearstobeperforminglesswell,thenthisislikelytoresultinaweakercurrency.Therelativechange that this economic strength has upon economies and currencies subsequently forms a basis forspeculativetrading.

The information that forms the foundations for this economic data is referred to as fundamentals.

Fundamentaldata encompassesmany scales frommacro-economic news, relating to global far reachingevents,tomorelocalisednationaleconomicinformation.Theultimateaimoffundamentalanalysisistouseittotryanddeterminehowspecificnews,reportsanddatareleaseswillinfluencethecurrencymarketsandtodeterminewhattrendsmayappearasaresultofthesereleases.Byknowinghowthemarketmayreacttocertaineventsornewsupdatesitbecomespossibletoplantradingstrategy,whichcanthencapitaliseuponthesepotentialmovements.

The relevance and impact of individual news items onmarkets varies.Reaction tomajor economic

newscanresultinsignificantmarketmovements,whereastheeffectoflessimportantinformationwillhavemoresubtleinfluencesonpricemovements.

There is a massive amount of information released daily that can be used to effectively plan and

managetrades.Belowisalistofthetypesofdatatowatchfor:-EmploymentRates-InterestRateMovements-RetailSalesFigures-TradeBalanceReports-GrossDomesticProductInformation-InflationReports-DurableGoodsReportsTherearemanyresourcesavailable,bothintraditionalmediaformatandonline,thatwillhavedetailed

information relating to the schedulingof thesenews reports.Manyonlinewebsites and forumswill alsoallow you to activate specific updates that will keep you informed of all relevant releases relating to acurrencyofchoice.

KeyLesson:Make sure thatyouknowwhichnews releasesaredueeachweek. It canbeuseful to

createadiaryofeventsthatyoufeelmayhavesignificantinfluence,andthenutilisethisinformationintheplanningoffuturetransactions.

3.2TradingUsingFundamentalAnalysisTherearesomeimportantpointstolearnwhenusingfundamentalanalysis.The effect of newson currencies is generally related to the differencebetween the expected results

(whichwill already be priced into themarket) and the actual results. If a news report is releasedwhichmeets expectations, then there is likely to be little movement in the related currency. However, whereresultsaresignificantlydifferentfromthoseexpectedthenthereislikelytobestrongmovementinpricesasthemarketadjustsaccordingly.

Whenhotlyanticipatednewsstoriesaredue for release, there isoftenaquietperiod in themarkets

prior to updates. If the released information is unexpected and produces subsequent currency pricemovementsthenthechangesinpriceareoftenrapidandshort-lived.Therefore,whentradingfundamentalsitisimportanttobereadytoreactquicklyinresponsetoinformationupdates.

Someeconomicinformationhasgreaterimpactonthemarketthanothers.Newsreleasesthatcanhave

astrongimpactonmarketactivityinclude:-InterestRates(Whereinterestratesareupthencurrenciestendtoriseaccordingly).-EmploymentFigures(Higheremploymentratesmeanmorepeopleinwork,generallyreflectinga

strongereconomyandanequallystrengtheningcurrency).-GrossDomesticProduct(HigherGDPsuggestseconomicresilienceandastrongcurrency).Lessimportantnewsreleasesinclude:-RetailSales(Stillagoodindicationofeconomicperformance).-DurableGoodsOrders(Providesameasureofmanufacturingperformance)Therearesomefactorsassociatedwiththetradingoffundamentalinformationwhichrequireadegree

ofcaution.Oneexampleofthisisthatmarketvolatilityoftenincreasesconsiderablyduringperiodsdirectlyfollowingnewsreleasesandthiscanleadtopriceschangingfairlyrapidlyoververyshortperiodsoftime.This rapidmovementcanalsobeaccompaniedbyerraticprice fluctuations.Dependingon theexecutionrates of individual brokers, these fluctuations can result in trade orders being fulfilled at prices that aredifferent from thatwhich you expected, as the pricemay change during the time taken to implement atransaction.Thissituationisknownaspriceslippage.

Thisvolatilitycanalsocausepricestoswingbetweengainsandlosses,overshortperiodsoftime.You

should closelymonitor themarket at these times and be aware of how thismovement is affecting yourindividualtrades.

KeyLesson:Itisvitaltofullyunderstandtheimpactoffundamentalsonthemarket.Ifyouarenewto

trading,thenitisimportanttotaketimetolearntheimpactofnewsreleasesbeforetradingatthesetimes,asmarketscansuddenlyandrapidlyswinginoppositedirections,wipingoutyourprofits.ManywebsitesandinformationsourcesprovideForexnewsschedulesandshouldindicatetherelativeimportanceofeach.Byusing a mixture of these resources it is possible to gain a reliable indication of the likely impact eachscheduleditemmayhaveonthemarket.

3.3FundamentalAnalysis–InterestRatesInterest rates are one of the most influential factors relating to the value of a currency. An

understandingofhowinterestratesareusedbycentralbanksinordertotryandcontroleconomicactivityhelpsatraderdeterminehowcurrenciesareperceivedtobeperforming.Centralbankdecisionsrelatingtointerest rates are possibly the most important fundamental news items and should always be closelymonitored.

Theprinciplereasonforinterestrateadjustmentsbycentralbanksistocontrolinflation,whichmeans

attemptingtolimittheriseincostofgoodsandserviceswithinaregion.Rapidinflationmeansthatpricesoneverydaygoodsandservices,commodities,etcareincreasingtoofast,anderodingthespendingpowerof commerceand thegeneralpublic.Whilst adegreeof inflation is anacceptedelementnecessary for agrowingeconomy,wheninflationincreasestoorapidlyitcanbeharmfultoeconomicactivity.Therefore,centralbankswillattempttomaintainstablelowlevelinflationaryconditions,withtheuseofinterestrates.

KeyLesson:Insimpleterms,thewaythisisachievedisthatwhentherearehighlevelsofinflation

thencentralbankswilloftenraiseinterestrates.Thisresultsinbusinessesandindividualssavingmoreandspending less, thus resulting in reduced levels of economic activity and helping to reduce inflation.Alternatively,wheninterestratesareloweredthenthistendstoencouragepeopleandbusinessestoborrowmoreandsaveless,whichmeansincreasedeconomicactivity.

Trading Strategy: In terms of Forex trading, the higher the interest rate acting upon a particular

currency, then the better the chances of that currency strengthening over time. Currencies with lowerinterestratesarelikelytohaveweakercurrencies.

3.4FundamentalAnalysis–InterestRateDifferentialsItispossibletousethedifferencebetweentheinterestratesactingupontwocurrenciesasameansof

determiningwhetheronecurrencymaybestrengtheningorweakeningagainstanother.KeyLesson:Aninterestratedifferentialthatincreasessupportsthehigher-yieldingcurrency,whereas

adifferentialthatdecreasessupportsthelower-yieldingcurrency.

3.5FundamentalAnalysis-ExampleAgoodexampleofhow fundamental elementscan influence themovementofcurrencyprices is to

consider the importance of key central bank decisions. When a country’s central bank makes criticaldecisionsrelatingtotheireconomy,therewillalwaysbeasubsequenteffectuponthatcountry’scurrencyandanyconnectedcurrencyinstruments.

IftheEuropeanCentralBankwishestotryandimproveconditionstoencourageexport,thentheymay

decide to sell euro holdings and resort to purchasing a non euro-zone currency like theUS dollar. Theintendedresultfromamovesuchasthiswouldbeasubsequentdropinvalueoftheeuroagainstthedollarmeaning that it is cheaper for businesses within the euro-zone to export goods and services. Often theannouncementofkeyfiguresrelatingtomoves,suchasthese,causetraderstobegintopre-emptmovementinprices,drivingpriceslower,meaningthemarketitselfhelpsmovethecurrencyvaluelower.

KeyLesson:AsaForextraderitisimportanttobeawareofannouncementssuchasthisexampleand

tounderstandboth,howthemarketmayreactintheshorttermi.e.totheannouncementitself,andthenalsotobeawareofthelongertermimplicationsfortheeconomy.Byhavinganunderstandingofhowcurrenciescanmove, immediatelyand in the future, in relation to fundamentaleconomic strategy, thenyouwillbeabletoidentifyrelatedtradingpotential.

3.6TechnicalAnalysisUnlikefundamentalanalysis,whichuseseconomicdataandnewsinformationtotryandpredictfuture

possiblepricemovements,theprocessoftechnicalanalysisreliesuponstudyingtheactualmovementsinmarket prices as a means of identifying discernable trends and patterns from the data. The idea is thathistoricalpricepatternsshouldprovideanindicationoffuturemarketfluctuations.

Essential to technical analysis is the observation and examination of charts plotting past price

movements.Theseprovidethebasisfordeterminingpossiblefuturemovements,trendsandfluctuationsinthepriceofcurrencies,aswellasvitalinformationforplanningandexecutingtradingstrategy.

Therearemanymethodsavailable toaForex traderusing technicals inorder toanalyse the foreign

exchangemarkets.Oneelementthatisessentialtoallofthese,andwhichwillformthestartingpointforeachprocess,istheabilitytochartandunderstandpricemovements.Byobservinghistoricalpricedata,theaimistotryandunderstandthelevelsthatfuturepricesmayachieve.Chartscanalsobeextremelyusefulforhighlightinglongandshort-termtrends,aswellasrevealingpatternsintheinformationthatcanbeusedtohelpexaminemarketconditions.

In addition to thebasicpresentationofprice, information charts alsoprovidemanyopportunities to

applymathematical and statistical analysis,which can further uncover essential trends and patterns.Theidentificationof thesechartpatternsarekey to technicalanalyses, as they illustrate thepast, currentandpotential future movements in price and underlying market conditions. By using these as a trader, itbecomes possible to plan where and when trading transactions should be executed, and to define thestrategybehindeachtrade.

Technicalanalysisisfluidinitsnature,meaningthatasconditionschangeinthemarketplace(which

canhappen rapidlyorover longerperiodsof time) theanalysishelps tobreakdown this informationandpresentaclearerindicationofwhatisactuallyhappeningandultimatelywhatmayoccurasaresult.Toatrader this type of information is vital, as it helps to convert seemingly random fluctuations in currencypricemovementintodiscernablerepresentationsofunderlyingtrendsandpatterns.

There are many different types of technical analysis ranging from techniques that require the

identificationofspecificpatternswithinthepricedata,toothersthatrelyuponmathematicalmanipulationofthedatainordertoproducetoolsthatindicatewhen,andhow,tradingshouldbepotentiallyundertaken.

Effective technical trading should use a combination of these analysis techniques, as this helps to

reducetherisksofidentifyingfalsetrendsorfalseindications.Multipleanalysistechniquesappliedtothesamedataatanyone timewillhelp to reduce theriskof lossesand increase the likelihoodofaccuratelyidentifyingtruetrendsandpatterns.

Atfirstglance,thiscanallseemcomplicated.Therearevaryingdegreesofskillrequiredtolearneach

of the techniques and apply it to everyday trading activity. However, once mastered and understood,technical analysiswill become an extremely useful and essential part of your everyday trading activity.Developingafirmunderstandingofthebasicswillallowyoutobuildextremelyeffectivetradingstrategieswhich,over time,willbecomeincreasinglymoreaccurateaseachnewskilladdsadegreeofcomplexitythatcanbeapplied.

KeyLesson:Understandingthemeaningandimplicationsofpastpricemovementsisanessentialpart

of any trading activity. Technical analysis provides the everyday tools necessary to help structure andmanagethewhen,whereandwhyofeachandeverytradingtransactionyoumake.

3.7FundamentalAnalysisv.TechnicalAnalysisBothmethodsoffundamentalanalysisandtechnicalanalysisareextremelyusefultoolswhentrading

Forex.However,whilstsomepeopledeveloptradingstrategiesbasedsolelyupononlyoneortheotherofthesemethods,thisisrare.Inmostcasesthetwotypesofanalysisshouldnotbemutuallyexclusive.

KeyLesson: To become a successful trader it is important to understand and use bothmethods in

ordertoprovidesupportingtradesignals.Inpractice,thismaymeanusingtechnicalanalysistofirstdiscovertheunderlyingtrendsinacurrency

priceandtoidentifypatternsandindicationsofwhereandwhentoenterthemarket.Thisanalysisshouldthen be supported by finding news sources or market reports using fundamental analysis that providefurther evidence to reinforce or negate the trading strategy. News items, relating to the strength of theeconomyfor thatparticularcurrency, shouldconfirmordeny theoriginalanalysisandmayalso identifykey news events from the trading calendar, which could have further significant influence on the pricemovement.

Byusingthetwotypesofanalysistogetherthechancesofsomethingoccurringbysurpriseandruining

anotherwisecredibletradingstrategyaresignificantlyreduced.

3.8MarketSentimentWhilst technical and fundamental analyses tend to rely primarily on raw data as sources for

determining potential pricemovements, a successful trader should also learn to consider a third type ofanalysiswhichinvolvestryingtojudgeoverallmarketsentiment.Thisistheprocesswherebyatraderwillattempttodeterminethethoughtsandfeelingsofothertradersandtrytodevelopstrategybaseduponthisgroup psychology.Whether market traders are bullish or bearish is a key factor when planning trades.Market sentiment is a difficult concept tomeasure and comprehend, however, experiencewill graduallyproducetheknowledgerequiredtogaugethissentimentcorrectly.

BullsandBearsThetermbullmarketorwhentradersaresaidtobebullishreferstotimeswhenthereisconsiderable

optimisminthemarketplacegivingrisetolargernumbersofbuyersthansellers.Thesecircumstanceswilloftenbeaccompaniedby strongprice rises and significantupwardmarketmovement.Bycomparison, ifconditions are such that theopposite of this is true and there is considerablepessimismamongstmarketparticipants then this is known as abearmarket or traders are said to bebearish.These conditionswillgenerallybeaccompaniedbyagreaternumberofsellersthanbuyersinthemarketplaceresultinginfallingprices.

Chapter4:ForexCharts Charts are thekey to effective technical analysis, and there arenumerouswaysofpresentingForexdata.Chartstobeawareofinclude:Linecharts,Barcharts,andCandlestickcharts.

4.1LineChartLinechartsarethesimplestrepresentationofcurrencypricemovements.Acontinuouslineisusedto

linktheclosingpricefromthecurrentsessiontotheclosingpriceoftheprecedingsession.Thedatashownbythistypeofchartthereforehaslimiteddetailbutcanbeveryimportantforindicatingrisingandfallingtrendsovertradingsessions.

KeyLesson:Linechartsareextremelyusefulforindicatinggeneralpricemovementsinthemarkets.

4.2BarChartBar charts provide considerablymore information than line charts, and are an extremely effective

methodofvisuallyrepresentinggreaterdetailinrelationtopricemovements.Bar charts similarly link closing prices, but also simultaneously present opening prices, aswell as

highsandlowsforthesession.Thetopofeachbarrepresentsthehighestpricereachedduringthesession,thebottomrepresentsthelowestpriceandthehorizontallinestotheleftandrightofeachbarrepresenttheopening and closing prices respectively. The overall length of the bar indicates the price range for thesession.

Inmost charting software bars will be colour coded – green to represent a rising price and red to

representafallingprice.Eachindividualbarshowsinformationforaparticularsession.Thetimeframeforthissessionwillbe

dependentuponthecontextofthechartbutcouldrepresentaminute,anhour,oraday.KeyLesson:BarchartsaresometimesknownbytheacronymOHLCorOpen,High,LowandClose

charts.

4.3CandlestickChartsCandlestickcharts(oftenknownasJapaneseCandlesticks)areusedtovisuallyrepresentinformation

relatingtothepricemovementsofasecurity,derivative,orcurrency.CandlestickchartsareanimportanttoolforForexanalysisastheyencapsulatealargeamountofinformation,andpresentitinanefficientandeasytoreadformat.

Candlesticksrepresenttherangeofpricemovementsoveragiventimeperiod,makingthemidealfor

technicalanalysisofcurrencies.Lookingatanindividualcandlestickitwillusuallycomprisethebody(blackorwhite),andanupper

and a lower shadow (called thewick).Theseupper and lower shadows represent the highest and lowesttradedpricesofasecurityduringthetimeintervalrepresented.Thebodyillustratestheopeningandclosingprices.When the currency closes higher than it opened, the body iswhite or unfilled, the opening pricerepresentedbythebottomofthebodyandtheclosingpricethetop.Whenthecurrencycloseslowerthanitopened,thebodyisblack,withtheopeningpriceatthetopandtheclosingpriceatthebottom.

Chartingsoftwarewilloftenreplacetheblackorwhiteofthecandlestickbodywithcolourssuchasred(foralowerclosing)andgreen(forahigherclosing),makingiteasiertovisualisepricemovements.

4.3.1ReadingCandlesticksCandlesticksareformedfromthevaluesfortheopen,high,lowandclose.

4.3.2LongandShortBodiesA long white/green body suggests a strong buying presence. Indicating that prices have increased

considerablyoverthetimeperiod,thelongerthebarthemoresignificanttheincrease.

Conversely, a long black/red body suggests a strong selling presence indicating that prices have

decreasedoverthetimeperiod,again,thelongerthebarthemoresignificantthedecrease.

4.3.3ShadowsLong shadows indicate that trading occurredwell beyond the open and close prices,whereas short

shadowsindicatethatthemajorityoftradingoccurredneartotheopenandcloseprices.

Alonguppershadowandshortlowershadowsuggeststhattraderstriedtopushthepricehigher,butwere unsuccessful. The opposite is true for candlesticks with a short upper shadow and a long lowershadow.

4.3.4BasicCandlestickPatternsCandlestickchartsareanextremelyeffectivemethodofillustratingthemovementofcurrenciesovera

giventimeframe.Therearedifferent typesofcandlestick,whichcanbeusedtodeterminetheunderlyingtrendinthemarket.

White/GreenCandlesticks– suggestanupward trend in themarket.The longer thebody themore

significanttheoverallpriceincrease.Black/RedCandlesticks–suggestadownwardtrendinthemarket.Thistimethelongerthebodythe

moresignificantthepricedecrease.ALongLowerShadow–suggestsabullishmarket(associatedwithincreasinginvestorconfidencein

anticipationoffuturepriceincreases).Themainbodyoftransactionsareoccurringatthehigherprice.ALongUpperShadow–suggestsabearishmarket(associatedwithdecreasinginvestorconfidence

in anticipation of future price decreases). Themain body of transaction are occurring at the lower price

levels.SpinningTops–arecandlestickswithlonguppershadowsandlonglowershadows,witharelatively

smallmainbody.Thecolourofthebodytendstobeirrelevantastheyindicateperiodsofindecision.Thesmallmainbodyshowsthatpricesopenedandclosedwithinalimitedpricerange,whilstthelongshadowssuggeststradershaveunsuccessfullyattemptedtopushpriceseitherupordown.

Maruboza–awhitemarubozaconsistsofalongwhitebodywithnoshadows.Itmeansthattheopen

price isequal to the lowestpriceof theperiodandtheclosingprice isequal to thehighestprice. It isanindicationofbullishconditions.Ablackmarubozaconsistsofalongblackbodywheretheopenpriceisequaltothehighoftheperiodandtheclosingpriceisequaltothelowoftheperiod.Itisasuggestionofbearishconditions.

Doji–haveextremelyshortbodiesresemblingjustaline,wheretheopenandclosepricesareeither

identicalorextremelyclose.Theysuggestalackofanysignificantmovementduringtheperiod.Ifadojiformsafterasequenceofcandlestickswithlongwhitebodiesthenthissuggeststhatthedemandamongstbuyersisweakening.Conversely,ifadojiisseenafterasequenceofcandlestickswithlongblackbodiesthenthisislikelytosuggestthatconfidenceamongstsellersisweakening.

4.4.5CandlestickTrendsWhenusingcandlesticksfortechnicalanalysis,itisimportanttonotalwaysviewthemasindividual

entities,buttoseethemwithinthecontextoftheirsurroundings.Asinglewhite/greencandlestickfollowinganumberofblack/redsbyitselfisinsufficienttodemonstrateachangeintrend.However,shouldanumberof white/green candlesticks begin to occur in sequence then this provides more significant evidence

suggestingthatatrendmaybedeveloping.

There are a number of significant patterns that can develop within candlestick sequences, each ofwhichcanbeusedtoidentifypossiblepricetrends.Inthisbookwewillnotexamineallcandlesticktrendsindetail,however,thediagramsbelowhighlightsomeexamplesofthedifferenttypesofcandlestickpatternthatcanoccur:

Tweezertoppatternscanoftenbespottedtowardstheendofanextendedupwardordownwardtrendandsuggestthatpricesarelikelytoreverse.

Thethreeblackcrowspatternisformedwhenthreeconsecutivebearishcandlesticksappearfollowing

apreviousupwardtrend.Theseareindicationsthatareversaloftrendcanbeexpected.

ThreeWhiteSoldiersaretheoppositeofthethreeblackcrows.Theyusuallyappearfollowingastrongdownwardtrend,andsuggestthatareversaloftrendisoccurring.

KeyLesson:Thesearejustasampleofthemanypatternsthatcanappearincandlestickcharts.There

aremanyothersanditwouldbeusefultoresearchandusetheseasyoudevelopyourtradingskills.Oftenthetrendpatternsthathaveahigherdegreeofcomplexityusinglongersequencesofsequentialcandlesticksaremorereliable.

Chapter5:TechnicalTradingTechniques5.1TrendsYouwillprobablyhaveheardthephrase‘thetrendisyourfriend’andthisisanextremelyimportant

messagetoremember.Inordertoutilisethevarioustradingstrategiesdiscussedinthisbook,itisimportanttounderstandthemarketconditionsthatyouaretradingin.Thiswillhelptodecidewhichtoolyoushouldapply indifferent circumstances.For example,Fibonacci canbeappliedeasily to trendingprices,whilstpivotpointsandsupport/resistancelevelsarebestappliedinarangingmarket.

Atrendingmarketisonewherepricesarepredominantlymovinginonedirection.Theremaybeshort

termretracementsduringthisperiodwherepricesmoveforashortperiodinadifferentdirection,however,thegeneraloverallmovementwillremainonthesamecourse.Alternatively,inarangingmarketpriceswillfluctuate,movingbothupwardsanddownwardswithnoclearpattern.

KeyLesson: There are often periods of pricemovementwhere theremay be no discernable trend

evident, and as a Forex beginner it is sometimes wise to try and avoid trading at these times. Moreexperienced traders are able to find profits when prices are ranging and when there is only sidewaysmovementinthemarket,buttheseperiodscantraditionallygeneratemisleadingsignalsandthevolatilityatthesetimescanresultinunpredictableswingsinprices.Asyougainmoreexperienceandunderstandingofstrategies that can be employed in ranging conditions, then you can begin to take advantage of theseopportunitiesaswell.

Marketconditionscanbebrokendownintothreemaincategories:Upwardtrend;downwardtrend;or

oscillating/ranging.5.1.1UpwardTrendAnupwardtrenddevelopswhentherearemorebuyersinthemarketactivethansellers,thus,overthe

period,pricesrise.Itiseasytorecogniseanupwardtrendwhenusingtechnicalanalysissimplybyconnectingthelower

troughs in the price movement. In an upward trend, when these are connected, they will form a clearupwardslopingtrendline,confirmingtheunderlyingmovement.

KeyLesson:Ageneral rulewhendrawing trend lines is thatyoushouldbeable toconnectat least

threepointsonthelineinorderforittobeseenasareliableindicator.5.1.2DownwardTrendDownwardtrendsdevelopwhentherearemoresellersofaparticularcurrencythantherearebuyers,

resultinginadropinpriceovertheperiod.Technicalanalysis to identifyadownward trend isachievedbyconnectingaseriesofprogressively

lowerpeaksorhighs in thepricemovement. Aminimumof three touchingpoints is required todrawareliabledownwardtrendline.

5.1.3Oscillation(Ranging)

Whenthereisnoclearlydiscernabletrendevidentinthepricemovements,thenthepriceissaidtobe

oscillating or ranging. During this period there are swings in pricemovement, often between levels ofsupportandresistance,asthepricebouncesbetweentheboundariesofaparticularrange.

5.1.4DrawingTrendLinesTrend lines are one of the simplest forms of technical analysis, and if used correctly can also be

extremelyeffective.Theyshouldalwaysbethefirstformofanalysisused,andwhereverpossiblecombinedwithothertechnicalanalysistechniquesinordertoaccuratelyplotthecurrentmarketdynamics.

Drawingtrendlinessimplerequireslocatingandthenconnectingtwomajortopsorbottomsinprice

movement.Twopointsofcontactarenecessarytoestablishatrend,andthenathirdisrequiredtoconfirmthetrend.Inanupwardtrendthelinewillconnectthelowerpointsofsupport(troughs),andinadownwardtrendthelinewillconnecttheupperpointofresistance(peaks).

Therearethreetypesoftrend:Upwards,DownwardsandRanging(Sideways).Thesteeperatrend,thenthelessreliableitislikelytobe,and,therefore,thehigherthechanceofit

beingbroken.Themorepointsthatcanbeconnectedalongaline,thestrongerthesignificanceofthetrend.KeyLesson:Itisimportanttoalwaysdrawatrendlinebasedupontheinformationavailable,andnot

tomakethemistakeoftryingtofitthedatatoaperceivedtrend.5.2SupportandResistanceSupport and Resistance are two concepts that are considered extremely important for technical

analysis.The twocanbesometimesdifficult tounderstandas thereareoftendifferentopinions,amongsttraders,astohowbesttocalculatesupportandresistancelevels.

There are often times, when prices are moving in a particular direction, where a level is reached

beyondwhich traderswill struggle topushprices.When this isseen inanupwardpricemovement, thentheselevelsareknownasresistance.Theyactlikeaceilingonprices,preventingmovementbeyondthem.Conversely,when these levelsare reached inadownwarddirection then theyareknownassupport, andtheyactlikeafloorpreventingpricesfromdroppinglower.

Theselevelsdevelopinresponsetoactivityinthemarketandasaresultofoverallmarketsentiment.If

tradersfeelthatapriceismovingupwardstooquicklyorbecomingovervaluedthenwheneveranygroupoftradersattempts topushpriceshigher than the resistance level, themajorityof themarketwill resist thisaction.Thismeans themarkethasdecided that apriceabove that levelwouldbe toohighand that theywould be unwilling to pay those prices for that currency. Essentially, this lack of demand produces theresistance.Theoppositeistrueinthecaseofsupportlevels.Thistime,iftheoverridingmarketsentimentisthatthepriceisfallingbelowavaluethatthemajorityoftradersfeelitshouldbetradingat,thentherecanbesaidtobesupport.Thismeansthattradersaregenerallysupportingthecurrentpricesandfeelthatthevalueshouldnotdropbelowcurrentlevels.

Oftenwhenthepricehitsoneoftheseareasofsupportorresistance,itresultsinthepricerebounding

in theoppositedirection.This can lead to either a significant reversal ofmovement, or just a temporaryadjustment.

Althoughsupportandresistance levelsdoactasaboundariesofpricemovement, that isnot tosay

thattheyareunbreakable.Oftenpriceswillrangebetweenparticularlevelsofsupportandresistanceforaperiodoftime,astradersattempttodeterminewhetherthepriceshouldbeproceedinghigherorlower.Ifaneventshouldoccurthatbeginstopushpricespredominatelyinonedirectionthenitismuchmorelikelythateither thesupportorresistance levelwillbebroken.Oncethepricesucceeds inbreakingthroughoneoftheselevels,thennewlevelsofresistanceandsupportwilldevelop,whichfactorthesechanges.

Asaresultofthesechangessupportandresistancelevelsshouldbeseenasdynamicentities,meaningtheyconstantlyreadjustandmoveinrelationtomovementsofprices.

Therearenumerouswaysofcalculating thesesupportandresistance levels,manyofwhichwillbe

addressedinlatersections.

KeyLesson:Itiswidelyacceptedthatsupportandresistancelevelsarecredible‘signposts’ofareas

whereactivity is likely tohappen.Thismeans thatat these levels it ispossible toexpect,prices toeitherbreakthrough,orrebound.Itispossibletoplantradesthatcancapitaliseshouldeitheroftheseeventsoccur.

5.3PivotPointsPivotpoints areonemethod thatcanbeused tocalculate levelsofsupportorresistance,whichare

crucialforindicatingachangeinpricemovement.Theymaybeusedtoidentifylevelsatwhichapriceislikely to reverse, orvalues thatpricesmustpass inorder to signify specificpricebreakouts.Essentially,pivotpointsareusedas importantmarkers toanticipatewhenchanges inpricemayoccur,andaspartoftradingstrategiestodeterminewhenandwheretransactionsshouldbeundertaken.

Pivotpointsarecalculated inanumberofways,andgenerally thiscanbedoneautomaticallyusing

chartingsoftware.Itisimportanttohaveabasicgraspoftheunderlyingmethodologyofgeneratingpivotpoints.Outlinedbelowisthemostcommoncalculationmethod,whichisknownastheFive-PointSystem:

PivotPoint=(High+Low+Close)/3FirstSupport=(PivotPointx2)–HighFirstResistance=(PivotPointx2)–LowSecondSupport=PivotPoint–(High–Low)SecondResistance=PivotPoint+(High–Low)Chartingsoftwarecanbeusedtotransposethesevaluesasvisualrepresentationsontocurrencycharts.

AstheForexmarketoperates24hrsadaythevaluesforcalculatingtheselevelsareusuallytakenat

4pm EST. Other methods of calculating pivot points can be used and it may be helpful to have someknowledgeoftheseothermethodologies.

5.3.1UsingPivotPointsPivotpointsareanextremelyeffectivetoolforintra-daytrading,astheyprovidestrongindicationsof

levelsofsupportandresistancewithinthemarket.Thepivotpointitselfistheprimarylevelofsupportorresistance,anditisatthispointwherethelargestpricemovementcanbeexpectedtooccur.Inessenceitcanbeexpectedthatthepricewilleither‘bounceoff’thepivotpointor‘breakthrough’it.

Pivotpoints canbeused todeterminewhen trendsaredeveloping in themarket. If thepricebreaks

below thepivot point then this indicates the formation of a general downward trend, similarlywhen thepricebreaksabovethislevelthenitcansuggestthestartofanupwardtrend.Wherepricesbounceoffthepivotpointthenthissuggestsaperiodofconsolidationwherethereisnospecifictrendpresent.

Aspivotpointsarebasedupontheresultsofthepreviousdaytheyareonlyashort-termindicatorand

needtoberecalculatedonadailybasis.Thisisdoneautomaticallybymostchartingsoftware.Pivot points can also be a very useful tool for determining when and where to enter and exit the

market.Themethodfordoingthisreliesuponthepivotpointtosignposttheseentryandexitlevels.Forexample,ifthepricebreaksbelowthepivotpointyoucouldusethisasanindicationtoenterthe

market.Youwouldthenusethepivotpointpricetosetastoploss(ideallythisshouldbeplacedjustabovethislevelinordertopreventyourtradebeingclosedearlyshouldthepricereboundbacktowardsthepivotpointatanytime).Thefirstsupportlevelshouldthenbeusedasthetargetpriceforthatparticulartrade.Iftheprice continues tomovebelow this first support level thenyoucouldeither choose to exit the trade,takingyourprofit,or,youcoulddecidetorepositionyourstoplossusingthefirstsupportlevelasitsnewposition.Inthiscasetheprofittargetwouldnowbecomethesecondsupportlevel.

Byfollowingthismethodandusingpivotpointstosetthevariousstrategiclevelseachtradeshouldbe

wellpositionedtotakeadvantageof thetrendingpriceswhilstremainingprotectedfromanyreboundsorreversalsinmovement.

Therearesomefactorsassociatedwiththeuseofpivotpointswhichnecessitateadegreeofcaution.

Oftenitisdifficulttodeterminehowthemarketisreactingatanygiventime,andifthepricehoversaroundthepivotpoint then it canbehard todistinguish inwhichdirectiona futuremovemaybe.Occasionallypriceswillalsoreversebeforeactuallyreachingthesetlevelsofsupportandresistance,resultinginafailedstrategy.

KeyLesson:Itisimportanttousepivotpointsinconjunctionwithotherindicators,andtoensurethat

the overallmarket trend is taken into accountwhen predicting possiblemovements. Trading against thetrendshouldbeavoidedwherepossible!

5.4Volume

Inadditiontomonitoringpricefluctuationsanothervitalaspectoftechnicalanalysis,isbeingawareof

the level of activity taking place in the marketplace at any given time, and this means understandingvolume.Volumesimplyindicatesthenumberoftradestakingplaceoveraperiodoftime,providingusefulinformationastothenumberoftraderscurrentlyactive,aswellasshowingthemarketinterestinbuyingorsellingofaparticularcurrency.

Mostchartingsoftwarewillprovidevolumelevelsforprecedingperiodsatthebottomofeachchart.In

justthesamewaythatmovementsintheactualmarketpricecanrevealimportantinformation,sototrendscanbedeterminedviatheanalysisofvolumelevels.

ThereisactuallynotruemeasureofvolumeintheForexmarketsowingtothescaleandmagnitudeof

thenumberofindividualtradestakingplacedaily,andthelackofcentralisedorganisationtomonitorthismultitude of transactions. However, market makers will be aware of the approximate volumes oftransactionsoccurringatanygiventime,anditisthesefigureswhichcanbeusefultotrack.

Eachbarinachartdepictingvolumewillindicatethenumberoftradesexecutedinthatgivenperiod,

aswellasillustratingwhetheroveralltherewasagreaternetnumberofbuyorsellorders.Itisimportanttoremembertomonitorvolume,asitwilloftensupporttheevidencefortheaccuracyof

aparticulartrend.Wherethereisapricemovementeitherupordownwhichisaccompaniedbyarelativelyhighvolumeoftradingactivity,thenitismorelikelytobeareliabletrendmovementthanifvolumelevelsweresignificantlylower.

KeyLesson:Practically,thismeansthatwheneveryouhaveidentifiedaparticulartrend,bywhatever

means, then it is essential to check the volume levels to identify whether trading levels support youranalysis.

Volume levels also generally move in accordance with the prevailing trend. Therefore, as a trend

develops momentum in a particular direction this will often be accompanied by increasing volume,suggesting that there are an increasing number of market participants reinforcing the trend. This willultimatelyhelptopushpriceseverhigherastradersmovetotakeadvantageoftherisingorfallingtrend.Asthe support amongst traders for aparticular trendbegins todecrease then thiswill be accompaniedby arelativedrop in the levelsofvolume,as tradersbecomewaryof theunderlying trend.Thisadoptionofamorecautiouspositiontendstosignaleitheraperiodofconsolidationorsuggeststhatatrendreversalmaybeimminent.

Aswellassupportingtheidentificationofunderlyingtrends,volumecanalsobeanimportantfactor

whenusingtechnicalanalysischartpatterns. In these instancesvolumebecomesafactor,whenparticularpatternsform,indeterminingwhethertheexpectedoutcomeofthatpatternislikelytooccurandwhethertheinterpretationofmarketconditionsissupportedbyothertraders.

Chapter6:CommonChartPatternsEffectivetechnicalanalysisrequirestheidentificationofpatternsinchartedinformationaswellasan

understandingofwhatthesespecificpatternformationsindicate.Experiencedtraderswillusechartpatternsasablueprinttodevelopindividualtradingstrategy.

Knowinghowthemarketislikelytoreactwhenanyofthesechartpatternsappearallowstradersto

determinethebuyandsellsignalsthatsignpostwhenandwheretoenterandexittrades.Key Lesson:Chart patterns are usually good indicators of impending breakout movement. These

providetheopportunitiesforgoodprofitpotential.

6.1ContinuationandReversalPatternsMostchartpatternsdevelopandcanbeseeninpricemovementduringperiodsofeithercontinuation

or reversal. The exact interpretation of each chart pattern is dependent upon a number of factors, butessentiallytheyprovideinformationastowhetherapriceislikelytocontinueheadinginthedirectionoftheprevailingtrend(continuationpattern)or,ifthepriceissettohaveareversalintrendandbeginheadingintheoppositedirectiontoprecedingmovements(reversalpattern).Anumberofchartpatternswillappearduringperiodsofmarketconsolidationanditisimportanttolearnineachcasewhetherthepatternsuggestscontinuationorreversaloftheprice.

KeyLesson:Chartpatternsarenotanexactscienceand it isonlybygainingexperienceover time

thatitbecomespossibletolearntounderstandhow,whyandwhentheyform.Atradercanthenbegintointerpret themeaningof a patternspresence andultimatelyhow itmaybeused as a part of a profitabletradingstrategy.

6.2ChartPatterns-HeadsandShouldersHeadsandshouldersisthetermusedtodescribeoneofthemostreliablechartpatterns.Thisparticular

typeofpatterncanbecategorisedasareversalpattern,which,whenseenshouldsuggest that the futurepricemovementislikelytoprogressintheoppositedirectiontothatoftheprecedingtrend.

There are twomaincategoriesof thisparticular typeofpattern.Theheadand shoulder top usually

formsattheupperpartofanupwardtrendandisastrongindicationthatthepriceissettofallback.Theopposite formation is thatof theheadandshoulderbottom,whichmayalsobe referred toasan inverseheadand shoulder. In this case the pattern usually forms towards the bottomof a downward trend, andprovidesasignificant indicationofanimminentpricereversalsuggestingthat thepricewillbegintoriseagainsttheearliertrend.

Bothheadandshoulderchartpatternsdevelopasasequenceoffoursignificantparts.Thepresenceof

allpartsinsuccessionrepresentsanextremelyreliableindicationthatthecurrencymovementcouldbesetforareversal.

Atrueheadandshoulderpatternwillconsistofaninitialpeak(shoulder)followedbyahigherpeak

(head) and then subsequently another lower peak (second shoulder). The final element consists of anecklinewhichyoushouldbeabletocreatebydrawingalinebetweenthetwotroughsofthepattern.Thisnecklinecanbeusedasacriticallevelofsupport.

During the occurrence of a head and shoulder formation the price of the security should follow a

specificpattern,whichuponcompletionshouldresultinthepricereversal.

The first shoulder is formed as the price rises to a new high for the period before peaking and

experiencingafallback.Thisshortperiodofretreatisthenfollowedbythepricebeginningtoclimbhigheragainreachinganoverallhighfortheperiod.Thisoccursastradersattempttotestthemarkets’‘appetite’forahigherpricelevel.Ifthereisalackofpositiveresponsetothistestthenthepricewillretreatagain,formingthesecondhigherpeakorheadelementofthepattern.Thispriceretreatwillgenerallyfalltoalowsimilar to that seen in the first shoulder.The second shoulder of thepatternoccurswhen theprice risesagain,peakingata level lower than thatof theprecedingheadbutata levelsimilar to,orslightly lowerthan that of the first shoulder. This happens as traders attempt oncemore to test the demand for higher

prices.Whenthistestfailsandpricesbegintofallbelowthenecklinethenthissignifiesthecompletionoftheheadandshoulderpattern.

Thepatternprovidesagraphicalillustrationofeventsinthemarkethighlightingasuccessionoffailed

attempts to push prices higher. These failures confirm a falling demand amongst traders, resulting in areversaloftheunderlyingtrend.

KeyLesson:Itisimportanttoalsoconsiderandmonitorvolumelevelswhilstobservingtheformation

of the head and shoulder pattern. A high increase in trading volume, corresponding with the pricesmovement through the neckline, provides additional evidence that the expected reversal is gainingmomentum.

TradingStrategy:Thebreakout indicationproducedby theheadandshoulderpattern, aswehave

seen, happens as the currency price passes through the neckline, therefore a good trading strategy willdependuponenteringthemarketatthepointofbreakoutorasthesecuritypassestheneckline.

A good rule-of-thumbwhen setting your profit target for a trademade in these circumstances is to

measure thedistancebetween theheadand theneckline,and touse thissamemeasure (appliedfromtheneckline,inthenewdirection)asatargetprice.

Often,thetrendshouldcontinueinthisnewdirectionasexpected,butitisimportanttobeawarethat

fall-backmayoccur.Thisiswherethepricebrieflybreakspastthenecklinebutthenretreatsbackaboveorbelowit.Oftenthisoccursasthemarketteststhelevelsofsupportandresistancerelatedtothenewtrend.Thisactivitycanactuallystrengthenthesignificanceofthepatternandwhenthepricemovesagaininthedirectionofthenewtrendyoucanrelyuponthismovementtoagreaterextent.

6.2.1Inverse/BottomHeadandShoulderIn thecaseofan inverseorbottomheadandshoulder then thesameformationscanbeexpected to

occur,butintheoppositedirection.

6.3TrianglesThere are a number of chart patterns which use different types of triangle formations to identify

potentialopportunitiesinthemarket.6.3.1SymmetricalTrianglesSymmetricaltrianglescaneitherrepresentaperiodofconsolidationoraperiodofindecisionamongst

marketparticipants.Typically,duringthistimesupplyanddemandareatfairlyequallevels.Key Lesson: Symmetrical triangles can be an essential indicator to help decide when to enter the

market.Thispatternoftenleadstoacontinuationofthepriortrend.Forexample,wheretheprecedingtrendwasdownward,thenitisreasonabletoexpectadownwardsbreakbelowtheascendingsupportlineasthepricenearstheapexofthetriangle.Conversely,iftheprecedingtrendhadbeenupwardthenthebreakislikelytobeinanupwarddirectionmovingabovethedescendingresistancelineandcontinuingthetrend.Therearetimeshowever,whenthispatterndoesnotalwaysfollowtheprevailingtrendanditisimportanttobepreparedforfalsebreakouts.

The triangle is formedby theconvergenceofadescending resistance lineandanascendingsupport

line.Theselinesshouldhaveasimilarslopeandwillconvergeatacommonapex.Withinthepatterneachnewpeakandtrough,formedbylowertopsandhigherbottoms,willbecomecloserfollowingtheshapeofthe triangle. Lower volumes usually accompany this period. The pricewill continue to bounce betweenthesetrendlines,asitnearstheapex,beforefinallybreakingout.

The underlying cause for this particular pattern is that it represents a phase when traders are

‘indecisive’astowherethepriceislikelytogointhenearfuture.Thisproducesaperiodwherepricescanbesaidtobeinconsolidation,alsosometimesdescribedassidewaysmovement.Asthesymmetricaltrianglepatternformsitsuggeststhenumberofbuyersandsellersareinrelativeequilibriumforashortperiodoftime.As the price nears the apex of the triangle then this period of consolidation completeswith pricesmovinginaclearbreakout-ofteninthedirectionoftheprecedingtrend.

TradingStrategy:Onceasymmetricaltrianglepatternhasbeenidentified,itispossibletouseitto

determinetradingentrypoints.Byplacingentryordersjustabovethedescendinglineofresistance,andjustbelowtheascendinglineofsupportitispossibletocapitaliseonanyforthcomingbreakout.Althoughyoushouldbeexpectingabreakoutinthedirectionoftheprecedingtrend,thisstrategycoversyoushouldtheoppositeoccur.Whenthebreakoutbeginsandtheentryorder ishit, thentheoppositeentryordercanbecancelled.Prudentplacementofstop-lossescanthenbeusedtolock-inanyprofitablegains.

6.3.2AscendingTrianglesAscendingtriangleswillgenerallybeconstructedwithaflattop,formedbyalineofresistance,andan

upwardslopingbottomformedbyalineofsupport-createdbyaperiodofincreasinglyhigherlows.

The pattern typically represents periods of continuation and is commonly seen as an indication of

bullishmarket activity.As suchascending triangles aremost reliablewhen found as part of an upwardtrend.Inasimilarmannertoasymmetricaltrianglepricesshouldmoveupanddownbetweenthetwolinesofsupportandresistancepriortobreakingouttotheupper-sideoftheresistanceline.Ascendingtrianglescanattimesalsobefoundinadownwardbearishtrend,but,inthesecircumstances,thepatternisoflesssignificance.

KeyLesson:Thepricewillbouncebetweenthetwolines,asbuyersstruggletopushpriceshigherin

ordertobreakthecurrentresistancelevel.Thepresenceoftheincreasinglyhigherlowsatthesupportlevelindicatesthattherearegraduallyfewersellers,whicheventuallyallowsbuyerstopushthepricebeyondthelevelofresistance,leadingtoacontinuationofthetrend.

Trading Strategy:As has been seen, the ascending triangle pattern is completed when the price

breaksabovetheresistancelineanditisthisindicationthatshouldbeusedtoplantradableentrypoints.Insomecases,thetrendmaynotcontinueaspredictedandthepricemayfallbackbelowthesupportline.Itis,therefore, sensible to ensure that a genuine breakout is occurring in the correct upwarddirection, beforeenteringatrade.

6.3.3DescendingTrianglesDescendingtrianglepatternsworkintheoppositemannertothatofascendingtriangles,andassuch

areusuallyusedasanindicationofabearishmarket.Thedescendingtrianglepatternisformedfromaflatbottomsupportlineandadownward-slopingresistanceline.

Pricesshouldagainbouncebetweenthetwolines,butthistimetheindicationtakenfromtheexistence

ofthepatternwouldbethatultimatelythepricewilldescendbelowtheexistingsupportline,andcontinue

in a downward trend. When the pattern is seen in a period where the preceding trend has been in adownwarddirection, then itcanbemorereliablyexpected thatanybreakoutwillalsooccur in thatsamedirection.

In a similar manner to ascending triangles it is necessary to be aware that the breakout may also

happen in thereversedirectionandsocautionshouldbe takenwhenplanning transactions toprepareforthiseventuality.

6.4FlagsandPennantsFlagsandpennantsarecontinuationpatternsthatusuallyfollowstrongpricemovements.Theymost

often occur during periods of price consolidation following dynamic market activity. When the pricemovements foraperiodcreatea rectanglepattern then this isknownasa flagwhereaswhen thepatternformsatriangleitisknownasapennant.

When a pricemoves strongly upwards or downwards, there are often periods duringwhich traders

‘pause’andpricesconsolidatebeforeactivitybeginsagainandtradersoncemoreseektopushpriceseitherhigherorlower,dependinguponwhethertheprevailingtrendwasupwardordownwards.Flagandpennantpatterns are formed during these periods and will often provide a good indication that can be used toprepareforimminentbreakouts.

6.4.1FlagsFlags are reliable patterns that are generally found after a large price movement in a particular

direction.Arectangleshapecreatedbytemporarysupportandresistancelinesformthebasisfortheflag,which will generally slope in a direction away from the preceding price movement. This should beaccompaniedbyasimultaneousreductionintradevolumes.

Theoccurrenceof thispatternaccompaniedbya reduction inmarketactivity representsaperiodof

consolidationwherepricesovertheshorttermback-track.Duringthistimetradersevaluatethesignificanceof theprecedinglargepricemovementandtherewillbeadegreeofprofit taking.Thecompletionof theflagpatternwillsuggestthatthereissufficientappetiteamongsttraderstocontinuetheprecedingtrend.

Trading Strategy:Once the price breaks through the temporary support or resistance lines then it

becomesa strong indicationof continuedpricemovement, and this canbeused toplan transactions thattakeadvantageofthatmovement.Highervolumelevelswilloftenaccompanyanybreakoutsowherethesetwoeventsoccur,thevalidityofthepatternisstrengthened.

6.4.2PennantsPennantsworkinasimilarmannertoflagsandcanprovideequallyeffectivetradingindications.They

followa triangular pattern similar to that of symmetrical triangleswhere temporary linesof support andresistanceareusedtoproducetheupperandlowerlimbsofthepennantwhich,overtime,willconvergeatacommon apex. Pennants whilst similar in pattern to flags will often form in a flatter horizontalconfiguration.

Aswithflagstheexpectationwithapennantpatternisthatthepricewill(followingabriefperiodof

consolidationduringwhichappetiteamongsttradersforadditionalpricemovementisassessed)breakoutinthesamedirectionasthepriortrend.

TradingStrategy:Flagsandpennantscanbothbeutilisedaseffectiveandsignificanttradesignals.

Where there is an upward trend a buy order should be placed just above the upper limb of the flag orpennantandastoplossplacedjustbelow(topreventlossesshouldabreakoutprovefalse).Inadownwardtrendthentheoppositeofthismethodshouldbefollowed.

Key Lesson: Flags and pennants are commonly used amongst traders as they are both reliable

continuationpatternswhichtendtoonlyrarelyresultinanunexpectedreversaloftrend.

6.5WedgesThewedgechartpattern tends toformover longerperiodsof timecomparedtootherpatterns,often

taking between 2-6 months to fully develop. The pattern can represent both periods of continuation orreversal,andformsinasimilarmannerandshapetothatofthesymmetricaltrianglepattern.

Thepatternwillgenerallydevelopaseitherarisingwedgeoradescendingwedge.Itcanbedifficultto

accuratelydeterminewhetherthepatternwillresultincontinuationorreversalbutthegeneralrulefollowsthat a risingwedge should indicate conditions for a bearishmarketwhereas adescendingwedge shouldindicatethatcurrentconditionssuggestabullishmarket.

6.5.1RisingWedgesArisingwedgeformswhenpricesbegintoconsolidate,enclosedbetweentheupwardslopinglinesof

support and resistance. The line of support will usually be steeper than that of the line of resistance,suggestingthathigherlowsarebeingformedmorequicklythanthehigherhighs.Thiscreatesaperiodofsidewaysmovementwhich formsadistinctivewedge shape.Aswehaveseenpreviously,patternswhichillustrateperiodsofpriceconsolidationtendtopredictsignificantforthcomingpriceactionandthisisalsothecasewithwedgepatterns.Asthepatternforms,itisfairtoexpectsomesignificantpricemovementintheforeseeablefuture.

Whenarisingwedgeformsfollowingaprecedingupwardtrend,thenitwilloftensuggestthatafuture

pricereversalcouldbeexpected.Whereas,whenthepatternappearsaspartofaprecedingdownwardtrend,thenitoftentendstoindicatethatthereislikelytobeafurthercontinuationofthatdownwardtrend.

6.5.2FallingWedgesIn a similar manner to the rising wedge, the falling wedge pattern can also signify either the

continuation, or reversal of a trend.When a falling wedge pattern is observed towards the bottom of adownwardtrend,thenthiscanoftensuggestthatthemarketispreparingforapricereversal.Alternatively,when a falling wedge is found in a period with an upward trend, then it tends to signify a period ofconsolidation, where, upon completion of the full pattern, prices could be predicted to move in acontinuationoftheprecedingtrend.

KeyLesson:Arisingwedge canbeconsideredasabearishpatternwhichwill result indownward

pricemovement.Thismeansthat,whenitisobservedinanupwardtrend,itwill,inmostcases,resultinareversal and subsequent downwardmovement, whereas, when it is seen in a downward trend it shouldresultinthecontinuationofthatdownwardtrend.

By contrast, the falling wedge should be viewed as a bullish chart pattern, meaning that it should

generallyleadtoupwardpricemovement.

6.6RectanglesRectanglechartpatternsarefoundwhenthepricebecomesboundedbyparallel linesofsupportand

resistance,asaresultofthepriceoscillatingbetweenfairlyregularlevelsofhighsandlows.Formationofthepatternoftensuggeststhatthemarketisinaperiodofconsolidation,orthatthereiscurrentlysubstantialindecisionamongsttradersastowherefuturepricesareheading.Thisphaseofpricereboundwillmeanthatboththelevelsofsupportandresistancearebeingperiodicallytestedbybuyersandsellers,todetermineinwhichdirectionabreakoutmayoccur.Thecriticalpointwithrectanglesisthatthebreakoutcouldoccurineitherdirection.

Oftenpricemovementmayfollowthedirectionofaprecedingtrendhowever,thisshouldnotbetaken

for granted.Themainpoint to remember is thatwhen thebreakout doesoccur, it should result in fairlydynamicpriceactivity. Eitherway,thepointofbreakoutcanbeemployedtodeterminepotentialtradingentrypoints,soastotakefulladvantageofthenewtrend.

Key Lesson: Once the direction of the breakout has been identified and a trade entered, then a

potentialtargetpricecanbedeterminedbytakingameasureoftherectangleandusingthisasaguideforthepricemovementbeloworabovethebrokenlevelofsupportorresistance.

6.7DoubleTopandDoubleBottomThedouble topanddoublebottomchartpatternsboth tendtobereversalpatternswhich,whenseen

should strongly suggest that the currency price in the near future is set to beginmoving in the oppositedirection.

Inadoubletoppatternthepricewilltwicetrytopushhigherthanaparticularlevelandwhenitfailsto

dosoovertwosuccessiveattempts,thenthetrendoftenreversesresultinginthepricemovinglower.Wherethesecondtopofthedoubletopisslightlylowerthanthefirst,thenthiscanfurthersupportthelikelihoodofareversaloccurring.Theoppositecanbesaidtohappeninthecaseofadoublebottom.

Thedouble topordoublebottompatternsoftenformfollowing thestrongmovementofapreceding

trend.Theydevelopwhen thepriceon twooccasionsattempts tobreak through the same levelof eithersupport, or resistance and fails to do so at each attempt. By rebounding from the level of support orresistance, this typeofpricemovementillustratesthat tradersaretryingtotestwhetherthereissufficientappetitetopushthepricethroughthatparticularlevel.Failuretodosoontwosuccessiveoccasionsusuallysignifies that there is a lack of demand for higher/lower prices in themarketplace, whichwill often besufficienttodrivethepriceintoreversalandmarkthebeginningofanewtrend.

KeyLesson:Adoubletopismostlikelytooccuratthetopofastrongupwardtrend,andwhenboth

are seen together then the indication of the pattern becomesmore reliable. The same connection can beobservedbetweenastrongdownwardtrendandthedoublebottompattern.

TradingStrategy:Bydrawinganecklinelinkingthebasesofthetwopeaksformedinadoubletop,

thiscanbeusedtopositionyourentryorders.Byplacingtheorderjustbelowthislevel,itbecomespossibleto capitalise on a breakout if it occurs as predicted. The drop in price below the neckline will oftencorrespondtotheheightofthedoubletoppeaksfromtheneckline,andthiscanbeusedasausefulmeasurewhensettingaprofittarget.Thesamemethodcanbeemployed,justintheoppositedirection,whendealingwithadoublebottom.

In somecases, pricemovementsmayactually test the support or resistance levels on three separateoccasions,and,inthesecircumstances,thepatterncanbedescribedasatripletoportriplebottom.

6.8RoundBottomsandTopsAroundbottom is a long termchartpattern that canoccurovera fewmonthsoroveranumberof

years.Itisareversalpatternthatformsasasteadycurvedtroughindicatingthelong-termtransitionfromadownward trend toanupward trend.This typeofpatternwilloftenoccur inconjunctionwith improvingfundamental evidence thatwould suggest a currency is gradually improving in strength andquality.Theoppositecanalsobefoundwhenanupwardtrendgraduallytransformstoadownwardtrendwherebythepatterncreatedisreferredtoasaroundedtop.

6.9ChartPatterns-ConclusionsAswehaveseenchartpatternsareanextremelyusefulpartofanycurrencytrader’stoolbox.Whilstit

mayseemthatspottingthemcanproveadifficulttask,bytakingthetimeandpatiencetothoroughlylearnandobservewhenandhowthesepatternsarelikelytooccur,theyshouldgraduallybecomeavitalelementofeverydaytechnicalanalysis.Overtimetheseskillswillallowyoutomoreaccuratelydeterminecurrentmarketconditionsandtomakeappropriatedecisionsastowhatcouldhappeninthefuture.

Key Lesson: Outlined below is a brief summary recapping the different chart patterns and

highlightingwhethertheyfallintothethreecategoriesofcontinuationpatterns,reversalpatterns,orbinarypatterns:

ContinuationPatternsThepresenceofacontinuationpatternsuggeststhatpriceswillcontinuetofollowthedirectionofthe

precedingtrend.-RisingWedge-FallingWedge-BullishRectangle-BearishRectangle-BullishFlag/Pennant-BearishFlag/Pennant

ReversalPatternsAreversalpatternsignalsthatthereislikelytobeachangeinthedirectionofpricemovementaway

fromtheprecedingtrend.-HeadandShoulders-InverseHeadandShoulders-RisingWedge-FallingWedge-DoubleTop-DoubleBottom

BinaryPatternsAbinarypatternrepresentsaperiodofconsolidation,afterwhichthemarketmayrespond,bydriving

pricesineitherdirection.Thiscouldmeancontinuationoftheprecedingtrendsorleadtoareversalofthattrend.Onlyoncethepatternhasbeencompletedandabreakoutoccurscanthenewtrendbeidentified.

-SymmetricalTriangle-AscendingTriangle

-DescendingTriangle

Chapter7:MovingAverages Thetermmovingaveragereferstoamethodofanalysisthatcanbeusedtosmoothoutthefluctuationsinpricemovementoveragivenperiodoftime,soastoprovideaclearuncomplicatedrepresentationofthecurrencymovementsduringthatperiod.

When a currency pair is illustrated using a normal chart that plots all the oscillations in price

movement, the level of detail can sometimesmean that it is difficult to seewhenanunderlying trend isforming or to identify opportunities for trading.Moving averages help to reduce these fluctuations byplottingonlyaveragevalues,resultinginamuchsmootherchartedrepresentation.Thesecanbemoreeasilyreadandhelptounderstandthemovementthatisoccurringovertheperiod,ultimatelymakingiteasiertospotanycoretrends.

KeyLesson:Amovingaverage iscalculatedbyusingtheaverageclosingpricesforacurrencypair

overtheprevious‘x’numberofperiods.Therearedifferent typesofmovingaveragewhichcanbeemployed.Themorepricesareaveraged,

over longer periods of time, then the smoother the resulting trend line that is produced. Generally, thesmootherthemovingaverage(thelongertimeframeoverwhichithasbeenaveraged)thenthesloweritisto react toshort termprice fluctuations.Conversely, themore rugged the trend lineofamovingaverage(oneaveragedoutoverfewertimeperiods)thenthecloseritwilltrackshort-termchangesinprice.

Movingaveragesarea laggingindicator,whichmeans theydonotprimarilypredictnewtrendsbut

servetoconfirmandsupporttheidentificationoftrendsoncetheyhavebeenestablished.Therearetwomainclassesofmovingaverage:Simpleandexponential.7.1SimpleMovingAverage(SMA)Simplemovingaveragesare,asthenamesuggests,thesimplesttypeofmovingaveragetocalculate.

Wherebyyouwouldsimplyadd‘x’numberofclosingpricestogetherandthendivideby‘x’.Thevalueof‘x’willdependuponthenumberoftimeperiodsoverwhichyouwishtoaveragetheprice.

KeyLesson:Shouldyouwishtocalculatea tenperiodmovingaverageonaone-minutechart, then

youwould take the closingprices for eachof the last tenone-minuteperiods, add themall together anddividebythetotalnumberofperiods,whichinthiscasewouldbeten.Whenusingchartingsoftware,thenthemovingaveragewillberepresentedbyalineanddrawnonthechartaccordingly.Chartingsoftwarewilloftenabbreviateanylabelsappliedtoreadinthefollowingformat-10SMA.Thenumbersimplyreferstotheperiodsoverwhichthemovingaveragehasbeencalculated.

Whilst most charting software will calculate moving averages on your behalf and plot them

accordingly as overlaysonyour currency charts, it is important to understand theunderlyingmethodbywhich they are calculated, in order to appreciate how they can be used effectively as a part of dailytechnicalanalysis.Knowledgeofthemovingaverageindicatorandhowitworksmakesiteasiertoadjustandpersonaliseitscomponentelementsinordertofitwithindividualtradingstrategies.Chartingsoftwarewillallowyoutoadjustandeditthespecificcriteriaofanymovingaverageyouuse,dependinguponyourown specifications, so it is crucial to knowhow the figures usedwill affect the indicator andultimatelywhattheresultswillactuallyshow.

Thesimplemovingaverageprovidesaretrospectiveviewpoint,owingtothefactthatitiscalculated

and based on past figures and from events that have already taken place. It, therefore, should not beinterpretedasan‘allseeing’predictoroffutureevents.However, it isextremelyeffectiveathighlightingemerging trends and can provide very useful signposts that relate to possible future price movements.Experiencedtraderswillusemovingaverages incombinationwithotherindicatorsandtechnicalanalysistechniques inorder tohelp themgainagreaterunderstandingofmarketconditionsand identifypotentialtradingopportunities.

Whilstsimplemovingaveragesareveryusefulasameansofviewingthebroadermarketconditions,

theycan,attimes,beobscuredbyrapidfluctuationsorspikesinprices.Ifthereisasuddenpricemovementthat only results in temporary price peaks, then this can distort the accuracy of the moving average,especially over shorter periods of time.This in turn can result in the identification of false trends. It is,therefore important to alwaysmonitor actual pricemovements in conjunctionwith anymoving averageindicators.

7.2ExponentialMovingAverage(EMA)Theexponentialmovingaverageindicatorhelpstoreducesomeoftheproblemsthatcanoccurwith

simplemovingaverages.Thistimethecalculationisadjustedinordertoreducetheeffectthattemporarypricespikesmayhaveontheaccuracyoftheindicator.

The calculation of exponential moving averages does this by placing more emphasis on the price

valuesofrecenttimeperiodsandlessonthosethatarefurtherinthepast.Thismanipulationofthefigureshelpstoproduceamoreaccurateillustrationofthetradingactivityhappeningintheshort-term.Ultimately,thisprovidesabetteroverallpictureofcurrentmarketconditions.

Asaresult,exponentialmovingaverages(EMA’s)aremuchmoreresponsivetotheinfluencesofnewinformation than theirSMA counterparts.Traders generally tend to preferEMA’s specifically because ofthisgreaterlevelofresponse.

7.3UsingMovingAveragesMoving averages are an effective indicator of the current market conditions and should be used

regularlyasacomponentofyourtechnicalanalysistodiscoverunderlyingpricetrendsandtorevealtradingopportunities.

Whereamovingaverage isheadinginanupwarddirectionandisbelowtheactualpricevalue,then

this should signal that there is a prevailing upward trend. When the moving average is heading in adownwarddirectionbutremainsabovethecurrentcurrencypricevalue,thenthissuggeststhepresenceofadownwardtrend.

Whilsttheabovestatementsarebothtrue,inrealityitisnotalwayssostraightforwardtopractically

usesuchdeterminations.Ifyouareonlyusingoneparticularmovingaverage,thenitcanbesusceptibletoproviding false indications and unreliable breakout signals. A false indication, for example, may occurwhenanunexpectednewsitemoreventcausesshort-termreactionamongstmarketparticipants,resultinginpricemovementsintheoppositedirectiontotheprevailingtrend.Inmanycases,areactionlikethiswillbeshortlived,meaningthatoncethemarkethasdigestedthenewsstoryorevent,pricestendtorevertbacktotheearliertrend.Becausethemovingaveragetakeslongertoreacttotheevent,thelinerepresentingitonachartcanenduponthewrongside,aboveorbelow,ofthelinebeingusedtoplottheactualcurrentprice.Inthiscase,ifyouweretofollowtheaxiommentionedearlier,thenitwouldsuggestthatareversaloftrendcouldbeoccurring.However,inthesecircumstancesthatassumptionwouldbewrong.Thepricemovementonlybriefly reacted to thenewsbeforecontinuingwith theprevailing trend,meaning that thesignalwasfalse.

Toavoidanyfalsesignalsandconfusion,mosttraderswilloftenusemorethanonemovingaverageat

anyonetimeinordertoincreasethereliabilityoftheindicationtheyprovide.KeyLesson:Forexample,plottingtwomovingaveragesonachartwillprovideamuchclearerand

morereliableindicationofwhenthepriceistrendingupordownthanifyouweretosolelyrelyuponjustone.Todothis,itisnecessarytoplottwomovingaverageswithsufficientlydifferenttimeperiodsasthiswillhelptoprovideaclearerpictureofmarketconditions.Whenafastermovingaverage(10SMA)andaslowermovingaverage(20SMA)aresimultaneouslyplottedonachartthengenerally,whenthefasterMAisabovetheslowerMAitwillindicatethatthepriceisinanupwardtrend.Inadownward,trendthenthefasterMAshouldbebelowtheslowerMA.

7.4MovingAveragestoDetermineMomentumAnysuccessfultradingstrategyrequiresamethodtogaugepricemomentum(relativestrengthofany

movement)inordertohelpidentifypotentialmarketmovementandultimatelydetermineprofitabletradingevents.Movingaverages are seenbymanyasanextremelyeffectivemeasureof thismarketmomentum.ThetechniqueofusingmovingaveragesMAstodeterminethismomentumistoapplyandutilisemultipleMAs that have been calculated using different time frames. In general, short-term momentum can beidentifiedusingMAswitha timeperiodof20daysor less;medium-termmomentumcanbegaugedwithMAsof20-100days;andlonger-termmomentumcanbeseenusingMAswithperiodsofgreaterthan100days.

In practice,manyForex tradeswill be conducted overmuch shorter periods than this, however thesameprinciplesapply.

Agoodmeasureofoverallpricemomentumistoplotthreedifferentmovingaveragesonachart,each

withadifferent timeperiod, ideally representing the long-termmomentum (longer timeperiod),medium-termmomentumandshort-termmomentum.TheinteractionbetweenthiscombinationofMAswillhelptogiveaclear signalas towhether themarket is inanupward,ordownward,phaseaswellasprovidingameasureoftherelativestrengthofthatpricemovement.

Whentheshort-termMAislocatedabovetheotherlonger-termMAsonthechart,thenthiswilloften

indicate a bullish upward trend present in the market, especially when the short-termMA is divergingupwards and away from the other two. When the short-termMA is below the other two longer-termindicatorsand isdivergingdownwards, then this shouldprovidestrong indications that there isabearishdownwardtrendprevailing.

7.5MovingAverageCrossoversTraders use the interactions between long and short-termMAs in order to determine buy and sell

signals.When a short-termMA crosses above a longer-termMA, also known as aBullishCrossover, itgenerally suggests growingmomentumwithin themarketplace. It also highlights that prices in the shorttermarerisingatafasterratethantheyhavedoneoverthelongerperiod.Overall,theindicationisusedbytraders as abuy signal.Conversely,when a short-termMApasses below a longer-termMA then this isknownasaBearishCrossover.Inthiscircumstancetraderswillusethecrossoverasanindicationthatthereis fallingmomentum and that short term prices are reducing in relation to longer term prices. Thiswillgenerallybeemployedasasellsignal.

7.6MovingAverages–SupportandResistanceMovingAveragescanalsobeusedasdynamiclevelsofsupportandresistancethatadaptdepending

uponthecurrentpricemovement.

Chapter8:IndicatorsandOscillators

Thekeytoalltechnicalanalysisistotryandidentifytrendsinpricemovementsastheyhappen.Therearemanytoolsavailabletoatraderwhichcanhelptoachievethis.Thesetoolstendtofallintotwodistinctcategories of indicators and oscillators. They provide useful information relating to where trends areoccurring,howtheyaredeveloping,andsuggesthowthemarketmayreacttothesemovementsinthenearfuture.

Asa trader, knowledgeof these toolswill helpyou tomore easily andaccurately identifypotential

trendsandtouncoversignalsthatwilldeterminewhen,andwhere,toenterandexitthemarketwitheachtrade.

Tradingsuccessrequiresagoodworkingknowledgeofallthesetools,inadditiontoanunderstanding

of how they are calculated, charted, and what they ultimately mean. Trading strategies will often usecombinationsofdifferentindicatorsandoscillatorstotrytoincreasereliability.

8.1Leadingv.LaggingIndicatorsThere are twomain types of indicator:Leading indicators (also known asoscillating indicatorsor

simply oscillators) or lagging indicators (also known as trending or momentum indicators). Laggingindicators use price information in order to determine trends after they have begun, whereas leadingindicatorsuse thesame information toattempt todetermine trends inpricemovementsbefore theyhavebegun.

Themaindifferencebetweenthetwotypesofindicatorisrelatedtothereliabilityoftheresultsthey

produce.Ifitwerepossibletouseleadingindicatorsaccuratelyallthetime,thentheywouldessentiallybethe‘holygrail’ofForextrading.Itwouldbepossibletoforeseenewtrendsbeforetheybeginandtoprofitfromthepredictedmovementseachandeverytime.However,unfortunatelythisisnothowthingsworkinreal life. In reality, leading indicators,whilst extremely useful, are also notoriously difficult to interpretaccurately and are regularly prone to providing unreliable indications. Theywill often predictbreakoutswhicheitherfail toactuallyoccur,orwhichdonotproduceanysignificantchangeinprice.Despite this,leading indicators are still a vital element of any trader’s toolbox, because when combined with otherelements such as fundamental analysis, orwhenused in conjunctionwith supporting lagging indicators,theymakeitpossibletopredictwhenandhowpricesmaychange.

Laggingindicators,whichareretrospectivebynature,areconsiderablymorereliableastheyrelyupon

information and events that have already occurred as ameans of revealing underlying trends.This doesmean,however,thattheycanonlybeusedtoidentifytrendingphasesaftertheyhavebegun,whichmeansthatitcouldbepotentiallytoolatetobeabletoprofitfromthem.

8.2LeadingandLaggingIndicators-SummaryKeyLesson:Themostimportantthingtoremember,whenitcomestousingindicatorsofanytype,is

thattheycanonlytellyoueitherwhatthemarkethasbeendoing,orwhatthemarketmaydointhefuture,baseduponanalysisofthehistoricmovementofthecurrency.

All indicators have been developed to interpret price information in slightly different ways and,

therefore,theyreactdifferentlytocertainconditions.Theyarealsodevelopedundertheassumptionthatthemarketwillalwayshavethesameresponsetoparticularbehaviourwithinthepricemovement,andthisissimplynotthecase.

TradingStrategy:Inordertosuccessfullyidentifypotentialtrendsandfuturepriceactivityitisvital

to use a variety of both lagging and leading indicators.When this combination of indicators producesconflictingsignalsrelatingtowherethemarketmaybeheading,thenyoushouldavoidmakingatrade.

Only trade when all the criteria of your individual trading strategy are present and when all your

differentindicatorsandsourcesofinformationreinforceeachother.8.3BollingerBandsBollingerbandsareaformoftechnicalanalysisproducedusingthevaluesoftwostandarddeviations

awayfromaparticularmovingaverage.Itdoesn’tmatterwhichMAisused,butbychartingthetwolinesderived,usingthestandarddeviations,itcreatesanupperandlowerbandtothetopandbottomsidesoftheMA,whichwilltrackthepricemovement.

Whilst thisdescriptionmaysoundcomplicated, in reality,all thenecessaryrequiredcalculationsare

performedbyyourchartingsoftwareandthebandsareplottedautomatically.Itissufficienttohaveonlyabasicknowledgeofhowthefiguresarederived,what ismore important ishavinganunderstandinghowthesebandscanbeeffectivelyused.

Bollingerbandsprimarilyprovideastrongindicationofmarketvolatility.Whenthemarketbecomes

morevolatile,thebandswillwidenandmoveawayfromtheMAandwhenthereislessvolatility,thebandswilltightentowardstheMA.

The relationship between theMA and theBollinger bands can also provide information relating to

whetherthecurrencyisbecomingoverboughtoroversoldatanygiventime.Astheactualcurrencypriceapproaches theupperband then thiswill suggest that the currency isbecomingoverbought.Conversely,whenthepricemovestowardsthelowerbandthenitsuggeststhatthecurrencyisbecomingoversold.

KeyLesson:Bollingerbandsareextremelyusefulastheyindicatetherelativelevelsofvolatilityin

pricesand,assuch,provideagoodmeasureofmarketconditions.Trading Strategy: As well as being an extremely important indicator, Bollinger bands can also

provideusefultradingsignals.Thefirstthingtobeawareofisthatthepriceshouldtendtomigratetowardsthe centreof the enclosingBollingerbands.Knowing this,when thepricedoes start to approachoneor

otherof thebands, then it is likely that, if ithits them, it shouldsubsequently reboundback towards thecentre.This occurs because thebands act like dynamic levels of support and resistance.This pattern ofreboundingisespeciallyevidentwhenthereisnocleartrendandthepricerangesbetweenthesetwolevels.Thelongerthetimeframeused,thenthemorereliableBollingerbandstendtobe.

WhenthereisatrendthenBollingerbandscanalsobeused.Asthebandsbegintoclosetogether,this

isusuallyagoodindicationofanimminentpricebreakout.Whenthepricebreaksthroughtheupperband,thenthiswilloftensignifythestartofanupwardpricetrend,andsimilarly,whenthepricebreaksbelowthelowerband,thenthissuggestsadownwardmovementinprice.

8.4MovingAverage–ConvergenceandDivergence(MACD)The termMovingAverageConvergenceandDivergenceoften referred toby theacronymMACD is

one of themost commonly used indicators amongst Forex traders.Whilst the name seems to suggest apotentially complicated analysis process, MACD is actually a relatively simple tool, that when usedeffectively,candetermineshorttermpricemomentum.

To appreciate how the MACD tool can be implemented, it is important to fully understand the

relationshipbetweenlongandshort-termmovingaverages.Asdiscussedpreviously,traderswillconsidertheinteractionsbetweenlongandshort-termMAsinordertodeterminebuyandsellsignals.Whenashort-termMAcrossesabovealonger-termMA,alsoknownasaBullishCrossover,itgenerallysuggestsgrowingmomentumwithinthemarketplace.Italsohighlightsthatpricesintheshorttermarerisingatafasterratethan they have done over the longer period. Overall, the indication is used by traders as abuy signal.Conversely, when a short-termMA passes below a longer-termMA then this is known as a BearishCrossover. In this circumstance traders will use the crossover as an indication that there is fallingmomentumandthatshorttermpricesarereducinginrelationtolongertermprices.Thiswillgenerallybeemployedasasellsignal.

The MACD indicator utilises this relationship between MAs by analysing the convergences and

divergences. In practice, this is achieved by subtracting the value of the long-termMA from that of theshort-termMAandvisuallyrepresentingtheresultsonachart.ThetimeperiodsofthecomponentMAscanbeadjustedtofitwithindividualtradingstrategy,however,generallythedefaultperiodswillbesufficient.

MostchartingsoftwarewillpresentMACDdataintheformofahistogramtomakeiteasier toread

andunderstand.Key Lesson: When the MACD tool produces a positive value (a result of the short-term MA

performingabovethelong-termcounterpart),thenthisindicatesthatthereisincreasingupwardmomentumsuggestingagoodtimetobuy.Alternatively,whentheoppositeistrueandtheMACDproducesanegativevalue,thenthissuggestsfallingmomentumandshouldbeusedasapotentialsellsignal.

Trading Strategy:An effective method of usingMACD in order to provide strong buy and sell

transaction signals, is to combine theMACD plotwith that of anothermoving average.By plotting thisseparateMA alongside theMACD, it can be used to accurately chart when momentum is shifting. AstandardformofthisprocessusesanMAcalculatedwithanineperiodaverageoftheMACDvalues.Whenplottedtogether,theseprovidewhatisknownasatriggerlineorsignallineasthepointsatwhichthetwocrosscanbeusedtoeffectivelyprovidetransactionsignals.

8.5RelativeStrengthIndexTheRelative Strength Index (RSI) is a ratiowhich can be used to determinewhether themarket is

showingsignsofbeingoverboughtoroversold.Itisatechnicalindicatorthatcomparesthelevelsofrecentgainsagainstthelevelsofrecentlosses,inordertoascertaincurrentmarketconditions.

TheRSIiscalculatedusingthefollowingformula:

RSI=100–100/1+RS**RS=Averageofxdays’upcloses/Averageofxdays’downcloses.TheRSIproducesafigurerelativeto100.RSIfiguresofbelow30suggestoversoldmarketconditions

whereasfiguresabove70typicallyindicateoverboughtmarketconditions.TradingStrategy:RSIcanbeusedtodeterminepotentialreversalsinpricemovement,asaresponse

to either the oversold or overbought conditions occurring in the market. For example, when prices aretrendingdownwardwithfallingvaluesandtheRSIsuggestsafigureofbelow30,thiscanindicatethatthecurrencyhas beenoversold andhas becomeundervalued.As such, it is possible that a reversal in trendcouldbeimminentastradersrealisethatpriceshavebecomerelativelycheapandrestartbuying.

TheRSIisalsoaveryusefultoolforconfirmingwhetheranupwardordownwardtrendhasbegunto

form.Where there isapossibleupwardtrend, thentheRSIshouldshowafigureofabove50 insupport,whereasinapossibledownwardtrendthefigureshouldbebelow50.

KeyLesson:LargeswingsinthemarketcanresultinamisleadingRSI,soitisimportanttobeawareofthisandtosimultaneouslyuseotherindicatorstoreinforceRSItradesignals.

8.6StochasticOscillatorThe stochastic oscillator is another technical indicator that again provides insights into price

momentum,particularly in relation tomarketconditions,whereacurrencybecomeseitheroverboughtoroversold.Itprovidesanindication,suggestingwhentheremaybeapotentialreversalofprice,owingtoacurrencybecomingeitherunder,orovervalued.

Astochasticindicatorcomparesthecurrentclosingpriceagainstthepricerangeoveragivenperiodof

time.The ideabehind thisbeing that, inanupward trend,prices tend toclosenearer to thehighsof thatsessionandinadownwardtrendpricestendtoclosenearertothelowsofasession.

It is not essential to understand the formula for calculating the stochastic oscillator due to its

complexity,butyoushouldbeawarethatchartingsoftwarewillgenerallyplottheresultingrepresentationastwolinesonaseparatesectionunderthemainchartinyoursoftware.Thesecanbeusedtoanalysewhenthemarketisinoverboughtoroversoldconditions,and,assuch,whenareversaloftrendmaybeexpected.

TradingStrategy:Whenthetwolinesofthestochasticoscillatorreadabove80thenthisisagood

signal that thecurrencyhasbeenoverboughtand thata reversal toadownward trendcanbeexpected tooccur.Whenthetwolinesofthestochasticoscillatorarebelow20onthechartthentheoppositeistrueanditislikelythatthecurrencyhasbecomeoversoldandundervalued.

8.7ParabolicSARIndicatorTheparabolicindicatorisatechnicalanalysistoolthatusesamethodcalledstopandreverseorSAR

asameansofdeterminingwheretoplaceentryandexitorders.Whilsttheindicatorcanbecomplicatedtocalculate,itisextremelysimpletounderstandanduse.The

parabolic SAR is often visually illustrated in charting software using dots placed above and below thechartedprice,whichrepresentpointsofpotentialreversalgiventhecurrentpriceconditions.Thedotswillappeareitherabovethepriceinanupwardtrend,orbelowthepriceinadownwardtrend.

TradingStrategy:ThesimplicityoftheparabolicSARissuchthat,whenthedotsappearbelowthe

priceonachartthen,theysuggestabuysignalandwhentheyareabovethepricelinetheysuggestasellsignal.Thepositionsofthedotscanalsobeusedtosettrailingstoplevelsandtoindicatewhentoexitatrade.

8.8AverageDirectionIndexThe average direction index (ADX) is another oscillating indicator, which is primarily used to

determinethemomentumpresentincurrentmarketconditions.Ratherthantryingtoidentifythedirectionoftrends,theADXcanbeusedtomeasuretherelativestrengthofanexistingtrendandwhetherthereisthecontinuingmomentumnecessarytokeepthattrendgoing.

TheADX is calculated using figures from twomeasures of pricemovement, the positive direction

indicator+DIthatprovidesameasureofupwardpricetrendsandthenegativedirectionindicator–DIthatprovidesameasureofdownwardpricetrends.

The actual calculation of ADX for the purposes of this book will not be detailed. However, it is

sufficienttoknowthattheindexitselfproducesafigurethatwillrangebetween1and100.Whentheindexproducesafigureoflessthan20thenitindicatesthattheparticulartrendisrelativelyweak,whereaswhenthevalueoftheindexisabove40-50thenitsuggeststhatthetrend,eitherupordown,isrelativelystrongandthatthereissignificantmomentumnecessarytomaintainthepricemovement.

WhentheADXcrossesabovethe40range,butfails toremainaboveitforanysignificantperiodof

time,thenthisalsosuggeststhatatrendhaspotentiallyrunitscourseandthatareversalcanbeexpected.WhentheADXcrossesabove20intheindexlevel,itoftenindicatesthatanewtrendcouldbedeveloping.

KeyLesson:TheonlyproblemwiththeADX is that itdoesnotprovideanindicationofwhetherto

buy,orsell.Itis,however,anextremelyusefultoolfordeterminingwhetheratrendisstrongandlikelytocontinue,aswellas,whenatrendbeginstosubsequentlyweaken.

TradingStrategy:UsetheADXasatooltoillustratewhenaparticulartrendisbeginningtodevelop

and when there are strengthening trends of which you are in a position to take advantage. If theADXstagnatesaroundalevelof20,thenthiswouldsuggestthatthepriceismerelyrangingbetweenconfiningboundaries. As theADX rises above 20, then this should be taken as a signal that a new trend, eitherupwards,ordownwards, isbeginning todevelop. If theADX continues topushabove the40oreven50levels, then this can be taken as significant evidence that a trend, supported by solid momentum, isoccurring.OncetheADXbeginstorangeloweragain,thenthiswouldbeagoodtimetoexitanytradesandlockintheresultingprofits.

8.9CommonIndicators–ConclusionsAswehaveseen indicatorsareanextremelyusefulsetof toolsthatcanbeusedtohelptarget trade

entriesandexits;identifytrendsandpricemovements;andhelpprovidereliabletradingsignals.Thewaytouseindicators,effectively,istounderstandhowthemechanismsworkandwhattheymean

in relation to the market conditions. By having an understanding of the fundamental nature of eachindicator,thenthisensuresthatyourecognisethestrengthsandweaknessesofthetoolsandtheindicationstheycanprovide.

Aswe havementioned previously, successful traderswill often develop trading strategies that rely

uponmultiplecombinationsofthese indicatorsandusethemconcurrently.This,ultimately, increasesthe

chancesoftheanalysisprovidingaccurateandreliabletradingsignals,andreducestheoccasionswhereaprofitabletransactionmaybemissed.Multipleindicatorsshouldreinforceeachother,strengtheningtradingstrategy,andwillespeciallydosowhentheyarecombinedinwaysthatprovideinformationondifferentelementsofthemarket.

TradingStrategy:Themosteffectivecombinationsshouldcompriseindicatorsthatcanhelpidentify

trendsmixedwith those that help to determine the levels ofmomentum supporting that particular trend.Belowareacoupleofexamplesofhowyoumaycombinesomeofthemorecommonindicators:

-StochasticIndicator+BollingerBands-RSI+MovingAveragesEach trader will ultimately develop their own particular combination of indicators. Many have

searched in vain for the ultimate strategy thatworks every time, but the reality remains that there is no‘magicstrategy’thatdeliversprofitsoneachtransaction.Thebestwaytoprofit,fromtheuseofindicators,istolearnfromexperienceanddiscoverhowtheyrespondtodifferentmarketconditions.Fromthis,itwillthenbecomepossibletodevelopstrategiesthatworkforyou.

KeyLesson:Chartingsoftwareshouldbeabletocalculateandplotallofthesecommonindicatorsand

manyothers, automatically, onyourbehalf. It iswise to spend time learninghoweach indicatorworks,especially those that have not beenmentioned here. They are constantly being developed, adjusted andimproved.Therearemanyresourcesonlinethatcankeepyouupdatedwhennewindicatorsarepublished,andwhichwillallowyoutodownloadindicatorsnotincludedinyourstandardchartingpackage.

Chapter9:Fibonacci

Fibonacciconceptsareparticularlyrelevanttomanytypesoftechnicaltrading,anditisimportanttolearn andunderstand the importanceofFibonacci ratios, as they areveryoften applied inmany tradingstrategiesoranalysistechniques.AlthoughtherearedifferentvariationsoftheFibonacciratiosandvariousmethodsbywhichtheycanbeused,therearetwomainmethodswhichwewillconsider:Retracementandextension.

Fibonacci ratios, described simply, are sequences of numbers that tend to relate to the naturally

occurringproportionsbetweenelementsoftheuniverse.DiscoveredbyLeonardoFibonacci,theratiosallstemfromthefollowingcommonnumbersequence:1,1,2,3,5,8,13,21,34,55,89,144...

After the first fewnumbers, ifyouwere tocalculate the ratiosbetweenconsecutivenumbers in this

sequence then thiswould always produce a figure of 0.618. If youwere tomeasure the ratios betweenalternatenumbers in the sequence, thenyouwouldcontinuallyget thenumber0.382.Thesenumbers, inadditiontoothers,areknownasthegoldenmeananditisthesefigureswhichareusedtoderiveFibonacciretracementandextensionlevelsthroughouttechnicalanalysisoftheForexmarket:

Fibonacciretracementlevels:0.236,0.382,0.500,0.618,0.764Fibonacciextensionlevels:0,0.382,0.618,1.000,1.382,1.618KeyLesson:Itisnotnecessarytofullyunderstandhowtocalculatethissequenceofnumbers,merely

toknowthattheyareusedregularlybytraderstoselectanddeterminelevelsinthemarket,wherebyitisexpected that somethingwillhappen.This, in turn,means that theycanbeused toplan tradingstrategy.ChartingsoftwarewillcalculatebothFibonacciretracementandextensionnumbersandapplythemtoyourcharts

TradersusetheFibonacciretracementfiguresaslevelstodetermineareasofsupportandresistance.

Theseprovideinformationastowheretosetentryandexitpointsandwheretoplacestops.TraderstendtouseFibonacciextensionlevelsasameansofdirectingwheretosetprofittargetlevels.Becausesomanytradersuse these techniques thenpricesveryoftenreact inpredictablewayswhen

theselevelsarereachedorpassed.

9.1FibonacciRetracementTheFibonacciretracementmethodisusedtoidentifylevelsofsupportorresistancebaseduponthe

sequenceofvaluesmentionedearlier.It isanextremelyusefultoolfortradersasitcanidentifytheentryandexitpositionsfortrades,thetargetpricesoftransactions,andwheretolocatestoplosses.

The underlying premise ofFibonacci retracement is that, following a significant movement up or

downinprice,thenewlevelsofsupportorresistancecanbecalculatedbaseduponvaluesassociatedwiththispricemovement.Yourtradingsoftwareshouldhaveabuilt-inFibonacciretracement toolwhichwillplothorizontallinesonacharttorepresentthelevelsofsupportorresistancecalculatedusingthekeyratios–23.6%,38.2%,50%,61.8%,and100%.

KeyLesson:Theretracementtoolworksbestinatrendingmarket.Itfollowsthat,inanupwardprice

swing, you shouldbuy at the retracement support levels and that in a downward trendingmarket, youshouldsellattheretracementresistancelevels.

9.2FibonacciExtensionFibonacciextensionisatoolthatextendstheFibonaccilevelsbeyondthestandardretracement100%

levelandcalculatesnewpotentiallevelsofsupportandresistance.

Chapter10:TradingCycle

The fact that repeated patterns often develop,within currency pricemovements, is the fundamentalbasisoftechnicalanalysisandtechnicaltradingmethods.Onepatternthatisveryimportanttounderstandand learn is the basic trading cycle. By knowing how the trading cycle works and often develops, itbecomes possible to recognise where the price movement is within the cycle. This, in turn, can guidetradingstrategybyprovidingusefulsignpostsrelatingtowhenandwheretradeentryandexitpointsshouldbeset.Anunderstandingofthepricecyclesequencewillalsohelpimprovetheuseoftradingtools,suchasindicatorsandoscillators.

Thebasictradingcyclecanbeseeninthediagrambelow:

KeyLesson: In reality the trading cycle rarely develops in such a uniform pattern, andwith such

regularity,butitisimportanttounderstandthebasicelementsofthecycle.Thetradingcyclealsoformsthebasisforanumberofmorecomplexpricepatternanalysistheories:

TheElliotwavepatternandHarmonicwavepatterns.

Chapter11:AdvancedChartPatterns

Theaimofalltechnicalanalysisistheearlyidentificationofpatternsthathavethepotentialtoprovidean indication as to where the price of a currencymay bemoving in the near or longer-term future. Inadditiontothechartpatternsthathavealreadybeenseen,therearemanyadditionalanalysistechniquesthatcan be used to predict price movements over longer periods of time. These types of analysis tend toconsider the patterns of price cycles and wave patterns that appear with predictable regularity withincurrencymovements.

11.1ElliottWaveTheoryTheElliottwavetheoryisaconceptdevelopedbyRalphNelsonElliottinthe1920s,which,although

firstappliedtostockmarketfluctuations,canbesimilarlyappliedtothetechnicalanalysiscurrencies.The theory, behind thewave pattern, challenges the historical idea that financial markets move in

chaotic patterns and replaces thiswith the theory thatmarkets actually fluctuate in repetitivepatterns orcycles.Thesetendtobedirectlyrelatedtotheinfluencesaffectingtraders,atanyparticulartime,andtotherelatedmasspsychologyofmarketparticipants.Elliottdiscoveredthat,theupward,ordownward,swingsinmarketpricestendtorespondtothismasspsychologyproducingsimilarrepeatedpatternsoverdifferentperiodsoftime,whichhecategorisedaswaves.

TheElliottwavepatternisanindepthanalysisoftheseparticularwaves,whichworksusingfractals.

These are essentially mathematically elements that will infinitely repeat themselves on a constantlyreducingscale,orsimply,apatternwithinapatternwithinapattern.ByusingfractalsElliottwasabletosuggest that financialmarkets are structured in the sameway, producing repeated patterns, which, overtime,becomepredictable.

Elliottdeterminedanimpulsivewave,i.e.onewhichmoveswiththepredominatetrend,hasfivemain

elementswhichshouldbeuniqueand identifiable.Healsosuggested that, ineachof thesefivewaves, itshouldbefurtherpossibletoidentifyastructureformedfromthesamepatternbutonasmallerscale.This,intheory,shouldbecontinuallyrepeatedoversmallerandsmallerscalesreflectingthefractalstructure.

Price movements can be reduced into trends, corrections and sideways movement, and it is the

relationshipbetweenthesefactorsthatgeneratestheElliottwavepattern.Elliottdeterminedthat,followinganupwardordownwardtrend,thereisalwaysacorrectionwhichproducessomemovementthatiscontra-trend.Henamedtheupward/downwardtrendelementofthepatternasimpulsivewavesandthecorrectingmovementascorrectivewaves.

TheseelementsformawavepatternthatElliottnamedthe5-3wavepattern.Brokendown,thismeans

that a complete cycleof theElliottwave should consist of5movements that follow thedirectionof theprevailingtrend,followedby3correctivemovementsthatwillmoveagainstthedirectionofthetrend.

This type ofwave pattern ismore difficult to identify through technical analysis than some of the

earlierpatternsconsidered.However,itisanimportantpatterntobeawareof.Withexperience,thistypeofpatternbecomesmucheasiertorecogniseaswillthetradingopportunitiesthatitcanpresent.

KeyLesson:ItisimportanttorememberthattheconceptbehindtheElliottwavetheoryisbasedon

fractalstherefore,the5-3patterncanbeseenrepeatedineversmallerelementsandcanbeobservedovermanydifferenttimeframes.

11.2HarmonicWavePatternsAnotherusefulcategoryofadvancedchartpatternsareknownasharmonicwavepatterns.Anumber

ofwhicharediscussedbelow:

11.3ABCDPatternTheABCDpatterncanappearineitherabullishorbearishsituation,whereABandCDareknownas

the legswhilst theBC segment is known as the correction or retracement. The size of each segment isrelated toFibonacciretracementvalues.FromtheAB segment, thesubsequentBC segmentshouldreachthe0.618level,followedbytheCDsegmentreachingthe1.272level.Asthepatterniscompletedthentheindication is that the price is set for a reversal, thus suggesting an opportunity to either buy or selldependingonwhetherthepatternhasbeenobservedinabullishorbearishtrend.

Key Lesson: The reliability of the ABCD pattern increases when the distance and time intervals

betweenABandCDareofasimilarvalue.

11.4Three-DrivePatternThethree-drivepatternisverysimilartotheABCDpattern.Themaindifferenceisthatthispatternis

representedbythreemainsegmentscalleddrivesandtworetracementsegments.Again,thepatternrelatestothekeyFibonacciretracementvalues.

Aswith theABCDpattern it is important to let the full three-drive pattern complete before taking

responsivetradingaction.KeyLesson:Thereliabilityof thispattern increaseswhenthe timeanddistancesof theretracement

segmentsareofsimilarvalues,andwhenthesecondandthirddrivesareofsimilarintervals.

11.5OtherHarmonicPatternsThere are a number of other harmonic price patterns that can be effectively used to predict and

indicate retracements and reversals. Each has a specific pattern that develops over time, and it can beextremelyusefultobeawareofeach.Thediagrams,below,highlightsomeofthemorecommonoftheseharmonicpatterns:

Key Lesson: With harmonic wave patterns it is important to always ensure that the full pattern

completesbeforetakingarelatedtradingposition.

Chapter12:Timeframes

InordertosuccessfullytradeForex,itisextremelyimportanttounderstandthenatureandrelevanceoftimeframes. This is because themarket reacts differently depending upon the period of time overwhichactivityisoccurring.Allchartingsoftwareallowsyoutomonitoranddisplaydifferenttimeframes:1min,5min,10min,1hour,4hours,1day,etc.Traderswillusedifferenttimeframestolookfor‘opportunity’inthemarket.

Deciding which timeframe to use is very much dependent upon individual preference and it will

generally reflectconditionssuchaspersonality, tradinggoals,andpersonalstrategy.Long-terminvestorsmayoftenbesatisfiedtoonlyconsiderdaily,orlongerperiodpricecharts,whereasdaytraderswillneedtousemultipletimeframesinordertomaximisethepossibletradingopportunities.

Choosingthe timeframesyouwishtouseasabasisforyour tradingstrategywilldependuponyour

individual requirements, but there are some general guidelines relating to how the various timeframesperform,thatshouldbeconsidered.

Shorter timeframes like the ‘one’or ‘five’minutechartingperiods’areextremelyfrenetic innature.

Movementhappensveryquicklywithpricesfluctuatingrapidly,sometimeswithnodiscernabletrend.Asatraderyoumustbeconstantlyalertastowhentomoveinandoutofindividualtrades.Thevolatilenatureofshorter timeperiods canbe extremely stressful to understand and interpret, and, as such, are oftenmoresuitedtoseasonedtraders.

Amedium-termtimeframesuchastheone-hourchartperiodprovidesalessstressfulenvironment,as

movement is often less rapid but still provides sufficient opportunities for regular trading activity. Theadditionallengthofthesessionmeansthat,asabeginner,youhavemoretimetointerpretandanalysethedataandthentomakesubsequenttradingdecisions.

Key Lesson: The only way to truly become comfortable with timeframes is to practise using a

combinationofthemandtothendecidewhichcanworkbestforyou.Onepointtoconsideristhatshortertimeframetradingoftenrequireslesscapitalandcanallowyouto

takegreateradvantageofleverage,italsooftenallowsyoutoutilisetighterstoplosses.Tradingoverlongertimeframeswilloftenrequiregreateravailablecapitaltocoverpotentialswingsinthemarket.

12.1MultipleTimeframesUsingonlyone timeframe can result inmisleadinganalysis.Forexample,a traderusinga5minute

chart for a particular currency pairmay decide that their analysis suggests evidence of a risingmarket.However, another trader looking at the samecurrencypair using aonehour timeframemay see that themarket is actually in an overall downward trend. This is why it is important to employ the concept ofmultipletimeframes.

By usingmore than one timeframe, it becomes possible to gain a greater understanding ofwhat is

happening across the whole of the market. In practice, this often means selecting a primary timeframewhichwill act as the foundation for your trading strategy. For example, should you decide to use a 10minutechartasaprimarytimeframe,youwouldusethisasthebasisforplottingallyourrelevanttechnical

analysesand indicators to identify trendsandtradingopportunities.Youwould thensupport thisprimarytimeframewithadditionalsupportingtimeframes.Theseshouldconsistofoneshortertimeframe-1minutechart, and two longer timeframes - 1 hour and 4 hour charts.Most charting softwarewill allow you todisplaymultiplecharts,sidebyside,onscreen,whichmakescomparisonrelativelyeasy.Analysisof thesupportingtimeframesshouldhelptodeterminewhetherthereiscorroboratingevidencethatreinforcesanyconclusionsyouhavemaderelatingtotheactivitypresentintheprimarytimeframe.Thisshouldimproveyourunderstandingofhowthemarketisbehavinginitsentirety,andaidtheaccuracyofdecisions.

Chapter13:TradingStrategy 13.1Breakouts

Aswell as looking for trends in themarket, one of the elements that a trader should constantly be

lookingforisthebreakout.Breakoutsoccurwhenthepricepassesthroughalevelofsupportorresistanceandcontinuestomoveinthatparticulardirection.Thistypeofactivitycanbeproducedasaresultofmanydifferenteventsandwillpresentaseitheracontinuationofaprecedingtrend,orasthestartofanewtrend.When truebreakoutsdevelop, there isoftena rushof tradingactivityas traders seek tocapitaliseon themovement,andthis,initself,oftenpushesthepricefurtherinthenewdirection.

In a period of consolidation they occur as a continuance breakout forming in the direction of the

preceding trend. Prices can also breakout at the beginning of a new trend, if there is a reversal.Alternatively,whenpricesare rangingbetween twoboundingsupportor resistance levels thenbreakoutscanoccurin,eithertheupwardordownwarddirections.

In order to effectively trade abreakout, it is first necessary to determinewhether there is an actual

breakout occurring, or whether there are conditions causing misleading price movements that could bemisinterpretedasabreakout.Usingmultiplecombinationsofchartingtechniques,technicalanalysis,and,fundamentalanalysis,willhelptoidentifyreliablebreakoutsignals.

KeyLesson:Breakoutsaremorelikelytooccurduringperiodsofhighvolume,whentherearegreater

numbersofparticipantsinthemarket.Highervolumelevelswillmeanthat,whenabreakoutbegins,thereissubstantialsupportingactivitywhichhelpssustainthebreakoutandperpetuatespricemovement.

As there is no comprehensive measure of volume available in the Forex market, it can make the

processofspottinghighvolumeperiodsdifficult.Volatilityisthereforethekeytoidentifyingwhenthereisanincreaseinmarketparticipantsand,assuch,whenthereisthepotentialsupportforaparticularbreakout.Ifthereisalargepricemovementinarelativelyshortperiodoftime,thenpricevolatilitycanbesaidtobehigh,conversely,wheretherearesmallpricemovementsovershorttimeperiods,thenthiscanbeclassedasaperiodwithrelativelylowvolatility.

TradingStrategy:Manytraderswillgetsuckedintoabreakoutasitishappening,andtryandfollow

therapid/volatilemovement.Theproblemwiththis typeoftradingis that,bytheverynatureof thehighvolatility, it can mean that any profits can be rapidly reduced if prices move against your position.Therefore,amuchmoreeffectivewaytoprofitfrombreakouts,istolookforcurrencypairswherethereisinitially relatively little volatility. By doing so, you give yourself sufficient time to analyse the marketconditions and the technical nature of the pricemovements, and as a result put in place trades thatwillallow you to benefit when a breakout does occur. This means that you have a better opportunity ofbenefitingfrombeinginatthestartofthebreakoutandyoumaydictatethetermsofyourtrade,ratherthantryingtochaseabreakoutthatisalreadywellunderway.

13.2MeasuringVolatilityA number of techniques can be used to measure the volatility in prices. Essentially, any technical

measureemployedshouldbeused to try todetermine the levelofpricemovement takingplacewithinagiven time period.Of the technical analysismethodswe have considered previously, both thebollingerbandsandthemovingaverageindicatorsaresuitedtoprovidingameasureofvolatility.

Inthecaseofbollingerbands,thebandswilltightenclosertothecentralmovingaveragewhenthere

islowpricevolatility,whereasthebandswillbroadenawayfromthecentralmovingaveragewhenthereishighpricevolatility.

Moving averages can also provide a good indication of volatility as they indicate the average price

overagivenperiodoftime.13.3ConfirmingaBreakoutAsmentioned previously, breakout signals don’t always lead to a true breakout event developing.

Overtime,ifyoutradedallthesefalsesignalsthenthiswouldlikelyresultinsignificantlosses.However,therearewaystohelpimprovethechancesofspottingandconfirmingtruebreakouts.Itispossibletousesomeofthemethodsdescribedearliertodeterminewhenabreakoutismorelikely.Theycanalsoindicatethedegreeofmomentuminthemarketatanyparticulartime,whichprovidesagoodmeasureofwherethepricemaybeultimatelyheading.

Themovingaverageconvergenceanddivergenceindicator(MACD)isaverygoodmeasureofprice

and market momentum. When the MACD histogram is relatively small, it suggests low levels ofmomentum,whereaswhentheMACDhistogramislarger,itsuggestsgreaterlevelsofmomentum.Thewaythisworksinrelationtotrends,isthatwhenatrendisoccurringandtheMACDishighthenthistendstoindicatehighlevelsofmomentumandstrongsupportfor that trend.However,whentheMACD indicatorregisters low momentum in a trending scenario, then this often indicates that support for that trend issubsiding.

The relative strength indicator (RSI) is another good measure of divergence, providing useful

informationastowhenthemarketisshowingsignsofeitherbeinginoverboughtoroversoldconditions.Inboththesesituations,whentheyhappen,itisoftenagoodsignalthattheremaybeanimminentchangeinforthcomingtrendpatterns.

13.4TradingtheOppositeBreakDuetothenatureoftheForexmarket,manypotentialbreakoutsfailtobecometruebreakouts,instead,

pricesswingintheoppositedirectiontothatwhichwasexpected.Manytradersrefertothesesituationsasafakeoutandtheoppositepricemovementthatresultsasfadeout.

Thereasonforthesefakeoutsoftencomesfromtheinherentdifferencesbetweenthetradingactivities

of institutional traders (market makers) and retail traders (market participants). At this stage, it is notnecessarytoknowalloftheintricaciesthatleadtothesefadeoutsas,overtimeandwithexperience,youwilllearntoidentifywhentheyareoccurringandwhy.

It isprudent though to remember that theydohappen,and thatoften theywilloccurwithinranging

markets at times when chart patterns have suggested a change in trend. This is because institutionalinvestors arewell aware thatmany of the chart patternswe have described are readily known and usedamongstretailtraders.Thismeansthatthereisadegreeofpredictabilityintermsofwhatmayhappen,atanygiventime,inthemarketplace.Thispredictabilitycanbeusedbymarketmakerstopushpricesintheopposite direction to that which the majority of retail participants may be expecting, resulting in asignificantwindfallforthem.

Itisessentialforanovicetradertobeawareoffakeoutsandtoalwaysunderstandthatthemarketcan

reactinadifferentmannertothatwhichisexpected.Ultimately,thisknowledgehelpstoimprovetradingstrategy as itmeans a tradermust ensure that they usemultiple buy signals and price indicators beforemakingtrades,andunderstandthenecessaryuseofstoplossesandtrailingstops,inordertolockinprofitsandpreventdamagefromanyswingsinprice.

13.5DivergenceTradingOneoftheproblemsforanytraderofForexisdecidingwhentoenterthemarketandwhentoexitthe

market.Knowingwhenapriceislikelytoreverse,andgettingoutofatradepriortothatpoint,isvitaltolock-inprofits.Divergencetradingisoneofthemethodsthatcanbeusedtohelpimprovetheplanningandexecutionoftradesinordertoincreaseoverallgains.

Divergence trading involves the comparison of actual price movement in relation to an indicator.

Indicatorscanprovidethreedifferenttypesoftradingsignal:Crossingoveramajorsignalline;Crossingoveracentreline;andIndicatordivergence.

Indicator divergence occurs when the actual price movement and an indicator are travelling in

oppositedirections.Positivedivergencereferstosituationswhenthepriceisinadownwardtrendandtheindicator (MACD,RSI,and StochasticOscillator) ismoving in the opposite upward direction.Negativedivergencedescribeswhenthepriceisanupwardtrendwhilsttheindicatorismovingdownwards.

KeyLesson:Divergence isausefulearlysignalofpossibleprice reversal,and,assuch,whenused

properlycanworkwellasareliableleadingindicator.Divergence often happens over longer periods of time, so it is useful to employ trend lines, and

support/resistance levels as ameans of analysing themarket over the short-term, which should provideadditionalevidenceforareversaloccurring.

The philosophy behind divergence trading is that, consistently, price andmomentum tend towork

togethere.g.higherpricesareoftensupportedbyhigherlevelsofmomentum,andconverselylowerpricesare often supported by lower momentum levels. When there is a divergence of these two elements inopposingdirectionsthenthissignifiesthatthepricemovementislosingmomentumandthattheremustbeacorrectioncomingatsomepointinthenearfuture,mostprobablyresultinginareversal.

TradingStrategy:Byknowinghowprice and indicators interact,divergence provides vital signals

that suggest when a trend may be beginning to weaken.Divergence can be used as a reliable leadingindicator,providingtradesignals,whichtakeadvantageofchangesinmarketmomentumorpricedirection.

Therearetwotypesofdivergence:RegulardivergenceandHiddendivergence.Regulardivergenceisbestusedasanindicatorsignallingtheendofanexistingtrendorthatareversal

should be expected. In practice, it means that even where the price is continuing to head upwards ordownwardsontrend, theevidenceofdivergence ishighlightingthatmomentumisbeginningtoslowandthatthesupportfortheincreasingordecreasingvalueisstartingtoreduce.Wherethepriceishigh,buttheindicator/oscillatormoveslower,thenthisisknownasregularbearishdivergence,andoftenindicatesthetopofapricerun.Conversely,whenthepriceiscontinuingtomovelower,butmomentumbeginstoswinghigher,thisisknownasregularbullishdivergence,andoftencorrespondswithpricesreachingthebottomofatrend.

Hiddendivergenceoccursactuallywithinatrendandcanbeusedasasignaltosuggestthatthetrend

will continue.Hidden bullish divergence can be seenwhen the actual price is registering progressivelyhigher lows,but theoscillator is, conflictingly, showing lower lows.When thisparticularcombination isfoundinanupwardtrend, thenitsuggestshiddendivergenceandsuggestsevidenceofcontinuedsupportforthattrend.

Hidden bearish divergence will be seen in a downward trend and occurs when the price makes

progressivelylowerhighswhilsttheindicator/oscillatorisshowinghigherhighs.Thiscanbetakentomeanacontinuationoftheprevailingtrend.

13.5.1Divergence-ConclusionEvidenceofdivergencesshouldnotbeusedsolelyasameansofdeterminingwhenandwheretoenter

transactions. They instead should primarily be employed as a supporting factor among other technicalanalysistools.Bybuildinganunderstandingofdivergencesintoyouranalysisprocess,itwillhelptospotprofitableoccasionsandtogenerateaclearerpictureofmarketconditionsandactivity.

KeyLesson:Aswithanyformoftradingthatreliesupontechnicalanalysis,if,atanypoint,youare

unsureashowthepriceactivitymaybedeveloping,thenitissensibletowaitandseehowthingsprogress,evenif,attimes,thismeansmissingoutonopportunitiesthatwouldhaveresultedinprofits.

13.6ScalpingScalpingisatechniqueoftenemployedbytradersofstockmarketsecuritieswherebytheyattemptto

makea relativelysmallprofit fromhundredsof tradesmade in thecourseofaday.Byscalpinga traderhopes toexploit thedifferencesbetween thebid/askpricesorprofit fromverysmallnegativeorpositivemovementsinprice.

Chapter14:TheCarryTrade

The carry trade is a particular trading strategy that can allow you to profit by simply holding acurrency for a period of time, even when there is no significant movement in the actual price of thatcurrency.

Basically,thecarrytradeexploitsdifferencesininterestratesofonecurrencyoveranother,inorderto

profitfromthedifferential.Toachievethisinpractice,thecarrytradereliesupontheborrowingorsellingofone currencywith a low interest rate, thenusing this to purchase a currency that is yielding a higherinterestrate.Whilstyouarepayingthelowerinterestrateonthecurrencyyouhaveborrowed,youcollectthe higher interest rate on the currency you have purchased. The difference between the two signifies aprofitevenwhenthepricepositionshaveremainedflat.

Asimpleexampleofthiswouldbe:Considerifyouwereabletogotoabankandsecurealoanfor

$10,000atarateof2%andyouthentookthismoneyandwereabletoputitinasavingsaccountthatpaid6%. You are essentially receiving a profit of 4% on the trade. However, in reality, banks make thisextremelydifficulttodoastheynearlyalwayskeeplendingratesabovethoseofthesavingsrate.Thecarrytrade,therefore,isaveryusefulmethodofproducingprofitsforfinancialtradersandthroughForexitcanbeaparticularlyprofitabletradingtechnique.

14.1ForexCarryTradeIn theForexmarket a number of factorsmake thecarry trade a very useful instrument for traders.

Whenyoubuyacurrencypaire.g.GBP/USDthenyouareactuallybuyingtheBritishPoundandsellingtheUS dollar, at the same time you pay interest on the currency that you buy and receive interest on thecurrencythatyousell.Theuniquenatureof theForexspotmarketmeans that interestpaymentsarepaideveryday, basedupon the position held for that day.Brokerswill close and reopenyour position everynightand,subsequently,creditordebit interest,baseduponthedifferencebetweenthecurrencypair thatyouhold.

KeyLesson:Theinfluenceofleveragemeansthatinterestratescanberapidlymultipliedovertime.TradingStrategy:Thefollowingexampleillustrateshowthecarrytradecanpracticallybeappliedto

Forexspotmarkets,andtheresultingoutcomes.Italsoaccountsfortheinfluenceofleverageandhowthiscanbegintosignificantlyincreasepotentialgains.

Ifyouhad$10,000inyouraccountanddecidedtoplace$1,000ofthatonamargin,ataleverageof

100:1youcouldpotentiallycontrol$100,000ofcurrency.Abrokerrequiringonly1%marginwillholdthis$1,000ascollateralonthetrade.Younowdecidetoinvokeacarrytrade.Youidentifyacurrencypair(e.g.GBP/USD)thathasaninterestratedifferentialof4%;youtakeapositionanddecidetomaintainthetradeforaperiodofoneyear.Overthecourseoftheyear,evenifthereisverylittlemovementinpricebetweenthetwocurrencies,thenthetradewouldresultinareturnonyourinvestmentof4%,providingyouwithaprofitof$4,000.Whenthisreturnisconsideredinrelationtoyourinitialaccountfundof$10,000thenyouhavereceivedtheequivalentofa40%returnonyourinvestment.Evenifthecurrencypricedropsovertheperiod,youcansetstops,inordertominimiseanypotentiallosses.Ifthecurrencypairrisesovertheperiodthenyoualsocollectthecapitalgrowthinadditiontotheinterestpayments.

To summarise, thepotential outcomesof thecarry trade in these circumstances, the followingmayoccur:

Outcome1-Thepriceofthecurrencypairlosesvalue–ifthelevelofthislossreachesthepriceset-

asideby themargin, then thepositionwouldbeclosed.Bysettingstop losses, thencapital lossescanbereduced.

Outcome2 -Thepriceof thecurrencypair remains thesame. In thiscase, then there is littleorno

capitalgrowthorloss,butinterest isstillpaid.Onthepreviousexample, thiswouldrepresentareturnof40%ontheinitialinvestmentof$10,000or$4,000.

Outcome3-Thepriceofthecurrencypairrises–ifthevalueofthepairrisesduringtheperiodofthe

investment, thennot only is interest paidover the lifetimeof the trade, but youwill also receive capitalgrowthrelativetothepriceincrease.

Key Lesson: You should also be aware that the carry trade can equally operate in the opposite

direction. Therefore, in the earlier example, if you had sold the British pound rather than buying, andboughttheUSdollarasopposedtoselling,theresultaftertheyearwouldnothavebeenaprofitablecarrytradeyielding4%butinstead,wouldhaveresultedinanegativecarry,meaningalossof4%.Itisthereforeveryimportanttocontinuallymonitorfluctuationsininterestratesapplicabletoanycurrencyyouhold,asthiswillensurethatyoucontinuetoreceiverevenueasopposedtopayingtoholdaposition.

14.2SettinguptheCarryTradeThe first thing to do when setting up a carry trade is to obtain the interest rates for all relevant

currencies.Therearemanyresourcesavailable,particularlyonlinethatcanprovideaccurateanduptodateinformation for interest rate levels. Once you have found a pair that will yield a significant differentialbetweenthetworates,thenthiscanprovidethebasisforthetrade.

Itisprudenttoapplyalltheskillsoftechnicalanalysisinordertoestablishwhetherthecurrencypair

identified is in an upward trend. This will help ensure that the market will be moving in a profitabledirectionduringthecourseofyourtrade.Theseskillscanequallybeusedtoidentifywhentoexecutethetradeandwheretosetanystoplosses.

Finally,itisnecessarytomanagetheriskassociatedwiththetradebylimitingthepercentageofyour

capitalemployedtonomorethana10%margin.Asthetradewillbeactiveoverthecourseofayear,thenthislevelshouldprovideasuitablysufficientrisk-to-rewardratio.

Monitorthetradeandinterestratescloselyoverthecourseoftheyeartotryandensurethatyouare

preparedtotakeactionshoulditberequired.KeyLesson:Thecarrytradeworksbestwhenthereisagoodlong-termeconomicoutlookrelatedto

thecurrencythatispayingtheinterest.Thisisnecessarybecause,whenthereisstrongeconomicactivitycentralbankswilloftenraiseinterestratesinordertocurbbuyinginflation.Foryouasaninvestorinthatcurrency,thismeansahigherreturn.Bycontrast,whenthereislesseconomicconfidencefortheoutlookofacurrency,theninvestorsaremorelikelytoplacetheirmoneyinsaferplacesthatpaylowerinterestrates,butwhichareconsideredmorereliablecurrencies.Assuch,thiscanresultinlessmarketactivityassociatedwiththeriskiercurrency,causingtheunderlyingpricetofall.Therefore,alwaysbeawareoftheeconomicconditionsaffectingyourtradesandbereadytoactaccordingly.

Chapter15:ReadytoTrade

15.1TheForexTradingCommunityInthepast,themarketinformationavailabletoindividualretailtraderswaslimited,however,withthe

adventofmodernmediaandtheinternet,retailForextradersnowhaveawealthofinformationavailablethatpreviouslywouldonlybeknowntolargeinstitutionalinvestors.

Makinggooduseofthisavailableinformationshoulddramaticallyincreaseyourchancesofsuccess.

There areonline communities,websites, blogs, etc all devoted toproviding regulardetailed information.Thesesourcesareextremelyusefulforprovidingnewstrategyideas,highlightingtradingopportunities,andgenerallyprovidingahugeresourceofsupporttohelpwithday-todaytrading.

15.2TradingandChartingSoftwareMostbrokers,especiallythosewithanonlinepresence,willprovideclientswithaccesstotradingand

chartingsoftwaredesignedtofacilitatethetradingprocess.Somebrokersusetheirowntradingplatforms,whilstotherswillprovideaccesstogenericsoftwareapplications.Allshouldincludethekeycomponentsthat have beenmentioned in this book.Additional featureswill becomemore andmore relevant as youincreaseyourtradingknowledge.

Youshouldlearnhowtousethetradingplatformwellbeforemakingactualtrades.Manybrokerswill

provide a demonstration version of their software and it iswise to use this to develop a comprehensiveunderstandingofhowtheapplicationworksanddiscoveralltherelevantfeatures.Youwillbeabletoplaceandexecutetradingtransactionsinasimilarmannertotherealtradingplatform,butwiththedemonstrationversionyouareprovidedwithahelpful,risk-free,environmenttopractisealltheskillsyouhaveacquired.Ademonstrationaccountcanequallybeusedonceyoubegintradingasatoolfortestingtradingstrategywithoutriskingpersonalcapital.

All trading platforms should include charting features, and it is important to understand how to

manipulate the software in order to display the charts you require, with the information you need.Youshouldalsolearnhowtoapplytechnicalanalysistools,suchastrendlines,indicators,oscillators,etc,andhavethesoftwarepresenttheinformationonyourcharts.

15.3TypesofTraderTherearemanydifferentcategoriesintowhichForextraderscanfall,andthesetendtobedetermined

bytheindividualstrategiesusedbydifferenttraders.Itmaybethatyoudecidetotryanumberofdifferenttechniqueswithinyouroverallstrategy,soitisimportanttoknowthetypesoftradingavailabletoyou.

ScalptraderScalp trading is an extremely short-term strategy, which requires making lots of trades over short

periodsoftime(minutesratherthanhours).Theideaistoscalparelativelysmallprofitoffthemanytradesmadeduringthecourseoftheday.

It is an extremely frenetic method of trading and requires individuals who can devote all day to

watchingchartsandrapidlyplacingordersbasedaroundshort-termtrends,highlightedbytechnicalanalysistechniques.

DaytraderA day trader tends to be an individual using short-term trading strategy, which often consists of

making only one or two trades during the course of a day. It will require analysing the market in themorning and deciding upon a position to take for the day, then continuing tomonitor the trades, beforeclosingthepositionsasthedayends.

Daytraderstendtorarelyholdpositionsopenovernight.Thedaywillfinishwiththeknowledgethat

eitheraprofitorlosshasbeenachieved.SwingTraderSwingtradingisamedium-termtradingstrategy,wherepositionswillbeheldfortwotothreedaysin

ordertotakeadvantageofmoredefinedtrends.Thistypeoftradingstrategyiswellsuitedtotraderswhoareunabletomonitormarketsduringtheday,butareabletoanalyseandplantradesintheeveningandthenplaceordersthatwill lastoverthemedium-term.Thismeansit isastrategywellsuitedtopeopletradingpart-timeorcasually.

KeyLesson:Withswing trading chancesare that themarketwillmoveagainstyou,at somepoint,

whilst the position is held. It is therefore important to set stop losses with large margins – in order topreventtradesfromclosingprematurely.

This type of trading also requires strong nerves, in order to accept the fluctuations that will occur

duringthelifetimeofeachtrade.PositionTraderPositiontradingisalonger-termstrategythatwillseetradesheldforweeksormonths.Itisatypeof

tradingthatdemandspatienceandstrongnerves,asitislikelythattherewillbesignificantswingsinbothdirectionsduringthecourseofthetrade.

Key Lesson: Position trading requires good knowledge and understanding of the fundamentals in

ordertopredictwhereacurrencyislikelytobeheadingoverthelongerterm.

15.4DevelopingaTradingPlanOnce you have decided the type and style of trading that suits your particular requirements, it is

necessary to develop a trading strategy that works for you. The starting point for this should be thedevelopmentofatradingplan.

This should be the blueprint by which youmanage the way you trade, the tools you use, and the

analysisemployed.Essentially,itshouldbringtogethereverythinglearntpriortotradinginordertoprovideacomprehensiveplanofhowyouintendtotrade.Thetradingplanshouldcompriseaseriesofinstructionsandguidelineswhichwillhelpnegotiatetheupsanddownsoftrading.

Key Lesson: When trading it can be very difficult to remove emotion from the decision making

process,andthestressorexcitementofmakingorlosingmoneywillonlyaddtothisproblem.Atradingplan will help you tomake decisions based upon your own predetermined processes, thus reducing thechanceofmakingemotionalmistakes.

Theplan shouldnotbea singular strategy, instead, it should includemultiple strategiesdesigned to

takeadvantageofdifferentopportunitiesanddifferentmarketconditions. It shouldalsocontain research,analysistechniques,andmostimportantlytheprocessesthatneedtobeundertakeneverytimeyoutrade.

Toachieveaneffectivetradingplan,youshoulddevelopastep-by-stepsetofprocessesorguidelines

thatyouwillfollowbefore,duringandaftereachplacementofanorder.Elementsthatshouldbeincorporatedintothetradingplaninclude:-Defineyourtradingprofile-Determinehowyouwanttotradeandthegoalsyouhopetoachieve-Setprofittargets-Decidehowoftenandwhenyouwilltrade-Decideuponariskprofilethatsuitsyourrequirements-Determinethestepsnecessaryineachtradetominimiserisk-Putinplacemethodstorecordprogress,asthiswillhelpdeterminewhethergoalscanbeachieved-Determineyourcapitalrisks,i.e.howmuchmoneydoyouhaveavailabletotradewith,andcan

affordtolose?-DecideonthetimeframesyouintendtouseandhowtradingthesewillfitintoyourlifestyleKeyLesson:Thereareanumberofessentialelementsthatalltradingplansshouldincorporate,these

include:Managingpersonalexpectations;developingapersonal tradingprofile; riskmanagement;setting

tradingrules;decidinguponatradingroutine;andplanningtradingstrategies/systems/setups.

15.5TradingRoutineAcriticalpartofthetradingplanisdevelopingatradingroutine.Overtimeitislikelythatthiswill

becomesecondnaturetoyou,butitisimportant,initially,toplanthestepsthatyouintendtotakebeforetrading each day. There are certain pieces of information that should be monitored every day that willinfluenceyourtradingdecisions.Theseinclude:

-Reviewopenpositions,andmakeanynecessaryadjustments-Checkthedailynewsandnoteanydiaryeventsthatmayinfluenceyourtrades-Reviewthetradesfromthepreviousday,andevaluateprofits/losses-Noteanynewsetupideas-Identifyanynewsoreventsthatcouldcausesignificantmarketactivity-Reviewmarketsentiment-PreparesetupsandstrategyforthedayaheadKeyLesson:Tradingroutinewillbedifferentforeveryoneandshouldbedevelopedtosuitindividual

needsandrequirements.Themainconsiderationshouldbethatitsufficientlypreparesyouforthetradingofthedayahead.

15.6TradingToolsA vital requirement of any trading plan is deciding upon the tools thatwill be used to analyse and

execute trades. This means choosing the trading setups and strategy that are best suited to particularconditions,anddecidinguponthecorrectanalysistechniquestouseinordertoappropriatelydiagnosehowandwhentradingshouldbeundertaken.

15.7TradingDisciplineThetruthisthatmanyofthesetupsthatareavailablecommerciallyaswellasthosethataredeveloped

individually do provide significant opportunities for success, and if used properly can allow a trader tomake profitable gains. Themost important thing to remember, however,when using any predeterminedsystemoftrading,isthatitiscriticaltomaintaintradingdiscipline.Thissimplymeansdecideonaplanandsticktoit!

KeyLesson:Therewillbemanyoccasionswhereitwillbetemptingtodynamicallyalterasetupasa

situationdevelops.Whilstattimesthiscanprovetobesuccessful,orbenecessaryinordertodealwiththeunexpected, by continually changing elements of a trading setup, you considerably increase the risk offailure,overthelongterm.

15.8TradingDiaryAnothergood idea forany trader is todevelopyourown individual tradingdiary.Thiswillactasa

roadmap,whichyoucanusetoplananddeveloptradingstrategiesbasedaroundeventsthatarelikelytohappeninthefuture.

Agood tradingdiarywill take intoaccountdifferent trading timeframes,breakingdownevents into

thosethatareexpectedtooccurthatday,overthecourseoftheweek,oroverthelonger-term.There aremany good online resources that provide trading diaries, but it is best if you are able to

integratethenewsandeventslistedinthese,intoyourowndiary.Thiswillthenbecomeanessentialday-to-daytoolthatwillmakesurethatyouawareofnewsandeventsastheyareduetohappen,allowingyoutoplanaccordingly.

KeyLesson:Maintainingagooduptodatetradingdiarywillhelpensurethatyoucaneffectivelyplan

how,andwhen,totradeduringthecourseoftheday,week,ormonth.Thetypeofinformationtorecordshouldinclude:-Potentialtradingopportunities-Triggerpoints-Targetvalues-Positionsizes-YourtrademanagementrulesIt isoftendifficult tocontinuetomaintaina tradingdiary,particularlywhentradingfrequently,but,

wherepossible ifyoucanstickwith it, itwillprove tobeanextremelyusefulsourceof informationandhelpmanagetradingactivity.

15.9TradingJournalAtradingjournalshouldprovidearecordofallyourtradingactivity.Ideally,itshouldbedesignedin

suchawaythatnotonlydoesitprovideahistoricallydocumentationofalltradesandtherelevantoutcomesof those trades, but it should also provide the basis for building new trading strategy and improvinginvestmentsetup.

Essentially,thisprocessshouldmakeitpossibletolearnfrombothsuccesses,andfailures,inorderto

helpadvance tradingoutcomes.Recordwhen tradesgowrongas thiswillhelp identifywhereyou thinkproblemsmayhaveoccurredandhowthesecanbeminimisedgoingforward.

Theinformationstoredinatradingjournalwillbedifferentfrompersontoperson,buttherearesome

essentialpiecesofinformationthatshouldalwaysberecorded,whichinclude:Ideasandnewsthatprovidetrading ideas; market movements and potential movements; market observations; observed influentialfactors-andtheresponsestothem;entryandexittriggers;ordersizes;trademanagementrules;and,tradeevaluations.

Maintaining a trading journal overtime will produce a great source of information that will help

influencethedevelopmentoffuturestrategy,definetrademanagementrules,andshouldhelptoshapeyourtradingplans.

Chapter16:TradingSystems

All trading systemswork in a similarmanner, they should be designed to look for and identify adeveloping trend, then apply systematic procedures to analyse data in a way that either proves ordisproves the original findings. Each system should then identify suitable order entry triggers, andproposepossibleprofittargets.Asystemshouldalsoapplytrademanagementtechniques tohelpsetstoplosses,exittriggers,andcontinuallyanalysethetradeasitdevelopsdynamically.

Therearemanytradingstrategiesavailableanditiseasytofinddescriptionsoftheseeitheronlineor

fromconventionalresources.Thebestprocessfordevelopingstrategiesandtradingsetupsistotaketheseideas and then build upon themas youdevelop greater levels of experience.By testing individual setupideas in charting software anddemonstrationaccounts it ispossible todetermine those that fitwellwithyourparticularstyleoftradingandtoperfecthowthesetupworksinrealconditions.

Trading Strategy: It is equally possible to develop your own individual and unique strategies, by

followingafewsimplesteps:1.Timeframe.Itisimportanttofirstdecidethetimeframeforwhichyouwillholdthetrade.Thiswill

bedependentuponindividualtradingstyles,andinvestmentexpectations.Knowingthiswillallowyoutosetchartingsoftwaretodisplaytherelevanttimeframe,inordertomonitorthetrade.

Duringthecourseofanytradeitwillbenecessarytoalsomonitorothertimeframes,asthesewillhelp

illustratewhatishappeninginthewidermarket.2.Findindicatorsthathelpidentifyanewtrend.Aswehaveseeninthetechnicalanalysissectionof

thisbook,therearemanytechniquesandtoolswhichcanbeemployedtohelpidentifyandhighlightwhenanewtrendisdeveloping.Anexampleofthiswouldbetheuseofmovingaverages.Mosttraderswillutilisea long and a short moving average, and then use the points at which these intersect as a means ofdetermining when new trends are beginning to form. (See moving averages and moving averagecrossovers).

3:Useindicatorstohelpconfirmthetrend.Onceonesetofindicatorshasidentifiedapossiblenew

trend then it is necessary to try and confirm the validity of that trend, using additional indicators andanalysistechniques.Examplesofindicatorsthatcouldbeusedfortrendconfirmationinclude:RSI,MACD,andStochasticindicators.

4:Manage the risk.Having identified a tradingopportunity, the next step is determining the trade

order thatshouldbeplacedandmanage the riskassociatedwith thatorder.Thismeansdecidingonhowmuchaccountcapitalshouldbeusede.g.1%,2%,etcandcalculatingthepossiblerisk/rewardratios.

5:Calculate/Identifyentryandexitpoints(triggers).Aswehaveseeninearliersections,oneofthe

criticalelementsofForex trading, thatultimatelycomeswithexperience, isdecidingwhenandwhere toenterandexittrades.Itisimportanttoensurethatyoudon’tenteratradetooearlyinthelifetimeofanewtrend, as itmay prove to be a false trend, equally it is not good to leave it too late, bywhich time thechancesofprofitinghavebeenreduced.

In terms of getting the entry correct, this will really depend upon personal choice and experience.

Graduallyitwillbecomeeasiertospottherightentrypoints.Intermsofexitingatradetherearetheoptionsof setting a trailing stop or stop loss, which will close out the trade for you, automatically, once thepredetermined levels are reached. Alternatively, you may set specific profit targets, possibly based onpreviousmovement,whichwillagainactasexittriggersasthepricereachesthoselevels.

Averypopularmethodofcalculatingexittriggersistousesupportandresistancelevelsasbuyorsell

markers.6:Recordthesystemandfollowit.Onemistakethatmanynovicetradersmakeisfailingtofollow

theirtradingsystem,oncetheygetinvolvedinthetrade.Thisisextremelyeasytodo,asemotionsbegintooverrule good judgement, but it can also be a very costly error tomake.By sticking to the system, youknowwhat you intend to do, and should do, at each step of the trade cycle.Over time this should helpensuretradesaremoresuccessful.

16.1RiskManagementItisvitaltoviewtradingasaninvestmentprocess,andnotconsideritasgambling.Riskmanagement

is the process by which financial management techniques are used to ensure that trades aremade withconsidered methodology and that steps are put in place to reduce the chances of losing money, thusensuringthattherisktofinancialcapitalisminimised.

Thefirstruleofriskmanagementisthatyoushouldnevertradewithmoremoneythanyoucanafford

tolose.MostForexdaytraderswillstartwithanaccountofnolessthan$10,000thattheycanaffordtoloseshouldtheworstcaseoccur.Whilstdaytradingisoftenseenasagreatwaytomakeadditionalmoneyinhardtimes,manypeoplehaveplacedthemselvesingreaterfinancialdifficultybytradingwithmoneythattheyreallycannotaffordtorisk.Themainproblemisthatifyouareheavilyinvestedintradeswithmoneythat is essential for your day-to-day living then it becomes virtually impossible to detach yourselfemotionally from the investment process. This reduces trading discipline and can ultimately lead to badinvestmentdecisions.

Thenextessentialstepofriskmanagementiseducation.Thebetterpreparedyoucanbebeforemaking

any trades backed by actually capital resources, the higher the chances of succeeding going forward.Readingresources,suchasthis,andothertitleswillhelpprovideacomprehensivebackgroundtotheForexmarketandhighlight the idiosyncrasies thatwillbeencountered indaily trading.Havingagoodworkingknowledge of how the market operates, and the specific terminology used amongst market participantsshould help preventmistakes ormisinterpretations. It is also advisable to extensively use demonstrationaccountsanddemonstrationsoftwareinordertodevelop,understandandperfectstrategiesandsetupspriortoriskingcapital.ThereisawealthofonlineandofflineinformationsourcesthatcanhelpassistinlearningForexmethodology.

Therearealsomanyopportunitiesavailabletogainaccesstomentorsortuitionthatpromisetooffer

helptofast-tracktheForexlearningprocess.ManyofthesecanbeextremelybeneficialastheyprovidetheopportunitytolearndirectlyfrompeoplewithgenuineForextradingexperience.Theseresourcesarelikelytobefairlycostly,soitisimportanttoconsiderthebenefitsthattheycanprovideagainstthecapitaloutlayrequired.

16.2CapitalManagementEvenwhen the skills and preparation are in place to begin trading, riskmanagement should be an

everydayconsiderationthatisactivelybuiltintoyouroveralltradingplan.Ifatradingstrategyprovided,onaverage,an80%rateofreturn,itisstillnecessarytoconsiderwhen

andhowthosereturnscouldoccur.Ifan80%returnratetranslatesinto80successfultradesoutof100,thenthisalsomeans20tradesoutof100havethepotentialtolosemoney.Theproblemisthatitisimpossibletopredictwhere andwhen these 20 losing tradesmayoccur.They couldpotentially happen consecutively,and,ifthiswasthecase,thenwithoutcapitalmanagementproceduresalosingstreaklikethiscouldrapidlywipe-outthereservesinatradingaccount.

KeyLesson:Professionaltraderswillputinplaceprocedurestohelpminimisetheriskoneverytrade

andensurethatonlyasmallproportionofoverallcapitalisinvestedinanyoneposition.Thefollowingtableshowsthedifferentialratesatwhichcapitalcanbereducedduringalosingperiod,

dependingupontheproportionofcapitalriskedoneachtrade.

Thisshowsthatwithjusttenconsecutivelossmakingtradesthedifferenceinoverallcapitalreduction

couldbefrom20,000to16,675whenplacingtradesthatrepresent2%ofoverallaccountcapital,andfrom20,000tojust7,748ofcapitalleftwhenplacingtradesthatrepresent10%ofcapital.Thatwouldbealossof3,325inthe2%examplecomparedwithamuchmoresubstantiallossof12,252inthe10%example.

It is, therefore, vital to decide and plan what proportion of capital you are willing to commit to

individualtrades,inordertoensurethatthelong-termoverallrisksremainacceptable.KeyLesson: It isbest toonly riska smallpercentageofoverall capitalper trade,asover time this

techniquewillultimatelyensureyouraccountremainsprotectedduringlossmakingperiods.

16.3TradingSetupsAllthetools,processesandconceptsmentionedpreviouslywillallbenefitdevelopinghowandwhen

youwilltrade.Wewillnowbrieflyconsidertwoelementswhicharevitalforeverydaytradingandwhich,usedproperly,willhelpimprovethechancesofsuccess.

16.4StopLossesWehavesuggestedhowstoplossordersshouldbeusedinrelationtomanyoftheanalysisandtrading

techniquesintroducedinthisbook.ThestoplossisanextremelyimportanttoolforanyForextrader,astheyhelptoplantradesandexecutesellorbuyorders,andcanbeusedtoautomatethetradingprocesswhenyouareunavailable.

Youruseofstoplossesshouldreflectmarketconditionsandyourparticulartradingstrategy.They

shouldbeusedineverytradeyouconduct.Itisimportanttoconsideranumberoffactorswhenplacingstoplosses:

1.Astoplossshouldnotbeplacedtootightlyaboveorbelowyourentrypoint.Thisisbecause

marketswillalwaysfluctuateupanddowntoacertainextent,eveninaclearlytrendingmarket.Ifthestoplossissettotightlytothepricethenthesefluctuationscouldeasilycausethetradetocloseprematurely.

2.Equally,stoplossesshouldnotbesettoofarfromtheentrypoints.Gettingtherightbalanceof

wheretosetstoplosseswillimprovewithexperience.3.Stoplossesshouldnotbeplacedexactlyonlevelsofsupportorresistance.Insteadtheselevels

shouldbeusedasmarkerswherebystoplossescanbesetjustaboveorjustbelowthesepositions.Aspriceswilltendtomigratetowardssupportandresistancelevels,thiswillpreventanytradesclosingearlyduetofluctuationsinprice.

16.5CalculatingPositionSizesDecidinghowmuchcurrencyyouwishtobuyinanygiventradeisanimportantelementofevery

trade.Calculatingapositionsizewillhelpyoukeepwithintheconstraintsofyourownriskprofile.Asimpleexampleofcalculatingpositionsizecanbeseenbelow:

Thisexampleconsidershowtocalculateapositionsize,whereyouraccountdenominationisthesame

asthequotecurrencyofthepairyouwishtopurchase.Youhave$5,000inatradingaccountandwishtouseatradingsystemthattradesEUR/USDrisking

about200pipspertrade.Youdonotwanttoriskmorethan1%ofyouraccountpertrade.Usingtheaccountbalanceandthepercentageamountyouwanttorisk,itispossibletocalculatethe

dollaramountrisked.Firstly,$5,000x1%(or0.01)=$50Next,dividetheamountriskedbythestoptofindthevalueperpip.($50)/(200pips)=$0.25/pipFinally,multiplythevalueperpipbyaknownunit-pipvalueofEUR/USD.Inthiscase,with10,000

units(oroneminilot),eachpipofmovementisworth$1.$0.25perpipx((10kunitsofEUR/USD)/(USD1perpip))=2,500unitsofEUR/USDTherefore,youshouldplaceanorderfor2,500unitsofEUR/USDorlesstostaywithinthe1%risk

level.Whenyouraccountisheldinthedenominationofthebasecurrency,simplyconverttheamounttobe

risked into the quote currency using the current exchange rate, before continuing with the rest of thecalculation.

Getting the position size of orders correct will become easy over time, and there aremany online

calculatorsthatwillperformthecalculationsforyou.Oftentradingsoftwarewillincludethesetools.

Chapter17:SomeFinalThoughts

The aim of this book, throughout, has been to provide an introduction to the Foreign ExchangeMarketsandtoprovideyouwiththenecessarytoolstobegintrading.Oneimportantlessontolearnisthatunfortunatelythereisno‘perfectsetup’or‘magicstrategy’thatwillworkeverytime.Whilstmanybooksandwebsiteswill tryandsaydifferent, suggesting that their setup is thepath to ‘guaranteedprofits’, thetruthremainsthattherearenoguaranteeswhenitcomestotrading.Themarketsarenotsimplymovementsofnumbers,butarethedynamicexpressionsofhumannatureandofthemarketparticipants.Thiscoupledwith the difficulties of trying to predict the future makes it impossible to reduce the risks to a singlecalculableequation,wherebytheresultsareconsistentlyaccurate.

Key Lesson: On occasions you will find yourself on the wrong side of the market and making

incorrectdecisions.Thisisnotalwaysabadthing.Aswitheverything,itispossibletolearnfrommistakesandtousethemtohelpimprovethechancesthatfuturedecisionswillbemoresuccessful.

ThisbookisbynomeansanexhaustivedescriptionoftheForexmarketsorForextrading.Insteadthe

aimhasbeen toprovideyouwith the informationnecessary tounderstandhow themarketsworkand tooutlinesomeofthetoolsandtechniquesthatcanbeutilisedinordertobeginplanningandactuallymakingtrades.Ultimately the process of trading should be a continual learning curve,with each successful andunsuccessfultradeprovidingnewinsightsandnewideasastohowtoprofit.