The Skinny on Forex Trading

What is FOREX?
The Foreign Exchange market, also referred to as the "FOREX" or "Forex" or "Retail
forex" or "FX" or "Spot FX" or just "Spot" is the largest financial market in the world,
with a olume of oer !" trillion a da#$ %f #ou compare that to the !&' (illion a da#
olume that the )ew *ork Stock Exchange trades, #ou can easil# see how enormous the
Foreign Exchange reall# is$ %t actuall# e+uates to more than three times the total amount
of the stocks and futures markets com(ined, Forex rocks,
What is traded on the Foreign Exchange market?
The simple answer is mone#$ Forex trading is the simultaneous (u#ing of one currenc#
and the selling of another$ -urrencies are traded through a (roker or dealer, and are traded
in pairs. for example the euro and the /S dollar 0E/R1/S23 or the 4ritish pound and the
5apanese *en 0647157*3$
4ecause #ou8re not (u#ing an#thing ph#sical, this kind of trading can (e confusing$ Think
of (u#ing a currenc# as (u#ing a share in a particular countr#$ 9hen #ou (u#, sa#,
5apanese *en, #ou are in effect (u#ing a share in the 5apanese econom#, as the price of
the currenc# is a direct reflection of what the market thinks a(out the current and future
health of the 5apanese econom#$
In general, the exchange rate of a currency ersus other currencies is a reflection of
the condition of that country!s economy, com"ared to the other countries!
economies#
/nlike other financial markets like the )ew *ork Stock Exchange, the Forex spot market
has neither a ph#sical location nor a central exchange$ The Forex market is considered an
Oer:the:-ounter 0OT-3 or 8%nter(ank8 market, due to the fact that the entire market is
run electronicall#, within a network of (anks, continuousl# oer a &":hour period$
/ntil the late ;<<=8s, onl# the "(ig gu#s" could pla# this game$ The initial re+uirement
was that #ou could trade onl# if #ou had a(out ten to fift# million (ucks to start with,
Forex was originall# intended to (e used (# (ankers and large institutions : and not (# us
"little gu#s"$ >oweer, (ecause of the rise of the %nternet, online Forex trading firms are
now a(le to offer trading accounts to 8retail8 traders like us$
?ll #ou need to get started is a computer, a high:speed %nternet connection, and the
information contained within this site$
4a(#7ips$com was created to introduce noice or (eginner traders to all the essential
aspects of foreign exchange, in a fun and eas#:to:understand manner$
What is a S"ot $arket?
? spot market is an# market that deals in the current "rice of a financial instrument$
Which %urrencies &re Traded?
The most popular currencies along with their s#m(ols are shown (elow@
Sym'ol %ountry %urrency (ickname
/S2 /nited States 2ollar 4uck
E/R Euro mem(ers Euro Fi(er
57* 5apan *en *en
647 6reat 4ritain 7ound -a(le
->F SwitAerland Franc Swiss#
-?2 -anada 2ollar Boonie
?/2 ?ustralia 2ollar ?ussie
)C2 )ew Cealand 2ollar Diwi
Forex currenc# s#m(ols are alwa#s three letters, where the first two letters identif# the
name of the countr# and the third letter identifies the name of that countr#Es currenc#$
When %an %urrencies )e Traded?
The spot FX market is uni+ue within the world markets$ %tEs like a Super 9al:Fart where
the market is open &":hours a da#$ ?t an# time, somewhere around the world a financial
center is open for (usiness, and (anks and other institutions exchange currencies eer#
hour of the da# and night with generall# onl# minor gaps on the weekend$
The foreign exchange markets follow the sun around the world, so #ou can trade late at
night 0if #ouEre a ampire3 or in the morning 0if #ouEre an earl# (ird3$ Deep in mind
though, the earl# (ird doesnEt necessaril# get the worm in this market : #ou might get the
worm (ut a (igger, nastier (ird of pre# can sneak up and eat #ou tooG
Time *one (e+ ,ork -$T
Tok#o Open H@== pm =@==
Tok#o -lose "@== am <@==
Bondon Open I@== am J@==
Bondon -lose ;&@== pm ;H@==
)ew *ork Open J@== am ;I@==
)ew *ork -lose '@== pm &&@==
The Forex market .OT%/
The Forex OT- market is (# far the (iggest and most popular financial market in the
world, traded glo(all# (# a large num(er of indiiduals and organiAations$ %n the OT-
market, participants determine who the# want to trade with depending on trading
conditions, attractieness of prices and reputation of the trading counterpart$
The chart (elow shows glo(al foreign exchange actiit#$ The dollar is the most traded
currenc#, (eing on one side of J<K of all transactions$ The EuroEs share is second at IHK,
while that of the #en is at &=K$
Why Trade Foreign %urrencies?
There are man# (enefits and adantages to trading Forex$ >ere are just a few reasons
wh# so man# people are choosing this market@
• (o commissions#
)o clearing fees, no exchange fees, no goernment fees, no (rokerage fees$
4rokers are compensated for their serices through something called the (id:ask
spread$
• (o middlemen# Spot currenc# trading eliminates the middlemen, and allows #ou
to trade directl# with the market responsi(le for the pricing on a particular
currenc# pair$
• (o fixed lot si0e#
%n the futures markets, lot or contract siAes are determined (# the exchanges$ ?
standard:siAe contract for siler futures is '=== ounces$ %n spot Forex, #ou
determine #our own lot siAe$ This allows traders to participate with accounts as
small as !&'= 0although we explain later wh# a !&'= account is a (ad idea3$
• 1o+ transaction costs#
The retail transaction cost 0the (id1ask spread3 is t#picall# less than =$; percent
under normal market conditions$ ?t larger dealers, the spread could (e as low as $
=H percent$ Of course this depends on #our leerage and all will (e explained
later$
• & 234hour market#
There is no waiting for the opening (ell : from Sunda# eening to Frida#
afternoon EST, the Forex market neer sleeps$ This is awesome for those who
want to trade on a part:time (asis, (ecause #ou can choose when #ou want to
trade::morning, noon or night$
• (o one can corner the market#
The foreign exchange market is so huge and has so man# participants that no
single entit# 0not een a central (ank3 can control the market price for an
extended period of time$
• 1eerage#
%n Forex trading, a small margin deposit can control a much larger total contract
alue$ Beerage gies the trader the a(ilit# to make nice profits, and at the same
time keep risk capital to a minimum$ For example, Forex (rokers offer &== to ;
leerage, which means that a !'= dollar margin deposit would ena(le a trader to
(u# or sell !;=,=== worth of currencies$ Similarl#, with !'== dollars, one could
trade with !;==,=== dollars and so on$ 4ut leerage is a dou(le:edged sword$
9ithout proper risk management, this high degree of leerage can lead to large
losses as well as gains$
• 5igh 1i6uidity#
4ecause the Forex Farket is so enormous, it is also extremel# li+uid$ This means
that under normal market conditions, with a click of a mouse #ou can
instantaneousl# (u# and sell at will$ *ou are neer "stuck" in a trade$ *ou can
een set #our online trading platform to automaticall# close #our position at #our
desired profit leel 0a limit order3, and1or close a trade if a trade is going against
#ou 0a stop loss order3$
• Free 78emo9 &ccounts, (e+s, %harts, and &nalysis# Fost online Forex
(rokers offer 8demo8 accounts to practice trading, along with (reaking Forex news
and charting serices$ ?ll free, These are er# alua(le resources for LpoorM and
SF?RT traders who would like to hone their trading skills with 8pla#8 mone#
(efore opening a lie trading account and risking real mone#$
• 7$ini9 and 7$icro9 Trading:
*ou would think that getting started as a currenc# trader would cost a ton of
mone#$ The fact is, compared to trading stocks, options or futures, it doesn8t$
Online Forex (rokers offer "mini" and LmicroM trading accounts, some with a
minimum account deposit of !I== or less$ )ow we8re not sa#ing #ou should open
an account with the (are minimum (ut it does makes Forex much more accessi(le
to the aerage 0poorer3 indiidual who doesn8t hae a lot of start:up trading
capital$
What Tools 8o I (eed to Start Trading Forex?
? computer with a high:speed %nternet connection and all the information on this site is
all that is needed to begin trading currencies$
9hat 2oes %t -ost to Trade ForexN
?n online currenc# trading 0a Lmicro accountM3 ma# (e opened with a couple hundred
(ucks$ 2o not laugh O micro accounts and its (igger cousin, the mini account, are (oth
good wa#s to get #our feet wet without drowning$ For a micro account, we8d recommend
at least !;,=== to start$ For a mini account, weEd recommend at least !;=,=== to start$
5o+ ,ou $ake $oney Trading Forex
%n the FX market, #ou (u# or sell currencies$ 7lacing a trade in the
foreign exchange market is simple@ the mechanics of a trade are er# similar to those
found in other markets 0like the stock market3, so if #ou hae an# experience in trading,
#ou should (e a(le to pick it up prett# +uickl#$
The o(ject of Forex trading is to exchange one currenc# for another in the expectation
that the price will change, so that the currenc# #ou (ought will increase in alue
compared to the one #ou sold$
Exam"le of making money 'y 'uying euros
Trader!s &ction E;R ;S8
*ou purchase ;=,=== euros at the
E/R1/S2 exchange rate of ;$;J
P;=,=== :;;,J==Q
Two weeks later, #ou exchange #our
;=,=== euros (ack into /S dollars at the
exchange rate of ;$&'==$
:;=,=== P;&,'==QQ
*ou earn a "rofit of <=>># = ?=>>
@E;R A>,>>> x A#AB C ;S <AA,B>>
@@ E;R A>,>>> x A#2D C ;S <A2,D>>
?n exchange rate is simpl# the ratio of one currenc# alued against another currenc#$ For
example, the /S21->F exchange rate indicates how man# /$S$ dollars can purchase one
Swiss franc, or how man# Swiss francs #ou need to (u# one /$S$ dollar$
5o+ to Read an FX Euote
-urrencies are alwa#s +uoted in pairs, such as 6471/S2 or /S2157*$ The reason the#
are +uoted in pairs is (ecause in eer# foreign exchange transaction #ou are
simultaneousl# (u#ing one currenc# and selling another$ >ere is an example of a foreign
exchange rate for the 4ritish pound ersus the /$S$ dollar@
-)FG;S8 C A#=D>>
The first listed currenc# to the left of the slash 0"1"3 is known as the 'ase currency 0in
this example, the 4ritish pound3, while the second one on the right is called the counter
or 6uote currency 0in this example, the /$S$ dollar3$
9hen (u#ing, the exchange rate tells #ou how much #ou hae to pa# in units of the +uote
currenc# to (u# one unit of the (ase currenc#$ %n the example a(oe, #ou hae to pa#
;$H'== /$S$ dollar to (u# ; 4ritish pound$
9hen selling, the exchange rate tells #ou how man# units of the +uote currenc# #ou get
for selling one unit of the (ase currenc#$ %n the example a(oe, #ou will receie ;$H'==
/$S$ dollars when #ou sell ; 4ritish pound$
The 'ase currency is the 7'asis9 for the 'uy or the sell# %f #ou (u# E/R1/S2 this
simpl# means that #ou are (u#ing the (ase currenc# and simultaneousl# selling the +uote
currenc#$
*ou would (u# the pair if #ou (eliee the (ase currenc# will appreciate 0go up3 relatie to
the +uote currenc#$ *ou would sell the pair if #ou think the (ase currenc# will depreciate
0go down3 relatie to the +uote currenc#$
1ongGShort
First, #ou should determine whether #ou want to (u# or sell$
%f #ou want to (u# 0which actuall# means (u# the (ase currenc# and sell the +uote
currenc#3, #ou want the (ase currenc# to rise in alue and then #ou would sell it (ack at a
higher price$ %n trader8s talk, this is called "going long" or taking a "long position"$ 5ust
remem(er@ long C 'uy#
%f #ou want to sell 0which actuall# means sell the (ase currenc# and (u# the +uote
currenc#3, #ou want the (ase currenc# to fall in alue and then #ou would (u# it (ack at a
lower price$ This is called "going short" or taking a "short position"$ Short C sell#
)idG&sk S"read
?ll Forex +uotes include a two:wa# price, the 'id and ask$ The (id is alwa#s lower than
the ask price$
The 'id is the price in which the dealer is willing to (u# the (ase currenc# in exchange
for the +uote currenc#$ This means the (id is the price at which #ou 0as the trader3 will
sell$
The ask is the price at which the dealer will sell the (ase currenc# in exchange for the
+uote currenc#$ This means the ask is the price at which #ou will (u#$
The difference (etween the (id and the ask price is popularl# known as the s"read$
Bet8s take a look at an example of a price +uote taken from a trading platform@
On this 6471/S2 +uote, the (id price is ;$H""' and the ask price
is ;$H""<$ Book at how this (roker makes it so eas# for #ou to trade awa# #our mone#$
%f #ou want to sell 647, #ou click "Sell" and #ou will sell pounds at ;$H""'$ %f #ou want
to (u# 647, #ou click "4u#" and #ou will (u# pounds at ;$H""<$
%n the following examples, we8re going to use fundamental anal#sis to help us decide
whether to (u# or sell a specific currenc# pair$ %f #ou alwa#s fell asleep during #our
economics class or just flat out skipped economics class, donEt worr#, 9e will coer
fundamental anal#sis in a later lesson$ For right now, tr# to pretend #ou know whatEs
going onG
E;RG;S8
%n this example Euro is the (ase currenc# and thus the L(asisM for the (u#1sell$
%f #ou (eliee that the /S econom# will continue to weaken, which is (ad for the /S
dollar, #ou would execute a );, E/R1/S2 order$ 4# doing so #ou hae (ought euros in
the expectation that the# will rise ersus the /S dollar$
%f #ou (eliee that the /S econom# is strong and the euro will weaken against the /S
dollar #ou would execute a SE11 E/R1/S2 order$ 4# doing so #ou hae sold Euros in
the expectation that the# will fall ersus the /S dollar$
;S8GHF,
%n this example the /S dollar is the (ase currenc# and thus the L(asisM for the (u#1sell$
%f #ou think that the 5apanese goernment is going to weaken the *en in order to help its
export industr#, #ou would execute a );, /S2157* order$ 4# doing so #ou hae (ought
/$S dollars in the expectation that the# will rise ersus the 5apanese #en$
%f #ou (eliee that 5apanese inestors are pulling mone# out of /$S$ financial markets and
conerting all their /$S$ dollars (ack to *en, and this will hurt the /S dollar, #ou would
execute a SE11 /S2157* order$ 4# doing so #ou hae sold /$S dollars in the
expectation that the# will depreciate against the 5apanese #en$
-)FG;S8
%n this example the 647 is the (ase currenc# and thus the L(asisM for the (u#1sell$
%f #ou think the 4ritish econom# will continue to do (etter than the /nited States in terms
of economic growth, #ou would execute a );, 6471/S2 order$ 4# doing so #ou hae
(ought pounds in the expectation that the# will rise ersus the /S dollar$
%f #ou (eliee the 4ritish8s econom# is slowing while the /nited State8s econom# remains
strong like (ull, #ou would execute a SE11 6471/S2 order$ 4# doing so #ou hae sold
pounds in the expectation that the# will depreciate against the /S dollar$
;S8G%5F
%n this example the /S2 is the (ase currenc# and thus the L(asisM for the (u#1sell$
%f #ou think the Swiss franc is oeralued, #ou would execute a );, /S21->F order$
4# doing so #ou hae (ought /S dollars in the expectation that the# will appreciate
ersus the Swiss Franc$
%f #ou (eliee that the /S housing market (u((le (urst will hurt future economic growth,
which will weaken the dollar, #ou would execute a SE11 /S21->F order$ 4# doing so
#ou hae sold /S dollars in the expectation that the# will depreciate against the Swiss
franc$
% don8t hae enough mone# to (u# ;=,=== euros$ -an % still tradeN
*ou can with margin trading, Fargin trading is simpl# the term used for trading with
(orrowed capital$ This is how #ou8re a(le to open !;=,=== or !;==,=== positions with as
little as !'= or !;,===$ *ou can conduct relatiel# large transactions, er# +uickl# and
cheapl#, with a small amount of initial capital$
Fargin trading in the foreign exchange market is +uantified in LlotsM$ 9e will (e
discussing these in depth in our next lesson$ For now, just think of the term "lot" as the
minimum amount of currenc# #ou hae to (u#$ 9hen #ou go to the grocer# store and
want to (u# an egg, #ou can8t just (u# a single egg. the# come in doAens or "lots" of ;&$
%n Forex, it would (e just as foolish to (u# or sell ; euro, so the# usuall# come in "lots"
of ;=,=== 0Fini3 or ;==,=== 0Standard3 depending on the t#pe of account #ou hae$
For Exam"le:
• *ou (eliee that signals in the market are indicating that the 4ritish 7ound will go
up against the /S dollar$
• *ou open one lot 0;==,===3, (u#ing with the 4ritish pound at ;K margin and wait
for the exchange rate to clim($ 9hen #ou (u# one lot 0;==,===3 of 6471/S2 at a
price of ;$'===, #ou are (u#ing ;==,=== pounds, which is worth /S!;'=,===
0;==,=== units of 647 Q ;$'= 0exchange rate with /S233$ %f the margin
re+uirement was ;K, then /S!;'== would (e set aside in #our account to open
up the trade 0/S!;'=,=== Q ;K3$ *ou now control ;==,=== pounds with
/S!;'==$ *our predictions come true and #ou decide to sell$
• *ou close the position at ;$'='=$ *ou earn '= pips or a(out !'==$ 0? pip is the
smallest price moement aaila(le in a currenc#3$
,our &ctions -)F ;S8
*ou (u# ;==,=== pounds at the 6471/S2 exchange rate of
A#D>>>
P;==,===:;'=,===
*ou (link for two seconds and the 6471/S2 exchange rate
rises to A#D>D> and #ou sell$
:;==,=== P;'=,'==QQ
*ou hae earned a "rofit of <D>># = ?D>>
9hen #ou decide to close a position, the deposit that #ou originall# made is returned to
#ou and a calculation of #our profits or losses is done$ This profit or loss is then credited
to #our account$
9e will also (e discussing margin more in:depth in the next lesson, (ut hopefull# #ou8re
a(le to get a (asic idea of how margin works$
Rolloer
)o, this is not the same as rolloer minutes from #our cell phone carrier, For positions
open at #our (roker8s "cut:off time" usuall# 'pm EST, there is a dail# rolloer interest
rate that a trader either pa#s or earns, depending on #our esta(lished margin and position
in the market$ %f #ou do not want to earn or pa# interest on #our positions, simpl# make
sure the# are all closed (efore 'pm EST, the esta(lished end of the market da#$
Since eer# currenc# trade inoles (orrowing one currenc# to (u# another, interest
rolloer charges are part of forex trading$ %nterest is paid on the currenc# that is
(orrowed, and earned on the one that is (ought$ %f a client is (u#ing a currenc# with a
higher interest rate than the one he1she is (orrowing, the net differential will (e positie
0i$e$ /S2157*3 : and the client will earn funds as a result$ ?sk #our (roker or dealer
a(out specific details regarding rolloer$
?lso note that man# retail (rokers do adjust their rolloer rates (ased on different factors
0e$g$, account leerage, inter(ank lending rates3$ 7lease check with #our (roker for more
information on rolloer rates and crediting1de(iting procedures$
2on8t know what the interest rates are for each currenc#N >ere is a chart to help #ou out$
?ccurate as of =;1&I1=<$
8emo Trading
*ou can open a demo account for free with most Forex (rokers$ This account has the full
capa(ilities of a "real" account$ 9h# is it freeN %t8s (ecause the (roker wants #ou to learn
the ins and outs of their trading platform, and hae a good time trading without risk, so
#ou8ll fall in loe with them and deposit real mone#$ The demo account allows #ou to
learn a(out the Forex markets and test #our trading skills with CERO risk$
,O; S5O;18 8E$O TR&8E FOR &T 1E&ST I $O(T5S )EFORE ,O;
EJE( T5I(K &)O;T F;TTI(- RE&1 $O(E, O( T5E 1I(E#
I REFE&T 4 ,O; S5O;18 8E$O TR&8E FOR &T 1E&ST I $O(T5S
)EFORE ,O; EJE( T5I(K &)O;T F;TTI(- RE&1 $O(E, O( T5E 1I(E#
L8on!t 1ose ,our $oneyL 8eclaration
7lace #our hand on #our heart and sa#$$$
LI +ill demo trade for at least I months 'efore I trade +ith real money#L
)ow touch #our head with #our index finger and sa#$$$
LI am a smart and "atient Forex traderML
Kno+ ,our FNs and 1Ns
>ere is where weEre going to do a little math$ *ou8e pro(a(l# heard of the terms "pips"
and "lots" thrown around, and here we8re going to explain what the# are and show #ou
how the# are calculated$
Take #our time with this information, as it is re+uired knowledge for all Forex traders$
2onEt een think a(out trading until #ou are comforta(le with pip alues and calculating
profit and loss$
What the heck is a Fi"?
The most common increment of currencies is the 7ip$ %f the E/R1/S2 moes from
;$&&'= to ;$&&';, that is O)E 7%7$ ? pip is the last decimal place of a +uotation$ The 7ip
is how #ou measure #our profit or loss$
?s each currenc# has its own alue, it is necessar# to calculate the alue of a pip for that
particular currenc#$ %n currencies where the /S 2ollar is +uoted first, the calculation
would (e as follows$
BetEs take /S2157* rate at ;;<$J= 0notice this currenc# pair onl# goes to two decimal
places, most of the other currencies hae four decimal places3
%n the case of /S2157*, ; pip would (e $=;
Therefore,
;S8GHF,:
;;<$J=
$=; diided (# exchange rate R pip alue
$=; 1 ;;<$J= R =$====JI"
This looks like a er# long num(er (ut later we will discuss lot siAe$
;S8G%5F:
;$'&'=
$===; diided (# exchange rate R pip alue
$===; 1 ;$'&'= R =$====S''
;S8G%&8:
;$"J<=
$===; diided (# exchange rate R pip alue
$===; 1 ;$"J<= R =$====SH;'
%n the case where the /S 2ollar is not +uoted first and we want to get the /S 2ollar
alue, we hae to add one more step$
E;RG;S8:
;$&&==
$===; diided (# exchange rate R pip alue
so
$===; 1 ;$&&== R E/R =$====J;<S
(ut we need to get (ack to /S dollars so we add another calculation which is
E/R x Exchange rate
So
=$====J;<S x ;$&&== R =$====<<<<
9hen rounded up it would (e =$===;

-)FG;S8:
;$H<H'
$===; diided (# exchange rate R pip alue
So
$===; 1 ;$H<H' R 647 =$====''S
4ut we need to get (ack to /S dollars so we add another calculation which is
647 x Exchange rate
So
=$====''S x ;$H<H' R =$====<<J
9hen rounded up it would (e =$===;

*ouEre pro(a(l# rolling #our e#es (ack and thinking do % reall# need to work all this out
and the answer is )O$ )earl# all forex (rokers will work all this out for #ou
automaticall#$ %tEs alwa#s good for #ou to know how the# work it out$
%n the next section, we will discuss how these seemingl# insignificant amounts can add
up$
9hat the heck is a BotN
Spot Forex is traded in lots$ The standard siAe for a lot is !;==,===$ There is also a mini
lot siAe and that is !;=,===$ ?s #ou alread# know, currencies are measured in pips, which
is the smallest increment of that currenc#$ To take adantage of these tin# increments, #ou
need to trade large amounts of a particular currenc# in order to see an# significant profit
or loss$
BetEs assume we will (e using a !;==,=== lot siAe$ 9e will now recalculate some
examples to see how it affects the pip alue$
/S2157* at an exchange rate of ;;<$<=
0$=; 1 ;;<$J=3 x !;==,=== R !J$I" per pip
/S21->F at an exchange rate of ;$"'''
0$===; 1 ;$"'''3 x !;==,=== R !S$JH per pip
%n cases where the /S 2ollar is not +uoted first, the formula is slightl# different$
E/R1/S2 at an exchange rate of ;$;<I=
0$===; 1 ;$;<I=3 X E/R ;==,=== R E/R J$IJ x ;$;<I= R !<$<<HI" rounded up will (e
!;= per pip
6471/S2 at an exchange rate or ;$J="=
0$===; 1 ;$J="=3 x 647 ;==,=== R '$'" x ;$J="= R <$<<";S rounded up will (e !;= per
pip$
*our (roker ma# hae a different conention for calculating pip alue relatie to lot siAe
(ut whicheer wa# the# do it, the#8ll (e a(le to tell #ou what the pip alue is for the
currenc# #ou are trading is at the particular time$ ?s the market moes, so will the pip
alue depending on what currenc# #ou are currentl# trading$
5o+ the heck do I calculate "rofit and loss?
So now that #ou know how to calculate pip alue, letEs look at how #ou calculate #our
profit or loss$
BetEs (u# /S dollars and Sell Swiss Francs$
The rate #ou are +uoted is ;$"'&' 1 ;$"'I=$ 4ecause #ou are (u#ing /S #ou will (e
working on the ;$"'I=, the rate at which traders are prepared to sell$
So #ou (u# ; lot of !;==,=== at ;$"'I=$
? few hours later, the price moes to ;$"''= and #ou decide to close #our trade$
The new +uote for /S21->F is ;$"''= 1 ;"'''$ Since #ou8re closing #our trade and #ou
initiall# (ought to enter the trade, #ou now sell in order to close the trade so #ou must
take the ;$"''= price$ The price traders are prepared to (u# at$
The difference (etween ;$"'I= and ;$"''= is $==&= or &= pips$
/sing our formula from (efore, we now hae 0$===;1;$"''=3 x !;==,=== R !S$JH per pip
x &= pips R !;IH$"=
Remem(er, when #ou enter or exit a trade, #ou are su(ject to the spread in the (id1offer
+uote$
9hen #ou 'uy a currency you +ill use the offer "rice and when you sell you +ill use
the 'id "rice$
So when #ou 'uy a currenc#, #ou pa# the spread as #ou enter the trade (ut not as #ou
exit$ ?nd when #ou sell a currenc# #ou don8t pa# the spread when #ou enter (ut onl#
when #ou exit$
9hat the heck is Beerage?
*ou are pro(a(l# wondering how a small inestor like #ourself can trade such large
amounts of mone#$ Think of #our (roker as a (ank who (asicall# fronts #ou !;==,=== to
(u# currencies and all he asks from #ou is that #ou gie him !;,=== as a good faith
deposit, which he will hold #ou for (ut not necessaril# keep$ Sounds too good to (e trueN
9ell this is how forex trading using leerage works$
The amount of leerage #ou use will depend on #our (roker and what #ou feel
comforta(le with$
T#picall# the (roker will re+uire a minimum account siAe, also known as account margin
or initial margin$ Once #ou hae deposited #our mone# #ou will then (e a(le to trade$
The (roker will also specif# how much the# re+uire per position 0lot3 traded$
For example, for eer# !;,=== #ou hae, #ou can trade ; lot of !;==,===$ So if #ou hae
!',=== the# ma# allow #ou to trade up to !'==,=== of Forex$
The minimum securit# 0margin3 for each lot will ar# from (roker to (roker$ %n the
example a(oe, the (roker re+uired a one percent margin$ This means that for eer#
!;==,=== traded, the (roker wants !;,=== as a deposit on the position$
What the heck is a $argin %all?
%n the eent that mone# in #our account falls (elow margin re+uirements 0usa(le margin3,
#our (roker will close some or all open positions$ This preents #our account from falling
into a negatie (alance, een in a highl# olatile, fast moing market$
Exam"le OA
BetEs sa# #ou open a regular Forex account with !&,=== 0not a smart idea3$ *ou open ; lot
of the E/R1/S2, with a margin re+uirement of !;===$ /sa(le Fargin is the mone#
aaila(le to open new positions or sustain trading losses$ Since #ou started with !&,===,
#our usa(le margin is !&,===$ 4ut when #ou opened ; lot, which re+uires a margin
re+uirement of !;,===, #our usa(le margin is now !;,===$
%f #our losses exceed #our usa(le margin of !;,=== #ou will get a margin call$
Exam"le O2
BetEs sa# #ou open a regular Forex account with !;=,===$ *ou open ; lot of the
E/R1/S2, with a margin re+uirement is !;===$ Remem(er, usa(le margin is the mone#
#ou hae aaila(le to open new positions or sustain trading losses$ So prior to opening ;
lot, #ou hae a usa(le margin of !;=,===$ ?fter #ou open the trade, #ou now hae !<,===
usa(le margin and !;,=== of used margin$
%f #our losses exceed #our usa(le margin of !<,===, #ou will get a margin call$
Fake sure #ou know the difference (etween usa'le margin and used margin$
%f the e+uit# 0the alue of #our account3 falls (elow #our usa(le margin due to trading
losses, #ou will either hae to deposit more mone# or #our (roker will close #our position
to limit #our risk and his risk$ ?s a result, #ou can neer lose more than #ou deposit$
%f #ou are going to trade on a margin account, itEs ital that #ou know what #our (rokerEs
policies are on margin accounts$
*ou should also know that most (rokers re+uire a higher margin during the weekends$
This ma# take the form of ;K margin during the week and if #ou intend to hold the
position oer the weekend it ma# rise to &K or higher$
The topic of margin is a touch# su(ject and some argue that too much margin is
dangerous$ %t all depends on the indiidual$ The important thing to remem(er is that #ou
thoroughl# understand #our (rokerEs policies regarding margin and that #ou understand
and are comforta(le with the risks inoled$
Some (rokers descri(e their leeraging in terms of a leerage ratio and other in terms of a
margin percentage$ The simple relationship (etween the two terms is@
Beerage R ;== 1 Fargin 7ercent
Fargin 7ercent R ;== 1 Beerage
Beerage is conentionall# displa#ed as a ratio, such ;==@; or &==@;$
Would ,ou 1ike Fries +ith ,our Fi"s?
The term "order" refers to how #ou will enter or exit a trade$ >ere we discuss the
different t#pes of orders that can (e placed into the foreign exchange market$ 4e sure that
#ou know which t#pes of orders #our (roker accepts$ 2ifferent (rokers accept different
t#pes of orders$
Order T#pes
4asic Order T#pes
There are some (asic order t#pes that all (rokers proide and some others that sound
weird$ The (asic ones are@
• $arket order
? market order is an order to (u# or sell at the current market price$ For example,
E/R1/S2 is currentl# trading at ;$&;"=$ %f #ou wanted to (u# at this exact price,
#ou would click (u# and #our trading platform would instantl# execute a (u#
order at that exact price$ %f #ou eer shop on ?maAon$com, it8s 0kinda3 like using
their ;:-lick ordering$ *ou like the current price, #ou click once and it8s #ours,
The onl# difference is #ou are (u#ing or selling one currenc# against another
currenc# instead of (u#ing 4ritne# Spears -2s$
• 1imit order
? limit order is an order placed to (u# or sell at a certain price$ The order
essentiall# contains two aria(les, price and duration$ For example, E/R1/S2 is
currentl# trading at ;$&='=$ *ou want to go long if the price reaches ;$&=H=$ *ou
can either sit in front of #our monitor and wait for it to hit ;$&=H= 0at which point
#ou would click a (u# market order3, or #ou can set a (u# limit order at ;$&=H=
0then #ou could walk awa# from #our computer to attend #our (allroom dancing
class3$ %f the price goes up to ;$&=H=, #our trading platform will automaticall#
execute a (u# order at that exact price$ *ou specif# the price at which #ou wish to
(u#1sell a certain currenc# pair and also specif# how long #ou want the order to
remain actie 06T- or 6F23$
• Sto"4loss order
? stop:loss order is a limit order linked to an open trade for the purpose of
preenting additional losses if price goes against #ou$ ? stop:loss order remains in
effect until the position is li+uidated or #ou cancel the stop:loss order$ For
example, #ou went long 0(u#3 E/R1/S2 at ;$&&I=$ To limit #our maximum loss,
#ou set a stop:loss order at ;$&&==$ This means if #ou were dead wrong and
E/R1/S2 drops to ;$&&== instead of moing up, #our trading platform would
automaticall# execute a sell order at ;$&&== and close out #our position for a I=
pip loss 0eww,3$ Stop:losses are extremel# useful if #ou don8t want to sit in front
of #our monitor all da# worried that #ou will lose all #our mone#$ *ou can simpl#
set a stop:loss order on an# open positions so #ou won8t miss #our (asket weaing
class$
9eird Sounding Order T#pes
• -T% .-ood Ptil canceled/
? 6T- order remains actie in the market until #ou decide to cancel it$ *our
(roker will not cancel the order at an# time$ Therefore it8s #our responsi(ilit# to
remem(er that #ou hae the order scheduled$
• -F8 .-ood for the day/
? 6F2 order remains actie in the market until the end of the trading da#$
4ecause foreign exchange is a &":hour market, this usuall# means 'pm EST since
that that8s /$S$ markets close, (ut %Ed recommend #ou dou(le check with #our
(roker$
• O%O .Order cancels other/
?n O-O order is a mixture of two limit and1or stop:loss orders$ Two orders with
price and duration aria(les are placed a(oe and (elow the current price$ 9hen
one of the orders is executed the other order is canceled$ Example@ The price of
E/R1/S2 is ;$&="=$ *ou want to either (u# at ;$&=<' oer the resistance leel in
anticipation of a (reakout or initiate a selling position if the price falls (elow
;$;<J'$ The understanding is that if ;$&=<' is reached, #ou will (u# order will (e
triggered and the ;$;<J' sell order will (e automaticall# canceled$
?lwa#s check with #our (roker for specific order information and to see if an# rolloer
fees will (e applied if a position is held longer than one da#$ Deeping #our ordering rules
simple is the (est strateg#$
Summar#
The (asic order t#pes 0market, stop loss, and limit3 are usuall# all that most traders eer
need$ /nless #ou are a eteran trader 0#eah right3, donEt get fanc# and design a s#stem of
trading re+uiring a large num(er of orders sandwiched in the market at all times O stick
with the (asic stuff first$
Fake sure #ou full# understand and are comforta(le with #our (rokerEs order entr#
s#stem (efore executing a trade$
8O (OT make a trade with real mone# until #ou hae an extremel# high comfort leel
with the trading platform and order entr# s#stem$
School S"onsors
%hoosing a Forex )roker
4efore trading Forex #ou need to set up an account with a Forex (roker$ So what exactl#
is a (rokerN %n simplest terms, a (roker is an indiidual or a compan# that (u#s and sells
orders according to the trader8s decisions$ 4rokers earn mone# (# charging a commission
or a fee for their serices$
*ou ma# feel oerwhelmed (# the num(er of (rokers who offer their serices online$
2eciding on a (roker re+uires a little (it of research on #our part, (ut the time spent will
gie #ou insight into the serices that are aaila(le and fees charged (# arious (rokers$
%s the Forex (roker regulatedN
9hen selecting a prospectie Forex (roker, find out with which regulator# agencies it is
registered with$ The Forex market is la(eled as an LunregulatedM market, and it (asicall#
is$ Regulation is t#picall# reactie, meaning onl# after #ouEe (een (am(ooAled out of
#our entire saings will something (e done$
%n the /nited States a (roker should (e registered as a Futures -ommission Ferchant
0F-F3 with the -ommodit# Futures Trading -ommission 0-FT-3 and a )F? mem(er$
The -FT- and )F? were made to protect the pu(lic against fraud, manipulation, and
a(usie trade practices$
*ou can erif# -ommodit# Futures Trading -ommission 0-FT-3 registration and )F?
mem(ership status of a particular (roker and check their disciplinar# histor# (# phoning
)F? at 0J==3 S&;:I'H= or (# checking the (roker1firm information section 04?S%-3 of
)F?8s 9e( site at www$nfa$futures$org1(asicnet1$
?mong the registered firms, look for those with clean regulator# records and solid
financials$ Sta# awa# from non:regulated firms,
The )F? is stepping up their efforts in educating inestors a(out retail forex trading$
The#Ee created a (rochure fit for a 7ulitAer 7riAe called, "Trading in the Retail Off:
Exchange Foreign -urrenc# FarketM$ The )F? recommends #ou read it (efore taking the
forex plunge$
The#Ee also deeloped a Forex Online Bearning 7rogram, an interactie self:directed
program explaining how retail forex contracts are traded, the risks inherent in forex
trading and steps indiiduals should take (efore opening a forex account$ 4oth the
(rochure and the online learning program are aaila(le at no charge to the pu(lic$
%ustomer Serice
Forex is a &":hour market, so &":hour support is a must, -an #ou contact the firm (#
phone, email, chat, etc$N 2o the reps seem knowledgea(leN The +ualit# of support can
ar# drasticall# from (roker to (roker, so (e sure to check them out (efore opening an
account$
>ereEs a good tip@ choose seeral online (rokers and contact their help desks$ Seeing how
+uickl# the# respond to #our +uestions can (e ke# in gauging how the# will respond to
#our needs$ %f #ou don8t get a speed# repl# and a satisfactor# answer to #our +uestion,
#ou certainl# wouldn8t want to trust them with #our (usiness$ 5ust (e aware that as in
other t#pes of (usinesses, pre:sales serice might (e (etter than post:sales serice$
Online Trading 7latform
Fost, if not all, Forex (rokers allow #ou to trade oer the %nternet relatiel# eas#$ The
(ack(one of an# trading platform is their ordering s#stem$ So trading software is er#
important$ 6et a feel for the options that are aaila(le (# tr#ing out a demo account at a
few online (rokers$
-losel# examine the (rokerEs screen la#out$ %t should include@
• the a(ilit# to iew real:time currenc# exchange rate +uotes,
• an account summar# showing #our current account (alance with realiAed and
unrealiAed profit and loss, margin aaila(le, and an# margin locked in open
positions$
Fost trading platforms are either 9e( (ased 0in 5aa3, or a client:(ased program #ou can
install on #our computer, and which ersion #ou choose is #our personal preference@
• 9e( (ased software is hosted on #our (rokerEs we( site$ *ou wonEt hae to install
an# software on #our own computer, and #ouEll (e a(le to log in from an#
computer that has an %nternet connection$
• ? client:(ased software program, or one that #ou download and install, will onl#
allow #ou to trade on #our own computer 0unless #ou install the program on eer#
computer #ou use3$
/suall#, the "download and install" program runs faster, (ut most programs are operating
s#stem specific$ For example, most (rokers onl# offer their trading platform application
to run on Ficrosoft 9indows$ %f heaen for(id #ou are a Fac user 0,3, #ou wonEt (e a(le
to install the application and will hae to use #our (rokerEs 9e( (ased or 5aa:(ased
trading platform$ These two 0the 9e( or 5aa:(ased3 will run on an# computer since the#
run through #our internet (rowser$
5aa:(ased software programs are preferred (# most (rokers, who think the# are more
safe and relia(le$ 5aa:(ased software tends to (e less ulnera(le to attack from iruses
and hackers during transmissions than "download and install" software$
4ut alwa#s (e sure to open a demo account and test out the (roker8s platform (efore
opening a real account,
2onEt forget #our high speed %nternet connection
The Forex market is a fast moing market and #ou will need up:to:the second
information to make informed trading decisions$ Fake sure #ou hae a high speed
%nternet connection$ If you donNt, you might as +ell not een 'other trading# 2ial:up
will a(solutel# not work for Forex, %f #ou plan to trade online #ou will need a modern
computer and high speed %nternet connection, and we canEt stress this enough,
4ells and 9histles
?n# Forex (roker worth his salt should offer #ou real:time +uotes and allow #ou to
+uickl# enter and exit the market$ These are minimal re+uirements of an# trading
software$ /pgraded software packages are usuall# offered as an extra monthl# fee (#
(rokers$
Fost (rokers now offer integrated charting and technical anal#sis packages with their
trading platforms$ The leel of integration with the trading platforms aries and is worth
understanding carefull#$
Fini1Ficro ?ccounts
Fost (rokers offer er# small Lmini:accountsM and een smaller "micro:account" for as
little as a couple hundred (ucks$ These little cute accounts are a great wa# to get started
and test #our trading skills and gain experience$
4roker 7olicies
4efore selecting an online Forex (roker, #ou should closel# examine their features and
policies$ These include@
• &aila'le %urrency Fairs
*ou should confirm that the prospectie (roker offers, at minimum, the seen
major currencies 0?/2, -?2, ->F, E/R, 647, 57*, and /S23$
• Transaction %osts
Transaction costs are calculated in pips$ The lower the num(er of pips re+uired
per trade (# the (roker, the greater the profit that the trader makes$ -omparing pip
spreads of half doAen (rokers will reeal different transaction costs$ For example,
the (id1ask spread for E/R1/S2 is usuall# I pips, (ut if #ou can find & pips,
thatEs een (etter$
• $argin Re6uirement
The lower the margin re+uirement 0meaning the higher the leerage3, the greater
the potential for higher profits and losses$ Fargin percentages ar# from $&'K
and up$ Bow margin re+uirements are great when #our trades are good, (ut not so
great when #ou are wrong$ 4e realistic a(out margins and remem(er that the#
swing (oth wa#s$
• $inimum Trading Si0e Re6uirement
The siAe of one lot ma# differ from (roker to (roker, spanning ;,===, ;=,===, and
;==,=== units$ ? lot consisting of ;==,=== units is called a LstandardM lot$ ? lot
consisting of ;=,=== units is called a LminiM lot$ ? lot consisting of ;,=== units is
called a LmicroM lot$ Some (rokers een offer fractional unit siAes 0called odd
lots3 which allow #ou create #our own unit siAe$
• Rolloer %harges
Rolloer charges are determined (# the difference (etween the interest rate of the
countr# of the (ase currenc# and the interest rates of the other countr#$ The
greater the interest rate differential (etween the two currencies in the currenc#
pair, the greater the rolloer charge will (e$ For example, when trading
6471/S2, if the 4ritish pound has the greater interest differential with the /$S$
dollar, then the rolloer charge for holding 4ritish pound positions would (e the
most expensie$ On the other hand, if the Swiss Franc were to hae the smallest
interest differential to the /$S$ dollar, then oernight charges for /S21->F would
(e the least expensie of the currenc# pairs$
• $argin &ccount Interest Rate
Fost (rokers pa# interest on a traderEs margin account$ The interest rates
normall# fluctuate with the preailing national rates$ %f #ou decide to take an
extended (reak from trading, the mone# in #our margin account will (e accruing
interest$ Deep in mind that most (rokers 2O )OT allow #ou to accrue interest
unless #our margin re+uirement is at least &K 0'=@;3$
• Trading 5ours
)earl# all (rokers align their hours of operation to coincide with the hours of
operation of the glo(al Forex market@ '@== pm EST Sunda# through "@== pm EST
Frida#$
Other 7olicies
4e sure to scrutiniAe a prospectie (rokerEs Lfine printM section to (e full# aware of all
the nuances that a specific (roker ma# impose on a new trader$
Finding the right (roker is a critical part of the process$ %tEs not eas# and re+uires some
real work on #our part$ 2onEt pick the first one that looks good to #ou$ Deep looking and
tr#ing different demo accounts$
Summar#
9hat to look for in an online Forex (roker1dealer@
;$ 1o+ S"reads#
%n Forex trading the TspreadE is the difference (etween the (u# and sell price of
an# gien currenc# pair$ Bower spreads sae #ou mone#$
&$ 1o+ minimum account o"enings#
For those that are new to Forex trading and for those that donEt hae millions of
dollars in risk capital to trade, (eing a(le to open a micro trading account with
onl# !&'= 0we recommend at least !;,===3 is a great feature for new traders$
I$ Instant automatic execution of your orders#
This is er# important when choosing a Forex (roker$ 2onEt settle with a firm that
re:+uotes #ou when #ou click on a price or a firm that allows for price TslippageE$
This is er# important when trading for small profits$ *ou want what we call a
9*S%9*6 0pronounced wiA:ee:wig3 (roker, This means #ou want instant
execution of #our orders and the price #ou see and "click" is the price that #ou
should get$$$9*S%9*6 R What ,ou See Is What ,ou -et,
"$ Free charting and technical analysis
-hoose a (roker that gies #ou access to the (est charting and technical anal#sis
aaila(le to actie traders$ Book for a (roker that proides free professional
charting serices and allows traders to trade directl# on the charts$
'$ 1eerage
Beerage can either make #ou super rich or super (roke$ Fost likel#, it will (e the
latter$ ?s an inexperienced trader, #ou don8t want too much leerage$ ? good rule
of thum( is to not use more than ;==@; leerage for Standard 0;==k3 accounts and
&==@; for Fini 0;=k3 accounts$

O"ening a Forex Trading &ccount
Opening a new online trading account with a Forex (roker can (e done in three simple
steps@
;$ Selecting an account ty"e
&$ Registration
I$ &ctiating your account
4efore trading a dime of #our hard earned mone#, #ou ma# want to think a(out opening
demo account$ ?ctuall#, open up two or three demos : wh# notN %tEs all FREE, Tr# out
seeral different (rokers to get a feel for the right one for #ou$
?ccount T#pes
9hen #ou8re read# to open a lie account, #ou hae the choice of opening a Forex trading
account under #our personal name or a (usiness name$ ?lso, #ou will hae to decide
whether or not #ou want to open a "standard" account or a "mini" account 0or "micro"
account if aaila(le3$ %nexperienced traders or traders with a small amount of capital to
trade should alwa#s open a mini account$ Onl# experienced traders with lots of mone#
should open a standard account$
&l+ays read the fine "rint#
Some (rokers hae a Lmanaged accountM option in their applications$ %f #ou want the
(roker to trade #our account for #ou, pick this, (ut o(iousl# #ouEre here to learn how to
trade the Forex for #ourself$ 4esides, opening a managed account t#picall# re+uires a
prett# (ig minimum deposit : !&',=== or higher : and the (roker also takes a portion of
the profits$
?lso, make sure #ou open a Forex spot account and not a LforwardsM or LfuturesM
account$
Registration
*ou will hae to su(mit paperwork in order to open an account and the forms will ar#
from (roker to (roker$ The# are usuall# proided in 72F format and can (e iewed and
printed using ?do(e ?cro(at Reader program$
?ccount ?ctiation
Once the (roker has receied all the necessar# paperwork, #ou should receie an email
with instructions on completing #our account actiation$ ?fter these steps hae (een
completed, #ou will receie a final email with #our username, password, and instructions
on how to fund #our account$
So all thatEs left is for #ou to login and start trading$ 7rett# eas# huhN
)ut +ait a darn minuteM
STOFM
9e strongl# adise #ou spend some time at our entire School of 7ipsolog# (efore #ou
start risking real mone#$
Why?
4ecause if #ou donEt, you +ill lose all of your money and freak
out,
*ouEre pro(a(l# thinking, LSo if % read through #our School of Fi"sology first, % will not
lose an# mone#NM
)o, weEre not sa#ing that$ *ou will still pro(a(l# lose mone#$$$
4ut #ouEll lose 1ESS, much less, and pro(a(l# feel fine that #ou lost mone#$ 6o through
our entire School of Fi"sology and #ou8ll understand what we mean$
Forex ersus Stocks
Forex ersus Stocks &dantages
&dantage Forex Stocks
&":hour Trading *ES )O
-ommission Free Trading *ES )O
%nstant Execution of Farket Orders *ES )O
Short:Selling without an /ptick *ES )O
2345our $arket
The Forex market is a seamless &":hour market$ Fost (rokers are open from Sunda# at
&7F EST until Frida# at " 7F EST with customer serice aaila(le &"1H$ 9ith the a(ilit#
to trade during the /$S$, ?sian, and European market hours, #ou can customiAe #our own
trading schedule$
-ommission Free Trading
Fost Forex (rokers charge no commission or additional transactions fees to trade
currencies online or oer the phone$ -om(ined with the tight, consistent, and full#
transparent spread, Forex trading costs are lower than those of an# other market$ The
(rokers are compensated for theirs serices through the (id1ask prices$
%nstantaneous Execution of Farket Orders
*our trades are instantl# executed under normal market conditions$ *ou also hae price
certaint# on eer# market order under normal market conditions$ 9hat #ou click is the
price #ou get$ *ouEre a(le to execute directl# off real:time streaming prices 0*eeeaah,3$
There8s no discrepanc# (etween the displa#ed price shown on the platform and the
execution price to enter #our trade$ Deep in mind that most (rokers onl# guarantee stop,
limit, and entr# orders are onl# guaranteed under normal market conditions$ Fills are
instantaneous most of the time, (ut under extraordinaril# olatile market conditions order
execution ma# experience dela#s$
Short:Selling without an /ptick
/nlike the e+uit# market, there is no restriction on short selling in the currenc# market$
Trading opportunities exist in the currenc# market regardless of whether a trader is long
or short, or which wa# the market is moing$ Since currenc# trading alwa#s inoles
(u#ing one currenc# and selling another, there is no structural (ias to the market$ So #ou
alwa#s hae e+ual access to trade in a rising or falling market$
Book at Fr$ Forex$ >e8s so confident and sex#$ Fr$ Stocks has no chance,
$ore Reasons to 1ike Forex
(o $iddlemen
-entraliAed exchanges proide man# adantages to the trader$ >oweer, one of the
pro(lems with an# centraliAed exchange is the inolement of middlemen$ ?n# part#
located in (etween the trader and the (u#er or seller of the securit# or instrument traded
will cost them mone#$ The cost can (e either in time or in fees$ Spot currenc# trading
does awa# with the middlemen and allows clients to interact directl# with the market:
maker responsi(le for the pricing on a particular currenc# pair$ Forex traders get +uicker
access and cheaper costs$
)uyGSell "rograms do not control the market
>ow man# times hae #ou heard that "fund ?" was selling "X" or (u#ing "C"N Rumor
had it that the funds were taking profits (ecause of the end of the financial #ear or
(ecause toda# is "triple witching da#", all as an explanation of wh# this stock is up or the
market in general is down or positie on the session$ The stock market is er# suscepti(le
to large fund (u#ing and selling$
%n spot trading, the li+uidit# of the Forex market makes the likelihood of an# one fund or
(ank to control a particular currenc# er# slim$ 4anks, hedge funds, goernments, retail
currenc# conersion houses and large net:worth indiiduals are just some of the
participants in the spot currenc# markets where the li+uidit# is unprecedented$
&nalysts and 'rokerage firms are less likely to influence the market
>ae #ou watched TU latel#N >eard a(out a certain %nternet stock and an anal#st of a
prestigious (rokerage firm accused of keeping its recommendations, such as "(u#" when
the stock was rapidl# decliningN %t is the nature of these relationships$ )o matter what the
goernment does to step in and discourage this t#pe of actiit#, we hae not heard the last
of it$
%7O8s are (ig (usiness for (oth the companies going pu(lic and the (rokerage houses$
Relationships are mutuall# (eneficial and anal#sts work for the (rokerage houses that
need the companies as clients$ That catch:&& will neer disappear$
Foreign exchange, as the prime market, generates (illions in reenue for the world8s
(anks and is a necessit# of the glo(al markets$ ?nal#sts in foreign exchange don8t drie
the deal flow, the# just anal#Ae the forex market$
B,>>> stocks ersus 3 maQor currency "airs
There are approximatel# ",'== stocks listed on the )ew *ork Stock exchange$ ?nother
I,'== are listed on the )?S2?V$ 9hich one will #ou tradeN 6ot the time to sta# on top
of so man# companiesN %n spot currenc# trading, there are doAens of currencies traded,
(ut the majorit# of the market trades the " major pairs$ ?renEt four pairs much easier to
keep an e#e on than thousands of stocksN %Ed sa# so$
Forex ersus Futures
Forex ersus Futures &dantages
&dantage Forex Futures
&":hour Trading *ES )O
-ommission Free TradingQ *ES )O
/p to "==@; Beerage *ES )O
7rice -ertaint# *ES )O
6uaranteed Bimited Risk *ES )O
">e# Fr$ Futures, don8t our short shorts look coolN"
Bi+uidit#
%n the spot Forex market, almost !& trillion is traded dail#, making it the largest and most
li+uid market in the world$ This market can a(sor( trading olume and transaction siAes
that dwarf the capacit# of an# other market$ The futures market traders a pun# !I= (illion
per da#$ Thirt# (illionN,, 7eanuts, The futures markets can8t compete with its limited
li+uidit#$ The Forex market is alwa#s li+uid, meaning positions can (e li+uidated and stop
orders executed without slippage except in extremel# olatile market conditions$
2345our $arket
?t &@;' p$m$ EST Sunda#, trading (egins as markets open in S#dne# and Singapore$ ?t H
p$m$ EST the Tok#o market opens, followed (# Bondon at & a$m$ EST$ ?nd finall#, )ew
*ork opens at J a$m$ EST and closes at ' p$m$ EST$ So, (efore )ew *ork trading closes
the S#dne# and Singapore markets are (ack open : itEs a &" hour seamless market, ?s a
trader, this allows #ou to react to faora(le or unfaora(le news (# trading immediatel#$
%f important data comes in from England or 5apan while the /$S$ futures market is closed,
the next da#8s opening could (e a wild ride$ 0Oernight markets in futures currenc#
contracts exist, (ut the# are thinl# traded, not er# li+uid, and are difficult for the aerage
inestor to access3$
%ommission Free Trading
*ou know whatEs great a(out trading currenciesN *ou pa# )O commissions, 4ecause
#ou deal directl# with the market maker ia a purel# electronic online exchange, #ou
eliminate (oth ticket costs and middleman (rokerage fees$ There is still a cost to initiating
an# trade, (ut that cost is reflected in the (id1ask spread that is also present in futures or
e+uities trading$ 4rokers are compensated for their serices through the (id:ask spread
instead of ia commissions$
Frice %ertainty
9hen trading Forex, #ou get rapid execution and price certaint# under normal market
conditions$ %n contrast, the futures and e+uities markets do not offer price certaint# or
instant trade execution$ Een with the adent of electronic trading and limited guarantees
of execution speed, the prices for fills for futures and e+uities on market orders are far
from certain$ The prices +uoted (# (rokers often represent the B?ST trade, not
necessaril# the price for which the contract will (e filled$
-uaranteed 1imited Risk
Traders must hae position limits for the purpose of risk management$ This num(er is set
relatie to the mone# in a traderEs account$ Risk is minimiAed in the spot FX market
(ecause the online capa(ilities of the trading platform will automaticall# generate a
margin call if the re+uired margin amount exceeds the aaila(le trading capital in #our
account$ ?ll open positions will (e closed immediatel#, regardless of the siAe or the
nature of positions held within the account$ %n the futures market, #our position ma# (e
li+uidated at a loss, and #ou will (e lia(le for an# resulting deficit in the account$ That
sucks$
Im"ress ,our 8ate +ith ,our Forex 1ingo
?s in an# new skill that #ou learn, #ou need to learn the lingo$$$especiall# if #ou wish to
woo #our loe8s heart$ *ou, the new(ie, must know certain terms like the (ack of #our
hand (efore making #our first trade$ Some of these terms #ou8e alread# learned, (ut it
neer hurts to hae a little reiew$
$aQor and $inor %urrencies
The eight most fre+uentl# traded currencies 0/S2, E/R, 57*, 647, ->F, -?2, )C2
and ?/23 are called the maQor currencies$ ?ll other currencies are referred to as minor
currencies$ 2o not worr# a(out the minor currencies, the# are for professionals onl#$
?ctuall#, on this site we8ll mostl# coer what we call the Fa' Fie 0/S2, E/R, 57*,
647, and ->F3$ These pairs are the most li+uid and the most sex#$
)ase %urrency
The 'ase currency is the first currenc# in an# currenc# pair$ %t shows how much the (ase
currenc# is worth as measured against the second currency$ For example, if the
/S21->F rate e+uals ;$SI'=, then one /S2 is worth ->F ;$SI'=$ %n the Forex markets,
the /$S$ dollar is normall# considered the L(aseM currenc# for +uotes, meaning that
+uotes are expressed as a unit of !; /S2 per the other currenc# +uoted in the pair$ The
primar# exceptions to this rule are the 4ritish pound, the Euro, and the ?ustralian and
)ew Cealand dollar$
Euote %urrency
The 6uote currency is the second currenc# in an# currenc# pair$ This is fre+uentl# called
the "i" currency and an# unrealiAed profit or loss is expressed in this currenc#$
Fi"
? "i" is the smallest unit of price for an# currenc#$ )earl# all currenc# pairs consist of
fie significant digits and most pairs hae the decimal point immediatel# after the first
digit, that is, E/R1/S2 e+uals ;$&'IJ$ %n this instance, a single pip e+uals the smallest
change in the fourth decimal place : that is, =$===;$ Therefore, if the +uote currenc# in
an# pair is /S2, then one pip alwa#s e+ual ;1;== of a cent$
One nota(le exception is the /S2157* pair where a pip e+uals !=$=;$
)id Frice
The 'id is the price at which the market is prepared to (u# a specific currenc# pair in the
Forex market$ ?t this price, the trader can sell the (ase currenc#$ %t is shown on the left
side of the +uotation$
For example, in the +uote 6471/S2 ;$JJ;&1;', the 'id "rice is ;$JJ;&$ This means #ou
sell one 4ritish pound for ;$JJ;& /$S$ dollars$
&sk Frice
The ask is the price at which the market is prepared to sell a specific currenc# pair in the
Forex market$ ?t this price, #ou can (u# the (ase currenc#$ %t is shown on the right side
of the +uotation$
For example, in the +uote E/R1/S2 ;$&J;&1;', the ask "rice is ;$&J;'$ This means #ou
can (u# one Euro for ;$&J;' /$S$ dollars$ The ask price is also called the offer "rice$
)idG&sk S"read
The s"read is the difference (etween the (id and ask price$ The L'ig figure 6uoteM is the
dealer expression referring to the first few digits of an exchange rate$ These digits are
often omitted in dealer +uotes$ For example, the /S2157* rate might (e ;;J$I=1;;J$I",
(ut would (e +uoted er(all# without the first three digits as LI=1I"M$
Euote %onention
Exchange rates in the Forex market are expressed using the following format@
4ase currenc# 1 Vuote currenc# 4id 1 ?sk
Transaction %ost
The critical characteristic of the (id1ask spread is that it is also the transaction cost for a
round:turn trade$ Round:turn means (oth a (u# 0or sell3 trade and an offsetting sell 0or
(u#3 trade of the same siAe in the same currenc# pair$ For example, in the case of the
E/R1/S2 rate of ;$&J;&1;', the transaction cost is three pips$
The formula for calculating the transaction cost is@
Transaction cost R ?sk 7rice O 4id 7rice
-ross -urrenc#
? cross currency is an# pair in which neither currenc# is the /$S$ dollar$ These pairs
exhi(it erratic price (ehaior since the trader has, in effect, initiated two /S2 trades$ For
example, initiating a long 0(u#3 E/R1647 is e+uialent to (u#ing a E/R1/S2 currenc#
pair and selling a 6471/S2$ -ross currenc# pairs fre+uentl# carr# a higher transaction
cost$
Fargin
9hen #ou open a new margin account with a Forex (roker, #ou must deposit a minimum
amount with that (roker$ This minimum aries from (roker to (roker and can (e as low as
!;== to as high as !;==,===$
Each time #ou execute a new trade, a certain percentage of the account (alance in the
margin account will (e set aside as the initial margin re6uirement for the new trade
(ased upon the underl#ing currenc# pair, its current price, and the num(er of units 0or
lots3 traded$ The lot siAe alwa#s refers to the (ase currenc#$
For example, let8s sa# #ou open a mini account which proides a &==@; leerage or $'K
margin$ Fini accounts trade mini lots$ Bet8s sa# one mini lot e+uals !;=,===$ %f #ou were
to open one mini:lot, instead of haing to proide the full !;=,===, #ou would onl# need
!'= 0!;=,=== x $' R !'=3$
1eerage
1eerage is the ratio of the amount capital used in a transaction to the re+uired securit#
deposit 0margin3$ %t is the a(ilit# to control large dollar amounts of a securit# with a
relatiel# small amount of capital$ Beeraging aries dramaticall# with different (rokers,
ranging from &@; to "==@;$
$argin ? 1eerage C Fossi'le 8eadly %om'ination
Trading currencies on margin lets #ou increase #our (u#ing power$ Feaning that if #ou
hae !',=== cash in a margin account that allows ;==@; leerage, #ou could purchase up
to !'==,=== worth of currenc# (ecause #ou onl# hae to post one percent of the purchase
price as collateral$ ?nother wa# of sa#ing this is that #ou hae !'==,=== in (u#ing power$
9ith more (u#ing power, #ou can increase #our total return on inestment with less cash
outla#$ 4ut (e careful, trading on margin magnifies #our profits ?)2 losses$
$argin %all
?ll traders fear the dreaded margin call$ This occurs when #our (roker notifies #ou that
#our margin deposits hae fallen (elow the re+uired minimum leel (ecause an open
position has moed against #ou$
9hile trading on margin can (e a profita(le inestment strateg#, it is important that #ou
take the time to understand the risks$ Fake sure #ou full# understand how #our margin
account works, and (e sure to read the margin agreement (etween #ou and #our (roker$
?lwa#s ask an# +uestions if there is an#thing unclear to #ou in the agreement$
*our positions could (e partiall# or totall# li+uidated should the aaila(le margin in #our
account fall (elow a predetermined threshold$ *ou ma# not receie a margin call (efore
#our positions are li+uidated 0the ultimate unexpected (irthda# gift3$
Fargin calls can (e effectiel# aoided (# monitoring #our account (alance on a er#
regular (asis and (# utiliAing stop:loss orders 0discussed later3 on eer# open position to
limit risk$
Frotect ,o Self )efore ,ou Wreck ,o Self
4efore we go an# further we are going to (e ;==K honest with #ou and tell #ou the
following (efore #ou consider trading currencies@
;$ &ll forex traders, and +e mean all traders 1OSE money on trades$
)inet# percent of traders lose mone#, largel# due to lack of planning and training
and haing poor mone# management rules$ ?lso, if #ou hate to lose or are a super
perfectionist, #ou8ll pro(a(l# hae a hard time adjusting to trading$
&$ Trading forex is not for the unem"loyed, those on lo+ incomes, or +ho can!t
afford to "ay their electricity 'ill or afford to eat$
*ou should hae at least !;=,=== of trading capital 0in a mini account3 that #ou
can afford to lose$ 2onEt expect to start an account with a few hundred dollars and
expect to (ecome a kaAillionaire$
The Forex market is one of the most popular markets for speculation, due to its enormous
siAe, li+uidit# and tendenc# for currencies to moe in strong trends$ *ou would think
traders all oer the world would make a killing, (ut success has (een limited to er#
small percentage of traders$
Fan# traders come with the misguided hope of making a gaAillion (ucks, (ut in realit#,
lack the discipline re+uired for trading$ Fost people usuall# lack the discipline to stick to
a diet or to go to the g#m three times a week$ %f #ou can8t een do that, how do #ou think
#ou8re going to succeed tradingN
Short term trading %S )OT for amateurs, and it is rarel# the path to Lget rich +uickM$ *ou
can8t make gigantic profits without taking gigantic risks$ ? trading strateg# that inoles
taking a massie degree of risk means suffering inconsistent trading performance and
often suffering large loss$ ? trader who does this pro(a(l# doesnEt een have a trading
strateg# : unless #ou call gam(ling a trading strateg#,
Forex Trading is not a -et4Rich4Euick SchemeM
Forex trading is a SKI11 that takes TI$E to learn#
Skilled traders can and do make mone# in this field$ >oweer, like an# other occupation
or career, success doesnEt just happen oernight$
Forex trading isnEt a piece of cake 0as some people would like #ou to (eliee3$ Think
a(out it, if it was, eer#one trading would alread# (e millionaires$ The truth is that een
expert traders with #ears of experience still encounter periodic losses$
2rill this in #our head@ there are )O shortcuts to Forex trading$ %t takes lots and lots of
T%FE to master$
There is no su(stitute for hard work and diligence$ 7ractice trading on a 2EFO
?--O/)T and pretend the irtual mone# is #our own real mone#$
8o (OT o"en a lie trading account until you are trading FROFIT&)1, on a demo
account#
%f #ou can8t wait until #ou8re profita(le on a demo account, at least demo trade for &
months$ >e#, at least #ou were a(le to hold off losing all #our mone# for two months
rightN %f #ou can8t hold out for & months, cut #our hands off$
%oncentrate on O(E maQor currency "air#
%t gets far too complicated to keep ta(s on more than one currenc# pair when #ou first
start trading$ Stick with one of the majors (ecause the# are the most li+uid which makes
their spreads cheap$
,ou can 'e a +inner at currency trading, 'ut as in all other as"ects of life, it +ill
take hard +ork, dedication, a little luck, a lot of common sense, and a +hole lot of
good Qudgment#
Ty"es of Trading
-ongratulations, *ouEe gotten through the 7re:School and are read# to (egin #our first
da# of class$ *ou did go through the 7re:School rightN 4# now #ouEe learned some
histor# a(out the Forex, how it works, what affects the prices, (lah (lah (lah$
9e know what #ouEre thinkingG)ORI(-M S5OW $E 5OW TO $&KE $O(E,
&1RE&8,M
9ell, sa# no more m# friend. (ecause here is where #our journe# as a Forex trader
(eginsG

This is #our last chance to turn (ackG Take the red pill, and we take #ou (ack to where
#ou were and #ou will forget all a(out this$ *ou can go (ack to liing #our aerage life in
#our <:' jo( and work for someone else for the rest of #our life$

OR
*ou can take the green pill 0green for mone#, *eah,3 ?nd learn how #ou can make
mone# for #ourself in the most actie market in the world, simpl# (# using a little (rain
power$ 5ust remem(er, #our education will neer stop$ Een after #ou graduate from
4a(#7ips$com, #ou must constantl# pursue as much knowledge as #ou can, so that #ou
can (ecome a true FOREX F?STER, )ow pop that green pill in, wash it down with
some chocolate milk, and gra( #our lunch(oxGSchool of 7ipsolog# is now in session,
Note: the green pill was made with a brainwashing serum. You will now obey everything
that we tell you to do! Mwuahahaha! <--evil laugh
T+o Ty"es of Trading
There are & (asic t#pes of anal#sis #ou can take when approaching the forex@
;$ Fundamental anal#sis
&$ Technical anal#sis$
There has alwa#s (een a constant de(ate as to which anal#sis is (etter, (ut to tell #ou the
truth, #ou need to know a little (it of (oth$ So letEs (reak each one down and then come
(ack and put them together$
Fundamental &nalysis
Fundamental anal#sis is a wa# of looking at the market through economic, social and
political forces that affect suppl# and demand$ 0*ada #ada #ada$3 %n other words, #ou
look at whose econom# is doing well, and whose econom# sucks$ The idea (ehind this
t#pe of anal#sis is that if a countr#Es econom# is doing well, their currenc# will also (e
doing well$ This is (ecause the (etter a countr#Es econom#, the more trust other countries
hae in that currenc#$
For example, the /$S$ dollar has (een gaining strength (ecause the /$S$ econom# is
gaining strength$ ?s the econom# gets (etter, interest rates get higher to control inflation
and as a result, the alue of the dollar continues to increase$ %n a nutshell, that is
(asicall# what fundamental anal#sis is$
Bater on in the course #ou will learn which specific news eents drie currenc# prices the
most$ For now, just know that the fundamental anal#sis of the Forex is a wa# of
anal#Aing a currenc# through the strength of that countr#Es econom#$
Technical &nalysis
Technical anal#sis is the stud# of price moement$ %n one word, technical anal#sis R
charts$ The idea is that a person can look at historical price moements, and, (ased on
the price action, can determine at some leel where the price will go$ 4# looking at
charts, #ou can identif# trends and patterns which can help #ou find good trading
opportunities$
The most %F7ORT?)T thing #ou will eer learn in technical anal#sis is the trend,
Fan#, man#, man#, man#, man#, man# people hae a sa#ing that goes, LThe trend is #our
friendM$ The reason for this is that #ou are much more likel# to make mone# when #ou
can find a trend and trade in the same direction$ Technical anal#sis can help #ou identif#
these trends in its earliest stages and therefore proide #ou with er# profita(le trading
opportunities$
)ow % know #ouEre thinking to #ourself, L6eeA, these gu#s are smart$ The# use craA#
words like "technical" and "fundamental" anal#sis$ % can neer learn this stuff,M 2on8t
worr# #ourself too much$ ?fter #ou8re done with the School of 7ipsolog#, #ou too will (e
just as$$$$uhmmm$$$"smartN" as us$
By the way do you feel that green pill ki!king in yet" Bark like a dog!
So +hich ty"e of analysis is 'etter?
?hh, the million dollar +uestion$ Throughout #our journe# as an aspiring Forex trader
#ou will find strong adocates for (oth fundamental and technical trading$ *ou will hae
those who argue that it is the fundamentals alone that drie the market and that an#
patterns found on a chart are simpl# coincidence$ On the other hand, there will (e those
who argue that it is the technicals that traders pa# attention to and (ecause traders pa#
attention to it, common market patterns can (e found to help predict future price
moements$
#o not be fooled by these one sided e$tremists! %ne is not better than the other...
%n order to (ecome a true Forex master #ou will need to know how to effectiel# use
'oth t#pes of anal#sis$ 2on8t (eliee meN Bet me gie #ou an example of how focusing
on onl# one t#pe of anal#sis can turn into a disaster$
• BetEs sa# that #ouEre looking at #our charts and #ou find a good trading
opportunit#$ *ou get all excited thinking a(out the mone# thatEs going to (e
raining down from the sk#$ *ou sa# to #ourself, LFan, %Ee neer seen a more
perfect trading opportunit#$ % loe m# charts$M
• *ou then proceed to enter #our trade with a (ig fat smile on #our face 0the kind
where all #our teeth are showing3$
• 4ut wait, ?ll of a sudden the trade makes a I= pip moe in the OT>ER
2%RE-T%O), Bittle did #ou know that there was an interest rate decrease for
#our currenc# and now eer#one is trading in the opposite direction$
• *our (ig fat smile turns into mush and #ou start getting angr# at #our charts$ *ou
throw #our computer on the ground and (egin to puleriAe it$ *ou just lost a
(unch of mone#, and now #our computer is (roken$ ?nd itEs all (ecause #ou
completel# ignored fundamental anal#sis$
0)ote@ This was not (ased on a real stor#$ This did not happen to me$ % was never this
naie$ % was always a smart trader$$$$ From the oerused sarcasm, % think #ou get the
picture3
Ok, ok, so the stor# was a little oer:dramatiAed, (ut #ou get the point$
The Forex is like a (ig flowing (all of energ#, and within that (all is a (alance (etween
fundamental and technical factors that pla# a part in determining where the market will
go$
o Remem(er how #our mother or father used to tell #ou as a kid that too
much of an#thing is neer goodN 9ell #ou might8e thought that was just
hogwash (ack then (ut in the Forex, the same applies when deciding
which t#pe of anal#sis to use$ 2on8t rel# on just one$ %nstead, #ou must
learn to (alance the use of (oth of them, (ecause it is onl# then that #ou
can reall# get the most out of #our trading$
Ty"es of Forex %harts
BetEs take a look at the three most popular t#pes of charts@
;$ Bine chart
&$ 4ar chart
I$ -andlestick chart
Bine -harts
? simple line chart draws a line from one closing price to the next closing price$ 9hen
strung together with a line, we can see the general price moement of a currenc# pair
oer a period of time$
>ere is an example of a line chart for
E/R1/S2@
4ar -harts
? 'ar chart also shows closing prices, while simultaneousl# showing opening prices, as
well as the highs and lows$ The (ottom of the ertical (ar indicates the lowest traded
price for that time period, while the top of the (ar indicates the highest price paid$ So, the
ertical (ar indicates the currenc# pairEs trading range as a whole$ The horiAontal hash on
the left side of the (ar is the opening price, and the right:side horiAontal hash is the
closing price$
>ere is an example of a (ar chart for E/R1/S2@
(OTE: Throughout our lessons, #ou will see the word L(arM in reference to a single
piece of data on a chart$ ? (ar is simpl# one segment of time, whether it is one da#, one
week, or one hour$ 9hen #ou see the word T(arE going forward, (e sure to understand
what time frame it is referencing$
4ar charts are also called LO>B-M charts, (ecause the# indicate the Open, the 5igh, the
1ow, and the %lose for that particular currenc#$ >ereEs an example of a price (ar@
O"en: The little horiAontal line on the left is the opening price
5igh: The top of the ertical line defines the highest price of the time period
1o+: The (ottom of the ertical line defines the lowest price of the time period
%lose: The little horiAontal line on the right is the closing price
-andlestick -harts
%andlestick charts show the same information as a (ar chart, (ut in a prettier, graphic
format$
-andlestick (ars still indicate the high:to:low range with a ertical line$ >oweer, in
candlestick charting, the larger (lock in the middle indicates the range (etween the
opening and closing prices$ Traditionall#, if the (lock in the middle is filled or colored in,
then the currenc# closed lower than it opened$
%n the following example, the Tfilled colorE is (lack$ For our TfilledE (locks, the top of the
(lock is the opening price, and the (ottom of the (lock is the closing price$ %f the closing
price is higher than the opening price, then the (lock in the middle will (e LwhiteM or
hollow or unfilled$
9e donEt like to use the traditional (lack and white candlesticks$ 9e feel itEs easier to
look at a chart thatEs colored$ ? color teleision is much (etter than a (lack and white
teleision, so wh# not in candlestick chartsN
9e simpl# su(stituted green instead of white, and red instead of (lack$ This means that if
the price closed higher than it opened, the candlestick would (e green$ %f the price closed
lower than it opened, the candlestick would (e red$ %n our later lessons, #ou will see how
using green and red candles will allow #ou to LseeM things on the charts much faster, such
as uptrend1downtrends and possi(le reersal points$
For now, just remem(er that we use red and green candlesticks instead of (lack and white
and we will (e using these colors from now on$
-heck out these candlesticksG4a(#7ips$com st#le, ?www #eeaaah, *ou know #ou like
that,
>ere is an example of a candlestick chart for E/R1/S2$ %snEt it prett#N
The purpose of candlestick charting is strictl# to sere as a isual aid, since the exact
same information appears on an O>B- (ar chart$ The adantages of candlestick charting
are@
• -andlesticks are eas# to interpret, and are a good place for a (eginner to start
figuring out chart anal#sis$
• -andlesticks are eas# to use$ *our e#es adapt almost immediatel# to the
information in the (ar notation$
• -andlesticks and candlestick patterns hae cool names such as the shooting star,
which helps #ou to remem(er what the pattern means$
• -andlesticks are good at identif#ing marketing turning points O reersals from an
uptrend to a downtrend or a downtrend to an uptrend$ *ou will learn more a(out
this later$
)ow that #ou know wh# candlesticks are so cool, itEs time to let #ou know that we will
(e using candlestick charts for most, if not all of chart examples on this site$ ?lso, make
sure #ou check out our Forex -harts 6uide$
Summary of &nalysis R %harts
Ty"es of Trading:
• There are & t#pes of anal#sis@ Fundamental and Technical
• Fundamental anal#sis is the anal#sis of a market through the strength of its
econom#$ 0i$e$ the dollar gets stronger (ecause the /S econom# is getting
stronger3
• Technical anal#sis is the anal#sis of price moements$ Technical anal#sis R
charts$
• Technical anal#sis also helps us identif# trends which can help us find profita(le
trading opportunities$
• To (ecome a successful trader, #ou must alwa#s incorporate (oth t#pes of
anal#sis$
Ty"es of %harts:
• There are three t#pes of charts@
;$ Bine charts
&$ 4ar charts
I$ -andlestick charts
• 9e will (e using candlesticks from now on

What is a %andlestick?
9hile we (riefl# coered candlestick charts in the preious lesson, weEll now dig in a
little and discuss them more in detail$ First letEs do a +uick reiew$
What is a %andlestick?
4ack in the da# when 6odAilla was still a cute little liAard, the 5apanese created their own
old school ersion of technical anal#sis to trade rice$ ? westerner (# the name of Stee
)ison LdiscoeredM this secret techni+ue on how to read charts from a fellow 5apanese
(roker and 5apanese candlesticks lied happil# eer after$ Stee researched, studied,
lied, (reathed, ate candlesticks, (egan writing a(out it and slowl# grew in popularit# in
<=s$ To make a long stor# short, without Stee )ison, candle charts might hae remained
a (uried secret$ Stee )ison is Fr$ -andlestick$
Oka# so what the heck are candlesticksN
The (est wa# to explain is (# using a picture@
-andlesticks are formed using the open, high, low and close$
• %f the close is a(oe the open, then a hollow candlestick 0usuall# displa#ed as
white3 is drawn$
• %f the close is (elow the open, then a filled candlestick 0usuall# displa#ed as
(lack3 is drawn$
• The hollow or filled section of the candlestick is called the Lreal (od#M or (od#$
• The thin lines poking a(oe and (elow the (od# displa# the high1low range and
are called shadows$
• The top of the upper shadow is the LhighM$
• The (ottom of the lower shadow is the LlowM$

Sexy )odies and Strange Shado+s
Sexy )odies
5ust like humans, candlesticks hae different (od# siAes$ ?nd when it comes to forex
trading, thereEs nothing naughtier than checking out the (odies of candlesticks,
Bong (odies indicate strong (u#ing or selling$ The longer the (od# is, the more intense
the (u#ing or selling pressure$
Short (odies impl# er# little (u#ing or selling actiit#$ %n street forex lingo, (ulls mean
(u#ers and (ears mean sellers$
Bong white
candlesticks show
strong (u#ing
pressure$ The
longer the white
candlestick, the
further the close is
a(oe the open$
This indicates that
prices increased considera(l# from open to close and (u#ers were aggressie$ %n other
words, the (ulls are kicking the (earsE (utts (ig time,
Bong (lack 0filled3 candlesticks show strong selling pressure$ The longer the (lack
candlestick, the further the close is (elow the open$ This indicates that prices fell a great
deal from the open and sellers were aggressie$ %n other words, the (ears were gra((ing
the (ulls (# their horns and (od# slamming them$
$ysterious Shado+s
The upper and lower shadows on candlesticks proide important clues a(out the trading
session$
/pper shadows signif# the session high$ Bower shadows signif# the session low$
-andlesticks with long shadows show that trading action occurred well past the open and
close$
-andlesticks with short shadows indicate that most of the trading action was confined
near the open and close$
%f a candlestick has a long upper shadow and short lower shadow, this means that (u#ers
flexed their muscles and (id prices higher, (ut for one reason or another, sellers came in
and droe prices (ack down to end the session (ack near its open price$
%f a candlestick has a long lower shadow and short upper shadow, this means that sellers
flashed their wash(oard a(s and forced price lower, (ut for one reason or another, (u#ers
came in and droe prices (ack up to end the session (ack near its open price$
)asic %andlestick Fatterns
S"inning To"s
-andlesticks with a long upper shadow, long lower shadow and small real (odies are
called spinning tops$ The color of the real (od# is not er# important$
The pattern indicates the indecision (etween the (u#ers and sellers
The small real (od# 0whether hollow or filled3 shows little moement from open to close,
and the shadows indicate that (oth (u#ers and sellers were fighting (ut no(od# could
gain the upper hand$
Een though the session opened and closed with little change, prices moed significantl#
higher and lower in the meantime$ )either (u#ers nor sellers could gain the upper hand,
and the result was a standoff$
%f a spinning top forms during an uptrend, this usuall# means there arenEt man# (u#ers
left and a possi(le reersal in direction could occur$
%f a spinning top forms during a downtrend, this usuall# means there arenEt man# sellers
left and a possi(le reersal in direction could occur$
$aru'o0u
Sounds like some kind of oodoo magic huhN "% will cast the eil spell of the Faru(oAu
on #ou," Fortunatel#, that8s not what it means$ Faru(oAu means there are no shadows
from the (odies$ 2epending on whether the candlestickEs (od# is filled or hollow, the
high and low are the same as itEs open or close$ %f #ou look at the picture (elow, there are
two t#pes of Faru(oAus$
? White $aru'o0u contains a long white (od# with no shadows$ The o"en "rice
e6uals the lo+ "rice and the close "rice e6uals the high "rice$ This is a er# (ullish
candle as it shows that (u#ers were in control the whole entire session$ %t usuall#
(ecomes the first part of a (ullish continuation or a (ullish reersal pattern$
? )lack $aru'o0u contains a long (lack (od# with no shadows$ The o"en e6uals the
high and the close e6uals the lo+$ This is a er# (earish candle as it shows that sellers
controlled the price action the whole entire session$ %t usuall# implies (earish
continuation or (earish reersal$
8oQi
2oji candlesticks hae the same open and close price or at least their (odies are
extremel# short$ The doji should hae a er# small (od# that appears as a thin line$
2oji suggest indecision or a struggle for turf positioning (etween (u#ers and sellers$
7rices moe a(oe and (elow the open price during the session, (ut close at or er# near
the open price$
)either (u#ers nor sellers were a(le to gain control and the result was essentiall# a draw$
There are four special t#pes of 2oji lines$ The length of the upper and lower shadows can
ar# and the resulting candlestick looks like a cross, inerted cross or plus sign$ The word
"2oji" refers to (oth the singular and plural form$
9hen a doji forms on #our chart, pa# special attention to the preceding candlesticks$
%f a doji forms after a series of candlesticks with long hollow (odies 0like white
maru(oAus3, the doji signals that the (u#ers are (ecoming exhausted and weakening$ %n
order for price to continue rising, more (u#ers are needed (ut there arenEt an#more,
Sellers are licking their chops and are looking to come in and drie the price (ack down$
Deep in mind that een after a doji forms, this doesnEt mean to automaticall# short$
-onfirmation is still needed$ 9ait for a (earish candlestick to close (elow the long white
candlestickEs open$
%f a doji forms after a series of candlesticks with long filled (odies 0like (lack
maru(oAus3, the doji signals that sellers are (ecoming exhausted and weakening$ %n order
for price to continue falling, more sellers are needed (ut sellers are all tapped out, 4u#ers
are foaming in the mouth for a chance to get in cheap$
9hile the decline is sputtering due to lack of new sellers, further (u#ing strength is
re+uired to confirm an# reersal$ Book for a white candlestick to close a(oe the long
(lack candlestickEs open$
Reersal Fatterns
Frior Trend
For a pattern to +ualif# as a reersal pattern, there should (e a prior trend to reerse$
4ullish reersals re+uire a preceding downtrend and (earish reersals re+uire a prior
uptrend$ The direction of the trend can (e determined using trend lines, moing aerages,
or other aspects of technical anal#sis$
5ammer and 5anging $an
The hammer and hanging man look exactl# alike (ut hae totall# different meaning
depending on past price action$ 4oth hae cute little (odies 0(lack or white3, long lower
shadows and short or a(sent upper shadows$
The hammer is a (ullish reersal pattern that forms during a downtrend$ %t is named
(ecause the market is hammering out a (ottom$
9hen price is falling, hammers signal that the (ottom is near and price will start rising
again$ The long lower shadow indicates that sellers pushed prices lower, (ut (u#ers were
a(le to oercome this selling pressure and closed near the open$
9ord to the wiseG just (ecause #ou see a hammer form in a downtrend doesnEt mean
#ou automaticall# place a (u# order, Fore (ullish confirmation is needed (efore itEs safe
to pull the trigger$ ? good confirmation example would (e to wait for a white candlestick
to close a(oe the open of the candlestick on the left side of the hammer$
Recognition -riteria@
• The long shadow is a(out two or three times of the real (od#$
• Bittle or no upper shadow$
• The real (od# is at the upper end of the trading range$
• The color of the real (od# is not important$
The hanging man is a (earish reersal pattern that can also mark a top or strong
resistance leel$ 9hen price is rising, the formation of a hanging man indicates that
sellers are (eginning to outnum(er (u#ers$ The long lower shadow shows that sellers
pushed prices lower during the session$ 4u#ers were a(le to push the price (ack up some
(ut onl# near the open$ This should set off alarms since this tells us that there are no
(u#ers left to proide the necessar# momentum to keep raising the price$ $
Recognition -riteria@
• ? long lower shadow which is a(out two or three times of the real (od#$
• Bittle or no upper shadow$
• The real (od# is at the upper end of the trading range$
• The color of the (od# is not important, though a (lack (od# is more (earish than a
white (od#$
Inerted 5ammer and Shooting Star
The inerted hammer and shooting star also look identical$ The onl# difference (etween
them is whether #ouEre in a downtrend or uptrend$ 4oth candlesticks hae petite little
(odies 0filled or hollow3, long upper shadows and small or a(sent lower shadows$
The inerted hammer occurs when price has (een falling suggests the possi(ilit# of a
reersal$ %ts long upper shadow shows that (u#ers tried to (id the price higher$ >oweer,
sellers saw what the (u#ers were doing, said Loh hell noM and attempted to push the price
(ack down$ Fortunatel#, the (u#ers had eaten enough of their 9heaties for (reakfast and
still managed to close the session near the open$ Since the sellers werenEt a(le to close the
price an# lower, this is a good indication that eer#(od# who wants to sell has alread#
sold$ ?nd if thereEs no more sellers, who is leftN 4u#ers$
The shooting star is a (earish reersal pattern that looks identical to the inerted hammer
(ut occurs when price has (een rising$ %ts shape indicates that the price opened at its low,
rallied, (ut pulled (ack to the (ottom$ This means that (u#ers attempted to push the price
up, (ut sellers came in and oerpowered them$ ? definite (earish sign since there are no
more (u#ers left (ecause the#Ee all (een murdered$
Summary of %andlesticks
-andlesticks are formed using the o"en, high, lo+ and close$
• %f the close is a(oe the open, then a hollow candlestick 0usuall# displa#ed as
white3 is drawn$
• %f the close is (elow the open, then a filled candlestick 0usuall# displa#ed as
(lack3 is drawn$
• The hollow or filled section of the candlestick is called the Lreal (od#M or (od#$
• The thin lines poking a(oe and (elow the (od# displa# the high1low range and
are called shadows$
• The top of the upper shadow is the LhighM$
• The (ottom of the lower shadow is the LlowM$
Bong (odies indicate strong (u#ing or selling$ The longer the (od# is, the more intense
the (u#ing or selling pressure$
Short (odies impl# er# little (u#ing or selling actiit#$ %n street forex lingo, (ulls mean
(u#ers and (ears mean sellers$
/pper shadows signif# the session high$
Bower shadows signif# the session low$
-andlesticks with a long upper shadow, long lower shadow and small real (odies are
called spinning tops$ The pattern indicates the indecision (etween the (u#ers and sellers
Faru(oAu means there are no shadows from the (odies$ 2epending on whether the
candlestickEs (od# is filled or hollow, the high and low are the same as itEs open or close$
2oji candlesticks hae the same open and close price or at least their (odies are
extremel# short$
The hammer is a (ullish reersal pattern that forms during a downtrend$ %t is named
(ecause the market is hammering out a (ottom$
The hanging man is a (earish reersal pattern that can also mark a top or strong resistance
leel$
The inerted hammer occurs when price has (een falling suggests the possi(ilit# of a
reersal$
The shooting star is a (earish reersal pattern that looks identical to the inerted hammer
(ut occurs when price has (een rising$
Su""ort and Resistance
Support and resistance is one of the most widel# used concepts in trading$ Strangel#
enough, eer#one seems to hae their own idea on how #ou should measure support and
resistance$
BetEs just take a look at the (asics first$
Book at the diagram a(oe$ ?s #ou can see, this AigAag pattern is making its wa# up 0(ull
market3$ 9hen the market moes up and then pulls (ack, the highest point reached (efore
it pulled (ack is now resistance$
?s the market continues up again, the lowest point reached (efore it started (ack is now
support$ %n this wa# resistance and support are continuall# formed as the market oscillates
oer time$ The reerse of course is true of the downtrend$
Flotting Su""ort and Resistance
One thing to remem(er is that support and resistance leels are not exact num(ers$ Often
times #ou will see a support or resistance leel that appears (roken, (ut soon after find
out that the market was just testing it$ 9ith candlestick charts, these "tests" of support and
resistance are usuall# represented (# the candlestick shadows$
)otice how the shadows of the candles tested the &'== resistance leel$ ?t those times it
seemed like the market was "(reaking" resistance$ >oweer, in hindsight we can see that
the market was merel# testing that leel$
So ho+ do +e truly kno+ if su""ort or resistance is 'roken?
There is no definite answer to this +uestion$ Some argue that a support or resistance leel
is (roken if the market can actuall# close past that leel$ >oweer, #ou will find that this
is not alwa#s the case$ Bet8s take our same example from a(oe and see what happened
when the price actuall# closed past the &'== resistance leel$
%n this case, the price had closed twice a(oe the &'== resistance leel (ut (oth times
ended up falling (ack down (elow it$ %f #ou had (elieed that these were real (reakouts
and (ought this pair, #ou would8e (een seriousl# hurtin, Booking at the chart now, #ou
can isuall# see and come to the conclusion that the resistance was not actuall# (roken.
and that it is still er# much in tact and now een stronger$
So to help #ou filter out these false (reakouts, #ou should think of support and resistance
more of as "Aones" rather than concrete num(ers$ One wa# to help #ou find these Aones is
to plot support and resistance on a line chart rather than a candlestick chart$ The reason is
that line charts onl# show #ou the closing price while candlesticks add the extreme highs
and lows to the picture$ These highs and lows can (e misleading (ecause often times the#
are just the "knee:jerk" reactions of the market$ %t8s like when someone is doing
something reall# strange, (ut when asked a(out it, the# simpl# repl#, "Sorr#, it8s just a
reflex$"
&hen plotting support and resistan!e you don't want the refle$es of the market. You only
want to plot its intentional movements.
Booking at the line chart, #ou want to plot #our support and resistance lines around areas
where #ou can see the price forming seeral peaks or alle#s$
Other interesting tid(its a(out support and resistance@
;$ 9hen the market passes through resistance, that resistance now (ecomes support$
&$ The more often price tests a leel of resistance or support without (reaking it the
stronger the area of resistance or support is$

Trend 1ines
Trend lines are pro(a(l# the most common form of technical anal#sis used toda#$ The#
are pro(a(l# one of the most underutiliAed as well$
%f drawn correctl#, the# can (e as accurate as an# other method$ /nfortunatel#, most
traders don8t draw them correctl# or the# tr# to make the line fit the market instead of the
other wa# around$
%n their most (asic form, an uptrend line is drawn along the (ottom of easil# identifia(le
support areas 0alle#s3$ %n a downtrend, the trend line is drawn along the top of easil#
identifia(le resistance areas 0peaks3$
-hannels
%f we take this trend line theor# one step further and draw a parallel line at the same angle
of the uptrend or downtrend, we will hae created a channel$
To create an up 0ascending3 channel, simpl# draw a parallel line at the same angle as an
uptrend line and then moe that line to position where it touches the most recent peak$
This should (e done at the same time #ou create the trend line$
To create a down 0descending3 channel, simple draw a parallel line at the same angle as
the downtrend line and then moe that line to a position where it touches the most recent
alle#$ This should (e done at the same time #ou created the trend line$
9hen prices hit the (ottom trend line this ma# (e used as a (u#ing area$ 9hen prices hit
the upper trend line this ma# (e used as a selling area$
Summar# of Support and Resistance
9hen the market moes up and then pulls (ack, the highest point reached (efore it pulled
(ack is now resistance$
?s the market continues up again, the lowest point reached (efore it started (ack is now
support$
%n their most (asic form, an uptrend line is drawn along the (ottom of easil# identifia(le
support areas 0alle#s3$ %n a downtrend, the trend line is drawn along the top of easil#
identifia(le resistance areas 0peaks3$
To create an up 0ascending3 channel, simpl# draw a parallel line at the same angle as an
uptrend line and then moe that line to position where it touches the most recent peak$
To create a down 0descending3 channel, simple draw a parallel line at the same angle as
the downtrend line and then moe that line to a position where it touches the most recent
alle#$

o
Fi(onacci 9hoN
9e will (e using Fi(onacci ratios a lot in our trading so #ou (etter learn it and loe it like
#our mother$ Fi(onacci is a huge su(ject and there are man# different studies of
Fi(onacci with weird names (ut weEre going to stick to two@ retracement and extension$
Bet me first start (# introducing #ou to the Fi( man himselfGBeonard Fi(onacci$
Beonard Fi(onacci was a famous %talian mathematician, also called a super duper u(er
geek, who had an Laha,M moment and discoered a simple series of num(ers that created
ratios descri(ing the natural proportions of things in the unierse
The ratios arise from the following num(er series@ ;, ;, &, I, ', J, ;I, &;, I", '', J<, ;""
GG
This series of num(ers is deried (# starting with ; followed (# & and then adding ; P &
to get I, the third num(er$ Then, adding & P I to get ', the fourth num(er, and so on$
?fter the first few num(ers in the se+uence, if #ou measure the ratio of an# num(er to
that of the next higher num(er #ou get $S;J$ For example, I" diided (# '' e+uals =$S;J$
%f #ou measure the ratio (etween alternate num(ers #ou get $IJ&$ For example, I"
diided (# J< R =$IJ& and thatEs as far as into the explanation as weEll go$
These ratios are called the Lgolden mean$M Oka# thatEs enough mum(o jum(o$ Een %Em
a(out to fall asleep with all these num(ers$ %8ll just cut to the chase. these are the ratios
#ou hae to know@
Fi'onacci Retracement 1eels
=$&IS, =$IJ&, =$'==, =$S;J, =$HS"
Fi'onacci Extension 1eels
=, =$IJ&, =$S;J, ;$===, ;$IJ&, ;$S;J
*ou wonEt reall# need to know how to calculate all of this$ *our charting software will do
all the work for #ou$ 4ut itEs alwa#s good to (e familiar with the (asic theor# (ehind the
indicator so #ouEll hae knowledge to impress #our date$
Traders use the Fi(onacci retracement leels as su""ort and resistance leels$ Since so
man# traders watch these same leels and place (u# and sell orders on them to enter
trades or place stops, the support and resistance leels (ecome a self:fulfilling
expectation$
Traders use the Fi(onacci extension leels as "rofit taking leels$ ?gain, since so man#
traders are watching these leels and placing (u# and sell orders to take profits, this tool
usuall# works due self:fulfilling expectations$
Fost charting software includes (oth Fi(onacci retracement leels and extension leel
tools$ %n order to appl# Fi(onacci leels to #our charts, #ouEll need to identif# Swing
>igh and Swing Bow points$
? Swing >igh is a candlestick with at least two lower highs on (oth the left and right of
itself$
? Swing Bow is a candlestick with at least two higher lows on (oth the left and right of
itself$
Bet8s take a closer look at Fi(onacci retracement leels$$$
Fi'onacci Retracement
%n an uptrend, the general idea is to go long the market on a retracement to a Fi(onacci
support leel$ %n order to find the retracement leels, #ou would click on a significant
Swing Bow and drag the cursor to the most recent Swing >igh$ This will displa# each of
the Retracement Beels showing (oth the ratio and corresponding price leel$ BetEs take a
look at some examples of markets in an uptrend$
Watch ho+ to dra+ Fi'onacci retracement leels on a chart
This is an hourl# chart of /S2157*$ >ere we plotted the Fi(onacci Retracement Beels
(# clicking on the Swing Bow at ;;=$HJ on =H1;&1=' and dragging the cursor to the
Swing >igh at ;;&$&H on =H1;I1='$ *ou can see the leels plotted (# the software$ The
Retracement Beels were ;;;$<& 0=$&IS3, ;;;$H= 0=$IJ&3, ;;;$'& 0=$'==3, and ;;;$I'
0=$S;J3$ )ow the expectation is that if /S2157* retraces from this high, it will find
support at one of the Fi(onacci Beels (ecause traders will (e placing (u# orders at these
leels as the market pulls (ack$
)ow letEs look at what actuall# happened after the Swing >igh occurred$ The market
pulled (ack right through the =$&IS leel and continued the next da# piercing the =$IJ&
leel (ut neer actuall# closing (elow it$ Bater on that da#, the market resumed its
upward moe$ -learl# (u#ing at the =$IJ& leel would hae (een a good short term trade$
)ow letEs see how we would use Fi(onacci Retracement Beels during a downtrend$ This
is an hourl# chart for E/R1/S2$ ?s #ou can see, we found our Swing >igh at ;$I&HJ on
=&1&J1=' and our Swing Bow at ;$I;S< a couple hours later$ The Retracement Beels
were ;$I&IS 0=$S;J3, ;$I&&" 0=$'==3, ;$I&;; 0=$IJ&3, and ;$I;<' 0$&IS3$ The expectation
for a downtrend is if it retraces from this high, it will encounter resistance at one of the
Fi(onacci Beels (ecause traders will (e placing sell orders at these leels as the market
attempts to rall#$
BetEs check out what happened next$ )ow isnEt that a thing of (eaut#, The market did tr#
to rall# (ut it (arel# past the =$'== leel spiking to a high ;$I&&H and it actuall# closed
(elow it$ ?fter that (ar, #ou can see that the rall# reersed and the downward moe
continued$ *ou would hae made some nice dough selling at the =$IJ& leel$
>ereEs another example$ This is an hourl# chart for 6471/S2$ 9e had a Swing >igh of
;$H"IJ on =H1&S1=' and a Swing Bow of ;$HIIS the next da#$ So our Retracement Beels
are@ ;$HI<< 0=$S;J3, ;$HIJH 0=$'==3, ;$HIH' 0=$IJ&3, and ;$HIS= 0=$&IS3$ Booking at the
chart, the market looks like it tried to (reak the =$'== leel on seeral occasions, (ut tr#
as it ma#, it failed$ So would putting a sell order at the =$'== leel (e a good tradeN
%f #ou did, #ou would hae lost some serious cheddar, Take a look at what happened$ The
Swing Bow looked to (e the (ottom for this downtrend as the market rallied a(oe the
Swing >igh point$
*ou can see from these examples the market usually finds at least temporar# support
0during an uptrend3 or resistance 0during a downtrend3 at the Fi(onacci Retracements
Beels$ %tEs apparent that there a few pro(lems to deal with here$ ThereEs no wa# of
knowing which leel will proide support$ The =$&IS seems to proide the weakest
support1resistance, while the other leels proide support1resistance at a(out the same
fre+uenc#$ Een though the charts a(oe show the market usuall# onl# retracing to the
=$IJ& leel, it doesnEt mean the price will hit that leel eer# time and reerse$
Sometimes itEll hit the =$'== and reerse, other times itEll hit the =$S;J and reerse, and
other times the price will totall# ignore Fr$ Fi(onacci and (low past all the leels like
similar to the wa# ?llen %erson (lows past his defenders with his nast# first step$
Remem(er, the market will not alwa#s resume its uptrend after finding temporar#
support, (ut instead continue to decline (elow the last Swing Bow$ Same thing for a
downtrend$ The market ma# instead decide to continue a(oe the last Swing >igh$
The placement of stops is a challenge$ %tEs pro(a(l# (est to place stops (elow the last
Swing Bow 0on an uptrend3 or a(oe the Swing >igh 0on a downtrend3, (ut this re+uires
taking a high leel of risk in proportion to the likel# profit potential in the trade$ This is
called reward:to:risk ratio$ %n a later lesson, #ou will learn more mone# management and
risk control and how #ou would onl# take trades with certain reward:to:risk ratios$
?nother pro(lem is determining which Swing Bow and Swing >igh points to start from
to create the Fi(onacci Retracement Beels$ 7eople look at charts differentl# and so will
hae their own ersion of where the Swing >igh and Swing Bow points should (e$ The
point is, there is no one right wa# to do it, (ut the (ad thing is sometimes it (ecomes a
guessing game$
Fi(onacci Extension
The next use of Fi(onacci #ou will (e appl#ing is that of targets$ BetEs start with an
example in an uptrend$
%n an uptrend, the general idea is to take profits on a long trade at a Fi(onacci 7rice
Extension Beel$ *ou determine the Fi(onacci extension leels (# using three mouse
clicks$ First, click on a significant Swing Bow, then drag #our cursor and click on the
most recent Swing >igh$ Finall#, drag #our cursor (ack down and click on the
retracement Swing Bow$ This will displa# each of the 7rice Extension Beels showing
(oth the ratio and corresponding price leels$
Watch ho+ to dra+ Fi'onacci extension leels on a chart
On this ;:hour /S21->F chart, we plotted the Fi(onacci extension leels (# clicking on
the Swing Bow at ;$&""H on =J1;"1=' and dragged the cursor to the Swing >igh at
;$&'<I on =J1;'1=' and then down to the retracement Swing Bow of ;$&'"; on =J1;'1='$
The following Fi(onacci extension leels created are ;$&'<H 0=$IJ&3, ;$&SI; 0=$S;J3,
;$&SJH 0;$===3, ;$&H"I 0;$IJ&3, ;$&HS= 0;$'==3, and ;$&HHH 0;$S;J3$
)ow letEs look at what actuall# happened after the retracement Swing Bow occurred$
• The market rallied to the =$'== leel
• fell (ack to the retracement Swing Bow
• then rallied (ack up to the =$'== leel
• fell (ack slightl#
• rallied to the =$S;J leel
• fell (ack to the =$IJ& leel which acted as support
• then rallied all the wa# to the ;$IJ& leel
• consolidated a (it
• then rallied to the ;$'== leel
*ou can see from these examples that the market often finds at least temporar# resistance
at the Fi(onacci extension leels : not alwa#s, (ut often$ ?s in the examples of the
retracement leels, it should (e apparent that there are a few pro(lems to deal with here
as well$ First, there is no wa# of knowing which leel will proide resistance$ The =$'==
leel was a good leel to coer an# long trades in the a(oe example since the market
retraced (ack to its original leel, (ut if #ou didnEt get (ack in the trade, #ou would hae
left a lot of profits on the ta(le$
?nother pro(lem is determining which Swing Bow to start from in creating the Fi(onacci
Extension Beels$ One wa# is from the last Swing Bow as we did in the examples.
another is from the lowest Swing Bow of the past I= (ars$ ?gain, the point is that there is
no one right wa# to do it, and conse+uentl# it (ecomes a guessing game$
?lright, letEs see how Fi(onacci extension leels can (e used during a downtrend$ %n a
downtrend, the general idea is to take profits on a short trade at a Fi(onacci price
extension leel since the market often finds at least temporar# support at these leels$
On this ;:hour E/R1/S2 chart, we plotted the Fi(onacci extension leels (# clicking on
the Swing >igh at ;$&;IHH on =H1;'1=' and dragged the cursor to the Swing Bow at
;$&=&; on =J1;'1;' and then down to the retracement >igh of ;$&=J'$ The following
Fi(onacci extension leels created are ;$&="; 0=$IJ&3, ;$&=&H 0=$'==3, ;$&=;I 0=$S;J3,
;$;<S< 0;$===3, ;$;<&' 0;$IJ&3, ;$;<;; 0;$'==3, and ;$;J<H 0;$S;J3$
)ow letEs look at what actuall# happened after the retracement Swing Bow occurred$
• The market fell down almost to the =$IJ& leel which for right now is acting as a
support leel
• The market then traded sidewa#s (etween the retracement Swing >igh leel and
=$IJ& leel
• Finall#, the market (roke through the =$IJ& and rested on the =$'== leel
• Then it (roke the =$'== leel and fell all the wa# down to the ;$=== leel
?lone, Fi(onacci leels will not make #ou rich$ >oweer, Fi(onacci leels are definitel#
useful as part of an effectie trading method that includes other anal#sis and techni+ues$
*ou see, the ke# to an effectie trading s#stem is to integrate a few indicators 0not too
man#3 that are applied in a wa# that is not o(ious to most o(serers$
?ll successful traders know itEs how #ou use and integrate the indicators 0including
Fi(onacci3 that makes the difference$ The lesson learned here is that Fi(onacci Beels can
(e a useful tool, (ut neer enter or exit a trade (ased on Fi(onacci Beels alone$
leels are =$&IS, =$IJ&, =$'==, =$S;J, =$HS"
Traders use the Fi(onacci retracement leels as su""ort and resistance leels$ Since so
man# traders watch these same leels and place (u# and sell orders on them to enter
trades or place stops, the support and resistance leels (ecome a self:fulfilling
expectation$
Fi(onacci extension leels are =, =$IJ&, =$S;J, ;$===, ;$IJ&, ;$S;J
Traders use the Fi(onacci extension leels as "rofit taking leels$ ?gain, since so man#
traders are watching these leels and placing (u# and sell orders to take profits, this tool
usuall# works due self:fulfilling expectations$
%n order to appl# Fi(onacci leels to #our charts, #ouEll need to identif# Swing >igh and
Swing Bow points$
? Swing >igh is a candlestick with at least two lower highs on (oth the left and right of
itself$
? Swing Bow is a candlestick with at least two higher lows on (oth the left and right of
itself$

? moing aerage is simpl# a wa# to smooth out price action oer time$ 4# Lmoing
aerageM, we mean that #ou are taking the aerage closing price of a currenc# for the last
TXE num(er of periods$
Bike eer# indicator, a moing aerage indicator is used to help us forecast future prices$
4# looking at the slope of the moing aerage, #ou can make general predictions as to
where the price will go$
?s we said, moing aerages smooth out price action$ There are different t#pes of
moing aerages, and each of them has their own leel of LsmoothnessM$ 6enerall#, the
smoother the moing aerage, the slower it is to react to the price moement$ The
choppier the moing aerage, the +uicker it is to react to the price moement$
9eEll explain the pros and cons of each t#pe a little later, (ut for now letEs look at the
different t#pes of moing aerages and how the# are calculated$
Sim"le $oing &erage .S$&/
? simple moing aerage is the simplest t#pe of moing aerage 02/>,3$ 4asicall#, a
simple moing aerage is calculated (# adding up the last LXM periodEs closing prices and
then diiding that num(er (# X$ -onfusedNNN ?llow me to clarif#$
%f #ou plotted a ' period simple moing aerage on a ; hour chart, #ou would add up the
closing prices for the last ' hours, and then diide that num(er (# '$ Uoila, *ou hae
#our simple moing aerage$
%f #ou were to plot a ' period simple moing aerage on a ;= minute chart, #ou would
add up the closing prices of the last D> minutes and then diide that num(er (# '$
%f #ou were to plot a ' period simple moing aerage on a I= minute chart, #ou would
add up the closing prices of the last AD> minutes and then diide that num(er (# '$
%f #ou were to plot the ' period simple moing aerage on the a " hr$
chartGGGGGG$$OD OD, % think #ou get the picture, BetEs moe on$
Fost charting packages will do all the calculations for #ou$ The reason we just (ored #ou
0#awn,3 with how to calculate a simple moing aerage is (ecause it is important that #ou
understand ho+ the moing aerages are calculated$ %f #ou understand how each moing
aerage is calculated, #ou can make #our own decision as to which t#pe is (etter for #ou$
5ust like an# indicator out there, moing aerages operate with a dela#$ 4ecause #ou are
taking the aerages of the price, #ou are reall# onl# seeing a LforecastM of the future
price and not a concrete iew of the future$ 2isclaimer@ Foing aerages will not turn
#ou into Fs$ -leo the ps#chic,
>ere is an example of how moing aerages smooth out the price action$
On the preious chart, #ou can see I different SF?s$ ?s #ou can see, the longer the SF?
period is, the more it lags (ehind the price$ )otice how the S& SF? is farther awa# from
the current price than the I= and ' SF?$ This is (ecause with the S& SF?, #ou are
adding up the closing prices of the last I2 periods and diiding it (# S&$ The higher the
num(er period #ou use, the slower it is to react to the price moement$
The SF?Es in this chart show #ou the oerall sentiment of the market at this point in
time$ %nstead of just looking at the current price of the market, the moing aerages gie
us a (roader iew, and we can now make a general prediction of its future price$
Exponential Foing ?erage
Ex"onential $oing &erage .E$&/
?lthough the simple moing aerage is a great tool, there is one major flaw associated
with it$ Simple moing aerages are er# suscepti(le to spikes$ Bet me show #ou an
example of what % mean@
BetEs sa# we plot a ' period SF? on the dail# chart of the E/R1/S2 and the closing
prices for the last ' da#s are as follows@
2a# ;@ ;$&I"'
2a# &@ ;$&I'=
2a# I@ ;$&IS=
2a# "@ ;$&IS'
2a# '@ ;$&IH=
The simple moing aerage would (e calculated as
0;$&I"'P;$&I'=P;$&IS=P;$&IS'P;$&IH=31'R ;$&I'J
Simple enough rightN
9ell what if 2a# &Es price was ;$&I==N The result of the simple moing aerage would
(e a lot lower and it would gie #ou the notion that the price was actuall# going down,
when in realit#, 2a# & could hae just (een a one time eent 0ma#(e interest rates
decreasing3$
The point %Em tr#ing to make is that sometimes the simple moing aerage might (e too
simple$ %f onl# there was a wa# that #ou could filter out these spikes so that #ou
wouldnEt get the wrong idea$ >mmmmG% wonderG$9ait a minuteGG*ep, there is a
wa#,
%tEs called the Exponential Foing ?erage,
Exponential moing aerages 0EF?3 gie more weight to the most recent periods$ %n
our example a(oe, the EF? would put more weight on 2a#s I:', which means that the
spike on 2a# & would (e of lesser alue and wouldnEt affect the moing aerage as
much$ 9hat this does is it puts more emphasis on what traders are doing )O9$
9hen trading, it is far more important to see what traders are doing now rather than what
the# did last week or last month$
SF? s$ EF?
Which is 'etter: Sim"le or Ex"onential?
First, letEs start with an exponential moing aerage$ 9hen #ou want a moing aerage
that will respond to the price action rather +uickl#, then a short period EF? is the (est
wa# to go$ These can help #ou catch trends er# earl#, which will result in higher profit$
%n fact, the earlier #ou catch a trend, the longer #ou can ride it and rake in those profits,
The downside to the chopp# moing aerage is that #ou might get faked out$ 4ecause
the moing aerage responds so +uickl# to the price, #ou might think a trend is forming
when in actualit#. it could just (e a price spike$
9ith a simple moing aerage, the opposite is true$ 9hen #ou want a moing aerage
that is smoother and slower to respond to price action, then a longer period SF? is the
(est wa# to go$
?lthough it is slow to respond to the price action, it will sae #ou from man# fake outs$
The downside is that it might dela# #ou too long, and #ou might miss out on a good trade$

S$& E$&
Fros:
2ispla#s a smooth chart, which
eliminates most fakeouts$
Vuick moing, and is good at showing
recent price swings$
%ons:
Slow moing, which ma# cause a lag in
(u#ing and selling signals$
Fore prone to cause fakeouts and gie
errant signals$
So which one is (etterN %tEs reall# up to #ou to decide$ Fan# traders plot seeral different
moing aerages to gie them (oth sides of the stor#$ The# might use a longer period
simple moing aerage to find out what the oerall trend is, and then use a shorter period
exponential moing aerage to find a good time to enter a trade$
%n fact, man# trading s#stems are (uilt around what is called LFoing ?erage
-rossoersM$ Bater in this course, we will gie #ou an example of how #ou can use
moing aerages as part of #our trading s#stem$
Time for recess, 6o find a chart and start pla#ing with some moing aerages$ Tr# out
different t#pes and look at different periods$ %n time, #ou will find out which moing
aerages work (est for #ou$ -lass dismissed,
Summar#
• ? moing aerage is a wa# to smooth out price action$
• There are man# t#pes of moing aerages$ The & most common t#pes are@ Simple
Foing ?erage and Exponential Foing ?erage$
• Simple moing aerages are the simplest form of moing aerages, (ut the# are
suscepti(le to spikes$
• Exponential moing aerages put more weight to recent prices and therefore show
us what traders are doing now$
• %t is much more important to know what traders are doing now than to see what
the# did last week or last month$
• Simple moing aerages are smoother than Exponential moing aerages$
• Bonger period moing aerages are smoother than shorter period moing
aerages$
• -hopp# moing aerages are +uicker to respond to price action and can catch
trends earl#$ >oweer, (ecause of their +uick reaction, the# are suscepti(le to
spikes and can fake #ou out$
• Smooth moing aerages are slower to respond to price action (ut will sae #ou
from spikes and fake outs$ >oweer, (ecause of their slow reaction, the# can
dela# #ou from taking a trade and ma# cause #ou to miss some good
opportunities$
• The (est wa# to use moing aerages is to plot different t#pes on a chart so that
#ou can see (oth long term moement and short term moement$
-ongratulations on making it to the 'th grade, Each time #ou make it to the next grade
#ou continue to add more and more tools to #our traderEs tool(ox$ L9hatEs a traderEs
tool(oxNM #ou sa#G Simple, *our traderEs tool(ox is what #ou will use to L(uildM #our
trading account$ The more tools 0education3 #ou hae in #our traderEs tool(ox 0*O/R
4R?%)3, the easier it will (e for #ou to (uild$
So for this lesson, as #ou learn each of these indicators, think of them as a new tool that
#ou can add to that tool(ox of #ours$ *ou might not necessaril# use all of these tools, (ut
itEs alwa#s nice to hae the option, rightN )ow, enough a(out tools alread#, BetEs get
started,
)ollinger )ands
4ollinger (ands are used to measure a marketEs olatilit#$ 4asicall#, this little tool tells us
whether the market is +uiet or whether the market is BO/2, 9hen the market is +uiet,
the (ands contract. and when the market is BO/2, the (ands expand$ )otice on the chart
(elow that when the price was +uiet, the (ands were close together, (ut when the price
moed up, the (ands spread apart$
ThatEs all there is to it$ *es, we could go on and (ore #ou (# going into the histor# of the
4ollinger (and, how it is calculated, the mathematical formulas (ehind it, and so on and
so forth, (ut we reall# didnEt feel like t#ping it all out$

%n all honest#, #ou donEt need to know an# of that junk$ 9e think itEs more important that
we show #ou some wa#s #ou can appl# the 4ollinger (ands to #our trading$
)ote@ %f #ou reall# want to learn a(out the calculations of a 4ollinger (and, then #ou can
go to www$(ollinger(ands$com
The )ollinger )ounce
One thing #ou should know a(out 4ollinger 4ands is that price tends to return to the
middle of the (ands$ That is the whole idea (ehind the 4ollinger (ounce 0smart, huhN3$ %f
this is the case, then (# looking at the chart (elow, can #ou tell us where the price might
go nextN
%f #ou said down, then #ou are correct, ?s #ou can see, the price settled (ack down
towards the middle area of the (ands$
ThatEs all there is to it$ 9hat #ou just saw was a classic 4ollinger (ounce$ The reason
these (ounces occur is (ecause 4ollinger 4ands act like mini support and resistance
leels$ The longer the time frame #ou are in, the stronger these (ands are$ Fan# traders
hae deeloped s#stems that thrie on these (ounces, and this strateg# is (est used when
the market is ranging and there is no clear trend$
)ow letEs look at a wa# to use 4ollinger 4ands when the market does trend$
4ollinger 4ands
4ollinger 4ands
-ongratulations on making it to the 'th grade, Each time #ou make it to the next grade
#ou continue to add more and more tools to #our traderEs tool(ox$ L9hatEs a traderEs
tool(oxNM #ou sa#G Simple, *our traderEs tool(ox is what #ou will use to L(uildM #our
trading account$ The more tools 0education3 #ou hae in #our traderEs tool(ox 0*O/R
4R?%)3, the easier it will (e for #ou to (uild$
So for this lesson, as #ou learn each of these indicators, think of them as a new tool that
#ou can add to that tool(ox of #ours$ *ou might not necessaril# use all of these tools, (ut
itEs alwa#s nice to hae the option, rightN )ow, enough a(out tools alread#, BetEs get
started,
)ollinger )ands
4ollinger (ands are used to measure a marketEs olatilit#$ 4asicall#, this little tool tells us
whether the market is +uiet or whether the market is BO/2, 9hen the market is +uiet,
the (ands contract. and when the market is BO/2, the (ands expand$ )otice on the chart
(elow that when the price was +uiet, the (ands were close together, (ut when the price
moed up, the (ands spread apart$
ThatEs all there is to it$ *es, we could go on and (ore #ou (# going into the histor# of the
4ollinger (and, how it is calculated, the mathematical formulas (ehind it, and so on and
so forth, (ut we reall# didnEt feel like t#ping it all out$

%n all honest#, #ou donEt need to know an# of that junk$ 9e think itEs more important that
we show #ou some wa#s #ou can appl# the 4ollinger (ands to #our trading$
)ote@ %f #ou reall# want to learn a(out the calculations of a 4ollinger (and, then #ou can
go to www$(ollinger(ands$com
The )ollinger )ounce
One thing #ou should know a(out 4ollinger 4ands is that price tends to return to the
middle of the (ands$ That is the whole idea (ehind the 4ollinger (ounce 0smart, huhN3$ %f
this is the case, then (# looking at the chart (elow, can #ou tell us where the price might
go nextN
%f #ou said down, then #ou are correct, ?s #ou can see, the price settled (ack down
towards the middle area of the (ands$
ThatEs all there is to it$ 9hat #ou just saw was a classic 4ollinger (ounce$ The reason
these (ounces occur is (ecause 4ollinger 4ands act like mini support and resistance
leels$ The longer the time frame #ou are in, the stronger these (ands are$ Fan# traders
hae deeloped s#stems that thrie on these (ounces, and this strateg# is (est used when
the market is ranging and there is no clear trend$
)ow letEs look at a wa# to use 4ollinger 4ands when the market does trend$
)ollinger S6uee0e
The 4ollinger s+ueeAe is prett# self explanator#$ 9hen the (ands Ls+ueeAeM together, it
usuall# means that a (reakout is going to occur$ %f the candles start to (reak out a(oe
the top (and, then the moe will usuall# continue to go up$ %f the candles start to (reak
out (elow the lower (and, then the moe will usuall# continue to go down$
Booking at the chart a(oe, #ou can see the (ands s+ueeAing together$ The price has just
started to (reak out of the top (and$ 4ased on this information, where do #ou think the
price will goN
%f #ou said up, #ou are correct, This is how a t#pical 4ollinger S+ueeAe works$ This
strateg# is designed for #ou to catch a moe as earl# as possi(le$ Setups like these donEt
occur eer#da#, (ut #ou can pro(a(l# spot them a few times a week if #ou are looking at
a ;' minute chart$
So now #ou know what 4ollinger 4ands are, and #ou know how to use them$ There are
man# other things #ou can do with 4ollinger 4ands, (ut these are the & most common
strategies associated with them$ So now #ou can put this in #our traderEs tool(ox, and we
can moe on to the next indicator$
F?-2
F?-2 is an acron#m for $oing &erage %onergence 8iergence$ This tool is used
to identif# moing aerages that are indicating a new trend, whether itEs (ullish or
(earish$ ?fter all, our W; priorit# in trading is (eing a(le to find a trend, (ecause that is
where the most mone# is made$
9ith an F?-2 chart, #ou will usuall# see three num(ers that are used for its settings$
• The first is the num(er of periods that is used to calculate the faster moing
aerage$
• The second is the num(er of periods that are used in the slower moing aerage$
• ?nd the third is the num(er of (ars that is used to calculate the moing aerage of
the difference (etween the faster and slower moing aerages$
For example, if #ou were to see L;&,&S,<M as the F?-2 parameters 0which is usuall# the
default setting for most charting packages3, this is how #ou would interpret it@
• The ;& represents the preious ;& (ars of the faster moing aerage$
• The &S represents the preious &S (ars of the slower moing aerage$
• The < represents the preious < (ars of the difference (etween the two moing
aerages$ This is plotted (# ertical lines called a histogram 0The (lue lines in the
chart a(oe3$
There is a common misconception when it comes to the lines of the F?-2$ The two
lines that are drawn are )OT moing aerages of the price$ %nstead, the# are the moing
aerages of the 2%FFERE)-E (etween two moing aerages$
%n our example a(oe, the faster moing aerage is the moing aerage of the difference
(etween the ;& and &S period moing aerages$ The slower moing aerage plots the
aerage of the preious F?-2 line$ Once again, from our example a(oe, this would (e
a < period moing aerage$
This means that we are taking the aerage of the last < periods of the faster F?-2 line,
and plotting it as our LslowerM moing aerage$ 9hat this does is it smoothes out the
original line een more, which gies us a more accurate line$
The histogram simpl# plots the difference (etween the fast and slow moing aerage$ %f
#ou look at our original chart, #ou can see that as the two moing aerages separate, the
histogram gets (igger$ This is called diergence, (ecause the faster moing aerage is
LdiergingM or moing awa# from the slower moing aerage$
?s the moing aerages get closer to each other, the histogram gets smaller$ This is
called conergence (ecause the faster moing aerage is LconergingM or getting closer
to the slower moing aerage$ ?nd that, m# friend, is how #ou get the name, $oing
&erage %onergence 8iergence, 9hew, we need to crack our knuckles after that one,
Ok, so now #ou know what F?-2 does$ )ow %Ell show #ou what F?-2 can do for
*O/$
$&%8 %rossoer
4ecause there are two moing aerages with different LspeedsM, the faster one will
o(iousl# (e +uicker to react to price moement than the slower one$ 9hen a new trend
occurs, the fast line will react first and eentuall# cross the slower line$ 9hen this
LcrossoerM occurs, and the fast line starts to LdiergeM or moe awa# from the slower
line, it often indicates that a new trend has formed$
From the chart a(oe, #ou can see that the fast line crossed under the slow line and
correctl# identified a new downtrend$ )otice that when the lines crossed, the histogram
temporaril# disappears$ This is (ecause the difference (etween the lines at the time of the
cross is =$ ?s the downtrend (egins and the fast line dierges awa# from the slow line,
the histogram gets (igger, which is good indication of a strong trend$
o There is one draw(ack to F?-2$ )aturall#, moing aerages tend to lag
(ehind price$ ?fter all, it8s just an aerage of historical prices$ Since the
F?-2 represents moing aerages of other moing aerages and is
smoothed out (# another moing aerage, #ou can imagine that there is
+uite a (it of lag$ >oweer, it is still one of the most faored tools (#
man# traders$
7ara(olic S?R
/p until now, weEe looked at indicators that mainl# focus on catching the (eginning of
new trends$ ?nd although it is important to (e a(le to identif# new trends, it is e+uall#
important to (e a(le to identif# where a trend ends$ ?fter all, what good is a well:timed
entr# without a well:timed exitN
One indicator that can help us determine where a trend might (e ending is the 7ara(olic
S?R 0Stop &nd Reersal3$ ? 7ara(olic S?R places dots, or points, on a chart that
indicate potential reersals in price moement$ From the chart a(oe, #ou can see that the
dots shift from (eing (elow the candles during the uptrend, to a(oe the candles when the
trend reerses into a downtrend$
;sing Fara'olic S&R
The nice thing a(out the 7ara(olic S?R is that it is reall# simple to use$ 4asicall#, when
the dots are (elow the candles, it is a (u# signal. and when the dots are a(oe the candles,
it is a sell signal$ This is pro(a(l# the easiest indicator to interpret (ecause it assumes
that the price is either going up or down$ 9ith that said, this tool is (est used in markets
that are trending, and that hae long rallies and downturns$ *ou 2O)ET want to use this
tool in a chopp# market where the price moement is sidewa#s$
Stochastics
Stochastics
Stochastics are another indicator that helps us determine where a trend might (e ending$
4# definition, a stochastic is an oscillator that measures oer(ought and oersold
conditions in the market$ The & lines are similar to the F?-2 lines in the sense that one
line is faster than the other$
5o+ to &""ly Stochastics
Bike % said earlier, stochastics tells us when the market is oer(ought or oersold$
Stochastics are scaled from = to ;==$ 9hen the stochastic lines are a(oe H= 0the red
dotted line in the chart a(oe3, then it means the market is oer(ought$ 9hen the
stochastic lines are (elow I= 0the (lue dotted line3, then it means that the market is
oersold$ ?s a rule of thum(, we (u# when the market is oersold, and we sell when the
market is oer(ought$
Booking at the chart a(oe, #ou can see that the stochastics has (een showing oer(ought
conditions for +uite some time$ 4ased upon this information, can #ou guess where the
price might goN
%f #ou said the price would drop, then #ou are a(solutel# correct, 4ecause the market
was oer(ought for such a long period of time, a reersal was (ound to happen$
That is the (asics of stochastics$ Fan# traders use stochastics in different wa#s, (ut the
main purpose of the indicator is to show us where the market is oer(ought and
oersold$ Oer time, #ou will learn to use stochastics to fit #our own personal trading
st#le$ Oka#, let8s moe on to RS%$

Relatie Strength %ndex
Relatie Strength %ndex, or RS%, is similar to stochastics in that it identifies oer(ought
and oersold conditions in the market$ %t is also scaled from = to ;==$ T#picall#, readings
(elow &= indicate oersold, while readings oer J= indicate oer(ought$
;sing RSI
RS% can (e used just like stochastics$ From the chart a(oe #ou can see that when RS%
dropped (elow &=, it correctl# identified an oersold market$ ?fter the drop, the price
+uickl# shot (ack up$
RS% is a er# popular tool (ecause it can also (e used to confirm trend formations$ %f #ou
think a trend is forming, take a +uick look at the RS% and look at whether it is a(oe or
(elow '=$ %f #ou are looking at a possi(le uptrend, then make sure the RS% is a(oe '=$
%f #ou are looking at a possi(le downtrend, then make sure the RS% is (elow '=$
%n the (eginning of the chart a(oe, we can see that a possi(le uptrend was forming$ To
aoid fakeouts, we can wait for RS% to cross a(oe '= to confirm our trend$ Sure enough,
as RS% passes a(oe '=, it is a good confirmation that an uptrend has actuall# formed$
Oke# doke#, we8e coered a smorgas(ord of indicators, let8s see how we can put all of
what #ou just learned together$$$
Relatie Strength %ndex, or RS%, is similar to stochastics in that it identifies oer(ought
and oersold conditions in the market$ %t is also scaled from = to ;==$ T#picall#, readings
(elow &= indicate oersold, while readings oer J= indicate oer(ought$
;sing RSI
RS% can (e used just like stochastics$ From the chart a(oe #ou can see that when RS%
dropped (elow &=, it correctl# identified an oersold market$ ?fter the drop, the price
+uickl# shot (ack up$
RS% is a er# popular tool (ecause it can also (e used to confirm trend formations$ %f #ou
think a trend is forming, take a +uick look at the RS% and look at whether it is a(oe or
(elow '=$ %f #ou are looking at a possi(le uptrend, then make sure the RS% is a(oe '=$
%f #ou are looking at a possi(le downtrend, then make sure the RS% is (elow '=$
%n the (eginning of the chart a(oe, we can see that a possi(le uptrend was forming$ To
aoid fakeouts, we can wait for RS% to cross a(oe '= to confirm our trend$ Sure enough,
as RS% passes a(oe '=, it is a good confirmation that an uptrend has actuall# formed$
Oke# doke#, we8e coered a smorgas(ord of indicators, let8s see how we can put all of
what #ou just learned together$$$
7utting %t ?ll Together
%n a perfect world, we could take just one of these indicators and trade strictl# (# what
that indicator told us$ The pro(lem is that we 2O)ET lie in a perfect world, and each of
these indicators has imperfections$ That is wh# man# traders com(ine different indicators
together so that the# can LscreenM each other$ The# might hae I different indicators and
the# wonEt trade unless all I indicators gie them the same answer$
?s #ou continue #our journe# as a trader, #ou will discoer what indicators work (est for
#ou$ 9e can tell #ou that we like using F?-2, Stochastics, and RS%, (ut #ou might
hae a different preference$ Eer# trader out there has tried to find the Lmagic
com(inationM of indicators that will alwa#s gie them the right signals, (ut the truth is
that there is no such thing$
9e urge #ou to stud# each indicator on its own until #ou know EX?-TB* how it reacts
to price moement, and then come up with #our own com(ination that fits your trading
st#le$ Bater on in the course, we will show #ou a s#stem that com(ines different
indicators to gie #ou an idea of how the# can compliment each other$
Eer#thing #ou learn a(out trading is like a tool that is (eing added to #our traderEs
tool(ox$ *our tools will make it easier for #ou to L(uildM #our trading account$
)ollinger )ands
• /sed to measure the marketEs olatilit#
• The# act like mini support and resistance leels
• 4ollinger 4ounce
o ? strateg# that relies on the notion that price tends to alwa#s return to the
middle of the 4ollinger 4ands
o *ou (u# when the price hits the lower 4ollinger (and
o *ou sell when the price hits the upper 4ollinger (and
o 4est used in ranging markets
• 4ollinger S+ueeAe
o ? strateg# that is used to catch (reakouts earl#
o 9hen the 4ollinger (ands Ls+ueeAeM the price, it means that the market is
er# +uiet, and a (reakout is eminent$ Once a (reakout occurs, we enter a
trade on whateer side the price made its (reakout$
$&%8
• /sed to catch trends earl# and can also help us spot trend reersals
• %t consists of & moing aerages 0; fast, ; slow3 and ertical lines called a
histogram, which measures the distance (etween the & moing aerages$
• -ontrar# to what man# people think, the moing aerage lines are )OT moing
aerages of the price$ The# are moing aerages of other moing aerages$
• F?-2Es downfall is its lag (ecause it uses so man# moing aerages$
• One wa# to use F?-2 is to wait for the fast line to Lcross oerM or Lcross underM
the slow line and enter the trade accordingl# (ecause it signals a new trend$
Fara'olic S&R
• This indicator is made to spot trend reersals. hence the name 7ara(olic Stop &nd
Reersal 0S?R3
• This is the easiest indicator to interpret (ecause it onl# gies (ullish and (earish
signals$
• 9hen the dots are a(oe the candles, it is a sell signal$
• 9hen the dots are (elow the candles, it is a (u# signal$
• These are (est used in trending markets that consist of long rallies and downturns$
Stochastics
• /sed to indicate oer(ought and oersold conditions
• 9hen the moing aerage lines are a(oe H=, it means that the market is
oer(ought and we should look to sell$
• 9hen the moing aerage lines are (elow I=, it means that the market is oersold
and we should look to (u#$
Relatie Strength Index .RSI/
• Similar to stochastics in that it indicates oer(ought and oersold conditions$
• 9hen RS% is a(oe J=, it means that the market is oer(ought and we should look
to sell$
• 9hen RS% is (elow &=, it means that the market is oersold and we should look to
(u#$
• RS% can also (e used to confirm trend formations$ %f #ou think a trend is forming,
wait for RS% to go a(oe or (elow '= 0depending on if #ouEre looking at an
uptrend or downtrend3 (efore #ou enter a trade$
Each indicator has its imperfections$ This is wh# traders com(ine man# different
indicators to LscreenM each other$ ?s #ou progress through #our trading career, #ou will
learn which indicators #ou like the (est and can com(ine them in a wa# that fits your
trading st#le$
9e know this has (een a er# loooooooooooonnnnng lesson, and we do encourage
#ou to go (ack and read oer an#thing #ou haenEt full# understood #et$ Sometimes it
just takes a couple times of reading (efore #ou trul# grasp something$
Once #ou understand the concepts of these indicators, go to a chart and start pla#ing with
them$ Reall# stud# how each indicator reacts to the price moement$
9hen #ou full# understand an indicator, then it will (ecome another tool for #our traderEs
tool(ox$ For now #ou should just take a (reak$ 6ra( some coffee or get something to
eat$ 9e know #our e#es are hurting, Bet this lesson soak in, and then come (ack when
#ouEre refreshed,
Extra %reditM
;se )ollinger )ands as SRR 1eels and Trade )reakouts
Bearn this simple techni+ue to trade (reakouts (# using 4ollinger 4ands as d#namic
support and resistance leels$
1eading s# 1agging Indicators
9eEe coered a lot of tools that can help #ou anal#Ae charts and identif# trends$ %n fact,
#ou ma# now hae too much information to use effectiel#$
%n this lesson, weEre going to look at streamlining #our use of these chart indicators$ 9e
want #ou to full# understand the strengths and weaknesses of each tool, so #ouEll (e a(le
to determine which ones work for #ou and #our trading planG and which ones donEt$
1eading ersus 1agging Indicators
BetEs discuss some concepts first$ There are two t#pes of indicators@ leading and lagging$
? leading indicator gies a (u# signal 'efore the new trend or reersal occurs$
? lagging indicator gies a signal after the trend has started and (asicall# informs #ou
Lhe# (udd#, pa# attention, the trend has started, #ouEre missing the (oat$M
*ouEre pro(a(l# thinking, LOoooh, %Em going to get rich with leading indicators,M since
#ou would (e a(le to profit from a new trend right at the start$ *ouEre right O #ou would
LcatchM the entire trend eer# single time, %F the leading indicator was correct eer#
single time$ 4ut itEs not$
9hen #ou use leading indicators, #ou will experience a lot of fake:outs$ Beading
indicators are notorious for giing (ogus signals which will LmisleadM #ou$ 6et itN
Beading indicators that "mislead" #ouN >a:ha$ Fan we8re so funn# we een crack
ourseles up$
The other option is to use lagging indicators, which arenEt as prone to (ogus signals$
Bagging indicators onl# gie signals after the price change is clearl# forming a trend$ The
downside is that #ouEd (e a little late in entering a position$ Often the (iggest gains of a
trend occur in the first few (ars, so (# using a lagging indicator #ou could potentiall#
miss out on much of the profit$ 9hich sucks$
Oscillators and Trend Following %ndicators
For the purpose of this lesson, letEs (roadl# categoriAe all of our technical indicators into
one of two categories@
;$ Oscillators
&$ Trend follo+ing or momentum indicators
Oscillators are leading indicators$

Fomentum indicators are lagging indicators$

9hile the two can (e supportie of each other, the#8re more likel# to conflict with each
other$ 9eEre not sa#ing that one or the other should (e used exclusiel#, (ut #ou must
understand the potential pitfalls of each$

Oscillators G 1eading Indicators
?n oscillator is an# o(ject or data that moes (ack and forth (etween two points$ %n other
words, itEs an item that is going to alwa#s fall somewhere (etween point ? and point 4$
Think of when #ou hit the oscillating switch on #our electric fan$
Think of our technical indicators as either (eing LonM or LoffM$ Fore specificall#, an
oscillator will usuall# signal L(u#M or LsellM, with the onl# exception (eing instances
when the oscillator is not clearl# at either end of the (u#1sell range$
2oes this sound familiarN %t should, Stochastics, 7ara(olic S?R, and the Relatie
Strength %ndex 0RS%3 are all oscillators$ Each of these indicators is designed to signal a
possi(le reersal, where the preious trend has run its course and the price is read# to
change direction$
BetEs take a look at a few examples$
On the ;:hour chart of /S21E/R (elow, we hae added a 7ara(olic S?R indicator, as
well as an RS% and Stochastic oscillator$ ?s #ou hae alread# learned, when the
Stochastic and RS% (egin to leae their LoersoldM region that is a (u# signal$
>ere we get (u# signals (etween the hours I@== am EST and H@== am EST on =J1&"1='$
?ll three of these (u# signals occurred within one or two hours of each other, and this
would hae (een a good trade$
Fomentum 1 Bagging %ndicators
So how do we spot a trendN The indicators that can do so hae alread# (een identified as
F?-2 and moing aerages$ These indicators will spot trends once the# hae (een
esta(lished, at the expense of dela#ed entr#$ The (right side is that thereEs less chance of
(eing wrong$
On this ;:hour chart of E/R1/S2, there was a (ullish crossoer for F?-2 at I@== am
EST on =J1=I1=' and the ;= period EF? crossed oer the &= period EF? at '@== am$
These two signals were all accurate, (ut if #ou waited for (oth indicators to gie #ou a
(ull signal, #ou would hae missed out on the (ig moe$ %f #ou calculate from the start of
the uptrend at ;=@== pm EST on =J1=&1=' to the close of the candle at '@== am EST on
=J1=I1=', #ou would hae watched a gain of ;'< pips while sitting on the sidelines$
BetEs take a look at the same chart so #ou can see how these crossoer signals can
sometimes gie false signals$ 9e like to call them Lfake:outsM$ Book at how there was a
(earish F?-2 crossoer after the uptrend we just discussed$
Ten hours later, the &= EF? crossed (elow the ;= EF? giing a LsellM signal$ ?s #ou
can see, the price didnEt drop (ut sta#ed prett# much sidewa#s, then continued its
uptrend$ 4# the time (oth indicators were in agreement, #ou wouldEe entered a short
trade at the (ottom and set #ourself up for a loss$ 4ummer, dude,
-op#right X &==< 4a(#7ips$com BB-$ ?ll rights resered$
?(out 4a(#7ips$com Y 7riac# 7olic# Y Terms of /se Y Risk 2isclosure
"? (argain is something #ou can8t use at a price #ou can8t resist$"
Franklin 5ones
9e also got a sell signal from all three indicators (etween the hours of &@== am EST and
'@== am EST on =J1&'1='$ ?s #ou can see, the Stochastic indicator remained in the
oer(ought for a prett# long time : a(out &= hours$ /suall# when an oscillator remains in
the oer(ought or oersold leels for a long period of time, that means there is a strong
trend occurring$ %n this example, since Stochastic sta#ed oer(ought, #ou see there was a
strong uptrend present$
)ow letEs take a look at the same leading oscillators messing up, just so #ou know these
signals arenEt perfect$ Booking at the chart (elow, #ou can +uickl# see that there were a
lot of false (u# signals popping up$ *ouEll see how one indicator sa#s to (u#, while the
other one is still sa#ing sell$
?round ; am EST on =J1;S1=', (oth RS% and Stochastic gae (u# signals, while
7ara(olic S?R still showed a sell signal$ *es, 7ara(olic S?R gae a (u# signal I hours
later at " am EST, (ut then 7ara(olic S?R turned into a sell signal one (ar later$ %f #ou
actuall# look at the (ar with the 7ara(olic S?R (elow it, notice how itEs a strong looking
red (ar with er# short shadows$ ?lso, notice how the next (ar closed (elow it$ This
would not hae (een a good long trade$
On the last two oersold 0(u#3 signals gien (# Stochastic, notice how there is no
indicator at all for RS%, (ut 7ara(olic S?R is giing sell signals$ 9hatEs going on hereN
The# are each giing #ou different signals,
9hat happened to such a good set of indicatorsN
The answer lies in the method of calculation for each one$ Stochastic is (ased on the
high:to:low range of the time period 0in this case, itEs hourl#3, #et doesnEt account for
changes from one hour to the next$ The Relatie Strength %ndex 0RS%3 uses change from
one closing price to the next$ ?nd 7ara(olic S?R has its own uni+ue calculations that can
further cause conflict$
ThatEs the nature of oscillators O the# assume that a particular chart pattern alwa#s results
in the same reersal$ Of course, thatEs hogwash$
9hile (eing aware of wh# a leading indicator ma# (e in error, thereEs no wa# to aoid
them$ %f #ouEre getting mixed signals, #ouEre (etter off doing nothing than taking a T(est
guessE$ %f a chart doesnEt meet all #our criteria, donEt force the trade, Foe on to the next
one that does meet #our criteria$
Summary of 1eading R 1agging Indicators
The $illion 8ollar Euestion
>ow do #ou figure out whether to freakinE use oscillators, or trend following indicators,
or (othN ?fter all, we know the# donEt alwa#s work in tandem$
This is pro(a(l# the most challenging part a(out technical anal#sis$ ?nd wh# % call it the
million dollar +uestion$
9e will proide the million dollar answer in a future lesson$
For now, just know that once #ou8re a(le to identif# the t#pe of market #ou are trading in,
#ou will then know which indicators will gie accurate signals, and which ones are
worthless at that time$
This is no piece of cake$ 4ut it8s a skill #ou will slowl# improe upon as #our experience
grows$
Summary
• There are two t#pes of indicators@ leading and lagging$
• ? leading indicator gies a (u# signal (efore the new trend or reersal occurs$
• ? lagging indicator gies a signal after the trend has started
• Technical indicators into one of two categories@ Oscillators and trend following or
momentum indicators$
• Oscillators are leading indicators$
• Fomentum indicators are lagging indicators$
• %f #ou8re a(le to identif# the t#pe of market #ou are trading in, #ou will then know
which indicators will gie accurate signals, and which ones are worthless at that
time$
S#mmetrical Triangles
S#mmetrical triangles are chart formations where the slope of the priceEs highs and the
slope of the priceEs lows conerge together to a point where it looks like a triangle$ 9hat
is happening during this formation is that the market is making lower highs and higher
lows$ This means that neither the (u#ers nor the sellers are pushing the price far enough
to make a clear trend$ %f this was a (attle (etween the (u#ers and sellers, then this would
(e a draw$
This t#pe of actiit# is called consolidation$
%n the chart a(oe, we can see that neither the (u#ers nor the sellers could push the price
in their direction$ 9hen this happens we get lower highs and higher lows$ ?s these two
slopes get closer to each other, it means that a (reakout is getting near$ 9e donEt know
what direction the (reakout will (e, (ut we do know that the market +ill (reak out$
Eentuall#, one side of the market will gie in$
So how can we take adantage of thisN Simple$ 9e can place entr# orders a(oe the slope
of the lower highs and (elow the slope of the higher lows$ Since we alread# know that
the price is going to (reak out, we can just hitch a ride in whateer direction the market
moes$
%n this example, if we placed an entr# order a(oe the slope of the lower highs, we
wouldEe (een taken along for a nice ride up$ %f #ou had placed another entr# order (elow
the slope of the higher lows, then #ou would cancel it as soon as the first order was hit$
?scending Triangles
This t#pe of formation occurs when there is a resistance leel and a slope of higher lows$
9hat happens during this time is that there is a certain leel that the (u#ers cannot seem
to exceed$ >oweer, the# are graduall# starting to push the price up as eident (# the
higher lows$
%n the chart a(oe, #ou can see that the (u#ers are starting to gain strength (ecause the#
are making higher lows$ The# keep putting pressure on that resistance leel and as a
result, a (reakout is (ound to happen$ )ow the +uestion is, L9hich direction will it goN :
9ill the (u#ers (e a(le to (reak that leel or will the resistance (e too strongNM
Fan# charting (ooks will tell #ou that in most cases, the (u#ers will win this (attle and
the price will (reak out past the resistance$ >oweer, it has (een m# experience that this
is not alwa#s the case$ Sometimes the resistance leel is too strong, and there is simpl#
not enough (u#ing power to push it through$
Fost of the time the price will in fact go up$ The point we are tr#ing to make is that we
do not care which direction the price goes, (ut we want to (e read# for a moement in
E%T>ER direction$ %n this case, we would set an entr# order a(oe the resistance line and
(elow the slope of the higher lows$
%n this scenario, the (u#ers won the (attle and the price proceeded to sk#rocket,
2ou(le Top
? dou(le top is a reersal pattern that is formed after there is an extended moe up$ The
LtopsM are peaks which are formed when the price hits a certain leel that canEt (e (roken$
?fter hitting this leel, the price will (ounce off it slightl#, (ut then return (ack to test the
leel again$ %f the price (ounces off of that leel again, then #ou hae a 2O/4BE top,
%n the chart a(oe #ou can see that two peaks or LtopsM were formed after a strong moe
up$ )otice how the &nd top was not a(le to (reak the high of the ;st top$ This is a strong
sign that a reersal is going to occur (ecause it is telling us that the (u#ing pressure is just
a(out finished$
9ith dou(le tops, we would place our entr# order (elow the neckline (ecause we are
anticipating a reersal of the uptrend$
9ow, 9e must (e ps#chic or something (ecause we alwa#s seem to (e right, Booking at
the chart #ou can see that the price (reaks the neckline and makes a nice moe down$
Remem(er, dou(le tops are a trend reersal formation$ *ouEll want to look for these after
there is a strong uptrend$

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