ABeginner'sGuidetotheForex:

The10KeystoSuccessfulTrading
By JaredF.Martinez
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LegalNotices:The10KeystoSuccessfulTrading1998,1999,2000,2001,2002and2008. ALL RIGHTS RESERVED: No part of this book may be reproduced or transmitted in any form by any means, electronic or mechanical, including photocopying, recording or by any information storage or retrieval systems, withouttheexpresswrittenpermissionfromtheauthorandpublisher.Allmaterialscontainedhereinhavebeen copyrighted.ReproductionwillbeinviolationofallCopyrightLaws.Violatorswillbeprosecuted. Whileattemptshavebeenmadetoverifytheaccuracyofinformationprovidedinthismanual,neithertheauthor northepublisherassumesresponsibilityforerrors,inaccuraciesoromissions. TherearenoclaimsbytheAuthor,JaredF.Martinez,orMarketTradersInstitute,Inc.,ForexTips.comoranyofits directors, employees, and affiliated instructors that the trading strategies or methodologies in this manual will resultinprofitsandwillnotresultinlosses.Thismanualisnotaguaranteetoproduceprofits.Currencytradingon theFOREXandtradingresultsingeneralvaryfromindividualtoindividualandmaynotbesuitableforeveryone. All strategies, techniques, methodologies and trades contained in this manual should not be construed as an invitationtoenterandtradeinthemarket. Eachtraderisresponsibleforhisorherownactions.Yourdownloadingofthismanualconfirmsyouragreement with the Statement of Risk, constitutes your agreement to this disclaimer, confirms and exempts the author, publisherandInstructorsfromanyliabilitiesorlitigation. 2000,2001,2008MarketTradersInstitute,Inc.

Your Constant Companion

I am your constant companion. I am your greatest helper or heaviest burden. I will push you onward or drag you down to failure. I am completely at your command. I am managed with careyou must be firm with me. Show me exactly how you want something done, and after enough lessons, I will do it automatically. I am the servant of all great people and, alas, of all failures. Those who are great, I have made great. Those who are failures, I have made failures. I am not a machine, though I work with the precision of a machine and the intelligence of a person. You may run me for profit or run me for ruinit makes no difference to me. Take me, train me, and be firm with me, and I will place the world at your feet. Be easy with me and I will destroy you. Who am I? I am habit!
~ Author Unknown

TableofContents

Introduction
A Trader's Mission and Goal Level of Traders 04 04

Chapter One: What is the Forex?

Foreign Exchange Market Roles of Commercial Banks Advantages of Forex Trading 05 05 06

Chapter Two: Reading Candlestick Charts

Bullish Candlestick Formations Bearish Candlestick Formations Neutral Candlestick Formations Reversal Candlestick Formations 10 12 13 14

Chapter Three: Types of Orders

Market Orders Limit Orders Stop Orders One Cancels the Other Cancel/ Replace Orders

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Introduction
ATrader'sMissionandGoal
Itisthemissionofthetradertobecomealongterm,financiallysuccessfultrader.Thiscanbeachieved whenthetraderadoptsandacceptsThe10KeysofSuccessfulTrading.Atradermustcommittoliveby threedisciplinestobecomeasuccessfultrader.

ThreeDisciplinesofSuccessfulTraders
(1) A trader must believe in The 10 Keys to Successful Trading and merge them into their personality. Successdependsoncreatingatradingplan,andmaintainingthedisciplinetoTRADETHATPLAN!

(2) A trader must be committed to Continuing Education. Study technical analyses and the psychologyofsuccessfultrading.Atradermustmakelogicaldecisions,voidofemotions,while trading.Learntotradeincontrol!

(3) AtradermustmapoutasensibleequitymanagementplantoinsureaReturnOnInvestment. Tradenomorethan20%ofaMarginAccountandexposenomorethan5%ofthataccounton anysingletrade.

LevelsofTraders
LevelOne BeginnerTraderStudiesandpapertradesforaminimumofonemonthwithpretendcurrency,gaining theexperiencerequiredtoestablishatrackrecordofprofitableperformance.(SeeMTIsDemoTrading Account) LevelTwo AdvancedBeginnerTradesoneortwolotswithrealmoney,learningtoovercomeemotionsandatthe sametime,establishesatrackrecordofmakingmoney. LevelThree CompetentTraderTradeswithcontrolovertheiremotionaldistractions.Utilizesproperequity managementandachievesapositivefinancialreturn LevelFour ProficientTraderTradeswithconfidence,educationandexperience.Achievespositivefinancialreturns. LevelFive ExpertTraderInstinctivelyexecutesprofitabletradeswithoutemotion. 4

Chapter1
WhatistheForex?
Forex=ForeignCurrencyExchange Youcantrade24hoursaday TheForexislargerthanallotherfinancialmarketsCOMBINED

TheForeignExchange(Forex)Marketisacash,orspot,interbankmarketestablishedin1971when floating exchange rates began to materialize. This market is the arena in which the currency of one countryisexchangedforthoseofanother,andwhereinternationalbusinessissettled. The Forex is a group of approximately 4,500 currency trading institutions that include international banks,governmentcentralbanks,andcommercialcompanies.Paymentsforexportsandimportsflow through the Foreign Exchange Market, as well as payments for purchases and sales of assets. This is called the Consumer Foreign Exchange Market. There is also a speculator segment in the Forex Market.SpeculatorshavegreatfinancialexposuretooverseaseconomiesparticipatingintheForexto offsettherisksofinternationalinvesting. Historically,theForexInterbankMarketwasnotopentosmallspeculators.Withaprevious,minimum transaction size, and often stringent financial requirements, the small trader was excluded from participation in this market. Today, Market Maker brokers are allowed to break down the larger interbankunitsandoffersmalltraderstheopportunitytobuyorsellanynumberofthesesmallerunits (lots).

CommercialBanksplaytworolesintheForexMarket:
(1)Theyfacilitatetransactionsbetweentwoparties.Forexample,twocompanieswishingtoexchange differentcurrencieswouldseekthehelpofacommercialbank. (2) They speculate by buying and selling currencies. The banks take positions on certain currencies because they believe they will be worth more if, long, or less if, short, in the future. It has been estimated that international banks generate up to 70% of their revenues from currency speculation. Otherspeculatorsincludemanyoftheworldsmostsuccessfultraders,likeGeorgeSoros. The Forex also includes central banks from various countries, like the U.S. Federal Reserve. They participateintheForextoservethefinancialinterestsoftheircountry.Whenacentralbankbuysand sellsitsownoraforeigncurrency,thepurposeistostabilizetheirowncountryscurrencyvalue. The Forex is so large and is composed of so many participants, that no one player, not even the governmentcentralbanks,cancontrolthemarket.Incomparisontothedailytradingvolumeaverages 5

ofthe$300billionU.S.TreasuryBondmarketandtheapproximately$100billionexchangedintheU.S. stockmarkets,theForexishuge,andhasgrowninexcessof$3trilliondaily. ThewordmarketisamisnomerdescribingForextrading.Thereisnocentralizedlocationfortrading activityasthereisintheothermarkets.Currencytradingoccursoverthephoneandthroughcomputer terminals at hundreds of worldwide locations. The bulk of the trading is between approximately 300, large, international banks that process transactions for large companies, governments, and their own accounts.Thesebanksarecontinuallyprovidingprices(bidtobuyandasktosell)foreachotherand the broader market. The most recent quotation from one of these banks is considered the markets current price for that currency. Various private data reporting services provide this live price informationviatheInternet.

TherearenumerousadvantagestotradingontheForex.
Liquidity IntheForex Market, thereisalwaysabuyerandaseller!TheForexabsorbstradingvolumesandper tradesizeswhichdwarfthecapacityofanyothermarket.Onthesimplestlevel,liquidityisapowerful attractiontoanyinvestor.Itsuggeststhefreedomtoopenorcloseapositionatwill,24hoursaday. Once purchased, many other, highreturn investments are difficult to sell at will. Forex traders never havetoworryaboutbeingstuckinapositionduetolackofmarketinterest.Inthenearly$3.5trillion U.S.perdaymarket,majorinternationalbanksalwayshavebid(buying)andask(selling)pricesfor currencies. Access TheForexisopen24hoursadayfromabout6:00P.M.Sundaytoabout4:00P.M.Friday.Anindividual tradercanreacttonewswhenitbreaks,ratherthanhavingtowaitfortheopeningbellofothermarkets when everyone else has the same information. This timeliness allows traders to take positions before the news details are fully factored into the exchange rates. High liquidity and 24 hour trading permit market participantstotakepositions,orexit,regardlessofthe hour.There areForexdealersinevery timezoneandineverymajormarketcenter;Tokyo,HongKong,Sydney,Paris,London,UnitedStates,et al.willingtocontinuallyquote"buy"and"sell"prices. SincenomoneyisleftonthemarkettablereferredtoasaZeroSumGameorZeroSumGainand providingthetraderpickstherightside,moneycanalwaysbemade. TwoWayMarket Currenciesaretradedinpairsforexample,Dollar/Yen,orDollar/SwissFranc.Everypositioninvolvesthe selling of one currency and the buying of another. If a trader believes the Swiss Franc will appreciate againsttheDollar,thetradercansellDollarsandbuyFrancs.Thispositioniscalled"sellingshort". If one holds the opposite belief, that trader can buy Dollars and sell Swiss Francsbuying long. The potential for profit exists because there is always movement in the exchange rates (prices). Forex 6

trading permits profit taking from both rising and falling currency values in relation to the Dollar. In everycurrencytradingtransaction,onesideofthepairisalwaysgaining,andtheothersideisalways losing. Leverage TradingontheForexisdoneincurrencylots.Eachlotisapproximately100,000U.S.dollarsworthofa foreigncurrency.TotradeontheForexmarket,aMarginAccountmustbeestablishedwithacurrency broker. This is, in effect, a bank account into which profits may be deposited and losses may be deducted.Thesedepositsanddeductionsaremadeinstantlyuponexitingaposition. BrokershavedifferingMarginAccountregulations,withmanyrequiringa$1,000deposittodaytrade acurrencylot.Daytradingisenteringandexitingpositionsduringthesametradingday.Forlongerterm positions,manyrequirea$2,000perlotdeposit.Incomparisontotradinginstocksandothermarkets, which may require a 50% margin account, a Forex speculators' excellent leverage of 1% to 2% of the $100,000lotvaluemeansthetradercancontroleachlotforonetotwocentsonthedollar. ExecutionQuality Because the Forex is so liquid, most trades can be executed at the current market price. In all fast movingmarkets(stocks,commodities,etc.),slippageisinevitableinalltrading,butcanbeavoidedwith somecurrencybrokers'softwarethatinformsyouofyourexactenteringpricejustpriortoexecution. Youaregiventheoptionofavoidingoracceptingtheslippage.TheForexMarket'shugeliquidityoffers theabilityforhighqualityexecution. Confirmations of trades are immediate and the Internet trader has only to print a copy of their computer screen for a written record of all trading activities. Many individuals feel these features of Internet trading make it safer than using the telephone to trade. Respected firms such as Charles Schwab, Quick & Reilly and T.D. Waterhouse offer Internet trading. These companies would not risk theirreputationsbyofferingInternetserviceifitwerenotreliableandsafe.Intheeventofatemporary technicalcomputerproblemwiththebrokersorderingsystem,thetradercantelephonethebroker24 hoursadaytoimmediatelygetinoroutofatrade. Internetbrokerscomputersystemsareprotectedbyfirewallstokeepaccountinformationfromprying eyes. Account security is a brokers highest concern. They take multiple steps to eliminate any risk associatedwithfinancialtransactionsontheInternet. A Forex Internet trader does not have to speak with a broker by telephone. The elimination of the middleman (broker/salesman) lowers expenses, makes the process of entering an order faster, and decreasesthepossibilityofmiscommunication. ExecutionCosts Unlikeothermarkets,theForexdoesnotchargecommissions.Thecostofatradeisrepresentedina Bid/Askspreadestablishedbythebroker.(Approximately4pips) 7

Trendiness Overlongandshorthistoricalperiods,currencieshavedemonstratedsubstantialandidentifiabletrends. Eachindividualcurrencyhasitsownpersonality,andoffersaunique,historicalpatternoftrendsthat providediversifiedtradingopportunitieswithinthespotForexmarket. Focus Insteadofattemptingtochooseastock,bond,mutualfund,orcommodityfromthetensofthousands availableinothermarkets,Forextradersgenerallyfocusononetofourcurrencies.Themostcommon andmostliquidaretheJapaneseYen,BritishPound,SwissFrancandtheEuro.Highlysuccessfultraders have always focused on a limited number of investment options. Beginning Forex traders will usually focusononecurrencyandlaterincorporateonetothreemoreintotheirtradingactivities. MarginAccounts TradingontheForexrequiresaMarginAccount.Youarecommittingtotradeandtakepositionstoday. Asaspeculatortraderyouwillnotbetakingdeliveryontheproductthatyouaretrading.AsaStockDay Trader,youwouldonlyholdatradingpositionforafewminutes,uptoafewhours,andthenyouwould needtocloseoutyourpositionbytheendofthetradingsession. All orders must be placed through a broker. To trade stocks you would need a stockbroker. To trade currencies you will need a Forex currency broker. Most brokerage firms have different margin requirements.Youneedtoaskthemtheirmarginrequirementstotradecurrencies. A Margin Account is nothing more than a performance bond. All traders need a Margin Account to trade. All accounts are settled daily. When you gain profits, they place your profits into your Margin Accountthatsameday.Whenyoulosemoney,anaccountisneededtotakeoutthelossesyouincurred thatday. Averyimportantpartoftradingistakingoutsomeofyourwinningsorprofits.Whenthetimecomesto takeoutyourpersonalgainsfromyourmarginaccount,allyouneedtodoiscontactyourbrokerand askthemtosendyouyourrequesteddollaramount.Theywillsendyouacheckorwiretransferyour money.

Chapter2
ReadingCandlestickCharts
In the Seventeenth Century, the Japanese developed a method to analyze the price of rich contracts. Thistechniquewascalled"CandlestickCharting."Today,StevenNisoniscreditedwithpopularizingthe CandlestickChart,andisrecognizedastheleadingauthorityoninterpretationofthesystem. Candlesticks are graphical representations of the price fluctuations of a product. A candlestick can representanyperiodoftime.Acurrencytraderssoftwarecanprovidechartsrepresentingtimeframes fromfiveminutes,uptooneweekpercandlestick. There are no calculations required to interpret Candlestick Charts. They are a simple visual aid representing price movements in a given time period. Each candlestick reveals four vital pieces of information;theopeningprice,theclosingprice,thehighestpriceandthelowestpricethefluctuations duringthetimeperiodofthecandle.Inmuchthesamewayasthefamiliarbarchart,acandleillustrates a given measure of time. The advantage of candlesticks is that they clearly denote the relationship betweentheopeningandclosingprices. Because candlesticks display the relationship between the open, high, low and closing prices, they cannotbeusedtochartsecuritiesthathaveonlyclosingprices.InterpretationofCandlestickChartsis basedontheanalysisofpatterns.Currencytraderspredominantlyusetherelationshipofthehighsand lowsofthecandlewicksoveragiventimeperiod.However,CandlestickChartsofferidentifiablepatterns thatcanbeusedtoanticipatepricemovements. Therearetwotypesofcandles:TheBullishPatternCandleandtheBearishPatternCandle.

Awhite(emptybody)representsaBullishPatternCandle. It is used/denotes when prices open near the low price andcloseneartheperiodshighprice.

Ablack(filledbody)representsaBearishPatternCandle. It is used/signifies when prices open near the high price andcloseneartheperiodslowprice.

Bullish Candlestick Formations

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BearishCandlestickFormations

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NeutralCandlestickFormations

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ReversalCandlestickFormations

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CandlestickExampleCharts

StockchartscanalsobeinterpretedusingCandlestickCharts.

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Exercise1:CircleandidentifytheCandlestickFormationsinthefollowingchart.

Exercise2:CircleandidentifytheCandlestickFormationsinthefollowingchart.

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AnswerstotheExercises

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Chapter3
TypesofOrders
SellersareASKingforahighprice BuyersareBIDdingatalowerprice Tradingisanauction SlippageoccurswithmostMarketOrders ThedifferencebetweentheASKandtheBIDpriceistheSPREAD.

ATradermustunderstandwhateachorderis,whatitandwhatpartitplaysincapturingprofit. AForexTradermustusethree(3)typesoforders:aMarketOrder,aLimitOrder,andaStopOrder. Thetwo,primaryordersusedforenteringandexitingtheForexmarketareLimitandStopOrders.Once an order is placed, there are two critical procedures: OneCancelstheOther (OCO) and Canceland ReplaceOrders.Properlyunderstandingtheproceduresoforderexecutionisavitalsteptoprofitable trading. Remember: All good carpenters carry a toolbox. The sharper the tools, and the more skilled the carpenterisatusingthem,themoreeffectivetheyare.Thesharperyoubecomeasatrader,themore efficientandlucrativeyouwillbe. MarketOrders AMarketOrderisanordergiventoabrokertobuyorsellacurrencyatwhateverthemarketistrading itforatthatmoment.TheMarketOrdercanbeanentryorderintothemarket,oranexitordertoget outofthemarket.TradersuseMarketOrderswhentheyarereadytomakethecommitmenttoenteror exitthemarket.CautionshouldbeexercisedwhenusingMarketOrdersinfastmovingmarkets.During periods of rapid rallies, or down reactions, gains or losses of many points may occur due to slippage beforereceivingthefill. Tradingisanauctionwheretherearebuyersbiddingonwhatsellersareoffering.Thebidisthebuyand theoffertosellistheask. Slippage Slippage is a trade executed between a buyer and seller where the resulting buy or sell transaction is differentthanthepriceseenjustpriortoorderexecution.Onaverage,onetosixpipswillbelostwith MarketOrders,perhapsmore,duetoslippage.MarketOrdersarerarelyfilledattheexact,anticipated price.MarketTradersInstituterecommendscautionwhenenteringorexitingwithaMarketOrder. LimitOrders Limit Orders are orders given to a broker to buy or sell currency lots at a certain price or better. The term"Limit"meansexactlywhatitsays.Mostofthetime,youwillbuyatthatexactlimitpriceorbetter. 18

LimitOrdersareusedtoenterandexitthemarket.Theyaregenerallyusedtoacquireaspecificprice, avoidslippageandunwantedorderfills(executionprice),whichcanhappenwithMarketOrders. Whensellingabovethemarket,itisaLimitOrder.Whenbuyingbelowthemarket,itisaLimitOrder.A LimitOrderwillbeexecutedwhenthemarkettradesthroughit.Seventytoninetypercentofthetime,if the market is trading at your Limit Order, it will be executed. The market must trade through your specified Limit Order number to guarantee a fill. The trading software provides notification within secondsofthefill.Atraderdoesnothavetocallhisbrokertoseeiftheirorderhasbeenfilled. StopOrders Stop Orders are orders placed to enter or exit the market at a desired, specific price. When buying abovethemarket,itisaStopOrder.Whensellingbelowthemarket,itisaStopOrder.StopOrdersturn into Market Orders when the market trades at that price. Stop Orders, as well as Market Orders, are subjecttoslippage,LimitOrdersarenot. ThemajorityofStopOrdersareusedasprotective,StopLossOrders.Theseordersareplacedwithan EntryOrdertoinsureanexitwhenthemarketgoesagainstyou.Agoodtradernevertradeswithouta protectiveStopLossOrder.Theyareordersexecutedtogetyououtofthemarketwhenyourtradehas goneagainstyou.ProtectiveStopsarediscussedseparatelyasoneofThe10KeystoSuccessfulTrading. OneCancelstheOther(OCO) Wheneverenteringthemarket,exitingthemarketatsomefuturetimeisrequired.AnOCOorderisa procedurethatmeans"onecancelstheother."Uponenteringthemarket,placeaprotectiveStopLoss Orderandestablishaprojectedprofittarget.ThatprojectedprofittargetcanbeyourLimitOrder. IfyousimultaneouslyplacebothLimitandStopLossOrderswhenyouenterthemarket,youcanOCO themandwalkawayfromyourcomputer.Whatdoesthatmean?Atsomefuturepointintime,either yourStopOrderorLimitOrderwillautomaticallycancelyouropposingorder.Ifthetraderissureabout atrade,theycanexecuteanOCOorderandwalkawayfromthetrade.Thetradingsoftwarewillthen managethetrade. Cancel/ReplaceOrders ACancel/ReplaceOrderisaprocedureandnotanEntryorExitOrder.Bydefinition,itiswhenthetrader cancels an existing open order and replaces it replace it with a new order. A Cancel/Replace order is primarilyastrategyoftradingandpredominatelyusedafteronehastakenapositioninthemarketand wantstostayinthemarketlockinginprofit.Forexample,youbuySwissat1.410.YourprotectiveStop Loss Order is 1.390. The market moves in the direction you projected. Now, you want to reduce your potentialloss.So,cancelyourStopOrderat1.390andreplaceitto1.410whereyougotin.Youarenow inatradewithnorisk!AsthemarketmovesfurtherNorth,inyourdirection,youwanttolockinmore profit.Youcancancelyour1.410StopLossOrderandreplaceitwithanew1.440StopLossOrder.You havelockedin30pipsofprofit.Youareinanallwin,norisktrade.Keepcancelingandreplacingyour Stop until you are finallystoppedout. This is discussed separately under "Protective Stops" as one of The10KeystoSuccessfulTrading. 19

UltimateTradersPackage BoththenoviceandthemoreexperiencedForextradercangainnewinsightsintoForextradingfrom thestraightforward,stepbystepapproachofMTIsForextrainingmethods. MTIs premiere Forex training course is a four phase Forex training program using live, online Forex trainingclassesinconjunctionwithhomestudymaterialstoprovideourclientswiththemostthorough Forex training available. With the aroundtheclock support of our Forex trading experts and Forex EducationSpecialists,TheUltimateTradersPackage(UTP),haspositionedMTIasthebenchmarkforall otherForexeducationcourses.

Live,online,interactiveForexmentoring Workbooktrainingmodules OnlineForextradingdemonstrations

AccesstoMTI4.0Forexcharting Onsite,2dayForextrainingclasses IndepthForextrainingvideoCDs

Lesson1:"WhatistheForex?"

Lesson9:"TradingFibonacciNumbers"

Lesson2:"TradingJapaneseCandlesticks"

Lesson10:"TradingFibonacciConvergences"

Lesson3:"ForexIndicatorsandTimeFrames"

Lesson11:"TradingtheGartley"

Lesson4:"ForexSupportandResistance"

Lesson12:"TradingForexPennants"

Lesson5:"EquityManagement"

Lesson13:"ForexHarmonicVibrations"

Lesson6:"ForexTrendsandTrendlines"

Lesson14:"ThereversalorKingsCrown"

Lesson7:"ForexBuyandSellZones"

Lesson15:"AnalyzingtheMarket"

Lesson8:"TradingForexConsolidation"

Lesson16:"Traderrulesandworkbook"

After completing the first 8 lessons of our Ultimate Traders Package, you may elect to participate in MTIsEarnWhileYouLearnprogramtomaximizethepotentialprofitabilityofyourForexeducation experience.Visitmarkettraders.comformoreinformationaboutMarketTradersInstitute,ourUltimate TradersPackage,andhowwecanshowyoutheprofitabilityofCurrencyTradingontheForex.

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