Bless My Pips

Contains a detailed explanation of over twenty Japanese candle patterns, about twenty
indicators, fundamental events, chart patterns, Elliott waves and Fibonacci levels.

This book is a must for all first time Forex traders!

A Forex Traders Guide

to the Currency Market
Steven Lombardi

Bless My Pips

Bless My Pips
A Forex Traders Guide
to the

Currency Market

Steven Lombardi

Cover Design and Pictures by Sayuri Ozawa

Copyright 2010 by Forex Club Financial Company

All Rights Reserved. No part of this book may be reproduced in any many
manner without the express written consent of the publisher, except in the case
of brief excerpts in critical reviews or articles. All inquiries should be addressed
to Forex Club Financial Company, 1200 South Ave, Suite 203, Staten Island,
NY 10314 or info@fxclub.com.
www.fxclub.com
ISBN 978-0-578-05846-7
Limit of Liability/Disclaimer of Warranty: While the publisher and author have
used their best efforts in preparing this book, they make no representations
or warranties with respect to the accuracy or completeness of the contents of
this book and specifically disclaim any implied warranties of merchantability
or fitness for a particular purpose. No warranty may be created or extended
by sales representatives or written sales materials. The advice and strategies
contained herein may not be suitable for your situation. You should consult
with a professional where appropriate. Neither the publisher nor author shall
be liable for any loss of profit, including but limited to special, incidental,
consequential, or other damages.

Introduction

Contents

SECTION ONE: FOREX BASICS

1.1
History of the Market

1.2
Why Choose forex? Comparing forex to Stocks

1.3
Examples of How Money Is Made and Lost in Forex

1.4
Market Hours

1.4.1 Currency Pairs

1.4.2 Spreads

1.4.3 Leverage

1.4.4 Market Orders

1.5
Intro to Technical and Fundamental Analysis

1.6
Trading with the ExpressFX Platform

11
13
15
19
21
23
29
33
35
39
43

SECTION TWO: FOREX CHARTS

2.1
Line Charts

2.1.2 Bar Charts

2.1.3 Candle Charts

2.1.4.1 Japanese Candlestick Patterns
Long Candle
Short Candle
Spinning Tops
Marubozu Candle
Doji Candle
Dragonfly Doji
Gravestone Doji
Four-Price Doji
Deviant Doji
Paper Umbrella
Hammer
Inverted Hammer
Hanging Man
Shooting Star
Engulfing Pattern
Harami

53
55
57
59
61
61
63
64
65
66
67
68
69
70
72
73
74
75
76
77
81

 Harami Cross
Dark Cloud Cover
Piercing Line
Morning Star
Evening Star
Abandoned Baby
Tweezers
The Bears Tweezers
Bulls Tweezers
Windows

2.2
Support and Resistance Lines

2.3
Pivot Points

2.4
Chart Patterns

82
83
84
85
86
87
89
89
90
92
95
101
105

SECTION THREE: FUNDAMENTAL ANALYSIS

3.1
Who and What Affects Market Movement

3.2
The Major Events

3.3
Examples of How News Moves Price

119
121
123
129

SECTION FOUR: TECHNICAL ANALYSIS

4.1
List of Forex Indicators

4.2
Elliott Wave

4.3
Fibonacci

133
137
155
161

SECTION FIVE: TRADING SYSTEMS

5.1
Market Psychology

5.2
Forex Trading Best Practices

5.3
Creating a Trading System

5.4
Trading on a Live Account

167
169
173
177
181

Conclusion

185

With the deepest dedication

to you, curious
investor.

Introduction

SUALLY these books begin with the author stating how she or he
got into the currency market. They might recount an anecdote of their
college years, when they made XXX amount of dollars on a chance trade.
Other authors use these first sentences to describe how awesome and immense
the currency market is. Im not going to follow suit.
Id like to begin this book by offering you flattering compliments. Think
of it as an added incentive to keep you reading. That said, did you lose weight,
Champ? Its a very good look. And I must say that I love what you did to the
place, youre an artist.
There you have it; you just received a good dose of compliments and
the general voice of this book. You picked this book up because you want
to learn about the forex market and how to trade successfully on the forex
markets. To a first-time trader, this can sound like a daunting task. Reader,
fear not. Im going to walk you through everything you need to know about
the forex markets and will do so in a manner thats friendly, fun, soothing, and
very easy to comprehend.
Theres a lot of information in this book but I know youll be able to fly
through it and understand everything completely. If at any point you find that
theres something thats unclear, please visit our website at www.fxclub.com to
find your answer. And if your answer isnt there, you can send your question to
info@fxclub.com and Forex Clubs expert customer service team will be sure
to give you an answer.
Its important for you to realize that even professional forex traders make
losses from time to time. All biases aside, I want you to view every trade you
make, every price movement you watch, and every emotion you feel good
or bad as a learning experience. As a novice to the market, you are a clump
of clay; formless, colorless and with no direction as to what you will become.
Every step forward that you take in your learning process will mold you into
something better than you were.
When you are happy with a trade that you made, bless your pips, and

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learn how to duplicate that trade. When youre upset with a trade that you
made, move through it, and learn from your mistake.
So, sit down someplace nice, make yourself cozy, and pour yourself a nice
drink. Lets learn about forex.

Section One

Forex Basics

1.1

History of the Market

OST of us have had firsthand experience with the forex market. Some
may have placed their money into savings in a currency more stable
than their own, while others may have converted currencies at an exchange
booth in an airport prior to traveling abroad. On that trip to Sweden or New
Zealand, you may have noticed that the price at which your money was being
exchanged was never quite the same two days in a row. On some days, you
were able to squeeze out a few more pennies for bucks and on other days,
those Swedes robbed you of some cents. When you saw this happen, you may
have asked yourself, Why is this happening?
The day is September 1, 1939, and Germanys forces have just moved
into Poland, sparking a little conflict that would later be known as World
War II. Lets fast forward to July 1944, fourteen months shy of the wars end.
In Bretton Woods, New Hampshire, representatives from the Allied nations
gathered to discuss how they would go about restoring the global economy
that has been decimated by the war. Their solution was the Bretton Woods
system.
Under the Bretton Woods system, all currencies involved with the pact
were pegged against the United States dollar (which was pegged to gold at
$35.00 an ounce.) This system remained in practice for some decades after, but
it underwent many reforms to keep up with the worlds changing economy.
It wasnt until the early 1970s that the practices of the Bretton Woods system
were dissolved for various reasons, such as a weakening dollar as a result of the
Vietnam War, and to combat a would-be liquidity crisis, among other reasons,
after which currencies were able to fluctuate at their own accord.
If the price of anything fluctuates, an investor is always nearby trying to
exploit ways to profit off the fluctuations. Hence, since the price of currencies fluctuated, investor entities bought and sold large sums of currencies

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against other currencies in an attempt to make profits from these fluctuations

(although losses also occurred).
Today, the forex market is the largest market in the world, trading sums
of approximately 1 3 trillion dollars per day. Several entities participate in
the market, including:

Central banks
Commercial banks
Market makers
Investment firms
Brokerage firms
Firms that perform foreign trade operations
Private individuals

You and I fall into the latter category. Only recently have private individuals been allowed to trade on the currency markets. Thanks to the aid of
brokers technological advancements that allowed traders to access the market
and to the allowance of high leverages that made trading on the forex market
worthwhile, the presence of private individuals in the marketplace has thrived.

1.2

Why Choose forex?

Comparing forex to Stocks

F youd like to diversify your portfolio, you have dozens of choices. You
can invest in stocks, commodities, options, real estate, or a crazy yet oddly
clever idea that your brother-in-law had. Like I said before; if the price of
anything fluctuates, you can invest in it.
So why choose forex? 1
Lets take a look at how forex compares with stocks (fig. 1.2), since the
stock market seems to be the first choice for many prospective investors.

1 Trading foreign currencies on a margin carries a high level of risk and may not be suitable for
all investors. The high degree of leverage can work against you as well as for you. Before deciding
to trade, you should carefully consider your investment objectives, level of experience, and
appetite for risk. The possibility exists that you could sustain a loss of some or all of your initial
investment; therefore, you should not invest money that you cannot afford to lose. You should be
aware of all the risks associated with foreign exchange trading, and seek advice from an independent financial advisor if you have any doubts.
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Fig. 1.2 Forex vs. Stocks

Leverage
Well look at leverage in greater depth later on in this section. For now,
know that leverage is a loan given to a trader by your broker to intensify their
results while trading. In stock trading, investors are allowed a leverage of 2:1,
which means that their broker will allow them a loan of $2 per every $1 the
investor puts into a trade. In the forex market, brokers can give their traders
a leverage of 50:1, which means theyll lend the investor $50 per every $1
they invest into a trade.
I placed this as an advantage because a high leverage allows a trader to
be more exposed to the forex market, but always keep in mind that with
great leverage comes great responsibility. Leverage can increase your profits
and your losses.

24 Hour Trading
Ill introduce you to the different trading sessions in a little bit, but for

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now just know that you can trade 24 hours a day, 5.5 days a week on the forex
market.

Great Liquidity
There is a great amount of liquidity on the forex market, meaning that
if you want to buy or sell a currency at a certain price, chances are that youll
get it.
For example, lets say youre trading stocks and you invest all of your
money in company ABC. Their stock plummets and you try like a mad man
(or mad woman, were not here to discriminate) to sell off that stock. Not
many people out there will want to buy a losing stock; hence you may be stuck
without a buyer taking that stock off your hands.
Since trillions of dollars traded on the forex market every day, the market
is extremely liquid. If you open a position or place an order, Forex Club will
guarantee* that the trade is opened for the price you bought it at and will
guarantee that all of your orders are filled.
*Providing the market trades at those levels.

Limited Trade Decisions

In an attempt to avoid making this book sound dated (as I anticipate new
currency pairs in the near future), Ill tell you that there is a liberal number
of about five dozen popular currency pairs on the forex market that are
commonly traded compared to the thousands of stocks offered on the stock
market, making your decision of what pair to trade incredibly easier than
picking out a winning stock.

Accessible Information
Traders on the forex market also have great exposure to the information
that causes price to move. This information, such as news releases and speeches
given by influential government officials, is outlined on economic calendars. By
looking at economic calendars, a trader will always have an idea of what news
event is coming up and how this news event will affect the price of currencies.
Ill delve deeper into this topic later on in the section on fundamental
analysis.

1.3

Examples of How Money Is Made

and Lost in Forex

OW that you have an idea of what the market is and why forex trading
is more convenient than trading stocks, Im going to give you some
examples of how money is made and lost on the forex market to better your
understanding of what youre getting into.
On the forex market, traders can make money or lose money by
exchanging currencies. The profit and loss occur when the price of these
currencies fluctuate.
Ideally, a trader aims to buy a currency at a low cost and sell it off at a
higher cost. Alternately, a trader could aim to sell off a currency at a high cost
and buy it back when it

Fig 1.3 GBP/USD Chart

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In Fig 1.3, a trader aspires to make money online by trading the GBP/
USD.
Using leverage, a trader can attempt to earn money with a modest deposit.
With a leverage of 50:1 ,2a trader can buy or sell up to $10,000 with an
original investment of $200. If the trader sold $10,000 GBP against USD at
1.6650 and two weeks later bought at 1.5800, let's see how much money he
or she would have made:
(1.6650-1.5800) X $10,000 = $850
You could have turned your $200 into $850.
Now lets look at that through the reverse side of the trade: if a trader were
to buy at 1.6650 and hold his position during the downtrend, he would have
lost his deposit.
Forex trading involves substantial risk of loss and is not suitable for all
investors. As a trader, its your responsibility to follow good trading practices
to manage your risks. In this book, Ill offer you great information on how
to manage your risks and create a trading system that, if used properly, will
maximize your profits and minimize your losses.

2 *The high degree of leverage can work against you as well as for you.

1.4

Market Hours

HE forex market is a global entity that allows for 24 hour trading, 5 days
a week. An easy way to look at the market is to compare it to a 24 hour
deli. The deli is always open, but the same person isnt always running the
shift. Lets take a look at the workers name tag. If you live and trade in New
York, you may find that the worker of the graveyard shift has a name tag that
reads, Hello! My name is Asian Session! The worker who works the early
morning shift to lunch time is the London Session, and the worker working
the same hours as you is the U.S. Session. Each one can provide you with the
same great service and products.
Heres a chart that contains the forex market hours:
TIME ZONE

EST

GMT

Tokyo Open

7:00 PM

00:00

Tokyo Close

4:00 AM

09:00

London Open

3:00 AM

08:00

London Close

12:00 PM

17:00

U.S. Open

8:00 AM

13:00

U.S. Close

5:00 PM

22:00

You may have noticed that I included Eastern Standard Time as well a
Greenwich Mean Time. Why did I choose to use these two time sessions? The
answer is simple because Im biased. I live and work in the EST zone, so
Im going to place certain times for things like webinar events, trading contest
times, or news releases in EST so that its easier for me and the team.
The forex market exists in every inch of the world that is graced by sunlight.
As a trader of the forex market, its important for you to fully understand
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GMT and different time zones. By knowing the different time zones, youll
know exactly which session youre in and what news is making what currency
pair jump.
In looking at the previous chart, you may have noticed time periods in
which two trading sessions over lap one another. Tokyo and London are in
shop from 08:00 (GMT) 09:00 (GMT) while London and New York are
working together from 13:00 (GMT) 17:00 (GMT). Get out your maps and
calculators and find out when these times occur in your neck of the woods,
because these two periods of time are when the market is its busiest. A busy
market means more volatility.
The busiest days on the forex market are Tuesday and Wednesday, and the
busiest session is the London session. During these days and times, the market
does its biggest moves. You should think of big moves on the market as little
gifts from a dear friend.
Little moves on the market, however, are more like the smelly little gifts
that your dog leaves on your carpet. Low volatility in the market is not your
friend. Many traders find that they make their most frequent losses during
times of low volatility. Sunday is the slowest day on the market and the
second-slowest day is Friday. Low volatility also occurs during holidays when
banks are closed. Keep an eye on the economic calendar on www.fxclub.com
to make sure that you avoid trading on a holiday.
As a forex trader, your job is to harness market volatility. When Japanese
candles (mentioned later) start stretching, traders want to get into the right
side of the trade to make profit but the risk of loss is always present.

1.4.1

Currency Pairs

currency pair is exactly what the name implies: a pair of currencies. The
concept of a currency pair can be hard to grasp at first. The idea behind
a pair is that you can buy one currency for the other, or you can sell off one
currency in exchange for another.
The world is a big place, and there are dozens of currencies out there, so
Ill just go through all of the most popular currencies.
Country

Currency

Slang

Symbol

Australia

Dollar

Aussie

NZD

Canada

Dollar

Loonie

CAD

European Union

Euro

Fiber

EUR

Great Britain

Pound

Cable

GBP

Japan

Yen

Yen

JPY

New Zealand

Dollar

Kiwi

NZD

Switzerland

Franc

Swissy

CHF

United States

Dollar

Buck

USD

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A trading pair consists of a base currency and a quote currency. The first
currency listed in the pair is the base currency, while the second currency is the
quote currency. What a trader is doing when he or she places a trade is buying
or selling the base currency using the quote currency. Here, lets look at a pair:

EUR/USD
Thats the Eurodollar, the most popular pair traded today. In the case of
the EUR/USD pair, the Euro is the base currency, and the USD is the quote
currency. If youre trading the EUR/USD, you are buying or selling Euros
using the United States dollar.

Fig 1.4.1.1 Buying versus selling

In Fig 1.4.1.1 is the EUR/USD as shown in the ExpressFX platform. Your

goal is to make money on this trade. In order to do that, youll have to evaluate
whether price will go up or down. At first, this may seem like a gamble, but
as you continue reading, youll find out that there are proven ways to estimate
which way price will move. For now, do you think price will move up or
down?
If you think price lines are going to move up, you would want to buy, or
go long on the EUR/USD. In this instance, you would purchase Euros using
United States Dollars.
If you think price lines are going to move down, you would want to sell,
or go short on the EUR/USD. In this instance, you would sell off Euros for
United States Dollars.
There are different groups of currency pairs, each with its own name,

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style, and personality. The first group well look at is that of the major currency
pairs. As a first-time trader, it would be a good idea to trade a major currency
pair because they are the most popular pairs; you can find the most information, signals, and analysis for them.
Heres a look at the six majors:
Majors
Euro/United States dollar (EUR/USD)
British pound/United States dollar (GBP/USD)
United States dollar/Japanese yen (USD/JPY)
United States dollar/Swiss franc (USD/CHF)
Australian dollar/United States dollar (AUD/USD)
United States dollar/Canadian dollar (USD/CAD)

We also have a group of currencies called crosses. A cross is a currency pair

that does not have the USD as its base or quote price. Heres a look at some
crosses:
Crosses
Canadian dollar/Japanese yen (CAD/JPY)
Swiss franc/Japanese yen (CHF/JPY)
Euro/Swiss franc (EUR/CHF)
Euro/Japanese yen (EUR/JPY)
Australian dollar/Swiss franc (AUD/CHF)

The list of crosses goes on, but you get the point. If you dont see a USD
in the pair, its a cross.
Each pair has its own personality. Think of each pair as a unique animal.
Some animals are nocturnal and move the most at night. Some are sluggish,
while others are quick. Some animals move in similar directions while others
move in opposite directions.

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Im going to focus a little bit on this idea of recognizing which pairs move
in similar directions because it can be quite helpful for you. If you know that
two different pairs move alike, you can hedge a position, or diversify a profit
that youre already making.

Pairs that Move Similarly

AUD/USD and EUR/USD
AUD/USD and GBP/USD
EUR/USD and GBP/USD
EUR/USD and NZD/USD
USD/CHF and GBP/USD

Fig 1.4.1.2 EUR/USD and AUD/USD

In fig. 1.4.1.2, you can see the EUR/USD chart on top and an AUD/
USD chart on the bottom. They look pretty similar, dont you think? I think
so. We also have currency pairs that move opposite from one another. Those
pairs are:

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Pairs that Move Oppositely

AUD/USD and USD/CAD
AUD/USD and USD/JPY
EUR/USD and USD/CHF
GBP/USD and USD/CHF
GBP/USD and USD/JPY

Fig 1.4.1.3 USD/CAD and AUD/CAD

There you have actual proof that what I said is correct. In fig. 1.4.1.3,
we have two charts of pairs that are known to move oppositely from one
another: the AUD/USD and the USD/CAD. They almost look like a mirror
reflection of one another.
Now that you have an idea of what currency pairs are and how they move,
Im going to talk about how you can buy yourself into a trade.

1.4.2

Spreads

N the forex market, a trader pays his or her broker a spread cost in order
to initiate a trade. Spread costs are usually a fraction of a cent. The smallest
increment of a currency is called a pip. Spreads usually range from 1 to 15
pips, depending on which currency pair youre trading, although some exotic
pairs may cost even more.
You can find out how much a broker is charging for a spread by looking
at the bid/ask price. In the industry, we call it the bid/ask price, but on forex
Clubs platforms we simply call it the sell/buy price because that seems to be
easier to understand.

Fig 1.4.2 Sell/Buy price as featured in Rumus

Fig 1.4.2 shows the currency pair EUR/USD. Youll notice that there are
two buttons: a sell button that has the price of 1.4016 on it and a buy button
that has the price of 1.4019 on it. The difference between these two costs is
three pips (1.4019 minus 1.4016 equals .0003). This means that youll pay
three pips spread to trade this pair. After factoring in spread costs, this also
means that price has to move three pips in favor of your trade before you can
profit.
On the forex market, traders initiate trades in lots. A lot is equivalent
to 100,000 units of currency. Dont get intimidated, it sounds like a large
amount of money but it can be accessible because a trader can trade fractions
of a lot with forex Club. On the very easy to use ExpressFX platform, a trader
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can even open a position for whatever amount of money he or she wants to
trade simply by typing in the amount into the trading platform.
To give you an idea of how many pips a trader can make per trade and
how much spread costs depend on the amount of money placed into the
trade, look at the table below:
Units of
EURUSD
Traded

1,000

10,000

100,000

1 pip =

$0.10

$1.00

$10.00

So, for example, if you were to trade one thousand on the EUR/USD,
you would have to pay three pips spread which equates to $0.30 and would
make or lose $0.10 each time price moves a tick up or down. 1,000 units is the
smallest trade size allowed by Forex Club and will cost you ten dollars of your
money to trade using 50:1 leverage. 3
The chart above deals only with the EUR/USD. When dealing with
a currency pair containing JPY, one pip is equal to .01, instead of .0001.
Moreover, to calculate the pips per profit for different pairs, you would need
to use a slightly more complex equation. Pairs containing CHF or CAD as a
quote currency have a pip price equal to one dollar divided by the USD quote
currency rate per 10,000 units traded. If the instrument contains GBP or
AUD as a quote currency, the pip price would be $1 multiplied by the USD
quote currency rate per 10,000 units. Finally, the JPY pip rates equal one
hundred dollars divided by the USD/JPY rate per 10,000 units. If that sounds
difficult, I advise you get your hands on a practice account and get firsthand
experience of P/L levels per transaction sizes using different currency pairs.
When you look at the sell/buy price, youll always notice that the buy
price is greater than the sell price. When a trader opens a sell position, she
must buy back a new position in order to close her deal. For example, if I sell
off $10,000 EUR/USD and lose $20.00, I cant just wave a magical wand and
close the position. Ill have to buy $10,000 EUR/USD to have the position
closed.
To revisit a thought previously mentioned, if you want to make money on
3 The high degree of leverage can work against you as well as for you.

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the market, you have to make sure that price moves favorably in the direction
of your trade more than what you paid for the spread. In other words, if you
paid three pips spread to initiate a EUR/USD trade, price has to move in your
direction greater than three pips in order for you to make profit. If you close a
position with three pips profit, this means that your trade broke even. If you
close a position with less than three pips profit, this means you lost money.
Spreads can be hard to understand at first and theyre not especially
exciting to talk about. The people at Forex Club understand this. This is why
they offer a totally unique and very lucid solution to trading with spreads
called zero spread trading (which is exclusive to the ExpressFX platform.)
The way it works is very simple a trader only has to pay $0.40 per every
one thousand units of currency he trades on any pair offered on the ExpressFX
platform. There is also a commission return feature, which instantly refunds
the commission cost that you paid the moment one of your trades becomes
unprofitable.
As the saying goes, Trade with zero spread and pay commission only
when you profit!
Its a good saying.

1.4.3

Leverage

N the previous section that I said you could buy 1,000 units of currency
with just twenty dollars of your money. So how do you get that extra money?
Hold up an old lady? Rob a liquor store? Sell your body to science?
Nay, you use leverage. Leverage is a personal loan given to each individual
trader by his or her broker to intensify that traders results.
When a broker talks about leverage, youll usually see two numbers that
look like this:

:1
The broker is telling you that it is willing to lend you X amount of dollars
for every one dollar you place into a trade.
Leverage is an essential part of the forex industry because a trader needs
to command a large sum of money in order to see results. Common leverages
offered by brokers are 10:1, 20:1, and 50:1.
My personal opinion is to use a limited amount of leverage. A leverage
such as 20:1 is a nice safe amount. If you use 50:1 leverage all the time, youre
intensifying the amount of money that you can win, but youre also intensifying the amount of money that you can lose.
To give you a better understanding of how your trades are intensified, take
my example below:
Youre a trader who deposits $1,000 into a trading account. Using the
leverage of up to 50:1 provided by Forex Club, you can trade with up to
$50,000.00 units of currency (50 multiplied by $1,000).
Lets say you were to place your entire amount into a trade while using all
the leverage. With $50,000.00 of currency placed in a trade, every time price
moves up or down one pip, you will make or lose $5.00.
The forex market is very volatile, so price can jump dozens of pips in
just minutes. Lets say price moves in your favor ten pips in a minute with
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the above trade; that means you just made fifty dollars in just one minute!
But what happens if you werent so lucky and price moves against you? That
fifty dollars could just as easily be lost. In that case, youd be wishing that you
hadnt placed all of your eggs into that basket.
Please understand that using high amounts of leverage can be dangerous.
I highly recommend that you trade different amounts of money with different
leverages on a risk-free, no cost, practice account offered on www.fxclub.com
so that you can fully realize the pros and cons of leverage.
Recently, it was made mandatory that all leverages be limited to 50:1.
Prior to this, traders could use leverages of 500:1 or higher - financial suicide.
On the forex market, the amount of money that you put into your account
doesnt necessarily correlate with how well you do. If you risk a large amount,
you can profit or lose a large amount. Be smart when deciding the amount
you want to trade and dont get too greedy. As a Chinese proverb says, Cross
the river one stone at a time.

1.4.4

Market Orders

market order is an order to buy or sell into a currency. Orders are what
enable you to enter into a trade on the forex market. By placing a market
order, youre telling your broker to initiate an immediate trade to open or close
a position.
There are simple buy/sell orders, which enable a trader to buy or sell a
currency pair, and then there are orders that are slightly more complex.

Take-Profit and Stop-Loss Orders

You have a feeling in your bones that a currency pair is going to leap up
a hundred pips. You want to sit by your computer all day, close price when it
hits its zenith, and rake in all that cash, but you looked out the window and
saw the sun and remembered how much you love being outside. So, instead
of trading, you strap on your sneakers and run outside to frolic in the grass.
While you are in mid-frolic, price jumps up a hundred pips. You just missed
out on your trade.
Has this situation ever happened to you?
Probably not.
While frolicking in the grass may not be on the top of your to-do list,
there are millions of things that can distract us from our work and our trading.
It is humanly impossible to stare at price charts all day long, because as the
saying goes, life happens.
Imagine if you could look at a chart all day. Your eyes would shrivel up
into little beady raisins. You dont want beady-raisin eyes; they look disgusting.
In the attempt to save the eyes of traders around the world (and for various
other reasons, Im sure), take-profit and stop-loss orders were created.
A trader can set take-profit and stop-loss orders the moment he or she
opens a new position. By setting a take-profit position, you ensure that your

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position will close after you make a certain amount of profit that has been
predetermined by you.
Look at fig 1.4.4.1 to see what the take-profit order looks like in the
ExpressFX platform.

Fig 1.4.4.1 Setting Take Profit in ExpressFX

Adversely, by setting a stop-loss order, you can have your position automatically closed when youve incurred a certain amount of losses.
Fig 1.4.4.2 shows you what the stop-loss order looks like in the ExpressFX
platform.

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Fig 1.4.4.2 Setting Stop Loss in ExpressFX

Once price has hit a level to activate either take-profit or stop-loss orders,
Forex Club guarantees that the order will be filled, or that the order will go
through at the price at which you set it.
In fig. 1.4.4.3, youll find an example of what the take-profit and stop-loss
orders actually look like on the ExpressFX trading platform. In the example,
Im betting that the United States Dollar will weaken against the Canadian
Dollar. In other words, Im selling USD/CAD.
The current price value can be seen as a red line running across the chart.
Slightly above that red line is a solid green line, which is the price at which
I sold the currency pair for. Now look for the orders they appear as dotted
green lines above and below prices current value.
The dotted green line on the top of the page is the stop-loss order. Said
order is signified by a sad face. The dotted green line below the current price
value is the take-profit order. This order is signified as a happy face.

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Fig 1.4.4.3 Orders as they appear in ExpressFX

The moment price hits one of the dotted green lines, the position will
automatically close and I will either be rewarded with the profits or kick the
dirt thinking about the losses.

1.5

Intro to Technical
and Fundamental Analysis

RADERS use many different methods to estimate whether price will

move up or down. I knew a trader from Chicago who would shake his
magic 8 ball before opening a position. A friend from Atlantic City would
always travel up the boardwalk and ask the old white eyed palm reader if
he should go long or short on EURUSD. There was another trader from
Haiti who used to throw chicken bones and read the way they landed before
opening a trade.
These traders had one thing in common they were all very, very bad at
trading forex.
Traders use two methods of analysis to estimate how price will react.
These methods are called technical and fundamental analysis. Both methods
are very different from one another, but theyre both very effective and must
be considered by all traders who hope to last on the forex market.
Humans have brains that process information and rationalize it according
to their emotions. Computers have motherboards that process information to
provide definitive, hard answers. Fundamental analysis relies heavily on the
brain, while technical analysis relies on the computer. With fundamental analysis, youll be analyzing news, natural disasters, speeches and the way speeches
are spoken; while with technical analysis, youll be analyzing the answers of
complex equations given to you by your computer.
Fundamental traders believe that price is a momentary thing. The past
does not matter. Burn those price charts that you have from 2008, because our
destination is the future. The only thing that matters to a fundamental trader
is the present. The future of price will be determined by the release of news
events, natural disasters, or speeches from powerful political or social figures.

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The fundamental traders Bible is the economic calendar. You can find an
economic calendar on the Forex Club Web site by visiting http://www.fxclub.
com/economic-calendar/. On the economic calendar, you can find all of the
global events that cause price to move. These events can include bank releases
of interest rates, unemployment rates, vehicle sales anything that directly
correlates with a countrys economy.
Let me take you a bit deeper into the forex market to show you why these
events affect price so much.
The heart, brain, and nerves of the forex market are its traders. This means
that the forex market is being controlled by thousands of men and women
who are doing everything in their power to make money. If a large number of
these men and women buy into a currency, the currency will strengthen. In
the opposite scenario, if these men and women sell off a currency at a rapid
rate, the currency will weaken. This is the reason why fundamental traders
trust the economic calendar the calendar releases up-to-date news on the
important economic indicators that will trigger moments of excessive buying
or selling.
If the outcome of these reports is better than expected, that means the
countrys economy is strong. That cues the men and women to buy into this
countrys currency, hence, making it stronger. Of course, if the outcome of the
reports is poorer than expected, these traders will sell off the currency, making
it weaker.
It should be noted that these men and women are mad theyre indecisive
and driven by greed. There have been instances where they disregarded the
economic calendar information or went against it.
Ill go into further detail of fundamental analysis in section 3; Ill tell you
more about these men and women a rundown of the major events that cause
price to move. Well look at past examples of when big news events caused
price to move and when big news events had no effect on price at all.

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Fig 1.5.1 News as is shown in ExpressFX

A fundamental trader would see Fig 1.5.1 and say, Hey, price just went
up because of the XYZ news event that was just released.
Now, whereas fundamental analysis dont care about past price movement,
technical analysis relies heavily on historical data.
By using mathematical equations, technical analysts gather past data and
use the information given to them to weave indicators that they place onto
charts or to look for chart patterns that emerge. Thanks to platform advancements, traders such as you and I dont even need to pick up a calculator to
process these complex equations. All you need to do is click a button and
presto, the trading platform will do all of the plotting for you; itll be up to
you to interpret the actual charts.
There are different types of software and companies that offer technical
analysis for free. With Forex Club, you can get free market signals courtesy
of Autochartist when you sign up for an account. Traders who have a live
account with Forex Club will get technical analysis courtesy of award winning
Trading Central.

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Fig 1.5.2 Indicators plotted on EURUSD

In fig 1.5.2, I used Forex Clubs advanced Rumus platform to plot what a
technical traders chart may look like.
Every single line in that chart tells a technical analyst something very
important about the market. The lines are like a different language, a language
that you must learn to speak and read in order to understand what the forex
market is telling you.
Ill go into detail about technical indicators in the next section and in
section 4. Dont let the picture above intimidate you once you know what
each indicator means (and Ill tell you what about twenty of them mean),
youll have a much easier time reading and understanding the charts.

1.6

Trading with the ExpressFX Platform

AKE your keyboard and place it on the floor. Now get your dog. If you
dont have a dog, a cat, ferret, gerbil, hamster, or any other small creature
will do. In the event that you dont have any pets, take off your right shoe and
sock.
Do you have that all ready? Good. The next step is to get Forex Clubs
ExpressFX platform. You can download the platform at www.fxclub.com/
expressfx.
Have the software running on your computer, and then allow your pet to
walk across the keyboard. If no pet is readily available, place your foot firmly
against your keyboard.
Chances are good that you just placed a trade using ExpressFX. Its that
easy.
Forex Clubs programmers worked very hard to create the simplest, most
user-friendly forex trading platform ever created. The thought process behind
the creation of this platform was very simple; the Forex market can be a tricky
thing to conquer, but the tool you use to enter the market shouldnt be. As
your teacher, Id like you to read this book and other books to help optimize
the amount of money you can make while minimizing losses on the forex
market. I dont want you to have to pick up a 400-page manual that talks
about how to plot a simple price chart on some complex trading platform.
If you havent already done so, go online and visit www.fxclub.com/
expressfx/. On this page, you will be able to register for a practice account
and download the software. Both processes will take you only a few seconds,
depending on how long it takes you to write your name and email address.
With the ExpressFX practice platform, you can place risk-free trades on
the forex market using virtual money. Well supply you with fifty thousand
virtual dollars to trade with as you please. With this virtual money, you can

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get a better understanding of how much money you could expect to make or
lose on the market depending on your trade amount.
Practice accounts are essential for all traders. Newbies need them to get
firsthand experience in the forex market prior to placing one of their hardearned dollars at risk. Veteran traders need them to test out new strategies.
Regardless of your skill level, you will always want to keep a practice account
at hand, so make sure that your write down your ExpressFX username and
password, and store it somewhere safe.
When you first launch the platform, youll find a login area at top center,
price quotes to the right of the login area, a large area in the center of the
screen where we see price movement, and a news section below that.
We want to focus on the login part at first, seen in fig 1.7.1.

Fig 1.7.1 Platform log in screen

Here is where you enter the information that was provided to you when
you registered for your ExpressFX platform. Once youve entered the correct
account number and password, click Enter to access to the platform.
Youll notice that your password is a mess of random numbers and letters
that are in no way easy to memorize. The first step that I always take once I
open a new trading platform is to change the password. I usually like entering
a password thats very memorable to me. Something like killerrobot1386.

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Please feel free to enter a password thats easy for you to remember; doing so
will make future log ins a breeze.

Fig 1.7.2 Preparing to change password to killerrobot1386

To change your password, click on the Settings tab and scroll down to
change password (seen in fig 1.7.2). In order to change your password, youll
be required to enter your current password followed by your new password.
Now that we have our platform opened and a nifty new password created,
lets look down at the ExpressFXs most prominent feature: the price chart (fig
1.7.3).

Fig 1.7.3 Price charts in ExpressFX

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On the top left of the chart is the trading pair that we use followed by the
time frame. In this case, our trading pair would be EUR/USD, and the time
frame is by the hour.
Above the chart are eleven tabs, each one labeled with a different trading
pair. You can switch between charts to view these other currency pairs simply
by clicking on the tabs. If youd like to view the charts in different time frames,
click on the small upside-down triangle beside the given time and make your
choice. On the ExpressFX platform, traders can view currency pairs over the
course of hours, days, weeks, months, or a year.
The time has come, reader. I would like for you to now pick out your
favorite currency pair. Will you be like 27 percent of the traders currently
trading forex and choose the EUR/USD? Maybe youre feeling dangerous and
would like to trade the volatile GBP/JPY? Or maybe youll pick the EUR/
CHF, because that pair happens to have all of your favorite letters in it.
Call me old fashioned, but for this example, Ill pick the trusty, good ol
EUR/USD. Now it is time for me to place my trade. On the ExpressFX platform, youll notice that the top left button says trade, and shows a picture of
currency being wrapped by two blue arrows. Give that button a click.
Once you click the button, youll notice that a pop up window appears.
That window will look something like fig 1.7.4.

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Fig 1.7.4 It takes two to tango

This is the first step to opening a trade. From here, you may enter your
currency pair and choose which direction you think the pair will move.
Heres a rule of thumb for all first-time traders enter the currencies
according to how they show up in the currency pair. For example, if youre
trading EUR/USD, make sure that the first currency you choose, which
appears in the I expect that row, is EUR and the last currency you choose,
which appears in the against row, is USD. If the pairs match up in this way,
it will be much easier for you to understand which position youre opening
using the up (buy order) or down (sell order) feature.
When youre all settled on which direction you think the currency is going
to head, click the continue button.
Our next step is to pick the amount of money you wish to place into your
trade. The ExpressFX practice account is preset with fifty thousand units of
currency. Youll notice the lowest amount that you can trade is one thousand
and the largest amount by default is five million. This seems like a lot of
money, but it is attainable through using Forex Clubs 50:1 leverage. 4
4 The high degree of leverage can work against you as well as for you.

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Fig 1.7.5 Setting my trade for a buck a pip

For the trade featured in fig 1.7.5, Im prepared to place ten thousand units
of currency at risk in hopes of making a profit. Thats a good safe amount, in
my opinion.
After you have chosen the amount of money that youd like to trade, the
next step is to set your take-profit. Remember that order? Its the one that
closes your position the moment youve made a certain amount of profit. And
after you set your take-profit order, you can set your stop-loss order (the one
that closes your position when youve made a certain amount of losses.)
Once youve set these two limit orders, youll be brought to the final step
in your opening a position journey. Rejoice, reader. You are about to make the
transition from average Joe to forex trader.
A pop up screen will appear confirming your order. When you see this,
you have to hit the request price button.
Now its time to act quickly! The ExpressFX platform will show you a
quote for four seconds before recalculating the next quote. Why the rush?
At Forex Club, we utilize the request for quote feature, which ensures that the
price that you request is the price you get guaranteed, regardless of current
market conditions. Without this feature, slippage could occur. Slippage occurs

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when price moves extremely fast precisely while you are trying to initiate an
order. The market is moving so quickly that a broker cant quite pin point the
price you think youre getting. As a result, price slips out of the brokers hands
for a moment and you end up in a position a few pips away from the opening
price that you wanted. In other words, you may lose out on money because of
a brokers poor execution.
Forex Club guarantees no slippage on their ExpressFX and Rumus
platform.
If you like the quote presented to you at step 5, click on confirm button
to enter your trade (fig 1.7.6).

Fig 1.7.6 Confirming your trade

Its time to make your business cards. Forex Trader Extraordinaire would
be a good header for the card it has a good ring to it. Send a few to the
family; theyd be proud.
After you place a trade, its time to follow the trade to see how your
position is doing. You can view the trade and all of its details in the white
area above the charts. Here, you can see the trade size, currency pair, price,

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current P/L (profit and losses), your orders, and how much commission will
be returned to you if you are in a failed trade.
In fig 1.7.7, you can find two different instances in which a trader is
making profit or losing money.

Fig 1.7.7 Making money or making losses

At any time during your trade, you can change your take-profit or stoploss order by clicking on the limits button located at the top of the platform.
The ExpressFX platform has some features located to the right of the price
chart. There are two magnifying glasses to zoom into and out of the market,
a drawing tool to plot lines on your charts, an auto-adjust tool that keys into
your trade and a tool to change the line chart into a candle chart (explained
later). All of these tools are very useful for a novice, and I suggest you play
around with all of them.
When youre ready to close your position, simply hit the close position
button, seen in fig 1.7.8.

Fig 1.7.8 The trade is over

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The request for quote pop up will appear to lock in on a closing price, so make
sure that you click to request it within four seconds or youll have to request
for another quote. Once you have clicked on the button that has appeared,
you have successfully opened and closed a forex trade. Congratulations; youre
now a trader.

Section Two

Forex Charts
WHEN you look at the price chart, youre looking at the ideas and
expectations of the thousands of men and women who are currently
trading on the forex market. Price charts show the current and past
values of a currency pair. You can find out how much a currency pair
is currently worth by looking at the numbers to the right of the chart.
The price shown is the price of the base currencys worth in exchange
for the quote currency.
For example, you know that in the pair EUR/USD, the euro is the
base currency and the United States dollar is the quote currency. If the
price of the EUR/USD is 1.4000, that means that you can buy one
euro using 1.4000 United States dollar. Lets take it one step farther;
if we switched the equation around wed find that we could buy one
United States dollars using 0.7146 Euros (1 unit divided by the value
of 1.400 equals 0.7146).
Each different type of chart has its own unique qualities, but they all
share a universal feature: Price charts are divided into different price
intervals.

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These different price intervals are:

Tick
Minute
Hourly
Daily
Weekly
Monthly
Year

The smaller the increment of time you choose, the less past information you can see. This has its advantages and disadvantages; most
chartists need past data to help them plot lines called support and
resistance, lines which help them determine if price is going to break
out (move rapidly in a certain direction), but use smaller time intervals to narrow in on an entry point. Ill tell you all about these support
and resistance lines later on in this section. But for now, onto the
charts.

2.1

Line Charts

HIS is one of the more basic charts. With line charts, the last closing
price of each interval is shown at the end of the line, or rather at the
point farthest to the right. When looking at this chart in small time intervals,
you will notice that price has a tendency to jump up and down, forming acute
edges. Its nearly impossible to get any meaningful indication of future price
movements from this information alone. If you take a step back and look at
line charts in intervals of months, youll notice that these jagged little spiked
lines are more smoothed out.
Line charts are one of the easiest charts to read, but they dont provide
traders with great insights in technical analysis.

Fig 2.1 A line chart of the EUR/CHF

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2.1.2

Bar Charts

HE bar chart expands on information not given on line charts. On a bar

chart, traders can find four key prices in any time interval:

High (the highest price in the interval)

Low (the lowest price in the interval)
Open (the first price in the interval)
Close (the last price in the interval)

On bar charts, the time intervals are extremely relevant. Each bar on the
graph represents one unit of time that is determined by the interval of the
chart. For example, if youre looking at an hour chart, each bar represents
one hour. If youre looking at a minute chart, each bar represents a minute. If
youre looking at a weekly chart, each bar represents you guessed it a week.
The open price signifies the exact price of the currency pair at the moment
the time interval began. If were looking at an hour bar chart, for example, the
beginning of each hour would be marked by the open price. If were looking
at a daily bar chart, the beginning of each day would be marked by the open
price and so on and so forth.
You may notice that the bar tends to stretch or shrink after the opening
price. The stretching and shrinking of the bar represents the fight for market
dominance. The way I usually imagine it is that there is a gigantic bull and a
gigantic bear. They both have human-like hands and are holding a tremendous
rope. The gigantic bull and bear are trying to pull the rope towards themselves
with all their might. The bull and bear are not alone; they have cheerleaders
thousands of them. And each one of them is mad, indecisive, and greedy. The
more fans either animal has, the more it will pull on its rope. We can see how
well either animal is pulling by looking at the bars. If the bar is sinking down,
the bear is winning. If the bar is rising up, the bull is winning.
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After the time interval is done, the bar ends and a little notch can be seen
which represents the closing price. The close price will provide two definitive gifts: the high and low price. The high represents the highest point that
price hit from the moment the bar opened until the moment the bar closed.
Likewise, the low represents the lowest point price hit between the open and
close times. All of these aspects are illustrated in fig 2.1.2.

Fig 2.1.2 Open, high, low and close (OHLC) prices on a bar graph

The concept of having open, close, high and low points that are separated
by time intervals is widely used. There are other charts that follow the same
idea as the bar chart, but they are illustrated differently.

2.1.3

Candle Charts

F you search the Internet for forex charts, I bet that nine times out of ten
the charts that you find will be Japanese candlesticks.
Japanese candlesticks are the worlds oldest form of technical analysis. They
were originally created in seventeenth century Japan by Munehisa Homna as
a way to track the price of rice. It wasnt until 1985 that this form of charting
reached the West, although the West was already utilizing bar charts, the function of which was very similar to that of candles. Strange, eh?
To reiterate, candles follow the same rules of open, close, high and low
prices as do bar charts. To further illustrate how these four prices are created,
Ive included fig 2.1.3 below to clearly indicate the different price levels over
a specific interval of time.

Fig 2.1.3 A candlestick. It doesnt get easier than that.

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You can see that the high and low prices are illustrated by thin black lines
that form below or above the open and close price. These lines are called
shadows or wicks. The thick part of the candle that exists between the open
and close price is called the body.
The bodies of candles are color coded in accordance to the direction that
price is traveling. If the open price is less than the close price, this means that
price went up. This is illustrated with a white candle. This is a bullish candle.
In order to have made money trading this candle, you would have had to been
in a long or buy position.
If the open price is greater than the close price, the candle will be black.
That means that price moved down. Black candles tell us that the market
made a bearish move. In order to have made money in this scenerio, you
would have to have been in a short or sell position.
Candles are like snowflakes; each one is unique. Some candles are white;
others are black. Some candles have long wicks, some have short wicks, and
some have no wicks at all. Each one of these little discrepancies tells a trader a
great deal of information about the market.
When a professional trader looks at candles, she doesnt see different
colored lines. She sees messages and gestures. Every movement that a candle
makes is the forex market making a muted sound. The market is communicating to us and those who understand the forex language are the ones who
will profit the most.
One of the easiest ways to learn a foreign language is with a translation
dictionary. Think of this next section as a Forex-English dictionary: candlestick edition. Feel free to crease the next page over for future use, it will take
you a few days of hands-on experience and chart watching to fully understand
what each candle is telling you.

2.1.4.1

Japanese Candlestick Patterns

Forex-English dictionary: candlestick edition

ETS start with the basics, and then Ill ease you into the more difficult
types of candles.

Long Candle
Most of the different types of candles in this list have romantic, imaginative names that are both mystical and hypnotic. Not the long candle. You cant
get a more unimaginative name then long candle.
A long candle is just that: a candle that is longer than the average candles
on the chart. Some of the philosophers among us may ask, What is a long
candle? Who is to say when a candle is long?
One method to find the average size of candle involves tracing volume
amounts with a moving average over a fairly long time (say sixty-five days) to
determine an average candle length, in which to compare the long and short
candles.
Or you can just use your eye to determine which candles look longer than
the other. This method isnt an exact science, but eyeing the candles will work
just fine.
A long candle signifies a period in which the men and women of the
market are buying or selling a currency pair at a rapid pace. Remember that
tug of war between the gigantic bull and bear? When we see a long candle on
the market, this means that one of the two won by a substantial amount.
How can you tell whether the bulls or the bears won? You can find out by
simply looking at the color of the candles body. Long white candles indicate
a period of excessive buys, which means that the bulls are victorious. Long
black candles indicate a period of excessive sells, which means the bears are
victorious.

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Fig 2.1.4.1 Assorted candles

In fig 2.1.4.1, Ive listed five different types of candles, the middle candle
being the long candle.

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Short Candle
These small candles represent a period of time in which the open price
is very close to the close price. Essentially, the bulls and bears are fairly even
here. Neither one can muster up the strength to make a meaningful big move.
I say meaningful because the open and close prices are considered the most
emotional moments for price.

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Spinning Tops
These candles arent half as fun as their name implies. Spinning tops are
typically short candles, but its not the size of the candles body that we consider
when identifying these candles its the size of their shadows (or wicks).
Spinning top candles have shadows that are much longer than their
bodies. What this candle tells you is that the bulls and the bears are fairly
even, but only after a furious fight. Think back to the tug of war analogy the
bull and the bear are at a tie, but only after giving one another some ground.
Their freakishly evolved human-like hands are probably beet red from tugging
that rope. Ouch.

Fig 2.1.4.2 Spinning tops

A spinning top candle indicates a moment of indecision. The bulls and

bears are fairly even here, and the men and women who are by the sidelines
cheering are torn regarding which direction they should go.

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Marubozu Candle
A marubozu candle is a candle that has either no upper shadow or no
lower shadow hence, its name, which translates to bald. In very rare cases,
the marubozu has neither a top nor bottom shadow.
Take a minute to think about whats happening to the market here. The
highs or lows are equal to the opens or closes, which is the reason why we have
no shadows.
If you see a black marubozu candle, this means that the sellers have
had complete control of the time interval in which the candle was formed.
The moment the candle opened, the bears gathered their numbers and did
everything they could to drive price down, and it worked wonderfully until
the moment that the candle closed.
Adversely, if you see a white marubozu candle, the buyers were in
complete control from the moment the candle opened until its close.

Fig 2.1.4.3 Mmm, marubozu bar

Fig 2.1.4.3 features a picture of a black marubozu or, as I sometimes like

to call them, a dark chocolate marubozu. Its a tasty candle, folks.
These candles signify the strength of the buyers or sellers, depending on
the color the marubozu. They can also signify a strong continuation signal,
which means that if you see a marubozu, chances are pretty good that the
next few candles forming on the chart will move in the same direction as that
marubozu.

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Doji Candle
The translation for doji is unskillfully made. Doji candles have no body,
which means that their open and close prices are equal. Of all the different
candles, the doji is probably the easiest to spot on a graph. It looks like a plus
sign.
When we spoke about the spinning top candles, I discussed how the bulls
and bears were about even, signifying indecisiveness. With doji candles, the
bulls and bears arent almost even they are in a dead heat.
A doji signifies a major moment of indecision. By itself, the doji is a
neutral pattern, but when paired with some of the more complex candlestick
patterns, the doji can signal a meaningful move on the market.

Fig 2.1.4.4 The unskillful doji

In fig 2.1.4.4, we can see a doji candle or to be more exact, a long-legged

doji.

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Dragonfly Doji
This is where the names of the dojis start to get interesting. The history of
the dragonfly dojis name is a little shrouded in mystery, but many believe that
this doji was named after the dragonfly because the insect is a graceful flyer
that can hover and soar up with utter control and ease.
A dragon fly doji occurs when a currency pair has made the same open,
high and close price, but it has a different low price. This doji can has one long
shadow below it. On the chart, it looks like an upper case T.
Dragonfly dojis typically occur after a long period of selling. Well have a
few black candles indicating a mighty move by the bears which will end the
moment this dragonfly doji appears. Now its time for price to fly up on the
wings of the dragonfly.
We call this a trend reversal signal.
Spot the picture of a dragonfly doji in fig 2.1.4.5.

Fig 2.1.4.5 The dragonfly doji

The dragonfly doji is an indication that a bullish market may appear.

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Gravestone Doji
The gravestone doji is the dragonflys opposite. The gravestone doji got
its name in the days when traders could only make profit if the market was
moving up. When they saw this signal, they knew that all hopes of future
profits were dead at least for a short period of time.
The gravestone doji is formed when price makes a same open, low and
close price, but it has a different high price. In other words, we have a doji that
has no lower shadow and one long upper shadow.

Fig 2.1.4.6 A series of candles leading to a gravestone doji

In fig 2.1.4.6 you can see a picture of a gravestone doji. The gravestones
appear at the end of a bullish movement and signify that the bears are about
to take control.
Please note that reversal signals dont automatically trigger a new trend.
After such a signal appears, the market tends to drift sideways for a short
period of time before price plows into a certain direction. Keep this in mind
when youre trading.

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Four-Price Doji
The four-price doji appears when the open, close, high and low price are
all the same. It looks like a dash, or a subtraction sign.

Fig 2.1.4.7 Four-price doji

Fig 2.1.4.7 is a picture of a four price doji.

During your trading adventures, if you were to ever see a four price doji,
it would signify total indecisiveness in the market or that some sort of error
occurred on your trading platform. You wont see them often, but may spot a
few on a one minute chart on some Sunday afternoon.

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Deviant Doji
Nothing in this world is perfect, and as I stated before, candles are like
snowflakes each one is unique. You may notice that a doji almost looks like
a gravestone, except it has a small shadow on its bottom. You might also spot
a candle that has an extremely small body; this may or may not be a doji.
These imperfections happen on the forex market. Theyre called deviant
dojis.
In the case of the standard doji, I accept that if the actual body of the doji
is 10 percent of the entire candle, its a doji, as seen in fig 2.1.4.8.

Fig 2.1.4.8 Appropriate body-to-candle ratio of a doji

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Getting back to the gravestone and dragonfly dojis, use your own discretion when deciding if a candle is a deviant. Ive included some examples of
what a deviant gravestone and deviant dragonfly may look like in fig 2.1.4.9.

Fig 2.1.4.9 Deviant gravestone and deviant dragonfly dojis

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Paper Umbrella
Essentially, a paper umbrella (fig 2.1.4.10) is almost like a dragonfly doji,
except that this candle has a body. When we see this, what is happening in
the market is that the price of a currency pairs open, close and high are fairly
similar, while its low price is much lower.

Fig 2.1.4.10 These paper umbrellas never appear in Tiki drinks

So the only difference is a little candle body. Big deal, right?

Not really. The market is basically telling us the same thing as it would be
telling us if we were to see a dragonfly doji. It doesnt matter if the candle is
black or white; a paper umbrella form on your charts is an indication that a
bullish trend may occur.

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Hammer
This is where the candles start to get more complex. Until now, all of the
candles that we viewed were independent of one another. Now were going
to move away from individual candles to look at what happens when we see
several candles form into common patterns that have been known to cause
price movements in the past.
Well start it off with a simple candle called the hammer. The hammer
candle looks exactly like the paper umbrella candle. The only difference
between the hammer and paper umbrella candle is location.
In order to have a hammer, we need to be in a bearish market. In other
words, there must be a succession of black candles making their way down the
chart before this candle can appear.

Fig 2.1.4.11 Stop hammer time

You can see a picture of a hammer in fig 2.1.4.11.

The properties of this candle are the same as those of the paper umbrella;
price has made similar open, high, and close prices, but there is a lower low
price. And, just as with the paper umbrella, the actual color of the hammers
body doesnt matter. No discrimination.
Sometimes we need additional signals before we can enter into a trade.
In the case of the hammer, if the hammer is followed by a black dragonfly or
white candle, the old trend has come to an end, and a bullish trend may occur.
If the hammer is followed by a black candle, we are entering into an uncertain
market.

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Inverted Hammer
An inverted hammer looks just like it sounds it is a hammer that has
been inverted or flipped around. When an inverted hammer occurs on the
market, we know that price has made similar open, close and low prices, and
a high price that exceeds all others.

Fig 2.1.4.12 Stop inverted hammer time

Fig 2.1.4.12 shows a picture of an inverted hammer. Personally, I think

this should be called a shoebox with a pencil sticking out of it candle but
who am I to rewrite history?
In order to have an inverted hammer, were going to need the same location as what is needed to make a hammer the pattern must occur at the
bottom of a downtrend.
Just as with hammers, the color of an inverted hammers body doesnt
matter; an inverted hammer, like a hammer, signifies that the bulls are about
to take charge.

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Hanging Man
In talking about the last few candles, I explained the candle formations
that indicated bullish trends. Some of you bear fans might have felt left out.
Fear not, bear fans! You, too, have candles that signify bearish trends.
The hanging man got its name for obvious reasons it looks like a man
who is hanging at the top of a hill. To further illustrate this, I drew a small
dead face on the hanging man candle picture (fig 2.1.4.13). The formation of
the candle is similar to that of the hammer or paper umbrella (similar open,
high, and close prices, with a lower low price) and, as with some of the other
candles, the color of the hanging mans body does not matter.
In order to have a hanging man candle, we need to be in an uptrend. The
bulls have to be in contro,l and the white candles need to be pushing price up.

Fig 2.1.4.13 Hanging man

The bear was a good friend of that man who is hanging. Now that
his friend has passed away in an unfortunate manner, the bears desire for
vengeance must be sated.
If a hanging man is followed by a black candle or gravestone, the old trend
is over, and we are entering a bearish market. If a hanging man is followed by
a white candle, we are entering an uncertain market.

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Shooting Star
This is a bearish signal that looks very similar to an inverted hammer.
Where inverted hammers occur at the bottom of a downtrend to signify a
reversal trend, the shooting star occurs at the top of an uptrend. Shooting
stars are fairly weak indicators; before considering opening a new position,
one should seek additional confirmation. As with the last few candles that I
told you about, shooting stars can be either black or white; their color does
not matter.

Fig 2.1.4.14 The shooting star formation

Fig 2.1.4.14 shows a picture of what a shooting star may look like.
A shooting star that is followed by a long black candle is a good indication
that a bearish trend will emerge.

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Engulfing Pattern
Keep an eye out for these, because engulfing patterns are very trusty candle
formations. An engulfing pattern occurs when one candle of a certain color is
followed by a new candle of the opposite color whose size is large enough to
engulf the first candle. The actual color of each candle in the engulfing pattern
will tell you whether price will move up or down, so its important to pay
attention to their colors.
Before we can consider a pattern to be an engulfing pattern, we must have
a strong uptrend or a strong downtrend.
Let me paint the picture for you Youre watching your charts and notice
a lot of long white candles forming. You are watching an uptrend occur right
before your eyes. Spotting the uptrend, you decide to go long and buy into
the position.
Suddenly you start to notice that the profits you were making stopped
increasing and are starting to shrink. Worried that youre going to incur more
losses, you close your position.
You notice that the last white candle in this uptrend was a short candle.
Now price is beginning to fall and a black candle is forming. This isnt just
any black candle; its a long black candle, one thats longer than the previous,
shadows and all.
The time interval ends and you study the last candle. These last two
candles price made will look like the candles seen in fig 2.1.4.15.

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Fig 2.1.4.15 A bearish engulfing pattern

Since you were clever enough to read this chapter, you know that these
candles on your chart right now are an engulfing pattern. Its not just any
engulfing pattern; its a bearish engulfing pattern.

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So, to review, you need three things in order to spot an engulfing pattern:
1. Youll need a strong uptrend or downtrend
2. Youll need two side-by-side candles of different colors
3. Youll need the second candle to be larger than the first candle

Fig 2.1.4.16 A bearish engulfing pattern

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If we are in an uptrend and a small white candle is followed by a large

black candle, this is an indication that a bearish trend may occur (fig 2.1.4.16).

Fig 2.1.4.17 A bullish engulfing pattern

If we are in a downtrend and a small black candle is followed by a large

white candle, this is an indication that a bullish trend may occur (fig 2.1.4.16).

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Harami
If you were to switch the position of the engulfing patterns candles so
that the long candle occurred before the short candle, you will see the harami
pattern (fig 2.1.4.18).

Fig 2.1.4.18 Illustrating the difference between the

engulfing and harami patterns

Harami is the Japanese word for pregnant, since the formation itself looks
like a pregnant woman. In the bearish harami, the first candle is a long white
candle, which represents a pale mother. The short black candle in front of her
represents her child: a small dark bundle of joy that is attached indefinitely
until birth. When a trader spots this formation, he knows that the market
itself is pregnant and ready to give birth to a trend from which its traders can
profit.
The two candles that signal a bearish harami formation are a long white
candle followed by a short black candle (the baby); these form at the end of
an uptrend. Its important to note that the smaller the baby is, the stronger
the bullish trend.
If you spot a long black candle followed by a short white candle at the end
of a downtrend, you just spotted a bullish harami formation, which signifies
a period of buying.

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Harami Cross
The harami cross follows the same principles as the harami. Similar to
the harami, the harami cross occurs when a long candle is followed by a short
candle. However, in the case of the harami cross, this short candle is a doji.
Remember when I said that the smaller the baby, the more potent the
trend? This applies even more so with the harami cross, since the baby is a doji
(fig 2.1.4.19).

Fig 2.1.4.19 The harami cross

If you spot a long white candle at the end of an uptrend followed by a

doji, this is an indication that a bearish trend may occur.
If you spot a long black candle at the end of a downtrend followed by a
doji, this is an indication that a bullish trend may occur.

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Dark Cloud Cover

Dark cloud cover candles probably got its name from the bearish trends
that follow the patterns formation. Remember, back when Japanese candlesticks were invented, people couldnt make profit in a down market only
when price moved up. The name of this one might sound a bit ominous, but
the opportunities that this formation can offer the modern trader are anything
but ominous.
In order to have a dark cloud cover candle, we have to be in an uptrend.
The first candle in this pattern has a long white body. In order for this
pattern to occur, price has to open higher than the previous candle bars high.
In other words, youre going to notice one long white candle and to its right
one long black candle which appears to be hovering slightly above the white
candle.
To better illustrate this, look at fig 2.1.4.20 to see what the dark cloud
cover pattern looks like. Please note that the first candles closing price is not
equal to the next candles open price. Price made a quick leap, leaving a gap.

Fig 2.1.4.20 Dark cloud cover, the preferred pattern of Batman

If you see the above pattern at the end of a bullish trend, this signifies that
we are entering a bearish trend.

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Piercing Line
The piercing line formation is similar to the dark cloud cover formation.
Where the dark cloud cover formation marked a bearish signal at the end of
an uptrend, the piercing line formation marks a bullish signal at the end of a
downtrend.
At the end of a downtrend, we need to have two candles: a long black
candle followed by a long white candle. The white candles open price must be
below the black candles low price. In other words, if youre looking at these
candles on a chart, the white candle will seem to be hovering below the black
candle (fig 2.1.4.21). Again, notice how the black candle in the end of the
downtrends close price is not equal to the following white candles open price.

Fig 2.1.4.21 The piercing line can be seen after the downtrend

The piercing line formation signifies that a bullish trend may occur.
However, you shouldnt be too hasty with this formation. If, for example,
you see that the bar following the white bar is a black bar that sinks down
below the white bars low price, this signals a continuation pattern, which
means that the market will remain in a bearish trend.
It would be smart to take some time with this formation and wait for a
confirmation signal.

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Morning Star
The morning star formation is a pattern that consists of three candle sticks.
This pattern is a reversal signal that appears at the end of a bearish trend.
The first candle in this formation is a long black candle. Beside this candle
is a second candle, the star. This second candles color is irrelevant. The only
thing were looking at is the size of this candle and its position in relation
to the first candle. We want this second candle to open lower than the first
candles close; in other words, we want the smaller candle to look like its
hovering below the first candle. The final candle in this formation is a long
white candle. This third candle should close above the first candles midpoint
in order to validate the formation.

Fig 2.1.4.22 Morning star formation

If all three candles are in place (fig 2.1.4.22), you have a morning star
formation, which signals a bullish trend.

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Evening Star
Similar to the morning star pattern, the evening star pattern consists of
three candlesticks. Where the morning star occurred at the end of a bearish
market, signifying an uptrend, the evening star occurs at the end of a bullish
market, signifying a downtrend.
There are three pieces to the puzzle with the evening star. The first is the
long white candle. This long white candle is followed by a short candle, which
is known as the star. The stars location is very important. The short candle
must open higher than the first candles close. In other words, we want the
second candle to be hovering above the first. The third candle in this formation is a long black candle, which signals that many more black candles will
appear in the future. See a picture of the evening star formation in fig 2.1.4.23.

Fig 2.1.4.23 The evening star formation

The third black candle is very important in this formation. The longer
this black candle is, the stronger you can expect the emerging trend to be.
When you see this, its an indication of a bearish trend.

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Abandoned Baby
When we look at morning and evening star patterns, its very important to
note that there are several key ingredients necessary to ensure that the pattern
will work correctly and strongly. The first indication that the morning and
evening star are strong is the actual star, or the second candle. The smaller the
second candle is, the more potent the reversal pattern. If, for instance, the star
is a doji, we can expect a strong trend to emerge.
The second indication of a strong reversal is the gap that appears between
the first candle and the star. The larger the gap, the more potent the signal. In
the rare instance that there is a complete gap between the first candle and the
star, which means that the first candles high is lower than the second candles
low (or the first candles low is lower than the second candles high), we have
an extremely powerful indication of a strong trend.
Our last indication that the trend is strong is that the third candle overwhelms the first candle, meaning that if the third candles close is higher than
the first candles open. Adversely if the evening stars third candles close is
lower than the first candles open, this also indicates a power signal.
If all three of these indications are present, we have one of the strongest
candle formations: the abandoned baby formation (fig 2.1.4.24).

Fig 2.1.4.24 Where is this babys mother?

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It is important to note how the patterns form in relation to the morning

and evening star patterns. If you see that the formation looks like a morning
star and all three indications of the abandoned baby are present, this is a
powerful bullish signal. If the formation looks like an evening star pattern and
the abandoned babys indications are present, this is a powerful bearish signal.

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Tweezers
The Bears Tweezers
In order to have a tweezer formation that signifies a bearish outbreak,
There must be one white candlestick at the end of the uptrend that has a long
upper shadow. The next candle in the chart must be a black candle with a long
upper shadow that has the same high point as the previous candle.

Fig 2.1.4.25 Bearish tweezers

Bearish tweezers can be seen in fig 2.1.4.25. If you spot this trend on the
chart, it is an indication of a bearish trend.

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Bulls Tweezers
As you noticed by now, almost every candle formation works both ways,
which means that if a certain candle pattern produces a bearish signal, there is
probably an opposite pattern, which may or may not have a different name,
that produces a bullish pattern.
In order to have a tweezer formation that signifies a bullish trend, the
first thing we need is a downtrend. At the end of the downtrend, we have a
black candle with a long shadow, or we may even have a dragonfly doji. The
following candle is a white candle that is making a low that is similar to that
of the first.

Fig 2.1.4.26 Bullish tweezers

Fig 2.1.4.26 shows bullish tweezers. If you see this, its an indication that
the market is poised to move upward.
It should be noted that these candles dont necessarily have to be next to
one another to signify a tweezer. If you notice that there are candles between
two tweezer candles that make similar highs or lows, this only strengthens the
possibility of a future trend occurring.

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Fig 2.1.4.27 These tweezers are spaced far apart

In fig 2.1.4.27, you can notice that we have a quite a few candles appearing
between this tweezers pattern. In the West, we have a different name for this
pattern, which Ill go into more detail with in section 2.4.

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Windows
While describing the morning star, evening star, and abandoned baby
formations, I noted that there were instances when a close price may differ
from the following candles open price. I described this by stating that the
candles were hovering above or below one another. These instances are called
price gaps. If were in a bearish trend, a price gap, also known as a window,
occurs when a black candle has an opening price greater than the previous
candles low. If were in a bullish trend, a window occurs when a white candles
opening price is greater than the previous candles high.
If you had a hard time comprehending that, take a look at fig 2.1.4.28.

Fig 2.1.4.28 Bear windows

Fig 2.1.4.28 shows a price gap that occurred when the bears were in
control. Look at the second-to-last candle in this pattern. Its low price is
higher than the next candles high price. There is literally a gap, or window,
between these two candles.
Windows can indicate a continuation of the trend. If you see a few black
candles and notice a gap between the last two, theres a good chance that
the next few candles will also be black. Likewise, when you see a gap occur
between two white candles, price may go up, as seen in fig 2.1.4.29.

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Fig 2.1.4.29 Bull windows

However, there is more to windows than just signifying a continuation

pattern. The low price of a white candle that occurs after a window in a bullish
market also acts as a support line for future bars.

Fig 2.1.4.30 A continuation, plus support or resistance? Score.

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And vice versa, the high price of a black candle that forms after a window
acts as a resistance line for future price (fig 2.1.4.30).
So, what exactly are support and resistance lines? Go on and turn the page
to find out.

2.2

Support and
Resistance Lines

OW that Ive given you more candlesticks patterns than you probably
know what to do with, its time to drill in some more valuable and
extremely vital information about the forex market.
Remember the analogy in which price was represented by a gigantic bull
and bear engaged in a tug-of-war? Lets forget that analogy for a bit. For this
section, the information I provide for you may be easier to understand if you
think of price as a ball.
Im sure that youve played with a ball before. What happens when you
take the ball and drop it onto the floor? Simple answer: The ball bounces back
up towards you. But what happens if, say, this ball of yours is extremely heavy?
You have a two-thousand-pound ball that you manage to drop onto the floor.
That ball is going to crash through your floor and end up somewhere in your
basement.
On the forex market, support lines act like floors from which price can
bounce up while resistance lines act like ceilings from which price pushes off.

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Fig 2.2.1 Good ol support and resistance lines

You can see in fig 2.2.1 how price bounces off of these support and resistance lines.
By knowing where support and resistance levels exist on a chart, a trader
can either attempt to trade off of these levels to make quick profit on the
bounces or wait until one of the support or resistance lines is broken. Whenever
price is heavy and can break through this floor or ceiling, price is going to soar
or plummet in that direction (much like how Id imagine a bowling ball would
plummet if dropped on a glass floor). However, more often than not, price
bounces off of these lines rather than breaking through them.
Now would be a good time to reiterate this golden rule of the forex market:
Price moves three ways.
Price Can Move:
1. UP
2. DOWN
3. SIDEWAYS

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This is an important rule to consider when plotting out support and resistance lines. When plotting your support and resistance lines, youll notice that
the trend youre following will either be a bullish trend (heading upward), a
bearish trend (heading downward) or a range (moving sideways). From my
personal experience, I would suggest that you go long on the bullish trends, go
short on the bearish trends (both obvious suggestions), and do nothing at all
in a range. Theres nothing more frustrating than placing a trade in a market
that isnt moving.
So, now that you have a general idea of what support and resistance lines
can tell you about price movements, lets talk about how to plot them.

Drawing Support
Support and resistance lines are not exact levels. They are rough estimations that most traders spot simply by looking over a graph. When you
learn to plot these lines yourself, you may notice that sometimes the shadow
of a candle just barely dips past a support or resistance line, testing out this
new level before price bounces back. Always take caution when looking for a
breakout. Make sure that you have candle body penetration, not just shadow
penetration, before trading a breakout.

Fig 2.2.2 Support and resistance lines again!

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In fig 2.2.2, we can see that the support line is indicated by the flat line
on the bottom. In this case, price has made similar lows and is moving sideways, indicating that were in a range. Now is not an opportune time to trade
unless you plan on trading between the support and resistance lines. This too,
however, might not prove to be profitable because of the minimal market
movement.
If were in an upward-moving market, our candles or bars are bound to
make higher lows. Heck, if were in an upward-moving market, our candles
or bars will be making higher everything. But for plotting support lines, were
only interested in the lows.
In some instances, you may notice that if you trace a finger along these
lows, you have a straight diagonal line. This diagonal line is your support line
(see fig 2.2.3).

Fig 2.2.3 Drawing support in an uptrend

A support line has the same function whether it is horizontal or diagonal.

Price is going to either bounce off it, or plow through it.

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Drawing Resistance
Now that we got the floors out of the way, its time to focus on the ceilings.
Resistance lines provide traders with the same information that support lines
offer they tell a trader that price will either bounce off of them or penetrate
through them and create a momentous market move. However, resistance
lines are drawn by tracing highs, as seen in fig. 2.2.6.

Fig 2.2.6 Drawing resistance in a downtrend

2.3

Pivot Points

OME traders just arent satisfied with one line of support and resistance.
Some traders want seven support and resistance lines. Thats fine; Im a
firm believer of the more, the merrier.
Pivot points are indicators that are used by traders to automatically plot
key points of support and resistance. The only thing you need to do in order
to plot these lines is log into Forex Clubs Rumus platform, click on Pivot
Point, and drag it right onto the screen. Voila, you have support and resistance
lines that have been plotted onto your chart using mathematic equations.
The equation to find pivots points is as follows:
Resistance 3 = High + 2*(Pivot - Low)
Resistance 2 = Pivot + (R1 - S1)
Resistance 1 = 2 * Pivot - Low
Pivot Point = ( High + Close + Low )/3
Support 1 = 2 * Pivot - High
Support 2 = Pivot - (R1 - S1)
Support 3 = Low - 2*(High - Pivot)
Lucky for you and me, we dont have to plug numbers into these equations
in order to plot lines on charts. Thats the beauty of indicators; the computer
will do all of the work for you.

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Fig 2.3.1 Pivot lines plotted on an hour chart

In fig 2.3.1, you can see the pivot points that have been automatically
loaded onto the chart thanks to Forex Clubs advanced Rumus trading
platform.
Each and every day, youll notice that the pivot points on your charts will
be plotted at different levels, depending on historical market data.

Fig 2.3.2 Pivot lines shown over the course of days

By looking at the central line (known as the actual pivot point line),
traders can get a sense of how the market responded the day before and thus

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get a sense of how its currently responding in contrast with price from the
day before.
Here are some tips that will help you harness the power of pivot points.
You should know that the most important aspects of the pivot point indicator are the actual pivot point, the first line of resistance, and the first line of
support. The second and third support and resistance lines indicate that the
market is either overbought or oversold.
Its important to look at the location in which price opens with regard to
where the pivot point line is. If price is above the pivot point line, this means
that we should consider holding mostly long positions throughout the day.
However, if price is below the pivot point line, we should consider holding
mostly short positions throughout the day.
Pivot points are opportune tools to use in ranging markets if you feel bold
enough to place a trade in them, as price often has a good chance of bouncing
off of the first levels of support and resistance.

2.4

Chart Patterns

HINK of price like an animal. Animals have habits that they exhibit.
For example, a man may have the habit of bending down and picking
up a coin that he has dropped. Will he pick up the coins every time? Maybe;
maybe not.
Now lets say that before this man bends down to pick up this coin, he
does a small gesture that further confirms his future action. This action can
be something small, such as a quick tug at his pants so that his knees dont get
caught up against the fabric when he bends down. If we were placing bets on
whether the man would bend down and pick up the coin, the moment he tugs
on his pants, we would all say that he will pick it up.
That is his pattern.
The man and the market are one and the same. If you havent fully realized it yet, do so now; price moves because we, the speculate traders, want
it to move. Some of us want it to move more than others and will therefore
place more money into our trades. Even though trillions of dollars are surging
through the markets every day, even the most menial amounts of cash influences price movement. The market is a living, moving thing, much like the
man who has dropped the coin. All living things exhibit some sort of patterns
in their daily life.
The forex market has moments in which it tugs at its pants. These tugs are
called chart patterns. Youve already seen some simple chart patterns in the
Japanese candlestick section, but now lets look at larger patterns that occur
on the markets every day.
You may ask how large are these patterns that were talking about?
The reversal and continuation patterns discussed in this section can occur
throughout all different sorts of time frames. According to Charles Dow, there
are three different types of trends that occur over specific time frames. The
longest time frame is known as a major time frame. We say that a pattern
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occurs over a major time frame if the time period spans from a year to several
years. The next-smallest pattern occurs during an intermediate time frame.
This pattern generally occurs between time frames of three weeks to three
months. The smallest pattern is called a minor trend, and it typically occurs
over the course of minutes to hours, no longer than three weeks.

Triangles
Say what you will, triangles are my favorite shape. Some people prefer the
smoothness of a circle, or the sturdiness of a square. Not I. During my career
as a trader, circles and squares have done nothing for me to indicate future
price trends. I like triangles because when I spot them on the market, I know
price is going to start moving.
In order to plot out triangles and the other formations that Im going to
list for you, you will have to know how to plot support and resistance lines.
This is essential! If you go off and start plotting lines that you dont fully
understand, you will make mistakes and end up drawing something like this:

Fig 2.4.1 Chart monster

Lets not go off and draw monster faces on our charts. If you havent fully
digested the support/resistance section, I suggest that you go back and read it.
Three different types of triangles can be spotted on your charts. These
triangles include symmetrical, ascending, and descending triangles. They

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all share one characteristic price in all three triangles converges to a certain
point. This is where the actual triangle shape comes from.
Let me give you an example of a symmetrical triangle. We call it
symmetrical because the support and resistance lines that we plotted to form
the triangle are symmetrical; each line is pitched at a similar angle.

Fig 2.4.2 Symmetrical triangle pattern

Fig 2.4.2 will better help you understand what I meant when I said that
price is converging to a certain point. Whats happening on the market is
that the bull and the bear are getting tight. Neither one can gain ground on
the other. The fight intensifies. Each beast is pulling with all of its might and
inching up the rope until boom, we reach the point of convergence.
Back in the section 2.2 I said that if price breaks through a support or
resistance line, it will soar in the direction in which the line was broken. When
these support and resistance lines converge to a certain point, one of these
lines will break guaranteed.
So where should you trade? Do you assume that price will make breakout
past the resistance line and buy or do you assume that price will break through
the support line and sell?
Typically, symmetrical triangles dont have a bias to where the breakout

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will occur, ascending triangles have a bullish bias, and descending triangles
have a bearish bias.
Play it safe, though. When it comes to triangles, we dont assume. We
simply sit and wait until price breaks either line, and then we ride the trade.
Now lets take a look at the difference between the ascending and
descending triangles. Again, they both share the principal of price converging
to one point and they both guarantee that either a support or resistance line
will be broken.
An ascending triangle occurs when candles are making similar highs. In
other words, the resistance line that we draw on top of the candles is a horizontal or nearly horizontal line. The only reason the support and resistance
lines are converging is because the candles are making higher lows. In laymens
terms, when we trace the support line, we notice that its moving up, as seen
in fig 2.4.3.

Fig 2.4.3 Ascending triangle pattern

As I mentioned before, ascending triangles typically lead to a bullish

breakout, but this is not always the case. As a trader who is trying to maximize
profits while minimizing losses, it would be smart to wait for the moment in
which a support or resistance line is broken before entering a trade.

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The ascending triangles doppelganger is the descending triangle, seen

in fig 2.4.4. Descending triangles candles are making similar lows. That is to
say, when we trace our support line, we notice that its horizontal or nearly
horizontal. In this case, the lower highs are driving the resistance line down to
a point of convergence.

Fig 2.4.4 Descending triangle pattern

Chart Pattern 101 says that this is a bearish signal, but this isnt always the
case. Wait for confirmation after the breakout before opening a trade.

Double Tops and Double Bottoms

In the market place, double tops and double bottoms occur when the market
tries to breakthrough a previous high or low, but doesnt have the strength to do so.
Heres a quick analogy of whats happening on the market. Im going to shy
away from the monster bull and bear locked in eternal tug-of-war for the sake
of keeping things fresh. An easy way to think of it is to imagine the currency
candles on your chart as a person trying to swim upstream. He goes as far as
they can, gets exhausted, and is pulled back by the current. He makes one
more valiant attempt to swim upstream to make it to the same spot as he did

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before. However, now that hes really tired, theres no other option but to float
downstream.
This, to an extent, is what happens in the market place.
Double-tops occur after a bullish trend. We can spot a double top occurring when price makes a new high, recedes back down and then builds up
enough momentum to create the same high. Price cant push through this
resistance line. Failing to break through, theres no place left for price to go
except down.
The pattern belongs to the bears. If you spot a double-top formation, the
bias for the trend will be bearish.

Fig 2.4.5 A double-top formation (looks a lot like tweezers, no?)

In fig 2.4.5, we see a double-top. Note that the formation looks like a large
M.
Lets flip the double top upside down to find the bulls formation. A
double-bottom occurs at the end of a downtrend. With this formation, price
cant quite seem to break through a support line after two valiant efforts.

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Fig 2.4.6 Heres a double-bottom featured as a smooth line

The double-bottom formation looks a lot like a large W. When you see
this formation, brace yourself for a bullish outbreak.

Head and Shoulders

In the East, they have a flowing, poetic name for this pattern called the
three mountains formation. In the West, this pattern shares a name with a
dandruff shampoo. Makes you think.
The head and shoulders formation occurs at the end of an uptrend. Price
makes two similar highs and one high that surpasses the others. The first and
third highs are similar, while the second or middle high is higher. When you
look at this formation on a chart, it looks a lot like a persons head and shoulders (that is, if he is wearing spiked shoulder pads.)

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Fig 2.4.7 Head and shoulders, or head and spikes?

Fig 2.4.7 shows a head and shoulders formation and a professional wrestler. Similar, no?
When spotting a head and shoulders formation, youll notice that the lows
it the formation reach a similar point, making a support line. This support
line is called the neckline. The moment price comes off of the second shoulder
and breaks this neckline is when we have confirmation of a bearish trend.

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Reverse Head and Shoulders

A similar formation to the head and shoulders occurs at the end of bearish
trend when price makes three consecutive lows, the second being lower than
the first and third. We call this formation a reverse head and shoulders
pattern (seen in fig 2.4.8).

Fig 2.4.8 A reverse head and shoulders

If all goes according to plan, price should break through the neckline,
indicating a period of buying.

Channel
A channel formation occurs when support and resistance lines are parallel
to one another. Channels can form in the three different ways that price
moves: up, down, or sideways. We call channels continuation patterns, since
price has a tendency to break out in the direction of the trend.

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Fig 2.4.9 An ascending channel

Fig 2.4.9 shows an ascending channel. Though it may be hard to notice

without the aid of support and resistance lines, price here has reached some
sort of equilibrium.
If you spot a channel formation, you can either trade with the trend or
wait for the breakout.

Wedge
The wedge is the hybrid freak child of a triangle/channel affair.
Wedges are very similar to triangles in that both formations include
support and resistance lines that converge to a certain point. Wedges are also
similar to channels, as their lines of support and resistance are moving in a
similar path (be it bearish or bullish). Since the support and resistance lines
of a wedge must be heading in a similar path, there can only be two types of
wedges: falling wedges or rising wedges (if the support and resistance lines
were evenly pitched, wed just call it a symmetrical triangle).

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Fig 2.4.10 A bullish wedge pattern

See the falling wedge pattern shown in fig 2.4.10. Note that the support
and resistance lines are both slanted downwards. This is the only reason why
we dont refer to this pattern as a triangle; because price is making lower lows,
not similar lows.
The falling wedge is a bullish pattern, but it would be smart to wait until
either the support or resistance line was broken before opening your position.
If price is making higher highs and higher lows while converging to a
certain point, we have a rising wedge (seen in fig 2.4.11).

Fig 2.4.11 Bearish wedge pattern

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Rising wedge patterns are bearish signals, but again, its always smarter
and safer to wait until a support or resistance line is broken before entering
into a trade.

Flags and Pennants

Flag and pennant patterns occur after the market has made a powerful up
or down trend. To better visualize whats happening during a flag pattern, think
of the powerful up or down trend as the flags pole and the support and resistance lines formed during the sideways market as the flags or pennants cloth.
Flag patterns happen quite often in the market. Traders should take note of
when price begins to level out after a powerful trend. Depending on the slope
of the support and resistance lines used to draw the flag, this can be an indication of a continuation pattern.
I think playing it safe would be best dont try to guess where price will
move. Wait until a resistance or support line is broken to place your trade.

Fig 2.4.12 Look at all of those flags and pennants

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In fig 2.4.12, you can find all of the different varieties of flags and
pennants. Note that pennants are formed when support and resistance lines
are converging at a certain point, while the support and resistance lines of flags
follow an even trend.

Section Three

Fundamental Analysis
Most traders believe that they can get by with just the technicals.
Technical analysis is on the rise and every year we have new indicators
being created and new technical strategies being developed but lets
not forget about our fundamental analysis!
Some of the markets biggest moves are caused by fundamental
analysis.
Lets remember back to section 1.5, Intro to Technical and
Fundamental Analysis. In that section, I wrote the following:
Fundamental traders believe that price is a momentary thing. The
past does not matter. The only thing that matters to a fundamental
trader is the present. The future of price will be determined by the
release of news events, natural disasters, or speeches from powerful
political or social figures.
The fundamental traders Bible is the economic calendar. You can
find an economic calendar on the Forex Club Web site by visiting
http://www.fxclub.com/economic-calendar/.
Before I go into more information about fundamental analysis, I
would like to share two tips with you:

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1) Use both fundamental and technical analysis. Do not trust

one more than the other.
2) Do not trade before big news events. Wait for news to be
released and then ride the trend.

3.1

Who and What Affects

Market Movement

ERES a list of all of the markets main participants:

Central banks
Commercial banks
Market makers
Investment firms
Brokerage firms
Firms that perform foreign trade operations
Private individuals

We are the private individuals. Looking at the growth of retail forex

companies, Id say that we are the most rapidly growing segment of the market.
Unfortunately, our impact on the market is miniscule when compared to the
other participants. Private individuals are simply riding on the coat tails of
banks and large corporations.
So why do news events move price?
Psychology is the name of the game. When you look at an economic
calendar, youll note that there is a price beside each event entitled something along the lines of survey amount, or forecast amount, or projected
amount. No matter what you call it, it signifies the same thing this amount
is an estimate made by the country as to what the economic outcome of the
event should be.
If the forecast/survey/projected amount is different from the actual
amount, this means that the countrys economic state isnt what economists
thought it would be. Traders see any discrepancy in the economic figures as
validation for buying or selling that economys currency.
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Price is also affected by speeches from government officials and events

such as natural disasters or terrorists attacks. With regards to speeches, its
sometimes not what is said but rather how it is said.
Heres a hypothetical example for you lets say that the president of
country XYZ decided to take the podium after the news of his unemployment
claims were released. He wants to ensure his people that the economy is okay
and that they have nothing to fear.
The president opens his speech by stating, Fellow countrymen, we have
nothing to fear! Our factories are filled with happy workers who are making
great wages that allow them to buy the newest cars and the largest homes! This
news release is simply a small bump that will be smoothed out in history as
we work hard to continue to prove that country XYZ has a healthy economy!
Enlightening, no? Too bad the whole time that the president spoke, we
saw that the otherwise charismatic and confident man was fighting to keep his
knees from wobbling. There were tears in his eyes the whole time. His voice
was trembling like a Chihuahua in an ice box.
Speculators make it a point to pay attention to small nuisances in speeches
to determine if what the suits are saying is real or embellished.

3.2

The Major Events

OZENS of economic events occur each day affect price. Not all events
are equal. Each economic event has a different weight or importance, so
you may find that one event moves the market more than another event does.
This makes complete sense, though. If youre a trader on the forex market,
which event would you pay more attention to new home sales or popsicle
sales?
The number of economic events that occur each day varies. There are
slow days when only about half a dozen events occur and then there are busy
days when we have a few dozen events occurring. Im not going to list every
economic event, because many of the minor events form small burps in the
market. Im going to list some the majors events that have been known to
move price.
Get your folding fingers ready to fold over the next page for future
reference.
Heres the big list of big economic events (in alphabetical order).

The Big List of Big Economic Events

(in alphabetical order)
The Beige Book
This is the summary of Commentary on Current Economic Conditions
by the Federal Reserve District. Commonly known as the Beige Book, this
report is published eight times per year, and is used as a basis of discussion
at the FOMC. Each Federal Reserve Bank gathers anecdotal information on
current economic conditions in its district through reports from bank and
branch directors and from interviews with key business contracts, econo-

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mists, market experts, and other sources. The Beige Book summarizes this
information by district and sector.
As of May 1995 the Federal Reserve Board of Governors started releasing
the Beige Book in electronic format.

Building Permits
Building permits, released with housing starts statistics, indicates future
housing activity a permit is filed before construction begins.

Business Sales
Business Sales and Inventories data cover manufacturers, retailers and
merchant wholesalers. The three components of business sales are released
separately and are available prior to the release of total business sales with
the following statistics: retail sales, manufacturers shipments, and sales of
merchant wholesalers. The data of manufacturing and wholesale inventories are also reported beforehand. Retail inventories are the only part of this
report that is not known ahead of the release. The inventory statistics are a
major ingredient to the inventory investment component of GDP. An increase
in inventory building also signals rising credit demands by corporations to
finance the inventories.

Cash Rate
The cash rate is a key overnight interest rate used by Australia and New
Zealand to set monetary policy. The cash rate is comprised of the interest rates
charged on overnight loans between banks.

Consumer Confidence
U.S. Consumer Confidence is measured by two widely followed confidence reports (1) University of Michigan, (2) The Conference Board.
Over the long term, these surveys work together and serve as a reflection
of the nations mood. Consumers are more inclined to spend when they feel
confident about their financial and employment prospects. Both the index
of consumer confidence from the Conference Board and the index from the
University of Michigan are good leading indicators of consumer spending.

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The University of Michigans index of consumer expectations is one of the

components of the leading economic indicators.
CPI
Consumer Price Index is one of the most widely recognized price measures
for tracking the price of a market basket of goods and services purchased by
individuals. The weights of the components are based on consumer spending
patterns. For example, an item that makes up 20 percent of the average households budget would have the same weight in the CPI. The food and beverage
components have a relative importance of about 16 percent in the CPI, so a 1
percent rise in food prices would contribute 0.16 points to the change in the
overall CPI.
The CPI covers both goods and services. Here it differs from the Producer
Price Index, which only covers goods. The other difference between the
two indexes is that the CPI covers costs facing consumers, while PPI covers
purchases and/or wholesalers.

Employment Statistics
The employment report released by the Bureau of Labor Statistics is probably the single most important economic series for the financial markets, and
is generally viewed as one of the best concurrent measures of business activity.
The report covers two surveys. One is business establishments (payroll survey),
which measures employment in nonagricultural industries. The second is the
household survey and measures civilian non-institutional employment of citizens aged sixteen years old and older, which includes agricultural workers and
the self-employed.

FOMC Meeting Minutes

The Federal Open Market Committee consists of twelve members, seven
of which are members of the Board of Governors of the Federal Reserve
System. One of the remaining five is the president of the Federal Bank of
New York, and the remaining four memberships, which carry a one-year term,
consist of a rotating selection of the presidents of the eleven other Reserve
Banks. The FOMC holds eight regularly scheduled meeting per year to direct
the conduct of open market operations by the Federal Reserve Bank of New
York in a manner designed to foster the long-run objectives of price stability

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and sustainable economic growth. The FOMC also establishes policy relating
to system operations in the forex exchange markets. Meetings are usually
scheduled for Tuesdays. At the first and fourth meetings of the year, which
are scheduled for two-day periods, the FOMC considers its long-run objectives for the money and debt aggregates as well as the current conduct of open
market operations. The minutes of each meeting are made available three
weeks after the meeting.

GDP
Gross Domestic Product is the value of all final goods and services
produced in the country. GDP is the broadest measure of economic activity
and the principal indication of economic performance. Built as a system of
inter-locking sector accounts, the GDP report provides the most comprehensive reading of the nations health.
Also released with GDP statistics is the GDP deflator. Two calculations
of the GDP deflator are reported: an implicit deflator and a fixed-weight
deflator. The implicit deflator is the ratio of current-dollar GDP to constant
dollar GDP. The fixed-weight deflator is the sum of the deflators for individual components of GDP with each component weighted by its share of
real GDP in the base period, and, is consequently a better gauge of inflation.

70.45% Personal consumption expenditures

16.97% Gross private domestic investment
17.96% Government consumption expenditures and gross investment
5.41% Net exports in goods and services

Housing Starts
Housing starts represent the beginning of construction of houses or apartment buildings. Since housing activity usually leads the business cycle, this
economic release can be useful in spotting cyclical turning points.

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Inflation Report
A countrys inflation report contains a projection of the currencys inflation and the economys growth over a set period of time.

New Home Sales

New home sales or the pace of new single-family home sales indicates the
future course of housing construction. The ratio of the inventory of unsold
homes to home sales which is the month supply of homes at the current
selling rate suggests the need for new construction.

Non-Farm Employment Change

The non-farm employment change is the measurement of a piece of information released by the Bureau of Labor Statistics that represents the total
number of employed people working in all professions except for government,
household, nonprofit, and farm. This information is typically released on the
first or last Friday of each month and has been known to move the market
considerably.

PMI
The Institute for Supply Management releases two reports monthly:
manufacturing and non-manufacturing. The manufacturing report is released
on the first business day of the month and the non-manufacturing report
comes out a few days later. The manufacturing report receives the most
attention because of its timeliness and track record in marking turns in
manufacturing activity. The respondents to the survey state whether various
measures of economic performance in their company increased, decreased or
remaining the same. The results of the survey are combined into a composite
figure which is reported as a diffusion index. A reading above 50 percent for a
diffusion index means that the indicator is expanding, while below 50 percent
signifies contracting activity. The Buffalo, Cleveland, Chicago, Detroit,
Houston and New York indicies are regional manufacturing reports.

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PPI
Producer Price Index measures prices received by producers at the first
commercial sale. The report measures prices for goods at three stages of
production: finished, intermediate and crude. The index for finished goods
generally receives the most attention. Change in this index is the first aggregate inflation measure available for the month. Food and energy are large
components of PPI. As with the CPI, the PPI excluding food and energy
is a good measure of underlying inflation. Food and energy prices are often
affected by temporary and non-economic factors such as weather. The PPI for
consumer goods can be a good indicator of the goods component of the CPI,
which represents about half of the CPI. Capital goods prices measure costs
facing the industry. The crude and intermediate indices track prices at the
early stages, and suggest future changes in finished goods index.

Press Conference
Government officials hold press conferences to address a certain aspect
of a countrys economy. How much effect these press conferences can have
on a currency depends on how hawkish or dovish the officials are and on the
overall sentiment of their speechs content.

Retail Sales
The retail sales report details the dollar value of purchases made at retail
stores: (e.g. auto dealers, department stores, etc.). The first retail sales figure
for a month (the advance report) is based on incomplete information, and is
subject to much revision. However, it is the first available indicator of consumer
spending on any major scale. It is useful to divide retail sales statistics into
auto and non-auto components. Auto sales constitute about 20 percent of
retail sale and thus have a strong influence on the total. As auto sales can be
very volatile, they can obscure the underlying pattern of consumer spending.
With some adjustments, the retail sales report is a good guide to the goods
component of the personal consumption expenditures statistics, which is part
of GDP and is released with personal income later in the month. Figures
from January 1992 to the present have been revised and reclassified into new
categories. Comparison of figures prior to 1992 with those after 1992 should
be made with caution.

3.3

Examples of How News Moves Price

RADING the news can be tricky. Price can moves with the news, against
the news, or not move at all. Unless you have some sort of psychic ability
or a time machine, there is no way to know how price will react to the release
of news events until after the fact.
Below, I will show you two examples of when price moved with news and
when priced moved against news. In both examples, I chose to use non-farm
payrolls, because I believe that the NFPs are one of the more potent news
releases.

When News Works

Here is a great example of when trading the news can be extremely profitable. Lets look at the December 4, 2009 release of the non-farm payrolls (fig
3.3.1). The forecasted amount for this days NFP was -119K.
What was the actual outcome?
-11! That is an astounding difference, which showed great potential for
the recovery of the U.S. economy.

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Fig 3.3.1 EUR/USD day chart with information shown for the
4/12/2009 candle

By looking at that days candle and subtracting the close price from the
open price, we find that price advanced 224 pips in favor of the USD. Not
only was it a day of gains for the bears, but this news also helped push price
down over a period of weeks.

When News Doesnt Work

Sometimes the market does strange things. Take the May 8, 2009 release
of the non-farm payrolls, for example. This months projected number was
-590K. The actual amount was -539K. In other words, the report came out
51K better than expected. When we look at NFP data, we can also see that
May 2009 saw the best outcome for non-farm payrolls since August 2008.
How does the market react to this information?

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Fig 3.3.2 EUR/USD day chart with information shown for the
8/05/2009 candle

As you can see from the chart provided by Forex Clubs Rumus platform,
this release of information did very little to strengthen the USD. By looking
at that days candle, we can see that price closed at 1.3632, meaning that the
USD made a 234 pip loss to the EUR.
Apparently, the non-farm payroll wasnt influential enough to stop the
bullish uptrend that was occurring.

Section Four

Technical Analysis
In this section, I will be talking about market indicators. Indicators
are used by traders to determine information that would otherwise
be unknown to them from looking at price charts alone. Indicators
provide insights that can help traders to estimate when to enter a
trade and when to liquidate a position. Please note that while indicators appear to be very powerful and accurate when we look at them
against past price movements, they cannot give a definitive answer
as to where price will move. Following indicators does not guarantee
profit. Indicators can only provide ideas for a trader to use to guesstimate future market movement. Nevertheless, I encourage all traders
to use indicators.
Technical analysis relies on the ideas that price moves in patterns and
that these patterns will occur again and often.
The basic principles of technical analysis are:
Price is everything
All of the factors (economic, psychological, political, etc.) that can
influence the price have already been taken into account by the
market and are included in the price. Therefore, only the study of the
dynamics of price is essential. The reasons for these dynamics are not
important. The key is to study the past flow to predict the future flow.

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Price moves in trends

As a rule, price does not jump spontaneously and erratically up and

down like a demented grasshopper. It moves in trends over time.
History repeats itself

Theres a saying that if you dont learn from history, you are doomed
to repeat it. Technical analysts, however, are determined to learn from
history and bet that trends that have occurred in the past will occur
again in the future.
Do you remember the Japanese candle formations in section 2.1.4, the
pivot points in section 2.3, and the chart patterns shown in section
2.4? In each section, you read about price formations or equations
plotted onto price charts that have been known to indicate that price
will move in a familiar direction. The candle formations, pivot points,
and chart patterns are all forms of technical analysis.
Technical analysts use more than chart patterns, resistance, and
support lines to determine where price will move, though. They also
use indicators.
An indicator is a mathematical equation that gathers market data to
plot new lines onto a chart. Traders are able to read these indicator
lines in relation to current price levels to determine where price will
move.
The pivot point mentioned in section 2.3 is a good example of what
you can expect from indicators. Do you remember that long, complicated equation that I gave you before showing you the pivot point?
You should expect equally, if not more, complicated equations in the
following sections. The good news is that you dont have to know
what each and every equation is. You only need to concern yourself
with the translations of each of the indicators lines on the charts.

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Technical analysts also use tools called oscillators. Oscillators and

indicators are very similar. Where an indicator is an equation that
offers further insight on a currency pair, an oscillator is an equation
that offers further insight on an indicator. In that sense, you could call
an oscillator an indicators indicator... but we just call them oscillators.
Before you plunge in and start using indicators, it would be very
helpful to log into Forex Clubs ExpressFX platform and fool around
on a practice account, if you havent already. I only suggest this because
indicators are not offered on the ExpressFX platform, as they are too
complex for the capability of ExpressFX platform.
Only after you fully understand your trading platforms overall functionality and have a general sense of market movement should you
start experimenting with indicators.
The following list contains all of the indicators available on Forex
Clubs Rumus trading platform. Im going to include information
about the indicators equation, what it shows a trader and most
importantly, how a trader can make money using it.

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4.1

List of Forex Indicators

Acceleration Deceleration Oscillator (AC)

HIS oscillator is comprised of the nought line (featured as a blue line in

the Rumus platform), the AC Red and the AC Green. The point of this
oscillator is to measure the acceleration and deceleration of the driving force
of the market.

How do traders read this indicator?

Open Rumus and drag the Acceleration Deceleration Oscillator (AC)
onto a chart. Look at the vertical lines. When these vertical lines are above the
nought line (blue) and there are two green bars next to one another, this is an
indication to buy. If the lines are below the nought line and there are two red
bars next to one another, this is an indication to sell.

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Heres an example:

Fig 4.1.1 AC Oscillator

In fig 4.1.1, we see five instances where positions could be opened

according to the AC indicator.

Accumulation/Distribution Line
Created by Marc Chaikin, this volume indicator measures the supply
and demand of a currency by calculating the amount of people going
long or short on a trade.
The formula for the Accumulation/Distribution indicator is:
Acc/Dist = ((Close Low) (High Close)) / (High Low) * Period's
volume
When the indicator rises, this signifies a period of buying; many traders
are speculated to be buying this specific currency. A decrease in the indicator
signifies a period in which traders are selling the pair.

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Fig 4.1.2 Accumulation/Distribution line

In fig 4.1.2, we can speculate that many traders are going long on the
GBP/USD, as the Accumulation/Distribution line appears to be at a fifteen
day high. Price later rallied up, just as the Accumulation/Distribution line had
indicated.

Aroon Indicators
The Aroon Indicator was created by Tushar Chande. Its purpose is to
identify trends and trend reversals.

How it works:
The indicator is made up of two lines; the Aroon Down (blue in Rumus)
and the Aroon Up (green in Rumus). As the names suggest, the Aroon Up
measures the strength of uptrends while the Aroon Down measures the
strength of downtrends. Look towards the right of the indicators, and youll
see a graph with values from 0-100. The higher up on the graph the Aroon
lines cross, the stronger the trend.
When the Aroon Up moves above the Aroon Down, this indicates a
bullish move. When the Aroon Down moves above the Aroon Up, this indicates a bearish move.

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Fig 4.1.3 Aroon indicators

In fig 4.1.3, we see the Aroon Down crossing the Aroon Up from below,
indicating a downtrend. If you followed this indicator, you could have made
roughly 300 pips on this downtrend. The downtrend continues until the
Aroon Down crosses the Aroon Up from above at a relatively weak value of
approximately twenty, indicating an uptrend. If you were to reverse your position and sell, as indicated by the Aroon lines, you would make an additional
150 pips on the uptrend!

ADX Indicator
Its full name is Average Directional movement Index, but we like to call it
ADX for short. This indicator was created by Welles Wilder as an instrument
to measure a trends strength.

The formula for ADX is:

ADX = modify moving average of DX
DX = 100 x ( (+DI - -DI)/( +DI + -DI) )
+DI = +DMn / TRn , -DI = -DM / TRn
+DM = Ht - Ht-1 , -DM = Lt - Lt-1
CL = Ct - Ct-1
TR = largest of +DM,-DM ,and CL

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Where :
+DI = current positive directional index
-DI = current negative directional index
+DMn = current modified moving average of +DM
+DM = current positive directional movement value
Ht = current hign
Ht-1 = previous high
Lt = current low
Lt-1 = previous low
-DMn = current modified moving average of -DM
-DM = current negative directional movement value
TRn = current modified modified moving average of the true range
TR = true range
n = number of periods
DX = current DX
Reference from : J.Welles Wilder
Did you get that? If not, thats fine. You dont need to be a math champion to plot these graphs. You can easily graph the ADX and, all of the other
indicators by using our Rumus platform.

Making the trade:

In the Rumus platform, the ADX line is a yellow line, while the DI+ line
(Positive Directional Indicator) is red and the DI- line (Negative Directional
Indicator) is blue. When the ADX (yellow line) is above 40, this indicates
a strong trend. When the ADX is below 25, this indicates a weak trend. If
you see the ADX indicator moving below 20, this is a sign that a new trend is
developing, and that it may be a good time to make a move.
When the +DI (red) line crosses above the DI (blue) line, this is an indication to buy.
When you see the DI (blue) line crossing above the +DI (red) line, this
is an indication to sell

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Fig 4.1.4 ADX indicator

In fig 4.1.4, you can see that the ADX value (yellow line) is very low at
16, indicating that a new trend is emerging. At the same time, our -DI (blue)
line is crossing above our +DI (red) line. Whats the result? In this case, if you
followed the ADXs rules, it resulted in a 185 pip profit.

Alligator Indicator
The Alligator indicator builds on what the MACD indicator (mentioned
later) lacks. The indicator consists of three lines; all of which are smoothed
moving averages. Theres the blue line (considered the Alligators Jaw), which
is a 13 period Moving Average moved 8 bars into the future, the red line
(considered the Alligators Teeth), which is an 8 period Moving Average
moved 5 bars into the future, and the green line (considered the Alligators
Lips), which is a 5 period Moving Average moved three bars into the future.
The concept of the Alligator is similar to that of the MACD. When the
Alligators lips (the green line, which is the fastest line here) crosses the other
lines from above, the action to take is a short position. When the lips are
crossing the other lines from below, the action is a long position. When all
three lines are moving together as a whole, the alligators mouth is wide open,
and the action to take is to hold ones position until its jaws snap close.

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Fig 4.1.5 Alligator indicator

In fig 4.1.5 (a GBP/USD hour chart), we can see three instances when
the Alligators jaws were wide open. If you followed the indicator and had
patience, you could have made more than 500 pips in the ten day span.

Awesome Oscillator
The Awesome Oscillator is a neat indicator that has several different types
of interpretations.

Zero Line Cross:

The first indication to buy or sell is the most obvious one. A buy signal is
indicated when the AO green line passes above 0, and a sell signal is indicated
with the AO red line passes below 0.

Saucer:
Slightly more complex: When two red bars are followed by a green bar
above the zero line, this is a buy signal. Conversely, if two green bars are
followed by a red bar below the zero line, this is a sell signal.

Twin Peaks:
A buy signal is created when the histogram is below the zero line and
the last indicators low is higher than the preceding low. The histogram must
remain below zero between these two troughs. When the higher low is made
and followed by a green bar the buy signal is generated.

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A sell signal is created when the histogram is above the zero line and the
last bars high is lower than the preceding peak. The histogram must remain
above zero line between the two peaks. When the lower high is made and
followed by a red bar a sell signal is generated.

Bollinger
Named after its creator, John Bollinger, this indicator is used by traders to
compare relative price and volatility.
The Bollinger indicator consists of three lines. The outer bands act as
resistance points. If price touches the upper band, the pair is considered overbought. If price touches the lower band, its considered underbought. What
does this mean? It means that if prices touches one of the bands, theres a very
good chance that itll bounce back.

Fig 4.1.6 Bollinger bands

If you take a look at fig 4.1.6, youll see that when price touches the bands,
it has a very good tendency to bounce back to the middle band.

CCI
The Commodity Channel Index is a momentum indicator created by
Donald Lambert. The CCI measures price in relation to its moving average.
This signals when the market is overbought or oversold or when a trend is
weakening.

How its used:

Most traders use this indicator to see if a currency is overbought or
oversold.
When the CCI is above 100, this is a bullish signal.
When the CCI is below -100, this is a bearish signal.
In addition, some traders also believe that a cross from a negative to posi-

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tive is potentially a bullish sign, while a cross from positive to negative is

potentially a bearish sign.

Fig 4.1.7 Commodity Channel Index

In fig 4.1.7, the CCI line is at -250, indicating an extremely bearish signal
after price dipped about 300 pips. Using this indicator, a trader would have
known to cash in on the pips and go long while the currency recouped.

Ichimoku Cloud
The Ichimoku cloud was created by a journalist known by the pseudonym
Ichimoku Sanjin. It receives its name from the most noticeable aspect of the
actual indicator; the Ichimoku cloud or kumo.
The Ichimoku cloud is a series of five formulas and lines that, at first
glance, can look very intimidating to a first-time trader. The indicator is made

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up of two Senkou lines (the area between these lines is shaded in, making the
cloud), a Tenkan line, a Kijun line and a Chikou span.

Formulas:
Tenkan Line

= (highest high + lowest low) / 2 calculated over last nine periods

Kijun Line

= (highest high + lowest low) / 2 calculated over last twenty-six periods

Chikou Span = (most current closing price plotted twenty-six time periods back)
Senkou Span A = (Tenkan line + Kijun Line) / 2 plotted twenty-six time periods ahead
Senkou Span B = (highest high + lowest low) / 2 calculated over past fifty two time periods,
sent twenty-six periods ahead.

The Kumo
The actual Ichimoku cloud, or kumo, represents resistance and support
levels. If price moves above the cloud, were in a bullish trend and the top
of the cloud turns into the first support level, while the bottom of the cloud
turns into the second support level. If price moves below the cloud, were in
a bearish trend, and the bottom of the cloud acts as a resistance level, while
the top of the cloud turns into the second resistance level. If price is moving
within the cloud, theres no bias to the trend.

Tenkan and Kijun Lines

The market will move upwards when price is above the kijun (shown
purple in Rumus) line. When price is below the kijun (purple) line, the
market will move down.
The tenkan (shown red in Rumus) line will show the direction of the
trend.
These lines will tell us whether the trend is going to be bullish or bearish.
When the tenkan (red) line crosses the kijun line (purple) from below, this
tells us that the signal is bullish. When the tenkan (red) line crosses the kijun
(purple) line from above, this tells us that the signal is bearish.

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The Chikou Span

The chikou span (shown black in Rumus) shows us what price was twentysix periods ago. How does this help us? Since price tends to move in trends, it
gives us some insight to how strong a trend is. When the chikou span is below
price, this indicates a bearish trend. When the chikou span is above price, we
have a bullish trend.

Fig 4.1.8 The Ichimoku cloud in all its glory

Lets look at fig 4.1.8 from a GBP/USD hour chart. The chikou is below
price, indicating a bearish trend. In the example above, we see that the kijun
crosses above the tenkan when price is at 1.6017. Price then plows through
both resistance levels of the kumo. If we follow the rules of Ichimoku and sell
when these lines cross, and we close when the kijun crosses back below the
tenkan at 1.5783, we will make a 234 pip profit.

MA
The moving average indicator is one of the oldest and most widely
expanded upon indicators.
As the name suggests, the moving average reveals the average of price over
a specific period of time.
The moving average has different variants, all of which follow the same
general principal of showing the average levels of price over a specific period.
Those variants include:

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SMA
The SMA is the simple moving average. The following formula is used to
calculate SMA:
SMA = P1 + P2 + P3 ++ Pn
n
Where P is the currency price being averaged, andn is the number of time
periods in the moving average (selected by the trader).
In other words, a five-day SMA is calculated by the sum of the closing
prices of the last five days divided by five.
The simplicity of the SMA is its one big drawback. Each price has the
same weight or importance, meaning that old information is as important
as new information. When the price at the end of the day jumps, our SMA
jumps. This is good, as we want our indicator to respond to changes on the
market, but SMA also jumps when the same price information is dropped
from the equation five days later and has nothing to do with the current state
of the market.
The most common time periods used with SMA are three, five, ten and
twenty days.

WMA
The WMA is the weighted moving average. The WMA was created to
solve the SMAs drawback. Each price is weighted, with more weight put on
recent data and less weight on past data. Here are the calculations for a fiveday WMA:

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5-day weighted moving average

Day #

Weight

Price

Weighted

25.00

25.00

26.00

52.00

28.00

84.00

25.00

100.00

29.00

145.00

Totals:

15

406.00

Average

/ 15

27.067

In our example the weight on the first day is 1 while the weight on the
most recent day is 5 but you can assign whatever weights you want. The main
drawback with the WMA is that it gets overly complex with longer periods of
time and is best used shorter periods.

EMA
This one is the exponential moving average.
The equation is as follows:
EMA = EMA(t-1) + (2/(n+1))*(Pt EMA(t-1))
Where Pt = the current price;
n = length of EMA (chosen by trader)
As you can see, each new value of EMA contains information about the
preceding EMA, EMA (t -1). Consequently, EMA considers price history in its
entirety. Information does not disappear abruptly but rather fades away.
EMA can be calculated for any period of time.

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MACD
This is the Moving Average Convergence/Divergence, created by Gerald
Appel. This is a very simple indicator to read and can indicate when a trader
should buy or sell a position.
The indicator is composed of two lines: the MACD fast (seen as a solid
red line in Rumus) and MACD slow (seen as a dotted blue line in Rumus).
When the MACD fast (red) line crosses the MACD (blue) line from
above, this is an indication to sell. When the MACD fast (red) line crosses the
MACD (blue) line from below, this is an indication to buy.

Fig 4.1.9 Moving Average Convergence/Divergence

In fig 4.1.9, we can see that by following the indicators closely and
opening positions accordingly to where the MACD Fast and MACD Slow
lines intersect, we could perform back to back buy and sell positions and make
a considerable profit.
In theory, you can open and close positions each time the MACD fast and
MACD slow lines cross, and you will make a profit. The only problem here
is estimating when the indicators will cross. By using Forex Clubs ActTrader
platform, a trader can input algorithms that will automatically open and close
positions when the MACD lines cross.

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Parabolic SAR
This is the parabolic stop and reversal.
The parabolic SAR indicator is used to identify downtrends and uptrends
in the market and is used by some traders as a trailing stop indicator. The
indicator is comprised of PSAR dots, which appear either above price, indicating a downtrend, or below price, indicating an uptrend.

Fig 4.1.10 Parabolic stop and reversal

In fig 4.1.10, traders can see that when the PSAR dots are below the price
bar, the indication is a bullish trend. A PSAR dots pattern above price is a clear
indication of a bearish trend.

Price Oscillator
The price oscillator is the difference between two moving averages.
Traders use this oscillator to determine trends.

How to read it:

Bullish trends: Using the price oscillator, we know that a bullish trend is
occurring when:
A. Price makes a lower low while the oscillator makes a higher low.
B. Price makes a higher low while the oscillator makes a lower low.

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Bearish trends: Using the price oscillator, we know that a bearish trend is
occurring when:
A. Price makes a higher high while the oscillator makes a lower high.
B. Price makes a lower high while the oscillator makes a higher high.

Fig 4.1.11 Price Oscillator

In fig 4.1.11, we see that a bullish hidden divergence is forming, since

price is making a higher low while the oscillator makes a lower low. The result
is a bullish trend that could win you approximately 150 pips.

RSI Indicator
This is the relative strength index indicator. This indicator can tell a
trader whether a currency is overbought or oversold.

Formula:
RSI = 100 (100 / 1+RS)
RS= Average of x days up closes / Average of x days down closes
If you look at the RSI indicator, youll see that the indicator is measured from
between 0 and 100. If the indicator is above 70, the currency is considered
overbought, and if the indicator is below 30, its underbought.

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Fig 4.1.12 RSI Indicator

Look at fig 4.1.12. Towards the left side of the chart, you can see that the
RSI indicator deemed the currency underbought. If you opened a long position when the indicator dipped, you could have made roughly 200 pips.

Stochastic Indicator
If youre a fan of the RSI and MACD indicators, the Stochastic indicator
will be perfect for you. This indicator is a combination of both indicators,
giving traders a clear point of entry (via moving averages) while showing
whether the currency is overbought or underbought.
Lets take a look at fig 4.1.12 using Stochastic Indicators.

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Fig 4.1.12 Stochastic Indicators

As you can see, all entry points are labeled using moving averages, and the
trader has a good idea of whether the currency is underbought or overbought.

Zig Zag
The zigzag indicator focuses only on important price reversals to give
traders a very plain and rigid view of how price has moved. On its own, it
doesnt look very useful, but Im sure youll be able to find very good use for it
after you read the next section on Elliott waves.
Now that you have all those indicators, youll be able to plot them and
translate their meanings. Indicators do provide a great insight to price, but
there isnt a person alive who could tell where price will move in the future.
Youll learn the limitations of indicators by looking at charts that show a
period where moving averages almost crossed, but havent yet or at Bollinger
bands that seem an impossibly far distance away from current price levels.
Nevertheless, indicators are a fantastic weapon that should be wielded by all
traders, including you.

4.2

Elliott Wave

NCE upon a time, an accountant and engineer named Ralph Nelson

Elliott became seriously ill and had to be confined to his bed. To pass
the time, Elliott studied price movements on the Dow-Jones index. Elliott
was able to make some very successful predictions using his own homegrown
theories, and later published these theories in the Financial World magazine.
Some people have an ear for music. Elliott had an ear for the market. In
his publication, he wrote that wave cycles of the Dow-Jones index were subject
to specific rhythms that he was able to spot. He wrote that these prices fluctuated naturally, much like how waves of the ocean rise, fall, and repeat.
Thanks to a period of alone time in bed for Mr. Elliott, traders can now
utilize his findings to help them trade the markets.
Below, youll find the general principles of the Elliott wave theory. It may
seem like a foreign language at first, but once you compare what you read
with the picture chart that you see, youll be able to make more sense of what
youre reading.

General Principles of the Elliott Wave

Price moves in waves. A wave is a generalized direction in which
price travels. Simply put, a wave occurs when a trend occurs.
A falling wave is always followed by a rising wave, while a rising
wave is always followed by a falling one. Price is always trying to
correct itself to find a perfect ground that it will never reach.
Waves are separated into many different parts and sub-waves. There
are impulse waves that follow the direction of the trend. These
impulse waves are numbered 1, 3, 5, A, and C and their subwaves
are (1), (3), (5), (A), and (C).
Up waves 1, 3, and 5 consist of five smaller waves that zigzag (1),
(2), (3), (4), and (5).
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Down waves 2 and 4 consist of three smaller waves (A), (B), (C);
Down waves A and C consist of five smaller waves (A), (B), (C), (D)
and (E).
Up wave B consists of three smaller waves (1), (2), and (3)
A wave traveling in any direction is always a sub-wave of a more
powerful wave. In the words of Qui-Gon Jinn, Theres always a
bigger fish. What may seem like a large wave is just a piece of a
larger wave. In the example below, waves 1, 2, 3, 4, and 5 are the five
wave sequences of a larger wave.

Fig 4.2.1 Illustrating the impulse and correction waves

A five wave impulse is always followed by a three wave correction. To

break that down into simple language, when you see five waves heading in a
general direction, they will be followed by three waves heading in the opposite
direction. Any trend will always follow this eight wave cycle. How the waves
can be sub-divided depends on their direction in relation to the larger wave
they are a part of.

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The impulse waves (1), (3), (5), (A), and (C) all divide into five subwaves; and corrective waves (2), (4) and (B) each divide into three sub-waves,
corrective waves are always shorter than impulse waves.
Keeping these rules in mind, we can tell where we are within a wave at any
time. For example:
If you just noticed that five waves traveled downward, then at that
moment you can then say that you are in wave (A) of a three- wave
(A)-(B)-(C) fall. Therefore, you can expect a correction wave (B)
where price will rise and then a period (C) where price will continue
to fall.
During a bear market, a three-wave increase in prices should be
followed by a renewed trend of falling price, and a revival in five
waves is a signal to us that the market is turning bullish.

Fig 4.2.2 Illustrating sub-waves

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Take a few minutes to let that all sink in.

Im going to take a few pages to give you a rundown of the properties of
each Elliott wave. These explanations are not fully complete; in other words,
that there is a ton more research and information out there about the Elliott
wave theory. But, since this book is geared towards first-time traders, Ill just
give you the essential information you should know about each wave.
Wave 1: Almost half of all first waves are conceived at the bottom of
the market and are just rebounds from the lowest levels. The first
wave is the shortest of the up waves, although sometimes it is very
dynamic.
Wave 2: Wave 2 never retraces 100 percent of wave 1.
Wave 3: Wave 3 is usually the longest and is the most dynamic of all five
impulse waves. Wave 3 passes wave 1s high, signaling to traders to
open positions in the direction of the wave. Volumes rise sharply.
Wave 3 is never the shortest wave in price movement terms.
Wave 4: This wave usually has a complex structure. Like wave 2, it is a
phase of correction or consolidation. Unlike wave 2, triangles usually
appear on wave 4 (remember triangles?). Important rule: the base of
wave 4 never overlaps the maximum of wave 1.
Wave 5: This wave is usually much less dynamic than wave 3. During
this wave, many indicators (oscillators) lag behind the flow of prices,
and negative divergences appear, warning of the approach of the
market top.
Wave A: The most convincing sign of the appearance of this wave
is its sub-division into five sub-waves, this happens as an
increase in volume corresponds to the fall in price.
Wave B: This wave is the rebound of prices against the new
trend that began with wave A. For wave B, low volume is
typical. At the same time, a double-top forms (I know you
remember those). Sometimes wave B even overlaps the peak
of wave 5.
Wave C: Wave C frequently drops much lower than wave A's
minimum. A trendline drawn using wave 4 and wave A gives

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us the classic head and shoulders chart pattern (known only to

me as head and spiked shoulders).
Reading this information straight through can be hard to absorb at first, so
make sure to reread this chapter for more charity, using the graphs provided.

4.3

Fibonacci

LLIOTT made his wave theory in the 1930s. If it werent for the help
of a man who died lifetimes before Elliott was born, he wouldnt have
been able to develop his wave theory. Lets rewind a few hundred years to the
thirteenth century, to a time when Italian mathematician Leonardo Pisano
(1175-1240) was hard at work trying to introduce the Hindu-Arabic decimal
system to his countrymen, who only knew the Roman numeral system.
Pisano, who often referred to himself as Fibonacci, was born in Pisa,
Italy, and educated in North Africa, where his father worked. It was thanks to
his North African education that Fibonacci was first exposed to the decimal
system. As he grew, it became increasingly evident that the decimal system was
superior to Roman numerals, which were being used in Europe.
Fibonacci wrote a book that was completed in 1202 called Liber Abaci
(The Book of the Abacus, or The Book of Calculation), in which he introduced
the decimal system to European mathematicians.
In chapter twelve of Liber Abaci, Fibonacci set out to solve an age-old
question that has been plaguing men for centuries: If you breed a pair of
rabbits in an enclosed place for a year, how many rabbits can you expect in
that year?
I know what youre thinking why should I care about rabbits? These
rabbits gave us a number value that has a natural, almost mystical quality, and
have been used to create some of our worlds natural wonders. More importantly for you and I, these numbers can predict where the markets will move.
In his equation, Fibonacci set up a few rules. Firstly, a rabbit is able to
reproduce one month after its birth. Secondly, a rabbit is pregnant for one
month before it gives birth. Thirdly, rabbits never die. Theyre in a hawk proof
room with an unlimited water and food supply. Finally, all pregnant rabbits
give birth to a pair of new rabbits no more, no less. The problem started
with one pair of rabbits. At the end of the first month, there are two pairs
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of rabbits: one that is able to breed and one that is too young to breed. In
the next month, we have three pairs (two can breed, one cannot) and in the
third month, we have five pairs. If we fast forward a few months to the tenth
month, Fibonacci says that we will have 144 pairs, which will multiply to 293
pairs by the end of the eleventh month. In the eleventh month, 144 more
rabbits will be born, bringing our grand total to 377 rabbits.
That is a lot of rabbits.
Fibonaccis sequence of numbers is as follows:
1,1,2,3,5,8,13,21,34,55,89,144,233,377 and on and on. One thing
you may notice is that if you add the sum of any two adjacent figures,
youll end up with your next number.
Check it out: 1+1=2; 1+2=3; 2+3=5; 3+5=8; 5+8=13 et cetera.
Furthermore, the ratio of any number in the sequence to the following
number gradually approaches 0.618. Take a look:
1:1 = 1
1:2 = 0.5
2:3 = 0.67
3:5 = 0.6
5:8 = 0.625
8:13 = 0.615
13:21 = 0.619 and so on.
If you wanted to do something crazy and find the ratio of any number
against the preceding number, you would find that the answer would be
numbers that gradually reach 1.618.
For example:
13:8 = 1.625
21:13 = 1.615
34:24 = 1.619

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In both cases, the higher the numbers in the ratio, the closer they approach
0.618 and 1.618.
You can find other interesting ratios that approach similar numbers, too
(for example, the number 0.382 is found from the ratio of any number to the
number next to it (i.e., 8:21, 13:24) while 2.618 is found from the ratio of any
number to the number preceding (i.e., 21:8, 24:13).
Although Fibonacci developed a method to reach these two numbers, he
was not the first to discover them. The ancient Greek and Egyptian mathematicians had working knowledge of these two numbers. They called these
numbers the golden ratio or golden section. This number was used to
develop music, fine arts, architecture and biology. The Greeks used this ratio
when building the Parthenon and the Egyptians used it to build the great
pyramid at Giza. This golden ratio was used by the likes of Pythagoras, Plato,
and Leonardo da Vinci.
So why is this number important to you as a trader?
Thanks to Fibonaccis findings, traders have used the golden ratio to
predict where price will move after price rebounds and to plot support and
resistance lines.
These price rebounds are known as retracements or as corrections.
In the beginning of this section, I mentioned that Elliott couldnt have
made his wave theory had it not been for Fibonaccis findings. This is because
each wave in Elliotts theory corresponds to Fibonaccis numbers. By using
the golden ratio, we can even figure out where we are in the Elliot wave cycle,
which helps us to determine where price will move in the near future.

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Fig 4.3 Fibonacci retracements plotted on an Elliot impulse waves

In the Rumus platform, you can access Fibonacci lines. To plot a Fibonacci
line in a downward trending market, your first step would be to click on the
highest high. Feel free to use your zig zag indicator to help you spot these high
points. Now you have to drag this line down to the lowest low. Adversely, if
were in an upward trending market, we should trace the Fibonacci lines from
the lowest low to the highest high. The software will automatically plot all of
the levels that you choose to plot. These lines are price retracement levels, or
in laymens terms, the rebound levels.
The most common price retracement levels are 38%, 50%, and 62%. In
the Rumus platform, youd plot them as 0.382, 0.500 and 0.618. These are
used as support and resistance lines.
When plotting extension levels, or the levels of support and resistance that
occur beyond current market highs or market lows, youd plot 1.618, 261.8
and 423.6.
Two of these numbers are directly derived from the golden ratio (38%
coming from .382 and 62% coming from .618). Mr. Dow had a similar idea,
but preferred using 33% and 66%.

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Its important to note that the popularity of Fibonacci numbers is enormous. With so many traders trusting in them, the sheer volume of their trades
in relation to where Fibonacci lines appear is enough to move the market.

Section Five

Trading Systems
If you read this book from the cover to this very sentence, congratulations! You have just absorbed a considerable amount of information
about the forex market.
As an old song once stated, It dont mean a thing if it aint got that
swing. In our case, that swing is your hard-earned cash. All of the
lessons, tricks, and tips you read about in this book can be instantly
erased from your memory, forgotten, or ignored the moment you
start trading with your money.
Im sure that by now youve placed a few trades on a practice account.
You may have even plotted a few indicators or spotted some powerful
trends that won you a pretty hefty amount of virtual money on
your practice account. It probably felt very rewarding. You may have
plotted a few trades and let them sit over night while you slept like a
baby, only to find in the morning that you made a considerable loss.
No worries, right? Its just a practice account.
The rules change when you place real money into your account.
Youre going to experience feelings that would not affect if you were
using a practice account.
Do not fear these emotions. After all, it is emotions and the acknowledgement of these emotions that make us human. If you are able to

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conquer your emotions, conquering the forex market will come more
easily for you.

5.1

Market Psychology

ETS take a moment for some much needed self-analysis. March yourself right up to a mirror, stare yourself dead in the eye and say, Who are
you?
Now think hard on that question. Notice how your eyebrows shuffle
around while youre in deep thought. Who are you? Have I ever thought
about this question before? you briefly think, and then you resume your sousearching. The answer may come to you now, it may come to you ten years
from now, or it may come to you during your last breath.
Think back on your childhood memories and all of the joys and pains
that you felt. Think back on your birthdays, your best friends, and your worst
enemies. What was it about your friends that made you bond, and what did
you hate about your enemies? Why did your enemies hate you?
Think back on your favorite toy, whether it was a ball, a doll, a blanket,
whatever did you ever misplace that object? How did that make you feel?
Are you the sort of person who spends lavishly or saves each hard-earned
penny? Do you pick up change that you see on the sidewalk, or is the effort of
bending down more trouble than the cents are worth?
If you ask yourself these questions and billions of more like them, you
may gain complete understanding of your true self. Humans are interesting
creatures who often project different dispositions to different people. We hide
our fears to some, while displaying them to people around whom we feel more
comfortable. Sometimes, we even hide our deepest fears from ourselves.
When you trade with real money on the forex market, you may find that
you have acquired different fears. Even if you are, for example, someone who
spends money freely and doesnt care too much about personal savings, you
may find it very hard to lose money on the forex market. Adversely, if you
are someone who gets teary-eyed at the thought of dropping a coin down a

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storm drain, you may find that youre not deeply affected by losses made while
trading.
Greed and fear are the names of the game. These two emotions are feelings that haunt every trader.
Greed as you watch your hard earned money multiply by the second.
Fear that the market will turn on you at any moment; that your hard
earned cash would vanish before your eyes.
Both emotions can be costly if you allow them to overwhelm your senses,
but if you keep your feelings in check, they can also help you to profit greatly.
Greed kicks in when the market is in a frenzy. An example would be when
most traders notice a powerful trend occurring. They want to ride on the coat
tails of this trend in order to get soaring profits. So what do you, as a trader,
do? You trade with the trend. You are now driven by greed to hold the position. This is good; in this case you would be making money. But, alas, nothing
in life is as simple as clicking a button and making money. No, you must click
a button and then govern your emotions.
The greed intensifies as you watch your profits and losses hit limits youve
never seen them hit. Just one more minute, you say, and then youll close
your position. Just one more minute. Just another minute. Then you begin
to change the rules a little. Youll close the position if it reaches a new level.
Price makes new moves and all the while youre compromising with yourself. In this hypothetical situation, youre making profits. But in your greed,
you overlooked something. It could be a support or resistance breach, a chart
pattern, a warning from an indicator, anything. Perhaps you and the other
greedy traders like you overbought or oversold a currency, causing a correction. Suddenly the market turns on you, and you find that those tremendous
profits have dwindled, or even turned into tremendous losses. What do you
do now? Do you hold the position hoping that price returns to its levels or do
you just take your profit as is? The rational man would take his profits. Alas,
many a rational man , blinded by greed, chooses to hold his position to get
their profits back up. He may find that their hard-earned profits dwindle to
nothing.
Never overlook your fear, but never let your fear take control of you. The
main component that feeds into fear is the thought of the pains you will feel
if you lose your money. No one wants to lose his or her money. Lets face it;
we live in an age in which its believed that money can buy us happiness. Can

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money buy us happiness? The question is open to debate. Money can buy us
comfort, and to most people, comfort equates to happiness. If you are the type
of person who needs to have a certain amount of money set off somewhere
untouched to act as an anchor of comfort, you may have a strong fear of losing
money.
Unlike greed, which often causes direct losses, fear often prevents traders
from making profits. This fear prevents a trader from buying a new high or
selling a new low. Instead, he sits on the sidelines, watching a huge bull and a
huge bear pull on a rope. If his fears are correct and price moves against him,
there is a sense of relief. However, if his fears turn out to be irrational and price
soars in the direction that they wanted to trade, he feels regret.
Unless you have attained Zen or live on a higher plane of existence, you
will feel these emotions.
Look yourself in the mirror and ask, Who are you?
Once you get your answer, youll be better equipped to dealing with the
nullification of greed and fear.

5.2

Forex Trading Best Practices

S a forex trader, your job is to maximize your profits while minimizing

your losses. The best way to go about maxing out profits and cutting
losses is to follow forexs best practices; however, there is no guarantee that you
will make a profit and there will always be the possibility of incurring losses.
Dont take these lessons for granted its better that you learn them from this
book than you learn them from your personal (possibly negative) experiences.

Use limited leverage

Leverage, can be the greatest pat on the back or the hardest punch in
the face. Leverage increases your exposure to the markets by up to a fifty
times. You can make a whole lot of money using leverage, but you can also
lose all of your money using it.
Lets say you have a deposit of $1,000. If you place every dollar into a trade
using the maximum leverage of 50:1, you can control a $50,000 trade on the
forex market. If youre trading the EUR/USD, that means that each point you
move will equate to $5.00. If the market moves a hundred points against you,
you just lost all of your money.
The amount that a pair moves varies from day to day, but seeing a currency
pair move 100 pips or more in a day is not unheard of. Lets keep things safe.
My rule of thumb is to use a leverage of 10:1 to 20:1. This way, your losses
will not be as austere as if you used, say, 50:1 leverage. Sure, your profits wont
be as large, but thats okay. The forex market isnt a get-rich-quick device that
you can use to buy that new yacht you had your eye on. Its a market in which
you can make steady profits that will ideally grow over time. Slow and steady
wins this race.

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Have a realistic idea of how much you can make

I wrote this tip in regards to your take-profit and stop-loss orders. Before
you enter a trade, know how much money each move on the market will
equate to. If, for example, you find that with the money youre placing on a
trade, each move on the market will equate to $1, dont set your take profits
and stop losses at $1,000. The orders will basically be useless, unless some
unlikely occurrence moves the market price 1,000 pips.
Consider the time frame that youre trading for, whether it be a one-day
trade (a trade that occurs over a one-day period), a swing trade (a trade
that occurs over several days), or a long-term trade, and place your orders
appropriately.

Realize the risk

Every dollar that you place into a trade is at risk of being lost. I will use
comparisons between trading on the forex market and buying a lottery ticket
to better illustrate this idea. Personally, when I spend a couple of dollars on a
scratch off, I consider it money lost. I am spending the money on this lottery
ticket because I can afford to lose it and because the loss of this money wont
otherwise affect my life. If I win hey, its a good day. If I lose, its no problem.
This isnt to say that forex trading is like gambling on lotto tickets. No
way; far from it. The possibility of losses is far greater on the forex market than
on lottery tickets. In addition, you know from reading this book that there are
methods that you can use to help you place winning trades, where as lottery
is simply blind luck.
What I am saying is that you should consider every dollar that you place
into a trade money that is already lost. I understand that were not all millionaires and we all cant just lose a hundred dollars every day on the forex
market, but if you consider each dollar that you place into a trade money lost,
youll slowly find that those greedy and fearful emotions that most traders
tend to feel while trading on the market will begin to dissolve.
The idea is a bit of a catch-22, but if you divorce yourself from all
emotional attachment to your money, you will do better on the forex market.
In other words, a tip to help you make money is to not care about making
money.

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Only trade 2%-5% of your account

This tip is slightly related to tip number 1, in that both tips encourage
traders to place a limited amount of money into each trade. The magic number
that most professional traders swear by for opening a position is 2% to 5% of
their trading balance for each trade. If you have an account of five hundred
dollars, your safest bet would be to trade 2% of that, or ten dollars. With
leverage, that equates to having a buying power of 1,000 units of currency.
If youre not happy with the results that youll get by trading 1,000 units of
currency (youll be seeing profits and losses of cents), you should start trading
with more money in your account.

Set Risk-to-Reward Ratios

When creating a personal trading system, you should ask yourself how
much money you would like to make from a trade and stick to that amount.
Different traders tend to follow a different set of rules, but they all follow
the same risk-to-reward rule. Using this rule, a trader will set a percentage of
money that he is willing to risk and a percentage of money that he is willing
to gain prior to entering a trade.
For example, if you are willing to risk a hundred dollars and profit two
hundred dollars, your risk-to- reward ratio would be 1:2.
Many professional traders agree that 1:3 is a good risk to reward ration.

Have a clear entry and exit plan

Theres enough information in this book to inform you of the proper
times to enter the market, and of times when you shouldnt enter into the
market.
Use the information that Ive given you about technical indicators,
support and resistance lines, chart patterns, Elliot waves, Fibonacci lines, and
the fundamental factors to estimate the proper times to enter a trade and the
proper times to exit a trade.
If youre ever uncertain about whether or not you should enter a trade,
you probably shouldnt enter a trade.
When I look at a chart, I can say that X currency is going to rise because of
Y reasons. When I cant do this, I dont sweat it. I just power down my trading
platform and go out fishing.

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Dont revenge trade

The markets can be as rewarding as they are cruel. If you adapt a suitable trading strategy that works well to meet your trading goals, there is a
possibility of success on the market. However, no one can dream to run until
he first learns to walk. In all probability, you will find that at one point or
another, you will incur losses. Thats fine.
Whats not fine is trying to make up your losses by quickly placing a
large, irrational, poorly planned trade right after making a loss to recover some
ground. It doesnt work that way, friend. Be Zen.
This tip is coming from the heart. Im bleeding on this paper right now.
When forex trading and I first began to tango, I often got frustrated from a
losing trade and went off to place half of my account at risk to make up lost
grounds. Sometimes it worked, sometimes it didnt. And when it didnt work,
I felt insult added to misery.
I want to make people happy. I want you to be successful on the forex
market. Hear me out, dont revenge trade.

5.3

Creating a Trading System

S a forex trader, you should treat the time you spend trading as time
spent in a career. You may already be working a 9-5 job, which means that
this new career choice will only be a part-time job. Thats okay; the frequency
and times at which you trade are not important here. Whats important is how
you treat trading on the forex market.
Most people find that if they have a set schedule, they can go about
completing tasks at hand with greater ease and efficiency. Almost everyone
has a schedule or set rules to which they adhere, whether it is morning routine,
exercise plan, work schedule, or bedtime preparations.
Call me an Apollonian, but when it comes to getting my work done, I
like having a schedule and set number of rules. Many forex traders will agree
with me on that.
Forex traders adhere to something called a trading system. A trading
system is a personal set of rules that each trader sets up for him or herself.
Trading systems are as unique as the people who create them. They can change
over time, be totally reinvented, or stay completely the same over a traders
entire career.
What you need to do is create a trading system that youll know like the
back of your hand. You can form it however youd like, and once you complete
it, it should match your personality and risk appetite.
I cant tell you how to create your trading system; I can only set you on
the path to create your own. Like a Jedi master who is sending his Padawan off
to create his or her lightsaber, I give you these lessons that you must complete
before you can become a forex master.

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Choose a Time Frame

Your first step to mastering the market is to work out a schedule. You must
decide when in the day you are available to look at the charts. For those who
are working 9-5 jobs, the options may be limited for obvious reasons. Pick a
time that you can devote to the charts. Work this into your daily routine
forex will now be what you do during this part of your daily routine.
Now you must consider how much time you can devote to looking at the
charts. This will influence which time frames of charts you should look at. Are
you going to be the trader who stares at charts nonstop for hours on end, or
the trader who will check in on his or her trades a few times a day? You must
decide that for yourself.
Once youve devoted a time for trading and have decided how often you
will look at the charts, its time to pick a time frame of charts that is easy
to read and identify trends with. You may prefer to look at day charts, or
hour charts. Perhaps you want something that covers a smaller period of time,
and will choose to look at minute or tick charts. Find your chart time, but
remember to not limit yourself to only this chart time frame, because theres
always a bigger picture with the forex market.

Choose a Currency Pair

Each currency pair is its own animal. Although many pairs moving similarly or oppositely, each components movements are wholly unique. Your
next step towards mastering your system is to pick a currency pair that you are
comfortable with. You must study this animal to see how it moves throughout
the day. Notice how news affects this animal. Notice if there are any other
currency pairs that move similarly to this animal. You may find that one
currency pair moves slightly faster than you pair, in which case you may be
able to look to that one for indications of where your currency pair will move.
You must become an explorer, an adventurer and an observer. You will
jump into the bush and spy on this animals every movement. As time goes
on, you will become an expert of this currency pair.

Choose Your Technical Analysis

Now that you have devoted a set period of time to look at a specific
currency pair, its time to choose your indicators. Indicators will give you the

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edge on the market by revealing certain information that may otherwise be

unknown to you from looking at price charts alone.
Pick your volume indicators, or trend spotting indicators, or moving
average indicators.
Remember to not over complicate your chart. If you start to notice that
your price lines are being drowned by bright indicator lines, it may be time to
cut down on your indicator usage.

Choose Your Risk-to-Reward Ratio

And while youre at it, develop financial goals that you wish to accomplish.

Practice, Practice, Practice

Apply your trading system to a practice account. If you find that youre
making consistent back-to-back wins on your trades, its time to start trading
on a live account with real money.
While trading on a live account, if you make a considerable loss, give yourself a break from live trading. Go back to a practice account and analyze your
failed position. Learn what went wrong with the failed trade, and continue
to trade on your practice account. If you find that youre continuing to make
back-to-back winning trades with your practice account, you may resume live
trading again.

5.4

Trading on a Live Account

EVE come to the end of our journey, reader. Its been fun. If youve
studied these lessons thoroughly, you should now be well prepared to
trade on the forex market. The only thing you need now is a trading account.
Forex Club can offer you everything you need to get started on the forex
market. If you would like to learn even more about forex trading, you can
watch their online videos at http://www.fxclub.com/intro-to-forex/.
To open a trading account with Forex Club, visit their official site at www.
fxclub.com and click on the Open Live Account button, which is featured
as a black button on the left-hand side of the screen.

Fig 5.4 Forex Clubs homepage

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When you choose to trade with Forex Club, youre not only choosing
to place your trust in a company that is regulated by the NFA (regulation
#0358265), youre placing your trust in a company that is willing and eager to
teach its traders how to make better educated trades.
Forex Club prides itself on the abundant amount of quality educational
materials that we can offer traders. If you have any questions, we are here to
answer them. Please feel free to call us toll free at 1 (800) 881-3809 or contact
us by email at info@fxclub.com.
If youd like to ask me any specific questions about the forex market or
trading strategies, you can always visit our forums and post a question. My
name on the forums is Mayday, and I can answer any question you may have.

Regulation
Anyone can make a forex Web site and sell you empty promises with
hefty price tags. In the United States, a third-party government regulation
agency known as the National Futures Association is working very hard to
ensure that traders or prospective traders are not mislead or cheated out of
their money.
You can find an NFA search on this Web page: http://www.nfa.futures.
org/basicnet/ where traders can submit the NFA ID numbers of brokers to see
if any claims have been filed against said broker.

Unique Advantages
In addition to caring about our traders education, Forex Club offers
unique advantages that you wont find anywhere else.
No Spreads and Commission refunds
On our simplistic ExpressFX platform, traders do not have to worry about
calculating spread costs. Instead, traders pay a commission cost of $0.40 per
trade on all pairs available on the platform. If your trade dips into a loss,
you will instantly be refunded your commission fee. Zero spreads and pay
commission only when you profit.

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Position U-Turns
Another unique advantage that Forex Club offers is called position
U-Turns. With position U-Turns, a trader can switch his or her position from
buy to sell or sell to buy without closing the position. This is a great feature
if you want to cut losses or ride out a reversal trend to intensify your profits.
Leverage in the base currency
Forex Club offers leverage in the base currency. What does that mean?
Lets say that you want to fund your account with five hundred U.S.
dollars. With other brokers, if you wanted to trade a pair like EUR/GBP, you
would have to convert the currency you deposited into your account to the
base currency in order to place a trade. Who wants to sit around and calculate
their total exposure to the markets? Better question who wants to limit their
exposure to certain currency pairs?
At Forex Club, we offer leverage in the base currency. If you want to
command 500 GBP using 500 USD, go right ahead; we wont stop you.
Guaranteed no slippage and no requotes*
Guaranteed fixed spreads and filled on stop/limit orders*
Great market trading signals
*On the ExpressFX and Rumus platforms
Market trading signals are forecasts given to you either by a software computer or by an actual analyst. At Forex Club, all traders are given
Autochartist market signal software. This program automatically finds
emerging chart patterns in the market and alerts you of these signals.
Forex Club also offers signals from actual professional analysts. Trading
Central is a world renowned research provider for individual and professional
market investors. The signals offered by Trading Central are perfect for traders
who are looking for trading ideas or who want confirmation on their trades.
News uploaded into platforms

You wont miss out on any news releases, as Dow Jones news feeds,
Bloomberg and price quotes are fed directly into all of our trading platforms.
When youre ready to trade, well be here to help you every step of the way.
Until then, Id like to leave you with the parting words of the Introduction to
Forex Trading book, written by Slava Taran and Dennis Carr, which was the
first book on trading forex Ive ever read.

And in Conclusion:
HARLEY-DAVIDSON

HE photograph and the text that you see in the figure below is an
original Harley Davidson advertisement. Everyone is familiar with this
company: it produces powerful motorcycles. However, for many people a
Harley is much, much more than a mere motorbike. Its a dream, another
way of life, symbolizing freedom and individuality. Its a revolt against boring
convention and the dull compulsion of the economic. It is a dusty leather
jacket, the wind in your ears and the whole world at your feet
What do you think this elderly man is dreaming about and regretting?

This is the text accompanying the photo:

If I had my life to live over,
Id try to make more mistakes next time.
I would relax.
I would be sillier than I have been this trip,
I know of very few things I would take seriously.
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I would take more chances,

I would take more trips.
I would climb more mountains, swim more rivers and watch more
sunsets.
I would eat more ice creams and less beans.
I would have more actual troubles and fewer imaginary ones.
You see, I am one of those people
who live prophylactically and sanely and sensibly,
hour after hour, day after day.
Oh, I have had my moments and, if I had to do it over again, I would
have more of them.
In fact Id try to have nothing else.
Just moments, one after another.
If I had to live my life over,
I would start bare-footed earlier in the spring
and stay that way later in the fall.
I would play hooky more.
I would ride on more merry-go-rounds.
Id pick more daisies.
Forex, just like Harley, is more than a mere trade, business or interesting
pastime. It is, if you will, a way of living, the basis of which is the belief that a
person can achieve tremendous material and spiritual freedom, thanks to his
or her own mind.
Look into the eyes of this old man once again. Ask yourself to what extent
you are richer than this old man. Your priceless treasure is time.
What do you want from your life?
Would you like to fill it with adventures, discoveries, battles and victories?
Would you like to stand out from the crowd, to be free and a true
individual?
Then look for your own Harley, try to catch your dream. Try it and see.
Life is so short!
Good luck!

The greatest investments dont come in the form of a winning stock or a strengthening
currency the greatest investments come in the form of learning materials. Education
and knowledge of the markets continue to be the backbone of every successful
investors trades. By knowing what moves the markets and the small nuances that
price makes prior to a breakout, investors can trade on the markets in a fashion that
will both maximize profits while minimizing losses.
The information provided in Bless My Pips is offered in a straight forward and easy to
understand fashion. Readers will learn about key aspects of the currency trading
market ranging from simple information, like the markets trading hours, to more
complex information, like understanding Elliott Waves.
A first time trader to Forex cant hope to be profitable without the proper understanding of the markets. Bless My Pips is the perfect educational foundation for all first time
investors. Even if you have never heard of the Forex market before, this book can
prepare you to trade currency with confidence.

ISBN 978-0-578-05846-7

Phone: 1-800-881-3809
Email: Info@FXClub.com
www.fxclub.com

9 780578 058467