Forex Trading for the Frustrated

Beginner
By Steve Farinello
 Copyright © 2015 by Steve Farinello

All rights reserved. No part of this book may be reproduced or transmitted in any form
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Your support of author’s rights is appreciated.

Disclaimer
All information contained in the following pages is intended for educational purposes
only. At no time is the author suggesting any of the information should be used to trade
with ‘real money’ on live accounts. Please only practice what is contained in this book
on a Demo account.
 Introduction
If you are reading this, then you have either decided to start to trade in the Forex market
or you have already begun trading but with limited success. If you have already started
trading then you will be aware of how unpredictable the Forex markets can be. I liken
Forex trading to what it must be like to keep a tiger cub. You can spend many hours,
days or months gently stroking the tiger cub, getting very comfortable in its presence but
all the time, the potential for getting your hand bitten off is growing!
 No Place For Emotions in Forex
When I was starting out in Forex I reached a point where I started to think I knew what I
was doing. Most of my trades would be profitable with only the occasional drawdown.
I didn’t realise it at the time but complacency was starting to creep into my trading. The
more profitable trades I made the less choosy I was about picking those trades. Until
one week it seemed every trade I put on was a loss! This caused me to think my original
strategy must be wrong, although it had been profitable for a time. What I realised was
that I had very subtly strayed from my original ideas. I hadn’t stuck to a plan. Mainly
because I didn’t have a clearly defined plan written down, just a collection of ideas in
my head!
Conversely, consistent winning can have an opposite effect on your trading. Just as
losing can, winning can also make you afraid to place a trade. Although not trading is a
much better financially stable place to be than in a losing trade, you won’t make any
money if you are not trading. If I had a string of winning trades, then sometimes I would
be hesitant in entering a trade because I didn’t want to see my new found ‘wonder’
strategy fail. Sorry to disappoint you but there is no ‘wonder’ strategy to be found in
Forex, no strategy will win all the time but you can still be profitable. So how can you
overcome this emotional side of trading? The answer is by having a trading plan.
 The Forex Trading Plan

In my Forex trading infancy I would hear a lot about the need for a ‘trading plan’.
Unfortunately, information about what one of these actually consisted of was hard to
find. So what does a trading plan contain? Well firstly it doesn’t need to be over
complicated. More importantly, it needs to be useable by you. The simpler and clearer
defined the better, and placed somewhere that you will see it everyday. There is no
point in taking the time to create this plan and then hiding it away somewhere never to
be referred to again. So type it up on your computer and place it above your workstation
or hang it on the fridge but read it everyday!

Your trading plan should basically be a list of rules for your trading strategy. It could
even be written down as a flow chart so you could check that rule 1 is met before you
move to rule 2 and so on. Your rules should include:
What currencies you are going to trade? Are you going to just choose one
currency pair such as EUR/USD or are you going to trade all the majors? Maybe
you want to trade some of the exotics. Whichever pairs you choose, write them
down in your trading plan. A word of warning, don’t trade too many pairs to
begin with. Just concentrating on a limited number and really fine tuning your
strategy will be easier than trying to do all things to all pairs. Furthermore, your
record keeping (more on this later) will be simpler and so therefore you are
more likely to do it and benefit from it.

What timeframes are you going to trade? Your strategy may be better suited to a
long period time frame with trades being in progress for days or weeks. Maybe
you want to scalp from the 1m chart. Which ever you choose, write it into your
plan.

What is the strategy set up? That is, what are you going to look for on your charts
to warn you that you might be able to enter a trade in the near future? This might
be that price is approaching a critical level on you chart, a level that you might
be looking to take a trade at. It might be a particular candle pattern is forming
and you will take a trade on the close of the candle.
 What is your entry signal for your trade? Are you waiting for a candle to close
after breaking a level or moving average? Are you looking for a particular type
of candle? Are you waiting for price to reach a certain level?

What is your stop loss? Is it at a recent swing high/low? Is it at the high/low of a

recent candle? Is it a set amount of pips?

What is you target (take profit)? Is it a set amount of pips? Is it a multiple of your
risk? Is it a significant level?

What lot size are you going to trade? What proportion of your account will you
risk?

When you have all these things written down, it is then up to you to stick to them.
Discipline is one of the most essential attributes to have if you are to become a
successful trader. Don’t be tempted to take substandard trades just because you might
not have had a set up in a while. Don’t take a trade thinking that it is ‘near enough’ to
your plan. Either it is or it isn’t a good trade to take. ‘Near enough’ has no place in
Forex trading. Sticking to your plan will enable you to carry out a proper evaluation of
your trading methods. Only after a long term study should you consider ‘tweaking’
things. If you are constantly drifting from your trading plan you will never know what
consistently works and what doesn’t. Remember, in Forex losses are part of the process.
You will never find a system that will never lose. Your system might be one that has
more losers than winners. What you are looking to develop is a system that is
consistently profitable over a reasonable length of time.
 Forex Trading Strategies

What now follows is a selection of Forex strategies that I have used in the past. Some of
them I still use today. Why don’t I use them all? Why do I prefer to use one strategy and
not another? Well this is where Forex trading becomes personal. I have read many
trading books that would tell me that trading plans and strategies were an ‘individual’
thing, what suited one person would not suit another. This is true, but what many of the
books failed to do was to give me a starting point for my trading. Hopefully, you are
finding many starting points within these pages. What is true is that we are all different
people, we enjoy different things, we approach things differently and our brains are
wired quite differently. Added to this, the practical side of our lives, we all have a
different amount of time to devote to our trading. Some of us will be happy sat in front
of our trading screens for hours on end. Others will like to spend 15mins a day trading.
What we all have to do as traders is find a system that fits us mentally and physically.
For example there is no point trying to trade a strategy that requires us to be in front of
our screens all day if we have a full time job. Conversely, there won’t be much
enjoyment if you like watching the movement of the charts, getting in and out of several
trades a day and then choose a strategy that works on the daily charts! That is why I
don’t trade all these strategies, not because they don’t work but because they don’t all fit
my personality and lifestyle.
15min Channel Breakout Strategy
Timeframe: 15min
Currency Pairs: Eur/Usd

In this
strategy
you
need to
look for
places
on your
chart
where
price
action
is

consolidating, where price is going side ways.

You can see from the chart that price moved sideways, where the blue line is, before
breaking out and down. Price will do this; it is like traders are having a rest, taking a
breather before trading again. Quite often this is true and price will consolidate like this
because traders aren’t trading because they are in bed! I have found that mostly (not
always) these kinds of patterns are found when the European Markets are closed, so
between the hours of 17:00GMT and 07:00GMT. My favourite time for trading this
strategy is between 06:00GMT and 07:00GMT. I can generally find the pattern already
formed on my chart and place my trades. When the European markets open, price
usually takes off in one direction, so I am in and out of my trade quickly, the best way
for success in this strategy. You don’t want to have trades placed for a long time, while
the market fluctuates up and down (ranging) as you will usually get stopped out before
you hit your target.
There are two ways to use this strategy, the basic and the advanced. I would encourage
everybody to use the basic strategy first and then when you have got the idea, give the
advanced method a go.
The Basic Method
What follows are the basics of this strategy, the foundations. You can trade the strategy
with these rules if you don’t have a lot of time to sit in front of charts or simply you
don’t want to trade that way!
In MT4 I use the channel tool to create a channel 20 pips (that’s 4 decimal places pips)
wide. If you haven’t got a channel tool on your platform you can just use 2 individual
horizontal lines, keeping them 20 pips apart. I place this on my chart at the current price
action and try to find 12 candles that fit inside this channel. When I say ‘fit’ I mean only
the candle bodies, I’m not interested in the wicks of the candle.

Counting from the right of this chart we can clearly see that we have at least 12 candles
fitting between our 20 pip channel, in fact we have 16! This is the signal to enter the
trade. I would place a pending order to Buy (Buy Stop) 20 pips above the top purple
line @1.1598. My take profit would be 10 pips above this @1.1608 and my stop loss
would be 30 pips below my entry @1.1568.
I would also place a pending order to sell (Sell Stop) 20 pips below the bottom purple
line @1.1538. My take profit would be 10 pips below this @1.1528 and my stop loss
would be 30 pips above my entry @1.1568.
When one order is filled, I let it run and when it hits the take profit target, only then do I
cancel the opposite pending order. If my order is filled and price reverses I leave both
orders open even if the first one hits the stop loss. Only if I have had one successful
order will I manually close the opposite pending order.
In the above chart:
Purple lines : Channel Boundaries
 Blue
lines :
Pending
Orders
Green
lines :
Take
Profit
Targets
Red
line :
Stop
Loss
You can
see from this example that my Buy order was filled @1.1598 and my take profit target
was hit @1.1608 for a 10 pip gain. The sell stop order @1.1538 would have then been
cancelled manually.
The Basic Rules:
15min timeframe
EUR/USD
12 candles
Candle bodies within a 20 pip channel
Pending orders 20 pips above and below the channel
10 pip take profit target
30 pip stop loss

The Advanced Strategy

The advanced method follows similar rules to the basic method but differs in that the
entry channel is much more managed. This can give a tighter stop loss and a closer
target.
Instead of using the channel tool in MT4 I just use two horizontal lines. This allows for
the independent adjustment of each line, you will see the reasons for this shortly. On the
15min Eur/Usd chart I wait until I get 3 - 4 candles forming that the difference between
the highs and lows of the bodies doesn’t exceed 20 pips. I then place my lines at the
highs and lows of the bodies.

In this chart 4 candles have

formed with an open and close,
high to low difference of 6 pips.
The red candle is defining the
upper limit for the channel and the latest candle to form (green) is defining the lower
limit of the channel
As each new candle forms I move the purple lines to accommodate the new candle,
always ensuring the distance between the purple lines never exceeds 20 pips.
 You can see here that by the
time 12 candles (always
counting from right to left) have
formed the lines have been
moved to 10 pips apart.
Now we don’t set our pending orders just yet, unlike the ‘Basic Method’. Instead we
monitor the candles to see if we can move the purple lines closer together. An important
rule of this strategy is that once we have twelve candles between our lines we don’t
move the lines further apart, we can only move them closer together.
 As we continue with this chart
we can see that the candles
continue to form between our
two lines. However, if you
look carefully the largest red
candle is what is keeping our
upper purple line in position.
If you count the candles from
right to left we can now count
12 candles before we get to
the large red candle.
This means we can move the top line down to 1.21585 and still have 12 candles within
our channel.
 A little while later and both
top and bottom lines have
been moved again, now
only 7 pips apart.
As you can see, it is the
candles that the purple lines
are touching which are the
significant ones. What you
are looking for are new
candles to form within the
lines so you can then
discount the previous ones
holding the lines apart and
move the lines closer together. Remember, 12 candles is the key and don’t move the
lines further apart once you have your 12 candles, you can only move the lines closer
together.

So, what happens next?

 We can see that price
breaks out of our
channel. That is, a
candle closes outside
of our lines.
This is our signal to set
our orders. Just as in
the ‘Basic Method’, we
set pending orders, buy
stop and sell stop, 20
pips above and below
the purple lines and a
take profit target of 10
pips. The only
difference this time is the way we set the stop losses. For the buy stop order our stop
loss would be just below the bottom purple line and for the sell stop order the stop loss
would be just above the top purple line. If this would mean having stop losses of greater
than 30 pips then I would stick with the 30 pip stop loss.

Here the chart is showing our orders set at the blue lines, the take profit at the green
lines and the stop losses at the red lines just outside the channel. (I had to shrink the
vertical axis to show all in the lines, that’s why the chart looks ‘squashed’)
And
what
happens
next?
Price breaks out, fills our sell stop order and continues on to our target! Remember to
manually cancel the other order.
A word of warning! Don’t be complacent and think ‘the price has broken to the
downside of the channel so I will only set the sell stop order.’ Always set both buy and
sell orders. Occasionally price will reverse and go the other way. As I’m sure some of
you will have noticed, the risk involved in this strategy is quite high. You will usually
have a stop loss of 30 pips and a take profit target of only 10 pips. This basically means
you stand to lose three times as much as you can win on each trade. Therefore, to break
even you have to have 3 winners to every loser. Fortunately, if applied correctly, this
strategy has a good win rate of at least 4:1.
Although I have recommended this strategy for use with Eur/Usd, it will work with
other currency pairs. As the take profit is only 10 pips I would just use it on the majors,
currencies with a low spread. Additionally, if using it on less volatile pairs I would
change some of the numbers; have a narrower channel, a nearer entry and a closer take
profit. Just altering these by a few pips can make a large difference to the profitability
of the strategy. Have fun with it, experimenting on your demo account.
The Trend Trading Strategy
This strategy is suitable for somebody who can’t or doesn’t want to spend a lot of time
sat at their computer terminal. This strategy will only take you a few minutes (depending
on the number of pairs you are watching) everyday just to scan your charts for possible
set ups or monitor trades you are already in. If you are somebody who likes to be very
active in their trading, then this strategy is probably not for you. Sometimes you might
not find a trade setup for days, occasionally even weeks and when you do enter a trade,
it’s highly likely you will be in that trade for a similar amount of time. This strategy is
suited to someone who has a day job and has limited time to trade. This will also be an
advantage because if you are at work you can’t interfere with ongoing trades. This is
very much a ‘set and forget’ strategy where you need to be able to leave your trade
running without you getting nervous and pulling out for a small profit. What you are
trying to do in this strategy is jump into a trend and ‘ride’ it for the majority of its
existence. More often than not you will get stopped out or only be able to take a handful
of pips out of each trade. What makes the difference and ultimately makes this strategy
successful is that occasionally you will land in a great trend and ride it all the way, up
or down. This one big trade can be the difference to making your trading year
successful. Therefore it is important that you don’t over manage your trades and come
out of them too early. Equally important is that you don’t become nervous (remember
what we said earlier about emotions) after a losing streak and become afraid to enter a
trade. This is where your trading plan comes in. Remember what we spoke about
earlier, no emotions. If the trade meets all of the rules of your plan, then you must take it
as this could be the ‘big one’ and if you miss it, this could make the difference to your
whole trading year!
The Strategy
Timeframes: 1month, 1 week, 1 day, 4hr, 1hr
Currency pairs: All
Indicators: 50EMA, 20EMA, ATR (optional)

This is a multi-timeframe strategy, that is, we will be referring to the timeframes above
in groups of three. You can use 1month, 1week and 1 day together or you can use 1
week, 1 day and 4hr together. I tend to prefer to use the latter combination and will use
this in my explanation although I am sure you will see, by the end of the chapter, how
you can apply this to other groups of time frames.
When looking for an entry I will first look at the weekly chart. If price is trading above
the 20 and 50 EMAs then it is in an uptrend and I am looking for buy entries only.
Conversely, if price is trading below the EMAs then it is in a down trend and I am
looking only to sell.
Don’t get too caught up in the values of the EMAs. They don’t necessarily have to be 50
and 20 periods, I’m sure other values will work just as well. After all, they are only
acting as dynamic support and resistance; they are only indicating a ‘zone’ of reference
and should be treated as such. The 50 and 20 period EMAs are just a personal
preference, something that I am comfortable working with.
Having noted the trend on the weekly chart I will look for confirmation on the daily
chart. Price must be either above or below the EMAs just as it is on the weekly chart. If
both the weekly and daily chart agrees on the trend direction then I will move onto the
4hr chart. This is the chart I use for entry. I am looking for a candle that exits the zone
between the 2 EMAs and closes outside of the ‘zone’ in the direction of the trade I want
to take. Also, if working in a down trend and looking for short entries, the 50 EMA
should be above the 20 EMA.

On this weekly Eur/Usd Chart we can see price had been in the ‘zone’ between the
EMA’s and broke out on the 29th April. From then on we should be looking for short
entries.

On the daily chart around the same time, we can see that price broke through the
 EMA’s
on the
2nd May
and

remained below it. Now we need to look at the 4hr chart for a short entry.

On the
4hr
chart,
price
was
already
trading
below
the
EMA’s.
We had
to wait until it pulled back into the ‘zone’ and then came out again on the 21st May to get
an appropriate entry. I placed a sell stop order at the low of the candle arrowed, which
was the break out candle. You can see, price went back into the zone before finally
filling my order seven candles later. There are a number of options for your stop loss.
You could place it at the high of the breakout candle or at the most recent swing high.
You could use the EMA’s, placing the stop loss either in the middle of the zone or at the
far side, above the 50 EMA. Another method is to use the ATR (Average True Range)
indicator and place your stop at 2 times the ATR. My preferred method is to initially
place my stop the far side of the zone and then manually trail my stop by 2 times the
ATR. I don’t have a set profit target either as I like to ‘ride’ the trend. I stayed in this
trade until price pulled back into the zone, closing inside it with a small green candle on
the 28th May. As you can see a profitable trade, entering at 1.2740 and exiting around
1.2592 for 148 pips. Furthermore, price soon broke back out of the zone a few hours
later and as price was still below the EMAs on both the weekly and daily charts, I
entered again on the close of the breakout candle. A sell stop was placed at the low
(1.2531) and I exited the trade, again when price closed inside the ‘zone’ on 1st June at
1.2434
for a
further
97 pips.

This is
the
chart
showing
both
nd
entries and exits. You can see after the 2 exit, price once again broke out of the ‘zone’
so I placed another sell stop order at the low of the breakout candle. As you can see this
order wasn’t filled before price went back inside the ‘zone’. In fact price continued in
that direction breaking through the other side of the ‘zone’. As I had placed a sell stop
order, no loss was taken. I always prefer to use stop orders if I can. It might mean I lose
a few pips in a trade but it also means price has to move in the direction I expect it to
before I am entered into a trade. As you can see by my first entry, price went back into
the ‘zone’ and it could have easily kept going in that direction. Depending on where my
stop had been, if I had just entered on a ‘Market Order’, I could have been looking at a
loss! I always prefer to use pending orders if I can.
Another example, this time buying into an up trend on the 4hr Usd/Jpy Chart
 Price
first
breaks
out of
the
‘zone’
on the
5th
August.

However, we didn’t enter there after observing price action on the weekly chart.

We can see that price was going back into the zone rather than out of it. Although the
previous candle had closed outside the zone I don’t like to enter a trade until I know
price is truly clear of the zone on the larger timeframe charts. We can see that over the
next couple of weeks price did make a good break of the zone. From then on I was
looking to buy into the up trend. Looking back at the 4hr chart we can see that price re-
entered the zone and broke out to the upside a couple of times on the 11th and 12th of
August. However, I didn’t enter here either because the 20 EMA was not above the 50
EMA; therefore a clearly defined trend hadn’t been formed. Not until the 18th August do
we get a candle that closes to the upside of the EMAs, both of which are in the correct
order. We know that price is above the EMAs on the weekly chart, a quick check of the
daily chart shows that price is also above the EMA’s so all criteria for a buy order have
been met.
 I

placed
a buy
stop
order at
the high
of the

breakout candle indicated @102.491 and manually trailed my stop underneath the 50
EMA line. Price climbed steadily before pulling back into the zone and nearly hitting my
stop before continuing its climb.

I
finally got out of the trade on the 1st October when price pulled all the way back through
the zone and hit my stop @109.050. I was in this trade for 44 days but made a profit of
656 pips!

Trend Trading Summary

You will have noticed some differences between the two examples I have given, both
with entries and exits. I have shown these differences to demonstrate how flexible this
strategy is and how you can tweak it to your individual preferences. Please don’t think
you have to trade short trades one way and long trades another way! It doesn’t matter
which timeframe chart you look at first, as long as you use the shortest timeframe for
entry and check the trend corresponds on the two longer timeframes. Additionally, you
may have noticed that my stops were set slightly different between the two trades.
However, if I had set my stop in the first trade like I did in the second, it would have
just meant I would have stayed in the trade and not had the need for the second entry.
When placing my stop I prefer not to use a set number of pips. Instead I ask myself why I
entered the trade in the first place, what was the signal? My stop is placed where this
signal would become invalid. So if I entered on a bounce of the 50 EMA then my stop
would be placed around the 50 EMA. If I entered on a bounce of the 20 EMA then my
stop is placed around the 20 EMA. If price pulled back into the middle of the zone then
broke back out then my stop would be placed in the middle of the zone.
I also look at how price has reacted around the EMAs in the past. Which one has price
respected (bounced off) the most, or does price like to pull to the middle of the zone
before breaking back out. I take these things into consideration when entering trades as
well as exiting them.
Don’t forget that even though I have demonstrated this method on a combination of the
weekly, daily and 4hr you can also trade it on the monthly, weekly and daily. In the latter
case you would use the daily chart for entries and exits and the weekly and monthly
charts for trend confirmation. Alternatively, if you have more time on your hands, you
could trade with a combination of daily, 4hr and 1hr charts. You would use the 1hr chart
for entries and exits and the daily and 4hr for trend confirmation.
Finally, please remember that with trend trading you are trying to ‘eat the meat in the
sandwich’; you will be leaving the bread behind. In other words, you will give up some
pips at the beginning of the trade and definitely give some up at the end of it. As a ‘trend
trader’ you are not trying to catch the top or bottom of the market. Make sure you
understand this before you begin otherwise the temptation will be to exit trades early.
What will happen is something like this: You see a trade going well in your favour and
you are 300 pips up, then price pulls back to your stop giving you a profit of ‘only’ 100
pips. The next successful trade you are in hits 300 pips and you get nervous because of
what happened last time and manually close the trade. The trend then carries on, without
you, for a further 1000 pips! You missed the trade that could have put you in profit for
the year! Remember, don’t over-manage your trades. Before you enter a trade, be clear
on not only where you will enter but also where you are going to get out and stick to
your plan. The ‘where you will get out’ shouldn’t be a specific price but more a
decision about your exit strategy, these have been mentioned a few paragraphs
previously. Once you have entered a trade you only need to check your charts at the
period of your entry chart, at the most. So if you entered on the 4hr chart then the most
you need to check your charts is every 4 hours. If you entered on the Daily chart then you
only need to check you chart once every day. All you will be looking for is do you need
to manually move you stop in relation to the EMAs. This will also be your opportunity
to check for new trade entries on other charts.
 Support and Resistance and Trend Line Trading.

Before I go into any details on an entry strategy, first I must talk a little bit about support
and resistance itself. It is important that if you are going to trade this way that you
understand how to draw support and resistance, why you should draw support and
resistance and when support and resistance becomes important to your trading. Support
and resistance can be a problem area (no pun intended) for many a new trader but there
is no need for it to be. Although, sometimes we talk about specific levels and draw lines
at an exact price on our charts, we should always view support and resistance as zones.
While we might plot a single horizontal line at a particular price it is unlikely that price
will turn around at exactly this price. I prefer to imagine these areas as balloons. If you
push a balloon gently with your finger, then the balloon will ‘give’ a bit but push your
finger back. If you pushed it really hard then the balloon would pop! Price on a chart
will do the same thing. It might push gently against a level and then come back, or it
might hit the level aggressively and go straight through. Once you stop viewing support
and resistance as an exact science and treating it as an area where something might
happen, you will be more relaxed about placing the zones on your chart.
One argument that divides the trading world is how long a level remains significant for.
For some traders once a level is broken then it is no longer significant and you can
remove it from your chart. For other traders they will be looking at significant levels
from years ago. Personally, I don’t believe that once a level is broken it is redundant.
How many times have you seen price break through a level only to see it respect it next
time around. And we must remember that a level that was resistance, once broken, often
becomes support and conversely, support can become resistance. However, neither do I
look back in history, years and years, and place all the support and resistance levels on
my charts. To do so would be ridiculous as I could end up with more lines than candles
on my charts!
If I am going to place support and resistance on my charts then I will do it on a chart one
timeframe higher than the one I am trading. So, if I am trading the 1hr then I will place
my support and resistance on the 4hr before coming down to the 1 hr to trade. If I am
trading on the 4hr then I will use the daily chart and if I am trading the daily chart then
it’s the weekly chart that I use. As an example, if I am trading the 4hr chart then I will go
to the daily chart and zoom out so I have about half a years worth of candles to look at. I
will then start looking for places where price has come to the same level on at least two
different occasions. The more times that price touches your line, the stronger the line
will be in terms of support or resistance. Some people get hung up on whether the line
should include the wicks of the candle or not. I just try to get the ‘best fit’ line possible
with as many candles touching it as possible. Some candles might touch the line with a
wick and some with the top or bottom of their bodies. I do try to avoid cutting through
candle bodies with my line but sometimes even this is not possible and as long as it is
an obvious area I don’t mind if the candle body gets ‘cut’ slightly. After all, remember
these are areas or zones and not an exact price. Some people actually prefer to draw a
band of colour a certain number of pips wide instead of using a single line just to
remind them this is a zone.

On this daily Eur/Gbp chart you can clearly see price respecting the price zone where I
have placed my support and resistance lines.

If you
are
having
trouble
seeing
the
support
and

resistance zones because of the ‘clutter’ of the candles, then switching to a line chart
whilst you do this will make things a lot clearer. Here is the same chart but as a line
graph:

Try to avoid placing to many lines on your chart or it will become cluttered and in
theory you won’t be giving price any place to go. A zone is a place where price has
reversed significantly on two or more occasions. Don’t place lines at every swing high
and swing low. Remember, zones are more significant the greater the number of touches
they receive from the candles/line. Additionally, zones are more significant the higher
up the timeframe you place them. A zone on the weekly chart that has seen price reverse
from it several times will be more likely to be respected again than a zone on the 1hr
chart that has a couple of touches. Why is that? Well think about what is going on behind
the chart, why is price behaving in this way? These zones that you are placing on your
chart are indicating barriers to a price that traders are unwilling to trade at. So if traders
have repeatedly shown a refusal to trade at a certain price over a number of weeks it is
more likely they will continue to do so. If traders refuse to trade at a price just for a
couple of hours, then it is more likely this barrier will be broken before the weekly one
will be.
Just because price trades beyond a line you have placed on your chart, even if the
candle closes beyond it, doesn’t mean that the support or resistance level has been
broken. Remember what we said early about these levels are zones, very much like a
balloon, occasionally price will push into it but come back out.

In this chart we can see price respecting the resistance level before breaking through.
However, on the next candle it drops back under the level before eventually falling
away.
In my early trading days I tried to trade a breakout strategy this way and more often than
not I would be caught in a false breakout where it seemed that the market knew exactly
what I was doing and was against me. As soon as I entered the trade, price would
reverse back through the level and hit my stop. This wasn’t really a case of ‘the market
knowing what I was doing’ but more a case of, I didn’t know what I was doing! It can be
very easy to blame the market, your broker, even the dog! But ultimately it is you, the
trader, who must accept responsibility when things don’t go right, just as I’m sure you
accept responsibility when they do! This attitude is the only one to have if you want to
learn and progress as a trader.
Candlestick Patterns
When I was starting out in trading, I got very excited when I discovered a couple of
candlestick patterns on the internet. I copied them out into a note book I had and
scribbled copious notes down about how to trade them. I then closely monitored my
charts, anticipating the formation of a certain candlestick shape or a particular formation
of candlesticks. When the pattern formed I would then refer to my notes which told me
how to enter the trade and what would happen next. Unfortunately, what would happen
next, more often than not, would be that my stop loss would be hit! I would try to trade
the pattern a few more times, occasionally winning but usually losing. I would then
spend a few days dwelling on my failures until I found a new candlestick pattern to try.
The process would repeat itself several times until I fell out with candlestick patterns
altogether. I realised candlestick patterns, on their own, just don’t work often enough to
be successful.
When I eventually stopped looking for the ‘next best thing’ I started to analyse my
trading. I came back to look at candlestick patterns and in particular to question why
sometimes they had worked and other times they had failed. I wanted to know if there
was any reasoning behind the outcome. What I discovered was enlightening in many
ways. What I learnt was that there are lots of signals within the charts, although not
perfect, and when you start to combine the different signals you greatly increase the
probability for success.
The first thing I did was trade in the direction of the trend. If I was trading on the 4hr
chart I would check the trend also on the daily chart and if I was trading on the daily
chart then I would check the trend also on the weekly. Trading these higher timeframes
also increased the higher probability of success. It is usually obvious what the trend is,
is price showing an upward slope or a downward one? If you still struggle to identify
the trend then an EMA (Exponential Moving Average) might help. I would use one of at
least 50 periods. Some people prefer a 100 EMA or even a 200 period EMA. If price is
above the EMA then the trend is up. If the price is below the EMA then the trend is
down. If you find it too difficult to identify the trend then the price is probably not
trending so don’t trade, wait until it is. Remember, if in doubt stay out.
The second thing I did was only trade candlestick patterns that formed around a support
and resistance zone. As discussed previously, these are areas on the chart where price
has moved significantly in the past.
My third step was to only look for a candlestick pattern that I though the most
successful. Of all the different candlestick patterns it is the ‘pinbar’ that I have found to
have the highest success rate if traded the correct way.

On this
4hr

Eur/Gbp Chart we can see two pinbars, the first one forming after a pullback, showing a
rejection of price going higher at resistance and indicating a continuation of the trend.

However, not every pinbar should be traded even if it appears in the correct place on
your chart. There are some further rules to consider. One of the most important is
something called space to the left. This means that where the pinbar tail (wick) is must
be a zone that price hasn’t been for sometime.

On the same chart I have drawn in blue boxes to give you an idea of ‘space to the left’.
These could have been drawn differently but it gives you an idea of the rule. You can
clearly see for the first pinbar that there is a large area where price hasn’t been for a
while; about 24 candles which is 8 days. This would have been a great trade to take
given all these indications. Pinbars are often formed at times of high volatility such as
news releases. Don’t be fooled into thinking you can’t trade these for this reason. The
charts don’t lie and the pinbar still means the same thing; there are more traders who are
unwilling to take price into this area than are willing.
Before we go into how to trade pinbars lets first cover a few rules.
A pinbar candle must have a body no larger than a third of its overall size.
The body should be at the end of the candle ‘pointing’ the direction you will trade.
There should be hardly any wick at the end of the candle, in the direction you are going
to trade.
There should be space to the left of the long wick, indicating the area that price hasn’t
been for sometime.
Some people also prefer that the pinbar body is engulfed by the previous candle. I
haven’t found this to be essential however, it does increase the probability of a
successful trade.
Trading Pinbars

Having previously identified this pinbar, on the 4hr Eur/Gbp, as suitable for trading I
will now explain my method for trading it. I place a pending order (sell stop) a few pips
from the ‘nose’ of the pinbar, this means price will have to move in the direction I think
it will before I am actually committed to the trade. Using pending orders can mean you
miss a few pips but I like the extra confirmation they allow that my thoughts are right.
My stop loss would be placed a few pips off of the ‘tail’ of the pinbar. I’m trading the
pinbar because it is telling me traders don’t want to take price into this area. Therefore,
I like to place my stop in a place where I will be proved wrong. I want to have a reason
for my stop placement rather than just choosing a number of pips that have no meaning at
all. My minimum target in this case was at the next purple line, indicating support and
resistance. I carefully observed what price would do in this zone and when it formed
another pinbar I was happy to stay in the trade. I started to consider taking profit after
the large red candle was formed with large wicks either side. When price reversed on
the next green candle I took profit on its close @0.8274 for a profit of 90 pips.
Obviously, pinbars can also be traded for long entries.
Most of your pinbar entries will be after a pullback so when you see price turning
against the overall trend look for a pinbar to form to indicate that this pull back is over.
Pullbacks won’t always stop at a resistance zone that you have placed on your chart,
sometimes they will turn around from a 50% or 61.8% retracement. To find out where
this area is you will need the Fibonacci tool that comes with your trading software.
When price has had a large move in one direction then starts to move in the other this
doesn’t usually mean the trend is over; rather it means price is retracing. This would be
the time to use the Fibonacci tool. In a downtrend with price reversing, click on the
highest point then drag the tool down and click on the low point. This will automatically
place the levels on your chart.

We can see on this daily Eur/Usd chart price falling then retracing, creating a pinbar that
reached up between the 50% and 61.8% zone. This would be a tradable short (sell) set
up.
Obviously do the opposite for an uptrend.

long (buy) trade entry example on the daily Usd/Jpy. The pinbar tail shows
rejection of price entering the 50% to 61.8% zone, indicating a continuation of
the up trend.
When price is not trending and it is ranging predictably between two levels, it presents
another opportunity to look for pinbar reversal signals at the extremities of the range.
As this 4hr Eur/Nzd chart shows, there can be several opportunities to trade even in a
range, although the achievable profit may be smaller.

Although horizontal support and resistance is the most reliable way to trade pinbars,
they can also be traded from diagonal trend lines or even moving averages. Trend lines
are drawn in a similar way to horizontal lines in that you need at least two points to join
up before extending the line to predict how price will react.
The following chart shows such a trend line and the pinbar opportunities to trade.

On this daily Usd/Jpy chart we can see several pinbars rejecting the moving average
(10) giving several opportunities to join in this trend.
It is also worth noting a large number of pinbars pointing in the opposite direction to the
trend and that if we had traded these we would have been stopped out. Remember, trade
with the trend.
So you can see, a large number of opportunities to trade pinbars should present
themselves. Whether it is horizontal support and resistance, diagonal trend line or a
moving average acting as dynamic support or resistance, always be clear about which
pinbars you can trade and trade them in the direction of the trend on the higher
timeframe. Additionally, the higher the timeframe you trade on and the better formed the
pinbar is (long wick, small body near ‘nose’) the higher the probability of making a
successful trade.
MACD Strategy
The MACD indicator is one of the most popular and reliable indicators in Forex
trading. Its full name is Moving Average Convergence/Divergence and, as its name
suggests, is based on moving averages. The standard settings for MACD (12,26,9) are
the ones, found by its developer, Gerald Appel, to be most suitable for a range of
markets, either fast or slow. As you get more accustomed to using the indicator it might
be worth experimenting with different settings to suit the way you use it in your trading.
Basically, if you decrease the numbers in the settings you will have a faster responding
indicator but one that will give you more false signals. Conversely, if you increase the
values, the indicator will respond slower, cutting out a lot of ‘noise’ but getting you into
trades later. For now, I would recommend sticking with the standard settings.
As we have already said, the MACD is based on moving averages. In the standard
settings, the line is created by calculating the difference between the 26 EMA and the 12
EMA. A line is then plotted that oscillates above and below zero but with no upper or
lower boundaries. A second line is also plotted, the trigger line, which is an average of
the last 9 periods of the MACD line! Don’t worry if you can’t quite understand all this
as it is not crucial to your trading. Further to this, a histogram (bar chart) is also formed
which indicates the difference between the two lines. Make sure you are using a MACD
indicator that displays values in these ways or the following strategies will not make
much sense to you. I have seen some MACD indicators that only display a MACD line
and then the trigger value is displayed as a histogram. Not ideal for how we want to use
it.

An example of a good MACD indicator setup. MACD line in red, signal line in
blue and the histogram in green.
1hr MACD Scalping
As I have mentioned previously, in my early trading days, I did, as many new traders do,
bounce around from one strategy to the next, constantly looking for the ‘holy grail’ of
trading, the one system that will keep winning. Although I discarded many strategies
along the way, I kept coming back to this method time and time again. I would disregard
it mainly because I would get a series of losers, sometimes taking 10 in a row.
However, once I started making slight changes to what I was doing, my success rate
improved. The downside to the strategy is that it is quite ‘labour’ intensive in that you
have to monitor your charts every hour, profits are usually small and sometimes you
have to wait days for an entry signal. Nonetheless, if you wish to trade this way you can
have several winners all in one day.

The Strategy
When I first started trading this strategy I would simply wait for the MACD line to cross
the signal line and then enter the trade. Although this was the first strategy to bring me
successes, as mentioned previously, there were times when every trade I entered was a
loser. I remember one week in particular where I was managing two or three successful
trades a day and even one of those days managed to profit from 8 trades with only 4
losers all week! I went into the second week full of confidence, finally thinking I had
‘cracked’ this Forex trading. As I’m sure you can guess, the next week was a complete
turn around, I think I had 2 successful trades and about 12 losers, and that’s without
trading one of the days because I was so despondent! However, it was these two weeks
that actually changed my whole trading life! After the events of the previous two weeks
I finally decided to sit down and analyse my trading. Instead of just moving on to
another strategy, hoping it would work; for the first time I actually sat down to try to
improve what I already had. At the very least, to see if I could find out why sometimes
this method worked and then other times fail so spectacularly! I looked back at all my
entries for the previous weeks, paying particular attention, to the reason behind my entry
and observing what happened next. I was hoping to see a pattern, that my successful
entries would all have a common factor or factors and similarly, my failures. I was also
starting to get a ‘feel’ for what was a good entry. Sometimes when I entered a trade I had
awareness that some trades looked better than others, they would be mentally labelled
as ‘good’, having a high probability of success; so I wanted to know what I was seeing
that was giving me these convictions. This strategy is a result of those musings.
You can trade any currency pair you wish for this strategy and although I haven’t tried
all timeframes, I have found it to be successful on the 1hr charts. Obviously you also
need to have the MACD indicator on your chart, ensuring it is similar in style to the one
shown in the earlier picture.

Long (Buy) Entry

Before even considering an entry, you must establish that price is in an uptrend. As in
previous strategies, this can be done on the next higher timeframe, 2hr or 4hr and
assisted by a moving average if necessary. If it clearly is in an uptrend then you can start
to look for buying opportunities, if you are unsure if price is trending or not, then don’t
trade. If a good trend is in place it will be quite obvious. Next, you are looking for a
‘good quality’ crossover of the MACD line with the signal line. To be of good quality,
the MACD line should cross from underneath the signal line to go above it and this
should happen below the zero horizontal line in the indicator window. The further
below the zero line this happens the greater the probability of success. Furthermore,
when the lines cross, the closer they do this to 90 degrees to each other, again the higher
the probability of a successful trade.

On the
chart
above,
between
the two
vertical
lines I
have
drawn,
we can
see we get a ‘quality crossover’ of the MACD and signal lines. The MACD line coming
at the signal line from a large angle and it’s well below the zero line. As soon as the
histogram reading, in green, said zero I would have entered my buy order at market. My
stop loss would have been placed at the recent swing low or the low of the previous
candle, both the same in this case and I would look to take profit the same number of
pips that I have risked; so the same distance away from my entry as my stop (but
obviously in the other direction!). As you can see, in this case this was very
conservative with price rising like it did but this is a scalping strategy so a quick ‘smash
and grab’ approach is usually the most profitable over time.

Short (sell) Entry

Obviously, the short trade set up is just a mirror image of the long trade. First you need
to find a downtrend and then wait for a ‘quality’ cross of the MACD and signal lines.
This time the MACD line needs to cross from above the signal line and go beneath it.
Also, this needs to happen above the horizontal zero line of the indicator.

In this example a short trade was entered on the 30/01/2015 when the MACD line
crossed from above the signal line and went below it. This crossing happened at a large
angle and above the horizontal zero line of the indicator. Again, my entry would have
been at the moment the lines crossed, highlighted by the histogram reading and my stop
would have been placed at the recent swing high as it was very close to my entry. My
exit would have again been the same number of pips that my stop loss was set at.
However, this example demonstrates an alternative exit strategy that would have been
much more profitable. I could have stayed in this trade until the MACD and signal line
crossed again but I find this means I give up too many pips at the end of the trade.
Instead, I would have carefully observed the behaviour of the two lines and when the
MACD started to turn towards the signal line, I would have exited then. In addition to
this, I would manually trail my stop through this trade. As well as accepting losses in
Forex you will also have to realise that exits are never perfect, just be prepared to adapt
them to what is happening in front of you on the charts.
 The Trading Journal.

This is probably the most neglected area of trading for someone new to Forex. It’s very
easy to get excited about the next strategy you’re going to implement, you’re absolutely
sure this one will be the ‘one’. Everything starts out well, you have a couple of trades
that make a profit but then the losses come and you move on to the next ‘great’ strategy,
only for history to repeat itself. If you have read the chapter on the 1hr MACD strategy
you will be aware that I was making exactly these errors in my trading and it wasn’t
until I started to analyse what was happening that things started to change for the better.
Keeping a trading journal is actually a crucial task in any performance or goal-oriented
endeavour. The key is to have some way to measure, record, and stay focused on
improving your performance. A forex trading journal isn’t just about writing in the
prices of your entry and exit and the time you executed the trade. The trading journal is
also about refining your methods and mastering your own psychology. To be even more
specific, it is about your individual emotional psychology before, during, and after the
trade.
For example, your trading plan says to buy EUR/USD but your gut feeling tells you that
the trade is NOT going to work. However, you follow your trading plan and take the
trade. During the trade, the price comes to within 5 pips from your stop loss and you’re
thinking, ‘This trade isn’t looking so good. I knew it! Why didn’t I listen to myself?’ You
then decide to close your trade. A few moments later the price shoots to your original
profit target! This is why you should write a trading journal. This is a classic case that
probably happens to too many traders. If you keep trading like that and you don’t keep a
trading journal, then your trading account will be ‘blown up’ before you realize what
you’re doing wrong.
A well-kept, detailed forex trading journal can be almost as good as having a mentor
watching you over your shoulder and helping you learn those lessons. Keeping a journal
may seem boring and time-consuming, but a forex trader can often learn more from
reviewing their own trades, than from reading a book or even attending a seminar. Over
time, your journal will grow with you and, if you keep detailed records on everything
about your forex trading (from psychological issues, the market environment, system
tweaks, etc.) it will become a body of reference for your trading future. Taking screen
printouts of what happened before during and after you trade and then annotating them
accordingly is just one way to keep a journal. It was analysing screen prints that enabled
me to see the pattern in my successful trades with the MACD indicator. It allowed me to
notice the difference between what a good signal was and what a bad one was. Your
trading plan should tell you ‘how’ to trade and your journal should be all about ‘why’. It
should record answers to questions like;
Why did I enter the trade?
Why did I place my stop/target there?
Why did I exit my trade there?
Which chart patterns or technical indicators work out best? Which do not?
How can I adjust my indicators to get in trades earlier, or help me avoid
whipsaws and false breakouts?
Am I closing winning trades too early? Is it that I need to adjust my profit targets
or am I afraid of losing my unrealized gains?
Do I hold onto losing trades longer than I should? How can I improve my stop-
loss processes?
What trade setup did I miss, or not take, and why? Was it a legitimate signal or
setup according to my method or system?
What could I have done differently to make prevent/reduce this loss or maximize
my gain?
What kind of market environments have I been doing well in? Trending or
ranging?
Which news events have brought on the kind of volatility I was looking to trade
or avoid?
Which trading sessions have been the most favourable to my trading style?
Are my losing trades concentrated on certain days of the week, such as Mondays
and Fridays?
Questions like these can help you quickly filter out the actions that have kept you from
making good profit. In the beginning, the idea is to get to the point where you have
figured out what works for you and to only do those things. Once you have figured out
those right things, the next step is to consistently practice those actions that work until it
becomes a habit. The answers to these questions should then feed back into your trading
plan to refine it. How disciplined you are with your trading journal will be a great
indictor of your overall forex trading success in the future.
I hope some of the information in this book will help you to improve your Forex trading.
There are many strategies to trade Forex but not everybody will be successful. A person
trading one strategy can be hugely profitable whilst another person trading the same
strategy can destroy account after account. So what’s the difference? Obviously, the
person! We all have different characters and we all respond to things in different ways.
We might trade the same strategy but very subtle differences might creep in. We will
respond to pressure and elation in different ways. These things can influence our trading
and we must try to guard against them. When you find a strategy, stick with it, study it,
record the outcomes and refine it. A strategy is not bad because you have a handful of
losses in a row. Some strategies will have 9 or 10 losses but it doesn’t mean it’s not a
viable approach. Conversely, a strategy might be successful for a couple of weeks,
leading you to think you’ve ‘cracked it.’ No you haven’t but you are on the correct path.
I still believe there is a place for some of our humanity in Forex trading and we
shouldn’t trade just like a robot. I believe intuition and discernment should be involved
in our trading but these can only come from experience. Treat trading as an academic
exercise, study it, learn from it and most of all enjoy it. Do not trade to ‘get rich quick,’
trade to learn a new skill. Obviously most of us trade to make money but whilst being
our main ‘driver’ this shouldn’t be our prime objective. Learning how to do anything
worthwhile in life takes time and trading Forex is no different. You will make mistakes;
you will suffer huge losses, this is all part of the package. Learn from those mistakes to
minimise them in the future. Above all, Forex is a discipline not a game, the more
disciplined your approach the more successful you will be.