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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 Trader’s Guide to the Currency Market
Bless My Pips
Bless My Pips A Forex TrAder’s Guide To The CurrenCy MArkeT Steven Lombardi Cover Design and Pictures by Sayuri Ozawa .
. You should consult with a professional where appropriate. www. The advice and strategies contained herein may not be suitable for your situation. Staten Island. including but limited to special. or other damages. Suite 203. NY 10314 or info@fxclub. All inquiries should be addressed to Forex Club Financial Company.fxclub. Neither the publisher nor author shall be liable for any loss of profit.com. except in the case of brief excerpts in critical reviews or articles. No part of this book may be reproduced in any many manner without the express written consent of the publisher. 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.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.Copyright © 2010 by Forex Club Financial Company All Rights Reserved. consequential. 1200 South Ave. No warranty may be created or extended by sales representatives or written sales materials. incidental.
3 Leverage 1.2 Bar Charts 126.96.36.199.3 Examples of How Money Is Made and Lost in Forex 1.6 Trading with the ExpressFX Platform SECTION TWO: FOREX CHARTS 2.1 Currency Pairs 1.1.5 Intro to Technical and Fundamental Analysis 1.1 History of the Market 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 .4 Market Orders 1.1.2 Spreads 1.2 Why Choose forex? Comparing forex to Stocks 1.1 Line Charts 2.3 Candle Charts 2.1.4.Introduction Contents 9 11 13 15 19 21 23 29 33 35 39 43 53 55 57 59 61 61 63 64 65 66 67 68 69 70 72 73 74 75 76 77 81 SECTION ONE: FOREX BASICS 1.4 Market Hours 1.
3 Creating a Trading System 5.1 Market Psychology 5.3 2.2 Forex Trading Best Practices 5.1 List of Forex Indicators 4.2 The Major Events 3.2 2.1 Who and What Affects Market Movement 3.2 Elliott Wave 4.3 Fibonacci SECTION FIVE: TRADING SYSTEMS 5.2.3 Examples of How News Moves Price SECTION FOUR: TECHNICAL ANALYSIS 4.4 Trading on a Live Account Conclusion .4 Harami Cross Dark Cloud Cover Piercing Line Morning Star Evening Star Abandoned Baby Tweezers The Bear’s Tweezers Bull’s Tweezers Windows Support and Resistance Lines Pivot Points Chart Patterns 82 83 84 85 86 87 89 89 90 92 95 101 105 119 121 123 129 133 137 155 161 167 169 173 177 181 185 SECTION THREE: FUNDAMENTAL ANALYSIS 3.
.With the deepest dedication to you. curious investor.
com to find your answer. and very easy to comprehend. There’s a lot of information in this book but I know you’ll be able to fly through it and understand everything completely. soothing. formless. fun. I want you to view every trade you make. I’d like to begin this book by offering you flattering compliments. To a first-time trader.fxclub. I’m going to walk you through everything you need to know about the forex markets and will do so in a manner that’s friendly. Think of it as an added incentive to keep you reading. you are a clump of clay. As a novice to the market. You picked this book up because you want to learn about the forex market and how to trade successfully on the forex markets. bless your pips. you’re an artist. fear not. please visit our website at www. every price movement you watch.com and Forex Club’s expert customer service team will be sure to give you an answer. Other authors use these first sentences to describe how awesome and immense the currency market is. you can send your question to info@fxclub. and every emotion you feel – good or bad – as a learning experience. When you are happy with a trade that you made. Reader. Every step forward that you take in your learning process will mold you into something better than you were. That said. And I must say that I love what you did to the place. did you lose weight. colorless and with no direction as to what you will become. this can sound like a daunting task. and 9 . It’s important for you to realize that even professional forex traders make losses from time to time. Champ? It’s a very good look. when they made XXX amount of dollars on a chance trade. All biases aside. If at any point you find that there’s something that’s unclear. you just received a good dose of compliments and the general “voice” of this book. I’m not going to follow suit. There you have it.Introduction U 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. And if your answer isn’t there.
make yourself cozy.10 www.com BLESS MY PIPS learn how to duplicate that trade. When you’re upset with a trade that you made. So. . sit down someplace nice.fxclub. and pour yourself a nice drink. and learn from your mistake. move through it. Let’s learn about forex.
seCTion one Forex Basics .
On that trip to Sweden or New Zealand. 1939. and to combat a would-be liquidity crisis. such as a weakening dollar as a result of the Vietnam War. It wasn’t until the early 1970’s that the practices of the Bretton Woods system were dissolved for various reasons. you may have noticed that the price at which your money was being exchanged was never quite the same two days in a row. In Bretton Woods. investor entities bought and sold large sums of currencies 13 . If the price of anything fluctuates. since the price of currencies fluctuated. Under the Bretton Woods system. “Why is this happening?” The day is September 1. sparking a little conflict that would later be known as World War II. Some may have placed their money into savings in a currency more stable than their own. an investor is always nearby trying to exploit ways to profit off the fluctuations. all currencies involved with the pact were pegged against the United States dollar (which was pegged to gold at $35. among other reasons. those Swedes robbed you of some cents. but it underwent many reforms to keep up with the world’s changing economy. you were able to squeeze out a few more pennies for bucks and on other days. representatives from the Allied nations gathered to discuss how they would go about restoring the global economy that has been decimated by the war. On some days.1. while others may have converted currencies at an exchange booth in an airport prior to traveling abroad. Hence.1 History of the Market M OST of us have had firsthand experience with the forex market. and Germany’s forces have just moved into Poland. Their solution was the Bretton Woods system. fourteen months shy of the war’s end. Let’s fast forward to July 1944.) This system remained in practice for some decades after.00 an ounce. New Hampshire. When you saw this happen. you may have asked yourself. after which currencies were able to fluctuate at their own accord.
Today.fxclub. 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. Only recently have private individuals been allowed to trade on the currency markets. the presence of private individuals in the marketplace has thrived.com BLESS MY PIPS against other currencies in an attempt to make profits from these fluctuations (although losses also occurred). . the forex market is the largest market in the world. Several entities participate in the market.14 www. 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. trading sums of approximately 1 – 3 trillion dollars per day.
1. you should carefully consider your investment objectives.2). since the stock market seems to be the first choice for many prospective investors. You should be aware of all the risks associated with foreign exchange trading.2 Why Choose forex? Comparing forex to Stocks I F you’d like to diversify your portfolio. you can invest in it. So why choose forex? 1 Let’s take a look at how forex compares with stocks (fig. and seek advice from an independent financial advisor if you have any doubts. and appetite for risk. Like I said before. options. 15 . The possibility exists that you could sustain a loss of some or all of your initial investment. 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. you should not invest money that you cannot afford to lose. you have dozens of choices. 1. if the price of anything fluctuates. real estate. You can invest in stocks. commodities. or a crazy yet oddly clever idea that your brother-in-law had. Before deciding to trade. level of experience. therefore.
which means that their broker will allow them a loan of $2 per every $1 the investor puts into a trade. which means they’ll lend the investor $50 per every $1 they invest into a trade. but always keep in mind that with great leverage comes great responsibility. For now. Leverage can increase your profits and your losses.2 Forex vs. Stocks Leverage We’ll look at leverage in greater depth later on in this section.fxclub.16 www. In the forex market. investors are allowed a leverage of 2:1. 24 Hour Trading I’ll introduce you to the different trading sessions in a little bit. know that leverage is a loan given to a trader by your broker to intensify their results while trading. 1. In stock trading. brokers can give their traders a leverage of 50:1. I placed this as an advantage because a high leverage allows a trader to be more exposed to the forex market.com BLESS MY PIPS Fig. but for .
5. let’s say you’re trading stocks and you invest all of your money in company ABC. meaning that if you want to buy or sell a currency at a certain price. *Providing the market trades at those levels. chances are that you’ll get it. making your decision of what pair to trade incredibly easier than picking out a winning stock.com 17 now just know that you can trade 24 hours a day. Their stock plummets and you try like a mad man (or mad woman. By looking at economic calendars. If you open a position or place an order. Since trillions of dollars traded on the forex market every day.fxclub. hence you may be stuck without a buyer taking that stock off your hands. the market is extremely liquid. . Limited Trade Decisions In an attempt to avoid making this book sound dated (as I anticipate new currency pairs in the near future). I’ll delve deeper into this topic later on in the section on fundamental analysis. Accessible Information Traders on the forex market also have great exposure to the information that causes price to move. we’re not here to discriminate) to sell off that stock.5 days a week on the forex market. 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. Not many people out there will want to buy a losing stock. 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. is outlined on economic calendars.BLESS MY PIPS www. Great Liquidity There is a great amount of liquidity on the forex market. For example. such as news releases and speeches given by influential government officials. I’ll 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. This information.
The profit and loss occur when the price of these currencies fluctuate.1. a trader could aim to sell off a currency at a high cost and buy it back when it Fig 1. Alternately.3 Examples of How Money Is Made and Lost in Forex N OW that you have an idea of what the market is and why forex trading is more convenient than trading stocks. traders can make money or lose money by exchanging currencies. I’m going to give you some examples of how money is made and lost on the forex market to better your understanding of what you’re getting into.3 GBP/USD Chart 19 . a trader aims to buy a currency at a low cost and sell it off at a higher cost. Ideally. On the forex market.
6650 and hold his position during the downtrend. With a leverage of 50:1 . 2 *The high degree of leverage can work against you as well as for you. In this book.000 with an original investment of $200.5800) X $10. .000 = $850 You could have turned your $200 into $850. Forex trading involves substantial risk of loss and is not suitable for all investors. a trader aspires to make money online by trading the GBP/ USD. it’s your responsibility to follow good trading practices to manage your risks. a trader can attempt to earn money with a modest deposit. let's see how much money he or she would have made: (1. he would have lost his deposit.000 GBP against USD at 1.6650 and two weeks later bought at 1.20 www. I’ll offer you great information on how to manage your risks and create a trading system that.2a trader can buy or sell up to $10. Using leverage. Now let’s look at that through the reverse side of the trade: if a trader were to buy at 1.6650-1. will maximize your profits and minimize your losses.fxclub. if used properly.5800.com BLESS MY PIPS In Fig 1. As a trader. If the trader sold $10.3.
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 isn’t always running the shift. Let’s take a look at the worker’s 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. Here’s a chart that contains the forex market hours:
TIME ZONE Tokyo Open Tokyo Close London Open London Close U.S. Open U.S. Close EST 7:00 PM 4:00 AM 3:00 AM 12:00 PM 8:00 AM 5:00 PM GMT 00:00 09:00 08:00 17:00 13:00 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 I’m biased. I live and work in the EST zone, so I’m going to place certain times for things like webinar events, trading contest times, or news releases in EST so that it’s 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, it’s important for you to fully understand
BLESS MY PIPS
GMT and different time zones. By knowing the different time zones, you’ll know exactly which session you’re 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.
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 I’ll just go through all of the most popular currencies.
Country Australia Canada European Union Great Britain Japan New Zealand Switzerland United States Currency Dollar Dollar Euro Pound Yen Dollar Franc Dollar Slang Aussie Loonie Fiber Cable Yen Kiwi Swissy Buck Symbol NZD CAD EUR GBP JPY NZD CHF USD
com BLESS MY PIPS A trading pair consists of a base currency and a quote currency. you’ll find out that there are proven ways to estimate which way price will move. you would purchase Euros using United States Dollars. you would sell off Euros for United States Dollars. while the second currency is the quote currency. If you’re trading the EUR/USD. In order to do that.24 www. There are different groups of currency pairs. If you think price lines are going to move down. or go short on the EUR/USD. you’ll have to evaluate whether price will go up or down. the most popular pair traded today. At first. In this instance. the Euro is the base currency.1.1 Buying versus selling In Fig 1. What a trader is doing when he or she places a trade is buying or selling the base currency using the quote currency. The first currency listed in the pair is the base currency. but as you continue reading.4. each with its own name. Fig 1. you would want to buy. you are buying or selling Euros using the United States dollar.1 is the EUR/USD as shown in the ExpressFX platform. For now. let’s look at a pair: eur/usd That’s the Eurodollar.1. Here. In this instance. do you think price will move up or down? If you think price lines are going to move up. In the case of the EUR/USD pair.fxclub. you would want to sell. or go long on the EUR/USD. Your goal is to make money on this trade. . and the USD is the quote currency. this may seem like a gamble.4.
it would be a good idea to trade a major currency pair because they are the most popular pairs. Some are sluggish. and analysis for them.BLESS MY PIPS www. If you don’t see a USD in the pair. Some animals move in similar directions while others move in opposite directions. Think of each pair as a unique animal. you can find the most information. Here’s 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. . As a first-time trader. The first group we’ll look at is that of the major currency pairs. signals. and personality. Some animals are nocturnal and move the most at night. Each pair has its own personality. but you get the point. A cross is a currency pair that does not have the USD as its base or quote price. while others are quick.com 25 style. Here’s 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.fxclub. it’s a cross.
1.4. you can “hedge” a position. If you know that two different pairs move alike. you can see the EUR/USD chart on top and an AUD/ USD chart on the bottom.2 EUR/USD and AUD/USD In fig.com BLESS MY PIPS I’m 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.2.4. Those pairs are: .26 www. or diversify a profit that you’re already making. They look pretty similar. 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 1.1. 1. We also have currency pairs that move opposite from one another. don’t you think? I think so.fxclub.
we have two charts of pairs that are known to move oppositely from one another: the AUD/USD and the USD/CAD.1. Now that you have an idea of what currency pairs are and how they move.fxclub. In fig.com 27 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. I’m going to talk about how you can buy yourself into a trade.1. 1.3. . They almost look like a mirror reflection of one another.4.3 USD/CAD and AUD/CAD There you have – actual proof that what I said is correct.BLESS MY PIPS www.4.
depending on which currency pair you’re trading. The difference between these two costs is three pips (1. After factoring in spread costs. 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. although some exotic pairs may cost even more. On the very easy to use ExpressFX platform.2 Spreads I N the forex market. You’ll notice that there are two buttons: a sell button that has the price of 1. Spread costs are usually a fraction of a cent. A lot is equivalent to 100.4019 on it.4016 equals .2 Sell/Buy price as featured in Rumus Fig 1.4. In the industry. a trader pays his or her broker a spread cost in order to initiate a trade. we call it the bid/ask price.4019 minus 1.4016 on it and a buy button that has the price of 1.0003). this also means that price has to move three pips in favor of your trade before you can profit. Spreads usually range from 1 to 15 pips. a trader 29 . traders initiate trades in lots. Fig 1.000 units of currency. This means that you’ll pay three pips spread to trade this pair. The smallest increment of a currency is called a pip.1.4. On the forex market. You can find out how much a broker is charging for a spread by looking at the “bid/ask” price. Don’t get intimidated.4. but on forex Club’s platforms we simply call it the “sell/buy” price because that seems to be easier to understand.2 shows the currency pair EUR/USD.
30 and would make or lose $0. if you want to make money on 3 The high degree of leverage can work against you as well as for you. to calculate the pips per profit for different pairs. you would need to use a slightly more complex equation. When a trader opens a sell position. the JPY pip rates equal one hundred dollars divided by the USD/JPY rate per 10.com BLESS MY PIPS 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. For example.01. for example. you would have to pay three pips spread which equates to $0. if I sell off $10. When dealing with a currency pair containing JPY. she must buy back a new position in order to close her deal.00.fxclub. 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.10 each time price moves a tick up or down.000 10. I’ll have to buy $10. If the instrument contains GBP or AUD as a quote currency. If that sounds difficult. look at the table below: Units of EURUSD Traded 1 pip = 1. the pip price would be $1 multiplied by the USD quote currency rate per 10. instead of .00 $10. .000 units traded. Moreover. Finally.000 100. one pip is equal to .30 www.0001.000 $0. 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.000 units. 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. To revisit a thought previously mentioned. 3 The chart above deals only with the EUR/USD.000 EUR/USD and lose $20. you’ll always notice that the buy price is greater than the sell price.10 $1. if you were to trade one thousand on the EUR/USD.000 units. 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. I can’t just wave a magical wand and close the position.000 EUR/USD to have the position closed.00 So.
As the saying goes. The people at Forex Club understand this. Spreads can be hard to understand at first and they’re not especially exciting to talk about. .40 per every one thousand units of currency he trades on any pair offered on the ExpressFX platform. If you close a position with less than three pips profit. 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. this means that your trade broke even.com 31 the market.) The way it works is very simple – a trader only has to pay $0. if you paid three pips spread to initiate a EUR/USD trade.BLESS MY PIPS www. In other words. If you close a position with three pips profit. There is also a commission return feature. “Trade with zero spread and pay commission only when you profit!” It’s a good saying. price has to move in your direction greater than three pips in order for you to make profit. you have to make sure that price moves favorably in the direction of your trade more than what you paid for the spread. which instantly refunds the commission cost that you paid the moment one of your trades becomes unprofitable. this means you lost money.fxclub.
take my example below: You’re a trader who deposits $1. A leverage such as 20:1 is a nice safe amount. you can trade with up to $50. you use leverage.000). and 50:1.000. but you’re also intensifying the amount of money that you can lose. 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. you’re intensifying the amount of money that you can win. so price can jump dozens of pips in just minutes. Let’s say you were to place your entire amount into a trade while using all the leverage.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. Let’s say price moves in your favor ten pips in a minute with 33 .00 units of currency (50 multiplied by $1.000. When a broker talks about leverage.4. Leverage is a personal loan given to each individual trader by his or her broker to intensify that trader’s results.00 of currency placed in a trade. you will make or lose $5. To give you a better understanding of how your trades are intensified. The forex market is very volatile.3 Leverage I N the previous section that I said you could buy 1.000 into a trading account. you’ll usually see two numbers that look like this: x: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. 20:1. Common leverages offered by brokers are 10:1. If you use 50:1 leverage all the time. every time price moves up or down one pip. With $50.00.1. My personal opinion is to use a limited amount of leverage. Using the leverage of up to 50:1 provided by Forex Club.
” . you can profit or lose a large amount.com so that you can fully realize the pros and cons of leverage. no cost. traders could use leverages of 500:1 or higher . On the forex market. If you risk a large amount.34 www. Please understand that using high amounts of leverage can be dangerous. practice account offered on www. As a Chinese proverb says.financial suicide.fxclub.com BLESS MY PIPS the above trade. Recently. it was made mandatory that all leverages be limited to 50:1. you’d be wishing that you hadn’t placed all of your eggs into that basket. Be smart when deciding the amount you want to trade and don’t get too greedy. the amount of money that you put into your account doesn’t necessarily correlate with how well you do.fxclub. In that case. “Cross the river one stone at a time. I highly recommend that you trade different amounts of money with different leverages on a risk-free. that means you just made fifty dollars in just one minute! But what happens if you weren’t so lucky and price moves against you? That fifty dollars could just as easily be lost. Prior to this.
4.4 Market Orders A market order is an order to buy or sell into a currency. and then there are orders that are slightly more complex. they look disgusting. which enable a trader to buy or sell a currency pair. close price when it hits its zenith. instead of trading. You don’t want beady-raisin eyes. there are millions of things that can distract us from our work and our trading.” Imagine if you could look at a chart all day. It is humanly impossible to stare at price charts all day long. I’m sure). take-profit and stop-loss orders were created. There are simple buy/sell orders. Has this situation ever happened to you? Probably not.1. A trader can set take-profit and stop-loss orders the moment he or she opens a new position. “life happens. While you are in mid-frolic. You just missed out on your trade. By placing a market order. 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 ensure that your 35 . Orders are what enable you to enter into a trade on the forex market. you’re telling your broker to initiate an immediate trade to open or close a position. In the attempt to save the eyes of traders around the world (and for various other reasons. So. but you looked out the window and saw the sun and remembered how much you love being outside. You want to sit by your computer all day. By setting a take-profit position. While frolicking in the grass may not be on the top of your to-do list. and rake in all that cash. because as the saying goes. you strap on your sneakers and run outside to frolic in the grass. price jumps up a hundred pips. Your eyes would shrivel up into little beady raisins.
Fig 188.8.131.52 www. you can have your position automatically closed when you’ve incurred a certain amount of losses. .4. by setting a stop-loss order.1 to see what the take-profit order looks like in the ExpressFX platform.com BLESS MY PIPS position will close after you make a certain amount of profit that has been predetermined by you.fxclub.4.2 shows you what the stop-loss order looks like in the ExpressFX platform.4.4.1 Setting Take Profit in ExpressFX Adversely. Fig 1. Look at fig 1.
you’ll find an example of what the take-profit and stop-loss orders actually look like on the ExpressFX trading platform. The current price value can be seen as a red line running across the chart.4. I’m selling USD/CAD. Slightly above that red line is a solid green line.4. I’m betting that the United States Dollar will weaken against the Canadian Dollar.4. The dotted green line below the current price value is the take-profit order.BLESS MY PIPS www. This order is signified as a happy face. which is the price at which I sold the currency pair for.com 37 Fig 1. Said order is signified by a sad face.” or that the order will go through at the price at which you set it. 1.3. Forex Club guarantees that the order will be “filled.fxclub. . Now look for the orders – they appear as dotted green lines above and below price’s current value.2 Setting Stop Loss in ExpressFX Once price has hit a level to activate either take-profit or stop-loss orders. In other words. In fig. In the example.4. The dotted green line on the top of the page is the stop-loss order.
the position will automatically close and I will either be rewarded with the profits or kick the dirt thinking about the losses.4.4. .com BLESS MY PIPS Fig 1.fxclub.38 www.3 Orders as they appear in ExpressFX The moment price hits one of the dotted green lines.
Fundamental traders believe that price is a momentary thing. I knew a trader from Chicago who would shake his magic 8 ball before opening a position.1. speeches and the way speeches are spoken. but they’re both very effective and must be considered by all traders who hope to last on the forex market. Fundamental analysis relies heavily on the brain. while technical analysis relies on the computer. The only thing that matters to a fundamental trader is the present. you’ll be analyzing news.5 Intro to Technical and Fundamental Analysis T RADERS use many different methods to estimate whether price will move up or down. while with technical analysis. hard answers. Computers have motherboards that process information to provide definitive. These methods are called technical and fundamental analysis. There was another trader from Haiti who used to throw chicken bones and read the way they landed before opening a trade. or speeches from powerful political or social figures. The past does not matter. natural disasters. Humans have brains that process information and rationalize it according to their emotions. The future of price will be determined by the release of news events. With fundamental analysis. very bad at trading forex. Burn those price charts that you have from 2008. you’ll be analyzing the answers of complex equations given to you by your computer. 39 . Both methods are very different from one another. because our destination is the future. These traders had one thing in common… they were all very. 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. natural disasters. Traders use two methods of analysis to estimate how price will react.
and nerves of the forex market are its traders. If the outcome of these reports is better than expected. That cues the men and women to buy into this country’s currency. We’ll 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. these traders will sell off the currency. Of course.40 www. There have been instances where they disregarded the economic calendar information or went against it. You can find an economic calendar on the Forex Club Web site by visiting http://www. .fxclub. making it stronger. It should be noted that these men and women are mad – they’re indecisive and driven by greed. If a large number of these men and women buy into a currency. Let me take you a bit deeper into the forex market to show you why these events affect price so much. com/economic-calendar/. vehicle sales … anything that directly correlates with a country’s economy. On the economic calendar. These events can include bank releases of interest rates. In the opposite scenario. The heart. the currency will strengthen.fxclub.com BLESS MY PIPS The fundamental trader’s Bible is the economic calendar. hence. making it weaker. 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. brain. 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. I’ll go into further detail of fundamental analysis in section 3. I’ll tell you more about these men and women – a rundown of the major events that cause price to move. you can find all of the global events that cause price to move. the currency will weaken. that means the country’s economy is strong. unemployment rates. if these men and women sell off a currency at a rapid rate. if the outcome of the reports is poorer than expected.
whereas fundamental analysis don’t care about past price movement. technical analysis relies heavily on historical data. it’ll be up to you to interpret the actual charts. you can get free market signals courtesy of Autochartist when you sign up for an account.BLESS MY PIPS www. There are different types of software and companies that offer technical analysis for free. traders such as you and I don’t even need to pick up a calculator to process these complex equations.1 News as is shown in ExpressFX A fundamental trader would see Fig 1. price just went up because of the XYZ news event that was just released. By using mathematical equations.1 and say. “Hey.5. the trading platform will do all of the plotting for you.com 41 Fig 1.fxclub. With Forex Club. All you need to do is click a button and presto.5. 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.” Now. Thanks to platform advancements. . Traders who have a live account with Forex Club will get technical analysis courtesy of award winning Trading Central.
you’ll have a much easier time reading and understanding the charts.com BLESS MY PIPS Fig 1. .2.5. Every single line in that chart tells a technical analyst something very important about the market. I used Forex Club’s advanced Rumus platform to plot what a technical trader’s chart may look like. I’ll go into detail about technical indicators in the next section and in section 4.fxclub. a language that you must learn to speak and read in order to understand what the forex market is telling you. The lines are like a different language.5.2 Indicators plotted on EURUSD In fig 1.42 www. Don’t let the picture above intimidate you – once you know what each indicator means (and I’ll tell you what about twenty of them mean).
If no pet is readily available. With this virtual money. you can 43 .” We’ll supply you with fifty thousand virtual dollars to trade with as you please. gerbil. or any other small creature will do. place your foot firmly against your keyboard. hamster. With the ExpressFX practice platform. most user-friendly forex trading platform ever created. You can download the platform at www. The next step is to get Forex Club’s ExpressFX platform.1. you can place risk-free trades on the forex market using “virtual money. go online and visit www. In the event that you don’t have any pets. you will be able to register for a practice account and download the software. and then allow your pet to walk across the keyboard.fxclub. Do you have that all ready? Good. If you don’t have a dog. Chances are good that you just placed a trade using ExpressFX. It’s that easy. ferret. Both processes will take you only a few seconds. take off your right shoe and sock.com/ expressfx/.com/ expressfx. a cat. the Forex market can be a tricky thing to conquer. Now get your dog. The thought process behind the creation of this platform was very simple.fxclub. I don’t 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. depending on how long it takes you to write your name and email address. If you haven’t already done so. but the tool you use to enter the market shouldn’t be. On this page. Have the software running on your computer. Forex Club’s programmers worked very hard to create the simplest.6 Trading with the ExpressFX Platform T AKE your keyboard and place it on the floor. I’d 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. As your teacher.
44 www. Newbies need them to get firsthand experience in the forex market prior to placing one of their hardearned dollars at risk. I usually like entering a password that’s very memorable to me. Fig 1. . When you first launch the platform. price quotes to the right of the login area. you’ll find a login area at top center.com BLESS MY PIPS get a better understanding of how much money you could expect to make or lose on the market depending on your trade amount. Something like killerrobot1386. and a news section below that.fxclub. click Enter to access to the platform. a large area in the center of the screen where we see price movement. seen in fig 1. Regardless of your skill level. you will always want to keep a practice account at hand. Once you’ve entered the correct account number and password. so make sure that your write down your ExpressFX username and password.7. Veteran traders need them to test out new strategies. We want to focus on the login part at first. The first step that I always take once I open a new trading platform is to change the password.1 Platform log in screen Here is where you enter the information that was provided to you when you registered for your ExpressFX platform.1.7. Practice accounts are essential for all traders. and store it somewhere safe. You’ll notice that your password is a mess of random numbers and letters that are in no way easy to memorize.
click on the Settings tab and scroll down to “change password” (seen in fig 1. you’ll be required to enter your current password followed by your new password.7.com 45 Please feel free to enter a password that’s easy for you to remember.7.3). let’s look down at the ExpressFX’s most prominent feature: the price chart (fig 1. Now that we have our platform opened and a nifty new password created. In order to change your password.2).2 Preparing to change password to killerrobot1386 To change your password.7.7. Fig 1. Fig 1.fxclub.BLESS MY PIPS www.3 Price charts in ExpressFX . doing so will make future log ins a breeze.
. reader. you’ll notice that the top left button says “trade. months. On the ExpressFX platform. I would like for you to now pick out your favorite currency pair. but for this example. because that pair happens to have all of your favorite letters in it. Call me old fashioned. traders can view currency pairs over the course of hours. click on the small upside-down triangle beside the given time and make your choice. and the time frame is by the hour. you’ll notice that a pop up window appears.4. Give that button a click.fxclub. In this case.com BLESS MY PIPS On the top left of the chart is the trading pair that we use followed by the time frame.46 www. On the ExpressFX platform. each one labeled with a different trading pair. The time has come.7. Once you click the button.” and shows a picture of currency being wrapped by two blue arrows. Above the chart are eleven tabs. good ‘ol EUR/USD. That window will look something like fig 1. or a year. Now it is time for me to place my trade. I’ll pick the trusty. our trading pair would be EUR/USD. days. Will you be like 27 percent of the traders currently trading forex and choose the EUR/USD? Maybe you’re feeling dangerous and would like to trade the volatile GBP/JPY? Or maybe you’ll pick the EUR/ CHF. You can switch between charts to view these other currency pairs simply by clicking on the tabs. weeks. If you’d like to view the charts in different time frames.
make sure that the first currency you choose. click the continue button. When you’re all settled on which direction you think the currency is going to head. is EUR and the last currency you choose. From here.com 47 Fig 1. The ExpressFX practice account is preset with fifty thousand units of currency. Our next step is to pick the amount of money you wish to place into your trade. which appears in the “against” row. it will be much easier for you to understand which position you’re opening using the “up” (buy order) or “down” (sell order) feature. is USD.fxclub.BLESS MY PIPS www. if you’re trading EUR/USD. but it is attainable through using Forex Club’s 50:1 leverage. You’ll 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. Here’s a rule of thumb for all first-time traders –enter the currencies according to how they show up in the currency pair. you may enter your currency pair and choose which direction you think the pair will move. For example. 4 4 The high degree of leverage can work against you as well as for you. If the pairs match up in this way.4 It takes two to tango This is the first step to opening a trade.7. . which appears in the “I expect that” row.
48 www.5 Setting my trade for a buck a pip For the trade featured in fig 1. regardless of current market conditions. Rejoice.7. Slippage occurs . You are about to make the transition from average Joe to forex trader.fxclub. Now it’s time to act quickly! The ExpressFX platform will show you a quote for four seconds before recalculating the next quote. slippage could occur. you have to hit the “request price” button. which ensures that the price that you request is the price you get – guaranteed.) Once you’ve set these two limit orders.5. the next step is to set your take-profit. After you have chosen the amount of money that you’d like to trade. A pop up screen will appear confirming your order. I’m prepared to place ten thousand units of currency at risk in hopes of making a profit.com BLESS MY PIPS Fig 1. Why the rush? At Forex Club. And after you set your take-profit order. Without this feature. in my opinion. Remember that order? It’s the one that closes your position the moment you’ve made a certain amount of profit. When you see this. you can set your stop-loss order (the one that closes your position when you’ve made a certain amount of losses. you’ll be brought to the final step in your opening a position journey. reader. we utilize the request for quote feature.7. That’s a good safe amount.
click on confirm button to enter your trade (fig 1. You can view the trade and all of its details in the white area above the charts. you may lose out on money because of a broker’s poor execution. In other words. Fig 1. price slips out of the broker’s hands for a moment and you end up in a position a few pips away from the opening price that you wanted.fxclub. price.6). you can see the trade size. they’d be proud.com 49 when price moves extremely fast precisely while you are trying to initiate an order.6 Confirming your trade It’s time to make your business cards. it’s time to follow the trade to see how your position is doing. The market is moving so quickly that a broker can’t quite pin point the price you think you’re getting.7. . currency pair. Forex Trader Extraordinaire would be a good header for the card – it has a good ring to it. Forex Club guarantees no slippage on their ExpressFX and Rumus platform. After you place a trade.BLESS MY PIPS www. Here. If you like the quote presented to you at step 5. As a result.7. Send a few to the family.
you can change your take-profit or stoploss order by clicking on the limits button located at the top of the platform.50 www.7.com BLESS MY PIPS current P/L (profit and losses). simply hit the close position button.7.7. In fig 1. and I suggest you play around with all of them.7. There are two magnifying glasses to zoom into and out of the market.8. All of these tools are very useful for a novice. a drawing tool to plot lines on your charts. When you’re ready to close your position. you can find two different instances in which a trader is making profit or losing money. Fig 1. seen in fig 1. an auto-adjust tool that keys into your trade and a tool to change the line chart into a candle chart (explained later). and how much commission will be returned to you if you are in a failed trade. your orders.7 Making money or making losses At any time during your trade.fxclub. The ExpressFX platform has some features located to the right of the price chart.8 The trade is over . Fig 1.7.
Once you have clicked on the button that has appeared. Congratulations. you have successfully opened and closed a forex trade. .fxclub.com 51 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 you’ll have to request for another quote.BLESS MY PIPS www. you’re now a trader.
For example. that means that you can buy one euro using 1. If the price of the EUR/USD is 1. but they all share a universal feature: Price charts are divided into different price intervals. . the euro is the base currency and the United States dollar is the quote currency.7146). you know that in the pair EUR/USD. you’re looking at the ideas and expectations of the thousands of men and women who are currently trading on the forex market.4000 United States dollar. Price charts show the current and past values of a currency pair. Let’s take it one step farther.400 equals 0. You can find out how much a currency pair is currently worth by looking at the numbers to the right of the chart.7146 Euros (1 unit divided by the value of 1. if we switched the equation around we’d find that we could buy one United States dollars using 0.4000. The price shown is the price of the base currency’s worth in exchange for the quote currency. Each different type of chart has its own unique qualities.seCTion Two Forex Charts WHEN you look at the price chart.
54 www. the less past information you can see.com BLESS MY PIPS These different price intervals are: • • • • • • • Tick Minute Hourly Daily Weekly Monthly Year The smaller the increment of time you choose. lines which help them determine if price is going to break out (move rapidly in a certain direction). This has its advantages and disadvantages.fxclub. but use smaller time intervals to narrow in on an entry point. . But for now. most chartists need past data to help them plot lines called support and resistance. I’ll tell you all about these support and resistance lines later on in this section. onto the charts.
Fig 2. you will notice that price has a tendency to jump up and down. or rather at the point farthest to the right.1 Line Charts T HIS is one of the more basic charts. but they don’t provide traders with great insights in technical analysis. When looking at this chart in small time intervals. It’s nearly impossible to get any meaningful indication of future price movements from this information alone. Line charts are one of the easiest charts to read. you’ll notice that these jagged little spiked lines are more smoothed out. If you take a step back and look at line charts in intervals of months. the last closing price of each interval is shown at the end of the line.2. forming acute edges. With line charts.1 A line chart of the EUR/CHF 55 .
2 Bar Charts T HE bar chart expands on information not given on line charts.1. the beginning of each hour would be marked by the open price. The gigantic bull and bear are trying to pull the rope towards themselves with all their might. The stretching and shrinking of the bar represents the fight for market dominance. On a bar chart. You may notice that the bar tends to stretch or shrink after the opening price. and greedy. If you’re looking at a weekly chart. If you’re looking at a minute chart. If we’re looking at an hour bar chart. They both have human-like hands and are holding a tremendous rope. The way I usually imagine it is that there is a gigantic bull and a gigantic bear. 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. each bar represents – you guessed it – a week. 57 . If the bar is sinking down. Each bar on the graph represents one unit of time that is determined by the interval of the chart. the time intervals are extremely relevant. the bear is winning. For example. indecisive. they have cheerleaders – thousands of them.2. each bar represents a minute. the bull is winning. The bull and bear are not alone. If the bar is rising up. The open price signifies the exact price of the currency pair at the moment the time interval began. the more it will pull on its rope. each bar represents one hour. if you’re looking at an hour chart. the beginning of each day would be marked by the open price and so on and so forth. And each one of them is mad. If we’re looking at a daily bar chart. for example. We can see how well either animal is pulling by looking at the bars. The more fans either animal has.
The high represents the highest point that price hit from the moment the bar opened until the moment the bar closed. but they are illustrated differently. high and low points that are separated by time intervals is widely used. All of these aspects are illustrated in fig 2.2. Fig 2. The close price will provide two definitive gifts: the high and low price.1. . the low represents the lowest point price hit between the open and close times. high. low and close (OHLC) prices on a bar graph The concept of having open.1. the bar ends and a little notch can be seen which represents the closing price.58 www. There are other charts that follow the same idea as the bar chart. close.2 Open. Likewise.com BLESS MY PIPS After the time interval is done.fxclub.
It doesn’t get easier than that. Japanese candlesticks are the world’s oldest form of technical analysis. I bet that nine times out of ten the charts that you find will be Japanese candlesticks. It wasn’t until 1985 that this form of charting reached the West. eh? To reiterate. Fig 2. close.1.3 A candlestick. candles follow the same rules of open.3 Candle Charts I F you search the Internet for forex charts. although the West was already utilizing bar charts. 59 . I’ve included fig 2.3 below to clearly indicate the different price levels over a specific interval of time. the function of which was very similar to that of candles.1. They were originally created in seventeenth century Japan by Munehisa Homna as a way to track the price of rice. high and low prices as do bar charts.1.2. To further illustrate how these four prices are created. Strange.
She sees messages and gestures.60 www. The thick part of the candle that exists between the open and close price is called the body. Candles are like snowflakes. That means that price moved down. this means that price went up. Black candles tell us that the market made a bearish move. One of the easiest ways to learn a foreign language is with a translation dictionary.com BLESS MY PIPS 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. In order to have made money in this scenerio. Some candles have long wicks. When a professional trader looks at candles. Feel free to crease the next page over for future use. Some candles are white. and some have no wicks at all. she doesn’t see different colored lines. each one is unique. 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. These lines are called shadows or wicks. If the open price is greater than the close price. you would have to have been in a short or sell position. This is a bullish candle. the candle will be black. it will take you a few days of hands-on experience and chart watching to fully understand what each candle is telling you. you would have had to been in a long or buy position.fxclub. The market is communicating to us and those who understand the forex language are the ones who will profit the most. Think of this next section as a Forex-English dictionary: candlestick edition. others are black. This is illustrated with a white candle. Every movement that a candle makes is the forex market making a muted sound. In order to have made money trading this candle. . some have short wicks. Each one of these little discrepancies tells a trader a great deal of information about the market.
Japanese Candlestick Patterns
Forex-enGlish diCTionAry: CAndlesTiCk ediTion
ET’S start with the basics, and then I’ll ease you into the more difficult types of candles.
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 can’t 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 isn’t 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 candle’s 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 184.108.40.206 Assorted candles
In fig 220.127.116.11, I’ve listed five different types of candles, the middle candle being the long candle.
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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.
but only after a furious fight.fxclub.4.2 Spinning tops A spinning top candle indicates a moment of indecision. but only after giving one another some ground. and the men and women who are by the sidelines cheering are torn regarding which direction they should go.com BLESS MY PIPS Spinning Tops These candles aren’t half as fun as their name implies. Think back to the tug of war analogy – the bull and the bear are at a tie.64 www. Spinning tops are typically short candles. Ouch. . Their freakishly evolved human-like hands are probably beet red from tugging that rope.1. Spinning top candles have shadows that are much longer than their bodies. The bulls and bears are fairly even here. but it’s not the size of the candle’s body that we consider when identifying these candles – it’s the size of their shadows (or wicks). Fig 2. What this candle tells you is that the bulls and the bears are fairly even.
a dark chocolate marubozu. It’s a tasty candle.3 Mmm.4.1. They can also signify a strong continuation signal. .1.BLESS MY PIPS www.fxclub. which translates to “bald. Take a minute to think about what’s happening to the market here. the bears gathered their numbers and did everything they could to drive price down. Adversely. marubozu bar Fig 2.4. chances are pretty good that the next few candles forming on the chart will move in the same direction as that marubozu. as I sometimes like to call them. folks. the buyers were in complete control from the moment the candle opened until its close. and it worked wonderfully until the moment that the candle closed.3 features a picture of a black marubozu or. If you see a black marubozu candle. These candles signify the strength of the buyers or sellers. The moment the candle opened. The highs or lows are equal to the opens or closes. its name. depending on the color the marubozu. Fig 2.” In very rare cases.com 65 Marubozu Candle A marubozu candle is a candle that has either no upper shadow or no lower shadow – hence. which is the reason why we have no shadows. this means that the sellers have had complete control of the time interval in which the candle was formed. which means that if you see a marubozu. if you see a white marubozu candle. the marubozu has neither a top nor bottom shadow.
A doji signifies a major moment of indecision. I discussed how the bulls and bears were about even. When we spoke about the spinning top candles.fxclub.4. a long-legged doji. the bulls and bears aren’t almost even – they are in a dead heat. but when paired with some of the more complex candlestick patterns.4. It looks like a plus sign.1. Fig 2.4 The unskillful doji In fig 2.” Doji candles have no body. the doji is a neutral pattern.com BLESS MY PIPS Doji Candle The translation for doji is “unskillfully made. signifying indecisiveness. the doji is probably the easiest to spot on a graph.1. we can see a doji candle – or to be more exact.4. . By itself. the doji can signal a meaningful move on the market.66 www. which means that their open and close prices are equal. Of all the different candles. With doji candles.
4. . We’ll have a few black candles indicating a mighty move by the bears which will end the moment this dragonfly doji appears. Dragonfly dojis typically occur after a long period of selling. A dragon fly doji occurs when a currency pair has made the same open.fxclub.com 67 Dragonfly Doji This is where the names of the dojis start to get interesting. high and close price.4. We call this a trend reversal signal.BLESS MY PIPS www.5 The dragonfly doji The dragonfly doji is an indication that a bullish market may appear. 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. This doji can has one long shadow below it.1. Fig 2. but it has a different low price. Now it’s time for price to fly up on the wings of the dragonfly.5. On the chart.1. Spot the picture of a dragonfly doji in fig 2. The history of the dragonfly doji’s name is a little shrouded in mystery. it looks like an upper case T.
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The gravestone doji is the dragonfly’s 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 18.104.22.168 A series of candles leading to a gravestone doji
In fig 22.214.171.124 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 don’t 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 you’re trading.
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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 126.96.36.199 Four-price doji
Fig 188.8.131.52 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 won’t see them often, but may spot a few on a one minute chart on some Sunday afternoon.
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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. They’re 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, it’s a doji, as seen in fig 184.108.40.206.
Fig 220.127.116.11 Appropriate body-to-candle ratio of a doji
1.4.com 71 Getting back to the gravestone and dragonfly dojis.4.BLESS MY PIPS www.9. I’ve included some examples of what a deviant gravestone and deviant dragonfly may look like in fig 2. use your own discretion when deciding if a candle is a deviant. Fig 2.fxclub.1.9 Deviant gravestone and deviant dragonfly dojis .
a paper umbrella (fig 2.10 These paper umbrellas never appear in Tiki drinks So the only difference is a little candle body.72 www. while its low price is much lower.4. It doesn’t matter if the candle is black or white. a paper umbrella form on your charts is an indication that a bullish trend may occur. except that this candle has a body.4. close and high are fairly similar.10) is almost like a dragonfly doji. Big deal. When we see this.1. Fig 2.1.fxclub.com BLESS MY PIPS Paper Umbrella Essentially. The market is basically telling us the same thing as it would be telling us if we were to see a dragonfly doji. what is happening in the market is that the price of a currency pair’s open. . right? Not really.
but there is a lower low price. and close prices. the old trend has come to an end. In order to have a hammer. Now we’re 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.com 73 Hammer This is where the candles start to get more complex. Until now.1. In the case of the hammer. In other words. we are entering into an uncertain market. the actual color of the hammer’s body doesn’t matter. If the hammer is followed by a black candle.fxclub. all of the candles that we viewed were independent of one another.BLESS MY PIPS www. there must be a succession of black candles making their way down the chart before this candle can appear.4. The properties of this candle are the same as those of the paper umbrella. Fig 2.11.11 Stop – hammer time You can see a picture of a hammer in fig 2. if the hammer is followed by a black dragonfly or white candle. high. We’ll start it off with a simple candle called the hammer. and a bullish trend may occur.1. The only difference between the hammer and paper umbrella candle is location. The hammer candle looks exactly like the paper umbrella candle. we need to be in a bearish market. No discrimination. just as with the paper umbrella. Sometimes we need additional signals before we can enter into a trade. . And.4. price has made similar open.
74 www. an inverted hammer.com BLESS MY PIPS Inverted Hammer An inverted hammer looks just like it sounds – it is a hammer that has been inverted or flipped around. like a hammer.fxclub. Just as with hammers.1. Personally. signifies that the bulls are about to take charge. . Fig 2. we’re going to need the same location as what is needed to make a hammer – the pattern must occur at the bottom of a downtrend. 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.1.12 Stop – inverted hammer time Fig 2. the color of an inverted hammer’s body doesn’t matter. When an inverted hammer occurs on the market.4. and a high price that exceeds all others.12 shows a picture of an inverted hammer.4. close and low prices. we know that price has made similar open.
If a hanging man is followed by a white candle. The bulls have to be in contro.1. In order to have a hanging man candle. . the bear’s desire for vengeance must be sated. as with some of the other candles. and close prices. the old trend is over.com 75 Hanging Man In talking about the last few candles.4. and we are entering a bearish market. we are entering an uncertain market. we need to be in an uptrend.4. I drew a small dead face on the hanging man candle picture (fig 2. Some of you bear fans might have felt left out. the color of the hanging man’s body does not matter.1. high.fxclub. Now that his friend has passed away in an unfortunate manner. bear fans! You.BLESS MY PIPS www. The hanging man got its name for obvious reasons – it looks like a man who is hanging at the top of a hill. Fear not. To further illustrate this.13 Hanging man The bear was a good friend of that man who is hanging.l and the white candles need to be pushing price up. I explained the candle formations that indicated bullish trends. The formation of the candle is similar to that of the hammer or paper umbrella (similar open. have candles that signify bearish trends.13). Fig 2. with a lower low price) and. too. If a hanging man is followed by a black candle or gravestone.
Fig 2.1.fxclub. before considering opening a new position. As with the last few candles that I told you about. the shooting star occurs at the top of an uptrend. shooting stars can be either black or white. Shooting stars are fairly weak indicators. . their color does not matter.com BLESS MY PIPS Shooting Star This is a bearish signal that looks very similar to an inverted hammer.4.76 www.1. one should seek additional confirmation.4. A shooting star that is followed by a long black candle is a good indication that a bearish trend will emerge. Where inverted hammers occur at the bottom of a downtrend to signify a reversal trend.14 shows a picture of what a shooting star may look like.14 The shooting star formation Fig 2.
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.fxclub. You notice that the last white candle in this uptrend was a short candle. it’s a long black candle. we must have a strong uptrend or a strong downtrend. one that’s longer than the previous. you decide to go long and buy into the position. Now price is beginning to fall and a black candle is forming.BLESS MY PIPS www.4.15. Suddenly you start to notice that the profits you were making stopped increasing and are starting to shrink. The actual color of each candle in the engulfing pattern will tell you whether price will move up or down. you close your position. You are watching an uptrend occur right before your eyes. This isn’t just any black candle. Let me paint the picture for you… You’re watching your charts and notice a lot of long white candles forming. Before we can consider a pattern to be an engulfing pattern. Worried that you’re going to incur more losses.com 77 Engulfing Pattern Keep an eye out for these. The time interval ends and you study the last candle. so it’s important to pay attention to their colors. . shadows and all. because engulfing patterns are very trusty candle formations.1. These last two candles price made will look like the candles seen in fig 2. Spotting the uptrend.
15 A bearish engulfing pattern Since you were clever enough to read this chapter.fxclub.com BLESS MY PIPS Fig 2. it’s a bearish engulfing pattern. you know that these candles on your chart right now are an engulfing pattern. . It’s not just any engulfing pattern.4.1.78 www.
to review. You’ll need a strong uptrend or downtrend 2.fxclub.com 79 So. you need three things in order to spot an engulfing pattern: 1.1.BLESS MY PIPS www. You’ll need the second candle to be larger than the first candle Fig 2.4. You’ll need two side-by-side candles of different colors 3.16 A bearish engulfing pattern .
4. Fig 2.16).1.80 www.fxclub.16).1. .1.com BLESS MY PIPS If we are in an uptrend and a small white candle is followed by a large black candle.4. this is an indication that a bearish trend may occur (fig 2.4.17 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.
If you spot a long black candle followed by a short white candle at the end of a downtrend. It’s important to note that the smaller the baby is. The two candles that signal a bearish harami formation are a long white candle followed by a short black candle (the baby). .fxclub. which represents a pale mother. which signifies a period of buying.1.4. the stronger the bullish trend. you just spotted a bullish harami formation. these form at the end of an uptrend. In the bearish harami.18). he knows that the market itself is pregnant and ready to give birth to a trend from which its traders can profit.4. since the formation itself looks like a pregnant woman.BLESS MY PIPS www.18 Illustrating the difference between the engulfing and harami patterns Harami is the Japanese word for pregnant.1. the first candle is a long white candle. you will see the harami pattern (fig 2. The short black candle in front of her represents her child: a small dark bundle of joy that is attached indefinitely until birth. Fig 2.com 81 Harami If you were to switch the position of the engulfing pattern’s candles so that the long candle occurred before the short candle. When a trader spots this formation.
this is an indication that a bullish trend may occur. However. this short candle is a doji.4.19 The harami cross If you spot a long white candle at the end of an uptrend followed by a doji. in the case of the harami cross. this is an indication that a bearish trend may occur.1.82 www. Remember when I said that the smaller the baby.fxclub. Fig 2. .com BLESS MY PIPS Harami Cross The harami cross follows the same principles as the harami. Similar to the harami. the more potent the trend? This applies even more so with the harami cross. the harami cross occurs when a long candle is followed by a short candle.4. since the baby is a doji (fig 2. If you spot a long black candle at the end of a downtrend followed by a doji.19).1.
. 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.1. Remember.BLESS MY PIPS www. look at fig 2. In order for this pattern to occur. we have to be in an uptrend.com 83 Dark Cloud Cover Dark cloud cover candles probably got its name from the bearish trends that follow the pattern’s formation. leaving a gap.20 Dark cloud cover. Price made a quick leap. you’re 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.fxclub. Fig 2. In order to have a dark cloud cover candle. Please note that the first candle’s closing price is not equal to the next candle’s open price. back when Japanese candlesticks were invented.20 to see what the dark cloud cover pattern looks like. The first candle in this pattern has a long white body. price has to open higher than the previous candle bar’s high. people couldn’t make profit in a down market – only when price moved up.1. In other words. To better illustrate this.4. but the opportunities that this formation can offer the modern trader are anything but ominous.4. The name of this one might sound a bit ominous.
which means that the market will remain in a bearish trend. However.4.fxclub. At the end of a downtrend.21). Where the dark cloud cover formation marked a bearish signal at the end of an uptrend. notice how the black candle in the end of the downtrend’s close price is not equal to the following white candle’s open price.84 www. Fig 2. this signals a continuation pattern. The white candle’s open price must be below the black candle’s low price.21 The piercing line can be seen after the downtrend The piercing line formation signifies that a bullish trend may occur. you shouldn’t be too hasty with this formation. the white candle will seem to be hovering below the black candle (fig 2.1. If. It would be smart to take some time with this formation and wait for a confirmation signal. we need to have two candles: a long black candle followed by a long white candle. In other words. the piercing line formation marks a bullish signal at the end of a downtrend. you see that the bar following the white bar is a black bar that sinks down below the white bar’s low price. for example.4. Again.com BLESS MY PIPS Piercing Line The piercing line formation is similar to the dark cloud cover formation. if you’re looking at these candles on a chart.1. .
in other words.1. We want this second candle to open lower than the first candle’s close. Fig 2. we want the smaller candle to look like it’s hovering below the first candle. you have a morning star formation. which signals a bullish trend.22).4.BLESS MY PIPS www. This third candle should close above the first candle’s midpoint in order to validate the formation. This second candle’s color is irrelevant. This pattern is a reversal signal that appears at the end of a bearish trend. the star.com 85 Morning Star The morning star formation is a pattern that consists of three candle sticks. .fxclub.1. The only thing we’re looking at is the size of this candle and its position in relation to the first candle. The first candle in this formation is a long black candle. Beside this candle is a second candle. The final candle in this formation is a long white candle.4.22 Morning star formation If all three candles are in place (fig 2.
4. which signals that many more black candles will appear in the future. signifying a downtrend. it’s an indication of a bearish trend.fxclub. This long white candle is followed by a short candle.com BLESS MY PIPS Evening Star Similar to the morning star pattern. the evening star pattern consists of three candlesticks. The first is the long white candle. the evening star occurs at the end of a bullish market.23 The evening star formation The third black candle is very important in this formation.1. which is known as the star.1. The third candle in this formation is a long black candle. Fig 2. we want the second candle to be hovering above the first. the stronger you can expect the emerging trend to be.23.4.86 www. The longer this black candle is. . The short candle must open higher than the first candle’s close. The star’s location is very important. When you see this. In other words. Where the morning star occurred at the end of a bearish market. There are three pieces to the puzzle with the evening star. signifying an uptrend. See a picture of the evening star formation in fig 2.
it’s very important to note that there are several key ingredients necessary to ensure that the pattern will work correctly and strongly. we can expect a strong trend to emerge. this also indicates a power signal.com 87 Abandoned Baby When we look at morning and evening star patterns.4. the star is a doji. we have an extremely powerful indication of a strong trend. or the second candle. The smaller the second candle is. The larger the gap.24).BLESS MY PIPS www. Fig 2. If. In the rare instance that there is a complete gap between the first candle and the star. we have one of the strongest candle formations: the abandoned baby formation (fig 2. Our last indication that the trend is strong is that the third candle overwhelms the first candle.1. The first indication that the morning and evening star are strong is the actual star.fxclub.24 Where is this baby’s mother? . which means that the first candle’s high is lower than the second candle’s low (or the first candle’s low is lower than the second candle’s high).1. meaning that if the third candle’s close is higher than the first candle’s open. the more potent the reversal pattern. If all three of these indications are present. Adversely if the evening star’s third candle’s close is lower than the first candle’s open. for instance.4. The second indication of a strong reversal is the gap that appears between the first candle and the star. the more potent the signal.
If the formation looks like an evening star pattern and the abandoned baby’s indications are present. this is a powerful bullish signal.fxclub. this is a powerful bearish signal.com BLESS MY PIPS It is important to note how the patterns form in relation to the morning and evening star patterns. .88 www. If you see that the formation looks like a morning star and all three indications of the abandoned baby are present.
it is an indication of a bearish trend.4. 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.25.4. There must be one white candlestick at the end of the uptrend that has a long upper shadow. If you spot this trend on the chart.25 Bearish tweezers Bearish tweezers can be seen in fig 2. Fig 2.com 89 Tweezers The Bear’s Tweezers In order to have a tweezer formation that signifies a bearish outbreak.1.1. .BLESS MY PIPS www.fxclub.
the first thing we need is a downtrend. At the end of the downtrend.1.26 shows bullish tweezers. If you notice that there are candles between two tweezer candles that make similar highs or lows.4. which means that if a certain candle pattern produces a bearish signal. there is probably an opposite pattern. It should be noted that these candles don’t necessarily have to be next to one another to signify a tweezer.90 www. or we may even have a dragonfly doji. almost every candle formation works both ways.26 Bullish tweezers Fig 2. Fig 2. we have a black candle with a long shadow.1. In order to have a tweezer formation that signifies a bullish trend. that produces a bullish pattern. it’s an indication that the market is poised to move upward.com BLESS MY PIPS Bull’s Tweezers As you noticed by now. The following candle is a white candle that is making a low that is similar to that of the first.fxclub. this only strengthens the possibility of a future trend occurring. If you see this. which may or may not have a different name.4. .
BLESS MY PIPS www.4.27.1.fxclub.27 These tweezers are spaced far apart In fig 18.104.22.168. which I’ll go into more detail with in section 2. we have a different name for this pattern. you can notice that we have a quite a few candles appearing between this tweezers pattern.com 91 Fig 2. In the West. .
or window.com BLESS MY PIPS Windows While describing the morning star. when you see a gap occur between two white candles. and abandoned baby formations.4. between these two candles. a price gap.4. There is literally a gap.29. Fig 2. evening star. . Windows can indicate a continuation of the trend.1. Look at the second-to-last candle in this pattern. there’s a good chance that the next few candles will also be black.1.4.28 Bear windows Fig 2.1. Likewise. take a look at fig 2. I noted that there were instances when a close price may differ from the following candle’s open price.28. price may go up. also known as a window. Its low price is higher than the next candle’s high price. a window occurs when a white candle’s opening price is greater than the previous candle’s high. If you had a hard time comprehending that. If we’re in a bullish trend.fxclub. If we’re in a bearish trend. occurs when a black candle has an opening price greater than the previous candle’s low. as seen in fig 22.214.171.124 www.28 shows a price gap that occurred when the bears were in control. If you see a few black candles and notice a gap between the last two. I described this by stating that the candles were hovering above or below one another. These instances are called price gaps.
BLESS MY PIPS www.com 93 Fig 2.1. . 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.fxclub. there is more to windows than just signifying a continuation pattern.1.30 A continuation. plus support or resistance? Score.29 Bull windows However.4. Fig 2.4.
So.com BLESS MY PIPS And vice versa. what exactly are support and resistance lines? Go on and turn the page to find out.30). .1.94 www.4. the high price of a black candle that forms after a window acts as a resistance line for future price (fig 2.fxclub.
2 Support and Resistance Lines N OW that I’ve given you more candlesticks patterns than you probably know what to do with. But what happens if. For this section. this ball of yours is extremely heavy? You have a two-thousand-pound ball that you manage to drop onto the floor. On the forex market. 95 . the information I provide for you may be easier to understand if you think of price as a ball. it’s 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? Let’s forget that analogy for a bit. What happens when you take the ball and drop it onto the floor? Simple answer: The ball bounces back up towards you. support lines act like floors from which price can bounce up while resistance lines act like ceilings from which price pushes off. That ball is going to crash through your floor and end up somewhere in your basement. I’m sure that you’ve played with a ball before.2. say.
By knowing where support and resistance levels exist on a chart. However. SIDEWAYS .2.fxclub.1 Good ol’ support and resistance lines You can see in fig 2.com BLESS MY PIPS Fig 2. price is going to soar or plummet in that direction (much like how I’d imagine a bowling ball would plummet if dropped on a glass floor).1 how price bounces off of these support and resistance lines. Price Can Move: 1.2. price bounces off of these lines rather than breaking through them.96 www. more often than not. 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. Now would be a good time to reiterate this golden rule of the forex market: Price moves three ways. UP 2. Whenever price is heavy and can break through this floor or ceiling. DOWN 3.
now that you have a general idea of what support and resistance lines can tell you about price movements. you’ll notice that the trend you’re following will either be a bullish trend (heading upward). I would suggest that you go long on the bullish trends. When plotting your support and resistance lines. There’s nothing more frustrating than placing a trade in a market that isn’t moving.BLESS MY PIPS www. let’s talk about how to plot them. Fig 2. From my personal experience. Make sure that you have candle body penetration. testing out this new level before price bounces back. When you learn to plot these lines yourself. go short on the bearish trends (both obvious suggestions).com 97 This is an important rule to consider when plotting out support and resistance lines. Drawing Support Support and resistance lines are not exact levels. before trading a breakout. and do nothing at all in a range. you may notice that sometimes the shadow of a candle just barely dips past a support or resistance line. They are rough estimations that most traders spot simply by looking over a graph. So. not just shadow penetration.2 Support and resistance lines again! . Always take caution when looking for a breakout. a bearish trend (heading downward) or a range (moving sideways).fxclub.2.
we’re only interested in the lows. If we’re in an upward-moving market. Fig 2.2. . our candles or bars are bound to make higher lows. you may notice that if you trace a finger along these lows.fxclub.2. But for plotting support lines.2. might not prove to be profitable because of the minimal market movement. indicating that we’re in a range. This diagonal line is your support line (see fig 2. Heck. we can see that the support line is indicated by the flat line on the bottom. if we’re in an upward-moving market.3 Drawing support in an uptrend A support line has the same function whether it is horizontal or diagonal.3).2. you have a straight diagonal line. Now is not an opportune time to trade unless you plan on trading between the support and resistance lines. or plow through it.com BLESS MY PIPS In fig 2. In this case. however. our candles or bars will be making higher everything.98 www. This too. Price is going to either bounce off it. price has made similar lows and is moving sideways. In some instances.
BLESS MY PIPS www. 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. Fig 2. 2.com 99 Drawing Resistance Now that we got the floors out of the way. However. it’s time to focus on the ceilings.fxclub.6. resistance lines are drawn by tracing highs.6 Drawing resistance in a downtrend . as seen in fig.2.2.
I’m a firm believer of the more. That’s fine. and drag it right onto the screen. Voila. the merrier. you have support and resistance lines that have been plotted onto your chart using mathematic equations. the computer will do all of the work for you. The equation to find pivots points is as follows: Resistance 3 = High + 2*(Pivot . Pivot points are indicators that are used by traders to automatically plot key points of support and resistance. That’s the beauty of indicators. we don’t have to plug numbers into these equations in order to plot lines on charts.High Support 2 = Pivot .2. click on Pivot Point.S1) Resistance 1 = 2 * Pivot .Pivot) Lucky for you and me. Some traders want seven support and resistance lines.Low) Resistance 2 = Pivot + (R1 .(R1 .S1) Support 3 = Low . 101 .2*(High .Low Pivot Point = ( High + Close + Low )/3 Support 1 = 2 * Pivot .3 Pivot Points S OME traders just aren’t satisfied with one line of support and resistance. The only thing you need to do in order to plot these lines is log into Forex Club’s Rumus platform.
you’ll notice that the pivot points on your charts will be plotted at different levels. depending on historical market data. you can see the pivot points that have been automatically loaded onto the chart thanks to Forex Club’s advanced Rumus trading platform. Fig 2.1. Each and every day.fxclub.2 Pivot lines shown over the course of days By looking at the central line (known as the actual pivot point line).3. traders can get a sense of how the market responded the day before – and thus .1 Pivot lines plotted on an hour chart In fig 2.com BLESS MY PIPS Fig 2.102 www.3.3.
If price is above the pivot point line. if price is below the pivot point line. we should consider holding mostly short positions throughout the day. . this means that we should consider holding mostly long positions throughout the day.BLESS MY PIPS www.com 103 get a sense of how it’s currently responding in contrast with price from the day before. You should know that the most important aspects of the pivot point indicator are the actual pivot point. However. Here are some tips that will help you harness the power of pivot points. The second and third support and resistance lines indicate that the market is either overbought or oversold. It’s important to look at the location in which price opens with regard to where the pivot point line is. and the first line of support. the first line of resistance.fxclub. 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.
he does a small gesture that further confirms his future action. That is his pattern. We say that a pattern 105 . If we were placing bets on whether the man would bend down and pick up the coin. do so now. Will he pick up the coins every time? Maybe. If you haven’t fully realized it yet. moving thing. According to Charles Dow. maybe not. Even though trillions of dollars are surging through the markets every day. but now let’s look at larger patterns that occur on the markets every day. even the most menial amounts of cash influences price movement. price moves because we. You’ve already seen some simple chart patterns in the Japanese candlestick section. This action can be something small. there are three different types of trends that occur over specific time frames.4 Chart Patterns T HINK of price like an animal. the speculate traders. You may ask – how large are these patterns that we’re talking about? The reversal and continuation patterns discussed in this section can occur throughout all different sorts of time frames. Now let’s say that before this man bends down to pick up this coin. The man and the market are one and the same.2. much like the man who has dropped the coin. Animals have habits that they exhibit. All living things exhibit some sort of patterns in their daily life. we would all say that he will pick it up. a man may have the habit of bending down and picking up a coin that he has dropped. Some of us want it to move more than others and will therefore place more money into our trades. The longest time frame is known as a major time frame. The forex market has moments in which it tugs at its pants. such as a quick tug at his pants so that his knees don’t get caught up against the fabric when he bends down. The market is a living. the moment he tugs on his pants. These tugs are called chart patterns. For example. want it to move.
This pattern generally occurs between time frames of three weeks to three months. no longer than three weeks. and it typically occurs over the course of minutes to hours. They . and descending triangles. Three different types of triangles can be spotted on your charts. triangles are my favorite shape.1 Chart monster Let’s not go off and draw monster faces on our charts. circles and squares have done nothing for me to indicate future price trends. ascending. In order to plot out triangles and the other formations that I’m going to list for you. you will make mistakes and end up drawing something like this: Fig 2. This is essential! If you go off and start plotting lines that you don’t fully understand. During my career as a trader. I suggest that you go back and read it. or the sturdiness of a square.com BLESS MY PIPS occurs over a major time frame if the time period spans from a year to several years.4. Not I. The next-smallest pattern occurs during an intermediate time frame. The smallest pattern is called a minor trend. Some people prefer the smoothness of a circle. I like triangles because when I spot them on the market. Triangles Say what you will. you will have to know how to plot support and resistance lines.106 www.fxclub. I know price is going to start moving. These triangles include symmetrical. If you haven’t fully digested the support/resistance section.
This is where the actual triangle shape comes from.2 I said that if price breaks through a support or resistance line. Neither one can gain ground on the other. Let me give you an example of a symmetrical triangle.BLESS MY PIPS www. each line is pitched at a similar angle. one of these lines will break – guaranteed.2 will better help you understand what I meant when I said that price is converging to a certain point.fxclub. it will soar in the direction in which the line was broken. What’s happening on the market is that the bull and the bear are getting tight.com 107 all share one characteristic – price in all three triangles converges to a certain point. Back in the section 2.4. The fight intensifies.4. We call it symmetrical because the support and resistance lines that we plotted to form the triangle are symmetrical.2 Symmetrical triangle pattern Fig 2. symmetrical triangles don’t have a bias to where the breakout . When these support and resistance lines converge to a certain point. Fig 2. Each beast is pulling with all of its might and inching up the rope until boom. 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. we reach the point of convergence.
as seen in fig 2.com BLESS MY PIPS will occur. In other words. Play it safe.4. When it comes to triangles. it would be smart to wait for the moment in which a support or resistance line is broken before entering a trade. and descending triangles have a bearish bias. 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. and then we ride the trade. the resistance line that we draw on top of the candles is a horizontal or nearly horizontal line. Fig 2. The only reason the support and resistance lines are converging is because the candles are making higher lows.fxclub. Again.3. 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. ascending triangles have a bullish bias. In laymen’s terms. though. An ascending triangle occurs when candles are making similar highs.4.3 Ascending triangle pattern As I mentioned before. . We simply sit and wait until price breaks either line. when we trace the support line. we notice that it’s moving up.108 www. Now let’s take a look at the difference between the ascending and descending triangles. we don’t assume.
we notice that it’s horizontal or nearly horizontal. That is to say. Fig 2.com 109 The ascending triangle’s doppelganger is the descending triangle. Descending triangles’ candles are making similar lows. but this isn’t always the case. Here’s a quick analogy of what’s happening on the market.BLESS MY PIPS www. He makes one more valiant attempt to swim upstream to make it to the same spot as he did . and is pulled back by the current. Wait for confirmation after the breakout before opening a trade. double tops and double bottoms occur when the market tries to breakthrough a previous high or low.fxclub. gets exhausted.4 Descending triangle pattern Chart Pattern 101 says that this is a bearish signal. Double Tops and Double Bottoms In the market place. I’m going to shy away from the monster bull and bear locked in eternal tug-of-war for the sake of keeping things fresh.4. An easy way to think of it is to imagine the currency candles on your chart as a person trying to swim upstream.4. In this case.4. seen in fig 2. He goes as far as they can. when we trace our support line. but doesn’t have the strength to do so. the lower highs are driving the resistance line down to a point of convergence.
com BLESS MY PIPS before. If you spot a double-top formation. This.5.fxclub. is what happens in the market place. there’s no other option but to float downstream. recedes back down and then builds up enough momentum to create the same high. Note that the formation looks like a large M. However. Price can’t push through this resistance line.110 www. no?) In fig 2. we see a double-top. Let’s flip the double top upside down to find the bull’s formation.4. now that he’s really tired. to an extent. Fig 2. the bias for the trend will be bearish. . With this formation. The pattern belongs to the bears. A double-bottom occurs at the end of a downtrend. Failing to break through. price can’t quite seem to break through a support line after two valiant efforts. there’s no place left for price to go except down.4.5 A double-top formation (looks a lot like tweezers. We can spot a double top occurring when price makes a new high. Double-tops occur after a bullish trend.
The first and third highs are similar. In the West. brace yourself for a bullish outbreak. they have a flowing. poetic name for this pattern called the three mountains formation. while the second or middle high is higher. Price makes two similar highs and one high that surpasses the others. The head and shoulders formation occurs at the end of an uptrend. it looks a lot like a person’s head and shoulders (that is.6 Here’s a double-bottom featured as a smooth line The double-bottom formation looks a lot like a large W. Head and Shoulders In the East. Makes you think. this pattern shares a name with a dandruff shampoo.com 111 Fig 2. When you see this formation. if he is wearing spiked shoulder pads.fxclub.BLESS MY PIPS www.) . When you look at this formation on a chart.4.
112 www.fxclub. This support line is called the neckline.7 shows a head and shoulders formation and a professional wrestler. no? When spotting a head and shoulders formation. you’ll notice that the lows it the formation reach a similar point. The moment price comes off of the second shoulder and breaks this neckline is when we have confirmation of a bearish trend. making a support line. Similar.4. .4.7 Head and shoulders. or head and spikes? Fig 2.com BLESS MY PIPS Fig 2.
Channel A channel formation occurs when support and resistance lines are parallel to one another.fxclub.8).4.4. Fig 2. Channels can form in the three different ways that price moves: up. since price has a tendency to break out in the direction of the trend.BLESS MY PIPS www. . We call channels continuation patterns. down. indicating a period of buying. the second being lower than the first and third. price should break through the neckline.com 113 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.8 A reverse head and shoulders If all goes according to plan. or sideways. We call this formation a reverse head and shoulders pattern (seen in fig 2.
price here has reached some sort of equilibrium.fxclub. If you spot a channel formation. as their lines of support and resistance are moving in a similar path (be it bearish or bullish). Wedge The wedge is the hybrid freak child of a triangle/channel affair.114 www. Since the support and resistance lines of a wedge must be heading in a similar path. Wedges are very similar to triangles in that both formations include support and resistance lines that converge to a certain point. Though it may be hard to notice without the aid of support and resistance lines.9 An ascending channel Fig 2. Wedges are also similar to channels. you can either trade with the trend or wait for the breakout.4. .com BLESS MY PIPS Fig 2. there can only be two types of wedges: falling wedges or rising wedges (if the support and resistance lines were evenly pitched. we’d just call it a symmetrical triangle).4.9 shows an ascending channel.
Note that the support and resistance lines are both slanted downwards. we have a rising wedge (seen in fig 2.10. because price is making lower lows.BLESS MY PIPS www. Fig 2.11 Bearish wedge pattern .4. not similar lows.4. The falling wedge is a bullish pattern. This is the only reason why we don’t refer to this pattern as a triangle. If price is making higher highs and higher lows while converging to a certain point.10 A bullish wedge pattern See the falling wedge pattern shown in fig 2.4.11).fxclub.4. but it would be smart to wait until either the support or resistance line was broken before opening your position.com 115 Fig 2.
fxclub. Wait until a resistance or support line is broken to place your trade.” this can be an indication of a continuation pattern. but again.4. Depending on the slope of the support and resistance lines used to draw the “flag. To better visualize what’s happening during a flag pattern. it’s always smarter and safer to wait until a support or resistance line is broken before entering into a trade. Traders should take note of when price begins to level out after a powerful trend.” Flag patterns happen quite often in the market. Flags and Pennants Flag and pennant patterns occur after the market has made a powerful up or down trend.com BLESS MY PIPS Rising wedge patterns are bearish signals.116 www.12 Look at all of those flags and pennants . Fig 2. think of the powerful up or down trend as the flag’s “pole” and the support and resistance lines formed during the sideways market as the flag’s or pennant’s “cloth. I think playing it safe would be best – don’t try to guess where price will move.
. while the support and resistance lines of flags follow an even trend. Note that pennants are formed when support and resistance lines are converging at a certain point.4.BLESS MY PIPS www.com 117 In fig 2.fxclub.12. you can find all of the different varieties of flags and pennants.
I would like to share two tips with you: . The fundamental trader’s Bible is the economic calendar.com/economic-calendar/. The past does not matter. The future of price will be determined by the release of news events. Intro to Technical and Fundamental Analysis. Let’s remember back to section 1. You can find an economic calendar on the Forex Club Web site by visiting http://www. The only thing that matters to a fundamental trader is the present. Before I go into more information about fundamental analysis.seCTion Three Fundamental Analysis Most traders believe that they can get by with just the technicals.fxclub. I wrote the following: Fundamental traders believe that price is a momentary thing. or speeches from powerful political or social figures.5. In that section. natural disasters. Technical analysis is on the rise and every year we have new indicators being created and new technical strategies being developed – but let’s not forget about our fundamental analysis! Some of the market’s biggest moves are caused by fundamental analysis.
120 www.com BLESS MY PIPS 1) Use both fundamental and technical analysis. . Wait for news to be released and then ride the trend. Do not trust one more than the other.fxclub. 2) Do not trade before big news events.
I’d say that we are the most rapidly growing segment of the market.” or “forecast amount. you’ll note that there is a price beside each event entitled something along the lines of “survey amount. When you look at an economic calendar.1 Who and What Affects Market Movement H • • • • • • • ERE’S a list of all of the market’s 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. our impact on the market is miniscule when compared to the other participants.” No matter what you call it.” or “projected amount. Unfortunately. 121 . 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. this means that the country’s economic state isn’t what economists thought it would be. So why do news events move price? Psychology is the name of the game. Private individuals are simply riding on the coat tails of banks and large corporations. If the forecast/survey/projected amount is different from the actual amount. Traders see any discrepancy in the economic figures as validation for buying or selling that economy’s currency.3.
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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, it’s sometimes not what is said but rather how it is said. Here’s a hypothetical example for you – let’s 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.
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 you’re 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. I’m not going to list every economic event, because many of the minor events form small burps in the market. I’m 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. Here’s 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, released with housing starts statistics, indicates future housing activity – a permit is filed before construction begins.
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.
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.
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 nation’s 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.
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 . The report covers two surveys. Employment Statistics The employment report released by the Bureau of Labor Statistics is probably the single most important economic series for the financial markets. For example. The second is the household survey and measures civilian non-institutional employment of citizens aged sixteen years old and older.fxclub. The CPI covers both goods and services.16 points to the change in the overall CPI. which measures employment in nonagricultural industries. which includes agricultural workers and the self-employed. One is business establishments (payroll survey). seven of which are members of the Board of Governors of the Federal Reserve System. The weights of the components are based on consumer spending patterns. and is generally viewed as one of the best concurrent measures of business activity. consist of a rotating selection of the presidents of the eleven other Reserve Banks. FOMC Meeting Minutes The Federal Open Market Committee consists of twelve members. The other difference between the two indexes is that the CPI covers costs facing consumers. The food and beverage components have a relative importance of about 16 percent in the CPI. an item that makes up 20 percent of the average households budget would have the same weight in the CPI. which only covers goods. so a 1 percent rise in food prices would contribute 0. while PPI covers purchases and/or wholesalers.BLESS MY PIPS www. One of the remaining five is the president of the Federal Bank of New York. which carry a one-year term. Here it differs from the Producer Price Index. 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. and the remaining four memberships.com 125 The University of Michigan’s index of consumer expectations is one of the components of the leading economic indicators.
41% – Net exports in goods and services Housing Starts Housing starts represent the beginning of construction of houses or apartment buildings. the FOMC considers its long-run objectives for the money and debt aggregates as well as the current conduct of open market operations.45% – Personal consumption expenditures 16. the GDP report provides the most comprehensive reading of the nation’s health. GDP Gross Domestic Product is the value of all final goods and services produced in the country. At the first and fourth meetings of the year. 70. and. .fxclub. 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. Built as a system of inter-locking sector accounts.96% – Government consumption expenditures and gross investment 5. Also released with GDP statistics is the GDP deflator. this economic release can be useful in spotting cyclical turning points. GDP is the broadest measure of economic activity and the principal indication of economic performance. is consequently a better gauge of inflation. Meetings are usually scheduled for Tuesdays.126 www. which are scheduled for two-day periods. Since housing activity usually leads the business cycle. The implicit deflator is the ratio of current-dollar GDP to constant dollar GDP. The FOMC also establishes policy relating to system operations in the forex exchange markets. The minutes of each meeting are made available three weeks after the meeting.com BLESS MY PIPS and sustainable economic growth. Two calculations of the GDP deflator are reported: an implicit deflator and a fixed-weight deflator.97% – Gross private domestic investment 17.
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. Houston and New York indicies are regional manufacturing reports. 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. Chicago.com 127 Inflation Report A country’s inflation report contains a projection of the currency’s inflation and the economy’s growth over a set period of time. The results of the survey are combined into a composite figure which is reported as a diffusion index. New Home Sales New home sales or the pace of new single-family home sales indicates the future course of housing construction. This information is typically released on the first or last Friday of each month and has been known to move the market considerably. Detroit. 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. nonprofit. A reading above 50 percent for a diffusion index means that the indicator is expanding.BLESS MY PIPS www. decreased or remaining the same. The respondents to the survey state whether various measures of economic performance in their company increased. The Buffalo.fxclub. Cleveland. . while below 50 percent signifies contracting activity. PMI The Institute for Supply Management releases two reports monthly: manufacturing and non-manufacturing. and farm.
). As with the CPI. Figures from January 1992 to the present have been revised and reclassified into new categories. the PPI excluding food and energy is a good measure of underlying inflation. . However. Comparison of figures prior to 1992 with those after 1992 should be made with caution. which represents about half of the CPI. The PPI for consumer goods can be a good indicator of the goods component of the CPI. Retail Sales The retail sales report details the dollar value of purchases made at retail stores: (e. department stores. and is subject to much revision. The crude and intermediate indices track prices at the early stages. The first retail sales figure for a month (the advance report) is based on incomplete information. it is the first available indicator of consumer spending on any major scale. Auto sales constitute about 20 percent of retail sale and thus have a strong influence on the total. With some adjustments. Press Conference Government officials hold press conferences to address a certain aspect of a country’s 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 speech’s content.128 www. and suggest future changes in finished goods index. which is part of GDP and is released with personal income later in the month. Food and energy are large components of PPI. they can obscure the underlying pattern of consumer spending.fxclub. Change in this index is the first aggregate inflation measure available for the month. the retail sales report is a good guide to the goods component of the personal consumption expenditures statistics. etc.com BLESS MY PIPS PPI Producer Price Index measures prices received by producers at the first commercial sale. As auto sales can be very volatile.g. The index for finished goods generally receives the most attention. auto dealers. It is useful to divide retail sales statistics into auto and non-auto components. Food and energy prices are often affected by temporary and non-economic factors such as weather. intermediate and crude. Capital goods prices measure costs facing the industry. The report measures prices for goods at three stages of production: finished.
1). which showed great potential for the recovery of the U. 2009 release of the non-farm payrolls (fig 3. I will show you two examples of when price moved with news and when priced moved against news.3. In both examples. Below. Let’s look at the December 4. Price can moves with the news. or not move at all. The forecasted amount for this day’s NFP was -119K. 129 .3 Examples of How News Moves Price T RADING the news can be tricky.3. What was the actual outcome? -11! That is an astounding difference. because I believe that the NFPs are one of the more potent news releases. there is no way to know how price will react to the release of news events until after the fact. economy. against the news. when news works Here is a great example of when trading the news can be extremely profitable.S. I chose to use non-farm payrolls. Unless you have some sort of psychic ability or a time machine.
When News Doesn’t Work Sometimes the market does strange things. The actual amount was -539K. 2009 release of the non-farm payrolls. the report came out 51K better than expected. Not only was it a day of gains for the bears.1 EUR/USD day chart with information shown for the 4/12/2009 candle By looking at that day’s candle and subtracting the close price from the open price. How does the market react to this information? . When we look at NFP data.130 www. In other words. Take the May 8. for example. This month’s projected number was -590K. but this news also helped push price down over a period of weeks. we find that price advanced 224 pips in favor of the USD.fxclub. we can also see that May 2009 saw the best outcome for non-farm payrolls since August 2008.com BLESS MY PIPS Fig 3.3.
fxclub.BLESS MY PIPS www. By looking at that day’s candle. meaning that the USD made a 234 pip loss to the EUR. Apparently. this release of information did very little to strengthen the USD.3632. we can see that price closed at 1. .2 EUR/USD day chart with information shown for the 8/05/2009 candle As you can see from the chart provided by Forex Club’s Rumus platform.3. the non-farm payroll wasn’t influential enough to stop the bullish uptrend that was occurring.com 131 Fig 3.
I encourage all traders to use indicators. The basic principles of technical analysis are: • Price is everything All of the factors (economic. Technical analysis relies on the ideas that price moves in patterns and that these patterns will occur again and often. The key is to study the past flow to predict the future flow. Indicators are used by traders to determine information that would otherwise be unknown to them from looking at price charts alone. political. psychological.seCTion Four Technical Analysis In this section. etc.) that can influence the price have already been taken into account by the market and are included in the price. Following indicators does not guarantee profit. I will be talking about market indicators. Please note that while indicators appear to be very powerful and accurate when we look at them against past price movements. only the study of the dynamics of price is essential. The reasons for these dynamics are not important. Nevertheless. . Indicators can only provide ideas for a trader to use to guesstimate future market movement. Therefore. Indicators provide insights that can help traders to estimate when to enter a trade and when to liquidate a position. they cannot give a definitive answer as to where price will move.
Do you remember that long.4? In each section. price does not jump spontaneously and erratically up and down like a demented grasshopper. however. . Do you remember the Japanese candle formations in section 2. They also use indicators.3 is a good example of what you can expect from indicators.3. pivot points. It moves in trends over time. You only need to concern yourself with the translations of each of the indicator’s lines on the charts. The pivot point mentioned in section 2. Traders are able to read these indicator lines in relation to current price levels to determine where price will move.com BLESS MY PIPS • Price moves in trends As a rule. and the chart patterns shown in section 2. and support lines to determine where price will move. if not more.4. Technical analysts use more than chart patterns. complicated equation that I gave you before showing you the pivot point? You should expect equally. The good news is that you don’t have to know what each and every equation is. 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. complicated equations in the following sections. Technical analysts. the pivot points in section 2. The candle formations.134 www. resistance. you are doomed to repeat it. • History repeats itself There’s a saying that if you don’t learn from history.fxclub. and chart patterns are all forms of technical analysis. are determined to learn from history and bet that trends that have occurred in the past will occur again in the future.1. though. An indicator is a mathematical equation that gathers market data to plot new lines onto a chart.
.. if you haven’t already.fxclub. Where an indicator is an equation that offers further insight on a currency pair. but we just call them oscillators. an oscillator is an equation that offers further insight on an indicator. Oscillators and indicators are very similar. I’m going to include information about the indicator’s equation. you could call an oscillator an indicator’s indicator.BLESS MY PIPS www. how a trader can make money using it. what it shows a trader and most importantly. I only suggest this because indicators are not offered on the ExpressFX platform.com 135 Technical analysts also use tools called oscillators. . as they are too complex for the capability of ExpressFX platform. Before you plunge in and start using indicators. Only after you fully understand your trading platform’s overall functionality and have a general sense of market movement should you start experimenting with indicators. In that sense. The following list contains all of the indicators available on Forex Club’s Rumus trading platform. it would be very helpful to log into Forex Club’s ExpressFX platform and fool around on a practice account.
Look at the vertical lines. this is an indication to sell. 137 . this is an indication to buy.1 List of Forex Indicators Acceleration Deceleration Oscillator (AC) T HIS oscillator is comprised of the nought line (featured as a blue line in the Rumus platform). When these vertical lines are above the nought line (blue) and there are two green bars next to one another. how do TrAders reAd This indiCATor? Open Rumus and drag the Acceleration Deceleration Oscillator (AC) onto a chart. If the lines are below the nought line and there are two red bars next to one another. The point of this oscillator is to measure the acceleration and deceleration of the driving force of the market.4. the AC Red and the AC Green.
many traders are speculated to be buying this specific currency. Accumulation/Distribution Line Created by Marc Chaikin.1 AC Oscillator In fig 4.138 www.com BLESS MY PIPS Here’s an example: Fig 4.1. this signifies a period of buying. this volume indicator measures the supply and demand of a currency by calculating the amount of people going long or short on a trade.1.fxclub. we see five instances where positions could be opened according to the AC indicator. The formula for the Accumulation/Distribution indicator is: Acc/Dist = ((Close – Low) – (High – Close)) / (High – Low) * Period's volume When the indicator rises.1. . A decrease in the indicator signifies a period in which traders are selling the pair.
Price later rallied up.BLESS MY PIPS www. just as the Accumulation/Distribution line had indicated. The higher up on the graph the Aroon lines cross.fxclub.com 139 Fig 4. the stronger the trend.1.2. the Aroon Up measures the strength of uptrends while the Aroon Down measures the strength of downtrends. Look towards the right of the indicators. this indicates a bearish move. As the names suggest. and you’ll see a graph with values from 0-100. this indicates a bullish move.1. .2 Accumulation/Distribution line In fig 4. When the Aroon Up moves above the Aroon Down. Aroon Indicators The Aroon Indicator was created by Tushar Chande. When the Aroon Down moves above the Aroon Up. the Aroon Down (blue in Rumus) and the Aroon Up (green in Rumus). Its purpose is to identify trends and trend reversals. How it works: The indicator is made up of two lines. as the Accumulation/Distribution line appears to be at a fifteen day high. we can speculate that many traders are going long on the GBP/USD.
but we like to call it ADX for short.-DI)/( +DI + -DI) ) +DI = +DMn / TRn . The downtrend continues until the Aroon Down crosses the Aroon Up from above at a relatively weak value of approximately twenty. indicating an uptrend. indicating a downtrend. we see the Aroon Down crossing the Aroon Up from below. -DI = -DM / TRn +DM = Ht .3 Aroon indicators In fig 4.Ct-1 TR = largest of +DM.Lt-1 CL = Ct .1. you could have made roughly 300 pips on this downtrend. as indicated by the Aroon lines.com BLESS MY PIPS Fig 4.Ht-1 .3. If you were to reverse your position and sell.-DM . -DM = Lt . The formula for ADX is: ADX = modify moving average of DX DX = 100 x ( (+DI .fxclub. If you followed this indicator. you would make an additional 150 pips on the uptrend! ADX Indicator It’s full name is Average Directional movement Index.140 www.1. This indicator was created by Welles Wilder as an instrument to measure a trend’s strength.and CL .
while the DI+ line (Positive Directional Indicator) is red and the DI. When the ADX is below 25.Welles Wilder Did you get that? If not. this indicates a strong trend.com 141 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. Making the trade: In the Rumus platform. When you see the –DI (blue) line crossing above the +DI (red) line. this is an indication to buy. When the ADX (yellow line) is above 40. You can easily graph the ADX and. this is a sign that a new trend is developing. all of the other indicators by using our Rumus platform. You don’t need to be a math champion to plot these graphs.line (Negative Directional Indicator) is blue. this indicates a weak trend. If you see the ADX indicator moving below 20. that’s fine.BLESS MY PIPS www.fxclub. the ADX line is a yellow line. When the +DI (red) line crosses above the –DI (blue) line. and that it may be a good time to make a move. this is an indication to sell .
What’s the result? In this case. the action to take is a short position. . The concept of the Alligator is similar to that of the MACD.142 www. When the lips are crossing the other lines from below.4.4 ADX indicator In fig 4. which is a 5 period Moving Average moved three bars into the future. and the action to take is to hold one’s position until its jaws snap close. The indicator consists of three lines. all of which are smoothed moving averages. our -DI (blue) line is crossing above our +DI (red) line. indicating that a new trend is emerging. and the green line (considered the Alligator’s Lips). you can see that the ADX value (yellow line) is very low at 16. which is an 8 period Moving Average moved 5 bars into the future.fxclub.1.1. the alligator’s mouth is wide open. which is the fastest line here) crosses the other lines from above. At the same time. Alligator Indicator The Alligator indicator builds on what the MACD indicator (mentioned later) lacks. if you followed the ADX’s rules. the red line (considered the Alligator’s Teeth). When the Alligator’s lips (the green line. which is a 13 period Moving Average moved 8 bars into the future. the action is a long position. it resulted in a 185 pip profit.com BLESS MY PIPS Fig 4. There’s the blue line (considered the Alligator’s Jaw). When all three lines are moving together as a whole.
The histogram must remain below zero between these two troughs. If you followed the indicator and had patience. this is a buy signal. we can see three instances when the Alligator’s jaws were wide open. Conversely. and a sell signal is indicated with the AO red line passes below 0.com 143 Fig 4. Saucer: Slightly more complex: When two red bars are followed by a green bar above the zero line. A buy signal is indicated when the AO green line passes above 0. Awesome Oscillator The Awesome Oscillator is a neat indicator that has several different types of interpretations.BLESS MY PIPS www. Zero Line Cross: The first indication to buy or sell is the most obvious one.5 (a GBP/USD hour chart). .1. 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.5 Alligator indicator In fig 4. When the higher low is made and followed by a green bar the buy signal is generated.fxclub. this is a sell signal. if two green bars are followed by a red bar below the zero line.1. you could have made more than 500 pips in the ten day span.
this indicator is used by traders to compare relative price and volatility. some traders also believe that a cross from a negative to posi- .6. this is a bullish signal. the pair is considered overbought. CCI The Commodity Channel Index is a momentum indicator created by Donald Lambert. it has a very good tendency to bounce back to the middle band. The Bollinger indicator consists of three lines.144 www. The outer bands act as resistance points. How it’s used: Most traders use this indicator to see if a currency is overbought or oversold. this is a bearish signal. there’s a very good chance that it’ll bounce back. The CCI measures price in relation to its moving average.6 Bollinger bands If you take a look at fig 4. Fig 4. If price touches the lower band.1. it’s considered underbought.fxclub. you’ll see that when price touches the bands. Bollinger Named after its creator. John Bollinger. When the lower high is made and followed by a red bar a sell signal is generated. When the CCI is below -100. What does this mean? It means that if prices touches one of the bands.1. In addition. If price touches the upper band. This signals when the market is overbought or oversold or when a trend is weakening.com BLESS MY PIPS A sell signal is created when the histogram is above the zero line and the last bars high is lower than the preceding peak. When the CCI is above 100. The histogram must remain above zero line between the two peaks.
The Ichimoku cloud is a series of five formulas and lines that. the CCI line is at -250.7.1. while a cross from positive to negative is potentially a bearish sign. Using this indicator. a trader would have known to cash in on the pips and go long while the currency recouped. It receives its name from the most noticeable aspect of the actual indicator. can look very intimidating to a first-time trader. the Ichimoku cloud or kumo.1.com 145 tive is potentially a bullish sign.fxclub. Ichimoku Cloud The Ichimoku cloud was created by a journalist known by the pseudonym Ichimoku Sanjin. The indicator is made .7 Commodity Channel Index In fig 4. Fig 4. indicating an extremely bearish signal after price dipped about 300 pips.BLESS MY PIPS www. at first glance.
this tells us that the signal is bearish.fxclub. a Kijun line and a Chikou span.146 www. represents resistance and support levels. When price is below the kijun (purple) line. Tenkan and Kijun Lines The market will move upwards when price is above the kijun (shown purple in Rumus) line. These lines will tell us whether the trend is going to be bullish or bearish. When the tenkan (red) line crosses the kijun (purple) line from above. or kumo. we’re in a bullish trend and the top of the cloud turns into the first support level. sent twenty-six periods ahead. If price moves below the cloud. If price is moving within the cloud. making the cloud). a Tenkan line. the market will move down. If price moves above the cloud.com BLESS MY PIPS up of two Senkou lines (the area between these lines is shaded in. The tenkan (shown red in Rumus) line will show the direction of the trend. The Kumo The actual Ichimoku cloud. Formulas: Tenkan Line Kijun Line Chikou Span = (highest high + lowest low) / 2 calculated over last nine periods = (highest high + lowest low) / 2 calculated over last twenty-six periods = (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. this tells us that the signal is bullish. while the bottom of the cloud turns into the second support level. When the tenkan (red) line crosses the kijun line (purple) from below. . there’s no bias to the trend. while the top of the cloud turns into the second resistance level. we’re in a bearish trend. and the bottom of the cloud acts as a resistance level.
fxclub. we will make a 234 pip profit.8 The Ichimoku cloud in all its glory Let’s look at fig 4. we see that the kijun crosses above the tenkan when price is at 1. it gives us some insight to how strong a trend is. and we close when the kijun crosses back below the tenkan at 1. the moving average reveals the average of price over a specific period of time. The moving average has different variants. this indicates a bearish trend.1.BLESS MY PIPS www. Those variants include: . In the example above. Fig 4.8 from a GBP/USD hour chart. The chikou is below price. Price then plows through both resistance levels of the kumo. we have a bullish trend. If we follow the rules of Ichimoku and sell when these lines cross. indicating a bearish trend.1. MA The moving average indicator is one of the oldest and most widely expanded upon indicators.com 147 The Chikou Span The chikou span (shown black in Rumus) shows us what price was twentysix periods ago.5783. When the chikou span is below price. all of which follow the same general principal of showing the average levels of price over a specific period. When the chikou span is above price. As the name suggests.6017. How does this help us? Since price tends to move in trends.
our SMA jumps. Here are the calculations for a fiveday WMA: . ten and twenty days.fxclub. When the price at the end of the day jumps. with more weight put on recent data and less weight on past data.148 www. 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. meaning that old information is as important as new information. Each price is weighted. as we want our indicator to respond to changes on the market. Each price has the same “weight” or importance. WMA The WMA is the weighted moving average. The simplicity of the SMA is its one big drawback. The most common time periods used with SMA are three. andn is the number of time periods in the moving average (selected by the trader). The following formula is used to calculate SMA: SMA = P1 + P2 + P3 +…+ Pn n Where P is the currency price being averaged. The WMA was created to solve the SMA’s drawback. In other words.com BLESS MY PIPS SMA The SMA is the simple moving average. five. a five-day SMA is calculated by the sum of the closing prices of the last five days divided by five. This is good.
each new value of EMA contains information about the preceding EMA. . EMA considers price history in its entirety. EMA can be calculated for any period of time.00 26.00 406. The main drawback with the WMA is that it gets overly complex with longer periods of time and is best used shorter periods.00 28.00 29. Consequently. EMA This one is the exponential moving average.00 84.com 149 5-day weighted moving average Day # 1 2 3 4 5 Totals: Weight 1 2 3 4 5 15 * * * * * Price 25.00 52.00 100.00 = = = = = = Weighted 25. n = length of EMA (chosen by trader) As you can see. The equation is as follows: EMA = EMA(t-1) + (2/(n+1))*(Pt – EMA(t-1)) Where Pt = the current price. Information does not disappear abruptly but rather fades away.067 Average 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.00 25.00 145. EMA (t -1).00 / 15 27.BLESS MY PIPS www.fxclub.
you can open and close positions each time the MACD fast and MACD slow lines cross. this is an indication to sell. In theory.1.fxclub.9. this is an indication to buy.com BLESS MY PIPS MACD This is the Moving Average Convergence/Divergence. a trader can input algorithms that will automatically open and close positions when the MACD lines cross. The only problem here is estimating when the indicators will cross. created by Gerald Appel. When the MACD fast (red) line crosses the MACD (blue) line from above. By using Forex Club’s ActTrader platform. . When the MACD fast (red) line crosses the MACD (blue) line from below. we could perform back to back buy and sell positions and make a considerable profit.1. Fig 4. we can see that by following the indicators closely and opening positions accordingly to where the MACD Fast and MACD Slow lines intersect. 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). and you will make a profit.9 Moving Average Convergence/Divergence In fig 4. This is a very simple indicator to read and can indicate when a trader should buy or sell a position.150 www.
or below price. 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. Price Oscillator The price oscillator is the difference between two moving averages. Traders use this oscillator to determine trends.com 151 Parabolic SAR This is the parabolic stop and reversal. indicating an uptrend. A PSAR dots pattern above price is a clear indication of a bearish trend.fxclub. traders can see that when the PSAR dots are below the price bar. which appear either above price. B. Fig 4. Price makes a higher low while the oscillator makes a lower low.BLESS MY PIPS www.10 Parabolic stop and reversal In fig 4. The indicator is comprised of PSAR dots. indicating a downtrend. .1. we know that a bullish trend is occurring when: A.10. Price makes a lower low while the oscillator makes a higher low. the indication is a bullish trend.1. How to read it: Bullish trends: Using the price oscillator.
11 Price Oscillator In fig 4.1. B.1. since price is making a higher low while the oscillator makes a lower low. we see that a bullish hidden divergence is forming. we know that a bearish trend is occurring when: A.11. RSI Indicator This is the relative strength index indicator. If the indicator is above 70. This indicator can tell a trader whether a currency is overbought or oversold. and if the indicator is below 30. you’ll see that the indicator is measured from between 0 and 100.fxclub. Price makes a lower high while the oscillator makes a higher high.com BLESS MY PIPS Bearish trends: Using the price oscillator. Fig 4. the currency is considered overbought.152 www. Price makes a higher high while the oscillator makes a lower high. The result is a bullish trend that could win you approximately 150 pips. 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. it’s underbought. .
If you opened a long position when the indicator dipped. you could have made roughly 200 pips.1.BLESS MY PIPS www.12 RSI Indicator Look at fig 4.12 using Stochastic Indicators. . Towards the left side of the chart.12. This indicator is a combination of both indicators.1. giving traders a clear point of entry (via moving averages) while showing whether the currency is overbought or underbought.1. the Stochastic indicator will be perfect for you. Stochastic Indicator If you’re a fan of the RSI and MACD indicators.fxclub.com 153 Fig 4. Let’s take a look at fig 4. you can see that the RSI indicator deemed the currency underbought.
including you. indicators are a fantastic weapon that should be wielded by all traders. . 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.12 Stochastic Indicators As you can see. but there isn’t a person alive who could tell where price will move in the future. On its own. it doesn’t look very useful. Nevertheless. you’ll be able to plot them and translate their meanings.fxclub. but I’m sure you’ll be able to find very good use for it after you read the next section on Elliott waves. You’ll learn the limitations of indicators by looking at charts that show a period where moving averages almost crossed.154 www. and the trader has a good idea of whether the currency is underbought or overbought. Now that you have all those indicators.1. but haven’t yet or at Bollinger bands that seem an impossibly far distance away from current price levels. Indicators do provide a great insight to price.com BLESS MY PIPS Fig 4. all entry points are labeled using moving averages.
but once you compare what you read with the picture chart that you see. (A). 3. (2).4. and 5 consist of five smaller waves that zigzag (1). and C and their subwaves are (1). 5. There are “impulse waves” that follow the direction of the trend. (4). and (C). 155 . In his publication. (5).” A wave is a generalized direction in which price travels. Below.2 Elliott Wave O NCE upon a time. Elliott had an ear for the market. Thanks to a period of alone time in bed for Mr. Elliott was able to make some very successful predictions using his own homegrown theories. A. and (5). 3. It may seem like a foreign language at first. you’ll be able to make more sense of what you’re reading. (3). and repeat. he wrote that wave cycles of the Dow-Jones index were subject to specific rhythms that he was able to spot. Elliott studied price movements on the Dow-Jones index. These impulse waves are numbered 1. Elliott. while a rising wave is always followed by a falling one. fall. an accountant and engineer named Ralph Nelson Elliott became seriously ill and had to be confined to his bed. traders can now utilize his findings to help them trade the markets. much like how waves of the ocean rise. Some people have an ear for music. He wrote that these prices fluctuated naturally. (3). and later published these theories in the Financial World magazine. To pass the time. Price is always trying to correct itself to find a perfect ground that it will never reach. General Principles of the Elliott Wave • Price moves in “waves. • A falling wave is always followed by a rising wave. a wave occurs when a trend occurs. • Up waves 1. Simply put. you’ll find the general principles of the Elliott wave theory. • Waves are separated into many different parts and sub-waves.
2. In the words of Qui-Gon Jinn. Fig 4. (C).” What may seem like a large wave is just a piece of a larger wave. (C). waves 1. 2. (B). (2). • Up wave B consists of three smaller waves (1). • Down waves A and C consist of five smaller waves (A). (B). “There’s always a bigger fish. (D) and (E). and 5 are the five wave sequences of a larger wave. 4.com BLESS MY PIPS • Down waves 2 and 4 consist of three smaller waves (A). To break that down into simple language. 3. . when you see five waves heading in a general direction.156 www. In the example below. How the waves can be sub-divided depends on their direction in relation to the larger wave they are a part of. Any trend will always follow this eight wave cycle. and (3) • A wave traveling in any direction is always a sub-wave of a more powerful wave.fxclub. they will be followed by three waves heading in the opposite direction.1 Illustrating the impulse and correction waves A five wave impulse is always followed by a three wave correction.
and corrective waves (2). 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.2 Illustrating sub-waves . (A). then at that moment you can then say that you are in wave (A) of a three.2. and (C) all divide into five subwaves. (4) and (B) each divide into three sub-waves.fxclub. Fig 4. (5).com 157 The impulse waves (1). Keeping these rules in mind. For example: • If you just noticed that five waves traveled downward. 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.BLESS MY PIPS www. we can tell where we are within a wave at any time. (3).wave (A)-(B)-(C) fall. corrective waves are always shorter than impulse waves. Therefore.
Sometimes wave B even overlaps the peak of wave 5. I’ll just give you the essential information you should know about each wave. this happens as an increase in volume corresponds to the fall in price. Wave 1: Almost half of all first waves are conceived at the bottom of the market and are just “rebounds” from the lowest levels. Important rule: the base of wave 4 never overlaps the maximum of wave 1. warning of the approach of the market top. The first wave is the shortest of the up waves. I’m going to take a few pages to give you a rundown of the properties of each Elliott wave. Wave 3: Wave 3 is usually the longest and is the most dynamic of all five impulse waves.com BLESS MY PIPS Take a few minutes to let that all sink in. A trendline drawn using wave 4 and wave A gives . low volume is typical. Volumes rise sharply. For wave B. although sometimes it is very dynamic. a double-top forms (I know you remember those). in other words. Wave A: The most convincing sign of the appearance of this wave is its sub-division into five sub-waves. since this book is geared towards first-time traders. Wave 5: This wave is usually much less dynamic than wave 3. Wave 4: This wave usually has a complex structure. During this wave. Unlike wave 2. signaling to traders to open positions in the direction of the wave. These explanations are not fully complete. Wave 2: Wave 2 never retraces 100 percent of wave 1.158 www. Wave C: Wave C frequently drops much lower than wave A's minimum. Wave B: This wave is the “rebound” of prices against the new trend that began with wave A.fxclub. At the same time. Like wave 2. and negative divergences appear. Wave 3 is never the shortest wave in price movement terms. triangles usually appear on wave 4 (remember triangles?). But. Wave 3 passes wave 1’s high. many indicators (oscillators) lag behind the flow of prices. that there is a ton more research and information out there about the Elliott wave theory. it is a phase of correction or consolidation.
so make sure to reread this chapter for more charity.fxclub. Reading this information straight through can be hard to absorb at first.BLESS MY PIPS www. . using the graphs provided.com 159 us the classic head and shoulders chart pattern (known only to me as head and spiked shoulders).
was born in Pisa. Let’s rewind a few hundred years to the thirteenth century. Fibonacci wrote a book that was completed in 1202 called Liber Abaci (The Book of the Abacus. almost mystical quality. Firstly. Pisano. Secondly.3 Fibonacci E LLIOTT made his wave theory in the 1930’s. 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. Italy.4. who only knew the Roman numeral system. in which he introduced the decimal system to European mathematicians. They’re in a hawk proof room with an unlimited water and food supply. a rabbit is pregnant for one month before it gives birth. there are two pairs 161 . 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. where his father worked. Thirdly. which were being used in Europe. In his equation. It was thanks to his North African education that Fibonacci was first exposed to the decimal system. As he grew. how many rabbits can you expect in that year? I know what you’re thinking – why should I care about rabbits? These rabbits gave us a number value that has a natural. it became increasingly evident that the decimal system was superior to Roman numerals. these numbers can predict where the markets will move. or The Book of Calculation). he wouldn’t have been able to develop his wave theory. At the end of the first month. all pregnant rabbits give birth to a pair of new rabbits – no more. a rabbit is able to reproduce one month after its birth. and educated in North Africa. and have been used to create some of our world’s natural wonders. Finally. no less. The problem started with one pair of rabbits. If it weren’t for the help of a man who died lifetimes before Elliott was born. who often referred to himself as Fibonacci. More importantly for you and I. rabbits never die. In chapter twelve of Liber Abaci. Fibonacci set up a few rules.
One thing you may notice is that if you add the sum of any two adjacent figures. the ratio of any number in the sequence to the following number gradually approaches 0.com BLESS MY PIPS of rabbits: one that is able to breed and one that is too young to breed.55. 3+5=8. we have five pairs.1. we have three pairs (two can breed. which will multiply to 293 pairs by the end of the eleventh month.3.6 5:8 = 0. If we fast forward a few months to the tenth month.144.619 .5 2:3 = 0. 1+2=3. 5+8=13 et cetera.615 13:21 = 0.625 21:13 = 126.96.36.1998. Check it out: 1+1=2. bringing our grand total to 377 rabbits. In the eleventh month. For example: 13:8 = 1. Fibonacci says that we will have 144 pairs. 144 more rabbits will be born.13.377 and on and on.618.89.34. one cannot) and in the third month.625 8:13 = 0.615 34:24 = 1.233. 2+3=5.21.67 3:5 = 0.162 www. you’ll end up with your next number.fxclub.2. If you wanted to do something crazy and find the ratio of any number against the preceding number.619 and so on. In the next month. That is a lot of rabbits. Take a look: 1:1 = 1 1:2 = 0. you would find that the answer would be numbers that gradually reach 1. Fibonacci’s sequence of numbers is as follows: 1. Furthermore.
BLESS MY PIPS www. the closer they approach 0. architecture and biology.. fine arts. You can find other interesting ratios that approach similar numbers.com 163 In both cases.618 and 1. 21:8. By using the golden ratio. 24:13). The Greeks used this ratio when building the Parthenon and the Egyptians used it to build the great pyramid at Giza. too (for example. the higher the numbers in the ratio. 8:21. he was not the first to discover them.e. traders have used the golden ratio to predict where price will move after price rebounds and to plot support and resistance lines. Plato. I mentioned that Elliott couldn’t have made his wave theory had it not been for Fibonacci’s findings. These price rebounds are known as retracements or as corrections. 13:24) while 2.382 is found from the ratio of any number to the number next to it (i. .fxclub. This is because each wave in Elliott’s theory corresponds to Fibonacci’s numbers.618 is found from the ratio of any number to the number preceding (i.. which helps us to determine where price will move in the near future. They called these numbers the “golden ratio” or “golden section. This golden ratio was used by the likes of Pythagoras. The ancient Greek and Egyptian mathematicians had working knowledge of these two numbers. In the beginning of this section. and Leonardo da Vinci.” This number was used to develop music. we can even figure out where we are in the Elliot wave cycle. So why is this number important to you as a trader? Thanks to Fibonacci’s findings.618. the number 0. Although Fibonacci developed a method to reach these two numbers.e.
618.3 Fibonacci retracements plotted on an Elliot impulse waves In the Rumus platform.618. your first step would be to click on the highest high.6.382 and 62% coming from . you’d plot 1. we should trace the Fibonacci lines from the lowest low to the highest high. Dow had a similar idea.fxclub.8 and 423. Two of these numbers are directly derived from the golden ratio (38% coming from . Now you have to drag this line down to the lowest low. These are used as support and resistance lines. and 62%. or the levels of support and resistance that occur beyond current market highs or market lows. Feel free to use your zig zag indicator to help you spot these high points. or in laymen’s terms. you’d plot them as 0. if we’re in an upward trending market. When plotting extension levels. you can access Fibonacci lines.500 and 0. Adversely.382. but preferred using 33% and 66%. 0.com BLESS MY PIPS Fig 4. To plot a Fibonacci line in a downward trending market. These lines are price retracement levels. In the Rumus platform. Mr. 261. The software will automatically plot all of the levels that you choose to plot. the “rebound” levels. .164 www.618). The most common price retracement levels are 38%. 50%.
BLESS MY PIPS www.com 165 It’s important to note that the popularity of Fibonacci numbers is enormous. With so many traders trusting in them. .fxclub. the sheer volume of their trades in relation to where Fibonacci lines appear is enough to move the market.
only to find in the morning that you made a considerable loss. It probably felt very rewarding.” In our case. After all. it is emotions and the acknowledgement of these emotions that make us human. that swing is your hard-earned cash. No worries. All of the lessons.seCTion Five Trading Systems If you read this book from the cover to this very sentence. and tips you read about in this book can be instantly erased from your memory. 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. You may have plotted a few trades and let them sit over night while you slept like a baby. I’m sure that by now you’ve placed a few trades on a practice account. If you are able to . As an old song once stated. right? It’s just a practice account. congratulations! You have just absorbed a considerable amount of information about the forex market. tricks. forgotten. or ignored the moment you start trading with your money. Do not fear these emotions. You’re going to experience feelings that would not affect if you were using a practice account. “It don’t mean a thing if it ain’t got that swing. The rules change when you place real money into your account.
conquering the forex market will come more easily for you.com BLESS MY PIPS conquer your emotions.fxclub. .168 www.
stare yourself dead in the eye and say. you may find it very hard to lose money on the forex market. “Who are you?” Now think hard on that question. When you trade with real money on the forex market. and your worst enemies. or it may come to you during your last breath. and what did you hate about your enemies? Why did your enemies hate you? Think back on your favorite toy. Humans are interesting creatures who often project different dispositions to different people.1 Market Psychology L ET’S take a moment for some much needed self-analysis. and then you resume your sousearching. for example. 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. if you are someone who gets teary-eyed at the thought of dropping a coin down a 169 . Notice how your eyebrows shuffle around while you’re in deep thought. you may gain complete understanding of your true self. you may find that you have acquired different fears. We hide our fears to some. March yourself right up to a mirror.5. Sometimes. What was it about your friends that made you bond. someone who spends money freely and doesn’t care too much about personal savings. Who are you? “Have I ever thought about this question before?” you briefly think. we even hide our deepest fears from ourselves. Think back on your birthdays. a doll. your best friends. 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. while displaying them to people around whom we feel more comfortable. Adversely. Even if you are. Think back on your childhood memories and all of the joys and pains that you felt. The answer may come to you now. whether it was a ball. it may come to you ten years from now.
but if you keep your feelings in check. Just one more minute. You are now driven by greed to hold the position. 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. blinded by greed. you overlooked something. But. Greed kicks in when the market is in a frenzy. They want to ride on the coat tails of this trend in order to get soaring profits. These two emotions are feelings that haunt every trader. a chart pattern. that your hard earned cash would vanish before your eyes. we live in an age in which it’s believed that money can buy us happiness. a warning from an indicator. but never let your fear take control of you. This is good. and then you’ll close your position. Let’s face it. Just another minute. or even turned into tremendous losses. you must click a button and then govern your emotions. nothing in life is as simple as clicking a button and making money. But in your greed. Alas. you say. alas. causing a correction. Price makes new moves and all the while you’re compromising with yourself. The greed intensifies as you watch your profits and losses hit limits you’ve never seen them hit. Then you begin to change the rules a little. anything. and you find that those tremendous profits have dwindled. chooses to hold his position to get their profits back up. you may find that you’re not deeply affected by losses made while trading. Greed and fear are the names of the game. you’re making profits. Greed as you watch your hard earned money multiply by the second.170 www. You’ll close the position if it reaches a new level. Just one more minute. as a trader. So what do you. No. Both emotions can be costly if you allow them to overwhelm your senses. He may find that their hard-earned profits dwindle to nothing. In this hypothetical situation. Perhaps you and the other greedy traders like you overbought or oversold a currency. It could be a support or resistance breach.fxclub. An example would be when most traders notice a powerful trend occurring. The main component that feeds into fear is the thought of the pains you will feel if you lose your money. they can also help you to profit greatly. do? You trade with the trend. Never overlook your fear. No one wants to lose his or her money. Can . in this case you would be making money.com BLESS MY PIPS storm drain. many a rational man . Suddenly the market turns on you. Fear that the market will turn on you at any moment.
Money can buy us comfort. However. he feels regret. you will feel these emotions. 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. watching a huge bull and a huge bear pull on a rope.fxclub. . Look yourself in the mirror and ask. If his fears are correct and price moves against him. “Who are you?” Once you get your answer. he sits on the sidelines. you may have a strong fear of losing money. Unless you have attained Zen or live on a higher plane of existence. and to most people. there is a sense of relief. you’ll be better equipped to dealing with the nullification of greed and fear. if his fears turn out to be irrational and price soars in the direction that they wanted to trade. fear often prevents traders from making profits.com 171 money buy us happiness? The question is open to debate.BLESS MY PIPS www. which often causes direct losses. comfort equates to happiness. Unlike greed. This fear prevents a trader from buying a new high or selling a new low. Instead.
you just lost all of your money.2 Forex Trading Best Practices A S a forex trader. The forex market isn’t a get-rich-quick device that you can use to buy that new yacht you had your eye on. If you’re trading the EUR/USD. Leverage increases your exposure to the markets by up to a fifty times. The amount that a pair moves varies from day to day. You can make a whole lot of money using leverage. Let’s say you have a deposit of $1. but that’s okay. but seeing a currency pair move 100 pips or more in a day is not unheard of. The best way to go about maxing out profits and cutting losses is to follow forex’s best practices. Don’t take these lessons for granted – it’s better that you learn them from this book than you learn them from your personal (possibly negative) experiences. If you place every dollar into a trade using the maximum leverage of 50:1. your job is to maximize your profits while minimizing your losses. there is no guarantee that you will make a profit and there will always be the possibility of incurring losses. Use limited leverage Leverage. you can control a $50. Slow and steady wins this race.000. your profits won’t be as large. can be the greatest pat on the back or the hardest punch in the face. however. If the market moves a hundred points against you. Let’s keep things safe. say. your losses will not be as austere as if you used. 173 . but you can also lose all of your money using it. It’s a market in which you can make steady profits that will ideally grow over time. This way. that means that each point you move will equate to $5.000 trade on the forex market. Sure.5. My rule of thumb is to use a leverage of 10:1 to 20:1. 50:1 leverage.00.
far from it. I consider it money lost. know how much money each move on the market will equate to. Personally.174 www. you will do better on the forex market. If.com BLESS MY PIPS Have a realistic idea of how much you can make I wrote this tip in regards to your take-profit and stop-loss orders. If I lose. I am spending the money on this lottery ticket because I can afford to lose it and because the loss of this money won’t otherwise affect my life. but if you consider each dollar that you place into a trade money lost. What I am saying is that you should consider every dollar that you place into a trade money that is already lost. . The idea is a bit of a catch-22. The possibility of losses is far greater on the forex market than on lottery tickets. In other words. I will use comparisons between trading on the forex market and buying a lottery ticket to better illustrate this idea. I understand that we’re not all millionaires and we all can’t just “lose” a hundred dollars every day on the forex market. This isn’t to say that forex trading is like gambling on lotto tickets. Before you enter a trade. The orders will basically be useless. where as lottery is simply blind luck. when I spend a couple of dollars on a scratch off. a tip to help you make money is to not care about making money. unless some unlikely occurrence moves the market price 1.000. Consider the time frame that you’re trading for. Realize the risk Every dollar that you place into a trade is at risk of being lost. for example. you know from reading this book that there are methods that you can use to help you place winning trades. it’s no problem. each move on the market will equate to $1. In addition. but if you divorce yourself from all emotional attachment to your money.fxclub. you’ll slowly find that those greedy and fearful emotions that most traders tend to feel while trading on the market will begin to dissolve. it’s a good day. No way. don’t set your take profits and stop losses at $1.000 pips. you find that with the money you’re placing on a trade. or a long-term trade. whether it be a one-day trade (a trade that occurs over a one-day period). If I win – hey. a swing trade (a trade that occurs over several days). and place your orders appropriately.
For example. chart patterns.BLESS MY PIPS www. When I look at a chart.fxclub. Elliot waves. in that both tips encourage traders to place a limited amount of money into each trade. I don’t sweat it. . if you are willing to risk a hundred dollars and profit two hundred dollars. you should start trading with more money in your account. With leverage. Different traders tend to follow a different set of rules. If you have an account of five hundred dollars. you should ask yourself how much money you would like to make from a trade and stick to that amount.com 175 Only trade 2%-5% of your account This tip is slightly related to tip number 1. that equates to having a buying power of 1. I just power down my trading platform and go out fishing.reward ratio would be 1:2. or ten dollars. The magic number that most professional traders swear by for opening a position is 2% to 5% of their trading balance for each trade. Fibonacci lines. If you’re not happy with the results that you’ll get by trading 1. and of times when you shouldn’t enter into the market. you probably shouldn’t enter a trade. 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. your risk-to. Use the information that I’ve given you about technical indicators. and the fundamental factors to estimate the proper times to enter a trade and the proper times to exit a trade. Many professional traders agree that 1:3 is a good risk to reward ration. Set Risk-to-Reward Ratios When creating a personal trading system. Using this rule. but they all follow the same risk-to-reward rule. support and resistance lines.000 units of currency (you’ll be seeing profits and losses of cents). When I can’t do this. If you’re ever uncertain about whether or not you should enter a trade. your safest bet would be to trade 2% of that.000 units of currency. I can say that X currency is going to rise because of Y reasons. Have a clear entry and exit plan There’s enough information in this book to inform you of the proper times to enter the market.
If you adapt a suitable trading strategy that works well to meet your trading goals. That’s fine. you will find that at one point or another. In all probability.176 www. don’t revenge trade. I want you to be successful on the forex market. friend. Be Zen.com BLESS MY PIPS Don’t revenge trade The markets can be as rewarding as they are cruel. I often got frustrated from a losing trade and went off to place half of my account at risk to make up lost grounds. I want to make people happy. you will incur losses. poorly planned trade right after making a loss to recover some ground. And when it didn’t work. irrational. When forex trading and I first began to tango. Sometimes it worked.fxclub. This tip is coming from the heart. What’s not fine is trying to make up your losses by quickly placing a large. It doesn’t work that way. no one can dream to run until he first learns to walk. there is a possibility of success on the market. However. Hear me out. sometimes it didn’t. I’m bleeding on this paper right now. I felt insult added to misery. .
Trading systems are as unique as the people who create them.5. which means that this new career choice will only be a part-time job. but when it comes to getting my work done. be totally reinvented. the frequency and times at which you trade are not important here. I like having a schedule and set number of rules. 177 . You may already be working a 9-5 job. you should treat the time you spend trading as time spent in a career. Forex traders adhere to something called a trading system. they can go about completing tasks at hand with greater ease and efficiency. Many forex traders will agree with me on that. or stay completely the same over a trader’s entire career. They can change over time. whether it is morning routine. A trading system is a personal set of rules that each trader sets up for him or herself. I can only set you on the path to create your own. That’s okay. exercise plan. Call me an Apollonian. Almost everyone has a schedule or set rules to which they adhere. Most people find that if they have a set schedule. What you need to do is create a trading system that you’ll know like the back of your hand. or bedtime preparations. it should match your personality and risk appetite. I give you these lessons that you must complete before you can become a forex master. You can form it however you’d like. I can’t tell you how to create your trading system. Like a Jedi master who is sending his Padawan off to create his or her lightsaber. and once you complete it. work schedule.3 Creating a Trading System A S a forex trader. What’s important is how you treat trading on the forex market.
Choose a Currency Pair Each currency pair is its own animal. Your next step towards mastering your system is to pick a currency pair that you are comfortable with. 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.178 www.com BLESS MY PIPS Choose a Time Frame Your first step to mastering the market is to work out a schedule. the options may be limited for obvious reasons. or the trader who will check in on his or her trades a few times a day? You must decide that for yourself. As time goes on. Notice how news affects this animal. but remember to not limit yourself to only this chart time frame. Choose Your Technical Analysis Now that you have devoted a set period of time to look at a specific currency pair. an adventurer and an observer. Work this into your daily routine – forex will now be what you do during this part of your daily routine. You must study this animal to see how it moves throughout the day. You must decide when in the day you are available to look at the charts. Although many pairs moving similarly or oppositely. Notice if there are any other currency pairs that move similarly to this animal. each component’s movements are wholly unique. it’s time to pick a time frame of charts that is easy to read and identify trends with. You will jump into the bush and spy on this animal’s every movement. and will choose to look at minute or tick charts. For those who are working 9-5 jobs. or hour charts. you will become an expert of this currency pair. You may prefer to look at day charts. because there’s always a bigger picture with the forex market. Find your chart time. Indicators will give you the . You may find that one currency pair moves slightly faster than you pair. it’s time to choose your indicators. Are you going to be the trader who stares at charts nonstop for hours on end. Perhaps you want something that covers a smaller period of time. in which case you may be able to look to that one for indications of where your currency pair will move. Pick a time that you can devote to the charts. You must become an explorer.fxclub. Once you’ve devoted a time for trading and have decided how often you will look at the charts.
Practice.com 179 edge on the market by revealing certain information that may otherwise be unknown to you from looking at price charts alone. While trading on a live account.BLESS MY PIPS www. you may resume live trading again. If you start to notice that your price lines are being drowned by bright indicator lines. If you find that you’re making consistent back-to-back wins on your trades. Practice.fxclub. Practice Apply your trading system to a practice account. Choose Your Risk-to-Reward Ratio And while you’re at it. and continue to trade on your practice account. develop financial goals that you wish to accomplish. Pick your volume indicators. . give yourself a break from live trading. or trend spotting indicators. Learn what went wrong with the failed trade. Go back to a practice account and analyze your failed position. If you find that you’re continuing to make back-to-back winning trades with your practice account. if you make a considerable loss. it’s time to start trading on a live account with real money. or moving average indicators. it may be time to cut down on your indicator usage. Remember to not over complicate your chart.
It’s been fun. visit their official site at www. fxclub. reader.4 Forex Club’s homepage 181 . you can watch their online videos at http://www.5. which is featured as a black button on the left-hand side of the screen.com and click on the “Open Live Account” button. The only thing you need now is a trading account. If you’ve studied these lessons thoroughly.com/intro-to-forex/. If you would like to learn even more about forex trading. Fig 5. To open a trading account with Forex Club.fxclub. Forex Club can offer you everything you need to get started on the forex market. you should now be well prepared to trade on the forex market.4 Trading on a Live Account W E’VE come to the end of our journey.
com.fxclub. org/basicnet/ where traders can submit the NFA ID numbers of brokers to see if any claims have been filed against said broker. traders do not have to worry about calculating spread costs.182 www. traders pay a commission cost of $0. you’re placing your trust in a company that is willing and eager to teach its traders how to make better educated trades. . Zero spreads and pay commission only when you profit. If you’d like to ask me any specific questions about the forex market or trading strategies. and I can answer any question you may have.nfa. you’re not only choosing to place your trust in a company that is regulated by the NFA (regulation #0358265). You can find an NFA search on this Web page: http://www. Please feel free to call us toll free at 1 (800) 881-3809 or contact us by email at info@fxclub. Forex Club offers unique advantages that you won’t find anywhere else.futures. we are here to answer them. If your trade dips into a loss.com BLESS MY PIPS When you choose to trade with Forex Club. My name on the forums is Mayday. If you have any questions. • No Spreads and Commission refunds On our simplistic ExpressFX platform. you can always visit our forums and post a question. Unique Advantages In addition to caring about our traders’ education. Forex Club prides itself on the abundant amount of quality educational materials that we can offer traders. Regulation Anyone can make a forex Web site and sell you empty promises with hefty price tags. In the United States. you will instantly be refunded your commission fee. 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. Instead.40 per trade on all pairs available on the platform.
• News uploaded into platforms . a trader can switch his or her position from buy to sell or sell to buy without closing the position.fxclub.S. go right ahead. At Forex Club. The signals offered by Trading Central are perfect for traders who are looking for trading ideas or who want confirmation on their trades. This program automatically finds emerging chart patterns in the market and alerts you of these signals. With other brokers. • Leverage in the base currency Forex Club offers leverage in the base currency. Trading Central is a world renowned research provider for individual and professional market investors.com 183 • Position U-Turns Another unique advantage that Forex Club offers is called position U-Turns. all traders are given Autochartist market signal software. This is a great feature if you want to cut losses or ride out a reversal trend to intensify your profits. we won’t stop you. Forex Club also offers signals from actual professional analysts. With position U-Turns. if you wanted to trade a pair like EUR/GBP. 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. you would have to convert the currency you deposited into your account to the base currency in order to place a trade. What does that mean? Let’s say that you want to fund your account with five hundred U. dollars. we offer leverage in the base currency. • 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.BLESS MY PIPS www. If you want to command 500 GBP using 500 USD.
When you’re ready to trade. we’ll be here to help you every step of the way.You won’t miss out on any news releases. I’d like to leave you with the parting words of the Introduction to Forex Trading book. which was the first book on trading forex I’ve ever read. written by Slava Taran and Dennis Carr. as Dow Jones news feeds. Bloomberg and price quotes are fed directly into all of our trading platforms. . Until then.
It’s a revolt against boring convention and the dull compulsion of the economic. I know of very few things I would take seriously. 185 . I’d try to make more mistakes next time. It is a dusty leather jacket. It’s a dream. Everyone is familiar with this company: it produces powerful motorcycles. I would relax. I would be sillier than I have been this trip. for many people a Harley is much. symbolizing freedom and individuality.And in Conclusion: HARLEY-DAVIDSON T HE photograph and the text that you see in the figure below is an original Harley Davidson advertisement. another way of life. much more than a mere motorbike. However. 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.
Forex. day after day. if I had to do it over again.com BLESS MY PIPS I would take more chances. I would start bare-footed earlier in the spring and stay that way later in the fall. swim more rivers and watch more sunsets. I’d pick more daisies. I have had my moments and. I would play hooky more. Your priceless treasure is time. I am one of those people who live prophylactically and sanely and sensibly. I would have more of them. if you will. Ask yourself to what extent you are richer than this old man. a way of living. You see. discoveries. I would ride on more merry-go-rounds. I would climb more mountains. If I had to live my life over. I would take more trips. is more than a mere trade. What do you want from your life? Would you like to fill it with adventures. to be free and a true individual? Then… look for your own Harley. just like Harley. Oh. hour after hour. the basis of which is the belief that a person can achieve tremendous material and spiritual freedom. In fact I’d try to have nothing else. It is. battles and victories? Would you like to stand out from the crowd. thanks to his or her own mind. business or interesting pastime. try to catch your dream. Just moments. Life is so short! Good luck! . one after another.fxclub. Try it and see. I would have more actual troubles and fewer imaginary ones.186 www. I would eat more ice creams and less beans. Look into the eyes of this old man once again.
fxclub. like understanding Elliott Waves. like the market’s trading hours. 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. A ﬁrst time trader to Forex can’t hope to be proﬁtable without the proper understanding of the markets.com www. Education and knowledge of the markets continue to be the backbone of every successful investor’s trades. to more complex information. this book can prepare you to trade currency with conﬁdence.com 9 780578 058467 . ISBN 978-0-578-05846-7 Phone: 1-800-881-3809 Email: Info@FXClub. investors can trade on the markets in a fashion that will both maximize proﬁts while minimizing losses. Bless My Pips is the perfect educational foundation for all ﬁrst time investors. By knowing what moves the markets and the small nuances that price makes prior to a breakout.The greatest investments don’t come in the form of a winning stock or a strengthening currency – the greatest investments come in the form of learning materials. Even if you have never heard of the Forex market before.
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