Beginners Ebook

Forex Trading for Beginners
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Contents
Introduction ................................................................................................................................ 4
Chapter 1: How Much Money Do I Need to Start Trading Forex? .......................................... 5

Forex Broker Minimum Position Size and Maximum Leverage ....................................................... 6
Forex Brokers Offering Nano Lot Trading ........................................................................................ 6
How Risk Management Affects Deposit Size ................................................................................... 7
How Stop Losses Affect Deposit Size ............................................................................................... 8
How Much Money Do I Need to Position Trade Forex? ................................................................... 8
How Much Money Do I Need to Swing Trade Forex? ...................................................................... 9
How Much Money Do I Need to Scalp or Day Trade Forex? ........................................................... 9
Can I Start Trading Forex with $100? ............................................................................................... 9
Is It Worth Trading Forex with a Low Minimum Deposit?............................................................... 9
FAQs ................................................................................................................................................ 10
Chapter 2: How to Read Fundamental Analysis in Forex ...................................................... 12

Fundamental Case Study: the U.S. Dollar ....................................................................................... 13
The Forex Economic Calendar ........................................................................................................ 14
Making and Applying a Fundamental Analysis .............................................................................. 15
Trading with Fundamentals: A Warning ......................................................................................... 16
FAQs ................................................................................................................................................ 17
Chapter 3: Technical Analysis: How to Recognize and Profit from Forex Chart Patterns .... 18
What are Forex Chart Patterns? ....................................................................................................... 18
Types of Forex Chart Patterns ......................................................................................................... 18
Top Chart Patterns Every Trader Should Know .............................................................................. 20
How to Read Forex Chart Patterns in Trading ................................................................................ 31
Pros and Cons of Forex Chart Patterns ............................................................................................ 32
Final Thoughts About Technical Trading ........................................................................................ 32
Chapter 4: How to Use the Weekly Time Frame in Forex Trading....................................... 34

What is a Time Frame in Forex Trading? ........................................................................................ 34
Why You Should Use the Weekly Time Frame in Forex Trading .................................................. 34
How to Measure Trends with the Weekly Time Frame ................................................................... 35
Should You Use Only One Time Frame in Forex Trading? ............................................................ 37
Multi Time Frame Trading with the Weekly Time Frame .............................................................. 38
Trading with the Weekly Time Frame Only .................................................................................... 40
In Sum: How to Use the Weekly Time Frame in Forex trading? .................................................... 43
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Chapter 5: How to Select Your Trade Entries ........................................................................ 44

First Things First: The Trend ........................................................................................................... 44
Moving Averages............................................................................................................................. 44
Candlestick Patterns......................................................................................................................... 45
Fibonacci Retracement .................................................................................................................... 45
Chapter 6: How to Trade Commodities .................................................................................. 47

Size Matters ..................................................................................................................................... 47
Fundamental Factors Differ ............................................................................................................. 48
Liquidity Varies ............................................................................................................................... 48
In Sum: Stick with the Majors ......................................................................................................... 49
Chapter 7: How to Trade Gold................................................................................................ 50

Trading Gold vs Investing in Gold .................................................................................................. 50
Where to Trade Gold ....................................................................................................................... 50
Trading Gold with Technical Analysis ............................................................................................ 58
Trading Gold Tips............................................................................................................................ 62
Chapter 8: “Long” and “Short” Trades Explained .................................................................. 64

Simplest Explanations ..................................................................................................................... 64
Long and Short Forex Trades .......................................................................................................... 65
Bottom Line ..................................................................................................................................... 66
Chapter 9: The Difference Between ECN & Standard Accounts ........................................... 67

The Network .................................................................................................................................... 67
Standard Account............................................................................................................................. 68
Pay Attention to Costs ..................................................................................................................... 68
ECN vs Standard Account FAQs..................................................................................................... 69
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Introduction
Trading currencies, aka, foreign exchange, aka Forex, is an excellent way to supplement your
income, or even to serve as a replacement for a standard 9-5 job – but profits won't start rolling
in until you understand how the markets work, how to find profitable entry points, and how to
manage your risk carefully. If you're looking for a quick buck, this isn't the ebook for you. But
if you're looking for tried and tested strategies to help you master the currency markets, you've
come to the right place. In this ebook, we'll take a look at some of the pressing questions that
new traders ask and answer them – and more. Take care to read this ebook carefully and to
practice your trading before depositing real money, and never trade with money that you can't
afford to lose. Let's get started!
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Chapter 1:
How Much Money Do I Need to Start Trading
Forex?
Although some Forex brokers will let you start trading with as little as $1, you will need to
deposit at least $12 with a broker offering nano lots or $120 with a broker offering micro lots
in order to day trade safely. The amount of money you need to start will depend upon your
broker’s:
• Minimum deposit requirement

• Minimum trade position size
• Maximum leverage
and your:
• Risk management strategy

• Trading style / average stop loss required
• Overall financial situation
In order to trade Forex effectively, you need a Forex broker. Trying to trade Forex using a
regular bank account or a money changer is too costly and slow to be a realistic option for
traders looking to profit from market movements (it should be fine for anyone just looking to
trade money for their upcoming travels).
Forex brokers won’t let you trade with real money until you have deposited their required
minimum deposit, which these days is usually about $100. However, there are Forex brokers
that require no minimum deposit at all, so theoretically you could start trading Forex
with as little as $1. Unfortunately, if you try to trade Forex with such a small amount of
money, you will quickly run into several problems, starting with minimum position sizes
and maximum leverage.
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Forex Broker Minimum Position Size and Maximum Leverage
The vast majority of Forex brokers will not let you make a trade sized smaller than 1 micro lot
(0.01 lots) which is worth 1,000 units of the base currency. For example, 1 micro lot of the
USD/JPY currency pair is worth $1,000. This means that you will need leverage in order to
make any trade in the USD/JPY currency pair with a deposit of less than $1,000. If a broker
offers a maximum leverage of 30 to 1 on this currency pair (typical in the European Union),
you will need to deposit at least $33.34 just to make one trade in USD/JPY. If maximum
leverage of 50 to 1 is offered (typical in the United States), you will need to deposit at least $20
to make a trade in USD/JPY. If maximum leverage of 500 to 1 is offered (typical in Australia),
you will need to deposit at least $2 to make a trade in USD/JPY.
Just because lots of leverage is offered to you as a trader, does not mean that it is wise to use
it. The minimum amount of money you need to make just one trade in Forex is determined by:
• The maximum leverage offered by your Forex broker in what you want to trade
(leverage varies from asset to asset and country to country); and
• The minimum position size you can trade with your broker in what you want to trade
(this is usually 1 micro lot).
There are a few Forex brokers allowing trading in a minimum position size even lower than 1
micro lot. This lower size is 1 nano lot, which is equal to 0.001 lots. Continuing with our
example of placing a trade in the USD/JPY currency pair, 1 nano lot would be equal to a
position size in cash of $100, so with leverage of 100 to 1, a deposit of $1 would be enough
margin to open that trade.
Forex Brokers Offering Nano Lot Trading
FXTM is a regulated Forex broker offering trading in nano lots. Their highest maximum
leverage offered is 1000 to 1 and their minimum deposit required is $10. There are several
other brokers also offering trading in nano lots. Oanda, for example, takes it even further and
allows you to place a trade with a position size as low as $1 or 1 unit of any other base currency,
meaning you can trade with $1 without using any leverage.
So far, we have considered only broker-imposed limitations affecting how much money you
need to start trading Forex. We still need to consider the issues of risk management, stop losses,
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meaningfulness of profits, and different types of trading styles, all of which are important
factors in answering this question.
How Risk Management Affects Deposit Size
We looked earlier at the minimum amount of money you need to enter just one trade. Yet Forex
trading involves taking a large number of trades. Even a position trader who might aim to
stay in winning trades for a few weeks or even a few months would probably expect to take at
least ten trades over a year, and shorter-term traders such as swing traders or scalpers many
more trades than that.
Forex trading involves losing trades. There is simply no way around that: any trader, even the
very best Forex trader, will lose at least one third of all the trades he makes. It is well known
that winning and losing trades are not evenly distributed: markets tend to go through winning
and losing streaks. This means that every trader should plan for a worst-case losing streak of
at least twenty losing trades in a row. Every trader should also plan for their worst
drawdown (peak to trough account decrease). Once your account Is down by more than 20%,
it gets harder and harder to get back to the peak, because the gain required to achieve it rises
exponentially. For example, if your account is down by 50%, you need to make 100% from
what remains to get back to where you were before the 50% loss.
Let’s assume you don’t ever want your trading account to be down by more than 20% and your
worst losing streak will probably be 20 losing trades in a row. This means that you should risk
no more than 1% of your account per trade. But wait – you may only ever lose 20 trades in a
row, but it is likely that your net losing trades within any major drawdown will be
approximately double that, with a few winners mixed in. This implies that you probably
should risk no more than 0.5% of your account on a single trade. Therefore, if you are
going to need due to minimum position sizing, leverage, and trade stop loss requirements, say
$1 for a single trade, you will have to multiply that by 200 to come up with the minimum
amount you need to trade Forex. You are also going to need to think about how big your typical
trade stop loss is going to be.
As well as losing streaks, traders have to worry about a wild, sudden price movement causing
massive slippage beyond a trade’s stop loss. This usually only happens with pegged or
manipulated currencies, such as the Swiss Franc in 2015. This is another reason why it is
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usually a good idea to risk only a small percentage of your account on any single trade. It
should also help to trade liquid major currencies such as the U.S. Dollar, Euro, and Japanese
Yen.
How Stop Losses Affect Deposit Size
You should never enter a trade without inputting a hard stop loss. The hard stop loss tells
your broker that when the trade has gone against you by a certain amount, to close the trade
immediately. Although the stop loss will not always be executed at the exact price given when
markets are volatile, it is a useful and very important way to limit your risk and control
your losses.
Stop losses should always be determined by technical analysis, not by how big a stop loss you
can “afford” due to the amount of money in your trading account.
For example, say you want to risk 0.5% of your account on a trade, and you want your typical
stop loss to be 100 pips. The smallest trade position size your broker allows is 1 micro lot,
which on a USD based currency costs $0.10 per pip. This means that your 100 pip stop loss
will require that you risk 100 X $0.10 which equals $10. You want this $10 to be no more than
0.5% of your account – and that means you are going to have to make a deposit of $2,000 to
start Forex trading with enough money to make 100 pip stop losses work, if your broker only
goes as low by size as micro lots.
Don’t ever make a stop loss smaller than you really want it to be just because you can’t “afford”
it with your account size. Either put more money in your account, find a Forex broker that
allows trading in nano lots, or consider switching to a style of trading which typically requires
tighter stop losses. The three styles of Forex trading are position trading, swing trading, and
scalping, and we’ll consider them each in turn.
How Much Money Do I Need to Position Trade Forex?
Position traders look for trades which take several days or even weeks or months to complete,
and so usually need to use stop losses of about 100 to 150 pips. Assuming you don’t want to
risk more than 0.5% of your account on any trade, and that you will never lose more than 20%
of your account, you should start with a deposit of at least $2,500 to $3,750 at a Forex
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broker offering trading in micro lots, or at least $250 to $375 at a Forex broker offering
nano lots.
How Much Money Do I Need to Swing Trade Forex?
Swing traders look for trades which take from between about one to eight days to complete,
and so usually need to use stop losses of about 30 to 60 pips. Assuming you don’t want to
risk more than 0.5% of your account on any trade, and that you will never lose more than 20%
of your account, you should start with a deposit of at least $720 to $1,440 at a Forex broker
offering trading in micro lots, or at least $72 to $144 at a Forex broker offering nano lots.
How Much Money Do I Need to Scalp or Day Trade Forex?
Scalpers or day traders look for trades which take only seconds, minutes, or perhaps a few
hours at most to complete, and so usually need to use stop losses of about 5 to 10
pips. Assuming you don’t want to risk more than 0.5% of your account on any trade, and that
you will never lose more than 20% of your account, you should start with a deposit of at least
$120 to $240 at a Forex broker offering trading in micro lots, or at least $12 to $24 at a
Forex broker offering nano lots.
Can I Start Trading Forex with $100?
The calculations discussed above show that it is absolutely possible to trade Forex safely
starting with an initial deposit of $100, if you use a Forex broker offering nano lots or smaller,
and you are day trading, scalping or swing trading.
Is It Worth Trading Forex with a Low Minimum Deposit?
A final issue to consider is, even if you can trade Forex safely with a small amount of money
such as $50 or $100, is it really worth it? It all depends how much these sums of money
mean to you and how much time and effort you are going to put into trading Forex.
For example, let’s say you double your money in a year. This is a great result for any trader
and will probably take a lot of work. Yet if you start with $100, you will only have $200 after
this great result. Maybe it isn’t worth it if you can, for example, save that amount of money by
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making other changes in your life (such as saving more) without putting your capital at risk. It
might be smarter to wait until you have a bigger amount to start with, because then such
profit would be more meaningful to you and feel like it is worth the work you put into
making it.
Nobody should ever trade Forex with money they cannot afford to lose, but you probably
won’t stay motivated for long if you trade with an amount of money which is so small and
trivial to you that you don’t feel like you care much about the result. You need to find a
balance which works for your trading style, your emotional style, and your financial
situation.
FAQs
Can I start trading Forex with $10?
There are Forex brokers which will allow you to start trading with a deposit of $10 or even
less. However, unless they offer trading in nano lots, you will only afford a maximum loss of
100 pips before your whole account would be gone.
Can I start Forex with $5?
There are Forex brokers which will allow you to start trading with a deposit of $5 or even less.
However, unless they offer trading in nano lots, you will only afford a maximum loss of 50
pips before your whole account would be gone.
Can I start trading with $100?
Yes, a large majority of Forex brokers require deposits of $100 or less, so this is enough capital
to start trading with most brokers, even if their minimum trade size is 1 micro-lot, which is
typical.
What is the smallest amount you can trade with Forex? How much does it take to start
Forex trading?
There are Forex brokers which will allow you to start trading with a deposit of $10 or even
less. However, it is wise to start with at least $12 at a broker offering trading in nano-lots or
$120 at a broker offering trading in micro-lots, to ensure that you do not take on too much risk.
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How do I start trading Forex?
Work out how much capital you have to start with, which should be at least $120 if you use a
broker offering micro-lots of $12 if you use a broker offering nano-lots. Then use our guide
to find the best Forex broker for you to choose the best broker fitting your personal
circumstances.
What is a good amount of money to start trading Forex?
To navigate the inherent risk of the Forex market and the longest losing streak a competent
trader will be likely to experience, you should start scalping with at least $120, swing trading
with at least $720, or position trading with at least $2,500, if you are using a broker offering
trading in micro-lots.
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Chapter 2:
How to Read Fundamental
Analysis in Forex
In terms of predicting price movements and identifying Forex trading opportunities,

there are two main approaches. One of them is technical analysis (which we'll address later
on in this ebook) which attempts to predict the direction a price is taking based on historical
price data and statistics.
The other main approach is performing a fundamental analysis which, as its name suggests, is
based on taking into account the economic fundamentals of a given asset, sector, or economy
to determine whether it is currently being traded higher or lower than its actual “fair price,"
assuming that eventually the price will reflect this information. In other words, the main goal
is establishing, based on publicly available data, whether the asset is undervalued, overvalued,
or priced “correctly”.
Another way of seeing it involves understanding that the Forex market is driven by supply and
demand, and that the fundamental approach aims for understanding the factors that affect
supply and demand for profit-making purposes.
Fundamental trading is a very popular method, though it is often linked to buy-and-hold

strategies instead of short-term trading. Some of the greatest investors, like Warren Buffet and
Benjamin Graham, often make their investment decisions based on fundamentals.
Stock traders usually base their fundamental assessments on the financial statements of the
company they are valuing. This allows them to determine whether it is appropriate to sell or to
buy a particular stock.
It is also possible to adopt this approach when it comes to performing an analysis of the
currency markets. Just as the financial statements of a given company can be used to determine
whether its stocks are trading higher or lower than the “fair price”, economic indices (which
help to measure the economic performance of a country) can help to determine whether a given
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currency is overpriced or not, or predict which direction the markets could take after its
publication or even over the longer run.
There are some factors that must be considered before beginning to explore this approach.
Firstly, some of the relevant economic indices have more impact on the performance of a
currency than others, this implies that the publication of certain indices or figures is more
prone to having a bigger influence in the markets than the publication of any other relevant
information or event. Furthermore, the markets often move on expectations for the future,
so the criteria and the anticipation of the experts and analysts regarding any economic
figure or event can end up being relevant before and after the information is released or
the event occurs.
Therefore, a trader that is interested in adopting this approach should not only pay attention to
the figures and events themselves, but also to analysts' forecasts, as the expectations could
affect the market's reaction in a significant way.
Fundamental Case Study: the U.S. Dollar
Let us take the U.S. dollar as an example. The U.S. dollar is the official currency of the United
States, which implies that its performance is supposed to be intrinsically linked with the state
of the US economy and the expectations for it. And not only that, the dollar’s price behavior is
also highly susceptible to events that are not necessarily related to the United States itself: any
specific event or data that is relevant to other currency could drive traders towards the U.S.
dollar, being the main competitor of some of the most important currencies (like the Euro or
the Yen) and a well-known safe haven asset.
In terms of relevant figures and indices, there are several that are regularly published by both
the United States government as well as private organizations. An example of this is the
Consumer Price Index (better known as CPI or the inflation rate) which is published by the
U.S. Department of Labor Statistics and is used to estimate whether the country is going
through an inflationary or a deflationary period.
Regardless of any personal opinion an individual trader may have in terms of interpreting what
this figure means for the economy of the United States, a decreasing CPI is usually perceived
as a positive signal by the markets, and vice versa.
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Market expectations for the CPI itself often end up affecting the performance of the currency.
Because of this, it is usual to find out that the publication of any figure has already been priced
in by the markets.
This is why sometimes markets do not seem to react as expected right after a significant event
or announcement, as sometimes the event itself is quite predictable and was already assimilated
by traders. Furthermore, sometimes the predictions turn out to be inaccurate, which can
cause an unexpected reaction in the markets.
For example, if the Federal Reserve announced an unexpected rate cut this would likely drive
investors to sell their dollar-denominated assets, which could put a significative downward
pressure on the dollar right after the announcement. Otherwise, they would have already taken
this outcome into consideration, which would not have caused such a dramatic reaction.
Just as the Consumer Price Index and the interest rate can be important pieces of information
for an experienced trader, there are several other economic indicators and events that can be
relevant for the performance of a given currency. The Non-Farm payrolls figure, among other
economic indicators, comes to mind in the case of the U.S. dollar.
Some of them tend to signal the actual state of the economy, such is the case of the
unemployment rate and the Gross Domestic Product figures. While others might just boost or
hinder the expectations about the future, interest rates announcements come to mind as an
example, as well as any announcement or statement made by government or central bank
officials.
This applies to other currencies as well. An increasing eurozone Consumer Price Index tends
to have a negative effect on the Euro’s performance, while a positive assessment of the
eurozone economy by the European Central Bank president may boost it.
The Forex Economic Calendar
Considering that it is usually very hard to keep track of all the relevant information pertaining
to any specific currency when engaged in currency trading, the need arises for an efficient way
to do so. While this information can be accessed easily from many news outlets, it may be more
convenient to have access to automatic updates. Many Forex brokers and news sites provide
access to one.
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A typical economic calendar not only provides key real-time information related to the most
popular currencies, but also provides the trader with information about any upcoming relevant
event that may influence the markets, the analysts’ expectations, previous figures and even the
likely degree of impact of the information that is being reported.
Most Economic calendars can be customized to only show the information that the trader
considers relevant. For example, if a trader is interested on trading the EUR/JPY pair he or she
could filter the calendar so only relevant information regarding the Euro and the Japanese Yen
appears.
Using the data provided by the economic calendar, an investor can determine whether a specific
currency has strong or weak fundamentals, which would help him to decide whether he should
buy, sell, or hold it.
An alternative or adjacent method to using an economic calendar and to relying on your own
fundamental assessments is basing your strategies on the perception of a third party. Some
news sites, trading platforms and brokers provide their own fundamental assessments to their
clients, so learning how to read fundamental analysis in forex and relying on their insights can
be a viable option.
Making and Applying a Fundamental Analysis
List all the currencies your Forex broker offers for trading. Look for recent data on those
currencies that may influence their behavior in an economic calendar. The Gross Domestic
Product and the Interest Rate are an example of commonly employed data to perform
fundamental analysis.
It is important to consider the actual figures as well as the market consensus forecasts, which
are also available on any regular economic calendar. This data can be used to analyze and
compare the trends and to ascertain if the actual figures were in line with the expert forecasts.
This last step is important since the impact of the publication of the economic data depends on
whether the information was unexpected by the markets: if the figure remains in line with the
market consensus, then the impact of its publication will be relatively lower as probably at that
point the information would have been already priced in the markets.
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For example, if the U.S. Bureau of Economic Analysis reports that the United States GDP
increased on the past quarter, this would be obviously a bullish sign as it signals strong
fundamentals. However, if the figure remained in line with the analysts forecasts it’s highly
likely that this data was already priced in the markets, so at the moment of its publication the
positive impact of this information on the dollar performance could be lower than if the data
came in much higher than expected.
It is important to note that the analysis could be way more effective if historical data, which is
also available on the regular economic calendar, is used. In this case, the historical data can be
used to determine whether the US economic performance is on an upwards trajectory, which
is a sign of a strongly growing economy.
It is better to complement your analysis using other relevant economic information, such as the
inflation level, or the manufacturing PMI. For example, a rising manufacturing PMI would
back up the case for a strongly growing US economy, aiding the bullish position, on the other
hand, a negative figure could weaken your assessment, which may be a sign to rethink your
strategy.
Using this approach, you can classify all currencies into three main groups:
1. Currencies with strong fundamentals: this suggests you should be bullish on this
currency.
2. Currencies with weak fundamentals: this suggests you should be bearish on this
currency.
3. Currencies that are a mixture: this suggest you should either avoid (at least for now)
or just be neutral about trading this currency.
If a specific currency has strong fundamentals, while one of its competitors does not, the
common approach is selling the currency with weak fundamentals against the one with bullish
fundamentals. For example, if your analysis suggests that you should be bullish on the Japanese
Yen and bearish on the Australian Dollar, then you should sell AUD/JPY.
Trading with Fundamentals: A Warning
Fundamental trading can be a very powerful method to make money in the markets, especially
if coupled with strategies that are based on technical analysis.
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However, you must realize that the markets may not react the way you expect after the release
of economic data, even if its meaning seems unambiguously positive or negative. As we
already mentioned, sometimes the markets already priced the event, or decide to interpret the
data in another way. For example, an overly positive unemployment figure could be interpreted
as a sign of the possible stagnation of the job market, or any other relevant piece of data that is
not positive (for example, lower average earnings) could be released at the same time and
attract the market’s attention.
FAQs
How do you conduct a fundamental analysis in Forex?
The best method to perform fundamental analysis in Forex is by keeping an economic calendar
on hand with all the relevant past and future information about the currencies you are trading.
Special attention should be paid to events that are listed as high impact.
How do you read a fundamental analysis?
Monitor the changes over time of a currency’s country’s major economic variables, such as
GDP, inflation (CPI), and the rate of interest. Compare the recent numbers here also to what
the forecasts were. If data is getting better and beating the forecasts, then the fundamentals
suggest the currency should be getting stronger.
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Chapter 3:
Technical Analysis: How to Recognize and Profit
from Forex Chart Patterns
When it comes to trading, understanding Forex chart patterns can be the difference between
being a gambler and putting the odds in one’s favor. Developing the skill to recognize the
major patterns in real time can give you a trading edge or improve your profitability as
an extra tool in your trading toolbox.
I will explain in this article how to read Forex chart patterns and candle formations and the best
way to identify opportunities within any single time frame. I will begin by answering some
basic questions about what Forex chart patterns are, although these patterns can occur in all
speculative markets and not just in Forex.
What are Forex Chart Patterns?
Forex chart patterns (or Forex candlestick formations) are structures of price movements
that tend to replicate themselves in different periods and time frames. They respond to
specific conditions that produce similar results. In that line, traders follow those patterns
to identify trading opportunities.
Forex chart patterns are based on technical analysis, and they represent price actions and
specific pair behaviors previously classified by historical movements and context. They help
traders identify market sentiment, mode, direction, and entry and exit points for trades.
Types of Forex Chart Patterns
The number of patterns that can potentially be identified within a single price chart is vast. It
can even grow every day as new assets, pair behaviors, and financial instruments are
continuously created. In other words, as the market evolves with the passage of time, so do
chart patterns.
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However, there are three popular types of Forex chart patterns that traders pay most
attention to and it is therefore a good idea to focus on these.
1. Continuation chart patterns – indicates price likely to continue moving in

same direction.
2. Neutral chart patterns – indicates price likely to continue to range
(consolidate).
3. Reversal chart patterns – indicates price likely to change direction.
Of course, there is no tool than can tell you with 100% certainty what is going to happen
in any market. As traders, we try to identify hints that, when aligned, show us potential
market directions. When clear Forex trading patterns arise, they are accurate more often than
not, but they can also fail. So, trade responsibly and use risk management tools.
Let us explore these types of Forex chart patterns.
Continuation Chart Patterns
As its name suggests, continuation chart patterns are price formations that signal the
dominant trend should continue if the pattern requirements are fulfilled. Continuation
formations usually happen when the pair consolidates recent runs. They can offer good
opportunities because “the trend is your friend”.
When these chart patterns occur, they suggest that investors are taking a breath before
resuming the ongoing trend. Trends rarely express themselves in direct straight lines, instead
tend to make lots of retracements and zigzags.
The most popular Forex continuation chart patterns are flags, rectangles, pennants, and
directional wedges.
Reversal Chart Patterns
Forex reversal chart patterns are formation which suggest winds of change have arrived on a
price chart. These chart patterns indicate that the dominant trend is coming to an end.
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Among popular reversal patterns are head and shoulders, double tops, double bottoms,
triple tops and bottoms, and directional wedges.
Neutral Chart Patterns
Also known as bilateral chart patterns, these price formations happen in both trending and
ranging markets. The key element here is that these Forex chart patterns can move the price
in either direction after a trigger occurs.
Popular neutral chart patterns include both symmetrical and asymmetrical triangles.
Top Chart Patterns Every Trader Should Know
Now we can talk in detail about the most popular patterns commonly seen in Forex charts.
Head and Shoulders (H&S)
Head and shoulder formations are reversal chart patterns. These can be found as the top
of an uptrend or as the bottom of a downtrend, with the latter known as an inverted head
and shoulders. It signals a change in trend direction from bullish to bearish or vice versa
depending upon whether it is occurring in an uptrend or in a downtrend.
When it acts as a topping pattern, the price structure shows three peaks; the first and the
third peak are similar in height, while the second is the highest. It signals a bullish to a bearish
trend change.
In traders' words, the first and the third peaks are known as the shoulders, and the second is
the head. Then, the neckline is the bottom after the first and second peaks. The signal comes
when the price action breaks below the neckline after the third peak.
Some traders state that the neckline should be strictly horizontal, but others prefer to also
consider necklines that are not equal. In that case, if the neckline slopes down, it signals
bearishness. In the other case, if it goes up, it signals bullishness.
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When trading this popular chart pattern, the entry point is located after the break of the
neckline following the third peak. Stop loss can be placed either above the second
shoulder or above the head. The profit taking target level will be determined by
measuring the height of the pattern between the neckline and the head, and then adding
that number of pips from the opening price. In simple terms, the profit target will be the
same height as the pattern.
On the other hand, please pay attention to the wider location of this or any other Forex chart
pattern as it could face strong resistance or support. Obviously, if a pattern had developed
and you are getting 75% of the profit target just ahead of a strong resistance, take your money
and secure your profit.
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Double Top
The double top chart pattern signals a reversal as it takes two rejections of a similar
resistance area and suggests price exhaustion. It describes a price movement that makes
two peaks following strong trending moves.
The signal comes when the price fails to break above a level twice and falls below the
valley's bottom between the two peaks, also called the neckline. The position is opened
after the price breaks below the neckline as a rejection of the second peak. Then, the
profit target is set by the distance between the tops and the neckline.
Obviously, you can revise your position once it is completed and let it go for further gains. You
can also close before a critical level if it has gone close enough to the profit target. Remember,
reading Forex chart patterns is not an exact science.
If you are a conservative trader, you can wait for a second confirmation in the form of a retest
of the neckline from the other side, which should hopefully then act as a resistance level.
Double Bottom
The double bottom chart pattern is a formation that combines two bottoms and a peak
between them. It signals a reversal from a bearish trend that turns into an uptrend. When
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the price is falling, it fails to break below a price level twice, and it breaks above the level
of the first retracement following the second bottom.
The position is opened when the price breaks above the neckline after the rejection of the
second bottom. Then, the profit target is set by the number of pips between the bottoms
and the neckline.
As always, you can revise your position once the trading plan is completed. You can also close
the position before the target price is reached if you see strong resistance ahead.
For a more conservative approach, wait for the rising pair to get back to retest the neckline
which should have become support.
2b Breakout
A “2b Breakout” is really just a double top or bottom, but one where the second top or
bottom quickly exceeds the high or low of the first top or bottom before reversing very
quickly and strongly. It is a failed breakout, and the faster and more dramatic its failure,
the better.
Now of course technically, every double top or bottom is a 2b breakout if the second top or
bottom exceeds the first one by any measure at all. However, we can usually distinguish
“true” 2b breakouts by the fact that there is a candlestick wick making the breakout, followed
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immediately by a strong candle in the opposite direction. The example of a triple top shown
above is a fairly good example of a 2b failed breakout on the third top: note the strongly
bearish candlestick immediately following the break.
This pattern is the most common of all the patterns covered in this article. For that reason,
be careful in picking which ones you will trade. They ideally will fall at price extremes which
are rarely touched.
Quasimodo (Over & Under)
This pattern is a triple top or bottom, but one where the middle top or bottom is lower
than the other two bottoms (if it is a bottom) or higher (if it is a top). This can be a very
powerful pattern and is often nested within other similar, longer term compounded
candlestick formations.
An example is shown in the gold chart below:
Referencing the numbers marked in the chart above, at 1, we can see the price made a
bottom, which had greater validity as it made another low after the spike before rising again.
At 2, the price made a low just barely below that slower low within the structure at 1: a double
bottom. However, within the second, longer-term bottoming, we can see almost equal but
higher lows (compared to the low at 2) which are shown at 3 and 4. If the price were now to
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rise suddenly, it would be based off both a double bottom and a Quasimodo, as well as a very
short-term double bottom at 4.
Here, a long entry would have made sense when the price broke up quickly to at least $1335,
with the stop loss placed just below either the lowest low at $1331 or alternatively the most
recent low at about $1331.40.
Often, the best and most effective compounded candlestick formations include several
elements all within the same structure, giving them greater power to push the price in the
same direction.
Square Root
A square root is a low followed by two higher but equal lows: equal to each other. In the
other direction, it would be a high followed by two lower but equal highs. It is called a
“square root” as its shape mimics the mathematical symbol for square root.
An example of a bearish square root formation is shown in the below chart of the GBP/USD
currency pair:
At the high marked as (1) in the chart above, we have a high, then at (2) and (3) we have
nearly equal lower highs that presage a strong downwards move.
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Note that it is also more or less a Quasimodo / over and under pattern too.
Here, a logical short entry would have been at around 1.3275, with the stop loss placed just
above the double top at 1.3345.
Ascending Triangle
As continuation patterns, ascending triangles talk about two different forces working
simultaneously in a chart. It always happens, bulls versus bears, but with ascending triangles,
the bears are located in a very concentrated area, while bulls are buying in the development
of an uptrend.
This advanced forex chart pattern happens when a pair follows a rising trendline. Still,
the unit starts a consolidation phase at a certain point, failing to make new highs as the
unit is rejected several times in the same area.
The entry signal comes when the Forex pair breaks above the triangle's upper side, which
triggers a rally. The profit target is then set taking the number of pips between the initial
low of the triangle and the break level. That number is added to the entry price level, and
the sum will give you the profit target.
Of course, the pattern fails if the price action falls below the upward sloping trendline instead
of breaking above the triangle.
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Descending Triangle
Descending triangles are another type of continuation pattern. Obviously, these are the
opposite of ascending triangles. These occur when a Forex pair is in a downtrend and then
begins a consolidation phase. Then, after breaking the triangle to the downside, it triggers a
further renewed downwards movement.
The signal is generated when the pair breaks below the supportive lower line of the
triangle. The profit target goes with the sum of the pips between the triangle's initial high
and the breaking point, from the price at the entry position.
The pattern is generally deemed to fail when the price action goes above the sloping
downwards trend line instead of breaking below the triangle.
Symmetrical Triangle
A symmetrical triangle is a Forex trading pattern that traders try to identify in any
timeframe. It is among the most common neutral chart formations, and it can provide
either a bullish or bearish entry signal.
A symmetrical triangle happens when two trend lines are converging in the chart.
Usually, an uptrend connects a series of higher lows, and a downtrend connects a series
of lower highs.
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The signal comes when the pair breaks above or below the symmetrical triangle pattern.
Profit targets would result from the sum between the low or high of the triangle and the
price where the position is entered. That number of pips is added to the opening price,
and the result is the profit target.
The stop loss is placed at the previous meaningful low or high before the break, depending
on the position's direction. The pattern fails when the triangle comes to an end, and the price
action remains in a neutral stance or range bound
Engulfing Pattern
Engulfing patterns are popular among candlestick chart users as it goes into the chart's
intrinsic nature. They can work in all time frames and can be easily identified. It suggests
an immediate and strong change in the direction of the Forex pair.
In an uptrend, this signal comes when a declining candle body completely engulfs the
prior rising candle body. In a downtrend, the call comes when a rising candlestick body
engulfs the previous down candle.
The position is opened after the engulfing candle is completed and a new candle is
generated. It trades in the closing direction of the engulfing candle. The stop loss is set
below the low or above the high of the pattern.
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Although there is no widely accepted profit target in this trading chart pattern, there are two
popular ways to determine a profit target.
Firstly, you can use the same chart pattern to identify subsequent trend changes and close
the position. Secondly, you can combine it with another strategy or technical levels, such
as Fibonacci, support and resistance, or round numbers, to set a take profit target.
Finally, this chart pattern can also be used as an exit strategy for other running trade positions
as it suggests a change in the odds of the pair from continuation to reversal.
Rising Wedges
Wedges are advanced forex chart patterns that work with a series of price movements
limited by converging trend lines. A wedge can be either rising or falling depending on
the movement's direction and are popular among Forex traders as having a good track
record as price reversal signals.
A rising wedge happens when a trend is moving between two parallel lines that are
converging slightly. It is formed by a series of higher lows and higher highs.
The entry signal comes when the price action falls below the rising wedge's bottom line
and performs a candle close below that breaking level. Then, the pair should retest the
support previously broken that is now acting as resistance as confirmation.
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The entry point is set at the confirmation level. Stop losses are usually placed at the swing
high previous to the break. The wedge chart pattern offers extra profit-taking options
depending on the strength of the break. As a profit level, you can select any preliminary
support set when the formation developed.
Falling Wedges
As the opposite of rising wedges, the falling wedge chart pattern occurs when a downtrend
moves between two semi-parallel lines. It is a succession of lower highs and lower lows in
which bears are initially in control.
The entry signal is generated when the price action breaks above the falling wedge's top
line and closes the period above that given line. Then, the pair should retest the resistance
previously broken that is now acting as support. This will be your confirmation.
The entry point is set at the confirmation level. Stop losses are usually placed at the low
previous to the break.
The wedge chart pattern offers several potential take profit target levels depending on the
strength of the break. You can select any preliminary resistance tested when the pattern was
forming.
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How to Read Forex Chart Patterns in Trading
Forex chart patterns are powerful graphical representations of what is going on in the market.
They help to identify potential movements and profitable trades. They represent a market's
technical conditions in real time and tell you what the market is doing right now.
As traders, we do not know for sure what will happen in the future, but we look for hints that
align in the same direction so that we can open and close positions with some confidence that
the odds are on our side. The idea behind chart patterns is that statistically, prices make
structures, and those structures anticipate reactions. Patterns give us hints.
However, the art of how to read forex chart patterns is incomplete if you do not apply other
studies such as volume (not always possible in Forex), risk/reward ratio, and
some fundamental factors.
The first step to trade a chart pattern is to locate a price structure that complies with all
requirements for that formation. Do not cheat by trying to force it because the market will
make you pay. A good chart pattern jumps out at you, you do not have to look for it too hard.
After identifying the pattern, you should consider how much money you are willing to put
at risk and how much your reward will be. Experts tend to recommend a 1 to 3 risk to
reward ratio, which means that you will get three pips for each one you put at risk if the trade
works out in your favor.
Now that you have your trading plan designed, examine wider market conditions, volume
in the pair, and independent aspects that can affect your trade. Such movements can be a
significant economic event, fundamental factors, or a considerable resistance or support line
just in front of the pattern.
Finally, follow your trading plan. Show respect for your analysis and follow profit targets and
stop losses. You can obviously do extra research once your targets are reached and adapt
yourself to any change in market conditions. Let your winners run and cut your losses.
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Pros and Cons of Forex Chart Patterns
As you may know, Forex trading is not an exact science; neither are the investment markets.
With that in mind, we should understand that no strategy can guarantee a 100% winning
formula. Like most things in life, popular chart patterns and formations have advantages and
disadvantages.
Pros of Chart Patterns
• Statistically, chart patterns provide hints on what a Forex pair will do in the near future.
• Chart patterns offer full trading plans, including opening price, take profit targets, and
stop losses.
• You can add other studies for confirmation and the chart should still work correctly.
• It is easy to learn and understand how to read Forex chart patterns.
Cons of Chart Patterns
• It takes time for chart patterns to form.

• Not all chart patterns work in more than two different time frames.
• Subjectivity can play a principal role in patterns localization.
• Chart patterns can deliver false signals.
Final Thoughts About Technical Trading
Should you use Forex chart patterns in your trading? It depends on what you are more
comfortable with and what adapts better to your trading profile. The good thing with chart
patterns is that several formations serve different needs and trading styles.
Before going live trading chart patterns with real money, test them in Forex demo
accounts so you can identify opportunities, adaptations, and problems with those price
structures.
Following longer-term compounded candlestick patterns on higher timeframes such as

the hourly chart, using a zoomed-out chart, can lead to much greater accuracy and an
ability to cherry-pick a higher percentage of truly profitable trades. It can be difficult to
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find many trades that line up precisely at predetermined support or resistance levels, which
is why using compounded candlestick formations to determine where support and resistance
has been found can be a more fruitful trading methodology.
Keep in mind that additional research is needed to identify which Forex trading patterns work
better in different pairs and timeframes. Remember, no market is the same as another, and
not all timeframes are equal. Many expert traders will only trade chart patterns on higher
time frame charts.
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Chapter 4:
How to Use the Weekly
Time Frame in Forex Trading
One of the main reasons why most Forex traders lose money is a failure to trade based upon
longer-term, higher time frames such as the weekly time frame. This chapter explains why and
how to use the weekly time frame in your Forex trading, and outlines both rules and actual
historical performances of a few weekly time frame trading strategies which you might use or
adapt.
What is a Time Frame in Forex Trading?
“Time frame” in Forex trading means the unit of time that the price chart you are viewing
is based on. For example, in a weekly time frame Japanese candlestick chart, each candlestick
represents one week of time. In a 5-minute time frame Japanese candlestick chart, each
candlestick represents 5 minutes of time. Shorter time frames show much more detail of
price movement over time, but longer time frames show wider, longer-term pictures of
trends and ranges in the price.
Why You Should Use the Weekly Time Frame in Forex

Trading
The most effective, profitable, and powerful tool you can use to trade Forex is to pay
attention to whether or not there is a long-term trend or range in any currency pairs or
crosses, especially the major pairs; and if so, in which direction that trend is going. Then,
make sure that you trade in the same direction as that trend, or trade reversals from support
and resistance when there is no trend and the price is ranging. Use a higher time frame price
chart such as the weekly time frame to make these calls.
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While you can use a daily time frame chart for the same purpose, you should use the weekly
time frame in Forex trading for this because it is easier to judge the very long-term price action
at a glance there. It is also a good idea to drill down and use at least one shorter time frame
chart as well, such as the 4 hour or hourly time frames, to fine-tune your trade entries
and exits to make them more precise, which also means more profitable.
How to Measure Trends with the Weekly Time Frame
The reason why the weekly time frame is the best time frame for trading Forex is because
historical Forex data shows that when the price is higher than it was several months ago, it is
more likely to rise than fall, and vice versa when the price is lower than it was several months
ago. So, if you pull up a weekly chart, one easy trick you can do to create the best trend
indicator, is count back 13 and 26 weeks from the current weekly candlestick. Is the price
now higher than it was at those times? If yes, you have a long-term uptrend. If it was
lower at both, you have a long-term downtrend. If the results are mixed, you have no
trend. Forget all the fancy Forex indicators – this is a method which is both very simple and
effective.
For example, the weekly timeframe chart of the EUR/USD currency pair below shows the
current weekly candlestick, on the far right, clearly below the opening prices of the
candlesticks from 13 and 26 weeks ago. So, there is a clear downtrend, and this week traders
can look for short trades in this currency pair.
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Weekly Time Frame: Long-term Downtrend
In another example, the weekly timeframe chart of the GBP/USD currency pair below shows
the current weekly candlestick, on the far right, closing above the opening price of the
candlestick from 13 weeks ago, but also below the opening price of the candlestick from 26
weeks ago. So, there is no long-term trend, and next week traders who want to trade this
currency pair should look to trade reversals at support and resistance levels.
Weekly Time Frame: No Long-term Trend
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Should You Use Only One Time Frame in Forex Trading?
Although a weekly time frame chart can show you a trading edge, in all except very limited
circumstances (explained in more detail below in the “Trading Forex with the Weekly Time
Frame Only” section), it is not smart to trade using the weekly time frame alone. In fact, using
just a single time frame to trade Forex is usually a bad idea, whatever time frame you
might pick. However, using higher time frames such as the weekly price chart, can at least tell
you whether there is a long-term trend and if so, in what direction.
There are several reasons why trading using the weekly time frame alone is usually a bad
idea:
• It is just too long-term and slow to use on its own. While you might easily hold a
good trade open on a short time frame such as 5 minutes for fifty candles, if you try
holding a trade open for 50 weeks, you will encounter many problems.
• Some Forex brokers impose a time limit on the duration of trades, forcing you to
close an open trade after it has been open for typically a few weeks or months. Few
brokers advertise this fact- you have to check the small print or ask the broker directly
to find out.
• All Forex brokers, unless you have an Islamic Forex broker account, will either charge
or pay you a small amount based on the size of your trade and the interbank interest
(“tom/next”) rates of the respective currencies in the pair. Usually, it is a charge and
not a credit – the system is biased against the trader and is a way Forex brokers can
make money quietly from long-term traders. Even if the fee is typically small, such as a
quarter of a pip per day, if you hold a trade open for a long time these overnight swap
fees add up and can really eat away at your profit.
• Professional traders always use a combination of long-term and short-term time
frames. Typically, professional traders will have three timeframe screens open for
whatever they are trading showing the daily, hourly, and 5-minute time frame charts.
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Multi Time Frame Trading with the Weekly Time Frame
Multiple time frame analysis is simply looking at two or more price charts for the same
Forex currency pair or cross or other instrument, at the same time. You make a multiple
time frame analysis by looking first at a higher time frame and using that chart to
determine whether the price is trending (and if so, in what direction) or ranging, and also
maybe to identify clear support and resistance levels. It is a top-down analysis, because once
you have that information from the higher time frame, you then use a lower time frame to
trade from that analysis, which will usually get you more precise trade entries and exits
which should maximize your reward to risk ratio.
There are a few good Forex trading strategies which have historically been profitable on
the weekly time frame, outlined below. You can use a shorter time frame as a tool to trade
these strategies more effectively.
The results detailed below are from back tests conducted on sixteen major and minor Forex
currency pairs over a very long period of almost 20 years, from 2001 to 2020. Thousands of
samples were taken, increasing the statistical validity of the back test.
Weekly Multi Time Frame Breakout Trend Strategy
• When a Forex currency pair or cross ended a week at its highest or lowest weekly
close for 26 weeks (equal to 6 months), in 51.10% of cases the next week closed
further in the direction of that breakout. However, on average the next week
closed against the trend by 0.04%.
• If we take only the USD currency pairs from the above example, in 53.94% of
cases the next week closed further in the direction of the trend. On average, the
next week closed further in the direction of the trend by 0.02%. Although this
second statistic is not encouraging, by use of a relatively tight hard stop loss, trading
long-term breakouts in USD currency pairs could be made into a profitable trading
strategy, but you should use a shorter time frame to make your trade entries
and exits more profitable.
• Example trade: reusing an earlier image, we see the EUR/USD currency pair with a
weekly candlestick making the lowest weekly close in 26 weeks – you can see there is
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not a single previous candlestick in the price chart with a lower close. The following
week, look for short trades on a shorter time frame such as the hourly or 4-hour time
frame.
Weekly Breakout Trend Strategy: Short Trade Entry
Weekly Multi Time Frame “Buy the Dips” Trend Strategy
• This strategy and all the following strategies rely upon mean reversion. “Mean
reversion” means that the price will likely revert back to its average after a
sustained directional movement away from the average. You trade mean reversion
just by waiting for a turn of direction back towards the average and opening a
position targeting the average.
• When a Forex currency pair or cross ended a week either above both its prices
from 13 and 26 weeks ago, or below both, but the week’s price movement from
open to close was against that trend, in 51.71% of cases the next week reversed
and went on to close further in the direction of that trend. On average the next
week closed with the trend by a further 0.09%, so “buy the dips” seems broadly to
work better in Forex than trading breakouts.
• If we take only the USD currency pairs from the above example, the results do not
improve. This means that the data shows that for USD currency pairs, the win rate has
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been better trading breakouts, but the overall trade expectancy for the next week was
better when “buying the dips”.
• Example trade: we see the EUR/USD currency pair with a weekly candlestick closing
up from its open – the green candlestick on the far right of the chart. However, this
close is below the opening prices of the weekly candlesticks of both 13 and 26 weeks
ago, so there is an opportunity here to “sell the rally” (the same as “buy the dip”). Next
week, look for short trades on a shorter time frame such as the hourly or 4-hour time
frame.
Weekly “Buy the Dips” Trend Strategy: Short Trade Entry
There are also two weekly trading strategies with good track records which can more
safely be used with only the weekly time frame.
Trading with the Weekly Time Frame Only
These strategies produce trades which are meant to be entered just as a week ends, and
held until the same time next week, without a stop loss. This can of course be traded more
precisely by using a shorter time frame as well.
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Weekly Time Frame “Buy the Strong Dips” Trend Strategy
• When a Forex currency pair or cross ended a week either above both its prices
from 13 and 26 weeks ago, or below both, but the week’s price movement from
open to close was against the trend by at least 2%, in 55.54% of cases the next
week reversed and went on to close further in the direction of that trend. On
average the next week closed with the trend by a further 0.41%, so this is
historically the best-performing trading strategy outlined within this article.
• This strategy does not produce trades very often, as a directional movement in
Forex of more than 2% from a weekly open to a weekly close is relatively rare and
has tended to happen in only approximately 3% of samples.
• This strategy is powerful, because it is based not only upon the market’s tendency
to both trend and revert to its mean, but also upon volatility clustering.
• Example trade: we see the GBP/AUD currency cross with a weekly candlestick closing
down from its open – the red candlestick on the far right of the price chart below. By
dividing its closing price by its opening price, we see the result is more than 1.02,
meaning we have a strong enough move to generate an entry signal. Also, this close
is above the opening prices of the weekly candlesticks of both 13 and 26 weeks ago,
so there is an opportunity here to “buy the dip”. You could either just enter long here
just before the week closes, or next week, look for long trades on a shorter time frame
such as the hourly or 4-hour time frame.
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Weekly “Buy the Strong Dips” Trend Strategy: Long Trade Entry
A back-test equity curve of this strategy using weekly moves from open to close greater than
2% in value trading 16 Forex currency pairs and crosses from 2001 to 2020 is shown
below. Trades were hypothetically entered at the end of a qualifying week and held until
the next week’s close. Spreads and overnight financing payments/charges were not
included.
Weekly “Buy the Strong Dips” Trend Strategy: Equity Curve
Weekly Time Frame “High Volatility Mean Reversion” Strategy
• This strategy is exactly the same as the previous strategy, just without the trend
element.
• All you are looking for is for a weekly candlestick to close with a price movement
from its open to close of at least 2%. Then you enter a trade in the opposite
direction and sell at the end of the next week, regardless of the trend. In 50.73% of
cases the next week reversed direction and closed up. On average the next week was
a winner by 0.20%.
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• Example trade: the example above can be used as illustration; you just don’t need to
check whether the price is above or below any previous candlesticks: a move from
open to close greater than 2% is enough to trigger a trade entry signal.
In Sum: How to use the weekly time frame in Forex trading?
1. Identify whether there is a long-term trend or range in a currency pair or cross by

checking price moves over last 3 and 6 months
2. Identify the direction of the long-term trend if there is one and trade it
3. Drill down to lower time frames to fine-tune your trade entries
4. Trade reversals from support and resistance when there is no trend and the price is
ranging
5. Buying dips in trends is usually more profitable than trading breakouts in Forex
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Chapter 5:
How to Select Your Trade Entries
While there is no “magic bullet” when it comes to entries for trades, there are some things
that you should keep in mind when choosing your trade entries. There's no question that
trading seems difficult at times and finding a good entry can be difficult. However, when you
place a trade, there is still a certain amount of probability coming into play. The thing about
trading is that you need to keep it simple. In other words, you need to know exactly what is
working for you, and then pay attention to those factors. The best way to trade is to make
sure that you have several simple and easily identifiable reasons to enter the market.
First Things First: The Trend
The most important thing for your entry should be to understand whether you are with the
trend or against it. In other words, if you’ve been rising in this market for months, and you are
looking to buy the currency, then it means that you are trading with the trend. However, if
you have an entrance into the market that is a short position, you are going against the longer-
term trend.
As a general rule, it is much wiser to enter with the longer-term trend, as the big money will
help you realize your gains much quicker than short-term speculators. When you look at a
chart and it’s been rising for the last several years, it’s obvious that buying is the intelligent
thing to do.
Moving Averages
Some people will use a specific moving average calculation to start buying. For example, a
moving average crossover system is quite often used by trend traders. A trend trader will wait
for a smaller time frame moving average to cross above a longer timeframe moving average
to start buying, or vice versa. One of the most common ways that traders employ this strategy
is to buy a currency pair won the 50-day EMA crosses above the 200-day EMA and sell when
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it breaks to the downside. However, you should also make sure that there is some type of
momentum, and the market isn’t simply chopping sideways as that can cause a lot of whipsaw
trading.
Candlestick Patterns
While there are literally hundreds of candlestick patterns you can choose from, there are
handful of them that catch most traders attention. I believe that probably the most important
one is going to be the hammer or shooting star, as it shows a complete reversal. If you can
marry that up with a major resistance level or perhaps even some other system, then you
have several reasons to enter a trade. In the next section, I talked about Fibonacci
retracement trading, and there is a perfect example of a shooting star that coincides nicely
with a major Fibonacci retracement level that a lot of traders will be paying attention to.
Fibonacci Retracement
There are a lot of traders out there that use Fibonacci retracement entries. Some of the most
common will be the 38.2% Fibonacci retracement, the 50% Fibonacci retracement, and the
61.8% Fibonacci retracement. This is especially interesting when there is also a round number
or previous support/resistance to back up a Fibonacci move as well. There is probably nothing
truly magical about Fibonacci when it comes to trading markets, but still, so many people pay
attention to it and in the end that's all that matters.
Typically, people will look for some type of candlestick pattern at one of those major Fibonacci
retracement levels, and place their trade based upon not only a supportive or resistance
candlestick pattern, but also the fact that so many people will be paying attention to these
levels.
A perfect entry could be something like the following: you are in a market that has been in
and uptrend for some time but has recently pulled back. That pullback has been a move down
to the 50% Fibonacci retracement level on the daily chart, forming a hammer on the daily
close. You also have the 200-day moving average just below the candle stick, and at the next
day opening you see the market rally a bit and break above the previous candle stick that had
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formed the hammer. These are all reasons that some traders will come in and start buying
this market. You have at least the trend, the retracement, the hammer, and the moving
average all backing up your trading opportunity. That is for reasons much more important
and much more likely to succeed than just entering the trade whenever.
However, I would point out that no matter how well put together this trade entry is, that
doesn’t necessarily mean that it’s going to work out. There are no certainties when it comes
to trading, so make sure that your money management is followed as well. After all, if you
have 1% risk put into a trade that goes against you, it’s not a huge deal. However, if you get
some type of major trade signal like the one mentioned previously and risk 10%, if the trade
goes against you it will be very destructive.
Keep your entry simple and recognize that you need other people to push the market in your
direction. It needs to be an entry that everybody can recognize, as this gives you the best
opportunities to make money in the market which of course can be somewhat erratic and
noisy at times. Remember that nothing is 100% guaranteed, so make sure you're prepared to
accept losses when they come.
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Chapter 6:
How to Trade Commodities
We've spoken a lot about trading Forex and how different strategies can help you make
money. Now we're going to look at the commodity market and see how it compares to the
Forex market and how you can diversify your trades.
Size Matters
Size matters when it comes to trading commodities. This is because of the futures markets.
Futures markets are standardized contracts that allow you to trade various commodities. In
order to place a trade in the commodity market of your choice, you need to put up the
necessary amount of margin to put that position into play, just as you would in the Forex
world. This is where futures markets can be a bit expensive for some people. While some
commodities are cheaper than others to be involved with, some commodities demand an
initial margin well over $5000 for one contract. Beyond that, the standardized contract means
that there is only one tick value available. For example, if you were to trade crude oil, each
tick is worth $12.50. There are so-called “mini contracts”, but they are normally not as liquid,
and still are very expensive for some traders.
This is where CFD providers come in. They allow you to trade less than a full contract, mainly
because you are not actually trading on the futures market. You are trading a contract
with your broker to pay or receive the difference between the opening price and the closing
price. It is because of this that your broker can offer the equivalent of 1 bushel of wheat as
opposed to the standard contract size, for example. In that sense, CFD brokers might be a
good option for you to consider.
A last choice may be trading commodities on the options markets, but lately options have
been extraordinarily volatile and expensive. Likewise, binary options have gotten a lot of bad
press lately, and in general can be extraordinarily dangerous because of the high amount of
leverage that they offer.
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Fundamental Factors Differ
Keep in mind that fundamental factors in the commodity markets can be a lot different than
what you are used to if you are a stock or currency trader. This is because you are dealing
with actual “things”, and not necessarily companies or economies. For example, a few years
ago there was a long string of floods along the Mississippi River and the surrounding area in
the United States. This had a massive effect on the price of wheat, as flooding became a major
issue. With crop destruction, this drove down the supply of wheat for the market, which
naturally would drive up the price.
It is because of this that the so-called “softs” in the futures markets, which are generally things
that grow in the ground, can be a bit challenging for some traders as weather patterns
become very important. Typically, when you are trading a currency you do not have to worry
about weather, unless there is some type of an anomaly like a tsunami hitting Japan. Overall,
weather very rarely enters the equation for currency traders. However, agricultural traders
that get involved with wheat, corn, soybeans, and many other markets live and die by weather
reports.
Precious metals are a completely different beast as well, as they often react to interest rate
expectations coming from the Federal Reserve. Similarly, the price of metals is directly
impacted by the strength of the US dollar, as most of the larger precious metal markets are
based in that currency. For this reason, it is imperative that you understand how the US dollar
fluctuates before you trade gold, silver, or other metals.
Liquidity Varies
Another thing to consider when getting involved in commodities markets is the liquidity of
the market being traded. Just because your futures broker offers the lumber markets, doesn’t
mean that you should be involved in them as they are very illiquid and typically are used for
hedging more than anything else. This is not a place for retail traders to be involved. Contrast
that with the EUR/USD pair, and you can see that there is a major difference in getting in or
out of a position. Many retail traders have been hurt by the lack of liquidity in a market that
they don’t understand.
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In Sum: Stick with the Majors
Commodity markets have varying liquidity, and if you are involved in a futures contract, that
liquidity can hurt you as the tick value can be extraordinarily large on some of these contracts.
It is because of this that typical retail traders should be trading things like crude oil, gold,
silver, corn, wheat, soybeans, natural gas, etc. Getting involved in milk, lumber, or even palm
oil may sound exotic, and therefore intriguing. However, this is an excellent way to lose
money.
That’s not to say that you can’t trade these commodities: you just need to have the
appropriate account size, which very few retail traders do. At the end of the day, it’s best to
stick with markets that are much more stable.
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Chapter 7:
How to Trade Gold
Trading gold should be a natural part of trading Forex. Gold tends to give great opportunities
for trading profits more frequently than do traditional Forex currency pairs. Traders with only
a few hundred or thousand dollars can trade gold online most cost-effectively using Forex /
CFD brokers offering trading in gold. Profitable gold trading is best achieved by applying
technical analysis methods, possibly filtered by fundamental analysis, the details of which are
outlined below with supporting historical price data.
Trading Gold vs Investing in Gold
There are several ways to invest or trade in gold.

Investing in gold means buying and holding for a long period of time, meaning months or
years. Trading in gold means both buying and selling several times within a shorter
period, such as a few days, hours, or even minutes.
You can invest in gold with just a few hundred U.S. Dollars by buying physical gold in the form
of coins or nuggets or by buying small amounts of shares in gold bullion held in secure vaults.
However, these methods are not practical for trading as they are slow and do not give an
ability to sell short. Also, gold coins do not directly mirror the value of gold, as they are marked
up at sale. Holding physical gold as an investment can also involve problems of proof and
storage.
Trading gold can allow you to make more frequent and larger profits, from fluctuations
in the price of gold both up and down, than you would through “buy and hold” investing.
Where to Trade Gold
If you want to make trades based on the price of gold, you will need to trade something very
closely linked to the value of gold, or the price of gold itself.
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Trading Gold Options & Futures
The ideal option for gold traders is to trade gold options or futures which represent real Gold
through a major, regulated exchange. However, this requires a deposit of at least $5,000 with
a futures brokerage, because the smallest gold futures contract represents just over 33
ounces of gold and buying or selling only a single contract will require this much margin to
support the trade.
Trading Gold ETFs
An alternative solution is to trade shares in an ETF (exchange traded fund) which owns gold
and whose price fluctuations will closely mirror fluctuations in the price of gold itself. The best
example of such an ETF is the SPDR Gold Trust. However, this requires opening an account
with a brokerage offering direct trading in stocks and shares. Such stockbrokers usually
require minimum deposits of several thousand U.S. Dollars and charge sizable minimum
commissions or spreads on every trade. One share in the SPDR Gold Trust will cost you
approximately one tenth of the value of an ounce of Gold priced in U.S. Dollars, so this is also
going to be an impracticably expensive gold trading method for most people who want to
make money trading gold with under $5,000, because it is hard to get maximum leverage
higher than 2 to 1.
Trading Gold Mining Shares
Another option for would-be gold traders is buying and selling shares in gold mining
companies, as the value of such shares is influenced by the value of Gold. However, this also
involves the same difficulties of speed, costs, and minimum deposit required, and has the
added drawback that the value of gold is just one of several factors driving the prices of mining
shares.
Trading Gold with a Forex Broker
This leaves one remaining method which is fast, easy, practical and cost-effective for
anyone wanting to spend just a few hundred or thousand dollars trading gold: opening
an account with a Forex / CFD brokerage offering trading in spot gold (the actual price
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of gold per ounce). Most Forex brokers offer trading in spot gold priced in U.S. Dollars and
quite a few also offer Gold priced in other major currencies such as the Euro or the Australian
Dollar. Almost every Forex / CFD broker offering gold allows trades as small as 10 ounces
of gold and a few even go as low as 1 ounce. With maximum leverage on gold trading at 20
to 1 in the European Union and at much higher levels applying to brokers outside the
European Union, it has become possible to trade gold both short and long with a deposit only
$100 at many Forex / CFD brokers.
Trading gold through a Forex / CFD brokerage can have two possible disadvantages which
you should be aware of. The spreads and commissions charged may be overly high, but there
are plenty of brokers which make a reasonable offering so you can avoid that. A potentially
bigger problem (unless you are only day trading) is that brokers will usually charge a fee for
every day you have an open trade past 5pm New York time, unless you open an Islamic
trading account. This means that if you are keeping a trade open for many days, or even for
weeks or months, you need to be sure the trade is doing well enough to justify this cost. Some
brokers publish these fees, which can change day to day, on their website. It is usually
described as “swap”, “tom/next”, or “overnight financing fee”. If your broker does not
publish it on their website, you should be able to find the current rates within their
trading platform. In the MetaTrader 4 trading platform, you can find a rate by right-clicking
in the “Market Watch” section on the trading symbol you want to check (e.g. XAU/USD) and
choosing “properties”. Usually, a different rate will be applied to long or short positions.
Rarely, the rate may be negative meaning you will get paid for holding a position overnight,
but this is very unlikely to happen to gold.
Forex brokers usually offer gold in their menu of assets as either “Gold” or as
“XAU/USD”.
Now we’ve established where and what to buy or sell to trade Gold, let’s look at how to trade
Gold.
The Best Gold Trading Strategies
Deciding upon the best gold trading strategy or strategies to use requires you to consider
the cases for trading gold using fundamental or technical analysis, or a combination of
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both. Let’s consider the basis of such strategies and how they have performed over recent
decades to help you make that decision.
Trading Gold with Fundamental Analysis
Unlike stocks and shares, or a valuable commodity such as crude oil, Gold has very little
intrinsic value as it has few practical uses. However, it is rare, and humans are attracted to it
and have attributed value to it by consensus. It is impossible to measure minor fluctuations
in that human perception from day to day, so in this sense, fundamental analysis is of limited
value.
Another aspect of Gold which differentiates it from fiat currencies such as the U.S. Dollar is
that its supply is limited. This should mean that a limited supply of Gold can be taken for
granted. A problem with this analysis is that almost all the world’s known Gold is held by
banks and governments, but nobody knows for sure exactly how much there is. It seems that
the large banks, who have colluded for years to fix the price of gold by means of a twice
daily “gold fix”, are able to manipulate perceptions of supply and demand.
Fortunately, a fundamental analysis of gold can be applied through a macroeconomic

analysis. For example, analysts traditionally see the value of gold rising under the following
circumstances:
• High inflation
• Economic crisis / instability
• Falling U.S. Dollar
• Negative real interest rates
Are these analysts correct? We can check the data since gold’s fully free float began in 1976
to see whether the price of gold correlates with these factors.
Correlation of Gold with U.S. Inflation
The U.S. has not seen historically high annual rates of inflation, defined as a rate greater than
6%, since the early 1980s. The U.S. suffered from high inflation during the late 1970s and
early 1980s, and the price of gold rose dramatically during this period. There was a strong
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correlation between gold and inflation over this time, but when inflation rose again during
the late 1980s the price of gold fell.
The bottom line is that the price of gold may be likely to rise when inflation reaches an
unusually high level, and there is a small positive correlation between the monthly change
in the gold price and the monthly U.S. inflation rate over the entire period from 1976 to
2019. The correlation coefficient between the two was 17.24%, with 100% indicating perfect
correlation and 0% indicating no correlation at all. This means that it is probably wise to only
expect gold to rise strongly when inflation reaches an unusually high rate, but it is also
reasonable to be more bullish on gold when inflation is rising and more bearish when inflation
in falling.
Gold / U.S. Inflation correlation chart
Correlation of Gold with Economic Crisis / Instability
Economic crisis or instability is difficult to measure objectively. However, there can be

little doubt that a country entering a major economic crisis tends to see the relative value of
its currency depreciate. Additionally, the worst economic crisis in the U.S.A. in recent decades
occurred during the 1970s, and this was a period during which the price of gold in U.S. Dollars
increased dramatically.
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More recent evidence that gold tends to rise during a period of serious economic crisis
appeared in 2020 as the coronavirus pandemic hit the U.S.A. and other western nations
starting in February. From March to July 2020, the price of gold in U.S. Dollars increased by
slightly less than 23%, from $1,586 to $1,948, exceeding the previous all-time high price of
$1,921 made by Gold in 2011.
Correlation of Gold with the U.S. Dollar Index
As gold is priced in U.S. Dollars, you would expect the price of gold in Dollars to be very
strongly positively correlated with the U.S. Dollar Index, which measures the fluctuation in
the relative value of the U.S. Dollar against a volume-weighted basket of other currencies. A
measurement of the correlation coefficient of all the monthly price changes in gold and
the U.S. Dollar Index from 1976 to 2019 shows a minor positive correlation of
approximately 25.23%.
Considering we are measuring the price of Gold with the U.S. Dollar, this correlation is not
very strong, but may have a use within technical analysis, which will be discussed later
within this article.
Gold / U.S. Dollar Index correlation chart
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Correlation of Gold with Negative Real Interest Rates
As gold is believed by many to be a store of value with a finite supply, while fiat currencies
can be debased or artificially inflated by the central banks and governments which control
them, it can be argued that the price of gold in a fiat currency such as the U.S. Dollar will be
bound to rise when the fiat currency is being debased. Indicators for the debasement of a
currency include high inflation, which we have already discussed, and negative real interest
rates. A currency has a negative real interest rate when its inflation rate is higher than its
interest rate because the currency is depreciating in value by more than it pays in interest, so
depositors of that currency make a net loss over time.
The problem we face here is that the U.S. Dollar has suffered a negative real interest rate only
twice since 1976: during a very brief period in the late 1970s, and then again during 2018 and
2019. This means that we don’t have a long enough sample to make a statistically
meaningful analysis of the correlation between gold and a negative interest rate, but it is
true that the price of gold in U.S. Dollars broadly rose during these periods, so it would
seem possible that there is a positive correlation.
Trading Gold with Seasonality
“Seasonality” is a form of fundamental analysis which is based upon a theory that demand for
an asset such as gold tends to peak or ebb with the seasons of the year. For example, the
price of natural gas would tend to rise during the winter in the northern hemisphere as cold
weather brings more demand. It is hard to see the same logic applying to gold, but the table
below shows that there have been certain months of the year where the price of gold has
tended to either outperform or underperform its average. I do not believe the concept of
seasonality applies well to trading Gold, but I present the data anyway. From 2001 to 2019,
the price of gold rose in 56% of months. The percentages of calendar months during this
period when Gold rose are shown below:
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Gold Seasonality
The data suggest that August and September have been especially good months for
buying gold while February and July have been good months for selling gold.
Gold Fundamental Analysis: Bottom Line
The precious metal has historically shown a tendency to rise in price during periods of
unusually high inflation, severe economic crisis, or negative real interest rates. Over the
long term, gold has not shown any meaningful positive or negative correlation with stock
markets.
On a more micro level, it is often true that when markets are in “risk off” mode, money tends
to flow into the Japanese Yen, Swiss Franc, and gold. Therefore, gold traders can learn to spot
“risk off” sentiment and look to enter long gold trades at these times.
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Trading Gold with Technical Analysis
Technical analysis is the art of determining whether future price movements can be
predicted from past price movements. Here we will look back at whether movements in
the price of Gold over recent decades have been able to tell us anything useful.
Gold has shown a long bias since 1976. Its price has risen over 51% of months, and the
average month has seen a price rise of 0.55%. The median monthly price change over this
period was a rise of 0.07%. These statistics suggest that gold, as a theoretically finite store or
value, may tend to rise against fiat currencies. If true, this suggests that looking for long trades
pays off more reliably than short trades. It seems logical that as fiat currencies suffer from
inflation while real assets such as gold and stocks do not, real assets like gold and stocks
will tend to rise in value over time.
Gold, like most major liquid speculative assets, tends to trend. This means that one of the
best technical analysis methods you can use here is defining whether gold is in a trend or
not, and then trading in the direction of the trend.
Trend Trading Gold
Gold is a commodity, prone to strong price movements. It is well known that one of the best
trading strategies for commodities is to trade breakouts in the direction of the long-term
trend. Let’s check the historical data and see how well trend trading gold has worked using
two different methods.
The first strategy involves trading breakouts. Let’s say that when the monthly closing price
of gold is the highest it has been in six months, that is a bullish breakout and we would take
a long trade. Conversely, when the monthly closing price is the lowest it has been in 6 months,
that is a bearish breakout and we would take a short trade. I will call this “Breakout Strategy”.
The second strategy is also a trend trading strategy, but less of a breakout strategy: it
enters long when a monthly close is higher than the closing price six months ago, or short
where lower. I will call this “Higher/Lower Strategy”.
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Let’s see how a back test of this strategy would have performed since 1976, assuming every
trade was held for one month and then exited.
Gold 6-Month Breakout Strategy Back Test
Both strategies have performed positively over almost half a century, in both long and
short trades, with the breakout strategy performing considerably better. It seems clear
that the best technical trading strategy for gold is to trade 6-month price breakouts, and
that trading with the 6-month trend even when the price is not making new highs or lows has
also worked quite well.
These back-test results are very strong. It is not easy to find a trading strategy which
would have performed as well as this over the same period using typical Forex currency
pairs, which is a good reason why you should trade gold if you are going to trade Forex.
Don’t forget that Forex / CFD brokers will usually charge you a fee to keep a trade open
overnight if you do not have an Islamic account. When you are trend trading and holding
trades for weeks or months, this can eat away at the profit of your trade. This is a reason why
you might want to trade with the trend but exit the trade after it stops going in your favor for
a few days, or even day trade gold in the direction of the trend. When day traders close their
trades before 5pm New York time, they pay no overnight swap fees.
One way to try to time entries to exploit the multi-month trend is to wait for some kind of
retracement on a shorter time frame such as the daily time frame, and then when a new day
closes in the direction of the trend and makes a higher close than the closes of the last two
days in an uptrend, for example, you have a shorter-term entry signal to use.
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How to Use Volatility to Trade Gold
“Volatility” in trading means how much the price of something fluctuates. You can use
average price movement, which we call average volatility or average true range, to
determine better trade entry points, because if volatility is relatively high today, it is likely
to also be relatively high tomorrow, suggesting a stronger movement in your favor is more
likely. Volatility is best measured using an indicator called Average True Range (ATR) which is
available in almost every trading platform or charting software package.
For example, suppose that the price of Gold is closing today at a 6-month high price. We have
already shown that there has been an edge in trading such long-term breakouts in the Gold
price. If you switch on the ATR indicator on your daily chart and set it to the last 15 days, it
will show you by how much the Gold price has moved per day on average over the last 15
days. If today’s price movement is significantly higher than the value shown by the ATR
indicator, that means that the price is breaking out to new highs on above-average
volatility. This means that tomorrow it is more likely to rise further than usual, as the
volatility is above average.
We can demonstrate this by looking at some historical data of the price of spot Gold from
2001 to 2019. Let’s compare the days when the price closed at a 100-day high or low price,
see whether the price continued in the same direction over the next, and by how much,
broken down by how strong the volatility was as measured by the 15-day ATR indicator.
Gold 100-Day Volatility Breakout Strategy Back Test
The historical data shows that during this period, more profitable trades were triggered
when the price of Gold moved in one day by more than the 15-day average daily price
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movement. On average, where the day’s price movement was above its 15-day ATR on a
breakout, it closed by a further 81 cents in the direction of the breakout the next day. Where
the day’s price movement was below its 15-day ATR on a breakout, it only made a further 51
cents the next day.
How to Day Trade Gold
Gold is very suitable for day traders. One advantage in day trading gold is avoiding the
cost of overnight swaps, which can be relatively large at many gold brokers. The main
disadvantage is that the spread plus commission for trading Gold is higher than in the major
Forex currency pairs, but this is compensated for by the higher average price movement in
gold.
Gold day traders are best advised to trade with the longer-term trend:
• If the price is HIGHER than it has been for the past 6 months, be STRONGLY
BULLISH
• If the price is HIGHER than it was 6 months ago but BELOW some of the prices
reached since then, be WEAKLY BULLISH
• If the price is LOWER than it has been for the past 6 months, be STRONGLY
BEARISH
• If the price is LOWER than it was 6 months ago but ABOVE some of the prices
reached since then, be WEAKLY BEARISH
• If the price has shown little direction over the past 6 months, trade REVERSALS
at obvious areas of support or resistance
Gold day traders should use shorter time frames to fine-tune entries in line with the above
points.
When is the Best Time to Trade Gold?
The price of gold tends to move more at certain times of the day. Day traders should try to
day trade gold during these more volatile times to take advantage of the increased price
movement.
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Best Time of Day to Trade Gold
The data show that the price of gold tends to move the most on average between Noon and
8pm London time, roughly corresponding to the hours when markets are open in eastern
and central U.S.A. This suggests that the best time of day to trade gold, whether as gold
options, gold futures, spot gold, or XAU/USD is from Noon to 8pm London time. This is
probably true because the major gold market opening times are within this period.
back to top
Trading Gold Tips
• It is worthwhile trading Gold as its price moves a lot and often trends strongly.
• Almost every Forex broker offers Gold trading.
• Trade with the 6-month trend. New 6-month breakouts are best.
• Enter on a price breakout or a pullback following the breakout.
• Fundamental analysis can be used to determine which technical analysis signals
are more likely to perform better.
• Take profit on winning trades by using some type of trailing stop.
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• Beware of overnight swap fees if you hope to keep a trade open for more than a
couple of days.
• Always use a hard stop loss based upon the value of the ATR indicator. Tight stops
such as half of the daily ATR tend to give good results.
• If the U.S. Dollar Index is trending up, you may feel more confident in taking short
trades in Gold priced in U.S. Dollars; if trending down, you may feel more
confident in long trades.
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Chapter 8:
“Long” and “Short” Trades Explained
When we talk about trading, we often use the expressions “long” and “short” to classify two
types of trades. It can be confusing to understand exactly what these terms mean, so in this
chapter, we're going to explain everything you ever wanted to know about what “long” and
“short” trades mean.
Simplest Explanations
The simplest way to classify “long” and “short” trades is to say that in any trade, you are long
of that from which you will profit if it rises in relative value, and short of that from which you
will profit if it falls in relative value.
For example, let’s say that you buy a stock of ABC Inc. with U.S. dollars. It can now be said
that you are “long” stock of ABC Inc. and “short” of U.S. dollars. This is because for you to
profit, the value of the ABC Inc. stock must rise against U.S. dollars, or alternatively, the value
of the U.S. dollar must fall against the stock of ABC Inc.
It should be pointed out that in a trade where you are short of a currency against some
tangible asset, you would usually refer to that only as a “long” trade, and not say that you
were “short” of the cash denomination. We will talk more about that later.
Another way to understand the difference between long and short trades is that if you make
a trade where you want the price to rise in a chart, you are long of that instrument. If you
want the price to fall in a chart, you are short of that instrument.
What, then, is a real “short” trade?
The Short Trade
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From the time of the Bretton Woods Agreements shortly after the end of the Second World
War until 1971, the value of the U.S. Dollar was defined as $35 per ounce of gold, and
therefore effectively the “price” of the greenback was the same as the price of gold. Most
major economic powers agreed to fix the value of their own currency to that of the greenback.
In 1971 the U.S. began a series of devaluations of the greenback compared to the price of
gold, before finally abandoning all linkage between the dollar and gold in 1976.
For this reason, there was very little Forex trading before the 1970s. Speculative traders
instead focused on stocks and commodities. Traders could make money by buying stocks and
commodities cheaply and selling them at a higher price. However, as traders wanted to find
a way to profit when they thought that prices were about to fall but didn’t already own any
stocks or commodities to sell, the practice of going “short” arose. Traders would go short
of stocks or commodities by borrowing the stocks or commodities in question, and then
selling them, before buying them back later at a hopefully cheaper price. The stocks or
commodities could then be returned to the loaner, and a profit taken from the difference
between the original sale price and the buy-back price. It should be noted that short sellers
would have to pay interest on any money borrowed initially that was required to purchase
the stocks or commodities to be sold.
Therefore, going short could be very different to going long. It should also be noted that stocks
and commodities – but especially stocks – tend to have a “long bias”, meaning that their value
is more likely to rise over time than fall. Falls in stock markets, or “bear markets” as they are
often called, tend to be faster and more violent than rising markets (“bull markets”). This is
arguably at least partly due to the fact that if you sell stocks that you have borrowed money
to pay for, you are more likely to panic if the trade starts moving against you, than if you own
stocks while the price is falling.
Long and Short Forex Trades
In Forex, things are different, because whether you are making “long” or “short” trades, you
are always long of one currency and short of another. If you buy, or go long, EUR/USD for
example, you are buying EUR with USD. You are long EUR and short USD. If you sell, or go
short, EUR/USD, then you are long USD and short EUR. It is really all the same.
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The only important factor regarding the long and short trades question in Forex is any interest
you might need to pay to your Forex broker if you hold a position overnight, or alternatively
receive from your broker. This is calculated by reference to the interest rates at which banks
lend particular currencies to each other, at least in theory. Unfortunately, Forex brokers
sometimes use this as a subtle way to make some extra money from their clients.
For example, let’s say you go long EUR/USD. You have, at least theoretically, bought EUR with
USD. If the inter-bank interest rate for USD is higher than it is for EUR, your broker might be
paying you some money each time you hold the position over the New York rollover time (i.e.
daily). This is because you are getting interest on your USD greater than the interest they are
getting on the EUR, and in theory, positions are “squared” at every New York rollover. On the
other hand, if the interest rate on the currency you are long of is less than the rate for the
currency you are short of, you will be charged some amount representing the difference every
day that the position is kept open.
Bottom Line
To summarize the meaning of “long” and “short” in the simplest terms possible, it can be
said that a long trade is one where you profit when the price goes up, while a short trade
is one where you profit when the price goes down. That is essentially all you need to know.
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Chapter 9:
The Difference Between ECN & Standard
Accounts
Now that you have a solid understanding of how to get started, it's important to find a Forex
broker that offers the right type of trading account for you. The biggest difference between
different brokers is whether they're offering a standard or ECN account. ECN stands for
Electronic Communication Network, simply meaning that computers are connected to each
other. It’s a bit of a broad term, but when it comes to Forex trading, it can be somewhat
advantageous.
The Network
The main reason why using an ECN can help you is that it offers liquidity through a
network. In other words, there are various bids and offers out there that are available for
trading, meaning that the spread between ask/bid can be quite tight. For example, you may
see spreads as tight as breakeven. You can buy or sell at the same price, but usually there is
some type of commission involved.
It is because of this that you must pay attention to commissions for ECN brokers because they
can be a bit expensive if you aren’t paying attention. In general, the commission works out to
be about one half of a PIP. Ultimately, that is cheaper if you are a more short-term trader and
have a several in and out positions. However, you may be thinking that even a longer-term
trader can take advantage of this, and while that’s true to a point, the reality is that it
isn’t as advantageous for a longer-term trader as it is a short-term trader. This is because
a longer-term trader doesn’t have to worry about the cost of transactions so much.
Another thing that you should be aware of is that liquidity can dry up occasionally. For
example, if you have the Nonfarm Payroll Numbers coming out, a lot of traders will choose
not to be in the marketplace. While your typical spread on the network might be 0.2 pips in
67
the EUR/USD pair, right around the announcement you may see something closer to 15 pips.
Obviously, that can drastically change your profitability if you aren’t careful.
As a general rule though, the network will keep relatively tight spreads most of the time,
especially if it is a larger network because there are more traders involved. Ultimately, a
profitable trader can take advantage of either type of broker, an ECN or standard broker.
Standard Account
In most cases, a standard account is generally thought of as one with the fixed spread. The
broker is the counterparty to any position you put on. It’s not always the case, but it often is.
The EUR/USD pair might be offering a spread of something like two pips, and while most of
the time that is more expensive than an ECN, when it comes to news related events it can
save you quite a bit of trouble.
The downside of course is that if you are a frequent trader, you might be paying something
like 1.5 pips extra per trade. People do not pay attention to the cost of execution, which is a
killer over the long term if you are not careful. However, if you are more apt to have a position
on for days or weeks, at this point neither is going to make much of a difference as you don’t
have a lot of cost involved.
Pay Attention to Costs
Figure out which broker you need based upon the idea of expenses. At the end of the day,
the only thing you need to worry about is whether or not the broker can give you a decent
and reliable fill, and of course whether or not it is fair. Forex brokers have come a long way
over the last 10 or 15 years and are much more reputable. The days of the wild west are
gone, so really at this point most traders will find that they can use either an ECN or a standard
account and make money.
If you are worried about the type of broker, the only time it really should come into play is if
you are a scalper. Otherwise, any difficulties you run into should not have anything to do with
the broker.
68
ECN vs Standard Account FAQs
What is the difference between true ECN and standard account?
A true ECN account matches orders and executes accordingly, charging only commission for
execution without placing any premium on the raw spread, while a standard account is usually
managed by a market-making broker which artificially charges a premium spread to profit
from execution.
What is an ECN account?
A true ECN (Electronic Communications Network) account is a pure order-matching execution

system, where the account provider charges a premium as commission per trade instead of
artificially inflating the raw spread which occurs naturally within the order-matching process.
What is ECN and STP?
“ECN” stands for “electronic communications network” and “STP” stands for “straight
through processing”. ECN brokers execute by matching client orders and STP brokers execute
by passing client orders directly to an external liquidity provider.
Which is better ECN or STP?
ECN accounts can offer tighter spreads and a cheaper overall cost of trading in liquid market
conditions, but STP brokerages can offer a similar ease and cost of execution without the
disadvantage of the increased cost from a dealing desk. Much will depend upon the quality
of the service and the liquidity of markets traded.
If you've made it to the end of this ebook, you've gotten a lot of information that can help
you begin your Forex trading journey and make it successful. The beauty of Forex trading is
that you can practice on a demo before you get started so that you can see how you'll perform
and profit in real time. We hope you've found this helpful, and that you're well on your way
to becoming a successful and satisfied Forex trader!
69

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Forex Trading for Beginners

Chapter 1: How Much Money Do I Need to Start Trading Forex? .......................................... 5

Chapter 2: How to Read Fundamental Analysis in Forex ...................................................... 12

Chapter 4: How to Use the Weekly Time Frame in Forex Trading....................................... 34

Chapter 5: How to Select Your Trade Entries ........................................................................ 44

Chapter 6: How to Trade Commodities .................................................................................. 47

Chapter 7: How to Trade Gold................................................................................................ 50

Chapter 8: “Long” and “Short” Trades Explained .................................................................. 64

Chapter 9: The Difference Between ECN & Standard Accounts ........................................... 67

• Minimum deposit requirement

• Risk management strategy

Forex Broker Minimum Position Size and Maximum Leverage

Forex Brokers Offering Nano Lot Trading

How Risk Management Affects Deposit Size

How Stop Losses Affect Deposit Size

How Much Money Do I Need to Position Trade Forex?

How Much Money Do I Need to Swing Trade Forex?

How Much Money Do I Need to Scalp or Day Trade Forex?

Can I Start Trading Forex with $100?

Is It Worth Trading Forex with a Low Minimum Deposit?

Can I start trading Forex with $10?

Can I start Forex with $5?

Can I start trading with $100?

How do I start trading Forex?

What is a good amount of money to start trading Forex?

In terms of predicting price movements and identifying Forex trading opportunities,

Fundamental trading is a very popular method, though it is often linked to buy-and-hold

Fundamental Case Study: the U.S. Dollar

The Forex Economic Calendar

Making and Applying a Fundamental Analysis

Trading with Fundamentals: A Warning

How do you conduct a fundamental analysis in Forex?

How do you read a fundamental analysis?

What are Forex Chart Patterns?

Types of Forex Chart Patterns

1. Continuation chart patterns – indicates price likely to continue moving in

Let us explore these types of Forex chart patterns.

Continuation Chart Patterns

Reversal Chart Patterns

Neutral Chart Patterns

Top Chart Patterns Every Trader Should Know

Head and Shoulders (H&S)

Quasimodo (Over & Under)

An example is shown in the gold chart below:

How to Read Forex Chart Patterns in Trading

Pros and Cons of Forex Chart Patterns

Pros of Chart Patterns

Cons of Chart Patterns

• It takes time for chart patterns to form.

Final Thoughts About Technical Trading

Following longer-term compounded candlestick patterns on higher timeframes such as

What is a Time Frame in Forex Trading?

Why You Should Use the Weekly Time Frame in Forex

How to Measure Trends with the Weekly Time Frame

Weekly Time Frame: Long-term Downtrend

Weekly Time Frame: No Long-term Trend

Should You Use Only One Time Frame in Forex Trading?

Multi Time Frame Trading with the Weekly Time Frame

Weekly Multi Time Frame Breakout Trend Strategy

Weekly Breakout Trend Strategy: Short Trade Entry

Weekly Multi Time Frame “Buy the Dips” Trend Strategy

Weekly “Buy the Dips” Trend Strategy: Short Trade Entry

Trading with the Weekly Time Frame Only