Content

Chapter 1 The Forex Industry Page 3

1.1 Gold Standard and Bretton Woods system
1.2 The expansion of the European market
1.3 The development of Asian dollar
1.4 The evolutionary process of foreign exchange market

Chapter 2 Product Specification Page 6

2.1 Five product advantages
2.2 The classification of trading products
2.3 Comparison of trading costs

Chapter 3 Fundamental Analysis Page 14

3.1 The concept of fundamental analysis
3.2 The principal theories of fundamental analysis
3.3 The 7 key factors that influence foreign exchange rates
3.4 Interpreting key economic indicators
3.4.1 Gross Domestic Product (GDP)
3.4.2 Interest Rates
3.4.3 Inflation
3.4.4 Unemployment Rate
3.4.5 Retail Sales

Chapter 4 Technical Analysis Page 23

4.1 Introduction of Forex Technical Analysis
4.1.1 The Concept
4.1.2 Three basic assumption of technical analysis
4.1.3 Three basic principles of technical analysis
4.2 Candlestick charting
4.2.1 What is it?
4.2.2 The four elements of a candlestick
4.2.3 Common candlestick chart patterns

Chapter 5 Fund Management Page 30

5.1 Introduction to Fund Management
5.2 The importance of capital management
5.3 What about stop loss orders?
5.4 The risk-reward ratio in capital management

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 Learn from ACY’s 10 years of experience and research

The Forex
Industry
The development history of forex industry

Gold Standard and Bretton Woods system

T
he Bretton Woods ternational currency. Prior to this, with basic content includes the
Agreement, signed the Gold Standard, prevailing link between U.S. dollar and
in 1944, was estab- from 1876 to the World War I, gold, and the fix exchange rate
lished to prevent was dominating global econom- between dollar and other curren-
funds from escaping ic system. cies from international monetary
between countries The essential of signing the fund members.
and to impose restrictions on Bretton Woods Agreement is The Bretton Woods Agree-
speculation by international to establish a dollar-centred ment required that “the dollar
currency, in order to stabilize in- international monetary system, is linked to gold”, which means
an ounce of gold valued $35.
Governments or central banks of
countries had rights to exchange
gold by using dollar by following
an official price.
Under the Gold Standard,
currency achieved a new stage
of stability under the support of
gold prices, along with repealing
the arbitrarily currency depreci-
ation conducted by kings or rul-
ers, which could lead to inflation.
The Gold Standard, however, is
not perfect.

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 With the rapid economic devel-
opment of one country, a large
amount of commodities would
be imported until complete de-
pletion of gold which supports
its currency, causing the tight-
ening of currency supply and
the rise of interest rates which
eventually lead to economic
slowdown and even recession.
Then, prices of commodities
slump to the bottom, which
gradually attracts other countries
to have rush purchase, resulting
in a vast amount of gold surg-
ing back into this country until
its money supply increases and
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interest rates decline, finally it
becomes wealthy again. The
“boom-and-recession” cycle
model ran through the entire
Gold Standard until the outbreak
of World War I, which stopped
the free flow of trade and gold.
In 1950s, the continuous
growth of international trade would no longer be able to
volume led to large-scale fund convert into gold. By 1973, the
transfers generated by after major industries achieved overall
war’s reconstruction, which re- growth, the daily exchange rate
sulted in instability of exchange fluctuated, new financial instru-
rate established in the Bretton ments gradually came out into
Woods system. This agreement the market. Eventually liberal-
was finally abolished in 1971, ization of market and trade had
meaning that the U.S. dollar been achieved.
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In 1980s, due to the rapid development of computers and relevant

technologies, the flow of transnational funds was accelerating, making
regions of Asia, Europe and American combine together. Daily trading
volume of 70 billion U.S. dollar in the mid-1980s has surged to current
level of 5.3 trillion U.S. dollar.

The expansion of the European market

One of the main drivers of

the booming foreign exchange
market is the rapid development
of the European dollar market,
where US dollar is deposited
in banks beyond the border.
Likewise, the European market
refers to the market where assets
stored in outside the border
where the currency comes from.

The development of
Asian dollar
The rapid growth of the
Asian-dollar market, mainly in
Singapore and Hong Kong,
made foreign exchange trans-
action a truly global market and
the largest financial market.

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 Are you still paying too much
for trading spot gold?

A
t ACY, our gold spread starts
from $0.20 and there’s no com-
mission on transactions. We do
this to create a great trading
environment that benefits all our
investors.
Suppose we have $10,000, and trade 10 lots
each month. This means we save $300, which
is equivalent to 3% of our expected return. Our
yearly saving is $3,600, which is equivalent to 36%
of our yearly return.
If we trade 20 lots each month, then we can save
$600 or 6% of our monthly return. Our yearly
saving reaches $7,200, or 72% of our expected
return for the year.

Lots Average market cost of trading Cost at ACY ($USD) Money saved ($USD)
(100oz) gold ($USD)
1 50 20 30
2 100 40 60
3 150 60 90
4 200 80 120
5 250 100 150
6 300 120 180
7 350 140 210
8 400 160 240
9 450 180 270
10 500 200 300
20 1,000 400 600
50 2,500 1,000 1,500
100 5,000 2,000 3,000

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 Are you still paying too much
for forex transactions?
If we take EUR/USD as an example at ACY, our
Euro spread is around 0.8 pip and no commis-
sion is charged. We do this to improve the trad-
ing environment for all our traders.
Suppose we have $10,000, and trade 10 lots
each month. This means we save $170, which is
equivalent to 1.7% of our expected return.
Our yearly saving is $2,040, or 20.4% of our
yearly return. If we traded 50 lots each month,
we can save $850 or 8.5% of our monthly re-
turn. Our yearly saving reaches $10,200, which
is equivalent to 102% of our expected return
for the year.

Lots Average market spread cost Average market spread Transaction fee saving
(100,000 units) ($USD) cost at ACY ($USD) ($USD)
1 25 8 17
2 50 16 34
3 75 24 51
4 100 32 68
5 125 40 85
6 150 48 102
7 175 56 119
8 200 64 136
9 225 72 153
10 250 80 170
20 500 160 340
50 1,250 400 850
100 2,500 800 1,700

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 What is fundamental
analysis?
The concept of fundamental analysis
Fundamental analysis is an analytical method
used to determine market trends. It relies on re-
search of the overall state of the economy, and
considers factors including interest rates, pro-
duction, earnings, employment, GDP, housing,
manufacturing and management. Fundamental
analysis is based on macro-situational factors
and looks at how changes in these might impact
on exchange rates.
Fundamental analysis aims to determine long-
term exchange rate trends and allows us to
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more reliably predict those trends. However, the
method does have its drawbacks. Starting and
ending points, and the precise time of changes
in the exchange rate, can’t be reliably predict-
ed. Further, changes in exchange rates some-
times don’t strictly comply with fundamental
methodologies. Therefore, research based on
fundamental analysis must be combined with
other analytical methods such as technical anal-
ysis and market psychology.
The principal theories of fundamental analysis
1. Purchasing Power Parity (PPP)
According to PPP, exchange rates are determined by rela-
tive prices of specified commodities (or baskets of similar
goods). Changes in inflation are offset by equivalent but
converse changes in the exchange rate.
Let’s take a famous case, buying a hamburger, as an ex-
ample. If a hamburger costs $2 in the US and £1 in UK,
then the exchange rate should be $2 US dollars per
pound based on PPP. If the exchange rate is US$1.70 per
pound in the forex market, the pound is regarded as an
undervalued currency. Alternatively, the dollar is viewed
as an overvalued currency. So, PPP theory assumes the
two currencies should be approaching the parity value of
2:1.
The limitation of PPP is that it assumes commodities can
be traded freely, without any costs such as tariffs, quotas
and taxes. Another drawback is that it is only suitable for
commodities. Non-traded services that go into a ham-
burger’s price, such as the storefront, insurance, heating,
labour and so on, are unlikely to be at parity internation-
ally.
2. Interest Rate Parity (IRP)
IRP is the theory that appreciation or depreciation of one
currency against another currency must be offset by the
differential between the forward exchange rate and the
spot exchange rate.
So, if US interest rates are higher than those in Japan, the
US dollar will depreciate against the Japanese yen, and
the depreciation level is the difference in interest rate lev-
els as determined by the prevention of risk-free arbitrage.
The future exchange rate will be reflected by the forward
exchange rate required today. According to this, the for-
ward exchange rate of the US dollar is viewed as premi-
um, since the amount of yen from the forward exchange
rate is less than that from the spot rate. Alternatively, the
yen is regarded as discounted.
Since the 1990s, there’s been no evidence that IRP theo-
ry actually works. Contrary to this theory, a currency with
high interest rate normally won’t depreciate. Instead, it
will appreciate because of forward-inhibition of inflation
and the fact it’s an efficient currency.
3. Balance of payments model
The balance of payments model supposes that foreign
exchange rates must be in equilibrium. That is, it must be
at the rate which produces a stable current account bal-
ance. Countries with a trade deficit will have their foreign
exchange reserves reduced, which eventually lowers the
values of their currency. A cheaper currency makes that
country’s goods more competitive in the international
market, but it also makes imported products more expen-
sive. After a period of adjustment, imports are forced to
decline while exports rise, causing the trade balance and
currency to move towards equilibrium.
Similar to the theory of Purchasing Power Parity, the bal-
ance of payments model places emphasis on trade com-
modities and services, while ignoring the increasingly im-
portant role of the flow of international capital. In other
words, the exchange rate is determined by the demand of
imports and exports, and also financial assets like stocks
and bonds. The in and out flows of money are part of
the capital account, which creates the balance of current
account in an economy. The activity of capital flows then
created the “Assent Market Model”.
4. Assets Market Model (the preferred
model)
The rapid expansion of trade in financial assets, such as
stocks and bonds, allows analysts and traders to look at
currency from a new perspective. Economic variables like
growth rate, inflation rate and production rate are no lon-
ger the only factors driving changes in currency value.
The share of foreign exchange transactions derived from
global financial assets trading has overshadowed curren-
cy transactions generated by goods and services.
According to the Assets Market Model theory, currency is
closely related to the assets market, especially the stock
market, and a currency will tend to appreciate if the flow
of funds are fuelled into the economy.
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 The 7 key factors that
influence foreign exchange rates
1. Political situation
International and domestic political changes have a big
impact on exchange rates. A steady political situation
normally stabilises exchange rates. However, political tur-
moil can cause a loss of confidence in the market and
movement of investment funds to more stable countries.
Pay attention to events affecting international relation-
ships, partisan fights, issues challenging government
leaders and the like.
5. Military events
Psychological expectation of forex market participants
has a big influence on exchange rates. The market nor-
mally reaches a consensus and forms a view on the appre-
ciation or depreciation of a currency, and how it will be af-
fected in a certain period of time. This force is sometimes
strong enough to push the exchange rate away from its
equilibrium level so that even central bank intervention
can’t stop it.

2. Economic situation 6. Policies from governments

The economic situation of a country is a critical factor and
has a direct influence on its exchange rates. The issues
that need to be considered here include the level of eco-
nomic growth, the balance of payments, inflation levels,
interest rates and the like.
3. Market psychology
Psychological expectation of forex market participants
has a big influence on exchange rates. The market nor-
mally reaches a consensus and forms a view on the appre-
ciation or depreciation of a currency, and how it will be af-
fected in a certain period of time. This force is sometimes
strong enough to push the exchange rate away from its
equilibrium level so that even central bank intervention
can’t stop it.
and central banks
The fiscal and foreign exchange policies of a government,
and monetary policies from the central bank, play a vi-
tal—and sometimes decisive—role in exchange rates. For
example, a government may declare it will appreciate or
depreciate its currency value, or the central bank may de-
cide to intervene in the market and adjust interest rates.
7. Emergencies
Some serious emergencies affect market psychology,
leading to changes in exchange rates. The extent to which
this has an impact on the long-term change in exchange
rates is a different matter, though. For example, the 911
attacks caused a very short-term slump in the US dollar.

4. Speculative transactions
With the globalisation of financial markets accelerating,
hot money in the forex market is growing. The market
is sometimes dominated by speculative organisations
who have a massive transaction volume, and their hedg-
ing transactions can have a far-reaching influence on ex-
change rates. For example, Quantum Fund’s speculation
on the British Pound netted the company billions of dol-
lars in 1992, and in 1997 its gambling on the Thai Baht is
thought to have triggered the Asian financial crisis.

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 Interpreting key economic indicators
Gross Domestic Product (GDP)
The concept
Gross Domestic Product (GDP) is the monetary value
of all the finished goods and services produced within
a country’s borders in a specific time period (normally a
quarter or a year). GDP is commonly accepted as the best
indicator of the economic health of a country. It reflects
the economic performance of a country, and is a gauge of
a country’s national power and wealth.
Normally, GDP includes four parts: all private and public
consumption, government outlays, investments, and ex-
ports minus imports that occur within a defined territory.
It can be calculated using the following formula:
GDP=C+I+G+(Ex-Im)
C = consumption spending
I = private investment
G = sum of government spending
Ex-Im = total exports - total imports = the nation’s total
net exports
Interpreting GDP
A dramatic growth in GDP reflects the booming econo-
my of a country, with increasing national income as well
as purchasing power. Under these conditions, the central
bank tends to increase interest rates and reduce currency
supply. A well-performing economy and growing interest
rates make the country’s currency more attractive.
On the other hand, if a country has a negative growth rate
in GDP, it reflects economic recession and declining con-
suming power. At this time, the country’s central bank is
likely to lower interest rates to stimulate the economy. In
this case, the lower interest rates and economic downturn
could make the country’s currency less attractive.
Therefore, a high economic growth rate would normally
push up the exchange rate of a country while economic
recession leads to a downturn in the exchange rate.
For example, from 1995 to 1999 the annual average GDP
growth rate in the US was 4.1%, while in the Eurozone,
Germany, France and Italy’s rates were only 1.5%, 2.2%
and 1.2% respectively, far lower than in the US. This led
to the a declining exchange rate against the US dollar,
declining by 30% within less than 2 years since the estab-
lishment of Eurozone on 1 January 1999.
In fact, the impact of the difference in economic growth
on exchange rates is multifaceted:
• First, a country’s high economic growth rate
means an increase in income and domestic demand,
increasing the country’s imports and resulting in a trade
deficit and decline in its currency.
• Second, if the country’s economy is export-ori-
ented, economic growth means producing more export
products. Meanwhile, growing exports will compensate
for the increase in imports and alleviate downward pres-
sure on the exchange rate.
• Thirdly, a high economic growth rate normally
means that labor productivity is rising rapidly. This causes
reduced costs to improve competitiveness of domestic
products, which helps increase exports and reduce im-
ports. Moreover, a high economic growth rate makes the
country’s currency more attractive, leading to a potential
rise in its exchange rates.
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 Interest rates
What is an interest rate?
An interest rate is the amount charged, expressed as a
percentage of the principal, by a lender to a borrower
for the use of assets. Classically, the interest rate refers to
the price of capital, while supply and demand of capital
determines the interest rate.
Keynes considered interest rates to be the “cost of mon-
ey”, while Marx argued that interest rates are part of the
surplus value and referred to the distribution of surplus
value and borrowing capitalists.
Interest rates are normally controlled by the central bank.
For example, in the US rates are managed by the US Fed-
eral Reserve Board and in Australia they’re managed by
the Reserve Bank.
These days, all countries view interest rates as an import-
ant tool for managing macroeconomics. When an econ-
omy is overheated with rising inflation, interest rates will
be increased and credit will be tightened as well. Once
the overheated economy and its inflation levels are under
control, interest rates will be moderately reduced.
Interpreting interest rates
Interest rates have a critical impact on the foreign ex-
change rate. The exchange rate is the relative price be-
tween the currencies of two countries. Like the pricing
mechanism of other commodities, the exchange rate is
determined by the demand-supply relationship in the for-
eign exchange market.
Forex is a financial asset that, if held by investors, can
bring capital gains. Whether investors choose to hold
their own currencies or certain foreign currencies, the first
thing to be considered is which currency can make more
profits.
Profits of different currencies are determined by interest
rates in the financial market. If the interest rate of a cur-
rency rises, it benefits the currency as the interest profits
of holding this currency will increase, making it more at-
tractive to investors. On the other hand, if the interest rate
decreases, the profit of holding this currency will decline,
making the currency less attractive.
Therefore, if interest rates rise, the currency will be stron-
ger; if interest rates fall, it will be weaker.
From an economic perspective, when the foreign mar-
ket is in equilibrium the profits brought by holding two
currencies should be equal. If the profits generated by
two currencies are different, there is an arbitrage oppor-
tunity in the market, where investors tend to buy foreign
Page 18 | THE WAY OF FOREX
currency A and sell B. There is no risk in arbitrage activ-
ity. Therefore, once the rate of returns of two currencies
are not equal, the arbitrage mechanism will push the re-
turns of both to be equal again. In other words, there is a
tendency in equality of interest rates between countries’
currencies, which has a big impact on changes in foreign
exchange rates.
For example, when the dollar lost its value in August
1987, investors chased the British pound with high inter-
ests. This led to the exchange rate of pound against dollar
rising to 1.9000 from 1.6500, by as high as 15.15%. To
prevent the sterling from surging, the British government
lowered the interest rates several times, from annual rates
of 10% to 7.5%. With each rate cut, falling exchange rates
followed. Due to the pound’s rapid depreciation, inflation-
ary pressure increased and rates were raised a few times
by the central bank of Britain, which led to some rallies in
the pound’s value.
Financial globalisation has led to great progress. With
economic openness, the volume of international capital
flows has been tremendous, exceeding that of interna-
tional trade. And the impact of changes in interest rates
on exchange rates is far more important than ever before.
When a country tightens credit, interest rates tends to
rise. This results in a difference in rates around the globe,
which then leads to flows of short-term funds between
countries, normally from countries with lower rates to
those with higher rates. If a country has a higher rate than
any other countries, it will lead to more funding inflow and
less outflow. In this situation, investors are more likely to
chase its currency. Meanwhile its income and capital ac-
count expenditure has improved, promoting exchange
rate gains. On the other hand, if a country loosens credit,
its exchange rate will usually fall.
 Inflation
Since the 1970s, when floating interest rates replaced
fixed rates, inflation has played an essential role in ex-
change rate changes. Inflation is a sustained increase in
the general price level of goods and services in an econ-
omy over a period of time.
As prices reflect commodities’ currency value, inflation
means that the currency of a country depreciates. With
a close link between products of domestic and interna-
tional markets, inflation and rising prices will generally
cause more exports and less imports, and then the de-
mand-supply relationship in the forex market changes,
leading to changes in currency value.
According to the law of one price and purchasing pow-
er parity, when country A’s inflation is higher than that of
country B, country A’s currency that actually represents
the value relative to B’s currency is reduced, meaning that
A’s value will decline. The reverse situation will lead to an
increase in A’s value.
There are three indicators for inflation levels: the Producer
Price Index, the Consumer Price Index and the Retail Price
Index.
1. Producer Price Index (PPI)
The Producer Price Index (PPI) is a price index that mea-
sures prices of retail products provided by manufacturing
industry and farmers, and reflects the average change in
prices received for their output. PPI is also used to mea-
sure the average change in costs of products at different
stages of production.
PPI is a leading indicator when predicting inflation. When
prices of raw materials and semi-finished products go up,
this is reflected in the price of consumer goods within
a few months. This leads to an increase in overall price
levels, which can result in more serious inflation. On the
other hand, when PPI goes down, meaning there’s a fall in
the price of production, this lowers the overall price level
which then reduces inflationary pressure.
However, PPI does not include some sales discounts,
which means it doesn’t fully reflect the real rate of price
rise. This sometimes causes an exaggerated effect. In ad-
dition, seasonal changes which affect some agricultural
prices, and the cyclical changes in energy prices, have an
impact on PPI. When using PPI for analysis, it’s therefore
appropriate to ignore food and energy prices.
In the forex market, PPI is a key concern for investors. If
PPI is higher than expected, there is a possibility of infla-
tion. This may lead to tightening monetary policies by the
central bank, which benefits the currency. If the reverse
situation presents, investors may trade for a short position
of the currency.
2. Consumer Price Index (CPI)
Expressed as a percentage, CPI is a measure that exam-
ines the weighted average of prices of a basket of con-
sumer goods and services. It’s also a tool for measuring
inflation.
CPI is very important but investors should be careful when
using it. A rising CPI sometimes indicates a stronger cur-
rency, while sometimes the currency may head in a differ-
ent direction.
The CPI level indicates the purchasing power of consum-
ers and reflects economic status. If the CPI goes down,
this indicates an economic downturn which weakens the
country’s currency. If it rises, is this good for the country’s
exchange rate? Not always. It also depends on how quick
the CPI goes up. When it increases mildly, the economy
is stable and this is favourable to the country’s currency.
However, if the CPI increases dramatically in a short peri-
od of time, this has a negative impact on the economy as
the CPI and purchasing power are in inverse proportion,
meaning that higher prices cause lower purchasing pow-
er. This has a negative impact on the country’s currency.
If you take interest rates into consideration, the impact of
CPI on exchange rates is more complex. When a country’s
CPI rises, it shows that its inflation is rising, which means
decreasing purchasing power. And its currency would be
weakened according to the purchasing power parity the-
ory. On the contrary, when a country’s CPI falls, this means
that its inflation decreases and purchasing power rises. Its
currency strengthens according to the purchasing power
parity theory.
Since the central bank prioritises inflation control, rising
inflation will cause higher interest rates, which is good for
a currency. If inflation falls, interest rates tend to dip, lead-
ing to a weaker currency.
THE WAY OF FOREX | Page 19
 Unemployment rate

What is the ‘unemployment rate’

The unemployment rate is the share of the labor force ment rate is employment data, the most representative of
that is jobless, and willing to look for a job. It reveals which is non-agricultural employment data.
the employment status of the entire working population
during a certain period of time. Unemployment rates are
considered an indicator of the overall economic situation. Non-farm payrolls (NFP)
In the fundamental analysis of foreign exchange trading,
NFP is an unemployment statistic that measures job
unemployment rates are the most sensitive monthly indi-
changes with the exception of farm work. It therefore re-
cator, and are considered to be the ‘jewel in the crown’ of
flects the development of manufacturing and service in-
economic indicators.
dustries. Declined NFP indicates reduced production and
an economic downturn. With rapid economic develop-
Interpreting the unemployment rate ment, consumption will increase. This leads to increased
job opportunities in consumptions and services. As NFP
Normally, a decline in the unemployment rate means a grows dramatically, it is theoretically good for exchange
healthy economy, which is good for currency. Rising un- rates. NFP is an important indicator that measures the
employment rates, on the other hand, point to an eco- current situation and development of social economy.
nomic slowdown or downturn which leads to a weaker
currency.
If we compare the unemployment rate with the inflation
rate during the same period, we can determine wheth-
er the economy is overheated, or will cause inflationary
pressures, or will spur economic development thanks to
interest rate cuts. Also, the opposite of the unemploy-

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 Retail sales
What are ‘retail sales’
Retail sales are an aggregated measure of the sale of re-
tail goods over a stated time period, and also a total value
of commodities paid by cash or credit in retail shops (ex-
cluding the service industry).
Interpreting ‘retail sales’
Retail sales play an important role in determining the eco-
nomic situation of a country and its prospect since it di-
rectly reflects changes in consumer spending.
In the US, UK and much of the western world, consum-
er spending usually accounts for more than half of the
national economy. Increased retail sales represent grow-
ing consumer spending and economic recovery. In this
situation, interest rates tend to increase, which is good
for the currency. Declining retail sales, however, mean an
economic slowdown or even a downturn. In this situation,
interest rates may decrease, which can lead to a decline
in currency.
Purchasing Managers’ Index (PMI)
PMI is an indicator of the economic health of the manu-
facturing sector.
The PMI is based on five major indicators: new orders, in-
ventory levels, production, supplier deliveries and the em-
ployment environment. A PMI of more than 50 represents
Appendix 1: Key indicators (ranked by importance)
Gross Domestic Product (GDP)
Producer Price Index (PPI)
Consumers Price Index (CPI)
Retail Sales
Non-farm Payrolls
Foreign Trade
Net Capital Inflows
Factory Orders
Leading Index
Purchase Management Index (PMI)
Non-Manufacturing Index (ISM)
Capacity Utilization Rate
expansion of the manufacturing sector when compared to
the previous month, and is favourable to currency. A PMI
of under 50 represents a contraction, and traders may go
short position on that country’s currency.
Balance of trade (BOT)
The balance of trade compares goods trade between
countries and is an important indicator of the macroeco-
nomic situation. It’s often used in fundamental analysis in
the forex trade.
BOT is reflected in market trends: when foreign trade
deficit expands, currency will be undermined, leading to
decreased exchange rates, whereas a surplus is good for
the currency.
Leading indicator
The leading indicator is a measurable economic factor
that changes before the economy starts to follow a par-
ticular pattern or trend. If a leading indicator decreases
for three consecutive days, it indicates an impending eco-
nomic slowdown. However, if it rises for the same period
this means the economy is likely to expand.
Normally, a leading indicator can reveal something 6 to 9
months ahead of it happening. For example in the US a
leading indicator can forecast possible economic down-
turn 11 months out, while economic expansion can be
predicted 3 months out.
Industrial Production
Durable Goods Orders
Merchandise Inventory
Unemployment Rate
Consumer Confidence Index
Housing Starts
Loan for Consumption
New Home Sales
Existing Home Sales
Personal Income / Spending
Building Permits
Unemployment Changes
THE WAY OF FOREX | Page 21
Appendix 2: Schedule of US economic data announcements
Timing below is US winter time (one hour behind summer time)

Economic data Release time Release date

(Beijing time)
Gross Domestic Product (GDP) 21:30 End of month every quarter
Unemployment Rate/ Non-farm Payrolls 21:30 First Friday of every month
Retail Sales 23:00 Middle of month
Inventory 21:30/23:00 End of month
Purchase Management Index (PMI) 23:00 Beginning of month
Industrial Production 21:00/22:15 15th of month
Industrial and Durable Goods Orders 21:00/23:30 End or beginning of month
Leading Indicator 23:00 Middle or end of month
Trade Data 21:30 Middle or end of month
Consumers Price Index (CPI) 21:30 20-25th of month
Producer Price Index (PPI) 21:30 Second Friday of every month
Budget Report 21:30 End of month

Appendix 3: Economic data of major countries (excluding US)

Country / region Some important economic data

Japan GDP, Unemployment Rate, Export Trade, Retail

Sales, Industrial Manufacturing
Euro-area countries (12 members, centred at Germa- GDP, Unemployment Rate, Inflation Rate, IFO Cli-
ny and France) mate Index, Purchase Management Index, Factory
Orders, Export Trade
Britain GDP, Unemployment Rate, Retail Sales, Industrial
Manufacturing
Australia GDP, Unemployment Rate, Export Trade, Business
Confidence Index
Canada GDP, Export Trade, Retail Sales
Switzerland GDP, Unemployment Rate, Export Trade

Page 22 | THE WAY OF FOREX

Introduction to Forex Technical Analysis
The concept
Technical analysis uses analysis methodologies, such as
psychology and statistics, and past data to forecast the
direction of prices and trends
The underlying assumption of technical analysis is that
market price reflects all available information, and there-
fore represents true value.
There are many techniques, tools and elements of tech-
nical analysis, however mainstream theory involves can-
dlestick charts. Candlestick charts are a favourite tool for
technical analysis, and a must for all professional inves-
tors.
Before we take a closer look at candlestick charting, let’s
first get clear on the assumptions and principles of tech-
nical analysis.
Three basic assumptions
of technical analysis
1. Prices already reflect everything. In other words, chang-
es in all factors, such as economics, politics and psycho-
logical expectation, will be fully and truly reflected in the
exchange rate prices.
2. The exchange rate changes in accordance with certain
trends and laws.
3. History repeats itself: past trading activity and price
changes are a better indicator of future price movements
than intrinsic value.
Three basic principles of
technical analysis
1. Long-term patterns are more important than short-term
patterns. Understanding long-term trends before analys-
ing the short-term movement of exchange rates allows
traders to forecast short-term trends and make better de-
cisions.
2. Position is more important than pattern. There’s an in-
vestment rule which goes something like this: “A head is
more likely to occur on the top, while a bottom probably
appears at the base.”
3. Market direction is more critical than position. The
trend of an exchange rate is more important than its cur-
rent position.
THE WAY OF FOREX | Page 23
Candlestick charting

What is it?
A candlestick chart, also called a Japanese candlestick
chart, is derived from a method of tracking the price of
rice during Tokugawa Shogunate. After 200 years of evo-
lution, the candlestick chart is now widely used as a basic
method in the technical analysis of the security market. It’s
developed into a complete method with its own analysis
theory.
The four elements of a candlestick
chart
The candlestick chart shows more information than a
traditional line chart. The four elements of a candlestick
chart are:
• opening price
• highest price
• lowest price
• closing price.
Basic patterns: analysis of candlestick
charts
The “candlestick” is the thin vertical line showing the pe-
riod’s range of trading and the wide bar on the vertical
line shows the difference between the opening and clos-
ing price. The wide bar is also called the “real body”.
The relationship between the day’s opening, highest, low-
est and closing prices determines the overall look of the
daily candlestick.
When the opening price is lower than the closing price,
the candlestick is a positive line (green).
When the opening price is higher than the closing price,
the candlestick is a negative line (red).
The doji is a common pattern that occurs when the open-
ing and closing prices are virtually equal.
If a candlestick is a positive line, an upper shadow or tail
occurs between the highest and closing prices. A lower
shadow occurs between the opening and lowest prices.

Page 24 | THE WAY OF FOREX

Common candlestick chart patterns and the meaning
of long and short in the stock market
Candlestick chart pattern Meaning of long and short in the stock market

The opening price is the same as the lowest price,

the closing price is the same as the highest price, and
there’s no upper or lower shadow.

This means the long in the market has the absolute

Large (full) dominance, and its rising trend is strong and over-
Positive Line whelming.

The closing price is the same as the highest price. The

lower shadow is short.

The exchange rate dropped slightly and then pulled

back, indicating the advantage of the long and a
greatly trending purchase order.
Large Positive
Lower Shadow Line The longer the length of the lower shadow, the
stronger the power of the long.

High point, but the selling pressure is heavy, so ex-

change rate drops.

This pattern represents the dominance of the long,

yet selling pressure is great too so it’s likely to reverse.

Large Positive You should be alarmed. The longer the length of the
Upper Shadow Line upper shadow, the greater the selling pressure and
the more likely it’ll reverse.

The length of the upper shadow and lower shadow is

basically the same.

This pattern represents intense competition between

the long and short.

Short Positive Line The long is somewhat dominant, yet the power of the
short can’t be discounted.

THE WAY OF FOREX | Page 25

 Candlestick chart pattern Meaning of long and short in the stock market

(Top: shooting star pattern; Bottom: inverted ham-

mer pattern)

Upper shadow is long, at least 2 to 3 times the length

of the real body of the positive line.

This pattern shows that the long is still in a dominant

Upper Shadow position but has been in a deliberation, which indi-
Positive Line cates a massive reversing trend.

If it appears at the top of the recent exchange rate,

then the reversing trend is even stronger.

(Top: above-the-stomach; Bottom: hammer)

Lower shadow is long, at least 2 to 3 times the length

of the real body of the positive line.

This pattern shows that the long is still in a dominant

position
and the purchase order is increasing, pushing the
exchange rate up.
Lower Shadow
Positive Line If it appears at the bottom of the recent exchange
rate, this is a signal
of a massive reversing trend and you should exercise
caution.

The opening price is the same as the highest price,

and the closing price is the same as the lowest price,
so there’s no upper or lower shadow.

This means the short in the market has absolute

dominance, and the exchange rate continues to drop.
Large (full)
Negative Line

Page 26 | THE WAY OF FOREX

Candlestick chart pattern Meaning of long and short in the stock market

The opening price is the same as the highest price, so

the lower shadow is short.

The exchange rate attempts to hit a low point, but

the buying pressure is heavy causing a rebounded
exchange rate.

This pattern shows the short is dominant, but the

Large Negative purchase order is large. It’s therefore likely to reverse
Lower Shadow Line and you should be alarmed.

The longer the lower shadow, the greater the pur-

chase order and the more likely it is to reverse.

The closing price is the same as the lowest price, so

the upper shadow is short.

The exchange rate rose slightly and then pulled back,

indicating the dominance of the short. The selling
order shows a massive trend.

Large Negative The longer the length of the upper shadow, the
Upper Shadow Line stronger the power of the short.

The length of the upper shadow and lower shadow is

basically the same.

This pattern represents intense competition between

the long and short.

Short Negative Line The short is somewhat dominant, yet the power of
the long cannot be discounted.

(Top: Above-the-Stomach; Bottom: Hammer)

Lower shadow is long, at least 2 to 3 times the length
of the real body of the positive line.
This form shows that the short side is still in a domi-
nant position but
has been in deliberation, which indicates a massive
Lower Shadow reversing trend.
Negative Line If it appears at the bottom of the recent exchange
rate, this is a sign of an even bigger reversing trend.

THE WAY OF FOREX | Page 27

 Candlestick chart pattern Meaning of long and short in the stock market

(Top: above-the-stomach; Bottom: hammer)

Lower shadow is long, at least 2 to 3 times the length

of the real body of the positive line.

This pattern shows that the short is still in a domi-

nant position but
but has been in deliberation, which indicates a mas-
Lower Shadow sive reversing trend.
Negative Line
If it appears at the bottom of the recent exchange
rate, this is a sign of an even bigger reversing trend.

The opening and closing prices are the same, with

the long and short well-matched in strength.

If this pattern appears at the top or bottom of the re-

cent exchange rate, it’s a signal of a massive reversing
Cross Line trend. Or if it appears in a long-term consolidation
period, it’s a strong break signal.

The opening and closing prices are the same, with

the long more dominant.

You should pay close attention to the later develop-

ment of the candlestick pattern.
Cross Line

The opening and closing prices are the same, with

the short more dominant.

You should pay close attention to the later develop-

ment of the candlestick pattern.
Cross Line

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Candlestick chart pattern Meaning of long and short in the stock market

The opening and closing prices are the same. Below

the closing price, the purchase order of the long is
positive and this price is strongly supported by the
long.

Cross Line If this pattern appears at the bottom, it’s a signal of a

massive reversing trend.

The opening and closing prices are the same. The

purchase order of the long above the closing price is
positive, and this price is strongly supported by the
short.

T Wave Inversion If this pattern appears at the top, then it’s a signal of a
massive reversing trend.

The opening, closing, highest and lowest prices are

all the same. This pattern rarely appears. But if it
does, it’s a precursor to either a (sudden and sharp)
Word Line rise or drop.

THE WAY OF FOREX | Page 29

 Introduction to fund management
A forced liquidation in your forex trading account is usual-
ly a result of poor fund management and underutilisation
of capital for trading purposes. Lack of trading skills may
be part of the reason for this failure, but inappropriate
capital management and poor risk control are generally
the major causes. As an investor, you should not take too
much risk, since trading is not allowed once there’s no
longer any capital left in your account.
Fund management methods used by forex traders in-
clude portfolio design, money allocation, instruction for
stop-loss, take-profit and risk-reward analysis. The strat-
egies used in managing funds, particularly whether they
are conservative or aggressive, should be guided by your
successes and failures in trading.
Proper fund management is crucial for long-term success
in forex trading as it helps you manage your capital. Suc-
cess and long-term profits in trading is usually a result of
one key factor: proper fund management.
The importance of capital
management
It’s often said that:
mental control + capital management + analysis systems
= successful trading
One often forgotten part of this equation is capital man-
agement. To put the focus on this topic, let’s play a capital
management game.
Page 30 | THE WAY OF FOREX
A capital management game
Let’s start the game with a 60% winning percentage. Sup-
pose you have $1,000 and can place 100 bets. The odds
are 1:1. So, how do you bet to get the most out of it?
Before you continue, think about this: according to a sur-
vey, most people tend to bet more in unfavourable cir-
cumstances, and less in favourable circumstances. Why?
When it comes to the market, people often expect a rise
after several consecutive drops, or a drop after several
consecutive rises. But this is a fallacy. Here, the winning
percentage is still only 60%. So, at this time, money man-
agement is an extremely important issue.
Assuming you start the game at $1,000, then you lose the
game 3 times in a row (chances are that’s something very
likely to happen). Now you only have $700 left. Most peo-
ple think they’ll win in the fourth game, so they increase
their bet to $300 (hoping to win back the $300 lost).
Although the possibility to lose in the fourth game is slim,
it’s still a possibility. And if it does happen, you’d only
have $400 left.
If you want to win back all of your loss in that round you
have to win 150% profitability, which is unlikely to hap-
pen. Assuming you put your bets up to $250, then it’s
very likely you’ll lose all the money in the fourth round.
No matter what the situation is, you can’t win anything in
this simple game. If you have no concept of capital man-
agement, you’ll face big challenges because you’re not
balancing risk and opportunity.
According to market statistics, 80% of foreign exchange
transactions are losses, 10% break even and only the re-
maining 10% of transactions result in a profit. Therefore, if
we narrow the position down to a very small number, we
can transfer a foreign exchange trader from among the
80% of losers to the 20% who don’t lose.
If you’re eliminated from the game, you won’t be able
to continue trading. So, you must make sure that you
can continue trading. Most traders, however, tend to get
eliminated before they have the chance to win. A little
bad luck will make their efforts come to nothing. It’s im-
portant to stay in the game, live on and let the capital
through the inevitable trough. Imagine if a few tweaks to
your methods mean you can turn the corner. You should
focus on trading for a long enough period to allow you to
master the skills and acquire the information you need to
be a successful trader.
What about stop-loss orders?
It’s said that learning how to set a stop-loss order is a
tragedy for retail investors. While it may be an appropri-
ate tool for some people, one of the reason why retail
investors can’t make a profit from investment is that they
know nothing about stop-loss orders.
People are always keen to make profits as quickly as pos-
sible, and are tolerant of small losses. This leads to profit
cuts and rising loss. So, for the long term, how do we
achieve capital appreciation?
Let’s try to memorise a few figures: 20% loss requires 25%
profits to break even, which seems easy. Forty percent
loss needs 66.7% profit to make break even, while more
than a 50% loss means you need 100% profit to break
even (which would rarely reverse a loss).
According to these statistics, 20% loss should be your
maximum drawdown. However, the stop-loss order is not
a means of capital management as it will not tell you the
exact number that you should sell, which leads to the fail-
ure of controlling risks.
Capital management is a critical component of the trad-
ing system, but in essence it is something that determines
the size of position in your position. It helps you deter-
mine how much profit you earn and how much risk you
take in your trading career.
THE WAY OF FOREX | Page 31
 Investing with a large and small proportion of funds
The chart below shows the difference between investing with a large and a small proportion of funds.

Chart 1. Drawdown risks by investing 2% versus 10%

No. Account Risks by No. Account Risks by

balance investing 2% balance investing 10%

1 $20,000 $400 1 $20,000 $2,000

2 $19,600 $392 2 $18,000 $1,800

3 $19,208 $384 3 $16,200 $1,620

4 $18,824 $376 4 $14,580 $1,458

5 $18,447 $369 5 $13,122 $1,312

6 $18,078 $362 6 $11,810 $1,181

7 $17,717 $354 7 $10,629 $1,063

8 $17,363 $347 8 $9,566 $957

9 $17,015 $340 9 $8,609 $861

10 $16,675 $333 10 $7,748 $775

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 Chart 1. Trading risks by investing 2% versus 10%

No. Account Risks by No. Account Risks by

balance investing 2% balance investing 10%

11 $16,341 $327 11 $6,974 $697

12 $16,015 $320 12 $6,276 $628

13 $15,694 $314 13 $5,649 $565

14 $15,380 $308 14 $5,084 $508

15 $15,073 $301 15 $4,575 $458

16 $14,771 $295 16 $4,118 $412

17 $14,476 $290 17 $3,706 $371

18 $14,186 $284 18 $3,335 $334

19 $13,903 $278 19 $3,002 $300

According to chart 1, there’s a big difference in risk between investing 2% and 10% of your capital. Every
time you invest 10% of your account, 19 consecutive losses in trading will significantly reduce your account
balance from $20,000 to only $3,002. That’s as much as 85% of your total balance. However, if you invest
only 2% of your account, there’ll be $13,903 remaining, which means you lose only 30% in total.

THE WAY OF FOREX | Page 33

 The risk-reward ratio in capital management

Another way to increase the chance of gaining profits is by making an order when potential profit is three
times the level of risk. In other words, if the risk-reward ratio in the investment is 1:3, there’s a high possibil-
ity you can make a profit.

Chart 2. Risk-reward ratio

10 lots Loss Gains

1 $1,000

2 $3,000

3 $1,000

4 $3,000

5 $1,000

6 $3,000

7 $1,000

8 $3,000

9 $1,000

10 $3,000

Total $5,000 $15,000

We can see from chart 2 that when possibility is at 50% , you can still gain $10,000 in earnings. You need to
remember that when you trade with a high reward-to-risk ratio you’re more likely to make profits even with
lower possibilities of a win.

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THE WAY OF FOREX

THE WAY OF FOREX | Page 35