CAPITAL MANAGEMENT

ACADEMY

copresented
OVERVIEW
● Understand how the Forex market works,
● Learn how to trade the Forex market,
● Understand the difference between technical and fundamental
analysis,
● Learn how to trade Forex using Fundamental Analysis,
● Learn how to trade Forex using Techncial Analysis including
support and resistance, candlestick patterns, chart patterns,
indicators, etc.
● Learn how to read a price chart,
● Learn how to place and manage a trade on the Forex market,
● Learn how to apply proper Risk and Money management in trading
Forex,
● Learn how to improve your trading using Trading Psychology tips,
What Is Forex?

Forex (foreign exchange, FX or currency trading) is a decentralized global market where all the world’s
currencies trade.The forex market is the largest, most liquid market in the world with an average daily
trading volume around $5 trillion dollars, where 20% of volume per day (around $1tln) are used for real
economic business purposes/transactions. The other 80% is for pure speculation. This is mostly hedge
funds, investment banks proprietary trading and retail traders.All transactions in the Forex market involve
two currencies. If a trader, a bank, an institution, or a traveler decides to exchange one currency for
another, a forex trade takes place. Thus, one currency is being bought and another currency is being
sold.Currencies must be compared to something else in order to establish value; this is why forex trading
involves two currencies.
Decentralized Market
What is a Decentralized Market?

A decentralized market is a market structure that consists of a network of various technical devices
that enable investors to create a marketplace without a centralized location.

In a decentralized market, technology provides investors with access to various bid/ask prices and
makes it possible for them to deal directly with other investors/dealers rather than with a given
exchange.

Forex traders can use the internet to check the quotes of various currency pairs from different
dealers from around the world.

This type of markets can allow for transparency between parties (buyers and sellers), especially if
they use technology that ensures all parties share mutually agreed upon data and information in
the transaction.
 The History of Forex
The Gold Standard Monetary System

The creation of the Gold Standard Monetary System in 1875 is one of the major events that
marked the history of the forex market. The system guaranteed the conversion of currency into
a specific amount of gold, in other words, governments needed substantial gold reserve to meet
the demand of currency exchanges.

Before the gold standard was created, countries around the world had a major issue with
commodities like gold and silver as international payment methods, because the value of these
metals is affected by global supply and demand. For example, when a new gold mine is
discovered it would drive gold prices down due to high supply in gold.
During the late nineteenth century, all of the major economic countries had pegged an amount of currency to an
ounce of gold. Over time, the difference in price of an ounce of gold between two currencies became the exchange
rate for those two currencies. This represented the first official means of currency exchange rate in history.

The gold standard broke down twice during the beginning of World War I and by the onset of World War II. The
major European powers needed to complete large military projects, which forced governments to print more money.

They ended up with more money than gold reserve to exchange for extra currency to sustain the financial burden of
completing these projects. However, gold never stopped being the ultimate form of monetary value and is generally
regarded as a safe haven for those seeking stability.
The Bretton Woods Accord
At the end of World War II, and after abandoning the gold standard monetary system, the United States, Great
Britain, and France met at the United Nations Monetary and Financial Conference in Bretton Woods, New
Hampshire to design a new global economic order

In July 1944, the Bretton Woods Accord was established for the purpose of restoring global economies by replacing
the gold standard with U.S. dollar to become a primary reserve currency, and creating three international agencies to
oversee economic activity:

– the International Monetary Fund (IMF),

– the International Bank for Reconstruction and Development, and

– the General Agreement on Tariffs and Trade (GATT).

Unfortunately, the Bretton Woods Accord was a failure and was terminated on August 15, 1971, by U.S. President
Richard Nixon, primarily because the U.S. dollar became the only currency in the world that was backed by gold
The Beginning of the Free-floating System

In 1972, the European community established the European Joint Float agreement by West Germany,
Italy, France, Belgium, the Netherlands, and Luxemburg for an attempt to escape the dependency on the
U.S. dollar.

This attempt was also a failure and the agreement was canceled in 1973.

Establishment of the Euro

The Maastricht treaty was signed in 1992 and established the European Union (EU), the creation of the
Euro currency, and included initiatives on foreign policy and security.
Internet Trading

With the advent of technology, the currency markets grew faster and became accessible to
everyone around the world. Now with just one click away you can get the most accurate
price on any asset in just few seconds.
The history of Forex market since the end of WWII presents a classic example of a free
market in action. Now the Forex market is one of the most liquid and heavily traded
market in the world.
 How Does Forex Trading Work?

The currency exchange rate is the rate at which one currency can be exchanged for another. It is always quoted in
pairs like the EUR/USD (Euro and the US Dollar).

Exchange rates fluctuates based on economic factors like inflation, consumer sentiment and geopolitical events.
These factors will influence whether you buy or sell a currency pair.

The EUR/USD exchange rate represents the number of US Dollars one Euro can purchase.

For example, let’s say the EUR/USD exchange rate is 1.270, this means that 1 Euro = 1.270 US Dollars.

If you believe the Euro will increase in value against the US Dollar, you will buy the EUR/USD pair.

If the rate rises, you will sell the EUR/USD to take profit. If you buy the EUR/USD and the exchange rate falls, then
you suffer a loss.
 Spot Market vs. Futures Market

The spot market or cash market is a public financial market in which financial instruments or commodities are traded
for immediate delivery. It contrasts with a futures market, in which delivery is due at a later date.

A spot market can be through an exchange (i.e., NYSE MKT and Toronto Stock Exchange) or over-the-counter
(OTC), which simply means that securities are traded via a dealer (Broker) network rather than on a formal physical
exchange. Spot markets can operate whenever the infrastructure exists to conduct the transaction.
 Why Trading Forex?

The Forex market is a market that does not sleep. It is open 24 hours a day, 5 and a half days a week, except the
weekends. The reason behind this is because governments, businesses and individuals who require currency
exchanging services are spread around the world and in different time zones.

For example, currency pairs with Japanese yen are most traded when it is daytime in Japan. However, since there
are always counter currencies to complement the pair, Japanese Yen ends up being traded all day with a spike in
activity from 12 a.m. to 8 a.m. GMT.

Why would anyone trade Forex? The market is open after 24 hours and traders with full time jobs are able to trade
Forex after work, before work and on Sunday evening.
Another reason is the liquidity of the market. The Forex market is the most liquid market in the world. With most
trading concentrated during the New York Session, for example roughly 70% of all Forex transactions involve
the US dollar, there are always a lot of people trading. This makes it very easy to get into and out of trades at any
time, even in large sizes.

Forex can be accessible anywhere you go and where there is an internet connection. You can trade from your
computer, your laptop, or your cell phone. The only things you need are an internet connection and a trading
account
 Types of Currency Pairs: Major, Minor and Exotic

In the Forex market, we trade currencies in pairs. For example, when you buy US dollars you need to sell
another currency in order to complete the transaction because you can’t buy US dollars with US dollars or
Euros with Euros.

There are three types of currency pairs in the Forex Market:

1. Major
2. Minor
3. Exotic
1. Major Currency Pairs

Major currency pairs consist of the most frequently traded currencies in the world. The major pairs are the most liquid pairs in the market and
have the lowest spreads (costs).These pairs include:

EUR/USD = Euro/US dollar

USD/JPY = US dollar/Japanese yen

GBP/USD = British pound/US dollar

USD/CHF = US dollar/Swiss franc

USD/CAD = US dollar/Canadian dollar

AUD/USD = Australian dollar/US dollar

NZD/USD = New Zealand dollar/US dollar

As you can notice, every major currency pair has the US dollar on one side, because it is the world’s leading reserve currency and because the
United States is the largest economy in the world involving about 88% of currency trades.
2. Minor Currency Pairs
The minor currency pairs are pairs that don’t include the US dollar. These pairs are called minor currency pairs or cross-currency
pairs.

These are some of the minor pairs:

EUR/GBP = Euro/British pound

EUR/AUD = Euro/Australian dollar

GBP/JPY = British pound/Japanese yen

CHF/JPY = Swiss franc/Japanese yen

NZD/JPY = New Zealand dollar/Japanese yen

The most widely traded minors are those containing euro, British pound and Japanese yen.
3. Exotic Currency Pairs

The exotic currency pairs include a major currency, such as (EUR, GBP or USD) and the currency of a developing
economy such as (Brazil, Mexico or South Africa).

These pairs are not frequently traded and the spreads are higher compared to the major or the minor pairs.

Here are a few exotic pairs:

EUR/TRY = Euro/Turkish lira

JPY/NOK = Japanese yen/Norwegian krone

GBP/ZAR = British pound/South African ran

AUD/MXN = Australian dollar/Mexican peso

EXCHANGE RATE
 The Exchange Rate

The Base/Quote Currencies

In Forex, currency pairs are written as Base/Quote

The base currency represents how much of the quote currency is needed for you to get one unit of the base currency. The
quote currency is often referred to as the counter currency or the domestic currency.

For example, the EUR/USD currency pair, the Euro here is the base currency and the US dollar is the quote currency.

A reading of EUR/USD = 1.25 means that 1 Euro equals $1.25. In other words, to purchase (or sell) 1 Euro you must pay
(or get) $1.25 US dollar.
The Exchange Rate

An exchange rate is the price of a domestic currency in terms of a foreign currency. In other words, it is the
amount of one currency you can exchange for another.

For example:

CAD $1 = US $0.9050 = 90.5 US cents, here the base currency is the Canadian dollar and the quote currency
is the U.S. dollar.

– Flexible Exchange Rates

– Fixed Exchange Rates

 Flexible Exchange Rates

Currencies under a flexible regime are controlled by the Government and the Central Bank. Most exchange rates are determined by the Forex
Market. Such rates are called flexible or floating exchange rates. The value of a currency under this regime is supposed to be determined by
the free market forces of demand and supply.

However, as we can see throughout history, as a result of War, International Competitiveness, Economic Crises and high levels of
Government Debt can lead to direct intervention and mismanagement of the currency exchange rate.

The US allows its forex market to determine the US dollar’s value. The US dollar strengthened against most currencies during the 2008
financial crisis. When stock markets fell worldwide, traders flocked to the relative safety of the dollar.

When a government and or a central bank manipulates a flexible exchange rate is to stop volatility in the exchange rate caused by economic
shocks or speculation and to stabilize it to enable international trade through imports and exports.

When a government and or a central bank manipulates a flexible exchange rate to the disadvantage of the other countries, it is termed as dirty
floating.
 Fixed Exchange Rates

When a country’s currency doesn’t vary according to the forex market, it has a fixed exchange rate. The country makes sure that its value
against the dollar, or other important currencies, remain the same. It buys and sells large quantities of its currency, and the other currency,
to maintain that fixed value.

For example, China maintains a fixed rate. It pegs its currency, the yuan, to a targeted value against the dollar. As of June 19, 2017, one
dollar was worth 6.806 Chinese yuan. Since February 7, 2003, the U.S. dollar has weakened against the yuan. One U.S. dollar could be
exchanged for 8.28 yuan at that time. The U.S. dollar has weakened because it can buy fewer yuan today than it could in 2003.

The U.S. government pressured the Chinese government to let the yuan rise in value. This allows U.S. exports to be more competitively
priced in China. It also makes Chinese exports to the United States more expensive. The U.S.-China trade deficit shows a huge imbalance
favoring China. The United States spends more buying Chinese goods than it makes selling American-made products to China. As a result,
China’s volume of exports to the United States largely outweighs its American imports.

The yuan to dollar conversion is one of the most widely monitored exchange rates. These currencies are backed by the two of the largest
economies in the world.
 Pips and Pipettes

Pip is the unit of measurement that represents the change in value between two currencies. For
example, if EUR/USD moves from 1.2550 to 1.2540, the 0.0010 USD rise in value is 10 pips.

Some pairs like the USD/JPY goes with two decimals instead of 4 decimals. In this case, one pip
move would be .01 JPY.

Some brokers quote currency pairs beyond the standard 2 and 4 decimals and use 3 and 5 decimals
instead. In this case, the change in value is called pipette instead of pip.

For example, EUR/USD moves from 1.25501 to 1.25508 USD, it is a 0.00007 pipettes.
 Percentages and Basis Points

Let’s convert the pip value into Percentage and Basis Points:

For example, EUR/USD appreciates 100 pips from 1.1174 to 1.1274,

{(1.1274-1.1174)/1.1174} x 100 = 0.895%, EUR/USD has risen 89.5 basis points.

Therefore, at current prices 1 pip in EUR/USD is equal to 0.00895 or 1 basis point.

As a rule: A basis point is 1/100th of 1 percent (%) i.e. 1% = 100 basis points or 0.01% = 1 basis
point.
Lot size

Lot simply means the number of currency units you will either buy or sell of a specific security. The
standard size for a lot is 100,000 units of currency, a mini, micro, and nano lot sizes are 10,000, 1,000,
and 100 units respectively.

For example, let’s say you are using a standard lot size and you decide to buy or sell USD/JPY pair at
the exchange rate of 119.20. Let’s calculate the pip value:

(0.01/119.20) x 100,000 = $ 8.38 per pip.

It is more than likely that as a retail trader, you will be dealing in Mini, Micro and Nano lots. Lots are
more for institutional level traders at investment banks and hedge funds.
Leverage

Leverage involves borrowing money from your broker to invest in the market. It is basically the ability to
control a large amount of money using small capital.

For example, to buy a position worth of $100,000, your broker will ask you to deposit a certain amount of
money, let’s say $1000 in your account and the rest of the money will be provided by your broker.

In this example, the leverage ratio is 100:1. You are now trading $100,000 with $1000.

The $1000 deposit is what is called the margin. It is the amount of money deposited in your account in order
to use leverage.

So if your broker requires 2% margin, you have a leverage of 50:1. If the required margin is 0.25%, you
have a 400:1 leverage
Spread

Let’s define the bid and the ask price first.

Bid/Ask is two-way price quotation that indicates the best price at which a security can be sold or bought at a given point of
time.

The bid price represents the maximum price that a buyer is willing to pay for a security.

The ask price is the minimum price that a seller is willing to receive from this transaction.

A trade occurs after the buyer and the seller agree on a price for the security.

The difference between the bid price and the ask price is the spread. In general, the smaller the spread, the better the liquidity.

The spread is an indicator of supply and demand for the financial instrument in question. The more interest the investors
have, the tighter the spread.
For example, EUR/USD quote of 1.2550/1.2557 tells traders that they can currently purchase the currency pair
at 1.2557 or sell it at 1.2550. The spread between the bid and the ask is 0.0007 or 7 pips.

When trading a 10k EUR/USD lot with a $1 pip cost, you would pay a total cost of $7 on this transaction.
Margin

With 1% Margin Requirement, this means you only have to put up GBP 1,000 initial margin in order to borrow GBP
100,000 from the broker to trade 1 lot of GBP/USD – 100 times leveraged.

If GBP/USD goes up by 1% you will make GBP 1,000 (100% return), if GBP/USD goes down by 1% you will lose GBP 1,000
and therefore 100% loss on your initial margin.

What really matters is gross exposure you have and the volatility of the assets that you have positions in. Let’s think of this
in terms of buying a stock like Apple. If you buy 1,000 shares at $125 your exposure is $125,000, if Apple goes down by 1%
you lose $1,250.

It’s the same when trading currencies. We’re simply using a base unit to work out our risk i.e. percentages.
Margin Call

A margin call happens when a broker demands that an investor deposits additional money or securities so that
the margin account is brought up to the minimum maintenance margin. A margin call occurs when the account
value falls below the broker’s required minimum value.

For example, let’s assume you have a standard account leveraged 100x and you deposited $1,000 to manage a
$100,000 trading account. You actually deposited 1% of the entire account size and you borrowed the rest
($99,000) from your broker.

Therefore, if you lose 1% of your entire trading account, which is $1,000, you will get a margin call and your
account is closed. In order for you to keep trading, you will need to fund your account.
 Types of Forex Orders

Trading is a bit more complicated than just buying and selling. There are many ways you can buy and sell
using different types of orders in forex, and each way serves a purpose. Here are the basic trading order
types, and when you will want to use them.

1. Forex Market Order

2. Sell Limit Order

3. Buy Limit Order

4.Buy Stop Order

5. Sell Stop Order

1. Forex Market Order

A Market order is the simplest order type. There are market orders to buy and market orders
to sell.
A market order gives you whatever price is available in the marketplace. For example, if you buy using a
market order you will get whatever price is available from those willing to sell to you. If you sell using a
market order, you get whatever price is available from people willing to buy from you.

Market orders are advantageous when you need to get into or out of a trade quickly, such as when the
price is moving quickly.

The problem with market orders is that you don’t know the exact price you will end up buying or selling
at. If you buy an asset with a tight bid/ask spread, usually you’ll end up paying the ask price, and when
you sell you’ll end up paying the bid price. In markets with low volume or a large bid/ask spread, you
could end up paying or selling at a much different price than expected
2. Sell Limit Order

A Sell Limit is an order to sell (or short) that is placed above the current price. The
order is only filled at or above the limit price

The attached chart shows an example of this. The sell limit order is placed above the current price of the
EUR/USD. The current price is 1.08971. The sell limit is at 1.09600 (dotted upper line). Therefore, the price
must rally to 1.09600 (or above) to fill the sell order.

Sell limits are also often used as targets, to get you out of a profitable long trade.
3. Buy Limit Order

A Buy Limit is an order to buy that is placed below the current price. The order is only
filled at or below the limit price.

The attached chart shows an example of this. The buy limit order is placed below the current price of the EUR/USD
forex pair. The current price is 1.08936. The buy limit is at 1.0775 (dotted lower line). Therefore, the price must drop to
1.0775 (or below) to fill the buy order.

Buy limits are also used as targets, to get you out of a profitable short trade.

*Fill means your order is completed, for example, if you put out an order to buy 100 shares at a limit price of $10, and
someone sells you 100 shares at $10, then your order is filled.
4. Buy Stop Order

A Buy Stop is an order to buy that is placed above the current price. The order
is only filled at or above the stop price.
The attached chart shows an example of this. The buy stop order is placed above the
current price of the EUR/USD. The current price is 1.0 8991. The buy stop is at 1.0918
(dotted upper line). Therefore, the price must rally to 1.0918 (or above) to fill the buy
order.
This order can be used to get out of a short trade.
Buy stops act like market orders once the buy stop price is reached. Therefore, they are
useful for using as a stop loss on short positions, when you must get out because the price
is moving against you. They are also useful for buying breakouts above resistance, but
you can’t be sure of the exact price you will end up buying at.
 5. Sell Stop Order

A Sell Stop order is an order to sell that is placed below the current price. The
order will only be filled at or below the stop price.
The attached chart shows an example of this. The sell stop order is placed below
the current price in the EUR/USD. The current price is 1.08978. The sell stop is at
1.0868 (dotted lower line). Therefore, the price must drop to 1.0868 (or below) to
fill the sell order.
This order can be used to get out of a long trade.
Sell stops act like market orders once the sell stop price is reached. Therefore, they
are useful for using as a stop loss on long positions, when you must get out
because the price is moving against you. They are also useful for selling/shorting
on breakouts below support, but you can’t be sure of the exact price you will end
up selling at.
 Forex Trading Styles

There are four main forex trading styles: scalping, day trading, swing trading and position
trading. The difference between these forex trading styles is based on the length of time that
traders keep their trades open. Scalping traders are only holding their positions for a few seconds
to a few minutes. Day traders keep their positions for anywhere from a few minutes to hours.

While swing traders hold their positions for a few days. Finally, position traders are holding their
positions for anywhere from a few days to several years.

Choosing the right trading style that best suits your personality and your lifestyle can be a
difficult task, but it is absolutely necessary to your long-term success as a professional trader.
Scalping

Scalping is very rapid trading style, and scalpers often make trades within a very short time. This trading style is very
demanding and traders need to make immediate trading decisions and act on it without second guess.

Being a successful scalper requires focus, concentration and most importantly stress management. Because they spend a
great time in front of their screens looking for short and quick opportunities, they need to be able to manage their level
of stress and keep calm no matter what the outcome is.
Day Trading

Day trading style is suited for those who like to open and close trades within the same day. They are
often unable to sleep at night knowing that they have an active trade that could be affected by
overnight price movements.
Swing Trading

Swing trading is compatible with people that have patience to wait for a trade and be able to hold it
overnight. So it is not suitable for those who would be nervous holding a trade while they are away from
their computer.

This trading style requires a large stop loss and the ability to keep calm when a trade is going through
retracements.
 Position Trading

Position trading is the longest term trading and often has trades that last for several years. Position trading style is more
suitable for the most patient, least excited traders and have a large capital to begin with.

Choosing a trading style requires the flexibility to know when a trading style is not working for you, but also requires the
consistency to stick with the right trading style even when it is not performing optimally.

One of the biggest mistakes that new traders often make is to change trading styles at the first sign of trouble.

Constantly changing your trading style or trading system is a sure way to catch every losing streak. Once you are
comfortable with a particular trading style, remain faithful to it, and it will reward you for your loyalty in the long run.
 What is the Best Time to Trade Forex?

The best time to trade forex (Foreign Exchange) is when it’s at its most active levels,
when trading spreads (the differences between bid prices and the ask prices) tend to
narrow.
 Forex Market Hours

The Forex market is open 24 hours a day from 10 p.m. GMT on Sunday until 9 p.m. GMT on
Friday. The reason why Forex market is open 24 hours a day is because currencies are in high
demand. Currencies are also needed around the world for international trades, as well as by
central banks and global businesses.
 The 3 Major Forex Exchanges

The Forex market can be split into three main regions: Australia-Asia, Europe and North America. Within each of
these main areas there are several major financial centers. For example, Europe is comprised of major centers like
London, Paris, Frankfurt and Zurich. Banks, institutions and dealers all conduct forex trading for themselves and
their clients in each of these markets.
Each day starts with the opening of the Asian session, followed by Europe and then North
America. As one region’s market closes another opens, or has already opened, and continues
to trade in the Forex market. Often these markets will overlap for a couple hours providing
some of the most active Forex trading.

European currencies are most traded from 8 a.m. to 4 p.m. GMT – this is called the
London/European session, and from 12 p.m. to 9 p.m. GMT is the North-American trading
session.

Although the Sydney, Australia, Forex market opens at 9 p.m. Sunday GMT, it is too thinly
traded, so you could wait for the Tokyo market to open an hour later for better trading
volume.
Best Time To Trade Forex vs. Profitable
Forex traders should proceed with caution, because currency trades often involve high leverage
rates of 1000 to 1. While this ratio offers tantalizing profit opportunities, it comes with an
investor’s risk of losing an entire investment on a single trade.

In fact, a 2014 Citibank study found that just 30% of retail forex traders break even or better. But
tellingly, 84% of those polled believe they can make money in the forex market.

The chief takeaway: new forex investors should open accounts with firms that offer demo
platforms, that let them make mock forex trades and tally imaginary gains and losses, until
investors become seasoned enough to confidently trade for real.
 How To choose Your Forex Broker?

What is a Broker?
A brokerage firm is a firm that acts as a middleman between buyers and sellers in order to
facilitate a financial transaction. Brokerage firms typically receive compensation by means of a
commission once the transaction is completed.
In the financial markets, there are several different types of brokerage firms offering a wide
range of services, ranging from more expensive brokers where a professional financial adviser
manages all investment decisions and provides ongoing advice and support. Retail brokers use
online platforms for investors to make their own trading decisions for lower commissions (low
spreads).
 Criteria for choosing the right Broker
Licensure
With hundreds of Forex brokers to choose from, selecting the right one can be both challenging and time consuming.

First thing you need to do is to check whether the brokerage firm is licensed and what is the country who issued the license. For example,
in the United States, intermediary companies must be registered with the Futures Commission Merchant and with the Futures Trading
Commission, the CFTC, and a member of the National Futures Association (NFA).

The NFA and the CFTC agencies are designed to protect consumers from fraud, manipulation and illegal business practices.

You can check the date of any brokerage firm at the CFTC or NFA websites or by calling the Broker firm information section at (001-
621-3570). You also can visit this link for more information: www.nfa.futures.org/basicnet

Always avoid unregistered companies with clean records and stay away from non-regulated companies.
The number one priority should be ensuring the safety of your funds. This means making
sure that your broker will not steal your deposit. You can best take care of this by making
sure that you only use a broker based in and regulated by a financial authority in a respected
financial center.
You need to make sure that even if the broker operates honestly, but goes bankrupt for any
reason, that you will be able to recover your deposit. One measure that can be taken here is
to only deposit with brokers whose regulators offer deposit protection for clients such as
regulated brokers in the UK or Australia. This means that the government will bail you out
by paying back your funds up to a certain amount, although it might take some time.
 What Is Fundamental Analysis?

Fundamental analysis is a method of evaluating a security in an attempt to assess its intrinsic value, by examining
related economic, financial, and other qualitative and quantitative factors.

Fundamental analysts study anything that can affect the security’s value, including macro and micro-economic
factors. Analysts use real, free public data to conduct their market research to generate trading ideas.
Fundamental Analysis: Stocks vs. Forex

In the stocks market, fundamental analysis focuses on the financial statements of the company being
evaluated. It determines the health and performance of an underlying company by looking at key numbers
and economic indicators, such as Earnings per share (EPS), Price to earnings ratio (P/E), Dividend yield,
Price to earnings ratio to growth ratio (PEG), etc.

The purpose is to identify fundamentally strong and weak companies or industries to trade.

Investors go long on the companies that are strong, and short the companies that are weak. This method of
security analysis is considered to be the opposite of technical analysis, which forecasts the direction of
prices through the analysis of historical market data, such as price and volume.
In the forex market, fundamental analysis looks at economic indicators that may affect the supply and demand of a
currency. This is what determines the currency exchange rate.

It helps professional and retail traders understand how economic indicators like the unemployment rate or GDP numbers
affect a country’s economy and monetary policy which ultimately, affect the level of demand for its currency.

The better shape a country’s economy is, the more foreign businesses and investors will invest in that country, thus
increasing the demand of that country’s currency to buy those assets. Investors are attracted to countries offering higher
interest rates.

When authorities are increasing the interest rates of their domestic currency, the demand for that currency increases and
therefore the currency exchange rate goes up and vice-versa.
 What Is Technical Analysis?

Technical analysis is the study of price patterns on a particular asset. There are many ways to identify patterns in the market, but
most technicians will focus on the following:

● Technical analysis chart patterns. In this study, technicians use drawing tools such as horizontal lines, trend lines and
Fibonacci levels to identify well-known classical chart patterns such as symmetrical triangle formations and consolidation
patterns, among others. These patterns give clarity to the strength and weakness of buyers and sellers in the market.
● Technical analysis candle patterns. In this study, technicians use technical analysis charts such as candle charts, which
display the open, close, high and low price levels of a particular timeframe to identify clues on the behaviour of buyers
and sellers in a short period of time.
● Technical analysis indicators. In this study, technicians use price action indicators to help in understanding the market
condition. For example, many indicators provide signals on when the market is overbought or oversold. Other indicators
provide clues on the rising and falling momentum.
 The Origins of Technical Analysis

Technical analysis of the financial markets has existed for as long as there have been markets driven by supply and demand.
The first known historical records are dated around the 17th century for Dutch merchants and the 18th century for Japanese rice
traders. At the end of the 19th-century technical analysis began to take off, as it was propelled into the trading masses by the
founder and editor of The Wall Street Journal, Charles Dow.

Among his contemporary compatriots were other technical pioneers such as Ralph Nelson Elliott, the founder of the famous
Elliott wave theory; William Delbert Gann, the founder of Gann angle theory; and Richard Demille Wyckoff who was possibly
the first market psychologist who theorised that the market, with all the historical data recorded, is best considered as a single
mind.

His teachings are still taught at some of the top universities in the US. For most of the 20th century and throughout history,
technical analysis was limited to charting, as statistical computation of vast amounts of data was unavailable. That meant no
technical analysis indicators were available. It also means that now – the digital era – can probably be considered as the Golden
Age of technical analysis and the right time to learn more about it.
 Does Technical Analysis Work?

Financial markets are impacted and influenced by a wide range of factors including, for instance, monetary
policies administered by central banks, fiscal policies delivered by governments, and many internal economic
factors that are determined by companies and consumers alike. Studying all those factors, realising how they
impact different assets and markets, and knowing which factors have the most impact is an incredibly difficult
task. This type of study is also known as fundamental analysis.

Equally important is that, when analysing these factors, traders can make errors in cause and effect. This is
particularly true for individual traders who have limited time and focus. However, the good news is that there is a
reliable short-cut whereby analysts can focus a lot of their attention on just one piece of data – price movement.
Technical analysis is also known as chart analysis, and allows traders to analyse historical price movements.
Technical analysis can then offer traders:
1. The ability to judge whether the chart is interesting to trade on
or not.
2. How traders can look for a potential trade setup.
3. Where traders can find potential trade setups.
4. How to manage those potential trade setups.
 The Difference between Fundamental & Technical Analysis

Fundamental and technical analysis are at opposite ends of the spectrum. Both methods are used for researching and
forecasting future trends in asset prices, and both have their advocates and adversaries.

Fundamental analysis can be used to evaluate a number of trading instruments, such as shares, indices, currencies and
commodities. Some traders will weigh up economic factors such as a country’s GDP, unemployment levels, company
profitability and the health of a sector before taking a decision to buy or sell. This is all fundamental data.

Technical analysis differs from fundamental analysis in that the asset’s price and volume are the only inputs. The core
assumption is that all known fundamentals are factored into price; thus, there is no need to pay close attention to them.

Technical analysts do not attempt to measure a security’s intrinsic value, but instead use charts to identify patterns and
trends that suggest what a security will do in the future.
The most popular tools of technical analysis are simple moving averages, support and
resistance, trend lines and momentum-based indicators such as stochastics, MACD and RSI.
The hardest part in using fundamental data is how to translate financial and economic data
into trading ideas such as buying or selling an asset.
In the following courses, we’re going to go through the fundamental factors that drive the
forex market and show you a simple way of utilizing the data to generate trading ideas.
It’s going to be a little be overwhelming at the beginning but once you get familiar with the
terminologies and the core concepts fundamental analysis will become part of your daily
analysis.
 The Advantages and Disadvantages of Fundamental Analysis
Advantages:The methods and approaches used in fundamental analysis are based on sound financial data and news releases. The
analysts use statistical and analytical tools to help them construct trading ideas based on their analyses. It requires rigorous
accounting and financial analysis to gauge better understanding of everything.

They need to translate financial reports and statements into trading ideas to generate proper buy/sell recommendation.

– Disadvantages:Conducting fundamental analysis can be time consuming. Carrying out industry analysis, financial modeling and
valuation, it is not an easy task, especially if a trader doesn’t know where to get the data and how to analyze it. This is why
fundamental analysis is not popular among retail traders.

Assumptions play a vital role in forecasting the financial markets. So it is important to consider the best and the worst case scenario.
Unexpected negative economic, political or legislative changes, may cause problems.

As a fundamentalists, you need to keep an eye on news releases and financial reports because these are the tools you have to get data
and construct trading ideas.
 The Advantages and Disadvantages of Technical Analysis

Advantages: Everybody loves technical analysis because it is simple and there are tons of resources free online to analyze the markets.
Once you understand the basic techniques of analysis, you can begin analyzing any market you want from currencies to stocks and
commodities.

The core concept used in technical analysis is Demand & Supply governs the trading market. Thus, it tells you a lot about Traders
Sentiments. You can actually judge how the overall market is working. Usually High demand push up the prices, and high supply push
down the prices.

Retail traders can use technical tools to tell when to enter and when to exit a trade. For example, some traders use crossing moving
averages to spot entry price and exit price.

Technical analysis also provides current information about the market. Price reflects all the known information about an asset. Prices may
increase or decrease, but ultimately, the current price is the balancing point for all information.

Traders use chart patterns as a guide to gauge whether the market is moving up or down.
– Disadvantages:
Retail traders often use too many indicators that spoil the charts and cloud their
judgments. Too many indicators can produce confusing signals, which may affect
their trading analysis.
Technical analysis does not take into account the underlying fundamentals of a
company or a country. This is why only 5% of traders are making real money trading
financial markets in the long run.
FUNDAMENTAL ANALYSIS

1 .Who Are The Major Participants in Forex Market?

2. How To Read The Economic Calendar?
3. Important Economic Indicators: Eurozone
4. Important Economic Indicators:US
5. Important Economic Indicators: The united kingdom
6. Important Economic Indicators:Canada
7. Important Economic Indicators:Japan
8. Important Economic Indicators:Switzerland
9. Important Economic Indicators:Australia
10. Carry Trade Strategy
 Who Are The Major Participants in Forex Market?
In this lesson, we will learn about the major players that participate in the Forex market. The major forex
participants are: Central Banks, largest investment firms/Commercial Banks, Hedge funds, Mutual funds and
Retail Forex Brokers and Retail Traders.

Businesses & Corporations

Let’s say that a company X in US is selling some goods to a company Y in Europe. The company X is projecting a
potential fall in Euro and the US Dollar may rise from EUR/USD = 1.30 to 1.20.

To hedge this exposure, the board of the company X in US proposes entering a one year forward contract to sell €
1,000,000 /and buy $ 1,300,000 USD close to the current spot rate at the beginning of the year.

The current rate is €1 = $1.30 USD, therefore if EUR/USD goes to 1.20 by the end of the financial year, they will
have locked in a profit of $ 100,000 USD, which wipes out the local currency loss that the impact of the exchange
rate move had on their USD reported sales.
Pension Funds & Hedge Funds
They are very active in the forex markets on a day to day basis. In order to buy a stock or a bond in another country, they must first
purchase the currency of that country. The exchange rate matters over the lifetime of the investment. If a pension fund sells USD to buy
JPY in order to buy Japanese Equities, if they make 20% return on the Japanese Equities but when they sell the Equities and convert
back into USD, the USD/JPY rate is 20% higher, they don’t make anything.

The currency conversion has cancelled out the profit on the day. The currency exposure can be hedged out by buying the same value of
USD/JPY as the value of the Japanese Stocks at the time of purchase. If the fund is denominated in Yen, then this doesn’t matter as there
is no currency conversion required.

Hedge Funds often trade correlation between asset classes and use liquid strategies to hedge the risk in their portfolios.

Classic risk on strategies in which global GDP is forecasted to go higher usually means that the world outside the US is set to grow faster
than the US – Sell USD buy rest of the world’s currencies, buy rest of the world’s stocks market and debt (bonds).

Classic risk off strategies in which global GDP is forecast to go lower usually means that the world outside of the US is set to grow slower
than the US – Buy USD Sell rest of the world’s currencies, Sell rest of the world’s stock market and debt.
Investment Banks & Retail Banks
The difference between investment banks and retail banks is the size of the client, the
complexity of the trades and the price they pay. Investment Banks offer hedging facilities in
forex and retail banks do plain vanilla (spot) transactions for small and medium-sized enterprises
(SME) importers and exporters for example, that do repeat business and require forex to pay for
foreign inputs/goods, SME services to pay for foreign services and foreign purchases for retail
clients that are traveling.
At Investment Banks client business is done on an Agency basis and on risk. So the bank will
take the opposite trade to the client if they need to or even want to in order to provide over-the-
counter (OTC) liquidity.
Retail Traders & Retail Brokers
Typically, forex is traded on 1% margin requirement. For example, if your initial margin deposit is $1,000 and your
leverage is 100x, it means that if you lose 1% on the $100,000 position you will be wiped out. This is known as the margin
call.

Retail brokers are incentivized to make you trade as frequently as possible, in the biggest size possible, to take the other
side of your losing trades and to leverage their win ratio to maximize their revenues.

Brokers don’t like clients who make money, because they are low value to them. It means they get paid less spread and
commissions. They also have to hedge out their exposure every time you trade and they make less profit on financing turn
charges.

There are two types of money in the forex markets: smart money (professional traders) who know how to trade and dumb
money (retail traders) that believe everything they are told and blindly rely on the infrastructure that is provided to them
(free webinars, free resources online, etc.).
 Central Banks
By Direct Intervention
The level of direct intervention from a Central Bank in manipulating the Exchange Rate for the benefit of an
Economy is down to the Exchange Rate Regime they have chosen to follow: fixed or floating regimes.

When a domestic currency weakness and the central bank wants to intervene, they must use their Foreign
Currency reserves to buy their own currency as a currency cannot be bought without selling another one.

When a domestic currency strengthens and the central bank wants to intervene, they must sell their own
currency reserves to buy foreign currency as a currency cannot be bought without selling another one.
Controlling the Money Supply
Modern financial systems incorporate a Fractional Reserve Banking System which is the mechanism by which Money is
created and flows to and from Banks, Institutions, Corporates, Businesses and Individuals.

Whenever a bank gives out a loan in a fractional-reserve banking system, a new sum of money is created. This new type
of money is what makes up the non-M0 components in the M1-M3 statistics.

There are two types of money in a fractional-reserve banking system:

1. Central bank money (obligations of a central bank, including currency and central bank depository accounts)
2. Commercial bank money (obligations of commercial banks, including checking accounts and savings accounts)

Central bank money is defined as Monetary Base (MB) and Commercial Bank Money is defined as M0-M3.
In financial Banking System a Reserve Requirement Ratio is minimum fraction of customer deposits and notes
that each Commercial Bank must hold as reserves (rather than lend out). These required reserves are normally in
the form of cash stored physically in a bank vault or deposits made with a central bank.

Central Banks increase/decrease the Money Supply M2 by increasing or decreasing Banking Reserves.

Adding to Reserves is the money printing mechanism – this allows banks to multiply their deposits and increases
the amount of Money M2 in circulation in an Economy at a supposed constant and predictable rate.

M2 is the broadest and most important measure of money supply and is used as an injection and withdrawal to
control inflation.

A country’s Exchange Rate is therefore affected by the Central Banks policy/rate of growth of M2.
Quantitative Easing (QE)
Quantitative Easing (QE) – QE is a non-classic monetary policy used by Central Banks to stimulate an Economy when
Classic Monetary policies like increasing loans through increasing M2 and Interest Rates have failed to stimulate the
Economy.

Central Bank implements QE by buying specified amount of financial assets which raises the price of those financial
assets and decreases the yield, while increasing the monetary base.

Expansionary monetary policy to stimulate an economy typically involves the Central Bank buying short-term
government bonds in order to lower short-term market rates to encourage banks to increase loans.

However, when short-term interest rates reach or approach zero and this hasn’t stimulated loans there may be no other
option to increase MB.
QE differs from the classic monetary policy of buying or selling short-term government bonds in order to keep
interbank interest rates at a specified target value.

QE can be used to further stimulate the economy by buying assets of longer maturity than short-term government
bonds, thereby lowering longer-term interest rates further out on the yield curve. Risks include the policy being
more effective than intended in acting against deflation, leading to higher inflation in the longer term, or not being
effective enough if banks don’t lend out on the additional reserves.

If loans are at capacity (zero excess reserves), the reserve ratio requirement is at the maximum it can possibly be
and increasing reserves by lowering rates to zero does not work, then the implementation of QE is a desperate
measure and is a last throw of the dice lever – no more levers exist unless.

Implementation of quantitative easing is an injection to the Money Supply and therefore has the risk of a lower
Exchange Rate, longer term domestic inflation and possibly not having the effect of even increasing banks loans
through increased reserves.
Interest Rates
Expansionary monetary policy to stimulate an economy typically involves Central Banks buying short-term government
bonds in order to lower short-term market interest rates to encourage banks/businesses/individuals to increase loans.

Contractionary monetary policy to deflate an economy typically involves Central Banks selling short-term government
bonds in order to raise short-term market interest rates to discourage banks to decrease loans.

When a Central Bank is in the mode of lowering interest rates (Dovish), they are buyers of short-term government
bonds.

When a Central Bank is in the mode of increasing interest rates (Hawkish), they are sellers of short-term government
bonds.
Interest Rates
When interest rates are falling this discourages capital from abroad flowing into a particular country for the purposes of
risk free investment in favor of countries with relatively higher interest rates – therefore lower Exchange Rate (sell
Currency).

When interest rates are rising this encourages capital from abroad flowing into a particular country for the purposes of
risk free investment in away from countries with relatively lower interest rates – therefore higher Exchange Rate (buy
Currency).

What matters for the relative exchange rate is the interest rate differential which forms the basis of what is termed as a
Carry or the Carry Trade.

Understanding Carry and Interest Rate Differentials is crucial to understanding Forex trading.
Governments
Taxes on Imports
If a Government wants to make domestic goods relatively cheaper they can introduce Import Tariffs making foreign goods
more expensive for domestic consumers. Foreign goods and therefore currency will be relatively less in demand on the
international Forex markets and foreign currency will therefore fall in value seeing the domestic currency rise.

This policy intended to be Inflationary (stimulating measure) by reducing Imports and increasing Exports. All things being
equal this policy is intended to increase a country’s surplus and decrease Deficit.

The reverse will happen if a Government decides to lower Import Tariffs i.e. Exchange rate of foreign trade partners rise
due to higher demand for imports relative to domestic goods i.e. deflationary/ decrease surplus/ increase deficit.
Taxes on Exports
If a Government wants to make domestic goods relatively more expensive they can increase tariffs on exports to other
countries making domestic goods more expensive for consumers abroad. Domestic goods and currency will therefore be
less in demand in International Forex markets and Domestic Currency will therefore fall in value seeing foreign trading
partner’s currency rise.

This policy is intended to be deflationary. This policy may not work at all if the domestic exchange rate falls by the same
amount as the export tax has increased.

The reverse will happen if a Government decides to lower export tariffs i.e. exchange rate of foreign trade partners rises
relative to domestic currency due to lower demand for foreign goods relative to domestic exports.

In most developed nations are duties (taxes) on both Imports and Exports, therefore the balance between Import and Export
 How To Read The Economic Calendar?
A forex economic calendar is useful for traders to learn about upcoming news events that can shape their
fundamental analysis.

In this lesson, you will learn how to read an economic calendar and how it could help you in your trading forex
market

WHAT IS AN ECONOMIC CALENDAR?

An economic calendar is a resource that allows traders to learn about important economic information
scheduled to be released. Such events might include GDP, the consumer price index, and the Non-Farm Payroll
report. In today’s environment of fiscal cliffs and central bank intervention, it can be very helpful to know the
date of the next central bank meeting or major news announcement.

The events on the calendar are graded low, medium and high, depending on their likely degree of market
impact. This is what the Investing.com economic calendar looks like.
HOW TO READ THE FOREX ECONOMIC CALENDAR
Knowing how to read the forex economic calendar properly is important to maximize your trading prior to and
following the most important releases. Checking the calendar every morning will allow you to familiarize yourself
with the upcoming events that matter.

In default mode, the calendar will show you every piece of economic news coming out for the major economies. For
many, that will be information overload, so you may want to customize the look.

TOP BENEFITS OF USING A FOREX ECONOMIC CALENDAR

The top benefits of using the forex economic calendar include:

● Being able to manage risk effectively

● Being in a position to plan ahead
● Having access to extra, helpful features for customisation
Risk Management
Being able to plan your trades based on economic calendar events means you can ready
yourself for potential turbulence in price. When an event listed on the calendar occurs, there
may be expected a period of volatility if data is released well above, below or in line with
expectations.
Understand the principle of risk management in regard to these trades. Risk is the difference
between your entry price and stop loss price, multiplied by the position size. Traders should
aim for this percentage to be less than 2% of account equity.
Planning Ahead
The forex economic calendar allows for planning ahead. For example, if a Nonfarm Payroll
report is set to be released, traders will know that this indicator has the potential to move FX
markets substantially, so awareness of the timings means they can plan their forex trades
accordingly.

Benefiting From Features on the Forex Economic Calendar

The forex economic calendar offers the added benefit of special features such as the
customization option mentioned above, offering the facility to select specific timeframes, set
alerts and apply filters to make it more relevant to your specific trading strategy.
 Important Economic Indicators: Eurozone
European Economy and Monetary Union (EMU) – EUR
The EMU (European Economic and Monetary Union) consists of 16 member countries: Austria, Belgium, Finland,
France, Germany, Greece, Ireland, Italy, Luxemburg, Netherlands, Portugal, Slovenia, Spain, Sweden, Norway and
The United Kingdom.

However, Sweden, Norway and The United Kingdom have not entered the last stage of the EMU where they adopt the
Euro as their currency; they still use their own currency.

Eurozone is a common term used for those countries that have adopted the Euro as their Currency.
According to the International Monetary Fund, if the European Union (EU) was a country, it would be the only one
in the world with a largest GDP than the US with 14.5 trillion USD.

Aside from a common currency, Eurozone countries share a single monetary policy dictated by the European
Central Bank (ECB). The ECB has established strict rules for every member country which main focus are:

– Stability of Prices

– Low Inflation per country (below 1.5% of the average of the best three performing countries)

– Low deficit

– Growth

The importance of the EUR has grown considerably as more and more countries in the world switch their reserves
from USD to EUR.
Interest Rate

Interest rates are a measurement of “the cost of money. The European Central Bank uses Interest rates as a tool to accomplish their
most important goals: inflation, growth and stability of prices.

When the ECB lower (tightens up) their interest rates, the Euro tends to depreciate against other currencies as it yields lower returns
(i.e. investors sell their Euros to buy other currencies with higher returns, increasing the offer of Euros thus prices go down).

When the ECB hikes their interest rates, the Euro tends to appreciate against other currencies as it yields higher returns (i.e. investors
sell their local currency to buy increasing its demand thus prices go up).

News Source: http://www.ecb.int/press/pressconf/2006/html/index.en.html

NOTE: As we already know the EU consists of various countries and each one of them has its own figure, although its important to
have an idea of the overall performance, for the following economic indicators it’s more important to monitor the performance of the
top three or four countries of the EU (refer to the GDP per country in the Eurozone above).
Gross Domestic Product (GDP)

The GDP of the EU is the value of services and Products produced within the borders of the EU. A good GDP
reflects a healthy economy.

A good GDP figure indicates the economy is growing and the Euro tends to appreciate against other currencies.

In a bad GDP figure, the Euro tends to lose value against other currencies.

News Source: http://ec.europa.eu/comm/eurostat

Harmonised Consumer Price Index (HCPI)

HCPI is what the EU uses as a measurement for inflation and stability of prices. As we already explained above,
the ECB has some rules for its members and one of the most important is that each country’s inflation should not
deviate more than 1.5% of the average of the best three performing members.

Usually for the EU:

When a low HIPC number is released the Euro tends to gain value against other currencies.

When a high HIPC number is released the Euro tends to lose value against other currencies.

News Source: http://www.ecb.int/stats/prices/hicp/html/index.en.html

Unemployment

Employment is always a good indicator of the shape of the economy of all countries. Usually when
unemployment numbers are low it reflects an economy in good shape (and vice versa).

Usually for the EU:

A low unemployment number tends to appreciate the value of the Euro against other currencies

A high unemployment data tends to depreciate the value of the Euro against other currencies.

News Source: http://ec.europa.eu/comm/eurostat

Trade Balance

The Trade Balance in the Eurozone measures the amount of services and products purchased (imports) against
those sold to other countries (exports). Trade Balance of each country of the Eurozone is divided in two: Intra-
Eurozone and Extra-Eurozone. Intra-Eurozone is the balance of each country of the Eurozone against the
Eurozone and Extra-Eurozone is the balance between each country of the Eurozone against non-Eurozone
countries.

Usually Intra-Eurozone data does not affect the currency market while Extra-Eurozone tends to affect the
currency market.

A good trade balance number usually appreciates the value of the Euro against other currencies.

A bad trade balance number usually depreciates the value of the Euro against other currencies.

Most investors focus on the Trade Balance of Germany as it is the leading economy of the Eurozone.

News Source: http://ec.europa.eu/comm/eurostat

Industrial Production

Industrial production of the Eurozone measures the total output of the manufacturing and energy sector.
Sometimes the Industrial Production is used as a proxy variable to measure the GDP of any country.

Usually:

With a good number the Euro will gain value against other currencies

With a bad number the Euro will lose value against other currencies.

Most investors focus on Industrial Production of Germany as it is the leading economy of the Eurozone.

News Source: http://ec.europa.eu/comm/eurostat

IFO Business Climate Survey

The IFO Survey is one of the most important sentiment indicators for the Euro Zone. This survey is conducted on
over 7,000 enterprises of Germany and it is divided into two main areas: their current assessment of business
climate and their expectations for the future business conditions. It is an index where 100 is the centerline between
good and bad conditions.

Usually:

A good number (above 100) tends to appreciate the Euro against other currencies.

A bad number (below 100) tends to depreciate the Euro against other currencies.

This survey is conducted monthly.

News Source: http://www.cesifo-group.de/pls/portal/url/page/IFOHOME/A-WINFO/D1INDEX/10INDEXGSK

Zew Survey

This is survey is conducted by experts throughout Europe on their assessment about Germany’s economic
expectation: inflation, growth, stock market and exchange rate over a medium term period (6 months) and their
assessment of the current conditions.

With a good number, the Euro tends to gain value against other currencies.

With a bad number, the Euro tends to lose value against other currencies.

News Source: http://www.zew.de/en/publikationen/Konjunkturerwartungen/Konjunkturerwartungen.php3

What is the difference between the IFO and ZEW surveys?

The IFO survey is conducted by enterprises and business owners while the ZEW survey is conducted by experts in
the area.
10-Year German Bund

Long term securities (governmental) are always a good indicator for future performance of any country. In fact, if
you do some research, you will see that very few under-development countries have in fact 10-Year securities
(because very few investors would invest in any long term security due to its uncertainty).

In this case, the 10-year Bund is a good indicator for the future performance of the Euro. When compared to the US
10-Year Bond:

If the Bund rates are higher and the differential increases: bull Euro sentiment

If the Bund rates are higher and the differential decreases: bear Euro sentiment
 Important Economic Indicators: US
Currently United States is the leading economic power in the world with a nominal GDP of 13.25 trillion USD, 3
times greater than Japan (which is the second in the world). US has a very large trade deficit (the US is the largest
trading partner for most countries in the world).

According to the Bank of International Settlements the USD is involved in 89% of all currency deals the Federal
Reserve (Central Bank of US) has two main economic goals: Price stability and Sustainable growth.

The USD is perceived as one of the strongest and most stable currencies in the world and as a result many countries
(mostly under-developed) peg their local currencies to the USD.
Non-Farm Payrolls Report “NFP”
The NFP report is probably in the top three market movers in today’s markets.

The NFP shows the number of jobs created for a given month outside the agricultural industry and government agencies. It is a major
indicator of the labor market strength, and the labor market is commonly tracked as an important domestic economy diagnosis.

A strong number indicates a healthy economy. Resultantly the USD could appreciate against other currencies

A weaker number indicates a lesser level of health in the economy. Resultantly the USD could depreciate against other currencies.

This report comes along with other data such as: the unemployment rate, which is the percentage of people actively looking for a job,
but were not able to find one.

This report is commonly released on the first Friday of every month.

News Source: http://www.bls.gov/news.release/empsit.toc.htm

Interest Rate (FED)
Interest rates are a measure of “the cost of money”. Central banks use interest rates as a tool to accomplish certain goals and objectives-
such as inflation, growth, etc.

An increase in US interest rates (hike) will typically increase the demand for the US Dollar, as foreign entities will sell their local
currency and buy the USD to take advantage of the higher interest rate, pushing up the value of the USD.

Tightening interest rates (cut) will decrease the demand for USD, as foreign entities will buy back their local currency and sell USD,
bringing back down its value.

Unchanged Interest rates could be bearish or bullish for the USD depending on the circumstances, unchanged interest rates after a
period of tightening is perceived as USD bearishness and after a hiking cycle it could be perceived as USD bullishness.

This report is released 8 times a year.

News Source: http://federalreserve.gov/fomc/fundsrate.htm

Trade Balance
This measures the net exports and imports of goods and services of the US. This is the trade flows component of
the balance of payments, which measures the demand and supply of one currency as explained before.

US has a negative trade balance against almost all countries in the world.

With a good number the USD is more likely to appreciate.

With a bad number the USD is more likely to depreciate

This report is released every two months (middle of the month following the reporting period.)

News Source: http://www.bea.gov/bea/di/home/trade.htm

Consumer Price Index
It is an index designed to measure the change in price of a fixed basket of basic goods and services (inflation). It is
intended to measure pure price changes while leaving out the changes in quality of goods and services.

If the CPI increases, the purchasing power of the currency decreases.

If the CPI decreases, the purchasing power of the currency increases.

This report is commonly released the second week of each month.

Core CPI excludes food and energy which are two of the most volatile components in the CPI measurement. This
indicator shows a more stable version of price changes.

News Source: http://www.bls.gov/cpi/

Consumer Confidence Index
The CCI is a survey conducted over 5000 consumers. They are asked questions about how they perceive the economy, current business
conditions, what they expect for the future, etc. It measures how confident the consumers are in a given month.

A good CCI number indicates that the economy is in good shape, and the USD appreciates.

A bad number indicates something is wrong with the domestic economy, therefore USD depreciates.

In a CCI release day, the average range for the EUR/USD is 129 pips.

Release date: close to the end of each month.

News Source: http://www.bls.gov/cpi/

Retail Sales
Retail Sales is an indicator of consumer expenditure. It measures the sales of retail stores (including durable and
non-durable goods), and excludes services (major weakness of this indicator).

A high number indicates favorable economic conditions, and the currency tends to increase its value.

A low number indicates non favorable economic conditions, and the currency tends to decrease its value.

Release date: near the middle of each month.

News Source: http://www.census.gov/svsd/www/advtable.html

Gross Domestic Product (GDP)
Measures the value of goods and services (total production) produced within the borders of the United States.
GDP includes: consumption, private investments, government expenditure and exports less imports.

The most important component of this announcement is the change (in GDP) between the actual month and the
same month of the previous year.

A good number indicates a strong economy, currency tends to increase its value.

A bad number indicates a weak economy, currency tends to decrease its value.

News Source: http://www.bea.gov/bea/dn/home/gdp.htm

ISM Manufacturing Index
ISM stands for “Institute of Management Suppliers”. It is a survey conducted over business executives on their
assessment for future business conditions. This indicator it’s important because the ISM is usually the first indicator
that turns around after a period of recession or constant growth.

The ISM values range around 50, where values above 50 mean an “expansion” or good expectation; and values
below 20 mean “contraction” or bad expectations for the near future.

News Source: http://www.ism.ws/ISMReport/index.cfm

FOMC (FED)
Minutes of the Federal Open Market Committee (FOMC) give some insight about the monetary policy decision
(three weeks after their actual monetary policy decision).

Usually investors and traders focus on key elements of how the Federal Reserve see current economic conditions,
what they expect for the future and general commentaries on market indicators such as inflation.

The market reaction to the FOMC Minutes varies as the information is already priced, but when they give
evidence of a “Hawkish” outlook interest rates hikes are more likely, on the other hand if they give evidence of a
“Dovish” outlook, interest rates cuts are most likely.
 Important Economic Indicators: The United Kingdom
The United Kingdom has the 5th largest economy in the world with a nominal GDP valued at over 2.3 trillion USD.

As with other leading economies in the world, the UK is a service oriented economy (mostly financial services: insurance and banking).

The UK has a very strong relationship with the Eurozone as imports and exports between both of them are around 50% of all UK’s trade balance.

The Bank of England (BoE) is responsible for the monetary policy in the UK. Bank of England’s main concern is to keep inflation at comfortable
levels.

There has been an ongoing debate on whether or not the UK should join the Eurozone (countries adopting the Euro as their currency). Argument
against: currently UK’s policies are doing well in the new global economy, they will no longer have control over their monetary policies and
arguments in favor are: the power of the European Central Bank will increase dramatically.

The GBP is amongst the most liquid currencies in the world and due its high interest, traders and investors are interested in this currency to
perform carry trades even when other currencies have higher interest rates.
Interest Rate
The Bank of England meets monthly to announce their interest rate decision. Currently, the GBP is the best choice
for carry traders (even when there are other majors with higher interest rates) because of its liquidity (the most
important being the GBP/JPY and the GBP/USD). For this reason traders and investors watch closely Bank of
England’s decision.

An increase in interest rates tends to appreciate the GBP value

A decrease in interest rates tends to depreciate the GBP value

Unchanged interest rates can be bullish or bearish depending on the circumstances.

News Source: http://www.bankofengland.co.uk/monetarypolicy/decisions.htm

Gross Domestic Product (GDP)
The GDP shows the overall growth of the economy of United Kingdom.

With a good number the GBP tends to gain value.

With a bad number the GBP tends to lose value.

Sometimes excessive growth can lead to periods of high inflation which can lead to further interest rates hikes.

News Source: http://www.statistics.gov.uk/instantfigures.asp

Trade Balance
Trade balance measures the difference from exports and imports of the United Kingdom. The first trading partner
for the UK is the Eurozone, but still on an individual basis, US remains the first one.

With a good number the GBP tends to gain value

With a bad number the GBP tends to decrease value.

Another important trade balance announcement is the NON-EU Trade balance which measures the difference
between exports and imports of non European countries.
Consumer Price Index (CPI)
Consumer Price Index is the key element of inflation. This is how most investors and traders measure inflation and
thus the increase/decrease of their purchasing power.

For the UK commonly:

A low number tends to increase the value of the GBP

A high number tends to decrease the value of the GBP

Another measure of the CPI for the UK is the Core CPI which excludes food and energy, two of its most volatile
components.
BoE Meeting (BOE)
In the Minutes of the BoE Meeting policy makers share their views and the reasons why they made any change to
the interest rate or indeed left it unchanged.

Most of the times traders and investors focus on the outlook for the future as the rate decision was already
occurred. They try to find evidence as to whether or not a future increase/decrease is likely to happen in the next
interest rate announcement.

For instance: if they mention “the housing market is in a clear expansion” it might create inflationary pressure
which might lead policy makers to increase interest rates.
Important Economic Indicators: Canada
Canada is currently the 8th largest economy in the world with a nominal GDP valued at 1.3 trillion USD.

Canada’s economy is highly dependant on its trade balance especially with the US who imports around three
quarters of Canadian exports.

The Canadian Dollar has a very tight relationship (positive correlation) with commodities such as gold and oil.

The Bank of Canada is responsible for the monetary policy. BoC primary objective is price stability. Changes in
policies can be made at any time as their councils meet almost every day.
Interest Rate
As in other countries rate decisions, it is of major importance to its exchange rate.

Typically an increase in interest rates might increase the demand for CAD increasing its value. Whilst an interest
rate cut will reduce the demand for CAD decreasing its value.

Because of the interest rate announcement is a highly expected and anticipated announcement, traders and investors
are more focused on the wording policy makers use to collect evidence about future economic conditions.

News Source: http://www.bankofcanada.ca/en/monetary/target.html

Canada’s International Merchandise Trade
This indicator measures the difference between exports and imports (excluding services). Canada’s major trade
partner is the US which imports about 75% of Canada Exports.

Typically in a good number the CAD will gain value

And in a bad number the CAD will lose value against other majors.

News source: http://www.statcan.ca/english/Release/index.htm

Gross Domestic Product (GDP)
The Canadian GDP measures the total production (and consumption) of goods and services produced within the
Canadian borders.

A good number usually makes the CAD gain value

A bad number usually makes the CAD lose some value

GDP includes: Private consumption and investments, government expenditure and exports less imports.

News source: http://www.statcan.ca/english/Release/index.htm

IVEY Purchasing Managers Index (PMI)
175 corporate executives across Canada are queried about their purchases for the current month comparing them
to the one previously.

With a good number the CAD might gain value

With a bad number the CAD might lose value against other majors.

A PMI value above 50 indicates expansion (better outlook) while a value below 50 indicates contraction (worse
outlook).

News Source: http://iveypmi.uwo.ca/english/historic_data.htm

Consumer Price Index (CPI)
As with other countries, the CPI measures price stability among a basket of goods and services. It intends to
measure inflation for a given period. An increase of inflation reduces the purchasing power of the CAD while a
decrease of it increases its purchasing power.

A good number tends to depreciate the CAD

A bad number tends to appreciate the CAD

News Source: http://www.statcan.ca/english/Subjects/Cpi/cpi-en.htm

Employment
Employment data is always a good measurement of the health of the economy. This announcement is the net
change in the number of people employed from one period to another.

A good number could make the CAD gain some value

A bad number could make the CAD lose some value.

News Source: http://www.statcan.ca/english/Subjects/Labour/LFS/lfs-en.htm

 Important Economic Indicators: Japan

Japan is the world’s second largest economy by nominal GDP with 4.4 trillion USD.

Japan is one of the Worlds largest exporters in the world. A good percentage of their GDP accounts for exports (close to 15%).

The Bank of Japan is the responsible for handling the monetary policy of Japan. The Bank of Japan is very active in the Forex markets. It is
known that when the USDJPY approaches to 100.00 the B of J tends to intervene in the market pushing the prices up. It’s important to
remember that Japan is a net exporter so it is in their best interests to have a cheaper currency than other majors; this way foreigners can
buy more Japanese goods and services for less of their local currency.

From the Major Currencies, the JPY is the currency with the lowest interest rate. This makes JPY crosses (such as GBPJPY or EURJPY)
interesting for carry traders (those who look to profit from interest rate differentials via rollover).

Although the Minister of Finance no longer officially dictates monetary policy, they still have some influence in exchange rates and monetary
policy.
Interest Rate
The Bank of Japan is responsible for the monetary policy of Japan. Currently, Japan is the country with the lowest
interest rates (from the majors). The BoJ meets once per month to announce possible changes in their current
monetary policy and economic outlook.

An increase in Japan’s interest rates might lead to JPY appreciation

A decrease in interest rates might lead to JPY depreciation.

News Source: http://www.boj.or.jp/en/theme/seisaku/kettei/index.htm

Gross Domestic Product (GDP)
GDP is the sum of all goods and services produced within the borders of Japan. Consumption, private investments,
government expenditure and exports less imports are the elements of GDP or growth.

With a good number the JPY might gain value

With a bad number the JPY might lose value

News Source: http://www.esri.cao.go.jp/en/sna/menu.html#93sna

TANKAN SURVEY
As other sentiment indexes, the Tankan survey is conducted on companies which are queried about their overall
economic outlook (including business conditions).

This report is very important for both foreign investors and the Bank of Japan as it gives a picture of the current
and the near future economic conditions. This helps investors allocate their capital or the BoJ to determine its
policy.

A positive number means a good outlook while a negative number means a negative outlook.

A better than expected number usually helps the JPY gain value.

A worse than expected number usually makes the JPY lose value.

News Source: http://www.boj.or.jp/en/theme/research/stat/tk/index.htm#

Trade Balance (and Merchandise Trade Balance)
The trade balance measures the difference between exports vs. Imports. Japan is widely known as a net exporter
country so the bigger this number the better for its economy.

A positive number indicates a surplus while a negative number indicates a deficit.

A better than expected number tends to appreciate the JPY

A worse than expected number tends to depreciate the JPY.

News Source: http://www.customs.go.jp/toukei/shinbun/happyou_e.htm

Merchandise Trade Balance is a similar economic indicator but only takes into accounts tangible goods such as
those of the car and electronic industries (two of the most important industries for Japan).
Employment Situation
This report is an analysis of the current and future conditions for the labor market in Japan. As always, the labor
conditions are a very good indicator for the overall economy health and activity.

Japan’s Employment Situation Report unusually incorporates other important data such as consumer consumption
data, increase/decrease of wages, inflationary pressures, etc.

With a good number the JPY tends to gain value

With a bad number the JPY tends to lose value

News Source: http://www.stat.go.jp/english/data

National Consumer Price Index (NCPI)
The NCPI is the most important indicator for inflation in Japan.

Unusually, Japan suffers from deflation (indicative of slow domestic activity) so a low number might not be good for
the JPY.

On the other hand, a high number might be good for the JPY as it indicates a more dynamic period for its domestic
economy.

News Source: http://www.stat.go.jp/english/index.htm

BOJ Policy Minutes (BOJ)
This report usually comes a month later after the actual monetary policy decision. It clearly explains the
reasons or why the BoJ hiked interest rates, cut interest rates, left them unchanged or other decisions.

Traders and investors try to focus on key elements that will give them evidence about how the policy
makers see the economy in the near future to make their trading decision.
 Important Economic Indicators: Switzerland

Switzerland is the 19th largest economic power of the world with a GDP valued at over 380 USD billion. But on a
per-capita basis, Switzerland is the 5th wealthiest country in the world.

The service industry, specially the banking, insurance and investment industries are very well developed and
employ more than 60% of its population. These industries represent around 70% of the total GDP.

The Swiss National Bank (SNB) is responsible for the monetary policy in Switzerland. As other Central Banks, all
decisions taken by the SNB are voted.
One difference between the SNB and other central banks is that monetary policy changes can be done at anytime.
The SNB inflation target is below 3%.

Another difference is that the SNB doesn’t set an official interest rate target but a range target (i.e. 2.5%-3.00%)
for their 3-month LIBOR rate.

The USDCHF has a very strong negative correlation (close to -1.0) with the EURUSD. So they both act as a mirror,
when the EURUSD goes up, the USDCHF goes down and vice versa.

Switzerland is considered a safe-heaven.

Interest Rate
As we already mentioned, the SNB doesn’t have a target rate but a target range for their 3-month LIBOR rate. The
SNB mainly changes its target range to have some influence over inflationary pressure.

When the interest rate range is increased, the CHF tends to gain value.

When the interest rate range is decreased, the CHF tends to lose value.

News Source: http://www.snb.ch/e/geldpolitik/geldpol.html

Gross Domestic Product (GDP)
Swiss GDP refers to all final goods and services produced within the national borders. The GDP growth in any
economy is used to measure the overall health of the economy.

As a result of a good number the CHF might gain some value.

As a result of a bad number the CHF might lose some value.

It’s important to mention that if growth rates are high and consistent it might create inflationary pressure that can
lead the SNB to increase the interest rate range. If GDP growth rates are low in the other hand, the SNB might
respond lowering their target range.

News Source:
http://www.bfs.admin.ch/bfs/portal/en/index/themen/systemes_d_indicateurs/economic_and_financial/data.html
Trade Balance
The Swiss trade balance measures exports less imports. When the country’s exports are larger than its imports the
trade balance has a positive value. The first trading partner for Switzerland is the Eurozone followed by United
States.

As a result of a good number, the CHF tends to gain value.

As a result of a bad number, the CHF tends to lose value.

News Source:
http://www.snb.ch/e/publikationen/monatsheft/aktuelle_publikation/html/matrix_lists/e/statmon_I3.htm
CPI
The CPI is the key element of inflation. Basically when the inflation rate grows the purchasing power of the CHF
decreases and vice versa.

The SNB inflation target is below 3%

As a result of a good number the CHF tends to appreciate against other currencies.

As a result of a bad number the CHF tends to depreciate against other currencies.

News Source: http://www.bfs.admin.ch/bfs/portal/en/index/themen/systemes_d_indicateurs/economic_and_financial/data.html

Monetary Policy Assessment
Members of the SNB share their views of the current and future economic conditions.

Traders and investors tend to focus on key elements such as possible increases or decreases in the interest range
target, inflation or growth.

News Source: http://www.snb.ch/e/publikationen/publi.html

Important Economic Indicators: Australia

Around 80% of Australia’s GDP come from services industries such as insurance, financial services and real state

The Reserve Bank of Australia (RBA) is responsible for the monetary policy. RBA main objectives are to: control
inflation, stability of the exchange rate and low unemployment. Each month its members meet to discuss possible
changes to the monetary policy.

The AUD has a very strong relationship (positive correlated) to commodities, especially gold prices.

Currently amongst the Majors, Australia has the highest interest rate at 6.75% (as of late 2007) making this
currency interesting for carry traders.
Interest Rate Decision
The Reserve Bank of Australia (RBA) is Australia’s Central Bank and is responsible for changes in monetary policy
including interest rates.

From the major currencies Australia is the country with the highest interest rate valued at 6.75% (as of late 2007).
The RBA normally meets nine times a year to discuss monetary policy and make possible changes.

An interest rate hike generally increases the demand for AUD increasing its value.

An interest rate cut generally decreases the demand for AUD decreasing its value.

News Source: http://www.rba.gov.au/Statistics/cashrate_target.html

Gross Domestic Product (GDP)
The GDP measures the final value of all goods and services produced within Australia’s borders during a specific
period of time. GDP includes: private consumption, private investment, government expenditure and exports less
imports.

During periods of constant growth inflation might become a problem for Australia’s economy.

With a good number, the AUD tends to gain value

With a bad number, the AUD tends to lose value.

News Source: http://www.abs.gov.au/ausstats/abs%40.nsf/mf/5206.0

Employment
This figure is the change of employment over a specified period of time. Usually traders and investors track
employment data as a measure of the overall economy.

With a good number the AUD tends to appreciate

With a bad number the AUD tends to depreciate.

News Source: http://www.abs.gov.au/ausstats/abs%40.nsf/mf/6202.0

Consumer Price Index (CPI)
The CPI is the key element of inflation measurement. Basically inflation is the change in the purchasing power of
one currency. Extreme inflation levels are no good for any economy, usually Central Banks tend to target values in-
between.

A good CPI number tends to appreciate the AUD

A bad CPI number tends to depreciate the AUD

News Source: http://www.abs.gov.au/ausstats/abs@.nsf/mf/6401.0

Trade Balance
The Trade Balance of Australia measures the difference between exports and imports of Australia and their foreign
trading partners. When this number is on the negative side, it means that imports are greater than exports,
conversely when this figure is in the positive side, it means that exports are greater than import.

With a good number the AUD tends to gain value against other currencies.

With a bad number the AUD tends to lose value against other currencies.

News Source: http://www.abs.gov.au/ausstats/abs%40.nsf/mf/5368.0

 Carry Trade Strategy

Most fundamentalists trade the currency market for the long term. This is because most of the time changes in
supply and demand take longer to be reflected in the charts.

Carry Trades or Rolling over is a common practice that consists of taking advantage of the interest rate
differentials between two currency pairs.

Most of these trades have a long-term span. Aside from taking advantage in the currency pair movements, they
also benefit from buying a high yield currency and simultaneously selling a low yield currency or selling a low
yield currency and simultaneously buying a high yield currency.

This way, traders are paid an interest or roll over.

How to Carry Trade?
The carry trade is one of the most popular trading strategies in the currency market. Mechanically, putting on a
carry trade involves nothing more than buying a high yielding currency and funding it with a low yielding
currency, similar to the adage “buy low, sell high.”

Example:

05/07/2019:

AUD: 1,25%; USD: 2,5%; AUD/USD = 1,25-2,5 = -1,25%.

07/02/2019:

AUD: 1%; USD: 2,25%; AUD/USD = 1 – 2,25 = -1,25%.

Technical Analysis in Forex
Trends And Trendlines

What Is a Trend?
One of the basic principles of technical analysis is that the market trends. But what exactly does that mean?

It is said that the market is trending when price action is either moving up:

Uptrend – successive higher highs and higher lows on its way up,

or moving down:

Downtrend – lower lows and lower highs on its way down.

Here is what an uptrend looks like on a chart:

Higher Highs: the market reaches a higher high relative to the previous high.

Higher Lows: the market reaches a higher low relative to the previous low.
And here is what a downtrend looks like on a chart:

Lower Lows: the market reaches a lower low relative to the preious one.
Lower Highs: the market reaches a lower high relative to the previous one.
Ranging or Sideways Markets
The market is not trending when it is not following a clear direction (up or down). This is condition is also called
as sideways markets.

Here is a ranging market:

Trendlines

Trendlines are very important tools for trend identification, confirmation and to
measure the intensity of the trend.
Trendlines are lines connecting two or more important points when price has bottomed
or topped and then it is extended to the future where it is expected to act again as a
support or resistance zone.
Let’s take a look at some charts.
Uptrend Trendline

Two or more higher lows connected (upward slope), identifying an uptrend.

Every time the market gets close to the trendline it gets rejected.
This trendline is acting as a support line. Price is not able to move
below the support line.
There are four points (higher lows) connecting this up-trendline. As
long as the market keeps trading above the trendline the uptrend is
intact. If a sustained break below the trendline happened, a reversal,
a correction or a consolidation period (range) is plausible.
Downtrend Trendline
Two or more lower highs connected (downward slope).
This trendline is acting as a resistance line. Price is not able to move
higher past this resistance.
As long as the price stays below the trendline, the trend stays intact.
Breakouts

So far, we learnt how to identify a trending market and a non-trending market. when
market trends, it either goes up or down. Using a trendline, we can identify the trend.
Now let’s say that the trend is up and at some point, the market violates the trendline
and goes the opposite way, this is called a breakout.
Breakout simple means that price breaks (violates) the trendline and changes course.
Here is an example of a breakout:
Price was moving up making new higher highs and new higher
lows. Price then breaks the trendline and reverses its course from
an uptrend to a downtrend. The trendline is violated and no more
valide.
Price could either reverse its course or correct and return to its
original course after a breakout.
Support And Resistance

Support and Resistance is one of the most important and fundamental parts of technical analysis. There are
many different ways to identify these levels and trade them.

Support and Resistance levels can be used as turning points, areas of congestion or psychological levels (round
numbers). The higher the time frame, the more relevant and reliable the levels become. Finding the most
important level can take many hours of practice. The fact that these levels flip roles between support and
resistance can be used to determine the range of a market, trade reversals, bounces or breakouts.

Each time the price makes a swing high or low, the resulting peaks and troughs can be marked as resistance and
support zones, respectively.

In this chapter we are going to learn how to identify and draw support and resistance levels and how we could
trade them using our trading strategy.
Support Level

Support is the price level at which demand is thought to be strong enough to prevent the price from declining
further. As the price declines towards support level and gets cheaper, buyers become more interested and
price bounces back up.

By the time reaches the support level, it is believed that demand will overcome supply and prevent the price
from falling below that support level.

In other words, think of support level like a barrier that stops price from moving down. When we look at a
price chart, we tend to see price moving down, pauses and retraces back up. This is a support level.

Here’s an example of a support level:

As you can see, price reverses back up every time it touches the support level and it was
unable to break through it and continue its direction to the downside.
One thing to keep in mind is that support levels do not always hold and a break below
support signals that the bears have won out over the bulls. When support breaks, new
lows signal that sellers have reduced their expectations and are willing to sell at even
lower prices.
One support level is broken, another support level will have to be established at a lower
price level.
Resistance Level
Like support levels, resistance levels are price levels at which selling is thought to be
strong enough to prevent the price from rising further. The price goes up then retraces
back down unable to break through the resistance level. By the time the price reaches
the resistance level, supply will overcome demand and prevent the price from rising
above resistance.
Here’s an example of resistance level:
Price keeps going up and touching the resistance level a few times before it breaks out
and continues to the upside. Resistance levels don’t always hold and at some point a
break above resistance signals that the bulls have won out over the bears. A break above
resistance shows new buyers willing to buy at even higher prices.
Once resistance is broken, another resistance level will have to be established at a higher
level.
Range
Ranges play an important role in determining support and resistance as turning
points or as continuation patterns. When price breaks out of the trading range:
– above: more demand than supply,
-below: more supply than demand,
In the chart below we can see that price is moving between support and resistance
levels:
Price ranges between 1.04537 and 1.14606. These are support and resistance levels respectively. In
a range, price seems to move horizontally rather than directionally.

Large ranges indicate high volatility, which refers to the amount of uncertainty or risk related to
the size of changes in the pair’s price. A higher volatility means that a pair price can potentially be
spread out over a larger range of prices.

Small ranges indicate low volatility. A lower volatility means that a pair’s price can potentially be
spread out over a smaller range of prices.

As retail traders, we need volatility because it provides high probability trading opportunities to
profit from.
How to Draw Support and Resistance

Support and resistance are very powerful technical tools and drawing them correctly on your charts is a key
skill for any trader to master. Because technical analysis is not an exact science, it is useful to think of support
and resistance levels as zones instead of single horizontal lines.

However, many traders out there make many mistakes when it comes to identifying and drawing these levels.

The Forex market is very dynamic and volatility and fundamental news releases can dramatically affect how
price moves on the chart.

The chart below shows you how we use zones instead of just lines:
The zones now include all major turning points and we can easily spot areas where support becomes resistance and vice-versa. When
price breaks below a support zone and continues down to reach a new support zone, the broken support zone becomes resistance.
Same thing happens when price breaks resistance and continues to the upside to a new resistance zone, the broken resistance zone
becomes support.

If this is new to you, just pull up price charts and start practicing drawing zones instead of lines. With practice, once you open a chart
your eyes will easily spot support and resistance zones with no effort.

Here’s the steps to draw support and resistance levels:

1. Start with higher time frames: weekly or daily time frames. This is important to get the bigger picture first and identify major
turning points and work your way down.
2. Identify all swing highs and lows and draw a rectangle connecting most of these swing highs and lows you just identified. You
might need to scroll left to see if the rectangle you drawn is confirmed by past swing highs and lows.
3. Repeat the process.
These are some tips to help you draw support and resistance zones correctly:

● You can draw them on any time frame you want, but for this strategy I recommend using 4H/Daily/Weekly and Monthly charts.
● When drawing your support and resistance zones keep them narrow as possible.
● Zones are not required to encompass every single trough or peak, just look for major levels where price has shown repeated bounces.
● If you are having a hard time identifying support and resistance levels using candlestick chart you can switch to a line graph instead.

Examples
In this example, we use a line graph to identify the peaks and the troughs. Next we connect them using a drawing tool to draw a rectangle.

Notice that we draw the rectangle in an area where we have a large number of peaks (for resistance) and troughs (for support).
We don’t have to draw every single support and resistance level, instead we focus on the levels around current price. The goal here is to
identify the next potential support or resistance level where price could go. We need to keep the chart clean and clear as possible to avoid
clouding our judgment.
The Psychology of Support and Resistance Zones
In any given financial market, there are typically three types of participants at any price level. The first type is traders who are buying and
waiting for price to go up, the second type is traders selling and hoping price will go down, and finally the third type is traders who are not sure
what to do.

As the price goes up from a support level, buyers are satisfied and maybe considering increasing their position size at pullbacks. The sellers in
this case, are starting to lose hope as price continues to rise and some of them start cutting their losses. The traders who did not know what do to
they may be ready to enter the market and go long once the price retraces back down to a support level.

A large number of traders may be willing to buy at this support level, adding to its strength as an area of support. If all these participants do buy
at this price level, the price will likely rebound from the support once again to the upside.

However, if price starts falling and breaks the support level, traders will quickly realize that the support level won’t hold and traders will wait
for price to retraces back up to new resistance to cut their losses and exit the market. Sellers are satisfied with their positions and are more than
willing to increase their position sizes when price pulls-back. Finally, those traders that did not know what to do see now a good opportunity to
jump in and short the market as price continues to go down. Again, a large number of traders may be willing to short at this price level. This
same behavior can be witnessed over and over again.
 Types of Forex Charts

There are 3 basic types of charts:

Line chart,
Candlestick chart and
Bar chart.
Line Chart:

Line chart is the easiest chart to look at as a beginner. It represents a curve, which shows closing price for a
certain period of time. Line charts can be also based on the median price, opening price, lows or highs.

A line chart is widely used for market analysis. It is usually applied in the graphic method of forecasting. A line
chart helps to identify patterns and build the most accurate levels of support and resistance.

Levels of support and resistance marked on a line chart will be more accurate. However, the line is not an
analytical tool and cannot be used to predict prices. Most traders prefer to use bars or Japanese candles when
they work with indicators.
Bar Chart:

The bar chart represents a vertical line in which the top denotes the high price of the period and the bottom
denotes the low. Off on the left of the bar is a horizontal line denoting the opening price and off on the right is
another horizontal line denoting the close.

A bar therefore includes all four of the key price components — the open, high, low and close, sometimes
abbreviated OHLC.

On your trading platform, you can have 5-minute bars, 15-minute bars, 1-hour bars, 4-hour bars, etc. In
Forex, the most commonly used bars are the 15-minute, 1 and 4-hour, and daily.
Candlestick Chart:
The candlestick chart is the most user friendly and popular among forex traders. It’s the easiest to read and the
nicest to look at
Forex Candlesticks are the individual boxes you see (Real Body or Body). Some of them have a thin line
protruding from the top and/or the bottom (Wicks or Shadows). You can see that there are 2 different colors, red
and blue. Originally, there were only white and black, but with modern technology, we are able to color them as
we like.

There are 4 components of a Forex candlestick: open, high, low and close.
The image above shows 2 candles, each a different color. Each Candle is composed of the same 4 elements
with one exception, the red candle has the close lower than the open while the blue candle has the close
higher than the open.

Each candle takes a period of time to build. This amount of time is reflected on the time frame of the
chart you are using. A 4 hour chart means that a candle takes 4 hours to create, a 15 minute chart means
each candle takes 15 minutes to create.

When a Forex Candlestick is built, it starts with the open level, this level remains exactly where it starts.
Through the course of the creation of the candle, price will bounce up and down making a high and a low
and then finally finish with the close. The close completes that candle and then a new candle starts with
the open, almost always in the position of the close of the previous candle.

A Forex Candlestick that closed higher than it opened is blue and a candle that closed lower than it
opened is red. Traditionally, a bull candle was white and a bear candle was black.
 Types of Candlesticks

Japanese candlesticks give us a better understanding of value, or more precisely.

They also help us have a better understanding of the psychology of traders and
investors driven by fear, greed and hope, since all these characteristics are
represented in price movements.
Before going through candlesticks patterns and how to trade based on them, we
should first understand what different candlesticks represent by themselves.
Long candlesticks
Long candlesticks describe strong buying/selling pressure. Price had a sharp advance/decline from
the open price (traders were aggressive).

When we talk about “long” candlesticks, we are referring to the body of the candlestick.

But, long compared to what?

We know it is long when we compare

the action of any candlestick with the
length of previous candlesticks. A
“long” candlestick must be clearly
identified in order to be a valid pattern,
should there be any doubt, it is probable
that the candlestick is not long
“enough”.
 Short candlesticks
Short candlesticks could represent two things: not much volume or periods of indecision (demand meets
supply.)

Short candlesticks are also compared to

previous action to assess the validity of the
candlestick.
Marubozu
Marubozu candlesticks are strong candles. They have no shadows, this means that the
open price equals the low/high of the period and the closing price equals the high/low
of the period.
The interpretation of this kind of candlesticks varies depending on where it was
formed. If a bullish marubozu appears in a downtrend, it could signal a short-
term reversal (bulls took control of the situation from the first minute to the
last.) If a bullish marubozu appears at the top the range, it could signal a final
push up, it all depends on preceding candlesticks. The same is true for a bearish
marubozu.

If the marubozu breaks through an important support or resistance level, the

market is likely to continue on the way of the “break through”.
Doji candlesticks
Doji candlesticks represent periods of indecision, or fierce battle between bulls and
bears.
Doji candlesticks are formed when the open price and the close price are
virtually the same (or very close). Ideally, the open and close prices
should be equal, but remember, the important thing to capture here is
the essence of the candlestick.

For instance, when the close and open price is similar, it shows us that as
the price went up, sellers took control of the situation, and when prices
went down, the buyers the control of prices.

Doji candlesticks alone are considered neutral, but should be a warning.

If for instance, in a downtrend a doji candlestick is preceded by a long
bull candlestick, then it could mean a possible reversal.
 Spinning tops/bottoms

Spinning tops and bottoms have small bodies and long shadows usually larger than its body.

Spinning tops/bottoms, as dojis, represent periods of indecision and intensive

action between bulls and bears, with no clear domination.

Spinning tops/bottoms are considered neutral until a long bull/bear

candlestick appears after them.
Long-legged doji

Long upper and lower shadows, open and close prices are virtually the same.
These candlesticks also represent intensive action between bulls and bears, and
no one was being able to take control over prices.
Dragonfly and Gravestone doji´s are Long-legged doji´s.
Dragonfly doji

Long lower shadow with open and closing prices

near the top of the range. Bears took control first,
but then bulls were attracted by cheaper prices then
taking control of prices.
This candlestick is more bullish than bearish since
the bears were not able to drive prices lower because
bulls took control over prices, pushing them up.
Gravestone doji
Long upper shadow with open and closing prices near the
bottom of the range. Bulls took control of prices at the
beginning, but then bears resurfaced gaining control
taking the price near the low (and open) of the range.
This candlestick is slightly more bearish than bullish since
bulls tried to take control over prices driving them higher
first, but then the bears took control over them driving
them back down.
 Candlestick Patterns
A candlestick is a way of displaying information about an asset’s price movement, it enables traders to interpret price information quickly
and from just a few price bars.

In this lesson we will focus on a daily chart, wherein each candlestick details a single day’s trading. It has three basic features:

● The body, which represents the open-to-close range

● The wick, or shadow, that indicates the intra-day high and low
● The color, which reveals the direction of market movement – a green (or white) body indicates a price increase, while a red (or
black) body shows a price decrease

Over time, individual candlesticks form patterns that traders can use to recognize major support and resistance levels. There are a great many
candlestick patterns that indicate an opportunity within a market – some provide insight into the balance between buying and selling
pressures, while others identify continuation patterns or market indecision.

Before you start trading, it’s important to familiarize yourself with the basics of candlestick patterns and how they can inform your decisions.
Six bullish candlestick patterns
Bullish patterns may form after a market downtrend, and signal a reversal of price movement. They are
an indicator for traders to consider opening a long position to profit from any upward trajectory.

1. Hammer

2. Inverse hammer

3. Bullish engulfing

4. Piercing line

5. Morning star

6. Three white soldiers

 Hammer
The hammer candlestick pattern is formed of a short body with a long lower wick, and is found at the bottom of a
downward trend.

A hammer shows that although there were selling pressures during the day, ultimately a strong buying pressure
drove the price back up. The color of the body can vary, but green hammers indicate a stronger bull market than
red hammers.
Inverse hammer
A similarly bullish pattern is the inverted hammer. The only difference being that the upper wick is long, while
the lower wick is short.

It indicates a buying pressure, followed by a selling pressure that was not strong enough to drive the market
price down. The inverse hammer suggests that buyers will soon have control of the market.
Bullish engulfing
The bullish engulfing pattern is formed of two candlesticks. The first candle is a short red body that is completely
engulfed by a larger green candle.

Though the second day opens lower than the first, the bullish market pushes the price up, culminating in an
obvious win for buyers.
 Piercing line

The piercing line is also a two-stick pattern, made up of a long red candle, followed by a long green candle.

There is usually a significant gap down between the first candlestick’s closing price, and the green candlestick’s
opening. It indicates a strong buying pressure, as the price is pushed up to or above the mid-price of the previous
day.
Morning star
The morning star candlestick pattern is considered a sign of hope in a bleak market downtrend. It is a three-stick
pattern: one short-bodied candle between a long red and a long green. Traditionally, the ‘star’ will have no
overlap with the longer bodies, as the market gaps both on open and close.

It signals that the selling pressure of the first day is subsiding, and a bull market is on the horizon.
Three white soldiers
The three white soldiers pattern occurs over three days. It consists of consecutive long green (or white) candles
with small wicks, which open and close progressively higher than the previous day.

It is a very strong bullish signal that occurs after a downtrend, and shows a steady advance of buying pressure.
Six bearish candlestick patterns

Bearish candlestick patterns usually form after an uptrend, and signal a point of resistance. Heavy pessimism
about the market price often causes traders to close their long positions, and open a short position to take
advantage of the falling price.

1. Hanging man

2. Shooting star

3. Bearish engulfing

4. Evening star

5. Three black crows

6. Dark cloud cover

 Hanging man

The hanging man is the bearish equivalent of a hammer; it has the same shape but forms at the end of an uptrend.

It indicates that there was a significant sell-off during the day, but that buyers were able to push the price up
again. The large sell-off is often seen as an indication that the bulls are losing control of the market.
Shooting star
The shooting star is the same shape as the inverted hammer, but is formed in an uptrend: it has a small lower body,
and a long upper wick.

Usually, the market will gap slightly higher on opening and rally to an intra-day high before closing at a price just
above the open – like a star falling to the ground.
 Bearish engulfing
A bearish engulfing pattern occurs at the end of an uptrend. The first candle has a small green body that is
engulfed by a subsequent long red candle.

It signifies a peak or slowdown of price movement, and is a sign of an impending market downturn. The lower the
second candle goes, the more significant the trend is likely to be.
 Evening star

The evening star is a three-candlestick pattern that is the equivalent of the bullish morning star. It is formed of a
short candle sandwiched between a long green candle and a large red candlestick.

It indicates the reversal of an uptrend, and is particularly strong when the third candlestick erases the gains of the
first candle.
Three black crows

The three black crows candlestick pattern comprises of three consecutive long red candles with short or non-
existent wicks. Each session opens at a similar price to the previous day, but selling pressures push the price lower
and lower with each close.

Traders interpret this pattern as the start of a bearish downtrend, as the sellers have overtaken the buyers during
three successive trading days.
Dark cloud cover

The dark cloud cover candlestick pattern indicates a bearish reversal – a black cloud over the previous day’s
optimism. It comprises two candlesticks: a red candlestick which opens above the previous green body, and closes
below its midpoint.

It signals that the bears have taken over the session, pushing the price sharply lower. If the wicks of the candles are
short it suggests that the downtrend was extremely decisive.
Four continuation candlestick patterns

If a candlestick pattern doesn’t indicate a change in market direction, it is what is

known as a continuation pattern. These can help traders to identify a period of rest in
the market, when there is market indecision or neutral price movement.
 Doji

When a market’s open and close are almost at the same price point, the candlestick resembles a cross or plus sign –
traders should look out for a short to non-existent body, with wicks of varying length.

This doji’s pattern conveys a struggle between buyers and sellers that results in no net gain for either side. Alone a
doji is neutral signal, but it can be found in reversal patterns such as the bullish morning star and bearish evening
star.
 Spinning top

The spinning top candlestick pattern has a short body centered between wicks of equal length. The pattern
indicates indecision in the market, resulting in no meaningful change in price: the bulls sent the price higher, while
the bears pushed it low again. Spinning tops are often interpreted as a period of consolidation, or rest, following a
significant uptrend or downtrend.

On its own the spinning top is a relatively begin signal, but they can be interpreted as a sign of things to come as it
signifies that the current market pressure is losing control.
 Falling three methods

Three-method formation patterns are used to predict the continuation of a current trend, be it bearish or bullish.

The bearish pattern is called the ‘falling three methods’. It is formed of a long red body, followed by three small
green bodies, and another red body – the green candles are all contained within the range of the bearish bodies. It
shows traders that the bulls do not have enough strength to reverse the trend.
 Rising three methods
The opposite is true for the bullish pattern, called the ‘rising three methods’ candlestick pattern. It comprises of
three short reds sandwiched within the range of two long greens. The pattern shows traders that, despite some
selling pressure, buyers are retaining control of the market.
 Chart Patterns
There are two types of chart patterns: reversal and continuation chart patterns.

Continuation Chart Patterns

Set up the market for a follow through in direction of the prevailing trend. Among the most important continuation patterns are:

● Rising and falling wedges

● Symmetrical, ascending and descending triangles
● Rectangles

Reversal Chart Patterns

These types of patterns set up the market for a trend reversal once the pattern is confirmed. Reversal patterns are:

● Double Top and Bottom

● Triple Top and Bottom
● Head and Shoulders Top and Bottom
 Reversal Chart Patterns

These types of patterns set up the market for a trend reversal once the pattern is
confirmed. Reversal patterns are:
● Double Top and Bottom
● Triple Top and Bottom
● Head and Shoulders Top and Bottom
Head and Shoulders Patterns

It is typically associated with the start of a new trend and therefore when a Head and Shoulders pattern is formed
at the top, it signifies the start of a down trend on the time frame it appears and an inverted head and shoulders
pattern is formed towards the bottom of a down trend and indicates the start of an uptrend.

The head and shoulders pattern is identified with three peaks with the middle peak standing out from the other
two.

We have the head and shoulders and the inverted head and shoulders pattern with a horizontal support line, or
neck line. The head and shoulders pattern is traded when there is a break of the neckline and a short position is
entered on the pullback. Stops are placed at previous intermediary highs, while the target is a projected distance
of the previous head and neckline price distance.
Double Top and Bottom

The double top is made up by two extreme peaks and the double bottom is made up by two extremes lows like the illustration

Double top

After the first peak, there must be a decline of no more than 25% of the uptrend. (This decline makes up a support that must be broken for
the pattern to be complete). Then the price rallies again to the resistance made by the first peak. Highs should be roughly equal. Then the
price falls back down from resistance to support, and finally breaks the support.

Double Bottom

After the first low, there must be a rally of no more than 25% of the downtrend. (This rally makes up the main resistance that must be
broken for the pattern to be complete). Then the price drops again to the resistance made by the first low. Lows should be roughly equal.
Then the price rallies again from the second low to the main resistance, and finally breaks the main resistance zone.

These types of pattern can be used during trending markets signaling a possible reversal or during trendless markets, to signal a possible
change in the direction of the market.
Triple Top and Bottom

Triple Top

The triple top is similar to double tops, but has three peaks (instead of two):

Same mechanics are followed here. A prior trend has

to be reversed, three peaks reasonably equivalent to
each other, and an important support to be broken in
order to complete the pattern. In this pattern the
changes in supply and demand take a little longer to
change the perspective of traders about the markets.
Triple Bottom

The triple bottom is similar to double bottoms, but has three troughs (instead of two):

Same mechanics are followed here, a prior

trend has to be reversed, three troughs
reasonably equivalent to each other, and an
important resistance to be broken in order
for the pattern to be complete. In this
pattern the balance in supply and demand
take a little longer to change the perspective
of traders and investors about the markets.
Chart Patterns: Continuation Chart Patterns

In this lesson we will go over the continuation chart patterns. These patterns are important to understand since
they generate trades in direction of the prevailing trend thus generating low risk trading opportunities.

Among the most important continuation patterns are:

● Symmetrical, ascending and descending triangles

● Rectangles
Symmetrical Triangles

These types of patters are formed by two converging trendlines:

Symmetrical triangles indicate consensus, new highs or lows are reached, the price
makes a series of lower highs and higher lows, these points connected make two
converging trendlines.
As the price approaches the apex, supply and demand reaches a temporary equilibrium.
The pattern is completed when either the support or resistance trendline is broken.
Ascending Triangles

Ascending triangles are formed in an uptrend, after the prices rallied to new highs:

At this point the bears come in play attracted by the

higher prices and start selling at such highs making the
price pull back to a support level where the bulls take
control again of the market making the prices rally to test
previous highs.

A second decline is followed to the support-trendline

(higher lows). At this point, the bears realize there is not
enough supply to take the prices lower, as they close out
their short positions; bulls take again the command of
prices making them rally to new highs. The pattern is
completed when the trendline-resistance line is broken.
 Descending Triangles
Descending triangles are formed in a downtrend after new lows have been reached:
At this point the bulls come in play attracted by the
lower prices and start buying at such lows making the
price rally to the resistance level where the bears take
control again of the market making the prices reach
lower levels to test previous lows.

A second rally is followed to the resistance-trendline

(lower highs). At this point, bulls realize there is not
enough demand to take the prices higher, as they close
out their long positions; bears take again the command
of the market making it rally to new lows. The pattern is
completed when the trendline-support line is broken.
Bullish Rectangles
Bullish rectangles are periods of consolidation that appear after a sharp move:

These types of rectangles or channels are periods of

consolidation (after a sharp rally) where supply
and demand meet. At this period of indecision,
investors and traders try to digest the recent sharp
move. In a bullish rectangle, bulls prefer to take
partial profits, and wait for further pull backs so
they can make their move again. This pattern is
completed when the resistance is broken.
Bearish Rectangles

Bearish rectangles are periods of consolidation that appear after a sharp decline:

In a bearish rectangle, bears close most of their short

positions and wait for further rallies so they can sell again
at higher prices. Although the sentiment is still strong in
favor of the prevailing trend, traders and investors prefer
to take a rest. The support must be broken in order for the
pattern to be complete.
 Chart Patterns: Wedges

Rising and Falling Wedges

These patterns can be either reversal or continuation patterns. Depending on where

the pattern was formed and its slope it could signal a continuation of the trend or a
trend reversal.
Continuation Rising Wedge

As all wedges, this one begins wide and contracts as the market reaches new highs:

Continuation rising wedges are a bearish

continuation pattern. It starts out wide, but
narrows as prices keep going up.

The highs and the lows of the pattern form a

falling wedge. Two or more touched points are
required to form the converging trendlines.

This pattern is completed when the price

breaks through the support trendline.
 Continuation Falling Wedge

Continuation falling wedges are a bullish continuation pattern. It starts out wide, but narrows as prices keep going
down.

The highs and the lows of the pattern form a falling wedge. Two or more touched points are required to form the
converging trendlines.

This pattern is completed when the price breaks through the resistance trendline.
Reversal Rising Wedge
This pattern begins wide and contracts as the market keeps rising:

Reversal rising wedges are a bearish

reversal pattern found at the end of the
uptrend. Starts out wide, and narrows as
the market reaches new highs forming a
rising wedge when two or more points are
connected. The pattern is completed when
the price breaks the support trendline.
Reversal Falling Wedge

Reversal falling wedges are a bullish reversal

pattern. It starts out wide, but narrows as prices
keep going down.

The highs and the lows of the pattern form a

falling wedge. Two or more touched points are
required to form the converging trendlines.

This pattern is completed when the price breaks

through the resistance trendline.
 Forex Indicators: Moving Averages

Moving averages measure the average price of the previous n-periods. For instance, a MA(5) measures the
average price of the last 5 bars. However, as the name implies, the average changes as when a new period is added
the last period is dropped. So it is always the MA of the last 5 periods.

As in any other indicator, the period selected is a critical element. The shorter the period the more sensitive the
MA is to price movements and is less consistent, and the larger the period chosen, the more consistent it is, but at
the same time less sensitive to price fluctuations.

The moving average explained above is called simple moving average (SMA). However, there are also other
popular types of moving averages: exponential moving average (EMA) and weighted moving average (WMA).

The only difference between the SMA and the other two approaches is the weight assigned to each period. EMA´s
and WMA´s assign more weight to the periods that are closer to the current price, while in SMA all periods are
equally weighted.
Which one to use?
We prefer to use EMA since they give more value to more recent price fluctuations, and reflect what is happening at
any given time with more accuracy. However, there are traders that prefer to use SMA.

Moving averages As Trend Following Indicators

They smooth out price fluctuations and make it easier to identify a trend. There are several ways in which this
indicator can be used to identify the trend:

1 – Location of the MA in relation to price action. If the MA is above the price, it indicates a downtrend is in place.
If the moving average is below the price then it is considered an uptrend.

2 – With the slope of the MA. When the MA is sloping up, the market is considered to be in an uptrend. When it is
sloping down the market is considered to be in a downtrend. When there is no slope, then the market is trendless
or sideways.
When the price breaks the EMA(10), a significant change in trend could be imminent (or at least a retracement or
consolidation period). Also the slope of the EMA(10) keeps good track of the trend. There are also periods of
indecision (when the market breaks the MA back and forth). During these periods, the EMA(10) could lead us to
take false conclusions about the market condition.
For this reason it is always advised to use a second MA, for example the 10 and the 21 EMAs. This allows us to
keep track of the location of one MA relative to the other. When the short period MA is above the longer period MA
the trend is considered an uptrend, and when the short period moving average is below the larger period MA, the
trend is considered to be a downtrend.
 Moving Averages As Support and Resistance
Some MA’s are used to establish levels of support and resistance. The most common periods used in MA for this kind of usage are: 50,
100, 200

As you can see this moving average is a very powerful price level in the chart. Almost all
the time, something happens when the price action approaches to this EMA, either it
bounces off from it or makes a wild break out.
Moving Averages as Trading Signals

Perhaps the most common and easy trading system is this one. It consists in plotting a short period moving
average and a larger period moving average. When the short period moving average crosses above the large
period moving average, it signals a buy signal. When the short period MA crosses down the larger period moving
average, it indicates a sell signal.

In the chart above we used an EMA(9) as the short period MA (blue line) and an EMA(21) as the longer
period MA (red line). There are a total of 5 cross-over signals: 3 buy and 2 sell signals.

The three buy signals are generated when the short period MA crosses above the long period MA while the
2 short signals are generated when the short period MA crosses below the long period MA.
Forex Indicators: Average True Range (ATR)

What is Average True Range – ATR?

The average true range (ATR) is a technical analysis indicator that measures market volatility by decomposing
the entire range of an asset price for that period.

The true range indicator is taken as the greatest of the following: current high less the current low; the
absolute value of the current high less the previous close; and the absolute value of the current low less the
previous close. The average true range is then a moving average, generally using 14 days, of the true ranges.
What Does Average True Range Tell You?

The ATR may be used by traders to enter and exit trades, and it is a useful tool to add to a trading system. It
was created to allow traders to more accurately measure the daily volatility of an asset by using simple
calculations. The indicator does not indicate the price direction; rather it is used primarily to measure volatility
caused by gaps and limit up or down moves. The ATR is fairly simple to calculate and only needs historical price
data.
Example

Assume a daily reading on the ATR for EURUSD pair is 0.0036, which is 36 pips. To calculate your stop loss,
simply multiply it by 1.5 to get your stop loss order:

36 x 1.5 = 54 pips stop.

 Forex Indicators: Ichimoku Cloud

The Japanese have contributed a lot to the Western world in trading. From Candlestick, Heiken Ashi charts,
Renko and Kagi charts to the Ichimoku trading system. Considered to be one of the best trading indicators, the
Ichimoku trading indicator is in fact a trading system of its.

Roughly translated to English, Ichimoku Kinko Hyo, or Ichimoku for short, stands for Equilibrium of Price.

The Ichimoku Indicator is one of the standard indicators that are available in many charting platforms. In this
lesson, you will learn the various components of the Ichimoku indicator and how to trade the buy/sell signals it
generates.
Components of the Ichimoku Indicator
The ichimoku trading indicator is made up of the following components

● Kumo or Clouds
● Senkou Span A and Span B
● Chikou Span (or lagging span)
● Kijun Sen and Tenkan Sen (Conversion Line and Base Line)

The default indicator settings for the Ichimoku is 9, 26 and 52. The reason for using these values is based upon an
ancient Japanese work week. The 9 periods indicate one and half weeks or 9 trading days, while 26 indicates a full
trading month and 52 indicates two trading months. Bear in mind that when the Ichimoku indicator was developed,
the average Japanese work week was 6 days.
The chart below shows the Ichimoku Indicator and its various components.
The Ichimoku indicator is formed with the following parameters:

Chikou (Lagging Span): This line merely reflects current price but shifted to 26 periods ago

Tenkan/Kijun Sen (Conversion/Base line): The Tenkan sen is the moving average of the highest high and the lowest
low of the previous 9 periods, while the Kijun sen is the moving average of the highest high and the lowest low of the
previous 26 periods.

The Tenkan Sen can therefore be remembered as the short term moving average, while the Kijun Sen can be
remembered as the long term moving average.

Span A/Span B: The Senkou Span A is plotted as the average of the Tenkan and Kijun Sen, while the Senkou Span B
is plotted as the average of the highest high and lowest low of the past 52 days. Both the Span A and Span B lines are
projected 26 days into the future. The difference between the Span A and Span B is usually filled and forms the
Kumo cloud. The Span A Span B lines can also be viewed as dynamic support and resistance levels.
Interpreting the Ichimoku Trading Signals

Each component of the Ichimoku indicator forms a trade signal in itself. The following section describes the
Ichimoku components’ trade signals.

Chikou Span: When the Chikou Span is above price, the sentiment is bullish and when it is below price, the
sentiment is bearish. The chart below illustrates this point.

To put it in another way, if current price is above previous price 26 periods ago, it is a bullish sentiment and if
current price is below price 26 periods ago, it is bearish sentiment. When Chikou span is close to price, or ranging
the market is considered to be in consolidation, or no trend.
Tenkan/Kijun Cross: The Tenkan sen and Kijun sen crosses are similar to a moving average cross. Refer to the chart
below for the illustration. In this chart we notice how the bullish/bearish sentiments are displayed with the
crossovers of the short term Tenkan Sen over the longer term Kijun sen.
Price in relation to Kumo: Finally, when price is below the cloud, it reflects the bearish sentiment and when price is
above the cloud, it reflects bullish sentiment. When price is trading in the cloud, it exhibits consolidation phase.

As we can see from the above explanation of the individual components of

the Ichimoku indicator, they exhibit the market sentiment and therefore
signal buy/sell opportunities accordingly.
Now that we have an understanding of the various components of the Ichimoku trading indicator, it is now time to
combine these individual elements to form the Ichimoku trading system. The checklist below should offer an easy
reference for the trader using the Ichimoku trading system.

Ichimoku Buy

● Price Crosses above or is above the Kumo

● Chikou Span is above price
● Tenkan Sen Crosses above Kijun Sen

When all the above conditions are met, a buy signal is indicated by the Ichimoku Indicator.
Ichimoku Sell

● Price Crosses below or is below the Kumo

● Chikou Span is below price
● Tenkan Sen Crosses below Kijun Sen

When all the above conditions are met, a sell signal is indicated by the Ichimoku Indicator. Stops can be placed
at just above the Cloud at Span A or below the Cloud at Span B. Some prefer to use the Kijun sen for trailing
the stops, but at the cost of getting stopped out prematurely within the trend. It is therefore up to the trader to
decide where they want to trail the stops.
Note that there is particular order for the signal to be triggered, as long as all the conditions are met.

The Ichimoku indicator is best used in trending markets. The chart below shows sideways price action and as obvious, the
Ichimoku indicator can be confusing. It is therefore best to not trade during sideways market.
 Forex Indicators: Fibonacci Tools

Fibonacci sequence of numbers, especially in the context of trading is met with doubts, apprehensions and a bit of mystical
feel to it. Discovered by Leonardo (Leonardo Pisano Bigollo) of Pisa, the most important Fibonacci numbers are 61.8% (or
0.618) followed by 38.2% (0.382) and their variations such as 1.618, 1.272 and so on.

Due to the fact that Fibonacci trading is one of the most commonly used methods to trade, it has become a kind of self full-
filling prophecy. For example, when price tends to trade near 61.8%, due to the sheer number of traders expecting to see a
reversal, tend to short the currency pair, as would many other traders.

In most trading platforms, there are many Fibonacci Trading tools that are available. The most commonly used Fibonacci
tools are:

● Fibonacci Retracement Tools

● Fibonacci Extension Tools

Let’s take a closer look into each of these tools and how they can help the trader to form a bias in trading.
How to use the Fibonacci retracement tool?

To plot the Fibonacci levels, follow the steps below.

● Identify the chart timeframe or interval that you want to measure the Fibonacci tool for,
● Identify a key swing price movement,
● Using the Fibonacci extension tool, click on a swing point and drag to the other swing point,
● To plot correct fib levels, for an uptrend swing move measurement, plot the Fibonacci to a swing low point
and drag it towards the upper right swing high. Do the opposite for measuring a downtrend swing
movement.
In the chart above we have plotted the Fibonacci retracement tool to an uptrend by plotting the
tool from the bottom swing low to the left to the upper swing high on the right. This swing
measurement gives us the fib levels of the swing move.Notice how, after making the swing
high, price bounces off constantly from the 61.8% Fibonacci level.
Fibonacci Extension Tools

The Fibonacci extension tools are used to measure the possible fib levels that prices can attain after a retracement. The best
way to use Fibonacci extension is to use them in tandem with the retracement tool. Unlike the retracement tool, the Fibonacci
extension tool makes use of only 0.618 ad 1.1618 levels. Of course, traders tend to use their own custom levels as well.

Plotting the Fibonacci extension tool is a bit different as it takes into account 3 swing points. High/Low/High or
Low/High/Low.

In the chart below, we have plotted the Fibonacci extension tool within a minor swing point of the larger leg. So by applying
the Fibonacci extension tool to A, B and C, we get the targets of 0.618.

If we use only the Fibonacci retracement tool, it wouldn’t have given us anything much as to where price could reach. But
when we apply the extension tool, we get a key price level at 0.618% of the Fibonacci extension tool.

As we see from the above example, using the Fibonacci retracement tool along with the expansion or extension tool gives a
more probable trade bias.
 Forex Indicators: Relative Vigor Index (RVI)

What Is the Relative Vigor Index?

The Relative Vigor Index (RVI) is a technical analysis indicator that measures the strength of a trend by comparing
a security’s closing price to its trading range and smoothing the results.

It’s based on the tendency for prices to close higher than they open in uptrends and to close lower than they open in
downtrends.
The RVI indicator is calculated in a similar fashion to the stochastics oscillator but it compares the close relative to
the open rather than comparing the close relative to the low.

Traders expect the RVI value to rise as the bullish trend gains momentum because, in this positive setting, a
security’s closing price tends to be at the top of the range while the open is near the low of the range.

The relative vigor index is interpreted in the same way as many other oscillators, such as moving average
convergence-divergence (MACD) or the relative strength index (RSI). While oscillators tend to fluctuate between set
levels, they may remain at extreme levels over a prolonged period of time so interpretation must be undertaken in a
broad context to be actionable.
The RVI is a centered oscillator rather than a banded oscillator, which means that it’s typically displayed above or
below the price chart, moving around a center line rather than the actual price. It’s a good idea to use the RVI
indicator in conjunction with other forms of technical analysis in order to find the highest probability outcomes.
How to Trade Using RVI?
● Crossovers
● Overbought/Oversold market Entry and exit signals are triggered when the short moving
average crosses the long moving average.
A low value indicates an oversold market and a high value signals an
overbought one.

● Divergence

Divergences between
price action and RVI
often lead counter-trend
moves.
Forex Indicators: Chaikin Money Flow (CMF)
What is Chaikin Money Flow?

Chaikin Money Flow (CMF) is a technical analysis indicator used to measure Money Flow Volume over a set
period of time. Money Flow Volume is a metric used to measure the buying and selling pressure of a security for
single period.

CMF then sums Money Flow Volume over a user defined look-back period. Any look-back period can be used
however the most popular settings would be 20 or 21 days.

Chaikin Money Flow’s Value fluctuates between 1 and -1. CMF can be used as a way to further quantify changes
in buying and selling pressure and can help to anticipate future changes and therefore trading opportunities.
Chaikin’s Money Flow’s value fluctuates between 1 and -1. The basic interpretation is:

● When CMF is closer to 1, buying pressure is higher.

● When CMF is closer to -1, selling pressure is higher.

How to Trade Using CMF?

Trend Confirmation

Buying and Selling Pressure can be a good way to confirm an ongoing trend. This can give the trader an added level of confidence
that the current trend is likely to continue.

During a Bullish Trend, continuous Buying Pressure (Chaikin Money Flow values above 0) can indicate that prices will continue to
rise.

During a Bearish Trend, continuous Selling Pressure (Chaikin Money Flow values below 0) can indicate that prices will continue
to fall.
Crosses

When Chaikin Money Flow crosses the Zero Line, this can be an indication that there is an impending trend reversal.

Bullish Crosses occur when Chaikin Money Flow crosses from below the Zero Line to above the Zero Line. Price then rises.

Bearish Crosses occur when Chaikin Money Flow crosses from above the Zero Line to below the Zero Line. Price then falls.

https://forex-indicators.net/volume/chaikin-money-flow
 Forex Indicators: Williams %R

What is Williams % R?
Williams %R is a momentum indicator developed by Larry williams that is the inverse of the Fast Stochastic
Oscillator. Also referred to as %R, Williams %R reflects the level of the close relative to the highest high for the
look-back period.

In contrast, the Stochastic Oscillator reflects the level of the close relative to the lowest low. %R corrects for the
inversion by multiplying the raw value by -100. As a result, the Fast Stochastic Oscillator and Williams %R
produce the exact same lines, but with different scaling.

Williams %R oscillates from 0 to -100; readings from 0 to -20 are considered overbought, while readings from -80
to -100 are considered oversold. Unsurprisingly, signals derived from the Stochastic Oscillator are also applicable
to Williams %R.
How to Trade Using Williams % R?

As you can see on the chart below, when Williams % R line is above -20 market is overbought and when below -80 market is
oversold.

The way I recommend you using this indicator is buying when the indicator gives an overbought signal and selling when the
indicator gives an oversold signal.
What is SSL Indicator?

The SSL indicator is a tool for spotting trends and finding good entry and exit points. The indicator uses two lines, one is red and the
other one is green. When the green line crosses below the red line it signals a bearish trend. When the green line crosses above the red
line, it signals a bullish trend.

Here is what the SSL indicator looks like on a chart:

This indicator is very

basic in its application
and gives good trading
signals on a 4H and daily
charts.
How to Trade Using SSL Indicator

● Entry signal:

The SSL indicator can be used to find entry points in the forex market; When the lines cross it signals an entry point. For
example, if the green line crosses below the red, it is a Sell trade.

If the green line crosses above the red, it is a Buy trade.

The SSL alone does give

some false signals. It is
recommended to use it with
other technical tools to get
more confirmation and
filter the signals you get.
 ● Exit signal:

To exit a trade, simply wait for the SSL indicator lines to cross and change direction to close your position.

https://www.best-metatrader-indicators.com/ssl-channel-chart-al
ert-indicator/
 Build Your Trading Plan

Fail to plan and you plan to fail.

Traders who are serious about being successful, should follow these words as if they were written in stone. Ask any
successful trader out there and they will tell you that trading without a written plan is a one-way ticket to failure.

In this lesson you will learn the five most essential components that every trading plan should include.
 Your Risk Appetite

How much of your capital are you willing to risk on any one trade? You need to specify your trading style and your
risk tolerance. In general, traders risk between 1-5% of their capital on a given trading day.

In other words, if you lose 1-5% of your capital at any point in the day, you take a break and stay away from
trading.

It is crucial to leave your trading desk to clear your mind, re-assess the situation and start fresh the next day. If you
fail to do so, you might end up losing all your capital.
 Write Your Goals
In this section, you need to set realistic goals like:

– What is the minimum risk-to-reward you will accept in every trade?

Many traders will not take trades that offer less than 1:3 risk-to-reward ratio. For example, if your stop loss is 10pips, your goal should
be at least 30pips or greater.

– I will make 10% return on a monthly basis!

Instead of starting out with a monthly goal of 10%, why not begin with a monthly goal of just 1% or 2%? A goal like this is unlikely to
put much pressure on a trader, which is good – trading can be stressful enough without any additional pressure.

Achieving a goal of just 1% per month would put you well ahead of most traders, since the majority of traders lose money. If you have
successfully achieved your modest goal for three months in a row, raise the goal to the next plateau – from a 1% monthly goal to 2%, or
from 2% to 3%, and so on. Don’t rush through this process; remember, as you gain experience and confidence, you will be a better
trader in the future than you are now, and you’ll be better suited to more aggressive goals.
 Define Your Daily Routine
Your trading plan should describe what your daily habits are. This will set you apart from amateur traders that simply start trading
without any previous preparation and expect to make big profits in no time.

Your daily routine may include:

– What time do you get up in the morning?

– How do you prepare mentally and physically to start your day? Do you exercise or do yoga?

– How long does it take you to analyze and scan the markets to generate trading ideas?

– Do you have specific markets to watch daily, weekly or monthly?

– Do you need to update your Watchlist every day?

– Are they any economic events for the day? And much more.

The goal here is to stay efficient with your time and avoid any redundancy or doing stupid things.
Your Entry and Exit Strategy

In this section you need to determine the set of conditions you must identify in the market that will validate an
entry and confirm an exit. You must be very precise and consistent in applying these rules.

Make sure to define the pairs you want to monitor in a daily basis for potential trading opportunities. You choose
between 2 to 7 pairs to trade consistently. You don’t have to trade every single pair in the market.

Also make sure before entering a trade, you need to know where your exits and your stops are, what timeframe
will you trade and are the pairs correlated or not.

Your strategy should be detailed to help you take the right trading decision and profit from high probability
setups.
Keep a Trading Journal

Successful traders keep good trading records. They keep a record of each and every trade they take, both winners and
losers.

You need to write down details such as targets, entry and exit prices of each trade, and record comments about why you
took these trades and what were the results.

Analyzing your past performance will help you improve your strategy and develop a better trading system.

Here’s a trading journal template you can use to start keeping records of your daily trades. Please feel free to adapt it to
your trading style and goal.

https://www.dropbox.com/s/7ah0jdyofxdqatv/Trading%20Journal.pdf?dl=0
Bonus – Forex Trading Strategy

In this bonus lesson, you will learn a very simple trading strategy that you can implement in as your first
trading system.

The strategy is composed of:

● Entry indicator,
● Confirmation indicator 1
● Confirmation indicator 2
● Volume indicator
● ATR volatility indicator
● Exit indicator
Entry Indicator

The entry indicator is a simple indicator that will give us a buy or sell signal to enter a trade.

As an entry indicator, we are using the Kijun-sen component of the Ichimoku cloud indicator as our entry indicator.

When price is below

Kijun-sen, we go short.

When price is above

kijun-sen, we go long.

Now let’s move to the

second part of our
trading system.
Confirmation Indicator 1

Our first confirmation indicator is an 8 exponential moving average. Now, if price is below the Kijun-sen and 8EMA is crossing below
Kijun-sen we go short.

When price is above Kijun-sen and 8EMA is crossing above Kijun-sen, we go long.
Confirmation Indicator 2

Even with a confirmation indicator we still get false signals. To filter those signals we add a second confirmation indicator: William
%R.

We go long when William %R is above the (-20) line,

We go short when William %R is above the (-80) line,

Volume Indicator

Now that we have our entry signal and our confirmation indicators, we still want to be confident that the trend will
continue. For that we are adding a CMF indicator that measures the buying and selling pressure of an asset over a
certain period of time.
When CMF is above
zero, it confirms a
bullish pressure,

When CMF is below

zero, it confirms a
bearish pressure
ATR Indicator

At this point we have a solid view on the market and a valid entry signal from our trading system. Before you
place your position, you need to calculate your stop loss and your target.

To do this you will need to add an ATR indicator that will calculate the avverage true range of your forex pair.
For example, if your ATR indicator gives you a reading of 0.0069, it means that the ATR is 69 pips.

To calculate your stop loss:

ATR x 1.5 = Stop Loss order

For example, your ATR is 69 pips, your stop loss is (69 x 1.5 = 104 pips).

For your target, you can multiply your ATR by 2 for 2:1, or multiply it by 3 for 3:1 risk-to-reward ratio.
Exit Indicator

The last piece of this trading system is the exit indicator. When the short moving
There two options: average crosses above the
long moving average we exit
● Use the CMF or the William %R indicators to exit the trade, or a short position,
● Use Relative Vigor Index (RVI) indicator to exit a trade,
When the long moving
average crosses above the
short moving average we
exit a long position,

So let’s put everything

together and find some
trading examples.
Examples:

Example 1:

Time Frame: Daily,

Buy Trade:

● Entry Indicator: Price is above Kijun-sen,

● Confirmation Indicator 1: 8EMA above Kijun-sen,
● Confirmation Indicator 2: William %R is above the (-20) line,
● Volume Indicator: CMF is above zero,
● ATR Indicator: Calculate your stop loss,
● Exit Indicator: William %R crosses below (-20) line,
In this example, we went long as soon as our entry and both confirmation indicators
confirmed the Buy signal. For the exit indicator, we used the William %R to exit the
trade.Now let’s use RVI indicator to exit the trade instead of William%R.
Example 2:

Time Frame: Daily,

Sell Trade:

● Entry Indicator: Price is below Kijun-sen,

● Confirmation Indicator 1: 8EMA below Kijun-sen,
● Confirmation Indicator 2: William %R is below the (-80) line,
● Volume Indicator: CMF is below zero,
● ATR Indicator: Calculate your stop loss,
● Exit Indicator: RVI moving averages cross
● In this example, we used RVI as our exit indicator. We went short once our entry and confirmation indicators said short. The
exit signal is when the RVI moving averages cross signaling a potential shift in the momentum.

Conclusion This trading system is based on technical tools and is designed to give a quick signal to whether we short, we go
long, or we stay away from the market.Feel free to add or replace any indicator you feel will add more confluence to your trading
performance.
 Risk & Money Management
What is Forex Risk Management?

The Forex market is one of the biggest financial markets on the planet, with everyday transactions totalling more than 1.4
trillion US dollars. Banks, financial establishments, and individual investors therefore have the potential to make huge
profits and losses.

Forex trade risk is simply the potential loss or profit which occurs as a result of a change in exchange rates. To minimise the
likelihood of financial loss, each investor needs to have in place some Forex risk management actions, strategies, and
precautions.

A lot of people today are engaged with trading activities within the foreign exchange market. However, most of them are not
in a position to achieve the profits that they expect. Some traders will lose all of their money, while some fail to get the
results they expected.
In fact, only a small share of traders are ever able to meet or even surpass their
expectations. The Forex market is constantly changing, and this brings great risks that all
traders have to work with. Therefore, the topic of Forex trading risk control is an
increasingly popular subject amongst Forex traders.
How does a trader do this? Risk management can include establishing the correct
position size, setting stop losses, and controlling emotions when entering and exiting
positions. Implemented well, these measures can prove to be the difference between
profitable trading and losing it all.
 The 5 Fundamentals of Forex Risk Management

Risk management can include establishing the correct position size, setting stop losses,
and controlling emotions when entering and exiting positions. Implemented well, these
measures can prove to be the difference between profitable trading and losing it all.
 1. Appetite for Risk

Working out your appetite for risk is central to proper forex risk management. Traders should ask: How much am I willing to lose in a
single trade? This is particularly important for the most volatile currency pairs, such as certain emerging market currencies. Also, liquidity
in forex trading is a factor that affects risk management, as less liquid currency pairs may mean it is harder to enter and exit positions at the
price you want.

If you don’t know how much you are comfortable with losing, your position size may end up too high, resulting in losses that may affect your
ability to take on the next trade – or worse.

Let’s say 50% of your trades are winners. In the long term, mathematically you can expect to have runs of multiple losing trades in a row.
Over a trading career of 10,000 trades, the odds suggest that you will face 13 sequential losses at some point. This underlines the importance
of knowing your appetite for risk, as you need to be prepared, with sufficient money on your account, for when bad runs hit.

So how much should you risk? A good rule of thumb is to only risk between 1 and 3% of your account balance per trade. So, for example, if
you have an account of $100,000, your risk amount would be $1,000-$3,000.
2. Position Size

Selecting the right position size, or the number of lots you take on a trade, is important
as the right size will both protect your account and maximize opportunities. To select
your position size, you need to work out your stop placement, determine your risk
percentage and evaluate your pip cost and lot size. For more on how to do these things,
click on the link above.
 3. Stop Losses

Using stop loss orders – which are placed to close a trade when a specific price is reached – is another key
concept to understand for effective risk management in forex trading.

Knowing the point in advance at which you want to exit a position means you can prevent potentially significant
losses. But where is this point? Broadly, it’s whatever point your initial trading idea is invalidated.

Traders should use stops and also limits to enforce a risk/reward ratio of 1:1 or higher. For 1:1, this means you
are risking $1 to potentially make $1. Place a stop and a limit on each trade, ensuring that the limit is at least as
far away from current market price as your stop.

The table shows how the outcomes of different risk-reward ratios can change a strategy:
RISK-REWARD 1:1 1:2
As can be seen in the table, if
Total Trades 10 10 the trader was only looking for
one dollar in reward for every
one dollar risked, the strategy
Total Wins (40%) 4 4 would have lost 200 pips. But by
adjusting this to a 1-to-2 risk-to-
Profit Target 100 pips 200 pips reward ratio, the trader tilts the
odds back in their favor (even if
only being right 40% of the
Stop Loss 100 pips 100 pips
time).

Pips Won 400 pips 800 pips

Pips Lost 600 pips 400 pips

Net Gain (-200 pips) 200 pips

4. Leverage

Leverage in forex allows traders to gain more exposure than their trading account might otherwise allow, meaning
higher potential to profit, but also higher risk. Leverage should, therefore, be managed carefully.

It is commonly known that traders with smaller balances in their accounts carried much higher leverage than
traders with larger balances. However, the traders using less leverage saw far better results than the smaller-
balance traders using levels over 20:1.

Larger-balance traders (using average leverage of 5:1) were profitable over 80% more often than smaller-balance
traders (using average leverage of 26:1).

Based on this information, at least when starting out, it’s advisable for traders to be very wary of using leverage
and to be mindful of the risks it poses.
5. Controlling Your Emotions

It’s important to be able to manage the emotions of trading when risking your money in any financial market.
Letting excitement, greed, fear or boredom affect your decisions may expose you to undue risk. To help you take
your emotions out of the equation and trade objectively, maintaining a forex trading journal or log can help you
refine your strategies based on prior data – and not on your feelings.
How to Deploy Capital in Forex

Avoid Margin Call

A margin call is basically when the broker closes your trading account because your losses exceed your account balance.

So let’s say that you open a trading account with 1:100X (leverage), this means that your exposure rate is 100X and to avoid
margin call your losses should not exceed 1%.

If you deposit $1,000 in a trading account with a 1:100X leverage, your exposure rate in dollar is $100,000. If you lose 1% of your
entire account you get a margin call:

$100,000 x 1% = $1,000

In trading Forex, retail traders should limit their exposure rate between 6-8X as professional traders do instead of using 100-500X.
Remember that if you use high leverage you are increasing your risk of losing all your money.
How to Calculate your Stop Limit:
To calculate the stop loss limit of a single position you need to know the exposure rate, your initial balance on margin and how much
you are willing to lose. For example:

● Exposure rate: 8X (Leverage),

● Initial deposit on margin: $1,000 Tips:
● Stop loss of your entire portfolio: 20% which is $200
– Only increase your Exposure Rate when you
To calculate your stop loss limit for a single position: start making money in your account. By
increasing your exposure rate your risk is
20% / 8X = 2.5% of $8,000. decreasing because you are making money.

($8,000 is your initial deposit of $1,000 multiplied by the exposure rate of 8X) – Compare your ATR% with your % margin
call to adjust the stop loss % of your entire
To avoid a margin call in this example, your losses should not exceed 12.5%:
portfolio.
1/8X = 12.5%
 How to Calculate Your Trading Size

In this lesson we are going to learn how to calculate the trading size for every trade you open.

To calculate the trading size:

Trading size = P&L /(sell price – buy price)

P&L has always to be expressed in the quote currency, it represents the amount of money you are willing to risk
in every trade.

For example, if your P&L is 200$ (2% of 10,000 account):

 Entry Stop Quote Currency Value of 2% Trading Size Micro-lots

Short 1.0400 1.1100 USD 200 200/0.07 2.9

AUDUSD

Long 81 73 JPY 100*USDJPY = 8000/8=1,000 1

100*80=8000JPY
AUDJPY

Note:

1 lot = 100,000 currency pairs, 1 mini lot = 10,000 currency pairs,1 micro lot = 1,000 currency pairs
Let’s take few examples:

For example, we are shorting AUDUSD and risking only 2% of our capital (which is $200):

– Entry Price: 1.0400

– Stop: 1.1100 (700 pips)

– Pip value in: USD

– Risk 2%: $200

– Pip Value: ($200/700 pips) = 0.29 USD

– Lot to use: 0.29 or 2.9 micro lots

If we trade using 0.29 lot we will lose exactly $200 (2%).

For example, we are shorting USDINR and risking 2% of our capital ($200)

– Entry Price: 50

– Stop: 57 (700pips)

– Pip Value: INR

– Risk 2%: INR 11,400 (200*57)

– Pip Value: (11,400/700) = 16.29 INR

– Lot to use: 1.62 or (16.29/1,000)

If we trade using 1.62 lot we will lose excatly $200 (2%).

 Kelly Criterion in Forex

How to use Kelly Criterion in Forex

The Kelly Criterion is considered the most efficient risk/money management strategy to
maximize your long-term growth of capital and self-assess your trading performance.
Use the Kelly Criterion to improve your results and grow your trading account.
What is The Kelly Criterion
The Kelly criterion is a mathematical formula developed by John Larry Kelly. The
formula is currently used by gamblers and investors to determine what percentage of
their bankroll/capital should be used in each bet/trade to maximize long-term growth of
their capital.
The formula is:
Kelly % = W – [(1-W)/R]
Where:

W is your winning probability factor/ probability a trade will be a winning trade,

R= W/L ratio represents your ability to manage risk, best value is close or equal to 2,

(1-W) is your losing probability factor,

There are two key components to the formula for the Kelly criterion: the winning probability factor (W) and the
win/loss ratio (R). The winning probability is the probability a trade will have a positive return. The win/loss ratio is
equal to the total positive trade amounts divided by the total negative trading amounts.

The result of the formula will tell traders what percentage of their total capital that they should apply to each trade.
How to Allocate your Trading Capital
Let’s assume you find a trading opportunity and you are about to open the trade, but you are not sure what the optimal lot size to use. So you
don’t want to risk too much in case the market goes against you, but also you don’t want to risk too little either.

In this chapter, we will explain exactly what percentage of your capital is it optimal to risk on a given trade.

Let’s play a game; you bet $1 on a coin flip. Here’s the rules:

On heads I pay you $2 and on tails you pay me $1, now let’s see it from a mathematical perspective. We need to calculate the expected value
E(x) of this game:

The formula says:

So when you toss a coin you have two outcomes, either a head or a tail thus the
E(x) = n * p probability is ½ for getting a head and ½ for getting a tail.
n here is the amount you win or lose in dollar,

p is the probability of occurrence,

Let’s calculate the expected value:

E(x) = ($2 * 1/2) – ($1*1/2) = $0.50

The result is positive showing it is a profitable opportunity. In the long-run if we average out all the tosses, we will
be earning an average of 50cents per coin toss.

Let’s assume that you get a profitable trading strategy that has risk-to-reward ratio of 1:2, 1 for your loss and 2x
for your profit. This sounds like a great trading strategy!!!

Sadly, not.

Even though it looks great in terms of winning to losing ratio, but in fact it is not a good strategy…let me explain
myself.

Let’s say you deposit $1000 in your trading account and decided to trade using the above strategy you found giving
you a 1:2 ratio. And because it is such a great strategy you decided to allocate 75% of your capital to highly
probable trading setups. Let’s trade:
First trade:

– You allocate 75% * $1000 = $750

– Price hits your target – you just earned $1500

– Your balance is now $2500

Second trade:
– You allocate 75% * $2500 = $1875

– Price hits your stop loss – you just lost $1875

– Your balance is now $625

You see now that after only two trades you are already in the negative. And since winning and losing come in with roughly the same
frequency, in the long-run this pattern will continue and you will lose all your capital. Numbers don’t lie!!

So what went wrong? No, your strategy is fine, the problem is you over-allocating capital. That is why we introduced the Kelly
Criterion so we can learn how to allocate capital without over-betting.

Let’s allocate different percentage (different from 75%) and see what happens to your account balance:

10% your balance at the end = $1080

20% = $1120 60% = $880 Between 10-30% return seems to increase from $1080-
$1120 and then above 40% the return drops off and goes
30% = $1120 70% =$720
into negative. As a conclusion from this little experiment,
40% = $1080 80%= $520 there is a maximum somewhere between 20% and 30%
that yields good and steady returns in the long run.
50% = $1000 (Break-even) 90%= $280

100%= $0
This is where Kelly Criterion comes in handy:

K% = W – [(1-W)/R]

This formula determines the optimal percentage of your trading account that you can allocate to get the most
profitable outcome. Let’s calculate the Kelly Criterion for the example above:

R is the 1:2 risk-to-reward ratio we used,

W is our probability of winning or losing a trade (W=0.50),

K% = 0.5-[(1-0.5)/2] = 0.25

25% = $1125
Therefore, the best outcome is to allocate 25% of your account on every trade you place.

The chart below shows the relationship between balance growth and the percentage of risk allocated. Return increases as risk increases up to 25%,
then return drops off and becomes zero (margin call).

Remember that whatever strategy you are using to trade the markets, always keep in mind that increasing risk doesn’t go hand in hand with high
returns.

As long as you have calculated your

Kelly correctly, you can draw Kelly’s
chart on Excel using your own data from
your strategy and understand how your
investment will behave in the long-term
perspective depending on your selected
risk exposure.

If your portfolio is combining swing and

day/intraday positions, you should keep
your daily Kelly % separate from your
swing Kelly %.
 Trading Psychology
Why Most Traders Lose Money in Forex

You have probably heard that most people who attempt Forex trading end up losing money. There’s a good reason for this, and the reason is
primarily that most people think about trading in the wrong light.

Most people come into the markets with unrealistic expectations, such as thinking they are going to quit their jobs after a month of trading or
thinking they are going to turn $1,000 into $100,000 in a few months.

These unrealistic expectations work to foster an account-destroying trading mindset in most traders because they feel too much pressure or “need”
to make money in the markets. When you begin trading with this “need” or pressure to make money, you enviably end up trading emotionally,
which is the fastest way to lose your money.
What emotions should you watch for in yourself while trading?

To be a little bit more specific about “emotional” trading, let’s go over some of the most common emotional trading mistakes that traders
make:

Greed

There’s an old saying that you may have heard regarding trading the markets, it goes something like this: “Bulls make money, bears make
money, and pigs get slaughtered”.

It basically means that if you are a greedy “pig” in the markets, you are almost certainly going to lose your money. Traders are greedy when
they don’t take profits because they think a trade is going to go forever in their favor.

Another thing that greedy traders do is add to a position simply because the market has moved in their favor, you can add to your trades if
you do so for logical price action-based reasons, but doing so only because the market has moved in your favor a little bit, is usually an action
born out of greed.

Obviously, risking too much on a trade from the very start is a greedy thing to do too. The point here is that you need to be very careful of
greed, because it can sneak up on you and quickly destroy your trading account.
Fear
Traders become fearful of entering the market usually when they are new to trading and have not yet mastered an
effective trading strategy like price action trading (in which case they should not be trading real money yet
anyways).

Fear can also arise in a trader after they hit a series of losing trades or after suffering a loss larger than what they
are emotionally capable of absorbing.

To conquer fear of the market, you primarily have to make sure you are never risking more money than you are
totally OK with losing on a trade. If you are totally OK with losing the amount of money you have at risk, there is
nothing to fear.

Fear can be a very limiting emotion to a trader because it can make them miss out on good trading opportunities.
Revenge
Traders experience a feeling of wanting “revenge” on the market when they suffer a losing trade that they were
“sure” would work out. The key thing here is that there is no “sure” thing in trading…never.

Also, if you have risked too much money on a trade (starting to see a theme here?), and you end up losing that
money, there’s a good chance you are going to want to try and jump back in the market to make that money
back….which usually just leads to another loss (and sometimes an even larger one) since you are just trading
emotionally again.
 Euphoria

While feeling euphoric is usually a good thing, it can actually do a lot of damage to a trader’s account after he or she hits a big winner
or a large string of winners.

Traders can become overly-confident after winning a few trades in the market, for this reason most traders experience their biggest
losing period’s right after they hit a bunch of winners in the market.

It is extremely tempting to jump right back in the market after a “perfect” trade setup or after you hit 5 winning trades in a row…
there’s a fine line between keeping your feet grounded in reality and thinking that everything you do in the markets will turn to gold.

Conclusion
The key to remember here is that trading is a long-term game of probabilities, if you have a high-probability trading edge, you will
eventually make money over the long-term assuming you follow your trading edge with discipline.

But, even if your edge is 70% successful over time, you could still hit 30 losing trades in a row out of 100. So keep this fact in mind
and always remember you never know which trade will be a loser and which will be a winner.
 How To Maintain an Effective Trading Mindset

Obtaining and maintaining an effective Forex trading mindset is the result of doing a lot of things right, and it usually takes a
conscious effort on the trader’s behalf to accomplish this. It’s not necessarily difficult to achieve, but if you want to develop an effective
trading mindset, you have to accept certain facts about trading and then trade the market with these facts in mind…

You need to know what your trading strategy (trading edge) is and you need to master it. You have to become a “sniper” in the market
instead of a “machine gunner”, this involves knowing your trading strategy inside and out and having absolutely NO questions about
what the market needs to look like before you risk your hard-earned money in it.

You need to always manage your risk properly. If you do not control your risk on EVERY single trade, you open the door for
emotional trading to take hold of your mind, and I can promise you that once you start down the slippery slope of emotional Forex
trading, it CAN be very hard to stop your slide, or even recognize that you are trading emotionally in the first place. You can largely
eliminate the possibility of becoming an overly-emotional trader by only risking an amount of money per trade that you are 100% OK
with losing. You should EXPECT TO LOSE on any given trade, that way you are always aware of the very real possibility of it actually
happening.
You need to not over-trade. Most traders trade way too much. You need to know what your trading edge is with
100% certainty and then ONLY trade when it’s present. Once you start trading just because you “feel like it” or
because you “sort of” see your trading edge…you kick off a roller coaster of emotional trading that can be very
hard to stop. Don’t start over trading and you will likely not become an emotional Forex trader.

You need to become an organized trader. If there is something that is the “glue” that holds all of the points I’ve
discussed in this part together, it is being an organized trader. By organized, I mean having a trading plan and a
trading journal and actually using both of them consistently. You need to think of Forex trading like a business
instead of like a trip to the casino. Be calm and calculating in all your interactions with the market and you should
have no problem keeping the emotional trading demons at bay.
 Interpreting the Commitment of Traders Report

This report is very important to Forex traders, as it shows the overall average positioning of market participants. Knowing the exact
position is not possible because the Forex market is the most liquid one in the world, and the biggest as well. More than 5 trillion
dollars change hands each day, and for that reason it is impossible to quantify all these transactions.

Because of this, traders don’t know what the general market sentiment is, and any information regarding the overall general
positioning is regarded as crucial. Such information is contained in the Commitment of Traders report, which shows the overall
exposure for a currency and/or a currency pair.

It is expressed in percentages, and the bigger the exposure, the less likely that direction is the right one. Trading based on the
Commitment of Traders report involves finding extreme crowd positioning, and going in the opposite direction. The idea behind this
strategy is that the crowd simply cannot be right, as most of the time it gets caught on the other side of the trade.
Oscillators are also good indicators of market psychology. If the oscillators are showing
overbought and oversold levels, then trading with oscillators should be straightforward:
buying when price is oversold and selling when it is overbought. While this is true when
the market is ranging, it simply does not work when the market is trending.
Price can stay in an overbought or oversold area more than a trader can stay solvent. The
same is true if one is using divergences: Price can stay in a divergent mode more than a
trader’s account can handle. To be able to tell fake moves, market psychology involves
looking for things that are not so obvious. This, in turn, will increase trader’s chances of
succeeding.