Education

Total Trader



Introduction to Forex Training

If you’ve ever travelled to another country, you would know that you need to go and exchange your money for the money of the foreign currency. They will set a rate at which you can exchange your money. So if you had British Pounds, the exchange people might say “we will give you USD 1.5 per pound you give us”.

Now at the end of your holiday you go home and want your British Pounds back, so you go to the same people and in that time exchange rates have changed. The travel agent now says “It used to be USD 1.5 for each 1 GBP, but now it’s USD 1.2 per Pound”. So the Dollar has strengthened. And all the dollars you didn’t spend are now worth more than when you bought them and you’ll get more pounds per dollar. Make sense?

In essence, you have traded Forex already.

Exchange rates fluctuate constantly, every second there is a minor change. Forex traders learn how to predict these changes and purchase the currency they think will get stronger than another. There are many different systems, tools and sources of input. Don’t worry about that for now, we’ll get to that later.

The difference between someone who calls him/herself a Forex trader, and someone just going on holiday, is that a Forex trader does this intentionally and with the view of earning a profit. Also, we don’t have the expense of plane tickets, accommodation and all those things. We have one small expense to place the trade and that’s it.

Forex trading used to be the domain of only large banks or very large investment groups, with the smallest trade being allowed of $100’000 (that’s USD and not Zimbabwean Dollars!). This puts it out of reach of the general population.

Over the last 10 or 15 years the Forex market has had several changes which allows people to trade with very small amounts. Some brokers offer as low as $25, these accounts are not recommended and we’ll get in to that later as well.

It’s good that you’re reading this and that you are interested in Forex trading. However, it’s not for everyone.  You must be aware that there is always an element of risk when placing a trade. And secondly, anyone offering a 2 or 3 day course with no follow up program is just making a quick buck from you. I could not learn your job in 2 or 3 days, so how can I expect you to learn mine ? Make sure there is a good follow up and mentorship program involved. Getting live trade advice and market analysis is a huge bonus, especially if it’s based on the same system you’ve been taught in class. We’ll go more into how to choose the right tutor in more detail.



Brief History of the Forex Market

At the end of World War 2, the whole world was experiencing so much chaos that the major Western governments felt the need to create a system to help stabilize the global economy.

Known as the “Bretton Woods System,” the agreement set the exchange rate of all currencies against gold. This stabilized exchange rates for a while, but as the major economies of the world started to change and grow at different speeds, the rules of the system soon became obsolete and very limited.

In 1971 the Bretton Woods Agreement was abolished and replaced by a different currency valuation system. With the United States in the pilot’s seats, the currency market evolved to a free-floating one, where exchange rates were determined by supply and demand.

At first, it was difficult to determine fair exchange rates, but advances in technology and communication eventually made things easier.

Once the 1990s came along, thanks to the advent of personal computers, banks began creating their own trading platforms. These platforms were designed to stream live quotes to their clients so that they could instantly execute trades themselves.

Meanwhile, internet-based trading platforms were introduced for individual traders.

These are known as “retail Forex brokers”, these entities made it easy for individuals to trade by allowing smaller trade sizes. Unlike in the interbank market where the standard trade size is one million units, retail brokers allowed individuals to trade as little as 1000 units.



Why the Forex Market, and not stocks or others?

Once again, this is a personal choice. I can only give you the reasons why I decided on the Forex market and not the more traditional stock market.

There are many factors to consider, from how the market works to how it will fit in to your personal life and income. The Forex Market suits me very well, and I hope to persuade you to consider Forex as your market of choice.

Long story short, here’s my propaganda for why you should consider trading Forex.


Trade Volume

trade volume

You will see that in the graph above there are two spots for Forex. This is because there are two published versions of how much Forex is traded daily. The larger one of $3,98 trillion is the entire global Forex market traded per day. The retail sector (you and I) accounts for a smaller amount of $1.49 trillion per day.

The retail sector is still 15 times bigger than the combined weight of the three largest stock markets combined.

So why is trade volume important? Liquidity. There is always someone out there wanting to buy your currency, and trades execute almost immediately. Also, the sheer size of the global Forex market eliminates the possibility of companies or people tampering with the prices. It takes almost the full weight of a government to influence the price, and even then it doesn’t last for long.


Trade in either direction

Forex is traded in either direction on the graph. Unlike stocks, where the aim is to buy low and sell off the stock at a higher price, Forex traders can enter the market high and close low. This will be discussed in more detail later, but for now you need to know it’s there. As long as there is movement in the Forex market, you can make money. And if your favourite currency pair is a little too quiet, you can pick another.



Time Management

In Stocks and other markets, there are loads of options out there, which can become quite confusing. Successful traders in those markets can require to watch 50 to 100 (or more) different stocks or options, and analyze each one. The real professional Forex traders very rarely trade more than 5 currency pairs. I know several very successful traders who trade from only one pair, and then only 20 to 25 times a year.

This gives you more time to spend on your pairs, and pick the right trades. It also means that once you have a good system and you feel comfortable trading, you can spend as little as an hour a day trading. It might take you 3 years to get to that level, but how many businesses can realistically say that in 3 years the business will run and you only need to work 1 hour a day 5 days a week?


No Commissions

No clearing fees, no exchange fees, no government fees, no brokerage fees. The only “fee” charged is a spread, which differs from broker to broker, but is charged upfront and the fee is usually covered in the first 2 or 3 pips of positive movement.


No Middlemen

Spot currency trading eliminates the middleman and allows you to trade directly with the market responsible for the pricing on a particular currency pair.


No Fixed lot Size

Unlike other markets where contract sizes or lot sizes are determined by the exchange, you can determine your own lot (trade volume). This allows traders to participate with small accounts or massive accounts alike.


Low transaction costs

The retail transaction cost (spread) is typically less than 0.1% in normal market conditions. Large dealers might offer costs as low as 0.07%.


Leverage

And this is a big bonus. In Forex trading, a small deposit can control a much larger amount. Leverage gives the trader the ability to make nice profits and keep total capital risk to a minimum. Leverage is given in a ratio, the two most common being 50:1 and 100:1. How the ratio works, is the broker will let you trade as though you had an amount 50 times or 100 times larger than what you have put down. So a $500 account could effectively trade with $50’000.

There are brokers out there that will offer up to 400:1 leverage. However, I don’t recommend going that high. Stick to either 50:1 or 100:1. This is because while leverage can greatly increase your earnings, it can also increase your loss. Always keep in mind that Forex is a risk. Sorry to put a dampener right there, but I want to make sure you’re aware of the risk and don’t go running to the bank after seeing a 400:1 leverage !


Demo accounts

Demo accounts are accounts offered from brokers where they give you virtual money to trade on their platforms. You are trading real exchange rates, real indicators, and the fees and everything is built in as though it was a real account. Best of all, they’re free. So if you want to try out a new system, try trading a currency pair you’re not used to, you can setup a demo account and try it out. It’s fantastic.


It’s better than stocks

Let me finish that sentence with “in my opinion”. Even though it should be your opinion too. But here’s a quick breakdown of why.


Advantages Forex Stocks
24 Hour Trading YES No
Minimal or no commission YES No
Instant execution of market orders YES No
Short-selling without an uptick YES No
No middlemen YES No
No market manipulation YES No


What is traded and how?

The long story short, is money. You are purchasing foreign currency in the hopes that that country’s economy strengthens in relation to the currency you used to buy it. You are effectively purchasing stock or shares in world economies.


The Major Currencies

Depending on who you speak to, there are 5 or 8 major currencies. On the below table we show the 8 major currencies, with the first 5 being the big five.


Symbol Country Currency Nickname
USD United States Dollar Buck
EUR Euro Zone Members Euro Fibre
JPY Japan Yen Yen
GBP Great Britain Pound Cable
CHF Switzerland Franc Swissy
CAD Canada Dollar Loonie
AUD Australia Dollar Aussie
NZD New Zealand Dollar Kiwi

The symbol of each currency always has three letters, and generally the first two letters shows which country and the last letter shows the name of the currency. So the USD is the United States Dollar.

These currencies are called the majors because they are the most traded currencies.


How is it traded?

In Forex, a single trade is the simultaneous purchase of one currency and the selling of another. Brokers and dealers handle all the technical things related to it so you don’t need to worry about that. Because you’re buying AND selling currencies in one trade you are trading pairs.

If you knew that the USD was going to get a lot stronger than the JPY, you would trade the pair USD/JPY and you would buy. This means you are purchasing Dollars and selling Yen. If you thought the Yen would strengthen against the dollar, you would trade the same currency pair but enter a sell.


These are the major currency pairs that get traded

The Major currency pairs all contain the USD on one side. The majors are the most liquid and widely traded pairs.


Pair Countries Lingo
EUR/USD Euro Zone / United States Euro Dollar
USD/JPY United States / Japan Dollar Yen
GBP/USD Great Britain / United States Pound Dollar / The Cable
USD/CHF United States / Switzerland Dollar Swissy
USD/CAD United Stats / Canada Dollar Loonie
AUD/USD Australia / United States Aussie Dollar
NZD/USD New Zealand / United States Kiwi Dollar

The Minor currency pairs consist of any currency from the 8 majors except for the USD. You also get exotic pairs, which consist of currencies from the emerging markets against the USD.

There are few Forex brokers who offer these pairs, and even if they do then the spreads are quite high making them more difficult to trade. We’ll explain more on spreads later in the document if you’re not sure what that is.

Here are the exotic pairs.


Pair Countries Lingo
USD/HKD United States / Hong Kong
USD/SGD United States / Singapore
USD/ZAR United States / South Africa Dollar Rand
USD/THB United States / Thailand Dollar Baht
USD/MXN United States / Mexico Dollar Peso
USD/DKK United States / Denmark Dollar Krone
USD/SEK United States / Sweden
USD/NOK United States / Norway


Market Size and liquidity

The Forex Market is considered an OTC (over the counter) market due to the fact that the entire market is run electronically between a network of banks 24 hours a day. There is no physical location nor a central exchange.

So in a market that is spread throughout the world with no central location, trading can take place anywhere that you can connect to a broker. Whether it be a trading floor, or on the beach, it makes no difference.

The Forex market is by far the biggest financial market in the world, and is traded globally by over 4000 world banks and a massive amount of individuals and other organizations. See the Trade Volume diagram earlier in this document.

Traders choose who they want to trade with depending on current market conditions, attractiveness of price and even the reputation of the trading counterpart.

The USD is the most traded currency taking up 84,9% of all transactions. The Euro’s share is second at 39.1% followed by the Yen at 19%.

currency composition of world fx reserves

You can quickly see why the Dollar keeps getting mentioned in this document.


percentage of all transactions

According to the International Monetary Fund, the USD comprises almost 62% of the world’s official foreign exchange reserves.



Speculation

It is important to note that despite the Forex comprising of commercial and financial transactions, most currency trading is based on speculation.

Most trading volume comes from traders that buy and sell based on intraday price movements, the trading volume brought about by speculators is estimated to be more than 90%.

Due to the massive volumes and high number of traders, the liquidity of the Forex market is very high. This makes it easier for people to buy and sell currencies.

For investors, liquidity is very important because it determines how easily a price can change over a given period of time. In a very liquid market like the Forex market, huge trading volumes can happen with very little effect on the price or action.

It is good to note that market depth can change depending on the currency pair and the time of day. We’ll go more into detail on best times to trade later on.



Different Ways to Trade Forex

There are four different ways to trade Forex, we will only be focusing on one of them. The four methods are Spot Market, Futures, Options and Exchange-traded Funds


Spot Market

In the spot market, currencies are traded immediately or “on the spot” using the current market price. The simplicity, liquidity, tight spreads and 24 hours a day operation makes this the most popular of the four methods. You can start with tiny accounts of $25 (not recommended but possible) up to several million dollar accounts. This is the market that we will focus on.


Futures

Futures are contracts to buy or sell a certain asset at a specified price on a future date. Forex futures were first created in 1972 by Chicago Mercantile Exchange. Since futures contracts are standardized and traded through a centralized exchange, the market is very transparent and well-regulated.


Options

An “option” is a financial instrument that gives the buyer the right or the option (with no obligation) to buy or sell an asset at a specified price on the option’s expiration date. If a trader “sold” an option, then he or she would be obliged to buy or sell an asset at a specific price on the expiration date.


Exchange-traded Funds

An ETF could contain a set of stocks with currencies, allowing the trader to diversify with various different assets. They can be traded like stocks through an exchange. The market is not open 24 hours however, and since they contain stocks they are subject to trading commissions and other transaction costs.



When are the good times to trade?

You should now have an understanding of what Forex is, why you should trade it, who makes up the Forex market but now we should find out when you should trade. The market is open 24 hours a day, but there are still “sweet spots” where it’s best to trade.

Ideally we want movement in the market when we trade. Doesn’t matter if it’s up or down, as long as there is movement we’re happy. When it’s a sideways market (no real up or down trend) things can be quite tough.

Before we choose the best time to trade, let’s look at what happens in the market over a 24 hour period. We can break the Forex market up into four major trading sessions. Sydney, Tokyo, London and New York sessions. Here are the session times.


Northern Hemisphere Summer

Time Zone GMT SA Time (GMT+2)
Sydney Open Sydney Close 22:00 07:00 00:00 09:00
Tokyo Open Tokyo Close 23:00 08:00 01:00 10:00
London Open London Close 08:00 17:00 10:00 19:00
New York Open New Your Close 12:00 21:00 14:00 23:00

Northern Hemisphere Winter

Time Zone GMT SA Time (GMT+2)
Sydney Open Sydney Close 21:00 06:00 23:00 08:00
Tokyo Open Tokyo Close 23:00 08:00 01:00 10:00
London Open London Close 07:00 16:00 09:00 18:00
New York Open New Your Close 13:00 22:00 15:00 00:00

You can see that between each session, there is a period of time where two sessions are open at the same time. For example, Tokyo overlaps with London for an hour, and London overlaps with New York for 3 hours. These are the busiest times of day because two major centers are both open and trading.

Now here’s the really interesting table. The average pip movement of the majors during each separate trading session.


Pair Tokyo London New York
EUR/USD 76 114 92
GBP/USD 92 127 99
USD/JPY 51 66 59
AUD/USD 77 83 81
NZD/USD 62 72 70
USD/CAD 57 96 96
USD/CHF 67 102 83
EUR/JPY 102 129 107
GBP/JPY 118 151 132
AUD/JPY 98 107 103
EUR/GBP 78 61 47
EUR/CHF 79 109 84

From the table, you can see that the European session usually provides the most movement. All of the markets can be traded, but if you’re looking for a fast moving and liquid market then the European session is the better one to look at.

Here is why I tend to look at the European session more than the others

  • I’m based in South Africa, and the timing suits me perfectly.
  • The London session crosses with two other major trading sessions, and with London being a key financial sector, a large portion of all Forex transactions take place during this time. So there’s a very high liquidity and usually lower transaction costs.
  • Most long term trends begin in the London session and typically continue until the beginning of the New York session.
  • If you want to work half days, the volatility tends to die down in the middle of the session. Larger traders head off for a break before the New York session begins.


Which pairs to trade?

Assuming you agree with me on the European session, it’s usually a good idea to stick with the majors to avoid surprises. The majors are traded in such large volumes by so many people that it’s less likely for something unexpected to occur.  The majors in this trading session to look at would be the EUR/USD, GBP/USD, USD/JPY and USD/CHF.

You can try the Yen crosses, specifically using the two biggest European currencies EUR/JPY and GBP/JPY. Personally, I trade the GBP/USD as my primary currency pair, then I’ll branch out to the other majors.



How is Money Made in the Forex Market

In the Forex market you buy or sell currencies. The idea is that you exchange one currency for another with the expectation that the price will change in your favour. So the currency you bought will increase in value compared to the one you sold.

Here’s an example

Trade EUR USD
You purchase 10’000 Euros at the EUR/USD exchange of 1.1800 +10’000 -11’800
Two weeks later you exchange your 10’000 Euros back into USD at the exchange rate of 1.2500 -10’000 +12’500
Profit taken of $700

When taking leverage into account, profits could be much higher.  Exchange rate is the ratio of one currency valued against another currency.



How to Read a Forex Quote

As usual, we will be using the GBP/USD. This information will apply to any of the currency pairs that you decide to use.


gbp / usd

The first currency mentioned in the quote is the base currency. The second (after the slash) is the quote currency. In the above figure, we are showing that 1 British Pound is worth 1.6050 US Dollars.

So if at this point you decided you want to trade on this exchange rate, and you felt that the GBP would increase in strength, you will then buy. When trading we always refer to what you are doing with the base currency. Because if you feel the pound with strengthen, you want more of them, so you buy pounds.

If you decided that the pound would weaken against the dollar, you would sell. You want to get rid of them and rather stock up with dollars.



How to Read a Forex Chart – the basics


how to read a forex chart the basics

What is there to take note of on the Forex charts?


  • Currency Pair
  • Chart period
  • Current Exchange Rate
  • Any obvious trend ?

Usually on charts it will show what currency pair you are trading. You’ll see on the top left of this chart it shows I am trading the GBP/USD. The H1 next to the currency pair shows us that it is the 1 hour chart. This means that each candlestick represents one hour. Don’t worry, we’ll cover more about candlesticks soon.

The vertical column on the right shows the values of the currency, in this case the black background block shows the current exchange rate. And we can clearly see over this period that there was a big long movement. Long meaning going up. This shows us that the British Pound is hammering the US Dollar. At least over this small bite of the market.



Important Forex Terms

Long vs Short

Traders like their lingo. A long position or a short position, has nothing to do with time. Long means that they are buying the base currency, and short means selling the base currency.

So if you hear someone saying they are “entering a short position” or “going short” they are basically entering a trade by selling. “Going long” or “entering a long position” is when they are entering a trade by buying the base currency.

But why do traders use these terms? It’s a fairly simple answer when you consider that traders can make money in either direction. For example, suppose you walk into my office and ask me what sort of trade I will be making today. I tell you that I am going to sell today.

By saying that I am going to sell, I am not being clear because that can have two different meanings. Perhaps I am going to sell a currency pair that I had previously purchased, thus closing an existing trade. Or it could mean that I am opening a new short trade.

However, if you ask the same question and the answer is that I am going short, there can be no confusion as to what it means.

The same applies to buying. If I say that I am going to buy, it could mean that I am either opening a new long trade, or that I am now buying back currency that I had previously sold and am therefore actually closing an existing trade.

But if I say I am going long, then there can only be one meaning.


Bid / Ask

All Forex quotes are quoted with two prices. The bid and ask. The bid is the price at which your broker will buy the base currency, and the ask is what they will sell the base currency. The difference between the bid and ask price is known as the spread and this is where brokers make their money.

Brokers bid prices will be a little lower than the value of exchange so when they buy back the currency they make a small profit. The ask price is a little higher than the exchange value, so when they sell you the currency they make a small profit.

This is actually a very good system, so there are no fees or commissions payable to brokers and your spread is included in your trade immediately. So you can cover your costs immediately.


What is a pip?

Have a look at the above graph, and the section on how to read Forex quotes. You will note that we use 4 decimal places instead of the regular two. Nothing is smaller than 1c right? Wrong.

A pip is 1/100th of a cent and this is where Forex traders make their money. Let’s take the exchange rate from the previous graph of 1.6069.


pip

So if the market moves from 1.6069 up to 1.6089 it means it moved 20 pips up, or you could say the pound strengthened by 20 pips.

Depending on how much you traded, this could be a small amount of profit or a lot. With a $5’000 dollar account, you could trade $10 a pip and make $200 off a small trade like that. It should be noted again that Forex trading is a risk, and if you went the wrong way you could also lose $200 on a trade like that.

The next section covers Lots, Leverage, Profits and Loss which will help you understand how we make money from pips. Important Note : Some brokers will offer a 5th decimal place, and these are called Fractional Pips. They are also nick-named a pipette.


Lots, Leverage, Profit and Loss

In the introduction of this document, we showed that the minimum amount allowed used to be $100’000 per trade for this type of Forex trading. With the opening of the retail sector, these lots have been divided up making it more accessible to the general public to start trading.


Lot Sizes

Lot’s Name Number of Units
Standard 100’000
Mini 10’000
Micro 1’000
Nano 100

Micro lots seem to be a very popular account size for people starting out, and most brokers will allow Micro accounts. Not many allow Nano accounts purely because it’s not worth their while.


Leverage

Leverage is one of the best (and possibly worst) things about Forex trading. If you think of your broker as a bank who is fronting you the money to purchase currencies, all the bank is asking is that you give it a smaller amount as a good faith deposit.

If your broker offers a 100 : 1 leverage, then for every 1 unit you put in, the broker will let you trade 100 times that amount. In this example, if you wanted to trade a Micro lot (1’000 units) you could put down 10 units at 100:1 leverage. Make sense?

Simply put, here’s an example of profit/loss on a trade. So let’s say you wanted to trade $100’000 on the USD/CHF pair, and you agreed on a 100:1 leverage with your broker. You would put down $1’000 to secure the temporary loan and the broker would let you trade with $100’000 value. For every pip movement on this amount, you would make or lose $10.


Liquid

A liquid or a thick market, is a market in which selling and buying is done quickly and easily. This is because there are more people trading in the market, so there is more likely to be someone who wants to buy what you are selling, or sell what you are buying.

A market with very few buyers and sellers is referred to as an “illiquid” market.


Support

Support is a point on the chart where we have seen the market often stop falling. It is not an exact point, but generally an area. The tighter the points are the stronger we generally see the support line. In the below example, we have a support line drawn in that has been hit several times, even having a break through in the middle section.


support

Resistance

This is the polar opposite to the support line. Instead of us seeing the market stop falling, this is where we see the market stop rising. It is also not an exact price, but an area above.


resistance

Breakout

A breakout occurs when the exchange rate breaks below a support or above a resistance line.


breakout

Range

A range occurs when the exchange rate is moving more sideways, rather than moving in a clear direction. It is contained within visible support and resistance levels.


range

Consolidation

A consolidation occurs when the exchange rate is moving in an area that is getting squeezed, or narrowing. The consolidation times often lead to breakouts.


consolidation

Central Banks

Every country, or sometimes a group of countries (like Europe) has a corresponding interest rate, and that rate is determined by a central bank. Many traders and speculators monitor these interest rates very carefully because it often has a dramatic impact on currency exchange rates.


Several important central banks


  • ECB – European Central Bank
  • BoE – United Kingdom’s Bank of England
  • Fed – United States Federal Reserve
  • BoJ – Bank of Japan
  • SNB – Swiss National Bank
  • BoC – Bank of Canada
  • RBA – Reserve Bank of Australia
  • RBNZ – Reserve Bank of New Zealand
  • SARB – South African Reserve Bank

The role of the central banks

These central banks raise interest rates to try and fight inflation, and lower interest rates to stimulate growth. Their actions often create movements in the exchange rates that are used in many different forex trading strategies.



Types of Orders

The term “order” refers to how you will enter or exit a trade. There are various types of orders that can be placed in the Forex exchange market. Different brokers will have different options of what type of orders they will accept.


Market Order

A market order is an order to buy or sell at the best available price.  It is an immediate order with no pending details. It is quite simply the easiest order to place and the most commonly used.



Limit Entry Order

This is an order placed to either buy below the market, or sell above the market at a certain price. This falls under the pending order category on most platforms. Let’s say the GBP/USD is currently at 1.6900. You can set a Limit Entry Order to buy if the market reaches 1.6950 or sell if it drops to 1.6850. The idea is to place this order, and be able to walk away. Most commonly used when you believe the market will turn after reaching a particular price.


Stop Entry Order

This order works in reverse to the Limit Entry Order, where you will buy above the market, or sell below the market at a certain price.  This is generally used when you believe that if the market hits a certain price it will continue in that direction. Let’s say the market is on 1.6950. There is a nice trend forming upwards, but you’re not convinced yet. You know that if the market hits 1.6980 then it will continue. So you place a Stop Entry Order that if the market hits 1.6980 (or maybe a little higher to be safe) it will then BUY. The same works in reverse for sell positions.


Stop Loss Order

A stop-loss is a very good type of order to learn. It helps you protect your overall capital, but setting a market price that will trigger your trade to close. So if you see a trend, enter, and the market swings the other way while you’re not at your computer, it will stop your trade. You will still lose some money, just not nearly as much as you could’ve.


Trailing Stop

A trailing stop is like a dynamic stop loss. If you set your trailing stop at a certain level (let’s say 20 pips) then as you move in to profit your stop loss will automatically follow 20 pips behind. This can be very useful for the nervous trader, but sometimes it can also cause your trade to close on a fake out.



Demo Account vs Live Account

Firstly, let’s talk about the difference between the two types of account. Money. That’s it. Almost every broker has a demo account option where you use real live charts, and all the spreads are already built in. So it works exactly like a live account, except you’re playing with a fake bank account.

So that’s the technical difference. The other difference is much more important, psychology. Using a demo account is great for learning whichever platform you want to trade with, testing new systems, or as a beginner to the Forex market.

Here’s a little disclaimer. If you do not feel ready to put down real money on a live account, then wait. This must be your decision to do so, and you must be aware that there is always risk when trading Forex so never put down more money than you can afford to lose.

Assuming you have gone for genuine training and have a good mentorship program, then you should look at moving to a live account. If you scour forums and chat to existing traders you will find out quickly that the transition from demo account to live account is quite big. There are many people trading very successfully on demo accounts who fail miserably on live accounts. Even though they are technically the same, it is hard to remove all emotions from trading.

We suggest, and once again this is only a suggestion, that after you have completed your training, you spend 2 to 4 weeks on a demo account using the same platform you intend to trade on. In this time you must become comfortable with the software to avoid silly mistakes, and apply what you learnt in class to the charts and follow your mentorship program. After that, you open your live account.

If at any time you lose 4 consecutive trades, or have a drawdown of 10%. STOP TRADING. Contact your trainer, analyze your trades, take a step back and relook at your strategy. Never chase that “one big deal to cover losses”.

Let’s be honest here, when looking at the possible income from Forex trading people generally get quite greedy. I’m not saying you shouldn’t want to earn a lot, but greed itself is never good. It makes you step out of your trading strategy, take bigger risks and often it makes you trade when you should actually just step away for a bit.

Strategies do need to be adjusted from time to time, and you might notice that everything just goes wrong at the worst possible time. Nine times out of ten, this is due to news coming out. There are several ways to trade news, one of which is to simply not trade at all! Which is a surprisingly popular decision to make. We will be covering popular news and how to trade off it, or if you prefer to be a pure indicator trader you might make the decision to simply avoid trading during those times.



Choosing the right broker

In the case of a demo account it’s not as important to make sure you choose the right broker because real money isn’t on the line. It is good to look around though and start using a demo account from the broker who you are planning to use just to get a feel for them.


First and most important question

Is your broker regulated? And more specifically, are they regulated by a strict authority. This is why I personally tend to avoid brokers that are based in Cyprus and various other countries. They can officially be regulated, but the regulatory authority might not be up to scratch themself.

I recommend you stick to brokers who have head offices (and main bank accounts) in either the UK or USA. For UK based brokers, they must be regulated by the Financial Service Authority (FSA). For brokers based in the USA, they must be regulated by either National Futures Association (NFA) or Commodity Futures Trading Commission (CFTC). If you are using a South African broker, make sure they are registered with the Financial Services Board (FSB).


Almost as important Questions

Does your broker offered fixed or non-fixed spreads? What are the spreads? If you are planning on scalping and trading several times a day then the spread is a lot more important than a long term trader. For example, if your broker charges just 1 pip more than mine per trade, and we trade twice a day, 20 days a month, that’s 40 pips you’ve already lost out on.

What is the minimum lot size? If you are trading a smaller account with a capital less than $2’000 you will most likely be wanting to trade micro lots (0.01). Larger accounts are fine with mini lots (0.1), this is basically $1 per pip.


Very useful extras

Does your broker offer premium services like charting, access to trading central, news feeds and anything else ? This can greatly assist with your trading and I recommend looking at various outside sources to get you going.



Basic MetaTrader 4 Functions

We’ll be running through a few basic functions, so that you can get used to the overall feel for the platform. Firstly, let’s look at the main sections of the website, so when I later refer to the Terminal or Market watch, you’ll know what I’m chatting about.


basic metatrader 4 funcations

Main Menu:

All commands and functions that can be executed in the client terminal are collected in its main menu. It contains File, View, Insert, Charts, Tools, Window and Help.


Toolbars:

Four toolbars are built into the terminal : Standard, Charts, Line Studies and Periodicity. The toolbars contain duplicated commands and functions of the main menu. They are the more used functions and put there so they’re easily accessible.


  • Standard : These are the common functions. Load a new chart, load profile, new order and so forth.
  • Charts : I use this one the most. It contains the most useful chart editing tools, such as candlesticks, zooming in or out, auto scroll, add indicator, load/save templates
  • Line Studies : These are the tools that you use to draw on the chart. Adding Fibonacci lines, drawing horizontal or vertical lines, trend lines, inserting text, inserting signals like arrows or price marks.
  • Periodicity : This is where you set the period (time frame) of the chart. MetaTrader 4 offers M1 (1 minute), M5, M15, M30, H1 (1hour), H4, D1 (Daily), W1 (weekly) and MN (month).

Market Watch:

This window contains the symbol list. Commands of this window allow to control trade positions and charts. If you select a currency pair, and then click on the “tick chart” option you will get a real time chart in the small window. Please note that it’s so fast and generally covers a small portion of the market that you should not use it to try and pick up trends.


Data Window:

By default the data window is turned off, and in my picture it’s off. To turn it on you can click on View in the main menu, then click on Data Window. Or, simply press Ctrl+D.

The data window shows information about prices, as well as indicators and expert advisors that are applied. There are no actions that can be performed in this window and is purely there to give detailed information on specific points in the market.


Terminal

The terminal window has several sets of information that it can display to you, and is a very important window to get used to. By clicking through the tabs at the bottom of the terminal it will cycle you through the various sets.


  • Trade : This tab shows all your open positions and pending orders, and you can manage all those orders here as well. Closing, modifying, applying trailing stops and more. When you are in trades, this is possibly the most important option.

  • terminal trade

  • Account History : This is a set of data that will either make you feel great or very depressed. We’re aiming for extreme happiness. It shows your trading history for all closed positions. The history period can be adjusted to view particular date ranges.

  • terminal account history

  • News : Different brokers have different news feeds that come through here. Typically it’s always financial news. – Please note, this is often disabled on demo accounts.
  • Alerts : Various alerts can be viewed and set here. Alerts can be anything from playing a particular sound when certain market conditions are met, or can be set to send you an email.
  • Mailbox : This is a mailbox for messages sent exclusively from your broker. You can send and receive under this tab.
  • Experts : This tab shows the history and information about the functioning of attached experts. From the initializing of the expert itself to the opening and closing of positions.
  • Journal : This contains history of tasks performed by MetaTrader 4, like the launching of the program and various events while it’s running. This is useful when trying to debug or figure out why something is not working (like sending email in alerts).


First Functions

Opening a chart

Most of the time allocated to trading is watching charts with various indicators. MetaTrader can handle up to 99 charts at any given time, although this will use more resources than necessary and there is no way to monitor that many charts.

To open a new chart, select “File” in the main menu, then “New Chart”. This will bring up the available currency pairs. Click on any of the pairs, and you will see the new chart load up in the main console area. Another way which is a bit faster is to select the  button in the “Standard Toolbar”.

Another way is to click and drag a currency pair from the list in the Market Watch window on to an existing chart. The new currency pair will replace the old chart but keep all the indicators and old settings available.


Setting up your chart

Charts are a visual representation of market history, and with the application of indicators and reading trends and patterns we try to predict what will happen. So it’s good to have a chart that is visually appealing and easy to read.

New charts in MetaTrader come with their standard look, which I personally don’t find very useful and difficult to read. I setup a way that I find the charts visually appealing. Here is MetaTrader’s chart next to my setup.


setting up your chart

My chart is significantly different. I zoom in a bit more, switch to candlesticks and changed the colour scheme. To edit your chart to a setup you like, select the chart you want to edit by clicking on it then select “Charts” in the main menu and click properties at the bottom. Alternatively you can just press F8. It will load up the chart properties. Here is a picture of my settings in case you like them and want to copy them.


setting up your chart

Saving your template

Editing the chart every time can become tiresome. Once you have the chart looking the way you feel comfortable with you can save it as a template. Then when you open a new chart you can simply load the template. To save, select “Charts” from the main menu, then select “Template”, and then “save template”.

A popup window will appear asking you what you would like to call it. Give it a name that’s memorable. I have a habit of starting all chart names with “aaa” so they’re easy to find and close to the top. Once it’s saved, you can load it on new charts using the “Load Template” option found just below “save template”. You can use the  button found in the Charts Toolbar to access the templates quickly.


Changing Time Frames

Click on one of your open charts to highlight it, then look for the Time Period Toolbar.


changing time frames

M1 is for 1 minute, M5 is for 5 minutes and so on. H1 is hourly, D1 is Daily, W1 is Weekly and MN is monthly. What this means, is that each tick on the chart represents the amount of time selected.


Changing Chart type (candlesticks, line, bar chart), zooming, auto scroll and more

We will exclusively use candlestick charting in this training course. They are very versatile and work well with any indicators I use as well as any Forex system I have ever used. Look for the Charts Toolbar.


changing chart type

The first three buttons will change the type of chart. Bar Chart, Candlesticks, Line Chart. Feel free to click through them, but once you’ve had a look at the different types then set it to Candlesticks. Apply this to the chart that you have set your colours on.

Next, have a look at the zoom level. The + and – signs will zoom in and zoom out the chart. This is useful for quickly looking at a larger time frame and then zooming back in to wait for candle information.

The Auto-Scroll feature to the right of that does exactly what it says. It automatically scrolls the chart as there are updates. This should remain on except when you are looking at history and don’t want the chart jumping back.

Next up we have the Indicators button. We will cover this coming up, for now just remember where to find it.

Following that is a Periods option, which is the same as the Time Period Toolbar, but can be more convenient if you want to remove that other toolbar for extra space.

Then we have the Templates button which we have covered. Once you’ve updated your chart to candlesticks and set the zoom level you like you can save your template again and update your already saved template.


Placing a Trade

And now for the very important task of how to place a trade. There are five ways to open an order in MetaTrader. They seem to really want you to be able to place an order very quickly. Here are the five ways to place an order.


  1. Press the "New Order" button in the Standard Toolbar
  2. Click on the “tools” menu then select “New Order”
  3. Right click on a chart, in the menu that pops up select “Trading” and then “New Order”
  4. Right click in the Terminal window when the “Trade” tab is selected, then select “New Order”
  5. And finally, press F9.

When you load a new order in any of these ways, it will automatically select the currency pair of the active chart.

The “Order” Window will open up giving you a few options. If you are wanting to enter the market immediately then the most important ones to look at is the volume (amount of lots traded) and if you’re entering a sell or a buy.


placing a trade

Stop loss and Take Profit will be discussed in more detail later in the course. It does not have to be entered to place a trade, but when you are trading with real money then you should always at least have a stop loss. Different systems will give different ideas as to where a stop loss should be, these will be discussed in the various systems. Go ahead and open a trade now. Remember, it’s on a demo account so we’re not using real money while learning.


Modifying Trade

In the terminal window with the “Trade” tab selected you will see your open trade with the relevant details.


modifying trade

If you have more than one trade open they will all be listed here. Right click anywhere on the line with the trade you want to edit. A new popup will appear that looks very similar to the above order window.

The modify trade window will allow you to change the stop loss and take profit of the trade. As much as you may wish it, you can’t cancel existing trades or change your mind from a buy or sell. Trust me, I’ve looked.


modifying trade

Closing a Trade

The best way to do this is in the Terminal window again, with the trade tab selected.


closing a trade

You also right click on the trade anywhere on the line, and in the menu that pops up you select “Close Order”. A new window will popup confirming your choice and showing the prices you are attempting to close the order at.


closing a trade

Splitting a Trade

This is a feature very often overlooked, but will be required with some of the systems taught later in the course. Follow the same steps in the “Closing a Trade” but stop before you click the yellow button to close the actual trade. If you change the volume you are closing to a lower amount it will leave the remainder open.

For example, if you were in a 2 lot sell you can go through the closing steps, but change the volume amount to 1 lot. Now when you close, it will only close half the trade.


Shifting the chart and viewing history

To scroll back in time to see historical data, all you do is left click and hold on the chart itself, then move the mouse right, you will see the chart sliding right and showing more of the history. Click and drag the other way to return to current time. It’s a good idea to turn off auto-scrolling first because that will want to keep shifting the chart back.


Adjusting candle height and price level display

If you click and hold the left mouse button on the right side of the chart (on top of the price levels) and drag the mouse up and down you will change the Y-axis price levels. This is often useful when you have an indicator that is outside the chart display area and you want to pull it in.



Technical Analysis

The theory behind technical analysis

Long-term movements in the currency market generally correlate with economic cycles. These economic cycles tend to repeat themselves, and so they can be predicted with a reasonable degree of accuracy. Repetition is the key, since the entire premise of technical analysis lies in using historical price movement to predict future price movement.

In the stock market, the fundamentals of a particular company can change radically in a short period of time. This makes past stock prices irrelevant in the prediction of future movement. There is no predictable economic cycle in the life of a company or in the life of an individual stock. As a result, technical analysis becomes a hit-or-miss proposition in the stock market.

In the forex market, we are trading the economies of entire countries. The fundamentals of these countries change very slowly, making the boom-bust nature of the economic cycle easier to predict.


Statistical survey

Which would you consider more accurate—a survey of five people or a survey of 5,000 people? If the survey is performed in a fair and even-handed manner, the larger sample of information will generally reveal the more accurate result.

The greater size and liquidity of the forex market gives technical analysts a larger sample of information from whic

h to draw. There are many more trades, and much more money changing hands than in any stock market or futures market. The currency market contains more data points, making a statistical sampling like technical analysis more accurate.

Also, the vast liquidity found in the currency market makes it much less likely that insignificant players will disrupt the market and temporarily skew technical indicators, which is common in less liquid markets. One stock trader can easily influence the price of an illiquid stock, but it is much more difficult—and expensive—to exert influence over exchange rates.

For example, imagine a stock that trades an average daily volume of just 20,000 shares per day. If a trader places a market order to buy 10,000 shares of this stock, what do you think will happen? Because this order is equal to 50 percent of the stock’s average daily volume, the price rockets higher, as the available offers are absorbed. In a very real sense, one trader has single-handedly moved the market for that stock.

While this scenario is common in the equity markets, it is unheard of in the currency markets. The sheer size of the forex market makes this type of reaction nearly impossible. In fact, there have been numerous occasions where governments and central banks have tried to exert their influence over currency exchange rates and failed.


Fear of the unknown

It’s natural to have a fear of the unknown, and this is normal human behaviour. I remember when I first decided to get involved with forex trading, there were many concerns weighing on my mind.

What would the chart look like? Would I have to abandon my current trading style and learn some esoteric new method of trading? These are common concerns of traders who want to experience the advantages of forex but are reluctant to leave their “comfort zone.” As we take a look at charts of forex exchange rates, the first thing that will become apparent is that they are not very different from the charts of other trading vehicles, such as stocks or commodities.



Technical Strategies

Introduction

A good winning trader is defined by the portfolio of forex strategies known and applied in different situations, considering that a single system is not enough to supply the right number of successful trades if you apply it all the time. A trader that doesn’t have a strategy would be like trying to drive a car without any fuel. You can have the best education in the world but without a single strategy you would simply be a gambler.

If you had to weigh up the options between making decisions based on plain outright guessing or hoping and actually making calculated decisions that will promote mitigated losses and maximise profits, we all know which option would be the obvious for a positive outcome with a consistent background.

Trading forex profitably excludes gambling in its entirety as it is and should be treated like a business. Running a business requires one or a set of strategies and if executed with precision can yield desired results time and time again. Welcome to trading forex like a business, with a set of cutting edge strategies.


Bullish Reversal Patterns

Inverted Head-and-Shoulders

inverted head and shoulders

  • Formation – left shoulder, head, right shoulder and a neckline
  • Breakout – upside through the neckline (a;b)
  • Duration – could take up to several months or more than a year
  • Target – distance from the top of the head to the neckline

Bottoming-up

bottoming up

  • Formation – left shoulder, head, right shoulder and a neckline
  • Breakout – upside through the neckline (a;b)
  • Duration – could take up to several months or more than a year
  • Target – distance from the top of the head to the neckline

Bear Channel Breakout

bear channel breakout

  • Formation: falling tops and bottoms within a channel
  • Breakout – through the upper slope (A)
  • Duration – can persist until a breakout occurs
  • Target – the width of the two parallel lines

Double-bottom

double-bottom

  • Formation – two troughs (A;B) and an intermediate peak (C)
  • Breakout – through the upper horizontal line/intermediate peak (C)
  • Duration – it is preferred to have at least 4 weeks between the lows (A;B)
  • Target – distance from the two troughs (A;B) to the intermediate peak (C)

Bearish Reversal Patterns

Head-and-Shoulders

head and shoulders

  • Formation – left shoulder, head, right shoulder and a neckline
  • Breakout – downside through the neckline (a; b)
  • Duration – a few weeks, but shorter than an inverted H & S pattern
  • Target – distance from the top of the head to the neckline

Topping-out

topping out

  • Formation – ascending, consolidation and descending phase
  • Breakout – through the horizontal line of the consolidation phase (B)
  • Duration – no specific time frame
  • Target – distance from the horizontal line (B) to the beginning of the pattern

Bull Channel Breakout

bull channel breakout

  • Formation: rising tops and bottoms within a channel (A;B)
  • Breakout – through the lower slope (B)
  • Duration – can persist until a breakout occurs
  • Target – the width of the two parallel lines

Double-Top

double top

  • Formation – two peaks (A;B) and a trough (C)
  • Breakout – downside through the trough (C)
  • Duration – 1 to 3 months, or less
  • Target – distance from the peak to the trough


Trading Indicators

There are 100’s if not 1000’s of custom indicators available for people to try. Many of them are based on the built in indicators with MetaTrader with some unique modifications, and some of them are completely new. For the purpose of this, we will stick with the most commonly used indicators. In advanced courses we will introduce some very advanced custom indicators and the strategies that they are used with.


Average Directional Movement Index (ADX)

ADX is a momentum indicator that will confirm a trend. The ADX is derived from two directional indictors, known as DI+ and DI- which are derived from the directional movement index (DMI). It is calculated by dividing the difference between the two by the sum of the two. It is then multiplied by 100.

The final answer yields a number between 0 to 100 as a scale. 0 means that the market is equally likely to move in either a positive or negative direction, so no overall trend, and 100 indicates that the market is exclusively going to continue its current trend. Think of it as a trend strength indicator.

ADX indicator loaded below candlesticks in chart window.


average directional movement index

Bollinger Bands

Bollinger Bands are used to measure the volatility of a market and to indicate relative price levels. Bollinger bands consist of three separate lines which are drawn on the chart itself. The center line is a simple moving average (SMA). The upper and lower bands are drawn two standard deviations above or below the moving average. Standard deviation of any given market price varies depending on the difference between high and low prices on any given candle. So when a pair becomes more volatile the Bollinger bands will expand, and when they become less volatile the bands will contract.

Bollinger Bands applied to active graph.


bollinger bands

Moving Averages  (SMA and EMA)

Moving averages are one of the most popular fundamental tools of technical traders. The two most popular types are the simple moving average (SMA) and the exponential moving average (EMA) indicators.

The SMA is calculated by taking the average market price over a selected range. For example, if you had the input value selected to 10, it would simply take the average price over the last 10 candles and plot that point. The smaller the input value given, the closer to the actual price it will reflect. People refer to the smaller inputs as being “quicker” or “faster” because the moving average will respond quicker to price updates than longer periods.

The EMA is more complicated. It is calculated by taking the difference between the current price and the previous EMA. This value is multiplied by a set percentage (often dependent on the number of periods taken into account). The resulting number is added to the previous EMA value. The complicated story made simple, is the EMA takes in to account the full range you specify, but the more recent candles are weighted more. So it is slightly more responsive than the SMA.

These are the easiest ways to see a general price behavior at a glance. There are several trading techniques which use moving average cross overs, which we will be covering in our trading systems section.


moving averages

Moving Average indicator applied to chart.


MACD

One of the most used, but not often understood indicator (in my humble opinion). The Moving Average Convergence/Divergence is essentially an EMA crossover system drawn as a histogram. It measures the difference between a fast and a slow EMA of closing prices. The formula is Fast EMA – slow EMA. Then a signal line is drawn on top of the histogram which enables you to look for entry points. When you setup MACD it will ask for the three variables, so keep in mind what you are looking for. Smaller EMA settings will yield quicker responses but will also show more fakes.

When the MACD crosses the 0 point it confirms a change in direction of the market.


macd

MACD applied to chart as histogram.


Relative Strength Index (RSI)

The RSI measures the strength of a trend and even shows direction. It is one of the more popular tools and is relatively easy to interpret. The oscillator (representation style) looks like a simple graph with a range from 0 to 100. The value 50 represents a sideways movement in the market, 100 extreme uptrend, and 0 extreme downtrend. The more it deviates from 50 the stronger the trend is.


relative strength index

RSI added to graph as an oscillator.


Stochastic

Stochastics are an indicator used in technical analysis. It compares the closing prices in a market to the high and low prices for that market over a certain period of time.

Stochastics are calculated by taking the lowest low price and the highest high price for a number of previous trading periods. The difference between the current closing price and the lowest low is divided by the difference between the highest high and lowest low. The result is multiplied by 100.

Stochastics are used to determine when a market is overbought or oversold. Generally when the indicator is showing values above 80% we see it as overbought and below 20% it is oversold. This helps us get ready to find a good entry point and is used in several systems.


Closing Price – Highest High ---------------------------------------- x 100 Highest High – Lowest Low

stochastics

Stochastics applied to Forex chart.

These are a handful of the most common indicators used, we will discuss other indicators as necessary for the trading systems later in the course.




Trading Strategies

There are many forex systems out there, and a lot of them work. The bad news is, most of those won’t work for you. So it’s important that you understand the system and try it out before you put all your eggs in the basket. I will be introducing you to three very different systems.

In my experience I have found that there are three types of systems out there.


  1. Pure indicator systems which work purely on statistical chances of particular market prices being met.
  2. Market sentiment systems, where traders rely on interpreting market prices and predicting what the bigger traders will do. Fibonacci, resistance, support, general trend and pivot lines play on market sentiment.
  3. Hybrid systems, which take pieces from each. In my opinion, these are the more successful of the systems.

So in any system I use I make sure that we have something from 1 and 2 which increases my success rate. So let’s look at the first one.



Cowabunga System

Yes, that’s it’s real name. This was the first system that I got success from, and I found it on www.babypips.com. It’s a simple system that if stuck to properly, it can yield decent results.

Let’s setup the indicators used for this.


  1. Open a fresh chart, preferably on a pair with a low spread like the EUR/USD or GBP/USD.
  2. Load up your template so you’re happy with the look of your fresh chart. No indicators yet.
  3. Add a 5 EMA indicator applied to the close. We need different colours here, I recommend RED for this EMA. I start with the hot colours for fast moving EMA’s and move down to colder colours as a habit.
  4. Add a 10 EMA indicator applied to the close. Make this one a slightly colder colour, like a dark orange.
  5. Add Stochastic with inputs (10.3.3) Slow and Simple Settings
  6. Add RSI (9) Simple
  7. Add MACD (12.26,9) Exponential Histogram

You should land up with a chart that looks something like this:


cowabunga system

Rules for the system

The main trend is your friend. Switch your chart over to a 4 hour and identify the trend direction. If it’s moving short, then we will only be looking at short positions and visa versa for long positions.

Entries will be taken on the 15m chart, so now that you’ve picked the direction, change the period to 15 minute chart.

To enter LONG positions


  • 5 EMA must cross above the 10 EMA.
  • RSI must be greater than 50.
  • Stochastic must be headed up but NOT in overbought territory (over 80).
  • MACD histogram must go from negative to positive OR be negative and start to increase in value. The Ideal is for MACD to have been negative and turning up.

To enter SHORT positions

  • 5 EMA must cross below the 10 EMA.
  • RIS must be lower than 50.
  • Stochastic must be headed down but NOT in oversold territory (under 20).
  • MACD histogram must go from positive to negative OR be positive and start to decrease in value. The ideal is for MACD to have been positive and turning down.

Stop Loss

This is essentially a swing trading system, so stop losses should never be far from entry point. For long trades, you can set the stop loss at the most recent swing low, and for short trades at the most recent swing high. In a lot of cases the stop loss will be quite close. If the recent swing is too far to keep your stop loss within the parameters of your money management plan then you should not compromise your money management.


Exits

You can sit and watch the market and exit on candle information, or EMA crossover. Alternatively you can set take profit at the next 50 or 00 level (ie 1.2550 or 1.2600). If your target is less than your stop loss, then the risk is not worth it.


exits

Here is a successful entry. The 4 hour showed a strong downtrend so we were looking for short positions there. The Stochastic was heading down, the RSI below 50, MACD heading down and the 5 EMA went below the 10 EMA. Ideal Entry. This is best shown in practice, so we’ll spend some time on it during the day.



Simple Scalper

This is a system that came around after trying to figure out a way to use the Zigzag indicator properly. The Zigzag indicator is fantastic for quickly highlighting highs and lows on your chart, and really helps with deciding which price levels to use for Fib lines, A fellow trader, Vic, and myself have spent some time on the Zigzag line thinking that if we could get a reliable way to trade between highs and lows we can grab lots of trades.

After back testing it with several indicators and applying several trading methodologies I believe we’ve come up with a good set of rules and best of all, it is far simpler than initially anticipated. Here’s the setup.


  1. Load a new chart, also with tight spreads like the EUR/USD or GBP/USD.
  2. Apply your template with just colours and no indicators; we want this as clean as possible.
  3. Add the Zigzag line, you’ll find this in the Navigator window under “Custom Indicators”. I recommend changing the default colour from red, I prefer using a pale blue colour so it doesn’t get lost in the mix of red and green candles.
  4. Add Bollinger Bands as a standard indicator, with the period set to 20 and shift 0 applied to close. Once again, change the colour so it doesn’t clash with what’s on the screen already. I go with a darker blue.

Go ahead and save this as a template so you can load it quickly to other charts.

You should now have a chart that looks like this.


simple scalper

PLEASE NOTE !!!

Once you’ve loaded the indicators and you look at the chart, it looks too good to be true. And it is. The Zigzag line repaints itself to new candles if conditions are met. So looking at a history makes it look 100% perfect. This is NOT the case. The system is good, but nothing is 100%.

Rules for the system


  • Only trade in the direction of the general trend on larger time frames. I recommend using the 4 hour period. Look at the direction of the center Bollinger band. If it’s trending down, then we’re looking for shorts, if it’s trending up then we’re looking for longs. If it’s moving sideways, change currency pair,
  • While this system is a scalping system, it is a slower scalping system but does yield more pips. Do NOT apply to 5m charts, and avoid 15m charts. After back testing the system, 30m seems to be the most reliable and highest yield.

To enter a LONG position

  • Zigzag must paint on to a new low.
  • New low candle must be at least 25% below the low Bollinger Band. Tail is fine, body does not need to be outside but is preferable.
  • Do NOT enter if the candle has a full body with no wick on the top.

To enter a SHORT position


  • Zigzag must paint on to a new high.
  • New high candle must be at least 25% above the high Bollinger Band. Tail is fine, body does not need to be outside but is preferable.
  • Do NOT enter if the candle has a full body with no wick on the bottom.

Stop Loss

This is a tricky one. On occasion, you will see the perfect setup. Zigzag attaches to a candle that is out of the Bollinger bounds, candle will finish forming but the next one keeps on going and the Zigzag reattaches. The temptation is to put very high stop losses so when it does eventually turn you’ll get the trade. Remember, this is a scalping system, so if you go heavily negative you might not hit break even when it does turn.

My recommendation is to put the stop loss just outside the high of the candle for short entries, or just outside the low for long entries. You don’t want to risk more than a handful of pips on any trade. Rather let your stop loss get hit and wait for a better entry point.

Exit Points

I have tested several exits, and you have two options. One will give you the highest amount of successful trades which is to simply take profit at the same value as your stop loss, i.e. if stop loss is 10 pips, take profit at 10. Simple, done, and usually works.

But you’ll see that this system picks up one or two entries on incredibly good trades each day, and you would not want to miss out on that. So this is what I suggest.

Close 50% of profit when price crosses the center band, move stop loss of remaining position to break even. So now worst case scenario and you get hit with a reversal, you’ve already cashed in a few pips and the remainder closes on 0. Best case scenario, you hold on to that trade until you see an entry point to another direction.



Pivots and Candles

A pivot point is a market price that if crossed will signal a change in direction. Please  note that if you are trading a 15m chart it does not necessarily mean the longer trend will change, so don’t bet the farm and expect to be rich in one trade.

Many brokers offer advice from Trading Central or other similar services which give pivots and target lines. But it is a good idea to learn a popular formula to calculate your own pivots and apply them to the chart. Here are the steps to get started.


  1. Load up your chart again and apply the colours (or load your template with only colours).

That’s it for the chart ! Now we need to calculate our pivots and here is how. If you are an intra-day trader then you will want to use the Daily chart, if you are trading inter-day then you will want to use the weekly for pivots. I recommend the daily, since you will most likely be trading on time frames smaller than the daily at first. Switch your graph over to the daily, move the mouse over to the most recently closed daily candle (i.e., not the current daily candle) and get the figures from the data window.

I have taken sample data from the EUR/USD pair 2nd May 2012


  • High – 1.32408
  • Low – 1.31215
  • Close – 1.31580

Now we want 5 price levels, the pivot itself, and then 2 resistances and 2 supports. And here’s how we get them.

Pivot                     = (High + Low + Close) / 3                             1.32408 + 1.31215 + 1.31580)/3                     = 1.31734 Resistance 1 = (2 x Pivot) – Low                                           1.2 x 1.31734) – 1.31215                                  = 1.32253 Support 1            = (2 x Pivot) – High                                          2 x 1.31734) – 1.32408                                     = 1.31060 Resistance 2 = (Pivot – Support 1) + Resistance 1            1.31734 – 1.31060) + 1.32253                         = 1.32927 Support 2 = Pivot – (Resistance 1 – Support 1)             1.31734 – (1.32253 – 1.31060)                        = 1.30541

Now plot them on your Chart using the horizontal bars. Don’t stress too much if you can’t get the bars on the exact price, you can press Ctrl+B to load up the objects window, select the horizontal line and edit the value.

If you used the same date and figures, you should have a chart like this on the Daily.


pivots and candles

Now switch over to a 15m chart and the pivots will still be drawn in, you might need to click and drag on the price bar to increase the scale so you can see the pivots. You should be able to see this.


pivots and candles

The 5 points we have plotted are significant for different reasons. Firstly, the pivot. If the current market price is below the pivot we would expect the market to continue short, and if it heads above we now consider it to be long. I really recommend taking a general trend from a bigger time frame and stick with trading in that direction unless something very significant comes along.

Now bring out that candlestick cheat sheet and get it close by. What we are looking for, are candlestick formations suggesting a change in direction on one of these 5 lines. You will see plenty of candles in between the lines, but very often they fail. They are much more likely to work out on these lines and give you a good entry point.

As an example. Let’s use the levels that we’ve charted and stay on the 15m chart. You can decrease the range to increase the size of the candles and make them easier to read. Scroll the graph right and look for a hammer, hanging man or shooting star on one of the lines. Have a look what happened over the next few days.


pivots and candles

The first highlighted area shows a cluster of weak shooting stars, which did move the market, but not with a lot of vigour. It would have yielded a few pips but nothing to write home about.

The second highlighted area shows an almost perfect shooting star also crossing the pivot line with its wick, and that worked out very nicely. You will see a big gap in the market, that was what happened over the weekend. If you traded that candle down to Friday night before the markets closed you would have gathered 81 pips. Holding it over the weekend would have yielded another 70 pips on top of that.


Stop Loss

With this system as well, we do NOT enter in a trade that is already happening. This is because the best stop loss is just above the wick of the turning candle. Remember, these points usually signify a bounce but if the market crosses through with a decent momentum it will keep running, so trades can go horribly wrong. By entering the trade early, we can have a tight stop loss and limit losses. If you enter late in the trade, you’ll find your stop loss is very high.

Exit points

A “safe” (and I use the word “safe” loosely) take profit would be at the next plotted line. A riskier take profit is the following line. This is where splitting the trade is a good idea. Close 50% at the first line, and close the remainder further than that. If you have a fair sized account, you could close 33% at the first line, 33% at the second line, then set a trailing stop on the remainder. Trailing stop should be as large as the difference between the two plotted lines. Make sure you have set your take profit to at least break even.


Now try using the Simple Scalper system with pivots and targets plotted


Finding important price levels

Setting up the chart

Firstly, you will want to load up your chart with your preferred colour scheme, and NO INDICATORS. Yes, that’s right, no indicators. I even like to go as far as to remove the background grid, this can be removed under the  chart properties setting (F8). Untick the box next to “Show grid”.


setting up the chart

You want your graph to look as clean as possible, and with colours that makes sense to you and is easy on the eye. This is not just to look nice, but because we aren’t using indicators you need to rely on your ability to read the market and determine price levels as efficiently as possible.


Finding the important levels

Now to find important price levels. This system is based on a methodology of trading called Price Action. The fundamental concept of it, is exactly what it’s called. Price Action determines important levels, and not so much with formulas or Fibonacci. So what we are ideally looking for are previous prices where the market bounced off on more than one occasion. It’s a little tricky at first, but once you start getting the feel for it you can find these prices very quickly. Here is an example of a chart with just one line drawn in.


finding the important levels

This is drawn on the weekly time frame, but daily and 4 hour works as well. What we have picked up here are two strong lines of resistance. So we draw the line in and keep an eye on it in weeks to come. With a Daily you will be able to trade more, but the smaller the time frame the less reliable it is. After some time, we came across a decent looking candle that formed around that price range.


finding the important levels

We’ll get to which candle formations we deal with later. I’m sure you have seen this one before (If you’ve been reading the notes!). For now, you should have a look for these price ranges on a demo account at some random point in history, then scroll forward and see how often history repeats itself. Keep in mind, that previous support often becomes new resistance and visa versa.

As with most systems, it’s a good idea to keep in line with the general direction of the market and find the best possible entry points. This reduces risk and maximizes profits. That’s exactly what we want. Because we are trading the larger time frames already, we can’t really look at bigger ranges. So what we do is look at how the lows and highs have been forming.

The definition of a confirmed low is simply when you see a low candle that sticks out and the two candles to either side are higher than it, then it’s a confirmed low. Visa versa for a high. For example, that candle you see highlighted above would be a confirmed high.


Using Highs and Lows to confirm direction

So what we look for on the chart, are higher highs and/or higher lows to confirm a long trend, or lower highs and/or lower lows for a down trend. Here is an example of a very obvious long trend.


using highs and lows to confirm direction

Keep this chart handy, we will be coming back to it.

You can clearly see a series of higher lows, so we would be looking for long positions by the third marked. So by this point we would most certainly be looking for long positions and long positions only. You will see that the short positions that do occur go for fewer pips than the long positions, so our risk/reward is better looking at longs and this is a key point for our money management.

So now you know what price levels to look for based on SR (Strength Resistance) lines and how to pick which direction you should be trading in. Now let’s find what sort of candles we are looking for to get good entry points.


Most commonly used Candlesticks

The two that yield the best successes are the pinbars and engulfing patterns. Pinbar is a new term in this training, it is a simplified (but stricter) application of the hanging man, shooting star, hammer and inverted hammer. The engulfing candles are the same with the bearish engulfing bar (BEEB) and bullish engulfing bar (BUEB).


most commonly used candlesticks

The pinbars are the most popular and generally work the best. The third type we can use is the Harami. It is more unreliable than the Pinbars and Engulfing patterns so I won’t be covering it but you can look up the Day 2 notes and get the Harami out of it.

The ideal situation for the pin bar is for it to be as big or bigger than the previous candle. I.e. if we see a long pinbar (expecting long position) we would like it to be bigger than bearish (short) candle before it. I must admit I don’t always follow the “as big or bigger” rule, and as long as the pin bar is of a decent enough size to show a change in momentum I will take it. This has caused one or two losing trades, but it has also given a few extra winning trades.


3 Rules for entry confirmation


  1. Determine general market direction and look for trades that way.
  2. Look for important price levels (previous support and resistance).
  3. Wait for candle to form (perfectly, none of this “good enough” nonsense) on or around those price levels.

If you have ever really looked at a chart in real time, and seen a perfect candle, gone in, and the candle doesn’t work out, then you know what I’m talking about. Make sure the candle has formed on an important price range otherwise it’s considered no-man’s land and you may as well flip a coin. We are not aiming for 50% here like a coin flip, we want at least 70% success ratio so stick to the rules.

So let’s say you have been sitting patiently and you have found a fantastic pin bar on the daily, it’s on an important line and it’s in the direction we are looking for. Everything looks great, but now we need to find the best entry from that candle.

Because we are using the daily or 4 hour charts for our candles, you will often use pending orders. Here are the four types of pending orders


  • Pending Order

Pending order is the client's commitment to the brokerage company to buy or sell a security at a pre-defined price in the future. This type of order is used for opening of a trade position provided the future quotes reach the pre-defined level. There are four types of pending orders available in the terminal:


  1. Buy Limit — buy provided the future "ASK" price is equal to the pre-defined value. The current price level is higher than the value of the placed order. Orders of this type are usually placed in anticipation of that the security price, having fallen to a certain level, will increase;
  2. Buy Stop — buy provided the future "ASK" price is equal to the pre-defined value. The current price level is lower than the value of the placed order. Orders of this type are usually placed in anticipation of that the security price, having reached a certain level, will keep on increasing;
  3. Sell Limit — sell provided the future "BID" price is equal to the pre-defined value. The current price level is lower than the value of the placed order. Orders of this type are usually placed in anticipation of that the security price, having increased to a certain level, will fall;
  4. Sell Stop — sell provided the future "BID" price is equal to the pre-defined value. The current price level is higher than the value of the placed order. Orders of this type are usually placed in anticipation of that the security price, having reached a certain level, will keep on falling.

This was taken directly out of MetaTrader’s help. If you ever get confused, just press F1 while in MetaTrader and search for “pending orders” in the help.

With the Pinbar that we have seen and decided everything is lined up to trade, we want the most amount of profit with the least risk. That should be true for every single trade you make.

On the next page you will see a diagram of a pin bar which would be ideal for a short position. Keep in mind that we would only trade this pin bar if the longer trend was short (lower lows) and this pin bar bounces from a previous support or resistance line.

There are three entry points. The safest is to enter the trade once the market has shorted from the closing price and broken the nose of the pin bar.

The most common is the immediate entry where the moment the candle closes you enter a short position,

The third is in anticipation of the market rallying against the short position for a while, and waiting for the market to go long for a bit before turning to the predicted short position. This level is often set at either 50% of the candle length or on the 61.8% Fibonacci level.


3 rules for entry confirmation

My personal favourite is to split the trade in two sections. One pending order with a Sell Stop kicking in when the price breaks the nose price, and the other 50% is the Sell Limit at 50% of the total candle size.

The Sell Stop at the break of the nose is the most reliable, but the draw back is you have a larger stop loss and you miss out on a few pips. The Sell Limit gives the smallest stop loss and largest profit, but is often not triggered. If the price goes the wrong way immediately after the close then only your sell limit kicks in and you have a small stop loss so the loss is not too big. If the price immediately goes in to profit and keeps going then your Sell Stop kicks in.

The best scenario, is when the price goes the wrong way for a bit, kicks in your Sell Limit and then turns your way kicking in the Sell Stop as well. Now you are in a lot of profit, full position open, and you can move your first order (Sell Limit) deal stop loss to the nose price and shift your Sell Stop’s Stop Loss to your old Sell Limit entry. Making it an overall riskless trade. We will work through a few examples in the course to explain it a bit better.

So how do we decide on take profits ? There are several options here again. The simplest is to set your take profit at twice your stop loss, or twice the amount of pips in the candle you are trading from. This is the simplest, and works well. The downside of it is that you often don’t get the whole trade, or even half of it. But leaving take profit at a very high mark might mean your trade reverses on itself and you lose all your profit.

The next method is to look at the market and find other important price ranges where there has been previous resistance and support, and set take profit on those lines. It’s a smarter option, but sometimes limits your trades even more depending on the price action in that area.

I like to split my trade in to three. The moment my trade has covered the amount of pips of the candle I close 1/3rd of the trade and take profit. I find the next resistance level and close 1/3rd there. The final 1/3rd you can set the stop loss at break even. And then put a trailing stop on it. The trailing stop should be the size of the candle you used to trade or larger. So if things keep going in your direction you could hold the trade for weeks and keep profiting the entire way.

That’s the first half of the system done, now for the addition of patterns to grab some more trades. These are actually two separate systems that can be traded on their own. I combine them because they work in the same time frames, don’t use indicators and they are both dealing with actual price changes.

Here’s a repeat of one of the earlier charts, with the addition of a rising trendline.


3 rules for entry confirmation

Have a look at the two highs I circled in green, and see what that could signify to us.

The second green circle is a confirmed high, but it’s lower than the previous high. So it’s a lower high, meaning that we can expect the market to start going short. So at that point we might want to wait for a lower low to confirm, or we can put our faith in the lower high and start looking for short positions.

With the previous part of the system we were looking purely at horizontal price levels. Now we are opening up diagonal trends as well. It’s a lot simpler than people expect. All we are looking for are clear lines where the market has turned. The above is an almost perfect example. You can see three consecutive points that if we draw a line in, the market turned sharply.

I find that the sharper the turn, the stronger the trend line. Now when the market comes to that price again two things can happen. It can bounce again, or it can break through. That’s true for all market conditions, but more so with trend lines. We can take the bounce as an entry point, or if it breaks the trend line we can enter there as well. It’s best to give it a full 10 to 15 pips before entry. You can enter during a candle without it needing to close since this system does not rely on candles.

These trend lines can be found on highs or lows. Sometimes both, and then we start seeing patterns. Here are two examples of potential trade opportunities.


3 rules for entry confirmation

This is my personal favourite of the patterns. If you come across a trend on the lows and highs that will lead to an eventual crossover, we call this a wedge. In this case, it is a falling wedge because it is pointing down. As you can see, the market is getting squeezed and at some point it is going to break out and we would jump on that. Because the market is already so squeezed, we would not enter a trade that bounces off the trend line.


3 rules for entry confirmation

When the trend line on the highs runs parallel to the trend line on the lows, we call this a channel. In this case it is a falling channel because it is trending down. Once a channel has been confirmed we can trade inside the channel or wait for a breakout. It’s best to trade in the direction of the channel, so in the above chart we would be trading short positions only. That way we have a higher chance of a bigger trade.

If the wedge or channel is moving long, they would be called a rising wedge or rising channel. If you come across a rising trend line on the lows, and a falling trend line on the highs, this is what we call a triangle.


Doji – our not-so-secret weapon

Simple. In a Doji candlestick, price is essentially unchanged. Hence, it represents market indecision. It’s like an area of congestion compressed into one candlestick.

We trade it like a reversal signal, if there is a trend to reverse. Treat it as a signal to stand aside if there is no trend to reverse.


dojo

Marubozu

A Marubozu is the polar opposite of a Doji. Its opening price and closing price are the extrem ends of the candlestick. Visually, it is a block.


marubozu

A Marubozu that closes higher signifies powerful bullish strength while one that closes lower shows extreme bearishness.

How do we trade it?


  • The Marubozu is more useful as a learning tool than as a pattern for trading. Together with the Doji candlestick, they highlight the extremes of the candlestick spectrum.
  • By placing a candlestick on this spectrum, we are able to judge the directional strength of any bar.
  • If you must trade the Marubozu pattern, consider the following.
  • Continuation pattern in a strong break-out aligned with the market bias
  • Part of another candlestick pattern (discussed below)

marubozu

Harami Candlestick

a.) What does it look like?


  • Just remember that Harami means pregnant in old Japanese. The first candlestick is the mother, and the second candlestick is the baby.
  • Focus on their bodies. The body of the baby bar must be entirely within the body of the mother bar.
  • Typically, in a bullish Harami, the first bar closes lower than it opens while the second bar closes higher. Similarly, in a bearish Harami, the first bar closes higher than it opens while the second bar closes lower.

harami candlestick

What does it mean?


  • It means that the market has come to a muted reversal.
  • The candle body stands for the real price change of the candle regardless of its intracandle excursions.
  • Hence, it represents the real and conclusive movement of the candlestick.
  • The smaller candle bodies points to decreased volatility.
  • Thus, it is not surprising that many Harami candlestick patterns are also inside bars.
  • Compared with the Engulfing candlestick pattern below, it is a weaker reversal pattern.

How do we trade it?


  • In a bull trend, use the bullish Harami to pinpoint the end of bearish retracement.
  • In a bear trend, use the bearish Harami to pinpoint the end of bullish retracement.

how do we trade it

Engulfing Candlestick

What does it look like?


  • Simply flip a Harami patter horizontally and you will get an Engulfing pattern.
  • The body of the second candle completely engulfs the body of the first.

engulfing candlestick

What does it mean?

Again, the focus on the candle bodies looks for a real reversal, in this case, the second candle body fully engulfs the first and represents a strong reversal signal.


How do we trade it?


  • In a bull trend, buy above the bullish engulfing pattern for bullish continuation
  • In a bear trend, sell below the bearish engulfing pattern for bearish continuation

engulfing candlestick

Piercing Line / Dark Cloud Cover

What does it look like?

The Piercing Line and the Dark Cloud Cover refer to the bullish and bearish variants of the same two-bar pattern.

The first candlestick of the Piercing Line pattern is bearish. The second candlestick:


  • Opens below the low of the first candlestick; and
  • Closes above the mid-point of the first candlestick.

As for the Dark Cloud Cover pattern, the first candlestick is bullish. The second candlestick:


  • Opens above the high of the first candlestick; and
  • Closes below the mid-point of the first candlestick.


piercing line

b.) What does it mean?


  • It means some traders are sorely disappointed.
  • In the Piercing Line pattern, the second bar opened with a gap down, giving an initial hope of a strong bearish follow-through.
  • However, not only did the bearishness fail to materialise, it proceeded to erase more than half of the bearish gains from the first bar.
  • This bullish shock offers a great long trade.
  • Likewise in the Dark Cloud Cover pattern, the first gap up prompted hope from the bulls before the lower close crushed it.

c.) How do we trade it?


  • Find major bullish reversals with the Piercing Line pattern (preferably after a break of a bear trend line).
  • Find major bearish reversals with Dark Cloud Cover pattern (preferably after a break of a bear trend line).

piercing line

Hammer / Hanging Man Candlesticks

What does it look like?

Let’s get this straight. Both the Hammer and the Hanging Man patterns look exactly the same. Both have a:


  • Candle body near the top of the candlestick; and
  • A long lower shadow (around twice of the candle body).

The difference is this. The Hammer pattern is found after a market decline and is a bullish signal.

However, the Hanging Man appears (as an ill-omen) at the end of a bull run and is a bearish signal.


hammer

What does it mean?


  • The Hammer pattern traps traders who sold in the lower region of the candlestick, forcing them to cover their shorts. As a result, they produce buying pressure for this bullish pattern. Its bar pattern equivalent is the bullish Pin Bar.
  • The Hanging Man pattern is a seemingly bullish candlestick at the top of an upwards trend. Infected by its optimism, traders buy into the market confidently. Hence, when the market falls later, it jerks these buyers out of their long positions. This also explains why it is better to wait for bearish confirmation before going short based on the Hanging Man pattern.

How do we trade it?


  • In a downtrend, buy above the Hammer pattern for a reversal play. (You can also trade the Hammer pattern like a bullish Pin Bar.)
  • In a uptrend, sell below the Hanging Man pattern for a reversal play after bearish confirmation.

hammer

Inverted Hammer / Shooting Star Candlesticks

What does it look like?


  • Simply invert the Hammer pattern.
  • The Inverted Hammer is visually identical to the Shooting Star pattern.
  • The difference is in where you find them. An inverted Hammer is found at the end of a downtrend while a Shooting Star is found at the end of an uptrend.

inverted hammer

What does it mean?


  • The Inverted Hammer is a bullish pattern. In a down trend, the Inverted Hammer pattern emboldens the sellers. Hence, when the Inverted Hammer fails to push the market down, the bullish reaction is violent.
  • The bearish Shooting Star pattern implies a different logic. The Shooting Star traps buyers who bought in its higher range, forcing them to sell off their long positions and hence creating selling pressure. Its bar pattern equivalent is the bearish Pin Bar.

How do we trade it?


  • In a downtrend, buy above the Inverted Hammer pattern for a reversal play after bullish confirmation.
  • In a uptrend, sell below the Shooting Star pattern for a reversal play. (You can also trade it like a bearish Pin Bar.)

inverted hammer

Morning Star / Evening Star

What does it look like?

Both star patterns are three-bar patterns.

In candle-speak, a star refers to a candlestick with a small body that does not overlap with the preceding candle body. Since the candle bodies do not overlap, forming a star will always involve a gap. Thus, it is uncommon to find Morning Stars and Evening Stars in intraday charts.

A Morning Star comprises (in sequence):


  • A long bearish candlestick
  • A star below it (either bullish or bearish)
  • A bullish candlestick that closes within the body of the first candlestick

An Evening Star comprises (in sequence):


  • A long bullish candlestick
  • A star above it (either bullish or bearish)
  • A bearish candlestick that closes within the body of the first candlestick
  • This pattern is similar to the three-bar reversal.

morning star

What does it mean?


  • The first candlestick in the Morning Star pattern shows the bears in control. The star hints at a transition to a bullish market. Finally, the strength of the last candlestick confirms the bullishness.
  • The Evening Star expresses the same logic. The first candlestick shows the bulls in control. Uncertainty sets in with the star candle. The last candlestick confirms the bearishness.

How do we trade it?


  • We apply both patterns to catch reversals as well as continuations.
  • Buy above the last bar of the Morning Star formation.
  • Sell below the last bar of the Evening Star formation.

morning star

Three White Soldiers / Three Black Crows

What does it look like?
  • Each of the three candlesticks in the Three White Soldiers should open within the previous candle body and close near its high.
  • Each of the three candlesticks in the Three Black Crows should open within the previous candle body and close near its low.

three white soldiers

What does it mean?
  • In the Three White Soldiers pattern, each bar opens within the body of the previous candlestick and suggests a potential fall. However, each bar ends up with a strong and high close. After three instances, the bullishness is undeniable.
  • In the Three Black Crows pattern, each bar opens within the body of the previous candlestick, suggesting bullishness. However, as each bar closes lower, the bearishness is clear.
 

c.) How do we trade it?

  • These patterns are effective for trading reversals.
  • Buy above the Three White Soldiers after a substantial market decline
  • Sell below the Three Black Crows after a substantial market rise

three black crows

Hikkake

(Despite having a Japanese name, the Hikkake is not one of the classic candlestick patterns. However, it is an interesting pattern that illustrates the concept of trapped traders.)

What does it look like?


  •  To find a Hikkake pattern, first look for an inside bar.
  • For a bullish Hikkake, the candlestick after the inside bar must have a lower low and a lower high to signify a bearish break-out of the inside bar. When this bearish break-out fails, we get a long Hikkake setup.
  • For a bearish Hikkake, the next candlestick must have a higher high and higher low. When this bullish break-out of the inside bar fails, the market forms a short Hikkake setup.

hikkake

What does it mean?


  • The Hikkake pattern pinpoints the failure of inside bar traders.
  • Trading the break-out of inside bars is a popular strategy. When the break-out fails, we expect the price to blaze in the other direction.

c.) How do we trade it?


  • We use Hikkake for continuation trades.
  • Buy if a downside break-out of an inside bar fails within three bars
  • Sell if an upside break-out of an inside bar fails within three bars

hikkake

Now that you are able to identify various actions by means of analysing candlesticks and what they mean, we can move on to the next section where you will learn about price action and how they work in strategies coupled with candlestick patterns.

Using candlestick patterns can serve as confirmation of a change in direction of price movement.



Candlestick Cheat Sheet – Print this


Abandoned Baby


abandoned baby

A reversal pattern characterized by a gap followed by a Doji, which is then followed by another gap in the opposite direction. The shadows on the Doji must completely gap below or above the shadows of the first and third candle.


Bearish Engulfing Pattern


bearish engulfing pattern

The market must be in clearly defined uptrend. The first candle is bullish. The second candle is bearish. The bearish candle engulfs the previous candle's body. The size of the candle being engulfed doesn't matter. Ignore the wicks. An even stronger signal occurs when the bearish candle engulfs the bodies of two or three previous candles. Indicates a bearish trend may be beginning.


Bearish Engulfing Pattern


bearish engulfing pattern

This pattern must occur after a significant downtrend. It occurs when a small bearish candle is engulfed by a large bullish candle. This signals a possible reversal. Ignore the wicks. An even stronger signal occurs when the bullish candle engulfs the bodies of two or three previous candles.


Dark Cloud Cover


dark cloud cover

A bearish reversal pattern that continues the uptrend with a long white body. The next candle opens at a new high then closes below the midpoint of the body of the first candle. The pattern is more significant if the second candle's body is below the center of the previous body. The pattern is casting a “dark cloud” over the bullish trend that preceded it. Confirmation of the pattern is achieved when another black candle, of smaller size, forms after the second candle.


Doji


doji

The Doji is a warning sign of a pending reversal. The lack of a real body conveys a sense of indecision or tug-of-war between buyers and sellers and the balance of power may be shifting. The open and close are pretty much equal. The length of the upper and lower shadows can vary and the resulting candlestick looks like a cross, inverted cross or plus sign.


Dragonfly Doji


dragonfly doji

A Doji where it opens and closes at or near its high. The candle ends up with a tall lower shadow and no body. It is usually seen at the bottom of a move. More bullish than a hammer.


Engulfing Pattern


engulfing pattern

A reversal pattern that can be bearish or bullish depending upon whether it appears at the end of an uptrend (bearish engulfing pattern) or downtrend (bullish engulfing pattern). The first candle is characterized by a small body, followed by a candle whose body completely engulfs the previous candle's body.


Evening Doji Star


evening doji star

Hammer candlesticks form when prices moves significantly lower after the open, but rallies to close well above the intracandle low. The resulting candlestick looks like a square lollipop with a long stick. A hammer indicates that the market may be attempting to find a bottom, and that buyers are strengthening their position. If this candlestick occurs after a significant uptrend, then it is called a Hanging Man. The body can be clear or filled in.


Hanging Man


hanging man

Hanging Man candlesticks form when a security moves significantly lower after the open, but rallies to close well above the intracandle low. The resulting candlestick looks like a square lollipop with a long stick. If this candlestick forms during a decline, then it is called a Hammer.


Harami


harami

A two candle pattern that has a small body candle completely contained within the range of the previous body, and is the opposite color. Coming after a strong trend, this pattern indicates a decrease in momentum and possibly the end of the trend.


Inverted Hammer


inverted hammer

A one candle bullish reversal pattern. In a downtrend, the open is lower, then it trades higher, but closes near its open.


Long Candle


long candle

A long candle represents a large move from open to close, where the length of the candle body is long.


Long-Legged Doji


long candle

This candlestick has long upper and lower shadows with the Doji in the middle of the candle's trading range, clearly reflecting the indecision of traders.


Marubozo


marubozo

A candlestick with no shadow extending from the body at either the open or close


Morning Doji Star


morning doji star

A three candle bullish reversal pattern that is very similar to the Morning Star. 1) The first candle is in a downtrend with a long black body. 2) The next candle opens lower with a Doji that has a small trading range. 3) The last candle closes above the midpoint of the first candle.


Morning Star


morning star

This is a bullish pattern signifying a potential bottom. A three candle bullish reversal pattern consisting of three candlesticks: 1) A long-bodied black candle extending the current downtrend 2) A short middle candle that gapped down on the open. 3) A long-bodied white candle that gapped up on the open and closed above the midpoint of the body of the first candle. The star can be a bullish (empty) or a bearish (filled in) candle.


Piercing Line


piercing line

A bullish two candle reversal pattern. During a downtrend: 1) The first candle is a long bear candle followed by a long bull candle. 2) The bull candle opens lower than the bear's low but closes more than halfway above the middle of the bear candle's body. This is a warning sign for sellers since a reversal to the upside might soon occur.


Shooting Star


shooting star

A single candle pattern that can appear in an uptrend. It opens higher, trades much higher, then closes near its open. It looks just like the Inverted Hammer except that it is bearish. A shooting star can mark a top but is often retested.


Spinning Top


spinning top

Candlesticks that have small bodies with upper and lower shadows that exceed the length of the body. A very good reversal signal and can be any color. Spinning tops signal indecision. The smaller the body, the less direction the market has.


Stick Sandwich


stick sandwich

A bullish reversal pattern with two black bodies surrounding a white body. The closing prices of the two black bodies must be equal. A support price is apparent and the opportunity for prices to reverse is quite good.


Three Black Crows


three black crows

A bearish reversal pattern consisting of three consecutive black bodies where each candle closes near below the previous low, and opens within the body of the previous candle.


Three White Soldiers


three white soldiers

A bullish reversal pattern consisting of three consecutive white bodies, each with a higher close. Each should open within the previous body and the close should be near the high of the candle.


Tweezer Top


tweezer top

Two or more candlesticks with matching tops. They can be composed of real bodies or shadows. These occur on consecutive or nearby candles.


Tweezer Bottom


tweezer bottom

Two or more candlesticks with matching bottom. They can be composed of real bodies or shadows. These occur on consecutive or nearby candles. Indicates a bearish trend is ending, and perhaps a reversal is in the works.



Fundamental Analysis

Introduction

Fundamental analysis of an instrument is when you look at the news relating to a currency (or other instrument). We focus on what is happening within the instrument on its own, and don’t necessarily compare it with another instrument, and based on what the expected results will be it influences our trading decision.

Let’s take an example by using Vodaphone. Don’t worry, the exact same concept works with currencies and even the cryptocurrencies as well.

Imagine the CEO of Vodaphone releases a statement that the company has been showing higher sales than expected with a lower cost than budgeted for. We would see that financially things are looking even better than investors predicted which would make the stock more attractive. This would drive up the value of their stocks. We would not need to look at technical analysis to make a reasonable estimation.

On the flip side, if the CEO or other executive is embroiled in some scandal and subsequently forced to resign his/her position, this could negatively effect the value causing it to fall.

There are several things that we look at to make predictions using Fundamental analysis. Remember, there are no guarantees, but by using fundamental analysis we can increase our likelihood of success.


Gross Domestic Product GDP

Probably one of the most important indicators which can reflect the overall health of an economy. The GDP is the final value of all goods and services produced in an economy. It is referred to as a measure of the country’s standard of living.

It is calculated using the following formula.

GDP = Private Sector Consumption + gross investment + government spending +exports – imports.

This is why it is so important, as this number represents the rate of growth (or decline) in the economy as a whole. Keep in mind that since it represents a rate of growth in prices and therefore a rate of growth in the economy, it also shows an increase in inflation.


Why do traders care?

The GDP reflects the performance of an economy within the last quarter. The change in the number gives a good indication about the growth of the respective economy. If the release is positive then this is good news for the economy as a whole. Whereas a negative result is bad news.

If the rate of growth is very high it represents a fast growing economy, and this can be good or bad for the markets. If high growth comes without an expectation of increased inflation then investors generally remain optimistic about future growth and the market generally rallies up. If the growth rate is too high and considered unsustainable without excessive inflation, we sometimes see a negative reaction to the market as they expect monetary policies to play a role and slow the economy down.

As with many releases, the actual outcome is often less important than the difference between the expected outcome. This will be covered more in the strategies section.


GFP release dates and times

Quarterly estimates of GDP are released monthly and advanced incomplete estimates that are subject to further revision are released. The dates also vary, so it is important to track them using an economic calendar.


Central Bank Influences

The main purpose of a central bank is to promote economic stability for a country, by using various policies to ensure growth and sustainability of the growth as well as manage the country’s financial system.

The most important role of a central bank is to supply capital to the commercial banks who then provide capital to the consumers. This makes sure that the banking system has sufficient liquidity for consumers to borrow money. The central bank will charge interest on the loans it provides and this affects the interest rate that the banks charge to the consumer.

The central banks use the rate it charges commercial banks for loans as a mechanism to influence the cost of borrowing in the economy and hence the money flow.

For example, if the central bank wants to increase consumer spending to boost the economy it can lower the short term rates it charges the commercial banks, which in turn lowers the rates for the end consumer. This means that consumers have more money to spend, which results in a boost to the economy.

If they want to tighten the economy to reduce inflation, it can increase interest rates which makes loans more expensive. This reduces available funds for the consumer and tightens the economy.

Central banks can also affect the currency value. To increase the value of a currency, it can purchase currency and hold it in reserve which decreases the supply of a currency and hence increases the value. The opposite is also true, by selling its reserves back to the market the supply increases, which reduces the currency value.


Producer Price Index

This is an index used to measure the prices that producers receive for their goods. Simply, it is giving us a measure of the price that producers receive for their goods. It is generally reported in the 2nd week of the month and is also expressed as an index value of 100. This index is normally comprised of over 10 000 sub-indices and all are giving a weighted average to compile the final index value. It excludes the very volatile industries such as food and energy to avoid providing distorted values of the index value.


Consumer Price Index

The consumer Price index measures the cost to buy a fixed basket of goods and services. This is basically a measure for consumers about how the price of the same fixed basket of goods and services have changed over a specified period of time. Since it is representing a change in prices, it is therefore giving us an indication of the inflation being experienced in a country. A higher inflation means that that the Central bank will lead to interest rate increases to control the money supply and hence this leads to an appreciation in your currency.

The CPI index is released at 8:30 EST on the 15th of each month and is expressed as an index based on a value of 100. A value of 116 demonstrates that it now costs 16% more for the same basket of goods and services than it did when the index first started.

As a result by monitoring and comparing the values from one period to the next, you can get an idea of what is happening with inflation and hence interest rates. If inflation increases, interest rates need to increase accordingly. Inflation is a concern to traders as it impacts the currency and control of supply and demand of money directly.


Differences between the CPI and PPI


  • The PPI is designed to measure the entire market output of US Producers which includes goods and services purchased by other producers. The CPI only includes goods purchased by consumers.
  • Imports are excluded by PPI but included in CPI
  • Taxes paid as part of the purchasing price such as VAT are not included in PPI but are included in CPI.

As a result of these factors mentioned above, this is the reason why these numbers are not exactly the same.


Similarities of CPI and PPI

CPI and PPI is providing us with a measure of inflation from both sides which are the producer and the consumer. There are two factors to take note of in this figure. This is the headline prices and the core prices.

Headline inflation includes the process of food and energy whereas core inflation excludes the prices of food and energy.


Employment Figures

The employment figures is also a very big economic indicator for forex trading as this has a direct influence on a consumer’s disposable income. Employment is the number of individuals whom are employed.

A high unemployment rate implies that less people have jobs and a result less people have a salary. This means that there is now less flow of money into the economy and as a result the economy cannot do well because there is less money available to be spent. Another way to look at it is that an unemployment means less money which means that the supply of money in the economy has decreased. A decrease in the supply of money will mean that the economy is not doing well and as a result the currency value will depreciate or go down.

A low unemployment rate means that more people are employed and hence the supply of money is higher and our economy is doing well as people have jobs and are spending more money. A good economy means that growth is evident in the economy and hence the economy is doing well and the currency value accordingly.

Remember that a currency value can be distinguished as a representation of a countries economy. If the economy is doing well, it should imply that the currency value should be increasing and the same applies when it is doing badly. It is important to remember that in Forex trading we are always comparing two countries or two currencies so this becomes much broader.

Below is a list of the major economic indicators for employment reports:


  1. Australia – Wage Price Index
  2. Canada – Labour Force Survey
  3. United States – Non Farmers Payroll and Unemployment insurance claims
  4. United Kingdom – Claimant Count Change

ISM Manufacturing Index

This is another measure of inflation which focuses on the manufacturing side of the economy and looking at the number of goods being produced. Another moving indicator which helps market participants anticipate growth in the manufacturing sector of the economy.

This index is released on the 1st business day of the month and the ISM is comprised of several sub-indices.

The most important ones are:


  • The production index which gives insight into industrial production
  • The prices index which gives insight into the Producer Price Index
  • The new orders index which is used to predict factory orders
  • The employment index which is used to predict manufacturing employment
  • The supplier’s delivery index which is a component of the leading economic indicators index. Another indicator used to predict future growth or lack thereof in the economy.

This is express based on a number from the value of 50. A reading above 50 means that manufacturing has increased from the previous period whereas a reading below 50 indicates that manufacturing have contracted during the period.

Since the ISM index captures the amount of goods that are being produced by manufacturers, this is the first sign of what is happening regarding the demand of goods by consumers and expansion in the economy. Goods need to be produced first before it can be consumed so the ISM index allows us to identify that the economy is either growing or contracting by looking at the amount of goods which are being produced. We cannot consume goods without it being produced.

Purchasing Managing Index (ISM Manufacturing Sector in Europe) They were originally focused on the manufacturing sector but as the evolution of these sectors increased it now also includes the construction and the services sector. This is basically the ISM index in the Euro Zone.

The PMI composite index is an important inductor of the overall performance of a countries bloc economy.

Both the PMI and the ISM are important indicators to identify if there is growth or lack of growth in an economy since they represent amounts of goods being manufactured.


Consumer Confidence Index

This indicator measures the consumer’s opinion on the current state of the economy. Monthly survey of over 5000 households, the purpose of which is to gauge the financial health, spending power and confidence of the average consumer.

The consumer will normally adjust spending habits depending on how optimistic they feel about the economy pulling back to save and spend less when the economy is doing bad and vice versa. This gives good insight into what is happening in the economy and hence able to determine good turning points and trades.


Commodity Prices (Commodity Price Index)

The Commodity Price Index tracks the changes in the prices of commodities such as oils, minerals and metals. This is more relevant for countries which are resourceful in these commodities such as Canada (Oil) and Australia (Gold). An increase or decrease in this index is dependent on whether a country is an importer or exporter of the particular commodity.

For example, Canada is a big exporter of crude oil. As a result when the price of Oil increases it means that Canada will receive more revenue for each barrel of oil that it exports. As a result there will be more money to flow into their economy and their economy will grow accordingly leading to an appreciation of their currency.

The United States however is a major importer of oil so if oil prices increase, it means that they will pay more money for a barrel of oil as a result of this increase. This means that less money is available in the economy and it also means that they will have to increase the price of petrol and pass it on to consumers which is negative for the economy leading to a depreciation of their currency value.


Trade Balance

This looks at the value of imports to the value of exports over a specific period.

Trade Balance = Exports – Imports

A negative balance indicates that the number of goods which were imported is more than the number of goods which are exported and as a result the country has experienced a trade deficit.

A positive balance indicates that the number of goods which were exported is more than the number of goods which were imported and as a result the country has experienced a trade surplus.

A trade surplus means that there is an increased demand for the currency whereas a trade deficit means that there is an increased supply of the currency.

An increased demand for the currency means an appreciation of its value whereas a trade deficit could lead to a depreciation.


Interest Rates

This is the number one determine factors of the movement of a currencies value. All of the economic indicators mentioned above gives insight into what the central bank will do regarding interest rates. As we discussed earlier, the central bank can control the demand and supply of money by increasing or decreasing interest rates accordingly. Bear in mind that an investor would want to have or own a currency which has the highest return. An increase in interest rates means two things. Firstly let’s look form the consumers point of view.

An increase in interest rates means that the consumer now pays a higher rate for their debt and as a result their disposable income has decreased. They now have a higher demand for money and require more money to purchase the same amount of goods and hence the currency value has increased accordingly.

Secondly from an investor’s point of view, it means that an investor would like to get a return on his investment which offers the highest return. An increase in interest rates means that he will receive more income or return on his investment. As a result this means that the supply of money has increased because investors would put more of their money to generate a return accordingly.

Events leading up to interest rate changes will create drastic moves in the forex market for the particular currency pair. Sometimes even if information is leaked it will create extremely large movements in the market so it is important to understand this. Generally, the information regarding interest rates is public information so it allows us to get insights into what is happening and take advantage of these opportunities.


Quantitative Easing

This is a method which is a type of monetary policy employed by a central bank of an economy to control inflation and interest rates. There are numerous reasons and methods that this is done but basically what the central bank is doing is buying non-treasury securities in the country in order to inject a supply of money into a specific economy to help boost the economy.


Bonds and the effect in Forex

A bond is a debt contract similar to an IOU agreement issued by the government when it needs to borrow money. Governments issue bonds in order to boost the economy or raise capital to operate the government of new projects to create employment, stimulate monetary policy. If you own a government bond, the government has essentially borrowed money from you.


Bonds vs Stocks


  • Bonds have a set or predetermined time to maturity.
  • The owner of the government bond will get paid back the original borrowed amount as the principal on a set date. When a bond gets purchased the investor also gets paid at an agreed rate of return at certain time intervals which is called the bond yield. The payments which is received from investors is called coupon payments.
  • The bond yield is the rate of return or interest received for that bond and the price he paid is called the bond price.
  • Bond prices and bond yields are inversely correlated. When one goes up the other one goes down.

What do Bonds have to do with Forex?

Bond yields serve as one of the best indicators of a country’s stock market which increases the demand for that currency. Bond yields are the best indicator to determine the direction of a country’s interest rates and expectations.

If the government of one country is offering a higher bond yield then another country, it means that the demand for the first currency is much higher which increases the price. Furthermore, it means that investors want to put their money into the country which yields a higher return.

Hence the demand for that currency has increased and so should its currency value. It is important to remember that we are comparing the bond price of one country’s bond yield to another. Ie USD/ZAR.


Bond Spreads

The bond spread is the difference in the bond yields between two different countries. By monitoring these spreads and expectations for interest rate changes, you can identify where the currency pairs are headed.

If one country is offering a higher yield on its bonds, it means that there is a higher demand for that specific currency pair over the other currency pair and hence the demand for that currency has increased which hence increases the pair accordingly.

Example: When bond spreads increased between the AUD bonds and U.S treasuries, traders startto purchase more of the AUD and go long.

From the above we can see that the forex markets are affected by many different things fundamentally. Furthermore, there are numerous other smaller indicators which can affect the markets accordingly also dependent upon how significant the information is and the effect accordingly. As a guideline, it is always important to anticipate and think about how this will affect the demand and supply of money as a result of the event that has occurred.

For example, in September 2011 when the twin towers collapsed, the dollar plummeted as a result. If we start think about the effect this has on the demand and supply of money it basically means that during that period, the supply of money decreased drastically as people we unable to trade on that day and therefore the currency value will decrease.

We will be going through the exact strategies and how to use this in our strategies section.


Non-Farm Payroll (NFP)

Introduction

  • The Non Farm Payroll , or NFP is one of the biggest currency news that is released every month.
  • When is the non-farm payroll news released? On The first Friday of Each month.
  • All you need to know now is that the non farm payroll reports shows the current state (how good or bad) of the US economy.
  • So…if the US economy is good, the value of US dollar goes up, if not, it goes down (or Euro rises up…if you are trading EURUSD).

Why Trade The Non-Farm Payroll?

  • There are those traders that don’t like trading news and there are those that like to trade currency news. For those that like to trade currency news, here are their main reasons: trading the non-farm payroll news can be really profitable, the thing is, you’ve got to get the direction right.
  • You make profits in a matter of seconds and minutes and they are huge profits. In a matter of few minutes, price can move from anything 40-200 pips. On ordinary days, you’d average 40-70 pips move in a day compared to the price move due to the release of the non-farm payroll news.
  • The important thing here is to note here is this: if you get the direction right.

Some Forex Traders Will Not Trade The Non-Farm Payroll


  • As always, what is exciting to some traders will not be so for others. So there are traders that will not trade the non-farm payroll and here are some of their reasons for not doing so: they think, it’s gambling trying to guess which way the market is going to move when the news comes out. The tendency of price to whipsaw means that sometimes your trade direction may be right but you’d get stopped out prematurely when price whipsaws and hits your stop loss.
  • Spread increase, which means your trading costs go up as time comes new to the nonfarm payroll news release.
  • Liquidity can dry up and sometimes, if you are in the wrong direction, stop loss jumping can happen. What this means is that even though you have a stop loss to protect your account, due to the fast moving nature of the market when news is released, your stop loss won’t be hit and you can lose a significant amount of your account if this happens.

Forex Calendar And Where To Get Non-Farm Payroll Dates


  • Nonfarm payrolls is an employment report released monthly, usually on the first Friday of every month.
  • The best place to get the forex calendar for other currency news as well as nonfarm payroll is at forex factory and there you’ll have a list of dates and times where forex news will be released:

forex calendar and where to get non farm payroll dates

How To Trade The Non-Farm Payroll News
  • With this Non-Farm Payroll news forex trading strategy, you really do not care which direction the forex market will go when the news is released. Because what you are going to do is place two opposite pending orders on both sides to catch the price move in any direction it goes as soon as news is released.
  • The non-farm payroll trading strategy is suitable in the situation where the market travels in a tight range before the news is released.

Non-Farm Payroll News Forex Trading strategy Rules:


  • 30 minutes before the non-farm payroll news is due, open your chart in the 5 minute timeframe.
  • Find the highest high and lowest low in this 5 min chart.
  • Place 2 pending orders on both sides, a buy stop pending order at least 5-10 pips above the highest high and a sell stop pending order 5-10 pips below the lowest low in that range.
  • Then place your stop loss on either side for each of the pending orders: your stop loss for a pending buy stop order will be the level at where you place your sell stop pending order and vice versa.
  • Then wait for news to get released and it will activate one of the pending orders. Whatever pending order that is not activated has to be closed immediately.

non farm payroll news forex trading strategy rules

Take Profit Options

Here are a few options on how to take your profits:


  • 2 times the range (example, if the distance between the high and low is 40 pips, then set your take profit level at 80pips)
  • or you can set your TP at 3 times the range
  • or another way is not to have a take profit target but to use a trailing stop and place it 3- 5 pips behind the lower swing highs (for short entry trade) and ride out the price move until you get stopped out eventually. Do the exact opposite for a long (buy) trade.

Disadvantages Of The Non-Farm Payroll News Trading Strategy

One of the big problems for forex traders trading the NFP is the price whipsaws. Price whipsaws can happen a few minutes before the news is released, this may be due to traders taking positions or exiting positions prior to the news being released and it can also happen a few seconds after the news is released.

See chart below to see what I’m talking about:


disadvantages of the non farm payroll news trading strategy

Disadvantages of trading the NFP (non-farm payroll):


  • Price spikes or whipsaws, which can tend to activate both pending orders and then hit your stop loss (if they are placed too close) and you have two loses, almost at the same time.
  • Lack of liquidity can also mean that sometimes your pending order may get filled at a very bad price.
  • Increase of spread before and just a few minutes after NFP news release.

Be Careful With Trading Forex News Like Non Farm Payroll
  • The movement of price when non-farm news comes is very fast, so you can lose a lot of money if you get your direction of breakout wrong. If you think, a 100 pip moves on the wrong side can wipe out your trading account, then you shouldn’t be trading contract sizes that will exactly do that.
  • As mentioned, forex brokers increase spread a great deal during major news events like the non-farm payroll therefore you may have to place larger stop loss distance.
  • Don’t get into the habit of trading every forex news you see…only trade ones that really matter or you have a good understanding of.


What is the Elliott Wave and how does it help?

What do we mean by Elliott Wave Trading?

First lets answer the question as to what exactly do we mean by Elliott Wave Trading. Simply put, it is based on the Elliott Wave Principle. It is a form of technical analysis that traders use to analyze various financial market cycles and make predictions on future trends.

This is done by identifying extremes in investor psychology, highs and lows, and other collective factors which we will discuss in more detail.

The name comes from Ralph Nelson Elliott. He was a professional accountant who discovered the underlying social principles and developed the analytical tools all the way back in the 1930’s. This is why you may have already heard of the Elliott Wave Principle even if you have no experience in Forex, as it was originally applied to stocks and commodities.

Ralph Elliott proposed that the market prices unfold in specific patterns, which we affectionately refer to as Elliott Waves. He published his theory in his book The Wave Principle in 1938, along with a summarized series of articles in Financial World Magazine in 1939 and later he covered more information on it in his book Nature’s Laws: The Secret of the Universe in 1946 just 2 years before his death in 1948.

Elliott famously said that “because man is subject to rhythmical procedure, calculations having to do with his activities can be projected far into the future with justification and certainty heretofore unattainable”.


What is it?

We will be showing examples and exactly how to find waves and use them how to make predictions, but before we get there we need to understand what it is and how we can use it in our trading toolkit.

First lets break down the various types of technical studies in to three main categories.


  • Trend following indicators – This includes indicators like Moving Averages, Bollinger Bands and even the MACD. The MACD looks like an oscillator, but the results are calculated by using moving averages so we consider this an indicator.
  • Trend following oscillators – The most popular of these, and my personal favourite, is Stochastics.
  • Sentiment indicators – These are not necessarily even on your chart. These can be taken from various news reports and opinion polls from the larger financial institutions.

These methods are great and a lot of traders have a lot of success with these. But they do fall short in certain areas. The largest point is understanding the current price action and how it fits in to the much bigger picture in the market.

As an example. Imagine you have a bullish crossover that has formed from your moving averages. It is indicating that the trend is turning up, and that is incredibly useful. With an understanding of Elliott Wave Trading you will be able to figure out whether or not it is a new trend, and make more accurate predictions as to how far it will go.

As I’m sure you have noticed, increasing your likelihood of a successful trade as well as increasing profits on trades will greatly enhance your trading experience. As well as potential income.


How does it fit in to our trading ?

Elliott Wave Trading can either completely replace your existing trading strategy, or you can use it to enhance your existing strategy. Because it does not rely on any indicators and teaches you how to read more in to the chart formations and patterns, it can benefit your existing strategies as either a confirmation for a trade or to help manage existing trades and squeeze more profits out.

There are Elliott Wave indicators for various platforms available. However, I feel that this sort of knowledge is best when the trader has a complete understanding of it and does not need to rely on indicators. You will soon find yourself spotting wave formations just by practicing it. This will allow you to easily add on to your existing strategies.


Fractals

We don’t have to cover a full understanding of exactly how fractals work. But I do find it useful for people to understand what they are, and how it applies to Elliott Wave.

“A fractal is a never-ending pattern. Fractals are infinitely complex patterns that are self-similar across different scales.” – Fractalfoundation.org

Here is an example. Look at the image of the snowflake.


fractals

You can clearly see the general shape of the snow flake. You can see the repetitions, and how all the angles are very similar across the entire structure.

Now if we have a closer look at just one piece of it, we can see that the same shapes and patterns that make up the whole also exist inside each of the smaller pieces.


fractals

If we could put this snowflake under a microscope we would see the same patterns even in the microscopic scale. If you’re bored and on YouTube, I highly recommend you watch some fractal videos.

The reason I bring this up is that we often see the Forex market working in a very similar fashion. And it is a good idea to never forget about the big picture. We often focus on the right now, that we forget about the larger trend. Elliott Wave Trading helps a lot with this.

It is like focusing on the last three candles without looking at the rest of the data.


fractals

The 5-3 Wave Pattern – What is it and how to find it

First 5 – Impulse Waves

Some of these definitions and sets of rules can be a little tricky to understand at first. So we will go through it slowly and show images to drive it home. Once you have the “Aaahhh” moment you will find it much easier to use and understand.

Elliott showed that in a trending market, it often moves in what he called a 5-3 wave pattern. The first 5 waves are called impulse waves, and the last 3 waves are corrective waves.


first 5

Here is a short description of what happens during each wave. And please note, there are no guarantees so no matter how perfect you may spot this in real life, keep a level head and manage your risk!

Wave 1: The currency pair makes a small move upwards. This is often caused by either positive or negative news for one of the pairs involved.

Because the price of the pair is still relatively low, it is a good time to get in and we often see a good first movement.

Wave 2: By this point, the trade has often brought in a good amount of profit for the initial investors. We often see traders closing all of part of their positions to bank their profits. Due to the reduced demand of the currency, we often see a drop.

Wave 3: Most often we see the third wave as the largest of the 3 impulse waves. This is where the currency pair has been noticed by many investors and traders, and where the trade is still early enough for significant profits. With more traders purchasing we often see this wave move further than the others.

Wave 4: At this point, many traders feel as though the trade has finished. Significant profits are showing and it would become expensive to enter the trade at this point. So we often see the big players closing off their trades which will show a dip in the market.

Wave 5: After a dip in the market, the pair seems more likely to continue an upwards trend. This is also where the public often sees just how far and fast a particular pair has moved and they start wanting in on the action. You will often see a news report stating just how much a particular currency has gained, and very often this lines up perfectly with the 5 wave. It is also very dangerous to purchase at this wave as we often see people start shorting the pair to push it down.


Extended Impulse Waves

One thing to keep note of, is that one of the three impulse waves (1, 3 or 5) will always be longer. We call this an extended wave. Originally this was most often the 5th wave, but as time went by we saw that the extended wave was more and more likely to be the third wave.


Last 3 – Corrective Waves

So we have looked at the first 5 waves in the 5-3 wave pattern. This drives the market in a direction. But what about the last 3?

These are the corrective waves. Named partially due to the fact that it is believed to “correct” the market movement and pull things back in to line.


last 3

You will notice, or at least you will hopefully notice, that it is the same shape except with three more waves on the end. These waves are all more bearish than they are bullish.

When we see a reversal like this in the 5-3 pattern, we give the final three letters instead of numbers. This is so you can easily identify them when using someone else’s charts.


But what if the markets move in the other direction?

The exact same principles and rules apply in a bearish market as it does in a bullish market. We just spot the patterns the other way around.


last 3

The Three Basic types of Corrective Wave Patterns

When the Elliott Wave Trading Principle was first worked on, there were a total of 21 corrective ABC (final 3 in the 5-3 wave) patterns. Some were simple, and some were incredibly complicated.

A lot of traders started feeling that if you were looking for so many different patterns, then of course you would find at least one fitting. So the majority of traders have adopted the three most successful patterns as the ones to look for, and we find that by following the basic rules of the patterns you actually start finding more. But not so many that you will find these patterns in everything!


The Zig-Zag Formation

The Zig-Zag Formation is when we see very strong moves in price that contradicts the larger trend. So basically the market has moved quickly against the expected direction.


the zig zag formation

Depending on market volatility, we can see these zig-zags appear twice or even three times during a corrective pattern.


The Flat Formation

This is where we see the correction as not moving against the market direction, but rather moving the market sideways. This is most often spotted after a strong trend and the market is slowing down.


the flat formation

In the Flat Formation, the lengths of the waves are usually the same in length. It is extremely rare for any wave to be the exact same length, and the most likely outcome is that the end of B is slightly higher than the beginning of A.

Take note that the end of C is the same (or very close to the same) as the end of A. This is a key point in the flat formation.


Triangle Formation

Those of you who have covered Price Action will be familiar with this, but it is good to look at it again from the Elliott Wave perspective as well.


triangle formation

Triangles are made up of 5 waves that move against the larger trend. They are typically bound by trendlines that shows the shape of a triangle when you draw them in.

This is the perfect depiction of the triangle formation, but they can also present themselves as symmetrical, descending, ascending or even expanding triangles.


The Grand Super Cycle – Waves within waves within waves

Elliott Waves are found and used in many different time frames. Some trade as low as the 5 minute time frame, and others as large as the weekly. I personally don’t like those extremes, but I often trade the 30, 1 hour, 4 hour and for the big runs the daily chart.

However, when you are trading a particular time frame, it is important to keep in mind the larger picture. And Elliott Wave works very well for this.


Example of multiple time frames

Below is an example just to illustrate how so many formations can occur without you even knowing. I setup my blank chart and drew in vertical lines on the daily chart. I then left those lines and took screen shots of several time frames going lower. You will see how the vertical bars (time stamps) get wider and wider, and how much goes in within a single day.

Don’t worry that you can’t see all the candles. Just the general shape is fine.


example of multiple time frames

Figure 1 - Daily Chart


example of multiple time frames

Figure 2 - 4 Hourly Chart


example of multiple time frames

Figure 3 - Hourly Chart


example of multiple time frames

Figure 4 - 30 minute chart

Hopefully you would have noticed how much actually happens between each line on the daily that you could not see. Deciding on what time frame to trade is a personal choice of traders, but it is important to always look at the larger picture to help determine the smaller times.


Waves Within Waves within Waves

When you start drawing in your trend lines on a time frame, you could then go to a smaller time frame and find sets of waves that exist within a single wave from the larger frame. The below image illustrates this better.


waves within waves

You will never see such perfect waves, or at least extremely rarely. But the general concept of waves within waves is true very often.

The image illustrates how a single wave can have 5 full waves in it. Sometimes more and sometimes less. Often times a single impulse wave will contain your 5 small impulse waves, and the following corrective wave has three corrective waves. This would give us the 5-3 wave pattern.


So what is the Grand Super Cycle?

Elliott Wave Traders in the community have assigned several categories to the waves to help reflect the length of time a wave has or could exist.

Because we are never 100% certain of anything in trading, the time frames are rough estimates and are generally accepted in the trading community. The largest being the Grand Super Cycle.


  • Grand Supercycle (100’s of years)
  • Super Cycle (40 to 70 years)
  • Cycle (1 year to several years)
  • Primary (a few months to several weeks)
  • Intermediate (weeks to months)
  • Minor (weeks)
  • Minute (days)
  • Minuette (hours)
  • Sib-Minuette (minutes)

The idea is that the grand supercycle is the biggest picture of them all. That will exist over the period of an entire civilization. Now there is no way that we can actually test that, and I have never come across a trader who actually considers it as a viable option. We’re not immortal.

Most of my trading, and trading of people I know, is placed in the Minute cycle, using the Intermediate as our confirmation for bigger picture.


The 3 Important rules

Things never look as good in reality as they do when I draw in perfect shapes. They are not always obvious, but as you practice you will start getting better and better at spotting in. In the video tutorials (if you purchased the full course) you will see several examples of finding it.

To take some of the guess work out, we need a few simple rules. There are three important rules to stick to, followed by some rules that can be bent a little.

Rule1 : Wave 3 can NEVER be the shortest impulse wave

Rule 2 : Wave 2 can NEVER go beyond the start of wave 1

Rule 3 : Wave 4 can NEVER cross in the same price area as wave 1

If you stick to those rules, you are almost completely set. If a wave follows those basic rules, it will be moving relatively quickly in the market showing us a strong trend. This is what we want to see.

Here is the picture again of a perfect shape for you to look at while double checking those rules. Followed by some guidelines.


the 3 important rules

The bendable Rules – Guidelines

Sometimes the 5th wave does not pass the end of wave three. We call this “truncation” because it is like the pattern is cut short.

Often, the 5th wave goes beyond a trend line drawn from end of Wave 1 and Wave 3.

Wave 3 is most often very long and sharp. This can distort the pattern significantly, but will still abide by the rules.


Applying this to Your Forex Trading

A Practical Example of a Trade

I found a recent trade I paced using this method, took some screenshots and I will talk you through the process.

This was on the EURUSD trading the 4 hour chart, and I had to wait a very long time for it to work. Waiting for big trades like this allows me to carry on with life, you may choose to do smaller time frames. Try not to go lower than 30 minutes.


a practical example of a trade

So I spotted this potential setup, drew in the lines and spotted a very good reason not to consider this an Elliott Wave. Stop reading here if you want to figure it out for yourself, or read on if you want the answer now.

Did you find it? Hopefully you did, but did you see two reasons? Firstly, Wave 4 crosses over in to Wave 1’s price range. This is one of the must not be broken rules. The second, and less obvious to most, is that the third impulse wave is the shortest.

So this looks good to trade, unless you actually apply the rules.


a practical example of a trade

This is where I was kicking myself, because trading that retracement could have been fantastic. However, experience shows that when I stick to the rules I am more profitable in the long run. This time it could have succeeded, but we did not know that and I had a lower chance of success.

However, a near perfect first 5 waves of Elliott Wave formed over the next few days as seen above.

While Wave 3 wasn’t the longest, it was not the shortest wave. Wave 2 did not even come close to the start of Wave 1. Wave 4 did not even come close to the price range of Wave 1. All three main rules ticked.

Even the guidelines were mostly followed, and the end of wave 5 we had a great short pinbar (see my courses on Candle Stick Formation for more detail).

I place my trade just a few pips above the end of Wave 5, which was approximately 30 pips from entry. Then this happened.


a practical example of a trade

The end of Wave C maxed out around 170 pips profit. To confirm it was the end of the wave we have to hold the trade a bit longer, and I lost about 30 pips of potential profit. Closing the trade around 140 pips profit.

Off a 30 pip risk, it was over 4 times as much profit as risk.


Keeping it going

The last image shows the 5-3 formation. The first 5 impulse waves, followed by the corrective waves. Now if you look at the bigger picture in a larger time frame, and it confirms that we still have a bullish market, it means we are likely to start forming a new 5-3.

So the end of C (once confirmed) is a great potential entry to get in on the start of a Wave 1.


keep it going

I moved the chart over so you could see more in to what happened. Try to spot the close of Wave C, and see what happened after it.

While it did not create a good first 5 waves according to Elliott Wave trading, I still entered at the close of C and made profit most of the way up.

For those of you who already understand Candlestick formations, you will notice a near perfect long pinbar at the end of C. As well as a bullish engulfing pattern about 10 candles after.



Money Management

Why do traders fail? A shocking experiment.

Ralph Vince is a well-known financial investor. He performed a very famous experiment known as the Ralph Vince experiment. He took 40 PhD. students and set them up to trade with a computer game. Now, these forty people all had doctorates, but Mr. Vince made sure that none of their doctorates involved any sort of background in mathematical statistics or trading. In the game, they were given $1,000 and 100 trades, with a 60% winning percentage. The rules were simple. When they won, they won the amount of money they risked. When they lost, they lost the amount of money they risked. So, after all 40 students had completed their 100 trades, how many do you think made money?

Only two students out of 40 were able to make money, the other 38 failed to succeed.

Recall: they had 60% winning percentage. It means that they won 6 trades from 10 in average.

The odds were in their favour, so why did they lose money? Why only two students out of forty were able to win? It doesn't make any sense!


How a good strategy “fails”

It is not the strategy – it is the trader who fails. That's the truth. The experiment shows that most traders fail even if they are trading a winning trading system. We want to give you a clear answer as to why most people fail to make money consistently. Imagine you are one of the students. You bet $100 and win $100. You bet another $100 and win another $100... And you feel rich... And then suddenly you lose $100. You are still laughing: $100 loss is not so big, you are thinking that you will win next time and recover that small loss. But you lose another $100.

You become uncertain and since you want to recover your two losses as quickly as possible (it is a normal human behaviour called greed), you bet $200 to get $200. You are praying to win. But what happens if you lose again? You become very angry and you want your money back immediately! This is the worst situation – you let your emotions gain control of your trading decisions. From that point on, you will probably never recover your money back and the chances are that you will blow out the whole account. You will bet more and more in the hope of winning back all that you have lost in one single trade. If that lucky trade makes you rich, then good luck!

But please realize that you cannot make a living from trading if you act like a spread gambler. You need to follow strict money management rules to succeed as a trader.


Psychology Secrets

We named this chapter “secrets” because a very small proportion of all traders really understand what distinguishes good traders from bad traders. You are probably bombarded with guaranteed money making methods all the time. When someone can't succeed, he thinks that the methods don't work or specifically don't work for him or her. These traders are locked in a vicious circle.

And unfortunately, they leave one method and go looking for another one. They are wasting time and energy in searching for the Holy Grail that will make them rich. They think that making a huge amount of money is very hard. What a joke! If you understand the basic psychology of trading, you will be light years ahead of the losing traders.

The shortest path to becoming successful is to study your own psychology. We and our students often say that trading is the easiest way to make money. Most people simply can't believe this.

If trading were so easy, why are there so many traders not making money? They are studying hard, reading all the newspapers and magazines about trading, they are discussing trading techniques on the forums but still they are not making money. They are all making the same mistake! Some of them are extremely stubborn and they won't accept that it is psychology, discipline and proper money management that distinguishes good traders from bad traders. Not economic education or the amount of effort put into trading. Most of our students succeed in just a few months studying our methods.

These who succeed have read this book several times. Finally, they have been able to fulfil their dreams. So what's the problem that is causing some traders not to make money?


  • They just won't admit that trading is easy! Their approach is too complicated because they think that if trading were so easy, there would be more multimillionaires around. But the real multimillionaires have already realised that trading is easy.
  • We talked about greed and we will talk of it again in the next paragraph. Greed is your worst enemy, and it lies in your head. Fight it! Remember - Unsuccessful traders are risking more money in the hope of recovering losses quickly. Successful traders are doing just the opposite. Greed is your worst enemy.
  • Some people trust financial advisers for their trading methods. Most financial advisers give false promises that they will make you rich. They do it for money. The real traders share ideas with you just for fun.
  • Most people follow the crowd. They are selling dollars because all the traders in the forums are shouting: “SELL THE DOLLAR!” They log on to their platform immediately and
  • sell the dollar. Avoid this! Be yourself!

Money Secrets

What is in reality a trading strategy? A strategy gives you entry and exit points based on some sort of information (charts, indicators, fundamentals, etc.). You know when to enter the market and when to exit. But something is missing here... the strategy doesn't tell you how much money you have to risk on any one trade. You need to know how many mini lots, lots or contracts to open every time. This is in fact the most important part of a successful trading strategy.

To make things clear, let's talk about Gambler George and Trader Tim. It is important to understand the difference between them, so read carefully.

George is trading because he has heard somewhere that he can make a large amount of money quickly. When George is winning, he stays calm and bets the same amount of money on every trade. When he feels rich, he is afraid of losing his hard earned money. So he bets a smaller amount of money on the next trade. When he is losing, he becomes angry. He bets a larger amount of money to recover the losses quickly. George risks less when he is winning and risks more when he is losing.

Tim is a serious trader. He makes exactly the opposite decisions. When he is winning, he bets more. When he is losing, he bets less. It sounds really strange and counter-intuitive, so why is he doing this? Because his money management tells him so. He doesn't let his emotions control him and his decisions. He doesn't play like everyman. He acts like a money making machine.


money secrets

Risk Management

Introduction

If you can manage the downside of trading currencies then the market will take care of the upside. Managing the downside takes discipline and planning, but it enables you to control your emotions and keep your trading account in profit.

We have countless examples of traders who were new to trading Forex and they jumped in without any understanding, funding a trading account with money they could not afford to lose and placing the entire account at risk on the very first trade. Not surprisingly the money was swallowed by the market in an instant and they quit trading.

We have other stories of traders who without any effort were lucky to win their first few trades and then felt they could not lose. They increased their trade size, did not apply any risk management using stop loss orders and went on holiday only to return and find their account was empty.

Then there is the millionaire businessman who felt he had the same touch with trading as he did with business. Placing more and more trades to get back at the market and recover his losses he only increased his losses and turned a $2500 trading account into a $150,000 loss.

So are you suitably scared? The purpose of this is not to create fear in you but to impress upon you the need for understanding the risks you face in trading so you can have a plan to limit or remove the risk. In this way trading becomes acceptable, manageable and you are able to make a profit.


Is Trading Gambling?

When you visit a casino and place $100 on the turn of a card or the spin of a wheel, how much can you lose? $100 you say and you would be correct. This is not the same with trading. If we follow the same principle in trading Forex and enter a trade without knowing the size of our order; that is to say how much currency we have bought or sold, then we do not know how much profit or loss we will realise for every point the currency moves.

For example; let us say we place a $100 trade with 100:1 leverage so we control $10,000 of currency. This will mean that for every $0.0001 move of the currency we will gain or lose $1. It only needs the currency to move 1cent ($0.01) against the direction we predicted and we have lost $100.

However if we do not understand how to place trades using our broker’s platform and we do not use stop loss orders the loss will continue to increase as the currency price moves in the “wrong” direction and the losses will continue to grow until the market changes direction or we close the trade. This is how a $100 trade can easily turn into a $1000 loss or more.

So if you want to be able to trade Forex profitably it is critical that you understand how the market moves, how you can lose money quickly and easily and therefore how to protect your trading account from big losses.


Other Elements of Risk

Our risk in trading is not just our trade planning and application of our strategies as it covers a host of other factors that can affect our trades and how we execute them. The following list is not exhaustive but covers the majority or Risks that may impact our trades:


Major Catastrophes

Such as the Japanese Tsunami or Euro Collapse. Use these events to influence the trades you take. For example sell short the Euro and Exit to cash any Japanese Yen trades until the impact of the Tsunami is known.


Day Trading

It is reported that 90% to 95% of day traders fail to make any profit. We have no way of knowing how true this is, however from personal experience We know that short term trading puts us under emotional pressures that negatively impact our trading. We would recommend longer term trading to start with and once you have proven you can generate a profit with swing trading (trading over several days to several weeks), then you may want to explore day trading (trading within a day).


Your Health

If you are not well then seek medical attention and stay away from the market. It will keep the money in your account!


Your Mindset

There is a quote in the Bible “As a Man Thinks, so is he”. If we believe we will fail and if we talk negatively to ourselves then we are not in the right mind to trade. We need to prepare the mind for trading before sitting at the computer. Go for a run, have music playing to lift spirits and be in a positive and clear thinking mindset.


Distractions

While it is good to create a pleasant atmosphere to trade in, such as a light room and background music it is important that you do not get unwanted distractions. So disconnect the phone, put the cell phone on silent, and tell your family not to disturb you for the next 2 hours and so on.


Your system

There are many different ways and methods of reading the markets to plan for trade entries and exits. Test the systems you learn to find the ones you can read and use and that have high probabilities of success.


Deceiving yourself

Trading like gambling taps into our ego so that we only recognise our winning trades and can exclude our losing trades. It can be easy to believe we are better at trading than our profits show.

To enable us to overcome this a trade journal records all our trades and identifies where we can improve.


False Expectations

The best traders make 20 to 30% profit per year on average. This can mean that some years are 150% profit and other years are 30% loss. For a novice to start trading and expect 100% profit per month because “that is what some traders make” puts you under extreme pressure to expect a result and try to “force” or “dictate” what the market should do…only to lose a lot.


Fear

If we have a dislike to lose or we have experienced a series of losing trades, then it can create in us a fear to enter trades for fear of losing. If we do not trade then we do not have the opportunity to make a profit. Our fear can also cause us to delay entering a trade when all the right conditions are in place so we miss the trade or are exposed to greater risk should we delay our entry.


Greed

When we enter a trade and it moves in our favour it is easy to get carried away and hope/expect it to move further and further creating bigger and bigger profit. If we allow our greed for more profit to rule what we actually see happening then we can be exposed to holding open trades that we should close and take what profit there is to be had. In these circumstances we can end up allowing a winning trade to become a losing trade.



Risk Management for Dummies


  • Learn as much about Forex, Technical Analysis and Fundamental Analysis as you can and never stop reading and learning as it keeps your mind alert and fresh.
  • Don’t spend thousands of Dollars on training as these courses teach what is already out there. The key difference to what is being taught and how you trade is how you interpret the data.
  • Open a live account with money you can lose!
  • Ensure the broker provides free charts and has less than 2pip spreads
  • Start small and only risk 1% to 2% of your account on any one trade
  • If you lose 3% of your account stop trading for a week and go back to Demo trading to correct your errors
  • If you lose 6% of your account stop trading for a month and go back to Demo trading to correct your errors
  • If you lose 10% stop trading and go back to school to correct your errors


Psychology of Trading

Demo vs Live

Trading on a demo account is easy to perform because you don’t have to worry about the money as there is no emotion involved. You are not losing anything although you are gaining skill.

If you are going to load a live account with $500 then why would you trade standard lots on a demo account??

Make sure that you treat your demo account exactly the same as your live account to simulate live trading. Nothing more and nothing less...

What you need to remember is that it’s all about pips at the end of the day. So if you are a "demo king" you need to keep your volumes on par with what you are able to do on a live account!

Because trading forex is 90% emotion and 10% strategy, the best thing that you can do is to get your mind right while trading demo so that when you go live, you will be trading the same way and experience the same success, loss, pressure and other feelings.


Revenge Trading

This is something that happens all the time. This occurs when you lose a trade and you act out of impulse to try and recover your losses...

For example let’s say that you traded badly and lost 20% of your account. Now you go back with bigger volumes and trade again. DO NOT lose a few orders and go back trying to make the money back plus profit. You will be bound to set yourself up for failure and probably blow your account.

This experience will only leave your mind in a bad place and you feeling bitter about forex. The best thing that you can do, is to make sure that your mind is CLEAR and CLEAN before you start your technical analysis and looking for trade set ups. Should you happen to lose a lot of money unexpectedly for whatever reason, STOP and walk away. Wait for the anger and disappointment to pass before you return to place another trade.

When you are looking at finding a potential trade, do not look for a trade for too long as you will only end up seeing what you want to see and enter a bad set up...rather wait for what you are looking for and let the trade come to you.


Trading Styles

This is a very simple principal. You cannot trade in as many ways as the amount of traders that you actually know in person.

You need to know and perfect your own style. Don’t try to apply too many strategies or styles into your trading as you will either not be able to place a trade or you will end up with one bad trade after another.

Simple example. When you use an indicator on a chart, there will only be so many ways that you can use it. Then you look at someone’s charts and they have more indicators than candlesticks on their charts?? Everybody trades differently and that is okay as we are all unique. For this very reason you trade in a way that you are comfortable with and you are not copying other trade styles that you have seen and try all different methods together.

Don’t be a "Jack of all charts".....


Fear of the markets

Fear is completely normal. This usually kicks in when you see that you have loaded an order and the amount starts to go negative. You will only realise that it was a bad idea to close the trade when it is too late.

When you close a trade negatively and you experience fear in terms of being reluctant to open another trade, don’t rush a move. Rather revert back to the trade that you had taken and see where you had gone wrong. Once you can place a trade with confidence, you will not have to worry about fighting anxiety and have yet another trade that you cannot wait to close because you fear losing more money. Do not fear to lose money rather than having confidence to keep you in a trade, and follow the plan like you are supposed to!

Fear will make your mind freeze up and then you can’t think properly to make informed decisions. Do not make yourself a victim of fear paralysis. How you deal with your fear will determine if you are placing your next trade as a smarter trader or not.


Greed

This is the biggest demon that you will have to deal with when it comes to trading forex. If you come into the forex industry after completing your training and you think that you can earn your monthly cheque in one day you have already messed up and lost your trades.

Make sure that your lot sizes are in line with your account size and risk management. You can build a million dollar account if you want to but in the same instance it can also disappear right in front of your eyes in a matter of minutes!

If you have taken a trade and you have reached a point where you have achieved your target, DO NOT hang on to the trade to try and maximise your profits beyond your trading plan. You will only end up stressing yourself out and you will not be able to focus properly - this usually leads to a total loss! Reach your targets and when you are done simply walk away, don’t let the greed take over and destroy your wealth....

The most important concept in trading and the reason why most traders are psychology. I have seen thousands of traders who are smart and business people and have various degrees and PHD’s who have made enormous sums of money in their trading careers but lose money because of this very simple mistake.

There is a huge amount of money that can be made trading forex and you are guaranteed to become successful by following all the strategies and tools that we have taught but if you miss this simple mistake you will still end up losing money.

Those same traders are the ones who consider themselves too smart for this concept and this is the only thing that leads to their downfall.

E.G. One trade incorrect as a result of poor money management and over confidence can lead to a big wipe-out of your account.

Psychology it’s very difficult for someone to admit when they are wrong and this relates on to trading. Humans in general do not want to accept when they are wrong. What would happen is that you enter a trade without any risk management and the trade initially turns and goes against you and then the trade turns again and goes into profit and because you are too scared and think that trade will go back into a loss, you will take that small profit instead of holding on to it.

Start thinking about your account as one big trade. All other trades that are entered into you account are only spikes up and down until your final target level is reached.


Mistakes that could destroy your trading account

Social influences or the lack thereof can warp a traders viewpoint on what success and failure is when it comes to trading.

One of the most common mistakes that even the smartest people make is ingrained human need to always be right.

The most common error that traders make is staying in a trade where you believe or know your strategy is correct even when the market moves against you. Most times this need to be right will lead the trader to move stop orders to stay in a trade.

Once of the most famous traders and economist, John Maynard Keynes said: “The markers can remain irrational longer than you can remain solvent” Trader’s strong desire to be right will keep them in trades that they should have moved on from even though the market will prove them correct.

Normally what happens is that trades initially place stop losses at potential support or resistance levels and then the market turns and moves just after or past his stop loss. What then happens is the trader decides to manage their stop loss themselves if it moves against them.

The problem with this is now you don’t have a plan. You don’t have a level of how much you willing to lose in a trade and you don’t have an idea of how move you could lose in your account.

The other thing that may come as a surprise to you is that just as many traders have problems letting their profits run as they do in cutting their losses.

Example

Option 1: A sure gain of R 90 000

Option 2: A 95% chance of an R 100 000 gain plus a 5% chance of no gain at all.

A study which was done showed that 85% of the population chose option 1 even though the other option represents an R 5000 gain on average.



Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose. No warranty may be created or extended by sales representatives or written sales materials. The advice and strategies contained herein may not be suitable for your situation. You should consult with a professional where appropriate. Neither the publisher nor author shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages.