88452430-forex

8/19/2019 88452430-forex

1/83

8/19/2019 88452430-forex

2/83

TABLE OF CONTENTS

CHAPTER 1 INTRODUCTION...............................................................................3

Entering the Trade......................................................................................................................... 4

Exiting the trade............................................................................................................................. 6 Cut Your Losses Short .................................................................................................................7

Let Your Profits Run .....................................................................................................................8

Trading Mindset............................................................................................................................. 8

Trading plan. ................................................................................................................................ 13

CHAPTER 2 GENERAL FOREX TRADING INFO................................................15

Understanding Forex Trading .................................................................................................... 15

About Currency Pairs and Exchange Rates ............................................................................. 15

Understanding the Standard Contract Size .............................................................................. 17

What is the Pip?........................................................................................................................... 18

How to Calculate the Profit......................................................................................................... 18

Step 1: Calculating the Pip Value per Lot ................................................................................. 19

Step 2: Calculating Your Profit in Terms of the Quote Currency .............................................. 19

Step 3: Converting Your Profit to Your Deposit Currency......................................................... 20

Summary Tables ....................................................................................................................... 22 The Concept of Leverage............................................................................................................ 23

Your Trading Equipment............................................................................................................. 24

Your Computer Equipment........................................................................................................ 24

How to choose your Forex Broker............................................................................................. 25

Charting Software...................................................................................................................... 31

www.forextradingtips.com 1

8/19/2019 88452430-forex

3/83


Monitor More Than One Currency Pair...................................................................................... 38

CHAPTER 3 TECHNICAL ANALYSIS .................................................................39

Why Does Technical Analysis Work?........................................................................................ 39

Moving Average........................................................................................................................... 41

Relative Strength Index RSI........................................................................................................ 42

Support and Resistance Levels ................................................................................................. 43

CHAPTER 4 TRADING STRATEGY .....................................................................46

How To Prepare For A Trading Day ........................................................................................... 49

Economic Calendar ..................................................................................................................... 52

Calculating Major S/R Areas....................................................................................................... 55

How to set up our trading screen? ............................................................................................ 57

When to enter the trade? ............................................................................................................ 58

Entering on the bullish side. ...................................................................................................... 58

Entering on the bearish side...................................................................................................... 59

What kind of order should you use to enter the trade?........................................................... 60

What size should you be trading with? ..................................................................................... 60

Money Management .................................................................................................................... 61

When To Exit The Trade? ........................................................................................................... 62

Recursive Trailing Stops ............................................................................................................ 64

CHAPTER 5 EXAMPLES ....................................................................................67

Trading Example 1. EUR/USD .................................................................................................... 67

Trading Example 2. GBP/USD .................................................................................................... 70

Trading Example 3. USD/CAD.................................................................................................... 72

Trading Example 4. EUR/USD .................................................................................................... 74

Trading Example 5. GBP/USD .................................................................................................... 77

Trading Example 6. USD/CAD.................................................................................................... 79

8/19/2019 88452430-forex

4/83

CHAPTER 1 INTRODUCTION

The obvious reason as to why you are interested in trading currencies is the

unparalleled profit potential that forex market has to offer. Therefore, the purpose of

this course is to prepare you to enter the exciting field of currency trading and what is

more important, to put you on equal ground with successful traders. You may be a

beginning trader, made a few trades, lost some, won some, however you have cometo the conclusion that you don’t have a real edge and if you continue you will slowly

burn most of the capital in your trading account. Or maybe you are already actively

trading currencies and you are always looking for new ideas to improve your

trading…

In any case you have come to the right place.

As I have promised there will be no unnecessary information in this course. I assume

that you are already familiar with the concept of forex trading. If you are totally new

to the forex trading game you can find all of the necessary basic info inside the

Chapter 2. All of the other chapters deal directly with the system itself. You should

read each chapter carefully. Everything is explained in detail. The first chapter that

you are just reading is just a short introduction to the logic that is behind my trading

system. The basic skeleton of each trading system consists of two elements.

Entering the trade and exiting the trade. Each of those elements is equally important.


8/19/2019 88452430-forex

5/83

Entering the Trade

The profitability of a trading system is not based on the quantity of entry

signals that it produces. It is based on the quality of entry signals. The entry signal

needs to have the highest possible probability that the trade will move in your

desired direction. After years of trading many different trading strategies I have found

out that most of them have one large flaw. They were producing way too many entry

signals which as a result is greatly reducing the profitability of a trading system. One

of the greatest myths that most of the forex trading strategies propagate is that at the

same time you can be looking for both buy and sell opportunities. Well the truth is -

you can’t. If you want to make profit, that is.

If you were ever swimming in the river you would know that it is much easier to swim

with the current than it is to swim against the current. Although there are always

minor movements against the current trend they usually don’t last very long and after

them the market moves again in the direction of the current trend. However it is

precisely those minor movements that are likely to produce losing entry signals.

Any system that generates entry points will provide us with entry points both against

and in the same direction as the long-term trend. Even though there is money to be

made in both cases, by following only the entry points in the same direction as the

long-term trend we will get the higher quality trades leading to the higher profits in

the long run.

Let’s have a look at the figure below:


8/19/2019 88452430-forex

6/83


FFiigguur r ee 11--11

As we can observe on the chart above the trend during the given period is clearly

bullish, meaning that we were much more likely to make a profit during this period if

we were looking only for buying opportunities instead of focusing on both buy and

sell opportunities. It is clear that in most of the cases if we were taking sell positionswe would be stopped out resulting in losing trades. On the other hand if we were

looking only for buy positions we were likely to make some very profitable trades.

Another misconception that most of the forex trading strategies make is to

underestimate the power and importance of support and resistance areas when

looking for entry opportunities. Those strategies usually concentrate mostly on

lagging indicators that are most likely to get you into the trade when it is already too

late. Let’s have a look at the figure below:

8/19/2019 88452430-forex

7/83



As we can observe on the chart above the support and resistance areas haveextremely important role when it comes to price movement. What would you say if

you were told that these lines were drawn before the start of this trading day?

That's right. Successful traders know where the major support and resistance areas

will be located before they start looking for entry opportunities.

Exiting the trade

Most traders make a mistake by thinking that entering the trade is more

important than exiting the trade, and if they have found an entry strategy with

positive expectations, “the job is done”. Nothing could be further away from the truth.

Exit strategy is equally if not more important than entry. Average traders typically use

8/19/2019 88452430-forex

8/83

a simple trailing stop as their exit strategy. Even though a trailing stop may work ok

in certain cases, definitely it is not the best option for a proper exit strategy.

Why? Because a trailing stop does not fulfil all the basic fundamental requirements

for a proper exit strategy. Especially when it comes to “let your profits run”.

So, which are the basic fundamental requirements for a proper exit strategy?

Well, let’s show them to you:

“Cut your losses short”

“Let your profits run”

Cut Your Losses Short

This requirement is linked to the question how much capital we can risk on

one trade. This is where it gets tricky. You have probably heard hundreds of times

that you need to protect yourself against large losses in order to protect your start up

capital. However if by cutting your losses short you think running out of a trade like a

scared rabbit as soon as the trade goes against you, you will be in a big trouble. YouCAN NOT trade currencies in such fashion. The key to currency trading success is

to catch a major movement. You will not be able to do that if you don’t give your

trade a chance. By properly implementing our entry strategy you have done

everything you can to enter the trade with a high probability that it will go in your

direction. However, it doesn’t mean that it will do so immediately after you placed a

trade. You need to give it some space. How much space? Enough space so that you

don’t get stopped out all of the time while at the same time tight enough so that if you

are wrong you preserve majority of your capital to fight another day.

If our stop loss is reached we will get out of the trade immediately, no questions

asked. You cannot cut corners with the stop loss rule. It needs to be followed every

single time without exception. Failure to follow the stop loss rule is the number one

reason for failure among beginning traders. It is true that sometimes price will turn


8/19/2019 88452430-forex

9/83

around just after you get out, but there is no way to know this in advance. It only

takes a few stubborn incidents to entirely devastate your initial trading capital.

Let Your Profits Run

As mentioned above, the key to currency trading success is to catch major

market movements. And for that purpose we need to give our trade a chance by

giving it some space for moving in our desired direction. The key issue is hereby to

determine the proper space depending on your current trade situation. It is not the

same situation, when you just have entered a trade or when you are already in with a

current positive balance of 150 pips. In the first case the main focus is to protect your

trading capital, in the second case you don’t need to protect your capital any more as

you definitely will close your position with profits. The focus hereby is to give your

trade more space than when you entered the trade in order to make even more

money.

In order to be profitable in the long run we need to extract as much profit as possible

from every single trade. So we need to stay in the trade as long as the trade goes in

our direction. Most exit strategy methods out there, as for example a trailing stop, do

not fulfill above requirement as they will lead to exiting a position too soon. For this

purpose I have developed a Recursive Trailing Stop formula that extracts as much

profit from our trade as possible. You will learn about it in the Trading Strategy

chapter.

Trading Mindset

If you were ever watching somebody else trade, you have probably quickly

come to the wrong conclusion that trading is fairly easy. The same applies if you are

just observing the price action on the chart and placing the trades on paper or in your

head. There are two reasons for that. Number one reason is that you are not trading

with your own hard earned money and the second reason is that everything seems

simple after it has already happened. It seems that nothing is easier than predicting


8/19/2019 88452430-forex

10/83


price movement by watching the chart. The problem with such conclusion is that the

certainty of the outcome comes after we have already seen the whole picture.

Basically we have seen the outcome of the trades that have already ended. For the

inexperienced observer it seems irrelevant since he is sure that he would have

reacted in the same way even if he did not see the whole picture. That is a mistake. I

am not sure if you have experienced such situations but I definitely did back in my

beginning trading days.

Now let’s assume that you have an open 5 minute chart at 2 p.m. and you want to

enter a trade. There were some big down movements in the morning. Then, for

some short period of time it was a sideways market and now it is going down again.

At 14:25 you want to take some action. See the figure below.


Can you make the prediction as to where the price will move by observing the chart

above? Will it go down and for how many pips? Will it go up and for how long?

Tricky, isn’t it?

8/19/2019 88452430-forex

11/83



As we can see from the chart above, the first move was down, then it went up and at

present it is moving down again. Now think again about the situation from the chart

that we have observed earlier. At 14:25 you did not have the information that you

have now. If you entered on a long side would the price action trigger the stop loss?

If you entered on a short side would the price touch the take profit? You may say that

you would have entered on a short side, taken your 30 pip profit and exited the trade.

Again, it is easy to speculate about this when you have already seen the whole

chart.

Such price movements happen all of the time. In order to deal with them, first of all

you need to have a winning and proven trading strategy. We will get to the strategy

later in the course, however another aspect that we need to master in order to deal

with such erratic price movements is to have a winning trading mindset.

One needs to understand that forex trading even though it offers great opportunities

to make income is also a very risky endeavor. Basically you need to learn how to

deal with your emotions whether you are on a winning or a losing streak. Even the

best forex traders have losing streaks as even the most consistent trading systems

do not produce winning trades only.

8/19/2019 88452430-forex

12/83

To have a winning mindset means to be able to deal with emotional highs that

happen during the winning streaks and emotional lows that happen during the losing

streaks.

Let’s go through some mistakes that a lot of aspiring traders make.

This is a typical scenario. After demo trading for a while you have just funded your

forex account with real money. You are monitoring the charts and observing price

action. You see some bearish movement and you are eager to take action. You

realize how different it feels when you are trading with real money. You decide to

follow your own instincts instead of following the strategy you were testing in your

demo account. You want to make 20 pips just to get a feeling of how it is to make

real money. You enter a trade on the sell side. You are quite sure that the price will

reach your take profit of 20 pips so you don’t even bother placing a stop loss.

However, as soon as you have entered the trade the price starts to move up. Half an

hour later you are 20 pips in minus. And your goal was 20 pips in plus. You are

starting to get nervous. One hour later and you are 40 pips in minus. You want to get

out but you still believe that the price will change the direction. The adrenaline is

rising. Another fifteen minutes and you are 60 pips in minus. This is more than you

can take and you get out of the trade. Now you are really nervous, you just wanted tomake 20 pips and you ended losing 60. You want to make up for your loss as quickly

as possible and before you know it you are making the same mistake again.

Therefore – Don’t trade impulsively.


8/19/2019 88452430-forex

13/83

Here is another typical scenario.

You have done your homework regarding forex trading, read several books on the

subject, purchased a system that appears to make sense however you don’t have a

startup capital. You were successfully trading a demo account and now you feel

confident that forex is a way out of your financial troubles. Since you are so sure in

your ability to make money you decide to borrow your initial capital. With the profits

that you are going to make you will easily repay the borrowed money. At least that’s

what you believe.

Most people do not have a clear mind and are unable to keep cool under pressure

and that especially rings true if they are trading with borrowed money. It is hard

enough to lose money that you own, losing money that you don’t own is even harder.

Again, you have to keep in mind that no matter how good a trading system is, there

will be some losing trades. And what if they happen at the beginning? You should

trade with money that you can afford to lose. That way you are already one step

ahead as you are not under pressure of losing the capital that you can not afford.

Don’t forget that many people fail to become successful traders not because their

trading system but because they couldn’t take the pressure.

So, never, ever invest money that you can not afford to lose…

Yet another mistake that many beginning traders make is that they are too eager to

enter a trade. They think that if they didn’t enter some trade – the opportunity is lost.

I can understand that. Everyone likes to see action. However, you really haven’t

missed anything. You should enter only those trades that meet all of the criteria that

your trading system requires. Look at the picture below.


8/19/2019 88452430-forex

14/83



Those are the price movements that happened during one trading day. Price is

constantly moving. There were and there will be many, many opportunities to enter a

trade. Don’t feel bad that you have missed some trades. It is much better to miss a

trade than it is to enter a bad one.

Don’t overtrade. Enter only those trades that fully meet your criteria. No

compromise there.

Trading plan.

There are several variables that need to be taken into account when creating

a trading plan. Please do not confuse a trading plan with a trading strategy or a

trading system. Our trading system is outlined in the last chapter of this course and

should be taken as is – without improvisation. The trading plan on the other hand

should be created by each trader individually. It should take into account what is your

trading objective. Of course, your trading objective is to make money. How much

money? This may sound as a dumb question as obviously you want to take as much

money as possible. On the other hand you need to understand that making more

money involves taking more risk and investing more time. So the next question is:

How much time can you invest? How much risk can you handle without falling under

8/19/2019 88452430-forex

15/83


pressure? How much money can you invest – money that you can afford to lose? All

of those questions fall under the definition of a trading plan. Most people do not

think of trading as a business and that is a mistake. Trading should be treated as any

other business venture and every successful business venture must have a business

plan.

“He who fails to plan, plans to fail…”

8/19/2019 88452430-forex

16/83

CHAPTER 2

GENERAL FOREX TRADING INFO

In this chapter I want to give you some general trading tips that may help you

to improve your trading, especially if you are a novice trader. If you are already an

experienced trader this chapter might not be of interest to you, so you might just

throw a glance at it.

Understanding Forex Trading

About Currency Pairs and Exchange Rates

When trading currencies, you don’t trade a single currency, but always

currency pairs. That’s the reason why when looking at forex quotes you will always

see the currencies quoted in pairs, as for example EURUSD, GBPUSD or USDCAD.

To every pair you will see an exchange rate quoted. The first currency of the pair is

known as the “base” currency, the second one as the “counter” or “quote” currency.

The exchange rate gives the amount of the “quote” currency which needs to be sold

to buy 1 unit of the base currency.

EURUSD is the rate of 1 euro in US dollars, GBPJPY – 1 British pound in Japanese

yens, i.e., the first currency is always defined in terms of the second one. For


8/19/2019 88452430-forex

17/83


example in picture below the exchange rate of 1.5736 means that for 1 euro you can

get 1.5736 US dollars. You could also write it like 1 euro / 1.5736 US dollar.


Even though there are 100’s of currency pairs out there, you should pay only

attention to the major currency pairs, which are the most traded. It is estimated that

activity in these currencies comprises more than 85% of the daily foreign exchange

volume.

Liquidity is essential when trading foreign currencies. Currencies that are illiquid

generally will have wider trading costs (spreads), they also will have a much greater

chance to have "fast market" conditions where liquidity can be non-existent andvolatility greatly increased, and they are also often more susceptible to short term

market manipulation or deception, like false technical breakouts.

The major currency pairs are assumed to be:

EURUSD Euro and US dollar

USDJYP US dollar and Japanese yen

USDCHF US dollar and Swiss franc

GBPUSD British pound and US dollar

AUDUSD Australian dollar and US dollar

USDCAD US dollar and Canadian dollar

GBPEUR British pound and Euro

8/19/2019 88452430-forex

18/83


Understanding the Standard Contract Size

When trading a currency pair, the standard contract size is called a "lot”. A lot

can have different values for different currency pairs. At present, the major currencypairs have the lot value equal to 100,000 units. But 100,000 of what? When we buy,

we give money for goods. When we sell, we get money for goods. But with

currencies, we buy and sell simultaneously since we get one currency for another

one. This is why it is common practice to consider that we get the first currency of

the pair (base currency) when we buy and give, respectively, the second currency

(quote currency).

A standard lot for USDCAD is $100,000 US dollars. If we buy one lot of USDCAD, it

means that we get $100,000 US dollars and give a number of Canadian dollars

equal to 100,000 times the actual exchange rate. If the current exchange rate of

USDCAD is 1.1, then buying one lot of USDCAD means that we get $100,000 US

dollars and give $110,000 Canadian dollars. The other way round if we sell one lot of

USDCAD at the same exchange rate, it means that we give $100,000 US dollars and

get $110,000 Canadian dollars.

Most of the forex brokers offer also the possibility to trade mini lots, which are one

tenth of a standard lot (for example 10,000 units instead of 100,000 units).

Here you can find the lot and mini lot definition for the major currency pairs:

CURRENCY PAIR LOT SIZE MINI LOT SIZE

EURUSD 100,000 euros 10,000 euros

USDJYP 100,000 US dollars 10,000 US dollars

USDCHF 100,000 US dollars 10,000 US dollars

GBPUSD 100,000 British pounds 10,000 British pounds

AUDUSD 100,000 Australian dollars 10,000 Australian dollars

USDCAD 100,000 US dollars 10,000 US dollars

TTaabbllee 22--11

8/19/2019 88452430-forex

19/83


What is the Pip?

The pip is the smallest price change of the exchange rate. For example when

trading EURUSD the smallest price change is 0.0001, for example a move from

1.5231 to 1.5232 is called a 1 pip move. Below you can find the pip definition for the

major currency pairs:

CURRENCY PAIR PIP SIZE

EURUSD 0.0001

USDCHF 0.0001

GBPUSD 0.0001

AUDUSD 0.0001

USDCAD 0.0001

USDJYP 0.01

TTaabbllee 22--22

How to Calculate the Profit

The profit of your trade is calculated in the three steps:

Step 1: Calculating the Pip Value per Lot

Step 2: Calculating Your Profit in Terms of the Quote Currency

Step 3: Converting Your Profit to Your Deposit Currency

8/19/2019 88452430-forex

20/83


Step 1: Calculating the Pip Value per Lot

The pip value per lot is calculated according to the following formula:

Pip Value per lot = lot size x pip size in units of the quote currency (second currency

of the pair)

Below you can find the pip value per lot for the major currency pairs:

CURRENCY PAIR PIP VALUE PER LOT

EURUSD 10 US dollars

USDCHF 10 Swiss francs

GBPUSD 10 US dollars

AUDUSD 10 US dollars

USDCAD 10 Canadian dollars

USDJYP 1000 Japanese yen

TTaabbllee 22--33

Step 2: Calculating Your Profit in Terms of the Quote Currency

The profit is calculated according to the following formula:

profit = lot size x pip size x pip value per lot in units of the quote currency

Example 1:

Sold 3 lots of EURUSD at 1.5675 and bought them at 1.5610. In this example, we

made 65 pips profit (as we sold at a higher price than we bought). The pip value for

EURUSD is 10 USD, so the total profit = 3 lots x 65 pips x 10 USD pip value per lot =

1,950 US dollars.

8/19/2019 88452430-forex

21/83

Example 2:

Bought 2 mini lots of GBPUSD at 1.9170 and sold them at 1.9250: In this example,

we made 80 pips profit (as we bought at a lower price than we bought). The pipvalue for GBPUSD is 10 USD, so the total profit = 0.2 lots x 80 pips x 10 USD pip

value per lot = 160 US dollars.

Step 3: Converting Your Profit to Your Deposit Currency

Though it is possible to make trades using various currency pairs, the trading

result is always written in only one currency - the deposit currency. If the depositcurrency is US dollar, profits and losses will be shown in US dollars, if it is euro, they

will be, of course, in euros. The most usual is that you run your forex account in the

deposit of your country. If you live in US, then you will probably run your account in

US dollars. If you live in France, then in euros.

The profit is converted into your deposit currency by using the appropriate exchange

rate. For example if your account is in euros and you made a profit of 1,000 US

dollars, then you can convert your profit in euros by dividing with the actualexchange rate for EURUSD.

In the following example we will assume that the deposit currency is US dollars.

Example 1:

Sold 5 mini lots of EURGBP at 0.7915 and bought them at 0.7815: In this example

we made 100 pips. The pip value for EURGBP is 10 GBP, so the total profit is 0,5

lots x 100 pips x 10 GBP per pip = 500 British pounds.

The exchange rate of GBPUSD was 1.8500 (for 1 British pound you can get 1.85 US

dollars), when the position was closed:


8/19/2019 88452430-forex

22/83

500 British pounds x GBPUSDJPY exchange rate

= 500 British pounds x 1.85 US dollars / 1 British pound = $925 US dollars

Example 2:

Bought 2 lots of USDJPY at 105.60 and sold them at 105.20: In this example, we

made 40 pips (as we sold at a lower price than we bought). The pip value for

USDJPY is 1000 JPY, so the total profit is = 2 lots x 40 pips x 1000 YPJ pip value

per lot = 80,000 JPY yen.

The exchange rate of USDJPY was 105.20 (for 1 US dollar you can get 105.20 JPY

yen), when the position was closed. In order to get the amount of dollars we need to

divide by the exchange rate.

80,000 JPY yen / USDJPY exchange rate = 80,000 JPY yen x 1 US dollar / 105.20

JPY yen = $760.46 US dollars


8/19/2019 88452430-forex

23/83


Summary Tables

Currency

Pair

Profit in US dollars:

”number of lots” x “pips” x ...

Profit in euros:


EURUSD 10 US dollars 10 US dollars / EURUSD

USDCHF 10 Swiss francs / USDCHF 10 Swiss francs / USDCHF / EURUSD

GBPUSD 10 US dollars 10 US dollars / EURUSD

AUDUSD 10 US dollars 10 US dollars / EURUSD

USDCAD 10 Canadian dollars / USDCAD 10 Canadian dollars / USDCAD / EURUS

USDJYP 1000 Japanese yen / USDJPY 1000 Japanese yen / USDJPY / EURUS

TTaabbllee 22--44

Currency

Pair

Profit in Canadian dollars:


Profit in Australian dollars:


EURUSD 10 US dollars x USDCAD 10 US dollars / AUDUSD

USDCHF 10 Swiss francs / USDCHF x USDCAD 10 Swiss francs / USDCHF / AUDUSD

GBPUSD 10 US dollars x USDCAD 10 US dollars / AUDUSD

AUDUSD 10 US dollars x USDCAD 10 US dollars / AUDUSD

USDCAD 10 Canadian dollars 10 Canadian dollars / USDCAD /

USDJYP 1000 Japanese yen / USDJPY x 1000 Japanese yen / USDJPY / AUDUS

TTaabbllee 22--55

Currency

Pair

Profit in British pounds:


Profit in Japanese yens:


EURUSD 10 US dollars / GBPUSD 10 US dollars x USDJYP

USDCHF 10 Swiss francs / USDCHF / GBPUSD 10 Swiss francs / USDCHF x USDJYP

GBPUSD 10 US dollars / GBPUSD 10 US dollars x USDJYP AUDUSD 10 US dollars / GBPUSD 10 US dollars x USDJYP

USDCAD 10 Canadian dollars x USDCAD / 10 Canadian dollars / USDCAD x USDJ

USDJYP 1000 Japanese yen / USDJPY / 1000 Japanese yen

TTaabbllee 22--66

8/19/2019 88452430-forex

24/83

The table is to be used as following: we trade 3 lots AUDUSD, make a profit of 50

pips , our deposit currency is in euros and the actual EURUSD exchange rate is 1.5,

then our profit in euros is: 3 lots x 50 pips x 10 US dollars / 1.5 (EURUSD exchange

rate) = 1,000 euros

The Concept of Leverage

Many beginning traders don’t fully understand the concept of leverage.

Basically, if you have a start up capital of $5,000 and if you trade on a 1:50 margin

you can effectively control a capital of $250,000. However, a two percent move

against you and your capital is completely wiped out. If you are a beginning trader

you should not use more than 1:20 margin until you get comfortable and profitable

and then and only then you can attempt to use higher margins. What does 1:20

margin mean? It means that with your $5,000 you will control a capital of $100,000.

Let’s say you are trading EUR/USD and by using our entry strategy you have

decided to enter the trade on a long side. That means that you are betting that USD

will depreciate against Euro. Let’s say current EUR/USD rate is 1.567. Again, if your

trading capital is $5,000 and you are using 1:20 leverage you will effectively beexchanging $100,000 to Euros. If the current rate is 1.567 you will receive

100,000/1.567 = 63,816 Euros. If the trade goes in your direction the margin will

work in your favour and 1% decline in USD will mean 20% increase in your start up

capital. So if EUR/USD rate moves from 1.567 to 1.583 you will be able to exchange

your 63,816 Euros back to $101,000 for a profit of $1,000. Since your start up capital

was $5,000 it is effectively a 20% increase in your account. However, if the trade

went against you and USD appreciated 1% vs. Euro your account would be reduced

to $4,000. That would not have happened as our strategy has built in hard stops to

prevent such an outcome.


8/19/2019 88452430-forex

25/83

Your Trading Equipment

Before you can start trading you need the following trading equipment:

appropriate computer equipment

a forex broker

a suitable charting software

Your Computer Equipment

Unfortunately, you cannot go into real forex trading with an outdated

computer system or an unstable and slow Internet connection. If you enter a

position, you cannot afford that your computer system crashes or that your Internet

connection fails. That way you could miss a proper exit signal which would have

protected your already achieved profit or what is much worst, directly after you enter

a position, it could happen that you are not able to place your stop order, because

your Internet connection or computer fails. This is trader’s suicide, as you could lose

all of your trading capital, if suddenly the price of the currency pair drasticallychanges in opposite direction of your trade!

On top of that you cannot afford that you follow the market price or place market

orders with a considerable time delay (either because your Internet connection or

your computer is too slow), because this will cost you lots of money in the long run.

As a rule of thumb you can use the following check: Is your computer and Internet

connection 100% stable? Are you able to follow the market price and to place market

orders in real-time without any time delay? If not, you should enhance your computer

equipment, starting with the weakest part of the chain.


8/19/2019 88452430-forex

26/83

How to choose your Forex Broker

Without a reliable broker, even the best traders may have a limited chance of

success. Every trader I know has at least one horror story about his/her broker. What

happens if you try to sell your position because the value of your holdings is quicklydepreciating only to find out that your broker’s server is down. By the time they fix

the problem you may be out of 100’s even 1000’s of dollars. This is especially true

when trading currencies.

When choosing your broker, you’ll need to take into account several factors. You

also need to understand that while one broker may be an excellent choice for one

form of trading it may be a terrible choice for another form of trading. If you are not

happy with the service and performance that you receive from your broker youshould look for another one. It is not worth your time or money to be loyal to

someone whose service isn’t working for you.

There are literally hundreds of brokers that you can choose from. When it is time to

choose your broker, take the time to get informed about several prospective brokers.

Although you can always change your broker later it is often a frustrating experience,

so try to do everything in your power to make sure that you do it right the first time.

By choosing your broker carefully you will save yourself valuable time and money.

Your forex broker should have the following properties:

Low Trading Costs

Although brokers do say that it is not in their interest that you lose your money,

you need to remember that they make profit whether you win or lose. Equities

and futures brokers make their profits on commissions that traders pay to them

for every trade they make. Forex brokers make their profits from spreads. Spread

is the difference between bid price (the price you sell at) and ask price (the price

you buy at). Every currency quote has these two numbers displayed. For

example, a EUR/USD quote of 1.5701 / 1.5703 means bid(sell): 1.5701 and

ask(buy): 1.5703, a spread of 2 pips. Didn’t you notice that every time you enter a

trade, you start with a negative balance account? Well, that is the spread your


8/19/2019 88452430-forex

27/83


broker is earning from you. If you would buy and sell immediately 1 lot EUR/USD,

then you would make a loss of $20: as you would buy at 1.5701 and sell at

1.5703→ $100,000 x (1.5703 - 1.5701) = $20.


More trades you do, more money your broker makes. This is why many brokers

that cater to currency traders prefer traders who make many trades during the

day. They even hold courses that teach you how to scalp in and out of positions

all day long. Although this approach has worked out for some traders who were

trading highflying Nasdaq stocks in the late ‘90s for a currency trader it is a sure

way to slowly lose all of his money.

Here is an example of the danger of such a strategy. Let’s say a trader has

$2,000 in capital and is using 1:5 leverage to buy/sell $10,000 per trade and let’s

say that he trades 20 times daily as some of these courses and strategies teach.

Average spread being around 5 pips he would spend $5 per trade. At 20 trades

per day this would equal $100 per day in spreads. It is five percent of the trader’s

capital each day just in spreads. 20 trading days a month and it would equal

100% of trader’s capital each month. You are better spending your money

anywhere else.

The importance of spreads depends greatly on your trading style and your

trading strategy. If your strategy generates several entry signals per day and you

are using relatively tight stops in order to limit your losses, then spread size is

very important to you. With such trading style the difference between a broker

that has average spread of 4 pips and a broker that has an average spread of 8

pips is of huge importance. 5 trades per day can mean $40 per day, $800 per

month, $9,600 per year if you are trading in $10,000 per trade. Adds up quickly,

doesn’t it?

8/19/2019 88452430-forex

28/83

Some forex brokers will request, in addition to the spread, a commission per

trade. For example they may ask 5$ for every lot you want to trade. One would

normally assume that brokers asking for commission are in any case more

expensive than the other “commission-free” ones. Well, that is not always the

case, as brokers asking for commissions offer typically much lower spreads than

the “commission-free” ones. For example assume that we have a broker A that

requests for trading the major currency pair EUR/USD 3 pips and a broker B that

requests for trading the same currency pair 1 pip plus 5$ per lot. Which would be

the costs for trading 1 lot EUR/USD? With broker A the costs would be $30 per

trade (3 pips x $100,000), with broker B the costs would be $15 per trade (1 pips

x $100,000 + 5$)!

So don’t automatically disregard the brokers requesting commissions.

Sometimes they are cheaper than the “commission-free” ones! In the table below

you can find the trading costs of several forex brokers at the time of this writing.

Fast Execution of Market Orders

In order to successfully place a trade you need to be able to get the most

favorable price at any given time. This is especially true for market orders. When

trading currencies, prices move extremely fast and by the time your order gets

filled it may be at a price that is very different from the price you were trying to

get, which was exactly the price displayed at your monitor at the time you place

your order. The losses we suffer in case such a scenario occurs are known as

slippage costs. Even the brokers that normally provide fast executions

occasionally may take longer to fill your order. High trading volumes may affect

the speed of their executions and when prices move quickly your limit orders may

become outdated.


8/19/2019 88452430-forex

29/83

Appropriate 24-hour Customer Service

You should be able to contact the customer service even if the brokerage firm

has technical problems and lots of clients call the customer service at the same

time. Further you should be able to contact the customer service by differentways, 24-hour phone service as a must-have. Think about the possibility, that

while you have an opened position your internet connection fails. In such case

you need somebody on the phone being able to let you know what is happening

with your trade.

High System Reliability

If you find out that the brokerage system is down too often, then you have to

choose another brokerage. You cannot afford that after you enter a position, the

brokerage system fails! For the same reason you need stable computer

equipment, you also need reliable brokerage system.

High Company Reliability

If you do not completely trust your broker, you won’t feel comfortable transferring

your funds to those guys, so that you can start trading. Of course, there is no

100% guarantee in life, but you can minimize possible risks. First you will requestthat the brokerage company is regulated by a governmental agency from a

country of your trust. Brokerage companies are usually regulated by the US

agencies CFTC and NFA, sometimes also by agencies from other countries such

as FSA (UK), SFBC (CH) or ASIC (AU). Would you trust a brokerage company

which is not regulated or even one which is regulated by an offshore island?

Second you will request that the brokerage company is over five years in the

market. And third that it has offices in several places around the world, desirable

of course also in your residence country.

Below you can find a list of brokers that are appropriate for forex trading (see Table

6.1).


8/19/2019 88452430-forex

30/83

Account

ConditionsTrading Costs Company Reliability

Forex Broker

Min.

Deposit

Max.

Leverage

Commi-

ssion

Spread

on

Majors

Since Regulated By

www.alpari-idc.com

$200 100:1 No 2 to 4 2004 FSA (UK)

www.ac-markets.com

$2,000 100:1 No 2 to 3 2002 SFBC(CH)

www.cmcmarkets.com/us

$2,000 100:1 No 2 to 3 1989

NFA(US),

FSA(UK),

ASIC(AU),

BAFIN(DE),

OSC(CA)

www.cmsfx.com

$200 400:1 No 3 to 4 2003 CFTC/NFA (US)

www.crownforex.com

$300 200:1 No 1 to 2 2004 SFBC(CH)

www.forex.com

$250 200:1 No 2 to 3 1998 CFTC/NFA (US)

www.forex.ch

$2,000 200:1 No 3 to 4 2006 Polyreg (CH)


http://../Anwendungsdaten/Microsoft/Word/www.alpari-idc.comhttp://../Anwendungsdaten/Microsoft/Word/www.alpari-idc.comhttp://www.ac-markets.com/http://www.ac-markets.com/http://www.cmcmarkets.com/ushttp://www.cmcmarkets.com/ushttp://../Anwendungsdaten/Microsoft/Word/www.cmsfx.comhttp://../Anwendungsdaten/Microsoft/Word/www.cmsfx.comhttp://www.crownforex.com/crown/cf/white/en/index.aspxhttp://../StreetSmartTrading/book/www.crownforex.comhttp://../StreetSmartTrading/book/www.crownforex.comhttp://../StreetSmartTrading/book/www.forex.comhttp://../StreetSmartTrading/book/www.forex.comhttp://www.forex.ch/http://../StreetSmartTrading/book/www.forex.chhttp://../StreetSmartTrading/book/www.forex.chhttp://../StreetSmartTrading/book/www.forex.chhttp://../StreetSmartTrading/book/www.forex.comhttp://../StreetSmartTrading/book/www.crownforex.comhttp://../Anwendungsdaten/Microsoft/Word/www.cmsfx.comhttp://www.cmcmarkets.com/ushttp://www.ac-markets.com/http://../Anwendungsdaten/Microsoft/Word/www.alpari-idc.comhttp://www.forex.ch/http://www.forex.com/http://www.crownforex.com/crown/cf/white/en/index.aspxhttp://www.cmsfx.com/http://www.cmcmarkets.com/us/en/content/index.jsphttp://www.ac-markets.com/

8/19/2019 88452430-forex

31/83

Account

ConditionsTrading Costs Company ReliabilityForex

Broker Min.Deposit

Max.

Leverage

Spread

onMajors

Commi-

ssionSince Regulated By

www.fxlite.com

$500 200:1 No 2 to 4 2004 NFA (US)

www.fxsol.com

$250 400:1 No 3 to 5 2001 CFTC/NFA (US)

www.gfsforex.com

$500 200:1 No 3 to 5 CFTC/NFA (US)

www.gftforex.com

CFTC/SEC (US),

FSA (Japan),

ASIC (Australia)

$250 400:1 No 3 to 5 2001

www.hotspotfx.com

$7,500 50:1 $3/100k 1 to 2 2000 CFTC/NFA (US)

www.interactivebrokers.co

m

$5,000 50:1 $2/100k 2 to 2 1998

www.interbankfx.com

NFA(US),

CFTC(US)

$250 100:1 No 2 to 3 2001

www.mbtrading.com

$400 100:1 Yes 1 to 2 2002 CFTC/NFA (US)


http://../StreetSmartTrading/book/www.fxlite.comhttp://../StreetSmartTrading/book/www.fxlite.comhttp://../StreetSmartTrading/book/www.fxsol.comhttp://../StreetSmartTrading/book/www.fxsol.comhttp://../StreetSmartTrading/book/www.gfsforex.comhttp://../StreetSmartTrading/book/www.gfsforex.comhttp://www.gftforex.com/http://../StreetSmartTrading/book/www.gftforex.comhttp://../StreetSmartTrading/book/www.gftforex.comhttp://../StreetSmartTrading/book/www.hotspotfx.comhttp://../StreetSmartTrading/book/www.hotspotfx.comhttp://../StreetSmartTrading/book/www.interbankfx.comhttp://../StreetSmartTrading/book/www.interbankfx.comhttp://www.mbtrading.com/http://www.mbtrading.com/http://www.mbtrading.com/http://../StreetSmartTrading/book/www.interbankfx.comhttp://../StreetSmartTrading/book/www.hotspotfx.comhttp://../StreetSmartTrading/book/www.gftforex.comhttp://../StreetSmartTrading/book/www.gfsforex.comhttp://../StreetSmartTrading/book/www.fxsol.comhttp://../StreetSmartTrading/book/www.fxlite.comhttp://www.interbankfx.com/http://www.gftforex.com/http://www.fxsol.com/

8/19/2019 88452430-forex

32/83


www.mgforex.com

$200 100:1 No 3 to 5 2000 CFTC/NFA (US)

www.migfx.ch

$2,000 200:1 No 2 to 3 2005 SFBC(CH)

www.oanda.com

$1 50:1 No 1.2 to 2.5 2001 CFTC/NFA (US)

www.saxobank.com

$2,000 100:1 No 2 to 3 1998 DFSA(DK)

TTaabbllee 22--77

Charting Software

In order to implement our strategy you need charting software capable to

place some TA indicators (MA and RSI) and capable to draw lines on the chart.

These features are usually provided by any charting software, so you should be able

to implement our strategy regardless which charting software you are using.

Usually when you open an account in a brokerage firm, you get free or discounted

charting software. If you do not feel comfortable with the provided charting software,

we recommend that you to take a closer look at the following charting software

programs. Most of them provide a one month free trial period so you can try several

of them before you decide which one suits your needs. Here is a short list of some of

the software providers. There are many others out there and you can find them by

doing simple Google searching.

http://www.mgforex.com/http://../StreetSmartTrading/book/www.mgforex.comhttp://../StreetSmartTrading/book/www.mgforex.comhttp://www.migfx.ch/index.php?id=5&L=0http://../StreetSmartTrading/book/www.migfx.chhttp://../StreetSmartTrading/book/www.migfx.chhttp://../StreetSmartTrading/book/www.oanda.comhttp://../StreetSmartTrading/book/www.oanda.comhttp://www.saxobank.com/http://../StreetSmartTrading/book/www.saxobank.comhttp://../StreetSmartTrading/book/www.saxobank.comhttp://../StreetSmartTrading/book/www.saxobank.comhttp://../StreetSmartTrading/book/www.oanda.comhttp://../StreetSmartTrading/book/www.migfx.chhttp://../StreetSmartTrading/book/www.mgforex.comhttp://www.saxobank.com/http://www.migfx.ch/index.php?id=5&L=0http://www.mgforex.com/

8/19/2019 88452430-forex

33/83

Free Charts

Metatrader

Website: http://www.metaquotes.net/metatrader/

Metatrader offers several technical indicators and time frames, but what sets the package apart is its

built-in language for programming custom indicators and trading strategies. With this feature you can

analyze the market, enter pending orders, and automatically trigger trades generated by your

strategy. It is the best charting software for free out there.


http://www.metaquotes.net/metatrader/et/http://www.metaquotes.net/metatrader/et/http://www.metaquotes.net/metatrader/et/

8/19/2019 88452430-forex

34/83

Fxtrek

Website: http://quote2.fxtrek.com/misc/fxcm2.asp

Costs: $115/Month plus Data feed $50/month for the FX

FXtrek offers a suite of increasingly sophisticated packages. Here you can gain access to FXtrek's

free package, which makes for an extremely efficient starter kit for the beginning technician. The

charts feature the most popular time frames, including tick and 1 minute. In addition, it offers the

most commonly used indicators used for FX analysis. Java-based.


http://quote2.fxtrek.com/misc/fxcm2.asphttp://quote2.fxtrek.com/misc/fxcm2.asphttp://quote2.fxtrek.com/misc/fxcm2.asp

8/19/2019 88452430-forex

35/83

Stratagem

Website: http://scharts.fxcorporate.com/

Designed for ease of use, this package contains a menu bar that allows you to execute the most

common charting actions with a single click of the mouse. The user friendly layout offers you the ability

to organize and tile workspaces. This package includes 14 technical indicators, 7 different time frames,

and a multiple-chart viewing capability. Java-based.


http://scharts.fxcorporate.com/http://scharts.fxcorporate.com/http://scharts.fxcorporate.com/

8/19/2019 88452430-forex

36/83

Premium Charts

Esignal

Website: http://www.esignal.com

Costs: $115/Month plus Data feed $50/month for the FX

E-signal is a well established name in the charting software arena. E-signal offer reliable charts with a

slew of technical indicators, drawing tools, as well as alerts, back testing capabilities, and a helpful

support team. Windows based.


http://www.esignal.com/http://www.esignal.com/http://www.esignal.com/

8/19/2019 88452430-forex

37/83

Amibroker

Website: http://www.amibroker.com/

Costs: SOFTWARE COST: Professional - $229.00 one time purchase fee. Standard -

$149.00 one time purchase fee, FX DATA FEED COST: Varies based on Data feed

Provider AmiBroker offers a robust professional charting package with such features as

alerts back-testing, and indicator customization all accessible via a clear, user-friendly

interface. AmiBroker is also noted for their exceptional Customer Support team, which

distinguishes itself with superior service quality and efficiency. Windows based.


http://www.amibroker.com/http://www.amibroker.com/http://www.amibroker.com/

8/19/2019 88452430-forex

38/83

CQG

Website: http://www.cqg.com/

Costs: SOFTWARE COST: $545/month, FX DATA FEED COST: $100/month

CQG charts offer a robust charting solution with alerts, back testing, the ability to

export to excel, and a large number of technical indicators. CQG provides

worldwide data coverage including futures, options, and stock exchanges.

Windows based.


http://www.cqg.com/http://www.cqg.com/http://www.cqg.com/

8/19/2019 88452430-forex

39/83


Monitor More Than One Currency Pair

As we did not want to confuse our reader with too much information at once,

we decided to monitor only one currency pair in our examples.

Once you get more comfortable using our strategy, we recommend that you monitor

more than one currency pair at the same time. That way, you will get more entry

signals and in consequence you will enter more trades generating a higher profit.

First you have to decide how many currency pairs you are going to monitor at once.

We recommend starting with two currency pairs, as it is a manageable number of

currency pairs. If at any time you do not get enough entry signals, you can just

increase the number of monitored currency pairs.

Once we enter a trade for a particular currency pair, then we concentrate only on

that currency pair until we exit the position. After closing the trade, we return again to

monitor more currency pairs to get an entry signal.

8/19/2019 88452430-forex

40/83

CHAPTER 3 TECHNICAL ANALYSIS

Why Does Technical Analysis Work?

Technical analysis describes different ways of predicting the future of the

underlying market based on its history. Unfortunately, technical analysis is not an

exact science. Many prominent scientists label it as “voodoo science”. They claim

that due to market efficiency, if you use TA to find your entry positions, you’re no

better off than someone who chooses those positions randomly. Market efficiency

means that all the available information is already calculated in the market prices,

and that you can only guess how wills the price behave in the future.

The “voodoo science” theory would make sense if it wasn’t for a fact that

there is a significant number of traders who are able to consistently make profits in

currency markets. Those traders use technical analysis as their main tool. Since any

trader has or can have access to the same TA tools we have to ask how can a small

group of traders consistently win and the other larger group, more or less

consistently lose in the currency trading game. What is it that winning traders know

about technical analysis that gives them the upper hand?

The answer is simple: Technical Analysis works but not necessarily for the

reason most people believe. Many successful traders don’t want to share this secret.

TA works because many people use it, and successful traders are able to predict

how will other people react on different TA indicators and signals. In other words,

while the losing traders are using TA to determine their trades, winning traders are

winning because they know how the losers are going to react based on this data. For

example, when a price goes below one of the key moving averages, MA, many


8/19/2019 88452430-forex

41/83

traders will sell to protect themselves against additional losses. By doing so, they will

drive the price of that instrument/currency lower and that will prompt some traders to

start short selling in anticipation of further decline. Prices continue the downward

trend, forcing traders who were long on that particular instrument/currency to sell

their positions because it is going below their stop limits. This creates a domino

effect as the price continues to decline. However, at this point, successful traders

realize that most of the current price action was created artificially. They start to

enter the positions on the buy side and more often than not price starts to reverse.

The losing traders have already sold their positions based on the TA tools. The

winning traders buy the instrument/currency because they understand that

fluctuation was temporary, and they seize the opportunity based on the losing

trader’s reactions.

No TA tool by itself will give you reliable buy or sell signals. There is no Holy

Grail or magic black box that will give you the perfect, accurate signal. However,

combining of the right group of TA indicators with discipline and adequate trading

capital has been the road to fortune for many traders. There is no reason why you

cannot emulate their success.

Technical Analysis is similar to studying history. Historians are usually able to

make the most accurate predictions of future and outcomes of events. Usually thepast repeats itself. History proves that people historically behave in the same

manner in the similar situations. Great empires start to fall when everybody starts

thinking that they are invincible. The same thing happens in currency markets. Every

time when there has been a long lasting bull market in any major currency, new

experts come from the woodwork claiming that this time it is different, that for this

currency sky is the limit, fundamentals are strong there are hundred reasons why

this currency should continue to appreciate. And now everybody starts to buy this

currency more and more. Money is borrowed, leveraged and put into this currency.

However, when no fresh money is coming in to feed this beast, it has to start to feed

of itself. There comes the bear. If traders who were among the last to join the party

looked at the charts of previous times, they would have noticed that many technical

indicators were behaving similarly as they had in the past.


8/19/2019 88452430-forex

42/83


When you’re unprepared and unaware of historical facts, history is doomed to

repeat itself. This is the last lesson you want to learn the hard way when entering the

currency trading battle. If you learn while in the battle, not beforehand, your chances

of success will most likely be lost.

We will now examine the most important TA indicators and how can they be

effectively used in predicting future movements in currency prices.

Moving Average

Moving average is one of the most widely used TA indicators. Moving

average is calculated by finding the average price of the trading instrument over a

set number of periods. It is called a ‘moving” average because as the newest period

is added, the oldest period is dropped. MA crossovers are used in many trading

systems as buy or sell signals. Usually combinations of two or three MA intervals are

used. Another popular way of observing buy and sell signals is by using single,

longer term MA such as 20 day MA. Buy signals occur when the current price

crosses MA from below to above. The sell signal occurs when current price crosses

MA from above to below.


Figure above is a daily candlestick chart for EUR/USD covering a five-month period.

Blue line represents 20 day Moving Average. As we can observe from the chart

when the price crosses blue line from the above to below it is usually a negative

8/19/2019 88452430-forex

43/83


signal and the trend becomes bearish for a certain period of time. Then, when the

price crosses the blue line from below to above, sentiment changes and the trend

becomes bullish for a certain period of time.


Figure above is 1-hour candlestick chart for EUR/USD covering a five-day period.

Red line represents 4 hour moving average and blue line represents 12 hour moving

average. Buy signal occurs when 12 period MA (blue line) crosses 4 period MA (red

line) from above to below and sell signal occurs when 12 period MA crosses 4 period

MA from below to above.

Relative Strength Index RSI

Relative strength index is a momentum indicator. It usually moves ahead of

price. It is an indicator that measures an instruments price relative to itself. The

8/19/2019 88452430-forex

44/83


values that it can have are between 0 and 1000. Sudden short-term movements in

an instruments price do not affect it. Therefore, it looks at the overall picture and

eliminates much of the marketplace noise. RSI is usually used in combination with

other indicators. RSI value of 30 or less is generally considered as buy signal and

RSI value of 70 or more is considered as sell signal.


Figure above is a daily candlestick chart for EUR/USD. The RSI value is represented

by the blue line on the bottom part of the chart. From the chart above we can

observe that when the RSI starts reaching upper horizontal line price is often

peaking and is starting to reverse its course and when the RSI starts reaching lower

horizontal line price is often bottoming and is starting to reverse. Traders also look

for the divergence between price movement and RSI (price moving up and RSI

moving down and vice versa). If you see such movement, it is very likely that price is

about to change direction.

Support and Resistance Levels

Support and resistance is the most basic concept of technical analysis. There is no

wonder since support and resistance are based on supply and demand. And as we

8/19/2019 88452430-forex

45/83

all know supply and demand determine the price of goods in this case of the

currencies traded. To recollect the law of support and demand in forex: as the

demand for some currency increases the price of this currency will also increase and

v.v. if the supply for some currency increases the price will decrease.

What are then support and resistance?

Support is created at points below current price where there are enough buyers to

prevent and eventually reverse decline of the underlying instruments price.

Resistance is created at points above the current price where there are enough

sellers to stop and eventually reverse advance in the underlying instruments price.

If the price breaks through support then support becomes resistance level and if the

price breaks through resistance then resistance becomes support.

And what we are trying to do, is nothing else than forecast the price of currencies at

the given time. So if we can find out what are the support and resistance levels, we

could with high probability tell in which direction price will move.

Support and resistance are often established around key exponential moving

average such as 20 day MA and 50 day MA or around key Fibonacci Retracement

levels. Sometimes they simply establish around round numbers such as 1.15, 1.10,

0.75 etc…


8/19/2019 88452430-forex

46/83



8/19/2019 88452430-forex

47/83

CHAPTER 4 TRADING STRATEGY

Now the battle is about to begin and you should get ready for it. Before you

go any further ask yourself the following questions:

Are you willing to invest your time, money and effort in a profession in which

success is not guaranteed? Are you comfortable with and aware of the fact that the

chances of failure are high?

Do you have a comfortable basic knowledge of the Currency Markets in

general? Are you familiar with key concepts and terms as related to currency/forex

trading?

Have you opened an account with an online broker/dealer that meets the

criteria that we have outlined? Have you set aside the amount of money that you are

willing to risk?

Are you set up with the necessary hardware and Internet connection? We will

assume that you will be using two monitors for the purpose of this strategy. If you

haven’t installed two monitors yet, you will have to jump between the screens.

Eventually, if you are serious enough about trading, you will realize that using only

one monitor puts you at a disadvantage.

Have you found a decent data feed and charting software provider?

Before we start...


8/19/2019 88452430-forex

48/83


Although the core of our strategy is Support and Resistance we will also be using

two of the most basic technical tools that are used for confirmation purposes.

150 Period Moving Average

Moving average is one of the most widely used TA indicators. Moving

average is calculated by finding the average price of the trading instrument over a

set number of periods. It is called a ‘moving” average because as the newest period

is added, the oldest period is dropped. Most of the trading systems out there use MA

crossovers as buy or sell signals. Our strategy will not be using MA indicator for such

purposes. The only purpose of using MA indicator in our strategy is to determine

current market sentiment. 150 Period means that in your charting software you will

enter value of 150 when you are setting your MA indicator.

Let’s have a look at the figure below:


Figure above is a 5 minute candlestick chart for EUR/USD currency pair. The

blue line represents 150 Period Moving Average. If the current price is above the

blue line the market sentiment, for the purpose of our strategy is considered bullish.

If the current price is below the blue line the market sentiment for the purpose of our

8/19/2019 88452430-forex

49/83


strategy is considered bearish. Obviously in the figure above, the market sentiment

is bearish. The application of this will be shown later in the chapter.

4 Period Relative Strength Index

For the purpose of our strategy we will be using RSI in a different manner

than it is used by most of the trading systems out there. Most of the trading systems

use 14 Period Relative strength index or RSI(14) in order to determine overbought or

oversold market conditions.

In our strategy we will be using 4 Period Relative Strength Index or RSI(4) in order to

confirm whether the price is likely to make a breakthrough through predetermined

support and resistance lines or to bounce off them. 4 Period means that in your

charting software you will enter the value of 4 when you are setting your RSI

indicator. Also during the setting make sure that upper and lower bands are set up at

values of 70 and 30.

Let's have a look at the figure below.


Figure above is a 5 Minute candlestick chart for the EUR/USD currency pair. The

lower portion of the figure represents RSI(4) and the black lines are representing 30

and 70 areas. For the purpose of our strategy we only need to determine if the

8/19/2019 88452430-forex

50/83

current RSI(4) is above 70, below 30 or in between those two values. The application

of this will be shown later in the chapter.

How To Prepare For A Trading Day

For the purpose of this course we will be using Esignal charting software.

Which software and which trading platform you will be using is entirely up to you,

however our setup will give you a general idea of what capabilities should your

software have.

Our examples will deal mostly with EUR/USD however if you live in Canada I

would encourage you to trade USD/CAD, if you live in Australia you should trade

AUD/USD, if you live in East Asia you should trade USD/JPY, if you live in UK you

should trade either GBP/USD or EUR/GBP, if you live in European Union you are

best off trading EUR/USD and finally if you live in the United States you should trade

USD against the currency that you are most familiar with (EUR, JPY, GBP, CAD,

SFR). Trading the currency that you are familiar with has lots of advantages vs.

trading currencies that you have never used. For example a person who lives in

Canada remembers approximate range of CAD vs. USD during past ten years or

more and has much better understanding of those currencies than average person

from Japan. Principles that are explained in this strategy can be used to trade any of

the above currencies.

Although forex markets are in essence 24-hour markets, for the purpose of

our strategy we will define when does the trading day start and when does it end.

Lets have a look at figures below:


8/19/2019 88452430-forex

51/83




8/19/2019 88452430-forex

52/83



Figures 1, 2 and 3 are 15-min candlestick charts for EUR/USD, USD/CAD and

GBP/USD respectively. What do they all have in common? We can observe that the

time of the lowest trading volume for all of them is at approximately 5pm EST or

10pm GMT. That is the time when almost all of the forex trading centers around the

world are closed. Therefore we will use 10pm GMT as the time when previoustrading day ends and the new trading day begins. Here is an example: “You live in

Europe. It is Thursday morning 9amGMT. Previous trading day has started on

Tuesday 10pmGMT and it has ended Wednesday 10pmGMT. Another example: You

live in North America. It is Thursday morning 9amEST. Previous trading day has

started on Tuesday 5pm EST and it has ended Wednesday 5pm EST.”

For those who don’t know:

Eastern Standard Time (EST) = Greenwich Mean Time (GMT) – 5Why it is important to determine when does the trading day start and when does it

end?

8/19/2019 88452430-forex

53/83

It is important because our strategy will be based on 3 day Pivot Points and in order

to calculate 3 day Pivots we will need to combine 3 trading days into a single period.

We will get to that later in the strategy.

Economic Calendar

Another important place to look at is Global Economic Calendar that has

exact times and dates of all the major economic reports and events during current

week. If you are trading EUR/USD you need to pay attention to the reports coming

out of EU and US. If you are trading USD/CAD you need to pay attention to the

reports coming out of US and Canada etc… Some of the important indicators that

you should pay attention to are Weekly Jobless Claims, CPI, University of MichiganSentiment, Federal Reserve or Central Bank Meetings … However you will not look

at those indicators as trading signals because by the time you get the news it is

already too late, price has already started moving. The reason you need to be aware

of those reports and events is that at those times markets can get extremely volatile

and for a beginning trader it is best to stay out of the market at such times. It doesn’t

mean that you cannot have a trade going on if there is a report due to come out.

Those reports come out almost every day so you cannot avoid them. If you are

already in the market you should watch the situation closely at those times and be

ready to quickly react. Figure shown below is an hourly EUR/USD candlestick chart.

You can notice that majority of the time price is trading in a close range and then

suddenly there is a sudden upward or downward price move. Majority of those

sudden moves happen immediately after the economic reports that we have

described above come out. Again, if you are beginning trader, don’t enter your trades

just before such reports are due to come out.


8/19/2019 88452430-forex

54/83



One of the places where you can find economic calendar is:

http://www.forexnews.com

Figure shown below is an example of how a Global Calendar can look like however

at the time when you are reading this course the website mentioned above can

change and you will have to find the calendar someplace else. Here is another place

where you may find a complete economic calendar: http://www.dailyfx.com/calendar/

Or if you are looking for a US calendar you may find it at:

http://biz.yahoo.com/c/e.html or

http://moneycentral.msn.com/investor/calendar/econ/current.asp

http://www.forexnews.com/http://www.dailyfx.com/calendar/http://biz.yahoo.com/c/e.htmlhttp://moneycentral.msn.com/investor/calendar/econ/current.asphttp://moneycentral.msn.com/investor/calendar/econ/current.asphttp://biz.yahoo.com/c/e.htmlhttp://www.dailyfx.com/calendar/http://www.forexnews.com/

8/19/2019 88452430-forex

55/83



As we have already mentioned our goal is to catch larger currency swings as that’s

where the real money is in currency trading. However, in order to be able to do so,

we have to choose the best possible place of entry or the place that has the highest

probability that the trade will go in our direction. Before we start to look for the place

of entry (it doesn’t matter at what time of the day we plan to place our trades) we

need to do a preparation.

8/19/2019 88452430-forex

56/83

Calculating Major S/R Areas

Support and resistance is the most basic concept of technical analysis.

Support is created at points below current price where there is enough buyers to

prevent and eventually reverse decline of the underlying instruments price.

Resistance is created at points above the current price where there are enough

sellers to stop and eventually reverse advance in the underlying instruments price.

Let’s say it is 8pm EST or 1am GMT and we are planning to trade tomorrow

morning. First we need to calculate 3 day pivot points as those are the most

important S/R areas that we will be looking at.

How to calculate 3 day pivots?

You may be asking why aren’t we using a single day pivot points and the answer is

that our particular approach will attempt to catch larger moves and 3 day Pivots will

be better at eliminating much of the intraday noise.


8/19/2019 88452430-forex

57/83



Figure above is a 15 minute bar chart covering a three day period for EUR/USD.

From the chart we can observe values for the 3 Day High, 3 Day Low and 3 Day

Close. From those values we will calculate pivot values. In our example those are

the values covering period from Nov/15/2009 to Nov/18/2009. Those are the values

that we would use if we were to trade on Nov/19/2009. If we were to trade on

Nov/6/2009 we would then calculate pivot values for the period Nov/16/2009 to

Nov/19/2009.

We will use classic formula to calculate pivot values.

PP = (High + Low + Close)/3

Support = 2*PP – High

Resistance = 2*PP – Low

In our example:

3 Day High = 1.5016

3 Day Low = 1.4805

3 Day Close = 1.4960

8/19/2019 88452430-forex

58/83

PP = (1.5016 + 1.4805 + 1.4960)/3 = 1.4927

Support (S1) = 2*1.4927 – 1.5016 = 1.4838

Resistance (R1) = 2*1.4927 – 1.4805 = 1.5049

For the purpose of our strategy Resistance Areas are 3 Day High, R1, Pivot Point

and 3 Day Close. Support Areas are 3 Day Low, S1, Pivot Point and 3 Day Close.

Resistance Areas are:

1. 3 Day High

2. R1

3. Pivot Point

4. 3 Day Close

Support Areas are:

1. 3 Day Low

2. S1

3. Pivot Point

4. 3 Day Close

Please note that Pivot Point and 3 Day Close are acting both as Support andResistance Areas.

How to set up our trading screen?

OK, our trading day is about to start. We now need to set up our chart with

the necessary info and tools.


8/19/2019 88452430-forex

59/83



Figure above is a five minute candlestick chart for EUR/USD currency pair.

As you can see we have drawn the support and resistance lines that we have

already calculated. Support and resistance lines are R1, 3 Day High, 3 Day Close,

Pivot Point, S1 and 3 Day Low. On the figure above you can not see R1 and 3 Day

Low as they are not close to current price action. The thin blue line is representing

150 Period Moving Average and on the bottom of the chart there is 4 Period Relative

Strength Index.

When to enter the trade?

We will now define our entry strategy.

Entering on the bullish side.

If the current price is above 150 MA it means that the price is trading in a bullish

medium term trend and therefore we will adopt a bullish strategy.

8/19/2019 88452430-forex

60/83


If bullish we will be looking to enter our position on upside breaktroughs through

(Pivot Point, 3 Day Close, 3 Day High and S1) resistance lines and on the upside

bounces from the (Pivot Point, 3 Day Close, 3 Day Low and S1) support lines.


Please note that Pivot Point and 3 Day Close are acting both as Support and

Resistance lines.

Confirmation with 4 Period RSI.

Bullish Breaktrough signal will be taken ONLY if current RSI(4) is higher than 70.

Bullish Bouncing signal will be taken ONLY if current RSI(4) is in between 30 and 70.

Entering on the bearish side.

If the current price is below 150 MA it means that the price is trading in a bearish

medium term trend and therefore we will adopt a bearish strategy.

If bearish we will be looking to enter our position on downside breaktroughs through

(Pivot Point, 3 Day Close, 3 Day Low and S1) support lines and on the downside

bounces from the (Pivot Point, 3 Day Close, 3 Day High and R1) resistance lines.

8/19/2019 88452430-forex

61/83



Please note that Pivot Point and 3 Day Close are acting both as Support and

Resistance lines.

Confirmation with 4 Period RSI.

Bearish Breaktrough signal will be taken ONLY if current RSI(4) is lower than 30.

Bearish Bouncing signal will be taken ONLY if current RSI(4) is in between 30 and

70.

What kind of order should you use to enter the trade?

The only negative consequence you may get from not entering a trade is just

that; you haven’t entered a trade. It is better to miss a trading opportunity than to

have your order filled at a price that is far from your entry target price. If you feel the

opportunity gap is closing too quickly, simply wait for the next opportunity to come

along. It’s worth it to save your money than risk losing it simply because you’ve got

an itchy “trigger finger”. To get into the trade you should always use Limit orders.

What size should you be trading with?

If you are a beginning trader you should start very small and when you are

able to build up your account you can start trading with larger amounts. This applies

even if you are starting with substantial start up capital. You need time to perfect

8/19/2019 88452430-forex

62/83

your trading strategy. It is much better to preserve your capital for later on, when you

become more formidable market participant.

Money Management

As explained earlier in the course the leverage basically gives a trader the

possibility to control a higher capital, than his real start up capital. That way he is

able to control larger lot size and to make higher profit, if the trade goes in his

direction. But at the same time he is taking higher risk, if the trade goes against him.

Resuming, leverage is a powerful tool but it should be used by traders carefully!

Example 1: EURUSD, 4 percent per trade risk level, $1,000 account size, 40 pipsstop loss

Well, let us assume that you want to trade EURUSD using our Support Resistance

Strategy and that your account size is $1,000. First of all you need to define how

much risk you want to take every time you enter a trade. For example, let’s say you

want to take a risk level of 4% per trade ($40 per trade). Ok, in our Support

Resistance Trading Strategy after entering the market we place a 40 pips stop order

in order to cut possible losses short. That means the maximum loss we may suffer is40 pips. Now, we need to calculate the lot size we will use according to the defined

risk level of 4%:

Maximum loss in dollars $1000 * 0.04 = $40

Lotsize = maximumloss in dollars/stoploss in pips * $10 = $40/40*$10 = 0.1

That means that in this case we would be using 0.1 lot size when entering a trade.

Example 2: GBPUSD, 4 percent per trade risk level, $2,000 account size, 100 pips

stop loss

Well, let us assume that you want to trade GBPUSD using our Support Resistance

Trading Strategy and that your account

88452430-forex

Documents