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Step-By-Step Strategy & Guidelines
For Successful Forex Trading
By Maurice Perry
www.slumdogforex.comCopyright 2010
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Table of Contents
Table of Contents 2
Disclaimer 3
1 Introduction & Brief Overview of Forex Trading 42 Creating OANDA FXTrade Practice Account 83 Setting Up Chart Type: Candlestick 124 Setting Up Indicators: SMA 20 (Simple Moving Average) 175 Setting Up Indicators: EMAs (Exponential Moving Averages) 196 Setting Up Indicators: RSI (Relative Strength Index) 227 Setting Up Indicators: Slow Stochastic 25
8 Setting Up Pivot Points 28
9 Setting Up Trading User Preferences 3610 Adjusting Leverage 4111 Creating Multiple Time Chart Windows 4312 Time of Day/ Volume Factor 47
13 Check Forex Factory Day Calendar 51
14 Determining Goal For The Day 55
15 Using the SMA 20 Indicator 62
16 Using the EMA 5 & 12 Indicators 67
17 Using the RSI Indicator 71
18 Using the Slow Stochastic Indicator 74
19 Drawing & Using Support & Resistance Lines 79
20 Using The Fibonacci Retracement Tool 87
21 How to Buy & Sell/Open & Close Trades 92
22 Trading Game Plan 100
23 Conclusion: Words of Wisdom 105
Slumdog Forex Traders Checklist 109
Basic Trading Terminology 110
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Disclaimer
Every individual investors success depends on his or her own background,instruction, devotion, dedication, perseverance, aspiration and inspiration. Aswith any business endeavor there is always the possibility of loss of capital and
there is no guarantee the use of this book will result in profits or success. Theinformation enclosed herein is intended strictly for instructive purposes. Nothingin this publication should be construed as an approval to buy or sell any securityor to offer any investment counsel. It is possible the author of this book at this ora subsequent time in the future may own, buy, or sell securities discussed.Information provided herein has been obtained from sources believed to bereliable but no guarantee is made as to their precision or comprehensiveness.The advice of a knowledgeable legal, tax, accounting, or business professionalshould be sought at all times.
U.S. Government Required Disclaimer Trading foreign exchange markets onmargin carries a high level of risk, and may not be suitable for all investors. Thehigh degree of leverage can work against you as well as for you. Before decidingto invest in the Forex market, you should carefully consider your investmentobjectives, level of experience, and risk appetite. The possibility exists that youcould sustain a loss of some or all of your initial investment and therefore youshould not invest money that you cannot afford to lose. You should be aware ofall the risks associated with foreign exchange trading, and seek advice from anindependent financial advisor if you have any doubts. Readers of this publicationshould also be aware of the following CFTC disclosurerule 4.41 regarding
hypothetical performance results:
HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAININHERENT LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD,SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, SINCETHE TRADES HAVE NOT BEEN ACTUALLY EXECUTED, THE RESULTS MAY HAVEUNDER-OR-OVER COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAINMARKET FACTORS SUCH AS LACK OF LIQUIDITY. SIMULATED TRADINGPROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY AREDESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS MADETHAT ANY USE OF THIS INFORMATION WILL OR IS LIKELY TO ACHIEVE
PROFITS OR LOSSES SIMILAR TO THOSE SHOWN.
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Chapter 1
Introduction & Brief Overview of Forex Trading
Hello, and welcome to Slumdog Forex. My name is Maurice Perryand Id like to thank you for purchasing this book tutorial. My hope and
desire is for the knowledge that I have gained over the last four years of
forex trading to be shared with you within the following chapters of this
book. So prepare to sit back, relax and enjoy the ride!
But before we get into any serious detail, I would like to first do a
brief overview of what forex trading actually is. Forex trading is the
trading or exchange of currencies. Whether it is the U.S. Dollar (USD)
traded or exchanged for the Euro, or the USD exchanged for the
Japanese Yen, forex trading is basically the exchanging of two different
currencies. Its similar to if someone were to take a trip overseas to
another country. Lets use Japan as an example. Some people would
like to have their money exchanged before they make it to their
destination, Japan in this instance. So they would go to their bank or a
local currency exchange in order to exchange the USD or a certain
amount or value of the USD for whatever the current value of the
Japanese Yen is. So upon arrival, they would not have to worry about
exchanging currencies there. Nor would they have to worry about the
exchange rates changing while in mid-air!
With forex trading, we basically look to buy another currency at
its lowest rate, and we wait until the value of that currency rises to a
certain level before we sell it. Its similar to trading stocks and
commodities - buy low, sell high.
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One of the things that I really love about forex trading is that you
have the ability to trade virtually at any hour of the day, five days a
week. This definitely allows for more flexibility, especially if you have a
work schedule that may not be conducive for you to trade duringcertain trading peak hours of the day. The beautiful thing is that forex
trading can be done 24 hours a day. For instance, lets say that you
work 2nd
shift and your work hours are from 3-11 PM. Well, when you
get off at 11 PM, the next major peak time of trading is typically
between the hours of 12 AM and 3 AM (CST). Lets say that you work
3rd
shift, from 11 PM to 7 AM. If you can get home by 8 AM, you would
get home just in time for the New York Stock Exchange (NYSE) openingbell at 8:30 AM (CST). This would be in the midst of the major peak time
of trading activity. Also, you would be able to trade in the evening time
as well, between the peak hours of 6 PM and 9 PM (CST). So, the good
thing is the flexibility that exists with trading forex.
Forex rates, the price or value of a pair of currencies at any given
moment, are determined by three things:
1.Economic Factors
2.Political Conditions
3.Market Psychology
Economic factors consist of the ripple effect that may occur after
financial reports are released daily, weekly, monthly or quarterly.
Reports such as New Home Sales, Non-Farm Employment Change,Oil Inventory, and many more can have drastic impact upon the
economy, and thus, will affect the value of a countrys currency as well.
Political conditions can affect the value of currencies when a
government becomes unstable or stabilizes. When there is a change of
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governmental structure of a nation, or in the case of America, when
one administration moves in, and another moves out, this can affect
the nations currency value. Or if there is indecisiveness on Capitol Hill
regarding legislation that may impact the economy, this can also causethe fluctuation of the USD.
Market psychology analyzes the speculative tendencies of traders
as a whole. Traders will try to guess what direction the market may go
next, based off of previous movements and indicators that they have
set up. When there is a noticeable change of directions with the forex
rate, you may witness the rise in volume (indicates the worth of a
market move; high volume usually means a greater push in one
direction or the other the more traders that trade in one direction
simultaneously, the greater the volume). I will talk more about volume,
as well as volatility later on in the book.
There are two strategies that are used in forex trading. One
strategy is called Fundamental Analysis. The other strategy is called
Technical Analysis. Fundamental Analysis is the use of what was
mentioned previously (Economic Factors, Political Conditions and
Market Psychology) to determine the general direction a currency may
be headed to, as well as when there could be a good time to buy or sell.
With Technical Analysis, the trader is using various indicators and
different levels to determine when is the proper time to buy or sell.
With the strategy that I use, which will be taught in SlumdogForex, both Fundamental Analysis, as well as Technical Analysis, are
used. We will pay attention to the financial reports that are released,
and will be aware of the political conditions of the countries of which
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are associated with the currencies that we are trading. But we will also
use technical indicators to assist us with our trading as well.
Probably the greatest thing about forex trading, especially with
the platform and service/broker that I trade with/through, is that you
could trade with as little as one dollar!Now granted, Im not telling
you to just invest one dollar into forex trading. Thats not the message
that I want to convey. The point that Im trying to make is that there is
not a minimum balance that is needed in order to have, or maintain a
forex account, especially with the broker that I use.
Before we dive into the meat and potatoes of forex trading andour strategy, the first thing that I want to do is help get you started with
creating a practice account with OANDA FXTrade, the service/broker
and platform that I use to trade with. So in the next chapter, I will walk
you through the process of setting up your practice account.
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Chapter 2
Creating OANDA FXTrade Practice Account
Lets get you started with creating a practice account. Open yourweb browser, and in the web address bar, type the following web
address:
www.fxtrade.oanda.com
When the web page appears, look to the right side of the page
and you will find a section called Get Started. Here you will find two
links. One is for FXTrade. The second one is for FXGame. Click on thelink that says OPEN AN FXGAME ACCOUNT (see fig. 1). After clicking
on the link, you will be taken to a registration page.
Fig. 1
Proceed to fill out the information requested in the Register
Now box. You will fill out your name and email address. You will also
create a username and password, as well as select the type of currency
your want to use as your base currency. After this form is filled out,
click on Register.
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You will then receive an email that says OANDA FXGame Account
Activation in the subject heading. Within this email there will be a link
that you will have to click on in order to activate your account. When
you click on the link, you will be taken to a web page that lets you knowthat your account has been activated (see fig. 2). There is a hyperlink
that you can click onLogin to FXGame. You will then be taken to the
OANDA Login page (see fig. 3).
Fig. 2
Fig. 3
When you arrive at the OANDA Login page, feel free to bookmark
this page with your web browser so that youll have easy access to it.
On my home PC, as well as my laptop, I set this page as my Home Page.
After doing that, you will see that theAccountpull-down menu is
already set for FXGame and the Type pull-down menu will be set for
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Trading Platform. Type the username and password that you created,
then click the Login button. It may take a few seconds to verify the
username and password.
When the platform (see fig. 4) finally appears, go ahead and
maximize the window.
Fig. 4
If you ever wanted to change your password (which would
actually be a good idea to get in the habit of doing), in the upper-left
hand corner of the platform, you will see the Account pull-down
menu. Click on it, and scroll down until you see the line that says
Change Password (see fig. 5). When you click on that link, a dialogbox will pop up (see fig. 6). Here, in the space provided for Old
Password, you will have to type in your current password.
Underneath, for the New Password, proceed to type in your new
alpha-numeric password. Then confirm your new password below.
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Fig. 5 Fig. 6
Make sure that you remember your password, and write it down,
if necessary. When you are finished, click on the Submit button. The
dialog box will close, and another dialog box will appear to confirm that
the password has been successfully changed. Click on OK.
You are now finished with creating your practice account! Yeah!
Next, we will begin constructing your platform. We will start with
setting your chart type.
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Chapter 3
Setting Up Chart Type: Candlestick
In this chapter, I will begin showing you how to set up your chart.We will start off by setting your chart type to Candlestick. The first
thing that we want to do is go to the pull down menu that is currently
set to Close Price (see fig. 7). Click on the arrow, and then select
Candlestick.
Fig. 7
When the Candlestick chart type appears, zoom into an area so
that you can see the two different shades of candlesticks vividly. Some
of the candlesticks should be shaded black, and the others should be
shaded gray. The black candlesticks are ascending, or rising
candlesticks. The gray candlesticks are descending, or falling
candlesticks (see fig. 8).
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Fig. 8
What I like to do is change the color of both of the candlesticks.
To do so, click on the body of a black candlestick first. A box should pop
up with Rising Colour and Falling Colour. Click on Rising Colour,
then scroll down and select Purple (see fig. 9). Then click on the body
of a gray candlestick. Click on Falling Colour, then scroll down and
select Orange. So now you should have purple rising candlesticks and
orange falling candlesticks (see fig. 10). I think this is a nice contrast to
help you visualize the difference between the two. No, I am not a Los
Angeles Lakers fan! Nor am I an LSU alum! I thought Id just clear thatup really quick!
Fig. 9 Fig. 10
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Nonetheless, let me briefly explain the components of the
candlestick. There are three parts of the candlestick The Body, The
Upper Stem, and The Lower Stem. The Body consists of the shaded area
of the candlestick. The Upper Stem is the line that rises up from thebody of the candlestick. The Lower Stem is the line that falls down from
the body of the candlestick (see fig. 11).
Fig. 11
Within each candlestick, there is vital information. If you hover
over one of the candlesticks and look at the lower left-hand corner of
the chart, you will see a gray rectangular box, showing the date and
time of that particular candlestick. In the bottom part of that box, you
will see the Open, Close, High and Low values for that candlestick.
These values are located at different parts of the candlestick. The
Open is the top or bottom of the body of the candlestick that aligns
with the top or bottom of the previous candlestick (the previous
Close). The Close is the opposite end of the body (if the candlestick
body is orange, the Close will be at the bottom; if the candlestick
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body is purple, the Close will be at the top). The High is the top
peak of the Upper Stem of the candlestick. The Low is the lowest part
of the Lower Stem of the candlestick (see fig. 12).
Fig. 12
Sometimes you will find candlesticks with no body at all. This
means that the Open and Close of the candlestick were at the same
value (see fig. 13).
Fig. 13
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Those are the basic components of the candlestick. You should
now save the profile. Go to Tools, and select Save Current Profile.
In the next chapter, we will set up the SMA 20 Indicator.
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Chapter 4
Setting Up Indicators: SMA 20
(Simple Moving Average)
Now I will show you how to begin setting up the various indicators
that I use. The first indicator that we will set up is called the SMA 20
line. SMA stands for Simple Moving Average. Ill go into more detail
later.
To insert the indicator, if you have your platform open, look
towards the lower left hand corner of the chart. There you will see a
pull-down menu that says Add Study (see fig. 14). Go ahead and click
on the arrow of that pull-down menu. Then scroll up the list until you
see SMA, and then click on it (see fig. 15). After clicking on SMA,
next to the pull-down menu (which should now have SMA), there is a
value (14). Change that value to 20, and then click on the + sign to the
right of it (see fig. 16).
Fig. 14 Fig. 15 Fig. 16
If you look at your chart, you should now see a curvy line that is
somewhat following the direction of the candlesticks. This is the SMA
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20 line that we just created. Were going to change the color of that
line to red. To do so, click anywhere on the line and a menu will pop up.
Scroll down until you see Red, and then click on it (see fig. 17).
After the color has been changed, save
the profile. Again, to save the profile,
go to the top of the screen and click on
Tools, then Save Current Profile.
Basically, the SMA line is a moving
average line. The value that we set for
our line, which was 20, tells the line totake the average of the current
candlestick, and the previous 19
candlesticks. The location of that line at
the current candlestick illustrates the
average price/rate over those 20
candlesticks.
We will go into much more detail about how this indicator is used
with our trading, as well as how it will be used in conjunction with the
other indicators that we will be setting up. And speaking of other
indicators, the next indicator that we will set up will be two EMA
(Exponential Moving Average) lines.
Fig. 17
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Chapter 5
Setting Up Indicators: EMAs
(Exponential Moving Averages)
In this chapter I will show you how to set up your EMA
(Exponential Moving Average) lines. There will be two different lines
that we will be setting up. To begin, click on Add Study, just as we did
with the SMA 20 set-up, and then select EMA. Change the value to
12 and click on the + sign. Your platform should now have an
additional line now. This line is the EMA 12 line. Change the color of
this line to blue. Click on the line, then scroll down the list, and click onblue. You should now have a red SMA 20 line and a blue EMA 12 line
(see fig. 18).
Fig. 18
Now, you will create one more EMA line. So click on Add Study,
and then select EMA again. This time, change the value to 5, and
then click on the + sign. You should now see three lines. The third line
is your EMA 5 line. Were going to change the color of this line to
yellow. Click on the line, and then scroll down the menu to select
yellow. So now, you should have three lines; red SMA 20 (created in
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previous chapter), blue EMA 12, and yellow EMA 5 (see Fig. 19). The
EMA 5 line is the faster moving line. It will always stick closest to the
current price/rate. The EMA 12 line will be the slower moving line. Its
movement will always lag behind that of the EMA 5 line. Thus, all threeof these indicators are called lagging indicators because all of them lag
behind the current price/rate. Go ahead and save the current profile to
lock in these additions to your profile.
Fig. 19
The EMA line is similar to the Simple Moving Average line in that
the location of the line is determined by the average of the current
candlestick with the previous candlesticks, according to the value that is
set for the line. However, the major difference is that for the EMA line,
more weight is placed on the latter few candlesticks. For instance, with
the EMA 5 line, the location of that line is determined by the rate of five
candlesticks, including the candlestick at its current location on the
chart. But, more emphasis, or weight will be placed on candlesticks #4
and #5 than candlesticks #1 and #2. So in essence, the curvature of an
EMA line will be slightly different than that of the SMA line in that it will
move a bit quicker into the direction of the current rate.
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I will talk later about how all three of these lines are used to
determine when to enter into trades and when to exit. But the next
indicator that I want to show you how to set up is the RSI indicator.
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Chapter 6
Setting Up Indicators: RSI
(Relative Strength Index)
Okay, now we will set up our RSI (Relative Strength Index)
indicator. The first thing that were going to do is click on Add Study,
then scroll up and click on RSI. Now you should see three values, 14,
70 and 30 (see fig. 20).
Fig. 20
Change the first value, 14, to 21. Change the second value, 70, to 50.
And change the third value, 30, to 50 as well. Afterwards, click on the
+ sign. A second chart will appear below our candlestick chartshowing gray hatched areas (see fig. 21). This is the RSI indicator.
Fig. 21
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But we want to do a few more things to this indicator before we move
on. Look towards the upper right-hand corner of your chart. There you
will see an icon that looks like a forward slash. This is the Draw
Trendline button (see fig. 22). Click on it, then scroll down the menuand click on Horizontal Trendline (see fig. 23).
Your cursor should now be
controlling a yellow horizontal line.
Drag this line down to the RSI chart
and click as close as you can to the
50.00 value (see fig. 24). Then click on
the line again and change the color of
that line to red. Also, we want to give
the line a bit of thickness so that its a
bit more visible on the chart. To do so,
Fig. 22 Fig. 23
Fig. 24
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click on the line again, and then scroll down the menu, and click on
Style. Then, click on Thick (see fig. 25).
Fig. 25
After modifying the horizontal line, proceed to save the current
profile.
The RSI indicator compares the magnitude of recent gains torecent losses in an attempt to determine overbought and oversold
conditions of the forex pair that you will be trading. When the gray
shaded area rises above 70.00, it is considered to be in an overbought
range. When the gray shaded area falls below 30.00, it is considered to
be in an oversold range. However, the way that I utilize this RSI
indicator is different than the conventional way that it is used. I will
cover this later when I begin to talk about how to use the indicators.
In the next chapter, we will set up another indicator the Slow
Stochastic Indicator.
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Chapter 7
Setting Up Indicators: Slow Stochastic
The next indicator to set up is the Slow Stochastic Indicator.
Similar to the RSI, it is typically used to identify overbought and
oversold conditions. A Stochastic value above 80 is considered
overbought and below 20 is considered oversold.
To create the Slow Stochastic indicator, click on Add Study, and
then click on Slow Stochastic. Just like the previous indicators, there
are some values that are preset, 14 and 3. For the first value, change
the 14 to 18. For the second value, leave it at 3. Then click on the +
sign. The Slow Stochastic Indicator is now visible below the RSI
Indicator (see fig. 26).
Fig. 26
Now, you will need to drop a few horizontal lines into this
indicator. Click on the Draw Trendline icon in the upper right-hand
corner of the chart, and select Horizontal Trendline. Drag the yellow
horizontal line down to the Slow Stochastic chart and click as close as
you can to the 50.00 mark (see fig. 27). It doesnt have to be exactly 50.
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Fig. 27
Next, we want to duplicate this
line and copy it to a few other levels. To
do so, click on the line that we just
dropped in at the 50.00 level, and thenclick on Duplicate (see fig. 28). Then
drop the new line in at, or near the
80.00 level. Repeat the process a few
more times and drop lines near the
20.00, 40.00 and 60.00 levels. Change
the color of the middle line (50.00 level)
to green. Also, Change the color of the
40.00 and 60.00 level lines to red (see fig. 29).
Fig. 29Now we have our stochastic indicator set up, so go ahead and
save the profile.
Fig. 28
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In the next chapter, I will show you how to determine critical
horizontal levels on the chart. These horizontal levels are called pivot
points.
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Chapter 8
Setting Up Pivot Points
In this chapter I will show you how to set up pivot points. Pivot
points are extremely important in technical analysis, in that they signify
the points where the overall trend in price, or rate changes. They can
be determined for any time frame, with the daily time frame being
most common. I like to set up the daily and 4-hour pivot points on my
charts.
To start, you will need to open your web browser. At the web
address bar, type in fx-charts.com (see fig. 30), and then hit Enter.
When you get to the page,
look towards the left side, and
youll find a heading that says
Traders Toolbox. If you scroll
down, you will see a bullet point
that says Pivot Point Calculator(see fig. 31). Go ahead and click on that.
You will come to a page with the
heading Forex Pivot Point Calculator.
Near the top you will see the words
High, Low, and Close, all followed
by boxes to type values in. Below these,
theres a Calculate button (fig. 32).
Fig. 30
Fig. 31
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However, before we can enter any
values into this page, we must go back to
our chart to find the previous weeks High,
Low and Close to help determine our pivotpoints.
On the timeframe pull-down menu,
on the trading platform, select 1 Hour (see fig. 33). On this 1 hour
chart, we will scroll back to locate the highest point, lowest point, and
the close of the previous 24-hour period, beginning and ending at 2100
GMT. Visithttp://www.timezoneconverter.com/cgi-bin/tzc.tzcto
convert times to your time zone.
If you can recall in
chapter three, I talked about
the components of the
candlestick. Each of those
candlesticks represents a
timeframe. So, scroll back or
expand the 1-Hour timeframe
chart until youre able to see
the previous 24-hour period.
Since Im in the central time
zone, my daily time period will
begin and end at 1600 hours, or 4 PM CDT (see fig. 34). Within this
window of time is where I will have to locate the High, Low, and
Close (see fig. 35-a, b & c). Please be aware that if you live in a time
zone that observes Daylight Saving Time, then you will have to adjust
the times accordingly, because the GMT time does not change.
Fig. 32
Fig. 33
http://www.timezoneconverter.com/cgi-bin/tzc.tzchttp://www.timezoneconverter.com/cgi-bin/tzc.tzchttp://www.timezoneconverter.com/cgi-bin/tzc.tzchttp://www.timezoneconverter.com/cgi-bin/tzc.tzc -
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Fig. 34
I found that the High for the day was
1.25636. The Low for the day was
1.21777. The Close for the day was
1.23449.
So now that I have these three values,
I can go back to the pivot point calculator
and plug in these numbers, and then click
on Calculate (see fig. 36).
Fig. 36
You will now see the results below.There are seven numbers that are
calculated. The first number is called the
Fig. 35-a
Fig. 35-b
Fig. 35-c
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Pivot Point. The next three are called Resistance Points, or Resistance
Levels. The other three are called Support Points, or Support Levels (fig.
37).
Fig. 37
Horizontal lines will now be placed on my platform at these seven
levels, beginning with the Pivot Point (PP), 1.2362. So, I now go back to
my chart and click on the Draw Trendline icon in the upper right-hand
corner of the chart, and click on Horizontal Trendline. Then I would
drag the line to as close as I can get to 1.2362 on the chart, and click
there. There will now be a yellow horizontal line in that location. I willchange the color to White, and change the style to Thick.
Next, I click on this line and
select Duplicate, and drag the
copied line to the first Resistance
Point/Level (R1), which is 1.25463.
Once I move as close as I can get to
1.25463, I will drop the line in, and
then change the color to Green. I will proceed to duplicate this R1
line to the locations of R2 (1.27479) and R3 (1.29322) (see Fig. 38).
Fig. 38
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Now, I have to do the same for the Support Points/Levels. Ill start
by copying the PP line to the first Support Point/Level (S1), which is
1.21604. When the line is dropped in place, change the color to
Purple; the style will already be set to Thick. Afterwards, I willcontinue to duplicate this S1 line to the locations of S2 (1.19761) and S3
(1.17745). When finished, I now have all of my daily pivot points in
place (see fig. 39). I will now save my profile to be sure that these lines
are locked in.
Fig. 39Then I would repeat the process to show the pivot points for the
4-Hour time frame. These pivot points will have to be updated more
frequently than the daily pivot points because they are determined by
the previous 4-hour block of market activity. The 4-Hour pivot point
blocks are as follows: 0900-1300 GMT, 1300-1700 GMT, 1700-2100
GMT, 2100-0100 GMT, 0100-0500 GMT, and 0500-0900 GMT (to
convert these times to your time zone, use the following website:
http://www.timezoneconverter.com/cgi-bin/tzc.tzc. To calculate these
pivot points, take the High, Low and Close of the previous 4-Hour
block and plug those values into the pivot point calculator. When thevalues are given, draw horizontal lines at the appropriate locations on
the chart. Use the same color scheme as the daily pivot points (green-
resistance lines, white pivot point, purple support lines), but change the
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line type to dotted (see fig. 40). After these points are in place, save
the profile.
Fig. 40
As mentioned earlier in this chapter, pivot points can be a good
indicator to use to identify where a trend change may occur. They act
as floors and ceilings for the chart. Later on, I will talk about support
and resistance in more detail. But basically youll find that the price or
rate of a forex pair will bounce between two pivot point lines. When a
line is broken, it will either retrace back, or it will make a push to get tothe next line. These pivot points will be very instrumental, along with
our other technical indicators, to determine the proper times to be on
the look-out for trend changes.
Another website that you can utilize to get the pivot points is
www.actionforex.com. When you get to the site, hover over the
Markets button at the top of the page, and then select Pivot Points(see fig. 41).
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Fig. 41
When the next page pops up, you will see the heading, Standard
Pivot Points. Underneath this heading, there is a series of hyperlinks to
different pivot point types. Below this area, there is a chart with the tab
Hourly highlighted. Click on the Daily tab. The daily pivot points for
EUR/USD pair are listed on the top line. For the 4-Hour pivot points,
click on the tab that says 4 Hours (see fig. 42).
Fig. 42
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There may be a slight difference in the values of each of the
levels, but they are still in very close proximity and are valid for the
purpose in which we use them. So, if you want to find the high, low and
close and insert them into the calculator onwww.fx-charts.com, thatsfine. If you want to use the chart onwww.actionforex.com, thats fine
as well. Or, if you want to learn how to calculate the pivot points on
your own, you can check out the following site:
http://www.investopedia.com/ask/answers/forex/forex-pivot-
points.asp
Another website that you can use to determine pivot points ishttp://www.pivotpointcalculator.com/. With this site, a fourth support
and resistance line is given.
Now that you have learned how to set up your trading platform
by creating the key indicators that we will be using, I will show you in
the next chapter how to set up your User Preferences.
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Chapter 9
Setting Up Trading User Preferences
Since you should have your indicators set up, now its time to
show you how to set up your User Preferences. To start, click on
Tools and then scroll down and click on User Preferences (see fig.
43). The User Preferences box will pop up with a variety of tabs. The
first tab is the Chart tab. There will already be boxes checked for the
first three items. This will remain as is. Click on the next two boxes to
turn the Auto-Extend Trendlines Left/Right on. Everything else on this
tab is okay as is (see fig. 44).
Fig. 43 Fig. 44
Click on the next tab, Quotes. Since I trade primarily with the
EUR/USD pair, what I like to do is move that pair to the top of the
Quote List. To do this, look at the right side, underneath the term
Quote List. Scroll down until you find the pair, EUR/USD. Click on that
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pair, and then using the Move Up arrow towards the bottom of the
box, click on that arrow until the EUR/USD pair is moved all the way to
the top of the list (see fig. 45). Click on the Apply button.
Now, if you look atthe left side of your
platform, youll see two
tabsQuote List and
Quote Panel. The Quote
List tab should be
highlighted. You will now
see that the EUR/USD pair
is at the top of the list (seefig. 46). If you click on the
Quote Panel tab, you will
also see that the EUR/USD
pair is in the top left-hand
corner of that list as well
(see fig. 47). By the way, I
use the Quote Panel for my
platform. Ill talk more about this later on when I talk about thedifferent ways to buy and sell. Sometimes I trade the USD/JPY pair also.
So if you want to, you can find that pair in the Quote List and move it
up, just beneath the EUR/USD pair, and then click on Apply.
Fig. 46 Fig. 47
Fig. 45
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The next tab is the Trading tab. (see fig. 48). Here, we will insert
values and create parameters that will be preset in our trading orders.
The pull-down menu at the top, for Market, will remain as Default.
We want all of thechanges that will be made
below to be valid for all
trading pairs. Therefore, it
will remain. For Default
Order Size, click on the
arrow for the pull-down
menu, and select %.
Then, for the box on theleft, type 76.4. The
order size on every trade
that I make is 76.4% of
the total margin that is
available. Margin is
borrowed money. Using
a lot of margin can be
extremely risky becauseboth gains and losses are
amplified. While the potential for greater profit exists, great losses can
occur as well. However, one of my main goals is to show you how to
limit any losses that may occur, and teach you how to always be in
situations to make gains the great majority of the time. We will talk
about this later.
The next three lines can remain as is. Jump down to the DefaultStop Loss line. The current setting for this in the pull-down menu is %
Price. Change this to % Balance. Then, change the value to the left
to 2. For Default Take Profit, change this to % Balance as well.
Fig. 48
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Then change the value to 5. Depending on your daily goal, which we
will discuss later, this value may change.
For Default Trailing Stop, change the pull-down menu to PIPS.
Set the value to 15. Default Limit Order Duration can remain as is.
For the items at the bottom of the Trading tab, place checks in
the boxes of the following:
Enable Stop Loss By Default
Enable Take Profit By Default
Enable Trailing Stop By Default
Remove the checkmark from Confirm One-Click Trades. Click onApply afterwards.
The next tab,
Locale, is for you to
identify what time zone
you are located. This is
important because the
time on the charts will be
according to what you
set it as here. So, for
instance, I currently live
in the Central Time Zone.
Therefore, for the pull-
down menu next to
Time Zone, I selected
GMT-6. Then, to theright, I selected
America/Chicago (see
fig. 49). Whatever is
appropriate for you,
make those selections. Then click on Apply.
Fig. 49
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For the Sounds tab, here you can upload any compatible sound
files to your account to assign to various events/actions that will take
place. For example, you can have different sounds assigned for the
price hitting your Take Profit and Stop Loss lines so that if you were
in another room, you will know when one of the actions takes place.
For the last tab, Misc, everything can remain as is. So, now, you
can click on Apply, then Save.
In the next chapter, I will show you how to adjust the leverage
setting for your account.
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Chapter 10
Adjusting Leverage
In this chapter, I will show you how to adjust your leverage
setting. Leverage is when the investor only funds part of the amount
traded. It is a ratio of the amount used in a transaction to the required
deposit.
To start, click on the Account pull-down menu, and then click on
Change Leverage (see fig. 50). A browser window will pop up,
prompting you for your username, password and account number (see
fig. 51).
Fig. 50 Fig. 51
If you dont remember your account number written down
somewhere, or saved with your confirmation email when you first set
up the practice account, you can go back to your platform and look at
the top left-hand corner of that window. There, you will see a six-digit
number that follows your username and the active window (Primary)(see fig. 52). Now you can go back to the account leverage ticket and
type in your username, password, and the six-digit account number.
Afterwards, change the leverage to 50:1 (see fig. 53).
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Fig. 52 Fig. 53
Next, click on Submit. A confirmation page will pop up. Click on
the Close button.
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Chapter 11
Creating Multiple Time Chart Windows
Before creating any new windows, the first thing that I want to do
is turn on a dashed horizontal line that moves with the current rates on
our chart, as well as the indicators below (RSI and Slow Stochastic). To
start, change the time frame on the base chart to 5 min. Next, pan
over to the upper right-hand corner of your chart and click on the
Chart Options icon. The icon is just to the right of the Sell button.
After clicking on it, select Show Average Price (see fig. 54).
Fig. 54
You should now see horizontal dashed lines on your price chart,
RSI indicator and Slow Stochastic indicator (see fig. 55). On the price
chart, the dashed line follows the movement of the average price for
that particular time frame/candlestick. For the RSI indicator, the dashedline delineates the current relative strength for that particular pair. For
the Stochastic indicator, the dashed line shows the real stochastic
value. The wavy lines on the stochastic charts are lagging lines.
Therefore, they will always trail the movement of this dashed line.
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Fig. 55
To create a new window, pan over to the upper right-hand corner
once again. This time, find the overlapping boxes/windows icon,
furthest to the right. When you hover over that icon, it will read Opengraph in new window (see fig. 56). Click on the icon. You will see a
duplicate of the base chart
pop up in a new window.
Stretch the sides of the
window to make it half the
size of the main chart. For
this new window, change
the time frame to 1 Hour(see fig. 57). Next, go ahead
and go to Tools, and click
on Save Current Profile.Fig. 56
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Fig. 57
If you would like to, you can create another window so that you
will have three windows, showing three different time frames. Just click
on the overlapping boxes icon on either of the charts, and a new
window will pop up. You can resize this window, along with the first
duplicated window, in order to be able to fit both of the new windowscomfortably within the platform, without overlapping the account
summary on the left side. You can change this middle window, or
second duplicate to 15 min, and leave the base chart window as the
5 min time frame (see fig. 58).
Usually, I use the 1M chart to determine the entry points for
trades. However, instead of creating another timeframe chart, I change
the 1H chart to the 1M timeframe. The reason why I change the 1Hchart is because the trend for this chart is slow in changing. So I already
have an idea of whats happening with the 1H chart indicators.
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Fig. 58
I will talk about how to use all of these windows in conjunction
with one another later. But in the next chapter, I will share information
about the proper times to trade.
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Chapter 12
Time of Day/ Volume Factor
There are certain times of the day that are more conducive for
successful forex trading than others. When trading, it is helpful to trade
at the same time as many others, who may in fact, be using indicators
and systems that are similar to yours. Because many traders use some
type of lagging indicator to dictate when to open and close trades, a
signal to trade in one way or the other will be followed by a strong rush
of traders hopping on board and riding the trend-train to their
destination!
The best time to trade, in my opinion, is between the hours of6AM and 12 PM CST. The reason why this is such a critical time to trade,
especially the early hours of this range, is because of the following
reasons:
1. Its near the opening bell of the New York markets
2. Its near the closing bell of the European markets
3. Its the evening in Asia and Australia.
The hours around the opening bell (8:30 AM CST) is usually where
you will be able to find the most market activity. Therefore, I
typically trade between the hours of 7-11 AM CST. This is a peak time
for trading because the volume is the greatest during this period.
Volume is a significant gauge in technical analysis as it is used to
determine the value of a market move. If the markets have made a
strong price move, either up or down, the apparent force of that
move depends on the volume for that time frame. The higher thevolume during that price move, the more important the move.
So, not only are there people in North America that are trading at
this time, but there are people in Europe, Asia and Australia that are
trading as well. While it is 6 AM CST/9 AM EST in New York, it is only
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8 PM CST/9 PM EST in Japan. So Asian and Australian traders are also
influencing the direction the forex rates go.
The next best time to trade, in my opinion, is between the hours
of 1 AM and 3 AM CST. At this time, the Asian and AustralianMarkets are preparing to close. Meanwhile, the European markets
are opening. So, once again, there is an overlapping of trading
markets that will affect currency rates.
The third best time to trade is between the hours of 6 PM and 9
PM CST. The Asian and Australian markets open at 6 PM, and of
course, traders in Europe, as well as America are still awake and may
look to make quick gains as well.
There are a few things that you must be aware of when trading.
NEVER enter a trade five minutes prior to financial news
releases/ economic reports
Before news releases/reports, there will be a lot of speculation. Some
will hedge their bets that the price/rate will go up. Some will think that
the price/rate will go down. This period of uncertainty creates what is
called volatility. Volatility refers to the amount of indecision or risk
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about the size of changes in a security's value. A higher volatility means
that a pairs (i.e., EUR/USD) worth can probably be spread out over a
larger range of values. Meaning, the price of the pair can fluctuate
considerably over a short time period in either direction. A lowervolatility means that a pair's value does not rise and fall severely, but
instead, changes in value at a stable pace over a period of time.
WAIT five to ten minutes after financial/economic news releases
Usually, the market drastically reacts to news releases. The price/rate
will take off into one direction or the other. It will then move strongly in
that direction for a minute or two. Then the movement will slow down,and then begin to retrace (reversal in the movement of a pair's price,
countering the prevailing trend). A lot of times, youll find that the
price/rate will actually retrace all the way back to where the price was
before the news report. At this point, sometimes it will continue in the
retraced direction, or it may rebound and go back into the direction
that it took after the news release. Sometimes, it will move side-ways
for a while after returning back to its previous location. But just as aword of wisdom, simply wait for the extreme volatility and noise of the
pair to calm down before thinking about entering a trade.
NEVER trade while the Fed Chairman is speaking EVER!!!
Something that Ive noticed is that whenever the Fed Chairman speaks,
there is usually a lot of volatility in the markets. Market psychology
begins to affect the stability of the rate when traders try to decipher
every word that comes from the mouth of the chairman! In this
instance, just sit back, relax, listen to what is being said, but do not
react to it. Again, just wait five to ten minutes before you resume
trading.
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A website that I utilize to let me know when important
financial/economic news reports will be released is
www.forexfactory.com. I will cover this site in the next chapter and will
talk about its value to you, the forex trader.
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Chapter 13
Check Forex Factory Day Calendar
In this chapter, I will show you how to utilize the tools on Forex
Factorys website. Open your web browser, and go to
http://www.forexfactory.com. When you arrive at the site, the first
thing that youll see is a calendar of events, or reports that will be
released for the current day (see Fig. 59).
Fig. 59
Each line shows a financial report that will be released at a giventime of the day, which will directly impact a certain currency.
The probable impact of the report is
delineated by a flag color system
underneath the Impact heading. A red
flag means potential high impact; an orange
flag means medium impact; a yellow flag
means low impact. I usually filter out theyellow flags. To do so, you can click on the
green link to the right that says Filter On
(blue when not activated), and then remove
the checkmark from the box next to theFig. 60
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yellow flag (see fig. 60).
If you click on the blue folder to the right underneath the Detail
Heading (see fig. 61), more information will be given in regards to that
particular economic report, along with results from previous releasedates (see fig. 62).
Fig. 61
Fig. 62
The specifications (Specs) of a particular report will show the
Source (authors of the report), what the report measures, the usual
effects of that data, how frequently the report is given, the next release
date, general notes about the report, why traders should care about
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the report, and other names for the report. Under the History
heading of the details, you will see the results of that same report in
the past.
To the right of the Details icon, you will see the forecastednumbers, the previous reports numbers, and the actual numbers that
are released on that day (see fig. 63). In the Actual column, when the
released data exceeds the forecast, the font color will be green. If the
actual numbers are below the forecasted number, the text will be red.
Fig. 63
If you click on the icon furthest to the right, underneath the
Chart header, a window will pop up which shows the results of that
report over the last few years.
If you want to see the next days schedule of economic reports,
click on the hyperlink just in the upper right-hand corner that says
Tomorrow. Also, if you want to see the schedule for the remainder ofthe week, you can click on the hyperlink This Week (see fig. 64).
Fig. 64
At the bottom of the page, you will find a bunch of discussion
threads and forums that have been created for different subject matter
regarding forex trading. I highly recommend checking some of these
threads out. There are people that have been trading forex for much
longer than I have that share good advice and tips, as well as post
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images of charts, demonstrating their trading strategies. So definitely
visit some of those forums. You dont even have to say anything. Just
browse through some of them.
To view the next weeksactivities, theres a calendar in the top
left-hand corner of the page. You can
click on the arrow to the left of that
week to show the entire weeks worth
of reports that will come out. Or, you
can click on single days just to see that
days reports (see fig. 65). You can
also look at future months by clickingon the month and arrow in the upper
left-hand corner of the calendar. To
look at dates in the next year, click on
the year as well.
This site is extremely useful to let you know when the reports are
coming out so that you can stay away from trading during those times.
If you can recall from the previous chapter, I talked about times whenyou shouldnt be trading at all 5-10 minutes prior to a news release
and 5-10 minutes after a news release. So, definitely utilize this tool for
the purpose of knowing when not to trade. But also, take time to
browse the site and check out some of the information that is shared in
the forums as well.
There is one last thing to be mindful of make sure that you
change the time that is located at the top of the page to reflect your
time zone. If you create an account, you can save the changes. If not,
you may have to update the time with each visit to the site.
In the next chapter, I will show you how to determine your goal
for the day.
Fig. 65
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Chapter 14
Determining Goal For The Day
In this chapter, I will show you how to utilize the Excel Projection
Chart that I created to help you determine your goal for each day that
you trade. If you have not downloaded the Projection Chart, please do
so at this time. If, or when you have downloaded the file, proceed to
open it.
If you look at the bottom of the Excel window, you will see a
series of tabs (see fig. 66). Each tab represents different amounts of
increases per day. The tab furthest to the left is the .5% Increases tab.
Then as you go from left to right, youll see tabs for daily gains of 1%,2%, 3%, 4%, 5%, 7.5% and 10%.
For the sake of learning how to use the chart, we will start off by
using the 3% Increases tab. So click on that tab right now.
If you had a chance to see the video that was on the web site, or
on a social networking site, you may remember me talking about the
possibility of turning an initial investment of $100 into over $160K in 12
to 16 months. It seems kind of outlandish, but this is actually a very true
statement.
Look at the top of the
chart, and under column C,
youll see Starting Money.
Below this, youll see the first
line, Day 1, with a starting
amount of $100 (see fig. 67).
This starting amount can be
Fig. 66
Fig. 67
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changed to whatever amount that you start with. Just click on that cell
and then type in the correct amount, and hit Enter. The rest of the
chart will update. But for now, leave it as $100. I just want to show you
that if you started with only $100 on Day 1 of trading, and you make 3%
gains daily for an entire year (which is approximately 250 trading days
per year), you will end up with more than $160K for the year. If you
take a look at fig. 68, youll see that at consistent gains of 3% daily, on
the 250th
day of trading, your starting amount will be $157,205.94. You
will finish the day with
$161,922.12 (see fig 68). I just wanted to show this to you to let you
know that I wasnt making that up! Its just the power of compound
interest/numbers!
Scroll back to the top. Now, you may have noticed an odd colorscheme with the cyan, magenta and white rows. There is a method to
my madness! This just visually helps me recognize weeks of trading, and
breaks the chart down. The magenta lines are always Fridays. The cyan
lines are the beginning of a 20 day trading cycle (remember, there are
only 20+/- trading days in a month. This isnt a monthly chart because
the months have different amounts of trading days in them. So the
easiest thing for me to do was create divisions of weeks.
If you take a look at column B, this is the Date column. So, on
the day that you trade, type the date into the appropriate cell in this
column. For example, lets say that you begin trading on a Thursday. Do
not start with the first cell on column B. But rather, start with the cell
just above the magenta line, which indicates a Friday (see fig. 69).
Fig. 68
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Fig. 69
The next column to the right is the Starting Money column. The
next column is the Approx. Trade Amount column. However, you
dont have to worry about adjusting this, or even typing it into your
order ticket when triggering a trade (which we will get into later). This
is just a ballpark estimate of what the order size may be. When we
adjusted our user preferences, we placed a value in the Market Order
Size box so that when we do trade, the order size will be preset
accordingly.
The next two columns show what the individual trade goals wouldbe for two trades. Each column shows a 1.5% gain. Seeking a small
amount such as 3%, you can set your Take Profit for 3%, or set it for
1.5% and make a net total of two positive trades to equal 3%. Most
likely, if you are trading for 1.5%, you may end up with a little more
than 3% when youre finished, due to compounding numbers.
The next column shows the Target Projection for the day. For
instance, starting with $100, a 3% gain for the day will allow you tofinish the day with $103. This is what the Target Projection will be for
that day.
In the next column, you will type in your Actual Finish amount.
So, lets assume that you actually finish with $105.34. When you hit
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Enter, in the column to the right, the Balance Difference column, it
will show the difference between your Actual Finish amount and your
Starting Amount. The next column to the right will show the actual
percentage change for the day. Therefore, if you gained $5.34 for the
day, since you started with $100, your Actual % of Increase will be
5.34% (see fig. 70).
Fig. 70
Something that I like to do, which also helps me to visually be able
to see what Ive done over a span of days is shade in the Actual % of
Increase cell. If it has been a positive trading day, and I have either hit
my goal or exceeded it, I would shade the cell in with a green color (see
figs. 71 & 72).
Fig. 71 Fig. 72
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Now, lets assume that on the next day, Friday, I didnt meet my
daily goal of 3%, but I did end up with a positive gain. I would then
shade the Actual % of Increase cell with a lighter shade of green (see
fig. 73).
Fig. 73
The column to the right, Weekly Gains, tallies the amount that
was gained throughout that week. The next column, Monthly Gains
(which are not always monthly gains), tallies the amount gained over a
20-trading day period. And the last column, Interest/Added Funds,
allows you to plug in dollar amounts that you either add to, or
withdraw from your forex account. When a number is plugged in, andyou hit Enter, the following rows will be updated according to the new
value.
Everything that Ive just covered is similar to all of the other tabs
that you may use. The only thing that changes between all of them is
the percentage of gains.
You may have noticed that the tabs are different colors (green,
yellow and orange). The green tabs, I consider extremely easy to
achieve your personal goal. The yellow tabs may take a little longer to
achieve your goal, based on various trading factors such as volume and
time of the day. The orange tabs, a little longer. But honestly, with all of
these tabs, as long as you abide by the trading rules/parameters that I
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will share with you in the next few chapters, you should have no
problem achieving your goals, no matter what the percentage may be
for the day. If you can catch a trend right when its beginning, especially
in the morning, it may be very easy to hit 7.5% in just one trade. And
even 10% with one trade is doable at times! There have been times
when Ive gained between 16%-18% with just one trade!
In terms of a strategy that I use, I personally try to hit the 7.5%
mark daily. The way that I do this is by trading in the morning between
7 and 10 AM CST to get a small gain of 3%. Then in the evening time, Ill
try to get an even smaller gain, like 2%. So that leaves me with 2.5% left
to gain. So if Im up late at night, Ill gain the remaining amount after 1
AM. However, sometimes, when I know theres going to be a major run,Ill gain all 7.5% in the morning. Or, Ill gain half of it in the morning, and
the other half in the evening. So, this is an example of how you really
dont have to stay in front of the computer forever to trade. All it takes
is a few minutes at the right time to get in, and get out with small gains.
And even if I dont meet my goal of 7.5% everyday, Im happy with a
gain, period. Im happy to end the day with more than I started the day
with. Thats all that matters small, consistent gains for an extended
period of time!
Take some time to plug in dollar amounts on each tab to help you
identify a goal that you think youll be able to achieve. See what you
can make after half of a year (125 days), one year, two years and five
years (some of the larger percentage gains dont go past two years, so
you may need to copy and paste to enlarge the chart). Whether its .5%
per day, 1% per day, 4% per day, decide which tab will work best for
you and your own personal goals, AND STICK WITH THAT TAB! Do notget into the habit of switching tabs/goals. This can be detrimental to
your overall efforts of making your goal. If you make more than your
goal, fine. If you make less than your goal, fine. Just stick with your
goal!
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Okay! Now its finally time to get into the good stuff! I will begin
to show you how to use the various indicators in the following
chapters!
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Chapter 15
Using the SMA 20 Indicator
I will now start going over the various indicators. The first
indicator that I will talk about is the SMA 20 indicator. Next, I will talk
about how each of the indicators are used in conjunction with the
others.
If you can recall when we set up the SMA 20 indicator, it was the
red line that was on our main chart (see fig. 74). It is a simple moving
average line, a lagging indicator that illustrates the average price of the
previous twenty candlesticks. For our purpose, this line divides our
chart into two different sections; an upper section, and a lower section
(see fig. 75). The upper section is what I call the Buy Only section. The
lower section is the Sell Only section (see fig. 76).
Fig. 74
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For instance, when the price or rate breaks above the red SMA 20
line, this is where you would enter into a Buy trade (see fig. 77).
Then, when the price or rate falls below the red SMA 20 line, you would
exit that Buy trade (see fig. 78).
Fig. 77 Fig. 78
Lets assume that you were able to enter a Buy order at the
entry point of Fig. 77, and exit that Buy order at the exit point of Fig.78, using the SMA 20 line only. If this were the case, then you would
close this trade out with a gain of approximately 16 PIPs (a PIP is the
smallest unit by which a forex quote can change. For example, if
Fig. 75 Fig. 76
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EUR/USD is now quoted at 1.4767 and it moves up 2 pips, it will be
quoted at 1.4769) (see fig. 79).
Fig. 79
Now, how about entering a Sell trade after the price dropped
below the red SMA 20 line? You would then close the Sell order when
the price crosses back above the red SMA 20 line. If this were the case,
you would have closed the Sell order with a gain of 8 PIPs (see fig.
80).
Fig. 80
Considering the gain of the previous Buy order of 16 PIPs, andcombining it with the gain of the Sell order of 8 PIPs, and the principle
of compound numbers/interest, we will have close to a 7% gain (see
Fig. 81).
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Fig. 81
Something that we must also keep in mind is where our Take
Profit (TP) line is located. For instance, if our TP is set for 5%, then it
would be placed nearly 19 PIPs away from our entry point. That being
said, if our first trade would have hit the TP line, then we would have
finished that first trade with a gain of 19 PIPs (see fig. 82).
Fig. 82
So, what happens when we sell? How does the TP line come into
play? Well, in this case, the price/rate never hits the TP line (see fig.
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83). Therefore, I would have ended up with the same amount of PIPs as
I did previously.
Fig. 83
To summarize, the SMA 20 line divides our chart into two
sections; the Buy section and the Sell section. If you keep in mind
that you are to only enter Buy orders when the price is above the
SMA 20 line, and only enter Sell orders when the price is below the
SMA 20 line, it will help you in regards to validating the other indicators
that you will use.
In the next chapter, I will show you how to use the EMA indicators
in conjunction with the SMA 20 line.
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Chapter 16
Using the EMA 5 & 12 Indicators
In the previous chapter I talked about how the SMA 20 line
divides our chart into two halves; a Buy only half, and a Sell only
half. Now I will talk about how the EMA lines are used in conjunction
with the SMA line.
The first line that we created was the EMA 5 line, which is the
yellow line (see fig. 84). The second line that we created was the EMA
12 line, which is the blue line (see fig. 85).
Fig. 84 Fig. 85
The key to the usage of the EMA lines is identifying where the two
lines cross. For example, at the point where the blue EMA 12 line
crosses beneath the yellow EMA 5 line, this signifies a Buy entry point
(see fig. 86).
Fig. 86
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Adversely, when the blue EMA 12 line crosses above the yellow
EMA 5 line, this signifies a Sell entry point (see fig. 87).
Fig. 87Something that we
want to see beforeentering into a Buy
trade is if in fact there is a
cross of the blue EMA 12
line beneath the yellow
EMA 5 line, we want to
make sure that the
current rate at the cross
location is above the red
SMA 20 line (see fig. 88).
If this is not the case,
then we do not enter a
trade here. Remember,
so far, we are using both indicators to positively confirm each other.
Therefore, if both dont agree, then we do not enter a Buy trade.
To determine our Buy exit point, we look for the blue EMA 12line to cross above the yellow EMA 5 line, while the rate crosses below
the red SMA 20 line (see fig. 89).
Fig. 88
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Fig. 89
So, if we were to enter and exit trades as shown in the
illustrations above, while utilizing the EMA lines and SMA line on the 1-
Hour chart, we would have closed out with a gain of approximately 192
PIPs (see fig. 90).
A gain of 192 PIPS is roughly a 50.5% gain. This would be a super
huge gain, for only close to 72 hours of trading. Granted, this would be
the case if we were trading longer term. This example illustrates how
great of an opportunity there is to make a lot of money with trading
Fig. 90
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forex. As long as we use our indicators to allow us to enter and exit
trades properly, we will be successful.
So, to summarize the usage of the EMAs see the bullet points
below:
FOR BUY ENTRY POINT: BBlluuee EEMMAA 1122 lliinnee crosses beneath
YYeellllooww EEMMAA 55 lliinnee, while rate of pair is above RReedd SSMMAA 2200 lliinnee.
CLOSINGBUYORDER:BBlluuee EEMMAA 1122 lliinnee crosses above YYeellllooww
EEMMAA 55 lliinnee, while rate of pair is below RReedd SSMMAA 2200 lliinnee.
FOR SELL ENTRY POINT: BBlluuee EEMMAA 1122 lliinnee crosses above YYeellllooww
EEMMAA 55 lliinnee, while rate of pair is below RReedd SSMMAA 2200 lliinnee.
CLOSINGSELL ORDER: BBlluuee EEMMAA 1122 lliinnee crosses beneathYYeellllooww EEMMAA 55 lliinnee, while rate of pair is above RReedd SSMMAA 2200 lliinnee.
In the next chapter, I will talk about the RSI Indicator, and how it
is used with the EMAs and the SMA.
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Chapter 17
Using the RSI Indicator
In the two previous chapters, I talked about how to use the SMA
and EMA indicators. Now, I will talk about how to use the RSI indicator,
along with the previous two indicators.
The first thing to be mindful of in regards to the RSI indicator is
that it is an indicator that determines when the rate of a pair is
overbought or oversold. However, the way that I use it, and the way
that it is set up graphically, is a bit different than normal. Just as the
SMA 20 line divides the chart into two halves (a Buy half and a Sell
half) (see fig. 91), the 50.00 red line on our RSI indicator divides thatindicator into two halves as well; a Buy half and a Sell half (see fig.
92).
Fig. 91
Fig. 92On the RSI indicator, when the gray shaded area crosses above
the 50.00 red line, this signifies a Buy entry point. To close this trade
out, the Buy exit point would be at the location where the gray
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shaded area crosses beneath the
50.00 red line (see fig. 93). Take a
look at illustration 93. Notice how
near the left edge of the green
vertical shaded area, the gray
shaded area crossing above the red
50.00 line on the RSI indicator
coincides with the crossing of the
blue EMA line underneath the
yellow EMA line, as well as the rate
being above the red SMA line. The
indicators are verifying each other.
Utilizing all three of the indicators in
this instance gives us a pretty
dependable sign that an up-trend
has just begun, and that it would be
the perfect time to enter into a
Buy trade. To exit the trade, all
three indicators assist us in making
that decision as well. Looking at the right edge of the green shadedarea, we see that the gray shaded area of the RSI indicator has briefly
crossed below the red 50.00 line. Meanwhile, the blue EMA line has
crossed above the yellow EMA line as well. Also, the rate dropped
beneath the red SMA line. But as you can see, this was a very short-
lived closing of that Buy order because the gray shaded area popped
above the red 50.00 line again. In addition, the blue EMA line crossed
beneath the yellow EMA line, and the rate jumped back above the red
SMA line as well. Therefore, we would enter another Buy order at thislocation.
Fig. 93
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Just the opposite
occurs when we are
looking for a Sell entry
point. When the gray
shaded area crosses
beneath the red 50.00
line on the RSI Indicator,
this signifies a Sell entry
point (see fig. 94). This
entry point is verified by
the blue EMA line
crossing above the yellow
EMA line, and also the
rate falling below the red
SMA line. Our Sell exit
point is located where the gray shaded area of the RSI indicator crosses
back above the red 50.00 line. The exit point is confirmed by the other
indicators (the blue EMA line crossing beneath the yellow EMA line, and
the rate crossing above the red SMA line).
So just as a re-cap of the information given regarding the RSI indicator,see the following bullet points:
When the gray shaded area is above the red 50.00 line, BUY!
When the gray shaded area is below the red 50.00 line, SELL! (see
fig. 95)
Fig. 95
Fig. 94
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Chapter 18
Using the Slow Stochastic Indicator
The final indicator that I want to cover is the Slow Stochastic
Indicator. I have shown you how to use the SMA 20 line, EMA 5 & 12
lines, and the RSI indicator, individually, as well as collectively. Now I
will show you how to use the Slow Stochastic Indicator in conjunction
with the previous indicators to assist you in identifying the appropriate
time to enter trades.
The stochastic indicator is a tool that is used to identify the
overbought and oversold conditions of a pairs rate. It consists of two
lagging lines that fluctuate in a vertical range between the values of 0and 100. The two lines that let us know when the rate is overbought or
oversold are the two yellow lines (80.00 and 20.00) (see fig. 97).
Fig. 97
When the slow stochastic value (which is determined by the
moving white dashed line) is above the 80.00 line, the rate of the pair is
nearing an overbought threshold. When the value falls beneath the
20.00 line, the rate of the pair is nearing an oversold threshold (see fig.
98).
Fig. 98
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So, before we even think about triggering a Buy order, we want
to make sure that a few things happen, in regards to our slow
stochastic indicator. First and foremost, when the rate crosses above
the red SMA 20 line, the blue EMA 12 line crosses beneath the yellow
EMA 5 line, and the gray shaded area of the RSI crosses above the red
50.00 line, we want to make sure that the current slow stochastic value
at that time falls within a Buy range. This range is between the valuesof 0 to 50.00 (anywhere below the green line) (see fig. 99). Or, at the
very least, make sure that the slow stochastic value is below the red
60.00 line; the line of last resort! (see fig. 100).
Fig. 100
Take a look at fig. 101. I have drawn a
blue vertical line on the chart that cuts
through the candlestick chart, RSI indicator
and slow stochastic indicator. The white
arrow is pointing to the Buy entry point.Here, you see that the rate has crossed
above the SMA line, and the EMA lines
have crossed. On the RSI indicator, the
gray shaded area has crossed above the
red 50.00 line. On the slow stochastic
Fig. 99
Fig. 101
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indicator, the white dot denotes the current location of the slow
stochastic value, which was below the red 60.00 line. All of the
indicators are telling me that this would be a good time to enter a
Buy trade. Thus, the beautiful bright green checkmark that you see!
What about Sell orders? Well, the exact opposite has to take
place. We have to make sure that the current slow stochastic value falls
within a Sell range. This range is between the values of 50.00 to
100.00 (anywhere above the green line) (see fig. 102). Likewise, at the
very least, we must make sure that the slow stochastic value is above
the red 40.00 line, our second line of last resort! (see fig. 103).
Fig. 102
Fig. 103
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Take a look at fig. 104. A blue vertical line
is drawn on the chart, cutting through the
candlestick chart, RSI indicator and slow
stochastic indicator. The white arrow is
pointing to the Sell entry point. Here,
you see that the rate has crossed below
the SMA line, and the EMA lines have
crossed. On the RSI indicator, the gray
shaded area has crossed below the red
50.00 line. On the slow stochastic
indicator, the white dot denotes the
current location of the slow stochastic value, which was above the red
40.00 line. All of the indicators are telling me that this would be a good
time to enter a Sell trade.
What you will inevitably notice is that the majority of your trade
entry points will have a slow stochastic value that falls within the range
of 40.00 and 60.00. I like to call this range TheSweet Spot (see fig.
105).
Fig. 105
Fig. 104
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So, this is how I use the slow stochastic indicator in conjunction
with the other indicators. It prevents me from entering into Buy
trades when the rate is close to being overbought. It also prevents me
from entering into Sell trades when the rate is close to being
oversold. I always want to enter trades at the precise time, when
momentum is first building for the new trend/direction. I dont want to
enter trades when theyre half-baked, or near burnout/exhaustion.
Therefore, I wait until I know theres enough gas in the tank of the
slow stochastic indicator, which will help me get to my final destination,
my Take Profit line! I hope that makes sense!
Okay. In the next chapter, Im going to discuss something that is
absolutely critical for all traders to understand. It is the concept ofSupport and Resistance, the staple of trading with all known markets.
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Chapter 19
Drawing & Using Support & Resistance Lines
A foundational principle of any type of trading that you may do is
the concept of Support and Resistance. Support is a level at which a
rate has had difficulty falling below. It is also thought of as the level at
which many traders consider entering into a Buy trade. Resistance is
a level at which a rate has had difficulty breaking above. It is also
thought of as the level at which many traders consider entering into a
Sell trade (see fig. 106).
Fig. 106
I like to start off by drawing support and resistance lines on the 1
Hour (1H) chart first. Maximize the 1H chart and locate the previous
two high points and previous two low points on the chart. The two high
points are resistance points #1 and #2. The two low points are support
points #1 and #2. Click on the Draw Trendline icon in the upper right
hand corner of the chart, and then select Trendline (see fig. 107).
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Fig. 107
Draw a trendline that connects the two high points, resistance
points #1 and #2 (see fig. 108). Then repeat the process to draw a
trendline through the two low points, support points #1 and #2 (see fig.
109).
Fig. 108 Fig. 109
By connecting those four points, the angled support and
resistance lines are created (see fig. 110). These two lines will act as
two barriers that withhold the movement of the pairs rate. The rate
will oscillate between the two lines until one of the lines is finally
broken.
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Some traders that use support and resistance lines as a primary
tool for their trading will place Limit Orders near either the support or
resistance line in anticipation of a retrace/rebound into the opposite
direction. For instance, take a look at fig. 111.
This image shows a Limit Buy Order box (I will discuss Market
and Limit Orders in chapter 21). It is placed a few PIPs above the
support line, in anticipation of the current rate falling towards that line,
and then retracing back to the resistance line. However, there is a
chance that the price/rate could break through that support line, and
then continue to the next line of support.
Fig. 110
Fig. 111
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I use Support and Resistance lines in tandem with the other
indicators that I covered in the previous chapters. I draw my trendlines
on the chart, and then use the indicators to determine the proper time
to enter a trade.
Take a look at fig. 112. Youll
see that the support and
resistance lines are drawn in on
the chart (I usually change the
color of them to cyan). But before
entering a trade, there is
something that I must do check
the indicators. In the illustration,
youll notice that 1) the blue and
yellow EMAs have crossed and
the current rate is below the red
SMA line, 2) the RSI value is under
50.00, and 3) the slow stochasticvalue is within our sweet spot.
Therefore, all of the indicators give the okay for entering into a Sell
trade (order location identified in illustration). Now, in regards to the
Take Profit (TP) line, there are two locations where we may encounter
support. The first location is the white Pivot Point line. The second
location is the cyan Support line. In the instance where a known barrier
may be (either support or resistance), I will more often than not movemy TP line about 3-4 PIPs above the next line of support (in the case of
a resistance line, 3-4 PIPS below). The reason for doing this is because I
do not want to jeopardize my gains if a retrace occurs at that next line
of support (the white Pivot Point). If no Pivot Point would have been in
Fig. 112
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this location, then I would have moved my TP line 3-4 PIPs above the
Support line. The trade will be closed out when either the rate hits my
TP line, hits the adjusted Stop Loss line, or when the RSI crosses back
above 50.00 on the shorter timeframe chart.
You would also want to draw Support and Resistance lines on the
15M chart, as well as any other charts that have been created. Just
repeat the process. Keep in mind that these lines will have to be drawn
in every day before you begin to trade. It will only take a minute to
draw them on all of the charts.
So, what happens when the price/rate breaks through either thesupport or resistance line? Well, the first thing that has to be
determined is if it was a true break or not, and whether it has enough
momentum/strength to continue. When the price/rate breaks through
the support line, it is called a Breakdown. When the price/rate breaks
through the resistance line, it is called a Breakout. Usually, you will
hardly see a breakdown during a downtrend. Meaning, if the general
direction of the price/rate is moving down, the support line will hardly
ever be broken or penetrated for an extended period of time. And just
the opposite happens during an uptrend. You will be hard-pressed to
find a breakout during an uptrend. The reason for this is because the
stochastic value at these lines is so overbought or oversold that running
any further is typically out of the question.
A sign of a potential break of either a support or resistance line iswhen the price/rate has trouble reaching the next line in the oscillating
period (see fig. 113 & 114). The retrace from the previous line becomes
so weak that it barely makes it half-way to the next line, before the
stochastic value has bottomed out, or hit the ceiling.
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Fig. 113
Fig. 114
Something that you may notice from the illustrations above is that
after a breakout or breakdown, the previous high or low points act as
lines of resistance or support. For instance, in Fig. 113, you see how
after the breakout, the price/rate will move to the next