________________________________________________________

The Real Forex Basics

At base, foreign exchange trading, or often referred to as forex trading, is the same as any other

kind of trading. The goal is always the same:

SELL SOMETHING FOR MORE THAN YOU PAID FOR IT.

That's all. It works the same way whether you're trading in General Motors stock, or selling used

comic books on eBay. The big difference with foreign exchange trading is that instead of

trading in things, you're trading in money.

It's trading in its purest form. Foreign exchange trading cuts out everything extraneous and

focuses on a single thing: Money. We already track all other transactions using money, so why

not eliminate the middleman and just trade money for money.

All you need to do is follow this simple three-step process:

1) Make Money

2) Take Money

3) Repeat

That's the lather, rinse, repeat of foreign exchange trading.

Step one, make money. You make money when the value of what you bought goes up from

when you bought it. If you're a gambler, think of it as your table winnings. It's how far you're

ahead when you're still in the game.

Step two, take money. For many people, this is the hardest one. Going back to our gambling

example, these are the winnings you take away from the table. In order to succeed at foreign

exchange trading you have to know when to get your money back out. It doesn't matter if

you doubled your money when it peaked; you still lose if you sell it for less than you paid for it.

Step three, repeat. Anything that can be done once can be done more than once. That's how the

Universe works. You can't make enough money to live on off a single forex trade. Not unless

you've already got enough money that you've got people to work the markets for you. You're

going to have to work at it, and that means getting it right often enough to stay in the black.

Once you've mastered those three steps, you're well on your way to being a successful forex

trader. This is where everyone starts.

Before we go any further, there's one more thing we need to mention:

The Pip

Since we're trading in money, we keep score in pips. A pip is the quantum unit of money. It's

the last decimal place, the smallest amount that's tracked for value. It's also something you're

going to get to know and love, because it's where you make your money: in the pips.

The Other Forex Basics

Or, What Are Those Forex Traders Actually Doing?

The simplest explanation that's not so simple it leaves everything out is that forex traders are

betting that one currency will increase in value against another. Someone may see that the

euro is rising against the dollar and sell their dollars for Euros.

Once the euro peaks, they sell the Euros back for dollars and end up with more dollars than they

started with.

Sounds good doesn't it? The trick is in the timing, knowing when to get in and when to get out.

It's like that old country song; you have to "know when to walk away."

Anyway, enough about old music; let's get to the start of the matter: The market.

The Forex Market

There's more money in the forex market than any other market in the world.

An average day sees about 1.5 trillion dollars in forex trading. That's $1,500,000,000,000

changing hands every day. It's a big pool with plenty of room to play.

Part of this is because the forex market isn't like the New York Stock Exchange (NYSE) or any

other stock market. They're geographically limited and only execute trades made during certain

hours in a specific place.

The name "Forex Market" gives the impression that currency trading is handled the same way.

It isn't.

The forex market exists at any time or place one currency is traded for another. It's not a single

monolithic market, but the sum total of all the markets where people trade currency. Needless to

say it's much bigger than either stocks or futures: two or three times the size at least.

Because it's made up of all the major markets, and any minor ones that trade currency, linked

electronically, you can follow the sun from market to market and not stop trading from when the

first market opens on Sunday until the last one closes on Friday. If you do, we want the deal to

supply your coffee.

Spot Market

It's also what's known as a spot market. In a spot market, trades are made immediately, there's

no waiting period. Think of it as if you're buying something "on the spot." When you issue an

order to buy, you're saying how much you'll pay right now for immediate delivery. This is as

opposed to a futures market where you're entering into an agreement to buy something later for

an agreed-upon price.

How the Forex Market Works

The forex market works on the same mechanism as exchange rates; this shouldn't be surprising

because the forex market is what drives exchange rates.

One important thing to remember is that exchange rates don't exist in a vacuum. It's always

one currency quoted against another.

This is because there is no absolute value in forex markets. There's no fixed yardstick that

everything else is measured against. Instead currencies are traded in pairs, and a currency that's

rising against one currency may be dropping against another.

This means that each forex trade you do is actually working with two currencies, not one. You

don't just buy dollars; you buy dollars with another currency, such as Euros. Since your bank

account probably isn't in Euros this means you're simultaneously buying dollars and selling

Euros. If you sell dollars, you'd be selling dollars and buying another currency, such as Euros.

Every forex trade works this way; Buy one, sell another. We'll go into the details later, but for

right now, just remember this simple statement:

Buy one, sell another.

What Do They Trade On the Forex Market?

There are almost two hundred different currencies in use today, and every one of them can be

traded on the forex market. Sounds overwhelming, doesn't it? Don't worry, it's not that bad. The

vast majority of currencies are only traded locally, mostly because people in every country need

foreign exchange. The vast majority of currency trading only involves eight currencies, and

they're the ones we're going to focus on.

Name Nickname Symbol

United States Dollar Buck USD

Euro Fiber EUR

Japanese Yen Yen JPY

British Pound Cable GBP

Swiss Franc Swissy CHF

Canadian Dollar Loonie CAD

Australian Dollar Aussie AUD

New Zealand Dollar Kiwi NZD

These eight are the major forex currencies, and the only ones that we need concern ourselves

with. Anything outside these are either for locals or more experienced forex traders. In fact, we

don't even have to deal with all the eight majors.

Most foreign exchange trading and what the vast majority of you should be starting with deals

with the Top Five: USD, EUR, JPY, GBP, CHF.

Since the U.S. dollar is by far the biggest forex currency on the market, we can break it down

into four pairs:

EUR/USD

USD/JPY

GBP/USD

USD/CHF

Over ninety percent of the time you'll be dealing with one of those four pairs. So if you want to

get ahead, learn them.

Why Should You Trade the Forex Market?

In the previous pages we've gone over the basics of the forex market, and now that we've

sparked your interest let's go over some of the reasons why you should choose the forex market

rather than the stock market or futures markets. Every market has its place, and some people do

very well in the other markets, but here are some of the reasons we think the forex market is the

best option for someone looking to break into currency trading.

1) Size: The forex market is the largest of the markets, and that very size gives it a number of

advantages. For one thing, no one investor or group can control the forex market. It's too big. Its

size, or rather liquidity, also means that you don't have to worry about trade limits. You can trade

however much you want at any time, rather than only being able to do a partial trade because you

hold too much to dump at once without it affecting the forex market.

2) Hours: The forex market's up when you are. Unlike other markets you can trade on your

schedule not someone else's. If you see something in the news you can jump on it now - rather

than having to wait for the market to open. This gives you much more control of your forex

trading, and the ability to pursue an opening when it occurs, and not having to rely on specific

market times.

3) Low Cost: Forex brokers typically don't charge commissions; instead they work off the

"spread." They make their money off the difference between the buying and selling price of

currencies.

You're not paying a brokerage fee; you're not paying a commission on top of the trade. It's all

seamless, brokers make their money the same way you do, from the trades.

4) Knowing What You're Going to Pay: Other markets don't execute as quickly and can only

guarantee that the last trade went at that price. Forex traders make the trade they want at the rate

they want when they want, and that's not true in the futures or equities markets.

5) You Won't Lose More Than You Have: Going back to our gambler, you're playing with the

money you brought. The way the system works protects you by limiting your possible losses to

what's in your account. Once your net goes to zero, it closes everything. Sure it's no fun to have

an empty account, but it's much better than what can happen in the futures market. Remember

the movie "Trading Places?" It never would have happened on the forex market. You can't lose

your shirt.

6) Wide Margins: Forex trading gives you plenty of margin to work a trade. You can leverage a

small investment into a big trade. There are two sides to this though. Yes you get all the profit,

but all the losses from the part of the money that you put up. Big wins, big risks.

7) Bulls and Bears Together: Every forex trade is double, that means you're always both

buying and selling. If one currency is falling, another is rising.

8) Start Small and Trade Up: In the old days, forex trading was only for the biggest of the big.

You needed fifty million dollars to get in the door. Nowadays things are easier, you can start

with as little as a few hundred dollars, and work your way up to bigger accounts and bigger

deals. You can open what's called a "mini" account for as little as a few hundred or a "standard"

account for a few thousand dollars. It's not much of a barrier to entry.

9) Learn before You Earn: Any kind of trading comes with risk. All those profits you're going

to make have to come from somewhere; and most of the time they're going to come from

someone else's losses. It's a fact of life that those who know the least lose the most, and new

forex traders are usually the ones that know the least. Most forex brokers will let you start with a

demo account. Demo accounts have all the features of real ones except the profits (or the losses).

They're a risk-free way to learn what you're doing before you risk your money.

There are more reasons to trade the forex market, but those are some of the most important. The

thing to remember is that forex is not like any other market.

In many ways it's a free market with room for everyone from the smallest investor with a

thousand dollars to risk, to the largest investor who's looking to invest tens of millions.

It's a fast-moving open market where none of the players have absolute control. It's also largely

unregulated. That's because it's not just one market, it's all the markets. Even the big central

banks can only influence things, they don't have total control. It's Adam Smith's "invisible hand,"

where everyone works for their own profit. It's not a single hand though, more like millions of

"invisible fingers" working in concert.

This is Capitalism with everything stripped away but the capital: The last free market; the Forex

Market.

What Every Forex Trader Needs

That's the real question: what do you need to have to get into the forex market and how much is

it going to cost?

If you have a way to check email or surf the web, then you probably already have most if not all

of what you need to be a forex trader and get started in the forex market.

1) A computer

2) Internet Access

Somewhere to sit helps too, but if you want to trade standing up we won't stop you.

Once you've got those things, the next thing you need is this forex training course, which you're

already reading, and a trading account.

You don't need inventory; you don't need a list of sales contacts. You don't need employees

either, though if you do well enough we recommend you hire an accountant.

You're going to need money too-- at least enough to open your account, but we're going to

recommend that you don't start with any.

This is where you say, "What? Trade without money, are you crazy?" We're not. What we are is

canny. The best way to learn is with a demo account.

That will let you figure out what you're doing before risking any money.

Meet the Cash Family

Earlier we mentioned the Cash family, and now that you know a little about the forex market it's

time to add some people to the mix.

Examples always work better when there are characters involved.

So let's start with a little back-story, shall we? The Cash's are a typical American family, not

related to Johnny, and over the last few months they've been looking for ways to make a little

money. They liked the idea of forex, and just to make it interesting they've decided to have a

family competition to see who understands the market the best.

Here they are:

Bill Cash: Bill's about forty, losing his hair and works in an office doing component orders for a

major computer company.

He wants to get out of the office so he can go climbing in the southwest.

He's looking for the big score, so he'll wait for just the perfect moment and then try to make a

killing.

A game theorist would call him a "romantic," willing to risk everything on a single trade. He's

not reckless, he plans and is willing to wait, but it's the big score that keeps him coming.

Dolly Cash: Where Bill's a romantic in games theory terms, Dolly's more classical. She works at

a call center, in quality assurance, and spends her time making sure people do things correctly.

She's not in it for the big score. Her goal is to put money away for their future. She wants to help

the kids get through college and have plenty of money for retirement.

Her style is more cautious. Rather than make one big trade, she thinks it's better to make a dozen

small trades and keep making steady profits.

That's where she's focused. Learn the market, keep your eye on the trends and always make

money. Why wait for one big score if you let dozens of smaller wins get away?

Jimmy Cash: Jimmy's eighteen and thinks he knows everything. He's sure he's the best trader in

the family and if you give him a chance he'll not only prove it, but rub it in everyone's face.

That's if you listen to Jimmy.

The problem is Jimmy doesn't have a system. Jimmy doesn't have a plan, or much patience.

Jimmy sees what's happening right now and jumps on it. Ten minutes later he might change his

mind and jump on something else.

He's convinced that he's the smartest in the family, if not the world, and so he just follows his

instincts.

Jenny Cash: People always think Jenny's the youngest, but she's actually a year older than

Jimmy. She's one of those quiet people that no one really notices. Jenny follows her mother's

lead, but without her decisiveness. Where Dolly knows that sometimes you have to take a risk,

Jenny doesn't. She won't make a trade unless it's a sure thing.

She doesn't lose often, but she doesn't win often either. Jenny doesn't actually do much trading.

She spends her time watching the market, looking for trends and trying to be absolutely sure

before making a trade. The problem is that she waits so long that most of the time she never does

make the trade.

There they are; your four fellow students on the road to wealth. Each of them views things

slightly differently, and each will make different mistakes, and different profits.

Now that we've met them, our next step is to look at brokerage houses, and see what to look for,

and what to look out for. Their plan is to find a broker, set up an account, and then learn the real

ins and outs of trading with a demo account.

CHAPTER 2

Forex Market Regulations

This one's important to Dolly, because she's used to holding people to standards in her job in

quality assurance. T

he forex market is for the most part, unregulated. Only when a broker has gone off the deep end

will steps be taken. It's always best to go with a registered broker, because that way you know

what you're getting into. If a broker is registered you can look at their disciplinary history, as

well as their financials.

There's no point dealing with a broker with no money, and if they aren't registered you have to

wonder why not. Since you're playing with money it's just safer to stick to a registered broker.

Finding a Reputable Broker

Dolly hops on the internet and makes a few calls, and discovers that in the United States most

reputable brokers are registered as Futures Commission Merchants (FCMs) with the

Commodity Futures Trading Commission (CFTC) as well as with the NFA (National

Futures Association); two organizations which were founded to protect the public from market

manipulation, fraud and other abuses.

The NFA can be contacted at 1 (800)621-3570 and keep records of both a broker's registration

status (with the NFA and the CFTC) as well as their disciplinary history. For those who prefer

the internet, it can also be found online at www.nfa.futures.org/basicnet/.

Despite Jimmy's protests, Dolly insists on a firm with a clean record and solid financial history.

He thinks regulation's less important than good deals, but gets overruled.

Forex Trading Online

The whole family is interested in forex trading online, since everyone plans to trade by

computer. Part of the attraction of forex trading is the ability to trade at all hours from home, and

the best way to do that is online.

Trading Platforms

On-line trading platforms have two main aspects, the platform and the interface. The platform

is how your computer connects to the market, while the interface is how the user connects to the

market.

Let's look at the platform first.

Trading Platform Overview

There are two main kinds of trading platforms. One kind runs on your computer, the other runs

through the broker's web page, usually in a Java. Each has advantages and disadvantages.

Local Trading Platform Programs

Pros: Speed: They're usually faster than web-based programs.

Cons: Need to be installed: You have to install it on every computer you're going to be trading

from.

Platform Specific: If your broker's program is Windows-specific, any Mac or Linux users are

going to be out of luck.

Web-Based Programs:

Pros: Portability: You can log in to your account from any computer that has an internet

connection. If Jimmy stays at a friend's for the weekend he can check his trades from their

computer.

Security: Web-based programs are more secure, everything requires a log-in to access and

the program itself stays behind the broker's firewall. It's also safe from any viruses that might

be on a user's computer. Cons: Speed: Usually web based platforms run slower than local

ones. But mostly this will be due to your internet connection speed.

Which one you want to use is up to you. Most of the Cash family went with the web-based

option, though Jimmy downloaded the client for his own computer.

He wants to be able to respond as fast as possible.

The Interface

Regardless of the nature of the platform, whichever broker you go with has to provide a good

interface for their software package. The interface is what you're going to be looking at every

time you research, plan, or make a trade. You can't do without it.

A good interface has to give you real-time information on data in two main categories in order to

do any good: Your account and market rates.

On the account side you need a summary of your account with the following information clearly

visible:

* Your current balance

* What your balance would be if your open trades closed now.

* Your available margin

* Your locked in margin.

If you don't have that information, you don't know where you stand, and without that knowledge

you won't be able to trade effectively.

The market rate side is equally important. The software has to be able to give you a continuous

feed of the current rates for the currency you're trading. It's the other half of the puzzle. If you

don't know what you have or what you're trading there's no way you can make money.

It should also provide real-time graphing and charting capability so you can see the trends. Spot

values won't give you enough data for a successful trade.

Like the Cashes, you should take a look at several brokers and their software platforms before

you commit to a single broker.

While we're on the subject of software and online trading, there's one more thing we cannot

stress enough. The software is only as good as your connection. If you don't have a fast internet

connection no software platform, whether installed locally or used on the web is going to do you

any good.

You Can't Trade on Dial-Up

A fast computer helps, but a fast connection is a requirement. It's a fast moving market and the

best way to lose money is to always be behind the curve. If you don't have current information

your trades are going to be based on guesses, not facts and that's a sure way to fail.

YOU CANNOT TRADE ON DIAL-UP!

I know that sounded repetitive, but it's vitally important. Trading on dial-up is like sprinting in

lead overshoes. You're not going to win any races that way.

Basic Broker Deals

How good is their help desk?

Jenny wants to know because she's going to be spending a lot of time on the phone asking

questions. She's always felt better when she knows she has support.

A good forex broker has a good help-desk; they have twenty-four hour phone and or chat

support because the market's open at all hours.

Help desks can be tricky, especially if they're out-sourced overseas. Some people in foreign

countries may speak perfectly good English, but not have the background to understand the

questions you're trying to ask.

Jenny grabbed the list of brokers, and gave all of their help desks a call, just to see what kind of

service she was going to get. Even with the possibility that they'd treat her better before she

joined than after, it's a really good way to get a feel for how good their customer service is.

It's possible you may get the sales staff, who are often better natured than the support staff, but

even so if you get bad service here, it's a sign to go with another broker.

Once you've found a forex broker that meets those standards it's time to take a good look at the

contract. As always, read the fine print. Obsess over it if necessary. The major points are

important, but if anything's going to reach out and bite you, it's going to be in the fine print.

Still, there are things you have to check in the big print too before you sign on the dotted line.

These are the basic features of every agreement that you have to know before you can make an

informed decision.

Basics of the Deal:

How much will it cost?

How many pips does the broker take on each trade? In other words, what's the difference

between the buying and selling rate for a given currency pair. The closer those rates are together,

the quicker you're going to go into profit, because the sell price has to rise above your buy price

before you can make money. So the first few pips go to the broker. The lower the spread, the

easier it is for you to make money.

What can I trade?

Not all forex brokers offer trades in all currency pairs, and you don't necessarily need one that

does. At a minimum a good broker should deal with the major currencies, or at least the top

seven of them-- which is all but the Kiwi. Just like rates, this is something you need to know

before you sign the agreement.

How much do I have to trade?

Different brokers have different minimum trades. Some may let you trade "micro" lots of 1,000

units, some "mini" lots of 10,000, and some may hold out for full standard lots of 100,000 units.

Others may let you trade "odd lots" which as the name implies are made up of fractions of the

amounts mentioned above.

How much leverage will you give me?

Leverage is related to margin, which we'll go into more detail on later. In simplest terms this is

finding out how much, or how little, of the amount you're trading do you have to put up front.

The more leverage you've got, the more profit you can make, and the smaller the proportionate

loss it will take to wipe you out.

When can I trade?

You should already know this from when they offer customer support, but it's an important

question to answer. Most brokers are open 24 hours a day 6 days a week so you can trade during

the hours of the major markets: New York, London and Tokyo. If a broker doesn't offer

continuous trading from 5:00PM EST on Sunday through 4:00PM EST on Friday you're going to

lose out to those traders whose brokers do.

What about rollover and interest?

When you hold currency from one day to another, there's interest involved. It's all based on the

currency with the higher interest rate in the pair. If you sell the currency with the higher rate, you

pay rollover, if you're buying it, you earn interest. If you're using a lot of leverage a broker may

not pay interest, but they'll always charge rollover if it accrues.

Those are the questions the Cash family asked, and you should ask the same ones too.

Summary; Things to Look For in a Forex Broker

Before we move on to opening an account, we'll just go over a few things that you should look

for in a forex broker. Depending on what you're personally looking for you may not be as

concerned with some features as others, but all of these are very important.

1) The Ability to Start Small:

A good forex broker will let you start with a micro account, especially when you're just starting

out. Micro accounts can start as low as $250, but $1,000 is better as you don't want to run out of

money too fast. Unless you have spent quality time practicing your skills on a demo account,

you're going to lose money when you start, everyone does, so don't start with a broker that insists

you open an account with more money than you can really afford to lose.

2) The Ability to Start Making Money Quickly:

Go for a forex broker with low spreads. You want your buy and sell prices as close together as

possible. This is important because the lower the spread the sooner you stop paying the broker

and start paying yourself. Anyone who's in this seriously is in to pay themselves, not the broker.

Small fluctuations are more common than large ones, so you want to be able to take advantage of

them.

3) The Ability to Leverage Your Money:

Leverage is what will make or lose most of your money. It's hard to make much money when

you're only trading $1000 or less, but much easier if you can use the money in your account as

leverage and only put up enough to cover your potential losses. Unless you already have a lot of

money you can't make a lot in foreign exchange without leverage.

4) The Ability to See What's Happening:

A good forex broker will supply charting and analysis software that will let you see what's

happening as it happens. Trading without real-time charting is like driving while blindfolded.

You can't make the right decisions if you don't have information. It's also a benefit if you can

make trades right from the chart, without having to open another tab or window.

5) The Ability to Trade Instantly Without Another Quote:

This one's vital. A good forex broker will not show you one quote on the chart, and then re-quote

when you go to make the trade. If you're watching in real time you should be able to trade in

real-time, not at an unspecified delay with an associated change in price. If your broker allows

for "slippage" in the price you won't be able to take advantage of small changes in the market.

You'll have to wait for the big ones to make sure it doesn't drop back into paying the broker and

not yourself before the trade executes.

There's a term that's become popular with Web Designers and other creators that applies here:

WYSIWYG: What You See Is What You Get.

The basic idea is that you want any changes to a document or environment to be reflected

instantly on screen. You want to be able to trade at the price you see, without having it change on

you as discussed before.

Opening a Forex Trading Account

The Cash family can't trade without an account and neither can you.

That's why the next step is going online and opening a Forex Trading Account, which is a

simple three-step process. Once you've picked your broker (or maybe more than one to start) this

is what you do.

1) Pick An Account:

Most forex brokers offer multiple account types, and we recommend starting with the smallest

unless you have lots of experience. That means start with a demo, and then move to a "mini."

The object is to spend as little money as you can get away with when you're just learning. None

is about right.

Do read the fine print. We've said it before and we'll say it again and again and again.

READ THE FINE PRINT!

It's not like a software license where you just click through it so the program will install. This is

important and you need to read it. Always read the fine print.

There are a couple of other points you need pay attention to as well.

Managed Forex Trading Account

* Don't select a "managed account."

That's one where someone else trades for you, which defeats the whole point of taking this

course. You'll need more money to start, and you'll pay a portion of the profits made to the

managers doing the trading.

Forex Spot Market

* Don't select a "futures" account, sometimes called a "forwards" account. You want to trade on

the Forex Spot Market so you need a Spot account.

Everyone except Jimmy started with a demo account. He jumped straight in with a mini and

would have gone for a standard but he couldn't afford it.

2) Get Registered:

Opening a forex trading account is just like opening a bank account, there's paperwork

involved. The good news is that you can do it from home, but there's still going to be plenty to

fill out. Each broker has their own forms, but the process is always going to be basically the

same.

You download the forms, usually in Adobe Acrobat's PDF format, fill them out, sign them and

either fax or mail them to your broker. Once they've been received and processed at the other

end, it's time for you to move on to the next step, and activate the account. Some brokers will let

you do most of the paperwork on-line, filling out the forms on a web page.

3) Go Active:

Once they've processed the paperwork they'll email you instructions and probably a link with

instructions to activate your account. Once that's done you should get a final email with

instructions on how to log in and fund your account. Different brokers may send the login and

password with either the first or second email, but you won't be fully active until the second.

Once that's done, you're ready to go: Log in, change your password (always change your

password from whatever initial one someone provides) put some money in your account, and

you're ready to trade.

STOP, Before You Take the Plunge...

Put the credit card down. Don't fund your account and start trading real dollars until you've

finished the course. It's fine to play with a demo account right from the start, but when you're

dealing with real money wait until you've got a bit better idea of what you're doing.

Jimmy Cash may want to start trading right away, but he's going to lose his shirt doing so.

Everyone who is ill prepared loses money when they start and the less you know the more

money you lose.

Completing this entire course isn't going to magically prevent you from losing money. If we

promised you that we'd be lying and your best option would be to walk away now. However it

will do the following:

1) Limit the amount you lose.

If you know what you're doing you'll lose less money, and you'll be able to make money to offset

your losses. Successful traders still lose money; they just make more money than they lose.

That's the mark of success.

2) Understand why you lose money.

There's nothing worse than watching your money disappear and not having a clue why it's

happening. That will cost you your hair faster than almost anything else we can imagine. It's not

fun at all.

If you understand that losing money's part of the process, see why that trade went south, and

don't lose too much those losses become much easier to take. It's just part of the cost of doing

business.

FINISH THE ENTIRE COURSE!

We told Jimmy that but he didn't listen. With any luck you're smarter than Jimmy. Once you've

read the course you'll have a much better idea of what you're seeing when you're watching those

charts. More information means more knowledge means more money.

It really is that simple.

You'll be able to accept the losses and move on, ideally all the way to the bank where you can

deposit your gains.

Now that we've gone over finding a broker and selecting an account, we can move on to the good

stuff: Trading.

In the next section we'll go over the basics of trading so you can see what you're doing with your

shiny new demo account and how you're going to be making more money than you lose.

CHAPTER 3

Forex Currency Basics

We've mentioned this before, but like many things it bears repeating. At base it all comes down

to buy low and sell high. That's it. Buy low, sell high, lather rinse repeat. At the heart, the idea

behind forex trading is that the forex currency you buy today is going to be worth more when

you sell it tomorrow. Everything is based around the idea that there is no absolute value and

exchange rates are going to continue to fluctuate.

Let's look at a couple of examples...

1) Dolly buys Pounds:.

Using her demo account, Dolly buys 10,000 Pounds at an exchange rate of 1.85, which costs

$18,500. A week later, the Pound has risen to 1.97 and she sells the same 10,000 GBP for

$19,700, making a profit of $1,200.

2) Jimmy buys Euros:

Using a real account, Jimmy buys 10,000 Euros at an exchange rate of 1.41, which costs him

$14,100. Three days later, Jimmy decides the real money is in yen and decides to liquidate his

Euro holdings. Unfortunately the Euro is now selling for $1.38 so he only receives 13,800 and

marks up a loss of $300 on his first trade.

In both cases, all they did was convert one currency to another, then back again. This is the

simplest kind of forex trading, and the kind we recommend you start with. Jimmy could have

gone straight from Euros to yen without the intermediate step, but for the purposes of the

illustration we decided to have him go back to USD first. .

Here are a couple of tables for those who find things easier to follow that way:

Table 1, Dolly GBP/USD.

Trade GBP USD

Buy 10,000 GBP at 1.85 for $18,500 +10,000 (-18,500)

Sell 10,000 GBP at 1.97 for $19,700 -10,000 +19,700

Change in value 0 +1,200

Table 2, Jimmy EUR/USD.

Trade EUR USD

Buy 10,000 EUR at 1.41 for $14,100 +10,000 (-14,100)

Sell 10,000 EUR at 1.38 for $13,800 -10,000 +13,800

Change in value 0 -300

In both these forex trades you'll see the currencies written as pairs because as previously

discussed, all forex trades consist of buying one currency and simultaneously selling another. So

when Dolly is buying GBP/USD she's selling USD from her account to buy GBP, and then when

she closes the trade she'll be selling GBP to buy USD back for her account.

Base vs. Quote

In any trade the "Base" is the currency with a value of one. It's the one where the amount doesn't

change over the duration of the trade. In both Dolly's and Jimmy's cases, the value of the other

currency remained stable, only the dollar's value changed. He opened and closed with 10,000

Euros just as she opened and closed with 10,000 Pounds. It doesn't matter if the base currency is

the one rising or falling in value relative to the quote currency. All that matters is that you

understand the base is always one, in comparison to the other currency in the pair.

Its' value is your anchor point for the trade.

Quote Currency: The "Quote" is the currency that fluctuates over the course of the trade. It's the one you're using

to determine the value of the other, the one you're "quoting" the value in. This is the side you

make or lose your money on.

Just as you don't want the amount of your holdings in the base currency to change, you want the

amount of your holdings in the quote currency to change.

You see these descriptions of base and quote currencies every time you exchange money for a

trip across the border to Canada or Mexico. You go to the kiosk and they say they'll give you this

much Canadian money for every US Dollar. That's selling USD/CAD when you get to the

border, and then buying USD/CAD when you change your dollars back to come home. If you've

done that you've already had your entry to forex trading.

USD was the base, and CAD was the counter. It's not hard. Any currency exchange transaction is

a simple ratio, comparing the quote currency to the base to get the exchange rate.

One interesting thing about the forex market is that you can make money whether a forex

currency is rising or falling. For any given currency pair, USD/CAD for example, you issue a

buy if you think the USD is going up, and issue a sell if you think the USD is going to go down.

The Long and Short of IT

We're going to share a secret. Forex traders are like everyone else, they like to use different

words for things than the rest of us. They're no different than sailors that way, except that they

have less jargon and it's not as colorful.

Forex traders don't buy, they go long; they don't sell, they go short. Truth is, it doesn't really

matter what they call it, it's all the same thing.

Going Long:

When you go long, you're buying one forex currency in the expectation it's going to go up in

value, and you'll be able to sell it back for more of the other forex currency than you paid for it.

Going Short:

When you go short, you're selling that forex currency in the expectation it's going to go down in

value, and so you can buy it back for less than it was worth and pocket the difference.

Bid/Ask Trading Spread

We can't discuss buying and selling without going into details of the trading spread. The

trading spread, better known as the bid/ask spread is the difference between what you pay for a

forex currency and what you can get for it. You buy for the "ask" price, and you sell for the "bid"

price.

It sounds simple enough, but it hides a very important fact. Every time you make a trade you

start at a loss. It works like this.

THE BID IS ALWAYS LOWER THAN THE ASK

That means everyone you deal with is always going to sell a currency for more than they would

pay for it. That difference is where the brokers make their money and no one in the forex market

works for free. Sometimes you can find a smaller trading spread than others, but you're always

going to find a spread.

Let's take a look at the kind of information you'd typically see on a trading platform.

If you take a look at the screen above you can see the forex currency pair listed at the top, so you

can clearly see what you're dealing with. In this case it's EUR/USD with the Euro as the base

currency and the US Dollar as the quote currency.

In the example you can see that right now you could buy Euros for $1.5736, and sell them for

$1.5733 with a three point trading spread. There are handy buy and sell buttons right there below

the price just in case you do want to make the trade right now. They really do want to help you

make money, or at least make trades so they can make money.

Let's say that Jimmy decides to buy Euros so he hits the buy button. He's got a good platform and

the trade executes immediately. If he changes his mind and wants to sell before the rate changes,

he's going to lose money, approximately $3 USD if he traded a single lot of 10,000 Euros. The

only one who would profit on that trade is his broker.

He can't even break even unless the Euro rises 3 pips (that’s the last digit on the right of the

exchange rate, the smallest that can be measured) so that the bid matches the ask price he bought

at.

You have to watch the trading spread.

Fundamental Analysis: A Basic Understanding

Earlier we mentioned the idea of buying and selling based on our predictions of whether a given

forex currency was going to go up or down against another.

One way to make those predictions is to consider what's happening between those two countries.

If one country is doing better than another, its currency might rise, or if it has a disaster its

currency is likely to fall.

Studying these factors is called fundamental analysis, and something we'll get into later in the

course. For the moment let's just look at a couple of basic fundamental analysis examples so we

can get an idea of how you can make money both buying and selling.

Examples of Basic Fundamental Analysis:

USD/CAD

Let's use the US dollar as the base currency, and the Canadian dollar as the quote currency.

If there's a big oil or gold find up in the Canadian north that looks to bring a lot of money into

the country, you would go short on the USD/CAD or execute order, based on the premise the

Canadian dollar is going to strengthen against the US Dollar (the chart would go down).

On the other hand, if there's a rally in the US economy because more companies are turning to

domestic sources for products and services rather than outsourcing to Canada you would issue a

BUY USD/CAD order on the premise that the Canadian dollar is going to weaken against the US

Dollar.

EUR/USD This time we'll take the EUR as the base currency and work from there.

If there's a slump in Europe, and the governments are spending money to bail out faltering car

makers, which is bad for the Euro, you would execute a SELL EUR/USD order. You're selling

EUR on the presumption it's going to weaken against the USD.

If on the other hand, the US sub-prime mortgage bubble pops, causing several major banks to

take huge losses you would issue a BUY EUR/USD order based on the prediction the US Dollar

will weaken against the euro.

The thing that's most important to remember from the above examples is that a good forex trader

can make money on a forex trade regardless of whether the base or the quote currency goes up or

down. It doesn't matter because, as long as one currency in the pair is changing value, either up

or down, at a quicker pace than the other, we can make money.

Basics of Trading Margins

This is where we learn the basics of trading with more money than you have; trading margins.

Not everyone has enough money to trade in lots of 10,000. Margin trading is what lets you trade

larger lots with smaller amounts of money.

Essentially what you're doing is borrowing the money to make the trade. You're trading with

someone else's money, and it's what lets you use small amounts to fund large enough forex trades

to make a decent profit. Margin trading lets people use as little as $250 to open a position of

$100,000. It's what lets the smaller players make their money.

When you're trading on the margin, you're going to be trading in "Lots" which were mentioned

briefly earlier in the course. For now all you really need to know about a lot is that it's the

smallest amount of margin required to place forex currency trade.

It's like going to the grocery store and buying hotdogs. You don't buy them one at a time, you

buy packages of eight. Eggs are the same way; you buy them by the dozen, not individually. It's

not worth anyone's time to trade currency below certain minimum amount. With pips on most

currencies being at the fourth decimal point (one-hundredth of a cent for the USD) you can't

make enough money on small trades. So in forex, you typically trade lots of $10,000 or $100,000

depending on your account or broker.

Leverage; Using It To Make More Money...

Dolly's going to make another trade; only this time she's using the margin and a much bigger lot.

This time she likes the Euro, and thinks it's going to rise against the dollar so she's going to BUY

EUR/USD.

Her broker lets her trade on a 1% margin, so at the current rate for every $1,345 she puts up, she

is leveraging $100,000.

Dolly buys EUR 100,000 (1 standard lot) at an exchange rate of 1.3450 and spends $134,500 to

do it, which with a 1% margin means she's risking $1,345 of her own money on the trade. She

takes a sip of her coffee, the screen refreshes, and she sees the bid has now risen to 1.3500 and

decides to sell. That nets $135,000 which means she profited $500 and the $1345 she used for

leverage has turned into $1845.

Let's put it into a table for another look.

Trade EUR USD Margin

Buy Euros at $1.3450 +100,000 (-$134,000) $1,345

Sell Euros at $1.3500 -100,000 +$135,000 $1,845

Net Change 0 $500 .

As you can see, while the profit was relatively small compared to the size of the lot, $100,000, it

was over a third of the amount of trading margin she used to enter the trade. As we've said

before, this is where you really make your money.

Leverage Is Based on Borrowing

Now we can take a bit better look at leverage. Archimedes said that if you gave him a long

enough lever and a place to stand he could move the world, and the forex market is a perfect

example of that principle. It's exactly the same as trading margins, just looked at from the other

direction.

A 1% margin is the same as 100:1 leverage. Margin is based on how much money you're putting

up, and leverage on how much you're borrowing. Think of it this way, margin is looking at the

short end of the stick, leverage at the long end.

However they describe it, and whatever amount they describe, all forex brokers have fairly

similar policies and expectations for how margin works. In most cases they'll start with a

minimum deposit, and once you've put that in your account the broker will open your account for

trading. They will also let you know how much trading margin will be necessary for leverage.

The 1% margin used in the example is fairly common, but different brokers will have different

policies when it comes to margins. Some may allow less, some may require more. Sometimes a

forex broker may have different trading margin rates over the weekend than during the week.

Weekends are more volatile, so a broker may require 2% margin over the weekend. Again this is

something you will have to know before you start trading. If your forex broker has a different

trading margin on the weekend than the week you might get a surprise margin call.

Understanding Margins Calls

Think of a margin call as a kinder gentler form of foreclosure. While your broker may be kind

enough to lend you money to trade with, they aren't going to be kind enough to let you lose their

money. Any money you lose is going to be your own.

Margin comes in two varieties, used and usable, and it's vital that you understand the difference.

Used Margin:

This is the margin you have used to get leverage. When you put up your 1% margin for a lot, that

margin is classed as used margin. Its security for the money you borrowed and that means it's

tied up and can't be used for anything else.

Usable Margin:

This is the money left in your account after the used margin has been subtracted. It's what you

use to open new positions or sustain losses. Once you run out of usable margin your positions

will be closed, regardless of how much total margin you have. Your broker is not in business to

lose their money on your trades and is going to make sure they don't.

Jimmy's Usable Margin:

Let's take a look at what Jimmy's doing. Jimmy has a regular standard forex account with $3,000

in it, and he buys one lot of GBP/USD using 1% margin. He started with $3,000 of usable

margin, and now he is using $1,000 of margin for this trade, so he has $2,000 usable margin.

This means he's still got $2,000 which he can use to offset any losses, or open new positions if he

decides to do another trade.

He holds the GBP for a while and it drops, and he sustains losses of $1,000 which is still inside

his usable margin, so he's okay. He's sure things are going to turn around so he holds on to the

GBP rather than taking the loss. Right now he has $1,000 in usable margin, and $2,000 in equity.

Equity is figured by subtracting losses from the balance of the account, and reflects the current

value of an account. Used margin doesn't count because that money's unavailable since it's being

used as security for the trade.

He holds the position over the weekend and for some reason the GBPUSD drops during the

weekend while his broker was closed for trading. He turns on his dealing station Sunday night

and he finds that the GBPUSD has dropped another 100 pips, so he is down a total of 200 pips,

or $2,000. Unfortunately this means he has no equity left in his account. So if the GBPUSD falls

even one more pip he's going to suffer a margin call ($3,000 equity -$1,000 used margin -

$2,000 losses = $0 available margin).

His broker will close his position (sell off the GBP holdings) in order to prevent further losses

unless Jimmy puts more money into the account. When this happens, Jimmy will be left with a

balance of just under $1,000 in his account.

That's a margin call.

Trade Order Basics

Trade Orders should be self-explanatory, they're just telling people what to do, right? Not

exactly; in forex terms an order refers to what you use to open or close a position, or as is also

said enter and exit a trade. Don't worry too much about the terminology; it's not as important as

the concepts.

Opening a position or entering a trade both refer to the same thing, making a new buy or sell

order. It's when you want to take on a new trade by clicking on the buy or sell button on your

trading platform. That gets you into the game for this round. This is where you move margin

from usable to used margin.

When you exit a trade, or close a position, you're liquidating your open position to move your

used margin back to usable margin. It's where you take your profit or loss.

Now that we know what those are, let's move on to the types of trade orders.

Standard Trade Orders: These are the basic trade orders that all brokers provide. They're the kind that every trader should

know, understand and use on a daily basis. Don't risk a single dollar until you are thoroughly

comfortable with all the standard orders. They're as basic as a hammer and saw are to a

carpenter.

1) Market Trade Order:

This is the simplest and most basic trade order. It's where you see the price and click the button

to make the trade. Buy or sell doesn't matter. It's manual trading, watching the numbers and

deciding whether to buy or sell. It's just like shopping online.

2) Limit Trade Order:

A limit trade order is the second simplest. It's the equivalent of calling your stock-broker and

saying "When it hits 500 sell everything I've got." It basically frees you from having to sit in

front of the computer all day and waiting for the exchange rate to move where you want it.

If you're holding GBP/USD at 1.8040 and want to sell at 1.8100 you can either sit and wait, or

set a limit order to sell when it hits that price. Or if you're going short and sold at 1.8020 and

want to buy at 1.7950 you can do that too. You set the price and as soon as it hits that value the

order will go through. You can either leave the trade order active indefinitely, or set a time limit

on it.

3) Stop-Loss Trade Order:

A stop-loss trade order is a variant on the limit order. A normal limit order is set with the

intention of making a profit. A stop-loss is set with the intention of preventing a loss. It's like a

safety net.

Going back to the example from our limit order, let's say Jenny bought GBP/USD at 1.8040 but

rather than wanting to set a specific profit point, she's going out for a bit and just wants to make

sure that if it suddenly drops she doesn't get hit with a huge loss or even worse a margin call.

She thinks it's going up, but just in case she sets a stop-loss at 1.8030 so the most she's going to

lose is ten pips. Most people would probably set it larger to cover fluctuations, but Jenny really

wants to limit her losses.

Complicated Trade Orders:

1) GTC

A GTC order is "Good 'til Cancelled" which means it's going to stay active until it either goes

through, you cancel it, or you get a margin call. Your broker won't cancel it, so it's entirely your

responsibility.

2) GFD

These trade orders are "Good for the Day." If the price is reached before the end of the trading

day (usually 5PM EST, but you should check in case your broker does it differently), then the

trade order will execute. If it's not reached that day the order will cancel automatically.

3) OCO

This is essentially two orders in one. OCO means "order cancels other," and refers to setting

one trade order above and one below the current price. Essentially it combines a limit order with

a stop-loss order, and whenever one executes it automatically cancels the other.

Using Jenny's example from above, she might set an OCO as a sell order on the GBP/USD at

1.8030 as a stop-loss, which will basically sell her buy orders, and have a limit of 1.8050 so that

she will get out of the position quickly with a small 10-pip profit.

Don't forget to check with your broker to see how they handle things. Each broker does things

slightly differently, and while they all provide essentially the same services it pays to know

specifically how your broker does things.

Read the fine print.

Also, don't try to over-complicate things, especially when you're starting out. Simplicity is the

best policy.

Forex Money: How To Keep Score

Let's talk about Forex Money.

We've lumped all of these together because they're how you keep score. You already know that a

pip is the smallest number in the exchange rate, and that a lot is the unit in which currency trades

are made. Profit and loss should be self-evident if you've read this far.

What we're going to do is start by discussing how pips are converted to money, and then go into

some of the details of calculating profit and loss. You're going to have to deal with both, so it's

best to know how to figure them.

One thing you will notice is that the exchange rate for the Yen looks different than that for other

currencies. That's because no smaller denominations than a single Yen are currently circulated,

so everything is carried to the same number of significant figures, two decimal points beyond the

smallest coin in use. For all practical purposes, the Yen can be considered the Japanese

equivalent of the cent, not the dollar.

However, don't let it worry you, the details of the calculation may vary, but the basic calculation

is always going to be the same regardless of which currency pair you're using.

So, let's move on to some detail and examples:

CHAPTER 4

PIPS

As we've said before, the PIP is the smallest number to the right of the decimal place. The pip

value is a function of the exchange rate and lot size, though normally variations in lot size will

only move the decimal place.

Since most of you will be trading with US Dollar accounts we're going to start with pairs where

the USD is quoted first, and then move on to the reversed pairs. The basics are the same in both

cases, and in fact it's easier when the USD is not the base currency, as we'll see.

Let's start with a simple example:

USD/CAD In this case we're trading USD/CAD at an exchange rate of 1.0166. Since the pip is the smallest

unit of value that can be measured, it's 0.0001. This works for all currencies except the JPY

where the pip is 0.01. As we're using the CAD in this example we can stick to the normal 0.0001.

What we do is divide 0.0001 by the exchange rate to get the pip value. It looks complicated, but

what we're really doing is breaking down the pip to a fraction of USD (or whatever our base

currency is).

So, 0.0001 divided by 1.0166 works out to be 0.0000984 which is our pip value in this case.

For those who prefer to see it in mathematical form, here it is again.

USD/CAD = 1.0166

0.0001/1.0166 = 0.0000984

It works exactly the same way with any other currency.

USD/JPY This one is slightly different, because we use fewer significant figures, but otherwise it's

identical. So this time we'll trade USD/JPY at an exchange rate of 107.37. As we're trading the

JPY, our pip is based on 0.01.

Plugging it into our formula, we divide 0.01 by 107.37 and get 0.0000931. Again, here it is

without the words

USD/JPY = 107.37

0.01/107.37 = 0.0000931

You'll notice that in both cases we end up with figures of a similar order of magnitude (almost

the number of zeroes after the decimal point). That's because the lower value of the Yen cancels

out the greater number of significant figures. If we carried the JPY to the same number of figures

as the other currency pairs we'd end up with a much lower pip value so it just makes sense to

work it this way.

Let's take a look at a case where the USD is the quote currency, not the base and see how that

works.

EUR/USD In this case we're working with the standard 0.0001 pip and an exchange rate of 1.4815. The only

difference is because we now have the EUR as the base currency, the exchange is how many US

Dollars to the Euro rather than the other currency to the dollar in the previous examples.

So, taking our 0.0001 pip and dividing it by 1.4815 we end up with a pip value of EUR

0.0000675. If we want to get that back to dollars we have to multiply it by the exchange rate,

which gives us 0.00010000125 which rounds off to 0.0001.

Again, for those with a preference for seeing it numerically, here it is:

EUR/USD = 1.4815

0.0001/1.4815 = 0.0000675

0.0000675 x 1.4815 = 0.0001

Those of you who have more than a passing familiarity with mathematics will have noticed

something about this calculation: It was completely unnecessary. If you are quoting in USD then

one pip is always going to be 0.0001. Any time we divide and then multiply by the same number

the only changes we're going to generate are rounding errors.

There is only one time you would need to use this kind of calculation and that's if neither of the

currencies in the pair are the USD and you need to convert it to the USD for your final

accounting. In that case you'd divide 0.0001 by the exchange rate between the two currencies,

and then multiply by the USD exchange rate. However that's somewhat beyond the scope of this

course so we won't be covering it here.

Before we go on to turning these very small figures into noticeable amounts of money there is

one more thing about figuring pip values that we need to mention: You don't have to do it.

It's one of those things that your broker's software should handle automatically. The reason we

include it is because it's easier to work with things when you understand what's going on behind

the scenes.

LOTS

Now let's move on to LOTS, where we'll hope to make, and not lose, lots of money. Just as a pip

is the smallest unit of value we count in a trade, a lot is the smallest amount of money we use in

a trade. For the purposes of this course we're going to confine ourselves to the "standard" lot

which is $100,000 and the "mini" lot which is $10,000.

Seeing how a forex lot works with pips is a simple matter of multiplication. When you multiply

the pip value we calculated earlier by the forex lot size you end up with how much each pip is

worth.

Let's start with our first example, USD/CAD at 1.0166. At that exchange rate we have a pip

value of 0.0000984. This means that on a lot of $100,000 each pip is going to be worth $9.84.

The only catch is that the pip is a moving target. If the exchange rate changes, the pip will

change with it. Given that it does change, the question arises as to when do we calculate it?

The answer's simple: when you take the money out. That's when pips actually turn to money, so

that's when you figure the value.

Sometimes different brokers may use slightly different conventions for figuring pip values for

different forex lot sizes. Don't worry about it; it's one of the things your platform calculates

automatically. Computers are good at arithmetic, let them handle it.

Here's a recap:

USD/CAD = 1.0166

Pip = 0.0000984

Standard Lot pip value = 100,000 x 0.0000984 = $9.84

Mini Lot pip value = 10,000 x 0.0000984 = $0.984

USD/JPY = 107.37

Pip = 0.0000931

Standard Lot pip value = 100,000 x 0.0000931 = $9.31

Micro Lot pip value = 10,000 x 0.0000931 = $0.931

For any trade where the USD is the quote currency the pip value is $10 for a standard lot and $1

for a mini lot. It may not look like much, but it adds up. This is especially true because your

profits should be considered against your margin, not the lot size, so it's proportionately larger

than it looks.

PROFIT AND LOSS

Now that we know how to figure pip values, let's take a look at PROFIT AND LOSS. After all,

that's what we're all here for: to make money.

Because we haven't really used him before, let's say that Bill Cash is about to make a trade, and

he's planning on buying USD/JPY. We aren't going to worry about margin, or rollover, but it's

impossible to cover profit or loss without considering the spread, which in Bill's case is three

pips. Bill likes to hold things for a while so he wants to wait for a solid rise before he sells.

Bill sees USD/JPY trading at 106.84/106.87 and believing the USD is going to rise against the

JPY he buys one standard lot of $100,000 at 106.87. Remember you always buy at the higher

price and sell at the lower. Because he's buying, he pays the spread now as he enters or opens the

trade. We're not going to worry about pip value because we're not going to realize the value until

we close the trade.

Some time later Bill sees that the exchange rate has changed to 107.37/107.40 and decides to

sell. This is where he exits or closes the trade. Because he's selling he has to take the lower price,

just as he bought at the higher price (yes, the odds are stacked against you but that's always the

case and this is much fairer than a casino would be.)

So he sells his JPY and walks away with 50 pips.

What's 50 pips you may ask? If you've been following along for the last few pages you can

probably figure it out, but let's do it together anyway:

USD/JPY = 107.37 (The rate we close the trade at) 0.01/107.37 = 0.0000931 (Pip value)

$100,000 x 0.0000931 = $9.31 (Pip value for this standard lot) $9.31 x 50 pips = $465.50 (profit)

Not bad at all is it?

Now we talked about the trading spread earlier, this is where you can really see it in action.

When Bill bought USD/JPY he used the offer, which is the higher of the two prices. With the

106.84/106.87 quote that meant he paid the 106.87. When he closed the trade, he sold at the bid

price, which had risen to 107.37, giving him 50 pips in profit. Now in order for him to make that

profit, the bid had to rise 53 pips before he could see fifty.

Paying the spread is accounting for those extra pips.

In this trade, Bill bought USD/JPY so he paid the trading spread when he entered the trade. If

he'd sold USD/JPY he would have opened the trade by selling USD/JPY at 106.84 and then

closed it buy buying USD/JPY at 07.40 and taken a bath with a loss of 56 pips. This is because

when exiting a sell you close at the buy price which in this case had moved 56 pips from the

opening sell price of 106.84.

In both cases the USD rose 53 pips against the JPY and Bill had to pay 3 pips for the privilege of

trading. Those three pips increased his loss or decreased his profit. It's the house cut and you're

always going to have to pay it.

Now you know what to do: Buy low, sell high. That's a good beginning, but in order to succeed

in the market both you and the Cash family are going to have to know a little more about how to

see patterns and make predictions. This was the easy part.

Before we move on though, we're just going to do a quick recap of what we've learned so far and

why we think the forex market provides the greatest opportunities of any market out there.

CHAPTER 5

Forex Trading Review"

If you've been following along so far you should have a good understanding of the basics of

forex trading. You should have a good handle on pips, lots, exchange rates, and what the

trading spread is. You should also know a bit about forex brokers as well as trading margins

and leverage.

You should also understand that all forex trading is based on the idea that since exchange rates

fluctuate you can make a profit by buying a currency at one rate and selling it when its value

increases, or by selling it and buying back more when the value decreases. You also know that

nobody's perfect and everyone loses money sometimes-- good forex traders just make more than

they lose.

Here's a quick glossary of some of the more important things we've covered:

Pip The smallest unit of value: the last significant figure when an exchange rate is quoted. It's

also what you normally use to follow movement and measure your profit and loss. It's 0.01 for

the JPY and 0.0001 for all other currencies. The pip is your friend.

Lot The smallest unit of a trade: different account sizes usually come with different lot sizes.

Two common lot sizes are $100,000 for a standard lot, and $10,000 for a mini lot.

Margin The amount of collateral you have to put up to borrow more money for a trade than you

have. Usually expressed as a percentage, it's typically in the range of 1-2%.

Leverage Leverage is the ratio of how much currency you're trading expressed against the

amount you've actually risked. Common ratios are on the order of 100:1.

Currency Pairs The basis behind every trade; a currency pair consists of the currency you're

buying or selling, and the currency you're buying or selling it with. The first currency listed is the

base (the one you're buying or selling) and the second the counter (the one you're buying or

selling the base with.) The following are the four main currency pairs:

EUR/USD - USD/JPY - GBP/USD - USD/CHF

Major Currencies These eight currencies are used for the majority of all trades in the global forex

market. You need a forex broker who handles the majority if not all of these currencies. If they

don't handle at least the top five you need another broker.

Name Nickname Symbol

United States Dollar Buck USD

Euro Fiber EUR

Japanese Yen Yen JPY

British Pound Cable GBP

Swiss Franc Swissy CHF

Canadian Dollar Loonie CAD

Australian Dollar Aussie AUD

New Zealand Dollar Kiwi NZD

Bid The exchange rate you pay when selling one currency for another. It is always lower than the

amount you would pay to buy that currency.

Ask The exchange rate you pay when buying one currency with another. This one is always

higher than the one you would pay to sell that currency.

Spread Also known as the bid-ask spread, the trading spread is the difference

between the two exchange rates. It's shown on the graphic below. It's also where the forex broker

makes their money.

Broker The broker is your intermediary to the forex market. They handle your account and all

your forex trades. They're also the one who loans you money when you're trading on the margin;

and the one who gets the trading spread.

Demo Account This is what you should start trading on; don't jump in with real money. Start

with a demo account to learn the ropes. It will give you hands-on experience before you put

yourself in a position to lose money.

Mini Account This is the smallest account most forex brokers will let you have that involves real

money. A mini account can be opened at some brokers with as little as $250, but we recommend

you start with at least $1,000.

Standard Account This one's the next step up from a mini account, and you should have at least

$10,000 to trade before you open a standard account. This is the larger account type and it's best

to save this one until you've made more money and have more experience trading.

Margin Call A margin call is what happens when your forex broker closes your open trades

because your losses on a position have exceeded your available margin. It's a way to protect both

of you from excessive losses. You may not like it when it happens to you, but it beats the

alternative.

Order This one's pretty simple; it's a request to initiate a trade at either a specific time or when a

specific price is reached. It can be as simple as buy now, or as complicated as sell if the GBP

drops below 1.8564 or if it reaches 2.1000.

Exchange Rate Usually expressed as a decimal fraction, this is the amount of one currency that's

required to purchase one unit of another. All forex trading is based on the idea that these rates

change over time.

Base Currency When you consider a currency pair, this is the one that's listed first. It's also the 1

in the exchange rate, and the one that you are buying or selling to open a position.

Quote Currency This is the other currency, the one listed second, and the one where you expect

the value to change in relation to the other one. When you see an exchange rate listed as 1.3064

or 0.8742 that's the quote currency.

Now that we've had a quick refresher on the basics, it's time to compare the forex market to some

of the other markets out there and see why we believe forex is the best market out there. The two

main competitors to the forex market are the futures and stock markets. Let's start by looking at

the advantages of forex over both, then move on to treating them individually.

Forex Market Compared to Other Markets

Features Stocks Futures Forex

Trade on Your Schedule NO NO YES

Trade WIthout Commissions NO NO YES

Trade at the Price You See NO NO YES

Trade on Your Schedule

This is one advantage the forex market has over all the competition. Instead of waiting until a

particular market opens before you can trade, you can have the benefits of trading at any time of

day or night on the 24-hour forex market. You can trade when and where you have the time, not

just when a particular "other" market or your broker says you should. Here's an example of how

much forex trading time is available:

The first forex markets open in Singapore and Sydney Australia at 2:15PM on Sunday afternoon

EST. New York closes on Friday at 5PM EST. That means less than forty-eight hours after New

York closes the forex markets are open again. Throughout the week you can trade whenever the

fancy strikes you, in any currency pair you want from the comfort of your own desk (or couch if

you're using a laptop). You can wake up in the middle of the night and trade at three in the

morning from the comfort of your own bed. Even insomnia can be turned into profit.

Trade Without Commissions

Forex brokers are typically compensated without resorting to commissions. They make their

money off the trading spread, so it's factored into every transaction.

You don't have to worry about an additional fee, or a ticket cost or anything else. There's no need

to hold money back in your account to cover fees, commissions or hidden costs. Everything is up

front and transparent.

Trade at the Price You See

When you're doing forex trading, most platforms allow you to make an instant trade at the price

you see on your screen when you see it. That's not the case with either the stock market or the

futures market. When you're dealing with the futures market, you are often quoted the price of

the last trade, which may not be the price of the next trade (yours).

When you're dealing with the stock market there can be delays in initiating your trade. Under

normal market conditions this isn't the case for forex. With forex markets you're tied into a

real-time feed. It's like streaming audio with currency symbols, and when you hit that execute

button it goes. Forex brokers won't normally guarantee instantaneous execution except for stop

and limit orders, but under normal market conditions that's what you're going to get. It's a huge

advantage.

CHAPTER 6

Futures Market vs. Forex Market

Let's get tomorrow out of the way and focus on today shall we? The forex market has other

advantages over the futures market than just the ones we've discussed, and here they are...

Liquidity, there's real money in this forex market.

This is a big one because the forex market's so big. The futures market is only about $30 Billion

a day, while the forex market is on the order of $1.5 Trillion a day. That's fifty times the

liquidity, and that's a huge advantage. Liquidity means when you want to sell, there's someone

out there to buy. You're not going to have to worry about getting stuck in a position because

there aren't enough people out there to buy what you want to sell, or to sell what you want to

buy. It can absorb any transactions the world can throw at it. Not so with futures.

You can't lose your shirt, just the sleeves.

When you open a position in the forex market, your available trading margin limits the amount

of money you can lose. If your losses pass your available margin you'll get an automatic margin

call that will close some or all of your open trades and use the results to cover the loss.

It's not fun, but it means you can't lose more money than you've decided to risk. Further losses

are going to get cut off at the knees. This isn't the case in the futures market. In the futures

market you don't know what you're going to lose until it happens, and if your position is

liquidated at a loss, you're still responsible for the additional losses. There will be no margin call

to get you out of this one.

Put No Stock in Stocks

Nobody to Get Between You and Your Trade

When you're dealing with a centralized market like the stock market, where traders may actually

be physically present there's always going to be a class of "middle-men," who will get between

you and your trade. This is not a good thing. Each layer that's added to the transaction brings its

own cost in either money, time or both.

Their absence means faster trades at lower cost.

Fewer Onerous Regulations

One result of the Great Depression and the Crash of '29 was increased regulation in the equities

market. One of those regulations prevented short selling unless there was an uptick, basically

meaning you couldn't promise to sell some shares you didn't yet have and then go get them

unless there was evidence the price was rising.

Because all forex trades are structurally identical, you buy one currency to sell another there's no

advantage or disadvantage to going long or short. Any given currency can be falling against one

currency and rising against a second. You can always make forex trades regardless of how the

forex market's moving so you can't get into trouble the same way.

Size and Simplicity for the Win

Not only is the forex market bigger than its competitors, it's also much simpler than the stock

market. Have you any idea how many stocks are traded on the NYSE? Thousands, and thousands

more are traded on the NASDAQ. That's not including any of the other markets in other

countries or the smaller markets in the US.

Those are a lot of stocks, and to succeed you're going to have to specialize because no one can

keep everything in mind. Things will get lost in the details and a perfect opportunity can be

missed just because you never hear of the stock and don't have the chance to jump on board.

Now compare that to the forex market. You've got four major currency pairs to keep track of.

That's all. It's much easier to follow the forex market and far fewer opportunities are going to slip

under your nose. It's also much easier to see patterns when there aren't so many stocks being

traded that everything gets lost in the noise.

No Talking Heads to Ignore

You see it all the time. Insider trading scandals, analysts advising clients to buy stocks that are

plummeting in an attempt to stem the fall for their real clients: the companies. Stockbrokers can't

exist without the companies that trade on the market, and even when things are discouraged it

doesn't mean no one will ever do them.

It's the kind of thing that's been on the news more times than anyone can count. Big business

means someone is going to take little shortcuts for the company with an upcoming IPO that's

going to make the brokerage house millions of dollars in commissions. Governments can make

regulations all they want, reporters can uncover scandals all they want, but as long as people are

human it can happen, and the market can get caught in the middle.

The forex market is immune to this; analysts are observers not actors on the stage. They can't

drive things and so the forex market's left without this kind of interference.

Size Brings Stability

There's another problem with the stock market that the forex market doesn't share. Big players

who can drive the market with what look to everyone else involved to be nothing but whims. A

big fund can decide to buy heavily in one company, or divest another, and start the entire market

on its way up or down. One decision by one person can set the stage for an entire day of trading,

leaving everyone else to wonder what happened.

That's not going to happen in the forex market. With the vast size of the forex market not even

central banks have enough influence to force the market one way or another indefinitely. It's not

subject to being gamed in the same way. There are too many big players and the forex market

itself is too big for anyone to be able to control it.

Now that you know the basics of forex trading, the next step is to go into the details: figuring out

how to know when and what to trade not just how. In the next section we'll look at the basics of

forex market analysis and then move on to charts.

Remember though, no trading with real money until you can demonstrate a regular profit trading

with a demo account. Yes you'll lose money, but things will go a lot faster if you lose pretend

money first.

CHAPTER 7

HOW DO YOU KNOW WHEN TO TRADE?

Okay, now you know the basics of forex trading, and how to trade. However, the trick to making

money is not only knowing how to trade, but also knowing when to trade; when to jump and

which direction. We've got two main tools to do that...

Fundamental and Technical Analysis

Both are very useful, but neither gives the whole picture. At base, fundamental analysis

involves looking at what's happening outside the market, while technical analysis looks at

what's happening in the forex market.

Hopefully you didn't find that too confusing, but just in case you did, here's a bit more detail.

Fundamental analysis is based on the presumption that a country's economic health and various

actions by its government and central banks can have an effect on the currency's standing in the

market. A stronger economy leads to a stronger currency, and an economic crisis leads to a

weaker currency.

Technical analysis is slightly different, looking to the market itself rather than the forces that

drive it. The idea is that you can look at what's happening in the market and use that information

to make a reasonable prediction of what's likely to happen next. In many ways it can be a

self-fulfilling prophecy, if lots of people are trading based on the trends they see in the charts, the

exchange rates will continue to follow the trend.

Fundamental Analysis

Bill Cash swears by fundamental analysis, almost but not quite to the point of ignoring the

technical side. His rationale is that technical analysis only shows you what's happening, not why

it's happening and in the long run it's the why of things that determines the outcome. He's

thinking long term so he's not too worried about immediate fluctuations so long as he doesn't get

a margin call. This costs him a lot in shorter term profit, but he generally does well when he does

close his forex trades. It's tricky though, because he does need to keep enough usable margin to

absorb those fluctuations.

Jimmy thinks differently. He's all about the technical analysis side. He spends hours watching

the charts, trying to figure out what's going to happen in the next ten seconds so he can jump the

curve. No worries about what's going on outside the forex market for him. He watches each tick

to see what's happening, and then jumps with all he can as fast as he can.

He's looking for trends in the forex market-- taking a look at patterns and seeing which way

things are likely to change in the future. Recognizing trends is a vital skill for technical analysis,

if you can't see a trend you won't see what all the other technical traders are basing their

decisions on, and you just might take a bath. Yes, cleanliness is a good thing, but this kind of

bath isn't. Let's look at trends now...

If you look at the example chart you can see that there's a certain line that your currency keeps

reaching and then bounces back from. It's acting as a ceiling that it just can't break through. This

lets you predict that once it reaches a point near that line it's more than likely to drop. So if you

are long in that forex currency it would be a good idea to sell before it reaches that level, as

experience show's it's likely to drop once it does.

That's why so many traders say "the trend is your friend." Think of it like the current, or a tide.

It's a lot easier to swim with the tide than against it, and it's much easier to make money going

with the trend rather than against it too. Once you get good at technical analysis you'll be able to

see trends as they're forming and use that to your advantage.

PICK ONE: The False Dichotomy.

Now that you've seen both, you may be asking which is more important, technical analysis or

fundamental analysis. Well, there are two answers to this one.

a) The one you didn't use.

b) Neither, they're both important.

Both of those answers are right.

Here's why: The forex market's big and messy and complicated just like the real world. We've

already discussed how no single entity can control the market, and that means no single factor

drives everything either. It's like a ball suspended by hundreds of rubber bands with different

people tugging on each one, some are technical factors, some are fundamentals. They're all

pulling and where the forex market sits is where all those forces balance.

That's why both fundamental and technical factors are important.

As to why the one you don't use is the most important: That's because it's the bus that you don't

see that runs you over. You can get out of the way of the bus you do see.

If you just want to dabble in forex trading you can pin all your faith in one or the other form of

analysis; you can make money that way, but you'll lose more than you'd like too. If you're going

to be a true Master of the Forex Arts you're going to have to pay attention to both. Someone

who dabbles in woodworking might be good with a hammer but not with a saw, but a true

carpenter can use both.

Yes you'll run across fanatics of both stripes, fundamentalists and technophiles, but don't listen to

them. Even though one may be more important today, the other might have a greater effect

tomorrow. Remember the bus and don't get hit.

Here's an example:

Jimmy's Story

Jimmy likes his charts, watching them makes him feel like he knows exactly what's going on.

When the rest of the family mentions fundamental analysis he just laughs. "You make more

money watching the market than the news." Technical analysis is the key according to Jimmy.

So one afternoon he's sitting at home watching his charts; something big is about to happen, he's

sure of it. The dollar has been rising steadily all day, nothing too spectacular, but if you plot the

curve you can see that it's accelerating. Any minute now it's going to take off and just go through

the roof.

Bill and Dolly are watching the news in the background, but he's not paying attention. Somebody

said something about foreclosures, but his parents already had a mortgage burning party so it

won't affect them any.

He takes a big swig of his super-caffeinated energy drink and goes long on the dollar with

everything he's got. He can't miss! The dollar has nowhere to go but up, and he's going to be

riding it all the way to riches.

Then it happens:

Bam! The dollar takes a twenty pip drop between one tick and the next and now he's got a

margin call and the dollar is in a free fall.

What happened? Fundamental Analysis happened.

The news story Jimmy ignored had all the details as to why the dollar collapsed. Foreclosures

just hit a new monthly record and thousands of families were ruined. Everyone's scrambling to

catch up, the banks are out hundreds of millions of dollars and things are looking bleak. As soon

as the news hit the market, everyone holding the dollar tried to get out of it as fast as they could,

and Jimmy was the perfect sucker.

Now he's sitting there with a sugary mess on his keyboard and a look of utter shock on his face.

All he can do is drop the laptop on the floor and storm up to his room to work out his frustrations

on his Xbox. And it's all because he only looked at half the picture.

Don't be like Jimmy, look at the whole picture.

A true expert relies on both fundamental analysis and technical analysis to make decisions.

That's what we do and what we hope you will do too. You'll probably spend more time on

technical analysis, because the charts run continuously, but that doesn't mean you can overlook

fundamental analysis. If you do it can and will bite you.

As to those who say that fundamental analysis is everything and that the patterns you see in the

charts are nothing but coincidence, don't listen to them either. Even if they are coincidental, and

we don't think they are, all that matters is whether they're useful indicators. Being that they are

useful, it doesn't matter why they work as long as you know them well enough to read them.

That's what the next section's about; an introduction to charts.

Forex Trading Charts

We've been discussing forex charts for a while now, but we haven't really shown you any. There

are literally dozens of different kinds of forex charts: Graphs, Line Charts, Bar Charts, Pie

Charts, if you can think of it someone has probably made a chart of it. As far as we're concerned

there are three main kinds of forex charts: Line, Bar, and Candlestick.

Bar and Candlestick charts are very similar, showing the same data, just in a slightly different

visual format. Line charts are simpler, so they're what we'll deal with first.

Here's a simple line chart showing EUR/USD over the course of a week.

In the simple forex chart given here we are watching EUR/USD again, only this time we are

watching on an hour by hour view. Using the chart we can not only see the highs and lows, but

also where the currency opened and closed.

That's a lot more data that we can use to look for trends.

Unfortunately, the bar chart isn't very easy to read.

This is where the candlestick chart comes in. It gives the same information as a bar chart, but in

a more visual format so it's easier to read.

Let's look at the bar first. The vertical line shows the high and low for the day; the longer the

line, the greater the movement. The little horizontal bar sticking out to the left shows the opening

price, while the bar to the right shows the closing price.

Now let's look at the candlestick. The rectangle defines the range of open to close for the day. It's

filled so we know it opened higher than it closed. The little bar sticking out the top shows the

high, and the one descending from the bottom shows the low.

In both cases we see the same information, high, low, opening and closing, but the information

just pops out more if with a candlestick. This really shows up when you're comparing whether a

currency rose or fell on a given day. Look at the following figure:

Now that you know the terminology things will make sense when we get into some of the more

advanced things that can be done with candlesticks.

One thing we do like to do though is change the colors of our candlesticks. Most humans are

very sensitive to color, and so we recommend using colors rather than black and white to show

the difference between rising and falling candlesticks.

Like bars, candlesticks are defined by four factors: Open, High, Low and Close. The big

rectangle is called the real body, or sometimes simply the body, while the lines above and below

are called the shadows. The high is the end of the upper shadow, and the low is the end of the

lower shadow. If the close is above the open the body is empty, and if the close is below the open

it's filled.

Now you know the basics, so let's look at the shapes candlesticks can form and what they mean.

Build Strong Bodies

When you're looking at candlesticks patterns the first thing you see is the body. It's big, it's thick,

and it's in your face. This is a good thing. The longer the body, the greater the difference between

open and close, and the more active the currency; if everyone wants to buy a currency, they'll

drive the price up, and if they want to sell they'll drive it down. So long bodies mean lots of

activity and lots of interest, whether in buying or selling. This one's hot and it's moving.

A short body means there's been very little activity, people aren't very interested in this currency

today.

Taking a look at the figure above, we can see in the first example, a long lower shadow and a

short upper shadow on a rising candlestick. The story this shadow tells is one of sellers driving

the price down, but buyers coming back with a rally that force the final price higher than the

opening.

If we look at the other example, with the long upper shadow we see a different story. This time it

was the sellers fighting back against the buyers and finishing the day have just managed to eke

out a hard-fought victory and drive the close down past the opening.

Candlestick Pattern Examples:

Now let's look at some of the more common candlestick patterns:

Marubozu

We're putting this first because it has a great name. No it's not a dessert, nor is it a jingle you

heard on TV. It's a candlestick with no shadows.

When you see a spinning top it means there's lots of activity but not much real movement. Prices

are moving up and down, but both buyers and sellers are largely undecided and are waiting to see

which way to jump. The color of the body doesn't usually matter; what's more important is the

length of the shadows and what it tells you.

When you see a spinning top it usually means that the current trend is just about played out. If it

comes up during a down-trend it may be a sign there are no more sellers and the currency's

getting ready to move upwards. If you see it on an up-trend it may well signify the opposite. Doji

Doji candlestick patterns are not the same as a dojo, they don't mean you're going to learn how to

defeat all competitors through some ancient martial art. It can be similar to a spinning top,

though it usually represents a more extreme case. The defining features of the Doji are that the

open and close are the same, or so close that they are almost indistinguishable.

Unlike previous patterns, Doji generally require confirmation, and usually indicate an upcoming

reversal. Whenever you see a Doji it's best to look at the previous candlestick pattern for

evidence of what it's telling you.

Here are four of the more noticeable Doji:

Dragonfly and gravestone Doji tell essentially the same story from different sides. A dragonfly

shows a pattern where sellers pushed the price down, but buyers were able to rally and bring the

price back to the open. In a gravestone you see the reverse. In either case it can signify a reversal,

but it needs confirmation, as the evidence is showing that it there isn't quite enough pressure to

force a reversal without further motion.

A long-legged Doji is much like a spinning top; lots of noise and action but no real movement.

It's a marker that of indecision in a restive market. There are buyers and sellers and people want

the market to move, but no one really knows which way. It's like a bunch of equally matched

puppies fighting over a ball. There's enough going on to wear you out but nothing really

happened.

Four-price Doji show the same amount of indecision, but much less energy. When you see a

four-price Doji you're seeing a session where nothing happened. Everyone sat and waited to see

what happened. Unlike the long-legged Doji with its tug of war, this Doji shows that buyers and

sellers are both exhausted, and are waiting for something to happen before they move.

The most important point of Doji is that you cannot consider them in isolation. Doji mean

something is going to happen, but what that is depends on what's going on around them. Never

base a buy or sell decision on Doji alone without some kind of confirmation. Doji candlestick

patterns can signify a bullish or bearish market, so read them in context, not on their own.

Forex Market Chart Patterns

Reversal Patterns

We've already looked at one kind of reversal pattern in the Doji, now it's time to look at reversal

chart patterns in general. All these patterns mean is that the forex market is getting close to

changing its collective mind on the value of a currency so be on the lookout for a change. It

doesn't mean one's going to happen, but it's more likely than not.

There are four main reversal chart patterns, but they all follow a similar format.

You'll see a candle with a relatively small body and a long shadow on one side and a very small

or nonexistent shadow on the other. Think of a gravestone or dragonfly Doji with some price

movement over the day. The important thing to remember is that it doesn't matter if the

candlestick is rising or falling. All that matters is whether it's following an up-trend or

down-trend and which side the shadow is on.

Hammer and Inverted Hammer

These two chart patterns appear during a downtrend and indicate the possibility of a reversal.

When you see a hammer, you know that despite a lot of selling action during the session the

buyers made a come-back at the end and forced the price back up. If it's inverted, it was the

sellers who dominated trading at the end of the session. A hammer's a stronger sign of reversal,

but you should still wait for confirmation before acting on it.

The other two chart patterns are the Hanged Man and Shooting Star, both of which appear on an

up-trend.

Hanged Man and Shooting Star

The chart above shows some sideways movement on the left side of the chart followed by a few

spikes as the bulls briefly took over. The problem is that this is a one hour chart. Meaning, each

candle is one hour of time. It does not let you see the actual movement that took place during that

hour. This is why we would want to drop down to a lower compression; it will let us see some of

the movement that took place during the hour.

Below is an illustration of the same twenty-four hour period but on the fifteen minute chart.

Notice how you can now see more detail in this compression.

"

Candlestick Review

Before we move on to the next section, let's take a quick moment to review candlesticks:

* Defined by four points: open, close, high and low.

* Area between open and close is the body. Outline shows a rising candle which closed higher

than it opened. Solid shows falling candle which closed lower than it opened.

* Lines above and below the body are the shadows. They show the distance between the high

and low and the open or close.

* Long bodies mean lots of activity.

* Long bodies and no shadows are Marubozu candles. Almost all the activity is in one direction

as high and low equal the open or close. The market has made up its mind.

* Short bodies mean very little activity.

* Short bodies with long shadows on both sides means the market doesn't know which way to

jump. Not much action, everyone's indecisive.

* No change between open and close is a Doji; could be a sign of a reversal or of indecision.

CHAPTER 8

How To Trade Forex Charts

By now you should be able to look at a forex chart and identify candlesticks and all of the

different ways a candlestick can look. You should have a basic understanding of forex charts and

that they are a vital part to forex trading and the measure of a currency's value.

Now let's dig a little deeper and understand what these candlesticks are trying to tell us about

what a currency has done in the past, is doing right now and what it could possibly do in the near

or distant future.

Support and Resistance

If you're at all familiar with trading you've probably heard about support and resistance. In fact,

if you look closely you can see support and resistance in anything with regular price fluctuations,

from gasoline to loaves of bread. In simplest terms a resistance is a price it's hard for something

to rise above, while a support is a price it's hard for something to fall below.

If you graph a price and it comes up as a stepped line, the points are your supports and

resistances. Take a look at the graph below:

If you follow the line, the first high point is your resistance, and it then falls until it reaches a

support, at which time the trend reverses and it rises again to almost the same resistance point as

before. It then drops to a new support, and begins a slow rise to a new point of resistance.

Here's the simple way of looking at it:

Resistance: Reversal point on an upwards trend.

Support: Reversal point on a downwards trend.

As you can see from the graph, neither resistance nor support points are fixed. Instead they move

up and down as the market fluctuates. A great real world example of support and resistance

comes with gas prices.

Remember when gas passed $2.00 a gallon in the US? At first it kept creeping up to it, but never

passing. $2.00 was the resistance. It broke through once or twice, but quickly dropped back

below it. Then prices went up, and over $2.00 became the norm. It wasn't long before you never

saw the price below $2.00 anymore. It had changed from a resistance to a support.

When you're plotting support and resistance, it's important to remember that the forex market's

fluid and nothing is permanently fixed. Don't think of support and resistance as single points but

rather as zones. Modern forex charting software normally carries things to four significant

figures, and neither resistance nor support is going to be that specific. It's more likely that you'll

see resistance between 1.9 and 1.93 than at 1.9134, regardless of what your software's showing.

If you're using candlestick charts, base your resistance and support on the closes, not the highs

and lows. Highs and lows are best viewed as tests of resistance and support, not breakthroughs.

If you look at the above chart you'll see a resistance line in red. The thing to remember is that

while we sometimes saw prices spike higher than our resistance line, it never closed above it.

So then, you might ask how we tell if a resistance line is broken. The simplest way is to just say

it's broken if the session closes above that value. But what happens if it closes above one day,

then back down below it the next?

You could say that it broke the resistance, but you could also argue that it didn't really, because it

couldn't stay above it for any length of time. Before declaring that a breakout has occurred, it's

best to make sure that not only has the market closed above the previous resistance line, but that

it's kept going.

Don't be fooled by the extremes of highs and lows

When you're looking for breakouts you want to see a new trend forming that continues past the

previous support or resistance point. Because we're looking for trends it's important to remember

that one point does not a trend make. Look at things over time and you'll be better able to see

trends, and that's what will tell you when you've got a real breakout.

Trends & Channels in Forex Trading

We've been throwing the word trend around quite a lot lately, and you may be wondering what

they are. Simply put, a forex trend is a pattern of movement in one direction. The best way to

see a trend is to put a trend line on your graph. The safest way to measure an uptrend is to plot a

line of rising support, while the way to measure a downtrend is to plot one of falling resistance.

If you do it right, a forex trend line is a great tool for technical analysis; if you do it wrong it's a

great way to cut a hole in the bottom of your trading account.

Let's look at the "right way" to use forex trend lines

If you look at the figure above, you can see the downward trend lines in red, and the upward

trend lines in green.

While forex trends can be handy, they really become useful when we use them to create trading

channels. Where a forex trend gives us an idea of how a given currency is moving, trading

channels give us a great tool for short term trading gains.

First let's look at how to draw channels.

We start with the same chart we had previously, complete with trend lines, but now we add a

second set of lines parallel to the first. This time we put our ascending lines from the peak rather

than the valley, and vice versa with our descending lines.

In the graphic above the green pairs represent ascending channels while the red pair represents a

descending channel. If you're charting channels you can buy when the prices hit the bottom line

of the channel and sell when it reaches the upper line. This works whether going short or long on

a given currency pair.

Summary

Resistance: Reversal point on an upwards trend; or the high point right before a new downward

trend.

Support: Reversal point on a downwards trend; or where the price bottoms out before moving

back to an upward trend.

Trend Line: A line drawn either upwards along the bottom of easily identified support points, or

downward along the top of easily identified resistance points.

Channel: The area between a trend line and another line drawn parallel along the other side of

the price range-- along the highs if ascending and along the lows if descending.

Fibonacci Ratio Introduction

Like candlesticks, Fibonacci ratios have been the subject of more words than most people can

imagine. They're based on a discovery by an Italian mathematician named Leonardo Fibonacci

who first described them over eight hundred years ago. He wasn't the first to discover them, but

he introduced the idea to the West and by the time the earlier discoveries were publicized they

were pretty well linked with his name. Let's look at the Fibonacci ratios closer...

Not surprisingly, Fibonacci ratios (which we as forex traders work on) are based on Fibonacci

numbers which are a series of numbers where each one is equal to the sum of the preceding two

numbers.

Here's the sequence:

0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 377...

It goes on but these are enough to work with for the moment, especially as we're more concerned

with the ratios between Fibonacci numbers than the numbers themselves. The way the Fibonacci

ratios work is that the ratios between any given Fibonacci number and the numbers to either side

are the same: either 0.618:1 or 1:1.618. Essentially each number is 1.618 times the preceding

number and 61.8% of the next number.

These Fibonacci ratios also carry on further as can be seen in the following table: 0.236, 0.382,

(0.50), 0.618, (0.764), 1.00, (1.382), 1.618, 2.618, 4.236. The numbers in brackets aren't actually

Fibonacci ratios but they're used so often when trading that most people lump them in with the

real Fibonacci ratios. One thing to remember is that so many forex traders do set their buy and

sell orders according to Fibonacci ratios that it can become a self-fulfilling prophecy.

The thing to note about these ratios is that they show up all the time in both natural and artificial

systems and no one knows why. Being good empirical traders we don't know why either, but all

that matters for us is to know how we can make use of the sequence.

Retracement & Extension Levels

Retracement and Extension levels are essentially the same thing, just looked at in slightly

different fashions. Traders look at retracement levels to figure likely points of support and

resistance, while they look at extension levels as points to take profit. O.618, 0.50, and 0.382 are

primary retracement levels while 0.236 and 0.764 are secondary ones. The primary profit taking

extension levels are 1.382 and 0.618 (moving upwards from the Swing High).

The idea behind retracement is simple: when a currency is falling it will usually bounce back

when it reaches one of the Fibonacci retracement levels, so if you buy either at or just before that

point while it's on the way down, you should be able to catch the wave when it turns back up and

sell at a profit.

Similarly you can use the extension levels to determine when it's likely to reverse again, and use

that to pick your selling point.

It sounds great, but how do you do that?

You start by finding your range, which first requires picking your Swing High and Swing Low

points, which are fancy terms for a peak and valley. You get a Swing High when you have a

peak where the highs of the candlesticks on both sides are lower than its own. You get a Swing

Low when the lows of the candlesticks to either side are lower than its low.

These two values give you the end points of your range. Once you've got that the rest is simple

arithmetic.

All you do is find your range (the difference between the two points) and then plug the Fibonacci

ratios in to the variation to find your natural buy and sell points.

Here's an example using EUR/USD.

Our Swing High is 1.4823, while our Swing Low is 1.3946 which gives us a range of 877 pips or

0.0877. So let's plug that in to our ratios and see what we get.

Fibonacci

Retracement Levels

Range Ratio Pips Value

877 1.00 877 1.4823

877 0.764 670 1.4616

877 0.618 542 1.4488

877 0.500 439 1.4384

877 0.382 335 1.4281

877 0.236 207 1.4153

877 0.00 0 1.3946

Now that we've done that we can see where we might expect rallies as the EUR/USD falls from a

high of 1.4823. Since 0.764 and 0.236 are weaker points we are less likely to see support there.

For those of you who are wondering where the 0.764 comes from, it's derived by working

downwards from the high and its value is 0.236 of difference between our Swing High and

Swing Low when moving downwards.

So our likely predictions are that it will find support at or near 1.4488, 1.4384 and 1.4281 even if

it continues to trend downward.

If the EUR/USD started to rise we can simply extend the chart upwards to see likely resistance

points which would give us good points to set sell orders.

So let's take the same chart and add Fibonacci extensions:

Fibonacci

Retracement and

Extension Levels

Range Ratio Pips Value

877 (0.618) (1.419) 1.5365

877 (0.382) (1212) 1.5158

877 1.00 877 1.4823

877 0.764 670 1.4616

877 0.618 542 1.4488

877 0.500 439 1.4384

877 0.382 335 1.4281

877 0.236 207 1.4153

877 0.00 0 1.3946

From the table above we can see that resistance points are likely to form at either 1.5158 or

1.5365 and can plan our sell orders accordingly.

Now the good news is that you won't have to figure all that out manually. Modern software

handles it automatically, so all you need do is select your Swing High, and Swing Low, drag

them into line and it will generate the retracements and extensions for you. The chart below

shows the Fibonacci lines drawn showing the swing high and low and the .236, .382, .50, .618

and the .764 that were automatically drawn with the chart tool

The reason we went over process before is so that you can see how it works and have a better

understanding of what people are talking about when Fibonacci's name comes up.

Now that you've seen Fibonacci levels you may be thinking that they're the trick: Use the levels

to pick your buy and sell points and you can't lose.

Survey Says: Thumbs Down!

It doesn't work that way. Like candlesticks, Fibonacci levels are indicators, they're not

guarantees. All plotting Fibonacci levels will do is give you a list of potential values where

support or resistance may materialize.

Using Fibonacci levels is much like statistics: Think of it like tossing coins: If you flip a penny

you have a 50:50 chance of heads or tails. If you flip the same penny 1,000 times the chances are

you will get approximately 500 heads and 500 tails. That knowledge is fine for the aggregate, but

it doesn't tell you anything about which will come up on the next toss.

For all that Fibonacci levels will do, there are a number of things they won't do:

1) They won't tell you which, if any, levels will provide support or resistance. Just because

Fibonacci levels are more likely doesn't mean that the market won't hit support or resistance

levels elsewhere.

2) They won't make you rich all by themselves by telling you exactly when to make that killer

trade. They help, at least in part because most of the market pays attention to them, but they

aren't going to be enough.

Just like Candlestick Charts, Fibonacci Levels are part of a forex trader's arsenal. Use them the

same way you would use any indicators, as part of a forex trading strategy, not the whole of one.

The real key to successful trading is finding a strategy that will let you put together indicators

that aren't obvious to everyone so you can trade ahead of the curve, not behind it. Fibonacci

Levels can be part of that strategy, but they cannot provide the whole thing.

Summary

Fibonacci Levels are based on the "Golden Mean" and the Fibonacci sequence found in nature.

Fibonacci retracement levels are predicted support and resistance levels while extension levels

are predicted profit points. Because Fibonacci levels are very popular, these predictions often

become self-fulfilling prophecies.

Fibonacci Levels are determined by the range between selected Swing High and Swing Low

points. A Swing High occurs when a specified candlestick has a higher high than the candlesticks

on either side while a Swing Low occurs when it has a lower low than the candlesticks on either

side.

Fibonacci levels to be aware of are the following:

Retracement: 0.236, 0.382, 0.500, 0.618, 0.764

Extension: 0.382, 0.618, 1.000, 1.382, 1.618

Everyone knows that if you want to smooth something out you use an average. That's what

they're all about, getting rid of the highs and lows so you can get a better look at the middle.

Averages are great for seeing trends, because they cut out excess noise, but they run into the

problem that because each one is made up of multiple data points you end up with fewer points

to work with.

This is where the Simple Moving Average or SMA comes in.

What it does is take an average from a rolling period and use that, so you end up with the same

number of data points as you had in the original chart, but the line is smoother.

Here's an example from one of our previous charts

In the above forex chart, the blue line represents the close, while the red line is an SMA of the

last five periods. As you can see, it's a much smoother line with far fewer extremes than the

close. The greater the sample size, the smoother the line.

This is great for smoothing out lines to see long term trends, but because each point has that

much less weight it means that there's an ever greater lag with longer periods.

Thus a ten period average will have more lag than a five period, and a thirty or sixty period

average will have even more lag. It gives you a better line for trends, but the lag may be too great

to tell you when to jump. That's a problem because there's no profit in jumping in late.

So, if you don't want to use an SMA chart, you can use what's called an Exponential Moving

Average or EMA chart. In this kind of average, the weighting for older data points decreases

exponentially. What this does is focus on the more recent data while still giving the smoothing

effect of a moving average. However it still doesn't smooth the data as much as an SMA does.

So, which is better?

Once again we're at the sixty-four million dollar question, and the answer is: Neither. Let's take a

look at the two so we can compare the advantages and disadvantages of each kind:

Movin

g

Avera

ges

SMA EMA

Lag High: Increases with sample

size. Low: due to greater weighting of more recent data

Smoot

hness

High: eliminates false signals

and spikes

Low: greater weight on more recent data means sudden

moves can cause spikes

Exponential is great when you're looking for a quick response. As an average it filters out the

worst of the spikes but the weighting lets you see what's happening almost as quickly as it

happens. This makes it very effective for showing short term trends, giving you the ability to see

a trend early and get on it quickly. This is good because the quicker you can react to a trend, the

greater the profit you can wring from it.

Still this speed comes at a cost. Yes it's more responsive to change, but that very responsiveness

makes it more likely to be thrown off by sudden spikes in the data. Sometimes a quick spike can

appear to be a new trend and you'll find yourself with a margin call instead of profits.

This is where a simple moving average excels. It's very resistant to sudden changes, so it can

absorb spikes without showing false positives. Unfortunately, this means it may not show a trend

until its well underway and everyone else has already jumped on.

You may still be able to make some money this way, but following rather than leading means

you won't make as much as you could.

The good thing is that being a forex trader is not like being a child with two candy bars in front

of her. You don't have to pick just one. Technical analysis involves taking multiple indicators

and using them effectively to make a trade. One technique is to run a relatively long-period SMA

to identify real trends, and use an EMA to find just the right time to jump on and make a killing.

That's far more effective than sticking to one or the other.

Experiment with several different moving averages. Try different periods and see what happens.

Summary

A moving average is an average drawn from a rolling sample set which serves to give you the

smoothing advantages of an average without reducing your sample size.

There are multiple kinds of moving averages. The two we see most often are the simple and

exponential varieties. A simple moving average or SMA is subject to lag, but provides the

greatest smoothing effect for a given sample size. An exponential moving average or EMA

doesn't smooth as much, but it's less subject to lag, so you can react to changes faster.

It's always a trade-off between smoothness and responsiveness. The smoother the average the

less responsive it is to quick changes and the more resistant it is to sudden spikes and false

signals. Your best option is to run several averages simultaneously to give you different pieces of

the picture.

CHAPTER 9

Reading Forex Charts

We previously looked at the basics of reading forex charts and some of the tools such as

Fibonacci ratios that people use to make decisions. Now let's take a deeper look at charts and

some of the things you can read from them. There are more to forex charts than just lines on a

graph, or even candlesticks. There are patterns and indicators that show up over time, and signs

that indicate things are about to shift. In this section we'll look further into how to turn raw data

into patterns that can help us with choosing when to make trades, and what trades to make.

There are going to be a lot of new terms and acronyms in this section, so if you're not

comfortable with them we recommend you get a bit of scratch paper and write them down. As

we were writing this course, one of our team commented that he had seen a lot of courses that

were written by people who knew a lot about their subject and so they kept explaining things in

terms they hadn't defined. That works really well when people know the terms already, but can

leave newcomers more than a little confused.

We don't want to confuse you, the forex market can do that on its own, so before we go too

deeply into the indicators let's start by going over some of the basics:

You'll see these terms a lot, as many of these indicators are used to determine when the market is

either overbought or oversold as the basis for buy or sell orders. These terms come into play

when you have a sudden rise or drop in price that can be traced directly to market activity rather

than fundamental factors.

The idea is that when prices rise too far and fast the currency is overbought, and people are going

to realize that in short order and start dumping it, forcing the price down to a sustainable level.

Oversold is the same thing when a price drops. You want to be able to identify these situations

because it will give you advance warnings of a likely reversal.

Trend Trading with MACD

MACD is why we spent time on moving averages earlier. What this tool does is show you when

a new trend is likely to be forming. We like trends because trading with the trend is the single

best way to make money on the forex market.

The best way to understand it is to see it, so what we're going to do is take some numbers and

plug them in to a MACD chart. Let's start with the raw data. Here's a chart of EUR/USD from

early in 2007 which we'll use to generate our numbers

It makes a very pretty candlestick chart, but there's data there we can get a better understanding

of if we look at it in a slightly different fashion. So let's plot a couple of moving averages.

Here we have two simple moving averages of twelve and twenty-six periods respectively on the

same data.

The blue line shows the twelve period moving average and the red the twenty-six. As you can

see from the chart it's clear that the red line is both smoother than the blue and also lagging

behind it.

This chart gave a great look at the two moving averages, but that's not our main concern when

we're dealing with MACD. As we said before, MACD deals with the difference between the two

moving averages, and is usually presented as a moving average normally written in a three digit

form, such as 12,26,9 (the default for many charting programs). This means you're looking at a

nine-period moving average of the difference between the twelve and twenty-six period moving

averages of the price of the currency.

However since we're more concerned about the differences than the values, the line graph isn't

the best way to view things when dealing with an MACD.

Take a look at the following chart:

This is the same information plotted as a histogram or bar chart. What it does is let us focus on

what's most important on this chart, which is the degree of difference between the two averages

and how it changes over time.

Where the bands crossover the horizontal axis is important because that's where the difference

drops to zero and often signifies a new trend, one the faster average is responding to but the

slower one has not yet seen. When the lines get shorter, that's convergence, and when they get

further apart it's divergence. Stronger trends produce longer bars than weaker ones.

The one real weakness of MACD is that since it does rely on moving averages it can be slow to

react to quick changes in the market. Even with the lag, MACD is so helpful that it's a very

popular tool in many forex trader's toolboxes.

How to Read Bollinger Bands

Bollinger Bands are another very useful tool which works to help determine the volatility of a

currency. Your charting software will generally handle them, so you don't really need to know

how to calculate them, just how to read them and use them. They're based on two standard

deviations above or below the mean of the last twenty periods moving average.

The trick to remember is that when the market is active, the bollinger bands move further apart

and when the forex market is quiet they move closer together. They also tend to act like support

and resistance levels, so when the price approaches one or the other bollinger band it tends to

move back toward the middle. This is called the Bollinger Bounce.

The following chart shows an example of Bollinger Bands:

As you notice, the upper and lower lines are moving together toward the later part of the period,

signifying a possible "Bollinger Squeeze." The closer together the bands get, and the longer they

stay that way the more likely the price is to break out one way or the other. The trick is to watch

the bands, and when you see the candlesticks start to move outside the bounds it's a good sign

that it's going to break.

We don't recommend that you base all your decisions on Bollinger Bands, but they are a useful

technique when applied with others.

Momentum Indicator

Well, it's more an art than a science, but the Stochastic Oscillator is a momentum indicator

which is used to see if the forex market is oversold or overbought. As we mentioned earlier, if a

currency is overbought the value is generally perceived as too high and there's likely to be a fall

very soon.

Let's look at a chart and then see what the stochastic indicators have to tell us:

If you compare the two forex charts you'll see for much of the period in question the USD/CHF

was hanging around the bottom of its value, but it spiked up on a couple of occasions. The

vertical spike was a clear example the CHF was overbought, and it quickly tumbled back down

very shortly thereafter.

The important thing to remember is that when a currency spends a lot of time with a stochastic

value above 80 it is likely to fall, and when it spends most of the time below 20 it is likely to rise.

Your charting package can set different options to smooth out stochastic indicators and eliminate

spikes, but you'll always use it the same way.

RSI - Relative Strength Index

In many ways RSI can be considered a second form of Stochastic Oscillator, as it's read on the

same kind of charts and used the same way. The way it works is to take the ratio of the upward

closings against the downward closings. When the ratio trends up, the currency is heading into

overbought territory and when it trends down it's trending into oversold territory.

Where the stochastic indicators are usually triggered at 80 and 20, the RSI can be considered

more sensitive with scores of 70 or above indicating overbought while 30 or below can indicate

oversold.

Parabolic SAR

The Parabolic Stop and Reversal, normally abbreviated SAR, does not refer to search and rescue.

It's extremely hard to calculate by hand, but very easy to use. What it does is provide a series of

data points which can be used as stop-loss points for floating sell orders.

The essence of the idea is that when there's a strong trend you can plot prices on a parabolic

curve and they will tend to stay within it.

If you look at the above image, you can see the red Parabolic SAR indicators below the curve on

the upward trend and above it on the downward. The important thing about this indicator is that

it only works when there's a strong trend. However when there is such a trend in place it gives a

clear indication of when it has reversed and the need to exit your trade.

Now that we have a basic understanding of these indicators it's time for a recap:

MACD: Moving Average Convergence and Divergence. It's a fancy term for watching the

difference between moving averages of different periods. It can be used to spot reversals and

measure the strength of trends. Remember you're not looking at prices, but at the difference

between averages.

Bollinger Bands: Based on statistical analysis, these measure volatility and provide support and

resistance lines around a currency's price. They're commonly used either to predict a return to a

median price with the "Bollinger Bounce" where a price tends toward the average, or to predict

possible price breakouts with the "Bollinger Squeeze" when a long period of price inactivity is

likely to precede more active movement.

Stochastic Indicators: Hard to calculate, easy to use, these indicators predict reversals by letting

you know whether the market is overbought or oversold. Don't worry about the calculations; the

important thing to remember is that stochastic indicators tell you when the currency is spending

too much time at the edges of the bell curve.

RSI: Relative Strength Index: Very similar to the Stochastic Indicators, but rather than

comparing prices to a recent historic range they compare upwards closings to downwards.

Parabolic SAR: It's the easiest to interpret, but don't even think about the calculations. Just

remember the following: It needs a trend to work, otherwise it won't give you enough

information to make it worthwhile. Also, the moment the indicator crosses the line it's signaling

a possible reversal.

Still, as we always say, don't rely on just one indicator. Try them all out and see which ones

work best for you and then build up a technique that compares different indicators against each

other to help you build a better picture of what's going on.

Technical Indicators Working Together

Now that we know what the technical indicators are, it's time to look at how they work together

and see if we can draw any general rules from them. We can divide them into two basic types,

leading and lagging indicators. As the name implies, leading indicators give signals before a

trend changes, while lagging indicators let us know that a change has occurred.

Jimmy Cash had the hardest time trying to see the use of the lagging indicators. He could

understand the importance of leading indicators easily enough. He naturally gravitated in that

direction because of his desire to be the first one to jump on a new trend. It took a few times, but

he finally managed to get enough experience to see how lagging indicators could weed out false

positives and incorporate them into his trades.

Leading indicators set you up for a potential trend reversal, and lagging indicators confirm when

it's actually happened. Leading indicators are often called oscillators, while lagging indicators are

also known as momentum indicators.

Now, let's start with the leading indicators and see what they can do for us. For this exercise

we're going to use EUR/USD data from 2007. We'll start with a basic candlestick chart and then

follow it with two leading indicators so we can compare what they predict against what actually

happened.

We start with a daily chart from the beginning of May through the middle of July. As you can

see, there was a slow decline in the beginning of the period, with a brief rise followed by a fall

and then a steady progression upward in a series of steps.

EUR/USD 5/2/2007-7/16/2007

The next chart shows the stochastic indicator for the same period. EUR/USD5/2/2007-7/16/2007

As you can see, this technical indicator does a fairly good job of showing that the Euro was

rising for the latter part of the time period involved, but it was giving a pretty solid sell indicator

with an overbought Euro for almost three weeks while the Euro continued to rise.

For our third chart let's take a look at the Bollinger bands. We've plotted the bands against the

Euro's highs and lows so that you can get a better look at how things change over time.

EUR/USD 5/2/2007-7/16/2007

This chart does a much better job of showing that the Euro was continuing to rise against the

dollar despite looking overbought in the stochastic indicators. They're both good technical

indicators but they weren't giving us exactly the same advice.

What you have to remember about the oscillators is that they refer to a back and forth movement

within a range. That's how they get their name. The problem they have is that they are each only

looking at part of the picture. They don't take into account all the data and like all mathematical

formula they work on the principle that the same input will always provide the same results.

When you're dealing with Forex that's not always the case!

It would be the case if each oscillator was based on complete data, but they aren't, they're only

based on part of the data. This is where the false positives come up. Oscillators project one thing,

and then something else happens due to a factor that oscillator didn't include.

In addition to the two shown here, the RSI and Parabolic SAR are also considered leading

indicators, as they can give advance warning of when a reversal and new trend is likely to occur.

It's not always guaranteed, because no amount of technical analysis can predict when

fundamental analysis is going to come into play and knock everything sideways.

Now that we've had a look at leading indicators it's time to move on to the lagging indicators. As

we said before, the primary use of these indicators is to confirm a reversal. The great benefit of

these indicators is that they don't tend to give much in the way of false positives, however by

their very nature they tend to provide the information after the new trend is underway, which

may be too late to do any good.

Let's take the same data set we took earlier, and compare it to a lagging indicator.

EUR/USD 5/2/2007-7/16/2007

Looking at the lagging indicator we see yet another pattern. Even thought the Euro was clearly

trending up overall, as was shown by the leading indicators, the MACD lagging indicator

focused on the downward side of things and gave a totally different impression.

Lets' take a look at it again, this time compared to the Bollinger Bands for the same period:

Now we're seeing a possible Bollinger Bounce coming up after 6/13, at the same time that the

MACD is trending downward, but despite this trend, the price keeps rising into a breakout.

So you're probably asking, what's the point of all these technical indicators, since none of them

give complete information and sometimes they generate false positives?

The point is that they give more information than not having access to them, and that depending

on which kind of market you're in, they can prove very effective at predicting what's going to

happen next. The only problem is that sometimes it can be a real trick to determine which kind of

indicator is more appropriate for the current market. For the moment just remember that different

indicators work better in different kinds of markets and we'll cover which ones work when in a

later section.

Here's the recap:

Leading Indicators/Oscillators: Let you know what's likely to happen, but may give false

positives.

Lagging/Momentum Indicators can confirm a trend reversal, but may be too late for you to get a

jump on the market.

If you know what kind of market you're in you know which indicators to trust and which to

throw away.

Stochastics

RSI

Parabolic SAR

Bollinger Bands

...are leading indicators.

Moving Averages

MACD

...are lagging indicators.

Reading a Chart Pattern

Now that we've seen some of the indicators it's time to move to the next area, patterns. Chart

patterns are funny things; the human eye and mind are able to make patterns out of anything,

even when they aren't really there.

If you don't believe us, just take a look at the night sky. Every constellation you see is a pattern

that was imposed by the human eye and mind. They aren't really there; they only exist because

we can't tell the difference between stars at different distances, so we impose patterns to make

sense of things.

The good thing about this ability is that if we're so good at seeing patterns even if they're only an

artifact of how we're looking at things, consider how good we are at seeing patterns that do exist.

That's one reason why we use charting software, to take advantage of our ability to gather

information in the form of patterns. Computers work with raw data, and they do it very well.

They generate the patterns better than we do, but they can't see them.

Before we start looking for the patterns, let's take some time and go over the kinds of patterns

that we'll be looking for. One thing you should always remember when dealing with patterns is

that they tend to appear when there's a strong resistance and they respond just like a boiler with a

stuck relief valve. The greater the pressure that's needed to overcome the resistance (or support

as the case may be), the further it's likely to move when it does break through.

Triangles:

Triangle patterns have one thing in common: while they do predict a breakout, they can't be

guaranteed to predict which direction it's going to go.

There are three main kinds of triangle patterns: Symmetrical, ascending, and descending. They're

all defined by trending the highs and lows against each other. You get a triangle when the

difference between the high and low is decreasing, just like when you see a Bollinger squeeze.

Symmetrical Triangles:

High and low are converging, with the highs decreasing and the lows increasing. This triangle

indicates that as they get closer to a convergence the more likely there's going to be a breakout.

There's no way to tell which way it will break, so place orders above and below to catch the

break when it happens.

Ascending Triangles:

These are formed when there is a strong resistance level and as the lows get higher they put more

and more pressure on that resistance line. If this continues, there's going to be a breakout where

either the buyers will manage to break the resistance level, and push the price upwards, or the

sellers will hold firm and the price will drop because they couldn't break through.

We don't care which. All we need do is place orders above the resistance and below the slope,

and whichever way it breaks we can make money.

Conventional wisdom holds that it will normally break upwards, but that doesn't always happen.

That's why we suggest placing orders above and below. Remember, you shouldn't care if you're

going long or short, so long as you can make money doing it.

Descending Triangles:

These work just like ascending triangles, with the difference being that it's a support line rather

than a resistance that the price can't break through. Again, place your orders above the trend and

below the support and watch for the inevitable breakout.

While you can make money trading either direction, the descending triangle does have one

advantage. It's more likely to break downwards, and since prices usually fall faster than they rise

you can make more money going short.

Using Pivot Points To Enter The Forex Market

Pivot Points are being used more and more by forex traders and are an excellent tool for

calculating entry and exit points as well as levels for Stops. Pivot Points are super sized-support

and resistance levels that are calculated from the price action from the previous day. The reason

these levels are superior to Fibonacci levels is because there is no subjectivity involved in

calculating them. For example, when choosing a range to mark Fibonacci levels one person may

choose a range from the one hour and another person might choose a different range all together

which would result in 2 different sets of support or resistance's.

Pivot points, however, are based on the High, Low, and Close of yesterday's price action and

therefore there will be very little fluctuation in the results.

Pivot points are good at forecasting short term price levels because they are reflective of both

short-term volatility and trader psychology. Calculating pivots for the last session is measuring

short-term volatility and direction. Pivot points also reflect forex trader psychology in that major

pivot points are also: major Fibonacci retracements, trends and major levels of support or

resistance.

While all three of these types of systems are quite subjective, there will be enough traders in the

market using these methods to turn a pivot point into a "battle ground" between buyers and

sellers. Price action speeds up around pivot points and makes it a lower-risk entry or exit point.

Remember, no system will forecast with 100% success. What we're seeking to do is lower our

entry and exit risk and raise our odds above random entry. By only entering around pivot points

we can minimize our risk greatly. Pivots are made up of 1 pivot line, which is the center of the

range, 3 levels of support, and 3 levels of resistance. Some pivot point systems also include an

additional 6 levels. These levels are called mid-pivots and are used for intermediate targets and

possible entry levels. It is advised to implement these using a breakout strategy rather than a

reversal point. These levels act just like a regular pivot however they can be slightly weaker.

The first strategy for using pivot points is to trade pivot breaks with the momentum. Successful

Pivot Point trading greatly depends on the momentum of the market and current volume. If

volume is low it is best to pass on the trade unless you have overwhelming indications of a trade.

Providing you have proper volume and momentum you would go short when one of the support

levels is breached and long when a resistance level is breached. Keep in mind that resistance

becomes support and support becomes resistance once broken. You want to wait for a

convincing breach to ensure that the market has indeed broke the level. Usually waiting for 1 or

2 (15 min) candles to open and close on the opposing side of the level ensures that the market

has broken the level. Always enter as close to a pivot as possible.

This will limit the risk you take on in each trade as stops should be approximately 20 pips above

or below the broken level. Many times the market will return to the level that was broken before

continuing on; this provides an excellent entry with a very tight stop. You should not enter

between two pivots if at all possible as this will increase your risk by increasing the necessary

stop for the trade. Below is an excellent example of a break below the S1 level which is with the

overall momentum of the market. This illustrates a clean break followed by a retest which gave

an excellent short entry with minimal risk.

The second strategy for trading pivot points would be using these levels as reversal entries.

When the forex market is moving towards a Pivot level your entry would be to buy off of support

and sell from resistance. This strategy works best when the market is range bound. You must

watch these trades very carefully because they are against the overall push. If a support level is

breached and the market lingers below for too long you should look for an exit opportunity. As

stated earlier, the forex market tends to revisit the level which will give you the opportunity to

exit the trade with little or no loss. If a level is good for a bounce it will generally reverse fairly

quickly. Therefore, if you don't see profit after 30 to 60 minutes you should be very cautious and

once again begin looking for an exit.

The example below illustrates a low volume day where that market is range bound. Under these

conditions you would sell the resistance and buy the support using close stops and target 50% of

the distance between the levels.

This is a good example of a range bound market.

CONGRATULATIONS!

You have just completed the Forex Trading Course!

NEXT STEP:

This was the basic course in Forex Trading.

The next step is to study the

Complete Forex Trading Course

That will take you a bit more in depth explaining the Market conditions and how to deal with them.

After studying the above you would then need some Forex Trading System

Here you will find some:

http://www.zwinner.com

http://www.zwinner.com/luckytips/index.html

http://www.asianbreakouts.com