unleash the power of binary options

Binary Options Profit Pipeline

TesTimonials

Mara

Here are my results for today! $12,340! for European-US session. The loss was because I placed the trade too late and didnt review rules. But I only hope to do 1-2 High trades per day. I have just seen a friend of mind lose 20K in a couple of minutes. It was a wake up call. One of the things I have learnt is that you have to be very patient to seek for the trade.

Mara Sorm

Robert

Last night I made what I thought was a mistaken trade, I wanted to place a trade for $37 but instead didnt clear the $100 that was in the entry box and ended up making a $1037 trade. I followed the entry rules and signals sent yesterday and ended up making a lot for the day. More than what I wanted to make. Slowly and surely my confidetx:e is rising.

Robert Mashilo Kligoeng

Amanda

I just also wanted to let you know I really received major help from the videos in the member area and thought it was great you guys shared the one that Curtis did. I took myself back to my college days... I sat myself down, focused, hand wrote the trade entry rules, reviewed them, reviewed the videos, and I am on track. Imagine that, studying works haha. It is like you said, its up to us to take responsibility for where we want to be.

Amanda Harman

Lee

I have been a member for less than one month and I can already see the benefits of being a member! The signals I have received have been VERY beneficial! The win rate is ASTOUNDING and I can hardly believe this is real.The signals are delivered in a MORE THAN timely manner to your email inbox. The signals are very accurate as well. They are very clear to read and understand as well as easy to implement.

Lee Woodsum

Chris

Since starting 3 months ago my account has more than trebled, on just placing trades on the indices. Imagine what my account would look like if I was to trade the forex as well? Signals that are sent out are clear & easy to understand even for someone like myself who has very little trading knowledge. I cant thank The Binary Options Experts enough.

Chris Smith

Antwan

My name is Antwan and Ive been with The Binary Options Experts for some time now and what I have found out about The Binary Options Experts is that they are on your side one hundred percent. The support is the best ever. You will be glad you chose The Binary Options Experts to help you become money-worry free. Im really happy right now that I picked The Binary Options Experts, you should too.

Antwan Carty

Anita

Just wanted to say thank you for all your help. You should be proud that you are doing what so many other companies claim to do, genuinely help and educate others so they are able to produce real and proven results. Thanks again.

Anita K

Dan

The profits I am seeing daily are by far and away the most immediate ard lucrative I have ever experienced. I would recommend The Binary Options Experts to anyone looking for exceptional trading programs, cutting edge education, practical and timely support and SCREAMING PROFITS.

Dan Andrews

Jane

Just wanted to drop you a line and tell you that the profits from our last 4 days trading has paid off my Binary Options Experts investment for the month, my weekly mortgage repayment AND I had $100 to spare PROFIT! Awesome work guys, cant thank you enough!

Jane Button

Liz

On every occasion they have treated me with patience and understanding, answering all my questions and concerns promptly and concisely. I could not recommend their business strongly enough and look forward to working with them in the future as they help me build my growing pottfolio.

Liz P

Dominic

I have lost over $250,000 of my own funds attempting to trade for myself ! The Binary Options Experts have given me the opportunity to trade profitably without the risk or losses I experienced trading previously. Trading with The Binary Options Experts has given me a rewarding income with limited time investment allowing me the lifestyle of having both money and the time to enjoy it.

Dominic M

Risk Disclosure

Binary Options carries a risk to your capital and you may lose all, but not more than, your initial stake. This may not be suitable for everyone. Ensure that you fully understand the risks involved prior to trading and seek independent financial advice if you have any doubt in the suitability of any type of speculation. Only ever speculate with money you can afford to lose.

The Binary Options Experts (a division of Profit Pipeline Systems Corp.), its products and representatives do not provide individual investment advice. Therefore any information provided by the companys products or representatives or publicity material are not to be read or taken as any form of trading advice nor a solicitation to trade and is designed for educational purposes only.

No guarantee or warranty of future profitability can or has been made. The use of this product is purely at the members own risk. Past performance is not necessarily a guide to future profitability.

All rights reserved. No part of this publication may be reproduced in any form or by any means without the prior permission in writing of The Binary Options Experts.

Please note it is our intention to be as accurate in fact, detail and comment as possible. However, the publishers and their representatives cannot be held responsible for any error in detail, accuracy or judgement whatsoever. The book is sold on this understanding.

ConTenTs

Chapter 1: Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11Chapter 2: Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15Chapter 3: Introduction to the Markets. . . . . . . . . . . . . . . . . . . . . 19Chapter 4: Introduction to Bet On Markets . . . . . . . . . . . . . . . . . 27Chapter 5: Introducing MetaTrader. . . . . . . . . . . . . . . . . . . . . . . . 35Chapter 6: Introduction to Charting . . . . . . . . . . . . . . . . . . . . . . . 45Chapter 7: Market Direction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51Chapter 8a: Introducing Divergence . . . . . . . . . . . . . . . . . . . . . . . . 55Chapter 8b: Regular Divergence . . . . . . . . . . . . . . . . . . . . . . . . . . . 59Chapter 8c: Hidden Divergence . . . . . . . . . . . . . . . . . . . . . . . . . . . 75Chapter 8d: Confirming Divergences . . . . . . . . . . . . . . . . . . . . . . . 85Chapter 9: Introducing Support and Resistance . . . . . . . . . . . . . . 95Chapter 9a: Previous Market Swing Zones. . . . . . . . . . . . . . . . . 101Chapter 9b: Trend Lines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 109Chapter 9c: Moving Averages . . . . . . . . . . . . . . . . . . . . . . . . . . . . 117Chapter 9d: Pivot Points . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 121Chapter 9e: Fibonacci Retracements . . . . . . . . . . . . . . . . . . . . . . . 125Chapter 9f: Fibonacci Extensions . . . . . . . . . . . . . . . . . . . . . . . . . 137Chapter 10: Putting it all Together . . . . . . . . . . . . . . . . . . . . . . . . 143Chapter 11: Using the Flowcharts . . . . . . . . . . . . . . . . . . . . . . . . . 153Chapter 12: Support/Resistance Confluences . . . . . . . . . . . . . . . . 163Chapter 13: Placing No-touch Barriers . . . . . . . . . . . . . . . . . . . . . 171

Chapter 14: Money Management . . . . . . . . . . . . . . . . . . . . . . . . . 179Chapter 15: When Not to Trade . . . . . . . . . . . . . . . . . . . . . . . . . . 185Chapter 16: Trading Psychology . . . . . . . . . . . . . . . . . . . . . . . . . . 189Chapter 17: SharpReader. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 197Chapter 18: Keeping a Trade Log . . . . . . . . . . . . . . . . . . . . . . . . . 199Chapter 19: Final Thoughts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 203

11

ChapTer 1

Introduction

What we are aiming to introduce to you in this book is a successful methodology for making regular profits from the financial markets, with as little as a few minutes per day of market analysis.

As you progress through the book, we will guide you through everything you need to know in order to become a successful Binary Options trader. Even if you have never traded before and you feel as though you may not know the first thing about how to make money from the financial markets, we are confident that by the end of this book you will be ready to do just that!

You may never have heard of Binary Options before, or you may only have heard of it in relation to vanilla options. Its definitely one of the newest investment and/or trading vehicles in existence.

When most people think of the financial markets, they view it in terms of perhaps investing in the stock market, or possibly arbitrage, which is also becoming a very popular method of getting involved in the markets.

Both of those approaches require a great deal of time if you are to be successful. Many people, who have regular jobs, simply cant commit the hours that are necessary in order to study and learn the correct methods and trading styles, or to do the research thats necessary for making good investment decisions.

Binary Options, and the methods of approaching it that we will teach you, are different. With the methods you will learn in this book, you will be able to analyse the markets very quickly each day; in the mornings before you go to work and even on your lunch break. We will be teaching you a trading method which means you dont have to be at the screen every minute of the day waiting for an opportunity to come along.

Introduction

12

Naturally, the more time you spend with the markets the better, but one of the main reasons we created this trading book was to give people an opportunity to enter the world of the financial markets without it interfering in their everyday lives.

The other great advantage of binary options trading is the ability to be in complete control of the risk element. With every binary options trade, you will know before you even get into the trade exactly how much you will make if youre correct, and exactly how much you stand to lose if youre wrong. With that information you can plan your risk management strategy accordingly. Youll never be overexposed to the market and there is absolutely no danger at all of your account being decimated by a sudden sharp move. This means that anyone, with any level of capital, can get started.

We trade professionally using the exact methods you will learn in this book, and we are aiming to give you the knowledge you need to one day enjoy a professional trading career of your own.

On that note, wed like to tell you a bit about ourselves, why we do what we do, and what we are now offering to you through this book.

We trade professionally, and have been actively trading for many years. Trading professionally for yourself is, as far as were concerned, absolutely the best job in the world. There are no bosses; there are no clients; and there are very few overheads. As a professional trader you have complete freedom and flexibility.

We come from a professional trading background. We learned some of the most effective trading techniques in the world while working in this environment, but after even just a few years the long hours and stress began to take their toll on us and we decided to strike out on our own.

We are fortunate to live in an era when this is even possible. Throughout much of the history of financial trading, the only way to make it a profession was to work for a bank or a major financial institution, or failing that, at least have access to vast amounts of capital beyond the reach of most ordinary people.

All this has changed over the last decade or so. With the rise of faster internet connections and new technologies, its now possible for anyone to trade the financial markets using just their home computer. When we realised this was possible, it was, for us, the obvious next step.


13

Its no secret that there are advantages to the city trader lifestyle that you dont get working for yourselfthe main one of course being the bonuses!

But, we thought, what good is a city traders income if you never have the time or the freedom to enjoy it? We saw some of our friends in the city reach burnout point in their early 30s, and decided that that wasnt what we wanted for ourselves.

As soon as we got ourselves set up at home and began applying some of the methods we knew from our City experience, we never looked back. We now have a job which we can do from a laptop; from our living room, from the garden, even abroad. Anywhere in the world in fact!

We truly believe that the methods you will learn in this book have the potential to give you the lifestyle we currently enjoy ourselves. Not right away of courseas with virtually everything in life its best that you take things slowly and become truly comfortable and confident in what youre doing before you even begin to think about making a career of itbut thats where the great advantage of this method is to be found. You can learn everything in this book around your existing commitments.

Before you move on and begin learning, there are a few points to be made

First of all, we emphasise that you should take things slowly when youre learning. Dont skip ahead or be in a rush, because thats where things will go wrong. This book is arranged in a very logical waywe introduce you to the different pieces of the puzzle as we go through the chapters, and then towards the end of the book we show you how to put those pieces together into a complete approach to trading. If you skip ahead youll find you may well struggle when you get to some of the later chapters. Go through each chapter one by one and make sure you understand completely before moving on.

In conclusion, we look fmward to helping you understand the concepts that are contained in this book, and using those concepts to start taking profits out of the fmancial markets!

15

ChapTer 2

Risk

S peculating on the movement of the financial markets is something that contains inherent risk.There are plenty of opportunities to make money if you can make

correct judgements, but there are just as many opportunities to lose money if you get it wrong. Its important to understand that there are no guarantees in any form of financial trading!

The first thing you need to be absolutely clear on is that you should NEVER ever be trading with money that you cannot afford to lose!

Not only is it simple common sense not to risk money you need for other purposes, but doing so can also adversely affect your trading performance by impacting on your psychological approach to trading. It creates fear of loss, which in turn causes you to make poor trading decisions based on emotion rather than on information.

As long as you understand that risk of loss is part of the trading game, and that as long as you manage your money accordingly and dont over-extend yourself, then youre on your way to becoming a successful trader.

The second aspect of risk that you need to understand is the idea of risk/reward ratios. A risk/reward ratio, for those that are very new to this, is simply the amount of money that you risk on an individual trade, compared to the amount that you could potentially gain on it. One of the key rules of traditional types of trading, such as through a broker account or spread betting, is that you should never risk more on a trade than you stand to gain, and this is very good advice.

In one of these traditional types of trade, the amount of money you can win or lose depends entirely on the amount that the market moves against you or in your favour, so in order to be successful you have to always position yourself in the market at a point where the odds

Risk

16

are that the market will move further in your favour than it could move against you. This is something thats very difficult to achieve consistently.

With Binary Options trading however, we are not actually particularly interested in how far the market moves in our favour or against us. Naturally, we always prefer to see the market move in our favour, but its not an essential part of successful binary options trading.

Were going to be doing a type of trading where we can win even when the market moves against us.

With binary options trading, we are purely interested in the probability of a particular event occurring, or not occurring. Because we are thinking purely about probabilities, this allows us to think about risk in a different way.

In the type of trading well be showing you as you go through this book, youll find that in the vast majority of trades well be taking, we risk more than we stand to gain. This means that if a trade loses, we will lose more money than we stood to gain had the trade been successful.

That might sound slightly strange to you at this stage, but read on and things will become clearer!

Take a look at this semi-hypothetical example from the field of sports:

FA Cup 4th RoundLiverpool vs. Havant & Waterlooville (H&W)

This match actually occurred in 2008. The fixture pitted the multiple English and European Champions, a team made up of some of the top players in the World, against a part-time team from five divisions below, made up of plumbers, postmen, taxi drivers and more. Not only that, but the game was to be played at Liverpools home ground, giving them even more of an advantage. The chances of H&W winning this game were tiny.

But what if you could have gone into a bookmakers and placed a bet that paid out a profit as long as H&W didnt win?

If Liverpool won, youd make money. Even if the match ended in a draw, youd make money. They only way youd lose money would be if the rank outsiders actually managed to win the match!

Its unlikely you would have been able to find a bookmaker willing to offer you this bet, because the odds would be so stacked in your favour!


17

Now heres the hypothetical aspect: Imagine if this fixture was played 100 Saturdays in a row, and every Saturday, before the match, you could place a bet that says H&W wont win.

Its likely that even if you found a bookmaker willing to offer you this bet, they would have offered you incredibly short odds, perhaps around 1/15, which means that for every $15 you staked on H&W not winning, youd earn a profit of $1 if they did indeed fail to win. Conversely, if H&W did manage to win, youd lose your $15 stake.

So imagine if the game was played 100 times in a row, and every time, you staked $1,500 that H&W would not win the match at odds of 1/15. This means that every time the match ended as either a draw or a Liverpool win, youd get your $1,500 stake back, plus a profit of $100. But if H&W managed to win, youd lose your $1,500 stake.

Its entirely possible, highly likely even, that the match could be played 100 times in a row and H&W wouldnt win a single one, such is the difference in ability between the two teams. But imagine the following:

Ninety-eight times out of 100 the match ends as either a Liverpool win or a draw. Two times out of 100 H&W manage to win.

With the bets you would have been making, this means that on 98 occasions, youd make a profit of $100, while on two occasions youd lose your $1,500 stake.

Do the maths:

98 x $100 = $9,8002 x$-1,500 = $-3,000

Net Profit after 100 matches = $6,800!!!

Even though you were risking more than you stood to gain on each bet, they were still good bets because the odds were so strongly in your favour.

Sadly, these opportunities simply dont exist in sports. For one thing matches with such a bias in the probable outcome dont come around too often, and when they do theyre never played 100 times in a row! Even if they were, theres no bookmaker on Earth who would let you bet this way, because the odds would be too stacked in the favour of those placing the bet.

Risk

18

But opportunities with this kind of bias not only exist in the financial markets, they occur over and over again! Were going to be teaching you to find the financial equivalents of this kind of tradeopportunities where the odds are so strongly in our favour that its acceptable to risk more than our potential gain.

The reason why Binary Options brokers will let you place these high-probability trades while sporting bookmakers wont is actually quite simple.

With the sporting example above, it would have been very easy for anyone to figure out that H&W would have very little chance of beating Liverpool.

Even if you didnt know the first thing about football you could have learned all you needed to know just by picking up a newspaper. Therefore, to offer bets that any member of the general public can easily profit from is quite simply bad business for sporting bookmakers.

On the financial markets though, you do need specific knowledge in order to profit from the high-probability trades, and indeed to even spot them in the first place. The vast majority of people dont have this knowledge, and never will, so the brokers are taking acceptable risks by offering the high-probability trades, because only a small minority of their clients will be able to spot them.

In this book our aim is to teach you to identify these high-probability trades that arent necessarily obvious to others who dont have the correct training.

While on the surface this approach to trading may look risky, the truth is that if you study all the materials in this book and apply them correctly, you will be putting the odds massively in your favour on each trade while taking negligible risks, just as you would have been had you been able to place bets on 100 consecutive Liverpool v H&W games.

Thats the key to this style of trading.

19

ChapTer 3

Introduction to the Markets

A financial market is like any other marketplace. It is a place where buyers and sellers convene to set the value of a particular item.

Within a financial market, prices fluctuate constantly, and these fluctuations are caused by changes in the balance of supply and demandmeaning of the weight of buying at any given moment versus the weight of selling at any given moment.

When supply and demand are in equal measure, things are in absolute equilibrium, and market prices stand still. This rarely lasts for very long however, and sooner or later, one will start to outstrip the other.

Lets take a look at an example of supply and demand.Imagine that a new University study announces that oranges are the

new super-fruit. This results in a sudden buying frenzy of oranges, an increase in demand, to the point where the supply cant keep up.

With oranges getting more and more scarce, the demand is greater than the supply. As a result of this, oranges become more valuable, and the price of an orange rises. It continues to do so, as long as people still believe theyre worth buying at the increased prices.

Eventually, the price of oranges gets so high that people think theyre no longer good value. People who bought oranges as an investment and hoarded hundreds of thousands of them might start to think that now is the time to cash in, to sell their oranges for a massive profit at this price because it seems theyre not going any higher.

The problem is that nobody wants to buy at the moment. Theres now plenty of supply of oranges but no demand, because the price has gone too high.


20

This means that in order for demand to come back in to the market, the prices have to come down again to the point where people once again think theyre good value.

This means that the price of oranges starts to fall again, and it will continue to do so as long as there is more supply than demand. Eventually it will get to a point where people think oranges are once again good value, and they start buying again, and the whole process repeats itself again.

The market is a constant battle between supply and demandsellers and buyers.

The key to being successful in the financial markets is to be able to identify, either ahead of time, or right at the time, the point at which the market changes from being a selling market to a buying market, or vice versa.

As you go through this book, you will learn how to accurately identify these points.

So, what kinds of things are traded in financial markets?First of all, the ones you are probably most familiar with are

company shares. Company shares are traded on what is known as the stock market and their prices tend to rise and fall depending on the companys performance. When a company is doing well, demand for its shares increases, and so does their value, as the supply diminishes. When a company is doing badly, its share price falls because the demand for the shares is lessened, while supply increases.

Company shares are also grouped together in what are known as stock indicessuch as the FTSE 100 (London), or the Dow Jones Index (New York).

Stock indices are effectively a combination of all share prices listed within the index, and as a result they give an overall view of how a countrys economy is faring.

Usable items such as gold, oil, copper, rubber, orange juice, coffee and many more, are known as commodities. There is no single commodity market howeverrather, each item has its price set on its own market. This means that there is a market to set the price of gold, another to set the price of oil, and so on.

The next major group of markets is known as the Currency Market, or Foreign Exchange Market, which can be shortened to either the FOREX Market, or just the FX Market.


21

The term currency market is, like the term commodity market, actually an umbrella term for a group of markets. The currency market includes hundreds of separate markets, because each individual market is used to define the value of one currency against one other currency. This means that theres a separate market for setting the value of pounds against Dollars, another to set the value of pounds against euros, another to set the value of euros against yen, and so on.

There are hundreds of currency markets in total, but as we go through this book were going to be focusing on just a few of them. Were going to focus on most of the bigger, more active currency markets.

Why do we choose to trade the currency market?Firstly, and this may come as a surprise to you, the currency market

is the worlds biggest financial market by a long, long way. It absolutely dwarfs the stock market or the commodity market. The average DAILY turnover in the currency markets is over four trillion dollars. This means that four trillion dollars of money is traded every single day across the many currency markets.

The sheer amount of activity in the currency market means that is a very liquid market. The term liquidity means that the market functions smoothly. In any transaction in any financial market, you need someone to take the other side of your trade.

This means that if Im buying, then someone else is selling to me, and if Im selling, someone else is buying from me. There is so much activity in the currency market that you can almost always find someone else to take the other side of your trade, which results in a smooth and well-functioning market.

When theres very little liquidity in a financial market, you tend to find that long periods of inactivity are punctuated by sudden, sharp price movements, which can make good trading somewhat difficult. This is not a problem in the currency market.

The next great advantage to trading the currency market is that it runs for 24 hours, five days a week. From Sunday night through until Friday night, the market is constantly open. The main advantage of this, for us as traders, is that it means that you can, to a certain extent, pick and choose your trading hours.

If you are studying this book around another job, you might find that you want to get into the markets when you get home from work, and this is possible with the currency market because it will still be open.


22

Some other markets have opening and closing hours during the week. For example, the FTSE 100 Stock Index is open only between 8.30am and 4.30pm every day. This obviously creates a problem if you are unable to trade until the evening as you cant trade on a market when it is closed. Again, this is not a problem with the currency market.

Understanding currency quotes

When trading the currency market, the most basic piece of information available is the current market ratealso known as the quote. You need to be able to quickly and easily read currency quotes and interpret what they mean.

In any currency quote, youll see six letters to start with. The first three letters represent the first currency that makes up the quote, and the second three letters represent the second currency involved.

Remembereach individual currency market defines the value of one currency against one other currency. This means that they often get referred to as currency pairs which is another term youll be hearing regularly.

Each currency has its own specific three-letter symbol, so you can always know which currencies are involved in the quote you are looking at. The major currencies of the worldthe ones we will be tradinghave their three-letter symbols listed in the table below.

Currency SymbolAustralian Dollar AUDCanadian Dollar CADSwiss Franc CHFEuro EURBritish Pound GBPJapanese Yen JPYNew Zealand Dollar NZDSwedish Kronor SEKUS Dollar USD


23

Look at these examples of currency pairs:

1) GBP/USD = British Pounds against US Dollars2) EUR/JPY = Euros against Japanese Yen3) USD/CHF= US Dollars against Swiss Francs

Now look at these examples of currency quotes:

1) GBP/USD = 1.87552) EUR/JPY = 161.253) USD/CHF= 1.0877

The next key concept in understanding currency quotes is to be able to determine what these numbers mean.

The currency listed on the left of the quote is referred to as the base currency, and in any currency quote the base currency is always equal to 1. The currency on the right of the quote is the currency thats being compared to the base currency.

So, in those three examples shown above, what the numbers are telling us is:

1) It takes 1.8755 US Dollars to equal 1 British Pound2) It takes 161.25 Japanese Yen to equal 1 Euro3) It takes 1.0877 Swiss Francs to equal 1 US Dollar

It may take a while to commit to memory both the symbol abbreviations and the way in which the quotes are structured, but keep practising and before long youll be able to read a whole list of currency quotes at a glance and get a full picture of what the markets are doing!

The next thing to learn is how the movement of a currency is represented in its quotes. Currency quotes change almost constantly, in incremental values. During the busier European and US trading hours, the quotes change almost every second!

The movement of a currency pair can be described in increments called either pips or pointsthese two terms are interchangeable and mean the same thingwhich one you use comes down to personal preference, and youll no doubt hear both as you learn more.


24

(NoteWe will use the term points throughout the rest of this guide)Lets have a look at some basic examples of how movement in points

is shown within currency quotes:

If GBP/USD moves from 1.8750 to 1.8751, that is a move of 1 point

If GBP/USD moves from 1.8750 to 1.8760, that is a move of 10 points



The simple rule to understanding what equates to a points worth of movement is this: In nearly all currency pairs, the final digit of the quote equates to one point.

Most currencies are quoted in four decimal places, but some, such as EUR/JPY or USD/JPY are quoted in two decimal places; but regardless, the f inal decimal place corresponds to one point. One increment of that digit corresponds to one point of market movement.

Some key trading terms

As you proceed through the book, you are likely to hear a few terms that have specific meanings within the context of financial trading. These terms are:

Bull and Bear (or Bullish/Bearish)+

Long or Short

What do these terms mean?Bull/bear or bullish/bearish effectively describes your view of the

market. If you are bullish on a market, that means you expect the market to rise. If youre bearish, you expect the market to move down. This means that depending on your view of the market, you can be described as either a bull or a bear.


25

Similarly, long and short describe your actual positions. These terms actually apply more to traditional types of trading than they do to Binary Options, but they are still worth knowing.

If a trader enters a long position that means he or she has bought that market in the expectation of it moving up. But if a trader takes a short position that means that they have sold the market in the expectation that it will move down.

27

ChapTer 4

Introduction to Bet On Markets

This chapter will be your introduction to the Bet On Markets (BOM), and by extension of that, its also going to serve as an introduction to Binary Options trading, and what its all about.

Thats where were going to start in factby explaining the concepts behind Binary Options, how it works and how it differs from more traditional types of trading. Well then move on to looking at the Bet On Markets website itself, well go through all the features of that and explain some of the different types of trades that are available.

First of all, theres one thing we need to make clear. We are not actually trading directly on the markets ourselves, were simply trading on the movements that are caused by the millions of banks, institutions and individuals worldwide who are actually trading.

When youre taking positions with BOM youre not actually physically buying and selling any currencies, or shares or commodities. Youre not directly involved in the marketyoure just speculating on its price movements.

If you want to think of it again in terms of a sports analogywhen you bet on a horse race, youre simply betting on the outcome of the race, youre not participating in it directly. Youre just wagering on what might happen, against the odds of certain outcomes given to you by a bookmaker. Thats what were doing.

But this is no bad thing! Binary Options trading, has a number of advantages. The main one that youll be interested in is of course the fact that under current legislation, its possible that the profits earned from Binary Options trading are tax free! You may pay absolutely no tax on the profits you earn from Bet On Markets, even if you get to the point


28

where youre doing it for a living. This could change in the future so please consult a tax advisor in this regard.

The second great advantage of binary options trading is the flexibility it gives you to take different types of views on the markets that are simply not possible with more traditional trading methods.

In a more traditional type of trade, you can make money in just two ways. You can buy a market, and if it goes up, you make money. Or you can sell a market, and if it goes down, you make money. But thats itthey are the only ways you can profit in a traditional type of trade. But as we covered in Chapter 2, the profits that you can make in either of those situations depend entirely on how far the market moves, because in a traditional type of trade, you make a certain amount of money for each point that the market moves in your favour. This means that in order to be really successful, you have to find the trades where the market is likely to move a long way in your favour, and trades like that can be quite hard to find.

With Binary Options trading, you can take all sorts of different views on the market. You place a trade which states I want to make money if the market touches a certain level in the next week; you can also place a trade which states I want to make money if the market doesnt touch a certain level in the next 2 weeks. With Binary Options trading, there is a lot more variety in the types of positions you can take on the markets.

It is a generally accepted statistic that financial markets spend roughly 70% of the time trading in small, awkward ranges, and only 30% of the time moving in strong directional trends. With traditional types of trading its very difficult to make good profits in small range markets, but with Binary Options trading, you can make money in any market condition because theres a type of trade to suit your viewpoint.

When you place a Binary Options trade, it costs a certain amount to place. This, effectively, is your margin. If the trade losesif your prediction doesnt come trueyou lose your margin. But if the trade wins, you get your margin back plus the agreed profits on top of that. We use the term agreed profits because before you even commit to the trade, the BetOnMarkets website will tell you what size your margin has to be to achieve a certain level of profit, providing your prediction does come true. These figures vary depending on how likely the trade is to be successful.

An example binary options trade:


29

Iwishtoprofit$1,000ifGBP/USDishigherthan1.9500in10 days time.

Thetradecosts$650. Ifthetradeloses,youloseyour$650stake. If the trade wins, you win $1,000, which is your $650 stake

returned, plus $350 profit.

The ability to set all the parameters before committing to the trade is a great advantage of Binary Options trading. If you wanted to risk less than $650 on the above trade, you could have halved the potential profit, therefore halving the margin that you would have had to put up.

You can adjust all the parameters to suit your risk level, and your capital level. Before you even place the trade, you know exactly the maximum you can stand to gain or lose. This helps in planning your money management strategies and gives you the peace of mind of knowing that even if a trade goes wrong, you cannot lose any more than youve placed, which takes a lot of the fear element out of your trading.

The Bet On Markets Website


30

First of all, lets take a look at some background information about Bet On Markets, as its important to know about the company who will be holding your account when you move on to trading live money.

Bet On Markets is owned by Regent Markets, a very large, international financial group with offices in numerous locations around the world and a turnover of over $100m per year. Regent Markets is based on the Isle of Man, and is fully authorised and regulated by the Isle of Man Gambling Supervision Commission. You can actually view their gambling licence on the Bet On Markets website itself.

We have personally been trading with Bet On Markets for over four years and weve never found them to be anything less than fair in their dealings, helpful in their approach and very prompt when it comes to the subject of withdrawing profits back into ones bank account.

Bet On Markets are the leading financial bookmaker in the world at the moment, and you can have as much confidence in betting through them as you would with any of the more traditional brokers such as FXCM or FOREX.COM.

The different types of trades

When you begin looking at the trades available at the Bet On Markets website, youll see that there are a number of different types. There are trades which are classed as double trades, trades which are classed as expiry trades and a third category called boundary trades.

Rise/Fall trades

Rise/Fall trades are so-called because in every single one of these trades, the payout is twice the amount of the investment. If the stake is $50, the payout is $100*. That means that the final profit on a successful trade is $50*. Rememberthe final profit is the payout minus the initial investment.

* Less broker commissions.


31

Higher/Lower trades

An higher/lower trade allows you to specify, depending on the type of trade, certain levels or areas in the market where you would expect the market to be in a given time period. Its not important what the market does while the trade is runningthe only thing that counts is whether or not the market is within the parameters you set at the time the trade expires. The investment required for an expiry trade, and the potential profit, vary depending on how likely the trade is to succeedthe higher the probability of success on a trade, the costlier it is to place, and the lower the return.

Touch/No Touch trades

A touch/no touch trade allows you to specify, depending on the type of trade, certain levels that the market must either touch, or not touch at all while the trade is running. With the expiry trade, it doesnt matter what the market does while the trade is running, as long as it expires within the set parameters. With boundary trade however, were specifying what the market must do, or not do while the trade is running.

The type of trade we will be focusing on throughout this course is the No-Touch trade.

The No-Touch trade

This is the type of trade that we will be focusing on in this book, so lets take a more detailed look at it. Its fairly self-explanatory, but with a


32

no-touch bet we are specifying a certain level in the market and a certain time period. If the market doesnt touch that level within the specified time period, the bet will be a winner. If it does touch while the bet is running, then the trade will be a loser.

This is our favourite type of trade at Bet On Markets. We have been extremely successful with it, and were going to teach you to be successful with it too!

Just as with the higher/lower trades, the investment required for a no-touch trade, and the potential profit, vary depending on how likely the trade is to succeed. The further from the current market level you place your barrier, or the shorter the duration of the trade, the more likely the trade is to succeedtherefore the investment required increases and the payout decreases.

Placing a trade and using the portfolio page

Once you have entered the parameters for your trade, actually placing it on your account is a very simple one-click processjust press the buy this bet button over on the right-hand side of the screen:

Once you have placed a trade on your account, you can monitor it using the portfolio page. This is the section of the website where you can look at your current open trades, manage them, and keep up to date with how your account is faring.


33

The portfolio allows you to see the details of each trade you currently have runningthe price at which you bought the trade (your investment), and the current price at which Bet On Markets will let you sell the trade back if you no longer wish to keep it.

This is quite an important concept. You can sell your trade back to Bet On Markets at any point; theres no need to be tied to a position you no longer want and although we normally run our trades until the expiry date in order to claim the maximum payout, it is possible to exit a trade whenever you like. This is handy in rare cases where a sudden unforeseen event might make you reassess the chances of the trade being successful.

The sale price of a trade fluctuates constantly. If the market on which youve placed your trade starts to move in your favour, further and further away from the no-touch barrier you specified, your sale price will increase, and if the market moves against you, towards your no-touch barrier, your sale price will drop.

At the bottom is the portfolio information section. These details include your current account balance and your current level of exposure to the markethow much capital you have tied up in currently active trades. This information is useful when you come to determining how much capital to use on an individual trade, which we will be covering in detail in a later chapter.

35

ChapTer 5

Introducing MetaTrader

MetaTrader is a software tool we can use to analyse financial markets. This is because it allows us to create charts of the markets so we can get a visual representation of how the market is moving now, and how it moved in the past.

It is an absolutely fantastic and totally free programthere are no installation fees, no subscription fees, and no hidden costs.

MetaTrader is a complete financial program, in that it provides us with all the tools we need to both analyse and trade the markets if you wish. Were not going to be using it for actual trading, because well be doing our trading through Binary Options platforms such as Bet On Markets, but what we will be using are the analysis tools that come with the program.

MetaTrader gives us access to up-to-the-second live data feeds from the worlds financial markets. Through MetaTrader we have access to exactly the same live market data that all the major banks, institutions and professionals do, so we can analyse the markets in real-time as theyre moving.

How to install and set up MetaTrader

This trading platform offers one of the best opportunities for forex forecasting that include: all standard indicators, custom indicators, trading tools allowing you to create and add your own trading indicators.

Installation Instructions MT

First of all, download the trading platform. You can do that with any broker.


36

Install trading platform with clicking the Install button.Continue to step by step.Choose installation language.


37


38

Please closely read the license agreement. Do you accept all the terms of the following license agreement? Click YES

Then you should select the destination folder where you want to install Metatrader. If you want to install to a different location, click Browse and select another folder.


39


40

When installation is finished, click the Launch Metatrader4 button to start using Metatrader! The application window should appear automatically.

Now, open an account for practice.


41

Look for File at the top and click Open an account. The Personal detail window should appear.

Fill out all the following fields: Name, Country, State, City, Address, Phone, email, select Account type, Currency, and you select sum of deposit and leverage as well. And Click I agree to subscribe to your newsletters

Now, select a more suitable trading server. Click Scan.


42

Thats all. Registration is complete. Now you have an account for trading practice. Your user ID and password will automatically be saved in the platform.

Any Problems?If you ran into problems during install, click the Download button

to start the install process again. In the Market Watch window, select Symbols. In the following box, expand the list marked FOREX and select the following markets:

AUDJPYAUDUSDEURCHFEURGBPEURJPYEURSEKEURUSDGBPJPYGBPUSDNZDUSDUSDCADUSDCHFUSDJPY


43

This will load the 13 currency markets that we will be trading into the market watch window. You are now ready to start creating charts of the markets!

Go to the File menu, and select New Chart. Open a chart of the currency pair of your choice. Repeat the process twice more, then go to the Window menu and select Tile Vertically.

Right-click on each chart and select Template followed by the blank template in the colour of your choice.

MetaTrader basics

To load a different currency into an existing chart, simply click and drag your chosen currencys symbol from the Market Watch window on to the chart.

You can zoom in and out of each chart using the magnifying glass icons located on the toolbar at the top.

Auto scroll makes sure the chart always snaps to the current area whenever a market makes a point of movement. If you wish to turn this feature off, allowing you to review past data, you can turn Auto scroll off by de-selecting the green arrow button on the toolbar at the top.

Chart shift creates some space on the chart to the right of the live market. You can turn this feature on by selecting the red arrow button on the toolbar at the top.

45

ChapTer 6

Introduction to Charting

Fundamental analysisto use it or not?

Financial market analysis can be broken down into two broad fields. The first is fundamental analysis, and the second is technical analysis.Fundamental analysis is concerned with the study of economic

fundamentals in order to predict where market rates might be going.For example, if youre looking to invest in a certain companys stock,

you might well look at the companys underlying fundamentals. How are their sales doing? Are they expanding into new markets? Do they have new products? Are the directors buying or selling shares?

Similarly, with currencies, you might look to certain economic factors to determine whether or not a currency is likely to rise or fall. You might examine the interest rate outlook, look at how the retail sector is faring, whether unemployment is going up or down, or if consumer confidence is rising or falling. There are many different fundamental factors you can study in order to figure out how a countrys economy is doing and how it might fare in the future, and what resultant effect that would have on the countrys currency.

Theres no doubt that fundamental analysis is a valid approach to the markets. Major banks and financial institutions employ hundreds of analysts on substantial salaries to figure out these economic factors, and thats why when you switch on a financial channel such as Bloomberg, its often a continuous stream of talking heads discussing various economic factors and what they might mean for certain markets.

The problem with fundamental analysis is that its such an enormous field of study, and there are so many different economic factors to consider, that it can be very confusing and difficult to accurately figure things out. A certain piece of economic data might appear to mean one


46

thing on the surface but once you dig into the numbers, it can often mean something completely different. This means that you might end up taking a trade based on one view of the market, which can very quickly go against you if the market changes its interpretation of the fundamental data.

Its our view that fundamental analysis is something thats best left to the banks and institutions of the world! That said, however, later on in the book you will learn about a small computer program you can use in order to have lots of fundamental analysis headlines and stories streamed directly into your computer for free. Thats as far as we recommend you go with the subject of fundamental analysis for now.

While its handy to keep up with market fundamentals, its not actually necessary to too much of a degree because we can use the other main school of thought on how to predict marketsand thats what were going to be focusing on for the most part in this book.

Technical analysisour preferred method

Technical analysis is the study of market movement, and more specifically, previous market movement. What so-called technical analysts are searching for are certain repeating patterns of market behaviour, which lead to predictable outcomes. For example, you might search back across five years of historical market data looking for a pattern which leads to a large bullish move more often than not. Thats technical analysis in one of its most basic forms.

There are many different types of technical analysis. One method is to simply look at a chart with your eyes and try to pick out certain patterns in the market movement.

Another field of technical analysis involves the use of what we call technical indicators, which are mathematical tools that perform certain calculations on the markets movement and then present that information as a visual overlay on the chart. The basic premise of technical indicators is that they may be able to spot patterns in the markets which arent necessarily visible to the human eye.

For the most part, however, all forms of technical analysis are based on the use of charts. A chart is simply a way of visualising the movement of a financial market, rather than looking at dry statistics. With a chart you can actually see what the market is doing now and what it was doing


47

at any point in historyyou can see when it was rising and when it was falling, you can see when it was moving strongly, and you can see when it didnt really have the strength to do much at all.

By having a visual overview of the markets behaviour we can start to look for certain patterns which might give us a clue as to the future behaviour of the market.

Charts explained

Take a look at this example chart. As you can see, it has two axes. There is a time axis along the bottom and a price axis running down the right-hand side.

The current, live market is always over at the right-hand edge of the chart. Everything to the left of that is what came beforepast data. By cross-referencing these two axes, you can tell what the market rate was at any point in time.


48

Introducing candlestick charts

There are a number of different styles of charts we can use, but our favourite, and what we believe to be the most effective in terms of clearly presenting information, is whats known as candlestick charting.

Candlestick charts have their origins in 18th century Japan, where they are said to have been invented by a trader who was trading one of the worlds earliest financial marketsthe Japanese Rice futures market. Since then they have come in and out of popularity, until becoming widely-used in the computer-trading age that began in the 1980s.

A candlestick chart gives us several pieces of information about how a financial market moved within a given time period. The main body of the candle tells us the market rate at the beginning of the time period, and at the end of the time period, while the two extremes (also known as the wicks) tell us the highest and lowest levels the market reached within that time period.

The colour of the candle also tells us whether the market rose or fell between the open and the close of the time period. If the candle is green, we know that the open price is represented by the bottom of the main body, and the close is represented by the top of the main body. If the candle is red, we know that the open price is represented by the top of the main body and the close price is represented by the bottom of the main body.

Take a look at these examples. Each of these candles represents one day in the market.


49

The candle on the left is green. Therefore we know that the opening level of the day was at the bottom of the main body, and the closing level was at its top. In-between the open and the close, however, the market reached extreme high and low levels as marked out by the wicks.

The candle on the right is red. Therefore we know that the opening level of the day was at the top of the main body, and the closing level was at its bottom. And again, in-between the open and the close, the market reached extreme high and low levels as marked out by the wicks.

When looking at a chart within MetaTrader, you can hold the mouse over any of the candles and MetaTrader will show the Open level of that bar, and the High, the Low and the Close in a series of information boxes at the bottom of the screen, as shown below:

On the chart in the picture above, each candle represents one days action in the market. Its whats known as a daily chart. Within MetaTrader however, you can change the time frame of the chart so that each candle represents another time period, such as one hour, or even one minute.

You can do this by clicking on any of the time frame buttons in the toolbar at the top:


50

The available time frames are: 1 minute, 5 minutes, 15 minutes, 30 minutes, 1 hour, 4 hours, 1 day, 1 week and 1 month.

This is handy because as you go through this book, you will see that we use a triple screen method to simultaneously analyse each market from three different time frames.

51

ChapTer 7

Market Direction

There are three main cornerstones to the trading method you will learn in this book. The first of those cornerstones is the concept of trends within a financial market.

Theres a very old saying in trading circles which states the trend is your friend. The best opportunities in financial markets come when the markets are trending, either trending upwards or trending downwards.

Thats not to say you cant make money by trading against the trend, there are opportunities to do so and occasionally we will be taking counter-trend trades, but in general the majority of safer, higher-probability trades always come when you trade in the direction of a prevailing trend. That means taking bullish positions when the market is trending upwards, and taking bearish positions when the market is trending downwards.

Put simply, a trend within a financial market is a sustained directional move, either a sustained upward move or a sustained downward move. Trends occur because of an imbalance in the supply and demand (see Chapter 3 for reference). As long as traders perceive value in a market, they will buy, pushing the price ever higher, and as long as they feel that a market is too expensive, they will sell, pushing the price ever lower.

There are a number of different ways to determine the trend within a financial market. Some traders look at the sequence of highs and lows to determine the trend, while others use technical indicators.

The Market Direction tool is a technical indicator based on our own proprietary method of determining the trend within a financial market.

For every candlestick bar on a chart, the Market Direction indicator will display a corresponding dot. The colour of this dot tells us the trend on that chart at that moment. The Market Direction indicator can show

Market Direction

52

four different colours of dots depending on what it calculates the trend to be at that point.

A dark green dot represents a strong uptrend. A light green dot represents a weak uptrend. A red dot represents a strong downtrend.

A pink dot represents a weak downtrend.Take a look at this screenshot showing how the Market Direction

indicator appears on a chart.

Starting at the left-hand edge of the chart, we can see each candle with a corresponding pink dot. This shows a weak downtrend. But the market accelerates lower, and at the bar marked (1), the Market Direction dots change to red, showing a strong downtrend. Several bars later, the market begins to rally again, and by point (2) it has moved high enough for Market Direction to calculate that the downtrend is weakening. By the next bar, marked (3), the market is in a strong uptrend.

This uptrend continues for some time, occasionally weakening as the market puts in occasional retracements against the trend, such as at point (4). At point (5), a downward move in the market weakens the


53

uptrend again, and by the next bar (6), Market Direction has calculated that the markets trend has changed to a strong downtrend.

This downtrend doesnt last, however. The market begins to rally again, weakening the downtrend at point (7) and changing back into a strong uptrend at point (8).

Using Market Direction

There is one very important rule that applies to the Market Direction indicator and how to use it. That rule is, that the trend on any chart determines the signals you look for on the time frame below. For example, if the Market Direction dot on the daily chart is dark green, therefore showing that that chart is currently in a strong uptrend, this means that you would then drop down to the 4-hour chart to find any trading signals in the direction of that trend.

We do understand that that might seem slightly difficulty to understand at this point but all will become clear as you move on to the later chapters and start to piece together all the different concepts youre going to be learning about, but for now, all you need to remember is that rule.

The trend on any chart determines the signals you look for on the time frame below.

Weve provided you with a set of flow charts to guide you in the decision-making process to help you figure out which trades to look for, when you should be trading with trends and when you should be trading against them. By looking over those youll begin to understand how it all fits together. The next part of the process is looking for the specific technical patterns which give you the trade signals themselves, and were going to start looking at those in the next chapter.

And thats how the Market Direction indicator works! Its a very simple tool for determining the trend of a market at a glance, with no ambiguity and no confusion, which is a great advantage because it allows you to analyse a market in a matter of seconds to determine whether or not there might be a potential trading opportunity.

55

ChapTer 8a

Introducing Divergence

There are three main cornerstones to our trading approach. The first, as you saw in the previous chapter, is the concept of trends within financial markets, and how to spot them using our Market Direction tool.

The second main cornerstone is the concept of divergence. Before moving on, lets look at the dictionary definition of divergence:

The act of moving away in different directions from a common point.In the context of the markets, what we are looking for are divergences

between the movement of the market, and the movement of certain technical indicators. A technical indicator (indicator for short) is simply a mathematical tool which performs certain calculations on the movement of the markets, and then presents that information, usually as a visual overlay on the chart.

A moving average is a simple example of an indicator: its a mathematical tool which works out the average market level over a given number of preceding bars on a chart, and then presents that in visual form as a line, so you can see how the average market level changed over time.

As weve already discussed in this book, the practice of technical analysis is effectively all about spotting certain repeating patterns of market movement that lead to predictable outcomes. Most technical indicators are designed to help with this. The basic premise of technical indicators is that by performing certain calculations on the market movement, they can spot certain patterns, or give certain information, that may not be visible to the human eye.

There are literally hundreds, if not thousands, of indicators which can be applied to financial market charts, and they are nearly all designed


56

to interpret the market movement and then give trading signalseither bullish signals or bearish signals.

Unfortunately, the problem with almost all indicators is that they suffer from lag; that is, they lag behind the market. You can see a good example of a lagging indicator by looking at a moving average. If a market is falling, and then starts rising, it will take a while before the average starts to rise as well. By the time the moving average has started to slope upwards, youve already missed a lot of the move in the market, as you can see in the image:

All indicators have the same problem. They lag behind the market, and theyll only really tell you whats happening after it has already happened.

What this means is that most indicators are effectively useless when they are used in the way they were originally intended. Indicators that are designed to generate bullish or bearish signals simply do not work because they lag too far behind the market. The signals come too late to give effective trading signals.

The only way to overcome this problem is to use indicators in a manner for which they were not originally intended, and that is by using them to spot divergences. By using them in this way, you can turn lagging indicators into what we call leading indicators. This means that


57

the indicators tell us whats going on right now rather than telling you whats already happened.

When the movement of an indicator diverges from the movement of the market, it effectively gives you an early warning that the market may be about to change direction. It gives you the warning before the move happens rather than after, and this is what makes divergence such a powerful trading tool.

We are going to be teaching you about two types of divergence in this book.

The first type of divergence were going to be introducing to you is whats known as regular divergence. Regular divergence is a signal that tells you when a trend may be about to reverse.

The second type of divergence is called hidden divergence. Hidden divergence is a signal that tells you when a trend might be about to resume.

Take a look at the diagram below. The black line in this diagram represents a market that is trending upwards. As you can see its making higher highs and higher lows. Four turning points are highlighted in this trend.

The two that are marked with red arrows are reversal points, where the upward movement ended, and a period of downward movement began. These turning points are the kind that could be signalled by a regular divergence. Remember, regular divergence is a trend reversal signal.


58

The turning points that are marked with blue arrows are the points at which the prevailing uptrend resumed. These are the turning points that could be signalled by hidden divergence. Remember, hidden divergence is a trend re-entry signal.

We use two popular technical indicators in conjunction with our charts in order to spot divergences. These indicators are known as the MACD and the OSMA.

We use two indicators to spot divergences to establish a consensus about each set-up. Its entirely possible to trade divergence signals using just one indicator, but we feel it is much safer to use two.

We only trade divergence signals which set up on both indicators simultaneously. If a divergence sets up on one indicator but not on the other, then we ignore it. If you only use one indicator youre likely to get false signals from time to time, divergence signals that fail, but this is much less likely if you confirm the divergence signal by checking whether or not it is present on a second indicator as well.

A divergence set-up that is present on two indicators is a higher-probability set-up than one that is only present on one indicator, and since were striving to put the probabilities as much as possible in our favour, we always use two indicators.

59

ChapTer 8b

Regular Divergence

Regular divergence is a signal which tells us when a trend might potentially reverse. What this means is that it can be used to generate counter-trend trading signals.

Lets start off by taking a look at the definition of a bullish regular divergence:

A bullish regular divergence occurs when the market makes a LOWER LOW, but over the corresponding time period, our indicators make a HIGHER LOW.

Now take a look at the diagram:

Weve got a downward move in the market, as it makes an initial low, rises slightly then falls again to a lower low. But at the same time, weve got an upward move in our indicator. While the market is making a lower low, our indicator is making a higher low! This is the definition of a bullish regular divergence.

Now lets take a look at the definition of a bearish regular divergence:A bearish regular divergence occurs when the market makes

a HIGHER HIGH, but over the corresponding time period, our indicators make a LOWER HIGH.

Regular Divergence

60

This time, weve got an upward move in the market, as it makes an initial high, falls slightly, then rises again to a higher high. But at the same time, weve got a downward move in our indicator. While the market is making a higher high, our indicator is making a lower high! This is the definition of a bearish regular divergence.

Lets now look at some examples ofthese regular divergence patterns in the actual charts ofthe markets, using our MACD and OSMA indicators.


61

Regular Divergence

62


63

Different types of regular divergence

The concept of divergence can be broken down into two main types-regular divergence and hidden divergence. From there however, it s possible to break down regular divergence further, as there are several different types of regular divergence that appear on our charts.

The first is what we call same peak regular divergence, or same trough regular divergence, depending on whether it is a bearish signal or bullish signal respectively.

The indicators we usethe MACD and OSMAare known as oscillators. This is because they oscillate between positive and negative values around a central zero line.

A same peak regular divergence is a bearish signal which occurs when the divergence on a particular indicator plays out entirely within one peak above the zero line.

Similarly, a same trough regular divergence is a bullish signal which occurs when the divergence on a particular indicator plays out entirely within one trough below the zero line. You can see examples below:

Regular Divergence

64

The next type of regular divergence is known either as separate peak regular divergence or separate trough regular divergenceagain, this depends on whether or not it is a bearish or a bullish signal respectively.

A separate peak regular divergence is a bearish signal which occurs when the divergence begins on one peak of the indicator above the zero line and ends on another, with a move below the zero line in-between.

A separate trough regular divergence is a bullish signal which occurs when the divergence begins on one trough of the indicator below the zero line and ends on another, with a move above the zero line in-between.


65

You can see examples below:

Regular Divergence

66

The third different type of regular divergence is known as sequential regular divergence. A sequential regular divergence occurs when there are a number of peaks or troughs in-between the start point of the divergence and the end point, which dont quite fit the pattern. There is nonetheless an overall pattern of divergence.

Sequential regular divergence is a little bit harder to spot than the other types, the same peak/trough and separate peak/trough divergence, but by knowing the difference between all three types you shouldnt have any trouble in being able to spot them and then start applying that when you come to look for signals in the markets.

You can see examples below:


67

Knowing the differences between these types of regular divergence is important in this approach to trading. This is because there are some divergence signals that we choose not to trade, even if there is divergence on both of the indicators.

As you have already learned, we use two different indicators to spot divergences and we are only interested in divergence signals which set up on both indicators simultaneously. If the divergence is only present on one indicator, we ignore it.

The combination of divergence types on the two indicators is not hugely important. You might, for example, see a bearish signal with separate peak divergence on both indicatorswhich is a perfectly trade-able setup. As another example, you might see separate peak divergence on one indicator and same peak on the other. That too is a tradeable set-up.

There is, however, one exception, and that is when you find same peak (or same trough) divergence on both indicators. That is not a strong enough signal to trade.

Regular Divergence

68

Some divergences are harder to spot than others

One general rule with regular divergence signals is that the steeper the angle of the divergence, the stronger the potential move.

Sometimes, some divergences occur at such a steep angle, that the second peak or trough on the indicator doesnt even make it back through the zero line! These types of signals do take a little extra practice to spot, but its worth taking the time to get used to them because they can often be very powerful signals.

A number of examples screenshots below.


69

Filtering regular divergence signals with Bollinger Bands

The fact is that the vast majority of divergence setups actually fail to produce a trend reversal. Regular divergence is still a great trend reversal signal, but only when its used in the right way.

We are not going to be trading every single regular divergence setup we seefar from it, in fact. Were going to be extremely choosy in terms of the divergence setups we will actually be trading.

As well as only trading divergence signals that are pointing us in the right direction, as per the prevailing trend of the market, we will also only be trading divergence signals that are backed up by a strong area of support or resistance levels (which youll learn about in Chapter 9).

There is, however, one more step we take to filter out weaker divergence signals, and thats by using another indicator, overlaid on the market action on our charts. The name of this indicator is Bollinger bands, and this is how they appear on the charts:

Regular Divergence

70

As you can see, Bollinger bands effectively create a channel in the market. Theres an upper band and a lower band, and most of the time, you will see that the market stays within the channel. What we are interested in, however, are the points at which the market goes outside of that channel.

When analysing a regular divergence signal, we are looking for at least one of the peaks or troughs of the market to go outside the long-term Bollinger band channel. Effectively, the market must go outside the Bollinger band channel at either the start point of the divergence, or the end point, or both.

If we do not see this occur, then the signal is not valid, and we would not trade it.

The reason we use this rule is because when a market goes outside the Bollinger band channel, it is considered to be overstretched and therefore more likely to reverse. You can think of the market as being almost like a rubber band, in that the more overstretched it gets, the more likely it is to snap back. It therefore follows that if you see a regular divergence signal at the same time the market is overstretched, then the likelihood of that signal being successful is increased. When divergence signals are combined with Bollinger bands, you effectively have a confluence of factors that indicate a potential reversal in the market. The regular divergence is a signal that indicates a potential


71

trend reversal based on the fact that strength of the trend is beginning to weaken. Additionally, when the market goes outside the Bollinger bands, its also an indication of a potential trend reversal, based on the fact that the market is in an overstretched condition.

Below you can see several examples of regular divergences, and whether they are considered valid or invalid as a result of their interaction with the Bollinger bands.

Regular Divergence

72

Rememberwe are only interested in trading regular divergence signals that are accompanied by the market trading outside the Bollinger band channels, and in turn becoming overstretched.

Its all about putting the probabilities in our favour!As you move forward through this book, you need to be clear on

what we mean by the phrase regular divergence signal, as its something you will hear regularly.

When we use the phrase regular divergence signal, we mean a complete signal. This means that regular divergence is present on both our indicators, and that the market has gone outside the long-term Bollinger band at either the start point, or end point of the divergence, or both.

If any of those factors are missing, then its not a complete signal. If the divergence is only present on one indicator, its not a signal. If the market does not move outside the Bollinger bands, then its not a signal.

But if it all checks out, then thats what we mean by a regular divergence signal. Make sure you are comfortable with this concept before moving on.


73

Key points of this chapter

Before moving on, these are the key points you need to understand from Chapter 8bRegular Divergence:

Youmustunderstandthedefinitionsofbothbullishandbearishregular divergence and how to spot them.

You must understand the three types of regular divergence(separate peak/trough, same peak/trough and sequential).

Youmust be aware that there are somedivergenceswhere thesecond peak/trough doesnt cross the zero line.

You must remember that we are only interested in regulardivergence signals where the market trades outside the long-term Bollinger band on at least one peak/trougheither at the start point, the end point, or both.

75

ChapTer 8C

Hidden Divergence

In the previous section we took an in-depth look at the concept of regular divergence and how it can be used to signal trend reversals. This is useful because even when trading in the direction of longer-term trends, we will often be trading against shorter-term trends, and on some rare occasions we will even be trading against long-term trends as well.

The vast majority of trades we will be taking, however, will be in the direction of longer-term trends. Most of the time, when we get into a trade, it will be a trend-following trade.

With that in mind, we need to not only be able to spot trend reversals, we also need to find optimum entry points into existing trends. We need to find the points at which trends resume, because thats where the best trend-following trades are to be found.

Hidden divergence is the method we can use to find the points at which trends resume following counter-trend retracements. It is used to spot the points at which trends might resume. We therefore class it as a trend re-entry signal.

First of all, as we did in the previous section, lets look at the definitions of both bullish and bearish hidden divergence, and take a look at some diagrams.

A bullish hidden divergence occurs when the market makes a HIGHER LOW, but at the same time our indicators make a LOWER LOW, as shown below:

Hidden Divergence

76

Weve got an upward move in the market, as it makes an initial high. It then retraces slightly lower, but makes a higher low than its starting point. At the same time, however, weve got a downward move in our indicator. While the market is making a higher low, our indicator is making a lower low! This is the definition of a bullish hidden divergence.

A bearish hidden divergence occurs when the market makes a LOWER HIGH low, but at the same time our indicators make a HIGHER HIGH, as shown below:

Weve got a downward move in the market, as it makes an initial low. It then retraces slightly higher, but makes a lower high than its starting point. At the same time, however, weve got an upward move in our indicator. While the market is making a lower high, our indicator is making a higher high! This is the definition of a bearish hidden divergence.

Now lets look at some actual chart examples:


77

Hidden Divergence

78

Some divergences are harder to spot than others (again!)

In the last section when we were looking at regular divergence, we saw that some regular divergences are slightly harder to spot than others, because the second peak or trough doesnt cross back through the zero line.

As you might expect, similar concepts apply to hidden divergence signals as well. You will often find signals which have one peak or trough which doesnt cross through the zero line.

Unlike with regular divergence however, with hidden divergence its usually the first peak or trough of the setup, ie: the start point of the divergence rather than the end point, which you will see not crossing through the zero line.

Its also possible for a hidden divergence to form completely the opposite side of the zero line to where you would expect.

Just as with regular divergence, this means that it does take some practice in order to be able to spot these signals quickly and easily, but its important to do so because the signals are just as valid as the more obvious hidden divergences.


79

You can see a number of clearly-explained examples shown below.

Hidden Divergence

80


81

Filtering hidden divergences with Bollinger B ands

In the last section we demonstrated the method we use to filter out low-probability regular divergence signals. This was achieved with the use of a separate indicator called Bollinger bands. We look for the market to trade outside the channel created by the Bollinger bands in order to be valid. If this does not occur, we consider the signal invalid and do not trade it.

We use a similar filter with hidden divergence signals. The short-term Bollinger band indicator is the one we use with hidden divergence signals.

You may also notice that it creates a much narrower channel than the longer-term indicator, but despite that, the market still stays within the channel most of the time. Once again, however, what were interested in is when the market trades outside the Bollinger band channel.

The rule we have for filtering hidden divergence signals is this:In order for a hidden divergence signal to be valid, the market

must trade outside the short-term Bollinger band channel at some

Hidden Divergence

82

point during the retracement which produced the hidden divergence setup.

This concept is clear. Some examples are provided for reference below.

Defining some terms

You may remember that in the previous section we emphasised that it was important to understand the term regular divergence signal. This is the term we use for a trading setup containing regular divergence on both our OSMA and MACD indicators at the same time, with the market also trading outside the long-term Bollinger band.

There are two further terms you need to memorise and understand that relate to the concept of hidden divergence. These two terms are:

Standard hidden divergence re-entry signal and hybrid hidden divergence re-entry signal. Lets take a look at them individually.

A standard hidden divergence re-entry signal is used when trading in the direction of a strong trend (as per the Market Direction indicator) and it has the following attributes:


83

1) Hidden divergence on both the MACD and the OSMA indicators

2) The market trades outside the short-term Bollinger band channel during the retracement which produces the signal

You can see examples of standard hidden divergence re-entry signals on the previous page.

A hybrid hidden divergence re-entry signal is used when trading in the direction of a weak trend (as per the Market Direction indicator) and it has the following attributes:

1) Hidden divergence on the MACD indicator2) Regular divergence (of any kind) on the OSMA indicator3) The market trades outside the long-term Bollinger band channel

during the retracement which produces the signal

The hybrid signal takes some elements of the standard hidden divergence re-entry signal and some elements of the regular divergence reversal signal. This gives us the extra confirmation we need when trading in the direction of a weaker trend.

You can see some examples of a hybrid hidden divergence re-entry signal below:

Hidden Divergence

84

Key points of this chapter

Before moving on, these are the key points you need to understand from Chapter 8cHidden Divergence:

Youneedtounderstandthathiddendivergenceisasignalthatatrend is about to resume following a retracement.

You need to know the definitions of both a bullish hiddendivergence and a bearish hidden divergence.

Youneedtounderstandthathiddendivergencesetupscanoccuron both sides of the zero line.

You need to understand how and why we use short-termBollinger bands to filter our divergence signals.

Youneed to understand the difference between a standard re-entry signal and a hybrid re-entry signal and the different situations in which they are used.

85

ChapTer 8d

Confirming Divergences

In the previous two chapters youve seen both how regular divergence works and how hidden divergence works, and how they can both be used to generate very effective trading signals.

We have three specific trading signals based on divergence and involving Bollinger bands: the regular divergence reversal setup, the standard hidden divergence re-entry setup, and the hybrid re-entry setup. They are the three actual signals we look for to get us into trades.

But finding the trade signals is only the first step. The next step is understanding when to act on a trade signal. In this chapter you will learn about the specific trigger we use to turn potential trading setups into confirmed trades.

We have a specific trigger that we look for to actually get us in to trades. When we see a valid trading setup, what we are looking for is a trigger that is based on the movement of the market itself. Quite simply, we wait for the market to begin moving in the direction suggested by our trade signal. We dont act on the signal the moment it sets up; we wait for more confirmation, and the confirmation we look for is to see the market beginning to move in the direction our trade signal is pointing.

We have a specific rule which dictates how far a market must move in the right direction before it triggers our entry in to the trade, and its called:

The 50% rule

The 50% rule governs how far we need to see a market