Forex Trading to Riches

Forex Trading To Riche$


By Daniel S. ForexTradingPower.com

Disclaimer: No part of this book may be used or reproduced in any manner whatsoever

without written permission from Forex Trading Power. All information on this ebook is for

educational purposes only and is not intended to provide financial advise. Any statements

about profits or income, expressed or implied, does not represent a guarantee. Your actual

trading may result in losses as no trading system is guaranteed. You accept full responsibilities

for your actions, trades, profit or loss, and agree to hold Forex Trading Power and any

authorized distributors of this information harmless in any and all ways.

© 2008 ForexTradingPower.com

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TABLE OF CONTENTS

CHAPTER 1 Page Introduction To Forex 5 CHAPTER 2 Why Trade Forex? 8 CHAPTER 3 The Mechanics Of Forex Trading 12 • Currency Quoting Name and Conventions 12 • Major Currency Pairs 12 • Cross Currency Pairs 13 • Exotic Currency Pairs 13 • Reading Base and Quote Currencies 14 • What is PIPS? 15 • Calculating PIP Value 15 • Currency Contracts 16 • Margin Trading 17 • Types of Trading Orders 18 • Rollover and Swap Interest 21 CHAPTER 4 Reading A Currency Chart 22 Choosing Your Broker 23 CHAPTER 5 Forex Strategies 25 • Fundamental Analysis 25 • Technical Analysis 26



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CHAPTER 6 The Trading System – The Pips Mover™ 34 CHAPTER 7 The Psychology of Trading 40 CHAPTER 8 Money Management 44 CHAPTER 9 Forex Trading Tips 46 CHAPTER 10 Forex Glossary 48


About The Author

The author of this ebook, Daniel S is an expert foreign exchange currency trader, online mentor and the CEO of ForexTradingPower, a forex powerhouse online portal that strives to help people worldwide to improve their trading skills and help them path their way to financial freedom.

His forte is in forex trading, market analysis, technical analysis and creating forex trading systems. Daniel started actively to make money online through forex trading in 2007 and went full-time in 2008.

He is a master at creating quick intraday and short swing profits, to the tune of more than 600 pips in as little as 13 days. You can get more information from Daniel by visiting his website ForexTradingPower.com today!

If you have any questions or feedback after reading this ebook, you can email Daniel at [email protected] and he’ll get back to you as soon as he can.


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http://www.forextradingpower.com/


mailto:[email protected]



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INTRODUCTION TO FOREX Forex, or as it is referred to many times: “Fx”, “currency trading”, or “foreign exchange”, is the term used to describe the trading of worlds currencies. A currency trade is the simultaneous buying of one currency and selling the other one, e.g. buying US dollars and selling Euro dollars, buying British pounds and selling US dollars etc. The combination is called a currency pair. We’ll touch more on that later on in this e-book. In the past, foreign exchange trading was mostly limited to large banks and institutional traders however; recent technological advancements have made it so that small traders can also take advantage of the many benefits of forex trading just by using the various online trading platforms to trade. Banks, major currency dealers and sometimes even very large speculator were the principal dealers. Only they were able to take advantage of the currency market's fantastic liquidity and strong trending nature of many of the world's primary currency exchange rates. The currencies of the world are on a floating exchange rate, and they are always traded in pairs Euro/Dollar, Dollar/Yen, etc. About 85 percent of all daily transactions involve trading of the major currencies. Four major currency pairs are usually used for investment purposes. They are: Euro against US dollar, US dollar against Japanese yen, British pound against US dollar, and US dollar against Swiss franc. Right now I will show you how they look in the trading market: EUR/USD, USD/JPY, GBP/USD, and USD/CHF. As a note you should know that no dividends are paid on currencies. Transactions on the FOREX market are performed by dealers at major banks or FOREX brokerage companies. FOREX is a



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necessary part of the world wide market, so when you are sleeping in the comfort of your bed, the dealers in Europe are trading currencies with their Japanese counterparts. Therefore, it is reasonable for you to believe that the FOREX market is active 24 hours a day and dealers at major institutions are working 24/7 in three different shifts. Clients may place take-profit and stop-loss orders with brokers for overnight execution. Below is the time zone which shows the time that forex trading takes place: Tokyo Open 23:00 (GMT) Tokyo Close 08:00 (GMT) London Open 07:00 (GMT) London Close 16:00 (GMT) New York Open 12:00 (GMT) New York Close 21:00 (GMT) There is high trading volume within the London and New York session, which is from 07:00 GMT to 21:00 GMT. Most of the professional traders trade during these timeframes. Price movements on the FOREX market are very smooth and without the gaps that you face almost every morning on the stock market. The daily turnover on the FOREX market is somewhere around $3.2 trillion, so a new investor can enter and exit positions without any problems. The fact is that the FOREX market never stop, even on September 11, 2001 you could still get your hands on two-side quotes on currencies. The currency market is the largest and oldest financial market in the world. It is the biggest and most liquid market in the



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world, and it is traded mostly through the 24 hour-a-day inter-bank currency market. When you compare them, you will see that the currency futures market is only one per cent as big. Unlike the futures and stock markets, trading currencies is not centered on an exchange. Trading moves from major banking centers of the U.S. to Australia and New Zealand, to the Far East, to Europe and finally back to the U.S. it is truly a full circle trading game. As you can see, the foreign exchange market has come a long way. Being successful at it can be intimidating and difficult when you are new to the game. But DON’T WORRY, this comprehensive ebook will be a guide to your successful trading and you are in for a treat because I’ll REVEAL one of my trading strategies to you so that you can start to make profits in the market! You might think why am I so generous to reveal a profitable trading strategy to you for free? Whatever motive you thought that I may have, I just want to let you know that I hope to train as many people as I can to be successful in trading, like what I hoped to be trained by someone a few years ago, so that I can be a successful trader. I did it, and you can do it too if you are serious about it. So let us continue to progress from here and have an enjoyable reading…



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WHY TRADE FOREX?

Forex Market vs. Other Financial Markets

Spot Forex Market

Equity(Stock) Market

Futures(Stock Index &

commodities) Market

Options Market

Opens from Monday to Friday for 24 hours

Less than 8 hours of trading time per day

Trading hours based on various markets

Trading hours based on various markets

High Leverage – from 50:1 to 400:1

Leverage restricted to 2:1

Leverage restricted to 15:1

Depends on type of option transaction. Calls or Puts generally requires a huge amount of margin.

Most Liquid & Largest market

Liquidity depends on stock’s daily volume

Liquidity depends on month of traded contract

Liquidity depends on underlying stock & expiry date

Commission Free

Brokers charge commission & exchange fees

Brokers charge commission & exchange fees

Brokers charge commission

Can profit regardless of bull/bear market

Most people profit from bull market

Can profit from bull/bear market

Can profit from bull/bear market



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Can short-sell without restrictions

Can only short-sell with restrictions

Trading restricted by limit up/down rule

Can short-sell

Minimum Slippage and order errors

More room for slippage



24-Hour Trading Forex offers a 24-hour market, which offers a major advantage over stocks, futures and options. The forex market effectively opens from the beginning of Monday morning in Tokyo until the afternoon of Friday in New York. Whether it's 6pm or 6am, somewhere in the world there are always buyers and sellers actively trading foreign currencies.

Superior Liquidity The forex market is the world’s largest and most liquid market. According to the data from Bank for International Settlements released on September 25, 2007, currency trading volumes reached to US$3.2 trillion a day. The liquidity of this market, especially that of the major currencies, helps ensure price stability. Traders can almost always open or close a position at a fair market price.

High Leverage 100:1 leverage is commonly available from online FX dealers, which substantially exceeds the common 2:1 margin offered by



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equity brokers. At 100:1, traders post $1000 margin for a $100,000 position, or 1%, this is for standard lot. For mini lot, traders post $100 margin for a $10,000 position. There are some brokers which offers up to leverage of 400:1, which means that with a $1000 account, traders can trade 4 standard lots instead of just 1 standard lot. The latter leverage is not encouraged unless traders have tons of money to afford it.

Lower Transaction Costs It is much more cost-efficient to trade Forex in terms of both commissions and transaction fees. Commissions for stock trades range from $7.95-$29.95 per trade with online discount brokers up to $100 or more per trade with full service brokers. Another important point to consider is the width of the bid/ask spread. Regardless of deal size, forex dealing spreads are normally 5 pips or less (a pip is .0005 US cents).

Profit Potential In Both Rising And Falling Markets In every open FX position, an investor is long in one currency and short the other. A short position is one in which the trader sells a currency in anticipation that it will depreciate. This means that potential exists in a rising as well as a falling market.

Inter-Bank Market The foundation of the FOREX market consists of a global network of dealers that communicate and trade with their clients through electronic networks and telephones. There are no organized exchanges like in futures that are there to serve as a central location to facilitate transactions the way the New York Stock Exchange serves the equity markets. The FOREX market actually works a lot like the way the NASDAQ market in the United States



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operates, and because of this, it is also referred to as an over the counter or OTC market.

No one can corner or control the market The FOREX market is so large and has so many participants that no single trader, even a central bank, can control the market price for an extended period of time. Even when interventions are conducted by mighty central banks are getting to be increasingly ineffectual and short-lived. This means that central banks are becoming less and less inclined to intervene to manipulate market prices.

Small Initial Margin Unlike other financial investments, forex trading erquires as little as US$300 to start trading.

It is Unregulated The FOREX market is seen as an unregulated market although the operations of major dealers like commercial banks in money centers are regulated under the banking laws. The daily operations of retail FOREX brokerages are not regulated under any laws or regulations that are specific to the FOREX market, and in fact, many of these types of establishments in the United States do not even report to the Internal Revenue Service. The currency futures and options that are actually traded on exchanges like Chicago Mercantile Exchange (CME) are under the regulation in the same manner that other exchange-traded derivatives are regulated.



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THE MECHANICS OF FOREX TRADING

Currency Quoting Name and Conventions

Nicknames are sometimes used for certain currencies. Knowing currency trading nicknames can be useful. Here are some of the more common forex trading nicknames:

▪ USD – Dollar, Greenback

▪ GBP – Cable, Pound, Sterling

▪ EUR – Euro

▪ JPY – Yen

▪ CHF – Swiss, Swissy, Franc

▪ CAD – Loonie

▪ AUD – Aussie

▪ NZD – Kiwi The Major Currency Pairs The four currencies which are actively traded against the US dollar make up more than 90% of the forex market and are called major currencies: ▪ Euro (EUR) ▪ Great Britain Pound (GBP) ▪ Swiss Franc (CHF) ▪ Japanese Yen (JPY)



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When the above currency pairs are traded against the US dollar, they are quoted as: ▪ EUR/USD ▪ GBP/USD ▪ USD/CHF ▪ USD/JPY In recent years, due to the active movement of commodities like gold and oil, many traders start to actively trade Canadian Dollar (USD/CAD) and Australian Dollar (AUD/USD) as well. The Cross Currency Pairs Those currency pairs that do not include the US dollar are referred to as Cross Currency pairs. A number of the cross currencies offer attractive interest, e.g. swap, rollover interest, which can be paid on open positions. Examples of some common cross currency pairs are: ▪ GBP/JPY ▪ EUR/JPY ▪ EUR/GBP ▪ EUR/CHF ▪ GBP/CHF ▪ AUD/JPY The Exotic Currency Pairs Currency pairs which are traded less, harder to find buyers and sellers and has very wide PIP spread are called “exotics”. Example of some exotic currency pairs are the Russian Ruble, Danish Krone, Mexican Peso, Indian Rupee, Turkish Lira, Chinese Yuan.



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Reading Base and Quote Currencies Currencies are quoted in pairs. The base currency is indicated on the left hand-side while the quote currency is indicated on the right hand-side. Let’s look at the examples of the four major currency pairs:

Currency Pair Base Currency Quote Currency EUR/USD EUR USD GBP/USD GBP USD USD/CHF USD CHF USD/JPY USD JPY

So when you sell one unit of the currency pair, you are actually selling one unit of the base currency and buying an equivalent amount of quote currency. Vice versa, when you buy one unit of the currency pair, you are actually buying one unit of the base currency and selling an equivalent amount of quote currency. So for example AUD/USD, if you analyse that gold price is dropping and the Australian government is going to weaken it’s currency, so you would SELL AUD/USD (in trading terms: GO SHORT). Why? Because you want to own the US dollar while they appreciate against the Australian Dollar. On the other hand, if you believe the US economy has weaken and thus US currency will lose value, you would then BUY AUD/USD (in trading terms: GO LONG). Why? Because you want to own the Australian Dollar and sell away US dollar as AUD appreciates against the US dollar.



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What is PIPS? Price Interest Point (PIP), is the smallest price movement regardless of direction, a currency pair can make. For example, for the currency pair GBP/USD, 1 pip = 0.0001. Most major currency pairs are priced to four decimal places (.0000), so the smallest change/movement is the last decimal point. But there is an exception for the USD/JPY pair as 1 pip = 0.01, which is priced to 2 decimal places (.00). So if the trader bought the currency pair GBP/USD at the price of 1.7800 and sold it at 1.7850, he would have made 50 pips. Vice Versa, if that trader sold the currency pair for 1.7800, expecting the price to go lower, but the market went against him and he bought it back at 1.7850, thus losing 50 pips. Calculating PIP Value Let’s use a 10,000 (which is a mini-contract, we’ll discuss more later) unit purchase for example. Formula: (1 pip with correct decimal placement/exchange rate) X (amount being purchased) = pip value For currency pairs whose quote currency is the U.S. Dollar, for example the GBP/USD: 1 pip = 0.0001 X 10,000 = USD 1.00 For example, if one has made a profit of 100 pips by selling first at 1.7600 and closing at 1.7500 from trading the GBP/USD, he or she would have made USD 100 per mini contract.



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For currency pairs whose base currency is the U.S. Dollar, for example the USD/JPY: 1 pip = (0.01 ÷ Closing Price) X 10,000 For example, if one has made a profit of 100 pips by buying first at 108.00 and closing at 109.00 from trading the USD/JPY, he or she would have made USD 91.70 per mini contract. And for USD/CHF: 1 pip = (0.0001 ÷ Closing Price) X 10,000 For example, if one has made a profit of 100 pips by buying first at 1.1300 and closing at 1.1400 from trading the USD/CHF, he or she would have made USD 87.72 per mini contract. But don’t worry! Fortunately, all trading platforms automatically computes the trading profits and losses so that no manual computation is needed at all. Currency Contracts Standard Lot (Contract) Each standard lot or contract is valued at 100,000 units of the base currency. One would need USD 1,000 in their account margin to trade a standard contract for a 100:1 leverage. Take us look at the previous example of the GBP/USD: If one has made a profit of 100 pips by selling first at 1.7600 and closing at 1.7500 from trading the GBP/USD, he or she would have made USD 1,000 per standard contract instead of USD 100 from the mini contract.



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Mini Lot (Contract) Each standard lot or contract is valued at 10,000 units of the base currency. One would need USD 100 in their account margin to trade a mini contract for a 100:1 leverage. We have already done some examples on this in the previous ‘Calculating PIP Value’ session. Trading on Margin (Margin Trading) There are several reasons in the forex market that attract traders and investors. One of the reasons is trading on margin. This means that traders can now trade much bigger contract size with a just a small amount of deposits required. Leverage is the word to use for margin trading or borrowed capital. Leverage is required in order to increase the potential returns of investment/currency trade. How much money can one borrow depends on the marginable equity that one has in his or her trading account. The leverage level can be changed at one’s request to the trading broker. Let’s look at the example below: A trader has USD 2,000 in his trading account. His trading broker actually allows him a leverage of 100:1 or 1% margin. He can now trade one mini lot (contract) of value USD 10,000 for only USD 100, and he can buy up to 20 mini lots(contracts), using all his capital in his trading account. He can also trade one standard lot (contract) of value USD 100,000 for only USD 1,000, and he can buy up to 2 standard lots, which costs USD 2,000. But if his broker allows him a leverage of 200:1 or 0.5% margin, then the trader only needs a margin of USD 1,000 to buy the 20



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mini lots with a total value of USD 200,000. OR he can buy the one standard lot with only a margin of USD 500 in his trading account. The bottom line is letting you understand why leverage is so powerful and how much money you can borrow or are borrowing from your broker to execute a trade. Most forex brokers will allow you a 100:1 leverage, and some will allow you as high as 200:1, or even 400:1! However, you must understand that buying and selling currencies with borrowed money can be risky because both the gains and losses are amplified. You may think that you will have a potential for greater profit, but there is a potential of greater losses too. So I personally think 100:1 leverage will be alright unless you have prepared a huge sum of capital for potential losses if you decided to go for higher leverage. We will discuss more of that in the money management session later on. Types of Trading Orders There are different types of orders provided by the forex market and some major types can be found on forex trading platforms. Market Order – A market order is an instant order to buy or sell a currency pair at the current market price. Under normal market conditions, market orders are executed within a few seconds. When the market order is placed, the trader has bought or sold the currency pair at whatever price that the order gets processed. Under extremely volatile market conditions, especially during news release, you may find that the prices are moving rapidly the



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price that you requested may get re-quoted. In this case, the trader will decide whether he or she would want to continue to trade with the re-quoted price. Pending Order – It is a type of order to buy or sell a currency pair when the current price reaches a specific price. There are four types of pending order which are provided by most of the trading brokers: Buy Stop Order – It is an order to execute a BUY (Long) position at a price higher than the current price. Sell Stop Order – It is an order to execute a SELL (Short) position at a price lower than the current price. Buy Limit Order – It is an order to execute a BUY (Long) position at a price lower than the current price. Sell Limit Order – It is an order to execute a SELL (Short) position at a price higher than the current price. The above pending orders can be entered as either: GTC (Good Till Cancelled) – A GTC order will remain active until the trader decides to cancel it. It is the trader’s responsibility to be aware of the order he or she possessed as the broker will not cancel the order for the trader at any time. GFD (Good for the day) – A GFD order will remain active until the end of the trading day. It is usually 12:00 GMT. For Stop Loss orders:



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When there is an existing Long position, a stop loss order is placed below the current price to exit the market. When there is an existing Short position, a stop loss order is placed above the current price to exit the market. The Stop Loss order is used to minimize losses for a trade once a specific price is reached. You will always use Stop Loss order in order to prevent excessive losses. And when a portion of the profits from a trade is protected once a specific price is reached, it is called ‘protective stops’. For Target Profit orders: When there is an existing Long position, a target profit order is placed above the current price to exit the market. When there is an existing Short position, a target profit order is placed below the current price to exit the market. The Target Profit order is used to lock in or protect a portion of the profits from a trade once a specific price is reached. You may or may not want to use Target Profit order depending on whether you are monitoring the trade every now and then, or monitoring every few days. For Day traders, they will have a smaller target profit as compared to swing traders. Trailing Stop Order – It is an order that sets the stop price at a specified number of pips below the market price. For a long position : When the market price rises, the stop loss also rises by the same amount of pips. But when the market falls, the stop loss still remains the same. For example, you have a long position for GBP/USD at 1.7730, you set the trailing stop order at 30 pips. The market price rises to 1.7780, so now your trailing stop rises to 1.7750, 30 pips below the market price.



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For a short position : When the market price falls, the stop loss also falls by the same amount of pips. But when the market rises, the stop loss still remains the same. OCO (One Cancels the Other) – It is an order that one of the orders is executed and the other order is cancelled. It is used to enter the market based on two prices: to either buy at a higher price or to sell at a lower price. It is also used to exit the market based on two prices: to close an open position either when the target profit has reached or when the price has reached the cut-loss(stop loss) level. Roll-over and Swap Interest In the spot forex market, rollover is required because all trades must be settled in two business days from the trade date. For example, if the trader sold USD 100,000 on Monday, he or she must deliver USD 100,000 on Wednesday, unless the position is rolled over. At the end of the trading day, at 5 pm EST, an account with any open positions is either credited or debited interest on the full size of the positions. When a rollover takes place, a trader can earn or be charged an extra amount of money for his or her positions overnight. This extra amount of money is known as swap. It is therefore advantageous for a trader to be buying a currency pair whose base currency has a higher interest rate.


READING A CURRENCY CHART

A. Currency pair: It shows the currency pair which the chart

corresponds to. In this case, this is a EUR/USD chart. B. Time Frame: It shows the time frame of each bar and not the whole chart. In this case, the above chart is set to hourly time

frame. Can be set to 1 minute (M1), 5 minutes (M5), 15 minutes (M15) and 4 hours (H4) etc.

C. Candlesticks Bar: Each bar represents the timeframe and in

this case, illustrates every bar of 1 hour. The red candlestick shows a bear price movement and the green shows the bull price movement. The short and long shadows are the lowest and highest price of the hour. If it is a green bar, the opening price is at the bottom and closing price at the top and vice versa for a red bar.


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D. Price Scale: The vertical axis shows the price of the currency pair. No matter what time frame you change to, the price will still remains the same.

E. Time Scale: The horizontal axis shows the date/time of the

currency pair. Different timeframe will cover different time scale. If it is a 15 minutes chart, then you will see a smaller time range compared to the 1 hour timeframe of the above chart. And if it is a 4 hour chart, you will see a larger time range. F. Price Gaps: This usually happens when there high impact happenings in the financial market during the weekends, e.g. huge oil price movement, bank failure. That is why it is not advisable to open a position on Friday, unless you have profits protected, because no one knows what will happen during the weekends. CHOOSING YOUR BROKER FOREX brokers should be registered with the Futures Commission Merchant (FCM) as well as regulated by the Commodity Futures Trading Commission (CFTC) and a NFA member. The CFTC and NFA were made to protect the public against fraud, manipulation, and abusive trade practices. You can verify Commodity Futures Trading Commission (CFTC) registration and NFA membership status of a particular broker at http://www.nfa.futures.org/basicnet/. There are many forex brokers in the market and they offer different trading platforms. These different trading platforms often show real-time charts, technical analysis tools, real-time news and data, and even support for the various trading systems. But the most

http://www.nfa.futures.org/basicnet/



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important thing is that you must be comfortable with the trading platform and consider some of the following important factors: 1) Customer service: Forex is a 24-hour market, so 24-hour support is a must!You can choose several online brokers and test their efficiency by contacting their help desks and see how responsive they are. 2) Low Spreads: In forex trading, transaction costs are calculated in pips spread. For example, the bid/ask spread for EUR/USD is usually 2 pips, but if you can find 1 pip, that’s even better. The ‘spread’ is the difference between the buy and sell price of any given currency pair. Lower spreads save you money. 3) Leverage: It is important, but do not overuse it. A good rule of thumb is to not use more than 100:1 leverage for Standard (100k) accounts and 200:1 for Mini (10k) accounts. 4) Low minimum account openings: Most brokers offer very small “mini-accounts” and even smaller "micro-account" for as little as a couple hundred bucks. It is a great feature for new traders. Be sure to open a demo account and test out the broker's platform before opening a real account! 5) Trading tools: It is very important to have those basic analytical features like Fibonacci, moving averages, and other types of indicators.



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FOREX STRATEGIES

Fundamental analysis and technical analysis are the two basic areas of strategy in the forex market which is the exact same as in the equity markets. You will not be trained to be an expert in fundamental and technical analysis in this short course and you do not need to be one! All I’ll teach you here in this short course is to let you understand the basics of forex and a strategy that will start earning you money.

Fundamental Analysis

By using fundamental analysis in the forex market as the basis of the decision making process, traders predict future price movements by interpreting economic indicators, high impact news releases, government reports etc. Fundamental analysis is a difficult one, as it's usually used only as a means to predict long-term trends. However it is important to mention that some traders do trade short term strictly on news releases. There are a lot of different fundamental indicators of the currency values released at many different times. Here are a few to get you started:

U.S. News:

• Non-farm Payrolls

• Purchasing Managers Index (PMI)

• Consumer Price Index (CPI)

• Gross Domestic Production (GDP)

• Durable Goods



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These are not the only fundamental factors that you have to watch. There are still a lot more like the U.K news, European Union news, Japanese news etc. At certain times, you will notice that these economic indicators cause sharp price swings after they are released. A 100 pips move is even possible within half an hour time. For example when the Federal Open Market Committee (FOMC) changes or give comments on the interest rate, you might see a very volatile market.

Technical Analysis

Traders use technical analysis to predict future price movements solely by using and reading charts. They are known as chartist and are not concerned with the market fundamentals and only rely on certain technical indicators. The chartist believes that a chart will tell the past, present and the future.

By using technical analysis as the basis to trading decision, traders are able to profit consistently from short term market swings. No matter what time frame you choose, the markets move up, down and sideways and different strategies are used in these different market conditions.

The trader has to be able to identify the type of market that he is dealing with in order to apply different types of strategies. The strategy that I’m going to reveal to you later will also be based on technical analysis with a combination of some indicators.

Some of the common forms of technical analysis used in forex trading include:

• The Trend

• Support and Resistance

• Fibonacci Studies


• Pivot Points

The Trend

Trend is the most important part of the technical analysis I can say. It is a very important rule to follow the trend as there is a saying: “the trend is your best friend” and “never go against the trend”.

The trend simply means the direction of the currency market, which way it is moving, uptrend, downtrend or sideways. As a trader, before you even think of trading, you must be able to determine whether the price chart is trendy. If it is trendy, then you will decide on your profit taking target, risk to reward ratio and when to enter the trade (based on indicators). If the price chart is not trendy, it means that the market is going sideways or ranging. With ranging markets, traders will use other trading strategies that are more effective and suitable.

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Support and Resistance

Support and Resistance is also extremely important even though you have all different types of trading methods under your sleeve. They are price levels which the market has difficulty in breaking below i.e. support or breaking above i.e. resistance. The stronger they are, the harder they will be broken. Usually when the market reaches the support and resistance level, the market may rebound (reversal), range for some while, or break through the support and resistance levels. With the guide of the S and R levels, traders will also be able to decide whether it is a good time to enter a trade, exit a trade or continue the position that he or she has opened. For example, you would not want to trade or open a position when the price is very near a strong S and R levels. Why? Like I have mentioned earlier, the S and R levels are hard to break through, so that is very risky if you do trade near those levels. It is important to know that the S and R levels are relative to the timeframe that you are looking at. The longer the timeframe, the stronger the S and R levels it will be, e.g. 1 hour, 4 hour, 1 day etc. Let’s look at the chart below:


There a few support and resistance in real life charts, and it’s up to you to identify them. After you have identified them, you will find trading will be easier as they are indicators which you can’t ignore.


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Fibonacci Studies

Fibonacci levels are used in trending markets. Traders look at the levels of Fibonacci because it is the indicator of possible S and R levels. Since so many traders watch these levels and place buy and sell orders on them to enter trades or place stops, the support and resistance levels become a self-fulfilling expectation. Most charting software includes Fibonacci retracement tools. In order to apply Fibonacci levels to your charts, you’ll need to identify the high and low points. The Fibonacci levels are 23.6%, 38.2%, 50% and 61.8%.

You can’t be rich by just trading using the Fibonacci levels However, Fibonacci levels are definitely useful as part of an effective trading method that includes other analysis and techniques. Now I think you have already got some idea, the key to an effective trading system is to integrate a few indicators with the correct combination and to find the style of trading that you are suitable to and comfortable with.

Using Fibonacci method can be subjective, so it will take some experience to make decisions on where the levels should be drawn. But don’t worry, I’m sure that experience will come to you after some time, and now what you need to do is to follow this guide and learn whatever that is available in this ebook. Take a step at a time and you find nothing is unachievable. So the lesson learned here is that Fibonacci Levels can be a useful tool, but never enter or exit a trade based on Fibonacci Levels alone.

Let’s look at the chart below:


For the above chart, using just Fibonacci as the only indicator, we can see that from this downtrend, the price rebounded from the 50% and 61.8% levels to continue to downtrend. In this case, the Fibonacci acted as a strong resistance.


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Pivot Points

Traders use pivot points to identify important support and resistance levels. A pivot point and its S and R levels are areas at which the direction of price movement can possibly change. Pivot points are especially useful to short-term traders who are looking to take advantage of small price movements. Below is the calculation of pivot points:

Pivot point (PP) = (High + Low + Close) ÷ 3

Support and resistance levels are then calculated off the pivot point.

First support (S1) = (2 X PP) – High

Second support (S2) = PP – (R1 – S1)

Third support (S3) = Low – 2 X (High – PP)

First resistance (R1) = (2 X PP) – Low

Second resistance (R2) = PP + (R1 – S1)

Third resistance (R3) = High + 2 X (PP – Low)

But don’t worry, you don’t have to perform these calculations yourself as your charting software will automatically do it for you and plot it on the chart.


Below are some of the tips regarding the pivot points trading:

• If price is at PP, the price may go back to R1 or S1. • If price is at S1 or R1, expect a move to S2 and R2

respectively, or back towards PP. • If price is at S2 or R2, expect a move to S3 and R3

respectively or back towards S1 and R1 respectively. • A high impact news could influence the market price to go

straight through R1 or S1 and reach R2 or S2 and even R3 or S3.


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THE TRADING SYSTEM : THE PIPS MOVER™

Parameters: 1. 30 Minutes (M30) Chart 2. Exponential Moving Average (EMA) 4 3. Exponential Moving Average (EMA) 60 4. Exponential Moving Average (EMA) 200 5. Stochastic 20,3,3. Levels at 20 and 80. 6. Moving Average Convergence Divergence (MACD) 5,25,1 The Pips Mover™ Trading Rules: 1. The chart must look trendy before you start to trade. 2. Buy (Go Long) when EMA 4 crosses EMA 60 and the price is above EMA 200. The entry price must be as close as possible to EMA 4, preferably less than 15 to 20 pips away from the EMA 4. The stochastic and MACD must follow the up direction. DO NOT trade more than 90 minutes after EMA 4 has crossed EMA 60. 3. Sell (Go Short) when EMA 4 crosses EMA 60 and the price is below EMA 200. The entry price must be as close as possible to EMA 4, preferably less than 15 to 20 pips away from the EMA 4. The stochastic and MACD must follow the down direction. DO NOT trade more than 90 minutes after EMA 4 has crossed EMA 60. 4. Decide your risk to reward ratio. Risk to reward ratio is preferably 1:2, 1:3 or above. For example, if your stop loss is 30 pips, target profit should be 60 pips or more, so that if you win one trade of 60 pips, you lose another trade of 30 pips, you still



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make 30 pips. 5. Set your Stop Loss 30 to 35 pips away from your entry price, and target profit depending on your risk to reward ratio. I.e. 60 pips. 6. Adjust the stop loss to breakeven price when you have at least profited 30 pips. Adjust the stop loss to protective stop, around 10 to 20 pips away from entry price when you have profited more than 50 pips. Let the market trigger your stop loss or target profit without having to close your position manually. To filter false signals: 1. Do not trade 2 to 3 hours before medium and high impact news are released. You can go to http://www.forexfactory.com to check what news will be released everyday. 2. Take trade signals between 0600GMT to 1600GMT only. The rest of the time is not advisable to take trade signals. 3. Trade only during good volatility and ranges. 4. If you want to take a higher risk and trade when the EMA 4 crossed EMA 60, but EMA 200 is not below the price when buying or EMA 200 is not above the price when selling, then the trade can only be executed if the price is at least 30 pips away from EMA 200. More advanced trading system can be found at ForexTradingPower.com. Let us look at some of the examples that you can learn from:

http://www.forexfactory.com/



Example 1

From the above chart, the blue arrow indicates the initial phase of the downtrend. The trade was executed because EMA 4(black line) crossed EMA 60(blue line), and the price executed was below EMA 200(gold line). But how do we confirm that that is a valid sell signal? This is where the Stochastic and MACD comes into play. The Stochastic is to filter out consolidation and noise while to MACD is telling us where the trend is going. So in this case, the Stochastic and MACD is also pointing the same direction (down) as what the trend indicates, so this trade is valid. We prefer to take signals when the Stochastic crossed down or up from the 80% and 20% levels respectively, but in this case is still alright as it is near the 80% level.


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Example 2

From the above chart, the blue arrow indicates the initial phase of the uptrend. The trade was executed because EMA 4(black line) crossed EMA 60(blue line), and the price executed was above EMA 200(gold line). As the Stochastic is already above the 80% level, you may not be confident enough or feel comfortable to take this trade. So it’s alright that you let go of this opportunity. Later in this ebook, you will know what I mean by that. The EMA 200 usually acts as very good support and resistance, as you can see from the chart.


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Example 3

From the above chart, the blue arrow indicates the initial phase of the downtrend. We should not be opening a trade if the price is not below EMA 200 when selling. But in this case, like I mentioned earlier, if you wanted to take a higher risk, you can trade, but make sure that the price is at least 30 pips away from EMA 200. The above chart meets the requirement.


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Example 4

There are very few times when signals failed as the market goes choppy. So what you have to do is to accept the loss, forget about that and wait for another good opportunity to trade. The reason is, forex trading is not 100% winning all the time, and the fact that if you can get 60% to 80% of the trades right, you are considered successful and profitable. One thing you must always remember in your heart is that, your trading results does not only depend on a single day or week, it depends on a stretch of period e.g. a month or so before you can say whether you make profit or loss. So please give yourself some time and patience, or else you will be feeling miserable for some tiny losses which you can overcome with the consistent amount of effort that you put in.


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PSYCHOLOGY OF TRADING – DEALING WITH EMOTIONS You may think that the “The Pips Mover™” trading system that I revealed to you earlier is the most important part in this ebook. But you will be surprised if I tell you that the psychology part of trading is the most important of this ebook. And this is true because what makes up the whole of forex trading is 30% technical and 70% emotional. What I mean here is that while there is no holy grail in trading, no matter how good your trading system is, you have to control your emotions if you want to be a successful trader. We will now look at several factors that will affect your emotions: Discipline You certainly need the confidence to trade. Confidence is vital to success, and because confidence comes from discipline and if you don't have the discipline to follow your method you do not have confidence! Discipline is vital because you need it to follow your forex trading system through periods of losses to overall forex trading success without throwing in the towel. The difference between being a winner and loser is in most cases down to the mindset and the discipline of the trader. There was once a student of mine told me that he will try to be discipline to standby everyday in order to catch a signal to trade. Get this clear, discipline does not mean that you have to trade everyday! Even more, good trading signals do not appear every single day! And I mean good signals, though I know someone will always tell me that there are signals to trade almost everyday.



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So exactly what do I mean by discipline? As a disciplined trader, you must be consistent in what you are doing everyday. You can’t be trading one lot now and then 5 lots the other moment. This will lead to unhealthy risk to reward ratio. Do not chase the price even if you see there is strong momentum of the trend, a pullback of the price could stop you out. Never trade near strong support and resistance levels even if you see a clear signal to trade, the price may reverse and stop you out. Some of the successful traders even ended up back to square one, wrecked their trading account, because of their undisciplined, recklessness. They thought they are always winning and ignored the money management rule. One losing trade actually wiped out all the winning trades that they have accumulated over the disciplined times. It is because of greed that they ignored the money management rules. Greed A lot of people have a misconception that forex trading will bring them quick riches. Make no mistake, this is a wrong mindset and could be a disaster for your trading career! Forex trading is not gambling, you can’t be putting 50% or 80% of all your capital in just one trade and hope to be rich after that. Trading has to be accumulative from small gains, and you see those small gains becoming big profits after sometime. Once you start trading and found the trading system that suits you best, you may keep winning and slowly forgot the money management rules in place. There will be a time when you will find the small gains unsatisfying and will be tempted to place a bigger stake on a trade. You will think that, “Ok, I’m going to try to win a lot of money this time round since most of the time I’m winning.” But you might not know that the trade which you traded



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with huge stake could be the downfall when it lost. I know the temptation is very strong, it happens to everyone and I admit sometimes I was tempted too. That is why I said that psychology part of trading is so important, now you get it? But don’t worry, try to get pass this hurdle, so that with time, consistent wins and equity growth will make you a very successful trader. Patience Waiting for the right opportunity to trade is very important and it could mean either success or failure for you. Good traders with patience is what separates them from the 95% of the losing crowd. I like to compare trading with parents who have children. Parents teach and groom their children patiently with love, and trader will wait for his trade patiently with a plan in mind. I do not know what you think about forex trading. Most people will think that trading is fun and exciting. However, while it may be fun to some people, forex trading is certainly very boring. Yes, you heard it right! Trading is boring! Why? Because traders must not be emotional and will trade according to their system and plan, so it’s nothing excited about for doing the same stuffs all over and over again. Except that when you earn profits, then that is the reason to be excited about. I must stress that while not everyone is patient, anyone can be trained to be patient. I myself is an example. I’m patient in other stuffs, but not really when it comes to trading. So I trained myself, telling myself that I’ll always lose money if I do not wait patient for trades. If I missed an opportunity to trade or the price has gone far from the entry which I should enter, then I’ll just let go and wait for another opportunity. It’s as simple as that, you must learn to let go of opportunities, or else you’ll be blaming yourself on missing them and affect your emotions.



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For other things in life, once you missed a good opportunity, it may not come again. But it is totally the opposite in trading. Opportunities will not stop coming, so have patient, and believe me it pays off eventually. Sure, you may not find trading an exciting dream like you imagined anymore, but it’s better to be more boring and wealthy rather than exciting and poor…don’t you agree? Finally, if you are a trader with patient and discipline everyday, you are demonstrating 80% of what it takes to become a successful trader. So are you willing to be disciplined enough, discover the positive and negative qualities you have and work on it? Make sure that you think about this first before you start on trading, or else you will see a hole in your trading account.



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MONEY MANAGEMENT In the trading world, trading system is your weapon and money management is your shield! Get that into your heart. Every trader will have their money management rule even if they own the perfect trading system, which does not exist at all. Market is unpredictable, and the problem is no matter how good a trading system is, there will be bad times which the trader has to be prepared mentally and financially. Drawdown is the magnitude of a decline in account value. For example, a trader's account dipped from $15,000 to $10,000 and then after some winnings, back to $15,000 again. That is a drawdown of $5000 even though the trader's account never actually lost money. Every trader will experience that, but maybe lesser drawdowns because of different trading systems. But at the end of the day, we will arrive at the same point that trading the history is only a rough indicator of the future. So we need to have a money management rule to protect ourselves and be able to continue to trade even if we lost the 1st trade, 2nd or even the 3rd. The risk per trade that you should be looking at is 1% to 5% of your total account. You have to determine how much you are able to risk for each trade, conservative traders may just trade 1% of their total account while the aggressive traders may want to trade 5%. Let us look at an example: You have $20,000 in his trading account. Trading EUR/USD 1 standard lot (10 mini lots). Risk per trade you set: 1.5%. Risk in pips: 30(same as the above percentage but expressed in pips). Risk in dollar: $300(same as the above percentage but expressed in dollars).



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Accounts has grown 30% from $20,000 to $26,000, then you can increase your lot size to trade 1 standard($10) and 3 mini lots($1 per mini), which is risking 30 pips X $13 = $390 per trade, which is still 1.5% of total account. Account decreased 10% from $20,000 to $18000, then you should decrease your lot size to 9 mini lots, which is risking 30 pips X $1 X 9 = $270, which is still 1.5% of total account per trade. The bottom line is, you should be consistent in your trading at all times and take a step at a time to increase lot sizes when your trading account grows.



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FOREX TRADING TIPS Although you need some experience, capital, a good trading system and discipline to find success in trading, below are some of the trading tips that can help you shorten your learning curves:

1) Never open 2 trades at the same time unless your first trade is already in profits.

2) You should never trade against the trend, go along with the

trend, as the trend is your best ‘friend’!

3) Never add trades to a position that is losing.

4) When there is a lack of liquidity or volatility, avoid trading during that day as the market will tend to be choppy/ ranging.

5) You should have different trading strategies for both trending

and ranging markets.

6) Always have a trading plan in mind at the start of the day before you trade. 7) Never rush into a trade. Most of the time, rushing into a decision would not be a good decision.

8) Measure yourself by profitable consecutive days and not by individual trades.

9) Rest for 2 or 3 days if you are on a losing streak. 10) Do not turn a winning trade into a losing one.



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11) Good habits are so much easier to give up than bad ones, so never build on bad habits, try to get rid of it as soon as possible. 12) You should not worry about a missed opportunity, there will always be another one round the corner.

13) Don’t bother to look for secrets in trading, because there is none after you learned the proper way to trade.

14) There is no free lunch in this world. Do your homework for trading and you will be rewarded.

15) Never depend on your instinct when it comes to trading. Just depend on your trading system and discipline.

16) Do not be discouraged by lost trades. Always start a trading day with a fresh memory. 17) If you are troubled and unable to focus on certain days, do not trade, because you will not be able to make good decisions. 18) To succeed to the level that you want, you have to be very serious and focused. 19) We must remove the emotional element as quickly as possible in trading. Only that, we can be successful in trading. 20) Experienced traders will control risk, while the inexperienced ones will chase after gains and price. More forex tips and techniques can be found at ForexTradingPower.com.




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FOREX GLOSSARY

Below is the list of glossary that are commonly used in forex trading for your easy reference.

Appreciation - A currency is said to 'appreciate' when it strengthens in price due to market demand.

Arbitrage - The simultaneous buying and selling of an equal and opposite position in a related market, in order to take advantage of small price differentials between markets.

Ask (Offer) Price - The price at which the market is prepared to sell a specific Currency in the Foreign Exchange. For example, in the quote GBP/USD 1.7625/29, the ask price is 1.7629; meaning you can buy one Great British Pound for 1.7629 U.S. Dollar.

Bar Chart - A type of chart which consists: the high and the low prices, which form the vertical bar. Closing price and opening price are represented by a right tick and a left tick respectively. Bear Market - Declining trend or prices Bid Price - The bid is the price at which the market is prepared to buy a specific Currency in a Foreign Exchange. For example, in the quote GBP/USD 1.7625/29, the bid price is 1.7625; meaning you can buy one Great British Pound for 1.7625 U.S. Dollar. Broker - An individual or firm that acts as an intermediary, putting together buyers and sellers for a fee or commission in a financial market Bull Market – Rising trend or prices.



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Candlestick Chart - A chart that indicates the trading range for the day as well as the opening and closing price and represents the high and the low of certain period with wicks at the upper and the lower extreme. Carry Trade – The simultaneous selling of a currency with a low interest rate, while purchasing currencies with higher interest rates. Examples are the JPY crosses such as GBP/JPY and EUR/JPY. Central Bank - A bank, administered by a national government, which regulates the behavior of financial institutions and manages a country's monetary policy. For example, the US central bank is the Federal Reserve, and the German central bank is the Bundesbank. Chartist - An individual who uses charts and graphs and interprets historical data to find trends and predict future movements. Closed Position - The process to close a position is to sell or buy a certain amount of currency to offset an equal amount of the open position. This results in liquidation (squaring up) of the position. Commission - A transaction fee that a broker may charge clients. Confirmation - A document exchanged by counterparts to a transaction that states the terms of said transaction. Currency - Any form of money issued by a government or central bank and used as legal tender and a basis for trade. Daily Charts - Each bar or candle in a chart represents the daily price movements.



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Day Trading - A short term trading style. Refers to open and closing out positions within the same day. Dealer - An individual or firm that acts as a principal or counterpart to a transaction. Depreciation - A fall in the value of a currency due to market forces. Devaluation - The deliberate downward adjustment of a currency's price, normally by official announcement. Divergence - When an indicator and a price chart don’t yield the same peaks/bottoms. It is an indication of the trend exhaustion. Economic Indicator - A government issued statistic that indicates current economic growth and stability. Common indicators include employment rates, Gross Domestic Product (GDP), inflation, etc. End Of Day Order (EOD) - An order to buy or sell at a specified price. This order remains open until the end of the trading day which is typically 5PM ET. European Central Bank (ECB) - the Central Bank for the new European Monetary Union. Federal Reserve (Fed) - The Central Bank for the United States. Fill Price - The price at which a buy or sell order was executed. Federal Open Market Committee (FOMC) – The committee that sets money supply targets in the U.S. which tend to be implemented through Fed Fund interest rates etc.



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Forward Points - The pips added to or subtracted from the current exchange rate to calculate a forward price. Fundamental Analysis - Analysis of economic and political information with the objective of determining future movements in a financial market. G7 - The seven leading industrial countries, being US , Germany, Japan, France, UK, Canada, Italy. Going Long - The purchase of a stock, commodity, or currency for investment or speculation. Going Short - The selling of a currency or instrument for speculation. Gross Domestic Product - Total value of a country's output, income or expenditure produced within the country's physical borders. Gross National Product - Gross domestic product plus income earned from investment or work abroad. Good Till Cancelled Order (GTC) - An order to buy or sell at a specified price. This order remains open until filled or until the client cancels. Hedge - A position or combination of positions that reduces the risk on an existing investment position.

High/Low - Refers to the high and low of a certain period.

Hourly Chart - Each bar or candle in a chart represents the hourly price movements.



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Inflation - An economic condition whereby prices for consumer goods rise, eroding purchasing power. Initial Margin - The percentage of the price of a security or amount of money required to enter a transaction. Interbank Rate - The rate at which the major banks trade.

Intervention – Action taken by central banks to affect its currency.

Leading Indicators - Statistics that are considered to predict future economic activity. Liquidation - The closing of an existing position through the execution of an offsetting transaction. Liquidity - The ability of a market to accept large transaction with minimal to no impact on price stability. Long position - A position that appreciates in value if market prices increase. Margin - The required equity that an investor must deposit to collateralize a position. Margin Account – An account that allows leverage buying on credit and borrowing on currencies already in the account. Interest is charged on any borrowed funds and only for the period of time that the loan is outstanding. Margin Call - A request from a broker or dealer for additional funds. It occurs when the value of a trading account falls below the maintenance margin.



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Market Maker - Institution willing to buy and sell at the quoted bid and ask prices. Market Risk - Exposure to changes in market prices. One Cancels the Other Order (OCO) - stands for “one cancels other order”. Through the execution of this order, cancels the other part of the same order. Open position - An active position (long or short) with corresponding unrealized P&L, which has not been offset by an equal and opposite deal. Over the Counter (OTC) - Transactions are not conducted over an exchange. Overnight Position - A trade that remains open until the next business day. Order - An instruction to execute a trade at a specified rate. Price Transparency – The ability of all market participants to ‘see’ or deal at the same price. Rally - A recovery in price after a period of decline. Resistance - Price level at which a currency pair had trouble breaking through. At this level the sellers gained control of the market outnumbering the buyers. If the price approaches to this level again, the market is likely to hold again. Retracements - Correction phase after a considered uptrend or downtrend.



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Risk Management - the employment of financial analysis and trading techniques to reduce and/or control exposure to various types of financial risk. Roll-over - Settlement of a transaction is rolled forward to another value date, the cost of this is the interest rate differential between the two currencies. Settlement - The process by which a trade is entered into the books and records of the counterparts to a transaction. Short Position - An investment position that benefits from a decline in market price. Slippage - This occurs when the market orders (including stop losses) are not getting filled at one’s expected price. This happens when the market moves too fast for the broker to execute the order close to the expected price. Spread - The difference between the bid and ask price. Support - Price level at which a currency pair had trouble breaking through. At this level the buyers gained control of the market pushing the prices higher. If the price approaches to this level again, the market is likely to hold again. Swap - A transaction which moves the maturity date of an open position to a future date. Swing Trading – A type of trading that attempts to capture profits from a financial market by leaving the position open for more than a day.



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Technical Analysis – A technique used to try and predict future movements of a currency pair based solely on past price movements and volume data. Transaction Costs - The costs incurred by a trader when buying or selling financial instruments (spread, commissions, etc). Transaction Date - The date on which a trade occurs. Turnover - The number or volume of transactions traded over a specific period of time. Two-Way-Price - When both, bid and ask prices are quoted in a transaction. Variation Margin – Funds, which are required to bring the equity in a trading account back up to the initial margin level, calculated on a day-to-day basis. Value Date - The date on which counterparts to a financial transaction agree to settle their respective obligations, i.e., exchanging payments. Volatility (Vol) - A statistical measure of a market's price movements over time.

Weekly charts - Charts for which each candlestick or bar represents the data of one week movements.

Whipsaw - Describes highly volatile price movements and reversals in the market.



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Last but not least, I hope you’ve enjoyed reading this ebook and find it helpful. I’ll like to hear more from you. Tell me the top 3 burning questions on forex trading that you’ll need anwers and drop me a mail at [email protected]. My team and I will get back to you as soon as we can.

Thank you.

To Your Trading Success

Daniel S.

ForexTradingPower.com

mailto:[email protected]


Forex Trading to Riches

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Transcript of Forex Trading to Riches