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The FOREX market in a nutshell

The Interbank Market (Forex or FX) is the largest, most liquid and fastest growing financial market today. The FOREX functions like any other market: Buyers
and sellers of a commodity meet and trade. In FX, as in any market, a currency whose demand exceeds supply will see the value go up, and vice versa. A
professional trader was quoted saying, "it is the purest or truest market in existence, due to that every factor influencing peoples lives in terms of economics,
technology and geography is involved".

FOREX is a vibrant, 24-hour market comprised of diverse group of participants from every corner of the earth.
FX trading is the mechanism that values all currencies, and is the most essential component of global commerce.
An exchange rate is the price of one currency in terms of another, also known as a pair or a cross.
The FOREX is one of the most versatile and dynamic markets traded.

Historically, the oldest function of the FOREX was the facilitation of international trade. Since countries have different currencies, the FOREX market must
exist for international partners to trade goods and services or to travel abroad. However, the present function of the FOREX market is speculation.

Speculation comes in many forms. It could be a corporation deciding to move facilities to a foreign country to exploit a more favorable labor market, or a
Swiss bank selling francs buying Australian dollars to carry a higher interest rate. Both are speculative and both will influence the market accordingly.

The U.S. dollar is the benchmark currency, and is involved in 85-90% of all transactions, with the Euro represented in about 38%, and the Japanese yen
involved 23% of the time. The three laggards to them are: British sterling, Swiss franc, and the Canadian dollar respectively.

FX quotes contains two single currencies, also know as a pair when the USD is involved or a cross when it is not, such as sterling/yen (GBP/JPY). For example,
with the dollar/yen pair (USD/JPY), the dollar is the commodity currency and the yen is the transaction currency. Therefore, prices are quoted as yen per
dollar. In EUR/USD, the Euro is the commodity currency and the dollar the transaction currency.

The Major Trading Pairs


The Major Trading Pairs

EUR/USD - (Euro vs. U.S. Dollar)


GBP/USD - (Great Britain Pound vs. U.S. Dollar)
USD/JPY - (U.S. Dollar vs. Japanese Yen)
USD/CHF - (U.S. Dollar vs. Swiss Franc)
USD/CAD (U.S. Dollar vs. Canadian Dollar)

The Dealing Spread

Not unlike any market, FOREX quotes contain a difference between the price at which you buy and the price to sell, resulting in an immediate cost in
establishing a position. The difference is known as the spread, and is necessary for the market to exist. Without a spread market makers would have no
reason to quote the instrument.

Spreads can be fixed or floating


The spread is the difference between the bidding price and offered price
Spreads of the major pairs are the smallest

Standard and Mini Lots (lots)

A lot is a unit of measurement traders use to gauge the amount of account equity they would like to expose to the market. In FX trading a standard lot
represents $100,000 and mini lot is $10,000.

Standard lots allow traders to take one big position in the market
Mini lots offer more flexibility to traders for implement precise risk management control.
Both have advantages and should be used accordingly.

Margin

In FX trading it is standard for the equity in your account to be on margin. What that means is your account balance can be augmented anywhere from 50 to
as much as 400 times the actual amount. The reason this is necessary is due to the fact that currency fluctuations, in dollar terms, are very small. It is very
important to understand how leverage works in order maximize its effectiveness. Below are a few rules that traders have to know about margin to utilize it
effectively:

You can monitor your margin balance on your trading platform in real time.
The position you have can be closed if your account balance falls below a certain amount based on the available margin this measure is
taken to protect you and your broker from experiencing a larger than expected loss in the market.
taken to protect you and your broker from experiencing a larger than expected loss in the market.
You must monitor your margin balance and if you desire to deposit more funds it must be done before the market reaches your brokers
predetermined level for liquidation.

Point in Percentage Values (pips)

The specific currency exchange rate and the number of lots you are trading determine pip values.
The following is an example when trading one standard lot, the first being the USD/JPY which is quoted with two decimal places and the EUR/USD which is
quoted in four decimals:

1. USD/JPY trading at 123.53, you use the following formula 0.01 (one pip) x $100,000 (one lot) then divide by the current price of the
denominator as follows: 1,000/123.53 = $8.095 per pip.
2. EUR/USD trading at 1.2050, you will find that when trading in a currency pair where the USD is the transaction currency or the denominator
as in the case, the pip value is simply $10 for each 100K lot.

24-hour Trading

Anytime, night or day somewhere in the world there are buyers and sellers trading currency. This characteristic is what makes the FOREX market truly unique
providing traders with many advantages over every other market. For example, if a piece of key economic data is released in Tokyo, London or New York,
traders anywhere in the world are able to take advantage of it, whereas in any other market that would be impossible simply for the fact that dealers and
brokers are not open for exchange.

In addition to scheduled events unknown events unfold while other markets are closed. In todays day and age geopolitical uncertainty appears to be on the
rise creating volatility in all markets from currency, equity and commodity markets. This aspect of the world we live in today is unfortunate, but if potentially
market moving events arise anywhere in the world at any time traders can act on the information protecting their exposure and limiting risk in light of the
new information. This is not the case in any other markets, with stocks or futures for example, you have the potential for gapping prices rendering one
powerless to the market movement. This is just one of the numerous advantages FX traders hold over those trading other markets.

Major Units

The U.S. Dollar

The U.S. Dollar (USD) is the worlds benchmark currency. Most currencies are quoted in terms of U.S. dollar and many currencies are directly pegged to it.
The greenback became the leading currency toward the end of World War II. The major currencies traded against the U.S. Dollar are the Euro, Japanese
Yen, British Pound, and Swiss Franc.

The Euro

The Euro (EUR) replaced the German mark and became the second most common currency after its initial release in December of 1999. The Euro has a
strong international presence stemming from members of the European Monetary Union; however, it is exposed to a wide variety of economic and political
factors deriving from the expansive number of members of the Euro Zone. This is vastly different from the responsibilities another currency usually
t f i l N th l j t i lik Chi J dR i i t i l i h t l t ill b
factors deriving from the expansive number of members of the Euro Zone. This is vastly different from the responsibilities another currency usually
encounters from a single economy. Nevertheless, many major countries like China, Japan, and Russia maintain large reserves in what some speculate will be
the benchmark someday.

The Japanese Yen

The Japanese yen (JPY) runs a close third to the Euro as the most traded currency in the world, and the pair is very liquid at all times. Because commodity-
producing countries are dependent on Japan, the Yen is sensitive to changes in the prices of the raw material markets, and the Japanese stock market. In
terms of price action the Yen stands apart from the other major pairs. The pair often takes on a course divergent of those of the EUR and CHF, offering
traders the best opportunity to profit. The Bank of Japan (comparable to Americas Federal Reserve Bank), among other Asian central banks is very active and
the resulting price adjustments are very swift and with little warning.

The British Pound

The British pound (GBP) was the benchmark until the end of World War II. Trading volumes in what are know as The Power Hour, between 6am Frankfurt
time and 6am London time is when sizable shifts take place due to the large amount of order flow that occur when dealers become active in the market. The
cable, as it is called among traders and dealers alike, is heavily traded against Euro (EUR/GBP) and the U.S Dollar (GBP/USD) and the Yen (GBP/JPY). The
tendency for the pair to overshoot following a data release makes it the favorite of many contrarian strategists intraday.

The Swiss Franc

The Swiss franc (CHF) is the only currency of a major European country that is not a member of the European Monetary Union (EU) or the G-7 countries. The
Swiss franc is favored over other major currencies in terms of geopolitical uncertainty due to the countries large reserves of gold and reputation for political
neutrality. The USD/CHF closely resembles the price patterns of the EUR/USD, though inverse as the pair is commonly quoted in terms of the franc. Many
traders enter positions on the EUR/USD based on analysis of the USD/CHF and vice versa. The demand of Swiss francs often rises considerabley during times
of geopolitical unrest, making it a favorite of event driven strategists.

Primary Market Participants

1. Central Banks:

Central Banks (CBs), like the Federal Reserve Bank of the United States, are for all intents and purposes non-profit entities. Therefore they do not speculate
in the currency markets. In other words, they are not in the market to make a profit. Their main purpose in the market is to create stable economic conditions
through bouts of liquidity from their cash reserves. Therefore, they may intervene directly, or via foreign central banks in an attempt to adjust perceived
imbalances. More importantly from a speculators point of view, they are just one of the many sources of blind liquidity that comprise the enormous dollar
volume traded daily in the FX market.

CBs are not in the market for profit


They provide opportunities for speculators to profit by way of large bouts of liquidity

2. Commercial and Investment Banks:


Commercial and Investment banks such as: Unified Bank of Switzerland (UBS), Citibank, JP Morgan, Royal Bank of Scotland (RBS), HSBC, Barclays, Goldman
Sachs and Bank of America just to name a few are regarded as the main players. These banks are in the market via proprietary trading desks worldwide on
behalf of themselves and their clients. In fact, the majority of these banks profit is derived from FOREX trading. The market has proven to be very profitable
for banks providing them with less exposure to risk than loans and other banking activity.

These banks dealers exploit every advantage in this market using technical, fundamental and order flow data. Before computing power evolved to the level it
has reached today, it required a large team of people to consolidate all the data into concise trading decisions. Today however, many of the advanced
strategies employed by them can be done with nothing more than a modern desktop PC and a spreadsheet. This fact allows the individual trader to keep cost
low while maintaining an effective posture in the market.

The banks dealers, trading on behalf of the bank and their clients, act as proprietary traders on the desks of the institution and often trade the session range
in order to get the best position on the market. The strategies they use yield massive returns of which the proprietary dealer receives a small percentage,
while the institution reinvests the majority of all their traders profits into the bank. Annual salaries for proprietary dealers run well into six figures with
yearend bonuses above the seven-figure echelon. Our course on FOREX trading will show how to use these very strategies to yield your own potentially
extraordinary returns.

The majority of major bank profit is derived from FOREX trading


The same advanced strategies the banks use can be done with a desktop PC

3. Hedge Funds and Private Equity Groups:

Hedge Funds and Private Equity groups consist of partnerships between high net worth investors and top performing traders who pool millions, or in some
cases billions of equity. These funds flock to the FOREX simply because no other market offers the same advantages. The most popular high frequency
strategies used by hedge funds are non-directional market neutral strategies. These methods are merely designed to harvest money from market as oppose
to predict the direction of an exchange rate, contrary to the common misconception of what professional traders do in order to profit in all market climates.

Hedge funds are the fastest growing investment vehicle today and are likely to gain even more acceptance in the investment community in the future. More
funds are entering the currency markets as international investment opportunities increase. Many infamous investors such as George Soros and his Quantum
Fund are part of the most formidable members of the FX trading community. Additionally, there are many offshore hedge funds whose assets are largely
unknown, but aggregates under management are likely to be well into the trillions.

The fastest growing segment of the investment community trades FOREX


Hedge funds reap massive returns trading FOREX

4. International Corporations:

The impact of globalization on large corporations has forced them to pay close attention to FOREX rates. In the past corporations were involved in the FOREX
market as a means to hedge the risk then incur when transacting business overseas. However, today corporations are becoming more sophisticated with risk
management techniques, going beyond their commercial needs taking speculative positions to improve the bottom line. Thus, the demand for proficient FX
traders is rising exponentially.

Often corporations unload a large number of any major currencies at any given time to protect their business from the constant fluctuation of exchange rates.
They conduct a categorized volume of transactions on the CME, or with their bank and are known as commercial participants. These market entities provide a
t d l f th li idit i df l ti fit Th h th titi i t th k t i lit ll h d d t k l t
They conduct a categorized volume of transactions on the CME, or with their bank and are known as commercial participants. These market entities provide a
great deal of the necessary liquidity required for speculative profit. The cash these entities poor into the market is literally handed over to keen speculators
who are poised to walk through this open door of opportunity. Youll learn precisely why this is so, and how to capitalize on this fact in level two of our course
on FOREX trading.

Large corporations speculate in FOREX to improve the bottom line for shareholders
Corporations hedging activity creates liquidity for traders to profit from

5. The Individual Investor:

Its no surprise that the daily dollar volume has grown so rapidly over the past 30 years. As the information age takes hold and globalization becomes more of
a reality to the general public, FOREX is sure to become a household name. Presently, the individual trader group is larger than ever and may very well move
up the ranks towards becoming the largest class of participant someday. At no time in the past has the FOREX market been more accessible to the individual
trader or small fund. Retail volumes have soared in the past 10 years and show no sign of topping out.

Lower Transaction Costs

Due to rapid nature of the FX market it is in traders best interest to stay active. In other markets this is not feasible given the cost of doing a transaction. It
is much more cost-efficient to trade FX in terms of both commissions and transaction fees. Commission fees for stock trades range from anywhere between
$7.95 to $29.95 per trade with discount brokers and up to $200 or more per trade with full service firms. An average commission on a futures trade is $15
per round turn. Fore brokers offer much lower commission structures, using the gap of the bid/offer spread as the commission.

What our course will teach you

Fundamental Analysis: What moves the market?

Geopolitical events - War, Terrorism, Political Developments


Federal Reserve announcements - FOMC announcements and Beige Book
Employment data NFP and Unemployment Percentage Rate
Inflation data - GDP, CPI and PPI

Technical Analysis: How to measure the pace of the market.

Support, Resistance and Fibonacci Retrenchments and Projections


Trend Indicators - ADMI, Bollinger Bands, Parabolic SAR and Moving Averages
Oscillators - MACD, RSI, CCI and Stochastic
Patterns Head &Shoulders, Double Tops/Bottoms and Triangles

Strategy: How to trade like a pro


Account and order management Risk Management Techniques
Promoting good habits Decision making techniques
Trading logs How to track performance effectively
Putting it all together Building account equity

Trades and monitoring positions

Unlike other market other markets, when trading FX you can trade in anticipation of the market going up (Long) or in anticipation of the market going down
(Short). Long and Short are relics of the stock and futures markets and are largely irrelevant in FX technically speaking since in FX we are talking in terms of
two single currencies and their relation to one another, as oppose to a single corporations stock price or a physical commodity. In fact in some parts of the
world a pair like EUR/USD is quoted as USD/EUR, therefore the price is inverted and a different figure all together. Nevertheless, the terminology is widely
used and thus it is the status quo.

Profit/Loss

If you would like to go Long EUR/USD, you are in effect buying euros in exchange for dollars. Therefore you anticipate the Euro will strengthen or appreciate
relative to the dollar. If it does you will see your position create an unrealized profit. If you exit or close the position you will then have realized the profit and
your account balance will reflect this increase. If the contrary takes place, meaning the Euro depreciates during the time youre in the market you will have an
unrealized loss in equity. Upon closing the position your account will reflect this loss.

Entry Orders

Limit Entry

Limit entry orders allow traders to initiate a position in the market. The order can be set Long or Short depending on what direction the trader anticipates the
market to move. A trader will use limit orders when the market is currently trading above the Long entry or below the Short entry. For instance, if the traders
strategy implies the market may trade higher but will come back shortly after, he can set a limit above the current price in anticipation of the event.
Inversely, if the trader feels the market may drop momentarily, offering a good price on what may be the future vale the trader can set a Buy Limit below the
current price in order to exploit the event taking place.

Stop Entry

Stop entry is the opposite of the Limit entry and is used when the trader anticipates the market moving through a price level and advancing further still. For
example, if the traders strategy implies the market will advance through a region above where it is currently trading he might set a Buy Stop above the
current price in anticipation of the event taking place. If the traders strategy implies the same will take place on the downside, then he might set an order
below the market

Market Orders

Market orders are often used when a trader would like to enter the market at the current price. Few instances require a trader to take this course of action,
and it is recommended for seasoned traders only.
and it is recommended for seasoned traders only.

Exit Orders

Stop Loss

Stop loss orders are the most important orders and essential to trading profitably. Stop loss allows a trader to control risk and manage the unexpected. A stop
is set above or below the traders entry price in order to shield account equity from an unexpected event in the market.

Limits

Limit orders on live trades are not the same as a Limit Entry that we discussed earlier. They allow traders to take profit once an objective in the market is
achieved. Limits are useful for preserving equity and can be placed strategically based on various factors.

Trailing Stops

Trailing stop orders allow traders to stay in a profitable trade until it begins to move against the position. If you set a 20 pip trailing stop the order will close
your position if the market moves greater than 20 pips in favor of the trade then returns another 20 pips against it.

For example, a trader entered EUR/USD with a buy stop at 1.2000, a stop at 1.1950, limit at 1.2100 and a 20 pip trailing stop. The market advances higher to
1.2080 then moves back to 1.2060. The trade will be closed at 1.2060 because the market moved against the profit 20 pips. This is a very good method for
building account equity.

Superior Liquidity

Other markets, such as stock or futures, could never possibly provide the trader with the liquidity that is comparable to the FOREX market. With a daily
trading volume that is 50 times larger than the New York Stock Exchange, there is always someone willing to match an order. It would take nearly three
months of dollar volume on the NYSE to match one single day of trading in the FX market. This magnitude of volume ensures liquid conditions, enabling you
the potential to exit at a fair market price virtually anytime.
Profit Potential in both Rising and Falling Markets:

FX trading provides profit potential in either rising or falling markets. With every open position, an investor is long one base currency and shorts the other.
The ability to sell currencies without any limitations is another distinct advantage over other types of trading. In the US equity markets, it is much more
difficult to establish a short position due to the up-tick rule, which prevents investors from shorting a stock unless the preceding trade was lower than the
price of the short sale.
As you may or may not know, the market often responds with volatile price changes following the release and dissemination of major market data. With so
much information to process in such little time and the market making large swings, it is easy to feel like you are well behind the curve. Fortunately, there are
ways to compartmentalize this seemingly insurmountable data in order to preserve your account equity in the face of uncertainty.

There are just a few things that you must realize in order to make heads or tails of it all.

The majority of market moving data is released at the onset of American trading, usually 8:30 and 10:00 am in New York.
The biggest releases are on the first Friday of every month (NFP and Unemployment).
The days before, of, and following the FOMC announcement are volatile.
Geopolitical unrest creates uncertainty about the stability of exchange rates uncertainty often translates into weakness in market leading
currencies and strength in safe-haven currencies.

Geopolitical Events

Geopolitical events are very common and impact exchange rates continuously. Some of which are: war, or threats of war,
terrorist activity and political developments, such as a new President or ruler of a nation just to name a few.

It is very difficult to get an idea of how an event will impact the market on a short-term scale. However, the broader scope, or
the "global macro" view as it is called, can offer a much clearer picture of how the market consensus will translate to price. By
taking a broader view of the current state of the geopolitical landscape traders can lend more or less weight to near-term
events in the market such as a new high or low being made by price.

Federal Open Market Committee

The Federal Open Market Committee (FOMC) is the board chaired by Ben Bernanke, and is the organization the United States
Government designates to set monetary policy.

The most important piece of information that comes from the FOMC is the interest rates. The Target rate and the Federal
Funds rate are of incredible importance to traders. In the age of increased transparency, the accompanying statement has
garnered a great deal of attention by traders.

In some cases, interest rates remain unchanged, but a change in the wording of the statement has been made by the
Chairman and district Fed officials. Typically, it is the last sentence in the statement that is most influential; as the first
address the current focal points the committee was most concerned with when making their decision.

For example, if the FOMC had raised rates on 3 occasions and the market priced in a high probability for the FOMC to raise rates again, as indicated by the
futures market, then the price will reflect this fact. If then, the announcement is made and the committee does indeed raise again, but makes a change in the
futures market, then the price will reflect this fact. If then, the announcement is made and the committee does indeed raise again, but makes a change in the
accompanying statement to the effect that they are less likely raise on the next meeting than they were during the present cycle, the market may look upon
the change in rates in a completely differently light, and a react accordingly, than if the statement were a carbon copy of the previous statement, as it often is.

This example is just one of many hypothetical scenarios the market could be confronted with regarding the regularly scheduled FOMC meetings. Yet another
might go along these lines: The committee did not raise rates at the previous meeting, and are not expected to raise at the next meeting given the previous
statement and the futures market, then hit the market with a snap hike in rates and a change in the wording of the statement. This in effect sends the market
reeling leaving your account equity at the mercy of the panic stricken traders. These events are nearly impossible to predict with any accuracy and play out
nearly as often as the FOMC meets, as so many different scenarios may play out given the number of variables at work.

This fact makes predicting the reaction to the FOMC announcement nearly impossible - and many seasoned traders know this. A veteran trader in this case
typically stands flat ahead of the announcement, instead makes trades following the release to capitalize on the new information and resulting inefficiency as
the information is disseminated.

Employment Friday

Employment Friday as its known in trading pits around the world is the day the U.S. government divulges its latest compilation of the previous months
employment figures for the entire United States. The two components of the report that traders are concerned with are Non-farm Payrolls (NFP) and the
Unemployment Rate (%), and the results of which are published and can be found at the Bureau of Labor Statistics - www.bls.gov.

The numbers are heavily scrutinized and the reaction is potentially very large and often instantaneous. All markets are impacted by the number from bonds,
domestic and international, to exchange rates of countries like Denmark, South Africa and Norway, as well as international equity markets.

The data is much like the FOMC release in that the results are often unquantifiable. Needless to say, it is difficult to predict how the market will react to the
data, irrespective of the actual figure itself. Just as seasoned traders do ahead of the uncertainty inherent in the FOMC release, they take all of their trades off
and wait until the dust settles before initiating a new position. This approach allows them to develop a probability of a move in the market.

It is very common for novice traders to take positions ahead of these very uncertain events. It is difficult for some to grasp that the largest move on the chart
does not provide the best opportunity to profit. What is important to realize is that a low degree of probability is not favorable when trading. The uncertainty
inherent in these events is what dictates the low probability. Instead, professional traders leverage their account equity with higher probability trades to
increase the size of the account, rather than take a chance on a potentially large move with great uncertainty. Steering clear of increasing uncertainty due to
event risk should be every traders primary concern at all times.

Beige Book

Another piece of data released by the FOMC that can be potentially market moving is the Beige Book report. This report is published eight times per year, and
the market keeps a close on it for an indication of what the FOMC might do at the next meeting. Each Federal Reserve Bank gathers information on current
economic conditions in its District through reports from Bank and Branch directors and interviews with market experts. The Beige Book summarizes this
information by District and sector according to the Federal Reserves website www.federalreserve.gov.

The Beige Book release is just another way for traders to get a better feel for what the next FOMC announcement. Market participants often react to the
release, but not nearly as much as the announcement on interest rates or NFP for example. Instead, the information is used to get a better feel for how the
FOMC views the current state of the economy.
Inflation Data

Gross Domestic Product

The third most important piece of Fundamental data that is released regularly is the inflation related data. Gross Domestic Product (GDP) and its
subcomponents are the front runner of the group, and it is broken down into three different quarterly releases. The following is a list in order of importance:
Advanced GDP, Preliminary, and Final. The market tends to react with lesser degree as the quarter progresses and more is known about the current state of
the economy for that period. The greater the uncertainty about the event the greater the impact on the market, this is precisely the reason the largest change
in price follows the first of the quarterly releases (Advanced GDP).

CPI and PPI

The Consumer Prices Index (CPI) and Producer Prices Index (PPI) are another component of key inflation data, and not unlike NFP, are released on a monthly
basis. The data is usually released during the middle of the month as oppose to the beginning.

Both releases are broken down into two components of Core and Actual, Core being Actual less the food and energy sectors. The government feels it is prudent
to break the reports down into two separate parts to make it clear to the investment public that the food and energy sectors can be very volatile, and are often
worth disregarding entirely.

The FOMC pays very close attention to the inflation data, and the many components in order to get more accurate perception of the current state of the
economy. Modulating inflation is one of the committees primary concerns, and the statement often eludes to certain components of the inflation data as
influential to their final decision.

European and Asian data releases

Essentially, the data from each major country does have an impact on exchange rates though a muted one in relation to the US. Some nations have different
names for the data, but it measures the same aspects of the nations respective economic status.

The impact of globalization has very much made the FX market one seamless global macro consensus metric. What is important for traders to note however is
that you must weigh each release as the price indicates. If the data hits the tape and the market moves, you can deduce the release was important to the
market at this moment in time. If little or no response in price is overtly apparent, the market clearly demonstrates disinterest, despite the expectation
beforehand, and this fact can tip you off as to trends in the markets current fixation on any bit of particular economic minutia going forward.

International Business and Trade

The flow of money from one country to another will augment the balance of supply and demand, therefore impacting the price of currencies relative to one
another. Trends in speculative capital flows, in importing and exporting, as well as corporate mergers and acquisitions are the primary source of these flows.
However, other sources of flow include: geopolitical events or political capital flight, civil unrest, and meta-expectations of market participants. Interestingly, in
the long run it is all speculative. The people in charge of making these decisions may not be speculating in the market, but are instead making speculative
decisions based on their business that will impact that market thus it all is in fact speculative.

With such a tremendous number of spurious variables interacting, it is hard to fathom that one person, or even a large group could assimilate all this
information in a clear and concise pattern. What is important to remember however is that all of these factors including the most important and unequivocally
unquantifiable of all of them, the meta-expectations of market participants, do in fact converge on the price at all times.
unquantifiable of all of them, the meta-expectations of market participants, do in fact converge on the price at all times.

Modern Economic theory is lending more each year to factors from the social science realm in order to better explain the stochastic nature of global commerce
and its impact on exchange rates. Prospect theory is quickly becoming the status quo in Economics classes across the worlds finest Universities and learning
Institutions, laying waste to the more neoclassical ideals that were taught less than 10 years ago and in many places to this day.

Advances in super-computing and modeling of dynamic systems in general demonstrate that the "rationale" efficient theories of old offered more of a
convenience for those who created them rather than an accurate means of discovering methods of modeling the convergence of spurious variables.

The Benchmark

You may be wondering: Why in a global market the data from one country moves the market the most? When the fact of the matter is that the U.S. dollar is
the benchmark currency and this is the nature of non-linearity in dynamic systems, such as the factors the influence exchange rates. This fact is known and
accepted to be the case on dealing desks all around the world from London, Frankfurt, Dubai, Hong Kong, Tokyo, New Zealand to Sydney and elsewhere. For
that reason, traders around the world are very much attuned to the Benchmark nations state of affairs with regard to economic data, political developments
and various market moving tidbits.

Naturally, due to information networks and globalization, all of the nations of the world are interrelated to one degree or another indefinitely, therefore it is
important for others to look to the leading and major contributing economies for clues as to how things are likely to influence trailing economies and their
nations currency relative to the Benchmark USD.

Implementing Geopolitical Events into Trading via the Swiss Franc

There a few factors traders must place in the forefront when determining what governs the relationship between the Benchmark currency and the Swiss franc.
These factors are what determine if the pair is appropriate for trading, or if it is better left for analyzing further until a clear opportunity is presented. We will
cover a few of those factors as well how to identify them as they evolve.

Often traders will turn to this specific pairing in times when the macro consensus of the market is under the influence of certain factors in an attempt to
achieve higher returns on speculative gains from the evolution of market participants expectations. This cooperation of sorts is precisely the reason tradable
opportunities present themselves, and what a trader must be attuned to in order to take speculative profits out of the pairing.

Main factors to consider when implementing your interpretation of the macro global and geopolitical consensus as it pertains to trading CHF:

1. The Swiss franc (CHF) is the only currency of a major European country that is not a member of the European Monetary Union (EU) or the G-7 countries.
2. The Swiss franc is favored over other major currencies during times of geopolitical uncertainty, or unrest, primarily due to the countries large reserves of
gold and reputation for political neutrality during global conflict.
3. The USD/CHF closely resembles the price patterns of the EUR/USD, though inverse, as the pair is commonly quoted in terms of the franc. Many traders
enter positions on the EUR/USD based on analysis of the USD/CHF and vice versa.
4. Since the demand for Swiss francs often rises considerable during times of geopolitical unrest, it is a favored by event driven strategists active in the
markets.

When these factors are suspected to be the reason for the current governing factor(s) over the market, traders tend to shift their exposure to the market
towards the pairing. This is well known amongst sophisticated traders and creates a good deal of volatility for astute traders to reap upon.
For example, geopolitical tensions may be rising in the Middle East, and this is represented to the market by way of an increase in news headlines regarding
rising death tolls, verbal jarring by leaders of the region, comments of recognition of wrong-doing by one side or the other, or from the Administration, or a
general feeling of hysteria regarding the matter.

Traders see this unfolding, and in anticipation of the markets reaction to the situation, place orders accordingly. Since larger investors flock to safety during
times of unrest, by placing their money in a nation known for neutrality, they protect their interests, but more importantly impose an imbalance on the fairly
static supply on the demand for the currency thus it appreciates.

Since this actual or perceived increase in demand will force the currency to appreciate, the trader is in good position to manipulate the probability of the
market moving with favorable uncertainty. Professional traders are fully aware of the fact that there is no certainty regarding anything in the markets, and this
is why they comfortable placing stops on open orders - knowing that all they can control is their risk to the fluctuation of the market.

Traders see that when the market responds in a predictable fashion they are in position to benefit from favorable uncertainty; contrarily, if the market remains
erratic they protect they can control their equity. We cover more on probability theory in lesson 9.

Unlike smaller scale shifts in consensus that impact the market, the factors that influence the CHF, cited above, are broader macro scale factors. This being the
case it takes more time for the impact of such events to be reflected in price. To create results that are favorable when trading this slower moving consensus it
is crucial that the trader scale the time frame appropriately. Therefore, trading a system based on 60 minute increments are less volatile then trading 5
minutes increments.

Note: Trading both time frames is optimal when hedging against the unknown inherent in the evolving state of the consensus and the resulting volatility. We
cover more on this topic later in the session.

Given the amalgamation of geopolitical factors impacting the underlying consensus of the CHF, many traders find that a MACD crossover system coupled with
Dual MA system suits the conditions effectively. The system, like all good systems, is easy to interpret and clearly outlined in lesson 8 complete with charts. We
go into more detail on this system in the Technical Oscillators chapter.
When trading the FOREX market it is of utmost importance that one analyzes price action in a consistent and precise manor. Accurate
measurement of price change is critical when calculating and implementing trading decisions. One of the quickest and easiest ways to
achieve precision in analyzing price data is the use of technical indicators. There are many types of technical indicators, and only a
handful of the most popular types are all you will need to know how to accurately measurer the tendency of the market to rise or fall.

The course will cover various types of indicators in the Trend and Momentum and the Oscillator groupings. Both are significant in rising,
falling and range bound markets, and will be explained clearly with a short quiz at the conclusion of both subchapters. Your quiz will be
evaluated and you will have an opportunity to ask questions and obtain feedback in addition to submitting your quiz results.

To get the most out of this segment of our course on FX trading we suggest you open your charting utility and apply each indicator,
one at a time, on live prices in order to get a reinforced understanding of how the indicator uses price in the calculation, and how to
correctly interpret the study. We will begin with Japanese Candlesticks, followed by Trend and Momentum indicators.

Technical analysis (TA) is one of the most versatile and precise methods of measuring the pulse of the market. By implementing TA you
will be able to identify recurring patterns in the market as they take place. Once you become familiar with important formations and
recurring patterns, you will be able to take full advantage of significant events in the financial markets as they unfold.

Traders who use TA in conjunction with Fundamental Analysis have a distinct advantage over those who just use news data and events
to trade. What is important to realize is that TA does not conflict with the fundamental consensus, it merely measures it. By combining
the two it will help you interpret the underlying fundamentals that influence price and vice versa.

The course will cover various types of indicators in the Trend and Momentum and the Oscillator groupings. Both are used in rising,
falling and range bound markets, and will be explained clearly with a short quiz at the conclusion of both subchapters. Your quiz will be
evaluated by our in-house trading professionals, and you will have an opportunity to ask questions and obtain feedback in addition to
submitting your quiz results.

Keys to successful TA: How to interpret the studies

Although there are hundreds of different studies and variations that fall under the TA grouping, the most effective methods are usually
the simplest. By integrating basic charting tools such as Candlesticks, Moving Averages, Relative Strength and Pivot Points, you will be
able to make trading related decisions more effectively. We will start with the most simplistic form of TA, and that is Support and
Resistance.

Charting is very dependent on the interpretation of the technician who is drawing the charts and interpreting the patterns. Subjectivity
can permit emotions like fear or greed to affect the trading strategy. The class of mechanical trading rules avoids this subjectivity, and
is more consistent and disciplined, but, according to some technicians, it sacrifices some information that a skilled chartist might
discern from the data. Mechanical trading rules are even more explicitly extrapolative than charting; they look for trends and follow
those trends.

How to find Support and Resistance


The most effective attribute a trader can have is to be capable of identifying levels of significant Support (S) and Resistance (R) as they
evolve. If a trader is able to do this effectively he can place orders in strategic locations to yield profits and shield losses. Thus, upon
iteration of the process he is capable of experiencing growth in account equity.

Technical and flow analysis can help traders discover S and R prior to the arrival of price at the respective levels. By the end of this
course you will have the knowledge necessary to:

1. Find S/R levels


2. Pinpoint places to place entry and exit orders based on S/R
3. Trade with piece of mind

Once you have acquired this knowledge you should practice persistently until you are able to identify trading ranges, trends, and
reversals with relative ease. With this knowledge you will have the capacity to trade the market during the most volatile times of the
day without hesitation or compromising accuracy.

Throughout the trading day an endless number of patterns and formations will appear on your price chart. The formations will often
very clearly exemplify a critical level of S or R respectively. Though patterns are very indicative of S/R levels; a more simplistic way to
discover levels is by simply placing a line on the chart at the point where price had stopped moving in one direction and began moving
sideways, or in the other direction entirely. Below is a chart with Support and Resistance in red.
This chart shows how important it is to be capable of identifying S/R in advance to place orders in strategic locations. As you can see
here, starting on the charts left and moving with price as time passed.

1. Moved lower
2. Stopped and rallied significantly
3. Stopped going higher then started to trade sideways in a range

These two levels where the market reversed course are the location where the S then R were created. We have illustrated the S and R
in red horizontal lines on the chart.

Shortly after price began to fall it started to go up yet again, then failed near the same level, in effect confirming the level of R. The
process repeats itself a few times before the inevitable took place and the range was broken by another rally higher.
process repeats itself a few times before the inevitable took place and the range was broken by another rally higher.

This chart can give you the general idea, but take a closer look at the same chart on a smaller time frame. Below is a close up view of
the period that took place after the highest point on the previous chart was made.

As you can see here, starting on the charts left and moving with price as time passed. A level of R was established where the rally
failed to trade higher still. Shortly thereafter, price revisited the exact same level the R was confirmed on the failure and a sharp sell-
off ensued.
Shortly following the failure to trade through the Resistance, price started moving towards Support, where upon the arrival it was
clearly influenced. The level is then confirmed due to the fact that price made such a sharp change in the vicinity. Shortly thereafter
price broke through the S, and the next time it intersected with that level again it clearly influenced the ultimate direction thereon.

Key Notes:

1. Support is made when price trades lower then reverses course


2. Resistance is made when price trades higher then reverses course
3. If price resumes that level and fails again the S/R is confirmed
4. S/R levels provide opportunities to place orders strategically to shield stop orders and achieve profit targets with greater
probability

At this point you should have a better understanding of S/R and how it relates to price. If you do not and you are confused about
creating S/R, we suggest you reread the material, as it can be much easier to understand now that you have seen the charts. It is very
critical that you understand this topic before you move on in the course.

Historical price data is not the only way to determine S/R levels. A variety of methods are popular and effective. It is important to have
a diverse array of methods in trading as they can confirm one another improving your trading decisions overall.

Pivot Points

Another method of determining S/R is by calculating Pivot Points (PP). A PP is based on popular formula using the previous day's high,
low and close:

Central Pivot Point: (P) = (H + L + C) / 3


First Resistance: (R1) = (2*P) - L
First Support: (S1) = (2*P) - H
Second Resistance: (R2) = P + (R1-S1)
Second Support: (S2) = P - (R1-S1)

The Central Pivot Point (P) is the designed to represent the equilibrium point. The formula for tomorrow's P is simply the average of
today's high, low and close. However, keep in mind that they are best suited when used in conjunction with other technical indicators
to discover S/R.

Trendlines and Channels

Trendlines are just as straightforward and easy to apply as S/R. They should be interpreted in a nearly exact same way as well. In this
case the Trendline is tracing the price lower, however Trendlines can be applied to both falling and rising markets.
To draw a Trendline all you have to do is simply connect two or more price extremes with a line, below is an example.

As you can see on this chart, by connecting the first two peaks in price you were able to discover the descending resistance, or as
traders refer to it - Trendline Resistance.

Creating Channels on your price chart is just as simple creating a Trendline plus one step. Most packages include a utility to create
them, however they can be created by simply drawing two parallel Trendlines.

Channels and horizontal levels will give a trader means of placing entry and stop orders strategically based on historical price data.
It is important to realize the lines do not represent a path the market will follow exactly. All Channels and S/R levels are eventually
broken through. What the lines will do for you however, is give you a clear method for measuring the pace of the market, so you can
place orders accordingly. Below is an example of a channel using parallel Trendlines.
To get the most out of this segment of our course on FX trading we suggest you open your charting utility and attempt to identify the patterns discussed in
this chapter, one at a time, on live prices in order to get a reinforced understanding of how to spot them. We will begin with the most common patterns seen
in FX everyday.

Patterns exist everywhere, and trading is no exception. Scientists and mathematicians call them fractals, but traders prefer to keep things simple, calling
them simply patterns.

Pattern trading is popular amongst professional traders and dealers alike, and is very efficient since everyone has pattern recognition ability. Additionally, in
light of the shear immensity and speed of market data and resulting price action, pattern trading is a very effective means of staying ahead of the curve.

Many permutations have been coined by traders over the years but at the end of the day only a few patterns have much utility. We cover all the useful
patterns below with pictures and charts to help you visualize the pattern and commit them to memory.

Triangles

The triangle is one of the most popular tools chartists use in order to obtain more precise S/R levels. There are two types of triangles and they are ascending
and descending.

The diagram above, in trading terminology is known as an Ascending Triangle (AT). Below, it is known as a Descending Triangle (DT).
It is simple really, price always moves left to right, therefore the description of the pattern refers to the long side of the triangle. However, advanced
strategies using empirical data refute any significance to the long edge of the triangle, and the ultimate direction of price, instead indicating volatility will rise
at the end of the pattern.

With an AT price makes a high followed by multiple attempts to go higher through the resistance that fail while simultaneously making higher lows about an
ascending trendline. When this takes place a triangle is created from the juxtaposed trendline and the resistance. Most of the candlesticks real bodies if not all
should be contained within the triangle.

Below is an illustration of the Ascending Triangle.


As you can see here, a level of resistance was made while at the same time three distinct higher lows were established. The resistance line and rising
trendline encompass the majority of pricing creating what traders call an AT.

The description of the pattern refers to the long side of the triangle
AT is created from the juxtaposed trendline and the resistance

Inversely, when price makes a low followed by multiple attempts to go lower that fall short of an equal or greater low while simultaneously making a solid
horizontal resistance line you have what traders call a DT.

As price trades closer to the small angle on the right side of your chart, the likelihood of a large move from the confines of the triangle
increases.
It is very important to note the name of the triangle does not necessarily indicate the direction of the break out. What is important to note is that a large
move may come as the price closes into the small angle, or the apex. In coming chapters we will explain the most strategic way to trade the triangle no
matter what direction it eventually breaks in from the confines of the pattern.
The name of the triangle does not necessarily indicate the direction of the break out it merely indicates volatility will rise

Double Top/Bottom

Another category of pattern is the Double Top and Double Bottom, and much like the triangle formation one is the inverse of the other.

The Double Bottom (DB) appears on all price charts and are a very good representation of a level of Support in the market. When price moves lower and finds
a level of S, it then illustrates the first leg of a potential DB. If the price advances, but fails to make any significant strides higher, then retests the S, but fails
to trade through the S - a DB will have been illustrated on your price chart. If the S holds yet again, and price moves higher a DB will be clearly be illustrated
on the price chart. Below is an example of a DB.

DBs are often accompanied by candlestick formations such as: engulfing patterns, hammers, or morning stars all of which will be covered later in the
material. DBs clearly indicate a key level in the market at the region encompassed by the spike low and candle body lows. They are confirmed when the
second rally crosses above the peak of the first rally.

The Double Top (DTop), is the inverse of a DB, and occurs following a move in price higher. Not unlike the DB, the first segment is created when price fails to
advance creating a level of resistance. As the DB, when price stops trading higher, trades lower briefly, and makes a second attempt to trade through the
level but fails, a DT will be illustrated on the chart. A DT indicates a level of R at the level between the high price and the candle body high. We cover more on
candlestick charting later in the course.
candlestick charting later in the course.

The Head and Shoulders


The third and final pattern you will see iterated continually in trading is the Head and Shoulders (H&S) formation.

The definition is very clear: If a period of range trading is prevalent, but the range breaks, only for a short while, then price resumes trading within the
previous range, you have a H&S pattern. It sounds more complex than it is, however the name really says it all. Once the pattern comes to complete fruition
the price will have drafted something that looks similar to that of a silhouette of a person. Below is an example of a H&S pattern.

As you can see the pattern in a sense resembles the silhouette of a person, hence the name. You will see these patterns on your price chart on all time
frames. As the pattern develops you will be presented with many opportunities to make profitable trades. We will discuss many of them in the following
chapters.
chapters.

Just as all the other patterns appear inverted, so does the H&S. An inverted H&S presents the same opportunities to profit as the former. What is important
to understand is that the price levels that create the pattern are clearly identified.
Japanese Candlesticks

When trading the FOREX market it is of utmost importance that one analyzes price action in a consistent and precise manor. Accurate measurement of price
change is critical when calculating and implementing trading decisions. One of the quickest and easiest ways to achieve precision in analyzing price data is the
use of technical indicators such as Japanese Candlesticks. There are many types of technical indicators, and only a handful of the most popular types are all
you will need to know how to accurately measurer the tendency of the market to rise or fall.

To get the most out of this segment of this course we suggest you open your charting utility and apply each indicator, one at a time, on live prices in order to
get a reinforced understanding of how the indicator uses price in the calculation and how to correctly interpret the study. We will begin with Japanese
Candlesticks, followed by Trend and Momentum indicators on day 5.

Japanese Candlesticks

The Japanese Candlestick is a very intuitive and informative means of representing price action of FX rates. At first it might seem difficult to move from line or
b h tt dl b t if i th f i l ti ill fi d th t th l l th t i th d f h ti i d t
The Japanese Candlestick is a very intuitive and informative means of representing price action of FX rates. At first it might seem difficult to move from line or
bar chart to candles, but if you give them a fair evaluation, you will find that they are clearly the most superior method of charting price data.

The candle itself represents a period of time. For example, a daily candle chart will show you the open, high, low and close of that days trading range. The
top of the candle represents the highest price of the period or the maximum power of the buyers. The bottom of the candle represents the lowest price of the
period or the maximum power of the sellers that day. However, every time frame can be used from monthly down to 1 minute. This fact makes them very
useful for pattern traders and identifying valid levels of support and resistance.

Candles:

Illustrate the price range for any given period


Create patterns making the inclination of the market clearer

The creators of the method consider highs and lows relatively insignificant professing these levels represent the height of panic trading. Rather, they focus on
the relationship between opening and closing prices, or as they call it the real body of the candle. Often, these candlestick patterns may include several
candles in a specific sequence.

The advantages of the candlestick charting

Allow traders to visualize the substantial pricing of that period allowing you to focus on certain aspects of the periods price action.
Help traders pinpoint key levels of S/R

The most important thing to know when considering the meaning of a candlestick formation is that it can be interpreted differently depending on where it
appears and what type price action preceded it. In some instances a candle may indicate the complete opposite of what the exact same formation indicated
previously in that same day. Clearly it is important to know how to differentiate. Below is the most common candle you will encounter trading FX.

The Doji Cross (Doji)

The Japanese word translated in Latin based languages means a sudden danger. A perfect Doji has the same closing price as the opening. However, like any
other chart formation, there is some flexibility involved. One to five ticks difference between the open and close is acceptable, depending on the time frame
and range. On shorter time frames 1-5 ticks and on larger time frames as much as 5 or even 10 on a very large time scale. Just keep in mind that the larger
th l th l th diff i t bl
and range. On shorter time frames 1-5 ticks and on larger time frames as much as 5 or even 10 on a very large time scale. Just keep in mind that the larger
the scale the larger the difference is acceptable.

The Doji is one of the more dynamic formations in that it can appear in many places on your chart but mean something different entirely depending on that
location. For example, when found after a large move it indicates a reversal may be looming. Conversely, when one appears after a period of consolidation, or
sideways trading, it demonstrates that a large forceful move may be coming soon.
Doji Candlesticks in review

1. Doji has the same closing price as the opening


2. Demonstrate that a large forceful move may be coming soon
3. When found after a large move it indicates a reversal may be looming

The Double Doji Cross essentially amplifies the previous Doji. In the example below you can see that the double Doji in one instance meant that a forceful
move would follow, and in the other a reversal. The key is the price action that occurred before the pattern.
Examining this price chart from right to left you see a period of consolidation had taken place. This is evident by the sideways price action near the 1.8240/60
range. After the double Doji appeared a forceful move followed shortly thereafter.

At the bottom of the move lower, we see that the Doji were indicative of a reversal due to the fact that a period of selling came before them. Clearly you can
see why you must have an idea of the price action that preceded a Doji to understand what the candle pattern indicates. A Doji that appears arbitrarily on
i h t i i i ifi t
see why you must have an idea of the price action that preceded a Doji to understand what the candle pattern indicates. A Doji that appears arbitrarily on
your price chart is insignificant.

1. Double Doji Cross essentially amplifies and exemplifies the first Doji
2. A Doji that appears arbitrarily on your price chart is insignificant

The Hammer and Hanging Man (takuri)

The Japanese word takuri loosely translated means feeling in water to find the depth or the bottom. Below is a chart illustrating two hammer formations and
how the exact same candle can represent a contrary indication.
As you see here, the first hammer(s) on the left side or beginning of the chart indicated an underlying level of support established, thus a bottom formed and
price had reversed direction and began climbing.

Later still, at the top of the uptrend prices formed another hammer just as the climb had come to and end. The formation still looks like a hammer. Obviously
this can be confusing, so what traders have done to get some clarity is to call a hammer that appears at the top of a rise in price is a hanging man. It is an
i t t i h i l th k t f ll i th dl ith t t ti t ff d i ifi tl i fit
this can be confusing, so what traders have done to get some clarity is to call a hammer that appears at the top of a rise in price is a hanging man. It is an
appropriate name too, since anyone who is long the market following the candle without protective stops suffered a significant loss in profit.

This is an excellent example of how an identical formation can be either bullish or bearish depending on what kind of price action preceded it. Although in this
example both candles have a long wick on the bottom and black real bodies the color of the body is not significant. Additionally, the orientation of the
hammer is not particularly relevant. We will explain more on this later in the segment.

Similarly to the Doji, a Hammer is indicative of a bottom and top, or known better as a reversal pattern. It is not a true hammer (meaning it should not be
interpreted as a hammer) unless it follows a downtrend. The same goes for a hanging man. If the hammer pattern does not appear after an upward trend in
price it is not a hanging man and will not impact price action as defined.
The picture you see here is a terrific example of a hammer. The formation itself is slightly skewed as you can see a small wick at the top, but a distortion as
small as this one can be ignored. As we noted above with the Doji and every other candlestick formation for that matter, a few ticks of imperfection will not
necessarily negate the significance of the pattern.
1. A hammer that appears at the top of a rise in price is a hanging man

Below is the exact same chart as above. Like the chart above a hammer has been highlighted to show you how the market follows these very significant
candlestick formations.
Since the hammer appeared after an uptrend in prices, even if it was a small one, it was still indicative of some underlying selling pressure in the market. The
reason we know this is clear. Price began to fall indicating selling pressure had strengthened at this precise point revealing some resistance at the level. This
is stunning example of how candlestick charting can give you a much better visualization for the temperament of market participants at any given time.
This information revealed is very significant for making trades. The price is telling you that the support indicated by the hammer is strong and an uptrend
may ensue. Hammers and hanging man formations often indicate very significant support and resistance levels.

Naturally this is much easier to confirm after the fact. While it is actually materializing before your eyes, you must wait patiently while prices probe the base
level of the hammer to see if a support line develops. If it does, as we see here, you trade long then watch for a reversal or hanging man candlestick to close.

Below is an illustration of how hammer formations can create support and resistance levels.
On this chart a hammer appeared after a downtrend and a reversal of the trend followed. The rally in price soon faded thereafter dropping back to the original
reversal in price. As in this example, often you will find the area between the close and the low provide the near exact support line as it did in this example.
This is just one of many examples of how a Hammer formation can be incredibly accurate in indicating valid levels of support or resistance.
In the Example below a far reaching wick of a Hammer Candle indicated a key level, however in this case it is resistance since price was trading below the
level the Hammer indicated. This example is yet another stunning display of how precise this charting technique is.

A variant of the hammer formation is known as the inverted hammer. An inverted hammer is merely a hammer formation upside down. Again, the color of
the real body is not significant. The bodies can be up candle or a down candle. As you can see here the space between the wick and body were the key to
forecasting future direction in the market. Below are a few more examples of the inverted hammer in action.
An inverted hammer is similar to a hammer in that it often indicates a reversal in a trend. Inverted hammer are also very similar to the shooting Star and
Morning Sun formations.
The Shooting Star, Morning Sun, Evening Doji and Morning Doji are all key reversal candlestick formations, in that they can be very indicative of key support
and resistance levels. They are comprised of small real bodies that gap the previous and following candle.

In the chart shown above the circle highlighting the top in prices is a variation of the Shooting Star. A true Shooting Star will gap up from the previous
candles real body followed by a gap down to the following candles real body. A Morning Sun is the same as the Evening Star except it follows a downtrend as
oppose to an uptrend.

At the base of the sharp move down that followed the trend reversal indications another variance of trend reversal indicators appeared. At the end of this
formation a Morning Doji (a variation of the Morning Sun) has appeared on the horizon followed immediately by a Hammer. This combination is known
unambiguously as a Morning Doji.

A Morning Doji and Evening Doji are the same as the Morning Star and Evening Star except that the Doji variations do not have a real body.

Below are a few examples of Morning Star and Evening Star formations.
The Bullish Harami Cross is basically the same as the Morning Doji shown above except in a Harami the Doji is above the close of the previous candle.
Similarly, The Bullish Harami is essentially the same as the Morning Star except there is no gap between the previous and following candles.

The trading that creates these formations is often very volatile and must be approached with caution. The candles covered thus far are handy for spotting
reversals. Now we will cover the candles that are good for spotting range breakouts. It is very important that you become acquainted with both scenarios, as
they are equally as likely to take place in any given trading day.
Bullish (shown here) and Bearish Engulfing

Engulfing patterns can be either bullish or bearish. Not unlike the Morning Sun discussed above, engulfing patterns are comprised of multiple candlesticks.

The pattern is comprised of two different color candles with the latter candle engulfing or containing the previous candles range. That is, the open and close of
the latter candle exceed the open and close of the previous candle. If one of either the open or close is equal to the prior candle the formation still constitutes
an engulfing, but not both.

An engulfing pattern is known as a confirmation indicator. What that means is once you have observed a trend reversal indication, like those outlined
previously, you will be provided confirmation by this formation. An engulfing pattern will provide you just the necessary confirmation.

Shown below are few examples of both bullish and bearish engulfing patterns.
Notice that following the trend reversal patterns you find the confirmation candle pattern in the engulfing.

As highlighted, the close of the first candle is equal to the open of the second, as often is the case. However, on some occasions the entire real body has been
engulfed by the latter real body, as shown below. Note that the candlewicks are somewhat irrelevant in most instances including this one.
A bearish Engulfing is the inverse of the bullish engulfing. It is simply the opposite of the Bullish Engulfing pattern. Below are a few examples of the market
sentiment confirmation indicator.
If you train your eye to the left side or beginning of this chart you see an Evening Star (trend reversal) followed by a Bearish Engulfing pattern (trend
confirmation). A large sell-off shortly ensued. Notice that the close of the engulfed candle and the open of the engulfing candle had the exact same price as
the close of the Evening Star.

In this example the formation made three consecutive engulfing patterns all at lower prices than the previous before prices finally dropped.
In every formation seen here the first candle of the formations had candlewicks that exceeded the high of the engulfing candle - this is irrelevant because the
real body is what you are focusing on. Remember, according to the creators of candlestick charting: The real body of the candle, and where it lies in relation
to the high and low, carries all of the significance. In time you will find this is a very accurate and predicative statement.

Below is an example of what is close but not an engulfing pattern.


In some instances of the engulfing you will have multiple formations. All of which we have discussed in this lesson. Below are a few examples of combinations
of formations that should be familiar to you at this point.
Fibonacci Retracements and Projections (Fractals)

Leonardo Fibonacci was a mathematician born in Italy nearly 1000 years ago. Dubbed the "greatest European mathematician of the middle ages, and
authored The Book of Calculations credited for implementing the Hindu-Arabic numerals, also known as the decimal system replacing roman numerals in
Europe.

Among these extraordinary accolades Fibonacci was sought after by many powerful rulers of his day to solve problems in trade, finance and urban planning.

In his book Fibonacci describes what is known today as the Fibonacci Sequence, or what the ancient Greeks coined the Golden Ratio (Phi or ?), while modeling
trade and exchange rates amongst several Mediterranean nations for The Holy emperor of Rome. Similar observations were made in the Far East at some
undocumented time in Eastern history.

The Fibonacci numbers are a sequence of numbers in which each successive number is the sum of the two previous numbers:

0 + 1 = 1 + 2 = 3 + 5 = 8 + 13 = 21 + 34 = 55 + 89 = 144 + 233 ?

This simple two-stage iterative process results in a number of intriguing interrelationships and self-similarities, such as that any given number is
approximately 1.618 (Phi) times the preceding number and any given number is approximately 0.618 (Reciprocal of Phi) times the following number.

We observe the occurrences of this sequence in many instances of dynamic systems including financial markets. However, it is not entirely necessary that you
fully grasp the significance of the relationships to utilize it. Rather it is of much greater importance that you understand how to apply it to a chart. Below we
have created a few simple examples of common use in trading.

Charting with the Fibonacci Sequence

Fibonacci Retracements

Fib Retracements (Fibs) are displayed by first choosing two extreme opposing points on a chart, such as between a low and a high in price. Then you place
horizontal lines between the two points at 0%, 23.6%, 38.2%, 50%, 61.8%, 76.4% and 100% as shown below. Most charting packages will do the calculation
for you, but it can be done easily with a spreadsheet as well.
The Fibonacci levels provide us with yet another means of finding key levels of S/R upon arrival of price at these respective levels.
Shortly after this chart was made the market began to retrace the move lower. Traders using this technique to discover S/R watch for some response from
price at the arrival of the first Fib level (23.6) for confirmation of the R. Below is the resulting price action.
As you can see the price does indeed change course rather abruptly following the intersection with the first retracement line. Shortly thereafter price made
another change of course at the S level.

Fibonacci Projections

Fib Projections (projections) work in a similar way to retracements, but allow us to get an idea of where S/R may exist in a range break out scenario.
In this example a high and low range was created then failed with one very sharp move lower. Fib projections will allow you to measure the move lower,
potentially discovering an important level of S/R.

Traders use all of the levels we outlined here in conjunction with other methods of confirming S/R, such as Oscillators and Candlesticks to make precise
trading decisions.

.
.
Technical Indicators

Trend and Momentum Indicators

A trend indicator is used to measure the strength, direction and overall health of a trending market. Trends are just as prevalent as range bound markets, so
traders must be capable of identifying a trending or range bound market in advance in order to trade effectively. We cover the most commonly used
indicators for your benefit.

Moving Averages (MA)

The MA is an indicator that displays the average value of price over a set period of time. The MA is the most popular form of technical analysis. Several
different types of moving averages can be utilized. First of which is the Simple Moving Average (SMA). Other types include the Exponential, Weighted and
Triangular. The only significant difference between these types is the weight given to the incremental data. Exponential and Weighted Moving Averages apply
more weight to the recent prices than the simple calculation, while Triangular gives more weight to the middle of the time period. Below is a chart with two
simple moving averages of different length.
A simple moving average is formed by finding the average price over a set number of periods or length. For example, a 5-period moving average is calculated
by adding the closing prices for the last 5 periods and dividing the total by 5. As you change the length of the period so too will the MA.

10 + 11 + 12 + 13 + 14 = 60

60/5 = 12

The Average moves with time by ignoring the oldest period and adding the newest period, thus moving with price changes as time passes. In our example
above, if the next closing price in the average is 15, then this new period is added and the oldest period, which is 10, would be dropped. The new 5-day
moving average would be calculated as follows:
11 + 12 + 13 + 14 + 15 = 65

65/ 5 = 13

The Exponential Moving Average (EMA) is similar to the SMA in that it uses the average of the set number of period in the calculation. However, the
calculation will give a greater weight to the most recent data. The theory behind this technique being that the most recent data is more relevant.
There are many uses for moving averages, but basic application uses are:

Trend identification/confirmation
Support and Resistance level identification/confirmation
Trading Systems/Signal generation

Bollinger Bands

Bollinger Bands (BB) are one of the most ingenious technical studies commonly used, and are also one of the most popular studies for both new and seasoned
traders. The study is based on a common statistical assumption called The Empirical Rule. The rule postulates that in a normal distribution 68% of a data set
(in this case historical price changes) will be contained within what is know as one standard deviation from the mean (one standard deviation is also know as
one sigma). Additionally, the rule goes on to include 95% of all data will fall between two standard deviations.

Bollinger Bands, by default, are set using a 20-period SMA for the mean with a two sigma set above and below the mean. Below is an example of two
standard deviations above and below the historical price datas 20-period mean or SMA.
What is important to note however, the price of financial instruments frequently violate the empirical rule, instead exhibiting behavior of what is called a non-
normal, or non-linear distribution, thus other measures are compulsory.

The BB can be used to make several generalizations about key support and resistance.

1. When prices move outside the second standard deviation key support and resistance levels are often simultaneously established. S/R can then
be confirmed with candle formations and oscillators such as RSI.
2. The levels of S/R that appear outside the BB can be used to measure risk, providing more precise stops and limit orders.
Average Directional Movement Index (ADMI)

The ADMI also know as DMI or ADX was developed by a pioneering technician named Wells Wilders, and is one of his brilliantly intuitive interpretations of
price change. It is designed to identify moments when trends are being created or dispersing.

The definition is very straight forward and easy to interpret. When the black line (ADX) is above 45 a trend is beginning. If the D+ (green line) is rising while
the D- is falling it is said that a trend higher may be looming. It is simply reversed when a trend lower is in store.

A trend is said to be dispersing if the indicator is below the 45 level and the D+ and D- indicate a contrary trend emerging. Like most oscillators the range is 0
to 100, though most readings are within 20-60.
Parabolic SAR

The Parabolic Time/Price system, developed by Welles Wilder, is used to set trailing stops and is usually referred to as the Parabolic SAR (Stop and Reversal).
The indicator can provide you with means of preserving and maximizing your gains by providing ideal, systematic exit points for your long or short positions
in the market.

If the price of a long position falls below the SAR you have reached an ideal exit point and you should take profits. Conversely, when the price of a short rises
above the SAR you should cover for maximum gain.
The interpretation is relatively straightforward. The dotted lines below the price establish the trailing stop for a long position and the lines above establish the
trailing stop for a short position. At the beginning of the move, the Parabolic SAR will provide a greater cushion between the price and the trailing stop. As the
move gets underway, the distance between the price and the indicator will shrink, thus making for a tighter stop-loss as the price moves in a favorable
direction.

There are two variables: the Step and the Maximum. The higher the step is set, the more sensitive the indicator will be to price changes. If the step is set too
high, the indicator will fluctuate above and below the price too often, making interpretation impossible.

The maximum step controls the adjustment of the SAR as the price moves. The lower the maximum step is set, the further the trailing stop will be from the
price. The creator of the indicator recommends setting the step at .02 and the maximum step at .20; though different markets call for different settings.
Technical Oscillators

Oscillator Indicators

Moving Averages Convergence Divergence (MACD)

MACD is one of the more complex indicators available to traders. The MACD compares three moving averages to one another to give traders a solid feel for
the underlying tendency of the market to rise or fall. The three MA are: 26-period EMA, the 12-period EMA, and the 9 period EMA compared to one another as
they relate to the 9-period moving average. Since the 9-period EMA is the benchmark, the two slower MAs plot oscillating about it. The resulting calculation is
displayed as two lines independent of on another about a centerline. Below is a chart of the process. For clarity the charting software we used in this example
uses a histogram for the 12-period EMA, though most packages usually use another line.
The MACD Histogram

The MACD-Histogram calculates the distance between the 26 and 12-period EMA and plots it as a histogram that oscillates about the 9-period EMA
benchmark. A centerline crossover for the MACD-Histogram is the same as a moving average crossover for MACD. A moving average crossover occurs when
MACD moves above or below the signal line.
If the value of MACD is larger than the value of its 9-day EMA, the value of the MACD-Histogram will be positive. Conversely, if the value of MACD is less than
its 9-day EMA the value on the MACD-Histogram will be negative.

Relative Strength Index (RSI)

The Relative Strength Index (RSI), yet another indicator developed by Welles Wilder years ago, is a special form of momentum indicator and measures
internal strength of an instrument as compared to past prices.

The RSI is in the oscillator family and the calculation takes a few of steps. First, positive closing prices and negative closing prices are added and then divided
by the number of periods less one. The result is the period's mean value of upward and downward strength of the underlying instrument. The relative
t th i th d i df ti f th d dd d
by the number of periods less one. The result is the period's mean value of upward and downward strength of the underlying instrument. The relative
strength is then derived from a ratio of the upward and downward mean.

The RSI fluctuates between the values of 0 to 100. By the default definition, a reading over 70 suggests an overbought market, but does not necessarily
mean a top. Conversely, a reading below 30 implies an oversold market, but does not necessarily imply a market bottom. A reading in between these regions
is considered near parity or neutral. A 50 reading can serve as the zero-line or parity in every oscillator.

MACD and RSI Trading Systems


The Rules are a follows:

1. MACD oscillator indicator should be set using modified parameters


2. The 12 period setting should be increased by 50 to 100% depending on the level of exuberance you determine the macro global consensus is
shifting
3. The 26 period setting is set similarly to the 12 increased by 50 to 100%
4. The trigger line is unchanged at the default of 9 periods
5. If the MACD is positive signal long
6. If the MACD is negative a signal short

Filter:

1. 10 period SMA crosses 100 period SMA

Once all the rules are met and a level of S/R is established orders in the direction of the trend are placed with a small cushion. For example, the 10 period
MA is above the 100 MA and the MACD is positive, like in the example below. As soon as a valid level of R is established, as indicated by the red line
horizontal line, buy orders are placed above the level by approximately 5 pips.
A simple means of managing the position is a trailing stop, though other methods are viable depending on the traders ability. We explain some simple steps
to practice, and aspects of the system to monitor to take advantage of catching a losing trade earlier.

In some cases the first level of S/R takes place a good distance for the crossover in terms of pips. And in others all the rules are met, but the market fails to
trade to the level the orders are placed. This puts you in excellent position to avoid making forecasts and trading on a hunch. By taking a sound, rational,
quantitative approach to trading the market you are in much better position to take money off the hands of those who refuse too. Fortunately, few people
ever stop trading on a gut feel, in the process supplying enormous amounts of capital to the market for those who take a sound approach to risk
management.

Below is an example of both scenarios, the first level of S is a large distance from the price of the signal, and the market failed to trade below the S. So
many traders look for indications of a directional bias, yet it is only apparent after the fact, and by then it is simply too late to make money from the move.
This element of the system is what sets it apart from systems designed to forecast, and is in fact what makes it profitable. If the system traded when the
signals were confirmed it would not be profitable. In other words, if the trader places market orders before the price advances to the entry level this system
will lose money over the long term.

In addition to trailing stops, the most critical action to take is to move your stop to breakeven, this may be one of the most difficult actions for traders to take
at that moment because the trade is so fresh in the traders mind making it difficult to a course of action that might extinguish it so soon. Below is an
example of exactly why it is critical to set a trail and breakeven stop soon after the entry into the market.
As you can see in this example of a long entry, the market ran into another level of R just above the entry as the market apparently lacked the conviction to
continue with the prior indication of a move higher that the system acted upon a very common occurrence in profitable trading. Those traders who did not
move to a trailing stop or breakeven suffered unnecessary losses when the stop was executed.

The fact of the matter is in profitable trading, all signals are not profitable. In fact, in some cases the market will immediately reverse course, proving the
prior indication incorrect, and you must be nimble in order to shield your account from extreme events like in the example below. This is the natural
tendency of the market and you must get used to it in order to effectively manage it.
The market reversed dramatically, and as all novice traders know, in this situation you may be tempted to leave a losing trade on in hopes of it coming back
so you can get out without the dreaded loss. Anyone taking that approach on this trade was likely faced with margin call, as the market continued on to
levels over 200 pips away from the entry price.

In this example you can see that all the conditions are confirmed, and the market price dropped below the S and filled the order, yet the market turned
around. Now, when the market turns around you must exit the trade.

To avoid making inconsistent decisions you must be systematic about the placement of your stops. Using this strategy you have a few solid benchmarks to
work with. One is the 100 period MA, another is the local S/R, yet another is the 10 period MA. Below is an example of using the 100 MA.
When price traded to the 100 period MA the trade was squared for a small loss in relation to the size it would have been if no stop at all was used.

The key to deciding which parameter to use is that you make the determination based on relevant information. The reason being is that your position size is
going to be directly proportionate to the number of pips between the entry price and stop. When deciding you must take a few factors into account:

Is the stop parameter static or dynamic (S/R was static MAs are dynamic as they move with the market)?
How much exposure to this move in the market is you account holding?
Any scheduled data that is likely to move the market slated to be released shortly?

Below is another example of why you should move to break even shortly after the trade is triggered. After all, another signal will be coming shortly, and if
you do not shield you account equity it will fall over time. We cover more on this topic in the Money Management course.
When trading this strategy you will face some ambiguity with regard to the best S/R level to work with. In some cases a level of S/R will be difficult to
discern, as in this example as below.
At this point the trader must use their discretion to determine which level to trade. We suggest you use the level that is the highest in the case of R, and the
lowest in the case of S. It is much better to have orders left stranded by the market, nothing lost nothing gained, than getting into a trade too soon.

Scaling Out your Analysis Multi Time Frame trading


Modern theories postulate that stochastic processes demonstrate what is known as quasi-recursive self-similarity. This is a very advanced mathematical
explanation for what profitable traders have known for a long time. In fact we covered the technical reification of these patterns in the DB/T, Triangle, H+S
and the variants in the intro course.

For all intents and purposes regarding trading, you do not need to know the advanced aspects of dynamic models to see them on a chart or in the sentiment
of a news feed. In fact simple pattern analysis that you already know from the intro course is all you need to trade quasi-recursive self-similarity effectively.

Many leading theories in finance suggest markets, the price data of and news stories regarding, meet the definition of a stochastic process as the pattern
trading methods assume. Some of the most respected measures of data suggest this is indeed fact.

Traders can attest that certain patterns do seem to reoccur in the market with astounding regularity. Both technical and fundamental traders exploit patterns
for profit in the market. From a technical perspective it is by way of price patterns, and from fundamental point of view it is by way of perceived shifts in the
sentiment of major news stories. With this being the case, scaling out your analysis to a larger time frame while using the exact methods can help put in
iti t i k ff ti l
sentiment of major news stories. With this being the case, scaling out your analysis to a larger time frame while using the exact methods can help put in
position to manage risk more effectively.

Below is the exact same system for trading CHF on scale 12 times larger. Trading both time frames can offer less volatility to traders and improved returns.
In fact, this is the reason the best brokers offer hedging capabilities so profitable traders can have positions in both directions, as they may be trading a 5
minute signal and a 60 minute signal simultaneously.

Benefits of proper hedging are:

Result in two profitable trades always a good outcome


Smaller losses when the trend shifts
Decrease volatility and perceived heat of the portfolio enabling more efficient use of capital.

Misuses of hedging:

Locking in losing trades to avert the feeling of paralysis that is associated with losses spiraling out of control
Overleveraging
Again, it is much more important to manage losses effectively when compared to managing winning trades. As you can see in these examples making
money is the easy part managing losses is much bigger factor to facilitating a net profit than many novice traders recognize.

Below is an example of the very next signal on the 60 minute time frame. The updraft was still in tact despite the previous signal getting trailed out, and the
next signal indicating a move lower.
Getting caught in this trade is not necessarily an error, however, you may have been able to avoid this trade by taking a closer look at what the technical
indicators are telling you. Take a long look at the chart above and see if you can spot the tell tale indication that this test of Support may be buffeted. Some
indications include:

The trend in the market is higher as indicated by price


The slope of the 100 period MA is not decelerating (pointing lower but not slumping over)
Upon closer examination, or scrolling down to the next chart, you can see that the MACD is pointing higher in line with the trend, despite having crossed the
zero line confirming the signal. This is very good way to stay out of losing trades, or if already committed, get an early warning on taking a losing trade down
early.
Since the market is dynamic and in a constant state of flux the trader must use a means of analyzing it a way that shapes to the market like liquid shapes to
the container it is placed in. A trading system that has clearly defined parameters and is subscribed to by the trader with rigid discipline will achieve the
required stasis to produce replicate the state of the market.

As you might have realized by this point, discovering levels of support and resistance prior to the markets arrival to the region is the most important aspect of
measuring the market effectively. Some, after seeing long trends in the market, look back in the data and seek to discover criterion that will put them in
position to get in early so they can reap the majority of the drift.

This is ultimately a fools pursuit. Let me stress this point to the fullest: For entries and exits into the market S/R is the determinant. For taking part in big
trends in the market, risk management is the determinant. This fact is mathematically immutable and well known amongst the more sophisticated trading
community. This is fact simply because there is no way to know in advance how strongly the market will respond to any given event on any scale.

In the case when large trades are taken advantage of, it was not due to an accurate forecast; rather it is due to chance. Chance and probability can be
modeled for optimal values over a number of trades, therefore sound risk management techniques are the cornerstone of a winning strategy. Determining
i t i t th h d i tb h th it i d l d b th l ti f k t ti t h l d th l i ti f th
modeled for optimal values over a number of trades, therefore sound risk management techniques are the cornerstone of a winning strategy. Determining
precise entry points on the hand is not by chance, rather it is developed by the amalgamation of market sentiment, psychology and the culmination of the
macro consensus, and therefore it is quantifiable on a single trial basis using price.

Since precise measurement of the market is the most effective way to quantify the expected return vs. the risk on any investment, or in this case trade, you
must be able to determines levels of support and resistance accurately.

At this point we would like to introduce a system that is designed to help traders discover meaningful levels of S or R. Once a level is established a trader can
place orders accordingly to establish a favorable risk and reward ratio.

Rules:

1. RSI oscillator indicator should be set using your charting utility to 5 periods.
2. If the previous RSI is below 30 while the current is above 30 at the end of the period you have a signal to trade long.
3. Set the stop with a 1:1 ratio to your first target using recent S/R
4. Set the second target using a 2:1 ratio.
5. Set the third target using trailing stop set at half the number of pips the trade has established to date.
6. The procedure is simply inverted using the 70 reading for short trades.

Filter:

1. If the stop needs to be set so tight that it crosses through the recent low or high of the respective entry then you can not make the trade.
2. Another filter can be used but is not recommended. The fewer restrictions to the signal the better.

Step by step with illustration below:


RSI crosses from oversold (30) to neutral (above 30 but less than 70. In this example the RSI moved from 14.9254 to 50.2488.

When this takes place often you will see Japanese Candlestick formations indicating a base or Support in the region, Bullish Engulfing, Harami, Hammer
variants, Morning Stars and alike are the types of candle patterns that will appear often on your chart at the time of the signal made by RSI.
Note: The simplicity a systematic approach affords traders is precisely why it has so much utility. Making note of the indications made by the candles and
other analysis are good bits of information for journal entries. Doing so is helpful and promotes fast and frugal decision making in upbeat markets.

At this point of the trade enter the market at the close of the period and set the stops.
The nearest Resistance is the former Support, and in this case it is 20 pips from the entry price. To calibrate the correct stop price use a 1:1 risk reward. In
this case it is 20 pips.

Finding the nearest R is critical in trading a strategy that is profitable. This part of the procedure is where human error is most susceptible and likely to
occur. Being aware of this fact is half the battle, but adopting systematic methods to combat it is what matters most.

It is important to note that you are not cheating the market when you slight the analysis; you are cheating your own trading account and nothing else. By
slighting the analysis you are creating a strategy that has a negative arithmetic expectation. Losses are sure to accrue if your analysis is subjective.

It is important to remember that it is a mathematical certainty that some trades will lose, and this is the natural process of profitable trading. No matter what
transpires on any given trade, as the results are unbounded and many scenarios can play out on any one trade, over many trades eventually the equity in the
account will grow when a positive arithmetic expectation is established. Putting this fundamental aspect of profitable trading at the forefront of every action
is what really separates the winners from the losers.
The first target was achieved at 1.1892, take 1/3 of the position out of the market.

Manage the Trade


At this point the trade often will come about face and stop you out before the other target parameters are met. Being aware of the chance this can happen
can be likened to fostering a seedling that has sprouted. You need to take very special care of your fledgling trade as it can be potentially harmful to neglect
its development.

Often when a trade is stopped out prematurely novice traders conclude the trade went wrong because the signal was bad, when in fact this is not so. A
premature stop simply indicates the market had evolved to a state whereby traders felt that what was understood before regarding the consensus has now
changed, thus in light of the new valid information the signal is deemed incorrect.

This can be tricky for some novices to accept as fact, but it is very important that it is understood to develop profitable habits. Novice traders must accept
that being stopped out prematurely is simply a means of managing unfavorable uncertainty in the most effective manor. This allows the profitable trades to
h th t ti t th f it th l h l
that being stopped out prematurely is simply a means of managing unfavorable uncertainty in the most effective manor. This allows the profitable trades to
have the greatest impact on growth of equity over the long haul.

The 2nd Target

The second target was achieved when the price met the 2:1 risk reward level. At the second target take another 1/3 of the position out of the market and
book the profit.

At this point the trade is in very good shape. A net profit was booked and the remaining portion of the trade will float with virtually no risk due to the break
even stop that was placed. In other words you have achieved a nearly risk less opportunity to profit in the market a very good place to be in any
investment. Needless to say, from this point forward it is usually very simple to manage the position.
The 3rd Target

The 3rd Target is set using a trailing stop. The trail is set using the highest high the pair achieved, and the low of the market where you entered.

This system is profitable because it trades in both directions to take advantage of the volatility that takes place when the market reaches critical S/R. This
makes it a very active strategy when use on short timeframes.

Often the pair will break away from the range and this system will enter the market long in advance of the trend therefore trading in the best position to
profit from the move.

Therefore, this system will not be profitable if the proper money management techniques are not employed, because this entry system is not designed to
forecast momentum. Remember, the money management aspect of the system (trailing stop and stop adjustments) are really what allow this trade to take
advantage of the favorable uncertainty that may unfold. Advanced traders refer to this as a long volatility strategy.
If you find yourself unable to trade the systems correctly simply go back and reread the material and practice good execution until you have mastered it.
With these two systems you are now ready to start trading the fastest growing, most liquid financial market in the world. Clearly, this is not an easy
endeavor, but the rewards are virtually limitless when executed properly.

In conclusion of the chapter on technical indicators we hope you feel much more confident in your ability to analyze and measure price change. We
understand that there was some complex material covered here and feel it is in your best interest to review the material again in a few days to help fortify
your knowledge.

We would also like to stress that the most important aspect in making trading decisions based on indicators is that you understand precisely how the
calculation uses price in order to create the indicators output.
Systems, statistics and data management

What is a trading system?

A trading system is synonymous with a trading strategy and most traders take some sort of a systematic approach to trading. Many traders however insist
that they do not use a system that trading is highly intuitive and evolutionary, therefore one never repeats the same method twice, thus it is not systematic.

This may or may not be true, however, as a novice or intermediate trader one must use a system much like a person learning to ride a bicycle needs training
wheels, or at least someone to hold the bike up while they get the feel for riding on wheels as oppose to their own feet.

This systematic process if you will allows the mind to develop an ability to manage the task, leaving the individual with the feeling of second nature that
perhaps the opponents of systems intend to express when debating the proponents of the systematic approach.

In addition, seasoned traders who are experiencing performance results that are sub-par in relation to their own status-quo will often find themselves
breaking out from the plateau when resorting to a new trading system or style.

What will a trading systems do for you exactly?

A system will afford the convenience of having a fixed point to measure the effectiveness of you approach to trading the market. This benchmark will create a
range that is quantifiable and will help traders pinpoint weaknesses.

The process of developing a new system is likely to be repeated many times and every trader who is in the market for the long haul can expect to repeat the
process as performance dictates. Those who want to sit back and wait for checks from their broker while a magical system produces profits month after
month are in for a big surprise. Why?

The market is evolutionary and will continue to evolve around many theories that are behind the massive amounts of capital active in the market today. As
the ideas behind that capital evolve so too will the price of financial instruments that capital is active in. Those who embrace this fact and are willing and
talented enough to stay with the pace of evolution will be rewarded those who thwart it will not.

Mean, standard deviation, randomness and pseudo-randomness

Every proficient trader has a solid foundation in statistics and the most common statistical measures such as mean, standard deviation and the definition of
randomness. What many novice traders fail to understand fully in addition to basic statistics is randomness and stochastic processes. The more complex
aspects of randomness is beyond the scope of this lesson. However, we will discuss the basics here, and encourage you to include in the chapter quiz any
questions you have regarding this topic.
questions you have regarding this topic.

Mean reversion is very common attribute of price action, especially when little information other than price is being disseminated across trading desks. The
consensus tends to remain unchanged in these environments, and the random noise of order placement tends to force price to oscillate about the mean, also
known as the average.

A standard deviation is in fact what the name implies, and that a common deviation from the mean. The empirical rule postulates that a standard deviation
encompasses approximately 68% of the entire data set with the second deviation including 95%. You may remember this from our chapter covering Bollinger
Bands, which are based on the Empirical Rule the basis of this measure.

Statistical randomness is defined as any variable multiplied by a variable or raised to the power of a variable. In algebraic notation that would be (a b)c or
(a^b). For all intents and purposes, in trading randomness can be defined by the information available to the participants or the expectation of the
participants.

When referring to price of financial instruments however, many theories conflict one another making it incorrect to call price random per se, but it is
accurately know as pseudorandom or a more commonly - a stochastic process. Meaning the output is random though it fails to meet the statistical
definition.

For example if the expectation for NFP is +200K and the number is released at +175K then the two variables, expectation and the actual number will result in
random action that being order placement and subsequent price action about those orders.

This fact is precisely why making forecasts in the market is futile. What traders do to develop a positive arithmetic expectation, defined as the probability of
success on any given trial multiplied by the max gain minus the max loss, on any given trade is dissimilar to making accurate forecasts.

What many traders do to grow equity is strategic placement of orders near critical levels and if the market moves from the region the reaction, being random,
is impossible to predict therefore the consensus of price will overshoot the correct level that it often reverts to following the exuberance. However, the
incorrect estimation of randomness is what in fact offers astute traders an opportunity to seize upon that to systematically generate profit potential.

Thus one might conclude that traders are more practitioners of uncertainty and randomness as oppose to people who are capable of predicting the future - as
so many new to trading misinterpret.

Spreadsheets

The most common spreadsheet application is Excel by Microsoft. If you do not have Excel you can search the internet for a suitable spreadsheet application.
Trading without a spreadsheet would be like building your home without a hammer. The importance of spreadsheets is best exemplified simply by the fact
that all of the top performing traders arm themselves with one. In the information age there is nothing more critical than timely compilation of data a
spreadsheet will help traders achieve this.

The applications for spreadsheets in trading is incredible expansive. A trader is limited only by his creativity when using a spreadsheet for data management
and system development. However, we will discuss the basics in this chapter to develop a solid foundation in data management techniques.
Formulas and Functions

To analyze large amounts of data you must create a formula for the results you require or use one of the preconfigured formulas in the Data Analysis Toolpak
or Functions list. Many commonly used statistical measure such as: Correlation, mean, standard deviation of a sample or population, median, range, as well
as, ANOVA (Analysis of Variance) can be handy in discovering key levels and patterns in price structure as postulated by the data sample. All of these can be
found in the help feature and further explanations for use by searching the Internet.

Many functions are available for testing data samples as well, including: Statistical, Logical, Math & Trig and Engineering to name the most commonly used by
traders. It is important however that you develop a solid foundation in spreadsheet application before moving on to the advanced uses.

Exporting Price Data

Most charting applications on the market for free offer a feature that allows you to export the price data (Open, High, Low, and Close) for any selected period
up to a certain amount of time. Typically, due to software constraints, the container that holds the data is limited in size. Therefore the amount of time the
data covers will vary depending upon the periodicity chosen.
For example if you choose one minute periodicity you may receive 300 minutes of data; whereas if you select hourly periodicity, you may receive 300 hours
of data. It is important to consider the results you expect from the data when deciding on the periodicity.

Dynamic Data Exchange (DDE)

This is one of the best features that the Excel software offers. It virtually brings your data to life by creating real-time inputs of most common price attributes.
The source of the data often requires a subscription, though many packages are very affordable and are offered by the major exchange in FX. By inputting
live price data into your spreadsheet you can: audit formulas in real-time, model price action to give you buy and sell signals - among other market breadth
indications, and populate an array for backtesting or data storage on a tick by tick basis for developing a new system.

Excel for Risk Management

In the FX market risk management is paramount. Often traders find themselves in over their head insofar as exposure to highly correlated FX market. This
aspect that is inherent in the FX market for reason we have covered extensively in the text thus far, is precisely the reason professional traders use a risk
model. In fast markets it is often very difficult to be aware of all that is critical, hence the use of a spreadsheet application to aid in this factor. With all of the
features explained here an individual trader can build a risk model that will keep them abreast of their total exposure to the USD when trading the major
pairs. This course will take a more in depth approach to spreadsheets and advanced applications in trading.

Money Management (MM)


How can you take more off the table, or is it better framed as how much can you avoid losing? This paradoxical question holds the quintessential truths to
proper risk control, and in turn success in trading.

It seems simple - manage losses in a way that does not overtly impact the winning trades ability to augment them thus increasing equity.

The fact of the matter is: Anyone can make a winning trade - at any given time. It is as simple as placing a trade long and the market subsequently going
up. However, where most traders go wrong is how they manage the losing trades. Losing trades are inevitable, and part of trading. Some traders say that,
you have to pay to play, and this certainly holds true in trading profitably. In so many instances novice traders fail to see this before it is too late.

In fact many fail to give much consideration at all to losing, even when they experience a massive streak of losing trades. What many novices do instead is
similar to what an ostrich does when frightened, placing their head in the sand when it comes to reckoning with loses - and why not? After all, losses are
painful, and if we can consciously choose to ignore them some will.

However, the secret to profitability lies within the traders ability to reckon with the inevitable losing trades in order to manage them more effectively. Once
you realize losses are simply one key component to the equation of profitable trading, you are one gigantic step closer to becoming a proficient risk manager
and trader. After all, if Baseballs Hall of Fame player Reggie Jackson was afraid to strike out he would have never reached infamy as a hitter in the major
leagues. In fact he leads the MLB in strikeouts. Same goes for Michael Jordan he in holds the record for number of shots missed in the NBA. So it seems
the path to success is paved with failure.

The facts of trading:

Trading is a game of probabilities


Some losing trades with winning trades are likely since the probability of a trade is unknown
Take the leap and shift your focus to the losers perhaps it is effective simply because most people do not practice this?

As we all know, it takes a strong person to admit when they are wrong, and in trading it happens often, so you must learn to be strong to manage the
adversity effectively. Interestingly, the upside of taking this new outlook is that you will immediately place yourself ahead of so many other market
participants and you may in fact find the methods that failed to produce returns in the past become profitable.

You are the Risk Manager


Profitable traders see the practice of risk management as paramount. Profitable traders see the market in terms of the potential pitfall at all times, and if
circumstances are so gracious to afford them a favorable position, than they work that position to maximize the gain. Cut and dry.

Traders simply do not look at the market in terms of a forecast or prediction they leave this to those who do not regularly engage in risk taking, such as
analysts, market pundits, and the gurus you see speaking loudly in a very animated way on financial news networks.

Trading is not about picking winners


The old traders axiom: Let your winners ride and cut your losses short should have a new meaning to you at this point

There are a few exceptions to this rule however, for the same reason some people win the lottery while others might play over a million drawings in a lifetime
and never get more than 3 numbers, we see a certain percentage of market participants pursing riches by way of a grand forecast. Often these people are
wiped out and quickly forgotten, if they remain lucky however, they can attract a good deal of attention and investment capital from those who are not willing
t d th th di th b bilit f th i di id l i i l k f l d i d
wiped out and quickly forgotten, if they remain lucky however, they can attract a good deal of attention and investment capital from those who are not willing
to do the math regarding the probability of the individuals remaining lucky for a prolonged period.

The reason these people are thrust into the limelight is due more to the sensational aspects of the results of extreme randomness that people are compelled
by, rather that the fact that any sort of skill had placed the individual there. Sensational stories attract peoples attention not stories about hard working
people who go to work on the market day in and day out managing a small edge. A small edge that can be leveraged and experience geometric growth as we
detail below.

This reason alone is responsible for some many losing trades open in the market today for those who are willing to recognize this as fact. So why is this
simple fact regarding risk taking so difficult to implement?

The fact of the matter is the human mind is not optimized for risk taking. Recent advances in science by Nobel Prize winner in Economics, Daniel Kahneman,
postulate that this indeed the case. We outline the primary reasons below.

Remember: The conclusions drawn by this scientific data are not the reason one fails to take money from the market. Failure to reckon and effectively
mange the affects of these conclusions is the reason one fails to take money from the market. Everyone is subject to the conclusions made by these studies.
Team up with the right side and you too can profit from those who do not.

Asymmetrical Risk Taking


Prospect theory is one of the modern theories recently adopted by the investment community, replacing the neoclassical ideas such as Utility Maximization
theory, and offers a more discrete view on what profitable traders know to be fact already regarding the decision making process where it involves risk taking
endeavors.

Older theories assume that people view a certain chance of loss to be the same as the exact same chance of gain. This is in fact incorrect accordingly to
modern theories. Results from modern studies suggest a person will give more weight to loss than they do to a gain. Meaning they dislike losses more than
they like gains notably the empirical data of these studies suggest that this is the case by nearly 2 fold meaning we feel the impact of pain with twice as
much fervor than we feel pleasure.

The primary component described in Prospect theory is known as asymmetrical risk taking. This phenomenon is what makes decision making during live
trades so difficult, and is precisely the reason a systematic approach to trading one of most effective ways to experience consistent results over the long
term.

The general idea is that when rational agents as investors were coined in older theories, or better said: people who think their actions are rational, when
faced with a reasonable chance of making a profit become less inclined to take risks; while contrarily faced with the same probability of loss become more
inclined to take that very same risk - clearly the actions of an irrational agent. This inclination for risk given the identical probability is the reason large losses
being to accumulate in traders accounts that fail recognize their predilection.

For example, studies show that a person who is told they have a 33% chance of losing $100 and a 66% chance of making $200, or an opportunity walk away
with $50 without risking anything, the person will tend to avoid taking the risk and take the certain gain of $50, though they have a very good chance of
making $200 once the trial takes place though a loss of $100 exists.

In the study this question is then reframed with the exact same probabilistic outcome, though with the opportunity to take a certain loss of $50, and the
exact same probabilities as above for making money. In this case, what many aging theories say are rational agents, tend to opt for the risk despite the
probability of success and failure being identical. This is the decision a trader is faced with while in a live trade. Lets discuss a few more topics before we
d l i
probability of success and failure being identical. This is the decision a trader is faced with while in a live trade. Lets discuss a few more topics before we
drawn any conclusions.

Framing and Anchoring of Prospect Theory


The reference point also plays a major role in the results of the study above, and again seasoned traders are already fully aware of this phenomenon.
Traders feel the reference point (Prospect theory defines it as the Anchoring heuristic) when they are in live trades that are balanced to one side or the other,
either to the upside or downside, and find that the decision making process is augmented due to this.

This can be translated in to terms that are analogous to trading whereby you are in a trade and the market has moved in favor by $50 and the trader takes
the trade off before it can reach $200. Contrarily, where the market has moved against them $50, with the possibility of the market eventually moving in
their favor over time, but they are inclined by nearly twice as much to hold on to the loser to avoid the pain of realizing the loss though the market or trading
strategy recommends otherwise.

This affect can be scaled out from this point, using any period, perhaps the day, week or even year as balanced to one side or the other and the decision
making process is augmented in turn. What is important to realize is that this study was conducted on a large number of people with broad ranging
backgrounds. Thus it concludes that it affects everyone from all walks of life and this particular study demonstrates that people, when managing financial
decisions, may not be rational at all times. Some seasoned veteran traders say this is precisely the reason money can be made in the markets.

Worse yet, as the losing trade grows the trader may decide to see what happens next, removing the stop, looking for a piece of scheduled data that may
move the market in their favor or something along those lines. Perhaps worse still, the person realizes the loss, closing the trade, only to be proven right
when the market returns to a favorable prize at a later point in time.

This is where another major flaw in the way the mind manages forward looking uncertainty crops up. You must see each trade as an individual trial or event,
two trades are not under the same amalgamation of catalysts, therefore the only relation the two trades has is in your perception. Humility will teach you
that the broader market takes little concern with you perception, and this is the proper mind set many profitable traders cling to.

Again, this fact equates to traders tending towards holding a losing trade longer than necessary (all due to asymmetrical risk taking and heuristics), thus
making it difficult, if not nearly impossible to facilitate a net profit in account value for those who cannot identify it in their own thinking. It also equates to
traders taking profits too soon, skewing the distribution of trade results to the negative side in value.

First, the trader must reckon with the conclusions made by this Nobel Prize winners conclusions, and then they will be in much better position to manage it
effectively and trade profitably. When developing a strategy this fact must be at the forefront of the thought process at all times. This was you can build a
strategy that is in accordance with the facts, most traders can attest to that govern the market.

Additionally, contrary to popular misconception, the size of the trade is in fact the most critical aspect of trading. Since we can not predict with certainty the
outcome of any given trade, the only thing the trader can control is the size risk they should take relative to account value or total risk capital they are willing
to trade with.

Allow me to explain. If you trading a strategy that tests dictate will produce a positive trade to a negative trade at a ratio of 1:1, or with a 50% chance of
success, and when the strategy is correct, the winner will produce a gain or 20 pips while the loser 10 pips. Clearly this is a very favorable situation. The
question is now: How best to exploit this for maximum gain.

What is your optimal trade size?


The primary factor to consider is: How much heat (a term traders use meaning the risk in monetary units taken at any given time) can you comfortably trade
ith? M i t i i b l f th i l l f i k t l t ith th t t t bli h d i i ti f i th lti t
The primary factor to consider is: How much heat (a term traders use meaning the risk in monetary units taken at any given time) can you comfortably trade
with? Maintaining a balance of the maximum level of risk you can tolerate with the most return you can establish during any given time frame is the ultimate
goal when it comes to money management.

Some prefer a level of risk that leaves them trading comfortably without inspiring a large degree of asymmetry in their thought process. This may seem like
a shot in the dark; however, one sound, quantifiable means of producing the right mix is to use what is known as fixed fractional money management.

For example, if you have an account of $10000 you may want to risk more than a trader with $5000 account in absolute terms; however, you would not want
to exceed an amount that your strategy tests conclude is too large to ride out the periodical cluster of losing trades that take place along with clusters of
winning trades in a strategy with a positive expectation.

One thing that is important to realize in terms of MM is that no MM methods are good enough to turn the methodology of a trading strategy with a negative
expectation into a money making system. Lets take some time to get better acquainted with all the terminology that is required of traders who plan on using
fixed fractional position sizing.

Optimal Fixed Fractional Risk Management

Once you have a strategy with test results in place and you have a good deal of confidence in the results of you trading, you can determine the proper trade
size to take in the future based on the empirical data. We explained the two percent rule in the introductory course, but once you developed a higher degree
of confidence in your trading methodology, but as we noted above it would be erroneous to continue to use this size if larger trades will produce a more
efficient growth function in account value, with identical risk.

Optimal f is just one of the MM techniques, but there are many that traders use. One of the most conservative approaches, and the one recommended that a
novice use is the 2% rule. The rule is very simple and entails trading with no more at risk than 2% of your account on any one single trade. The best way to
start learning which technique suits the trading style used is to combine the two. With a fixed maximum loss the formula becomes very simple to compute.

The optimal f is simple to calculate and is used by many traders to modulate risk. The optimal f is simply the largest loss in your sample divided by the
probability of success. Since the largest loss is fixed the formula does not change from trade to trade, instead you can modify the formula every 60 trades
using the following parameters:

Optimal f = ((B + 1) * P - 1)/ B - Where B is the ratio of a winning trade to a losing trade, and P is the percentage of winning trades.

For example, you have discovered through the data mining and hypothesis testing of your trade results that most of your losing trades should be stopped out
near 22 pips, and that the gainers will often be limit out by 31 pips, and the probability of placing a winning trade is between 43 and 46%.

Arithmetic Expectation
With an average probability of 44.5% (.445), and a potential gain of 33 pips and loss of 22 pips, your arithmetic expectation on any given trade is:

.445 X (33-22)
.445 X (11)
= 4.895 or about 5 pips
Therefore you can expect to make 5 pips on any give trade over many iterations, as long as your methods are sound and strictly adhered too. 5 pips may
sound like a small number, but this just goes to show how important precise execution is to a trader's overall success.

In algebraic notation where p is the probability of the trade and a is a success and z is a failure: p X (a z) is the formula for calculating your arithmetic
expectation. You can apply your figures to the formula to develop your expectation. We recommend you use a spreadsheet to do this calculation that way as
your performance changes you can simply paste in your trad results. As you become more advanced in your methods of risk management you will find that
more than one calculation will be necessary and small modifications will be made when using parametric analysis of your trade results.

Geometric Mean
The geometric mean is simply a straight line between the beginning and end of a series of profitable trades. It represents the growth factor of the
methodology that was employed while the profits were produced.

For example, if you had 5 trades (many more than 5 trades are needed we are using small numbers for simplicity in this explanation) and the results in
dollars were as follows: +500, -200, +100, -100, +250, totaling a gain of 550. The starting account was $5000 so that added to the gains comes to $5550.
With this data we can develop a geometric mean. Note: This procedure is just as simple with larger numbers when using a spreadsheet for assistance.

The formula is as follows:

In the example above the geometric mean would be: (GM) = (Final Account Value / Starting Account Value) raised to the power of (1 / Number of Trades)

In algebraic notation the formula would be:

GM = (f / s) ^ (1 / t)

Using the example above the results in notation are:

GM = (5550 / 5000) ^ (1/5)


GM = (1.11) ^ (.2)
GM = 1.0211

You can apply your figures to the formula to develop your geometric mean. The GM is always a positive number in a favorable scenario. If the number was
negative the strategy would have lost money. Investment performance is often measured in respect to the dispersion of the returns, some common methods
are the Sharpe Ratio, and Value at Risk (VAR), GM is another means of determining the dispersion.

Remember: One thing that is important to realize in terms of MM is that no MM methods are good enough to turn a trading strategy with a negative
expectation into a money making system. You must focus on the methodology, as this is the most dynamic aspect of trading profitably. These methods for
maximizing the gains one that is in place are static and very simple to implement with a spreadsheet, so it deserves second billing to methodology and
discipline. After adopting these methods you are much better position to analyze your performance, enabling you to make accurate deductions regarding your
trades.

In addition to this, you must first have a large sample of trades to develop an accurate idea of your arithmetic expectation overall, and then create an optimal
size trade relative to your account value to shield your account against the worst case scenario. The larger the sample the better, but 60 should suffice for the
purpose of this procedure.
purpose of this procedure.

Once you have a sample of trades large enough to analyze, you must do some calculations regarding the biggest total loss and the longest streak of losses in
order to maximize the growth of your equity. By doing this you can calculate a geometric growth function, and optimize your returns based on your
Putting it all Together and Promoting Good Habits

Putting it all Together Promoting good habits

The value of a currency represents the markets consensus of the nation it belongs to, and in the case of the euro many nations. With that said, making a
logical comparison between a single currency such as the EUR or USD to a person or group of people. Just as the currency represents the markets consensus
of the correct value, a deduction one makes regarding a person, or more accurately a group of people, mostly likely response to an event.

This analogy leads us to a better understanding of why some techniques for trading are better suited to certain currencies than others. Just as groups of
people collectively respond differently to the same information, so do currencies. Some currencies hold little regard to certain market events while others
might hold the same information in the highest regard.

A person, not unlike a currency, is dynamic and has many different traits and predispositions. It is a common assumption in social sciences that people, when
in a group, act in a different way than as an individual. Becoming familiar with a currency, like with a person or group of people, will enable you to have a
better understanding of how it is likely to behave in response to certain market events.

With that understood you might realize that trading the EUR/USD relationship is quite different to trading the USD/JPY relationship or EUR/JPY for that
matter. Certain events that take place in the market can invoke a different response to each respective pair. A degree of correlation does exist however and
should be factored in to your decision making at all times.
should be factored in to your decision making at all times.

Since the events that unfold impact price to certain degree based on the markets varying perception among other dynamics, traders are less likely to be able
to predict the degree of change, but can simply place orders in location that can facilitate a profit in probabilistic terms, and if do not benefit favorably, exit
the trade and reevaluate.

It is never in your best interest to wait and see what happens when a trade is not doing what you anticipated. In fact the worst thing that can happen to a
trader when confronted with the decision cut the loss short or ride it out, is that they are rewarded with a profit. Naturally, the traders will tempt fate again
on the next losing trade in light of the recent fortune, only to find themselves with a catastrophic loss.

The importance of spotting Support and Resistance


Since this is the case it is important the trader focus on the market in terms of S and R. The reason this is fundamentally correct is that S/R is created by
something that is tangible, clusters of floating and entry orders, as oppose to something that is intangible, such as the future decisions of market participants.
By basing your decisions on the intangible you are simply guessing. By calculating decisions on what is tangible you are taking a scientific and quantifiable
approach.

What makes viewing the market in terms of S/R difficult is that it is:

1. constantly changing
2. not clearly visible - as price action for example
3. convoluted by hindsight leading you to believe that you forecasted the direction of the market encouraging the trader do it again

The price never lies

One of the greatest axioms in trading is: the price never lies. What traders are trying to exemplify when saying this is that you may misunderstand, to one
degree or another, with regard to other bits of market data, such as economic release, geopolitical news and alike, but you can never misinterpret the price.

The only piece of market information afforded to you that is unequivocal is the price. There is no other information that is indisputable. The fact of the matter
is that everything that every market participant knows, and has acted upon, about the relevant information has converged on the price. The price reveals
everything you need to know about what the market participants have acted on regarding their interpretation of the fundamental news and accompanying
underlying consensus, therefore the price is paramount to traders.

Trading like a Market Maker

Trading the cable, as dealers call it for the fact that it was traded over the trans-Atlantic communications cable for many years, is not something the novice
trader should take on without proper instruction. In fact that you must be a fairly proficient trader to get a good hold on the pair.

We feel that with time and the material covered in this course you too can become a competent trader of the British Pound sterling vs. the US dollar. You
must be forewarned however, the road to success is paved with failure, and this pursuit is going to follow that same course. Knowing this in advance is one
of your greatest weapons against the trials and tribulations that are sure to follow.

What you must realize is that with increased risk comes increased reward, and you must scale this factor accordingly to suit your risk tolerance. Introducing
trades in sterling is likely to have an impact on your trading overall, so you must take this into account when determining that scale. There are a few
i f t th t lik l t i d f l i dt d W ill tli f l iti l b f tli
trades in sterling is likely to have an impact on your trading overall, so you must take this into account when determining that scale. There are a few
governing factors that are likely to serve as an impedance for less experienced traders. We will outline some we feel are critical before we outline a common
trading strategy for the pairing.

The Power Hour


During the period that is known to FX market participants as the power hour, and takes place between the openings of the morning session in Frankfurt and
London, that overlap by one hour - hence the name. During this period sterling related instruments (GBP/USD, JPY, EUR, CHF) can be very tricky to get a
handle on. The reason this is so is that a tremendous surge of volume hits the market when overnight orders on brokers and jobbers (aka dealers) desks
from old money and corporate hedgers get worked through the book at the tip of the day.

Since the dealers have so much influence over this portion of the 24 hour session, stop hunting activity is incredibly prevalent. Some factors to consider
given this is the case are:

Position size needs to be smaller and stops set wider to accommodate this market environment
You should disregard breakouts on a smaller scale, as the pair tends to overshoot - instead looking to the near term technical indication of the
majors at large especially EUR to determine if range breakouts are going to be prevalent
Trade actively Do not fall victim to holding out for a better price in sterling

Some of the most successful people trading FX are also dealers, employed by a major bank, in the market on behalf of themselves and various financial
products and services the institution offers to the client base - and why not? Banks are not solely interested in making a market for clients to trade such a
potentially lucrative market they too want a piece of the trillion dollar pie.

For this reason it is helpful to take a viewpoint on the market that is similar to how a dealer sees the market. Consider the dealers job he needs to fulfill
benchmarks set by his superior for volume and speculative gains in the market. Additionally, he needs to make it as difficult as possible for the largest
accounts, usually counterparties at other institutions, to take money off the table with ease in order to protect the banks positions in the market.

Since these are his goals he would be wrong in diverting his strategy to take money off the table from this archetype. Naturally, if he did so, a competitor at
the bank would be more than happy to take his place on the desk and his 7 figure year-end bonus in the case of the top paid dealers. For this strength
the dealer exhibits you can dissect his course of action, and exploit the predictability of his intentions as we noted above.

Prepare for the Changing States of the Battle


For novice traders who insist they are active in sterling, it is best if traded by daily chart before intraday trading. Similar ideas can be employed and the
scaling of doing so is going to slow things down though only a bit.

Despite the benchmark influence on the pair at this point in time, it is sure to evolve, as all the pairs do, over time and traders should keep an eye on the new
underlying tendencies the pair demonstrates as time passes. Things to watch for as the behaviors of pair evolve with the current state of the global macro
consensus are:

Carry trade interest may subside somewhat, as the interest rates of the USD have climbed rapidly, in recent years.
Carry trading where traders are holding GBP is expected to curtail further as Japan (GBP/JPY is one of the most heavily traded cross for
carry) is expected to make a move towards policy accommodation.
Trading volume in the GBP crosses - EUR/GBP and GBP/CHF specifically

Fortunately for individual traders, all the perceived strengths that the largest participants utilize can be exploited for the fact that they rely on these
characteristics are rigid in their exploits. The methods that work for them create means for systematic profit potential. In effect, these very strengths are the
reason smaller participants can generate a positive expectation. Thus, it is important to realize that as long as you are thoroughly acquainted with the
process that creates these strengths you are in much better position to exploit them for your own profit.

These tendencies serve to create opportunities such as:

Quick profits intraday with contrarian trades - since dealers are running stops, backing and filling as the market advances in a broader trend
small traders can exploit this tendency for profits
Influenced by cross action in GBP/JPY, GBP/ CHF and EUR/GBP affording traders a way of getting a better idea of where support and
resistance reside
On days of market wide consensus shifts typically following major US data release the pair will lead the advance in respect to micros S/R
levels making it ideal for trend following and early warning on the rest of the market and the overall health of the current exuberance

Day Traders enjoy the pair for quick profits during times of high liquidity.

Times of liquidity are:

The Power Hour


MPC Meetings and major data releases from the UK
The American session especially the morning period

Analyzing Intraday Setups


Intraday setups can be discovered by other indications other than price of GBP and news stories related to the UK. For example, when the EUR is trading to a
S/R level you may see the sterling react to the level in a similar, though exaggerated, way as the EUR does, even if the pair is not trading at the relative or its
own respective S/R level as if the dealers are looking to the leader for a better idea of the inclination of the market.

Risk Management Techniques

Trading with stops

The great traders debate trading with stops or without them:

If you are one who prefers trading without a stop, then there is one thing perhaps you have not realized. You are trading with a stop it just happens to be
your entire account.

To risk your entire account on one trade would be an error. Instead traders must manage the size of the inevitable losing trade by using a stop loss order - a
predetermined amount that deems the trade incorrect.
predetermined amount that deems the trade incorrect.

The reason this is the case is simply due to the immutable mathematical law that if you trade a strategy with infinite loss (without a stop) you will reach ruin
(total loss of capital) with certainty as the number of iterations (trades) reach infinity.

After eliminating the chance of losing all the equity on one trade, the trader is in a position to be profitable. Without this, among other fundamentals to
trading it is unlikely that account equity will rise.

Trading with a trailing limit

Just as stops control traders risk to unfavorable changes in price, trailing stops control the reward. Generally speaking the best way to manage the
uncertainty of a position moving in your favor is to use trailing stops. A trail preserves equity, and allows you to manage the difficulty in deciding when to
take close a profitable trade.

Decision Making Techniques

When it comes right down to it sound decision making skills are what make the difference between trading profitably or unprofitably. To make good decisions
one must be aware of a few governing principles to the psychological aspects of the decision making process.

Using the data from the 2002 Nobel Prize winner in Economics Sciences, Daniel Kahneman, theory's we outlined before reveal that effective decision making
does not have to involve a great deal of variables such as technical indicators, fundamental data or mathematical algorithms.

Kahneman and his colleagues have proven that in financial decision making in particular, it is not useful to have a great deal of information at hand because
this leads to a type of decision making paralysis something veteran traders can surely attest. In fact, he has uncovered evidence that implies quality not
quantity is far superior when making financial decisions. Thus, making good decisions may in fact come from on or two bits of information. Determining the
proper weight of that information is of course paramount.

His work has uncovered many interesting facts regarding the human thought process. One of which is that when placed under a certain amount of stress the
mind often reverts to simple fight or flight mode, where weighty decisions are made based on very little information, if not just one bit of information. Now
this propensity that every person has is actually essential to our very survival, yet it is the reason for many traders losing all their equity.

However, professional traders are aware of this fact and actually use it to their advantage. It is quite simple: By accepting - as oppose to denying - this fact a
trader is in much better position to manage the effects and identify them when the market, collectively, becomes consumed by it and leverages it against the
market.

What the research has uncovered and what the best traders do to make high quality trading decisions is coined by some industry leaders as fast and frugal
decision making. Fast meaning the window of opportunity to seize upon the market is often brief, and frugal referring to the fact that tight stops are placed on
orders to ensure a single trade is never catastrophic. This practice will afford good trades an opportunity to benefit from favorable uncertainty while
simultaneously controlling unfavorable uncertainty as it inevitably occurs.

Clearly, professional traders are not capable of measuring, quantifying, strategizing and implementing a course of action to manage the impact of every
variable the influences price at any given time to make profits and grow account equity simply because doing so would be impossible. They trade fast and
frugal consistently everyday and that is their method to making money in the markets.
frugal consistently everyday and that is their method to making money in the markets.

Trading Logs

Keeping a brief but concise record of your thoughts at the time of making a trade is one of the most invaluable practices a trader can take on. Doing this will
help traders in a many ways:

1. The same mistakes that were made in the past are less likely to occur simply because you have documented the event and it will be recalled
with ease, and youll be in better position to analyze the reiterative flows in your strategy and or thought process for the same reason.
2. Good record keeping is synonymous with positive performance in most every task
3. Positive reinforcement of favorable habits will emerge with frequent repetition.

An example of a trade log should include the date and time, a brief synopsis of the interpretation of price action and the market, as well as the entry and exit
point of the trade. Below is an example:

Trade log example:

GBP/USD: Sell Limit If strength in the dollar proliferates, this factor combined with rate speculation revolving the uncertainty the BoE has disseminated in
recent press snippets may provide some selling pressure in sterling. Though, a large cluster of S resides below the daily low and it is prudent to get involved
in this trade only if the force is strong enough to break down the S level - orders are laddered according to this analyses.

Entry 1.7450 Stop 1.7495 Target 1.7385 Trail 25 pips

Attaching a chart to the comments in a .doc file or spreadsheet will further in your development as a profitable trader.

Growing Account Equity

The key to increasing the size of your account in regular intervals really lies on just one primary factor consistency.

You need to practice all of the profitable techniques on a consistent basis. This can be difficult for a few reasons:

1. The fluctuations in the account can deceive you when in fact they are completely normal and what can be expected when interacting with a
spurious variable such as the FX market. This may cause a trader to change from a profitable technique to an unprofitable one creating
unnecessary losses.
2. Bad habits will arise in place of the good ones and they may be hard if not impossible to overcome later.
3. Factors influencing the trader outside of the market can be damaging unless a sound basis in the fundamentals of trading profitably are firmly
in place.
Sterling Trading Strategy

The entry techniques required to make trades on this action are much more sophisticated than those covered above and outlined in the course strategy
pieces. Traders are more often trading at the market or with limit orders than with other methods. This fact is what makes this technique more advanced
traders and not for those who have the tendency to move stops out of the way of price, as moves are swift and often unmerciful to those who practice this
dire action.

Backing and Filling


A common strategy dealers exploit is known on desks as Backing and Filling. Those who watch sterling intraday may have noticed this taking place in
trending markets.

The concept is simple: As the market advances orders are set behind the advance. This method is favorable for a few reasons:

1. stop hunting will create profitable trades while other traders are losing
2. given the tendency for dealers to utilize this strategy often it is available to traders almost everyday
3. traders are in early on major shifts in trends affording them many advantages with common risk management methods
4. If the trend is legitimate orders will simply be left enqueue nothing gained and nothing lost

This strategy can be very lucrative when the market makes the inevitable shift in direction, simply due to the fact that when the market backs into the entry
order it will be swept up in the nascent trend in the contrary direction.

This intraday chart of the GBP demonstrates the tendency for backing and filling. One word of caution to traders who use trailing entries is that you must
employ a stop loss orders and be comfortable with them being executed. If you do use them this strategy may quickly turn disastrous as the predominant
trend can move against the orders. Additionally, it is far less likely, probabilistically, for the large winning trades to compensate for those controlled stop
losses.
In the example above you can see a level of R was established on a failure to trade through the highs on this chart days prior. However, it is also clear that
the pair is demonstrating a propensity to test that level. This is where dealers on the desks of major institutions begin to place the orders of corporate
hedgers, who are truly impartial to the ultimate price of the pair, while filling their own orders counter trend. This is backing and filling taking place right
before your eyes.
before your eyes.

Later the pair tested the exact same level where price failed recently. At this point dealers stop pushing the large corporate orders on the market, in affect
discontinuing the rally, creating a counter trend situation in the market. This often takes place in the minutes prior to a major data release when the impact
of those corporate orders will be felt most as many stand aside ahead of the key data.
of those corporate orders will be felt most as many stand aside ahead of the key data.

For those who are not very well adept to technical trading the Parabolic SAR can be used to set entry orders. It is recommended however that one trade
using the study on a demo account. By trading on demo you will be able to get thoroughly acclimated with changing the parameters of the study to suit the
current state of the evolving market climate.
current state of the evolving market climate.

Few platforms offer trailing entry capabilities, but as traders demand for the strategy increase it is likely to be included. However, platforms that offer
programmable capabilities can be setup to trail the advance of the market with an entry order set at any distance. A good rule of thumb however would be
setting the entry at about 15 to 20 pips.

In addition to day trading, trend trading is a viable means to establishing an effective posture in the market trading sterling. In the case of trading trending
markets similar order placement strategies can be utilized. The key being that the order is placed in a location that will protect the entry from getting caught
in rangebound random market noise, but when the market does break to a new level of consolidation the orders are in an efficient location to take advantage
of the consensus shift.

When markets are ranging and the trader feels it may be signifying a propensity for trending, the trader must then place orders outside the range to get the
best position on the market for the subsequent trend.

Many of the most successful traders who trade less frequently, analyzing large scale time frames, admit that they only act on signals their system implicate in
the direction of the trend. This trading methodology is called Trend Following.

Trend followers primary assumption is that people tend to overreact when excited or fearful, thus creating inefficiencies in the market. These inefficiencies
can be seized upon when price breaks out from a range.

The best way to trade a break out is to place entry stops above and below the range. For example, if the market indicates a level of S at the round number in
GBP, then the trend following strategy would place orders below the round number near X.XX90. This way if the S continues to prop the price then the orders
we be left enqueue, and only ill be triggered on forays below the region.

Stops are then placed inside or above the range that was developed prior to the breakout. This is an optimal placement for stops because after breaking the
range the market often trades back to the range boundaries. In the event that does take place, as it does more frequently on lower volume, and the trade
will not get stopped out prematurely.

In the example below a clear level of S and R was established in the European session, at the high and low of the range. When the American daily session
opened and volume increased the market reacted by lifting price through the R. Orders entered into the market prior to the break were shielded by the R,
and were triggered only after the market traded through the R.

This example also demonstrates why stops should be placed near the center or the opposite side of the range. As illustrated by the candle tails, after the
market broke out of the range, it then came back to the range momentarily, before the trend was established.
In order for this strategy to overcome the number of instances whereby the market makes a false break and trades back to the stop price, trader must
practice a money management strategy known commonly as pyramiding.

The procedure is quite simple. The same method of discovering S and R for the initial entry in to the trend, as outlined above, when the market makes its
shaky run higher new opportunities to trade the same method present themselves.
shaky run higher new opportunities to trade the same method present themselves.

Following the initial break the pair fashioned a level of R at the highest point established. The stops on the subsequent trades however are not placed at the
range center or opposite boundary. We cover the best way to manage the trend in order to parlay the trend so that over many instances of using this
technique you are able to maximize risk and reward on the drift. More on risk management in our strategy piece Money Management.
technique you are able to maximize risk and reward on the drift. More on risk management in our strategy piece Money Management.

Before you read on try and find the next place the sequence reiterates.
If you were successful in finding the R at the first black candle, congratulations, if not you can now see it on this chart. The highest high at or prior to the
black candle clearly illustrates the R that was developed, though only momentarily.

In this particular development of a trend we in fact have another entry into the market and it can be seen close to the top of this trend.

This strategy always ends with a losing trade, as the trend inevitably comes to an end. At this point the profits floating from the initial and pyramided orders
will overcome the losses, so this fact should comfortably by accepted by those trading the strategy, since the trend in the market is net positive in equity.
If you find yourself unable to trade the systems correctly simply go back and reread the material and practice good execution until you have mastered it.
At this point we will move on to the Question and Answer segment of the lesson. In the introductory course many of the questions required little more than a
few sentences to explain your understanding of the material. In the strategy course quiz it is compulsory for traders to be much more thorough when
answering the questions. You may find that a short essay is necessary putting your ideas to words effectively. Learning how to trade profitably is in your
hands now.

Dispelling Myths

Margin Demystified
The financial industry as a whole makes many attempts to lead you to believe that margin level is a major component of trading profitably. This is more for
marketing purposes than anything else simply because it is the dollar amount at risk relative to your account value that is relevant at any given time.

The dollar amount risk weighed against what your analysis deems the probability of any given outcome will offer you a quantifiable means of controlling risk.

The idea being that when a string, or cluster, of randomly distributed trades with a positive arithmetic expectation result in drawdown in account equity you
are able to plan for it and trade accordingly. Some money management strategies in fact can afford a 95% drawdown in account equity before realizing a net
gain.

Obviously, this is an extreme example and most novice traders are not even remotely interested in trading that level of heat in their portfolio. Nevertheless,
what is important to realize is that the level of risk you incur is very much proportionate to the return you can expect, as well as the likelihood of reaching
ruin.

Many of the impedances between traders and profitability come from the traders own actions. Accepting that as fact is 99% of trading profitably. Humility will
help bring this to light, and must be practiced at all times.

Novice traders who experience some success in most cases begin to think that they can do no wrong if they buy they market will go up if they sell the
market will go down. This misnomer will lead to future losses almost certainly. The market teaches tough love and you must be humble to it at all times
both in times of rising equity and falling.

With these two systems you are now ready to start trading the fastest growing, most liquid financial market in the world. Clearly, this is not an easy
endeavor, but the rewards are virtually limitless when executed properly.

In closing of our lesson on FX trading, we would like to say that we know profitable trading is one of the most exhilarating experiences an individual can take
part in. It takes cunning, stamina, a high degree of skill and hard work to be a success in trading. Trading is not easy, but we all know the rewards are
virtually infinite.

One thing you have to be certain of however , is that no one is trading profitably by laying back while the trading system or methodology does all the work
bringing in profits month after month. This is one of the greatest fallacies in the financial business and always will be simply because there are so many
people who would like to believe it. However, there are traders, and teams of traders, in the market making profits month after month doing nothing more
than what you have learned in this course.

There will be times when it seems impossible, or that you cannot do it. However, you must remember that it all starts with your will to succeed. Without
determination you will not be able to drive for what it takes to be profitable.
determination you will not be able to drive for what it takes to be profitable.

By applying the fundamental principals of sound trading that we have outlined you too can be trading with a net profit month after month, year after year for
as long as you like.