forex survival guide secrets

The Forex quick guide for beginners and privat e t raders This guide was creat ed by Easy-Forex™ Trading Plat form, and is offered FREE t o all Forex t raders.. The market The currency

The Forex quick guide

for beginners and privat e t raders

This guide was creat ed by Easy-Forex™ Trading Plat form, and is offered FREE

t o all Forex t raders

Make your Forex learning much more efficient :

Regist er now at Easy-Forex™

and get FREE 1-on-1 LIVE training, in your language!

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In this book: (cl ick a chapt er t it l e bel ow t o direct l y get t here)

page

1 Forex? What is it , anyway? (a simple int roduct ion, for t he

very beginners…)

4

6 Technical Analysis: pat t erns and forecast met hods used

t oday

29

7 Fundament al Analysis and leading market indicat ors 47

Introduction: how to use this book

This book has been developed t o help t he Forex beginner, t hough experienced and professional t raders may find it a handy reference

Beginners and novice t raders are likely t o benefit from reading t he ent ire

t ext , st art ing wit h Chapt er 1, which provides a basic overview of what currency t rading is, and how t o get st art ed

The chapt ers are set out in a logical flow, but do not need t o be read in order

t o make sense, as each works as a discret e unit unt o it self You may prefer t o focus first on t hose chapt ers t hat you feel will complement your part icular knowledge base best Chapt er 11 is a glossary of t erms (list ed alphabet ically) used in t he Forex business, t hat will prove helpful as you read t his book, and may serve as a valuable reference as you become an experienced currency

Before you st art , please remember:

• Forex trading (OTC Trading) involves substantial risk of loss, and may not be suitable for everyone Bef ore deciding t o undert ake such

t ransact ions, a user should carefully evaluat e whet her his/ her financial sit uat ion is appropriat e for such t ransact ions Read more in t he "RISK WARNING" sect ion on Easy-Forex sit e / Risk Disclaimer

• Always ask your Forex dealer (t he TRADING PLATFORM you wish t o

t rade wit h) t he quest ions we prepared for you in t his book (chapt er 9) Select ing t he appropriat e Forex TRADING PLATFORM is essent ial for success in handling your t rading and monit oring your act ivit y, as well as maximizing profit s, while minimizing losses and cost s

Your comment s and suggest ions are highly appreciat ed (and may well be

incorporat ed in our next edit ion)! Be our guest and writ e us:

ForexBooks@Forex.info

[1] Forex? What is it, anyway?

The market

The currency t rading (foreign exchange, Forex, FX) market is t he biggest and fast est growing market on eart h It s daily t urnover is more t han 2.5 t rillion dollars The part icipant s in t his market are cent ral and commercial banks, corporat ions, inst it ut ional invest ors, hedge funds, and privat e individuals like you

What happens in the market?

Market s are places where goods are t raded, and t he same goes wit h Forex In Forex market s, t he “ goods” are t he currencies of various count ries (as well as gold and silver) For example, you might buy euro wit h US dollars, or you might sell Japanese Yen for Canadian dollars It ’ s as basic as t rading one currency for anot her

Of course, you don’ t have t o purchase or sell act ual, physical currency: you

t rade and work wit h your own base currency, and deal wit h any currency pair you wish t o

“Leverage” is the Forex advantage

The rat io of invest ment t o act ual value is called “ leverage” Using a $1,000 t o buy a Forex cont ract wit h a $100,000 value is “ leveraging” at a 1:100 rat io The $1,000 is all you invest and all you risk, but t he gains you can make may

be many t imes great er

How does one profit in the Forex market?

Obviously, buy low and sell high! The profit pot ent ial comes from t he fluct uat ions (changes) in t he currency exchange market Unlike t he st ock market , where share are purchased, Forex t rading does not require physical purchase of t he currencies, but rat her involves cont ract s for amount and exchange rat e of currency pairs

The advant ageous t hing about t he Forex market is t hat regular daily fluct uat ions – in t he regular currency exchange market s, oft en around 1% - are mult iplied by 100! (Easy-Forex™ generally offers t rading rat ios from 1:50 t o 1:200)

How risky is Forex trading?

You cannot lose more t han your init ial invest ment (also called your “ margin” ) The profit you may make is unlimit ed, but you can never lose more t han t he margin You are st rongly advised t o never risk more t han you can afford t o lose

How do I start trading?

If you wish t o t rade using t he Easy-Forex™ Trading Plat form, or any ot her, you

must first register and t hen deposit t he amount you wish t o have in your

margin account t o invest Regist ering is easy wit h Easy-Forex™ and it accept s payment via most maj or credit cards, PayPal, West ern Union Once your

deposit has been received, you are ready t o start trading

How do I monitor my Forex trading?

Online, anywhere, anyt ime You have full cont rol t o monit or your t rading

st at us, check scenarios, change some t erms in your Forex deals, close deals,

or wit hdraw profit s

Easy-Forex™ wishes you enj oyable and successful Forex t rading!

[2] What is Forex trading? What is a Forex deal?

The invest or's goal in Forex t rading is t o profit from foreign currency movement s

More t han 95% of all Forex t rading performed t oday is for speculat ive purposes (e.g t o profit from currency movement s) The rest belongs t o hedging (managing business exposures t o various currencies) and ot her act ivit ies

Forex t rades (t rading onboard int ernet plat forms) are non-delivery t rades:

currencies are not physically t raded, but rat her t here are currency cont ract s which are agreed upon and performed Bot h part ies t o such cont ract s (t he

t rader and t he t rading plat form) undert ake t o fulf ill t heir obligat ions: one side undert akes t o sell t he amount specified, and t he ot her undert akes t o buy

it As ment ioned, over 95% of t he market act ivit y is for speculat ive purposes,

so t here is no int ent ion on eit her side t o act ually perform t he cont ract (t he physical delivery of t he currencies) Thus, t he cont ract ends by offset t ing it against an opposit e posit ion, result ing in t he prof it and loss of t he part ies involved

Components of a Forex deal

A Forex deal is a cont ract agreed upon bet ween t he t rader and t he market maker (i.e t he Trading Plat form) The cont ract is comprised of t he following component s:

-• The currency pairs (which currency t o buy; which currency t o sell)

• The principal amount (or "face", or "nominal": t he amount of currency involved in t he deal)

• The rat e (t he agreed exchange rat e bet ween t he t wo currencies)

Time frame is also a fact or in some deals, but t his chapt er focuses on Trading (similar t o “ Spot ” or “ Current Time” t rading), in which deals have a lifespan of no more t han a single full day Thus, t ime frame does not play int o t he equat ion Not e, however, t hat deals can be renewed (“ rolled-over” )

Day-t o Day-t he nexDay-t day for a limiDay-t ed period of Day-t ime

The Forex deal, in t his cont ext , is t herefore an obligat ion t o buy and sell a specified amount of a part icular pair of currencies at a pre-det ermined exchange rat e

Forex t rading is always done in currency pairs For example, imagine t hat t he exchange rat e of EUR/ USD (euros t o US dollars) on a cert ain day is 1.1999 (t his number is also referred t o as a “ spot rat e” , or j ust “ rat e” , for short ) If

an invest or had bought 1,000 euros on t hat dat e, he would have paid 1,199.00

US dollars If one year lat er, t he Forex rat e was 1.2222, t he value of t he euro has increased in relat ion t o t he US dollar The invest or could now sell t he 1,000 euros in order t o receive 1222.00 US dollars The invest or would t hen have USD 23.00 more t han when he st art ed a year earlier

However, t o know if t he invest or made a good invest ment , one needs t o compare

t his invest ment opt ion t o al t ernat ive invest ment s At t he very minimum, t he ret urn

on invest ment (ROI) shoul d be compared t o t he ret urn on a “ risk-f ree” invest ment Long-t erm US government bonds are consider ed t o be a risk-f ree invest ment since

t here is virt ual l y no chance of def aul t - i e t he US government is not l ikel y t o go bankrupt , or be unabl e or unwil l ing t o pay it s debt s

Trade only when you expect t he currency you are buying t o increase in value relat ive t o t he currency you are selling If t he currency you are buying does increase in value, you must sell back t hat currency in order t o lock in t he profit An open t rade (also called an “ open posit ion” ) is one in which a t rader has bought or sold a part icular currency pair, and has not yet sold or bought back t he equivalent amount t o complet e t he deal

It is est imat ed t hat around 95% of t he FX market is speculat ive In ot her words, t he person or inst it ut ion t hat bought or sold t he currency has no plan

t o act ually t ake delivery of t he currency in t he end; rat her, t hey were solely speculat ing on t he movement of t hat part icular currency

Exchange rate

Because currencies are t raded in pairs and exchanged one against t he ot her when t raded, t he rat e at which t hey are exchanged is called t he exchange rat e The maj orit y of currencies are t raded against t he US dollar (USD), which

is t raded more t han any ot her currency The four currencies t raded most frequent ly aft er t he US dollar are t he euro (EUR), t he Japanese yen (JPY), t he Brit ish pound st erling (GBP) and t he Swiss franc (CHF) These five currencies make up t he maj orit y of t he market and are called t he maj or currencies or

“ t he Maj ors” Some sources also include t he Aust ralian dollar (AUD) wit hin t he group of maj or currencies

The first currency in t he exchange pair is referred t o as t he base currency The second currency is t he count er currency or quot e currency The count er

or quot e currency is t hus t he numerat or in t he rat io, and t he base currency is

selling one unit of t he base currency For example, an exchange rat e for EUR/ USD of 1.2083 specifies t o t he buyer of euros t hat 1.2083 USD must be paid t o obt ain 1 euro

Spreads

It is t he difference bet ween BUY and SELL, or BID and ASK In ot her words,

t his is t he difference bet ween t he market maker's "selling" price (t o it s client s) and t he price t he market maker "buys" it from it s client s

If an invest or buys a currency and immediat ely sells it (and t hus t here is no change in t he rat e of exchange), t he invest or will lose money The reason for

t his is “ t he spread” At any given moment , t he amount t hat will be received

in t he count er currency when selling a unit of base currency will be lower

t han t he amount of count er currency which is required t o purchase a unit of base currency For inst ance, t he EUR/ USD bid/ ask currency rat es at your bank may be 1.2015/ 1.3015, represent ing a spread of 1,000 pips (percent age

in point s; one pip = 0.0001) Such a rat e is much higher t han t he bid/ ask currency rat es t hat online Forex invest ors commonly encount er, such as 1.2015/ 1.2020, wit h a spread of 5 pips In general, smaller spreads are bet t er for Forex invest ors since t hey require a smaller movement in exchange rat es

in order t o profit from a t rade

Prices, Quotes and Indications

The price of a currency (in t erms of t he count er currency), is called “ Quot e” There are t wo kinds of quot es in t he Forex market :

Direct Quot e: t he price for 1 US dollar in t erms of t he ot her currency, e.g – Japanese Yen, Canadian dollar, et c

Indirect Quot e: t he price of 1 unit of a currency in t erms of US dollars, e.g – Brit ish pound, euro

The market maker provides t he invest or wit h a quot e The quot e is t he price

t he market maker will honor when t he deal is execut ed This is unlike an

“ indicat ion” by t he market maker, which informs t he t rader about t he market price level, but is not t he final rat e for a deal

Cross rat es – any quot e which is not against t he US dollar is called “ cross” For example, GBP/ JPY is a cross rat e, since it is calculat ed via t he US dollar Here

is how t he GBP/ JPY rat e is calculat ed:

Margin enables privat e invest ors t o t rade in market s t hat have high minimum unit s of t rading, by allowing t raders t o hold a much larger posit ion t han t heir account value Margin t rading also enhances t he rat e of profit , but similarly enhances t he rat e of loss, beyond t hat t aken wit hout leveraging

Maintenance Margin

Most t rading plat forms require a “ maint enance margin” be deposit ed by t he

t rader parallel t o t he margins deposit ed for act ual t rades The main reason for t his is t o ensure t he necessary amount is available in t he event of a “ gap”

or “ slippage” in rat es Maint enance margins are also used t o cover administ rat ive cost s

When a t rader set s a St op-Loss rat e, most market makers cannot guarant ee

t hat t he st op-loss will act ually be used For example, if t he market for a part icular count er currency had a vert ical fall from 1.1850 t o 1.1900 bet ween

t he close and opening of t he market , and t he t rader had a st op-loss of 1.1875,

at which rat e would t he deal be closed? No mat t er how t he rat e slippage is account ed for, t he t rader would probably be required t o add-up on his init ial margin t o finalize t he aut omat ically closed t ransact ion The funds from t he maint enance margin might be used for t his purpose

Import ant not e: Easy-Forex™ does NOT require t hat t raders deposit a maint enance margin Easy-Forex™ guarant ees t he exact rat e (St op-Loss or

ot her) as pre-defined by t he t rader

If you don’ t wish t o deposit “ maint enance margin” , in addit ion t o t he margin

required for t rading, j oin Easy-Forex™: no “ maint enance margin” , t rade

from as lit t le as $50!

Leverage

Leveraged financing is a common pract ice in Forex t rading, and allows t raders

t o use credit , such as a t rade purchased on margin, t o maximize ret urns Collat eral for t he loan/ leverage in t he margined account is provided by t he init ial deposit This can creat e t he opport unit y t o cont rol USD 100,000 for as lit t le as USD 1,000

There are five ways privat e invest ors can t rade in Forex, direct ly or indirect ly:

• The spot market

• Forwards and fut ures

• Opt ions

• Cont ract s for difference

• Spread bet t ing

Please not e t hat t his book focuses on t he most common way of t rading in t he Forex market , “ Day-Trading” (relat ed t o “ Spot ” ) Please refer t o t he glossary for explanat ions of each of t he five ways invest ors can t rade in Forex

A spot transaction

A spot t ransact ion is a st raight f orward exchange of one currency for anot her The spot rat e is t he current market price, which is also called t he “ benchmark price” Spot t ransact ions do not require immediat e set t lement , or payment

“ on t he spot ” The set t lement dat e, or “ value dat e” is t he second business day aft er t he “ deal dat e” (or “ t rade dat e” ) on which t he t ransact ion is agreed

by t he t rader and market maker The t wo-day period provides t ime t o confirm

t he agreement and t o arrange t he clearing and necessary debit ing and credit ing of bank account s in various int ernat ional locat ions

Risks

Alt hough Forex t rading can lead t o very profit able result s, t here are subst ant ial risks involved: exchange rat e risks, int erest rat e risks, credit risks and event risks

Approximat ely 80% of all currency t ransact ions last a period of seven days or less, wit h more t han 40% last ing fewer t han t wo days Given t he ext remely

short lifespan of t he t ypical t rade, t echnical indicat ors heavily influence ent ry, exit and order placement decisions

You don’ t need Brit ish pounds or Japanese yens t o t rade wit h t hem Use your

own account base currency at Easy-Forex™

[3] What is the global Forex market?

Today, t he Forex market is a nonst op cash market where currencies of nat ions are t raded, t ypically via brokers Foreign currencies are cont inually and simult aneously bought and sold across local and global market s The value of

t raders' invest ment s increases or decreases based on currency movement s Foreign exchange market condit ions can change at any t ime in response t o real-t ime event s

The main at t ract ions of short -t erm currency t rading t o privat e invest ors are:

• 24-hour t rading, 5 days a week wit h nonst op access (24/ 7) t o global Forex dealers

• An enormous liquid market , making it easy t o t rade most currencies

• Volat ile market s offering profit opport unit ies

• St andard inst rument s for cont rolling risk exposure

• The abilit y t o profit in rising as well as falling market s

• Leveraged t rading wit h low margin requirement s

• Many opt ions for zero commission t rading

A brief history of the Forex market

The following is an overview int o t he hist orical evolut ion of t he foreign exchange market and t he root s of t he int ernat ional currency t rading, from t he days of t he gold exchange, t hrough t he Bret t on-Woods Agreement , t o it s current manifest at ion

The Gold exchange period and the Bretton-Woods Agreement

The Bret t on-Woods Agreement , est ablished in 1944, fixed nat ional currencies against t he US dollar, and set t he dollar at a rat e of USD 35 per ounce of gold

In 1967, a Chicago bank refused t o make a loan in pound st erling t o a college professor by t he name of Milt on Friedman, because he had int ended t o use

t he funds t o short t he Brit ish currency The bank's refusal t o grant t he loan was due t o t he Bret t on-Woods Agreement

Bret t on-Woods was aimed at est ablishing int ernat ional monet ary st abilit y by prevent ing money from t aking flight across count ries, t hus curbing speculat ion

in foreign currencies Bet ween 1876 and World War I, t he gold exchange

st andard had ruled over t he int ernat ional economic syst em Under t he gold

st andard, currencies experienced an era of st abilit y because t hey were support ed by t he price of gold

However, t he gold st andard had a weakness in t hat it t ended t o creat e bust economies As an economy st rengt hened, it would import a great deal, running down t he gold reserves required t o support it s currency As a result ,

boom-t he money supply would diminish, inboom-t eresboom-t raboom-t es would escalaboom-t e and economic act ivit y would slow t o t he point of recession Ult imat ely, prices of commodit ies would hit rock bot t om, t hus appearing at t ract ive t o ot her nat ions, who would t hen sprint int o a buying frenzy In t urn, t his would inj ect

t he economy wit h gold unt il it increased it s money supply, t hus driving down int erest rat es and rest oring wealt h Such boom-bust pat t erns were common

t hroughout t he era of t he gold st andard, unt il World War I t emporarily discont inued t rade flows and t he free movement of gold

The Bret t on-Woods Agreement was founded aft er World War II, in order t o

st abilize and regulat e t he int ernat ional Forex market Part icipat ing count ries agreed t o t ry t o maint ain t he value of t heir currency wit hin a narrow margin against t he dollar and an equivalent rat e of gold The dollar gained a premium posit ion as a reference currency, reflect ing t he shif t in global economic dominance f rom Europe t o t he USA Count ries were prohibit ed f rom devaluing

t heir currencies t o benefit export market s, and were only allowed t o devalue

t heir currencies by less t han 10% Post -war const ruct ion during t he 1950s, however, required great volumes of Forex t rading as masses of capit al were needed This had a dest abilizing effect on t he exchange rat es est ablished in Bret t on-Woods

In 1971, t he agreement was scrapped when t he US dollar ceased t o be exchangeable for gold By 1973, t he forces of supply and demand were in cont rol of t he currencies of maj or indust rialized nat ions, and currency now moved more freely across borders Prices were float ed daily, wit h volumes, speed and price volat ilit y all increasing t hroughout t he 1970s New financial inst rument s, market deregulat ion and t rade liberalizat ion emerged, furt her

st oking growt h of Forex market s

The explosion of comput er t echnology t hat began in t he 1980s accelerat ed

t he pace by ext ending t he market cont inuum for cross-border capit al movement s t hrough Asian, European and American t ime zones Transact ions

in foreign exchange increased rapidly from nearly $70 billion a day in t he 1980s, t o more t han $2 t rillion a day t wo decades lat er

The explosion of the euro market

The rapid development of t he Eurodollar market , which can be defined as US dollars deposit ed in banks out side t he US, was a maj or mechanism for speeding up Forex t rading Similarly, Euro market s are t hose where currencies are deposit ed out side t heir count ry of origin The Eurodollar market came int o being in t he 1950s as a result of t he Soviet Union deposit ing US dollars earned from oil revenue out side t he US, in fear of having t hese asset s frozen

by US regulat ors This gave rise t o a vast offshore pool of dollars out side t he cont rol of US aut horit ies The US government react ed by imposing laws t o rest rict dollar lending t o foreigners Euro market s were part icularly at t ract ive because t hey had far fewer regulat ions and offered higher yields From t he lat e 1980s onwards, US companies began t o borrow offshore, finding Euro market s an advant ageous place for holding excess liquidit y, providing short -

t erm loans and financing import s and export s

London was and remains t he principal offshore market In t he 1980s, it became t he key cent er in t he Eurodollar market , when Brit ish banks began lending dollars as an alt ernat ive t o pounds in order t o maint ain t heir leading posit ion in global finance London's convenient geographical locat ion (operat ing during Asian and American market s) is also inst rument al in preserving it s dominance in t he Euro market

Euro-Dollar currency exchange

The euro t o US dollar exchange rat e is t he price at which t he world demand for US dollars equals t he world supply of euros Regardless of geographical origin, a rise in t he world demand for euros leads t o an appreciat ion of t he euro

Fact ors aff ect ing t he Euro t o US dollar exchange rat e

Four fact ors are ident ified as fundament al det erminant s of t he real euro t o US dollar exchange rat e:

• The int ernat ional real int erest rat e different ial bet ween t he Federal Reserve and European Cent ral Bank

• Relat ive prices in t he t raded and non-t raded goods sect ors

• The real oil price

• The relat ive fiscal posit ion of t he US and Euro zone

The nominal bilat eral US dollar t o euro exchange is t he exchange rat e t hat

at t ract s t he most at t ent ion Not wit hst anding t he comparat ive import ance of

bilat eral t rade links wit h t he US, t rade wit h t he UK is, t o some ext ent , more import ant for t he euro

The following chart illust rat es t he EUR/ USD exchange rat e over t ime, from

t he inaugurat ion of t he euro, unt il mid 2006 Not e t hat each line (t he EUR/ USD, USD/ EUR) is a “ mirror” image of t he ot her, since bot h are reciprocal t o one anot her This chart is illust rat es t he st eady (general) decline

of t he USD (in t erms of euro) from t he beginning of 2002 unt il t he end of

2004

In t he long run, t he correlat ion bet ween t he bilat eral US dollar t o euro exchange rat e, and different measures of t he eff ect ive exchange rat e of Euroland, has been rat her high, especially when one looks at t he effect ive real exchange rat e As inflat ion is at very similar levels in t he US and t he Euro area, t here is no need t o adj ust t he US dollar t o euro rat e f or inf lat ion different ials However, because t he Euro zone also t rades int ensively wit h count ries t hat have relat ively high inflat ion rat es (e.g some count ries in Cent ral and East ern Europe, Turkey, et c.), it is more import ant t o downplay nominal exchange rat e measures by looking at relat ive price and cost development s

The fall of the US dollar

The st eady and orderly decline of t he US dollar from early 2002 t o early 2004 against t he euro, Aust ralian dollar, Canadian dollar and a few ot her currencies (i.e it s t rade-weight ed average, which is what count s for purposes of t rade adj ust ment ), while significant , has st ill only amount ed t o about 20 percent There are t wo reasons why concerns about a free fall of t he US dollar may not

be wort h considering First ly, t he US ext ernal deficit will st ay high only if US growt h remains vigorous, and if t he US cont inues t o grow st rongly, it will also ret ain a st rong at t ract ion for foreign capit al which, in t urn, should support

t he US dollar Secondly, at t empt s by t he monet ary aut horit ies in Asia t o keep

t heir currencies weak will probably not work in t he long run

When was t he last t ime t he EUR-JPY pair was over 150.00?

(Have a look at Easy-Forex™ professional charts)

The basic theories underlying the US dollar to euro exchange rate

Law of One Price: In compet it ive market s, free of t ransport at ion cost barriers

t o t rade, ident ical product s sold in different count ries must sell at t he same price when t he prices are st at ed in t erms of t he same currency

Interest rate effects: If capit al is allowed t o f low f reely, exchange rat es

become st able at a point where equalit y of int erest is est ablished

The dual forces of supply and demand

These t wo reciprocal forces det ermine euro vs US dollar exchange rat es Various fact ors affect t hese t wo forces, which in t urn affect t he exchange rat es:

The business environment: Posit ive indicat ions (in t erms of government

policy, compet it ive advant ages, market size, et c.) increase t he demand for

t he currency, as more and more ent erprises want t o invest in it s place of origin

Stock market: The maj or st ock indices also have a correlat ion wit h t he

currency rat es, providing a daily read of t he mood of t he business environment

Political factors: All exchange rat es are suscept ible t o polit ical inst abilit y and

ant icipat ion about new government s For example, polit ical inst abilit y in Russia is also a flag for t he euro t o US dollar exchange, because of t he subst ant ial amount of German invest ment in Russia

Economic data: Economic dat a such as labor report s (payrolls, unemployment

rat e and average hourly earnings), consumer price indices (CPI), producer price indices (PPI), gross domest ic product (GDP), int ernat ional t rade, product ivit y, indust rial product ion, consumer confidence et c., also aff ect currency exchange rat es

Confidence in a currency is t he great est det erminant of t he real euro t o US dollar exchange rat e Decisions are made based on expect ed fut ure development s t hat may affect t he currency

Types of exchange rate systems

An exchange can operat e under one of four main t ypes of exchange rat e syst ems:

Fully fixed exchange rat es

In a fixed exchange rat e syst em, t he government (or t he cent ral bank act ing

on it s behalf) int ervenes in t he currency market in order t o keep t he exchange rat e close t o a fixed t arget It is commit t ed t o a single fixed exchange rat e and does not allow maj or fluct uat ions from t his cent ral rat e

Semi-fixed exchange rat es

Currency can move wit hin a permit t ed range, but t he exchange rat e is t he dominant t arget of economic policy-making Int erest rat es are set t o meet

t he t arget exchange rat e

Free float ing

The value of t he currency is det ermined solely by supply and demand in t he foreign exchange market Consequent ly, t rade flows and capit al flows are t he main fact ors affect ing t he exchange rat e

The definit ion of a f loat ing exchange rat e syst em is a monet ary syst em in which exchange rat es are allowed t o move due t o market forces wit hout int ervent ion by nat ional government s The Bank of England, for example, does not act ively int ervene in t he currency market s t o achieve a desired exchange rat e level

Wit h float ing exchange rat es, changes in market supply and demand cause a currency t o change in value Pure free float ing exchange rat es are rare - most

government s at one t ime or anot her seek t o “ manage” t he value of t heir currency t hrough changes in int erest rat es and ot her means of cont rols

Managed float ing exchange rat es

Most government s engage in managed float ing syst ems, if not part of a fixed exchange rat e syst em

The advant ages of fixed exchange rat es

Fixed rat es provide great er cert aint y for export ers and import ers and, under normal circumst ances, t here is less speculat ive act ivit y - t hough t his depends

on whet her dealers in foreign exchange market s regard a given f ixed exchange rat e as appropriat e and credible

The advant ages of float ing exchange rat es

Fluct uat ions in t he exchange rat e can provide an aut omat ic adj ust ment f or count ries wit h a large balance of payment s def icit A second key advant age of float ing exchange rat es is t hat it allows t he government / monet ary aut horit y flexibilit y in det ermining int erest rat es as t hey do not need t o be used t o influence t he exchange rat e

The EUR-USD has dropped? So what ! (you can profit in any direct ion it t akes, provided you chose t he winning direct ion…)

Who are the participants in today’s Forex market?

In general, there are two main groups in the Forex marketplace:

Hedgers account for less t han 5% of t he market , but are t he key reason

fut ures and ot her such financial inst rument s exist The group using t hese hedging t ools is primarily businesses and ot her organizat ions part icipat ing in int ernat ional t rade Their goal is t o diminish or neut ralize t he impact of currency fluct uat ions

Speculators account f or more t han 95% of t he market

This group includes privat e individuals and corporat ions, public ent it ies, banks, et c They part icipat e in t he Forex market in order t o creat e profit ,

t aking advant age of t he fluct uat ions of int erest rat es and exchange rat es

The act ivit y of t his group is responsible f or t he high liquidit y of t he Forex market They conduct t heir t rading by using leveraged invest ing, making it a financially efficient source for earning

Market making

Since most Forex deals are made by (individual and organizat ional) t raders, in conj unct ion wit h market makers, it ’ s import ant t o underst and t he role of t he market maker in t he Forex indust ry

Questions and answers about 'market making'

What is a market maker?

A market maker is t he count erpart t o t he client The Market Maker does not

operat e as an int ermediary or t rust ee A Market Maker performs t he hedging

of it s client s' posit ions according t o it s policy, which includes offset t ing various client s' posit ions, and hedging via liquidit y providers (banks) and it s equit y capit al, at it s discret ion

Who are the market makers in the Forex industry?

Banks, for example, or t rading plat forms (such as Easy-Forex™), who buy and sell financial inst rument s “ make t he market ” That is cont rary t o int ermediaries, which represent client s, basing t heir income on commission

Do market makers go against a client's position?

By definit ion, a market maker is t he count erpart t o all it s client s' posit ions, and always offers a t wo-sided quot e (t wo rat es: BUY and SELL) Therefore,

t here is not hing personal bet ween t he market maker and t he cust omer Generally, market makers regard all of t he posit ions of t heir client s as a whole They offset bet ween client s' opposit e posit ions, and hedge t heir net exposure according t o t heir risk management policies and t he guidelines of regulat ory aut horit ies

Do market makers and clients have a conflict of interest?

Market makers are not int ermediaries, port folio managers, or advisors, who represent cust omers (while earning commission) Inst ead, t hey buy and sell currencies t o t he cust omer, in t his case t he t rader By definit ion, t he market maker always provides a t wo-sided quot e (t he sell and t he buy price), and

t hus is indifferent in regards t o t he int ent ion of t he t rader Banks do t hat , as

do merchant s in t he market s, who bot h buy from, and sell t o, t heir

cust omers The relat ionship bet ween t he t rader (t he cust omer) and t he market maker (t he bank; t he t rading plat form; Easy-Forex™; et c.) is simply based on t he fundament al market forces of supply and demand

Can a market maker influence market prices against a client’s position?

Definit ely not , because t he Forex market is t he nearest t hing t o a “ perfect market ” (as defined by economic t heory) in which no single part icipant is powerful enough t o push prices in a specific direct ion This is t he biggest market in t he world t oday, wit h daily volumes reaching 3 t rillion dollars No market maker is in a posit ion t o effect ively manipulat e t he market

What is the main source of earnings for Forex market makers?

The maj or source of earnings for market makers is t he spread bet ween t he bid and t he ask prices Easy-Forex™ Trading Plat form, for inst ance, maint ains neut ralit y regarding t he direct ion of any or all deals made by it s t raders; it earns it s income from t he spread

How do market makers manage their exposure?

The way most market makers hedge t heir exposure is t o hedge in bulk They aggregat e all client posit ions and pass some, or all, of t heir net risk t o t heir liquidit y providers Easy-Forex™, for example, hedges it s exposure in t his fashion, in accordance wit h it s risk management policy and legal requirement s

For liquidit y, Easy-Forex™ works in cooperat ion wit h world's leading banks providing liquidit y t o t he Forex indust ry: UBS (Swit zerland) and RBS (Royal Bank of Scot land)

Easy-Forex™ guarant ees t he accuracy, securit y and int egrit y of all

t ransact ions Read more here

[4] Overview of trading Forex online

How a Forex system operates in real time

Online f oreign exchange t rading occurs in real t ime Exchange rat es are const ant ly changing, in int ervals of seconds Quot es are accurat e for t he t ime

t hey are displayed only At any moment , a different rat e may be quot ed When a t rader locks in a rat e and execut es a t ransact ion, t hat t ransact ion is immediat ely processed; t he t rade has been execut ed

Up-to-date exchange rates

As rat es change so rapidly, any Forex soft ware must display t he most up-t dat e rat es To accomplish t his, t he Forex soft ware is cont inuously communicat ing wit h a remot e server t hat provides t he most current exchange rat es The rat es quot ed, unlike t radit ional bank exchange rat es, are act ual

o-t radable rao-t es A o-t rader may choose o-t o “ lock in” o-t o a rao-t e (called o-t he “freeze rate”) only as long as it is displayed

Trading online on Forex platforms

The int ernet revolut ion caused a maj or change in t he way Forex t rading is conduct ed t hroughout t he world

Unt il t he advent of t he int ernet -Forex age at t he end of t he 1990’ s, Forex

t rading was conduct ed via phone orders (or fax, or in-person), post ed t o brokers or banks Most of t he t rading could be execut ed only during business hours The same was t rue for most act ivit ies relat ed t o Forex, such as making

t he deposit s necessary for t rading, not t o ment ion profit t aking The int ernet has radically alt ered t he Forex market , enabling around t he clock t rading and conveniences such as t he use of credit cards for fund deposit s

Forex on the internet: basic steps

In general, t he individual Forex t rader is required t o fulfill t wo st eps prior t o

t rading:

• Regist er at t he t rading plat f orm

• Deposit funds t o facilit at e t rading

Requirement s vary wit h each t rading plat f orm, but t hese st eps bear furt her discussion:

Regist ering

Regist rat ion is done online by t he individual t rader There are various forms used in t he indust ry Some are quit e simple, where ot hers are longer and more t ime-consuming In part , t his can be at t ribut ed t o government al or

ot her aut horit ies’ requirement s, t hough some Forex plat f orms require more informat ion t han is act ually needed Some even require a face-t o-face meet ing, or t o obt ain hard copies of required document s such as a passport ,

or driver’ s license

The key requirement s for regist rat ion are t he t rader’ s full name, t elephone, e-mail address, residence, and somet imes also t he t rader’ s yearly income or capit al (equit y) and an ID number (passport / driver’ s license / SSN / et c.) Typically, t he Forex plat form is not required t o run a t horough check, but rely

on t he regist rant t o be t rut hful Nevert heless, each Forex plat form conduct s cert ain rout ines, in order t o check and verify t he aut hent icit y of t he det ails provided

Regist rant s are required t o declare t hat funds used for t rading are not in quest ion, and are not t he result of any criminal act or money laundering act ivit y This is mandat ory as part of a global ant i-money laundering effort

It is advised t hat t he reader becomes familiar wit h Ant i-Money Laundering

regulat ions, and t he procedures associat ed wit h t he prevent ion of t his

criminal act ivit y

Deposit ing funds

New regist rant s must deposit funds t o facilit at e t rading However, t he maj orit y of t he Forex plat forms t oday require t hat , in addit ion t o funds used for act ual t rading, an addit ional amount be deposit ed Of t en called

“ maint enance margin” or “ act ivit y collat eral” , it s purpose is f or t he plat form

t o have an addit ional guarant ee Some of t he plat forms t hat require an addit ional deposit do pay int erest on t he collat eral, which is “ f rozen” under

t he t rader’ s name

The Easy-Forex™ Trading Plat form does NOT require any addit ional guarant ee, and allows t rading wit h 100% of t he amount deposit ed Easy-Forex™ is able t o

provide t hese advant ages because it assures “ guarant eed rat es and St Loss” That means t hat t here will never be any addit ional requirement for funds as a result of a “ gap” t hat causes you t o surpass t he St op-Loss See “ 20 issues you must consider” (Chapt er 9) for more

t rading is borderless, and may be performed at any given t ime, it is obviously advant ageous t o have access t o t rading f rom as many locat ions as possible The Easy-Forex™ Trading Plat form is a fully web-based syst em, which means

t rading can be conduct ed from any comput er connect ed t o t he int ernet Traders are only required t o log-in, ensure t hey have available funds t o t rade,

or make new deposit s, and commence t rading

The Trading Platform: real-time software

The main feat ure of any Forex t rading plat f orm is real t ime access t o exchange rat es, t o deal and order making, t o deposit s and wit hdrawals, and

t o monit oring t he st at us of posit ions and one’ s account

The Easy-Forex™ Trading Plat form syst em uses web services t o cont inuously fet ch t he most current exchange rat es The most recent dat a displays wit hout

t he need f or a page refresh This includes account st at us screens such as “ My Posit ion” , which updat es cont inually t o reflect changes in rat es and ot her real

t ime element s

Easy-Forex™ guarant ees t he accuracy, securit y and int egrit y of all

t ransact ions Read more here

Transaction processing and storage

As soon as a t ransact ion is execut ed, t he relevant dat a is processed securely and sent t o t he dat a server where it is st ored A backup is creat ed on a different server farm, t o ensure dat a int egrit y and cont inuit y All of t his happens in real t ime, wit h no human int ervent ion

Trading via brokers and dealing rooms (by phone)

Performing Forex t rading via Dealing Room dealers (over t he phone) requires knowledge about t he way dealing rooms work, and t he t erminologies used in

t he course of t rading

At st art , t he client should specif y whet her he/ she is int erest ed in obt aining a QUOTE (in order t o make a deal) or j ust an INDICATION In t he case of an indicat ion, t he price given does not bind t he dealer, but rat her provides informat ion about market condit ions

When asking for QUOTE, t he t rader must specify t he currency pair and t he deal amount (volume) For example: “ Need a quot e for EUR/ USD in EUR100,000”

It is wise t o wit hhold f rom t he dealer t he int ended direct ion of t he deal, specifying t he pair only Accordingly, t he dealer t hen provides a quot e comprising t wo prices, buy and sell (“ bot h sides quot e” ) The quot e binds t he dealer for t he very second it is given If t he t rader does not immediat ely ask for execut ion, t hen t he price is no longer in force The dealer would t hen t ell

t he cust omer “ risk” , or “ change” , meaning – t he price quot ed is no longer in force In such case, t he t rader should ask f or a new price

On t he ot her hand, in order t o make a deal, t he t rader must proclaim “ buy”

or “ sell” , t oget her wit h t he currency (or t he price)

An example:

• The t rader asks for a quot e for EUR/ USD

• The dealer says “ 1.2010/ 15”

• If t he t rader want s t o buy EUR, he/ she says “ buy" (or "buy EURO” , or

Banks are closed at night s, weekends and holidays Trade, deposit and

wit hdraw at Easy-Forex™, 24x7

[5] Training for success

Underst anding t he nuances of t he Forex market requires experience and

t raining, but is crit ical t o success In fact , ongoing learning is as import ant t o

t he vet eran t rader as it is t o t he beginner The foreign currency market is massive, and t he key t o success is knowledge Through t raining, observat ion and pract ice, you can learn how t o ident ify and underst and where t he Forex market is going, and what cont rols t hat direct ion

To invest in t he right currencies at t he right t ime in a large, nonst op and global t rading arena, t here is much t o learn Forex market s move quickly and can t ake new direct ions from moment t o moment Forex t raining helps you assess when t o ent er a currency based on t he direct ion it is t aking, and how

t o forecast it s direct ion for t he near fut ure

Training with Easy-Forex™

Easy-Forex™ offers one of t he most effect ive forms of t raining t hrough

hands-on experience For as lit t le as USD 25 at risk per t rade, you can st art t rading while learning in real-t ime Easy-Forex™ st rongly recommends st art ing wit h very small volumes, and deposit ing an amount t o cover a series of t rades Learn t he basics of t he foreign exchange market , t rading t erminology, advanced t echnical analysis, and how t o develop successful t rading st rat egies Discover how t he Forex market offers more opport unit ies for quick financial gains t han almost any ot her market

To learn more about t he t rading advant ages of Easy-Forex™, j oin Easy-Forex™

(regist rat ion is quick and free, no obligat ion)

The many available resources and tools to train yourself

There are many free t ools and resources available in t he market , part icularly online Among t hese, you will find:

or polit ical) Make an effort t o det ermine t he general magnit ude of each change on t he chart (meaning: what is t he $ value of t he change, if you were

t rading at t hat point )

Guided t ours

Most plat f orms provide guided t ours, demos or t ut orials, eit her online or via download

News / breaking news

Keep abreast of world news Read all t he headlines, part icularly t hose direct ly relat ed t o Forex Check t he impact of such news, if any, on t he chart s

Forex out looks

Read daily/ weekly out looks post ed on Forex or general financial sit es Many include alert s t o upcoming report s and event s such as market indicat ors and int erest rat e decisions

To read t oday’ s professional out look and view det ailed chart s, j oin

Easy-Forex™ (regist rat ion is quick and free, no obligat ion):

Follow t he indices of t he leading market s (e.g Dow-Jones, NASDAQ; Nikkei;

et c.) Compare t hem t o t he changes in t he Forex market , as well as t o changes in part icular currency pairs

Economic indicat ors

Pay at t ent ion t o t he release of economic indicat ors (for example – t he mont hly unemployment rat e in t he USA), and t ry t o ident ify t heir impact on

t he market in general, and on specific currency pairs in part icular

Seminars and courses

Try t o at t end professional Forex seminars Some seminars are offered free, oft en as part of a client recruit ment process by a given plat form; many are, nevert heless, wort h at t ending Educat ional courses are offered online and by many post -secondary inst it ut ions

Forex books

Read, or even j ust browse Many books are offered free, or as part of a service package t o t he t rader For many, hist orical background and t echnical analysis are t opics bet t er covered in books t han in an educat ional set t ing Int ernet forums / blogs

Visit and part icipat e in Forex forums This gives you an opport unit y t o learn from t he experience of ot hers Of course, remember t hat some forum part icipant s may be biased, promot ing a given Forex plat form or t heir own agenda

No commissions? How about profit wit hdrawal fees?

(No hidden cost s at Easy-Forex™ Join and t rade wit hout banking cost s or ot her indirect cost s Read more: www.Easy-Forex.com/ - Spreads and Commissions)

So much to consider…

To succeed as a Forex t rader, you must t ake int o considerat ion a wide variet y

of fact ors such as:

• spread (“ pips” );

• commissions and fees;

• ease of access t o t he t rading plat form;

• minimum amount s needed for t rading;

• addit ional amount s needed (if any);

• cont rol over act ivit y and posit ions;

• t he plat form soft ware requirement s;

• ease of deposit s and wit hdrawals;

• personal service and support provided by t he plat form;

• t he plat form’ s business part ners;

• t he plat form’ s management , offices and out reach;

• t he product s offered onboard t he plat form; and many ot hers

Online training, no downloads

Easy-Forex™ is dedicat ed t o educat ing it s cust omers Cust omers can access

FREE one-on-one online t raining The t raining goal is t o t each people specif ic

st rat egies for t rading currencies over t he int ernet Bot h novice invest ors and expert day t raders have benefit ed from t he t raining provided by Easy-Forex™

The “demo” account idea

Many Forex plat forms offer new regist rant s a “ demo” account A t ypical example would provide 10,000 “ demo” dollars t hat can be “ t raded” as a means of learning how t o succeed in Forex

Easy-Forex™ does not offer “ demo” account s Coming t o underst and t hat reason must rule over emot ion is t he most import ant lesson a t rader can learn, and it cannot be done wit h play money If t here is no consequence t o indulging in emot ional responses t o t he market , t here is no learning, so

“ demo” account s t end t o have lit t le educat ional value Rat her, Easy-Forex™ allows you t o st art t rading wit h j ust $50, including full access t o one-on-one

t raining New regist rant s are t hus able t o garner bot h an educat ional and experient ial benefit unavailable t hrough simulat ed sit uat ions

To get personal assist ance and free t raining,

Join Easy-Forex™ (regist rat ion is quick and free, no obligat ion)

[6] Technical Analysis :

Patterns and forecast methods used today

Basic Forex forecast methods:

Technical analysis and fundamental analysis

This chapt er and t he next one provide insight int o t he t wo maj or met hods of analysis used t o forecast t he behavior of t he Forex market Technical analysis and fundament al analysis differ great ly, but bot h can be usef ul forecast ing

t ools for t he Forex t rader They have t he same goal - t o predict a price or movement The t echnician st udies t he effect s, while t he fundament alist

st udies t he causes of market movement s Many successful t raders combine a mixt ure of bot h approaches for superior result s

If bot h Fundament al analysis and Technical analysis point t o t he same

direct ion, your chances for profit able t rading are bet t er

In this chapter…

The cat egories and approaches in Forex Technical Analysis all aim t o support

t he invest or in det ermining his/ her views and forecast s regarding t he exchange rat es of currency pairs This chapt er describes t he approaches, met hods and t ools used t o t his end However, t his chapt er does not int end t o provide a comprehensive and/ or professional level of knowledge and skill, but rat her let t he reader become familiar wit h t he t erms and t ools used by

t echnical analyst s

As t here are many ways t o cat egorize t he t ools available, t he descript ion of

t ools in t his chapt er may somet imes seem repet it ive The sect ions in t his chapt er are:

[6.1] Technical Analysis: background, advant ages, disadvant ages;

[6.2] Various t echniques and t erms;

[6.3] Chart s and diagrams;

[6.4] Technical Analysis cat egories / approaches:

a Price indicat ors;

b Number t heory;

c Waves;

d Gaps;

e Trends;

[6.5] Some ot her popular t ools

[6.6] Anot her way t o cat egorize Technical Indicat ors

[6.1] Technical analysis

Technical analysis is a met hod of predict ing price movement s and fut ure market t rends by st udying what has occurred in t he past using chart s Technical analysis is concerned wit h what has act ually happened in t he market , rat her t han what should happen, and t akes int o account t he price of inst rument s and t he volume of t rading, and creat es chart s from t hat dat a as a primary t ool One maj or advant age of t echnical analysis is t hat experienced analyst s can follow many market s and market inst rument s simult aneously Technical analysis is built on t hree essent ial principles:

1 Market action discounts everything! This means t hat t he act ual price is a

reflect ion of everyt hing t hat is known t o t he market t hat could affect it Some of t hese fact ors are: fundament als (inflat ion, int erest rat es, et c.), supply and demand, polit ical fact ors and market sent iment However, t he pure t echnical analyst is only concerned wit h price movement s, not wit h t he reasons for any changes

2 Prices move in trends Technical analysis is used t o ident ify pat t erns of

market behavior t hat have long been recognized as signif icant For many given pat t erns t here is a high probabilit y t hat t hey will produce t he expect ed result s There are also recognized pat t erns t hat repeat t hemselves on a consist ent basis

3 History repeats itself Forex chart pat t erns have been recognized and

cat egorized for over 100 years, and t he manner in which many pat t erns are repeat ed leads t o t he conclusion t hat human psychology changes lit t le over

t ime Since pat t erns have worked well in t he past , it is assumed t hat t hey will cont inue t o work well int o t he f ut ure

Disadvantages of Technical Analysis

• Some crit ics claim t hat t he Dow approach (“ prices are not random” ) is quit e weak, since t oday’ s prices do not necessarily proj ect fut ure prices;

• The crit ics claim t hat signals about t he changing of a t rend appear t oo lat e, oft en aft er t he change had already t aken place Therefore,

t raders who rely on t echnical analysis react t oo lat e, hence losing about 1/ 3 of t he fluct uat ions;

• Analysis made in short t ime int ervals may be exposed t o “ noise” , and may result in a misreading of market direct ions;

• The use of most pat t erns has been widely publicized in t he last several years Many t raders are quit e familiar wit h t hese pat t erns and of t en act

on t hem in concern This creat es a self-fulfilling prophecy, as waves of buying or selling are creat ed in response t o “ bullish” or “ bearish” pat t erns

Advantages of Technical Analysis

• Technical analysis can be used t o proj ect movement s of any asset (which is priced under demand/ supply forces) available for t rade in t he capit al market ;

• Technical analysis focuses on what is happening, as opposed t o what has previously happened, and is t herefore valid at any price level;

• The t echnical approach concent rat es on prices, which neut ralizes ext ernal fact ors Pure t echnical analysis is based on obj ect ive t ools (chart s, t ables) while disregarding emot ions and ot her fact ors;

• Signaling indicat ors somet imes point t o t he imminent end of a t rend, before it shows in t he act ual market Accordingly, t he t rader can maint ain profit or minimize losses

Be disciplined, don’ t be greedy

Close your Forex t he posit ion as you originally planned

[6.2] Various techniques and terms

Many different t echniques and indicat ors can be used t o follow and predict

t rends in market s The obj ect ive is t o predict t he maj or component s of t he

t rend: it s direct ion, it s level and t he t iming Some of t he most widely known include:

• Bollinger Bands - a range of price volat ilit y named aft er John Bollinger, who invent ed t hem in t he 1980s They evolved f rom t he concept of

t rading bands, and can be used t o measure t he relat ive height or dept h

of price A band is plot t ed t wo st andard deviat ions away from a simple moving average As st andard deviat ion is a measure of volat ilit y, Bollinger Bands adj ust t hemselves t o market condit ions When t he market s become more volat ile, t he bands widen (move furt her away from t he average), and during less volat ile periods, t he bands cont ract (move closer t o t he average)

Bollinger Bands are one of t he most popular t echnical analysis

t echniques The closer prices move t o t he upper band, t he more overbought is t he market , and t he closer prices move t o t he lower band, t he more oversold is t he market

• Support / Resist ance – The Support level is t he lowest price an

inst rument t rades at over a period of t ime The longer t he price st ays

at a part icular level, t he st ronger t he support at t hat level On t he chart t his is price level under t he market where buying int erest is sufficient ly st rong t o overcome selling pressure Some t raders believe

t hat t he st ronger t he support at a given level, t he less likely it will

break below t hat level in t he fut ure The Resistance level is a price at

which an inst rument or market can t rade, but which it cannot exceed, for a cert ain period of t ime On t he chart t his is a price level over t he market where selling pressure overcomes buying pressure, and a price advance is t urned back

• Support / Resist ance Breakout - when a price passes t hrough and st ays beyond an area of support or resist ance

CCI - Commodit y Channel Index - an oscillat or used t o help det ermine when an invest ment inst rument has been overbought and oversold The Commodit y Channel Index, f irst developed by Donald Lambert , quant ifies t he relat ionship bet ween t he asset 's price, a moving average (MA) of t he asset 's price, and normal deviat ions (D) from t hat average The CCI has seen subst ant ial growt h in popularit y amongst t echnical invest ors; t oday's t raders oft en use t he indicat or t o det ermine cyclical

t rends in equit ies and currencies as well as commodit ies

The CCI, when used in conj unct ion wit h ot her oscillat ors, can be a valuable t ool t o ident ify pot ent ial peaks and valleys in t he asset 's price, and t hus provide invest ors wit h reasonable evidence t o est imat e changes in t he direct ion of price movement of t he asset

• Hikkake Pat t ern – a met hod of ident ifying reversals and cont inuat ion

pat t erns Used for det ermining market t urning-point s and cont inuat ions (also known as t rending behavior) It is a simple pat t ern t hat can be viewed in market price dat a, using t radit ional bar chart s, or Japanese candlest ick chart s

• Moving averages - are used t o emphasize t he direct ion of a t rend and t o smoot h out price and volume fluct uat ions, or “ noise” , t hat can confuse int erpret at ion There are seven different t ypes of moving averages:

• simple (arit hmet ic)

• exponent ial

• t ime series

• weighed

• t riangular

• variable

• volume adj ust ed

The only significant difference bet ween t he various t ypes of moving averages is t he weight assigned t o t he most recent dat a For example,

a simple (arit hmet ic) moving average is calculat ed by adding t he closing price of t he inst rument for a number of t ime periods, t hen dividing t his t ot al by t he number of t ime periods

The most popular met hod of int erpret ing a moving average is t o compare t he relat ionship bet ween a moving average of t he inst rument ’ s closing price, and t he inst rument ’ s closing price it self

• Sell signal: when t he inst rument ’ s price f alls below it s moving average

• Buy signal: when t he inst rument ’ s price rises above it s moving average

The ot her t echnique is called t he double crossover, which uses short

-t erm and long t erm averages Typically, upward momen-t um is confirmed when a short -t erm average (e.g., 15-day) crosses above a longer-t erm average (e.g., 50-day) Downward moment um is confirmed when a short -t erm average crosses below a long-t erm average

indicat or, developed by Gerald Appel, used t o det ect swings in t he price of financial inst rument s The MACD is comput ed using t wo exponent ially smoot hed moving averages (see furt her down) of t he securit y's hist orical price, and is usually shown over a period of t ime on

a chart By t hen comparing t he MACD t o it s own moving average (usually called t he "signal line"), t raders believe t hey can det ect when

t he securit y is likely t o rise or fall MACD is frequent ly used in conj unct ion wit h ot her t echnical indicat ors such as t he RSI (Relat ive

St rengt h Index, see furt her down) and t he st ochast ic oscillat or (see furt her down)

• Moment um – is an oscillat or designed t o measure t he rat e of price change, not t he act ual price level This oscillat or consist s of t he net difference bet ween t he current closing price and t he oldest closing price from a predet ermined period

The formula for calculat ing t he moment um (M) is:

M = CCP – OCP

Where: CCP – current cl osing price

OCP – ol d cl osing price

Momentum and rate of change (ROC) are simple indicat ors showing

t he difference bet ween t oday's closing price and t he close N days ago

"Moment um" is simply t he difference, and t he ROC is a rat io expressed

in percent age They refer in general t o prices cont inuing t o t rend The moment um and ROC indicat ors show t hat by remaining posit ive, while

an upt rend is sust ained, or negat ive, while a downt rend is sust ained

A crossing up t hrough zero may be used as a signal t o buy, or a crossing down t hrough zero as a signal t o sell How high (or how low, when negat ive) t he indicat ors get shows how st rong t he t rend is

• RSI - Relat ive St rengt h Index - a t echnical moment um indicat or, devised by Welles Wilder, measures t he relat ive changes bet ween t he higher and lower closing prices RSI compares t he magnit ude of recent gains t o recent losses in an at t empt t o det ermine overbought and oversold condit ions of an asset

The formula for calculat ing RSI is:

RSI = 100 – [100 / (1 + RS)]

Where: RS - average of N days up cl oses, divided by

average of N days down cl oses

N - predet ermined number of days

The RSI ranges from 0 t o 100 An asset is deemed t o be overbought once t he RSI approaches t he 70 level, meaning t hat it may be get t ing overvalued and is a good candidat e for a pullback Likewise, if t he RSI approaches 30, it is an indicat ion t hat t he asset may be get t ing oversold and t herefore likely t o become undervalued A t rader using RSI should be aware t hat large surges and drops in t he price of an asset

will affect t he RSI by creat ing false buy or sell signals The RSI is best used as a valuable complement t o ot her st ock-picking t ools

• St ochast ic oscillat or - A t echnical moment um indicat or t hat compares

an inst rument 's closing price t o it s price range over a given t ime period The oscillat or's sensit ivit y t o market movement s can be reduced by adj ust ing t he t ime period, or by t aking a moving average of t he result This indicat or is calculat ed wit h t he following formula:

%K = 100 * [(C – L14) / (H14 – L14)]

C= t he most recent cl osing price;

L14= t he l ow of t he 14 previous t rading sessions;

H14= t he highest price t raded during t he same 14-day period.

The t heory behind t his indicat or, based on George Lane’ s observat ions,

is t hat in an upward-t rending market , prices t end t o close near t heir high, and during a downward-t rending market , prices t end t o close near t heir low Transact ion signals occur when t he %K crosses t hrough a

t hree-period moving average called t he “ %D”

• Trend line - a sloping line of support or resist ance

• Up t rend line – st raight line drawn upward t o t he right along successive react ion lows

• Down t rend line – st raight line drawn downwards t o t he right along successive rally peaks

Two point s are needed t o draw t he t rend line, and a t hird point t o make it valid t rend line Trend lines are used in many ways by t raders One way is t hat when price ret urns t o an exist ing principal t rend line’ it may be an opport unit y t o open new posit ions in t he direct ion of t he

t rend in t he belief t hat t he t rend line will hold and t he t rend will cont inue furt her A second way is t hat when price act ion breaks

t hrough t he principal t rend line of an exist ing t rend, it is evidence t hat

t he t rend may be going t o fail, and a t rader may consider t rading in t he opposit e direct ion t o t he exist ing t rend, or exit ing posit ions in t he direct ion of t he t rend

Don’ t fall in love wit h your Forex posit ion

Never t ake revenge of your Forex posit ion

[6.3] Charts and diagrams

Forex chart s are based on market act ion involving price Chart s are maj or

t ools in Forex t rading There are many kinds of chart s, each of which helps t o visually analyze market condit ions, assess and creat e forecast s, and ident ify behavior pat t erns

Most chart s present t he behavior of currency exchange rat es over t ime Rat es (prices) are measured on t he vert ical axis and t ime is shown of t he horizont al axis

Chart s are used by bot h t echnical and fundament al analyst s The t echnical analyst analyzes t he “ micro” movement s, t rying t o mat ch t he act ual occurrence wit h known pat t erns The fundament al analyst t ries t o find correlat ion bet ween t he t rend seen on t he chart and “ macro” event s occurring parallel t o t hat (polit ical and ot hers)

What is an appropriat e t ime scale t o use on a chart ?

It depends on t he t rader’ s st rat egy The short -range invest or would probably select a day chart (unit s of hours, minut es), where t he medium and long-range invest or would use t he weekly or mont hly chart s High resolut ion chart s (e.g – minut es and seconds) may show “ noise” , meaning t hat wit h fine det ails

in view, it is somet imes harder t o see t he overall t rend

The maj or t ypes of chart s:

scale, will show a

line connect ing all

t he act ual rat es

every 5 minut es)

This chart does not show what happened during t he t ime unit select ed

by t he viewer, only closing rat es f or such t ime int ervals The line chart

is a simple t ool for set t ing support and resist ance levels

• Point and figure chart s - chart s based on price wit hout t ime Unlike most ot her invest ment chart s, point and figure chart s do not present a linear represent at ion of t ime Inst ead, t hey show t rends in price

Increases are represent ed by a rising st ack of Xs, and decreases are represent ed by a declining st ack of Os This t ype of chart is used t o filt er out non-significant price movement s, and enables t he t rader t o easily det ermine crit ical support and resist ance levels Traders will place orders when t he price moves beyond ident ified support / resist ance levels

• Bar chart

This chart shows t hree

rat es for each t ime

unit select ed: t he high,

t he low, t he closing

(HLC) There are also

bar chart s including

four rat es (OHLC,

which includes t he

Opening rat e for t he

t ime int erval) This

chart provides clearly

visible informat ion

about t rading prices

range during t he t ime

period (per unit )

select ed

• Candlest ick chart

This kind of chart is based on an ancient Japanese met hod The chart represent s prices at t heir opening, high, low and closing rat es, in a form of candles, f or each t ime unit select ed

The empt y (t ransparent ) candles show increase, while t he dark (full) ones show decrease

The lengt h of t he body shows t he range bet ween opening and closing, while t he whole candle (including t op and bot t om wicks) show t he whole range of t rading prices for t he select ed t ime unit

Following is a candlest ick chart (USD/ JPY) wit h some explanat ions:

Pattern recognition in Candlestick charts

Pat t ern recognit ion is a field wit hin t he area of “ machine learning”

Alt ernat ively, it can be defined as “ t he act of t aking in raw dat a and t aking an act ion based on t he cat egory of t he dat a” As such, it is a collect ion of met hods for “ supervised learning”

A complet e pat t ern recognit ion syst em consist s of a sensor t hat gat hers t he observat ions t o be classified or described; a feat ure ext ract ion mechanism

t hat comput es numeric or symbolic informat ion from t he observat ions; and a classificat ion or descript ion scheme t hat does t he act ual j ob of classifying or describing observat ions, relying on t he ext ract ed feat ures

In general, t he market uses t he f ollowing pat t erns in candlest ick chart s:

• Bullish patterns: hammer, invert ed hammer, engulfing, harami, harami

cross, doj i st ar, piercing line, morning st ar, morning doj i st ar

• Bearish patterns: shoot ing st ar , hanging man, engulfing, harami,

harami cross, doj i st ar, dark cloud cover, evening st ar, evening doj i

st ar

Chart system available at Easy-Forex™ Trading Platform

The Easy-Forex™ Trading Plat form offers t he following chart ing t ools, for bot h professional and beginner t raders

The chart t ypes:

The t ime scales:

The view t ypes: