FREE FOREX

TRADING MANUAL

Fundamentals
Technical Analysis
Money Management

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INTRODUCTION TO CURRENCY TRADING

What is FOREX?

The Foreign Exchange market, also referred to as the "FOREX" or "Forex" or "Retail forex"
or “FX” or "Spot FX" or just "Spot" is the largest financial market in the world, with a volume
of about £5 trillion a day. If you compare that to the £30 billion a day volume that the London
and New York Share Exchange trades, you can easily see how enormous the Foreign
Exchange really is. It actually equates to more than three times the total amount of the
shares and futures markets combined!

What is traded on the Foreign Exchange?

The simple answer is money. Forex trading is the simultaneous buying of one currency and
the selling of another. Currencies are traded through a broker or dealer, and are traded in
pairs; for example the Euro dollar and the US dollar (EUR/USD) or the British pound and the
Japanese Yen (GBP/JPY).

Because you're are not buying anything physical, this kind of trading can be confusing.
Think of buying a currency as buying a share in a particular country. When you buy, say,
Japanese Yen, you are in effect buying a share in the Japanese economy, as the price of the
currency is a direct reflection of what the market thinks about the current and future health
of the Japanese economy.

In general, the exchange rate of a currency versus other currencies is a reflection of the
condition of that country's economy, compared to the other countries' economies.

Unlike other financial markets like the London Stock Exchange, the Forex spot market has
neither a physical location nor a central exchange. The Forex market is considered an Over-
the-Counter (OTC) or 'Interbank' market, due to the fact that the entire market is run
electronically, within a network of banks, continuously over a 24-hour period.

Until the late 1990’s, only the “big boys” could play this game. The initial requirement was
that you could trade only if you had about ten to fifty million pounds to start with! Forex was
originally intended to be used by bankers and large institutions - and not by us “little guys
and girls”.

However, because of the rise of the Internet, online Forex trading firms are now able to offer
trading accounts to 'retail' traders like us.

All you need to get started is a computer, a high-speed Internet connection, and your
broker!

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What is the ‘Spot’ FX Market?

A FX spot market is any market that deals in the current price of a currency. It is a cash
market.

All trades are ‘settled’ within 2 working days. Retail traders settle their trades immediately.

Which Currencies Are Traded?

The most popular currencies along with their symbols are shown below:

Symbol Country Currency Nickname

USD United States Dollar Buck
EUR Euro members Euro Fiber
JPY Japan Yen Yen
GBP Great Britain Pound Cable
CHF Switzerland Franc Swissy
CAD Canada Dollar Loonie
AUD Australia Dollar Aussie
NZD New Zealand Dollar Kiwi

Forex currency symbols are always three letters, where the first two letters identify the name
of the country and the third letter identifies the name of that country’s currency. USD is US
dollars, GB pounds etc.

When Can Currencies Be Traded?

The spot FX market is unique within the world markets. It’s like a Super Money Market which
is open 24-hours a day. At any time, somewhere around the world a financial center is open
for business, and banks and other institutions exchange currencies every hour of the day
and night with generally only minor gaps on the weekend.

The foreign exchange markets follow the sun around the world, so you can trade late at
night or early in the morning. It can be traded on full or part time basis.

The chart below shows global foreign exchange activity. The Dollar is the most traded
currency, being on one side of 89% of all transactions. The Euro’s share is second at 37%,
while that of the Yen is at 20%.

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E. THE BEST BUSINESS IN THE WORLD ?

I believe that FX is one of the most lucrative business opportunities in the world because; it
has:

• No premisies
• No employees
• No stock
• No customers/clients
• No Tax / VAT payments (via UK Spreadbetting Platforms)
• No accounting requirements to the Tax man
• 100% Cash Liquidty = No bad debts
• Powerful financial leverage
• Low monthly operating costs (PC & broadband)
• Worldwide 24-hour trading opportunities

How do I make money from this?

In the FX market, you buy or sell currencies. Placing a trade in the foreign exchange market
is simple. The object of Forex trading is to exchange one currency for another in the
expectation that the price will change, so that the currency you bought will increase in value
compared to the one you sold.

Bid/Ask Spread

All Forex quotes include a two-way price, the Bid and Ask.

The bid is the price in which the dealer is willing to buy the base currency in exchange for
the quote currency. This means the Bid is the price at which you (as the trader) will Sell.

The Ask is the price at which the dealer will sell the base currency in exchange for the quote
currency. This means the Ask is the price at which you will Buy.

The difference between the bid and the ask price is popularly known as the spread.

Let's take a look at an example of a price quote taken from a trading platform:

On this GBP/USD quote, the bid price is 1.7445 and the ask price is
1.7449. Look at how this broker makes it so easy for you to trade
away your money.

If you want to sell GBP, you click "Sell" and you will sell pounds at
1.7445. If you want to buy GBP, you click "Buy" and you will buy
pounds at 1.7449.

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Bid and Ask is easy to easy to remember - The bid is always lower than the ask price.

How to Read an FX Quote

Currencies are always quoted in pairs, such as GBP/USD or USD/JPY. The reason they are
quoted in pairs is because in every foreign exchange transaction you are simultaneously
buying one currency and selling another. Here is an example of a foreign exchange rate for
the British pound versus the U.S. dollar:

GBP USD = 1.7500

The first listed currency to the left is known as the base currency (in this example, the British
pound), while the second one on the right is called the counter or quote currency (in this
example, the U.S. dollar).

When buying, the exchange rate tells you how much you have to pay in units of the quote
currency to buy one unit of the base currency.

In the example above, you have to pay 1.7500 U.S. dollar to buy 1 British pound.

When selling, the exchange rate tells you how many units of the quote currency you get for
selling one of the base currency. In the example above, you will receive 1.7500 U.S. dollars
when you sell 1 British pound.

You would buy the pair if you believe the base currency will appreciate (go up) and you
would sell the pair if you think the base currency will depreciate (go down). It is as simple as
that.

I don't have enough money to buy £100,000 euros. Can I still trade?

You can with margin trading! This is how you're able to open £10,000 or £100,000 positions
with as little as £50 or £1,000. You can conduct relatively large transactions, very quickly
and cheaply, with a small amount of initial capital.

Spread Bet Trading has made it very simple. Typically, the maragin is 1: 100 so you need to
deposit just £1 to control £100 of Forex Ex. £1,000 deposit would control £100,000. This is
leverage.

A small investor like yourself can trade large amounts of

money using leverage. Think of your broker as a bank who
basically fronts you £100,000 to buy currencies and all he
asks from you is that you give him £1,000 as a good faith
deposit, which he will hold you for but not necessarily keep.
Sounds too good to be true? Well this is how forex trading
using leverage works.

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The amount of leverage you use will depend on your broker and what you feel comfortable
with. The broker will also specify how much they require per position (margin) traded.

Typically, the broker will require a minimum account size, also known as account margin or
initial margin. Once you have deposited your money you will then be able to trade.

Why Trade Foreign Currencies?

There are many benefits and advantages to trading Forex. Here are just a few reasons why
so many people are choosing this market:

• No commissions. No clearing fees, no exchange fees, no government fees, no

brokerage fees. Brokers are compensated for their services through something called
the bid-ask spread.
• No middlemen. Spot currency trading eliminates the middlemen and allows you to
trade directly with the market responsible for the pricing on a particular currency pair.
• No fixed trade sizes. In the futures markets, lot or contract sizes are determined by
the exchanges. A standard-size contract for silver futures is 5000 ounces. In spot
Forex, you determine your own trade size. This allows traders to participate with
accounts as small as £500
• Low transaction costs. The retail transaction cost (the bid/ask spread) is typically less
than 0.1 percent under normal market conditions. At larger dealers, the spread could
be as low as .07 percent. Of course, this depends on your leverage and all will be
explained later.
• A 24-hour market. There is no waiting for the opening bell - from Sunday evening to
Friday evening, the Forex market never sleeps. This is great for those who want to
trade on a part-time basis, because you can choose when you want to trade--
morning, noon or night.
• No one can corner the market. The foreign exchange market is so huge and has so
many participants that no single entity (not even a central bank) can control the
market price for an extended period of time.
• Leverage. In Forex trading, a small margin deposit can control a much larger total
contract value. Leverage gives the trader the ability to make nice profits, and at the
same time keep risk capital to a minimum. For example, Forex brokers offer 200 to 1
leverage, which means that a £50 margin deposit would enable a trader to buy or sell
£10,000 worth of currencies. Similarly, with £500, one could trade with £100,000 and
so on. But leverage is a double-edged sword. Without proper risk management, this
high degree of leverage can lead to large losses as well as gains.
• High Liquidity. Because the Forex Market is so enormous, it is also extremely liquid.
This means that under normal market conditions, with a click of a mouse you can
instantaneously buy and sell at will. You are never "stuck" in a trade. You can even
set your online trading platform to automatically close your position at your desired
profit level (a limit order), and/or close a trade if a trade is going against you (a stop
loss order).

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• Free “Demo” Accounts, News, Charts, and Analysis. Most online Forex brokers offer
'demo' accounts to practice trading, along with breaking Forex news and charting
services. All free! These are very valuable resources for “new” traders who would like
to hone their trading skills with 'play' money before opening a live trading account
and risking real money.
• Spread Bet Trading: You would think that getting started as a currency trader would
cost a ton of money. The fact is, compared to trading shares, options or futures, it
doesn't. Online Forex brokers offer "mini" and “micro” trading accounts, some with a
minimum account deposit of £250 or less.

F. THE DEEP SECRETS ARE REALLY VERY SHALLOW

There are 3 keys “understandings” that once understood will put you into a very small and
selective group of successful traders. They are;

1. Trading is simply a skill

2. The banks are ‘stealing’ your money

3. Its all about ‘Pain and Pleasure’

1. Trading is simply a skill

Forex trading is a science that can be understood. You do not have to be a super human to
get great results in trading Forex. The reality is that trading is just a skill and a skill can be
learnt!

Once it is learnt then you will know how to do it and when to apply it correctly and
consistently.

Desire, patience and practice are the ingredients to acquiring and developing this skill.

The One Skill That You Absolutely Need is… Market Sentiment Analysis.

This will allow you to understand the Forex environment and how it is traded across the
world.

99% of the time, traders just use technical analysis and don’t understand market sentiment,
therefore they fail. Technical analysis is great, but it must be used with knowing the current

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market sentiment. Once you begin to understand this you will see technical analysis from a
whole different light and trading will become simpler.

2. The banks are stealing your money

The banks have been trading for years and years. They are very, very profitable. They know
the formula that works, and they apply that formula over and over. But that’s not what
people understand or what new traders are being taught.

Most traders believe that you have to be competitive and trade against others in the market.

With over 80% of the market being made up of the big banks, hedge funds etc, they are
trying to beat the ‘big boys’! It is critical that you understand “what you are up against”
when it comes to trying to ‘out trade’ the banks, hedge funds and market makers, because

“They know what you don’t and they know that you don’t know”

If you can understand how the “big boys” trade then you can understand their trading
sentiment and can therefore, ‘piggy back’ onto their trades and share in their profit taking!

Literally, They are the ‘financial whales’ and we are the ‘small fish’…. The fish need to swim
behind the whales… simply follow their lead and swim with them in their direction!

Remember, trading is a skill and if you can also understand the FX arena sentiment then you
are playing with them. This will give you the power to completely transform your life.
Learning to read Market Sentiment means:

• You don’t have to have a Master’s degree in economics

• You don’t have to have a Master’s degree in technical analysis
• You don’t have to have worked for a bank for 20 years to trade successfully
• You don’t have to have huge capital reserves to trade successfully

But you do need to have the desire, patience and willingness to develop a new skill. Once
this is done then you will have the ability to;

• ‘capture’ 50-500’ pips regularly

• ‘bank’ long term profits. You will know what to look for in order to ‘spot’ good trades

“Swimming with the whales means you can stand on the shoulders of giants”

This is the key understanding in my trading career that has made everything else pale in
comparison. Simply put, you don’t need to re-invent the wheel.

Trading is no different. It’s been around for a long time, and lots of really smart people have
spent a lot of time testing, tweaking and perfecting their trading. If you want your trading to
work, don’t try to make it happen from scratch…look at what has worked in the past. Use

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that as a starting point and a model for your trading…and you will be on your way to trading
profitably.

80% of the profits made in this market are made only 20% of the time!

Why is it that so many traders think they have to trade all of the time?

When they do this the “Big Boys” love to ‘steal’ the small traders’ money.

And they do this when the market is in the range. The fact is it is in the range 80% of the
time. This is easy for the banks to do because they all do the same thing at the same time.
Trading in the range means that the market stays within a tight price range for a given period
of time without any major longer-term runs. For example, if the euro trades between 1.2400
and 1.2700 for 2 months it would be in the range. Contrary to popular belief among some FX
traders, this is not when the most money is made.

The money is made when due to key fundamental changes the market breaks out of this
range. When it does this, you will see 400-1000 pip moves in a very short period of time.
This is the kind of analysis the banks and other big traders use.

This is where the big money is without a doubt. Most traders never make it to this level
because they got all of their money ‘stolen’ from them by the banks when the market was in
the range.

Therefore, they have no trading capital left to ‘load the trade’ when a big move occurs.

3. Its all about Pain and Pleasure

Back to basics

To understand how Forex trading works we need to identify the basics of trading;

• The market is made up of people – they drive the markets up or down

• People have financial goals and targets

• These financials goals and targets have emotions attached to them

o The profit target has a pleasure emotion (wish to achieve it) = GREED

o The loss target has a pain emotion (wish to avoid it) = FEAR

Therefore, the Forex market is driven primarily by greed and fear. These cause emotional
trading responses which ultimately lead to failure for the vast majority of traders.

The following example shows the ‘emotional dynamics’ of the Forex market.

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On every trade there are two sets of people - those that want the price to go up and those
that want it to go down. Each set of people will have their profit targets (pleasure area) AND
they will each have their own ‘Stop Losses’ (Pain Area)’. This is shown in the chart below.

Sellers ‘FEAR’ AREA

Buyers ‘FEAR’ AREA

The fear area is the area where the traders put their automatic ‘get me out of this trade, I
have got it wrong and I am losing money’ orders, with their brokers. It makes absolute
sense to put these orders with brokers to protect yourself from huge losses, if you get it
wrong.

However, the ‘big players’ know your psychology, they know these ‘pain areas’ and as you
can see from the chart they simply took the price up to ‘take out the sell orders and then
they immediately took the price down to take out the buy orders… nice, easy and simple
profits for them!

The lesson is simple. Trade against them and you will fail, but trade with them, with their
knowledge and tactics and it is so much easier and more profitable.

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G. FX KEY FEATURES

There are 3 key features that make FX highly lucrative;

1. POWERFUL CONTINUING TRENDS

2. REGULAR HIGH TIMES OF HIGH VOLUME
3. CLEAR EARLY WARNING OF DANGEROUS TRADING TIMES

The best tactics for ‘sustainable’ FX profitability are:

1. FOCUS on the most powerful TRENDING currency pair

2. AVOID ‘NEWS IMPACT’ ON MARKETS
3. MUTLI TIME FRAME CONFIRMATION for every trade
4. CLEAR AUTOMATED TARGETS……. Unemotional automated trading
5. EARLY BREAK EVEN AND BANKING OF PROFITS – Free Trading Concept
6. RIDE EACH TREND…. Average candle colour changes over time
7. SIMPLE TRADING HABITS.... Systemised daily times, routines and actions

Our trading system has been designed and tested to allow you to access the powerful features of FX Trading
using the best tactics for success….

1. Powerful Trends
The Daily Chart opposite shows the Main Trend for the
GBPUSD for a 3-month trend move. It is what the big
banks, Hedge Fund Managers and Professional Traders
are looking at and trading every day…. This allows us to
see which ‘currency’ they are focusing on, because in the
huge FX market only they have the financial power to
create such huge candles and big trends.

The lines are ‘all lined up’ and spread out... i.e. Trending…
This shows us very clearly that the Trend is upwards.

When the price comes back and hits the gold line. it will
bounce off it. we would enter a trade in the direction of the
trend using the ATR indicator figure, as shown at the
bottom of the chart as our safety stop loss.

The ATR (Average True Range) indicator shows us that the

daily figure right now is 119 pips. We would use this figure
(by dividing it in half) as our stop loss figure when entering
a trade. Each night we would pull our stop up by the new
ATR number. Thus, we are able to ‘lock in’ profits each
day and be in a free trade in the first day or so….

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2. Regular Times of High Trading Volumes

The FX market seems to be chaotic and disorganised, as there is no real single FX exchange or market and it
is spread out across the world. However, there is a very real sense of order and process. The following data
will help you to understand its key characteristics.

The market opens at Sunday night GMT 10pm and closes Friday night GMT 10pm.

There are three main trading centres:

Asia – Tokyo Trading Centre

Europe – London Trading Centre
US - New York Trading Centre

The key trading times are shown in the table opposite. Trading passes
through each Centre. Thus, the best time to trade is when 2 or more
centres are open at the same time. They are

First - GMT 6-8am : London and Tokyo

Second - GMT 1-4 pm : London and New York
Third - GMT 10-12 pm : New York and Tokyo

The average price movement for the top four FX Majors is shown in
the table opposite.

USD CHF - Highly Volatile

GBP USD - Highly Volatile

The London session is the most volatile (high volume) with two key
trading times – when London opens and when New York opens.

During the week, it can be seen that the FX market takes time to
move. It starts off slowly on Sunday and it has its best days of trading
on Tuesday and Wednesday.

Sundays and Fridays are ‘slow days’ as people are not at work or are
taking extended early weekend breaks. The key is to understand that
FX is conducted by people. Therefore, their patterns of behaviour will
directly impact the markets.

The best Currencies to trade are GBP USD and/or USD CHF During
high volume trading times - London Open (GMT 6am-8am) and New
York Open (GMT 1pm- 4pm). Day trades should be placed at a low
volume time, which is GMT 10pm.

The best trading days are Tuesday and Wednesday with Mondays and Thursdays being acceptable. It is
important to ensure that you build your personal timetable to allow you to trade at these times.

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3. Clear Warning of Dangerous Trading Times

The currency rate of each country is effectively an indication of its economic power and performance.
Therefore, we are effectively trading the changes of economic performance and power of a country related to
another country. Throughout the trading day, many economic reports and speeches are made in the key
industrial countries which can and do affect the currency rates.

This can make the market very erratic and emotional. This is a very dangerous time to trade. The big market
players do trade the news releases. But with such powerful, dramatic moves, only the big players can play it
successfully, because they get the news within seconds of its release and are able to directly buy/sell in the
market. We can not trade it that quickly. So, the risks for the small player are great. We can purchase fast
professional subscriptions for news releases, but they cost about £2,500 to 3,000 per month and we then need
direct trading access, via direct accounts. these start at a minimum balance of £50,000 to £100,000!

This is very high-risk style of trading I strongly recommend not trading in this manner.

The only ‘safe’ way to deal with it is to stay out of the markets on news releases.

Every country produces its own reports and releases these throughout the month. The key economic releases
are UK and US. The US are the most powerful and our news chart will warn you when the next one is due. It
will count down the minutes to it, so you can ensure you are not trading as it is released.

US Traded Releases UK Traded Releases

Employment ‘Non-Farm Payroll’ Consumer Price Index

Consumer Price Index Gross Domestic Product
Durable Goods Retail Sales
Gross Domestic Product Trade Balance
Personal Income and Consumption Balance of Payments
Retail Sales
International Trade
Current account

H. KEY MARKET INSIGHTS

1. Forex Trading is not a Get-Rich-Quick Scheme!

Forex trading is a SKILL; there are NO shortcuts to Forex trading. Skilled traders can and do
make money in this field. Some of them enormous amounts of money, most do not bother to
learn and master the skill of trading and hence fail and lose money.

An exciting career in the ‘worlds’ most profitable money market is possible if you want it.
Forex trading isn’t a piece of cake and like any other occupation or career, success doesn’t
just happen overnight... (As some people would like you to believe)

You can be a winner (and a big winner) at FX currency trading, but as in all other aspects of
life, it will take dedication, learning, and discipline.

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A Skill for Life

Even though technology has enabled me to create a very powerful set of trading resources,
it all comes back down to the individual and building their skill. My Human Resources and
Forex experience combined with my professional coaching background will ensure that I will
be able to help you ‘learn and develop’ the skills necessary for successful trading. Once
learnt, you can ‘utilise’ these skills for them for the rest of your life.

Risk Free Learning - Start your trading in a demo account

You can open a demo account for free with most Forex brokers. This account has the full
capabilities of a "real" account.

Why is it free? It’s because the broker wants you to learn the ins and outs of their trading
platform, and have a good time trading without risk, so you’ll fall in love with them and
deposit real money. The demo account allows you to learn about the Forex markets and test
your trading skills with ZERO risk. YOU SHOULD DEMO TRADE FOR AT LEAST 1 MONTH BEFORE YOU
ARE USING REAL MONEY.

2. Basic Market Terminology: Bid, Ask and Spread

All Forex quotes include a two-way price, the bid and ask. The bid is the price in which the
dealer is willing to buy the base currency in exchange for the quote currency. This means
the bid is the price at which you (as the trader) will sell. The ask is the price at which the
dealer will sell the base currency in exchange for the quote currency. This means the ask is
the price at which you will buy.

The difference between the bid and the ask price is popularly known as the spread.

On this GBP/USD quote, the bid price is 1.7445 and the ask price is 1.7449. Look at
how this broker makes it so easy for you to trade away your money.
If you want to sell GBP, you click "Sell" and you will sell pounds at 1.7445. If you want
to buy GBP, you click "Buy" and you will buy pounds at 1.7449.

Bid and Ask is easy to easy to remember - The bid is always lower than the ask price.

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I. The Winning Mind-set - Maximum Preparation allows minimum Perspiration

“The hard work in FX is done before the trade, then when you enter your just a passenger!”

• So many traders try and find the very bottom or the very top of the market to get the best
trades. This is not necessary and is usually driven by greed. Simply, wait for the market to
choose a direction and then look for a valid entry in that direction using your preferred trading
style, as described in the previous section.
• Be prepared to lose- it is part of trading. If you carry your losses into the next trade you win
dwindle your account away. You must take responsibility for your losses and realize that it's
not the broker's fault or the markets fault. The market holds no prejudices; it doesn't care
about your nationality, ethnicity, financial situation, it will give you money or take your money
either way.
• Know what you will do. Be prepared to act by immediately by closing losing trades and letting
winning trades run on. Don't get married to a trade either. Realise the market has no
boundaries and the direction you are trading may be wrong – if you have got your analysis
wrong. When you close a loss, you are protecting your previous profits and that is why you
should happily ‘accept/embrace’ your profits as well as your losses. If you can learn to
control your losses the wins will take care of themselves.
• You must have a set of rules or guidelines when trading. You must follow the rules at all
times. Greed will keep an individual from taking profit at his pre-determined level in hope for
more and fear will keep him from closing a trade at a loss at the predetermined stop level. A
trader must plan his trade and trade his plan.
• To be a good trader you must conquer your emotions, build a strong self image, stick to a
trading plan, embrace your mistakes, learn to relax. This is the foundation for a winning
mindset

The Traders ‘Daily Focus’

1. Trading for a Living: ‘A dollar a day’

If a trader is ‘trading for a living’ then effectively their normal ‘job wage/salary’ needs to be ‘replaced’
by their trading profits. The ‘dollar a day’ refers to the amount of profit required to earn their daily
wage.

Typically, US professional traders use ‘a dollar a day’ as the expression because they want just $1-
dollar profit on the 1000 units they trade to give them £1000 dollars daily profit (wage/salary). Every
trader must know what they need to earn each day, and this is the top priority for each trading day.

2. Trading Objective: “All I need is a free trade”

The basic cost of a FX trade is the 2-5 pips spread. This is the ‘winning’ post for professional traders.
Professionals have simple priorities:

- to protect their capital. They know that the market is and will be always paying out winning
trades everyday, so protecting their capital is their first priority.
- ‘lock in profits’. If there is always a winner and loser on each trade, then if you get to break
even (the 2-5 pip spread) and move your Stop Loss to it as soon as you can then you have
put yourself into a “no lose situation”.

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You have protected your capital with your stop loss and now you are simply waiting for the
market to reach your profit targets or take you out at a break even. This is exactly the
professional situation good traders get themselves into everyday. Therefore, belief and focus
become “all I need to get my dollar a day is to get into free trades”.

3. Independent Thinking

Remember, success in Forex trading relies

heavily on your ability to stick to the basics.

A key understanding which separates out the

successful traders is that they know it is all
about timing.

The professional Trader has ‘safely’ entered

his trade and will exit it before the crowd.

The professional trader thinks independently

and knows he is in the minority.

Most traders are not professional in their

approach, education, or trading behaviour.

This puts the professional trade at a ‘huge’

advantage over the ‘crowd of amateur traders’.

The 6 key differences as shown in the charts

opposites between the professionals (black
sheep) and the herd of ‘amateurs’ are
absolutely critical.

Read, review, and read again these key

differences because 89% of people entering
the trading markets end up losing their trading
fund within 3-6 months. Most much quicker
than this!

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Trading success is 80% mental and 20%

technical ‘know how’!

Therefore, most traders start trading with ‘huge’

odds ‘stacked against them.

A professional mindset is the key to winning

and losing.

It simply is not a matter of choice, it is a matter

necessity!

J. INTRODUCTION TO TECHNICAL ANLAYSIS

TECHNICAL ANALYSIS is the study of market prices over time and it is highly effective in FX
markets.

1. Charts –What do they measure?

With the power of modern day computing

computers and software technical analysis has
become easier, simpler and faster.

2. Types of Charts

There are 4 main types of charts used for analysis, they are show below:

LINE CHART BAR CHART

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CANDLE STICK CHART POINT & FIGURE CHART

My personal favourite chart for technical analysis of the currency markets is the Candlestick Chart as
it gives comprehensive and very clear information at a glance. It has also been developed over 300
years!

3. MAIN CHART “TIMEFRAMES”

The price/time measurement of the market can be done in many different timeframes. The most
popular are shown below. Each candlestick represents the length of time for each measurement, i.e.
in a weekly chart each candlestick is one week long, in a daily chart each candlestick is one day
long, in a 4-hourly chart, each candlestick is 4 hours long etc. etc.

Weekly Time Frame Daily Time Frame

4 Hourly Time Frame 1 Hourly Time Frame

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15 min Time Frame 5 min Time Frame

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K. The Basic Technical Knowledge

Success in Forex trading relies heavily on your ability to stick to the basics. Trading is a journey, it's
a skill learnt and mastered over time and from hours of research, back testing and trading of price
charts.

1. Candles Stick Basics

Japanese rice traders developed candlesticks centuries ago to visually display price activity over a
defined trading period. A candle stick informs the trader of the specific price movement of a given
time frame. A candle stick can represent price action for 1 minute to 1 year or anything in between. I
will first break down the different parts of a candle stick. Keep in mind that the components would
be the same for any time period.

The solid portion is called the body of the candle and the lines protruding above and below are
referred to as the wicks.

BULL CANDLE (Green / Buy / Up)

The highest price in reached during the candle time period

Market Closed here

Market Opened here

The lowest price in reached during the candle time period

In the instance of the Bull candle we see that the market open is found at the bottom of the candle
body and the market close is found at the top of the body. The wicks illustrate the high and the low
the market traded at during the given candle timeframe.

BEAR CANDLE (Red / Sell / Down)

The highest price reached during the candle time period

Market opened here

Market closed here

The lowest price reached during the candle time period

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The Bear candle is exactly the opposite in that the market open is the top of the body and the market
close is the bottom of the body. The wicks illustrate the high and the low the market traded at during
the given candle timeframe.

DOJI (Neutral / Indecision/ Exhaustion)

The Dodi represents a period of time in which the market was indecisive and could not choose a
direction; a fight between the bulls and the bears so to speak. This candle is also a sign of market
exhaustion and when found at the end of a long term a trader should begin watching for signs of a
market price reversal.

This candlestick formation is best if found on a 15 min chart or greater.

The highest price reached during the candle time period

Market opened and closed here

The lowest price in reached during the candle time period

Keep in mind this is only a sign of exhaustion if the market is currently trending. If this is found
during low volume time periods when the market is range bound it cannot be trusted as an
exhaustion bar.

2. Candles Stick Formations

There are many different candle stick patterns; however, the key ones are the ones that are easily
identified and are relevant to professional trading.

These formations are examples of reversal candlesticks and are best used when found at the end of
a trend, at a support or resistance level. They give the trader a good indication that there is high
probability the market will reverse and not just consolidate at that level.

Although there are many types of candle patterns, the most effective one I call a ‘HOT Candle’. Its
traditional name when it strikes a support level at the bottom of a trend is a HAMMER and when it
strikes resistance at the top of a trend is called a SHOOTING STAR.

The Hammer

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A Hammer is a reversal candle and it occurs when the market price

reaches a certain bottom but is quickly pushed back upwards.

Sellers have attempted to ‘move’ the market down below former lows,
but as buyers come in-those that were selling panic and close their
positions forcing price back up higher away from the support. Seller’s
confidence of lower prices has collapsed, and the support price has held
and is now re- confirmed intact.

This produces a small body near the high with a wick which is quite long
at the bottom and little or no wick on the top of the candle.

The Shooting Star

A Shooting Star is a reversal candle and occurs when the market price
reaches a certain top and is quickly pushed back downwards.

Buyers have attempted to ‘move’ the market up higher above former lows,
but as sellers come in those that were buying panic and close their positions
forcing price it back down lower away from the resistance. The resistance
price has held and has been re-confirmed intact.

This produces a small body near the low with a wick which is quite long at
the top and little or no wick on the bottom of the candle.

As usual you would not trade solely based on the Hammer or Shooting Star. You would want to wait
for some additional confirmations such as a trend line break to the downside, thereby allowing the
price to prove to you that there is a reversal occurring.

The Engulfing Bar

This pattern is generally found at the end of a trend during market conditions that are either ‘over
sold or over bought’.

The pattern is formed when the price ‘hits’ a key support or resistance
level and changes direction. This means that next candle ‘engulfs ‘the
previous candle.

‘Engulfs’ actually means that the previous candle (always to the left) is
smaller and can ‘fit’ inside the new candle.

The arrow opposite shows the pattern. It is much bigger than the
previous red candle, thus it has engulfed it. This would typically lead to
the trend reversing.

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The example in the chart above shows that the market hits a point after a single candle fall which
provokes an influx of buyers, thus retracing an amount nearly equal to the fall down.

The engulfing pattern is very common ... literally dozens occur every day and many are just
incidental. Only the ones at a major support or resistance should be carefully noted.

This is a good time to exit a trade if you are in an existing position and/or consider taking on a new
position if you are waiting for a reversal. As usual you would not want to enter solely based on the
Engulfing bar. You would want to wait for some additional confirmations, such as a trend line break
to the opposing side, thus allowing the price to prove to you that there is a reversal occurring.

When using an Engulfing bar or any of the other reversal candlesticks patterns. A good place to put
a stop loss is on the other side of the pattern. This can be a stop loss order on the system or a
mental one depending on your style of trading. If the price goes against the setup then the setup has
failed, and any trade based upon it must be closed immediately.

3. Support and Resistance

Support is a price level below the current market price. At a support level, buying interest should be
able to overcome selling pressure, which keeps the price from going any lower. A support level is
usually a very low level in the market and would look like a dip or low point on any market price
chart.

We generally look for support on the lower portion of a market trending upwards (the bottom side of
an up trend).

Resistance is a price level above the current market price. At a resistance level, the selling pressure
should be strong enough to overcome the buying interest, which should keep the price from going
any higher. A resistance level would usually look like a rise or high point on any analysis chart.

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We generally find resistance points on the upper portion of a market trending downwards (the
topside of a downtrend).

Support and Resistance Characteristics

When a currency prices ‘breaks’ a level of support or resistance, the role of that level reverses. In
other words, if a currency price ‘breaks’ a resistance level, that resistance level will later serve as a
support level.

Conversely, when the price ‘breaks’ a support level later on it will serve as a resistance level. This is
a very powerful characteristic of the Forex market.

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There are two key ways to use "support and resistance.

Method one is to anticipate a reversal in the market upon

striking a support or resistance. This is trading the
‘bounce’.

The other method is to wait for the trend level to be broken

and then enter in agreement with the trend. This is trading
the ‘breakout’.

It is best to use both methods; however, when using either

we only enter based on having more than one reason to
enter the trade. Ideally, it would be a combination of trend
lines, Fibonacci levels and support /resistance breaks.

4. Fibonacci Ratios

Fibonacci jumped into the technical mainstream late in the bull market. Futures traders had it all to
themselves until real-time software ported it over to the FX and equity markets. Its popularity
exploded as professional traders experimented with it and discovered its many virtues.

Fibonacci ratios describe how markets pullback slightly when they are trending to predetermined
percentages of 38%, 50% and 62% form the primary market move. It is very accurate.

Apply these percentages after a trend in either direction to predict the extent of the reversal move in
the trend. By stretching the Fib grid over the most obvious up or down wave, you will see how the
percentages cross key price levels.

Fibonacci assists the trader to monitor the trend action. The trend can continue, retrace, congest or
fail. Using Fibonacci, the trader can accurately identify what the current trend situation is.

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1. Trend Continuation
The Fibonacci Grid was stretched from the top of the red candle to
the bottom of the large red candle. This gave us the high and low of the
move and the grid then automatically worked out the Fib percentages
for us.

The market ‘was held’ at the first level and did not even go to the
retracement levels. Thereafter, it simply continued with the trend.
This is a simple continuation back into the trend after
‘pausing/resting’.

It occurs because traders are ‘banking / locking’ partial profits. This

usually occurs around key profit target areas and support or
resistance points.

2. Trend Retracement

38.2 % 50 % 61.8 %

The charts above show when the market stops at key points, retraces back to one of the key levels
and then continues back into the trend direction. There is no set percentage retracement level
although the 50% and 61.8% seem to be the preferred one. This retracement occurs in up and down
trends.

3. Trend Test (Congestion)

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There are situations when the market trend is not very

strong, therefore, it will retrace twice to test the trend.

The chart opposite shows such a situation. The trend

was retraced to 61.85 the first time. It then tried to
continue with the original trend.

However, the trend was unable to break past the 100%

so it ‘retraced’ again to 50% before it finally ‘bounced’
off and continued the trend move. The trend was
reconfirmed.

4. Trend Failure

There will be situations, usually at the end of the trend

where the trend will retrace to 100% of the last move and
try to enter the trend again.

However, upon the market entering the trend again, it fails

to break the 38.2% level in the old trend direction.

This is a favourite price level when traders like to test the

trend strength. If it fails to move past this price level, then
the trend is broken, and a new trend is started in the
opposite direction.

Convergence between highs, lows and moving

averages and key support and resistance prices and
the retracement % levels can point to excellent trading
opportunities.

Keep in mind that retracements work best in trends.

Always examine to bigger move. Strong correlation

between Fibonacci and key support and resistance
levels poses highly predictive reversals at narrow price
levels, as shown in the chart example opposite.

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5. Trend Lines and Trend Direction

Trend lines illustrate the direction of the market movement and provide a primary consideration in
any market analysis. The market can only move in 3 directions; up, down, and sideways.

When a trend is upwards, it can be described as prices making higher highs and higher lows. We
draw up trend lines by connecting the 2 most recent swing lows. The trend does not have to be
limited to 2 swing lows, it can be as many ‘lows’ as are lined up in a straight line. When drawing up
trend lines we draw on the bottom of the market. The trend line drawn will identify a dynamic point of
support which will change as time passes.

When drawing down trends the market is making lower lows and lower highs. We draw down trend
lines by connecting the 2 most recent swing highs. These will be on top of the market price action.

Price Channel

A price channel is a continuation pattern that slopes up or down and is bound by an upper and lower
trend line. The upper trend line marks resistance and the lower trend line marks support. Price
channels with negative slopes (down) are considered bearish and those with positive slopes (up)
bullish.
For explanatory purposes, a "bullish price channel" will refer to a channel with positive slope and a
"bearish price channel" to a channel with negative slope.

Main Trend line: It takes at least two points to

draw the main trend line. This line sets the tone
for the trend and the slope.

For a bullish price channel, the main trend line

extends up and at least two reaction lows are
required to draw it.

For a bearish price channel, the main trend line

extends down and at least two reaction highs
are required to draw it.

Channel Line: The line drawn parallel to the main trend line is called the channel line. Ideally, the
channel line will be based off of two reaction highs or lows. The channel line marks support in a
bearish price channel and resistance in a bullish price channel.

Bullish Price Channel: As long as prices advance and trade within the channel, the trend is
considered bullish. The first warning of a trend change occurs when prices fall short of channel line
resistance. A subsequent break below main trend line support would provide further indication of a
trend change. A break above channel line resistance would be bullish and indicate an acceleration of
the advance.

Bearish Price Channel: As long as prices decline and trade within the channel, the trend is
considered bearish. The first warning of a trend change occurs when prices fail to reach channel line
support. A subsequent break above main trend line resistance would provide further indication of a

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trend change. A break below channel line support would be bearish and indicate an acceleration of
the decline

The illustration opposite shows a break of the trend line.

Notice that once the market ‘breaks it’, it tends to retest
the trend line which becomes resistance

Notice that once the market has made a correction and

retraced to an approximate Fibonacci level of 50%, it
reversed and then it continues its move in the new
direction. A trader could have entered a sell (down trade)
at the 50%. Once price breaks the lower (red) trend line
we have a valid reason to enter this trade. Notice the
increase in volume (big red candle) once the breakout
occurred. This would have been an excellent sell
opportunity.

As shown below the trend line is overlapping a Fib level,

which provides additional support.

Therefore, the Fib reversal and the trend line gives a

double support level. In addition, if the price then moves
in the direction of the main trend then this is an excellent
level to enter a trade with the trend.

This is a very common setup in the FX market and in all

timeframes and all the currencies.

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This is a good example of a ‘breakout’ type trade, where

we find the market bounces off the trend line.

Notice that once the market broke below the lower trend
line it retested the trend line before falling. This is an
excellent place to enter a down (sell) trade because you
are entering this trade at the top of the range which allows
for sufficient profit.

After further investigation we find that there is a Fibonacci

level overlapping the trend fine and that there is a 61.8%
retracement. This means the market has retraced 61.8%
of the overall move down.

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Trend Direction.

There are many different ways to establish the trend direction.

What is important is that you have an awareness of the market and that you trade in the direction of
the established trend. You have to realise that the trend direction is relative to the chart you are
using and the amount of PIPS you are targeting.

If you are only targeting 5 or 10 pips then it is not necessary to concern yourself with the day chart,
but you should be aware of the 30 min chart trend. (I would not advise trading for 5 to 10 pips)

The first method is to mark the trend using trend lines as we did in the section and decide on the
overall direction based on multiple charts. The day and 4 hr chart are excellent for this.

The second method is the use of moving averages to distinguish

the trend direction.

These averages should be monitored on the Day, 4hr, and 1hr

charts.

Place long and short term moving average lines on your daily, 4
hourly and 1-hour charts. When these all ‘align; in the same
direction, you have a confirmed strong trend.

The best market monitoring systems are the ones that are able to show multiple time frames easily.

The best trades are the ones when trend in all the time frames ‘align’ so you can be trading with the
trend.

By monitoring the multiple time frames you will see ‘good trades ‘setting up’. Therefore, a key skill
every trader has to learn is to monitor the trend in all timeframes.

The best combination of timeframes for day traders is; 4 hr, 30mins, 15 mins and 5 mins.

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Multi Point Reversals.

Exercise patience and discipline and wait for the trends to

‘align’ to produce strong trends.

The best reversals are when there is a ‘clustering’ of support

and/or resistance which cause the price to go back into the
main trend. Namely:

• Trend lines
• Moving averages
• Fibonacci ratio

When you have this Multi point clustering then it is usually an excellent level for trade entry.

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6. Pivots and Profit Targets

Pivot Points are being used more and more by Forex Traders and are an excellent tool for calculating
entry and exit points when trading.

Pivot Points are super sized-support and resistance levels which are calculated from the price action
from the previous day. The reason these levels are so powerful is because there is no subjectivity
involved in calculating them.

Pivots are based on the High, Low, and Close of yesterday's price action and therefore there will be
very little fluctuation in the results. Pivots are good at forecasting short term price levels because
they are reflective of both short-term volatility and trader psychology.

Traders using pivots methods tend to turn

a pivot point into a real 'battle ground’
between buyers and sellers.

Price action speeds up around pivot

points and makes it a lower-risk entry or
exit point. Remember, no system will
forecast with 100% success. What we're
seeking to do is lower our entry and exit
risk and raise our odds above random
entry.

It is advised to use pivots points when

using a breakout strategy rather than a
reversal strategy.

Above is an excellent example of a break below the S1 level which is with the overall momentum of
the move. It illustrates a clean break followed by a retest which gave an excellent short entry with
low risk.

Another strategy for trading pivots would be using these levels

as reversal entries.
When the market is moving towards a Pivot level your entry
would be to buy off of support and sell from resistance. This
strategy works best when the market is range bound.
You must watch these trades very carefully because they are
against the overall trend.
If a support level is breached and the market lingers below for
too long you should look for an exit opportunity. As stated
earlier, the market tends to revisit the level which will give you
the opportunity to close the trade with little or no loss.

If a level is good for a bounce it will generally reverse fairly quickly. Therefore, if you don't see profit
after 30 to 60 minutes you should be very cautious and once again begin looking for an exit. The
example above illustrates a low volume day where the market was range bound. Under these

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conditions you would sell the resistance and buy the support using ‘tight’ stops and target 50% of
the distance between the levels. This is a good example of a range bound market.

7. Price Projection

Knowing when to get in and equally when to exit out of trade is very important.

If you are risking 20-50 pips on any given trade and you do not have a target in place you will
generally take profit after 5 or 10 pips simply because you do not know if it will go much further.

You already know how to use Pivot Points and Fibonacci levels to trade to for profit and, generally
speaking, any support or resistance can be used in the same manner including trend lines.

However, there are certain circumstances when you may need an alternative to these levels. The
method I am about to share with you is an excellent way to establish extremely accurate targets. The
market is very chaotic; however, there is organisation within the chaos.

This pattern occurs quite often and tends to be extremely accurate. Once a run up is established
(A to B) and a retracement occurs we wait for the retracement to find a solid bottom and continue up
Once this happens the swing low becomes C. Now you a have completed B to C.

We are expecting the AB movement to be duplicated as CD, therefore the distance from A to B is
added to C which gives us our target of D. In more simple terms, the first run is duplicated after a
slight correction.

This projection method works in up trends and in down

trends as well.

The formula is exactly the same: A-B-C= Target D

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The reversal that occurs at the C level usually happens at a Fib level or trend line. The best entries
occur when there is a Fib line and or a pivot point overlapping with a trend. This is called a ‘cluster’.

If there is no evidence of substantial support/resistance, then it is best to wait for a break of the
trend line. Your stop would be place above or below the C level, depending on the trend direction of
the ABC pattern.

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8. Chart Patterns

A chart is simply a graphical representation of supply and demand. Any news or information that is
important or relevant will show up in the chart. It is a totally unbiased, unemotional, direct
representation of everything that is going on in the market. History has shown did the market often
forms patterns and when these patterns are broken, price movements can be predicted with a high
degree of accuracy.

The Pennant

Pennants are small continuation patterns that represent brief pauses in an existing trend. They are
typically seen right after a big, quick move. The market then usually takes off again in the same
direction. Research has shown that these patterns are some of the most reliable continuation
patterns. They are characterised by converging trend lines and have a definite bullish or bearish bias
depending on the overall trend.

Although it generally breaks out in the overall direction

Of the trend, the wise choice is to wait till the break occurs
and enter on a retest of the trend line rather than
anticipating the move and possibly getting stuck in a trade.

Symmetrical Triangle (Flag)

Symmetrical triangles can be characterised as areas of

indecision.

A market pauses, and the direction is questioned. Typically, the

forces of supply and demand at that moment are considered
nearly equal.

Attempts to push higher are quickly met by selling, while dips

are seen as bargain opportunities.

Each new lower top and lower bottom becomes shallower than
the last, taking on the shape of a sideways triangle.

Eventually, this indecision is met with resolve and usually

explodes out of this formation (often on heavy volume).

Research has shown that symmetrical triangles overwhelmingly

resolve themselves in the direction of the trend; however, it is
still preferable to wait for a break of the triangle before
entering.

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Ascending and Descending Triangles

There are 2 other triangles that are important, Ascending and Descending Triangles.

The ascending triangle is a variation of the symmetrical triangle. Ascending triangles are generally
considered bullish and are most reliable when found in an uptrend. The top part of the triangle
appears flat while the bottom part of the triangle has an upward slant.

In ascending triangles, the market becomes overbought and prices are turned back. Buying then
re-enters the market and prices soon reach their old highs, where they are once again turned back.
Buying then resurfaces, although at a higher level than before.

Prices eventually break through the old highs and are propelled even higher as new buying comes in.

The descending triangle is usually found in downtrends and is thus

generally considered to be bearish

Unlike the ascending triangle, this time the bottom part of the triangle
appears flat. The top part of the triangle has a downward slant. Prices
drop to a point where they are oversold. Tentative buying comes in at the
lows and prices perk up.

The higher price however attracts more sellers and prices retest the old
lows. Buyers then once again tentatively re-enter the market. The bearish
prices once again attract even more selling. Sellers are now in control and
push through the old lows of this pattern, while the previous buyers rush
to dump their positions. Once again, I prefer to wait until a break of the
lows unless the pattern is very small.

Head and Shoulders

A head & shoulders top or bottom is a powerful and reliable reversal pattern that appears as a large
distribution period after a significant trend. Its completion signals a trend reversal Three successive
peaks characterize the pattern with the middle one being the tallest and the two outside ones being
shorter and approximately equal.

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Entry is on the break of lower trend line.

When the market first breaks a support trader in an existing

long position tend to panic and many of them close
immediately. This in return increase volume as the market
trades lower, concern becomes fear and the selling
accelerates. Then fear becomes panic, and people sell
regardless of price. This is why there typically is a delayed
volume surge with breaks to the downside.

Double Tops/ Bottoms

When the market tests a certain support or resistance and falls away, many times it will retest that
level in order to establish it as a solid top or bottom. If a level holds after 2 attempts at a break it can
be considered a good point for entry and stop placements.

One should be careful when trading this pattern because occasionally these levels are broken.

These patterns should be treated like a hammer or engulfing bar. If you are in a current long/short
position against this level, you should consider taking profit or at least moving your stop closer.

Unless you are in an extremely strong trending currency it is best to take profit and wait for another
entry. As usual, when entering off of one of these levels one should wait for other confirmations such
as a trend break.

These patterns become more trustworthy as you get to larger timeframe. The 1 hour or greater is
ideal when trading this pattern as a reversal.

The example opposite depicts a double top

combined with an engulfing bar which provides a
multiple confirmation for an entry short.

The third retest has a candlestick similar to a Doji

which is a sign of exhaustion.

The resistance level has held and the buying

pressure collapses. Thereafter, there is a sell off.

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Top Bottom Reversal Wedge

If you draw the support line (magenta) at the double

top/bottom level and the upper resistance line (blue),
you will get a price squeeze wedge.

When the price bounces off the bottom and ‘breaks’ the
top edge of the price wedge then it is usually a good
time to enter the ‘breakout’ trade.

The price will ‘pullback’ to retest the top wedge line and
then move off, as shown in the chart opposite.

This is a very reliable pattern and occurs at the top of an uptrend and bottom of the down trend.

Therefore, its frequency makes it a very good pattern to trade. It also takes time to set up so more
traders are likely to see it and therefore trade it.

L. Market Price Waves

1. Market Structure

Before considering a trade, it is essential

to know what stage/phase the market is
in.

The Market typically is in one of four

stages, as shown in the diagram opposite.
Markets are in a cycle of stage 1,2,3, 4.
This cycle is repeated over and over
again.

Obviously, the length and power of each

1234 cycle is not similar/uniform, it differs.

Stage 1 - Basing

Stage2 - Trending

Stage 3 - Topping

Stage 4 - Retracing

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Stage 1 Basing The market is range bound between a strong resistance and support line. Therefore, the
best trade will be a ‘breakout’ of the channel.

Stage 2 Trending The market is in a strong trend bouncing off fast/ medium moving trend lines. Therefore,
the best trades will be a ‘trend pullbacks’ into the trend moving lines.

Stage 3 Topping The market is range bound between a strong resistance and support line. Therefore, the
best trades will be a ‘bounce’ off the channel.

Stage 4 Retracing The market is topped, and the trend has failed. A strong chart pattern will be evident i.e.
Double top/bottoms, head and shoulders etc… Therefore, the best trades will be
‘retraces’ back to Fibonacci levels of 38.2%, 50% and 61.8%.

What move are you going to trade?

Once the market stage/phase has been identified then the professional trader must decide what
trade they will trade. This is critical because it will determine how the trade is entered, managed and
crucially how the stop loss and profit targets can be successfully identified.

Trade the Big move - Trade stages 1- 3 or 3 back to 1

Trade the Intermediate move - Trade stage 2 or stage 4

Trade the Small moves - Trade stage 1 or stage 3

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2. Wave Structure

When a market is trending, it moves in 5 waves, they are

called impulses waves.

This is the basic pattern of wave movement in a trend.

The basic pattern is the same for up trends and
downtrends.

The basic five pattern impulse waves are divided into

three waves which drive the trend forward in its direction
and two waves that are ‘pullbacks’.

Wave 1, 3 and 5 are the actionary waves that drive the

trend in its direction and wave 2 and 4 are the
pullback/retracing waves.

Waves are never simple straight lines, they will ‘oscillate /

shake’ as they move.

The chart shows the various ways that the waves will
‘oscillate’ as they move in their chosen direction.

Each market has its own ‘level of movement and it is just a

matter of ‘getting use to’ how each market tends to move.

RULES:

1. Wave 2 never goes beyond the start of Wave 1

2. Wave 3 is never the shortest wave
3. Wave 4 never overlaps Wave 1
4. Wave 4 is usually an expanding wedge (or sideways consolidation)

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5. Diagonal triangles are always in wave 5

GENERAL OBSERVATIONS

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3. Wave Trading Strategies

There are four key basic trading strategies. This means that the trader will have the opportunity to
decide which style fits in with their personality and work lifestyle. The five trading styles are;

1. Daily Trading This is a long-term strategy, which means analysis and trades are executed on a
daily basis with key decisions being made in the evenings. Trades can be held for a week or so. This
focuses on the larger market price movements.

The Daily Chart opposite shows the Main Trend for the
GBPUSD for a 3-month trend move. It is what the big
banks, hedge fund managers and professional traders are
looking at and trading every day.

This allows us to see which ‘currency’ they are focusing on,

because in the huge FX market only they have the financial
power to create such huge candles and big trends.

The fast, medium, slow and long-term trend lines are

‘fanning / spread out.i.e. a strong trend. This shows us very
clearly that the trend is upwards.

When the price comes back and hits the gold fast tend line
it will bounce off it. This is a good trading entry time.

With the entry in the direction of the trend using the ATR indicator figure, as shown at the bottom of
the chart as our safety stop loss. The ATR (Average True Range) indicator shows us that the daily
figure right now is 119 pips. We would use this figure (by dividing it in half) as our stop loss figure
when entering a trade. Each night we would pull our stop loss up by 50% of the new ATR number.
Thus, we are able to ‘lock in’ profits each day and be in a free trade in the first day or so….

2. 4 Hourly Trading

This is a medium-term strategy, which means analysis and trades

are executed on a four-hourly basis with key decisions being
made at 11pm, 7am, 11am and 3pm etc in the evenings.

This focuses on the key market price movements and trades

which can be held for a few days. This is a part time trading style.

The time frame is best traded with simple short term and long-
term trend lines. Wave analysis adds strong ‘weight’ to trading
decisions. Entry and Exits are determined with powerful trend
indicators and support and resistance ‘spots’ as show in the
chart. The 4-hour timeframe is excellent for trend following
trading.

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3. Hourly Trading

This is a short term strategy, which means analysis and trades are
executed on a hourly basis with key decisions being made at every
hour from 6am to 4pm ..

This focuses on the key market price movements during the day.
This is a full-time day trading style.

The time frame is best traded with simple trend lines, which identify
the price ‘squeeze’ areas. As shown in the chart opposite.

The reversal indicator (thick red and dotted black line) on the price
chart adds strong ‘weight’ to trading decisions

Entry and exits are determined with powerful trend indicators and
support and resistance ‘spots’ as show in the chart.

The hour timeframe is excellent for ‘breakout’ trading where the

focus is to ‘capture explosive candles’ breaking out of price
consolidations and price squeezing chart patterns.

The London market open at 7am and the New York open at 1pm
are very good trading times for this strategy.

4. 5 min Trading

This is a short term ‘price breakout’ strategy, which means

analysis and trades are done early in the morning and
monitored on a 15 min basis throughout the day.

The key price movements occur typically between 6am-7.30 am

and 1pm-3pm each day. These trades will have definite price
target points and are typically held for 15 to 60 minutes.

This is a full-time day trading style. The time frame is best

traded with simple trend lines, which identify the price
‘squeeze’ areas. As shown in the chart opposite.

The reversal indicator (thick red and dotted black line) on the
price chart adds strong ‘weight’ to trading decisions

Entry and exits are determined with powerful trend indicators

and support and resistance ‘spots’ as show in the chart.

The 15 min timeframe is excellent for ‘breakout’ trading where

the focus is to ‘capture explosive candles’ breaking out of price
consolidations and price squeezing chart patterns.

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“A matter of personal choice”

Every trader will decide which style of trading is right for them. This does not mean that any one is
better than any other. What is important to understand is that each trader will have a strong
preference for one style over another. It is simply a matter of personal choice, based upon your
personality, attitude to risk and lifestyle.

Game Theory

A very ‘empowering’ perspective that has helped many traders to be successful in the markets is to
see ‘trading’ as a game, not a silly game, but a serious game. It must be ‘set up’ so that it is fun,
energising and allows the ‘slow and steady’ building up experience, enjoyment and success.

It is vital to ensure that traders stop ‘setting themselves up’ for ‘performance anxiety’ (overnight
success mentality). This is the key and often fatal error made by new traders.

Therefore, the goal is to build up trading performance slowly at £1 per point level, risking only 2% of
the trading fund and with an attitude and expectation of ‘gradual’ success over the medium to long
term time. This will minimise any trading stress/pressure whilst enabling the trader to will build up
‘valuable exposure and experience’ in the markets. This will build a strong personal trading style.

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M. The FX MARKET OVERVIEW

The diagram below shows the overall picture of the various parts of the FX market. The
‘heart’ of the markets is called the “Interbank market” and consists of the major international
banks who trade amongst themselves. This represents 80% of the total FX trades done
each day.

RETAIL BROKERAGES INVESTORS

INTERNATIONAL BIG
CORPORATIONS INSTITUTIONS

INTER BANK
MARKET
“$5 Trillion traded per day”
FX MARKET
MID SIZE MAKERS
BANKS
CURRENCY
EXCHANGES BROKERS

SMALL BANKS
FX PRIVATE TRADERS

The private FX trader has access to the market in two ways. Firstly, via a major market
maker who gives him direct access (called level II) and secondly through a FX broker.

They are both called market makers because they provide a ‘mini market’ based upon the
interbank prices to the private trader. The direct interbank market, is huge in volume and in
cost, the minimum single trade in the interbank market is 100,000 units! Therefore, most
traders will not be able to trade with such sums and volumes. Also this type of trading is
liable for tax. Thus, it is not suitable for most private traders.

The FX brokers provide trading opportunities via spread betting. Currently spreading betting
is not taxable, thus it is an excellent way to trade FX. The brokers have very simple trading
platforms. This is the way that the vast majority of private traders trade FX in the UK.
However, we must remember the following key points:

• brokers are businesses and they are focused on making money. They provide an excellent
way to access the market and take profits… but nothing is for free!
• over 81% of traders in the stock exchange typically lose their entire account within 1 year.
This figure is much higher in FX over 90% of traders will lose. FX is a ‘zero sum game’, so for
every loser there must be a winner… thus 5-10% of traders end up winning from the
remaining 90% losers. The brokers often trade against the individual, you are trading against
them! So, it is simply a ‘business game with the broker’. Typically, are the winners, we need
to ‘beat them”.

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• The 3% money management rule is critical for long term success

N. SETTING YOURSELF UP FOR FX SUCCESS

1. The Spread Bet Edge

Many FX brokers offer the following;

• 100:1 Leverage
• Open an account with only £250
• Trade with small tight stop losses
• Tax free trading
• Free accounts with no commissions
• 2-3 pip spreads
• 24 hours dealing

I believe most new traders who open a forex trading account with the bare minimum deposit
do so because they don’t completely understand what the terms “leverage” and “margin”
really are and how it affects their trading.

It’s crucial that you’re fully aware and free of ignorance of the significance of trading with
leverage. If you don’t have rock solid understanding of leverage and margin, I guarantee that
you will ‘clear out’ your trading account in the short term.

The typical charges for most financial spread betting companies are as follows:

Currency Leverage Trade Value Spread Margin

(cost of trade) (Deposit per point)

GBP /USD 100:1 £ 1 per point 3 points 200

This means that this trade will require you to deposit a minimum of £200 for each £1 you
trade with. That £1 will give you the ability to purchase £100 worth of currency. The cost of
‘purchasing’ the currency 3 points.

For example, if the quote was 6767 / 6772 and you bought it at 6772 at £10 per point. Then
the following would apply;

Cost of trade = £ 10 * 3 points = £ 30.00

Margin required in account = £ 200 *10 = £ 2,000.00

You would be looking for the price to increase. If prices did increase and you closed the
position at 6782, a 10 point increase then the profit would be as follows;

Open level 6772

Closing level 6782
Difference + 10 points therefore, a profit of 10 * £10 = £100

If however, the price went 10 points against your position then it would be a £100 loss.

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The best aspect of this is that a spread bet trade is tax free and audit free, so you get to
keep all the profits that you make!

2. Leverage: Good financial habits

Most professional traders and money managers trade 0.5% of their total fund on any single
trade. Therefore, their account has very little risk exposure.

They would have to over 100 continuous losing trades before their account are ‘cleared’.

3% risk of total fund is acceptable, but 0.5% is great.

It means that the probabilities will be stacked heavily in the professional traders favour.

The number one reason new traders fail is because they are undercapitalized from the start
and don’t understand how leverage really works. They set themselves up for failure from the
start.

If professionals trade with less than 0.5%, why do less experienced traders think they can
succeed by trading 100K with a £2,000 account or 10K £200?

It is a very high risk exposure – one or two trades and they are wiped out!

The table below shows the ‘number of losing trades in a row’ required to ‘clear’ an account
is very high if the account is properly structured and managed.

The secret is to ‘stick religiously’ to the 2% or below rule.

Total Trade STOP £ % Losing Continous

Fund £ pip LOSS RISKED Fund Trades ? Losing
(£500 ) (Max 2%)
£ 10,000 £10 50 £500 2% 50 70
pips
£ 10,000 £10 40 £400 2% 50 80
pips
£ 10,000 £10 30 £300 2% 50 95
pips

Most new traders will work out the stop loss (50 pips) and then the total risked on that stop
loss (£500). They would then risk this amount thinking it was 2% of their fund. In the first
losing trade yes it is, but with each successive loss, it is more than 2% and keeps growing.

In this way they would wipe it out in 50 losing trades. However, if they stuck to the 2% of the
fund, and this would decrease as the fund total went down they would actually have at least
another 20 trades extra!

“Trading success is simply having a set of good financial habits”

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3. Risk to Reward - Play it professionally

Another way you can increase your chances of profitability is to trade when you have the
potential to make 3 times more than you are risking. If you give yourself a 3:1 reward/risk
ratio, you have a significantly greater chance of ending up profitable in the long run. Take a
look at this chart as an example:

In this example, you can see that even if you only won 50% of your trades, you would still
make a profit of £10,000. Just remember that whenever you trade with a good risk to reward
ratio, your chances of being profitable are much greater even if you have a lower win
percentage.

4. Professional Money Management

This section is one of the most important sections you will ever read about trading.

Why is it important? Well, we are in the business of making money, and in order to make
money we have to learn how to manage it. Ironically, this is one of the most overlooked
areas in trading.

Many traders are just anxious to get right into trading with no regards to their total account
size. They simply determine how much they can stomach to lose in a single trade and hit the
“trade” button. There’s a term for this type of trading…. it’s called GAMBLING!

When you trade without money management rules, you are in fact gambling. You are not
looking at the long-term return on your investment. Instead you are only looking for that
“jackpot”. Money management rules will not only protect us, but they will make us very
profitable in the long run.

People go to casinos all the time to gamble their money in hopes to win a big jackpot, and in
fact, many people do win. So how in the world, are casino’s still making money if many
individuals are winning jackpots? The answer is that while even though people win jackpots,

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in the long run, casinos are still profitable because they rake in more money from the people
that don’t win. That is where the term “the house always wins” comes from.

In fact, here is a chart that will illustrate what percentage you would have to make to
breakeven if you were to lose a certain percentage of your account.

You can see that the more you lose, the harder it is to make it back to your original account
size.

This is all the more reason that you should do everything you can to protect your account.

So by now, I hope you have understand that you should only risk a small percentage of your
account in each trade so that you can survive your losing streaks and also to avoid a large
drawdown in your account.

Remember, you want to be the casino…NOT the gambler!

Golden Rule :

Always Stick to the 3% maximum rule

And

Never allow the result of any single trade to disrupt or change your trading plan

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O. THE WINNING TACTICS

1. Its all about Pain and Pleasure

To understand how Forex trading works we need to identify the basics of market trading;

• The market is made up of people – they drive the markets up or down

• People have financial goals and targets
• These financials goals and targets have emotions attached to them
o The profit target has a pleasure emotion (wish to achieve it) = GREED
o The loss target has a pain emotion (wish to avoid it) = FEAR

Therefore, the Forex market is driven primarily by greed and fear.

These cause emotional trading responses which ultimately lead to failure for the vast
majority of traders. The following example shows the ‘emotional dynamics’ of the Forex
market.

On every trade there are two sets of people - those that want the price to go up and those
that want it to go down. Each set of people will have their profit targets (pleasure area) AND
they will each have their own ‘Stop Losses’ (Pain Area)’. This is shown in the chart below.

Sellers ‘FEAR’ AREA

Buyers ‘FEAR’ AREA

The fear area is the area where the traders put their automatic ‘get me out of this trade, I
have got it wrong and I am losing money’ orders, with their brokers. It makes absolute
sense to put these orders with brokers to protect yourself from huge losses, if you get it
wrong.

However, the ‘big players’ know your psychology, they know these ‘pain areas’ and as you
can see from the chart they simply took the price up to ‘take out the sell orders and then
they immediately took the price down to take out the buy orders… nice, easy and simple
profits for them !

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The lesson is simple. Trade against them and you will fail, but trade with them, with their
knowledge and tactics and it is so much easier and more profitable.

2. How do we stay safe and beat the broker?

The Market makers (brokers) usually win because:

• They know your psychology. Traders are driven by greed and fear.
o ‘Greed’ makes most traders start to trade and trade with big risks before they are
ready. They have not educated themselves nor built up their trading experience.
o ‘Fear’ of losing the trade makes most traders put very tight stop losses in and
often panic and ‘cut their losses’ too quickly.
• They control the price data feeds to the traders, which are usually free of charge!
• They know where traders typically put their stop losses. They simply are able to hunt
this and take them out of the market before the real trade move takes place. This is
illegal but it does happen, because it is so difficult to prove.

Therefore, the brokers are in a very powerful situation. They have the motive (making
profits), they have the means (control of data) and they have the opportunity (know where
the stops are). Now I am not saying for one moment that they are all doing it and on every
trade… but from experience I know it does go on….

I have developed a very simple and effective tactic to ‘overcome’ this ‘stop hunting’ by the
brokers. It is based upon two key understandings.

1. Trades are usually lost when you:

a. Trade against the trend
b. Put your stop loss in the wrong place
c. Trade with more than 2% of your fund on any single trade

2. The whole point of a stop loss is to avoid a catastrophic loss on your account… so no
bad trade could ‘wipe’ out 100% you’re trading account.

Therefore, the ‘tactics’ are;

1. Have only 10% of your trading account with the broker at any time, so a catastrophic
loss would only be 10% of your whole trading fund in any single trade!
2. When you win or lose, you adjust your account balance according by removing
winnings and add if you lose in order to always maintaining just your 10%!
3. In a trade situation, put in a stop loss as soon as you reach the 1st profit level or
break-even price, so you ‘lock’ in your profit. Thereafter, the trade is a winner no
matter.

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3. Be the Casino, not the Gambler!

“Casino’s have a small edge and they know, over time that the edge will manifest itself”

Likewise, professional traders have a slight edge that will manifest itself over time!

The number one reason why 90% of trader’s fail is that they do not understand winning and
losing probabilities. That is how to play the odds when they trade. Most of the time they will
trade with the odds heavily stacked against them.

The normal average cost of a trade is 3 points (PIPs) and many Traders will target about 10
to 20 points as a profit target. The odds of the trades are shown below;

Target = 10 Cost = 3 pips So Break even 3+10 = 13 pips

So 10 pip loss 3-10 = 7 pips
ODDS 13/7 = 1.85%
Win Loss ratio 1: 1.85
& Cost of Trade = 3/10 = 30%

This is nearly 2 to one against. It is very aggressive trading and is far riskier than any game
in any casino! Also, it is an expensive trade at 30% cost!

Target = 20 Cost = 3 pips So Break even 3+20 = 23 pips

So, 10 pip loss 3-20 = 17 pips
So, ODDS 23/17 = 1.35%
So, Win Loss ratio 1: 1.35
& Cost of Trade = 3/20 = 15%

This is much better but is still quite aggressive and playing against the odds!

Target = 30 Cost = 3 pips So, Break even 3+30 = 33 pips

So, 10 pip loss 3-30 = 27 pips
So, ODDS 33/27 = 1.22%
So, Win Loss ratio 1: 1.22
& Cost of Trade = 3/30 = 10%

This is better still, and the cost of trading is done to an acceptable 10%

Target = 50 Cost = 3 pips So, Break even 3+50 = 53 pips

So, 10 pip loss 3-50 = 47 pips
So, ODDS 53/47 = 1.35%
So, Win Loss ratio 1: 1.1
& Cost of Trade = 3/50 = 6%

This is acceptable, nearly a 1:1 (or 50:50) probability and only paying out 6% trading cost.

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“Casinos and big traders are nothing more than great statisticians!”

4. Build your success - £1 at a time

The tables show, as a guideline the possible ‘earnings’ at each £1 per point level. The ‘tactics’ to use
are;

• Capitalise your account properly, as described in the previous section

• Put down a minimum ‘mental’ 50+ pip stop loss (ideally the 2% set up as described earlier)
• Start off playing with small £1 increments and build up slowly
• Once you have made 20 successful trades at a price level then you ‘graduate’ to the next price level in
£1 increments. This sounds like a small increase, but with leverage it gets magnified very, very quickly
• Always trade with the 2% - 5% as a maximum fund exposure in any single trade, as per the table
below:

DAILY Weekly Monthly Annual Equivalent

Pip Stop Loss
£ 2% Earnings Earnings Earnings Earnings Job Salary

£1 £ 50 £ 50 £250 £1,000 £11,000 £15,400

£2 £ 100 £ 100 £500 £2,000 £22,000 £30,800
£3 £ 150 £ 150 £750 £3,000 £33,000 £46,200
£4 £ 200 £ 200 £1,000 £4,000 £44,000 £61,600
£5 £ 250 £ 250 £1,250 £5,000 £55,000 £77,000
£6 £ 300 £ 300 £1,500 £6,000 £66,000 £92,400
£7 £ 350 £ 350 £1,750 £7,000 £77,000 £107,800
£8 £ 400 £ 400 £2,000 £8,000 £88,000 £123,200
£9 £ 450 £ 450 £2,250 £9,000 £99,000 £138,600
£10 £ 500 £ 500 £2,500 £10,000 £110,000 £154,000
£11 £ 550 £ 550 £2,750 £11,000 £121,000 £169,400
£12 £ 600 £ 600 £3,000 £12,000 £132,000 £184,800
£13 £ 650 £ 650 £3,250 £13,000 £143,000 £200,200
£14 £ 700 £ 700 £3,500 £14,000 £154,000 £215,600
£15 £ 750 £ 750 £3,750 £15,000 £165,000 £231,000
£16 £ 800 £ 800 £4,000 £16,000 £176,000 £246,400
£17 £ 850 £ 850 £4,250 £17,000 £187,000 £261,800
£18 £ 900 £ 900 £4,500 £18,000 £198,000 £277,200
£19 £ 950 £ 950 £4,750 £19,000 £209,000 £292,600
£20 £ 1,000 £ 1,000 £5,000 £20,000 £220,000 £308,000

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