ForexInvestment & Trading

Free Trading Course: Three Lines – Forecasting Forex Price Action

Three Lines Forecasting Forex Price Action

In this Forex Course

 

Introduction

Why Trade Forex?

An Introduction to the Foreign Exchange (Forex)

Forex Trading Essentials
Chapter Summary

An Analysis of the Forex Market

Fundamental Analysis
Technical Analysis
Trading Styles
Chapter Summary

The Basis of Technical Analysis

Chart Types
Concepts of Candlestick Formation
Concepts of Supply and Demand in Fx
Chapter Summary

Trends in Forex Markets

Dow Theory
Elliott Wave Theory
Double Top and Double Bottom
Head­-and­-Shoulders and Inverse H&S
Multiple Time Frame
Chapter Summary

Demand and Supply Zones

Identifying Market Reversal Points
Identifying Demand and Supply Zones
The Structure of Market Reversal
Chapter Summary

Confluence Factors for Demand and Supply Zones

SMA and EMA
Round Numbers
Fibonacci Ratios and Retracements
Candlestick Formation Patterns
Gaps
Chapter Summary

Candlestick as Demand and Supply

Trade Entry Types
Chapter Summary

Money Management and Trading Psychology

Trading Psychology
Chapter Summary

Trading Plans

What Is a Trading Plan?
Trading Time and Day
Trader Types
Trading Goals
Trade Risk Management
Money Management
Trading Strategy
Journals/Trade Reviews
Chapter Summary

Trading Using MetaTrader 4/5

Installation Process

Opening a Demo Account
Optimizing MT4 for Demand and Supply
Chapter Summary

Summary

Sample Trading Plan

Possible Objectives
Personal Strengths
Personal Weaknesses
Trading Schedules
Trading Style: Day Trader
Log Sample

 

INTRODUCTION

Just a few years ago, it was almost impossible for the average investor to trade in the foreign exchange market (Forex) online. It was the domain of corporations, large financial institutions, hedge funds, central banks, and very wealthy individuals. However, with the advent of Internet access to brokerage houses, it became easier to integrate financial trading platforms worldwide; thus today almost anyone can trade on foreign exchanges.

The Bank for International Settlements Triennial Central Bank Survey report on global foreign exchange market activity of 2013 showed that the daily turnover of Forex is about $5.3 trillion. It is one of the largest financial markets in the world. Generally speaking, in Forex there are two actions, BUYING and SELLING, which lead people to either EARN money or to LOSE money. The end result a trader can expect is either financial success or financial loss.

Taking action to either buy or sell using a computer platform is very simple— almost everyone could do that. However, making money in Forex is not easy. The market does not move in a logical fashion. Emotions, greed, and wariness move the market. Therefore, you need to change your habits and have discipline to be consistently profitable over the long term. This book provides information in detail on how you can be successful in a Forex trading career. This book contains all the skills you will need to become a successful Forex trader.

This book will give you a clear idea of when to buy or sell, how protect yourself in case you make a bad decision, and to give you tips on when to get out. These parameters must be learned before you make your first trade. This book will help you to be a rule­based trader, not one overcome by greed or fear. I have tested this strategy on myself for almost five and a half years, and I am very happy with the result—and I have decided to share the approach in this book.

Before going into further details, I would like to mention that this book is for those “who like to trade using technical analysis.” Analysis of the foreign exchange market falls into two broad methods: technical and fundamental. Fundamental analysis looks at the price of a currency in respect to many factors that may affect it, including political stability, economic performance, interest rates, and a market development.

On the other hand, in technical analysis, an investor studies the behavior of different indicators, such as momentum indicators, support and resistance levels, price indicators, statistical price, and oscillator indicators in order to predict a future price.

These days, technical analysis is growing in popularity due to its accuracy and simplicity. I am not saying that a technical trader should ignore all fundamental analysis indicators, but any decision should be made based on a technical point of view rather than a fundamental one. In short, as a technical trader, a trader should be aware of fundamental factors, but act based on technical analysis.

 

WHY TRADE FOREX?

The objective of buying and selling currencies is to get profit in order to fulfill desires—whether they are personal or for social causes. I have met a fifty-­three­ year­-old woman, for example, who was trading Forex to support a nonprofit company. Forex offers numerous of benefits, such as:

  • The market is open twenty-­four hours a day, five days a week. This means traders can make trades any time of the day or night.
  • There are two ways of earning money—in many financial markets, going short may cause difficulties. In Forex there is no restriction on either buying or selling. Both ways, traders can earn money.
  • Excellent liquidity. Liquidity makes it easier to get in and out of a trade at any time (if the market is not liquid, the trader may stock up to buy or sell instruments when they want). Forex is one of the most liquid financial markets in the world.
  • High leverage. Leverage allows someone with a small amount of capital to control large amounts of money. Which means gains can be maximized.
  • Low trading cost. Nothing is free in the financial market—every transaction costs money. Any person who decides to open a trade must pay fees to brokers as spread (you open an account with a broker for a Forex trading account). Spread is just the difference between the bid and ask (I will explain more about these terms in a later section).

Anyone who has Internet access, a personal computer or laptop, who knows how to use a computer, and who has this book can trade. In the beginning, you do not even need real money to get experience in trading. Large numbers of Forex brokers offer demo accounts. There is no difference between demo and real account platforms, except that you will trade without emotions! Real accounts can be opened for as little as twenty­five dollars (not recommended).

Forex trading can be done without leaving your current job, too; however, you need to develop a strategy that fits your lifestyle. In general, traders are categorized into four types: scalping, day, swing, and momentum. Scalping and day-­trading styles consume more time, whereas swing and momentum trading requires very little time.
This book is divided into three broad sections:

  • Enriching your knowledge about Forex trading
  • Introducing a great strategy for buying and selling currency pairs
  • sample trading plan, journal, and money management tips

The method for trading on almost any Forex platform is similar, however, we will show a step­by­step process with clear pictures using the MetaTrader 4 platform (a free Forex trading platform for all) and most for Forex brokers provide this platform for clients, too.

 

Chapter One – AN INTRODUCTION TO THE FOREIGN EXCHANGE (FOREX)

Worldwide, the importance of trading is increasing in the financial market. The basic concept of trading is an exchange of goods or services for other goods or services. When money emerged as a medium for commerce, trading became much simpler than traditional bartering. In financial markets, instruments such as stocks, bonds, currencies, and derivatives are exchanged or traded.

A market where sellers and buyer exchange shares is called a stock market. Bonds are another kind of investment, and buyers and sellers engage in the exchange of debt securities—arrangements where one party promises to return the invested money with interest at fixed intervals.

Usually, a contract is signed by both parties to formalize a trade. The predictive market is another type of exchange, where the exchange of goods or services is arranged to take place in the future. Foreign exchange (Forex) is a type of financial market where people exchange currencies to conduct business internationally.

Forex is an unregulated and decentralized network of currency trading between banks, public and private institutions, retailers, and speculators. It is one of the most liquid and the single largest financial market in the world. In the year 2013, Forex traded at an average volume of $5.3 trillion per day—much more than the largest stock exchange. The New York Stock Exchange (NYSE) trades at an average of $22.4 billion a day (EV 2014).

In 1944, with the aim of stabilizing the global economy after World War II, the Bretton Woods Agreement was developed. This agreement fixed other nations’ currencies against the price of gold, but eventually the US dollar was identified as a reserve currency linked to the price of gold. Gold was set at $35 per ounce.

In 1971, the modern foreign currency exchange was created and the Bretton Woods Agreement was discontinued (Viterbo 2012), and it was agreed that the US dollar would no longer be exchangeable for gold. In late 1971 and 1972, two more attempts were made to redefine how exchange rates related to the US dollar.

These agreements were called the Smithsonian Agreement and The European Joint Float. By 1973, the price of a foreign currency was determined by supply and demand, which was mainly controlled by industrialized countries. The birth of computer and Internet technology encouraged currency trading to rise from $70 billion a day in the 1980s to $1.86 trillion a day twenty­five years later (Bailey 2006).

In 1999, the European Union introduced the Euro (EUR), and it became the first single currency to be able to rival historic leader currencies such as the United States Dollar (USD), British Pound (GBP), and the Japanese Yen (JPY). Today, the Euro (EUR) is considered the second most important currency in the world (Martinez 2007).

In Forex, a transaction between traders occurs on the spot, using decentralized computer networks. Therefore it is called the spot market. Traditionally, foreign exchange trading has been a domain of large financial institutions, corporations, hedge funds, central banks, and very wealthy individuals. However, trading became much easier with the advent of modern Internet technology and other financial trading platforms; average individual investors can now speculate on the foreign exchange market.

The attraction to Forex trading is also growing rapidly. This is mainly because it provides enormous opportunities to traders. It is open twenty­-four hours a day, five and a half days a week; it has the highest leverage of any financial industry; liquidity around the clock; no commission; and it’s relatively easy to open an account even with a small initial deposit.

FOREX TRADING ESSENTIALS

Forex is the abbreviation for foreign exchange. This is where one country’s currency is traded with another country’s currency (sometimes, a currency can represent the economies of multiple countries, as is the case with the Euro). Since a currency represents a country, its value depends on that country’s economic health.

The trading between currencies happens in real time, on the spot, for whatever price it costs at any given moment, therefore, it is called the spot market, too (Martinez 2007). In Forex trading, there are only two possible actions: the buying or selling of currencies. Because of the nature of the exchange, currencies must always be bought or sold in pairs.

For example: Euro vs. United States Dollar (EUR/USD), or British Pound vs. Japanese Yen (GBP/JPY). The first currency listed in an exchange, EUR and GBP in these two examples, are called base currencies and the second currency listed, the USD and JPY in these examples, are called quote currencies. The base currencies are the basis for any currency being bought or sold.

Let’s look at an example of EUR/USD to discover how traders earn money by buying and selling a currency pair. Below, in Table 1, we see the process of buying a base currency (EUR) in respect to a quote currency (USD). In Table 2, we see the process of selling a base currency (EUR) in respect to a quote currency (USD).

Currencies are mainly divided into three categories: major, minor, and exotic. Major currencies include the United States Dollar (USD), Euro (EUR), Swiss Franc (CHF), Australian Dollar (AUD), British Pound (GBP), Japanese Yen (JPY), Canadian Dollar (CAD), and the New Zealand Dollar (NZD). When these currencies are traded with USD, they are called major pairs, for example, EUR/USD, GBP/USD, USD/JPY. When any of the major currencies are traded with each other, but not with USD, they are called a minor currency pair. For example, EUR/GBP, GBP/CAD.

If there are no major currencies traded with another currency, it is called an exotic currency pair. for example, Omani Rial (OMR) vs. Egyptian Pound (EGP), so OMR/EGP. These currencies are less liquid, lack market depth, and trade at low volumes (Taylor 2003).

Forex price action table 1 and 2

In Forex trading, all currencies are quoted in two ways: with a bid price and an ask price. In general, the bid price will always be lower than the ask price. The bid is the price at which market is willing to buy the base currency in exchange for the quote currency (Arkolakis 2014). This is the price at which traders buy the base currency.

Below, in Figure 1, we see a EUR/USD pair. The bid price is 1.1043, which means the trader can sell 1 EUR for 1.1043 USD. The ask is the price at which market sells the base currency in exchange for the quote currency. In this EUR/USD pair, the ask price is 1.1046, which means the trader can buy 1 EUR for 1.1046 USD. The difference between the bid and the ask price is called the spread, which is 0.0003 pips. Normally, the spread is what a trader would pay a broker as a commission charge.

A pip is short for a “price interest point,” or the amount of change in the exchange rate of a currency pair. A pip is the smallest unit of currency value. This is also the smallest measure of change in a given currency pair. All currency pairs are displayed to four decimal places, and one pip is equal to 0.0001. The only exception to this is Yen­based currency pairs; they are displayed in two decimal places (0.01). Some Forex brokers offer smaller denotations of pips, up to 1/10 of a pip.

Forex price action figure 1
Forex price action figure 2

Traders have various nicknames for approaches to buying currencies, such as “going long,” “long,” or taking a “long position.” These are for when they think that the base currency will rise in value; then they buy it in order to sell it back later at a higher price. Similarly, if they think that the base currency will fall in value, they sell it in order to buy it back at a lower price. This is often called taking a “short position” or “short,” or “sell position.”
There are three types of lot size available in Forex trading: standard lots, mini lots, and micro lots.

The standard lot is made of 100,000 units. The average pip size for a standard lot is approximately USD 10/pip. One pip changes the base currency value relative to the quote currency, with a result of USD 10 positive or negative value in a standard lot. A mini lot is a 10,000 unit lot, and the average pip size for a mini lot is approximately USD 1/pip. One pip changes the base currency value relative to quote currency, with a result USD 1 positive or negative. The micro lot the smallest lot, 1,000 units. The average pip size for micro lot is noted in cents (i.e., approximately USD 0.10/pip). That means one pip changes the base currency value relative to quote currency, with a result 10 cents positive or negative.

Traders (individual or institutional) must open an account with a Forex broker in order to trade Forex. Based on the broker’s capabilities, traders can open an account in various currencies, such as USD, EUR, JPY, or others. A broker also provides the investor with a trading platform—software that allows traders to carry out online buying and selling activities. One of the most common trading platforms is MetaTrader; however, some brokers have developed their own platforms for clients. An open account comes with leverage, agreed between the client and the Forex broker.

Leverage is expressed as a ratio and is based on the margin requirements imposed by your Forex broker. In order to hold an open position, a margin is required—it is collateral. The term “margin” is probably best explained with the word “bailout”. Margin is defined as the amount of money required in your account to maintain your market positions using leverage.

For example, if you are in an open position for $20,000 using a 100:1 margin, then your account balance should be no less than 1% of that amount. This is because you can usually trade up to 100 times the money you actually have. Similarly, if your broker require a 2% margin, you have a 50:1 leverage. The calculation for leverage is:

Leverage = 100 / Margin Percentage

Account balance and margin balance are different. The trader can have a balance in his or her account, but he or she can also have a shortage of margin, which may trigger the broker to close all open positions. Leverage allows a trader to trade without putting up the full amount, however, some margin amount is required to be in the trading account.

For example, 100:1 leverage means $1,000 of equity is required to purchase an order worth $100,000. Traders need to keep a careful eye on margins. If there is not a sufficient marginal amount or the account falls below the liquidation margin level, trade will be immediately liquidated, which is called margin closeout. This mainly happens when open positions are in the negative.

Traders can conduct just two actions: buying and selling a base currency. An entry is when a trader decides to open a position, either to buy or sell. Traders have the option to close a position as well, either in a state of profit, loss, or no gain or loss. When a trader decides to close open positions for either a profit or a loss, or for no gain or loss, it’s is called an exit. A stop loss is the amount or value a trader is willing to lose in case of a bad decision. Stop loss can also be used to secure profit, if the trade is already profitable.

The distance between entry and stop is called risk, whereas the distance between target and entry is called a reward (Seiden 2011). Target is a price that, if accomplished, would result in a trader recognizing the best possible outcome. This is the price at which the trader would like to exit his or her existing position.

Liquidity in the Forex market is due to the presence of many participants. This enables traders to get in and out anytime, and at a variety of prices. This level of activity and interest reduces trading risk to traders. The seven major currencies —EUR, CHF, GBP, CAD, AUD, JPY and NZD—are the most liquid currencies in the Forex market when traded against the USD (Karnaukh, Ranaldo, & Söderlind 2013). Major international banks play an important role in providing liquidity in the Forex market (BIS 2014).

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