Forex eBook

Forex eBook
Part I-Introduction

What is Forex?

Forex is the knowledge and art of trading currencies in a way to gain some
profit. In other words, Forex market is a place where people buy or sell
currencies expecting profit. It is clear that we only buy when we expect the
value of a currency will raise and sell when we expect it will fall. All the efforts
of a Forex trader are in this way that predict the upward or downward
movement of a currency.
Currencies are usually expressed as pairs with US dollar as the base. Major
currency pairs are relevant to the major economical countries. EUR/USD,
GBP/USD, USD/JPY, AUD/USD, USD/CHF and USD/CAD are the majors.

1-2 Profit/Loss Units (pips)

Pip (or in plural pips) connotes point in percent, means one forth decimal in a
unit of currency. For example if the price (or ratio) of USD/CAD goes from
1.0035 to 1.0085 it has changed 0.0050 unit or 50 pips. So, if you buy USD/CAD
at 1.0035 and sell it at 1.0085 you will profit 50 pips.

1-3 Investment Units (lots)

A lot in Forex means the portion of trading investment in comparison to
$100,000. For example if you invest $10,000 in a trade it will be
$10,000/$100,000=0.1 lot. It is very important that you take your trading lot
size according to your investment budget. Usually investing 1/30 up to 1/20 of
the total budget in a single trade is considered safe.

1-4 Leverage

One of the advantages of Forex market that makes it very attractive is that the
brokers multiply your investment amount in each trade by usually 50-500
times. This is called leverage. For example if you invest $50 in a trade with a
broker of leverage 100, actually you will enter to the market with $5,000. In
this case your trade lot size will be $5,000/$100,000=0.05, or if you want to
trade 0.1 lot at leverage of 150 you should invest (0.1x$100,000)/150=$66 in
this trade. So, your required investment in each trade will be determined by
your lot size and the leverage level of the broker.
Using the leverage offer of the broker is upon your choice and there are lots of
controversies around it because although you can multiply your profit if you
leverage your investment, in the same time there is a risk of a great loss (if the
currency goes in wrong direction). But to end this argument we have to say if
our trading system (or strategy) is reliable and its profit/loss ratio is high why
not use leverage advantage. Leverage is bad in a case which the risk of loss is
higher than win.

1-5 Forex Charts

Forex charts are the drawings of currency pairs in various time windows. The
are drawn in forms of lines or candles. Candle forms are traders standard and
the most beneficial form for trading purpose because each single candle
shows the opening, closing, maximum and minimum of the price in a specific
time window. If a candle body opens at a lower and closes at a higher price it
is called bullish or long and is drawn in green (or blue). Maximum and
minimum spot prices in the same candle are shown by spikes. If the price
opens in a higher spot and closes in a lower price the candle or chart is called
bearish or short and is shown in red.
Candle charts are the top most visual tool to analyze a trading opportunity. In
this way, having top quality charts are very important. A good chart should be
clear, exact (both in pricing and drawing) and well-scaled. Only on such a
chart you will be able to spot prices, compare, evaluate or calculate them or
realize the patterns.

You can get an amazing Forex trading system for free from the below address.
With an amazing 90% profitable trade rate, the system has proven itself during
the time. The system is full of rare, top secret tips and strategies that only 1% of
Forex traders know them. I earn constantly 3200 pips a month using this system. It
is so easy that you can do indeed. This offer is only valid for a short time. So, just
don't miss this one time in a life opportunity.
http://thebestforexsystem.tumblr.com/

Part II- Support And Resistance

Many traders believe that support and resistance are the most important concepts
in Forex. I describe them and their use here so you can judge yourself how much
they may worth.

Support is a zone where the currency price can hardly pass it and goes down
further. It is not a fix price but a price range that each time the price reach it lose
momentum and stops there. On the other side, resistance is a zone where resists
the price to goes up further. If we draw an hourly or a 4-hour chart for each of the
currency pairs we can see top and down levels that price has tried them many
times but never has passed them as if those levels act as barriers for the price. If
we take a closer look at the charts, there are several intermediary support and
resistance levels between weekly or monthly high or low prices. Weekly or
monthly highs and lows are called strong support or resistance. The price hangs
around them for awhile and then goes up or down to reach another intermediary
level as if it jumps between these levels. If again we revisit the charts we
understand that when the price releases from one level almost in all times goes
non-stop to reach the nearest level, then heads for another level in its
neighborhood. This is a point that needs some attention. If this is true, so there is
plenty of trading opportunities when a currency moves from one support or
resistance level to another one. Actually, experienced traders use the full
potential of this property to their advantage.

However, support and resistance have a deeper meaning. Support occurs when a
series of positive economical factors force the price to stop weakening and push
it upward. Just the same, resistance take place when a series of negative
economical factors cause a price to stop. At these levels, the currency has
reached its full potential and can not goes further. To go further and pass the
barriers it needs more positive or negative economical drives. From this view we
can resemble support and resistance as the two poles of an electromagnet with
the price swings in between. The reason of the price swing is the current of
electricity (in our case economical drives). When the current increases, the price
jumps up and when it decreases, the price goes down.

So, a smart trader takes the most out of all these theories. Trading has a close
relationship with probability. So if we take it to account, the chance of breaking of
strong supports or resistances is much less than the chance of price rebound.
According to this logic, if we buy at support or sell at resistance, with a high
probability we will be on the profit side. Math says this and all we know that math
is right.


Part III-Forex Chart Patterns

For many reasons, forex charts usually obey some patterns. If you work with them
and your eyes get familiar with them, these patterns are very powerful tools to
guide you during your trades. There are many patterns and each of them has its
name but to be simple and short I explain here only the most proven patterns
which always work and you can rely on.

3-1 M and W (Bat) Patterns

These are the most frequent chart patterns and more or less have M or W shapes.
Sometimes, one leg extends or another leg gets short. These are not very
accurate signals but they help you to get a rough estimation of a currency move.
3-2 Weakening M and Strengthening W (Triangle) Patterns
In contrast to M and W patterns, weakening M and strengthening W patterns are
very accurate signals. A weakening M occurs when an upward (bullish) move is
completed, then a weaker downward move (one third or half of the first move)
forms and then a very weak (usually one candle) bullish follows it. After
completion of the third move you can say with a high confidence that the currency
price will sharply drop. This is the point you should sell the currency and gain a
nice profit. Strengthening W pattern has just the same story but in a reverse
order. I love triangle patterns because they are very strong signals and nearly
always are correct.

3-3 Weakening Upward or Downward (Cascade) Patterns

These are in fact upward or downward moves that get weaken during the time.
For example, an upward move starts with three bullish candles, then continues by
one bearish candle, then two bullish and again one bearish and hence forth. It is
obvious that the move gets weaken and then tends to reverse (a major or minor
reversal depends on the support/resistance type, for example if a weakening
upward cascade reaches a major resistance level it is highly expected to go for a
big reversal).

These patterns are tradable in two forms. The first is at the time when only the
first few bullish or bearish candles have formed and the move is in its half way to
get matured (reach a support or resistance level). At this time we can buy or sell
and wait until the move ends, then close the trade with profit. However, these are
short or medium range moves and we can not expect so much pips. The second
better use is at the time when a move gets matured and a reversal is imminent.
We can take this opportunity and trade. I also like weakening cascades because
they are very reliable and stable signals.

3-4 J or Reverse J Patterns

These patterns form when a move starts with very dwarf body candles and during
the time the candles get taller and the move escalates. In these patterns the
candles are usually uniform (full bullish in upward or full bearish in downward
moves). The start of such patterns are usually from a strong support or resistance
and they are profitable if the trader recognize them at the very early stages. If
they grabbed in time, they are very reliable and profitable.

3-5 Fractals

Fractals in general are regularly repeated shapes in various scales. Fractals occur
in forex charts and are very various in in both shape and size. If a fractal is
detected in the early stages (when the first or second fractal has shaped), the
trader can trade on it. Trading fractals needs much experience and many forex
professionals use them in their advantage.


Part IV-Consolidation and Breakout, Local Maxima and Minima

4-1 Consolidation and Breakout

If a currency swing in a relatively tight price range (10-20 pips) for a long time (a
few hours or more) it is said that the currency is in consolidation. If we zoom in a

4-hour consolidation by charting short time frames (for example 15-minute
charts), we can see several zigzag moves. As soon as we zoom out the same
consolidation to a 4-hout charting, that consolidation transforms to a single 4-hour
dwarf candle (that may have equal head or tail spikes). So, charting time frame
can hide or show a consolidation. Moreover, any short range equilateral candle in
any time frame is a consolidation if it is charted in smaller time frames.
If we take a look at the behind scene, it will be found that consolidation happens
actually when economical forces reach a very tight balance. Positive and
negative forces fight each other to overcome and push the price up or pull it
down. During a consolidation period this does not take place until one of the
forces wins and causes a fast, big move. Such a move is called breakout. In other
words, breakout is the release of currency from a tight consolidation range and
heading fast upward or downward seeking to reach new price levels (usually at a
strong support or resistance). General rule is that the momentum of a breakout
depends on the duration of its consolidation. Longer time consolidations usually
signal that bigger breakouts are on the way.

Now, the question is when a breakout will happen and what will be the direction
of the move. The answer is a breakout happens when the involving economic
forces get out of balance and it goes to the direction that the winner forces
determine. To know about these forces we need to learn more about economy,
currency dynamics and forex fundamentals.

4-2 Local Maxima and Minima

During the study of consolidation or support and resistance we note that the price
goes up and down in a short range (10-30 pips). These price levels are local
maxima or minima. To take out the most from our trade and gain the maximum
profit we should always wait the price reach its local minima to buy and its local
maxima to sell. This way we will earn 10-30 pips more profit in each trade.
Moreover, in setting stop loss, we should always consider local maxima and
minima.


Forex eBook

Recommended

Recommended

More Related Content

Recently uploaded

Recently uploaded (20)

Featured

Featured (20)

Forex eBook