The forex quick guide for beginners and private traders


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The forex quick guide for beginners and private traders

  1. 1. The Forex quick guide for beginners and private tradersThis guide was created by Easy-Forex™ Trading Platform , and is offered FR EEto all Forex traders. Make your Forex learning much more efficient: Register now at Easy-Forex™ edit by http:/ Joining is free and simple, and it gives you online access to many supporting tools, such as Forex outlook, Forex charts, info-center, and more. www.Easy-Forex.comIn this book: (click a chapter title below to directly get there) page Intro How to use this book 3 1. Forex? What is it, anyway? (a simple introduction, for the 4 very beginners…) 2. What is Forex trading? What is a Forex deal? 6 3. What is the global Forex market? 12 4. Overview of trading Forex online 21 5. Training for success 25 6. Technical Analysis: patterns and forecast methods used 29 today 7. Fundamental Analysis and leading market indicators 47 8. Day-Trading (on the Easy-Forex™ Trading Platform) 56 9. Twenty issues you must consider 64 10. Tips for every Forex trader 71 11. Forex glossary 78 12. Disclaimer (risk warning) 114 2 of 2
  2. 2. Introduction: how to use this bookThis book has been developed to help the Forex beginner, though experiencedand professional traders may find it a handy reference.Beginners and novice traders are likely t o benefit from reading the entiretext, s tarting with Chapter 1, which pr ovides a basic over view of whatcurrency trading is, and how to get started.The chapters are set out in a logi cal flow, but do not need to be read in orderto make sense, as each works as a discrete unit unto itself. You may prefer tofocus first on those chapters that you feel will complement your particularknowledge base best. Chapter 11 is a gl ossary of terms (listed alphabetically)used in the Forex business, that will pr ove helpful as you read this book, a ndmay serve as a valuable reference as you become an experienced currencytrader.With the h elp of this guide , you will soon be ready to start trading Forex – i nfact, with the assistance of the online Easy-Forex™ team, you can start today.We wish y ou success in your trading, and hope you f ind this book interesting,helpful and enjoyable.Before you start, please remember: • Forex t rading (OTC Trading) involv es substantial risk of l oss, a nd may not be suitable for everyo ne. Before deciding to undertake such transactions, a user should carefully evaluate whether his/her financia l situation is appropriate for such transactions. Read more in the " RISK WARNING" section on Easy-Forex site / Risk Disclaimer. • Always ask your Forex dealer (the TRADING PLATFORM you wish to trade with) the questi ons we prepared for you in this book (chapter 9). Selecting the appropriate Forex TRADING PLATFORM is essential for success in handling your trading and monitoring your activity, as well as maximizing profits, while minimizing losses and costs. Your comments and suggestions are highly appreciated (and may well be incorporated in our next edition)! Be our guest and write us: 3 of 3
  3. 3. [1] Forex? What is it, anyway?The marketThe currency trading (foreign exchange, Forex, FX) m arket is the biggest andfastest growing market on earth. Its daily turnover is more than 2.5 trilliondollars. The participants in this mark et are central and comm ercial banks ,corporations, institutional inves tors, hedge funds, a nd private individuals likeyou.What happens in the market?Markets are places w here goods are traded, and the same goes with Forex. InForex markets, the “goods” are the curre ncies of various countries (as well asgold and s ilver). For example, you migh t buy euro with US dollars, or youmight sell Japanese Yen for Canadian dollars. It’s as basic as tradin g on ecurrency for another.Of course, you don’t have to purchase or sell actual, physical currency: youtrade and work with your own base currency, and deal with any currency pai ryou wish to.“Leverage” is the Forex advantageThe ratio of investment to actual value is called “leverage”. Using a $1,000 tobuy a Forex contract with a $100,000 value is “leveraging” at a 1:100 ratio.The $1,000 is all you i nvest and all you risk, but the gains you can make ma ybe many times greater.How does one profit in the Forex market?Obviously, buy low and sell high! Th e profit potential c omes from th efluctuations (changes ) in the currency exchange market. Unlike the stockmarket, w here share are purchased, F orex trading does not require physicalpurchase of the currencies, but rather involves contracts for amount a ndexchange rate of currency pairs.The advantageous thing about the Fo rex market is that regular dailyfluctuations – in the regular currency exchange markets, often around 1% - ar emultiplied by 100! ( Easy-Forex™ generally offers trading ratios from 1:50 to1:200).How risky is Forex trading?You cannot lose more than your initial investment (also called your “margin”).The profit you may make is unlimited, but you can never lose more than themargin. You are strongly advised to never risk more than you can afford tolose. 4 of 4
  4. 4. How do I start trading?If you wish to trade u sing the Easy-Forex™ Trading Platform, or any other, youmust first register an d t hen deposit the amount y ou wish to have in yourmargin account to inv est. Registering is easy with Easy-Forex™ and it acceptspayment via most major credit cards, PayPal, Western Union. Once yourdeposit has been received, you are ready to start trading.How do I monitor my Forex trading?Online, anywhere, anytime. You have fu ll control to monitor your tradingstatus, check scenarios, change some te rms in your Forex deals, close deals,or withdraw profits. Easy-Forex™ wishes you enjoyable and successful Forex trading! 5 of 5
  5. 5. [2] What is Forex trading? What is a Forex deal?The investors goal i n Forex trading is to profit from foreign currencymovements.More than 95% of all Forex trading performed today is for speculative purposes(e.g. t o p rofit from currency movemen ts). The r est bel ongs to hed ging(managing business exposures to various currencies) and other activities.Forex trades (tradi ng onboard i nternet pl atforms) are non-delivery trades:currencies are not physically traded, bu t rather there are currency contr actswhich are agreed upon and performed. Both parties to such c ontracts (thetrader and the tradi ng platfor m) undert ake to fulf ill their obligations: oneside undertakes to sell the amount specified, and the other undertakes to buyit. As mentioned, over 95% of the market activity is for speculative purpos es,so there is no intenti on on either side to actually pe rform the contract (thephysical delivery of the currencies). Thus , the contract ends by offsetting itagainst an opposite position, resulting in the profit and loss of the par tiesinvolved.Components of a Forex dealA Forex deal is a contract agreed up on between the trader and the market-maker (i.e. the Trading Platform). The contract is comprised of the followingcomponents: • The currency pairs (which currency to buy; which currency to sell) • The princi pal amount (or "face", or "nomi nal": the amount of c urrency involved in the deal) • The rate (the agreed exchange rate between the two currencies).Time frame is also a factor in some deals, bu t this chapter focuses on D ay-Trading (similar to “Spot” or “C urrent Time” trading), in which deals have alifespan of no more than a single full day. Thus, time frame does not playinto the equation. Note, howeve r, that deals can be r enewed (“rolled-over”)to the next day for a limited period of time.The Forex deal, in this context, is therefore an obligation to buy and sell aspecified amount of a partic ular pair of currencies at a pre-determi nedexchange rate.Forex trading is always done in c urrency pairs. For example, imagine that theexchange r ate of EUR/USD (euros to US dollars) on a certain day is 1.5000(this number is also r eferred to as a “spo t rate”, or just “rate”, for short). If 6 of 6
  6. 6. an investor had bought 1,000 euros on that date, he would have paid 1,500.00US dollars. If one year later, the Forex rate was 1.5100, the value of the eurohas increased in relation to the US do llar. The inv estor could now sell the1,03300 euros in order to receive 1,510.00 US dollars. The investor would thenhave USD 10.00 more than when he started a year earlier.However, to know if the investor made a good investment, one needs to comparethis investment option to alternative investments. At the very minimum, the returnon investment (ROI) should be compared to the return on a “risk-free” investment.Long-term US government bonds are considered to be a risk-free investment sincethere is virtually no chance of default - i.e. the US government is not likely to gobankrupt, or be unable or unwilling to pay its debts.Trade only when you expect the currenc y you are buy ing to i ncrease in val uerelative to the currency you are selling. I f the currency you are buying doesincrease in value, you must sell back that currency in order to lock in theprofit. An open trade (also called an “open position”) is one in which a traderhas bought or sold a particular currency pair, and ha s not yet sold or boughtback the equivalent amount to complete the deal.It is estim ated that around 95% of th e F X market i s speculati ve. In otherwords, the person or instit ution that bought or sold the currenc y has no pl anto actually take delivery of the currency in the end; r ather, they were solelyspeculating on the movement of that particular currency.Exchange rateBecause currencies are traded i n pairs and exchanged one against the otherwhen traded, the rate at whic h they are exchanged is called the exchangerate. The majority of currencies are traded against the US dollar (USD), whichis traded more than any other currenc y. The four currencies traded mostfrequently after the US dollar are the eu ro (EUR), the Japanese yen (JPY), theBritish pound sterling (GBP) and the Sw iss franc (CHF). These fi ve currenciesmake up the majority of the m arket and are called the major currencies or“the Majors”. Some sources also include the Australian dollar (AUD) within thegroup of major currencies.The first c urrency in the exchange pair is referred to as the base currency .The second currency is the counter currency or quote currency . The cou nteror quote currency is thus the numerator in the ratio, and the base currency isthe denominator.The exchange rate tells a buyer how muc h of the c ounter or quote c urrencymust be paid to obtain one unit of the base currency. The exchange rate alsotells a seller how much is received in the counter or quote currency wh en 7 of 7
  7. 7. selling one unit of the base c urrency. For exampl e, an exc hange rate forEUR/USD of 1.5083 specifies to the buyer of euros that 1.5083 USD must bepaid to obtain 1 euro.SpreadsIt is the di fference between BU Y and SE LL, o r BID and ASK. In other words,this is the difference between the market makers "selling" price (to i tsclients) and the price the market maker "buys" it from its clients.If an inves tor buys a currency and imme diately sells it (and thus there is nochange in the rate of exchange), the investor will lose money. The reason forthis is “the spread”. At any given moment, the amount that wil l be receivedin the counter currency wh en selling a unit of ba se currency will be lowerthan the a mount of c ounter currency which is requir ed to purc hase a uni t ofbase currency. For instance, the EU R/USD bid/ask currency rates at yourbank may be 1.4975/1.5025, representing a spread of 500 pips (percentage inpoints; one pip = 0.0001). Such a rate is much higher than the bid/askcurrency rates that online For ex inve stors commonly encounter, such as1.5015/1.5020, with a spread of 5 pips. In general, smaller spreads are betterfor Forex i nvestors since they r equire a s maller movement in exchange ratesin order to profit from a trade.Prices, Quotes and IndicationsThe price of a currency (in terms of the counter currency), is called “Quote”.There are two kinds of quotes in the Forex market:Direct Quote: the price for 1 US dollar in term s of the other currency, e.g. –Japanese Yen, Canadian dollar, etc.Indirect Quote: the pr ice of 1 unit of a currency in terms of US dollars, e.g. –British pound, euro.The market maker pr ovides the investor with a quote. The quote is the pri cethe market maker will honor w hen the deal is executed. This is unlike an“indication” by the market maker, which informs the trader about the mark etprice level, but is not the final rate for a deal.Cross rates – any quote which is not against the US dollar is called “cross”. Forexample, GBP/JPY is a cross rate, since it is calculated via the US dollar. Hereis how the GBP/JPY rate is calculated: 8 of 8
  8. 8. GBP/USD = 2.0000; USD/JPY = 110.00; Therefore: GBP/JPY = 110.00 x 2.0000 = 220.00.MarginBanks and/or online trading providers need collateral to ensure that theinvestor can pay in the event of a loss. The collateral is called the “margin”and is also known as minimum s ecurity in Forex mar kets. In pr actice, i t i s adeposit to the traders account that is intended to cover any currency tradin glosses in the future.Margin enables private investors to trad e in markets that have high mi nimumunits of tra ding, by al lowing traders to hol d a much l arger position than th eiraccount value. Margin trading also enhanc es the rate of profit, but similarlyenhances the rate of loss, beyond that taken without leveraging.Maintenance MarginMost tradi ng pla tforms require a “mainte nance mar gin” be de posited by thetrader par allel to th e margins deposi ted for actual trades. The main reasonfor this is to ensure the necessary amo unt is available in the event of a “gap”or “slippage” in rates. Maintenance m argins are also used to cov eradministrative costs.When a tr ader sets a Stop-Los s rate, most market makers cannot guaranteethat the stop-l oss will actually be us ed. For example, if the market for aparticular counter currency had a vert ical fall from 1.1850 to 1.1900 betweenthe close and opening of the market, and the trader had a stop-loss of 1.1875,at which rate would the deal be closed ? No matter how the rate slippage isaccounted for, the tr ader would probably be required to add-up on his initialmargin to finalize the automatically cl osed transacti on. The funds from themaintenance margin might be used for this purpose.Important note : Easy-Forex™ does NOT require that traders deposit amaintenance margin. Easy-Forex™ guaran tees the e xact rate (Stop-L oss orother) as pre-defined by the trader. If you don’t wish to deposit “maintenance margin”, in addition to the margin required for trading, join Easy-Forex™: no “maintenance margin”, trade from as little as $100! 9 of 9
  9. 9. LeverageLeveraged financing is a common practice in Forex trading, and allows tradersto use credit, such as a trade purchased on margin, to maxi mize returns.Collateral for the loan/leverage in the margined acc ount is provided by theinitial deposit. This can create the opportunity to control USD 100,000 for aslittle as USD 1,000.There are five ways private investor s can trade in Forex, directly orindirectly: • The spot market • Forwards and futures • Options • Contracts for difference • Spread bettingPlease note that this book focus es on the most com mon way of trading in theForex market, “Day-Trading” (related to “Spot”). Please refer to the gl ossaryfor explanations of each of the five ways investors can trade in Forex.A spot transactionA spot transaction is a straightf orward exchange of one currency for another.The spot rate is the current market price, which is also called the “benchmarkprice”. Spot transact ions do no t requ ire immediate settlement, or payment“on the s pot”. The s ettlement date, or “value date” is the second businessday after the “deal date” (or “trade date”) on which the transaction is agreedby the trader and market maker. The two-day period provides time to confirmthe agreement and to arrange the clearing and necessary debiting andcrediting of bank accounts in various international locations.RisksAlthough Forex trading can lead to very profitable resul ts, there aresubstantial risks involved: exc hange rate ri sks, interest rate risks, credit risksand event risks.Approximately 80% of all currency transactions last a period of s even days orless, with more than 40% lasting fewer than two da ys. Given the extremely 10 of 10
  10. 10. short lifes pan of th e typical trade, tec hnical in dicators hea vily influenceentry, exit and order placement decisions. You don’t need British pounds or Japanese yens to trade with them. Use your own account base currency at Easy-Forex™. 11 of 11
  11. 11. [3] What is the global Forex market?Today, the Forex market is a nonstop cash market where currencies of nationsare traded, typically via brokers. Foreign currencies are continually andsimultaneously bought and s old across local and global markets. The value oftraders investments increases or de creases based on currency movements.Foreign exchange market conditions can change at any time in response toreal-time events.The main attractions of short-term currency trading to private investors are: • 24-hour tr ading, 5 days a wee k with nonstop access (24/7) to global Forex dealers. • An enormous liquid market, making it easy to trade most currencies. • Volatile markets offering profit opportunities. • Standard instruments for controlling risk exposure. • The ability to profit in rising as well as falling markets. • Leveraged trading with low margin requirements. • Many options for zero commission trading.A brief history of the Forex marketThe follow ing is an overview into th e hi storical evolution of the forei gnexchange market and the roots of the international currency trading, from thedays of the gold exchange, through the Bretton-Woods Agr eement, to itscurrent manifestation.The Gold exchange period and the Bretton-Woods AgreementThe Bretton-Woods Agreement, establis hed in 1944, fixed national currenciesagainst the US dollar, and set the dollar at a rate of USD 35 per ounce of gold.In 1967, a Chicago bank refused to make a loan in pound ster ling to a collegeprofessor by the name of Milton Friedm an, becaus e he had intende d to usethe funds to short th e British currency. The banks refusal to grant the loanwas due to the Bretton-Woods Agreement.Bretton-Woods was a imed at es tablishing i nternational monetar y stability bypreventing money from taking flight across countries, thus curbing speculationin foreign currencies. Between 1876 an d World War I, th e gold exchangestandard had ruled over the internatio nal economic system. Under the gold 12 of 12
  12. 12. standard, currencies experienc ed an era of stabili ty becaus e they weresupported by the price of gold.However, the gold standard had a weakne ss in that it tended to c reate boom-bust economies. As an economy strength ened, i t would import a great deal,running down the gold reserves required to support i ts currency. As a result,the money supply would diminish, interest rates would escalate and economicactivity would slow to the point of recession. Ultimately, prices ofcommodities would hit rock bottom , th us appeari ng attractive to oth ernations, who would then sprint into a buying frenzy. In turn, this would injectthe economy with gold until it i ncreased its money su pply, thus driving do wninterest rates and restoring wealth. Such boom-bust patterns were commonthroughout the era of the gol d stan dard, un til Wo rld War I temporari lydiscontinued trade flows and the free movement of gold.The Bretton-Woods A greement was founded after World War II, in order tostabilize and regulate the inter national Forex market. Participating countr iesagreed to try to mai ntain the v alue of their currency with in a narrow marginagainst the dollar and an equivalent rate of gold. The dollar gained a premiumposition as a reference currenc y, reflecti ng the shi ft in global econom icdominance from Europe to the USA. Countries were prohibited from devaluingtheir currencies to benefit export market s, and were only allowed to dev aluetheir currencies by less than 10%. Po st-war construction during the 1950s,however, r equired gr eat volum es of F orex trading as masses of capital w ereneeded. This had a destabilizing effect on the exchange rates established i nBretton-Woods.In 1971, t he agreement was scrapped w hen the US dollar ceased to beexchangeable for gold. By 1973, the forc es of supply and demand were incontrol of the currencies of major indu strialized nations, and currency nowmoved more freely across borders. Prices were floated daily, with volum es,speed and price volatility all increasin g throughout the 1970s. New financialinstruments, market deregulation and trade liberali zation em erged, furtherstoking growth of Forex markets.The explosion of computer technology that began in the 1980s acceleratedthe pace by exte nding the market continuum for cross -border capitalmovements through Asian, European and American time zones . Transacti onsin foreign exchange increased rapidly from nearly $70 billion a day in the1980s, to more than $3 trillion a day two decades later. 13 of 13
  13. 13. The explosion of the euro marketThe rapid developme nt of the Eurodollar market, which can be defined as U Sdollars de posited in banks ou tside th e US, was a major m echanism forspeeding up Forex trading. Similarly, Euro markets are those where currenciesare deposi ted outside their c ountry of origin. The Eurodollar market cameinto being in the 1950s as a res ult of the Soviet Union depositing US dollarsearned from oil revenue outside the US, i n fear of having thes e assets fr ozenby US regu lators. This gave rise to a va st offshore pool of dollars outside t hecontrol of US authori ties. The US gove rnment reacted by im posing law s torestrict dollar lending to foreigners. Eu ro markets were particularly attractivebecause they had far fewer reg ulations and offered higher yields. From thelate 1980s onwards, US companies bega n to borrow offshore, finding Euromarkets an advantageous place for hold ing excess liquidity, providing s hort-term loans and financing imports and exports.London w as and remains the principal offshore market. In the 1980s, itbecame the key cent er in the Eurodollar market, when British banks beganlending dollars as an alternative to po unds in order t o maintain their leadingposition i n global finance. Londons convenie nt geogra phical loc ation(operating during Asian and American markets) is also instrumental inpreserving its dominance in the Euro market.Euro-Dollar currency exchangeThe euro to US dollar exchange rate is the price at which the w orld demandfor US dollars equals the world supply of euros. Re gardless of geographi calorigin, a rise in the world dem and for euros leads to an appreciation of theeuro.Factors affecting the Euro to US dollar exchange rateFour factors are identified as fundamental determinants of the real euro to USdollar exchange rate: • The international real interest ra te differential be tween the Federal Reserve and European Central Bank • Relative prices in the traded and non-traded goods sectors • The real oil price • The relative fiscal position of the US and Euro zoneThe nominal bilateral US dollar to euro exchange is the exchange rate thatattracts th e most attention . Notwiths tanding the c omparative importance of 14 of 14
  14. 14. bilateral trade links with the US, trade with the UK i s, to some extent, moreimportant for the euro.The follow ing chart i llustrates the EUR/USD exchange rate over time, fro mthe inauguration of the eur o, until mid 2006. Note that each line (theEUR/USD, USD/EUR ) is a “mirror” image of the other, si nce both ar ereciprocal to one another. This chart is illustrates the steady (general) declineof the USD (in terms of euro) from the beginning of 2002 until the end of2004.EUR-USD rates 1998-2008In the l ong run , th e correlation betwee n the bilateral US dollar to e uroexchange rate, and different measures of the eff ective exc hange rate ofEuroland, has bee n r ather high, especi ally when one looks at the effec tivereal exchange rate. As inflation is at very similar levels in the US and the Euroarea, ther e is no need to adjust the US dollar to euro rate for inflationdifferentials. However, becaus e the Euro zone also trades intensively withcountries that have relatively high inflati on rates (e.g. some countries inCentral and Eastern Europe, Turkey, etc.), it is mor e important to downplaynominal exchange r ate measures by lo oking at relative price and costdevelopments. 15 of 15
  15. 15. The fall of the US dollarThe steady and orderly decline of the US dollar from early 2002 to early 2007against the euro, ster ling, Australian dollar, Canadian dollar an d a few ot hercurrencies (i.e. its trade-weighted average, which is what counts for purpos esof trade adjustment), remains significant.In the wake of the sub-prime mortgage crises in the US, dollar lossesescalated and continued to feel the backlash. The Fe d responded with severalrounds of rate hikes while weighing the balance of domesti c growth andinflation fears. When was the last time the EUR-JPY pair was over 150.00? (Have a look at Easy-Forex™ professional charts).The basic theories underlying the US dollar to euro exchange rateLaw of One Price: In competitive markets, free of transportation cost barriersto trade, i dentical products sold in di fferent countries must sell at the sameprice when the prices are stated in terms of the same currency.Interest rate effects: If capital is allowed to flow freely, exchange ratesbecome stable at a point where equality of interest is established.The dual forces of supply and demandThese two reciprocal forces determine euro vs. US dollar exchange rates.Various factors affect these tw o forces , which in turn affect the exchangerates:The business environment: Positive indi cations (i n terms of governme ntpolicy, competitive advantages , market size, etc.) i ncrease the demand forthe currency, as more and more enterpri ses want to invest in its place oforigin.Stock market: The major stock indices also have a correlati on with thecurrency rates, prov iding a daily read of the mood of the busin essenvironment.Political factors: All exchange rates are susceptible to political instability andanticipation about n ew govern ments. Fo r example, poli tical instabili ty in 16 of 16
  16. 16. Russia is also a flag for the euro to US dollar exchange, because of thesubstantial amount of German investment in Russia.Economic data: Economic data such as labor reports (payrolls, unemploymentrate and average hourly earnings), c onsumer price indices (CPI), producerprice indices (PPI), gross domestic product (GD P), intern ational tr ade,productivity, industri al produc tion, c onsumer confi dence etc ., also aff ectcurrency exchange rates.Confidence in a currency is the greatest determinant of the real euro to USdollar exc hange rate. Decisions are m ade based on expected futur edevelopments that may affect the currency.Types of exchange rate systemsAn exchange can operate under one of four main types of exchange r atesystems:Fully fixed exchange ratesIn a fixed exchange r ate system, the go vernment (or the central bank actingon its behalf) intervenes in the currency market in order to keep the exchangerate close to a fixed target. It i s committed to a single fixed exchange rateand does not allow major fluctuations from this central rate.Semi-fixed exchange ratesCurrency c an move within a permitted ra nge, but the excha nge rate is th edominant target of economic policy-making. Interest rates are set to meetthe target exchange rate.Free floatingThe value of the currency is det ermined so lely by supply and de mand in th eforeign exchange market. Consequently, trade flows and capi tal flows are themain factors affecting the exchange rate.The defini tion of a f loating exchange rate system is a monetary system inwhich exchange rates are allowed to move due to market forces withoutintervention by nati onal govern ments. The Bank of England, for exam ple,does not actively intervene in the currency markets to achi eve a desi redexchange rate level.With floati ng exchange rates, changes in m arket supply and demand caus e acurrency to change in value. Pure free floating exchange rates are rare - mostgovernments at one time or a nother s eek to “manage” the v alue of theircurrency through changes in interest rates and other means of controls. 17 of 17
  17. 17. Managed floating exchange ratesMost governments engage in managed floating systems, if not part of a fixedexchange rate system.The advantages of fixed exchange ratesFixed rates provide greater certainty for exporters and importers and, undernormal circumstances, there is less speculative activity - though this dependson whether dealers in foreign exch ange markets regard a given fixedexchange rate as appropriate and credible.The advantages of floating exchange ratesFluctuations in the e xchange ra te can provide an automatic adjustment f orcountries with a large balance of payments deficit. A second key advantage offloating exchange rates is that i t a llows the governm ent/monetary authori tyflexibility in determining interest rates as they do not need to be used toinfluence the exchange rate. The EUR-USD has dropped? So what! (you can profit in any direction it takes, provided you chose the winning direction…)Who are the participants in today’s Forex market?In general, there are two main groups in the Forex marketplace:Hedgers account for less than 5% of the market, but are the key reasonfutures and other such financi al instrum ents exist. The group using thesehedging tools is primarily businesses an d other orga nizations participatin g i ninternational trade. Their goal is to diminish or neutralize the impac t ofcurrency fluctuations.Speculators account for more than 95% of the market.This group includes private individual s and corporations, public entities ,banks, etc . They participate in the Forex market in order to create profit,taking advantage of the fluctuations of interest rates and exchange rates.The activit y of this group is res ponsible f or the hi gh liqui dity of the F orexmarket. They conduct their trading by using leveraged investing, making it afinancially efficient source for earning. 18 of 18
  18. 18. Market makingSince most Forex deals are made by (ind ividual and organizational) traders, inconjunction with market makers, it’s im portant to un derstand the role of th emarket maker in the Forex industry.Questions and answers about market makingWhat is a market maker?A market maker is the counter part to the client. The Market M aker does notoperate as an intermediary or trustee. A Market Maker performs the hedgingof its clients positions according to its policy, which includes offsettingvarious clients posi tions, an d h edging via liquidi ty providers (banks) an d itsequity capital, at its discretion.Who are the market makers in the Forex industry?Banks, for example, or trading platforms (s uch as Easy-Forex™), who b uy andsell financial instr uments “ make the market”. That is contrary tointermediaries, which represent clients, basing their income on commission.Do market makers go against a clients position?By definiti on, a market maker i s the c ounterpart to all its clie nts positions ,and always offers a t wo-sided quote (t wo rates: BUY and SELL). Therefore,there is nothing personal between the market maker and the customer.Generally, market makers regard all of the positions of their clients as awhole. They offset between clients op posite positi ons, and he dge their netexposure according to their risk manage ment polic ies and the guidelines ofregulatory authorities.Do market makers and clients have a conflict of interest?Market makers are n ot intermediaries, portfolio managers, or advisors, whorepresent customers (while earning comm ission). Instead, they buy and sellcurrencies to the customer, in this case the trader. By definition, the mar ketmaker always provides a two-s ided qu ote (the sell and the buy price), andthus is indifferent in regards to the intenti on of the trader. Banks do that, asdo merchants in th e markets, who bo th buy from, and sell to, theircustomers. The relationshi p between the trader (the customer) and themarket maker (the bank; the trading platform; Easy-Forex™; e tc.) is sim plybased on the fundamental market forces of supply and demand. 19 of 19
  19. 19. Can a market maker influence market prices against a client’s position?Definitely not, because the Forex market is the nearest thing to a “perfec tmarket” (as defined by economic theory) in which no single participant ispowerful e nough to push price s in a sp ecific direction. This is the biggestmarket in the world today, wit h daily vo lumes reaching 3 trillion dollars . Nomarket maker is in a position to effectively manipulate the market.What is the main source of earnings for Forex market makers?The major source of earnings for market makers is the spread between the bidand the ask prices. Easy-Forex™ Trading Platform, for instance, maintainsneutrality regarding the direction of any or all deals made by its traders; itearns its income from the spread.How do market makers manage their exposure?The way m ost market makers hedge their exposure is to he dge in bulk. Theyaggregate all client positions and pass som e, or all, of their net risk to theirliquidity providers. Easy-Forex™, for ex ample, hedges its exposure in thi sfashion, in accordance with its risk management policy and l egalrequirements.For liquidity, Easy-Forex™ works in cooperation with worlds leading banksproviding l iquidity to the Forex indust ry: UBS (Switz erland) an d RBS (R oyalBank of Scotland). Easy-Forex™ guarantees the accuracy, security and integrity of all transactions. Read more here 20 of 20
  20. 20. [4] Overview of trading Forex onlineHow a Forex system operates in real timeOnline fo reign ex change t rading o ccurs in real t ime. E xchange rat es areconstantly changing, in intervals of seconds . Quotes are accurate for the ti methey are displayed only. At any moment, a different rate may be quoted.When a trader locks i n a rate and exec utes a transac tion, that transaction isimmediately processed; the trade has been executed.Up-to-date exchange ratesAs rates change so rapidly, any Forex software must display the most up-to-date rate s. To ac complish this, the Forex s oftware i s conti nuouslycommunicating with a remote server that provides the most curr ent exchangerates. The rates quoted, unlike traditional bank exc hange rates, are actualtradable rates. A trader may choose to “loc k in” to a rate (called the “freezerate”) only as long as it is displayed.Trading online on Forex platformsThe internet revoluti on caused a majo r c hange in the way Forex trading isconducted throughout the world.Until the advent of the internet-Forex age at the end of the 1990’s, Forextrading was conducted via phone orders (or fax, or in-person ), poste d t obrokers or banks. M ost of the tr ading could be executed only during businesshours. The same was true for most activiti es related to Forex, such as makingthe deposits necessary for trading, n ot to mention profit taking. The internethas radically altered the Forex market, enabling around the clock trading andconveniences such as the use of credit cards for fund deposits.Forex on the internet: basic stepsIn general, the i ndividual Forex trader is required to fulfill two steps prior totrading: • Register at the trading platform • Deposit funds to facilitate trading 21 of 21
  21. 21. Requirements vary with each tr ading platf orm, but these steps bear furtherdiscussion:RegisteringRegistration is done online by the individual trader. There are various formsused in the industry. Some are quite simple, where others are longer andmore time-consuming. In part, this can be attributed to governmental orother authorities’ requirements , though so me F orex p latforms require moreinformation than is actually needed . Some even require a face-to-facemeeting, or to obtain hard copies of required documents such as a pass port,or driver’s license.The key requirements for registr ation are the trader’s full name, telephone,e-mail address, residence, and sometime s also the trader’s yearly income orcapital (equity) and an ID number (passpor t / driver’s license / SSN / etc.).Typically, the Forex platform is not required to run a t horough check, but relyon the regi strant to be truthful. Neve rtheless, each Forex platform conductscertain routines, in order to check and verify the authentici ty of the de tailsprovided.Registrants are required to dec lare that funds used for trading are not i nquestion, and are not the result of any criminal act or money launderingactivity. This is mandatory as part of a global anti-money laundering effort. It is advised t hat the reader becomes familiar with Anti-Money Laundering regulations, an d t he procedures a ssociated with the prevention of thi s criminal activity.Depositing fundsNew registrants must deposit funds to facilitate tradin g. However, th emajority of the Forex platforms today requi re that, in addition to funds us edfor actual trading, an additional amount be deposite d. Often called“maintenance margin” or “activ ity collateral”, its purpose is for the platformto have an additi onal guarantee. Some of the platforms that require anadditional deposi t do pay in terest on the c ollateral, which is “f rozen” un derthe trader’s name.The Easy-Forex™ Trading Platform does NOT require any additional guarantee,and allows trading with 100% of the amo unt deposited. Easy-Forex™ is able to 22 of 22
  22. 22. provide these advantages because it ass ures “guaranteed rates and Stop-Loss”. That means that there will neve r be any additional requirement forfunds as a result of a “gap” that causes you to surpass the Stop-Loss. See “20issues you must consider” (Chapter 9) for more.Trading onlineThe trading platform operates 24 hours a day just as the global Forex marketruns around the clock.However, many online Forex market makers require the d ownload andinstallation of software specific to their own trading platform. Consequently ,accessibility is limited to those terminals that have the software. Since Forextrading is borderless, and may be performed at any given time, it is obviou slyadvantageous to hav e access to trading f rom as many locations as possible.The Easy-Forex™ Trading Platform is a fully web-bas ed system, which meanstrading can be conducted from any co mputer connected to the internet.Traders are only required to log-in, ensu re they have available funds to trade,or make new deposits, and commence trading.The Trading Platform: real-time softwareThe main feature of any Forex trading platform is real time access toexchange r ates, to deal and order maki ng, to deposits and withdrawals, andto monitoring the status of positions and one’s account.The Easy-Forex™ Trading Platform system uses web services to continuous lyfetch the most current exchange rates. The most recent data displays withoutthe need f or a page r efresh. This includes account s tatus screens such as “MyPosition”, which updates continually to reflect changes in rates and other realtime elements. Easy-Forex™ guarantees the accuracy, security and integrity of all transactions. Read more hereTransaction processing and storageAs soon as a transaction is executed, the relevant data is processed securelyand sent to the data server wh ere it is stored. A backup is created on adifferent server farm , to ensure data integrity and continuity . All of thishappens in real time, with no human intervention. 23 of 23
  23. 23. Trading via brokers and dealing rooms (by phone)Performing Forex trading via D ealing Room dealers (over the phone) requiresknowledge about the way deali ng rooms work, and the terminologies used inthe course of trading.At start, the client should s pecify whether he/she is i nterested in obtaining aQUOTE (in order to make a de al) or just an INDICA TION. In the case of anindication, the price given do es not bi nd the deal er, but rather provi desinformation about market conditions.When aski ng for QUOTE, the trader mu st specify the currency pair and thedeal amount (vol ume). For example: “Need a quote for EUR/US D inEUR100,000”.It is wise to withhold from the dealer the intended directi on of the deal,specifying the pair only. Ac cordingly, the deal er then provides a quotecomprising two prices, buy and sell (“both sides quote ”). The quote binds thedealer for the very second i t is given. If the trader does not im mediately askfor execution, then the price is no longer in force. The dealer would then tellthe customer “risk”, or “change”, meaning – the price quoted i s no l onger inforce. In such case, the trader should ask for a new price.On the other hand, in order to make a deal, the trader must proclaim “buy”or “sell”, together with the currency (or the price).An example: • The trader asks for a quote for EUR/USD. • The dealer says “1.5010/15”. • If the tra der wants to buy EUR, he/she sa ys “buy" (or "buy EURO”, or “15”. • If the trader wants to sell EUR, he/she says “sell" (or "sell EURO”, or “10”.The mome nt the tra der says “buy” (or “ sell”) he/s he is bound to the deal ,regardless of the market situation. Banks are closed at nights, weekends and holidays. Trade, deposit and withdraw at Easy-Forex™, 24x7 24 of 24
  24. 24. [5] Training for successUnderstanding the nuances of the Forex market requires experience andtraining, but is critical to success. In fact, ongoing learning is as important tothe veteran trader as it is to the beginner. The foreign currency market ismassive, and the key to success is know ledge. Through training, observati onand practice, you can learn how to id entify and understand where the Forexmarket is going, and what controls that direction.To invest i n the righ t currencies at th e right time in a large, nonstop andglobal trading arena, there is much to learn. Forex m arkets move quickly andcan take new directions from moment to moment. Forex training helps youassess when to enter a currency based on the directi on it is taking, and howto forecast its direction for the near future.Training with Easy-Forex™Easy-Forex™ offers one of the most effective forms of training through hands-on experience. For as little as U SD 25 at risk per trade, you can start tradi ngwhile learning in real-time. Easy-For ex™ strongly r ecommends starting withvery small volumes, and de positing an amount to cover a series of trades.Learn the basics of the foreign exchange market, trading terminology,advanced technical analysis, and how to develop suc cessful trading strategies.Discover how the F orex market offers more opportunities for quick financ ialgains than almost any other market. To learn more about the trading advantages of Easy-Forex™, join Easy-Forex™ (registration is quick and free, no obligation)The many available resources and tools to train yourselfThere are many free tools and resources available in the market, particularlyonline. Among these, you will find:ChartsThere are many kinds of charts (see Chap ter 6, Technical Analysis). Start wi thsimple cha rts. Try to iden tify trends and major changes, and try to rel atethem to technical patterns as well as to macro events (news, either financ ial 25 of 25
  25. 25. or political). Make an effort to determi ne the general magnitude of eachchange on the chart (meaning: what is the $ value of the change, if you weretrading at that point).Guided toursMost platf orms provi de gui ded tours, dem os or tutorials, either online or viadownload.News / breaking newsKeep abreast of world news. Read all the headlines, particularly those directlyrelated to Forex. Check the impact of such news, if any, on the charts.Forex outlooksRead daily/weekly outlooks posted on Forex or general financial sites. M anyinclude alerts to upcoming repor ts and events such as market indicators andinterest rate decisions. To read today’s professional outlook and view detailed charts, join Easy- Forex™ (registration is quick and free, no obligation): www.Easy-Forex.comForecastsRead forecasts, some of which are availa ble free of charge. Bear in mind thatforecasts and predicti ons are made by people, none of whom can guaran teethe occurrence of future events…IndicesFollow the indices of the leadin g markets (e.g . Dow-Jones, NAS DAQ; Nikkei;etc.). Com pare them to the c hanges in the Forex market, as well as tochanges in particular currency pairs.Economic indicatorsPay attention to the release of economi c indicators (for example – themonthly u nemployment rate in the USA), and try to identify their impact onthe market in general, and on specific currency pairs in particular.GlossaryDon’t hesitate to br owse Forex glossaries, which are offered free on manyplatforms. A given word may have different meaning as it relates to Forex andto the terminology used by the Forex market participants. 26 of 26
  26. 26. Seminars and coursesTry to attend profes sional Forex semi nars. Some seminars are offered fr ee,often as part of a client recruitment proc ess by a given platfor m; many are,nevertheless, worth attendi ng. Educational courses are offered online and bymany post-secondary institutions.Forex booksRead, or even jus t browse. M any book s are offer ed free, or as part of aservice package to the trader. F or many, historical ba ckground and technicalanalysis are topics better covered in books than in an educational setting.Internet forums / blogsVisit and participate i n Forex forums. Th is gives you an opportunity to learnfrom the experience of others. Of cou rse, remember that some forumparticipants may be biased, pr omoting a given Forex platform or their ownagenda. No commissions? How about profit withdrawal fees? (No hidden costs at Easy-Forex™. Join and trade without banking costs or other indirect costs. Read more: - Spreads and Commissions)So much to consider…To succeed as a Forex trader, you must tak e into consideration a wide varietyof factors such as: • spread (“pips”); • commissions and fees; • ease of access to the trading platform; • minimum amounts needed for trading; • additional amounts needed (if any); • control over activity and positions; • the platform software requirements; • ease of deposits and withdrawals; • personal service and support provided by the platform; • the platform’s business partners; • the platform’s management, offices and outreach; • the products offered onboard the platform; and many others. 27 of 27
  27. 27. Online training, no downloadsEasy-Forex™ is dedicated to educating its customers. Customers can acces sFREE one-on-one online training. The trai ning goal is to teach people specificstrategies for trading currencies over th e internet. Both novice investors an dexpert day traders have benefited from the training provided by Easy-Forex™.The “demo” account ideaMany Forex platforms offer new regist rants a “demo” account. A typicalexample w ould provi de 10,000 “demo” dollars t hat can be “traded” a s ameans of learning how to succeed in Forex.Easy-Forex™ does not offer “demo” accounts. Coming to u nderstand thatreason must rule over emotion is th e most important lesson a trader canlearn, and it cannot be done with play money. If ther e is no consequence toindulging i n emotional respons es to the market, there is no learning, so“demo” accounts tend to have l ittle educational value. Rather, Easy-Forex™allows you to start trading with just $100, including full access to one-on-onetraining. New registrants are thus able to garner both an educational andexperiential benefit unavailable through simulated situations. To get personal assistance and free training, Join Easy-Forex™ (registration is quick and free, no obligation) 28 of 28
  28. 28. [6] Technical Analysis: Patterns and forecast methods used todayBasic Forex forecast methods:Technical analysis and fundamental analysisThis chapter and the next one provide insight into the two ma jor methods ofanalysis used to forec ast the behavior of the Forex m arket. Technical analysisand fundamental analysis differ greatly, but both c an be usef ul forecastingtools for the Forex trader. They have the same goal - to predict a price ormovement. The technician studies the effects, w hile the fundamentaliststudies the causes of market movement s. Many successful traders combine amixture of both approaches for superior results. If both Fundamental analysis and Technical analysis point to the same direction, your chances for profitable trading are better.In this chapter…The categories and approaches i n Forex Technical Analysis all aim to supportthe investor in determining his/her views and forecasts regarding theexchange rates of currency pairs. Th is c hapter des cribes the approac hes,methods and tools used to this end. H owever, this chapter does not intend toprovide a comprehensive and/or professional level of knowledge and skill, butrather let the reader become familiar with the terms and tools use d bytechnical analysts.As there are many ways to categorize the tools available, the description oftools in th is chapter may sometimes see m repetiti ve. The se ctions in thischapter are:[6.1] Technical Analysis: background, advantages, disadvantages;[6.2] Various techniques and terms;[6.3]Charts and diagrams;[6.4] Technical Analysis categories / approaches: a. Price indicators; b. Number theory; c. Waves; d. Gaps; e. Trends;[6.5] Some other popular tools.[6.6] Another way to categorize Technical Indicators. 29 of 29
  29. 29. [6.1] Technical analysisTechnical analysis is a method of predicting price movements and futuremarket trends by s tudying w hat ha s occurred in the past using charts .Technical analysis is concerne d with what has actually happened in themarket, rather than what shoul d happen, and takes i nto account the price ofinstruments and the volume of trading, and creates charts from that data as aprimary tool. One m ajor advantage of te chnical analysis is that experiencedanalysts can follow many markets and market instruments simultaneously.Technical analysis is built on three essential principles:1. Market action discounts e verything! This means that the actual price is areflection of everything that is know n to the market that could affect it.Some of these factors are: fu ndamentals (inflation, interest rates, etc.),supply a nd deman d, political fa ctors an d market se ntiment. H owever, th epure technical analyst is only c oncerned with price movements, not wi th thereasons for any changes.2. Prices move in trends. Tec hnical anal ysis is used to identi fy patterns ofmarket behavior that have long been recognized as significant. For manygiven patterns there is a high probabili ty that they will produce the expec tedresults. There are also recogni zed pa tterns that repeat them selves on aconsistent basis.3. History repeats itself. Forex chart patterns hav e been recognized andcategorized for over 100 years, and th e manner in which many patterns arerepeated l eads to the conclusion that human psychology changes little overtime. Since patterns have worked well in the past, it is assumed that they willcontinue to work well into the future.Disadvantages of Technical Analysis • Some critics claim that the Dow approach (“prices are not random”) is quite wea k, since t oday’s prices do no t necessar ily project futur e prices; • The critics claim that signals about the changing of a trend appear too late, ofte n after th e chan ge had already taken place. Therefore, traders who rely on technical analysis react too late, hence losing about 1/3 of the fluctuations; • Analysis made in short time intervals may be exposed to “noise”, and may result in a misreading of market directions; 30 of 30
  30. 30. • The use of most patterns has been wide ly publicized in the last several years. Many traders are quite familiar with these patterns and often act on them in concern. This creates a self-fulfilling prophecy, as waves of buying or selling are created in re sponse to “bullish” or “bearish” patterns.Advantages of Technical Analysis • Technical analysis ca n be used to projec t movements of any asset (which is priced under demand/supply forces) available for trade in the capital market; • Technical analysis focuses on what is ha ppening, a s oppose d to wha t has previously happened, and is therefore valid at any price level; • The technical approach concentrates on prices, which neutralizes external factors. Pure technic al analysis is based on objecti ve tool s (charts, tables) while disregarding emotions and other factors; • Signaling indicators s ometimes point to th e imminent end of a trend, before it shows in the actual ma rket. A ccordingly, the trader can maintain profit or minimize losses. Be disciplined, don’t be greedy. Close your Forex the position as you originally planned.[6.2] Various techniques and termsMany different techn iques an d indicators can be use d to foll ow and pre dicttrends in markets. The objecti ve is to predict the major componen ts of th etrend: its direction , its level and the timi ng. Some of the most widely knowninclude: • Bollinger Bands - a range of price volatility named after John Bol linger, who invented them in the 1980s. Th ey evolved from the concept of trading bands, and can be used to m easure the relative height or depth of price. A band is pl otted two standard deviations away from a simple moving av erage. As standard deviation is a measure of volatility , Bollinger Bands adjust themselves to market conditions. When the markets become more volatile, th e bands widen (move further away from the average), and during less volatile periods, the bands c ontract (move closer to the average). 31 of 31
  31. 31. Bollinger Bands are one of the mo st popular technical analysis techniques. The clos er prices mo ve to t he u pper band, t he more overbought is the market, and the closer prices move to the lower band, the more oversold is the market.• Support / Resistance – The Support level is the lowest price an instrument trades at over a period of time. The longer the pric e stays at a partic ular level, the stronger the support at that level. On the chart this is price level under the market where buying inter est is sufficiently strong to overcome selli ng pressure. Som e traders believe that the s tronger the support at a gi ven level, the less likely it will break below that lev el in the future. The Resistance level is a price at which an instrument or market can trade, but which it cannot exceed, for a certain period of time. On the chart this is a pri ce level ov er the market where selling pressure overcomes buying pressure, and a price advance is turned back.• Support / Resistance Breakout - when a price passes through and stays beyond an area of support or resistance. CCI - Commodity Channel Index - an oscillator used to help determine when an investment instrument has been overbought and oversold. The Commodity Channel Index, f irst developed by Donald La mbert, quantifies the relationship betw een the assets price, a moving average (MA) of the assets pr ice, and normal deviations (D) from that average. The CCI has seen substantial growth in popularity a mongst te chnical investors; todays traders often use the indicator to determine cyclica l trends in equities and currencies as well as commodities. The CCI, when used in conjunction with other osc illators, ca n be a valuable tool to identify potential peaks and valleys in the assets price, and th us provide in vestors with r easonable evidence to es timate changes in the direction of price movement of the asset.• Hikkake Pa ttern – a method of identifyin g reversals and conti nuation patterns, this was dis covered and in troduced to the market thr ough a series of publishe d articles writte n by technical analyst Daniel L. Chesler, CMT. Used for determin ing market turning-points an d continuations (also known as tre nding behavior). It is a simple patte rn that can be viewed in market pric e data, using tradi tional bar charts, or Japanese candlestick charts.• Moving averages - are used to emphasize the direction of a trend and to smooth out price and volume fluctuatio ns, or “noise”, that c an confuse interpretation. There are seven different types of moving averages: 32 of 32
  32. 32. • simple (arithmetic) • exponential • time series • weighed • triangular • variable • volume adjusted The only s ignificant difference betw een the various types of moving averages is the weight assigned to the most recent data. F or example, a simple (arithmetic ) moving average is calculated by addi ng the closing pri ce of the instrument for a number of ti me periods, then dividing this total by the number of time periods. The mos t popular method of interpreti ng a movi ng average is t o compare the relati onship betw een a moving average of the instrument’s closing price, and the instrument’s closing price itself. • Sell signal : when the instrument’s price f alls below its moving average • Buy signal: when the instrument’s price ri ses above its moving average The other technique is called the do uble crossover, which uses short- term and long-ter m averages. Typic ally, upw ard mom entum is confirmed when a short-term aver age (e.g., 15 -day) crosses above a longer-term average (e.g., 50-day). Downward momentum is confirmed when a short-term average crosses below a long-term average.• MACD - Moving Av erage Convergence/Divergence - a technica l indicator, develope d by Gerald Appel, us ed to de tect swings in the price of financial instruments. The MACD is computed using two exponentially smoothed moving averages (see further down) of the securitys historical price, and is usually shown over a period of time on 33 of 33
  33. 33. a chart. By then comparing the MACD to its own moving average (usually called the "signal line" ), traders believe they can detec t when the securi ty is likely to rise or fall. M ACD is frequently used i n conjunction with other technic al indi cators such as the RSI (Relative Strength Index, see further down) and the stochastic oscillator (s ee further down).• Momentum – is an oscillator designed to measure the rate of pric e change, not the ac tual price level. This oscillator consists of the net difference between the current closing price and the oldest closing price from a predetermined period. The formula for calculating the momentum (M) is: M = CCP – OCP Where: CCP – current closing price OCP – old closing price Momentum and rate of change (ROC) are simple indicators showing the difference between todays closing pri ce and the close N days ago. "Momentum" is simply the difference, and the ROC is a ratio expressed in percentage. They refer in general to prices continuing to tre nd. The momentum and ROC i ndicators s how that by remaining positive, while an uptrend is sustained, or negative, while a downtrend is sustained. A crossing up through zero may be used as a signal to buy, or a crossing down through zero a s a signal to sell. How high (or how low, when negative) the indicators get shows how strong the trend is.• RSI - Rela tive Stren gth In dex - a technical momentum indicator , devised by Welles Wi lder, meas ures the relative cha nges betw een the higher and lower closing prices. RSI compares the magnitude of recent gains to recent loss es in an attempt to determi ne overbought and oversold conditions of an asset. The formula for calculating RSI is: RSI = 100 – [100 / (1 + RS)] Where: RS - average of N days up closes, divided by average of N days down closes N - predetermined number of days The RSI ranges from 0 to 100. An asset is deemed to be overbought once the RSI approac hes the 70 leve l, me aning that it may be gettin g overvalued and is a good candi date for a pullback. Likewise, if the RSI approaches 30, it is an indicati on that the asset may be gettin g 34 of 34
  34. 34. oversold and therefore likely to become undervalue d. A trade r using RSI should be aware that large s urges and drops in the price of an asset will affect the RSI by creating false bu y or sell signals. The RSI is best used as a valuable complement to other stock-picking tools.• Stochastic oscillator - A technical momentum indicator that compares an instruments closing price to its price range over a given time period. The oscillators sensitivity to market movements can be reduced by adjusting the time period, or by taki ng a moving average of the resul t. This indicator is calculated with the following formula: %K = 100 * [(C – L14) / (H14 – L14)] C= the most recent closing price; L14= the low of the 14 previous trading sessions; H14= the highest price traded during the same 14-day period. The theory behind this indicator, based on George Lane’s observations, is that in an upwar d-trending market , pr ices tend to close near their high, and during a downward-trendin g m arket, prices tend to close near their low. Transaction signals occur when the %K crosses through a three-period moving average called the “%D”.• Trend line - a sloping line of support or resistance. • Up trend l ine – strai ght line dr awn upwar d to the right along successive reaction lows • Down trend line – straight line drawn downwards to the righ t along successive rally peaks Two poi nts are needed to draw th e trend line, and a third point to make it valid trend line. Trend lines are used in many ways by traders. One way is that when price returns to an existing principal trend line’ it may be an opport unity to open new posit ions in the direction of th e trend in the belief that the trend line will hold and the tr end will continue further. A second wa y is that when price action breaks through the principal trend line of an existing trend, it is evidence that the trend may be going to fail, and a trader may consider trading in the opposite direction to the existing trend, or exiting positions in th e direction of the trend. Don’t fall in love with your Forex position. Never take revenge of your Forex position. 35 of 35
  35. 35. [6.3] Charts and diagramsForex charts are based on mar ket action involving price. Charts are majortools in Forex trading. There are many kinds of charts, each of which helps tovisually analyze market conditions, a ssess and create forecasts, and identifybehavior patterns.Most charts present the behavior of curren cy exchange rates over time. Rates(prices) are measured on the v ertical axis and time is shown of the horizonta laxis.Charts are used by both techni cal an d fundamental analysts. The tec hnicalanalyst an alyzes the “micro” moveme nts, trying to match the a ctualoccurrence with known patterns. T he fundamental analyst tries to findcorrelation between the trend seen on the chart and “macro” eventsoccurring parallel to that (political and others).What is an appropriate time scale to use on a chart?It depends on the trader’s strategy. Th e short-range investor would proba blyselect a day chart (units of hours, minutes), wher e the medium and long-range investor would use the we ekly or monthly charts. High resolution c harts(e.g. – minutes and seconds) may show “noise”, meaning that with fine detailsin view, it is sometimes harder to see the overall trend.The major types of charts: • Line chart The simplest form, base d upon the closin g rates (in each time unit), for ming a homogeneous line. (Such chart, on the 5-minutes scale, will show a line connecting all the actual rates every 5 minutes). This chart does not s how what happe ned during the time uni t selected by the viewer, only closing rates for such time intervals. The line chart is a simple tool for setting support and resistance levels. 36 of 36
  36. 36. • Point and figure charts - charts based on price without time . Unlike most other investment charts, point and figure charts do not present a linear representation of time. Instead, they show trends in price. Increases are represented by a rising stack of Xs, and decreases are represented by a declining stac k of Os . This type of chart is used to filter out non-si gnificant price move ments, and enables the trader to easily determine critical support and resistance levels. Traders will place orders when the pric e move s beyond identified s upport / resistance levels.• Bar chart This chart shows three rates for each time unit selected: the high, the low, the clos ing (HLC). There are also bar charts including four rates (OHLC, which includes the Opening r ate for the time inte rval). Th is chart prov ides clearl y visible information about tra ding pric es range during the time period (per un it) selected. 37 of 37
  37. 37. • Candlestick chart This kind of chart is based on an ancient Japanese method. The char t represents prices at their opening, high , low and cl osing rates , in a form of candles, for each time unit selected. The empty (trans parent) c andles show inc rease, whil e the dark (full ) ones show decrease. The length of the body shows the range between opening and closing, while the whole candle (including top and bottom wicks) show the whole range of trading prices for the selected time unit.Following is a candlestick chart (USD/JPY) with some explanations: 38 of 38
  38. 38. Pattern recognition in Candlestick chartsPattern recognition is a field within the area of “machine learning”.Alternatively, it can be defined as “the act of taking in raw data and taking anaction bas ed on th e category of the data”. As suc h, it is a collection ofmethods for “supervised learning”.A complete pattern recognition system consists of a sensor that gathers theobservations to be c lassified or described; a featur e extraction mechani smthat computes numeric or symbolic in formation from the obs ervations; and aclassification or description scheme that does the actual job of classifying ordescribing observations, relying on the extracted features.In general, the market uses the following patterns in candlestick charts: • Bullish patterns: hammer, inverted hammer, engulfing, harami, harami cross, doji star, piercing line, morning star, morning doji star. • Bearish patterns : s hooting st ar , hangi ng man, engulfin g, harami, harami cross, doji star, dark cloud cover, evening star, eveni ng doji star. 39 of 39
  39. 39. Chart system available at Easy-Forex™ Trading PlatformThe Easy-Forex™ Trading Platform offers the following charting tools, for bothprofessional and beginner traders.The chart types:The time scales:The view types: 40 of 40
  40. 40. The "drawing line on the chart" types:The Study types:Please note: the above screen-shots were taken around mid-2006. The Easy-Forex™platform continuously upgrades its system, while adding new features on a regularbasis. 41 of 41
  41. 41. [6.4] Technical Analysis categories / approachesTechnical Analysis can be divided into five major categories: • Price indicators (oscillators, e.g.: Relative Strength Index (RSI)) • Number theory (Fibonacci numbers, Gann numbers) • Waves (Elliotts wave theory) • Gaps (high-low, open-closing) • Trends (following moving average).[a] Price indicatorsRelative Strength In dex (RSI): The RSI measures the ratio of up-moves todown-moves and nor malizes the calculati on, so that the in dex is expresse d ina range of 0-100. If the RSI is 70 or great er, then the instrument is assumed tobe overbought (a si tuation in which prices have risen more than marketexpectations). An RSI of 30 or less is taken as a signal that the ins trument maybe oversol d (a situation in which pric es have fallen more than the marketexpectations).Stochastic oscillator: This is used to indicate overbought/oversold conditionson a scale of 0-100% . The indicator is based on the observation that in astrong up-trend, period closing prices tend to concentrate in the higher par tof the periods range. Conversely, as prices fall in a strong down-trend, closingprices tend to be near the extreme low of the period ran ge. S tochasticcalculations produce two lines, %K and %D, that are used to indicateoverbought/oversold areas of a chart. Divergence between the stochas ticlines and the price action of the unde rlying instrument gives a powerfultrading signal.Moving Average Converge nce/Divergence (MACD): This indicator invol vesplotting tw o momentum lines. The MACD line is the difference between twoexponential moving averages and the si gnal or trigger line, which is anexponential moving average of the difference. If the MACD and trigger linescross, then this is taken as a signal that a change in the trend is likely.[b] Number theory:Fibonacci numbers: The Fibonacci number sequence (1, 1, 2, 3, 5, 8, 13, 21,34 ...) is constructed by adding the first two num bers to arrive at the thi rd.The ratio of any number to the next larger number is 61.8%, which i sapopular Fibonacci retracement number. The inverse of 61.8%, which is 38.2%, 42 of 42
  42. 42. is also used as a Fibonacci retracement number (as well as extensions of thatratio, 161.8%, 261.8%). Wave patterns an d behavior, identified in For extrading, correlate (to some exte nt) with relations within the Fi bonacci series.The tool i s used in technical analysis that c ombines various num bers ofFibonacci retracements, all of which ar e drawn from different highs and lows.Fibonacci clusters are indicators which are usually found on the side of a pri cechart and look like a series of h orizontal bars with various degrees of shading.Each retracement level that ove rlaps with another, m akes the horizontal baron the side darker at that pric e level. The most significant levels of suppor tand resistance are found where the Fi bonacci cluster is the dar kest. This toolhelps gau ging the rel ative stren gth of the support or resistance of variousprice levels in one quick glanc e. Traders often pay close attention to thevolume ar ound the identified levels to confir m the strength of th esupport/resistance.Gann numbers: W.D. Gann was a stock and a com modity trader working inthe 50s, who reputedly made over $50 mi llion in the markets. He made hisfortune usi ng methods that he develo ped for trading inst ruments based onrelationships between price movement and tim e, known as time/ priceequivalents. There is no easy explanati on for Ganns methods , but in essencehe used angles in charts to determine support and resistance areas, and topredict th e times of future tr end cha nges. He als o used li nes in char ts topredict support and resistance areas.[c] WavesElliotts wave theory: The Elliott Wave Theory is an approach to marketanalysis that is based on repetit ive wave patterns an d the Fibo nacci num bersequence. An ideal El liott wave patte rn shows a five-wave advance follow edby a three-wave decline.[d] GapsGaps are s paces left on the bar char t w here no trading has taken plac e.Gaps can be created by factors such as regular buy ing or selling pressur e,earnings announcements, a change in an analysts outlook or any other type ofnews release. 43 of 43
  43. 43. An up gap is formed when the lowest price on a trading day is higher than thehighest high of the previous day. A down gap is formed when the highest pri ceof the day is lower than the l owest price of the prior day. An u p gap is usuallya sign of market strength, whi le a down gap is a si gn of market weakness. Abreakaway gap is a price gap that forms on the co mpletion o f a n i mportantprice patte rn. It us ually signals the be ginning of an i mportant price move. Arunaway gap is a pri ce gap that usually occu rs around the mi d-point of animportant market trend. For that reason , it is also call ed a measuring gap. Anexhaustion gap is a price gap that occurs at the end of an important trend andsignals that the trend is ending.[e] TrendsA trend refers to the direction of prices. Rising peaks and trough s constitutean up trend; falling peaks and troughs constitute a downtrend that determinesthe steepness of the current trend. The breaking of a trend line usually signalsa trend reversal. Horizontal peaks and troughs characterize a trading range.In general, Charles Dow categorized tr ends into 3 categories: (a) Bull tr end(up-trend: a series of highs and lows , where each high is higher than theprevious one); (b) Bear trend (down-tren d: a series of highs and lows, whereeach low i s lower than the pr evious one); (c) Trea ding trend (horizo ntal-trend: a series of highs and low s, where peaks and lows are around the sam eas the previous peaks and lows).Moving averages are used to smooth pric e information in order to confirmtrends and support-and-resistance levels. They are also useful in deciding on atrading str ategy, particularly in futures trading or a market with a strong upor down trend. Rec ognizing a t rend may be done u sing standard deviati on,which is a measure of volatility. Bolli nger Bands, for example, illustratetrends with this approach. When th e markets become more volatile, the 44 of 44
  44. 44. bands widen (move further away from th e average), while during less volatileperiods, the bands contract (move closer to the average).Various Trend linesPattern re cognition i n Trend li nes, whic h detec t a nd draw t he followi ngpatterns: ascendin g; desce nding; symmetrically & exten ded trian gles;wedges; trend channels.[6.5] Some other popular technical tools:Coppock Curve is an investment tool used in technical analysis f or predictingbear market lows. It is calculated as a 10-month weighted movi ng average ofthe sum of the 14-month rate of change and the 11-m onth rate of change forthe index.DMI (Directional Movement Indicator) is a popular technical indicator used todetermine whether or not a currency pair is trending.The Parabolic System (SAR) is a stop-loss system based on price and time. Itis used to determine good exit and entry points. You are almost ready to trade in real-time, but you want to discuss something online. Chat with an Easy-Forex™ expert.[6.6] Another way to categorize Technical Indicators:The indicators and tools aim to provide information in various approaches: • Cycle indicators A cycle is a term to indicate repeating patterns of market movement, specific to recurrent events, such as s easons, el ections, etc. Many markets have a tendency to m ove in cyc lical patterns. Cycle indicator s determine the timi ng of a parti cular market patterns. (Exam ple: Elliott Wave). • Momentum indicators Momentum is a gener al term us ed to desc ribe the speed at whi ch price s move over a given time period. Momentum indicators deter mine the strength or weakness of a trend as it progresses over time. M omentum is highest at the beginning of a trend and lowest at trend turning points. Any divergence of directions in price and momentum is a warning of weakness; 45 of 45
  45. 45. if price extremes occur with weak momentum, i t signals an end of movement in that dir ection. If momentum is trending strongly and prices are flat, i t signals a potential chan ge i n price di rection. (Example: Stochastic, MACD, RSI).• Strength indicators Market strength describes the intensity of market opinion with reference to a price by examining the market positions tak en by various market participants. Volume or open interest , are the basic ingredients of this indicator. Their signals are coincident or l eading the market. (Example: Trading Volume).• Support/Resistance indicators Support and resistanc e describe price levels where markets repeatedl y rise or fall, and then r everse. This method shows the price levels at which the market is expected to revers e and stay within the S/R levels (e.g. – not excee ding the s upport or the resi stance level). This phenomenon is attributed to basic supply and demand forces. (Example: Trend Lines)• Trend indicators Trend is a term use d to descri be the per sistence of price mov ement i n one directi on over ti me. Trends move in three direc tions: up, down and sideways. Trend indi cators smooth varia ble price data to create a composite of market direction. Gene rally, the trend could be e ither UP, or DOWN, or TREAD (flat). (Example: Moving Averages, Trend lines).• Volatility indicators Describe the intensity of fluctuations i n the market prices. A change i n the volatility level hints at a coming change in the price. Vol atility is a general term used to describe the magnitude, or size, of day-to-day price fluctuations independent of their direction. Generally, changes in volatility tend to lead changes in prices. (Example: Bollinger Bands).Unlike the fundamental analyst, the techni cal analyst is not much concernedwith any of the “bigger pi cture” factors affecting the market, butconcentrates on the activity of that instruments market. To read today’s professional outlook and view detailed charts, Join Easy-Forex™ (registration is quick and free, no obligation): 46 of 46
  46. 46. [7] Fundamental Analysis and leading market (economic) indicatorsFundamental analysis is a method of forecasting futur e price movements of afinancial i nstrument based on economic , political , e nvironmental and otherrelevant factors, as w ell as data that will affect the basic supply and dema ndof whatev er underli es the financial instrument. In practice, many marketplayers use technical analysis in conj unction with fundamental analysis todetermine their trading strategy. One major advantage of technical analysis isthat experi enced anal ysts can follow many markets and market i nstruments,whereas the fundamental analyst needs to know a par ticular marketintimately. Fundame ntal analy sis focuses on what ough t to happe n i n amarket. Among the factors considered are: supply and demand; seasonalcycles; weather; government policy.The fundamental analyst studi es the caus es of market movem ents, while thetechnical analyst stu dies the e ffect. Fu ndamental analysis is a macro, orstrategic, assessment of where a curre ncy should be traded, based on anycriteria but the movement of the currenc ys price itself. These c riteria ofteninclude the economic conditions of th e country that the currency represents ,monetary policy, and other “fundamental” elements.Many profi table trades are made mome nts prior to, or s hortly after, m ajoreconomic announcements.Leading economic indicatorsThe following is a list of economic indicators used in the USA. Obviously, thereare many more, as well as those of other leading economies (such asGermany, the UK, Japan, etc.). In genera l, it is not only the numerical v alueof an in dicator tha t is important, but a lso the m arket’s an ticipation andprediction of th e forecast , and the i mpact of the relation betw eenanticipated and actual figures on the market.Such macro indicators are followed by the vast major ity of traders worldwide.The “quali ty” of the publishe d data can differ over time. The value of t heindicator data is considered greater if it presents new information, or isinstrumental to drawing conclusions which coul d not be drawn under othe rreports or data. Furthermore, an indicato r is highly valuable if one may use i tto better forecast future trends. 47 of 47
  47. 47. Note that in the US A most in dicators ar e publis hed on c ertain weekda ys,rather than on a particular monthly da te (e.g. the second Wednesday in eachmonth, as opposed to the 14th of each month, etc.).Each indicator is marked as High (H), Medium (M) or Low (L), according to theimportance commonly attributed to it.[H] CCI - Consumer Confidence IndexThe Conference Board; last Tuesday of each month, 10:00am EST, covers currentmonths dataThe CCI is a survey based on a sample of 5,000 U.S. househ olds and is considered one of themost a ccurate indi cators of c onfidence. The idea behind c onsumer c onfidence i s that w henthe economy warrants more job s, increased wages, and l ower interest rates, it increases ourconfidence and spending power. The respondents answer que stions about th eir income, t hemarket condition as they see it, and th e chances to see increase in their income. Confidenceis looked at closely by the Federal Re serve when determining interest rates. It is consideredto be a big market mover as private consumption is two thirds of the American economy.[H] CPI - Consumer Price Index; Core-CPIBureau of Labor an d Statistics; ar ound the 20 th of each month, 8:30am EST, coversprevious months dataThe CPI is considered the most widely used mea sure of inflation and is regard ed as anindicator of the effecti veness o f go vernment po licy. The CPI is a basket of consu mer goods(and serv ices) tracked fr om m onth to month (ex cluding ta xes). The CPI is o ne of the m ostfollowed e conomic i ndicators a nd co nsidered to be a very bi g ma rket mover. A r ising CPIindicates infl ation. The Core-CPI (CPI, exclud ing food and energy, expense it ems which aresubject to seasonal fluctuations) gives a more stringent measure of general prices.[H] Employme nt ReportDepartment of Labor; t he first Frid ay of each month, 8:3 0am EST, covers previ ousmonth dataThe collection of the d ata is gathe red thro ugh a s urvey a mong 37 5,000 bus iness and 60,000households. The report reviews: the number of new work places created or cancelled in theeconomy, average wages per hour and the averag e length of the work week . The report isconsidered as one of the mo st im portant eco nomic public ations, bo th fo r the f act tha t i tdiscloses new up-to-date information and due to the fact that, t ogether with NFP, it gives agood pi cture of the tot al state o f the econ omy. The repo rt a lso bre aks out data by se ctor(e.g. manufacturing, services, building, mining, public, etc.) 48 of 48
  48. 48. [H] Employment Situation ReportBureau of Labor and St atistics; the first Friday of each month, 8:30am EST, cov ersprevious month dataThe Employment Situation Report is a monthly indicator which contains two major parts. Onepart is the u nemployment and new job s created: the report reveals the unemployment r ateand the change in the unemployment rate. The second part of the report indicates things likeaverage wee kly hours worked and average hour ly earnings. This data i s imp ortant fordetermining the tightness of the labor market, which is a major determinant of inflation. TheBureau of Labor surveys over 25 0 re gions across th e United States and cove rs al most everymajor indust ry. This indi cator is ce rtainly on e of the most watched ind icators and al mostalways moves markets. Investors value the fact th at information in the Empl oyment report isvery timely as it is less than a week old. The report provides one of the best snapshots of thehealth of the economy.[H] FOMC Meeting (Federal Open Market Committee): Rate announcementThe meeting of the US Federal Bank re presentatives, held 8 times a year. Thedecision ab out the prime interest rate is pu blished during each meeting (around14:15 EST).The FED (the Federal Re serve of USA) is re sponsible for managing the US monetary policy,controlling t he banks, providing ser vices t o governmental organizations a nd cit izens, andmaintaining the country’s financial stability.There are 12 Fed regions in the USA (each comp rising several states), represented in the Fedcommittee by regional commissioners.The rate of interest on a currency is in prac tice the price of the money. Th e higher the rateof interest on a currency, the more people will tend to hold that currency, to purchase it andin that way to strengthen the value of the currency. This is very important indicator affectingthe rate of inflation and is a very big market mover.There is gre at import ance to the FOMC a nnouncement, how ever – the content of t hedeliberation held in the meeting, which is published 2 weeks after the rate announcement, isalmost as important to the markets. The FED’s announcement has shaken the Forex market? Learn about economic indicators; read the online financial calendar onboard Easy-Forex™ Trading Platform.[H] GDP - Gross Domestic ProductBEA (Burea u of Econo mic Analys is); last da y of the quarter, 8:30 am EST , co versprevious quarter data. 49 of 49
  49. 49. The US Commerce de partment p ublishes the GDP in 3 modes: adv ance; prel iminaryand final.GDP is a gross measure of market activity. It represents the monetary value of all the goodsand s ervices produ ced by an ec onomy over a spe cified period. This in cludes c onsumption,government purchases, investments, and the tr ade balance. The GDP is perh aps the gre atestindicator of t he econo mic health of a country. I t is usually measured on a yearly basis, butquarterly stats are also released.The Commerce Dep artment releases an "advance report" on the last day of each quarte r.Within a mo nth it follows up with the "prel iminary report" and then the "final rep ort" isreleased yet a month later. The most recent GDP figures have a relatively high importance tothe markets. GDP indicates the pace at which a countrys economy is growing (or shrinking).[H] ISM (Institute for Supply Management) Manufacturing IndexInstitute for Supply M anagement; the first business day of the month, 10:00am EST,covers previous month dataThe Manufacturing ISM Repo rt on Business is based on data compiled from monthly replies toquestions asked of purchasing executives in more than 400 industrial companies. It reflects acompound average of 5 main economic areas (new customers’ orders 30%; manufacturing 25%;employment 20%; supply order s 15%; inventories 10%). Any dat a ov er 5 0 p oints shows t heexpansion of economic activities, and data under 50 points shows a contraction.[H] MCSI - Michigan Consumer Sentiment IndexUniversity of Michigan; first of each month, covers previous month dataA sur vey o f consumer sentiment, c onducted by t he Univer sity of M ichigan. The index isbecoming more and more useful for investors. It gives a snapshot of whether or not consumersfeel like spending money.[H] NFP - Changes in non-farm payrollsDepartment of Labor; t he first Frid ay of each month, 8:3 0am EST, covers previ ousmonth dataThe data int ended to represent ch anges in the t otal number of paid U.S. workers of anybusiness, excluding the following:- general government employees;- private household employees;- employees of nonprofit organizations that provide assistance to individuals;- farm employees.The total n on-farm payroll accounts for approx imately 80% of the workers resp onsible forthe entire gr oss do mestic product o f the Unit ed States. The report is used to assistgovernment policy-makers and econ omists in determining the current state of the econ omyand predicting future levels of economic activity. It is a very big market mover, due largely tohigh fluctuations in the forecasting. 50 of 50