Forex Introduction - What is Forex? - PDF

What is forex? Introduction - Lesson 1 What is forex? Let's say for example... You're from Britain, and you want to go to Italy for a few weeks You would need to exchange your money from GBP (Great British Pound) to EUR (Euros) This is known as the foreign exchange market There are various...

What is forex? Introduction - Lesson 1 What is forex? Let's say for example... You're from Britain, and you want to go to Italy for a few weeks You would need to exchange your money from GBP (Great British Pound) to EUR (Euros) This is known as the foreign exchange market There are various financial markets that you can trade however the foreign exchange market is the largest financial market in the world Stock market 22.4 billion is traded per day Participants: Investors / Mutual funds / Index funds / Hedge funds / Institutional investors (e.g., Pension funds / Insurance companies / Banks & various other financial institutions forex market 6.6 trillion traded per day Participants: Commercial banks / Central banks / Money managers / Hedge funds & Retail traders Stock market closes each business day Forex market is open 24/5 We trade the "spot market" Retail traders & banks that are actively trading day to day on the foreign exchange market Immediate excecution of asset, giving traders the felxibility to place trades straight away 2 trillion traded per day Others trade "futures" Futures are fixed contracts and can only be placed on the date you choose to excecute an asset Delayed excecution of asset, placing trades on a future date at a specific price 45.5 billion traded per day We trade currencies in order to profit off of their movements We aim to take profit from the market when we think the market goes up or down We aim to catch as many pips as possible whilst also utilising a strict risk management plan Where we enter the market is super important and where you get in and out the market determines how much profit you make So why do we trade forex? The main factor as to why we trade forex comes down to the idea of being able to have more freedom, and being able to make money whenever and wherever. Benefits of trading forex Work from anywhere The ability to choose a trading style that suits your lifestyle best Network with like-minded traders, and build a community High volatility, ability to catch high profitablity set-ups Forex Terminologies Introduction - Lesson 2 BULL A trader who believes that prices of a given currency will go up in price or value is called a Bull. A bull trader is therefore considered to be holding a 'Bullish' sentiment in whichever currency pair they are trading. BEAR A trader who believes that prices of a given currency will go down in price or value is called a Bear. A bearish trader is therefore considered to be holding a 'Bearish' sentiment in whichever currency pair they are trading. LONG It is the process of buying a certain currency when the price is low with the expectation that the currency will appreciate in value and move to a higher price. When a bull trader buys a currency, they are said to be long on that given currency. SHORT It is the process of selling a certain currency when the price is high with the expectation that the currency will depreciate in value and move to a lower price. When a bear trader sells a currency, they are said to be short on that given currency LOT A LOT is the standard size of a contract that is used for trading. When you place an order to trade a certain currency, the order is placed in a size quoted in lots. LOT Lots sizes are broken down to: Standard (100,000 units) - $10 per pip Mini (10,000 units) - $1 per pip Micro (1,000 units) - $0.1 per pip SPREAD The difference between the Bid and Ask price is known as the Spread (Transaction Cost). For example, if the Bid price of GBP/USD is 1.3350 and the Ask price is 1.3360, the difference between the two is 0.0010 (10 PIPS), therefore giving us a spread of 10 pips. SPREAD This spread if where Brokers make their money, in that if a pip is $1 each (Mini Lot Size), once you execute a trade, the broker already banks in ($10 x 10pips) $10 from your trade which accounts as the transaction cost. BID and ASK In the forex market, there are 2 prices on a currency pair given at any one time known as the Ask and Bid Price. Bid price is the price by which a given pair is being bought at any one time Ask price is the price by which a given pair is being sold at any one time LEVERAGE Leverage is process of borrowing more money than that that you have in your account in order to invest or trade in the forex market When you leverage your trading account, it allows you to make higher profits as compared to a non-leveraged account LEVERAGE Think of your broker as a bank who lends you $100,000 to buy currencies. What the broker asks from you is that you give them $1,000 as good faith deposit, which is kept in an account known as a Margin Account LEVERAGE From the above example, it is clear to see that the amount ratio required as margin to the money borrowed from the broker is 1:100. Meaning, for every $1 you have in your account, the Broker can allow you to borrow $100 to trade with. MARGIN A Margin is a specific percentage of your account that the broker keeps once you execute a trade. It is a good faith deposit that a trader puts up for collateral to hold open a position. If your equity (trading account balance) decreases below the margin then you will get a margin call. MARGIN CALL A Margin Call is when your broker informs you that you need to deposit more money in your account in order for your trade or investment not to be closed. This happens when your trading equity has drastically dropped to levels where you cannot afford to lose more money because there is simply no more money left in your account. RISK:REWARD RATIO (RR) Risk is the amount of money a trader is willing to lose on a certain trade if it does contrary to what he/she had expected once a trade is taken Reward is the amount of money a trader will gain on a certain trade if it does as he/she had expected once a trade is taken RISK:REWARD RATIO Therefore a Risk:Reward Ratio of 1:2 simply means that for every $1 you are willing to risk the reward on it is $2. So if you lose on the trade, you will end up losing $1 but if you win on the same trade, you will profit $2. RISK:REWARD RATIO We use risk management to mitigate our risks, by utilising a low risk high reward strategy, meaning we can lose and still remain profitable overall The different types of traders There is a variety of trading methods that traders use in order to profit from the market, and each individual has their own specific style of trading they use. Knowing your style as a trader is crucial when it comes to building your strategy as each trading style has their differences, and each require different types of attention. The swing trader A swing trader is a trader who holds his or her trade for more than a day and usually not more than a month or two. The day trader Day Traders are traders who enter and exit multiple trades within a day and usually do not allow those trades to run overnight. The scalp trader Scalpers on the other hand enter and exit trades within minutes. These are more aggressive traders. Types Of Orders Introduction - Lesson 3 Market Order A market order represents an order you give to your online forex broker to enter or exit a trade at the best available price, at a specific time. Market Order When someone places a market order it removes liquidity from the market. Why? Because the person who is placing the market order is essentially demanding that his trade is placed right now. His market order is then matched with someone who has a pending order to sell placed in the market. Market Order Market order Opposing pending order Part of the market order will be filled but the rest will remain unfilled, so the market must move higher in order to seek out additional pending orders to fill what's remaining of the market order. What this essentially means is pending orders add liquidity to the market, because they are the orders in which market orders will be matched with at the point of trade execution. In such a fast-changing market, there can be a difference between the price when the market order is given and the actual price; consequently, this type of order can lead to a instant loss or gain of several pips Liquidity Liquidity is the ability to buy or sell something without causing a large price change. Whenever you see the market move it is due to a lack of liquidity in the market, not because there are more buyers than sellers as is commonly taught in trading literature. The stop-loss order A stop-loss order represents an order you place with your online broker to exit the trade once a certain price is reached. Designed to limit your loss of capital in one trade, this order is mandatory when participating in the forex market. Why some traders do not use it Some traders refuse to use a stop-loss because they're afraid of being stopped out only to see the market reversing. Others don't use it simply because it does not align with their strategy. The limit order The limit order represents an order you give to your broker to execute a transaction (buy or sell) only at a specified price (the limit) or better. A stop-loss order not only protects your trade from a huge capital loss, but it also exterminates the emotional factor that can tempt you to over-trade and suffer even greater losses. It can be used to buy currencies below the market price or sell currencies above the market price. Purpose of a limit order The purpose of this type of order is to restrict the risk of a sudden price fluctuation, so it should be incorporated into your risk management system. The Take Profit Order The take profit order represents an order you give to your forex broker to close the trade automatically, when it reaches a certain point in the desired direction. Because the price can unexpectedly reverse, you need to set a take profit before it moves in the opposite direction. This order is usually used together with a stop loss order and the ratio of the amount of take profit pips to the amount of stop loss pips is known as the risk to reward (R:R) ratio. Market Players Introduction - Lesson 4 Commercial / Investment Banks There are many types of banks in the forex market. These can be huge or small. Central Banks A central bank is the predominant monetary authority of a nation. They are usually under the authority of the government. Businesses And Corperations These are companies and businesses of different sizes; they may be a small importer/exporter or a palpable influencer with a multi-million dollar cash flow capability. Businesses And Corperations These players are identified by the nature of thier business policies which include: How they get or pay for the goods or services they usually render. How they involve themselves in business or capital transactions that require them to either buy or sell foreign currency. The major aim of hedge funds is to make profits and grow their portfolios. They want to achieve absolute returns from the forex market and dilute their risk. Advantages Of Hedge Funds For Creating An Investment Environment Liquidity Leverage Low cost Pips Introduction - Lesson 5 What Is A Pip? The unit of measurement to express the change in value between two currencies is called a pip. Pip stands for "Percentage in Price". Let's Say For Example... EUR/USD 1.1050 EUR/USD 1.1051 1 Pip Movement 2nd Example... EUR/USD 1.1050 EUR/USD 1.1060 10 Pip Movement Don't Let It Confuse You... All you need to know is that when you're looking at a chart, you need to factor in the last decimal point. EUR/USD 1.1051 1 Pip The same count is considered vice versa... When the pair moves down or depreciates, the only difference is that instead of adding the pips we are subtracting the pips Let's Say For Example... EUR/USD 1.1050 EUR/USD 1.1030 20 Pip Movement 2nd Example... EUR/USD 1.1050 EUR/USD 1.0950 100 Pip Movement It is also very important to note Different pairs have different prices & decimal point places. Some key pairs to take note of: EUR/USD - .0001 USD/JPY - .01 Japanese Yen Most pairs go out to 4 decimal places, but there are some exceptions like Japanese yen pairs. EUR/USD 0.0001 USD/JPY 0.01 Japanese Yen As The Counter Currency Notice that this currency pair only goes to two decimal places to measure a 1 pip change in value. In this case, a one pip move would be .01 JPY. Example... USD/JPY 105.10 USD/JPY 105.15 5 Pip Movement ~UP~ 2nd Example... USD/JPY 105.10 USD/JPY 105.00 10 Pip Movement ~DOWN~ 3rd Example... USD/JPY 105.10 USD/JPY 106.10 100 Pip Movement ~UP~ Pip Value Every single pip movement a pair moves either up or down, has a certain value to it and that is how we take advantage of the market and make profits. Let's say for Example, If you execute a Standard Lot size (1 Lot), which represents $10 per pip, every pip it moves either up or down, you either make or lose $10 depending on what position you executed (Buy or Sell). EURUSD Example... EUR/USD 1.1050 1 Lot Trade $1,000 Profits EUR/USD 1.1150 EURUSD Example... From the above, EURUSD has moved up 100 pips. If you executed a 1 Lot long (buy) position, when the market got to 1.1150 (100 pips up), you would have made a profit of $1,000. $1,000 Profit Calculation 1 (Lot) x 100 (pips) x 10 (pip value) $1,000 Profit Note... The same happens in terms of losses. If you executed a long position and the pair moved downwards instead of upwards, then you would have lost $1,000. $1,000 Loss Currency Pairs Introduction - Lesson 6 What is a currency pair ? Currency pairs are two foreign currencies of different value paired against one another in the foreign exchange market. An example of this is GBP/USD. GBP which is short for Great British Pound and USD which is short for United States Dollar. Currency pair broken down Taking GBP/USD as an example, the first Currency on the left, GBP, is referred to as the Base Currency. The Currency on the right, USD, is known as the Quote Currency. Currency pair quotation The quotation on GBP/USD = 1.35 meaning that 1 GBP is exchanged for 1.35 USD. The quotation on EUR/USD = 1.25 meaning that 1 EURO is exchanged for 1.25 USD. The quotation on GBP/JPY = 140 meaning that 1 GBP is exchanged for 140 JPY. Major Currencies The most popular traded pairs in the Forex Market are known as Major Currencies. All Major Currencies are traded against the United States Dollar (USD). Examples of major currencies Major Currency Pairs include: 1. GBP/USD 2. EUR/USD 3. USD/JPY 4. AUD/USD 5. USD/CAD Minor Currencies The less popular traded pairs in the Forex Market are known as Minor Currencies, also known as Cross Currencies or Exotic Pairs. All Minor Currencies are NOT paired or traded against the United States Dollar (USD) Examples of minor currencies Minor Currency Pairs include: 1. GBP/JPY 2. EUR/GBP 3. GBP/CAD 4. EUR/CHF 5. GBP/AUD Trading Currency Pairs When you buy a currency pair, you are simply buying the base currency and simultaneously selling the quote currency. Conversely, when you sell a currency pair, you are simply selling the base currency and buying or receiving the quote currency. Buying GBPUSD When you buy GBP/USD, it simply means that you are buying the GBP and simultaneously selling the USD. In this example, GBP is the base currency while USD is the quote currency. This means that you expect GBP to increase in value while the dollar is depreciating in value. Selling EURJPY When you sell EURJPY it simply means that you are buying the JPY and selling the EUR. In this case, EUR is the base currency while the JPY is the quote currency. This means that you expect JPY to increase in value while the EUR will decrease in value. Commodities Introduction - Lesson 7 Commodities A commodity is a basic good in the form of raw material that can be bought or sold in the Financial Markets since it is considered a physical asset. Commodities have value based on many factors which keep changing. It is this change in value that results to trading of commodities. Commodities Examples of Commodities include: 1. Precious Metals such as Gold, Silver, Platinum 2. Energy such as Crude oil, natural gas 3. Grains such as soybeans, corn, coffee, cocoa 4. Livestock How to trade commodities Commodities are traded on an Exchange. The main exchange is the CME which stands for Chicago Mercentile Exchange. As traders we do not buy or sell physical commodities, we participate in the fluctuation of their prices by buying and selling the underlying contracts. Commodity Traders There are two main types of traders who trade commodities. The first are buyers or companies that produce and deliver the physical commodity such as farmers or oil producers and refiners, and gold miners. Commodity Traders The 2nd type are known as Speculators and can include individuals like you and I, banks or even hedge funds. These traders speculate and take trades in the commodity market in order to benefit in the fluctuating prices of the commodities by making a profit. Speculators do not take delivery of the physical commodity. The most traded commodites include Gold, Oil and Silver. Commodity Pairs Different commodities are produced in different countries, therefore affecting each of those countries' currency. Such currencies that are directly affected by the price change of an underlying commodity are known as Commodity Currencies or Pairs Commodity Pairs Different commodities are produced in different countries, therefore affecting each of those countries' currency. Such currencies that are directly affected by the price change of an underlying commodity are known as Commodity Currencies or Pairs Commodity Pairs For example, USD/CAD (U.S. Dollar to the Canadian Dollar) is highly correlated with the price movement of Oil. This is because Canada is one of the largest Producers and Exporters of Oil. As a result, if oil prices increase then there is high chance that the Canadian Dollar is also going to increase in value against the US Dollar. Commodity Pairs Forex traders therefore take the advantage of trading these underlying commodity pairs by following the prices of the commodity itself. For example, if Oil prices increase, then it like to buy the Canadian Dollar and sell the US Dollar. Stocks and Indices Introduction - Lesson 8 Stocks and Indices The stock market, also known as equity or share market, is a place where shares of publicly listed companies are bought and sold. Indices on the other hand are a measurement of a basket of stocks of different companies that are traded as one unit. Stocks and Indices The stock market, also known as equity or share market, is a place where shares of publicly listed companies are bought and sold. Indices on the other hand are a measurement of a basket of stocks of different companies that are traded as one unit. Stock Market Unlike Currencies which are limited by the number of countries that have a particular currency being traded in the free market, Stocks on the hand are not limited and therefore there are thousands of them. They include companies such as Apple, Microsoft, Amazon, Tesla, Facebook, among many others. Stock Market They are all traded and listed on Stock Exchanges. These exchanges include the New York Stock Exchange, NASDAQ, and the FTSE. Unlike the Currency Market which has a daily volume of about $6.5 Trillion being exchanged, the stock market is much less and its volume ranges in the Billions. Indices Indices on the other hand, are an aggregate of different stocks brought together in one basket, and traded as one unit. They include Dow Jones, S&P 500, Nasdaq, and FTSE 100 among others Indices For example, the Dow Jones tracks the 30 largest companies listed on the American Stock Exchange, and the FTSE 100 tracks the 100 largest companies on the London Stock Exchange. Trading Stocks and Indices We traders have access to some of these Stocks and Indices, therefore some traders end up trading both Currencies alongside stocks and indices, while others choose to strictly stick to one of the classes. However, there are some disadvantages of solely focusing on trading Stocks:. Disadvantages of trading the stock market Unlike the Currency market which can be traded 24 hours a day for 5 days a week, the stock market is limited to the time a particular stock exchange open, for example the New York Exchange is open from 9.30am and closes at 4pm. Between this time is when you have access to the particular shares being traded in that exchange. Disadvantages of trading the stock market Unlike the forex market which sees a has a daily volume of over $6.5 Trillion, the Stock Market sees a much less volume depending on the amount of stocks bought and sold in the particular stocks exchanges on a given day. This therefore limits traders from the amount of shares that one can trade on a particular day. Market Sessions Introduction - Lesson 9 Market Sessions There are basically 4 major trading sessions in the foreign exchange market: 1. New York Session 2. London Session 3. Tokyo Session 4. Sydney Session New-York Session The New-York session starts at 1:00 P.m GMT and ends at 10:00 P.m GMT. There is high liquidity during the morning as it overlaps with European session. U.S economic reports are released near the start of the New York session. London Session The London session starts at 8:00 A.m. GMT and ends at 5:00 P.m. GMT. It is normally the most volatile session since it crosses with two other major sessions. A large chunk of forex transactions take place during this session. Tokyo Session The Tokyo session starts at 12:00 A.m. GMT and ends at 9:00 P.m GMT. Typically after big moves in the previous New York session, you may see consolidation during the Tokyo session. Most of the pairs that move during this session are Yen pairs. Sydney Session The sydney session starts at 10:00 P.m and ends at 7:00 A.m. GMT. Most of the pairs that move during this session are AUD pairs. Conclusion We have covered all basics that are necessary for you to trade the forex market. In the next section, we will cover technical analysis which is our primary method of analysing the forex market. Fundamental Analysis Introduction - Lesson 1 Fundamental Analysis Fundamental analysis can be defined as the study of underlying factors that drive a currency's price. It mainly deals with using economic data to make predictions about the movement of a currency's price. Fundamental Analysis Some of the key questions we try to answer through fundamentals include: 1. Which economy is growing ? 2. What is driving economic growth ? 3. How will the growth affect the currency ? Economic Data Releases Fundamental Analysis - Lesson 2 ECONOMIC DATA Trader's should pay attention to data releases to understand how a currency's value will be affected. There are key economic data releases that Investors and traders across the world will always track to understand the movement of asset prices. ECONOMIC DATA Economic data is mainly released regularly across the world economies. Some data releases are positive while others are negative. Data releases are done regularly. In many cases, the releases take place quarterly while others take place monthly. Key Economic Data Releases Interest Rates In simple terms, an interest rate is the rate charged by a lender of money or credit to a borrower. In most cases, the rate is annual. Interest are mainly released every quarter by the central bank. Key Economic Data Releases Interest Rates Interest plays a key role and one way to take advantage of interest rate differentials between two countries/economies is by buying the currency with a higher interest rate, collecting that interest and then selling a currency with a lower interest rate. This trade is often called the carry trade. Key Economic Data Releases GDP FIGURES GDP, is the total value of goods and services produced in a country. If the GDP number is growing then it means that the economy is growing. A decrease in the GDP number is often a sign of a slowing economy and in most times a signal of an economic recession. Key Economic Data Releases Inflation Data Basically, the inflation rate is used to measure the price stability in the economy. A low inflation rate scenario will mean a rising currency rate, as the purchasing power of the currency will increase as compared to other currencies. High rates of inflation often translate to a weaker currency. Key Economic Data Releases Consumer Price Index: The Consumer Price Index (CPI) measures the average price of consumer goods and services bought by households. It is a key indicator in determining inflation on the retail level. Trader's use this number to track the inflation rate. Key Economic Data Releases NFP(Non-farm payrolls) The non-farm payroll reports the amount of jobs added to or subtracted from the U.S. economy in the nonagricultural sectors over the previous month. It basically shows the rate of unemployment in the U.S.A. Key Economic Data Releases NFP(Non-farm payrolls) It is released on the first Friday of every month. It also shows the rate of unemployment. High rates of unemployment mean a weak economy while the reverse is true. Low rates of unemployment mean a strong economy. Effects of Economic Data Releases Economic data releases will always affect how markets behave both in the short term and long term. Some data releases will have a big impact on markets while most won't change the outlook of the markets. This ultimately depends on how much attention trader's and Investor's pay to the Data release. Effects of Economic Data Releases During news releases, markets can be highly choppy and unpredictable due to high volatility. Some trader's like trading after the data release while others think it's too risky to trade during the releases. The following examples show the effects of news releases on some asset prices. Effects of Economic Data Releases The following is a Gold chart after NFP data release: Effects of Economic Data Releases The following is a chart of Dow Jones after positive vaccine related news during covid 19. Stocks moved higher due to this news. Black-Swan Events Fundamental Analysis - Lesson 3 Black-Swan Events Black swan events in the markets are unpredictable events that are beyond what is normally expected of a situation and has potentially severe consequences. They Include events like 911 and the recent corona virus pandemic. After a black swan event, there is often a change in fundamentals.For example, after covid-19, we had lower interest rates. Effects of Black-Swan Events Black swan events most of the time affect investors and trader's psychology. For example, the beginning of covid 19 spread fear and panic among people and traders across the world. When Investors are under uncertainty they tend to sell assets. When selling pressure is higher it means lower prices. Effects of Black-Swan Events For example, the start of COVID 19 in 2020 sent US stocks lower almost 35%. Economic Calendar Websites The following websites can help us note down the dates and time when economic releases will take place: 1. Tradingeconomics.com 2. Forex Factory.com 3. Bloomberg.com Drawbacks of Fundamental Analysis They are more focused on the long term. As retail traders, we make decisions on a short term basis. Long term outlooks are therefore not as helpful in making trading decisions. It's also hard to predict the behaviour of market prices after fundamental releases. Summary of Fundamental Analysis We have covered the basic and advanced concepts of fundamental analysis that are needed to trade the forex market effectively. We will however warn that you should devote much of your attention to understanding technical analysis. Technical analysis is the best method of making short term trading decisions in the markets. Introduction Technical Analysis: Lesson 1 Technical Analysis Technical analysis can be defined as the study of trends and turning points. We use past price action to predict future price action. Trends The market can trend in only two directions. When the market is forming higher highs and higher lows, then that is a bullish trend. When the market is forming lower highs and lower lows, then that is a bearish trend. Live chart example of a bullish trend: Live chart example of a bearish trend: Ranging Market When the market is moving sideways its called a ranging market. In a ranging market, the market often trades within two major levels(support and resistance). Example of a ranging market Real live chart example of a ranging market Stages of a Trend Supply & Demand Technical Analysis: Lesson 2 In this section of the course we will be looking at: What exactly supply & demand is How can you use this in your trading? Supply & demand Refers to the point in which price action has played a strong advance or decline in either direction, and has been marked as a supply/demand zone Support and Resistance A resistance level is defined as a point at which the market has stopped and moved lower. A support level is a point at which the market has stopped and bounced higher. At a support level there is strong demand; buyers step up and purchase a market aggressively while at resistance levels there is abundance in supply. What do supply and demand zones look like? Why use them? Combining traditional support & resistance with supply & demand zones can help traders understand price movements in a clearer way You'll see supply/demand zones just below or above support & resistance levels: Support & resistance are horizontal levels Supply & demand are zones. It is key to understand supply and demand zones are based on analysing and defining zones in the past and are not predictions of future movements Supply & demand zones are zones where we expect price action to react in future, based on the past Supply and demand zones are however very important to use when analysing pairs Especially on higher timeframes such as the daily & 4H, as these are key opportunities to locate and plot significant zones to draw ideas and potential setups from These supply & demand zones can be effective when looking at potential trading setups where price action is heavily respecting the zones and unable to break out past them or fall below them. Often, an entry could be confirmed from these rejections alone, especially when coupled with support and resistance Example of a sell setup from a resistance level: Conclusion We have explained the concept of support and resistance. As a trader you are expected to grasp the following concepts so as to use supply and demand levels in your trading. We will explain further this trading concepts using videos and real live chart examples. Candlesticks Technical Analysis: Lesson 3 A candlestick can be defined as a way of displaying information about an asset's price movement. Candlesticks are the simplest and purest form of price action that provides a visual picture of what is occurring or playing out in the market. Candlestick charts are used by traders to determine possible price movement based on past patterns. The Anatomy of a candlestick A typical candlestick is made up of two parts: the body and the shadow. The body of the candlestick shows the opening and closing prices while the shadows on top and bottom of the body show the high and low price for that time period. The shadow looks like wicks hence the name candlesticks. The Anatomy of a candlestick Each candlestick displays to us four pieces of information: 1. Opening Price 2. Closing Price 3. Highest price 4. Lowest price The Anatomy of a candlestick There are two types of candlesticks. 1. Bullish candlesticks 2. Bearish candlesticks. Bullish candlesticks show that the price is going up. This means that an asset is increasing in value. Bearish candlesticks show that the price is moving down. This means that the value of an asset is decreasing in value. The Anatomy of a candlestick Bullish Candlestick Bearish Candlestick highest highest close open body open lowest close lowest Candlestick Patterns Candlesticks provide information about market behaviour through the length of the candle body. Long bodies indicate strong price movement, and short bodies tend to indicate indecision. Candlesticks also provide information about market behaviour through the length of the shadows or wicks. Long shadows represent a failed attempt to move a market in that direction Candlestick Patterns Images of lengths of the body. Candlestick Patterns Images of lengths of the body and the wick. Short Wick Long Wick Long Wick Short Wick Candlestick Patterns There are different kinds of candlestick patterns. Each pattern has a meaning which traders use when making decisions in the market. They Include: 1. Doji 2. Hanging man and Hammer formation 3. Bullish and Bearish engulfing 4. Morning Star formation and Evening Star formation 5. Shooting Star formation Doji The Doji represents indecision regarding price and frequently occurs near market highs or market lows. It is characterised by a body that is very small and usually has long wicks. There are different types of doji candlesticks: 1. Gravestone doji 2. Long legged doji 3. Dragon-fly doji Doji Images of a doji: Long-Legged Doji Dragonfly Doji Gravestone Doji Hanging Man A hanging man is a bearish reversal pattern that forms at the top of an uptrend. It is made up of just one candle, found in an uptrend of price charts of financial assets. It has a long lower wick and a short body at the top of the candlestick with little or no upper wick. Hanging Man Image of a hanging man Hammer A hammer also known as the pin bar has the same appearance as a hanging man but has a different meaning. Hammers have tiny bodies with long lower shadows and little to no upper shadows. They appear after a downtrend where price sells off before buyers gain control and drive price back to or close to the session’s high creating little or no upper shadow. Hammer Images of a hammer Bullish engulfing pattern The formation consists of a bearish candlestick, mostly small but not necessarily followed by a bullish candlestick that completely ‘engulfs’ the bearish candlestick. The formation indicates a change in trend direction from a bearish trend to bullish trend. Bullish engulfing formations occur at the bottom of a downtrend at the support levels where they signal an uptrend. Bullish engulfing pattern Image of bullish engulfing pattern Bullish Engulfing Candle Bearish engulfing pattern This pattern is the opposite of the bullish engulfing formation. The reversal formation is formed by a green bull candle followed by a large red bear candle that completely engulfs the previous green candle. It occurs at the top of an uptrend or a resistance point of a consolidation region. Bearish engulfing pattern Images of a bearish engulfing pattern Bearish Engulfing Candle Morning Star pattern The morning star candle formation is a bullish reversal formation made of three candlesticks. The formation indicates that a downtrend is coming to an end and trend reversal is approaching. The pattern consists of three candlesticks. It mainly forms around support levels in the market. Morning Star pattern Images of a morning star pattern Evening Star pattern This candlestick formation is the opposite of a morning star formation. It’s a bearish reversal formation that indicates that an uptrend is coming to an end. It also consists of three candlestick patterns. It mainly forms around resistance levels in the market. Evening Star pattern Images of an evening star pattern. Shooting-star pattern A shooting star candlestick is formed when the open, low and close are near or roughly at the same price forming a small real body and a long upper shadow. The long upper shadow of the candlestick indicates that the buyers drove price up during the session forming a high and found resistance before sellers came in and drove price lower. It mainly forms at resistance levels. Shooting-star pattern Images of a shooting star pattern Conclusion We have covered the major candlestick patterns that traders use when trading the forex market. Your job as a trader is to practise identifying different candlestick patterns and how to use them in real live trading. Candlestick patterns are quite reliable in trading the forex market since most patterns are repetitive. All the best in your trading using candlestick patterns! Trendlines Technical Analysis: Lesson 4 What is a trend line ? The Markets tend to move up, down or sideways at any given time. However, when it is an upward or downward trend, it does not move so in a straight line, rather it moves in the respective direction forming patterns. What is a trend line ? When they move in an upward direction, they form a series of patterns which are called Higher Highs and Higher Lows. When they move in a downward direction, they form a series of patterns which are called Lower Lows and Lower Highs. Example of an Upward Trend Higher Highs Higher Highs Higher Highs Higher Lows Higher Lows Example of an Downward Trend Lower Highs Lower Highs Lower Lows Lower Lows Lower Lows What is a Trendline? These Patterns in turn end up forming what we call Trendlines. There are two types of trendlines, namely Upward or Bullish Trendline and Downward or Bearish Trendline. Example of an Upward Trendline Higher Highs Higher Highs Higher Highs Higher Lows Higher Lows Example of an Downward Trendline Lower Highs Lower Highs Lower Lows Lower Lows Lower Lows Trendlines From the above images it is clear to define a Trendline as a line that connects two or more turning points together within a trending market Example of a Live Upward Trendline Point to note... Notice how as the market forms Higher Highs and Higher lows touching the trend line it offers us the opportunity to take a buy trade that we can profit from as the market continues to move higher. These trades can be executed at the trend line bounces. Example of a Live Downward Trendline Point to note... Notice how as the market forms Lower highs and Lower lows touching the trend line it also offers us the opportunity to take a sell trade that we can profit from as the market continues to move lower. Example of a buy trade after a trend line bounce: Example of a sell trade after a trend line bounce: Trendline Rule As a Rule of Thumb, the Trend is your friend until the trend breaks. Trendline Break Trendline breaks occur when the market breaks the trend line instead of bouncing off it. Sometimes this can act as a sign that the market might be changing Direction. Live Example of an Upward Trendline Break: Live Example of a Downward Trendline Break Trendline Break Once a trend line breaks it is best to wait for another trend line to form, often in the new direction that the market is heading. What are Counter Trendlines? Counter trendlines as the name suggests, are trendlines that go counter or opposite the main trendline that we are following. Counter Trendlines are also known as CTL. Counter Trendlines For example, if the market is in an overall uptrend, then the counter trendline will form in the opposite direction as the market is in the Pullback phase. And if the market is in an overall downtrend, then the counter trendline will form in the opposite direction as the market is in the Pullback phase. Up Trend Counter Trendline Live Example of a Counter Trendlines Down Trend Counter Trendline Live Example of a Counter Trendlines Advantages of Counter Trendlines The main reason as to why it is important to watch the CTL in a trending market is because it helps us to confirm that the pullback phase is over and that the trendline is continuing. Once a break of this CTL occurs, it is a clear signal to enter into that trade in order to make profit. Conclusion Trend lines are a valuable trading tool. Practising to draw this trend lines well should be your top most priority. Learning how to trade using trend lines will mainly depend on how accurate you are at drawing. We will cover this concepts better in the video section. Chart Patterns Technical Analysis - Lesson 5 What are Chart Patterns? Chart Patterns as the name suggests are patterns that are formed in the market due to human cyclic nature and occur over and over again. They are formed due to the repetitive nature of human behaviour. They basically act as the foundational building blocks of Technical Analysis. ABCD Pattern ABCD is one of the most important and simplest of all chart patterns. They form as the market moves from one point to another forming new higher highs or lower lows depending on the direction of the trend. Example of a Bullish ABCD Pattern D B C A Live Example of an ABCD... Example of an Bearish ABCD Pattern A C B D Live Example... Head and Shoulder Head and Shoulder Patterns are mainly considered reversal patterns and they form after an uptrend has been formed. They also form after a down trend but in this case they are referred to as Inverse Head and Shoulder. Structure of the Head and Shoulder The head and shoulder pattern basically has two shoulders, the left and the right, and one head, an exact imitation of the human body. Example of Head and Shoulder Head Left Right Neck Line How to trade the pattern... If you are an aggressive trader, you can execute a short trade as the market forms the right shoulder If you are a conservative trader, you can wait for a break of the neckline, which confirms that the market is in a down trend forming new lower lows and lower highs. This confirms that the market has reversed. Live Example of Head and Shoulder Inverse Head and Shoulder An inverse head and shoulder has the same exact characteristics of a head and shoulder, only that it is inverse and forms after a significant down trend. Example of Inverse Head and Shoulder Neck Line Left Right Head How to trade the pattern... If you are an aggressive trader, you can execute a short trade as the market forms the right shoulder If you are a conservative trader, you can wait for a break of the neckline, which confirms that the market is in an up trend forming new higher highs and higher lows. This confirms that the market has reversed. Live Example of an Inverse Head and Shoulder Double Top and Bottom Pattern A Double Top forms when the market retests a point of previous high and fails to create a new higher high. A Double Bottom on the other hand forms when the market retests a point of previous low and fails to create a new lower low. Example of an Double Top Double Top Neck Line Double Top Double Top formations are basically a clear indication that the market has failed to create a new high and was encountered by a significant resistance level. Just like the Head and Shoulder, they are also a sign of a reversal in the markets to the downside Trading Double Top Formation There are two points at which you can execute a trade: once the market forms a rejection at the resistance level and starts to fall, or after a break of the neck line which will confirm that the market has reversed to the down side Live example of a Double Top Example of a Double Bottom Neck Double Bottom Double Bottom Double Bottom formations are basically a clear indication that the market has failed to create a new low and was encountered by a significant support level. Just like the Inverse Head and Shoulder, they are also a sign of a reversal in the markets to the upside Trading Double Bottom Formation There are two points at which you can execute a trade: once the market forms a rejection at the support level and starts to rise, or after a break of the neck line which will confirm that the market has reversed to the upside Live Example of a Double Bottom Triangles There are 3 different types of triangles: Symmetric Triangles Ascending Triangles Descending Triangles Symmetric Triangles Symmetric triangles are created whenever the market is ranging and moving sideways. They are formed by a series of Lower Highs and Higher Lows. Example of Symmetric Triangle Lower High Lower High Lower High Higher Low Higher Low Higher Low Live Example of Symmetric Triangle Trading Symmetric Triangles The formation of higher lows and lower highs indicates that there is indecision in the market between the Bulls and the Bears, creating no sense of direction. Therefore, we wait for a break of either side to confirm the trend direction that is forming, and we trade in that direction Ascending Triangle An ascending triangle is formed by a series of higher lows and equal highs or a flat top. When they form, just like symmetric triangles, we wait for a break of either side in order to determine the direction of the market Example of an Ascending Triangle Equal highs Higher Low Higher Low Higher Low Live Example of an Ascending Triangle Trading Ascending Triangle An ascending triangle can be formed both in a bullish or bearish trend. There is more emphasis to anticipate a break in the direction of the underlying trend. However,a breakout in either direction of the market gives an indication of where the market is headed. Descending Triangle A descending triangle is formed by a series of lower highs and equal lows or a flat bottom. Just like all other triangles, we also wait for the market to break from either side of the descending triangle Example of a Descending Triangle Lower High Lower High Lower High Equal Low Live Example of a Descending Triangle Trading Descending Triangle A descending triangle can also be formed both in a bullish or bearish trend. Just like the ascending triangle, there is more emphasis to anticipate a break in the direction of the underlying trend. However, a break out in either direction of the market gives an indication of where the market is headed. FLAGS A flag is a form of a continuation pattern that is formed in the market. Just as the name suggests, flags represent a an actual flag and therefore they are quite easy to spot in the market. Types of FLAGS There are two types of Flags: Bullish Flag - indicates that the market is to continue to the upside Bearish Flag - indicates that the market is to continue to the downside Example of a Bullish Flag Live Example of a Bullish Flag Example of a Bearish Flag Live Example of a Bearish Flag Channels Channels are basically two parallel trend lines drawn in a trending market. They are one of the most common pattern formed in the forex market. Example of a Bullish Channel Upper Boundary Higher High Higher High Higher High Lower Boundary Higher Lows Higher Lows Higher Lows Live Example of a Bullish Channel Example of a Bearish Channel Lower High Lower High Lower High Upper Boundary Lower Low Lower Low Lower Low Lower Boundary Live Example of a Bearish Channel Trading Channels When trading the Channels, we are looking to execute trades when the market bounces off either side of the Channel's boundaries. It is however much more safer to trade in the direction of the underlying trend. Trading Bullish Channels If market is moving upwards, forming a Bullish Channel, it is best to look for long (buy) trades at the bounce of the the lower boundary and taking our profits at the upper boundary of the Channel. Live Example Trading Bullish Channels Trading Bearish Channels If market is moving downwards, forming a Bearish Channel, it is best to look for short (sell) trades at the bounce of the the upper boundary and taking our profits at the lower boundary of the Channel. Live Example Trading Bearish Channels Point to Note... Just like all other analysis, each of the above patterns will hold more significance if it is in confluence with more than one pattern and indicator. Conclusion We have covered the most important chart patterns that you can use in trading. As a student, your task is to practise how to identify the most reliable chart patterns that you can use in your trading. Chart time will therefore prove to be valuable as you start out in your trading career. Introduction Risk management: Lesson 1 Introduction to Risk management Risk can be best explained as the probability of loss. We can also explain risk as dealing with more things than we can imagine. There are different kinds of risks in trading. The two main categories are the risks that must be taken in order to thrive and the risks that must be avoided to survive. Different Kinds of Risks Risk of Ruin - This is the risk of permanent loss of capital. If a trader blows an account it means they don't have any more capital to trade. Psychological Risks - These are the risks that involve making emotional decisions when trading. For example, newbie traders often start trading without understanding the psychology of trading. This means most newbies will make emotional decisions. Different Kinds of Risks Risk of missing opportunities - If you don't take enough risks in the markets then you could be missing out on great opportunities. Different Kinds of Risks Risk of under-capitalisation - This can be explained as the risk of starting to trade with a very small account. If you are under-capitalised, then there is a high chance you will try to make a fortune from a very small account meaning you will take very big bets. Big bets often end up in ruin. Different Kinds of Risks Risk of taking too much risk - Newbies often blow accounts because they don't manage this risk. If you can avoid over trading and over-position sizing then you can manage this risk well. Different Kinds of Risks Risk of not understanding risk in forex trading Traders often blow accounts cause they don't understand risk and this leads to taking uncalculated risks or bets which lead to account blow ups. Strategies for managing risk Develop a positive expectancy system - If you are trading a system that is losing money then there is a high chance you will eventually lose your bankroll. Traders must ensure that they are trading a positive expectancy system. Strategies for managing risk Use of thresh-hold limits - This means you shouldn't be willing to lose a certain percentage of your capital. For example, one can set 15% of his capital as the limit. Strategies for managing risk Trading few uncorrelated pairs - Traders don't understand how correlations work. Historically, some markets are highly correlated. For example, Stocks and a commodity like oil will often move in the same direction about 80% of the time. Strategies for managing risk Use of stop losses - It's important to always ensure you have an exit point if the trade doesn't work out well. Stop losses are therefore critical in trading. Strategies for managing risk Under trading - Taking few high probable trades is one of the best methods of managing risk. Traders need to learn to be patient enough to wait for the best opportunities in the market. Strategies for managing risk Use of proper lot sizes (proper position sizing) - Depending on your account size, you should only risk a small percentage on each trade. For example 1% risk on a $10, 000 account would mean risking $100 on every trade. Take Profit Risk Management: Lesson 2 What is a Take Profit? Take Profit is the process of setting a predetermined profit target in place once you enter a trade. At this specific level, if the market gets to that point, you will have banked in on a certain amount of profit and you will be out of the trade. Take Profit The main reason as to why we should have a Target Profit in place is because each trade we take should always have a goal, in this case a profit target. We do not enter trades blindly and just let it run, we instead analyse the market before hand and get a predetermined target level where if the market should reach we take all our profits out. For Example... Let us say you are analyzing the EURUSD pair which is currently trading at 1.1500 and has the potential to rise to 1.1600 (100 pips), you will execute a long trade have your Target Profit level at 1.1600. If the market gets to this level then you will take all your profits and wait for the next opportunity to trade. For Example... If you had entered the trade using 1 Lot ($10 per pip), and the market moved up 100 pips, the amount of money you would have made if your TP was attained is: (1 x $10) x 100 pips = $1,000 $1,000 Profit Taking Profit There are two ways to set a Target Profit, one is manually and the other is automatically through a process called Market Order. Manually simply means that if the market reaches 1.1600 for instance, then you will manually close out the trade in profit. Using an automatic Market Order on the other hand, once the market reaches 1.1600, you will be automatically taken out of the trade in profit. Advantages of Take Profit It is important to set profit target in place before hand because if you do not, you will easily see a profit suddenly turn into a loss. Also having a TP helps control an emotional weakness we all have, Greed. Stop Loss Risk Management: Lesson 3 Stoploss Stop loss on the other hand is the process of setting a predetermined loss limit target in place once you enter a trade. At this specific level, if the market gets to that point, you will have lost a certain percentage of your trading capital and you will be out of the trade. Stoploss In simple terms, as the name suggest, a Stop Loss stops the amount of loss that can be accumulated on any given trade. Stoploss This is the ultimate basic process of Risk Management. Remember, Risk is all about how much money we plan to risk or lose in order to get a certain amount of money in return. Therefore, having a NO Stop Loss in a running trade is like driving a car without brakes and the Damage can be brutal. Stoploss Determining a Stop Loss target before hand ensures that you will only lose a certain amount of your capital on a trade and nothing more than that. Example of using Stoploss For example, EURUSD is trading at 1.1500 and you expect it to go up to 1.1600 (100 pips), however there is also the risk of the market falling down lower. So you decide to put a stop loss limit at 1.1450, which is 50 pips below your entry. If the market drops to this level, you will have a certain amount of Capital on that trade depending on the amount you had risked. Example of using Stoploss If you had entered the trade using 1 Lot ($10 per pip), and the market moved against you by 50 pips, the amount of money you would have lost if your Stop Loss was hit is: (1 x $10) x 50 pips = $500 $500 Loss Point to Note Keep in mind that once you have a stop loss in place, depending on the lot size you have taken, you can only lose a certain amount of money and nothing more. This process helps you be in control of how much you can lose and not end up losing all your money to the Markets on one single trade. Point to Note If you trade without a Stop Loss then it will be very hard for you as the trader to come out of a trade that is continually losing money because you do not want to accept the loss. Having a Stop Loss in place quickly helps us stop the bleeding and look for other trading opportunities that can give us profits instead. Conclusion And just like Take Profits, Stop losses can also be either set Manually or Automatically. In this case, a manual stop is usually called a Mental Stop as you already have a predetermined level in you head where if the market reaches, you will be totally wrong and you will manually exit the trade at a loss. Hedging Risk Management: Lesson 4 Hedging Hedging is a strategy that is used in trading or investment that helps reduce the amount of possible loss in a certain trade. There are two main ways in which we can hedge in the markets: Direct Hedging The first way is taking both a long and short position simultaneously on a currency pair. For example, you are short on GBPUSD in the long term, meaning you are buying the US Dollar and selling the Pound, however, there is US interest rates news coming out and you believe that in the short term if the news is negative, the US Dollar might weaken. Direct Hedging When the NEWS came out, your idea was right, it was negative news and the Dollars starts to weaken. You therefore decide to hedge your position immediately by taking a short term long position while your long term short position is still running. As the trade progresses your short term trade profit is attained and the market continues to drop, also attaining your long term target. This is called Direct Hedging. Direct Hedging Direct Hedging can be simply explained as opening a second position on the same currency pair but in the opposite direction. Point to Note Note that hedging this way, you are both long and short on the same currency pair. This strategy is however used to reduce the exposure risk rather than eliminating all of it. Point to Note In the long run, this is a zero sum game because one of the positions will be losing money while the other is making money. Therefore, if you are to use this type of hedging, you should do it very strategically in order to benefit from it. Safe Havens The other common way of hedging is quite different from the one already discussed, and it includes trading Safe Havens. Safe havens, are instruments that increase in value whenever there is a lot of uncertainty around the world or an economic downturn. Safe Havens Gold is considered to be the greatest Hedging Asset, because it is mainly used as a hedge against inflation of currencies. What this means is that it increases in value as the purchasing power of dollar declines. Also during a financial crisis, such as Black Swans, it is quite common to find Gold increasing in value. At such times, traders and investors tend to be Hedging the US Dollar by buying Gold. Safe Havens The US Dollar and Japanese Yen are also considered to be the major Safe Haven Currencies. This is because the US Dollar is used by a majority of Countries as the Reserve Currency, and the Japanese have a lot of trading pacts with multiple countries, giving it's currency a safe option whenever there is uncertainty around the World. Safe Havens Such currencies are called Safe haven currencies because they tend to retain or increase in value during times of market instability and uncertainty. As Traders, we need to be keeping track of how these Safe Havens will increase or decrease in value and execute trades accordingly. Dollar Cost Averaging Risk Management: Lesson 5 Dollar Cost Averaging Dollar Cost Averaging (DCA) is one of the methods used mitigate risk in the Financial Markets. It is a method mostly used by long term investors rather than traders, but we as traders can use it in some aspects in order to reduce the amount of risk taken on a trade. Dollar Cost Averaging The term Dollar Cost Averaging refers to the practice of consistently investing in the same pair over a period of time in order to maximize on the return. Dollar Cost Averaging For example, EURUSD has been falling and you anticipate that the market is about to bottom and start moving higher. However, you do not want to risk all your money at once at one price because you are not sure where it is going to bottom. Therefore, you decide to enter the trade in 4 intervals instead of once by evenly distributing your Capital. Dollar Cost Averaging If the pair was trading at 1.500, every time the trade falls by 1% (150 pips), you enter a quarter of your full position. If you were to enter a total of 1 Lot, you instead decide to enter 0.25 lot every 1 % down. U