The Forex Bible How to Become a Trading Master for Monthly Income Nicolas Guerrero @i.am.guerrero Table of Contents 1. Introduction 2. Why Trade Forex? 3. What Do I Need To Be Successful? 4. Forex Basics 5. Forex Fundamentals 6. Advanced Intermarket Analysis 7. How To Read A Price Chart 8. Basic Chart Patterns - Continuation 9. Basic Chart Patterns - Reversal 10. Basic Chart Patterns - Triangles 11. Harmonics & Fibonacci 12. Important Technical Indicators 13. Example Trades & Analysis 14. Risk Management 15. 7 Laws of Trading 16. Backtesting 17. My Personal Swing Trading Strategy 18. Action Plan for Beginners 19. Discord Group, Youtube and more 20. Resources and Recommended Books INTRODUCTION I am a full-time trader who has been in the forex markets since 2010. The journey was long, and as you'll indeed find out, sometimes very demoralizing. There were times where I asked myself if this was possible (losing $25,000 in one day due to a Black Swan event - CHF circa 2015- always use a stop-loss), but I never even considered quitting; and I'm here to tell you that if you're here for a quick buck, ask me for a refund and return the book, no hard feelings. With this mindset, you're better off hitting the slot machines or buying 29 lottery tickets… But if you're here because you genuinely want to become a trader and want to grow or fuel a passion for the charts (as I did), and enjoy the lifestyle, then stick along, because I'm not going to let you down. My purpose for writing this book was to provide beginners with EXACTLY what I would have wanted when I started—a one-stop-shop for everything needed to become successful. I am a very OCD/organized person who dislikes clutter and searches the far corners of the internet for every little detail I might need to know to be successful. As they say, you don't know what you don't know. Well, I wanted to make sure you wouldn't have to worry about that. Inside this book, you will find absolutely everything relating to forex, fundamentals, economics, technicals, etc. you need to know to make an income stream from trading forex. You won't need any other resources. I won't be talking about myself or filling the book with fluff. You can message me with any questions you have regarding forex or this book on my website www.theforexnomad.com, and I will answer ASAP. You've invested a lot of money for a reason, and I appreciate and respect that, so let's get right into it. . WHY TRADE FOREX? Perhaps you're here because you've always been drawn to trading like I was. You enjoy learning about the charts and their patterns, what makes markets move, fundamentals, and economic indicators. Something about being a trader inspires you. It's just cool. That's totally valid. It is cool. Perhaps you're drawn to the lifestyle that trading can provide you. The freedom and flexibility to work when you want and where you want so long as you have a laptop and internet connection. Being a digital nomad has its perks for sure, and forex is just one way to make money online. Each has its pros and cons, so I'll go through a couple of reasons why you should trade forex specifically. I will stress again, though, without a passion for the markets and charts, like any other career in this life, you will not find it easy. 1) Forex is 24/7. Unlike the stock market that opens from 9:30 EST- 4:00 EST on weekdays, the currency markets are open 24/7 (almost). You can trade 6 days a week, 24 hours a day, from Sundays 5 PM EST until Fridays 5 PM EST. So besides Saturdays, you can be in any country in the world, in any time zone, and trade. You do not have to worry about overnight positions and gappers as in stocks, and are not subject to any market opening hours. 2) Margin. It takes literally 5 minutes to open a forex account with a reputable broker (more on that later) and you're off to the races. FX allows you 50:1 margin, which means trading on "borrowed" money, in the USA, and even more outside of the USA. This will enable you to trade large position sizes with relatively small accounts. This is an advantage of the FX markets for small traders, who don't have to deal with equity margins or day trading rules. For example, with a 50:1 margin, you only need $2,000 in your account to trade a $100,000 position size (one standard lot) of EURUSD. Remember, though, with more leverage comes more risk - more on that later. 3) Liquidity. Forex markets are the most liquid markets in the world, seeing over 5 trillion dollars a day in transaction volume. This is mostly due to the amount of international business occurring on a daily basis, but also institutional traders and retail traders like ourselves. This means your trades will be quickly filled, at all hours of the day, with no slippage (getting filled at a different price than you entered), as you'll commonly find in the stock markets. 4) Low transaction costs. Currency markets require not only a little capital to get started, but also low transaction costs per trade. The transaction cost, which is how the broker makes money, comes from the spread of a currency pair. This is the difference between the buy and the ask price (more on this later) and is measured in pips. The spread is factored in when you make a trade and is usually very low (1-3 pips), and forex traders pay no commissions on their trades. In summary, forex markets are available 24/6, have a low barrier to entry, low cost of entry, allow for high leverage, have low transaction costs, and offer maximum liquidity. These perks combine for the ultimate market to trade in terms of being a professional trader and having the freedom to dictate your lifestyle around your career. WHAT DO I NEED TO BE SUCCESSFUL? In order to be successful in these markets, you are going to need patience, perseverance, control of your emotions, and mental clarity. You are going to have to spend a lot of time on the charts, and there is no way around that. Like a professional athlete has spent hundreds of hours on the court, in the gym, or on the pitch, the professional trader has spent thousands of hours on the charts. Scanning the charts every day must be something you enjoy or something that appeals to you. Eventually, through built-up experience, you will be able to read charts like a book, anticipate price patterns, and recognize profitable setups. This could take weeks to years, as there is no way of precisely predicting someone's natural aptitude for trading. You need not be a math whiz, or good with numbers whatsoever to make it in this game. Heck, you do not need any experience or curriculum in finance at all. Nothing I learned in my double majors in finance and international business has helped me become a profitable trader. If you have a good eye for patterns and visuals or a sound mind for strategy and memory games such as chess, poker, or board games, then technical analysis (reading chart patterns) should come naturally to you. The two things that you do definitely need to succeed in this game are risk management and control over your emotions. I cannot stress this enough, as trading is highly psychological. I have an entire chapter dedicated to risk management later - as you can't win, no matter if you have everything else going for you - without it. Lack of emotional controls is the one reason most traders fail. This can lead to a plethora of trading sins like overtrading, revenge trading, and impulsive trading (if you are impulsive by nature - get it fixed). If you find that you learn the chart patterns quickly, can identify profitable setups with ease, and understand the fundamental economics that move the markets, but your account balance continues to shrink - then this is where you are most likely struggling. I will repeat, this is a purely psychological game, and mastering your mind and emotion is the key to success. You can finish this book in one day, master the concepts in one month, and take 5 years to become a profitable trader because of this. If this is your case, I'll point you to some resources. You need to do more research on trading psychology and trading emotions and put information into practice. Some personal recommendations are the classic Trading in the Zone by Marc Douglas, considered the Bible of trading psychology books, and Chat with Traders podcast. In this Podcast/YouTube channel, Aaron Fifield interviews professional retail traders with decades of experience. Each episode is a different interview and has many helpful little nuggets of information. It truly helps to listen to a professional's viewpoint, early struggles that are just like yours, and slightly different psychological perspectives. My personal favorite episodes are Trader Dante and Blake Morrow. I know I said I wanted this to be a one-stop-shop for your entire learning experience, but emotions could take a lifetime to master - and I truly wanted to provide what I have found to be excellent resources in this regard. Don't take five years to become profitable- as I did - , actively work on your issues as a trader. In a later chapter, called the 7 Laws of Trading, I will lay my groundwork for what I have found to be must-do's, and if you follow them, you will have a much easier time dealing with the issues that stem from trading emotions and psychology. These laws will safeguard you from making the same mistakes myself and many other traders made when starting our careers. They will sound easy to follow but will prove difficult in real-time, so mentally prepare to think, feel, and trade like a professional. FOREX BASICS Forex stands for FOReign-EXchange. In other words, the foreign exchange market for currencies. It is a market where different countries’ currencies such as the US Dollar and the British Pound are traded against each other. As we mentioned earlier, this is the largest and most liquid market in the world, with over 5 trillion dollars in daily traded volume. i. Pairs In forex, we trade what we call pairs. A pair is one currency against another, for example, the most popular pair EUR/USD - which stands for Euro/ United States Dollar. The Euro is over the USD so you can think of it in terms of 1 euro equals (whatever the pair price is) US Dollars. For instance, right now the EURUSD is quoted at 1.1989. So we can say that “one euro is equal to 1.19 dollars.” This means that the euro is stronger than the dollar, because we get more than one dollar for one euro. Again, if the pair price is greater than 1, the first currency is stronger than the second. There are 8 major currencies in forex trading and they are as follows: ● ● ● ● ● ● ● ● United States Dollar - USD Euro - EUR Great British Pound - GBP Japanese Yen - JPY Canadian Dollar - CAD Australian Dollar - AUD New Zealand Dollar - NZD Swiss Franc - CHF The 7 pairs representing the USD with the 7 other major currencies, are referred to as the majors. These pairs represent the most liquid and highest volume pairs in forex - it might be a good idea as a beginner to begin with a watchlist of only these pairs. The majors are: ● ● ● ● ● ● ● EURUSD GBPUSD USDJPY USDCAD AUDUSD NZDUSD USDCHF The remaining pairs within the 8 major currencies are referred to as the cross pairs. There are a total of 28 major and cross pairs. Some of the most popular crosses are: ● ● ● ● ● ● ● ● ● ● ● EURJPY GBPJPY CHFJPY AUDJPY AUDNZD EURCAD EURAUD EURCHF EURGBP AUDCAD GBPCHF The EURUSD is the most heavily traded currency pair in the world and accounts for almost 20% of total daily forex transactions. Liquidity and high volumes mean tighter spreads, better margin requirements and no slippage. Pairs that are neither the majors nor cross pairs are referred to as the exotics. Some popular exotic pairs to trade are USDMXN (Mexican Peso), USDSGD (Singapore Dollar), USDZAR (South African Rand), USDSEK (Swedish Krona), and USDNOK (Norwegian Krone). It is recommended to stay away from exotic pairs as a beginner, as they are more unpredictable, volatile, susceptible to random moves, and have much larger spreads. ii. Pips A pip is a unit of measurement for a forex pair. We count movement in the markets in terms of pips, for example “EURUSD is up 40 pips today.” When looking at a quote, a pip is the 4th number after the decimal: EURUSD - 1.1834 So if this was the current EURUSD quote, the pip is the ‘4’. So if EURUSD moves to 1.1838 it has gone up four pips. Likewise if it moves down to 1.1814 , it has moved down 20 pips. Personally, I like to ignore everything before the decimal, and so I will read the quote as “eighteen thirty-four”. So if I enter my trade at “eighteen thirty-four” and tomorrow EURUSD price is 1.1876 , I will be up 42 pips and I will say we are at “eighteen seventy-six.” We count pips for all the majors in this exact same way - fourth number after the decimal, except for Japanese Yen pairs. A Yen pair, such as USDJPY, will look like this: USDJPY - 106.24 This is a little more straightforward, as the four is the pip, and so a move to 106.34 will be a ten pip move. If you are ever confused you can google a forex pip calculator, but soon it will be second nature to you. When trading forex, you typically make $10 per pip on most pairs, when trading one standard lot. iii. Lots & Position Sizing Positions in forex are called “lots.” One ‘standard’ lot refers to $100,000 worth of a currency. This is the typical position size in forex. As said above, if you are trading one lot ($100,000 position size), each pip is worth about $10 on most of the major pairs. (Your broker will display all of this information to you when you are entering a position - it will display size, pip value, margin required etc.). Of course, everything is flexible. You can trade any size you want, with most brokers these days having no minimum deposit to open an account - or very small minimums such as $100-$300. You can trade mini-lots, which are $10,000 worth of a currency pair. You can trade micro-lots, which are $1,000 worth of a currency pair. And you can trade anything in between. Don’t worry too much about all of this, when entering your position you simply input your position size. You can type ‘100,000’ to trade one lot, or ‘40,000’ to trade 4 mini lots, etc. The only thing you must worry about is margin requirements. iiii. Margin As we briefly touched upon in chapter two, one of the benefits of trading forex is the leverage. Leverage is defined as using borrowed capital (money) to trade with. Margin is defined as “deposit an amount of money with a broker as security for (an account or transaction).” In other words, margin is the amount of actual cash that must be in your account to trade with leverage. If this sounds complicated or scary, do not worry, it is very standard in the trading and finance markets. Simply put, the margin provided in the forex markets, allows you to trade large position sizes with small accounts. Just remember that this is not gambling, and all potential profit is also potential loss. In the United States the legal forex margin is 50:1. This means you get 50x on your cash. So going back to our position sizes, if you want to trade one lot - that is, $100,000 position size - you must have $2,000 cash in your account. (2,000 x 50 = 100,000) And that’s all! It works like magic. Remember though, each pair will have different margin requirements (EURUSD usually being the most favorable). Each broker will also have different margin requirements, more on that later. So what have we learned? We learned that forex means foreign exchange, or the exchange of different currencies. In forex trading, we trade pairs (one currency vs. another). We learned about the 8 most popular currencies in the trading markets, and the major pairs (the ones involving USD). We learned that pairs move in pips, and we earn money depending on how many pips we make. We learned that $100,000 position size of a pair is called a standard lot, but we can trade any amount we want. We are able to trade such large sizes by trading with leverage. Our margin requirements will depend on our broker and on which currency pair we are trading, but is usually 50:1 in the United States (and much higher outside the United States). These are the basics of forex trading. We must create an account with a forex broker (we’ll cover this in detail in a later chapter) to trade the forex markets. We are primarily swing traders, meaning we hold medium term positions. Our trades last anywhere from one day to a couple of weeks, as opposed to day traders who are in and out within a few minutes (scalping). In the following chapters we will go over the fundamentals behind the markets and what makes currencies move. *Appendix This is what placing a trade looks like in your broker account. You can see here we are buying one mini-lot of EURUSD. Our stop loss is 20 pips below current price, and we would lose $20 if we get stopped out. Our target is 100 pips above price, and we would win $100 if we hit target. Pip value is $1 per pip. Margin required is $236 meaning we must have $236 cash in our account to place this trade. **Appendix II - Order Types in Trading If you are completely new to trading in general, lets go over the different order types and how to place a trade. There are 3 order types: market order, limit order, and stop order. A market order is the standard order type. This means you will enter at the current market price. Your broker will usually show you the pip value. As we discussed earlier, a pip is worth about $10 for all the majors, when trading one lot ($100,000). When placing your trades on TradingView (we discuss this later in the chapter Action Plan for Beginners), if you place a market order, you must add your stop-loss and target after placing the order. Your position will appear on the chart as soon as you place the order, simply click on the position to add your stop loss and profit target. However, if you place the trade directly with your broker, you should be able to enter the trade with your stop loss and profit target already set. (We saw this in the first picture on the previous page, Appendix 1) The next order type is a limit order. A limit order is an order to buy or sell at a specific price or better. A buy limit order can only be executed at the limit price or lower, and a sell limit order can only be executed at the limit price or higher. In other words, if you want to buy, but when price goes down because it is too expensive right now, you use a limit order. If price does indeed drop and reach your limit price, the order will execute and you will enter the position. Likewise, if you want to short, but the price is too low right now and you want to short from a higher (better) price , you place a limit order. When placing the orders, you enter your stop loss and profit target with the order. As you can see here in the image (Buy Button) current price is .7285, so if we would place a market order we would buy at that price. However we selected a limit order and we want to enter at .7265 , which is 20 pips lower than the current price of .7285. The last order type is a stop order. This is the opposite of a limit order. In other words if we want to buy at a higher price or if we want to short at a lower price. A buy stop is triggered when price goes up and hits our stop price and a sell stop is triggered when price goes down and hits our stop price. Again when placing these orders, we can enter in our stop-loss and take profit levels. As you can see here, the current price for AUDUSD is still .7285. Our buy stop order is for .7300 , so when the price goes up and hits that price, we will enter our trade. If you think about a market order, your stop loss is actually a stop order, and your take profit is a limit order. Let’s say you buy at .7300 and your stop loss is at .7280. You are saying that if price goes down and hits .7280, execute a sell and get you out of the position. Hence, a sell stop. Or if price goes up and hits your take profit level, execute a sell at that price (higher than current price) , hence a sell limit. FOREX FUNDAMENTALS So what moves the forex markets fundamentally? That is, what causes prices to go up or to go down for each currency? There are a few important factors that we will cover, and even though we are technical traders, that is, we make trading decisions based on price action on what we see on the charts, these fundamental principles are important to be aware of. Interest Rates This is the major driver of currency values, on a macroeconomic long-term scale. Each country’s currency is managed by that country’s central bank. The job of a central bank is price stability. Central banks control the money supply - or the amount of money in circulation. They have different tools at their disposal - but the one all traders and market participants keep an eye on is the interest rate. When CBs are making interest rate decisions, forex traders pay particular attention. The general rule of thumb is that rising interest rates are good for a currency while lowering interest rates are negative for a currency. For example if the Federal Reserve (USA Central Bank) continues to raise interest rates, while the ECB (European Central Bank) is lowering interest rates, you can look for long-term shorting (or selling) plays in EUR/USD. My recommendation is to stay OUT of the market, when a central bank is making an interest rate announcement. Use a forex calendar to check for the week’s upcoming economic events and avoid currency pairs that have big announcements coming. Trading these can be extremely volatile and risky in the short term. www.forexfactory.com is my recommended calendar to use. The image below displays a typical economic calendar. Important events are denoted with red folders. For example, yesterday Canada’s Central Bank had interest rate announcements, so if I was in any CAD position, I would have exited the position before the news. Yellow and orange folders are okay, as they don't affect the markets much. The logic behind interest rates is simple supply and demand. If one currency is offering a higher yield return than the other, more people are going to purchase that currency. This causes demand to go up, which in turn raises price. If you can get 4% returns in the UK and only 2% returns in Canada, you are going to buy British Pounds. Inflation One of the principal things that central banks watch when making interest rate decisions is economic growth and inflation. Inflation is how a dozen eggs used to cost 2$ in the 90’s and now costs $5. It is defined as a “general increase in prices and fall in the purchasing value of money.” While moderate inflation is acceptable and a side-effect of a booming economy, central banks keep an eye out for extreme inflation- or uncomfortable levels. If inflation is rising too much, central banks will generally raise interest rates - which, as we discussed - is good for that nation’s currency. The logic here is that higher interest rates are less appealing to businesses and individuals in terms of borrowing from banks, to buy and build new things - in turn slowing economic growth and as a result, inflation. For example, you are not going to borrow all that money to start that new business with your friend at these high interest rates (money you’ll have to pay back on the loan). Two indicators to keep an eye on (on the economic calendar at Forex Factory) are CPI and PPI. These will help you notice trends in currency valuations and overall inflation. CPI is Consumer Price Index , which measures how much a basket of goods that consumers regularly buy costs. The more money consumers have to spend on essential goods and services, the less money they have to spend on extra goods and services. On the contrary, PPI is Producer Price Index, which measures how much producers must pay for the raw materials they use to produce their finished goods. If prices for producers are rising, they will most likely pass those costs onto consumers. These are two gauges to watch long term for an inflationary environment - which would lead the Fed to raise interest rates. Other things to take note of are overall economic strength, stock markets, capital and trade flow, and political turmoil/instability. In the next chapter, Advanced Intermarket Analysis, we will discuss different fundamental relationships in currencies. For example, how a strong dollar is synonymous with falling equity prices, while a weaker dollar can cause stock prices to rise- and how we can pay attention to these different relationships to anticipate price movements. In summary, central banks control the stability and overall supply of their respective currencies. All market participants watch interest rate decisions in anticipation of price movements in the underlying currency. Use an economic calendar to be aware of interest rate announcements from central banks. Stay out of a trade involving a currency with red folders - i.e big news coming out- because of the volatility in the short term. Pay attention to different economic indicators like CPI and PPI to have a general gauge on the inflationary environment of a currency. In general, rising inflation leads to raising interest rates, which can lead to strengthening of that currency. *The major central banks are the FED - Federal Reserve (USD), ECB - European Central Bank (EUR), BOJ - Bank of Japan (JPY), BOC - Bank of Canada (CAD), SNB - Swiss National Bank (CHF), RBA - Reserve Bank of Australia (AUD), RBNZ Reserve Bank of New Zealand (NZD) and BoE - Bank of England (GBP). ADVANCED INTERMARKET ANALYSIS Bonds/ Equities The main thing to establish in this category is that if bond yields (interest rates) go up, the local currency goes up. That is, interest rates and their underlying currency maintain a positive correlation. An economy offering higher returns on bonds makes its local currency more attractive than that of an economy offering lower returns on bonds. The relationship with equities is a negative correlation. Falling bond prices (rising interest rates) is negative for stocks. On the other hand, rising bond prices (falling interest rates) is good for stocks. Commodity Prices & USD A falling US Dollar is positive for commodity prices (as commodities are all priced in USD - the World Reserve Currency). Conversely, a rising USD is negative for commodity prices. Commodities go in the opposite direction of bond prices i.e. same as interest rates. Gold As a commodity, gold is inversely related to the USD. They move in opposite directions, as gold is usually seen as a safe-haven in times of economic uncertainty. Because of this, Gold and EURUSD move in tandem- if gold goes up, EURUSD goes up. Since Canada, Australia and New Zealand are some of the top gold producers in the world (known as the 3 commodity currencies), and Switzerland backs 25% of its reserves with gold, there are some interesting relationships to keep in mind. ● If gold goes up, AUDUSD & NZDUSD goes up ● If gold goes up, USDCAD & USDCHF go down Think about the logic behind this. In Forex Basics, we reviewed how a pair price moves. If the first quoted currency is going up, or if the second quoted currency is going down, the pair goes up. For this reason, AUDUSD & NZDUSD have especially strong relations to gold as commodity currencies. We already know gold is inversely related to the dollar. This means as gold goes up, USD goes down. If USD is going down, AUDUSD & NZDUSD should already be bullish (since USD is the second quoted currency). On top of this though, gold going up is also pushing AUD and NZD UP because of their relationship to gold. Oil Ah, good old liquid gold. Oil has a lot of geopolitical implications with OPEC and is dependent on economic environments (demand and supply) etc. But whatever does happen to oil prices, the currency most affected by it is CAD. Canada is a top 5 oil producer on Earth and you will find that if oil goes up, USDCAD goes down, and vice-versa. For this reason a lot of news about oil reserves (shown on the ForexFactory economic calendar) etc. will affect the prices of USDCAD - so be on the lookout for those announcements. Sentiment Sentiment is defined as changes in investment activity in response to global economic patterns. It is used as a gauge for the current investing environment. Investors are driven by fear in uncertain times and greed in positive times - and this leads to some established nuances in the markets. The two terms used when describing investor sentiment are risk-on and risk-off. I will use bullet points to display the characteristics of each. Risk-On: ● Positive investor sentiment ● Stocks rallying ● USD down, Commodities up ● Environment signs include expanding corporate earnings, optimistic economic outlook & increasing stock markets ● If stocks are outperforming bonds, we are risk-on (because stocks are riskier) ● VIX (Volatility Index a.k.a “Fear Gauge”) - If VIX is down, we are risk-on (VIX has an inverse relationship with AUDUSD) ● Gold/silver ratio down is risk-on ● NZDJPY/AUDJPY up is risk-on Risk-Off ● Fearful investor sentiment ● Sell risky positions (stocks, crypto etc.) ● Stocks down ● USD up, Commodities down ● Investors seek cash, gold, treasury bonds, safe-haven currencies ● Yen up, USD up, CHF up - (Safe haven currencies) ● Environment signs include corporate earnings downgrades, uncertain Central Bank policies, falling stock markets (investors avoiding risk) ● VIX up, we are risk-off ● Gold/silver ratio up is risk-off ● NZDJPY/AUDJPY down is risk-off I am sure you have some questions now. I will add some notes to the forex bullet points. NZDJPY and AUDJPY are seen as risk barometers. This is because high yielding currencies (such as AUD and NZD) go up in risk-on environments. We use their JPY counterparts because as we discussed, the Yen is seen as the most historical ‘safe-haven’ currency. Usually, if these two pairs hold up well, there is less fear than the markets show. The logic behind these moves has to do with what they call the carry trade. Basically, in a risk-on environment, low yielding currencies (JPY, EUR) are sold to fund the purchase of high yielding currencies (AUD, NZD), for their superior returns. This is because investor sentiment is positive, and riskier, during risk-on. For this reason, these pairs specifically are seen as risk barometers. When investors begin to sell the high-yielding currencies to run back to the safe-havens (i.e AUDJPY & NZDJPY begin to drop) we are probably fast-approaching a risk-off environment. Pictured above are the S&P 500 (stock market) on top and an AUDJPY chart on the bottom. Notice the positive correlation. You can see the massive sell-off in stocks at the beginning of the COVID-19 pandemic. This coincided with a flee to purchase safe-haven currencies like the YEN. As the market began to recover after that, we entered a risk-on environment. As stocks began to rally back towards all time highs, the carry trade was in full swing. Once again low-yielding currencies like the Japanese Yen were sold to purchase high yielding currencies like the Australian Dollar and New Zealand Dollar. It is helpful to keep all of this information in the back of your mind. As you gain more experience in your career and on the charts, you will see the relationships manifest themselves. Being aware of them simply acts as another indicator to support a trade idea. For example if you are bullish the US Dollar, and looking at potential setups for buy entries, seeing resistance form on an equity index, such as the S&P 500, would boost your case. HOW TO READ A PRICE CHART Hooray! We’ve finally made it to the sweet science (art) of technical analysis. To recap, the term fundamental analysis refers to analyzing a market through news, economics, politics etc. and the term technical analysis refers to analyzing a market solely through a price chart. As day and swing traders, this is our bread and butter. We must have an overall understanding of the fundamentals behind the forex markets, the intermarket relationships, and central bank influences on currencies, but our trades are still made based on what the charts tell us. To begin, we will learn how to read candlesticks (If your chart is not showing candlesticks, you can change it, usually at the top, or in settings- more on how to open an account on TradingView in the later chapter Action Plan for Beginners.) The image below displays a candlestick. As you can see, the candlestick is simply displaying price action over a period of time. You can set your chart to any time frame. As swing traders, we look at Daily charts (each candle represents one day) for an overall market direction and then smaller time frames such as 4h (4 hour - each candle represents four hours) and 1h (1 hour). In the image below you can see how I select candles and timeframes at the top of my chart (picture depicts 30 minute candles). So the candles show us a few key pieces of information. At what price the candle opened , at what price it closed, and the highs/lows (depicted by the ‘wicks’). If the candle closes at a price above the price it opened at, it will be a green (bullish) candle. If the candle closes at a price below its opening price, it will be a red (bearish) candle. A green day is seen as “bullish” because since price closed above where it opened, that means that price appreciated, which means buyers were in control of the market. If you are long (buying) you want to see green candles, you want to see buyers in control of the market, not sellers. And vice-versa. Important levels to note when looking at candlesticks are new highs/lows and daily closes. These are levels all traders are looking at, so breaking these levels is considered important. For example if price is going sideways for a while, not doing much, and the next candle makes new highs (price breaks above the high of the previous candle), this is a bullish event. Likewise if the daily candle closes and price retraces (comes down), and later in that day the previous day’s close is broken, it is seen as bullish as well. Now that we know how to read individual candles, let’s look at the most prominent candlestick patterns: Hammer Sometimes called a pinbar, the hammer candle and shooting star (inverse hammer) is defined by a small body and a long wick - with no upper wick. When found at the end of a strong move, this can signal a reversal is coming. In other words, if there is a strong downwards (bearish) move and then a hammer candle prints at the bottom, this can be a signal that price is getting ready to turn bullish. Likewise, if there is a strong upwards (bullish) move with a shooting star at the top, this is a signal that bulls are losing momentum, and price is getting ready to turn bearish. Example in the image below. If you think about the psychology behind a hammer candle, it makes sense. Look at the image above. The fact that the hammer candle has such a long lower wick, signifies that at one point this was a large red candle. Bears had control of price, and the selling was raging on. But what happened? The bulls (buyers) came in and were able to take price all the way back up to not only leave a long lower wick, but to make the body of the candle green - i.e. close above the candle’s opening price. When you understand the logic behind the candles, you can read what the market is telling you. If the bulls were able to actually take control of this market, there might be a buying opportunity for us here as traders. Remember all technical analysis serves as indicators, never make a trade solely based off of one individual candle, with no other substance. Engulfing Candle The engulfing candlestick pattern is one where a candle’s body completely consumed the body of the candle before it. If it is a green candle, it is a bullish engulfing and is a bullish indicator and if it is red it is a bearish engulfing and is a bearish indicator. Look at the image on the next page. As you can see the bullish candle completely consumes the bearish candle. It opened at or below the bearish candle’s close, and it closed above the bearish candle’s open. Like the hammer, the engulfing is a reversal candlestick pattern. It is an indicator that price might be getting ready to break the current trend, and reverse in the other direction. A bullish engulfing at the bottom of a bearish move is a bullish indicator and vice-versa. Inside bar Lastly, we take a look at the inside bar candlestick pattern. This is the opposite of the engulfing pattern. An inside bar candle is completely consumed by the candle before it. The general way to trade the inside bar pattern is to enter a trade when price breaks the high/low of the mother candle (first bar). For example, if you have an inside bar setup like the first one in the image above and a third candle breaks the low of the mother (green) candle, you would enter a sell position. Again, this setup works best at the end of a trend or strong move, just like the previous two. In the image above you can see price came down to a support level and printed a pin bar followed by two inside bars (the more indicators you can combine, the better the odds). The next candle broke the highs over the mother candle, which in this case was the pin bar, signaling a long (bullish/buy position) entry into the market. Support and Resistance The key to all technical analysis, being able to properly identify the important support and resistance levels. Do not worry, it is a fairly simple concept to grasp, and once you begin drawing on your charts you will have it down in no time. Support levels are levels which price respects. This means that when price action comes down to these levels, the levels hold. In other words, price bounces, or reverses from these levels. So if price comes down to a support level, it can be an indicator to start looking for signs of a reversal coming - for bullish price action. For example, a hammer candle forming on the support level. In contrast, resistance levels are levels above current price, that price respects. When price reaches resistance levels, it bounces down and reverses bearish. This will be easier to visualize: So when price came down and touched support, it reversed and made a bullish move. And when price came up and touched a resistance area, it reversed and made a bearish move. It is important to note that these levels are areas, and not straight lines. Psychologically, if we think about this, what is it telling us? A resistance level is telling us that there are sellers in that area. That’s where the bears are.So if you took a buy-order at a support area, your profit target might want to be in the next resistance area, because you wouldn’t want price to turn around on you and take back your profits. Since we know that support and resistance areas indicate where the buyers and sellers are, we know that if these levels are broken, they can be explosive trades. In the image above, the resistance area was finally broken after 5-6 bounces. This indicated that the bulls were really taking control, and provided a great buying opportunity. This is called a breakout trade. It is important to note that once broken, support becomes resistance, and a previous resistance becomes support: Trendlines While we just looked at horizontal support and resistance levels, trendlines act as dynamic support and resistance. They are also respected by price and work in the same capacities in terms of breakouts and support becoming resistance. Trendline support and resistance similarly shows us where the bulls and the bears are. It would be wise to follow the trend and buy with the bulls, until the trendline support is broken. So we have learned how to read candlesticks and the psychology behind them. We looked at the three main candlestick patterns. We then learned about support and resistance levels and trendlines. As traders we need to combine all of our indicators into technical analysis. We need to ask ourselves “Where are the buyers/sellers?” and then draw these important levels on our charts. This image shows a current trade I am involved in. I have my green rectangle support area, and my blue trendline resistance drawn on the chart. As you can see, price broke the trendline resistance and came back to retest these levels, which now acted as support. My entry was an inside bar candlestick pattern: BASIC CHART PATTERNSCONTINUATION Now that we can understand what the candlesticks say and we can identify important levels in our charts via support/resistance and trendlines, we’re going to learn basic chart patterns. When these patterns align with our important levels, candlestick signals, fibonacci levels and technical indicators (chapter later in this book), we are creating technical superpowers. There are two types of chart patterns: continuation and reversal patterns. In this chapter we’ll cover the former. Continuation means we are seeking for the current price trend to continue. In other words, if there is an up trend (bullish price action) coming into our continuation pattern, we are looking to take long entries (buy orders). One form of continuation we have already seen is support/resistance trendline retests. When support is broken, it generally becomes resistance. And so breaking out, and coming back to retest the level, we are looking for continuation price action to continue the break out. The most important continuation patterns are flags and pennants. Flags A flag pattern literally looks like a flag. We have a flagpole and then the flag itself. The flagpole is the initial impulse move in one direction, a strong move. After the strong move, buyers are tired, rest and profit taking occur, and price corrects a little bit. A correction, is a smaller retracement in the opposite direction from a strong move. The correction forms the flag. Price usually stays within support/resistance channels when correcting and the flag’s candles are usually much smaller (less volume) than the impulse move’s (flag pole) candles. When the flag resistance line is finally broken, it is time to enter the trade - looking for continuation of the impulse move. As you can see in the image below, on my charts EURUSD was in a channel on the longer time frame (blue trendlines), and we were making our way from the trendline support towards the top of the channel. A flag formed - green line indicating pole, and blue lines indicating flag - and then price broke out after the correction and continued bullish. Note that price also found support on the 200 period moving average (red line) - more on that in a later chapter called Important Technical Indicators. This is part of forming a complete picture with technical analysis, knowing our important levels, and knowing where to put our stop losses. Flags come in all sizes. On a small intraday move like above, the flag itself is a few individual candles. But on a more long-term timeframe, the flag can form as entire price action: There is a lot going on here so bear with me. To the left we have a giant bear flag. The chart begins with the big bearish impulse move downwards, and is followed by a correction, which forms on a support trendline. This correction forms the flag itself. The green rectangle shows where the flag was broken and retested - support became resistance. That was our entry for a short position, and price continued downwards. Next, a giant impulse bullish move (long green arrow) follows. Price corrects in a downwards channel - that finally breaks, and retests the resistance line. The green rectangle signals an entry point where we are retesting the resistance line (now support), as well as a horizontal support area (extend the green rectangle to the left - you will find the previous lows) and finding support on the 200 period moving average again. Price continues upwards. When we zoom out and begin to combine our technical analysis patterns and indicators like this, we begin to truly read the markets. Just to drill the point home, the image below shows a position I am currently in that is now bear flagging: Thus, since I am short, I am anticipating this bear flag pattern to break to the downside and continue my bearish position. Note my stop loss is already below my entry price - this is securing profits. This means that this trade is already a winner and we can sleep easy. Pennants Pennants are very similar to flags, except that the shape of the correction is more triangular, as opposed to a channel. Take a look at the images below: Just like a flag, there is a flag pole followed by a small correction. After the brief consolidation, when the trendline breaks, price looks to continue in the direction of the impulse move. The important thing to note here is the direction of the corrective move. When the impulse move (flag pole) is followed by correction in the opposite direction (flag itself, channel, pennant), it is typically a continuation pattern. On the contrary, when the small consolidation following a large impulse move moves in the same direction as the impulse, it is a potential reversal pattern. Similar to flags and pennants, we have a reversal pattern called rising/falling wedges. When price consolidates (low volume, small candles) in the same direction as our flag pole, it is a sign that the trend might be about to reverse. (Always note the direction of the consolidation, price generally moves opposite that direction). Now let’s move on to reversal patterns. BASIC CHART PATTERNSREVERSAL Just as you guessed it, as opposed to trend continuation, these are trend reversal patterns. This means that when we spot these, we are looking to get involved in the market in the direction opposite to the trend or impulse move. The two main reversal patterns are double tops/bottoms and head and shoulders. Double Tops/Bottoms As you may have noticed in the last image of the previous chapter, a double top is when price comes up and makes two peaks. Psychologically, the logic behind this being a reversal pattern makes sense. As price came up the second time, it was unable to make new highs. That is, price was unable to surpass the previous highs (close above) from the first top. This indicates wavering strength from the buyers, and provides a counter-trend (reversal) trading opportunity for the bears. The correction (pullback) low after the first top is referred to as the neckline. The typical way to trade a double top is to wait for the neckline to break after the second top, and then enter your short position. The reason behind this is that the neckline was the previous low and acts as immediate support. Breaking this and making new lows, is a bearish indicator, adding confirmation to the double top pattern. You can now enter your short position with stop loss either above the neckline or above the second top. As I will continue to emphasize, technical analysis is a combination of all your patterns and indicators, and the more you can combine together, the stronger the trading opportunity. Notice here how the second top rejected the resistance (support/resistance) area with a pinbar (candlestick analysis), and with several candles that had long upper wicks (signaling bearish rejection). The neckline was then broken, and a bearish flag (continuation chart pattern) pattern formed - retesting neckline resistance. This was the perfect opportunity to get involved to the short side. Double bottoms function in the exact same way, but they are bullish reversal patterns - the opposite. Remember to always think about the psychology behind the patterns. Simply put, price (sellers) tried to break a level twice and make news lows, but failed both times - indicating seller weakness. When we see seller weakness, we can begin to consider looking for buying opportunities. Head And Shoulders While the name might sound strange, this is the second of the two most important reversal patterns. H&S functions in a very similar way to double tops, the only difference is that there are three peaks instead of two. After an impulse move, a first top will form (left shoulder), followed by a second, higher top (head), and completed with a third lower top (right shoulder). Again, we have a neckline which functions as a support level from the corrections of the left shoulder and the head. When the neckline is broken and retested, that is the signal that confirms the pattern and we can enter the trade. Like the double bottom, the inverse head and shoulders is a bullish reversal pattern (we are looking for buying opportunities). Remember since these are reversal patterns, there must be an impulse move, or a trend before they form. A downtrend precedes an inverse head and shoulders, and an uptrend precedes a head and shoulders. By now, I know you can figure out the psychology behind the pattern on your own already. If you can’t don’t worry, this will all engrain in your head with more chart hourts. Logically, in the head and shoulders, we see price make a high (left shoulder), then make a new high (head), and then fail to make a new high (right shoulder). This failure to make higher highs, indicates a loss of strength in the bullish uptrend. Again a loss of strength tells us we can start looking for shorting opportunities. The break of the neckline, and the neckline holding as resistance confirms the pattern. BASIC CHART PATTERNS TRIANGLES The last chapter for our basic chart patterns will be dedicated to triangles. I’ve dedicated to them their own chapter because they can be either continuation or reversal patterns- and can be a little bit tricky to trade. There are three main types of triangle formations - symmetrical, ascending, and descending triangles. Symmetrical Triangles A symmetrical triangle starts off wide, and narrows in. It has both an ascending support line and a descending resistance line - forming a triangle. This means that it is making lower highs and also making higher lows as it forms. While the rule of thumb is that a symmetrical triangle in a bull trend is bullish, and a symmetrical triangle in a bear trend is bearish, it can break either way. You trade a triangle when the resistance or support line is broken and retested - to confirm that resistance has become support. I want to stress again that these can break in either direction, and a lot of times will happen in the middle of nowhere, or in a sideway market - and not in a trending market. Try to scan your charts and look for symmetrical triangles, draw out your lines and analyze how they reacted. On the following page you will see an example of a bullish symmetrical triangle that played out bullish and a bullish symmetrical triangle that played out bearish. As I said, these can be unpredictable. The important thing to keep in mind is that price is bound between two levels - a support and a resistance. These principles will never change - whichever side is broken is an indication that those market players have the upper hand. But always seek confirmation. Ascending/Descending Triangles These triangles have one different feature, a flat top or bottom. While one side of the triangle is either an ascending or descending trendline (lower highs or higher lows) - the other side is a horizontal flat-top support or resistance level: Notice the flat top or flat bottom prevalent in these triangles. This is the key difference, and unlike symmetrical triangles, these do have a directional bias. Ascending triangles are bullish formations and descending triangles are bearish formations. The price range is getting smaller and smaller as the triangle forms, and this tightening of range can usually lead to explosive breakouts - when the support or resistance is finally broken. The logic behind these psychologically is simple. In a descending triangle (left picture), there is a support level that the bulls are holding. Like all support levels, this area is where the buyers are, and price continues to bounce from there. But what is happening after each bounce? After each consecutive bounce, there are lower highs. This means that bulls are taking price less high each time they come in - losing power. Bears meanwhile, are gaining strength as they attack the support level. They continue to sell into the support, not allowing the bulls to make new highs (which would be a bullish indicator), until they finally break the support level. To take a deeper look into why continuation patterns can lead to such great trades and explosive moves, think about the orders. If a support level is where a bunch of buyers are, that means they are placing long orders at that level, trying to trade support bounces (reversals). If they are placing these buy orders at the support level, where are their stops? Their sell-stops (stop loss orders) are right below the support area. This is typical because they know that if this area is broken, then they are wrong about this trade - so they want to get out. So when bears (sellers) finally break a support area, all these sell-stop orders are hit stopping out bulls, but also triggering a ton of more sell orders - adding to the bearish explosion! In my chart image above, we have this massive long term ascending triangle which formed on AUDJPY. This was a trade we took to the long side. As you can see resistance eventually broke and led to a 200 pip move upwards! You might notice that price at one point before the top, broke the trendline support to the downside. This is what we call a false breakout. Again, nothing in trading is certain, we can only play the probabilities and be confident that the odds are in our favor, while managing risk. Knowing that ascending triangles are bullish chart patterns, we should only be looking for long opportunities to get involved while this is forming. The traders who shorted the trendline break to the downside did get wrecked, for being impatient. Meanwhile the long traders only added even more confirmation to their pattern. Why? The bearish breakout failure, further confirmed bullish bias (strength) when the resistance did eventually break - making it a higher probability trade. Currently this symmetrical triangle is forming on USDJPY. Which side will it break out too? I am not sure. All we can do is react to what the market tells us, not what we want it to do. If we do break to one side, wait for a retest of the trendline to make sure it’s going to act as support now - confirm the idea. Like I said, symmetrical triangles can be tricky. A lot of times you might think a breakout is occurring, but it is just the next touch of the trendline and direction is also unpredictable. Whenever you are reading this, come back to USDJPY on the charts. Put your chart on 4H, and come back to September 12th 2020, and see what happened to this pattern. Did you anticipate it correctly? HARMONICS & FIBONACCI Our final chapter on technical analysis is a more advanced one. If you want to learn more about harmonics and fibonacci , I have referred to a book in the Resources chapter at the end of this one. To get started, I am going to show you an excerpt from this book to define harmonics and Fibonacci. What Is Harmonic Trading? “Harmonic Trading is a methodology that utilizes the recognition of specific structures that possess distinct and consecutive Fibonacci ratio alignments that quantify and validate harmonic patterns. These patterns calculate the Fibonacci aspects of these price structures to identify highly probable reversal points in the financial markets. This methodology assumes that harmonic patterns or cycles, like many patterns and cycles in life, continually repeat. The key is to identify these patterns and to enter or to exit a position based upon a high degree of probability that the same historic price action will occur. Harmonic Trading is based upon the principles that govern natural and universal growth cycles. In many of life’s natural growth processes, Fibonacci numeric relationships govern the cyclical traits of development. This “natural progression” has been debated for centuries and has provided evidence that there is some order to life’s processes. When applied to the financial markets, this relative analysis of Fibonacci measurements can define the extent of price action with respect to natural cyclical growth limits of trading behavior. Trading behavior is defined by the extent of buying and selling and influenced by the fear or greed possessed by the market participants. Generally, price action moves in cycles that exhibit stages of growth and decline. From this perspective, the collective entity of all buyers and sellers in a particular market follow the same universal principles as other natural phenomena exhibiting cyclical growth behavior. In an attempt to learn the origins of this analysis, many get lost in the need to understand why these relationships exist. The basic understanding required to grasp this theory should not move beyond the simple acceptance that natural growth phenomena can be quantified by relative Fibonacci ratio measurements. Applied to the financial markets, Fibonacci ratios can quantify specific situations where repeating growth cycles of buying and selling exist. It is the understanding of these types of growth cycle structures (patterns) that provides pertinent technical information regarding price action that no other approach offers” - Scott M. Carney - Harmonic Trading Volume One So Harmonic trading is a specific type of technical analysis, and it’s chart patterns are based on Fibonacci numbers. But what are Fibonacci numbers? Fibonacci “The mathematical sequence was discovered by Leonardo de Fibonacci de Pisa in the 12th century, and is the earliest recursive series known to date. Beginning with zero and adding one is the first calculation in the numeric series. The calculation takes the sum of the two numbers and adds it to the second number in the addition. The sequence requires a minimum of eight calculations. After the eighth sequence of calculations, there are constant mathematical ratio relationships that can be derived from the series. These mathematical relationships remain constant throughout the entire Fibonacci series to Infinity.” In the world of Mathematics, the 1.618 is known as the golden ratio or Phi. The inverse (1/1.618) of Phi is 0.618. The 1.618 ratio is commonly referred to as the golden mean. . The inverse of the 1.618 is referred to as the golden ratio (0.618). There are numerous examples everywhere in nature about Fibonacci numbers and sequences. From planetary phenomenon in the stars, to the human body, to the Great Pyramids, to the growth of seashells and more, these numbers recur over and over again. While these are all fascinating, what we care most about is their importance on the charts. Fibonacci Retracement When drawing Fibonacci levels on our charts, we have new technical indicators. The different levels act as support and resistance levels to price, and even projections. The standard Fib levels are .382, .50, .618 , .786, and .886, with 1 being a complete price retracement. We use our Fibonacci retracement tool after an impulse move or trend, to predict which of these levels price will come down to in a correction and find support on. In my chart pictured above, you can see I drew a Fibonacci retracement ,using the Fib Retracement tool, from the high (red rectangle) to the low (green rectangle) of the impulse bearish move. Note that price re-traced (corrected) back to the 618 Fibonacci level (golden ratio - most important level - red line) and rejected it. So I can say that the 618 is acting as immediate resistance.If i am short EURUSD, I am comfortable with my stop loss being above the 618 resistance. If we reach the 1 level at the top, it would be a 100% retracement of the bearish move. In the image above, USDSEK (Swedish Krona) has also found support on the 618 Fib level. This is a reverse of the first trade which was bearish. Here we can see that price broke above previous highs (red rectangle) - a bullish signal - and has corrected to 618 support. Bulls will look to hold this support level and continue upwards. To draw a Fib retracement on your chart simply select it from the third icon on the left panel on TradingView. (More on opening and setting up a TradingView account later). You will find Fib levels over and over and over again acting as support and resistance on your charts. These are universal numbers, price respects them, and all traders are looking at them. The stronger the trend, the smaller the correction. So if the impulse move was a very strong one, perhaps price might only correct to the 382 retracement and find support, as opposed to the golden ratio (618). Take a look at the image on the next page for an example of a weaker pullback due to a strong impulse move. As you can see this was a much stronger and longer impulse bearish move. As a result, price pulled back to find resistance at the 382 Fib, before it continued the downwards trend. Let me also call your attention to the beginning of the picture. We had another bearish impulse move right before this picture (to the left), and as you can see price formed a bearish flag. The flag trendline support was finally broken on the third bounce (and formed another mini bear flag), and the trendline support became resistance. Price finally broke down into another impulsive move. This was an excellent trading opportunity. At the end of the image, we can see that the 0 line was broken, in other words, bears have made new lows. What can we look for now? A pullback/retest of the 0 line support (which should now act as resistance) and a trading opportunity to be involved short again. Fibonacci Extension While a retracement helps us find support and resistance within the pullback of a correcting move, a fibonacci extension helps us project the next level price will reach. We select our fib extension tool in the same list as before. The three most important fibonacci extension numbers are the 1.27, 1.618 (golden mean) and 2.0 extensions. We draw a fib extension from the beginning of a move to the top, just as we draw a fib retracement. In the image above we drew a fib extension from the bottom of the first move to the top of the first move (1). As you can see price extended past the 1, to the 1.27 extension level where it found resistance. Price then came down and broke the trendline support that had been forming. After the Fib resistance level, and the trendline support being broken, the re-test of support (where it became resistance - green square) confirmed all of these bearish signals. This was a perfect entry for a short position. As you can see, price continued downwards from there. In this scenario, on USDCAD we had a long term down channel. Price did finally break out of the channel to the upside. We drew a Fib Extension from the bottom of the impulse move to the top, to project where the next price resistance would come. As you can see, price reached the 1618 (golden line) extension level almost exactly and corrected from there. And yes, if we were to draw a Fib Retracement from the 0 point to the top of the entire move (1618 point) you can bet that's a 382 retracement for the correction, where we found horizontal support with the previous highs. There you have it. Price came down after the breakout and found support right under the 382 Fib, at horizontal support. The green rectangle shows you why this was a strong support area. Follow it to the left, this was where previous highs were before the breakout, and before that, resistance was support - price bounced off of it 3 times before breaking it down. Having our stop below the 618 would have been a smart move on the initial breakout. Now that price formed a new bottom - a higher low - , we can confidently move our stops to below the most recent lows- that is, below the green rectangle, as we look to continue upwards. We now have an arsenal of technical analysis tools and patterns at our disposal. Look and draw on your charts. Identify trading opportunities where multiple signals line up. Find a bullish engulfing candlestick pattern on the second bottom of a double bottom at a giant support level which lays on a 618 Fib. IMPORTANT TECHNICAL INDICATORS Now that we know how to read a price chart and how to identify basic chart patterns, we can think about adding a couple of indicators to our charts. I highly advise to keep it at 1 or 2 max and stick to reading naked charts and price action. A lot of traders get so caught up in indicators that they can’t even read their chart anymore and they receive mixed signals. We will look at the two most important indicators that we as traders use as reference. Moving Averages A moving average is simply the average of price over a given amount of time. It is represented as a moving line on your price chart. You can customize it to whatever time period you want, but the ones used by traders are the 10, 20, 50, 100, and 200 period moving averages. The former being considered “short term” and the last two being considered “long term”. So, if you have a 200 period moving average on the screen, it is simply the average price of the last 200 candles. As an indicator, we look at price’s relationship relative to a moving average. If price is above the moving averages, it is considered bullish and if price is below them, it is considered bearish. The moving averages can also act as dynamic support and resistance levels, especially the 200. Another way to look at them is with their relationship to each other. If a short term moving average like the 20 crosses above the 100, it is seen as a bullish indicator. This is telling us that in the shorter, more recent term, price is trending up - that is, we are trading above the average levels of the last 100 periods. That is called a “golden cross”. If price is above the 10, the 10 above the 20, the 20 above the 100 and the 100 above the 200, they are said to be “in line”, and it is a picture perfect bullish market. In the image above you can see my moving averages on my chart. My green is my 20, my blue is my 50 and my red is my 200 period moving average. Looking at EURUSD, you can see when the green crossed under the blue, and both crossed under the red, price was in a bearish trend. However, price seems to have bottomed out, as price has broken the 200 MA resistance level and the short terms MAs have crossed back above the 200. Or has price just closed below the 200 MA again, finding resistance in the green MA as it forms a bear flag and is about to continue downwards? As traders we must analyze everything, and build a case and a reason for entry. Do not take the trade if it is not clear. Wait for the chart to tell you who is in control. Relative Strength Index RSI is what we call an oscillator. It is a momentum indicator that shows us extreme conditions in the market. The signal line in the RSI indicator travels between two bands. The top dotted line, 70, and the bottom dotted line, 30. When price crosses the top band, price is said to be overbought. When price crosses the bottom band, price is oversold. These extreme conditions in the market can help us make trading decisions in our analysis. Just like japanese candlesticks, never make a trade based on an RSI signal alone. In the previous example we can see that price was coming out of overbought conditions, hence it was a bearish indicator. Now we start to form a more complete picture. We can say that price was in overbought conditions, and made a strong bearish move (big red candles), that resulted in a candle close below the 200 moving average. Now we are forming a bear flag as we consolidate upwards with smaller, light volume candles. The green MA seems to be holding up as resistance and if you draw a Fibonacci on the chart, you’ll see we are at the 382 fib level. The RSI still has plenty of room to continue downwards. We also know that it is 11 PM EST right now and so the past few candles have occurred during the low-volume Asian session (this explains their smaller size). The strong bearish move had volume behind it and occurred during the London and New York sessions, so it is likely they will continue selling off here very soon. If the bear flag breaks to the downside, it could provide a good shorting opportunity here. EXAMPLE TRADES & ANALYSIS This is how we analyze a trade opportunity. In the image of my chart above you’ll see a long trade we took on AUDNZD. We have a combination of technical indicators here going for us. First, notice how price was in a down channel and we came to the trendline support (bottom line of channel- blue line). This is our first indication that we may want to look for buying opportunities, because we know trendline support is where the buyers are, so can we identify more reasons why support will hold one more time for us to take a long here? Do we have other bullish indicators? Yes. Next, notice the oversold signal on the RSI (bullish signal) and how we are at the 618 (golden ratio) Fibonacci level (red line). Next, the orange rectangle shows we are at horizontal support to add to the trendline support. The candles are forming with long lower wicks (showing bullish rejection) and several hammers have formed. To top it all off we formed a double bottom chart pattern. We had a total of six technical signals to build a case for going long at the double bottom. This was a fantastic trade that rewarded 100 pips. Stop-losses were below the double bottom (below support) and targets were at the top of the trendline resistance. This was a GBPCAD long position that exploded for an insane 300 pips! Again, you’ll notice the down channel, only this time the channel was broken to the top side (bullish indicator). So instead of taking the trade from channel trendline support, we were looking for a retest. Note how price came back to retest the channel resistance and that resistance became support. This coincided with a horizontal support level (green rectangle) and the 618 Fib once again. Lastly, we printed a picture perfect hammer candle on the trendline support. In summary, we had 5 bullish indicators here - downchannel trendline resistance broken, retest of resistance confirming trendline support, horizontal support level, 618 Fib level, and a hammer candle. Pictured above is a CHFJPY short position we took last week. This one might seem a little bit more complex, but the beauty of technical analysis is nobody is rushing you. Take your time. Draw on your charts. Look for indicators. First you will notice that the long up channel was broken to the downside, and the channel trendline support became resistance on the multiple retests, this is the first bearish sign. You’ll then notice how price came all the way up to the previous highs (red rectangle) and found horizontal resistance. Next, a head and shoulders pattern formed, and if you remember head and shoulders is bearish (inverse H&S is bullish). After the right shoulder (RS), price broke the neckline (green rectangle) which was an immediate horizontal support level, and formed a bearish flag. I marked the bearish flag with blue lines and you can see we flagged right back into the green support area (neckline) and retested it to confirm it has now become resistance. This was the time to enter the trade. Stops can be above the bear flag or above the most recent highs (RS) depending on your risk management. This netted us +100 pips. This chart of USDSGD illustrates the old adage of “If it ain’t broke, don’t fix it.” You’ll see five consecutive bear flag/ trendline support breaks with retests. Sometimes you’ll find a pair providing you with this type of opportunity for continuous longer term directional trading. This could be one long short position or five consecutive trades at each bear flag. You’ll notice in the boxes I drew, the trendline touches confirming support levels. They all eventually break and continue the downwards pressure. Bears have been in full control of the USD Singapore Dollar. This also shows us the power of moving averages in a strong trend. You can see the short term MAs acting as resistance the entire way down. This pair will remain bearish until price can break and close above the 200 MA and we get a golden cross (short term MAs cross above 200). Looks like we are finally testing the 200 for the first time in a long time (bear trend losing momentum?) Also I see a potential inverse head and shoulders forming. Did you spot that? Let’s take a closer look at trendline breaks and re-test, as it is an essential component of technical analysis. I urge you to look for these and draw on your charts, as they repeat over and over and over again. USDCHF is pictured above. We have the strong bearish impulse move, which becomes a bear flag (blue line). As we flag, trendline support is tested four times, while a horizontal resistance is formed on the top. We have a bearish bias because of the impulse move and flag forming, but also because on the top side, bulls cannot make new highs (horizontal resistance - red rectangle). Price finally breaks support and retests it in the form of a smaller bear flag (red lines) providing us our entry opportunity to get involved short. Stops are above the retest or above the horizontal red-box resistance for longer term traders - depending on your risk management rules. Our last example takes a look at a NZDUSD short position we took. Price was in a rising channel, testing both trendline support and resistance multiple times. Near the end of the channel, note how a mini-channel formed. That is, price was only making it from the support line to the middle of the channel and formed a new horizontal resistance (long red rectangle). This was our first bearish indicator and we then broke support and retested the trendline as well as the short term MAs which were acting as immediate resistance. This was our short entry. One particular thing to note about this trade was something we call RSI divergence. In this case, we had bearish divergence. Notice how the RSI went into overbought conditions at the beginning of the image and then proceeded to get lower and lower, forming a downwards slope (red line). Meanwhile, price continued to rise and rise after overbought conditions (red line on chart trendline resistance). This divergence, a down slope on RSI vs. an upwards slope on price, is called bearish divergence, and is a reversal indicator on the RSI. RISK MANAGEMENT Welcome to the most important chapter in the book. As I mentioned earlier, risk management is the be-all of trading. Professionals apply it, rookies who burn out accounts ignore it. If you lose, this will be the number one reason 99% of the time. So let’s get into it. Trading is not a get rich quick scheme. Rather, it is a game of survival. Those who win, those who are consistently profitable, simply survive long enough to allow themselves to continue to trade. Ignoring risk management, leads to wiping out accounts and certain death. In simple terms, imagine a trader who risks 3% of his account per trade and a trader who risks 20% of his account in any single trade. Trader A can run into a losing-streak of 5 losers in a row, and will be down 15%. Yet, he is very likely to average up to his mean and string together some winners (assuming he’s at least a 50% trader) , and his account is still alive to allow himself to do so. Trader B on the other hand, is completely wiped out with 5 losers in a row. Even if he risked only 15%, he would be down 75% of his account and now have much less buying power (leverage) - meaning his new positions would be much smaller than where he previously was, and he would need to make much more than 75% to get his capital back. As general trading law, risk 1-3% per trade. 5% is the absolute limit - for advanced traders. If the reduced buying power after losing 75% of your account didn’t scare you (i.e. he could previously afford to trade with one lot, but after losing 75% of his capital he can only trade 15,000 position sizes, making much less on his winners now), let’s dive into some simple mathematics. Getting back to break-even after losing, is much more difficult because you have to outperform your percentage loss. For example, going from $100 dollars to $50 dollars is a 50% loss. However, making a 50% gain from your new account balance of $50, would leave you at only $75. Yes, to fully recover a 50% loss, you need a 100% gain. DO NOT IGNORE RISK MANAGEMENT. My personal money management guidelines: 1. Risk no more than 3% per trade 2. Risk/Reward Ratio of 1:2 is my minimum for any trade To apply these guidelines let’s imagine a $10,000 trading account. This means that we cannot risk more than $300 on any one trade, and that our minimum R:R ratio is 1:2 - if we are risking $300, our target must be at least $600. So, if we execute a trade on EUR/USD with one lot ($100,000 position size), our stop-loss must be at 30 pips (one lot = $10 per pip, 30x10 = $300 if we get stopped out) and our take profit must be at least 60 pips. Remember, everything is relative and scalable. It is important to analyze your chart when you have a trade idea and decide where your stop loss is based off of the chart - NOT based on your money management rules. You must not enter a trade that requires a 50 pip stop-loss (based on technical levels), but put the stop at 30 pips because of your money management rules. What you must do is change your position size. Position Sizing Example: Account Equity = $ 10,000 Risk: 3% per trade, which equals $300 1.00 standard-lot equals $10 per pip Example stop-loss is 50 pips, so if you want to risk $300, each pip may be worth $300 / 50 = $6. You may open a position of size .60 lots ($60,000). Now each pip is worth $6 and you lose $300 if you stop-out at 50 pips. 7 LAWS OF TRADING Here’s the thing. As hard as it is, try your best to follow these laws. I promise you, they will save you pain and you will grow much faster as a new trader. I’ll tell you what, make me a deal? Every time you have a bad loss or a losing streak, come back to this chapter and check if you broke any of these laws. 1. Never risk more than 5% on one single trade. Adjust your position size accordingly and stick to professional money management. 2. Never move your stop loss. Ever. Unless you are trailing of course. By all means narrow it, to follow profits and secure profits. But never widen it, and invite more risk to your trade. Your entire trade needs to be planned before you enter the position. If you decide that price breaking a certain level means you were wrong about this trade, that isn’t changing in the heat of the moment, you were wrong, price has moved against you - get out. Too many traders widen their stop loss as price approaches it, and do this over and over until they’ve lost 30% of their account on one trade, convincing themselves “ok now price will turn around”. 3. Never add to losers. This is called dollar-cost averaging and while it might make sense in investing, it leads to pain in trading. As short term market participants (day trading or swing trading), we don’t have the luxury of time and infinite capital to weather losing positions. We need to be right about the direction of our trade. Too many traders add to losing positions, add to red positions, telling themselves they are lowering their average cost, and only end up inflating their loss. Does it make sense to put more money into something that is losing you money? And then praying? 4. Add to winners. On the contrary, it makes a lot of sense to put more money into something that is winning you money. As short term market participants, we want the market to validate our prediction. We want to be correct about the direction of the market that we anticipated. Adding to winners is a good practice, and it is called ‘scaling in’ to a position. If we enter long, and the market prints large green candles, it is confirming that the bulls have control of the market. Now it is safe to add to our position size and ride with the bulls. 5. Never revenge trade. This was personally the most difficult for me to overcome. As a professional trader, you need to learn to walk away when you are wrong. Losses are part of the game. Think of them as business costs. Just as running a business would pay for electricity and rent, traders have losses. We cannot exacerbate those losses by getting into emotionally driven revenge trading. Revenge trading is being emotionally driven by a loss to recover all your lost money and entering a random, impulsive trade immediately, without thorough analysis- and 99% of the time, the revenge trade also becomes a loss. I have seen revenge trading wipe out many traders’ accounts. Plan your trade, execute, and if you lose, move on. Try to trade as emotionless as possible. If you are playing basketball and your opponent scores, it is part of the game. You do not go crazy, pull-up from half court, commit dumb fouls, or stop playing defense. You continue to play your disciplined, even-keeled, smart game. 6. Plan your trade. Before ever entering the trade you should know exactly WHY you are getting involved and WHERE your stop loss and take profit target are. Do not enter now and figure it out later. A personal recommendation would be to post every trade on TradingView (later we will discuss how to open and use TradingView). Earlier in my career, I noticed that while my account balance was shrinking and shrinking, my posted trades on TradingView, had a 75% success rate. If only I had stuck to my posted plans and not done extra, random and impulsive trades. This adjustment helped me a lot, I only took trades that I was also posting on TradingView, with the complete plan. If you wouldn't post it, or present it in a job interview, don’t take it. 7. Don’t stay stuck on your initial bias. Just because your trade plan was for a long position, does not mean you cannot change to a short bias. We analyze what we see on the charts and attempt to predict future price behavior. If after our initial bullish plan, price action has gone in a different direction and printed a bearish setup, do not insist on being long. This ties into doing the opposite of revenge trading or widening our stops - that would be a hard-headed and close minded way to not accept change in market bias. So like our earlier laws said, don’t widen stops, don’t revenge trade, cut losses short - but to add to that - once you’ve done that successfully, if the market is showing you a setup in the opposite direction than your original direction, don’t be afraid to take the trade. Trade what the chart is telling you, not what you WANT it to do. BACKTESTING Backtesting is the process of mathematically validating your trading strategy. Whatever system or trading pattern you trade, I highly recommend you backtest it. This means going back in time in the charts, finding the setup over and over again, and writing down the results. Your trading should be as robotic as possible. So that when you see a setup that you’ve backtested 1,000 times, you know that it has a 60% winning percentage and you take it without emotions because you know if you take this ten times, six will win, and you will be in profit. When backtesting try to establish a set of rules. For example, if you are backtesting double-tops , know what qualifies as a double top for you. Because technical analysis is an art, patterns won’t always be perfect, but you can be strict in your qualifications during your testing. So, you could say, the second top cannot have any closes above the highest high of the first top. Those are your rules to qualify a double top. Your entry rule could be entering on the break of the neckline and your target 2 to 1 risk reward. You now have a set of parameters to go back and test double tops. I highly recommend you go backtest a couple of patterns with a set of rules, this will give you confidence when you run into these setups again. You can do this on Excel by simply logging each trade you take. Have a couple of columns such as date, entry, exit, result, notes, etc. Once you have data you become an emotionless trader. This is what you should be striving for. You don’t want to see a pattern and encounter a bunch of emotion, confusion, and excitement. You want to anticipate what will happen because you have seen and backtested the data and you trust the results because the percentages are in your favor. MY SECRET SWING TRADING STRATEGY As the title implies, I do have a personal strategy that I developed myself and backtested over 300 times. I call this the Salokin 1618 Strategy and it’s traded on the 4H timeframe. It should work on any time frame- but we haven’t done the proper backtesting on the others. In the image below you’ll see my backtesting results found a 69% winning percentage with my strategy over all major and cross pairs in the span of two years. I won’t give away the complete secret, but I will explain the gist of the strategy. It is a reversal (counter-trend) trading setup that uses fibonacci levels for our entries. The stop loss is usually below the 2.0 Fib Extension Level (but alters depending on the entry), and the Profit Target is at the 0 level. In the image below you will see a successful Salokin 1618 Strategy. As you can see we got involved short at the 127 Fib Extension level, with our stops above the 2.0. Price came down and hit the 0 line, giving us a successful trade and continued extremely bearish after that. That is a strong note about this strategy, the winners tend to run. Here is a bullish signal from Salokin 1618. We got involved at the 127 and this time we did not run for a giant move, but we did just hit our winner by touching the 0 line, before we turned around. So as you can see we are measuring Fib Extensions from a correction to a new peak. The secret is in what signal we are looking for in the market from other indicators to tell us we have a potential Salokin 1618 Setup, and pull out our Fib Extension tool. While I cannot give away everything, because I’d have to charge more for this eBook, you can join our Discord server, where we chat everyday and have a dedicated section to Salokin 1618 setups. ACTION PLAN FOR BEGINNERS Trading Plan Ok, so you’re itching and eager to get started and put everything you have learned into action. Let’s make an action plan. First, you need to write your trading plan. In this plan you will detail your trading methodology and your money management rules. I encourage you to write this down, read it over everyday until you have it memorized. Here is my original trading plan just for you guys: FOREX TRADING PLAN “My Opinion Does Not Decide What A Good Trading Opportunity Is. My Rules Do.” “Trading is my business and I will always conduct my approach to the market in a professional manner. I have written this plan for a reason and in order to succeed I must follow this plan. If not I will fall into the 95% of traders that fail. I will not settle for being average.” Trading Philosophy & Psychology I am a professional currency trader that uses various techniques to observe and maneuver around the market. I have neither a bullish nor bearish bias when analyzing the market; I simply follow my technical analysis and I take what the defense gives me. I am aware that I have no control over the market and it will do what it wants when it wants. It is my job to put myself in the best position possible to maximize my profits and minimize my losses while the market is in action. In order to reach my goals I must eliminate all of my emotions from trading. In order to achieve this I will use a very specific set of rules. I have rules for my entries, exits, position sizes and risk management. I will have the discipline to stick to my rules and follow my system through both good and adverse times. As long as I follow my rules, I will never enter a ‘bad’ trade. I understand that I must think of trading in terms of probabilities and always play the odds. If the odds are in my favor and the setup follows my rules, I will consider it a possible trade entry. I understand that losing is part of the business and even the best traders lose. If I lose a trade I understand that it has nothing to do with my trading strategy or myself personally and I will move on to the next trade. Some systems can lose 70% of the time and still produce profits. As long as I continue to follow my rules and take every opportunity I will end up on the profitable side. I deserve to be successful. I will continue to put in hard work into achieving this success and continue my education into mastering my craft. I trade in order to achieve financial freedom and travel. I have a genuine interest and love for trading and the technical aspect of the markets. However I must never forget that TRADING IS MY BUSINESS AND I AM IN BUSINESS TO MAKE PROFIT. Trading System As a price action trader, I analyze the naked charts and take note of support and resistance horizontal structure and trendline levels. I look for trend continuation opportunities and extreme trend reversal opportunities. I use Fibonacci levels and harmonic patterns (ABCD) to find confluence in my zones. I also identify basic chart patterns such as double tops, and triangles/flags in my price action breakdown. The advanced harmonic patterns I trade are the Gartley & Bat patterns. These are used in sideways or consolidating markets, as they are reversal opportunities. If my pattern rules are met, I will look to enter a good trading opportunity. I will always use stop-loss. Gartley Pattern Rules of Engagement: B point must touch XA .618 retracement but cannot touch the .786 C point must touch AB .382 retracement but cannot go above point A D point completion at AB 1.27 extension or XA .786 retracement If they are over 5 pips apart, use 1.27 for entry & better risk/reward If confluent, use .786 for entry Profits are taken at AD .382 retracement. Stops are placed below point X Bat Pattern Rules of Engagement: B point must touch XA .382 retracement but cannot touch the .618 C point must touch AB .618 retracement but cannot go above point A D point completion at BC 1.618 extension or XA .886 retracement Profits are taken at AD .382 retracement. Stops are placed below point X TradingView Okay so now you have a trading plan. It’s time to open your demo account. Head over to www.tradingview.com and create an account. This is the best, free, charting platform out there. It is based in the browser so you don’t need to download anything and it allows you to demo trade right on the charts, as well as connect your real money broker accounts. After creating your account, click on the first icon on the top right to open your watchlist. This is a list of stocks, currency pairs etc. you can customize. In the image below you can see my forex watchlist on the right side. Customize your watchlist from scratch. I recommend starting out with less than 10 pairs to not get overwhelmed. Perhaps with the majors only, to focus on the USD and its movements vs. the majors. Next, you will click on the button on the bottom that says “Trading Panel”. The first option is “Paper Trading” by TradingView, select this and open your demo (fake money) account. See the image below. You are now ready to begin demo forex trading. Try to apply everything you have learned in this book. Stick to the 7 Laws of Trading. Do not be impatient to succeed, it will take time. I cannot recommend enough to draw on your charts. Draw on your charts everyday and analyze the chart patterns, support and resistance levels and trendline levels. On the top left you will see the different time frames. Analyze the weekly(W) and daily(D) charts for a longer term outlook. Analyze the 4hour charts and 1hour charts for your trade setups and entries. To add indicators to your chart, click on “Indicators” on the top of your chart. Here you can search for and add RSI and moving averages. If you right-click and select “Settings” you can change the appearance and colors of your chart and candlesticks. When you find a trading opportunity and are ready to enter a trade, right-click on the chart and select “Trade > Create New Order”. You will see the order box where you can place your trade and select your position size. As soon as you enter the trade (if it is a market order), it will appear on the chart. Click on the trade to add a stop and target level. Master trade execution in your demo account. Make sure you learn exactly how to place your orders and enter your stops and limits. Make sure you know how to get out and how to place different types of entry orders - limits and stops - if you don’t want to enter at current market price, but at a future price. Once you have traded in the demo account for a few months, have mastered trade execution (not making entry mistakes etc.) and have found success in following your trading plan and growing your account, you can begin to trade a real money account. Brokers Choosing a broker, people make this a lot more serious than it has to be. There are a ton of reviews out there, and you can always change brokers if you are unhappy with yours. Of course, don’t sign up with “Papa Smurf’s Super Offshore Extreme Leverage French Polynesian” unregulated forex broker. There are plenty of options to choose from. If you live outside the United States, you have 10+ amazing world class brokers to choose from. Due to regulatory differences, us USA residents are a little more restricted. (For example in the USA max legal leverage is 50:1, while many brokers who don’t serve US clients offer crazy margins such as 500:1). Don’t fret, this is probably protecting you - yes I’m looking at you, beginner. For non-US residents, go to the last chapter in this book, Resources, where I posted a link to the best forex brokers and reviews. Some of these may apply to Americans as well, but I’ll recommend three fantastic brokers I have personal experience with (they’re all in that link as well). 1. Forex.com 2. IG 3. Oanda These are all fantastic options. All have basically no minimum account balance (or minimal) requirements allowing you to get started with any amount of capital you’d like. Note Forex.com and Oanda have capabilities to connect to TradingView, which I personally love - to trade directly from the TV charts. Trading Journal You are now a real forex trader! Wait, don’t go quit your 9-5 just yet, this is a long process. I recommend keeping a trading journal for your first year to keep track of your successes and mistakes. A simple Excel sheet will do. Have columns for Date, Pair, Timeframe, Long or Short, Setup, Stop, Target, Result, and Notes at the very least. In the result column you will enter “Stopped Out” or “Target Reached”. In the Notes you will begin to write down anything you notice about your wins and losses, which you can later analyze and see mistakes you are repeating. This is a basic template, feel free to add whatever columns you wish. Congrats on making it this far! I am happy to have helped you on this path to becoming a professional forex trader. Remember this will not be easy. You must master your emotions, control your psychology and be patient. There will be hard times and there will be ecstatic times, but we must remain even-keeled. Never get too high and cocky, and never get too low, as losses are just operating expenses of the business. Continue to analyze and draw on your charts until you can spot trendlines and patterns from a mile away, post your trades on TradingView to hold yourself accountable, follow the 7 Laws of Trading and preserve your capital. I want to thank you so much for buying this eBook and I wish you the best of luck in your journey.