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.