CONTENTS
Disclaimer
Testimonials
Fundamentals of Currency Trading
Preface
My Trading Journey
About The Author
Section 1: THEORY
Chapter 1: Introduction To Forex Trading
Chapter 2: Forex Market Participants
Chapter 3: Forex Market Drivers
Chapter 4: Analysis & Execution
Chapter 5: Basics Of Currency Pairs
Chapter 6: Understanding Currency
Fundamentals
Chapter 7: Introduction To Brokers
Chapter 8: Introduction To Fundamental
Analysis
Section 2: Application
Chapter 9: Economic Indicators
Chapter 10: Risk Management
Chapter 11: Risk Management Application
Chapter 12: Introduction To Technical
Analysis
Chapter 13: Technical Indicators
Chapter 14: Support & Resistance
Chapter 15: Candlestick Trading
Chapter 16: Trading Psychology
Chapter 17: Trading Currency Sentiment
Chapter 18: Sustaining Your Trading
Business
Conclusion
Appendices
Useful websites summary
Acknowledgement
DISCLAIMER
The content in this book is for informational
purposes only and should NOT be taken as
legal, business, tax, or investment advice. It
does NOT constitute an offer or solicitation
to purchase any investment or a
recommendation to buy or sell a security,
currency or asset. In fact, the content is not
directed to any investor or potential investor
and may not be used to evaluate or make any
investment. Investing and trading is a highrisk activity and should be approached with
caution. I am not a certified financial advisor.
Hence, it is important for you to seek a
certified financial advisor to craft your
portfolio. The author or publisher is not liable
for any losses incurred as a result of any
person taking action based on the information
presented in this publication.
TESTIMONIALS
“If there’s one book you need to read
about investment, please read
"Fundamentals
Of
Currency
Trading". This book is the result of
years of research. The models and
strategies in this book are tried and
tested in the real world to get you
results. Please buy a copy for yourself
and give all your loved ones a copy
too.”
Dr.
Patrick
Liew,
Entrepreneur of the Year for Social
Contributions
“Fundamentals Of Currency Trading
by Karen Foo is a must have and must
read for all aspiring to learn FOREX
trading. Highly recommended and the
only book you need to get started.
Hard hitting, Honest and Inspiring.
Share her journey from Zero to Hero
in this masterpiece. I met Karen and
traded FOREX alongside her in my
early days as a trader. I followed her
on social media, where she shared her
tears, pain and resilience to succeed,
not just in trading but personal
development. Today, she clearly has
mastered her art and clearly evolved
as a very confident and sharing
person. I have met only a few traders
dedicated to their art, and Karen is
among
them.”James
Tan,
Entrepreneur & Author of Your
Cashmoves
“While many new traders come into
financial markets hoping to get rich
quick, I believe firmly in the
importance of laying a strong
knowledge foundation before a new
trader opens his first real money
trade. Karen's "Fundamentals Of
Currency Trading" does just that in
helping a new trader grasp the
essential knowledge that all serious
forex traders need to know while
leaving no stones unturned. A truly
holistic coverage of the world of forex
trading, coupled with Karen's ability
in explaining many highly technical
concepts in an easy-to-understand
narrative form is what makes this
forex book for beginners stand out
from the other forex books out there”
- Philip Teo, Founder of Traderwave
Academy
FUNDAMENTALS
OF CURRENCY
TRADING
Mastering Technical
Analysis, Fundamental
Analysis, Trading
Psychology & Risk
Management
Karen Foo
Copyright ©2021 Karen Foo International
All rights reserved. No part of this publication may be
reproduced, stores in a retrieval system, or transmitted, in
any form or by any means, electronic, mechanical,
photocopying, recording or otherwise, without the prior
permission of the publisher, Karen Foo International.
Author: Karen Foo
Publisher: Karen Foo International
Cover design and layout: SY Thoo
ISBN: 9798515582371
Imprint: Independently published
PREFACE
If you picked up this book intending to find
the best trading strategy for you to make
millions, you can go ahead and put down this
book and don’t waste your time. Please don’t
waste my time too.
The
forex
market
presents
opportunities for the ordinary individual to
make an extra income or a full-time income
but what many don’t tell you is that it will
take patience and hard work to get there.
Way too many retail traders don’t
understand how professional traders think
and act, which is why they lose money. Most
of them are here to get rich quickly, and these
traders often don’t last long because they lack
the patience to survive in the long term.
They don’t bother to take time to learn
the basics. I’ve talked to professional hedge
fund traders, prop traders, and bank traders
over the past few years, and I realized that
they are a different breed compared to retail
traders.
What I hope to achieve in this book is
to educate the typical retail trader of the right
mindset and also, at the same time help them
learn the basics that they need to know.
If you’re an experienced trader, you
might know a lot of what I’m talking about in
this book since this book is meant for
beginners and aspiring traders. However, I’m
confident that you’ll gain some new insights
and perspectives you can use for your trading.
Take it as a refresher to what you already
know.
Good luck and happy trading!
MY TRADING
JOURNEY
I was born into a family of investors. My
parents were investing in stocks, mutual
funds, and asset classes ever since I was born.
The TV was almost always turned on
at home. Sometimes it’s my mom’s favorite
cooking channel, and sometimes CNBC or
Bloomberg will be turned on.
They would talk about stocks and
investments. Back then, I wasn’t even
interested in it. I was a game addict, and just
wanted to play my PlayStation and Gameboy.
Even if I wasn’t interested back then,
those TV channels were always playing in the
background, and I would hear all these
investment terms thrown around and I
thought to myself.
“Why would anybody listen to such
boring stuff?”
Trust me. When I was younger, I was
all about my games and nothing else.
Once in a while, I would come home
from school, I would sit on my dad’s lap just
as always and check out what he is doing on
his computer.
Dad was always on his computer from
early morning until late afternoon, when the
stock market closes. He always has multiple
tabs opened with some screens showing
ticker symbols flashing back and forth with
red and green lights.
In some tabs, he would have a
company’s financial report, and in others, he
would have the homepage of a financial
website.
He would also have stock charts
opened. Now, I’m a visual person. The stock
charts had colorful candlesticks. When I see
colors, I like them. I mean, who doesn’t like
colorful things, right? At the age of 4, I asked
him a question.
“Dad, what are all these things?”
Dad replied, “Oh these? These are
companies which you can buy, and if you buy
the right one, you might just make a lot of
money.”
“Really? Well, I like the ones that turn
red,” I said.
Mom was beside me at that time, and
they both burst into laughter. I guess they
were trying to see if I could turn into an
investment prodigy. I guess that wasn’t a
good start. Ironically, now I make more
money in bear markets and short selling than
buying bull markets. I just prefer to buy when
the crowd is scared of the markets.
At the young age of 4, I got my firsthand exposure to what a stock is, and I would
go to kindergarten the next day and tell my
friends about it.
They gave me nothing else but a blank
stare. I guess it worked out well with them. I
was not too fond of school anyway. I was
very quiet, and the teachers told my parents
that there was something wrong with me
because I just don’t talk and mix around with
my friends.
I was the quiet kid in school, and
everybody knew it. As a result, I was bullied
a lot in school just because I was just so
quiet. As a result, I grew up with social
anxiety, which I still have now. I’ve always
had low self-esteem. I think I was depressed
too as a result of being bullied all the time.
When I graduated from primary
school, I started watching Bloomberg and
CNBC in my free time. I didn’t understand
most of the things being said, but I was
curious to learn about it. The school was
teaching me history and geography, which I
don’t find interesting. I still studied hard in
school anyway.
I would come home from school to
watch business and occasionally financial
channels. My favorite back then was “The
Apprentice.” I used to look up to Donald
Trump.
At the age of 13, I was watching
Donald Trump because I also love the art of
running a business and building a personal
brand. The idea of being my own boss just
felt right.
In fact, that was one of my favorite
shows to watch aside from Spongebob
Squarepants. Yes, I know that’s a big
contrast. I mean, who doesn’t love
Spongebob?
Anyway, just like most teens out there,
I didn’t know what I wanted to be when I
grow up. Nowadays, kids want to become
Youtubers instead of doctors and engineers.
Back then, I had absolutely no idea.
I’ve had thoughts of becoming an
engineer or a veterinarian, but I wasn’t sure
about what I liked aside from gaming.
If I’m to look back right now, I
realized that since my favorite pastime was
watching business & financial channels, that
was a clear sign that I had an entrepreneurial
spirit in me.
I didn’t know what other kids were
watching at 13, but I just found Donald
Trump back then being cooler than some
famous celebrity singing in a music video. I
was a big fan of Westlife and Backstreet
Boys, but I wasn’t super crazy over them.
Mind you, back then, when I was 13, there
was no such thing as “influencers” or
Youtubers.
When my dad wasn’t in his office, I’ll
look through some of the annual reports he
has on his table. Probably, until today he still
doesn’t know I did that.
My mom would talk to my dad about
stocks all the time, and I would listen.
Sometimes they would talk about unit trusts.
Other times, my dad would call the
broker to open a position. Yes, back then, you
had call your broker to freakin’ execute an
order.
The receipt would sometimes be faxed
to him. I don’t even want to mention the fax
machine because I still don’t know how to
use it without breaking it. To Gen Z’s, you
probably don’t know what does it mean by
“I’ll fax it to you.”
To put it simply, it’s today’s equivalent
of “I’ll Whatsapp it to you.”
ABOUT THE
AUTHOR
Karen Foo is actively involved in speaking at
various conferences, seminars, expos,
workshops, and publicly-held events in
Singapore, Malaysia, Thailand & Vietnam.
Having overcome numerous setbacks
in her life, she has gone on to inspire
hundreds and thousands of youths, working
executives, and leaders of various companies
with her journey.
Being labeled as the “quietest student
and underachiever” throughout her life, she
went on to win numerous awards in public
speaking contests & scholarships.
She was also featured in TV, radio,
magazines, and documentaries for her
academic & career achievements. At 23, she
was featured in Channel News Asia as a
Young Investor.
She was voted as the “Best Trading
Guru in Singapore” by Traders Awards 2019
and accumulated over 100,000 subscribers on
Youtube. This is where she shares trading &
investing tips to her followers from over 30
countries. She was also given the “Top
Popular Analyst in Asia” award by Wikiexpo.
Karen has been ranked #1 in a
Singapore
nationwide
Forex
trading
competition, competing with over 200 traders
from NUS, NTU, SIM, SMU & the 5
polytechnics based in Singapore. She was
also ranked 10th in a contest organized by FX
Street, competing with over 3000 traders
from over 20 countries.
She has shared the stage with top
investment gurus and CEOs at the various
conferences she has spoken at. She is also the
contest judge for numerous public speaking
contests held around Singapore, ranging from
club level to the National level contests.
Her wide range of experience has led
her to co-author a book, “Turning Ideas into
Profit” with 10 other Asia’s experts and
professional speakers. Karen is also a
contributing author of an investment book
titled “Your Cash Moves”, where all the
proceeds are donated to Singapore Children’s
Cancer Foundation.
Website: www.karen-foo.com
Youtube (Gain access to free courses): Karen
Foo
Email: admin@karen-foo.com
Karen speaking in HatYai, Thailand as a keynote speaker
Voted as Best Singapore Trading Guru in Traders Awards
Invited to give a TEDx speech
Giving a keynote speech in Vietnam
Conducting a seminar for CGS-CIMB Securities (Singapore) Clients
Giving a keynote speech in Chiang Mai, Thailand
Delivering a keynote speech in Suntec Convention Centre, Singapore
Keynote at Marina Bay Sands, Singapore
Giving a keynote in Kuala Lumpur, Malaysia
With mom at university graduation ceremony
Crisis Hits
When I was about 18, I was in my final year
in secondary school. At the same time, it was
2008 when the financial crisis hit.
My dad was good at picking stocks,
but he probably has to work a little bit on risk
management. His side hobby was casual
gambling at the casino. I guess that’s not a
good hobby to have if you’re an investor.
Not to get too much into details. My
parents filed for a divorce, and my dad sold
our home, cars, and everything. I got to keep
my dogs, though.
I was depressed for a couple of years
before that happened because my mom told
me about it when I was 16.
I couldn’t believe how everything was
just taken away from me overnight. I had a
comfortable home with a stable family and all
of that vanished overnight.
At one point, it even affected my
grades to the point that I almost dropped out
of school.
I felt helpless and didn’t know what to
do.
Thankfully, I picked myself back up
and decided to study hard after that
temporary setback.
I went from being ranked at the bottom
of the class to the top 10 students in class. I
was also featured in the newspapers for my
good grades. I did all that within 6 months.
The school principal announced during the
school assembly that this has never been done
before in history. That made me realize that if
I set my mind to something, I can break other
people’s boundaries and my limitations.
What’s Next?
Fast forward a few years, I pursued a diploma
in environmental and water technology at
Ngee Ann Polytechnic. I still thought that I
love engineering because that’s what my
older brother was pursuing as well.
How did I fund myself through school?
My grades were good enough to be awarded a
scholarship, thankfully.
I wanted to become an environmental
engineer only to realize that it’s not my cup
of tea after I went through the 6 months
internship. Some of my friends were super
passionate about it. I didn’t see that same
passion in me.
I took a long break and thought about
my true calling in life. There was one point in
my primary school years; I was winning
coloring and design competitions. I also spent
a lot of my free time drawing and coloring. I
thought to myself, “Maybe that’s your
passion. It’s designing!”
After graduation, I got accepted into
the National University of Singapore (NUS)
to pursue a degree in architecture. I was so
wrong about it. I realized that my love for
drawing did not translate to the passion for
architecture.
I dropped out of NUS because I just
felt that I wasn’t pursuing my life calling. I
was frustrated with myself. NUS gave me an
opportunity and it felt like I just took it for
granted. I took a gap year to try out different
jobs to find out what I liked.
I remember feeling so lost back then in
2012 that my future looked so bleak, and I
couldn’t see the light at the end of the tunnel.
I fell into my second phase of deep
depression. I remember cutting myself once
and wanting to end it.
I worked many different odd jobs like
becoming a cashier, sales assistant, clerk, and
even helping people fix their phones. I was
earning $6-7/hour.
When I wasn’t at work, I would go to
the library and borrow books to read. I was
also training myself to become a confident
speaker by joining many toastmasters public
speaking competitions. I trained for 5 years
behind the scenes before I even spoke to an
audience as an official professional speaker.
When I went to libraries in my free
time, the first place I’ll head to is the shelf
that has business and finance books.
I would read books written by Donald Trump
and Robert Kiyosaki. I was so fascinated by
the world of business and finance just like
when I was younger.
I thought to myself; maybe this is my
passion after all. Even when I was still in my
architecture course, I would pick up financial
books from NUS central library. I don’t know
why I didn’t realize that earlier.
I decided to apply for another round of
university admissions and went through a
couple of interviews. I messed up one of the
interviews. So much for all that public
speaking training. I still couldn’t speak
confidently in an interview. I’ve just so much
social anxiety sometimes that it doesn’t even
make sense. As of the writing of this book, it
still lives with me. #FML
As a result, the university rejected me.
That is fine. I did really badly anyway
because I was just so nervous.
I learned from the bad experience and
decided to prepare for another interview.
Thankfully, I got accepted into
Nanyang Technological University (NTU) to
pursue a bachelor of business degree with a
banking and finance specialization.
NUS declined my application to pursue
a business degree. I don’t blame them
because I dropped out of architecture. They
probably felt that this ungrateful brat is going
to drop out again.
While I was waiting for my freshman
year, I was learning from a mentor how to
trade gold, currencies, and stocks. I traded
forex during my spare time while juggling
full time studying.
The way I learned from my mentors
was interesting. There were no books to read,
no workbooks for me to write on: just me and
the charts.
I worked hard to hone my craft as a
trader. I was sacrificing weekends. No
shopping. No movies. No random outing with
friends (I don’t have a lot of friends anyway).
No gaming. I just backtested all day and
learned everything that I could.
In my final year, I represented my
university in a nationwide trading
competition where I competed with traders
from other universities like NUS, SMU, SIM,
and 5 polytechnics. After losing a couple of
competitions, I was fortunate enough to rank
#1. After that, I went on to rank 10th place
(not that good of a ranking) in an
international trading competition organized
by FXStreet. People around me told me to
start classes and courses to teach them my
secrets. That was how I got into teaching.
While studying full time, I also gave
free seminars and speeches to share my
experience. At one point, I was invited to
speak at my university to my juniors. It was a
weird feeling to teach and then go back to
class the next day as a student.
Speaking at NTU to my juniors
I remember going to various trading
floors, investment banks, and meeting bank
traders during my university holidays. That
was when I got exposed to the world of
professional trading. I go to my university
library to pick up extra trading books to read.
That was when I realized that the world
of professional trading is so much more
different from retail trading. It’s like 2
completely different planets even though they
are doing the same thing.
Why This Book?
Over the years of speaking at seminars and
conferences all around Asia, I found that
there are some really common habits,
mistakes and mindsets that all top traders and
losing traders have.
I have personally made countless
mistakes that cost me a lot of time and
money. I wish somebody told me about these
mistakes back then but there weren’t. My
lovely mentor probably told me about those
mistakes, but I think it went in from the left
ear and went out on the other.
There weren’t YouTube videos that
would shout at me back then and be like,
“Start managing your risk and stop freakin’
thinking about profits like a losing trader!”
I learned a lot of lessons the hard way
and also by watching other traders that I
come across after all these years of traveling
to different countries speaking to different
traders from different backgrounds.
With the experience that I have, I want
to share what I know with retail traders so
that they don’t make the costly mistakes that
these traders make.
This book is also catered to my followers,
who told me to write this book. If it’s not for
their requests, I won’t write it because I still
prefer doing videos. After all, it is more
interactive.
How To Read This Book?
I’ve read over 100 trading books ever since I
started trading. The books are either very
theory-based like a textbook or way too
practical that it doesn’t allow the typical
beginner to understand the basics terms and
principles.
So I figured out that if I’m to write a
book, I want to provide the best of both
worlds to new traders. The first section will
be a textbook style theory for you to
understand what you need to know. You can
highlight and write notes, just like any other
textbook you use in school.
The second section will be more of a
practical style content where you can apply
what you’ve learned. I will need you to open
your charts and start applying them.
Basically, get your hands dirty and learn the
real practical world of trading.
Happy reading, and if you can, let me
know on social media once you’re done
reading it!
SECTION 1:
THEORY
◆ ◆ ◆
CHAPTER 1:
INTRODUCTION
TO FOREX
TRADING
What Is Forex?
The forex market is a market in which you
buy a currency and sell another currency
simultaneously. To put it simply, you’re just
trading money.
Currencies are traded in financial
centers all over the world, with the most
amount of the currency volume being
exchanged in the UK. This is because London
is classified as the international financial
center of the world. The United States ranks
2nd in the transaction volume and Japan being
the 3rd.
With that said, there is no physical
place or exchange in which forex transactions
will be exchanged because it is, after all, an
over-the-counter market. It is decentralized,
with banks processing currency orders for
another party. This means that currency
transactions are made between 2 different
parties.
The forex market is just one of the
many asset classes and markets that you can
take part in in the financial markets.
If you are already investing in stocks,
bonds, or mutual funds, the forex markets can
enhance your portfolio's overall returns if you
trade it the right way. You can also trade
currencies to hedge your portfolio.
Once you have mastered forex trading,
it is encouraged that you add another asset
class to your portfolio gradually to increase
your sources of income. After all, multimillionaires have multiple sources of income.
The forex markets can be traded using
forwards and futures. However, for the
simplicity of this book, I will focus more on
forex spot trading.
Fig1.1.1
Benefits Of Trading Forex
One of the key benefits of trading forex is the
24/5 market, which provides flexibility for
you despite working or studying full time.
Stocks and bond markets are only available
for trading when the exchanges are open.
During a recession, when the stock
market is down, you can look for
opportunities in the forex markets to profit
from the economic downturn. Hence, you can
make money regardless of economic
conditions.
There is also a downside with a 24hour market. You would be tempted to overmonitor the markets, which can potentially
lead to overtrading.
It is also a highly liquid market, and
unlike the stock market where you need to
pick from many different types of stocks, you
need to only focus on a few pairs as a forex
trader.
For most forex brokers, you only have
to pay a spread to the broker without the
need to pay a commission.
Aside from that, leverage can also be
used to magnify your gains. Hence, you can
start with small capital as a forex trader
because of leverage. You need to implement
proper risk management and money
management to trade successfully with
leverage.
However, it can also magnify your
losses, so you need to use the right amount of
leverage, which I’ll cover more on this later
on.
Downsides Of Trading Forex
I hate to break it to you, but the truth is that
90% of forex traders fail! Does this mean
that it will be hard for you to succeed? It
depends on how you look at it.
I find that the more challenging
something is and the lower the entry barriers
are, the more I want to succeed at it. Once
you make it to the top 10%, it is satisfying!
Another downside of forex trading is
that a lot of people use it to gamble. As of the
writing of this book, we are still in a
pandemic. The covid19 lockdown has led to a
lot of newbie traders jumping into the
markets and getting burnt.
Some even lost hundreds and
thousands of dollars, and they got into deep
debt and sadly even led to some suicide
cases. If you want to gamble, kindly head to
the casino because the markets are not the
place for you to do that!
Forex markets also have relatively
higher volatility, which also provides more
opportunities. However, it can be stressful
for those who don’t possess the risk appetite
or experience to handle it.
Another bad news, if you’re just lazy
and not willing to put in the work. This field
is not suitable for you, and you can stop
reading from this point onwards. Who forced
you to read this book?
What Tools Do You Need To
Become A Forex Trader?
You need a finance degree!
Just kidding! There are many
successful traders in this world who don’t
even have a university or college degree.
However, since I graduated with a
finance degree, I would say that it helps you
learn things faster because, let’s face it…
Finance jargons can be confusing
sometimes. Like what in the world is a
Sharpe ratio and CAGR? Finance terms
aren’t taught in school, so you’ll probably
need to take some time to learn the basic
terms before you start trading.
On a serious note, let’s talk about what
are the specific things that you need to
become a trader:
Good trading platform: For beginner
traders, you can start by using Metatrader 4,
which I find is pretty user friendly.
Computer with a high-speed internet
connection: Yes, this is common sense. You
can’t just buy any crappy computer that loads
forever! At least have a decent laptop that can
support gaming.
Nowadays, with the kind of technology
we have, most laptops are suitable for traders.
Reliable broker: I’ll get to this a bit
later in the book. Just make sure that your
broker cares about you just as much as they
care about what’s in your wallet!
Office: If you want to go pro trader
style, then get a trading office. Get dressed in
a suit when you head to office, if you will.
You will feel like a professional trader and
also feel like one. Hopefully, you will also
produce the results that you want.
Trading desk: If an office is too farfetched, at least have a table at home
dedicated to trading. Don’t shower your cat
there, and also have your barbecue there at
night. With that said, if you love your dining
table so much that you want to stick around it
all the time, then use that as your trading
desk. It’s your life.
Knowledge and experience: I would
say this is one of the most important things
you need, and yet this is what most beginner
traders skip or take shortcuts on. They think
they can learn to trade on a 2-days course and
then become a successful trader after that.
It takes the average professional trader
at least 3 years to become pro at it. I took 3
years to get a finance degree. So, if you’re
not willing to take 3 years to learn to trade
properly, then feel free to take 30 years
working for your boss, making him or her
rich.
There are many ways to learn trading.
Some will get you to your goals faster and
some slower. If you want to become an
Olympic swimmer today, you can figure it
out everything by yourself, but chances are,
you would want to have a coach around to
guide you so that you can correct your blind
spots.
Same thing with trading. It is OK to
learn everything online for free, but it will
take you a long time to master it because you
wouldn’t know which information is useful or
useless crap. There are millions of websites
out there. It’s good to find a mentor to
shorten your learning curve, but the problem
is this: There are also crappy mentors.
Based on my experience as a Youtube
creator, you would literally have one random
dude living in his mom’s basement,
preaching get-rich-quick in his dumb
YouTube videos, and on another side, you
would also have a professional prop trader
with a finance degree from an ivy league and
experience working in an investment bank
making videos on the same platform.
Guess what, you would be surprised
that the random self-proclaimed trading guru
dude would get more clout and views than the
professional trader talking about risk
management and proper economic principles.
People love hearing get rich quick promises!
The more they flex their rented
Lamborghini at gullible traders, the more
people follow them! In fact, they flex more
than they teach because they have nothing
inside their brains to flex to begin with. This
is called dumb money following dumb
money!
So, my point here is this: Make sure
you learn from the right people. You might
not wanna learn from me, and that’s fine.
Those who promise fast returns and get rich
quick probably are more interested in you
giving them money than you earning money
from your trading.
Basic Terms
I’m going to share some of the basic terms
you must know before you start. Otherwise,
you will be confused from this point onwards.
☐ Liquidity: Amount of interest in the
markets
☐ Pip: Smallest unit of measurement
of a currency pair (Percentage in
point)
☐ Leverage: Ability to use a small sum
of capital to control a larger sum of
money
☐
Margin: Amount of money
available in your account or used to
open a trade
☐ Ask: The price in which you buy the
base currency
☐ Bid: The price in which you sell the
base currency
☐ Spread: Difference between bid and
ask price
☐ Correlation: The extent to which
one currency moves in the same or
opposite direction to another currency
Trading Sessions
In the forex markets, the main trading centers
include the United Kingdom, United States,
and Japan. However, you also need to take
note of the other trading sessions, especially
if you are trading the relevant currency pairs.
Let’s talk about this one by one.
Sydney: If you’re trading this session,
which starts early morning in Singapore as
shown in the picture below, you’ll have to
take note if you’re trading the AUD.
Tokyo: Currencies to take note of in
this session include AUD and JPY. The
Tokyo session would have relatively lower
volatility as compared to the other trading
sessions.
London: During the London session,
you’ll start to see an increase in volatility and
hence trading opportunities. This individual
session accounts for most of the global
trading volume. You can trade most of the
currencies during this session, but you need
to take note of EUR and GBP for
opportunities.
New York: Currencies to take note
here is, of course, the USD, and it gives you
just about the same level of trading volume as
compared to the Asian session. Most of my
trades are made during the New York and
London sessions. There are just more trading
opportunities for me.
Europe-Asia
Overlap:
This
overlapping session would have less volatility
than the overlap that occurs later in the day,
which leads to fewer trading opportunities.
With that said, you may want to take note of
pairs like EUR/JPY and GBP/JPY during this
period.
US-London Overlap: You will find a
lot of trading volume and volatility in this
session. Take note of EUR/USD for trading
opportunities.
Fig1.1.2
Since I’m based in Singapore, I’ll write
in terms of Singapore time. If you’re based in
other countries, you have Google to help you.
At 5 am Singapore Time, Sydney
financial markets will open, followed by
Tokyo at 7 am. This is then followed by
Hong Kong and Singapore opening at the
same time at 9 am. This is followed by the
opening of the London financial markets at 3
pm and then New York financial markets will
open at 8 pm. The New Zealand market will
then open at around 2 am.
This happens all around the weekdays
until Saturday where the market closes at
around 4-5 am. This means that markets will
be opened from Sunday 2 am all the way to
Saturday.
Even though at different points in time,
specific sessions will be closed, that doesn’t
mean that a particular currency related to that
session should not be traded. This means that
you can still find trading opportunities in
USD pairs even if the New York markets are
closed.
Movements In Currency
Markets
In a bullish market, a trader would look for a
buy. In a bearish market, a trader would look
for a sell.
Source: MetaTrader 4, ©2000-2020 MetaQuotes Ltd.
What causes the currency to go up or
down? The answer is the supply and
demand from the traders and investors.
When the demand for the currency
exceeds the supply, the price will go up.
When the supply is more than the demand,
the price will go down.
In other words, if there are more
buyers than sellers, the currency will go up
and vice versa. For example, when a
country’s economy is booming coupled with
price stability, the country’s currency will be
attractive to foreign investors, which
increases the demand for that currency.
CHAPTER 2:
FOREX
MARKET
PARTICIPANTS
Types Of Traders
Traders use a variety of trading styles to
profit from the markets. The key is to find a
trading style that suits your risk appetite,
lifestyle, and comfort zone.
Long term traders would rely more
on fundamental analysis, whereas short
term traders rely more on technical
analysis.
To succeed in the markets nowadays,
you need a combination of technical,
sentiment, intermarket and fundamental
analysis to increase your probability of
success.
Fig1.1.4
Let’s classify short term traders as
scalpers and day traders and long-term traders
as swing traders and position traders.
Generally, long term traders would
require more patience and discipline because
they would hold their trades for a few days to
a few months. They also need to wait for
trading opportunities. They’ll open fewer
trades as compared to short-term traders.
However, this doesn’t mean that they are less
profitable than short-term traders. If anything,
long term traders are less stressed out and
more profitable than most day traders.
On the other hand, scalpers and day
traders rely on speed to trade the markets
because timing is crucial to make the right
trades at the right time. They would need a
higher risk appetite because they would open
more trades than long-term traders.
Most professional currency traders I
know are long-term traders. Of course, you
have hedge funds that focus on highfrequency trading, making over 100 trades a
day. They are pros. They can do anything
they want.
Beginner retail traders shouldn’t start
off day one scalping the markets because this
path requires a lot of experience. Most retail
traders pursue day trading because brokers or
certain educators told them to. Yet, most day
traders still lose money. There is a conflict of
interest within the industry. Day trading is
encouraged because it earns the brokers more
commissions. A lot of educators are also IBs
for brokers. I think you know where I’m
coming from.
Studies have also shown that traders
who hold their trades longer are more
profitable. If you trade the higher time
frames, you’ll experience less stress and
potentially earn more profits. You’ll also free
up more time to pursue other things rather
than staring at the screen all day. Why not? In
trading, less is more. I’ve tried all types of
trading. I prefer long-term trading any day.
Who Is Involved In Forex?
The participants in the forex market are
involved in it for different reasons. However,
the majority of them participate for
speculation purposes, which contributes to
most of the trading volume. A smaller
minority are here just for currency conversion
purposes.
Professional traders and financial
institutions dominate most of the trading
volume, which also helps increase the
liquidity of the forex markets because they
are well-capitalized.
Brokers and dealers: They execute
orders for their customers, and some would
act as a middle-man between traders and
banks.
Government & Central Banks: The
government can intervene and influence their
country’s currency by buying or selling large
quantities at one go, and the central banks
would act on behalf of them. The government
would do this to weaken their currency to
remain competitive in their exporting
activities. An example of an export-oriented
economy is Japan.
One of the downsides of regular
intervention is that it might cause a currency
war to ignite because, very often times,
countries are weakening their currencies at
the expense of other countries.
Central banks generally don’t get
involved in speculative activities. Instead,
they would get involved in it for the sake of
the country’s economic stability and
implementing their monetary policies.
For example, if the Yen strengthens
too much, the BOJ will intervene to weaken
the currency strength to prevent exports from
getting affected. Countries like Japan, who
are mainly export-driven would not want
their currency to strengthen beyond
acceptable levels.
When the central banks do intervene, it
could cause a significant temporary reaction
in the forex markets.
Banks: A well-established bank may
trade millions or billions of dollars every day
via the interbank market. They would process
orders for brokers, hedge funds, retail traders,
and corporations.
When you see a significant move in the
prices that are not explained by fundamentals,
the banks are very likely one of the main
contributing factors of that move. Examples
of such big banks include JP Morgan and
Barclays.
Retail traders: They gain access to the
markets via retail brokers and would have the
least influence on currency prices.
It used to be that only the big boys can
gain access to the forex markets. With the
rise of the internet, trading forex is readily
available to anybody with a stable internet
connection and computer.
In Japan, forex trading is common
among Japanese housewives, with carry
trading being very commonly done due to
Japan’s low interest rates. In fact, their
trading volume was once deemed to have
helped stabilize the currency markets.
Multi-National
Companies:
MNCs
Corporations/
are
particularly
vulnerable to currency risks because their
businesses operate in many different
countries. Most companies don’t participate
for speculative purposes. They have to
participate to buy foreign goods and services
overseas without having currency fluctuations
affect their profit margin.
They would typically use forex trading
as a hedging instrument so that their business
can expand to other countries without getting
affected by currency fluctuations. If a U.S
based company buys raw materials from a
factory in Singapore, they would need to pay
them in SGD.
Examples of MNCs who engage in
international business operations include
Apple and Nike, where overseas sales
revenue comprises more than half of the
overall revenue.
Companies like these would typically
have to engage a forex expert to advise them
on the future currency movements and the
actions they need to take to prevent currency
exchange rates from affecting their bottom
line.
The banks will help to assists in the
currency transactions made by these
companies.
Money Changers: This group
comprises a small portion in the forex
markets as a participant because they mainly
serve a small group of people such as tourists
and small businesses.
As of the time of writing, the market
value of 1USD is equivalent to 1.38SGD.
Money changers in Singapore will buy and
sell USD at approximately 1.35 SGD,
depending on the retailer. The price
difference will be the gross profit for the
money changer.
Hedge
funds
&
Investment
management firms: They manage large
accounts for clients and other organizations.
They have or might not have currencies as
part of their portfolio of stocks and bonds,
depending on their strategy and methodology.
Hedge funds are also known as one of
the world's largest speculators and perform a
variety of services for clients such as asset
management, hedging, or international
investments.
A lot of hedge funds are macro driven
when it comes to currency trading. This
allows them to hold their trades open long
term.
Even though they are behind banks
when it comes to trading volume, they also
have the power to influence prices in the
currency markets.
CHAPTER 3:
FOREX
MARKET
DRIVERS
What Moves The Forex
Markets?
As a forex trader, you need to understand
some of the main factors that move the
markets in the long-term, medium-term, and
short- term. This allows you to make
profitable trades in the markets and
understand what the analysts are telling you.
Floating & fixed currency regimes:
Most of the currencies are allowed to float
freely via a floating regime, which should be
your choice when it comes to picking
currency pairs with sufficient volatility to
trade. These are currencies in which market
forces drive their prices. As a result, any trade
deficit or trade surplus will automatically be
adjusted back to equilibrium levels.
This is in contrast with currencies that
have a fixed regime, in which authorities
control their movement.
Fixed regimes provide certainty to
importers and exporters since the currency
fluctuates within a narrow band. They won’t
have to worry too much about currency
movements, which will potentially affect
their profit margin. It also provides more
certainty to foreign investors who have to
exchange their currencies into local currency
to invest in the local market.
However, fixed regimes are more
expensive for central banks to maintain.
Examples of currencies with fixed regimes
include the Singapore dollar (SGD) and Hong
Kong dollar (HKD). SGD is fixed to an
undisclosed basket of currencies. This is to
prevent speculation on the SGD.
Another currency that is pegged to the
USD is the Chinese Yuan, in which the range
is set by the People’s Bank of China (PBOC).
In the past, in went through periods whereby
it was switched to a managed float regime
until the 2008 financial crisis caused the
Yuan to be re-pegged back to the U.S. dollar.
By keeping the Chinese yuan rates low, helps
Chinese
exports
remain
competitive.
However, it makes imports more expensive
for Chinese citizens.
Bear in mind that there is no such thing
as a currency that is entirely free-floating or
fixed. Both types of currencies are subject to
intervention, which makes them managed
floats. Central banks need to intervene to
maintain their competitive trade edge, control
inflation, or ensure the stability of the
economy. The only difference is that fixed
regime currencies are subjected to more
frequent intervention than currencies with a
floating regime.
There are many factors that drive the
forex markets, but at the end of the day, it
still comes down to supply and demand for
the currency, especially for currencies with
floating regimes. The following pointers are
some of the key factors that move the forex
markets:
Economic data: Key economic events
can be very market moving, especially when
it deviates from expectations by a significant
amount.
The economic health of a country will
determine the international capital flow,
which in turn affects the supply and demand
for the currency.
When traders have a positive economic
outlook on a particular country, the demand
for that currency will increase. This leads to
the currency to appreciate. A negative
outlook will be bad for the currency, ceteris
paribus.
Suppose the country you’re monitoring
has several major trading partners. In that
case, the economic conditions and changes of
those major trading partners will also
potentially affect the country you’re
watching.
Commodity prices: You’ll often see
an inverse correlation between the USD with
gold and oil prices over the long term. This is
because these commodities are priced in
USD.
In other words, if there is an increase in
the supply of USD, gold prices will
appreciate as a result of this. The good news
for currency traders is that XAU/USD can be
traded the same way as some of the currency
pairs. Investing in gold ETFs is also a popular
choice among investors who want to take
advantage of the price increase.
Silver has a close positive correlation
with gold, but due to the lack of liquidity
compared to gold, the price tends to be more
volatile and hence less predictable than gold
prices.
Commodity prices also influence
commodity currencies. I’ll cover more on this
in the next few chapters.
Political events: This can cause a
significant movement in the currency
markets. When you’ve chosen a currency pair
to trade, make sure you understand the
country's political situation. Elections are
particularly a market-moving event.
Hence, traders have to pick countries in
which their political environment is relatively
stable.
Over the past few years, elections have
had a significant impact on the value of the
USD. If you look closely enough, there is a
common trend in past elections, and you can
use this as a clue to trade future elections.
For instance, one week before an
election, the stock market will often tank due
to the incumbent party's uncertainty. This will
be followed by a rally after the election as the
markets have digested the new president’s
policies.
In the 2020 U.S Presidential election
rd
on 3 November, you can see that the stock
market plunged a week or more before the
elections(Fig 1.1.5). This was followed by a
rally with a Joe Biden win. Understand that
every election is different. The 2020 election
is different from that in the past, with the
pandemic being the backstory.
Fig1.1.5
Source: MetaTrader 4, ©2000-2020 MetaQuotes Ltd.
Similarly, the stock market tanked one
week before the 2016 U.S election held on
the 8th of November(Figure 1.1.6). During
election years, the stock market tends to be
more volatile as compared to non-election
years.
Fig1.1.6
Source: © 2020 Tradingview
Many people believe that a Democrat
win will harm the stock market, while a
Republican victory will cause the stock
market to rally. While this is true to some
extent, history proves otherwise.
Stock markets will rally regardless of a
democrat or republican win. The only
question is the % differences in which it will
rally.
In fact, for the past 16 elections, the
S&P500 gained an average of 6.5% in the
year following the election.
It might be the easy thing to close your
eyes and buy the market. If you want to
benefit from specific sectors within the
markets, you will have to study the policies
of the incumbent president, especially plans
when it comes to working with trading
partners.
For instance, Biden plans to increase
corporate taxes and focus on the clean energy
sector, whereas Trump is pro corporate tax
cuts and the increased spending on financial
assets.
This will have an effect in the
respective sectors, commodity markets, and
currency markets. For example, potential
expansive fiscal policies under Biden will
benefit gold prices in the long term.
Be mindful if you want to trade around
political events because you’ll be subjected to
volatility risk. This would require prudent
risk management on your end and knowing
what you’re doing.
Central banks: Rate decisions and
statements from central banks can cause an
immediate change in a currency's sentiment
and cause a rapid movement in the short
term. Also, take note of inflationary
expectations because this can be a leading
indicator of what the central banks would do
next. It affects their interest rate decisions.
When inflation increases too much,
central bankers are more likely to increase
rates. However, when interest rates aren’t
raised during a major inflationary period, the
currency will likely go down. When there is
too much money flowing in the economy, the
value of the currency decreases as goods and
services become more expensive.
When there is too little money in the
economy, this can lead to an increase in
unemployment. Central bankers hence have
to strike a balance when it comes to
managing inflation.
In other words, inflation and interest
rate changes will move the markets.
Technical Levels: This is a factor that
is often not talked about when it comes to
factors that move the currency markets.
Market participants would often use the same
patterns, indicators, or techniques to make a
trade.
Of course, even though different
traders use them differently, most of them
would use them the same way, especially for
retail traders. This would lead to people
buying and selling at the same price levels,
such as strong support and resistance levels.
Societal and ad-hoc events: When
traders decide whether to buy a currency or
otherwise, they will also consider the
country's social stability.
Other than that, unscheduled events
such as wars, pandemics, and natural
disasters will also cause a massive temporary
spike in the currency markets. It will also
shift the market sentiment.
During the start of the pandemic, the
stock market and commodity currencies took
a massive hit. If you’re one of the smart
monies, you won’t panic because that was a
good time to buy cheap stocks and
undervalued currencies.
As you can see from the chart (Fig
1.1.7), AUD/JPY took a big hit in March,
only to rally along with the stock market in
early April.
Fig1.1.7
Source: © 2020 Tradingview
Stock market: The movement of some
currencies will be in tandem with that of the
stock market, which we will discuss more in
the section on types of currency pairs.
If you compare the previous chart of
AUD/JPY with the stock market (Fig 1.1.8),
you can almost see a positive correlation
associated with these two markets. When I
discuss risk-on and risk-off environment in
the next few chapters, you’ll understand why
it moved the way it did.
Fig1.1.8
Source: © 2020 Tradingview
How To Profit From The
Forex Market?
Going Long (Buy)
When you bought a currency at 1.12000 and
got out of your position at 1.13000 (Fig
1.1.9), you’ve just harvested 100 pips, and if
you’re trading with 1 standard lot at $10/pip,
you would have earned $1000 (Without
taking into account spread).
You would look for a buy when the
base currency is expected to become stronger
than the counter currency. On the other hand,
you will also buy when the counter currency
is expected to weaken against the base
currency.
This is because when you’re buying
EUR/USD, for example, you’re buying EUR
and then at the same time selling USD.
Fig1.1.9
.
Source: MetaTrader 4, ©2000-2020 MetaQuotes Ltd
Going Short (Sell)
The good thing about the forex market is that
you can sell even on a down market.
When you sell a currency, you will be
buying at a higher price in anticipation that
the currency will go down. When you sold
the currency at 1.12500 and took profit at
1.11700 (Fig 1.1.10), you would have made
80 pips. Your profit for trading on 1 standard
lot will be about $800 (Exact value depends
on the spread).
You would look for a sell when the
base currency is going to weaken against the
counter currency or when the counter
currency is going to strengthen against the
base currency.
When you’re selling EUR/USD, what
you’re doing is selling EUR and then buying
USD simultaneously.
Fig1.1.10
Source: MetaTrader 4, ©2000-2020 MetaQuotes Ltd.
When you’re trading the spot market,
you are opening a position using the current
price that the currency pair provides you at
this moment. This is different from the
futures market in that the delivery date is on a
future date.
Other than trading the spot market, you
can also trade forex futures, forwards, or
options, which comprises a smaller
percentage of the trading volume than the
spot market.
Some traders profit from the forex
markets using carry trades or spread
betting.
CHAPTER 4:
ANALYSIS &
EXECUTION
Types Of Analysis
1) Technical Analysis
When you’re using technical analysis,
you’re using indicators or price action to
determine the probability of future
movements.
You are also using price behavior from
the past and present to determine the
future movements of the currency. This
is not a means to predict the markets but
a way to increase your probability of
winning.
You use it to determine the exact entry,
TP, and SL points. Technical analysis is
also suitable for short term traders. With
that said, long term traders still rely on it
for entry.
The disadvantage is that it does not
really tell you the long-term direction of
the trend.
2) Fundamental Analysis
Unlike technical analysis, where you’re
basing your decision on past price
behavior, right now, you’re speculating
on the movement of the price based on
the current and expected future state of
the economy.
Using data from economic, political, and
societal factors, you can use these to
determine the future price trends. With
that said, be aware of reading news and
using it as your main decision-making
process because by the time you’ve
received the news, very likely, those
factors have already been priced in.
Fundamental analysis helps you
determine the long-term trend of the
market because fundamentals drive the
currency markets in the long term.
If you’re a fundamental trader, timing
the markets is relatively less important
as compared to if you’re a technical
trader. This is why long-term traders
only focus 10-20% of their attention on
technical analysis. This is also how most
hedge fund traders tend to operate.
They use fundamental analysis to
generate their ideas and conduct
sentiment, intermarket analysis, and
technical analysis to confirm their longterm bias. In other words, other types of
analysis are used as a filter. If it is not
in-line with their fundamental bias, the
currency will have to be placed on a
waiting list until all the factors are in
line. As you can see, it is not as
straightforward as compared to day
traders who only use technical analysis
as their primary decision-making tool.
If we can all make money whenever a
candlestick signal shows up or a
technical indicator gives us a signal,
everybody would become rich very
quickly from trading. Anybody can read
charts and even teach technical analysis.
However, it takes somebody who really
knows what they are doing to combine
all the analysis tools to generate a high
probability trade.
If you want to become a position trader
like most professional traders, you will
need to master fundamental analysis. To
be specific, learn macroeconomics and
international trade. Also, study each of
the economic drivers and indicators. It
will take a lot of hard work and time but
hey, who said that trading is easy?
Maybe if you listen to the get-rich-quick
“gurus,” they will tell you that. You can
continue to live in your fantasy land by
listening to them.
With that said, trading longer time
frames require more patience for your
trade to work out because you’re very
likely holding your trade in the long
term rather than taking profits after a
few hours or days.
Although fundamental analysis gives
you an idea of the currency's big picture
direction, it doesn’t pinpoint the exact
entry and exit points for you. This is
why you still need technical analysis to
help you spot better entry points.
3) Sentiment Analysis
Basically, you’re trying to find out how
the market feels about current and future
market conditions. One way you can do
this is by identifying the net positioning
of the big players in the markets. Since
they are the ones who control a large
sum of capital, they have the ability to
move markets, especially when the
liquidity is lacking.
The Commitment of Traders (COT)
report provides valuable information on
commercial and non-commercial traders'
positions. Commercial traders refer to
companies that are involved in the forex
futures market to use it as a hedging
mechanism. Non-commercial traders
refer to the participants who speculate in
the currency markets such as hedge
funds and institutions. You can find the
report from the Commodities Futures
Trading Commission (CFTC) website.
What you need to focus on is the noncommercial positions. We won’t be
focusing on the non-reportable positions
as well because it involves the other
types of market participants which
include brokers and dealers.
Often, when net positionings are at an
extreme level, this is a potential sign of a
reversal in the currency. Take note of
the % rate of change in positionings.
This matters more than the absolute
number of positionings.
Better yet, plot a graph on an excel sheet
to visualize the trend of the positionings
over the past few months. This will give
you a better idea of the net positionings
overtime.
Fig1.1.11
Source: https://www.cftc.gov/
One important thing to note is that you
should never use sentiment analysis
alone to make your trading decisions. If
your fundamental analysis contradicts
the hedge fund positionings, you have to
wait until both factors are in line before
entering into the trade. Use sentiment
analysis as a confirmation for your
fundamental analysis. Next, look at the
charts to spot reversal patterns, and
you’ll have a high probability trade.
4) Intermarket Analysis
Also known as cross-market analysis,
this is a skill that you need to learn,
especially when you’re a long-term
trader. If you’re a scalper, it wouldn’t
matter that much to you since
correlations won’t play out that much in
short term charts.
The first thing you will need to learn is
the correlation coefficient. I won’t go
into detail about the formula. If some of
you math geeks are curious about it, I’ve
made a video about this on my Youtube
channel. Feel free to satisfy your
curiosity.
When you have a correlation coefficient
of more than one, it is an indication of a
positive correlation. This means that the
two asset classes or currency pairs
you’re comparing move in the same
direction most of the time.
For example, the current correlation
between AUD/JPY (Candlestick chart)
and CAD/JPY (Line chart) is about
84.5% on a 1-day time frame; this means
that the currencies will move in the same
direction 84.5% of the time. They will
have a random relationship with each
other 15.5% of the time. As you can see
from the chart (Fig 1.1.12), the positive
correlation played out pretty well.
Fig1.1.12
Source: © 2020 Tradingview
Another correlation we can look at is the
relationship between the British Pound
and the Euro (Fig 1.1.13). There is a
strong positive correlation of 87.3%
between GBP/USD (Candlestick chart)
and EUR/USD (Line chart), as you can
see from the chart. This is due to the
close link between the European and
British economies.
Fig1.1.13
Source: © 2020 Tradingview
If you have a negative correlation, the
two markets will move in the opposite
direction most of the time. Please realize
that I mention most of the time and not
all the time. This is because no two asset
classes or markets will move in the same
or opposite direction all the time.
Fig1.1.14
Source: © 2020 Tradingview
An example of 2 currencies with a
negative correlation is EUR/USD
(Candlestick chart) and USD/JPY (Line
chart). Their correlation for a 1-day time
frame is about -69.4% at the time of
writing. This means that they will move
in the opposite direction 69.4% of the
time. They will have a random
relationship 30.6% of the time. As you
can see from the previous chart (Fig
1.1.14), the correlation is not that strong.
There are only specific periods in which
it will move in the opposite direction to
each other.
As you may observe, some correlations
are strong, and some are weak. I would
say that a correlation coefficient of more
than 0.8 or less than -0.8 is considered
strong and worth taking note of.
To find out the correlation between 2
currencies, there are lots of online
resources that you can refer to. You’ll
realize those correlations tend to change
over time. Market conditions change, so
does currency and market correlations.
Also, each market has unique and
individual drivers, making it impossible
for two markets to move in tandem all
the time.
When
looking
at
correlations,
understand that it also has to make sense.
For example, sales of face masks and
board games increased this year.
Sometimes, indirect correlations can be
formed due to an external or third factor.
In this case, the 2020 pandemic caused
many cities to go on lockdown mode.
Many people had more time at home to
play board games. Face masks are also
needed to protect themselves from the
virus when they go out to the public.
When the pandemic is over, and there is
a sudden surge in board game sales, does
this mean that mask sales will increase?
Of course not! It doesn’t make sense. If
the correlation doesn’t make sense, it
won’t last long. Take note of this.
As you can see from the model above,
you need to implement the top-down analysis
approach. You start by looking at the big
picture, which is the broad market view.
What is the big story that is happening right
now? E.g., war, pandemic, disaster, etc. This
will affect the market sentiment, and you’ll
need to confirm that sentiment by looking at
other markets as well. This is where
intermarket analysis comes in.
Once you’re done looking at the big
picture (i.e., what’s happening around the
world now?), you’ll now look at the country
level. What is happening to the economy of
the country now? What will happen in the
future based on the relevant economic
indicators? Once you’ve established your
trading idea and the long-term direction of
the trend, you’ll now implement technical
analysis to spot good entry points.
There are times where you’ll be bullish
in the long term, but the charts are still on a
downtrend. You’ll need to wait for the charts
to turn bullish. Hence, you’ll have to place
your currency pair on your waiting list until
the opportunity presents itself.
To put it in simple terms, you look at
fundamentals, sentiment, and intermarket
analysis to generate a trading idea. Technical
analysis should be used to spot better entry
points. This is how most professional hedge
fund traders operate. The typical retail trader
just ignores all of the fundamental and big
picture drivers. They rely solely on technical
analysis to enter a trade. I’ve seen way too
many retail traders telling me to talk more
about technical analysis on my Youtube
channel, and talk less about boring
fundamental analysis.
Think about this. Most retail traders
focus on technical analysis and yet, most of
them lose money. They ignore what the
hedge fund traders are looking at because it’s
harder to learn fundamental analysis. This is
why most of them lose. If all these things are
too hard for you, you can pursue some other
career. Don’t even pursue trading. Don’t even
buy any trading courses. You’ll lose money
with that kind of lazy attitude.
Reading Currencies
Stocks are displayed in the form of ticker
symbols. For example, Apple would be
represented as AAPL on the platform. For
currencies, it is denoted by 3 letters. Let’s
look at how you can decipher a currency.
The first 2 letters represent the country,
whereas the last letter represents the name of
the currency. Hence, you would state the
above currency as “Japanese Yen”. Follow
this rule, and you’ll be able to read currency
pairs like a pro without memorizing it.
If EUR/USD is priced at 1.1200, this
means that the current exchange rate is
1.1200USD per EUR. (1 EUR= 1.12 USD).
In simple terms, this means that it will take
1.12 USD to buy 1 Euro.
Fig1.1.15
.
Source: MetaTrader 4, ©2000-2020 MetaQuotes Ltd
Let’s say if you see the above (Fig
1.1.15) bid/ask price on your MT4 platform
when you decide to short the EUR/USD
today, you will sell at the bid price. When
you make a buy trade, you will buy at the
asking price. The difference between the bid
and ask price gives you the spread.
This means that for every EUR you
buy, you’re selling $1.10315 of USD. When
you sell 1 EUR today, you will be paid USD
$1.10266.
The reason why you’re buying at a
high price and selling at a low price is so that
your broker will be able to earn their spread
for providing you the service of gaining
access to the forex markets. A spread is just a
cost of opening a trade. Every time you trade,
your aim is to cover this cost so that you can
end up with a profit.
Fig1.1.16
.
Source: MetaTrader 4, ©2000-2020 MetaQuotes Ltd
When reading currency quotes, you’ll
realize that they are quoted in different
decimal places. Prices for currencies that
include JPY will be quoted in 2 decimal
places, whereas the rest will be quoted in 4
decimal places.
Most brokers would quote an
additional decimal place on their platforms to
make it more specific for their clients.
Different Order Types
Market order: This is when you decide to
open a trade at the current price. Traders will
enter into this order if they feel that this is a
good price to enter.
This is suitable especially for traders
who can afford to spend time in front of their
screen. It is also a type of order that is
popular among traders.
The downside of entering immediately
at the current market price is that this will
often prompt traders to enter a trade earlier
than expected due to emotions such as greed
and fear of missing out.
Pending order: This can come in the
form of buy limit, buy stop, sell limit, or sell
stop. This means that your order will be
executed later on when the price hits a certain
level.
The good thing about using pending
orders is that it will reduce the likelihood of
emotional trading. Traders often pull the
trigger too quickly without waiting for the
market to give them a reasonable price, which
is a mistake that can be overcome by using
pending orders.
This type of execution order is also
suitable for those who don’t have time to
monitor the charts.
Limit orders are common among
traders who trade a pullback or price
retracement, whereas stop orders are
commonly used among breakout traders.
Stationary Stop Loss Order: When
your trade is wrong, this order will help you
cut your losses short.
You can apply stop losses regardless of
whether you are entering with a market order
or pending order.
You can set your stop loss by using
various ways, but one of the most common
ways to do it is to place it near a support or
resistance level or the recent high or low.
You should set it at a level where when the
price breaches it; you will be proven wrong.
It’s essential to have this set up even
before you open a trade so that you wouldn’t
make emotional decisions while you’re in a
trade.
Trailing Stop loss order: This type of
dynamic stop loss order will move along with
your price in the event that it moves in your
favor. This allows you to maximize your
gains while at the same time, remove your
emotions of taking profits too early.
Also, you don’t have to manually
adjust your stop loss when the price moves in
your favor. This is especially useful if you’re
a trend follower or don’t have time to monitor
your charts.
If you set your trailing stop at 30 pips
or example and the price moves in the
direction you want, the stop loss will, in turn,
move in increments of 30 pips.
If, on the other hand, the price moves
in the opposite direction, the trailing stop will
remain stationary.
Trailing stops are suitable for trend
followers who want to capture the long-term
trend. It’s also something that I often use
because I want to make the most out of the
opportunity when the price moves in my
direction.
That way, I would have a flexible
target price and a hard stop loss. I will never
move my stop loss further away from my
entry unless I realize that I’ve made a
mistake. Once I’ve set my stop loss, I will
leave it there. The only time I will move it is
when the price moves in the direction I want.
Sometimes, I’ll move my stop to breakeven
levels so that I can have a risk-free trade.
Target price (TP): Some would call it
a take profit level. This order limits your
gains just as how stop losses limit your
losses. It is important for you to set a TP
target so that you won’t act out of emotions
when your trade is open.
With that said, some trend followers
don’t set target prices at all because they
would want to maximize their gains. The only
time that they would get out of the trade is
when they get stopped out. If they were using
a trailing stop, they would get stopped out on
a profit, especially if the price has been
trending towards their desired direction for a
long time.
There are a variety of reasons for using
this order. If you know that the price won’t
exceed a certain level, for example, a strong
support or resistance level, you will need to
lock in your take profit level so that you will
not lose your unrealized profits when the
market reverses.
Whenever you set your target price,
always ensure that it is not tighter than your
stop loss unless you have a trading system
with a very high win rate. In my opinion, it
just doesn’t make sense to open a trade with a
less than desirable risk to reward ratio.
Maybe it is just not me.
I’ve seen traders who set super tight
TP targets but have wide stop losses. While
this strategy may give them a high win rate in
the short term, all it takes is one bad trade to
wipe out the previous trade profits. I’ve tried
this strategy before, and I didn’t like it. I
don’t want to go into another trading day,
hoping that the next trade won’t wipe out my
past 3 months of hard work.
Manual Exit: This is when you exit
the trade manually, whether at a profit or loss.
If you have an open trade, a sudden event or
unpredictable factor may have caused a
sudden change in sentiment. This is where
you’ll need to consider exiting manually.
Having a mental stop or target is also
classified under this category. The danger of
using mental stops or targets is that you will
be prone to making decisions out of fear and
greed, especially when you do not have a
strong discipline.
In other words, you need to be flexible to
know when you should exit earlier than
expected before your trade even closes by
itself. This would require more experience in
the financial markets in order for you to do so
because you’re “breaking the rules” in a
sense.
With that said, getting out of a trade
manually out of fear or greed is not
considered a good exit strategy. Only exit
when you have a valid and solid reason to do
so.
To reduce stress in your trading, it is
recommended that you stick with pre-set exit
points. You also don’t have to monitor your
charts constantly when it is pre-set.
CHAPTER 5:
BASICS OF
CURRENCY
PAIRS
Types Of Currency Pairs
Major Pairs
Major pairs are popular among forex traders,
especially for those who are just starting out.
It is also a popular choice among professional
traders, banks, and brokerage houses. It
includes the U.S dollar and currencies from
developed economies. The good thing about
trading majors is that it provides you with a
low spread due to its high liquidity.
High liquidity means that the market
would have many available buyers and sellers
at that particular time. It means that a lot of
people are trading or investing in that market.
The higher liquidity also means that
this set of pairs would be relatively more
predictable and less volatile than other pairs.
This would also mean less risk of slippages.
If you’re a complete beginner, majors
are good to start with regardless of whether
you’re a short term or long-term trader.
The most liquid pair as of the time of
writing is the EUR/USD, followed by
USD/JPY. Following behind USD/JPY is
AUD/USD and then followed by USD/CAD.
Minor Pairs
Also known as crosses, minor pairs don’t
have USD within the pair and are more
suitable for experienced traders to trade due
to their higher spread and higher volatility
than the majors. They have less liquidity as
compared to the majors. With that said, some
beginners do well trading minor pairs. There
are no fixed rules in trading.
You will find pairs like EUR/JPY and
EUR/CHF to have low spreads once in a
while because they are the more popular
minor pairs.
Looking at the crosses can give you a
better insight into the strength of a particular
currency. This is because, very often, the
strength of the currency may be obscured by
the USD. This is because the movement of
USD has a large overbearing effect on the
other currencies.
Crosses are suitable for longer-term
traders because their profit per trade will be
high enough to cover the spread.
GBP/CHF is the least liquid pair as of
the time of writing. Very likely due to the
decreasing interest in the CHF over the years.
Exotic Pairs
Exotic pairs comprise USD combined with a
currency of a smaller country or emerging
market. It’s not popular among traders due to
its lack of liquidity and predictability. It’s
also highly volatile due to the unstable
political environment in some of the
developing countries.
Picking Currency Pairs
When it comes to picking currency pairs,
several factors are essential to take into
consideration,
such
as
liquidity,
predictability, spread, and volatility.
With that said, you also need to ask a
couple of other questions before you pick a
currency pair.
☐ How often does this currency pair
trend and range?
☐ How liquid or volatile is this pair?
☐ What kind of news would be more
significant for this currency pair?
☐ What is the best time to trade this
currency pair?
☐ What is unique about this currency
pair?
☐ How will the movement of this pair
affect the other pairs that I trade?
☐ How would this pair behave in a
risk-on or risk-off environment?
☐ Which central bank has the most
impact on this pair?
☐ Do I understand the monetary and
economic policies of that country?
☐
How does this pair respond to
different stages of the business cycle?
☐ Do these currencies have a fixed or
floating regime?
☐ What is the correlation with the
stock market and bond markets?
☐ Will the base currency have an
effect on the counter currency and
vice versa?
☐
How often does this currency
produce surprises?
☐
Is this currency prone to
intervention?
☐ Which economic indicator will have
the most and least impact on this
currency?
☐ How does it respond to political
events and ad-hoc events?
Way too many traders pick currency pairs
just because of the low spread. They also
don’t bother to study the underlying
fundamentals and central banks of the
countries. They are only interested in the
charts. That is almost like trading
blindfolded.
While major pairs are a good place to start
with, they are not always the best for
beginners because some currencies within the
major pairs require more time and experience
to understand.
If you don’t know the answer to most of
the questions above, it probably means that
you have a lot of studying to do. Take the
time to go through and revise this book.
Firstly, let’s start by getting to know each of
the currencies.
CHAPTER 6:
UNDERSTANDING
CURRENCY
FUNDAMENTALS
Fundamentals Of U.S Dollar
(USD)
As a forex trader, if you’re to pick one
currency to study, USD should be your
number 1 priority. You have to understand
the underlying fundamentals of this currency
and its drivers.
Also known as the Greenback, USD
has been known as the world’s largest
currency. It is used as a monetary reserve
for central banks worldwide. Hence, it is also
known as a reserve currency. In recent
years, central banks worldwide have
diversified beyond using USD when it comes
to reserve currency holdings, adding the euro
and Chinese yuan as part of the reserves.
Central banks hold reserves to stabilize the
country’s currency in the event of unforeseen
circumstances.
The economic and political state of the
United States will affect the price of the
USD. As of the writing of this book, the
United States is running on a trade deficit.
Any movement in the USD can impact the
other currencies as well since most of the
foreign exchange transactions are done in
USD.
When it comes to international
monetary transactions, the USD is a currency
that is most commonly used. We’ve talked
about fixed currency regimes previously.
Many currencies are pegged against the USD,
which means that the currency can only
fluctuate within the upper and lower band
based on the USD rate.
Since S&P 500 is a popular index
among international investors, there will be a
rise in demand for USD when more foreign
investors are putting their capital into the U.S
stock market. When there is an increase in
demand for U.S treasury bonds, this will also
increase the demand for USD.
Also, the U.S dollar’s safe-haven status
has decreased in credibility since the onset of
the 2008 financial crisis.
When you’re trading USD, it is
essential to understand that the currency can
partly be affected by its trading partners'
economic states. According to U.S Census
Bureau, the top trading partners of the U.S
include:
☐
☐
☐
☐
☐
China
Mexico
Canada
Japan
Germany
As you can see from the chart (Fig 1.2.1),
most of the time, you’ll see a positive
correlation between CAD/JPY (Candlestick
chart) and USDJPY (Line chart), especially
in 2019, which implies a close relation in
terms of its economic conditions.
Fig1.2.1
Source: © 2020 Tradingview
During the COVID-19 pandemic, oil
prices were driven to an all-time low with
excessive supply and decreased air travel.
The tourism industry took a big hit, and
country lockdowns led to a decrease in travel.
Oil prices took a big hit in March 2020 before
it started to recover. The Canadian dollar also
gradually recovered as a result of it.
The U.S faced one of the highest
numbers of COVID cases in the world,
leading to high unemployment rates, and as a
result, the U.S economy took a hit. Low
interest rates also make the U.S markets less
appealing to foreign investors, resulting in the
outflow of capital from the U.S. These factors
contributed to the USD's tumble in 2020.
Based on this observation, you need to
understand that correlations don’t work out
all the time since no two asset classes have a
perfect correlation. During exceptional
circumstances, you need to think flexibly and
apply common sense in your trading.
Also, take note of the U.S dollar index
(DXY), which can be traded on the
Intercontinental Exchange (ICE) as a
futures contract. It can also be traded via
CFDs, futures, options, or ETFs. I’m not
going to go into detail about the formula that
is used to calculate the index.
Aside from the U.S dollar, it comprises
the Euro, Japanese Yen, British Pound,
Canadian dollar, Swedish Krona, and Swiss
Franc. In other words, it is the U.S dollar
measured against a basket of currencies. This
means that a rally in the index would mean
that the USD has strengthened. A drop in the
index means that it has weakened.
Fig1.2.2
Source: © 2020 Tradingview
Fundamentals Of Euro Dollar
(EUR)
The European Union (EU) includes 28
member states at the time of writing. The
EUR is used by the eurozone members,
which includes 19 countries. The euro makes
up a large percentage, about 57.6% of the U.S
dollar index (DXY) which makes it a good
gauge for the movement of the USD. There
were even speculations that the euro will
eventually replace the U.S dollar as the main
reserve currency.
Just like the U.S dollar, some countries
peg their currencies to the euro. This is
evident, especially for countries with
relatively smaller economies. Pegging a
currency to one of the major currencies
provides a level of stability and assurance for
investors.
The EUR is actively traded via the
EUR/USD pair, which is the most liquid
currency pair. Hence, you can use this pair to
gauge the economic strength of the U.S &
European economy. While it is a popular
currency pair among retail traders, beginner
traders might find the EUR hard to trade due
to the complexity caused by the Eurozone
crisis in the past as well as having to monitor
the major countries among the eurozone
members.
It is also a currency that is very
political and often unpredictable at times. It’s
almost like trying hard to keep up with the
Kardashians. You spend all day keeping up,
but you still won’t know what they are going
to do next because things are so dramatic and
unpredictable in the household. If you’re
starting out, I suggest that you go ahead with
other currencies like AUD. It’s relatively
more straightforward for beginners to
understand as compared to the EUR.
When you’re trading the Euro, you
need to take note of the countries within the
eurozone that will impact the currency most.
This includes Germany, France, Italy, and
Spain being the top few largest economies of
the Eurozone. Even though Eurozone
currently has 19 members, German data has
the greatest influence on the EUR.
Euro’s major trading partners at the
time of writing include the United States,
China, UK, and Switzerland. If you’re trading
EUR, make sure that you also take note of the
economic states of these trading partners.
Fundamentals Of Japanese
Yen (JPY)
Japan has one of the highest trade surpluses
in the world and is the 3rd largest economy in
the world behind China and the United States,
making it the 3rd most traded currency pair.
This year, Japan ranks 2nd place in terms of
countries with the highest foreign exchange
reserves, with China ranking 1st place based
on IMF statistics. The Yen is also held as a
reserve currency aside from the U.S dollar
and Euro.
Since Japan is an export-oriented
economy, the strengthening of the Yen would
have a negative impact on Japan’s exports.
The Yen exchange rate doesn’t only depend
on the state of the Japanese economy; it also
depends on the economy of its major trading
partners such as the U.S, South Korea, Hong
Kong, and China.
Hence, a slowdown in the U.S, as well
as other Asian countries, is going to impact
the Yen. In fact, the Japanese economic data
would often have a negligible impact on the
movement of the Yen. Due to Japan's low
interest rates, it is a currency that is
commonly used for carry trades.
In fact, carry trading is a popular
strategy used among traders in Japan. A term
used to describe the typical Japanese
housewife who trades currencies on the side,
known as Mrs. Watanabe. Carry trading
involves borrowing low-yield currencies like
the Yen and buying higher yield currencies
like the AUD to profit from the differences in
interest rates. Being a safe haven currency, it
is also a popular choice among investors
during times of recession. I’ll discuss more in
the next few chapters.
Fundamentals Of British
Pound (GBP)
Also known as the Sterling, the GBP is also a
popular reserve currency aside from USD
and EUR. It is also actively traded as a
currency (4th most traded currency), with
GBP/USD being one of the most liquid
currency pairs being traded. Also, the United
Kingdom is one of the largest economies in
the world.
What is happening within the
Eurozone significantly impacts the GBP, but
after BREXIT, conditions might change. The
UK economic conditions remain the most
influential factor affecting the supply and
demand of the pound.
Fig1.2.3
Source: © 2020 Tradingview
You’ll see a positive correlation
between GBP and energy prices since the UK
has a growing and expanding energy
industry. In fact, it makes up about 10% of
UK’s GDP.
As of the writing of this book, the top
trading partners of the UK include the United
States, Germany, France, Netherlands and
China. Hence, it is worth taking note of the
economic conditions of the trading partners
as it may influence the pound as well.
If you’re a beginner, you might want to
be extra cautious when trading pairs like
GBP/USD or GBP/JPY as they tend to be
volatile. However, the high volatility comes
with more opportunities for breakout traders.
Fundamentals Of Australian
Dollar (AUD)
As mentioned in the previous section, the
AUD is a high yield currency with relatively
high interest rates, making it a popular
currency among carry traders to buy or
borrow.
It is also known as a commodity
currency because the fluctuations in AUD
correlates with commodity prices in the long
term.
Australia is also a trade-driven
economy, with the majority of its exports
being gold, iron, cotton, ore, wheat, oil, and
other commodities. It imports products such
as machinery and tech equipment from other
countries. Hence, you’ll see a long-term
positive correlation between AUD and
commodities such as gold prices as well as oil
(Fig 1.2.4).
Fig1.2.4
Source: © 2020 Tradingview
When you’re trading the Australian
dollar, take note of China's economic
conditions since it is one of the country's top
trading partners. Other notable trading
partners include Japan, South Korea, UK, and
the U.S. Australia's proximity with Asian
countries makes it a popular currency to
trade, which also explains why its top trading
partners are also Asian countries.
In fact, there is a strong positive
correlation between the Australian stock
market (in USD) and AUD/USD. A lot of
investors’ wealth is placed in the stock
market. This is where intermarket analysis
comes in and gives you additional clues of
the long-term direction of the Australian
dollar.
This is one of my favorite currencies to
trade because if you know how it reacts to
changing sentiment and know how it
compares with other markets, it can be a
profitable currency for you to trade. For
instance, pairs like AUD/JPY are good to
consider during risk-on and risk-off
environments. The key is to pair it with a
currency that has a relatively lower yield.
AUD/USD is slightly tricky because
USD’s safe haven status has deteriorated over
the years and investors would rather buy the
Yen or Gold as a hedge. Recently, investors
and hedge funds are also buying bitcoin as a
hedge for inflation.
Fundamentals Of Swiss Franc
(CHF)
As mentioned previously, CHF is a safe
haven currency with low interest rates,
which makes is a popular choice for carry
traders as well. CHF price is determined
mostly by external factors due to the fact that
Switzerland is a relatively smaller country.
CHF also has a strong positive
correlation with gold prices. With gold being
a safe haven as well, when gold prices
increase, you’ll most probably see CHF
increasing in the long term as well.
Switzerland’s major trading partners
include the United States, Germany, China
and the United Kingdom.
Fundamentals Of Canadian
Dollar (CAD)
The CAD, also known as Loonie, is a high
yield currency and also a commodity
currency as Canada is a major exporter of oil.
A rise in oil prices will be followed by a rise
in Canadian dollar. Hence, if you are trading
CAD related pairs, oil can serve as a leading
indicator for the CAD.
At the same time, Japan is a net
importer of oil, and rising oil prices will harm
the Japanese Yen. This is why you’ll see an
overall positive correlation between oil prices
(line chart) and CAD/JPY(candlestick chart).
As you can see from the chart (Fig
1.2.5), oil prices tend to lead the CAD/JPY
most of the time, especially in the long term.
Fig1.2.5
Source: © 2020 Tradingview
Some of the other major exports
include precious metals like gold, agricultural
products, and machinery. Just like the U.S,
Canada is also running on a trade deficit.
As of the writing of this book, the
major trading partners of Canada include U.S,
China, United Kingdom, Japan, and
Germany. Since Canada’s top trading partner
is the U.S, its economy will be strongly
affected by the state of the U.S economy.
Canada is also unique in that it releases
its GDP data on a monthly basis compared to
a quarterly basis.
Fundamentals Of New
Zealand Dollar (NZD)
New Zealand is a commodity currency due
to the fact that it is a major exporter of
agricultural products, and its economy is
closely related to that of Australia and the
United States. When Australia has strong
economic growth, this will benefit New
Zealand. Other major trading partners of
New Zealand include China, U.S, Japan, and
South Korea.
Commodity prices will indirectly affect
NZD. An increase in commodity prices will
lead to the NZD to appreciate.
Since it is also classified as a highyield currency, the NZD is also popular
among carry traders due to its relatively high
interest rates.
Fig1.2.6
Source: © 2020 Tradingview
CHAPTER 7:
INTRODUCTION
TO BROKERS
Just a few decades ago, investors and traders
had to call up the broker to place an order.
Nowadays, an order can just be opened with a
click of the mouse.
When it comes to picking the right
broker, you need to treat it like you’re
choosing a business partner because that is
exactly what you’re doing.
You can have the best product or
service for your business, but if your business
partner’s interest is not in line with you, you
will not make a profit at the end of the day.
I’m going to go through a list of
different types of brokers and then share with
you a set of criteria you need to look at before
you pick your broker. The type of broker you
choose will depend on your trading style.
Understand that, just like anything in
life; nothing is perfect. Same with brokers, no
broker is perfect. Each type of broker has its
advantages and disadvantages. But as long as
the benefits outweigh the drawbacks, you can
safely do business with them.
Market Makers
Also known as a dealer, they make trades
that go against your position. This means that
if you make money, they will make less
money. If you lose, they will make more.
When it comes to market makers,
there's a certain stereotype that they
commonly engage in activities such as stop
hunting, widening spreads, frequent requotes,
and causing regular slippages.
With that said, not all market makers
are bad. You’ll once in a while come across
some that are good. Some of them are just
bad for your trading business. A good way to
reduce your risk is to pick a market maker
regulated by a good authority.
One good aspect about market makers
is that they can provide liquidity to their
clients and usually don’t charge a
commission, which reduces your trading cost.
STP Brokers
Also known as Straight Through
Processing brokers, this means that they
pass your orders straight through to a
liquidity provider like a bank. When you
make a buy trade, they will pass this buy
order to a liquidity provider that will give you
the best price.
ECN Brokers
Also known as Electronic Communication
Networks, some of them would charge
commissions in addition to a spread when
you open a trade.
As mentioned previously, every broker
has its disadvantages. The downside of going
with an ECN broker is that they might not be
able to provide liquidity to their clients just as
well as market makers.
Due to the stereotype that market
makers have nowadays, many brokers would
disguise themselves as an ECN or STP just so
that they can get more clients.
However, if you want to engage a
broker that doesn’t have a conflict of interest
with you, it is better to pick a broker that is
not a market maker.
Criteria For Picking Brokers
Take note that during a major news
release, it is normal for spreads to increase.
This is also the case right before or right after
the news release.
If you’re a short-term trader like a
scalper or day trader, spread will be an
important concern for you.
However, if you’re a long-term trader,
the spread shouldn’t be that much of a
concern to you since you’re harvesting large
enough profits to cover your spread.
This means that if you’re a short-term
trader, you would be better off choosing a
reliable market maker, whereas if you hold
your trades for more than a day, then
selecting a reliable ECN would be better. For
me, I’ll still go with non-dealing desks
regardless of my trading style because I don’t
want my brokers to be trading against me. I’d
rather pay a slightly higher spread in
exchange for a more reliable broker.
A spread of 3 pips or lower is
considered reasonable and low, especially in
the major pairs. Aside from making decisions
for your trade entry and exit, also take note of
the spread before opening the trade. Due to
stiff competition between brokers nowadays,
traders will enjoy low spreads even on the
crosses and commodities.
Swaps and rollover costs would
depend on the interest rates between the two
countries you’re trading, and it is charged or
paid only if you hold your positions for more
than a day. Some brokers even provide
interest for depositing money with them.
Some brokers offer fixed spreads, and
some brokers would offer variable spreads.
Fixed spreads would usually be wider
because the broker has to risk offering a fixed
rate during a high impact news event.
For variable spreads, it depends on the
liquidity of the markets. During the Asian
trading session, the spread would be higher as
compared to the London session. Of course,
news events will widen the spread.
Hence, if you trade the news all the time, a
fixed spread would be more suitable for you.
If you’re not that concerned about the news,
variable spreads are more suitable for you.
2. Regulated by a Good Authority
It also helps that the company has a long
history and financial standing aside from the
fact that it is regulated by a good financial
authority.
The point of regulation is to ensure that
the funds of trading clients are protected and
that the trading conditions are desirable.
Brokers have to comply with rules and
regulations set by the authority for them to be
regulated.
The risk of choosing an unregulated
broker or a broker regulated by an authority
with no strict requirements is very high. In
the event that the brokerage company
undergoes liquidation, you might not be able
to obtain your capital back. Scam brokers will
disappear with your money. I’ve heard of so
many cases of traders not being able to obtain
their capital back because they were too lazy
to conduct their research when selecting
brokers.
In order to check whether your broker
is regulated or not, you can do your research
on the broker’s website. They often publish
their regulation information there. The next
thing you need to do is double check the
official website of the authority.
Some of the notable regulatory bodies include
the Financial Conduct Authority (FCA),
Monetary Authority of Singapore (MAS),
Australian Securities and Investments
Commission, and Commodities and Futures
Trading Commission (CFTC).
3. Fast Trade Execution
If it takes more than 3 seconds for your trade
to be executed, it is too slow. It’s also not a
good thing if your trades are constantly being
requoted.
4. Suitable Account Type
Ensure that your broker offers a reasonable
margin requirement (30-50%) or leverage.
You also want to make sure that they offer
the pair or asset you’re looking to trade.
They should also allow you to trade micro
and mini lots, especially if you start trading
with a small account.
5. Stable Platform
Give it a test drive by starting with a small
account and trading on their demo account. If
there are constant freezing and glitches, then
it is not suitable for your trading business.
Also, ensure that they offer a userfriendly platform. It should provide the
indicators that you are used to using.
If you’re an automated trader, then you
also need to make sure that your broker offers
you the option of automated trading.
6. Good Customer Experience
To test out whether they care about their
customers or otherwise, you should send
them an email and observe the duration it
takes for them to get back to you.
Preferably, they should appoint a
personal relationship manager so that you can
contact him or her anytime via phone call or
live chat.
Alternatively, pay a visit to their office
and observe the way they treat you as a
customer.
7. Easy & Fast Withdrawal
It’s easy to deposit funds for most brokers,
but some scam brokers will prevent clients
from making a withdrawal. They would make
the withdrawal process as complicated as
possible.
If a hefty fee is charged just for the
withdrawal of funds, it is an indication that
they are not in line with your interests.
Your broker needs to return your funds
within five working days. Anything longer
than that, they are too slow.
8. Good Education
When your broker provides free education to
their clients every month, it also shows that
they care about their clients. However, it’s
common for brokers to provide free education
nowadays. Not all of it is useful because
scam brokers will provide “education” just
for the sake of it. They know that you will
make more trades when you have the skills to
trade, hence making them more commissions.
Remember, there is a conflict of interest
within the industry.
9. Segregated Funds
Some brokers would deposit your money in a
separate bank. Your trading funds will be
separated from the broker’s money. Scam
brokers who don’t provide this service will
sometimes use client’s funds to pay for their
business expenses and pay their staff. Who
knows what other things would they use it
for.
The good thing about this is that when
your broker collapses, your funds would still
be safe. This minimizes liquidity risk.
10. Comprehensive
Research
Ensure that the market analysis and research
materials are of good quality because it
shows that they care about their clients.
However, providing research for the
sake of it won’t help much if the research
quality is crap.
I’m not telling you to be paranoid. I’m
just telling you not to trust everything that
you see and hear.
Action Plan
Before you jump right into it and trade live
with a broker that fulfills all these criteria, I
need to warn you to take a step back first
before you take action.
You realize that I didn’t mention
reviews or awards as part of the criteria.
Those things help, but they aren’t that
reliable.
Some brokers can pay for awards and
good reviews. On the other side of it, a
brokers’ competitors can also pay others to
write bad reviews about them. This doesn’t
only happen in the brokerage industry; it
happens to every business out there.
Because no business out there is
perfect, you’ll generally come across some
complaints about the broker, which is
perfectly normal.
I’ve people gossip about me online, but
sadly or fortunately, they only contribute to
less than 5% of my followers. As long as the
majority of people are on my side, I’m OK
with it. I can’t impress everyone no matter
how well of a job I do. Some of them even
made things up with their creative brains
because they probably couldn’t think of
anything to gossip about. Come to think of it,
I probably have helped more people with my
free trading courses on Youtube than all of
them combined. I also probably donated more
money to charities than all of them. So, they
can keep talking while I keep hustling.
It is the same thing with the brokerage
industry. Even with good brokers, you will
find bad reviews about them. When they
grow bigger, there are people who just aren’t
cool about it because their life sucks. So, they
woke up one day and decided to take up the
profession as a keyboard warrior just to fill
their inner void that is empty. This is why
you should not wholly believe whatever you
read online. Some of that stuff was written by
idiots.
If you can’t trust everything you read,
what should you do? Follow these steps for
you to test your broker:
1. You should first pick at least 5
brokers and then eventually narrow
down to 3 that you want to work
with.
You should have your funds in more
than 1 broker to prevent having all your
eggs in one basket.
However, with the regulations in place
nowadays, you can be confident that
your funds are safe if you follow the
aforementioned criteria.
2. Compare these brokers' prices and
see if the prices on their platforms
vary too much from each other. It is
usual for different brokers to quote
you different prices for different
pairs, but the differences shouldn’t
be too significant.
3. Start with a small live account with
them and trade for a week. After
which, withdraw funds from them to
see how fast they return you the
money back.
4. Once they have proven that they are
reliable and efficient, then you can
consider adding more funds.
However, only do that when your
trading is profitable enough for you
to add more funds.
The most important thing is, take
your time to pick and test a broker just
like you’re hiring staff for your business.
How To Open A Live Account
Once you’ve traded on MetaTrader 4 with a
demo account and you’ve proven to be
consistent in your trading results, you can
start with a small live account.
Now that you’re ready to trade with a
live account, you need to understand that
your emotions will come into play when you
start trading. Hence, you need to study the
chapter on trading psychology before you
even begin trading live.
While different brokers will have
different account opening procedures, you
will generally have to go through these few
stages:
1. Pick account type and leverage:
As a beginner, it’s important to start
with a leverage of less than 1:50.
2. Submission
of
personal
information and documents: Most
brokers will require documents of
proof with details of your address,
name, bank account number, and
personal identification. Don’t be too
alarmed by this as this is a common
practice among brokers.
Some brokers might also ask you for
your experience in the financial markets,
whether you are a complete beginner or
a seasoned trader.
3. Verification:
Once
you’ve
submitted your document, you will
need to wait for account
verification.
4. Account
Funding:
Once
everything is done, you can now
fund your account either by NETs,
wire transfer, Paypal, or cheque.
Your broker may provide more
funding options aside from these.
5. Receiving Details of Your
Account: Nowadays, many brokers
will send you your account details
via email. Do not confuse the login
details for the broker’s website and
the login details for your trading
account.
6. Downloading of MT4: Assuming
that you’ve already downloaded this
to test out your demo account, the
good news is that you don’t need to
download it the second time in
order to trade your live account.
You need to log in with your live account
details using the same platform from that
broker, and you’re good to go.
If you want a detailed tutorial on MT4
(for mobile and computer), it’s better for me
to show it to you via video. You can check
out the video on my Youtube channel. (Type
in “Karen Foo MT4”)
CHAPTER 8:
INTRODUCTION
TO
FUNDAMENTAL
ANALYSIS
Why should you care about fundamental
analysis? If you’re a purely technical trader
and you have an open position right now, but
the Fed decides to cut rates all of a sudden,
the price can move 50-100 pips against you
within a few minutes.
If you trade in a bubble, especially in
today’s market environment, you will find
that you will get stopped out very frequently
even if you have a great trading system and
risk management strategy.
Moreover, the underlying economic
fundamentals drive the forex markets in the
long term and determine the overall direction
of the trend. This allows you to capture the
long-term trend in the currency markets. This
is what hedge fund traders focus more on.
For most professional forex traders in
institutions, 70-80% of their analysis involves
fundamental analysis, and only 20-30%
technical analysis. In fact, some of them
don’t even use any indicators. Yet, a lot of
retail traders only read about technical
indicators and watch technical analysis
videos. This is why most of them lose. If you
want to think and trade like professional
traders, the first step you need to take is to
master fundamental analysis.
Even if you’re not a long-term trader,
understanding fundamental analysis is crucial
for understanding what the analysts and other
traders are talking about.
Introduction To Central
Banks
It is not enough to only learn about economic
indicators when it comes to trading the
currency markets.
Before we get into the market moving
indicators, it is important to understand the
mandates of the different central banks that
will impact the currency you’re trading
because they will tremendously impact the
sentiment just with a change of interest rate
or monetary policy decisions.
If you only study economic indicators
without understanding central banks, that is
like learning how to drive a car without
learning about the driving rules in your
country. You will lose money in the long
term if you skip learning about any important
currency market drivers. You don’t want to
only focus on technical indicators while
ignoring fundamental analysis. If anything,
fundamental analysis is more important than
technical indicators. This is just my opinion.
While different central banks have
different mandates, they have a couple of
functions in common. Central banks are
known as the lenders of last resort. Aside
from being responsible for regulating the
country's money supply via monetary policy
tools, they can lend money to commercial
banks, especially during a financial crisis.
During a financial crisis, people often lose
confidence in the banking and financial
system, which leads to a massive capital
withdrawal from commercial banks. They
also play the role of the issuing of currency
and banker to the government.
In the world of central banks, there’s
certain lingo that is commonly used to
describe the actions of central bankers and
their outlook for interest rates.
Hawkish: A bias towards increasing
interest rates due to the concern that the
economy is growing too fast.
Dovish: A bias towards cutting interest
rates due to the concern that the economy is
slowing down too fast.
Intervention: Action by central banks
to induce movements in currency rates.
Other roles that central banks include
maintaining stable inflation rates, managing
the country’s foreign exchange reserve,
managing interest rates, and maintaining the
stability of the financial system. For exportdriven countries, their central banks will
intervene more often to keep exports
competitive.
Types Of Central Banks
U.S Federal Reserve (Fed)
The Federal Reserve, or in short, the Fed, is
the central bank of the United States. The
Federal Open Market Committee (FOMC)
fed funds rate should be taken note of,
especially for traders who are trading the
USD. FOMC comprises 12 members and has
the power to determine the interest rates.
Unlike typical commercial banks, the
Fed serves banks from the U.S and other
countries. During the 2008 financial crisis,
the Fed played an important role in acting as
a lender to other central banks.
One of the Fed's key mandates is to
ensure maximum employment and to
maintain inflation rates, or in other words,
maintain price stability and maintain
economic growth at a desirable rate.
The Fed is also responsible for
determining the reserve ratio required to be
held by banks. The amount of money the
banks can lend out to consumers will then be
determined by the Fed's reserve ratio. Banks
with a low reserve ratio will have the ability
to lend out more money than banks with
higher reserve ratios.
The Fed is closely monitored by
traders since the U.S dollar is the main
reserve currency. Any decisions made by the
Fed will have a huge impact not only on the
USD but also on other currencies. According
to the IMF (International Monetary Fund),
the U.S Fed currently has about $43,057
million in foreign currency reserves.
Bank of England (BOE)
The Bank of England is responsible for
managing UK interest rates and the currency,
pound sterling. Their mandate is to maintain
the stability of inflation rates and to achieve
financial stability. Monetary policy decisions
are made by the Monetary Policy
Committee (MPC) of the bank. Benchmark
interest rates are also determined by the
committee.
As of the time of writing, interest rates
have been cut to an all-time low (0.1%) due
to the economic impact of the pandemic (Fig
1.8.1). The UK is also currently imposing a
lockdown with a new variant of the virus
being detected in recent months. Not only has
the pandemic taken away more than 1 million
lives, but it has also taken a toll on the
economies of countries all around the world.
The number of mental health cases has also
surged. It has just been a tough year for
everyone.
Fig1.8.1
Source: ©2020 TRADING ECONOMICS, Bank of England
Bank of Japan (BOJ)
Bank of Japan is responsible for ensuring the
financial stability of the Japanese economy.
The bank’s Policy Board is responsible for
setting interest rates (discount rate).
Since Japan is an export-driven
economy, it is against the Bank of Japan's
interest for the Yen to strengthen too much.
Hence, intervention by BOJ is relatively more
common compared to the other central banks
to prevent the Yen from becoming too
expensive.
Due to the lack of natural resources in
Japan, they rely heavily on imports as well.
The top imports of Japan include mineral
fuels
(e.g.,
oil),
machinery,
and
pharmaceutical products. This means that
BOJ would pay attention to oil prices since it
will have an effect on the Japanese Yen. I’ve
already discussed the correlation of JPY with
oil prices in the previous chapters. You can
go ahead and revise it if you’re still unclear.
European Central Bank (ECB)
The ECB is the central bank of the 19
members of the European Union countries.
This central bank's mandate is to maintain
stable inflation rates (less than or equal to 2%
over the medium term) and ensure currency
stability. Like other central banks, they are
responsible for implementing monetary
policies and managing their foreign currency
reserves.
Traders need to take note of the
monetary policy decisions made by the
bank’s Governing Council, which is
responsible for setting refinancing operation
rates, marginal lending facility rates and
deposit facility rates.
Swiss National Bank (SNB)
Switzerland's central bank is responsible for
the CHF, and its mandate is to maintain
economic growth and price stability (CPI
lower than 2%). The 3-month LIBOR
market is used to determine interest rates. A
medium-term inflation forecast is published
during the monetary policy assessments
conducted in March, June, September, and
December. The bank also oversees the
financial market infrastructures as a strategy
to promote financial stability.
Bank of Canada (BOC)
The mandate of this central bank is to keep
inflation rates at a stable 2% level, with core
inflation being the main focus. In other
words, their mandate is to keep inflation at
stable and low levels.
Led by the Governing Council, their
role is also to manage foreign currency
reserves and manage the Government of
Canada's public debt programs. If you’re
trading the Canadian dollar, make sure that
you observe the overnight rate (key policy
rate) as it is one of the essential monetary
policy tools employed by the bank.
Reserve bank of Australia (RBA)
RBA is responsible for implementing
Australia’s monetary policy. Like most other
central banks, it’s mandate is to maintain
stable inflation rates (about 2-3%) over the
medium term. The bank also strives to
maintain the stability of the currency and
maximize employment.
During normal times, intervention by
RBA is not as common. When you’re trading
the Australian dollar, take note of the interest
rates on overnight loans (RBA cash rate),
which affects the borrowing rates and
inflation rates.
Reserve Bank of New Zealand (RBNZ)
The central bank of New Zealand implements
monetary policies to maintain a stable
inflation rate of between 1-3%. Promoting
full employment is another mandate that the
central bank has. The Official Cash Rate
(OCR) is used as a tool to achieve these
mandates. This is basically the interest rate
that is set by the bank to maintain price
stability. Other monetary policy tools used
include large-scale asset purchases and the
funding for lending program (FLP).
The monetary policy statement
(MPS) of the bank is published quarterly and
contains information regarding policy
judgements and alternative monetary policy
instruments.
Central Bank Intervention
Even though the high liquidity of the forex
markets would prevent any market participant
from manipulating the markets, this is the
exception when it comes to central banks.
Major central bank interventions are
just part and parcel of the forex markets and
are generally accepted by forex traders
because they are doing it for economic
stability.
With that said, central bank
interventions aren’t as common as you think
it would be (unless there is a crisis). In fact,
central banks try to avoid intervening to
prevent a sudden shock to the markets.
If central banks do intervene, it would
most likely be to weaken the currency rather
than strengthen it.
Introduction To Monetary
Policy
Monetary policies are needed to regulate the
money supply in the economy. The monetary
policy objectives include maintaining stable
inflation rates, achieving high economic
growth, and maintaining a healthy balance of
payment. Some of the monetary policy tools
used by central banks include conducting
open market operations (OMO), varying
discount rates, and setting reserve ratio
requirements.
Open market operations is a
monetary policy tool that involves buying and
selling government securities by FOMC to
influence the level of money supply and
interest rates. By buying back these
securities, the money supply will increase
within the economy, leading to the decrease
in interest rates. This is known as an
expansionary open market operation. On
the other hand, when the securities are being
sold, the money supply will decrease, leading
to an increase in interest rates. This is a
process known as deflationary open market
operation.
The Board of Governors has the
responsibility of varying the discount rates,
which would have an effect on the interest
rates. If interest rates are increased, it
becomes more expensive for businesses to
borrow, which leads to a decrease in money
flowing into the economy. All things being
equal, an increase in interest rate will cause
the currency to appreciate, and vice versa.
Money supply can also be influenced
by setting the reserve ratio requirements (also
known as cash reserve ratio). Banks have an
obligation to keep a certain amount of
deposits in the form of liquid cash, with the
rest being lent out to borrowers. This is
known as credit creation. For example, if the
reserve ratio requirement is 20%, the bank
can lend out 80%. Lower reserve
requirements allow banks to lend out more
funds, which leads to an increase in money
supply and vice versa.
During periods of high economic
growth coupled with rising inflation, central
banks will implement tighter or more
restrictive monetary policies. This is also
known as a contractionary monetary policy
or restrictive monetary policy. This will
reduce the money supply to the economy.
This type of policy is also used to correct the
trade deficit of a country, which may be
caused by excessive consumption of imports.
During
periods
of
rising
unemployment and low economic growth,
such as a recession, central banks will
increase the money supply by cutting interest
rates. Implementing an accommodative or
expansionary monetary policy is done at
this time to stimulate economic growth.
In 2008, the Fed cut interest rates to an
all-time low to stimulate the U.S economy
when the major recession hits the United
States and eventually the whole world. This
led to the EUR/USD ending its downtrend, as
shown below (Fig1.8.2).
Fig1.8.2
Source: MetaTrader 4, ©2000-2020 MetaQuotes Ltd.
In March 2020, during the start of the
Covid-19 outbreak, the Fed announced a
round of quantitative easing (QE) in
addition to fed funds rate cuts. This involves
the buying of government securities like
bonds, thus increasing prices and lowering
yields.
Previously being implemented in the
2008-2009 financial crisis, QE is often
implemented during a recession to boost the
economy by encouraging borrowing and
spending.
According
to
Bloomberg
Economics, central banks around the world,
namely the Fed, Bank of England, European
Central Banks, and Bank of Japan, were
using QE as a last resort to fight against the
economic impacts caused by the COVID-19
pandemic, spending about $5.6 trillion on QE
programs. Although QE programs are not
common, it is definitely an exception when
the global economy takes a hit, just like
what’s happening in 2020.
Although the intentions may be right,
QE doesn’t work all the time because it
depends on several external factors such as
consumer confidence. If many people are
unemployed, they may not want to spend
their money and hence will not be interested
in borrowing funds. Even if consumers want
to borrow funds, their credit scores might not
even allow banks to grant them access to
extra funds with such a high default risk on
the consumer’s part.
Of course, you have exceptions like the
2008 housing bubble where consumers who
were not credit-worthy were granted funds. I
hope we’ve learned our lesson. Ease of credit
encourages speculations which leads to
speculative bubbles that will eventually
destroy the economy. Understand that
quantitative easing is usually used as a last
resort when conventional monetary tools like
OMO didn’t work out. After the 2008
financial crisis, QE became more common
because the conventional monetary policies
failed to stimulate the economy.
Another type of policy that can regulate
economic growth is fiscal policies, as
determined by the U.S Treasury. The increase
in taxes can be a method implemented to
increase economic growth due to increased
government spending.
Interest Rate Differentials
It’s crucial for you as a trader to learn about
interest rates because announcements related
to interest rates are among the most marketmoving factors in the financial markets. It has
the ability to change sentiment around and
end a long-term trend.
Before we dive deep into interest rates,
let’s talk about an economic theory that is
pretty common in the world of economics,
the Interest Rate Parity. It states that if 2
countries have different interest rates, it will
automatically be adjusted to equilibrium
levels. With the same interest rates in both
countries, there will be no arbitrage
opportunities available for investors. If the
interest rate in the United States is currently
higher than that in Japan, the theory states
that the interest rates of Japan will
automatically appreciate, and U.S rates will
depreciate until an equilibrium level is
reached.
This theory doesn’t really fit well in
the real world. As you know, a lot of
textbook-based financial and economic
theories don’t really play out in the real world
all the time. The reality is that countries with
higher interest rates tend to appreciate due to
the inflow of capital from foreign investors.
Investors seeking higher yields will naturally
put their capital into the country’s financial
markets, which in turn benefits the currency
(Assumption: all things being equal).
Aside from having an impact on capital
and investment flows, interest rates also
affect you and me. Even if you’re not a
trader, it affects you. Think about the interest
rates in your savings account and the
mortgage you’re paying for your home as
well as your credit card payments; interest
rates can have a tremendous impact on your
financial wellbeing. The fed controls these
interest rates by adjusting the Federal funds
rate, which is the interest rate in which U.S
banks charge each other.
It also affects business owners. High
interest rates will produce an environment
where it becomes expensive to borrow. When
fewer business owners borrow, they will have
less capital to invest back into their
businesses. When businesses are not growing
due to a lack of capital, this harms the stock
market.
Higher mortgage payments and loans
for consumers would mean that they would
have fewer extra savings to spend. Less
spending leads to less money flowing into the
economy.
However, high interest rates are not
always bad for everyone. Rising rates are also
an indication that the economy is growing,
which leads to more jobs. This partly offsets
the negative impacts of higher interest rates
on loan payments. Banks are among the
beneficiaries of high rates since they can earn
a larger spread from the higher interest rate
differential. Aside from that, you can also
benefit from higher interest rates on your
savings.
On the other hand, low interest rates
can benefit the stock market due to the low
cost of borrowing. This is why sometimes
you’ll observe that even though economic
growth indicators are churning out bad
numbers, the stock market still rallies.
Investors expect the Fed to cut rates.
When it comes to monitoring interest
rates, the absolute numbers matter less as
compared to the % changes and interest rate
differentials. High interest rate differentials
between 2 currencies tend to attract carry
traders to buy the currency pair. You should
also take note of the yield curve because it
can provide clues as to when a recession is
going to come next.
At normal times, long term yields will
be higher than short-term yields, which if you
plot a curve, it will look like the normal yield
curve as shown above. We will be bullish
about the future outlook of the economy. If
you’re a bond investor, you will benefit more
from investing in long term bonds due to the
relatively higher yields. However, you’ll be
subjected to inflation risk.
What is the psychology behind the
upward-sloping yield curves? When investors
are buying long term bonds, they are
subjected to risks such as inflation risk,
political risk and other risks. Naturally, they
will demand a higher yield as compared to
short term bonds.
If investors feel that the Fed will do a
good job in controlling inflation, they are
more likely to buy long term bonds because it
provides higher yields. However, if investors
feel that the Fed is inefficient when it comes
to controlling inflation, they would buy short
term bonds instead.
When investors expect high inflation
rates in the future, they are less likely to buy
or hold long term bonds due to inflation risk.
Hence, they are going to sell off their longterm bonds which pushes the yields higher.
This leads to a steep yield curve.
On the other hand, if you see an
inverted yield curve where long term yields
are lower than short term yields, it can be a
potential sign that a recession is looming. We
will be bearish about the future outlook of the
economy. In the past recessions, you will
observe that inverted yield curves came
before it. The purchasing of long-term bonds
via QE can lead to a flattening of the yield
curve. A flat yield curve is also a sign that the
economic downturn is underway.
You can see that interest rates can
serve as an important tool for your overall
analysis. It not only helps you with picking
pairs to trade, it also provides you with clues
about the business cycle as well as overall
market sentiment.
SECTION 2:
APPLICATION
◆ ◆ ◆
CHAPTER 9:
ECONOMIC
INDICATORS
Understanding Economic
Indicators
There are many factors that move the
markets. One of the most market-moving
factors is a major economic data release.
Economic indicators give you an idea
of the state of the economy and give you a
clue of the future interest rate decisions of the
central banks.
Why is it so important to learn about
economic indicators? Firstly, it is the
fundamentals that drive the markets in the
long term. Secondly, central banks, hedge
funds, and the government use these
indicators to make their policy or trading
decisions. If the major market movers are
using it, I don’t see why you should ignore it.
Although different central banks have
different mandates, they have a common goal
of maintaining price stability and achieving
stable economic growth. To make their policy
decisions, they would need to look at
economic indicators to use them as a gauge
for the current state of the economy and
decide their next move.
Although there are different marketmoving indicators out there, it all comes
down to one principle.
When market participants have a good
future economic outlook and are optimistic
about the currency, the currency will proceed
to rally.
In other words, it all comes down to
market sentiment. Market sentiment is an
indication of whether market participants are
either optimistic or pessimistic.
When it comes to evaluating economic
numbers, it is not the released absolute
number that matters. You need to compare
the actual results with the consensus because
markets react based on expectations. When
the actual release is in line with expectations,
the markets won’t respond that much to it.
On the other hand, if the actual results
are beyond expectations, it can lead to
volatile moves. If the number is a big
difference from the consensus, how far off is
it from the typical range? Although forecasts
are not always accurate due to conflict-ofinterest issues within the industry, the
markets often won’t care about the accuracy
of the data. They will often observe what they
see in front of them and react to it.
To put things into context, you also
need to observe the overall trend for the past
12 months or more. If you’re observing 1
months’ worth of data, the sample size is not
representative enough to provide a good idea
of the big picture economic trend.
Is the current month better or worse off
than the previous months? This is what you’ll
need to take note of. It’s best to turn those
numbers into a line chart using an excel
sheet. You’ll get a better visual representation
that way. Alternatively, there are websites
like TradingView that provide such charts.
Types Of Indicators
Economic indicators can be classified
into low impact, medium impact, and high
impact indicators. Your focus most of the
time should be on the high impact indicators.
With that said, you shouldn’t ignore
the other economic indicators because if the
actual data that is released deviates too much
from the expectations and consensus, it can
potentially be market moving since it has not
been priced into the market.
Nowadays, you have economic
calendars to show you a summary of the
economic events that are happening for a
particular period. You will need to study all
of them because using a single indicator to
provide a long-term view of the economy just
doesn’t make sense. What drives the currency
markets is the forces of the various economic
indicators working together to influence the
economic conditions. As a start, pick one to
three economic indicators and study them for
a couple of months so that it is easier for you
to progress. Study how these indicators
impact the markets in the short term and long
term.
Sometimes, different indicators might
even show you conflicting signals. This is
why you need to have a scoring system to
sum up all of the numbers to arrive at an
overall fundamental bias. Nowadays, you can
easily do that with an excel sheet. Better yet,
plot the numbers into a graph so that you can
visualize the overall trend of each of the
economic indicators.
Economic indicators can also be
classified into leading, lagging, and
coincident indicators. Leading indicators tell
you what is going to happen in the future.
Lagging indicators give you an idea of what
happened in the past whereas coincident
indicators provide a picture of the current
state of the economy.
There are economic indicators that
move in tandem with the economy (e.g.,
GDP). In other words, they are positively
correlated to the state of the economy. There
are indicators that move in the opposite from
the economy (e.g., unemployment rates),
making them negatively correlated to the
economy. There are indicators that won’t be
affected by the economic conditions of a
country, which is rare.
To master economic indicators, you’ll
need to practice deliberately and do a lot
more thinking than the typical lazy retail
trader. Before the economic data is even
released, make your own “prediction” of the
number. Even if you’re eventually wrong
about it, at least you’ll learn something from
it. This is better compared to just sitting back
and waiting for the numbers to come out
every month. You’ll learn nothing that way.
A user-friendly economic calendar that
you can start with as a beginner is the Forex
Factory calendar. In my opinion, the interface
is simple to use and easy for beginners to
understand.
If you’re already a professional trader,
it is wise to invest in a Bloomberg terminal.
However, it is not compulsory since a lot of
the information you need can be found online
nowadays. You just need to know what to
look at and how to interpret it. I’ll put a list of
useful websites in the appendix at the end of
this book.
Factors Affecting Strength
Understand that the strength of economic
indicators changes over time due to changes
in the country’s economic environment and
political conditions. What is the most marketmoving now may not be the same in the
future. There are many factors that influence
the strength of an economic indicator:
Business cycle: In the business cycle,
you have the expansion phase, peak,
recession, and followed by a through. The
process repeats itself again and again. During
different stages of the economic cycle, the
markets will pay attention to different
economic indicators.
For instance, the markets will pay
attention to inflation numbers during the
expansion phase where the economy is
booming. During a recession, the markets
will shift their focus onto employment and
unemployment numbers.
Number of revisions: Economic
indicators are subjected to revisions. For
instance, for Gross Domestic Product (GDP)
data, you have 3 figures that are being
released: Advanced, preliminary, and final.
The markets tend to react least to the
revised data, which is the prelim and final
data. The first GDP release, which is the
advanced GDP, will be more market-moving
even though it is less accurate than the
revised prelim and final data. It seems like
the markets care more about what’s being
given to them first rather than the accuracy of
the release itself.
With that said, even revised numbers
are not entirely accurate. This is because no
economic indicators are perfect. There’s also
an element of conflict of interest involved in
numbers forecasting. Also, GDP doesn’t take
into account things like second-hand sales,
underground transactions, and free service
providers. This means that GDP tends to
underestimate the real economic activity of a
country.
Economic power: The larger the
economy of a country, the more marketmoving the release is going to be. This is why
traders and investors pay more attention to
the U.S economic data than other countries'
economic indicators.
Sample size and historical data: If
you’ve studied statistics, you probably
already understand this. If the survey sample
size is too small, the data being released will
not be representative and accurate. If the
economic indicator is new and lacks
historical data, it is generally not that market
moving since traders are not paying attention
to it.
There are many economic indicators
that you need to take note of. Each of them is
responsible for tracking the various economic
drivers of the market. You have economic
indicators that track the health of the
economy, housing market, manufacturing
industry, employment market, inflation rates,
consumer behavior, interest rates, and trade
activities between countries.
Understand that different countries
have their unique economic drivers. I’ll
discuss the indicators that most of the
countries consider important.
Employment Data
One of the most popular employment
data is the non-farm payroll (NFP) data,
which is released on the first Friday of every
month (8.30 am EST). It shows the number of
people employed (Excluding agricultural
jobs), and it’s one of the most market-moving
economic data out there. There are a lot of
factors that determine employment levels,
such as demand and supply of jobs.
If a lot of people are employed, it is an
indication that the economy is doing well.
When more people are employed, this will
lead to more consumer spending, and hence
businesses will be able to hire more staff due
to an increase in revenue. This benefits the
stock market and the currency of the country,
ceteris paribus. However, central banks will
raise interest rates in the event that the
economy is overheated.
When fewer people have jobs, the
spending power among consumers will be
less, which leads to less revenue for
businesses. This won’t be good for the stock
market and currency. With that said, a high
unemployment rate can lead to interest rate
cuts, which can stimulate the economy. As a
result, more money will flow back into the
economy. However, this will also lead to
lower yields, resulting in the outflow of
capital from the government debt market.
There are a couple of releases and
reports you need to take note of, namely the
employment
situation
report,
unemployment insurance weekly claims
report, and the ADP National Employment
Report.
Understand that employment indicators
shouldn’t be used to predict future economic
conditions as it is not a leading indicator.
However, it is still worth taking note of as it
is an important indicator for the market
participants to gauge the current state of the
economy. Moreover, it is an indicator that is
of great concern to politicians since
employment levels are often used by the
public as one of the gauges of their
competence.
One thing that a lot of beginners
attempt to do is to scalp the NFP numbers. If
you don’t know what you’re doing, I suggest
that you leave this to the pros because it can
lead to massive losses due to the high
volatility. In fact, a lot of hedge funds macro
traders use employment data as part of their
overall analysis to form a long-term view of
the currency rather than scalping it.
Gross Domestic Product
(GDP)
The GDP gives you an idea of the
economic condition of the country as it
measures the market value of all the final
goods and services produced within a country
over a period of 1 year. In other words, GDP
is the economy.
The keyword here is production, not
sales. A chair that has just arrived at the store
can be placed in the inventory for months
without being sold to consumers. It will still
be counted into the GDP values.
As a general rule, numbers that come
out above market expectations will be good
for the economy. Positive numbers generally
lead to an increase in capital flow into the
economy, which benefits the country’s
currency.
Numbers that come out below market
expectations will be harmful for the
economy. Negative numbers lead to the
outflow of capital, which is bad for the
country’s currency.
GDP values are released on a quarterly
basis (except for Canada) and expressed in %
terms. When people say that the economy
grew by 1% this year, what they are referring
to is that the GDP grew by 1%. GDP can be
measured by the income approach and
expenditure approach. I will not go into
detail about the income approach. The
expenditure approach follows this formula:
GDP Formula: C + I + G + (E-I)
C= Consumer consumption
I=Investment
G= Government spending
E= Exports
I= Imports
There are many factors that contribute
to the GDP. If you observe the formula
above, consumer consumption is included in
the GDP formula. For countries like the U.S,
consumer consumption contributes to over
70% of the country’s GDP. Investment refers
to the purchase of plant and equipment by
businesses. It also includes the purchase of
homes but does not include investments in
financial assets like stocks and bonds.
Government spending includes the amount of
money invested and spent by the
government.
Net exports take into account foreign
trade activities since this is also an important
contributing factor to the economy. Imports
are deducted from the equation because GDP
measures production activities within the
country.
While nominal GDP values can
provide an overall picture of the economic
health to a certain extent, it is not appropriate
to monitor that since it is not adjusted for
inflation. Real GDP values provide a better
picture of the economic growth since it is
calculated using the prices taken from a base
year.
However, looking at GDP will not give
you a complete picture of the economic
growth because higher GDP values can be
contributed by the increase in prices of goods
and services rather than an increase in overall
production numbers. An increase in prices
alone will not benefit the average consumer,
especially if they have all their savings in
their bank account.
A good and healthy GDP growth is
around 3-5%, which indicates that the
economy is good. A lower than usual GDP
indicates a potential recession, while a higher
than expected number indicates potential
inflation.
If there is better than expected growth
in the economy, this will eventually lead to
an increase in interest rates by the central
banks, especially when the economy becomes
overheated. A slower than expected growth
will eventually lead to easier monetary
policies being implemented, especially when
the economy is contracting too fast.
However, there are several exceptions
to this. If the GDP growth is caused by an
increase in exports by the country, this will
cause the currency to appreciate. On the other
hand, if the growth is caused by a buildup of
inventory, this will negatively impact the
currency.
In terms of its ability to move the
markets, it is relatively lower as compared to
major events like NFP due to the fact that it is
reported in annualized terms even though it is
calculated on a quarterly basis. It is not a
leading economic indicator. It is therefore not
appropriate to use this indicator alone to
predict future economic conditions.
With that said, you should still take
note of this economic indicator because it is
closely monitored by the market, media,
central banks, institutions, and the
government. If you would like to compare
GDP between different countries, you can
refer to GDP per capita.
Trade Balance
The trade balance is also known as the
balance of payment. It is the difference
between the nation’s exports and imports
over a period of time. It’s an important
economic factor that contributes to the GDP,
as shown in the GDP formula.
A trade surplus occurs when a
country exports more than it imports whereas
a trade deficit occurs when a country
imports more than it exports. A trade surplus
is generally good for the economy since the
increase in exporting activities creates more
jobs. However, this doesn’t mean that a trade
surplus will always be good for the currency
because it all comes down to expectations of
the numbers. Similarly, a trade deficit does
not necessarily mean that it’s always bad for
the currency.
Generally, a widening trade surplus
and contracting trade deficit will benefit the
currency. On the other hand, a contracting
trade surplus and a widening trade deficit will
cause the currency to depreciate.
Countries with a trade surplus will
have a relatively stronger currency as
compared to other countries because of the
increase in demand for that country’s
currency. Buyers would have to exchange
their own local currency for that country’s
currency. In general, investors are more likely
to invest in countries with consistent levels of
trade surpluses. This makes emerging
markets like China, an attractive country to
invest in since the country has recorded a
consistent trade surplus over the past few
years.
Countries have the ability to impose
tariffs and trade barriers on imports in an
attempt to boost the local manufacturing
industry, support local businesses, and reduce
trade deficits. This leads to a trade war
between countries. While the intentions may
be right, a lot of times, trade wars do the
exact opposite of causing more harm than
good to the local economy as consumers will
have to spend more on products and services
that are manufactured locally.
As of the writing of this book, China’s
exports have seen a massive surge despite the
U.S-China trade war. The western countries
are imposing lockdowns due to the pandemic,
and stay-at-home orders led to an increase in
online shopping, which partly contributed to
the increase in exports from China.
The U.S has experienced a trade deficit
(Fig 2.9.1) year after year. It is now
experiencing a 14-year high at the time of
writing. Americans buying products from
overseas is not the sole contributing factor to
the trade deficit. It can also be attributed to
the factor whereby people are not spending as
much money on U.S goods and services
compared to those produced by other
countries.
To compare the current account
balance between different countries, you can
refer to the current account to GDP ratio.
Fig2.9.1
Source: ©2020 TRADING ECONOMICS,
Bureau of Economic Analysis (BEA)
Retail Sales
As you may have seen from the GDP
formula previously, consumer consumptions
contribute a significant portion (70-80%) to
the GDP growth. An increase in retail sales
will be generally good for the currency and
vice versa. Consumer spending has a direct
impact on the state of the economy. If
consumers are not spending money, the
economy will take a hit as a result.
The number of people who are
employed has a direct impact on consumer
confidence, which in turn affects retail sales.
A more representative number is the
core retail sales number since it excludes
automobile sales, which represent a big-ticket
item that can distort the numbers. Since this
economic indicator reflects consumer
spending, it will have an impact on GDP
releases as well. The impact of retail sales on
the stock market, capital flow and currency
movements as a result will be pretty much
similar to GDP releases.
A reminder to you that you should take
note of the overall trend of the figures and its
expectations rather than the absolute
numbers. Retail sales are one of those figures
that are susceptible to seasonal factors.
Holiday spending will increase retail sales,
and it will not be representative if you’re only
observing data released for a single month.
With that said, if retail sales increase
too much, it may be bad for the U.S dollar
since a lot of the goods in the United States
are imported. Overly high retail sales
numbers can also lead to inflation getting out
of control, which prompts the Fed to increase
rates potentially.
Another
measure
of
consumer
spending is the Personal Consumption
Expenditures (PCE), which includes
elements like the sale of durable goods, nondurable goods, and services.
Consumer Price Index (CPI)
The CPI is an indicator of inflation
levels since it is a measure of the price of a
fixed basket of goods and services sold in the
market. In the United States, the goal is to
maintain inflation rates at a range of 0-3%.
As a general rule, inflation will erode the
value of the currency and lead to a decrease
in spending power. Decreasing inflation
allows consumers to buy more goods and
services with less money, which benefits the
currency.
When inflation rises beyond acceptable
levels, the Fed will reduce the money supply
in the economy by increasing reserve ratios
or selling securities to cut down the amount
of money flowing into the system. Rates will
be increased, and hence we will have a long
bias if the central banks take action.
This means that when there’s too little
money flowing within the system, the Fed
will do the opposite and start buying
securities in the open market, decrease
reserve requirements, or cut rates. This leads
to an increase in the money supply flowing
into the economy.
The core inflation rate should be of
the main focus since it excludes the goods
with volatile components, which would skew
the rates such as food and energy prices. This
means that the core CPI (CPI excluding
food & energy) is a more accurate measure
of inflation. Food and energy prices tend to
be volatile at times and susceptible to
seasonal factors. This is why it has to be
excluded from the calculation.
High inflation will increase the
probability of interest rates being raised,
which will in turn, cause the currency to
appreciate. This is why you should take note
of this economic indicator since the central
banks and governments monitor it on a
regular basis as a gauge for their monetary
and fiscal policy decisions. It can provide you
clues as to what the central banks are going to
do next with interest rates. With that said, it is
still considered a lagging indicator in the big
picture.
At the time of writing, the core CPI
increased over the past few months (with the
exception of October) in terms of % changes,
with most months beating consensus
estimates. Due to the pandemic, core CPI
experienced the largest decline in the month
of April 2020 since 1957 (Fig 2.9.2). Most
developed economies around the world went
on a major lockdown, and air travel in many
countries was banned. Despite the gradual
increase in % core CPI as the vaccine is being
rolled out, inflation rates are still low as
compared to pre-pandemic levels. In the
event that the vaccines work out in producing
herd immunity, we may see more inflationary
numbers in the following years.
Fig2.9.2
Source: ©2020 TRADING ECONOMICS,
U.S Bureau Labor Statistics
Another measure of inflation is the
GDP deflator (Nominal GDP/Real GDP),
and it can be used to convert nominal GDP
into real GDP.
Producer Price Index (PPI)
Also known as the wholesale price
index, the PPI is a measure of the prices
charged by manufacturers to retailers, and the
main focus is also on the core PPI rates due
to the fact that food and energy prices are
seasonal and tend to be volatile.
The increase in prices on the
manufacturers’ end is going to be passed
down to the retail sector. Retailers would
want to increase, or at bare minimum,
maintain their profit margins. As a result,
higher prices in retail stores are going to be
passed down to the average consumer.
Consumer Confidence And
Sentiment
As the name suggests, this measures
the level of confidence among the consumers
and the level of optimism that they have for
the current and future economy. A measure of
consumer confidence includes the Consumer
Confidence Index (published by The
Conference Board) and the University of
Michigan Consumer Sentiment Index.
The
University
of
Michigan
Consumer Sentiment Index can be a leading
indicator for future consumer spending
habits. The more confident consumers are
about the prospects of their jobs and income
levels, the more they are willing to spend
now.
Take note that the University of
Michigan Consumer Sentiment Index is
released in the form of reports. You have the
preliminary report, which is released first,
and a final report, which is revised. The
earlier release tends to exhibit more impact as
compared to the final release.
The consumer confidence index
(CCI), as the name suggests, is a measure of
consumer confidence. It measures inflation
expectations and confidence in business
conditions.
Why is consumer confidence so
important? Firstly, consumer spending
contributes to more than half of the United
States’ economy.
Secondly, the big boys (hedge funds,
policymakers, economists) pay attention to
this number for their decision-making
processes.
Higher consumer confidence will
potentially lead to an increase in U.S interest
rates and capital flowing into the stock
market. When foreign investors flock to the
stock market, the demand for USD will
increase.
On the other hand, if consumers are
pessimistic about the future prospects of their
jobs and businesses, this will eventually lead
to a deteriorating economy, thus weakening
the U.S dollar as capital flows out of the
country’s stock market in search of higher
yields.
To measure net foreign investment
flows into the U.S, you can refer to the
Treasury International Capital (TIC) data,
which can also be a useful economic
indicator that can be used to determine the
direction of the USD.
Consumer sentiment indicators tend to
be affected by a lot of factors. It can be
volatile, especially in times of crisis. As
expected, the 2020 pandemic led to a massive
drop in consumer sentiment (Fig 2.9.3). In
general, recessions will lead to a drop in
consumer sentiment. However, the overall
trend has been slowly recovering since the
onset of the pandemic.
Fig2.9.3
Source: ©2020 TRADING ECONOMICS,
University of Michigan
The beauty of learning how to evaluate
consumer sentiment indicators is that you can
also apply this as a confirmation for picking
good companies to invest. If you’re confident
that consumer sentiment will improve in the
long-term, you can look into good and
undervalued consumer discretionary stocks or
cyclical stocks. If consumer sentiment trends
indicate that it will go lower, you can look
into consumer staple stocks. I invest in stocks
long term. I won’t talk too much about
stocks-picking in this book. After all, you’re
here for currency trading.
Housing Indicators
The housing sector can have a
significant impact on the economy since it
provides jobs for people and revenues to
businesses. It also gives you an idea of the
health of the housing sector and the future
prospects of construction activities. An
increase in construction activity is a good
sign for the economy since it increases the
demand for construction materials like wood,
cement, steel, etc. Construction activities also
require brick layers, electricians, and painters,
which provides more jobs for people. Since
most people take up housing loans when they
purchase homes, housing indicators can also
give you a picture of the state of the credit
and banking sector. It is also an indication of
consumer sentiment and hence affects
consumer spending.
There are lots of housing indicators
that economists publish, but the one leading
indicator of future % real GDP growth is the
building permits data. To put it in simple
terms, before houses are even sold, and
before the foundation of a home is even laid,
you’ll need to apply for a building permit. An
increase in the application for building
permits indicates an increase in consumer
confidence in the economy and vice versa.
Other indicators like housing starts,
existing home sales and new home sales lag
behind building permits. It’s just like how
manufacturing activities are at the start of the
sales process. Manufacturing numbers give
you a clue on retail sales numbers. Building
permits gives you an idea of the amount of
house being “manufactured,” which gives
you a hint on home sales numbers.
Manufacturing PMI
The Purchasing Managers Index
(PMI), released by Institute for Supply
Management (ISM), is another leading
economic indicator that you need to focus on.
A survey is conducted to interview
purchasing managers regarding business
conditions within the manufacturing sector.
This is a survey conducted to find out
manufacturers’ opinion on future business
prospects. The objective is to gauge business
confidence.
The more confident the managers are
about the future prospects of their businesses,
the more they are willing to hire more staff
and invest more into their businesses. When
companies grow, this will benefit the stock
market and the economy. It can be a useful
predictor of future economic growth as well
as the potential actions of central banks.
The components of the headline
manufacturing PMI include new orders,
production or output, employment,
supplier deliveries, and inventory levels.
What we should pay attention to is the overall
figure rather than the components. Unless
you’re looking to gauge employment data
releases, you should be looking at the
employment component as part of your
analysis.
Hedge fund managers also take note of
this data as part of their decision-making
process. As you might already know by now,
if the big boys are paying attention to it, you
as a retail trader should too.
Retailers will place orders from
manufacturers in the event that their business
is doing well, and sales are increasing. If
orders for products are reduced due to a bad
economy, the number of orders will decrease.
This is a sign of deteriorating economic
conditions.
Another reason why this indicator is
worth taking note of is because it is released
on the first working day of the month. This
sets the tone for traders and investors for the
rest of the month. If this data deviates from
consensus by a significant percentage, it can
potentially cause a major move in the
markets. Also, if you’re a stocks investor,
you’ll be able to use this indicator as a gauge
for the future performance of manufacturing
companies.
Services PMI
Also
known
as
the
nonmanufacturing PMI, this is generally an
economic indicator that is relatively less
market-moving as compared to the other
indicators I’ve previously discussed. It is also
released by the Institute for Supply
Management (ISM).
It is a survey conducted to gauge the
business conditions of the services sector,
which tends to be less cyclical as compared to
the manufacturing industry.
However, if the actual release is far off
from the consensus, it might produce a
significant market reaction. Even though
services contribute a larger portion to the U.S
GDP as compared to the manufacturing
sector, it is viewed equally by the market
participants.
It is a useful leading indicator for
future % GDP growth, with values over 50
indicating economic growth and values below
50 indicating economic contraction.
For the past few years, the services
sector's overall trend reflects consistent
periods of growth and periods of minor
contraction until the pandemic, causing the
economy to slow down (Fig 2.9.4).
Fig2.9.4
Source: ©2020 TRADING ECONOMICS
Money Supply
If you’ve studied finance in school,
you’ll come across terms such as M1, M2,
and M3 supply. I’m not going to bore you
with the formulas too much but what you
need to focus on for now is the M2 money
supply. The components of M2 money supply
include M1, savings deposits, time deposits
(<$100,000), and balances in money
market mutual funds.
To put it in simple terms, it includes
the money that you can withdraw and spend.
M2 is used to measure the amount of money
supply in the economy.
Central banks are responsible for
controlling the amount of money supply in
the economy via their monetary policies to
keep inflation in control. An increase in the
money supply in the economy will lead to a
decrease in the value of the U.S dollar and
vice versa.
CHAPTER 10:
RISK
MANAGEMENT
If you didn’t skip this chapter, I want to
congratulate you because this is one of the
topics in trading that most beginner traders
skip. Over the year, I’ve seen so many traders
blow their accounts and lose their savings
because they just failed to pay attention to a
vital skill that you need as a trader. That skill
is risk management. I want to share with you
some common mistakes that I see a lot of
retail traders make.
Risk Management Mistakes
Most Traders Make
#1: They don’t learn it: As I said just now,
most beginner retail traders skip this topic
altogether. Even if they learn it, they won’t
learn it properly and hence lose money later
on.
#2: Don’t bother with risk exposure: I see
way too many beginner retail traders using lot
sizes that they are not supposed to and going
around boasting about how brave they are for
using such massive lot sizes.
Worse still, there are certain trading
gurus on YouTube who like to do “Turning
$100 into $10,000” challenges. These
mindless people probably don’t even
understand anything about risk exposure, %
risk per trade or even risk-adjusted returns.
This is why I always tell people that the retail
trading industry is so screwed up. People are
encouraging others to take a massive risk.
This gives beginner traders the
impression that you can grow a small account
to a large account fast and all you need to do
is be willing to take big lot sizes.
Yes, they probably can grow their
account fast, which enables these so-called
gurus to sell their signals, but I bet that these
people’s accounts won’t last long. If they
blow their accounts, all they have to do is
start another one again.
Don’t get me wrong. There are traders
who can indeed achieve fast growth within a
short span of time, but these are often people
who have years of experience working in a
hedge fund or a prop trading firm managing
millions of dollars.
My problem with the industry is that
there are novice traders who try to emulate
what the pros are doing, and as a result, get
burnt doing that.
So how do you differentiate the pros
from the self-proclaimed trading gurus? Just
look at their risk exposure in each trade. The
professional traders are the ones who will use
proper lot sizes.
Professional
traders
put
risk
management over profits. They focus a lot on
managing risk and losses first before they
even think about “How much money can I
make?”. On the other hand, retail traders
always think about profits, ROI & win rate
without even thinking about risk. Professional
traders focus on risk-adjusted returns while
most retail traders focus on returns alone. The
irony is that when you focus on the risk, the
profits will take care of itself. If you only
focus on the profits, you’ll blow your
accounts really quick.
As a result, most retail traders blow
their accounts really fast because the moment
you disrespect risk, you are disrespecting the
markets. Mr. Market doesn’t like to be
disrespected.
#3: Thinking that technical analysis is
more important than risk management
Almost every day, traders would ask me to
share the best indicator and strategy to use.
When I tell people that risk
management is more important than their
trading strategy, it goes in from the left ear
and goes out from the right.
It doesn’t sink in until they’ve blown
their accounts.
I’ve had so many traders who also tell
me that they’ve grown their accounts by 100200% within a month only to blow it all away
in one trade.
When you’re able to grow your
account that fast within such a short time, it’s
only a matter of time before you blow your
account.
It’s not a question of “will you blow
your account?”
It’s a matter of “when will you blow
your account by risking that much?”
Most of the retail traders’ primary
focus is on trading strategy, indicator, and
technical analysis. Yet, 90% of them lose
money and quit within 6 months.
Professional traders put the majority of
their focus on prudent risk management,
producing slow and steady returns.
This is why they last in the long term.
Check back on them 1 year later, they are still
here as compared to the typical retail trader
who over-leverage and use lot sizes that they
aren’t supposed to use.
If you don’t want to learn it the easy
way, then go ahead and be my guest and learn
it the hard way.
Don’t come crying to me telling me
that you’ve finally realized the importance of
risk management after you’ve lost your
$5000 hard-earned money.
#4: They determine their lot size based on
estimation
Even if some retail traders learn a little bit
here and there about lot size calculation, they
still don’t bother to calculate it properly
before they open a trade.
Think about this for a moment; if
something as simple as calculating lot size is
too much work for you, you should pursue
something else because trading is not
reserved for lazy people.
If you see somebody else trading with
a $5000 account and using a 0.5 lot size, that
doesn’t mean that you should do the same.
Different people have different risk
appetites, and you need to use one that you’re
comfortable with.
Too many traders just love taking
shortcuts in the retail trading industry.
They want instant signals to be given
to them. They want people to tell them what
lot size to use rather than learning how to
calculate it themselves. They want to be
spoon-fed.
This is another reason why most retail
traders lose. They are just too lazy.
If you really don’t want to calculate it
manually, at least craft your own lot size
calculator using an excel sheet or have a
programmer make one for you. The fastest
way to go about it is to use online lot size
calculators which are provided to you for
free.
To be safe, learn how to calculate it
manually as well, so that you can confirm
that the lot size calculator you’re using is
working correctly.
Yes, learning about lot size calculation
and % risk per trade is not as sexy as
technical indicators, but who said that
learning how to trade is supposed to be easy?
If you want to achieve the results that
the top 10% of retail traders have, you need
to be willing to do what 90% of the retail
traders are not willing to do.
#5: They use the same lot size all the time
A lot of beginner traders have the
misconception that if they are using the same
lot size all the time, they are taking the same
amount of risk. This is a typical amateur
mistake for those who don’t bother to study
the concept of % risk per trade and value per
pip.
Different currency pairs have different
value per pips, and this will affect the amount
of risk you’re taking, especially if you’re
trading multiple currency pairs.
Your stop loss level will also
determine the % risk per trade of your trade,
which you should take into account as well.
Later, when I go into detail about the
formula, you will understand what I mean.
Forex Exchange Risks
Market risk or currency risk
This is the risk that is a result of the volatility
and fluctuations in the market. If you’ve
decided to skip the learning process
altogether after listening to some get-richquick BS on Instagram, you will be more
susceptible to currency risk.
When you trade or invest in something
that you don’t have any understanding about,
you will eventually lose all your money.
You might get lucky a few times, but your
time will come.
If you skip the learning process, you’re
telling Mr. Market that you’re better than
him. When you disrespect him like that, he
will give you a taste of what it is like to
disrespect him, and it’s not going to be a fun
ride.
To reduce your market risk, you need
to put in the patience to learn it properly.
Don’t put in money that you can’t afford to
lose. Also, having a good trading strategy that
has a statistical edge helps.
In order to minimize market risk,
ensure that you’ve a fixed stop loss strategy
in place.
Even if you’re an investor in other
markets, you’ll be subjected to currency risk
since you’ll have to exchange the currency
back to your country’s currency. Let’s say
you’re based in Singapore and is an active
investor in the U.S stock markets; you’ll have
to convert the profits back to Singapore
dollars. If the currency rates move against
you, your returns from the stock market will
be diminished.
Leverage risk
The higher the leverage you’re using, the
more you’re exposed to leverage risk. Retail
traders love leverage, which is a doubleedged sword. I’ve seen traders use a leverage
of 1:400 and feel that it is too low!
You’d be surprised to know that retail
traders who don’t over-leverage tend to last
longer than those who do otherwise.
Only professional traders can pull it
off. If you’re not a professional trader, don’t
jump off the cliff like that. Your trading
parachute might fail you.
Event risk or volatility risk
If you open a trade right before a high impact
event, you’ll be subjected to massive event
risk where you’ll get stopped out by the
volatility.
To be safe, try not to have any open
short-term trades 1-2 hours before the news
release. If you’re a position trader, that is a
different context.
Event risk can also be caused by
external factors such as sudden changes in
consumer sentiment, recessions, wars, and
structural changes in the economy.
If you trade a currency that is not
liquid, you’ll be subjected to more volatility
risk. You’ll also need to pay more spread to
the broker. With that said, you don’t want to
trade currencies that have no volatility at all.
Volatility also equates to opportunity.
Counterparty risk or broker risk
If you’ve picked the wrong broker and don’t
bother to do your research on them, you’ll
often find that you will have trouble getting
back your trading capital.
Scam brokers would make it easy for
you to deposit funds but make it hard for you
to withdraw funds.
There’s also the risk of technological
disruption, which happens to even good
brokers because no broker is perfect.
As long as you have a customer service
representative guide you through the glitch in
a timely manner, then it’s fine.
Political risk or country risk
Central banks and government of a country
can change the money supply and market
sentiment when there is a need to.
To reduce your risk, you need to pay
attention to political developments, especially
if you’re using EA. Most of the EA out there
are not programmed to switch off
automatically when there is a major political
event.
Another way to reduce risk is to trade
currencies in which their country’s political
environment is stable. You also want to trade
currencies that will continue to exist. The
U.S. markets are popular among investors
worldwide due to their relatively lower
country risk.
Interest rate risk or rollover risk
If you hold your trades beyond one day, you
will need to check interest rates because you
will have this thing called swap, which can be
negative or positive.
If the base currency’s interest rate is
higher than that of the counter currency, you
will have a positive swap when you make a
buy trade.
If the base currency’s interest rate is
lower than that of the counter currency, you
will be charged a swap when you make a buy
trade. This is especially risky if the currency
only moves sideways and is going nowhere.
You’re just paying rollover fees to your
broker every day, making him rich.
If you’re a bond or stocks investor,
you’ll also be subjected to interest rate risk.
An increase in interest rates is generally bad
for the stock market. However, bonds are
subjected to more interest rate risk as
compared to stocks.
Ways Of Managing Your Risk
Hedge your positions
If you bought 2 currencies today that are
inversely correlated to each other, you will
make money if one of the currencies goes up
and lose money when the other pair goes
down. This means that if you have a losing
position in the first currency, the profits
obtained from the other pair will cover up the
losses.
Suppose you are opening 5 trades in
which all of them are positively correlated to
each other. In that case, you are exposing
yourself to more than 5x the risk, especially if
you’re not careful with your lot size
calculation.
The good thing about hedging is that it
can minimize your downside and risk
exposure, but the downside is that it can limit
your potential profits.
Having a diversified and balanced
portfolio also helps to keep your portfolio
growing steadily.
Trade during a specified trading session
If you know that your profits mostly come
from the London trading session, you might
want to focus more on trading that session
and avoid the trading sessions in which you
lose money.
Have a hard stop loss
You need to have a stop loss in trading. There
are so many traders who don’t use a stop loss
because they are afraid of getting stopped out.
Let me give you 2 options. It’s either
you lose a small amount of money right now
or blow your whole account in the near
future. Which option do you want?
You need to accept that losses are part
and parcel of trading. This is just the price
you pay to get returns that are more than your
savings account.
Trade the more predictable pairs
The higher the liquidity of a currency pair,
the higher will be the predictability of that
pair. As a beginner, you can start with the
major pairs, and then you can move on to the
minor pairs. The political and economic
conditions of that country also determine the
predictivity of that pair.
Invest in yourself
My mentor once told me that if I want to
reduce my risk in anything, I need to increase
my self-education, skills, and experience.
If you don’t understand the currency
you’re trading and don’t understand the
underlying fundamentals that move it in the
short term and long term; it will be very risky
for you to trade the currency.
Only trade pairs that you understand
and buy assets that you’ve conducted your
research on.
Determine your maximum drawdown and
% risk per trade
I’ll cover this in detail later on, but these 2
components are something that you need to
have in your trading plan before you even
start trading.
Improve on your Risk to Reward ratio
If you’re like the typical retail trader, you
probably focus more on the win rate than this.
You can have a win rate of 40-50%.
It’s possible for you to still make money in
the long term.
Before you open a trade, you always
need to ask yourself, “Is the risk worth taking
based on the reward that I’ll potentially get?”
To be safe, always have an R:R that is
at least 1:1.
How do you know whether you’re
good at managing your risk? Take note of
your Sharpe ratio. If it’s anything more than
1, you’re on the right track.
CHAPTER 11:
RISK
MANAGEMENT
APPLICATION
Risk Management Plan
You’ve probably heard of a trading plan.
What retail traders really need is a risk
management plan in addition to their trading
plan.
In hedge funds and prop trading firms,
there are dedicated risk managers to ensure
that their traders practice the risk
management rules that were imposed on
them.
If a trader breaks any of those rules,
they face the risk of getting fired. The stakes
are high. This is why a lot of professional
traders are such good risk managers.
As a retail trader, you don’t have the
privilege of somebody monitoring you and
ensuring that you’re following the proper risk
management rules. You are your own boss.
There are benefits of being your own
boss, but there are also downsides to it. Since
nobody controls you, it is easy to break your
risk management rules, especially if your
trading discipline is not strong enough.
To become a successful trader, you
need to become a successful risk manager
first, a successful trader second.
The first step you can take towards
consistent profitability is by having a proper
risk management plan, studying the various
risk parameters, and then following it with
discipline.
Concept Of Leverage &
Margin
Leverage:
To put it in simple terms, leverage allows you
to control a large sum of money using a small
sum of money.
If you start with a $100 account today
with a leverage of 1:10, you’ll be able to
control $1000 worth of currency. This allows
you to start with a small capital, which is one
of the benefits of forex trading.
However, leverage can also cause you
to lose a lot of money if you’re not careful in
using it. It’s like driving a sports car. You can
get to your destination faster, but you’ll also
face a higher risk of getting into a car crash.
The leverage you use will depend on the
following factors:
☐ Your risk appetite
☐ Account size
☐ Time frame you’re trading
☐ Your goals
☐ Broker
☐ Trading experience
A lot of professional traders don’t use a
leverage of anything more than 1:10. Of
course, it helps that they have a large capital
to work with. Even with a 4-5 figure account,
you can still make a good income without
having to over-leverage. You just need to be
patient and give it time to grow rather than
forcing an ROI out of it within a period.
The more trading experience you have, the
higher the leverage you can afford to use. It’s
just like how professional race car drivers and
handle a Ferrari better than any average
driver.
The higher the time frame you’re trading
with, the lower the leverage you can use.
If you have a low-risk appetite, don’t use a
leverage of 1:100 just because you saw
somebody on the internet pulling it off. Just
because it works for somebody else, doesn’t
mean that it will work for you.
Some brokers offer high leverage, but that
doesn’t mean that you should use it. It
depends on the country in which your broker
is based due to regulations. I’ve seen traders
go leverage shopping to seek out a broker that
offers the highest leverage.
This is a typical retail trader mistake.
They don’t know that some brokers offer
high leverage just to entice you to trade with
more risk exposure so that they can earn more
commissions. This is the conflict of interest
that exists within the industry that most retail
traders don’t even realize. High leverage is
also used as a marketing gimmick to attract
gullible traders.
Too often, you’ll see marketing messages
that go something like this: “Start with a
small capital of $50 and leverage up to 400X
to earn massive profits!” My question to you
is, do you think all the brokers are here to
help you make money? You probably know
the answer.
Margin:
A margin is basically a collateral or security
deposit. This is just a good faith deposit to
provide confidence to the broker that you’ll
meet your obligations. It is the minimum sum
of cash you are required to set aside to open a
position and keep it open.
In general, the higher the liquidity, the
lower the margin required. You’ll realize that
the major pairs would often have lower
margin requirements since they are relatively
more liquid than other types of currency
pairs. You’ll realize that the margins would
increase during high-impact events, just like
how the spread will increase.
Unlike stocks trading, forex trading
margin is not borrowed money. This is
something that you need to take note of.
When you exceed a certain amount in terms
of losses, you will receive a margin call from
your broker, which is a warning from your
broker to add more funds. They will typically
give you 2-5 days to top up your account.
However,
some
brokers
don’t
implement margin calls nowadays. When
your capital falls below a certain value,
they’ll close your positions automatically.
It can be a good thing because it helps
protect your account from further losses.
With proper risk management, you can
prevent yourself from getting a margin call.
Also, ensure that you have sufficient capital
in your trading account.
A lot of retail traders start with
accounts that are too small ($50-$200), which
is why they blow it up so fast. Like it or not,
the smaller your account size, the higher the
probability that you will blow your account
since most people won’t take it seriously
anyway.
Concept Of Risk Per Trade
How much money are you risking if the trade
doesn’t work out? A lot of traders don’t have
this number in their heads because, like I said
previously, they don’t bother to calculate it.
As a general guideline, aim to risk
between 1-3% per trade. There are many
factors that determine how much you should
risk per trade. Here’s a guide for you:
Some people would have this question in
mind. If I’m an experienced trader with a
low-risk appetite, which % risk per trade
should I pick? I think the more important
aspect is your risk appetite. If your trading
style doesn’t match your risk appetite, you’re
going to be subjected to making emotional
trades. Taking risks that are beyond your
comfort level also makes trading stressful for
you. I’ve seen experienced traders who have
been consistently making profits for many
years but still risk 0.5% in their trades.
Experiment with a number and see what feels
right for you.
Concept Of Drawdown
If you have a $1000 account, at what
point will you stop trading if you keep losing
money? When your balance reaches $500,
$600, or $700?
A safe number would be $700, which
is a 30% drawdown because if your %
drawdown is anything more than that, it will
be hard to recover.
Take a good look at the following table:
As you can see from the graph, the
higher your % drawdown, the harder it will
be to make it back to breakeven levels. Worse
still, it is tempting to revenge trade when
you’ve lost so much. Hence, a lot of traders
will be prone to emotional trading when their
drawdown exceeded 30%. This leads them to
lose more money from making those
emotional trades and eventually blowing their
accounts. This is why risk management is so
important.
Stop Loss Tips
Set an optimal stop loss level
You won’t want it to be so wide that you’re
risking more than your potential profit. You
also don’t want it to be so tight that you’re
not taking into account of the volatility of the
markets.
If it is too tight, you’ll face the
frustrating situation whereby the price
stops you out before it goes in the
direction you want. Trust me, I’ve been
through this many times, and it was not a
pleasant experience.
You will feel that markets are here to make
you lose. The truth is that the markets don’t
really care what you think (Unless your
broker is doing some shady things to stop you
out).
To determine an optimal stop loss
level, you need to backtest your trading
strategy and determine a level that is
appropriate for the currency that you’re
trading.
As a general guideline, place your stop
at a level where you're wrong about the trade
if the price reaches that level.
Determine your stop loss before you
determine your lot size
When I show you the formula later, you’ll
understand why. A common mistake that
most traders make is that they will determine
their lot size first, only to determine their stop
loss later on.
The only way that traders can
determine their lot size before their stop loss
is that they don’t even bother to calculate it,
to begin with. They set their lot size
randomly based on a number that pops up in
their head.
When you trade randomly, you’re
essentially gambling. You might as well go to
the casino. It’s more exciting there. There’s
free coffee there as well.
Traders who trade larger time frames
will generally have a wider stop loss as
compared to traders who trade a smaller time
frame because they need to take into account
the longer-term volatility.
No one size fits all level
Each currency pair requires a different level
of stop loss due to the difference in volatility
and behavior.
Some currencies would tend to trend
longer than others, and some would range
more often. If you set the same stop loss
target, say 30 pips, you are essentially trading
blindly.
How you set your stop loss depends on
your trading strategy, time frame and your
risk appetite.
Lot Size Calculation
Your lot size is the number of units that you
buy or sell when you open a trade. You will
need to first determine the value per pips
before you can determine your lot size.
Like I said previously, there are online
calculators that will calculate the position size
and value per pip for you. It would be best if
you still learned it manually so that you can
double-check your numbers.
Fig2.11.1
Source: MetaTrader 4, ©2000-2020 MetaQuotes Ltd.
Let’s take the above scenario as an
example. The price of EUR/USD now is
1.22291 (Fig 2.11.1). Let’s calculate our
value per pip on a standard sized contract.
Assuming the following scenario:
% risk per trade= 2%
Your trading capital= $50,000
Stop loss= 30 pips
Applying our numbers to the above
formula, we get an answer of 3.33. This
means that you’ll be trading 333,333 units
worth of currencies. If you lose this trade, the
most that you will lose is $1000, which
protects your downside risk.
CHAPTER 12:
INTRODUCTION
TO
TECHNICAL
ANALYSIS
Technical Analysis Mistakes
Most Traders Make
Thinking that indicators are everything
Your trading strategy only contributes to 10%
of your success as a trader. Does it make
sense to place more than 90% of your efforts
in finding the best indicator and strategy?
It doesn’t make sense, and yet every
day, I get questions from traders asking me
for the best strategy and indicator.
I’ve repeated these millions of times,
and yet most people still don’t bother to
digest that until they’ve learned it the hard
way by blowing their accounts.
Worse still, whenever a trader blows
their account, they would come to me and ask
me for a good strategy that will save them.
Let me give you a real-life example.
My mom is a good cook. So, it’s natural for
her to get requests from people around her
wanting her secret recipe.
They took her recipe, thinking that
they can now rely on themselves to cook the
dish without asking my mom to cook for
them.
Guess what, none of those people who
took her recipe could come out with a dish
that tastes just as well as my mom’s. Even my
brother, who grew up eating that same dish
over and over again, couldn’t pull it off!
They are all using the same ingredients
and even the same ketchup brand! Yet, all of
them produced different results.
My mom told me, “It’s not what
ingredients you use that matter. It is how you
use it that matter.”
This applies to trading too. You and I
can use the same indicator but yet produce
different results.
The truth is that you can have a not so
perfect indicator that gives you a 45% win
rate, you can still make money in the long
term and even be more profitable than a
trader with a 90% win rate!
And this is a true story. Time and time
again, I’ve seen traders with high win rates
blow their accounts and traders with low win
rates becoming profitable in the long term.
If anything, your risk to reward ratio
and risk management are more important than
your strategy's win rate.
Let me ask you this question again, is your
trading strategy as important as most people
think it is? Think about that carefully.
Using too many lagging indicators
Lagging indicators have their time and place,
but you can’t use them as an entry tool alone.
If you use it as a confirmation for your price
action strategy, that is fine.
Just because there are so many
momentum indicators offered to you by your
broker doesn’t mean you should use all of
them.
Professional traders don’t clutter their
charts with lagging indicators. In fact, most
of them trade with clean charts because it is
the price data that matters most.
That is why price action still works
today because it is as close as tape reading,
which is what a lot of floor traders used to do
back then when trading floors were a thing.
Using it at the wrong place
Certain indicators work better with certain
currency pairs and market conditions. Trend
indicators only work in a trending market.
If you apply trend indicators on a
ranging market, you’re going to lose a lot of
money. If you apply it to the wrong time
frame, it will also not work out.
Traders often ask me, “What indicator
do you use?” expecting that if they get the
answer, they can profit instantly and use it the
way I use it. That is not the right question to
ask.
Whether your indicators work or not
depends on how you use it rather than what
indicator you’re using. You’ve got to stop
asking shortcut questions.
Using it at the wrong time
Does your indicator work better during the
Tokyo, London, or New York trading
session? Based on my experience, if you’re
trading during a session that is not as liquid,
you will face the risk of your indicators
failing to work out.
Also, find out which day of the week
does your indicator work better. Which time
of the day does your indicator work better?
Only you will be able to find that out.
You need to look back at your past
performance and determine the periods in
which you make more money and keep losing
money.
Secrets Of Profitable
Technical Analysis Traders
Trade with the trend
Unless you’re Paul Tudor Jones, who is so
good at picking tops and bottoms, you’re
better off just going with the flow.
If you’re trading along with the trend
rather than against it, the probability of the
price going your way will be higher.
Some traders would make the mistake
of buying on a downtrend just because it
looks cheap. In the markets, cheap can get
cheaper.
Set target price and stop loss before
opening a trade
If you only start thinking about your stop loss
and target price after you’ve opened a trade,
you’ll be more susceptible to emotional
trading.
Different currency pairs would require
different levels of targets and stop losses due
to the difference in market structure and
volatility.
Perform multiple time frame analysis
Don’t just rely on one time frame to buy and
sell. You need to look at other time frames
for confirmation. If your time frames are
giving you contradicting signals, you
shouldn't enter into the trade.
Ideally, you would want the time
frames that you’re looking at to trend in the
same direction.
You don’t have to look at all the time
frames to ensure that all the stars are aligned.
Looking at 3 time frames is sufficient.
They will enter based on price
There are a lot of impulsive traders who enter
into a trade based on news or analyst
forecasts alone. If you’ve heard of the market
efficiency theory, the events have already
been reflected in the price by the time the
news comes out on TV.
You can use forecasts and consensus
numbers as a confirmation for your own
analysis. More than half of analyst
recommendations will not work out. This is
why it is safer for you to use it as a
confirmation rather than treating it as a
trading signal.
Applying it to the right market conditions
Does your trading strategy work better in a
volatile, trending, or random trading market?
If you don’t have the answer to that, you will
need to find out the answer.
Certain trading systems won’t work
under certain market conditions. I understand
that it is tempting to trade all the time as long
as the markets are moving.
You don’t need to trade all the time
under all market conditions like a freakin’
machine gun.
Successful traders pick and choose
high quality trades under appropriate market
conditions like a sniper. There are 4 main
types of market conditions.
Volatile markets are relatively riskier
to trade. If you want to minimize your
volatility risk, you should opt for the nonvolatile periods or currency pairs. You’ll also
need to study the behavior of the currency
pair that you’re trading. Some currency pairs
tend to trend longer than other pairs. For
instance, currency pairs with a low interest
rate differential would tend to range more
often. If the 2 countries have a high economic
reliance on each other, they will also range
more often than they trend. If you’re a
beginner, it’s better to start with trending
markets and then proceeding to trade ranges
once you’ve become more experienced.
On the other hand, you’ll want the
currencies to have a high interest rate
differential if you’re a carry trader. I’ll show
you a couple of examples.
Fig2.12.1
Source: MetaTrader 4, ©2000-2020 MetaQuotes Ltd.
Fig2.12.2
Source: MetaTrader 4, ©2000-2020 MetaQuotes Ltd.
Fig2.12.3
Source: MetaTrader 4, ©2000-2020 MetaQuotes Ltd.
Fig2.12.4
Source: MetaTrader 4, ©2000-2020 MetaQuotes Ltd.
CHAPTER 13:
TECHNICAL
INDICATORS
Introduction
If you haven’t read the previous chapters and
skipped all the way here, you can put down
this book. Go and do something else. Give
this book to somebody who deserves it more.
Do you want to be the typical retail trader
who loses money and goes around in circles
finding the perfect strategy and indicator? I
bet you don’t, especially if you’re reading
this book. If you’ve studied the previous
chapters carefully, let’s proceed.
When you’re using technical analysis,
you’re using it as a tool to analyze the current
market sentiment using price action and
indicators.
In order to use it properly, you will
need to understand the functions and true
purpose of technical analysis.
The most important function is helping
you to spot better entry and exit points. After
you’ve determined the overall long-term
trend from your fundamental and sentiment,
you will need to use technical analysis to spot
an appropriate entry point.
You don’t want to enter at the wrong
time and then get stopped out only to have
the trade eventually rally in the direction you
want.
Technical analysis can also help you
spot reversal points, measure the strength of
the trend, help identify the start of a new
trend, and be used as a confirmation for price
action.
Types Of Indicators
Leading indicators tell you where the price
might go next. You can’t use it to predict
price movements because nobody can predict
the markets. It only serves as a tool to
increase the probability of getting into a
winning trade.
Lagging indicators, on the other hand,
lags behind price. It is almost like buying a
watch that calculates the time for you using a
special equation, giving you a derived value
of the current time. This sounds stupid, but it
is essentially how most lagging indicators are
calculated.
The price data is taken and then
calculated using an equation in order to plot
the line graph that you see under your charts.
You shouldn’t be using this as a tool
alone to decide your entries. You will lose a
lot of money doing that.
Moving Averages
As the name suggests, moving averages are
lines that are plotted by taking the prior
closing prices over a defined time period in
order to smooth out price action.
One of the main functions of moving
averages is that it will help you determine the
trend of the markets. If you want to determine
whether or not you’re buying in a bullish
market, you can use them as a gauge for the
overall trend.
A crossover of 2 moving averages can
signal a potential reversal in the overall trend.
It can also just be a temporary retracement,
which means that it is a false crossover
signal.
Since this is a lagging indicator, I
wouldn’t want to put too much emphasis on a
magic number that you should use because it
is not that important in the overall grand
scheme of things.
As you know by now, I’m not a big
believer in the holy grail indicator and best
indicator number. It just doesn’t exist. You
just have to use what makes sense and go
with it. Focus on the more important things:
risk management, fundamental analysis, and
trading psychology.
However, since most retail traders like
structures and rules, I’ll give you some
moving averages that you can work with after
this.
First thing first, you need to understand
the different types of moving averages. There
are more types that I can talk about, but I’m
just going to make things simple and talk
about the 2 most common types of moving
averages:
☐ Simple moving average (SMA)
☐ Exponential moving average (EMA)
There’s no saying as to which one is
better. It depends on your preference and
what works for you. The most important
thing is to use an indicator that you’re
comfortable with. Let’s compare the 2:
SMA
Consistent
EMA
Drawing may differ
calculation
from one platform to
the next
More suitable for
longer term traders
More suitable for
short term traders
Slow response to
changes in price
Relatively faster
response
Less false signals
More false signals
As you can see, there are pros and cons
for both types of moving averages. EMA
might allow you to enter into a trade early,
but it will also potentially give you more false
signals.
To put it simply, EMA is more exciting
and fast-paced, whereas SMA is relatively
slower and calm. I use both. EMA when I
trade breakouts and SMA to determine the
overall trend.
For the purpose of this book, let’s
cover SMA and how you can use it to
determine trends. These are the moving
averages that I will cover:
☐ 50SMA
☐ 100SMA
☐ 200SMA
50SMA
You’ll realize that price tends to test this
moving average quite often. This is a short to
intermediate-term moving average.
If the price is too far off from the
moving average, you have to be careful about
getting into a trade because it will act like a
rubber band and snap. The price will
eventually return to the moving average.
Trends don’t go up and down in a
straight line. It will have to go through
retracements, and it is these retracements that
might potentially stop you out, especially if
you’re a short-term trader.
If you want to obtain a higher
probability for your trade, wait for the price
to touch 50sma and then make an entry with
candlestick confirmation. Comparing this to
the other moving averages, the price will test
50sma more often as compared to the 100sma
and 200sma. Of course, it doesn’t mean that
you should enter immediately when it tests
50sma. You’ll need a lot more confirmations
than that because the price will also often
cross below or above the 50sma without
testing it. As you can see from the chart (Fig
2.13.1), 50sma acts as dynamic support &
resistance at certain points of the trend.
Fig2.13.1
Source: MetaTrader 4, ©2000-2020 MetaQuotes Ltd.
100SMA
Fig2.13.2
Source: MetaTrader 4, ©2000-2020 MetaQuotes Ltd.
This is an intermediate to long-term
moving average. If the price is above the
moving average and the 100sma is sloping
upwards (Fig 2.13.2), you can confirm that
you’re trading on a bullish trend.
Fig2.13.3
Source: MetaTrader 4, ©2000-2020 MetaQuotes Ltd.
On the other hand, if the price is
currently below 100SMA and the moving
average is sloping downwards (Fig 2.13.3),
you’re trading on a bearish trend.
You might observe that the price
doesn’t test 100sma as often as the 50sma.
This is typical for how moving averages
work. The larger the number of the period
used, the less often will the price be testing it.
Let’s now combine the two moving
averages together. For a bullish trend, you
would also want the 50sma to be above the
100sma. Both moving averages should be
sloping upwards (Fig 2.13.4). For a bearish
trend, you want the 50sma to be below the
100sma (Fig 2.13.5). Of course, along the
trend you will have false crossovers. So, it
pays to check the higher time frames in order
to double-check the position of the trend in
the big picture.
Fig2.13.4
Source: MetaTrader 4, ©2000-2020 MetaQuotes Ltd.
Fig2.13.5
Source: MetaTrader 4, ©2000-2020 MetaQuotes Ltd.
200SMA
Fig2.13.6
Source: MetaTrader 4, ©2000-2020 MetaQuotes Ltd.
You don’t often see the price touching
the 200sma, but it is still a useful trend
indicator. If you’re looking for a buy trade,
you want the price to be above it (Fig 2.13.6).
The line can be flat or slightly sloping
upwards.
Fig2.13.7
Source: MetaTrader 4, ©2000-2020 MetaQuotes Ltd.
On the other hand, you want 200sma to
be sloping downwards and for the price to be
below it when you’re looking for a sell trade
(Fig 2.13.7).
The good thing about this moving
average is that it is also widely used in the
stock market and other popular markets. It is
also not as volatile as compared to the other
moving averages. However, it responds
relatively slower to the changes in price
action.
In an ideal condition, you would want
both 50sma and 100sma to be above 200sma
for a bullish trend. The moving averages
should also be sloping upwards, which
indicates a strong bullish trend (Fig 2.13.8).
Fig2.13.8
Source: MetaTrader 4, ©2000-2020 MetaQuotes Ltd.
For a bearish trend, you want the
50sma to be below the 100sma and 100 sma
to be below the 200sma. The moving
averages should also be sloping downwards.
Of course, in the real markets, things are not
always that straightforward. Sometimes
you’ll come across false crossovers (Fig
2.13.9). Be sure to check the other time
frames to look at the bigger picture. This
helps you differentiate the false crossovers
from the real crossovers.
Fig2.13.9
Source: MetaTrader 4, ©2000-2020 MetaQuotes Ltd.
Commodity Channel Index
(CCI)
A creation of Donald R. Lambert, this is a
lagging momentum indicator and oscillator
that was initially developed to track
commodities. It can also be used in the
futures and stock market.
It can be used as a confirmation
indicator for your price action trading
strategy. When CCI goes above 100, it is in
the overbought zone. When it goes below
-100, it is in the oversold zone.
As a general guideline, I want to share
with you 2 ways in which you can use this
indicator:
☐ Overbought/oversold entries
☐ Bullish/bearish divergence
Never use this indicator as a standalone
trading signal. The main entry signals should
be obtained from what we’ve discussed
earlier, which is your overall fundamental
analysis bias and sentiment bias. Technical
indicators are just additional filtering tools for
you to time your trades better. It should not
be the only tool used for entry; you will lose a
lot of money that way. It is not indicators that
drive the market. Moreover, this is a lagging
indicator. Use it with caution.
If you’re to use it as a confirmation, use it
the right way. Don’t make a buy trade
whenever CCI goes to oversold, and don’t
make a sell trade whenever it goes to
overbought. It just doesn’t work that way.
As you can see from the chart (Fig
2.13.10), if you’ve bought when CCI goes to
oversold, you’ll lose money as the price
continues to go down.
Partly it’s also because you’re buying on a
downtrend, which decreases your probability
of making money. To be safe, look for
overbought signals on a downtrend and only
look for oversold signals on an uptrend.
Fig2.13.10
.
Source: MetaTrader 4, ©2000-2020 MetaQuotes Ltd
Let’s look at the next chart (Fig
2.13.11). You can see that the probability of
the price going up is higher if you apply it on
an uptrend as compared to a downtrend. As
shown by the vertical lines I’ve drawn, the
price rallies after CCI goes from oversold
back to the transition zone.
Fig2.13.11
Source: MetaTrader 4, ©2000-2020 MetaQuotes Ltd.
Bear in mind that no indicator is
perfect, and this doesn’t happen all the time.
We don’t strive to predict the market. We
trade in terms of probabilities.
Also, you do realize that momentum
indicators don’t tell you how far the next
move will be. It can go up by 10 pips, 20
pips, 50 pips, or 100 pips, depending on the
market conditions and currency pair.
So how do you determine how far the
next move will go? You apply the rest of
your analysis: Fundamental analysis,
sentiment analysis and price action
confirmation.
You can also use divergences to spot
potential points of reversals. When price is
producing lower lows and lower highs while
CCI is producing higher lows (Fig 2.13.12), it
is a potential signal that a reversal is about to
come soon and that the trend is going to end.
This is called a positive divergence.
Fig2.13.12
Source: MetaTrader 4, ©2000-2020 MetaQuotes Ltd.
Similarly, when price is producing
higher highs and higher lows on an uptrend
while CCI is producing lower highs (Fig
2.13.13), it is a signal that the uptrend is
going to end. This is called a negative
divergence.
Fig2.13.13
Source: MetaTrader 4, ©2000-2020 MetaQuotes Ltd.
Relative Strength Index (RSI)
Developed by J. Welles Wilder, this is
another lagging momentum indicator that you
can consider using as a confirmation for your
leading indicators.
Source: MetaTrader 4, ©2000-2020 MetaQuotes Ltd.
When RSI goes above 70, it will be in
the overbought zone. When it goes below 30,
it is considered oversold.
This doesn’t mean that you should sell
whenever RSI goes above 70 and buy when it
goes below 30. It has to go from the oversold
or overbought zone back to the transition
zone. When it is overbought, price can
continue to rally. Similarly, when it goes to
oversold, the price can continue to plunge.
Fig2.13.14
Source: MetaTrader 4, ©2000-2020 MetaQuotes Ltd.
As you can see from the chart above
(Fig 2.13.14), you have a strong uptrend, and
it is quite common for the price to go to the
overbought zone. The vertical line shows RSI
going to overbought zone, but the price
continued to rally. Sometimes overbought
signals just mean that the buying strength is
getting stronger.
This is why it is so dangerous to use
this indicator alone as a trading signal. If
anything, it should only be used as a
confirmation of your price action tools and
fundamental analysis bias.
As a general guideline, whenever
you’re trading on an uptrend, look for
oversold signals. For a downtrend, only look
for overbought signals. These will act as a
confirmation for your entry strategy.
On the other hand, if you have an open
buy trade in an uptrend and the price goes up
to a strong resistance area while RSI is giving
you an overbought signal at the same time,
this can be a potential sign to take your
profits.
The default setting is a period of 14.
This will give you less false signals as
compared to if you’re to use a period of 9. If
you want more entry signals, you can opt for
a period of 9, but it will also present more
false signals. There is a trade-off in anything.
As you can see from the diagram (Fig
2.13.15), period 14 only gave you one
overbought signal, while period 9 gave you
more than 5 signals, both overbought and
oversold, within the same period.
Fig2.13.15
Source: MetaTrader 4, ©2000-2020 MetaQuotes Ltd.
Comparing Oscillators
The difference between RSI and CCI is that
the former provides you with less trading
signals than the latter. This means that RSI
also provides the benefit of less frequent false
signals. The more entry signals an indicator
gives you, the more likely you’ll trade into a
false signal.
If you compare CCI and RSI below
(fig 2.13.16), you can see that CCI gave
several oversold signals, whereas RSI didn’t
provide any. We’re using RSI of period 9,
which is supposed to provide more signals
than RSI period 14. Even with a period 9, it
doesn’t produce as many signals as compared
to CCI.
Fig2.13.16
Source: MetaTrader 4, ©2000-2020 MetaQuotes Ltd.
This means that if you’re a
conservative trader who prefers a less volatile
indicator, RSI is better suited for you. If your
risk appetite is higher, you can opt for CCI.
CHAPTER 14:
SUPPORT &
RESISTANCE
Horizontal Support And
Resistance
If you’re a complete beginner, one of the
most important skills you need to learn is the
art of spotting strong support and resistance
zones or areas.
Fig2.14.1
Source: MetaTrader 4, ©2000-2020 MetaQuotes Ltd.
Support is an area where demand is
strong enough to prevent the price from
further decreasing. As a result, the price
bounces up that area again and again until it
is breached.
Support levels are formed by traders
looking for a bargain price. When the price
goes up and comes down to the same level
again, traders are presented with another
chance to buy again at that level because they
might have missed it the first time.
Traders who have bought before this
are also encouraged to add to their positions
when the price retraces to the support level
again. It is also an area where short sellers
can potentially take their profits. This leads to
a support level being formed.
Buyers will take control as long as the
support continues to work. When price
breaches the support level, sellers will start to
come in as some of the buyers get stopped
out.
On the other hand, resistance is an
area where supply is strong enough to prevent
price from further increasing. As a result,
price bounces down from that area until it is
breached.
Resistance levels are formed by traders
looking to sell at a higher price. When the
price goes up to the resistance level, short
sellers are presented with another chance to
sell again, especially for those who missed
out on that level previously. Similarly, this
also encourages the short sellers with existing
positions to add to their positions by selling at
a higher price. For buyers, resistance levels
can act as a potential area for taking profits.
When the resistance level is breached,
sellers will no longer be in control. Buyers
will start to come in while some of the short
sellers get stopped out.
By now, you probably can think of
ways in which you can use support &
resistance levels. Here are some functions to
take note of:
☐ Used for entry at a better price
☐ Take profit and exit levels
☐ Used for breakout trading
☐ Used as a filter mechanism to prevent
entry into bad trades
Take note that you can’t just rely on this
alone to make a trade. You’ve got to use this
in addition to your current trading strategy.
Let’s say you’re using price action and a
momentum indicator as your confirmation
factor; you can add support & resistance to
increase the probability of your trades.
Bear in mind that support levels can
become resistance and vice versa (Fig
2.14.2). This is what we call a role reversal.
Fig2.14.2
Source: MetaTrader 4, ©2000-2020 MetaQuotes Ltd.
How To Draw Support &
Resistance
For support, you will need to draw at the
lowest price points of that particular time
frame (Fig 2.14.3).
Fig2.14.3
Source: MetaTrader 4, ©2000-2020 MetaQuotes Ltd.
For resistance, you will need to draw
the highest price points of that particular time
frame (Fig 2.14.4).
Fig2.14.4
.
Source: MetaTrader 4, ©2000-2020 MetaQuotes Ltd
Take note that support and resistance
should be seen as an area or zone rather than
a fixed level. It should be seen as a range
rather than a straight horizontal line.
Factors Determining Strength
Not all support and resistance levels are equal
because they possess different levels of
strength. There are no guarantees and hard
rules in determining this, but there are some
general guidelines that you can follow:
☐ Is it formed at an area of confluence?
☐ Is the area near or at a round number?
☐ The number of touch points
☐ How recent were the swing highs and
lows?
If you have a support or resistance area in
conjunction with a moving average and round
number, this acts as a triple layer of support
or resistance where the price is more likely to
bounce off.
As you might or might not already know,
price tends to form support and resistance at
round numbers on the chart, as seen in the
chart below. Support is formed at 1.17000 of
EUR/USD.
This is because we are programmed
naturally to think in terms of round numbers.
As a recap, moving averages serve as a
dynamic support and resistance. Same for
swing highs and lows, especially when they
are only formed recently (Fig 2.14.5).
Fig2.14.5
Source: MetaTrader 4, ©2000-2020 MetaQuotes Ltd.
Similarly, you can see that resistance is
being formed in EUR/USD at 1.09900 in the
next chart (Fig 2.14.6).
Fig2.14.6
Source: MetaTrader 4, ©2000-2020 MetaQuotes Ltd.
Although an all-time low that was
formed 10 years ago might still serve as a
support, it won’t be as significant compared
to if it were being formed 1 month ago.
Traders tend to look at the recent price action
levels to make their trading decisions rather
than many years back. The levels that traders
pay attention to are the ones that you should
take note of.
Introduction To Trendlines
Trendlines look like angled support and
resistance lines. They work in pretty much
the same way as horizontal support and
resistance lines.
As a start, you should learn how to
draw horizontal lines first before you learn
trendlines. Trendlines are a little bit trickier
as compared to their horizontal counterparts.
To increase the probability of your trades,
you can apply both.
Trendlines are most suited when
applied in trending markets. Horizontal
support & resistance, on the other hand, can
be used in both a ranging market and a
trending market, depending on your trading
strategy.
If you learn how to read chart patterns,
trendlines can also be drawn to identify them.
You can watch my Youtube channel (Karen
Foo) for free chart pattern courses.
How To Draw Trendlines
For an uptrend, you would want to draw
below the swing lows (Fig 2.14.7).
Fig2.14.7
.
Source: MetaTrader 4, ©2000-2020 MetaQuotes Ltd
For a downtrend, you should draw the
trendlines above the swing highs (Fig 2.14.8).
Fig2.14.8
Source: MetaTrader 4, ©2000-2020 MetaQuotes Ltd.
You need to learn how to draw high
quality trend lines.
Many traders make the mistake by drawing
too many trendlines and cluttering their charts
with irrelevant minor trendlines.
Before we get into the concept of high
probability trendlines, you need to understand
the different types of trends.
A major trend lasts from a few
months to a couple of years. This type of
trend is suitable for investors, trend followers,
and macro long term traders. An
intermediate trend lasts from a few weeks
to a couple of months, while minor trends
last from a few days to a few weeks.
Fig2.14.9 : An intermediate trend in a major trend
Source: MetaTrader 4, ©2000-2020 MetaQuotes Ltd.
Trendlines can be applied to all these
trends, with trendlines drawn on major trends
giving the highest probability. The longer the
duration of the trendline, the stronger it will
be. The breakout from that trendline will also
last longer as compared to a breakout from a
minor trend, provided that all the other
factors remain the same.
With that said, if you’re a swing trader,
you can still apply trendlines and make it
work for you.
The existence of trends shows us that
markets are not entirely random. Even though
finance textbooks would point out The
Random Walk Theory, which states that
markets are completely random and that the
average investor will not be able to predict
the next move and that past price behavior
does not predict future price movements.
When you learn how to spot a trend,
you’ll be able to increase the probability of
your trades. While experienced traders may
make good money by trading against the
trend, beginner traders are better off starting
with trading along with the trend. A lot of my
trading profits to date are gotten from picking
tops and bottoms. But this skill did not come
overnight. I’ve had to learn from a lot of my
mistakes and start with trading along with the
trend just like anybody else.
Let’s get back to our main topic. Why
should you learn how to spot trends? It
increases the probability of getting into a
winning trade and also helps reduce your
potential losses. If you’ve studied Newton’s
First Law, it says that “An object in motion
tends to stay in motion unless acted upon by
an unbalanced force.” This applies to a trend
as well. A trend in motion tends to continue
in the same direction unless a major breakout
against the trendline occurs.
This means that you can use trendlines
to get out of a trade. If you’re riding an
uptrend and all of a sudden price breaks
below the trendline, it can be a potential
signal for you to take your profits, provided
that it is not a false breakout.
Trendlines also allow you to enter into
a retracement. To increase your probability,
you would want to use trendlines with other
technical analysis tools to spot areas of
confluence.
Factors That Increase
Strength
As I’ve mentioned previously, the higher
time frames trendlines will be stronger as
compared to the ones found in smaller time
frames. Trendlines drawn onto major trends
are relatively stronger than trendlines drawn
on minor trends.
The angle also matters. The steeper the
angle of the trendline, the weaker it will be.
Often, you’ll find that breakouts from these
trendlines will tend to become false
breakouts. Anything more than 45 degrees
from the horizontal is too steep, in my
opinion.
As you can see from the chart (Fig
2.14.10), steep trendlines are also often times
short term trendlines (minor trendlines),
which is a waste of time if you draw them. It
makes your chart cluttered and confusing. It’s
best to avoid drawing them.
Fig2.14.10
Source: MetaTrader 4, ©2000-2020 MetaQuotes Ltd.
A valid trendline has to have at least 3
touchpoints. Often, the more touchpoints
there are, the stronger it is. However, this
concept won’t be valid anymore if there are
too many touchpoints. This shows that the
trend has been going on for quite a long time
now and the momentum is about to be
exhausted. To put it simply, you don’t want
to have too many touchpoints but also don’t
want to see too little touchpoints.
To be safe, if you spot a high
probability trade on the 3rd touchpoint, it is a
good chance to make an entry provided that
there is a reasonable risk to reward ratio on
that trade.
Entry at confluence levels will also
increase the probability of your trades. As
you can see from the chart (Fig 2.14.11), the
third touch shows a confluence with the 100
SMA, which can serve as a potential entry
point.
Fig2.14.11
Source: MetaTrader 4, ©2000-2020 MetaQuotes Ltd.
CHAPTER 15:
CANDLESTICK
TRADING
Introduction To Candlesticks
Candlesticks can give you information as to
how the price is going to behave next. It
signifies traders’ sentiment in the short term.
You can also use it to determine the
strength of the trend and hence the duration
of continuation. When you see a continuation
candlestick pattern, this is a signal that the
price will continue in the same direction.
Candlestick patterns can also be used
to point out reversal points. Reversal
candlestick patterns serve that purpose.
Reversal candlestick patterns can also be used
to spot areas where the price may retrace,
which will allow you to enter at a better price.
If you use it the right way, it can help
you spot good entry points as well as exit
points.
Bear in mind that there are no fixed
rules. Sometimes continuation patterns can
become reversal candlestick patterns,
especially if they are found at the end of the
trend or after a retracement.
It also depends on the time frame that
you’re looking at. If you’re looking at the
overall trend, the reversal pattern can serve as
a continuation pattern. In the short term, it
might be a reversal pattern for a minor trend.
At the same time, it can be considered a
continuation of the overall major trend.
Fig2.15.1: Hammer pattern caused a reversal in the temporary retracement,
but it is a continuation pattern of the major bullish trend
Source: MetaTrader 4, ©2000-2020 MetaQuotes Ltd.
Candlestick signals also don’t tell you
how far the continuation or reversal will take
place. Some candlestick formations will lead
to a price move that lasts for months and
weeks. On the other hand, some candlestick
formations will cause the price to move in the
desired direction for only a few hours. This is
why you should not be using it as a
standalone trading strategy.
There are also a lot of candlestick
patterns that we can talk about. I’m just going
to point out the ones that I look at and use
more often.
Classifications are only general
guidelines. They are flexible and depend on
the context. No hard and fast rules.
Continuation
Reversal Candlestick
Candlestick Patterns
Patterns
Bullish harami
Doji
Bullish engulfing
Hammer
3 white soldiers
Morning/evening star
3 black crows
Hanging man
Marubozu
Triple doji
Bearish harami
Inverted hammer
Bearish engulfing
Shooting star
Aside from continuation and reversal
patterns, candlesticks can also be divided into
single, double and triple candlestick patterns.
Doji
The Doji symbol represents indecision among
buyers and sellers. You have an upper wick
and lower wick that is of equal or almost
equal length. While some traders would use
this as a sign of reversal, it is not confirmed
until the next candle gives the signal. This
pattern by itself is a neutral pattern. When the
next candle is a bullish signal, buyers have
come back in control. On the other hand,
when the next candle is a bearish candle,
sellers will be back in control.
As you can see from the chart (Fig
2.15.2), a Doji formation caused the end of a
bearish trend since it is followed by a bullish
candlestick after it. The makes it a reversal
pattern in this context.
Fig2.15.2
Source: MetaTrader 4, ©2000-2020 MetaQuotes Ltd.
On the other hand, a Doji formation in
a bullish trend didn’t lead to the end of the
bullish trend. A bullish candle that is formed
next led to the continuation of the trend (Fig
2.15.3).
Fig2.15.3
Source: MetaTrader 4, ©2000-2020 MetaQuotes Ltd.
Gravestone Doji
This is generally a bearish candlestick signal.
You have a long upper shadow and no lower
wick. It’s fine if it has a short lower wick.
During the session, buyers pushed the price
up only to be replaced by sellers at the end of
the session. The price closes at the bottom at
the end of the trading session, indicating that
supply is more than demand.
As shown in the chart (Fig 2.15.4), the
formation of the pattern led to the eventual
reversal of the trend. The price action also
consistently shows candlesticks forming
upper wicks before and after the pattern,
which signals the presence of sellers coming
in.
Fig2.15.4
Source: MetaTrader 4, ©2000-2020 MetaQuotes Ltd.
Dragonfly Doji
The dragonfly Doji is characterized by a long
lower wick with no upper wick. During the
trading session, sellers came in and pushed
the price down. At the end of the session,
buyers came back in and pushed the price
back up, making it a bullish signal.
Fig2.15.5
Source: MetaTrader 4, ©2000-2020 MetaQuotes Ltd.
Hammer
The hammer is characterized by a long lower
wick with no upper wick. Sellers came in
during the session and pushed the price all the
way to the candle low. Buyers came in at the
end of the trading session, and the price
closed at the top end of the candle.
The candle body can be either bullish
or bearish. The color doesn’t matter much for
this pattern. What matters more is the length
of the wick. The hammer pattern is found at
the end of the downtrend and hence
represents a bullish signal (Fig 2.15.6).
Fig2.15.6
Source: MetaTrader 4, ©2000-2020 MetaQuotes Ltd.
It is also useful if found at the end of a
retracement during a bullish trend (Fig
2.15.7). This allows traders who trade
retracements to enter at a better price.
Fig2.15.7: Hammer being formed at the end of a retracement in a bullish
trend
Source: MetaTrader 4, ©2000-2020 MetaQuotes Ltd.
Shooting Star
The shooting star is characterized by a long
upper wick, small lower body, and little to no
lower wick. The ideal pattern won’t have a
lower wick. Having a short lower wick is
fine, but it wouldn’t be as ideal. This pattern
is a bearish signal.
Buyers initially came in and pushed the
price all the way up to the candle high.
Sellers eventually came in and pushed the
price down. At the end of the trading session,
sellers won the tug of war. If found at the end
of a bullish trend, it will potentially mean that
the price will go on a bearish move
(Fig2.15.8).
Fig2.15.8
Source: MetaTrader 4, ©2000-2020 MetaQuotes Ltd.
Inverted Hammer
The inverted hammer is characterized by a
long upper wick with a small body at the
bottom, similar to that of a shooting star.
There are no lower wicks or a short lower
wick. Of course, the ideal pattern doesn’t
have a lower wick. The color of the body is
irrelevant. Wick length is more important.
When found at the end of a downtrend
(Fig 2.15.9), it represents a bullish signal.
The fact that buyers came in during the
session to push the price up shows that buyers
were present, to begin with.
Fig2.15.9
Source: MetaTrader 4, ©2000-2020 MetaQuotes Ltd.
In terms of buyer strength, the hammer
would be a stronger bullish signal as
compared to the inverted hammer, provided
that everything remains the same.
If found at the end of a retracement of
a bullish trend (Fig 2.15.10), it can be a signal
that the trend is going to continue.
Fig2.15.10
Source: MetaTrader 4, ©2000-2020 MetaQuotes Ltd.
Hanging Man
This pattern looks similar to the hammer
pattern. However, the only difference is that
this is useful if found at the end of an uptrend
because it represents a bearish signal. Even
though the psychology of this candlestick
represents more of a bullish bias, the fact that
sellers produced the lower wick, to begin
with shows that they are present during the
trading session.
So, if you see this pattern at the end of
an uptrend (Fig 2.15.11), it could mean that
price can potentially go on a bearish move. It
can also represent the start of a minor
downward retracement in a bullish trend. If
you compare this with the shooting star, this
is a weaker bearish signal due to the
psychology of the pattern.
Fig2.15.11
Source: MetaTrader 4, ©2000-2020 MetaQuotes Ltd.
Bearish trends also have retracements.
The formation of a hanging man at the end of
the retracement can be a potential signal that
the price will continue on its bearish move
(Fig 2.15.12). However, if you’re to compare
hanging man with the shooting star pattern,
the latter is definitely a stronger bearish
signal, provided that everything remains the
same.
Fig2.15.12
Source: MetaTrader 4, ©2000-2020 MetaQuotes Ltd.
Marubozu
Marubozu pattern consists of a large body
and small wicks. The ideal pattern is one that
has no wicks. They also have to be 2-3 times
the size of the bodies of the previous
candlesticks. It represents a strong bullish
signal (green body) and can also represent a
strong bearish signal (red body).
Like I said in the previous sections, a
pattern can be either a continuation or
reversal pattern. If a bullish marubozu is
found at the end of an uptrend (Fig 2.15.13),
it can signal a potential reversal. The bullish
trend might come to an end because it shows
that the bullish momentum has been
exhausted.
Fig2.15.13
Source: MetaTrader 4, ©2000-2020 MetaQuotes Ltd.
On the other hand, if it is found in the
middle of a trend (Fig 2.15.14 & 2.15.15), it
can mean that the trend is going to continue
in the same direction as the prevailing trend.
Fig2.15.14
Source: MetaTrader 4, ©2000-2020 MetaQuotes Ltd.
Fig2.15.15
Source: MetaTrader 4, ©2000-2020 MetaQuotes Ltd.
Spinning Top
A spinning top in itself represents indecision.
It is a neutral pattern by itself. During the
trading session, buyers and sellers came in
and pushed the price all the way to the
candlestick high and down to the candlestick
low. At the end of the trading session, the
price closed in the middle. This makes the
spinning top a neutral pattern rather than a
sign that a reversal will take place. A lot of
traders have the misconception that this
pattern represents a reversal when it’s not.
It depends on the context, just like any
other candlestick pattern. For the spinning
top, you’ll need to seek confirmation from the
next candlestick. If the next candlestick is a
bullish one, it’s a sign that the price will rally
(Fig 2.15.16).
Fig2.15.16
Source: MetaTrader 4, ©2000-2020 MetaQuotes Ltd.
If it is a bearish candlestick instead, it
is a sign that sellers have started to come in,
and the price will eventually go down (Fig
2.15.17). When it comes to context, it refers
to more than that. I’ll discuss more in the next
few sections.
Fig2.15.17
Source: MetaTrader 4, ©2000-2020 MetaQuotes Ltd.
Harami Patterns
Harami patterns can be a continuation pattern
and reversal pattern, depending on the
location in which it is formed. The wicks
aren’t as significant as compared to the
candlestick body color. Body size also
matters.
It can signal an end of a long term
trend or the continuation of an ongoing trend.
Trends go through temporary retracements.
Harami patterns can also signal the beginning
or end of a retracement. It is effective if used
in a trending market, and these are pretty
commonly seen patterns.
The bullish harami consists of a
bearish candlestick followed by a relatively
smaller bullish candlestick. This is a bullish
signal.
Fig2.15.18
Source: MetaTrader 4, ©2000-2020 MetaQuotes Ltd
.
In the previous chart (Fig 2.15.18), we
observe the bullish harami being formed at
the end of a retracement of a bullish trend.
This is then proceeded by a rally in price.
The bearish harami consists of a bullish
candlestick followed by a relatively smaller
bearish candlestick. This makes it a bearish
signal (Fig 2.15.19).
Fig2.15.19
Source: MetaTrader 4, ©2000-2020 MetaQuotes Ltd.
Engulfing Patterns
Engulfing patterns are also a pretty common
occurrence in the financial markets. They are
known as engulfing patterns because the
second candlestick engulfs the first
candlestick entirely. Just like the harami
patterns, it can be a continuation or reversal
pattern depending on the context. The length
of the wicks isn’t as significant as compared
to the candlestick body color and size of the
body.
A bullish engulfing pattern consists of
a small bearish candlestick followed by a
relatively bigger bullish candlestick. This is a
bullish signal.
Fig2.15.20
Source: MetaTrader 4, ©2000-2020 MetaQuotes Ltd.
As seen from the chart above (Fig
2.15.20), the pattern is being formed in the
middle of the trend, which makes it a
continuation pattern. If it is formed at the end
of a downtrend, it can serve as a signal that
the downtrend is about to end or that a
retracement upwards will come soon.
A bearish engulfing pattern consists of a
small bullish candlestick followed by a
relatively larger bearish candlestick. This is a
bearish signal (Fig 2.15.21).
Fig2.15.21
Source: MetaTrader 4, ©2000-2020 MetaQuotes Ltd.
Morning Star
Morning star pattern consists of a large
bearish candle followed by a smaller second
candle, which can be either bearish or bullish.
This is followed by a bullish candlestick that
closes above the first candle's halfway point.
This pattern represents a bullish signal. If
found at the end of a downtrend, it can
potentially mean that the downtrend has
ended. This makes it a reversal pattern (Fig
2.15.22).
Fig2.15.22
Source: MetaTrader 4, ©2000-2020 MetaQuotes Ltd.
If it is found in the middle of an
uptrend, it signals that price will continue to
rally, making it a continuation pattern (Fig
2.15.23).
Fig2.15.23
Source: MetaTrader 4, ©2000-2020 MetaQuotes Ltd.
Evening Star
The evening star pattern consists of a bullish
candlestick followed by a smaller candlestick,
which can be either bearish or bullish. This is
followed by a bearish candlestick being
formed. This is a bearish signal. If found at
the end of an uptrend (Fig 2.15.24), it can be
a potential signal that the uptrend has ended,
making it a reversal pattern.
Fig2.15.24
Source: MetaTrader 4, ©2000-2020 MetaQuotes Ltd.
If found in the middle of a downtrend,
it is a sign that the trend will continue,
making it a continuation pattern (Fig
2.15.25).
Fig2.15.25
Source: MetaTrader 4, ©2000-2020 MetaQuotes Ltd.
3 White Soldiers
3 or more consecutive bullish candlesticks
signal a continuation of a trend, especially if
found in the middle of it (Fig 2.15.26).
Fig2.15.26
Source: MetaTrader 4, ©2000-2020 MetaQuotes Ltd.
If this pattern is found at the end of a
bullish trend, it can potentially signal that the
uptrend is exhausted and coming to an end,
making it a reversal pattern. If you’re riding
the bearish trend, it is a potential sign that
you should take profits. If you’re picking tops
and bottoms, it can be a possible buy signal.
Fig2.15.27
Source: MetaTrader 4, ©2000-2020 MetaQuotes Ltd.
Since it is a triple candlestick pattern, it
represents a very strong bullish signal. Here’s
a reminder to you that triple candlestick
patterns tend to be stronger than the single
and double candlestick patterns. This pattern
is also relatively stronger than the 3 black
crows, which I’ll talk about later, provided
that the context remains the same.
Take note that the candlesticks should
not be too long because it might signal that
the momentum has become exhausted. Large
bullish candles tend to attract short sellers
who might want to scalp the temporary spike
in price. The size of the candlestick bodies
should not be too much of a difference.
3 Black Crows
3
or
more
consecutive
bearish
candlestick patterns in the middle of a trend
signals that the bearish trend is going to
continue (Fig 2.15.28). This is not a
commonly seen pattern. If found, it can signal
a strong bearish sentiment since this is a triple
candlestick pattern.
Fig2.15.28
Source: MetaTrader 4, ©2000-2020 MetaQuotes Ltd.
However, if it is found at the end of a
downtrend, it can mean that the downtrend
momentum is about to become exhausted,
and the trend is coming to an end (Fig
2.15.29). In this context, the larger the
candles are, the higher the likelihood that the
downtrend is going to end. Large candles
produce a free fall in price. An almost 90degree free fall in the price at the end of a
downtrend often is a leading indicator that the
trend will end. You’ll see this phenomenon
occur in the stock market as well.
Fig2.15.29
Source: MetaTrader 4, ©2000-2020 MetaQuotes Ltd.
Important Principles Of
Candlestick Trading
When it comes to spotting candlestick
signals, you need to follow the important
principles so that you can learn to
differentiate the bad signals from the good
ones.
Take note of the color and size of the body
For certain candlestick patterns, the color and
size would matter more than the length of
their wicks.
Take the bullish harami pattern as an
example. You have a large red candle with a
large body followed by a small green candle.
When you see this pattern, it tells you that the
price might rally next. The larger the
difference between the size of the bodies, the
stronger the signal will be.
The smaller the inside bar (small green
candle), the larger the change in buyer and
seller balance. This causes the signal to be
stronger.
If you compare the 2 patterns below,
which one do you think is stronger?
The answer is the left pattern. In the
second pattern, you have the green candle
closing at the halfway point of the red candle,
which is not that ideal.
Also, the color of this candlestick
pattern is important. You need the first candle
to be a bearish candle (red) and the second
candle to be a bullish candle (green). Now, I
don’t mean that you should use the same
color as me. What I’m referring to is the
bullish or bearish sentiment associated with
the candle.
For this pattern, the wicks are not as
significant as compared to other patterns.
From the chart below (Fig 2.15.30), a
bullish harami is formed on a retracement,
and the price proceeded to rally.
Fig2.15.30
Take note of the length of the shadows
For certain candlestick patterns, the length of
their wicks is more important. Take the
hammer pattern, for example; you have a
candle body on top of the candle. This shows
that buyers are in control at the end of the
trading session. You have a long lower wick.
The longer the lower wick, the stronger is the
signal.
If you compare the 2 patterns, the one
on the right will be a stronger signal,
provided that other factors remain the same.
The color of the body doesn’t matter as
much. However, it will have a slight edge if it
is bullish since the hammer signals that the
price will potentially rally.
Context determines the strength of the
signal
Not all candlesticks are created equal. There
are false signals, even though the candlestick
pattern may look ideal and perfect.
Let me give you an example. Let’s say
if you go shopping for a luxury belt. You
head to a small random shop across the street.
The belt sells for only $50.
You head to a high-end shopping mall
in the city, and the same belt (same brand,
design, and color) sells for $1500.
Which one do you think has a higher
probability of being a counterfeit product?
You already know the answer. Both belts
look the same, but because they are sold at
different locations, you can easily tell which
is fake and which is real. In other words,
context matters.
Similar to candlestick patterns, if the
perfect pattern appears at the wrong location
and wrong market conditions, it will just be
another fake signal.
Just look at the chart shown here, you
can easily name each candlestick pattern, but
you’ll realize that some of them worked out
and some of them didn’t. Those that didn’t
work out the way they should act are false
signals.
A bullish harami is formed in the chart (Fig
2.15.31), but the price still continues to fall
when it is supposed to rally. It is because the
context is wrong.
Fig2.15.31
Source: MetaTrader 4, ©2000-2020 MetaQuotes Ltd.
So what does context refer to? The first
is location. For a bullish candlestick pattern
to rally, it will have a higher probability of
working out if it is formed at a strong support
compared to if it were formed at a random
place. You’ll also want it to form at an
uptrend.
To put it simply, the following pointers
refer to the context:
☐
Is it formed on an uptrend or
downtrend?
☐ Is it formed in a ranging, trending,
or random market?
☐ Is it formed at key critical levels
(Areas of support & resistance) or a
random area?
☐ What comes before and after the
pattern?
☐ Is it formed at the start, middle, or
end of the trend?
☐ Time frame
If you’re looking for a buy trade, you’ll
want to apply bullish candlestick patterns on
an uptrend. If you’re looking for a short sell,
you’ll want to apply bearish candlestick
patterns on a downtrend.
For a Doji pattern, the pattern in itself is
neutral. It doesn’t guarantee a reversal.
Buyers and sellers are in a mode of
indecision. When a bullish candlestick is
formed after the Doji, then it is a sign that the
price might rally and that traders have made
their decision to be bullish. In other words,
what comes after the pattern is worth taking
note of.
As you can see from the chart (Fig
2.15.32), a dragonfly Doji is being formed at
the end of the downtrend, followed by a
bullish candlestick pattern. This is a
confirmation that the price is going to rally.
With that said, dragonfly doji is more of a
bullish pattern as compared to the normal
doji, which is neutral. However, it is still
essential to wait for an addition confirmation
since it is a single candlestick pattern. If
you’re an aggressive trader, you would
probably not want to wait for a confirmation.
Just understand that you’ll be exposed to
higher risk.
Fig2.15.32
Source: MetaTrader 4, ©2000-2020 MetaQuotes Ltd.
This is also the reason why triple
candlestick patterns are stronger than double
candlestick patterns. Double candlestick
patterns are stronger than single candlestick
patterns. Triple candlestick patterns have
more confirmation as compared to the
patterns with fewer candlesticks.
Hammer patterns work best if found at
the end of a downtrend (Fig 2.15.33) or the
end of a retracement. If it is found in the
middle of nowhere, it is less effective.
Fig2.15.33
Source: MetaTrader 4, ©2000-2020 MetaQuotes Ltd.
For any price action trading tool, it is
best applied to higher time frames. Minute
time frames are too noisy, in my opinion.
False signals are also common in smaller
time frames. The higher the time frames, the
stronger will be the candlestick signals.
As you can see from the example in the
next chart (Fig 2.15.34), the highlighted area
shows a confluence between one of the
moving averages and the trendline. Our
momentum indicator also gave us a signal for
entry since we would be looking for oversold
signals on an uptrend. Candlesticks also show
that buyers are in control with the long lower
wicks being formed.
Fig2.15.34
Source: MetaTrader 4, ©2000-2020 MetaQuotes Ltd
.
Double-check the bigger picture trend
on other time frames (Fig 2.15.35 & 2.15.36),
and it shows that we’re trading on an uptrend.
This makes it a good entry point, provided
that fundamentals and sentiment are in line
with our trades. Remember that we should
not enter solely based on technical analysis. It
is only a tool used for us to confirm our
fundamental and sentiment analysis. If your
fundamental bias is bearish and you see this
bullish trend on the chart, you’ll have to wait
until there is a good bearish trend or bearish
breakout for you to make an entry.
Fig2.15.35
Source: MetaTrader 4, ©2000-2020 MetaQuotes Ltd.
Fig2.15.36
Source: MetaTrader 4, ©2000-2020 MetaQuotes Ltd.
CHAPTER 16:
TRADING
PSYCHOLOGY
Trading Psychology Mistakes
Most Traders Make
Not able to cut losses
Most people don’t use a stop loss or set their
stop loss wider than their target price just
because of the fear of losing money.
If you’re scared of losing money, you
should put all your money in a savings
account. A trader is somebody who is willing
to take risks in an attempt to get returns that
they can’t get from their savings account.
If you’re afraid of losses, there are
several solutions that can help ease the
process.
The first thing you should do is to use
a strategy with a high win rate. However,
high win rate trading systems will typically
have a risk to reward ratio that is not too
impressive. Whenever you choose a system
with high win rate, you will have to
compromise on the R:R.
However, the good thing about a
system with good R:R is that you’ll only
require a low win rate to reach breakeven.
From the table shown above, if you
have a R:R of 1:1, you’ll only need a trading
system with a 50% win rate to reach
breakeven (not taking into account spread).
With a R:R of 1:5, you’ll only need a win rate
of about 17%.
If you want a trading system with a
good R:R, you will have to compromise on
the win rate. I’m fine with my trading system
having a 45% win rate because my R:R is
often at least 1:3.
If you hate being wrong, a high win
rate trading system will be more suitable for
you.
The best thing you can do for yourself is to
accept that losing streaks is part and parcel of
trading. Once you’ve accepted this reality,
it’s easier to accept losses.
As long as you’re confident that your trading
system produces a statistical edge in the long
term, your temporary losses are just
temporary business expenses that you’ll pay
for obtaining future profits.
You can’t control how to market reacts, but
you can control how you respond to it.
They need to have an open position all the
time
A lot of traders, especially day traders, feel
like they need to have an open trade every
day. Otherwise, they will not feel productive.
In trading, less is more. Often, I find
that the fewer trades I make, the more
profitable I am. Probably it’s because I only
focus on trading like a sniper than trading like
a machine gun.
Way too many traders trade like a
machine gun. They shoot all the time, but
aren’t hitting anything. They are just keeping
themselves busy so that they don’t get bored.
You need to understand that not all the
market conditions are right for your trading
system. If you’re using a trend trading
system, avoid trading when the markets are
ranging because your trading strategy just
doesn’t fit the current market environment.
You need to have a balance when it
comes to putting in the screen time. You
don’t want to be staring at the screen all the
time to the extent that it affects your mental
and physical health. Too much screen time
can also lead to analysis paralysis.
You’ll also need to have a balance
between taking too many trades and taking
too few trades. You don’t want to be opening
trades all the time to the point where you’re
taking a lot of mediocre probability trades.
You also don’t want to avoid trading
altogether just because you’re afraid of losing
money, even though you have a good trade
right in front of you.
In trading, too much of anything is
bad. Too much screen time, too many trades,
too many indicators, and too many screens!
These will not help you at all. It will only
confuse you and add to your stress. Strike a
balance.
Pursuing trading for excitement
I’ve seen traders who go into the markets just
to gamble for excitement. I mean, it’s their
money and their life. They can do whatever
they want as long as that sum of money is just
spare cash that they have lying around.
It’s like casual gamblers who go to the
casino once a year just to have fun. That is
fine. But if you’re here for the long term,
don’t expect trading to be exciting.
Profitable trading requires a lot of hard
work, discipline, and patience, which will
make a lot of people vomit when they hear
about this.
A lot of beginner traders pursue
scalping for excitement. You can scalp
provided that you’re experienced. If you’re
not, it’s better for you to start with the higher
time frames.
Higher time frames are boring to most
people, yet these are the time frames that
many profitable traders focus on.
Take for example, the daily time
frame, you only have 1 candle being formed
after 1 day. Doesn’t sound so exciting, right?
Compare this to the 5-minute time
frame. You have a new candle being formed
every 5 minutes and you can see the price
moving really quickly.
I think that it is a waste of time to trade
the smaller time frames. Maybe it is too
stressful for me, and it’s just not for me. I
prefer to put in less screen time and let that 1
trade run for days and weeks rather than a
couple of minutes. I prefer to let the markets
do the work instead of me doing the work.
Don’t be driven by excitement.
Instead, be driven by a passion for the
financial markets.
How To Control Emotions In
Trading
Fear
These are the most common types of fear in
trading:
☐ Fear of losing money
☐ Fear of missing out on a trade
☐ Fear of retracements
Fear of losing money
Let’s talk about those traders who are too
afraid to open a trade due to the fear of losing
money. They’ve been on a losing streak, and
now they’re too scared to open another trade
that they envision will be another losing trade
again.
These are the traders that have lost
confidence. When you’re not confident in
yourself, you probably didn’t backtest your
trading strategy enough. The feeling is like
taking an exam without studying for it.
You’ve only turned the pages and read a
couple of bullet points.
If you don’t backtest and forward test your
trading system thoroughly enough, you’ll
second guess yourself every time you open a
trade or experience a losing trade. You’ll start
to doubt whether trading is for you or
whether your trading system works. You’ll
also start adjusting your target price and stop
loss out of emotions once your trade has been
executed.
This can be stemmed from laziness. Most
people are too lazy to backtest because it
takes a lot of time. You can make things
easier by using a backtesting software if you
don’t want to do it manually. Even if the
trading system is provided to you by your
mentor, you’ll still need to test it out to build
confidence.
However, the downside of backtesting
with a software is that you’ll not learn much
from it. If you backtest manually, you’ll be
able to learn about your trading system in
depth and how it reacts to different market
conditions.
Fear of losing money will prompt a lot of
traders to adjust their stop loss. Let’s say
you’ve set your stop loss at 30 pips away
from the entry price. As the price move
towards your stop loss, you don’t want to get
stopped out. So you drag it further away so
that you won’t get stopped out. As a result,
you’re now risking more than your target
profits.
Some traders found it too tedious to keep
adjusting their stop loss that they completely
remove it. I’ve done that before.
You might get a high win rate by not
using a stop loss. You’ll be on a winning
streak, raking in high % ROI for a couple of
months. Then one faithful day, that one trade
that didn’t go your way will blow up your
whole account.
Don’t blame yourself for this because this
is human nature. Unfortunately, we are all
born this way just like how most of us are
born to love ice cream.
Let me give you 2 scenarios:
#1: You’ll have to pay me $500 now.
#2: You can flip a coin. Heads and you’ll
pay me nothing. Tails and you’ll have to pay
me $1000.
Which one would you pick?
My guess is that you’ll pick #2. When it
comes to losing money, most people will
naturally pick the riskier option rather than a
guaranteed smaller loss.
This translates into trading. People will let
their losses run and take profits fast the
moment the trade goes their way. The key is
to cut your losses fast. Take the advice of
Marie Kondo; if it doesn’t spark joy, remove
it. Does your trade spark joy?
Fear of missing out (FOMO) on a trade
I’ve missed out on a lot of good trades. I
was away from the computer or I was just at
the kitchen eating ramen. Only to come back
and see the trade move on to my target price.
That feeling sucks, and I know it. It is very
tempting to get back in and chase the trade.
Please don’t do that because I’ve gotten burnt
doing that.
Like I told you, I’ve made almost every
single trading mistake under the sun. You
name it, I’ve made it. But I learn from it and
pick myself up from failure. Most beginner
traders just quit after a few setbacks. That’s
the difference.
If you’ve missed out on a trade, just let it
go. It is easier said than done. If you think
about this, there are so many trading days in a
year, and you wanna focus on this one small
trade that you’ve just missed out on?
Put things into perspective and think big
picture. You’re not here to get rich quick.
Learn to think long term. When you’re
focusing on the trade that you’ve just missed
out on, you’re focusing too much on the
smaller picture. Don’t get distracted. You’ve
got to stay focused on your long-term vision.
Fear of retracement
You have an open trade, and it went up by
20 pips. You’re now on a $400 unrealized
profit. However, the price hasn’t reached
your target price yet, which is about 60 pips
away. What if the price makes a U-Turn, and
you’ll lose your $400 and potentially even
lose money? Let’s take profit now and
remove the stress and anxiety.
You check back a few hours later only to
realize that the price went up by more than 60
pips to your initial target price, and you’re
like, “I shouldn’t have closed my trade that
early!”
Sounds familiar to you? You know how I
roll. Been there and done that.
Don’t blame yourself for it because this is
how we’re born to behave. It is human nature.
Just like how we’re all programmed to take
the path of least resistance, we’re also
programmed to want instant results,
experience pleasure, and avoid pain.
If I give you another 2 scenarios:
#1: I’ll give you $1000 today.
#2: I’ll give you $1300 1 year from now
(Assuming that there is no inflation).
Which one would you pick?
My guess is that most people will pick
option #1. We are all programmed to want a
guaranteed smaller return today as compared
to a non-guaranteed higher return in the
future. We’re programmed to want to
experience pleasure now than delaying
gratification. This is also why most people
would rather binge-watch Netflix than work
on the project that they’ve been planning to
work on.
What if I disappear 1 year from now and
you couldn’t find me? What if I changed my
mind 1 year from now? All these
uncertainties about the future are just giving
you too much anxiety. Hence, most people
would prefer option #2.
This, of course, translates into trading.
You have a $400 unrealized profit hovering
in front of you. You can potentially make
more if you hold the trade, but the uncertainty
of what is going to happen is giving you too
much anxiety. Hence, you’ll pick the option
with a guaranteed smaller return.
How do you prevent this human trait from
interfering with your trades? Firstly, you need
to recognize it and then do the exact opposite
of what you’re tempted to do. When you feel
the urge to take profits early for no reason,
you need to go against it. The key is to do
what is not comfortable. This is where having
strong discipline comes into play.
Personally, I just avoid looking at the
charts. I’ll take a glimpse of it maybe twice a
day, but I won’t sit in front of the screen and
stare at it. Staring at the screen increases the
chances of you taking profits early because
you’ll start to use your creative imagination
and think about all the things that could go
wrong. Make life simple. Be confident and let
your trades run. If it doesn’t work out, at least
you’ll have something new to learn from.
Greed
Greed can also lead to a lot of outcomes
that are similar to other trading emotions.
You’ll open trades when you’re not supposed
to, take excessive risks, or even trade too
many currency pairs.
To prevent greed from taking over your
trading, you need to think in terms of % ROI
or pips rather than measuring your
performance in monetary terms.
Instead of saying that you’ve made $1000
on this trade, say that you’ve made 100 pips.
It’s like scoring points in a game.
Instead of saying that you’ve made $3000
this month, say that you’ve made 3% ROI
this month.
If you measure your performance in
monetary terms, you’ll get emotional because
you’ve your hard-earned money on the line.
The best way to prevent greed from taking
control over you is to craft a proper trading
plan and then follow it with strict discipline.
Ego & Complacency
I’ve got to admit. I’m human, and I’ve been
through this phase as well. When I got #1 in
the
Singapore
nationwide
trading
competition, I felt that there is nothing else
for me to strive for because all along, this was
my goal for many years.
When you’re complacent, you’ll stop
doing what got you there, to begin with.
You’ll stop consulting your mentors, you’ll
stop journaling, and you’ll also sometimes
break your trading plan because you would
feel that you’re somehow invincible.
Ego and complacency will lead many
traders to use excessive risk, take too many
trades, or not use a stop loss.
It’s one of the most dangerous
psychological barriers that can destroy your
account overnight. At one point, I stopped
reading books and just traded whichever way
I want, only to have Mr. Market slap me in
the face by making me lose more than half of
my account.
I learned the lesson the hard way. This
is why, after that incident, I told myself that
I’d keep learning every day and improve on
myself no matter how well my trading
account is doing.
In fact, as I’m writing this book today,
I just realized that I’ve spent over $1000 on
books and learning resources these 4 months.
I’ve been reading and learning a lot this year
because I refuse to go back to where I was,
which is the complacent me who stopped
learning. Taking into account this amount,
I’m grateful to learn that I’ve invested a total
of $50,000 on myself in learning about the
financial markets. There are people who
didn’t even invest $500 on their financial
education and have the audacity to judge and
criticize me online. I bet they’ve nothing to
show for but a keyboard. I’m fine with that. It
doesn’t affect me one bit. Only losers will
have the time to pull others down. They can
keep typing while I keep growing.
In fact, I make it a routine to continue
attending courses and seminars like I used to.
I believe that there is always something to
learn from other educators. Even if I don’t
learn anything from them, I can get inspired
by their passion or stories.
Successful people never stop learning.
In fact, studies have shown that successful
people read at least 30 minutes a day no
matter how busy they are. Warren Buffett,
Bill Gates, and Elon Musk often talk about
the importance of reading and how it helped
them reach where they are today. Warren
Buffett, as busy as he is, reads 5-6 hours a
day. He even once mentioned that that is the
secret to his success. Elon Musk didn’t know
much about spacecraft. So he would go and
read about it as much as he can.
If they can find time to read and learn
every day, you have no excuses.
Sadness
A study has been done by Harvard. They
conducted a research to see how sadness can
impact our decision-making process. They
tested 2 groups of participants. Group 1 is in
a neutral state. Group 2 is shown a sad movie.
They were then asked to rate how
much they would pay for a water bottle. The
experiment results revealed that Group 2 is
willing to pay more for the same water bottle
than Group 1.
Does this sound familiar to you? You
go shopping when you’re sad or in a
depressed state, and you’ll buy more things.
You’ll not only buy more things, but you’ll
also buy expensive things that you’ll
normally not pay that much for. Heard of the
term “retail therapy?”
I’m a girl (just in case some people are
wondering). I know a little bit about this.
When I go shopping when I’m sad or burnt
out, I’ll buy like there’s no tomorrow only to
reach home and be like, “Why the heck did I
buy this?”
How does this relate to trading? The
experiment that was conducted can be applied
to financial market traders as well.
When you sit at your trading desk after
your beloved goldfish passed away and
you’re sad, you’re more likely to open a trade
when you’re not supposed to. In other words,
you’ll “buy” trades like you buy stuff when
you go shopping. You’ll also “pay more” for
the trades that you buy. You’ll use a lot size
that you’re not even supposed to be using.
A lot of traders don’t realize the effect
of emotions on their trading. They are not
even aware of it. They make losses and then
blame it on their strategy, mentor, or broker.
The next time that you sit at your desk,
ask yourself this, “Am I in a neutral state?” If
your answer is NO, then it is better for you to
wait until you’re feeling better. Go for a spa
or something. You’ll feel better.
There is always another trading day. If
you lose money, you’ll only dig the sadness
hole deeper. The deeper the pit of sadness,
the more discouraged you’ll be, and you’ll
quit trading. You don’t want it to end up that
way, right?
When you’re sad, the last thing you
should do is to face the potential of becoming
sadder than you already are.
Anger
You’ll also over-expose yourself to excessive
risk when you’re angry. You’re more likely
to take revenge trades. If you can’t take
revenge on your wife, whom you’ve just had
an argument, then why not take revenge on
Mr. Market?
A lot of traders also make revenge
trades after they’ve been on a losing streak.
The markets don’t care about whether you’ve
bought or sold the trade. So don’t take it
personally when you lose money.
The best thing you can do when you’re
angry is to not trade for the day. Meditation
will help clear your mind. Ray Dalio, the
billionaire hedge fund manager, said that this
is one of his secrets to success. In fact, he is
the one who got me into meditation.
Previously I thought it was a complete waste
of time.
Here’s one of the world’s top hedge
fund managers saying that this is his secret to
success. I think we should all practice what
he preaches.
Don’t get me wrong. We are still
human. We get sad and angry once in a
while, same for me. I admit that I still have a
problem with controlling my emotions when
it comes to dealing with people, but
surprisingly, I’m like a robot when it comes
to trading. Of course, this took a lot of
training and practice. When I lose money
now, I’ll just shrug it off and move on. When
I make money, I don’t feel joyful or anything.
It’s just neutral. But when somebody pisses
me off by saying nasty things to me, I’ll
become a maniac. It’s weird how things work
sometimes. I’m a normal human being. I am a
constant work-in-progress.
We can’t completely eliminate
emotions. The only thing we can do is to
manage it and reduce it so that it doesn’t
interfere with our daily lives and
relationships.
CHAPTER 17:
TRADING
CURRENCY
SENTIMENT
I’ve covered COT reports in the first few
chapters. Now let’s talk about how currencies
respond to a risk-on and risk-off market
environment.
Before we move on, understand that what is
categorized as high-yield and low-yield
currencies now will change in the future
when interest rates or fundamentals change. It
is important for you to keep updated with the
markets in order to adapt to changes that
might occur.
High Yield Currencies
These currencies are also known as risk
currencies
or
commoditydriven
currencies. Examples include the CAD and
NZD. They involve currencies in which their
countries export commodities. Commodity
currencies mainly comprise some of the
minor currency pairs that we’ve discussed
previously.
In good times, when traders are
optimistic, high yield currencies are going to
appreciate. Other than that, you’ll also see
risk assets appreciating.
Bear in mind that as countries'
economic conditions change, high yield
currencies now might not be considered high
yield in the future. Same for low yield
currencies.
In finance, when traders and investors
are having an increase in risk- taking appetite,
this is known as a risk-on environment.
During these times, you’ll also see markets
like the stock indexes going up. In bad times,
you’ll often see high-yield currencies
depreciating.
During the onset of the pandemic in
early March, the stock market tanked.
AUD/CHF followed suit (Fig 2.17.1). When
the stock market recovered, the currency pair
rallied along with it. Of course, the early
economic recovery of China from being able
to keep the spread of the virus under control
helped with the recovery of AUD dollar as
well.
Fig2.17.1
A currency that will often appreciate
the most in good times as compared to the
other high yield currencies is the AUD. Bear
in mind that you’ll only see this relationship
play out in the longer-term charts rather
than the shorter term. If you bought
AUD/JPY today and the currency
appreciates, you will earn a profit from the
interest rate differential in addition to the
capital gain profits. The idea of carry
trading is that traders will buy a currency
with high interest rates and sell one with
lower interest rates.
Due to its high interest rates set by
RBA in the past decade, AUD was a popular
currency to buy among carry traders.
However, at the time of writing, RBA has cut
rates to an all-time low. Yields are not as high
as compared to a decade ago, but it is
relatively higher than interest rates in Japan
and Switzerland. Whether it is a high yield
currency or otherwise, it is relative. If you’re
to compare Taiwan rates to that of Australia,
AUD becomes a low yield currency. Just like
how the role of candlesticks changes with
context, this is the same with classifying
currencies. Try not to put things into one box.
Low Yield Currencies
These currencies are also known as safe
havens or low risk currencies. Examples
include the JPY and CHF. In bad times, these
currencies will appreciate as investors seek
safety. In finance, when market participants
are having a decrease in risk- taking appetite,
this is known as a risk-off environment.
During these times, you’ll see safety assets
like bonds and gold going up.
In good times, you’ll see these
currencies depreciate in the long term as
investors sell them off.
Some would classify the USD as a low
yield currency. Again, it is relative. If you
compare USD with JPY, USD becomes a
high yield currency. Over the past few years,
the safe-haven status of USD has gradually
decreased. In fact, during times of
uncertainty, investors have a preference and
bias when it comes to picking safe-havens.
During the 2020 pandemic, gold rallied over
the dollar (Fig 2.17.2). This shows that
investors still prefer hard safe havens than
“soft.”
Fig2.17.2
Source: © 2020 Tradingview
During the same period, the safe-haven
status of JPY and CHF also played out during
the start of the pandemic when the stock
market tanked (Fig 2.17.3).
Fig2.17.3
Source: © 2020 Tradingview
Trading Risk-On & Risk Off
Environments
So how do you determine whether the
markets are optimistic or scared?
CBOE Volatility Index
One of the useful indicators you can look at is
the CBOE Volatility Index (VIX). The VIX
measures traders’ and investors’ sentiment,
specifically in the stock options market.
Fig2.17.4
Source: © 2020 Tradingview
When the VIX is below 20, it shows
that investors are complacent. This signifies
that the markets are in a very calm condition.
With that said, it doesn’t necessarily mean
that it is the ideal trading environment
because too much complacency in the
markets can backfire.
When VIX is more than 20, fear is
starting to rise, and investors will be prepared
to sell off some of their risk assets in their
portfolio.
When it rises above 40, you’ll see a lot
of panic selling and volatility in the markets.
In the 2008 financial crisis, VIX went all the
way above 70, which in turn caused relatively
safer assets like gold to rise.
The higher the VIX, the more fear
there is in the markets and vice versa. This
means that you’ll see markets like the
S&P500 decline & safe assets to appreciate.
You’ll see VIX increase above fear levels.
Fig2.17.5
Source: © 2020 Tradingview
Let’s look at what happened during the
pandemic. As expected, the VIX went near
the 2008 levels during the onset of the
pandemic (Fig 2.17.4). This was when the
stock market tanked and presented a lot of
opportunities to buy undervalued currencies
and stocks. This was also the same period
where people were flocking to the
supermarkets and went on a panic buying
mode. If you have this skill of panic buying,
you should apply it to the financial markets
where you can potentially grow your wealth.
Rather than having stacks of tissue rolls in
your closet, you’ll have piles of money that
you can donate to the less privileged.
S&P500
Another fast way to determine sentiment is
just by looking at the trends of risk markets
such as the S&P500. If the S&P 500 is in a
bullish trend, this tells you that investors are
optimistic and hence have an appetite for
buying risk assets.
Fig2.17.6
Source: MetaTrader 4, ©2000-2020 MetaQuotes Ltd.
On the other hand, when investors are
pessimistic, the stock market will plunge with
a decrease in the markets' overall risk
appetite, as shown by the spike in VIX.
Earlier in 2020, the stock market
plunged when the pandemic started. You can
observe that there is a subsequent spike in
VIX at the same time (Fig 2.17.7). As the
stock market starts to recover in early April,
VIX went on a downwards move.
Often, you’ll see an inverse correlation
between the VIX and the stock market.
Fig2.17.7
Source: © 2020 Tradingview
Stock market rallies like this don’t
come all the time, and people who can’t see
the opportunities missed out on the market
rally, which could have generated more than
50% returns. It’s not typical to obtain this
kind of ROI during normal years. When other
people are panicking, you should be happy
going shopping for undervalued markets.
When I bought the markets at the bottom in
March, I also told others to buy along with
me. The information that I put out was
publicly available on Youtube, but I don’t
think many people took action back then.
That’s the downside of free content. People
think it is useless. During that period,
everyone was spreading rumors that the
markets were going to continue to tank. You
know that rumors are what it is. They are
nothing but just gossip.
I’ve heard so many stories of people
investing in the 2020 pandemic and made
over 100% ROI. I am grateful that I was able
to achieve this type of return too in 2020. It
was a great year for traders and investors who
know what they are doing. I didn’t make
money every month, but I ended off the year
with a profit. I’m grateful for it because it
took me a lot of hard work and learning from
my mistakes. This type of opportunity and
returns don’t come every year. You know
when they say, preparation and opportunity
go hand in hand. Those people who didn’t
bother to learn to invest when times were
good, didn’t know how to take advantage of
the opportunity when markets gave them a
discount in 2020. Instead, they rushed into it.
This is why a lot of newbie traders and
investors got burnt in 2020 as well. They saw
the opportunity to make money and jumped
into the markets, only to lose 4-5 figures. The
casinos were also closed. Some of these
casual gamblers also turned to the markets to
gamble. I’ve also heard many stories in the
news about people losing their life savings.
These are the people who didn’t bother to
learn to invest or trade when times were good
only to learn it last minute when the recession
comes. They think that they can learn to trade
or invest easily just after attending a 2-day
course or reading a few articles. I wish that it
was that easy!
I’ve warned people again and again in
2018 and 2019 that their jobs are not safe.
I’ve told people that they need to pick up the
skill of trading and investing because a
recession is coming soon. Some of those
skeptical people were like, “You’re just
saying this because you wanna sell a course!”
or “My job is safe. All these gurus are a
scam.”
Like I said, feel free to stay in your job
forever, don’t buy any books and courses,
and retire at 65! It’s your life anyway!
So I didn’t see the point in doing live
previews anymore. Why spend time
convincing skeptical people to learn from
me? My belief is this: If you want to learn
from me, you’ll do it. If you don’t want to,
there’s no use in having me convincing you.
I used to run monthly live preview
seminars in Singapore, which I stopped
completely in October 2019. I stopped just 2
months before people were even talking
about the pandemic. I stopped because
teaching was taking away too much time
from my trading. I also found myself trying
hard to convince people to learn from me. I
also didn’t like teaching 2-day workshops. I
can talk for 1-2 hours at a conference, but 1-2
days is just not for me. Also, I don’t need to
teach courses for a living. I don’t need to. I
still speak in conferences for an hour or so,
but those 2-day boot camps that I’ve
conducted in the past was just taking time
away from my trading. I’m not condemning
the seminar industry because this is how it
works. You have to put people through a
sales funnel. Some of my trainer friends do a
good job of offering great courses. They do
tons of paid marketing to promote their
courses, and that’s great. I’m only saying that
this is not my lifestyle choice. Let’s just put it
that way.
CHAPTER 18:
SUSTAINING
YOUR
TRADING
BUSINESS
Truth About Trading That No
One Tells You
It is not going to be easy
If you hope to finish reading this book and
instantly become rich after this, you’ll be
disappointed. The process of learning how to
become a successful trader is long and hard.
You’re going to go through failures,
make stupid mistakes, and feel like quitting
every time you lose money. I’ve been through
these myself.
Most traders quit because they have
such an unrealistic expectation about
becoming a successful trader.
They’ve been brainwashed by all the
get-rich-quick forex influencers that you
commonly see on Instagram and Tiktok. Just
today alone there was this creator who
requested to collaborate with me.
The moment I checked his profile and
realized that he is promoting his BS by
holding stacks of cash in almost every single
post he made, I instantly ran away as fast as
possible.
Successful traders know that training
to become a successful trader is a long and
disciplined process that is not exciting to a lot
of people.
Many of the professional traders you
see in hedge funds often went through at least
three years of training before becoming a
professional.
Yet, I see way too many retail traders
calling it quits after three months or one year.
If it is so easy to become a successful
trader, everybody will become rich doing it.
The best traders that I know what their asses
off, even on holidays and weekends. They are
willing to sacrifice their free time sometimes
just so that they can live a better life in the
future.
If discipline and patience sound
daunting to you, you should pursue another
career. This is the hard truth.
The good news is that if you’re willing
to put in the work and patience, you will have
a chance of making it to the top 10% of elite
traders.
You can’t pursue trading just for the
money
If you’re just here for the money and have no
passion for the financial markets, it will be
hard to sustain your trading career especially
on those days when you lose money. You
will quit easily.
So if you’ve no passion for the
financial markets, don’t waste your time here,
and you can now put down this book. Go
pursue something else.
You can become rich by pursuing
something else that you’re passionate about.
There are thousands of ways that you can
make good money nowadays. Trading is just
one of them.
You don’t have to force yourself to pick it up
just because a guru told you to buy their
course.
With that said, if you still want to get
involved in the markets. You can opt to hand
the capital to a credible money manager. The
hedge fund industry exists for a reason.
However, hedge funds are reserve for high
net-worth clients. There are account
managers that accept lower capitals. You can
also pursue social trading. Just make sure that
you know how to pick good traders to copy.
You don’t have to get involved with the
markets directly. You can get involved in it
indirectly. Trading desks do this indirectly
too. They hire traders that are good and fire
the ones that are not generating good returns.
They trade traders instead of the markets. Get
what I mean?
It can be a lonely career
As a trader, most of the time, it’s just you can
your trading desk. You don’t need to deal
with customers, clients, and a shitty boss.
It doesn’t help that your friends think
that you’re crazy, your parents don’t support
you, and your spouse is going to dump you
just because you refuse to get a regular and
stable job.
If you’re an extrovert, you will
probably need some time to get used to your
new lifestyle. With that said, you can still join
a community of traders so that you don’t feel
alone.
Often, being with a community of likeminded people can serve as a motivation for
you because you will be able to share your
frustrations and problems with other traders
without having them tell you shit like,
“Maybe you should stop gambling and go get
a proper job.”
Trading Mistakes Most
Beginners Make
Taking profits early and cutting losses late
It is common knowledge that we should all
let our profits run and cut our losses fast.
However, when our trading emotions come
into the way. We will do the exact opposite.
Don’t blame yourself for it because
this is just human nature. I’ve already talked
about this during the previous chapters.
Constantly finding the holy grail indicator
There is no such thing as a perfect trading
system. Yet most traders are still going
around attending seminars, conferences and
reading tons of books in an attempt to find
the secret formula.
You’re not going to find a trading
system with a 100%-win rate. You’ll only see
this promise from get-rich-quick gurus. Some
of the best traders I know only have a win
rate of 40% to 60%.
Starting a live account without proper
training
A lot of traders are rushing into trading to
get-rich-quick. They can’t wait to start a live
trading account and start earning big bucks.
The only thing that will happen if you skip
the learning process is that you’ll blow your
live account.
Practicing in a demo account allows
you to build confidence in your strategy,
familiarize yourself with the trading platform,
and understand how the market reacts to
different market environments.
Of course, a demo account is not real
money. The downside is that you’ll not
experience any trading emotions.
There are also brokers who do shady
things like making sure that you don’t lose
money in your demo account to give you the
illusion that you’re a good trader. This is so
that you’ll open a live account with them as
soon as possible.
When you start a demo account, treat it as if
you’re trading a live account. If you plan to
start a $5000 account when you go live, then
start with a $5000 demo account.
Don’t boost your ego by starting a
$100,000 demo account, producing outsized
profits and returns. This will eventually affect
the way you trade when you finally go live
with your intended amount.
You need to be willing to practice in a
demo account for at least 6 months. If this is
too long for you, then you can keep your job
and work for about 40 years only to retire at
65. How does that sound to you?
Don’t bother with trading plans and
trading journals
If you’re treating your trading endeavor like a
hobby rather than a business, you will only
generate hobby results.
If you want to treat it like a real
business that generates results, then you will
need to craft a proper trading plan. Your
trading plan is like a business plan that will
keep you disciplined whenever you go off
track.
In trading, it is hard for traders, even
professional traders, to be disciplined
sometimes. As a retail trader, there is no boss
making sure that you’re following rules. That
is why you’ll need a trading plan pasted
beside your trading desk. If you’re a big fan
of Beth Harmon, paste it onto the ceiling.
Having a trading journal is equally
important. A trading journal is where you will
record all your demo and live trades so that
you can determine what you’ve done well
and what you can improve on for that trade.
The most successful performers, chess
players, and athletes in the world understand
the importance of deliberate practice. It’s
not as simple as merely repeating an action
over and over again.
Deliberate practice means that you will
need to actively think about what you can
improve on after making every trade. This is
hard for most people. The default mode that
most of us operate on every day is autopilot
mode. We don’t need to think so much and
don’t need to evaluate ourselves.
However, this also means that we will
not improve if we’re operating on autopilot
mode all the time. This is why you’ll see so
many golf players playing golf for over 10
years; they are still at the same level.
I was a competitive swimmer back in
school. I still am, but I compete less often
now. The best athletes record themselves so
that they can study themselves after every
training session or competition. They also
work on each aspect one by one during
training sessions. Let’s take swimming for
example, since this is the only sport I know.
In certain training sessions, we will work on
our kick using a kickboard. That is all we
focus on. In other training sessions, we will
work on our dives and turns. In other words,
we isolate the various components of what
we do. Of course, having a coach helps a lot.
This applies to trading too. Set aside
time for days where you’ll only work on your
stop loss placement. Other days you might
want to work on your trading psychology.
This sounds tedious, right? That’s why most
people don’t do it. If you don’t have a trading
mentor to provide you feedback, the more
you’ll need a trading journal.
Your trading journal is like a trading
mentor. It reveals your strengths and
weaknesses so that you can focus more on
what works and improve on what isn’t.
Don’t have a risk management plan
If you have a trading plan but don’t have a
risk management plan, you’re focusing too
much on your trading strategy and ignoring
what is more important: risk management.
What is your maximum % drawdown
limit? % risk per trade? Sharpe ratio limit?
The risk to reward ratio?
If you don’t have the answers to any of
these, you’ll need to write them down on
paper. What is not written down will not be
followed. Take time to go through the
chapters on risk management.
Don’t have a long-term vision
Before you make your first trade, you’ve got
to decide what kind of life you want to live as
a trader.
What are your short-term, mediumterm, and long-term goals? What do you want
to use your trading income for? To give your
family a better life, go on more vacations, or
to donate to charity?
Do you just want to earn more money
so that you can buy sports cars, Rolex
watches, and big houses to impress people
who forever can’t be impressed? If this is
your goal, I’ll guarantee that you’ll quit
within the first 3 years.
If you’re motivated by money alone,
you won’t last. If you’re motivated by a
deeper sense of purpose, like contributing to a
charity you love, you’re more likely to keep
going on those days when you lose money.
A strong purpose and a deep passion
are what filters out those who persevere from
those who quit.
Take some time to think about your
long-term vision. Write it down.
My Trading Vision
What Do You Want to Achieve In the Next
1-2 Years (Short term goals)
What Do You Want to Achieve In the Next
3-5 Years (Medium-term goals)
What Do You Want to Achieve In the
Long Term? (>10 years)
What Do I Want to Spend My Trading
Income?
How Much Capital Should
You Start With?
People like to ask shortcut questions like
these and expect a direct fixed answer to be
given to them. I don’t have an answer for you
because it depends on your circumstances. It
depends on a lot of factors. Take these into
consideration:
☐ Your trading goals
☐ Do you want to trade part-time or
full-time?
☐ Resources you have
☐ Broker requirements
☐ Trading experience
If your aim is to trade part time to
generate some side income for yourself, you
can afford to start with lower capital. If you
want an extra $500 a month for your kid’s
tuition, a $20,000 account is a good start.
You don’t even have to over-leverage and
frequently trade with that account size since I
assume that you’re also working full time
while having to take care of your children.
I would say that the 2 most important
requirements are the resources you have and
your trading experience.
One dangerous act that a lot of new
traders commit is using money that they can’t
afford to lose to trade the markets. This is
money that they need to pay rent and pay for
food next month.
If you trade with money that you don’t
have, or worse still, borrowed money from
your grandma, you will become a very
emotional trader, and you will lose
everything really fast.
To make good trades, you need to be
rational and calm. Trading with money that
you don’t have will cause you to become
stressed out, and you’ll make a lot of
irrational trading decisions that you’ll regret
later.
The money that should be deposited in
your account should be extra savings that you
have. If you lose it, it will not significantly
impact your life. You will not lose your
home, you can still feed your family next
month, and your spouse will still be with you.
Also, the more trading experience you
have, the larger the capital you can afford to
start with. Of course, different brokers have
different minimum deposit requirements.
That is not as much of an issue since most
brokers nowadays allow you to deposit with
as low as $1.
Another thing you need to take note of is
that starting with a small account is actually
very dangerous for your trading. Studies have
shown that traders who start with small
accounts are more likely to blow it all away
as compared to traders who start with
$10,000 or more than that.
When you’re trading with a small account,
you can only earn small profits. A lot of
traders would have the tendency to take
massive risk just to see a larger profit
showing up in their accounts. They can’t
handle earning $3 a trade with that $500
account.
Most people also don’t take small
accounts seriously. What’s losing $100 gonna
do to you? Not much impact, I guess. If you
don’t care about it, you’ll know what’s going
to happen.
Who Should You Trust?
(Gurus, signal providers, analysts)
When you’re dealing with the finance
industry, you’ll undoubtedly come across
conflict of interests.
In the retail trading industry, you have
trading gurus, signal providers, retail brokers,
and account management sellers all wanting a
piece of the pie.
To make life simple, do your research and
don’t trust anybody. If you don’t wanna trust
me, that is fine too. I can’t impress everyone.
Let’s take the brokerage industry, for
example. A lot of brokers push the idea of
day trading. Is it because it is more profitable
for you? NO!
The more you day trade, the more
commissions brokers can make. Some retail
trading educators who work as an IB for
brokers will also talk about day trading all the
time so that they can also have fatter pockets.
If you’re a market maker, will you like it
when a retail trader comes into your office,
wants to open an account with you but then
he is a position trader who only trades once a
week? NO!
You probably wouldn’t be too happy
about that. Even though position trading is
shown to be a good path to take (which is
why a lot of hedge fund traders are position
traders), you would probably want to
convince him to switch to day trading even
though you know that most day traders lose.
This is what we call conflict of interest. It
exists in all industries. The problem is that
the typical retail trader won’t be able to see
this and think that everyone is here to help
them make money.
Please don’t be so naïve and innocent.
You already know that the finance industry is
a place where there are full of sharks looking
to eat the small fish who don’t know what
they are doing.
You can go ahead and watch “The Wolf
of Wall Street” and “The Big Short”. Who
are the people recommending others crappy
stocks with their confident sales pitches?
Who are the people who gave shitty mortgage
securities good credit ratings just because
they don’t wanna lose business to their
competitors?
Don’t get me wrong. Not all brokers are
bad. In any career, there are good people and
bad people. You just need to be able to smell
the BS when it comes to you.
I’ve seen some brokers who just leave
with their client’s money, and I’ve seen
brokers who would process withdrawals just
within a few minutes. What a world of a
difference.
Let’s talk about signal providers. There
are tons of people who told me that they
would pay me money to start a signal service,
and to date, I still did not start it.
I mean, even though it is easy money for
me and I’ll earn good money from it since
there is already a demand, I don’t want to
pursue this path because of several reasons.
Firstly, I don’t believe in spoon-feeding. If
all I do is give you signals every day, you can
just sit back and be lazy. So the only person
that is going to benefit from selling the
signals is probably just me.
Secondly, there are so many BS educators
selling signals who also at the same time flex
their mansion or sports car telling people shit
like “If you buy my signals, you can also
make thousands every day and live this
lifestyle.”
Whether the house and cars are theirs or
not is another thing.
Most important reason: I refused to sell
signals because I don’t want to be in the same
arena as these f**kin jokers. NEVER EVER!
In fact, the profitable traders that I see
who are also educators often give out their
trading signals for free. Again, not all signal
providers are bad.
In the retail education industry, a lot of
people talk about technical analysis. Do you
know why?
Based on experience, the videos and
articles that talk about this topic will get more
clicks and views. Also, the courses that talk
about this? Well, they will get more sales.
Imagine if the whole trading course is just
talking about risk management, trading
psychology, and fundamental analysis. Do
you think retail traders will buy it? Not as
much.
The irony is that most professional traders
focus more on risk management, trading
psychology and fundamental analysis rather
than technical analysis. Now can you see why
most retail traders lose?
Retail traders focus their attention on
technical analysis. Content creators see the
demand for that and hence they’ll keep
producing more of those content. Retail
traders see the popularity of technical
analysis and think it is probably really
important since it is so popular. They
consume more of it. They apply technical
analysis only and lose more money. They go
on to demand educators to provide a better
trading strategy or indicator. Can you see the
cycle?
This is a vicious cycle that will forever
continue unless somebody does something
about it and educates the retail traders on the
proper things they should focus on.
In other words, retail traders like the easy
and sexy stuff that will not generate them
profits but avoid the boring but necessary
stuff that will make them money.
This is probably because most of them
don’t even have a passion for the financial
markets. Their passion is just the money that
comes with it. Being passionate about money
will not get you far.
How To Start Forex Trading
The Right Way
1. Get Your Shit Together
If you’re quarreling with your spouse every
day, your boss is abusing you, and your house
caught fire last week, do you think that you
can just hop into trading, hoping that it will
solve all your life problems?
If you’re stressed out with things in
your personal life, the last thing you should
do is to get into trading. There were people
who email me once in a while, telling me that
they are going through financial struggles and
are broke. The next thing they request from
me is to give them a good trading strategy,
help them make millions, or donate them
money for their forex accounts. First things
first, if you’re an entitled person, don’t
become a trader.
Secondly, if your life is a mess, your
trading will be a mess just like your life.
Successful trading requires you to be calm
and collected.
If you use trading to solve your life
problems, it will make your life worse
because you’ll be trading with an irrational
mindset.
Don’t believe me? Try it. Try trading when
your life is a complete chaos, and tell me
whether your account is still there 6 months
later.
2. Write down your vision
I’ve already talked about this just now. Make
sure you have a strong purpose before you
start trading. This is going to be a long and
hard journey, so you’ll definitely need your
vision to remind you why you started this
journey to begin with.
3. Learn the basics
If you’ve read all the way to this point, you
probably have already gotten a brief idea of
the basics that you need to know.
Reading may not be the mode of
learning for some people. If it helps, you can
go to my Youtube Channel (Karen Foo) and
learn from all the free courses I’ve published
there. See if that mode of learning works for
you.
With that said, when you become a
successful trader, you still need to keep
adapting and learning. Just these 2 months
alone, I’ve invested over $1000 on buying
books and learning resources. That makes my
total investment to learn about the financial
markets to be $50,000.
To those people who judge me and make
up false assumptions about me online, they
probably have not invested $50 on
themselves, what more $500 or $5000.
Probably they have used that money to buy a
keyboard. That’s all.
4. Determine your trading type
Are you more of a scalper, day trader, swing
trader, or position trader?
The right trading style for me might
not be the best for you. Similarly, the strategy
that works for me might not work for you
because we have different trading
personalities and risk appetite.
Don’t copy what other people are doing.
You’re unique as a person and also as a
trader. If you’re still not clear about these
differences, you can go back to the first few
chapters and revise.
5. Craft your trading plan
I’ve already crafted the template for you
(found in Appendices at the end of this book).
Feel free to add more or edit it if you want.
I would say the trading plan is
something that I must have because it keeps
me disciplined. It prevents me from taking
trades that are sub-par and low probability.
There are many days where you will
have the itchy finger syndrome and be
tempted to open a trade. Your trading plan’s
job is to prevent you from doing that.
If you have a high standard for buying
furniture, like you just want the highest
quality ones made in Italy, you also should
have high standards when it comes to picking
trades.
It’s better to open 1 high quality trade
taking 100 pips than opening 100 trades with
each trade taking 1-2 pips. The former is
more efficient and makes you instead of your
broker rich. The latter is just you busy being
busy just because you’re bored.
If you’re bored, go occupy yourself
with other things that will help you improve
as a trader. Attend trading club networking
events, read books, watch tutorial videos or
movies about traders. You don’t have to trade
all the time.
In fact, I find that the more you trade, the
more you’ll lose money.
6. Open a trading account with a
reliable broker
If you open a business today and want to pick
a business partner, are you going to just go
through their details for about 5 minutes and
then work with them?
NO! You’re going to spend weeks and
months understanding them as a person and
even go to the extent of testing their character
with questions after question. You’re going to
drill him or her like you’re a private
investigator searching for the murderer.
Ok. Maybe you don’t have to be that
paranoid. My point here is that you need to
spend time researching a broker properly.
Too many traders just look at 1 or 2
factors when they pick a broker. They’ll just
go ahead with the broker that offers the
lowest spread and highest leverage. That is
why most of them lose money. They are lazy.
I’ve already talked about the criteria you
need to look at in the earlier chapters. Go and
revise it if you need to.
7. Test your trading skills in a demo
account
If you’re not profitable with virtual money,
don’t expect to make consistent profits in a
live account. Some people might say that
demo accounts are useless. I'm afraid I’ll
have to disagree with that. It’s not entirely
useless.
You need to get used to the platform
and the act of opening a trade at the right time
until it becomes second nature to you.
You don’t want to open a live account
only to see a trade you want to enter and then
having to think about where to click. If it is
natural to you, your subconscious mind will
automatically know where to click. You
wouldn’t have to waste precious time
dabbling with the trading platform.
8. Start a small live account
If a demo account doesn’t work for you at all,
then you can start with a small live account.
I know this somehow contradicts what
I said just now about the need to trade large
accounts. My point here is that you need to
start small and then gradually add more
capital when you have gotten the hang of live
trading.
You don’t want to let your $100 account
stay there forever. You want to gradually add
capital as you become more comfortable with
trading live.
9. Add more capital
Start with a $100 first. After a few months, if
your account is growing, add more capital.
Why is it so important to start small? You
can’t expect to make money with a $10,000
account if you can’t even make money with a
$100 account.
Only add capital when you’ve proven
to yourself that you can make money and that
your account is growing. Don’t add capital
when you don’t even deserve it.
If your account is losing money, don’t
expect that adding capital is going to make
you more profitable. It just doesn’t make
sense.
It’s like giving yourself an ice-cream
as a reward even though you’ve skipped the
gym multiple times and broken your promise
to yourself. It will only encourage you to do
more stupid things.
Once you’ve started trading live, you
will still need to trade demo accounts on the
side for you to test out new strategies and
ways of trading. A lot of experienced traders
that I know trade with both live and demo
accounts at the same time. The former to
make money and the latter to test out new
trading systems.
Regardless of whether it’s a demo or live
trade, make sure that you record all your
trades in your journal.
10. Continue
adapt and change
to
learn,
Markets change, and your trading strategy
might stop working one day. To ensure that
your trading career lasts in the long term,
you’ve got to be flexible.
Even economic indicators’ impact on
the markets changes as time passes. In the
past, retail sales used to be one of the most
market-moving indicators. Not so much
today.
In the past, being a floor trader is a
common thing. Now, most of the trades are
made electronically.
In the past, people need to call their
brokers via the phone to make a trade. Now
you can just open trades with a click of the
mouse.
In the past, most retail traders lose
money. Now, most retail traders still lose
money. I guess this is the only thing that
remains constant.
Journey To Becoming A FullTime Trader
1. Have at least 6 months’ worth of
savings
Let’s say you’re a beginner. You only have
$300 in your bank account and want to quit
your job to attempt to make it as a full-time
trader, that will not happen.
In your first year as a trader, you’re
probably going to blow your account and
make tons of trading mistakes. You’re going
to be super stressed out trying to trade with
limited financial resources.
However, if you have a proper trading
mentor to help you, your journey can be
made easier.
2. Ensure that you can earn more
than your salary
If your side income from trading or other side
hustles hasn’t exceeded your salary yet, don’t
go and quit your job hoping to try to make it
as a full-time trader.
If you think that you can just quit your
job and try to make it in trading without
proving to yourself that you can make good
money from it yet, you are committing career
suicide.
A lot of retail traders make the mistake
of quitting their jobs in an attempt to make it
as a full-time trader.
It’s almost like going to a race track trying
to challenge the professional race car drivers
when you haven’t even gotten a basic driver’s
license yet. It just doesn’t make sense.
3. Have multiple sources of income
Multi-millionaires have multiple sources of
income. Your trading business is not going to
generate profits every month. Some months
you’re going to have some losses, and that’s
fine.
As long as you can grow your account
in the long term, temporary losses are just
part and parcel of this business.
Suppose you’re relying on trading
alone to generate income. In that case, it’s
going to be more stressful as compared to if
you have other additional income sources like
stocks dividends, rental income, and side gigs
that you take up once in a while.
There are naysayers in my life. When
you become successful, there are bound to be
jealous people who can’t handle your
success. They’ll say useless shit like this to
me, “If you can earn money from trading,
why do you need to teach?” They probably
don’t understand the importance of multiple
sources of income.
Here is a wealth mindset that you need
to learn. You won’t become the people that
you hate. So if you hate rich and successful
people, you’ll become the opposite of them,
which is being broke. If you want to become
rich, you’ll need to be inspired by them.
The wealthy people I know get
inspired by other successful people. As a
result, they will hang around successful
people. You become who you hang around
with, and then the whole cycle repeats itself.
Trading can be boring sometimes, and
having an arena to share my experience
makes life more meaningful. In fact, majority
of my courses are free of charge, which can
be a good or bad thing.
I find that if I don’t charge for it. I will
sometimes attract entitled people who would
message me to ask me for donations for their
forex trading accounts, help them with their
school fees, or even buy them a laptop. Some
of them even cursed at me for not replying
them. And all these people paid me zero
cents!
So if people still wanna ask shit like,
“If you can trade, why can’t you offer your
courses for free? Why do you need to charge
for it?”. Well, I’ve tried that, and it didn’t
work out! It only attracted a group of entitled
people who act like they’ve paid me millions.
I’ve run free live seminars in the past
where I didn’t upsell anything. I worked hard
with my business collaborators to organize it.
We provided free food. Also, we gave the
participants free books and learning
resources. In other words, we were just
focusing on providing value. All the
participants didn’t have to pay for anything.
Guess what? There were people complaining
about the food!
If I sell you an LV bag for only $10,
will you value it? You would probably think
it’s fake and won’t even take good care of it.
If I sell you the same bag for $1000, you’ll
probably value it more. It’s the same concept.
Finally, there are tons of traders that I
know who are making millions but also teach
others on the side. There are also traders who
teach but don’t make money trading. As I
said, there are good and bad people in every
arena.
One final thought, I only started
teaching after receiving tons of requests from
people to create a course after I’ve won the
national trading competition and gotten top
10 in other international competitions. People
can judge my actions whichever way they
please. Again, I can’t impress everyone.
Secrets To Successful Trading
1. Do what other traders are not
willing to do
The typical retail trader is too lazy to do these
things:
☐ Keep a trading journal
☐ Consistently backtest their strategy
☐ Keep learning from mentors
☐ Evaluate their mistakes
☐ Avoid trading when there are no trades
☐ Do their research
☐ Test their strategy on a demo account
☐ Save up their trading capital
☐
Learn proper risk management,
fundamental
analysis,
sentiment
analysis, intermarket analysis, and
trading psychology
☐ Write a trading plan & follow it
These are the exact things that you should
be doing. Yes, it might be boring to a lot of
people but whoever said that trading should
be easy and exciting? If excitement is what
you want, you have the casino there for you.
If you’re willing to do what the 90% of
traders are not willing to do, you’ll live the
life that the 90% won’t ever have. There is
pain and sacrifice either way. It’s either the
pain of discipline or the pain of regret.
Choose your pain.
2. Stop finding the secret formula
The irony is that the secret to successful
trading is that there is really no secret. You
don’t need a 90% win rate strategy. You’ll
still lose money if you have a 99% win rate
strategy if you don’t take care of your risk
management and trading psychology.
As of this book's writing, my win rate
for this year is about 45%, yet my account
equity curve is still going up. I don’t win
every single trade. In fact, there are times I
will have 6 consecutive losses, which is
enough to cause most traders to give up on
their strategy or trading altogether.
There are some months I’ll lose money
and have a negative ROI, but I’ll still end off
the year with a net positive ROI. My positive
months will cover up the losses for the
negative months.
When I was an amateur in my first year
of trading, I had a win rate of about 90%, yet
my account equity curve is going down and
down.
Why is that? I completely ignored risk
management and trading psychology. I was
also going around Singapore to attend
different trading seminars in order to find the
holy grail indicator.
Everything changed when I focused
my attention on risk management, taking high
probability trades, and having a good risk to
reward ratio. I also stopped going around
finding the perfect trading strategy. I decided
to focus on the underlying problem and try to
solve it.
The legendary Paul Tudor Jones only
has a win rate of around 40-50%. Yet, he is
one of the top hedge fund managers of our
time. How is this possible?
Whenever I get losing trades, I will cut
my losses fast, and I’ll lose small, but when I
win, my one winning trade will cover up my
previous losses, and I’ll have a net profit. In
other words, I cut my losses fast and let my
winners run. You need to have a firm stop
loss and a loose target price.
Remember, when I told you that you
need to treat trading like a business? Because
it’s really like running a business! You will
have expenses. You will also have sales
revenue. If you treat your losses like a
business expense and winning trades as sales
revenue, your mindset and outlook will
change.
As a business owner, you can’t avoid
expenses. That’s just impossible. You have
overheads, labor costs, and raw material costs
you need to pay for. You’ll still operate your
business. You are not gonna be like, “I’m
sick and tired of all these expenses!” This is
the same thing with trading. Why is that?
This is because you have absolute
confidence that as long as your sales revenue
exceeds your expenses, you will end off the
year with a net profit. It is the same with
trading.
3. Learn from the masters
The top chess players in the world would
spend hours after hours studying how the
masters make their moves.
Studying other successful people
allows you to learn from their experiences
and mistakes. It is definitely better to learn
from other people’s mistakes rather than your
own mistakes.
You might not wanna learn from me,
and that is fine. But I hope that this book
gave you some insights into what is important
and what isn’t.
If you want to continue learning from
me, you can check out my Youtube channel
and learn from the free courses I’ve made.
As of the writing of this book, we are
in the midst of a global pandemic, and a lot of
people lost their jobs. I also spent more time
at home this year because of the travel
restrictions. Hence, I had more time
producing these courses.
A lot of people got retrenched and
couldn’t even afford books. So, my hope is
that these courses can help them. And I’m
glad it did.
I’ve received messages from people
telling me how much these videos have
helped them become consistently profitable.
It is free. But don’t have the perception that it
is useless. I could easily charge thousands for
it if I wanted to, especially when I’ve spent a
whole week just to produce one course. Time
is money, my friend.
CONCLUSION
ongratulations on making it all the way
to the end of this book. Most people
don’t even finish a book that they’ve
bought. If you’ve borrowed this from the
library, I hope you’ve written down the
important points. Otherwise, you’ll forget it
after a few weeks.
For the purpose of this book, I couldn’t
cover everything that I want to. Some topics
are just easier to teach in video form. It’s also
useful if you need more examples of what
I’ve covered in this book. If reading books is
too hard for you, maybe try learning by
watching videos. Different people have their
effective ways of learning.
C
Remember that trading is not a getrich-quick scheme. It requires a lot of hard
work, patience, and discipline to make it as a
full time and consistently profitable trader.
To date, I’ve read over 500 books, put
in more than 8000 hours of practice, and
invested over $50,000 to learn about the
financial markets as I’m writing this. By the
time you’re holding this book in your hand,
these numbers have probably increased
because I never stop learning and investing in
myself. With that said, you don’t have to
copy what I do. It’s your life.
If you’re willing to put in the work that
other people are not willing to, you can
eventually live life on your terms without
having to answer to anybody.
You’ve got to come to a point where
you’re just sick and tired of being sick and
tired running in the rat race.
You have no reason to live your life
living paycheck to paycheck in a job that you
hate and having zero control over the time
you wake up, eat lunch, and even go to the
toilet.
If you want to give your loved ones a
better life, then work for it. Don’t just dream
and talk about it every 1st of January only to
put it off later because things are just too
hard.
You want it bad enough? Then work
for it. Show me that you really want to
achieve financial independence. If you don’t
do it for me, at least do it for you.
I wish you all the best.
With love,
Karen Foo
Website: www.karen-foo.com
Youtube channel (Gain access to free
courses): Karen Foo
Email: admin@karen-foo.com
APPENDICES
Trading Journal Template
Source: MetaTrader 4, ©2000-2020 MetaQuotes Ltd.
Date:
Time of entry:
a) Reason for entry
__________________________________________
__________________________________________
b) Reason it hit TP
__________________________________________
__________________________________________
c) Reason it hit stop loss
__________________________________________
__________________________________________
d) Good points for this trade
__________________________________________
__________________________________________
e) Bad points for this trade
__________________________________________
__________________________________________
f) Area of improvement
__________________________________________
__________________________________________
g) What was I feeling when entering this
particular trade?
__________________________________________
__________________________________________
h)
What was I feeling during the
market fluctuations?
__________________________________________
__________________________________________
i)
What was I feeling once I have
closed the trade?
__________________________________________
__________________________________________
Forex Trading Business Plan
My mission statement and yearly goals -
My trading philosophy -
Risk reward ratio-
Risk per trade (%)-
How will I measure my performance?
How long is my break from trading?
When should I review my trades?
Check list for Trade Entry
1.
2.
3.
4.
5.
Rules for Non-trading
1.
2.
etc.
NFP
Charts
Yield curve
https://data.bls.gov/pdq/SurveyOutputS
request_action=wh&graph_name=CE_
www.tradingview.com
https://www.wsj.com/market-data/bonds
Additional Websites
Forex big
www.forexlive.com
stories exdealers &
professional
traders (For
forex outlooks)
Find ETFs that www.etfdb.com
track various
assets &
sectors/industries
(For
intermarket
analysis)
Big stories
www.cnbc.com, www.reuters.com
(General
www.bloomberg.com, www.marketw
macro-outlook)
Euro stats
https://ec.europa.eu/eurostat/home
https://www.ecb.europa.eu/home/htm
China stats
http://www.stats.gov.cn/english/
Japan stats
http://www.stat.go.jp/english/
UK stats
https://www.bankofengland.co.uk/
Singapore stats
Canada stats
New Zealand
stats
Australia stats
Overview of
countries &
economic
indicators
Karen Foo’s
recommended
books
https://www.singstat.gov.sg/
https://www.statcan.gc.ca/eng/start
https://www.treasury.govt.nz/
https://rba.gov.au/
https://tradingeconomics.com/
https://www.amazon.com/shop/karen
ACKNOWLEDGEMENT
To my family members who were there for
me from the start and stood by me when I
was just starting out and facing numerous
setbacks.
To my team and manager, who has
been working behind the scenes, helping us
grow our business together so that we can
impact more lives.
To my mentors and university
professors who taught me everything that I
needed to know about the financial markets.
Also, to my public speaking mentors who
taught me the art of public speaking and
supported me in my journey as a professional
speaker.
To my business collaborators and
friends who have supported me in my dreams
and giving me unconditional love. To the
event organizers that have invited me to share
my expertise with others via live events.
Also, to my social media followers
who provided me with the encouragement to
write this book and also for constantly
supporting my online content and tutorials.