Forex Trading For Beginners

FOREX TRADING FOR BEGINNERS

Effective Ways to Make Money Trading Global
Currency Market

Table of Contents

Introduction
What is Forex trading
Forex versus other markets
What are the best trading strategies for you
Specifics of currencies and how to take advantage of it
Technical tools that might help you in trading currencies
Importance of risk management
Guidelines for selecting a Forex broker

Introduction

Modern world presents us with a lot of opportunities to make money
investing that did not exist before electronic age. Trading currencies online
has become a viable option for those who want to be their own bosses, work
from home and make steady income. Forex market is not that old as most
Stock markets in the world. However, in a very short period of time since its
inception, it has become the biggest, most liquid and attractive financial
market in the world.

Current possibilities to use leverage trading currencies enables one to open
an account with most Forex brokers investing as little as one hundred dollars
and trading a position of ten thousand US dollars. Making money trading
currencies has become a reality for everyone, everywhere and any time. This
eBook will introduce you to basic concepts of trading, uncover the most
profitable trading strategies and even define the key criteria how to choose a
reliable Forex broker. Read, learn and become a profitable currency trader.

Chapter 1

What is Forex trading

Forex is the biggest financial market in the world, where traders, investors
and speculators trade currencies to make profit or international companies to
exchange currencies after international trade deals are concluded. The market
did not start as a place for speculation and profiteering. No, it was established
as a means to exchange one currency to another and the main purpose of the
market was to facilitate international trade and make it easier to buy those
currencies which specific mega corporations or banks are in need of at that
specific moment. This has dramatically changed in the recent decades as most
of the operations (around 90 percent of them) are of speculative origin. It
means that various investment companies, hedge funds, big speculators or
simply average traders come to the market with an expectation to make
money on daily fluctuations in various currencies.

The market is considered to be over the counter (OTC), which means that
transactions occur between two parties over electronic network or a
telephone. It is unique, because Forex is open 24 hours per day about five and
a half days per week. It opens on Sunday in Australia and closes late on Friday
when New York trading session comes to an end.

Various factors, such as: economic, macroeconomic, political, financial and
etc. influence direction of currency exchange rates. No wonder, its’ daily
turnover is close to 4 trillion dollars per 24 hours. Just imagine that! It means
currency market could be around 50 times bigger than US stock market in
terms of turnover. This huge turnover also means that it is the most liquid
market in the world, meaning you can open and close your positions very fast.
These facts make FX market the most attractive place for investors,
speculators and traders.

Currency pairs

In spot Forex market currencies are traded in pairs. The basic logic behind
this is value of one currency in a pair is set in comparison to another currency
in the same pair. The first quoted currency is always called “base currency”
and the second quoted currency is called “quote currency”. You just have to
look at the quote currency to see how much it costs to purchase one unit of a
base currency. To better illustrate this we can look at the quote of one of the
most liquid currency pairs usd/jpy (US dollar/Japanese Yen). At the time of
writing it is quoted 119.08. It means that you need to spend 119.08 to buy US
dollar, or vice versa, one US dollar buys 119.08 Japanese Yens.

Another thing to remember is that when you buy one currency in a pair, you
automatically sell another one. So, if you are buying US dollars in usd/jpy
pair, you are automatically selling Japanese Yens.

Currency crosses

Those currency pairs that do not have US dollar as one of their component are
called currency crosses. These may have various combinations between main
currencies, such as: Euro, British Pound, Japanese Yen, Australian dollar and
a few more.

The most popular currency crosses at the time are: eur/jpy, gbp/jpy, eur/aud,
gbp/aud, eur/gbp and eur/chf.

Below is the chart of the currencies that are known as majors (with their
symbol, country of origin, currency and a nickname (traders like using
those)).

Major currencies

Symbol Country Currency Nickname(s)

USD United States US Dollar Buck, Greenback

EUR Euro zone members Euro Fiber

JPY Japan Japanese Yen Yen

GBP Great Britain British Pound Cable

CHF Switzerland Swiss Franc Swissy

CAD Canada Canadian Dollar Loonie

AUD Australia Australian Dollar Aussie

NZD New Zealand New Zealand Dollar Kiwi

Bid and ask price

By looking at quote window of currencies you will see two prices for any given
currency pair. Those are called bid and ask prices. I am looking now at
usd/jpy quote and the price is: 119.08/119.10. 119.08 is bid price and 119.10 is
ask price. So, if you want to buy 1 US dollar you will pay 119.08 Yen for that
and if you want to sell a US dollar you will do it for 119.10 Yens.

Spreads and pips

The difference between ask and bid price is called spread. If you look at the

example of usd/jpy that I gave above, you will see that this difference is 2
pips. So, the spread in given case for usd/jpy is 2 pips. Brokers are
compensated by means of spreads. When you open a position, it does not
matter whether you buy or sell it will be opened with a small loss of the
spread. If price moves in your favor that loss quickly disappears.

A pip is the smallest possible price change in any given currency. You will
typically have 100 pips to make a full cent in most currency pairs. It means
that if Euro moved one cent against US dollar, in Forex it moved 100 pips.

Using leverage in trading

Leverage is probably the most promoted thing in currency trading. Brokers
like boasting that they allow their customers to use high leverage. In simple
terms we may refer to leverage as a loan given by a broker or a bank that
provides liquidity to a trader. He may use it to operate much bigger amounts
than he actually has. He may use broker’s or bank’s money to trade with.
Leverage that trader may use vary. Some offer 50:1, in most cases 100:1 and
some brokers go to extremes by offering 200:1, 500:1 and even 1000:1.

Now, imagine what it means. If you have only one hundred dollars to trade
with, but also a leverage of 100:1, you can actually operate a sum of 10 000
US dollars. If you enter with full leverage and price moves in your favor 100
pips you actually make 100 US dollars on the move. Wow! That’s the size of
your account! Yah, but if market moves 100 pips against you, your account is
factually wiped out.

So, leverage is very good if you know how to control risk. It is, however,
dangerous if you take too big positions and the market turns against you.
Anyway, for those who become pros leverage can give the best opportunity to
grow their accounts. Newbies, on the other hand, may destroy their accounts
in a matter of a few minutes if they are not careful and trade positions that

are too big. If you want to avoid disaster in trading do not risk more than 2
percent of your deposit on any trade.

Market players

The biggest financial market in the world also attracts the largest amount of
traders across the world. Some of them impact the market; others trade too
small positions in order to impact exchange rates. Let’s go through main
market participants in order for you to know who may be on the other side of
a trade when you open a position.

Those that can really influence exchange rates and do interventions are
Central Banks and governments. Central Banks may raise interest rates and
markets will go wild in a matter of seconds. They can also do interventions
and those may cause prices to turn around. A political statement by some
political figure can cause market to rally hundreds of pips or even change a
trend.

Commercial banks and other huge financial institutions can move prices at
their will. They control large amounts of money and by simply entering a
position in the market may cause it to move dramatically.

Hedgers and commercial traders are the ones who are in the market to hedge
their positions, not to speculate on daily or weekly market fluctuations. These
often trade globally and they need to protect their deals from huge currency
swings.

Hedge funds do not usually have to do anything with hedging. They simply
carry a fancy name. They may trade large amounts of money and keep their
positions from a few days to a few years. They impact market prices a lot and
they also comprise a large percentage of all market turnover.

Investment and pension funds operate trillions of dollars, but they mostly

invest and trade conservatively. So, they do not usually influence daily
fluctuations, but when they enter or exit their positions you may see huge
trend changes.

Large speculators also have impact in currencies. You have heard about
George Soros. He often trades currencies and his positions are in multi billion
dollars. Individual like him can influence currency exchange rates
significantly.

Small traders like you and me do not have any impact on currency
fluctuations.

Types of orders

There are a number of orders that define how you enter and exit the order.
You may enter and exit your position right away by using market orders and
you can place distant orders which are going to be opened if some price level
is reached. Those are called limit orders. Let us look at the most popular
orders that traders use daily to trade currencies.

Market orders

Market orders let you to buy and sell currencies at current market prices. If
you believe that the currency pair you want to trade is at the right place for
you to buy you can place market order to buy that specific currency and it will
be opened immediately. If you want to buy a currency, simply use bid price
and if you want to sell it, use ask price.

Limit orders

Limit orders are liked by professional traders who do not want to trade at
current prices, but expect much better quotes and therefore they place orders
at the levels they expect price is going to reach. These can be of four types.

Buy stop orders

A buy stop order is placed above current price. It is often used by breakout
traders who expect price to break off its’ current range and go upwards. When
that price is reached their order is opened.

Sell stop orders

A sell stop order is placed below current price. It is used by breakout traders
who expect price to break down from its’ current range and continue to move
down. When that low price is reached their order is automatically opened.

Buy limit orders

A buy limit order is placed below current market price and it is executed when
price falls to that level. Traders using these orders do not want to buy at
current price as they believe it is too high and therefore they wait for price to
fall to their anticipated level and if it does, their buy orders are automatically
opened.

Sell limit orders

A sell limit order is placed above current market price and it is executed when
price rises to that level. These are often used by traders in a downtrend, when
prices rally and this gives traders a good opportunity to add to their “short”
positions. Trend traders sell rallies in a downtrend and sell limit orders are
excellent tools to implement that.

Stop loss orders

Stop loss orders are used to protect losses. Traders need to limit their risks
and they determine how much they are willing to lose in case the trade goes
against them. They place stop loss orders at specific price levels and if price
falls to that level, their stop loss orders are executed and further losses are

prevented. Most pros use these orders and so should newbie traders.

Take profit orders

No traders can stay at their computers 24 hours per day. If they have a
position open they may want to close it at some point. Take profit orders are
used for that. It does not matter whether you buy (go long) or sell (go short)
you can place a take profit order and it will be automatically closed even if
you are not at your pc. In this way, your profit will be protected and locked in.

Trailing stop orders

A trailing stop order is a combination of take profit and stop loss order.
Traders sometimes have a profitable position and they expect it to increase,
but they do not want to lose their profits. A trailing stop is a good choice. They
set how many pips market has to go against them in order for trail stop to be
executed and their trade is closed.

Let’s say a trader has 200 pips of profit in usd/jpy position. He sets his
trailing stop order at 30 pips. It means that if market goes against him 30
pips, his position is closed. If market continues going in his favor he will
make many more pips, if it goes against him, his position is closed after
market moves 30 pips down.

Forex trading sessions

It has already been stated that currency market is open 24 hours per day and
five and a half days per week. That means you can select hours you want to
trade depending on where you live, what kind of trader you are and what kind
of market volatility you like. Forex trading hours is usually divided into three
trading sessions: Asian, European and American. Let’s briefly look at each
one of those.

Asian session

Asian trading session usually starts a week when FX market opens in
Australia, Sydney on Sunday. It is the quietest session of the three. Volatility
is pretty low and prices usually fluctuate within very small ranges. Breakouts
are rare and those who enjoy low volatility and range trading strategies can
play this session pretty well. Tokyo is the centre for the session as the largest
trading activity is seen during Tokyo trading hours. It opens at 11.00 pm and
closes at 7.00 am (GMT)

European session

European trading session is the most volatile of all the three, particularly at
the time of London market open. It has the biggest turnover and the biggest
moves during a day. Those who like trading sharp moves and expect to grab a
larger amount of pips should trade European, or as traders often call it
“London” session. London session hours are between 7.00 am and 4.00 pm
(GMT).

American session

When New York markets open, so does American session in currencies. It is
second in terms of volatility, but there are a lot of pieces of news coming from
US during American session which cause a lot of big moves, particularly in US
denominated currency pairs and those who like trading major currencies
should trade this session too. New York session starts at 12.00 pm and closes
at around 8.00 pm.

Market hours in three main sessions

Region Financial centre Market opens Market closes

Asia Tokyo 11.00 pm 7.00 am

Europe London 7.00 am 4.00 pm

North America New York 12.00 pm 8.00 pm

Types of market analysis

There are various ways to analyze currencies and then make decisions to
trade. However, depending on what one concentrate on it is common to divide
those types into two groups: fundamental and technical.

Fundamental analysis

Economic and financial events are at the heart of fundamental analysis.
Investors scrutinize market data in order to see how it is going to affect
exchange rates in currencies. They watch what Central Banks are going to say,
whether unemployment data is improving or not, inflation is rising or falling
and many more. Traders that trade based on fundamental analysis tend to
have long term targets and keep their positions open for a long time.

Technical analysis

Those who implement technical analysis in their trading believe that past
price action can tell us a lot about what happens now and what might happen
in the future. The basic idea of this type analysis is that history tends to
repeat itself, because people do not change and they do the same things that
they used to do. Those who rely on technical analysis tend to look at such
aspects as: support and resistance, technical indicators, price patterns, candle
patterns and a few more other things.



Chapter 2

Forex versus other markets

The first chapter may have shown you some advantages of Forex over other
financial markets. This chapter aims to single out the main advantages of
currency market in comparison to all other financial markets. These will
surely explain why so many traders rush to trade currencies.

1. Traders can use high leverage in their trades. In most markets you cannot
use any leverage. In some Stock exchanges you can use up to 5:1 leverage. In
currencies brokers will offer you from 50:1 to 1000:1 leverage. This enables
you to trade with virtually any amount of money and still make nice cash.

2. The market is open 24 hours per day, which means you can trade any time
of the day. You can open positions during Asian, European or American
sessions. The market does not close during the week day and if you see some
unfavorable price action you may close your position any time you want.

3. Forex, unlike other financial markets does not have any rules for shorting.
A lot of markets do not allow this feature at all. It means you need to buy
first, before you can sell. In some stock exchanges you can do shorting after
an uptick in a given stock price. In currencies, you can short any time you
want. And you will not have to pay any extra fees.

4. You can day trade by opening as many positions as you want (in a single
day). Those traders who like “scalping” market can do that in currency market
easily and without any extra charges. In fact, you can open and close a
position within a few seconds.

5. Most brokers will allow you to use a variety of trading orders: market, limit,
stop loss, take profit or trailing stop. Some stock markets will allow you to do

that, but on such a large scale as you can do that in trading currencies.

6. Fees for opening trades are far smaller than you would pay trading stocks
or other securities. Some brokers may offer you a spread of 0.5 or even lower
than that in some of major pairs, such as eur/usd or usd/jpy. And the spread
does not increase if you trade one micro lot or a hundred standard lots.

7. A lot of Forex brokers will allow you to open a mini or even a micro account
where you can trade mini or micro lots that could vary from 1000 to 10000
units. That means you can open an account with as low as 100 or even 50
bucks and trade comfortably. One broker will even allow you to take 1 dollar
trades if you really want it.

Chapter 3

What are the best trading strategies for you

People come to Forex market with various expectations, but the main one
that lies at the heart of the coming is to make money. Although all humans
display the same character features, they also have their differences and those
differences become obvious in trading environment. Some people are looking
for long term results and they are not worried about things that happen in the
market on a daily basis. They might open a position and close it after a year or
even later. Others will be interested at weekly closes of currencies and they
would spend weekends analyzing what happened during previous week.
Others are short term oriented and they want to open and close their trades
the same day. These are usually called day traders. Yet, others might open
hundreds of trades per day and close them after a minute or some 30 seconds
after they open it. These are called scalpers and they are really short term
traders.

Timing has much to do with skills to analyze currencies and make decisions
that are going to generate profits. Those who see the big picture might know
that direction is to change at some point, but they hardly ever say when it is
going to happen. So, they might be in trade too early. However, if they are
long term traders they are often right about direction despite the fact they are
early. Long term traders are not very good at timing, but they often identify
period of trend change and they stick to that for the long haul. They expect to
make thousands of pips from large market moves. They usually use trend
trading strategy. These traders may only have a few trades per year.

Those who are weekly oriented are more concerned about intermediate
market swings that last for a few days or a few weeks. They can trade in a
range really well and often pick tops and bottoms using support and

resistance levels. They may expect to earn a few hundred pips when they
manage to identify correct entry points. They are better at timing than long
term traders. They may also have more trades, than trend traders. On average
that would be one or a few trades per week.

Day traders worry about a current day. They want to grasp a move that is
going to happen today. They may apply a lot of various trading techniques and
strategies as there are plenty of them. They would typically target from 20 to
70 pips per day. They are much better at timing than swing traders and day
traders often watch how price action changes during three major sessions of
the day: Asian, European and New York. They do not leave open positions
over the night.

Scalpers may not worry what happens in a given day. They worry what might
happen in the next fifteen, five or two minutes. Some are even preoccupied
with what happens every thirty seconds. Good scalpers develop excellent
intuition as to where price is headed in the next five minutes. Their targets
are usually for each separate trade, not a day and it may be just a few pips per
trade. Scalpers can sit for hours glued to their computer screens entering and
exiting their positions every single minute. Some of them specialize in one of
the three sessions. Those who love volatility may trade European or American
sessions and those who prefer calm ranges would trade Asian sessions.

As you can see your skills and preferences as well as goals determine what
kind of trader you are. Let us look at some of the most common trading
strategies for each group. Maybe you can find a trading system that is best for
you.

Trend trading for long term traders

Huge hedge funds and a lot of investors who have made millions and possibly
billions in various securities have used a trend trading strategy to achieve

good returns. Of course, you will probably need millions to make millions,
but you can still make nice cash even with much smaller amount of money by
trading big market trends. If you do not want to sit glued to your computer all
day and if you have a full time job to do, you can still trade and trend trading
is the system you may want to look at.

You need to know that markets do not trend that often. In fact, most of the
time they stay in ranges. Statistics shows that out of 12 months financial
markets range for about 10 months and only 2 months they trend. That may
sound disappointing, but it shouldn’t. You can prepare for an upcoming trend
way before it starts, even if you can look at your charts at the end of a day or
at the end of a week.

If we know that 10 months out of 12 currencies range, how do we know that a
trend has started? The moment a currency pair leaves its’ range we can state
that a trend has begun. It leads us to another thing and that is: we need to
define exactly the top and bottom of the range so that we can know exact spot
where range has been breached and a currency started trending. We do not
care which direction the trend will go. We care to be ready to go either way,
when top or bottom of that range is broken.

So, pro trend traders tend to place buy stop orders a few pips above the top of
the range in case range is broken upwards. And they place sell stop orders a
few pips below the low of the range in case the range is broken downwards. In
this way they are “on board the ship” right at the start of the journey. Of
course, you may join the trend later or add to your existing position, but it is
always better to be there right at the start.

The chart below shows range in eur/usd with bottom and top of the range and
you can clearly see what happened when the bottom of the range was broken.

How could you have traded this downtrend?

Firstly, you did not know whether it was going to be uptrend or downtrend
when price of eur/usd was still in a range. So, you need to define where the
top and the bottom of the range were. From the chart you can see that the top
was around 1.3500 level and the bottom was around 1.3200. That was a 300
pip range. As you did not which way price will break you had to place a buy
stop some 10-20 pips above the top of the range with 100 pip stop loss and a
sell stop some 10-20 pips below the low of the range with 100 pip stop loss.
When price broke lower your sell stop order would have been opened and you
would have been making hundreds of pips in a downtrend by simply letting
your position go in the direction of the trend. Price fell around 700 pips
without major retracements and then proceeded to fall even more. In these
kind of situations you could calculate expected take profit target by
measuring the size of a range (which was 300 pips) and adding it to breakout
point. So, if the bottom of the range was 1.3000, the minimum take profit
target would have been 1.2700. As you can see from the chart it was reached
in 8 trading days. Of course, you could and should have gone for more and
you would have made at least double the amount of your minimum target.

eur/usd daily chart

Range/swing trading short term swings

Those who search for more opportunities and focus on shorter term horizon
than trend traders tend to trade ranges of currencies. It is quite logical! If
currencies spend most of the times ranging why miss such an opportunity! Of
course, a range trader will not collect that many pips as trend trader at a time,
but he will have more trades and consequently his profits may even be bigger
than those of a trend trader.

It has already been said that in a range price of currencies tend to swing
between highs and lows of that specific range. It sometimes gets stuck in the
middle and a trader has to wait through some choppy price action where a
range trader may want to have a rest and not to trade, but eventually price
goes either to the top or the bottom of the range and at these extreme points
the biggest opportunities await.

By trading these two extreme points a trader follows the golden rule of
investing: buy low and sell high. That’s exactly what a range trader does!
When price goes to the low (or support) of the range he buys (or goes long)
and when it goes to the high (or resistance) of the range he sells (or goes
short).

Below is the example of a range in eur/usd pair that lasted for about two
weeks, from the middle till the end of February, 2015. You can see that the
bottom of the range (or support) was 1.1280 level and the top of the range (or
resistance) was 1.1450 level. The range was about 150 pips.

How could you have traded the range?

You simply had to place buy stop orders at around 1.1290 level with some 50
pips of stop loss and 100 pips of take profit. You also had to place sell stop
orders at resistance at around 1.1440 level with stop loss of 50 pips and take
profit of 100 pips. By trading this way you would have had 6 good trades and

one bad one. The bad one had actually occurred when the range was broken
downwards. Your stop loss order of 50 pips would have been closed. But
imagine making 600 pips on other good trades! That would have been 550
pips of profit in a matter of two weeks. Not too bad, huh!
eur/usd 2 hour chart (two week range)

Day trading strategy – trading daily three Forex sessions
As has been said day traders tend to close their positions within 24 hours or
the same day they open a trade. They closely monitor what happens during
three major Forex sessions: Asian, European and American. They often trade
support and resistance or a trend of particular sessions. Of course, they can
use various trading strategies as there are a lot of different personalities who
trade the market. Let’s look at one popular day trading strategy here and that
is trading support and resistance of a particular session. We do know that
Asian sessions are relatively calm and prices of currencies often stay within a
specific range fluctuating between support and resistance. If you intend to
trade Asian session you should definitely buy at support and sell at resistance.
Below are two examples of Asian sessions in eur/gbp pair. You can see how
price range narrows when Asian session comes and how price stays between

support and resistance of the range. Those traders who do not like volatility
and risk can trade these ranges pretty easily. They can simply buy when prices
hit support and sell when they hit resistance. Of course, they won’t earn a lot
of pips, but they also would not risk much. In the examples below you would
need to buy 1 or 2 pips above support with some 7 pip stop loss and 10 pip
take profit. The same can be said about short orders. You need to sell 1 or 2
pip below the resistance with some 5-7 pip stop loss and 10 pip take profit.
You would be out of your trades before European session begins or London
market opens.
If you trade other pairs such as eur/jpy or gbp/jpy you might expect bigger
profits. It is your choice. However, you need to remember, that Asian sessions
have the lowest volatility and breakouts during the sessions are very rare.
eur/gbp 15 minute chart (trading Asian session)

Trading European session in the direction of a short term trend
When Asian session comes to an end, volatility usually increases and we may
start seeing false and real breaks of Asian session highs and lows. Those who
love big moves should trade European session, particularly London open

when the biggest moves of the day occur. The way to trade this session is best
to know if there is some prevailing short term trend in the market. If price
has been rising for a few days or a week making higher highs and higher lows
you would only want to buy that currency pair at support and hold your
position for a session or two or closing it if your take profit target is reached.
If price has been falling for a few days or a week making lower lows and lower
highs you would only want to sell that currency pair at resistance and hold
your position for a session or two or closing it if your take profit target is
reached.

Example below shows eur/usd pair from 23rd of April to the 3rd of May, 2015.
We can clearly see that the pair was in a short term uptrend. It means you
only wanted to buy under these conditions. At the time European session
started the pair found itself at support or breaking Asian session lows and
presenting one with an opportunity to buy in the direction of the prevailing
trend. You could simply by at the market price around London open with
some 30 pip stop loss and wait for a session or place 50 pip take profit target
and enjoy nice cash throughout the last week of April.

eur/usd 1 hour chart (short term uptrend in eur/usd)

Trading news during American session

European session merges with US session. When New York session starts
some big European markets are still open and you can expect to see a lot of
volatility and big moves during American session. You also have important
data coming from US during American session and the data often creates a lot
of volatility, which volatility traders enjoy. Those who trade news like trading
during American session as the most important pieces of economic data are
released during this session. How do they trade it?

The best way to trade the news is again to trade it in the direction of the
prevailing trend. Even if the news is bearish during an uptrend, a pro trader
would often buy when the market falls after the news into the support level.
The same is true about a downtrend. If some bullish news comes out it
usually has temporary effect and market quickly resumes its’ downtrend after
initial reaction fades.

Below you can see example of usd/chf pair. The pair has been in a downtrend
for a while. On the 28th of April, 2015 US Consumer Confidence data was
released. Right before the release the pair was rising. However, when worse
than expected news hit the market it sold off sharply. After some fluctuations
it resumed its’ downtrend in a matter of a few days. So, you could simply sell
usd/chf a few minutes before the news with some 30-40 pip stop loss and get
around 70 pips profit after three hours. Nice risk reward ratio. These events
happen every week and a smart trader can take advantage of that by trading
them smartly and making nice profits.

usd/chf pair 1 hour chart (usd/chf news trading strategy)

Scalping

Scalping is yet another trading strategy that Forex traders use. As has been
said, those who use the system may open a hundred positions in a single day.
Depending on targets and time frames used a scalper can keep his position for
a split of seconds or a few minutes. He may also close his trades with one or
two pips to five or seven pips. On the other hand, it is a very complicated way
to trade. You have to be much focused, keep your positions very small and
always be in front of your computer screen to take those few pips and put on
a new trade. As the book is for newbies I would not really recommend
anybody who is new to the subject to start from scalping. I do not even want
to go into subject deeply. As you progress as a trader and you find out that
you are better with very short time frames and you want to do such short
term trades you will be able to search for books that specialize on the subject,
read them, practice and see for yourself whether you want to be a scalper or
not. The only idea that I want to leave you with if you want to know more is
that most scalpers also trade in the direction of prevailing trend and tend to
buy near support of a given range and sell at the top of it.



Chapter 4

Specifics of currencies and how to take
advantage of it

When you come to Forex market you may not have as many instruments to
trade with as in US or UK or most world stock markets due to a limited
number of currency pairs. However, there are still more than enough to
choose from and the limited number can also serve as an advantage, because
you can choose faster which currency pairs you like most and which ones you
would like to stay away from.

Currency pairs, in the same fashion as people have their own characteristics.
Why is that? Well, I guess because different people like trading different
currencies. They surely have their preferences, motives and reasons behind
trading this or that specific currency pair. And so should you.

Firstly, you need to remember that it is not only important to choose
appropriate currency pair, but also understand that at different times it may
behave differently because of different market states. What are market
states? These are conditions that cause currencies to do either of the three:
trend, range or go sideways. All of the pairs undergo all of the above and while
some currencies may be trending, others maybe ranging and yet others may
be simply going sideways. Depending on a state you may want to use a
completely different strategy to trade one and the same currency pair.

Charts below show the same currency pair in three different states.

The first one shows eur/usd 8 hour chart from the 16th of December, 2014 to
the 26th of January, 2015. We can clearly see that eur/usd in a downtrend and
the soundest way to trade it is to keep selling when it rallies upwards.

eur/usd in a downtrend

The second one shows eur/usd 8 hour chart from January 26th, 2015 to
February 26th, 2015. You can see that there is no direction in the pair and
there is no clear range too.
eur/usd in a choppy market

The third example shows eur/usd 8 hour chart, where we can see that the pair

from the 13th of March, 2015 to the 30th of April, 2015 stayed in a clear cut
range of 1.0500 (that acted as support) and 1.1000 (that acted as resistance).
As you may see the same pair acted differently at different times of the year
and if you have traded all those three states in the same way you would have
lost money. Each specific state needs a specific strategy for you to apply.
eur/usd in a range

However, currencies have their specifics and their daily ranges. These may
also differ as times go by, but currently daily ranges of most currencies can be
seen in the chart below.
Daily range in currencies. Taken from forexfactory.com

Upon careful analysis we are going to find out that some currency pairs have
much larger daily average range than others.

British Pound is the top runner

It is clear from what we see that British Pound currencies have the biggest
daily average ranges. That also means that they are the most volatile. You
may make bigger profits trading them, but your stop losses will have to be
bigger too due to large daily swings that these pairs create. Even in ranges or
choppy market conditions you will see that Pound pairs have their daily
average ranges pretty big. So, if you are a trader who searches for big market

swings, British Pound pairs are for you to trade.

eur/gbp and eur/chf are the “calmest” pairs

It has been for a long time. The only Pound pair that has very small daily
average range is eur/gbp. It is a very orderly pair and if you hate volatility
eur/gbp might be the right pair for you. The same can be said about eur/chf.
You may select one of them or both if you want to take smaller profits and
have smaller stop loss orders.

eur/usd is the most liquid pair

Although eur/usd does not have such large daily range as gbp/usd, it is the
most liquid pair. It means there are a lot of traders trading the pair and it will
never be a problem for you to open large orders and close them any time you
want, because there will always be somebody on the other side to buy from
you or to sell to you. eur/usd also forms nice trends and pretty clear technical
support and resistance levels that traders like trading.

Avoid not popular pairs

Some currency pairs are not very liquid and they may have big gaps during
the day, particularly when trading sessions change: from European to
American or American to Asian. Such pairs as gbp/nzd, eur/nzd or gbp/aud
are kind of exotic and should be traded with care or better avoided. They are
very volatile, their technical levels are not that good and as has been said you
may lose much more than you expect due to gaps that are quite often in these
pairs.

Conclusion

You need to know about daily average ranges of pairs in order to decide which
pairs you want to trade and which ones to avoid. You should also remember

that all currencies undergo different market states: trend, range and choppy.
You need to understand specifics of that, because what works in trend
environment may not work in a market which is in a range or in a choppy
state. The best thing to do is to find out one or two favorite pairs and trade
them consistently. Most traders find it difficult to concentrate on more than
four pairs. So, a few pairs are more than enough. One could be more volatile
and another one less. Practice for yourself to find out what pairs are the best
for you and then trade them consistently.

Chapter 5

Technical tools that might help you in trading
currencies

Some traders rely totally on fundamental analysis and they are successful.
There are others that rely totally on technical one. There is a third group that
will use both. In this chapter we want to look a little bit at some of the most
important technical tools that a trader can use in trading currencies. Some of
them might be used in spotting a trend reversal, others for trading in a range,
yet others will help you to add to your existing position in a prevailing trend.

Trendlines will help you to see a current trend and its reversal

A lot of traders use trendlines to see whether a current trend is still in
progress or it is stalling. You probably know that an uptrend can be defined by
higher highs and higher lows, while a downtrend is defined by lower lows and
lower highs. As long as you see those you maybe sure that up or down trend is
intact. Another thing that might help you to see an ongoing trend is a
trendline.

How to draw a trendline

In an uptrend you need to draw a trendline by connecting two higher low
points. There maybe more than two points (in fact, there can be even ten), but
there have to be at least two. As the trend progresses there may appear more
trendlines, because a trend can become steeper and you may need to redraw
your trendlines to see where support is. In an uptrend, trendline, not only
shows that trend is still on, but it also acts as support where you may attempt
to enter extra buy position in the direction of the prevailing trend.

When a trendline is finally broken we may assume that a trend is over, or at

least we are entering a consolidation zone, or a range. It does not mean that a
downtrend is about to emerge. A trendline is traditionally considered to be
broken when price closes below a trendline in an uptrend.
In the example of eur/usd below you can see a big uptrend that started in
2006 and ended in 2008. You can clearly see higher highs and higher lows
and two trendlines: primary and secondary. Primary trendline was hit 5 times
and acted as support. On the number 6 it was broken. You can also see that in
the middle of 2007 the uptrend became much steeper and we had to draw a
secondary line to adjust our support levels. This trendline was hit three times
(A, B and C) and acted as support. It was finally broken at point D.
eur/usd uptrend weekly chart

In a downtrend you need to draw a trendline by connecting two lower high
points. There maybe more than two points (in fact, there can be even ten), but
there have to be at least two. As the trend progresses there may appear more
trendlines, because a trend can become steeper and you may need to redraw
your trendlines to see where resistance is. In a downtrend, trendline, not only
shows that trend is still on, but it also acts as resistance where you may

attempt to enter extra sell position in the direction of the prevailing trend.
In the example below you see a downtrend that started in eur/usd in the
middle of November, 2014 and continued till the end of January, 2015. The
trendline was touched four times and it acted as resistance where you could
add extra sell positions to your portfolio. On point 5 the trendline was broken
and a range started. There was no possibility to draw a secondary trendline as
the fall was sharp enough from the very beginning.
eur/usd 8 hour chart (downtrend)

Trading RSI and price divergences in currencies
RSI is a technical indicator that a lot of traders use for trading a range. It
shows whether the price of a given security is overbought, oversold or stands
at neutral level. You can put different parameters for the indicator, but I
prefer playing with 14 and 21 day parameters. In most cases I use 21, but if a
currency pair is not very volatile like eur/gbp or eur/chf I might use 14 RSI
too. It is traditionally considered that when RSI goes below 30 level it is
oversold and when it is goes above 70 level it is overbought.

However, there is a better way to use RSI and that is by looking for divergence
between price and RSI indicator. If price is rising in most cases RSI and price
show the same thing. You see the same rise in price and in RSI indicator.
However, when price starts making deeper corrections and then makes new
highs, very often RSI forms a divergence with price; it does not show a higher
high. It will show a lower high. This indicates that the move may have
exhausted itself and a correction is due.

The chart below shows eur/jpy pair that has been rising in 2013. By the
middle of the year it started making bigger retracements and corrections. We
can see that in May, 2013 it made a new high. However, if you look at RSI
indicator at the lower part of the chart failed to show a higher high. This is
obvious that momentum started slowing in eur/jpy rise and a deeper
correction is coming. That’s exactly what happened in June, 2013. Of course,
it does not mean you have to sell right away when you see a divergence
between price and indicator, but it tells you to stay alert and wait for other
signs of reversal and when you see them, jump on board and start selling.

eur/jpy daily chart (bearish divergence between price and RSI)

You can see the opposite example in a downtrend of eur/jpy. The pair has
been falling sharply since beginning of 2014 for about four months. Price fell
more than 2000 pips in that period of time. However, somewhere around
beginning of February price started bouncing and rallying. It managed to
make two more lower lows on March 12 and April 13, but if you look at RSI
you will see that indicator did not reflect that. On the contrary, it showed two
higher lows. By the end of April price turned around and started moving up
sharply.
eur/jpy daily chart (bullish divergence between price and RSI)

As you can see by now, RSI divergences indicate about a reversal way before it
happens. This is quite unique as most indicators are lagging. They show some
event (a fall or a rise) usually too late (after it has occurred). RSI divergence
shows it before it has actually occurred.
Most important candle formations one can trade
What does a doji (pin) tell us?
A doji or a pin is probably one of the most traded candles that traders watch

and base their trading decisions on. You should know that any Japanese
candle consists of four parts: opening, close, high and low. Below you can see
a bullish pin. You can see that the body of the candle is very small. The lower
part of the body is opening, the upper part is closing, the very low of this long
wig is the low of the candle and the very top is the high of it. A bullish doji is
formed when price after opening moves sharply lower and then
suddenly jumps up and closes high for the day. This indicates a bullish
reversal. Bullish dojis form after a downtrend or simply after price correcting
in a bullish trend near support. It means that there are a lot of buyers of the
security and you may join them too.

A bullish doji (pin)

Below is the example of a bearish doji (pin). You can see that the body of the
candle is very small as in the example with bullish doji. The lower part of the
body is opening, the upper part is closing, the very high of this long wig is the
high of the candle and the very bottom is the low of it. A bearish doji is
formed when price after opening moves sharply higher and then
suddenly collapses and closes low for the day. This indicates a bearish
reversal. Bearish dojis form after an uptrend or simply after price correcting
in a bearish trend near resistance. It means that there are a lot of sellers of
the security and you may join them too.

A bearish doji (pin)

Below is an example of what happened when bullish doji formed after a
prolonged downtrend. eur/jpy pair has been falling for a long period of time
when a huge pin was formed on the 16th of October, 2014. A trend reversed
from bearish to bullish within a week and after that price rallied upwards for
over 1000 pips.
eur/jpy daily chart (bullish doji)

A completely different story happened eur/gbp pair. It has been in a range for
quite some time when on the 16th of December, 2014 it formed a big bearish
doji near resistance. Price started collapsing within a few days and moved for

around 1000 pips in less than three months. Taking into account that the
value of a pip in eur/gbp is higher than in other pairs it would correspond to a
move of around 2000 pips (a little bit less).
eur/gbp daily chart (a bearish doji)

Inside candle break
Inside candle is a candle formation that may result in a break of a pattern in
any direction (up or down). An inside candle is a candle that forms within
other candle. In fact, there may be more than one candle inside a bigger one.
Traders watch those carefully in order to predict a break. The most logical way
to trade it is to anticipate an inside candle near support and buy and an inside
candle near resistance and sell. It is best to trade these combinations within
direction of the prevailing trend and in a range (as has already been said) sell
at resistance and buy at support.
Inside candle

So, there are two main ways to trade these formations. When an inside candle
forms near support you would only want to buy that currency pair.
Below is a daily chart of aud/usd pair. You can find a lot of bullish inside
patterns near support. I singled out two of these formations. I left others
unmarked so that the reader might find them on his own (there are 4 more
inside candle examples on the right side of the chart. Find them near support
levels). The candle that other candle(s) fit in is usually called a mother
candle. You can see how price shot upwards after a break of inside candle
occurred.
aud/usd daily chart (examples of inside candle breaks)

You would also look for inside candle breaks and reversals at resistance in a

range or after a rally (correction) in a downtrend. In the second example we
see eur/gbp pair that has been in a range throughout the summer and half of
autumn of 2014. You can clearly see how price acted at resistance when inside
candles formed within mother candles. Price would collapse tremendously
making a possibility for technical traders to earn a lot of pips in the process.
On the left side of the chart you can actually see two mother candles right one
after another. The first one had only one inside candle within it, but the
second one had two. Eventually, the price crashed down. On the right side you
may see another example of a big mother candle and somewhat smaller
inside candle within. Strong move down started after the formation was
broken downwards.
eur/gbp daily chart (mother and inside candles within a range:
bearish)

Conclusion
There are a lot of other technical indicators, price patterns and candle
formations that you may want to learn about. The point is that you have to
learn which ones work best and under what conditions. You need to learn to

focus and not to fill in your head with too much information. Learn to
specialize. Learn one pattern very well and when you feel that it has become a
part of you (sort of second nature) you can go on with learning other patterns
and usage of other technical tools too. Mastering some pattern takes time and
patience. So, do not rush. Try to search for the above mentioned technical
things on your charts and see how you could trade them. Good luck.

Chapter 6

Importance of risk management

You are as long in the game of trading currencies as you have capital. If you
lose all of your money, you cannot trade anymore. It sounds logical! However,
so many fresh traders trade currencies like gamblers, pushing “all in”
whenever they feel like doing that and without thinking about consequences.
And they surely experience not only the thrill of trading, but also the
consequences of loss: pain, anger, disappointment and discouragement. This
thing could be easily avoided if traders learned a very simple lesson of risk
management. That is probably the most important thing they have to learn,
the thing that will help them to save their trading career in the future.

It is not a big secret that most traders lose, not make money in the market.
Why would you think you will be different? If you are not prepared for
trading you will surely not be an exception, but another example of what
happens to traders who place their trades based on emotions, without a
trading plan and in a hurry. There are two things that help us to stay in this
game: making money and protecting it. In any game of sport you will
probably have these two: offence and defense. Without offence you will not
move forward or grow your account, without defense you will keep losing
what you have made. Both are very important. This chapter will deal with
defense strategies in your trading or as all pro traders call the thing: risk
management. Learn the lesson and you will be able to sail through all the
storms of your trading career, ignore it and you will regret it sooner rather
than later. 90 percent of traders fail in this business. Most of them do so,
because they never learn to manage their risks. Follow the tips in the chapter
and you will be well equipped in defending your capital from top pros who
might be on the other side of the trade when you open it.

Never push it “all in”

I use this phrase from poker playing. This is a dramatic move that a poker
player might make while playing cards. If he loses the hand, he is out of the
game. Some traders do just about the same thing. They expect to double their
money on a single trade and they take maximum leverage, plus all of their
equity and they open a trade on expectation that money will be doubled. It
might be, but there will definitely come a time when risking it all will end
losing it all. Never do that. Be smart. When you start trading I would not
recommend risking more than 1 percent of your equity on a single trade. After
you gain experience you may up that to 2 percent, but not more. Every trader
has a losing streak at some point when he experiences a number of
consecutive bad trades. If you risk more than ten percent and you find
yourself in a losing streak you might be out of the game after some 8-9
trades. If you risk 1 or 2 percent you will still have 90 or 80 percent of your
capital after the losing streak is over. So, never push it “all in”.

Always use a protective stop loss order

Be sincere with yourself, you are going to have a lot of bad trades. Excellent
traders have some losing trades, good traders have a lot of bad trades, but
both types of traders survive strong market moves against them, because they
trade with stops on their positions, in case something happens. What could
happen, you might ask? A lot of things! There might come out some
fundamental news that will take market by surprise and currencies will move
hundreds, in some cases thousands of pips before you can make up your
mind what to do. Yes, that does not happen often, but it may happen once in a
lifetime and if you do not have a stop you might give a sweet kiss of goodbye
to your trading career as you can lose it all in split seconds. A recent example
of Bank of Switzerland move to remove the ceiling in eur/chf pair is a proof of
that. Swiss France soared thousands of pips when the news hit the market. If
you were on the wrong side of the trade you would have probably had a

margin call in a matter of a few minutes. So, be smart, trade with a stop loss.

Protect your floating profit

You may not risk your balance, but you can also risk your floating profit. If
you have an open trade and it shows you profit a smart thing to do is to
protect that profit. You may want to lock in some of it, in case market turns
against you and takes away all of it. Move your stop loss order in the profit
zone! If you have some 200 pips of profit you will surely want to preserve
most of it. How can you do it? You simply move your stop loss closer to
current price (not too close), let’s say some 100 pips. It means if there is a
sharp reversal you will still have your 100 hard earned pips. If market
continues going in your anticipated direction, you will make even more. So,
protect your profit by moving your stop loss order as price moves in your
favor.

Use small positions, but bigger stop losses

You can enter market with 10000 dollar position and use 10 pip stop loss
order and you can enter market with 1000 position and use 100 pip stop loss
order. In both situations your theoretical loss should be about 10$. However,
if you open a trade with the first type of position your risk could increase
dramatically. How is that? Imagine yourself opening a trade around
important news release. Market may gap out and your broker may not be able
to fill in your stop loss at the price you want. He will most definitely fill it in
at some point, but the stop loss may increase by 30-100 pips. Is that possible?
Yes.

When news releases come you can often see gaps. Brokers stretch spreads on
specific currency pairs and if you have an open position in any of them you
may burn severely. So, your initial projected loss of 10$ may become 50$ or
even 100$. This will hardly happen to second type of position. If your stop

loss order is some 50-70 pips away from current price, even when news
comes out your stop loss will not experience a gap and will be filled in at price
you indicated and if you lose, you will lose 10$, not 50 or 100$.
In currency crosses and more exotic pairs gaps happen even when no news is
around and if you have a position in one of the pairs you might be in much
bigger losses than you have expected. Below is the example of eur/nzd pair
(Euro/New Zealand dollar). You can see how the pair gapped up on the last
hour of April 29, 2015. The gap was around 62 pips. And then it continued
going up. The pair was at resistance at the time, so had you been selling it you
would have experienced a stop loss gap and your losses might have been 3-5
times bigger (depending on size of your position) than you initially expected.
eur/nzd 1 hour chart (gap on 29th of April, 2015)

Conclusion
The conclusion is obvious: never risk everything on a single trade, do not risk
more than 1 percent of your capital on any of your trades, always have a
protective stop loss, move your stop loss to protect your profits and finally,
trade smaller positions, but with bigger stop loss orders to avoid price gaps.