Everything You Need to Know About Forex from How Forex Trading Works Contents Introduction

Everything You Need to Know about Forex from How Forex Trading Works Contents Introduction...... 4 The Basics of Forex...... 5 The Size of the Forex Market...... 7 Where Forex Market Currencies Are Traded...... 9 How Forex Market Currencies Are Traded...... 10 The Advantages of Forex Trading...... 12 Currency Pairs Explained...... 13 Forex Spreads Explained...... 15 The Costs of Forex Trading...... 16 Types of Forex Orders...... 18 Forex Margin Trading Explained...... 20 Forex Micro Accounts and Lots Explained...... 22 Comparing Forex Trading to Stock Trading...... 23 Comparing Forex Trading to Futures Trading...... 25 Forex Trading Rollovers Explained...... 27 When the Forex Market Is Most Active...... 28 Fundamental Analysis Explained...... 30 The Movers of the Forex Market...... 32 Nonfarm Payrolls Explained...... 34 Consumer Price Index Explained...... 35 Consumer Confidence Index Explained...... 36 Gross Domestic Product Explained...... 38 Trade Balances Explained...... 39 Interest Rates and the US Dollar...... 40 Nonfarm Payrolls and the US Dollar...... 41 Comparing Fundamental Analysis with Technical Analysis...... 42 Types of Forex Charts...... 44 The Best Types of Forex Charts...... 46 Time Frames in Forex Trading...... 48 Technical Charting Indicators in Forex Trading...... 50 Support and Resistance in Forex Trading...... 52 Price Channels in Forex Trading...... 54 Fibonacci Retracements in Forex Trading...... 56 Moving Averages in Forex Trading...... 58 Bollinger Bands Explained...... 59 Candlestick Chart Information, History and Patterns...... 61 Using Candlesticks and Candlestick Patterns...... 63 Important Forex Trading Charting Patterns...... 65 Strong Bullish Reversal Candlestick Patterns...... 67 Moderate Bullish Reversal Candlestick Patterns...... 68 Weak Bullish Reversal Candlestick Patterns...... 70 Strong Bearish Reversal Candlestick Patterns...... 71 Moderate Bearish Reversal Candlestick Patterns...... 73 Weak Bearish Reversal Candlestick Patterns...... 75 Continuation Candlestick Patterns...... 77 The Head and Shoulders Charting Pattern...... 79

Copyright © 2012 How Forex Trading Works 2 Getting Started Commodity Currencies Explained...... 80 Trading Cross Currencies...... 81 Trading Synthetic Crosses...... 82 The Basics of Forex Options...... 83 Money Management in Forex Trading...... 85 Using a Risk/Reward Ratio...... 87 Using a Forex Trading Plan...... 88 Choosing a Forex Broker...... 89 Trusting Your Forex Broker...... 91 Choosing a Money Manager...... 92 Forex Trading and Taxes in the US...... 94 Scalping the Forex Market...... 96 Trading with News Announcements...... 97 Using a News Trading Strategy...... 99 Using a Range Trading Strategy...... 100 Using a Swing Trading Strategy...... 101 Using a Trend Trading Strategy...... 102 Using a Carry Trading Strategy...... 104 Creating Your Own Forex Trading System...... 106 Conclusion...... 107 Getting Started...... 108

Copyright © 2012 How Forex Trading Works 3 Getting Started Introduction Anyone can get rich Forex trading, but if you really want to be successful at trading currencies, you will need to work hard. If you are just starting out, you will have a lot to learn. However, Forex trading can be extremely rewarding, so you should keep at it and never give up. You will need to have both knowledge and experience to succeed in the Forex market. In order to gain knowledge, you will need to study and in order to gain experience, you will need to practice by applying your knowledge to the actual markets. This eBook should help to increase your knowledge of Forex trading. You should really open a Forex trading account of your own as soon as possible though, preferably a demo account to begin with so that you can trade risk-free, as this will allow you to practice as you study. This way you will be able to gain some valuable experience early on. Click here to get started. Success can never be guaranteed, but by reading this eBook and practicing alongside it, you will definitely be able to increase your chances of success in the Forex market.

Copyright © 2012 How Forex Trading Works 4 Getting Started The Basics of Forex Whilst you might not yet have heard of Forex, you will most likely have heard of the foreign exchange. Forex and the foreign exchange however, are actually both the same thing. The Forex market itself, can be referred to as the foreign exchange market, the currency market or the FX market. The market first established itself in the 1970s and has been lively ever since. Currencies began fluctuating in the 1970s, due to President Nixon's policy of taking the US off of the gold standard. The "gold standard" refers to the system in which values of currencies are defined in terms of gold. With the gold standard system, currencies could be bought and sold in exchange for gold. This system is of course nowadays very outdated and old-fashioned. So we can say that US currency was in fact once backed by gold, however now it is simply backed by the belief that people have in the US government and its ability to back the currency itself. The market, despite it being around for quite some time, has actually only been a publicly accessible market since the 1990s. It is thought that many of the main market makers didn't in fact establish themselves completely, until the 2000s. The market was originally reserved, mostly to banks and larger institutions. The big traders were the only ones that could play with the currency market and they tended to invest millions of dollars into it - generally no less than $10 million. The Forex market is unique for many reasons: - It bears a huge trading volume, leading to high liquidity (due to the fact that the market represents the largest asset class in the world) - It is very geographically dispersed - It is very continuous (the market operates 24 hours a day, excluding weekends) - It can be affected by a wide variety of factors - It provides low margins of relative profit (when compared to other markets of fixed income) - It, with respect to account size, can provide leverage that can be utilized to enhance both profit and loss margins. Although the market can experience currency intervention by central banks, the foreign exchange market has been referred to as the closest market to the ideal of "perfect competition". Perfect competition is an economic theory that describes markets whereby no participants are large enough to have full (or the majority of) market power to set the price of a homogeneous product. Although the FX market is in fact quite new and has only been open to the public since the 1990s, it has since been opened up to the retail public online due to the Internet, meaning that just about anyone can now open a currency trading account in the currency market within a matter of seconds. It is also possible to start an account with very little money nowadays, meaning that you can trade with almost as little as you want, as online Forex brokers only require very small minimum deposits.

Copyright © 2012 How Forex Trading Works 5 Getting Started In conclusion, the currency market is actually a relatively new market, though it is very unique and has many advantages. The market is also accessible by both small-timers and so-called big boys.

Copyright © 2012 How Forex Trading Works 6 Getting Started The Size of the Forex Market The largest financial market in the entire world is in fact the Spot Forex market. The market itself bears a daily trading volume of $4 trillion on average. The New York Stock Exchange (NYSE) trades around $20 to $30 billion per day, putting this into true perspective - the size of the Forex market is huge. The Forex market dwarfs the largest stock exchange in America, however even if you totaled the volume of every single stock market around the world, the Forex market's daily trading volume would still come out on top. The market is actually very simple though, in essence. The currency market merely involves the trading (AKA exchanging) of money itself. Usually you would exchange money for goods and services in the real world, but in the Forex world, you exchange money for money. When you buy a good or a service, it will be valued and you will have to pay that value in your chosen currency. This is similar in currency trading: a currency is valued in terms of another currency, and you pay for the value of that currency with the other currency! What you will usually see quoted is the exchange rate. The exchange rate simply determines how much currency another currency can buy. This can sometimes sound quite complicated, but it is very simple and you will soon get your head around how the Forex market works. There are plenty of factors that affect exchange rates and these factors can cause an exchange rate to go up or down. You could write a very long list, in fact the list would probably be endless, of all the factors that determine an exchange rate. However ultimately, an exchange rate is primarily determined by the belief that people have in a particular currency, collectively. The Forex market is just like any other financial market in the sense that it is all about mass psychology more than anything. People will collectively look at how different economies are doing, the political stability of a country, consumer sentiment, exchange rate trends etc - the list, of course, goes on! Traders and investors in the FX market include both large and central banks, governments, corporations, institutional investors, currency speculators, other financial institutions and retail investors. The foreign exchange market's (and other related markets') average daily turnover is consistently growing over time too as more and more people are taking advantage of this unique financial market and the market is slowly becoming more and more well-established. Currency trading has more than doubled since 2004, interestingly. In conclusion, the Forex market is the largest financial market in the entire world, dwarfing all other financial markets. It simply involves the exchange of currencies using exchange rates - these exchange rates are determined by many factors, though primarily mass psychology and the collective belief that people have in particular currencies. The Forex market consists of very high volume traders and investors as well as very low volume

Copyright © 2012 How Forex Trading Works 8 Getting Started Where Forex Market Currencies Are Traded One of the main advantages of trading in the Forex market is that trading is very easy and convenient. You can setup an online currency trading account within a few minutes nowadays, with only a few dollars. You do not have to literally exchange your money in cash form or setup some special kind of Forex bank account - you can simply start trading currencies online from your own home. But you can't do this all yourself - you will need to find an online Forex trading website. These online Forex trading websites are often referred to as "brokers", though they aren't technically brokers at all since they don't work with commissions - there aren't any commissions when trading in the FX market online. You are dealing directly with the market maker, when trading foreign exchange currencies. You might wonder why they would even bother providing such a service if they don't make any money out of you and your trades - well actually, they do, but not nearly as much as stock brokers do. Market makers in Forex simply charge spreads (the spread is the difference between the buy and sell quote - stock brokers though, will charge commissions. When trading stocks inside your stock brokerage account, not only do you incur a spread cost from the market maker, but also both a buy commission and a sell commission from your stock broker. So, once you have bought and sold a stock, you have already paid for three separate fees. In foreign exchange trading, you only have to simply pay for the single fee of the spread, and no annoying commission fees which could cut into your marginal profits/losses. It gets even better too: You might also want to know, that even the spread cost is lower in Forex trading than in stocks. This is because, when you consider the sheer volume and amount of currency you are actually controlling, the spread cost will come out appearing a lot less significant. So, this is just another advantage of trading foreign exchange currencies online - you pay a lot less in the Forex market than you do in other financial markets, which is just another reason why it is so popular. You will not have to worry about any hefty commission fees and you can take your entire profit or loss to yourself - you are your own trader! In conclusion, Forex trading in the currency market is a lot more simple than trading in other financial markets since you only need an online FX broker (though notably these brokers will also be referred to as "brokers") and you can trade from home within a matter of minutes. Forex brokers do not work with commissions, only spreads, making currency trading a lot cheaper than trading in other financial markets, such as in stocks. You are more responsible for yourself when trading Forex and you are your own trader, which if you think about it, is more of a positive attribute to FX trading than a negative one.

Copyright © 2012 How Forex Trading Works 9 Getting Started How Forex Market Currencies Are Traded Forex market currencies are traded in pairs. This is because one currency could be strong against one particular currency but weak against another. It's all about being relative when trading in the foreign exchange market. Remember that these exchange rate pairs are determined by a huge number of factors, but primarily by a collective belief in the currencies by investors all around the world (including not only large banks and corporations, but us too)! Let's take an example of how foreign exchange currencies are paired: Let's say that investors feel the US economy is doing relatively well when compared with the UK economy. In the US, the currency is represented as USD (US dollar) and in the UK, the currency is represented as GBP (British pound). Because investors feel the US is doing relatively well when compared with the UK, the USD will gain strength over the GBP. However the GBP, although losing to the USD, could in fact strengthen against another country's currency simultaneously - so it's all about being relative and knowing your exchange rates. One currency can look weak in terms of another currency, but strong in terms of another. Currency pairs usually look like the following: GBPUSD = 1.50 The pair above tells us that it will take 1.5 USD to purchase 1 GBP. So, if the USD gains strength over the GBP, the value of this pair (the exchange rate) might decrease to say 1.4. If you think about it, it is extremely simple! These pairs are always moving and all day too. The increases and decreases in the exchange rate are generally much more gradual than the example given above and a lot more marginal. All currencies are traded through the interbank market, through the many Forex market makers. The market makers themselves set the quotes based on the pressures of the buying and selling of the currencies that they see when looking at the demand for the currencies vs. other currencies. Currencies themselves are traded as OTC (Over The Counter) in the spot Forex market. This means that Forex is not traded on a particular exchange around the world but it can be traded anywhere. For e.g. the NYSE (New York Stock Exchange) is traded in a certain physical location, but NASDAQ is not. They are both two different ways in which stocks are traded, but one is OTC, like Forex! This is just another advantage of trading in foreign exchange market. Market makers have to compete with each other for your business more than for e.g. a stock broker would in the stock market since they work on a physical exchange. This extra competition is healthy and ends up in the favor of the currency traders. In conclusion, FX currencies are traded in simple pairs that represent the exchange rate and the price of one currency in terms of another. All currencies are traded through the interbank market through market makers and currencies are traded as OTC (Over The

Copyright © 2012 How Forex Trading Works 11 Getting Started The Advantages of Forex Trading There are many reasons why the Forex market is such a unique financial market and many of them are positive that also act as advantages of Forex trading. The currency market is very large with a $4 trillion average daily trading volume. This acts as an advantage to currency traders since greater volume means better fills on your trades (meaning less slippage). Slippage simply refers to the difference between a market price before and after placing an order - you could choose to buy at one price but actually end up buying at another by the time the order has actually completed. This is due to slippage (usually occurring in highly volatile markets). The greater the volume at each individual price level, the better the fills are. Because of the very large trading volumes, the FX market can provide less slippage than any other financial market, meaning less real trading costs. Not only are the fills better in the foreign exchange market, but the spreads are also less costly. Also, you pay zero commissions since you technically go to a dealer and not a broker. You trade with the market makers directly rather than through a broker, meaning you can save a lot of money. However, do remember that many online Forex brokers will call themselves brokers, but they technically are not brokers at all. The Forex market is also very convenient as you can trade 24 hours a day, rather than 6.5 hours a day with the stock market, both excluding weekends. This means that you can choose the best time to trade for you and you can really focus on your trading. Also if you want to, you can trade currencies as the news and announcements are released, which you cannot do when trading in the stock market. In the FX market, there are also no restrictions on short selling. They tend to make it hard to short sell in the stock market since they want stocks to rise and not fall. However, there are no restrictions when it comes to short selling in the Forex market. You can short just as easily as you can buy currencies in the currency market and the fills are just as quick. You should also remember that when trading currencies, you are technically going long in one currency and short in another since you trade with currency pairs. The currency market is also highly liquid and can provide high leverage. This means that currencies tend to be price stable and slip minimally with narrow spreads and high liquidity. High leverage, starting at a minimum of 100:1, means that you can make larger profit/loss margins with only a very small initial deposit - you should try to work this to your advantage. Do bear in mind that different countries will have different limits on the amount of leverage available to traders and investors. In conclusion, there are many advantages to trading in the Forex market. Greater volume means less slippage, you pay no commissions meaning less trading costs, you can trade 24 hours a day meaning more convenience, there are no restrictions on short selling meaning more freedom, the market is highly liquid meaning again less slippage and more stable prices and high leverage meaning larger margins.

Copyright © 2012 How Forex Trading Works 12 Getting Started Currency Pairs Explained Currency pairs are used frequently in Forex to show the relationship between one currency and another. They can simply and clearly show the exchange rate between one currency and another. For e.g. GBPUSD = 1.5 means it will take 1.5 USD (US dollar) to buy 1 GBP (British pound). If you click 'buy' on GBPUSD, you are buying into GBP (the first currency, AKA the base currency) and you are selling up USD (the second currency, AKA the quote currency). There are actually three groups of currency pairs. There are the "majors", the "crosses" and the "exotics". The major currency pairs, are the ones that pair the major countries' currencies with the USD. These majors also bear nicknames, given below: - GBP/USD. Sterling, Cable (British pound vs. US dollar) - EUR/USD. The Anti-Dollar (euro vs. US dollar) - AUD/USD. Aussie (Australian dollar vs. US dollar) - NZD/USD. Kiwi, AKA Kiwi Dollar (New Zealand dollar vs. US dollar) - USD/JPY. The Yen (US dollar vs. Japanese yen) - USD/CHF. Swissie (US dollar vs. Swiss franc) - USD/CAD. Loonie (US dollar vs. Canadian dollar) The cross currency pairs are simply the ones that pair any currencies with any other currencies excluding the dollar. For e.g. GBP/EUR (British pound vs. euro). The exotic currency pairs are slightly more interesting since they involve emerging economies rather than developed ones. For e.g. USD/MXN (US dollar vs. Mexican peso). These exotic currency pairs are interesting but it takes a little more research and experience to do well trading exotic currencies. As a beginner trader you should start trading with the major and cross currency pairs. When you become more experienced, you could try your hand at trading with exotic currency pairs. After understanding currency pairs, we should understand when each currency trades. Although in currency trading you can trade 24 hours a day excluding weekends, the different Foreign Exchange currencies trade in different sessions mostly: - United States Session (8AM to 5PM EST) - European Session (3AM to 11AM EST) - Asian Session (5PM to 4AM EST) Also take note that the trading week actually begins on Sunday evening at around 5PM EST and ends at around 4PM Friday evening. Between those times, the FX market is open to all. The different sessions also carry different characteristics. The United States Session is generally quite high volume and volatile, but it is in fact second to the European Session

Copyright © 2012 How Forex Trading Works 13 Getting Started which actually carries the most volume and volatility. The Asian Session is a lot less heavy in terms of volume and volatility. The Asian Session generally serves to form ranges whilst the United States and European Sessions tend to form intraday trends. If you want to focus on one particular currency (or on a few particular currencies) you should work around the time zones and discover when each currency is most active (currencies are more active when their banks are open during business days). In conclusion, currency pairs are very simple but they can also be categorized and we should understand the different types of currency pairs to get the most out of Forex trading. We should also understand that different currencies belong in different sessions and time zones and we should really understand the currencies that we focus on (how and when they work) to benefit the most out of currency trading.

Copyright © 2012 How Forex Trading Works 14 Getting Started Forex Spreads Explained In Forex trading, you will notice the term "spread" mentioned often. Spreads are relatively simple, but you must take some time to understand what they actually are and how they work. In Forex, a spread is simply the difference between the "ask" and "bid" price. The ask price is the price at which brokers are willing to sell a currency at, and the bid price is the price at which brokers are willing to buy a currency at. The ask and bid prices change over time in every case, however they generally always different from each other, meaning that the broker will always make a profit whatever the situation may be. Of course, the broker's main priority is to buy low and sell high - this is why, if the two prices are different, the ask price will always be higher than the bid price. The spread in Forex, just like in every other financial market, is dependent on more than factor e.g. the market demand and supply of a currency, currency liquidity. We, as investors, should be aware of the spreads for different currencies in order to maximize profits (or minimize losses) and minimize costs. Generally, you will never receive the exact amount when you exchange one currency for another in real-life. Many people have experienced currency exchanging, perhaps when abroad. The supplier of the currency you are looking to exchange your currency for, will always look to charge you a transaction fee for exchanging the currency. We have the same situation when trading currencies. You cannot avoid the cost of these transaction fees since they are embodied into the spreads, however you can go to better Forex brokers and find ones with the lowest spreads, in order to lower the costs of trading. It is not hard to find competitive spreads since the FX market is so large and competitive! Remember, spreads work whether you gain money or lose money. Regardless of whether you profit or make a loss, the broker will always profit. However although spreads sound bad and costly to you, trading costs are actually very minimal in Forex when you compare them to the trading costs that occur in the stock market. Stock brokers charge huge commissions when buying and selling stocks, so currency trading is actually the cheapest option when it comes to the financial markets. In conclusion, spreads are simple and work simply also. They are simply the difference between the buy and sell prices of a particular currency from a particular Forex broker. Spreads differ with different brokers however regardless of what broker you go with, they will always profit whether you win or lose: they are quite clever in this sense! However, you should ideally find a broker that provides a lower spread so that you can minimize your trading costs and maximize your profits (or minimize your losses, depending on whether you win or lose). Also note that again, although spreads sound costly, Forex trading costs are actually relatively low-cost (depending of course on which FX broker you go to)!

Copyright © 2012 How Forex Trading Works 15 Getting Started The Costs of Forex Trading In Forex, traders and investors don't typically have to worry at all about payable commissions that can can increase trading costs. However, there are definitely costs associated with currency trading that every trader and investor should understand and be aware of. There are two main types of trading costs associated with Forex trading, are "spreads" (the differences between the buy and sell prices of currencies, which are charged instead of commissions) and "rollovers" (which involve overnight holding of orders). Bid/ask spreads are very common in Forex trading and brokers use these spreads to make their money. The broker will make money whenever you buy or sell currencies. You buy or sell currencies relative to the broker's spreads. The broker will make money by selling you a currency at a higher price, this price being relative to the price at which the same broker will be happy to buy back the same currency from you, for your original currency. It might sound complicated at first, but it isn't in reality. The second Forex trading cost, is known as the "rollover". This fee applies only a Forex trader's position is enacted when all of the major markets have closed. Traders are investors typically wait for a few hours before receiving their destination currency. This means that they lose any interest that they could have made by having that currency safe in their bank account. So, rollover fees simply take into account the differences in interest rates of bought and sold currencies. If you buy into a currency with a high interest rate, you will actually be paid the rollover amount when the next trading session begins. Likewise, if you buy into a low interest rate currency, you will be charged the rollover amount. Margin trading in the stock market, essentially involves buying stocks with borrowed money from Forex brokers. However, margin trading presents a cost that is even more predominant in Forex than it is in stocks. Forex trading generally requires very high amounts of leverage. Leverage is when you use borrowed capital for an investment in the hope of making profits greater than the payable interest on the borrowed capital. Forex trading requires high leverage due to the size minimums placed on certain Forex trade types. So, traders and investors that do not have enough money must trade via financing. Leverage ratios of up to 100:1 are common in Forex trading, which means that you only have to own 1 single dollar for every 100 dollars invested. Although this means you can make much profit from a small investment, you can also make many losses, as it essentially increases the risk of the trade. You must learn to try and work leverage to your advantage when currency trading. In conclusion, costs are actually kept to a minimum, since the FX market is very tough and highly competitive - the trading costs reflect this tough competition, as Forex brokers compete with each other a lot. There are only two real costs that you need to worry about,

Copyright © 2012 How Forex Trading Works 16 Getting Started and if you go to a good broker, you won't have to worry at all as even the spreads tend to be unnoticeable and insignificant. You can also avoid rollovers by only trading when the market is open, however in general, rollovers are nothing to worry about anyway.

Copyright © 2012 How Forex Trading Works 17 Getting Started Types of Forex Orders When you buy or a sell a currency in the Forex market, you are actually making an "order". There is in fact more than one type of these that you can make in the currency market market, but there are generally only a few types of them that you must take note of and understand as a trader and investor. The most common types of Forex orders are given below. Remember, you should try to understand each one as best you can, if you want to make the most out of your currency trading career. The most common types of Forex orders are: 1) The market order. This is the most common type of Forex order. Market orders are orders that are placed by traders and investors to buy a particular currency at the current market price. This is the most simple type of Forex order. 2) The limit order. This is an order that is placed to buy or sell a particular currency at a specific price. 3) The stop-loss order. This is an order that is placed to sell a particular currency at a specific price, much like a limit order, except it acts like a limit order for a particular currency that you already hold. These stop-loss orders allow traders and investors to prevent extra losses, since it allows you to sell a currency before it keeps on falling in price. 4) The limit entry order. This is an order that is placed by traders and investors in order to buy below the market price or likewise sell above the market price at a specific price. 5) The OCO (One Cancels Other) order. This is an order that cancels out another order of the same amount. 6) The GTC (Good Till Cancelled) order. This is an order that definitely stays in the market until it has been filled or if the trader or investor decides to cancel the order. In conclusion, there is more than one type of Forex order available, when trading currencies. It really depends on the individual trader or investor and their individual situation, as well as their expectations. Different order types are more appropriate for different situations. For e.g. if you are looking to make more of a longer term investment you may want to simply go for a market order, however if you are looking to make a shorter term investment you might want to make a limit entry one. The majority of people like to go with market orders as they are the most simplistic, but you do need to be careful. It is recommended that you try and take advantage of the different order types in order to get the most out of your investments. Different order types will present different opportunities, but generally the concept is quite simple and you shouldn't worry too much about the different Forex order types. You will learn to grow and work with them. Occasionally, you might get the wrong order type for e.g. you may set a stop-loss order

Copyright © 2012 How Forex Trading Works 19 Getting Started Forex Margin Trading Explained Forex margin trading allows traders and investors to work with greater volumes of currencies that they actually own themselves by borrowing. If a trader or an investor sees a particular opportunity in the FX markets and wishes to take advantage of this opportunity that other investors and traders potentially do not see, they will want to take advantage of margin trading. Generally, you are only able to trade what you have, but with margin trading you can trade more than that. If a trader or an investor predicts that they will yield large returns after taking advantage of a particular Forex opportunity (a certain shift in the exchange rates), they will probably be happy to increase the risk of their trade or investment in order to yield these large returns. They can add risk to the trade by borrowing and investing more money into the trade. Margin can be defined as the amount of money that is required to keep all of your active orders open, in your Forex trading account. So margin trading is simply trading on margin (trading on money that does not belong to your account). Let's take a look at an example and demonstrate how margin trading actually works in currency trading. Let's say that we have one Forex trader with 1,000 USD in their Forex trading account, with a margin capacity of 5% (margin capacity being the minimum percentage of equity that they are allowed to maintain). This will mean that the trader or investor will be able to work with a whole 20,000 USD, being able to borrow 18,000 USD. So, the margin capacity of 5% means that the they will be able to trade up to 20 times more than they actually have in their Forex account. When using this borrowed money, the money will usually come as short-term credit and is generally interest-free. The total transaction of the trade is also used as collateral for this loan - collateral being the borrower's pledge of specific property to a lender in order to secure the repayment of a loan. Of course, margin trading adds a huge amount of unnecessary risk to Forex trading and can be an effective way to increase your losses, too. However, it can also be an effective way to increase your profits, if used both effectively and in moderation. You should really consider margin trading, until you have a good amount of Forex trading experience. Let's return to the previous example, with the Forex trader who has 1,000 USD in their account. Let's say they wish to buy 20,000 USD worth of JPY at an exchange rate of JPY 100/USD 1. This would put the trader or investor at JPY 2,000,000. Now, if the broker's own loan horizon is only 1 month and Japan's economy takes a quick turn for the worse, JPY will begin to devalue to an exchange rate of JPY 150/USD 1 and they must now pay back the borrowed money (which will equate to 18,000 USD). However, their holdings are only worth the value of 13,333.34 USD (since JPY 2,000,000 / JPY 3,000,000 = 0.666667 and 0.666667 x 20,000 USD = 13,333.34 USD).

Copyright © 2012 How Forex Trading Works 20 Getting Started This sounds negative, however on the other hand there is also another opportunity to make a lot of money if you flip the situation around. But the example is given simply to address the amount of risk that margin trading actually brings to the table. In conclusion, margin trading is a way in which Forex traders and investors can maximize and really magnify both their profits and their losses, by exchanging greater volumes of currencies than they actually hold themselves. It presents more opportunities to Forex traders, however these opportunities also come with more risk. In the stock market, stock brokers will usually only provide a 50% margin capacity and they will also provide maintenance margin requirements, for e.g. if a trader or investor's stock value falls below 30% in equity, the broker will immediately demand payment from them. These maintenance margin requirements are said to be positive for both brokers and traders, because it means that the broker will get their money back and the investor will not be able to accumulate unmanageable amounts of debt.

Copyright © 2012 How Forex Trading Works 21 Getting Started Forex Micro Accounts and Lots Explained Forex micro accounts aren't extremely common though some Forex brokers do offer these Forex micro accounts. These types of Forex accounts allow traders and investors to trade and invest in currencies with much smaller increments. To put these micro accounts into perspective, a standard lot is 100,000 units worth of the base currency. A mini lot is 10,000 units worth of the base currency. A micro lot is 1,000 units worth of the base currency. So, all you really need to know about micro accounts is that they allow you to trade with much smaller increments, more specifically 1,000 units worth of the base currency you are interested in trading. These micro lots also, regarding both trade and account sizes, usually have an upwards limit. Because you do not have to trade as much currency with micro lots as you would with mini lots or standard lots, there will be a lot less risk involved and this means that it is perfect for beginners or for traders and investors who want minimize risk. Micro lots are also perfect for traders and investors who want to test the Forex market a little without having to again risk as much of their money as usual - perhaps if the trader or investor was looking into trading exotic currencies, they might use micro lots to begin with before moving onto mini lots and standard lots. Micro lot brokers also tend to offer lower minimum deposits meaning you do not have to have as much money prior to trading to open an account with a Forex broker. Sometimes brokers might have high minimum deposits and you might not want to risk this minimum deposit or you simply cannot afford to lose the minimum deposit - in this case, micro lots are a perfect alternative to start out in the FX markets. Many Forex beginners will turn to demo accounts to start experimenting with the Forex market and to get a feel for currency trading. Although demo accounts are a good way to start and most brokers do offer them, some of the trading psychology is lost when trading with demo accounts; traders and investors tend to be a lot more impulsive and take more risk when trading with virtual money. With a Forex micro account, you can learn about the currency market as well as keeping the emotions of trading active in your brain since you are trading with real money! In conclusion, Forex micro accounts allow traders and investors to trade with Forex micro lots that are significantly smaller than Forex mini lots and Forex standard lots. You can trade with as little as 1,000 units worth of the base currency that you are interested in and these micro accounts allow you to trade with these micro lots that will minimize risk whilst allowing you to experience the markets and the emotions of trading. They are more popular among beginners though even experienced traders and investors sometimes take advantage of micro lots since it allows them to test and experiment with the currency market without having to risk as much money as they would usually.

Copyright © 2012 How Forex Trading Works 22 Getting Started Comparing Forex Trading to Stock Trading Forex trading and stock trading can be compared with each other since they both have their advantages and disadvantages. You do not need to know the differences between the two in order to be a successful currency trader and investor, but it is a good idea to learn as much as you can about trading in general. Now, although both Forex trading and stock trading have their differences, Forex bears many advantages that stocks simply cannot live up to. In fact, it is very common for traders and investors in the stock market to switch to Forex later on. One difference between Forex and stocks, is the way in which the two markets are informationally affected. The currency markets are generally affected by geopolitical events and/or important macroeconomic developments. Stocks are also affected by these, however there are many more variables that can affect the value of stocks. These variables can be large as well as very small. Some of the variables that affect the value of company stocks can be extremely difficult to spot and judge at times, arguably making stock trading more risky, even in an industry that you have relevant experience in. We require a lot more information when trading company stocks than we do trading foreign exchange currencies. This means that stock trading actually bears an advantage to larger firms, since they have the money and contacts to surround themselves with this required information. However, the majority of us do not have as much money and as many contacts as the large firms and so Forex can present us with more realistic opportunities. The information that moves the exchange rates of the currencies on the FX market is also generally public so that each and every trader and investor has access to this information. So, the currency market does not bear the same informational disadvantage that the stock markets do. As long as you know the Forex market and you are keeping up-to-date with the latest Forex news, you will never have to worry about losing to ignorance. A fair observation to make also, would be that the stock markets are far more volatile than the major currencies on the Forex market. Volatility is only a good thing when you can control it, for e.g. in Forex, controlling your effective volatility with the use of leverage. However, it is impossible to control the volatility of the market itself. This is why trading stocks is also more risky since they are more volatile. This presents another problem: because the stock markets are more volatile you will find yourself diversifying and having to spread risk, which can cause traders and investors to experience both complication and confusion. The liquidity of money itself gives Forex trading an advantage too, going back to the mention of leverage. Due to the high liquidity in FX trading, you can trade on margin for a lot less and generally allows traders and investors to both enter and leave the market more effectively than they could in stocks and bonds.

Copyright © 2012 How Forex Trading Works 23 Getting Started One more advantage to Forex trading is the fact that you can trade 24 hours a day (excluding weekends), which the stock market cannot match. This means that currency trading is a lot more convenient and allows you to conduct overnight orders. In conclusion, Forex trading comes out on top when you take into consideration all of the differences, advantages and disadvantages that the Forex and stock markets have. In FX trading, traders and investors require less information to be successful, the major foreign exchange currencies are less volatile than stocks, currencies are more liquid than stocks also allowing for more leverage and lower-cost margin trading - not to forget that the Forex market is open 24 hours a day, and even if one does decide to stick with the stock market, the Forex market is a great place to revisit in times of high stock volatility or economic turmoil.

Copyright © 2012 How Forex Trading Works 24 Getting Started Comparing Forex Trading to Futures Trading Traders and investors typically switch to Forex trading from stock trading and futures trading, because of its many advantages that simply outweigh the advantages of stocks and futures. All financial markets are volatile and it is hard to avoid volatility trading in any market, however you can take advantage of volatility and really reap the reward. First of all, futures trading presents an array of disadvantages to traders and investors straight away, as traders and investors must: - Work around opening and closing times - Pay transaction fees - Work with middlemen (intermediaries). The main disadvantages of futures trading are not at all present in Forex trading. The FX markets are open 24 hours a day meaning they are always open for trades (excluding weekends). The futures market is only open between 9:30AM and 4PM EST. We can conclude from this that futures trading really does limit your options as a trader and investor. However with Forex, you really are open to many options and opportunities. Unlike with futures trading, in currency trading you will not have to pay a single commission to anyone, which means that you can keep all of your money to yourself rather than having to regularly give away portions of your money out - this means that Forex trading is cheaper and allows you to maximize your profits. Forex order delays are much more minor than the order delays in futures trading. In futures, you will typically experience a time delay between when you place an order and when you actually get your order filled. These delays can get longer and worse during volatile periods. The delays are a lot less shorter in Forex meaning the money you receive will be much less affected by order delays - delays are shorted in the Forex market since there is a very high volume of transactions. Forex trading is also cheaper since you do not use intermediaries. Traders and investors in the FX market can freely buy or sell currencies without having to use a middleman. Not only does this make Forex trading cheaper, but also faster and more effective. More options also typically means more confusion and complication. There are only so many currencies to trade with in the Forex market and the majority of people only trade with the main currencies (usually the top 4) meaning that you have less options to think about and it means you can make quicker and easier decisions. It also takes less time to know the Forex market because of this. In futures trading, there is a vast amount of options and opportunities to trade or invest in, making the whole process slower and more difficult. Finally, Forex trading is less risky. This is because traders and investors can set margin limits. Margin limits mean that traders and investors can receive margin calls when their

Copyright © 2012 How Forex Trading Works 25 Getting Started available account capital is exceeded by their margin amount. This reduces the risk in currency trading. In conclusion, the advantages of trading Forex generally outweigh the advantages of trading futures. With Forex, traders and investors can trade 24 hours a day (excluding weekends), avoid commissions, avoid order delays, avoid middlemen (intermediaries), avoid confusion and complication with less options and avoid risk with set margin limits - all of which futures trading simply cannot match.

Copyright © 2012 How Forex Trading Works 26 Getting Started Forex Trading Rollovers Explained Trading rollovers occur in Forex trading and they are quite common. A trading rollover occurs when a broker switches a Forex trader's position in the market, extending the same position's settlement date. This means that, instead of receiving your money and having your position in the market closed, your market position is rolled over to the next day by your broker. Typically, you will receive a rollover whether you are want one or not, however you can specify if you want one or not. However, generally brokers make rollovers automatic since they like to assume that every trader and investor wants one. Rollovers can cause a trader or an investor to have to pay a rollover fee, but on the other hand trading rollovers can also cause a trader or an investor to receive a rollover fee. So, with rollovers, you either win or lose - but really, you don't win or lose, because you either pay back the interest you wouldn't have received without the rollover or you receive the interest you would have received without the rollover. Rollover fees are simply calculated by finding the difference between the interest rates of two particular currencies that make up a currency pair. Even over one night, money can earn interest and your Forex broker will credit your account with the difference between the two currencies' interest rates that you are trading - that's if you're making more interest on the base currency than you are on the quote currency. However, if the interest rate is lower for the base currency than it is for the quote currency, you will be charged the rollover fee and this fee will be deducted from your account by your Forex broker. Forex brokers typically offer a margin level of 1%, however occasionally some Forex brokers may require a margin level slightly higher (perhaps of 2%) for a trader or an investor take advantage of claiming rollover fees. Although it is good to know about rollover fees and understand how they work, rollover fees are generally very small and not very significant to the majority of Forex traders and investors. On the other hand, both Forex banks and brokers work with many traders and investors and all of their rollover fees would really add up if they account for them. In conclusion, Forex trading rollovers and Forex trading rollover fees work in a simple fashion. They allow traders and investors to benefit from their wise decisions in buying high interest currencies and they also allow traders and investors to account for their mistakes in buying low interest currencies fairly. However, it isn't always a mistake buy into a low interest currency since the benefits may of course outweigh the costs when you look at the actual values of the currencies. As mentioned before, interest rates and rollover fees and generally insignificant in the eyes of the majority of traders and investors in the FX market. Currency trading is focused on making money with currencies and not just with interest rates.

Copyright © 2012 How Forex Trading Works 27 Getting Started When the Forex Market Is Most Active There are certain trading times in the Forex market that allow you to arguably make more money and profit. Despite the fact that the currency market is open 24 hours a day (excluding weekends), there are specific times when the FX market is moving faster. The main time zones for trading are EDT, GMT and JST (New York, London and Tokyo). Although each main trading time zone bears a specific time bracket, there are always typically two trading time zone brackets that are overlapping with each other. The New York trading time zone bracket runs from 9AM to 5PM EST. The London trading time zone bracket runs from 3AM to 12PM EST. The Tokyo trading time zone bracket runs from 7PM to 4AM. The Forex market is quite obviously going to be more active during the overlaps of the main trading time zone brackets. These brackets are generally known as trading "sessions". Also, in terms of trading, it is generally the best time to trade in the middle of the business week as that is when the Forex market is the most active (more specifically between Tuesday and Wednesday). The worst times to trade Forex (due to low activity and movement) is typically on any Friday, Sunday or during a holiday. "Pips" can be used to measure the minimum price movement of an exchange rate (in other words, the minimum change an exchange rate can make). When you buy a product in a store, you pay the price of the product to the nearest penny - this means that the pip (percentages in point) is equal to 1 penny in ordinary transactions. However, in Forex, the value of exchange rates are priced to 4 decimal places (for most major currency pairs). The smallest change possible is that of the last decimal place, so 1 pip = $0.0001. It could be said for most currency pairs that the smallest change possible is equal to 1/100th of 1 percent (AKA 1 basis point). If you want to know how to calculate how much each pip will be worth to you as a trader and investor, simply divide 1 pip in decimal form (0.0001) by the exchange rate of the currency pair you are trading and then multiply it by the notional amount (AKA face amount) of the trade you are making. Going back to the Forex market, there are certain currency pairs that are the most active in each trading session, with the highest amount of pips in each session. The London session (running from 3AM to 12PM EST) and its main currency pairs (each with their average level of activity, in pips): - GBP/CHF (145 pips) - GBP/JPY (140 pips) - USD/CHF (115 pips) - GBP/USD (110 pips) - USD/CAD (90 pips)

Copyright © 2012 How Forex Trading Works 28 Getting Started - EUR/USD (80 pips) - USD/JPY (75 pips). The New York session (running from 9AM to 5PM EST) and its main currency pairs (each with their average level of activity, in pips): - GBP/CHF (130 pips) - GBP/JPY (120 pips) - USD/CHF (110 pips) - GBP/USD (90 pips) - USD/CAD (80 pips) - EUR/USD (75 pips). The Tokyo session (running from 7PM to 4AM EST) and its main currency pairs (each with their average level of activity, in pips): - GBP/JPY (110 pips) - GBP/CHF (90 pips) - USD/JPY (75 pips) - USD/CHF (65 pips) - GBP/USD (60 pips) - AUD/JPY (55 pips). As you can see, the London session tends to be the most active, closely followed by the New York session and then the Tokyo session. In conclusion, although the Forex market is open 24 hours a day, there are certain times during the day or week When The Forex market is most active and best to trade in. More specifically, there three main trading sessions that run through each trading day. We can use pips to measure the extent to which each session is active and we can choose optimal times to trade Forex, by choosing a time that preferably coincides with the overlap of two main trading sessions.

Copyright © 2012 How Forex Trading Works 29 Getting Started Fundamental Analysis Explained When Forex trading, you will commonly see the phrase "fundamental analysis" being mentioned, but what is it? This type of analysis is simply used to determine a particular investment's possible outcome or potential future. Fundamental analysis serves to determine whether or not a particular security is capable of deducing a profit by using a variety of both economic and political indicators, allowing the trader or investor to determine whether or not it would be worth investing into the particular security. Traders and investors use fundamental analysis to capitalize on (and take advantage of) price levels before they move. Fundamentals help traders and investors to predict outcomes and results before they happen, as market price levels in Forex (just like in any other financial market) do not make immediate price adjustments. Fundamental analysis is used in every financial market and it is generally used in different ways. For e.g. in stock trading, rather than looking at economic and political indicators, traders and investors may conduct this type of analysis through studying company profit flow data or company ratings. Aundamental analysis can involve the study of any kind of information related to economics or finance. Although fundamental analysis is typically used to find potential investments that are solid and safe, fundamentals are also occasionally used to seek out and avoid bad investments. In fact, sometimes traders and investors accidentally come across bad investments using this type of analysis. When conducting fundamental analysis, traders and investors should not limit themselves to one source and should explore economic indications as well as political indications both online and offline preferably. They should also aim to avoid biased sources and look only for reliable sources (or alternatively look for more than one source to make sure information and data can be backed up). It really helps to keep up-to-date with the latest international financial news when conducting fundamental analysis, as it will make the task seem much more easier. Fundamental analysis in Forex does not need to be difficult. For e.g. if you are considering trading USD with GBP, you should take note of both America's economical and political news as well as the UK's. You could take note of perhaps unemployment figures, inflation rates and more as well as recent government announcements and the two economies' GDP growth rates. If the US announced decreasing unemployment figures and high GDP growth rates whilst the UK announced the opposite, you might want to buy USD and sell GBP. However this is just an example, and fundamental analysis is generally a lot more detailed and complex. In conclusion, fundamentals are very important to all traders and investors and fundamental analysis is an effective solution in determining whether or not a particular investment is safe. This type of analysis can come in a variety of forms, but regardless, as long as the information and data is accurate and reliable it can be deemed as useful. Many online Forex brokers provide fundamental analysis for you for free and this can save you a

Copyright © 2012 How Forex Trading Works 31 Getting Started The Movers of the Forex Market The Forex market is typically moved by either macroeconomic events or otherwise geopolitical events - however, the Forex market is usually affected by a combination of the two and they both tend to arise with each other. Because the Forex market deals with multiple currencies from multiple countries from multiple continents across the world, changes and events in particular industries in particular countries don't tend to have much effect on the overall Forex market. It is only the events that affect the grand scheme of things - the major economies and the global economy, that actually have a significant effect on the overall Forex market. According the classic theory of the fluctuation of exchange rates, the export growth of a country will most likely lead to an increase in demand for the country's currency in turn. It is then thought that, due to the growth in the exports of a country, the country's currency will also grow (in value). This will, in theory, lead to the country's home exports losing their competitiveness. This will, in theory, lead to the country's export sector slowing in growth - in fact, the sector could even move back and shrink. This, again in theory, lead to a decrease in the demand for the country's currency, which would then lead to an increase in the demand for the country's exports. As you can see, according to this classic theory of exchange rate fluctuations, exports and exchange rates work in cycles. But export and import levels of a country are not the only movers of the Forex market and they generally only affect the demand for a country's currency in the long-run. However do remember, that the balance of payments (the balance of exports and imports) between two particular countries that together make up a particular currency pair, will often affect the exchange between that currency pair. The Forex market is also affected in other ways. When a central home bank to a country decides to raise interest rates, traders and investors collectively see this as confidence in the country's economy by the central home bank. Traders and investors also find currencies with higher interest rates more appealing, since they will make more money from the interest they will gain by holding the currencies. This will likely, in turn, lead to an increase in demand for the currencies. It is a very considerable event when central home banks decide to change their interest rates, whether they decide to increase or decrease them. Traders and investors as well as the media take note of such changes very carefully and changes in interest rates draw much attention from traders and investors as well as from the media. In fact, the amount of attention tends to dwarf the actual consequences that the changes in interest rates actually have on an economy. So, interest rates are very important in Forex trading. But changes in interest rates aren't simply determined by the belief that central banks have in the growth rate of their country's economy. If unexpected and unpredicted reports are released from a country regarding the country's currency claiming high inflation, this could cause real interest rates (interest rates taking into account inflation) to fall. This could then lead to a fall in demand for the

Copyright © 2012 How Forex Trading Works 32 Getting Started currency since the currency is no longer as appealing to hold as before. On the other hand, some traders and investors may believe that the higher-than-normal inflation rates will pressure the central home bank into increasing interest rates - this could actually increase the demand and value of the country's currency. Remember, anything is possible in the Forex market. So we can conclude that in the short-run, nothing can affect the currency as significantly as interest rates can, other than unexpected economic news or geopolitical events. In conclusion, there is more than one factor that will affect the Forex market. But, just like any other financial market, the FX market is generally moved by psychology and mass psychology. Traders and investors collectively move the market with their predictions and beliefs. Speculation will typically rely on collectively-agreed and predicted (rather than actual) effects that macroeconomic news, events and trends have on currencies. So, traders and investors play more of a part in the Forex market than actual news, events and trends do.

Copyright © 2012 How Forex Trading Works 33 Getting Started Nonfarm Payrolls Explained A nonfarm payroll (NFP), is a report that is published every month of the year in the United States, on each month's first Friday. These so-called "nonfarm payrolls" are typically referred to as "job reports". In the US, these job reports are seen to be extremely important in determining the US economy's health and state. "Nonfarm payroll employment" is a statistic used in the USA that is very influential, particularly among the financial markets (more specifically the Forex market). The statistic is also referred to as an economic indicator and merely shows us the current, up-to-date state of the labor market. But it doesn't simply tell us about the labor market - as mentioned before - the report allows us to conjure broader opinions regarding the health and state of the US economy in general. Generally, the United States of America requires the creation of 125,000 jobs per month in order to keep up with its powerful population growth rates. This is quite a tough number of jobs to create, especially in times of low economic growth. If the US fails to meet the 125,000 job mark each month, the job report is seen (including by traders and investors), as negative news. The results of the job report affect the US dollar primarily, but it also affects the Foreign Exchange market in general as well as the bond and stock markets. However, the job reports are not kept as secrets until their release date on the first Friday of each month. Traders and investors typically try to seek out large swings from expected results and from the last month's job report results. They can make estimates on the job reports' results by using and studying the movement of the Forex market itself prior to the job report release. The job report is really more specifically released at 8:30 AM Eastern Time. Traders and investors typically revise the previous job reports from the past 2 months and once they have come to a collective decision, this can lead to a major move in the Forex market. The actual figure that is released is, more specifically, a number. This number represents the change in nonfarm payrolls. This number is compared to the previous month for e.g. one month it might be +50,000 and the next it might be +55,000. Generally, the number is between +10,000 and +250,000, but this is only the case when the US is not in recession. The number does not include jobs relating to the industry of farming and is served to represent the addition or loss of jobs over the previous month. In conclusion, nonfarm payrolls accurately tell us the very latest employment figures for the US. This helps us to conjure an opinion not only on America's labor market but also general economy. The report moves multiple financial markets, but in the Forex market, the report most notably affects the movement of the dollar. Every trader and investor should take note of the jobs report, as it is probably the most important statistic used in fundamental analysis.

Copyright © 2012 How Forex Trading Works 34 Getting Started Consumer Price Index Explained The consumer price index (CPI) effectively measures fluctuations in value for a certain group of goods and services purchased by households. In the US, the CPI measures this against the US dollar and the currency's value. There are two main categories that come under CPI: core CPI and non-core CPI. The difference between the two, is that food and fuel prices are excluded from the former, the core CPI. The core CPI also typically tends to be more important in the eyes of investors and traders. This is because both food prices and fuel prices can fluctuate significantly each month and so, it is more effective when using CPI for fundamental analysis, to exclude these prices. The consumer price index is important because it allows traders and investors to keep up- to-date with the level of inflation in the US economy and inflation in the US is obviously going to affect the US dollar and its value. If prices go up in the US so does US inflation: that'll mean you're going to get less "bang for your buck", leading to the value of the US dollar decreasing. In Forex trading, inflation is essentially the cost of holding a currency. Inflation means that you lose money due to gradually growing prices in an economy as mentioned before. So, traders and investors look primarily to trade and invest in currencies with low inflation rates and preferably with higher interest rates. With low inflation rates and high interest rates, a trader or investor loses the least amount of money and gains the most amount of money, quite simply. The CPI is typically published each month at around the end of each month. The data released is for the previous month. The consumer price index is a lagging indicator, however it still remains important to traders and investors when conducting fundamental analysis - the CPI can be very useful. In conclusion, the consumer price index is split into two different categories: core CPI and non-core CPI. The core CPI is more important to traders and investors as it excludes volatile food and fuel prices. In the US, the CPI serves to keep traders and investors up-to- date with the US economy's inflation rate. This helps us all to determine whether or not it is worth either buying or selling USD. Though it is important to remember that inflation as well as interest rates are only blips on the radar for many traders and investors, especially for those who only trade or invest in the short-run. But, when trading in the long-run, it does all add up. For e.g. if the inflation rate is 4% and someone holds $1 million, they will lose 4% of that due to inflation, which is a loss of $40,000 excluding interest made. As mentioned before already, the CPI is published every month of the year towards the end of each month - the CPI released represents the previous month's data. Finally, the CPI is important to all traders and investors and is a necessary part of fundamental analysis.

Copyright © 2012 How Forex Trading Works 35 Getting Started Consumer Confidence Index Explained The consumer confidence index is used in Forex trading as part of fundamental analysis. It is published every month of the year in the United States by "The Conference Board", more specifically at 10:00AM EST on the reporting month's last Tuesday. The Conference Board is an independent economic research organization - the Board is responsible for both collecting the data for the CCI and also for issuing it to the general US population. The consumer confidence index (CCI) is typically referred to as a leading indicator. It is used to measure consumer confidence - consumer confidence defined simply as how confident consumers are in the economy. Consumers express their confidence collectively through their saving and spending activities - the index itself is measured by consumer opinions and these are directly collected through short questionnaires. The CCI is calculated uniquely through the use of questions and isn't as complicated or as mathematical as you would think. Every month, it is calculated on a household survey basis which includes the opinions of consumers on the US economy's present and future state and condition. The majority of the index, around 60%, is made up of consumer opinions on the future state and condition of the US economy, whereas the remaining 40% is made up of consumer opinions on the present state and condition of the US economy. Opinions are formed by consumers on business, employment and family income. The questions are simple, short and concise - and so are the answers, survey participants simply respond to each question with either "positive", "negative" or "neutral". The CCI is based on 5,000 different US households. The federal reserve will look at the CCI regularly and use it in conjunction with other sources of data in order to determine changes in interest rates when appropriate. The CCI not only affects interest rates but also the financial markets including the Forex market. The CCI also tends to affect the stock market. The CCI is a major indicator because consumer spending is so important. Consumer spending makes up around half of most economies and it makes up around two-thirds of the US economy. The consumer confidence index should not be underestimated due to the sheer importance of consumer spending itself. Consumer spending can be responsible for the movement of a particular economy. In conclusion, the consumer confidence index (CCI) is an important part of fundamental analysis in Forex trading. Although the sample size of 5,000 is relatively small when compared to the entire US population, traders and investors should take advantage of the CCI every month to assess whether or not consumers are confident with the US economy. The CCI can also help to form an opinion within traders and investors themselves, on whether or not they should think twice about buying or selling the US dollar. Confidence is essentially an emotion and the financial markets are all about mass psychology and collective emotions of people including traders and investors. This is why we should not

Copyright © 2012 How Forex Trading Works 37 Getting Started Gross Domestic Product Explained Not many people have heard of "gross domestic product" since the majority of people refer to gross domestic product as GDP. GDP is calculated as all private consumption plus gross investment plus government spending plus exports minus imports. GDP is studied by many traders and investors in the financial markets, including in the Forex market, as part of fundamental analysis. It allows traders and investors to assess how well a particular economy is doing. GDP is actually a lagging statistic and is released in three separate stages. First of all, the advance numbers are released. In the second stage, the preliminary numbers are released. In the third and final stage, the final numbers are released. The initial advance numbers are released on the very last day of each quarter of the year (a quarter is 3 months long, it is 1 quarter of a year). Gross domestic product essentially tells us whether or not an economy is growing or shrinking - it tells us the actual growth rate of an economy. So, traders and investors and even the general population can use GDP to form opinions on whether or not an economy is doing well or as well as expected and whether or not an economy has a good or bad future. Generally, the bigger the GDP is the better for an economy. However, with GDP (just like with any other kind of fundamental analysis), it is more about comparing the results to previous predictions and expectations. If results do not weigh up to previous predictions and expectations, usually the results are seen as negative. An economy could be in an awful state yet still look appealing as long as it is improving. In conclusion, gross domestic product (GDP) is an important part of fundamental analysis, as it allows traders and investors to assess where a particular economy is heading and whether or not it is following its predicted and expected schedule. If it is, or surpassing predictions and expectations, the economy's currency will look to be more appealing to buy into. If an economy is failing to meet predictions and expectations, the economy's currency will look less appealing to buy into. The formula used to calculate is simply (C + I + G + X - M, put into words above), however traders and investors only need to know the actual result of the formula in order to work with GDP, for e.g. in 2010, the US nominal GDP equated to $14.582 trillion as opposed to $14.044 trillion in 2009. You should remember though, that there is really two types of GDP: there is "nominal GDP" and also "real GDP". Nominal GDP is essentially the result that is deduced from the above equation, however real GDP takes into account inflation. Real GDP is also known as inflation-adjusted GDP and tends to be more useful to traders and investors as nominal GDP could rise yet real GDP could fall. Real GDP allows us to assess whether or not a particular economy is truly growing or not - traders and investors should consider real GDP more than nominal GDP when conducting fundamental analysis.

Copyright © 2012 How Forex Trading Works 38 Getting Started Trade Balances Explained Trade balances, often referred to as the "balance of trade", is simply the difference between an economy's monetary value of its exports and its imports over a certain period of time. In other words, trades balances can tell us more about the relationship between an economy's exports and imports. A "trade surplus" occurs when exports are greater than imports and a "trade deficit" occurs when imports are greater than exports. The balance of trade (similar to the "balance of payments") is an important part of fundamental analysis. Classically, the balance of trade would be the only factor of the Forex market, as the relationship of exports and imports used to define the demand and therefore value of a particular currency. Generally, there is more demand for a currency when a country's exports are greater. The more a country imports from another country, the more demand there is for that other currency. In almost every country, including the US, the balance of trade is still released in numbers fairly regularly. More specifically in the US, the trade balances are released 8 times a year at 2PM ET. The US trade balances are reported by Board of Governors of the Federal Reserve System. They are actually released by Federal Open Market Committee (FOMC). The FOMC meet 8 times a year to discuss the monetary policy of the US. The FOMC attempt to discuss and set the US borrowing rate in order to artificially affect the US price levels, which can in turn help to maintain economic growth in the US. The FOMC also aim to keep inflation within an acceptable range. If the FOMC decide to set a higher interest rates, traders and investors alike will see this as a positive move for the US dollar. Likewise, if the FOMC decide to set lower interest rates, traders and investors alike will see this a negative move for the US dollar. Although many different countries release their own trade balances, typically, only the US balance of trade statistics actually affect the major currencies. Traders and investors in the currency market can use trade balances to help them form a stronger opinion over the US dollar and over the major currency pairs. As mentioned above, a currency will tend to have more demand for it if its country's exports exceed its imports or if its exports are growing, so traders and investors might consider buying that currency over another. In conclusion, the balance of trade is an important part of fundamental analysis, though it is only a part of fundamental analysis and traders and investors should not look at the trade balances of a country solely, in order to determine whether or not they will buy or sell that country's currency. This is because there are many other factors now that affect the Forex market. The balance of trade is a lagging statistic and it is also not released particularly often, when compared with other statistical data, such as the Nonfarm Payroll (the job report) in the US. But having said that, the balance of trade can tell us more about the relationship a country and its currency has with other countries and currencies. After all, the FX market is all about relationships and comparisons - when trading and investing in the currency market, you will always be buying one currency and selling another.

Copyright © 2012 How Forex Trading Works 39 Getting Started Interest Rates and the US Dollar When interest rates are high for a particular currency, it will mean that you will benefit more from saving that currency. If you spend this currency, you will experience an opportunity cost, as if you had continued saving the currency you would have made more interest. So, we can think of interest rates as the cost of spending money. When they go up, they also go up for newly issued treasuries as well as for bank accounts. This causes consumers to save more than they spend and banks to hold more than they lend. This is because the cost of spending increases as well as the cost of borrowing. If greater interest rates fail to attract consumers to save more than they spend, banks continue to lend more than they hold and the money supply continues to grow, there will an excess money supply. When there is a money supply surplus, the price of goods and services rise as sellers can ask for more money from buyers. This will in turn cause the demand for these goods and services to fall. These sudden, aggressive price increases can cause people to suddenly feel afraid to spend and it is in this scenario where recessions are more common. In economics, people and their emotions are generally time-sensitive and although the two are directly linked, governments still do not have control over people are their emotions. Because of this, an economy will never remain at an equilibrium - an economy will always fluctuate, leading to fluctuations in interest rates. Constant fluctuations in interest rates will lead to constant changes in consumer spending and saving. This is the financial cycle and this is why traders and investors can profit/lose on fluctuating values of currencies. The price of currencies change with changes in interest rates, so traders and investors can bet on whether or not a currency will rise or fall in value. Because people don't have time machines, they must predict or make expectations and in the financial markets, these predictions and expectations are not always accurate. Because of this, you should bear in mind once again that the financial markets are ultimately dependent on mass psychology and collective predictions and expectations. In conclusion, interest rates are an important part of fundamental analysis and one of the main factors of the Forex market. Currency prices change with interest rates. Traders and investors can bet in advance, for e.g. they will want to take advantage of a predicted and expected change in US interest rates by buying or selling the US dollar prior to the predicted and expected change - so that they sell the US dollar before it decreases in price and vice versa, so that they buy the US dollar before it increases in price. Of course there are other factors that affect the currency market and other parts of fundamental analysis, but interest rates are one of the most important factors: the FX market is directly affected by changes in them.

Copyright © 2012 How Forex Trading Works 40 Getting Started Nonfarm Payrolls and the US Dollar The nonfarm payroll (NFP), also known as "the job report", is one of the main movers of the Forex market. The NFP numbers are released every month in the US. The NFP can give us an accurate estimate of how many jobs were created and lost over the previous month and the number is adjusted seasonally. The number can be either positive or negative. The NFP is important to traders and investors, especially for those who trade and invest in the currency market. The NFP is the most accurate report on US jobs that we have. There are alternatives to estimating the job count of the US, but the NFP is by far the most accurate and reliable of them all. Generally, a positive NFP number would suggest that the US economy is growing. Traders and investors in the FX market would then feel more confident in the US dollar, creating more demand for the US dollar. However, a negative NFP number would suggest that the US economy is experiencing negative growth, creating less demand for the US dollar. You should bear in mind though, that the NFP number is typically positive and rarely negative. Usually, it is more about the height of the demand created rather than whether or not the demand is positive or negative. It is thought that the US must create 125,000 jobs per month minimum to keep up with immigration and the ever growing population. So, even if the US created 100,000 jobs one month, unemployment would most likely rise (even if by just a fraction)! Quite simply, the higher the NFP number, the more demand there will be for the US dollar. This will mean that the higher the NFP number is, the more confident Forex traders will be in investing in the US dollar, in the market for currencies. The NFP is constantly watched and with great attention. This means that any slight change or movement away from the predicted and expected NFP numbers can have a multiplied effect on the financial markets. This is important to remember, as the financial markets are based heavily on mass psychology and collective opinions on events, rather than the actual effects that the events have themselves. For e.g. if every trader and investor predicted and expected that the NFP number would come to 200,000 one month but the number only reached 150,000, although the number is still positive and promising, the financial markets would treat this negatively. In conclusion, the NFP is one of the most important parts of fundamental analysis. If you trade and invest in the Forex market, you will definitely need to watch the NFP numbers each month. You should also remember that the US economy is considered very important to the economic health of the entire world, so radical changes in the US NFP numbers can cause traders and investors all over the world to retreat to trading commodities and such. The NFP is very important for this very reason and can affect Forex traders all over the world.

Copyright © 2012 How Forex Trading Works 41 Getting Started Comparing Fundamental Analysis with Technical Analysis Traders and investors need to conduct adequate analysis on the currency pairs they are looking to work with, before they trade and invest in them, so that they make more informed trades and investments. There are two types of analysis that traders and investors can conduct in the Forex market: "fundamental analysis" and "technical analysis" - both of these types of analysis have their own set of advantages and disadvantages and we can compare the two side-by-side. You should remember though, before comparing the two, that the most successful traders and investors will conduct both fundamental analysis and technical analysis to get the best out of both worlds. Fundamental analysis can tell us why the price of a particular currency has changed and why a particular exchange rate has changed. This type of analysis can explain Forex market movements to us by describing established correlations or casual relationships in the currency market. Let's say one country mainly exports gold and silver. If gold and silver both shot up in price, the country's currency will also rise in price. The price of the country's currency could have increased due to a number of different factors, however using fundamental analysis, we can see that justify the currency price increase by putting it down to the gold and silver price increase. So, using fundamental analysis, we can understand why the price of a particular currency changes and why a particular exchange rate changes. But we don't just use fundamental to justify past events - traders and investors attempt to predict the future with fundamental analysis - going to back to our previous example, traders and investors may then look closely at the prices of gold and silver and predict their future. This way, if they predict that gold and silver will fall back down in price, they might decide to sell their main exporting country's currency, prior to the expected price fall. Fundamental analysis is not as easy as it sounds to conduct though. Although there are explanations in fundamental analysis for currency price and exchange rate changes, these explanations can sometimes be difficult to find and understand. Also, it can sometimes be challenging to interpret some information and it can be difficult to use the information to forecast future currency price and exchange rate changes. You should also note that, in foundation, there are two relationships that fundamental analysis promotes: one is the relationship between US GDP and the US dollar and the other is the relationship between the world economy and the US dollar. fundamental analysis tells us that, generally, an increase in US GDP will lead to an increase in the price of the US dollar. This is logical, as traders and investors see an increase in US GDP as an indication that the US economy is growing (and strengthening). fundamental analysis also tells us that, generally, if the world economy is collapsing then the price of the US dollar will rise. This is also known as "risk aversion" and occurs because traders and investors all

Copyright © 2012 How Forex Trading Works 42 Getting Started over the world feel that the US dollar is the "safest" currency to work with, in economically- bad times. Remember that fundamental analysis is never as easy as it sounds, as mentioned above. There is a lot of conflicting information in fundamental analysis, which can cause confusion when trying to interpret the information. It is recommended that you surround yourself with as much news and information as possible. Technical analysis can tell us where the price of a particular currency has gone and where a particular exchange rate has gone. This type of analysis can also present more of a visual approach to the FX market through price charts. Price charts in technical analysis are used by traders and investors to spot trends in currency prices. Technical analysis allows us to try and predict future currency price movements, however it is not perfect and it cannot guarantee anything. Technical analysis can help us to to predict where the prices of currencies are going, but it cannot tell us why they are going in certain directions. This is why it is better to combine both types of analysis when Forex trading. The best and most successful traders and investors of the FX market know how to combine and exploit the best elements of both types of analysis. The two types of analysis are very different from each other, but if they are combined and exploited together correctly, they can compliment each other very well. Many traders and investors will use fundamental analysis mainly to spot opportunities in the Forex market, since this type of analysis is related more to psychology. The financial markets are of course all about mass psychology and collective opinions, predictions and expectations. But traders and investors will also use technical analysis to spot potential entry and exit points of the opportunities they spotted through fundamental analysis, in order to try and maximize their potential success. In conclusion, both fundamental analysis and technical analysis bear their own advantages. The most successful traders and investors have learned to effectively utilize both types of analysis. You might discover that you are better working with one type on analysis, though you should always try to take advantage of both for the best results. Also remember that good online Forex brokers will often provide you with both fundamental and technical analysis - though it is still recommended that you surround yourself with other information and keep up-to-date with the latest currency market news.

Copyright © 2012 How Forex Trading Works 43 Getting Started Types of Forex Charts There are three types of charts that are predominantly used by the traders and investors of the Forex market: the line chart, the bar chart and the candlestick chart. The line chart is the most common type of chart. The other two chart types are similar in the sense that they display the same information really, but through different visuals. The line chart displays the day's average currency pair price and exchange rate for a particular currency pair and sometimes it displays the closing price for a particular currency pair. The line chart is most useful to traders and investors who wish to find long- term trends in currency pair prices and exchange rates. The line chart is also useful to traders and investors who are looking to find correlations between currency pairs and other variables such as commodities and trade defects. Typically, any good online Forex broker will allow you to spot these correlations on their websites. Line charts prove to be an effective tool when trading and investing in the Forex market. Line charts bear the main advantage of being simple, easy to read and easy to spot directional changes in currency pair prices and exchange rates. However, there is one disadvantage to line charts, which is that they fail to provide daily price volatility. The bar chart is another chart used in Forex trading. The chart itself, much like other charts, has two notches on it. One of these notches represents opening costs and the other notch represents closing costs. Quite simply, the left notch represents the opening costs and the right notch represents the closing costs. The edges of each bar on a Forex bar chart, represent the highs and the lows of the particular currency pair's price. Bar charts do not bear many advantages, however new Forex traders and investors might find these bar charts as more accessible to them. However, the bar chart can make interpreting the data a slower process for the more experienced traders and investors. Traders and investors who are more familiar with interpreting bar charts may want to use candlestick charts. The candlestick chart is evidently the more popular type of chart in Forex trading. They provide a much faster and more effective way to find out what has happened each day in the FX market. Every good online Forex broker can provide each chart for you and these charts can be simply and effectively manipulated with ease and according to your needs. Both candlestick charts and bar charts can be switched around so that they represent different units - from representing the past minute right up to the past year. You can also manipulate line charts in a similar fashion. In conclusion, all of the charts are different and you should really start working with them, as soon as possible, once you start your trading career. You will learn a lot more about them by directly working with them than by reading about them. Different Forex websites and brokers will provide charts with different appearances, but you really just need to find a good online broker that will provide them as standard, as charting services are one of an online Forex broker's more important features. Although different websites will present different levels of quality and different capabilities, it does not matter if you are just starting. Your desire for complexity will grow as you become a stronger trader and investor. But first

Copyright © 2012 How Forex Trading Works 44 Getting Started of all, you should find a good online Forex broker that can provide you with what you need in the beginning, so that you can make the very best start to your trading career.

Copyright © 2012 How Forex Trading Works 45 Getting Started The Best Types of Forex Charts When traders and investors look to make predictions on particular currency pair prices and exchange rates, they will most likely turn to technical analysis at least once. Because technical analysis majorly consists of charts and graphs, they will then need to choose an appropriate chart or graph to work with. The problem is, there are multiple types of charts and graphs available to them, so they must weigh up in their minds which chart or graph will be the most appropriate and effective. The Forex candlestick chart tends to be the more popular chart type in Forex trading. This type of chart allows traders and investors to spot currency pair price and exchange rate trends, as well as allowing them to see the limits on the daily currency pair price and exchange rate variations. Candlestick charts are also effective producing a measure of confidence in Forex traders and investors. Over each day of trading, a candlestick chart will plot a new box-and-whiskers-type-figure. Each box will be shaded in a different way to represent each day. If the box is shaded black, this means that the currency pair price and exchange rate closed at a lower price than its opening price, that day - and vice versa, if the box is filled with white. If the box is shaded black, the top of the box will represent the opening price and the bottom of the box will represent the closing price - and again, vice versa if the box is filled with white. Sometimes different colors are used, though the colors of the boxes presented will always be either dark or light. The top of the whiskers represents the daily highs and the bottom of the whiskers represents the daily lows, respectively for the currency pair price and exchange rate. The Forex bar chart does not present as much information as the candlestick chart does. Bar charts do provide us with the daily highs and lows of a particular currency pair price and exchange rate. However, when it comes to opening and closing prices, a bar chart will only be able to tell us the closing price without the opening price - the closing price is marked the whisker as a tick. Although the bar chart does bear a significant disadvantage, it does allow us to work with the same financial information through an easier and more appealing visual medium. Bar charts can also hold more data and in less space than candlestick charts. The Forex line chart tends to be the most popular type of chart in Forex trading, simply because it is the easiest type of chart to work with. However, they do leave out a lot information, as day-by-day line charts only provide us with each day's closing currency pair price and exchange rate. Candlestick charts and bar charts on the other hand, can provide us with each day's highs and lows as well as each day's closing rate. Candlestick charts can even provide us with each day's opening rate too. Traders and investors can use candlestick charts and bar charts to assess a currency pair's level of volatility and its direction, however line charts fail to present this opportunity due to the lack of information they bring. In conclusion, there are three main types of Forex charts as listed in order of strength and usefulness: candlestick charts, bar charts and line charts. Candlestick charts are the strongest as they can provide us with each day's opening rate for a particular currency pair

Copyright © 2012 How Forex Trading Works 46 Getting Started price and exchange rate whereas the other two cannot. The line chart is the weakest as it provides us with the least information. However, each chart has its own unique advantage(s) and it really depends on your situation as to which chart would be the most appropriate to work with. You should also remember that the different charts can also differ on different websites and sources. Line charts can be made more complex and informative if the trader or investor has more data values to work with. Though, in general, line charts simply serve to graphically-illustrate currency pair prices and exchange rates as functions of time. Line charts, in relation to opening and closing prices, fail to organize the daily highs and lows of currency pair prices and exchange rates as well as candlestick charts can.

Copyright © 2012 How Forex Trading Works 47 Getting Started Time Frames in Forex Trading There are many different time frames available to Forex traders, with different ones presenting different opportunities. Traders and investors in the Forex market that expect to take full advantage of technical analysis, must decide which one is the most appropriate for them and the most useful. A Forex trader's time zone will be important and will most likely affect their time frame selections. Every trader and investor will have their own unique style of trading, however they will most likely have to work within more than one time frame when making trades. All good charting services and packages will allow any trader or investor to select their own time frames. In fact, you could have a single 1 minute one if you wanted. However, if you want to make more sense out of Forex trading, you should really aim to work within the more popular and conventional time frames. The financial markets, including the Forex market, are all based on mass psychology and collective opinions. This is why it is recommended, that you work within the time frames that people are aware of and care about, rather than your own. More popular and conventional ones might include: 5 minutes, 30 minutes, 1 hour, 1 day, 1 week, 1 month etc. There are different terms and phrases used to describe different Forex traders that work within different time frames. First of all, "investor horizon" refers to the duration of time that a trader or an investor is planning on holding an open position. Different currency traders will have different investor horizons. There are four main types of Forex traders: long-term traders, swing traders, day traders and scalpers. A long-term trader or investor will always plan to hold their open positions for longer than others. Long-term traders may decide to hold an open position for up to a few weeks and some may hold an open position for up to a few years! Long-term traders and investors will limit the amount of open positions a lot more than the other Forex traders and may only place between 1 and 10 orders per month. They will also mainly work with only weekly and monthly charts, however they may refer to daily charts and even smaller time frame charts to find the best entry points for their orders. The swing trader or investor is similar to the long-term trader or investor, in the sense that they will remain very selective over which orders they make, also referring mainly to weekly and monthly charts. They will also similarly refer to daily charts and smaller time frame charts to find the best entry points, but they will also use these to find the best exit points, as they place more orders than long-term traders. These swing traders will usually enter and exit all of their orders within each month - they are often referred to as "medium- term" traders. They will hold open positions for a few days minimum and usually up to around 2 weeks. A day trader tends to both enter and exit their orders within the same day, though on some occasions they may decide to leave certain orders for up to 2-3 days before exiting them. These traders and investors may still refer to weekly and monthly charts, though they do not bear as much importance as they do to long-term and swing traders. They will refer

Copyright © 2012 How Forex Trading Works 48 Getting Started mainly to very small time frame charts to find the best entry and exit points and these may include: 5 minutes, 15 minutes, 30 minutes and 1 hour. A scalper is a trader who places even shorter-term orders than day traders. Scalpers may decide to only hold an open position for up to 30 seconds, though some of their orders may last for up to a few minutes before they decide to exit them. Scalpers only aim to make a very small profit on each of their open orders, which may only be equate to 1-10 pips, though it all adds up since they usually aim to place around 15 orders per day - some place more and some place less. These traders and investors very rarely study weekly or monthly charts but instead refer mainly to time frames no longer than 15 minutes. Scalpers tend to focus on tick charts (which are essentially fractional minute charts) and time frames lasting either 1 minute or 5 minutes. In conclusion, although we can label different Forex traders with different names and time frames, many will prefer to work within multiple ones. Also remember, that charts and graphs only represent price actions, meaning that the same orders are always made at the same prices - it doesn't matter what time frame the trader or investor is working within. The smaller the time frame you work within, the more details you will receive on the up and down price movements. The longer the time frame you work within, the less details you will receive on the journey that the price makes. Some longer-term traders and investors are interested in the journey that the price makes, so they do what is to referred to as "drilling- down". This is when they choose to look at smaller time frame charts to study the price's journey in more detail.

Copyright © 2012 How Forex Trading Works 49 Getting Started Technical Charting Indicators in Forex Trading Technical charting indicators are present and common in technical analysis. Technical indicators are simply mathematical and graphical representations of currency pair price actions. There are different types of technical indicators in Forex, the main ones being: Bollinger bands, the moving average convergence/divergence (MACD), the parabolic stop and reversal (Parabolic SAR), the stochastic oscillator and the relative strength index (RSI). Bollinger bands are used in technical analysis to provide a relative definition of high and low. The bands were invented and named after John Bollinger in the 1980s, Bollinger being a Forex trader himself. The bands allow traders and investors to measure both the highness and lowness of a particular currency pair's price in relation to previous trades. There are two Bollinger bands: the upper band and the lower band. The upper band represents a particular currency pair's price when it is high and the lower band represents the same currency pair's price when it is low. Bollinger bands are based on rolling averages of currency pairs. When using Bollinger bands, you will notice that there are three lines running alongside each other: the middle line will represent the daily average price and the other two will remain parallel to the daily average price on either side - these other two lines will run at +0.1% and -0.1% of the daily average price line (the middle line). The two lines running parallel, the upper band and the lower band lines, will allow traders and investors to notice where a particular currency pair's price is relative to its average price. For Bollinger bands to be effective, traders and investors must attempt to adjust the outside band lines so that they accurately depict the currency pair price's highs and lows. This will then, in turn, allow traders and investors to buy at the lows and sell at the highs. Bollinger bands are particularly effective if used correctly. It may take some practice, but traders and investors can significantly improve their results and deduce much more profit with this lucrative technical charting and trading tool. Remember, that the two band lines can be adjusted to reflect a currency pair's price movements in different environments. This is important, as it is vital that Bollinger bands present the most accuracy possible in order to be as effective as possible. You should also remember that the size of the Bollinger band is affected greatly by daily volatility - it is the Bollinger band's most important variable. The moving average convergence/divergence (MACD) is another indicator used in technical analysis that helps traders and investors to spot beginning and growing trends. In order to take full advantage of a trend, you need to enter it in the beginning stages, so that you can reap the rewards. The MACD is composed of two lines and a bar chart. One line is erratic and unpredictable and the other line is much smoother and even. There is also a bar chart that accompanies the two lines. Generally, the MACD is set at 12-26-9. What this means, is that the more unpredictable line is set as a rolling average of the past 12 days. This also means that the

Copyright © 2012 How Forex Trading Works 50 Getting Started more even line is set as a rolling average of the past 26 days. Finally, again if the MACD is set at 12-26-9, this will mean that the bar chart will represent the difference between the two lines as a 9-day rolling average. The bar chart will sit at the bottom and it will help to predict beginning and growing trends, allowing traders and investors to take more advantage of these new trends and potentially make more profit. Although the MACD can be very effective and is very popular, the chart is also very basic and one drawback is that the chart can also present errors and inaccuracy. The MACD is particularly effective in estimating and determining the magnitude of a new trend rather than its direction. The parabolic stop and reversal (Parabolic SAR) is an important tool used frequently by traders and investors conducting technical analysis. It is one of the more simple and easier-to-use technical tools in Forex trading. There are two candles that are graphed: these are the buy and sell candles. There is also a dotted line that runs alongside the candles which symbolizes the many reversals possible in a currency pair's price movement. Quite simply, if the dotted line is shown above the candles, the Parabolic SAR is signalling that you should potentially sell - and vice versa, if the dotted line is shown below the candles, the Parabolic SAR is signalling that you should potentially buy. Stochastics were developed a while ago in the 1950s by George Lane. Stochastics are technical indicators that try to measure when a particular currency has been overbought or oversold. When the Stochastics signal that a particular currency has been overbought, the trader or investor might want to sell - and vice versa, when the Stochastics signal that a particular currency has been oversold, the trader or investor might want to buy. The Stochastics chart, based on a 100-point scale, is in fact quite complex and mathematical. However you don't have to understand its model completely in order to use it. Quite simply, if the chart reads over 80, the chart is signalling that the particular currency has been overbought (meaning that the trader or investor might want to sell at this point). If the chart reads under 20, the chart is signalling that the particular currency has been oversold (meaning that the trader or investor might want to buy at this point). Different trades and investments will use and perhaps require the use of different benchmarks (for e.g. instead of 80-20, a benchmark of 70-30 may be used). The relative strength index (RSI) works very similarly to Stochastics. Like Stochastics, the RSI is based on a 100-point scale. The RSI also, like the Stochastics chart, tries to measure whether a particular currency has been overbought or oversold by the Forex market. In function, the RSI is very similar to the Stochastics chart, however the relative strength index differs somewhat as it is based on slightly different variables. In conclusion, there is a variety of different technical charting indicators used in Forex technical analysis. The main ones being: Bollinger bands, the moving average convergence/divergence (MACD), the parabolic stop and reversal (Parabolic SAR), the stochastic oscillator and the relative strength index (RSI). Once you have a basic understanding of the main technical indicators used in Forex, it is recommended that you learn more about each one in more detail, so that you know how to use each one effectively and to your advantage.

Copyright © 2012 How Forex Trading Works 51 Getting Started Support and Resistance in Forex Trading In Forex trading, there will be both support and resistance. They both will arise from a variety of different sources for each currency pair at certain price levels. Traders and investors in the Forex market use the terms "support" and "resistance", to refer to certain price levels on currency pair price charts, that act more often than not as "barriers". These so-called barriers tend to prevent currency pair prices from getting pushed furthermore into a certain direction. Each barrier on a currency pair price chart is always, to some extent or to a degree, psychological in nature. This is why many traders and investors like to describe support and resistance as a strength contest between "the bears" and "the bulls". These animals are used to represent support and resistance because of their different ways of attacking. A bull drives its horns up in the air and represents the support of the price of a particular currency pair - bulls represent buyers. A bear swoops its paws down and represents the resistance of the price of a particular currency pair - bears represent sellers. Using this analogy, resistance and support is actually very easy to understand. Remember, bulls and bears present in all financial markets and not just the Forex market. Bulls and bears simply serve to animate the mechanics of supply and demand. Traders and investors in the Forex market like to make predictions and they have expectations of particular currency pair prices. This is why Forex traders tend to draw lines through as many high points or low points as they can find on a linear path in order to produce trend lines for particular currency pair prices. Once they have produced a trend line for the price of a particular currency pair, they can then predict the future with this trend line, giving the market a clearer idea of which direction the currency pair is moving in. This will then, in turn, create either support or resistance for that currency pair - alongside the produced trend line. Also, most online Forex brokers will offer free graphing of moving averages to you for free. Traders and investors in the Forex market tend to use moving averages and Bollinger Bands to determine whether or not a particular currency pair's price has a bullish or bearish future. The Forex market creates either resistance or support with all of the different sources of resistance and support. However, it is important to note, that neither resistance nor support are derived from any economic fundamentals that come with a particular currency pair (or with any other item, asset or commodity that is being traded, for that matter). Due to the fact that traders and investors in the currency market believe that both support and resistance come from elsewhere, they do. The economic fundamentals often eventually end up forcing the Forex market to push the price of a particular currency pair either above or below the levels of support and resistance, in fact. In conclusion, we can describe the Forex market as a strength contest between the bulls and the bears, meaning that the market is all about support and resistance (buying and selling pressures). Also, remember that the strength of a point of a resistance is usually greater the longer it has been around - however on the other hand, when traders and investors begin to discuss either historical support or historical resistance points being

Copyright © 2012 How Forex Trading Works 52 Getting Started broken, a dynamic is born that fulfills itself. When strong resistance points are broken in the Forex market, a strong trend will usually form itself at this point, moving in one direction or another. This is because traders and investors immediately begin to find new sources of support or resistance. Eventually, when the new point is found, volatility typically and temporarily weakens. Volatility will also typically remain weak, until it is awakened once again by the occurrence of the next market-moving event. support and resistance points tend to be a lot more important to short-term traders and investors, more specifically swing traders and investors - rather than long-term traders and investors. Levels of support and resistance are greatly affected and determined by the traders and investors of the Forex market (due to mass psychology and their collective opinions). They do not last for a significant amount of time, meaning they generally do not affect the long- term values of particular currency pair prices, which is why points of support and resistance are much less important to long-term traders.

Copyright © 2012 How Forex Trading Works 53 Getting Started Price Channels in Forex Trading Price channels in Forex trading are very simple and easy to use and they are common in Forex technical analysis. They are considered chart tools and they are used by many traders and investors in the Forex market. Price channels are used in Forex trading to set buy points and sell points for particular currencies. They usually comprise of two lines running parallel to each other. In between the two running lines, lies the value of a particular currency pair. Generally, the value (the price) of a particular currency pair remains within the two lines, however on occasion the value of the currency pair will rise or fall beyond one of the two trend lines. This represents either support or resistance, depending on the direction of which the value of the currency pair moves. Support will cause the currency's value to break through the upper trend line and resistance will cause the currency's value to break through the lower trend line. Regardless, in both cases, this is known as a "breakout". Breakouts can be considered bullish, if they involve breaking through the upper line with support - and vice versa, as they can be considered bearish, if they involve breaking through the lower line with resistance. Price channels differ slightly from regular trend lines since they require a slightly more fixed pattern. Sometimes, neither price channels nor regular trend lines belong on some charts, despite the fact that some traders and investors feel insist on forcing them on. You should remember, that both price channels and regular trend lines are only lines and they do not always accurately reflect real trends or channels. Although Price channels are very easy to use, they are harder to master. Knowing how to use them is easy, but really, you need to know when to use them. Valid price channels can sometimes be difficult to find. They are actually created through drawing firstly a trend line and then two running lines on either side of the trend line, with both typically running parallel alongside it. If on either side of the trend line there are enough points that match up, then it is very possible that a valid price channel has been found. Unfortunately, price channels are weak, more often than not. This is because trend line drawn tends to be weak, in that it marks very little in regards to the true range of a currency pair. Some Forex traders might create one based somewhat on random choice or personal whim rather than strong reasoning, in turn leading to the trader or investor to place a buy or sell order on a particular currency once it makes a breakout - according to their price channel. However, more often than not, these orders are wasted since theirs aren't valid. They can be used effectively though, allowing Forex traders to catch breakouts and take advantage of them. In conclusion, price channels are easy-to-use charting tools that are present in Forex market technical analysis. They can be very effective, however, they can also fail if they are not implemented correctly at the right times and on the right charts. They are different

Copyright © 2012 How Forex Trading Works 55 Getting Started Fibonacci Retracements in Forex Trading Fibonacci retracements are used by traders and investors in the Forex market as a method of technical analysis. They are used to try and determine the levels of support and resistance for different currencies. Fibonacci analysis is named after its creator, Leonardo Pisano, who was a famous Italian mathematician who was nicknamed "Fibonacci". Fibonacci can be effective and it involves numbers, sequences and ratios. Leonardo Pisano's work suggests that in nature, regardless of the subject matter, there is always a mathematical "order". Fibonacci analysis is based on the many mathematical relationships and as they are observed very often, they are considered to be significant and not simply random. There are many skeptics of Leonardo Pisano's work. Fibonacci analysis might sound vague and far-fetched to you, but it can actually be applied to Forex trading. Traders and investors in the currency market, only need to think carefully about the following two facts, before they try to evaluate the importance of Fibonacci analysis: - Leonardo Pisano believed that there were many mathematical ratios that could be found in nature everywhere. He also believed that these ratios were significant - A large proportion of traders and investors in the FX market know about Fibonacci ratios and consider them when they place orders. Fibonacci ratios could well be significant and this might well be the reason why so many Forex traders look at them. However, on the other hand, it could be argued that they are only significant solely because there are so many currency traders who look at them. Generally though, traders and investors in the Forex market do not worry about this philosophical argument and they tend to focus mainly on ways in which they can take advantage of Fibonacci analysis, in order to make more profit. There are certain ratios in Fibonacci analysis, that are considered more significant than others, to Forex traders. These more significant ratios are as follows: 38.2%, 50%, 61.8% and 75%. Combining these more significant ratios from Fibonacci analysis, with other Forex trading methodologies, can help currency traders to potentially find better and more profitable points of entry and exit. When Forex traders place orders, they want to find the best and most profitable entry point possible, in order to maximize their profits. If a Forex trader discovers a significantly strong upward trend in a particular currency pair's price, but they do not want to have to buy the currency pair on the trend's highest point, they might take advantage of Fibonacci analysis. The analysis might suggest that the currency pair's price might retrace some of the upward trend before returning back to the trend's overall upward direction. The currency trader would then be in a position where they might consider buying the currency pair at a Fibonacci retracement level - whether it be 38.2%, 50%, 61.8%. However, using this trading method, Fibonacci analysis does suggest that profitability will be very low if the upward trend retraces by 75%. So, when Forex traders buy into trends at the lower

Copyright © 2012 How Forex Trading Works 56 Getting Started retracement levels, they might want to consider placing Stop-Loss orders a little below the retracement price of 75%. After traders and investors place orders, they then wait to profit and eventually start looking for the best and most profitable exit points possible, in order to maximize their profits. Fibonacci retracements allow Forex traders in the Forex market to choose the best and most profitable exit points available to them, in order to maximize their profits. If a currency trader has reason to believe that an upward trend in a particular currency pair's price is beginning to end, they may open a short position. The Forex trader might expect the currency pair's price to fall, but they might not be able to predict the extent to which the currency pair's price will fall. In this case, the Forex trader could return to Fibonacci analysis. Taking into account Fibonacci ratios, they might now predict that the currency pair's price will fall to equal retracements levels of 38.2%, 50% or 61.8% of the currency pair's upward trend. Again, a retracement level of 75% could be predicted, however Fibonacci analysis does suggest that currency traders will more likely make profits with the lower percentages. In conclusion, Fibonacci analysis can sound quite vague and far-fetched at first, but after some practice and application it can work effectively. Fibonacci ratios are important in technical analysis to many traders and investors in the Forex market. Regardless of whether or not Fibonacci ratios are truly significant, ignoring the philosophical arguments over them, they do bear value and you should recognize the Fibonacci ratios when placing Forex orders.

Copyright © 2012 How Forex Trading Works 57 Getting Started Moving Averages in Forex Trading Many traders, investors, analysts and chart-makers in the Forex market use moving averages (AKA rolling averages, rolling means and running averages) to try and remove the "statistical noise" that comes with short-term price swings. The term "rolling average" is referred to frequently in the US come election season, when it comes to the public opinion polls. This is because people in the US try and spot voting behavior trends. Moving averages are also used in the currency market and in a similar way. They are used by Forex traders to spot trends in the prices of the particular currency pairs by removing the statistical noise that typically arrives with short-term price swings. 'Statistical noise' is the most common phrase used to describe unrecognizable amounts of unexplained variation in a sample, i.e. blips, anomalies and just generally-fluctuating currency pair prices in the FX market. In order for a Forex trader to create their own moving average, they must first collect their chosen currency pair's values over a chosen time period, before using those values to create a mean figure which can then be used as their first point on their new moving average line graph. If the chosen time period was 7 days, the day after the first initial 7 days, the currency trader would drop the first day's figure and then add the current day's figure to their line graph. So, it is always out with the old and in with the new, to put it simply. The advantage of using this type of technical indicator is that the statistical noise of the market for currencies is removed somewhat. If you use daily averages to create your trend lines, the lines themselves will appear a lot smoother. Moving average lines also allow traders and investors in the currency market to spot developing trends as they happen, rather than comparing one separate set of data with another, which can be tedious in some cases. In conclusion, moving averages (AKA rolling averages, rolling means and running averages), are very simple and easy-to-use. Moving average lines prevent statistical noise from stopping you spotting various currency pair price trends. They can easily be implemented into any Forex trader's technical analysis, as they are typically very easy, quick and convenient to create. However, moving averages are known to be lagging indicators, since they only present the market's current situation. They do not predict future Forex market directions. This also means that they can deliver their signals at any time, requiring Forex traders to regularly check and keep track of them. One last disadvantage that you should note also, is the fact that when the currency market trades sideways with no real trend, the moving averages can deliver false signals, so it is recommended that you do not implement moving average line graphs in such market conditions. They can be very effective and help currency traders to increase their profits, but they can also be ineffective at times; there are times to use them and there are other times not to.

Copyright © 2012 How Forex Trading Works 58 Getting Started Bollinger Bands Explained Bollinger bands were founded by John Bollinger in the 1980s and are used in Forex technical analysis, as a technical indicator that is used to compare a particular currency pair's volatility with its relative price levels over a chosen time period. John Bollinger invented the technique of taking advantage of moving averages with two different bands. The two bands are used to both add and subtract calculations of standard deviations. The technical indicator is comprised of two different trading bands that are both designed to specifically cover as much of the price action of a particular currency as possible, within the two trading bands. Standard deviation, being a measuring mathematical formula, allows traders and investors using Bollinger bands in the Forex market to measure volatility. Standard deviation also allows traders and investors to see how the price of a particular currency pair can spread around the "genuine price" of it. When people use this technical indicator, they can be quite confident that all of the pricing data for the particular currency pair will indeed fall between the two different trading bands. The Bollinger bands are actually comprised of one center-line and two separate price channels. The two separate price channels sit on either side of the center-line, one above and one below, quite simply. The center-line is known as a moving average, however more specifically, it is known as an exponential moving average. Both of the separate price channels are thought to be standard deviations of the chart that is being looked at and studied by the trader or investor. When the price action for a particular currency pair is volatile, the Bollinger bands will expand. When the price action for a particular currency pair bears more of a tighter pattern of trading, the Bollinger bands will contract. Some currency pairs can trade for longer time periods within the same trend, however there will often be times of volatility. In order for traders and investors to see trends more clearly, they will want to take advantage of moving averages so that they can filter the price action of a particular currency pair. This will allow traders and investors in the FX market to discover more information that could prove to be vital, in regards to discovering the overall trading pattern of the currency market. The Forex market can be quite unsteady, unstable and unpredictable at times and especially at peak trading times during the day, despite the fact that the market can continue to trade in the same trend that is either up or downwards. Traders and investors who use technical analysis in the Forex market, can use support and resistance lines so that they can more confidently anticipate the price action of a particular currency pair, using moving averages. Lower support lines are drawn and upper resistance lines are drawn, before price channels are formed, through the drawing of statistical inferences. Traders and investors expect that, between these two newly formed price channels, the price action for the particular currency pair will rest. In conclusion, Bollinger bands are used in Forex technical analysis as a technical indicator. They can be particularly effective if used correctly. You should also note that some traders and investors, prefer to draw straight lines that connect either the top of the prices or the bottom of the prices, so that they can notice the extremities of either the upper prices or

Copyright © 2012 How Forex Trading Works 59 Getting Started the lower prices - some traders and investors like to draw lines for both the top and the bottom prices for particular currency pairs. Parallel lines can then be implemented, allowing that traders and investors to identify where prices will move within the channel - and if the prices do not escape the channel, the trader or investor can be somewhat confident that the prices are moving as predicted and expected. Every trader and investor in the FX market knows when using Bollinger bands though, that when the price of a particular currency pair touches or breaks through the upper band, it is seen to be overbought - and vice versa, when the price of a particular currency pair touches or breaks through the lower band, it is seen to be over-sold. When a particular currency pair has been over-bought, you will most likely want to sell - and vice versa, when a particular currency pair has been over-sold, you will most likely want to buy.

Copyright © 2012 How Forex Trading Works 60 Getting Started Candlestick Chart Information, History and Patterns Candlestick charts are very commonly used in Forex technical analysis by many traders and investors. The candlestick charts that are used in the Forex market originate from Japan and were developed more than 500 years ago. The candlestick charts used in the FX market were developed by a Japanese merchant, who used candlestick charts to visually-represent price movements in a rice market, which apparently led to him to become very rich and wealthy. Due to the history of candlestick charts, some of the candlestick chart patterns have inherited very unique names, however these names allow traders and investors to more easily remember each one, as there are a few. First of all, before learning about candlestick chart patterns, you should know about candlestick charts themselves. Candlesticks can represent any chosen time frame - minutes, hours, weeks etc. The body of the candlestick chart is, quite simply, the thicker part. You will notice also, that there are two lines on either side of the candlestick's body - these are known as the shadows, or wicks. Again, quite, simply, the top line is known as the upper shadow or wick and the bottom line is known as the lower shadow or wick. The upper shadow or wick, is used to represent the currency pair's price highs, in the chosen time period - and vice versa, the lower shadow or wick, is used to represent the currency pair's price lows, in the chosen time period. The edges of each candlestick also represent the opening and closing prices of the currency pair in the chosen time period. Each candlestick will be shaded with a color that will represent the difference between the time increment's opening and closing prices. Typically, the lighter color will be used to show that the time increment's closing price was higher than its opening price - and vice versa, the darker color will be used to show that the time increment's closing price was lower than its opening price. Different candlestick graphs use different colors, however generally, the lighter color chosen will be used to represent an increase in the currency pair's price. The "Marabuzo" is one of the more common candlestick chart patterns. In the Marabuzo, you will find neither an upper shadow nor a lower shadow, on the candlestick. This chart pattern suggests that, in the chosen time period, the market for the currency pair would have been either very bullish or very bearish. If the candlestick is colored lightly, the market would have been bullish - and vice versa, if the candlestick is colored darkly, the market would have been bearish. A "Spinning Tops" candlestick is basically the opposite of the "Marabuzo" candlestick chart pattern. In the spinning tops charting pattern, the candlestick's shadows are longer than the candlestick's body, meaning that the market for the currency pair closed at a price

Copyright © 2012 How Forex Trading Works 61 Getting Started much closer to its opening price, than closer to its highs or lows in the chosen time period. Short days mean that the Forex market moved little for a particular currency pair. Long days mean that the Forex market moved much for a particular currency pair. Some candlestick chart patterns consist of multiple candlesticks and the "Dark Cloud" pattern is one them. The dark cloud pattern comprises of two candlesticks: the first one is lighter and has a longer body and the second one is darker but also has a longer body. The end of the second candlestick's body also exceeds the first candlestick's midpoint. A dark cloud candlestick pattern reflects a good session followed by a very bad session. Typically, in this case, the negative movement will move onto the following session too as well as the shorts. The "Bullish Engulfing" pattern is another candlestick chart pattern. This is similar to the dark cloud pattern, in that it comprises of two candlesticks, however: the first one is darker and has a shorter body and the second one is lighter and has a longer body. A bullish engulfing pattern reflects a particular trend that has played itself out. This pattern also gives traders and investors a sign that a currency pair's average prices are going to start moving in the other, opposite direction. This bullish pattern tends to occur in the lower area of a price swing. Conversely, the "Bearish Engulfing" is the opposite of the bullish engulfing pattern and tends to occur in the upper area of a price peak. The "Three Black Crows" candlestick charting pattern comprises of three candlesticks. All of the three candlesticks in this pattern are darker have longer bodies. This pattern quite simply signals to traders and investors, that the market for the currency pair has been very bearish. Typically, the three black crows charting pattern will suggest that the currency pair has been over-valued. Conversely, the "Three White Soldiers" is the opposite of the three black crows charting pattern and comprises of three lighter candlesticks. The three white soldiers charting pattern is found in the middle of a downward trend. Typically, the three white soldiers charting pattern will suggest that the currency pair has been under-valued. This pattern can signal to traders and investors that there is an opening for bullish market activity. There is also the "Falling Three Methods" and the "Rising Three Methods". The "Falling Three Methods" consists of two darker candlesticks with longer bodies, that typically bracket 3 (but sometimes 4) smaller, light candlesticks that between them. The second darker candlestick also forms a new closing low. In conclusion, there are many different candlestick charting patterns and we have only covered a more common select few of them. Candlestick charts, originating from Japan over 500 years ago, are used by the majority of traders and investors in the Forex market today and can be very effective. An advantage of using candlestick charts is that there are so many charting patterns available, making the charts very dynamic.

Copyright © 2012 How Forex Trading Works 62 Getting Started Using Candlesticks and Candlestick Patterns Many traders and investors in the Forex market use Japanese candlesticks when they conduct technical analysis, as they are unique and allow us to gather information regarding the price actions of particular currency pairs, a lot more effectively. Candlestick analysis is very popular, mainly due to the fact that there is a lot of information regarding trends of currency pairs, presented on candlestick charts. Before looking into these trends, you should know the basic layout of a Japanese candlestick. A basic candlestick chart consists of more than one candlestick - each one is spread across a chosen time frame. Each candlestick on the chart represents the price range and movement for the currency pair at each interval within the chosen time frame. The chart, as a whole, represents the chosen time frame. The candlesticks represent periodic intervals within that time frame. Both, of course, represent the price action of a particular currency pair. Each candlestick has a body. This body is used to illustrate the opening and closing prices for the currency pair during that periodic interval. You will also notice two lines coming from the top and bottom of each candlestick body. These are known as upper and lower shadows (or wicks, if you like). The upper shadow represents the currency pair's price highs and the lower shadow represents its price lows, again, during that periodic interval. The only other thing you should know really, is that they will each be shaded with either a lighter or darker color, to represent the relationship between the currency pair's opening and closing prices during that periodic interval. The colors used differ from chart to chart. Generally, the lighter color will be used to represent a higher closing price whereas the darker color will be used to represent a lower opening price, during that periodic interval. One advantage of using candlestick charts is that the chart condenses a lot of Forex price information into one single chart. This is one the reasons why the chart is so popular and effective. Traders and investors can have access to more information in less space. These charts also allow us to visually notice trends, whether they are upwards trends or downwards trends, through the candlestick shading patterns. The "Long Lower Shadow" trend indicates a bullish market for the currency pair. In this trend, the lower shadow is quite long, quite simply. However, in order for this trend to remain reliable, the lower shadow must be at minimum the length of the body. The "Long Upper Shadow" on the other hand, is a trend that indicates a bearish market for the currency pair. In this trend, the upper shadow is quite long. However, in order for the long upper shadow trend to remain reliable, the upper shadow must at least be as long as the body. In conclusion, many traders and investors in the Forex market use candlesticks and candlestick patterns in technical analysis to spot trends and to keep track of particular currency pair price actions, through a visually-appealing medium. Unlike other charts, candlestick charts allow traders and investors to conduct short-term analysis on particular

Copyright © 2012 How Forex Trading Works 63 Getting Started currency pairs, as well as on their highs and lows. The charts also allow traders and investors, to relate these high and low prices of currency pairs, to the opening and closing prices of them. Candlesticks really show traders and investors exactly how the market for a particular currency pair reacted during specific time intervals, as chosen by the trader or investor. When using candlestick analysis, like with other types of analysis, the more information and data you have to work with the better. This is why it is important to note, that if you are looking to spot or predict trends with candlestick analysis, you should try to study multiple time frames. This way, you will make more rational trades and investments, since you will be more confident in the trend you have spotted or predicted. You need to look at whether or not a trend has remained consistent or not over multiple candlestick charts in multiple time frames, rather than just looking at each individual candlestick chart on its own. When spotting and predicting currency pair price trends, always think and make note of each potential trend's reliability and consistency.

Copyright © 2012 How Forex Trading Works 64 Getting Started Important Forex Trading Charting Patterns Forex trading chart patterns can provide signals to traders and investors in the Forex market. charting patterns can signal to traders and investors when to buy or sell particular currency pairs. Sometimes, they can even suggest the direction in which the market for a particular currency pair is going to move in. Some charting patterns in Forex trading are more important than others. Many Forex trading charting patterns actually reinforce themselves too, since when traders and investors believe that a certain pattern is evolving on a chart, they will act differently and place orders to make the pattern seem even more apparent. You should also note that many charting patterns have opposites that act similarly but in reverse. This is good, as it makes it easier to learn and remember each pattern. The "Symmetrical Triangle" is one charting pattern that you should recognize. This is simply a pattern that occurs on a currency pair chart, where the lows are rising and the highs are falling. By drawing two trend lines, one for the lows and one for the highs, the two lines would eventually meet. The triangle's base would be to the left of the chart and the triangle's point would be to the right. When a symmetrical triangle occurs, it will usually lead to the market for the particular currency pair, to break out in a certain direction. It is impossible to tell which direction the market will move in, but you can be fairly confident that the market will indeed move in one direction or another, very soon. Traders and investors in the Forex market are always making predictions and expectations, so it is not typically difficult to notice different symptoms of growing trends for particular currency pairs, by studying charting patterns. You will also notice that generally, trends will begin to develop on charts, as the time approaches to an important event. This is one way in which fundamental analysis and technical analysis overlap with each other. You should try to take advantage of symmetrical triangles by placing orders of entry both above and below the trend lines. You can get both ascending triangles and descending triangles, but they are both very similar. With ascending triangles, the top line remains flat whilst the bottom line ascends: the lows rise and the highs remain consistent. With descending triangles, the top line descends whilst the bottom line remains flat: the highs fall and the lows remain consistent. Highs and lows can remain consistent when they fail to break a barrier of some sort. Ascending triangles suggest that the buyers in the market for the particular currency pair are placing enough support on the currency pair, but they are failing to surpass a certain barrier on the pair - and vice versa, descending triangles suggest that the sellers in the market for the particular currency pair are placing enough resistance on the currency pair, but they are failing to surpass a certain barrier on the pair. These barriers can be psychological. But in both ascending and descending triangles, the narrowing of the ranges will always tend to induce break ups. Also you should remember that, whether it is the buyers or the sellers, the group of traders and investors who are applying pressure onto the barrier will usually win. This means that the currency pair's price will typically break in favor of the pressuring group's direction (up for the bullish

Copyright © 2012 How Forex Trading Works 65 Getting Started buyers and down for the bearish sellers). This is only generally-speaking, however: anything could happen in the financial markets, including in the Forex market. The ascending and descending triangles both bring up a good point to remember, too. Generally, the price of a particular currency pair will always struggle to rise more than it will fall, currency values will tend to rise more slowly than they fall. One more point to make, would be that descending triangles tend to suggest more potential volatility in the future, than ascending triangles do. The "Double Top" is another charting pattern, that occurs when a particular currency pair's price reaches the same high point twice, on the currency pair's price chart. A double top charting pattern tends to suggest that buyer pressures on the currency pair have quite a solid ceiling at that high point in price. When the double top is recognized, many traders and investors in the market for the currency pair, will tend to place sell orders. The reverse charting pattern of the double top, is quite simply known as the "Double Bottom". This is when a particular currency pair's price reaches the same low point twice, on the currency pair's price chart. A double bottom charting pattern tends to suggest that seller pressures on the currency pair have quite a solid ceiling at that low point in price. Similarly to the double top: when the double bottom is recognized, many traders and investors in the market for the currency pair, will tend to place buy orders. The "Head And Shoulders" is another charting pattern, that occurs when there is a small price peak followed by a large peak in price, which is then finally followed by another small price peak that is of a similar size of the first. The head and shoulders charting pattern, in this instance, works similarly to a descending triangle - if you went from the second large peak in price to the third smaller price peak. The larger price peak is known as the head and the smaller price peaks are known as the shoulders. If a small descending triangle begins to appear, this could then eventually lead to a break in favor of the sellers. The "Reverse Head And Shoulders" is another charting pattern that is the exact opposite of the head and shoulders, quite simply. It occurs when there is a small price dip followed by a large dip in price, which is then finally followed by another small price dip that is of a similar size to the first. The reverse head and shoulders charting pattern, in this instance, works similarly to an ascending triangle - if you went from the second large dip in price to the third smaller price dip. The larger price dip is known as the head and the smaller price dips are known as the shoulders. If a small ascending triangle begins to emerge, this could then eventually lead to a break in favor of the buyers. In conclusion, there are many different types of charting patterns that we can observe in Forex trading. However, some are more important than others and we should make sure that we can accurately recognize the more important Forex trading charting patterns.

Copyright © 2012 How Forex Trading Works 66 Getting Started Strong Bullish Reversal Candlestick Patterns There are many strong bullish reversal candlestick patterns, including the "Abandoned Baby", the "Morning Doji Star", the "Three Inside Up", the "Three Outside Up" and the "Three White Soldiers". Although there are multiple strong bullish reversal patterns, these are the more important ones to know, understand and recognize. The Abandoned Baby is a three-day reversal pattern. The first day's candlestick is dark, which continues a previously established downward trend. A Doji represents the second day of the pattern. This Doji's shadows (or wicks) trade below the first day's closing price. The Morning Doji Star is a three-day reversal pattern. The first candlestick in this pattern represents the first day, which is in a downward trend, thus causing the first candlestick to have a long and dark body. The next day bears a small trading range, opening lower with a Doji. The last day of the pattern closes above the first day's midpoint. The Three Inside Up is a three-day reversal pattern. The pattern follows a previously established downward trend. The first candlestick of the pattern, representing the first day, is long and dark. The second day trades up to the first day's midpoint, with a light candlestick. The third day also comes with a light candlestick, however this candlestick carries the currency pair's price above the first bearish candlestick. The Three Outside Up is a three-day reversal pattern, that continues a previously established downward trend, from the first day. The first day's candlestick is therefore dark. The second day's candlestick however, is a light and longer one. This second candlestick sweeps over the first day's candlestick body and closes well over the first day's opening price. The third and final day's candlestick is also light, though it closes even higher than the second day's candlestick. The Three White Soldiers is a three-day reversal pattern. The pattern follows a previously established downward trend. The pattern comprises of three light candlesticks - one for each day. Each day's candlestick closes at a higher price than the previous day's opening price. In conclusion, there are multiple strong bullish reversal candlestick pattern to remember, the main ones being the Abandoned Baby, the Morning Doji Star, the Three Inside Up, the Outside Up and the Three White Soldiers. Currency traders will typically see strong bullish reversal patterns in action, at least at one time during their trading careers. Each one is slightly different, so it can prove to be hard to make sense of them sometimes. Fortunately though, candle patterns tend to have names that are easy to remember, making them slightly easier to spot and recognize. It is highly recommended that you take the time to learn about these candle patterns, before embarking on a Forex trading career, so that you can recognize them when they come about. By recognizing these patterns, you will be able to take advantage of them. Do be careful though, as the Forex market is unpredictable and anything can happen; just because you think that a certain pattern is evolving, it doesn't mean that the pattern you are predicting to occur and expecting to see will indeed come about.

Copyright © 2012 How Forex Trading Works 67 Getting Started Moderate Bullish Reversal Candlestick Patterns There are many moderate bullish reversal candlestick patterns, including the "Breakaway", the "Doji Star", the "Dragonfly Doji", the "Engulfing", the "Hammer", the "Ladder Bottom", the "Morning Star", the "Piercing Line", the "Three Stars In The South" and the "Tristar". Although there are multiple moderate bullish reversal patterns, these are the more important ones to know, understand and recognize. The Breakaway is a five-day reversal pattern. The first day's candlestick is long and dark, which continues a previously established downward trend. The next three candlesticks representing the following three days are dark too, however they also all have shorter bodies. Each of the three candlesticks also move in the same direction as one another, each one having a lower closing price than the last. The fifth and final day's candlestick is long and light. This candlestick closes into either the first or second day's candlestick body. The Doji Star is a simple two-day reversal pattern. The first day's candlestick is long and dark. A Doji represents the second day. This Doji opens at the first day's closing price and the Doji's shadows (or wicks) are short. The Dragonfly Doji is a simple one-day reversal pattern that is comprised of one candlestick. The pattern tends to the stronger when it follows a previously established downward trend. The candlestick itself has a significantly small body which appears hardly existent. The candlestick does however have a long lower shadow. This shadow is twice as long as the candlestick's body at least. The candlestick typically has no upper shadow, though sometimes it might have a small one. The Engulfing is a simple two-day reversal pattern. The pattern follows a previously established downward trend and the first candlestick, representing the first day, is dark. The second day's candlestick is long and light. This candlestick engulfs the entire body of the first day's candlestick, also closing well over the its opening price. The Hammer is a simple one-day reversal pattern that occurs after a previously established downward trend. The Hammer candlestick's body is small, forming at the trading range of the day's upper end. The candlestick can be dark or light and its lower shadow is twice as long as the body at least. Typically, this candlestick has no upper shadow, though it might occasionally have a small one. The Ladder Bottom is a five-day reversal pattern. It continues after a previously established downward trend. The first three candlesticks representing the first three days are all dark, each having lower closing prices than the last. The fourth day's candlestick is essentially an up-side down Hammer (AKA the "Inverted Hammer"). The fifth and final day's candlestick is light. The Morning Star is a three-day reversal pattern. This pattern occurs after a previously established downward trend. The pattern begins with the first day's candlestick, which is long and dark. The second day's candlestick is short and is also known as the "Star Candle". The third day's candlestick is light.

Copyright © 2012 How Forex Trading Works 68 Getting Started The Piercing Line is a simple two-day reversal pattern. Occurring after a previously established downward trend, this candlestick pattern begins with the first day's candlestick, which is long and dark. The second day's candlestick is light and closes above the first candlestick's midpoint. The Three Stars In The South is a three-day reversal pattern, continuing a previously established downward trend. The first day's candlestick is dark and has a long lower shadow, with a long body also. The second day's candlestick is similar to the first, however, it has a smaller body and a shorter lower shadow. The third day trades within the trading range of the second day. The third day's candlestick has a small body, with no upper or lower shadows. This candlestick is also referred to as the Dark Marubozu. The Tristar is a three-day reversal pattern. This pattern occurs after a previously established downward trend and is comprised of three identical Dojis. Each Doji represents each of the three days and they all have identical opening and closing prices. In conclusion, there are multiple moderate bullish reversal candlestick patterns to remember, the main ones being the Breakaway, the Doji Star, the Dragonfly Doji, the Engulfing, the Hammer, the Ladder Bottom, the Morning Star, The Piercing Line, the Three Stars In The South and the Tristar. All Forex traders will typically see at least one of these moderate bullish reversal patterns during their trading careers. Each pattern is slightly different, so it can be fairly challenging to distinguish each one from one another. On the other hand, candle patterns do tend to have unique names, making them more memorable. If you ensure that you understand all of these candle patterns before trading any currencies, you will put yourself at a great advantage. Do keep in mind that the Forex market is unpredictable though and even if you feel that a particular candlestick is evolving, it doesn't necessarily mean that the candlestick you are expecting to see and predicting to form will evolve.

Copyright © 2012 How Forex Trading Works 69 Getting Started Weak Bullish Reversal Candlestick Patterns There are many weak bullish reversal candlestick patterns, including the "Belt Hold", the "Gravestone Doji", the "Inverted Hammer" and the "Tweezers Bottom". Although there are multiple weak bullish reversal candlestick patterns, these are the more important ones to know, understand and recognize. The Belt Hold is a simple one-day reversal pattern. The pattern occurs during a downward trend. The pattern consists of a single light candlestick, with an opening price that is very close to the day's low. Typically, the candlestick has no upper shadow (or wick), though it might have a short one in some cases. The Gravestone Doji is a simple two-day reversal pattern. The first day's candlestick is dark and closes near the low of the day, at the lower trading range. The second day comprises of the Gravestone Doji itself. The Doji's opening and closing prices are identical to each other, however, the Doji's upper shadow is well into the first candlestick's body. The Doji tends not to have a lower shadow, though on the odd occasion it might. If the Doji does have a lower shadow, it will typically be very short. The Inverted Hammer is a simple two-day reversal pattern. Following a previously established downward trend, the first day's candlestick is dark and closes near the low of the day, at the lower trading range. The second day's candlestick also trades at the lower trading range. This candlestick can be dark or light, with opening and closing prices resting closely to each other. The second day's candlestick has an upper shadow that is twice as long as its body, at least. However, it typically does not have a lower shadow, though sometimes it might have a short one. The Tweezers Bottom is a simple two-day reversal pattern. The pattern follows a previously established downward trend, with the first day's candlestick being dark. The first candlestick of the Tweezers Bottom, has no lower shadow at all. The second day is comprised of either a light Hammer or Doji. In conclusion, there are multiple weak bullish reversal candlestick patterns to remember, the main ones being the Belt Hold, the Gravestone Doji, the Inverted Hammer and the Tweezers Bottom. Traders and investors in the Forex market will typically encounter every one of these weak bullish reversal candle patterns at least once during their trading careers. Each one is slightly different from one another, so it can sometimes prove to be difficult to distinguish each one from one another. However thankfully, candle patterns tend to have memorable names, making it much easier for us to be able to distinguish each one from one another. It is a good idea to make sure you know and understand each one of these candlestick patterns, before embarking on your trading or investing career, so that you can recognize and take advantage of them. Do be careful though, as anything can happen in the currency market and just because you recognize a certain pattern evolving, it doesn't necessarily mean that the pattern you are predicting and expecting to form will occur.

Copyright © 2012 How Forex Trading Works 70 Getting Started Strong Bearish Reversal Candlestick Patterns There are many strong bearish reversal candlestick patterns, including the "Abandoned Baby", the "Dark Cloud Cover", the "Evening Doji Star", the "Evening Star", the "Three Inside Down" and the "Three Outside Down". Although there are multiple strong bearish reversal candlestick patterns, these are the more important ones to know, understand and recognize. The Abandoned Baby is a three-day reversal candlestick pattern. The first day's candlestick is light. The second day however, comprises of either a Doji or a smaller one. The third day's candlestick is long and dark. The Dark Cloud Cover is a simple two-day reversal candlestick pattern. The first candlestick representing the first day is long and light. The second one representing the second day however, is dark and closes below the first candlestick body's midpoint. The Evening Doji Star is a three-day reversal candlestick pattern that follows a previously established upward trend. The first candlestick is light. The second day though, is represented with a "Doji Star". The third day is represented with a dark candlestick. The Evening Star is a three-day reversal candlestick pattern. The pattern continues a previously established upward trend with the first day's candlestick, which is long and light. The second day's one has a small body and can be either light or dark. The second candlestick also closes above the first one. The third day's candlestick is long and dark, which opens below the previous one and closes near the center of the first candlestick's body. The Three Inside Down is a three-day reversal candlestick pattern. Following a previously established upward trend, the first day's candlestick is long and light. The second day's one is dark and is engulfed by the first candlestick's body. The third day's candlestick is dark like the previous one, however this one has a lower closing price. The Three Outside Down is a three-day reversal candlestick pattern, which follows a previously established upward trend. The first day's candlestick is light. The second day's one is dark, which drives the price below the previous day's low. The second candlestick closes near the range's bottom. The third day's one is dark, with a closing price that is even lower than the previous candlestick's close. In conclusion, there are multiple strong bearish reversal candlestick patterns to remember, the main ones being the Abandoned Baby, the Dark Cloud Cover, the Evening Doji Star, the Evening Star, the Three Inside Down and the Three Outside Down. These strong bearish reversal candlestick patterns will typically at least once be encountered by Forex traders, during their trading careers. No two of these candle patterns are the same and so they can be hard to learn and understand, because there are quite a few. Thankfully though, each of these patterns have memorable names and they make it easier for traders and investors to remember them. It's advised that you learn and understand each of these patterns before entering the market for currencies, so that you can take advantage of them

Copyright © 2012 How Forex Trading Works 71 Getting Started and potentially make more profits. The Forex market is unpredictable though - you should remember this always. Because the market for currencies isn't completely predictable, even if you perceive that a candlestick pattern in particular is developing, it doesn't necessarily mean that that pattern in particular will indeed develop, so you have to be careful.

Copyright © 2012 How Forex Trading Works 72 Getting Started Moderate Bearish Reversal Candlestick Patterns There are many moderate bearish reversal candlestick patterns, including the "Advance Block", the "Breakaway Candlestick", the "Deliberation", the "Dragonfly Doji", the "Engulfing", the "Meeting Lines", the "Tri Stars", the "Gravestone Doji" and the "Hanging Man". Although there are multiple moderate bearish reversal candlestick patterns, these are the more important ones to know, understand and recognize. The Advance Block is a three-day reversal candlestick pattern. The pattern is comprised of three light candlesticks. Each one of these patterns has a higher closing price than the previous one. However, each day's candlestick has a considerably smaller body than the previous day's candlestick body. The second and third ones also have long upper shadows (or wicks). The Breakaway Candlestick is a five-day reversal candlestick pattern that begins with a long and light one, representing the first day. The second, third and fourth candlesticks representing the next three days are also all blue and continue in the same direction. However, these ones are generally much smaller than the first. All three of these candlesticks have higher closing prices than the previous candlesticks. The fifth and final day's one is long and dark, that closes into either the first or second candlestick's body. The Deliberation is a three-day reversal candlestick pattern. The pattern follows a previously established upward trend. The first two days are represented by two long and light candlesticks. However, the third day's one is short and light - either a Spinning Top or Doji. The Dragonfly Doji is a simple one-day reversal candlestick pattern, consisting of a single candlestick, with a very small body. The candlestick also has a long lower shadow, which is at least twice as long as the candlestick's body. However, it has no upper shadow. The Engulfing is a simple two-day reversal candlestick pattern. The first day's candlestick follows a previously established upward trend. This one is light and tends to have either a small or average-sized body. The second day's candlestick is long and dark. The second candlestick's high is typically higher than the first one's high. Also, the lower the closing price of the second candlestick, the stronger the signal is. The Meeting Lines is a simple two-day reversal candlestick pattern, continuing a previously established upward trend first, with a long and light one representing the first day. The second day however, is represented with a long and dark candlestick. Both candlesticks have identical closing prices. The Tri Stars is a three-day reversal candlestick pattern. Beginning after a previously established upward trend, this pattern is comprised of three Dojis. Each Doji represents each day and they all have identical opening and closing prices.

Copyright © 2012 How Forex Trading Works 73 Getting Started The Gravestone Doji is a simple two-day reversal candlestick pattern, following a previously established upward trend. The first candlestick, representing the first day, is light and closes near the high of the day at the upper trading range. Typically, the second day is represented by a Doji with identical opening and closing prices. The Doji's upper shadow is relatively long. However generally, the Doji will have no lower shadow, though occasionally it might have a very short one. The Hanging Man is a simple one-day reversal candlestick pattern. The pattern occurs after a previously established upward trend, beginning with either a light or dark candlestick. Regardless of the candlestick's color, its body rests at the upper trading range. The candlestick has a long lower shadow and generally no upper shadow, though occasionally it might have a very short one. In conclusion, there are multiple moderate bearish reversal candlestick patterns to remember, the main ones being the Advance Block, the Breakaway Candlestick, the Deliberation, the Dragonfly Doji, the Engulfing, the Meeting Lines, the Tri Stars, the Gravestone Doji and the Hanging Man. Most Forex traders will encounter at least one of these moderate bearish reversal candlestick patterns at least once during their trading careers. Some say that these are fairly complicated and hard to remember, but they do all have unique name, which can help when trying to remember them. Before trading currencies, you should try and learn these patterns off by heart. At the end of the day though, anything can happen in the Forex market and even if you think that one of these patterns is developing before your eyes, it doesn't mean that the pattern you are thinking of will indeed form.

Copyright © 2012 How Forex Trading Works 74 Getting Started Weak Bearish Reversal Candlestick Patterns There are many weak bearish reversal candlestick patterns, including the "Belt Hold", the "Harami", the "Shooting Star", the "Harami Cross" and the "Tweezers Top". Although there are multiple weak bearish reversal candlestick patterns, these are the more important ones to know, understand and recognize. The Belt Hold is a simple one-day reversal candlestick pattern, occurring after a previously established upward trend. The one and only candlestick is long and dark, with an opening price that rests very closely to the day's high. The candlestick generally has no upper shadow (or wick), though occasionally, the candlestick might have a very short one. The Harami is a simple two-day reversal candlestick pattern. The pattern begins with the first day's candlestick, which happens to be long and light, following a previously established upward trend. The second day's candlestick on the other hand, is smaller than the first. Also, the second candlestick's range is within the first candlestick's body, resting above its midpoint. The Shooting Star is a simple two-day reversal candlestick pattern that begins after a previously established upward trend. The first candlestick, representing the first day, is both long and light. The second day's candlestick however, is either light or dark, with its body resting at the lower end of the day's trading range. The second candlestick also has a long upper shadow. However generally, the same candlestick has no lower shadow, though on occasion it might have a very short one. The Harami Cross is a simple two-day reversal candlestick pattern. Continuing a previously established trend, the pattern begins with the first day's candlestick, which is long and light. However, the second day is represented with a small candlestick, which rests entirely within the range of the first candlestick's body. The Tweezers Top is a simple two-day reversal candlestick pattern. The Pattern follows a previously established upward trend. The first day's candlestick is light with a shaven bottom. The second day though, is represented with either a dark "Hammer" or Doji, with a long lower shadow. In conclusion, there are multiple weak bearish reversal candlestick patterns to remember, the main ones being the Belt Hold, the Harami, the Shooting Star, the Harami Cross and the Tweezers Top. The majority of currency traders see at least one of these weak bearish reversal candlestick patterns at least once during their careers in the Forex market. Although some may find these daunting and confusing to learn, they do fortunately have memorable names making them far easier to remember and learn. Before you begin to trade currencies, it's advised that you familiarize yourself with these patterns as much as you can, so that you are better prepared when you enter the currency market. Though do remember that the market can move in any direction and just because you feel that a particular one of these candle patterns is forming, it doesn't necessarily mean that the one you are thinking of will indeed form before your eyes. You need to be careful when trading

Copyright © 2012 How Forex Trading Works 76 Getting Started Continuation Candlestick Patterns There are multiple continuation candlestick patterns: there are both bullish ones and bearish ones. Bullish continuation patterns include the "Rising Three Methods" and the "Three Line Strike". Bearish ones include the "Falling Three Methods", the "Downside Tasuki Gap", the "Three Line Strike", the "Side By Side White Lines", the "In Neck", the "On Neck" and the "Thrusting". Although there are multiple continuation candle patterns, these are the more important ones to know, understand and recognize. The Rising Three Methods is a five-day bullish pattern. The pattern begins with the first day's candlestick which is long and light, after a previously established upward trend. The next three days are represented by short and dark ones, typically not escaping the first candlestick's range. The fifth and final day's candlestick is long and light, much like the first one. The Three Line Strike is a four-day bullish pattern, following a previously established upward trend. The first three candlesticks representing the first three days, all are all light, continuing the bullish trend. These three all have higher closing prices than the ones preceding them. The fourth day's candlestick however, is long and dark, with a closing price that is similar to the first candlestick's opening price. The Falling Three Methods is a five-day bearish continuation pattern, occurring after a previously established downward trend. The first day's candlestick is long and dark. The next three days are typically represented by three short and light ones. These three candlesticks do not escape the first one's range. The fifth and final day's candlestick is long and dark, continuing the bearish trend, creating new lows. The Downside Tasuki Gap is a three-day bearish pattern, beginning with the first day's candlestick, which is dark. The second day's candlestick is also dark, but gaps downward. The third candlestick, representing the third day, is light and its closing price rests within the gap between the first two. The Three Line Strike is a four-day bearish pattern. The first three candlesticks, representing the first three days, continue a previously established downward trend. All of these three candlesticks are long and dark, with lower closing prices than their preceding ones. The fourth day's candlestick however, is long and light, closing at a similar price to the first one's opening price. The Side By Side White Lines is a three-day bearish continuation pattern, which continues a previously established downward trend with the first day's one, which is dark. However, the second day's candlestick is light, opening well under the first one's closing price. The third day's candlestick is light too, with the same closing price as the preceding one. The third candlestick also has a similar sized body as the previous one. The In Neck is a simple two-day bearish continuation pattern. The first candlestick, representing the first day, is long and dark. The second day's one follows, with a short and light body. The second one also has the same closing price as the preceding

Copyright © 2012 How Forex Trading Works 77 Getting Started candlestick. The second candlestick typically has no upper shadow (or wick), though it might occasionally have a very short one. The On Neck is a simple two-day bearish pattern. The first day's candlestick is long and dark. The second day's one however, is light and closes on the first candlestick's low. The second candlestick typically has no upper shadow, though it might occasionally have a very short one. The Thrusting is a simple two-day bearish pattern, beginning with the first day's candlestick, which is long and dark. The second one however, representing the second day, is light. The second one also closes well into the first candlestick's body, but does not quite reach its midpoint. In conclusion, there are multiple continuation candlestick patterns to remember. The main bullish ones being the Rising Three Methods and the Three Line Strike. The main bearish ones to remember are the Falling Three Methods, The Downside Tasuki Gap, the Three Line Strike, the Side By Side White Lines, the In Neck, the On Neck and the Thrusting. Most Forex traders will see at least one of these continuation patterns at least once in the market for currencies, during their trading careers. Although it can be difficult to learn all of these patterns off by heart, they all have unique and memorable names that make it much easier to remember them. Although it is recommended that you learn and understand each of these candle patterns, you should remember that the Forex market is unpredictable and even if you are certain that a particular candle pattern is developing, it doesn't necessarily mean that the pattern you are thinking of will indeed show itself.

Copyright © 2012 How Forex Trading Works 78 Getting Started The Head and Shoulders Charting Pattern The "Head And Shoulders" is a charting pattern that is also often referred to as a trend. The Head And Shoulders allows traders and investors in the Forex market, to estimate the magnitude of future currency pair prices. In Forex trading, the Head And Shoulders refers to the nominal exchange rate between one currency and another. The Head And Shoulders occurs when there is an initial rise in the price of a currency pair, followed by a price fall. This price fall is then followed by a rise in price, which is larger than the first initial price rise. The price then falls once again, before finally rising similarly to the initial rise in price. The pattern is known as the Head And Shoulders since it graphically resembles the Head And Shoulders of a person. The name thankfully makes the charting pattern very easy to remember. The trend can help traders and investors in forming their own predictions and expectations, for future prices of particular currency pairs, allowing them to evaluate them. In Forex, a trend is essentially the general direction in which the price of a particular currency pair is moving in. Trends are about averages. When a trader or investor enters the market for a particular currency pair, they will want to take advantage of the up or downward trend occurring in that market, in order to profit. This is why every trader and investor in the FX market, typically works with trends when placing their orders. Rarely do people place orders against trends. Fortunately, trends are easy to find, regardless of whether they are up or downward. However, traders and investors should make sure that they know how to distinguish between short-term trends and long-term trends. There are usually ways in which we can tell whether or not a trend is going to be sustainable in the long-term future. This is where the Head And Shoulders trend comes in: this trend seems to indicate a general upward price movement, however it is typically an indication of a market turn. In conclusion, the Head And Shoulders is a charting pattern that signifies a market reversal. The pattern reflects the lack of confidence and certainty in the traders and investors of the Forex market. The first shoulder of the Pattern represents initially high trading volumes for the currency pair. Then, the initial dip represents decreased confidence in the currency pair. This is followed by the larger peak in the price of the pair, signifying greater confidence in the currency pair. Lastly, the final dip, peak and dip movements in price reflect the growing lack of confidence and certainty in the currency pair. The Head And Shoulders, all-in-all, symbolizes a shift away from a particular currency pair by traders and investors. The Head And Shoulders is an important charting pattern to know, understand and recognize in the Forex market. You should keep on the look out for this charting pattern, as it can be quite dangerous if it does not fall in your favor.

Copyright © 2012 How Forex Trading Works 79 Getting Started Commodity Currencies Explained Commodity currencies, are currencies of countries that heavily depend on commodity exports. Typically, a commodity currency's price will move in the same direction as the price of its country's main commodity export. The price of a commodity currency is also affected by its country's trade balances, with respect to the country's main commodity export. The most popularly traded commodity currencies are from Canada, Australia and New Zealand. The currencies from these countries are also known as the "Comdolls", since they are all named "dollar". Although many other countries export commodities, these three countries depend more on their commodity exports, since their exports make up a greater proportion of their gross domestic product (GDP). This means that a fluctuation in the price of a main commodity that one of these countries exports, will have a large effect on the that country's economy and currency. Canada's main export is oil. This means that changes in the price of oil will have a significant impact on the country: both its economy and currency. Typically, a country will import more oil than it exports, however this is not the case with Canada. Another main Canadian export is aluminum. It could also be said that Canada relies on its smaller exports, including zinc, copper and nickel. Australia's main export is gold. This means that changes in the price of gold will have a significant impact on the country: both its economy and currency. Likewise, a decline in gold production would also likely affect the price of the Australian dollar and potentially weaken it. Although Australia doesn't export as much oil as Canada, nevertheless, oil is also a significant export of Australia. New Zealand doesn't particularly have one main export, but rather multiple main exports. New Zealand depends mostly on its exports of timber, dairy products and meat products. A number of commodity indices have proven to be worthy indicators of the New Zealand dollar's long-term value. In conclusion, commodity currencies ultimately work quite simply. The main commodity currencies are the Canadian dollar, the Australian dollar and the New Zealand dollar - all of which are also known as the Comdolls. Typically, the price of a country's currency will move in the same direction as the price of the country's main export. However, this price relationship is generally long-term. You should remember that short-term fluctuations in the price of a country's main export, will rarely affect the price of that country's currency to any significant degree. Traders and investors should attempt to spot long-term trends in the prices of main exports of different countries, in order to take advantage of them, since there is typically a positive correlation between the price of a country's main export and the price of that country's currency. If there is a long-term downward price trend for a country's main export, that country's currency is likely to also decrease in price in the long-run. If done correctly, trading commodity currencies can be very effective and a great opportunity for traders and investors in the Forex market, to make long-term profits.

Copyright © 2012 How Forex Trading Works 80 Getting Started Trading Cross Currencies Cross currencies are often referred to as "crosses". Cross currency pairs are simply pairs of currencies that do not involve USD. Traders and investors are generally more uncertain about these types of currencies, since the US dollar is the most heavily traded currency in the Forex market. The euro and the yen are both in second place in terms of trading volumes, with the US dollar taking first place. These currencies are also often held as reserves by multiple nations. There are various euro and yen crosses, including: EUR/GBP, EUR/JPY, EUR/CHF, EUR/CAD, EUR/AUD, EUR/NZD, GBP/JPY and CHF/JPY. Although traders and investors are generally more uncertain about these cross currencies, they are still popularly traded, despite the fact that they are considered more obscure. There are also even more obscure cross currencies available, that do not even involve the euro nor the yen, which include: GBP/CHF, CAD/CHF, AUD/NZD and AUD/CHF. Although many traders and investors in the currency market work with these cross currency pairs, you should bear in mind that working with these pairs is generally more difficult and a lot riskier. People typically limit themselves to only working with the major currency pairs. This means that the trading volumes of these more obscure cross currencies are much lower. It also means that liquidity can, at times, be an issue for these more obscure types of currencies. In conclusion, cross currency pairs are pairs of currencies that do involve the US dollar. They are generally thought to be obscure, though some are more obscure than others. Despite the fact that not many traders and investors work with these types of currency pairs, some still do make an effort to keep track of them. This is because they can help us to find the relative strength of their relatives, which might involve USD, EUR or JPY. If a currency trader was considering selling USD against both EUR and GBP, for a safer investment, they won't want to sell both pairs of currencies in case USD strengthens. Rather than placing two orders, they will have to decide between EUR and GBP. The trader or investor might then examine the cross currency pair EUR/GBP. If the pair showed an upward trend, this would mean that the EUR would be strengthening against the GBP - and vice versa, if the pair showed a downward trend, this would mean that the EUR would be weakening against the GBP. If the EUR was strengthening against the GBP, the trader or investor would consider selling the EUR/USD currency pair. If the EUR was weakening against the GBP, they would consider selling GBP/USD. You do not have to trade these types of currency pairs in order to take advantage of them though. Crosses can help us to maximize our potential profits by helping us to find better orders to place. However some Forex traders work directly with some cross currency pairs by buying and selling them, though this is not recommended for beginners, cross currency trading is generally more difficult and and lot riskier.

Copyright © 2012 How Forex Trading Works 81 Getting Started Trading Synthetic Crosses Synthetic currency pairs allow traders and investors in the Forex market to trade cross currencies in greater volumes. Cross currencies typically cannot satisfy some high volume orders due to a lack of liquidity. However, synthetic crosses can combine two currency pairs in a way that allows us to cancel out our positions on the third currency, that is mutual to both of them. This allows us to create an artificial currency pair, comprised of the two cross currencies we are interested in working with. Synthetic crosses work, because it allows traders and investors to go long on one currency and go short on another. For e.g. if you wanted to create a synthetic currency pair for EUR/GBP. If you were interested in buying EUR and selling GBP, you would want to go long on EUR/USD and go short on GBP/USD. By creating this synthetic currency pair, you are now able to trade the cross currency in greater volumes and the USD will simply cancel itself out across the two pairs of currencies. This means that you will be able to avoid the lack of liquidity that comes with trading and investing in cross currencies. It can be difficult to trade with synthetic crosses, since not many websites can provide extensive, customizable graphing services and charting options. However, there are some services and options available, such as the ones provided by Google and Yahoo. These are both sufficient enough and free-to-use, so they are ideal, more often than not. Also, if you try creating a synthetic pair of currencies, you should make sure that you convert pairs appropriately. For e.g. if one half of your synthetic pair involved the EUR, you would have to take the current price of EUR/USD and divide that price by the desired volume of your order. So if you wanted to buy $100,000 worth of EUR/USD as part of your synthetic pair, you would need to divide 100,000 by the current price of EUR/USD, for e.g. $100,000/1.5 (which would come to $66,666). You should to try to be as accurate as possible when converting your currency pairs. In conclusion, synthetic crosses allow us to trade cross currencies in greater volumes than normal, avoiding the lack of liquidity that comes with cross currencies. Although they can be effective, they also present us with a lot more work to do. You should also remember that they aren't real currency pairs, hence their name. Synthetic crosses can be difficult to execute with success sometimes too, as they require the Forex trader using them to be right about both of the pairs of currencies that they choose to make up their synthetic currency pair. Nevertheless, synthetic crosses open up many new options for traders and investors in the currency market. Although they are not genuine, they can protect the trader or investor from third pair variations, to such an extent that they will actually seem like genuine currency pairs. Despite the fact that synthetic crosses require the trader or investor to be right on both fronts, when they are right, they can potentially make very large profits.

Copyright © 2012 How Forex Trading Works 82 Getting Started The Basics of Forex Options Options are not only used in the stock market, but they are also used in the Forex market. Options allow traders and investors in the currency market to place orders at their own set risk levels. There are two types of options that are both available to retail traders and investors in the FX market: the traditional call/put option and single payment option trading (SPOT). The traditional call/put option works very similarly to the stock option. This option allows traders and investors the right to buy from the option seller, at a specific time and price, though they are not obliged to. Because of the "over-the-counter" nature of Forex option trading, traders and investors in the Forex market can choose specific dates and times of their preferred options with ease. Quotes are issued to them in regarding the premiums that they are required to pay, in order to get the options that they want. There are actually two types of traditional options available: the American-style option and the European-style option. The American-style option can be used at any point until the date of expiration. However, the European-style option can only be used at the point of expiration. The main advantage of using the traditional call/put option is that it requires lower premiums than its counterpart. This option also allows traders and investors to be more flexible, since the American-style option allows them to trade and invest even before the expiration date of their options. However, when comparing the traditional call/put option with SPOT, one disadvantage is that it requires extra work to set and execute traditional options. Single payment option trading bears a similar concept to the traditional call/put option, though there is one main difference: with SPOT, traders and investors give a scenario, get a premium and then receive cash if the given scenario occurs. In other words, SPOT converts options to cash immediately, after the option placed is successful. However if your scenario does not occur, you will be held responsible for the loss of your premium. One advantage of single payment option trading, is that it is very simple and easy. SPOT only requires you to wait for your results after giving your scenario. Another advantage of SPOT, is that it presents a wide variety of choices to traders and investors and they can give their own exact scenarios. However, one disadvantage is that the SPOT premium is higher, costing significantly more when compared to its counterpart. SPOT has a number of benefits and downsides. Starting with the benefits, single payment option trading limits the financial risks to the premium (the amount of cash paid to purchase the option). SPOT allows for an infinite profit potential. The trader or investor can set their own dates and prices for their preferred options and SPOT initially requires less money. The option not only can limit risks but it can also hedge against cash positions. These options also present to traders and investors the opportunity to trade and invest on

Copyright © 2012 How Forex Trading Works 83 Getting Started future market movement predictions, but without the risk of losing significant amounts of capital. Single payment option trading can also provide us with many choices, including: standard options, one-touch SPOT, no-touch SPOT, double one-touch SPOT, double no- touch SPOT and digital SPOT. Single payment option trading does have some downsides though. With SPOT, the premiums can vary, depending on the dates and strike prices of options. This also leads to fluctuations in the risk/reward ratio. Traders and investors are also not allowed to trade these options, meaning that you once you buy a SPOT option, you will not be able to sell it. Finally, it can be difficult to predict future market movements, as with SPOT options you will have to be right about both the date and price you give. The premium price can vary, as previously mentioned. There are multiple factors that can cause the price of the premium to vary, which is why the risk/reward ratio of Forex options trading can also vary. Some factors that determine the price include: intrinsic value, time value, interest rate differential and volatility. Intrinsic value is the current price, if it was used, of the option. Against the strike price, the position of this price can be described in three different ways: "in the money" when the strike price is higher than the current price, "out of money" when the strike price is lower than the current price and "at the money" when the strike price is at the same level as the current price. Time value reflects the uncertainty of movements in the market in a chosen time period. Generally, the longer the option's time period, the higher the price of the option will be. Interest rate differential is typically included in the premium, as part of the time value. Changes in interest rates have an impact on the relationship between the strike price and current price. Volatility is also typically included in the premium, as part of the time value. High volatility increases the likelihood that the market price will meet the strike price in a certain time frame. In general, the more volatile currencies require higher premiums. In conclusion, options present to traders and investors in the Forex market, the opportunity to make a profit with less risk. There are main types of Forex options: the traditional call/put option and single payment option trading (SPOT). Both types bear their own advantages, disadvantages, benefits and downsides. Forex options prevail particularly during periods of high volatility, important economic developments and political uncertainty. It is up to the trader or investor whether or not they take advantage of Forex options.

Copyright © 2012 How Forex Trading Works 84 Getting Started Money Management in Forex Trading Money management is very important in Forex trading, for all traders and investors. Like all financial markets, trading in the Forex market is essentially gambling, as you risk your own money in order to potentially make a profit. However, if you do not manage your money correctly and on a day-to-day basis you risk too much, you will be destined for failure - no matter how skilled you are or how much experience you have, when it comes to fundamental and technical analysis. One of the most important aspects of Forex money management involves buying and selling the right proportion of your total liquid capital. It is one of multiple tactics, that can help to minimize both your risk and your exposure, allowing for more consistent positive returns. The bottom line to money management in Forex trading is to not trade or invest a large share of your money in any one trade or investment. This is because you will eventually and inevitably hit a stroke of bad luck. This will cause you to lose so much capital that you will not be able to trade at the same volumes as usual, because you will lack the capacity. Stops are another important aspect of Forex trading money management. Stops also work well alongside proportionate trading and investing. The main types of Stops are: the equity stop, the volatility stop, the chart stop and the margin stop. The equity stop is the most common type of stop. It allows traders and investors in the currency market to place sell orders at certain points below their entry points. Equity stops allow you to get out whenever you are satisfied with your earnings. They also allow you to get out early in order to avoid significant losses. You can adjust the percentage of your equity stop to match your own desired risk level. The volatility stop is another common type of stop. It allows traders and investors in the FX market to set selling parameters, for when the market is volatile enough to become risky. The volatility stop really, is just one type of chart stop. There are hundreds and thousands of parameters that you can set to create stops. Chart stops are any type of stop that decides when to buy or sell, using various technical indicators and combinations of various technical indicators. The margin stop is based more on your own account than the actual market. If you are trading with leverage, you can use a margin stop by placing a margin call at any point of your account. You set this margin call as a percentage, which means that as soon as the capital you have leveraged drops below your specified percentage of its original value, you will get pulled out of the market. In conclusion, there are two main aspects of money management in Forex trading, that are more important to traders and investors. The first one, is buying and selling the correct proportion of your total liquid capital. The second one involves the use of stops. By combining both of these money management techniques, you will be able to manage your

Copyright © 2012 How Forex Trading Works 86 Getting Started Using a Risk/Reward Ratio Risk/return is an important concept in Forex trading. Every trader and investor in the Forex market should understand and implement this concept of risk/return into their trading, if they want to maximize their profitability. The concept of risk/return quantifies the expected loss ratio (which means if the trade is unsuccessful) to the expected gain (which means if the trade is successful). Seemly use of the risk/return concept can increase a trader or investor's chances of success significantly, when it is combined with the probability that is associated with a particular trade or investment's outcome. Despite the ratio's name, the numerical ratio that is actually used is written backwards, when written conventionally. For e.g. a risk/return ratio of 2:1, will indicate that the trader or investor will expect either 2 units of return (i.e. profit) or 1 unit of risk (i.e. loss). The units can be dollars, pips or any other form of measure. It doesn't matter which form of measure is used, since the calculation is a ratio. Risk/return has two elements to it. Both of these elements are combined to determine risk/return itself. The first element addresses the amount of potential gain that could be made, if the particular trade or investment runs successfully. The second element addresses the amount of potential loss that could be made, if the particular trade or investment runs unsuccessfully. For e.g. if you can expect to gain $100 from a particular trade or investment, if it runs successfully, your amount of potential gain is $100. If you are only willing to lose $25 and set an appropriate Stop-Loss order for this, your amount of potential loss equates to $25. Now the risk-return formula divides your expected return by your maximum risk, so in this case, your risk/return ratio will be equal to 4:1 ($100/$25). However, the risk/return ratio is only one side of the profitability equation. The other side of the equation concerns probability, which basically relates to chance. For e.g. if you made a completely random trade or investment, the probability (or chance) that the trade or investment would run successfully, would be 50%. If a trade or investment is more likely to run successfully, the probability of success will be over 50% - and vice versa, if a trade or investment is less likely to run successfully, the probability of success will be under 50%. After you understand how both risk/return ratios and probabilities work, you can then implement them into your trading, by creating a risk/reward plan. For e.g. if you make 10 trades a day, with every trade having a risk/return ratio of 4:1 (if you win you earn $4 and if you lose you lose $1) and a winning probability of 50%, you will make a $15 profit. In conclusion, risk/return ratios and probabilities are both very important concepts in Forex trading, which together form the equation for success. The larger the risk/return ratio the better, however the very minimum ratio that one can use will depend on the individual trader or investor themselves and their own winning probability. Generally, a risk/return ratio of 2:1 should be used at a bare minimum, whereas risk/return ratios of 3:1 and 4:1 are recommended.

Copyright © 2012 How Forex Trading Works 87 Getting Started Using a Forex Trading Plan It is recommended that all traders and investors in the Forex market use a trading plan of their own. It is advised that you create your own trading plan in advance, as some trading strategies require more long-term planning. Although some trading strategies do require more planning ahead of time, others simply cannot be planned in the same way. For e.g. you cannot plan day trading or scalping too far in advance, since both heavily rely on quick and more instinctive reactions from traders and investors, to the market. This is because the market continually moves and changes throughout the day. Though for the majority of trading strategies, preset plans are important. Having said that, in the case of things not going to plan, you should still possess the ability to change your preset plans. You will have to make sure that you are both disciplined and aware. Discipline will allow you to rightly stay with a particular trading plan, without giving up too soon. Awareness will allow you to rightly drop the same trading plan with good reasoning. Discipline and awareness both generally come with time. When creating a Forex trading plan, you should consider your specific goals. You need to consider how much profit you expect to make with each specific trade. You should know in advance when you think a turn in the market is going to happen and you should accordingly set your sell orders, as these exit points will be vital for your overall success as a trader or investor in the currency market. But it isn't all about exit points, as entry points are also important. A strategy typically used by most traders and investors in the FX market, involves plotting out where the support is for each day, which will then allow you to spot when your currency pair is approaching its support line. Using this strategy, you will be given the chance to place your orders at relatively calm moments in the market. Before placing your orders, make sure you remember to evaluate how much of a loss you would be willing to tolerate. You should remember to consider the market's volatility and your own personal confidence in your order, amongst other things. It is also extremely important to manage your capital well. This is all about risk/reward ratios and probabilities. Good money management is vital for a good Forex trading plan. It is critical that you spread your risk out across multiple trades and investments - do not limit yourself to one currency pair, for example. In conclusion, a good Forex trading plan will undoubtedly improve your chances of success and your success rates. It is recommended that you explicitly write out your Forex trading plan for the best results, as you will then be able to refer to it and review your thought processes regularly. By explicitly writing our your plan, you will also be able to look for weaknesses within your strategy and long-term plan. Your trading plan should change and grow with you, as you will also change and grow yourself, as a trader or investor.

Copyright © 2012 How Forex Trading Works 88 Getting Started Choosing a Forex Broker There are multiple online Forex brokers available today and finding the best broker can be difficult. In reality though, you will not find one broker that is better than the others, but you will find a broker that is best for you. When choosing a broker, you should consider yourself before anything else. You are an individual trader or investor, with your own circumstances and requirements. First of all, you should find brokers that can provide practice accounts for you. It is highly recommended that you sign up for a free demo account, prior to making your first initial deposit. You should ignore any online Forex broker that cannot supply free demo accounts with zero time restrictions. Forex practice accounts allow you to test the broker's system and to make mistakes without losing any of your real money. You will also be able to test the broker's customer service and support. Do remember though, that although demo accounts will work similarly to live accounts, the functionality will be slightly different (within reason). Making sure that you consider every broker's legal legitimacy, as well as every broker's financial stability, before applying for a live account is also very important. Confirm that each Forex broker you look at: is registered with every necessary regulatory body, is well- established and been in the business for a while, is in good standing with the BBB (Better Business Bureau) and has solid, well-rated company financials. You should be well-aware of the costs of each Forex broker that you are considering, too. Spreads are the most significant source of revenue for brokers, meaning that they will also be the trader or investor's most significant operating expense. Remember, that the spread is simply the difference between the bid and ask prices. For each broker that you are considering to work with, find out: whether or not they provide fixed or variable spreads, what are their average and maximum spreads for each currency pair that is of most interest to you, what are their spreads during illiquid times, what are their spreads during volatile times and whether or not they charge commissions on each trade. As a trader or investor, when looking for Forex brokers, you should also consider how each broker you are looking at handles rollover debits and credits. Find out for each broker you are looking at: whether or not they debit accounts for rollovers, whether or not they credit accounts for rollovers, how their rollovers are handled and what interest rates they use to settle rollovers. Remember to find out about any other fees and expenses that you may be subject to, for each Forex broker you are considering. Determine, for each broker that you are looking at: where or not they have any requirements on the number of trades you can make in a given time period, whether or not they charge account maintenance fees, whether or not they charge minimum balance fees and whether or not they charge for charting/software packages. The amount of leverage that can be provided by each Forex broker that you are considering, is also important. Some brokers will be able to provide higher amounts of leverage than others. However, you do shouldn't simply go with the broker that can provide the most leverage - you might not need high amounts of leverage. Firstly, work out how

Copyright © 2012 How Forex Trading Works 89 Getting Started much leverage you are going to need. Then, make sure that every broker you are considering, can provide the same amount of leverage that you need. Try to find out about each Forex broker's order execution, from the brokers that you are considering. It is recommended that you find out how each broker executes their orders and the speed at which they do so. Also, try to find out about each broker's average slippage between your requested price and your filled at price. Charting and educational services are important too, especially if you are new to Forex trading. Out of all of the Forex brokers you are considering, find out about each one's charting packages and educational tools that they have on offer. Finally, you will want to make sure that each Forex broker that you are considering, can provide adequate customer service and support. For each broker's customer service and support, confirm: which hours their team are available, how quickly they can respond to calls and messages and their actual methods of contact. In conclusion, there is much to think about when choosing a Forex broker. For each broker you are considering, you must think about: practice accounts, legitimacy, stability, costs, rollovers, other fees and expenses, leverage, order execution, charting, education, customer service and support. However, do remember that typically, no trader or investor in the Forex market knows absolutely everything there is to know about their brokers. You simply just have to know what you are looking for in a broker and what you need as an individual trader or investor. Know the right questions to ask and do the necessary research, as this way, you will more than likely find the best broker for you.

Copyright © 2012 How Forex Trading Works 90 Getting Started Trusting Your Forex Broker It is important to be able to trust your Forex broker. A Forex broker works just like any other company that provides financials services, in the sense that they handle your money, which is why establishing trust in your chosen broker is so important. Firstly, it is recommended that you conduct a detailed review on your chosen Forex broker's website. It is important to read all of the information that has been made available to you by your Forex broker. Take note of both the basic and more detailed information - including the broker's address and contact information as well as the company's executive officers. The company's website should also be able to tell you how the Broker is organized - whether it be a corporation or an LLC. Also, look for any regulatory organizations or any professional organizations that the Forex broker is a member of. Secondly, you should use the information that you have gathered to conduct some cross- referencing. You should look up the broker's name and address, as well as its executive officers and the organizations that the company is a member of. It is also a good idea to find some customer reviews on your chosen Forex broker. However do bear in mind, that some customer reviews will be either positively or negatively biased, so not everything you read will be true. Ideally, you should contact any customers you can that have submitted reviews, so that you can ask them some follow-up questions. You will have to determine yourself though, which customer reviews that you read are worth any of your consideration. Thirdly, checking with the National Futures Association (NFA) is a good idea, to see if your chosen Forex broker is registered with this organization. The NFA is the trade group of the Forex industry, so really, you should disregard any Forex broker that is not registered with them. Finally, it would also be a good idea to search the Better Business Bureau (BBB), in order to look for any complaints that have been filed against the company of your choice. Generally it is not an issue if your chosen broker has complaints filed against them, but it is important to find out about how the company handled and resolved those issues. In conclusion, you only really need to use your common-sense and natural instincts to determine whether or not a Forex broker is trustworthy. Though by conducting some initial research on your chosen broker, you will find that you will be able to establish some trust in the broker much more quickly. Do remember though, that really, you tend to build trust over time with your chosen Forex broker. You might feel uncomfortable to trade and invest with larger amounts of capital initially, with your newly chosen broker - but this is natural. After some time, if the broker has been good to you and you have been happy with their service, you might then feel more confident to increase the amounts of capital that you trade and invest with them.

Copyright © 2012 How Forex Trading Works 91 Getting Started Choosing a Money Manager Many traders and investors in the Forex market employ money managers, to deal with the profits in their portfolios that they are not placing further orders with. In fact, some Forex traders make use of them in order to make progress without any work. They will employ money managers to deal with all of their open positions and account transactions over extended periods of time. The better Forex money managers will employ multiple experts. Each expert will specialize in a different area, which might be in finance, business or economics. Choosing the right money manager is an important decision, since they literally manage your money. Different managers will have different track records: do not underestimate how much these track records can vary, as some managers are far more effective than others. The better money managers will rely mainly on the income they derive through taking small percentages out of the sizes of the accounts they manage. When they take a small percentage out of the size of your account, they will have an incentive to work more effectively. This is good, because ideally, you want your manager to work as effectively as possible. Always avoid managers that charge you mainly through transaction-based fees. You do not want your Forex money manager to make much money through you in any way other than through the size of your account. It is vital that your manager has a strong incentive to work as effectively for you as possible. You may even want to avoid managers with systems that are based on annual profits, because they might decide to look into investments that bear more considerable risk. After you have established how each one of your potential money managers earns their money, you should examine their records. Although annual returns are very important, you should examine the strategies that each manager uses too. Try to judge whether or not you think the investment strategies used by each one of the money managers are good for the long-run. You should also find out whether or not each manager bases their decisions on good and thorough research. It is also a good idea to find out whether or not each manager is biased towards particular investments in particular sectors, since you might not believe that these investments and sectors are particularly ideal to work with, in the long- run. By taking a look at the resumes and qualifications of each of the money managers that you are considering to hire, you should be able to narrow down your list of potential managers, by picking out the more ideal candidates for the job. In conclusion, finding and choosing the right money manager for you can be difficult. However, as long as you take everything you need to consider take into account, the process of choosing one will seem far more easier. Remember to also make sure that the money manager you do select, can respond to your individual needs - your needs may also change over time, so make sure that your manager can be dynamic. Lastly, try to establish some personal rapport between you and your manager. Try to consider your

Copyright © 2012 How Forex Trading Works 92 Getting Started manager as a partner rather than an employee and try to let them work with you rather than for you, as this will help to increase both the performance of your trades and investments as well as your chances of success.

Copyright © 2012 How Forex Trading Works 93 Getting Started Forex Trading and Taxes in the US Once you begin to profit from your Forex trading, you will need to start learning and understanding how the tax code works for Forex trading in the US (if you do indeed live in the United States). Remember, if you live outside of the US, you will not have to pay any taxes on the profits that you deduce from Forex trading. Some transactions in Forex are categorized under the Section 1256 Contract of the US tax code, whereas others come under Section 988. Section 1256, compared with its counterpart, provides a lower tax treatment of 60/40. Every Forex contract, by default, is subject to usual treatment of gain or loss. Traders and investors must make sure they opt- out of Section 988 and into treatment of capital gain or loss, which comes under Section 1256. All US traders and investors in the Forex market, are expected to pay taxes on the capital gains that they accumulate, through Forex trading. The IRS defines the Section 1256 Contract, as any regulated futures contract, foreign currency contract or non-equity option. Non-equity options include debt options, commodity futures options, currency options and broad-based stock index options. Section 1256 will allow you to report any of your capital gains using Form 6781, which is from the IRS (gains and losses from Section 1256 contracts and straddles). You must also remember to separate any capital gains that are on Schedule D, with a 60/40 split. This will mean that 60% of total capital gains will be taxed at the lower rate of 15%. This will also mean that 40% of total capital gains will be taxed at a rate of up to 35%. Section 988 refers to gains and losses from Forex trading as interest revenue and expense. Unlike Section 1256, Section 988 does not use the 60/40 split. Traders and investors that fall under Section 988 will expect to pay more. Forex traders and investors also deal with changes in currency prices on a day-to-day basis, which causes complications in Section 988. Provisions were however made by the IRS that allow day-to- date changes in currency prices to be considered part of the trader or investor's assets. These provisions also allow the changes to be considered a part of the business. Consequently, US traders and investors in the currency market can now opt-out of Section 988, so that they can then tax their capital gains using Section 1256. Opting out of Section 988 isn't difficult either. The IRS doesn't really require you to file anything in order to opt-out of Section 988. However, it is generally a good idea to keep an internal record of your own, that proves that you have made the decision yourself to opt- out of Section 988. US traders and investors can also file Form 8886, if they have suffered from significantly large losses (at least $2 million in any single tax year, or $50,000 if the losses were deduced from certain foreign currency transactions). Traders and investors can also file Form 8886, if they have suffered from a loss of $4 million in any combination of tax years. It is not difficult to file Forex trading taxes. If you live in the US, you will only need to receive a 1099 form from your Forex broker, at the end of each tax year. If your Forex broker is located in another country, you must still make sure that you acquire the form and

Copyright © 2012 How Forex Trading Works 94 Getting Started any other related documentations that are necessary from your account. It is recommended that even if you are not sure about something in particular that is tax- related, you still seek professional tax advice. In conclusion, although Forex trading taxes can be a little daunting at first, the US Forex trading tax code is actually fairly simple. Paying for your Forex taxes is not difficult in the US and you should make sure that you always pay your taxes.

Copyright © 2012 How Forex Trading Works 95 Getting Started Scalping the Forex Market Scalping, also known as picking, is the most short-term Forex trading strategy used in The Forex market. The traders and investors that use the scalping strategy are known as scalpers. Scalping has become more and more popular over time. Scalpers do not look to make any significant amount of money per trade, since they make a considerable amount of trades each day. In fact, just a few pips of profit per trade is enough, for a trader or investor using the scalping strategy. This is because, due to the fact scalpers make many trades per day, each small profit they manage to make per trade all adds up. Depending on how many trades a scalper makes per day and how much profit each trade deduces, scalpers can gain significant amounts of profit. However, a scalper's success will also depend on their broker's efficiency in filing their orders, as well as the spreads that their brokers can provide. Because a lot of traders and investors who use the scalping strategy make very short-term trades, some trades only lasting up to a minute, brokers often struggle to keep up. Scalpers tend to place orders on their positions before their brokers even have enough time to fill their first orders. This can lead to brokers actually losing money from certain transactions made by traders and investors using the scalping strategy. However, Forex brokers have gotten faster and faster with filing orders made by traders and investors, meaning that scalping is no longer as much of an issue as it once was. But still, some brokers do limit the amount of orders you can place per day, in order to avoid or at least limit the use of the scalping strategy by traders and investors. If you are interested in scalping, you will need to find a broker that does not discourage the use of the strategy. You will not find it difficult to find brokers that support scalping, since the currency market has grown considerably in recent years, particularly online. You will also need to think about using a broker that can provide lower spreads. This is because you will be making many trades per day when scalping, aiming to make only a few pips of profit per trade, so a high spread will greatly restrict your chances of being profitable. In conclusion, scalping is a very short-term trading strategy used by many traders and investors in the FX market (who are often referred to as scalpers). Scalpers pay a lot more attention to Forex market movements than other traders and investors. By watching the market as continuously as they do, scalpers can spot very short-term trends and take advantage of them quickly (in order to make a quick few pips of profit). Scalping can present a fantastic opportunity to Forex traders and investors, with some scalpers making very significant profits despite working with brokers that provide particularly high spreads. With some practice and an efficient, low-spread broker, you could indeed make a lot of money.

Copyright © 2012 How Forex Trading Works 96 Getting Started Trading with News Announcements The nonfarm payroll (NFP) is a statistical report published every month, that is both collected and distributed by the US Bureau of Labor Statistics (BLS). The BLS releases the nonfarm payroll report on the first Friday of each month. The nonfarm payroll is supposed to serve as both an index and as an indicator of the economic status of the United States, in the short-term, with its statistic measuring the number of people in the United States that are currently in paid employment and on payrolls. However, the statistic does exclude those who work: in the agriculture sector, for non-profit companies and organizations, in the government sector and in the household sector. The nonfarm payroll can also provide us with additional information, such as average working week hours, average weekly wages and average overtime pay rates. Traders and investors in the Forex market bear much interest into the nonfarm payroll, since its statistic can tell us how many nonfarm payroll employees there are in the US and this number is important, since payroll employees constitute approximately 80% of total US GDP. This means that the payroll can give us a solid estimate of how well most wage earners are doing in the US economy, on a monthly basis. Not only that, but the payroll can also give us a solid idea of the size of the following month's levels of consumption, since economic prosperity is thought to generally influence short-term consumption positively. So, traders and investors in the currency market can use the nonfarm payroll as an indicator of the behavior of transaction levels in the US economy. This will in turn, allow them to assess and help them to determine the expected volume of currency that will circulate through the US economy. A certain volume of currency will be needed to help facilitate the transaction levels. Traders and investors in the FX market, see the volume of money that circulates through the economy as important, since the money supply has a direct effect on the prices and exchange rates that are involved in Forex trading - when the money supply is coupled with the investor demand for the national currency. We can conclude that the nonfarm payroll, from the above information, can also measure monthly national economic growth. It could be said that the nonfarm payroll numbers can also serve to measure the direction in which inflation is moving, whether it be up or down, in the US economy. Traders and investors in the Forex market are certainly interested in the rate of inflation. This is because a rise in the rate of inflation, would mean that the national currency would have decreased buying power, meaning that the currency would be worth less - and vice versa, if there was fall in the rate of inflation, this would mean that the national currency would experience increased buying power, meaning that the currency would be worth more. It is difficult to use the nonfarm payroll in order to try and distinguish the direction in which inflation is moving in. But nevertheless, sharp increases in the nonfarm payroll numbers tend to suggest higher rates of inflation, since increased expenditures hint growing consumer confidence which typically leads to higher price levels and therefore higher rates of inflation. In reality, there are countless ways in which traders and investors in the Forex market can interpret the monthly nonfarm payroll statistics. For one, we can compare payroll numbers

Copyright © 2012 How Forex Trading Works 97 Getting Started to previously predicted numbers that have been given by economists ahead of time, allowing us to assess the accuracy of economists in reading vital signs of business and economics. Investor confidence can result from close similarities between previously predicted numbers and actual numbers of the payroll - and vice versa, investor doubt can result from a lack of similarities between previously predicted and actual nonfarm payroll numbers. In conclusion, we can trade and invest with the monthly news announcement that is the nonfarm payroll, with its statistic measuring the number of people in the United States that are currently in paid employment and on payrolls. The nonfarm payroll numbers can be used and interpreted in a number of different ways, but remember that the payroll is only one economic indicator out of many, that traders and investors in the Forex market can use in order to assess current-day economic growth. There are many other economic indicators available to us that are also very popular, including the consumer price index (CPI), gross domestic product (GDP), unemployment rates, the volume of mortgages and the growth of jobs.

Copyright © 2012 How Forex Trading Works 98 Getting Started Using a News Trading Strategy News trading in the Forex market, involves trading currencies around newsworthy events, such as important releases of economic data. Traders and investors not only consider US market news, but also news from other countries, as long as they are relevant to the currency pairs they are working with. Using a news trading strategy is all about comparing news with previous forecasts: traders and investors are most interested in whether current news meets, exceeds or falls short of previous forecasts. Predicting the extent to which the market will react is also important to traders and investors using a news trading strategy. Quite simply, some newsworthy events and stories will bear more importance than others, however the more difficult side of news trading involves predicting how the market will respond to particular news in particular settings. If you implement a news trading strategy into your Forex trading, you must work out what the market is most concerned with at present and the degree of concern that the market is showing. You must consider whether or not there is a strong consensus for whatever the market is most concerned with, as the market isn't always stable. Once you come to a conclusion, regarding the extent to which the market will react to something of concern, you will have to choose from two main options. The first option involves placing a straddle order, where you will buy longs and shorts on both sides of your currency pair's current price. This will prevent you from having to predict the direction in which the market is going to move. Although this option can work well, newsworthy events can produce much volatility, which can lead to large price fluctuations. These large fluctuations in price can lead to the filling of both of your orders, in turn causing you to lose a lot of money. So although this first option can be effective, you must make sure that you accurately predict the degree of movement that the market will experience. The second option involves either buying or selling the currency pair. Your decision, whether to buy or sell the currency pair, will really depend on which way you predict the market will move in. This option does involve more risk of not having your order filled, however, you will find that you will have more available capital which can be used to increase the size of your order. Remember, that both these options bear much risk, since predicting news tends to be much more difficult than analyzing the mood of the market or data that already exists. Though on a positive note, if the predictions that you make are in fact accurate, you can expect to gain considerable profits. In conclusion, news trading in the Forex market simply involves trading and investing in currency pairs, around newsworthy events. Although news trading strategies are fairly risky, they are still very popular amongst traders and investors in the Forex market. news trading strategies are also very exciting and you will always be on your toes.

Copyright © 2012 How Forex Trading Works 99 Getting Started Using a Range Trading Strategy Range trading is a strategy used by traders and investors in the Forex market, allowing them to take advantage of sideways movements in the currency market, of lower volatility. The FX market is different to the majority of financial markets, since traders and investors can always profit, regardless of the direction in which a particular currency pair's price is moving in. You can profit if a currency pair's price is going up and you can profit if a currency pair's price is going down. Because of this, range trading works as a strategy. Rather than trying to predict break outs, you can study charts with support and resistance lines for particular currency pairs and take advantage of the prices of them, when they consistently move up and down within their lines. Both support and resistance in Forex trading are important, especially when you are using a range trading strategy. Traders and investors in the Forex market use the terms “support” and “resistance”, to refer to certain price levels on currency pair price charts, that act more often than not as “barriers”. These so-called barriers tend to prevent currency pair prices from getting pushed furthermore into a certain direction. Traders and investors use range trading strategies to buy currency pairs when they are around the bottoms of these barriers and to sell pairs of currencies when they are around the tops of these barriers. This way, they can take advantage of multiple opportunities, in order to make as much profit as possible. When range trading, you should remember to look for the right currency pair to range trade with. Pairs of currencies with lower interest rate differentials are ideal, but currency pairs whose economies intertwine are also good. Remember, that range trading does heavily involve support and resistance and the barrier levels for these must be set, in order for the strategy to work as effectively as possible. The barrier levels for the support and resistance can be determined, by examining the previous price highs and price lows for the currency pair you are looking to work with. You can also consider looking at pivot points, Bollinger bands and even Fibonacci levels. Once you have set your support and resistance barrier levels for your currency pair, you will next want to set stops and limits. In longer positions, you will want to set limits that are towards the tops of your resistance barrier levels and stops that are a few pips below the swing low. Make sure that you allow for some room, as you don't want to be taken out of the market just as its turns in a direction that is in your favor. In shorter positions, you will want to set limits that are towards the bottoms of your support barrier levels and stops that are a few pips above the swing high. In conclusion, range trading is a fairly simple strategy, that is used to take advantage of lower volatility sideways movements in the currency market. The strategy is popular, because it can effective and profitable if executed well. Remember not to be greedy though, when using a range trading strategy. It is a good idea to have set goals for each and every trade or investment. It is recommended that you do not follow break outs, even if you are tempted to.

Copyright © 2012 How Forex Trading Works 100 Getting Started Using a Swing Trading Strategy Swing trading is a popular Forex trading strategy used by many traders and investors in the Forex market. The style of trading can also be used with high-cap stocks. In the currency market, swing trading is usually defined as a speculative activity, whereby currencies are bought and sold repeatedly at (or near) the end of up or down price swings, which are caused by volatility in price. Traders and investors using these types of strategies can take advantage of price volatility of particular currency pairs, by placing either buy orders or sell orders - the type of order used would ultimately depend on the individual trader or investor. The type of order used, would depend on the market itself, as well as whichever type of order the individual trader or investor would think is most appropriate. The strategy is used in order to try and make profits by holding positions for a period of time. The period of time on average, ranges from one day to one week. Remember, that swing trading positions can in fact be held over months or even years. The period of time that positions are held within, ultimately depends on the actual type of swing trading strategy that is being used. The term "swing trading" is in fact quite broad, as it encompasses multiple trading strategies and styles, which are all unique, different and distinctive. Range trading strategies, trend trading strategies and counter-trend strategies all come under swing trading strategies. More often than not, A swing trading strategy is used by a technical trader, but other Forex traders also use similar strategies. When using a swing trading strategy, Bollinger bands tend to be the most useful tool of all. Luckily, most online Forex brokers and websites will be able to offer Bollinger bands. Swing trading is risky because traders and investors use trading ranges and look at trading ranges and sideways price movements, instead of looking at markets that are clearly moving in certain directions, whether those directions be bullish or bearish. There is more uncertainty in this type of trading - it is not as easy to make accurate currency pair price predictions. In conclusion, swing trading is a strategy used by a lot of traders and investors in the FX market, making it very popular. The strategy is not only used in the Forex market, but also often used in the stock market with high-cap stocks. However, the short-term nature of this strategy, means that it is particularly suitable and even more effective for traders and investors in the currency market. In fact, any strategy that is based more on short-term trading and investing, tends to be more suitable for traders and investors in the FX market. This is because in the Forex market, there is a general lack of commission fee, unlike in the stock market for example. Spreads in Forex trading, provided by the Forex brokers, also tend to be smaller than the spreads provided in other financial markets. You should also remember that swing trading strategies can be risky, much like market speculation is in general, since swing trading heavily involves the speculation of the Forex market.

Copyright © 2012 How Forex Trading Works 101 Getting Started Using a Trend Trading Strategy Trend trading is a strategy used in many financial markets, including in the Forex market, by many traders and investors. Although trend trading strategies work in many financial markets, they are particularly effective in the currency market. Trend trading is actually based on basic, fundamental principles of successful trading and investing: - Buying when prices are low and when the future looks hopeful - Selling at, or immediately before, the price highs in a particular trend. Although these types of strategies are based on basic, fundamental principles, using a trend trading strategy is not simple and it can prove to be difficult. First of all, the trader or investor must identify a trend and then predict where the trend will stop. They will then hold their position until the trend is broken by the currency, or if the currency reaches the predetermined sell point. In Forex Trading, trends are often defined as when currencies break out of their Bollinger bands and then trend in one particular direction. The easiest part of using a strategy that involves trading trends, actually tends to be the identifying of trends, as long as your Bollinger bands are well set. The trader or investor will secondly need to identify where the trend's floor or ceiling is. Generally, there is little reason or logic as to why particular ceilings are set. The trader or investor has two options to choose from, in order to identify the trend's ceiling or floor. The first option involves identifying either how low or how high the market for the particular currency pair can comfortably go. The second option involves identifying the economic fundamentals that will keep the market's behavior consistent, irrespective of the market's current psychology. In general, the barriers will be weaker when there is higher volatility in the market. Although trend trading strategies can be effective and profitable, the majority of traders and investors by and large lose more than they win. You ride trends when you win, in order to make a good profit. But the problem with using trend Trading Strategies, is that there are more false starts than genuine trends - these false starts are based on statistical noise that is misleading. If you do decide to use a trend trading strategy, you should remember to use relatively tight stops, in order to protect yourself from the fairly likely case in which you are wrong. In conclusion, trend trading is a popular Forex trading strategy that is based on basis, fundamental principles. The strategy mainly involves the use of Bollinger bands. Trend trading is particularly risky though, so Forex traders should ensure they are both careful and confident, when implementing a trend trading strategy into their trading. The strategy can be very rewarding if executed well: currency traders can deduce considerable amounts of profit, by successfully identifying and riding trends. Again though, do remember

Copyright © 2012 How Forex Trading Works 102 Getting Started that there is much risk that comes with trading trends. You will inevitably lose at least once, so make sure that you remember to use relatively tight stops. These tighter stops will help to protect you from the unfortunate scenarios that you will experience, when you are wrong about particular trends.

Copyright © 2012 How Forex Trading Works 103 Getting Started Using a Carry Trading Strategy Carry trading is a Forex trading strategy that is popular among traders and investors in the Forex market. Carry trading strategies are popular mainly because they guarantee some kind of return on medium to long-term positions. A carry trading strategy focuses on interest rate differentials between currency pairs, rather than focusing on currency pair price changes like most other Forex trading strategies do. Ideal carry trades involve currency pairs that experience minimal changes in price but have wide interest rate differentials. These wide interest rate differentials are what you must look for in carry trades. If you find one currency that has a higher interest rate of 5% and another currency that has a lower one of 0.5%, the interest rate differential will be 4.5%. So, this means that if you sell the currency with the lower interest rate and buy the currency with the higher one, you will make a 4.5% gain from the interest on your borrowed funds. When you look for higher interest rate currencies to trade or invest in, try to look for ones that have healthy economies. Generally, countries that have higher rates of interest will attract more capital from foreign traders and investors, because these foreign traders and investors are looking for higher returns on each of their trades and investments. If an economy has higher rates of inflation than normal, this indicates that in the near future, their interest rates could rise - which is typically good for that economy's currency. However, high rates of inflation aren't always good. If an economy experiences hyperinflation, they will also experience high rates of interest. But, traders and investors do not find currencies from these economies particularly appealing to trade or invest in, because they bear much risk. Although some traders and investors using carry trading strategies, sometimes try to profit also on favorable changes in the directions of currency pair prices, the main aim is to deduce profit from interest rate differentials. You should try to focus on the interest rate differentials between currency pairs, more than anything else, because carry trades tend to always be more suitable for medium to long-term positions - these types of strategies are not for getting rich quick. There are in fact dangers that come with using a carry trading strategy. The main danger that comes with this type of trading, is the danger of the depreciation of the currency that you are holding, against your home currency - if you ever suspect that this will happen, you should leave your position in the market. Many Forex traders who use these types of strategies will set their stops on long-term carry trades, at the entry points of their trades. This allows them to lock in their carry profits, as well as to stop their trades before they take position losses. In conclusion, carry trading is a popular Forex trading strategy that generally guarantees traders and investors in the Forex market, to see some kind of return on medium to long- term positions. Carry trading strategies take advantage of interest rate differentials between currency pairs. Although there are some risks that are apparent when it comes to

Copyright © 2012 How Forex Trading Works 104 Getting Started using these types of strategies, they are one of the more safer and risk-free types of strategies that you can use, in the Forex market. Remember though, that carry trading is a longer-term strategy that should also be treated as a longer-term strategy, so do not get stressed over profits and losses caused by daily, weekly or even monthly price fluctuations.

Copyright © 2012 How Forex Trading Works 105 Getting Started Creating Your Own Forex Trading System If and when you decide to create your own Forex trading system, there will be more than one thing that you will need to consider. Ultimately, you will need to be able to spot particular trends, whilst making sure that these trends are genuine. What you must remember when creating your own Forex trading system, is that you are really developing a system that will work for you, as an individual trader or investor. Once you have a trading system that works for you, you must remember to stick with the system. Do not make the mistake of ditching your system in order to pursue opportunities that are perceivably more profitable, as this lack of discipline will dramatically increase your chances of failure. In order for a Forex trading system to work effectively, you must be consistent. You will need to figure what exactly works the best for you, before you decide to trade live. You need to consider the time frame in which you will be working in and the amount of capital that you are willing to put at risk, once you start trading. In general, the moving average crossover system is recommended to identify trends. The moving average crossover system involves two moving averages, which together determine the times in which you should buy and sell, by crossing either over or under each other. The relative strength index (RSI) is also recommended for you to use, in order to either confirm or deny trends. When creating your own currency trading system, you should also establish the level of aggression that you will want to exert, with the entering and exiting of each of your trades. If you were more aggressive with your trading, you might not even wait until the candle has closed for your currency pair, but you might rather make your point of entry as soon as their indicators match up. The majority of traders and investors would wait until the candles have closed for the currency pairs they are working with, in order to hold more stability when entering trades. In conclusion, when you create your own Forex trading system, it is important to develop a system that works for you and to be consistent with whatever works for you. Of course, some Forex trading systems are better than others, but it will ultimately depend on the individual trader or investor. Some trading systems are however, recommended for the majority of traders and investors in the Forex market: the moving average crossover system for identifying trends and the relative strength index for confirming or denying trends. It is also important to establish the amount of capital that are willing to put at risk, as well as the level of aggression that you will want to exert, with the entering and exiting of each your trades. When creating your own Forex trading system, simply make sure that your system works for you and you stay disciplined, so that you can maximize your chances of success.

Copyright © 2012 How Forex Trading Works 106 Getting Started Conclusion If you have read this entire eBook, you will have gained a lot of knowledge, especially if this is the only material that you have read on Forex trading. You should have also gained some valuable experience, as you should have already begun practicing. If you haven’t already opened a Forex trading account of your own, click here to get started. You should never stop studying though; even the most successful and professional Forex traders don’t know everything there is to know about Forex. After making the transition from a demo to a live Forex trading account, you should still study regularly and always be eager to learn something new. Continue to practice with your demo account too, as it will allow you to practice risk-free. Once you start to build up some confidence and see some kind of success on a demo account, you then might want to consider opening a live Forex trading account and trading for real.

Copyright © 2012 How Forex Trading Works 107 Getting Started Getting Started With the availability of online Forex brokers, it is very easy to open a Forex trading account of your own and get started these days. However, there are many brokers available, which is why it can prove to be difficult to choose one. Fortunately, we have produced a short list of the three top brokers in the business. Each one of the three Forex brokers is highly recommended, trusted, credible and legitimate. They are also all regulated for your safety. Click here to view the list. You can compare the Forex brokers yourself and decide which one is best for you, before signing up for a free account. If you are uncertain about one or more of the brokers, simply read the reviews, as they will be able to give you more of an idea of what each of the brokers are about.