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The Basics of Forex If you have just been introduced to the forex

markets you may not be aware exactly what

it is. Our complimentary trading guide will

provide you with a greater understanding of

the FX market and the foundations you

require to start your journey trading the

forex/financial markets. The Forex market is

more commonly known as the FX market

and can also be called; Foreign Exchange,

Spot FX, Spot or simply FX!

FOREX FOREX is currently the largest financial market in the world in terms of both size and liquidity. To give you a general idea of the size, an average of $5 trillion is traded globally each day. At the time of writing this in June 2018 no stock, commodity or cryptocurrency market Globally trades such a huge amount on a daily basis.

The idea of FOREX is simple really, it’s the

exchange of one country’s currency for the

currency of another country. With FX you’re

essentially buying one currency and selling the

other and so naturally FX is traded in pairs, for example The British pound against the US Dollar

[GBP/USD]. There are some “FX pairs” that are more popular than others, Euro vs. US Dollar [EUR/USD],

British Pound vs. US Dollar [GBP/USD aka CABLE], US Dollar vs. Japanese yen [USD/JPY], and US

Dollar vs. Swiss Franc [USD/CHF]. These four popular currency pairs are often referred to as “the Majors”.

At almost any point during the day there is

always a financial centre somewhere in the

world open for business. The FX market is

open 24 hours a day and only closes at

weekends between 22:00 (GMT) on Friday

and 22:00 (GMT) on Sunday.

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How the Forex markets work

We mentioned above that currencies are always quoted & traded in pairs; this is because when you buy a currency you’re indirectly selling the other and vice versa.

So how do you read an FX quote? E.g. GBP/USD = 1.3100 This means that 1 GBP is equal to $1.31 GBP; in the above quote GBP is known as the base currency. USD; in the above quote USD is known as the counter or quote currency.

This quote is also referred to as a direct quote which is where US Dollar is the counter or quote currency

E.g. USD/JPY = 129.00 This means 1 $ = 129 ¥ USD; in this quote USD is known as the base currency. JPY; in this quote JPY is known as the counter or quote currency. This quote is also referred to as an indirect quote which is where the US Dollar is the base currency

The BID, The ASK and The Spread All forex quotes have two prices attached to them, one is a bid price, and the other an ask price. The bid price – if you want to SELL the base currency, then you would click on the bid price. The bid price is the price at which the other party is willing to buy the base currency you want to sell in exchange of the quote currency.

The ask price – if you want to BUY the base currency, then you would click on the ask price. The ask price is the price at which the other party is willing to sell the base currency to you in exchange for the quote currency.

The BID price is always lower than the ASK price and the difference between the two is known as the SPREAD. The spread is the difference in price between buying and selling the base currency – this difference is charged to the client and paid to the Market Maker (What is a market maker? We cover this later in our guide)

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Going Long or Going Short Going long or going short is trader terminology / jargon for buying or selling.

LONG = BUY

and

SHORT = SELL

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The Foundations and Definitions behind going

Long or Short in FX

In the following sections we will take a look at what going long or short means, the definition and values of a PIP also the concepts and understanding of lot sizes as it can get a little confusing, especially if you are new to the financial markets.

"Going long" in FX is buying the base currency and selling the quote currency. It is what you would do if you

thought the base currency was going to rise. E.g. GBP/USD = 1.5600

If you thought that GBP was going to

rise, you would “go long” meaning that

you would buy GBP with the view that

you would be able to sell it for a higher

price once it has risen.

Executing a ‘Long’ GBP @ 1.5600 The GBP rises in value; GBP/USD = 1.6700

Your GBP is now worth $1.67 instead

of $1.56

"Going short" in FX is selling the base currency and buying the quote currency. It is what you would do if you

thought the base currency was going to fall. E.g. GBP/USD = 1.7000

If you thought that GBP was going to fall, you would “go short” meaning that you would sell GBP with the view that you would be able to buy it for a cheaper price once it has fallen and profit from the difference. You go short GBP @ 1.700 GBP falls in value; GBP/USD = 1.5300

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When you begin trading there is a lot of technical jargon to learn and a couple of these are

pips and points.

In forex trading, the unit of measurement to express the change in value between two currencies is

called a "pip. “

It can be measured in terms of the quote or in terms of the underlying currency. A pip is a standardized unit and is the smallest amount by which a currency quote can change. It is usually $0.0001 for U.S.-dollar related currency pairs, which is more commonly referred to as 1/100th of 1%, or one basis point.

The definition of the word PIP? PIP stands for “percentage in point”.

Example:

GBP/USD is priced a rate of 1.5696 a PIP here would be 0.0001.

USD/JPY has a rate of 123.45 a PIP here would be 0.01.

So a PIP is essentially the last decimal place of quotation, most currency pairs will have a PIP

being equal to 0.0001 as they are usually quoted to 4 decimal places.

As we can see from the USD/JPY example above, this isn’t always the case.

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What is and how much is a Lot?

One of the first concepts you will need to understand as part of your Forex trading are standard lots,

micro lots and nano lots; what are they and what are the difference between them?

What is a Forex lot?

The standard size for a forex lot is equal to 100,000, there are also mini lots which is equal to 10,000,

micro-lots which are equal to 1,000 and nano-lots which are equal to 100.

Based on a standard lot size, in the case of GBP/USD is GBP 100,000.

The average pip size for a standard lot which is quoted to 4 decimal places is 10 of the

counter currency, so in this case $10. If you are down 10 pips on a standard GBP/USD contract you

have lost $100.

Pip Movements (e.g. GBP/USD @ 1.56001):

5th Decimal Place (Micro pip movement) = 100,000 (1 Lot) x 0.00001 = $1.00 P&L

4th Decimal Place (1 pip movement) = 100,000 (1 Lot) x 0.00010 = $10.00 P&L

3rd Decimal Place (10 pip movement) = 100,000 (1 Lot) x 0.00100 = $100.00 P&L

2nd Decimal Place (100 pip movement) = 100,000 (1 Lot) x 0.01000 = $1,000.00 P&L

1st Decimal Place (1,000 pip movement) = 100,000 (1 Lot) x 0.10000 = $10,000.00 P&L

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Pip Movements (e.g. USD/JPY @ 105.6.850):

3rd Decimal Place (Micro pip movement) = 100,000 (1 Lot) x 00.001 = Y100

2nd Decimal Place (1 pip movement) = 100,000

(1 Lot) x 00.010 = Y1,000

1st Decimal Place (10 pip movement) = 100,000

(1 Lot) x 00.100 = Y10,000

Big Figure move = 100,000 (1 Lot) x 01.000 = Y100,000

Let’s take another example in the form of USD/JPY. The standard lot size is USD 100,000 as USD is the base currency. As USD/JPY is quoted only to 2 decimal places then a pip is equivalent to JPY 1,000 so if you are up 10 pips on a standard USD/JPY contract you have made JPY 10,000.

Standard lots in forex are usually for institutional sized accounts; we're talking big rollers, who should

have $25,000 or more to make trades using standard lots.

What is a Forex Lot? – Conclusion! So, let’s get real, if you’re thinking of starting Forex Trading, you have to start small and work your way

up. Micro lots are good for beginners who need to get to grips with Forex trading. Unlike standard forex

lots, which are worth 100,000 of the base currency, a micro lot is the equivalent to 1,000 worth of the

base currency you want to trade. Similarly, unlike standard lots,

[where 1pip=10 of the counter currency on pairs quoted to 4 decimal places and 1pip=1,000

of pairs quoted to 2 decimal places] 1 of a pip in a micro lot is only worth 0.10 (4 decimals)

or 10 (2 decimals) of the counter currency.

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Leverage and Margin

Now that we understand the basics of what a pip is, we know that it is just a small notional amount to take advantage of relatively small moves in the exchange rates of currency, we need to trade large amounts in order to see any significant profit (or loss) or hold for long periods of time, which would be classed as trend-following or position sizing.

Using leverage allows you to magnify your profit potential, at the risk of greater losses, leverage allows you to control a relatively large asset for a fraction of its cost'.

Example: 0.2% margin deposit means you are trading 50 times leverage, for example;

Buying 1 lot of GBP/USD @ 1.5700 with a margin requirement of 0.2% will cost you $200.

The margin requirement means that you can trade a volume of $100,000 in the market.

Through leverage trading you can take advantage of very small pip movements in the market by

trading very large volumes. Don’t worry if you do not fully understand "leverage" yet, we’ll go into more

detail about it in some of the later modules.

Remember though, the larger the trade the larger the risk on a leveraged account BUT the broker still

receives their commission whatever the result of a client’s trade.

ESMA – Leverage Regulations The European Securities and Markets Authority (ESMA) recently agreed on imposing new provisions on CFDS (Contracts for difference) to retail traders/investors in the European Union (EU).

ESMA have restricted the marketing, distribution and sale of CFDS to retail investors. The restriction consists of leverage limits on opening positions; a margin close out rule on a per account basis; several brokers are now also offering negative balance protection on a per account basis; preventing the use of incentives by a CFD provider; and a firm specific risk warning delivered in a standardized way. The product intervention measures ESMA have agreed and imposed under article 40 of the Markets in Financial Instrument Regulation include: 1: Leverage limits on the opening of a position by a retail client from 30:1 to 2:1, which vary according to the volatility of the underlying; 30:1 for major currency pairs; 20;1 for non-major currency pairs, gold and major indices; 10:1 for commodities other than gold and non-major equity indices;

5:1 for individual equities and other reference values;

2:1 for cryptocurrencies

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Calculating Your Profit and Loss in Forex

Now that you understand what a pip is, and the different lot sizes, you need to know why we would

learn these in the first place.

We need pips and lots to work out our profit and loss; so here are the basics of your Profits and Losses. Earlier we referred to DIRECT and INDIRECT Forex quotes. There are two rules for calculating your profit and loss in forex, and it’s all about the counter currency.

Whenever you have a direct quote [where the quote currency is USD] you can calculate your profit

and loss by using the following formula

P/L = (SELL PRICE - BUY PRICE) x STANDARD LOT SIZE x NUMBER OF LOTS

Remember that the standard lot size is $100,000 and for mini lots the standard size will be $10,000

Example: You buy 2 lots of GBP/USD at 1.5600 and sell at 1.5610

P/L = (1.5610 – 1.5600) x 100,000 x 2 = $200

Whenever you have an indirect quote [where the quote currency is NOT USD] you can calculate your

profit and loss by using the same formula.

Example: You buy 1 lot of USD/AUD at 1.3017 and sell at 1.3032

P/L = (1.2932 – 1.2917) x 100,000 x 1 = 150 AUD

Note: the profit figure stated here is in AUD, not USD. It is important to remember that with indirect

quotes (where USD is not the quote currency) you need to convert the profit and loss figure to USD

by dividing by the relevant exchange rate, and then again into your ‘nominated trading currency,

i.e. GBP)

Your profit based on the above example is 150 AUD; divide by the sell price

[because you’re selling AUD and buying USD] 150 AUD/1.2932 = 115.99 USD.

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Fundamental, Technical and Sentiment Analysis

Trading should be treated like a business and requires hard work, preparation, a trading plan and a continued analysis and journaling your trades via your chosen approach. Throughout this book we will look at several approaches to trading the FX markets using a top down & bottoms up analytical approach, but, let’s start with the basics.

Fundamental, Technical & Sentiment

Technical, Fundamental & Sentiment Analysis are analytical tools & techniques used by traders to help determine and construct a trading plan. These types of analysis help traders to predict and exploit possible trends and future prices.

Technical Analysis; “The process of analysing a financial instrument's historical prices and other statistics generated by market activity, in an effort to determine probable future prices”

Fundamental Analysis; “'The determination of price based on future earnings – it focuses predominantly on factors such as the overall state of the economy, interest rates, production, earnings, and management”

Sentiment Analysis; mostly focuses on how markets are feeling about risk. When traders are in the mood for more risk, they may generally pursue higher-yielding currencies and assets since they may feel confident about chasing higher returns. On the other hand, when traders aren’t in the mood to take risks, they may put their money in safe-haven currencies and assets such as the US dollar or gold.

Here it is put simply; Technical analysis looks at past prices of an asset to predict future prices, Fundamental Analysis believes that market movement is determined by macro and micro economic factors including interest rates, GDP, employment, war, political unrest, recession, global economic depression etc. Essentially the fundamentalist studies the cause of market movement, while the technician studies the effect. However, it has been known that using fundamental analysis in isolation is like trying to calculate the average rainfall over the next 6 months.

So as Trader analysts, we prefer to ‘fuse’ the analysis together, combining both, fundamental & technical analysis

There are probably a million questions running through your mind;

“Which one is better?” “What’s the difference between the two?” “Can I use them both?” “How do I analyse?” “What do I analyse?”

A note to remember – analysis in any form is extremely subjective.

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The Basics of the Fundamentals

Fundamental analysis is a method of evaluating an asset; it attempts to measure its intrinsic value by

examining the underlying forces that could affect the asset.

Fundamental Analysis includes;

Geo Political factors – such as interest rates and other government

policies Macroeconomic factors – such as the level of unemployment

Company or industry specific factors – such as mergers or acquisitions

Why can this be useful?

So why is Fundamental Analysis used so widely and what does it help us achieve and understand?

Through fundamental analysis we are able to determine the overall health of an economy to give us a

mid to long term outlook as to the direction of the markets

Fundamental Analysis helps us to measure an asset's intrinsic value. The idea behind fundamental

analysis is that each asset has a “correct” price which means we can determine if the current market

price is overvalued or undervalued. Keeping in mind that the price will always revert back to what is

“correct”, knowing whether the asset is under or overvalued gives us an indication as to whether to buy

or sell.

Major Industrialized Nations Central Banks

Below is a list of a few major industrialised nations, their central banks and the chairman or governor: USA - The Federal Reserve [FOMC - Federal Open market Committee] – Chairman Jerome H Powell. Europe - European Central Bank [ECB] - Chairman: Mario Draghi UK - Bank of England [BoE (MPC - Monetary Policy Committee)] - Governor: Mark Carney

Japan - Bank of Japan [BoJ] - Governor: Haruhiko Kuroda

Central banks make decisions that affect will affect multiple economies. Decisions that are expected to

affect the economy are key pieces that will affect your trading. In order to know when Central Banks

are speaking, it would be advantageous to check the economic calendar to protect your trading capital

and/or manage your open positions accordingly.

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Interest Rates

When a chairman of A Central Bank speaks, traders/speculators/economists are trying to figure

out what is going to happen with Interest rates.

Interest rates can be defined as;

'The cost of borrowing money expressed as a % of loan value'

Understanding Interest rates can be extremely important when talking about factors such as the

money supply or inflation because central banks use the manipulation of interest rates to control the

money supply and combat inflation.

You might be wondering why this is important to you, well; changes in interest rate cause changes in

the economy i.e. mortgage rates, supply & demand and changes in the economy will inadvertently

affect your trading.

Example: Increasing the interest rates This effectively makes borrowing money less easy and as a result the amount that people spend

goes down. The decrease in expenditure means that the demand for many goods goes down and as

a result their price will also decrease.

The central bank will often increase interest rates when they fear the economy is “inflamed” – they make

borrowing less easy to reduce expenditure and cool the economy down in order to avoid inflation.

Example: Decreasing the interest rates This effectively allows us to borrow money more easily and as a result the amount that people spend

goes up. The increased expenditure means that there is also an increase in the demand for many

goods and as the demand for these goods increases so too will their prices. The central bank will

lower interest rates when they feel as though the economy is facing a potential recession, interest rates

will be reduced to encourage spending and promote the growth of the economy.

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Monetary Supply

The main role of any central bank is to control a country’s money supply.

By decreasing borrowing costs, central banks are effectively increasing the money supply.

The money supply is a measure of the entire amount of bills, notes, coins, loans, credit and other

liquid instruments in circulation within a country’s economy.

Money supply is measured by M0, M1, M2 and M3, with M0 being the narrowest measure of money

(cash and liquid assets), and M3 being the broadest.

The money supply is an important factor to keep an eye on, especially if you want to trade FX.

Increased money supply demonstrates early signs of inflation – if the supply of money exceeds the

supply of goods prices are likely to rise – hello inflation, an ongoing yet very current and recent sign of

this is Venezuela (Please feel free to take a look), which currently stands in excess of 42,000%

annually.

Originally governments used to set targets for the growth rate of the money supply and would often

manipulate interest rates to force the supply to fall in line with their suggested brackets. In fact, many

stipulate that the over manipulation of interest rates back in the 80s [a period when the US government

believed the money supply was growing proportionately out of control] was actually responsible for the

economic recession of that time. It seems they learnt their lesson; governments no longer force the

monetary growth to fall within their target brackets anymore. Governments nowadays just

“play it by ear” waiting for the right moment to do the right thing in order to maintain stability,

keep inflation in check, and promote sustainable growth.

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Inflation

What Is Inflation?

We’ve spoken about inflation a lot in this chapter, and in case you haven’t got it yet; put simply

inflation is 'Rising prices'. It can also be described as the sustained increase in the prices of goods and services.

What Does Inflation Do?

Inflation causes what we call an erosion of the

purchasing power of your money.

I.e. your money is worth less, you can buy less with your pound [dollars or euro], which is due to the

rate of inflation.

What Causes Inflation?

There are two main causes of Inflation: Demand-Pull Inflation; this form of inflation occurs when aggregate demand outweighs aggregate

supply. When there is more demand than there is supply, prices increase = inflation.

Cost-Push Inflation; this form of inflation occurs as a result of an increase in say the prices of wages

and or of raw materials. These increased costs cause supply to decrease and consequently the

amount of demand will outweigh supply. Again, where there is more demand than there is supply,

prices increase = inflation.

WHAT ARE THE DIFFERENT TYPES OF INFLATION?

Hyper-Inflation - Extremely rapid or out of control rising inflation

Deflation - Falling prices - The opposite of Inflation

Stagflation - Sluggish economic growth accompanied with rising inflation

Disinflation - Slowing of Inflation rate

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Economic Release

Every given period of time, each country around the world will have what is called an economic

release. A data release is the periodic publication of economic data and or news of a qualitative and

quantitative nature. These pieces of data or news releases help paint a picture of the overall health of

a company or country’s economy. A stronger outlook for a company or country’s economy should be

reflected by a higher company stock price or stronger domestic currency.

This data/news can have both a short and long-term impact on prices of which traders will look to

exploit and benefit from any movement created by these key economic data releases.

A certain type of trader/investor will make investment decisions based on their understanding and

interpretation of the economic data which has been released.

Key Points of Economic Data

The key to trading data is to look at the outcome of the data/news release in relation to the expected

forecast and react accordingly.

The larger the difference between the actual figure and the forecast figure, the greater the likely hood

of a larger change in prices.

The strength of importance of the data will also be a factor in determining strength of price

moves. By using an economic calendar, you will be able to determine which pieces of

economic data are of a greater importance.

An example of a ‘high impact’ economic data release is as follows;

U.S. Non-Farm Payrolls – [Released monthly] Measures the number of jobs created or lost

each month excluding the agricultural sector and usually is announced ‘usually’ on the first Friday of

every month.

We can see above, highlighted in green that the actual figure is greater than the forecasted and

previous figure, and as we mentioned before the greater the difference the more likely the fluctuation.

It is also worth making a note of the following two things:

When preparing to trade Non-farm payrolls, there are/can be extreme difficulties trading through

broker platforms, due to increased bid/ask spreads and prices not being accessible for seconds after

the release.

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What Is Technical Analysis? Now that we’ve spoken about fundamental analysis and have an understanding of what it means and

what it consists of, let’s take a closer look at technical analysis.

Unlike fundamental analysis, which is concerned with an asset's intrinsic value and what its

price should be, technical analysis focuses more on pattern recognition.

Technical analysis is a subjective art based on using past price movements to predict future outcomes.

Put simply it helps investors to predict what will happen in the future by looking at what has happened

in the past.

Why Is Technical Analysis Useful?

It’s a common misconception that all there is to technical analysis is lots of charts. There are plenty

of skills involved in technical analysis which if applied and applied correctly, are able to increase

the probability of a winning trade by predicting the likely price action.

Support & Resistance Levels + Trend Lines & Channels + Breakout Points + Chart Patterns Trade

Entry & Exit points Strategic Stop Loss points.

Technical analysis can be looked at as another way of reducing your risk.

There are three main principles for technical analysis:

1: Market action discounts everything

2: Prices move in trends

3: History tends to repeat itself

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Support and Resistance

Support and resistance is a concept used within technical analysis that suggests that the market

price of an asset will tend to fall and rise at certain predetermined levels.

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Support

The support level is the level at which the price tends to find support as it is falling; it is more likely to “bounce” off this point rather than break through it. In the event that a price does in fact break through its support it will often continue to fall until a new support level is identified.

Resistance

Resistance is the opposite of support – the resistance level is the level at which the price tends to find

resistance as it is going up, and again, it is more likely that the price will “bounce” off this level rather

than break through it.

In the event that a price does break through its resistance level, it will often continue to rise until it

finds another resistance level.

The diagram above gives a clear example of horizontal support and resistance levels.

The downtrend that we see here shows a downwards ‘primary’ trend and shows us how new levels of

support and resistance are determined as the market moves.

When the market moves down and then pulls back again the highest point before the fall is known as

a resistance level. Similarly, as the market then continues to move down it will look to touch/test &

break/hold a support level. The reverse of this is true for an upwards trend

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How Do I Find Support and Resistance?

Now that you have a general understanding and idea of what support and resistance levels are it's

time to learn how to identify them. Note you will spot both major & minor support & resistance levels

on every timeframe.

Unfortunately, it’s not as easy as A, B, C - support and resistance levels aren’t exact numbers and

very subjective that can be worked out using a formula or rule. A support or resistance level may

appear to have broken but, soon after we see that the market was just testing this particular level

and the support and resistance levels remain in place. Support and resistance levels are not only

there as guide for where the market could hold but, also that they can and will break, which creates for

further opportunity. We will cover this later in the guide.

The fact that support and resistance levels are often depicted as lines, when they are not in fact

exact figures is sometimes misleading – so it’s often simpler to think of support and resistance as zones

as opposed to definitive levels.

The Two Types of Support and Resistance

There are essentially two types of support and resistance – major and minor.

A price can move up for example, breaking the minor resistance in order to test the major

resistance and as we can see below often a price move against the trend will be stopped by the minor

resistance or support, and reverse.

As pictured below the Major S&R levels are highlighted in purple, whilst the minor horizontal S&R

levels are shown in green.

The more often price tests the levels of support and resistance without actually breaking through

them, the stronger the support and resistance zones are seen to be.

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Trendlines and Channels

Trendlines

“The trend is your friend” is a quote used often by traders and the theory behind it is simple; it’s

perceived as easy to make money trading in the same direction as the trend.

An uptrend line (successive higher highs and higher lows) is depicted as a line drawn along the

bottom of easily identifiable support areas.

In a downtrend (successive lower highs and lower lows), the trend line is drawn along the top of

easily identifiable resistance areas. In order for a trendline to be confirmed it must have 3

successive touches.

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Channels (Equidistant Price Channels)

An equidistant Channel represents two parallel trendlines connecting extreme maximum and minimum close prices. Market price jumps, draws peaks and troughs forming the channel in the trend direction. Early identification of the channel can give valuable information including that about changes in the trend direction what allows to estimate possible profits and losses.

To draw the equidistant channel, find the ‘symbol on your platform and then click with the left cursor button in the chart. After that holding the mouse button one should draw the channel in the necessary direction and set its width. Additional parameters will be shown near the end point of the lower border of the channel: distance from the initial point along the time axis, distance from the initial point along the price axis.

Indicators

There are essentially two groups into which technical indicators fall – leading and lagging indicators. Leading indicators will change in advance of expected economic trends; they are often used to predict future movements but not always necessarily accurate. Lagging indicators are used to summarise past movements as opposed to predicting future; it changes after the economy has already begun to follow a particular pattern or trend.

Source – Forexpartner.org

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Lagging Indicators

Moving Averages A moving average (MA) is a widely used indicator in technical analysis that helps smooth out price action by filtering out the “noise” from random price fluctuations. It is a trend-following, or lagging, indicator because it is based on past prices. There are four different types of moving averages however, in this guide we will be focusing on the two most basic and commonly used moving averages, the simple moving average (SMA), which is the simple average of a security over a defined number of time periods, and the exponential moving average (EMA), which gives greater weight to more recent prices. The most common applications of moving averages are to identify the trend direction, and to determine support and resistance levels.

Simple Moving Averages (SMAS)

A simple moving average is calculated

by adding up the last “X” period’s closing

prices and then dividing that number by

X.

If you plotted a 10-period simple

moving average on a 1-hour chart, you

would add up the closing prices for the

last 10 hours, and then divide that

number by 10. There

you have a simple moving average.

A simple moving average shows us the

overall sentiment of the market at a point

in time. It helps to show market direction

by smoothing out market noise (price

fluctuations) over time and can also be

used to identify support and resistance

as well as generating buy/sell signals.

We can see here that the longer the SMA period is, the more it lags behind the current price; i.e. the

higher the number period you use the slower it is to react to a current price movement.

One problem that traders often experience with SMAs is that they are very susceptible to price spikes.

Exponential Moving Averages (EMAS)

EMAs place more weight on the most recent periods and react faster to recent prices than SMAs. The

shorter the EMA period the higher the weight that the current price will carry in the MA curve – the

opposite is also true.

50SMA

60SMA

200SMA

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SMAS OR EMAS

Now that you know the difference between simple and exponential moving averages you’re probably

asking yourself when you would use them and more importantly, which one is better.

The answer is – either; it may sound cliché but, like most methods of analysis, it really depends on your

trading style.

Let’s go through the pros and cons of both SMAs and EMAs to help you work out which falls in line better

with your trading strategy.

EMAs respond faster to price movements and help you catch recent trends faster and more

accurately than simple moving averages.

BUT EMAs react SO quickly to price movements that often a price spike can be misinterpreted as the

beginning stages of a trend.

SMAs are better when you are looking at a longer-term movement of the market. It is best

applied to trends over longer periods of time and avoids the misleading price spikes encountered when

using EMAs.

BUT Although beneficial when taking a long-term view, the slow reaction experienced when using

SMAs causes a price lag which can make short term movements harder to take advantage of.

Now that we have compared the two, it’s really up to you to decide which you would like to use.

Take into consideration whether you are looking to gauge a long-term trend or looking to take advantage

of a short-term movement.

If you’re ever in doubt which to use, there’s no harm in using both; EMA to get a general idea of the

overall trend, and SMA to take advantage of short term movements.

Identifying Trends

As mentioned before, moving

averages are lagging indicators;

they do not predict new trends

but confirm trends once they have

started.

Moving averages are often used to

identify trends as displayed in the

graph above. When the price of the

product is higher than that of the

moving average then the price can

be said to be in an uptrend. For

example, many traders will only

consider going long when the price is trading above a moving average.

The opposite is also true; in instances where there is a downward slope with the graph displaying

prices lower than the moving average traders will use this to confirm a downtrend.

22

Identifying Momentum with Moving Averages

The strength and direction of a market's momentum can also be assessed by the use of moving

averages.

On the graph below three moving averages have been applied;

Red - EMA50 [short term]

Blue - EMA100 [medium term]

Gold - EMA200 [long term]

The three moving averages used above have varying time frames in an attempt to represent

short-term, medium-term and long-term price movements.

In this chart an upward bullish momentum can be seen in instances where the shorter-term

averages are located above longer-term averages. Which would suggest the Bulls are in control,

pushing prices higher. When the shorter-term averages are located below the longer-term averages,

the momentum is in the downward direct ion, suggesting the bears are in control, trying to drive the

price lower

23

Finding Support and Resistance with Moving Averages

The falling price of a market can stop and reverse direction at the same level as an important

average. This means that moving averages can often be used to identify support and resistance

levels on a chart. An example can be seen in the graph below when the 200-day moving average

can be seen to have provided a support level.

Moving averages that are based on longer time periods will give you a stronger and reliable view of a

support level than shorter time frames.

In cases where the price falls below an important moving average it can then act as a resistance

level which traders often use as a sign to take profits or to close out any existing long positions.

Traders also use these averages as entry points to go short because the price often bounces

off the resistance and continues its move lower.

24

Finding Crossovers with Moving Averages

Moving Averages can be used to generate buy and sell signals by identifying when an uptrend or downtrend is starting. As we discussed previously moving averages can be used to define up and downtrends. Moving averages can also therefore be used as a signal to buy or sell. A cross above a moving average can be a signal to go long or close out a short position. A cross below a moving average can be a signal to go short or close out a long position.

The most common type of crossover is when the price moves from one side of a moving average

and closes on the other – this can be seen on the graph below.

Red - EMA20 [short term]

Gold - EMA100 [long term]

When a short-term average cross through a long- term average it can mean momentum is shifting

in one direction and that a strong move is approaching. A buy signal is when the short-term

average crosses above the long-term average. A sell signal is when a short-term average cross

below a long-term average.

25

Leading Indicators

As mentioned before leading indicators will change in advance of expected economic trends; they are

often used to predict future movements but not always necessarily accurate.

Now that we have discussed moving averages, an example of a lagging indicator, let us move on to the

Relative Strength Index which is a type of leading indicator.

Relative Strength Index (RSI)

The Relative Strength Index [RSI] determines the speed and change of price movements; it allows

traders to measure the buying or selling momentum of a product. RSI oscillates between 0 and 100

and generally a market is thought to be overbought once the RSI approaches 70. This is a good

indication that the asset may be getting overvalued and is a good candidate for a pullback.

Conversely in instances where the RSI approaches 30, it is an indication the market may be oversold

and therefore the asset is likely to become undervalued.

What Does Overbought Mean? In technical analysis, overbought is a situation in which the price of a market has risen to such a degree - usually on high volume - that an oscillator, for example an RSI, has reached its upper bound. Put more simply it is when the demand for a product pushes the price of a market up to unjustifiable levels. Generally, when a product is overbought it is an indication that the market is becoming overvalued and may experience a pullback

What Does Oversold Mean? Oversold is simply the opposite to overbought. Oversold is a condition in which the price of a market has declined too steeply and too fast in relation to underlying fundamental factors. This condition is usually a result of market overreaction or panic selling. Overselling is generally interpreted as a sign that the price of the asset is becoming undervalued and may represent a buying opportunity for investors. Hopefully it is now clearer to you what it means to say an asset is overbought or oversold, but please remember that determining the degree in which an asset is overbought or oversold is very subjective and can differ between traders.

Overbought

Oversold

26

Stochastic Oscillator

The Stochastic Oscillator is another example of a leading indicator; it is a momentum indicator that

measures the speed of change of price or the impulse of price. It does this by comparing an asset’s

closing price against its price range over a given time period.

Similar to RSI, Stochastic Oscillators also have levels that indicate potential trends or points of entry

or exit.

Traders will often look to sell when the Stochastic Oscillator line rises above 80 predicting that it

will inevitably then fall back below. Traders will also look to buy when the level falls below 20 predicting

that it will increase above this level.

Another way of utilising stochastic oscillators is to watch timing trades. The chart below gives an

example of this using vertical lines to help visualize and indicate the potential entry (execution zones).

27

Fibonacci Sequence

Fibonacci sequence is used widely in many different industries in the world which is why it may sound

the most familiar to you out of all the technical analysis tools we have covered so far.

Leonard Fibonacci was an Italian mathematician (1200 AD) who discovered a simple sequence of

numbers (Fibonacci numbers) that are used today in what is called Fibonacci retracement as a popular

technical analysis tool.

Fibonacci Numbers are as follows; 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55 and so on.

More important than the sequence itself is the mathematical relationship between the numbers. It is the

quotient of any two adjacent numbers in the sequence that is what’s important to us; each term in this

sequence is the sum of the two preceding terms.

Fibonacci retracement works by taking two extreme points on a chart and dividing the vertical distance

between the two points by what are known as the Fibonacci ratios. These ratios are 23.6%, 38.2%,

50%, 61.8% and 100% and the quotient of adjacent numbers in the sequence. Once these calculations

have been done and the point defined they are noted on the graph using horizontal lines. These lines

are interpreted by many traders as levels of support and resistance and are also used to help identify

strategic places for transactions to be placed, and target prices or stop losses to be selected.

Thus, the Fibonacci sequence can be summarized using this formula;

The most commonly used Fibonacci levels are the:

• 38.2%

• 50%

• 61.8%

And sometimes the

23.6%

76.4%

In a strong trend

Why is Fibonacci analysis so popular in trading?

• Fibonacci levels are geometric numbers, so the retracements & extensions appear pleasing to

the eye.

• Fibonacci levels provide objective price reference points and thus remove subjectivity

(when used correctly).

• Fibonacci retracements and extensions are among the “invisible” levels of support and

Resistance.

𝑭𝒏 = (𝑭𝒏−𝟏 ) + (𝑭𝒏−𝟐 )

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How to plot Fibonacci levels on your chart(s)

How to plot Fibonacci levels on the chart almost all trading platforms will have Fibonacci as

part of their technical tools, so one does not have to worry about calculating the retracement

and extension levels manually. All the trader has to do is identify a distinct high and a distinct

low and plot the Fibonacci levels by dragging it from one extreme to the next. It is important to

select the candlesticks’ wicks (we discuss candlesticks later in this book), so as to obtain more

accurate results.

They are always drawn from the left to the right:

• for an upward trending market, it is drawn from the low to the high,

and

• for a downward trending market, it is drawn from the high to the low. Once plotted, the trading

platform would automatically display the Fibonacci retracements and extensions and also their

corresponding price levels. The Fibonacci tool is highly customizable, so one could add or remove

certain levels.

Fibonacci Projection Rules

First and foremost, you want to focus on trading in the direction of the trend (primary or secondary) of

the chart/timeframe you are trading on.

Fibonacci Price Extensions

Fibonacci extensions vs. Fibonacci retracements, use the same methodology and tools however, the

extensions go beyond 100%. To find an extension level on a new downtrend you would run the low to

the high extension for possible support and vice-versa for an uptrend i.e in an uptrend you would run

the high to low extensions for possible resistance, which also potentially help guide you in your ‘profit

targets’.

The levels most commonly used for Fibonacci Extensions are:

• 1.00%

• 1.272%

• 1.618%

• 2.00%

• 2.618%

Summary

In summary, the probability of price turning at a Fibonacci level or Fibonacci extensions are greatly

increased when they are used as additional confluence or converge with other technical tools. But

even on their own Fibonacci levels and extensions often provide strong support and resistance. Such

setups occur time and again and on various time frames. Generally, the higher the time frame the more

significant the Fibonacci support or resistance levels are likely to be. Try applying Fibonacci levels in

the direction of the underlying trend.

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Chart Patterns

Technical analysis, like we said before, is not just about charts. It does however rely heavily on them

and often uses chart patterns to assist in making trading decisions.

The underlying theory is that traders often expect chart patterns to repeat, and this prediction is what

presents them with various trading opportunities.

The most common chart patterns are:

o Symmetrical Triangles o Ascending Triangles o Descending Triangles o Double Top o Double Bottom o Head and Shoulders o Inverted Head and Shoulders

Chart Patterns – Triangles

Triangles represent continuation patterns and there are three main types;

Symmetrical Triangles

A neutral pattern signaling a potential consolidation before breaking out to either

side, though typically the symmetrical triangle is seen as a continuation pattern,

so how do you spot a systematic triangle pattern?

Symmetrical triangles have distinct pattern signs and these can be seen in the image below

o Upper trend line downwards sloping o Lower trend line upward sloping o Both trend lines converging together o Breakout to upside or downside being confirmation of trend in that direction

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The slope of the price’s highs and the slope of the price’s lows converge together to a point where it looks like a triangle.

In the example to the right is a systematic/symmetrical triangle. Price action continues to make making lower highs and higher lows. This type of price activity is called consolidation phase.

Traders who use symmetrical triangles are often looking for a breakout; i.e. when the pattern reaches a stage where the price moves decisively in one direction or the other. A breakout often occurs after a consolidation as seen below; traders wait for the price to either move above the top trend line or below the bottom trend line.

Note: The closer that price action gets to the apex the

tighter it becomes, much like a ‘spring’ price action will be extremely compressed and prime for a

breakout. If price action preceeds beyond the apex, this is known as a failed pattern and therefore any

trade would be void.

Traders will often wait to see if the price (price action) finally breaks the resistance level, at which

point the price could breakout decisively to the upside as seen to the left.

Be patient and let the market tell you when to trade’ Kevin Warner

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Ascending Triangles

Bullish continuation pattern

Ascending triangles also have pattern traits with which you can identify it.

Upper trend line horizontal / flat Lower trend line upward sloping Both trend lines converging

together

o Lower ascending trend line upwards sloping

o Upper resistance trend line (level) horizontal / flat

o Both trend lines converging together

o Breakout to the upside through upper/higher resistance level

Breakout to the upside through upper resistance

Ascending triangles are experienced in instances where there is a resistance level coupled with a

slope of higher lows as seen below;

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The alternative occurs when the resistance level proves too strong for an upward break through and the price move reverses downwards.

Descending Triangles

Descending triangles are known as a Bearish continuation pattern.

Descending triangles are essentially the opposite of ascending triangles.

o Upper descending trend line downwards sloping

o Lower trend line/support level horizontal / flat

o Both trend lines converging together

o Breakout to the downside through lower support

Above we can see a descending series of highs, which forms the upper descending trend line.

The horizontal ‘lower line’ is a support level in which the price struggles to close / move below.

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Unlike with ascending triangles where traders are waiting for an uptrend break. Traders that are

following a descending triangle pattern would generally expect a follow through to the downside upon

price action breaking down below the horizontal support level which would suggest a bearish

downward move (i.e Bears are in control), once and only when the price has broken down below the

horizontal support level, would traders take a ‘short’ position

The alternative scenario will occur when the support level proves too strong for a downward break;

the price will then be seen to “bounce” off of the support level and generally begin in an upward

movement.

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Double Tops – Reversal Pattern

A double top is a bearish reversal pattern that is formed after there is an extended move up.

The “tops”, as seen above, are peaks which are formed when the price hits a resistance level that

appears it is unable to break.

35

We can see in the diagram on the previous page that having bounced off the support level slightly

the price then returns to re-test the support again. If the price is unable to break through the support

level or a second time and is seen to bounce off of that level again, a DOUBLE top chart pattern has

been formed.

Referring back to the diagram on the previous page again we can see that the 2nd “top” was unable

to break the high of the 1st. Traders often interpret this as a strong sign that a reversal is going to

occur as this movement implies that the buying pressure is lessening.

When using double tops as a form of analysis traders will often look to go short below the level which

is referred to as the “neck line”. When the price level falls below the neckline traders will expect the

reversal of an upward trend.

Double Bottom – Reversal Pattern

A double bottom is the opposite of a double top. It is a bullish trend reversal formation, meaning that

unlike with double tops traders are now looking for the price to reverse upwards after it has been

coming down.

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Head and Shoulders

Head and shoulders patterns are another form of a market reversal pattern which has two main types;

Head and shoulders – Pattern formation that indicates a reversal in an uptrend [bearish] and the

Inverse Head and Shoulders pattern formation, which signals a potential reversal in a downtrend

[bullish]

The Head and Shoulders pattern is formed by a peak, known as the “shoulder”, followed by a higher

low and then a higher high (higher peak) which is called the “head”, following on from the higher high,

the market then descends back into the ‘support level’ to create a swing low followed by another lower

high to create another shoulder is seen depicting a lower peak, as per the image shown above.

A support level is drawn by connecting the lowest points of the price actions two troughs.

Although in this case the neckline is a straight line it can be either upwards or downwards sloping.

Much the same as double bottom and top formations traders that use head and shoulders patterns

will also look to sell once the price falls just below the neckline as it is thought to imply an impending

downward trend and downside break. The opposite would apply to an inverse head & shoulders

pattern.

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Inverse Head and Shoulders

An inverse (reverse) head and shoulders pattern is pretty self-explanatory.

An inverse head and shoulders formation is a bullish reversal pattern and so traders will look to buy

when the price increases above the neck line as they will be expecting an upward trend break

through.

Price Action

Price Action is an illustration which refers to a trading instrument(s)/security’s price movement.

It can be represented in terms of charts, graphs, and tables. Swings (Highs and lows), tests of

support / resistance and consolidation are some examples of Price Action.

Price action is best seen and traded from clean charts, that display very little noise in terms of

additional and potentially conflicting indicators however, if used correctly Price Action is a valuable

addition to your trading armoury. Utilising Price Action within your trading plan allows you to read

the raw price of human behaviour.

Patterns will continue to repeat themselves as long as humans trade. Humans are very habitual and

more times than not will repeat themselves, over & over again given similar set ups or circumstances.

Price Action traders must understand the key market structures and the many rules that the markets

will adhere to.

Trading with the Trend is a very important factor when trading Price Action as it can provide you with

a greater Edge rather, than trading against the momentum.

In the following sections we will now look at price action formations through – Japanese candlesticks.

38

Japanese Candlestick Formations

Basic Candlestick Patterns - Spinning Tops

A spinning top is one of the most commonly seen candlestick patterns. These particular types of

patterns are often regarded as neutral and indicate indecision between the buyers(bulls) and

sellers(bears) and the future direction of an asset.

We can see above that the body of the spinning top is small despite the obvious price fluctuations

being a large amount of price fluctuation during the day. It is also either green or red in colour,

indicating an upward or downward sentiment.

Technical analysts and traders use the presence of a spinning top to gauge whether there is an

impending up or downward trend. For example, if after a long uptrend a spinning top is formed this

generally means that buyers have begun to lose interest and it could be a sign of an impending

downtrend. The opposite is also true.

Basic Candlestick Patterns – Marubozu A Marubozu is a single candlestick pattern that can provide some insight into market sentiment at a given time. The appearance basically means that the market traded to the close without any retracement. A bearish Marubozu means the price closed at the period low

39

How to Identify a Marubozu Candlesticks

A Marubozu is a single candlestick formation that is fairly easy to identify. They can come in a few different forms which we look into below

Conclusion – How reliable is the Marubozu

The Marubozu can certainly be considered as a useful trading signal due to its simplicity and easy interpretation. It is subjective and imperfect. The predictive ability is not fixed but varies significantly across different timeframes and charts. If you are looking to trade using the Marubozu, it is best used in conjunction with other technical analysis, trading tools and indicators which could include support/resistance levels, breakouts and the direction of trend.

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Basic Candlestick Patterns – Doji

Doji candlesticks are said to be “neutral” as they do not indicate a definitive upward or downward

trend and so indicate indecision amongst traders.

Doji candlesticks are in a way similar to spinning top candlesticks in that they have very small bodies,

in the case of Doji the body is simply a bar as seen below. Also similar to spinning tops, Doji

candlestick patterns can be seen to display long shadows.

There are four main types of Doji candlesticks;

First let us look at the long-legged Doji – here we can see that opening and closing prices were

essentially equal. This long legged Doji implies that there is almost equilibrium between supply and

demand and that there may be a turning point in the prices direction approaching.

Next there is the dragonfly Doji – similar to the long- legged Doji the dragonfly Doji also forms when

the assets opening and closing prices are equal. The long bottom shadow however means that this

equilibrium took place at the high of the day. Again, it implies that the direction of the trend is nearing a

major breakthrough with the longer lower shadow implying the possible reversal of a bearish trend.

A gravestone Doji is essentially the opposite of the dragonfly Doji explained above. It forms when the

opening and closing prices are equal and occur at the end of the day. The long upper shadow implies

that the days buying pressure was countered by sellers and that a bullish uptrend is about to be

reversed.

A four price Doji is a candlestick formation where the day’s high, low, open and close price were all

equal (these are very rare to see). This is the most neutral of all the Doji candlestick formations and

does not occur often. It is seen mostly in times where there is a very low volume of trading such as

after hours and is often disregarded by traders as being a result of bad data.

Although Doji Candlesticks are important, it is their combination with preceding patterns which traders

look most at. For example, if a Doji candlestick appears after a series of candlesticks with long green

bodies it is an indication that buying pressure is weakening. Conversely, if a Doji candlestick is seen

after a series of red candlesticks this is an indication that selling pressure is weakened.

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Basic Candlestick Patterns – Hammer and Hanging Man

The hammer and hanging man look very similar with short bodies and long lower tails, but they have

very different indications. The hammer, which can be seen above on the left in green, is a bullish

reversal pattern that forms during a downtrend. When prices are falling hammers signal that the

support level has been approached and prices may well begin to rise again. Traders often take a

hammer man as in indication of an impending price rise, but it is always safer to wait a while and

confirm a bullish trend before buying.

Also, could be seen/referred to as a Morning Star formation.

The above images represent a pin bar setup, which can be classified as either a hanging man or a

hammer, depending on where it is a hanging man is found at the top of an uptrend and a hammer is

found at the bottom of a downtrend, a Hanging man is a bearish reversal pattern that often is seen to

mark a top or strong resistance. When price rises the formation of a hanging man is often taken by

traders as an indication that selling pressure is larger than upward buying pressure.

Pin Bars can also be seen as per the below images. A shooting star candlestick formation, which is

usually formed at the top of an uptrend or against strong resistance,

Indicating indecision and the potential for a change in the direction of price. The second pin bar

represents a

Also, could be seen/referred to

as an Evening Star formation.

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Basic Candlestick Patterns: Inverted Hammer & Shooting Star

The inverted hammer occurs when a falling price indicates the possibility of a reversal. Its long upper

shadow as seen below showing us that buyers are attempting to counter the downwards pressure and

were able to close the session near its open as opposed allowing the price to be pushed down further.

The shooting star is a bearish reversal pattern that looks identical to the inverted hammer but occurs

when prices have been rising.

Its shape indicates that the price opened at its low, rallied, but pulled back to the bottom. Conversely to

the inverted hammer the shooting star shows us that sellers countered the upward pressure of buyers

and were able to keep the day’s close almost equal to its open and avoid any further upward pressure.

Conclusion

We’re finally done analysing; and now that you know the basics of both technical and fundamental

analysis it’s up to you to put your newly learnt skills to use. It depends on your trading style, your

objectives, your time frame and many other factors. Don’t put yourself in a box and stick to one style,

there’s value in diversity. You can use any or all of these different methods as each complements the

other. Many investors use technical analysis and charting to decide on strategic exit and entry points

but use fundamental analysis to decide which asset to trade on. There’s limitless combinations, and

limitless opportunity.

We look forward to working with you.

If you do have any questions after reading ‘The Ultimate guide to Forex Trading’, please email

Info@intelligenttradingacademy.com

43

Risk

Risk management is key in trading, we personally feel it accounts for at least 20% of a trader’s success

rate.

Financial Risk

Risk in any situation is Uncertainty 'The chance of an outcome being different than expected' So now that we know what risk is, what exactly is risk in terms of finance?

'The chance of an investment's actual return being different than expected' It’s often said that trading the financial markets is effectively the trading of risk.

Example: "By buying GBP/USD, I effectively have the opinion the GBP will strengthen against the “US

Dollar"

The risk is the possibility of the GBP weakening against the US Dollar – an adverse movement

In other words, financial risk is the possibility of losing part or all of your original investment

Why “Risk” It?

If trading the financial markets is effectively the trading of risk, then why would we “risk” the market

going against us?

Although risk makes us susceptible to adverse movements in the market, risk also presents the

potential/opportunity to make huge amounts of money. Risk is present in everything we do, by utilising

professionals, technical and fundamentals we allow ourselves to take calculated risks when the

Probabilities are in our trading plan/strategies favour.

Risk = opportunity And The higher the risk, the higher the potential opportunity or risk of loss

The Risk/Reward Trade Off

The higher the risk an investor takes on, the higher the potential returns should be in order to

compensate the increased risk. This is known as The Risk/Reward Trade Off

Low Risk = Low Return High Risk = High Return

What Makes Trading Such Risky Business?

There are lots of things which influence what type and how much risk is experienced.

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Leverage

'Leveraging lets you magnify your profit potential, at the risk of greater losses, through allowing you to control a relatively large asset for a fraction of its cost'

0.25% margin deposit means you are trading 400 times leverage, for example;

Buying 1 lot of GBP/USD @ 1.5700 with a margin requirement of 0.25% will cost you $250.

The margin requirement means that you can trade a volume of $100,000 in the market.

Through leveraged trading you can take advantage of very small movements in the market by trading

very large volumes

Higher leverage = More risk = Larger profit potential or loss

Volatility

'Volatility can be described as the size of changes in an assets value (price movement) over time'

Volatility measures the dispersion of price values. High volatility means price can swing dramatically in

either direction over a short period of time.

Higher volatility = More risk = Larger profit potential or loss

Trading Psychology

The final factor that affects risk is trading psychology, which the senior traders at Intelligent Trading Academy believe it accounts for 70%+ of a trader’s journey / success.

– this will be covered in the module that follows. Although it does not seem it in nature, trading is in

fact very emotional and emotions often affect and influence trading decisions. Without delving into

the studies of Behavioural Finance, we take a look at the following:

Fear and Greed; generates greater implied volatility

- do not let your emotions get the better of you

Hope ('false dawn'); often leads to greater risk as it causes us to hold onto losing investments when

we should be cutting our losses.

Bad Mental State; For whatever reason, whether you have just incurred losses or are fatigued – do

not make investment/trading decisions

45

Risk Management Tools

If you want to be a part-time or full-time trader you must remember that this is the hardest game that

you will ever play and that there will be losses. If it is done correctly you will more than likely never

look back.

Stop Loss Orders Stop Loss Orders are the single most important risk management tool and should always be employed when trading

There are several different types of Stop losses. Stop losses allow us to reduce and control our risk.

Trading isn’t about how much you can make in a day but, staying in the game with enough stake to play again.

Types of Stops

Percentage Stops – Use a proportion of the traders capital/trading account for example 1% of the

account.

Volatility Stop – Using a stop level based on a specific pairs volatility or daily traded volume, by

knowing the average volatility helps you place your stops accordingly.

Chart Stop – Based on the market structure of your chart(s) a stop is then placed beyond the levels of support &/or resistance

Breakeven Stops – executed at the point at which gains equal losses

Time Stop – it relies on a certain period of time elapsing before the order is executed

Trailing stops - set at a percentage level below the market price. It allows you to let profits run on and

minimise your losses at the same time.

Mental Stop – A Mental stop is used when a physical computer order/stop is not placed to exit a trade

(This would only be used by disciplined professional traders) as there is no stop in place to limit your

loss.

Learn from your losses, manage your losses, and learn from them, or one day you will have the mother of all loses that will wipe out your entire account

Risk Tolerance

Low risk investments will be seen to have lower return potential than high risk investments.

Your trading style will often define how low or high risk your strategy is but even the greatest

investment/trading strategies are of little help if you do not control risk

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How Tough Are You? Your Risk Tolerance is the degree of uncertainty you can handle regarding a potential loss or decrease

in your investment portfolio value Risk tolerance will be different for each person and it is important to understand what style suits you

best, along with what type of trader you are.

Risk tolerance will usually and generally depend on three things;

Income & Responsibilities - Your personal income and personal situation

e.g. A person on a low salary about to get married will be likely to have a low to moderate risk

appetite and will therefore most probably have lower risk capital available than a single person on a

medium salary

Time Horizon - The amount of time you plan to keep your money invested. Longer time horizons are

associated with less risk than shorter time horizons

Investment Objectives - The greater your financial goals, the greater the risk you will likely have to take on

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Risk Mitigation

What Is Asset Allocation? Asset allocation is an investment strategy aimed to balance risk and reward. it shares out the portfolio's assets according to your investment goals, risk tolerance and time horizon. different asset allocations have different levels of risk, below is an example of the risk associated with a selection of asset allocations;

Diversification

'A risk management technique that aims to reduce risk through mixing up your portfolio with many different investments'

Diversification is particularly helpful when trying to offset unsystematic risk, which is industry/company

specific.

Diversification is based on the rationale that any bad performers should be offset by good performers

thus, smoothing out unsystematic risk.

The lower the correlation between investments in your portfolio, the lower the risk

Example of Correlation; Gold and the US Dollar

Gold is inversely correlated to the dollar meaning that the value of gold appreciates as the dollar weakens Gold and Crude Oil

Rising crude oil prices tend to lead to a rise in the value of gold as gold is often bought as a hedge

against inflation

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Controlling Your Leverage

Remember! Leverage can be tailored according to your risk appetite. If you are risk averse, trading

on lower margin requirements reduces your leverage. Learn to control your leverage amount as

discussed on page 7 ‘Leverage, Margin and Esma,

Whether you are a high flying professional trader with years of experience or a complete novice

looking to trade the financial markets and make a return on your money, being conscious of the

degree of severity of the risks posed by leverage is key to developing a robust risk management

approach, and as a result is absolutely fundamental to your success when trading the financial

markets.

The first and arguably most significant disadvantage with leverage is the inverse of the main

advantages. When trading is going well and the markets are going your way/in your favour. Leverage

Can be an effective tool to have in your trading armoury. Increasing your profit and increasing your

Return on investment. However, when the markets move against you, it can become pretty difficult to

manage your open trades when your positions turn against you to cause potentially extensive damage

to your trading portfolio. Highlighting the utmost importance being placed on risk management.

Technical Analysis

Technical analysis serves as an important aid in risk management

We can use it to:

Identify & Time Entry/Exit points

Identify Support & Resistance

Strategic Stop Loss Orders

Identify Trends & Chart Patterns

Create Risk Parameters - Technical Indicators

All the above will aid the reduction of risk and help improve your chances of making profits.

For more information on Technical Analysis please see the "Analysis" Module

Remember

Use Stop Losses

Using a stop loss – a present level at which an open trade is automatically closed – is standard good

practice as this can limit your downside risk and also shows trading discipline which is paramount in

developing a healthy trading account. However, when markets are incredibly volatile you could

experience some slippage with the position not being able to be executed at the exact level specified.

In volatile markets there is often a “gap”, where a product moves substantially lower or higher than

expected perhaps as much as 10-15%. With a normal stop loss, you will get the first available price

which could cause a large loss and result in a loss greater than your initial deposit.

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Reduce Your Trade Size

Margin is one of the biggest advantages in ‘Derivatives trading such as CFDS and spread betting. With any margin trading you should always be aware of how much is required to keep your position in the market. A general rule of thumb is that no single trading position should amount to risk exposure of more than 2% (subject to your trading style) of your available capital. Under new rules & regulations ESMA has stepped in to allow for tighter and stricter controls on leverage however, in volatile market conditions this kind of leverage is dangerous as any loses will magnified by even more than normal. Every trading strategy will go through a period of market cyclicity in terms of ‘losing periods’ which could last 1 day, 1 week, 1 month, 1 year. It happens to the best traders & fund managers, so a convicting belief not only in your trading strategy but, your mental ability to focus on only high probability trades and trust in your process would help you to oversee volatile market conditions. Remember earlier in this guide we mentioned that there are three trades.

Long | Short | Cash

As traders we must know when to trade the markets and when not to trade!

Limit Your Trades

Volatile markets are associated with high volumes of trading, which may cause delays in execution.

While online trading normally means you place a trade at a current bid and offer you see, some

market maker may widen bid offer spreads or even temporarily withdraw tradable prices.

This means that execution can be delayed and prices to execute at may not be available.

Stick to Your Strategy

During volatile times, it easy to be shaken and diverted from your normal trading strategy but most

experienced traders apply the same strategy to choosing investments as they normally do. While it’s

tempting to react to the volatility, it’s incredibly difficult to predict moves in the short term, so you have

to stick to your trading strategies and limit your risk exposure when times are volatile.

What are the important bits?

▪ Risk & Money Management

▪ Understanding your risk tolerance, and what type/style of trader you are

▪ Have a Risk Management strategy - Leverage/Volatility/Diversification/Asset

Allocation

▪ Always trade with a stop loss

▪ Follow your trading plan and be disciplined.

▪ Cut your losses and run your winners

▪ Journal your trades and review them – Win/Loss/Breakeven

▪ Education – continued learning & self-development

Trade your plan and Plan your trades

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Trading Psychology

Trading isn’t for the weak at heart and is s a lot more emotional than you may think, before you can

master trading you have to learn to master your emotions. At Intelligent Trading Academy we believe

Psychology & Mindset account for around 70% of a trader’s success.

Trading Psychology – The definition and importance having the right mindset

Trading psychology is about understanding the way we react mentally to the stresses and pressures of trading.

Controlling your emotions is essential to successful trading, without a clear mind you won’t be able to make rational trading decisions.

The Emotions of Trading

When trading there are two emotions that are more common, and more dangerous, than all the

rest; fear and greed.

Fear and greed can ruin even the best trading strategies.

One moment of fear or greed can lead to a moment of madness and months of hard won profits going down the drain.

Uncontrolled emotions should not be an excuse for losses and losses should not be an excuse for

uncontrolled emotions.

Remember!! Trading affects psychology as much as psychology affects trading.

Greed

“You can’t feed on greed”

• Many people think that greed is thinking that the sole aim of trading is to make money.

• This is NOT what greed is

• Greed is trying to make money too quickly

• There are lots of ways to be greedy in trading;

o Trading in sizes that are too large

o Trading too frequently

o Having unrealistic expectations

o Dreaming of the big hit trade, rather than steadily building your equity through

compounding and highly probable trades

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Fear

Fear in trading has two faces;

• Fear of loss

• Fear of missing out

The fear of loss compels traders to close profitable trades prematurely, meaning they miss out on

potential profit.

The fear of missing out compels traders to abandon their trading strategy so they do not miss a major

price move.

Fear is NOT good as it leads to overtrading and miss-timed entry and exit points.

So, DON’T BE SCARED!!

Managing Your Risk and Your Emotions

Risk management involves calculating how much risk you are prepared to tolerate in order to make a profit.

Traders must realise the importance of Risk / Money Management; it will help and teach you to take a

more realistic and steady view on your trading career/ account, coupled with thinking clearly, and most

of all, it will help to maintain and control your emotions and mindset.

Here are a few things you should think about when trading:-

Trade Size - Start with small trades whilst you develop your understanding and confidence/consistency & discipline

Always test the markets initially with a smaller size account or trade size. Until you become completely familiar with the platform you are using, the functions and features as well as your trading plan, mindset/psychology & risk management.

Trade sizes that are too large for your account can cause exaggerated price swings and play havoc

with your account as well as your emotions. This can then lead to mistakes caused by fear or greed.

Trading affects psychology as much as psychology affects trading.

Do not forget that a trade can go wrong – if you are dreaming of a huge profit by taking a large trade

size, remember this high-risk trade can also produce a loss as big as the profit you were dreaming of.

As we mentioned earlier on in this guide – Trading isn’t about how much money you can make in one

trade by over-risking but, staying in the game to play another day.

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Risk/Reward Ratio

Depending on the type of trader/your style of trading, it would be sensible in most cases to aim for a

Risk:Reward ratio of at least a 1 : 3 or at worst a 1: 2 Loss/Profit ratio.

• For example, if you are aiming for 200 pips profit, your maximum loss should be around 100 pips.

Or, if the maximum loss you are prepared to take is

• $2000, your profit target should be at least $4000

As touched upon above Risk:Reward ratio is key in trading however, if you are looking to scalp the

FX markets i.e. If your desired trading style is to get in and out of the market for a small profit each

trade / trading day then make sure your losses are also small.

Planning your risk/reward ratio means that you can prepare yourself mentally for the loss that you

might face and prevent emotional trades.

One wrong emotional trade can produce a large enough loss to wipe out the profit of many profitable trades. 5:1 (Risk:Reward). Five to one means I’m risking one pound to make five. What five to one does is allow you to have a hit ratio of 20%. I can actually be a complete imbecile. I can be wrong 80% of the time and I’m still not going to lose – Paul Tudor Jones (American investor, Hedge Fund manager)

Market Volatility

Certain market/trading hours can be more volatile than others; The afternoon in the London/European

session, which corresponds to the morning of the New York trading time, is the most volatile time of

day for most markets with the largest price swings and profit potential and losses occurring.

During periods of extreme volatility it is usually best to stand aside if you are not an experienced trader.

Remember there are three types of trade:

Long | Short | Cash

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Trading Tips

Here are some more trading tips that you may find useful

Implement Risk Management

Use stop losses and limits – these take the emotion out of closing a trade and reduce the risk

of unnecessary losses as a result of attachment to a position.

Traders hold on to unrealised losses as they allow they become married to the trade, which is classed as emotional attachment, they do not want to realise the loss in turn hold on to it in hope that it will reverse.

The hardest thing a trader has to do is manually close a losing trade placing a stop loss order at the

same time you make a trade will avoid having to do this.

- Traders often complain when their stops hit then the price reverses never cancel

a stop loss order after you have placed it. You placed the stop when you were

calm before you entered the trade now you are stressed because the trade is

moving against you

Trust your trading plan and your original risk management!

Treat Trading as A Business Not A Hobby

You wouldn’t invest £10,000 into a business or investment based on a hunch or impulse on impulse –

so don’t do it when trading!

You must take the time to conduct thorough due-diligence using your preferred methodology –

technical analysis, fundamental analysis, sentiment analysis, coupled with risk management and your

trading plan.

Preparation is key in trading the Forex and other financial markets,

Conduct your market analysis, watch list and due-diligence during the weekend and evenings.

Be pro-active and let the market tell you when to trade.

Kevin Warner

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Patience

I have always found that in trading – the money is made in the sitting, not the trading, which I was Taught very early on in my professional career by my mentor and fund manager, who has in excess of A$300 Million

Patience is a virtue in trading; it is different to not trade through fear Patience means…

…waiting for the price to hit your indicators before trading …waiting hours if necessary for the correct time to enter the market. Trading profitably is what matters, not the number of trades per day …not jumping in and trading just because you see the price moving or you are bored …not trading on a tip. You will find wildly divergent opinions even among so-called experts. Do your own research before you trade Standing aside during market volatility, market indecision such as distribution periods or trend-changes is a valid trading decision

OVERTRADING

Overtrading is a common mistake made by new traders as they try and catch every small price move

The price moves down so they sell, it moves up so they buy, in doing so they are always chasing the

market and usually losing.

Never chase a trade.

Adrian Slack

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Time Frames

• Short term trading is highly intensive and requires lots of discipline and concentration so make sure you are ready for this level of intensity and can trade without distractions

• Longer term trades do not have to be monitored constantly and are more appropriate for traders with other commitments such as jobs and families.

Coping with Losing Trades

Learn from your losses This is a term heard often in the trading world, and if you don’t learn to embrace your losses, your trading career will probably be short lived.

So, what exactly does “learn to love your losses” mean?

It means you should understand why you made a losing trade; Did you misread your indicators? Did you fail to anticipate the release of an important piece of economic data?

Some losing trades are not your fault; for example, an unpredictable event such as a natural disaster attack could move the market, but…

The majority of losing trades are because the trader made an impulsive decision. To lessen the psychological impact of a loss, redefine a loss from being a failure to being an opportunity to learn Do not blame the markets for your losses, the markets don’t owe you anything – look at your strategy and adjust accordingly

Trade based on what the market is doing rather than what you think it should be doing. Trends and market conditions can change; make sure your strategy changes with it.

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Taking Profit

`Cut your losers and run your winners

Don’t take profits too early through fear. Fear causes the mind to question and react while the trade is still “safe” and in profit, no matter how small. Conversely, don’t let a winning trade turn into a loser. Set yourself rules to follow; e.g. close a trade if the market retraces 20% from your profit target. This allows you to make sure that your emotions don't get out of hand when trading Don't torment yourself if a trade continues not to move in your favour. A common mistake is to close a position that is in profit and keep one that shows a loss.

Building Your Account Equity

Don’t try to make your fortune in a single trade as this can lead to you over risking or going against your trading plan/strategy. – you will never be satisfied if you have unrealistic expectations

Aim to build your account steadily Remember you will have periods of equity drawdowns or sideways movement.