Types of channels There are three types of channels: 1. Ascending channel (higher highs and higher lows) 2. Descending channel (lower highs and lower lows) 3. Horizontal channel (ranging) Channel Rules: * Generally, the bottom of channel is considered a buy zone while the top of. channel is considered a sell zone, + Like in drawing trend lines, DO NOT EVER force the price to the channels that you draw! A channel boundary that is sloping at one angle while the corresponding channel boundary is sloping at another is not correct and could lead to bad trades. 31Japanese Candlesticks Upper Shadow HIGH close Real Body OPEN Low Lower Shadow Upper Shadow Lower Shadow HIGH OPEN Lose Low Japanese candlesticks can be used for any time frame, whether itis one day, one hour, and 30- minutes. They are used to describe the price a n during the given time frame. Japanese candlesticks are formed using the open, high, low, and close of the chosen time period. © If the close is above the open, then a bullish candle (usually displayed as white) is drawn. © If the close is below the open, then a bearish candle (usually displayed as black) is drawn, The hollow or filled section of the candlestick is called the “real body” or body. * The thin lines poking above and below the body display the high/low range and are called shadows/wicks/tails. Spinning Tops Candles with long upper tails, long lower tails and small bodies are called spinning tops, whether it is bearish or bullish it doesn’t matter. This candle indicates indecision between bulls and bears Spinning Tops ea 32x CAPS Marubozu A white marubozu contains a long white body with no tails. This is a very bullish candle as it shows that buyers were in control the entire session. It is usually the first part ofa bullish continuation or bullish reversal. Marubozu white Black Marubozo — Marubazo Doji Doji candles have the same open and close price or at least their bodies are extremely short. A Doji should have a very small body that appears as a t Doji candles suggest indecision or a struggle for turf positioning between buyers and sellers. Prices move above and below the open price during the session, but close at or very near the open price. Neither buyers nor sellers were able to gain control and the result was essentially a draw. Lonsteccen | | oragonety GRAVESTONE FOUR PRICE ost 0a 00 out Hammer and hanging man The hammer is a bullish reversal pattern that forms during a downtrend, It is named because the market is hammering out a bottom. When price is falling, hammers signal that the bottom is near and price will start, again. The long lower tail indicates that sellers pushed prices lower, but buyers were able to overcome this selling pressure and closed near the open. ng 33Ea CAP! Just because you see a hammer form in a downtrend doesn’t mean you automatically place a buy order! More bullish confirmation is needed before it’s safe to pull the trigger. Atypical example of confirmation would be to wait for a white candlestick to close above the open to the right side of the hammer. Recognition Criteria: The long tail is about two or three times of the real body. Little or no upper shadow. The real body is at the upper end of the trading range. The color of the real body is not important. Hammer Hanging Man 1, hi i ‘The hanging man is a bearish reversal pattern that can also mark a top or strong resistance level. When’price is rising, the formation of a hanging man indicates that sellers are beginning to outnumber buyers. The long lower tail shows that sellers pushed prices lower during the session. Buyers were able to push the price back up some but only near the open. This should set off alarms since this tells us that there are no buyers left to provide the necessary momentum to keep raising the price. Recognition Criteria: * Along lower shadow which is about two or three times of the real body. Little or no upper shadow. ‘The real body is at the upper end of the trading range. The color of the body is not important, though a black body is more bearish than a white body. 34Inverted Hammer and Shooting Star ‘The jnverted hammer and shooting star also look identical. The only difference between them is whether you're in a downtrehd or uptrend, Both candlesticks have petite little bodies (filled or hollow), long upper tails and small or absent tails. The inverted hammer occurs when price has been falling suggests the possibility of a reversal, Its long upper shadow shows that buyers tried to bid the price higher. ‘The shooting star is a bearish reversal pattern that looks identical to the inverted hammer but occurs when price has been rising. Its shape indicates that the price opened at its low, rallied, but pulled back to the bottom. This means that buyers attempted to push the price up, but sellers came in and overpowered them. This is a definite bearish sign since there are no more buyers left. Inverted Hammer Shooting Star Dual Candlestick ‘The bullish engulfing pattern is a two candlestick pattern that signals a strong up move may be coming, It happens when a bearish candle is immediately followed by a larger bullish candle. This second candle “engulfs” the bearish candle. This means buyers gaining control and that there could be a strong up move after a recent downtrend or a period of consolidation. On the other hand, the bearish engulfing pattern is the opposite of the bullish pattern This type of candlestick pattern occurs when the bullish candle is immediately followed by a bearish candle that completely “engulfs” it. This means that sellers overpowered the buyers and that a strong move down could happen. Bullish Enguiting Bearish Engulfing Me ee ne af 35‘Tweezer Bottoms and Tops ‘The tweezers are dual reversal candles. These types of candles are usually spotted after an extended uptrend or downtrend, indicating that a reversal will soon occur. Tweezer Bottoms Tweezer Tops ‘Triple Candlestick patterns Evening and Morning Stars ‘The morning star and the evening star are triple candlestick patterns that you can F usually find at the end of a trend. Morning Star Evening Star 4 36Three White Soldiers and Black Crows ‘The three white soldiers’ pattern is formed when three long bullish candles follow a downtrend, signaling a reversal has occurred. This type of triple candlestick pattern is considered as one of the most potent bullish signals, especially when it occurs after an extended downtrend and a short period of consolidation. For the pattern to be considered valid, the second candlestick should be bigger than the previous candle’s body. Also, the second candlestick shauld close near its high, leaving a small or non-existent upper wick. For the three white soldier’s pattern to be completed, the last candlestick should be at least the same size as the second candle and have a small or no tail. The three black crow’s candlestick pattern is just the opposite of the three white soldiers. It is formed when three bearish candles follow a strong uptrend, indicating that a reversal is in the works. ‘The second candle’s body should be bigger than the first candle and should close at or very near its low. Finally, the third candle should be the same size or larger than the second candle’s body with a very short or no lower tail. Three White ‘Three Black Soldiers Crows, 6) f & 37,Chart Patterns — Ascending Triangle A Bearish chart pattern used in technical analysis that is easily recognizable by the distinct shape created by two trend lines. In an ascending triangle one trend line is drawn horizontally at a level that has historically prevented the price from reaching higher highs, while the second trend line connects a series of higher lows. Once the pattern has formed and spotted, Traders using technical analysis will enter short once price has touched the resistance level and wait for the breakout to the downside. As the image below suggests, price will drop an estimate the range of the ascending triangle Wy] eee height! - Li VI Descending Triangle A bullish chart pattern used in technical analysis that is created by drawing one trend line that connects a series of lower highs and a second trend line that has historically proven to be a strong level of support. Once the pattern has been formed and spotted. Traders using Technical analysis will enter long once price has touched the support level and wait for the breakout to the upside. As the image below suggests, price will rise an estimate the range of the Descending triangle. 38Symmetrical Triangle A chart pattern which is used in technical analysis that is easily recognized by its shape created by two converging trend lines. The pattern Is recognized by drawing two trend lines which connect a sequence of lower highs and higher lows. This chart pattern is generally regarded as a period of consolidation before price breaks out beyond one of the identified trend lines. A breakout below the lower trend line indicates a signal to the trader that price will move lower, while a breakout above the upper trend line indicates a signal to the trader that price will move lower. fi 4 Bearish Pennant A bearish pennant is formed during a steep, almost vertical, downtrend, itis similar to a symmetrical triangle with the difference being, it is formed after a steep drop in price, and thereafter price will consolidate briefly and thereafter continue its downward movement. As the image below suggest price will drop an estimate range from the most recent high it came from. - ' 39SUl Bullish Pennant Bullish Pennant, just as the name suggests, signals price will resume its upward movement after the brief period consolidation. A bullish pennant will occur after price made sharp, almost vertical movement upward. As the image below suggests price will rise an estimated range from the previous low it came from. continues uptrond Rising Wedge A rising wedge is formed when price makes higher highs and higher lows in-between upward sloping support and resistance trend lines. In the image below notice how the support trend line is steeper than that of the resistance. This indicates higher lows are being formed quicker than higher highs which forms a wedge - like formation. As the image below suggests price will breakout to an estimate range between the first high and first low from which the wedge started its formation. pricemakesanice move down, 40Falling Wedge A falling wedge is formed when price makes lower highs and lower lows in-between downward sloping support and resistance trend lines. In the image below notice how the resistance trend line is steeper than the support trend line. This indicates lower highs are being formed quicker than the lower lows, which forms this wedge like formation. As the image below suggests price rise an estimated distance equal from the first high and low of the falling wedge formation, Bearish Rectangle A bearish rectangle is a chart pattern formed during a downtrend once price consolidates between parallel support and resistance levels. A rectangle indicates a period of indecision between the bulls and the bears, as they take turns taking over. Price will test the support and resistance levels several times before eventually breaking out to the downside. a peer |Bullish Rectangle A bullish rectangle is a chart pattern formed during an uptrend once price consolidates between parallel support and resistance levels. A rectangle indicates a period of indecision between the bulls and the bears, as they take turns taking over. Price will test the support and resistance levels several times before eventually breaking out to the upside. 1 esc s | anitso much | a Double Top A double top is a reversal pattern after price has reached resistance. The tops can be describes as peaks which are formed when price hits an area which can’t be broken. After this level, price will bounce off it slightly but then return back to test the same level again, if price bounces off of that level again, a double top has formed, 42: CAP! Triple Top A pattern used in technical analysis to predict the reversal of a prolonged uptrend, This pattern is identified when the price of an asset creates three peaks at nearly the same price level. The bounce off the resistance near the third high is @ clear indication that buying interest is becoming exhausted. Itis used by traders to predict the reversal of the uptrend, i, as Triple Bottom A pattern used in technical analysis to predict the reversal of a prolonged downtrend, The pattern is identified when the price of an asset creates three lows at nearly the same price level. The third bounce off the support is an indication that buying interest is outweighing selling interest and that the trend is in the process of reversing, 43Double Bottom A double bottom is a reversal formation but this time we looking to enter long instead of short. In the image below notice how price touched a level of support twice failing to break through, therefore forming the double bottom. In some cases price will break out of the neckline of the double bottom, once it has broken out, it will rise the same distance as the range of the double bottom and its neckline. Head and Shoulders ‘A head and shoulders is a trend reversal formation.it is formed by high (first shoulder), higher high (head) and then a lower high (second shoulder), The neckline of the head and shoulders pattern is drawn by connecting the two lowest points of the shoulders. The slope of this line can either upward or downward. When the slope of the neck line is downward, it provides a more reliable signal oD a4Fibonacci Leonardo Fibonacci was a famous Italian mathematician; he discovered a simple series of number that created ratios describing the natural proportions of things in the universe. The ratios arise from the following number series: 0, 1, 1, 2, 3, 5, 8, 13, 21,34, 55, 89, 144. This series of numbers Is derived by starting with 0 followed by 1 and then adding 0+ 1 to get 1, the third number. Then, adding the second and third number (1 + 1) to get 2, the fourth number with the third (2+1), giving us three which is the fifth number, and so on, After the first few numbers in the sequence, if you measure the ratio of any number to the succeeding higher number, you get .618. For example, 34 divided by 55 equals 618. Ifyou measure the ratio between alternate numbers you get .382. For example, 34 divided by 89 = 0.382 and that’s as far as into the explanation as we'll go. ‘These ratios are called the “golden mean”. Fibonacci Retracement Levels 0.382, 0.500, 0.618 Fibonacci Extension Levels 1.272, 1.382, 1.618 We use the Fibonacci retracement levels as potential support and resistance areas. Since so many traders watch these same levels and place buy and sell orders on them to enter trades or place stops, the support and resistance levels tend to become self- fulfilling prophecy. How We Use Fibonacci Retracement to Enter Trades In order to spot the retracement level, you must first find the most recent significant high and low. For uptrends 0.0 Fibonacci level must be at the significant low and 100.0 Fibonacci level must be at a significant high. For Downtrends 0.0 Fibonacci level must be at the significant high and 100.0 Fibonacci level must at a significant low. Let’s take a look at an example: 45,KALE i Tf ik I we yeHarmonic Animal Patterns Harmonic patterns build on simple geometric chart patterns with the use of the Fibonacci sequence and the retracement and projection percentages that are typically associated with these numbers. Technical traders that use these patterns are looking for potential turning points after extreme trending moves are seen. But harmonic patterns are somewhat unique in that this trading approach looks to predict price movements, rather than to simply describe them. For this reasons, harmonic patterns show some differences when compared to trend trading or the identification of overbought and oversold conditions. Many common trading methods involve simple reactions to market conditions, rather than actually attempting to predict (and project) what will happen next for the price of an asset. Here, we will look at some of the ways harmonic patterns are actively used in forex markets, and learn about some of the ways the "Divine Ratio” is actually put to use Challenges When Trading with Harmonics The textbook structures for harmonic patterns are very precise, and require prices to unfold in movements of a set magnitude in order to signal a reversal point and trigger an actual trade. There will be many instances where traders might see a pattern that resembles one of the harmonic structures but if the Fibonacci measurements do not align with the predetermined requirements for the pattern, the structure is not valid. This essentially means that the shape itself is not enough (as it might be with a head and shoulders or flag pattern), to actually generate a trading signal. At the same time, however, this can be viewed as a positive as it takes out an element of subjectivity and can enhance the validity (and eventual accuracy) of the trading signals that are sent. a7‘The ABCD The simplest harmonic pattern and what could be more basic than your ABC's? To spot this chart pattern, all you need are ultra-sharp hawk eyes and the handy-dandy Fibonacci tool For both the bullish and bearish versions of the ABCD chart pattern, the lines AB and CD are known as the legs while BC is called the correction or retracement. If you use the Fibonacci Fetracement tool on leg AB, the retracement BC should reach until the 0.618 level. Then, the ine CD should be the 1.272 Fibonacci extension of BC. Ifyou want to be extra strict about it, here are a couple more rules for a valid ABCD pattern: ‘The length of line AB should be equal to the length of line CD. ‘The time it takes forthe price to go from A to B should be equal to the time ittakes fr the price to move from Cto Bearish ABCD Bullish ABCD a 48Three-Drive ‘The three-drive pattern isa lot like the ABCD pattern except that it has three legs (now known, as drives) and two corrections or retracements. Easy as pie! In fact, this three-drive pattern is, the ancestor of the Elliott Wave pattern, As usual, you'll need your hawk eyes, the Fibonacci tool, and a smidge of patience on this one, As you can see from the charts below, point A should be the 61.8% retracement of drive 1, Similarly, point B should be the 0.618 retracement of drive 2. Then, drive 2 should be the 1.272 extension of correction A and drive 3 should be the 1.272 extension of correction B. By the time the whole three-drive pattern Is complete, that’s when you can pull the trigger on your long or short trade. Typically, when the price reaches point B, you can already set your short or long orders at the 1.272 extension so that you won't miss out! But first, it'd be better to check if these rules also hold true: ‘The time it takes the price to complete drive 2 should be equal to the time it takes to complete drive 3. Also, the time to complete retracements A and B should be equal. Bearish Three-Drive Bullish Three-DriveThe “perfect” Gartley pattern has the following characteristics 2 1. Move AB should be the .618 retracement of move XA Move BC should be either 382 or .886 retracement of move AB. Ifthe retracement of move BC is.382 of move AB, then CD should be 1.272 of move BC. Consequently, if move BC is .886 of move AB, then CD should extend 1.618 of move BC. Move CD should be .786 retracement of move XA Bearish Gartley Bullish Gartiey The Crab Move AB should be the .382 or .618 retracement of move XA. Move BC can be either .382 or .886 retracement of move AB. Ifthe retracement of move BC is .382 of move AB, then CD should be 2.24 of move BC. Consequently, if move BC is .886 of move AB, then CD should be 3.618 extension of move BC. CD should be 1.618 extension of move XA. Bearish Crab Bullish Crab ast8The Bat ce +1, Move AB should be the .382 or .500 retracement of move XA. 2. Move BC can be either .382 or .886 retracement of move AB. 3, Ifthe retracement of move BC is 382 of move AB, then CD should be 1.618 extension of move BC. Consequently, if move BC is .886 of move AB, then CD should be 2.618 extension of move BC. 4. CD should be 886 retracement of move XA. Bullish Bat The Butterfly 1. Move AB should be the .786 retracement of move XA. 2. Move BC can be either .382 or .886 retracement of move AB. 3. Ifthe retracement of move BC is .382 of move AB, then CD should be 1.618 extension of move BC. Consequently, if move BC is .886 of move AB, then CD should extend 2.618 of move BC. 4, CD should be 1.27 or 1.618 extension of move of XA Bearish Butterfly Bullish ButterflyShark Pattern 1. The AB leg should be a 1.130 to 1.618 extension of the XA leg and 2. The BC leg should be a 1.618 to 2.240 extension of the AB leg and 3. The C point should be 0.886 to 1.130 retracement of the OX leg Bearish Shark Pattern 52.Elliot Wave Theory ( In the 1920s, there was a genius and professional accountant named Ralph Nelson Elliot. By analyzing around 75 years’ worth of stock data, Elliot realized that stock markets, historically thought to behave in a chaotic manner, actually didn’t. When he was 66 years, he finally gathered enough evidence to share his discovery with the world. He published his theory in the book titled “The Wave Principle” Impulse Waves Mr. Elliot demonstrated that a trending market moves in what he calls a 5-3 wave pattern. The first 5- wave pattern is called impulse wave The last 3- wave pattern is called corrective waves In this pattern, Waves 1, 3,3 and 5 are motive, meaning they move with the overall trend, while waves 2 and 4 are corrective. Here is the 5 - wave impulse pattern:Corrective Waves ‘The 5-wave trends are then corrected and reversed by 3-wave countertrends. Letters are used instead of numbers to track the correction. Check out this example of corrective 3-wave pattern. ‘The same 5-3 wave pattern can also like this: Which we can also call the lowest peaks an inverted head and shoulders Rules of the Elliott Wave Theory Rule Number 1: Wave 3 can NEVER be the shortest impulse wave Rule Number 2: Wave 2 can NEVER go beyond the start of Wave 1 Rule Number 3: Wave 4 can NEVER cross in the same price area as Wave 1 Then, there are the guidelines that help you in correctly labeling waves. U the three cardinal rules, these guidelines can be broken. Here they are: Conversely, sometimes, Wave 5 does not move beyond the end of wave 3. This is called truncation. Wave 5, more often than not, goes beyond or “breaks through” the trend line drawn off Wave 3 parallel to a trend line connecting the start of Waves 3 and 5. 54oil * Wave 3 tends to be very long, sharp, and extended. * Waves 2 and 4 frequently bounce off Fibonacci retracement levels. 55Sentiment Analysis Ichimoku Kinko Hyo Ichimoku Kinko Hyo (IKH) is an indicator that gauges future price momentum and determines future areas of support and resistance. Now that’s 3-in-1! Also know that this indicator is mainly used on. JPY pairs. To add to your Japanese vocab, the word ichimoku translates to “a glance”, kinko means “equilibrium”, while hyo is Japanese for “chart.” Putting that all together, the phrase ichimoku kinko hyo stands for “a glance at a chart in equilibrium.” The Ichimoku displays a clearer picture because it shows more data points, which provide a more reliable price action. The application offers multiple tests and combines three indicators into one chart, allowing the trader to make the most informed decision. The ichimoku is essentially made up of four major components, the application offers the trader key insight into FX market price action. First, we'll take a look at both the Tenkan and Kijun Sens. Used as a moving average crossover both lines are simple translations of the 20- and 50-day moving averages, although with slightly different time frames. Let's look at the ichimoku Figure 1 | | | | | 56; CAPS 1. Kijun Sen (blue line): Also called standard line or base line, this is calculated by averaging the highest high and the lowest low for the past 26 periods. 2. Tenkan Sen (red line): This is also known as the turning line and is derived by averaging the highest high and the lowest low for the past nine periods. What the trader will want to do here Is use the crossover to initiate the position - this is similar to a moving average crossover. Looking at our example in Figure 1, we see a clear crossover of the Tenkan Sen (black line) and the Kijun Sen (red line) at point X. This crossover simply means that price is rising above the kijun sun and tenkan span (crossover), signaling an uptrend where price will be above the cloud. Chikou Span (green line): This is called the lagging line. It is today’s closing price plotted 26 periods behind. 4, Senkou Span (Cloud): The first Senkou line is calculated by averaging the Tenkan Sen and the kijun Sen and plotted 26 periods ahead. The second Senkou line is determined by averaging the highest high and the lowest low for the past 52 periods and plotted 26 periods ahead. Now let's take a look at the most important component, the Ichimoku “cloud”, which represents current and historical price action. It behaves in much the same way as simple support and resistance by creating formative barriers. Once plotted on the chart, the area between the two lines is referred to as the Kumo, or cloud, Comparatively thicker than support and resistance lines, the cloud offers the trader a thorough filter. Instead of giving the trader a visually thin price level for support and resistance, the thicker cloud will tend to take the volatility of the currency markets into account. A break through the cloud and a subsequent move above or below it wll suggest a better and more probable trade. The cloud provides a sentiment as to which direction is price moving towards. If price is above kumo/cloud then the sentiment of the pair is bullish whereas if price is below the kumo/cloud then the sentiment of the pair is be Note: The Ichimoku kink hyo doesn’t work on all pairs; it’s most favored on JPY pairs. 57CAP Risk Management The most successful traders risk at the most 3% of their capital when trading. Beginners normally start with risking 1% of their capital when trading, It is advisable to never risk more than 10% of your total accounts capital (Maximum of 5 trades risking 1- 2% per trade) High Risk/Low Reward High Risk/ High Reward Low Risk/ High Reward Low Risk/ High Reward As you can n see this is a risk to reward quadrant. By the illustration within each quadrant, you can deduce that the optimal block is located at the bottom right which indicates low risk high reward scenario Managing your money is an important part for your sustainable success as a trader. When risking a certain amount you need to make a return of at least double that amount you initially risked. We call that a 1:2 risk to reward ratio, i.e. you risk 2% to gain 4%. When market conditions are ideal, clearly trending in a direction going for a 1:2 or 1:3 ratios could be very profitable, so now you are making more profit than what you risked. Le, risking 2% to make 4 %{ 1:2 risk to reward) or risking 2% to make 6% (1:3 risk to reward Position Si B Position sizing is setting the correct amount of units to buy or sell a currency pair. Position is the key to good and sound risk management. Before we get to the maths, we need the following informa 1. Account Balance 2. Percent of your account you wish to risk 3, Stop loss in pips 58ze CAPS Using your account balance and the percentage amount you wish to risk, + calculate the dollar amount risked: $5000 x 2% = $100 ‘Then use trial and error method to figure out which lot size you should take: 0.50 x 500 points (SOpips) = $250 --- More than 2% risk, too much. 0.10 x 500 points (50 pips) = $50 ---- 1% risk, too little 0.20 x 500 points (50 pips) = $100 --- 2% risk, perfect Enter the trade with 0.20 lots Where to place stop loss and take profit levels When going for a sell/ short position: i {ro — oe Wd We yf PW oy ” = For profit of 270 pps! 1:4 RR When you are about to take a short/sell position place your stop loss above the most recent high and your take profit levels - (gold line) at a previous support level/zone. 59Blue line - Entry ae Red line - Stop loss = For proft of 200 pips/ 1:3 RR. yh Ww ial i wh When you are about to take a long/buy position place your stop loss above the most recent low and your take profit levels - (gold line) at a previous resistance level/zone. Discipline Stick to your pre-determined risk comfort levels and in overall your profits will overpower your losses when all trades have a minimum of 1:2 - risk - to - reward ratio and winning rate is minimum of 50%.Trading Steps 1) Determine a trend, a direction to trade in: 2) Is the market making highs and new higher lows for a potential buy or is the market making lows and lower highs for a potential sell? 3) Support/Resistance: Has the market found support sitting on or over a previous low for a potential buy, or has the market found resistance on a previous high for a potential sell? 4) Determine if the potential trade price is on one of the key Fibonacci levels 5) Wait for candle stick confirmation/ signal to support your potential trade 6) Does the market have any technical patterns that might support your trade trend lines, false breakouts, Head and shoulders, Gartley, double/triple tops or bottoms 7) Does the market have any technical patterns that might obstruct your trade? Such as broken trend lines, false breakouts, Head and shoulders, Gartley, double/triple tops or bottoms that is now against you? WHEN ALL THE ABOVE STEPS HAVE BEEN CONSIDERED, YOU WILL BE IN A POSITION TO MAKE AN INFORMED DECISION WEATHER TO ENTER THE TRADE OR NOT. AT LEAST THREE OF THESE STEPS NEED TO BE IN YOUR FAVOR BEFORE CONSIDERING A TRADE. THE MORE CONFLUENCES YOU HAVE IN YOUR FAVO, THE GREATER THE PROBABILITY FACTOR OF YOUR TRADE SUCCEEDING Please also take note of the following steps 1) Follow proper risk management: refer to previous page 2) Keep an eye on the fundamentals on myfxbook.com, 3) Be Patient. Wait for proper setups to appear as per point 1 -6 on this list before considering taking a trade, Patience will be rewarded 61Advice for Successful Trading Develop trading discipline Determine position size: How large a position will you take for each trading strategy? Position size is half the equation for determining how much money is at stake in each trade. Decide where to enter the position: Exactly where will you try to open the desired position? Setting stop-loss and take-profit levels: Exactly where will you exit the position, both ifit’s a winning position and a losing position? Stop loss and take profit levels are the second half of the equation that determines how much money is at stake in each trade Developing a trading plan and sticking to it are the two main ingredients of trading discipline, the defining characteristic of successful trading, Traders whom follow a disciplined approach are the ones who survive year after year and market cycle after market cycle. They can even be wrong more than right and still make money because they follow a disciplined approach. The following sections explain a few principles of developing trading discipline. Take the emotion out of trading Don’t underestimate the power of emotions to distract and disrupt, because you can’t take all the emotion out of trading, the best you can hope to achieve is limit their impact on your trading Focus on the pips and not the dollars. Don’t be distracted by the exact amount of money won or lost ina trade, Instead focus on where prices are and how they're behaving. ‘Accept that you're going to lose in a fair number of trades. Taking losses is as much a part of the routine as taking profits, and you can still be successful over time. Don’t personalize what happens in the market. The market isn’t out to get you; it’s going to do what it does whether you involved in it or not. Interpret events professionally, just as you would the results of any business venture. Managing your expectations Balancing risk versus reward ‘Trading is all about taking on risk to generate profits. | would advise you to use a 2:1 risk/reward ratio, meaning that if you risk $100 on a trade, you should aim to make $200 to justify the risk. In that way you'll only need to be correct 50% of your trades and you'll still be making profit 62Keeping your ammunition dry ‘One of the biggest mistakes traders is known as overtrading. Overtrading typically refers to trading too often in the market or trading too many positions at once. Both forms suggest a lack of discipline ~ throwing handfuls of darts at a board and hoping one of them sticks. Keeping your ammunition dry refers to staying out of the market, watching and waiting and picking your trades more selectively. Using your margin collateral sparingly The margin you're required to post with your forex broker is the basis for all your trading. Holding losing open positions not only exposes you to market risk but can also cost you market opportunities. After you enter a position, your available margin is reduced, which in turn lowers the amount of available positions you can enter. If you're routinely involved in the market because you don’t want to miss out on the next big move, you actually run the risk of missing out on the next big move because you may not have enough available ‘margin to support a position for the big move ig a few opportunities — deliberately Don’t be afraid to miss out on some trade opportunities. No one ever catches all the moves. Instead focus on your market analysis and pinpoint the next well-defined trading, opportunity. (One advantage of trading less frequently is that your market outlook isn’t skewed by any of the emotional entanglements that come with open positions. If you ask a trader who is long on EUR/USD what he thinks of EUR/USD, surprise, surprise — he’s going to tell you he thinks it’s going up. That's called talking your book. But being out of the market, allows you to step back and analyze market developments with a fresh perspective. That’s when you can spot opportunities more clearly and develop an effective trade setup to exploit them. Making Time for Market Analysis The more regular your analysis, the greater the feel you'll develop for where the market has been and where it’s likely to go. Also, the more regularly you update yourself on the market, the less time it takes to stay up to speed. At the minimum, be prepared to devote at least one hour every day to looking at the market and keeping tabs on upcoming data and events. A routine for reliable market analysis includes: v Multiple time frame technical analysis, which enables you to recognize price channels Candlestick analysis after each daily and weekly close 63CAP! v + Reviewing market commentaries to stay in top of major themes and overall market sentiment. Managing the Trade The forex market isn’t a roulette wheel where you place your bets, watch the wheel spin, and simply take results. It’s a dynamic, fluid environment where new information and price developments create new opportunities and alter previous expectations. Actively managing a trade when you're in itis just as important as the decision making that went into entering the position in the first place. Monitoring the market No matter which trading style you follow, you want to keep up with the market news and price developments while your trade is still active. Unexpected news that impacts your position may come into the market at any time. v News and data developments: Ideally, you should be aware of all data reports and news events scheduled to occur during the anticipated time horizon of your trade. You should also have a good understanding of what the market is expecting in terms of event outcomes to anticipate how the market is likely to react. Additionally, if your trade rationale is reliant on certain data or event expectations, you need to be especially alert for upcoming reports. Increasing take profit targets Now that you have a well-developed trade strategy ahead of your trade, so now that you're in the trade, why would you change your take profit level? Only for some very good reason such as: v Major new information: Major meaning it has come from the echelons of decision making, like the FED chairman. The European Central Bank (ECB) president, or other central bank chiefs; the U.S. Treasury secretary; or the G7. Surprise interest rate changes or policy shifts are always candidates Thinner than usual liquidity: Reduced liquidity conditions can provoke more /e price movements than would otherwise occur, because fewer market Participants are involved to absorb the price shocks. Reduced liquidity is most evident during national holidays, seasonal periods (Christmas/New Years), the end of the month, the end of the quarter and certain Fridays. Breaks of major technical levels: Trend lines dating back several months or years, retracement levels of major recent directional moves, and recent extreme highs and lows are likely to trigger larger than normal price movements. 6av The currency pair: The more illiquid and volatile the currency pair you're trading the. greater the chances for an extreme move. GBP, CHF, and JPY are the most common culprits among the majors. Closing out The Trade On the most basic level, every trade ends with either a profit or a loss. Sure some trades finish flat, which is when you exit the trade at the same price you entered, producing no gain or loss. Most of the time, though, you're going to be dealing with the ‘agony or ecstasy of either being stopped out or taking profit Taking Profit Taking profit is usually a positive experience for traders. But if the market continues in the direction of your trade after you have squared up and taken profit, you may feel like you are missing out or losing money. At this time you want to, you want to avoid making rash decisions. Even if the market continues in to move in the direction of your earlier position, don’t reenter the same position until you have taken the time to reevaluate the market objectively. Also, avoid the urge to suddenly take a position in the opposite direction. “The key is to treat each trade independently, recognizing that the outcome of one trade has no bearing on the next trade. Here are some suggestions: v Take partial profits: One way to stay in the market with profitable position and hang on for potentially larger move is to take profits on the overall position. Taking partial profits requires the ability to trade multiple lots ~ at least two. The idea is that as price moves in your trading position, you take profit on just a portion of your total position. Whenever you take partial profits, modify the size of your stop loss and other take profit orders to account for the reduction in your total position size. Some brokers offer a positioned based order- entry system, where by your order size automatically adjusts based on any changes to the remaining open position. stop out before things get worse: Stop losses are a necessary evil for every trader, big or small. You can never know beforehand where a price movement will stop, but you can control where you exit the market if prices don’t move as you expect. Stop losses are an important tool for preventing manageable trading losses from turning into disastrous ones. v Let the market trigger your stop loss/take- profit: When you have identified a trade opportunity and developed a risk aware trading plan, you're going to have active orders out in the market to cover your position one way of the other (stop loss or take profit). Depending on your trading style and 65trading setup, you can reasonably follow a set-it-and-forget it trade strategy whereby your orders watch the market and your position for you. Medium- to longer-term traders are more likely to rely on set, or resting, market orders to cover open positions due to the longer time frame of such trade strategies and burdens of monitoring the market overnight or for longer stretches of time. If you use resting orders, also use rate alerts to update you on specific price movements so you may act when necessary. Shorter term traders are more apt to be in front of their trading monitor while their trade is still open, but they should always still have an ultimate set of orders (stop loss and take profit) to cover the trade. Although you may want to be flexible with where you leave your take profit order, always have a stop loss order in place to protect you in case of unexpected news or Price movements. If you are trading the market from the long side (meaning you think prices in a currency pair are likely to move higher), you need to pin point the ultimate price level on the downside, which negates this short term view. Analyzing after the trade Good traders learn from their mistakes and try avoiding repeating them by all means in their future. Bad traders don’t learn from their mistakes and keep repeating them over and over again until they give up in frustration or forced to for financial reasons (blowing your account). The best way to learn from each trading experience- both good and bad ones {although we choose to see them as educational rather than bad) is to make post trade analysis part of your regular trading routine. Identifying what you did right and wrong Regardless of the outcome of any trade, look back over the whole process to understand what you did right and wrong, In particular, ask yourself the following questions: 1. How did you identify the trading opportunity? If more of your trades are being generated by technical analysis, you'll probably want to devote more energy to that approach, for example. 2. How well did your trade plan work out? Was the position size sufficient to match the risk and reward scenarios, or was it too large or too small? Could you have entered at a better level? What tool might you have used to improve your entry timing? Was your take profit realistic or pie in the sky (emotionally based)? Use the answers to these questions to refine your position size, entry level, and order placement going forward. 3. How well did you manage the trade after it was open? Were you able to effectively monitor the market while your trade was active? 66Ea CAPS Did you modify your trade plan appropriately along the way? Did you close out the trade based on your trading plan? Or did the market surprise you somehow? Based on your answers, you'll discover what role your emotions may have played and how disciplined a trader you really are. Updating your trading record Recollections of individual trades may be hazy sometimes. Some traders may favor memory of winning trades, while others may remember only loosing trades, which is really a lot easier because of the emotional intensity of the two scenario’s. The only way to get to the heart of the matter is to look at the numbers- the results of your trades over a specific time period, such as a month. A trading record doesn’t lie, but you still have to interpret it properly to glean any useful lessons from it. Depending on your trading style, the best approach is to analyze your trading record from two different angles, which have a common denominator- average wins and average losses. Long term and medium term traders Tend to have fewer overall trades because they are more likely to look at the market from a more strategic perspective, picking trade opportunities more selectively. If that’s you, tally your results on a per trade basis, totaling up the number of winning trades and the number of losing trades, along with the amount of pips gained or lost (to examine strategy accuracy independent of position size), and cash profits and losses ( to account for position size and risk management). Divide the amount of profits by the number of winning trades to find your average winning trade amount. Do the same with the loosing trades. Short term traders Tend to have a larger number of trades due to their short term trading styles. if this is you, measure your results on a per day basis to get an idea of how successful you are at trading in multiple positions on any given day. Tally up the results of each trading day over the course of the month, total numbers of winning and losing trades, average pips gained or lost and average wins and loss amounts. 67REMEMBER 4Golden Rules Keep it simple Just do what the charts say you must do You not going to be right all the time The patient trader will be richly rewarded awn Focus on what you are doing right, but also figure out what you are doing wrong. Refine your analysis of your trading results by breaking them down to smaller categories, such as day of the week and currency pair or even trade size. Are your loosing days or trades concentrated on certain pairs of the week or certain currency pairs? Does the position size of every trade have any relationship to wins and losses? Your post trade analysis will only help you if you are diligent and honest about keeping it accurate and up to date. By faithfully monitoring your trading activity, you improve your skills, learn from your mistakes, and gain confidence in your market ability. Welcome to the Caps Family of Traders. 68Contact us Romeo Hadebe 82 Maud Road Sandton 2196 Johannesburg CAPS All money is a matter of belief Adam SmithTechnical Analysis Price Action Support and Resistance Support and resistance is one of the most widely used concepts in forex trading let's start with the basics As you can see in the diagram above the zigzag pattern was making its way down (bearish market), reversed and started moving up (bullish market). When price moves down and then pulls up, the lowest point is reached before it pulls up is now resistance. Many times you'll see a support or resistance level appears to be broken, but afterwards you'll notice price was just testing, With candlestick charts, these “tests” of support and, ze CAPS resistance are usually represented the “tails” of the candles. Notice how the tails of the candles tested the support level. At those times it seemed like price was “breaking” support, but we can see that price was just testing that level. So how do we know if support and resistance was broken? Unfortunately there is no definite answer to this question, some say that ’a support or resistance level is broken if the market closes past that certain level. However this is not always the case. Take a look at the example below see what happened when price closed below the level of support In this case price closed below the level of support but ended up rising back up above it. Looking at this chart, one can actually see and come to the conclusion that support was actually not broken; it's still valid and now even stronger. In order to help you filter out these false breakouts, its best to think of support and resistance more as “zones rather than solid numbers. Tidbits about forex support and resistance © When the price passes through resistance, that resistance could potentially become support. : + The more price tests a level of resistance or support without breaking it, the stronger the area of resistance or support is.ad ze CAP! © When a support or resistance level breaks, the strength of the follow-through move depends on how strongly the support or resistance had been holding, ; ised. Texnd man iret zs ‘Trend Lines ‘Trend lines are probably the most common form of technical analysis in forex trading. ‘They are probably one of the most underutilized ones as well. If drawn correctly, they can be as accurate as any other method. Unfortunately, most forex traders don’t draw them correctly or try to make the line fit the market instead of, the other way around. In their most basic form, an uptrend line is drawn along the bottom of easily identifiable support areas (valleys). In a downtrend, the trend line is drawn along the top of easily identifiable resistance areas (peaks).oe =e Sr”