50

shades of Forex

We are in social networks

 Content
Introduction ....................................................................................................... 4
Chapter 1. What You Didn’t Know About Forex ...................................... 5
Chapter 2. How It All Started . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Chapter 3. What Trading Was Like in the Past Century . . . . . . . . . . . . . . . . . . . . . . . . 16
Chapter 4. Beginner Traders’ Mistakes and How to Avoid Them . . . . . . . . . . 21
Chapter 5. Does Profit Depend on Discipline? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Chapter 6. Greed will be a trader’s doom! . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Chapter 7. What We Trade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
Chapter 8. When We Trade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
Chapter 9. Getting to Know Charts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
Chapter 10. Order Types . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
Chapter 11. What Position Types Exist and What Spread Is . . . . . . . . . . . . . . 62
Chapter 12. Bearish or Bullish . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67
Chapter 13. Market Analysis Methods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
Chapter 14. Support and Resistance Levels . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80
Chapter 15. Double Top and Double Bottom . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88
Chapter 16. Head & Shoulders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93
Chapter 17. Triangle . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98
Chapter 18. Wedge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103
Chapter 19. Flag and Pennant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 108
Chapter 20. The Outside Bar . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 114
Chapter 21. The Inside Bar . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 120
Chapter 22. Pin Bar . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125
Chapter 23. Fibonacci Levels . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 130
Chapter 24. The Bounce off Support and Resistance Levels . . . . . . . . . 136
Chapter 25. Level Breakout . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 142
 Content
Chapter 26. The 1-2-3 Pattern . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 148
Chapter 27. Moving Averages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 154
Chapter 28. Placing Stop Losses and Maintaining Positions . . . . . . . . . 160
Chapter 29. Margin Trading and Leverage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 166
Chapter 30. Maximum Risk and Position Calculation . . . . . . . . . . . . . . . . . . . . . . . 171
Chapter 31. Entertainment Math in Trading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 177
Chapter 32. What We Risk ......................................................................... 183
Chapter 33. How to Build a Trading Algorithm . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 188
Chapter 34. News Comes in Different Types . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 195
Chapter 35. Scalping . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 203
Chapter 36. A Brief Tour of the World’s Central Banks . . . . . . . . . . . . . . . . . 209
Chapter 37. Currency Interventions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 218
Chapter 38. Interest Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 224
Chapter 39. Indicators of the World’s Economic Situation . . . . . . . . . . . . . . 229
Chapter 40. The News That Matters for the Market ......................... 235
Chapter 41. How to Choose a Broker the Right Way ......................... 238
Chapter 42. Professional Aides in Trading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 242
Chapter 43. TIMA Service ........................................................................... 244
Chapter 44. Risk Manager . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 250
Chapter 45. Level Forecast Indicator . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 254
Chapter 46. Trader Diary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 259
Chapter 47. Algo Trading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 265
Chapter 48. What Investors Must Know . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 270
Chapter 49. Biographies of Successful Investors and Traders . . . . . . . 275
Chapter 50. Jokes About Trading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 283
 Introduction
By opening this book, every trader takes a step closer toward
achieving professional success. By reading this book to the end, he/
she will have acquired relevant knowledge which will reveal his/her
true speculator potential and future trading prospects.
In gathering information for this book, we tried to cover all aspects
of the Forex market: the history of its creation, trading strategies,
financial instruments, and modern services, reinforcing theory by
real-world cases and clear-cut chart visualizations.
The authors of this guide are experienced traders, each of whom
has traveled his/her own road towards becoming a Forex success
story, making their views respected and followed by both beginner
and professional traders.
The team at Gerchik & Co sincerely hopes that “50 shades of Forex”
will become a handbook for each trader who has come into the
market with serious intentions.

Time for quality Forex!

Sincerely, Gerchik & Co team.

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 Chapter 1. What You Didn’t Know
About Forex
The current global economic system operates through the various
financial markets, which, in addition to stock, commodity, futures,
and other stock exchanges, include the foreign exchange market.
Trading in the foreign exchange market allows not only for setting
the market exchange rates of various currencies against each other
by means of conversion operations but also for earning speculative
income through trading different currencies on margin trading
conditions whereby no actual delivery of the currency to the
counterparty takes place.
Five unbeatable advantages of Forex
1. Profit-making opportunities arising from trading are Forex’s
main advantage, which interests both traders and investors.
2. As trades are carried out in the OTC market, FOREX is not
inherently tied to a physical location, and any market participant can
make trades from any corner of the world where there is access to
the Internet and devices supporting trading terminals. The absence
of a single hub allows participants to make trades around the clock
for five days a week.
3. Cyclicality of trading sessions. It allows bidders to choose the
most convenient time interval in the trading day. Trades are made
alternately in the world’s major financial centers, such as Tokyo and
Singapore (Asian session), London (European session), and New
York, which closes the trading day.

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4. The high liquidity of the foreign exchange market, ensured by a
large number of participants and a huge volume of trades, allows
market participants to instantly locate counterparties for desired
amounts of currency, ensuring accessibility of the most competitive
prices.
5. The arbitrary volume of trades allows for equal participation in
the bidding by investors with any size of capital. The OTC foreign
exchange market has enough space for each investor, as the average
daily transactions volume amounts to $4-5 trillion and has quite a
strong tendency for further growth. In the early 1990s, the average
daily volume of trades in the market amounted to 1 trillion dollars,
but thanks to the development of computer technology and the

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advent of the internet, the volume of trades in the Forex market
increased several times after trading became accessible to a large
number of medium- and small-sized investors.

If you compare the average daily volumes of the FOREX market and the
stock exchange market, Forex has five times the world stock exchange
market’s $1 trillion average daily volume, says a survey carried out by
the Bank for International Settlements.

Forex’s building blocks

The general volume of the foreign exchange market can be broken
down the following way:
• Foreign exchange swaps. These make up approximately half of
the market’s volume.
• Spot operations. These make up over a third of the market and are
secured by real international economic transactions.
• Foreign exchange-based forward contracts and options. These and
other financial products represent the remainder of the turnover.
Most trades in Forex are dealing operations which facilitate
currency conversion without its physical delivery and allow investors
to receive speculative income from exchange rate differences.
Forex participants
The participants in the foreign exchange market make up quite an
extensive list:

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1. Central banks, which act as regulators of national currencies,
stepping into the market with currency interventions to ensure
cost-effective exchange rates of national currencies and the
replenishment of foreign exchange reserves. The main players in
this category are the Federal Reserve, the European Central Bank,
the Bank of England, the Bank of Japan, and the Swiss National Bank.
2. Large commercial banks, which conduct large volumes
of international trade, foreign exchange, deposit, and lending
operations and provide the bulk of investment. These banks play the
role of market makers in the foreign exchange market by providing
market participants with quotes for pricing. In this category, the
main actors are Deutsche Bank, Citi Group, Barclays Capital, UBS,
HSBC, JPMorgan, and Royal Bank of Scotland. They account for more
than half of all transactions in the foreign exchange market.
3. International companies, which take part in monetary and
financial relations and hence are always in need of large amounts
of different currencies, which they can buy at best prices from the
Forex market. Also, with the help of the Forex market, they hedge
the risks associated with currency fluctuations in the Forex market.
4. Institutional investors, which operate around the world and
likewise require large amounts of different currencies. The main
purpose of their participation in trading in the foreign exchange

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market is to hedge positions in their stocks and bonds portfolios,
although there are institutional investors with only currency
portfolios under management. Institutional investors account for
about 30% of trades in the foreign exchange market.
5. Brokers, which play the role of intermediaries between parties,
providing them with market quotes of currency pairs. This category
of market participants may also make independent trades with the
aim to profit from differences between exchange rates.
6. Private traders who invest in the foreign exchange market
their own funds to earn speculative income from exchange rate
fluctuations. Private traders account for about 5% of the Forex
market’s volume.

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 Despite differences between the purposes of various groups
participating in the foreign exchange market, their trading plans take
into account market sentiment and the various economic and political
factors in different time perspectives.

Forex trading instruments

As a means of trading instruments in the Forex market, participants
use currency pairs of the freely convertible currencies. Depending
on the demand for a currency in international trade, each currency
has a different market share. As the US dollar is the main global
currency, currency pairs with the dollar in them enjoy the most
popularity.
Approximately 30% of the market is represented by EUR/USD, 13%
by USD/JPY, 12% by GBP/USD, 6% by AUD/USD, 5% by USD/CHF, 4%
by USD/CAD, and 30% by other currency pairs.
The reason for the popularity of the FOREX market is that it is rather
easily accessible, in contrast with other financial markets. To work
in Forex, it is enough to have a computer connected to the Internet
and a minimum security deposit to cover the margin, the amount of
which depends on the investor’s investment plan, objectives, and
the trading conditions of the chosen Forex broker.

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 Chapter 2. How It All Started
The international Forex market started its development after the
collapse of the Bretton Woods monetary system and has won great
popularity among investors due to the emergence of the Internet.

The habitual FOREX title derives from the phrase «foreign exchange.»

Forex officially started operating in March 1973, when the Federal

Reserve decided to finally cancel the “gold standard” in the American
financial system and move on to a floating exchange rate, loosely
regulated by the OTC market.
Forex operates a trading system that has contributed to the
globalization of the world economic processes and is by far the
most successful example of the single monetary standard.
The emergence of a new foreign exchange system
The first successful application of the single monetary standard was
achieved by the Paris currency system in 1867, with gold as currency.
The countries participating in this system were able to establish a
«golden point» around which the exchange rates of participating
countries would fluctuate. Also, the standard identified the gold
content in these countries’ treasuries and assigned the British pound
sterling to be a reserve currency.

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 The First World War and the ensuing economic crisis forced the
countries to seek new ways of calculating exchange rates. The new
foreign exchange system was formalized at the Genoa International
Financial and Economic Conference in 1922. Gold was joined by the
British pound sterling and the US dollar. In the new system, these
two currencies were designated to be the exchange currencies, and
the system was titled the gold exchange system.
Established at the end of the Second World War in 1944, the Bretton
Woods currency system pursued the goal of early restoration of the
war-torn world economy, mainly in the European countries, with
the help of the Marshall Plan. Since the US economy was not only

12
not hurt by the war but also had seen its growth accelerate, and the
gold reserves of the United States accounted for 3/4 of the world
reserves, and so the US dollar was adopted as the financial system’s
reserve currency on a par with gold.
The Countries participating in the Bretton Woods agreement
established the nominal value of their national currencies in US
dollars, and the dollar became the main means of international
payments. Exchange rates of national currencies in the system
varied within 1% of the parity. Changes to the nominal exchange
rates of national currencies were adopted only with the approval of
the International Monetary Fund, created to maintain the stability
of the global financial system.
In signing the US Bretton Woods agreement, the US took the
responsibility to keep the price of gold in the range of 1% of the
approved cost of gold at $35 an ounce.

This rigid system of exchange rate regulation could not resist

inflationary processes, and the preset gold content of national
currencies could no longer match their purchasing power.

The pegging of the US dollar to the Bretton Woods «gold standard»

led to the depletion of the country’s gold reserves and a negative
balance of payments, which forced US President Richard Nixon
in 1971 to cancel the dollar’s to pegging to gold, which led to an
increase in foreign exchange rate volatility to 4.5%.

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The resulting floatation of national currencies made it necessary to
migrate to a new system of market exchange rates, which was done
in 1976. The creation of the new floating exchange rate system,
based on currency demand, occurred in Kingston, Jamaica, and
so the new system took the title of Jamaican currency system. The
main features of the Jamaican system were the abandonment of the
peg between gold and world currencies and the transition of gold
from the currency market to the commodity market.
The calculation of national currency exchange rates
The basis for the formation of new market exchange rate was the
specially created international payment document – SDR (Special
Drawing Rights) – issued by the IMF. The share in the special drawing
rights of each member country depends on its share in the IMF.
In the Jamaican system, national currencies can be pegged not
only to SDR but also to the currencies of other countries, or a “basket
of currencies.” Therefore, 16 countries chose SDR for a peg, 38
countries chose the US dollar, 13 countries chose the French franc,
and another 5 countries pegged their currencies to other currencies.
The economically closely tied member countries of the European
Community had from 1979 to 1998 used the ECU (European Currency
Unit) as its unit of settlements. In the future, the convergence of
European countries led to the creation of the EU and the introduction
of the single European currency – the euro.
The main achievement of the market-based floating exchange

14
rate regime is that now central banks no longer need to maintain
a fixed parity of the national currency and intervene in currency
markets. However, they have remained active players in the market
and, when economically feasible, do enter the market with currency
interventions to bring the national currency’s exchange rate to the
right level.
Positive roles in the stable development of the Forex market have
been played by the following factors:
• Participants’ need to constantly monitor changes in exchange
rates;
• Central banks’ ability to influence the value of the currency and
public policy, and
• High liquidity of the currencies, ensured by the continual
interaction of supply and demand.
Initially, trading in the Forex market was carried out according
to Reuters wire channels, which greatly limited the number
of participants. The development of personal computers and
telecommunication links allowed not only to increase by many times
the average daily turnover of the market but also to significantly
increase the number of participants, making the Forex market
accessible to every person today, regardless of his/her financial
capabilities.
Modern communication channels and powerful mobile gadgets
now allow traders to trade in the Forex market from virtually
anywhere in the world, which further increases the attractiveness of
investments in the foreign exchange market.

15
 Chapter 3. What Trading Was Like
in the Past Century
Today, trading is one of the best ways to make money, as it allows
you to earn serious income and gain financial freedom. This is one of
the few businesses in which one can control 90% of the risk.

Almost everyone can become a trader today. Trading and investing

are available for individuals with both personal and borrowed
funds. The entry threshold for investing has significantly declined
over the past 20 years.

But it hasn’t always been this way. Between 50 and 60 years ago,
exchange trading significantly differed from what it is now. Of course,
the principles of trading itself have remained virtually unchanged.
However, the speed of data transmission and the exchange value
have increased by several times.
A brief tour of history
Stock trading is rooted in regular markets and fairs. The similarity
is obvious to the naked eye. As with sellers in regular markets, who
cry out enticing messages about the quality of their goods, stock
brokers use similar methods to draw the attention of buyers and
sellers in the halls of modern exchanges.
The transition from the fair to the exchange, historians believe, took
place in Belgium in the XVI century. In the city of Bruges, merchants

16
began to gather on the square near the estate of the Van der Burse
family. Their emblem had three leather purses on it, so the locals
began to call the place Borsa (Exchange), which translates as “purse”.
A major first feature of exchange in those times was a lack of
physical goods and closing. The seller described the goods’ benefits
to the buyer, and if the latter agreed to buy, he made out an IOU
letter to the seller, stipulating an obligation to pay for the goods
upon receipt.
How traders traded before the advent of the Internet
At the beginning, the buyer and seller agreed on a price in person
during bargaining. After the price of the goods started to depend
on various economic factors, came the quotes, which were recorded
on conventional blackboards. For many years, the slate was the only
source of almost any price-related information.
With the opening of the first stock exchanges in London and New
York, traders began to make money from differences in the prices
of shares, bonds, and other securities. The trader in that time
represented the interests of a company or a private investor on the
stock floor. His task was to earn money for his clients. The pay of the
floor trader was the commission he charged on trade volumes.
As at that time there was no such thing as margin lending, trading
in the stock exchange was only available for wealthy individuals
with sufficient funds to carry out trades.

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 In parallel with the exchange floor came into existence another
place in which merchants worked: the sidewalk outside the stock
exchange. There gathered company share speculators who had
stopped short of making it to the stock exchange floor. Traders
learned quotations from the man who shouted them out from a
window. We must give credit to “sidewalk” traders, as they worked
in any weather: heat, rain, or snowstorm.
The technical revolution in trading
It all started with the emergence of the telegraph, which greatly
accelerated the transfer of not only personal but also corporate
messages and quotes. The market acquired different dynamics.
Stock traders got themselves a new assistant: the tick machine,
which operated through telegraph connection, marking quotes on
a special tape.

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 Traders equipped with personal tick machines towered head and
shoulders above the rest of their colleagues, as the tick machine allowed
the luxury of being the first to get information, which created inequality
in the stock exchange.

The technological revolution brought a lot of changes to the stock

exchange as the quoting board replaced the slate and the Quatron
terminal replaced the tick machine in the early 70s. Since then,
trading began to take on the features recognizable to a modern-
day trader.
With the advent of the Internet and margin lending in the 80s,
access to trading increased many times over. However, it still was
only available to wealthy people, because leverage was not so great,
and Internet technologies were not yet sufficiently developed.
Trading nowadays
The trading of today is one of the affordable and convenient
types of business. The entry threshold has dropped hundreds
of times, mainly due to increased leverage and reduced risk. In
order to trade, one no longer needs to be physically present on
the exchange floor, working instead from home using a special
terminal.
More than 30% of US citizens trade at the Stock Exchange, getting
extra income and reducing the negative impact of inflation on
their savings.

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 The stock exchange has become even more accessible and
convenient, but by these measures it still doesn’t come close to the
Forex market. The Forex market also uses terminals, including the
popular Meta Trader, and provides enough liquidity so that one can
always buy and sell any amount of currency at the current price.
This opens up vast earning opportunities. Anyone with access to
the network and a minimum deposit can engage in Forex trading.
Trading today does not compare to stock trading 50 years ago. The
technologies, volumes, and features are all dramatically different.
The only thing that remains the same is trading rules and money
management. If complied with, they can bring traders massive
revenues.

20
 Chapter 4. Beginner Traders’ Mistakes
and How to Avoid Them
All successful traders were once beginners. Many of them have
left behind a few lost deposits and dozens of scribbled notebooks,
which they used for taking notes in the trading process. However,
this isn’t all that unites them. The main thing that does is that all of
them have made mistakes on their path to success.

Most of these errors are fairly typical. They are the proverbial rake that
the trader steps on and gets hit by in the face and yet steps on again
numerous times. Every trader has had their share of rake-walking,
despite differences in strategies and uniqueness of trading algoriths.

Top 10 mistakes by beginner traders

Even knowing the common mistakes, traders do not manage to
fully avoid them. Something always keeps traders from avoiding
these mistakes, whether it be lack of experience or a fit of emotions,
which incidentally is the main enemy of successful Forex trading.
Basic mistakes by a novice trader:
1. Excessive arrogance;
2. Lack of a trading system;
3. Greed, hope, and fear;
4. Urge to win back losses here and now;
5. Trading against the market;

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6. Entering transactions without analysis;
7. Opening orders based on price momentum;
8. Using too much trading volume;
9. Putting heavy weight on the deposit;
10. Ignoring Stop Loss and Take Profit levels.
Every wrong move has a nature of its own. Knowing this nature will
help avoid repeating mistakes and facilitate excellent performance
in the future.
Trader’s overconfidence
After reading several books, such as the ones about technical
and fundamental analysis, the novice speculator starts to think he
knows and understands the market. Moreover, if he/she learned the
material well, his first results on a demo account confirm it. However,
problems arise when the trader decides to use real capital.

The psychological burden associated with trading from a demo

account is much lighter than when trading for real. Because of this, the
trader starts doing foolish things which will certainly lead to the loss of
an entire deposit or at least a part of it.

To avoid making this error in your trading, you need to take a long
time to practice with a demo account. As soon as you begin to get
stable results regardless of the market conditions, you can proceed
to real-world trading.

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 Lack of consistency in trading
The second most common reason for mistakes is lack of a systemic
component in trading, which translates to lack of any analysis of
one’s actions in the market. This leads to where the trader cannot see
the shortcomings of his/her trading system and is therefore unable
to eliminate them. Eventually, this leads to sad consequences in the
form of financial losses and psychological trauma.
It is necessary to keep a trader diary, recording in it the details of
every trading step. At what time the order was open, at what price
the trader had planned to enter and at what price he/she actually
did, where the profit and loss fixing levels were, with what result
the trade was closed, what the swap and spread were, and so on.

23
Subsequently, the diary will help the trader detect the wrongful
move that caused the loss and avoid repeating it.
Greed, hope, and fear
To succumb to emotions is another mistake. Emotions are the
main enemy of a trader. Greed is one of them. Greed is what makes
a speculator delay the closing of a profitable trade when it is
necessary to close it. As a result, all profit melts away, followed by
swelling losses.
After that, greed becomes hope, another negative emotion in
trading. Hope does not allow the trader to fix a loss, feeding him/
her the illusion that the price is about to make a turn for the better,
which never happens.
Fear does not allow the trader to take profits. He/she closes the
trade by hand, without waiting for the price to reach the level of
take profit, although nothing suggests that the price will not make
its way to it.
You can’t get rid of emotions completely, but you can reduce their
impact to a minimum by using a trading algorithm that spells out
everything: from trading rules to the steps to be taken in unforeseen
situations. Strict adherence to the algorithm eliminates the influence
of emotions on the trading process. Of course, the trader needs to
exercise discipline, which is something that comes with experience.
The urge to win back losses here and now
After losing a trade, beginner traders who lack discipline and a

24
coherent plan of trading immediately try to enter the market in the
opposite direction, wanting to make up for the lost money. Such
actions violate virtually all of the rules of doing business. Because
of this, the losses only swell out of proportion, the trader gets a
nervous breakdown and, driven by emotions, blows out the entire
deposit.
A legitimate exit requires following one’s trading plan and
complying with all the rules of risk management. In one trade, you
should be risking no more than 1-2% of your deposit.
Trading against the market
Almost every tutorial for novice traders says that trading against
the trend carries a lot of risks but that newcomers will still fall into
this trap. Of course, any trend comes to an end, but only experienced
speculators know exactly when it will happen. Beginners are often
mistaken, taking serious losses as a result.
Entering a trade without analyzing the market
Opening trades without prior analysis of the market is bad practice,
because there are factors that can dramatically change the direction
of the graph, such as the release of important economic data. So,
before you start searching for signals to enter the market, you must
look at the economic calendar. In addition, it is necessary to carry
out technical analysis.
Compulsive order opening
Often, newcomers enter positions based only on sharp, one-sided

25
price momentum. This again breaches the rules of trading and in 8
cases out of 10 ends in a loss. Avoid making this mistake.
Trading high volumes
Entering a trade by a trading volume that is too large relative to the
deposit is often explained by the trader’s desire to recoup losses.
One mistake leads to another.
Entering with a large volume, you put what may turn out to be
unbearable pressure on your deposit, which, as a result, may not
even be able to withstand a corrective movement, not to mention
a long-term drawdown. As soon as your capital ceases to meet your
broker’s margin requirements, the trade will have to be shut down
with a huge loss.

26
Putting heavy pressure on the deposit
If you don’t have a large deposit, then you shouldn’t be using large
trading volumes for the reason mentioned above. Further, trading
with small capital has limitations by the number of open positions:
no more than one or two at a time.

The optimal lot range for deposits between $500 and $1,000 is
between 0.01 and 0.1.

Ignoring Stop Loss and Take Profit levels

Failing to set T/P and S/L levels is a huge folly, which sooner or
later will end in the zeroing out of your deposit.
Using them is very important if you want to succeed in trading.
Please observe the correct ratio between Take Profit and Stop-Loss.
It should be at least 3:1 or 2:1. In this case, one profitable trade will
not only cover the loss but also take you into positive territory.
Becoming a successful trader is not as easy as numerous
advertising banners flooding the internet want us to believe. A
successful trader is a person who has been through the school of
hard knocks, some of which have cost him/her dearly. It takes a few
years of continuous learning and practice, but this path is definitely
worth taking. After all, the result is financial independence and the
ability to do what you like.

27
 Chapter 5. Does Profit Depend
on Discipline?
Everyone knows that, to be successful in the Forex market, the
trader should be highly disciplined. For those wanting to become
wealthy, the first step is to develop self-discipline.
The trader’s ability to organize his/her trading session, which
ultimately affects the results, often depends on how seriously
the trader approaches the trading process. Of course, much also
depends on the skills possessed by each individual trader. However,
we know that the chances of making a profit, even for the most
capable trader, will be negligible if he/she lacks discipline.
For traders, especially for beginner traders, discipline is the most
sensitive issue, although some traders blame all their problems
on bad trading strategies. After giving it some thought, it turns
out that the main problem is lack of discipline.
Why does this happen? To answer this question, you need to ask
yourself why you have decided to engage in Forex trading in the
first place.
Some of the most common reasons include:
• Ability to make a quick profit;
• Ability to work without depending on anyone;
• Ability to choose the most convenient time for work;
• Ability to work from home.

28
 These reasons are what most people name, this being what they
have seen from advertising on the internet and television.
Advertising, of course, is the engine of commerce, but we know
that it reveals only the positive side of things. If bright headlines
and engaging commercials are any guide, trading is considered an
easy profession in which serious concepts such as discipline have no
place. That is precisely why people wishing to become traders are the
ones that dream about living freely and independently. This is why
when pitfalls arise during trading they strike traders as bad surprises.
To deal with them, traders need motivation and self-discipline.
That is precisely why between five and at most ten percent of
traders earn in the Forex market, while others lose their money.

29
This is because a large percentage of newcomers arriving in the
Forex market wish to make easy money without having to write up
and follow a tight, routine plan and engage in the serious practical
and theoretical study at each step.

Essentially, success in Forex comes only to those able to correctly

organize their own learning and their workday routine as traders.

Above all, discipline is a strict compliance with your own trading

plan, which is compiled for the duration of the trading period. The
adherence to the rules of the chosen trading system should be
unconditional. Any changes to the plan must be perceived as a
serious deviation from the previously drawn-up plan of action.
You can draft a plan for just one day, a specific trading session, or a
week, if you plan on trading mid-term. However, events may go different
ways, so the plan should spell out how you will act in every case.
Discipline and profit: how do they relate?
The market only rewards disciplined traders. By following the rules
of the chosen trading system, it is possible to maximize profits
while minimizing risks. It’s better than stepping away from the plan,
increasing the risk, and suffering a total loss of deposit.
We know that discipline is directly linked to the quality of trading.
Examples abound. Suppose that, before opening a position, the

30
trader has already determined at what level he/she will need to fix
losses. To fix losses at the desired level, he/she uses a stop-loss by
placing it into a specific location. It seems everything will be fine if
things begin to go sour on the trader, because when the price has
reached the specified take-loss level, the order will be triggered,
and losses will be fixed.
But, watching the market and seeing that the price is going the
wrong way, the trader may think that the stop-loss has been placed
too close, and that this seemingly adverse movement is just a
correction. He/she may start thinking that the price will for sure
make a turnaround soon, and so he/she may decide to move the
stop loss a little further away. Contrary to his/her expectations, the

31
price does make its way to the stop loss and triggers it, the only
difference being that the trader takes a loss that can be several
times as great as previously planned.
How to get your trading in order?
The first thing you need to make sure to do is to prioritize your
actions. To do this, you need to create your own trading strategy
and let it be very simple, for starters. In addition to all this, you need
to write a trading algorithm and stick to your daily schedule.
It is not necessary to spend all day trading, practicing and learning.
Many traders combine trading with other kinds of employment.
However, if you have planned your market analysis session for the
period between 9 and 9:30 a.m., then it is necessary to do it at the
specified time.
You may wonder why all of this is necessary. Why drive yourself
into any strict limits? After all, you are the master of your time and
can spend it as you please.
The matter is that the notion of “convenience” is rather broad. In
this case, the most difficult thing to do is to find the time in which to
do market analysis, identify points of entry, and draft a plan for the
next trading day.
The usual excuse is “today I simply had no time.” As a result, the trader
begins to trade in the market completely unprepared. In this case,
the trading is not thought out, and the trader can make compulsive

32
decisions, based mainly on emotions, rather than analysis.
There are many examples of actions that illustrate the need for self-
organization during work:
• Determining the timing of the most important headlines, as they
signal the most likely occurrence of significant market rallies. Thus
way, we can gather rather important information about when to
look out for movements in currency pair prices.
• Preparing a trading plan for the next day.
• Analyzing the previous day’s trading.
• Keeping a trader diary.
• Analyzing the effectiveness of the trading system used at a
particular time.
• Preparing a plan for improvement of the trading system and taking
relevant actions.
Thanks to the strict observance of all of the above rules and
principles, you can become a successful and disciplined trader. After
all, without discipline, it is impossible to make significant progress,
not only in trading but also in any other field.

33
 Chapter 6. Greed will be
a trader’s doom!
The psychology of the Forex market is considered to be the key
to understanding all of the things that happen in the market. In
trading, all human emotions display themselves every day, and the
proudest of them are fear and greed. Furthermore, in many cases,
they play a major role in the effectiveness of a trader.
Trader psychology works in a way that ensures that the slowest,
greediest, weakest, and most self-confident individuals will be
the first to meet with failure. To avoid this, a trader needs to start
working on himself/herself. You just have to get used to the idea
that the key role in the market belongs to psychology.
By knowing your abilities, strengths, and weaknesses, you can avoid
being dropped from the market. If in addition to all of the above,
if a trader is able to make an adequate evaluation of the crowd’s
emotional state, regardless of the events taking place in the market,
he/she can be sure to soon get to the top five percent of traders who
really make money in the Forex market.
To become a successful trader, you must first select the right
market instruments and a trading system. What is also of critical
importance is the mental attitude and the “right” emotions. If you
don’t follow the rules of psychology, then emotions will directly
influence your trading process, and you will lose your money.

34
 Fear
In trading, fear is the feeling that makes traders pause before
taking risky actions. Clearly, a reasonable degree of fear is
necessary for survival. However, fear can swell into a debilitating
emotion and interfere with healthy decision making activities.
During intraday trading, the main fear is the fear of making the
wrong trade and taking substantial financial losses. This fear is
rational, because there are no traders who want to lose their own
money. But it often turns into an irrational feeling, if it prevents a
trader from starting to take the right actions. For instance, a trader
who has taken a loss will in the future be wary of making a trade
despite its potential to be successful and cover the previously
incurred losses.

35
 If the trader lets fear take control of his/her mind, he/she will again
meet with failure, even when the chances at making a profit are good.
In this case, the only cure for fear is to realize that losing trades are
impossible to avoid.

Greed
This emotion is interesting from the perspective of trading and is a
complete opposite of fear. Greed often causes traders to perform a
variety of actions, many of which are unlikely to be carried out under
normal conditions. Naturally, if greed is present within reasonable
limits, then it is absolutely necessary as a powerful motivator.
However, if greed exceeds reasonable limits, traders often begin
to take inconsistent and incorrect actions, leading to unpleasant
consequences. In intraday trading, greed can often provoke traders
to conduct chaotic trading or hold open positions for much longer
than necessary, despite the trading system sending correct signals.
Suppose the price is starting to go up as the trader watches the
market. He/she may give in to the urge to start trading despite
knowing that under this scenario the right strategy is to keep
waiting. This way, the trader lets the usual sense of greed take
control, resulting in a losing trade.
Greed is not an inherent flaw and can be overcome by staying
loyal to your own trading system. Have the discipline to follow all

36
the signals of your trading strategy, and you will make a profit
with a much greater likelihood than if you jump to making trades
at the slightest price movement.
How emotions and trading quality relate
To overcome the negative effects of greed, fear, and other negative
emotions in a trader, the trader must constantly work to improve
his/her psycho-emotional behavior and thereby evolve and become
more efficient.
The two most important personality traits of any trader are
discipline and patience. An excellent test of their presence in a
trader is the aftermath of an unsuccessful trade. During this time,
the trader is just waiting for the emergence of the next opportune
moment to open a new trade.
It is no secret that, during this time, traders are especially impatient,
restless, and have a tendency to look for points of entry where there
are none, in order to win back the lost money as soon as possible.
In this emotional state, novice traders often try to trade without
taking into account the rules of their own trading strategies. As soon
as this happens, they start piling up losses one after another. This
continues until the trader becomes aware of his/her actions and
begins to adjust them.
Discipline and patience are vital components, and every trader
must make them his/her main personality traits. If a person is
patient, he/she will wait for a new trade opening signal without

37
looking back at the trades that are done, no matter how successfully
they ended.
If a trader has enough discipline, he/she will begin to act as soon
as he/she sees an entry point that matches his/her trading strategy.
For some traders, the very idea of taking losses makes these traders
disciplined and patient, while others give in to strong emotions and
have to go through these powerful emotions to start changing their
personalities.
Experienced traders point out two most efficient ways to develop
self-discipline:
1. Keeping a trader diary. At the end of a day, month or week, it is
necessary to analyze all trades conducted to find errors and causes
of failed trades.
2. Absolute confidence that the chosen trading system is right.
Through the realization that by using a particular system you can
get a stable result, you will be able to overcome the various negative
emotions that recur after a failed trade.
The only way to gain sufficient confidence in your own trading
system and its features is to test it out in advance. If a trader has been
testing the chosen strategy for a long enough time, and if all the
time the results have been positive, the trader will have no reason
to doubt the future profitability of this strategy and will acquire the
confidence required for successful trading in the future.

38
 Chapter 7. What We Trade
Knowledge of the history of Forex gives a clear idea of what the
gold standard is, what the Bretton Woods system was created for,
and why economies around the world abandoned the gold standard
and switched to floating exchange rate regimes. By knowing the
theory, a trader may put major trading instruments to practical use.
One of these instruments is a currency pair.
Currency pairs: what they are and what they are made of
Conversion operations in the Forex market are conducted through
sales and purchases of currencies included in currency pairs. Each
currency pair has a base currency and a quote currency. In currency
pairs involving the US dollar, it is the base currency.
Initially, the British pound sterling was considered the main
currency of operations in the foreign exchange market. Trading was
at that time conducted using telegraphic communication channels,
so traders to this day refer to the pound as “cable.”
World War II made certain adjustments to the post-war economic
system, and currency priorities shifted. The US dollar replaced the
British pound as the main means of international settlements. This is
why, in the Forex market, the dollar was chosen as the base currency.
Types of Forex quotes
A currency quote is the real-time value of an exchange rate. Forex
has three major types of quotes: direct, inverse, and indirect.

39
1. Direct quote: the price of a currency is expressed in the US dollar,
which is in the denominator.

2. Inverse quote: shows the value of the US dollar in terms of the

quote currency. In this case, the USD will be in the numerator.

3. Indirect quote: is used in the calculation of the unit value of a

national currency in foreign currency.
In the notation adopted in the Forex market, the currency on the
left side of the quotation indicates the base currency, and the one

40
on the right side indicates the quote currency. For instance, in the
pair GBP/USD, the pound is the base currency and the dollar is the
quote currency.
The most popular currency pairs in the Forex market are the pairs
that contain the dollar in conjunction with one of the following
currencies: euro, Japanese yen, pound sterling, Swiss franc,
Australian dollar, Canadian dollar, and New Zealand dollar. These
pairs are considered essential and called majors, as the total volume
of trading in them represents nearly 75% of the Forex market
turnover.
Any profession has its jargon, and trading is no exception. Traders
use peculiar nicknames for some of the currencies traded:
• British pound: cable, sterling;
• Swiss franc: Chief, Swissy;
• Australian dollar: Aussie;
• New Zealand dollar: Kiwi;
• Canadian dollar: Loonie or Canadian.
Cross rate: the concept and its practical applications
A cross rate is the ratio between two national currencies tied to
one another through their exchange rates against a third currency,
usually the US dollar. In this case, the market sets an average rate
between the two currencies that form the cross pair, for instance:
• euro/pound (EUR/GBP)
• euro/yen (EUR/JPY)
• pound/yen (GBP/JPY)

41
 Said pairs are the most widespread in the Forex market. The size
of spread in popular cross pairs is greater than in majors, but that
does not strongly affect the results of speculative trading.

There are other currency pairs that contain one of majors and a
currency from less developed economies. Such pairs are called
exotic. Trading in these pairs is associated with significant costs
expressed in the value of the spread. Exotic pairs include US dollar/
Mexican peso, Norwegian krone/Japanese yen, and Canadian
dollar/Czech Koruna.
Quote types and lot calculation
Whether the quote is direct or inverse plays a significant role in
the calculation of a lot. In direct quotes where the US dollar is in
the denominator, for instance in the pairs EUR/USD or GBP/USD, the
value of one pip for a standard lot is $10. In inverse quotes, the pip
value will depend on the value of the quote currency.
In standard Forex quotes, the price in currency pairs is indicated

42
with the accuracy of one ten-thousandth, although there are quotes
with up to 5 decimal places.
The Forex features of commodity currencies
Commodity currencies require a special trading approach. Such
currencies include the national currencies of the countries whose
economies are heavily dependent on commodity exports.
The typical commodity currencies include the Canadian dollar,
Australian dollar, and New Zealand dollar. Trading in commodity
currencies requires more accurate fundamental and technical
analyses of commodity markets, as the movement of a commodity
pair depends on the value of a good and the relevant industry’s
performance indicators.
For instance, the Canadian dollar is highly dependent on world oil
price. The cost of this currency is directly correlated with oil prices.
Since Canada exports oil to the US, the world’s largest petroleum
consumer, the currency pair US dollar/Canadian dollar falls when
the oil price rises.

43
 Gold prices greatly affect the Australian dollar, as gold represents
a considerable portion of a nation’s export structure. Australia has
placed third in the world by gold production.

The pair Australian dollar/US dollar and gold prices almost always go
in the same direction. In the period from 1999 to 2008, the positive
correlation between the Australian dollar and gold reached 84.
The New Zealand dollar is also a commodity currency but
depends on a lot of different products, so the pair New Zealand
dollar/US dollar index and the CRB Index of commodity markets
are practically the same.

Currency pairs are a direct Forex trading instrument. Knowing

its features, formation methods, and action mechanisms will help
a trader be more efficient and successful.

44
 Chapter 8. When We Trade
A trading session is the time of operation of foreign exchange
platforms located in different geographical areas. In the Forex
market, there are three main trading sessions: Tokyo, London, and
New York, each of which has its differences in operating schedule
and in trading mechanisms.
The uniform opening indicator for all trading zones, regardless of
geographic location, is Greenwich Mean Time:
1. Tokyo session. This session opens the trading day. It opens at
midnight GMT or at 8 am Tokyo time.
2. London session. It opens at 7 am, an hour before the closure of
the Tokyo session. The London trading session lasts eight hours,
as does the Tokyo session.
3. New York session. It opens two hours before the closure of the
London session, or at 1 pm GMT, and closes at 9 pm.
In the time between the closure of the New York session and
the opening of the Tokyo session, opens the Sydney session, but
because activity at this time is negligible, this session is not taken
into account and is considered a transition between the two larger
sessions.
The Tokyo session
The Tokyo session, aka the Asian session, is the first session to open
the trading day and week, so the start of the Asian open is sometimes
marked by violent spikes in prices. For the rest of the Tokyo session,
the price moves in a rather sluggish way, except when important
economic news breaks out.

45
 At the time of the headlines releases, which mainly occur in early
trading, market activity intensifies, but by midday the situation
stabilizes again. Corrections that often occur in the Tokyo session
stabilize prices following the oversells or overbuys of the earlier
sessions. According to statistics, every day about 20% of all trades
in the foreign exchange market take place during the Tokyo session.
The Tokyo session’s major participants are commercial traders,
which generate a much larger trading volume than during any
other session. This is because the financial markets of the largest
exports- and commodity-oriented countries such as China, Japan
and Australia operate at this time.

46
 The most active currency pairs during the Tokyo session are
those involving the region’s currencies. These currencies are the
Japanese yen, Australian dollar, New Zealand dollar, and others.

The London session

The Tokyo session pours itself smoothly into the London session, as
the European markets open an hour before the close of the Tokyo
session. The London session combines all trading sessions of the
European financial centers, so it is also referred to as the European
session.
Institutional participants such as banks, insurance companies,
hedge funds, and others are what generate the bulk of activity
during this session. Because the majority of the world’s largest
banks are based in Europe, the London session hosts many huge
trades, which cause powerful movements in the market, from which
traders try to benefit.
The most active currency pairs in the London trading are those
containing European currencies such as the euro, pound sterling,
Swiss franc, and others.
The London session, owing to its location halfway from Tokyo to
New York, is the most important and the most volatile session. Over
a third of all Forex trades occur during the London session.
Halfway into the trading session, market activity subsides as market
participants go out for lunch and wait for the New York session to
open. The New York open coincides with Europe’s last trading hours.

47
 The New York session
The New York trading session is of critical importance for the
reasons that the US economy is the world’s largest, and its
currency facilitates 80% of all foreign exchange market trades.
The New York session is also referred to as the American session,
as the time of its operation coincides with that of the majority of
the financial markets in North and South America.
Early in the New York session takes place the release of key
economic data to which the markets respond actively, as these
data reflect the changes in the world’s largest economy. At the time
the headlines break out, both American and European traders are
taking place in the trading.
Price movements in the second half of the NY session become less
pronounced, as at that time only American players are participating.
Because the headlines are already out, market volatility at this time
declines, in most cases.
The most active currency pairs are those containing the US dollar,
Canadian dollar, and other local currencies.
Optimal Forex trading times
First, the trader should be aware that he/she should only make
trades when the market sends clear signals corresponding to his/
her trading strategy. If the market does not signal a point of entry,
you need to refrain from trading and wait for the situation to
become more suitable.

48
 In order to trade profitably, we must look for the moments at
which volatility and participants’ activity are rather high.
According to statistics, the most active trading days are
Wednesday, Thursday and Friday, because this is when the
release of important economic data takes place. Accordingly,
on Monday and Tuesday the market is relatively weak, and you
have to be careful not to lose money. When choosing a currency
pair, pay attention to the currencies it contains and to when these
currencies experience the most substantial movements. This will
aid in successful trading and in being efficient in any of the three
major trading sessions.

49
 Chapter 9. Getting to Know Charts
To analyze price action, traders use various types of charts, such as
line chart, bar chart, candlestick chart, tick chart, Renko chart, and
Kagi chart, of which the most popular are the first three.
What a chart is and why a trader needs it
There are several types of traders, who differ by how they forecast
prices in the currency market. Some traders use fundamental
indicators, some use market sentiment, and some technical
analysis.
Regardless of the methods used, all traders have the same point
of contact. They all use charts to determine by how much price
movement had changed in the past under the influence of different
factors. Traders predicting future movements with the help of
technical analysis are most heavily reliant on the historical price
charts of financial instruments, as these traders believe that prices
always move in certain specific patterns.
The charts themselves are plotted in two dimensions: price
and time. Prices are plotted on the vertical axis and time on the
horizontal. The time interval required to plot a chart is called
timeframe or trading period. The majority of popular terminals
offer the following timeframe options: one-minute, five-minute,
fifteen-minute, thirty-minute, one-hour, four-hour, one-day, one-
week, and one-month frames.

50
 Line chart

In financial markets, the line chart is in most cases constructed

by drawing straight lines across the closing prices of each trading
period. This means only one price for a particular time period is used
in the construction of this chart, while ignoring the rest of price
movements in that period.
Other ways to construct a line chart may only use the opening
price, the maximum or minimum price, or the average price for
the period. Relative to other chart types, the line chart looks more
smoothed out, as it only takes into account one price over a certain
time period.

51
 The main drawback of the line chart is that it is rather
uninformative. It leaves out crucial price movement information
for certain time periods. When using the line chart, we cannot tell
how the price behaved in that period, as we only see the closing
price. This means that for instance if the price first demonstrated
significant growth and then fell back to the closing level of the
previous period, the line chart would tell us that no change in prices
took place in that period.
The main advantage of the line chart, according to traders, is that
it can be used to more accurately determine the direction of a trend
and identify technical analysis patterns.
Bar chart

The bar chart is more informative than the line chart. This chart
type is also called OHLC, standing for Open, High, Low, and Close.
It consists of vertical bars, each containing information on the
opening price, maximum price, minimum price, and the closing
price for each individual period.

52
The dash on the left side of the column represents the bar’s opening
price, while the right-hand side dash represents the bar’s closing
price. The upper end of the bar shows the maximum price, while the
lower end the minimum price. The distance between the lower end
of the bar and the top of it indicates the range of price movement
over the period of the bar’s formation.
The bar chart gives us full information on all price changes that
occurred in the past. The main flaw of the bar chart is that it is
rather hard to read when cluttered with numerous tiny bars.
Bar charts are perfect for situations when we need to identify
support and resistance levels from which the price can change
direction.
Candlestick chart
The candlestick chart is similar to the bar chart in lots of ways.
Like the bar chart, the candlestick chart shows all the significant

53
changes in the price for that time period but has the additional
advantage of being much easier to read, identify price direction,
and see where a specific candlestick opened and closed.

The distance between the opening and closing of the candlestick is

called the body of the candlestick. The body shows us the magnitude
and direction of price movement. Depending on the direction of
price movement, the body may take on one of two colors.

54
• White or green: the candlestick’s opening price is below its closing price;
• Black or red: the candlestick’s opening price is higher than its
closing price.
The candlestick’s parts located above and below the body are
called shadows or wicks. The tip of the shadow at the top of the
candlestick represents the maximum price for the time period, while
the tip of the shadow at the bottom of the candlestick represents
the minimum that the price reached during the period of the
candlestick’s formation.

Thanks to the candlesticks’ ability to change color depending

on price direction, candlestick charts are the easiest to read and
most informative in comparison with other chart types.

By analyzing the three different chart types, it is rather easy to

understand what information they convey and where and when
each type is best used.

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 Chapter 10. Order Types
An order is a request or application that a trader sends to his/her
broker to make a trade to buy or sell a financial instrument in the
market.
For the broker to execute the trader’s request, it must specify the:
• Financial instrument planned for trading;
• Method of entering a trade;
• Desired price at which to execute the order;
• Desired amount of position.
By execution method, orders fall into two types:
• Market orders, executed at the current market price;
• Pending orders, the execution of which is deferred until the time
the price reaches a certain level.
A market order is an order to buy or sell one currency for another
at the best price available on the market at the current time. When
sending this order, all the trader has to do is choose the currency
pair and volume, choose the time of entering the trade, and press
the Buy button for a buy trade or the Sell button for a sell trade.
After that, the order is sent to the broker and executed automatically
in a few seconds. If during the sending of the order the market price
changes, the order is not executed, and the trader is offered new
prices instead. This is called re-quoting. To avoid re-quotes, the
trader can use the terminal’s function called “maximum deviation

56
from the asking price.” Here you can specify the number of pips for
a deviation from the asking price the trader is willing to accept.
The second way to enter a trade is to use pending orders. As we can
see from the title, these orders are placed in advance, and the trader
waits for the price to reach the level at which he/she has placed the
order to open a position. After the desired price level is reached, the
pending order becomes a market order and is executed immediately
at the new price. There are two types of pending orders: stop
orders and limit orders.
Stop order

Stop orders are used to open positions at prices that are worse
than the current market price level. They are used in cases where
it is expected that after passing a certain price level the price will
continue to move in the same direction.

57
 Suppose the pair EUR/USD is trading at 1.3480 and we expect that
after it passes the level 1.3500 the price will continue its upward
movement. To open a trade, we can wait for the price to approach
this mark and send a market buy order, but we don’t know how long
we have to wait. Therefore, in such cases we use stop orders, which
greatly simplify our work as traders. If we place a buy stop order
at the level of 1.3501 and the price reaches this level, our pending
order is automatically triggered and executed at the new current
market price.
Similar actions can be taken when we want to open a sell trade
below the current price. In this case, we place a sell stop order at
a level below the current price and wait for the price to get there.
When it does, the sell stop order is executed at the market price.
Limit order

A limit order is the other type of a pending order. Limit orders are
used in cases when the trader wants to open a trade at a better
price than the currently available.

Suppose the market price went down, but the trader did not have
time to open a sell trade at a desirable price. The trader may still do
it if there is a certain price retracement and the price goes back up.
In order that we may open a trade during retracement, we need to
either continuously monitor price movements and enter the market
by a market order or place a sell limit order at the level where we

58
want to open a trade. If the price approaches our pending order, it will
be triggered and we will have opened a sell trade at the market price.
This plan of action is good when the trader wants to open a buy
trade at the price better than the currently available. In this case, the
trader places a buy limit order below the current market price and
expects to open a trade.
Limit orders are by nature used to enter the market after a price
retracement or when trading a level bounce.

59
 The main drawback of limit orders is that the price does not always
reach the level of our limit order, continuing instead to move in the
old direction. But if our strategy requires that we open the trade at
a certain level, then we have to follow it no matter what, and it’s
perfectly normal that the price may not reach the pending order
level in some cases.
Orders executed for open trades
This group of orders includes the stop loss, trailing stop, and
take profit.
A stop loss is an order that automatically closes our losing trades
at a level where we place it. Traders use the stop loss order to protect
their accounts from excessive losses in case of price movement
against the position. The stop loss can be placed immediately when
sending a request to open a trade or after the trade is opened. When
opening a sell trade, the stop loss should be placed above the entry
point. When opening a buy trade, the stop loss should be placed
below the price at which you entered the market.
A trailing stop is also a stop loss order, with the only difference
that, when the price moves in the expected direction, the order
follows the price at a distance that the trader indicated when
placing it. Suppose you open a buy trade for the price of 1.3500
and place a trailing stop at a distance of 30 pips. When the pair has
reached the 1.3510 price, your stop loss will move ten pips higher to

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the level of 1.3480. The trailing stop is set after opening a position or
after placing a pending order.
A take profit is an order by which traders fix profits. When
the price level of the take profit is reached, the broker will
automatically close the position. This order is generally used to
just close profitable positions. When opening a buy position, the
take profit is placed for the price that is higher than the opening
price. When opening a sell trade, the take profit is placed below the
trade’s opening price.
When placing a pending order, the trader has the ability to set the
time of its expiry, that is, to specify until when the order is relevant.
After that time, the order is automatically canceled.
Ever order type has its features and placement methods, which
define when and where orders should be used.

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 Chapter 11. What Position Types
Exist and What Spread Is
Currency trades in the Forex market come with two price tags
attached to them: the price of demand by buyers and the price of
supply by sellers.
In the Forex market terminology, the demand price in terms of
foreign exchange quotes is called Bid, while the supply price is
called Ask. When you want to open a buy trade, you send a request
that will be executed at the most favorable ask price.
Sell trades are opened at the best available demand price, which is
a bid price. The most common Forex trading terminal Meta Trade 4
displays the ask and bid of a currency quote in the “Market Watch”
window.
In the classical market quote notation, the Bid price is indicated
first and the Ask second. Thus, if we take the most popular currency
pair EUR/USD with the prices 1.3777 and 1.3780, the first of these
prices is the bid price, at which we can open a sell trade to get $100
for EUR 137.70. The second price is the ask price, at which we can
open a buy trade to get EUR 100 euro for $137.80.
Long and short positions
As with the stock market, in the Forex market, all buy positions
are called long, and all sell positions short.
The difference between the ask and bid prices in a currency quote

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is called spread and represents the interest of the broker providing
the quotes to market participants.
Any open position in the Forex market should be closed by an
opposite trade or by the physical delivery of the purchased currency.
Thus, if a trader bought euros for US dollars at the price of 1.3700 and
after some time closed the trade by selling euros and getting back
dollars at the price of 1.3800, his/her profit will be 100 pips. If the
trade is closed at the price of 1.3650, the trader will take a loss of 50
pips. Fixed profits from closed positions are credited to the trader’s

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account. On the other hand, losses resulting from trades are debited
from the trader’s account in favor of other market participants.
Spread: features and types
As a commission for providing services to traders, the broker is paid
a reward in the form of spread from each trade. For the EUR/USD
pair with the 1.3800/1.3803 quotes, the size of spread is 3 pips. Since
in the pair euro/dollar, the European currency is the base currency,
the value of a pip in this pair will be expressed in the quote currency,
i.e. the US dollar. That is, in dollars, the 3-pip spread translates to 3
cents per every 100 euros.
In currency pairs where the base currency is the US dollar, the
value of one pip will depend on the value of the quote currency. For
instance, in the pair dollar/franc, the value of a pip depends on the
value of the Swiss franc. The value of a pip obtained in this case will
be automatically converted into the currency of your deposit.

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 A currency spread is a significant portion of the costs associated
with making trades in the Forex market, so most traders aspire to
choose a broker and a currency pair with the least spread.

The size of the spread depends on the chosen currency pair and
the broker. Each broker offers its own terms of providing access
to trading in the Forex market. The main part of these terms is
the spread, the size of which the broker establishes based on
competition and liquidity of the currency pairs offered for trading.
When choosing a currency pair, it’s noteworthy that the narrowest
spread comes the most popular currency pair EUR/USD. The next-
best spreads come with the pairs GBP/USD, USD/CHF, and USD/JPY.
Currency spreads in cross pairs in most cases are greater than 5
or even 10 pips. Some of the less frequently traded exotic currency
crosses come with 150-pip spreads at times.
The modern pricing technology in the Forex market has allowed it to
migrate from fixed to floating spreads, enabling market participants
to get market prices with fairly narrow spreads, which in some cases
can be reduced to zero.
Obtaining prices with floating spreads is enabled by the trading
technologies ECN and NDD, operating with little or no intervention
on the part of the broker. For a Forex broker to be able to earn from

65
rades with a floating spread, its size is increased by the size of the
broker’s commission per an open trade, but this commission is
several times less than a fixed spread.
The release of important news makes the size of the floating spread
change in the direction of its increase, which is the main drawback
of the floating spread. The size of the spread’s expansion also depends
on the specific trading terms put forward by the Forex broker.
In regular times, that is, for most of the trading session, the value
of the floating spread is maintained at a minimum level, and many
traders choose this type of spread to minimize their trading costs.
By the pricing method, the floating spread can be categorized as
the interbank spread. In a quote, the spread is expressed in up to
five decimal points.

A fixed spread is always preserved within the dimensions put

forward by the broker. As a rule, the fixed spread is wider than
its floating counterpart, but the size of the costs associated with
each trade is known in advance, which can be an important factor
in capital management and trading results prediction.

Most brokers offer their customers various trading terms,

depending on whether the spread is fixed or floating. This is why a
trader may choose the terms that best suit his/her trading system.

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 Chapter 12. Bearish or Bullish…
A trend is a purpose-based movement of prices on the chart in a

particular direction. This means that the price gradually increases

or decreases under the influence of buyers or sellers for some time.

One of the fundamental economic principles declares that, when

the market demand exceeds supply, the price of goods increases,

and vice versa, when supply exceeds demand, the price drops.

The foreign exchange market operates on the same principle.

The availability of a trend tells us in what direction the bulk of the

money in the market is moving and what kind of sentiment prevails

among participants. In order to take advantage of this information,

the trader should take sides with the stronger market players, which

currently dictate their conditions. Identifying a trend and trading

in the direction of its development will increase your chances of

successful trading.

Types of trend

Trends are distinguished by the time of formation and the

direction of movement. On the charts below, you may see a few of

the common types of trend:

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 • Ascending or bullish trend. A bullish trend has a pronounced
upward slope. In a bullish trend, prices rise under pressure from
buyers. The word bullish derives from the way bulls attack their
enemies from the bottom up in a bid to stick them on their horns.

• Descending or bearish trend. The chart shows how the price fell
under pressure from sellers, called bears as their actions resemble those
of an attacking bear, which slams his paws on its prey from top down.

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• Sideways trend or flat. This type of trend emerges when the market
has no clear-cut direction, that is, when the price is moving along a
horizontal corridor.

Trends are categorized as long-term, medium-term and

short-term.
Long-term trends last from several months to several years. To
identify them, traders use daily, weekly, and monthly charts. The
formation of such trends is largely affected by fundamentals, such
as the state of the economy, interest rates, and central bank policies.
Long-term trends are made up of shorter medium-term trends.
Medium-term trends last between a few days and a few weeks.
They are formed under the influence of intermediate fundamentals
which reflect the dynamics of a nation’s economic conditions.
Medium-term trends are made up of short-term trends.
Short-term trends last between one and several trading days. This

69
kind of trend is volatile, and its duration depends on the current
news and the sentiment of market participants. Short-term trends
tend to quickly replace each other.
Trend identification
How to identify a trend that currently prevails in the market?
As an example, we can look at a chart showing an ascending trend
with clearly visible local highs being above preceding highs, and with
lows, reached after price retracement, being above previous lows.
Trend line drawing rules
Trend lines are drawn by connecting at least two consecutive
extreme points. The greater is the number of points through which
we can draw a trend line, the stronger the resulting trend. We must
understand that trends are not always built with a ruler and that
sometimes there are cases when the price for a little while goes
beyond the trend line, but in the end it comes back and continues
its previous motion.
The chart shows that after an increase in the price, small corrections
can occur. These retracements are telling us that market demand is
falling, and that buyers are taking profits. After these corrections,
buyers return to the market, and the price moves to new highs. This
is the way all trends are formed.
A trader should also note some features of the trends that help

70
determine their strength and shape the further development of
the market’s movement. One of such features is the degree of a
trend’s inclination. The steeper is the trend, the stronger it is, but the
probability of a reversal in these situations is much higher than usual.
A long and low-pitched trend has a greater chance of continuing its
movement, as opposed to a steep trend. Despite the fact that over
time each trend weakens, the likelihood of continuation is always
higher than the probability of a reversal.
If we draw a line through local highs in parallel to the trend line,
we will get a price channel. In some cases, the price goes out of the
channel but eventually goes back into it.
Now that we know how to identify a trend and draw trend lines,
we need to learn how to determine the end of a trend on the chart.
A trend reversal is a price movement below the trend line, but
because there often appear false breakouts of the trend line, there

71
is another rule that allows for telling with greater accuracy when a
certain trend ended.
According to this rule, when the price in an uptrend falls below
the last local high, the trend is thought to have been replaced by a
downtrend. The situation is similar with a downward trend, but in this
case the price should break out of the last local high and go higher.
There is another signal that can serve as confirmation of trend
reversal: a price bounce from the trend line after its breakout. When
the price has bounced from the trend line, we can talk about the
end of the previous trend.
Trading rules applied when there is trend movement in the market
Every beginner trader should remember that the least risky and
more secure trading is trading in the direction of a trend. This means
that if a trader is planning to open a position, he/she must first

72
determine where the trend is headed. You can then search for the
right time to open a position.
A good signal for trade entry is a retracement towards the trend
line, as well as a breakout of a high in an uptrend and a breakout of a
low in a downtrend. To confirm the signal, you can use support and
resistance levels, chart patterns, and other patterns.
There are also times when it is not necessary to enter a trade in the
direction of the trend. Such situations arise when the price reaches
important levels of support or resistance on larger time frames, as
at these points the trend may reverse or a trade-through may start,
which may last long. In such cases, you should wait for a breakout
of the level.
Trading against the trend is extremely risky, as the trader cannot
know exactly when the reversal will start. Therefore, when the
trend reaches its new highs or lows, we must never open trades at
these points, as movement can continue in the same direction. You
can open trades against the trend only if the price has broken the
trend line, and the trend reversal has been confirmed.
The trend and its direction are what define one’s trading strategy
most of the time, so a trader must understand charts showing
trends, to correctly predict buyer and seller sentiment.

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 Chapter 13. Market Analysis Methods
Earning profits in the Forex market would be impossible without
analyzing current market conditions and identifying trends in
different time periods. Therefore, traders use a variety of tools and
methods for fundamental and technical analysis to predict future
market price changes.

In order to make an educated analysis of the market, the trader should

study the factors that affect changes in market conditions and the
formation of new trends in a given currency pair.

In order to form their outlook on the market, traders use:

• Fundamental analysis to study economic outlook;
• Technical analysis to predict future price movements based on
historical price changes.
Traders can also combine these two approaches in their work.
Fundamental analysis allows you to define the development
trends of the various markets using fundamental economic and
political factors. The goal of fundamental analysis of the Forex
market is the determination of fair exchange rates that would
match the market’s general state with maximum accuracy.
The most expedient use of fundamental analysis methods is to
apply them to long-term strategies. In the short term, fundamental
methods do not allow us to determine optimal points of entry

74
into the market. At the same time, the analysis of changes in basic
economic indicators can help identify long-term trends in the early
stages of their development.
The factors taken into account by fundamental analysis are:
• Economic indicators;
• Central bank policies;
• Speeches by heads of the central banks, the IMF, and governments;
• Political events affecting a country’s economy;
• Environmental disasters and natural calamities.
All economic indicators describing the state of the global and
national economies and their individual sectors fall into several
major groups:
• Economic growth indicators;
• Leading indicators;
• Other indicators.
The National Bureau of Economic Research and international
institutions regularly publish the values of different economic
indicators of different nations, releasing the new data annually,
quarterly, and monthly.
The most important indicators of economic growth are gross
national product (GNP), gross domestic product (GDP), industrial
production index, and the PMI index.
Leading indicators indexes reflect the general economic outlook.
Their growth leads to an increase in the national currency. Important

75
leading indicators are first-time jobless claims, commodity prices
index, and consumer confidence index.
Without a doubt, an important factor for national currencies is
inflation indicators. This category of economic indicators includes
consumer price index (CPI), producer price index, and retail sales.
The main indicators of consumer activity are the volume of issued
consumer credit, personal income, and personal spending.
PMI numbers are published by various leading research institutes
and the National Bureau of Economic Research.
Fundamentals factors have two life cycles with certain components:
• Short-term cycle. This group includes daily economic news that
affect the market for a few trading sessions, causing movement in
the currency pairs in shorter timeframes.
• Long-term cycle. This group is influenced by important
macroeconomic and political news, which can be both anticipated,
or planned, and unanticipated, or random.
Unlike fundamental analysis, technical analysis does not address
the causes of changes in the market situation but rather analyzes
only current price movements using historical patterns.
Technical analysis
Technical analysis is based on the assumptions that every action
by market participants has an impact on the market price and that
changes in the market price can be predicted using various chart
patterns, lines and indicators.

76
Technical analysis allows for getting an informative picture of the
market, based on the analysis of current and previous price charts.

The application of technical analysis in trading is based on three

major axioms:
1. Price takes into account all of the information arriving in the
market;
2. Price movement occurs in the form of trends;
3. History repeats itself.
There are several major groups of technical analysis tools, which
allow us to accurately find the best moments for making trades in
various periods of time:
• Trend lines and support and resistance levels;
• Chart models;
• Candlestick patterns;
• Technical analysis indicators;
• Wave-based technical analysis.
The use of lines to identify trends and levels of support and
resistance is one of the most clear-cut and easily interpretable
analysis methods, so it is applied by almost every trader.
The analysis of the direction and inclination of trend lines allows
for identifying points of trend acceleration and deceleration, trend
reversal, and correction termination. Support and resistance levels
allow for identifying the points of price consolidation trend reversal

77
on a chart. Both a bounce from a target level, constructed using
lines, and a breakout of it can signal an opportune moment for
position opening.
Chart models of technical analysis allow traders to confirm a trend
reversal or trend continuation. The most famous chart patterns of
technical analysis are the flag, pennant, triangle, head and shoulders,
double top, and double bottom.
The purpose of chart analysis is to construct price movement
channels using trend lines and support and resistance levels.
Candlestick patterns have originated in Japan and are based on
a combination of several candlesticks. The majority of traders use
candlesticks because they provide much more information for
market analysis than line graphs and bar charts.
The best-known candlestick patterns are models such as Doji, three
soldiers, bullish and bearish engulfing, hammer, hangman, and
many others.

Technical analysis indicators, like chart patterns, provide

opportunities to identify trends, corrections, price reversal points,
and points of trend acceleration and deceleration.

Indicators used by traders in their work fall into three types:

• Trend-following indicators;
• Oscillators;
• Specific indicators designed to identify various correlations and
market sentiment.

78
 Modern-day indicators are calculated using computer programs
embedded in the majority of trading terminals. These indicators are
displayed as graphs or histograms.
Along with fundamental and technical analyses, there exists an
intuitive approach.
Intuitive approach
The intuitive approach cannot really be called a method for the
analysis of markets, as it is based on subjective psychological
factors. This approach to market analysis is hard to quantify
and hence hard to trace the dynamics of. Traders who base their
trading on this approach sooner or later lose their trading deposits,
as they do not follow clear-cut strategies telling them how to act in
certain market situations. This method of analysis is based solely on
emotion and cannot possibly be of any use to a trader, unlike the
proven methods of fundamental and technical analyses.

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 Chapter 14. Support and
Resistance Levels
By looking at the graph of the movement of any market-based
instruments, including currency pairs, you can find a lot of places in
which a lot of peaks and valleys accumulate. These are located on
approximately the same line. Such locations on the chart are called
support and resistance levels.
The price moves in parallel to these horizontal lines, from one to
another, breaking out of or bouncing from these lines. Due to the
great interest in the market and the struggle between buyers and
sellers, flats may form in the locations of support and resistance levels.
After a flat is formed, the market trend reverses or a momentum
takes place in the direction of the existing trend.

When the current market price is located above the horizontal

straight line drawn on the chart, this line is called a support level.

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 Thus, after a breakout the level does not disappear but changes its
function: a support in a bear market turns into a resistance and vice
versa, in a bull market, a punched resistance becomes a support.
Depending on the number of times the price approaches a level, it
can be strong or weak. The more times the price touches the level,
the stronger it is and so the chances increase that it will not be
broken but that the price after approaching it will turn around and
go in the opposite direction.
Plotting support and resistance lines
The line of a support or resistance level can already be drawn
across two points, but it is desirable to have more touches. It is also
important to remember that levels will sooner or later be broken
no matter how strong they are. The more times the price has tested
a level and the smaller the movements that have occurred after
bounces, the more likely it is that in the end the level will be broken.
The larger the timeframe in which a support or resistance level
formed, the greater the impact that it will have on the future price
movement, and the more often traders will take into account its
position on the chart in their trading decisions.
Therefore, when the price approaches a strong level, the struggle
between supply and demand intensifies by several times, which
greatly improves the liquidity of the market and turns the support

81
and resistance levels into good position opening locations.
The need to open and close trades based on support and resistance
levels indicates foremost that the price of an instrument always moves
from level to level and that they always play the role of important
psychological levels for the majority of market participants.
Since trends and corrections are present in any time period,
support and resistance levels can be found in any timeframe,
but special importance should be attached to the lines marked
in older timeframes, as they attract the attention of almost all
traders. For instance, on the monthly and weekly charts, strong
support and resistance levels will be relevant for market makers and
large financial institutions.

Example. Support and resistance levels on a EUR/USD chart.

This is easy to see if we consider the important support and
resistance levels on a monthly chart of the euro/dollar pair. On it,

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we can clearly see that important changes in the global euro/dollar
exchange rate occurred near strong levels or formed them. Near the
mark of 0.8500, we can see how at the lows of a fall a level was formed
after the price approached it and bounced off it several times.
Following the resumption of growth, the price broke the level near
the 0.9600 mark, took hold above it and continued to rise to the
level of 1.085. A bit lower, the price made a trade-through and went
up to the 1.185 mark, forming a level from which the price then
bounced several times. After turning around, the price dropped to
the previous level, from which it bounced and resumed the upward
movement to the 1.2925 mark.
Here a level formed from which the price then changed its
movement’s direction several times. After that, the price again
made a retracement to the previous level and resumed the upward
movement to the 1.37 mark, marking the end of the first wave
of growth in the euro/dollar pair. As we can see, this growth was
followed by a stronger retracement, which also stopped at 1.185.
After enduring this fall, the price resumed growth to the levels
formed by the previous highs near which after some trade-through
the price punched them and continued the upward movement.
This growth met with some resistance at the approach to the 1.4950
mark, near which battles took place later on between buyers and
sellers who confirmed this level.

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 After breaking that mark, the price reached its maximum, creating
a level near the 1.6000 mark. At this time, the world economy was hit
by the financial crunch. Fleeing from it, investors poured their funds
into the dollar as a safe haven currency. Therefore, the currency pair
euro/dollar started making a rapid fall.
Further, it is clearly visible that the price continued to fluctuate
within the previous levels. Now the US and EU economies are in a
post-crisis state, so in the long run the euro/dollar pair is in a flat.
The resulting support and resistance levels have become important
targets for central banks, which conduct monetary policy in the
resulting price zones to contain the exchange rate of the pair in the
corridor that is optimal for international trade.
Despite the common rules for building support and resistance
levels, each trader constructs them from his/her subjective
perspective, as each trader has his/her own way of identifying
the spots across which to draw a level. The greater the number
of matching views of market participants, the higher the chances
that this is going to be where the new level will emerge or the old
one will get confirmation.
This is precisely why the resulting support and resistance levels
are considered to be zones rather than precisely drawn lines.
Charts clearly show that level breakouts can be true or false. False
breakouts are those followed by the price’s failure to take hold

84
beyond the level and by the price’s retracement. They occur because
major market players, while picking up a large position, chase the
stops of small market participants. After a level breakout, rather
strong price movements take place in the breakout’s direction. After
the breakout, the price at times comes back to the level to test it
for durability. This can happen both immediately after the breakout
and after a while.
Also, often there are cases where the price, while testing, stops
short of the desired level and forms a new one. The main reason
that this happens is the struggle between bulls and bears that place
their pending orders and option barriers here.
Support and resistance levels: market analysis
Despite clarity of perception, market analysis using support and
resistance levels can be called true art.
When the price comes close to the relevant support or resistance
level, the following market situation scenarios become possible:
• The market may get a boost to continue movement during
breakout;
• The market may find a point of price equilibrium and enter a
sideways range – a flat;
• After reaching the level, the price may turn around to go the
opposite way.
This happens because market participants are always evaluating

85
whether the achieved price matches the current market situation.
During a resistance level breakout in a bull market and when the
price is reaching a new peak, buyers are beginning to evaluate the
extent to which the new prices match the current market situation,
and some bulls are starting to close trades. Sellers always try to take
advantage of this type of situation by attempting short selling.
If the momentum of the bullish movement is weak, a retracement
occurs and the durability testing of the level takes place. If the bulls
are confident in their strength, the market continues to grow toward
the next resistance level.
In a descending market, the situation is reversed: bears after
breaking the support evaluate the depth of the new lows, while the
bulls try to develop a correction by buying after the breakout of the
support.
Various economic news and fundamental analysis data generate
the additional momentum for the breakout of support and resistance
levels, while triggered pending orders and stops placed beyond the
level stimulate new movement.
In their work, traders use support levels with the aim to:
• Place buy limit orders slightly above the level;
• Close open sell orders by take profit when the price approaches
the level from top down;
• Place a stop loss for open buy positions underneath the level;

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 • Place sell stop orders beyond the level to open new sell trades
after the breakout of a support level.
Traders use resistance levels in order to:
• Place sell limit orders when prices approach the level from bottom up;
• Close open buy orders near the level by take profit;
• Place a stop loss for open positions to make a sell slightly above
the level;
• Place buy stop orders beyond the level to open new buy trades
after the breakout of resistance.

Support and resistance levels are closely related to price action,

which is why traders pay close attention to them: to make an
unbiased evaluation and analysis of a current market situation.

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 Chapter 15. Double Top and
Double Bottom
The patterns Double Top and Double Bottom are reversal patterns,
as they signal the end of the previous trend and the start of an
opposite trend. Therefore, this chart pattern is formed at the highs
of an uptrend and the lows of a downtrend.
Double Top
The appearance of this pattern on the chart is the result of a
significant upward movement in prices, which shows the buyers’
prevailing power.
The first peak of the pattern represents the maximum of an upward
trend. It is followed by a retracement and a local low. This local low
tells us that at this level there are buyers who expect the uptrend to
continue and are not letting the price fall.
Renewed buyer activity stimulates price growth, but during the

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approach to the price level near the first top, buyers meet with
resistance from sellers. This results in the formation of the second peak.
In the classical description of this chart pattern, the two tops are at
the same level, but in reality this type of alignment does not always
occur. Sometimes, the second peak may exceed the first or vice
versa, fall short of it.

After the buyers use up their resources, the sellers begin to put
pressure and lower the price to a local minimum, which was formed
after the first top. If at this level the sellers manage to overpower the
buyers again, the price will fall below the local low, which will signal
a final reversal of the trend.
Double Bottom
This chart pattern is formed after the same principle as the
Double Top, the only difference being that it indicates the end of a
downtrend.
After a long downtrend, the price reaches its minimum after which
it starts to rise. This way, a local maximum is formed at which sellers

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are beginning to show that they still have power, with the result that
consumers retreat and the price continues to fall.

But during the approach to the price level of the first bottom,
another battle takes place in which buyers protect their positions
and go on the offensive. The price rises and approaches the level
of a local high. If the price breaks this level, we can tell with high
probability that there was a reversal from the downtrend to an
uptrend.
In order to determine the potential price movement after the
price’s departure from the graphical model Double Top, you have
to measure the distance from the higher of the two peaks to the
local low. According to the experience of many traders, the price
movement potential in most cases equals this distance. Therefore,
traders are using this law as a rule for placing take profits.
In the same way, we can calculate the price movement potential

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after the breakout of the resistance level in the Double Bottom
model. In this case, we measure the distance from the lows to the
local high between them.
Entry points: how to open positions and where to place a stop loss
There are several ways to open a position during the formation of
the patterns Double Top and Double Bottom.
There are three major ways to open a position when a Double Top
emerges:
1. After the price reaches the Double Top and a trade-through near
the level occurs. This entry method is the most risky, as we open
the trade at a time that the Double Top has not yet been formed.
However, we can still make a profit, which will be much greater than
when opening a position using other methods. In this case, the stop
loss is placed slightly above the tallest peak.

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2. After the model has finally formed and open a position after the
candlestick that broke the local low closes below the support line.
Despite the entry point being much lower than in the previous case,
the stop loss is also placed beyond the tallest peak.
3. After the price has tested the resistance level, which used to be
a support level before the local high of the Double Top pattern was
broken. In this case, the stop loss is set beyond the level of resistance,
slightly above this retracement.
In the case of a Double Bottom, we use the same trade-opening
methods but in the opposite direction.

Understanding how the chart patterns Double Top and Double

Bottom are formed enables a trader to clearly understand the
methods for entering trades and the rules for identifying price
movement potential after the pattern’s confirmation.

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 Chapter 16. Head & Shoulders
“Head & Shoulders” is one of the chart patterns indicating a
trend reversal. H&S appears on the chart after a long upward price
movement. There is also a bullish version of this model, which
occurs at the end of a downward trend and is called inverted H&S.
The H&S pattern is massively popular among traders, as it is one of
the most reliable chart formations. This model signals a slowing in
the previous trend and the beginning of a new, and opposite, trend.
Identifying this pattern on the chart is rather simple.
The H&S pattern consists of three successive peaks, with the middle
peak being the tallest and the two side peaks a bit shorter. The first
peak is formed as a regular retracement in an uptrend. The price
reaches a new high and makes a retracement.
After that, there is another motion, which under pressure from
buyers exceeds the first peak. This peak must be the highest point
of the uptrend. After reaching the high, the price begins to fall and
forms the second bottom on the chart. At the level of the second
bottom, buyers are activated again and begin to dictate their terms
in the market, which results in the price starting to rise and reaching
a local high, somewhat lower than the previous high. This last peak
in the pattern is considered its second shoulder.
In the classic case of the H&S pattern, shoulders should be located

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on approximately the same level and at approximately the same
distance from the head. However, this last rule is not required. H&S
will be considered fully formed only when it breaks through the
so-called neckline. In order to identify it on the chart, we need to
draw a line across the previous lows reached by the price after the
first and second tops or the left shoulder and head. The neckline
can be both horizontal and sloped upwards or downwards. In order
that we can speak of a trend reversal, the price after reaching the
third peak must fall and break through the neckline, which acts as a
support level.
How to trade Head & Shoulders
When the third peak of H&S emerges on the chart, we can see how
the price will behave during its approach to the neckline. If the price
breaks the neckline, we must wait for the candlestick to close below
this level. Then we can look for points at which to open sell trades.
When we open a trade, we should place a stop loss a bit above

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the top of the right shoulder. In order to determine the potential
downward movement, we need to measure the vertical distance
from the highest point of the head to the neck line. This will be our
expected potential price reduction.
There is another way to open a sell trade after identifying the H&S
model on the chart. This method is a second chance for those who
did not manage to open a trade immediately after the closing of the
puncturing candlestick and a drop in the price.
In some cases, after the price falls and goes a certain distance to
the downside, a retracement can occur from the neckline, which,
since the breakout, has gone from being a support to being a
resistance. If the price cannot go higher and begins to bounce from
the neckline, we can open a sell trade and place a stop-loss a bit
above this retracement beyond the neckline’s boundary.
Inverted Head & Shoulders
Inverted H&S is a reversal pattern, which appears on the chart at
the end of a long downtrend. The formation of inverted head and
shoulders begins with the right shoulder, followed by a retracement
and a continued fall in prices below this bottom. As a result of
the fall, the downtrend reaches its final bottom, followed by price
growth and the formation of the head.

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 This growth happens as market participants close their sell
positions and open long positions. But after some growth, sellers
are still hoping for a further price reduction and believe that what’s
happening in the market is just a correctional movement and that
a further drop should occur. They begin to lower the price until
they meet with a strong rebuff from the buyers, followed by a price
increase. When we have seen that the price begins to rise again, we
need to determine at what point the inverted head and shoulders
will be considered fully formed. To do this, we draw a line across
local highs located on both sides of the inverted head.
When the price breaks the neckline from the bottom up and is fixed
above this level, we can speak of a trend reversal and the beginning
of an uptrend. We place a stop loss slightly below the right shoulder,
and calculate the price movement potential, as with the previous
case, by measuring the distance from the head to the neckline.

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 The second way of opening a long position can be by entering
during a retracement of the price to the neckline after an upward
movement. In this situation, the neckline will be the level of support.
According to the rules of stop loss placement, the stop loss should be
slightly below the level of the neck from which the price has bounced.

By knowing the formation principles of the pattern Head &

Shoulders and its inverted copy, a trader can correctly interpret
its emergence on a chart and understand which position opening
signals it gives and which steps to take in trading if the pattern is
confirmed.

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 Chapter 17. Triangle
The Triangle is a price movement continuation pattern. Depending
on the direction of the previous trend and the formation method,
the Triangle may be either bullish or bearish. There are three types
of Triangles: ascending, descending and symmetrical.
How the Ascending Triangle is formed
The formation of the Ascending Triangle on the chart is preceded
by bullish price movement. The Triangle is considered to be the
right Triangle, if during its formation the price bounced from the
resistance level at least two times.
Through these highs, we can draw a horizontal line. We also need
to understand that the price does not have to touch that line but
that it should approach it close enough. The bottom line of the
Ascending Triangle is constructed from local lows that follow price
retracements from the resistance level.

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This line must pass at least two local lows, which must be at a distance
from each other. If at least one of the subsequent lows is below the
preceding low, this Ascending Triangle pattern is considered false.
In summary, in the formation of the Ascending Triangle, price lows
are becoming higher and higher, but price highs remain at the same
level. Also noteworthy, sometimes the Ascending Triangle may
occur at the end of a downtrend and indicate its completion.
How to trade the Ascending Triangle
When all the conditions for the formation of the Ascending
Triangle have been met, we should wait for further developments
and a breakout of the chart pattern’s top line. When this level gets
broken, we have to wait for the candlestick to close above the
Triangle’s boundaries. If that happens, we can open a buy trade and
place a stop loss slightly below the last local minimum the price
had reached during the formation of the Triangle. The movement’s
potential is determined by measuring the distance between the
lowest point of the Triangle and its maximum point.

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 The Descending Triangle
The formation of the Descending Triangle is a complete opposite
of that of its Ascending counterpart.
The lower horizontal line is drawn across the lows of the price
movement that are at about the same level. The number of the
lows required to draw the horizontal line must be at least two. The
Descending Triangle’s top line should pass through at least two local
highs, and each successive high should be less than the previous

one. These highs should be at a distance from each other. If at least

one of the following peaks is at the same level as the previous one,
then the Triangle is considered to be properly formed. In some cases,
the Descending Triangle may signal a reversal of an upward trend.
The Descending Triangle is traded after the same principle as with
the previous bullish pattern. During the breakout of the Triangle’s

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horizontal line, we should wait for the price to take hold below
the support level. Then we place a stop loss, expecting the price to
descend by a distance equal to the distance between the highest
point of the Ascending Triangle and its minimum. During the
approach to this level, we can fix a part of our profits and expect the
price to descend further.
The Symmetric Triangle
The main difference of this pattern from previously discussed
patterns is that we cannot be sure in which direction to open the
trade, as the Symmetric Triangle can be either a continuation or a
reversal pattern. Also, this Triangle is defined in the chart using the
inclined lines connecting the highs and lows of the center-bound
price movement.
For a Symmetric Triangle to be considered legitimate, the
diagonal lines must pass through at least two local highs and
two local lows. The top line should be facing downwards, and the
bottom one upwards.

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 In order that we can determine the direction in which to open
the trade, we need to wait for the price to go out of the Triangle’s
boundaries and for the punching candlestick to close above or
below the inclined upper or lower line. Once that happens, we need
to place a stop loss on the opposite side of the Triangle. The trend’s
potential, as with previously described Triangles, is calculated by
measuring the widest part of the Triangle. A breakout of one of the
Triangle’s lines is considered a more accurate signal, if the breakout
occurs when the price has gone less than two-thirds of the Triangle’s
length. A breakout of one of the lines in the last third of the Triangle
is considered less reliable, as the price often returns back into the
boundaries of the chart pattern.

Based on the type of the Triangle pattern, the direction of price

movement can be identified in order to correctly open trades and
benefit from these signals.

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 Chapter 18. Wedge
The Wedge is a graphical model that can signal both a
continuation of the trend and its reversal, depending on the
inclination of the graph and the direction of the current trend.
There are two types of the Wedge: Ascending and Descending.

How the Ascending Wedge is formed

The Ascending Wedge’s formation occurs when the highs and
lows on the chart reach new heights with respect to the previous
movement. The Wedge is considered legitimate if the lines drawn
through the highs and lows of this movement are directed
upwards. The lines on the chart should be narrowing down, and
the price should be fluctuating within them.
In the formation of the Wedge, price fluctuations should be dying
down from the beginning to the end of the pattern. The resistance

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line should be drawn across at least two local highs, each of which
must be higher than the previous. The support line should be drawn
across at least two local lows, each of which must be higher than the
previous one.
What the Ascending Wedge means on a chart
The Ascending Wedge may signal both a continuation of the
trend and its reversal. In a downtrend, the appearance of an
Ascending Wedge on the chart indicates a possible continuation
of the downtrend. In an uptrend, the formation of an Ascending
Wedge indicates a possible end of this trend and the beginning of a
downtrend. From this we can infer that when the Ascending Wedge
pattern is confirmed, we should expect a downward movement
regardless of the trend’s direction.

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The nature of the Descending Wedge’s formation
The Descending Wedge forms on the chart when the price reaches
lower lows and lower highs. That is, the price consolidates within the
inclined support and resistance levels. These lines should converge
and be directed in the same direction: downwards. The resistance
line must pass across at least two local highs, each of which must
be lower than the previous one. The support line is drawn through
price lows, the number of which must be greater than two, with
each subsequent minimum being lower than the previous one. The
angle between these lines should be narrowing down.
What the Descending Wedge means
The Descending Wedge pattern suggests in most cases a possible
upward price movement. The appearance of the Descending Wedge
on the chart in a downtrend indicates a weakening of the price
fall and the start of an upward trend. That is, in a downtrend, the

105
Descending Wedge gives us a price movement reversal signal. When
the Descending Wedge appears in an uptrend, it signals the end of
the correction in the market and the continuation of the upward
movement. From this we can infer that the Descending Wedge is a
bullish pattern, after the determination of which we should expect
the price to increase.
How to trade when the Wedge pattern emerges
When we have identified the Wedge pattern on the chart, we need
to know the circumstances under which we should open a position,
where to set a stop loss, and how to identify the price movement
potential after the prices goes out of the pattern’s boundaries.

Example. The case of an Ascending Wedge

In order that a trader can confidently open a trade in the direction
of the downward trend, he/she needs to wait for the breakout of
the support line and for the closure of the punching candlestick

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below this level. When the candlestick has closed below, the
trader can open a short position. But before he/she does that, he/
she needs to determine where to set a stop loss.
There is a clear-cut stop loss-setting rule when trading the
Wedge pattern. When you open a position after the breakout
of the Ascending Wedge, the stop loss should be placed above
the Ascending Wedge’s high. The price movement potential is
determined by measuring the distance from the top of the rear of
the Wedge to its lowest point. At this level, we can set a take profit or
close most of the gap and keep the rest of our positions in the hope
for a further price decline.
There is another, more conservative, method of opening a short
position when a Descending Wedge appears on the chart. In this
case, we do not open the position immediately after the closure of
the candlestick that broke the dynamic level of support, but rather
wait until after the price has made a retracement to it, tested it, and
bounced from it to the downside.
Trading the Descending Wedge is carried out on the same principles
as trading the Ascending Wedge, the only difference being that the
trade is opened in the direction of growth during the breakout of
resistance.

The chart pattern Wedge may signal both a trend continuation and
a trend reversal, depending on the case at hand. The rules discussed
above will help identify a Wedge on the chart and choose the trading
tactics in case the pattern is confirmed.

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 Chapter 19. Flag and Pennant
The chart patterns Pennant and Flag in most cases serve as
continuation patterns.
The Flag, which can be both ascending and descending, is
composed of two elements: the Flagstaff, or Flagpole, and the Flag
itself. The Flag is a chart pattern that signals a continuation of the
previous trend.
How the Flag is formed
The formation of the Flag on a chart always has to be preceded by
strong, purposeful trend-based price movement. This movement is
the first element of the Flag and is called Flagpole.
After this movement, the price consolidates in a small, inclined
range, which indicates that the participants in the market after a
strong movement have decided to relax and take some profits. As

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we can see, this price movement is bounded by two parallel lines,
which serve as inclined support and resistance levels. The direction
of these lines is opposite to that of the previous sharp movement
in the prices. Despite the requirement that the price movement be
limited to the parallel lines, there is no requirement on the number
of times the price will touch the lines. That is, the price should simply
consolidate in the inclined rectangle.
How the Flag is traded
What actions does a trader need to take when this pattern emerges
on ascending and descending charts?
After a Flag forms on an ascending graph, we need to wait for the
breakout of its upper bound. Once that happens, we have to wait
for a confirmation that the price has gone out of the pattern.
This confirmation will be the closure of the breaking candlestick

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above the dynamic resistance line.
When the candle is closed, we open a long position in the direction
of the trend. But before we do that, we need to define what we risk
in this trade and how we can benefit as a result of the expected
price increase. When trading the Flag on an uptrend, the stop loss is
placed slightly below the lower bound of the Flag. To determine the
potential price movement after departing from the Flag, we have to

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measure the distance between the start and the end of the Flagpole.
That is, the potential of the movement after the Flag’s breakout is
equal to the movement prior to its formation.
There is another way to enter this type of trade. After the breakout
of the resistance level, you must wait for a price retracement to this
level, which after the breakout will have become a support level. The
price should bounce from it and continue the upward movement.
When a Descending Flag emerges on the chart, trading is
conducted according to the same principles as with the Ascending
Flag, the only differences being that the entry point is the closing of
the candle that has broken the support line and that the stop loss is
placed slightly above the resistance level.
The chart pattern Pennant
As with the Flag, the Pennant is a trend continuation pattern and
can be both bullish and bearish.

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 As with the Flag, the appearance of the Pennant on the chart is
preceded by strong trend movement, which will serve as a Flagpole
for the Pennant. This movement is followed by a correction. The
converging lines connecting the highs and lows of the correction
form a small symmetrical triangle. The lines, serving as the Pennant’s
bounds, are directed opposite ways: one up and one down.
When the Pennant pattern emerges on the chart, the same
trading rules apply as with the Flag. When a Pennant shows up on
an upward graph, we wait for a breakout of the upper line and a
closure of the breakout candle above this line, which has by now
become a resistance level. Then we place a stop loss slightly below
the last local minimum. As with the Flag, the movement’s potential
is calculated by measuring the distance between the base of the
Flagpole and its top. This distance is the potential of the movement
that follows the Pennant’s breakout by the price.
If the Pennant pattern forms on a descending trend, we can act

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in the same manner as with the Ascending Pennant, the only
difference being that we are opening a trade in the direction of the
downtrend.
The chart patterns Flag and Pennant are trend continuation
patterns which dictate their own rules for opening trades and
placing stop losses. Knowing these rules will enable the trader to
evaluate potential profit after the pattern’s confirmation.

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 Chapter 20. The Outside Bar
Along with the price action pattern Inside Bar, there exists a pattern
called Outside Bar. Its emergence on the chart indicates a potential
reversal of the previous trend.
Outside Bar: how it is formed and where it occurs
The ability to find a point of trend reversal allows the trader to
derive a maximum gain from price movement, because it enables
him/her to open a trade at the time of the new trend’s birth, before
the bulk of traders realize that the old trend is over.
That is precisely why every Forex market trader can benefit from
the use of the Outside Bar in his/her trading strategy in finding
points of trend reversal or correction.
This reversal pattern consists of two bars and emerges at the ends
of directed price movements of a currency pair. With this feature of

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the Outside Bar in mind, we should understand that in a flat this
pattern performs worse, so in a flat it is better not to use it.
The reversal pattern Outside Bar can be either bullish or bearish.
Finding this pattern on the chart is easy. The first price bar of this
pattern will sit entirely within the boundaries of the second
bar, which fully engulfs the first one. Therefore, in Japanese
candlesticks-based analysis, this candlestick pattern is called an
absorption pattern.
For an operational pattern to form, the opening and closing prices,
as well as the highs and lows of the first price bar, must not go out of
the boundaries of the bar following it.
As with all technical analysis patterns, the Outside Bar will be
considered complete only after the closure of the candlesticks
forming it.
The movement of the second price bar, absorbing the first one,
must be opposite to the preceding bar and indicates the direction

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in which you need to open the trade after the pattern is confirmed.
The bearish reversal pattern – Bearish Outside Vertical Bar – is
formed when, after the price’s upward movement, the green
candlestick is fully covered by a red candlestick of greater size.
The emergence of this reversal pattern indicates the weakness
of the bullish market and the bears’ readiness to build up short
positions. BEOVB is the short for this bearish pattern.

The bullish reversal pattern – Bullish Outside Vertical Bar – is

made up of a red candle located at the end of a downward
movement, with its high and low overlapping a green bullish
candlestick. The emergence of this situation indicates that the
bears have started to take profits and the bulls are ready to go on
the offensive and make purchases. The short for this candlestick
pattern is BUOVB.

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The Outside Bar pattern will be considered operational until the price
breaks the outer boundary of the absorbing bar in the trend’s direction.
A stop loss must be placed beyond the outer boundary.

When you see this reversal pattern on the chart, you should open a
position in the direction of the second candlestick of the Outside Bar
after its breakout and after the price passes 10 pips above the high
for the bullish pattern and below the low for the bearish pattern.
After the position is opened, a stop loss is placed beyond the
opposite end of the candlestick below the low reached for the bullish
Outside Bar and above the high reached for the Bearish Outside Bar.
After the breakout of the absorption bar, price retracements in
the opposite direction often take place, which can be used to enter
the market at more favorable prices. But this rule can be followed

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only before the price goes halfway through the defining bar, as
further movement may signify the pattern’s failure. Also during a
retracement, you shouldn’t enter the market during a news update,
as the price may graze your stop loss.
The grounds for an exit from an open profitable position can be
the following:
• The price has reached the target level planned;
• The price has reached a strong level of support or resistance;
• A reversal signal has appeared on the chart;
• Partial profit-fixing has occurred.
As with any other technical analysis pattern, when the Outside Bar
pattern emerges, situations may arise in which it is better to ignore
the signals given by the pattern:
• The market is in a flat;
• High market volatility, caused by the release of important economic
news;
• The price is located near strong levels of support or resistance
which could severely restrict the movement of the target currency pair.
The strength of the Outside Bar pattern is affected by the size of
the absorbing price bar: the greater it is, the stronger the potential
movement after its breakout in our direction.
This has to do with the emotion-charged sentiment of market

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participants. When looking at the Outside Bar pattern on the daily
chart, market participants will be seeing how, as the day goes by, a
new peak in a bullish market or a new bottom in a bearish market is
followed by a sharp move in the direction opposite to the original
trend. This will cause a powerful mood swing in market participants
and an urge to open trades in the hope that the absorption bar will
continue its movement. In this market, trade volumes usually surge,
enabling the price to absorb the first bar.
Outside Bar and the strength of the signal
The Outside Bar pattern can be considered stronger if the body of
the first price bar is at least 30% less than the body of the signaling
bar absorbing it. The strength of the signal generated by the Outside
Bar pattern can be enhanced if it is formed in the vicinity of support
or resistance levels, inclined channels’ lines, or Fibonacci levels.
In this case, the Outside Bar pattern may indicate that the price
cannot break the level and that the market is likely to experience
a trend reversal.

The analysis of how the Outside Bar pattern is formed will tell
the trader how to correctly use it for making successful trades.

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 Chapter 21. The Inside Bar
The price action pattern Inside Bar gives us fairly accurate signals
about the future direction of a trend but, unlike the Pin Bar, can
signal both a trend reversal and a trend continuation. The direction
of price movement depends on how the price will behave after the
Inside Bar’s confirmation.
The formation of the Inside Bar
The Inside Bar is a chart pattern consisting of two or more
consecutive bars. The first bar on the left is called formative or
defining and is followed by one or several bars called internal.
The internal bar is completely within the range of the previous
bar. This means that the Inside Bar’s highs and lows must be
located inside the defining bar.
In the following case, we can see how, after the defining bar, an
internal bar appeared on the chart, followed by another few bars
located in the defining bar’s range. This pattern is stronger than the
usual Inside Bar, because the longer the price fluctuates in a narrow
range, the stronger will be the price’s movement when it has broken
it and gone farther out of its boundaries.
There are specific reasons for the emergence of the Inside Bar on
the chart.
1. Substantial price movement, after which the price begins to
consolidate as some market participants take profits or open new

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positions, resulting in a strong momentum-driven movement, both
along and against the trend.
2. The release of important, price-changing news. The price may
be consolidating in a small range for several days, resulting in
the emergence of the chart pattern Inside Bar, which receives
confirmation after the news update and signals to the traders the
direction in which to open a trade.
3. The appearance of the Inside Bar on strong support and resistance
levels. In these cases, the price is consolidating near the levels as
buyers and sellers fight. We should wait until the winner is known
and follow the winner’s lead when the Inside Bar pattern gives us a
signal to open a position.
The Inside Bar pattern can be traded in different timeframes, but
the most powerful are the signals that emerge on large timeframes.

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 How to trade the Inside Bar
When we see the Inside Bar taking shape on the chart, we should
wait for its closure. When it has closed and its highs and lows have
come within the limits of the defining bar, we can place a stop order
a few pips above and below the defining bar to open a trade when
the price goes out of this range.
When the price has broken out of one of the borders defining the

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bar and we have opened a trade, we will have to cancel the pending
order that has not worked and put a stop loss in its place. After the
Inside Bar forms, we do not care which direction the price will take,
so we are ready to open both long and short trades.
When trading the Inside Bar pattern, we cannot predict exactly
how long the price movement following the defining bar’s
breakout will last, which means that, after the price passes a
certain distance, we must move the stop loss into breakeven.
For instance, when the price has gone the distance equal to our
initial stop loss, we can close a third or a half of the position and
place a breakeven stop loss for the rest of the position. After the
price goes an additional distance, we can fix a fraction of the profits
again and, if possible, move the stop loss beyond the support or
resistance level.

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 The Inside Bar is a rather frequent phenomenon, but we must
understand that the likelihood of a profitable signal during the
identification of this pattern on the chart is not always the same.
In order to be more confident about the signals given by the Inside
Bar, we must use it in conjunction with support and resistance
levels, moving averages, and other technical analysis methods.

The Inside Bar pattern is one of the strongest and most significant
price action patterns.

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 Chapter 22. Pin Bar
The Pin Bar pattern is formed by three bars. The Pin Bar signals
a possible reversal of previous price movement. The pattern’s
middle bar is a reversal bar, meaning that this bar is what tells
us that the previous trend has ended and that it is no longer
worthwhile to open trades in the direction of this trend.

This pattern is called Pin Bar because the middle bar looks like
Pinocchio’s nose, which became longer every time the fairytale
character told a lie. As with Pinocchio’s nose, the longer is the end
of the middle bar, the more likely it is that the price will change its
direction after it. The highs of the two bars located on the sides of
the Pin Bar are called Pinocchio’s eyes.

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How the Pin Bar is formed
The Pin Bar’s emergence on the chart tells us that market sentiment
has undergone a sharp change in the short term, and that the
market will follow the movement opposite to the one indicated by
the length of the Pin Bar’s long wick. The Pin Bar is considered well-
formed if it has a small body and a big shadow, directed towards the
previous price movement.
The Pin Bar’s body should be close to one end of the candlestick.
The opening and closing of the bar should also be rather close
to each other. The bulk of the Pin Bar’s body must be located
completely within the preceding bar, i.e. not above the high in an
uptrend and not below the low in a downtrend. The Pin Bar must
stand out against the backdrop of other candlesticks around it. This
means that the longer the nose, the more likely the reversal of the
price movement.

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 The Pin Bar is considered a stronger signal when it breaks through
significant support and resistance levels, Fibonacci levels, and the
highs and lows of a trend.
The strength of the Pin Bar also depends on the timeframe in which
it is formed. The larger the timeframe, the stronger the Pin Bar signal,
but this comes at the expense of a much greater size of the stop loss.
How to trade the Pin Bar
After the emergence of a Pin Bar that meets all said criteria, we can
look for an entry point to open a trade.
There are several ways to enter a trade when a Pin Bar emerges.
1. After the Pin Bar closes and the price goes at least 10 pips below
a bearish Pin Bar or rises 10 points above a bullish Pin Bar. This is
the most conservative and least risky way. The trader waits for the
price to go more than ten pips out of the Pin Bar in order to avoid
entering during a false breakout. During conservative trading, we
place a stop loss ten pips above or below the Pin Bar’s nose.
2. Opening a position immediately after the Pin Bar’s closure. This is
one of the aggressive ways to open a trade, as the trader does not
wait for its breakout to confirm the formation of a reversal pattern.
3. Entering a trade after a retracement of the price to the level
identified by the trader is another aggressive way to open a position.
The drawback of this entry method is that the trader, while waiting
for a price retracement, may miss out on a potentially lucrative trade.
Pin Bar-based trading has specific stop loss placement mechanisms
associated with it:

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1. Placing a stop loss slightly above or below the left eye of the
Pin Bar. In this case, the size of the losses we can incur in a trade
is significantly lower, but at the same time the probability that the
price accidentally grazes the stop loss is rather high.
2. Placing a stop loss slightly above or below the significant price
level or price extreme that was broken by the Pin Bar. This way of
limiting losses is less aggressive, because the stop loss is placed
beyond the level that acts as a significant support or resistance to
price movement.
3. Placing a stop loss beyond the level of 61.8% using Fibonacci levels
plotted on the Pin Bar itself. This method of stop loss placement is
used in cases where the Pin Bar’s size is huge.

The trader chooses a specific way of entering a trade and placing

a stop loss based on the current market conditions.

Pin Bar and the rules of maintaining an open trade

The likelihood that our stop loss order will be executed is less than
10 percent, if the Pin Bar is supported by:
• Strong levels of support or resistance;
• A significant minimum or maximum;
• Moving averages or other signals.
After the price goes a certain distance in the direction we expect,
we have to take some profits and move the stop loss to breakeven
in order for our profitable trade not to turn into a losing one.

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There are no specific rules as for which portion of the position
should be closed at which level. It all depends on the trader, his/
her psychology, discipline, and experience.
As the price moves in your favor, you can take profits bit by bit at
important levels. The stronger the level, the greater the portion of
the position you can close. After the price breaks out of these levels,
you can move your stop loss order in the direction of the current
price movement, putting it in a safe place.
The Pin Bar is an important candlestick pattern, whose emergence
on significant price levels in most cases gives true signals of
further price movement. Furthermore, the pattern is rather easily
recognized and interpreted, as it stands out on the chart from
among other candlesticks preceding its formation, both by shape
and by place on the chart.

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 Chapter 23. Fibonacci Levels
Thanks to their good visibility, Fibonacci tools are widely popular
among traders using technical analysis to predict price movements
in financial markets.
At the heart of this technical analysis method are Fibonacci
summation series, discovered by medieval mathematician Leonardo
of Pisa, better known by his nickname Fibonacci, derived from the
phrase “filius Bonacci” printed on the cover of one of the major
works on mathematics titled «Liber Abaci.» Research enabled him
to identify a mathematical relationship between some numbers,
which later on took on the name of their discoverer.
The numbers in the Fibonacci summation series are obtained by
adding the two previous numbers and have interesting properties.
If any member in the Fibonacci sequence is divided by preceding

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member (e.g., 34:21), the result is a value approaching the irrational
value 1.618. For instance, take the number 89 and divide it by the 54
preceding it. The result will be a number close to 1.6182.
The result will be slightly different from the expected value, but
each step takes the result closer to 1.618 and is accompanied by
dying down waves which are very similar to the chaotic behavior of
market prices.
As early as the Middle Ages, scientists noticed that the ratio
derived from the Fibonacci series vividly manifested itself in
any natural, scientific, and social events, so it came to be called
the divine proportion or golden section. A manifestation of the
golden section is also found in the spontaneous behavior of the
various financial markets, so the Fibonacci summation series is
widely used in technical analysis methods for predicting price
movements. The most famous instruments operating on the
golden section principle are Fibonacci correction levels.
Fibonacci correction levels in Forex
Fibonacci levels are plotted at the significant highs and lows of
the chosen instrument’s price fluctuations. These highs and lows are
the easily identifiable start and end of the trend. Since the signal of
a reversal in the current market trend is already visible, Fibonacci
levels allow us to find the depth of the correction and determine
the price level from which a bounce and a market reversal in the
direction of the previous trend may occur.

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 Fibonacci levels are plotted from the bottom up for an upward
movement and from top down for a downward movement. This is a
very important condition, because if Fibonacci levels were built the
other way around, only the 50% level would be a match, while the
levels 23.6% and 38.2% would shift. With improper construction,
the level of 38.2% would have corresponded to the 61.8% line and
vice versa, and the desired first correctional level of 23.6% would
disappear altogether.
By stretching the Fibonacci grid over a bullish trend, we get four
levels of support – 23.6%, 38.2%, 50%, and 61.8% – from which the
price can bounce and continue the upward movement. In this case,
when trading Fibonacci levels, the trader’s actions will be as follows:
during trade-through near these levels, the trader will buy near each
support level, placing the stop loss slightly below and beyond this level.
By stretching the Fibonacci grid over a bearish trend, we get four

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levels of resistance – 23.6%, 38.2%, 50% and 61.8% – from which the
price can bounce and continue the bearish trend. In a bear market,
trading the Fibonacci levels is done in a similar way: sell trades are
opened during trade-through near every resistance level, with stop
losses being set slightly above this level.

Thus, the use of the Fibonacci grid allows you to achieve long goals in
the form of the distance between the levels and very short stop losses,
which is fully consistent with the general principles of risk management.

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 In addition to correction levels, the Fibonacci grid allows you to
build Fibonacci extension levels, which indicate to what level the
price could move after the correction and the resumption of the
current trend.
To build Fibonacci extension levels, Fibonacci levels are stretched
over the chart the opposite way. Most often, when forecasting the
future trend movement, traders use the levels of 161.8% and 261.8%.
Using the expansion levels, we define the goal of the expected
movement that can occur after a maximum or minimum price from
which was built the Fibonacci grid. Such movements occur when
the price, turning around from the Fibonacci correction level, has
enough momentum to break through the level from which the
grid was built. In this case, the resulting Fibonacci extension level
will show the approximate target that the price can reach after the
continuation of the trend movement.
The most expedient way to do it is to use Fibonacci retracement
levels in combination with other methods and tools of technical
analysis that signal a trend reversal or the end of a correction.
These tools can be levels of support and resistance, chart patterns,
candlestick patterns or indicator signals.
Apart from the most popular Fibonacci levels based tool, which
signals price correction levels, there are other technical analysis

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tools based on the Fibonacci summation series. These tools are the
fan, arcs and Fibonacci extension levels, which also help identify
support and resistance levels on the chart.
All Fibonacci tools are included in the technical analysis toolbox of
the Meta Trade 4 trading platform, and traders can easily use them
in their work.

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 Chapter 24. The Bounce off Support
and Resistance Levels
Trading the bounces from support and resistance levels is one of
the most popular trading tactics used both during trend movement
and during price consolidation in a flat. This trading method
allows traders to find market entry locations generating profits
outbalancing potential losses several times over.
The horizontal lines of levels are easy to see on the chart and hence
easy to identify. Some areas around levels lead to expectations of
price changes when approached, and traders concentrate their
orders near those areas.
Reversal signals in level-based trading are various candlestick-
based price bar combinations and price action patterns. Their
presence near a level allows the trader to determine the direction
of movement, while the level enables him/her to place a stop loss
for an open position.
During flat-based movement, when the price approaches the
support and resistance levels, the emergence of price action-based
reversal patterns and candlestick combinations significantly
increases the likelihood of the price bouncing off them and
continuing to fluctuate within the trading range.

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The presence of a reversal signal during the price’s approach to the
level that limits the trading range signifies that the market so far has
not generated sufficient momentum for the price to break the level
and launch a trend-based movement. In this case, you can safely
open a trade in the hope that the price continues to move in the
generated range and place a stop loss beyond the level’s boundary.
During a level breakout and the start of trend movement, levels
become the mirror images of each other. During breakout of
resistance and achievement of a new local high by the price, a
retracement to an old level of resistance may occur, which in this
situation becomes a mirror image and plays the role of a new support.
When the price approaches this level, you should be expecting
a reversal confirmation signal for buying. The role of this signal

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may be played by one of the price action patterns. When this buy
confirmation signal emerges, there is a strong likelihood that the
existing level of support will endure and that the upward movement
will continue.
Further on, the upward trend continues to move to the previously
formed local high, breaks it and forms a new level of resistance at
the new local high. The subsequent correction tests the second
mirror image support level, which used to be a local high. In this
situation, if there is a reversal signal near the support level, you can
expand your position in the trend’s direction to make another buy.
While trading support and resistance levels during a downtrend,
traders use a trading strategy similar to trend-based buying. If the
chart displays a local low, traders wait for its breakout and testing.
If during the price’s approach to the level of resistance a reversal
pattern emerges, you can open a sell position. The next trend-based

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sell is performed during the testing of the second mirror-image
resistance level located below the first one.
By following the trend in this manner, the trader can find potentially
favorable position-opening locations after corrections and benefit
from the bulk of the trend movement.
Support and resistance levels do not always come in the form
of mirror images. It often happens that the price does not reach
them and creates a new level instead. The presence of a Pin Bar or a
reversal candlestick combination in this case may also be a signal to
enter the market, but signals near mirrored levels are more reliable
and signify stronger movements.
When selecting a support or resistance level, you need to pay
particular attention to its strength, and the timeframe in which it
formed.
In conducting medium-term trading on hourly charts, the important
support and resistance levels need to be sought on daily charts,
while on your operating timeframe you have to look for reversal
signals of price patterns.

The advantage of using support and resistance levels as trading

signals is that the trader immediately knows where to place a stop
loss. The stop loss is always place beyond the level from which the
price bounced.

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 Example: trading the bounces from support and resistance levels
during the movement in a flat.
Suppose the pair AUD/USD had been trading for almost a year in a
price corridor whose range had exceeded four hundred pips in size
and formed resistance levels at the 1.0580 mark and a support level
near the 1.0175 mark.
While moving in waves within a flat, the price generated several
clear-cut reversal signals for buying and as many signals for selling.
All of the reversal signals formed directly from the support and
resistance levels, sending a signal to the trader that the price will
bounce and continue to fluctuate within the corridor.
The role of sell signals is played by a clear-cut Pin Bar and two interior
bars, followed by downward movement. After the formation of the
Pin Bar, which broke the resistance, the price made a sharp return
into the price range and replaced the uptrend with a downtrend.
In the case of the first Inside Bar, the price also bounced off the
level at once, but in this case the price movement was not as strong.

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When the second Inside Bar had emerged near the resistance level,
price consolidation took place, during which several Inside Bars
were generated, which, when broken, gave rise to a downtrend.
As regards the signals for buying from a support level, we can
distinguish two: a bullish engulfing and a Pin Bar. In the case of the
former signal, generated at the support level, there was a downward
movement, followed by a bar that absorbed three previous
descending bars, and then price growth continued.
In the case of the Pin Bar, which broke the support level, the sellers
pushed through the level but failed to endure, and the buyers got
the upper hand, and then the upward movement started.

Horizontal support and resistance levels are considered by most

market participants to be important trading areas, from which
all significant movements originate. The presence of reversal
confirmation signals near them allows traders to find effective
points of market entry.

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 Chapter 25. Level Breakout
Trading level breakouts is one of the most popular strategies
among traders. The essence of breakout trading is reduced to
the identification of a price corridor formed by the support and
resistance levels.
It is also important to know how to place pending orders at any
significant levels of the price corridor. When a level is broken, you
have to follow price movement. If the price breaks the resistance
level, you have to buy. If it breaks the support level, you have to sell.
In order to receive a confirmation signal that can protect against a
false breakout, some traders are advised to wait until the price takes
hold below or above the level passed.
The breakout of a formed price range may signal the end of a current
trend and the beginning of another. In addition, the breakout may

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be false, in which case the price returns beyond the punched level,
where it can continue to oscillate or start to move in the direction
opposite to that of the false breakout.

The traders trading breakouts face the challenge of correctly

interpreting information. They have to analyze the likelihood that
the breakout will be followed by a powerful movement that will
give the trader an earning opportunity and the likelihood that the
price will go back and the trader will take a loss.

By far, not all traders are endowed with the ability to benefit from
level breakouts. Some traders may fall victims to false breakouts
or may open positions too early and take losses. The following
recommendations will help avoid losses:
1. In order to for a level breakout to take place, it has to be supported
by a sufficient number of traders. For this to happen, they have to
see the same support or resistance lines. This lack of inclined lines is
considered rather serious. This is because many traders draw these
lines at their sole discretion, so the lines can vary significantly.
2. Trading breakouts is best carried out using horizontal levels,
as they are much easier to identify, and therefore the response
by market participants during a breakout will be much more
significant. In other words, a large number of trades will be opened

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in the direction of the breakout, so that movement in this direction
can be quite strong. After the prices breaks out of the level, you can
also expect it to return and test the level for strength.
3. In order to determine whether a current breakout is false and
whether it has enough power to continue movement, it is necessary
to analyze it in at least several timeframes. The direction of the
breakout has to coincide with the trend in a larger time period.
The strongest movements occur during the breakout of a level
that coincides with its counterparts in different timeframes. Some
traders may make mistakes, opening trades in the direction of the
breakout without taking into account the movement in senior time
periods. A downtrend on a five-minute chart may turn out to be
just a slight retracement of an uptrend on an hourly chart, resulting
in a losing sell trade. When trading breakouts, you should analyze
multiple time periods to find coinciding trends and open trades in
their direction. If this is taken into account, it is possible to easily tell
a false breakout from a true one.
4. Some traders expect confirmation signals after a breakout. This
seems reasonable enough, but it is known that doing so can play
a cruel joke. This is because, as trader waits for the confirmation
signal, the price can go most of the potential distance, resulting in
the trader missing out on a trade-opening opportunity due to the

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risk to reward ratio not being consistent with his/her strategy.
It can be concluded that it is insufficient simply to determine the
level of support and resistance and open the trade immediately after
the punching candlestick closes above or below the broken level.
In addition, it is imperative to pay attention to how the breakout
occurred, and whether the current direction of the breakout
coincides with the trend on a senior timeframe.
Trading: pluses and minuses
In trading level breakouts, traders plan to make profits, expecting
that the level near which the struggle between buyers and sellers
is taking place will not endure and that the price will continue the
breaking movement under pressure from winners.
However, support and resistance levels can take long to form,
and before the price breaks a level, it can repeatedly bounce off
it. However, sooner or later each level breaks and provides traders
with earning opportunities. After breakouts, the price often returns
to the level to test it for durability. Such cases do not happen very
often in the market, but they do provide stronger signals for position
opening than usual breakouts.
Traders who trade breakouts are often faced with a series of losing
trades. But just one profitable trade can balance out all of the losses
taken in earlier trades and bring the account into positive territory.

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Therefore, after losing 20 pips in four trades, you can make a profit
of 150 pips, meaning that you will have landed a positive 70 pips.
After breaking a support or resistance level, the price goes quite a long
distance from the level, bringing the risk to reward ratio above 1: 3.

Trading level breakouts in the trend’s direction is rather effective.

In addition, it is clear and simple. You just have to correctly identify
the trend and the levels which have to be broken to open trades.

During trading, we must be able not only to turn a profit but also
to keep it. There are many different methods for profit retention. The
most famous is to use trailing stops after breakouts.
When using a trailing stop, the stop loss lags a certain distance
behind the price and closes the trade when the momentum-driven
movement has ended and the price has started to return.

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 There are frequent cases when it is best not to enter the market
immediately after a breakout but only after the return of the price
to the broken level. This method of opening a position is referred to
as a technical return based entry.
At the time of the breakout of support and resistance, the price
can very quickly move in this direction, often without ever making
a technical return to the level. As a result, we miss a trade and a
money-making opportunity. This often happens in a long price
consolidation near the level it has been testing several times. After a
breakout of that level, the price may start a rapid movement toward
the breakout.
Despite the relatively high risk associated with this strategy, it
offers considerable advantages, but to use it successfully, the
trader must know what types of breakouts exist and how to
trade them the right way.

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 Chapter 26. The 1-2-3 Pattern
Among the reversal patterns of technical analysis, the 1-2-3 pattern
enjoys much popularity due to its frequent emergence rate. We can
say that the majority of trends end in a combination of price bars
that signal the trend’s gradual weakening. Further, this pattern can
emerge during sideways movements.

The 1-2-3 pattern stands out by its versatility, facilitating its

application for a variety of financial instruments and markets. It
works perfectly well with major currencies, currency cross pairs,
and commodity currencies.

This chart pattern comes in two major types:

• The 1-2-3 High pattern. This pattern emerges at peaks and signals
to the trader the appearance of bearish sentiment in the market.

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 • The 1-2-3 Low pattern. This pattern is made up of the reversals
of a downtrend, characterized by the emergence of a formation
opposite to 1-2-3 High.

Both the types of the 1-2-3 pattern can successfully be used for
finding the end of a correction. That is, we can use them as a signal
to enter the market in the direction of the larger trend.
How the 1-2-3 pattern is formed
The pattern 1-2-3 is made up of two small market waves between
the reference points of which a number of price bars are located. It is
believed that the more candlesticks there are between these points,
the greater will be the scope of the movement we can count on.
On the chart of a financial instrument, the 1-2-3 pattern is formed
by two momentums and a retracement, which provide for three
basic points for the construction of this pattern.
The first signs of the 1-2-3 pattern appear after a counter-trend
movement in the price from the extreme in point 1 to point 2. Let’s
consider this momentum to be the first element of the pattern.

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Point 1 is the low of the 1-2-3 Low pattern and the high of the 1-2-3
High pattern.
In point 2, starts the continuation of the movement along the trend
and a retracement in the pattern scheme. This movement in the
direction of the previous trend does not gain enough momentum
to continue and ends without breaking the previously achieved
price high, forming point 3 on the chart.
The formation of the 1-2-3 pattern is complete, and now the trader
can begin to place orders. This reversal-type formation gives a signal
to open a position when the price breaks the level near the mark of
2, where we should enter the market by using a pending order.
For the 1-2-3 Low pattern, a pending buy order is placed
slightly above point 2, while the stop loss is placed below point
1. A continuation of the upward momentum will trigger our
order, and we will have opened a buy trade. After the price
goes a certain distance toward us, we can move the stop loss to
slightly below point 3.

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For the 1-2-3 High pattern, a pending sell order is placed below the
level of point 2, and a stop loss is placed above the level of point
1. After the development of an uptrend, a stop loss can be moved
beyond point 3.
How the 1-2-3 reversal pattern is formed
In the formation of the 1-2-3 reversal pattern, the movement
potential is determined by measuring the distance between point
1 and point 2 and by measuring off the resulting length from point
3 in the direction of the incipient movement. That is, if the distance
between points 1 and 2 measures 50 pips, the minimum potential
of the movement from point 3 must be no shorter than 50 pips.
For a trader specializing in trading the trend movements, entering
the market at more favorable prices without first waiting for a
breakout of the second point will be a mistake, because at this time
the pattern has not been formed, and instead of correcting, the
market may enter a flat.

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 At the same time, an aggressive trading system allows for such
trading if a trader is willing to take the risk and open a trade in
advance. In this case, entry into the market is carried out after the
breaking of the trend line drawn between points 2 and 3. When
approaching point 2, the trader can already decide whether to
close a lucrative trade or wait for the level’s breakout and further
movement.
How the 1-2-3 pattern combines with other chart patterns
In order to increase the chances of obtaining more accurate
signals generated by the pattern, it can be used in conjunction
with other technical analysis patterns.
For instance, the 1-2-3 pattern works well in conjunction with the
pattern called Three Indians, appearing at the end of a trend or a
strong correction. In this case, the complete patterns 1-2-3 and
Three Indians will make up a well-known reversal figure called head
and shoulders. The combination of these patterns can enable the
trader to foresee the formation of the last shoulder in the Head and
Shoulders figure and enter the market in a more aggressive way
already in point 3 without waiting for the 1-2-3 pattern to form and
for a breakout of the point 2 level. If that happens, then we will get
a signal not only from the 1-2-3 pattern but also from the Head and
Shoulders figure.

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 The 1-2-3 patterns become the most promising in terms of
profits in oversold and overbought markets, because market
participants wait for a correction and the resulting pattern can
signal its beginning.
Precisely how promising the signals generated by this pattern will
be depends on the period of the chart that has hosted it.
From trading experience, we can say that the 1-2-3 pattern on a
daily chart may signal the beginning of a movement that will last
between 2 and 8 weeks. The emergence of this pattern on a weekly
chart could signal that the trend will last between 4 and 16 weeks.
Monthly charts with 1-2-3 patterns may signal the birth of a trend
that will last between 2 and 12 months. Patterns on large time
periods can be used for intraday and medium-term trading.

The emergence and formation of the reversal chart pattern 1-2-3 on

a chart tells the trader how to correctly use this financial instrument in
trading to evaluate profit potential when entering a trade.

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 Chapter 27. Moving Averages
A moving average is a technical analysis instrument and one of the
most widely used trend indicators.
The presence of moving averages of various periods on the chart
can clearly show in which direction the trend is moving. By the slope
of a moving average, you can judge the strength of the trend. When
crossed, moving averages can signal trend reversals.
The moving average line is drawn based on data obtained by the
mathematical averaging of prices over a period of time.
If a trader chooses a calculation period with an increment of 50
pips, the formula will take into account the prices of the past 50
bars return an arithmetic average of the prices for this period.
The timeframe on which to build the indicator can be between one
minute and one month in length. For a 50-pip increment period,
the moving average will plot the averages for the past 50 hours for
the hourly timeframe and the averages for the past 50 months if
monthly bars are selected for the plotting.
In technical analysis, moving average lines are abbreviated as MA
plus the figure denoting the relevant period. For instance, MA100
denotes a moving average with a period of 100.
Moving averages with short periods are called fast, while the
lines plotted on long periods are called slow.
Price bars include several opening prices, closing prices, a price
high, and a price low.

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 These prices can be used in the calculation of moving averages,
but most of the time traders use closing prices and build these
indicators based on the closing prices.
Since this indicator follows the trend and may lag or give false signals,
you can use in your calculation the Median Price (HL/2), Typical Price
(HLC/3), or Weighted Price (HLCC/4). For experienced traders, this
change in the moving average parameters may be relevant, as it
better meets the requirements of their trading strategies, but for the
majority of traders it is better to use the usual methods of moving
average construction based on bar closure prices.
Types of moving averages

There is a relationship: the shorter this indicator’s period, the

faster the moving average line will be giving signals indicating the
emergence of a new trend in the market. But this in turn leads to a
proportional increase in the number of false signals, which is why the
slowest line will give better quality signals, though with a certain lag.

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 To get rid of this flaw, traders use different methods for moving
average calculation. The most often used types of the moving
average indicator are:
• Simple Moving Average (SMA): the term is self-explanatory.
• Exponential Moving Average (EMA): exponential moving average
is different from the simple MA. In the EMA calculation, a fraction of
the last bar’s price is added to the previous price, so that the result
will more accurately account for the most recent prices.
• Smoothed Moving Average (SMMA): this indicator is obtained
from the simple moving average data but is more accurate in taking
into account the market noise and performs better in a flat.
• Linear Weighted Moving Average (LWMA): in its calculation, the
latest price data have greater weight while earlier data have smaller
weight.
Despite the ability of moving averages to be constructed for any
time period, the majority of traders use the most popular time
periods in the calculation of these indicators. Moving averages of
short periods are used for obtaining fast signals and frequent entries
when they intersect with moving averages of longer periods.
Long moving averages are most often used as support or resistance
levels from which a currency pair’s price can bounce and continue
the previous movement. In this case, traders rely on data from the
moving averages of the periods 50, 100, and 200.

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 Signals by moving averages

There are two types of MA signals for traders to rely on in their work.
The first is an intersection of moving averages. The second is their use as
support and resistance levels.

Moving averages form a buy signal when a fast moving average

crosses a slow one from bottom up and continues to stay above it.
This location of the fast MA in a bull market will be showing that

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the signal for price growth persists. As soon as the fast MA crosses
its slower counterpart from top down, this will be a signal that the
market trend has changed and that you can open a sell trade.
The other type of trading signals given by moving averages is the
price’s bounce from a moving average line. If the trend is upward
and the price during retracements fell to the moving average and
bounced off it, we can open a buy trade by placing a stop loss
slightly below this price level. In this case, the moving average line
played the role of a support and formed a buy signal.
If during a descending movement the price is able to break through
the moving average line and consolidate below it, we can infer that
the upward trend has ended and that a sell trade can be opened.
In a falling market, signals are generated in a similar manner.
In a downtrend, the MA line slopes down, and if during an upward
retracement the price fails to gain a foothold above it, it will play the
role of a resistance near which we can open a sell trade.
Thus, in an uptrend, the fast MA must always be above the slow
MA, and conversely, in a descending trend, the fast MA must always
be below the slow MA.

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 Signals given by moving averages come with the following
advantages:
• Easy identification of signals;
• Generation of several types of signals;
• Use of moving averages by most traders, allowing for viewing
moving averages as psychological levels.
The drawbacks of moving averages are:
• Delays in signaling. For this reason, moving averages are best
used in combination with other technical analysis methods or as
additional signals.
• Generation of false signals in a flat.
• Assignment of same weights to the old and new prices, although
recent price values are more relevant to a trader.
An unbiased analysis of the pluses and minuses of the moving
average indicator shows that it is more appropriate for use in a
trend-based market, where traders should be guided by short
moving averages. When the market goes into a flat, the period of
the moving average must be increased to filter out false signals.

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 Chapter 28. Placing Stop Losses
and Maintaining Positions
The correct placement of stop losses allows the trader to adhere to
the principles of risk management, while the correct maintenance
of open positions enables the trader to select the most opportune
moments for their closure.
In favorable market situations, the consistent support of open
positions, taking into account volatility and economic news, will allow
the trader to maximize profits or close a position at a better price than
when a stop loss is triggered regardless of these important factors.

How to best place a stop loss

To determine the optimal location for a stop loss, the most common

tools of technical analysis are used:

• Support and resistance levels plotted on the chart;

• Trend lines;

• Channel lines;

• Local highs and lows;

• Pin Bar signals;

• Fibonacci levels;

• Moving averages.

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 How does this happen in the real-world market?

Strong and long-term support and resistance levels are the most logical
places to put a stop loss for the majority of traders. These locations are
used by both the traders going with the trend and the ones trading in
sideways ranges.

While using support and resistance levels for placement of stop

losses in flat-based trading, we place orders beyond the boundaries

of the sideways range. While opening a long position from the flat’s

level of support, the trader places a stop below the selected support.

While selling an instrument from the resistance level, which is the

upper limit of the flat, you should place the stop loss above it.

When a trend or a deep correction begins, a breakout of the level

occurs in the market, and the purpose of the level changes. In an

uptrend, the majority of participants at the time of the resistance

level’s breakout will be opening positions above the level. This will

happen at the time of the level’s breakout or during its testing as

a new support level. In any case, the stop losses will be clustered

below the newly formed support level.

Some traders may set stop losses below the old support if the

distance to it is not too long and the risk to return ratio allows it.

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 The start of a trend or a deep correction gives the trader the

ability to draw trend lines, which form the inclined channels of price

movement. The methods for placing stop losses in this case are

similar to those used in the case of a flat, the only difference being

that the trend channel will be directed towards the movement of

the currency pair.

In long positions, a stop loss should be placed below the trend

support line and moved higher in the direction of price movement

from time to time.

For short positions, a stop loss is set slightly above the trend line

serving as an inclined resistance level. During price movement in

the direction of the downward trend, the stop loss should be moved

so that it follows the price movement.

The local highs and lows formed after trend movements create the

more reliable points where to place stop-losses, as they represent

the areas in which buyers and sellers clash. These local highs and

lows will create strong support and resistance levels, beyond which

market participants often place their stops.

In a trend-based market, moving averages do excellent jobs playing

the role of support and resistance levels. The moving average lines

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follow the price that is testing them, bouncing from them during

new momentum in the direction of the trend. By placing a stop loss

beyond the moving average line, the trader may maintain the trade

with the help of a dynamic stop-loss and exit it when the market

trend has reversed.

Various pin bars and a combination of Japanese candlesticks also

often create chart patterns that traders use as trading signals. For

instance, during the appearance on the chart of absorption patterns,

Price Action setups, or graphic patterns, the stop loss should be

placed so that, if price reaches it, it will be clear that the final price

has changed its direction and that it is no longer worthwhile to keep

the position open.

The size of the stop-loss in pips should be calculated based on

the current market situation, the point of entry, and the current
volatility of the currency pair, which may vary, depending on the
sentiment of market players.

The resulting distance to the stop loss should be compared with

the expected price movement, while trying to choose the point of
entry into the trade so that the potential profit will exceed potential
losses by 3-4 times. If a trading signal does not return this value of

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the ratio, it is better to give up and wait for a more favorable market

entry. The resulting stop size in pips will determine the optimal size

of the lot for the opening of the current trade.

In any trading system, a stop-loss is set in the most logical place

based on the technical analysis methods used in the trading system.

That is, if the price reaches a deferred stop order, the technical

picture will evolve in such a way that the previously given signal to

enter the position will have lost its relevance.

While maintaining their positions, some traders use the Parabolic

SAR indicator, which gives good signals and is easy to understand

when placing stop losses. This indicator is based on moving averages.

On the chart, this indicator puts a point under each candlestick

beyond which the trader can set a stop loss while maintaining the

position and close it when the trend has clearly changed.

When the market situation changes, it is logical not wait till the

stop loss is triggered but to maintain the position. This applies not

only to trades where the stop loss is transferred into breakeven or

into positive territory, but also to losing trades.

If the market signals that the background that had served as a

signal to open a position is no longer relevant, for instance when

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an opposite pattern or a price action signal shows up, it is logical to

close this position manually, without waiting for the triggering of

the stop loss.

If the trader moves the stop loss over to keep the part of the profit

already earned, your actions must be reasonable and justified. The

size of the new stop loss, as with the original one, must be sufficient

to ensure that the price has plenty of wiggle room.

With enough space set aside for price fluctuations, the market is

likely to achieve the goals planned by the trader, though not before

it has approached the stop loss several times.

Traders’ most common mistake is placing short stop losses. With

their help, they seek to minimize the loss of cash in a bid to enter with

high volume and step up the size of the lot. This type of approach to

the market is not legitimate at all, as the trader is much more likely

to make a profit by setting the stop loss within the limits allowing

the market to fluctuate in the desired range.

The monetary profit with this approach will in some trades be

smaller due to the smaller lot size. However, the stop loss will be

triggered much more rarely and only in justified cases during

significant changes in the market situation.

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 Chapter 29. Margin Trading
and Leverage
Forex trading is carried out using very large sums. For instance, the

volume of a standard lot is 100,000 units of base currency. The base

currency is the first currency in a currency pair. In the pair pound/

dollar, the base currency is the pound, and in the pair dollar/yen, the

base currency is the dollar.

For many, an amount greater than 10 thousand dollars is very large,

so it may seem that the Forex market is not available to everyone. But

this is not the case. In their trading, traders use the so-called leverage

and margin. This means that you can trade foreign exchange using

other people’s money, provided to you by your broker.

The broker gives you money against the security of a certain part

of your deposit, also called margin. Funds that are subject to margin

lending, unlike with conventional loan, may equal several tens

of times as much as the amount of collateral. For example, when

buying an apartment on credit, the bank gives you money against

the collateral of the property, and you also make a down payment.

In margin lending, when you open a trade, you receive an amount

that may exceed your collateral or margin by a 100 times or more.

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Margin trading

The essence of margin trading is to carry out trades using leverage,

which gives the trader the opportunity to trade on borrowed funds,

issued against the security of a relatively small deposit or margin.

Margin trading assumes that the trader, while making a trade,

must plan to make an exact opposite of this trade in the future. This

means that if a trader has opened a buy trade using leverage, he/

she must make a sell trade of the same volume in the future, to close

the position.

While making trades with leverage, the trader takes full financial

responsibility for the outcome of a trade. His/her trading deposit

serves as guarantee of compensation for possible losses resulting

from trading. In order for the trader not to lose more money than

there is in his/her account, the broker warns the trader to take

necessary measures when the margin approaches a critical amount.

This warning is called margin call. If the margin level continues to

decline, the broker will automatically close the trader’s positions

at current market prices. This operation is called stop out.

The margin level is calculated by dividing the trader’s funds by the

margin size and multiplying the result by 100%.

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 The margin level that triggers a margin call and a stop out will

depend on the conditions of a particular broker, but in most cases it

is below 100% for the margin call and 50% for the stop out.

Leverage

One of the main concepts of margin trading is leverage. Leverage

is a measure of how much greater the size of your position may be

than the size of your account. For instance, if the broker provides

you with a 1:100 leverage, then by having a thousand dollars in

your account you can open a trade worth the maximum of 100

thousand dollars. If you open a trade worth 50 thousand dollars,

then you are using a leverage of one to fifty, and your margin is $500.

To calculate leverage, you can use the formula in which the amount

of collateral or margin is divided by the amount of the trade we have

opened. The formula returns the leverage ratio.

How the leverage mechanism works when trading in the

Forex market

Suppose we have in the trading account $4,000, and the broker

gives us a leverage of one to one hundred. This means that our

purchasing power is $400,000.

When the market gives a signal to enter the currency pair GBP/USD

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at the 1.60 level, we decide to open a buy trade worth 160 thousand

dollars. For this trade, we use a leverage of one to forty. In making the

buy trade, we pay 160 thousand dollars for 100 thousand pounds.

When the price rises to around 1.61, we will close our trade, giving

away 100 thousand pounds and getting 161 thousand dollars in

return. Out of the one hundred and sixty one thousand dollars,

our profit will be one thousand dollars. This means that our profit

from this trade will stand at 25%. If instead we trade using only our

own funds, our profit will be only $25, which is less than 1%. But

since we are using the leverage of one to forty, our profit will have

increased by 40 times.

It is important to understand that if the price goes the same distance in

the opposite direction, then our loss will have amounted to 25%. Based
on this, we can conclude that the use of too much of a leverage gives us
great advantages but at the same time exposes us to high risks.

If you open and close trades within one day, you don’t have to pay
anything for the use of leverage. If you move your open positions
over to the following day, then you are either charged or credited
a small amount. This operation is called swap. The value of a swap

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and whether it is going to be positive or negative depend on the
interest rates for the currencies you are trading and on the size of
the commission charged by your broker.

Margin trading has its own pros and cons. The advantages of
margin trading are that we can trade in the market with a relatively
small amount of funds by borrowing funds for practically free and
earning a high return on investment.

The drawback of margin trading is that, when using a large

leverage, the risk of significant losses is rather high.

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 Chapter 30. Maximum Risk and
Position Calculation
In order for Forex trading to bring consistent income, you need to
thoroughly calculate all of the risks. First, you need to define the limit
on losses for an individual trade, as well as the limit on the amount
of losses for each trading day. Many traders in the short term simply
get lucky enough to turn a profit while running too much risk. But
this type of trading can lead to the draining of the entire deposit.
Often, something like this is done by beginners who have not yet
fully understood the very essence of trading and just want to get
rich quickly by putting at stake every cent of their savings. In the real
world, everything is different: the more secure the trading will be,
the more stable and, most importantly, positive the result will be.
The size of maximum risk
One of the main rules of trading is not to breach the risk limit.
A good strategy must help traders refrain from significant
financial losses.
The best rule that should be observed in trading is that in a single
trade you should not be risking more than 2% of your capital. This
rule is well known but often neglected. If a trader is risking a larger
amount, then it often leads to the loss of the deposit.

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 The practical application of this rule works as follows.
If the trader begins with a thousand dollar deposit, the loss of fifty
percent of the deposit amounts to losing five hundred dollars. With
this type of loss, to get your money back, you need to double the
existing amount. This requires that your deposit increase by 100%,
and taking into account the peculiarities of Forex trading, it may take
you a long time. Price movements in the Forex market are wavelike:
some lose a little, some win a little. If you use the right strategy, you
can get more profits than losses. This is a major key to success.

You don’t want to run the significant risks of exceeding the maximum
allowable loss in a trade, as this can lead to big problems. As a result,
the trader will have less chance to restore his/her account and make
a profit. By increasing the maximum percentage risk per trade, the
trader increases the risk of draining the entire deposit.

Therefore, it is better to use the 2% risk per trade rule. With this
rule in force, failure will not lead to large losses. In order to lose 20%
of start-up capital, the trader must do more than ten consecutive
losing trades. However, having a good strategy and following all the
rules of money management, making 20 losing trades in a row will
be difficult. It turns out that the two per cent rule can be considered
sufficiently effective when it comes to trading in the Forex market.

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 There are many traders who claim that the breach of the two-
percent barrier is acceptable and that it is not as important as it
seems. In fact, this risk is suitable only for those who trade in the
Forex market for purposes other than making a profit, such as
experiencing an adrenaline rush.

Beginners need to remember that the Forex is not a key to

getting rich quickly. There is nothing simple and fast. In fact, with
unsystematic trading and risking more than two percent in one
trade, you can have your deposit drained in less than 24 hours.

But it’s not all about money. You can compensate for the financial
loss, but the resulting mental trauma will remain. Just imagine that,
having opened a position at the cost of ten thousand dollars, you
lose fifty percent of it. This means you are five thousand dollars worse
off and will not be able to sleep well until you get the money back.
Such trauma is caused by each additional loss. It leads to increasing
disappointment with trading. After a few losing trades, you can easily
lose control of what is happening. Then, in order to get back your
deposit you begin to break rules, invent non-existent entry points,
and increase risks. These actions can only exacerbate the situation and
make it even more negative or lead to a complete loss of the account.

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What every trader wants
The main goal of every trader is to earn money. Regardless of all the
ups and downs, profits should continue to increase. Bit by bit, using
the right strategy and risking the minimum part of your deposit, you
can become a professional trader.
The main rules of a successful trader:
1. Selecting a low maximum risk level;
2. Testing a strategy out before using it with a real account;
3. Adhering strictly to one’s trading system;
4. Adhering to the 2% risk rule, no matter the previous trading
experience.
Some experienced traders increase the risk to as much as four
percent. In this case, they must make adjustments to their trading
strategies under a certain level of risk. This is the only way to
guarantee the safety of their deposits under the extreme conditions
of making a series of losing trades. The smaller the fraction of the
funds you put at risk in a trade, the less will be the likelihood of a
loss of deposit.

Also, you need to limit the size of losses for the day. In the case of
the three losing trades in a row, it is better to interrupt the trade
for at least one day. The overall risk for several simultaneously
open trades must not exceed the two-percent limit.

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 If the trading has ended in losses for several days in a row, it is
better to take a longer pause, say, one week long. During this time,
you need to relax and try to forget all of the unpleasant moments.
How to calculate position size?
Before making a trade, it is necessary to determine the size of
the lot with which you will be entering the trade. This can be done
using the following formula:

V = (R*B)/(SL*P)
R – percentage of deposit the trader can afford to lose;
B – size of deposit;
SL – pip value of Stop Loss;
P – value of one pip of the trading instrument given a one-lot volume.

First, it is necessary to determine the percentage of the

maximum risk per trade, which in this case will be 2%. Let the
size of the trading deposit be $1,000. In this case, in one trade we
can risk no more than $20.

Suppose we’re trading the euro dollar pair, which gives us an entry
point with a stop loss of 20 pips. As you know, for this pair, the value
of one pip is $10, given a full lot.
After plugging our parameters into the formula above, we get the
result that the optimal size of position is 0.1 of a lot.

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When placing a stop loss in an open position, you need to take into

account the current volatility of the market and the specific features

of the currency pair. Price movements for some pairs span more a

hundred pips a day, which is considered normal, while traffic in other

pairs never reaches 50 pips. In order to predict changes in market

volatility, the trader should watch for the releases of economic data

out of the countries whose currencies are included in this pair.

The knowledge of and compliance with maximum risk rules will

help a trader keep the deposit and earn a profit, rather than a

psychological trauma caused by trading.

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 Chapter 31. Entertainment Math
in Trading
Forex trading systems are based on different technical analysis
elements and designed for different types of markets. These
trading systems generate different signals and operate at different
time frames, but every profitable system has an important overall
statistical component – positive Expected Value (EV).
This term came into trading from probability theory, where it is
used to calculate the average value of a random variable in a variety
of events.
In trading, EV allows for obtaining statistics on the potential
profitability of the system. If the EV of the trading system is
positive, it means that if the trader sticks to it in the long run, it will
bring a profit.
In any trading system, the basic statistical data used in the
calculation of EV are as follows:
• Percentage of profitable trades: W%;
• Percentage of losing trades: L%;
• Average income from a trade closed in positive territory: ave W;
• Average loss from a trade closed in negative territory: ave L.
After collecting the data from the results of actual trading or from

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the history-based testing of the trading system’s signals, we can
calculate the EV of a trading strategy using the following formula:

EV = (W% × ave W) - (L% × ave L) (1)

Here we can see that the EV is the result of subtracting the product
of the number of losing trades and the average loss from the product
of the number of profitable trades and the average profit.
Each trading system in the Forex market has different parameters,
so there can emerge a situation in which a trader will consider one
of the parameters in the EV formula to be more important than
others, and so he/she will pay more attention to it in his/her work.
Expected value in trading: practical applications
First, consider the situation where the numbers of losing and
winning trades are the same and income is obtained only from a
properly selected risk/reward ratio, which we talk about in the
chapter Risk/Reward Ratio.
1. Suppose there is a 50/50 split between losing and winning trades,
and the average profitable trade equals 4%, while the average losing
trade equals 1%:
• W = 50%;
• L = 50%;

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 • ave W = 4%;
• ave L = 1%;
• Risk/Reward ratio = 1 : 4.
2. Let’s calculate EV using these data and formula (1):

EV = (50% × 4%) - (50% × 1%) = 150%

3. Now let’s calculate the result in dollars for 100 trades with the
same statistical parameters, in which the average profitable trade is
$400 and the average losing one is $100.

EV = (0.50 × $400) - (0.50 × $100) = $15,000 (per 100 trades)

In the EV calculation, we get a positive result, which indicates that

our business strategy brings us an average profit of $150.
As we can see, in a trading system with equal chances we get a
positive EV only from a properly sized risk/reward ratio. The average
profitability of a trade with our trading system is 150% per every
dollar invested, or $15,000 per 100 trades at the risk of $100 per
trade.
If the risk/reward ratio is reduced to 1:3, the result will get worse.
The average profit per trade will fall to $100.

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 EV = (50% × 3%) - (50% × 1%) = 100%
EV = (50% × $300) - (50% × $100) = $10,000 (per 100 trades)

When the risk/reward ratio is 1:1, EV takes on the value of zero and
the system no longer generates income. In the real world, trading
strategies with a positive EV close to 0 are already loss-making, as
the formula does not take into account the costs associated with the
opening and holding of positions.

By improving his/her trading strategy, the trader seeks to make

the proportion of profitable trades greater than 50%, to make
trading results more stable in order to avoid long losing streaks.

Depending on the statistics of a trading system, a positive EV can

be obtained by using an unlimited number of trading situations.

The trading system used by a trader can generate profitable signals

in 50%, 60%, or even 90% of the cases, but the resulting EV can be

both positive and negative because of other statistical parameters

included in the formula.

In effect, you can use an unlimited amount of both trading systems
and data to get a positive EV.

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 Expected value in the popular scalping strategy

In this case, the trader makes a lot of profitable trades, but the risk he/
she sets for every trade substantially exceeds the reward.

1. For the purposes of the calculation, we take 90% of the winning

trades and 10% of the losing. Further, let the profit from the average
profitable trade be $10 and the loss from an average losing trade be $50.

• W = 90%;

• L = 10%;

• ave W = 5% and W = $50;

• ave L = 1% and L = $10;

• Risk/Reward ratio = 5:1.

2. Using the EV formula, we arrive at $4, which is the result of our trade.

EV = (90% × 1%) - (10% × 5%) = 40%

EV = (0.9 × $10) - (0.1 × $50) = $4 (per 100 trades)

The system is profitable even when the average loss in a trade

exceeds the average reward by 5 times. But this trading system
is highly dependent on the number of profitable trades, a small
reduction in the percentage of which will cause damage. And
maintaining the fraction of winning trades at the 90% level is rather
difficult even for experienced traders.

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 Also, during scalping, problems can occur if the average losing
trade becomes too large.
As can be seen from the examples above, the trader must focus
on each element in the EV formula, as a significant change in any
component can lead to unpredictable consequences for the deposit.
The advantage of having a positive EV can only be demonstrated
when comparing a large number of statistical data, as a separate
trade or a series of trades can be both positive and negative and
may not reflect the true efficiency of your trading. Therefore, when
your strategy gives you a signal to open a position, you have to use it,
since you cannot know whether it will be profitable or unprofitable.
To maximize the accuracy of the EV calculations, the EV formula
should include the data from as many trades as possible, which is
why it is so important to keep a trading diary. The data obtained
from real-world trading are much more accurate than statistics from
historical data or demo trading, as they take into account the emotional
factor, which greatly affects the result of trading in real money.
With a sufficiently large number of statistical data for the
calculation of EV, a trader can adjust the parameters of the trading
system by changing the risk/reward ratio or the size of a stop loss
order to increase the profitability of trading.

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 Chapter 32. What We Risk
Despite the attractiveness of the Forex market, successful
currency trading is possible only with proper money management,
an important part of which is maintaining the right risk/reward
ratio in trades.

By using a trading strategy, a trader can make a large number of

losing trades and only a few profitable trades and still turn a profit.
The reason for this result is a properly chosen ratio between the
average losing and the average profitable trade. Regardless of the
trading system used, the risk/reward ratio is what can ensure the
proper efficiency of trades and profitable trading in the Forex market.
Risk in Forex
In every trade made in the Forex market, the measure of risk is the
size of a stop loss in pips. At the same time, we must remember that
for the determination of the amount of risk in terms of money it is
necessary to consider the size of the lot and the pip value of the
selected currency pair.
Most trading systems used by traders account for about a half
of profitable signals. The effectiveness of trading using signals is
significantly reduced because of the trader’s emotional approach
to working in the currency market.

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 Emotional traps in which the majority of traders fall include:
• Premature profit taking;
• Panic;
• Changing trading decisions and holding open trades for too long.
Because of this, the number of profitable trades becomes even
smaller. Therefore, only a correctly chosen risk/reward ratio will allow
the trader to make a profit even with a long string of losing trades.
Suppose a trader makes 20 trades in the euro/dollar pair of 1 lot in
volume and with a stop loss of 50 points and a 50% ratio between
losing and winning trades.
After closing all 20 trades, the trader takes a loss of $5,000:

10 × 50 × $10 = $5,000

In order to balance out the resulting losses, the risk and reward
ratio should be greater than 1:1. For instance, a ratio of 1:1.5 will
allow for setting the take profit size to be 75 pips and for making a
profit of $7,500, out of which $5,000 will go to cover the losses.
But with this ratio, even one extra losing trade will reduce the
efficiency of the trading system to a minimum. For instance, with
eleven losing trades, our loss will be $5,500:

11 × 50 × $10 = $5,500

The profit from the nine winning trades will amount to $6,750:

9 × 75 × $10 = $6,750

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 As a result, our profit will be $1,250 (= $6750 - $5,500), and this is
despite the fact that the number of losing trades has increased by
only one, which is only 5% of the total.
In the real world, the number of losing trades can be more than
50%, plus the need to take into account the errors caused by the
trader’s emotions that will influence the amount of profitable trades.
Thus, it is clear that the risk/reward ratio in this case should be much
greater, at least 1: 2.
Real-world trading situations in the Forex market have shown that
most trading systems, both trend-based and flat-based, work well
with the ratios of 1:3 and 1:4. That is, the size of a possible stop in pips
should be 3-4 times less than the expected return. Trading signals
with such ratios are what the trader must look for on currency pair
charts to get a good profit.
Trades opened with the stop loss to take profit ratios of 1:3 and
1:4 enable the deposit to endure a long string of losing trades.
For instance, let’s calculate the possible number of losing trades,
provided that the average losing trade is three times less than the
average profitable trade.
Suppose the losing trade is 50 dollars and the profitable 150 dollars.
In order to balance out the profit obtained in ten transactions, our
losses have to be $1,500. This means that for ten profitable trades
we can make 30 losing trades.

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 With a ratio of 1: 3, the number of losing trades is 75%, but our
account is still in positive territory. The majority of trading systems
that really work provide a much higher percentage of winning
trades, which means that with the risk/reward ratio of 1:3 and long
time frames we can make a profit.
Many traders in their trading use fixed risk levels denominated in
dollars, which, in principle, can be more convenient than the more
common setting of a stop loss as a percentage of the deposit. In this
case, the trader should measure the possible profits in dollars, too,
given the size of the lot and the pip value for each currency pair.
Systems in which the amount of risk in a single trade is greater than
the profit also have a right to exist. For instance, a system of this
type can involve scalping the trend when the trader is committed to
taking a tiny amount of profit from each trade, sometimes as little
as 3 to 10 points. In this case, the trader insures his/her deposit with
stop losses, the size of which may dramatically exceed the profit.
For instance, with a ratio of 2:1, the number of profitable signals
generated by the system must be greater than 70%. Such trading
systems are successfully used by a limited number of traders, as this
type of trading requires a special, emotion-driven approach.
To find an optimal balance between risks and reward for his/her
trading system, the trader should test the trading signals on historical

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charts. To do this, he/she needs to check the signals generated by
the trading system using different ratios between the stop loss and
he target potential of a trade. By alternately checking the ratios of
1: 1; 1: 2; 1: 3 and 1: 4, the trader will receive different numbers of
unprofitable and profitable trades, and each combination will yield
a different end result.
After choosing the potentially best ratio, you can test the trading
system out on real-world trading. Of course, in real life there are
always errors that reduce the potential profitability of the system,
but in the end the trader receives information that allows for
making adjustments to the risk/reward ratio to optimize trading
and improve the final result.

A correctly chosen risk/reward ratio in combination with a

positive mathematical expectation of the trading system will
provide the trader a steady income from Forex trading, regardless
of the percentage of losing trades.

By adhering to the optimal balance between risks and profits in their

trading and by eliminating the bulk of the emotional component
in making trading decisions, you can get rid of a trader’s common
mistake of fixing a small profit relative to losses obtained.

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 Chapter 33. How to Build
a Trading Algorithm
Emotionally charged decision-making is a factor that can have
a significant negative impact on trading outcomes. Uncontrolled
emotions are considered the main reason for a huge number of
mistakes made by traders in the Forex market. The psychology of
trading is precisely the factor that many novice traders underestimate.

Knowing trading psychology is the key to effective trading

Emotion-based trading, the urge to quickly win back losses, the
instinctive opening of trades during rapid and sharp price moves,
and overtrading make up an incomplete list of the wrong decisions
that occur in stressful situations under the influence of emotions.
Having a trading algorithm or plan can help avoid the influence
of these factors. Strict adherence to a trading plan is precisely what
makes traders achieve success.
A trading algorithm is a complete guide to working in the market
with an accurate description of each step to be taken by the trader.
Why does a trader need a trading algorithm and for what purpose?
These and other relevant questions are answered by professional
traders, based on their experience and the analysis of the long-term
practical application of trading algorithms.

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 First, with the help of a trading algorithm, the trader can stick to

the right directions in trading. The right sequence of actions plays

an important role in trading, as it allows the trader to see why his/

her trading is successful or not. Even the traders using good trading

systems routinely breach the rules of their trading algorithms and

never get to find out how profitable their systems really are. With the

help of a trading algorithm, you can achieve a particular purpose.

You have to keep your algorithm in mind and follow it at all times.

Second, trading is a business, and every business should have a

plan. It is difficult to name a really successful business that started

out without a plan. A perfect example would be McDonald’s. Many

people can make tastier burgers than you can get at McDonald’s,

but the guys at McDonald’s just have a plan and really act on it,

which explains their leadership in the fast food industry.

Third, trading algorithms come in different shapes and forms,

however simple or complex you want them to be. The most

important thing is to have one.

Understanding these principles enables a trader to understand the
importance of having a trading algorithm in his/her professional
activities and, hence, be on the way to successful trading.

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 Components of a trading algorithm
In order for a trading algorithm to be an effective and reliable
aide to a trader, the algorithm must contain a number of required
components:
1. Trading system. It is the heart of a trading algorithm. This system
should be tested out on historical data and in real-world trading.
You have to test your system by trading from a demo account for at
least a couple of months. Your system should have all the necessary
information about your trading style, including the most important
elements: timeframes used, risk per trade, entry/exit parameters,
trading tools applied, and position size.

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2. Trading routine. This part of the plan is quite important, as it helps
identify several significant things: when to analyze the market,
when to plan out position opening, when to make trades and when
to evaluate the actions you took during the trading session.
3. Mindset. You can ask any trader and he/she will tell you that
the most difficult part in trading is to leave one’s emotions out of
the market. This part of the plan should describe the mood and
thoughts with which one should get down to work, and in what
cases it is better to stay away from the trading terminal.
4. Weaknesses. Weaknesses are the natural elements of a personality
and the psycho-emotional state of every human being. Even if a
trader doesn’t want to openly own up to his/her weaknesses, he/
she should perform self-analysis in his/her private time to eliminate
the shortcomings getting in the way of effective trading.
5. Major goals. These are the parts of the plan that credibly reflect
the desires of a trader. The trader needs to sit down and think
about what he/she can achieve as a trader. “Making lots of money”
is not in itself a major goal, because major goals are not limited to
making money. It is necessary to consider how much the trader can
really expect from trading, taking into account his/her knowledge,
experience, and starting capital. The trader has to be striving for

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disciplined trading, and the result will not be long in coming. The
trader needs to understand why he/she has come into trading, and
what else in it interests him/her in addition to the money-making
opportunities. After including this part in his/her trading algorithm,
the trader will constantly have the objectives in front of his/her
eyes and will always know how close he/she has come to achieving
them. But first, each trader must set for himself/herself the most
important goal: not to lose money while trading, as money is the
tool for making more money.
6. Trading log. This valuable tool will help the trader become a
better trader. It is necessary to verify the accuracy of all actions you
took while opening and closing trading positions. After studying
their records in the trading log, many have realized how significantly
this habit has improved their trading. In the beginning, most of your
trading may not quite fit your strategy, but over time you will find
that you have developed a better feel of the market. Those who study
their trading logs have faith in themselves and watch themselves
make progress toward their targets. This tool helps in the long run,
so you should spend a few minutes every day keeping a trading log.
The main advantage of having a trading algorithm is that it
makes trading much easier, as the trader acts on a previously
drafted plan.

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Having a plan helps in:

• Avoiding stress and maintaining psycho-emotional health;

• Developing self-control and preventing irrational behavior in the

future;

• Avoiding overtrading, a major problem among traders.

After consulting with the plan, it is possible to evaluate one’s own

results and find shortcomings that require adjustments.

A trading Plan promotes discipline. Most traders who have not

made up their own trading algorithms usually do not have enough

discipline. As a result, they are often faced with heavy losses,

resulting from the inability to close losing positions with minimum

losses and profitable positions with maximum profits. If a trader

makes up a trading plan and sticks with it, said negative outcomes

can be avoided.

In general, a trading algorithm is similar to a GPS navigator, as it

leads the trader to the main goal of trading: consistent profits. But a

trading plan will be sufficiently effective only if the trader adheres to

all the rules written up in it. This task may seem fairly simple at first

sight, but many traders forget about their trading algorithms once

they start trading and let their emotions engulf them.

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 All trading plans are strictly individual, so they must necessarily
take into account the specific goals, individual lifestyles, and
risk attitudes of the trader. All components of a trading algorithm
should be formed taking into account these factors.
The trader needs to understand that trading algorithms should
be constantly updated to adjust to the current market situation.
It is necessary to periodically evaluate one’s trading plan, making
changes to it, especially in the cases when there have been changes
in one’s financial situation or life circumstances. The analysis of one’s
trading methods and system must also be reflected in the updated
trading algorithm.

The main task of a trading plan is to help the trader achieve his/
her goals and make effective trading decisions. But the rules of
algorithm construction and maintenance will only be as effective
as the practical application of the algorithm in real-world trading.

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 Chapter 34. News Comes in
Different Types
News-based trading is an important part of various trading
systems and can bring big profits with the right approach.
Almost every piece of economic news is part of fundamental
analysis and has great influence on trading decisions by market
participants.
News updates affecting the market fall into several groups:
• Published economic indicators;
• News and events taking place in the global economy, including
political and nature-related events;
• Rumors among market participants.
The importance of a news item defines its lifecycle:
• Short-lived news. This group includes unexpected news and rumors
whose impact on the market lasts between one and several days.
• Long-term news. News in this group depends on macroeconomic
parameters and indicators, and its impact on the market typically
lasts between several weeks and several months, generating
movement on large timeframes.
Also, news can be expected (planned) or unexpected (accidental).
For planned news, the trader prepares in advance, planning

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out when to exit positions. Unexpected news tends to have a
stronger effect on the market than planned news, causing greater
movements in the financial instrument at short time intervals due
to the excitement factor.
A trader should prepare for planned news in advance, knowing the
time of its release. In this case, trade orders are placed in advance
as during the news release it will be difficult to enter the market
manually at best prices.
How to trade the news
Having decided to trade news events, the trader must:
• Pre-determine the possible direction of price motion on the basis
of the likely market reaction to the expected performance;

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 • Evaluate the possible volatility of the market to determine the
optimal size of the stop-loss and target motion;
• Five minutes ahead of the news release, place pending orders;
• Evaluate the reaction of the market at the time of the news release
in order to manage an open position and a possible entry into the
market in the direction of the trend at best prices.
The trader determines the most likely direction of price movement
based on the importance of fundamental data and by evaluating
the resulting economic parameters:
• Expected indicators;
• Previous indicators;
• Indicator forecasts by leading financial institutions.
The necessary information can be found on the website of your
broker and leading analytical Internet resources dedicated to Forex.
Next, the trader must assess the market’s possible responses to the
release of economic indicators. These responses are not generally

uniform and so make possible different scenarios:

• The expectations of most market participants are generally
realized – no strong trend movement will take place.
• Trader expectations are not met as a result of the underestimation
of the news – the current trend is likely to continue, with a possible
acceleration when the news is out.

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 • The expectations of the majority of market participants turn out
to be wrong – there are chances the previous market movement will
be reversed.
• A piece of fundamental news is released that is contrary to the
trend – its impact on the movement of the currency pair will be
short-lived.
• A fundamental economic indicator confirms the current trend –
the trend accelerates, but so does the probability of retracement.
At the time of the release of important economic news, the market
freezes for some time as participants comprehend its meaning and
large market players carry out the «holding back» of the exchange
rates to make time for closing loss-making positions and open new
positions in the other direction.
Placing positions in advance is necessary, as many brokers ban
trading the news, stipulating the ban in the trading terms. Even if
the opening of positions during the news releases is enabled, the
broker can at this time be dramatically expanding the spread, which
naturally leads to immediate losses, as spread may be increased by
up to 20-30 pips.
The opening of positions during news releases may be further
affected by re-quotes caused by increased volatility. In this case, the

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price will change so rapidly that the broker will not have time to
handle the trader’s orders, with the result that the price of an open
position may significantly differ from the prices requested in the
trading order.
Based on said trading nuances, the optimal way to trade news is by
placing pending orders in the direction of the intended movement.
In this case, five minutes ahead of the news release, the trader places
BuyStop and SellStop orders at a distance of 20-30 pips from the
current price of the currency pair.
When a pending order is placed, TakeProfit and StopLoss orders
are placed. As a target of the movement, the TakeProfit is placed
at a distance of between 30 and 50 pips from the entry price, but
sometimes the distance can be increased, because, during the
release of important news, the price movements can exceed 100

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pips. The StopLoss size is selected to be no more than 10 pips.
This is justified by the fact that the news release may cause mixed
movements and it is better to lose a small amount at once than to
take a big loss during price momentum in the opposite direction
without being able to close positions due to re-quotes.
At the time of the news release, traders also use the lock-based
strategy. In this strategy, the BuyStop and SellStop orders are placed
without the limiting stop losses. When only one entry order is
activated, it brings a profit. If two orders at once have entered the
market, the first is closed when a reversal signal appears, and the

second is closed after taking losses in a retracement.

Trades can be entered after news releases as well. In this case, the
trader identifies the ongoing trend and enters it in the direction
of movement after a retracement. The scope of the movement is
generally determined by the importance of the indicator released.

The most important economic factors that have a major influence

on the foreign exchange market are:

• The release of refinancing rate numbers by central banks;

• The release of the indicators of inflation, gross domestic product,

and industrial production;

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 • The release of the employment indicator, an important proxy for

the number of jobless claims and the number of jobs created;

• Speeches by the finance ministers of the countries having great

influence on the world economy and the chairmen of central banks,

especially those in the US, EU, UK, and Japan.

The success of news-based trading is largely dependent on the

trading terms of a specific Forex broker.

So, if you decide to trade the news, test out the broker’s trading

terms using a small deposit. If the trading rules of a specific broker

are breached, the trades may be canceled, and the resulting profit

may be debited from your accounts.

The main criteria for choosing a broker for comfortable news

trading:

• Minimum slippage and re-quotes during news releases;

• No chance of spread expansions during news releases;

• No requirements on the timing of position opening;

• No intentional removal of your stop losses by the broker.

If the trading terms of the broker you have chosen more or less meet

these criteria, then it is possible to try trading the news at this broker.

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 It is necessary to understand that, during news releases,
volatility rises and there is not always a chance to get the price
the trader has indicated in his/her orders.

And not in all cases will the blame go to the broker, as, for instance,
when a good news item is released, all market participants may want
to buy while the market may not have enough sellers, resulting in
an expansion of the spread and execution of the trade at the current
market price. This is why trading the news is risky and can bring both
profits and significant losses.

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 Chapter 35. Scalping
Scalping
Identifying the most probable price movements over a short time
span is much easier than finding targets that the price can achieve
without a substantial correction on older timeframes.
On short timeframes, such as the one-minute and five-minute charts,
the price can often move in the same direction, going a few pips. If the
trading system used by the trader is able to generate trading signals
so the trader can make use of such small targeted movements with
optimal risk, it can be successfully used in practical trading.

Forex trading using trading systems feeding signals over

short periods with minimum achievable goals is called pipsing
or scalping.

The term suggests that this type of strategy has tiny goals, which
sometimes amount to as little as just a few pips, reached within
several minutes.
Scalpers make a lot of trades every day, trying to find signals for
trading in short-term trends to take profits a few pips in size and,
after a few-pip-long retracement, enter along the trend again,
getting almost the same prices for a repeat entry.

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 Scalping efficiency
The efficiency of scalper strategies derives from the wave-based
nature of financial markets. Long-term trends are made up of the
medium-term, which in turn are made up of the short-term. Any
trend or correction can be decomposed into directed movements
on smaller time intervals.
Therefore, any price movement can be seen as a set of trends
and retracements, forming their trend channels and support and
resistance levels, depending on the selected timeframe.
A scalper selects the smallest time intervals – 5-minute and
1-minute charts – and constructs trend lines, price channels, and
support and resistance levels.
The subsequent application of basic methods of technical analysis

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gives the trader signals, making it possible to enter the market for a
3-5-pip profit, taking into account the spread.
Major advantages and shortcomings of scalping
Analyzing this trading system reveals its obvious pluses:
1. Profit size. Using the same amount of investment, different
scalpers earn different amounts of profit, with the traders using
the right approach earning much more than others. This happens
because, as the price move toward a strategic goal, the scalper reaps
many more pips than the distance to the goal itself.
2. Continual signals. Signals for scalping are always there, and the
scalper can trade continuously, while the position trader waits long
for a market entry, which is not possible before the price reaches a
specific goal. The scalper makes dozens of trades per day, while the
position-based trader waits for the right signal, often to no avail.
3. News-based, economic indicator-free trading. Scalpers make
trades based on the potential of news updates. By evaluating the
psychological impact on the majority of participants, scalpers can
identify the current levels of support and resistance, basing their trading
on them rather than on the delayed signals of technical indicators.
4. Trading can be stopped at any time. The trader doesn’t have to
leave his/her positions unsupervised or roll them over to the next
session.

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 The significant shortcomings of scalper systems include the
following:
1. The trader has to endure an insane amount of stress caused by
the ongoing evaluation of the market and the need to make risky
decisions instantly. Such uncomfortable trading conditions may
diminish the trader’s attention and increase the number of errors
associated with emotions, so active scalping as a rule does not last
long. After 3-4 hours, the scalper starts to make critical mistakes,
forcing him/her to stop trading and take a break from the market.
Forex does not forgive scalpers any blunders. Trading using this
style is only available for cool and attentive traders. During pipsing,
positions are closed manually, so the scalper must always be able to
do this after getting the appropriate signal.
2. Risk management system. The usual rule that requires risk
minimization does not work in this scenario. The potential risk in
a trade is a lot greater than the expected profit, which is why the
scalper must perform many trades to cover the losses incurred in
one trade.
The shortcomings of scalping-related risk management include the
use of a large portion of the funds invested in a single trade. Where
a position-based trader uses the maximum leverage of 1:10 in one
trade, a scalper uses the 1:50 leverage and thinks it is normal.

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 Pipsing has enough of advantages and disadvantages,
so everyone decides independently whether this system is
psychologically suitable for him/her and how to deal with the
obvious drawbacks.

Many scalpers, to deal with the shortcomings of scalping, trade

for no longer than 4 hours, or until the first loss. Also, scalpers may
limit potential losses to, say, 10 pips or 5% of the deposit. In scalping,
current support and resistance levels are super-important, so the
scalper must be very careful to observe the behavior of the price
when it achieves these levels. When you have opened a trade and
the price has reached the level, it is better to close and observe the
following retracement. The retracement may be sharp or vice versa the
price will fluctuate a little, which may influence the scalping tactics.
For scalpers, the issue of broker choice is important, as many
brokers do not permit this type of trading, imposing limits on this
type of position opening. The trader should carefully read the
broker’s trading terms if the trader plans on scalping in the market.

The size of spread is important, as the profit in each trade heavily

depends on it, so when choosing a broker one should pay attention
to brokers offering minimum spreads.

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 When using trading technologies with fixed or floating spreads,
there is the need to look at the execution of trades by the broker.
Fixed spreads allow for more predictable trading but with lower
profitability. Floating spreads will cause the need to choose the
trading period corresponding to the minimum spread. In this
case, the scalper will not be able to use great movements on news
updates but will have much better conditions when trading in a flat.
Scalping, despite its apparent simplicity, turns out to be rather
hard and is only available to experienced traders, able to actively
maintain their positions, constantly stay in front of a computer
monitor, completely isolate themselves from emotions, and
instantly close losing positions rather than keep them as do
position traders.

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Chapter 36. A Brief Tour of the World’s
Central Banks
Central banks play an important role in the formation of national
economies, currency exchange rates, interest rates, and economic
relations between nations. Central bank operations affect the
foreign exchange market.

In each country, the central bank is a linchpin of the overall banking

monetary system designed to maintain its relationship with the state.

How central banks emerged and evolved

The first central bank, Swedish Riksbank, was founded in 1668.
As early as in late 19th century, the world economy faced an acute
need to control the financial system, as uncontrolled economic
growth had led to crises. As a result, central banks were been given
the mandate to carry out monetary policy to maintain the stability
of the economy and the national currency.
At first, national banks were joint-stock financial institutions with
shares in free float. Gradually, however, the majority of them were
nationalized and made the property of the state.
The national banks of today come in different ownership types and
sizes. For instance, among state-owned banks are the central banks

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of Britain, Russia, Germany, Denmark, France and the Netherlands.

Among the banks with joint-stock ownership are the central banks

of the United States and Italy. These central banks are owned by

other banks and insurance companies. Among central banks with

mixed ownership are those of Japan and Switzerland.

In the modern-day world, the banking system of any country is

made up of two levels:

• Upper level, housing the nation’s central bank;

• Lower level, housing commercial banks of various types, investment

funds, insurance companies, trust funds, pawnshops, and non-

banking financial institutions.

The main functions performed by any central bank:

• Implementation of monetary regulation of the national economy;

• Issuance of money;

• Oversight of credit institutions’ activities;

• Implementation of the accumulation and preservation of cash

reserves by other banks and credit institutions;

• Conduct of necessary refinancing of commercial banks;

• Provision of credit financing and settlements to service the

government’s operation;

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 • Preservation of the nation’s foreign exchange reserves.

The main monetary policy instruments of any national bank are:

• Official discount rate, whose changes have strong impacts on the
Forex market;
• Provision requirements for banks’ balance sheets;
• Open market operations, allowing the national bank to regulate
supply and demand by purchasing and selling various securities,
including foreign exchange-denominated liabilities;
• Control over the capital market to set standards, rules, and
requirements for working in the country’s financial system;
• Foreign exchange interventions, allowing the national bank
to take the market-based exchange rate closer to the PPP-based

exchange rate.

Market-based exchange rates are most strongly affected by

the actions of the central banks of the world’s most developed
economies.

The Federal Reserve (Fed)

As the US dollar is the world’s major settlement currency, the

Federal Reserve is undoubtedly the world’s most powerful central

bank. Despite being a private institution, the Fed’s decisions have

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a fundamental impact on the market exchange rates of most of the

world currencies.

The Fed is made up of:

• Seven Fed Governors of the Federal Reserve System;

• Federal Open Market Committee (FOMC);

• Chairmen of the 12 Federal Reserve banks;

• Advisory boards;

• Fed member commercial banks.

The Fed’s rate-setting decisions are made by the FOMC, whose

meetings are held eight times a year and always cause a strong

response in the foreign exchange market.

The European Central Bank (ECB)
Decisions by this supranational financial institution influence the
exchange rate of the single European currency. Created in 1998, the
ECB has become a major part of the European System of Central
Banks (ESCB), along with the national central banks of the member
countries of the European Economic Community.
The most important role in the Pan-European banking monetary
system is played by the Governing Council of the ECB, which is a
supreme governing body comprised of members of the ECB’s
Management and CEOs of National Central Banks.

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The ECB Governing Council is empowered to define important key
elements of the overall monetary policy in the euro area, including:
• Interest rates;
• Minimum provision requirements for national central banks;
• Development of regulations and decision-making protocols for
the national banking systems of Eurozone countries.
Meetings of the ECB Governing Council take place twice a week,
but major decisions are voiced at a press conference taking place 11
times a year.
Due to the complete independence of the ECB from the governments
of the Eurozone countries, decisions taken by the ECB have a strong
influence on the activities of Forex market participants.
The Bank of England (BOE)
The British banking system is one of the oldest in Europe, as the
Central Bank of England was founded in 1694.
Despite its membership of the EU, the UK has always had its own
currency, the pound. It has a serious impact on and is correlated
with the euro.
The supervision of the Bank of England’s operations is the
responsibility of the Monetary Policy Committee, composed
of a chairman, two deputies, two executive directors, and four
independent experts.

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 The scope of the news published by the Bank of England is rather

extensive. Under the Robert Peel Act of 1844, the balance sheet of the

Bank of England is published every week. Since the nationalization

of the Bank of England, it has been required to publish annual

operating reports, and, since 1961, to release quarterly newsletters.

The Swiss National Bank (SNB)

The SNB’s decisions have a major impact on the exchange rate of

the currency pair USD/CHF and the related crosses including the
Swiss franc.

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 The supervision of the Swiss National Bank is the responsibility
of the interest rate committee, made up of three people. Due to
the Swiss economy’s export orientation, it takes no interest in the
high strength of its currency, so the actions of the Central Bank are
directed at keeping the Swiss franc from becoming too strong.
The Bank of Japan (BoJ)
Control over the activities of the Japanese banking system is
exercised by the Central Bank of Japan, 55% of which is owned by the
state, and the Central Bank’s private investors may not participate in
its management.
The management of the Bank of Japan is the responsibility of the
Monetary Policy Committee, whose decisions determine the course
of the nation’s banking activities. The Bank pays special attention to
the level of interest rates.
Since 1998, the Bank of Japan has become independent in its policy
from the Ministry of Finance. This independence enabled the bank’s
management to conduct a looser monetary policy.
Traders are always waiting for foreign exchange interventions by the
Bank of Japan, which responds very harshly to the strengthening of
the national currency, as the nation is heavily dependent on exports.

The Bank of Canada (BoC)

In Canada, the role of the central bank is played by the Bank of

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Canada, established in 1934 as a joint stock company but reformed
into a state-owned entity later on. The direction of the Bank of
Canada’s activities is defined by the Federal Government through
the appointment of the board of the Central Bank.
It consists of a managing director, a deputy managing director,
an assistant to the Minister of Finance, and 12 other members of
the board. The decisions of the BoC Board of Directors are adopted
by a consensus. The Central Bank makes regular reports to the
Parliament. Meetings of the BoC Board of Directors are held eight
times a year.
The Reserve Bank of Australia (RBA)
In Australia, the central bank functions have since 1960 been
performed by the RBA (Reserve Bank of Australia).
Control of the monetary policy is administered by the Committee
on monetary policy, comprised of the Chairman of the RBA, Deputy
Chairman, Secretary of Treasury, and six independent experts
appointed by the Government of Australia. Any changes to the
makeup of the RBA policy committee are adopted jointly by finding
a consensus.
Since 1983, Australia has maintained a floating exchange rate of
the national currency, and the central bank is entitled to participate
in trading in the Forex market to stabilize market conditions through
foreign exchange interventions.

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 Meetings of the Monetary Policy Committee, which may sanction
interest rate changes, are held on the first Tuesday of every month.
The Bank also publishes quarterly and semi-annual reports.
The Reserve Bank of New Zealand (RBNZ)
In New Zealand, all the functions of a central bank are performed
by the Reserve Bank of New Zealand. Its monetary policy is
determined by the head of the RBNZ.
To maintain the inflation target of 1.5% for the year, the Central
Bank of New Zealand conducts a balanced monetary policy, trying
to eliminate the volatility in interest rates and reduce the volatility of
the New Zealand dollar. The meetings of the Reserve Bank of New
Zealand are held eight times a year.

Decisions by the national banks of the world’s major economies

significantly affect exchange rates, so traders working in Forex
must closely follow the news relevant to national banks and take
these pieces of news into account when making trading decisions.

The publication of interest rates makes for the most important

headlines. During their publication, market volatility increases
significantly, and so do the odds of taking losses from stop
loss triggers.

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 Chapter 37. Currency Interventions
Currency Interventions
Currency interventions, or foreign exchange market inter-
ventions, are the type of instrument central banks resort to when
other currency regulation methods have failed.
The foreign exchange market is closely related to the operation
of the central bank and finance ministry of every country. These
institutions helped create the complex mechanism that is used in
the formation of the financial system in every country.
A currency intervention is a purchase or sale of the national
currency by the country’s central bank. The main purpose of
currency interventions is to regulate the exchange rate in a way that
meets the interests of the state. Currency interventions are viewed
as the most important tool of foreign exchange regulation.
Types of currency interventions
There are two types of interventions in the foreign exchange market:
1. Real interventions. Interventions of this type are carried out
on behalf of the state. After a real intervention, the media publish
an accurate and comprehensive report specifying the amount of
funds that were spent in the course of the intervention. There are
cases when foreign exchange interventions are carried out with the
participation of the central banks of several countries. It is clear that
in this case the intervention is a win-win transaction for both parties.

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Rather often, real interventions involve different commercial banks,
acting at the request and on behalf of the country’s central bank.
2. Verbal, or dummy, interventions. In a verbal intervention, the
Central Bank deliberately spreads rumors about a forthcoming
intervention. These rumors often give rise to subsequent events
occurring in the Forex market. Most of the time, the response is not
long in coming. Verbal interventions occur much more frequently
than the real. This can be explained by a factor of surprise.
Interventions are also categorized according to their direction:
• Against the market: the aim of this intervention is to return
the exchange rate to its previous level. This type of intervention
counteracts the previously established market trend. Such actions
often end in failure.

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 • Directed towards the current trend: the purpose of this measure
is to direct all exchange rate-setting actions in the direction of the
existing trend.
How a foreign exchange market intervention works
If the purpose of an intervention is to increase the exchange
rate, the Central Bank actively sells the foreign currency and buys
the national currency. As a result, the national currency becomes
considerably stronger, while the foreign currency becomes
considerably weaker.
If the goal is to reduce the exchange rate, the Central Bank
actively sells the national currency and buys the currencies of
other countries. This operation leads to a weakening of the
national currency and a significant strengthening of the foreign
currencies.
There are many striking examples of currency interventions. It is
known that the use of interventions in order to regulate the national
currency is considered a non-market method. The country using the
non-market methods most actively is Japan. Japan often resorts to
currency interventions.
Along with currency interventions, the Japanese government
conducts banking policies aggressive in every sense. However, apart
from Japan, many other countries resort to currency interventions.

220
 For instance, in 1992, the United Kingdom wanted to use this
method to correct the pound’s exchange rate, but the Bank of
England had never succeeded in doing so, because its measures
at the time were outbalanced by the massive capital of serious
market players, the most famous of which is George Soros.
For a successful currency intervention, the following conditions
are necessary:
• The nation’s main economic indicators should change significantly;
• Market participants should fully trust the long-term policy of the
central bank;
• The central bank must have substantial financial reserves.
Let’s look at a currency intervention by, say, the National Bank of
Switzerland.
In recent years, the foreign exchange market has seen the Swiss
franc strengthen against the euro, Canadian dollar, Australian dollar,
US dollar, pound sterling and yen.
Several pronounced patterns are emerging as the Swiss franc
strengthens. Consider the currency pair USD/CHF. It reached its
all-time high in October 2000, when it stood at 1.8309. After that,
a long-term descending trend in the dollar/franc pair began to
take shape in the market, indicating a strengthening of the Swiss

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currency. On August 9, 2011, the dollar reached its historical low of

0.7067 against the Swiss franc, meaning that, over the eleven years,

the currency pair dollar/franc lost 11242 pips, or 61.4%.

Soon after, the Swiss currency appreciated rapidly relative to other

key currencies traded in the Forex market. The first step of the

National Bank of Switzerland towards the containment of the Swiss

franc was to cut the interbank three-month LIBOR rate range. The

maximum of the range was reduced from 0.75% to 0.25%. Then, in

2011, the Central Bank of Switzerland began to actively pursue a

deliberate policy aimed at weakening the national currency. It was

an answer to the rampant growth of the Swiss franc. This way, the

Central Bank had significantly increased the supply of the franc in

the foreign exchange market from 80 billion to 120 billion francs.

On August 17, 2011, the bank once again increased the limit to 200

billion francs.

All of the above measures relating to the weakening of the franc lasted

until about August 30, after which the franc began to strengthen

again. Seeing that such methods for deterring the franc’s growth

had come to nothing, the central bank of Switzerland conducted a

tough and aggressive currency intervention, directed against the

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key currencies traded in the Forex market. The Swiss Central Bank
in a press release in 2011 indicated that 1.2 Swiss francs against
the euro was the minimum level that must be maintained for the
stable functioning of the Swiss economy. The bank stressed that
the peg to the euro would likely not hold out for long and that, if
necessary, the franc will be weakened further.

Noteworthy, currency interventions are quite a rare occurrence,

but Forex market traders should always be prepared for such
developments. It is worthwhile to always monitor the actions of
national banks and the news while following the signals of one’s
own trading system.

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 Chapter 38. Interest Rate
Interest Rate
Interest rates are the main tool that central banks use to maintain
the stability of the economy and the rate of the national currency.
The banking system of any country uses several types of interest
rates, the size of which is important for investors, creditors and
debtors. Each banking system uses interest rates as a major tool
with which to regulate the crediting of the economy by commercial
banks and stabilize the movement of capital in the economy.

The main interest rate in any national economy is the rate of

refinancing, which serves as the primary discount rate. The size of
this rate determines the cost of the loans the central bank offers to
commercial banks.

The high level of interest rates attracts international lenders and

investors to the national economy, because the higher discount
rate implies higher bank deposit rates. In the world of finance, this
phenomenon is referred to as carry trading, which strongly affects
the Forex market. In this type of trading, investors use the currency
with the lower interest rate to buy the currency with the higher
interest rate. The currency bought this way is then deposited into
the banks of the country offering high deposit rates.

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 When choosing a currency pair with which to trade, a trader can
determine the attractiveness of a currency pair by using the concept
of interest differential: the difference between the interest rates of
the currencies within a currency pair which reflects the demand for
each of these currencies.
Central banks use the interest rate as a monetary policy tool to
control inflation. Therefore, changes in interest rates affect long-
term economic processes, which is important for traders and
investors trading long-term.
The size of the interest rate set by a central bank creates a stable
economic environment in a country. By increasing the interest rate,
the central bank aims to reduce inflation and contain overly rapid
economic growth. Such interest rate hikes lead to a rise in the cost
of credit financing for businesses and curtail their operations.
High inflation is dangerous for the national currency, because it
hurts the holders of national currency-denominated government
bonds. These investors begin to dump them, causing a surplus of
currency and its devaluation. Growth of interest rates strengthens a
country’s national currency and makes its economy more attractive
to foreign investors.
When interest rates reach sufficiently high levels, the other side
of interest rate hikes begins to affect the national economy. Due

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to the resulting high cost of credit, the volume of production begins
to decline, investors suspend investing in the real economy, and an
economic recession sets in. At this stage of the economic cycle, central
banks are beginning to cut rates in order to make loans more accessible.

This cycle of interest rate changes by central banks is correlated with

significant long-term currency movements in the market. Therefore,
traders always follow changes in the current interest rates and try to
anticipate these changes by analyzing other fundamental factors.

When carrying out interest rate changes, every central bank

aims to achieve certain economic indicator targets as part of a
successful monetary policy, rather than maximize the yield on its
own banking operations.

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 Interest rate and trader behavior
While trying to predict future changes in interest rates and
the actions that central banks may take, the trader can receive
good clues from analyzing relevant economic indicators. These
indicators include consumer price index, employment, consumer
spending, and changes in GDP growth.
If the interest rate is reduced suddenly, one should expect massive
sales of the currency whose country’s central bank has made
that decision. However, if this decision is planned and market
participants know about it in advance, there can be an opposite
response. This is due to the fact that large market participants

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may take action in advance of the rate cut. If they do, their actions
may weaken the national currency in question. So when the
anticipated interest rate change finally arrives, they start buying
the currency or ignore the rate cut altogether, thinking that this
piece of news has already been priced in by the market.
Since the interest rates of central banks are a major factor
in fundamental analysis, almost all traders in their work pay
attention to changes in interest rates. For information about the
current level of interest rates of various central banks and for
analytical reports on the trends in interest rate changes, you can
contact almost any Forex broker.

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 Chapter 39. Indicators of the World’s
Economic Situation
Economic indicators are the financial and economic data
published by state statistical agencies and financial institutions.
Thanks to these data, market observers are able to constantly
monitor the overall state of the economy. It is not surprising
that almost all of the participants in the Forex market pay close
attention to economic indicators every time they are published.
Most people respond to published information in the same way,
which is why economic indicators can have a significant potential
impact on trade volumes. In addition, they can significantly affect
the price movements of currency pairs.
To confidently use these financial indicators and generate profit
from their ever-changing values, traders should learn only a few
standard rules they may need when making their own trading
decisions based on this information.
Economic indicators and trader behavior
In order for a trader to always be in the know about the publication
of economic indicators, he/she must constantly monitor the exact
time of their publication, which is marked on the calendar.
By following the events in this calendar, one can view trading from
the perspective of a particular data release. Thus, one can expect
strong changes in exchange rates during the releases of certain news.

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 For instance, consider a case with the US dollar in which it has
declined for several days against other major currencies. Suppose
that on Friday new information is pending release concerning
employment in the United States. If the data in this report turn out
better than expected, traders can react to it and start closing their
short positions. This leads to the end of the previous downward
trend in the dollar, observed in the market in the last few days.
There is no need to understand the many nuances present in
every data release, but you should try to understand the large-scale
key relationships between reports, as well as their importance for
the economy. For instance, a trader needs to know all about the
economic terms used in the measurement of economic growth and
how they relate to the rate of inflation or to the employment index.
Much attention is paid by market participants to individual
indicators under certain conditions. The importance of published
data may vary over time. For example, if the price level in a country
in the current situation is stable but economic growth is rather weak,
traders can pay much less attention to data concerning inflation and
focus instead on information relating to employment and GDP growth.
Rather often, the information itself is much less important than
whether it meets market expectations. If any reported values differ
significantly from the forecasts of analysts and economists, this

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gap will lead to increased volatility and the emergence of potential
trading opportunities.
At the same time, one must be careful not to start acting too
quickly, especially if the economic data are very different from the
expected performance. Some economic indicators include revisions
to previously published information.
Whereas a macroeconomics professor has the time to assess the
details of every economic report, regular traders should filter the
information only to make the right decisions.
For instance, many traders pay close attention only to employment
report titles, thinking that the number of jobs will be a key in
determining economic growth. This is true, but in the context of
trading, the number of jobs created in the non-agricultural sector
is considered to be a more important indicator for the market, so its
publication is observed by a larger number of traders.
It is necessary to remember that there is no clear-cut rule to help
traders identify the future direction of a currency pair depending
on whether economic data turn out better or worse than the
market. It all depends on the economic situation and the current
market sentiment. A trader can well understand the economic data
published in the United States, but the data released in Australia
and Europe may have unexpected effects on the different financial

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instruments traded in the market. Thanks to prior training, you will
be ready for anything that may happen with the currencies of the
countries publishing economic data.
The most significant economic indicators
The economic health of different countries can be measured by
economic indicators, but not all statistics are of equal importance.
Every trader should know the major economic indicators that have
the greatest impact on market participants.
Indicators fall into two groups:
• Leading indicators, which change before the situation in the
economy follows a particular trend. These indicators are used to
predict changes in the economic situation;
• Lagging indicators, which indicate changes in the economy
after it has started following a particular trend. They are used for
confirmation of economic changes.
Major types of economic indicators
A categorization of economic indicators helps develop a clear
notion of the current situation unraveling in financial markets and
take advantage of it.
Gross Domestic Product (GDP)
Gross domestic product is the amount of goods and services
produced by national or foreign companies. GDP allows for
determining the pace of economic development. This is a general
indicator of economic development and production.

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 Industrial Output
This is the mean value of changes in the production of domestic
enterprises, mines, and factories, and an indicator of industrial
production. This indicator reflects the industrial potential of a
nation and the degree of its realization.
The manufacturing sector represents a quarter of each of the
major currencies’ nations, so it is important to take into account
the state of the industrial sector, as well as whether the production
capacity is used in full.
Producer Price Index
The purpose of calculating the producer price index is to measure
the average change in the selling prices of the products of mining,
power generation, agriculture, and other industries. This index is
used as a leading indicator of consumer inflation in predicting
changes in its level.
Consumer price index
The consumer price index reflects the average level of all
prices paid by consumers for a fixed basket of goods. This index
indicates changes in the value of goods in more than two hundred
categories. Its calculation also takes into account changes in the
amount of costs associated with certain services. This index is used
to predict future inflation.

233
 Durable goods
The calculation of this indicator takes into account all of the orders
received by producers of goods lasting more than three years.
These products are automobiles, home appliances, furniture, and
construction materials.
Sometimes, in challenging economic conditions, consumers and
businesses may defer purchases of such goods. This indicator is
used in the measurement of different types of consumer demand.
New housing starts
The calculation of this index takes into account all the residential
units constructed during the last month. The beginning of
construction is considered to be the time of excavation of the
foundation.
The housing market is considered to be the first sector to respond
to changes in interest rates. A significant reduction in the number
of new building permits means that interest rates are at a fairly
high level.
Major economic indicators, their formation, and publication
impact foreign exchange movements and, hence, define future
actions by traders.

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 Chapter 40. The News That Matters
for the Market
Trading the news is a simple but important strategy for the Forex
market. Its effective application in the real-world trading requires a
certain amount of knowledge and skills.
For a start, a trader should learn to understand the significance of
a news item, its features, and the duration of its impact on exchange
rates. This information will allow for making profitable deals and
generating substantial financial reward.
Types of news by importance
In terms of their importance for the Forex market, news items fall
into three information groups:

235
 1. Most important.
This category includes the headlines that have a significant
impact on the economic and financial market: natural and man-
made disasters, terrorist attacks, bankruptcies, and defaults. This
information makes an impact immediately but loses importance
quickly. In such situation it is recommended that trades be opened
immediately, without waiting for a price correction.
2. Important.
Important news means information that is already known as a result
of various economic processes: news on unemployment, inflation,
or a drop in GDP. In this case, it is best to trade along trends and
close trades during trend reversals.
3. Moderate.
This group includes events that cannot significantly alter price
levels in the foreign exchange market. This information weakens or
reinforces an existing trend.
Based on the importance of a news item, a trader selects an
optimal trading strategy.
Types of news by duration

At the same time, currencies are affected by how long a headline’s

impact lasts. Some of the information contributes to rapid and
sharp leaps, while other information leads to smoother processes
and long-term trends.

By the length of impact on the foreign exchange market, headlines

fall into two categories:

236
 • Short-term: these are messages that emerge quickly and affect
exchange rates equally quickly. As a rule, this level of importance
is typical of the news based on statements by national leaders and
speeches by representatives of major financial institutions.
• Long-term: the impact of these headlines on exchange rates lasts
between several days and a couple of months. They keep exchange
rates moving in a single direction, stabilizing their movement along
descending or ascending trends.
At the same time, the short-lived news items can instantly get
replaced by other information. For instance, the news of an
impending default in Greece caused a rapid fall in the Euro and
panic in the foreign exchange market. The subsequent word of
international support for the country instantly returned the euro to
its previous level.
When choosing a news-based trading strategy in the Forex market,
a trader should bear in mind that the flow of information is rather
lively and changes continually. Foreign exchange market trends
fluctuate under the influence of incoming information.
Economic news is published in real-time by the world’s leading
agencies, including Financial Times, Reuters, CNN, CNBC, and
Bloomberg. Information on financial news updates is contained in
the economic calendar posted on the websites of these agencies. Its
accessibility keeps traders up to date with financial market events
and enables traders to make the right decisions.

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 Chapter 41. How to Choose a Broker
the Right Way
The right choice of broker is guarantee of a Forex trader’s and
investor’s operating success.
When trading in the Forex market, the trader’s main business
partner is his/her broker, whose experience and reliability
determine the success of its operation in the market. An
optimal combination of the broker’s trading conditions, the
trader’s profitable trading system, and the size of deposit will
allow him/her to earn a stable profit with little risk of losing the
capital invested.

238
 Therefore, before entering into a contract with a broker to open
an account and invest, you should evaluate how the broker of your
choice meets fundamental criteria, including:
• Specific terms of trading in the Forex market;
• Licenses and documents obtained by the broker, which regulate
its operations in a specific country;
• How many years the broker has been in the market;
• Customer feedback on the quality of operations and reliability
of the broker.

Trading conditions the broker provides to its customers

are probably the most important criterion, as they strongly
influence the trading system itself, risk management and the
size of deposit.

Therefore, in considering the possibility of cooperation with a Forex

broker, the trader must first pay attention to the following items:
• Number of trading instruments available to traders. The higher
the number of instruments offered by the broker, the wider will be
your selection of points of entry into the market, which will reduce
risks to your account and let you apply various trading techniques.
• Size of spread. Being a type of broker reward, spread will

substantially affect the profitability of your trading.

239
 • Value of swap. This is a type of commission charged for the rollover
of open trades to the following day, and it affects the profitability
of trading.
• Additional commissions by the broker. This is relevant for ECN
brokers and for funds deposits/withdrawals.
• Size of minimum deposit.
• Quality of service and customer support provided by the broker.
• Additional services offered by the broker company, such as a
PAMM system, the ability to copy trades, the availability of trading
signals, and the availability of automated trading.
If the broker company charges additional commissions per trade
(per lot traded), the trader should conclude that commissions are
the broker’s only source of income and that the broker’s income is
directly proportional to the trader’s trade volume.
Brokers operating this business model take interest in getting
traders to make only profitable trades and in creating conditions
maximizing traders’ profits.
The Western experience with regulation tells us that, in the CIS
countries, regulation will lead to a substantial decline in leverage,
which will cause a hike in margin requirements and in the minimum
amount invested. At the same time, regulators will monitor the
accuracy of the quotes provided to clients by Forex brokers and the
quality of their operations.

240
 Forex market regulation in the CIS countries will help make the
market more civilized and enable traders to defend their interests
in courts.
The ECN and NDD (STP) technologies enable the automatic feeding
of quotes from liquidity providers and essentially facilitate the
generation of supply and demand-based prices in the interbank
market. This minimizes the broker’s role in the price setting
mechanism and keeps traders happy with the resulting minimum
spreads and ample market liquidity.
To the readers of this book, we definitely recommend broker
company Gerchik & Co, which operates an STP system for trader
convenience and meets all of the criteria for reliability and honesty.
At the same time, the company provides clients with the following
free services:
1. Risk Manager: an automated system of risk optimization and
regulation.
2. Trader Statistics: a service for control and management of
trading activities by a trader.
3. Trading Algorithm Constructor: a service enabling every trader to
compile a trading algorithm based on his/her own trading strategy.
This makes Gerchik & Co an ideal choice for all types of trading
strategies, regardless of a trader’s experience in the market.

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 Chapter 42. Professional Aides
in Trading
Congratulations! You are done reading the theoretical part of this

book. Now is the time for practice.

By now you should know that earning a consistent income in

the foreign exchange market requires that traders use a variety

of software tools, services, and indicators. These are necessary to

facilitate the trading process, generate more revenue, increase the

accuracy of price chart analysis, reduce potential risks, and free the

trader from repetitive, time-consuming, and nervous work.

Gerchik & Co Company is constantly engaged in the development
and implementation of said services, which we introduce further
on in the book.
In the following chapters, we bring to your attention the
unique products developed by our experts.
Using the Risk Manager software, a trader can control the level

of risk. The Trader Statistics service helps identify the

strengths and weaknesses of a trading system. The interactive

Trading Algorithm Constructor, created by traders for traders,

facilitates the process of creating a trading system and returns a

ready-to-use algorithm.
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 For those who prefer to trade levels, we have developed the
Level Forecast indicator. It identifies levels with almost 100%
probability of successful usage in the real-world trading.
On top of that, for traders characterized by unstable
behavior, our team has developed a robot psychologist,

which analyzes a trader’s actions in a trade and makes

recommendations. (For details, refer to https://gerchikco.com)

A total breakthrough in the industry has been made by our

revolutionary approach to asset management: TIMA Service.

A TIMA account is a trust account that, under the control of a risk

manager, offers additional money-making opportunities for traders

and passive income opportunities for investors.

Learn more about some of the services by reading the following

chapters. To keep abreast with innovations, follow updates on

our website.

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 Chapter 43. TIMA Service
Gerchik & Co offers a l arge n umber o f t ools a nd s ervices t o
its customers to make trading more comfortable and,
most importantly, more profitable. TIMA Service is one of such
tools. It can generate income not only for traders but also for
investors. That is, even those unable to trade Forex can earn
themselves a steady income through TIMA.
What a TIMA account is
TIMA account is a kind of trading account from which trades are
copied to the investor’s account while taking into account the balance
between risks and the amount of capital invested. The investor does
not participate in the trading process – the manager does. At the
same time, the trader does not have access to the investor.
TIMA is an improved version of the currently popular PAMM
accounts.
The principle on which TIMA operates
The managing trader creates a special type of account to which
he/she deposits his/her own funds. Then the manager starts trading,
and the results are shown in the managers rating.
In the process of creating the TIMA account, the trader also
creates a public offer, a contract that specifies the conditions
of his/her cooperation with investors, such as the minimum

244
amount of investment, trading period, and commission for funds
management.
In turn, an investor wishing to receive passive income, reads
the managers rating and based on specified trading parameters
chooses one or more traders. By investing in TIMA, the investor
agrees to the terms of the offer and connects his/her deposit to
the system.
Note: To increase investment security in the TIMA-service, it is
recommended to connect between 5 and 10 asset management
accounts. In this case, according to the rules of diversification, the
profit of one manager will balance out the potential losses of another.
How TIMA differs from PAMM
As a matter of fact, TIMA is a new product with the already known
fundamental basis, which is the PAMM system. Its main difference
is the ability to limit the investor’s loss by using the Risk Manager
system.
The software is specifically designed in order for the company’s
customers to be able to specify the parameters that can be changed
only after a certain period. This way, the limit on losses is reached.
For both traders and investors, Risk Manager is a unique
opportunity to keep the deposit in the event of loss of control over
the situation and psychological instability.

245
 The program has the following major parameters:
• Number of losing trades in a day.
• Maximum amount of losses in a trade.
• Limit on losses during a trading period.
• Maximum per trade volume.
As soon as one of the specified parameters is reached, the system
will shut off the terminal and prohibit sells for a certain period, which
you can also specify in the settings.
Managers rating
Like many other brokers providing the trust fund management
option, the TIMA system provides a managers rating.
Here the investor can assess long-term investment options by
several key parameters, such as total return, drawdown indicators,
profitability chart, investment size, account age, and so on.
A sample managers rating

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 For a trader who wants to become or already is a manager, the

rating is a kind of motivation to lead the way in order to attract to

his/her account more investors and thus generate more revenue.

What TIMA means for investors

This is an opportunity to earn between 5% and 40% of the

portfolio’s monthly return through competent diversification at

relatively small risks. Of course, you can reach a profitability of 100

percent or more by investing in aggressive accounts, but it is worth

remembering that the risks in this case are directly proportional to

the return, even with the Risk Manager system in place.

Suppose an investor has invested 10 thousand dollars in equal

installments into 5 TIMA accounts:

• VALUTAEURO

• G.A.S.

• Money – 24

• Finlab Petrolium

• Harmony – Fx

Take a look at the Table 1 below. It shows the results that can be

achieved by properly diversifying one’s deposit.

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 Table 1.
Account Return for 3 months, Amount Profit
name % invested

VALUTAEURO 35.53 2000 710.6

G.A.S 129.97 2000 2599.4

Money – 24 69.03 2000 1380.6

Finlab Petrolium 42.7 2000 854

Harmony – Fx 56.83 2000 1136.6

Average return 66.8% Income for 3 months – 6681.2

Note: account names and data were generated for illustration purposes
What TIMA means for a trader
If the managing trader has a tested strategy, a trading plan, and
discipline, he/she will quickly place first in the managers rating. This
will attract more investments to his/her account, which in turn will
significantly increase his/her income.
Often, a manager receives several times more money from
commissions paid by investors than from trading with his/her own
funds. It is easy to calculate a trader’s approximate income if he has
50 thousand dollars in investment and if his/her account generates
a 10% monthly return.
On average, the manager’s fee is 40% of the profits. Thus, by
generating a 10% return on the 50 thousand, i.e. $5,000, the manager
will have earned 2 thousand dollars a month.

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 TIMA Service is a unique system. On the one hand, it has
absorbed all the advantages of PAMM, such as high yields, a
large variety of managers, and the relatively low barriers to entry,
and on the other hand, it has reduced the risks through the use of
the Risk Manager software, which protects both investors and
traders against losses.

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 Chapter 44. Risk Manager
Risk Manager
Personal Risk Manager is an assistant that will safeguard
your deposit
Trading in the foreign exchange market involves constant risks
that threaten to wipe out the trader’s deposit. How to get rid of
these risks? The answer is, there is no way to accomplish that.
However, they can be significantly reduced, thereby making
trading safer.
To do this, you must strictly comply with money and risk
management, carefully calculate the amount of each trade and
acceptable losses, have excellent discipline, and avoid being
influenced by emotions. All of this really aids in accomplishing the
main goal in the market: preventing the loss of your deposit. But
this takes experience, which sometimes comes at the steep cost of
lost deposits and nervous breakdowns.
Risk Manager from Gerchik & Co is a brand new approach
to trader work. The team at Gerchik & Co company has
recently developed and launched the Risk Manager software,
allowing for limiting traders’ losses and protecting their
deposits from being wiped out. At the heart of the software’s
algorithm lies the rich
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baggage of knowledge, reinforced by many years’ experience of
professional traders, who have by their own success proven that
trading is a business of great opportunities and is accessible to
anyone.
What Risk Manager is
Despite its rather unoriginal title, Risk Manager is a unique
tool that has no analogues in the brokerage market of the CIS
countries.
Risk Manager is free software that limits the losses of Gerchik
& Co customers by allowing traders to choose their trading
plan parameters in its settings. That is, if your trading strategy,
subject to the size of your deposit, prohibits opening a trade of
more than 0.2 lots in volume, then the software will not allow
you to do so, even if you really want to.
The advantage of the service is its functionality
When trading, a trader is exposed to several types of risks.
Risk Manager reduces their impact on the trading process and
protects the deposit.

Its main usage is to prevent the trader deviating from his/her

trading plan and doing silly things in a state of psychological
insecurity.

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Inexperienced traders are often exposed to emotional breakdowns
after a series of losing trades. An urge to immediately recoup the
losses clouds their thinking, makes them spit on the trading plan
and their own trading strategy. While in the state of a nervous
breakdown, the trader starts opening orders against the market,
increasing the volume of trades, increasing the number of one-
time open positions, with all of this ultimately leading to the loss
of the entire deposit or a substantial part of it.
Activating the Risk Manager stops these situations from happening,
because trading is disabled when the parameters specified in the
settings are reached.
As a result, emotions such as greed, hope, and fear will not affect
the trader, thanks to the informed and timely operation of the
personal Risk Manager.
Risk Manager’s functions
The software has an extensive list of parameters that can be adjusted
according to your trading plan and money management rules.
Here are the main parameters that the trader can set up in the
software’s settings:
1. Risk per day, %: this parameter regulates daily risk.
2. Risk per daily profit, %: this parameter defines risk per daily
profit received.
3. Risk per week, %: this parameter regulates weekly risk level.

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4. Risk per month, %: this parameter defines the per month risk level.
5. Maximum per day number of losing trades.
6. Maximum per week number of losing trades.
7. Locking: this option defines whether positions can be locked.
Breach by the trader of one of the services parameters triggers a
complete shutdown of the ability to trade from the account. The
duration of shutdown depends on the parameter breached and can
be defined in the settings.
If one of said parameters is triggered, the software will shut the
terminal down and keep it shut for a period that can also be specified
in the settings.
Risk Manager is a unique helper that keeps a trader from making
the fatal mistake of losing control over the situation. Risk Manager
does not interfere in trading as long as it complies with the
parameters specified in the program settings, which makes Risk
Manager virtually invisible and unobtrusive. In addition, Risk
Manager is available to all Gerchik & Co customers for absolutely
free and suitable for all account types.
Think about whether you can fully control your emotions when a
force majeure situation breaks out in the market and whether you
can pull yourself together and stop the trading after a series of
losses? If the answer is no, the Risk Manager is just what you need.

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 Chapter 45. Level Forecast Indicator
Level Forecast Indicator
In trading, a significant role is played by one’s trading strategy.
The trader’s income ultimately depends on its credibility. One of
the most reliable strategies of today is trading the levels using price
action patterns as signals. The indicator called Level Forecast will
greatly facilitate the preparation for trading by this strategy.
What Level Forecast is
Yes, yes, price action and level-based trading are indicator-free
strategies, but Level Forecast is not a simple indicator. It does not
show the average value of prices for a period. It automatically
plots price and time levels on the chart. That is, it helps the trader
see the point of entry into a trade and the amount of potential
movement.
Its main advantage is its use of the most complete information
about quotations from the futures history when plotting levels. The
indicator draws quotes from an external cloud, so the trader can
rest assured that the terminal has uploaded everything and that the
information is reliable.
In addition to the calculation and installation of important price
levels, Level Forecast has a number of features that facilitate
trading and increase the potential return:

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• Search for points of entry into a trade;
• Identification of signal patterns;
• Detection of support and resistance levels;
• Calculation of Take Profit and Stop-Loss levels;
• Identification of relationships between levels and time periods;
• Search for points of potential change in the direction of the
current trend;
• Identification of the current trend and forecasting of further
developments in the market.
Once activated, the indicator immediately plots price levels for all
time periods and marks each by a corresponding icon. This is very
useful because, for example, on the hourly chart, the trader will
be seeing the levels M30, H4, D1, and so on, so there is no need to
switch between the need to switch between time periods.
In addition to price lines, Level Forecast also plots temporary
vertical levels where strong price movement may occur with high
probability.
The indicator’s features
Level Forecast works on both real and demo accounts. By
installing the indicator in a demo account, the trader receives
its test version with a full set of features and functions, but the
identification and plotting of levels will only be happening on
the timeframes D1 W1 and MN.

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 This is not enough for day trading but is quite enough for evaluating
the indicator’s performance.

Important: The Level Forecast indicator will not work on the platforms
of third-party brokers, as it was originally written for Gerchik & Co and
is a unique tool available only to the company’s customers.

How to work with Level Forecast

To start working with the indicator, you need to install and configure
it. Installation is absolutely standard: simply move the file over to
the Indicators folder and launch the indicator in the MT4 terminal.
The indicator may fail to load immediately, so it may be necessary
to restart the terminal.
The settings are standard as well: you can change the color of the
lines, turn on and off specific time frames, and so on. Be sure to
enable the Allow DLL Imports option.
The main rule of trading based on the Level Forecast indicator is
sell entry on highs and buy entry on lows.
There are two level-based trading strategies: bounce and
breakdown. It is safer to use the bounce option, because it is
more reliable and less risky. Trades based on level breakouts also
have great potential, but because of the high risk involved, this
trading option is recommended only for traders with long-term
experience using this strategy.

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 The main reference point for trade entry is the price level itself,
and signals for opening are given by certain patterns, such as trade-
through or false breakout.
The rules for calculating the levels of Stop Loss and Take Profit are
the same in this case. Suppose a pattern has been formed near the
strongest level. Before calculating the levels of Take Profit and Stop
Loss, you need to measure the potential price movement. To do this,
simply count the number of pips from one price level to another.
In Figure 1, the potential price movement is calculated as
follows: the 1.44324 resistance level is subtracted from the
1.43488 support level, which yields a price movement potential
of 0.00836, or 83.6 pips.

You can place the Take Profit on the opposite level in a bid to
capture the entire movement, but it is better to take 60% of the
movement’s potential. The example shows how this principle is
fully justified. In the example, the Take Profit level will be 50.16

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pips away from the point of entry into the trade at the 1.439896 mark.
By the same token, we calculate the Stop Loss, which is 20% of the
price’s movement potential: the Stop Loss level is 16.7 pips away
from the 1.433208 entry mark.

Thus, it is possible to achieve an ideal profit-to-potential-loss ratio

of 3:1. By always sticking to this rule and by closing 35% of trades
in positive territory while trading based on levels and the Level
Forecast indicator, the trader will be in positive territory.
The Level Forecast indicator is a unique tool that allows the trader
to efficiently find and use excellent entry points. At the same time,
it is available to every client of Gerchik & Co free.
In fact, by properly entering a trade based on a level, you can
capture all of the price movement with minimal risk. But as we
discussed above, it is better to stick with the ratio 3:1.
Trade successfully and let the green color of profit please your eye
as often as possible.

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 Chapter 46. Trader Diary
Trader Diary
The psychology of successful trading is as important as trading
strategies, market analysis, risk management, and other elements
of trading. A trader may be trading long-term or short-term, using
technical or fundamental analysis, but he/she must have certain
psychological traits.
In order to become a successful trader, you need to take your
emotions under control and not to allow greed, fear, or panic to
influence your trading decisions. Many successful people may
experience negative emotions because of failures, so you just need
to learn how to control these emotions and keep them in check.
Trading is a job that requires constant concentration and a fair
amount of discipline. Often, mistakes or lack of attention to small
details turn out too expensive. Traders must control their emotions
the same way good actors control and manipulate theirs. After
developing a trading strategy, successful and experienced traders
methodically follow it without ever stepping aside or questioning
the correctness of their own decisions.
All successful traders share a common trait: they make sure to
keep a diary of trades. In it, they enter information about trades,
their outcomes, and lessons learned.

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 People who don’t learn from their mistakes can repeat them, and
this piece of wisdom is particularly relevant in trading. Many traders,
especially beginners, often repeat mistakes for the sole reason of
being unable to adequately react to different situations under
stress. That is why keeping a trader diary is important: it provides
an opportunity to analyze your motives, logic, thinking, and actions
while making trades. Conclusions derived from this analysis enable
you to avoid repeating such errors.
Why keep a trader diary?
Everybody knows what a diary is, yet not all traders in the Forex
market grasp the meaning of a trader diary.
First off, keeping a diary is a strictly personal matter. There are no
diary-keeping standards. However, we must remember that the
trader diary’s main task is to provide information on trades made.
The main principles of keeping a diary are based on at least five
main criteria for keeping records of Forex market activity:

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1. Opening a first real-account trade: start a diary as soon as you
open your first real-world trade.
2. Entries must contain detailed descriptions of position-opening
signals used, in which direction we opened positions, prices and times
at which we entered and exited trades, and other parameters. With
their help, it is possible to understand how profitable your strategy is
and how disciplined you are in following it.
3. Every time you enter or exit a trade, you have to describe in detail
your own mood and motivation. This way you can protect yourself
from all kinds of impulsive decisions in the future. With the use of
a diary, you can ensure that your trades are carried out in strict
accordance with your trading strategy.
4. At least once every month, analyze all the entries in your diary. A
thorough analysis based on your own experience can tell you whether
your decisions have been correct.
5. Apart from numbers, the diary should contain descriptions
of the trader’s feelings, emotions, and reflections. Numbers only
reflect the time lapse, positions, and earnings but do not convey the
psychological state the trader was in when the trade was being made.
If the diary contains at least one entry describing a successful
trade, the trader will probably wish to go back to it and repeat the
entire sequence of actions to make new profitable trades. It is

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also helpful to go back to the records of failed trades and analyze
what had caused them and how not to repeat them. Traders in
their decision-making are often driven by greed or excitement, so if
the trader succumbs to these emotions, he/she should admit it and
record it in the diary.
The internet offers a wide variety of templates for electronic diaries
and accompanying services to help you analyze information. These
websites lay out information in a way that enables the trader to
thoroughly evaluate his/her trading using charts and graphs.
The following are some of the main advantages of keeping a
trader diary:
• Ability to track the types of market entries and direction of
trades and see which trades are profitable and which ones should
be avoided;
• Assistance in identifying the shortcomings of a trading strategy
that underlies the trading;
• Assistance in managing emotions and stress.
Thanks to the trader diary, the trader can identify his/her own
weaknesses and reinforce his/her strengths. For instance, while
analyzing a trade, you may find that the idea that seemed a flawless
trade-opening opportunity turns out not good at all. The diary will

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help you understand your mistakes as soon as they are detected,
so keeping a diary is considered the most important element of
improving one’s trading strategy. In addition, prior to entering the
market, you must be aware of the reasons that make you open
trades. This way, over time you can develop a certain automated
protocol for making the right decisions.
The main requirement on a diary’s structure is that it must contain
objective and detailed records of all trades carried out by the trader.
The diary should be organized so well that you can with minimum
effort view all of the positive and negative aspects of trading.
Most trader diaries contain the following information:
• Instrument in which the trade was opened;
• Exact time and date of opening the trade;
• Price at which market entry was made;
• Direction in which the trade was opened;
• Reason that the position was opened;
• Level at which a stop loss was placed;
• Time of exiting the trade;
• Price at which the exit was made;
• Method for exiting the trade;
• Reason for exiting;

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• Outcome of the trade;
• Assessment of the trade;
• Comments about the trade.
Electronic diaries translate this information to charts which you
can use for analyzing your trading outcomes in greater detail.
Thanks to a diary, you can find out which types of trade entry
bring you more revenue and which market conditions are suitable
for carrying out trades under your strategy. Data on losing trades
can help you determine what you need to change in your trading in
order to take your trades into positive territory.

The analysis of losing trades is a painful exercise, because it is

hard to accept the losses incurred. However, this type of analysis
must be performed in order to get rid of bad habits and avoid
repeating them.

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 Chapter 47. Algo Trading
Every trader after a while starts to think about how to free up
some time by automating the trading process. In researching this
issue, the trader comes across information on “magic” advisor who
have made millions out of $100 at a minimum risk.
Encouraged by their example, the trader buys or downloads an
advisor for free, without even wondering if it fits his/her style and
trading rules. He/she launches the robot and very quickly becomes
disappointed, because the advisor has instantly destroyed his/her
deposit. Then the trader concludes algo trading doesn’t work and
that it’s a scam. Is this a correct conclusion?
What algo trading is

Algo trading is a type of trading based on certain rules of risk

management, trade entry and exit, and the use of certain patterns

and signals. That is, algo trading completely eliminates the role of

the trader’s perspective on the market situation and is only based

on clear-cut rules inherent in the underlying algorithm.

One could follow these rules and trade manually or integrate

them into an automated trading system which will perform certain

actions on the market without trader’s participation.

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 In other words, algo trading in the broadest sense of the term is a
special piece of software that carries a certain trading algorithm for
opening and closing of trades using relevant price chart signals.
It turns out that by creating a trading algorithm and reflecting it in
a special program, the trader may lie under a palm tree sipping on a
cocktail, his/her only job being from time to time to check whether
his/her account has increased? Yes, this is exactly what advertising
tells us, but it is far from the truth, though not unreasonable.
The truth is that automated algo trading has its advantages and
shortcomings.
Benefits of algo trading
Unbiased analysis allows for articulating the following advantages
of algo trading:

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1. It saves time. Traders do not need to sit for hours in front of a
computer, analyzing trading instrument charts, looking for necessary
patterns or other signals to enter a trade. Also, when using a robot,
the trader has no need to calculate risk for each trade and identify
price values for placing Take Profit and Stop Loss orders. The robot
does it all much faster and often enters the market at a better price.
2. It has no emotions. Greed, fear, hope: all of this is not known to the
“machine.” It is guided instead only by a trading plan, which is not
a human. Even experienced traders sometimes make fatal mistakes
under the influence of emotions. When using a trading robot, such
situations are excluded.
Shortcomings of algo trading
The pluses of the service cannot be appreciated by a trader without
him/her knowing the software’s shortcomings.
The software may malfunction and expose the trader to the risk of
falling short of planned profit or incurring serious losses. In view of
this shortcoming, the trader still needs to monitor the functioning
of the robot to see if it has correctly entered into the trade, and more
importantly, how the robot exited the trade.
Some brokers forbid their clients to use automatic trading systems,
punishing them with fines or putting a full freeze on their deposits.

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The team at Gerchik & Co is strongly against this approach, as a
trader’s success is the company’s success.
How to get a trading robot
A trader today is faced with a huge selection of robot services,
some of which are rather expensive and some free. Some of them
really work, if properly set up, but basically it makes no sense to buy
a ready-made robot. Why is that so?
All automated systems have underlying strategies and rules for
opening, maintaining, and closing trades built into them. However,
it does not always coincide with the rules of the trader’s own trading
algorithm. Of course, no one forbids testing such systems out on
historical data or from a demo account, but it will be more effective
to order the customization of the robot from scratch to trader’s
personal strategy and trading rules.
Gerchik & Co customers can order a free development of their own
trading robots. After the order is fulfilled, the trader gets a unique
assistant which can significantly increase the trader’s free time and
income.
This boils down to the question of whether or not traders should
use algo trading.
Automated trading can be a real deal, if you observe a number

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of rules. For example, you may use advisors, written to fit one’s
personal trading algorithm, control the operation of the software
in the event of failure to take measures, and avoid interfering with
an advisor doing its job if all goes to plan.

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 Chapter 48. What Investors
Must Know
What Investors Must Know
Over the past twenty years, investment business has been made
available to almost anyone wanting to invest. The entry threshold fell
from tens of thousands to a few hundred dollars. All this was made
possible thanks to the emergence of new investment instruments
such as capital trust management. It has been in existence long
enough, but some of its types have emerged fairly recently.
This tool comes in different forms:
• Asset management under a personal agreement with the trader.
• Investment in mutual funds. In essence, this is the same as trust
management, but with a predetermined investment portfolio.
• Investment in a PAMM account.
• Investment in TIMA managers.
Each form has its own pros and cons. For instance, asset
management under private agreement between the trader and
the investor can be quite a profitable way of making investments.
However, it carries a lot of non-commercial risks and difficulties
monitoring investments.
Investing in mutual funds (mutual funds) carries fewer risks due to

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a built-in diversification tool, but access to this tool can be limited
to investors with small capital. Further, its profitability is relatively low.
Of much greater interest are the tools such as PAMM and TIMA
accounts. They are similar in nature and in investment rules.
PAMM and TIMA: what the difference is
Both PAMM and TIMA are trust management systems in Forex. They
are characterized by a relatively high yield and moderate risk. The
latter, incidentally, is largely dependent on the investment portfolio
structure, a set of accounts in which the investor has invested.
Unlike PAMM, TIMA is a unique tool available only at Gerchik &
Co company. The TIMA tool has a built-in loss limit system entitled
Risk Manager, which does not allow the trader to lose more than the
amount specified in the system settings.
The principle of investing in TIMA
The investor chooses several managers by certain parameters
reflected in the ranking of traders. After that, the investor reads the
offer outlining investment conditions for each account.
If the terms meet with the investor’s approval, he/she invests his/
her capital in equal installments in each manager and, over time,
receives income, which is averaged across the portfolio. This is
the first principle that every investor must know: risk-sharing and
diversification.

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 What you need to know when choosing a TIMA manager
All data on TIMA accounts can be found in the managers ranking
on the official website of Gerchik & Co.
The main parameters for the choice of managing trader:
• Return;
• Maximum drawdown;
• Age of account;
• Private equity of the trader;
• Funds under management.
Stable profitability of a manager does not guarantee the same
results in the future. However, it characterizes the trader as a

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confident speculator that can be regarded as an investment option.
Maximum drawdown reflects the amount of losses relative to the
deposit size at the time losses are fixed. The value of this parameter
may be different depending on the trading style of the manager.
For conservative accounts, the figure ranges between 10 and 15%,
for moderate accounts between 15 and 30%, and for aggressive
managers the normal rate of drawdown can be 60% or higher.
Account age is an important indicator of a manager’s reliability. A
trader can show good profitability, but if he/she has been trading
less than 5 to 6 months, he/she should not be viewed as a serious
investment option.
A trader’s personal capital, with which he/she trades, reflects his
personal responsibility. The greater the trader’s personal funds that
he/she puts at risk, the better. After all, the investor should not risk
10 thousand dollars if the trader risks no more than a hundred.
Funds under management make up the amount of all investments
connected to a specific account. This figure speaks of investor
confidence toward the manager. In theory, the greater is the capital
under a trader’s control, the higher his/her reliability.
How much income TIMA investment can generate
Giving a precise answer to this question is difficult, because
everything depends on the knowledge and skills of the investor and
on the type of portfolio he/she puts together.
For instance, aggressive traders normally generate 100% or greater

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return per month, but the risk of investing in such managers is
directly proportional to return on investment.
Traders working with moderate risk can show 10 to 30% in per
month return. Conservatives increase investor funds by an average
of 5-10% per month with minimal risk.
An illustrative example is provided by the real-world accounts
out of a TIMA managers rating. For these accounts, an investment
portfolio has been put together with $10,000 in capital and 3
months’ duration.
Name Return for Amount Profit
of account 3 months, % invested

Harmony-Fx 52.88 2,000 1,057.6

G.A.S. 126.97 2,000 2,539.4

Money – 24 69.03 2,000 1,380.6

Surest Profess 67.36 2,000 1,347.2

FinlabPetrolium 42.70 2,000 854.0

Average return 71.78% Income for 3 months – 7178.8

Based on the data obtained, the average monthly yield on this

portfolio is 23.92%, or $2,392.
All data in the table are real and available for reference in the
managers ranking on the website of Gerchik & Co.
To earn in Forex, it’s not necessary to be a trader yourself. All you
have to do is to familiarize yourself with TIMA investment options,
have your investor account connected to the best TIMA managers,
and earn between 10 and 40% in passive income at a moderate risk.

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Chapter 49. Biographies of Successful
Investors and Traders
In order to be successful and make a fortune in any business, it
is important to have the right guidelines on what needs to be
done and how. These guidelines are often the personalities whose
examples demonstrate how high one can climb in one’s profession.
In trading, the same rule applies. It is important to have a role
model and try to repeat or even surpass his/her success. In financial
markets, there have been lots of amazing people, but a few of them
stand out: George Soros, Larry Williams, Alex Gerchik, Linda Raschke,
and Bill Williams.
These five investors and traders have been working in different
financial markets, using various methods of investment and
trading, have different capital, but each of them can be confidently
called a star in the financial world.
GEORGE SOROS
The great and terrible George Soros: this is what they call him,
referring to his success and the methods used in achieving it.
His real name is Gyorgy Schwartz, and he was born in the 1930
Budapest. When the Nazis began to deal with the “Jewish question,”
György’s father brought the family to the UK on forged paperwork.
In 1947, George went to the London School of Economics.

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After graduation, he worked a slew of imaginable jobs: from
assistant manager at a haberdashery factory to waiter at a
restaurant to porter at a train station to traveling salesman to
apple gatherer. All this time, he was trying to get in the banking
sector, but they just wouldn’t hire him.
But perseverance did its job, and he got a job at Singer &
Friedlander. After three years of work in the arbitration department,
he gets bored and leaves for the US.
In the US, he gets hired by a brokerage company and spends
a long time doing foreign arbitration: buying securities in one
country and selling them in another. He invents his own trading
method: selling complex securities individually before they are
separated.
In 1970, his career takes off as he founds the Quantum hedge
fund. For decades to follow, the fund earns huge profits for its
investors: a total of $32 billion since inception.
George Soros’s Achievements
Over $20 billion in private equity, the US’s 7th richest billionaire,
father of five, and founder of funds in 25 countries.
George Soros’s most notable achievement is making $1 billion
overnight. In 1992, Soros shorted the pound and nearly toppled
the Bank of England.

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Soros’s rules:
• Use your head. Do not settle for a small role in a huge machine.
• Sometimes, if you don’t take risks, you lose your life.
LARRY WILLIAMS
The famous trader Larry Williams was born in 1944 in the town of
Billing in Oregon. At as early as high school age, Larry worked at a
factory along with his father. Larry got a degree in journalism, but
little did the future millionaire know that it would be journalism, of
all trades, that would lead him to the stock market.
After graduation, he got a job as a proofreader at one of the
advertising agencies in New York. Soon, Larry got bored with
working for hire and founded his own publication, titled The Oregon
Report. The newspaper covered the economy of his home state. This
was the turning point in his development as a trader.
At the beginning, Larry wasn’t doing anything particularly
successful. However, while trading stocks, he switched to the
futures market and stayed there long. As part of the Robbins
World Cup, he set a record by making $1 million out of $10,000.
The money, measured in 1970 dollars, was made in just one year.
This brought him worldwide fame, allowing him to earn more
by advising exchange analysts and traders and teaching the less
fortunate traders.

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 In 1997, Larry virtually repeated his success, but this time around
he started with $50 thousand and turned it into $1 million: over
2,000% profitability in 12 months.
Larry Williams is also known as:
• Inventor of the Williams Interest Rate Spread indicator.
• Chairman of the Board of the National Futures Association.
• Columnist at Wall Street Journal, Forbes and Fortune & Barron’s.
• The world’s most famous and quoted consultant.
• Author of numerous books.
ALEX GERCHIK
Alexander Gerchik was born in 1971 in Odessa, USSR. After finishing
a vocational school, he enrolled in the local Food Engineering
College but dropped out soon after passing entrance exams. After
the collapse of the USSR, he, like many youngsters, was engaged
in commercial activities. Having earned about $2,000, he went to
visit his father, who had lived in the US for decades. It got to be
so that his return was delayed by 20 years. Alex returned to his
homeland a famous and successful man with a ton of experience
behind him. But that’s easier said than done.
The only job available to immigrants from the former USSR at
that time was driving a taxi, which Gerchik honestly did for about
3 years. As he was working in Manhattan, he often had to drive

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people to Wall Street. After giving repeated rides to an old Jewish
man, Gerchik was told by him that wasting his life away behind the
wheel wasn’t worth it and that he should go in for an internship at
a broker company.
Having studied and received a trader license, Gerchik worked for
the company for two years. After the making his first consistent
profits, he went into the “free float” mode. Gerchik’s rule number
one is, learn to not lose money before you learn to make it. This
is obviously the reason that, since 1999, Alexander has not had a
single losing month.
Between 2003 and 2010, Gerchik was a manager at Hold Brothers
LLC, one of the top three brokerage firms in the US. In 2006, Alexander
and his team took the company to the New York Stock Exchange.
Today, Alex spends lots of time sharing his knowledge with
the next trader generation. At the heart of his methodology
is the thorough analysis of the market and one’s own trading
style. Gerchik believes that getting big profits out of the market
depends on the ability to analyze each trading decision and
create a perfect trading algorithm.
LINDA RASCHKE
She is the only woman, but no less successful trader, on
today’s list. Her father was a financial speculator and, seeing
price charts everyday from early childhood, Linda was destined
to become a trader.

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However, it wasn’t before college that she got involved in trading.
After an anonymous investor set up a trust, Linda and her four
fellow students started trading using the trust money. She enjoyed
trading and decided to make it her life’s business.
After graduation, she sent application letters out to brokerage
companies, which predictably rejected them over lack of experience.
Without thinking too long, Linda got a job as a financial analyst at a
paper producing company. The company’s office was located next
to the Pacific Stock Exchange, and before the start of the day, she
used to spend an hour wandering the exchange’s halls, watching
the work of traders, and from time to time bothering them with
questions.
It comes as no surprise that the girl’s perseverance caught the
interest of one of the traders, and he decided to take her under
his wing. Her ability to grasp everything on the fly impressed the
teacher and after a while he handed $25 thousand over into her
management. At the time, that was the size of a minimum deposit.
She first doubled it but then lost more than half of it in one trade.
She had to repay the debt out of her own pocket. Then she took a
few more losses, but in the end she grew up to be a professional
trader, whose rules have become quoting material for technical
analysis guru Jack Schwager.

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 Linda’s approach to trading is rather conservative, and her strategy
is practically unchanged from the time of her first trades. When
making trading decisions, she relies on statistics for different market
situations. Almost every formation on the chart is described in one
of her notebooks. Linda writes books. One of her most well-known
works is “Virtuosos of the Foreign Exchange Market,” a recommended
reading for anyone wishing to consistently earn in Forex.
BILL WILLIAMS
This person is the second most experienced trader and investor
on our list after George Soros. For over 40 years, Bill Williams had
been trading in financial markets. He is the creator of the Profitunity
system and trading company.
Bill was told about trading by his fellow student, who at that stage
in Bill’s growth was his mentor. Like many traders, Williams started
out by successfully losing a few deposits. As he puts it himself, the
main reason was an overabundance of information. He watched
and analyzed too many stock tickers, read other people’s research,
and so on. He thanks his wife for patience and for not getting in
the way of his work, especially when it was unprofitable.
Today, the Bill Williams system contradicts many canons of
trading, denying technical and fundamental analysis and
declaring that following the price is the key. Fractal geometry
and no forecasting is the strategy Williams has invented based
on the market’s “driving forces.”

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 He describes his strategy in a book titled “Trading Chaos.” In
theory, by using this book, one could trade the basic price
movement from the beginning to the end of a trend. Despite
criticism, this approach to trading is rather popular and, oddly,
rather profitable.
The brief life stories of the five most famous financial market
players serve as inspiring examples for beginner traders,
highlighting the ever-present opportunities for personal
development and improvement. Each of these famous investors
and traders has traveled the hard road from loss to disappointment
to despair to eventual success without breaking down under the
weight of problems. All of them have worked on themselves
and their own trading strategies, which ultimately led them to
success and worldwide recognition.

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 Chapter 50. Jokes About Trading
A priest has died and is standing in line in front of the Gates of
Heaven. He is preceded in the queue by a man wearing sunglasses,
a bright shirt, a leather jacket, and jeans.
St. Peter asks the man with the sunglasses: “Tell me who you were
in life, so I can decide whether to let you enter the kingdom of God.”
The man says, “I’m Joe Cohen, a broker from New York Stock
Exchange.”
Saint Peter consults with his list. Then he smiles and says to the
broker: “Take this silken robe and golden staff and move on through
the Gates of Heaven.”
The broker leaves, and it comes the priest’s turn. He straightens
to his full height and blurts out: “I am Joseph Snow, pastor of the
Church of St. Mary for over 43 years.”
Saint Peter consults with his list and says to the priest: “Take this
cotton robe and wooden staff and enter the Gates of Heaven.”
“Wait!” says the priest. “The man in front of me was a broker, but
you gave him a silken robe and a golden staff, but to me you only
gave cotton rags and a wooden stick! Where’s justice in that?”
“Up here, we reward performance,” says St. Peter. “When you were
reading your sermons, people were falling asleep, but as soon as
they became the broker’s clients, they started spending all of their
time in prayer.”

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 ...................................................
A successful millionaire businessman meets his son-in-law.
“On the occasion of your marrying my beloved daughter, I am
making you a co-owner of my business. You will have to take trips
to the factory and familiarize yourself with the production process.”
“I can’t stand noise, motors, and production processes.”
“Well, then you will be doing office work, managing a part of the
business.”
“I hate office work.”
“Wait, I just made you a party to a thriving enterprise, and you don’t
want to work. What am I supposed to do with you?”
“Just buy me out,” says the young man.
...................................................
In a news update, the Russian Federation’s Economic Development
Minister Alexei Ulyukayev says:
“This is not a weakening of the Russian ruble, but rather a
strengthening of reserve currencies.”
A person out of the audience makes a comment:
“The plane isn’t falling. The land is rising.”
...................................................
In the dead of the night, a trader sits in front of a computer and
feels someone’s touch on this back. He turns around and sees his
naked wife caressing him with her eyes.
The trader says: “I’m sorry, honey, the computer is off limits.”
...................................................
An old Forex broker is dying. Physicians have gathered to discuss
his condition:

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“His temperature is 38.9 Celsius. When it reaches 41, he will most
likely die,” says one of the physicians.
The old broker musters whatever strength is left in him and utters:
“At forty point five, sell.”
...................................................
A trader seldom errs twice. It’s more like thrice or more often.
...................................................
A trader is being asked to solve a riddle:
“What shines but doesn’t heat?”
“A margin call!”
...................................................

After a drop in the dollar, the US government decides to support

the initiative of Iran and abandon the greenback as settlements
currency.
This makes China, Japan and Russia the world’s largest holders
of numismatic collections.
...................................................
“How long does it take to learn to trade Forex?”
“It depends on whether you have the talent, will, and intelligence.”
“And what if I don’t?”
“Five minutes.”
...................................................

A boy asks his father: “What’s a trader?”

“Well, sonny, it’s like this: a man buys a rabbit on the edge of town
for one ruble, brings it downtown, and sells it for two rubles.

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Then he goes back to the edge of town and buys two rabbits
and sells them downtown for four rubles. And in the end he buys
rabbits with all of his money, brings them downtown, but finds
it flooded with water. Now he’s standing there, thinking: “Damn,
I should’ve bought fish.”
...................................................
Two traders are having a conversation:
“What are you reading?”
“Elliott’s Wave Theory.”
“Why upside down?”
“What’s the difference?”
...................................................
Forex trading is like teenage sex:
- Everyone is thinking about it;
- Everyone is talking about it;
- Everyone is thinking their friends are doing it;
- Almost no one is doing it;
- Whoever is doing it is doing it badly;
- Everyone is thinking that the next time will be better;
- Nobody is taking safety precautions;
- Everybody is embarrassed to admit they don’t know certain
things;
- If anyone succeeds in doing it, everyone is making a lot of noise
about it.
...................................................
A traffic jam takes place in a London street. Noticing a
police officer, one of the frustrated drivers asks him, “Sir, what
happened?”

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 “Due to recent problems with the economy, the Prime Minister
developed a depression, stopped his car in the street, and is now
threatening to soak himself in gasoline and set himself on fire.
He is upset over the fact that no one believes in his ability to
save us from the crisis. To comfort the head of government, we
started collecting donations.”
“And how much have you collected already?”
“So far, about 40 gallons, but many continue to give away
gasoline.”
...................................................
A grandfather is sitting next to his grandson. Both are drinking
juice. The boy’s mother comes in:
“US stocks are up again. Have you heard?”
The grandfather says:
“Buy Russian shares. They’re never expensive.”
...................................................
A blonde is told that the best way to multiplying her financial
resources lies through Forex.
“Xerox is easier,” thinks the blonde.
...................................................
How many stock traders does it take to change a burned out
light bulb?
Two: one screws the new bulb in as the other quickly sells the
old one on the exchange before CNBC tells everybody the old
one is burnt out.
How many commodity traders does it take to change a burned
out light bulb?
None. They will not change it. Instead, they will drive down the
price of darkness amid excess supply.

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 ...................................................
An old broker is dying and makes a request for a broker and an
analyst to approach his bedside. When they arrive, he tells them:
“One of you, stand on my left, and the other on my right.”
They start taking their places as requested, but one of them,
running out of patience, asks a question:
“Sir, why make such a strange request?”
“I want to die like Jesus: between two robbers!”
...................................................
An old trader is sitting in front of a computer monitor, working,
earning two pips here, five pips there… A day passes by. A young
trader approaches him with criticism: “You aren’t supposed to
work like this. There is no system to your actions. Everything
you’re doing is baloney.”
The old trader turns to him and says: “I’m tired of being smart. I
just want to make a little money.”
...................................................
An analyst is asked:
“Do your predictions always come true?”
“They always do. Eventually.”
...................................................
Little Masha once went mushrooming and berry hunting...
...and brought back nothing. Because you have to set yourself
specific goals!

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