The Forex Lifestyle

Forex made Simple

for Beginners
-- Edition 2.0 --

Michael R. Pilinski
Copyright © 2012

All Rights Reserved

No part of this document may be copied or republished

without the prior written permission of the Author.
Protected under worldwide
Digital Rights Management (DRM) regulations.

Contact the author: Michael R. Pilinski for more information

 Table of Contents
Introduction: Foreign Exchange Currency Trading
A Raging River of Money Spinning Electronically
Around the World

What is Forex Currency Trading?

Who are the Main Players in Forex?
Why Should You Get Involved in Forex?
Forex is High Tech All the Way
Advantages of Forex vs. the Stock Market
If you like Action, You're gonna Love Forex!

Chap 1: The Mechanics of the Forex Marketplace

How is Money Actually Made Swapping Currencies?

Pips Explained
Leverage Explained
Pip Value Explained
Lot Size Explained
Reading A Forex Quote and Understanding Spreads
Best Trading Times of the Forex Week

Chap 2: Technical Analysis in Forex

Deciding When to Buy and Sell Currency Pairs

Market Price Contains All the Information

Charting and Analyzing Currency Movements
Trendlines, Vertical, Horizontal and Channel Lines
Fibonacci Pattern Tool
Average True Range (ATR)
Moving Averages
Average Directional Indicator (ADX)
One Final ADX Trick
Color My World of Currency
Chap 3: Fundamental Analysis in Forex
Economic Factors That Effect Currency Prices

Forex-Relevant News Services

Playing the News

Chap 4: Managing Risk, Fear and Greed

Learning How to be a Prosperous Trader

Two Stage Trading for Maximum Fear And Greed Control

A Crash Refresher Course
Keep Forex Trading Fun by Mentally Re-Framing Your Losses
Some Closing Thoughts

MetaTrader Video Training Tutorials

Disclaimer
FOREX -- an acronym FOReign EXchange -- is the world's all-encompassing, virtual
currency exchange marketplace, with a volume of cash moved through it's electronic
network valued at approximately four trillion dollars every day. Yes, I said trillion with
a "T". That would be four thousand Billion dollars per day, and if that sounds big, that's
because it is... VERY big. This number represents thirty times the transfer value of the
NASDAQ and New York Stock Exchanges put together -- which combine for piddling
$25-35 billion dollars being swished around daily.

What is Forex and where did this thing come from? When I first heard the term Forex
back in February of 2010, I thought it was some new phone like the android that would
soon be in everyone's pocket. That's how clueless I was. How amazing it was for me to
discover the rich and thrilling universe of Foreign Exchange Currency trading. I had
no idea of the depth of analysis and computerized tools that were now readily available
to people. Hell, I didn't even know it was possible for ordinary people to even get
involved in this market -- I thought it was something that only banks could do.

It turns out I used to be right, but not any more. Up until recently (the last 10 years) it
really hasn't been possible for small time investors -- guys like you and me -- to play the
Forex market at all. Forex was mainly an electronic underground of cash accessible
only to banks, major financial institutions, governments and a very few rich traders with
millions of dollars of cash to toss around. Originally the whole concept of trading in the
Foreign Exchange market was only intended for huge companies and banks, but with the
rise of globalization and the inter-connectivity of the net, trading has become accessible
to anyone with a home computer, and on a purely speculative basis.

So move over Bank of America, do-it-yourself at-home foreign exchange currency

trading for retail cowboys like us has landed squarely in the lap of the still infant (and
highly colic!) 21st century... with the sound of a sack of gold coins thumping down on
Caesar's dinner table!

What is Forex Currency Trading?

The foreign exchange market is the mechanism by which all the world's currencies are
valued relative to one another, and then exchanged in a way that adjusts for disparities
in that value by requiring more of one currency to be swapped for another. This
correction between currency values is expressed as the exchange rate, which denotes
how much of the second currency in a pair is required to buy one base unit of the first.

For example, regarding the EUR/USD (Euro vs. US dollar) currency pair, the rate might
be shown on a price chart as 1.2495. This means it takes $1.24 and 95/100ths dollar to
buy a single Euro -- meaning that the Euro is precisely this much more valuable on the
world market. Prices are calculated to a precision of 4 places beyond the decimal point,
and these prices change from moment-to-moment depending on the level of trading
volume worldwide.

The exchange rate itself is determined through the interaction of market forces dealing
with supply and demand, plus the general economic strength of one nation vs. the other
as measured by such factors as gross domestic product, national debt load (or surplus),
economic growth, trade (im)balance, unemployment, use of natural resources, prime
interest rate and political stability -- to name just a few. In addition, there are periodic
reports which come out from all these various different countries which affect the
movement, and thus the exchange rates, of their currencies.

The Forex market does not rely on the special performance of any one particular
currency or economy, although the US Dollar does hold a pivotal role and appears in
many pairs because it is the world's "reserve currency", meaning that it is commonly
used in pricing commodities such as oil and food products. A person can earn money by
either buying or selling a particular currency. Fundamental-style trading entails buying
or selling in response to long or short term economic or political events -- while
technical trading is based on a trader's analysis of historical price movement and his
projection of future moves. The value of any foreign currency, in its' simplest
explanation, is a reflection of a country's economy with respect to other major
economies... in the LONG term, and by supply and demand imbalances in the SHORT
term.

Trading Forex is quickly becoming an integral and even critical part of many people’s
current financial picture, especially when it's becoming increasingly more difficult to
make a living out there in the real world. Traders seek to create profits by speculating
on whether a currency will rise or fall in value in comparison to another currency. A
trader will buy a currency which he anticipates will gain in value, or sell the currency
which he thinks will lose value in the near term relative to another currency. This
thrilling, sometimes maddening, always fascinating widespread practice of 'retail
trading' has enabled some of the most savvy among us to make a small fortune right from
their home computers.

At 2 p.m. EST each Sunday, trading begins as markets open for the week in Wellington,
New Zealand... followed by Sydney and Singapore. At 7 p.m. EST the Tokyo market
opens, followed by London at 2 a.m. and finally New York at 8 a.m. This overlapping
movement of currency trading among market centers allows traders to react to news
immediately and also provides the flexibility of determining trading schedules. If
important overseas news occurs while the U.S. currency futures markets are closed for
instance, the next day’s opening could be a wild ride -- and this is exactly the type of
activity which the short term (intraday) retail Forex speculator attempts to seize upon
and exploit for profit.

Who are the Main Players in Forex?

The day to day business of banks around the world facilitate 90 percent of the trading
action in the Forex market. Forex trading itself is conducted over an electronic
“interbank” computer network that is surprisingly not regulated by any central exchange
like the stock or commodity markets. That's because currencies aren't securities (i.e.,
tangible properties in and of themselves) but just cash running through an exchange
network. Their prices will fluctuate against one another based upon supply and demand
factors as banks and governments move various different currencies back and forth in
the course of their normal activities. They are not necessarily trying to manipulate the
price with such actions, but this is of course EXACTLY what happens as a result of
large enough (millions, billions) of units of currency being swapped.

It is within these price fluctuations that the opportunity for profit is created. And, as
with any commodity, price movement is what creates all the money-making possibility.
Since the instantaneous swapping of money around the world creates second-by-second
changes in the available global SUPPLY of one currency vs. another, their prices are
constantly changing relative to one another to reflect these supply variations. Demand
(trading volume) also adds to this volatility. Here are three of the most influential forces
moving the marketplace:
 Typical FOREX Investment Trading Floor

CENTRAL BANKS -- Big national banks like the US Federal Reserve play an
important role in the workings of the Forex market. They control the supply of a nation's
money, and will often attempt to influence factors like inflation by manipulating interest
rates, etc. They have desired target rates for their own currencies, and are responsible
for stabilizing the Forex market through the use of foreign exchange reserves. Their
intervention in the market can be enough to stabilize a currency if it's price is getting out
of control, for instance. Exchange rates are not just simple numbers to be taken lightly:
they are very important to exporters and international traders for establishing trade
balances between countries, and for people holding foreign investments and property.

INVESTMENT FIRMS -- Financial companies who manage very large accounts on

behalf of their clients, such as endowments and pension funds, commonly make use of
the Forex market to facilitate several types of transactions. For example, an investment
manager with an international portfolio might need to buy or sell foreign currencies in
order to pay for foreign securities, etc. This manipulation if large enough can cause
movements and even trends in the priceline.

SPECULATORS -- This would be guys like me and you... individuals who buy and
sell currencies for profit by exploiting fluctuations in their prices -- as opposed to
investing in the usual sort of investment instruments like stocks, bonds or option
contracts. Speculators perform the important role of accepting a floating currency's
price risk from individuals and businesses who do not wish to bear it.

For instance, a US-based business sells a $1,000,000 piece of equipment to a Canadian

mining company, who agree to pay 1 million Canadian dollars for it. The manufacturing
company's profit margin on such a heavy machine might be 10%, or $100,000. They
deliver the equipment and expect payment within 90 days. If, however, the value of
Canadian money falls 10% relative to US money during the course of the 90 days before
payment is secured, this would wipe out all their profit margin!

To protect itself from this happening, the manufacturing company will SELL enough of
the USD/CAD pair (they will sell Canadian dollars for US dollars) to cover their
$100,000 profit margin. In other words if the CAD falls in value before they get paid for
the job they will make enough profit on this trade to cover and offset the lost 10% (or
whatever amount by which it's lost value during the 90 day interim). This is called
hedging and is very common in the world of international trading and manufacturing. It
is one of the major reasons why the Forex market even exists in the first place -- to
facilitate just this sort of hedging activity, which acts as an insurance policy to protect
profits from fluctuations in currency prices. We'll learn more about all this later in the
book.

Why Should You Get Involved in Forex?

For me the idea of being able to enter into an investment vehicle without having to slap
down $5,000 (or even much more) just to get on the playing field, was the instant
attraction of currency trading. Try opening a "mini" $250 trading account for stocks or
commodity trading and you'll get laughed off the phone. These types of equities are
controlled by the rules of the exchanges and can generally only be purchased in
minimum lots of 100 shares or so. This means that even a small $10 stock purchase
requires a $1000 opening buy-in for one lot -- and probably with little or no leverage
being offered. (Especially to small players that are viewed as more risky unknowns for
the brokerage.)

Forex brokers, on the other hand, allow tremendous leverage for even small mini-
players who are just starting out, to help them learn the ropes until they can fully
participate in bigger money plays. Typical leverage is still as much as 50 to 1, even
after the new US financial reforms of 2010 were implemented in October. And
remember that you can open an account with as little as a few hundred dollars (micro-
accounts) and practice trading with just a small amount of money at risk. Then as you get
better and build up some winnings you can begin to increase your trading numbers. This
is an awesome advantage for those of us who can't bring a big wad to cash to table to
start off with!

In fact, you can actually practice trading Forex at almost any broker of your choice with
a 2-3 month demo account and trade with virtual "play" money. So anyone with even the
slightest interest in investigating currency trading can now do so without spending a
dime for a full 90 days (the typical trial period for demo accounts).

You can GROW into becoming a skilled Forex trader rather than having to plunge
into it with your life savings!

So comon' and dip your toe into the torrent of currencies out there, and see if it's for
you! ;-)

Forex is High Tech All the Way

And by that I'm talking about the sophisticated software tools that are now available to
any trader for virtually no cost at all.

Long gone are the stone-aged days of traders plotting prices with a pencil, ruler and a
sheet of graph paper. Nor are we talking about the old, relatively low-tech Forex of
2002 or '03 when access to the global currency network was just becoming available to
the individual home trader. Now we have algorithms crunching out massive amounts of
data in real time and generating highly processed data, which can be tapped into with
any home computer or mobile device.

One of the most common and popular trading platforms is the MetaTrader 4 (or the
newer 5.0) application, which is open source and free. When you sign up for a typical
demo account, you'll download a copy of MT4 that is all set to hook into that
brokerage's data stream so you can watch the currencies move around in real time. And
of course you can open trades and get a feel for how it works no risk whatsoever, you
just input your username and password to configure the app and you're all set to begin
trading.
 MetaTrader 4 ::: Most popular FREE trading software

I should tell you that not all brokers use MetaTrader, some have their own proprietary
software platforms and this fact will be one of your major considerations in choosing a
broker.

One of the truly incredible facets of the MT4 app is the ability for anyone with some
trading knowledge and a little programming skill to create software routines called
Expert Advisors -- which automate the trading process to various extents and remove
much of the technical analysis AND emotional burdens from the trader. These EA's, as
they are known, are plug-ins for the core MT4 app that work in the same way that
browser plugins for Firefox or Internet Explorer, (or Wordpress plugins for all you
bloggers out there) expand the functionality of the original baseline application. They do
so in a thousand-and-one creative new ways that could not have been anticipated by the
original software designers. This allows for endless upgrades in the way in which
traders can analyze the market with greater and greater ease and precision.

Many EA's operate with particular currency pairs (which we will discuss soon) --
applying precise analytical algorithms and money management frameworks to the
incoming data streams. Then they either execute automated trades (opening or closing
positions automatically), or present trade setups for the trader to evaluate and act upon
manually, if he or she so chooses. You can set up any "robot" to work at whatever level
of trust that you prefer.

Again, you'll find the world of Forex to be an endlessly fascinating hobby as well as a
great new way to make money for yourself... even if you're just starting out as a "little
guy".
MetaTrader can be a bit overwhelming when you first begin playing around with it, it
has a fair amount of hidden functions that are not always obvious. I have an excellent
21-part video training series that will get you schooled-up quickly and accurately with
all the in's-and-out's of the MetaTrader app called The MetaTrader 4 Quick Mastery
Video Training Series. Give it a look, it will get you right up to speed on this powerful
trading software fast.

Advantages of Forex vs. the Stock Market

Basically in Forex you can begin trading with no real money at risk in a demo account...
start small with a mini-account, literally playing for 'nickle and dimes' as you learn, then
graduate to a larger account and trade for higher stakes. And again, you set the size and
the pace of all this activity on your own since all the trading is done through software
screens. There's no actual broker to call and yell "buy!... no, sell!" into the phone. Of
course there is always a phone number where you can call for support or to make a
backup trading order in the event you lose your internet access for some reason
(computer crash, storm blackouts, etc.) You can't really start small in the stock market
because lot sizes are both fixed and larger and there isn't remotely enough leverage
available, especially for the novice trader. But anyway...

As if you needed any more reasons to avoid the wild and crazy Dow, here's a few more:

Outstanding Liquidity

Forex is a computerized network that can handle a very large volume of transactions,
representing nearly 4 trillion dollars a day on average, as noted earlier. This means that
buyers and sellers are almost instantly available when you want to open or close a
trade. Any stock market trader can give you nightmare stories of not being able to get an
order filled at a price he wanted due to little or no action being available for the
particular stock or option he was looking to move. These requests are known as "fills".
Well, fills usually occur within seconds on the Forex market, especially among the
major pairs.

Unbelievable Leverage

Unlike the stock and futures markets where leverages are relatively small (5:1 , 10:1...
but only for the bigger players with lots of equity to collateralize), Forex trading
routinely allows for much higher leverages: as large as 50:1 max after the regulatory
changes of 2010. These new rules apply to US-based brokers only -- many offshore
brokers still offer 50:1+, but these are off limits to US-based traders now anyway as
those same rules require us to stick with domestic brokerages. These new rules will
likely remain in force for at least a decade I would imagine, barring some economic
disaster that might cause Congress to go back in and make still more legislative changes
to further control the financial markets.

Regardless, that's a lot of borrowing power. This is made possible because the
relatively small daily movements of currency prices (a 1% daily move would be
considered enormous, whereas stock prices can easily change 15-20% in a day under
volatile circumstances) make it safe for the broker to lend the trader a large block of
cash so that his pip value makes it worthwhile to trade. I'll explain how all the math
works in a moment to make this clearer. Just know that the high leverage in Forex
trading provides an entry point into the market for the small trader that just
doesn't exist in the stock, commodity and to a lesser extent the futures markets.

Of course, leverage can cut both ways and wipe you out as fast as it makes you a fortune
if you are reckless and don't manage your risk appropriately. It's this leveraged potential
that creates both the higher risk in Forex and the ability to make a large amount of money
starting with a small amount of seed capital. Make sure you are clear on this concept.

24/7 Action

The Forex market is operational around the clock for five days a week. It effectively
closes from about 3PM EST on Friday and re-opens at 5PM Sunday at the start of the
new trading week (which is Monday morning in Sidney and Tokyo). This timeframe
generally follows the schedule of the world's banking industry. You can play with your
Forex account early in the morning or in the middle of the night. Somewhere on Earth
the banks are humming along!

Simplified Trading Choices

There are approximately 4,500 stocks listed on the New York Stock exchange. Another
3,500 are listed on the NASDAQ. Which one of these 8000 possible companies will
you trade? Ugh. In currency trading the majority of the market trades the 4-6 major pairs.
Aren't four pairs much easier to keep an eye on than thousands of stocks?

No Standard Commissions

Forex brokers earn their money by setting spreads between the BID and ASK prices
which they buy and sell the various currencies at. I'll explain all this in a moment, but
briefly it works like this: when you open a trade with a BUY order, you must purchase
the currency at what is known as the ASK price. When you eventually close this trade
you will then sell back into the market at the BID price.

To clarify, you can buy a currency at the market ASK price (you must "give them
what they're asking"), or sell it at the BID price (the highest "bid" the market offers).
This means that whenever you open a trade you are automatically down by the spread --
and must recover this amount to reach breakeven. From that point on it's all profit.

No Inside-Trading Cheaters

Forex trading is considered to be the perfect system of competition since all players are
presented with an equal and level playing field. Fundamental information about a
nation's economic policies and the scheduled release of economic news that affects
currency prices is all public knowledge and completely accessible to every trader on
the planet who cares to keep tabs on it, large or small. This means that nobody can cheat
by possessing "insider information" of any sort. There's no such thing in Forex.

In addition, the fact that financial decisions within banks and governments are usually
kept private until being executed with little or no prior warning makes it impossible to
know WHEN these price-effecting events will actually occur. We can know when they
are LIKELY to occur -- but can never know exactly when, for instance, a banker in
Sidney is about to dump 5 million Yen on the market or a government official in Zurich
has instructed his financial minister to buy up 2 billion Euros that afternoon. The private
nature of money creates permanent uncertainty about the movement of prices that can
never be completely eliminated, and therefore affects all players in the market equally.
The trick is to analyze the market for signals that improve your odds of knowing what's
about to happen next -- but you can never be 100% certain. If that were the case the
market would collapse because it's essentially a zero sum game requiring a loser for
every winner.
 * * *
A massive torrent of foreign currencies moves along a vast electronic global network in
the blink of an eye. It's this speed that makes the Forex market so completely unlike the
snail-like trading pace of buying and hold stock positions for months and years, or
setting up elaborate "iron condors" and calendar spreads in the futures exchanges...
which are still plays that take anywhere from a few weeks to a couple months to unfold.

Not so in Forex, in this market MINUTES matter. Sometimes even seconds depending
on how tight you're playing a scalp. A 'long position' trade in Forex is one in which the
trader holds his currency overnight before closing the next day. This is known as
'rollover' and there's an interest cost (or gain) involved, but most retail speculators
never keep a trade open that long. This is a market that can move fast when it's trending
and is perfect for anyone who's idea of investing is more akin to a rapid fire video game
rather than buying stocks and stuffing them in a safe deposit box like Aunt Betty.

If you like Action, You're gonna Love Forex!

No matter what your trading style the important thing to remember is this: that raging
river of cash flying around the globe has no single owner -- it is just a mindless,
uncaring torrent. The Forex market is an expression of the decisions and the actions of
thousands and millions of individuals all going about the business of global commerce...
doing so on an individual case-by-case basis and for their own self-interested reasons.
From companies hedging to protect export profits, banks and individuals speculating to
make money, governments managing their economies, mega-wealthy people like sheiks
and oil barons moving money through their Swiss bank accounts, and even large drug
cartels and criminals laundering their ill-gained holdings... it's all just about people
doing things with money, 24/7.
And as a free individual with an internet connection you can now stick your nose into
this maelstrom for the first time ever in history and chip a little piece out of it for
yourself. Free money? Only in the sense that's it's hanging their ripe for the picking --but
you have to be both smart and sane about how you approach it without getting drowned.

The 20th century brought us aviation, mass-produced technology, the atom bomb, radio-
TV-the internet and a man on the moon. In the sense that it can be so potentially life-
altering for the ordinary common man, this to me is the first truly unique innovation of
the 21st Century.

Now let's go see how it works.

Okay let's back up a little and start from the beginning. How is money actually made in
Forex? It's pretty cool really...

What is traded on the foreign exchange market of course is currency itself ... Dollars,
Euros, Yen, Swiss Francs, Pesos, Pound Sterling and dozens of other minor currencies
from around the world. These are moved around by large banks, investment houses and
governments in the course of facilitating international trade. For instance, if Honda is
building some of it's cars in the USA somewhere, you can be sure that the employees do
not want to be paid in Yen come Friday afternoon. They want their salaries in dollars,
but since Honda is a Japanese company based in Japan that deals with Yen.

So to make their payrolls in the US they have to change a quantity of Yen into dollars,
and if this movement entails a large enough sum of cash (millions) it will cause the
price differential between the two currencies to change slightly, and that creates an
opportunity for speculators to make money. This is the typical sort of routine transaction
that goes on in the course of doing international trade involving thousands of companies
all over the world, and this swapping action causes the prices to change literally from
second to second.

Gold and silver are usually offered as trading options by many brokerages. In fact, it's
easy to understand how trading currencies works by considering the simple act of
buying gold. When you buy gold you exchange an amount of currency for a weight of
gold. Why do you so this? What do you want to see happen? You hope that while you
are holding it the gold increases in value so that when you sell it back to the market
(close the trade) you get back the money than you paid for it PLUS SOMETHING
MORE. Now just replace gold with a currency and you have the essence of a Forex
trade (a BUY trade, that is.) You can also make money by selling a currency as well as
buying it, hoping that it's value falls in the interim.
Here's how it works: when you buy and HOLD a currency you want the price to go UP
so you can sell it back (close the trade) to the market for more than you paid for it
(which could have been only minutes earlier). When you SELL a currency, you want
that currency to LOSE value WHILE THE OTHER GUY HOLDS IT so that when
you buy it back from the market (i.e., the act of closing the trade) you will pay less than
you sold it for and keep the remainder as profit. This is essentially how the Forex
currency exchange market creates an opportunity to make money. It can happen with
prices either going up or down, you just gotta guess right.

Yes, you could actually flip a coin to decide what to do since there are only two
possible choices to make on any trade, but we'd like to be a little more scientific than
that in our approach to things!

Pips Explained
Before we go any further, let me explain what a PIP is if you don't already know. Simply
stated, a pip is the smallest price increment that a currency pair can move in either
direction up or down. With the exception of the Japanese Yen, a single pip represents
the 4th decimal place of the price quoted for any given currency. For the US Dollar this
would be the equivalent of 1/100 of a penny, or 1/10,000 of a dollar. As an example,
if the Canadian dollar is quoted against the US dollar as $1.0673, the smallest increment
of movement there, the smallest pip, is represented by the "3". If the price went up to
$1.0693 it would have increased by 20 pips. (This means the Canadian dollar would
have LOST value by the way, because it now takes 20 more pips of Canadian money to
buy one US dollar. See how it works?).

Currencies move so slightly against one another that even a penny is too coarse an
increment to use as a measurement, so we use pips instead which are 100 times smaller
than a penny.

One of the few places I can think of where you'll actually see pips being displayed in
the "real" world outside of Forex is in the price typically quoted for a gallon of gasoline
at your local station. If regular gas is listed as $2.99 for instance, you'll always see that
little super-scripted "9" trailing the price, and you may've wondered what that is. Well,
that represents the EXACT price of the gallon all the way down to the pip level, and in
the case of gas it's always 90 pips. So the price of a gallon of gas in this example is
actually $2 dollars, 99 cents and 90 pips. Another way to look at it would be as being
ten pips short of $3.

And that's really all there is to understanding the wonderful world of Forex pips!

NOTE: As mentioned a moment ago and to avoid any bewilderment once you begin
looking over Forex quotes, you'll see that the Japanese Yen is only shown to 2 decimal
places instead of the usual 4. The Yen as a currency unit is unique among the world's
currencies in that it is more like our US penny than our dollar, and therefore is the only
pair that expresses pips to TWO decimal places instead of four. Using only 2 decimal
places automatically corrects for this discrepancy in base unit size. (Imagine if the
penny were our base unit for quoting all prices: a hamburger and fries might cost you
662 cents instead of $6.62, the way that we would normally quote it in dollars and a
fraction thereof to 2 decimal places.)

Currently the Yen is trading at 86.55, which means that it is more valuable than the
dollar. If the Yen were to lose value against the dollar to the point where it cost exactly
100 yen to buy a dollar, the two currencies would be at Par (equal) value.

One final note: Some brokers are now offering fractional pips, which means that all
their prices are quoted to 5 decimal places instead of four. You could essentially set
your stop loss to be 11.6 pips from your opening price, for instance. Don't ask me why
such precision is necessary, the extra math involved with this is already making my head
hurt. I'll stick with a broker like my own, FXDD, who uses good old fashioned 4
decimal places in their quotes.

Leverage Explained
It wasn't all that long ago that currency trading was out of the investment reach for most
individuals of ordinary means. It was an exclusive VIP money club for banks, large
financial institutions, government central banks (the ones that disperse physical cash
into society from their nations' mints in the form of loans) and a few select wealthy
individuals. No more. The internet has allowed access to the market via any home
computer to anyone interested in getting involved.

But the real sea-change has been due to regulatory modernization, which has allowed
people with lesser means to participate in the market by allowing brokerages to offer
high-leverage trading. Whereas a typical stock broker might offer 2:1 leverage on you
account (meaning that you would need to have $500 in your account to buy $1,000 worth
of stock), most Forex brokers will offer leverage as high as 50:1 to all accounts. At
50:1, you would only need to have $2,000 in your account in order to buy one standard
lot of 100,000 currency units (dollars, Euros, Francs, etc.). What's unique is that you
can buy much smaller fractional lots as well and trade with modest amounts of
money while you learn. You can trade with as little as $200 on margin, a great way to
get your "training wheels".

High-leverage trading is what favorably distinguishes retail Forex from other

markets.

How is this possible? Why would some broker allow you to borrow $49 for every $1
that you put into your own trade? It's safe for the broker to do this because the amount
that a currency changes in any given day is quite small. A one cent (or approximately
100 pip) change in the value of a currency is considered a large move. Therefore, Forex
dealers can afford to hold a fairly small amount of collateral for any given position. If
the market moves against a trader resulting in losses such that the trader lacks a
sufficient amount of margin, there is an automatic margin call, followed by the dealer
closing your position. (You don't get to lose the broker's money on your trade!)

Pip Value Explained

Opening a leveraged trade involves putting down collateral known as margin which in
essence covers your 2% of the cash being used in that trade, assuming 50:1. Currency
pairs are usually traded in 100,000 unit standard lots, although you can also trade
mini-accounts with lots as small as .01 of a standard lot, which involves only $1000 in
play. At 50:1 leverage this allows you to open a small trade with a mere $20 of your
money at risk.

Adjusting your lot size sets the value for a pip. A standard 100,000 unit trade
produces a pip value of $10. A half lot (.50) creates a $5 pip value. A mini-lot which is
one-tenth of a standard lot (.01) creates a pip value of $1. See how it works? The
smaller the amount of money at play in the trade, the smaller the pip value, which means
that it takes a larger move in price to make a significant amount of money.

Big risk = Small pip move required to produce a significant profit... while, Small
risk = Big pip move necessary to make a useful profit. Everything is always a
tradeoff, and this is where a lot of the judgement involved in trading currency
comes into play.

Although in Forex we often talk about "buying and selling" Pounds, Euros, Dollars, Yen
and Francs... these transactions as far as retail traders such as ourselves are concerned,
are only enacted in a virtual sense. That's to say, if you open a trade to "buy" 100,000
Euros, neither you nor the broker actually expects you to take physical delivery of this
currency at any point like a genuine business such as Ford Motor's might. The trade is
conducted on paper only (although the resulting profits and losses are very real!)

Bank rules typically state that physical delivery of cash must take place within 48 hours
of making a buy or sell market order. But your broker will perform what's called a
"rollover" to keep the trade refreshed from day-to-day. This will continually keep
resetting the actual delivery date of the cash into the future. A rollover will cost you a
fee, or it could MAKE you a small fee depending on the differential between the
baseline interest rates of the nations represented by the two currencies in play. As an
example, say the US prime interest rate (the one the Fed sets) is 5.0%, and the Euro's
prime rate is 6.2%. If you buy Euro's with dollars and hold them overnight you will be
credited with 1.2% interest on the amount you're holding, the difference between the
two prime rates, which happens to be in your favor in this case. If you sold Euro's then
you would be charged a 1.2% fee every rollover (24 hours). See how that works?

For big institutional players like your friendly neighborhood bank this is actually a "sure
bet" sort of way for them to make money in the Forex market. They just simply look at
the prime rate differentials of various currencies/countries, select the biggest one they
can find and then buy up X millions worth of those units. Then just sit there rolling the
trade over making a steady x% interest every day.

They don't even care where the actual currency prices go! Nice to have big bucks to
play with, isn't it?

Lot Size Explained

To open any trade, one currency is purchased with (or sold for) another. For instance, a
numerical amount of Euros such as 100,000 (a standard "lot" in the parlance) is
purchased with the required amount of a second currency, such as the US Dollar. This
lot size sets the actual value of a pip. For every $10,000 of currency in the trade, a
pip of movement in price will be worth $1. This means a standard lot of $100,000
would make each pip of price movement worth $10 to you. A net 10 pip "scalper"
move (10 pips plus the spread) would bag you $100 bucks. A day's pay for a lot of us.
But remember this can also blow back in your face and spank you for $100 (or more
depending on where your stop loss is set), and therein lies the great risk of Forex
trading that you read disclaimers about everywhere.

So it's generally a good idea to work with far less scary amounts while you learn. One-
tenth (0.1) lot = $1 per pip and that's good enough for a beginner. You can even play
with small $300 micro accounts and set your pips as low as a nickle or ten cents if a
buck is too much. All depends on your tolerance for risk (or thirst for it!).

One type of money management strategy consists of opening a trade with a small lot, and
then adding on lots (by opening parallel trades... lot size cannot be changed on an open
trade in progress). Once the trade begins moving in your direction, however, you may
wish to grab a bigger piece of it by opening parallel trades.

Where to actually set your stops is another aspect where a lot of the art and skill of
trading really comes into play. This is why you must first practice with virtual demo
money before you put your hard-earned money at risk. You need to get a sense of how to
do certain things and make tricky decisions to control your risk, and this requires the
sort of real-life experience that only hands-on trading can provide.

Reading A Forex Quote and Understanding Spreads

The foreign exchange market can be a baffling place for newcomers, and one of the main
sources of early confusion is the way in which the Forex QUOTE is written, so let me
explain that right now. When we talk about an exchange rate, what we're expressing is
the relative value between two currencies -- how much of one is needed to buy the
other. So the quoted rate is to a Forex trader is like lumber to a carpenter... something
essential that he needs to do his job.

MetaTrader 4 ::: Price Window

A quote always first identifies the pairing, then is followed by a number for the value.
For example, you might see the EUR/USD pair have a value expressed as: 1.2259 / 64
This means that it requires one dollar and twenty-two point five nine cents to buy 1
Euro, or $1.22 and 59 pips... we'll get to that hanging "/64" in a moment. (It also means
the Euro is currently about 22% more valuable than the US dollar, BTW). This value
changes daily and hourly of course... and we often follow it moment-by-moment as this
tells us the instantaneous state of our trade. Are we making or losing money?
The particular currency pairings themselves are pre-established by the broker, and as a
trader you can choose from among whichever are offered. Every broker should at least
have these major pairings (called "major" because one of the currencies involved is the
US Dollar):

Euro vs US Dollar (EUR/USD)

British Pound vs USD (GBP/USD)
USD vs. Japanese Yen (USD/JPY)
USD vs. Swiss Franc (USD/CHF)
USD vs. Aussie dollar (USD/AUD)
USD vs. Canadian (USD/CAD)

These currencies can also be mixed into various combinations without the USD being
involved (example: British Pound vs. Yen GBP/JPY). These are called cross-pairings
and involve a currency conversion during both the open and closing of trade (assuming
that your account with the brokerage is in USD). This calculation is a bit complicated
mathematically if you were to try and figure it out yourself, but fortunately the software
does all the heavy math with perfect precision for you and just spits out the answers.
This is a big improvement over the 'old days' of Forex when traders (bankers mostly)
had to figure everything out with calculators and apply head-scratching math formulas.
Hey, back then they made their money the old fashioned way... they EARRRRRNED it ;-
)

Anyway, back to our quote dissection: the first currency listed in the pair is called the
BASE, and the second one is the COUNTER currency (sometimes called the "quote"
currency). The number presented is always a price expression of how much of the
counter (second) currency is required to buy 1 UNIT of the base (first) pair. The
quote is written with an appended value after a slash because it's actually shorthand for
two numbers: the price that YOU can buy the currency for (the Ask), and the price
which the MARKET will buy the currency from you for (the Bid). In this example, you
can sell a Euro for $1.2259 to the market but it will cost you $1.2264 to buy one. You
will always pay more for a currency than you can sell it for. Why is that? That
difference represents the broker's commission on the trade.

The gap between these two prices (expressed in pips) is called the BID-ASK Spread --
and this value constitutes a commission to the broker for facilitating your trade. In this
case it's 5 pips (which BTW means that you are "in the red" automatically by 5 pips
once you open the trade, regardless of whether you buy-in or sell-in to open.) Even
when the actual price numbers change and go up and down the bid-ask spread remains 5
pips apart, so it tracks the price movement. The actual price at the start and close of a
trade doesn't matter (so far as the spread is concerned, anyway). Naturally you want this
spread number to be as small as possible because this value needs to be covered with a
favorable price move in your direction before you can begin to log any profit.

Remember that in Forex, sometimes you get paid for a trade, sometimes you don't... but
the broker always gets paid his spread no matter what! You're the one always taking the
risk remember, not him.

The value of the Bid-Ask spread is directly related to the liquidity of the market for that
particular pairing of currencies. The more liquid the market is (i.e., the EASIER it is
to buy in or cash out) the smaller the spread. That's because there is a risk to the
broker in an illiquid market of a bad trade cutting into his contribution to the lot in play.
Imagine a trade losing money rapidly and the broker not being able to close the trade out
as a margin call approached because of an inability to find a buyer or seller. That's a
risk to the broker and the spread reflects this risk. Typically the Euro-Dollar is the most
highly traded currency pair and the spread is usually about 2 pips. Other pairings with
the US Dollar are often in the 5-8 pip range.

The costliest trades involve currency pairings of what are known as "exotics" -- pairs of
currencies from smaller countries that may see limited trading action and low volumes
that make timely fills difficult, like the Polish Zlotych for instance. The spread for a
back alley pair like the Slovakia Koruny and Thai Baht (huh?) could be as high as 50
pips! You better be right on a trade like this, and you better be VERY right because you
will be starting off 50 pips down as soon as you open the trade! Needless to say such
trades would have to be long term and would rollover many times to completion.

And THAT, my friend, is all you basically need to know as far as reading a Forex price
quote is concerned, and how the broker's spread works.

Best Trading Times of the Forex Week

London is the main banking center in Europe (along with Zurich and Frankfurt), but
other key banking centers in New York, San Francisco, Tokyo and Sidney are also
important to watch. Trading activity tends to peak and ebb in terms of volume based on
the time of day that corresponds to regular banking hours in these geographic locations.
The chart below shows the trading times and how they overlap to create zones of high
activity where profits are most likely to be made. The crib-notes version of all this data
would simply be to say that the hottest time in the Forex market corresponds to between
6AM and 11AM Eastern time USA (-5 from GMT). This time slot catches the tail end of
the London session (which runs from about 3AM to 11AM New York time) plus the bulk
of the New York business day, which is about 7AM to 3PM.

(O=open C=close)

Here are some important Forex time windows for active trading chances:

• New York – 8am to 4pm EST

• London – 2am to 10am EST
• Tokyo – 8pm to 4am EST
• Australia – 7pm to 3am EST

As I mentioned, you will see that there are two instances where a couple of the major
markets overlap their prime trading hours. These occur between 2am and 4am EST
involving the Asian and European markets, and from 7am to 11am EST when the
European afternoon session overlaps with the start of the North American session.

It is during these times, and especially at the start of these time windows, that the
highest volume of trading activity occurs. This is when sharp up or down trends take
hold and currency prices can really start to pop... which of course is what you need, i.e.,
price movement. Between these highly active times the various currencies will go to
sleep tend to "range" horizontally within a narrow band of prices. It's difficult to make
any money when prices are ranging except for those who engage in very tight scalping-
type trading schemes. Otherwise it's safer to wait for a trend to establish itself and then
just go with the flow.

Basically the Forex market "closes" (becomes inactive actually) around 3PM Eastern on
Friday when the US banks begin to shut down for the weekend, and then re-opens at
5PM on Sunday -- which corresponds to the opening of the Tokyo and Sidney banks on
(their) Monday morning. There is no activity on a Saturday and many brokers deactivate
their live data feeds, so your MetaTrader or other platform cannot update during this
down time. When the market comes alive again on Sunday evening prices sometimes
will "gap" and jump significantly from their Friday close as pent-up orders are suddenly
cleared. This can present an opportunity to make a fast profit if you guess right, but
there is also a danger here that open orders and stops will not be activated as the price
values in-between the close and open are skipped over instantly without ever passing
through them. This can result in a big loss as easily as a large gain if you guessed
wrong, but is an example of the sort of high risk play many Forex traders do thrive on.
 "I realized that technical analysis didn't work when I turned the charts upside down
and failed to get a different answer."

~ Warren Buffett

Judging from that rather rude comment, I suppose Mr. Buffett is more a fan of
fundamental analysis than he is technical charting. Of course a super rich guy has the
luxury of making wide-open, long term position trades based on factors such as
international trade imbalances since his massive wall of money protects him from any
serious loss. For the very rich, investing might be a game of monopoly, but for the rest
of us with the rent money at risk it's serious business -- and that's exactly the way in
which YOU should always approach it. (BTW, don't bet the rent money -- you should
only be trading with risk capital. There, now you've been scolded...)

And when it comes to serious consideration of the market, there are a lot of Forex
traders who beg to differ with guys like Warren Buffet and for good reason: they know
that technical analysis WORKS.

Market Price Contains All the Information

There are two basic philosophies on how to forecast the financial markets as you
probably know. One is known as technical analysis, which studies the historical price
data to look for trends, and the other is fundamental analysis... which considers much
larger scale economic factors that can effect a nation's currency values over the long
term. And while fundamentals might be of more interest to the bigger position traders,
the casual technical trader still needs to keep an eye on the important world events that
can effect currency prices as well, or risk be run over by them. We'll look at
fundamental factors more closely in the next chapter.

The technical analytical approach to trading, by contrast, examines past market action
and attempts to use that data to predict the future. The technical analyst's creed is that
everything that you need to know about where a currency's price is headed can be
divined by studying where it's been in the recent past. In other words, historical price
action contains ALL the information that you need to understand when it comes to
deciding where a currency's price is going.

The Big Trick, of course, is to discover where all that magic knowledge is hiding in the
data!

Using fundamental analysis to forecast Forex markets is also more difficult in the sense
that it takes considerable bloodhound work to uncover all the various sources of
information that you'll need to consider, but can be highly accurate in the long term. This
type of analysis looks to forecast the market based on various factors that effect the
economic strength of nations: political moves, government financial actions (via central
banks), social movements, even the effects of the weather and climate (big storms or
earthquakes that could interfere with agriculture or offshore oil production, etc.).
Anything that can effect a nation's macro-economy will eventually move its exchange
rates.

Naturally, this means having to know when key financial reports about farm production,
manufacturing growth, interest rates, GDP, unemployment figures, tax rates, bond
stability and other similar indicators are coming out for those countries whose currency
you are watching. Such reports are regularly scheduled for various different countries --
and the trader's task is to find a good online news source and watch it regularly for
clues as to which currencies are likely to gain in value vs. others.

The point is that good traders must use a mixture of both technical and fundamental data,
but for now lets explore the tools and techniques of the technical analyst first.

The cornerstone of technical analysis is the idea that a currency's price is a reflection of
changes in the balance between short term supply and demand. This factor is either
supported or resisted by speculative reactions to economic, political or psychological
changes in the world. To an extent, traders tend to create self fulfilling prophecies by
acting en-mass in ways that support the very trend which they're following, either
bullish or bearish. They will therefore tend to take actions that cause prices to stop and
reverse at certain levels -- as "shorts" (sellers), for instance, take their profits -- causing
price reversals known as retracements. These can be scalped for quick profits if
successfully predicted.

This idea is what lies behind the slavish devotion to support and resistance lines,
channels and especially Fibonacci levels.

See, while much of the price action of currencies is due to the actions of institutions and
individuals who keep the intent of these actions private up until they are executed (and
therefore create eternal market uncertainty), a certain amount of it is created by the herd-
like actions of global traders. One thing that we assume about this phenomenon is that
they are all staring at both the same historical currency data -- because this data is both
publicly available and rigidly unmodified in it's presentation. In other words, it's the
same everywhere across the planet and every trader is staring at the exact same price
patterns on his or her computer screen. This creates the likelihood that many people are
drawing similar trendlines and Fibonacci levels and using 100-200 bar Moving
Averages to make the exact same judgements of the current price situation as everyone
else is doing.

For instance, if I draw a Fibonacci pattern (see below) based on very clear peak and
nadir points that have occurred on a particular currency chart over the past week, I can
feel some confidence that many other traders have done exactly the same thing. This
means that all of our collective 50% and 33.8% levels, etc. are pretty much in
agreement across thousands of trader's charts everywhere. This also means that traders
are likely to have set their stops and take profit marks at very similar price points,
which means that these levels are now likely to mark points where prices are poised to
either reverse or keep on going strong, as the interpretation may indicate. This
information gives us a very strong clue or "signal" that we can then exploit by planning
to buy or sell at these particular points, joining the herd.

This is essentially what charting is all about: trying to read the tea leaves and determine
what all those OTHER invisible players out there are about to do -- and then take action
to turn that knowledge into a profitable play for ourselves as well -- either by moving in
concert with them or against them as the situation may dictate.

MetaTrader 4 ::: Fibonacci Tool

Charting and Analyzing Currency Movements
Technical analysis of the movement of securities like stocks and futures is a fine
blending of art and science, with the ultimate goal of generating accurate buy or sell
signals that traders can act upon with some degree of confidence. In Forex there are 4
main items of price that are tracked: the open, close, high and low prices based on some
specific time increment... minutes, hours, days etc. Volume and open interest are
additional factors used in stock trading -- but these are a bit tricky to measure accurately
in Forex and are somewhat devalued as useful tools as a result. Volume is mainly useful
for determining when there are a lot of players on the field, and thus when prices are
more likely to be volatile. Times of low volume usually correspond to a currency
"ranging" or moving along a narrow sideways channel, which usually offers little
opportunity for profit and marks a good time to stay OUT of the market.

Trends are where most of the money is made in Forex. A variety of indicators can be
applied to a price chart which can reveal many interesting things going on beneath the
obvious, and these are mostly useful for visualizing trends and patterns. This is the
"science" part of charting. It is then up to the savvy of the individual trader and his
experienced eye to make judgements as to what to do next with this information. This is
the "art" part.

Technical analysis, when you boil it all down, is really the study of human psychology.
Chart patterns that reflect bearish or bullish market movements are as much a response
to trader mass psychology as they are economic factors, and this is what makes them so
valuable: because they give us a peek into the collective activity of people acting
around the world who are otherwise invisible to each other. We need to be able to
somehow read what the 'herd' is doing and infer what they are thinking in order to
understand what they may be intending to do next. Assuming that the innate nature of
human behavior when it comes to dealing with money never changes all that much,
patterns that have worked in the past are assumed to be viable forecasting tools for
coming price movements.

Any free trading market is governed by four basic human emotions: fear, greed, euphoria
and desperation. The interactions of these emotions and how they play out are depicted
on the charts in both short and long time frames. Extreme actions, such as panic selling
or a torrid uptrend are associated with particular emotions -- and we look to the charts
for evidence. It's why we try to plot support and resistance levels, for instance, because
we know that others are watching these points as well and that they may've set their
stops or take profit points at these marks. That means these could likely be points where
the price will rebound and change direction OR burst through and move onwards.
There are two ways to play this knowledge: either look to ride it or go against it. This
is known as having a trend-following or contrarian-style trading philosophy. Trend
following is mostly about identifying persistent directional price movements and
jumping on them before they become exhausted, trying to catch the middle third of the
entire movement. The trouble is you can never know for sure how long these rides will
last, but again, the historical data will contain clues that can help you make an educated
guess as to where to get on and off. You can really only hope to cut the middle third (the
guts) out of any strong trend move -- the sort that lasts from maybe 4 to 12 candlesticks.
Much more than that would require you to be a mind reader.

You'll find that it can sometimes be difficult to control your emotions when you are
sweating over a trade in real time with real money on the line. Technical analysis
attempts to take some of the blind guessing (and thus the fear) out of the system and
replace it with hard data which, while far from infallible, can shade the odds in your
favor. You're looking to give yourself just a bit of an edge so that in the LONG RUN you
will show an overall profit. Get it out of your head that you are going to figure out some
new and clever way to "beat" the market time after time. It simply can't be done. You
have to learn how to finesse it instead -- making more on the gains than you lose on the
losses over time.

Start poking around with your MetaTrader and you'll discover a mind-bogging array of
fascinating indicators... which you will probably have no idea of what they are at first
glance. Fortunately there are excellent help files that explain all of these better than I
can. Just go to Help Topics on the HELP menu item, then follow: ANALYITICS >
TECHNICAL INDICATORS and you will see about 30 different ones from the
"Alligator" to the "Williams Percent Range". I've experimented around with a lot of
these indicators and you should too, if only to learn how they work. I've found some
indispensable, some bewildering and others totally useless. But they were all in some
way educational.

With that in mind, here are some common indicators that I like to use on my own charts:

Trendlines, Vertical, Horizontal and Channel Lines

A trendline is a sloping line of support or resistance that is used to visualize the
trajectory of price movements, while horizontal lines are necessary for marking support
and resistance levels -- places where the price looks like it may do something that you
can use to open a trade. I also like to apply vertical lines to mark the starting and ending
points of trades, for pointing out ADX "criss-crosses" (see below), and for performing
forensic reviews of past trades.
Channels describe a pair of parallel trendlines which can be useful for visualizing
points where you think price breakouts will occur off of a long period of lateral ranging.
You'll find all sorts of uses for these basic tools of the chartists' trade.

On the USD/AUD sample chart below I've drawn in and labeled a few of these lines on
my MetaTrader. The blue horizontal line along the top is used for denoting support and
resistance levels (you can make these lines any color, thickness and style - solid or
dotted - that you may wish, BTW...), whereas a vertical line marks a notable criss-
crossing point on the ADX indicator (the squiggly green, grey and pale yellow lines
running along the bottom of the window). I'll explain more about how this favorite
indicator of mine works in a moment.

I've also displayed an equidistant channel -- which was drawn around the high and low
points of the currency price as it was ranging along horizontally. Notice how the price
suddenly broke out? A lot of people will draw these channels and wait for a breakout
such as this to happen, then open a trade -- either buying or selling depending on if the
price goes up or down. I would wait until the price moved maybe 20% or so beyond the
edge of such a channel just to confirm that a trend is solidly underway, but this is a
trader's own unique judgement call.

MetaTrader 4 ::: Trendline Tool

Fibonacci Pattern Tool

The Fibo tool draws a line between two points -- usually a high and low price over a
certain block of time -- and then marks horizontal lines at 3 levels that are called
retracement points. These are located at positions 38.2%, 50% and 61.8% between
the high and low limits. What you're looking to uncover with these levels are common
focal points of herd mentality and trade opening/closing activity that will affect the
price in some way. The one's at 50% and 38.2% especially are considered to be
"magic" in some way.

I think the only thing magic about a Fibo graph on a chart is that a lot of players are
looking at the same levels and have set their buy-ins, sell-ins, stops, etc. at these
points... and so prices will respond predictably as a result, IF enough traders act
together in unison to make the prediction happen. So this tool gives me yet another way
to watch for the actions of that "invisible herd" that I am looking to run either with or bet
against.

On the sample USD/CHF chart below I've drawn a Fibo off a high and low point (see
that diagonal dashed line?... that marks the points between which I drew the fibo pattern,
the 0 & 100% levels). You'll notice that the price went down to almost the 38.2 line and
bounced back. The whole trick to this tool is guessing where other traders have
likely selected their own high and low points on the chart. This gets everyone looking
at the same pattern and possibly setting their own stops and profit points at those same
retracement points that you are seeing on your chart.

Determine where the masses are likely going, and you can piggyback your own trades
atop their trends and ride them to profit!

Average True Range (ATR)

This tool is a measure of volatility and shows how much average pip movement has
occurred during the past X bars. It helps me set my stop loss points, and also helps to
define a price range when I'm looking to set my pending buy or sell opening prices --
places where I will automatically have a trade open if the price gets there. These
automatic tripwires are called "buy stops" and "sell stops" in the trading parlance.
(Read your MT4 Help files to better understand these functions...).

The ATR is pretty simple to grasp once you see it in action (but a bit tough to illustrate
with a static image... though I've tried my best for you!). As you roll your mouse over
each bar it pops up a data flag showing the average pip movement of the past X number
of candlesticks from that point backwards in time.

In the GBP/USD image below for instance you'll see that I've marked two points with
vertical red lines where I took a pair of different Average True Range readings. The low
point reads 24 pips, which was the average of that 20 bar run during a ranging period of
very little price movement. You can see I pointed out the actual bar that I measured at
the end of that rather quiet run.

Farther to the right I measured another bar which included a big 91 pip move during that
time span, so while the actual bar being measured (and really the ten bars leading up to
it) were rather small, the average of the past 20 bars, as you can see by the ATR line
rising up, was 39 pips -- a value that's skewed somewhat by the inclusion of that single
big 91 pip bar. See how this works? Working with these indicators on a live screen will
make it much clearer if you're still a bit uncertain about all this.

Average True Range Indicator

The big "trick" to using the ATR then is deciding what value to input for averaging.
Do you average the past 10 bars, or 20? Maybe 30? In this particular case, if I were
looking at that bar on the right I may want to reset the average to 15 to get rid of that 91
pip bar, because it's distorting my shorter range average. ("Lately" the price hasn't really
been ranging 39 pips, more like 25.) Generally the shorter the time frame you're
working the shorter this averaging period should be. If I'm scalping and looking to get in
and out within 5 bars let's say, then I'm more concerned with the very latest range value
because I'm looking to get on a short term trend or play a quick reversal in price. So
maybe I just want to see the average range of the past 10-15 bars. If I'm a position trader
holding a trade open over a few days, however, then I'd be more interested in what the
average of the last 30, 40 or maybe even 80 bars is -- and would I would set my ATR
value accordingly. Judgement call baby!

This indicator puts a hard number to volatility, which is easy to see visually, but still
needs to have an actual numerical value hung on it sometimes. That number is useful for
setting your stops and take profit points x number of pips BEYOND that range for
instance, for a stop -- or somewhere WITHIN that range for a profit mark. The thinking
is that if this range continues to hold steady for the next few bars as well, you will be
safe from stopping out on a retracement and your profit point has a reasonable chance of
being reached. A handy tool I think. It's on all my charts.

Moving Averages
I'm sort of lukewarm when it comes to Moving Averages... I do use them and have tried
all different setups, but I'm still not sure if they're telling me anything really useful,
especially when it comes to intraday trading. I always draw at least one MA line
because my charts look naked without them. I've used the standard 2 lines set at 10-20
or 7-14 (periods) and watched them criss-cross away, but the ADX criss-cross signal
(see next item below) is easier to read and holds more predictive data I feel in the angle
at which they intersect -- which I just don't see in the MA lines. They seem to lag a lot
more and are useless for short trends, which are essentially over before the criss-
crossing becomes fully apparent.

I've seen Moving Averages set up for very long periods like 100 and 200 bar MA's,
which produces these slowly rolling waves that may be good for analyzing longer term
trades, but like I said don't seem very useful for scalping. Maybe I'm missing something
when it comes to MA's, but they are widely used and watched by traders -- and they DO
provide a solid logic for setting points of support and resistance on your charts, so for
drawing general long-range support and resistance lines they are good.
One thing you can do is determine if a price is beginning to trend significantly upwards
or downwards relative to where it's been. If you set an MA to produce a curve that
represents an average of the past 50 bars say, and the price moves ABOVE this line, you
may feel comfortable opening a long (BUY) position. If it drops below you would go
short. How far above or below it must move to confirm the move, well, that's where
your trader's sixth sense born of experience will come in.

I've illustrated this with a screen capture from a USD/JPY chart. The blue line on the
chart is a 50 bar Moving Average line and you can see that a powerful trend favoring the
dollar finally formed after some back a forth ranging activity, and that the candlesticks
moved up and away from the line. Notice how the line gradually follows the price on a
shallow upward track, but it cannot stay with such a quick movement because it
represents the average of the previous 50 bars, of which the move is just a small part. If
this MA were set to a smaller value like 20 bars the line would be more lively and track
the candlesticks more closely.

Many traders like to use this as a signal that a new trend is beginning, and it works
sometimes to improve your odds of catching a trend at its' start, but like anything else in
Forex there is enough uncertainty so that any "rule" will be repeatedly violated.

For example: you can see the upper arrow pointing out another breakout above the MA
line, which looked similar to the previous one, but this time the price turned right back
and went against the long position trader. The lesson here: don't get fooled into thinking
that just because something worked for you once you've discovered some sort of
inviolate "rule" in Forex. The market will delight in punk-slapping you down next time.
You should always look for a convergence of several signals you prefer to watch, never
just one "magic" indicator.
 Moving Average Indicator (50 bar)

Average Directional Indicator (ADX)

This is my favorite indicator and for one main reason: it's the only metric that I've
played around with which seems to have just a bit of predictive power. In other words,
it doesn't lag like most indicators seem to (well, at least certain aspects of it don't lag).
You'll soon discover looking at all these various MT4-5 indicators that they are
generally showing you what just happened, not necessarily what's going to happen next.
This of course is the holy grail of Forex... finding some indicator that doesn't just plot
the past but seems to point with some accuracy towards the future.

Now don't go too crazy with this ADX and treat is as an absolute sure thing, because
you should know that in any sort of trading market there is no such thing as a sure thing.
What any indicator such as this does is give you a signal that improves your odds of
knowing what's likely to happen next. We're talking maybe 60% to 70% odds in your
favor, which is what you're looking for... just a way to shade the odds. Some "sure
thing" looking trades will always go back against you so you still have to practice good
money management, keep your lot sizes in order and your stop loss points reasonable.

Okay, that said, now let's see how this works...

The ADX is an indicator which produces a measurement of a trend's strength as well as

a portrait of which currency happens to be stronger than the other at any particular
moment in time. The silver-grey line is the strength indicator. The longer a trend persists
(either moving up or down in actual price) the higher this line will rise. Anything over
level "40" is considered very strong, but it could also signal a trend that is approaching
it's end as well, so you don't want to wait around watching it too long or you may miss
the move and enter a trade just as it reverses on you. I have a better way to read this
indicator which I'll show you in a moment.

The two currencies on this chart, the US dollar and the Euro, are represented by gold
candles (Euro) and green candles (dollar). The ADX lines match these colors so it's
easy to know which currency is represented by which line. Notice how the lines weave
up and down and criss-cross each other. This trace displays the price changes between
the currencies, so while one lines move up (in value) the other is moving in the opposite
direction until the price reverses -- then the lines converge and cross.

These criss-crosses contain a tantalizing clue, I feel, as to when a major move

MAY be underway -- but of course like anything else this signal is never 100%
accurate, and you will encounter numerous "fake outs" where the price lines cross and
then immediately zig back in the opposite direction and re-cross -- nullifying the first
move.

There are two major things I look for in the crazy zig-zaggy trace of these two lines
which helps me to decide whether to open a trade or not: the angle at which the two
lines are about to intersect with each other, and the number of "false alarms"... that
have built up, which seems to presage that a legitimate move is likely "due". This "due"
number will be somewhat different for the various currency pairs: all part of their
particular 'characters'. Take a look at this chart, which illustrates this pattern:
 Average Directional Indicator (ADX)

Well that was the happy part, now for the bummer: things don't always lay down and
reveal themselves for you quite that easy. There are numerous false alarms to contend
with. The chart below shows you a neat little row of these "fake outs". The best way to
understand the impact of these false moves on your decision-making process is to go
back through the historical data at the timeframe you wish to trade (hourly charts,
weekly, 5 minute ,etc.) and the currency pair (they will all be different as they each have
their own "character") and mark all the false alarms in one color with a vertical line,
and the good trades with another. Now count the number of false alarms that occur on
average between the good moves. This will give you a sense of how many such moves
generally have to accumulate before a good move is "due". This gives you something to
grasp hold of in the form of predictive data.

For instance, I have established after some head-scratching study on the EUR/USD
Hourly that 5.5 false alarm criss-crosses generally is the longest run of fakes before a
good move appears. So if I see the green dollar line turning upwards on the ADX and
the gold Euro line heading down and the two look to be on a collision course like a
couple of trains headed for a wreck... AND I count back and see that the preceding 6
criss-crosses were all short-lived head fakes, I am feeling pretty confident that a strong
move is next and it's looks to be in favor of the USD, so I get ready to open up a short
position and SELL. This is how I read the ADX.
 ADX Ranging vs. Powerful Trend Signal

The grey main ADX line is an indicator of trend strength. Notice how the line stays
down below 20 when the currency strength lines stay tangled close together? This
indicates a ranging price with no particular trend... as the bears and bulls are tussling
back and forth. Notice just before this happened though the Euro made a strong move
and the grey line ballooned over the 40 line indicating a strong trend?

You get your best trading clues from the ADX by watching the trajectory of the two
currency lines as they approach each other on a collision course. I ignore the
shallow approaches and look for an impending 90 degree crossing. That's when I look
to open a trade, especially if there have been a number of "fakes" building up in the
recent past. What this shows is that after a long stretch of equal strength between the
bull and bear forces, a sharp price move is about to take place. You can also see which
way the break is setting up to happen...

For instance, if the base currency is on an upward trajectory, a BUY trade would be in
order -- whereas if the counter currency is on an upward path then a SELL would be the
correct trade. You could even set up a pending order if a nearby resistance line is also
about to be broken. Set the opening price x pips beyond the resistance to assure that
you've captured a real move. If it's a sell called for, then the opening price should be set
x pips below some other indicator such as a support trendline or a Fibonacci level. This
is how you can use indicators such as the ADX to design a trade for yourself.
Now notice there was another cross on the right side of the chart that resulted in a strong
move by the Euro, but the grey ADX line was still very low -- indicating that there was
no established trend going on at the time. So this play, obvious now in historical
hindsight, would've seemed like something of a gamble to jump on. Also notice the
move over on the left side of the chart marked by the red vertical line: another cross
with a low grey line in the background signaling no trade, but the move turned out to be
a good one for the Euro.

This illustrates why the grey trend strength line is of limited value on this indicator, in
my opinion.

Why? Because when you're coming out of a long period of ranging where the currencies
have been fighting back and forth (bulls vs. bears), the grey ADX line will have
naturally fallen down to near or below 20 -- but remember what this line is supposed to
be showing you: trend strength. If the price is ranging along horizontally THERE IS NO
TREND and you wouldn't expect to see one. Most good setups come after a period of
ranging when a trend is absent. This makes this line not nearly as valuable as the two
currency lines themselves, and you should expect it to be low at the start of a good
opportunity.

What you're looking for are crosses that distinguish themselves in some way. I believe a
good trade opportunity becomes evident at the end of a string of fake outs when a good
move becomes "due". So how do you judge this? That's the $64,000 dollar question of
course, and where all your trader sixth sense comes in. You need to become a student of
your favorite pairs and try to get a feel for what they like to do. Studying charts is good,
but nothing focuses the mind like having a little money (even virtual money) in play. So
don't just study, hop into the market now and then and DO!

Also remember that a good trader would not be looking at this signal in a vacuum but
would consider this as one piece of the puzzle alongside complimentary data. If you
have other data to support a trade in addition to an impending cross off a long ("x")
string of fakes, such as those nearby support or resistance lines that I mentioned earlier,
then that would only add to your confidence. It's not a good idea to trade off just one
signal in isolation -- that's gambling and you may as well just flip a coin to generate
your buy-sell signals. Maybe you want to see where prices are positioned relative to
some moving average line, or have a stochastic or RSI (relative strength indicator) to
show you if a currency is overbought or oversold. You can read up on all these
indicators in the MetaTrader help files and see what they offer and how they work. Pop
them onto your charts and play around with them. Toss out the one's you don't like and
keep the ones that seem to show you something valuable.
That's how you learn to trade Forex: by experimentation and self-educating.

ADX Ranging Signal, No Trade

I make the +D1 and -D1 lines the same color as the currencies which they track to
prevent any confusion and make it obvious as to which is which. +D1 is always set as
the Bull (base) currency and is your BUY signal when it is going up, while the -D1 line
is the Bear (counter) currency, and when it is going up that's your SELL signal.

Don't get this confused, when the base currency line is going UP that's a BUY, and
when the counter currency line is going UP (not down) that's a SELL.

Here's how I configure my ADX indicator (colors shown are for the EUR/USD):

Parameters -- Set the period to 10, Apply to: Close, and I use a dark grey for the trend
line (except for GBP/USD where it's yellow because the GBP already uses that color)
Colors -- Set +D1 to base (first) currency color, and the -D1 to the counter (second)
currency color. In this example it's goldenrod for the Euro and Lime for the Dollar.

Levels -- Use the Add button to create 3 levels at 10, 20 and 40. Use a silver dashed
line. These levels mark trend strength: anything over 40 is a very strong trend, 20 is a
good trend and anything 10 or less is a very weak trend and denotes a ranging price
moving horizontally on the chart.

That will pretty much set your indicator up the same as mine. One adjustment you can
make is the "period" value which I have set for the default 10 bars (the previous 10 bars
are averaged to plot the lines). Making the period longer produces a different angle of
attack between the lines which you may find easier or more accurate to read -- play
around and see. If you set the period to 5 for instance the line traces will look much
more exaggerated and cartoon-like. Set it down to 1 and the lines squish together and
become unreadable. Try it... this is how you learn!

One Final ADX Trick

The ADX is an average of price fluctuation going back a certain amount of time don't
forget, so you can use it to define points of maximum and minimum price range within
that period, and then use those to judge the start of a breakout in either direction and
possibly a new trend. The longer the timeframe the more conservative the rule-set. For
instance, say I was to check the ADX along with the candlestick patterns to find the
highest and lowest price points that were made yesterday. I now draw a horizontal
channel using the channel tool (naturally!) with the walls set at these high and low
marks. I've now defined a range that I believe a price would have to break out of in
order to be seen as a new trend setting off. The width of this channel is maybe 150 pips,
indicating that yesterday was a fairly quiet day without any really big trends on the
move.

Now you need to create another rule for yourself that essentially says "I will open a
trade once the price reaches "x" number of pips beyond either channel edge." For
instance, when it breaks 5 or 10 or 20 pips beyond the channel edges, I'm in. The larger
this number the more conservative your rule-set. You're essentially saying: "I'm not
opening a trade until the price is 20 pips ( or 30, or 50 pips) beyond yesterday's top or
bottom price!" So this number actually represents an expression of your taste for risk.

Another way to engage a conservative approach is to use longer timeframes to set your
channel edges. Instead of going back 24 hours to find hi-lo points, suppose you base
your channel on the high and low marks from last week? This will be a much bigger
channel, maybe 500 pips wide, and a puny 10 pip breaking of this channel would be
insignificant and meaningless, so your rule for this would be something like a 50-80 pip
breakout before opening a trade. Now you're saying: "I'm not opening a trade until the
price exceeds last week's highest or lowest price by at least 80 pips... now that's what
I call a trend!" See? You must use these tools to find a way to trade that is comfortable
for you and within your risk temperament (and your account size, which we'll discuss
later).
 ADX Channel Setup

Color My World of Currency

Finally, (although this is something that you can't really see on your black-and-white e-
reader screen very well) I don't use the standard red and green candlestick colors on all
my charts to denote bull and bear bars, and I have a good reason for that: I once traded
the wrong pair by accident! I had all my charts set up with the same standard red-green
colors and didn't notice along the bottom of the screen that I had selected the USD/JPY
pair when I was actually looking to trade the EUR/USD pair. This mistake occurred
after some lengthy analysis that had me switching back and forth to various different
screens looking for patterns or whatever... I forget exactly what I was doing on that
particular trade. The point is that keeping everything looking the same made it easy for
tired and bleary-eyed ol' me to place an order off the wrong chart.

Because my charts all looked the same it was a simple mistake to make I suppose, but
this did nothing to stem my fury when I saw that I had played the wrong pair only after
having already opened the trade (and immediately being down $40 bucks due to an 8
pip spread as well!). By sheer luck I could've still made a profit of course, but that
didn't happen (because I stink at luck), and the trade was eventually stopped-out for a
loss...

...and that was the end of letting all my charts look the same!
So I came up with a color-coding system for the currencies which I will now share with
you so you can either copy it... or be inspired to dream up your own system that might
make more sense to you.

One thing I did was standardize the US Dollar as green on every chart where it appears
(LIME is the actual color from the MetaTrader color chart -- it shows up better against a
black background... I like using a black background because it looks high tech and
cool!) A dark green might look better on a white background, try it and see what you
like.

Anyway, here's my color schemes on the 6 pairs that I mostly trade:

Sample chart colors for the 6 major pairs

Any sort of news that has an impact on the economy of a nation can effect the value of
its' currency, and is therefore considered a fundamental factor as far as Forex traders
are concerned. Such fundamentals are separated into three major categories: economic
factors, political factors and environmental factors such as natural disasters.

Publication of key financial data is closely watched by investors. For instance, will that
report on German bond ratings have consequences for the Euro? Is that hurricane in the
Gulf going to disrupt the supply of oil for several weeks? Government economic reports
are kept under strict secrecy up until the time of their release to prevent any 'insider
trading' type unfairness to occur. Central banks in many countries for example change
their prime discount rates confidentially and with little warning, sending different
currency pairs into turmoil. And of course this opens the opportunity for profit as we
need vertical price movements to play.

The deciding factor when it comes to whether or not the release of an important bit of
economic news will have an effect on a currency is how closely the actual results come
to economists' prior expectations. If the news matches widespread predictions fairly
closely then it should have already been "priced in" to the market beforehand. However,
if the release deviates significantly from the anticipated numbers, then it has the
potential to have a bigger impact on the market. This is true of the stock and futures
markets as well as Forex.

In Forex, traders are essentially speculating on the health of various countries'

economies by proxy of their currencies. In order to have an understanding of an
economy's strength one needs to consider manufacturing, retail sales, housing
construction, consumer spending and the status of the labor market. Data on these
different sectors are found in reports released by government agencies, academic
institutions, and private data-collection firms.

I'll be the first to admit that all this stuff is about as exciting as watching paint dry, but a
lot of the energy that creates price action is generated off the reactions that businesses,
banks, governments, investors and speculators have to such data contained in these
reports -- and so they cannot be ignored even by the most strident technical analyst. A
well-rounded Forex trader must pay at least some attention to economic reports, and
especially must have an idea of when they are scheduled for release. Even if you don't
wish to trade the news, you may want to know when to stay away to avoid the
uncertainty and possible volatility during these times if you're a cautious trader.

Forex-Relevant News Services

An informed trader is a successful trader. To make logical decisions on when to buy and
sell currencies, you'll have to keep an eye on at least some of the above financial news
reports, especially those from the US and Europe. Reports out of Japan, Singapore,
Sidney and Hong Kong will also need to be followed if you like to play those Asian-
Pacific currencies. There are many sites that make it quick and easy to keep up on all the
forex-relevant news that you can possibly handle.

But it isn't just financial news that we have to keep a watch on. Any sort of big news
story can potentially affect the Forex market -- and the sharp-eyed trader is always on
the lookout for any major event that might impact his trading. You should try to stay up
on world affairs, monitor political, social and economic developments in many different
countries, and take note of how the FX markets tend to respond to these events.

Be sure to keep notes!

Ninety percent of this activity might be done "sitting on your hands" so to speak, i.e.,
without actually trading. But the other 10% could involve taking action when you feel
that the time is ripe to open a trade. You can get the "Forex spin" on the impact of major
news events from any of these various sources:

The Nation Bureau of Economic Research

http://www.nber.org/releases

FX Street
http://www.fxstreet.com
 WM Financial Strategies
http://www.munibondadvisor.com/EconomicIndicators.htm

Forex Capital News

http://wn.com/s/forexcapitalnews/index.html

Playing the News

The best way I believe to trade on any news announcement which you think may result
in a sharp price movement or trend breakout for any particular currency is to place 2
pending orders in anticipation of this event both above and below the current price
range by "X" amount of pips. This "x" value will be determined by how much you
anticipate a particular currency to range around before really jumping out on either side
of the current price.

I call such a trade a "pip trap" and how it works is fairly straightforward: you set up a
pending buy order some distance above the current price or channel, and a mirror-image
sell order an equal distance below it. Such a trade is ideal for using what they call an
OCO-type ordering format (IF your broker allows it, mine doesn't). OCO means 'One
Cancels Other'... meaning, for instance, that if the live priceline triggers the pending
BUY order to open, then the pending SELL order will be instantly cancelled out (or vice
versa).

In essence you are anticipating that the market will make a significant move in one
direction or the other immediately AFTER an announcement is made, but you don't
know which way it will go for sure and you're simply covering both possibilities. The
magnitude of this move will relate to how closely the news matches expectations -- if
it's as expected then the impact will have pretty much been "priced in" already and
things may not get too crazy -- but if not... then you could be in for a 200+ pip rocket
ride.
 Pip Trap:
Set OCO pending orders above and below channel
and wait for breakout on News, etc.

The EUR/USD pair is ideal for news-style trading because many important
announcements occur between 8:00 AM and 11:00 AM Eastern Time USA, and it is in
this time window that both the "big mama" London and the New York financial markets
are open and humming.

If you look at a 15-minute EUR/USD chart for instance you will see that there are
usually a great many pips worth of movement in the morning hours. What if you could
consistently capture the first twenty or fifty pips of any announcement-provoked move?
Opportunities for this sort of trading do not happen every day, but for those with a more
studious trading temperament this type of philosophy could be an ideal fit. Make sure
you stay up on the announcement schedules using those sources I just detailed, and
observe what happens and keep notes. You'll begin to see patterns and connections
forming that link typical moves to particular news reports, and that's the sort of
knowledge that can make you consistent money in the long run.
It is critically important before you go plunging headlong into the world of currency
trading that you get your brain wrapped around the idea of risk control and money
management. The standard advice you often hear is that the size of your trades (in
terms of "lots" placed at risk) should reflect no more than 2-3% of your entire account
equity. This sounds nice, but if you run the numbers you'll see that this 'rule' is really
only viable for accounts of at least $5000. That's because lot size controls the value of
the pips that you're trading for, which I think needs to be at least $2 bucks per pip in
order to make trading even worthwhile, and such a rule restricts the distance that you
can back your protective stop loss points out and therefore limits your ability to trade
for larger amounts.

You'll soon discover that your stop-losses need to be set back as far as 20-25 pips from
your entry price in order to give the trade room to survive those back-and-forth jiggles
and wiggles in price known as "market noise". Otherwise you'll just keep getting
stopped out for small losses trade after trade. Think of it as the vibration in the priceline
-- which gets more pronounced the closer that you "zoom in"... i.e., the shorter that the
timeframe you're using on your chart becomes, 15 minutes, 5 minutes, etc. You've got to
stay clear of this wiggle until the price starts trending in your favor.

And while none of these carefully managed negative trades may be enough to wipe you
out, it can play havoc with your emotions and confidence levels because you'll be
suffering from a "death by a thousand cuts" -- a slow and steady bleeding away of your
account equity. You don't want to go too long between winning trades. The bottom line
is you've got to give your trades room to breathe and stay alive every time or there's no
sense even bothering to open them. Then, once they move a little ways into profit, you
can pull your stops in tighter -- first to the break even point, and then to lock in
that first juicy chunk of profit. My two stage trading strategy which I will show you in
a moment will illustrate all this clearly.

So how do we judge how much to place at risk for any given trade? Smart money
management dictates that you should arrange your stops and take profit positions
immediately after opening any trade so that you have the opportunity to make $2-3
dollars worth of profit for every $1 you have at risk. This is considered a proper
risk-to-reward ratio. That way even if only 50% of your trades hit your "take profit"
target and the other half are stopped-out for a loss, you should still be showing an
overall profit at the end of any given number of trades. You always have to keep this big
picture in mind and try not to let yourself get too wrapped up in the results of individual
trades, good or bad. This is how you maintain a steady emotional keel in trading.

Well, we can use our good friend the Average True Range again which we talked
about earlier. I usually set this indicator at a value of 10, which means that any graph
point will represent the average pip range of the past ten bars -- but you could use a
setting of 20 to give you a smoother, less volatile indicator line if you wanted to. BTW,
when you roll the mouse across this line (or any chart line in MT4 for that matter) a
pop-up box will read out a numeric value at the various bars, so there's no need to try
and puzzle out what number is actually being represented by the squiggly blue chart line
that runs across the bottom of the frame.

Also note the 2 measured bars being pointed out by the vertical red lines: the line on the
left marks a low spot on the indicator with a value of 24 pips. This represents the
average pip movement of the past 20 bars, which you can see shows very little action,
since the price had been ranging in a narrow channel for most of that time. The vertical
red line on the right however shows an ATR point of 39 pips, which is considerably
higher. This is so because the past 20 bars looking back from THIS point included some
much taller candlesticks -- especially a single 91 pip bar. You may recall seeing this
chart from Chapter 2.

The ATR is a measure of the volatility of the priceline over the past "X" chunk of time,
in this case 20 bars. The actual real "clock time" that 20 bars represents depends on the
chart that you're viewing. Since this is an hourly chart (see the "GBPUSD H1" tag at
the very top left corner?) this would be a measure of the past 20 hours of price action on
the British Pound vs. US Dollar. On a 5 minute chart these same 20 bars would be
measuring the past 100 minutes of price movement. So it's all relative to the scale at
which you are viewing the priceline. When you are using shorter timeframe charts you
are essentially "zooming in" closer and closer to the moving tip of the priceline and
seeing a more microscopic view of things. remember.
Because this average can represent minutes or weeks depending on the timeframe, if you
set this up and play around a little bit you'll note potential range values typically such as
these (I'm displaying the Euro-Dollar as an example here, each pair must be analyzed
separately as they all have their different characteristics):

Monthly range: 600-750 pips (6 to 7.5 whole cents)

Weekly range: 300-375 pips
Daily range: 130-150 pips
Hourly: 20-35 pips
15 Minute: 11-15 pips
5 Minute: 4-5 pips

See what's happening here? The longer the timeframe the greater the room which
the currency needs to roam around in, which is entirely logical, right? Currency
prices can only change so fast and they need time to move around, and so the larger the
slice of time that you examine the greater they will have potentially moved.

These pip ranges tell us something else though don't they? They tell us approximately
how far we'll need to back our stop loss points out on any given trade in order to give it
a chance to stay alive, and that will directly effect the amount of money that we will
need to place into the trade. Otherwise we risk being stopped out too soon... our death
by a thousand cuts dilemma, remember? Suppose we want to play for $2 a pip so that if
we capture a 20 pip move we can at least make $40 bucks for our trouble. Heck, you
can set your lot size so small that you can play for 10 cents a pip if you want to (which
is great, btw, for testing out new trading strategies, etc.). I'm not against trading small
lots for experimentation like this, but for actual trading?

Comon, got to have at least $2 bucks a pip or I'm wasting my time!

Anyway, if I want to trade the daily chart then I should probably back my stop loss out
from my entry price about 150 pips. At $2 a pip this means I must put $300 at risk. Does
$300 represent 2% of my total account equity? It does if I happen to have 15 grand in
my account. If I have only $5000 then this trade represents placing 6% of my account at
risk -- somewhat larger, but not entirely crazy I don't think.

However, if I have only $1000 available, this same setup represents an unacceptable
30% risk! Three bad trades like this and my entire account is toast! See how easy it is
to get wiped out if you approach trading Forex without practicing risk management and
maintaining trading discipline? Temperament my friend, emotional control. We'll talk
about this subject in detail later in the book when we look at the psychology of trading.
For now, let's work this problem backwards and determine how I should manage my
money.

If my account consists of $1000 and I want to risk no more than 2% on any one trade,
well that's $20 bucks. At $2 dollars a pip, that means I can set my stop out to a
maximum of 10 pips. That's shaving it pretty close -- any more than that though and I'm
potentially losing more than 2% if the trade explodes in my face and hits the stop. Take a
look at the above pip chart again and you'll see that you'll probably have to work on an
hourly or shorter timeframe with a $1000 account in order to keep from putting too much
at risk per trade. You're pretty much scalping at this level, which is cool... it's how I
personally trade (of course, only because I'm impatient and hate having open trades
going -- I want them over and done with or I keep incessantly checking on them!...).

So remember this important principle: the less money you have to work with the
shorter the timeframes that you must work on in order to avoid an unacceptable
risk per trade. Richie rich boy with his $500,000 bankroll can set up a weekly play
with his stops pulled out 500 pips and check back next week after he gets back from
holiday in Aruba to see how he did, you can't. Not with a small account anyway. The
less money you have to work with, the more you have to watch every trade like a hawk!

If you want to trade a larger lot size, well okay... but to stay within the 2% rule you'll
now have to cut your stops even closer. At $5 per pip (.50 lot size, a half standard lot)
that $20 only buys you a measly 4 pips, which may in fact be too small and you're
broker won't accept the trade because they have a 5 pip stop loss minimum. (You'll
discover that right away as the trade window will reject your order until you set the
stop value out further.)

The solution here is obvious: you have to risk a greater percentage than 2% on a smaller
account, or set your pip value down to under a dollar. So if we risk 5% of our $1000
account now we have $50 at risk but at least we've got 25 pips available (at $2 per pip)
for our stop loss setup, and we can reasonably play the hourly chart. Read all this again
slowly if it went over your head and follow along with the math on a piece of paper --
it's important that you understand all this.

So please do your own analysis of the particular currency pairs that you are considering
trading using the ATR indicator and make a little chart like the one above. It's critical
for you to know just how much "pip swing room" you will need to give the market
room to breathe at that particular level and not just quickly stop you out. You will
soon begin to see and understand the relationship between how much money you have to
trade with (your account size) and the timeframe at which you will likely be able to play
without creating a lot of hairy-scary risk for yourself.

Small losses are part of the deal in Forex -- the trick is to make the winners bigger than
the losers so that your account is always building equity. A stop loss set at -25 pips (on
a BUY) means a take profit setting of +50 or +75 pips, comprende?

Another thing you'll need to develop a bit of feel for is the psychological level of
account drawdown that you're willing to tolerate. A very aggressive trader may be
willing to take on big risk to shoot for a larger reward. He may be ready to sustain a
drawdown of 50% of his account to chase a trend that he's "sure" is overdue -- whereas
a more conservative trader may only be willing to risk 5% max on ANY trade... no
matter what. Where do you fall on this scale? You may have to start trading with real
money to find out -- a demo account of virtual money might not have the same emotional
effect on you. Try getting a mini-account of a few hundred bucks open as soon as you
feel comfortable doing so and get to work managing your emotions.

Generally I would say that if you have a larger account over $25,000 you can play on a
daily or perhaps even weekly level (on a less volatile pair), because you can easily
afford to back your stop loss points out 100-250 pips (at $2 a pip) without the risk of
exceeding the holy 2% rule (or $500 in this example). If you want to play for $5 a pip
then you are back down into the 100 pip stop loss range and trading hourly. At $10 per
pip (produced by trading a standard $100,000 lot) $500 will buy you 50 pips of stop
loss protection -- so now you have to watch that trade closely and maybe even fly it
manually. See how all these elements interact with one another? No aspect of the system
changes in isolation without affecting something else.

Summary: smaller accounts will likely force you to break the 2% rule and drive your
stops tighter into the 25-50 pip range, therefore dictating that you must play the market
on an hourly or even minute-by-minute basis. This is just one of the many tradeoffs and
compromises that you will be dealing with during your Forex trading career, which you
will discover to be a string of such never-ending (and exciting!) judgement calls.

And as for playing the Forex long term on a MONTHLY level? Forget it... that's for
banks, investment firms and perhaps for good old Richie rich boy who's busy pissing
away his trust fund. Not for sensible traders like you and I my friend!

Two Stage Trading for Maximum Fear And Greed Control

Here's a little trading method that I devised myself (although I'm sure it's been codified
in a book somewhere else, I doubt that I'm the first guy to think of anything new in this
field) which I call a 2 Stage Trade.

My 2 Stage Trade consists of two simultaneous trades opened together on a currency

pair at the exact same price (or as close as you can get to it, since it will take a few
seconds to open a second open order window during which time the price will have
probably moved a bit). These 2 trades will then run side by side.

Like a two stage rocket shedding it's first stage once it's spent all it's fuel, the first trade
will be terminated at a particular take profit point... 'locking-in' a nice solid profit.
Meanwhile the second stage will be allowed to fly on and capture more of the move.
What's nice about this 2 stage trading method is that it controls the emotional tug of war
between fear and greed which messes up a lot of traders.

Here's how it works...

I determine what size lot I would like to trade and then split that value in half, or as
close as possible if it's an odd number. For instance, if I want to trade 0.4 lots, an action
that would produce a pip value of $4, I would do so by splitting that lot in half and
opening 2 trades simultaneously on the same pair for 0.2 lots each... rather than a single
trade at 0.4 lot size. If I wanted to trade 0.5 lots instead, I would set Stage 1 at "0.3" and
Stage 2 at "0.2" lots respectively. I like to make Stage 1 bigger because the smaller
take profit point has a greater odds of being reached, and so I want a greater share
of my money there. For that matter you could make that first trade: Stage 1 = 0.3 and
Stage 2 = 0.1 if you wanted to keep more of your money on the stage that has the shorter
distance to "fly" in order to be successful. This would be entirely your personal
preference, I have no data to suggest that either way is superior.

As an aside, do you know how much margin it would require for me to have in my
account in order to trade 0.4 lot (~ $40,000)?

At 50:1 leverage, I would have to place $800 of my account on margin -- meaning that
this sum would be at risk and therefore unavailable either to withdraw or use in another
trade. This $800 represents my 1/50th contribution to the trade -- with the brokerage
lending me the other 49 parts, or in this case $39,200. You will of course use stop loss
points to keep the actual amount of money you have at risk on this trade FAR smaller
than $800. You will never be allowed to lose any of the brokerage's money, btw... they
will automatically close your trade out once you've lost 95% of your $800... if you were
foolish enough to trade without any stop losses! We of course NEVER trade this
wantonly, and so this is really all a moot point -- but I'm just trying to show you how
things work.

A Crash Refresher Course

Figuring margin is pretty straightforward... because a standard lot is $100,000, a lot size
of 0.4 would mean I have $40,000 in play on the trade (100,000 x .4 = 40,000). Since
we are getting 50:1 leverage from the broker, you divide the $40,000 by 50 and the
answer is your margin requirement, in this case $800. And as I mentioned, you are
loaned the other $39,200. Large amounts of money like this must be used to trade in
Forex because the actual movements of the currencies on a daily basis is so small. A
"pip" don't forget is only 1/100th of a penny, or 1/10,000th of a dollar, so you need
to swap around large blocks of cash in order to make this even worthwhile doing.

There's a good book that I recommend in the appendix called Getting Started in
Currency Trading by Michael Duane Archer that explains all this Forex math in great
detail with numerous examples. This book would be a great investment in your
education and I would consider adding it to your library. Many Forex books are
expensive but this one is less than $20, so it's a great deal as well. This link will take
you to Amazon.com listing:
Getting Started in Currency Trading
by Michael Duane Archer

Okay then, the first thing we have to do to launch our 2-stage Forex rocket is to calculate
our stop loss and take profit points. These are price levels where the software will
automatically close the trade when reached. Stop losses are set back in the direction that
we DON'T want to see the price go and will therefore limit our loss to a predictable
amount of pips in the event it does -- whereas take profit target points are set in the
direction that we're hoping the price goes and will close the trade out at a certain
amount of profit once we get there.

So suppose we set our stop loss on these 2 trades (what I call a "common stop": the red
line at 1.2645 along the bottom of the graphic) at -15 pips -- figuring this will give us
enough protection from market noise at this timeframe. This is a judgement call that you
will make depending on many different factors such as your risk tolerance, a need to
place the stop behind a level of resistance or support that you think the price will not
cross, etc. The 15 pips is just an example. This whole example is a BUY trade by the
way so the stops are set 15 pips BELOW the current price -- for a SELL trade you
would flip everything around and set the common stops at +15 pips above the sell-in or
entry price. Just refer to the graphic below as you read through all this and it should
become clear to you.

Using a conservative "times 2" money management principle means that our take profit
points should be at least double this stop loss value, or +30 pips. So +30 above the
1.2660 entry price is where we would place our Stage 1 take profit mark: at 1.2690.
Our Stage 2 Take Profit would be set higher still, how much higher would be another
judgement call depending on how much potential you believe a coming move could be.
In this example I will set the Stage 2 Take Profit point at +50 pips or 1.2710 (x3.2),
but you could go even higher if you felt strongly about the likely move that was coming
based on your analysis. This profit is going to be all "gravy" anyway, as you'll soon see.

Now the first thing I want to do on a trade is see it get into profit ASAP and then
immediately reset my stops to the breakeven point. This way if the price suddenly
explodes back in my face I've lost nothing. A push is better than a loss any day, and so
that's my initial goal: protect against a loss! There is a danger of getting your trade
stopped out for no gain if market noise snaps the price back to breakeven and then it
takes off again in your desired direction, but I would rather be kicking myself in the ass
over playing it too cautious than be counting my loses.

How YOU decide to manage this will be up to you of course -- you may be willing to
risk a bit more to get your move going and so draw your stops back, and that's fine. Like
I said, playing the currency market is equal parts logic (analysis) and emotion (courage)
-- so practice as much as you can with a demo account at first and then with a micro-
account (using fractional lot sizes like .05 for instance, which makes the pip value 50
cents) to find your own temperamental set point.

The Breakeven point by the way is always your entry price plus the spread. So if I
enter a BUY trade on the EUR/USD at 1.2660 as per our example, (a very liquid pair
which has a small 2 pip spread), then my breakeven is 1.2662. Once the price hits this
mark you'll see that your balance has moved from a negative number up to zero. As it
continues to move in your favor the numbers will become positive and this is your
running profit. Every trade opens with you down by the spread of course, because this
spread in pips determines the difference between the price that you can buy a currency
at to open a trade vs. the price you can perform the reverse action (sell) in order to
close out the trade. This difference is the broker's commission and represents HIS profit
on the trade no matter what happens to you!
Unlike stocks, commodities and futures trading, there are no set commissions in Forex
trading other than this spread. Right now the Euro / US Dollar is the most liquid
currency pair in the world and therefore has the lowest spread offered by most brokers.
Other pairs like the Swiss Franc, British Pound and Japanese Yen are also major
currencies which have high liquidity and usually carry 4-6 pip spreads. As a trader,
you always want this spread to be as small as possible so that you can get into
profit quickly. Some exotic currencies like the Mexican Peso vs. the Singapore Dollar
for instance may have spreads as high as 20-30 pips... which means that you are DOWN
20-30 pips as soon as you open the trade and have to recover all this loss before you
can even begin to see a profit. You better have guessed correctly if you're going to mess
around with exotics! (Not me, gulp... I stick with the majors!)

Alright then, back to our 2 stage trade...

...but first all this talk of rockets and stages

reminds me of when we first landed on the moon
back in 1969. Right after Neil Armstrong went
down the ladder of the LEM and spoke his famous
words about the huge, amazing adventure being a
"...giant leap for mankind", few people probably
remember that the very first order of business for
the 2 astronauts was gathering up a small quick
sample of moondust and getting it passed back up
to Buzz Aldrin -- who was waiting at the open
lander door frame to receive it. Once Buzz tucked
away the quickie lunar sample safely inside the
cabin, he joined Neil out on the surface for an hour
of low-gravity frolicking on the moon... NASA
called this first pouch of rocks and dust a
"contingency sample", and the idea was to get a
small bit of the lunar surface material immediately
stowed away just in case there was some
emergency like a spacesuit air leak that would have caused the two men to have to drop
everything and hustle back inside the safety of the lander. Fortunately things went
incredibly well for them and, well, the rest is history.

In the same way, my 2 stage trading method allows me to grab a "Contingency Profit"
from a trade without having to surrender what I might feel is the lion's share of a much
bigger move by closing the trade out early. See, when you start trading Forex (and
especially if you're scalping short moves like this) there will be a battle going on inside
your head between Fear and Greed. Mr. Fear will want you quickly close out a trade
once you get even a small way into profit because he's scared the price will snap back
and wipe out everything he's gained in an eye blink (which can happen). But Mr. Greed
will be screaming at you to keep riding the trade to see if you can get more, more... and
MORE!

The conflict between these two deeply felt emotions is what ruins many a trader -- they
simply can't deal with this sort of roller coaster of conflicting passions on a day-to-day
basis.

This is why the 2 stage trade is so ideal: I can set the Stage 1 profit target to a
reasonably small pip value (even x1) and be happy to see it hit and close out. Now I've
got my contingency sample of moondust and Mr. Fear is satisfied! But there is no protest
from Mr. Greed because he's still flying along on Stage 2, which hopefully continues to
climb on to the stars! I call this added gain from the second open trade the "Gravy
Profit".

The way I further protect my profits is to move both common stops (the red arrows) up
to the breakeven point (1.2662) as soon as both trades make it about halfway (15 pips,
1.2675) to the Stage 1 take profit mark. Then, once Stage 1 closes out while Stage 2
continues to move in a favorable direction, I get that Stage 2 stop trailed up even
tighter to shield my profits even more.

My goal is to get that Stage 2 stop set at the Stage 1 closeout point ASAP (+30 pips,
1.2690 in this example). This locks in the exact same profit that I got from Stage 1...
meaning that you now have made the same on the two 0.2 lot trades as you would have
done on a single 0.4 lot trade, except that NOW you've still got 0.2 lot in play and the
rest is all wavy gravy for Mr. Greed! Just study my little drawing and it should all be
clear how 2 stage trading works, it's pretty straightforward.

Now all parties are happy and YOU can sleep soundly!

Keep Forex Trading Fun by Mentally Re-Framing Your Losses

So a trade blew up on you, your stops were backed out too far, you pushed the wrong
button on an order window, and now you've taken a nasty loss. In any kind of free
market that trades any sort of equity, it happens. A system that produced only winners
would almost immediately collapse on itself as everyone in the world jumped in and
"won" all the money out of the market, until there was nothing left. Can't happen, there
have to be losers. And we all get to take our turn at the wheel.
Now comes the profound part of trading -- the part where you get to see what you're
made of. The part that could be transformational if you play it right. That's because
every mistake we make in life can be either regarded as a hopeless random act of Fate,
or as a learning experience... and none more so than when it comes to losing money.

Even if, in retrospect, the reason is some painfully obvious flaw in your thinking or
calculations that should've never happened, you can be sure there will be something of
value to be found in the smoldering rubble which will be worth filing away in the ol'
memory bank. Engineers have this saying about living with a highly complex
technological system like the Space Shuttle: that they "get smarter" as both their
knowledge and decision-making ability matures over time as they continue to fly the
system and 'wring out' all its idiosyncrasies.

This is the exact same attitude that you need to adopt for yourself in order to keep
an even keel in the face of the inevitable setbacks that you will encounter trading
Forex. These losses need to be re-framed in your mind and viewed as tuition payments
on your trading education, rather than failures to beat yourself up over. Engaging in the
later will have you dropping out of "school" in very short order and must be avoided at
all costs.

Because Forex involves the movement of money, which is mostly done in private with
no prior announcement, there is a built-in element of uncertainty that can never be
removed -- and this uncertainty can stress-out many undisciplined traders who approach
Forex more like a blackjack game than what it really is, an investment vehicle. Okay, I
realize it's not like buying a stack of bonds and sitting on them for 10 years, or opening a
savings account and getting 1% interest and a free travel bag. You have to actively
create your own interest rate using your ingenuity and trading savvy, and there's even a
risk of creating a negative interest -- but you knew that going in, right? Well at least you
do now.

The world of Forex trading is one of fast money and high risks. When I first started
playing around in Forex, I made stupid trades, left trades open overnight only to find
them stopped out for a loss in the morning... made quick trades after an entire 2 minutes
of "analysis" and got crushed. As the negative thinking and uncertainty crept up and
became more intense with each bad trade, I began to lose my confidence and started
trimming down my lot sizes -- not out of a need to practice good money management, but
out of simple fear.

And all this just messing around with a virtual demo account! But I soon discovered that
a demo is an accurate emotional simulator as well as a practical training tool.
I soon lost all confidence in my ability to predict the market -- and for a time actually
contemplated flipping a coin to generate buy and sell signals! I figured, what the heck?...
couldn't be any worse than I was already doing, right? This kind of irrational, fear-
centered thinking will lead to a complete loss of faith in the fairness of the market
itself after a while. I even began bailing out on winning trades too early because I
would think: "My luck won't hold, it's coming back in my face in another second, get out
now!..."

But then I got hold of my frazzled emotions and went back to square one, and began
trading small. I made sure I was setting up trades with a 2:1 stop loss-to-take profit pip
spread and maintained those stops with firm discipline. Soon things stabilized and
started to get better. But only after I'd taught myself how to handle the ups and downs of
the market because, while I was fascinated by the technology of trading, the action of
putting money on the line was becoming too stressful for me. My 2 stage trading pattern
that I just showed you grew out of a need to control this stress, in fact.

Another reason I'll bet a lot of rookie traders get themselves into trouble is because --
while they may say they have some solid plan to trade by -- they make exceptions to
their own rules far too often and eventually go off the rails. Once a trade is open and the
priceline gets to whipping around, fear takes over... and the plan goes flying out the
window! Or maybe there really was no plan at all but just some fantasy of what would
likely happen -- and when it doesn't, panic takes hold.

The way to get around all this anxiety is to practice small and slowly desensitize
yourself to fear by exposing yourself to the "stressor" (trading!) as frequently as you can
manage to. Again, re-frame your thinking and consider your early losses "tuition"...
the cost of schooling yourself up in this 'wild west' of foreign exchange currency
trading.

You're like an old timer mining a gold stake in the 1850's California -- never knowing
for sure if your own personal boom or bust is just around the corner.

In Forex, that's just the way it is.

 * * *
Some Closing Thoughts
Well I hope you enjoyed this introductory peek into the universe of foreign exchange
currency trading, and that you have a little better understanding of some of the
mechanics of Forex and a realistic grasp of the potential that it holds. My hope is that
what you've just read will help you decide if investing in the currency markets is
something that you may wish to become more involved with by clearing up some of your
questions.

I've tried to show you a little bit of what goes on under the technological hood of
computerized trading by making the scary financial math a bit less bewildering, and
finally, by addressing some of the misconceptions and fantasy elements that have
surrounded Forex in recent years.

With the downturn in the American and global economies triggered by the collapse of
Lehman Brothers and the subsequent freeze-up of the credit markets in late 2008, the
world of investing has become shrouded in uncertainty and fear. This is especially so
for the "little guy" -- who for the most part has depended on professionals to manage his
finances and his future. What we are seeing happen now I think is a convergence of
technology in the form of widespread computing power... coming together with a
disillusionment in the ability of established institutions that we'd once trusted to take
care of our money for us.

I believe that the explosive popularity of retail Forex trading in the past few years has
much to do with the desire to seek a workaround to the uncertainties inherent in handing
your money over to an investment company and letting them manage your portfolio like a
"black box" without your having any detailed knowledge of what they're actually doing
with it.

Ask anyone whose IRA has recently been steamrolled along with their retirement plans
how well all that's been working out.

People want to sit at the controls and manage their own investments now, as was
apparent even before the economic crash with the enthusiastic embrace of online stock
trading. The move to retail Forex is the natural second stage in that transformation I
believe, brought on by this marriage of technology and what many of us may now feel is
a practical necessity.
And fueled, in the final analysis, by our relentless optimism for a better and more secure
future.
 * * *
Please take a look at this excellent MetaTrader Software Video Training
Series, a terrific value!
The MetaTrader Quick Mastery
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* Correlation Trading Secrets

Forex Correlation Trading

I would like to emphasize the very important video on
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Disclaimer
Please Read this Disclaimer...
Trading in the foreign exchange markets carries a fair amount of uncertainty and may not
be suitable for everyone depending on your tolerance for risk. The high degree of
leverage offered by Forex brokers (50:1 or more) can also work against you as well as
for you, so before getting involved in Forex you should learn everything you can and
open a practice account at any Forex broker (just Goggle up the one you like best). The
possibility always exists that you could wipe out much of your account if you start
playing too recklessly. Do NOT invest money that you cannot afford to lose.

The information presented in The Forex Lifestyle is for educational purposes only and
is not intended to provide financial advice. Nor is it to be considered any sort of
recommendation to buy, sell or hold any particular position in the market. Any
statements about profits or income, expressed or implied, in no way represents a
guarantee. No representation is being made that any method outlined in this book will
produce profits without risk of loss.

You should accept full responsibility for your decision to trade Forex and for any losses
you may incur while doing so, and you agree to hold Kipling Kat Publishing Co. USA
and the Author harmless for your actions.

PLEASE ONLY USE DISCRETIONARY CASH FOR TRADING FOREX

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