The Way to Trade Forex by Jay Lakhani

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This book is dedicated to the loving memory of my father, Mohanlal Lakhani, who would have loved to see it in print. Forever in my heart.

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I also dedicate this book to god as I thank him daily for all the blessings, including being directed to the Markets And as I often pray, that may my knowledge on the markets pass on to you, the reader so you do not have to go through what I had to in my early days of Trading God Bless

CONTENTS

About the author Foreword by Adrienne Toghraie Acknowledgement Risk warning & Disclaimer

1. 2. 3. 4. 5. 6. 7.

Introduction to Forex Technical Analysis & Chart Patterns Trading Strategies Trading Psychology Eastern Philosophy The Bhagavad-Gita Follow Up Service & Mentoring Recommended Reading

ABOUT THE AUTHORfile:////Computerina/desktop/2007%20Project/4x4u/ebook/Book.htm (2 of 98) [4/30/2007 12:16:06 AM]


Jay Lakhani was born in Malawi, C.Africa and came to the UK when he was 18. He is a professional trader and has been involved with markets since his early twenties. He has extensive experience of both the US and UK stock markets Trading in derivatives, Forex, Index & Stock futures, and Commodities. Jay was introduced to the glory of the Stock market by the Lady Thatchers Privatisation programme in the eighties, and has never looked back. He has survived a number of stock market crashes, including the crash of 1987 an experience that has made him a better trader today. Over the years, he has developed unique trading systems and strategies, which have made him into a successful trader. One would say that Jay is blessed with a mind that finds creative solutions to problems; a kind of a person that sees multiple solutions, he has a very inquiring mind. Once he is shown a strategy, he will always look at ways at which it can be improved. Jay uses Technical Analysis in his trading, and believes that successful trading is based on your Strategies and Techniques your system. He also believes that more emphasis should be put on the trader psychology and having a disciplined money management. Jay is also the Internets foremost Forex coach and mentor, and teaches his system to individual investors. For more information about his training and mentoring programme, go to www.4x4u.net Prior to becoming a full time trader, Jay was an Accountant, having worked with large companies such as British Airways and Visionhire a Granada Company. Later on, Jay was working as a Financial Planner specialising in Portfolio Management and Tax Planning.

FOREWORDBy Adrienne Toghraie By Adrienne Toghraie, President of TradingOnTarget.com You are about to embark on a journey of how to make the Forex market work for you, guided by Jay Lakhani giving you his experience and the knowledge necessary so that you can make trading a profitable career. In this book, The Way to Trade Forex, Jay gives you a simple and powerful overview of what it takes to be a trader, and then hones in more specifically on the techniques and the psychology to become a successful Forex Trader. Jay takes you step by step through the process, giving you your own personal trading coach in a book. Jay is one of those traders who learned the hard way how to make the markets simple and profitable. Of course, it should go without saying that you will still go through your own hurdles and learning discoveries even when he lays the pitfalls out to you plainly and clearly. However, if you follow his mentorship and coaching, you will not stumble quite as much as the average trader who fails his way to success. By Jay passing his insights on to you, he is saving you time, energy and losses. Jay teaches you realistically what to expect, unlike those who would like to wow you into thinkingfile:////Computerina/desktop/2007%20Project/4x4u/ebook/Book.htm (3 of 98) [4/30/2007 12:16:06 AM]


you will be instantly wealthy. The fact is, trading is a learnable skill and when you apply yourself through a good success model like Jay offers you in this book, then you are more likely to be successful in the markets in a shorter period of time. What this book is not is an instant win on a lottery ticket. Many traders who first pick up a technical analysis book feel overwhelmed by the buzz words. Jay holds your hand through the process of learning these words and their meaning. You will find it immediately understandable and be able to apply what is being taught. Another benefit is that you can review this book with the significant other people in your life, so they can realize that trading is a viable profession and not want to commit you to Gamblers Anonymous. When important people in your life understand the principles that make trading work, they are more likely to support your efforts in making trading your career. Trading the Forex is one of the most exciting instruments to trade. The problem for some is that with the emotional rollercoaster you can experience from volatility in the Forex, you also are more likely to experience psychological pitfalls that bring about sabotage. The good part of having such volatility is that you can earn money quickly. Jay is exceptional at explaining sabotage pitfalls, so that you will recognize them. With this knowledge you are more likely to want to take the steps necessary to overcome sabotage before it gets too engrained in your psychology. Most traders who are not aware of the psychological pitfalls often act as if their sabotage is a bull in a room that they want to ignore. Not until the bull smashes everything does sabotage get their attention. At this point they have lost all their capital or developed deeply rooted conditioned responses to loss, which paralyses their taking action. If they do continue to trade without first addressing these issues, they are headed for further disastrous experiences in trading. With Jay guiding your path, you are more likely to enjoy the process of becoming a successful trader. It is important to note that even though you may have the best coach in the world he can only give you the flashlight; you must direct it on the right path for you. What Jay has done in his book is not only given you the flashlight but shows you many good paths. Now it is up to you to choose the best one for yourself. Adrienne Toghraie. USA. www.tradingontarget.com

RISK WARNING & DISCLAIMERMargined trading is one of the riskiest forms of investment available in the financial markets and is only suitable for experienced traders. Foreign currencies trading is based on highly leveraged basis (up to approximately 100 times your account equity). The funds in an account trading at maximum leverage can be completely lost, if the position(s) held in the account has a one percent swing in value. Theoretically, an account could lose more than the equity it contains, if the account is trading at maximum leverage and positions held in the account swing more than one percent in value. Given the possibility of losing one's entire investment, speculation in the foreign exchange market should only be conducted with risk capital funds that if lost will not significantly affect one's personal or the institution's financial well-being.



You should carefully consider your financial situation as to the suitability to your situation prior to making any investment or entering into any transaction. We assume no responsibility for errors or inaccuracies in these materials, and do not warrant the accuracy or completeness of the information, text or other items contained within these materials, and shall not be liable for any damages, including any loss that may result from these materials. Market Opinions. Any opinions expressed in this book are purely for Education and entertainment, and are not guaranteed in any way. In no event shall we have any liability for any losses incurred in connection with any decision made, action or inaction taken by any party in reliance upon the information provided verbally or via the Internet; or any delays, inaccuracies, errors in, or omissions of information. You are responsible for your own actions on how you use the information in this book. If you are in any doubt, you should seek the advise of a Financial adviser or a broker. Internet Trading Risks. Please note that there are risks associated with utilising an Internet-based deal execution trading system including, but not limited to, the failure of hardware, software, and Internet connection. Accuracy of Information. The content on this website is subject to change at any time without notice, and is provided for the sole purpose of assisting traders to make independent investment decisions. We do not guarantee its accuracy, and will not accept liability for any loss or damage which may arise directly or indirectly from the content or your inability to access the website, for any delay in or failure of the transmission or the receipt of any instruction or notifications sent through this website.

LEGAL NOTICES

This legal notice relates to the publication of this book and also the related material as part of the follow up service on our website www.4x4u.net Past performance is not indicative of future results Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will be profitable. This website is for informational and educational purposes only and is not an offer to sell any security or investment program. This website is for personal use only and its contents are protected by applicable copyright, patent and trademark laws. The information provided on this website should not be construed as investment advice. It is merely the observations of technical analysis precepts as set forth in the various texts and works about the subject. Bindal FX is not providing personalized investment advice through the website. You should talk to a qualified investment advisor or financial planner before making any decisions based on the information provided on the website. Bindal FX is not responsible, nor liable for the content or any other aspect of any websites which may be accessed from this website. Bindal FX is not responsible for any damages to your computer or software as afile:////Computerina/desktop/2007%20Project/4x4u/ebook/Book.htm (5 of 98) [4/30/2007 12:16:06 AM]


result of using this website. Bindal FX has taken certain steps to provide a secure environment for your personal information on the website. However, due to the nature of the Internet, we cannot guarantee the confidentiality of such information. Bindal FX may discontinue or change, at any time, any of the services available through this website. Statistics, tables, charts and other information on trading systems, monthly performance or trades of the day are hypothetical, and are based on the referenced systems as illustrated in the manuals and on the site. THIS INFORMATION IS PROVIDED FOR EDUCATIONAL/ INFORMATIONAL PURPOSES ONLY. These results are not indicative of, and have no bearing on, any individual results that may be attained by the trading system in the future. PAST OR HYPOTHETICAL PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS

COPYRIGHT Copyright 2005 Bindal FX and Jay Lakhani, ALL RIGHTS RESERVED. The copyright in all material provided in this book is held by Bindal FX and Jay Lakhani, or by the original creator of the material. Except as stated herein, none of the material may be copied, reproduced, distributed, republished, downloaded, displayed, posted or transmitted in any form or by any means, including, but not limited to, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of Bindal FX, or the copyright owner. You may not, without Bindal FX's permission, "mirror" any material contained on these sites on any other server. Any unauthorized use of any material contained on these sites may violate copyright laws, trademark laws, the laws of privacy and publicity, and communications regulations and statutes.

ACKOWLEDGEMENTS

Many, many people have gone into the making of this book. First and foremost, I would like to thank my family, My Wife Jemini and my adorable children Bhavesh, Beena, Anand and Bindal. Whilst it might be trite to thank the family members who did none of the research nor write any of the words, but without their support this book would not have been possible. I would like to thank Ensignsoftware.com, esignal.com, and FXCM Marketscope for the permissionfile:////Computerina/desktop/2007%20Project/4x4u/ebook/Book.htm (6 of 98) [4/30/2007 12:16:06 AM]


to reprint the charts from their charting package. In fact, I would not be as successful a trader without access to these excellent charts. I would also like to thank a number of my colleagues and friends, who have come up with ideas and suggestions not only in writing this book, but also for the inspiration and confidence that I have received from them when trading, often exchanging ideas and strategies and giving each other the moral support. Trading can be very lonely at times. In my opinion, success in trading is 90% Psychology. In my own trading career I owe a great deal to Adrienne Toghraie for her help with my psychology, Alexander Elder for showing me the path to successful trading based on three Ms: Mind, Method and Money. I have met both Adrienne Toghraie and Alexander Elder, and my trading success improved substantially, since meeting both of them. I also would like to mention Tony Robbins; attending his courses and seminars-,- has been very inspiring and motivating. Psychology would be incomplete without the methodology and strategies. I am thankful to the authors of many works on the markets and trading which I have read, and also a number of seminars that I have attended. Once again special thanks to Alexander Elder from whom I have learnt many strategies. And Atul Sharma for showing me low risk trading strategies using Options. I also would also like to thank Andrew Shearman and Norman Allen both from Traderhouse, from whom I learnt the basics of Forex trading. This training in Forex was to take me a step further into success in my trading. I then subsequently created my own trading methods and strategies. Thank you to all those who took the trouble to read the draft of this book, especially Adrienne Toghraie, whom I regard as my guru. Adrienne was kind enough to also write the foreword. Special thanks to Neha Singh who has very kindly corrected my grammar mistakes

and also Kamlesh Vishwakarma, of perspective-media.com for all his hard work for designing the web site and also the Forex E Book.Finally my thanks to you, the readers of this book. No doubt you have taken a big step from the crowd of amateurs, by purchasing this book you have resolved to become a successful trader. I am sure you will not be disappointed and soon you will be on a path to being a successful trader. God bless. Jay Lakhani

INTRODUCTION TO FOREX

Special offer to readers Introduction Why do Forex Traders fail? Trading Systemfile:////Computerina/desktop/2007%20Project/4x4u/ebook/Book.htm (7 of 98) [4/30/2007 12:16:06 AM]


Background to Forex.

SPECIAL OFFER TO READERS.FREE FOLLOW UP SERVICES

For a limited period only, Bindal FX will provide a free follow up service to the first 1,000 readers of this book, worth 500.00. Yours for free! The FREE follow up service will include the following;

Free email newsletter for a period of 3 months. In this newsletter we will discuss the trading strategies and trades that could have been done using the systems discussed in this book Free follow up of 1 MONTH mentoring service, via Internet & Email. You can ask any questions that you may have in your Trading education, and our traders will endeavour to help you. Free guidance to write up your Trading Plan. Please feel free to send us a copy of your Trading Plan, and we will do a free evaluation report, and offer you all the guidance so that you are able to have a plan that suits your psychology and your trading style.

To register your interest for this free service, kindly send us an Email to [email protected], with a proof and date of purchase of this Forex Course.

INTRODUCTIONMany traders aspire to be successful traders, but few succeed. An amateur trader looks at the Trading platform, makes a trade and loses, makes another trade and loses more. Traders lose because the game is hard and they trade with emotions, lacking a purpose and discipline. If any of these relates to you, I write the book for you, for I too was in this position once! Many traders keep making impulsive trades; they do not have any trading plans or a system, and no money management rules. To put it simply, an amateur trader will cut short his profits, and let the losses run. Professional Traders accept the importance of psychology, yet the novice traders ignore it. You have to practice sound money management and you should watch your capital. In my opinion the markets only exist because losers bring money into the market, which is necessary for the Industry.file:////Computerina/desktop/2007%20Project/4x4u/ebook/Book.htm (8 of 98) [4/30/2007 12:16:06 AM]


This book is unique in that it takes you the trader, to devise your own trading philosophy, build your own methodology,-; a trading system which is your own, and not fed to you by the currently hot guru-., It guides you to develop your own trading plan. To be truly successful you have to become intuitive, and this simply means that you become an expert in what you are doing which will come through experience and learning from your past mistakes. You can be free, you can live and work anywhere in the world. You can be independent from routine This is the life of a successful trader. I can give you the knowledge, only you can supply the motivation. In this book I discuss many winning strategies that are NOT unique in the world, no doubt you have come across them, but chances are that you have never considered using them, or you have never been shown how to apply the strategies correctly. I have put together strategies in this book that I have developed over time. I am sure that you will find these methods to be very profitable for you. Some of the strategies here are awesome-. DEFINITELY practice these techniques in a demo account for a while before trading real money. No doubt, you might have read many books, written by non-traders, showing you strategies that do not work; or the author himself is not an active trader. Therefore the methods shown are not really tried and tested, so how can you trust them? We are living in an era of information overkill. Amateur traders are constantly tuning in to listen to experts on Bloomberg or CNBC and reading and following so many emails and newsletters from many trading gurus and then often acting on these hot tips. Uncertainty also occurs because of too much information; having to look at so many indicators, which give conflicting signals thereby, you do not take any action. Just how can you learn and take action using hundreds of Candlestick patterns, chart patterns, chart types and indicators? - Just too many!, no wonder 90% of traders lose money. In order to succeed in trading, you have to Keep It Simple Stupid - KISS, and that is exactly what I am going to do in this book. I will only concentrate on simple strategies, which have worked for me in the past, with actual charting examples and trades. I do not use lots of indicators or fancy trading systems. If you keep it simple, you will succeed but if you overkill your brain with too much conflicting information, then you are destined to be a loser. In this book I will cut the crap and go straight to the point! You do not need any third party killer system, you yourself can create your OWN Killer System, using some of the strategies shown in this book. You only need to have faith and belief in yourself. Let me once again assure you that, there are NO Holy Grails, NO Secret Code, NO Killer Trading System, and NO Unique Discoveries. The only thing that is stopping you from succeeding is YOU, because you are looking for someone to show you a Secret, which does not exist! Because you do not have faith and belief in yourself.

Take a look at some of the Internet marketing of Forex Codes and Forex Secrets

Are You Ready to Find Out What They Are Hiding From You?file:////Computerina/desktop/2007%20Project/4x4u/ebook/Book.htm (9 of 98) [4/30/2007 12:16:06 AM]


Jay says Let me assure you nobody is hiding anything from you! You are only hiding from yourself! Want to learn how to make $200 to $3,000 for as little as ten minutes of work trading FOREX with only tiny risks? And do this multiple times a week? Jay says If only I knew how to make that much money from 10 minutes! Just ask yourself. Is it easy to make that sort of money from as little as ten minutes? Else 90% of traders would not have failed! New York "Financial Mastermind" Reveals: The Biggest Online Trading, Day Trading, Investing Online, Cash "SECRET" At last!!! Jay says Yet another Secret! You will find hundreds of them! It only makes them a millionaire NOT YOU!

90% Traders fail to make profit! Why may I ask? Firstly, they believe in the systems sold by the Internet Marketing Cons, as above. Unfortunately these so called Gurus will not make you millionaires, but they will laugh all the way to the bank! Secondly, majority of humans believe that, anything that is simple will not make money. They want to have Secrets! And Holy Grail! You have secrets right in front of you, just look at the Charts on your computer screen; you do not need to go anywhere! Lastly we have a tendency to confuse ourselves. Just look at the following tools available to the modern day traders. Surely a case of analysis paralysis. Gurus to guide you Dashboard system Guru trading system Candlesticks Elder Ray Coppock Envelopes Macd Median price Moving averages On balance volume Price ratio Stochastics Buffet Vs Dividends Secret Codes revealed Neural signals! Bollinger bands Money flow Volatility Directional movement Equivolume Histogram Momentum Multiple moving averages Parabolic sar ROC TRIX Peg ratio Killer Systems Automated trading ATR Chaikin Oscillator Commodity channel Ease of movement Force index Mass index Money flow index Crossovers Point and figure Relative strength Williams Value investing



Harami Railway tracks Spinning top Evening star Dow theory Exp moving average Fundamental analysis Implied Volatility On balance Volume Oversold Pivot line Put call ratio Rate of change Symmetrical triangle Top down approach Wedge

Morning star Engulfing pattern Hammer AD line Trendlines Fibonnacci Gravestone doji Island reversal Open interest Parabolic SAR Point & figure Q Rank Reversal pattern Three black crows TRIN Yield Curve

Abandoned baby Doji Hanging man Cup and handle Elliott Wave Flag Pattern Head and shoulder McClellan Oscillator Overbought Pennant Price channel Ratio analysis Rounding bottom Three black soldiers TRIX Zig Zag

The list is endless In fact you will find hundreds and hundreds of these trader tools and indicators, and I will be not be surprised if we end up having over a thousand such tools.

ANALYSIS PARALYSISIs it surprising that 90% of Traders lose money? The proliferation of so many so-called gurus has ushered in a virtual anarchy of expertise. The psychological reaction to such overabundance of information and competing expert opinions is simply causing confusions in traders minds. Too many indicators can create confusion. Too much analysis can create paralysis. In this book, I have kept everything simple and have followed simple killer techniques that have been tried and tested. I have not invented anything new in this book, and I presume you may come across nothing new in this book, which you did not know! But maybe, nobody told you how to use the simple strategies, and how easy it was to make money! If you tend to second-guess almost every decision you make, you probably aren't getting much accomplished. Whether it is making small everyday decisions in life, or your career, personal life, or indeed the way you trade. Analysis paralysis is a very annoying and unproductive state to be in. You are virtually paralysed from the fear of making a mistake - so you analyse everything to 'just be sure'. Over analysing leads to confusion, and most probably leads to doing a wrong trade, or missing out from a great profitable trade. This type of irrational fear can stem from a variety of past experiences.

Trauma from making a big mistake or having sustained losses in past.



Trading without logic and a plan, thus leading to a mistake. Having a parent or a teacher who didn't reinforce the learning potential of making a mistake. Not believing you are qualified or capable to make the decision Believing you always make mistakes and can do nothing right Always regretting decisions you do make because you 'realise' the other option was the better one.

There are many other ways analysis paralysis can affect the way you trade or indeed your life in general. If this sounds like you, your life may feel like you are in an annoying state of limbo. So you need to ask yourself how you arrived at this place? What do you believe is the underlying reason for your inability to trust yourself? If you need help focusing on what is standing in your way of making small and/or crucial decisions in your life or trading, then I am sure that you will greatly benefit from the services of a Trading Coach. Later on, I cover this topic of a trader coach in detail; maybe you want to digest what I have written here? You may begin with reading some of the books on psychology and personal development -

Finally, I myself also offer a one to one consultancy service, for more details kindly visit the website, www.4x4u.net.

1. Awaken the Giant Within Anthony Robbins 2. The Trading On Target home study course Adrienne Toghraie

WHY DO FOREX TRADERS FAIL?Failure is a man who has not learnt from his blunders. If you are able to cash in on that experience you are on the path to success Jay Lakhani, Forex Trader It is a sad fact that 90% of traders fail, and many very quickly give up. Why? When I went through a phase of losing trades I treated it as a temporary setback and went back to the drawing board. I analysed the reasons of my failure and I sought the guidance of Top Traders, Mentors and Coaches to put me back on the path of success and profitability. In my opinion the high rate of failure for a new trader can be related to the six major obstacles that a trader faces, which are summarised as follows -

1. 2. 3. 4. 5. 6.

Poor Skills Lack of adequate capital Setting unrealistic targets and goals Lack of Patience Lack of discipline High risk aversion.

If we look at the list, it becomes apparent that the failure is as a result of trading without having in place a proper Trading System and a Trading Plan One that includes mind training, quality Forex education and strategies and sound money management rules.



So what are the Characteristics of a Successful Trader? All we have to do is to reframe the liabilities listed above;

1. Adequate trading knowledge and understanding. You should seek services of good quality mentors 2. Adequate capitalisation Dont be fooled that you can earn thousands every week from a 3. 4. 5. 6. 7.and a trading coach. starting capital of $500 Realistic Goals dont expect 100% profit each month, it simply is not possible. Have patience dont trade if you dont have to. You should wait for a set-up according to your trading plan and system. Have Discipline to follow your rules Understanding and Managing Risk And lastly the most important is having a Trading System and a Trading Plan. Virtually 90% of Traders that I have coached have never had one!

If you look at the advice from the worlds most successful people or traders today, you will notice that they follow the guidelines as identified above. Define first the level of risk you dare assume. Start with a small position, and then build it up if it works George Soros Give me a stock clerk with a goal and Ill give you a man who will make history. Give me a man with no goals and Ill give you a stock clerk J.C. Penny If you go to work on your goals, your goals will go to work on you. If you go to work on your plan, your plan will go to work on you. Whatever good things we build end up building us. Jim Rohn In this course, I will attempt to turn you from an amateur trader to a master trader. All you have to simply do is to follow the simple ideas and strategies put forward in this manual. It is only YOU who is responsible for your success or failure. I can show you the path to successful trading but YOU have to make a choice to follow it or not. Jay Lakhani, Forex Trader.

ABOUT PROFIT TARGETSDifferent traders have different trading philosophies about how many pips to target per trade.

Some traders go for large pip targets from 100 to 500, or even more. They are often position traders, leaving trades overnight often for days. They would normally start with a stop of 100 pips or more, then gradually moving the stops as the position goes into profit. You then have other traders who focus on day trading, who could be targeting anything above 20 pips to 50 or even a bit more. And lastly, you also have another breed of traders that will trade multiple lots to catch maybe just 5



or 10 pips, within minutes. There is nothing wrong with trading with any of these objectives in mind, they each have their pros and cons. You MUST find a trading style that meets with your psychology and mindset. Before I started trading FOREX, I use to actively trade the Index Futures, mainly the Dow and Nikkei, my targets were usually in hundreds, and in fact I pride myself with achieving profit targets of 500 points and even 1000 points on the Nikkei, Dow and also recently trading the Google stock futures. When I started trading FOREX, I was taught that I should aim for 20 pips, and when that was achieved, I should call it a day! I was laughed at when I talked about having profit targets of 100 pips or even 500 pips! There is disbelief when I tell some traders that I often use weekly charts on Forex some so called city professionals thought that I was a fool! Though I cover all Trading styles in this book, but my mindset is not geared up for sitting in front of the screen all day, looking for 5 pips or 10 pips. However, I know many traders who make a perfect living and enjoy the thrills of day trading and are very successful at it. Its not for me to tell you what to do you have to seek out a trading style that suits you. In this book I have strategies for all. Can you spot an opportunity at the following Weekly Chart of the EURO, between December 2004 and March 2005?

Source: eSignal. www.eSignal.com

TRADING SYSTEMIt seems that everywhere you look; you see advertisements for software promising accurate buy and sell signals and profits with every trade. Just have a look at some captions of the adverts I have seen!

Ive finally cracked the Forex Code

Make thousand pips every month Trade Forex with a secret formula that only a handful of Traders usefile:////Computerina/desktop/2007%20Project/4x4u/ebook/Book.htm (14 of 98) [4/30/2007 12:16:06 AM]


The list is endless.. These so-called killer systems dont come cheap, costing you thousands to buy. However with just a little bit of effort, you too can crack this secret code yourself. Once again let me assure you, from my experience and knowledge of being a trader for the past 20 years, that there is NO Secret Code, NO Killer Systems, NO Holy Grail, and No Unique Discoveries. In my opinion most of these adverts are no more than scams. It may not make YOU rich, but it will certainly make the Vendors millionaires. Most of these secrets and codes or discoveries are readily available to you. The only secret is that YOU dont know how to use these simple strategies! Or nobody has shown you how to use them correctly. This is precisely what I am going to do in my book The way to Trade Forex, I hope to hold your hand and show you step by step how to create a killer trading system of your own. However, the fact is that many traders are simply lazy and cannot make time to plan or create a system. YOU have a choice, either become a winning trader or continue to lose money! What Is a Trading System? A trading system is simply a group of specific rules, or parameters, that determine entry and exit points for your trade. These points, known as signals, are often marked on a chart in real time and will prompt you to pull the trigger. Here are some of the most common tools used to construct a trading system1. 2. 3. 4. 5. 6. 7. Chart Patterns Moving Averages Stochastics Oscillators Relative Strength Bollinger Bands Elliott Wave

Often, two or more of these forms of indicators will be combined in the creation of a rule. For example, the MA crossover system uses two moving average parameters, the long-term and the short-term, to create a rule: Advantages So, why might you want to adopt a trading system?

It takes all emotion out of trading - Emotion is often cited as one of the biggest flaws of individual investors. By cutting down on these human inefficiencies, system traders can increase profits. Apart from going through lot of strategies in this book so that you can construct your own Trading System, I am also devoting lot of space in psychology of trading, without which a trader can simply not succeed. It can save a lot of time - Once an effective system is developed and optimised, there is little to no effort necessary on the part of the trader. Computers are often used to automate the signal generation.

Developing an effective trading system is by no means an easy task. It requires a solid understanding of the many parameters available, the ability to make realistic assumptions, and the time and dedication to develop the system. However, if developed and deployed properly, a trading system can yield many advantages. It can increase efficiency, free up-time and, most importantly, increase your profits. Designing a Trading Systemfile:////Computerina/desktop/2007%20Project/4x4u/ebook/Book.htm (15 of 98) [4/30/2007 12:16:06 AM]


In my book The Way to Trade FOREX, I discuss many of the successful and profitable trading strategies that I have made use of from most of the Tools mentioned above. In addition as a follow up service, I am also extending a free 1 month mentoring so as to help you not only devise a Trading system, but also help you in preparing a Traders Plan or assist with your Trader Psychology. Here are some of the key factors to keep in mind when designing a trading system in the FOREX: 1. The liquidity and the volume in the Forex market is huge, therefore making trading systems more accurate and effective. 2. Most brokers do not charge commissions in this market, only spreads Therefore, it's much easier to make many transactions without increasing costs. Some brokers offer a very low pip spread. 3. Compared to the amount of equities or commodities available, the number of currencies to trade is limited. But because of the availability of 'exotic currency pairs'--that is, currencies from smaller countries--the range is not limited. 4. The main trading systems used in FOREX are those that follow trends (a popular saying in the market is "the trend is your friend"), or systems that buy or sell on breakouts. This is because economic indicators often cause large price movements at one time. 5. A good quality charting package, I use the eSignal and would highly recommend this package to any readers. In my long experience of Trading, I have read many books on trading and technical analysis. I have come across very few books, which focus on the importance of trading plans and trading systems and assisting their readers in creating such a system. This is precisely what this book is aimed at, i.e. assist you in creating your own killer trading system, having a trading plan, and finally a follow-up service.

BACKGROUND TO FOREXThe foreign exchange market is probably one of most interesting markets, as due to its sheer size and volume, it would make it impossible for any one person, institution or government to control. You may recall that during the ERM crisis, even the British Government was unable to control the Pound. The foreign exchange market now dwarfs any other investment market, with over $2 trillion traded every day, far more than the worlds stock market and bond markets combined. The word FOREX is derived from FOReign EXchange and is the largest financial market in the world, unlike many other markets, the Forex is open 24 hours a day Structure Decentralised, over the counter market, also known as the interbank market



Main participants: Central Banks, commercial and investment banks, hedge funds, pension funds, corporate and private speculators Online trading began in the mid to late 1990s

Trading Hours 24 hours market Sunday 5pm EST through to Friday 4pm EST Trading begins in New Zealand, followed by Australia, Asia, the Middle East, Europe and America.

Major Markets

The US & UK account for more than 50% of turnover UK alone accounts for over 30% daily turnover by country. Major markets: London, New York, Tokyo Trading activity is the heaviest when major markets overlap.

Trading

An estimated 95% of transactions are speculative More than 40% of trades last less than 2 days Brokers research: 90% of traders lose money, 5% break even, 5% make money.

The Players

Customers small business, individuals and Corporate. For cross border transactions Banks Large banks can literally trade billions in a day, with trades executed on behalf of clients, but they themselves will also speculate. Hedge Funds Speculative Trades Brokers they facilitate the trades between the two parties

Most commonly used Technical Analysis

Chart patterns and trend lines Moving averages RSI Fibonacci retracements Stochastics MACD Pivot point Elliott Wave

Currencies

The US dollar is involved in approximately 90% of all foreign exchange transaction.

Different Sections of The Forex Market The Spot Market this is the actual price of the currency at any given time, the price is for immediate delivery. You, as a Trader will mostly be using the spot market. Forwards This is where the parties agree on the price of two currencies involved at a future date (forward). The forward attempts to calculate the fair value for the two currencies using the interest rates of each country. The determination of a forward rate is not a prediction of thefile:////Computerina/desktop/2007%20Project/4x4u/ebook/Book.htm (17 of 98) [4/30/2007 12:16:06 AM]


future exchange rate, it is merely a tool to allow interested parties to fix a rate in the future. Swaps A combination of a spot deal, whilst at the same time making a forward deal or vice versa. Currency Futures are a type of forward transaction. They have specific contract sizes, maturity dates and are traded on a formal exchange. Currency Options provides the buyer with the right but not the obligation, to sell or buy an exact amount of Forex at an exchange rate and date specified in advance. This guarantees him to buy (call) or Sell (put) the currencies, should he exercise the option if it is in his favour. Intervention When the central bank of a country intervenes to buy or sell its currency to influence the exchange rate. It may also do so by selling government securities to back up its intervention. Currency Codes

USD = EUR = JPY = GBP = CHF = CAD = AUD = NZD =

US Dollar Euro Japanese Yen British Pound Swiss Franc Canadian Dollar Australian Dollar New Zealand Dollar

Crosses A cross currency of transaction is when two currencies that do not involve the U.S.Dollar, such as the CHF/JPY. This is commonly referred to as a cross. Exotics This is the exchange of currencies that are not normally traded. This might be because there simply is not enough volume due to little interest. An example may be say the Malawian Kwacha. Leverage and Margin Forex trading is normally undertaken on the basis of margin trading. A relatively small deposit is required to control a much larger position in a market. For trading currencies, a margin broker may require a 2% margin deposit. This means that in order to trade one million dollars, you need to place just USD25, 000 by way of security. As a result you will have obtained a gearing or leverage many times. Some brokers may also allow you a leverage of 100: 1 Margin Call Margin call is something you will have to be aware of. If say you have a position of $1,100,000 with a margin of $10,000.your broker may require additional funds to protect your position, if your position is in danger and losing. Why trade Forex?

An outstanding opportunity to accumulate wealth leverage (100:1) Small amount of capital required Easy market access platforms and brokers



There is always action

Example Transaction Lets assume you have a trading account and have chosen to use 100:1 leverage on your account. The current quote for EUR/USD is 1.3225/28. You place a market order to buy 1 lot of 100,000 Euros at 1.3228, expecting the euro to strengthen. At the same time you place a stop-loss order at 1.3203, and a limit order at 1.3328. So you are risking 25 pips with a profit target of 100 pips. The value of this transaction is $132,280 (100,000 * 1.3228) but because you are using 100:1 leverage, you only need a margin deposit of 1% of the total, which is $1322.80 ($132,280 * 0.01). The price rises to 1.3328/31, reaching your limit order at 1.3328, and your position is closed. You have made a profit of 100 pips. Your total profit for this transaction is $1,000 (100,000 * (1.3328 - 1.3228)), and the return on your investment is 75.6% ($1000/$1322.80). Trade Summary Leverage: Buy: Margin Requirement: Pip Value: Stop-Loss: Profit Limit: Risk/Reward Ratio: Sell: Profit: Return: 100:1 1 std lot EUR/USD @ 1.3228 = $132,280 $1322.80 $10 25 pips (representing 1.25% of the account) 100 pips 4:1 1 std lot EUR/USD @ 1.3328 = $133,280 $1,000 75.6% ($1,000/$1322.80)

Bid and offer Exchange rates in practice are quoted as two-way rates. Thus a dollar/British pound quotation will read something like 1.9000/10. The bank or company, which quotes this rate, understands that it buys Pound (selling dollars) at 1.9010 and sells Pounds (buying dollars at 1.9000). In other words it buys cheaper and sells dearer a given currency in exchange for the other one. Of course, the opposite is true for the person that asks for a quotation. The difference between the purchase and the sale rates is called spread. Such spreads vary in size according to market volatility. Basis points or pips A foreign exchange rate usually consists of an integer part and 4 decimal points (or 2 decimal points when expressed per 100 units e.g. dollar/yen). Thus the decimals are expressed either at 10th thousands or hundreds. Each such 0.0001 or 0.01 is called basis point or pip. E.g. a 50 pips change of 1.5000 is either 1.5050 or 1.4950 Understanding Forex Quote Reading a foreign exchange quote may seem a bit confusing at first. However, it's really quite simple if you remember two things: 1) The first currency listed first is the base currency and 2) The value of the base currency is always 1. The US dollar is the centrepiece of the Forex market and is normally considered the 'base' currency for quotes. In the "Majors", this includes USD/JPY, USD/CHF and USD/CAD. For these currencies



and many others, quotes are expressed as a unit of $1 USD per the second currency quoted in the pair. For example, a quote of USD/JPY 106.00 means that one U.S. dollar is equal to 106.00 Japanese yen When the U.S. dollar is the base unit and a currency quote goes up, it means the dollar has appreciated in value and the other currency has weakened. If the USD/JPY quote we previously mentioned increases to 108.00, the dollar is stronger because it will now buy more yen than before. The three exceptions to this rule are the British pound (GBP), the Australian dollar (AUD) and the Euro (EUR). In these cases, you might see a quote such as GBP/USD 1.9300, meaning that one British pound equals 1.9300 U.S. dollars. In these three currency pairs, where the U.S. dollar is not the base rate, a rising quote means a weakening dollar, as it now takes more U.S. dollars to equal one pound, euro or Australian dollar. In other words, if a currency quote goes higher, that increases the value of the base currency. A lower quote means the base currency is weakening. Currency pairs that do not involve the U.S. dollar are called cross currencies, but the premise is the same. For example, a quote of EUR/JPY 137.20 signifies that one Euro is equal to 137.20 Japanese yen. When trading Forex you will often see a two-sided quote, consisting of a 'bid' and 'offer'. The 'bid' is the price at which you can sell the base currency (at the same time buying the counter currency). The 'ask' is the price at which you can buy the base currency (at the same time selling the counter currency). Trading Equipment and basic PC set-up. You will need a fast PC with plenty of RAM to run several programs simultaneously, ideally 2 or 3 monitors. A sound internet connection Charting package software Online technical analysis software A margin broker, demo to begin with, then going to live account trading.

TECHNICAL ANALYSIS - CHART PATTERNS

Approach to Technical Analysis Support and Resistance Trend Lines Candle Sticks Charting Triangles



Flags & Pennants Channel Breakouts Double Tops Double Bottoms Head and Shoulder Patterns

TECHNICAL ANALYSISAn approach to forecasting prices which examines patterns of price change, rates of change, and changes in volume of trading and open interest, without regard to underlying fundamental market factors FUNDAMENTAL ANALYSIS seeks to determine future stock price by understanding and measuring the objective "value" of equity. The study of stock charts, known as TECHNICAL ANALYSIS, believes that the past action of the market itself will determine the future course of prices. Chartists study the market action, and will try and spot chart patterns, which repeat themselves. The goal is to profit from patterns that recur again and again. The chart shows the price action of the commodity, and it projects the hopes and fears of traders thats what makes a market. In order to succeed in trading, you need to listen to the market; it will tell you where it is going, so you can jump on the ride. Why use Charts? It plots the price action that has occurred in the past, and it will project the hopes and fears onto the charts. Smart money tends to put on trades when markets are quiet and may have bottomed whereas the amateur trader will tend to trade the news. The following chart on the GBP/USD perfectly illustrates this.




As you can see from the above chart, a picture is worth a thousand words. In order to know where the price is going, we have to know where the price has been. Knowing if a market is moving up or down helps investors to make an informed decision whether to go long or short. The chart simply show the current crowd psychology, the analysis of the past price action can enable to forecast the future. The Technical Analysis is not always right, nothing is. Therefore to succeed you have to have a sound money management plan cutting losses and letting profits ride. Support and Resistance Support is when price stops going down, and Resistance is when price stops going up. Chart patterns are bound by support and resistance levels.



Source: eSignal. www.eSignal.com In the above chart for CHFUSD, you can see that there had been a trading range, as soon as there is a break, the price has followed in the direction of the break. After a market forms a pattern, it eventually starts a new trend higher or lower, a breakout occurs when the price moves through the support or resistance. This is called a BREAKOUT; this is perfectly illustrated in the above example. TREND Technical analysis attempts to gauge the strength and direction of a trend, once the trend is in motion it will continue in that direction for some time. Once the trend is determined early, the trend can be followed and more profit can be made.



Source: eSignal. www.eSignal.com The trend is your friend - Never fight a trend. In the above example of AUDUSD, the break of up trend is followed by a long down trend. The topping of price action is followed by a price break. Apart from high volatility in the Forex market, you will also notice that it also trends well both giving perfect opportunities to make money. The markets can only move in one of three ways; up, down, or sideways. Thats it. Prices however do not move in a straight line, they move by zig-zagging up-down-up-down, so you will have An up trend A downtrend, and A sideways movement These trends are illustrated in the following chart.



Source: eSignal. www.eSignal.com Trends happen when traders worldwide believe that a price is either too low so you will now be in an up trend as you have a buying pressure, or traders feel that the prices are too high so you will be in a down trend as there is selling pressure. Sideways movement happen when traders either believe that the current price is more or less right, or when they are undecided. This normally happens when there is major news pending, for example prior to release of say Non Farms Payroll data. The FOREX market trends very well, and that is the main reason why traders love FOREX. If all you knew was how to follow trends properly, then this alone could make you a very nice income. As they say, a trend is your friend or never go against a trend! The trendline is the most basic technical analysis, and all traders use it. It is amazing how price repeatedly bounces off the trendline. An up trend will have a series of higher highs and higher lows, whereas a downtrend will have a series of lower highs and lower lows. When you draw a trendline, whether an up trend or a downtrend, so long as prices keep bouncing off a trendline you can keep making money. All trends will eventually end. A good indication that the trend is ending is when the price significantly penetrates through the trend line and takes out the previous low (up trend) or the high (downtrend).



CANDLE CHARTING BASICS A good beginning is the most important of things. (Japanese proverb) Candlestick charts are much more visually appealing than a standard two-dimensional bar chart. Candles can represent any time frame. The four elements necessary to construct a candle chart are the OPEN, HIGH, LOW and CLOSING price for a given period. Below are the Examples of Candlestick and a definition for each candlestick component

The above represents when prices close higher for that particular time frame

The above candle represents when prices close lower for that particular time frame, so will usually be RED to dark. You will come across probably hundreds of candle patterns, but I like to concentrate on the few of the most important ones that really work! HAMMERS / HANGING MAN

Hammers are formed after declines and hanging man after advances. When confirmed they become very powerful reversal signals.file:////Computerina/desktop/2007%20Project/4x4u/ebook/Book.htm (26 of 98) [4/30/2007 12:16:06 AM]


HAMMERS / HANGING MANThis chart of CHF / USD perfectly illustrates a Hammer, which comes at the end of a downtrend. There is a large Lower Shadow and a small body. This is followed by a positive candle. You can see that the price action resulted into a big uptrend.

DOJI Dojis are powerful reversal indicating candlesticks formed when security opens and closes at the same level, implying indecision in the price. Dojis become more significant, if seen after an extended rally of long bodied candles (bullish or bearish), and is confirmed by the engulfing candle, i.e. a long candlestick formed over the next period that engulfs the doji body.



Dojis can become support or resistance, usually on a short-term basis, a series of doji lines after a prolonged move could signal a rare and important top or bottom. GBP - DOJI Formation.

In the above chart, prior to a series of Dojis, there was a topping formation at around 1.8950, as you had a series of tops Resistance. The Dojis were followed by a trendline break, and a series of lower highs. Once again highlighting the importance of reading the chart patterns in conjunction with other signals and indicators. SHOOTING STAR The shooting star is made up of one candlestick (White or Black), with a small body, long upper shadow and small or non existent lower shadow, If this is followed by a down candle, there isfile:////Computerina/desktop/2007%20Project/4x4u/ebook/Book.htm (28 of 98) [4/30/2007 12:16:06 AM]


a high probability of a downtrend, and may provide a good shorting opportunity.

In this example, based on a 4-hour chart, the shooting star is followed by an extremely bearish candle. Overall resulted in a move of over 250 pips over the next few periods. One can look for a better shorting entry by magnifying a lower time frame chart, such as a 60-minute one or 15 minutes.

TRIANGLE CHART PATTERNS. Triangles frequently occur in the market, and this is a good way to catch some nice price moves. There are some traders who just trade and focus ONLY on triangle chart patterns and make handsome profits. Symmetrical Triangles



Symmetrical triangles are areas of indecision. Each top and bottom becomes shallow, as attempts to push the prices higher are quickly met by selling; eventually the price explodes out of this formation. Ascending Triangle. Ascending triangles are generally a bullish chart pattern, and most reliable when found in an up trend. The top part of the triangle appears flat, while the bottom part is upward moving, with higher lows. Prices eventually break the flat top, which was the previous resistance. When this happens, the price may move considerably higher..

Descending Triangle.

The Descending triangle is generally considered bearish. The bottoms are Flat offering support, whereas the highs are getting lower, as higher prices attract more sellers, and the price retests the old lows. Once again a good opportunity to trade the breakout. FLAGS and PENNANTS Flags and pennants are short-term continuation patterns that mark a small consolidation before the previous move resumes. These patterns are usually preceded by sharp advance or decline.



Pennants look very much like symmetrical triangles. Channel Breakout A Channel is formed between parallel support and resistance lines. This pattern usually indicates a strong trend, up, down or sideways is underway, until a breakout occurs

Trading Double Tops and Double Bottoms. No chart pattern is more common in trading than a double bottom or double top. In fact this pattern appears so often that it alone may serve as a proof that price action is not wild. Price charts simply express trader sentiments. If price were truly random, then why do they pause so frequently at those points? The bulls and the bears defend these levels therefore generate strong profitable countermoves.



Head and Shoulder Patterns The Head-and-Shoulders pattern is a trend reversal pattern. It marks the end of an up trend. Two lower peaks, or shoulders surround the head. The neckline is drawn through the lowest points of the two shoulders, and may slope upward or downward

The reason this pattern could be a reversal is due to the fact that there appears to be a momentum of falling prices. The prices fail to make a higher low, the retracement from the head is likely to result in a break in the trendline, which has acted as a support. The markets attempts to move up,file:////Computerina/desktop/2007%20Project/4x4u/ebook/Book.htm (32 of 98) [4/30/2007 12:16:06 AM]


but only result in a lower high. The target is calculated by measuring vertically from the highest point to the neckline, it is then projected down from the breakout. Once you identify the head & shoulder pattern, how would you manage your longs? You could consider to sell outright, and consider shorts at the break of neckline, tighten your stops so that your profits are locked in, or sell some of the position and hold the rest with tight stops. Your decision depends on how you feel about the pattern. If you did not have any position, then you may want to consider a short, when the neckline is broken, and a stop place above the previous high. Once again it would make sense to trade in conjunction with other indicators of your choice. Head & Shoulder Test your Knowledge, herewith a chart for the EURUSD, between 13 Sep 2004 to 29 Apr 2005, Can you spot the Head & shoulder?

Source: eSignal. www.eSignal.com Test your knowledge, calculate the following values. Feel free to email me with your answers and any queries that you may have. 1. Head 2. Right Shoulderfile:////Computerina/desktop/2007%20Project/4x4u/ebook/Book.htm (33 of 98) [4/30/2007 12:16:06 AM]


3. Left Shoulder 4. Neckline 5. Target If you were looking to short, what would be your entry point? Was the target achieved? And what was your profit in terms of pips.

COMPUTERISED TECHNICAL ANALYSIS AND TRADING STRATEGIES

Introductions Trading Strategies Moving Averages MACD MACD Divergence Trading Relative Strength Index (RSI) Elliott Wave Pivot Points Fibonacci Fundamental Announcements.

INTRODUCTION TRADING STRATEGIES For a modern day Trader a Computer is a Must, you are able to look at a number of complex technical Indicators, which can be used as part of your day-to-day trading and managing your positions. Just like a majority of the Car Drivers, you do not need to understand how the engine works, indeed many Car drivers would even struggle to change a wheel, yet they have been driving for years. My advise to many Traders is to Focus on the Indicators and how to read them, as opposed to what the Indicators are and what its formula is and try and work out its formula! Why invent a wheel, or indeed why change something if it works! I come across so many Traders, with so many ifs and buts. They are constantly looking to prove the author or the coach wrong, in the process burning so much of their precious energy in just trying to prove a point! Clearly such people will NOT succeed in life, let alone Trading! There are several good quality charting packages. To be successful, you have to invest in quality charting packages whilst there are so many free charts you can get on the Internet,file:////Computerina/desktop/2007%20Project/4x4u/ebook/Book.htm (34 of 98) [4/30/2007 12:16:06 AM]


but many have limitations. I have used E Signal and also Ensign software, both very powerful charting packages with many advanced features. These softwares are great toolboxes for the traders, and you must learn to use them to work smarter and more efficiently. It will allow you to look at multiple time frames, and will allow you to split screens, you will be able to look at many popular indicators such as moving averages, channels, MACD, Stochastics, RSI and many others. A quality software will also allow you to write your indicators into the system, also be able to edit some of the regular indicators that are already in the system. You are also able to back test your indicators, thus giving you some confidence on how you can apply it to live data, which is critical when you want to pull the trigger. Indicators Indicators will help you identify trends and reversal points, and it will give you a better insight into the balance of power between bulls and bears. Indicators are more objective than chart patterns. A good trader needs to know which indicator works in which market condition, you must understand what it measures and how it interacts with the price action. Most Traders divide indicators into Trend Following Indicators these include moving averages, MACD, MACD Histogram. These indicators are lagging indicators and turn after trends reverse. Oscillators help to identify turning points, they include stochastic, RSI and momentum. Oscillators, often turns ahead of prices. The secret of successful trading is to combine several indicators from different groups, with chart patterns. I have found many Traders who just concentrate on one indicator, which I feel is very dangerous, as often you can end up with a false signal. Basic Theory The most profitable way of trading the Forex market is to identify the trend and once it is identified, stay with it for as long as possible. Often you see the so-called Forex Gurus advising to take 20/30 pip profits, yet you could be at a start of a big move. Clearly with good money management and trailing stop loss, you should be able to catch the big move. Many new Traders to the Forex market end up overtrading, trying to enter the markets too often, and in my early days I was not an exception, often incorrectly identifying a trend. A fisherman cannot catch a fish everyday, so too a Forex trader cannot catch a trade everyday. You have to have patience and only trade if your system tells you to do so. If there is no trade, dont trade is a simple rule. Markets are there every day, and opportunities will come, however if you desperately try to find a trade when none exists, than this will only frustrate you. One of the most important lessons I can teach you is patience. Often I see that new traders end up having an incorrect entry point, but this is equally followed by an equally incorrect placement of a stop loss. Most have been taught to place no more than 20 point stop loss, and that also just around the previous support/resistance. How often have you seen that stops have been gunned, and than the market continues to go in the direction you first thought it would.? Your entry point, stop loss and exit levels must all be logical and it must be able to produce you consistent profits. Incorrect placement of stop loss can sometimes result in being stopped out just at a reversal point, have a look at the following examplefile:////Computerina/desktop/2007%20Project/4x4u/ebook/Book.htm (35 of 98) [4/30/2007 12:16:06 AM]


A signal for a short entry, price level was at 1.9050, signals for the short entry were

1. 2. 3. 4.

Macd divergence RSI Divergence Resisting at R1 (not shown) Resisting at a Pivot level

If say a 20 or 25 pip stop loss was put in, the position would have been stopped out. The cable peaked at 1.9076, then briefly consolidated, and then it eventually fell by over a 100 pips from its peak.

I hear lot of so called gurus in various books and trading seminars advising on a 20 pip stop loss. With so much of volatility, Forex can move 20 pips in minutes, and if you were on the wrong side of a trade, you are stopped out. Most of them also recommend not to trade unless the risk reward is 1 to 3 and above. I am simply baffled by this advice. To be honest a lot of these guys are not traders themselves. One Guru at a trading seminar says only morons will trade with a risk reward of 1 to 1, and adds that a trader should only risk 25 to make 100 a risk reward of 1 to 4 looks great on paper, and yes the books and trading seminars will sell like hot cakes! In my opinion in most cases the risk/reward ratio is a lie. It is a fun fantasy. Often an amateur sets unrealistic stops and lowers risks to reward, but ends up being stopped out and never achieving the profit target.



Bottom line is, what is important is are you able to steadily increase your Capital, if that means having a risk reward of 1:1 or 1:2, then so be it. Off course, once you get experienced and can read the market accurately, then even a risk reward of 1:10 is possible. On some of my swing trading positions, this has often been achieved. However, when I am trading intraday, having done my research and I am reasonably sure of the direction of the trend. I am not at all concerned in having a tight 20 pip stop loss. I would rather lose 60 pips on a well thought out trade with a good market direction, than lose 3 lots of 20 pips trying to achieve the same thing. That does not mean I cannot have tight stops, there have been many instances where there could be a finely balanced trade, and the market could go either way. I have even gone in with a 10 pip stop loss. You have to be flexible, and the market direction should dictate where to put the stop loss. In fact if I was trading of a shorter time frame, I would often start with a risk reward of 1 to1, what I focus on is I have to have the least number of trades, which get stopped out. Generally, I am able to get a winning percentage of 70%, 7 winning trades (7 X60 = 420 pips) 3 losing trades (3 X 60 = 180pips) that still gives me a net profit of 240 pips! Thank you I would rather have that instead of so many losing trades of 20 pips! Which Time Frame to Use When I first started trading Forex, I was taught to look at 1 & 5 minute charts, have a stop loss of 20 pips and a target of 20 pips. Majority of trades would be stopped out and the few would have been profitable. Profits were snatched too early, on some of those winning trades, these trades had offered opportunity to bank not 20 pips but more than 50 or 100 pips. It was only after I started using the larger time frame that I realised that the Support and Resistance were more relevant on say a 60 minute chart than a 1 minute or 5 minute chart On my screen I will look at four time frames, which would be 15 min, 1 hour, 4 hour and daily. You could use any combination, which suits your trading style, which might beTick, 1 minute, 5 minute, and 15 minute 5 minute, 15 minute, 30 minute and 60 minute etc In this situation, you are able to see the trend in the larger time frame, which will enable you to pin point your entry and exit levels. Take a look at the image below and see what my screen usually looks like.



Source: eSignal. www.eSignal.com I would use the above format, if I were looking for a trade using macd divergence, as you can see I have 4 screen, a 15 min, 60 min, 4 hour, and a daily chart. At the time of writing this book, the system issued a short signal on the EURJPY. As you can see there was a MACD divergence (to be explained later) first on a daily chart, then followed by a divergence on the 4-hour chart. Seeing this signal on 2 charts gives you more confidence to pull the trigger, together with the moving average system (discussed later) that I use. Having seen this divergence, I would then turn to 60 min and 15 min charts to look for a better entry. Trigger pulled and short at 139.62, currently the price is 135.60 that is a profit of 402 pips! And still in the trade. The 15 min charts are turning bullish, but a strong resistance at 135.80, so my stops have been moved to 136.20. However, looking at the 4-hour and daily chart, you can see that we are still in a strong down trend. It is this market direction that has kept me in the trade. The market direction has kept me in the position on the short side from an open entry level of 139.62. Stops losses are continually being moved to lock in the profits. MOVING AVERAGES



Introduction There are three types of moving averages: simple, exponential and weighted. Moving averages are one of the most popular and easy to use tools available to the technical analyst. They smooth out the price action and therefore it makes it easier to spot a trend, and this is particularly helpful in volatile and trending markets. They also form the building blocks for many other technical indicators and overlays. A moving average is the composite photograph of the market it combines prices for several days. The market consists of huge crowds, and the moving average identifies the direction of mass movement It must be noted that all moving averages are lagging indicators and will always be behind price. Currencies trend very well, so they fit well with trend following indicators. When prices are trending, moving averages work very well. I have often used the crossover of Exponential moving average (EMA) this strategy will not work well in a sideways market, as there will be numerous false signals. In order to reduce the lag in simple moving averages, I tend to use the EMA Exponential Moving Averages (EMA) EMA is a better trend following than a simple MA. It gives greater weight to the latest data and responds to changes faster than a simple MA. A successful trader does not forecast the future he monitors the market and manages his trading position. Moving averages will help us trade in the direction of the trend. No doubt there are literally hundreds of variations on various trading systems using the crossovers of moving averages to initiate a trading position. One of my favourite one is the use of 5, 20 and 60 period EMA. Like all other mechanical trading methods, this will work well in a strongly trending market. The system that I have successfully used is based on the following rulesUSE a 5, 20 and 60 PERIOD EMA WARNING to Buy When the 5 EMA crosses the 20 EMA moving UPWARD. This indicates that the currency pair is in a up trend. Confirmation to Buy When the 5 EMA crosses the 60 EMA moving upward, it indicates that the currency is on an up trend momentum. Warning to sell short This is the Exact opposite to the buy signal, When the EMA5 crosses the EMA20 moving downward, this indicates that the currency pair may be in a downtrend, so be ready to short and continue to monitor the price action. Confirmation to sell short This is when the EMA5 crosses the EMA60 moving downwards, this would indicate that the currency is in a downtrend ENTRY ORDER You should wait to see the price action after the crossover. Often the next 2 or 3 bars will retrace, thereby offering you a better entry point. If however, there is an aggressive price action, following the crossover of EMA, then you may wishfile:////Computerina/desktop/2007%20Project/4x4u/ebook/Book.htm (39 of 98) [4/30/2007 12:16:06 AM]


to consider a market order to fill your trade. Because currencies trend well, therefore you will be able to catch a bigger move. See the following examples; GBP Short Trade.


The above trade at best could have produced a profit of 175 pips, having entered short at 1.8935 leading to the lowest point at 1.8760. I would let this trade run until I saw a significant turn on the 20 period EMA, the first such signal would have been at 1.8790, producing 145 pips, or the crossover of 20 period EMA with the 60 period EMA this would have produced a profit of 125 pips. Not a bad trade, but how many traders would have had a patience to hold on to this trade! Patience is the key Wait for the signal, than let your profits run. JPY LONG Trade 14th April 2005.




Obviously when using the crossover of moving averages, you would also look at other signals in addition. Just relying on one indicator is dangerous and risky If we look at the above chart, you have a double bottom, a higher low, then consolidates, then breaks out of the triangle pattern. This coincides with the EMA crossover. When you have such confluence of events, the certainty of a profitable trade is much higher. CHF SHORT trade 4th Oct 2004. DAILY CHART




Using the Daily chart, a Short signal at 1.2601. One could have taken profits at 1.1300, when there was a double bottom that is a profit of 1300 pips. Would you have had patience to hold on to this trade for long? It is possible if you have a set of rules, which you follow strictly, off course you would have a trailing stop loss so that your profits are locked. If you had waited for the turning of the 20 period moving average, you could have closed the trade at around 1.1500 that still produced a profit of 1101 points! If however, you had waited for the crossover of the 20 and 60 period crossover, that would have produced a gain of 800 pips, obviously chances are that you would have taken profits much earlier, using other signals, such as the double bottom. This simple system can work on all time frames, as illustrated above. Once again this illustrates currencies trend well, and EMAs can be used to stay in the trade, for as long as the trend is in your direction. In addition to the EMA crossover signals described above, you can also use the MACD (Explained later) to confirm the trend. Always use the default settings of 12 and 26 to calculate the MACD on your charts. There are 4 basic stages to this cycle;



1. 2. 3. 4.

The The The The

MACD MACD MACD MACD

crosses the zero line moving upwards continues to increase until it reaches the maximum value then starts to decrease until it passes Zero continues to decrease moving downward to the minimum value

From the above, If MACD is in Phase 1, it verifies the confirmation of a buy signal, and if MACD is in phase 3 it verifies the confirmation to sell short. See the following example-

Using the EMA crossover signal in conjunction with MACD means that likelihood of a false signal is reduced, as illustrated in the above trade. As you can see that prior to the signal there were few trades where you would have been stopped out, as the markets were range bound. Therefore once again, what you are looking for is a confluence of events.



RECAP OF SIGNALS

1. 2. 3. 4.

Get ready to buy EMA5 crosses EMA20 moving upwards Confirmation to buy EMA5 crosses EMA60, MACD should be in phase 1 Get ready to sell EMA5 crosses EMA60 Confirmation to sell EMA5 crosses EMA60 moving downwards. MACD should be in phase 3.

An example of a Short Trade GBP USD Short at 1.8935, on 14th April 2005

RECAP OF SIGNALS - LONG 1. Get ready to buy EMA5 crosses EMA20 moving upwards 2. Confirmation to buy EMA5 crosses EMA60, MACD should be in phase 1 3. Get ready to close EMA5 crosses EMA60 moving downwards. MACD should be in phase 3. Some traders wait for EMA crossover of 20 and 60, since if you have a powerful trend then this will keep you in the trade longer.



A successful trader does not forecast the price action; he monitors the markets and manages his trading position. Moving averages are excellent indicators to work with when the markets are trending, so it will help us to trade in the direction of the markets. Moving Averages work very well in a strongly trending market, however, when you see that the markets are not trending, i.e. they are trading sideways, then you will have many cases of whipsaws. Therefore when the markets trade in ranges, just stand aside and be patient until a new trend emerges. The advantage of using moving averages in Forex is that the markets trend very well, it is not often you see very long sideways movement compared to Stocks. MAs lag market reversals at Top and bottoms, the larger the MA the longer the lag period, the shorter the MA the shorter the lag period, but more frequent the whipsaws.

MOVING AVERAGE CONVERGENCE DIVERGENCE (MACD)Gerald Appel developed the MACD indicator, and it is simply a method of identifying the potential for two exponential moving averages to cross. MACD is calculated using a short length and a long length exponential moving average (defaulted to 12 and 26) and calculating the difference between these two averages. In other words, it is the spread between the two averages. Normally, a signal line is derived by calculating an exponential moving average of the MACD. You can also have the MACD displayed as a histogram a series of vertical bars above and below a zero line

Crossovers of the MACD and signal lines identify shifts in the balance of power of bulls and bears. Trading in the direction of a crossover means going with the flow of the market When the fast MACD line crosses above the slow signal line, it gives a buy signal. Go long, and place a protective stop below the latest low. See A above. When the fast line closes below the slow line, it gives a sell signal, and places a protective stop above the latest minor high. See B above. MACD HISTOGRAM. The MACD Histogram gives a more in-depth guide to the balance of power between bulls and bears, and tells us if the bulls and bears are getting stronger or weaker. In my opinion one of the



best tools. In the above chart, you can see that just before point A, the bears are losing the momentum. MACD- HISTOGRAM and PRICE DIVERGENCES. Divergences between MACD- Histogram and prices identify major turning points. These signals do not occur often, but when they do, they often let you catch major reversals and the beginning of a new trend. In my opinion the MACD divergence is probably the strongest signal in Technical Analysis. You could probably make a living trading the divergences only! MACD should be a copycat of the price action, and therefore macd will also make a higher high same as a price action, if this pattern is not repeated then you have a divergence. When prices rally to a new high, but MACD traces lower, this is a bearish divergence, this shows that the bulls are getting weaker, this would identify a price weakness at market tops. The following is an example of a Bearish Divergence.

Another example of a perfect MACD Bearish Divergence A possible entry at 1.8670,



The EMA crossover at 1.8295 will still keep you in this trade; at this point the profit from the trade was 375 pips. You could consider closing the position at 1.7970 when the 20 EMA starts to rise, this giving a profit of 700 pips. At this stage the 20 EMA has not crossed over the 60 EMA, so some of you may want to carry on with the trade. If you did so then you would have had a perfect opportunity to close the trade at the Double bottom on 7/10/04 at 1.7760 giving a total of 910 pips profit. Not a bad trade, from divergence. MACD BULLISH DIVERGENCE If the prices fall to a new low but MACD traces a more shallow low, it would mean that bulls are ready to gain control, and this would identify strength at market bottoms. This is a Bullish divergence. They give buy signals when most traders feel fearful about a breakdown to a new low! The following chart illustrates a perfect MACD Bullish divergence on a EURUSD Chart

Source: eSignal. www.eSignal.com You could consider longs when the MACD Histogram ticks up from its shallower bottom; while prices are at a new low, place a protective stop below its latest low. The higher the time frame of a chart in which the MACD divergence occurs, this may result in afile:////Computerina/desktop/2007%20Project/4x4u/ebook/Book.htm (47 of 98) [4/30/2007 12:16:06 AM]


larger move. For example in the above chart, at around 1.2250 the peak of that rally had been 1.2850 thereby giving an overall gain of 600 pips. In this instance your entry points were much earlier than the EMA 5/60 day crossover All the above strategies will work in any time frame, so unlike me, if you enjoy the thrills and excitement of watching your screens for every second to catch 20 to 30 pips per trade, then you can certainly switch the charts to a lower time frame, i.e. 1 minutes or 5 minutes. Relative Strength Index (RSI) The relative strength Index (RSI) is a momentum-based indicator. Determining the true value of an oscillator depends on the understanding of overbought or oversold positions. The basic formula for calculating RSI is as follows: 100-(100/(1+U/D) U = average upward price change D = average of downward price change RSI as an indicator is front weighted i.e. it gives more importance to more recent price action. It gives a better velocity reading than other oscillators; it also tends to filter out lot of noise. Your software should be able to do the work for you. At the bottom of the chart below, the RSI, on a scale of 0 to 100, indicates that the overbought position is at 70 and oversold position is at 30. Some traders use the 80/20 range, as they do not want to pull the trigger too fast! Some traders also use the short term moving average crossovers, this will also indicate a shift in direction, and when this occurs when the RSI is at extreme levels then it could be a powerful setup to pull the trigger. There are 5 different uses for RSI;

1. Tops and bottoms overbought and oversold conditions are usually signalled at 30 and 70. 2. Divergences when a pair makes new highs or lows, but the RSI does not follow price action,

this usually indicates that price reversal is coming. 3. Support and Resistance RSI may show levels of support and resistance, sometimes more clearly than the price chart itself. 4. Chart Formations Patterns such as double tops and head and shoulder may be more visible on RSI rather than on price charts 5. Failure swings when RSI breaks out, i.e. it surpasses previous high or low, this may indicate that a breakout in price is coming. It is important to understand that an overbought or oversold position can remain in an extended up trend or downtrend for some time, so try and use other methods combined with RSI, rather than using it on its own.



In the above chart, RSI was useful in detecting a short trade after a divergence and also a crossover of the 70 overbought level. The above chart is a 5-minute time frame. There are at least 2 good short trades. On the long side, notice the RSI bouncing just around the 30 oversold, subsequently there is a double bottom, and a divergence on the RSI. This was around the price level 1.880. Having a closer review of the above 5-minute chart, which covers a two-day period. The GBP has not moved much, yet there were few opportunities to trade both from the long side as well as short, with a gain of more than 100 pips.

INTRODUCTION TO ELLIOT WAVEThe Elliot Wave Theory was proposed in the early 1930s by R.N. Elliot, a stock market speculator, Elliot focused on classifying market activity according to a set of cycles and ratios of movements. As with the waves on the ocean, market activity ebbs and flows in cycles that repeat and can be subdivided into smaller cycles. The theory states that markets move in repetitive patterns; a five-wave advance (impulse waves)file:////Computerina/desktop/2007%20Project/4x4u/ebook/Book.htm (49 of 98) [4/30/2007 12:16:06 AM]


and a three-wave decline (corrective waves, labelled with letters). This cycle of eight waves can be seen in all time frames from intraday to what Elliot

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The Way to Trade Forex by Jay Lakhani