8 Day Intensive Course Lesson 1: General Information and Introduction to Technical Analysis

A) Message From The Instructor

MESSAGE FROM THE INSTRUCTOR Hello, and welcome to the FX "Intensive" Power Course. This course is designed to teach individuals the concepts of Technical and Fundamental analysis, and demonstrate how to apply these methodologies to your trading account. As the instructors, our role is to ensure that the class runs in a consistent and orderly manner, and that the experience is as rewarding as possible for all of the students enrolled in the course. In particular, this will involve moderating and initiating class discussions, reviewing and analyzing homework assignments, and offering additional insight into the topics presented in the forum. Our duties are aimed towards helping you to start thinking and acting like a trader, and to give you the proper tools and mind set to trade with confidence in the FX markets. Students of the FX "Intensive" Power Course are encouraged to review and complete all lessons, quizzes and assignments in the course. (Note: When you enter into the Quiz Center, simply click on the word "Quiz" and it will allow you into the quiz for that day.) In order to get the most out of this course it is absolutely vital that you post questions and trades in the forum. Having an experienced trading instructor review and comment on your trade is the best resource you could possible ask for when starting out in this market. Students are also responsible for opening a Demo Account and practicing with each Technical Indicator that is covered in the course. This will entail applying each indicator to a trade. We recommend that students practice with at least 10 trades per indicator. These suggestions are to ensure that students properly understand and apply the trading methodologies covered in the course. Over the next 8 lessons, we will provide you with information that we have found, when used properly, to be of great benefit to trading the foreign exchange market. Every person is different and naturally every person will trade differently, thus it is imperative that each and every one of you make a concerted effort to develop your own strategy. We will help you along the ways as much as we can (24 hours a day), but ultimately, your trading performance will be indicative of the plan that you put in place. Saving the Lessons Our advice would be to save each lesson to a MS Word file. On any given thread, click on the Printable Version of the page, then copy and paste the text to MS Word. If you revert back to the normal view of the page, you can right click to copy and charts, then move your cursor in the Word file to where the charts should be, and

press Ctrl + V to paste the chart there. Charts in MS Word can be resized simply by clicking on the edge of the chart and dragging it larger or smaller. If you have any issues pertaining to the course or how it is running, please feel free to contact us via email at instructor@fxpowercourse.com. In conclusion, we'd like to welcome you once again to the FX Intensive Power Course. We're looking forward to getting started and interacting personally with each of you.
B) Tools of the Trade

Tools of the Trade In addition to the Online Classroom, students will need a few other tools to get through the course. All the tools involved in the Power Course Online are aimed at helping you become a better trader -- so it is to your advantage to use all the tools outlined below to your fullest advantage. Demo Account A demo trading account -- or a virtual trading account that provides you with virtual cash to practice trading in the FX market -- is the best tool any aspiring currency trader can use to improve his/her skill in the market. You can download the software and sign up for a demo account at this link: http://www.fxcm.com/getting-started.jsp The one of the most important things you can do if become familiar with the FX Trading Station before entering into a trade, even a practice trade. Here is a link to a preview on how to use the trading platform: http://www.fxcm.com/software-preview.jsp If after watching this preview there is still some things you arent sure of about using the FX Trading Station, we recommend you contact FXCM by phone and ask for a product walkthrough of the software. Knowing how to use this tool is a key to trading success. Here is a link to the main FXCM contact page: http://www.fxcm.com/contact-fxcm.jsp Fxtrek Desktop Charts Fxtrek is offering a free month long subscription to their desktop charts for all students in the course. These are excellent charts, and you will find that most of the examples that the instructors post are from these charts. Your login ID and password for the charts will come in a separate email. You can download the actual software from the following link: http://fxcmpc.fxtrek.com/misc/download.asp Here is a link to help with any technical problems you may encounter when accessing the charts:

http://www.fxtrek.com/aboutEN/technicalfaqs.asp You can also contact FXtrek directly at support@fxtrek.com. If you do not receive login information by the start of the course, please send an email to instructor@fxpowercourse.com and we can get you set up. Other Charting Packages You can use any charting package you want, to include the Intellicharts from FXtrek. However, you can see the other free charting packages that use the FXCM price feed at this link: http://www.fxcm.com/charting-options-exchange.jsp Supplemental Web Site In addition to the material presented in the Online Classroom, the course Online also includes a supplemental Student Site filled with additional trading strategies and advanced market topics. This material, while supplemental to the course, is invaluable to the student looking for more advanced material that will help them refine their trading strategy. Here is the link to access the supplemental Student Site: http://www.learncurrencytrading.com/pc_student/
C) How Do Our Students Benefit When They Open A Live Account?

Most of our students open a live account shortly before they graduate from the course. FXCM offers 2 types of trading accounts: Standard Account (100K) and Mini Account (10K). You need as little as $300 to get started in trading the FX market. However, in order to risk only a small portion of the account on any one trade, we suggest starting with at least $1,000 to $2000. There is no maintenance fee or inactivity fee. Even if you are not fully ready to trade live yet, you could still open up a live account before the course concludes and enjoy the full benefits of having a live account which are: 1. Get the course for Free! By opening an account before the course concludes, the course fee will be reimbursed to you. Simply email orders@fxpowercourse.com and let us know you opened an account. Even if you open a mini account with the $300 minimum, you will be reimbursed for the course. 2. Free One Year E-mail support from FX Powercourse Instructors Learning is an ongoing process. Even though youve graduated from the Powercourse, the chances are that you will have questions from time to time. By opening up a live account before the course concludes, you enjoy a full 1 year email access to the FX Powercourse Instructor. When you have questions regarding the fundamental news releases, technical trade setups or anything about trading the FX market, you may ask your course instructors via email 24 hours a day 7 days a

week. It makes you feel more confident when having experienced instructors on your side. They can be reached at instructor@fxpowercourse.com 3. Free access to DailyFX+. DailyFX+ is a complete suite of professional trading tools similar to those used by institutional trading desks. DailyFX+ is FXCMs premium resource website available FREE to live to FXCM clients. DailyFX+ includes: 1. 2. 3. 4. 5. 6. 7. 8. Guest Trade Ideas Buy/Sell Signals Intraday Analytics Technical Analyzer Real-time charts Live market news Technical trading levels Comprehensive Economic Calendar

Once you have a live account, you can login to DailyFX directly from the trading station by clicking on the Research Button This will take you to DailyFX+ which offers a complete suite of trading tools plus real time news, fundamental analysis, global economic a calendar and free charting all in one convenient place, 24 hours a day. For a short presentation that describes the benefits of DailyFX+ please click here: https://plus.dailyfx.com/tnews/loginForm.jsp 4. Eligible to win thousands of dollars by participating in our trading contests Contest 1: The King of Mini Trading Contest Each month over $4000 will be awarded to the top 5 mini account holders with the highest percentage gain. This is a live trading competition open to all live mini account holders. At the beginning of each month, the slate is wiped clean and traders have a new opportunity to win the monthly prizes. To qualify, just have at least $1000 in your account by the last day of month by 4:59pm EST. This will automatically enroll you into the contest. 1st place: $2,500 2nd place: $1,000 3rd place: $500 4th place: $250 5th place: $100 To view the full contest rule, please visit http://www.fxcm.com/mini_trading_acc...test-rules.htm Contest 2: The Powercourse Alumni Trading Contest FXCM sponsors a trading contest exclusively for FX Power Course graduates

on top of the King of Mini Trading Contest. Each month $1700 will be awarded to the top 3 mini account holders with the highest percentage gain. This is a live trading competition open to all FX Powercourse alumni with live mini accounts that have at least $1000 in that account before the new month starts (by 4:59 EST the last day of the month). At the beginning of each month, the slate is wiped clean and traders have a new opportunity to win the monthly prizes. We will find more detail in the Powercourse Alumni Forum. Alumni Contest rules are the same as the King of Mini Contest rules. 1st place: $1,000 2nd place: $500 3rd place: $200
D) Introduction to Forex Trading

Introduction to Forex Trading Kathy Lien, Chief Strategist at DailyFX and Boris Schlossberg, Senior Currency Strategist at DailyFX would like to introduce you to the world of Forex trading. Here is a link to their video: http://www.fxcm.com/forex-trading-video.jsp What is Forex Trading? Overview FXCM provides an online trading platform for individuals that want to speculate on the exchange rate between two currencies. In doing so, traders buy and sell currencies with the hope of making a profit when the value of the currencies changes in their favor, whether from market news or events that take place in the world. The forex market is the largest market in the world with daily reported volume of over 1.9 trillion making it one of the most exciting markets for trading. Market Hours The spot FX market is unique to any other market in the world, as trading is available 24-hours a day. Somewhere around the world, a financial center is open for business, and banks and other institutions exchange currencies, every hour of the day and night with generally only minor gaps on the weekend. Essentially foreign exchange markets follow the sun around the world, giving traders the flexibility of determining their trading day. How Market Hours Work Time Zone............New York...GMT Tokyo Open..........7:00 PM....0:00 Tokyo Close.........4:00 AM....9:00 London Open........3:00 AM....8:00 London Close......12:00 PM....17:00 NY Open.............8:00 AM....13:00

NY Close.............5:00 PM....22:00 How an FX Trade Works In this market you may buy or sell currencies. The objective is to earn a profit from your position. Placing a trade in the foreign exchange market is simple: the mechanics of a trade are virtually identical to those found in other markets, so the transition for many traders is often seamless. Example of How FX Trade Works Trader's Action............................................ ...............Euros.....US Dollars A trader purchases 10,000 Euros in the beginning of 2001 at the EUR/USD rate was .9600.........................+10,000....-9,600 In May of 2003 the trader exchanges his 10,000 Euro back into US Dollars at the market rate of 1.1800......-10,000...+11,800 In this example, the trader earned a gross profit of $2,200.........0.....+2,200 Quoting Conventions Currencies are quoted in pairs, such as EUR/USD or USD/JPY. The first listed currency is known as the base currency, while the second is called the counter or quote currency. The base currency is the basis for the buy or the sell. For example, if you BUY the EUR/USD, you buy Euros while at the same time sell US Dollars. You would do so in expectation that the Euro will appreciate (go up) relative to the US Dollar. Currency Abbreviations Symbol......Definition EUR..........Euro GBP..........British Pound JPY...........Japanese Yen USD..........US Dollar CAD..........Canadian Dollar CHF..........Swiss Franc NZD..........New Zealand Dollar AUD..........Australian Dollar EUR/USD In this example Euro is the base currency and thus the basis for the buy/sell. If you believe that the US economy will continue to weaken and this will hurt the US dollar, you would execute a BUY EUR/USD order. By doing so you have bought euros in the expectation that they will appreciate versus the US Dollar. If you believe that the US economy is strong and the Euro will weaken against the US Dollar you would execute a SELL EUR/USD order. By doing so you have sold euros in the expectation that they will depreciate versus the US Dollar. USD/JPY In this example the US Dollar is the base currency and thus the basis for the buy/sell.

If you think that the Japanese government is going to weaken the yen in order to help its export industry, you would execute a BUY USD/JPY order. By doing so you have bought U.S dollars in the expectation that they will appreciate versus the Japanese Yen. If you believe that Japanese investors are pulling money out of U.S. financial markets and repatriating funds back to Japan, and this will hurt the US Dollar, you would execute a SELL USD/JPY order. By doing so you have sold U.S Dollars in the expectation that they will depreciate against the Japanese Yen. GBP/USD In this example the GBP is the base currency and thus the basis for the buy/sell. If you think the British economy will continue to be the leading economy among the G7 nations in terms of growth, thus buying the pound, you would execute a BUY GBP/USD order. By doing so you have bought British Pounds in the expectation that they will appreciate versus the US Dollar. If you believe the British are going to adopt the Euro and this will weaken pounds as they devalue their currency in anticipation of the merge, you would execute a SELL GBP/USD order. By doing so you have sold British Pounds in the expectation that they will depreciate against the US Dollar. USD/CHF In this example the CHF is the base currency and thus the basis for the buy/sell. If you think the Swiss Franc is overvalued, you would execute a BUY USD/CHF order. By doing so you have bought US Dollars in the expectation that they will appreciate versus the Swiss Franc. If you believe that due to instability in the Middle East and in U.S. financial markets the dollar will continue to weaken, you would execute a SELL USD/CHF order. By doing so you have sold US Dollars in the expectation that they will depreciate against the Swiss Franc. Buying/Selling First, the trader should determine whether they want to buy or sell. If they want to enter a short order whereby they will profit if the exchange rate falls they simply need to click on the SELL rate. The opposite holds true for traders who enter buy orders: they can simply click on the BUY rate, and thus will profit if the exchange rate goes up. Buying and Selling Prices Just like in all markets, there are two prices for every currency pair. The difference between these two prices is the spread, or the cost of the trade. In this example, the spread is two pips. On a mini account, a pip on the EUR/USD currency pair is worth $1, while in a standard account, each pip is worth $10. You buy at the higher price and sell at the lower price. It is the sell side price that is printed on the various charting packages, so it is important to keep in mind that if you buy a currency pair based on the chart price, you will be filled at a higher price than the price that is on the chart.

Margin The margin deposit is not a down payment on a purchase of equity, as many perceive margins to be in the stock markets. Rather, the margin is a performance bond, or good faith deposit, to ensure against trading losses. The margin requirement allows traders to hold a position much larger than the account value. FXCMs online trading platform has margin management capabilities, which allow for this high leverage. In the event that funds in the account fall below margin requirements, the FXCM Dealing Desk will close all open positions. This prevents clients' accounts from falling into a negative balance, even in a highly volatile, fast moving market. Example of How Margin Works Since the trader opened 1 lot of the EUR/USD, his margin requirement or Used Margin is $1000. Usable Margin is the funds available to open new positions or sustain trading losses. If the equity (the value of his account) falls below his Used Margin due to trading losses, his position will automatically be closed. As a result, the trader can never lose more than he/she deposits. Rollover For positions open at 5pm EST, there is a daily rollover interest rate that a trader either pays or earns, depending on your established margin and position in the market. If you do not want to earn or pay interest on your positions, simply make sure it is closed at 5pm EST, the established end of the market day. Since every currency trade involves borrowing one currency to buy another, interest rollover charges are an inherent part of FX trading. Interest is paid on the currency that is borrowed, and earned on the one that is purchased. If a client is buying a currency with a higher interest rate than the one he/she is borrowing, the net differential will be positive and the client will earn funds as a result. To see the amount credited or debited at the daily close, see the Simple Dealing Rates Window of the FX Trading Station. An example would be, in the Simple Dealing Rates window of the FX Trading Station II, we can see that we earn $12.90 a day when we buy one standard lot of the USD/JPY ("Roll B" for buy) and must pay $13.10 a day when we sell one standard lot of the USD/JPY ("Roll S" for sell). The credit or debit takes place at the 5PM Eastern close of each trading day.

Free Webinars Every weekday, Kathy Lien, Boris Schlossberg and a Power Course instructor conduct a free webinar on trading the Forex markets. Here is a link to the schedule and titles: http://www.fxcm.com/webinars-page.jsp

E) Why Do Most Traders Lose Money?

Why Do Most Traders Lose Money? The fact is that most traders, regardless of how intelligent and knowledgeable they may be about the markets, lose money. What could be the cause of this? Are the markets really so enigmatic that few can profit or are there a series of common mistakes that befall many traders? The answer is the latter, and the good news is that the problem, while it can be emotionally and psychologically challenging, can be solved by using solid money management techniques. Most traders lose money simply because they do not understand or adhere to good money management practices. Part of money management is essentially determining your risk before placing a trade. Without a sense of money management, many traders hold on to losing positions far too long but take profits on winning positions prematurely. The result is a seemingly paradoxical scenario that in reality is all too common: the trader ends up having more winning trades than losing trades, but still loses money.

Money Management is the Key Key Money Management Practices So, what can traders do to ensure they have solid money management habits? There are a few key guidelines that every trader, regardless of their strategy or what instrument they are trading, should keep in mind: Risk-Reward Ratio. Traders should establish a risk-reward ratio for every trade they place. In other words, they should know much they are willing to lose, and how much they are seeking to gain. Generally, the risk-reward ratio should be at least 1:2. This means risk should equal no more than one-half of the potential reward. An example would be that if you are risking 50 pips on a trade, you should look for profit of at least 100 pips. This allows you to be consistently profitable if you win half of your trades, which should be your goal. Having a solid risk-reward ratio can prevent traders from entering positions that ultimately are not worth the risk. Stop Loss Orders. Traders should also employ stop-loss orders as a way of specifying the maximum loss they are willing to accept. By using stop-loss orders, traders can avoid the common scenario where they have many winning trades but a single loss large enough to eliminate any trace of profitability in the account. After having identified your entry price on the trade, you should identify your protective stop and then look for twice the in setting your limit order to take profits. Never trade without having a protective stop order entered at all times.

F) The Logic of Technical Analysis

The Logic of Technical Analysis

What is Technical Analysis? Technical analysis involves the forecasting of exchange rate movement based solely upon statistics and price patterns Simply put, technical analysis is the analysis of the market based on price action. While fundamental analysis looks at economic factors and geopolitical conditions (such as economic numbers, capital flows, and key political events) in an attempt to forecast exchange rates, technical analysis relies on the statistics and patterns in price movement for its forecast. Technical analysis has gained great popularity in recent history, especially as trends in computerized trading continue to develop and active traders continue to refine their strategies to best assess what is going on in the market at all times. In todays marketplace, technical analysis has become an essential tool for any aspiring trader. Why Technical Analysis Works Extremely popular, and hence offers insight into what many traders are doing More clear-cut and less controversial than fundamental analysis A simple way of making trading decisions

Many traders believe that technical analysis is a self-fulfilling prophecy in other words, it works solely because it is popular and is used by many traders. For example, many technical traders put a 20 day moving average line on charts not because the moving average itself is statistically important, but rather because it is an extremely common indicator used by active traders of all sizes. The rationale is simple: if so many traders are basing their decisions off moving averages and other indicators, then those indicators must be watched closely, for they offer insight into what a vast majority of traders in the market are doing. Because of this rationale, traders should focus on the most popular indicators in the trading community, and should use them in the most common way. This is the best way of tapping into the psychology of the market in other words, it is a simple but highly effective way of understanding what other traders are up to, and how the market may move because of it. Contrary to popular belief, it is NOT a study that requires complex mathematics or computer algorithms. Rather, it is a study that requires looking at the same tools other traders use to understand what is happening in the market. Below is a list of the most common indicators, all of which will be covered in the lessons that follow: Key Candlestick Patterns Fibonacci Retracements Moving Averages RSI Stochastics MACD Bollinger Bands

While it may seem intimidating, technical analysis is actually fairly simple often far simpler than fundamental analysis. It simply requires an abundance of the two traits that are most necessary to be a successful trader: discipline and patience.

Different Time Frames

Technical analysis tools will be valid on all time frames, but we strongly recommend using daily charts for most of your analysis. Medium term positions based on daily charts, using hourly charts for more precise entry points, have two advantages over short term positions based on 5 or 15 minute charts. 1) The spread is less significant for a longer term position. 5 pips out of a price target of 20 is a huge obstacle to overcome on trade after trade. 5 pips out of a 100 pip target is manageable.

2) Longer term charts are statistically much more reliable, since they are based on more data. Indicators have a higher degree of reliability on a daily chart than on an hourly chart or 15 minute chart. Trading on a weekly or monthly chart would likely be more accurate from a technical standpoint than a daily chart would be, but a slower time frame also means less precise entry points, and the wider stops necessary to trade a monthly chart are often beyond the capacity for many accounts. We recommend as a general rule risking no more than 2% of your account balance on a single trade, and this is sometimes difficult with a monthly or weekly chart.
G) Technical Analysis Theory: Range-bound vs. Momentum

Technical Analysis Theory: Range-bound vs. Momentum

Support and Resistance Support and Resistance are the basis of most technical analysis chart patterns. Identification of key support and resistance levels is an essential ingredient to successful technical analysis. Even though it is sometimes difficult to establish exact support and resistance levels, being aware of their existence and location can greatly enhance analysis and forecasting abilities. If a pair is approaching an important support level, it can serve as an alert to be extra vigilant in looking for signs of increased buying pressure and a potential reversal. If a pair is approaching a resistance level, it can act as an alert to look for signs of increased selling pressure and a potential reversal. If a support or resistance level is broken, it signals that the relationship between supply and demand has changed. A resistance breakout signals that demand (bulls) has gained the upper hand and a support break signals that supply (bears) has won the battle.

Support
Support and resistance represent key turning points where the forces of Sellers (supply) and buyers (Demand) meet. In the financial markets, prices are driven by excessive supply (down) and demand (up). Supply is synonymous with bearish, bears and selling. Demand is synonymous with bullish, bulls and buying. Support is the price level at which demand is thought to be strong enough to prevent the price from declining further. The logic dictates that as the price declines towards support and gets cheaper, buyers become more inclined to buy and sellers become less inclined to sell. By the time the price reaches the support level, it is believed that demand will overcome supply and prevent the price from falling below support. Support is the price level at which demand is thought to be strong enough to prevent the price from declining further and the logic dictates that as the price declines towards support and gets cheaper, buyers become more inclined to buy and sellers become less inclined to sell. By the time the price reaches the support level, it is believed that demand will overcome supply and prevent the price from falling below support

In all markets the excessive supply will drive prices down, while demand will drive the markets up. As demand increases, prices advance and as supply increases, prices decline. When supply and demand are equal, prices move sideways as bulls and bears slug it out for control. The market has a memory. When price falls to a new low and then rallies, buyers who missed out on the first trough will be inclined to buy if price returns to that level. Afraid of missing out for a second time, they may enter the market in sufficient numbers to take away from sellers. The result will be a rally, reinforcing perceptions that price is unlikely to fall further and creating a support level. A decline below support indicates a new willingness to sell and/or a lack of incentive to buy. A break of support and making new lows signal that sellers have reduced their expectations and are willing sell at even lower prices. In addition, buyers could not be tempted into buying until prices declined below support or below the previous low. Once support is broken, another support level will have to be established at a lower level

Resistance
Resistance is the price level at which selling is thought to be strong enough to prevent the price from rising further and the logic dictates that as the price advances towards resistance, sellers become more inclined to sell and buyers become less inclined to buy. By the time the price reaches the resistance level, it is believed that supply will overcome demand and prevent the price from rising above resistance.

The market has a memory. When price makes a new High and then retreats, sellers who missed the previous peak will be inclined to sell when price returns to that level. Afraid of missing out a second time, they may enter the market in numbers sufficient to overwhelm buyers. The resulting correction will reinforce market perceptions that price is unlikely to move higher and establish a resistance level. Resistance does not always hold and a break above resistance signals that the bulls have won out over the bears. A break above resistance shows a new willingness to buy and/or a lack of incentive to sell. Resistance breaks through and new highs are made that would indicate that buyers have increased their expectations and are willing to buy at even higher prices. In addition, sellers could not be tempted into selling until prices have rallied above resistance or above the previous high. Once resistance is broken, another resistance level will have to be established at a higher level. Another principle of technical analysis stipulates that support can turn into resistance and visa versa. Once the price breaks below a support level, the broken support level can turn into resistance. The break of support signals that the forces of supply have overcome the forces of demand. Therefore, if the price returns to this level, there is likely to be an increase in supply, and hence resistance. The other side is resistance turning into support. As the price advances above resistance, it signals changes in supply and demand. The breakout above resistance proves that the forces of demand have overwhelmed the forces of supply. If the price returns to this level, there is likely to be an increase in demand and support will be found. Therefore we first plot long-term charts and begin by analyzing the daily and weekly charts going back for a couple of years. This provides more visibility and a better long-term perspective on a market. Once the long-term has been has been established then review the daily and the intra-day charts. A short-term market view alone can often be deceptive. Even if you only trade the very short term, you will do better if you're trading in the same direction as the intermediate and longer-term trends. Take in the general view of the chart to determine the direction of the trend,

and follow it. We need to try to identify support and resistance levels, the best place to buy a market is near support levels that support is usually a previous reaction low. The best place to sell a market is near resistance levels. Resistance is usually a previous peak. After a resistance peak has been broken, it will usually provide support on subsequent pullbacks. In other words, the old "high" becomes the new "low." In the same way, when a support level has been broken, it will usually produce selling on subsequent rallies -- the old "low" can become the new "high." It is very important to make sure that we trade in the direction of that trend. We Buy dips if the trend is up and Sell rallies if the trend is down But in each case, let the bigger time frame chart determine the trend, and then use the shorter-term chart for timing entry. Find support and resistance levels; the best place to buy a market is near a support level, and that support is usually a previous reaction low. The best place to sell a market is near resistance levels. Resistance is usually a previous peak. After a resistance peak has been broken, it will usually provide support on subsequent pullbacks. In other words, the old "high" becomes the new "low." In the same way, when a support level has been broken, it will usually produce selling on subsequent rallies -- the old "low" can become the new "high." Stops are best placed after we first identify support and resistance on the charts and you place yours stop beyond those levels and at that time you decide if the risk reward on the trade is acceptable to you When price makes a new High and then retreats, sellers who missed the previous peak will be inclined to sell when price returns to that level. Afraid of missing out a second time, they may enter the market in numbers sufficient to overwhelm buyers. The resulting correction will reinforce market perceptions that price is unlikely to move higher and establish a resistance level.

Trading Range Trading ranges can play an important role in determining support and resistance as turning points or as continuation patterns. A trading range is a period of time when prices move within a relatively tight range, between support and resistance. This signals that the forces of supply and demand are evenly balanced. When the price

breaks out of the trading range, above or below, it signals that a winner has emerged. A break above is a victory for the bulls (demand or Buyers) and a break below is a victory for the bears (supply or sellers). The simplest way of using support and resistance in trading is to simply trade the range: in other words, traders can simply buy at support, and sell at resistance. A key advantage of this is that the market is range-bound approximately 80% of the time, making it a very viable strategy for most market conditions. The downside of range-bound trading, though, is twofold: Range-bound trading generally does not yield substantial gains on a per-trade basis. When the market breaks out of the range, it often will make big moves. As a result, traders using range-bound strategies can suffer overwhelmingly large losses when the market breaks out of the range. The chart below illustrates the concept of rangebound trading

Note how this pair repeatedly fails to cross beyond certain support and resistance levels, and simply fluctuates between an upper and lower band. Support and Resistance Zones Because technical analysis is not an exact science, it is sometimes useful to create support and resistance zones. Each pair has its own characteristics and the analysis should reflect the intricacies of the pair. Sometimes exact support and resistance levels are best and sometimes zones work better. Generally, the tighter the range, the more exact the level. If the trading range spans less than 2 months and the price range is relatively tight, then more exact support and resistance levels are probably best suited. If a trading range spans many months and the price range is relatively large, then it is probably best to use support and resistance zones. These are only meant as general guidelines and each trading range should be judged on its own merits. Support and Resistance in Momentum Markets Another way to use support and resistance is to trade outside of the range; in other words, to anticipate a breakout. This involves placing orders to buy above resistance and to sell below support. The rationale is that the market will gain momentum once it breaks out of the range, and thus by placing orders just below/above support/resistance, traders will be able to make big gains when the market moves out of the range. Momentum trading is a bit counter-intuitive, as it involves buying at a higher price and selling at a lower price. Below is a chart that illustrates the concept of momentum trading. Note how the pair accelerates once it breaks out of a narrow range:

Risk-Reward Ratios Is the estimated potential loss of a trade (risk) to the estimated potential gain (reward). Before entering into any trade, good traders first think about how much risk to take on any particular trade. We try to apply the 1:3 risk/ reward, for example if your average gain on winning trades is $1000 and you have consistently risked $300 per trade then your risk-reward ratio would be 3.3 to 1 (i.e. $1000 / $300). Since no one can win on every trade therefore your profits would cover your losses and at the end of the day you will be a winner.
H) Price Channels

Price Channels
Support and Resistance do not have to be horizontal lines, and often in a market that is moving higher or lower, trend lines effectively connect the high points or the low points to create a price channel that acts similarly to a horizontal range. Support and resistance levels function in the same manner in a trending market as in a rangebound one. However the line that is following the trend--support in an uptrend or resistance in a downtrend) should be considered by far the stronger of the two. Only when there is a trade with minimal risk involved should you enter a position based only on the resistance line above the price in an uptrend.

The same trend lines can be drawn in a bear market where the price is continuously moving lower.

There is no exact formula for drawing such lines. Some traders prefer to connect only the bodies of the candles and to exclude the high and low points outside of the open and close, but that is not a requirement. If the line does not look valid to you, chances are it is not relevant, because other traders are using the same charts.

I) Question of the Day

Question of the Day

1. Now that you have read about support and resistance, where would you place buy and sell orders relative to these levels when trading a breakout strategy? You can cite a specific chart if you would like to propose a specific support or resistance level and an order you would place. 2. Where would you place a stop-loss order once you initiate the position (relative to support and resistance)?

J) Assignment

ASSIGNMENT: Technical Analysis relies on the use of charts, so the purpose of this assignment is to build confidence and gain familiarity with charts. Open any of the charting packages available at http://www.dailyfx.com/charts/ and select any currency pair that you want. Display a daily chart and decide based on the chart whether you would use a trending strategy or a range-trading strategy for that currency pair. If there is a clear trend line or visible support and resistance , add that to your chart as well. If you are able, post a screen shot of the chart.

8 Day Intensive Course Lesson 2: Candlestick Patterns

A) Using Candlesticks to Identify Reversals
What are candlesticks? Candlestick charts convey information pertaining to price action, or the movement of a currency pairs price over the specified amount of time. Each candlestick contains four attributes: the opening price of the currency pair at the time the candle opened the closing price the high of the time frame the low of the time frame On a daily chart, each candle represents a 24 hour period; on an hourly chart each candle represents an hour, and so on. A visual analysis of a candlestick is as follows:

Key Definitions Body: The difference between the opening price and the closing price. This is the wide portion of the candle that is colored red or green. Wick or Shadow: The thin portion of the candle that represents the extreme high and low points for the time period represented by that candle. Key Concept: Candlesticks Signal Reversals

 Candlesticks can be used to identify trend reversals in the market So why are candlesticks so important in trading? Simply put, it is because they are the best gauge of what is going on in the market at the present time. Candlesticks give us insight into the emotions of the market participants. Although traders may come and go over time, human emotion remains constant. A certain series of events creates a candlestick pattern, and when we see that pattern we know exactly what has transpired. Ultimately, candlesticks can easily be used to identify potential reversals of trends in the market especially when used in conjunction with other indicators.

B) Key Candlestick Patterns

The following are key candlestick patterns to look for:

When these patterns appear in a chart, and when they appear at levels that coincide with other indicators such as Fibonacci retracement levels, or moving averages they create a potential trading opportunity.

C) Assignment Place a Trade

Identify a currency pair whose chart shows a candlestick formation noted in this lesson on its most recent daily candle. It is VERY IMPORTANT that the candle is closed; one of the most common errors that traders make is analyzing a candle that is still open. Determine whether this is a good entry point or not, based on how close support and resistance lines appear to the current price. If you do find a good trade, use an entry or market order to enter a position. If no good opportunities were available, tell us why you decided not to place a trade.

D) Question of the Day

This question is valid for all the technical indicators, not just for candlestick patterns, but how would you view a candlestick pattern on an hourly chart on a daily chart versus one on a 5 minute chart? Which would be more valid and why? How would it affect your target in terms of profit E) Question of the Day Question of the Day
This question is valid for all the technical indicators, not just for candlestick patterns, but how would you view a candlestick pattern on an hourly chart on a daily chart versus one on a 5 minute chart? Which would be more valid and why? How would it affect your target in terms of profit?

F) Quiz Quiz: Candlesticks Please test yourself on your knowledge learned from this lesson at the Quiz Center in the Candlesticks quiz. The quiz center is located at the following link. http://www.learncurrencytrading.com/main/

If you are unable to access the quiz center please email instructor@fxpowercourse.com

G) Animated Lesson: The following link(s) illustrate how the various indicators can be used to identify the best times to initiate a position, keep losses relatively small, and take advantage of trading situations that may occur over the course of a trading day. Please feel free to pause each animation or replay it as many times as you wish. In addition, please turn your speakers on to listen to the audio segment as well. http://www.learncurrencytrading.com...ingmarketsM.swf

8 Day Intensive Course Lesson 3

A) What are Fibonacci Retracements? Fibonacci Retracements What are Fibonacci retracements? Levels at which the market is expected to retrace to after a strong trend. Based on mathematical numbers that repeat themselves in all walks of life, Fibonacci retracements attempt to measure the likely points that a currency pair will retrace, or pull back to within a range. The key numbers in FX trading are 38.2%, 50%, and 61.8%. Consider the following example to see how Fibonacci retracements work: Suppose an asset is on an uptrend, going from 0 and 1000. After the asset reaches 1,000, how far will it retrace meaning how far will it fall before resuming its initial uptrend? We can do this by using the Fibonacci retracement numbers to gauge how deep of a pullback we could expect after the top boundary is reached. So, mathematically, it works like this: The 38.2% line. Calculate 38.2% of the size of the significant price move. The size of the significant price move in this case is (1,000) minus the lower boundary (0). In this case, the size of the significant price move is 1,000 pips. .382 x 1000 = 382 pips. It is expected that the asset will retrace 382 points from its peak. Assuming the asset is going up from 0 to 1,000, it would retrace 382 pips from 1,000. 1,000 382 = 618. Accordingly, this is a key level to look out for; you may want to buy here (at 618), as it is expected the upward trend will resume after reaching this retracement level. The 50.0% line. Same situation; 50% of the significant price move (1,000 pips) is 500. Take that off from top (1,000) since it is an the upward trend. 1,000 500 = 500. Look for the upward trend to resume at that point. The 61.8% line. 61.8% of the significant price move is 618. 1,000 618 = 382. If the asset retraces to this point, it is viewed as an opportunity to buy. If the asset were trending lower meaning it had gone from 1,000 to 0 then you would use the Fibonacci numbers to calculate the retracement regarding how far the price may rise before resuming the downtrend again. You would calculate the Fibonacci retracements in the same manner, except you would draw from the high point of the

significant price move to the low point of the move. Parameters: 38.2%, 50.0%, and 61.8% are the most common Fibonacci Levels. The 38.2% level is considered the least significant of the three major Fibonacci levels. The larger the percentage line (i.e. 61.8%) the greater the likelihood that the price will find support. Please keep in mind that other retracement levels exist in Fibonacci Studies that are not widely watched by the market. These levels include 21.4% and 78.6% as well as 127.2% and 161.8% extensions. Most charting packages do not even reference these levels and most traders would argue that if the market retraces 100% of a previous move, the original trend is no longer valid. Other Fibonacci studies called fans and arcs are quite mathematically complicated and are similarly ignored by most traders. Key Concept: Look for Confirmation Traders should enter when confirmation - for example key candlestick patterns emerge at Fibonacci levels. Traders can also seek confirmation from a variety of other indicators, as we will see as the course continues. Attached Images

B) How to Draw Fibonacci Lines Fibonacci Retracements: How to Draw Them

Drawing Fibonacci lines is easy. It can be broken down into three easy steps: 1. Identify the bottom and top of the overall trend. The bottom is referred to as support, and the top is referred to as resistance. While they are subjective, support and resistance levels can easily be determined simply by looking at a chart.

2. Using a charting package you are comfortable with, draw Fibonacci lines from the support level to the resistance level. The three lines should appear: one at 38.2% of the difference from the top and the bottom; one at 50%; and another at 61.8%. These are the key Fibonacci levels around which you should look for potential opportunities to enter trades.

3. After that, simply look for price action to confirm an opportunity to enter a trade.

C) Fibonacci Retracements: Historical Trades Fibonacci Retracements: Historical Trades

Below are two examples of how Fibonacci retracements, when used in conjunction with candlestick patterns, can be useful indicators for suggesting when a trend will reverse itself. Note how Fibonacci retracements work in both bullish (upwards trending) and bearish (downwards trending) markets.

A Look at a Poor Fibonacci Trade In order to learn how best to use Fibonacci retracements when trading the FX market, it is worth examining examples of traders often use them poorly. The following example shows how being over eager can cause a trader to enter the market without justification.

In the chart below, see that price comes very close to touching the fib level (by 13 pips) but does not quite break it. While many traders may take that as a positive sign (they may rationalize that the level was so strong that traders did not wait for it to touch the fib level), you ideally want to see the level being breached. The reason for it is because breakout traders may come into the market, thinking that price will go lower, maybe even down to a lower fib level. When the market reverses and starts to go back into the trend, these short traders will now have to eventually cover their trades at a loss. Short traders who need to cover their positions will add to the buying pressure, thereby increasing the probability of your trade going in your favor.

D) Assignment
ASSIGNMENT: Using a charting application of your choice, draw Fibonacci retracement lines on charts for the various currency pairs accessible through the trading station. Then, upon analyzing the charts, look for trading opportunities based on Fibonacci retracements. Reply to this thread telling us what trade you placed and why you placed it. In this case, the trade could be an entry order that is waiting for the price to retrace to a given Fib level. Feel free to upload an image of the chart you were looking at as well. If possible, try to focus on a longer time frame, such as a daily chart. You may use current or past situations.

E) Question of the Day

Question of the Day

Many traders feel that Fibonacci levels are significant only because the levels are highly publicized and other traders are aware of them. This self-fulfilling prophecy has the effect of making these levels significant because so many traders regard them as important levels. If this is true, what is the danger of using Fib. retracement levels for a small move that occurs on an hourly chart or an even shorter time frame?

F) Quiz Quiz: Fibonacci

Please test yourself on your knowledge learned from this lesson. Go to the Quiz Center and take the Fibonacci Quiz. The Quiz Center is located at the following link. http://www.learncurrencytrading.com/main

G) Using Moving Averages Using Moving Averages

What is a moving average? Moving averages simply measure the average price or exchange rate of a currency pair over a specified time frame. For example, if we take the closing prices of the last 10 days, add them together and divide the result by 10, we have created a 10-day simple moving average (SMA). There are also exponential moving averages (EMAs). They work the same as a simple moving average, except they place greater weight on the more recent closing prices. The mathematics of an exponential moving average are complex, but fortunately most charting packages calculate them automatically and instantaneously. Parameters. The most commonly used time frames for moving averages are 10, 20, 50, and 200 periods on a daily chart. As always, the longer the time frame, the more reliable the study. However shorter term moving averages will react more quickly to the market's movements and will provide earlier trading signals.

How to Use Moving Averages in Trading Enter when a strong trend pulls back to a moving average line Enter on a moving average crossover Gauge overall trend. Moving averages display a smoothed out line of the overall trend. The longer the term of the moving average, the smoother the line will be. In order to gauge the strength of a trend in a market, plot the 10, 20, 50 and 200 day SMAs. In an uptrend, the shorter term averages should be above the longer term ones, and the current price should be above the 10 day SMA. A traders bias in this case should be to the upside, looking for opportunities to buy when the price moves lower rather than taking a short position. Confirmation of price action. As always, traders should look at candlestick patterns and other indicators to see what is really going on in the market at the time. The chart above points out the Bullish Engulfing pattern that occurs just as the pair bounces off the 20 day EMA. Hitting the 20 day EMA, in conjunction with the candlestick pattern, suggests a bullish trend. Traders should enter once the Bullish Engulfing candle is cleared. Crossovers. When a shorter moving average crosses a longer one (i.e. if the 20 day EMA crossed below the 200 day EMA), that is viewed by many as an indication that the pair will move in the direction of the shorter MA (so, in the aforementioned example, it would move down). Historically, moving average crossovers have not been accurate trade indicators, but they do offer insight into the markets psychology. Accordingly, should the pair move in the opposite direction of the shorter EMA and thus cross it, this should be viewed as an opportunity to enter a position.

H) Moving Averages: Historical Moving Averages: Historical Trades The charts (top) below show examples of how moving averages, when confirmed by price action, can signal trading opportunities. In second chart we see moving averages applied to the USD/CHF currency pair. Notice the Hammer candlestick pattern that penetrates the 200 moving average (Black Line). This reversal pattern and the fact that it bounces off of the 200 moving average shows that the downside momentum is lost, and signals that a rally may follow. Here we see a classic candlestick pattern, as only the long wicks breach below the longterm moving average (200-SMA). As it pierces the 200-day SMA on this daily chart for the USD/CHF, we see a subsequent rally of the pair. Attached Images

I) Assignment-Place a Trade
ASSIGNMENT: Create moving averages on chart of a currency pair and place a trade based on the moving averages. Reply to this thread telling us what trade you placed and why you placed it. Feel free to upload an image of the chart to this thread. If possible, try to focus on a longer time frame, such as a daily chart. You may use current or past situations.

J) Question of the Day Question of the Day

Yesterday we presented the concept that Fibonacci retracement levels are valuable only because a large number of traders are aware of them, and they become a selffulfilling prophecy. The same concept can be raised for Moving Averages. Generally the 200, 100, 50, 20, and 10 day moving averages are the most commonly used, but that does not necesarily mean that other moving averages are not valid. In fact, some indicators

that we will discuss in future lessons are created from moving averages. You can also plot moving averages on shorter term charts. In your opinion--and there is no right answer for this one--do you think a moving average has value as an indicator if it is not one of the common ones? For an example using a completely random number, do you think the 15 day MA could be useful.

K) Animated Lesson: The following link(s) illustrate how the various indicators can be used to identify the best times to initiate a position, keep losses relatively small, and take advantage of trading situations that may occur over the course of a trading day. Please feel free to pause each animation or replay it as many times as you wish. In addition, please turn your speakers on to listen to the audio segment as well.

http://www.learncurrencytrading.com...hFibonacciM.swf http://www.learncurrencytrading.com...averagesIIM.swf

8 Day Intensive Course Lesson 4

Oscillators (RSI & MACD) A) Relative Strength Index Relative Strength Index (RSI)
What is RSI? RSI is an indicator that falls under the category of oscillators, and it is an extremely simple indicator to use. RSI works well in range-bound markets, but it has limited value in trending or breakout markets. RSI was created by Welles Wilder, who also created ATR, Parabolic SAR and other well-known indicators. The Concept of Oscillators Oscillators are chart studies that are designed to show the strength of the current price in relation to the recent price action. As such, they display the short term momentum of the market, giving signals that the bias of the market is shifting before the price actually changes directions. The principle upon which oscillators are based is that of regression to a mean. Essentially, a large part of a statistical sample should be within a certain number of standard deviations from the mean of the sample, and if the price strays too far from this center, then it will likely revert back to the rest of the sample. In terms of trading, the price should not rise or fall too far in too short a time. Oscillators are not usually displayed on the same graph as the price itself, but are most often placed at the bottom of the chart to show that the fluctuations do not occur on the same scale as the price movement. What RSI Does Like all oscillators, RSI offer indications of when a currency pair is overbought/oversold. RSI essentially calculates the strength of all upward candles (green) against the strength of all downward candles (red) over the course of the specified time frame. Parameters When pulling up RSI on a chart, the charting application will prompt you to select how many periods you would like to include in your study. The most commonly number used is 14, and most traders do not alter this default setting. Some traders do use 9 or 25 period RSI's instead of the standard 14. Of course, increasing the number of inputs will decrease the number of signals and increase the reliability of these signals. Decreasing the number of inputs would have the opposite effect. How to Use RSI in Trading Can be used to determine overbought/oversold levels

Used to spot divergences, which indicate potential weaknesses in trends

Overbought/Oversold If RSI is above 70, the pair is considered to be overbought. Some traders enter short at this point, but this can be dangerous as the price may still be rising. Enter short when the RSI crosses back under 70, as this may indicate that the momentum has turned. If the RSI is below 30, the pair is considered to be oversold; enter when RSI crosses back above 30. Like most oscillators, RSI works best when the market is range-bound in other words, when the market is expected to simply gravitate between an upper and lower level. In trending or momentum-driven markets, using the overbought/oversold levels offered by RSI is generally of limited value.

Divergence. RSI can also be used to signal when a trend is weakening. If a currency pair makes new highs in its price but RSI does not meaning there is divergence between the price movement and RSI it may signal that the trend is not strong, and that a reversal may be imminent. If candlestick patterns confirm, a trader can use this as an opportunity to enter a position.

B) RSI: Historical Trades RSI: Historical Trades

Overbought/Oversold The chart below offers an example of how RSI can be used to determine if a currency pair is overbought/oversold. Readings above 70 give an overbought indication, and readings below 30 give an oversold indication.

Divergence The chart below shows an example of how RSI divergence could have been utilized in trading.

Assuming a short position near 1.8900 with a stop at 1.9150, a limit near 1.8400 would have been hit before the price reached the support line. This would realistically have been a good place to cover (exit the trade).

C) Assignment - Place a Trade C) Assignment - Place a Trade

ASSIGNMENT: Using the methods described in this lesson, place a trade on your demo account based on the RSI indicator. Reply to this thread telling us about your trade and why you placed it. If you'd like, feel free to upload an image of the chart you were looking at to help convey to the class why you placed the trade. Also, feel free to ask the instructors any questions that you may have regarding usage of RSI and other indicators that have previously been covered. If possible, try to focus on a longer time frame, such as a daily chart. You may use current or past situations.

D) Question of the Day Question of the Day

RSI uses the levels of 30 and 70 to indicate that the market may be about to reverse, but it is an imprecise indicator. If RSI is above 70, it shows that the market is overbought and may sell off, however if you sell when RSI is above 70 you take

the risk of trading against a strong trend. Markets can always continue to become stronger or weaker, regardless of the fact that our indicators say they are overbought or oversold. What other indicators that we have already covered might you use along with RSI to help signal a reversal of a strong trend?

E) Quiz Quiz: RSI

Go to the Quiz Center and take the RSI quiz. http://www.learncurrencytrading.com/main

F) Trading with MACD H) Trading with MACD Trading With MACD (often pronounced Mac-D)
What is MACD? MACD is a commonly used technical indicator derived from exponential moving averages that can be used in both momentum and rangebound markets. Like RSI it is an oscillator plotted at the bottom of the chart, and it shows the momentum of the market relative to its recent history. What it does: Can be used as an oscillator (indication that the asset will revert back to its mean valuation) OR a momentum indicator (indication that the trend is strong and will continue). Parameters: The MACD line is the difference between the 12 and 26 day EMA. The signal line is the 9 day EMA of the MACD. Visually, the MACD consists of three elements: MACD line. This is simply the difference between the 12 and 26 day EMA. It is a line plotted on the chart. Signal line. The signal line is the 9 day EMA of the MACD line. Like the MACD, it is a line plotted on the bottom of the chart. Histogram. The MACD histogram is simply a bar chart located at the bottom of the chart, where the MACD and signal lines are plotted. The histogram is simply a visual representation of the difference between the MACD and the signal line. The zero point of the histogram meaning the point where the bars cross above and below is referred to as the centerline.

How to use it: Trade Signal. When the MACD crosses the signal line, a trade signal is issued. Traders can enter positions following the direction of the MACD. Overbought/Oversold. No specific numbers indicate whether it is overbought or oversold, but if it is relatively far from its mean compared to its recent history, this may suggest that it is due for a reversion. Divergence. When the pair makes new highs/lows but the MACD does not, this suggests divergence, and that the trend may in fact be weakening with a reversal in store. Consider the chart below for some examples as to how the MACD indicator can be used.

G) MACD: Historical Trades MACD: Historical Trades

Using the MACD Crossover The MACD crossover is a straight-forward indicator that provides precise timing for entry points. The one drawback of it is that it is sometimes too slow to provide a signal. Sometimes it signals an entry several candles after the ideal entry point. The price has already moved far enough that the trade no longer has a favorable risk:reward ratio. Always consider support/resistance when entering a trade regardless of the crossovers.

This second chart shows that while MACD divergence can be an effective signal, like crossovers it should not be considered in a vacuum. This divergence on the daily chart lasted over a year before the pair finally broke support and fell lower.

H) Assignment-Place a Trade
ASSIGNMENT: Using MACD crossovers, place a trade based on the chart or determine a possible entry point based on divergence combined with other indicators. Reply to this thread telling us about your trade and why you placed it. If you'd like, feel free to upload an image of the chart you were looking at to help convey to the class why you placed the trade. If possible, try to focus on a longer time frame, such as a daily chart. You may use current or past situations.

I) Question of the Day Question of the Day

The MACD provides a large number of signals based on the crossovers of the signal line, the MACD and the flat line. Describe what you feel would be the ideal situation for a MACD signal. Of the different signals available--crossover, divergence, MACD crosses the center line--what do you think is the ideal signal? If you have experience with the MACD, you can relate that as well.

J) Quiz

Quiz: MACD
Please test yourself on your knowledge learned from this lesson by taking the MACD quiz on the quiz center at the following link. http://www.learncurrencytrading.com/main

K) Animated Lesson: The following link(s) illustrate how the various indicators can be used to identify the best times to initiate a position, keep losses relatively small, and take advantage of trading situations that may occur over the course of a trading day. Please feel free to pause each animation or replay it as many times as you wish. In addition, please turn your speakers on to listen to the audio segment as well.

http://www.learncurrencytrading.com...rsilessonIM.swf http://www.learncurrencytrading.com...eimg/rsiIIM.swf http://www.learncurrencytrading.com...img/rsiIIIM.swf

http://www.learncurrencytrading.com...MACDlessonM.swf http://www.learncurrencytrading.com...acdlesson2M.swf

8 Day Intensive Course Lesson 5 Stochastics & Bollinger Bands

A)Trading with Stochastic Trading With Stochastic What is stochastic? Stochastic is an oscillator that works well in range-bound markets.[/i] What it does. Stochastic is an oscillator meaning it offers a measurement of the deviance of currency pairs rate (price) from its normal levels. Like all oscillators, stochastic offers indications of when a currency pair is overbought/oversold. Accordingly, it works well in markets that are not trending, but rather just fluctuating back and forth between an upper level (resistance) and a lower level (support). Parameters. Stochastic typically has three parameters that users must specify: %K, %D, and number of periods. Here is one commonly used setting for those parameters: 5 for %K 5 for %D 3 for number of periods %K is the fast moving line; it measures the relative strength of the asset, like RSI. %D is a moving average of %K, and hence is a much slower line. Different Inputs. The fast stochastic only requires two inputs, which are normally 5 and 5. The slow stochastic requires a third input, which is the number of periods used in taking a moving average of the fast %D line. Unlike MACD (which commonly uses 12, 26, and 9) or RSI (which uses 14), Slow stochastic has a number of popular settings that can be used. 5, 3, and 8 is one commonly used setting. 15, 3, 3 is used by conservative traders who are interested in receiving less signals, while 8, 5, 5 and 5, 5, 3 are more aggressive settings for traders who are looking for fast signals. The tradeoff between accuracy and speed is something every trader must consider when choosing the inputs they will use in stochastics. How to Use Stochastic in Currency Trading Can be used to determine overbought/oversold levels, like RSI Can be used in a crossover fashion like moving averages Used to spot divergences, which indicate potential weaknesses in trends Crossover. When %K crosses %D (when fast crosses slow), it can be interpreted as a

trade opportunity. Traders can enter positions following the direction of %K. Overbought/Oversold. Look for both %K and %D to be above/below the 20/80 levels. If they are both above 80, it may be a good opportunity to sell, as the asset is overbought and expected to return back to a normal level. Alternatively, if it is below 20, the asset is oversold and hence it may be a prime buying opportunity, as a range-bound market would imply that the currency pair will head back to a more normal asset price.

Divergence. Stochastic can also be used to determine when NOT to enter a position. For instance, if a trend looks strong, traders can look to stochastic to see if there is any divergence between the movement of the asset and the stochastic lines. If, for example, a currency pair is headed upwards sharply and is making new highs, but the stochastic is not making new highs or even heading downwards, then this suggests that the trend is weak, and the prices may come back down. Conservative traders can use look for divergence as a caution not to enter a trade based on momentum, while more aggressive traders can use divergence as a signal to enter a position before the trend actually starts retracing.

Slow versus Fast Stochastic. There are two types of stochastic, slow and fast. Both display the same two lines, and both can be interpreted in the same manner for crossovers, overbought/oversold conditions, and divergence. The difference is that the %D line of the slow stochastic is smoothed out by taking a moving average of the %D line of the fast stochastic. This makes the slow stochastic more accurate in the trade signals it provides but somewhat slower to react to the changing market price.

B) Stochastic: Historical Trades Stochastic: Historical Trades

Below are two examples of how stochastic could have been used to place a profitable trade. Note that the first chart uses crossovers for signals while the second chart uses divergence. Since divergence is not a precise indicator in terms of timing, the double top can be used for an entry point.

C) Stochastic: Question of the Day Stochastic signals a buy or sell when the two lines cross above 80 or below 20. How would you regard a crossover that occurs within this channel? Do you think it would be important enough to base a trade on? Keep in mind what the indicator is showing here when the fast crosses the slow line, and feel free to look at stochastic on as many charts as necessary before deciding.

D) Stochastic: Quiz Quiz: Stochastic Oscillator Please test yourself on your knowledge learned from this lesson. Complete the Stochastic Quiz at the Quiz Center. http://www.learncurrencytrading.com/quizcenter/

E) Stochastic: Animated Lesson The following link(s) illustrate how the various indicators can be used to identify the best times to initiate a position, keep losses relatively small, and take advantage of trading situations that may occur over the course of a trading day. Please feel free to pause each animation or replay it as many times as you wish. In addition, please turn your speakers on to listen to the audio segment as well.

Lesson 10: Stochastic: http://www.learncurrencytrading.com...ochasticIIM.swf F) Bollinger Bands Bollinger Bands

What are Bollinger Bands? Excellent range-bound indicator that measures standard deviation from the moving average Developed by John Bollinger, Bollinger Bands consist of three lines: A moving average (Often omitted in most charting packages) A upper band two standard deviations above the moving average A lower band two standard deviations below the moving average Bollinger bands are an excellent range-bound indicator meaning they work best when the market is not strongly trending, but rather fluctuating between a high barrier (resistance) and a lower barrier (support). Bollinger bands operate under the logic that a currency pairs price is most likely to gravitate towards its average, and hence when it strays too far such as two standard deviations away it is due to retrace back to its moving average. Parameters: Standard deviation of 2; moving average of 20 (usually omitted). How it can be used: Range-bound market. In range-bound markets, trading with Bollinger Bands is fairly simple: it essentially involves selling at the top band and buying at the bottom one. Note how the bands are nearly horizontal when the market is in an established range. This is when reversals at the bands are more effective.

Breakouts on Volatility. When the Bollinger bands contract (meaning grow narrower), this suggests that volatility is contracting, and that the pair is trading in a tighter range. Typically, volatility contracts right before the market makes a big breakout. Accordingly, contracting volatility symbolized by tight Bollinger Bands should be a sign to traders that the market may be ready to make a big break.

The chart above shows the bands have contracted to a very narrow range, preceding a breakout. Once the bands start to expand outwards, this is a signal to enter in the direction that the price is moving. So, as the chart shows, if the price is at the top of the bands and the bands start to widen, it is a signal to go long.

G) Bollinger Bands: Historical Trades Bollinger Bands: Historical Trades

Below are two charts showing how traders can use Bollinger Bands to effectively participate in range-bound markets. Note the importance of candlesticks in validating the reversal of the trend.

As the candlestick hits the lower Bollinger Band on this daily GBP/USD chart, we immediately see a rally back to the upper band. We also see a drop to the lower band as an Evening Star formation occurs at the upper band.

The Morning Star at the lower band of this USD/CHF chart precedes a reversal in price movement back to the upper band. Later, as the price hits the upper band, an Evening Star and Reverse Hammer precede a move back to the lower band.

H) Bollinger Bands Assignment: Place a Trade ASSIGNMENT: Place a trade based on the Bollinger bands indicator. Reply to this thread telling us about your trade and why you placed it. If you'd like, feel free to upload an image of the chart you were looking at to help convey to the class why you placed the trade.

I) Bollinger Bands: Quiz Quiz: Bollinger Bands Please test yourself on your knowledge learned from this lesson. Go to the Quiz Center and take the Bollinger Bands Quiz. http://www.learncurrencytrading.com/quizcenter/

J) Bollinger Bands: Animated Lesson The following link(s) illustrate how the various indicators can be used to identify the best times to initiate a position, keep losses relatively small, and take advantage of trading situations that may occur over the course of a trading day. Please feel free to pause each animation or replay it as many times as you wish. In addition, please turn your speakers on to listen to the audio segment as well.

Lesson 8: Bollinger Bands: http://www.learncurrencytrading.com...andslessonM.swf

8 Day Intensive Course Lesson 6

Fundamental Analysis -- Who and What Moves the Market A) FX Market Structure

FX Market Structure
The FX market is an over-the-counter market with no centralized exchange. Traders have a choice between firms that offer trade-clearing services. Unlike many major equities and futures markets, the structure of the FX market is highly decentralized. This means that there is no central location where trades occur. The New York Stock Exchange, for example, is a totally centralized exchange. All orders pertaining to the purchase or sale of a stock listed on the NYSE are routed to the same dealer and pass through the hands of a single clearing firm. This structure requires buyers and sellers to meet at the NYSE in order to trade a stock that is listed on this exchange. It is for this reason that there is one universally quoted price for a stock at any given time. In the FX market there are multiple dealers whose business is to unite buyers and sellers. Each dealer has the ability and the authority to execute trades independently of each other. This structure is inherently competitive as traders are faced with a choice between a variety of firms with an equal ability to execute their trades. The firm that offers the best services and execution will capitalize on this market efficiency by attracting the most traders. In the equities markets, the execution of trades is monopolized and there is no incentive for a clearing firm to offer competitive prices, to innovate, or to improve the quality of their service. DISCUSSION The FX market has clear advantages over the equities markets in terms of efficiencies created by decentralization and competition. How does the nature of this market structure effect a trader's profitability?

B) Key Market Participants

FX Market Participants
While the foreign exchange market was traditionally exclusive to all but a select group of large banks, advances in technology and reductions to capital flow barriers have brought in a variety of new participants. Because all of these participants affect the supply of and demand for currencies, it is important to understand the role each plays in the market. Commercial and Investment Banks Commercial and Investment banks make up the "Interbank" market and trade on electronic brokerage systems (EBS).

 These banks trade among themselves via strong credit relationships, and account for the largest portion of FX trading. These banks trade on a proprietary basis (they trade for themselves) and through customer flow (they fill orders for clients outside of the Interbank market). The Interbank market consists of the world's largest Commercial and Investment banks and caters to the majority of commercial turnover as well as enormous amounts of speculative day-trading volume. These banks will trade among themselves via credit relationships they have established with one another as part of a system of balancing accounts. Large Corporations, Hedge Funds, Central Banks are all customers on the Interbank market. Aside from trading exclusively amongst themselves, these banks also trade with large corporations, hedge funds, central banks, or specialized dealers that cater to smaller retail traders. For example, when a large international corporation based in Japan needs to pay its employees in the United States, they must buy USD with JPY. To buy USD, this corporation will go to a bank to make the transaction. This trading amounts to billions of dollars daily, or about of daily FX volume. Due to their size and the large volume that they trade, these banks have unique access to: Important information on direction and size of capital flows. This means they may be able to make reasonable short-term predictions on FX movements based on the large positions they hold and trade. Significant capital power they might use to defend their proprietary positions at significant technical levels. This is often what creates support and resistance. Large research departments that offer fundamental and technical analysis to prop traders. All of these factors make it requisite for a good trader to take advantage of all the resources these banks provide. Possible trading opportunities as well as information on the particular interests of banks is disclosed in much of the research these banks create. Many of these reports can be accessed at www.dailyfx.com Central banks Central banks have access to huge capital reserves. Central banks have specific economic goals. Central banks regulate money supply and interest rates. Central banks are large players with access to significant capital reserves. They enter the FX market primarily in a supervisory capacity in order to stabilize money supply and interest rates. Central banks closely monitor economic activity, and have many options available to them to regulate their economies. Many of these options relate to specific policies that greatly impact the FX market. Central banks set the overnight lending rates to change the rate of interest paid on their domestic currency. They buy and sell government securities to increase or reduce the supply of

money. They buy and sell their domestic currency in the open market to influence exchange rates. Knowing the policy of a central bank and its opinion of the domestic economy will allow a trader to anticipate what actions the central bank is most likely to take in future policy meetings. Corporations Corporations primarily use FX to hedge against currency depreciation. Corporations also buy and sell currencies in order to meet payroll for international offices. Foreign exchange plays an increasingly important role in the daily business of corporations as globalization forces them to make and receive payments in foreign currencies. When international transactions of goods are made, a transaction of currency is also necessary. Whether it is to pay employees abroad or to pay for products coming from a foreign nation, corporations must exchange their local currency for the domestic currency of the nation they are trading with. When a corporation agrees to buy or sell goods to a client in foreign nation at a future date, it runs the risk of its local currency depreciating in the meantime. If a corporation believes that its local currency is expected to depreciate, and as a result the outstanding position is at risk, it would most likely enter the FX market and buy the domestic currency of the country with which it is trading. Global Managed Funds Many profit-seeking managed funds invest in foreign financial instruments. When they purchase and sell these instruments, an FX conversion is always necessary. Global fund managers (large mutual, pension, and arbitrage funds) invest in foreign securities and other foreign financial instruments. These investments can have substantial impacts on spot price movements because these firms constantly rebalance and adjust their international equity and fixed income portfolios. These portfolio decisions can be influential because they often involve sizable capital transactions. Major changes in equity or bond markets of respective countries dictate the roles of Global Managed Funds in the FX market. When equity markets are performing well they will attract substantial global capital, which will drive a domestic currency higher. To purchase stocks or bonds in a foreign nation, managed funds must exchange their local currency for the domestic currency of the country in which they are purchasing financial instruments. Many of these funds implement currency-hedging strategies. When they wish to hedge existing investments so they don't incur the risks of depreciating currencies, they can also generate significant selling flows.

Under the umbrella of Global Managed Funds are pure FX funds (Global Macro Funds). FX Funds trade in FX for speculative purposes. Many large funds tend to take large carry trade positions exploiting global interest rate differentials (see next lesson). They also watch for misguided economic policy and over/undervalued currencies to take large spot positions (assuming a natural return to equilibrium). Ultimately, these funds gauge global events and take a longer-term view on which currencies will strengthen/weaken in the next six to eight months. Fund participation in the FX market has risen sharply in recent years and its total trading market share is now around 20%. While relatively small compared to other market participants, they can have a profound effect on the currency spot movements when acting together. Individuals With the advent of online currency trading, retail investors now have total access to the spot FX market. Retail clients trade in FX for both speculative and hedging purposes. Retail participation is growing rapidly and is having a tremedous impact on the foreign exchange market. Retail spot currency trading is the new frontier of the trading around the world. Up until 1996, foreign exchange trading was only available to banks, institutions and extremely high net-worth individuals. Prior to online retail FX dealers, individuals could not realistically participate in the foreign exchange market from a speculative standpoint. The Interbank market operated as a tight circle and it managed transactions with Corporations and Managed Funds to accommodate its own needs. Online foreign exchange trading offers retail clients access to trading functionalities similar to those of the Interbank market. Spreads are slightly wider - 5 pips on most currency pairs as opposed to the Interbank standard of 3 - but execution is unsurpassed; additionally, many of these firms maintain fixed spreads, as opposed to fluctuating spreads in the interbank market. Now retail clients and multinational institutions can participate in the FX market on a highly equitable playing field. Question While there are numerous market participants, each one plays a unique role in the market. Each role brings with it a varying degree of influence on the market. One of the common roles that influences exchange rates is that of speculation. Of the market participants discussed above, which ones do not speculate on exchange rates? What is it about the nature and purpose of these participants that would prevent them from speculating on exchange rates?

C) Intervention- The Bank of Japan

Intervention: The Bank of Japan in Action

What is intervention?

An attempt by a central bank to intentionally move the exchange rate.

Essentially, interventions are attempts by central banks -- banks that govern the value of respective currencies -- to manipulate the currency's value. Interventions serve as a prime example of how key market participants -- like central banks -need to be watched by all traders, as their actions can substantially affect exchange rate movement. The most prolific example of interventions can be seen in the actions of the Bank of Japan. Japan's economy is dependent upon exports -- meaning its economy relies on selling its products internationally. Because of this, Japan's economy benefits from a weaker yen, as a lowly valued yen easily allows other nations to purchase Japanese products (and hence facilitates exports). Since Japan's economy benefits from a weak yen, the central bank has a vested interest in ensuring that the value of the yen remains low. As a result, the Bank of Japan has intervened on numerous occassions in the currency markets, selling literally trillions of yen to drive the exchange rate down. For savvy traders, this presents an interesting and lucrative opportunity. Let's take a closer look at how the Bank of Japan has recently intervened in the FX markets to drive the exchange rates downward. Bank of Japan Attempts to Put a Floor Under USDJPY The Bank of Japan (BoJ) intervened numerous times throughout 2003, in an attempt to ensure that the USDJPY rate would fall as little as possible. The pair had been falling rapidly, as U.S. dollar weakness coupled with yen strength led to a sliding USDJPY exchange rate. As a result, emergency meetings were held at all major export firms to assess their plans for handling the rapid appreciation in the JPY. By the end of the year, the Bank of Japan would spend over Y13 trillion (or $115bn) to sell the yen in the FX market to prevent its value from rising excessively. The Bank of Japan started its new intervention policy in 2003 by intervening between the 115 and 116 levels. While their attempts at keeping the USDJPY above 115 were successful for some time, market forces eventually won out, and the pair made a sustained break through the 115 level in September of 2003. With the "invisible floor" of 115 cleared, traders felt comfortable that the Bank of Japan could not maintain a weak yen, and hence entered the market as buyers of yen and sellers of USD (or sellers of the USDJPY pair). The result was a sharp fall: the USDJPY pair fell about 600 pips in less than two weeks. Prior to the sustained break below 115, participants experienced a few months of trading where they could legitimately expect the BoJ to intervene in the market around that level. As a result, many traders purchased USDJPY around the 115 level -- and reaped profits in doing so.

More recently, in early 2004 the Bank of Japan intervened in the currency market to keep the exchange rate of USDJPY above 105.00. This massive intervention pushed the USDJPY from just above 105.00 to above 112.00, a 700 pip gain in just a few weeks. The intervention coincided with the end of the Japanese fiscal year. The Bank of Japan drew a "line in the sand" just above 105.00, and intervened on a masssive scale.

Risks to Intervention-Based Trades Clearly, intervention, or even failed interventions, can have a big impact on the FX market -- and hence should be something that traders keep an eye out for. Before seeing intervention as a quick way to easily profit, though, there are certain factors that traders should bear in mind before placing trades focusing on interventions. Timing The biggest risk of intervention-based trades is the timing of when intervention will occur. In the past year, the BoJ has intervened between 116-118. Although this level is known, 200 pips can be significant risk. Also, the exact timing is always unknown, so traders will typically need to hold their position for weeks -- with potentially large floating losses -- as they wait for intervention. Therefore unless traders have sufficient margin in their accounts to sustain losses, they could easily get a margin call prior to the BoJ stepping into market. Sustainability An additional risk is that, as we've seen, the BOJ cannot sustain intervention indefinitely. At some point, the artificial level the intervention is meant to uphold will have to fall. When exactly this will happen, though, is anyone's guess. A trader who had expected the intervention level to hold strong on September 17 of 2003, and thus had bought USDJPY, clearly would have experienced the downside of unsustainable interventions; the market fell strongly in the opposite direction, falling through the level and creating enormous potential losses for any trader who was counting on an intervention. Key Points for Traders There is no denying that intervention-based trades worked very well in 2003, as the

Bank of Japan has spent over Y13trln to aggressively combat Yen strength. However, as we have seen, traders cannot take their presence for granted and assume that interventions will last indefinitely, nor can they know precisely when they will occur. Ultimately, traders will have to follow the news to help them determine whether or not an intervention will occur, and need to react accordingly based on their analysis. DISCUSSION: Is it too risky to make trading decisions based on potential interventions? Or does the potential reward justify the risk? Share your thoughts on the topic with the class by replying to this thread.

D) Bank of Japan Intervention: How Traders Reacted On May 19, 2003, USD/JPY reached a low of 115.07. The Bank of Japan, knowing that there was a "head and shoulders" formation with a neckline at 115, intervened to support the exchange rate. The BoJ knew that 115 was a signficant level, and that a break of that level may have induced traders to sell USD/JPY. Traders, using both the fundamental knowledge and technical levels, may have had a very profitable trade.

The head and shoulders formation is a chart pattern that includes a peak that returns to support (the shoulder), followed by a higher peak, which again returns to support (the head). The second shoulder occurs when the exchange rate fails to reach the peak of the head, and instead reaches the approximate peak of the left shoulder before falling once again to support. The neckline is established as the common level of support, the low point reached by the exchange rate after the creation of each part of the formation. Once the price breaks below the neckline on the right side of the second shoulder, this is a signal to sell. Below, the head and shoulders pattern is outlined. The trading signal in such a pattern is to sell when the price breaks below the neckline, outlined in green.

E) Market Participants in Action: How Speculators Beat the Bank of England 1992: Bank of England Fails to Support GBP
The purpose of this article is to show one of the most famous examples of central bank intervention in an attempt to keep an exchange rate at a fixed level, and subsequent failure to do so. The Bank of England in September 1992 used its reserves to support the British Pound in an effort to stay within the confines of the European Exchange Rate Mechanism, but it ultimately ran out of funds to do so and could not oppose speculators indefinitely.

The European exchange rate mechanism (ERM) was introduced by the European Community in early 1979. It was a major part of the European Monetary System (EMS), which aimed to reduce exchange-rate variability and achieve monetary stability in Europe before the introduction of the Euro as a single common currency. The ERM was based on fixed currency exchange rates with a small margin of just over 2% allowed for the rates to fluctuate in either direction. Individual currencies were compared against a weighted basket of the other currencies. The ERM did not allow exchange rates to fluctuate outside of these margins and because of this the system was inflexible. If a country wanted to stay in the ERM and stay on course to becoming part of the common European currency, its individual currency had to remain within the inflexible threshholds designated by the ERM. In order to remain within the limits established for the British pound, the Bank of England was forced to use its reserves to buy the GBP against the German Mark (DEM), the other major currency within the ERM. As rumors circulated that the BoE would not be able to maintain the required level indefinitely, speculation against the GBPDEM increased. In September, the weight of the speculative selling pressure finally overwhelmed the BoE, and GBPDEM fell dramatically overnight and in the next few days.

Most famous among the speculators against the BoE was George Soros, who borrowed massive amounts of British pounds in order to convert them into DMs. When the exchange rate collapsed, he simply bought back the pound and repaid his borrowed funds for a tremendous profit. Soros, in fact, made a reported $1 billion overnight. Certainly one individual does not have the resources to trade against the BoE, but this is also an excellent example of how a central bank can not trade against the rest of the market indefinitely if the fundamentals are against the bank and there are enough speculators aligned on the opposite side of the trade.

The ERM has, of course, since been replaced by the common Euro currency. At the end of 1998, rates between Eurozone countries were frozen in place, but the failure of the BoE to keep the GBP within its alotted margin has been one of the major milestones preventing the U.K. from adopting the common currency. Discussion Point Prior to currencies being pegged to each other at a set date, such as the EMU before the creation of the Euro, what would be an incentive for a country to make intervene and make its currency weaker against the others? What would be an incentive to keep it strong against the other currencies?

F) Quiz Quiz: Market Participants

If you are unsure about the rationale for the answers to the quiz questions, please reply to this thread with any questions you have. A few further notes on the quizzes: The quizzes are for your benefit only. It is not necessary to share your results with the class if you do not wish to do so. Some of the material on the quiz is not found in the lessons. Feel free to use any outside resource you'd like in order to research the answers, including but not limited to the resources we have listed already. A simple web search will yield some answers. Go to the Quiz Center and take the Market Participants Quiz. The quiz center is at the following link. http://www.learncurrencytrading.com/main/

How would you rate your understanding of fundamentals? No understanding of why the market moves Basic understanding of how the market relies on capital flowing between countries Understanding of the fundamentals of capital flows and trade flows, as well as what causes them I should be a central banker

8 Day Intensive Course Lesson 7 Fundamental Analysis -- Correlations Between the Markets
A) Crude Oil Oil: The price of light sweet crude oil can have a tremendous effect on the FX market, specifically affecting currencies such as the Canadian Dollar (CAD), U.S. Dollar (USD), as well as the Japanese Yen (JPY) for somewhat different reasons. In fact, as oil has broken above the $50 psychological level, the impact of high oil prices continues to have a severe impact on the global economy. The following daily chart illustrates the rally oil has enjoyed over the course of the past year. Note the price of oil as well as the corresponding price of the USD/CAD during the same period of time. CAD: Oil represents around 8% of the Canadian economy, therefore for every dollar higher the price of oil moves, the Canadian economy tends to benefit. On the other hand, if oil moves to the downside, the Canadian economy tends to suffer. The Canadian economy depends on exports such as Lumber, Oil, as well as consumer staples such as wheat and other grains. Being the ninth largest producer of crude oil in the world, Canadas currency has a strong positive correlation with oil prices. In fact, over the past year (2004-2005), the weekly correlation has been close to 70%. This means that if oil prices rally, the Canadian dollar also has a high likelihood of rallying, but unfortunately the pitfall of this relationship is that the opposite scenario is true as well. When oil prices fall, the Canadian dollar will also fall. Higher commodity prices have benefited resourcerich Canada, but have hurt Canadian exports to countries such as the US, which accounts for two thirds of total exports from Canada. USD: Canada is the number one supplier of oil to the US; in fact the US consumes more oil from Canada than from the Middle East. Due to the fact that the US and Japan are considered very industrialized nations, high oil prices tend to cut into the USs ability to stay productive. High oil prices can have a sever effect on such industries such as the Airlines, Chemical, Automotive, and Industrial Production. The price of oil has a very strong correlation or relationship to the USD/CAD. USD/CAD: In fact the USD/CAD pair has a double barrel reaction to the change in the price of oil. As oil moves higher, it tends to benefit the CAD while putting a strain on the USD. For that reason, the USD/CAD tends to move with swift reactions as the price of oil moves higher or lower. As oil traded near the psychological $50/barrel, the USD/CAD traded near the 1.2500 large round figure. As oil crossed above $50, the USD/CAD sank below 1.2500. The opposite also holds true. As oil subsequently fell below $50, the USD/CAD broke above 1.2500. Traders who realize this inter market correlation can trade the FX market with a bias, depending on its respective commodity market.

JPY: Japan imports 99% of the oil they use, as they are also considered a highly industrialized economy. Their economy tends to benefit when oil prices decline, as their economy is usually put under strain during periods of higher oil prices. Most major industries such as the Auto and industrial production industries depend on oil on a day-today basis. As the price of oil has continued to rise over the course of the past few years, Japanese industries are not able to sustain the same level of growth over the long term due to this increased cost of production. Because oil can have such a severe impact to not only the JPY economy, but also the US and major European economies, it is one of the most widely watched commodities. We may not see this correlation on a day-to-day, minute-to-minute basis, however it is important to note these inter-market relationships and how they influence the long-term trends.

B) Gold Gold: In addition to oil, the price of gold tends to have a very strong correlation or relationship with such currencies as the CHF, and an opposite or reverse correlation to the USD. Until recently, the CHF was backed by gold, in the same way the USD was a few decades ago. Gold is considered a safe haven for capital during times of political and/or economic unrest. As capital flows out of the USD, Gold tends to benefit, as capital is attracted to tangible assets such as precious metals, primarily gold, in times of uncertainty. On the other hand, during prosperous times, capital will leave the safety of gold, and move into more speculative financial instruments such as the equity markets. Notice on the following daily charts, how gold and the USD/CHF are an almost perfect mirror image of each other, reflecting the flow of capital out of USD and into Gold or out of Gold and into the USD. USD/CHF & EUR/USD: The price of gold also tends to have a double barrel effect on the USD/CHF. As the price of gold increases, the USD tends to decline in value while the CHF tends to benefit. Since both Gold and the CHF are considered very safe, conservative financial instruments, any movement in either one, tends to have a strong impact on the other. As the price of gold rises in value, capital tends to flow out of the USD, while the CHF tends to benefit. In addition, the EUR/USD pair tends to have a strong correlation to the price of gold, and a reverse relationship to the USD/CHF. Although the EUR currency itself is not back by gold, it is often times considered to have a strong correlation with this precious commodity. In fact the EUR (EUR/USD) has been considered the anti-dollar due to the fact that as capital flows out of the USD, investors are constantly looking for a relatively safe financial instrument, at least for the short term. It is important to look at the reasons why the US dollar may lose value. This could occur due to a high difference in interest rates such as the GBP/USD or AUD/USD. But more importantly, the USD tends to lose value during times of economic and/or political instability inside the US. When this occurs, capital tends to search for financial instruments that generally benefit as an alternative investment to the USD. If the US economy is put under strain, perhaps the EUR economy will be the recipient of capital as investors look for a more favorable risk to reward investment.

C) Copper Copper: Australia is the world's second largest producer of this precious metal, mining nearly 261 tons annually, trailing only South Africa's output of 345 tons. More than half of Australia's exports are metals creating a high correlation between metals and the Australian dollar. Gold and copper particularly have a large effect. The price of copper plays a very large role in not only in the Australian economy, but also in many different sectors. For example, the housing (homebuilder) sector uses a great deal of copper for plumbing and other fixtures. The Australian economy has also benefited from their very strong housing market over the past few years. All of these elements are related in terms long-term economic cycles.

With the US economy, and many other economies around the world falling under strain, the FOMC (US) and other central banks around the world lowered interest rates to encourage economic growth around the world. Lower interest rates made it easier for the average consumer to buy new homes or refinance existing properties. This alone has had a great benefit to the Australian dollar. However, due to poor returns in the equity markets such as the Dow Jones Industrial Average and NASDAQ, investors looked to other financial instruments and commodities such as gold, silver, and copper to hedge their equity portfolios. So one could say that low interest rates stimulated the housing market, which in turn drove up the demand for those products and components that are used in the manufacturing of homes; i.e. copper. Traders tracking the AUD should also note the price action of copper as well as the fundamental reports released from Australia that relate to their housing markets. As copper, gold, and the Australian housing market soured, the Reserve Bank of Australia raised interest rates to combat the risk of inflation. As AUD interest rates climb quickly, capital from around the world looked to the AUD as it paid a significantly higher yield than other majors such as the USD, CHF, CAD, and JPY. In fact one of the only currencies that currently has a higher interest rate is the NZD, which benefits for some of the same reasons and macro economic forces. Buying a currency with a higher interest rate, and selling another with a lower interest rate is known as a carry trade. Looking down the road, those interested in the carry trade should not only study the current interest rates but as well the anticipation of future interest rates. The FX market moves in anticipation of higher or lower interest rates based on what information we have at the present time. The FX market, like any market is a forward looking mechanism. Therefore, if an Australian economic number is released that indicates that the housing market and/or AUD economy is slowing, or at least, has failed to sustain previous growth, traders may anticipate the Reserve Bank of Australia to cease raising interest rates, and perhaps consider cutting them down the road. In other words, simply buying the AUD/USD (positive carry trade) is not sufficient in order to be a profitable trader. We must not only study interest rates, and the charts, but as well the markets anticipation for future price action and the future outlook of the economies around the world.

D) Quiz Quiz: Correlations Between Different Markets

If you are unsure about the rationale for the answers to the quiz questions, please reply to this thread with any questions you have. A few further notes on the quizzes: The quizzes are for your benefit only. It is not necessary to share your results with the class if you do not wish to do so.

Some of the material on the quiz is not found in the lessons. Feel free to use any outside resource you'd like in order to research the answers, including but not limited to the resources we have listed already. A simple web search will yield some answers. Go to the Quiz Center and take the Correlations Between Different Market. The quiz center is at the following link. http://www.learncurrencytrading.com/main/

8 Day Intensive Course Lesson 8

Money Management
A) Why Do Most Traders Lose Money? Why Do Most Traders Lose Money? The fact is that most traders, regardless of how intelligent and knowledgeable they may be about the markets, lose money. What could be the cause of this? Are the markets really so enigmatic that few can profit, or are there a series of common mistakes that befall many traders? The answer is the latter, and the good news is that the problem, while it can be emotionally and psychologically challenging, can be solved by using solid money management techniques.Most traders lose money simply because they do not understand or adhere to good money management practices.. Part of money management is essentially determining your risk before placing a trade. Without a sense of money management, many traders hold on to losing positions far too long, but take profits on winning positions prematurely. The result is a seemingly paradoxical scenario that in reality is all too common: the trader ends up having more winning trades than losing trades, but still loses money.
Money Management is the Key Key Money Management Practices So, what can traders do to ensure they have solid money management habits? There are a few key guidelines that every trader, regardless of their strategy or what instrument they are trading, should keep in mind: Risk-Reward Ratio. Traders should establish a risk-reward ratio for every trade they place. In other words, they should know much they are willing to lose, and how much they are seeking to gain. Generally, the risk-reward ratio should be 1:2, if not more. This means risk should equal no more than onehalf of the potential reward. Having a solid risk-reward ratio can prevent traders from entering positions that ultimately are not worth the risk. Stop Loss Orders. Traders should also employ stop-loss orders as a way of specifying the maximum loss they are willing to accept. By using stop-loss orders, traders can avoid the common scenario where they have many winning trades but a single loss large enough to eliminate any trace of profitability in the account.

B) Using Stop-Loss Orders to Manage Risk Using Stop-Loss Orders to Manage Risk
Due to the importance of money management to long-term successful trading, the use of a stop-loss order is imperative for any trader who wishes to succeed in the currency market. The stop-loss order allows traders to specify the maximum loss they are willing to accept on any given trade. If the market reaches the rate the trader specifies in his/her stop-loss order, then the trade will be closed immediately. As a result, the use of stop-loss orders allows you to quantify your risk every time you enter a trade. There are two parts to successfully using a stop-loss order: (1) initially placing the stop at a reasonable level and (2) trailing the stop meaning moving it forward towards profitability as the trade progresses in your favor. Placing the Stop-Loss Here are two recommended ways of placing and trailing a stop-loss order: Two-Day Low. This technique involves placing your stop-loss order approximately 10 pips below the 2 day low of the pair. The idea behind this technique is that if the price breaks to new lows, the trader does not want to hold the position. For example, if the low on the EUR/USDs most recent candle was 1.2900, and the previous candles low was 1.2800, then the stop should be placed around 1.2790 10 pips below the 2 day low if a trader wishes to enter. As another day passes, the trader can raise the stop to 10 pips below the new two-day low. Parabolic SAR. One type of volatility-based stop is the Parabolic SAR, an indicator that is found on many currency trading charting applications. Parabolic SAR is a volatility-based indicator that graphically displays a small dot at the point on the chart where the stop should be placed. Below is an example of a chart using Parabolic SAR.

C) Different Styles of Trading There is no precise definition, however the following are considered the general trading styles. Day traders: will typically take positions for a few minutes up to a few hours, and day traders usually don't hold positions overnight. They will also usually use very short-term charts such as the 15-minute charts. Swing traders: may take a position for a few hours to a few days or even a week or two. They may use 1-hour or more charts to do so. Position traders: typically hold positions for an even longer period of time than the Swing trader and this may last a few weeks or a few months. A carry trade: is one that is made based on the difference in interest rates (short the lower yielding currency to gain returns on a higher yielding currency), and may last for a few years or more. The longer-term the trader is the longer the time periods used for the charts. Typically the use daily, weekly, or even monthly charts is popular. I believe every trader should at least start out with the longer-term charts to determine general trend as well as the significant support and resistance levels. Keep in mind that if you are a Day-Trader you dont want to use a 15-minute chart to enter a position and hold that position for days.

Conversely, if you are a Swing Trader you dont want to use an hourly chart and exit your position in 15-minutes.

D) Helpful Trading Tips When to Increase/Decrease Position Size: Whenever a trader is going through a difficult period, the first reaction should be to decrease the size of the trades. For example switch from trading 5 lots at a time to trading 2 lots at a time. Unfortunately, many traders try to recoup losses by increasing the size of their trades. This almost never works because it is a decision that is based on emotion rather than reason. The time to size up is when things are going well; that is the best time for traders to get aggressive.

How to Remove Emotion from your Trading: The best way to remove emotion from trading is to plan as much of the trade as possible in advance prior to entering. Many traders focus on what happens after they enter a trade, but the movements in price are not under the trader's control. What the trader can control is planning where to enter, and place stops and limits, and determine ahead of time what to do in the event of any situation that may arise. As a general rule of thumb, anytime you feel like your emotions are getting the better of you, take a step back from your trading to try and prevent making rash decisions. This can happen after one trade, or it can happen after a number of trades. I recommend that when you do find yourself getting frustrated with the results of your recent trades it is helpful to take a look back at why they were unsuccessful. Keeping a trade log will assist you with this. Each time you place a trade, jot down exactly why you placed the trade. For example, you decide to buy the EUR/USD because RSI crossed back above 30 and the most recent completed candle was a doji. If the trade is unsuccessful, you can look back to see why. Also keep in mind that your emotions can get the best of you when you are booking both profits as well as losses. If you find that you are taking unnecessary risks with your trading as a result of a few good trades, continuing on with this type of carelessness can be just as detrimental. Take a step back and try to identify what you did correctly with your recent successful trades. Then, when you feel ready, continue with your trading. Ideally, you want to avoid all emotion when trading. This is why the vast majority of successful traders practice good money management. They do things such as place stops and limits and never alter them after they have entered the trade. They let profits run and

well as limit their losses. That being said, if there are one emotion above all others that can quickly hurt a trader, it is greed. As soon as greed enters the equation, you will find yourself making poor trading decisions. Trading is an emotional roller coaster. You go from the highs when you are profiting big, to the lows when you are down. It is always best to do yourself and your account balance a favor and control these emotions.

E) Assignment - Place a Trade

ASSIGNMENT:Using your demo account, place a trade that includes a stop-loss order using the tactics discussed in this lesson. Reply to this thread telling the class about your trade, and why you placed it. As always, feel free to upload an image or word document illustrating the trade.

F) Animated Lesson: The following link(s) illustrate how the various indicators can be used to identify the best times to initiate a position, keep losses relatively small, and take advantage of trading situations that may occur over the course of a trading day. Please feel free to pause each animation or replay it as many times as you wish. In addition, please turn your speakers on to listen to the audio segment as well. http://www.learncurrencytrading.com...anagement1M.swf

G) Question of the Day Question of the Day

Aside from the 2-day low and the and Parabolic SAR stop-loss techniques, what are some other methods of determing stop-loss levels that seem reasonable to you?

H) Quiz Quiz: Money Management

Please go to the Quiz Center and take the Money Management Quiz. http://www.learncurrencytrading.com/main

I) The Psychology of a Good Trader The Psychology of a Good Trader Being a good trader involves more than just being able to analyze the market technically and/or fundamentally. One of the most crucial yet overlooked elements of successful trading is maintaining a healthy psychological outlook. At the end of the day, a trader who is unable to cope with the stress of market fluctuations will not stand the test of time no matter how skilled they may be at the more scientific elements of trading. Emotional Detachment Traders must make trading decisions based on strategies independent of fear and greed. One of the premiere attributes of a good trader is that of emotional detachment: while they are dedicated and fully involved in their trades, they are not emotionally married to them; they accept losing, and make their investment decisions on a mental level. Traders who are emotionally involved in trading often make substantial errors, as they tend to whimsically change their strategy after a few losing trades, or become overly carefree after a few winning trades. A good trader must be emotionally balanced, and must base all trading decisions on strategy not fear or greed. Know When to Take a Break In the midst of a losing streak, consider taking a break from trading before fear and greed dominate your strategy. As noted in the money management section of the course, losing is an inevitable part of trading. Not every trade can be successful. As a result, traders must be psychologically capable of coping with losses. Most traders, even successful ones, will go through a stretch of losing trades. The key to being a successful trader, though, is being able to come through a losing stretch unfazed and undeterred. If you are going through a bad stretch, it may be time to take a break from trading. Often, taking a few days off from watching the market to clear your mind can be the best remedy for a losing streak. Continuing to trade relentlessly during tough market conditions can breed greater losses as well as damaging your psychological trading condition. Ultimately, its always better to acknowledge your losses rather than continue to fight through them and pretend that they dont exist.