FX101 - Introduction To Forex

1 Research Department
FX101: Introduction to Forex
Contents
Chapter 1: Forex for Beginners................................................................................................................................. 4
What is forex?....................................................................................................................................................... 4
What is trading? ................................................................................................................................................... 4
Currency Pairs....................................................................................................................................................... 5
FX vs Stocks........................................................................................................................................................... 6
Who are the market players? ............................................................................................................................... 7
Retail Traders and Speculators ......................................................................................................................... 7
Large Commercial Companies .......................................................................................................................... 7
Banks ................................................................................................................................................................ 7
Trading Sessions ................................................................................................................................................... 7
Best and worst days and time to trade ................................................................................................................ 8
Chapter 2: Basic Terms and Definitions ................................................................................................................. 10
Key Definitions.................................................................................................................................................... 10
Pip ................................................................................................................................................................... 10
Lot ................................................................................................................................................................... 10
Leverage ......................................................................................................................................................... 10
Margin ............................................................................................................................................................ 11
Bid vs Ask ........................................................................................................................................................ 11
Spread ............................................................................................................................................................. 11
Long vs Short .................................................................................................................................................. 11
Transaction Cost ............................................................................................................................................. 11
Types of Orders .................................................................................................................................................. 12
Market Order .................................................................................................................................................. 12
Limit Entry Order ............................................................................................................................................ 12
Stop-Entry Order ............................................................................................................................................ 12
Stop Loss ......................................................................................................................................................... 12
Take Profit Order ............................................................................................................................................ 12
Trailing Stop .................................................................................................................................................... 12
Good till Cancelled.......................................................................................................................................... 13
Harborx Limited is authorized and regulated by CySEC (License no. 230/14) S.P.
info@harborx.com Tel: +357 25 025522 Fax: +357 25 030258

Good for the day............................................................................................................................................. 13

Types of market analysis .................................................................................................................................... 13
Technical Analysis ........................................................................................................................................... 13
Fundamental Analysis..................................................................................................................................... 14
Sentiment ....................................................................................................................................................... 15
Which type of analysis is the best? .................................................................................................................... 15
Types of Charts ................................................................................................................................................... 16
Line Charts ...................................................................................................................................................... 16
Bar Charts ....................................................................................................................................................... 16
Japanese Candlesticks .................................................................................................................................... 17
Chapter 3: Trading and Planning ............................................................................................................................ 19
What is a trading plan?....................................................................................................................................... 19
How to decide which trading plan to use ........................................................................................................... 19
Traders’ Phycology ............................................................................................................................................. 20
Types of Traders ................................................................................................................................................. 20
Scalpers........................................................................................................................................................... 20
Intraday .......................................................................................................................................................... 20
Swing .............................................................................................................................................................. 21
Position Traders .............................................................................................................................................. 21
Risk management ............................................................................................................................................... 21
Risk vs Return ..................................................................................................................................................... 22
Chapter 4: Technical Analysis ................................................................................................................................. 23
Charting Techniques ........................................................................................................................................... 23
Technical indicators ............................................................................................................................................ 25
Leading vs Lagging Indicators ............................................................................................................................. 25
Moving Averages ................................................................................................................................................ 26
Exponential Moving Average.............................................................................................................................. 27
SMA vs EMA........................................................................................................................................................ 27
MAs Interpretation ............................................................................................................................................. 27
Single Moving Average ................................................................................................................................... 27
Double Moving Average ................................................................................................................................. 28
Triple Moving Average.................................................................................................................................... 29

Stochastic Indicator ............................................................................................................................................ 30

Interpretation ................................................................................................................................................. 31
Relative Strength Index ...................................................................................................................................... 32
Interpretation ................................................................................................................................................. 33
Moving Average Convergence Divergence......................................................................................................... 33
Interpretation ................................................................................................................................................. 33
Candlesticks Patterns ......................................................................................................................................... 34
Three white soldiers ....................................................................................................................................... 34
Three Black Crows .......................................................................................................................................... 34
Bullish Marubozu ............................................................................................................................................ 34
Bearish Marubozu .......................................................................................................................................... 34
Falling Window ............................................................................................................................................... 34
Rising Window ................................................................................................................................................ 34
Hammer .......................................................................................................................................................... 35
Inverted Hammer ........................................................................................................................................... 35
Hanging Man .................................................................................................................................................. 35
Shooting Star .................................................................................................................................................. 35
Bullish Engulfing ............................................................................................................................................. 35
Bearish Engulfing ............................................................................................................................................ 35
Chapter 5: Fundamental Analysis ........................................................................................................................... 36
What are fundamentals? .................................................................................................................................... 36
News and Trading ............................................................................................................................................... 36
Persons to follow up: World Leaders ................................................................................................................. 36
Inflation .............................................................................................................................................................. 38
Interest Rates ..................................................................................................................................................... 39
Central Banks ...................................................................................................................................................... 40
Monetary Policy.................................................................................................................................................. 40
Fiscal Policy ......................................................................................................................................................... 41
Hawkish Vs Dovish .............................................................................................................................................. 41
Gross Domestic Product ..................................................................................................................................... 42
Unemployment................................................................................................................................................... 42
Economic Calendars ........................................................................................................................................... 43

Chapter 1: Forex for Beginners
What is forex?
“Forex” also referred to as “FX” stands for Foreign Exchange, and it is the market where currencies are traded.
It is actually the largest and most liquid market in the world, with a traded volume of USD 5 trillion per day! If
you compare it with New York stock exchange that reaches up to USD 22.4 billion per day, you would probably
understand what we are talking about! Tokyo Stock exchange measures around USD 18.9 billion of trading
volume per day and London Stock exchange around USD 7.2 billion per day. If we illustrate the markets by
towers of dollars, below is the proper illustration!
What is trading?
There are several examples in life of currency trading, from something very simple to complex activities. For
example the exchange of a British tourist’s Pounds into US Dollar when traveling abroad, or the hedging of a
bank’s exposures to different countries. Trading is simply the process of buying one currency and
simultaneously selling another in order to gain a profit, where the profit (or loss if you do not estimate it well
enough) results from the changes in the exchange rates. The price of one currency compared to another
reflects what the currency is worth based on the country’s current and future economy. As the economy of a
country is affected by many factors, the country’s currency is affected by them as well.

Currency Pairs
Currencies’ symbols are always determined by three letters, where usually the first two letters declares the
name of the country that owns the currency and the third letter declares the name of the currency (with some
exceptions of course). There are standard abbreviations for all the currencies which have been determined by
the International Organization for Standardization (ISO).
The main currencies traded in the FX market are the below:
Symbol Country Name Nickname

USD United States US Dollar Buck
EUR Eurozone countries Euro Fiber
JPY Japan Yen Yen
GBP Great Britain Pound Cable
CHF Switzerland Franc Swissy
CAD Canada Canada Dollar Loonie
AUD Australia Australia Dollar Aussie
NZD New Zealand New Zealand Dollar Kiwi
A currency pair is a combination of two currencies’ symbols that indicates the related transaction. The first
currency in the pair is the base currency and the second currency in the pair is the counter or quote currency.
For example, if a trader buys EUR/USD, they are buying euros and selling US dollars.
The most traded currency in forex market is the US Dollar, included in the 85% of all reported transactions.
That is a physical consequence as the US economy is the largest economy in the world. The second most traded
currency is Euro with 39%, the third is JPY presenting 19% of the transactions and the fourth GBP covering 13%
of the transactions.
There are three types of currency pairs, the majors, the minors or major crosses and the exotics. Majors are the
most liquid currency pairs and therefore the most frequently traded. Majors consist of a combination of USD
and another liquid currency, as USD is the most important currency. The majors are the below:
 EUR/USD
 USD/JPY
 USD/CHF
 GBP/USD
 USD/CAD
 AUD/USD
 NZD/USD
Major crosses are pairs that do not contain the USD, such as EUR/JPY, EUR/CHF, AUD/JPY, but they consist by
two major currencies.

Exotic pairs are made up of one major currency paired with the currency of an emerging economy, such as
Mexico, South Africa, Thailand etc. Below is a table with examples of exotic pairs.
Pair Name
USD/PLN US Dollar/Polish Zloty
EUR/RUB Euro/Russian Ruble
USD/HUF US Dollar/Hungarian Forint
USD/SEK US Dollar/Swedish Krona
USD/MXN US Dollar /Mexican Peso
USD/ZAR US Dollar/South African Rand
EUR/TRY Euro/Turkish Lira
USD/NOK US Dollar/Norwegian Krone
GBP/THB Great Britain Pound/Thai Baht
FX vs Stocks
Forex market has a lot of benefits and advantages; it certainly holds the most of the advantages between
traded markets. For example, there are no commissions on the transactions. In the forex market, margin
requirements are very low; this means if your deposit is not enough for a big trade, you can always control a
largest contract value using leverage! Leverage is the power of giving you the chance to trade larger amounts
than the amount of your balance (deposit). The table below reflects the major benefits of forex trading versus
stocks trading.
Characteristics Forex Stocks
Leverage Up to 1:500 No
24-Hour Trading Yes No
Middlemen No Yes
Minimal or no Commission Yes No
OTC market Yes No
Market Manipulation No Yes
Influence of brokerage firms Less Likely More Likely
Restriction on Short Selling No Yes

Who are the market players?
Retail Traders and Speculators

Retail traders and Speculators make money through buying and selling of currencies and could include anyone
from hedge funds through to a retail trader at home with an account of USD50. Although in terms of size they
are the smaller traders, in terms of trading volume they hold the majority of 90%.
Retail traders are generally about 30% accurate at picking the trend, the rest just lose on average and they are
expecting to keep doing so.
Large Commercial Companies

Large commercial companies participate in the Forex market to do business. For example, electronics
manufacturers need to buy electronics’ parts from all over the world, exchanging their currencies to the
providers’ countries currencies. By using the FX market, they can get the best deal on currency fluctuations and
use the Forex market to protect themselves against adverse currency movements. This type of market players
achieves their transactions through commercial banks.
Banks
Banks are the largest players in the Forex market, mainly due to their influence on exchange rates. As Forex
market does not have a central exchange, the world’s largest banks determine the exchange rates by providing
the market with sell and buy prices based on the prices they are willing to buy and sell at. The prices they set
are based on supply and demand for currencies. These large banks, which are collectively known as the
interbank market, take on a large number of Forex transactions every day for both their customers and
themselves. Another big advantage of banks is that they are one of only few players that have access to a full
picture of order books. This information often allows banks to predict where moves will happen before they do.
Governments and Central Banks
Governments use the Forex markets for their operations, international trade payments, and handling their
foreign exchange reserves. Central banks, such as European Central Bank, affect the Forex markets by adjusting
interest rates to control inflation which can affect currency valuation. Central banks may also intervene in the
Forex market to realign exchange rates. If central banks feel that their currency is priced too high or too low,
they will start large sell/buy operations to alter exchange rate.
Trading Sessions
Although forex market is open 24 hours per day, it does not mean that it is always active the whole day. There
are four major trading sessions including New York, London (or European session), Tokyo (also refers as Asia
session) and Sydney.
Below is the table of the open and close times for each summer session in GMT:
1 2 3 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24
LONDON
New York
SYDNEY
TOKYO

Time Zone GMT (OPEN-CLOSE)
London 07:00-16:00
New York 12:00-21:00
Sydney 22:00-07:00
Tokyo 23:00-08:00
Below is the table of the open and close times for each winter session in GMT:
1 2 3 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24
LONDON
New York
SYDNEY
TOKYO
Time Zone GMT (OPEN-CLOSE)
London 08:00-17:00
New York 13:00-22:00
Sydney 21:00-06:00
Tokyo 23:00-08:00
The summer session is approximately April to October while the winter session is approximately the period of
October to April.
As it’s illustrated from the chart above, there are hours where the two sessions overlap; those are the “prime
times” to trade forex!
Best and worst days and time to trade
During the overlap between London and New York there is the most movement in the market as New York and
London are the largest financial centers. Most trends begin during the London session, and they typically will
continue until the beginning of the New York session. Most economic reports are released near the start of the
New York session, as USD is involved in 85% of transactions and US economy is the largest of all the economies.
When those reports are released from US and Canada during the overlap of those two sessions, there is the
most movement in the market. Also, some late news coming from Europe can influence the market during the

overlap. On the other hand, Tokyo-London overlap is the time with the thinnest liquidity as it is just the start for
European traders’ day.
Although European session is the busiest of them all, there are also specific days in the week with more
movement from all the markets. This is the middle of the week, where the most movement happens. It is also
important to notice that Fridays are usually busy until half day, after 16:00 GMT the market gets dried. Thus,
Friday after midday is considered one of the worst times to trade. Sundays and holidays are also a bad choice
since the liquidity is limited.

Chapter 2: Basic Terms and Definitions
So, now that you know what FX is about and the opportunities it offers you to make money, let’s start with the
basics! You would probably need to calculate your profit and learn how to trade. Let’s begin the training for a
step to richness direction!
Key Definitions
Pip
Pip is actually the measurement of the change in value and stands for “Percentage in Point”. A pip is usually
the last decimal point of a quotation, for example if EUR/USD changes from 1.1153 to 1.1154 the 0.0001 USD
rise in value is one pip. For the most of currency pairs, pip is the fourth digit. However there are exceptions, like
USD/JPY where the pip is the second decimal point. A change in USD/JPY from 120.97 to 120.98 is a change in
price of one pip. Generally, the currency pairs tend to be quoted to five decimal places and JPY pairs to 3
decimal places. The fifth (or 3rd for JPY pairs) decimal is called fractional pip. For example, if GBP/JPY moves
from 188.332 to 188.331 this is a 0.001 JPY move or one fractional pip.
Lot
A lot refers to a bundle of units in trade. It is basically the size of a trade. There are four commonly known lot
sizes:
 Standard lot which is 100,000 units of the quote currency in a forex trade.
 Mini lot which is 10,000 units of the quote currency
 Micro lot that is 1,000 units of the quote currency
 Nano lot is 100 units of the quote currency
Thus, if a trader sells 100,000 USD then he/she sells a standard lot with a trade size of 100,000 units.
One standard lot is also known as one contract size.
Leverage
In electronic forex trading, leverage enables traders to trade a bigger amount than their deposit. That’s
something similar to borrowing from a bank. You give a deposit to the bank, let’s say for example USD 1,000
and the bank lends you USD 10,000. The leverage amount depends on the trader choices and what a broker
offers. The leverage could be from 1:1 (no leverage basically) to 1:500. For example, a leverage of 1:100 means
that the trader has an account margin of USD 1,000 and is able to open a position up to USD 100,000! That’s
quite interesting eh? It is important to note that leverage may results to unlimited potential gains but the
potential losses do not exceed a trader’s invested capital.

Margin
As mentioned above, margin is the amount of money needed to open and maintain a position while free
margin is the amount of funds that is available to open additional positions.
Bid vs Ask
Forex traders have 2 prices for every pair on their trading platform. The bid and the ask price. Bid is the price
the broker is willing to buy the base currency in exchange for the quote currency, thus the price that the trader
would sell the currency pair.
Ask or offer is the price the broker asks to sell the base currency (and thus buy the quote currency). Thus, the
ask price is the best available price at which the trader will buy from the market
Spread
Spread is simply the difference between the bid and the ask price.
On the EUR/USD example above, the bid price is 1.10288 and the ask price is 1.10298. If a trader wants to buy
EUR/USD though this broker, he/she would click on the ask price, the price at which the broker is willing to sell.
Long vs Short
In forex, “going long” refers to buy a currency, which actually means to buy the base currency and sell the
quote currency. Thus if a trader wants to buy a currency, he wants the base currency to rise in value and then
sell it back at a higher price. That’s a “going long” or taking a “long position”.
If a trader wishes to sell, which actually means to sell the base currency and buy the quote currency, he/she
wants the base currency to fall in value and then buy it back at a lower price. This is called “going short” or
taking a “short position”.
Transaction Cost
The critical characteristic of the bid/ask spread is that it is also the transaction cost for a round-turn trade.
Round-turn means a buy (or sell) trade and an offsetting sell (or buy) trade of the same size in the same
currency pair. For example, in the case of the EUR/USD rate of 1.1433/36, the transaction cost is 3 pips. The
formula for calculating the transaction cost is:
Transaction cost (spread) = Ask Price – Bid Price

Types of Orders
Market Order
A market order is an order to buy or sell at the best available price. It is one click order. You click on the price
you want to buy/sell and it’s done. It is the same like you are shopping on eBay! It’s kind of like using the one-
click ordering when you like the current price, you click once and the item is yours!
Limit Entry Order

A limit entry order is an order placed to either buy below the market or sell above the market, at a certain
price. These are used when traders want to enter the market in a value area. For example, if it looks like the
market is going to retrace lower from highs before moving higher again, a trader might use a limit entry order
to buy below the current price. That way, when the market retraces, he/she can get long for the push higher.
Stop-Entry Order
A stop-entry order is an order placed to buy above the market or sell below the market, at a certain price.
These are typically used in breakout plays. Traders will wait for a currency to break through a level before
entering in the direction of the breakout, and place a stop-entry order at the breakout level to get into the
trade as soon as it breaks out.
Stop Loss
Stop loss orders are useful for traders who are not willing to sit in front of their monitor all day in order to stop
the trade if it goes against them. A stop loss order is a type of order linked to a trade for the purpose of
preventing additional losses if price goes against expectations. A stop loss order remains in effect until the
position is liquidated or it can be cancelled by the trader. For example, you went long on EUR/USD at 1.1220.
To limit your maximum loss, you set a stop-loss order at 1.1200. This means if you were wrong and EUR/USD
drops to 1.1200 instead of moving up, your trading platform would automatically execute a sell order at 1.1200
the best available price and close out your position for a 20-pip loss.
Take Profit Order
Take Profit order is exactly the opposite of a stop loss order. It automatically closes a trader’s position once a
pre-set profit has been made. Let’s assume that you are sure that EUR/USD will go up to 1.2000 and then start
dropping again, you want to place a close order at that price in order to make the maximum possible profit. But
suddenly your girlfriend calls and she want to take her out tonight. So you place a take profit order and you
leave with no worries of losing the pick!
Trailing Stop
A trailing stop is a type of stop loss order that moves as price fluctuates. For example, let’s assume going short
USD/JPY at 89.90, with a trailing stop of 30 pips. This means that the stop loss is at 90.20. If the price goes down
and hits 89.60, the trailing stop would move down to 90.90. The stop won’t widen if market goes higher against
the trade. Once the market price hits the trailing stop price, a market order to close the position at the best
available price will be sent.

Good till Cancelled

That’s indeed as simple as is heard; a GTC order remains active in the market until the trader decides to cancel
it.
Good for the day

A GFD order remains active until the end of the trading day. If you wonder “What end of trading date? Didn’t
you tell me before that there’s not an end until Friday?”, then you really got the point! As forex is a 24-hour
market, this usually means 5:00 pm EST (the time U.S. markets close) but some brokers may have another
“end” for their trading days so we advise you to check it out.
We will examine later on how some of those orders are implemented on Meta Trader 4, an electronic trading
platform widely used by online traders.
Types of market analysis
There are three ways to analyze the market:
1. Technical Analysis
2. Fundamental Analysis
3. Sentiment Analysis
You would hear forex experts to debate which type is the best. However it doesn’t really matter as a good
trader needs to know about all of them. In this chapter we will provide a briefed explanation of those three
types of analysis and later on we will analyze them in detail.
Technical Analysis
Technical analysis aims to the determination of the future trend of movement of a currency based on current
and previous price movements. Hence, it’s directly connected with charts, patterns, indicators etc. It’s a
popular type of analysis because it’s relatively quick and it has been proven to work. Technical analysis is based
on the theory that historical price movements can determine the current trading conditions and potential price
movements. It is proven again and again that history tends to repeat itself, that’s why technical analysis is so
popular.
Charts are the easiest way for visualizing historical data, in forex language to visualize currency’s history. As the
majority of forex traders look for certain price levels and chart patterns relying on technical analysis, it becomes
likely that these patterns will manifest themselves in the markets. However, this does not mean that different
traders would have the same view about how price would move in the near or far future. Technical Analysis is
by default a very objective method of analysis. There are so many technical indicators that someone could use
that is almost impossible for all of the traders to think of the same.
Many technical analysis techniques will only work in specific conditions. Technical analysis can also give traders
an insight into turning points and potential entry points, by showing what is likely to happen in a certain set of

circumstances, or what may happen if you follow the opposite trade. The main evidence for using technical
analysis is that, theoretically, all current market information is reflected in price.
Technical analysts look for similar patterns that have formed in the past, and will form trade ideas believing
that price will act the same way that it did before. The important thing is that you understand the concepts
under technical analysis so you can use Fibonacci, Bollinger bands, trend indicators or pivot points. You can see
how a chart with several indicators would look like on the above picture. No, no do not panic, we will examine
them on a later stage and they would look at you like a piece of cake!
Fundamental Analysis
Fundamental analysis in forex involves analyzing the economic, social and political forces that affect the value
of a country’s currency. All of the news reports, economic data and political events that come out about a
country are similar to news that come out about a stock and are used by investors to obtain an idea of value. As
the economy of a country is changing over time, so does value.
As a general rule in economics, supply and demand determine price, the same stands in forex. A trader can
determine the demand and likely fluctuations in value for a particular currency by understanding the
relationship between an economy and its currency value; this is what fundamentals traders do. It may sounds
complex, but the most important premise is that if a country’s economy is good, then the value of its currency
should be high as well. As the economic profile of a country strengthens; the value of its currency is increasing.
Of course in order to have an outlook on a country’s economic outlook, you need to know which factors affect
its economy and how to analyze them. This is similar to the analysis of the factors that affect supply and
demand, which events and indicators could cause an increase or a drop of a currency’s economy and as a
consequence a currency’s value? The better profile a country’s economy has, the more foreign businesses and
investors will invest in that country. This results in the need to purchase that country’s currency to obtain those
assets.

Some important indicators to use are the figures and statements given in speeches by important economists,
CEOs or politicians. Those are known as economical announcements that have a big impact on currency moves,
especially those that are related with USA economy as USA has the biggest impact in the market. Later on, we
will examine in detail several fundamental indicators and the way to analyze them.
Sentiment
Sentiment analysis is a type of forex analysis that focuses on identifying and measuring the overall
psychological state of all participants in the market. Sentiment analysis attempts to identify what percentage of
market participants are bullish or bearish. The market basically represents what all traders feel about the
market.
Retail traders can’t move the forex markets in their favor. If the majority thinks it is a bearish market or a
bullish market and you don’t, you can’t actually do much about that. Sometimes you need to adapt rapidly to
this kind of change. If you get an idea of what market participants may be thinking, you can better predict the
market in your favor. If you choose to ignore forex sentiment analysis, then you simply increase your risk. Being
able to quantify market sentiment is an important tool.
Which type of analysis is the best?
Fundamental traders would argue with technical traders regarding which type of analysis is the best. Actually
one is not better than the other; all of them are different ways to look at the market. If you feel more
comfortable with one of them, if you prefer to watch the news for example, you can use mostly the one
preferred. However we would advise you to use all of them, even if you use the one more than the other. By
using all of them you would have a clear and most objective view of the market and how it will likely move.
Let’s illustrate this need with a real life example.
Let’s assume that you only use technical analysis and you are really good at it. You are so busy with watching all
those indicators and technical analysis charts that you do not have time to watch the news. Thus, you are fully
determined to ignore fundamentals and based your trading actions on technicals. With your high level skills
and technics you found out a great opportunity that would make EUR/CHF have an incredible uptrend, so you
decided to be aggressively long on EUR/CHF. You are so sure that you didn’t even place a stop loss order; you
are planning to stop it in few days after you receive a lot of pips. You put your order, feeling so good for having
a great opportunity and you leave home to go out with friends. All of a sudden, EUR/CHF moves 400 pips
against your order! You go home at night and you see that disaster. Feeling absolutely depressed and trying to
understand what happened, you sit on your sofa and switch on the TV. All channels are talking about the
unexpected decision of Swiss national bank to abandon attempts to cap CHF’s value. Today you just decided to
make space for fundamentals into your trading strategy.

Types of Charts
Line Charts
Line charts are the simplest form of forex charts that represent only the closing prices over a preset period of
time. It is the most basic of the three charts as there is a drawn line connecting the closing prices of the
selected timeframe.
Below is an example of a EUR/USD line chart:
The most popular version of line charts is the daily line chart that plots each day’s closing prices.
Bar Charts
A bar chart shows the opening and closing prices, as well as the highs and lows.
Those are:
 High: The top of the vertical line that defines the highest price of the time period
 Low: The bottom of the vertical line that defines the lowest price of the time period
 Open: A small horizontal line on the left of the vertical bar that is the opening price
 Close: A small horizontal line on the right of the vertical bar that is the closing price
If the close price is higher than the open price then the bar has the blue form, if the opposite occurs then the
bar takes the red form of the example below.

In contrast to the line chart, bar chart’s main advantages are its ability to display the price range over the given
period of time and its capacity to display price gaps. However it does not display the whole price fluctuation, as
line chart does.
Example of a bar chart for EUR/USD:
Japanese Candlesticks
The candlestick chart is quite similar to the bar chart as it consists highs, lows, open and close prices. In
candlesticks the body in the middle indicates the range between the opening and closing prices. Usually, if the
body is filled or colored in, then the currency pair closed lower than it opened. For those colors reasons, the
candlestick is considered easier to view as it immediately gives you the idea of a bearish or bullish market. In
the following example, the ‘filled color’ is black and the other white.

Candlesticks are the most widely used charts and the most technics in technical analysis are based on this type
of charts. They are easy to interpret, easy to use and they are the best identifiers of market turning points as to
whether the market is turning from a downtrend to an uptrend or vice versa.
For sure we will elaborate further on this great tool our Japanese friends discover hundred years ago, thanks to
them we can use our technical analysis on an easy manner!
Example of EUR/USD Candlestick Chart:

Chapter 3: Trading and Planning
What is a trading plan?
A trading plan is a systematic trading method, a strategy, set by an individual trader in order to evaluate assets,
return and risk. Thus, a trading plan includes a trader’s strategy, risk management, money management and
trading rules.
It is basically a guideline that the trader himself has created in order to follow those rules by discipline so that
he can achieve his trading targets.
A trader must not be affected by emotions as this might cause him to deviate from the rules, raw trading and
strategy rules must be followed every single day in every single trade in order to have successful trading results.
The importance of a trading plan is that it lets you know if the trades are in the right direction or not. As
renowned fund managers state, “the trading plan you use is not as important as having a trading plan.”
How to decide which trading plan to use
In order to create a trading plan you have to identify your risk appetite. Are you a risky trader or do you prefer
to risk less and get less? Of course this depends on your capital on how much of it you can afford to lose. A
good trader shall not be driven by emotions and risk more than what he can afford to lose.
The risk appetite of a trader is also closely related to the return he would like to have. All of you would laugh
and think that the more profit you have the better, but think again. If you go for much, you have to risk much
as well. Maybe it all goes right and you win all those pips, but what if it goes wrong and you lose them instead?
See? That’s not so simple.
One important step in determining the trading plan that you are going to follow is to calculate your drawdown.
The drawdown is the percentage of your initial capital that you have lost. The larger your drawdown is, the
hardest it is to recap. Drawdown is the peak to bottom decline during a specific record period of an investment
or of a trade. It is simply the money you lose divided by the initial money of the investment. For money
management purposes, the maximum drawdown one shall have is 20%-25%. Let’s illustrate the reason with
simple examples. Let’s say that you decided to have 20% drawdown. So, if you lose 20% of your capital, how
much do you need to gain in order to recover? The answer is simple 20% divided by 80% (the remaining capital)
which equals to 25%. 25% to recover and then even more to have a gain again! Now, if your drawdown is 50%,
you would need 100% win ratio to recover! And so on and so forth.
Another factor in choosing a trading plan that fits your personal lifestyle is exactly the way of your lifestyle. You
must ask yourself and reply honestly to the question of how much time you can really spend on trading. There
are traders which keep long term trades and do not have to be in front of the monitor all the time and there
are other traders which have a lot of time to trade and they are in front of the screen the whole day scalping
around.

A trading plan is a list consisting of many points, which you should check and tick before you proceed with
every new trade. If only one condition of your list is not met, then you have to think twice before proceeding
with the trade. Remember, consistency and discipline is the key to success!
Traders’ Phycology
A trading plan should fit the trader’s personality. If the trader does not feel comfortable following his own plan
he would most likely fail. You do not have to challenge yourself, just make yourself comfortable and you would
see that you would trade with less stress and more confidence, which usually leads to profitable trading. If you
are driven by emotions you would probably diverge from your plan and at the end you would find yourself in a
panic situation with no plan B to follow. The trading plan is raw rules you need to follow, do not listen to other
traders, do not copy others that does not fit your style and most significantly stick to your trading plan!
Recently there is a new science called “Behavioral Finance”. Those scientists are trying to identify the behavior
of investors and traders and see behind the market efficiency theory. In economics, we assume that traders are
rational human being that do not act irrational and always control themselves. Behavioral finance study
traders’ psychology and identifies several syndromes that are far from “efficiency” and “rationality”. An
example is the tendency of humans to go with the flow and the insecurity they feel of standing alone against
the crowd. For example, imagine yourself going long on EUR/USD, you are really happy for your trade since it
qualifies all requirements of your trading plan and is profitable at the moment. Then suddenly you see that all
of your friends are short on EUR/USD and they all deride you because “you are so stupid for going long”. Would
you feel a bit uncomfortable? Or maybe you would even close your trade and follow theirs. That is an everyday
example of behavioral finance and the irrationality of human beings. Your psychology plays a huge role in your
trades, be careful so that you can choose a trading plan on which you would feel comfortable enough to stand
alone against the crowd!
Types of Traders
Scalpers
The shortest interval trading award is definitely going to this type of traders! Scalpers are traders that enter and
exit a position in a very short period of time targeting a small amount of pips. If you are going to enter and exit
the market in a rapid timeframe you have to be able to watch market moves at all times. If you are prepared to
be a scalper then you need to have the ability to stare at your platform the whole day and make trades again
and again. If you are not willing to spend a lot of hours of your day in front of your computer screen then this
type of trading is not suitable for you. Make sure you know how many pips you are willing to lose in order to
gain around 10 pips and go on. You can also take a look at automated scalping techniques.
Intraday
If you prefer to hold trades for a short timeframe but think that scalping it too fast for you, then you may prefer
intraday trading. Intraday traders are those who hold a position within the day and close it before day ends.
Intraday traders usually use up to hourly charts to monitor their positions and their target is within 50-80 pips
per trade. This type of traders is up to date with fundamentals in order to be able to take the right decision at
the beginning of their trading day. They also like to use sentiment analysis and exit their positions when they
feel that the time has come.

An intraday trader may be looking for breakouts of the hourly trading range in either direction by placing
pending orders in both sides of the trading range waiting for one of them to be triggered. Another way to trade
within the day is to look at a longer time frame chart to determine the longer trend and then place your orders
based on a shorter timeframe in the direction of the longer trend.
The last method of intraday trading is again by looking at longer timeframe charts and determines your entry
point on shorter charts, but entering in the opposite direction of the overall trend in order to get some pips
from overall trend’s corrections.
Swing
This type of traders is looking to keep positions open for some days. The longer a trade remains open, the
wider the Stop loss and Take profit should be. Thus, this type of trading requires larger SL and TP than the two
types referred above. Swing traders usually use daily time-frame charts to evaluate the overall trend and 4-
hours timeframe charts for entry and exit purposes (timing purposes).
If you do not feel comfortable in keeping a trade open during the night and you can’t get enough sleep because
of that, then swing trading is probably not your style. Because swing traders are looking for larger moves, price
would move against the trade most frequent than intraday trading. If you cannot watch your trade losing
money, then you should not be a swing trader.
Position Traders
Last but not least, position trading which is the longest term in trading. This kind of traders holds their positions
open for several months or even years. In order for a trade to remain open for so long, you have to keep very
wide stop loses and take profit orders. Since you keep a position open for so long, you have to focus on
fundamentals which will move your trade accordingly. If you look for such a big move, you can’t ignore the
important news announced for your selected pairs of trading.
Thus, it is very important for position traders to understand how fundamentals work and how each
fundamental indicator affects their pairs.
Risk management
In trading, risk management is the art of minimizing your risk and maximizing your return. It is about mastering
the control of the probability and the impact of unfortunate events, so that we can maximize the opportunities
to make profit.
A very important lesson to learn in trading is to avoid gambling. Gambling is the worst enemy of risk
management in the world of trading. Remember that our goal is to make money and not to try our luck! Risk
management includes all the parameters of a trading plan referred to at the beginning of the chapter.
Risk management is the most important concept of a trading plan.

Risk vs Return
Under money and risk management purposes, a reward to risk of less than 1 is not acceptable. Reward to risk is
a simple ratio, the points you aim to gain divided by the points you risk. Thus, it is TP points divided by SL
points. 1 is the minimum risk to reward ratio that traders should accept. This means that you risk the same
amount of pips that you are aiming to gain. If you risk more than what you would win, then it is simply not
worth it.
In trading, it is generally accepted that a reward to risk ratio of 3:1 is the best one can follow. A simple example
is the below:
Trader A decided that the reward to risk ratio which fits his trading plan is 3:1. He wants to firstly apply that on
EUR/USD, going long on the pair. He would like to gain around 60 pips. In order to have a 3:1 ratio, you would
need to divide the TP pips by 3 to get his risk points. Thus, he would place a stop loss 20 pips below the current
market price of EUR/USD a take profit of 60 pips above current market price.

Chapter 4: Technical Analysis
Technical analysis is based on the analysis of historical data and its illustration on charts. The three principles
on which technical analysis and technical trading are based are the below:
 History repeats itself

 Market action discounts everything, all the known and unknown information that may affect prices.
There is no available information that affects prices and is not reflected in the price.
 Prices move in trends
There are many indicators invented by mathematicians, statisticians, financial analysts, even journalists that are
trying to predict future price moves. Of course like every other science that is forecasting future moves (for
example weather prediction), it is all about probabilities. Nothing is certain but everything is probable.
Charting Techniques
There are several types of charts construction: line charts, candlesticks, candle volume, bar charts, point and
figure charts, market profile chart etc... Each chart is being used mainly by a specific group of persons.
Line chart consists of two factors, the closing price and the selected time-period. If for example the selected
time frame is one hour, then the closing price of each hour will be illustrated on the chart by a continuous line.
Below is an example of a line chart of USDSGD. The horizontal axis represents the time factor and the vertical
axis the price factor. The same happens for bar charts and candlestick charts.
Line charts are the easiest charts to be understood by the general public as they represent only the closing
price of each time-period. Thus, they are being used mainly when a currency is represented to the public.

Bar charts are being used mainly by futures traders as they show the difference between the close price of the
previous period and the close price of the current period.
Candlesticks are mainly being used by traders as they represent the difference between open and close price
for the predetermined period of time and also the difference between high and low price for the same period.
This range is very important for trading. They represent the range of prices clearly as they are usually drawn in
different colors for up periods vs down periods. The illustration of such charts can clearly identify the trend of a
pair by referring to its color.
Above is an hourly chart of EURUSD with white downwards candles and black upwards candles. If a candle is
white, it means that within this specific hour the close price was lower than the open price.
Candle volume have the same characteristics with candlestick charts with the difference that they have widths
for each candle, they incorporate the volume. The bigger the width, the more volume there was on this specific
period and the thinner a candle, the less volume there was. This type of charts is mainly useful for stocks and
bonds.

Point and Figure charts, or better known as P&F, are much different from the previous types of charts. The
main difference is that they do not take into consideration time. A new entry is being drawn on a P&F chart if a
predetermined amount has been exited. If not, there is no entry at all. On very volatile periods there are many
entries while on quiet periods there are no drawings at all. P&F charts are mainly used by technical analysts as
they are too complex to be understood by an amateur trader or the public and it fits each technical analyst
needs. The main advantage of P&F chart is that it filters the noise and the technical analyst decides which
amount is the critical one.
Market Profile is a chart that is being used mostly by intraday stock traders. It shows if the current price of an
instrument is overpriced or underpriced and thus it produces sell or buy signals respectively.
Technical indicators
Technical indicators predict the future price moves or the future direction of the price. Most of them are based
on simple or complex mathematical calculation of historic data like the price itself, volume, open interest etc...
Examples of those calculations could be means, standard deviations, variances, regressions etc... Some
indicators are drawn on the price charts, others below the chart and others can apply on both of them.
There are indicators for all timeframes and time periods. Some of them are recommended by their inventor to
better be used for a specific period. For example relative strength index, or better known as RSI, was
introduced by Willes Wilder’s which recommended to use RSI with 14 lagging periods. Also, there are indicators
that are recommended to be used for a specific time frame, for example bullish and bearish flags are mostly
short-term patterns.
Leading vs Lagging Indicators
It is important for every trader to realize that there are two types of indicators. Leading indicators are those
who lead the price, in other words they precede price movements thus they give signals before the new trend
or the reversal occurs. Leading indicators have a forecasting sense. On the other hand, lagging indicators are
those who are behind price move, they react to prices and do not lead them. Thus, a lagging indicator gives a
signal after the new trend or reversal occurs, they have a confirmation sense that the new trend has indeed

began. Example of lagging indicators is moving averages while example of leading indicators is relative strength
index (RSI).
The indicators which are moving within a range are called oscillators. For example RSI is trending within the
range of 0 and 100 while moving average convergence divergence (MACD) does not have a certain bound
range. Most oscillators have overbought and oversold levels and all indicators have their equilibrium level.
Usually, the upwards penetration of the equilibrium level is a bullish signal while the downwards penetration of
it is a bearish signal. For RSI the equilibrium line is 50 since it ranges within 0 and 100, for MACD the
equilibrium line is 0 since it does not have certain bounds.
Between indicators and price a trader should always look for divergences. Positive divergences occur when the
price chart is making new lows but the oscillator chart does not confirm the downtrend and it is making higher
or equal lows. This means that a reversal to the upside is on its way, but we only trade that upon confirmation
by the price. Negative divergences occur when price is making higher highs but the oscillator is making lower or
equal highs and does not confirm the uptrend. That’s a sign that the uptrend is about to reverse, again we are
trading the signal upon confirmation by the price pattern which is the failure of higher highs.
Moving Averages
Moving averages are methods of calculation of the average value of an instrument’s price. There is the typical
statistical mean, which is called simple moving average, and other ways of calculation. They are being called
“moving” averages as they change or move respectively with price. A critical thinking is needed from the trader
about the time periods for which the MA will be calculated. Of course everything is being calculated on the
platform that each trader uses, the only thing needed by the trader is to select the type of moving average that
fits his/her style for each case and time period. However a good trader can decide the type of MA needed only
if he has an overview in mind of the calculation behind them. All the moving averages are illustrated on the
prices chart.
It is important to understand that MAs are trend-following indicators and not leaders, they are lagging
indicators. A moving average does not anticipate the trend; it only reacts to the prevailing trend. During a
trading range MAs produce a lot of whipsaws. Since they are trend-following indicators it is better to be used
during an uptrend or a downtrend. There are many types of MA, some of them are simple MA, Exponential MA,
weighted MA, triangular MA etc. The most used ones are EMA and SMA. Moving averages is the base of many
important and widely used indicators such as Bollinger bands, MACD, etc.
Simple Moving Average
SMA is the typical statistical mean of the prices. If the trader chooses a 14 day SMA then the calculation would
be the sum of the closing price for those 14 days and then the division of the sum by 14. For each period the
calculation would be for 14 periods before including the current one.

Below is an example of a 14-days SMA calculation
Day Price
1 95
2 88
3 98
4 99
95+88+98+⋯+100+110 1308
5 90 SMA = 14
= 14
= 93.428
6 94
7 89
8 87
9 85
10 88
11 90
12 95
13 100
14 110
Exponential Moving Average
EMA or exponentially weighted moving average gives more weight to the most recent price and less to the
previous data. Thus, EMA reacts faster to current price movements than SMA. Weighing factors decrease
exponentially that’s the reason why it is being called exponential. EMA takes into consideration all of the past
prices of the instrument and this is considered one of its biggest advantages.
SMA vs EMA
The main criticism of SMA is that it does not take into account all the historic periods while EMA does. Since
history is important in technical analysis that is considered the main disadvantage of SMA. On the other hand,
SMA puts equal weight to all the time periods while EMA put more weight on the most recent one. There is a
theory that stands that the most accurate forecast for the next day is today, so many believe that it is better to
put more weight on the last period than on the previous ones. It is up to each trader to choose the most
suitable MA according to its needs and strategy.
MAs Interpretation
Single Moving Average

During an existing uptrend a buy signal occurs when the closing price penetrates to the upwards the MA. On
the other side, a sell signal occurs upon a downwards penetration of the moving average by the price during an
existing downtrend. The selection of the lagging periods of the MA depends on the timeframe. Usually a
medium-term MA is being used for the single trading signals, like a simple moving average of 21 periods,
SMA21. Below is an example of a daily chart of NZDCAD during a downtrend, there are two sell signals on the
below chart marked in red cycles.

Downwards penetration of the SMA21

during an existing downtrend
Double Moving Average

Two moving averages are being used for this method, usually a short term and a medium term or a long term
MA. The general rule is that the longer MA is better to be a multiplier of two of the shorter MA, if for example a
trader chooses a 10-periods short term MA then the longest could be 20 periods or 40 periods. Both MA are
applied on the same chart and they execute buy and sell signals by their crosses.
A buy signal during an uptrend occurs when the short term MA crosses upwards the longer MA, an existing
uptrend is a must. Respectively, a sell signal during a downtrend occurs when the short term MA crosses
downwards the longer MA, an existing downtrend is a must.

Bearish cross during a downtrend => Sell

Signal
20-Periods MA
10-Periods MA
Triple Moving Average

Three moving averages are being used for this method, a short term, a medium term and a long term MA. Just
like double moving average trading signals method, the medium term MA needs to be a multiple of 2 of the
short-term and the long-term MA has to be a multiple of 2 of the medium term MA. For example if we choose a
short term MA of 10 periods, the medium term could be 20 or 40 periods and the long term 40 or 80
accordingly.
A buy alert occurs upon a bullish upwards penetration of the long term MA by the short-term MA during an
existing uptrend. A buy signal (buy confirmation) occurs upon a bullish upwards penetration of the long-term
MA by the medium-term MA during an existing uptrend. A sell alert occurs upon a bearish downwards
penetration of the long term MA by the short-term MA during an existing downtrend. A buy signal (buy
confirmation) occurs upon a bearish downwards penetration of the long term MA by the medium term MA
during an existing downtrend.

Sell Alarm
Sell Signal
20-Periods MA
10-Periods MA
40-Periods MA
On the example above, there is an existing downtrend, and then a sell alarm by the cross of 40-period MA of
10-periods MA and then there is a sell signal by the cross of 40-periods MA by the 20-periods MA.
Of course there are exceptions that prove the triple MA rule. One of them is the famous and widely used triple
moving average of Robert C. Allen. He suggested the combination of 4, 9 and 18 periods MAs. Another famous
triple combination of MAs is Fibonacci sequence numbers, 8, 13, 21, 34 and so forth.
The main advantage of the triple MA method is that it generates less whipsaw than the double MA method
since it gives an alert and then a confirmation. The main criticism and disadvantage of the MA methods is that
an existing uptrend or downtrend is a must, which means that the trader losses the opportunity to open a
position on tops or bottoms.
Stochastic Indicator
Stochastic is an oscillator that compares where an instrument’s price closed relative to its price range over the
last selected time periods. There are two main indicators that stochastic consists of, %K and %D. %K is being
called the fast stochastic and %D the slow stochastic. This happens because %K is closest to prices since it’s a
first derivative of them while %D is a moving average of %K.

Stochastic always ranges between 0% and 100%. A reading of 0% means that instrument’s current price is at its
lowest reading for the selected period and a reading of 100% means that instrument’s current price is at its
highest reading for the selected period. Also, instrument’s current price is at the midpoint of the selected
period’s range when the value of stochastic is 50% and so forth.
The below formula is being used for %K calculation:
𝐶 − 𝐿𝐿
∗ 100
𝐻𝐻 − 𝐿𝐿
Where:
 C = current period closing price

 LL=Lowest price of the previous x-time periods selected
 HH = Highest price of the previous x-time periods selected
If for example we want to calculate a 20-day %K and 0.6784 is today’s close price, 0.6018 is the lowest price of
the last 20 days and 0.7189 is the highest price of the last 20-days then %K price would be:
0.6784−0.6018
0.7189−0.6018
∗ 100 = 65.41%
65.41% level shows that today’s close is at the level of 65.41% relative to the security’s price range over the last
20 days. That means that today’s close is highest than the midpoint of security’s price range within the last 20
days.
Of course you don’t have to calculate stochastic prices for each period, they are being calculated automatically
and a chart of it is drawn below price chart. However is good to know the concept of calculation behind every
indicator to know where you can use it and what its amount reveals about the current market price.
Interpretation
In general, when a faster indicator crosses upwards the slower indicator, it is a bullish signal and when the
faster indicator crosses downwards the slower indicator, it is a bearish signal. For stochastic those signals are
stronger when %K rises above %D above 80% as a buy signal and when %K falls below %D below 20% as a sell
signal.
Another buy signal by stochastic is when both %K and %D fall below 20% and then rise above 20%.
Respectively, a sell signal occurs when %K and %D rise above 80% and then fall below 80%.

Above is an example of EURUSD where stochastic has upwards penetrated the overbought level and then
downwards penetrated the same level, which is a sell signal. Price has indeed felt after stochastic’s bearish
signal.
Another interpretation of stochastic and all the oscillators is looking for convergences/divergences between
price and stochastic.
Relative Strength Index
RSI was introduced by Welles Wilder in Futures magazine in 1978, Wilder proposed to use a 14-period RSI but a
trader can adapt the periods to its own trading style and time frame. The general rule of thumb for all the
indicators is that the less periods we choose the more volatile they are. RSI measures the internal strength of
an instrument and it ranges between 0 and 100.
RSI is calculated based on up-days and down-days of bar charts. RSI formula is the below:
100
100 - 1+𝑈/𝐷

Where:
 U = Number of up-days for the selected period

 D = Number of down-days for the selected period
The neutral days are calculated as up-days.
The equilibrium line of RSI is 50, its oversold level is 30 and its overbought level is 70. If RSI is above 50 it means
that there are more up-days than down-days for the selected period. If it is below 50 it means that there are
more down-days than up-days.
Interpretation
When RSI crosses upwards the equilibrium line, it is a buy signal and when it crosses downwards the 50 line
that’s a sell signal. A strong buy signal occurs when RSI upwards penetrates 70. Strong Sell signal occurs upon
downwards penetration of 30 oversold level.
Divergences also apply on RSI. If market is making new highs but RSI is making new lows then the price is
expected to fall and vice versa.
Also several patterns can be observed on RSI which precedes price action, like failure swings, head and
shoulders etc.
Moving Average Convergence Divergence
MACD was introduced by Gerald Appel in 1979. The period used for it were clearly determined by Mr. Appel, it
is calculated with the below formula:
EMA12-EMA26
Where:
 EMA12 is the exponential moving average of 12 periods

 EMA26 is the exponential moving average of 26 periods
There is also the signal line of MACD which is an exponential moving average of 9 periods of MACD. That is:
EMA(MACD)9
Another feature of MACD is MACD histogram (MACDH). That is the subtraction of signal from MACD. If the
histogram is at 0 reading then MACD is equal to its signal. If MACDH is greater than 0 this is a bullish
momentum while a negative value of MACDH indicates a bearish momentum. That is because the faster
indicator is MACD and the slower is the signal. MACDH helps us illustrate in a simpler way the crosses of the
two indicators.
MACD equilibrium line is 0 but there are no predefined overbought and oversold levels.
Interpretation
A downwards penetration of 0 line by MACD is a sell signal and an upwards penetration is a buy signal.

If MACD crosses to the upside its signal line and both of them have positive values then that’s a bullish cross.
On the other hand, if MACD crosses to the downside its signal and both are below zero then that’s a bearish
signal. Those signals are the same as if MACDH crosses to the upside or to the downside the zero line
respectively.
MACD extreme levels are based on the criticism of each trader. A trader can also identify divergences between
MACD and the price chart, divergences are always more effective near indicators’ extremes.
Candlesticks Patterns
Candlesticks are the most widely used charts in forex analysis. There are certain patterns that declare bearish
and bullish reversal or continuation of price movement.
Three white soldiers

A bullish bottom reversal signal. Three long upside candlesticks with consecutively
higher closes. The close price of each candle is usually near to high prices.
Three Black Crows

A bearish top reversal signal. Three long downside candlesticks with
consecutively lower closes. The close price of each candle is usually
near to low prices.
Bullish Marubozu
A long upside candle with no or little upper and lower shadows that indicates
continuation of the uptrend.
Bearish Marubozu
A long downside candle with no or little upper and lower shadows that indicates
continuation of the downtrend.
Falling Window
A gap (window) between two candles which consists also a strong resistance area.
The gap is between the low of the first candle and the high of the second candle.
The color of the candles does not matter. This is a bearish continuation pattern.
Rising Window
A gap (window) between two candles which consists also a strong support area.
The gap is between the high of the first candle and the low of the second candle.
The color of the candles does not matter. This is a bullish continuation pattern.

Hammer
A bullish reversal candle with small bullish or bearish real body, little or no upper shadow
and lower shadow at least twice the real body. The real body is better to be bullish. It is
observed at the bottom of the prevailing downtrend.
Inverted Hammer
A bullish reversal candle with small bullish or bearish real body, little or no lower shadow
and upper shadow at least twice the real body. The real body is better to be bullish. It is
observed at the bottom of the prevailing downtrend.
Hanging Man
A bearish reversal candle with small bullish or bearish real body, little or no upper
shadow and lower shadow at least twice the real body. The real body is better to be
bearish. It is observed at the top of the prevailing uptrend.
Shooting Star
A bearish reversal candle with small bullish or bearish real body, little or no lower
shadow and upper shadow at least twice the real body. The real body is better to be
bearish. It is observed at the top of the prevailing uptrend.
Bullish Engulfing
A bullish pattern consists by 2 candlesticks, a small bearish candle and a larger bullish
candle which closes above the first one. A prevailing downtrend is required.
Bearish Engulfing
A bearish pattern consists by 2 candlesticks, a small bullish candle and a larger bearish
candle which closes below the first one. A prevailing uptrend is required.

Chapter 5: Fundamental Analysis
What are fundamentals?
Fundamentals are data for the economy from a wide variety of resources that affect currencies’ prices.
Fundamental analysis is the analysis of those economic, political and social data targeting the projection of the
next price move. The whole idea behind fundamental analysis is that, if the economy of a country is strong and
healthy, then this country’s currency shall be strong as well. When the economic outlook of a country is
weakening, then this country’s currency is expected to lose in value.
In this chapter we are going to learn the basic fundamental data a trader shall examine on a frequent basis and
the main indices, events and persons he/she shall follow to be in line with market moves. Do not worry, they
may seem a lot but good brokers always find ways and cheat books to help the traders (they call them
“economic calendars”). By the end of this course you are not only going to be able to read an economic
calendar but also be an expert on the topic.
News and Trading
If you really want to be a good trader, it means that you have to stick on the web when an important
announcement is going to be released. If for example you are trading EURUSD, then for sure you need to be
updated on Europe and US economic outlook. Imagine that you are so sure about your long positions on
EURUSD that you are sitting on your sofa, eating your burger and relaxing watching a movie. Suddenly, you
receive a margin call notification from your broker. You think, “Oh my God! Euro was running an uptrend, what
happened??”. Then you are so disappointed that you do not even want to see the end of the movie and you
just sit back on the sofa and switch on the TV. All the channels are having the same urgent announcement; the
Central Bank of Europe (ECB) has collapsed! Where was your mind when the president of the ECB was speaking
this afternoon? What? Who’s the president of the ECB and why shall you care about his speech? Well, that’s
what happens when you are trading without looking at fundamentals.
What an awful scenario, right? Okay do not worry and do not search on the web for any possible Central Bank
crashes, the above case had a bit of science fiction scenario in it, central banks do not crash every day. So, did
you at least search who’s the ECB president? That’s currently Mario Draghi and you should watch his speech
and announcements if you are a Euro trader. We are going to learn about many important persons that we
shall keep a close eye on, and many important data that affect currencies prices.
Persons to follow up: World Leaders
Since it is important to follow up with world leaders, their decisions and speeches, we will refer to the most
important ones in this section.

Janet Yellen
15th Chair of the Federal Reserve, Yellen was sworn in on February 3, 2014, making her
the first woman to hold the position. She was also the 18th Chairperson of the Council of
Economic Advisers. As head of the US central bank, which controls short term interest
rates, she has more influence over the nation's currency value than any other person.
Traders scrutinize her public engagements as they are often used to drop subtle clues
regarding future monetary policy.
Mario Draghi
The President of the ECB since the beginning of November 2011. ECB, and hence
Draghi, is the institution which manages Euro and monetary policy in the European
Union. Draghi announces the strategy and interest rates decisions of the ECB, usually
while he is speaking euro pairs has big fluctuations.
Mark Carney
Mark Joseph Carney is the 120th and current Governor of the bank of England since
July 1st 2013. As head of the central bank, he controls interest rates, and thus has
more influence on cable’s value than any other person. Volatility is often
experienced during his speeches as traders attempt to decipher interest rate clues.
Angela Merkel
Angela Dorothea Merkel is the first woman to hold the position of the Chancellor of
Germany since 2005 and the leader of the Christian Democratic Union (CDU) since
2000.
Haruhiko Kuroda
31st and current Governor of the Bank of Japan (BOJ). He was formerly the President of
the Asian Development Bank. Haruhiko Kuroda has been an advocate of monetary policy
in Japan.

Theresa May
Theresa Mary May is the Prime Minister of UK since 13th July 2016. Theresa replaced David
Cameron after the Brexit referendum, since Cameron was a Bremain supporter. She is a
British politician and the leader of the Conservative party.
Barack Obama
Barack Hussein Obama II is the 44th and current President of the United States.
On 8th November 2016 there will be held the US presidential elections, the next president
would remain from 2016 until 2020.
Thomas Jordan
Thomas J. Jordan is the chairman of the governing board of the Swiss National Bank. He is
an economist, the chairman of the Central Bank Counterfeit Deterrence Group, a member
of the steering committee of the Financial Stability Board and a member of the board of
directors of the Bank for International Settlements. Thomas became a member of the
Swiss National Bank in 1997 as an economic advisor and he was appointed as chairman of
the governing board in 2012.
Inflation
In simple words, economists define inflation as the rise of prices of goods and services over a period of time. On
the other hand, deflation is exactly the opposite. It is the decrease in the overall price level of goods and
services in an economy over a period of time. Hyperinflation is a period of very rapid increases in the prices.
In general, when prices increase, a currency and the whole economy of a country are affected. Let’s assume
that we have one unit of a currency, for instance one dollar, and let’s say that with one dollar I can buy a bottle
of water today. If the annual inflation rate is 1%, I would need 1.01 bucks to buy the same bottle of water the
next year, since its cost is going to increase. This means that the buying power of the dollar will be weakened.
On the other side, let’s assume that the annual deflation is 1%, that means that the next year the same bottle
of water will cost 0.99 and the buying power of our dollar will be strengthen.

Most probably you would think that deflation is better, since you can buy more with the same unit of dollar.
However, there are many benefits and also drawbacks of inflation. Inflation affects the cost of living and thus
the cost of business, borrowing, mortgages, bonds, stocks etc.
In forex, inflation is a very sensitive issue since it is one of the main factors that affect the Central Banks
decisions as to where to increase or decrease interest rates. Inflation also affects in general the power of a
currency. A sustainable example could be the rate cut of the ECB on March 2016 from 0.05% to 0%. It was just a
cut of 5 points you would think, but EURUSD had a rally of 400 pips! Let’s have an indication of what those 400
pips could mean, you can have a look at the daily chart of EURUSD below.
You can notice that the longest candle is candle a and the second one is candle B. Specifically, candle A is 500
pips long while candle B is 400 pips long. On 10th of March 2016 ECB cut rates by 5 points but what was the
event on 24th of June 2016? Come on, you do not need to read Financial Times every morning to know that. On
June 24th there was the result of Brexit referendum! Can you imagine that? Brexit decision moved the market
only 100 pips more than ECB rate cut! By now you should get the importance of interest rates in forex markets!
Interest Rates
Interest rates are the cost of loans, the amount charged by a lender to a borrower for the use of assets. Interest
rates are expressed as a proportion of the amount lent, deposited or borrowed over a period of time. For
instance, annual interest rates are the rate charged over the period of one year. There are also monthly, bi-
monthly, quarterly, semi-annual etc. interest rates.
In the forex market, interest rates are the major catalyst for the value of a currency and for the strength of a
country’s economy. The Central Bank of each country is responsible of setting the interest rates on a
reasonable rate that would help country’s economy.
Interest rates are affected by many economic factors and they are directly interrelated with inflation. Do not
burn your mind wondering why, here’s the simple explanation for this. Let’s assume that the interest rates of a
country are high, thus interest rates for borrowing are high and so are the interest rates for depositing.

Therefore, people would prefer to borrow less and save more money in the banks, in order to avoid to be
charged high on borrowing and gain more on depositing. This makes the economy growth decreasing, the
inflation becomes slower also and most probably the currency of this country will lose its strength in the long
term. In simple words, high interest rates on deposits attract foreign investors to buy the currency in order to
benefit from high deposit rates and thus the currency’s value increase due to the buying demand. The opposite
case would be to have low interest rates. Hence, depositing is not attractive but borrowing is. This helps the
economy and inflation to move faster and the currency of this country to gain strength. In such case, low
interest rates on deposits attracts investors to sell the currency in order to avoid low deposit rates and benefit
from higher interest rates of other currencies; thus the currency’s value decrease due to the selling demand.
Central Banks
A trader needs to be aware of the interest rates of the countries’ currency that he is trading. Thus, he/she
needs to follow up with Central Banks’ interest rates decision and Central Banks policy meetings.
The major central Banks are the following:
 Bank of Canada, BoC

 Bank of England, BoE
 Bank of Japan, BoJ
 European Central Bank, ECB
 Federal Reserve System, Fed
 Reserve Bank of Australia, RBA
 Reserve Bank of New Zealand, RBNZ
 Swiss National Bank, SNB
Monetary Policy
The Central Banks have a target inflation and interest rate in mind so that the value of their currency and their
economy is stabilized. In order to achieve this they apply monetary policy, the procedure by which they control
the supply of money in the country.
There are two main types of monetary policy, which are applied according to each country’s needs.
Expansionary monetary policy applies when increased money supply is needed while Contractionary monetary
policy applies when the Central Bank wants to decrease the money supply in the country.
Expansionary monetary policy increases the money supply by decreasing the unemployment and increasing
borrowing and consumer spending. One way that expansionary monetary policy can be achieved is by
decreasing the interest rates. Of course interest rates cannot be sharply increased or decreased; this is a
procedure that is taking place steadily and carefully by the Central Banks. Usually, when the interest rates are
about to change, they change at round 0.25%.

On the other hand, Contractionary monetary policy slows the money supply, decreases inflation and borrowing
so that it slows down the economic growth of a country. Of course, this type of monetary policy can be
achieved by increasing interest rates, as we discussed before.
When an economy is in equilibrium, then Neutral monetary policy is being used.
Lately, a frequently used monetary policy is Quantitative Easing (QE) measures. QE can be applied by central
banks when the interest rates are near zero; the central banks buy financial assets from private and commercial
institutions so that they increase the money supply in the markets and evaluate the price of those financial
instruments. QE have been adopted by Central Banks predominantly after the economic crisis of 2008.
When the interest rates do not approach zero, an expansionary monetary policy used by central banks is the
purchasing of short term government bonds and securities targeting to decrease the short term interest rates
and increase money supply.
An out of the box alternative to QE is Helicopter Money. Yes, you understood correctly. Imagine a helicopter
flies over a country and drops money from the sky, what a great scenario uh? You can thank Milton Friedman,
the economist who first proposed this idea. Okay the central banks will not literally drop money from the sky,
but they are able to print an amount of money and distribute it to the public in order to strength the economy.
This method can be used when an economy is during a recession and interest rates are closed to zero.
Fiscal Policy
While monetary policy is carried out by Central Banks, fiscal policy is applied by government and it influences
the level of taxes and government spending, targeting the increase of the demand in the economy. The types of
Fiscal policy are the same with monetary policy, expansionary and contractionary. The meaning is again the
same, expansionary fiscal policy aims to boost the economy while contractionary fiscal policy aims to slow the
economy down.
When an economy is in equilibrium, then Neutral fiscal policy is being used.
Hawkish Vs Dovish
The Central Banks adopt a style of monetary policy, depending on current circumstances and the current health
of their economy. There is the hawkish and the dovish tone.
Generally, Hawkish tones favor high interest rates and the hawkish statements are concerned with inflation,
implying that prices are too high and inflation needs to be controlled. Hawkish statements support tightening
monetary policy and restrictive credit policy.
Dovish banks are not such aggressive; they favor low interest rates, they are less concerned with inflation and
support economic growth and employment.

For example, let’s say that Mario Draghi is having a speech and he is referring that “ECB considers the current
inflation rate to be lower than expected and to threaten European Union’s economy”.
Hmm, let’s see, who was following us and who got lost after all those definitions!
How would you describe super Mario’s statement?
Is it Hawkish or Dovish? Anyone?!
Yes! It is dovish! Since the governor of the European Central Bank claims that the inflation rate is too low, he
implies a rate cut and his statement is considered to be dovish.
Gross Domestic Product
Gross Domestic Product, or GDP as we use to call it, measures the market value of goods and services a country
produces during a period of time. The metric represents a snapshot of the economy at a certain point in time; it
measures the total economic activity of a nation. Economists also use this index to compare two nations’
economic health and to get an overview of the standard of living of the country. GDP is one of the most
important fundamental indicators that a trader should monitor closely.
The formula by which GDP is being calculated is very simple. It is the sum of consumer spending, net exports,
investments and government spending.
GDP = C + IV + GS + EX - IM
C: Consumer spending in a country’s economy

EX: Country’s total Exports,
IM: Country’s total Imports
IV: Total value of country’s Investments,
GS: Total value of Government Spending
It is obvious from the formula that when the imports of a country increase, then the GDP measure decreases.
Unemployment
Unemployment is the amount of people who are not working, who are looking for a job and are available and
willing to work. The people who are not available to work or does not seek to do so, does not count in the
unemployment amount. The rate of unemployment is often considered the key measure for the health of an
economy. During a recession period, unemployment is higher than other periods.
The major unemployment indicators in the US are the following:
 Non-farm Payroll or NFP is a report exported on a monthly basis which measures the total number of
private sector paid workers in the US added during the examined period. The term itself refers to the
private sector excluding the farmers; however it also excludes government workers, workers of

nonprofit organizations and private households’ workers. It is released to the public on the first Friday
of every month and it is one of the most important indicators for the health of the US economy. A
lower or better than expected number could drive the market to the opposite direction and cause
chaos for investors. NFP represents around 80% of workers who participated in the US GDP production.
 Unemployment Rate is equal to the number of unemployed persons divided by the whole labor force;
the labor force is the total sum of employed and unemployed persons. Unemployed is the definition
given earlier in this chapter. Usually, the US unemployment rate is announced the same day and time
together with NFP.
 Initial Jobless Claims is the number of people who applied for the first time to receive unemployment
insurance benefits during a specific period. Usually this report is published on a weekly basis. As an
unemployment indicator, economists and analysts are looking this figure closely to monitor the
economic health of a nation’s economy.
 Continuing Jobless Claims on the other hand, is the number of people who claimed to receive
unemployment insurance benefits during the examined period but it is not their first time, they have
been receiving employment benefits before.
 Employment Change measures the change in the number of people who are employed during a certain
period of time. Usually this index is calculated on a monthly basis.
Economic Calendars
So! Now you learned about all those leaders and all those economic indicators that you need to follow in order
to trade. And here is the billion dollars question, where can I find all those indicators and all those
announcements on time?! Did you think of it? If not, then take a look back to all of them, check their frequency
and then check an economic calendar on the web!
Economic calendars scheduled months before from several brokers and news sites on the web. There, you have
the normal calendar in front of you and notes on when the next ECB interest rate decision would be, when the
GDP would be announced etc. Isn’t that so great? Wait, there’s more! You can also see the exact time of those
events, their impact on the relative currency and also a forecast of how much they expect the reports to be.
Usually, forecasts play a major role on how markets are going to move after the announcement. Let’s take for
example NFP report. On Friday, June 3rd , the NFP report was estimated around 164k by most of the analysts.
Unfortunately for US Dollar, actual NFP was announced 38k, which had a huge gab from expectations. Yes,
most of the times in forex it’s all about expectations! Can you imagine the chaos on markets? EURUSD raised
230 pips after the announcement and it was kept on increasing for two consecutive days. Whoever bought
EURUSD on this day, was the happiest person on the world!

FX101 - Introduction To Forex

Загружено:

Сведения о документе

Исходное описание:

Оригинальное название

Авторское право

Доступные форматы

Поделиться этим документом

Поделиться или встроить документ

Параметры публикации

Этот документ был вам полезен?

Это неприемлемый материал?

Авторское право:

Доступные форматы

FX101 - Introduction To Forex

Загружено:

Авторское право:

Доступные форматы

1 Research Department

FX101: Introduction to Forex

info@harborx.com Tel: +357 25 025522 Fax: +357 25 030258

Good for the day............................................................................................................................................. 13

info@harborx.com Tel: +357 25 025522 Fax: +357 25 030258

Stochastic Indicator ............................................................................................................................................ 30

info@harborx.com Tel: +357 25 025522 Fax: +357 25 030258

Chapter 1: Forex for Beginners

info@harborx.com Tel: +357 25 025522 Fax: +357 25 030258

Symbol Country Name Nickname

info@harborx.com Tel: +357 25 025522 Fax: +357 25 030258

Characteristics Forex Stocks

24-Hour Trading Yes No

Minimal or no Commission Yes No

OTC market Yes No

Market Manipulation No Yes

Influence of brokerage firms Less Likely More Likely

Restriction on Short Selling No Yes

info@harborx.com Tel: +357 25 025522 Fax: +357 25 030258

Who are the market players?

Retail Traders and Speculators

Large Commercial Companies

info@harborx.com Tel: +357 25 025522 Fax: +357 25 030258

Time Zone GMT (OPEN-CLOSE)

New York 12:00-21:00

Time Zone GMT (OPEN-CLOSE)

New York 13:00-22:00

Best and worst days and time to trade

info@harborx.com Tel: +357 25 025522 Fax: +357 25 030258

info@harborx.com Tel: +357 25 025522 Fax: +357 25 030258

Chapter 2: Basic Terms and Definitions

One standard lot is also known as one contract size.

info@harborx.com Tel: +357 25 025522 Fax: +357 25 030258

info@harborx.com Tel: +357 25 025522 Fax: +357 25 030258

Limit Entry Order

Take Profit Order

info@harborx.com Tel: +357 25 025522 Fax: +357 25 030258

Good till Cancelled

Good for the day

Types of market analysis

There are three ways to analyze the market:

info@harborx.com Tel: +357 25 025522 Fax: +357 25 030258

info@harborx.com Tel: +357 25 025522 Fax: +357 25 030258

Which type of analysis is the best?

info@harborx.com Tel: +357 25 025522 Fax: +357 25 030258

info@harborx.com Tel: +357 25 025522 Fax: +357 25 030258

Example of a bar chart for EUR/USD:

info@harborx.com Tel: +357 25 025522 Fax: +357 25 030258

Example of EUR/USD Candlestick Chart:

info@harborx.com Tel: +357 25 025522 Fax: +357 25 030258

Chapter 3: Trading and Planning

What is a trading plan?

How to decide which trading plan to use

info@harborx.com Tel: +357 25 025522 Fax: +357 25 030258

info@harborx.com Tel: +357 25 025522 Fax: +357 25 030258

Risk management is the most important concept of a trading plan.

info@harborx.com Tel: +357 25 025522 Fax: +357 25 030258

info@harborx.com Tel: +357 25 025522 Fax: +357 25 030258

Chapter 4: Technical Analysis

 History repeats itself

info@harborx.com Tel: +357 25 025522 Fax: +357 25 030258

info@harborx.com Tel: +357 25 025522 Fax: +357 25 030258