ABSTRACT

This guide provides a comprehensive

overview of the financial market concept,
suitable for both beginners and intermediate
learners. It covers the fundamental basics of
how financial markets operate, with a specific
focus on the Forex market.

E.H.Leslie
Financial Market

INTRODUCTION
TO FINANCIAL
MARKETS
The Foreign exchange Market

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 FINANCIAL MARKET
A financial market is a broad term describing any market place where buyers and sellers
participate in the trade of assets such as equities, bonds, currencies and derivatives. Financial
markets can be found in nearly every nation in the world. Some are very small, with only a few
participants, while other like the New York Stock Exchange (NYSE) and the FOREX
MARKETS trade trillions of dollars daily. There are various types of financial markets, but here
we are going to look on one type of financial market which is the most liquid.

FOREX.
Forex market is the market where currencies are traded. It is the largest, most liquid market in
the world with an average traded value that exceeds $1.9 trillion per day and includes all of the
currencies in the world. Forex is the largest market in the world in terms of the total cash value
traded, and any person, firm or country may participate in this market.

Trading-place/area.
There is no central market place for currency exchange; trade is conducted over the counter. The
forex market is open 24 hours a day, five days a week and currencies are traded worldwide among
the major financial centers of London, New York, Tokyo, Zürich, Frankfurt, Hong Kong,
Singapore, Paris and Sydney, all opens at different times/periods called sessions.

Participants in the market.

Until recently, forex trading in the currency market had largely been the domain of large financial
institutions, corporations, central banks, hedge funds and extremely wealthy individuals. But
emergence of the internet has changed all of this, and now it is possible for average investors
to buy and sell currencies easily with the click of a mouse through online brokerage accounts.

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HOW TO PARTICIPATE IN FOREX MARKET.
From the idea that “FOREX IS FOR SPECIALISTS NOT FOR GENERALISTS” we need to
have a certain condensed (simplified) way for easily understanding Forex trading. In Forex
Market there are many things to consider in order becoming successful trader. When you’re
learning Forex, your Mentor may insist you to stick in certain major aspects or trading system for
success in trading because forex knowledge is very wide. Therefore, to be successful in Forex you
must be more specific than general. This means you have to understand few potential aspects
of Forex trading.

Consider the case below from Pareto success principle which generally shows how the power
of doing few things effectively or efficiently can have positive impact than running for many
things at a time inefficiently.

Focusing on knowledge and actions which are necessary in Forex, this book is going to analyze
aspects of successful Forex trading in major groups of three (Three’s Setup in Forex [3’s -
FX]). Despite the fact of being in group of three, be aware that some things work efficiently when
occurs in groups and others are effective following the rank from 1-3.

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THE THREE’S SYSTEM IN FOREX.

The Three’s Set-up in Forex have compacted down Forex trading as simple as
possible in as clear and understandable way as follows:

i. Three Analysis tools (Price action tool).

- Lines (Trend lines & Support and resistance lines).
- Candlestick Pattern (MCP, DCP & TCP).
- Chart Pattern (Squares i.e. multiple tops / Bottoms. Triangles, Channels and
Wedges).

ii. Three trading techniques.

- Trend following.
- Trading Reversal.
- Trading Breakout.

iii. Three Key Indicators.

- Moving averages (MA).
- Relative Strength Index (RSI).
- Moving Average Convergence Divergence (MACD).

iv. Three important currency pairs to trade.

- EUR/USD.
- GBP/USD.
- USD/JPY.

v. Three fast paying sessions to trade.

- London.
- New York.
- Tokyo.

vi. Three foremost market (Price) cycles.

- Up trend.
- Consolidation.
- Down trend.

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vii. Three major features of the price chart/patterns traded.
- Chopping pattern.
- Bouncing pattern.
- Surfing pattern.

viii. Three fast and profitable trading styles.

- Scalping (5-10 pips per trade in secs to mins, M1 & M5).
- Day trading (20-40 pips per trade in day, M15 & H1 to H4).
- Swinging (50-150 pips per trade in less than a week, H1 and H4).

ix. Three things to become successful in Forex.

- Trading system.
- Risk management.
- Psychology.

x. Major market orders.

- Stop orders (buy stop / sell stop & stop loss order).
- Limit orders (buy limit/ sell limit).
- Take profit order.

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CURRECY PAIRS.
Since FOREX is a short form of FOREGN EXCHANGE, therefore there are various currencies
traded in Forex. They occur in pairs where by each currency is traded against the other, that
means when you are buying one currency at the same time you are selling the
other. Currency are represented inform of letters like EUR for euro, USD for United States
Dollar, JPY for Japanese Yen e.t.c. therefore the first two letters have something to do with the
name of the country and the last letter carries the name of the specific currency.

NOTE: Base currency commonly has a value of “1” with respect to quote currency.

Currency pairs can be categorized in various categories like major currencies, which means
currency pairs containing USD or currencies which are most popular as one of the
component e.g. EUR/USD. Also currency pairs can be grouped as Cross currency which means
a pair lacking US Dollar EUR/JPY. Exotic currency pairs, these are currency pairs made up of
major currency and emerging currency i.e. currency from countries with strong but small
economy from global perspectives e.g. EUR/ZAR.

For successful trading especially for beginners you have to choose currency pairs that does not
exceed three from major currencies. These currencies have high liquidity which will help you
to have small positions with greater move. Also they create high trading opportunities by
showing clear patterns of the price chart.

Before you choose your currency pairs to trade understand how selected currencies can affect
each other in different aspects like currency strength fluctuations with time. What is
important enough is to have currency pairs with tight spread (small spread). Therefore,
currencies selected should be: -
i. The one with best trade.
ii. Have tight spread from the broker.
iii. Traded the most i.e. high liquidity.
iv. That crosses trading sessions.

Below are the first three currency pairs with the best trades: -
a) UER/USD.
b) GBP/USD.
c) USD/JPY.

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Reasons for selected currency pairs.
- EUR/USD, support trading the range i.e. buying at support and selling at resistance.
- USD/JPY, support trend trading especially up trend.
- GPB/USD, support trend trading in both directions and forms clear distinct trends. i.e.
up trend is long with many bullish candles and down trend is long with many bearish
candles.

What moves Forex market?

Forex market is not static rather it is dynamic and that is how traders can make or lose money.
Dynamicity of the currency pair during trading depends on the pair you are trading because there
are various factors behind the movement of the currency.

The key factors for the movements of currencies are the central banks. Therefore, you have to
understanding clearly few pairs of currencies and the factors behind their movements; this will
reduce but not eliminate at all the risk of losing trades. Therefore, the key is the CENTRAL
BANKS. From pairs of currencies selected above each currency is moved by the following banks:

 US Dollar, by the Federal Reserve System (USA).

 Euro, by European Central Bank.
 Pound, by bank of England.
 Yen, by bank of Japan.

Therefore, as a trader you have to be up-to-date with all news that seem to affect currency
concerning a specific central bank for your currency selected. Also be aware with news that may
affect people’s perceptions on currency.

NOTE: Don’t trade minor currencies which are less liquid and those with high volatility in
news. Always trade currency pairs that you monitor central banks information that may affect
currency.

CURRENCY NICKNAME.
Sometimes currency pairs are named by using their nicknames, below is the list of major
currencies with their nicknames.

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TRADING SESSIONS.
Trading session refers to the period of time when one market open and close. For
successive Forex trading you must have awareness on behavior of your selected currencies at
different time. Generally trading time is not so specific because is much linked with many factors
that can affect currency movement. Example news may occur at certain point in time and affect
people’s perception on a certain currency hence change currency movement.

Trading sessions include: -

- Asian session (Tokyo).
- European session (London).
- American session (New York).

Other sessions are;

- Moscow session.
- Australian session.

The most active trading hours occurs around the opening of London markets (around 8:00
GMT), and ends when markets close in US around 22:00 GMT. But the busiest time is when
London and US marketing time overlaps between 13:00 to 16:00 GMT. This is the most liquid
i.e. most traders make trades.

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For day traders these are key hours to trade because you have a chance to take quick profit but
remember that most news also occurs here.

Characteristics of major sessions.

i. London session.
- Starts around 8:00 GMT and winds down around 16:00 GMT.
- The most active currencies are EUR, GBP and USD.
- This is the more volatile session.
- It is good to trade breakouts.

ii. New York session.

- This starts around 13:00 GMT and winds up around 22:00 GMAT.
- The most active currencies are AUD, EUR, GBP, JPY and USD.
- It is the second volatile session from European session which is the most volatile.

iii. Asian session.

- Is the most quit session in most of the days.
- All pairs are slowly moving hence not good time for day traders.
- Only one currency which shows slow activity is JPY to small extend the AUD. This event
continuous until major events (NEWS) occur especially Chinese news data.

NOTE: The overlap between London and New York session is the most volatile where most
scalpers and day traders take advantages through trading EUR/USD and GBP/USD pairs.

Days with best trades.

As Forex open up five days a week there are some days with good trades and other days with the
worse trades. Commonly Monday and Friday are not much advised to be you preferred
trading days because on Monday is when the market opens therefore it will be not yet
stabilized almost throughout the day while on Friday is the day for people to close their
trades and taking profits, hence best trades are made half day. Therefore, the rest of the
days in a week are the coolest days to trade.

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WHAT ARE FX TRADING COMMISSIONS AND HOW DO THEY WORK?
In any business that you go into, you’ve got certain costs: Rental costs, marketing costs,
administrative costs, e.t.c.

In the trading business, commissions are the transaction costs. We pay it to the broker and
that’s how the broker makes money.

How Do Brokers Charge Us for Their Services?

There are three kinds of brokers, but I divide them into two groups:

1. Market Maker / STP Brokers.

These brokers charge a mark-up on the market’s bid/ask spread —whatever the bid/ask spread is,
they’ll quote you one or two pips higher.

For example, if the market is quoting at 1.2356, they’ll quote you at 1.2357. This one extra pip
goes to the broker and that’s how they make money.

2. ECN Brokers
These brokers charge a fixed commission. The lowest commission I’ve seen is the one I’m using
which is LiteFinance. They charge $3.50 per lot but it varies based on instrument you are
trading. So for every one lot that I trade, they charge $3.50 to buy and $3.50 to sell.

When you open and close a position (buy and sell), it’s known as a round trip. The total
commission I pay per entry and exit per lot is $7.

Open account with my broker here; https://www.litefinance.org/?uid=553438828&cid=51547

Broker Differences: Spreads and Charges.

Difference in Bid/Ask Spread.
Let’s see what the bid/ask spread looks like for these two kinds of brokers.

In this example, on the right you can see the ECN broker’s spread on EUR/USD is 1.2444 /
1.2444. The bid and the ask prices are very close; less than one pip apart. The broker doesn’t mark
up on the spread, so you can buy and sell at basically the same price.

On the left is a typical market maker broker. You can see the difference between the bid and ask
prices; a spread of almost 4 to 5 pips. Rather than quote you the market price, these brokers mark
you up by about 4 to 5 pips.

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Difference in Charges.
Imagine you want to go long on one lot of EUR/USD. You buy at 1.2434 and exit at 1.2454,
making you 20 pips in profit: -

20 pips x $10 x 1 lot = $200

But we have to factor in commissions. Let’s look at how much the two kinds of brokers will charge
you.
1. Market Maker / STP Brokers When you buy, they quote you 1.2435 (+1 pip), costing
you $10 per lot. When you sell, they quote you 1.2453 (-1 pip), costing you $10 per lot. The
total cost of your round trip is $20 per lot. Out of your $200 profit, $20 goes to the
transaction costs, which is about 10% of your profits.

If they were to mark up by more than one pip, your cost would be even higher.

2. ECN Brokers When you buy, you buy at 1.2434 (no mark-up). They charge you a fixed
commission ($3.50 in the case of my broker). When you sell, you sell at 1.2454. Again, you
pay a fixed commission of $3.50. The total cost of your round trip is $7 per lot, out of your
$200 profit.

This is why I prefer to use an ECN broker.

Now, there are many traders out there who say, “I don’t like ECN because I have to pay a
commission up-front.” But what they don’t see is that market makers and STP brokers cost more
due to the wider spread.

That said, I know that in some countries, you may not be able to get an ECN broker. If you have to
use a market maker or STP broker, find one that puts on you a maximum mark-up of one to
1.5 pips.

Recorded broker is here; https://www.litefinance.org/?uid=553438828&cid=51547

How Your Position Size Impacts the Commission You Pay?

Here’s another thing you need to know: How much commission you pay when you place a
trade depends on the number of lots you trade or your position size.

The bigger your position size, the bigger the number of lots you trade, and the higher the
commission you pay for that trade.

Now, what determines the number of lots you trade or your position size? It depends on how
close your stop-loss is.

If you’ve read my article on position sizing, you’ll remember this formula:

Your stop-loss distance is the only thing you can really control on a trade-by-trade basis.

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The smaller your stop-loss distance, the bigger the number of lots you trade, and
the more commission you pay.

Examples.
Let’s look at how this plays out using a Forex position sizing calculator available online.

In this example, your account size is $5,000 and you are risking 3% per trade. Say, you’re trading
EUR/USD and your stop-loss is 8 pips away.

Using the calculator, you know you’ll be trading 1.875 lots. So if you’re paying a commission of $7
per lot per round trip, that’s $7 x 1.875 lots = $13.13 commission.

Now, what if in another trade, your stop-loss is 20 pips away?

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Using the calculator, the number of lots you’ll trade is now 0.75. So $7 x 0.75 lots = $5.25
commission.

So you see, the tighter your stop-loss, the higher the commission you pay for a trade.

Should You Always Go for Wide Stop-Losses Then?

Now, you may be thinking, “If that’s the case, I’ll just put a wider stop-loss of 20 to 50 pips! Then
I can pay less commission.”

That’s okay if you’re a position or swing trader. You are in the trade for a few days or a few
months, so your stop-loss is usually further, like 30, 100 or 200 pips away.

When you’ve got such a wide stop-loss, the number of lots you trade would be less. So you worry
less about transaction cost as it takes up a smaller percentage of your profit.

But what if you’re a day trader like me?

How to Deal with High Transaction Costs as a Forex Day Trader.

Remember that when you are a day trader, you are getting in and out really fast. You’d like to take
a few trades in a day (for me, I take up to 3 trades in a day).

When you take short-term day trades, your stop-loss has to be close so that your
profit target can be reached fast.

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For example, if I put a trade where my stop-loss is 100 pips away and my profit target is 150 pips,
it’ll take me days or even weeks to reach my profit target. Because of this, I can’t place that many
trades.

But if my stop-loss is 10 pips away and my profit target is 15 pips, I can take profit in about one or
two hours. Thus, I can place more trades per day, which means I can make more pips per pip
risked.

“But wouldn’t I have to pay more commissions?” you ask.

Yes, that’s true; when you place a tighter stop-loss, your cost of trading is higher. So let me share
with you a little trick I use to cover these transaction costs.

Covering Transaction Costs by Tweaking Your Profit Target.

In my Forex day trading strategy, I used to always aim for a profit target of 1.5R with a tight stop-
loss of 8 to 10 pips.

But to cover the higher transaction costs, I want to make a bit more profit to make the trade
worthwhile.

Recently, I found that targeting 1.6R is more profitable if my stop-loss is 8 to 9 pips away.

 If my stop-loss is 8 pips, my profit target is 8 x 1.6 = 12.8 pips

 If my stop-loss is 9 pips, my profit target is 9 x 1.6 = 14.4 pips

But if my stop-loss is 10 pips or more, then I’ll stick to a 1.5R profit target, because the fixed
commission as a percentage of my profit is much lower.

Trading account terms.

Margin, Free Margin, Margin Level and Margin Call.

Margin is a portion of your account equity set aside and assigned as a margin deposit. A margin is
often expressed as a percentage of the full amount of the chosen position.

Free Margin is the amount of money that is not involved in any trade, so can be used in taking more
positions. If your open positions achieve profit, the greater the equity you will have, so you will have more
free margin.

Margin level is the percentage value based on the amount of accessible usable margin versus used margin.
Therefore, it is the ratio of equity to margin i.e. margin level = (equity/used margin) x 100. A margin
level is used by Brokers to detect whether FX traders can take any new positions or not. Most set this limit at
100%, this limit is called a margin call level. Therefore, margin call levels occur when your account equity

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is equal to the margin.

Margin Call this happens when your broker informs you that your margin deposits have simply fallen below
the required minimum level, owing to the fact that the open position has moved against you. If the money in
your account falls under the margin requirements, your broker will close some or all positions, this can
actually help prevent your account from falling into a negative balance.

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PRICE ACTION TOOLS (Technical analysis tools).
There are various technical analysis tools which are used to analyse the movement of price in the
past and present. This help to predict what will be the possible future move depending
on what does it meant by certain analysis tool in a specific time.

Technical analysis refers to study of financial markets based on price movements

in the past to the present. This includes tools like: -
i. Lines.
ii. Charts patterns.
iii. Candlestick patterns e.t.c.

CANDLESTICK PATTERNS & INTERPRETATION.

Candlestick pattern refers to a specific arrangement of candles in a price chart that
depict a certain meaning on the movement of the price in the market. There are various
candlestick patterns having various meaning in real market situations.

Reading candles.
A candle can be bullish or bearish depending on price movement represented by the candle.
Bullish candle represents a price movement from lower to higher while bearish candle
represents price movement from higher to lower price. This movement is represented at
any time frame i.e. 1M, 5M, 15M, 1H, 4H e.t.c.

Opening price and closing price represent body of the candle, but the price reached can be
higher or lower than the closing price. This results into formation of tail, weak or shadow of
the candle. The distance between the highest price and lowest price in the candle represent
range of the candle.

Usually bullish candle is represented in Green or white color while bearish candle is
represented in Red or Black color. These can be easily selected by the user in the trading
platform used like mt4.

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The easy way of grouping candle sticks is as follows: -
1. Mono – Candlestick Pattern (MCP) like Pin bars & Doji.
2. Di – Candlestick Pattern (DCP) like engulfing candles.
3. Tri –Candlestick Pattern (TCP) like Morning & Evening Stars.

MONO – CANDLESTIC PATTERN.

This pattern is formed of a single candle at a time in a price chart representing a certain
price movement in real market. The common mon-candlestick pattern is the pin bars.

Pin bars are candles with small bodies and long tail looking like a pin. Sometimes the body
may be highly reduced, such that the opening and closing price of the market occur at
the same price, this forms a doji candlestick.

Pin bars can be classified as: -

- Bullish pin bars.
- Bearish pin bars.

Bullish pin bars (Hammer).

Bullish pin bars are the candles with small body located higher/above and the long tail
projecting downward. They may have another short tail above. Bullish pin bars indicate the
bullish reversal pattern i.e. the market price changes from bearish to bullish.

Bullish pin bars occur in long term up trend at a support area of short term down
trend. The support line commonly considered here is the MA i.e. 50 EMA. When this is observed
a long trade can be entered.

Bearish pin bars (Shooting star).

Bearish pin bars are candles with small body located bellow and long tail projecting upward.
They may form a short tail bellow. Bearish pin bars indicate the bearish reversal pattern
i.e. the market price changes from bullish to bearish.

Bearish pin bar occurs in long term down trend at the resistance area of the short term
uptrend, the tail can cast to the support line but it is acceptable because support or resistance is
not a specific point instead is a zone.

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Doji candlestick.
This is the most common and easily traced candlestick pattern in trading. It is form of candle
that indicates the indecision among sellers and buyers, hence the market open at and
close at the same price. When doji occurs in uptrend or down trend it indicates the reversal
of the current trend.

Types of doji candlesticks.

The most common types of doji candlesticks are two: -
i. Dragonfly doji.
This is characterized by a long lower tail that indicates that the price was pushed down by
sellers but buyers come up and push it back hence closes at the same price. This when occurs
at the support level indicate bullish market.

ii. Gravestone doji.

This type of doji candlestick is characterized by long upper tail indicating that buyers pushed the
market higher then sellers come up and drive it back to the opening price. This occurs at
resistance area indicating the decrease of buying momentum hence reversal of the uptrend.

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DI-CANDLESTICK PATTERN.
This pattern is formed when two candles appear together in a price chart carrying a
certain meaning about movement of price in the market. Di-candlestick pattern includes: -
i. Tweezers pattern.
ii. Solders & crow pattern.
iii. Engulfing pattern.

Tweezers candlestick pattern (Railway track).

Tweezers are composed of two candlesticks with large bodies consisting tails on either
sides. Tweezers are of two categories: -
- Tweezers bottom (TB).
- Tweezers top (TT).

a) Tweezers bottom (Bullish railway track).

Tweezers bottom appears at the bottom of the short term down trend of the long term
up trend, the first candlestick being the bearish candlestick followed by a bullish candlestick.
This indicates bullish momentum (bullish reversal pattern) of the market price. The psychology
behind is bearish candle plus bullish candle of the same size forms a bullish pin bar (synthetic
pin bar).

b) Tweezers top (Bearish rail way track).

Like tweezers top have two candles with large bodies but the first being bullish candlestick
followed by bearish candlestick. Occurs at the top (resistance) of a short term uptrend of a
long term downtrend. This indicate bearish reversal pattern (bearish momentum).

Soldier & crow candlestick pattern.

This pattern is composed of two candles occurring significantly in uptrend or down trend. One
candle is bearish while the other is bullish, with large bodies and tails. These can be grouped as:-
- One white soldier.
- One black crow.

a) One white soldier.

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In this pattern bearish candle comes first, the bullish candle opens above the close of the
bearish candle and closes above the opening of the bearish candle. Occurs at the
support of the short term downtrend in a long term up trend indicating a bullish reversal pattern
i.e. buying.

b) One black crow.

Here bullish candle comes first, the bearish candle opens bellow the close of the bullish
candle and closes below the open of the bullish candle. This occurs in a series of short
term up trend in a long term down trend indicating bearish reversal pattern i.e. going short.

Engulfing candlestick pattern.

This pattern is also composing of two candles i.e. one is bearish and another is bullish. One
candlestick is always larger than another. Based on candlesticks organization, engulfing
candlestick pattern can be: -
- Bullish engulfing candlestick pattern.
- Bearish candlestick engulfing pattern.

a) Bullish engulfing candlestick pattern.

This is made up of bearish candle formed before the bullish candle. Bearish candle is
smaller (smaller body) than the bullish candle, therefore bullish candle engulfs (swallow) the
bearish candle. Commonly occurs at the support in a series of short term down trend
of the long term up trend. Strictly some may consider the body and shadows of the bearish
candle should be engulfed, but this is not necessary. Bullish engulfing candlesticks indicate a
time for placing a buy order (going long).

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 b) Bearish engulfing candlestick pattern.
Like bullish engulfing candlesticks, it is made up of two candlesticks but the first being small
bullish candlestick and the second is large bearish candlestick. Potentially occur at resistance
in a series of short term uptrend of a long term down trend. Bearing engulfing
candlestick pattern indicate a time to place a sell order.

NOTE:
Engulfing candlestick pattern can be formed in other parts of the price chart not discussed above.
Because all discussed are the most potential parts of the engulfing candlestick patterns.
Understand that engulfing candlesticks can occur against the long term trend;
therefore, here you can trade against the trend (Counter Trend Trading) provided that the
condition where they occur is over buy or oversold condition.

Also you may consider the parabolic strategy i.e. formation of 90˚ angle of the impulsive
wave in a series of common 45˚ impulsive wave which is common.

When using candlesticks in price action………………

General psychology of trading in the context of trending price in a chart regardless whether it is
bouncing or surfing: -
i. Go long when bullish candlestick pattern occurs: -
- At the support level of the long term uptrend.
- Also when occurs at the bottom of down trend at oversold condition (counter trend
trading).

ii. Go short when bearish candlestick pattern appears: -

- At the resistance level of the long term down trend.
- Also when occurs at the top of the trend in overbought condition (counter trend
trading).

TRI- CANDLESTISK PATTERN.

This pattern includes the morning star and the evening star; in other context we may have
the three white soldiers and three black crows. Morning star and evening star are made up
of three candles arranged in a particular manner (defined way).

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In trending market morning star occurs at the support level of the trend indicating the
bullish momentum while evening star occurs at the resistance level indicating bearish
momentum.

i. Morning star.
Morning star is composed of one large bearish candlestick, followed by a small bearish or
bullish candlestick and the third is large bullish candlestick with the size similar or almost
similar with the first candle (bearish). This pattern occurs at the support area indicating
bullish reversal.

ii. Evening star.

Evening star is composed of one large bullish candlestick, followed by a small bearish or
bullish candlestick and the last is the large bearish candlestick with same size or almost the
same with the first bullish candle. This pattern occurs at the resistance area indicating the
bearish reversal pattern.

Candlestick pattern in summary.

a) Mono Candlestick pattern.
- Pin bars (Bullish or Bearish).

b) Di Candlestick pattern.
- Tweezers (Bottom or Top)
- Solders and Crow (One White solder or One Black Crow).
- Engulfing candlestick pattern (Bullish or Bearish).

c) Tri Candlestick pattern.

- Stars (Morning or Evening).
- Soldiers (Three white and three black crows).

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MARKET ANALYSIS.
Before you start trading you have to analyze the market in order to have a picture where the
price is going to move in the future. Market is commonly analyzed in various ways which
can be fundamental analysis or technical analysis. The widely used way by most traders
is the technical analysis which uses price action tools like; lines, charts and candles. Despite
the use of technical analysis, you will not totally run away the fundamental analysis.
Fundamental analysis is the change in price of currencies in the market based on basic
economic social and political issues like new.

When analyzing the market, you must do the following: -

- Be aware of your trading session; therefore, select a trading session that suits your
trading system.
- Select your currency pair based on the session you trade and your trading system.
- Identify the current price of your currencies.
- Select your time frame; this depends on your trading style like scalper, day reader
e.t.c. But multiple time frames are essential in analyzing the market.
- See if there is any news which is likely to occur with your trading time. Look from
various sources like investing.com, ethics factory, forex factory e.t.c.
- Identify trend of your price in a chart i.e. up trand, down trend or consolidating,
then understand main features of the trend like Bouncing, chopping and surfing.
- Spot support and resistance lines.
- Identify the chart pattern of your price like multiple tops/bottoms, triangle, wedges
e.t.c.
- Recognize candle pattern of the current price, these can be pin bar, engulfing, stars
e.t.c.
- Insert technical indicators like MADC, MA, and W%.
- Finally depict the future move of you price based on your analysis (signal).

INDICATORS.
Indicators are technical tools used to tell you the movement of the price in the past and present.
This is useful in assessing where the probable direction of the price in the future is.
But we cannot rely on indicators only when trading because their utility may change with time
due to change in market mechanics. There are indicators of various types based on which
criterion used to classify them;

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  Based on direction of the move of price indicator can be: -
- Leading indicator, E.g, RSI & MACD.
- Lagging indicator, E.g. all indicators based on MA like Bollinger bands.

 Based on kind of movements exhibited by indicator, they can be: -

- Zero-line cross indicators e.g. MACD.
- Line that cross each other indicators e.g. MACD.
- Chart indicators e.g. Renko chart & Chart oscillator.

 Based on what an indicator can show they can be grouped as: -

- Oscillator or Momentum indicators e.g. RSI.
- Trend following indicator e.g. MA.
- Volume indicators e.g. MACD.

1. Moving Average Convergence Divergence (MACD).

This is the trend and oscillator indicator showing relationship between three MA i.e. 9MA,
12EMA & 26EMA. It is composed of two line i.e. MACD line and the Signal line, also have
Histograms. MACD line is the product of difference between 12 periods moving average
and 26 period moving average. Therefore, behaviors of 12 and 26 MA are represented by MACD
line. Example; when 12 and 26 MA converge, their difference become zero. This is represented by
MACD line when it crosses zero line indicating short term change in trend. Signal line is
the 9 period moving averages. Histograms are the derivative of MACD line with the 9
period MA line.

Uses of the MACD indicator.

i. MACD & Signal line cross over.
When MACD line crosses over the signal line (downward to upward), indicates the bullish
momentum. Principally MACD and signal line must be already over zero line for
profitable long trade. When MACD line crosses below the signal line from (upward to
downward), indicates bearish momentum. Principally MACD and signal line must be
already below zero line for profitable short trade.

ii. MACD cross over / below zero line.

This is also an important indication of an event when you are using the MACD indicator. When
MACD line cross over zero line (i.e. 20EMA cross over 26 EMA) indicates short term

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uptrend, and when MACD line closes below zero line (i.e. 20EMA crosses below
26EMA) indicates short term down trend.
iii. Divergence between MACD and Price in a chart.
Another use of the MACD is shown by divergence, this is when price in a chart move in
opposite direction with MACD. This is observed when price makes higher highs but
corresponding positions in MACD forms lower highs. This commonly indicates the weakening of
the bullish momentum. Wait for confirmation candle in order to place a short/sell order.

The vice versa is when MACD forms high lows while corresponding points in a price chart forms
lower lows. This indicates weakening of the bearish momentum. Wait for confirmation candle in
order to place a buy order.

iv. Length of histograms.

This is also an important indicator when using MACD whereby length of histograms provide
information about change in momentum of the market by indicating over bought and over
sold conditions. This is useful when trading reversals whereby length of histograms alerts you
with the possible short term change in momentum.

NOTE:
i. When histograms hit zero line while MACD and signal line are moving downward it is a
sell signal and when histograms are hitting zero line while MACD and signal line are
moving upward, it is a buy signal.
ii. MACD Histograms becomes too longer (overbought/oversold) indicating a potential
reversal, add other confluence to obtain a potential trade.
iii. MACD plays roles or many indicators like stochastic by showing over bought and sell by
the use of histograms. Also it shows trend like Moving averages by the use of MACD
line when crosses zero line.

OTHER MOST COMMONLY USED INDICATORS.

- Moving average.
- Relative Strength Index.

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CHART PATTERNS AND THEIR INTERPRETATION.
Charting is the category of technical analysis based on inspection of price data
through well-known patterns that are formed; examples of chart patterns are: - triangle,
double tops/bottom, wedges e.t.c.

Charts are primary determinants of the direction of the price to the future. Indictors like MACD,
Bollinger bands e.t.c. are suggested to be used after charts to add factors of confluence.

Types of chart patterns.

There are many types based on the shape provided by the movement of price. The most common
chart patterns are: -
i. Triangles.
ii. Channels.
iii. Wedges.
iv. Double tops & double bottoms.
v. Head and shoulders & inverted head and shoulders.

TRIANGLES.
Are formed when support and resistance lines converge. Due to these movements, price is
squeezed at a corner. This is due to uncertainty in direction of movement of price hence creates
pressure. When breakout occurs in any direction result into added momentum due to pressure
created.

There are three types of triangles;

- Symmetrical triangle (all lines equal), this indicates point of indecision in the market
price. Therefore, breakout may occur in any direction (direction of trend); basically it
forms a continuation pattern.

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 - Ascending triangle (have horizontal resistance with sloping support), this forms the
uptrend continuation’ therefore the breakout occurs at resistance level.

- Descending triangle (have horizontal support with sloping resistance), this is the
characteristic of the downtrend. Therefore expect the breakout at the support level.

NOTE: Ascending triangle occurs in a continuous bullish trend while descending

triangle occurs in continuous bearish trend.

Using triangles.
In an uptrend; the distance between rising line and resistance level will give the specific
projection of the movement of price. Example, if resistance level has value of 1 and start of trend
line has value of 0.5. our projected value will be 1.5 upward.

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RECTANGLES AND CHANNELS.

Rectangles are composed of two lines (support & resistance) running parallel in
horizontal direction. Rectangles include multiple tops and bottoms i.e. double
tops/triple tops. Also rectangles may include formation of head and shoulder pattern.

Channels are formed between parallel support and resistance lines in an inclined
plane indicating strong trend downward or upward. Therefore, price stay within those lines until
it breaks out, this can increase current trend (continuation) or reversal of the trend.

Rectangles and channels also include formation of flags depending on the stop of the initial trend
and that of the breakout. A flag can be bullish or bearish indicating continuation of the bullish or
bearish trend.

FLAG PATTERN.
This pattern is formed in trending prices where there if formation of large bodies
candlesticks followed by weak pullback that form small body candlesticks. A flag
can be bull flag or bear flag based on trend and direction where it occurs.

When to trade flags?

You can trade flag when market is consolidating followed by breakout. This occurs when price is
surfing the 18MA followed by formation of four or more consolidating candlesticks.

Example, to go long; enter the trade above the high (break above the high). Stop loss is
placed below ATR and the trade is exited at the moving average.
Depending on structure of the market, you can trade flag by entering and exiting the market at
several points in a price chart.

WEDGES.
These are formed when support and resistance lines are moving in an inclined or
declined converging pattern but not in an extent of triangles. Wedges have both lines
moving in positive or negative sloping not like in triangles where only one line may do that. There
are two types of wedges: -
i. Rising wedges (with positive slope).
ii. Falling wedges (with negative slope).

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 Fig: rising and falling wedge.

MULTIPLE TOPS & BOTTOMS.

These are reversal patterns of the trend. The price touches resistance or support several
(multiple) times before reversing. These are of two types : -
- Double tops & bottom.

- Triple tops & bottom.

Triple tops and bottoms are the strongest than double tops and bottoms, but before trading look
at the trend and identify significant breakout to confirm reversal.

Trend and breakout.

To understand the pattern in charts you have to determine how the price approached the chart. A
price may approach in strong initial trend or weak initial trend. Breakout defines the
condition when price crosses the support or resistance line. Breakout can be
continuous or reversal.

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SUCESSIFUL FOREX TRADING.
In order to be successful in Forex you are required to meet many requirements, where by
all are important but few plays huge role for trader’s success. Therefore, when one of these
important things required for success are missing will result into series of losing trades hence
trader will be whipped out of the system.

So what makes a profitable trader?

1 Trading system About 15% Indicators, analysis tech e.t.c.
2 Risk management About 35% Position sizing
3 Psychology About 50% FOMO, Greed, e.t.c.

TRADING SYSTEM.
As portrayed before, in order to be successful in Forex you need three important things, trading
system is one of them. Trading system carries to about 20% of the power to succeed in Forex.

Trading system is the organized manner of entry and exit in the market. Therefore, you must have
a trading system which is profitable or gives you an expectance in trading.
Don’t trade by following; people, emotions, predictions e.t.c. there is no luck in trading, no
good or bad day.

You trading system will help you to know when to trade and how to trade, this can be through
trading system components like: -
- Lines (trend line, support and resistance line / MA lines).
- Candlestick patterns.
- Chart pattern.

Know when to trade.

Your trading system should be able to tell you when to trade and not to trade; this is through
identifying organization pattern of price action and identification of the future move. Common
features of the price action charts that will tell you to trade or not to trade are: -
i. Choppy pattern.
ii. Trending pattern.
iii. Surfing pattern.

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CHOPPY PATTERN.

This refers to a pattern whereby there is random arrangement of price in the chart i.e. not
arranged in tradable fashion. But for experienced traders are able to identify this pattern
and choose a system that fit to trade in choppy pattern.

Generally, in this pattern candles do not respect the moving averages (MA) i.e. move over and
below moving averages randomly. For new traders, if you see this pattern move to another
currency pair because patterns vary between different pairs.

TRENDING PATTERN.
This is observed when currencies show clear trend which can be upward or downward. The trend
is clearly illustrated by arrangement of moving averages, and then the price will be bouncing off
the 50 EMA.

To trade this pattern, you may use bounce strategy or the Trend Continuation Entry (TCE). Note
that the bounce strategy is common in the 50EMA candlesticks bounce where TCE can
supplement it.

When the price bounces the 18 EMA in an upward or downward trend the commonly trading
strategy is the Trend Continuation Entry (TCE).

The EMA bouncing trade set-up.

Taking trade here varies depending on which MA the price is bouncing as follows: -

a) When the price bounces the 50 EMA.

When the price is tested once on the 50 EMA you can enter the trade at the retest (2nd test). For
your own risk you can wait until the second test is done then enter the trade at the third test, but
it is rarely to happen.

You may enter at the 2nd test by spotting higher highs and higher lows on the price chart to verify
the pattern and entry point.

How to enter this trade.

i. Place buy limit order (buy stop) at 50 EMA, when price reaches this will trigger the order.
ii.Place stop loss far enough because as price hit the moving average can penetrate and hit the
stop loss if is too close to the MA (Support).

NOTE: - Support and resistance are not specific points or lines, instead are
zones.

iii. Place your target profit at least near the previous swing high (1.5R or 2R).

E.g. SL = 18 pips.
PT = 38 pips (2R).

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All these are analyzed at higher time frame than your target trading time, example H1 if you trade
15M. This is important for confirmation.

b. When price bounce the 18EMA.

When this occurs the only profitable trading strategy is the Trend Continuation Entry. (TCE). The
price bounces the first time then retest; therefore, you can enter the trade but wait for the second
test and candlestick confirmation.

How to enter the trade.

i. Confirm the trend by looking higher highs and higher lows or vice versa in down trend.
Also you can look on the pattern arrangement of the moving averages.
ii. Profitable trade is entered after candlestick confirmation (bullish engulfing candlestick
pattern).
iii. Buy entry order is placed above the bullish candle formed at the support (MA).
Example; Buy order 1pip above the engulfing candlestick.
Stop loss is slightly below the low of the candlestick.
Target price must be 1.5 R or 2R.

SURFING PATTERN (Bull / Bearish Flag Pattern).

This occurs when the price is moving by hugging the moving averages (6EMA or 18EMA); this
means that it doesn’t produce ups and downs of the short term upward or downward trend.
This occurs in both long term and short term up trend and down trend.

The specific strategy to trade in this kind of price pattern is the bull flag or bear flag (TCE
strategy) depending on the direction of movement of the price in long term i.e. down trend or up
trend.

In up trend.
Going long, you will enter the trade above the high (breaks after consolidation) few cents above
the flag or the drawback. Stop loss is placed below the ATR (Average True Range), or consider
the 1R stop loss system. Depending on the structure of the moving price you may enter and exit at
several points in time, because there maybe repetition of flags formation as trend goes.

In down trend.
When the price hugs the 18EMA is the point to enter a short trade (sell order). By the use of the
Trend Continuation Entry (TCE) strategy, begin by verifying the trend through sporting
formation higher lows formed at a short term consolidation moving toward the 18EMA until
candlesticks touches it (18EMA) in a form of consecutive alternating bullish and bearish small 4
or more candlesticks. In lower cases there is formation of short term up trend.

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The order is placed at the last candlestick that touches the MA i.e. stop loss is placed above the
candlestick (at least 8 pips higher), then the profit target will be 13 to 15 pips away. Roughly the
stop loss can be placed one pip above the higher of the previous swing high.

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RISK MANAGEMENT.
This is the second thing that you need to have in order to be a successful trade. Risk management
refers to money management in trading that mainly relay on position sizing during trading.
Understanding this will enable you to understand how many shares to buy or sell.

Always you have to risk small amount of your capital, commonly ranging from 1% to 3%. For
beginners you’re not advice to go over 1% until you master the trade you may go over. You must
have a fixed percent at risk in every trade (order) you make. Note that “risking a lot will
result into being wiped away before reaching wining trades” this is because winning
and losing occur at unpredictable points in time.

In normal life you can’t run a business without running costs; therefore, profit will be the
amount which is always obtained from sales minus cost (expenses). In forex losing trades are
taken as running costs and wining trades are like sales.

Risk per trade.

Risk per trade = 1R which is = 1%.

%𝑹𝒊𝒔𝒌 𝒑𝒆𝒓 𝑻𝒓𝒂𝒅𝒆 𝑿 𝑪𝒂𝒑𝒊𝒕𝒂𝒍
Number of shares = let your capital be $10,000.
𝑹𝒊𝒔𝒌 𝑷𝒆𝒓 𝑺𝒉𝒂𝒓𝒆

Risk per Trade = 𝑑𝑖𝑠𝑡𝑎𝑛𝑐𝑒 𝑓𝑟𝑜𝑚 𝑒𝑛𝑡𝑟𝑦 𝑡𝑜 𝑠𝑡𝑜𝑝 𝑙𝑜𝑠𝑠

%𝑹 𝑿 𝟏𝟎,𝟎𝟎𝟎
= 𝟏𝑹

What is Forex Position Sizing?

This is the vital part of your trading system that helps you keep your risk per trade as small as
possible.

With this, even if you’re on a losing streak, you can continue trading to reap the positive edge that
comes with a large sample of trades.

Position sizing helps you determine: -

 How many contracts should you long or short for any particular trade?
 What is your risk per trade and the overall risk of your portfolio?
 What returns can you expect for your portfolio?

How to Calculate Forex Position Size.

Step 1: Check Your Net Liquidation (i.e. Capital)
Once you log in to your broker platform, you can look at your net liquidation, which is the
amount of capital that you have for trading.

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For example, if you open an account and you fund it with $1,000, which is your net liquidation.

Step 2: Determine Your Risk Per Trade

Risk refers to the maximum loss you’re willing to take for every trade you put in. This is the
maximum you can lose if your stop-loss is hit.

Remember this: NEVER risk more than 1% to a maximum of 3% of your capital in

any single trade.
If you’re new to trading Forex, my suggestion is to always start with a 1% risk per trade. When
you’re confident and experienced enough, you can raise it to 2% and eventually to 3% maximum.

Once you decide on your risk per trade, you must stick with it consistently over a period before
you raise it.

Always be consistent with your risk per trade because you can never predict the outcome
of any single trade. Remember: On a trade-by-trade basis, every trade outcome is random.

Step 3: Determine Your Forex Position Size for Each Trade

To help you understand how position sizing works, I’ll show you how to calculate it manually.

Here’s the formula:

Now, what do all these things mean? Let’s look at some examples.

Forex Position Sizing Example.

 Net Liquidation: Let’s say you start with $10,000 in your account. Net liquidation will
be $10,000.

 % Risk Per Trade: Imagine you’ve just started trading, so you risk 1% per trade.

 Net Liquidation x % Risk Per Trade: $10,000 multiplied by 1% is $100. This means
the maximum you are willing to lose is $100 per trade.

 Stop-Loss Distance: This is the distance from your entry price to your stop-loss price.
Say, you buy at 1.2120 and you place the stop-loss at 1.2100.

Now, your stop-loss placement is always based on candlestick patterns. So for

different trades, your stop-loss will be placed at different distances. (In my Forex trading course,
I teach you exactly where to place your stop-loss).

Depending on the price action, your stop-loss may be 8 pips or 20 pips away. In this case, let’s
imagine you’re placing your stop-loss 20 pips away.

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  $ Value Per Pip: This figure depends on the currency pair you’re trading. If you’re
trading EUR/USD, this will be $10. Other pairs could be slightly more or less than $10.
There are many websites where you can check this value.

This brings us to the equation: ($10,000 x 1%) / (20 x $10) = 0.5 lots

In Forex trading, one standard lot is 100,000 of the base currency. In this example, we’re trading
the EUR/USD, so the base currency is in euro.

One lot is 100,000 euro, so 0.5 lot is 50,000 euro, which is the exact amount you should buy to
place this trade.

Important Notes about Forex Position Sizing

1. No Matter Where You Place Your Stop-Loss, Always Be Consistent with Your
Risk Per Trade.
Remember this: Regardless of where you place your stop-loss, whether it’s 10 pips away or 100
pips away, your risk should always remain the same.

You can’t say things like, “This is going to be a winner, I’m going to risk 3%.” “I’m not too
confident with this other trade, so I’ll risk 1%.” No, it doesn’t work this way.

Once you decide on your risk per trade, such as 1%, you must risk 1% for every trade.

2. Always Determine Your Stop-Loss Before Calculating the Number of Lots to

Trade.
Depending on the strategy and the specific candlestick pattern of the trade, you place your stop-
loss at different distances (usually below the previous low of the candle).

So you must always determine your stop-loss first, then calculate the number of lots to trade to
keep your risk consistent.

3. The Number of Lots to Trade Is Inversely Proportionate to Your Stop-Loss.

The farther your stop-loss, the smaller the number of lots that you trade. The nearer the stop-loss,
the greater the number of lots that you trade, with your risk staying constant.

Using a Forex Position Size Calculator.

Alright, now that you know the concept behind position sizing, let’s look at the shortcut. Just do a
Google search for “Forex position sizing calculator” or download an app on your phone.

All you need to do is key in the values accordingly. Choose the currency pair you’re trading and
it’ll determine the $ value per pip for you. Simple as that!

Position sizing is just one of the many things you must learn to trade Forex
profitably.

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Expected profit per trade.
This is final thing that you have to be aware with in this part on risk management, sometimes is
known as EXPECTANCE because it defines the time you may exist in trade before being swiped
out. This is important to understand because is used to evaluate the validity of your trading
system.

Expected profit = 2R%, this means profit must be at least twice a loss.

Expected profit = (%Win X Average win) – (%Loss X Average loss).

Note: For effective system you have 55% chance to win the rest 45% is loss per trade.

Having $10,000 capital.

Average loss = 1R.
Average win = 2R.

Expected profit = (55% X 2R %) X (44% X 1R %)

= 1.1R – 0.45R
= 0.65R per trade.

Assume you done 20 trades per month.

= 20 X 0.65R
= 13R where R= % at risk, which was 10%.
= 13 X 10
= 130.

MAJOR TYPES OF MARKET ORDER.

There are various types of market order that you can use to manage your risk during trading. In
forex market, order can be; Instant execution order or Pending order. Instant execution
order is the order made at the current market price while pending order is the order placed in the
market that will open once a price reaches a certain price. As we need to be market specialist, our
consideration will be on three major types of orders:

- Stop orders (buy stop / sell stop & stop loss order).
- Limit orders (buy / sell limit).
- Take profit order.

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PSYCHOLOGY.
This is the third important thing in order to become a successful trader, and it takes large
percentage of the effect on success of the trader. Psychology defines the state of following your
trading system again and again without deviations. This is difficult to many people especially
when trading system goes inevitable losing streaks (drawdowns). Money have greater effect to
people’s emotional changes when someone gains or lose them.

Professional traders mind set.

Successful traders understand that winning and losing are random series of events in trading.
Their outcomes over large statistical set predict the profit but micro outcomes are random and
unpredictable.

How do winning and losing traders respond differently to losing streaks.

WINNING TRADERS LOOSING TRADERS

i. Take loss as the part of the game. i. Concentrate on how they can stop losing
ii.Keep executing valid trade set-up. ii. Look for indicators to add
iii. Start over trading
iv. Start looking for new strategies.
v. Remove stop loses
vi. Finally stop taking trade at all

NOTE: Generally, in order to be a successful trader you must: -

1. Have a good trading system that fit your personality (TRADING SYSTEM).
2. Have a winning trader mind set (PSYCHOLOGY).
3. Understand that lose and win in trading occurs randomly at unpredictable points in time,
and loss is inevitable (RISK AMANGEMENT).

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ADVICE FROM EXPERTS.

Trade with real account in order to have the exact feeling of the market conditions.

Advantages of the real account.

1. Huge experience in trading.
2. Real emotions.
3. Skill of managing your own capital.
4. Real understanding of Forex market.

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