Get Started in Forex

Copyright by Easy Forex LTD 2012

 Introduction l easy-forex eBook

Welcome to forex trading

Congratulations! You have taken your rst step towards becoming a forex trader. We are pleased
to provide you with this forex education book for beginners that will help you learn about the
forex market, explain the history of forex and give you some great tips and strategies for trading
success. Education is the key to successful trading and with almost $4 trillion traded each day
globally, the forex market is huge, exciting and captivating.
At easy-forex we believe that everyone should have access to the forex market, which is why
we pioneered online currency trading to make it accessible for beginners and expert traders alike
and developed web based trading platforms that are downloadable and user-friendly.
Our fast and straightforward registration means you can be trading within minutes. And, with
just one easy- forex account, you can trade forex using web, desktop or mobile platforms, from
any location in the world, at any time.

We support all of our traders with personal service and for those clients who would like to take
their trading to the next level, we offer our award-winning dealing room services.

So, happy reading and we look forward to supporting you on your

forex journey with us.

With best wishes

Miael Konnaris
Michael Konnaris
Chief Executive Ofcer

Michael Konnaris
CEO of easy-forex group

With over 20 years of experience in the

forex market Mr Konnaris is a specialist in
the field of currency trading. He has held
senior posts with large nancial institutions such
as NatWest Bank and the Royal Bank of Scotland
in the UK. Mr Konnaris joined easy-forex in 2005 as
Chief Dealer, was appointed Chief Operating Ofcer
in 2010 and Chief Executive Ofcer in 2011. Milestone
product and management innovations under his
stewardship have ensured that easy-forex remains
a world leader in the online forex market.

Copyright by Easy Forex LTD 2012 2

 Contents

Chapter 1 Forex basics

The who, what, where and when of forex 04

Chapter 2 Getting started

The how of forex 09

Chapter 3 Fundamental analysis

A brief overview 14

Chapter 4 Technical analysis

A basic practical guide 24

Chapter 5 Pulling it all together

How to develop a trading plan 42

Tell me more
Throughout this book you will nd additional information on the topic under discussion
in the 'Tell me more' box, like this one. Also, at the end of each chapter, we give you
tips on where to go to learn more. Any terms you dont understand can be looked
up in our online forex glossary on the easy-forex website.

Risk warning: Forex, commodities and CFDs (OTC Trading) are leveraged products that carry substantial risk
of loss up to your invested capital and may not be suitable for everyone. Please ensure that you understand
fully the risks involved and do not invest money you cannot afford to lose. The information provided can under
no circumstances be considered a recommendation to engage in any trade. Read more in our Risk Disclaimer.

Copyright by Easy Forex LTD 2012 3

 Chapter 1 l Forex basics

Chapter 1 Forex basics

What is the forex market? Unique features
The forex market is the worlds most exciting The forex market has several advantages over
and dynamic market. With $4 trillion traded other types of trading, such as traditional stocks:
every day, it is also the largest nancial market
in the world. Liquidity. The high volumes traded globally
lead to high liquidity. The big advantage of
Forex (or FX) stands for foreign exchange liquidity is that you can always nd demand
which a traveller will know as the currency to sell or buy the currency pair you wish.
that you buy when visiting another country.
For example, you may sell euros and buy Increased leverage. Leverage is when you
dollars for your trip to the USA. The online borrow money so that you can use a small
forex market is, however, 90% speculative, investment to get a greater yield. Most stock
which means that you dont take possession of markets offer 1:2 leverage. With forex, 1:100
the actual, physical currency. Rather, you open and higher is common. This means your
and close deals and make either a prot or loss opportunities for gain are greatly enhanced.
which gets reected in your online account. Remember though that your risk increases too.
Increased opportunities. Forex market
The forex market is an over-the-counter (or conditions can change at any time in
OTC) market which means that trading takes response to real-time events. While you
place directly between two parties without must be aware of the risks such changing
dealing through an exchange. This means you markets can pose, remember that volatile
can conveniently access the virtual market markets also offer high prot opportunities.
online anywhere in the world.
Easy access. At easy-forex you can start
trading forex with a low rst deposit. You
can fund your account with a debit or credit
card and start trading within minutes.
No commissions. easy-forex does not
charge you a commission. Instead, as the
market maker, we make our money from
the spread (i.e. the difference between the
buy and sell price), as well as any rolling fees
if you have kept a trade open overnight.
Controllable risk. Forex traders set a
stop loss which means you set the maximum
amount you are prepared to risk. At easy-forex
we guarantee your stop loss on our platforms.

Copyright by Easy Forex LTD 2012 4

 Chapter 1 l Forex basics

What do you trade?

In forex trading you mainly trade currencies, You can also trade hundreds of other currencies
which are always traded in pairs. There are against each other (called cross currencies
four major currency pairs (called the majors) because the exchange rate is calculated via
which are mostly traded against the US dollar. the US dollar), but remember that the majors
They are the euro/dollar (EUR /USD), the are the most liquid. At easy-forex you can also
British pound/dollar (GBP/USD), the Japanese trade precious metals (gold, silver), indices
yen/dollar (JPY/USD) and the Swiss franc/ and commodities like oil and gas.
dollar (CHF/USD). Trading in the four major
pairs makes up the majority of the market and
the most commonly traded currency pair is
the euro/dollar (EUR/USD).

Tell me more
In a pair, the rst currency is called the base currency and the second is called the
counter currency. When you buy a currency pair you are always buying the base
currency and selling the counter currency. Conversely, when you sell the pair, you
always sell the base and buy the counter. For example if the exchange rate of the
euro/dollar currency pair is 1.4100 this means that you need 1.41 US dollars to buy 1
euro. This also means that if you sell 1 euro you will get 1.4100 US dollars. Let us say
you bought 10,000 euros against
the US dollar. At an exchange rate
of 1.4100 this means you would
pay 14,100 (1 euro = $1.41, there-
fore 10,000 = $14,100). The next
day the euro rises against the dollar
and the exchange rate goes to
1.4200. This means that for every
euro that you bought, you have
earned 1 cent, which in this case
means you would have proted by
$100 ($14,200 minus $14,100). If you had decided to trade in the opposite direction by
selling the currency pair, this means you would have sold the euro to buy the dollar
and in our example the dollar then decreased in value against the euro. You sold
10,000 euros at 1.41, which means that for every euro that you sold you would have
lost 1 cent. For a trade valued at 10,000 euros that would have been a loss of $100
($14,200 minus $14,100).

Copyright by Easy Forex LTD 2012 5

 Chapter 1 l Forex basics

Who trades? When to trade

There are two parties involved in an online Because forex is a truly global market, you can
forex deal: you as the trader and the market trade 24 hours a day, ve days a week. As one
maker, for example easy-forex. A market regions market day ends, the next regions
maker is a company that facilitates trading by market day begins. This means you can trade on
offering an ask and bid price on a currency, any regions news as developments take place.
literally making the market for traders to trade in.
Individual forex traders like you make up the
fastest-growing segment of the global forex
market. The other players include the inter-
bank market which is mostly made up of the
largest commercial banks and securities
dealers, after which you have the smaller banks,
multi-national corporations and hedge funds.

Tell me more
The forex market is open 24 hours a day from the Monday morning open in Sydney
to the close on Friday evening in New York. Each trading day can be broken down
into three sessions: the Asian, the European (EU) and the US. Generally these are referred
to as the Tokyo, London and New York sessions. The Asian session opens around
21:00 GMT (summer hours) and closes around 08:00 GMT. This overlaps with the
EU session which opens around 06:00 GMT and closes around 16:00 GMT. Then the US
session, which overlaps with the EU session, opens around 13:30 GMT and closes
around 21:00 GMT. Then the cycle starts over again with the Asian open.

This means you can theoretically trade forex non-stop from 21:00 Sunday GMT
(summer hours) until 21:00 GMT Friday!

The times when two sessions overlap are the most exciting as it is then that you will
nd high volumes being traded and maximum volatility which presents opportunities.
The European session has the most volume traded since it is sandwiched between
the Asian and the US sessions. Approximately 50% of the daily forex volume goes
through the EU session.

Copyright by Easy Forex LTD 2012 6

 Chapter 1 l Forex basics

Where can I trade? macro-economic data releases, news

announcements and other reports may cause
Online, anywhere, anytime, on the device of rates to change.
your choice. You have full control to monitor
the status of your trades, modify the terms of
your open deals, close deals, or withdraw
What happens
prots. The ability to access your deals 24/7
to my investment?
is a great benet of online trading. At easy-forex, we like to keep things simple for
you, and all transaction-related calculations are
automatically done for you by the easy- forex
How do I make a prot? platform. Its simple to use and easy to
You can prot from forex trading by correctly understand. Your account is in a base currency
determining whether one currency in a currency of your choice, often the local currency where
pair will go up (strengthen) or go down (weaken) you live. You trade using your base currency no
relative to the other currency in the pair. With matter which currency pair you choose to trade.
forex, you can profit whether the market is
rising or falling. This is because currencies are What drives forex prices?
traded in pairs. The key is to buy when a currency
As with any marketplace, the main factor behind
is low and sell it back once it is high. In chapter 2
changes in exchange rates is supply and
we take you step by step through a trade.
demand. In the forex market there are however
Traders develop trading strategies based on many other factors that cause prices to uctuate
technical and fundamental analysis. Technical as well. These factors may be of an economic,
analysis (chapter 4) is the use of charts and political or geographical nature. Fundamental
other statistical measures to predict future analysis (chapter 3) explains how you can use
price movements based on past prices, while these factors to forecast currency rate
fundamental analysis (chapter 3) looks at how movements.

Tell me more
A number of economic indicators affect currency prices, ranging from unemployment
to Gross Domestic Product (GDP) to retail sales data. One of the most influential
indicators is interest rates. A change in interest rates in one country can have an impact
on many other exchange rates at the same time. For example, when the Federal
Reserve Bank (Fed) of the United States announces a change in the interest rate at
which it loans to banks, this inuences the value of the US dollar, which is involved
in nearly 90% of all forex transactions.
Politics are closely related to economics and so it is natural for changes in government
or policy to also play a role in currency price uctuation.
Finally, geography can play an important role. Think of the earthquake in Japan in March
2011 and the negative effect it had on the value of the Japanese yen.

Copyright by Easy Forex LTD 2012 7

 Chapter 1 l Forex basics

How risky is forex trading?

While forex trading is risky, the risk can be
minimised through the use of various controls
Need more?
you can put in place. For example, through Visit our learn centre to see:
setting a stop loss, you ensure that you cannot
lose more than the amount you decide to risk Education videos
on a trade (also called your margin). In this Forex articles
way, your loss is capped while your potential FAQs
prot is unlimited. You are strongly advised
never to risk more than you can afford to lose.
We also advise you to start with an investment
that is comfortable for you and to continue to Remember you can also:
educate yourself as your interest in trading
Look up terms in our online glossary
increases.
Call a personal account manager,
contact us at cs@easy-forex.com
Pulling it together or post your questions/comments
on our Facebook page.
This chapter covered the what, where, when and
who of forex trading. If you are happy that you
understand the information, move on to chapter 2
which deals with the how of forex trading.

Copyright by Easy Forex LTD 2012 8

 Chapter 2 l Getting started

Chapter 2 Getting started

How do I start trading?
Its simple. Register on the easy-forex website Your personal account service manager will
and deposit the amount you wish to invest into provide you with one-on-one training and
your account. We accept many different payment support. If you are new to forex or not ready
types which vary according to the region you to start trading yet, you can open a free demo
live in. Generally, we accept deposits via most account or try our trade simulator where you
major credit or debit cards, bank wire transfers can experience trading under real market
and ewallets. Contact your account service conditions without risking any real money.
manager through our Live Chat or email However, the best way to really understand the
cs@easy-forex.com to nd out which payment psychology of trading is to trade in a live account
solutions are available to you. Once your with real funds. You can get started by opening
deposit has been received, you are ready to a mini account with a low first deposit and
start trading. making small trades.

Copyright by Easy Forex LTD 2012 9

 Chapter 2 l Getting started

The easy-forex advantage

Our web trading platform is fully web-based and does not require the download and
installation of software, unlike many other online market makers. Traders are only
required to log in, ensure they have available funds to trade and if not, top up their
accounts and trade. In this chapter we take you step by step through a forex deal,
but rst here are some of the terms you will come across as you plan your rst trade.

What is a pip?
One pip is the smallest unit of change in price. decimal points, one pip usually equals 0.0001
It stands for percentage in point. Because but there are some currency pairs such as the
most currency pairs are quoted with four USD/JPY where 1 pip equals 0.01.

What is a spread?
When looking to trade a currency there are called the spread, which is the difference between
always two prices. On the currency table what you pay to buy a currency to what you
(from the previous page) the price you can get when you sell it.
buy for is on the right side and is called the
ask or the buy price. The price you can sell The spread is essentially the cost of your
at is on the left side and is called the bid or trading. You may come across brokers
the sell price. Remember when you buy a advertising low spreads but be sure to check
pair you are buying the base currency and what other commissions and costs they may
selling the counter and when you sell a pair be charging you. With easy-forex you only
you are selling the base and buying the counter. pay the spread.
The difference between these two prices is

Tell me more
Lets look at a EUR/USD example. If the price moves from 1.2853 to 1.2873, it has gone
up by 20 pips. If it goes from 1.2853 down to 1.2792, its gone down by 61 pips. Pips
provide an easy way to calculate the prot or loss (also known as the P&L) on a trade.
To turn that pip movement into a prot or loss, all you need to know is the size of your
deal. For a 100,000 EUR/USD position, a 20-pip move equates to $200 (100,000
0.0020 = $200). For a 50,000 EUR/USD position, the 61-point move translates into $305
(50,000 0.0061 = $305). Depending on which direction you decide to trade in
(either to buy or to sell) you could make or lose the calculated corresponding amount.

Copyright by Easy Forex LTD 2012 10

 Chapter 2 l Getting started

What do long and short mean? Margin and leverage

The forex market is bi-directional, meaning Through the use of leverage, traders are able
that you can trade both ways. You can buy or to invest a small amount of money and trade
sell depending on your strategy. Long means much larger deal sizes. This is useful because
to buy, and you will go long when you are the movement in currency rates can be very
looking for prices to appreciate, or rise. If you small, and larger trades represent larger
are going short you are selling because you prots/losses for every pip change in the rate.
are looking for prices to fall. Going short is
Leverage allows you to trade with more money
just as common in currency trading as going
than you have in your account, because you
long. If you are square or at, it means that
effectively leverage your free balance to open
your buy positions exactly offset your sell
a larger trade.
positions, or that you have no positions in the
market at all. Leverage is shown as a ratio, for example 1:100.
Note that leverage amplifies both potential
prots and losses alike.

Tell me more
Lets say you decide to buy 100,000 EUR and sell USD at a rate of 1.4100. Your account
leverage is 1:200. Do you need 100,000 US dollars to open the trade? No! With a leverage
of 1:200 you will need to put down only 1/200 of the deal size as the margin, which works
out to $500.
Calculate the margin:
Leverage 1:200
Deal size = 100,000
Divide 100,000 by 200= 500
Margin = $500
This is the amount that will be used to cover your potential losses. In other words, the
margin is the actual amount that you are risking to lose if the trade goes against you.

Copyright by Easy Forex LTD 2012 11

 Chapter 2 l Getting started

Stop loss and take prot Types of orders

Setting a stop loss is a way to limit your risk. You can decide to open a day trade, limit order
You decide upfront what your maximum loss or forward order.
could be by choosing the stop loss rate. If the
market reaches that rate, your deal will be A day trade, also known as a market order,
automatically closed. Since you are the person is an order to buy or sell at the best available
setting the rate, you are in control of your price. This type of order is typically executed
investment. immediately.
Setting a take prot rate works in the same way. A limit order is an order to open a day trade
You decide on a desirable prot amount and deal at a rate that you have pre-dened
your deal is automatically closed when the when and if the market reaches that rate.
prot rate you have chosen is reached. Using The limit order will remain pending (i.e.
a take profit rate helps you to control your waiting to be turned into a day trade) until
trading without having to continuously monitor the market reaches that rate, or the time
your position. expires. It has the usual features of a day
trade, including a margin requirement.
A forward order is an open trade with a
value date greater than the spot value date.
It has the usual features of a day trade,
including a margin requirement.

All three types of orders can have tailored

stop loss and take prot rates set by you, in
order to help you manage your risk.

The easy-forex advantage

At easy-forex we protect our traders by guaranteeing the stop loss, take prot
and limit order rates on the easy-forex platforms.

Copyright by Easy Forex LTD 2012 12

 Chapter 2 l Getting started

How long should I hold

my position open?
If you are day trading, you usually hold your
position open anywhere from a few minutes
to a few hours and generally not longer
than a day - hence the name, day trading.
A medium-term trader will look to get the general
market direction right and profit from more
signicant currency rate moves. This kind of
trading requires many of the same skills that
a day trader would use, especially when it comes
to entering and exiting positions. However it
also demands a broader view on the markets,
additional analytical work as well as much
more patience. Chapter 3 and 4 provide you
with the basic tools and knowledge to take
your trading further.

Pulling it together
This chapter covered the how of forex trading.
We explained some terms and then took you
step by step through a forex deal on the
easy-forex platform. Now lets move on to
chapter 3, which covers the basics of
fundamental analysis.

Need more?
Visit our learn centre where you can
download our eBook guide to forex.
Remember you can also:
Look up terms in our online glossary
Call a personal account manager,
contact us at cs@easy-forex.com
or post your questions/comments
on our Facebook page.

Copyright by Easy Forex LTD 2012 13

 Chapter 3 l Fundamental analysis

Chapter 3 Fundamental analysis

Fundamental analysis and
market moving events
Fundamental analysis can be dened as the may seem like good news. However, the market
study of a countrys economic and nancial will react negatively to this release if the
performance in order to determine the fair expectation was that unemployment would fall
market value and future direction of its currency. to 4.5%. For this reason, you should always
Fundamentals focus on factors that determine know what the market is expecting in order to
exchange rates, such as countries economic evaluate whether the actual data release is a
health, political stability, and environmental positive or a negative surprise. You should also
events. A popular way to gauge the health of note that the more a data release deviates
a countrys economy is through looking at its from expectations, the more it will impact on
economic indicators and data releases, which exchange rates.
is why every trader should be familiar with them
In the short term, the market typically reacts to
and how they inuence the value of a currency.
any data release within half an hour from the
time it is announced. After that, exchange rates
Data releases usually settle and give you a chance to analyse
Data releases on their own are not as important the longer term implications of the news.
as whether they come out above or below
You can follow the days major data releases
market expectations. In other words, in addition
and expected results on the easy-forex nancial
to knowing the data that will be released, it is
calendar, under the research & analysis section
also important to know what the market is
of our website.
expecting the data to come out as. For example,
if unemployment comes out at 5%, lower than Now lets have a look at some major indicators
the previous months data release of 5.1%, this every trader should know and follow.

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 Chapter 3 l Fundamental analysis

Interest rates
Interest rates are perhaps the single most of money in circulation to shrink as people
important indicator when it comes to determining store more money in the banks. The money
a currencys long term value. In fact, most supply is thereby reduced, and as lower supply
other economic indicators affect a currencys causes higher prices, the domestic currency
exchange rate because they imply a potential strengthens. Conversely, if interest rates are
change in interest rates. Central banks usually cut, borrowing from banks becomes cheaper
announce interest rates every month, with the and saving becomes less attractive, causing
whole forex market closely watching to see the supply of money in free circulation to
what they will do. increase, resulting in a weaker currency.
By adjusting interest rates, a central bank Major sources that release interest rate
can control the supply of its currency, directly announcements are outlined in the table
affecting its value. If interest rates are increased, below. Note that you should focus on rate
it becomes more expensive to borrow and announcements from the countries whose
more attractive to save, causing the amount currencies you are trading.

Country Source Acronym Frequency Biggest

impact on
USA Federal Open Market Committee FOMC 8 times per year USD
UK Bank of England BOE Monthly GBP
EuroZone European Central Bank ECB Monthly EUR
Japan Bank of Japan BOJ 14 times per year JPY
Canada Bank of Canada BOC 8 times per year CAD
Switzerland Swiss National Bank SNB Quarterly CHF
Australia Reserve Bank of Australia RBA Monthly AUD
New Zealand Reserve Bank of New Zealand RBNZ 8 times per year NZD

Tell me more
Traders compare the actual interest rate announcement to what the market is/was
expecting (forecasting). If rates are higher than expected, the currency is likely to
strengthen, while rates below expectations usually cause the value of the currency to fall.

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 Chapter 3 l Fundamental analysis

Gross Domestic Product (GDP)

A countrys Gross Domestic Product is the which directly affects the strength of its currency.
value of all goods and services produced GDP is normally released monthly or quarterly,
within a country in a given time period. and the outcome is compared to the countrys
It represents the health of a countrys economy, forecasted growth.

Tell me more
Traders compare the actual GDP with what the market is/was expecting. If GDP exceeds
the forecast, the currency is likely to strengthen, while a lower than expected GDP release
tends to weaken the currency.

Ination
High ination erodes the value of a currency in the economy, and lowering inflation. The
and is therefore considered very bad for any expectation of an interest rate hike will cause
economy in most circumstances. Central banks the currency to strengthen, as the market
normally target an inflation level of around prices-in the anticipated change in an effort
2-3%, and if their target is exceeded, they to benet from an announcement before it is
usually take action to get back to the desired ofcially made.
levels.
Common measures of inflation include the
When ination is high, the market begins to Consumer Price Index (CPI) and the Producer
expect that central banks may increase Price Index (PPI), and are usually released
interest rates, reducing the supply of money on a monthly basis.

Tell me more
If ination is above expectations, the currency is likely to strengthen, while lower than
expected ination is likely to weaken the currency.

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 Chapter 3 l Fundamental analysis

Unemployment
Without people who work, there would be no experience increased ination because of all
economic activity. For this reason, unemployment the nancial activity taking place, and to prevent
is an important gauge of the health of a countrys ination from getting out of hand central banks
economy and the pace of its economic growth. are likely to increase interest rates. As a result
Increasing unemployment (or decreasing of the expected rate hike, the currency is likely
employment, as it is sometimes also referred to as), to appreciate.
has a negative effect on a countrys economic
As well as unemployment and employment
growth, while decreasing unemployment
gures, other common labour-related indicators
(or rising employment) is seen as a positive
are US Non Farm Payrolls (NFP), Private
sign for the economy.
Payrolls and Claimant Count, and usually come
Because rising unemployment signals a troubled out on a monthly basis. By far the most important
economy, the market expects the central bank employment indicator is the US NFP, as it
to reduce interest rates in order to increase tends to have the greatest effect on the forex
the supply of money and help boost economic market. It represents the change in the number
activity and growth. As we saw earlier, the of employed people during the previous month
expectation of a rate cut tends to weaken the (excluding the farming industry), and is released
currency. shortly after the month ends, on the rst Friday
of the following month.
The converse is true when unemployment is
falling a fast growing economy may soon

Tell me more
Higher than expected unemployment (or lower than expected employment) normally
causes the currency to weaken, while lower than expected unemployment (or higher
than expected employment) usually results in a stronger currency.

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 Chapter 3 l Fundamental analysis

Consumer-related data
As we saw with unemployment, it is people Common consumer-related indicators include
who drive the economy, so their income and retail sales, durable goods orders, consumer
their demand for goods and services directly confidence, consumer sentiment and ZEW
affect a countrys economic growth. When (economic sentiment), and tend to come out
consumers demand more, economies tend to on a monthly basis.
grow faster, and when their demand shrinks,
we experience an economic slowdown.

Tell me more
Higher than expected sales, orders, condence or sentiment usually result in a stronger
currency, and data releases below expectations cause the currency to weaken.

Trade balance
This number represents the difference between
the value of goods and services that a country
exports and the value that it imports them at.
A surplus occurs if the value of exports is
greater than the value of imports, and a decit
occurs if the value of imports is greater than
the value of exports.

It is in a countrys interest to export more than

it imports and thereby generate money that it
can use to further its growth. This figure is
usually released on a monthly basis.

Tell me more
A greater than expected gure tends to be good for the currency, while a lower data
release tends to be bad for the currency.

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 Chapter 3 l Fundamental analysis

Speeches, press conferences

& meeting minutes
In addition to scheduled data releases, as a who can move the markets and are closely
trader you should also closely follow the observed by traders. Other notable figures
opinions of inuential gures who vote on a include the President of the European Central
countrys monetary and scal policies. Look Bank (ECB), Governors of the Bank of England
out for any hints of economic improvement or (BOE), Bank of Japan (BOJ), Bank of Canada
worsening, changes in policy stance, or anything (BOC), Royal Bank of Australia (RBA) and
that can signal the future of a countrys economic Royal Bank of New Zealand (RBNZ), members
state and affect the value of its currency. of the UK Monetary Policy Committee (MPC),
and the Chairman of the Swiss National Bank
In the US, the Chairman of the Federal Reserve (SNB), among others. Furthermore, traders
and voting members of the Federal Open Market also pay attention to releases of central bank
Committee (FOMC) are gures of inuence meeting minutes.

Tell me more
If the message is dovish (pessimistic) this tends to hurt the currency, while a hawkish
(optimistic) tone generally boosts the currencys value.

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 Chapter 3 l Fundamental analysis

Why technical traders should

follow news releases
Technical analysis is the study of historical price economic data releases such as US Non Farm
movements. It is less likely to work when market Payrolls can cause large market moves and
focus turns to important fundamental factors or increased volatility, which can disrupt technical
economic data, as market participants become trends and levels of support and resistance.
more sensitive to any developments. Major

The easy-forex advantage: nancial calendar

The easy-forex nancial calendar on our website is available in multiple languages, and
is designed to provide you with all the information you need about upcoming data releases
and announcements in a clear, easy-to-understand way. It tells you the previous and
expected data releases, the time at which they will be announced, and their expected
degree of impact on the markets shown as either low, medium or high.
The nancial calendar is an important tool in forex trading. The market usually reacts to
economic news and can get volatile if the news is different from what is expected.
By watching the nancial calendar, you can prepare your trading strategy in advance
and open specic positions to try and benet from market volatility. Placing trades in
anticipation of or in reaction to data releases is called trading the news.

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 Chapter 3 l Fundamental analysis

How other nancial instruments

and sentiment move the
forex market
In addition to data releases, the forex market condent they are, the greater their appetite
can also be moved by nancial instruments for risk. Stocks rise when sentiment is good
such as stocks, bonds and commodities, and (also known as risk appetite), and fall when
a savvy trader always keeps one eye on sentiment is negative (also known as risk
developments in other major nancial markets. aversion).

A quick look at stocks and stock indices can When gauging market sentiment, investors
tell a lot about the markets sentiment, which usually look at stock indices such as the S&P
is very useful information for every trader. and Nasdaq in the US, the DAX in Germany
Market sentiment refers to how confident or the FTSE in the UK. You too can follow or
investors feel about the markets the more trade any of these indices with easy-forex.

A case-study of positive
sentiment moving the
forex market
Lets look at what would happen to the EUR/JPY yielding currencies usually causes them to
during an economic boom, when market appreciate against the lower yielding and safer
sentiment is positive and risk appetite is high. ones, which include the JPY, CHF and USD.
During a period of economic growth investors Positive sentiment and risk appetite can apply
tend to feel good about taking on increased risk. upward pressure on numerous USD, CHF and
One way they can do this is by choosing to JPY pairs, including EUR/USD, GBP/USD,
borrow money from Japan (which usually AUD/USD, EUR/CHF, GBP/CHF, AUD/CHF,
keeps very low interest rates) and store these GBP/JPY and AUD/JPY, to name a few. If you
funds in banks abroad where interest rates are decide to trade the JPY and CHF crosses, be
higher in our example, this is the EuroZone. prepared for big moves, as they are among the
Because they feel safe to take on extra risk more volatile forex pairs.
which is associated with the euro, they essentially
In contrast, when market sentiment turns
sell the JPY and buy the EUR, aiming to earn
negative and stock indices decline, higher
a prot. This example explains why we often
yielding and more risky currencies like the EUR,
observe the EUR/JPY rising when economic
GBP, AUD, NZD and CAD often depreciate in
sentiment is good and investors have an
value. Negative market sentiment and risk
appetite for risk.
aversion may be caused by the release of
This logic can be generalised and applied to worse-than-expected economic data, geopolitical
many different forex pairs. When we have a risk events, or anything that would scare
positive market sentiment and stock indices rise, investors off from taking on large risks. For this
investors are buying higher yielding assets, reason, traders should pay attention to all
including currencies like the EUR, GBP, AUD, scheduled data releases relevant to the
NZD and CAD. Demand for these higher instrument they are trading.

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 Chapter 3 l Fundamental analysis

Correlation between currencies

and oil or gold
Correlation is a statistical term describing the to outlast market uncertainty in these troubled
relationship between two variables. Professional times, their price tends to rise. As gold is
forex traders have long known that trading commonly traded against the USD, the two
currencies requires looking beyond the world have a mostly inverse relationship, meaning
of forex, because currencies are moved by that a higher gold price generally results in a
many factors - supply and demand, politics, weaker US dollar and vice versa. When the
interest rates, economic growth, and so on. US dollar depreciates, it becomes cheaper to
More specically, since economic growth and buy gold. Therefore AUD which is correlated
exports are directly related to a country's to gold also rises. The AUD is commonly
domestic industry, it is natural for some referred to as a commodity currency because of
currencies to be heavily correlated with prices its heavy reliance on the export of metals such
of the main commodities a country exports as gold.
or imports.

Highest correlations with gold and oil can be

found with the Australian dollar (large gold
exporter), and the Canadian dollar (large oil
exporter). Another currency that is affected by
oil prices but has a weaker correlation is the
Japanese yen (large oil importer). Knowing which
currency is correlated with which commodity
can help you understand and predict certain
market movements before they happen,
increasing your chances of success.

Gold and the Australian dollar

Trading the Australian dollar (AUD) is very similar
to trading gold. As the world's third-largest
producer of the precious metal, the Australian
dollar and the precious metal are highly
correlated for example, their monthly
correlation between 2000 and 2012 was 89%.

During times of market uncertainty such as

economic or political troubles, gold, represented
by the symbol XAU, serves as a safe haven
and a hedge against ination. As commodities
such as gold act as a store of value that is likely

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 Chapter 3 l Fundamental analysis

The Canadian dollar

and the Japanese yen
Just like the AUD is affected by the price of Note that correlations can become stronger or
gold, the currency of a country like Canada weaker with time, and the relationship between
which is a large oil producer tends to be AUD/USD & Gold and CAD/JPY & Oil is
affected by changes in the price of oil. therefore not always stable. For this reason,
The Canadian dollar (CAD) usually strengthens as a trader you should always have a sufciently
on increases in the price of oil, and weakens funded account and be cautious when placing
when oil price falls. On the other hand, a a trade on a currency pair based on recent oil
country like Japan which is heavily reliant on oil or gold price moves.
imports benefits when oil is cheap, but is
negatively affected when oil prices rise.

Pulling it together
This chapter covered the basics of fundamental both fundamental and technical analysis. You
analysis and took a look at some other market can read the major newsfeeds from Reuters
moving events. It also explained ways you can and Market News International on the
stay up to date with the latest market-moving easy-forex platform, and watch daily video
events. news reports.
At easy-forex we make tracking the fundamentals You have now learned about the basics of
simple for you, by providing all relevant how you can use fundamental analysis in your
economic data releases in the nancial calendar trading. But theres more to learn. Our next
page in our research and analysis section. chapter deals with technical analysis. Traders
However, as we live in a dynamic and ever often use a combination of both fundamental
changing world, not all news is scheduled, and and technical analysis to help them assess the
market-moving events can happen at any time. markets and identify when to place a trade,
easy-forex helps you stay informed via an when to wait, and when to exit.
SMS news service, keeping you up to date on
breaking news. You can also get our daily and
weekly outlooks which give information on

Need more?
Visit our learn centre or check out our economic indicator denitions
Remember you can also:
Look up terms in our online glossary
Read more articles on our blog
Call a personal account service manager, join us on live chat, contact us at
cs@easy-forex.com or post your question/comments on our Facebook page.

Copyright by Easy Forex LTD 2012 23

 Chapter 4 l Technical analysis

Chapter 4 Technical analysis

Technical analysis is the study of historical In this chapter we introduce a few different
price movements by using charts in order to charts, go through some basic concepts and
predict future price movements. Charts, and explain some of the popular indicators. Once you
all the various technical analysis indicators understand some of the more basic concepts
that can be applied to them, are essential tools of technical analysis you can continue your
for traders. In its most basic form, technical forex education in the easy-forex learn centre.
analysis helps you to identify entry and exit
points for your trading.

Charts
Charts are a major tool in forex trading. A forex identify behavioral patterns, and assess and
chart is a graph representing the movement create forecasts. When traders perform
of market prices during a specic time period. technical analysis, they usually overlay lines
There are many kinds of charts, each of which on a chart and apply technical indicators to
helps to visually analyse market conditions, reach conclusions about future price action.

Tell me more
Charts are used by both technical and fundamental analysts. The technical analyst
studies the micro movements, trying to match the actual price move with known
patterns. The fundamental analyst tries to nd correlation between the trend seen
on the chart and macro events, which are usually either political or economic.

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 Chapter 4 l Technical analysis

Types of charts
Three of the most popular chart types are bar, or bar or candlestick shows what happened to
candlestick and line charts. At easy-forex, you the price by plotting the opening, closing, high
can view all three types, and choose the one and/or low price of each 30 minute interval.
that best suits your trading strategy. Timeframes can be chosen and changed by
traders, and well look at them in more detail
Aside from choosing a chart type, when looking
later.
at a chart traders also need to select which
timeframe they want to analyse. A chart is Let's take a closer look at each of the different
usually composed of many points or bars or chart types a trader can follow and the benets
candlesticks, each representing a period of time. of each choice.
In a 30 minute timeframe, the individual point

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 Chapter 4 l Technical analysis

Line chart
This chart type is least informative and line
charts are mostly useful for identifying trends.
However, this type of chart is the least informative
as it only shows the closing price for a series
of periods.

Line chart

Bar chart
Bar charts provide traders with four key pieces
of information within any timeframe: the opening,
closing, high and low prices during each interval.
Bar charts can be viewed in many different
timeframes, and hence a single bar can
summarise price movements over the past
minute, over the past month or even further
back in time. Different traders use timeframes Bar chart
in various ways, although a good rule of thumb
is that the longer the timeframe, the greater
its signicance, as it accounts for more data and
hence better reects the markets psychology.

Candlestick chart
Candlestick charts are similar to bar charts as
they also contain each intervals open, close,
low and high prices. The main difference is
that the candlestick chart has a body, which
represents the range between the opening and
the closing prices of a particular timeframe.
In this example, when the candles body is red,
it means that the closing price was lower than Candlestick chart
the opening. When the body is green, it means
that the closing price was higher than the
opening. Above and below the candlesticks
body are the wicks. The top of the wick
represents the highest price reached within the
interval, and the bottom of the wick represents
the lowest price.

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 Chapter 4 l Technical analysis

Timeframes

What timeframe should I look

at on a chart?
This depends on your trading strategy and normally start by looking at a longer timeframe
how long you like to keep your deals open for. to gauge the long term trend and then move
Available timeframe views usually include: down the scale of time periods to 1 hour, 30
tick-by-tick; 1, 5, 15 and 30 minutes; 1, 2 and minutes or 5 minutes, to look for entry and exit
4 hours; 1 day and 1 week. A day trader would signals.

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 Chapter 4 l Technical analysis

Support and resistance

how to trade them
Imagine throwing a tennis ball on the floor support and resistance work on a chart; the
really hard. It bounces and then hits the price is the ball, the support is the oor and
ceiling before coming back to the floor and the resistance is the ceiling.
bouncing again. This is analogous to how

Support levels represent oors - areas where the price falls below a support level, this is also
buying tends to be strong. If the price falls to a trade signal. It shows that sellers are still
a strong support, then sellers in the market are stronger than buyers, and may prompt buyers
less keen to sell at a cheaper price and buyers to close their trades and more traders to sell
are happy to buy at that attractively low level. even more of the traded security.
This drives the price up, or at least stops it from
falling any lower. By knowing the support levels, The next chart shows EUR/USD repeatedly
you can identify good buying opportunities, nding support at 1.4000 between June and
because thats where buyers are supposed to September, nally breaking below in September,
be strong and push the price up. However, if and dropping even lower after that.

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 Chapter 4 l Technical analysis

Support and resistance

Resistance levels are the opposite of support The reason support and resistance levels exist
levels, as they can act as a ceiling to rallies. is because markets remember prices where
If the price rises to a strong resistance level, buyers or sellers tend to cluster. For example,
chances are that buyers might be reluctant to if EUR/USD rises to 1.5000 and then reverses
buy at these high prices, whereas sellers are lower, the next time it reaches that price, the
more comfortable to sell as they consider their market will remember what happened last time,
entry price a good one. This dynamic tends to and buyers and sellers will begin positioning
drive the price down, or at least keep it from themselves for another reversal both knowing
moving higher. By knowing the resistance levels what happened last time at 1.5000.
you can recognise possible selling opportunities.

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 Chapter 4 l Technical analysis

Tell me more
The more times a support or resistance level has been touched and conrmed, the stronger
it is considered to be. As a general rule of thumb, a price level is considered as a
support or resistance if it has been tested at least three times. Exceptions can be around
numbers such as EUR/USD 1.5000, 1.4900, 1,2000 etc or OILUSD $100, $200 etc
which are considered psychological supports and resistances.
Support and resistance levels found on longer-term time frames are considered stronger
and more signicant. Start by analysing long-term charts and then move to shorter-term charts.
If you are trading in the direction of a trend and that trend approaches a resistance or
support, a good idea would be to tighten your stop loss to protect your prots in case
the price reverses against your trade.
Once a support level is broken in a downtrend, it often turns into a resistance level in
an uptrend (and vice-versa).

Trend lines - how to trade them

Trend is a term used to describe prices moving In a downtrend, we look for two consecutive
in the same direction over time. When prices lower lows and lower highs, with a third lower
are generally rising, this is known as an uptrend, low conrming the downtrend. Start by checking
and when they are falling, this is a downtrend. for a trend on a shorter time frame, and once
Prices tend to trend only 20-30% of the time, you identify it, run the same check on a longer
which means that the remaining 70-80% they timeframe. For example, if you conrm a trend
are trading in a range or without a clear direction. on the 30 minute chart, look at the 4 hour chart
For this reason, it is important to have a clear and also conrm it there. If you get conrmation,
way of identifying the existence of a trend, or go back to the rst time frame and look for a
lack thereof. good entry point. Remember, the trend is your
friend, meaning it is less risky to trade in the
There is a simple rule traders use to conrm a same direction as the trend than to go against it.
trend. In an uptrend, we look for two consecutive For this reason, if you identify an uptrend it is
higher highs and higher lows in an uptrend, safer to buy, and if you nd a downtrend, it is
and a third higher high conrms the uptrend. safer to sell.

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 Chapter 4 l Technical analysis

Traders can place limit orders to buy at the support line

Eventually, the price will stop following the trend Drawing a trend line on your chart can help
and fail to reach a new high or low. It will stall, you see the trend and decide when to enter
and then reverse direction. Traders often use or exit a trade. To draw an uptrend line you
another rule to identify trend completions or need to connect at least three lows. For a
reversals. During an uptrend, if the price downtrend line you need to connect at least
reverses down and dips below the most recent three highs.
low, then it may be a sign that the uptrend has
broken. Similarly, if during a downtrend the For a downtrend line you need to connect at
price bounces up and rises above the most least three highs (see next image).
recent high, the downtrend may have come
to an end (see image above).

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 Chapter 4 l Technical analysis

Traders can place limit orders to sell at the resistance line

Tell me more
When using trend lines:
Draw the lines through the edges of congested or busy areas rather than the extreme
high or low points. If a trend line can be drawn using the body rather than the wick of
a candle, the body should be used. The extreme points are still important as highs
and lows, but are not that useful for trend lines.
The breaking of a well-established trend line may signal the trend is changing direction,
as it shows that the dominant trading crowds have lost their power. Note that a trend
line break is only valid if the candlestick closes on the other side of the line.

Trend lines are used in many different ways by different traders. New traders usually
open a trade when they see something unusual happen in the market, whereas an
experienced trader waits for prices to nish the unusual movement and then opens a
trade, knowing that the price will most likely return to its long-term trend.

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 Chapter 4 l Technical analysis

Popular indicators
We are about to look at a few major indicators identify the market environment. The market
that can be used during technical analysis by can be in a range, in a trend, or trading sideways
traders. Each indicator is suitable for different with no clear direction. Once you have completed
situations, so you need to know which work best this quick analysis, you are ready to choose
under different conditions and base your choice the best indicator for your needs.
of indicator on your specic needs. Some, like
A common mistake beginners make is applying
MA and MACD, work best in trending markets,
the same three or four indicators during all
while others such as the RSI are good for
market environments. This tends to produce
identifying trend turning points.
conicting signals and makes it hard to correctly
Before choosing an indicator, you should rst identify good entry and exit points.

Moving averages
The chart below shows Moving Averages (MAs) There are three types of MAs; the Simple
for 20, 50 and 100 days. You can see the MAs Moving Average (SMA), the Exponential Moving
generally moving with the price, and the price Average (EMA), and the Weighted Moving
crossing the MAs when it changes direction. Average (WMA). The SMA is a straightforward
MAs are what we call a lagging indicator, average of the last x prices. For example,
meaning they follow the trend. You can also a 10-day SMA shows the average price of the
notice that the longer MA is a lot smoother than last 10 days. So if we calculate the average
the shorter MAs this is because it averages of the last 10 days for every day over a long
out more prices and is less sensitive to new prices period of time and we connect the values,
as they only make up a small part of the average. the SMA line is created.

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 Chapter 4 l Technical analysis

The WMA is a weighted moving average where, Aside from identifying trends, EMAs are also
as we go back in time, weights of each price used to signal trading opportunities. You could
decrease in arithmetical progression. Although plot two EMAs with a different number of periods
it is a more complex indicator than the SMA, on the same chart, for example a 12-period
it is also more popular since it puts more weight EMA and a 26-period EMA, and look out for
on current prices. the lines crossing - depending on whether the
shorter period EMA is heading above or below
Another weighted MA is the EMA, also the longer period EMA, it can be seen as a signal
sometimes referred to as the Exponentially to buy or sell, respectively. Note that when the
Weighted Moving Average (EWMA). In general, EMA goes at and only uctuates a little, it
the 50 and 200 day EMA are used as signals identies a trendless market, and one should
of long term trends. For example, when the not trade using indicators suited for trending
EMA rises it shows the market is bullish and markets.
can indicate an uptrend. If the price candle
closes on the other side of the EMA line, this
can indicate a change in direction of the trend.

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 Chapter 4 l Technical analysis

Bollinger bands
Bollinger bands is a technical analysis tool away from your entry point. The opposite is
that helps measure volatility, and are made up true for times of low volatility where the bands
of two lines moving around an exponential are narrow, and the stop loss may be placed
moving average. The lines above and below closer to the entry point. Remember, as
the EMA form the Bollinger bands and are always, the Bollinger bands are best used in
designed so that 95% of prices fall within the combination with other indicators to avoid
bands. The bands widen when market volatility false signals.
increases and narrow when it decreases.
This is a useful feature because if the average Bollinger bands work well in both ranging and
price move is 50 pips in a quiet market and trending markets. In ranging markets, they may
expands to 100 pips in a volatile market, you forecast reversals, as prices are likely to bounce
will need to adjust your trading to account for off the upper and lower bands. In trending
these bigger moves. The price that you choose markets, after we identify the trend direction
to enter the market will move further away from on the daily chart, we can look to sell when the
the market in volatile times, giving a better price touches the upper Bollinger Band if the
entry that is adjusted to the current situation market is in a downtrend, and look to buy when
rather than past activity. Furthermore,during the price touches the lower Bollinger Band if
times of high volatility when bands are wide, the market is in an uptrend.
you will need to place your stop loss further

Trending market - EURUSD daily chart

When the direction of the trend on the daily

chart is down, tests of the upper Bollinger band
can offer good entry opportunities for selling

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 Chapter 4 l Technical analysis

Ranging market - reversals at the bands

When the market is trading sideways in a range,

the price tends to reverse at the bands

MACD
MACD stands for Moving Average Convergence
Divergence, and is an indicator designed to
detect momentum change and signal overbought
or oversold conditions. It is made up of two
parameters: the MACD line showing the
difference between 12 and 26 period EMA,
and the signal line showing the nine day EMA
of the MACD line. Sometimes it also contains
a histogram which gives a visual representation
of the difference between the MACD line and
the signal line.
Overbought and oversold signals are
generated when the MACD line moves far
above or far below the signal line - the higher
above the signal line the MACD line is, the more
overbought the currency, the lower below the
signal line, the more oversold the instrument.

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 Chapter 4 l Technical analysis

MACD is much higher

MACD is far below than the signal line,
the signal line, showing an overbought
pointing towards an market where price
oversold market where may stop rising
price may stop falling

Aside from showing overbought and oversold each other. The MACD line crossing above
conditions, MACD also gives signals when the the signal line is a buy signal, and crossing
signal line and the MACD lines cross over below is a sell signal.

A sell signal is
generated when the
MACD line crosses
below the signal line

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 Chapter 4 l Technical analysis

Finally, you can also get important information is moving lower, this is a signal that the trend is
by looking at the slope of the MACD line weakening, and that we may even see a trend
relative to the price trend. Most often, they will reversal soon. The reverse also holds that when
move up or down in tandem, but occasionally the price moves lower while the MACD moves
they will either converge towards each other higher, then the signal is that the trend is
or diverge away from one another. When you weakening.
see the price moving higher while the MACD

The price and the MACD line are converging

towards each other - the price is moving
lower while the MACD is moving higher.
This signals the downward trend is weakening.

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 Chapter 4 l Technical analysis

RSI
The RSI or Relative Strength Index is an For example, if RSI is rising above 70, which
indicator that measures the strength of all is your preferred RSI reference level, you may
upward movements against the strength of all choose to sell the instrument when the price
downward movements, and identies turning turns back down below the reference level of
points by indicating overbought and oversold 70, placing your stop loss just above the most
levels. In trending markets, it can detect recent high. Note that a common mistake is
momentum change; while in ranging markets, to sell the instrument as soon as the RSI
it can spot overbought or oversold conditions. reaches your overbought level, and not wait
for it to move back down. This can be a costly
The RSI gives a reading between 0 and 100.
mistake as the RSI can continue to move up
If it is greater than 50, the upward force is
with the price, so always wait for a move lower
stronger than the downward force, and if it is
before getting in. Again, the exact opposite is
below 50, the downward force exceeds the
true if prices are moving in the other direction;
upward force. For us to derive any signal from
when the RSI reaches or passes below your
the RSI though, we normally look for readings
oversold level and then rises back up above it,
greater than 70 or 80, or below 30 or 20. An
this can be considered a buy signal and you
RSI above 70 indicates that the instrument we
may choose to buy the instrument, with a
are looking at is overbought, pointing to a
stop loss below the most recent low.
potential sell opportunity. A more conservative
trader may wait for the RSI to exceed 80 Most traders use 70 as their overbought
before selling, as this is considered an even reference level and 30 as their oversold level,
stronger overbought signal. By the same logic, and the most common parameter setting for
the opposite is true when the RSI is low - an the RSI is period 14. However, whatever
RSI below 30 indicates an oversold market levels you use in your trading, you should still
and gives a potential buy signal, while an RSI stick to the rules we just mentioned, waiting
below 20 gives an even stronger buy signal. for the RSI to come out of the extreme zones
before acting.

RSI > 70 indicates an overbought RSI < 30 indicates the market is

market and a selling opportunity oversold, and gives a buy signal
when RSI dips back below 70 when RSI rises back up above 30

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 Chapter 4 l Technical analysis

Another signal that can be derived from the starts to diverge from the trend and move in
RSI is based on the way it moves relative to the opposite direction, we can expect the trend
the instrument price. If you see that the price to weaken, or perhaps even reverse.
is near a support or a resistance, and the RSI

The price is making lower lows while the RSI

is making higher lows, signalling divergence.
After such a pattern, we can expect the
downtrend to slow down or reverse.

Pulling it together
This chapter covered the basics of technical Need more?
analysis. Once you are comfortable with the
basics, you can move on to more advanced Remember you can also:
technical analysis, using additional indicators
and oscillators. You can expect to come across Look up terms in our online glossary
terms like Fibonacci extension and retracement, Find out more about technical analysis
SAR, ADX, Commodity Channel Index, and more. in our learn centre or view our
Dont be put off by the technical names once standard charts
they are applied in practice they are not nearly
Call a personal account service
so daunting. And remember, with our advanced
manager, join us on live chat,
charting software, you can try out these and
contact us at cs@easy-forex.com
many more technical indicators on the
or post your question/comments
instrument of your choice and work your way
on our Facebook page.
towards making more informed trading decisions!

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 Chapter 4 l Technical analysis

The easy-forex advantage

At easy-forex we make technical analysis easy, and provide full support to help you get
the most out of the resources available. View our standard charts here or login to access
our advanced ProRealTime charts and professional technical analysis levels from
Trading Central.
Open your easy-forex account and get access to leading web based charting software
preferred by industry professionals enabling you to:

Analyse currencies, precious metals, commodities or indices

View trend lines, draw support and resistance lines and insert Fibonacci retracements
Choose from a variety of chart styles including line, bar and candlestick
Zoom in to magnify areas to scrutinise or zoom out for a wider perspective.

Copyright by Easy Forex LTD 2012 41

 Chapter 5 l Pulling it all together

Chapter 5 Pulling it all together

Emotional trading - fear & hope
It goes without saying that understanding the prot amount. This may push them into getting
nature of the forex market, knowing how to out of a trade too early and realise a much
apply fundamental and technical analyses, and smaller prot than initially planned. It may also
being able to assess the direction of a trend prevent them from taking advantage of a good
are necessary skills for every trader. trading opportunity. Hope, which creeps up
when a trade is losing, can cause the trader to
However, one of the most important, yet also
hold onto a poor trade for far too long.
most overlooked aspects of trading is related
to emotions. Successful traders are aware of Small prots and larger losses are the last thing
their emotions while trading and have learnt we want to see in our trading accounts, so why
how to be disciplined and make rational rather do we do it? If you can relate to what you have
than emotional decisions. just read about emotional trading, read on as
we look at a few examples when emotions
The two emotions that can cause most damage
lead to bad trading decisions and assess how
are fear and hope. Fear, which usually creeps
we can x it.
up on traders while in prot, can make them
doubt the likelihood of taking their initial desired

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 Chapter 5 l Pulling it all together

Alexs two previous trades closed with a loss, and this is weighing on
his mind. He is afraid that the next position he takes will result in a loss
too. Because of his fear of loss, he delays placing another trade when
his methodology tells him to do so and waits for extra conrmation that
his idea is okay, at which point it is too late. His hesitation causes him
to miss a perfectly good entry opportunity.

Alex

Anna opens a trade with a take prot amount of $1,000, and the trade
goes into prot. It jumps from $200 to $550 to $750, and Anna continues
waiting for her $1,000 target. Because prices dont usually move in a
straight line, the price temporarily reverses, bringing her unrealised prot
down to $200. When Anna sees her prot fall, she starts to worry that
she will miss her chance of taking any prot at all, and this fear becomes
intensied as the prot drops to only $50. She closes her trade the
moment she sees it back up at $200. The emotion of fear causes her
Anna to take a much smaller prot than what she initially targeted. In this
example, had she waited another 10 minutes, the price would have
continued moving in her favour and her deal would have closed with
her target prot of $1,000.

Mark sees a potential opportunity and opens a trade, but it quickly turns
against him. As he didnt plan to lose his margin so quickly, he decides
to wait for some time, hoping that the market will move back in his favour.
He sees the loss on the trade grow from -$100 to -$400 to -$850 in
minutes, approaching his margin amount of $1,000, and because he
doesnt want to take this loss, he quickly increases the margin to $2,000.
He thinks that if he keeps his stop loss a safe distance out, it is just a
matter of time before the price turns around and he closes the trade
Mark at zero. After some waiting, his loss shrinks to -$300 and then -$150,
and he continues watching the trade for a chance to close with zero
losses. Unfortunately, the market moves against him again and he sees
the loss at -$450, and then later at -$900. At this point, the hope of
avoiding a loss completely controls his trading decisions; he may move
his stop loss even further out so that the market does not take him out,
or he may ignore the trade hoping that it will get back to at least break-even.
What was supposed to be a day-trade turns into a position trade of a
few days, and may even become a long-term buy and hold strategy,
with Mark unable to discern the right time to close the deal. After a lot
of waiting and hoping, the trade closes with a -$3,000 loss because he
added even more money to his margin in the hope of saving the trade.

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 Chapter 5 l Pulling it all together

Plan your trade

and trade your plan
Had Alex demo-tested his trading strategy she would have ended up with a bigger prot.
until he was happy with it and had he been Lastly, if Mark stuck to his planned maximum
aware that even a winning strategy can loss of $1,000, he could have afforded to place
sometimes have a series of losing trades, he three losing trades instead of just one, and
may have been more confident and taken chances are, some of his trades would have
advantage of the good trade set-up that been protable and boosted his account!
appeared. Similarly, had Anna known that her So, we can see these traders are making
impulse to close the deal is emotional rather mistakes by acting on their emotions of fear and
than rational and probably not a good idea, hope. Does any of the above sound familiar?

The good news

There are ways in which traders can put their The next step is to enter and exit the market
emotions aside and avoid the above mistakes. every time the pre-defined signals arise,
In order to avoid missing trading opportunities, irrespective of the performance of your last
you should have a strategy which gives clear few trades, and irrespective of your feelings
entry and exit signals when a number of about what the right move is. Every successful
pre-dened factors coincide. Realise that just trader realises that no matter what trading
as some trades will win, some will lose, and it strategy they use, each and every losing
is no cause to panic or doubt a tried and tested trade might turn in their favour, or might hit
strategy. Test your strategy extensively on a their stop loss. The stop loss is in place to
demo account or a live account with smaller minimise potential losses, and should remain
deals, until you are condent to follow it without in place no matter what. It is the trade strategy
question. that should dictate where the target profit
and loss levels are and not the traders
fear or hope.

The easy-forex advantage

One of the great benets of trading on the easy-forex platforms is that you can set
stop loss and take prot limits that allow you to take some of the emotion out of trading.
Plan and test your strategy, set your limits and keep your goal in sight.

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 Chapter 5 l Pulling it all together

A trading plan in ve simple steps

1. Dene your trading strategy

A consistently successful trader always has a
dened trading method. Guessing or going by
your gut doesnt always work. Without a dened
trading method there is no way for you to know
what constitutes a buy or a sell signal, or to
even consistently identify the trend. Decide
what your method is, which technical indicators
or other tools (e.g. candlestick analysis, etc.)
you will use, what your buy or sell signals are,
and nally dene how you plan to exit a position,
with a take prot and a stop loss in place.

2. Be disciplined
Once you have dened a method or a system
that works for you, follow it. It is important to
stick to the levels you selected for your stop
loss and your take prot, always targeting a
larger prot than the amount you are willing
to lose. Adding to your margin and moving
your stop loss further is likely to result in larger
losses. Your stop loss should be placed at a
level where you can accept that the market has
moved against you and you are willing to take
the loss.

3. Be realistic with your

expectations
The goal for every trader in their rst year of
trading should simply be to stay in the game.
You cant experience above-average returns
without exposing yourself to above-average
risk and as a new trader you should not take
on more risk. Remember, you should only risk
what you can afford to lose. So be realistic with
the stop loss and take prot limits you set.

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 Chapter 5 l Pulling it all together

4. Be patient
Markets trend only 20-30% of the time, and the
rest of the time they are not moving in one
clear direction. This means that you need to
be patient, and wait for trends to form and give
you good trading opportunities. For example,
if youre a medium-term trader, there will usually
be only two or three good trading moves in
the market in any given week. All too often,
because trading can be so exciting, new traders
want to trade all the time. But this means you
are probably over-trading, and doing it at a
much lower standard too. Patience is important,
so be prepared to wait and stick to your trading
strategy.

5. Manage your money

effectively
This is a very important point, and it explains
why many traders lose the balance in their
account after just a few trades. While new traders
may risk half or even their entire free balance
on one trade, experienced traders tend to limit
their risk on any given position to 1- 5% of their
portfolio. If we apply this rule to ourselves, then
for every $5,000 we have in our trading account,
we can risk only $50-$250 on any one trade.
If you have a small trading account, then trade
small, or top it up so that you can trade the
deal sizes you want.

And remember: plan your

trade, and trade your plan.
Always!

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 Chapter 5 l Pulling it all together

easy-forex and you

Since 2003, we have guided many new traders like yourself into the exciting world of forex trading.
In our experience, education and information are key to successful trading. When people fail,
its usually because they risk too much too early, before they understand what to do. We encourage
and help you get the information and understanding you need before you start to trade.
This way you will have the right tools, the right knowledge, and the right attitude to trading.

Copyright by Easy Forex LTD 2012 47