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TABLE OF CONTENTS
CHAPTER 1
FOREX PRIMER
pg. 5
CHAPTER 2
THE BASICS
pg. 17
CHAPTER 3
FUNDAMENTAL ANALYSIS
pg. 23
CHAPTER 4
TECHNICAL ANALYSIS
pg. 31
CHAPTER 4
THE PSYCHOLOGY OF TRADING
pg. 47
Risk Warning: CFDs and Foreign Exchange (FX) traded on margin carry a high degree of risk. As such they may not be suitable for all investors. Investors should ensure they fully understand the risks associated with leveraged CFD and FX trading
before deciding to trade because you can lose some or all invested capital. Investors may choose to seek independent
advice and should not risk more than they are prepared to lose.
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CHAPTER 1
FOREX PRIMER
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WHAT TO TRADE?
AN OVERVIEW: THE FOREX MARKET IS DOMINATED BY FOUR MAJOR CURRENCY TRADING PAIRS. THESE ARE EURUSD, GBPUSD, USDJPY AND USDCHF. OTHER
MAJOR PAIRS INCLUDE AUDUSD, NZDUSD AND USDCAD.
The trading of Cross Currencys is also very popular. A Cross Cur- Furthermore the ACFX MT4 platform does not exclusively offer
rency pair is a trading instrument that does not include a US Dol- Forex products. Our clients are able to trade well known and
lar component. For example EURGBP, AUDNZD and CADJPY.
highly traded equity CFDs, Commodities, Metals and Indices.
The movements in cross currency exchange rates can give an ACFX is proud to be one of very few MT4 brokers to offer this
active trader valuable insights on the strength and weaknesses highly traded instrument to its clients.
of underlying moves in currency majors. For example if the Euro
is weakening against the Pound Sterling, Swiss Franc, Australian
Dollar and New Zealand Dollar then there is a good chance that
weakness will be found in the EURUSD currency pairing.
The ACFX Metatrader 4 (MT4) platform offers more than just the
currency majors. Exotic instruments such as PLNJPY, NOKSEK
and USDCNH are also available to clients.
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BUSINESS MODELS
ACFX operates and offers their clients two distinct business models under one roof. This allows the client the freedom to choose a
business model that is appropriate and most suitable to a clients needs. These well-known business models are the:
MARKET MAKING BUSINESS MODEL - In the case of the Retail Forex
Market one side of the trade is the investor and the other is
ACFX being broker of choice.
ACFX provides the pricing required to allow the investor to
participate in Forex Market activity. Additionally, ACFX operates as a market maker by providing bid and ask pricing to
the investors to trade from.
STRAIGHT THROUGH PROCESSING MODEL - In this case ACFX provides pricing direct through a well-respected selection of
global liquidity providers. The STP model is also known as the
Agency model. In the STP model, the investor acts as the client
through the ACFX MT4 trading terminal, and is able to transact
on prices quoted directly from our liquidity providers. In return
for acting as the link to the liquidity providers ACFX charges a
brokerage fee that is calculated on the volume transacted.
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In todays computerized world this task is easier to accomplish as trade management software will automatically look
after the currency position, limit the size of the potential loss,
set profit targets and execute new positions.
Therefore it became a necessity and standard practice over
the years for banks to pass on executional trading orders
across the world and across time zones. In this way a Cable
Trader who is sweating on an open position of GBPUSD can
pass on sell and buy orders to his colleagues in New York. If
the Market did not trade through these levels during New
York trading hours then the order would be passed onto Tokyo. From there would move onto Hong Kong, Singapore,
the Gulf and then back to Europe.
However the trading hours of a London Dealing Desk had
to accommodate the ending of the Asian trading session.
Therefore a Forex Trader could not work the standard and
well known 9 am to 5 pm day but had to shift their morning
so that it overlapped the Asian session.
Most global banks operate full branches in all the major financial centres of the world. Before the advent of automated trade
management systems investors need a method to manage open
positions and handle pending orders.
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TIME ZONE
OPENS (GMT)
CLOSES (GMT)
STATUS
Frakfurt Germany
Europe / Berlin
07:00 AM
18 - March - 2015
03:00 PM
18 - March - 2015
Open
London - UK
Europe / London
08:00 AM
18 - March - 2015
04:00 PM
18 - March - 2015
Open
12:00 PM
18 - March - 2015
08:00 PM
18 - March - 2015
Open
Sydney - Australia
Australia / Sydney
09:00 PM
18 - March - 2015
05:00 AM
19 - March - 2015
Closed
Tokyo - Japan
Asia / Tokyo
11:00 PM
18 - March - 2015
07:00 AM
19 - March - 2015
Closed
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41.00%
New York
19.00%
Singapore
5.70%
Japan
5.60%
Hong Kong
4.10%
Not only does the London session dominate the Forex Market in
terms of global volumes, but also experiences much larger price
movements and daily ranges than its counterparts in New York
and Tokyo.
The extent of large price movements during this session has
been a turning point for many trading strategies which are based
around the London Open. These strategies attempt to take advantage of large congestion break out trades that follow the
close of the Asian session and the London open.
PAIR
TOKYO
LONDON
NEW YORK
EUR/USD
76
114
92
GBP/USD
92
127
99
USD/JPY
51
66
59
AUD/USD
77
83
81
NZD/USD
62
72
70
USD/CAD
57
96
96
USD/CHF
67
102
83
EUR/JPY
102
129
107
GBP/JPY
118
151
132
AUD/JPY
98
107
103
EUR/GBP
78
61
47
EUR/CHF
79
109
84
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The internet revolution has transformed the world of investing and trading, it has brought the markets to the masses.
The days when investor have to call a broker to place a trade
are long gone. With respect to the Forex Markets the changes enforsed over the years have been extraordinary.
In the mid 1990s the Forex Markets was the preserve of investment banks, business and rich individuals. However with
the introduction of internet to the general public, scores of
companies around the world came into existence offering
internet based trading platforms.
With no need to go to an office, exchange or dealing floor;
todays traders can now trade from their own home office
or even from their mobile phones. With ACFX, the world of
trading has become so accessible investor can trade anywhere, anytime.
The Base Currency always relates to the first currency and the
counter currency to the second in a pairing. A little confused?
If investor chooses to trade GBPUSD the Base Currency is GBP
(Pound Sterling) and the Counter Currency is USD (United
States Dollar).
If for example, after analysing charts an investor comes to the
decision that the British Pound looks cheap where as the US
Dollar is rather expensive; and to take advantage of the potential benefit of an appreciation in the Pound, the investor
would buy the GBPUSD currency instrument.
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This includes learning how to use a trading platform and being familiar with all order types. Additionally, there is education and training that can be undertaken before one decides
to trade on a live account. ACFX brings to all its clients a demo
platform where an investor can simulate opening and closing
positions and testing strategies without risking their capital.
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CHAPTER 2
THE BASICS
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ACCOUNT OPENING
Opening a trading account with ACFX has never been easier. By visiting our website and selecting the START TRADING
button an investor is only a few clicks away from gaining access to the dynamic world of Forex.
The application form is unobtrusive and is in line with all the modern guidelines of our European Union regulator.
An investor can invest funds into a wide range of base currencies. Deposits are accepted from a wide variety of globally accepted and respected payment providers.
In the unlikely event that an investor has difficulty in completing the account opening process ACFX offers all our
clients LIVE 24/5 CUSTOMER SUPPORT through our LIVE CHAT function. Alternatively an email can be sent to our support
team at support@acfx.com .
WHAT IS A PIP?
The pip can be described as the smallest incremental movement for a currency, which is usually the fourth decimal place (It can
sometimes though be the second).
EXAMPLE:
If EURUSD is quoted at 1.0615 and then moves to 1.0616 that means that the EURUSD exchange rate increased by 1 pip.
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EXAMPLE:
An investor decides to buy GBPUSD and open a position of UK1,000.00 at a rate of 1.4750. By entering into this transaction
the investor has obliged him/herself to purchase UK1,000.00 and sell USD 1,475.00.
If subsequently the exchange rate rises to 1.4800, the result for the investor would be that now he/she can receive more US
Dollars for every 1 Pound Sterling. In simple mathematic terms:
OPENING POSITION
The investor buys GBP 1,000.00 and sells 1,475.00 @1.4750.
CLOSING POSITION
The investor sells GBP 1,000.00 and buys 1,480.00 @ 1.4800.
This produces a profit of USD 5.00.
To go short would imply that the investor believes that the Base Currency is overpriced and the Counter currency is
under-priced.
For example an investor takes a view to short GBPUSD
OPENING POSITION
The investor sells GBP 1,000.00 and buys 1,475.00 @1.4750.
CLOSING POSITION
The investor buys GBP 1,000.00 and sells 1,470.00 @ 1.4700.
This produces a profit of USD 5.00.
To GO FLAT means that the size of the long positions equals the size of short positions. This leaves the investor perfectly hedged
but does run the risk of building up considerable swap fees if positions are not liquidated.
FLAT HOWEVER CAN ALSO MEAN THAT INVESTOR HAVE NO OPEN LONG OR SHORT POSITIONS.
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MARGIN
You can think of margin as a loan from your brokerage. Margin trading allows you to buy more than you would be able to
normally buy.
BACK TO OUR PREVIOUS EXAMPLE
To open a position of 1 Lot of GBPUSD at a leverage level if
1:100 requires a GBP 1,000.00.
The Margin calculation being:
Position size = 1 Lot valued at GBP 100,000.00
Leverage = 1:100
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ORDER TYPES
STOP LOSS
MARKET ORDER
This is a key component it the management and mitigation of risk. It consequently limits the potential for excessive
losses being generated. The stop loss order would automatically action a trading order that flattens a position and
crystalizes the loss.
TAKE PROFIT
LIMIT ORDER
A limit order is an order to buy or sell at a specific price or better. A buy limit order can be only executed at the limit price or
lower, and a sell limit order can be only executed at the limit
price or higher.
At times, markets can move in a slow pace. Other times, extreme market volatility could take an open position into the
the price target area only for the move to fade eventually.
This means that if the investor is of the opinion that the current buy level maybe higher than where they wish to enterthen they can use a limit order to open the position at a level
that offers better value for the investor.
STOP ORDER
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CHAPTER 3
FUNDAMENTAL ANALYSIS
AS AN INVESTOR CAN USE A VARIETY OF METHODS TO COME TO AN INVESTMENT DECISION. THE
TWO MOST WIDELY USED AND POPULAR METHODOLOGIES IS FUNDAMENTAL AND TECHNICAL
ANALYSIS.
LETS TAKE A LOOK AT THIS FIRST BY STARTING WITH FUNDAMENTAL ANALYSIS.
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FUNDAMENTAL ANALYSIS
A trader or investor who takes a Fundamental approach to active investing, will focus on economic numbers.
A trader who uses fundamental approach to trading, could take a short term view by following todays or the last few sets of
data.
The trader can have a longer term view by taking in a broad picture of macro-economic, geo-political, legislative and regulatory
news and data.
As a participant in the Forex Market, a trader should not limit themselves to focussing on the events of one country. The Forex
Market is the leading indicator of Global money flow and as such what may seem an inconsequential piece of news from one
part of the planet could have huge global ramifications.
This was the case in 2013 when the Cyprus government took a political and budgetary decisions to liquidate its small holding of
Gold. Due to the financial crisis the markets took the Cyprus governments decision to sell its entire Gold position as a signal that
the same would follow from the Italian and Portuguese governments who hold substantial positions of Gold.
The study of Fundamental Analysis is to focus on the macro-economic indicators which allows investors to build a picture of
the state of a nations economic wellbeing. By understanding the trend in the data and being able to take a longer term views,
investors are able to gain a perspective of what the future could hold.
Fundamental analysis is however not just a case of collection lists of data samples. There is a need to and requirement to be able
to read through the news and between the lines of statements made by prominent Central Bankers, politicians and business
leaders.
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NON-FARM PAYROLLS
The king of the data sets we previously mentioned is the
Non-Farm Payrolls number, or more commonly known as
the NFP.
The NFP number is released monthly on the first Friday of a
new month. The NFP accounts for the total number of Paid
US Workers of any business.
The NFP has an overbearing impact on the market and can
cause large amounts of volatility in all liquid asset classes
and the forex market.
The NFP ,being released early in the month, gives traders
and investors an early warning of economic changes and
as such is a valuable tool in helping one decide if new risk
should be taken or if current exposure management should
be changed.
INFLATION
Inflation in an economic context occurs when underlying data
indicate that the trend in prices for goods and services experiences a sustained increase over a predefined time period.
FOR EXAMPLE
Inflation is viewed negatively by the general public as it limits their purchasing power. The reason being that it erodes the
value of a given currency. However some inflation is needed to
ensure that an economy grows at a consistent and sustainable
level.
During periods when the inflation rate is rising at a decreasing speed or when prices are actually falling, can have a detrimental effect on the growth and therefore impact on the Gross
Domestic Product.
The reason being that during periods of falling or negative inflation (also known as deflation) both the general public and
businesses could put off the purchase of goods and services.
The resulting drop off in demand could lead to a reduction in
the rate of economic growth.
In recent years the Central Banks of developed nations such
as the United States Federal Reserve, the Bank of England and
the European Central Bank have managed inflation targets of
between 2-3%. If the rate of inflation data begins to indicate
that increasing prices are above and beyond this threshold,
the Central Bank will raise interest rates. The action of raising
interest rates has the effect of reducing the money supply in
the economy. This under normal circumstances should lead to
some of the heat being taken out of an economy that is growing too quickly. In turn the drop off in demand causes the inflation rate to fall back into target levels.
The rate of interest has a direct link to the value of a currency.
An increase in interest rates will make a currency more attractive to invest in. This is due to the higher interest yield an investor will receive for a deposit if compared to a currency that has
a lower rate of interest.
Traders and investors therefore attempt to anticipate increases
in the rate of interest before it happens. By doing this a trader
will benefit from the appreciation in the value of the affected
currency.
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UNEMPLOYMENT RATE
Economic data that is derived from readings of the labour
market has a huge impact on the financial markets. The most
important data sets originate from the United States with the
Non-Farm Payrolls (NFP) data dominating all other releases.
These other releases being the Unemployment Claims and
Average Earnings data.
The labour data are hugely important as they can be directly
linked to the health of an economy. As such a buoyant labour
market is an indication that an economy is growing with the
labour force being economically productive and contributing to a countries economic activity.Whereas increasing and
high levels of unemployment is a strong indicator that the
economy is suffering from a drop off in demand and then
associated with a fall in growth levels.
In times of rising or full employment the Central Bank will
seek to curb a tendency for inflation to get out of control by
increasing interest rates and reducing the money supply.
CONSUMER DATA
Demand and sentiment based data releases give important
and significant insights on the health of an economy. Consumer led demand has an overbearing hold on economic activity. Through employment and the income that is received
for production,s citizens contribute by purchasing goods
and services.
When consumer based data and sentiment indicators begin
to trend lower or higher the Central Bank is alerted so that it
can bring the economy back into balance through means of
implementing effective interest rate policy. The Central Bank
will of course also simultaneously monitor other important
economic indications such as GDP growth, the labour market and inflation.
Traders therefore wil be in anticipation of changes in monetary policy monitoring important economic data releases
such as, Retail Sales, Durable Goods Orders, Consumer Confidence, Consumer Sentiment and the German ZEW and iFO.
BALANCE OF TRADE
The Balance of trade is a very simple calculation which measures the difference between the value of all the goods and
services that a country will import against those that are exported.
A country is said to have a surplus if the value of its exports
surpasses the value of its imports. On the other hand a country is said to be in deficit if the value of its imports surpasses
the value of its exports.
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FOR EXAMPLE
Would a EURUSD Trader be more inclined or less inclined to go
long with the Euro if EURGBP was falling? Probably not enough
data is available to make a fair assessment. However if an investor noticed that the price movement was also in a downward
direction in say EURAUD, EURCAD then he or she would probably think twice about placing that long trade.
CORRELATIONS
Many traders are happy to trade one currency pair or financial
instrument without being concerned with the implications
that are happening around them in the wider market. Many
of these traders are very skilled at following and trading one
financial instrument and are able to enjoy a profitable career
by being so extremely specialized and focussed.
However one financial instrument does not move independently from the broader global financial market. As any seasoned market professional knows, many financial instruments
move in parallel with the other. A bullish day for USDJPY will
usually lead to a bullish day for USDCHF. In fact if one was to
compare the two charts side by side it would be hard to differentiate between USDJPY and USDCHF.
This similarity in the price activity of different financial instruments is often referred to a correlation. The definition of a correlation is the relationship between two variables that can be
measured through statistical analysis.
Some financial instruments such as USDJPY and USDCHF are
positively correlated. That is to say that a move in one direction for USDJPY will be confirmed by a similar move in USDCHF. Inversely a negative correlation describes a relationship
between two financial instruments which move in opposite
directions. A good example of this the US Dollar Index ($dxy)
and EURUSD. On a statistical basis if $dxy moves higher then
consequently the EURUSD will move lower.
The degree of correlations however will vary. USDJPY and USDCHF will not experience the exact same percentage moves
over a given period of time and $dxy and EURUSD will not experience in percentage terms a move that is equal and opposite. However the correlation will be derived over a set period
of time and will produce a data output of between 1.00 and
-1.00. A result of 0.80 to 1.00 would be considered highly correlated and -0.80 to -1.00 to be highly negatively correlated.
Currencies and other financial instruments are correlated because prices are ultimately moved by a multitude of factors.
This can be economic factors such as growth, employment, inflation or interest rates. There are also political, legislative and
geopolitical factors. International trade plays an important
role in driving global financial markets. Countries which are
exposed and reliant on cross border trade will have their currencies affected by the demand and supply of these resources.
For example Canada is recognized as a major producer of energy commodities and most notably Crude Oil. Therefore there
is a high degree correlation between the price of Oil and the
value of USDCAD.
Understanding that correlations exist between different financial instruments is important as it allows an active trader to
have an insight of the true direction the money is flowing. As
Oil is getting weaker is it that wise to be selling USDCAD at an
area of resistance?
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CHAPTER 4
TECHNICAL ANALYSIS
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TECHNICAL ANALYSIS
An approach to trading that solely relies on the historical research of price movements is defined as Technical Analysis. Through the
analysis of price movements a trader or investor aims to identify key price patterns, important price points and other important relationships. It is through the correct application of technical analysis that a trader or investor can make assumptions and predictions on the
possible future price action.
CHARTS
CHARTS HAVE BECOME A MAJOR COMPONENT AND TOOL IN THE STUDY OF TECHNICAL ANALYSIS.
A chart is a graphical representation of the price action. Charts are useful to traders as they give the price action a visual order
that is easier to interpret. Further visual representation allows a trader to identify relationships between certain price points
through the application of trend lines, horizontal support and resistance levels, moving average and more complicated market
studies such as Stochastics, Bollinger Bands, MACD and RSI.
CHART TYPES
ACFX OFFERS TO OUR CLIENTS THE OPTION TO USE THREE WELL KNOWN AND POPULAR CHART STUDIES. THESE BEING:
CANDLESTICK CHARTS
BAR CHARTS
LINE CHARTS
All chart options allow our clients to choose a range of standard time frames from 1 minute to monthly. The ACFX Metatrader4
chart package also allows our clients to further customize their charts by choosing different colour schemes and back ground
designs.
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LINE CHART
Also known as Line on Close is probably one of the least used
method of chart types. The reason for is that its graphical representation of the price action as a sequence of closing prices
gives the least information. However this very simplicity does
give it a big advantage over other chart types. This being that
the lack of noise that a Line chart produces takes away some
of the psychological pressure a trader or investor experiences.
Furthermore this simple graphical representation does make it
much easier for the eye to identify price patterns which could be
lost in the noise of other chart types.
BAR CHART
Bar Charts have been popular for many years within the West
and as such are the second popular chart type in use. A Bar Chart
gives a trader four important price points over a specific period
of time. These being the open, high, low and close.
Traders and investors look at the structures created by bar chart
patterns for a means to predict the future direction of prices.
CANDLESTICK CHARTS
Candlestick Charts are by far the most popular chart study. Although very similar to Bar Charts, Candlesticks give a trader an
additional visual clue on how the last period closed. It does this
by creating what is called a body between the opening and
closing price. If the closing price posted a higher value than the
opening price for the period the body will be shaded green. If
conversely the closing price posted a value that is lower than the
opening price the body will be shaded red. The prices that fall
outside the candle body are called the wicks. The top of the wick
represents the highest price the instrument traded to during a
predetermined time scale and the bottom of the wick being the
lowest price.
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SUPPORT AND RESISTANCE, WHAT THEY ARE AND HOW TO USE THEM
Imagine an investor stood in the middle of an alley surounded by tall brick walls. If one was to throw a tennis ball at one of the
walls with sufficient power it would not be a surprising if the ball was to bounce back and forth between each wall. In this case
the two walls offer a solid boundary that repels the tennis ball.
On a chart, support and resistance have a similar effect to price action. In this case however, instead of two horizontal walls a
trader will look for an area to place a price floor and and a price ceiling. Support and resistance both act as boundaries against
the current price level. Support being the boundary floor and resistance being the boundary ceiling.
Unlike two solid brick walls horizontal support and resistance act as areas where the price may struggle to trade above or beneath. Traders tend to observe the price action around the key support and resistance levels. They want to examine whether
the price action can sustain a move and therefore close above or below these key levels; or whether the price action be pulled
back into the prior range.
By understanding the relationship of support and resistance levels to the current price structure, a trader is able to make informed decisions and plan their trading. A trader could for instance create a plan where they buy at support or sells at resistance.
Alternatively a trader may create a plan which buys breakouts above resistance and sells break downs beneath support.
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BULL POSITION
BEAR POSITION
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interpret the price action very quickly and through these tools gather a picture of how the instrument could move over the coming periods. Furthermore the simplicity of the data outputs allow a trader
to build a standardize strategy around these technical indicators.
From a negative aspect these indicators are all derived from price
and therefore lagging. A skilled technical trader who applies pure
price action analysis should be quick in entering the trade and nimble in managing the position.
MOVING AVERAGES
A moving average is a technical indicator which is used to take away some of the volatility of raw price action. This is achieved
by calculating the average closing price over a set amount of periods. This process is repeated over subsequent periods, with the
net result being a line that shadows the price action. Moving averages cannot be used to predict future price actions as they are
a lagging indicator.
The most common use of a moving average, is for reasons of quick visual identification of a trend. For example if an instrument is
trading above a 100 period moving average, over a set period, then it can be said that the price action is positive.
If a trader now adds the 50 period moving average to the chart, a variety of scenarios can be created based on the interaction of
the price action and both averages.
If the shorter 50 period moving average crosses above the 100 period moving average then it is said to be bullish and is defined
as a Golden Cross. As moving averages are lagging indicators, the price action will almost certainly be above the 100 period average at the time the cross over takes place.
If the shorter 50 period moving average crosses below the 100 period moving average, then it is said to be bearish and is defined
as a Black Cross. As moving averages are lagging indicator the price action will almost certainly be below the 100 period average
at the time the cross over takes place.
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A moving average can act as a leash that a dog walker will use to control his pet. As the dog gets over excited it will pull at the
leash as it moves away from the owner. At the point where the leash tightens as the dog struggles to move too far away the
walker pulls the dog back towards him.
Price action that trades away and becomes increasingly extended from the moving average is very much like the over excited
dog. Whereas the moving average is the leash that brings the price action back to a place where it feels most comfortable.
If for example the price action is trending higher, extended from the 50 period and 100 period moving averages, there is a tendency for upward momentum to lose energy. Eventually either the price action trades back down to meet the average, or in a
sideways fashion that allows the average to catch up with the price action.
because greater weight is given to more recent price data outputs. The more recent the data, the more relevant and therefore more useful. The sum of weighting should always equal
to 100. An SMA on the other hand gives all values the same
weighting.
SMA are deemed to have a problem which is referred to as
barking twice. This is used when the SMA react at the start
of the moving average period when a new data output is included in the equation, and once at the end when this same
data output falls out of the equation.
An EMA slope can be recognized with greater ease. This is because the slope EMA should point up when the price closes
above the average and down when the price closes below the
average. This tendency usually follows the most recent price
closely, which means that the EMA is much quicker to react
when compared to an SMA and the nature of the price action.
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TECHNICAL OVERLAYS
BOLLINGER BANDS
The Bollinger Band chart overlay was created by John Bollinger. Bollinger Bands work in conjunction with the moving average. Bollinger Bands are designed to act as volatility bands which envelope a moving average above and below. Bollinger Bands are calculated by the use of a standard deviation. The Bollinger Bands will expand as volatility increases and contract as volatility decreases.
The Bollinger Band overlay that can be found on the ACFX Metatrader 4 platform consists of three components. A Simple 20 period
moving average of closing prices. An upper and lower band that uses a standard deviation of 2. The bands use the same look back
period of the average.
Bollinger Bands can also be used to provide trading signals in the form of double tops and double bottoms. Furthermore Bollinger
Band contraction can be used as a warning signal of a potential break out or break down.
PARABOLIC SAR
The Parabolic SAR (PSAR) system was created by Welles Wilder. He referred to it as the Parabolic Time/Price System. SAR means stop
and reverse. Wilder is a well-respected writer on technical trading and wrote about the Parabolic SAR indicator in his book New
Concepts in Technical Trading Systems, that was published in 1978. This book also introduced other well-known technical indicators
such as the RSI, ATR and Directional Movement Index.
The indicator is actually a trading system. The indicator is designed to plot SAR points under the price action during an uptrend and
above the price action during a down trend.
A signal to stop and reverse will be given if the current candle breaks below or above the Parabolic SAR indicator. When this occurs
a new SAR point will be painted in the opposite direction of what was the prevailing trend.
As the SAR follows the price action it is considered a trend following indicator. The SAR comes into its own as an indicator that allows
a trader to stay in a trade during strong trending markets. Without the PSAR indicator a trader maybe influenced to cut a trade early,
due to psychological stress caused by normal market volatility.
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The PSAR will continually rise during an uptrend and continually fall during a down trend. Furthermore the PSAR will act as a trailing
stop which stops a trader from increasing the stop value.
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PIVOT POINTS
PIVOTS POINTS AND PIVOT POINT ANALYSIS IS A POPULAR AND WELL KNOWN TECHNICAL TRADING TOOL. THE USE OF PIVOT LEVELS WAS FIRST USED AT EXCHANGES BY PIT TRADERS. TRADING ON THE FLOORS OF MAJOR EXCHANGES IS TYPICALLY VERY FAST PACED. TRADERS ON THE FLOORS DID NOT HAVE THE USE
OF TECHNICAL CHARTS AND MODERN COMPUTER SYSTEMS. THEREFORE THERE WAS A REQUIREMENT TO CREATE A LEADING INDICATOR THAT WOULD MAP OUT
THE KEY DAILY LEVELS FOR THE FLOOR TRADERS.
Simple pivot point levels are calculated by taking the previous days high, low and close and by use of a simple arithmetic equation
which helps create predictive levels for the day ahead.
The calculation is shown below:
As the Pivot Point is based on the previous days data, the levels created are set in place for the whole days trading. A day trader
would look to buy a financial instrument and keep the position up to R1.
At R1 the day trader has three decisions to take:
1.
2.
3.
Shorts will mirror longs with the trader looking for tests and fades of S1 and S2.
THERE ARE OTHER MORE EXOTIC VERSIONS OF THE PIVOT POINT. THESE INCLUDE THE FOLLOWING.
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DIVERGENCES
Divergences typically occur when both moving averages converge with each other. The convergence signifies a decrease of
positive or negative directional momentum. Whereas the divergence signifies a lack of commitment to push prices higher
or lower.
During an uptrend one would expect to see the MACD in
step with the price action. As the financial instrument proceeds to print new highs, the MACD will also reach higher
levels. However during the exhaustion phase of the trend,
the MACD could come out of gear with the underlying
price action and consequently stop printing higher values.
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100
RSI = 100 - __________
1 + RS
RS = AVERAGE GAIN / AVERAGE LOSS
INTERPRETATION
The RSI can print multiple false signals during very strong trending markets. There can also be times when the RSI remains in overbought and oversold areas for a considerable time. This phenomenon can occur when the momentum oscillator becomes embedded in extreme areas during strong trending markets.
The use of RSI divergences are extremely useful when used as a filter to identify valid and non-valid overbought and oversold trade
set ups. As discussed in the section that focussed on MACD divergences, very similar set ups occur when using the RSI.
Furthermore although RSI could signal profitable trade sets off extreme overbought and oversold levels, divergences on the whole
can offer safe trade set ups that lead to much larger corrective moves in the price action.
As with all indicator based trading, the paramount importance is once the oscillator moves into an extreme area; entry should only
be taken if the price action begins to show signs of exhaustion.
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CHAPTER 5
THE PSYCHOLOGY OF TRADING
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The catch phrase during the years of the well respected and
now retired head of the Federal Reserve Mr. Alan Greenspan
was irrational exuberance. Traders feel the need to make huge
profits in the shortest period of time possible. The sharp market operators sense that a big move is about to happen, they
therefore minimize their risk and book profits according to a
well thought out plan.
Less experienced traders, do not always anticipate moves tlike
that. Fearing that they have missed a great opportunity they
jump onto the trade. Soon, the find themselves into the black
as their unrealized profit begins to rise. However this trader did
not have an entry plan and certainly did not have an exit plan.
The possible outcome to such a trade is therefore in a state of
flux. This trader may get lucky and close the position for the
maximum profit available. It is however more likely that the
greed takes hold as this trader gets excited and feels an emotional high as his unrealized profit increases dramatically.
The market then begins to fluctuate. The trader reinforces the
positive feeling about this trade by telling himself, dont worry,
its just another consolidation. Then the price slips lower so
the trader sets an imaginary stop under the current price action. The trader anxiously watches the market as the price action ticks down ever so closer to his soft stop. His stop is then
breached. He tells himself the market is wrong, this is just a
minor correction but the market moves lower.
The trader now places another soft stop just above the entry
price. The price action inevitably heads lower and before he has
time to contemplate what is happening, a profitable trade is
now in debit.
With his position now underwater a sense of fear and hope
takes control of what should be a rational trader. This trader
now is hoping that the selloff has run its course. He tells himself that if the position goes back into profit he will close the
trade with a small win. Then he thinks about the opportunity
he missed in booking a large profit and that next time he will
not repeat the same mistake.
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MANAGE RISK
Trading is all about managing risk. The management of risk sets a
trader apart from a gambler playing roulette at a casino.
Trade position sizes should be limited to the amount a trader is
willing to lose. The idea being that one trade should not be sufficient to wipe out an equity balance.
A trader needs to aim to incur acceptable losses and consistent
gains. The risk to reward ratio should preferably be biased to
booking profits that are larger than losses.
In terms of hard and fast rules, how much a trader should risk on
any given trade is very much down to their risk appetite and experience. However stop loss levels could vary between 0.5 5%
however many professional trades will risk at the most no more
than 2%.
Risking more could mean that a trader is over leveraged or has
misread the market. Sitting on a position that is 5% underwater
does beggar the question of how wrong must to a trader be to
be right?
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IN CONCLUSION
TO BECOME A SUCCESSFUL TRADER ONE REQUIRES TO TAKE A LONG JOURNEY THAT TAKES COMMITMENT, DEDICATION AND DISCIPLINE.
THE MARKET WILL NOT ALWAYS GIVE THE TRADER WHAT HE/SHE WISHES FOR. THERE WILL BE TIMES WHEN EUPHORIA IS FOLLOWED BY
FEELING OF REGRET, FRUSTRATION AND PAIN.
A TRADER NEEDS TO BE ABLE TO MANAGE EMOTIONS AND TRADE TO A PLAN. A FAILURE TO FOLLOW THE RULES WILL ULTIMATELY LEAD TO
A PROMISING TRADING CAREER ENDING PREMATURELY.
THIS EBOOK HAS BEEN WRITTEN TO GIVE TRADERS WHO ARE NEW TO THE MARKET AS MUCH INFORMATION AS POSSIBLE IN THE SHORTEST SPACE OF TIME.
READING THIS EBOOK SHOULD GIVE A TRADER THAT IS NEW TO THE MARKET THE BASIC GUIDELINES TO APPROACHING WHAT CAN BE A
VERY EXCITING AND REWARDING PROFESSION.
HOWEVER IT IS UP TO THE TRADER TO GO OUT AND FIND AS MUCH INFORMATION AS POSSIBLE ON TRADING. BE IT BOOKS, ONLINE
VIDEOS, CHAT ROOMS OR BY SUBSCRIBING TO THE DETAILED NEWS LETTERS SENT OUT TWICE DAILY FOR FREE TO ALL OUR CLIENTS.
THERE IS ALSO A WEALTH OF KNOWLEDGE TO BE FOUND ON THE ACFX ACADEMY WEBSITE. FURTHERMORE OUR INVESTMENT RESEARCH
DEPARTMENT IS ALWAYS AVAILABLE TO ASSIST OUR CLIENTS WHERE POSSIBLE.
SO WHAT IS HOLDING YOU BACK?
WITH ACFX YOU CAN.
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