BOOK 1 A SKILL FOR THE FUTURE WAMBUI DANIEL https://wambuifx.wixsite.com/mysite-2 Where technology meets financial freedom
A SKILL FOR THE FUTURE Table of Contents SECTION 1: WHERE DOES IT ALL BEGIN?.........7 Forex Trading Levels .......................................7 SECTION 2: HOW DO YOU READ A CURRENCY PAIR/QUOTE? ................................................11 The Most Traded Currencies ........................11 Understanding The Currency Quote/Pair .....13 SECTION 4: HOW DO WE MAKE PROFITS? ....18 Buy Order......................................................18 Sell Order ......................................................18 1
A SKILL FOR THE FUTURE SECTION 5: MOST IMPORTANT MARKET TERMINOLOGIES ............................................ 20 Terminologies ...............................................20 Section 6: UNDERSTANDING A CANDLE STICK. .......................................................................26 Japanese Candle Sticks .................................26 Buy Candle ....................................................29 Sell Candle ....................................................31 Rejections. (Pin Bars) ....................................33 2
A SKILL FOR THE FUTURE Heikin Ashi Candle Stick................................37 SECTION 7: TRADING INDICATORS................39 Trading Tools ................................................39 Exponential Moving Averages. .....................41 CN5 ...............................................................43 SECTION 8: TRADING SESSIONS ....................44 SECTION 9: PRICE ACTION .............................45 Support and Resistance Levels .....................45 Understanding The Support Level ................46 3
A SKILL FOR THE FUTURE Understanding The Resistance Level ............47 SECTION 10: HOW DO WE BECOME CONSISTENT PROFITABLE TRADERS? ............48 Risk Management .........................................48 Trading Plan ..................................................51 Trading Journal .............................................52 Pending Orders .............................................54 Buy Stop........................................................55 Sell Stop ........................................................56 4
A SKILL FOR THE FUTURE SECTION 11: SKILLS NEEDED TO BE A SUCCESSFUL FOREX TRADER .........................58 SECTION 12: HOW DOES YOUR TRADE GET TO THE MARKETS ON THE GROUND? .................59 Introduction to Forex Brokers ......................59 What Do You Need to Open an Account? ....60 Requirements for Account Verification Include: .........................................................60 Regulations Among Forex Brokers................61 5
A SKILL FOR THE FUTURE What Should You Consider When Choosing a Broker? .........................................................62 Types of Brokers in The Market....................63 SECTION 13: CONCLUSION ............................65 6
A SKILL FOR THE FUTURE SECTION 1: WHERE DOES IT ALL BEGIN? Forex trading is trading of currencies, where you buy one currency while selling the other, simultaneously. Forex Trading Levels Trading – Forex trading has been made possible by the involvement of International Commercial Banks. This are the only institutions that have the direct contact to the trading market on the ground. Can you see why it is not gambling? 7
A SKILL FOR THE FUTURE Regulating- Forex trading involves trading of currencies that are used in the global economy. The Central Bank in these specific trading regions, has to regulate how much a currency can gain or lose value. Hedging and Investing- Hedging is done by hedge funds, which are institutions involved in investing foreign securities. Large corporations also invest a lot in foreign securities. This two are the biggest players in the market, also referred to as the Market Movers or Trend setters. 8
A SKILL FOR THE FUTURE For example, if a hedge fund invests its money in buying the Pound currency that was previously on a Down trend (loosing value), it will probably change the trend to an uptrend (Gaining value). Speculating – The retail traders (Individuals) fall under this level since they have no capacity to move the market. They will speculate (Analyze) on the direction (Trend) of the currency based on what the Market Movers are doing. Most retail traders use candle stick charts to observe the movement of the price. 9
A SKILL FOR THE FUTURE Why is all this information important? When one is opening a real trading account, the broker will want to know the level of a client. It also helps you understand how the trading trickles down to you from above. 10
A SKILL FOR THE FUTURE SECTION 2: HOW DO YOU READ A CURRENCY PAIR/QUOTE? The Most Traded Currencies EUR - Euro GBP - Great Britain Pound. USD - United states Dollar. JPY - Japanese Yen. NZD - New Zealand Dollar. AUD - Australian Dollar. ZAR - South African Rand. 11
TRY A SKILL FOR THE FUTURE - Turkish Krona. CAD - Canadian Dollar. CHF - Swiss Franc. The above currencies are traded in pairs/quotes. e.g. GBPUSD, EURAUD, USDTRY etc. So how does the trading occur? You’ll probably be able to answer this question after reading the next page. 12
A SKILL FOR THE FUTURE Understanding The Currency Quote/Pair In this market, you either buy (when the currency is gaining value) or sell (When a currency is losing value). So how do we make a profit from a currency that is losing value? Hold on to that thought. Example GBPUSD. In trading this currency pair, what you need to understand is that it has two parts. The first part has the GBP which in this case is the stronger currency, and the second part is 13
A SKILL FOR THE FUTURE case is the USD which in this the weaker currency. So what this means is all the currencies that are on the first part of the pair are always the stronger currencies. This part (first part of the currency) is also the part that determines the Trend of a currency pair. So when you place a Buy on this currency pair (GBPUSD), what it means is you’re buying the GBP. 14
A SKILL FOR THE FUTURE So what happens to the second part? The opposite happens to the second part simultaneously. What this means is when you buy the GBP, you also sell the USD simultaneously. This clearly means the GBP is gaining value while the USD is losing value. The most important point to note is when the GBP or any other currency is gaining or losing value, it is doing so in all pairs. So if you're going to place a sell order on GBPUSD, it means you cannot go and place a buy order on GBPAUD. 15
A SKILL FOR THE FUTURE So for you to be sure you have understood the above, answer the following questions. Can I place a buy order and a sell order at the same time on AUDUSD? Can I place a buy order on EURUSD and a sell order on EURAUD? If your answers are yes, go back and read again but if your answer is No, well done. Let’s proceed. 16
A SKILL FOR THE FUTURE The above relationship of currencies movement is known as correlation. Positive Correlation is when currencies move in the same direction while negative correlation, is when the currencies move in different direction. These correlations will help you manage your exposure to the market. Click the link below for more correlations. https://www.myfxbook.com/en/forex- market/correlation 17
A SKILL FOR THE FUTURE SECTION 4: HOW DO WE MAKE PROFITS? Buy Order When taking a buy position, you make profits when you buy at a low price, and the currency gains value. So the difference between the price you bought (Low price) and the price you closed your trade (Higher price) is your profit. Sell Order Remember the theory about how the trading happens on the currency pairs? When you sell a currency, you buy the other currency simultaneously, right? 18
A SKILL FOR THE FUTURE What this means is the more the currency you sold loses value, the more the one you bought gains value. This also means when you sold the currency, it enabled you to buy the other currency cheap, and as it gains value, you make money. So in a sell, you gain from buying the second part of the currency cheap. The logic behind this is both currencies cannot be gaining and losing value at the same time. Do you see how interesting this is turning out to be? 19
A SKILL FOR THE FUTURE SECTION 5: MOST IMPORTANT MARKET TERMINOLOGIES. Terminologies Bearish - This is when the market (Charts) is moving in a downwards direction. In this case, a professional trader will only place sell orders. Bearish Bullish 20
A SKILL FOR THE FUTURE Bullish - This is when the market (Charts) is moving in an upward direction. In this case, a professional trader will only place buy orders. Ranging - This is when the market (Charts) doesn’t have a clear direction. Pips - Point in Percentage. This is used as a measure of value when trading. Margin - A portion of your account equity set aside and allocated as a margin deposit. Simply put, margin is the amount required to hold the trade open. 21
A SKILL FOR THE FUTURE Free Margin- Funds in the account that are not currently in use. Margin Call - Danger of having some of your position forcibly closed. Equity - The actual funds available for you to trade when you have trades running. This means when you have a running trade, your balance is fixed but your equity is moving. Your balance only changes once you have closed a trade. 22
A SKILL FOR THE FUTURE Stop Loss – This is a predetermined point of exiting the market, in case the market changes the direction. Trailing Stop Loss- This is also referred to as locking profits, where you move your stop loss above or below your entry point, in regards to what order you had placed. Take profit - This is placed when one has a specific reward target, after analyzing the market. Lot size- In simple terms, the lot size is the amount of “shares” you have acquired once you 23
A SKILL FOR THE FUTURE place a trade. e.g. If I use a lot size of 0.01, every single movement is equivalent to $0.01. Technical analysis- This is simply analyzing of Forex charts. Fundamental analysis- This centers mostly on the currency’s interest rate, which is determined by an area’s economy growth. Sentiments analysis- This centers mostly around where the vast majority of traders are already committed to 24
A SKILL FOR THE FUTURE Do you understand why the balance and the Equity are different in the case below? If your answer is Yes, Then let’s proceed. If your not sure of the answer, go back and read again 25
A SKILL FOR THE FUTURE Section 6: UNDERSTANDING A CANDLE STICK. Japanese Candle Sticks Japanese candle sticks are among the most used signals all over the world. This candles help you understand the behavior of the market, and make decisions on what actions to take. 26
A SKILL FOR THE FUTURE A candle stick has 4 parts: Open – This is the price at which the market opened. High – This is how high the market price got to, and it’s usually represented by a wick/shadow. Low – This is how low the market price got to, and it’s usually represented by a wick. Close – This is the price at which the market closed. 27
A SKILL FOR THE FUTURE The best way to understand a candle stick, is to think of it as the market price. So when the candles are moving in an upward direction, it means the prices are rising and when the candles are moving downwards, it means the prices are falling. To be able to differentiate between sell candles and buy candles, the trading platforms provides us with the choice of giving them different colors. If you’re to go with my preference, I use red for sell candles and green for buy candles. 28
A SKILL FOR THE FUTURE Buy Candle A buy candle helps us know that the prices are rising. We will use green color for now, but you can always change the colors to your preference. High Wick/shadow Close Body Open Low If you check the above illustration, the body of the candle represent the movement of the 29
A SKILL FOR THE FUTURE market price and the wicks represent the furthest or lowest the market price has gotten to. In this case, the prices opened from a lower price and closed on a higher price thus indicating a rise in the price. 30
A SKILL FOR THE FUTURE Sell Candle A sell candle helps us know that the prices are falling. We will use red color for now, but you can always change the colors to your preference. High Wick/shadow Open Body Close Low 31
A SKILL FOR THE FUTURE In this case, the prices opened from a higher price and closed on a lower price thus indicating a fall in price. Now that we are able to read the Japanese candle stick, let us see how we can read my best candle signal. I will not dive into other candle stick signals but in case you want to learn more candles stick signals/patterns, Kindly refer to a book by the name, The Candle Stick Bible. 32
A SKILL FOR THE FUTURE Rejections. (Pin Bars) There are so many candle stick signals and out of all those, this is my all-time best. In most books, they are referred to as pin bars, but I prefer to call them rejections since this makes more sense to me. Buy Rejection 33
A SKILL FOR THE FUTURE The wick means the sellers (Red arrow) tried to push the prices down, but the buyers (Green arrow) rejected the prices and managed to push the prices up. In this case, the buyers rejected lower prices, and hence pushed the prices up. In other words, the Bulls won. The color of the candle body can be either green or red, but the information relayed is the same. 34
A SKILL FOR THE FUTURE Sell Rejection In this case above, the wick means the buyers (Green arrow) tried to push the prices up, but the sellers (Red arrow) rejected the prices and 35
A SKILL FOR THE FUTURE managed to push them down. In this case, the sellers rejected higher prices, and hence pushed the prices down. In other words, the Bears won. NB: Wicks represent price rejections, and this types of candle signal, is more profitable on a key support or resistance level. 36
A SKILL FOR THE FUTURE Heikin Ashi Candle Stick Heikin Ashi candle sticks are also known as average bars. This candles give an average of the market price as opposed to exact points. They are the more preferred candles to keep you in a trend, but it’s not advisable to use them as entry candles. The candles are calculated as follows: 37
A SKILL FOR THE FUTURE Highest price + Opening price + Lowest price + Closing price = Heikin Ashi Candle 4 Green candles with no lower wicks are used to signal a strong uptrend, while filled red candles with no upper wicks are used to identify a strong downtrend. Don’t stress about the calculation because the system has already done it for you. 38
A SKILL FOR THE FUTURE SECTION 7: TRADING INDICATORS Trading Tools Forex Indicators are trading tools used to forecast price changes on the currency market. From my experience, the most important indicators are those that show you the following: - Trend direction. - Levels for decision making. - Entry signal. - Exit signal. - Stop loss points. 39
A SKILL FOR THE FUTURE - Trailing Stop Loss points. If you've noticed, on my list I haven't listed down Take profit points. What do you think is the reason behind this? In this course I will only discuss 2 indicators that have proven to cover all of the above. 40
A SKILL FOR THE FUTURE Exponential Moving Averages. This indicator comes in form of a line and it is calculated by using the current closes of candles, which gives the average movement of price. So if the candles (which represent the market price) are above the lines, the market is Bullish and when the candles are below the lines, the market is Bearish. 41
A SKILL FOR THE FUTURE This indicator gives you information in regards to the following: Market Trend. Market levels. Entry Signal. Exit signal. My EMA preferences are 10EMA, and 50 (Close) and (Low) EMA. We will dive in this more when we get to the practical. 42
A SKILL FOR THE FUTURE CN5 This is an indicator that I modified from the original one, and CN5 is the name I prefer to call it. This indicator gives you information in regards to the following: Market Trend start. Stop loss placing points. Trailing Stop Loss placing points. These two indicators are the closest thing to the market price action. Let's see how to use them in our practical sessions. 43
A SKILL FOR THE FUTURE SECTION 8: TRADING SESSIONS London session - The most active currencies are the GBP’s and Euro’s Asian Session - The most active currencies are the JPY’s. New York - The most active currencies are the USD’s. Sydney – The most active currencies are the AUD’s. This trading sessions are very important to traders who open and close trades on the same day, but aren’t as important to traders who hold trades for more than a day. 44
A SKILL FOR THE FUTURE SECTION 9: PRICE ACTION Support and Resistance Levels Support and resistance represent key areas where the forces of supply and demand meet. When demand increases, prices go up and as supply increases, prices go down. When supply and demand are equal, prices move sideways hence giving us a ranging market. 45
A SKILL FOR THE FUTURE Understanding The Support Level When the price is at the support level, the demand is thought to be high enough to prevent the price from declining further. This means the price becomes cheaper and the buyers are more likely to start buying. A break below support levels alerts that the sellers are willing to sell at even lower prices and buyers have to wait until the prices and at a lower level. One’s this levels are broken; a new support level has to be established at a much lower level. 46
A SKILL FOR THE FUTURE Understanding The Resistance Level When price is at the resistance level, the supply is thought to be high enough to prevent the price from rising further. This means the price is expensive and the buyers are not willing to buy anymore and the sellers are likely to start selling. Resistance Support 47
A SKILL FOR THE FUTURE SECTION 10: HOW DO WE BECOME CONSISTENT PROFITABLE TRADERS? Risk Management In this market, the only thing you can control is your risk. Lack of risk management is the main reason people blow up their accounts. In this topic, the terms Stop Loss and Lot size are very important. Example Let's say your account is $100. You choose to use a lot size of 0.05 (Kindly go back to what a lot size is) and place 3 EURUSD positions. Then 48
A SKILL FOR THE FUTURE the markets move 1000 points against you. How much is your loss? 1000*0.05*3= 150. In the above case, you already had a Margin call and you blew your account. So what if you used risk management? In risk management, you only risk 2% of your equity per position, with a maximum of 5 positions. So in this case, it means you will only risk $10. So if the market moves against you, then you only lose 10% of your account. 1000*0.01*3= 30 49
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