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Forex Guide

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The following are my notes from my Forex learning. 

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Market Participants

  1. Governments

  2. Central Banks

  3. Financial Institutions 

  4. Hedgers

  5. Speculators 

  6. Retail Traders

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Find the trends and follow them closely. 

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Supply & Demand - Wikipedia

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Learn the skills and psychology of trading. Trade with confidence. 

Skill, data, confidence

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Major World Currencies

USD - US dollar

EUR - Euro

JPY - Japanese yen

GBP - Great British pound (pound sterling)

AUD - Australian dollar

CHF - Swiss Franc

CAD - Canadian dollar

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A healthy economy is good for the trading of the country's currency. 

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Factors that affect the economy of a country:

  • politics

  • interest rates

  • natural disasters

  • terrorism/wars

  • unemployment

  • exports/imports

  • other factors

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Major currency pairs - any pair that contains the US dollar. 

  • EUR/USD - euro dollar

  • USD/JPY - dollar yen

  • GBP/USD - pound dollar

  • AUD/USD - aussie dollar

  • USD/CHF - dollar swiss

  • NZD/USD - kiwi dollar

  • USD/CAD - dollar loonie

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Cross currency pairs - any pair that does not include USD or "minors"

JPY, GBP, EUR

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Exotic currency pairs - any major paired with an emerging economy. Not traded as heavily, costs more to trade. 

RUB - Russia Federation ruble 

ZAR - South African rand

KRW - South Korean won

HKD - Hong Kong dollar

MXN - Mexican peso

SGD - Singapore dollar

+ lots more

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Pick only a few pairs to study (3-5). Treat currency pairs like dating.

- study only those 3-5 markets until you become familiar with how they act. 

- keep track of what they do.

- keep a trading journal.

- start with the most common pairs.

Top 8 FX pairs: EUR/USD, USD/JPY, GBP/USD, AUD/USD, USD/CAD, USD/CHF, EUR/JPY, EUR/GBP.

Don't pick three that have the same currency. 

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The Bid-Ask Spread

Spread - the difference between buying and selling the base currency.

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Sell base currency                Buy base currency

1.08660                                  1.08674               <-- 1.4 pip spread

EUR                                        USD

base currency                       quote currency

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Volatility - when market conditions begin to change rapidly.

High volatility - big moves take place, major news releases, traders paradise.

Low volatility - slow, sluggish markets, no major news releases, trader's nightmare. 

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Liquidity - number of participants in the market.

Low liquidity - not many market participants, worst time to trade. 

High liquidity - lots of participants in the market, best time to trade. 

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Volume - size of orders that are being put in. 

High volume - market participants doing large number of trades in certain currency pairs. 

Low volume - not many orders happening, holidays, end of London session, beginning of Sydney session. 

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Time of day, when do I trade Forex?

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Forex Market Hours

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Four main Forex sessions

Sydney market open 4pm - 1am central

Tokyo market open 6pm - 3am central

London market open 2am - 11am central

New York market open 7am - 4pm central

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Sydney session - smallest & calmest, Australian market, AUD and NZD, session begins, good for planning.

Tokyo session - JPY and Yen, third largest, Asian session, lower liquidity and volume, higher spreads. 

*London session - GBP, EUR, CHF, 34% of all transactions, high liquidity, high volume, lower spreads, major news releases. 

*New York session - End of the trading day, 85% of trades involve US dollar, USD & CAD pairs, high volume, volatility slows down after 11am central. 

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Notes:

London & New York overlap from 7am -11am central.

The Sydney session and Tokyo session together are sometimes referred to as the Asian session. 

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Session overlaps are the best time to trade as two major world markets are open at the same time providing high volatility, high liquidity, and high volume. The London - New York overlap is the most liquid, main trading session. The London - Tokyo overlap is good.

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The worst times to trade are:

- after 11am central, use this time to reevaluate your trades

- beginning of the Sydney session

- If there's no overlap

- Major holidays in the US & Europe

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Consolidation - a lot of nothing, sideways price movement, don't trade sideways movement.

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Buy (Long) - when currency value is expected to rise, you would want to place a buy. Bulls buy. 

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Sell (Short) - when currency value is expected to fall, you would want to place a sell. Bears sell. 

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Buy low, sell high. 

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Buyers in a market cause they exchange rate value to rise. Sellers cause exchange rate value to fall. 

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Overbought - best time to sell.

Oversold - best time to buy. 

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How do I know oversold or overbought? Check RSI indicator.

The relative strength index (RSI) is a momentum indicator that measures the magnitude of recent price changes to evaluate overbought or oversold conditions in the price of a stock or other asset. The RSI is displayed as an oscillator (a line graph that moves between two extremes) and can have a reading from 0 to 100.

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DON'T FIGHT THE TREND. THE TREND IS YOUR FRIEND UNTIL THE END. Until it isn't.

 

What is a pip?

A pip is a very small movement.

A pip is the 4th decimal number after the period. Example: 4.56772 - 4.56567 = 0.00205 / 0.0001 = 20.5 pips.

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Note: A pip in Forex is a similar concept to a satoshi in Crypto.

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A pipette is the 5th decimal number - it's not really used, but good to know. A pipette is equal to a “tenth of a pip“.

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Exceptions to the pip rule: Yen and gold pairs. 

2nd number after the decimal point. Example USD/JPY rose from 103.25 to 103.26, the change was one pip. 

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What are leverage and lots?

Lot - contract of a certain size.

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Lot size                     Units               Volume           $/pip

Standard lot             100,000           1.00                $10/pip

Mini lot                     10,000             0.10                $1/pip

Micro lot                   1,000               0.01                $0.10/pip

Nano lot                    100                  0.001              $0.01/pip

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Leverage - strategy that uses borrowed capital to increase potential future returns. Your deposit is your down payment.

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Leverage example 1:200 leverage - for every $1 your broker lets you leverage $200. 

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True leverage - what you actually use at any given time. 

 

Maximum leverage - it's not wise to use all leverage on one trade. 

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ROI - return on investment. Use leverage for a better ROI. 

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What is a trend

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Buy - price value should rise

Sell - price value should fall

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Look for trends on higher time frame charts (weekly and monthly).

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Uptrend - higher highs and higher lows.

> look for long term buys and short term sells

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Downtrend - lower highs and lower lows.

> look for long term sells and short term buys

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Retracement - when the market goes opposite the trend, before continuing. 

A retracement is a temporary reversal in the movement of a stock's price.

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Ranging market - no higher or lower highs. A price consolidation period. Indecision. Moving sideways. 

> Don't trade the chop. 

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What is a consolidation? 

That nasty disgusting crap that does nothing but hurts your feelings, confuses you, and takes your money. 

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A consolidation is also a sign that the market wants to move. Stay out of choppy markets. Wait for a trend confirmation. The trend is your friend. 

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Price Action: Candlesticks

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Candlesticks are made of a candle body and a wick

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Top of the wick is the highest price of the time period.

Top of the candle body is the open/close price of the time period (depending on price direction).

Bottom of the candle body is the close/open price of the time period.

Bottom of the wick is the lowest price of the time period. 

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Candlesticks - OHLC: Open High Low Close

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Resistance & Support

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Wicks tell you a lot about decisions being made in the background. 

Long wicks - possible reversal 

Wicks are also fake outs

Wicks - signs that the market wants to turn around.  

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Confirmations - you want multiple confirmations 

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Support. Resistance. Trend lines.

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Resistance is the price ceiling. Prices struggle to get above it. 

- stalling point

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Support is the price floor. Price is supported in this area.

- bounces

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Support and Resistance are price regions. Not one specific price. 

Support/Resistance are more like zones or areas. 

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Create a map of what price is doing. 

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The more touches, the stronger the area. 

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Support can become resistance.

Resistance can become support. 

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Map major reversal areas.

- create a map (if/then)

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Take only higher probability trades

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Required: Risk Management! Trading using margin (high leverage) is a double-edged sword. Trading on margin can multiply your profit, and it can also multiply your losses. Use appropriate leverage and position size for your trading capital.

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