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Forex Guide

The following are my notes from my Forex learning. 

Market Participants

  1. Governments

  2. Central Banks

  3. Financial Institutions 

  4. Hedgers

  5. Speculators 

  6. Retail Traders

Find the trends and follow them closely. 

Supply & Demand - Wikipedia

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

Skill, data, confidence

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

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

Factors that affect the economy of a country:

  • politics

  • interest rates

  • natural disasters

  • terrorism/wars

  • unemployment

  • exports/imports

  • other factors

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

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

JPY, GBP, EUR

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

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. 

The Bid-Ask Spread

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

Sell base currency                Buy base currency

1.08660                                  1.08674               <-- 1.4 pip spread

EUR                                        USD

base currency                       quote currency

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. 

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. 

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. 

Time of day, when do I trade Forex?

Forex Market Hours

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

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. 

Notes:

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

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

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.

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

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

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

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

Buy low, sell high. 

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

Overbought - best time to sell.

Oversold - best time to buy. 

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.

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.

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

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“.

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. 

What are leverage and lots?

Lot - contract of a certain size.

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

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

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

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

 

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

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

What is a trend

Buy - price value should rise

Sell - price value should fall

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

Uptrend - higher highs and higher lows.

> look for long term buys and short term sells

Downtrend - lower highs and lower lows.

> look for long term sells and short term buys

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

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

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

> Don't trade the chop. 

What is a consolidation? 

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

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. 

Price Action: Candlesticks

Candlesticks are made of a candle body and a wick

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. 

Candlesticks - OHLC: Open High Low Close

Resistance & Support

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.  

Confirmations - you want multiple confirmations 

Support. Resistance. Trend lines.

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

- stalling point

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

- bounces

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

Support/Resistance are more like zones or areas. 

Create a map of what price is doing. 

The more touches, the stronger the area. 

Support can become resistance.

Resistance can become support. 

Map major reversal areas.

- create a map (if/then)

Take only higher probability trades

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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