Forex Guide
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The following are my notes from my Forex learning.
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Governments
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Central Banks
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Financial Institutions
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Hedgers
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Speculators
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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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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:
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politics
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interest rates
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natural disasters
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terrorism/wars
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unemployment
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exports/imports
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Major currency pairs - any pair that contains the US dollar.
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EUR/USD - euro dollar
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USD/JPY - dollar yen
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GBP/USD - pound dollar
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AUD/USD - aussie dollar
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USD/CHF - dollar swiss
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NZD/USD - kiwi dollar
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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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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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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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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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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.
