INTRODUCTION

TO FOREX
What is foreign exchange?
The foreign exchange market also known as (Forex, FX, or currency market) is
an international market for the trading of currencies.

This includes all aspects of buying, selling and exchanging currencies at current
or determined prices.

This is the largest market in the world with a daily market value of $6 Trillion
USD.
What are the benefits of FX trading?
• It is the most liquid market in the world!

• Currencies always fluctuate which creates Trading opportunities

• Forex is not correlated to other asset classes.

• The market operates 24/5

How are currencies traded in the Forex market
Currencies are traded in pairs; pairs are made up of Base currency and the Quote currency.

e.g.: EUR/USD: EUR is the base currency, USD is the quote currency

The price represents how much of the quote currency is needed for you to buy 1 unit of the base
currency.

e.g.: If EUR/USD is trading at 1.3900, then it means that you’ll need 1.3900 dollars to purchase 1 euro.

The quote currency is what gives your profits or losses for each transaction you trade while trading in
the foreign exchange market.
Why are the currencies in Pairs?
Currencies are traded in pairs as one currency is bought while the other is
simultaneously being sold.

For one currency to rise the other must fall, this allows opportunity for profits and
potential losses.

The different directions of the pairs allows trades to be placed irrelevant of the
direction of the market.
Majors, Minors or Crosses
Majors are currency pairs with the largest trading volume
e.g. EURUSD, GBPUSD, USDJPY, USDCAD

Minors are currencies with lower trading volume

e.g. EURAUD, GBPJPY, USDNZD

Crosses are usually currency pairings not quoted in EUR or USD

e.g. AUDNZD, CADJPY, GBPCHF
What are Pips?
Pips are the units of calculation used by Forex traders to calculate the profit or loss from the trades they make

Currency pairs have a main figure to the left followed by decimal places
– EUR/USD 1.3214
– GBP/USD: 1.5939

One “Pip” is the value of the number furthest to the right.

If the prices moved to the below values they would have moved 1 pip.
– EUR/USD 1.3215
– GBP/USD: 1.5940

The Pip Value is the value of this decimal point, if the value is $10 and the price moves 5 pips then the profit of this
move would be $50
The Bid, The Offer and The Spread
The Bid is what you will pay to buy the currency pair
i.e. buy the base, sell the quote.

The Offer is what you are offering to sell the pair for
i.e. sell the base, buy the quote.

The difference between these two prices is the Spread.

For example if the EUR/USD currency rate is 1.2015/1.2020 there is a Spread of 5 pips.
What is Leverage?
Leverage is a common practice in currency trading, and allows traders to greatly magnify the speed and impact of

the trades they place.

Leverage allows a trader to take on larger positions that exceed their actual investment.

For example, if a trader opens a trade with a margin of $50 and a leverage of 200 times, then it means that the

actual trade value will be 50 x 200 or $10,000.

Risk Warning: Leverage can have such a dramatic impact on your trading, it is very important to set Stop losses

and Take profit parameters in order to reduce the risk.

Order Definitions
Stop Loss and Take Profit are parameters which can be enabled on MT4 to ensure that losses and profits
are capped.

These are set by the trader and are protective measures.

Limit orders: are placed and positions are automatically closed once filled.

Trailing stops: This is when you move your Take Profit to the direction of the market
Margin
Margin is the amount of money that is secured for a position or trade.

Margin can be considered a deposit that is set aside from your account, you must obtain a minimum of the
margin in your account to take a trade.

Margin terminology:

Usable margin: This is the capital available in your account that is available to open new positions.

Margin call: When an account is on Margin call it means that is not enough capital in the account to cover a
possible loss. This is when equity falls below your used margin. In this case Brokers will close your positions
to protect further losses.
Tradable instrument types
Forex: Currency pairs

Commodities: Gold, Silver, Oil, Wheat, Coffee and Sugar

Indices: S&P 500, NASDAQ, FTSE, DAX index

Energies: Crude oil, Brent natural gas, heating oil, Gasoline etc.

Futures Market – This is where futures contracts are traded.

CFD (contracts for difference) Financial contracts that derive their value from an underlying asset. The
underlying asset can be a commodity, foreign exchange, equities or any other asset.
Market Volatility
Volatility is a measure of how much the price of a financial instrument varies over time.

Volatility does not measure the direction of price changes, but rather the dispersion of price changes (how
big, frequent and different the changes are)

Volatility is a measure of risk and Market trends can be used to predict market direction.

Volatility is a result of the various external factors such as the stock market, news and world events and
therefore traders must follow the news in order to educated trades.
Introduction to Technical Analysis
• Charts
• Forex indicators
• Theories
Introduction to Charting
Technical analysts use charts to predict the movements of currency prices.

Trend is a pattern in which a instrument fluctuates in. An important aspect of technical analysis involves
identifying tradable trends.

Trend allows traders to identify entry and exit points

Trends
There are three main types of trends: upwards, downwards,
or sideways.

An upward trend or uptrend is defined as series of

consecutive higher peaks and troughs.

An upward trend line can be drawn through the rising through

point.
A downward trend or downtrend is defined as a
series of consecutively lower peaks and troughs. A
downward trend line can be drawn to link the
declining peak points.

When the currency pair rallies to close below the

downward trend line, a selling opportunity may exist.
Support and resistance
Support and Resistance are terms used by technical analysts to
indicate likely ends of trends

Breakout
Support refers to a certain price level on a chart at which a falling
currency pair encounters resistance from the market.

Resistance refers to a certain price level on a chart at which a

rising currency pair struggles to increase in value.

What was support becomes resistance, and vice-versa.

Support Resistance
Simple Moving Averages
MSFT Daily Prices with 10-day MA
• A moving average is simply the average price (usually the 9/23/93 to 9/21/94

60
closing price) over the last N periods.
55

• They are used to smooth out fluctuations of less than N 50

periods.

Price
45

• Historical time series of prices create patterns. However, some 40

patterns are considered illusions.

35

30
1 21 41 61 81 101 121 141 161 181 201 221 241
Date
Head and Shoulders
H&S Top
• This formation is characterized by two small peaks on either Head
side of a larger peak.

Left Shoulder Right Shoulder

• This is a reversal pattern, meaning that it signifies a change

in the trend. Neckline

H&S Bottom
Neckline

Left Shoulder
Right Shoulder

Head
Double Tops and Double Top
Bottoms
• These formations are similar to the H&S formations, but
there is no head.

• These are reversal patterns with the same measuring Target

implications as the H&S.
Target

Double Bottom
Triangles
• Triangles are continuation formations.
Ascending
• Three flavors:
– Ascending
Symmetrical
– Descending
– Symmetrical
Symmetrical
• Typically, triangles should break out about half to three-
quarters of the way through the formation.
Descending
Rounded Tops &
Rounding
Bottoms Bottom
Rounding formations are characterized by a
slow reversal of trend.

Rounding Top
Technical Indicators examples
– Moving Average Convergence/Divergence (MACD)

– Relative Strength Index (RSI)

– On Balance Volume

– Bollinger Bands
MACD
• MACD was developed by Gerald Appel as a way
to keep track of a moving average crossover
system.

• When this signal line goes from negative to

positive, a buy signal is generated.

• When the signal line goes from positive to

negative, a sell signal is generated.

• MACD is best used in choppy (trendless)

markets, and is subject to whipsaws (in and out
rapidly with little or no profit).
Relative Strength Index (RSI)
• RSI was developed by Welles Wilder as an oscillator to
gauge overbought/oversold levels.

• RSI is a rescaled measure of the ratio of average price

changes on up days to average price changes on down
days.

• The most important thing to understand about RSI is

that a level above 70 indicates a currency pair is
overbought, and a level below 30 indicates that it is
oversold (it can range from 0 to 100).
Bollinger Bands
• Bollinger bands were created by John Bollinger (former FNN
technical analyst, and regular guest on CNBC).

• Bollinger Bands are based on a moving average of the closing

price.

• They are two standard deviations above and below the moving
average.

• A buy signal is given when the currency price closes below the
lower band, and a sell signal is given when the currency price
closes above the upper band.

• When the bands contract, that is a signal that a big move is

coming, but it is impossible to say if it will be up or down.

• In my experience, the buy signals are far more reliable than the
sell signals.
Elliot Wave Principle
• R.N. Elliot formulated this idea in a series of articles in Financial World in 1939.

• Elliot believed that the market has a rhythmic regularity that can be used to predict future prices.

• The Elliot Wave Principle is based on a repeating 8-wave cycle, and each cycle is made up of similar shorter-
term cycles

• Elliot Wave adherents also make extensive use of the Fibonacci series.
Fibonacci
• The Fibonacci sequence is a series of numbers where a number is found by adding up the two numbers
before it. Starting with 0 and 1, the sequence goes 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, and so forth

• Fibonacci Retracement lines are based on the Fibonacci Sequence and are considered a "predictive"
technical indicator providing feedback on possible future exchange rate levels.

• Fibonacci retracement levels are static prices that do not change, unlike moving averages. The static nature
of the price levels allows for quick and easy identification. This allows traders and investors to anticipate and
react prudently when the price levels are tested. These levels are inflection points where some type of price
action is expected, either a rejection or a break.