Tuesday 15 July 2008

Tips on How to Identify a Scam or Fraud

If the email, phone call, prize or lottery notification has any of the following elements, we strongly suggest it is probably a fraud and you do not respond to it. Below are some general tips to recognize scams.
• The email matches one of the definitions or formats on this website.
• The organization has no website and can not be located in Google.
• The email or requester asks for bank account information, credit card numbers, driver's license numbers, passport numbers, your mother's maiden name or other personal information.
• The email or caller advises that you have won a prize - but you did not enter any competition run by the prize promoters.
• The email claims you won a lottery (we know of NO legal lottery that notifies winners by email)
• The mail may be personally addressed to you but it has been posted using bulk mail - thousands of others around the world may have received the exact same notification. Especially true if you find an exact or similar email posted on this website.
• The return address is a yahoo, hotmail, excite.com or other free email accounts. Legitimate companies can afford the roughly $100 per year that it costs to acquire and maintain a domain and related company email account.
• The literature contains a lot of hype and exaggerations, but few specific details about costs, your obligations, how it works, etc.
• The prize promoters ask for a fee (for administration, "processing", taxes, etc.) to be paid in advance. A legitimate lottery simply deducts that from the winnings!
• The scheme offers bait prizes that, if they are real, are often substandard, over-priced, or falsely represented. Or, as part of the prize you can purchase "exclusive items" which may also be over-priced or substandard.
• To get your prize might require travel overseas at your own cost (and personal risk) to receive it.

Buy to Sell on Ebay - a Simple Business Model Anyone Could Easily Follow

A simple business model for eBay entrepreneurs is described in this article. Buying products and then resell it on eBay. Various sources of products are described.
Once you start out as an eBay seller, the challenge is to have profitable products that are guaranteed to draw buyers on eBay. To achieve this, start considering the strategy of buy to sell on eBay. Unless you just want to sell from time-to-time to earn extra bucks, you cannot forever come up with used items from your own attic, garage and closets. This strategy of risk-free and cost-free eBay selling is just your stepping stone to earn the needed funds and expand your online business. Buying products to sell on eBay is a good way to start getting more serious and responsible eBay seller. If you choose to buy to sell on eBay, there is starting capital involved. Also, be aware that in doing buy to sell on eBay business, you accept that there are risks involved. First of all, consider the cost of acquiring the products you will be putting up for sale. Regarding this, you need to know the best places where to merchandise is cheap enough to buy so that you would still get profit once you sell it on eBay. Second, you have to prepare maintenance costs for transporting the products you bought, providing enough storage space for the items, and repairing damaged items. Buy to sell on eBay have very tedious and time-consuming aspects. Here are a couple of important things to be considered as you venture in the buy to sell on eBay business: - Identify what products you should buy according to the type of costumer you wish to target. - Places where you can buy the products you want to sell on eBay and at the same time get good bargains for it. Perhaps you might already aware of some places where you can start your buy to sell type of business. Still I'd like to give you some pointers on the top places where you can find good sources of products to buy to sell on eBay. Start your research here! 1. Garage sales and flea markets Buying products to sell on eBay from these sources are perfect for those who are starting small in their venture. Most probably you will be able to buy cheaply, a wide range of used items you are targeting to sell. Still, before beginning your shopping, do some research first on the product categories you are interested in. Scour on several sales in order to get the best bargain. 2. eBay Guess what, eBay itself can be your source. Call it recycling, but eBay is a good source for products you can buy and then sell again on eBay. As long as you are careful in purchasing, buying wholesale items to sell on eBay through retail can be a very good bargain on your part. 3. Drop Shipper Directories These are wholesalers that ready to ship directly to your customers the items they bought from you. With this kind of set-up you no longer have to invest in doing inventory of your merchandise. You also become free of the tedious responsibility to maintain a stockroom or warehouse for your products. Look up online for directories of drop shippers, which are for sale. You may run the risk of buying from a disreputable one, such that you need to confirm its record and reputation. 4. Local businesses There could be local businesses in your area that have the exact products you are targeting on for your buy to sell on eBay enterprise. Haggle for a low volume price for the products you wish to buy to sell on eBay for a considerable profit. 5. Crafters: These are good sources of specialized products. Have an arrangement whether to buy a certain quantity or thru consignment. Just be sure to get a certain discount. If you aspire for more types of product and better deals on products to buy to sell on eBay, try out these other sources: - Trade shows where there is a wide array of merchandise A perfect opportunity for those that buy to sell on eBay. - Permanent marts where you can meet up with product suppliers and get great bargains for retail or wholesale purchase. - Wholesaler directories online to point you to more places where you can buy to sell on eBay. - Importers/Exporters are the perfect sources if you want to buy to sell on eBay foreign and imported products, and; - Foreign trade offices in major US cities. In order to become successful in buying to sell on eBay, be more resourceful, open to challenges and ready to take risks.

Make $50 daily in www.massivegold.com

Thursday 10 July 2008

PERCEPTION OF SUCCESS

Perception in this content means how you see certain things? The way things are accepted by different individuals. So in relationship with success, it means the way people understand success.
So many people, including myself not until very lately take success as a destination or a place. A place or a stage in life that every good things is available in abundant at the tip of your fingers. This perception of success is however no doubt correct but not in the sense of financial success. Indeed perception of success actually means a place or a destination. It means heaven or paradise. A place where sorrow shall be a thing of the past for the successful ones.
However, in this content when everything we are talking about revolved on the wheel of financial success, it means a journey not a destination or a place. The day you make the mistake of taking success as a destination, or a place and assumed that you have arrived because you have some few dollars to throw about, will mark the beginning of your downfall or the return from the journey you started long time ago.
The earlier you accept the fact that success is a journey but not a destination the better it is for you. That is why you see wealthy people working harder than ever, because they understand that success is a journey.
So, to be successful is to continue on the journey of success. Always device a means of accelerating and avoid retardation. See success as a journey of life. Don’t allow failure to weigh you down. You are only a failure when you fail to try again. Those that see success as a place or a destination doesn’t remain there for too long, because, they will rest when they get to the destination. Pride will blind them and when they eventually realize that they need to continue the journey, they always feel too pompous to get back to work.

You can make some money in www.massivegold.com
Written by Felix O Ebago

Monday 7 July 2008

Pre School Forest Trading Materials

Here are the SECRET ingredients needed to create the ultimate business:
1. You
2. Computer
3. Internet connection
4. Desk (or sofa)
That’s it! No employees. No advertising. No cold calling. No inventory.
Imagine a business with just you, your computer, and a high-speed Internet connection?! That’s all you need trade in the foreign exchange market!! In other words...


A properly trained Forex trader can potentially earn BIG PROFITS in every single month, week, or day! (Of course a poorly trained Forex trader can suffer BIG LOSSES as well.)




Let’s continue with the TOP SECRET directions:
1. Walk about ten steps and
2. Sit in front of your computer (or sit on your sofa and place laptop on your lap)
3. Turn on computer and make sure Internet connection is working
4. Open charts and trading platform
5. Trade currencies
6. Make money!
Presto! You’ve just learned how to create the ultimate business.
Okay it's not thaaaat easy but you get the picture.
Consider the Following and Judge for Yourself
• You are your own boss!
• You don’t need any customers!
• You don’t need employees!
• You can operate from home, work, vacation or anywhere else in the world as long as you have a high-speed Internet connection.
• You never have to worry about job security, harassment or any other employment-related anxiety.
• You never need to worry about employer payroll, strikes, theft, rent increases, health inspectors, lease problems, being sued, etc…
• You don't need to do any cold calling.
• You decide which days you wish to work.
• You make the decision to take a vacation at a moment's notice.
• You are your own boss!

What is FOREX?
The Foreign Exchange market, also referred to as the "FOREX" or "Forex" or "Retail forex" or “FX” or "Spot FX" or just "Spot" is the largest financial market in the world, with a volume of about $2 trillion a day. If you compare that to the $25 billion a day volume that the New York Stock Exchange trades, you can easily see how enormous the Foreign Exchange really is. It actually equates to more than three times the total amount of the stocks and futures markets combined! Forex rocks!
What is traded on the Foreign Exchange?
The simple answer is money. Forex trading is the simultaneous buying of one currency and the selling of another. Currencies are traded through a broker or dealer, and are traded in pairs; for example the Euro dollar and the US dollar (EUR/USD) or the British pound and the Japanese Yen (GBP/JPY).
Because you're not buying anything physical, this kind of trading can be confusing. Think of buying a currency as buying a share in a particular country. When you buy, say, Japanese Yen, you are in effect buying a share in the Japanese economy, as the price of the currency is a direct reflection of what the market thinks about the current and future health of the Japanese economy.

In general, the exchange rate of a currency versus other currencies is a reflection of the condition of that country's economy, compared to the other countries' economies.
Unlike other financial markets like the New York Stock Exchange, the Forex spot market has neither a physical location nor a central exchange. The Forex market is considered an Over-the-Counter (OTC) or 'Interbank' market, due to the fact that the entire market is run electronically, within a network of banks, continuously over a 24-hour period.
Until the late 1990’s, only the “big guys” could play this game. The initial requirement was that you could trade only if you had about ten to fifty million bucks to start with! Forex was originally intended to be used by bankers and large institutions - and not by us “little guys”. However, because of the rise of the Internet, online Forex trading firms are now able to offer trading accounts to 'retail' traders like us.
All you need to get started is a computer, a high-speed Internet connection, and the information contained within this site.
BabyPips.com was created to introduce novice or beginner traders to all the essential aspects of foreign exchange, in a fun and easy-to-understand manner.




What is a Spot Market?
A spot market is any market that deals in the current price of a financial instrument.
Which Currencies Are Traded?
The most popular currencies along with their symbols are shown below:
Symbol Country Currency Nickname
USD United States Dollar Buck
EUR Euro members Euro Fiber
JPY Japan Yen Yen
GBP Great Britain Pound Cable
CHF Switzerland Franc Swissy
CAD Canada Dollar Loonie
AUD Australia Dollar Aussie
NZD New Zealand Dollar Kiwi
Forex currency symbols are always three letters, where the first two letters identify the name of the country and the third letter identifies the name of that country’s currency.
When Can Currencies Be Traded?
The spot FX market is unique within the world markets. It’s like a Super Wal-Mart where the market is open 24-hours a day. At any time, somewhere around the world a financial center is open for business, and banks and other institutions exchange currencies every hour of the day and night with generally only minor gaps on the weekend.
The foreign exchange markets follow the sun around the world, so you can trade late at night (if you’re a vampire) or in the morning (if you’re an early bird). Keep in mind though, the early bird doesn’t necessarily get the worm in this market - you might get the worm but a bigger, nastier bird of prey can sneak up and eat you too…
Time Zone New York GMT
Tokyo Open 7:00 pm 0:00
Tokyo Close 4:00 am 9:00
London Open 3:00 am 8:00
London Close 12:00 pm 17:00
New York Open 8:00 am 13:00
New York Close 5:00 pm 22:00
The Forex market (OTC)
The Forex OTC market is by far the biggest and most popular financial market in the world, traded globally by a large number of individuals and organizations. In the OTC market, participants determine who they want to trade with depending on trading conditions, attractiveness of prices and reputation of the trading counterpart.
The chart below shows global foreign exchange activity. The dollar is the most traded currency, being on one side of 89% of all transactions. The Euro’s share is second at 37%, while that of the yen is at 20%.

Why Trade Foreign Currencies?
There are many benefits and advantages to trading Forex. Here are just a few reasons why so many people are choosing this market:
• No commissions.
No clearing fees, no exchange fees, no government fees, no brokerage fees. Brokers are compensated for their services through something called the bid-ask spread.
• No middlemen. Spot currency trading eliminates the middlemen, and allows you to trade directly with the market responsible for the pricing on a particular currency pair.
• No fixed lot size.
In the futures markets, lot or contract sizes are determined by the exchanges. A standard-size contract for silver futures is 5000 ounces. In spot Forex, you determine your own lot size. This allows traders to participate with accounts as small as $250 (although we explain later why a $250 account is a bad idea).
• Low transaction costs.
The retail transaction cost (the bid/ask spread) is typically less than 0.1 percent under normal market conditions. At larger dealers, the spread could be as low as .07 percent. Of course this depends on your leverage and all will be explained later.
• A 24-hour market.
There is no waiting for the opening bell - from Sunday evening to Friday afternoon EST, the Forex market never sleeps. This is awesome for those who want to trade on a part-time basis, because you can choose when you want to trade--morning, noon or night.
• No one can corner the market.
The foreign exchange market is so huge and has so many participants that no single entity (not even a central bank) can control the market price for an extended period of time.
• Leverage.
In Forex trading, a small margin deposit can control a much larger total contract value. Leverage gives the trader the ability to make nice profits, and at the same time keep risk capital to a minimum. For example, Forex brokers offer 200 to 1 leverage, which means that a $50 dollar margin deposit would enable a trader to buy or sell $10,000 worth of currencies. Similarly, with $500 dollars, one could trade with $100,000 dollars and so on. But leverage is a double-edged sword. Without proper risk management, this high degree of leverage can lead to large losses as well as gains.
• High Liquidity.
Because the Forex Market is so enormous, it is also extremely liquid. This means that under normal market conditions, with a click of a mouse you can instantaneously buy and sell at will. You are never "stuck" in a trade. You can even set your online trading platform to automatically close your position at your desired profit level (a limit order), and/or close a trade if a trade is going against you (a stop loss order).
• Free “Demo” Accounts, News, Charts, and Analysis. Most online Forex brokers offer 'demo' accounts to practice trading, along with breaking Forex news and charting services. All free! These are very valuable resources for “poor” and SMART traders who would like to hone their trading skills with 'play' money before opening a live trading account and risking real money.
• “Mini” and “Micro” Trading:
You would think that getting started as a currency trader would cost a ton of money. The fact is, compared to trading stocks, options or futures, it doesn't. Online Forex brokers offer "mini" and “micro” trading accounts, some with a minimum account deposit of $300 or less. Now we're not saying you should open an account with the bare minimum but it does makes Forex much more accessible to the average (poorer) individual who doesn't have a lot of start-up trading capital.
What Tools Do I Need to Start Trading Forex?
A computer with a high-speed Internet connection and all the information on this site is all that is needed to begin trading currencies.
What Does It Cost to Trade Forex?
An online currency trading (a “micro account”) may be opened for with a couple hundred bucks. Do not laugh – micro accounts and its bigger cousin, the mini account, are both good ways to get your feet wet without drowning. For a micro account, we'd recommend at least $1,000 to start. For a mini account, we’d recommend at least $10,000 to start.




How You Make Money Trading Forex

In the FX market, you buy or sell currencies. Placing a trade in the foreign exchange market is simple: the mechanics of a trade are very similar to those found in other markets (like the stock market), so if you have any experience in trading, you should be able to pick it up pretty quickly.
The object of Forex trading is to exchange one currency for another in the expectation that the price will change, so that the currency you bought will increase in value compared to the one you sold.
Example of making money by buying Euros
Trader's Action EUR USD
You purchase 10,000 euros at the EUR/USD exchange rate of 1.18 +10,000 -11,800*
Two weeks later, you exchange your 10,000 euros back into US dollars at the exchange rate of 1.2500. -10,000 +12,500**
You earn a profit of $700. 0 +700
*EUR $10,000 x 1.18 = US $11,800
** EUR $10,000 x 1.25 = US $12,500
An exchange rate is simply the ratio of one currency valued against another currency. For example, the USD/CHF exchange rate indicates how many U.S. dollars can purchase one Swiss franc, or how many Swiss francs you need to buy one U.S. dollar.
How to Read an FX Quote
Currencies are always quoted in pairs, such as GBP/USD or USD/JPY. The reason they are quoted in pairs is because in every foreign exchange transaction you are simultaneously buying one currency and selling another. Here is an example of a foreign exchange rate for the British pound versus the U.S. dollar:
GBP/USD = 1.7500
The first listed currency to the left of the slash ("/") is known as the base currency (in this example, the British pound), while the second one on the right is called the counter or quote currency (in this example, the U.S. dollar).
When buying, the exchange rate tells you how much you have to pay in units of the quote currency to buy one unit of the base currency. In the example above, you have to pay 1.7500 U.S. dollar to buy 1 British pound.
When selling, the exchange rate tells you how many units of the quote currency you get for selling one unit of the base currency. In the example above, you will receive 1.7500 U.S. dollars when you sell 1 British pound.
The base currency is the “basis” for the buy or the sell. If you buy EUR/USD this simply means that you are buying the base currency and simultaneously selling the quote currency.
You would buy the pair if you believe the base currency will appreciate (go up) relative to the quote currency. You would sell the pair if you think the base currency will depreciate (go down) relative to the quote currency.
Long/Short
First, you should determine whether you want to buy or sell.
If you want to buy (which actually means buy the base currency and sell the quote currency), you want the base currency to rise in value and then you would sell it back at a higher price. In trader's talk, this is called "going long" or taking a "long position". Just remember: long = buy.
If you want to sell (which actually means sell the base currency and buy the quote currency), you want the base currency to fall in value and then you would buy it back at a lower price. This is called "going short" or taking a "short position". Short = sell.




Bid/Ask Spread
All Forex quotes include a two-way price, the bid and ask. The bid is always lower than the ask price.
The bid is the price in which the dealer is willing to buy the base currency in exchange for the quote currency. This means the bid is the price at which you (as the trader) will sell.
The ask is the price at which the dealer will sell the base currency in exchange for the quote currency. This means the ask is the price at which you will buy.
The difference between the bid and the ask price is popularly known as the spread.
Let's take a look at an example of a price quote taken from a trading platform:
On this GBP/USD quote, the bid price is 1.7445 and the ask price is 1.7449. Look at how this broker makes it so easy for you to trade away your money.

If you want to sell GBP, you click "Sell" and you will sell pounds at 1.7445. If you want to buy GBP, you click "Buy" and you will buy pounds at 1.7449.
In the following examples, we're going to use fundamental analysis to help us decide whether to buy or sell a specific currency pair. If you always fell asleep during your economics class or just flat out skipped economics class, don’t worry! We will cover fundamental analysis in a later lesson. For right now, try to pretend you know what’s going on…
EUR/USD
In this example Euro is the base currency and thus the “basis” for the buy/sell.
If you believe that the US economy will continue to weaken, which is bad for the US dollar, you would execute a BUY EUR/USD order. By doing so you have bought euros in the expectation that they will rise versus the US dollar.
If you believe that the US economy is strong and the euro will weaken against the US dollar you would execute a SELL EUR/USD order. By doing so you have sold Euros in the expectation that they will fall versus the US dollar.
USD/JPY
In this example the US dollar is the base currency and thus the “basis” for the buy/sell.
If you think that the Japanese government is going to weaken the Yen in order to help its export industry, you would execute a BUY USD/JPY order. By doing so you have bought U.S dollars in the expectation that they will rise versus the Japanese yen.
If you believe that Japanese investors are pulling money out of U.S. financial markets and converting all their U.S. dollars back to Yen, and this will hurt the US dollar, you would execute a SELL USD/JPY order. By doing so you have sold U.S dollars in the expectation that they will depreciate against the Japanese yen.
GBP/USD
In this example the GBP is the base currency and thus the “basis” for the buy/sell.
If you think the British economy will continue to do better than the United States in terms of economic growth, you would execute a BUY GBP/USD order. By doing so you have bought pounds in the expectation that they will rise versus the US dollar.
If you believe the British's economy is slowing while the United State's economy remains strong like bull, you would execute a SELL GBP/USD order. By doing so you have sold pounds in the expectation that they will depreciate against the US dollar.
USD/CHF
In this example the USD is the base currency and thus the “basis” for the buy/sell.
If you think the Swiss franc is overvalued, you would execute a BUY USD/CHF order. By doing so you have bought US dollars in the expectation that they will appreciate versus the Swiss Franc.
If you believe that the US housing market bubble burst will hurt future economic growth, which will weaken the dollar, you would execute a SELL USD/CHF order. By doing so you have sold US dollars in the expectation that they will depreciate against the Swiss franc.
I don't have enough money to buy $10,000 euros. Can I still trade?
You can with margin trading! Margin trading is simply the term used for trading with borrowed capital. This is how you're able to open $10,000 or $100,000 positions with as little as $50 or $1,000. You can conduct relatively large transactions, very quickly and cheaply, with a small amount of initial capital.
Margin trading in the foreign exchange market is quantified in “lots”. We will be discussing these in depth in our next lesson. For now, just think of the term "lot" as the minimum amount of currency you have to buy. When you go to the grocery store and want to buy an egg, you can't just buy a single egg; they come in dozens or "lots" of 12. In Forex, it would be just as foolish to buy or sell $1 EUR, so they usually come in "lots" of $10,000 or $100,000 depending on the type of account you have.
For Example:
• You believe that signals in the market are indicating that the British Pound will go up against the US Dollar.
• You open 1 lot ($100,000) for buying the Pound with a 1% margin at the price of 1.5000 and wait for the exchange rate to climb. This means you now control $100,000 worth of British Pound with $1,000. Your predictions come true and you decide to sell.
• You close the position at 1.5050. You earn 50 pips or about $500. (A pip is the smallest price movement available in a currency). So for an initial capital investment of $1,000, you have made 50% return. Return equals your $500 profit divided by your $1,000 you risked to trade.
Your Actions GBP USD Your Money
You buy 100,000 pounds at the GBP/USD exchange rate of 1.5000 +100,000 -150,000 $1,000
You blink for two seconds and the GBP/USD exchange rate rises to 1.5050 and you sell. -100,000 +150,500** $1,500
You have earned a profit of $500. 0 +500
When you decide to close a position, the deposit that you originally made is returned to you and a calculation of your profits or losses is done. This profit or loss is then credited to your account.
We will also be discussing margin more in-depth in the next lesson, but hopefully you're able to get a basic idea of how margin works.
Rollover
No, this is not the same as rollover minutes from your cell phone carrier! For positions open at your broker's "cut-off time" usually 5pm EST, there is a daily rollover interest rate that a trader either pays or earns, depending on your established margin and position in the market. If you do not want to earn or pay interest on your positions, simply make sure they are all closed before 5pm EST, the established end of the market day.
Since every currency trade involves borrowing one currency to buy another, interest rollover charges are part of forex trading. Interest is paid on the currency that is borrowed, and earned on the one that is bought. If a client is buying a currency with a higher interest rate than the one he/she is borrowing, the net differential will be positive (i.e. USD/JPY) – and the client will earn funds as a result. Ask your broker or dealer about specific details regarding rollover.
Don't know what the interest rates are for each currency? Here is a chart to help you out. Accurate as of 03/19/07.

Demo Trading
You can open a demo account for free with most Forex brokers. This account has the full capabilities of a "real" account. Why is it free? It’s because the broker wants you to learn the ins and outs of their trading platform, and have a good time trading without risk, so you’ll fall in love with them and deposit real money. The demo account allows you to learn about the Forex markets and test your trading skills with ZERO risk.
YOU SHOULD DEMO TRADE FOR AT LEAST 2 MONTHS BEFORE YOU EVEN THINK ABOUT PUTTING REAL MONEY ON THE LINE.
I REPEAT - YOU SHOULD DEMO TRADE FOR AT LEAST 2 MONTHS BEFORE YOU EVEN THINK ABOUT PUTTING REAL MONEY ON THE LINE.
"Don't Lose Your Money" Declaration
Place your hand on your heart and say...
"I will demo trade for at least 2 months before I trade with real money."
Now touch your head with your index finger and say...
"I am a smart and patient Forex trader!"

Know Your P’s and L’s
Here is where we’re going to do a little math. You've probably heard of the terms "pips" and "lots" thrown around, and here we're going to explain what they are and show you how they are calculated.
Take your time with this information, as it is required knowledge for all Forex traders. Don’t even think about trading until you are comfortable with pip values and calculating profit and loss.
What the heck is a Pip?
The most common increment of currencies is the Pip. If the EUR/USD moves from 1.2250 to 1.2251, that is ONE PIP. A pip is the last decimal place of a quotation. The Pip is how you measure your profit or loss.
As each currency has its own value, it is necessary to calculate the value of a pip for that particular currency. In currencies where the US Dollar is quoted first, the calculation would be as follows.
Let’s take USD/JPY rate at 119.80 (notice this currency pair only goes to two decimal places, most of the other currencies have four decimal places)
In the case of USD/JPY, 1 pip would be .01
Therefore,
USD/JPY:
119.80
.01 divided by exchange rate = pip value
.01 / 119.80 = 0.0000834
This looks like a very long number but later we will discuss lot size.
USD/CHF:
1.5250
.0001 divided by exchange rate = pip value
.0001 / 1.5250 = 0.0000655
USD/CAD:
1.4890
.0001 divided by exchange rate = pip value
.0001 / 1.4890 = 0.00006715
In the case where the US Dollar is not quoted first and we want to get the US Dollar value, we have to add one more step.
EUR/USD:
1.2200
.0001 divided by exchange rate = pip value
so
.0001 / 1.2200 = EUR 0.00008196
but we need to get back to US dollars so we add another calculation which is
EUR x Exchange rate
So
0.00008196 x 1.2200 = 0.00009999
When rounded up it would be 0.0001

GBP/USD:
1.7975

.0001 divided by exchange rate = pip value
So
.0001 / 1.7975 = GBP 0.0000556
But we need to get back to US dollars so we add another calculation which is
GBP x Exchange rate
So
0.0000556 x 1.7975 = 0.0000998
When rounded up it would be 0.0001

You’re probably rolling your eyes back and thinking do I really need to work all this out and the answer is NO. Nearly all forex brokers will work all this out for you automatically. It’s always good for you to know how they work it out.
In the next section, we will discuss how these seemingly insignificant amounts can add up.




What the heck is a Lot?
Spot Forex is traded in lots. The standard size for a lot is $100,000. There is also a mini lot size and that is $10,000. As you already know, currencies are measured in pips, which is the smallest increment of that currency. To take advantage of these tiny increments, you need to trade large amounts of a particular currency in order to see any significant profit or loss.
Let’s assume we will be using a $100,000 lot size. We will now recalculate some examples to see how it affects the pip value.
USD/JPY at an exchange rate of 119.90
(.01 / 119.80) x $100,000 = $8.34 per pip
USD/CHF at an exchange rate of 1.4555
(.0001 / 1.4555) x $100,000 = $6.87 per pip
In cases where the US Dollar is not quoted first, the formula is slightly different.
EUR/USD at an exchange rate of 1.1930
(.0001 / 1.1930) X EUR 100,000 = EUR 8.38 x 1.1930 = $9.99734 rounded up will be $10 per pip
GBP/USD at an exchange rate or 1.8040
(.0001 / 1.8040) x GBP 100,000 = 5.54 x 1.8040 = 9.99416 rounded up will be $10 per pip.
Your broker may have a different convention for calculating pip value relative to lot size but whichever way they do it, they'll be able to tell you what the pip value is for the currency you are trading is at the particular time. As the market moves, so will the pip value depending on what currency you are currently trading.
How the heck do I calculate profit and loss?
So now that you know how to calculate pip value, let’s look at how you calculate your profit or loss.
Let’s buy US dollars and Sell Swiss Francs.
The rate you are quoted is 1.4525 / 1.4530. Because you are buying US you will be working on the 1.4530, the rate at which traders are prepared to sell.
So you buy 1 lot of $100,000 at 1.4530.
A few hours later, the price moves to 1.4550 and you decide to close your trade.
The new quote for USD/CHF is 1.4550 / 14555. Since you're closing your trade and you initially bought to enter the trade, you now sell in order to close the trade so you must take the 1.4550 price. The price traders are prepared to buy at.
The difference between 1.4530 and 1.4550 is .0020 or 20 pips.
Using our formula from before, we now have (.0001/1.4550) x $100,000 -= $6.87 per pip x 20 pips = $137.40
Remember, when you enter or exit a trade, you are subject to the spread in the bid/offer quote.
When you buy a currency you will use the offer price and when you sell you will use the bid price.
So when you buy a currency, you pay the spread as you enter the trade but not as you exit. And when you sell a currency you don't pay the spread when you enter but only when you exit.
What the heck is Leverage?
You are probably wondering how a small investor like yourself can trade such large amounts of money. Think of your broker as a bank who basically fronts you $100,000 to buy currencies and all he asks from you is that you give him $1,000 as a good faith deposit, which he will hold you for but not necessarily keep. Sounds too good to be true? Well this is how forex trading using leverage works.

The amount of leverage you use will depend on your broker and what you feel comfortable with.
Typically the broker will require a minimum account size, also known as account margin or initial margin. Once you have deposited your money you will then be able to trade. The broker will also specify how much they require per position (lot) traded.
For example, for every $1,000 you have, you can trade 1 lot of $100,000. So if you have $5,000 they may allow you to trade up to $500,000 of Forex.
The minimum security (margin) for each lot will vary from broker to broker. In the example above, the broker required a one percent margin. This means that for every $100,000 traded, the broker wants $1,000 as a deposit on the position.
What the heck is a Margin Call?
In the event that money in your account falls below margin requirements (usable margin), your broker will close some or all open positions. This prevents your account from falling into a negative balance, even in a highly volatile, fast moving market.
Example #1
Let’s say you open a regular Forex account with $2,000 (not a smart idea). You open 1 lot of the EUR/USD, with a margin requirement of $1000. Usable Margin is the money available to open new positions or sustain trading losses. Since you started with $2,000, your usable margin is $2,000. But when you opened 1 lot, which requires a margin requirement of $1,000, your usable margin is now $1,000.
If your losses exceed your usable margin of $1,000 you will get a margin call.
Example #2
Let’s say you open a regular Forex account with $10,000. You open 1 lot of the EUR/USD, with a margin requirement is $1000. Remember, usable margin is the money you have available to open new positions or sustain trading losses. So prior to opening 1 lot, you have a usable margin of $10,000. After you open the trade, you now have $9,000 usable margin and $1,000 of used margin.
If your losses exceed your usable margin of $9,000, you will get a margin call.
Make sure you know the difference between usable margin and used margin.
If the equity (the value of your account) falls below your usable margin due to trading losses, you will either have to deposit more money or your broker will close your position to limit your risk and his risk. As a result, you can never lose more than you deposit.
If you are going to trade on a margin account, it’s vital that you know what your broker’s policies are on margin accounts.
You should also know that most brokers require a higher margin during the weekends. This may take the form of 1% margin during the week and if you intend to hold the position over the weekend it may rise to 2% or higher.
The topic of margin is a touchy subject and some argue that too much margin is dangerous. It all depends on the individual. The important thing to remember is that you thoroughly understand your broker’s policies regarding margin and that you understand and are comfortable with the risks involved.
Some brokers describe their leveraging in terms of a leverage ratio and other in terms of a margin percentage. The simple relationship between the two terms is:
Leverage = 100 / Margin Percent
Margin Percent = 100 / Leverage
Leverage is conventionally displayed as a ratio, such 100:1 or 200:1.

Would You Like Fries with Your Pips?


The term "order" refers to how you will enter or exit a trade. Here we discuss the different types of orders that can be placed into the foreign exchange market. Be sure that you know which types of orders your broker accepts. Different brokers accept different types of orders.
Order Types
Basic Order Types
There are some basic order types that all brokers provide and some others that sound weird. The basic ones are:
• Market order
A market order is an order to buy or sell at the current market price. For example, EUR/USD is currently trading at 1.2140. If you wanted to buy at this exact price, you would click buy and your trading platform would instantly execute a buy order at that exact price. If you ever shop on Amazon.com, it's (kinda) like using their 1-Click ordering. You like the current price, you click once and it's yours! The only difference is you are buying or selling one currency against another currency instead of buying Britney Spears CDs.
• Limit order
A limit order is an order placed to buy or sell at a certain price. The order essentially contains two variables, price and duration. For example, EUR/USD is currently trading at 1.2050. You want to go long if the price reaches 1.2070. You can either sit in front of your monitor and wait for it to hit 1.2070 (at which point you would click a buy market order), or you can set a buy limit order at 1.2070 (then you could walk away from your computer to attend your ballroom dancing class). If the price goes up to 1.2070, your trading platform will automatically execute a buy order at that exact price. You specify the price at which you wish to buy/sell a certain currency pair and also specify how long you want the order to remain active (GTC or GFD).
• Stop-loss order
A stop-loss order is a limit order linked to an open trade for the purpose of preventing additional losses if price goes against you. A stop-loss order remains in effect until the position is liquidated or you cancel the stop-loss order. For example, you went long (buy) EUR/USD at 1.2230. To limit your maximum loss, you set a stop-loss order at 1.2200. This means if you were dead wrong and EUR/USD drops to 1.2200 instead of moving up, your trading platform would automatically execute a sell order at 1.2200 and close out your position for a 30 pip loss (eww!). Stop-losses are extremely useful if you don't want to sit in front of your monitor all day worried that you will lose all your money. You can simply set a stop-loss order on any open positions so you won't miss your basket weaving class.




Weird Sounding Order Types
• GTC (Good ‘til canceled)
A GTC order remains active in the market until you decide to cancel it. Your broker will not cancel the order at any time. Therefore it's your responsibility to remember that you have the order scheduled.
• GFD (Good for the day)
A GFD order remains active in the market until the end of the trading day. Because foreign exchange is a 24-hour market, this usually means 5pm EST since that that's U.S. markets close, but I’d recommend you double check with your broker.
• OCO (Order cancels other)
An OCO order is a mixture of two limit and/or stop-loss orders. Two orders with price and duration variables are placed above and below the current price. When one of the orders is executed the other order is canceled. Example: The price of EUR/USD is 1.2040. You want to either buy at 1.2095 over the resistance level in anticipation of a breakout or initiate a selling position if the price falls below 1.1985. The understanding is that if 1.2095 is reached, you will buy order will be triggered and the 1.1985 sell order will be automatically canceled.
Always check with your broker for specific order information and to see if any rollover fees will be applied if a position is held longer than one day. Keeping your ordering rules simple is the best strategy.
Summary
The basic order types (market, stop loss, and limit) are usually all that most traders ever need. Unless you are a veteran trader (yeah right), don’t get fancy and design a system of trading requiring a large number of orders sandwiched in the market at all times – stick with the basic stuff first.
Make sure you fully understand and are comfortable with your broker’s order entry system before executing a trade.
DO NOT make a trade with real money until you have an extremely high comfort level with the trading platform and order entry system.

Choosing a Forex Broker
Before trading Forex you need to set up an account with a Forex broker. So what exactly is a broker? In simplest terms, a broker is an individual or a company that buys and sells orders according to the trader's decisions. Brokers earn money by charging a commission or a fee for their services.
You may feel overwhelmed by the number of brokers who offer their services online. Deciding on a broker requires a little bit of research on your part, but the time spent will give you insight into the services that are available and fees charged by various brokers.
Is the Forex broker regulated?
When selecting a prospective Forex broker, find out with which regulatory agencies it is registered with. The Forex market is labeled as an “unregulated” market, and it basically is. Regulation is typically reactive, meaning only after you’ve been bamboozled out of your entire savings will something be done.
In the United States a broker should be registered as a Futures Commission Merchant (FCM) with the Commodity Futures Trading Commission (CFTC) and a NFA member. The CFTC and NFA were made to protect the public against fraud, manipulation, and abusive trade practices.
You can verify Commodity Futures Trading Commission (CFTC) registration and NFA membership status of a particular broker and check their disciplinary history by phoning NFA at (800) 621-3570 or by checking the broker/firm information section (BASIC) of NFA's Web site at www.nfa.futures.org/basicnet/.
Among the registered firms, look for those with clean regulatory records and solid financials. Stay away from non-regulated firms!
The NFA is stepping up their efforts in educating investors about retail forex trading. They’ve created a brochure fit for a Pulitzer Prize called, "Trading in the Retail Off-Exchange Foreign Currency Market”. The NFA recommends you read it before taking the forex plunge.
They’ve also developed a Forex Online Learning Program, an interactive self-directed program explaining how retail forex contracts are traded, the risks inherent in forex trading and steps individuals should take before opening a forex account. Both the brochure and the online learning program are available at no charge to the public.
Customer Service
Forex is a 24-hour market, so 24-hour support is a must! Can you contact the firm by phone, email, chat, etc.? Do the reps seem knowledgeable? The quality of support can vary drastically from broker to broker, so be sure to check them out before opening an account.
Here’s a good tip: choose several online brokers and contact their help desks. Seeing how quickly they respond to your questions can be key in gauging how they will respond to your needs. If you don't get a speedy reply and a satisfactory answer to your question, you certainly wouldn't want to trust them with your business. Just be aware that as in other types of businesses, pre-sales service might be better than post-sales service.




Online Trading Platform
Most, if not all, Forex brokers allow you to trade over the Internet relatively easy. The backbone of any trading platform is their ordering system. So trading software is very important. Get a feel for the options that are available by trying out a demo account at a few online brokers.
Closely examine the broker’s screen layout. It should include:
• the ability to view real-time currency exchange rate quotes,
• an account summary showing your current account balance with realized and unrealized profit and loss, margin available, and any margin locked in open positions.
Most trading platforms are either Web based (in Java), or a client-based program you can install on your computer, and which version you choose is your personal preference:
• Web based software is hosted on your broker’s web site. You won’t have to install any software on your own computer, and you’ll be able to log in from any computer that has an Internet connection.
• A client-based software program, or one that you download and install, will only allow you to trade on your own computer (unless you install the program on every computer you use).
Usually, the "download and install" program runs faster, but most programs are operating system specific. For example, most brokers only offer their trading platform application to run on Microsoft Windows. If heaven forbid you are a Mac user (!), you won’t be able to install the application and will have to use your broker’s Web based or Java-based trading platform. These two (the Web or Java-based) will run on any computer since they run through your internet browser.
Java-based software programs are preferred by most brokers, who think they are more safe and reliable. Java-based software tends to be less vulnerable to attack from viruses and hackers during transmissions than "download and install" software.
But always be sure to open a demo account and test out the broker's platform before opening a real account!
Don’t forget your high speed Internet connection
The Forex market is a fast moving market and you will need up-to-the second information to make informed trading decisions. Make sure you have a high speed Internet connection. If you don’t, you might as well not even bother trading. Dial-up will absolutely not work for Forex! If you plan to trade online you will need a modern computer and high speed Internet connection, and we can’t stress this enough!
Bells and Whistles
Any Forex broker worth his salt should offer you real-time quotes and allow you to quickly enter and exit the market. These are minimal requirements of any trading software. Upgraded software packages are usually offered as an extra monthly fee by brokers.
Most brokers now offer integrated charting and technical analysis packages with their trading platforms. The level of integration with the trading platforms varies and is worth understanding carefully.
Mini/Micro Accounts
Most brokers offer very small “mini-accounts” and even smaller "micro-account" for as little as a couple hundred bucks. These little cute accounts are a great way to get started and test your trading skills and gain experience.
Broker Policies
Before selecting an online Forex broker, you should closely examine their features and policies. These include:
• Available Currency Pairs
You should confirm that the prospective broker offers, at minimum, the seven major currencies (AUD, CAD, CHF, EUR, GBP, JPY, and USD).
• Transaction Costs
Transaction costs are calculated in pips. The lower the number of pips required per trade by the broker, the greater the profit that the trader makes. Comparing pip spreads of half dozen brokers will reveal different transaction costs. For example, the bid/ask spread for EUR/USD is usually 3 pips, but if you can find 2 pips, that’s even better.
• Margin Requirement
The lower the margin requirement (meaning the higher the leverage), the greater the potential for higher profits and losses. Margin percentages vary from .25% and up. Low margin requirements are great when your trades are good, but not so great when you are wrong. Be realistic about margins and remember that they swing both ways.
• Minimum Trading Size Requirement
The size of one lot may differ from broker to broker, spanning 1,000, 10,000, and 100,000 units. A lot consisting of 100,000 units is called a “standard” lot. A lot consisting of 10,000 units is called a “mini” lot. A lot consisting of 1,000 units is called a “micro” lot. Some brokers even offer fractional unit sizes (called odd lots) which allow you create your own unit size.
• Rollover Charges
Rollover charges are determined by the difference between the interest rate of the country of the base currency and the interest rates of the other country. The greater the interest rate differential between the two currencies in the currency pair, the greater the rollover charge will be. For example, when trading GBP/USD, if the British pound has the greater interest differential with the U.S. dollar, then the rollover charge for holding British pound positions would be the most expensive. On the other hand, if the Swiss Franc were to have the smallest interest differential to the U.S. dollar, then overnight charges for USD/CHF would be the least expensive of the currency pairs.
• Margin Account Interest Rate
Most brokers pay interest on a trader’s margin account. The interest rates normally fluctuate with the prevailing national rates. If you decide to take an extended break from trading, the money in your margin account will be accruing interest. Keep in mind that most brokers DO NOT allow you to accrue interest unless your margin requirement is at least 2% (50:1).
• Trading Hours
Nearly all brokers align their hours of operation to coincide with the hours of operation of the global Forex market: 5:00 pm EST Sunday through 4:00 pm EST Friday.
Other Policies
Be sure to scrutinize a prospective broker’s “fine print” section to be fully aware of all the nuances that a specific broker may impose on a new trader.
Finding the right broker is a critical part of the process. It’s not easy and requires some real work on your part. Don’t pick the first one that looks good to you. Keep looking and trying different demo accounts.
Summary
What to look for in an online Forex broker/dealer:
1. Low Spreads.
In Forex trading the ‘spread’ is the difference between the buy and sell price of any given currency pair. Lower spreads save you money.
2. Low minimum account openings.
For those that are new to Forex trading and for those that don’t have millions of dollars in risk capital to trade, being able to open a micro trading account with only $250 (we recommend at least $1,000) is a great feature for new traders.
3. Instant automatic execution of your orders.
This is very important when choosing a Forex broker. Don’t settle with a firm that re-quotes you when you click on a price or a firm that allows for price ‘slippage’. This is very important when trading for small profits. You want what we call a WYSIWYG (pronounced wiz-ee-wig) broker! This means you want instant execution of your orders and the price you see and "click" is the price that you should get...WYSIWYG = What You See Is What You Get!
4. Free charting and technical analysis
Choose a broker that gives you access to the best charting and technical analysis available to active traders. Look for a broker that provides free professional charting services and allows traders to trade directly on the charts.
5. Leverage
Leverage can either make you super rich or super broke. Most likely, it will be the latter. As an inexperienced trader, you don't want too much leverage. A good rule of thumb is to not use more than 100:1 leverage for Standard (100k) accounts and 200:1 for Mini (10k) accounts.

Opening a Trading Account

Opening a new online trading account with a Forex broker can be done in three simple steps:
1. Selecting an account type
2. Registration
3. Activating your account
Before trading a dime of your hard earned money, you may want to think about opening demo account. Actually, open up two or three demos - why not? It’s all FREE! Try out several different brokers to get a feel for the right one for you.
Account Types
When you're ready to open a live account, you have the choice of opening a Forex trading account under your personal name or a business name. Also, you will have to decide whether or not you want to open a "standard" account or a "mini" account (or "micro" account if available). Inexperienced traders or traders with a small amount of capital to trade should always open a mini account. Only experienced traders with lots of money should open a standard account.
Always read the fine print.
Some brokers have a “managed account” option in their applications. If you want the broker to trade your account for you, pick this, but obviously you’re here to learn how to trade the Forex for yourself. Besides, opening a managed account typically requires a pretty big minimum deposit - $25,000 or higher - and the broker also takes a portion of the profits.
Also, make sure you open a Forex spot account and not a “forwards” or “futures” account.




Registration
You will have to submit paperwork in order to open an account and the forms will vary from broker to broker. They are usually provided in PDF format and can be viewed and printed using Adobe Acrobat Reader program.
Account Activation
Once the broker has received all the necessary paperwork, you should receive an email with instructions on completing your account activation. After these steps have been completed, you will receive a final email with your username, password, and instructions on how to fund your account.
So all that’s left is for you to login and start trading. Pretty easy huh?
But wait a darn minute!
STOP!

We strongly advise you spend some time at our entire School of Pipsology before you start risking real money.
Why?
Because if you don’t, you will lose all of your money and freak out!
You’re probably thinking, “So if I read through your School of Pipsology first, I will not lose any money?”
No, we’re not saying that. You will still probably lose money...
But you’ll lose LESS, much less, and probably feel fine that you lost money. Go through our entire School of Pipsology and you'll understand what we mean.

Forex versus Stocks
Print and run! Prefer to print out these lessons? Buy the PDF. Only $39.
Forex versus Stocks Advantages
Advantage Forex Stocks
24-hour Trading YES NO
Commission Free Trading YES NO
Instant Execution of Market Orders YES NO
Short-Selling without an Uptick YES NO
24-Hour Market
The Forex market is a seamless 24-hour market. Most brokers are open from Sunday at 2PM EST until Friday at 4 PM EST with customer service available 24/7. With the ability to trade during the U.S., Asian, and European market hours, you can customize your own trading schedule.
Commission Free Trading
Most Forex brokers charge no commission or additional transactions fees to trade currencies online or over the phone. Combined with the tight, consistent, and fully transparent spread, Forex trading costs are lower than those of any other market. The brokers are compensated for theirs services through the bid/ask prices.
Instantaneous Execution of Market Orders
Your trades are instantly executed under normal market conditions. You also have price certainty on every market order under normal market conditions. What you click is the price you get. You’re able to execute directly off real-time streaming prices (Yeeeaah!). There's no discrepancy between the displayed price shown on the platform and the execution price to enter your trade. Keep in mind that most brokers only guarantee stop, limit, and entry orders are only guaranteed under normal market conditions. Fills are instantaneous most of the time, but under extraordinarily volatile market conditions order execution may experience delays.
Short-Selling without an Uptick
Unlike the equity market, there is no restriction on short selling in the currency market. Trading opportunities exist in the currency market regardless of whether a trader is long or short, or which way the market is moving. Since currency trading always involves buying one currency and selling another, there is no structural bias to the market. So you always have equal access to trade in a rising or falling market.

Look at Mr. Forex. He's so confident and sexy. Mr. Stocks has no chance!




More Reasons to Like Forex
No Middlemen
Centralized exchanges provide many advantages to the trader. However, one of the problems with any centralized exchange is the involvement of middlemen. Any party located in between the trader and the buyer or seller of the security or instrument traded will cost them money. The cost can be either in time or in fees. Spot currency trading does away with the middlemen and allows clients to interact directly with the market-maker responsible for the pricing on a particular currency pair. Forex traders get quicker access and cheaper costs.
Buy/Sell programs do not control the market
How many times have you heard that "fund A" was selling "X" or buying "Z"? Rumor had it that the funds were taking profits because of the end of the financial year or because today is "triple witching day", all as an explanation of why this stock is up or the market in general is down or positive on the session. The stock market is very susceptible to large fund buying and selling.
In spot trading, the liquidity of the Forex market makes the likelihood of any one fund or bank to control a particular currency very slim. Banks, hedge funds, governments, retail currency conversion houses and large net-worth individuals are just some of the participants in the spot currency markets where the liquidity is unprecedented.
Analysts and brokerage firms are less likely to influence the market
Have you watched TV lately? Heard about a certain Internet stock and an analyst of a prestigious brokerage firm accused of keeping its recommendations, such as "buy" when the stock was rapidly declining? It is the nature of these relationships. No matter what the government does to step in and discourage this type of activity, we have not heard the last of it.
IPO's are big business for both the companies going public and the brokerage houses. Relationships are mutually beneficial and analysts work for the brokerage houses that need the companies as clients. That catch-22 will never disappear.
Foreign exchange, as the prime market, generates billions in revenue for the world's banks and is a necessity of the global markets. Analysts in foreign exchange don't drive the deal flow, they just analyze the forex market.
8,000 stocks versus 4 major currency pairs
There are approximately 4,500 stocks listed on the New York Stock exchange. Another 3,500 are listed on the NASDAQ. Which one will you trade? Got the time to stay on top of so many companies? In spot currency trading, there are dozens of currencies traded, but the majority of the market trades the 4 major pairs. Aren’t four pairs much easier to keep an eye on than thousands of stocks? I’d say so.

Forex versus Futures

Forex versus Futures Advantages
Advantage Forex Futures
24-hour Trading YES NO
Commission Free Trading* YES NO
Up to 400:1 Leverage YES NO
Price Certainty YES NO
Guaranteed Limited Risk YES NO

"Hey Mr. Futures, don't our short shorts look cool?"
Liquidity
In the spot Forex market, almost $2 trillion is traded daily, making it the largest and most liquid market in the world. This market can absorb trading volume and transaction sizes that dwarf the capacity of any other market. The futures market traders a puny $30 billion per day. Thirty billion?!! Peanuts! The futures markets can't compete with its limited liquidity. The Forex market is always liquid, meaning positions can be liquidated and stop orders executed without slippage except in extremely volatile market conditions.
24-Hour Market
At 2:15 p.m. EST Sunday, trading begins as markets open in Sydney and Singapore. At 7 p.m. EST the Tokyo market opens, followed by London at 2 a.m. EST. And finally, New York opens at 8 a.m. EST and closes at 5 p.m. EST. So, before New York trading closes the Sydney and Singapore markets are back open - it’s a 24 hour seamless market! As a trader, this allows you to react to favorable or unfavorable news by trading immediately. If important data comes in from England or Japan while the U.S. futures market is closed, the next day's opening could be a wild ride. (Overnight markets in futures currency contracts exist, but they are thinly traded, not very liquid, and are difficult for the average investor to access).




Commission Free Trading
You know what’s great about trading currencies? You pay NO commissions! Because you deal directly with the market maker via a purely electronic online exchange, you eliminate both ticket costs and middleman brokerage fees. There is still a cost to initiating any trade, but that cost is reflected in the bid/ask spread that is also present in futures or equities trading. Brokers are compensated for their services through the bid-ask spread instead of via commissions.
Price Certainty
When trading Forex, you get rapid execution and price certainty under normal market conditions. In contrast, the futures and equities markets do not offer price certainty or instant trade execution. Even with the advent of electronic trading and limited guarantees of execution speed, the prices for fills for futures and equities on market orders are far from certain. The prices quoted by brokers often represent the LAST trade, not necessarily the price for which the contract will be filled.
Guaranteed Limited Risk
Traders must have position limits for the purpose of risk management. This number is set relative to the money in a trader’s account. Risk is minimized in the spot FX market because the online capabilities of the trading platform will automatically generate a margin call if the required margin amount exceeds the available trading capital in your account. All open positions will be closed immediately, regardless of the size or the nature of positions held within the account. In the futures market, your position may be liquidated at a loss, and you will be liable for any resulting deficit in the account. That sucks.

Impress Your Date with Your Forex Lingo

As in any new skill that you learn, you need to learn the lingo...especially if you wish to woo your love's heart. You, the newbie, must know certain terms like the back of your hand before making your first trade. Some of these terms you've already learned, but it never hurts to have a little review.

Major and Minor Currencies
The eight most frequently traded currencies (USD, EUR, JPY, GBP, CHF, CAD, NZD and AUD) are called the major currencies. All other currencies are referred to as minor currencies. Do not worry about the minor currencies, they are for professionals only. Actually, on this site we'll mostly cover what we call the Fab Five (USD, EUR, JPY, GBP, and CHF). These pairs are the most liquid and the most sexy.
Base Currency
The base currency is the first currency in any currency pair. It shows how much the base currency is worth as measured against the second currency. For example, if the USD/CHF rate equals 1.6350, then one USD is worth CHF 1.6350. In the Forex markets, the U.S. dollar is normally considered the “base” currency for quotes, meaning that quotes are expressed as a unit of $1 USD per the other currency quoted in the pair. The primary exceptions to this rule are the British pound, the Euro, and the Australian and New Zealand dollar.
Quote Currency
The quote currency is the second currency in any currency pair. This is frequently called the pip currency and any unrealized profit or loss is expressed in this currency.
Pip
A pip is the smallest unit of price for any currency. Nearly all currency pairs consist of five significant digits and most pairs have the decimal point immediately after the first digit, that is, EUR/USD equals 1.2538. In this instance, a single pip equals the smallest change in the fourth decimal place - that is, 0.0001. Therefore, if the quote currency in any pair is USD, then one pip always equal 1/100 of a cent.
One notable exception is the USD/JPY pair where a pip equals $0.01.




Bid Price
The bid is the price at which the market is prepared to buy a specific currency pair in the Forex market. At this price, the trader can sell the base currency. It is shown on the left side of the quotation.
For example, in the quote GBP/USD 1.8812/15, the bid price is 1.8812. This means you sell one British pound for 1.8812 U.S. dollars.
Ask Price
The ask is the price at which the market is prepared to sell a specific currency pair in the Forex market. At this price, you can buy the base currency. It is shown on the right side of the quotation.
For example, in the quote EUR/USD 1.2812/15, the ask price is 1.2815. This means you can buy one Euro for 1.2315 U.S. dollars. The ask price is also called the offer price.
Bid/Ask Spread
The spread is the difference between the bid and ask price. The “big figure quote” is the dealer expression referring to the first few digits of an exchange rate. These digits are often omitted in dealer quotes. For example, the USD/JPY rate might be 118.30/118.34, but would be quoted verbally without the first three digits as “30/34”.
Quote Convention
Exchange rates in the Forex market are expressed using the following format:
Base currency / Quote currency Bid / Ask
Transaction Cost
The critical characteristic of the bid/ask spread is that it is also the transaction cost for a round-turn trade. Round-turn means both a buy (or sell) trade and an offsetting sell (or buy) trade of the same size in the same currency pair. For example, in the case of the EUR/USD rate of 1.2812/15, the transaction cost is three pips.
The formula for calculating the transaction cost is:
Transaction cost = Ask Price – Bid Price
Cross Currency
A cross currency is any pair in which neither currency is the U.S. dollar. These pairs exhibit erratic price behavior since the trader has, in effect, initiated two USD trades. For example, initiating a long (buy) EUR/GBP is equivalent to buying a EUR/USD currency pair and selling a GBP/USD. Cross currency pairs frequently carry a higher transaction cost.
Margin
When you open a new margin account with a Forex broker, you must deposit a minimum amount with that broker. This minimum varies from broker to broker and can be as low as $100 to as high as $100,000.
Each time you execute a new trade, a certain percentage of the account balance in the margin account will be set aside as the initial margin requirement for the new trade based upon the underlying currency pair, its current price, and the number of units (or lots) traded. The lot size always refers to the base currency.
For example, let's say you open a mini account which provides a 200:1 leverage or .5% margin. Mini accounts trade mini lots. Let's say one mini lot equals $10,000. If you were to open one mini-lot, instead of having to provide the full $10,000, you would only need $50 ($10,000 x .5 = $50).
Leverage
Leverage is the ratio of the amount capital used in a transaction to the required security deposit (margin). It is the ability to control large dollar amounts of a security with a relatively small amount of capital. Leveraging varies dramatically with different brokers, ranging from 2:1 to 400:1.
Margin + Leverage = Possible Deadly Combination
Trading currencies on margin lets you increase your buying power. Meaning that if you have $5,000 cash in a margin account that allows 100:1 leverage, you could purchase up to $500,000 worth of currency because you only have to post one percent of the purchase price as collateral. Another way of saying this is that you have $500,000 in buying power.
With more buying power, you can increase your total return on investment with less cash outlay. But be careful, trading on margin magnifies your profits AND losses.
Margin Call
All traders fear the dreaded margin call. This occurs when your broker notifies you that your margin deposits have fallen below the required minimum level because an open position has moved against you.
While trading on margin can be a profitable investment strategy, it is important that you take the time to understand the risks. Make sure you fully understand how your margin account works, and be sure to read the margin agreement between you and your broker. Always ask any questions if there is anything unclear to you in the agreement.
Your positions could be partially or totally liquidated should the available margin in your account fall below a predetermined threshold. You may not receive a margin call before your positions are liquidated (the ultimate unexpected birthday gift).
Margin calls can be effectively avoided by monitoring your account balance on a very regular basis and by utilizing stop-loss orders (discussed later) on every open position to limit risk.

Protect Yo Self Before You Wreck Yo Self

Be e Before we go any further we are going to be 100% honest with you and tell you the following before you consider trading currencies:
1. All forex traders, and we mean all traders LOSE money on trades.
Ninety percent of traders lose money, largely due to lack of planning and training and having poor money management rules. Also, if you hate to lose or are a super perfectionist, you'll probably have a hard time adjusting to trading.
2. Trading forex is not for the unemployed, those on low incomes, or who can't afford to pay their electricity bill or afford to eat.
You should have at least $10,000 of trading capital (in a mini account) that you can afford to lose. Don’t expect to start an account with a few hundred dollars and expect to become a kazillionaire.
The Forex market is one of the most popular markets for speculation, due to its enormous size, liquidity and tendency for currencies to move in strong trends. You would think traders all over the world would make a killing, but success has been limited to very small percentage of traders.
Many traders come with the misguided hope of making a gazillion bucks, but in reality, lack the discipline required for trading. Most people usually lack the discipline to stick to a diet or to go to the gym three times a week. If you can't even do that, how do you think you're going to succeed trading?
Short term trading IS NOT for amateurs, and it is rarely the path to “get rich quick”. You can't make gigantic profits without taking gigantic risks. A trading strategy that involves taking a massive degree of risk means suffering inconsistent trading performance and often suffering large loss. A trader who does this probably doesn’t even have a trading strategy - unless you call gambling a trading strategy!




Forex Trading is not a Get-Rich-Quick Scheme!
Forex trading is a SKILL that takes TIME to learn.
Skilled traders can and do make money in this field. However, like any other occupation or career, success doesn’t just happen overnight.
Forex trading isn’t a piece of cake (as some people would like you to believe). Think about it, if it was, everyone trading would already be millionaires. The truth is that even expert traders with years of experience still encounter periodic losses.
Drill this in your head: there are NO shortcuts to Forex trading. It takes lots and lots of TIME to master.
There is no substitute for hard work and diligence. Practice trading on a DEMO ACCOUNT and pretend the virtual money is your own real money.
Do NOT open a live trading account until you are trading PROFITABLY on a demo account.
If you can't wait until you're profitable on a demo account, at least demo trade for 2 months. Hey, at least you were able to hold off losing all your money for two months right? If you can't hold out for 2 months, cut your hands off.
Concentrate on ONE major currency pair.
It gets far too complicated to keep tabs on more than one currency pair when you first start trading. Stick with one of the majors because they are the most liquid which makes their spreads cheap.
You can be a winner at currency trading, but as in all other aspects of life, it will take hard work, dedication, a little luck, a lot of common sense, and a whole lot of good judgment.

Reference: School Of Pipsology

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Elementary School Of Forest Trading

Types of Trading
ConCongratulations! You’ve gotten through the Pre-School and are ready to begin your first day of class. You did go through the Pre-School right? By now you’ve learned some history about the Forex, how it works, what affects the prices, blah blah blah.
We know what you’re thinking…BORING! SHOW ME HOW TO MAKE MONEY ALREADY!
Well, say no more my friend; because here is where your journey as a Forex trader begins…

This is your last chance to turn back… Take the red pill, and we take you back to where you were and you will forget all about this. You can go back to living your average life in your 9-5 job and work for someone else for the rest of your life.

OR
You can take the green pill (green for money! Yeah!) And learn how you can make money for yourself in the most active market in the world, simply by using a little brain power. Just remember, your education will never stop. Even after you graduate from BabyPips.com, you must constantly pursue as much knowledge as you can, so that you can become a true FOREX MASTER! Now pop that green pill in, wash it down with some chocolate milk, and grab your lunchbox…School of Pipsology is now in session!
Note: the green pill was made with a brainwashing serum. You will now obey everything that we tell you to do! Mwuahahaha! <--evil laugh
Two Types of Trading
There are 2 basic types of analysis you can take when approaching the forex:
1. Fundamental analysis
2. Technical analysis.
There has always been a constant debate as to which analysis is better, but to tell you the truth, you need to know a little bit of both. So let’s break each one down and then come back and put them together.
Fundamental Analysis
Fundamental analysis is a way of looking at the market through economic, social and political forces that affect supply and demand. (Yada yada yada.) In other words, you look at whose economy is doing well, and whose economy sucks. The idea behind this type of analysis is that if a country’s economy is doing well, their currency will also be doing well. This is because the better a country’s economy, the more trust other countries have in that currency.
For example, the U.S. dollar has been gaining strength because the U.S. economy is gaining strength. As the economy gets better, interest rates get higher to control inflation and as a result, the value of the dollar continues to increase. In a nutshell, that is basically what fundamental analysis is.

Later on in the course you will learn which specific news events drive currency prices the most. For now, just know that the fundamental analysis of the Forex is a way of analyzing a currency through the strength of that country’s economy.
Technical Analysis
Technical analysis is the study of price movement. In one word, technical analysis = charts. The idea is that a person can look at historical price movements, and, based on the price action, can determine at some level where the price will go. By looking at charts, you can identify trends and patterns which can help you find good trading opportunities.
The most IMPORTANT thing you will ever learn in technical analysis is the trend! Many, many, many, many, many, many people have a saying that goes, “The trend is your friend”. The reason for this is that you are much more likely to make money when you can find a trend and trade in the same direction. Technical analysis can help you identify these trends in its earliest stages and therefore provide you with very profitable trading opportunities.
Now I know you’re thinking to yourself, “Geez, these guys are smart. They use crazy words like "technical" and "fundamental" analysis. I can never learn this stuff!” Don't worry yourself too much. After you're done with the School of Pipsology, you too will be just as....uhmmm..."smart?" as us.
By the way, do you feel that green pill kicking in yet? Bark like a dog!
So which type of analysis is better?
Ahh, the million dollar question. Throughout your journey as an aspiring Forex trader you will find strong advocates for both fundamental and technical trading. You will have those who argue that it is the fundamentals alone that drive the market and that any patterns found on a chart are simply coincidence. On the other hand, there will be those who argue that it is the technicals that traders pay attention to and because traders pay attention to it, common market patterns can be found to help predict future price movements.
Do not be fooled by these one sided extremists! One is not better than the other...
In order to become a true Forex master you will need to know how to effectively use both types of analysis. Don't believe me? Let me give you an example of how focusing on only one type of analysis can turn into a disaster.
• Let’s say that you’re looking at your charts and you find a good trading opportunity. You get all excited thinking about the money that’s going to be raining down from the sky. You say to yourself, “Man, I’ve never seen a more perfect trading opportunity. I love my charts.”
• You then proceed to enter your trade with a big fat smile on your face (the kind where all your teeth are showing).
• But wait! All of a sudden the trade makes a 30 pip move in the OTHER DIRECTION! Little did you know that there was an interest rate decrease for your currency and now everyone is trading in the opposite direction.
• Your big fat smile turns into mush and you start getting angry at your charts. You throw your computer on the ground and begin to pulverize it. You just lost a bunch of money, and now your computer is broken. And it’s all because you completely ignored fundamental analysis.
(Note: This was not based on a real story. This did not happen to me. I was never this naive. I was always a smart trader.... From the overused sarcasm, I think you get the picture)
Ok, ok, so the story was a little over-dramatized, but you get the point.
The Forex is like a big flowing ball of energy, and within that ball is a balance between fundamental and technical factors that play a part in determining where the market will go.
Remember how your mother or father used to tell you as a kid that too much of anything is never good? Well you might've thought that was just hogwash back then but in the Forex, the same applies when deciding which type of analysis to use. Don't rely on just one. Instead, you must learn to balance the use of both of them, because it is only then that you can really get the most out of your trading.

Reference: School Of Pipsology

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Types of Charts

Let’Lets take a look at the three most popular types of charts:
1. Line chart
2. Bar chart
3. Candlestick chart
Line Charts
A simple line chart draws a line from one closing price to the next closing price. When strung together with a line, we can see the general price movement of a currency pair over a period of time.
Here is an example of a line chart for EUR/USD:

Bar Charts
A bar chart also shows closing prices, while simultaneously showing opening prices, as well as the highs and lows. The bottom of the vertical bar indicates the lowest traded price for that time period, while the top of the bar indicates the highest price paid. So, the vertical bar indicates the currency pair’s trading range as a whole. The horizontal hash on the left side of the bar is the opening price, and the right-side horizontal hash is the closing price.
Here is an example of a bar chart for EUR/USD:

NOTE: Throughout our lessons, you will see the word “bar” in reference to a single piece of data on a chart. A bar is simply one segment of time, whether it is one day, one week, or one hour. When you see the word ‘bar’ going forward, be sure to understand what time frame it is referencing.
Bar charts are also called “OHLC” charts, because they indicate the Open, the High, the Low, and the Close for that particular currency. Here’s an example of a price bar:

Open: The little horizontal line on the left is the opening price
High: The top of the vertical line defines the highest price of the time period
Low: The bottom of the vertical line defines the lowest price of the time period
Close: The little horizontal line on the right is the closing price

Candlestick Charts
Candlestick charts show the same information as a bar chart, but in a prettier, graphic format.
Candlestick bars still indicate the high-to-low range with a vertical line. However, in candlestick charting, the larger block in the middle indicates the range between the opening and closing prices. Traditionally, if the block in the middle is filled or colored in, then the currency closed lower than it opened.
In the following example, the ‘filled color’ is black. For our ‘filled’ blocks, the top of the block is the opening price, and the bottom of the block is the closing price. If the closing price is higher than the opening price, then the block in the middle will be “white” or hollow or unfilled.

We don’t like to use the traditional black and white candlesticks. We feel it’s easier to look at a chart that’s colored. A color television is much better than a black and white television, so why not in candlestick charts?
We simply substituted green instead of white, and red instead of black. This means that if the price closed higher than it opened, the candlestick would be green. If the price closed lower than it opened, the candlestick would be red. In our later lessons, you will see how using green and red candles will allow you to “see” things on the charts much faster, such as uptrend/downtrends and possible reversal points.

For now, just remember that we use red and green candlesticks instead of black and white and we will be using these colors from now on.
Check out these candlesticks…BabyPips.com style! Awww yeeaaah! You know you like that!

Here is an example of a candlestick chart for EUR/USD. Isn’t it pretty?

The purpose of candlestick charting is strictly to serve as a visual aid, since the exact same information appears on an OHLC bar chart. The advantages of candlestick charting are:
• Candlesticks are easy to interpret, and are a good place for a beginner to start figuring out chart analysis.
• Candlesticks are easy to use. Your eyes adapt almost immediately to the information in the bar notation.
• Candlesticks and candlestick patterns have cool names such as the shooting star, which helps you to remember what the pattern means.
• Candlesticks are good at identifying marketing turning points – reversals from an uptrend to a downtrend or a downtrend to an uptrend. You will learn more about this later.
Now that you know why candlesticks are so cool, it’s time to let you know that we will be using candlestick charts for most, if not all of chart examples on this site.

Summary

TypTypes of Trading:
• There are 2 types of analysis: Fundamental and Technical
• Fundamental analysis is the analysis of a market through the strength of its economy. (i.e. the dollar gets stronger because the US economy is getting stronger)
• Technical analysis is the analysis of price movements. Technical analysis = charts.
• Technical analysis also helps us identify trends which can help us find profitable trading opportunities.
• To become a successful trader, you must always incorporate both types of analysis.

Types of Charts:
• There are three types of charts:
1. Line charts
2. Bar charts
3. Candlestick charts
• We will be using candlesticks from now on


What is a Candlestick?

While we briefly covered candlestick charts in the previous lesson, we’ll now dig in a little and discuss them more in detail. First let’s do a quick review.
What is a Candlestick?
Back in the day when Godzilla was still a cute little lizard, the Japanese created their own old school version of technical analysis to trade rice. A westerner by the name of Steve Nison “discovered” this secret technique on how to read charts from a fellow Japanese broker and Japanese candlesticks lived happily ever after. Steve researched, studied, lived, breathed, ate candlesticks, began writing about it and slowly grew in popularity in 90s. To make a long story short, without Steve Nison, candle charts might have remained a buried secret. Steve Nison is Mr. Candlestick.
Okay so what the heck are candlesticks?
The best way to explain is by using a picture:

Candlesticks are formed using the open, high, low and close.
• If the close is above the open, then a hollow candlestick (usually displayed as white) is drawn.
• If the close is below the open, then a filled candlestick (usually displayed as black) is drawn.
• The hollow or filled section of the candlestick is called the “real body” or body.
• The thin lines poking above and below the body display the high/low range and are called shadows.
• The top of the upper shadow is the “high”.
• The bottom of the lower shadow is the “low”.
Sexy Bodies and Strange Shadows

Sex Baby Bodies
Just like humans, candlesticks have different body sizes. And when it comes to forex trading, there’s nothing naughtier than checking out the bodies of candlesticks!
Long bodies indicate strong buying or selling. The longer the body is, the more intense the buying or selling pressure.
Short bodies imply very little buying or selling activity. In street forex lingo, bulls mean buyers and bears mean sellers.

Long white candlesticks show strong buying pressure. The longer the white candlestick, the further the close is above the open. This indicates that prices increased considerably from open to close and buyers were aggressive. In other words, the bulls are kicking the bears’ butts big time!
Long black (filled) candlesticks show strong selling pressure. The longer the black candlestick, the further the close is below the open. This indicates that prices fell a great deal from the open and sellers were aggressive. In other words, the bears were grabbing the bulls by their horns and body slamming them.

Mysterious Shadows
The upper and lower shadows on candlesticks provide important clues about the trading session.
Upper shadows signify the session high. Lower shadows signify the session low.
Candlesticks with long shadows show that trading action occurred well past the open and close.
Candlesticks with short shadows indicate that most of the trading action was confined near the open and close.

If a candlestick has a long upper shadow and short lower shadow, this means that buyers flexed their muscles and bided prices higher, but for one reason or another, sellers came in and drove prices back down to end the session back near its open price.
If a candlestick has a long lower shadow and short upper shadow, this means that sellers flashed their washboard abs and forced price lower, but for one reason or another, buyers came in and drove prices back up to end the session back near its open price.

Basic Candlestick Patterns

Spi Spinning Tops
Candlesticks with a long upper shadow, long lower shadow and small real bodies are called spinning tops. The color of the real body is not very important.
The pattern indicates the indecision between the buyers and sellers

The small real body (whether hollow or filled) shows little movement from open to close, and the shadows indicate that both buyers and sellers were fighting but nobody could gain the upper hand.
Even though the session opened and closed with little change, prices moved significantly higher and lower in the meantime. Neither buyers nor sellers could gain the upper hand, and the result was a standoff.
If a spinning top forms during an uptrend, this usually means there aren’t many buyers left and a possible reversal in direction could occur.
If a spinning top forms during a downtrend, this usually means there aren’t many sellers left and a possible reversal in direction could occur.
Marubozu
Sounds like some kind of voodoo magic huh? "I will cast the evil spell of the Marubozu on you!" Fortunately, that's not what it means. Marubozu means there are no shadows from the bodies. Depending on whether the candlestick’s body is filled or hollow, the high and low are the same as it’s open or close. If you look at the picture below, there are two types of Marubozus.

A White Marubozu contains a long white body with no shadows. The open price equals the low price and the close price equals the high price. This is a very bullish candle as it shows that buyers were in control the whole entire session. It usually becomes the first part of a bullish continuation or a bullish reversal pattern.
A Black Marubozu contains a long black body with no shadows. The open equals the high and the close equals the low. This is a very bearish candle as it shows that sellers controlled the price action the whole entire session. It usually implies bearish continuation or bearish reversal.

Doji
Doji candlesticks have the same open and close price or at least their bodies are extremely short. The doji should have a very small body that appears as a thin line.
Doji suggest indecision or a struggle for turf positioning between buyers and sellers. Prices move above and below the open price during the session, but close at or very near the open price.
Neither buyers nor sellers were able to gain control and the result was essentially a draw.
There are four special types of Doji lines. The length of the upper and lower shadows can vary and the resulting candlestick looks like a cross, inverted cross or plus sign. The word "Doji" refers to both the singular and plural form.

When a doji forms on your chart, pay special attention to the preceding candlesticks.
If a doji forms after a series of candlesticks with long hollow bodies (like white marubozus), the doji signals that the buyers are becoming exhausted and weakening. In order for price to continue rising, more buyers are needed but there aren’t anymore! Sellers are licking their chops and are looking to come in and drive the price back down.

Keep in mind that even after a doji forms, this doesn’t mean to automatically short. Confirmation is still needed. Wait for a bearish candlestick to close below the long white candlestick’s open.
If a doji forms after a series of candlesticks with long filled bodies (like black marubozus), the doji signals that sellers are becoming exhausted and weakening. In order for price to continue falling, more sellers are needed but sellers are all tapped out! Buyers are foaming in the mouth for a chance to get in cheap.

While the decline is sputtering due to lack of new sellers, further buying strength is required to confirm any reversal. Look for a white candlestick to close above the long black candlestick’s open.

Reversal Patterns

PrioPrior Trend
For a pattern to qualify as a reversal pattern, there should be a prior trend to reverse. Bullish reversals require a preceding downtrend and bearish reversals require a prior uptrend. The direction of the trend can be determined using trendlines, moving averages, or other aspects of technical analysis.
Hammer and Hanging Man
The hammer and hanging man look exactly alike but have totally different meaning depending on past price action. Both have cute little bodies (black or white), long lower shadows and short or absent upper shadows.



The hammer is a bullish reversal pattern that forms during a downtrend. It is named because the market is hammering out a bottom.
When price is falling, hammers signal that the bottom is near and price will start rising again. The long lower shadow indicates that sellers pushed prices lower, but buyers were able to overcome this selling pressure and closed near the open.
Word to the wise… just because you see a hammer form in a downtrend doesn’t mean you automatically place a buy order! More bullish confirmation is needed before it’s safe to pull the trigger. A good confirmation example would be to wait for a white candlestick to close above the open of the candlestick on the left side of the hammer.
Recognition Criteria:
• The long shadow is about two or three times of the real body.
• Little or no upper shadow.
• The real body is at the upper end of the trading range.
• The color of the real body is not important.
The hanging man is a bearish reversal pattern that can also mark a top or strong resistance level. When price is rising, the formation of a hanging man indicates that sellers are beginning to outnumber buyers. The long lower shadow shows that sellers pushed prices lower during the session. Buyers were able to push the price back up some but only near the open. This should set off alarms since this tells us that there are no buyers left to provide the necessary momentum to keep raising the price. .
Recognition Criteria:
• A long lower shadow which is about two or three times of the real body.
• Little or no upper shadow.
• The real body is at the upper end of the trading range.
• The color of the body is not important, though a black body is more bearish than a white body.

Inverted Hammer and Shooting Star
The inverted hammer and shooting star also look identical. The only difference between them is whether you’re in a downtrend or uptrend. Both candlesticks have petite little bodies (filled or hollow), long upper shadows and small or absent lower shadows.
The inverted hammer occurs when price has been falling suggests the possibility of a reversal. Its long upper shadow shows that buyers tried to bid the price higher. However, sellers saw what the buyers were doing, said “oh hell no” and attempted to push the price back down. Fortunately, the buyers had eaten enough of their Wheaties for breakfast and still managed to close the session near the open. Since the sellers weren’t able to close the price any lower, this is a good indication that everybody who wants to sell has already sold. And if there’s no more sellers, who is left? Buyers.
The shooting star is a bearish reversal pattern that looks identical to the inverted hammer but occurs when price has been rising. Its shape indicates that the price opened at its low, rallied, but pulled back to the bottom. This means that buyers attempted to push the price up, but sellers came in and overpowered them. A definite bearish sign since there are no more buyers left because they’ve all been murdered.

Summary

Can Candlesticks are formed using the open, high, low and close.
• If the close is above the open, then a hollow candlestick (usually displayed as white) is drawn.
• If the close is below the open, then a filled candlestick (usually displayed as black) is drawn.
• The hollow or filled section of the candlestick is called the “real body” or body.
• The thin lines poking above and below the body display the high/low range and are called shadows.
• The top of the upper shadow is the “high”.
• The bottom of the lower shadow is the “low”.
Long bodies indicate strong buying or selling. The longer the body is, the more intense the buying or selling pressure.
Short bodies imply very little buying or selling activity. In street forex lingo, bulls mean buyers and bears mean sellers.
Upper shadows signify the session high.
Lower shadows signify the session low.
Candlesticks with a long upper shadow, long lower shadow and small real bodies are called spinning tops. The pattern indicates the indecision between the buyers and sellers

Marubozu means there are no shadows from the bodies. Depending on whether the candlestick’s body is filled or hollow, the high and low are the same as it’s open or close.
Doji candlesticks have the same open and close price or at least their bodies are extremely short.
The hammer is a bullish reversal pattern that forms during a downtrend. It is named because the market is hammering out a bottom.
The hanging man is a bearish reversal pattern that can also mark a top or strong resistance level.
The inverted hammer occurs when price has been falling suggests the possibility of a reversal.
The shooting star is a bearish reversal pattern that looks identical to the inverted hammer but occurs when price has been rising.

Support and Resistance
Su Support and resistance is one of the most widely used concepts in trading. Strangely enough, everyone seems to have their own idea on how you should measure support and resistance.
Let’s just take a look at the basics first.

Look at the diagram above. As you can see, this zigzag pattern is making its way up (bull market). When the market moves up and then pulls back, the highest point reached before it pulled back is now resistance.
As the market continues up again, the lowest point reached before it started back is now support. In this way resistance and support are continually formed as the market oscillates over time. The reverse of course is true of the downtrend.

Plotting Support and Resistance
One thing to remember is that support and resistance levels are not exact numbers. Often times you will see a support or resistance level that appears broken, but soon after find out that the market was just testing it. With candlestick charts, these "tests" of support and resistance are usually represented by the candlestick shadows.

Notice how the shadows of the candles tested the 2500 resistance level. At those times it seemed like the market was "breaking" resistance. However, in hindsight we can see that the market was merely testing that level.
So how do we truly know if support or resistance is broken?
There is no definite answer to this question. Some argue that a support or resistance level is broken if the market can actually close past that level. However, you will find that this is not always the case. Let's take our same example from above and see what happened when the price actually closed past the 2500 resistance level.

In this case, the price had closed twice above the 2500 resistance level but both times ended up falling back down below it. If you had believed that these were real breakouts and bought this pair, you would've been seriously hurtin! Looking at the chart now, you can visually see and come to the conclusion that the resistance was not actually broken; and that it is still very much in tact and now even stronger.
So to help you filter out these false breakouts, you should think of support and resistance more of as "zones" rather than concrete numbers. One way to help you find these zones is to plot support and resistance on a line chart rather than a candlestick chart. The reason is that line charts only show you the closing price while candlesticks add the extreme highs and lows to the picture. These highs and lows can be misleading because often times they are just the "knee-jerk" reactions of the market. It's like when someone is doing something really strange, but when asked about it, they simply reply, "Sorry, it's just a reflex."
When plotting support and resistance, you don't want the reflexes of the market. You only want to plot its intentional movements.
Looking at the line chart, you want to plot your support and resistance lines around areas where you can see the price forming several peaks or valleys.

Other interesting tidbits about support and resistance:
1. When the market passes through resistance, that resistance now becomes support.
2. The more often price tests a level of resistance or support without breaking it the stronger the area of resistance or support is.


Trend Lines

Tre Trend lines are probably the most common form of technical analysis used today. They are probably one of the most underutilized as well.
If drawn correctly, they can be as accurate as any other method. Unfortunately, most traders don’t draw them correctly or they try to make the line fit the market instead of the other way around.
In their most basic form, an uptrend line is drawn along the bottom of easily identifiable support areas (valleys). In a downtrend, the trend line is drawn along the top of easily identifiable resistance areas (peaks).
Channels


If wIf we take this trend line theory one step further and draw a parallel line at the same angle of the uptrend or downtrend, we will have created a channel.
To create an up (ascending) channel, simply draw a parallel line at the same angle as an uptrend line and then move that line to position where it touches the most recent peak. This should be done at the same time you create the trend line.
To create a down (descending) channel, simple draw a parallel line at the same angle as the downtrend line and then move that line to a position where it touches the most recent valley. This should be done at the same time you created the trend line.
When prices hit the bottom trend line this may be used as a buying area. When prices hit the upper trend line this may be used as a selling area.


Summary

Wh When the market moves up and then pulls back, the highest point reached before it pulled back is now resistance.
As the market continues up again, the lowest point reached before it started back is now support.
In their most basic form an uptrend line is drawn along the bottom of easily identifiable support areas (valleys). In a downtrend, the trend line is drawn along the top of easily identifiable resistance areas (peaks).
To create an up (ascending) channel, simply draw a parallel line at the same angle as an uptrend line and then move that line to position where it touches the most recent peak.
To create a down (descending) channel, simple draw a parallel line at the same angle as the downtrend line and then move that line to a position where it touches the most recent valley.


Fibonacci Who?
We will be using Fibonacci ratios a lot in our trading so you better learn it and love it like your mother. Fibonacci is a huge subject and there are many different studies of Fibonacci with weird names but we’re going to stick to two: retracement and extension.
Let me first start by introducing you to the Fib man himself…Leonard Fibonacci.
Leonard Fibonacci was a famous Italian mathematician, also called a super duper uber geek, who had an “aha!” moment and discovered a simple series of numbers that created ratios describing the natural proportions of things in the universe
The ratios arise from the following number series: 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144 ……
This series of numbers is derived by starting with 1 followed by 2 and then adding 1 + 2 to get 3, the third number. Then, adding 2 + 3 to get 5, the fourth number, and so on.
After the first few numbers in the sequence, if you measure the ratio of any number to that of the next higher number you get .618. For example, 34 divided by 55 equals 0.618.
If you measure the ratio between alternate numbers you get .382. For example, 34 divided by 89 = 0.382 and that’s as far as into the explanation as we’ll go.
These ratios are called the “golden mean.” Okay that’s enough mumbo jumbo. Even I’m about to fall asleep with all these numbers. I'll just cut to the chase; these are the ratios you have to know:
Fibonacci Retracement Levels
0.236, 0.382, 0.500, 0.618, 0.764
Fibonacci Extension Levels
0, 0.382, 0.618, 1.000, 1.382, 1.618
You won’t really need to know how to calculate all of this. Your charting software will do all the work for you. But it’s always good to be familiar with the basic theory behind the indicator so you’ll have knowledge to impress your date.
Traders use the Fibonacci retracement levels as support and resistance levels. Since so many traders watch these same levels and place buy and sell orders on them to enter trades or place stops, the support and resistance levels become a self-fulfilling expectation.
Traders use the Fibonacci extension levels as profit taking levels. Again, since so many traders are watching these levels and placing buy and sell orders to take profits, this tool usually works due self-fulfilling expectations.
Most charting software includes both Fibonacci retracement levels and extension level tools. In order to apply Fibonacci levels to your charts, you’ll need to identify Swing High and Swing Low points.
A Swing High is a candlestick with at least two lower highs on both the left and right of itself.
A Swing Low is a candlestick with at least two higher lows on both the left and right of itself.
Let's take a closer look at Fibonacci retracement levels...

Fibonacci Retracement
In an uptrend, the general idea is to go long the market on a retracement to a Fibonacci support level. In order to find the retracement levels, you would click on a significant Swing Low and drag the cursor to the most recent Swing High. This will display each of the Retracement Levels showing both the ratio and corresponding price level. Let’s take a look at some examples of markets in an uptrend.
Watch how to draw Fibonacci retracement levels on a chart
This is an hourly chart of USD/JPY. Here we plotted the Fibonacci Retracement Levels by clicking on the Swing Low at 110.78 on 07/12/05 and dragging the cursor to the Swing High at 112.27 on 07/13/05. You can see the levels plotted by the software. The Retracement Levels were 111.92 (0.236), 111.70 (0.382), 111.52 (0.500), and 111.35 (0.618). Now the expectation is that if USD/JPY retraces from this high, it will find support at one of the Fibonacci Levels because traders will be placing buy orders at these levels as the market pulls back.

Now let’s look at what actually happened after the Swing High occurred. The market pulled back right through the 0.236 level and continued the next day piercing the 0.382 level but never actually closing below it. Later on that day, the market resumed its upward move. Clearly buying at the 0.382 level would have been a good short term trade.

Now let’s see how we would use Fibonacci Retracement Levels during a downtrend. This is an hourly chart for EUR/USD. As you can see, we found our Swing High at 1.3278 on 02/28/05 and our Swing Low at 1.3169 a couple hours later. The Retracement Levels were 1.3236 (0.618), 1.3224 (0.500), 1.3211 (0.382), and 1.3195 (.236). The expectation for a downtrend is if it retraces from this high, it will encounter resistance at one of the Fibonacci Levels because traders will be placing sell orders at these levels as the market attempts to rally.

Let’s check out what happened next. Now isn’t that a thing of beauty! The market did try to rally but it barely past the 0.500 level spiking to a high 1.3227 and it actually closed below it. After that bar, you can see that the rally reversed and the downward move continued. You would have made some nice dough selling at the 0.382 level.

Here’s another example. This is an hourly chart for GBP/USD. We had a Swing High of 1.7438 on 07/26/05 and a Swing Low of 1.7336 the next day. So our Retracement Levels are: 1.7399 (0.618), 1.7387 (0.500), 1.7375 (0.382), and 1.7360 (0.236). Looking at the chart, the market looks like it tried to break the 0.500 level on several occasions, but try as it may, it failed. So would putting a sell order at the 0.500 level be a good trade?

If you did, you would have lost some serious cheddar! Take a look at what happened. The Swing Low looked to be the bottom for this downtrend as the market rallied above the Swing High point.

You can see from these examples the market usually finds at least temporary support (during an uptrend) or resistance (during a downtrend) at the Fibonacci Retracements Levels. It’s apparent that there a few problems to deal with here. There’s no way of knowing which level will provide support. The 0.236 seems to provide the weakest support/resistance, while the other levels provide support/resistance at about the same frequency. Even though the charts above show the market usually only retracing to the 0.382 level, it doesn’t mean the price will hit that level every time and reverse. Sometimes it’ll hit the 0.500 and reverse, other times it’ll hit the 0.618 and reverse, and other times the price will totally ignore Mr. Fibonacci and blow past all the levels like similar to the way Allen Iverson blows past his defenders with his nasty first step. Remember, the market will not always resume its uptrend after finding temporary support, but instead continue to decline below the last Swing Low. Same thing for a downtrend. The market may instead decide to continue above the last Swing High.
The placement of stops is a challenge. It’s probably best to place stops below the last Swing Low (on an uptrend) or above the Swing High (on a downtrend), but this requires taking a high level of risk in proportion to the likely profit potential in the trade. This is called reward-to-risk ratio. In a later lesson, you will learn more money management and risk control and how you would only take trades with certain reward-to-risk ratios.
Another problem is determining which Swing Low and Swing High points to start from to create the Fibonacci Retracement Levels. People look at charts differently and so will have their own version of where the Swing High and Swing Low points should be. The point is, there is no one right away to do it, but the bad thing is sometimes it becomes a guessing game.
The placement of stops is a challenge. It’s probably best to place stops below the last Swing Low (on an uptrend) or above the Swing High (on a downtrend), but this requires taking a high level of risk in proportion to the likely profit potential in the trade. This is called reward-to-risk ratio. In a later lesson, you will learn more money management and risk control and how you would only take trades with certain reward-to-risk ratios.
Another problem is determining which Swing Low and Swing High points to start from to create the Fibonacci Retracement Levels. People look at charts differently and so will have their own version of where the Swing High and Swing Low points should be. The point is, there is no one right away to do it, but the bad thing is sometimes it becomes a guessing game.

The placement of stops is a challenge. It’s probably best to place stops below the last Swing Low (on an uptrend) or above the Swing High (on a downtrend), but this requires taking a high level of risk in proportion to the likely profit potential in the trade. This is called reward-to-risk ratio. In a later lesson, you will learn more money management and risk control and how you would only take trades with certain reward-to-risk ratios.
Another problem is determining which Swing Low and Swing High points to start from to create the Fibonacci Retracement Levels. People look at charts differently and so will have their own version of where the Swing High and Swing Low points should be. The point is, there is no one right away to do it, but the bad thing is sometimes it becomes a guessing game.
Fibonacci Extension
The next use of Fibonacci you will be applying is that of targets. Let’s start with an example in an uptrend.
In an uptrend, the general idea is to take profits on a long trade at a Fibonacci Price Extension Level. You determine the Fibonacci extension levels by using three mouse clicks. First, click on a significant Swing Low, then drag your cursor and click on the most recent Swing High. Finally, drag your cursor back down and click on the retracement Swing Low. This will display each of the Price Extension Levels showing both the ratio and corresponding price levels.
Watch how to draw Fibonacci extension levels on a chart
On this 1-hour USD/CHF chart, we plotted the Fibonacci extension levels by clicking on the Swing Low at 1.2447 on 08/14/05 and dragged the cursor to the Swing High at 1.2593 on 08/15/15 and then down to the retracement Swing Low of 1.2541 on 08/15/05. The following Fibonacci extension levels created are 1.2597 (0.382), 1.2631 (0.618), 1.2687 (1.000), 1.2743 (1.382), 1.2760 (1.500), and 1.2777 (1.618).

Now let’s look at what actually happened after the retracement Swing Low occurred.
• The market rallied to the 0.500 level
• fell back to the retracement Swing Low
• then rallied back up to the 0.500 level
• fell back slightly
• rallied to the 0.618 level
• fell back to the 0.382 level which acted as support
• then rallied all the way to the 1.382 level
• consolidated a bit
• then rallied to the 1.500 level

You can see from these examples that the market often finds at least temporary resistance at the Fibonacci extension levels - not always, but often. As in the examples of the retracement levels, it should be apparent that there are a few problems to deal with here as well. First, there is no way of knowing which level will provide resistance. The 0.500 level was a good level to cover any long trades in the above example since the market retraced back to its original level, but if you didn’t get back in the trade, you would have left a lot of profits on the table.
Another problem is determining which Swing Low to start from in creating the Fibonacci Extension Levels. One way is from the last Swing Low as we did in the examples; another is from the lowest Swing Low of the past 30 bars. Again, the point is that there is no one right way to do it, and consequently it becomes a guessing game.
Alright, let’s see how Fibonacci extension levels can be used during a downtrend. In a downtrend, the general idea is to take profits on a short trade at a Fibonacci price extension level since the market often finds at least temporary support at these levels.
On this 1-hour EUR/USD chart, we plotted the Fibonacci extension levels by clicking on the Swing High at 1.21377 on 07/15/05 and dragged the cursor to the Swing Low at 1.2021 on 08/15/15 and then down to the retracement High of 1.2085. The following Fibonacci extension levels created are 1.2041 (0.382), 1.2027 (0.500), 1.2013 (0.618), 1.1969 (1.000), 1.1925 (1.382), 1.1911 (1.500), and 1.1897 (1.618).

Now let’s look at what actually happened after the retracement Swing Low occurred.
• The market fell down almost to the 0.382 level which for right now is acting as a support level
• The market then traded sideways between the retracement Swing High level and 0.382 level
• Finally, the market broke through the 0.382 and rested on the 0.500 level
• Then it broke the 0.500 level and fell all the way down to the 1.000 level

Alone, Fibonacci levels will not make you rich. However, Fibonacci levels are definitely useful as part of an effective trading method that includes other analysis and techniques. You see, the key to an effective trading system is to integrate a few indicators (not too many) that are applied in a way that is not obvious to most observers.
All successful traders know it’s how you use and integrate the indicators (including Fibonacci) that makes the difference. The lesson learned here is that Fibonacci Levels can be a useful tool, but never enter or exit a trade based on Fibonacci Levels alone.
Summary
Fibonacci retracement levels are 0.236, 0.382, 0.500, 0.618, 0.764
Traders use the Fibonacci retracement levels as support and resistance levels. Since so many traders watch these same levels and place buy and sell orders on them to enter trades or place stops, the support and resistance levels become a self-fulfilling expectation.
Fibonacci extension levels are 0, 0.382, 0.618, 1.000, 1.382, 1.618
Traders use the Fibonacci extension levels as profit taking levels. Again, since so many traders are watching these levels and placing buy and sell orders to take profits, this tool usually works due self-fulfilling expectations.
In order to apply Fibonacci levels to your charts, you’ll need to identify Swing High and Swing Low points.
A Swing High is a candlestick with at least two lower highs on both the left and right of itself.
A Swing Low is a candlestick with at least two higher lows on both the left and right of itself.



Price Smoothies
A moving average is simply a way to smooth out price action over time. By “moving average”, we mean that you are taking the average closing price of a currency for the last ‘X’ number of periods.

Like every indicator, a moving average indicator is used to help us forecast future prices. By looking at the slope of the moving average, you can make general predictions as to where the price will go.
As we said, moving averages smooth out price action. There are different types of moving averages, and each of them has their own level of “smoothness”. Generally, the smoother the moving average, the slower it is to react to the price movement. The choppier the moving average, the quicker it is to react to the price movement.
We’ll explain the pros and cons of each type a little later, but for now let’s look at the different types of moving averages and how they are calculated.


Simple Moving Average
Simple Moving Average (SMA)
A simple moving average is the simplest type of moving average (DUH!). Basically, a simple moving average is calculated by adding up the last “X” period’s closing prices and then dividing that number by X. Confused??? Allow me to clarify.
If you plotted a 5 period simple moving average on a 1 hour chart, you would add up the closing prices for the last 5 hours, and then divide that number by 5. Voila! You have your simple moving average.
If you were to plot a 5 period simple moving average on a 10 minute chart, you would add up the closing prices of the last 50 minutes and then divide that number by 5.
If you were to plot a 5 period simple moving average on a 30 minute chart, you would add up the closing prices of the last 150 minutes and then divide that number by 5.
If you were to plot the 5 period simple moving average on the a 4 hr. chart………………..OK OK, I think you get the picture! Let’s move on.
Most charting packages will do all the calculations for you. The reason we just bored you (yawn!) with how to calculate a simple moving average is because it is important that you understand how the moving averages are calculated. If you understand how each moving average is calculated, you can make your own decision as to which type is better for you.
Just like any indicator out there, moving averages operate with a delay. Because you are taking the averages of the price, you are really only seeing a “forecast” of the future price and not a concrete view of the future. Disclaimer: Moving averages will not turn you into Ms. Cleo the psychic!

Here is an example of how moving averages smooth out the price action.
On the previous chart, you can see 3 different SMAs. As you can see, the longer the SMA period is, the more it lags behind the price. Notice how the 62 SMA is farther away from the current price than the 30 and 5 SMA. This is because with the 62 SMA, you are adding up the closing prices of the last 62 periods and dividing it by 62. The higher the number period you use, the slower it is to react to the price movement.
The SMA’s in this chart show you the overall sentiment of the market at this point in time. Instead of just looking at the current price of the market, the moving averages give us a broader view, and we can now make a general prediction of its future price.
Exponential Moving Average
Exponential Moving Average (EMA)
Although the simple moving average is a great tool, there is one major flaw associated with it. Simple moving averages are very susceptible to spikes. Let me show you an example of what I mean:
Let’s say we plot a 5 period SMA on the daily chart of the EUR/USD and the closing prices for the last 5 days are as follows:
Day 1: 1.2345
Day 2: 1.2350
Day 3: 1.2360
Day 4: 1.2365
Day 5: 1.2370
The simple moving average would be calculated as
(1.2345+1.2350+1.2360+1.2365+1.2370)/5= 1.2358
Simple enough right?
Well what if Day 2’s price was 1.2300? The result of the simple moving average would be a lot lower and it would give you the notion that the price was actually going down, when in reality, Day 2 could have just been a one time event (maybe interest rates decreasing).
The point I’m trying to make is that sometimes the simple moving average might be too simple. If only there was a way that you could filter out these spikes so that you wouldn’t get the wrong idea. Hmmmm…I wonder….Wait a minute……Yep, there is a way!
It’s called the Exponential Moving Average!
Exponential moving averages (EMA) give more weight to the most recent periods. In our example above, the EMA would put more weight on Days 3-5, which means that the spike on Day 2 would be of lesser value and wouldn’t affect the moving average as much. What this does is it puts more emphasis on what traders are doing NOW.

When trading, it is far more important to see what traders are doing now rather than what they did last week or last month.

SMA vs. EMA
Which is better: Simple or Exponential?
First, let’s start with an exponential moving average. When you want a moving average that will respond to the price action rather quickly, then a short period EMA is the best way to go. These can help you catch trends very early, which will result in higher profit. In fact, the earlier you catch a trend, the longer you can ride it and rake in those profits!
The downside to the choppy moving average is that you might get faked out. Because the moving average responds so quickly to the price, you might think a trend is forming when in actuality; it could just be a price spike.
With a simple moving average, the opposite is true. When you want a moving average that is smoother and slower to respond to price action, then a longer period SMA is the best way to go.
Although it is slow to respond to the price action, it will save you from many fake outs. The downside is that it might delay you too long, and you might miss out on a good trade.
SMA EMA
Pros: Displays a smooth chart, which eliminates most fakeouts. Quick moving, and is good at showing recent price swings.
Cons: Slow moving, which may cause a lag in buying and selling signals. More prone to cause fakeouts and give errant signals.
So which one is better? It’s really up to you to decide. Many traders plot several different moving averages to give them both sides of the story. They might use a longer period simple moving average to find out what the overall trend is, and then use a shorter period exponential moving average to find a good time to enter a trade.
In fact, many trading systems are built around what is called “Moving Average Crossovers”. Later in this course, we will give you an example of how you can use moving averages as part of your trading system.
Time for recess! Go find a chart and start playing with some moving averages. Try out different types and look at different periods. In time, you will find out which moving averages work best for you. Class dismissed!
Summary
• A moving average is a way to smooth out price action.
• There are many types of moving averages. The 2 most common types are: Simple Moving Average and Exponential Moving Average.
• Simple moving averages are the simplest form of moving averages, but they are susceptible to spikes.
• Exponential moving averages put more weight to recent prices and therefore show us what traders are doing now.
• It is much more important to know what traders are doing now than to see what they did last week or last month.
• Simple moving averages are smoother than Exponential moving averages.
• Longer period moving averages are smoother than shorter period moving averages.
• Choppy moving averages are quicker to respond to price action and can catch trends early. However, because of their quick reaction, they are susceptible to spikes and can fake you out.
• Smooth moving averages are slower to respond to price action but will save you from spikes and fake outs. However, because of their slow reaction, they can delay you from taking a trade and may cause you to miss some good opportunities.
• The best way to use moving averages is to plot different types on a chart so that you can see both long term movement and short term movement.


Bollinger Bands
Congratulations on making it to the 5th grade! Each time you make it to the next grade you continue to add more and more tools to your trader’s toolbox. “What’s a trader’s toolbox?” you say… Simple! Your trader’s toolbox is what you will use to “build” your trading account. The more tools (education) you have in your trader’s toolbox (YOUR BRAIN), the easier it will be for you to build.
So for this lesson, as you learn each of these indicators, think of them as a new tool that you can add to that toolbox of yours. You might not necessarily use all of these tools, but it’s always nice to have the option, right? Now, enough about tools already! Let’s get started!
Bollinger Bands
Bollinger bands are used to measure a market’s volatility. Basically, this little tool tells us whether the market is quiet or whether the market is LOUD! When the market is quiet, the bands contract; and when the market is LOUD, the bands expand. Notice on the chart below that when the price was quiet, the bands were close together, but when the price moved up, the bands spread apart.

That’s all there is to it. Yes, we could go on and bore you by going into the history of the Bollinger band, how it is calculated, the mathematical formulas behind it, and so on and so forth, but we really didn’t feel like typing it all out.

In all honesty, you don’t need to know any of that junk. We think it’s more important that we show you some ways you can apply the Bollinger bands to your trading.
Note: If you really want to learn about the calculations of a Bollinger band, then you can go to www.bollingerbands.com
The Bollinger Bounce
One thing you should know about Bollinger Bands is that price tends to return to the middle of the bands. That is the whole idea behind the Bollinger bounce (smart, huh?). If this is the case, then by looking at the chart below, can you tell us where the price might go next?

If you said down, then you are correct! As you can see, the price settled back down towards the middle area of the bands.

That’s all there is to it. What you just saw was a classic Bollinger bounce. The reason these bounces occur is because Bollinger Bands act like mini support and resistance levels. The longer the time frame you are in, the stronger these bands are. Many traders have developed systems that thrive on these bounces, and this strategy is best used when the market is ranging and there is no clear trend.
Now let’s look at a way to use Bollinger Bands when the market does trend.
Bollinger Squeeze
The Bollinger squeeze is pretty self explanatory. When the bands “squeeze” together, it usually means that a breakout is going to occur. If the candles start to break out above the top band, then the move will usually continue to go up. If the candles start to break out below the lower band, then the move will usually continue to go down.

Looking at the chart above, you can see the bands squeezing together. The price has just started to break out of the top band. Based on this information, where do you think the price will go?

If you said up, you are correct! This is how a typical Bollinger Squeeze works. This strategy is designed for you to catch a move as early as possible. Setups like these don’t occur everyday, but you can probably spot them a few times a week if you are looking at a 15 minute chart.
So now you know what Bollinger Bands are, and you know how to use them. There are many other things you can do with Bollinger Bands, but these are the 2 most common strategies associated with them. So now you can put this in your trader’s toolbox, and we can move on to the next indicator.
MACD
MACD is an acronym for Moving Average Convergence Divergence. This tool is used to identify moving averages that are indicating a new trend, whether it’s bullish or bearish. After all, our #1 priority in trading is being able to find a trend, because that is where the most money is made.

With an MACD chart, you will usually see three numbers that are used for its settings.
• The first is the number of periods that is used to calculate the faster moving average.
• The second is the number of periods that are used in the slower moving average.
• And the third is the number of bars that is used to calculate the moving average of the difference between the faster and slower moving averages.
For example, if you were to see “12,26,9” as the MACD parameters (which is usually the default setting for most charting packages), this is how you would interpret it:
• The 12 represents the previous 12 bars of the faster moving average.
• The 26 represents the previous 26 bars of the slower moving average.
• The 9 represents the previous 9 bars of the difference between the two moving averages. This is plotted by vertical lines called a histogram (The blue lines in the chart above).
There is a common misconception when it comes to the lines of the MACD. The two lines that are drawn are NOT moving averages of the price. Instead, they are the moving averages of the DIFFERENCE between two moving averages.
In our example above, the faster moving average is the moving average of the difference between the 12 and 26 period moving averages. The slower moving average plots the average of the previous MACD line. Once again, from our example above, this would be a 9 period moving average.
This means that we are taking the average of the last 9 periods of the faster MACD line, and plotting it as our “slower” moving average. What this does is it smoothes out the original line even more, which gives us a more accurate line.
The histogram simply plots the difference between the fast and slow moving average. If you look at our original chart, you can see that as the two moving averages separate, the histogram gets bigger. This is called divergence, because the faster moving average is “diverging” or moving away from the slower moving average.
As the moving averages get closer to each other, the histogram gets smaller. This is called convergence because the faster moving average is “converging” or getting closer to the slower moving average. And that, my friend, is how you get the name, Moving Average Convergence Divergence! Whew, we need to crack our knuckles after that one!
Ok, so now you know what MACD does. Now I’ll show you what MACD can do for YOU.
MACD Crossover
Because there are two moving averages with different “speeds”, the faster one will obviously be quicker to react to price movement than the slower one. When a new trend occurs, the fast line will react first and eventually cross the slower line. When this “crossover” occurs, and the fast line starts to “diverge” or move away from the slower line, it often indicates that a new trend has formed.

From the chart above, you can see that the fast line crossed under the slow line and correctly identified a new downtrend. Notice that when the lines crossed, the histogram temporarily disappears. This is because the difference between the lines at the time of the cross is 0. As the downtrend begins and the fast line diverges away from the slow line, the histogram gets bigger, which is good indication of a strong trend.
There is one drawback to MACD. Naturally, moving averages tend to lag behind price. After all, it's just an average of historical prices. Since the MACD represents moving averages of other moving averages and is smoothed out by another moving average, you can imagine that there is quite a bit of lag. However, it is still one of the most favored tools by many traders.

Parabolic SAR
Up until now, we’ve looked at indicators that mainly focus on catching the beginning of new trends. And although it is important to be able to identify new trends, it is equally important to be able to identify where a trend ends. After all, what good is a well-timed entry without a well-timed exit?

One indicator that can help us determine where a trend might be ending is the Parabolic SAR (Stop And Reversal). A Parabolic SAR places dots, or points, on a chart that indicate potential reversals in price movement. From the chart above, you can see that the dots shift from being below the candles during the uptrend, to above the candles when the trend reverses into a downtrend
Using Parabolic SAR
The nice thing about the Parabolic SAR is that it is really simple to use. Basically, when the dots are below the candles, it is a buy signal; and when the dots are above the candles, it is a sell signal. This is probably the easiest indicator to interpret because it assumes that the price is either going up or down. With that said, this tool is best used in markets that are trending, and that have long rallies and downturns. You DON’T want to use this tool in a choppy market where the price movement is sideways.

Stochastics
Stochastics
Stochastics are another indicator that helps us determine where a trend might be ending. By definition, a stochastic is an oscillator that measures overbought and oversold conditions in the market. The 2 lines are similar to the MACD lines in the sense that one line is faster than the other.

How to Apply Stochastics
Like I said earlier, stochastics tells us when the market is overbought or oversold. Stochastics are scaled from 0 to 100. When the stochastic lines are above 70 (the red dotted line in the chart above), then it means the market is overbought. When the stochastic lines are below 30 (the blue dotted line), then it means that the market is oversold. As a rule of thumb, we buy when the market is oversold, and we sell when the market is overbought.

Looking at the chart above, you can see that the stochastics has been showing overbought conditions for quite some time. Based upon this information, can you guess where the price might go?

If you said the price would drop, then you are absolutely correct! Because the market was overbought for such a long period of time, a reversal was bound to happen.
That is the basics of stochastics. Many traders use stochastics in different ways, but the main purpose of the indicator is to show us where the market is overbought and oversold. Over time, you will learn to use stochastics to fit your own personal trading style. Okay, let's move on to RSI.

Relative Strength Index
Relative Strength Index, or RSI, is similar to stochastics in that it identifies overbought and oversold conditions in the market. It is also scaled from 0 to 100. Typically, readings below 20 indicate oversold, while readings over 80 indicate overbought.

Using RSI
RSI can be used just like stochastics. From the chart above you can see that when RSI dropped below 20, it correctly identified an oversold market. After the drop, the price quickly shot back up.

RSI is a very popular tool because it can also be used to confirm trend formations. If you think a trend is forming, take a quick look at the RSI and look at whether it is above or below 50. If you are looking at a possible uptrend, then make sure the RSI is above 50. If you are looking at a possible downtrend, then make sure the RSI is below 50.

In the beginning of the chart above, we can see that a possible uptrend was forming. To avoid fakeouts, we can wait for RSI to cross above 50 to confirm our trend. Sure enough, as RSI passes above 50, it is a good confirmation that an uptrend has actually formed. Okey dokey, we've covered a smorgasbord of indicators, let's see how we can put all of what you just learned together...

Putting It All Together
In a perfect world, we could take just one of these indicators and trade strictly by what that indicator told us. The problem is that we DON’T live in a perfect world, and each of these indicators has imperfections. That is why many traders combine different indicators together so that they can “screen” each other. They might have 3 different indicators and they won’t trade unless all 3 indicators give them the same answer.
As you continue your journey as a trader, you will discover what indicators work best for you. We can tell you that we like using MACD, Stochastics, and RSI, but you might have a different preference. Every trader out there has tried to find the “magic combination” of indicators that will always give them the right signals, but the truth is that there is no such thing.

We urge you to study each indicator on its own until you know EXACTLY how it reacts to price movement, and then come up with your own combination that fits your trading style. Later on in the course, we will show you a system that combines different indicators to give you an idea of how they can compliment each other.

Summary
Everything you learn about trading is like a tool that is being added to your trader’s toolbox. Your tools will make it easier for you to “build” your trading account.
Bollinger Bands
• Used to measure the market’s volatility
• They act like mini support and resistance levels
• Bollinger Bounce
o A strategy that relies on the notion that price tends to always return to the middle of the Bollinger Bands
o You buy when the price hits the lower Bollinger band
o You sell when the price hits the upper Bollinger band
o Best used in ranging markets
• Bollinger Squeeze
o A strategy that is used to catch breakouts early
o When the Bollinger bands “squeeze” the price, it means that the market is very quiet, and a breakout is eminent. Once a breakout occurs, we enter a trade on whatever side the price made its breakout.
MACD
• Used to catch trends early and can also help us spot trend reversals
• It consists of 2 moving averages (1 fast, 1 slow) and vertical lines called a histogram, which measures the distance between the 2 moving averages.
• Contrary to what many people think, the moving average lines are NOT moving averages of the price. They are moving averages of other moving averages.
• MACD’s downfall is its lag because it uses so many moving averages.
• One way to use MACD is to wait for the fast line to “cross over” or “cross under” the slow line and enter the trade accordingly because it signals a new trend.
Parabolic SAR
• This indicator is made to spot trend reversals; hence the name Parabolic Stop And Reversal (SAR)
• This is the easiest indicator to interpret because it only gives bullish and bearish signals.
• When the dots are above the candles, it is a sell signal.
• When the dots are below the candles, it is a buy signal.
• These are best used in trending markets that consist of long rallies and downturns.
Stochastics
• Used to indicate overbought and oversold conditions
• When the moving average lines are above 70, it means that the market is overbought and we should look to sell.
• When the moving average lines are below 30, it means that the market is oversold and we should look to buy.
Relative Strength Index (RSI)
• Similar to stochastics in that it indicates overbought and oversold conditions.
• When RSI is above 80, it means that the market is overbought and we should look to sell.
• When RSI is below 20, it means that the market is oversold and we should look to buy.
• RSI can also be used to confirm trend formations. If you think a trend is forming, wait for RSI to go above or below 50 (depending on if you’re looking at an uptrend or downtrend) before you enter a trade.
Each indicator has its imperfections. This is why traders combine many different indicators to “screen” each other. As you progress through your trading career, you will learn which indicators you like the best and can combine them in a way that fits your trading style.
We know this has been a very loooooooooooonnnnng lesson, and we do encourage you to go back and read over anything you haven’t fully understood yet. Sometimes it just takes a couple times of reading before you truly grasp something.
Once you understand the concepts of these indicators, go to a chart and start playing with them. Really study how each indicator reacts to the price movement.
When you fully understand an indicator, then it will become another tool for your trader’s toolbox. For now you should just take a break. Grab some coffee or get something to eat. We know your eyes are hurting! Let this lesson soak in, and then come back when you’re refreshed!

Extra Credit!
Use Bollinger Bands as S&R Levels and Trade Breakouts
Learn this simple technique to trade breakouts by using Bollinger Bands as dynamic support and resistance levels.
Reference: School of Pipsology

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