FOREX Trading with Candlesticks and Chart Patterns.pdf

Contents

Introduction ------------------------------ 2

Chapter1 - Whatis Forex Trading? ------------------------------ 3

Chapter2 - Japanese Candlesticks ------------------------------ 10

Chapter3 - ChartPatterns ------------------------------ 22

Disclaimer ------------------------------ 49

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Introduction

Overthe last9 years we have putin thousands ofhours ofresearch and developmentto refine ourtrading

methods. Ourtrading methods have been tried and are functioning successfully. They work forus butwe

cannotguarantee they willwork foryou. There are many trading systems available in the market,mostof

them are mechanicaland are based only on a combination ofindicators,and although they make money

fortraders,the numberofsuccessfultrades varies between 35 and 75 percent. By understanding the

marketsentimentand by using chartand candlestick patterns,losses can be minimized. Whatwe attempt

to do in this book is to take trading methodologies to a higherlevelby using a combination ofchartand

candlestick patterns with technicalindicators. There is no single strategy thatworks successfully every

time. You need to use the strategy appropriate forthe marketconditions. The majority ofthe technical

indicators telltraders whathas happened and are considered lagging indicators while chartand

candlestick patterns predictwhatwillhappen in the immediate future and can be considered as leading

indicators.

Trading is approximately 20% technicaland 80% psychological. With the psychologicalside oftrading,

itis importantthatyou understand the sentimentofthe marketand have good money managementskills.

To teach this would take hundreds ofhours,this can only be successfully gained by hard work on your

part.

The main aim ofthis ebook is to go through the basics offorex trading and to share with you ourtrading

experience and knowledge in the hope thatyou can use itforyourown success. We coverthe ÐBig

PictureÑ and go through the building blocks,finally putting italltogether.

In this ebook we focus mainly on the use ofcandlesticks as the trend is towards the use ofcandlesticks

overthe use ofconventionalbars. More and more chartists are moving overto using candlestick charts as

they are easierto read and candlesticks in combinations provide criticalinformation on whatthe marketis

going to do. When the traditionalcandlestick patterns are combined with Western analysis,they add an

extra dimension to conventionalchartanalysis.

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Chapter 1

What is Forex Trading?

Forex orForeign Exchange is the simultaneous buying ofone currency and the selling ofanother.

Currencies are traded in pairs.

The Forex Markethas more buyers and sellers and daily volume than any othermarketin the world and

takes place in majorfinancialinstitutions across the globe. The forex marketis open 24 hours a day five

days a week

Buying/Selling

In the forex market,currencies are always priced in pairs and alltrades resultin the simultaneous buying

ofone currency and the selling ofanother. The objective ofcurrency trading is to buy the currency that

increases in value relative to the one you sold. Ifyou have boughta currency and the price appreciates in

value,then you mustsellthe currency back in orderto lock in the profit.

Quoting Conventions

Currencies are quoted in pairs. The firstlisted currency is known as the base currency and the second is

called the counterorquote currency.

Currencies are quoted using five significantnumbers,with the lastplaceholdercalled a pointora pip

Forexample a EUR/USD quote 1.1345/1.1350

Like allfinancialproducts,forex quotes include a "bid" and "ask" ora ÐsellÑ and a ÐbuyÑ price.

By quoting both the bid and ask in realtime,brokers ensure thattraders always receive a fairprice on all

transactions. As in any traded instrument,there is an immediate costin establishing a position. This cost

willvary between the differentbrokers and is sometimes called ÐspreadÑ.

Forexample,USD/JPY may bid at131.40 and ask at131.45,this five-pip spread defines the traderÓs cost,

which can be recovered with a favourable currency move in the market.

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Margin

The margin is a performance bond,orgood faith deposit,to ensure againstthe totalloss ofyouraccount.

Trade stations have margin managementcapabilities. In the eventthatfunds in the accountfallbelow

margin requirements,the brokerÓs dealing desk willclose allopen positions. This prevents clients'

accounts from falling into a negative balance,even in a highly volatile,fastmoving market.

The new NFA rule requires a minimum 1% margin atalltime to maintain an open trade. (Note this may

change from time to time so although we use 1% as the example atsome stage in the future the margin

maybe different. Howeverusing similarcalculations one can easily calculate the new margins)

Some dealstations automatically calculate this according to the formula and hence the margin

requirements are continually varying.

Based on a 1% margin requirement

Example 1: GBP/USD

rate: 1.7442/1.7447

accounttype: 100 000/lotaccount

1% leverage: 100 000x0.01 (1%)=1000units

When you are long (buy)GBP/USD,the margin required is:

1.7447 (GBP/USD)x1000 (units ofbase currency GBP)= USD1744 foreach lot.

Some brokers require $1800 margin forGBP pairs.

Example 2: EUR/USD

rate: 1.2326/1.2331

accounttype: 100 000/lotaccount

1% leverage: 100 000x0.01 (1%)=1000units

When you are long (buy)EUR/USD,the margin required is:

1.2331 (EUR/USD)x1000 (units ofbase currency EUR)= USD1233 foreach lot.

Some brokers require $1300 perlotin margin forEUR based pairs. In general,a margin of$1300

allows you to controla $100000 spotcurrency position. This is an efficientuse oftrading capitalas the

leverage in futures and stock markets is much less.

Example 3: Where the USD is the BASE currency,the margin requirementis USD1000

(ie 1% of100 000)

When you are long (buy)USD/CAD,USD/CHF etc the margin required is:= USD1000 for

each lot.

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Forex Market and Locations

The forex marketis a seamless 24 hourmarketand is open 5 days a week.

At5 pm Sunday,New York time,trading begins as markets open in Sydney and Singapore.

At7 pm the Tokyo marketopens,followed by London at2 am,

and finally New York at8 am. (Time is based on New York time)

As a trader,this allows you to reactto favourable/unfavourable news by trading immediately.

The trading offorex takes place alloverthe world and is notlocated in any one centrallocation.

Deals are done between a variety oftraders,from banks to managed funds to individualtraders

Size ofthe Forex Market

Forex trades approximately US$1.85 trillion a day and is by farthe mostliquid marketin the world. It

takes the NY Stock Exchange THREE MONTHS to trade the same USD value as the forex trades each

and every day making itthe largestand mostliquid marketin the world. This marketcan absorb trading

volume and transaction sizes thatdwarfthe capacity ofany othermarket. Ifyou compare this to the

US$30 billion perday futures market,itbecomes clearthatthe futures markets provide only limited

liquidity. The forex marketis always liquid,meaning positions can be liquidated and stop orders executed

withoutslippage.

Brokers and Market Makers

MarketMaker- One thatconsistently makes two way prices,providing both a bid and an offer. Unlike

brokers,marketmakers trade theircapital

Broker- An individualwho matches buy and sellorders in return fora commission. The bid and offer

prices are those ofthe marketparticipants and notofthe broker.

Currency Pairs

Traders can trade a variety ofcurrency pairs,limited only by which pairs each brokerprovides.

Majorcurrency pairs are typically the USD pairs forexample

EURUSD

GBPUSD

AUDUSD

USDJPY

USDCHF

Cross currency pairs are pairs which do notinvolve the USD forexample

EURGBP

EURJPY

GBPJPY

EURCHF

EUR= Euro,GBP= Pound,CHF= Swiss Franc,JPY=Yen,AUD= Aussie $

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