TABLE OF CONTENT

FOUNDATION 1
1. What is Forex
2. Market participants
3. Base and quote currency
4. Forex broker
FOUNDATION 2
1. Forex market hours
2. What is a spread
3. Pips and point
4. What is a lot
5. What is leverage
6. What is equity and margin
FOUNDATION 3
1. What is take profit
2. What is stop loss
3. Order types
I. Market execution
II. Pending orders
 Buy stop
 Sell stop
 Buy limit
 Sell limit
 Trailing stop
INTERMEDIATE
1. Forex analysis
 Fundamental
 Technical
 Sentimental
 2. Which type of forex analysis is best?
ADVANCE 1
1. Fundamental analysis
 Gross Domestic Product (GDP)
 Inflation rate or consumer price index
 Interest rate
 Non-Farm Payroll
2. Reading the economic calendar
3. Technical analysis
 Trend and flat/consolidation
 Support and resistance
 Ways to draw support and resistance zones
 Channel
 Fibonacci levels
4. Indicators
 Commonly used indicators
 Relative Strength Index
 Stochastic
 Moving Average Convergence Divergence (MACD)
 Moving average
 Parabolic SAR

5. Japanese Candlestick
 Anatomy of candlestick
 Importance of candlesticks
 What is a shadow
 The doji candlestick pattern
 Dragon-fly doji
 Graven-stone doji
 Morning star
 Evening star
 The hammer
 Shooting star
 Tweezer top/bottom
 6. Classic technical chart patterns
 Double top
 Double bottom
 Head and shoulder
 Inverse head and shoulder
 Rising wedge
 Falling wedge
ADVANCE 2
1. Harmonic Patterns
 Harmonic Pattern Cheat Sheet
2. Types of Traders
 Scalper
 Day trader
 Swing trader
 Position trader
3. Creating a Trading System
4. Money management
5. Trade management
What is FOREX?
Forex is usually abbreviated as FX, derived from Foreign Exchange. It
means simultaneous buying and selling of currencies.
Currencies are the instrument with which transactions are conducted.
Every nation in the world has its own currency peculiar to it.

See image below:

As long as people will continue to travel from one nation to the other,
the exchange of one currency with the other will continue to happen.
This therefore erases the doubt in our mind about the lifespan of Forex
trading.

Forex Trading will always involve two currencies at a time.

For instance:
EURUSD buy means that we are buying EUR and at the same time
selling USD. By this, we are saying EUROPE economy is stronger
than United State Economy. Forex market is dynamic in its movement
and this is as a result of different macro and micro economic activities
that play out in the country at that particular point in time. This also
goes a long way to give indication of the strength of the currency under
consideration.

MARKET PARTICIPANTS
These are different players involved in Forex markets: The Central
banks, commercial banks, hedge fund managers, brokers, speculators,
individuals etc.

Most of the participants trade Forex for profit motive while the goal of
central banks of different nation is to stabilize their respective
economies through the instrumentality of foreign exchange stability,
which is easily achievable through determination of appropriate rates.
Commercial banks and individuals for instance get involved with profit
motive.

It is worthy of note here that individual participation in Forex market is

only 2%-3% of global participation. This sends a signal to us as
individuals to always follow the big money movers in the market and
never try to go against them.
BASE AND QUOTE CURRENCY

You can recall that in our definition of Forex, we did say that it is a
simultaneous buying and selling of one currency against the other. The
buy or sell action taken, affects first currency in the pair and the
second at the same time. For instance, if we buy EURUSD, we are
actually buying the EUR and at the same time selling the USD.

In this case, the first currency is the base while the other currency
that appears at the back is the quote currency. The quote currency
serves as reference point to determine the value of the base currency.
If the current price of EURUSD is 1.20000, it means that for every 1
EUR you need 1.20000 dollar to buy it.

If the price of EURUSD increases to 1.2100 therefore means that more

units of USD is needed to obtain one unit of EUR.
By implication, the EUR has strengthened against the USD and the
same way we can say the USD weakened against the EURO.
FOREX BROKERS

These are firms that provide traders' access to trading platform where
buying and selling actions are completed.
The success of a trader depends on not only the strategy, trade
management and ability to detach emotion from trading but also to a
large extent depends on the broker.
If a broker has a wide spread which is the difference between the bids
and ask price (broker commission), there is a high tendency that profit
margin available to the trader will reduce. In other words, the cost of
the transaction is too high.
As you explore the world of Forex, I therefore charge you to choose a
broker that gives you minimal cost on your transaction to guarantee
quicker return on investment.
Here is the link to a broker we recommend

FOREX MARKET HOURS

The Forex market opens 24 hours, from Sunday 22:00 GMT (17:00
EST) to Friday 22:00 GMT (17:00 EST). This means you can place
and close orders within the given time.

Each session has its active time; this is when the specific countries in
that region are awake.
It is advisable to trade when there is high volatility in the market. The
most active session to trade in is the Overlap session which is from
13:00 GMT to 16:00 GMT. (See table below for better understanding
on how the time zones merge)

WHAT IS A SPREAD?
Spread is the difference between the bid and ask price of a given
instrument.
An Example of a Typical Forex Trade and Spread
Every Forex trade involves two currencies called a "Currency Pair".
In this example, we will use the Euro (EUR) and the U.S. dollar (USD)
- At a given time, EUR may be worth 1.14000 times USD. You may
believe the EUR will rise against the dollar, so you buy at the asking
price. But the asking price won't be exactly 1.14000; it'll be a little
more, perhaps 1.14001, which is the price you will pay for the trade
(i.e. 1Pip spread on EUR/USD at that particular time). Meanwhile, the
seller on the other side of the trade won't receive the full 1.14000
either; he'll get a little less, perhaps 1.13999
The difference between the bid and ask prices -- in this instance
0.0002 -- is the spread. That's what the specialist keeps for taking the
risk and facilitating the trade.
Spreads varies from one broker to the other depending on the type of
pairs you trade.

To minimize the spread incurred from Brokers, trade during most

favorable hour. When there are more market participants, competition
for this business increases and market makers often lower their
spreads to capture it.
Also avoid buying or selling low traded pairs.

PIPs AND POINTS

“PIP” stands for Point in Percentage. More simply though, a pip is what
we in the FX would consider a “point” for calculating profits and loss.
It’s a standardize unit and a smallest amount by which a currency
quote can change.
For USD related currency, it is always 0.0001
For JPY related currency, it is 0.01
WHAT IS A LOT
Historically, currencies were traded in specific amounts called lots. Lot
size directly impact in the risk you are taking in a trade.
In trading, we have standard size for a lot, which are 100,000 units.
There are also mini-lots of 10,000 and micro-lots of 1,000.

To take advantage of relatively small moves in the exchange rates of

currency, we need to trade large amounts in order to see any
significant profit (or loss).
In the trading terminal, standard lot size is represented as 1.0; while
mini lot is 0.10 and micro lot 0.01 respectively.
When you have no open position, and so no floating profit/loss, then
your account equity and balance are the same.
WHAT IS LEVERAGE
Leverage in Forex is the ratio of traders’ capital or funds to the size of
brokers fund made available for trading. In other words, Leverage is
borrowed fund in order to scale up investment capital for potential
returns. For Instance A leverage of 1:500 means that the trader can
trade a volume of as much as 500 times invested capital.
As good as it sounds, it is also important to note that traders can also
lose their invested capital easily when trade goes against them using
higher leverage. This is why some countries like USA protect their
citizen by regulating their maximum allowed leverage.

WHAT IS EQUITY AND MARGIN

Equity is the summation of your account balance with the floating
profit/loss of your open position. The equity changes base on price
fluctuation from your current open position(s).
Equity = Balance + Floating Profit/Loss
When you have no open position, and so no floating profit/loss, then
your account equity and balance are the same.
For instance:
Assuming you have open trades running in profit of $2000, Equity
would be $2000 plus your account balance, also if your
current positions is running in loss of $2000 your equity would be
Account balance less $2000.

MARGIN
Margin is calculated base on leverage.
Margin is amount of money put down as collateral, for a running
position or trade.

For Instance:
Let’s say you have a $10,000 account and you want to buy €1,000
against USD.
How much US dollars do you have to pay to buy €1,000?
Let’s assume that the EUR/USD rate is 1.4314.
It means each Euro equals $1.4314.
Therefore, to buy €1,000, you have to pay $1,431.40:
€1,000 = 1000 x $1.4314
Therefore:
€1,000 = $1,431.4
If you take a 1000 EUR/USD long position (you buy €1000 against
USD), $1,431.4 from your $10,000 account has to be locked in this
position as collateral.
When you set the volume to 0.01 lot (1000 unit) and then you click on
the buy button, $1,431.4 from your account will be paid to buy 1000
Euro against USD.
This “locked money” which is $1,431.4 in this example, is called
Required Margin.
WHAT IS A TAKE PROFIT
Take profit is also known as target price. Always referred to as TP.
This is an order that is sent to the broker informing the broker to close
a running position or trade when price reaches a certain target price
level in profit.

This order can either be done manually or electronically.

Electronic TP is an order that is set on the trading platform containing

the target profit price for which the position or running trade should be
closed, whereas, manual take profit is done without setting price on the
trading platform, but the trader takes decision to manually close the
trade in profit. The reason why traders would set take profit is to be
able to manage their trades better, so that when market goes in the
unanticipated direction, the profit made would not be wiped out.

STOP LOSS
It is the exact opposite of Take Profit.
This is an order that is sent to the broker informing the broker to close
a running position or trade when price reaches a certain price level in
loss.
SL is set in order to take out a position in loss if its goes against the
analyzed direction, so that the account will not be wiped-out.
This order can be done either manually or electronically just as we
have explained in TAKE PROFIT above.

ORDER TYPES

MARKET EXECUTION- Whenever you hear of market execution or

instant execution, we mean a buy or sell at the current market price.
There is no need waiting for price to get to any level before the trade is
taken.
This order implies that the trade set up at that point in time is valid
enough to be taken after going through series of analysis as may be
deemed fit by the trader. Some of the reasons for market execution
could be a breakout of trend line or counter trend line, a retest of
broken resistance or support, fulfillment of a golden Fibonacci ratio of
61.8, break of one psychological level or the other etc. Some or all of
the above could also be reasons to set other types of pending order
.Let us see those other types set in the course of trading.

PENDING ORDERS

These are requests made by a trader to the broker through

metatrader4 indicating the price level a position should be opened or
closed. The appropriate use of pending orders can greatly help to cut
losses and catching up with early market movement. However, use of
pending orders without proper analysis could cause early activation of
trade with the resultant effect of avoidable drawdown. The following
are the commonly used orders in Forex trading.

 BUY STOP
This is an order set to instruct the broker to activate a trade at certain
price level which is above the current market price in a bullish
direction. Whenever market gets to the set price in the buy position,
the trade is activated and if market does not move to the set price then
the trade is not activated. This order is particularly important because it
affords trader opportunity to catch trades at good price especially in a
situation where it’s expected that price reversal may be difficult at the
buy stop price.

 SELL STOP
This is the opposite of buy stop. It’s an instruction traders give to their
brokers to sell a pair at a price which is below the current market price
in a bearish market.
This order is given with the belief that if market execution is done at
that moment then drawdown is anticipated but sell stop order is given
to activate a trade where price reversal in the buy direction may not be
plausible.
As good as sell stop is to use it has its own set back too. After
thorough analysis, market could behave differently due to fundamental
news release as discussed earlier which could undermine technical
analysis validly done before pending order was set.. This could result
in sell stop order being activated and stop loss hit thereafter, meaning
that the market has gone in the opposite direction.

 Buy limit
This is an instruction to the broker to activate a buy trade for a
selling market. This means that the current market price is too
expensive for the trader and he therefore want the market to sell off
before the buy order is activated.

4 Sell Limit
This is opposite of the buy limit. it’s an order set to sell off a pair at a
given price which is above the current market price in a buying market.
If after analysis we believe that certain resistance level may not be
broken when market reach that level in a bullish market, we could set a
sell limit to instruct the broker through our MetaTrader4 to sell the pair
at that price.
The danger of this order is that we could be caught in a drawdown if
price decide to break through the target price or resistance area used
as yardstick to setting the sell limit.

TRAILING STOP
Traders often time want to maximize their profit by trailing their stop
profit. This order can be set on the MetaTrader4 on the desktop or
laptop. The function is not available for now on the mobile platform.
Some traders prefer to set their trailing stop at 10 pips while others
prefer 15-20 pips. If price move in the trade direction, the profit also
increases until the market pullback to the number of PIPs greater than
the number of PIPs set as trailing stop.
 FOREX ANALYSIS

THREE MAIN TYPES OF ANALYSIS

Success in Forex market is highly dependent on proper analysis and
predicting the future price movement either using economic NEWS
release or paste price movement.

Now let’s take a closer look at the three types of Forex analysis which
are:
 Fundamental Analysis
 Technical analysis
 Sentimental analysis

FUNDAMENTAL ANALYSIS is the process of forecasting price

movement in market using important political and economic news
release, which directly affect the behavior of the currency pairs. This is
done base on Macro and Micro - economic indicators, as well as the
news background.

FUNDAMENTAL ANALYSIS is tracked using economic Calendar.

Economic calendar is a tool used by traders to keep up with each
countries news release. It is a table displaying, date, time of the news,
currency and the expected impact on such currency (which could be
high, medium or low impact)
Example of a popular Economic news release is United States of
America Non-Farm Payroll (NFP).
This economic news forecast has great impact on EURUSD and some
other USD related pairs.

Forexfactory.com and myfxbook.com website offers a lot of assistance

on identifying how a fundamental release could affect the value of
currency.

TECHNICAL ANALYSIS
It is a method of forecasting the currency pair behavior base in its past
movement. Technical Analyst believes, analyzing patterns in price
history is enough to determine a high probability trade set up.
If price reflect all the information that is in the market, then price action
is all one needs to really make a good trade.
Well......

Because "History they say, tends to repeat itself"

And as a result, it is the most widely used type of analysis.

Technical analysis is done using a chart; this is because historical

movement is best visualized in charts. Traders look at past data to spot
trends and specific patterns which help in determining where the price
would likely head to.
Technical analysts also make use of indicators like Relative Strength
Index, Stochastic, Bollinger Bands, MACD etc. to determine future
price directions or reversals.

All these indicators are further explained in the next chapters. So you'll
grasp the respective names and its application to further help you
make a good trading decision.

SENTIMENTAL ANALYSIS
The market is a place that represents all of the traders and what they
feel for the market- at the same time. The traders' feelings and trade
position forms the Sentiment of the market.
The market is made up of mixed feelings, various ideas and trade bias.
This makes it really difficult for a retail trader to move the market to
his/her favor.
No matter how strong your opinion might be, if more people do not
think so, your analysis would be proven wrong (that's the market for
you, and nothing a retail trader can do about it).
You have to be cautious of what the market is made up of- think like
the big players to make money like them.
Keep in mind how the market feel and gauge it into any trade that you
make or the trading strategies that you use.

Learning to gauge the market sentiment is a multi-billion skill-set. And

this can be gained through consistent study of the markets and putting
into consideration how the big players act and then you react in line
with the market sentiment.

WHICH TYPE OF FOREX ANALYSIS FOR TRADING IS BEST?

Here comes a controversial question...

Just as we have in other sphere of studies, one sided extremism has

no chance in Forex trading. Because, as you advance in your journey
as a trader, a lot of opinion would come up, do not be deceived no one
is wrong or right in its entirety.
Funny right? LOL
Everyone is only predicting and the market rewards the person who is
able to merge all these three analysis and apply them hand in hand to
come up with better trade ideas.

Bottom line, do not rely on just one analysis, apply each one when
needed- Simple!

Respect chart patterns, supply and demand levels when formed, also
take caution in time of high impact news and gauge the feelings in the
current market, follow price and money would follow you!

FUNDAMENTAL ANALYSIS

These are analysis that has to do with the overall state of the economy
of any country. Forex traders have over time capitalized on the Internet
relationship of some of these key indicators to predict the strength of
the economy and by extension its currency.

It then means that if we are able to appropriately link the various

macro-economic indicators such as gross domestic product GDP,
inflation rate otherwise called consumer price index, Employment
change ,interest rate, housing, production, earning, etc. then we will
stand a better chance to predict price movement in the market.
As we have learnt the various types of analysis.
Fundamental analysts do not concern themselves with the study of
charts and its analysis but rather base their judgment on the recent
happenings in different countries of the world.

Let us look at some of the common fundamental news release that can
influence market price:

1. GROSS DOMESTIC PROFIT

It is a measure of the total output in the economy.
If the economy is doing well then the GDP number in percentage will
be greater than the expected value. When this happens, investors will
have confidence on the economy and this consequently causes the
local currency to strengthen. If the GDP figure is less than the
expected value there would be depreciation in the country's currency
and such currency would be bearish relative to other currencies.

2. INFLATION RATE OR CONSUMER PRICE INDEX

This is the general and the persistence rise in price level. This is not
too good for the economy as the consumer real income reduces. When
cost of production rises then the producer passes the cost to the final
consumer making them to pay more even when their income has not
increased.
Inflation is measured with CPI which captures the prices of baskets of
common goods over a period of time. If this number in percentage is
greater than the expected level, then the currency of that country will
fall at that moment.
If it is less than expected then its positive news for the economy;
buyers get ready to go Long on the currency of that country, relative to
other currencies.
 3. INTEREST RATE
Interest rate is determined by the central bank of any country.
It is a key rate that is used to regulate economic activities in the
country.

A country in need of foreign direct investment will increase its rate.

What is the implication of interest rates in Forex?

The implication on foreign exchange is, increase in rates causes the
local currency to appreciate and traders therefore go long (buy) to
benefit from the increase in value.

4. NON-FARM PAYROLL
It is the total employment in the United States.
NFP is released on first Friday of the month.

It does not include farm workers, private household employee or non-

profit organization employee.
A figure greater than the expected value is good for the economy;
hence rise in the value of DOLLAR should be anticipated.
If the employment change is less than the expected value, it means the
economy under perform under the period of consideration.
What this potent for the Dollar is depreciation of its value.

For instance,
If we get a less impressive employment change then we should expect
USD to fall relative to other currencies

EURUSD-Rises USDCAD-Falls
GBPUSD-Rises USDJPY-Falls

READING THE ECONOMIC CALENDAR

These news releases are categorized into stages depending on their
impact on the economy and by extension on their currencies.

Red folder news-High Impact

Yellow folder news-Low Impact
Orange folder news-Medium Impact

Just as seen below:

Website where news release can be obtained are:

investing.com forexfactory.com myfxbook.com .etc
 TECHNICAL ANALYSIS

TREND AND FLAT/CONSOLIDATION

TREND is a market condition for prices to move in a particular direction
over a period.
Price could either be downward trend or upward trend.

If it's upward trend traders say it's a bullish trend whereas, if it's a
downward trend it's called Bearish trend.

Trend can be spotted by visual observation, or by connecting two or

more picks and troughs.
Trends can be long-term, intermediate or short-term trend. Success in
Forex can be tied to the ability to identify trends and take position in
line with trend.

There is a popular saying by traders, "the Trend is your friend"

Never forget this saying. If you're able to remember it and apply it in
your trading, money would come after you!

Trend can be spotted using price action, Trend line, Moving Average
crossover and combining more techniques.

FLAT
This is a market condition that is neither rising nor declining. When the
market does not have a specific identifiable direction, the market is
said to be choppy or moving flat.
There are various names which this can be called, among which are,
sideways movement, range bound, consolidation etc.

It is advised by most educators to stay out of the market during this

action, because there is either low volatility or buyers and sellers
reluctant to place a trade in a specific identifiable direction.
There are various strategies, merged with indicators or price action
successfully used in trading a choppy market, some of these indicators
that suit a flat market is Bollinger Bands and other oscillators.

The idea is to find a trading style that fits your personality and then
adopt the trading system.

SUPPORTS AND RESISTANCE

This is the backbone of technical analysis.

Funny enough everyone seems to have their own ideology as regards

the plotting of support and Resistance.

Here is how it looks like:

From the diagram you can deduce that it's a bull market, because the
Zigzag is moving upwards. If you noticed that, then we're good! That
shows you're definitely grabbing the whole gist.
When the market moves up and then pulls back, the peak reached
before the pullback forms a ceiling, popularly known as Resistance.

The market does a short pull back, afterwards it continues upward, the
level it got to, is considered as the floor- known as Support.

Supports and Resistance is not just a random area where prices turn
around. There are potential sellers waiting to go short(sell) at
Resistance point, so also there are potential buyers waiting to go long
(Buy) at key support levels.
All of these buyers and sellers work together to send prices lower and
make up the supply in the supply and demand equation. More supply
than demand, price falls, more demand than supply price rises.

Resistance= Supply
Support= Demand.

Most traders base off their trades on support and Resistance principle.
And it's a proven way of trading in the Forex market.
WAYS TO DRAW SUPPORT AND RESISTANCE ZONES.

Support and Resistance shouldn't be viewed as a line; rather as a

zone.

With the above been said, let me outline the process I personally use
as support and Resistance zones.

I use Psychological levels and Sub-psychological level. They're round

up numbers that the big players in market pay attentions to.
They're derived simply by using the horizontal tool on your chart. The
horizontal lines are targeted at round up numbers on your chart.
For example, let say we're to add round up numbers on EURUSD.
The levels to place the horizontal lines would be: 1.13000, 1.14000,
1.15000 etc.
While sub-psychological level would be: 1.13500, 1.14500, 1.15500
etc.
As shown in the image below.

Another powerful way to draw support and Resistance

1. Select any of your favorite charts: Follow the process as you read
this guide, so as to get along.

2. Mark out all swing Highs (peaks) and Lows (Troughs).

This can be done by placing a line at these levels
3. Connect the highs/lows using the horizontal line tool on your trading
terminal.
Now you may compare the difference, which is almost the same as
what we did with the psychological and sub-psychological levels.

Different methods exist to define support and Resistance zones.

Based on Moving Averages:

MA as it is abbreviated, acts as dynamic support and Resistance. See
more under Technical Indicators.

Based on other technical indicators:

Like Fibonacci retracement.

I’m glad you're getting along so fast! If you don't seem to get this
lesson, read over and over again, practice along-side too. Then you
should be good!

Remember practice makes perfect.

CHANNEL
Channel is formed by connecting at least two consecutive swing lows
and highs, using the Trend-line.

Price channel is a trading technique that is borrowed from the

traditional Trend-line. Trade signal is taken if price breaks any of the
parallel Trend-line drawn.
When combined with Support/Resistance and Japanese Candlestick
Pattern, offers a great trading system.
This system requires a lot of practice and analyzing the market
structure.

so how do we draw a Channel on the chart?

First, we spot a price action forming a lower low and lower high,
moving in the same intensity to the downside.
In the case of an uptrend, we place the Trend-lines at the higher highs
and higher lows parallel to each other, trying to spot a trending price
move to the upside. We get in a trade upon the break of either of the
parallel line.
That's how simple it is to draw a channel in the chart! Just as we have
above.

And you can see how price moved aggressively to the upside upon the
break of the upper Trend-line, Yeah yeah!!,
That's how powerful trading channel when combined with
support/resistance could be. You'd learn all of those as we progress!

FIBONACCI LEVELS
This a common tool used by Technical traders to spot reversal or
continuation areas in the market.

It is based on key sequences of numbers as identified by a popular

Mathematician LEONARDO FIBONACCI in the 13th century.

The Fibonacci sequence number is as follows:

0,1,1,2,3,5,8,13,21,34,55.... And so on.
Each term in this sequence is simply the summation of two preceding
term.

The similarity with these sequences is that, each number of the

sequence is approximately 1.618 greater than the preceding number.
This relationship is the foundation of the common ratios used in the
retracement studies.
  The key Fibonacci ratio of 61.8%, also referred to as "the
golden ratio" or "the golden mean," is found by dividing one
number in the series by the number that follows it. For
example, 21 divided by 34 equals 0.6176 and 55 divided by 89
equals 0.6179.
 The 38.2% ratio is found by dividing one number in the series
by the number that is found two places to the right. For example,
55 divided by 144 equals 0.3819.
 The 23.6% ratio is found by dividing one number in the series
by the number that is three places to the right. For example, 8
divided by 34 equals 0.2352.

Don't get bored with the mathematical terms, lets show you where the
Fibonacci tool is located in your trading platform!

Navigate to the top right corner of your MT4 terminal, click on insert-
Fibonacci.
As seen on the image above, there are other forms of Fibonacci like:
Retracement, Time Zones, Fan, Arcs, Expansion.

Do you really need to know all of these before you start trading?? Not
really!
Remember application of the right tool at the right time is what we
need!

The idea here is for you to know its use and its application when
necessary.
For a lot of traders that I've seen, some only make use of the Fibonacci
retracement tool and a little bit of the expansion. This is because of its
simplicity and its applicability to any trading instrument.

They can be used to confirm Supports/Resistance, hence used as

Stop Loss and also take profit levels.
However, the use of this tool is subjective. Traders use this tool in
different ways. The most important rule on how to use is to plot the tool
from the trough to the peak of the current market structure.

see image below

INDICATORS

Technical Analysts use indicators to simplify their trading system.

Indicators are used to analyze price data to generate trade-able buy or
sell signals.

Indicators are based on some set of refined rules or theories,

developed by experienced traders, which is programmed to identify
potential trade set up when those rules are met.

Using indicator is a great way of adding simplicity to a trading system,

but then again, it shouldn't be over complicated.
There are various Indicators available in the trading terminal.
Indicators, if well utilize combined with Support/Resistance and Price
action can make you a consistent trader in the long run.
Knowing the perfect one to use for any market condition is a
prerequisite to success in trading.

We have indicators to determine current trend conditions, as well as

Oscillators; some are used to measure volume/momentum in the
market etc. as shown in the image above.

We will only discuss the commonly used ones for the purpose of this
lesson.

COMMONLY USED INDICATORS

 Relative Strength Index

The RSI is a technical indicator that falls within the oscillator family. It
is a leading indicator, meaning, its signals potential trade setups prior
price event on the chart.
This means, RSI is likely to generate early entry signals, reversals and
continuation prior price event. But then again, the signals can be false
or premature.

The default settings in most trading plat-form are: 14 Period. While

some traders find 7 Period more reliable. It can be tweaked to suit any
trading system.

Therefore, the need to combine RSI with other Forex trading tool would
make a great trading system.

How to use RSI

This indicator is unique in its style of spotting overbought and oversold
condition in the market.

It oscillates from 0 to 100.

Below 30 indicates oversold market condition.

While over 70 indicates overbought conditions.

It can also be used to determine current trend condition in the market.

For an uptrend confirmation, make sure the RSI line is above 50 level.
Just as seen above.
While in a downtrend, ensure the RSI line is below 50.

 Stochastic
The Stochastic indicator is classified as an oscillator since the values
fluctuates between 0 and 100.

Stochastic measures momentum of price.

Stochastic is a theory propounded by George Lane in the late 1950s.
He said " Stochastic measures the momentum of price. If you visualize
a rocket going up in the air- before it can turn down, it must slow down.
Momentum always changes direction before price".

It has two lines, where one is slower than the other. A signal can be
generated upon the cross of those two lines.

The default settings in most trading plat-form is: 5,3,3- K-Period, D-

Period and slowing respectively.

Stochastic also tells us when the market is overbought (above 80) or

oversold (below 20)

It is a trite principle, to buy when it's oversold and sell when it's
overbought.
As seen in the image above; Stochastic can be used to spot market
reversals when it is either overbought or sold and also spots
divergence.

When it's in over bought region, it simply means the strength or

momentum of the buyers is weakening, which connote likelihood of
reversal and vice versa.

As with other trading tool, Stochastic is best when combined with other
trading tool, support/resistance and candlestick formation in order to
form a great trading system.
It could be combined with Moving Average indicator, Bollinger Bands
etc.

 Moving Average Convergence Divergence(MACD)

The MACD is based on the moving averages and this means that its
ideal for analyzing momentum, trend-following entries and riding till the
momentum is exhausted.

The default settings in most trading plat-form are: Fast EMA 12, slow
EMA 26, MACD SMA 9.

MACD USAGE:
It can be used as an oscillator to spot overbought and oversold
condition
The above highlighted levels are considered overbought and oversold
level, otherwise known as, Buyers/sellers exhaustion.

Center-line Crossover (level 0)

When the MACD line cross over from the negative region to positive
region it is called a bullish crossover and indicates a bullish
momentum.
Also when its crosses from positive territory to negative territory it is
call bearish crossover and that indicates bearish momentum in the
market.

Divergence Trading
Just as the name implies, MACD is used to majorly spot divergence.

And what is Divergence?

Divergence occurs when an indicator and price are heading in opposite
direction. This further signals a reversal in that given market. There are
a couple of other indicators that can be used to spot divergence, like:
RSI, Stochastic etc.
You can see the MACD headed in the opposite direction with price.
Hence potential market reversal should be anticipated.

Now let’s have a look on what that resulted to...

There you go!!!

You can see how price tumbled slowly to the downside.
Just by merely spotting divergence on Price and MACD can potentially
make you a fortune off the Forex Market.

You can go through your charts with MACD applied on the second
window, back-test for divergence entry.
Take notes of how prices react when divergence occur.

MACD is best when combined with other trading tool,

support/resistance and candlestick formation in order to form a great
trading system.

MOVING AVERAGE
It is a trend following indicator.

Moving Average is a line created by taking the average of the

closing/open prices of the last group of candle base on that moving
average number and putting a dot and then connecting the dot as each
new candle forms.

There are four MA Methods in MetaTrader4 which are Simple,

Exponential, Smoothed and Linear Weighted.
Moving Averages are used to forecast future prices, and by merely
looking at it, one can tell the trend of the current market on that
particular time frame.

Like the one we have seen above, Its 50EMA on H4.

The above is simply by taking the closing price of 50 recently formed
candles; add it up divided by 50. It gets a number (average) and put a
dot at last candle position. When the next candle forms, it disregards
the first candle from the last 50 group and starts the calculation again
and place a dot. Then the dots are connected.

Moving Averages can be used to determine trend, just as it is earlier

stated as a trend following indicator.

MA also acts as dynamic support/resistance. Some traders base off

their support/resistance on MA and pick trade when the MA is either
broken or retested.
You can see how price respected the 50EMA line.

It can be used to generate potential buy/sell entry signal.

This is perhaps one of the most common trading systems.

Two or more MAs are plotted on the chart; this is usually a smaller
moving average and a larger moving average.

A potential trade signal is generated when there is a cross to the

downside or upside, as the case may be.
See example on the image below:
The image above shows two different Exponential Moving Averages
(EMA).

The magenta is 20EMA while the Blue is 40EMA respectively.

From the top left corner, you can observe that, when price started
rallying to the downside, the magenta crossed the blue downward such
that the blue stays above.
At this time, Moving Average traders get on the sell to ride along with
the trend.

Somewhere at the bottom, price started heading to the upside, then

the magenta crossed the blue MA to the upside signaling a buy entry.

It is worthy of note, that MAs follows the price and not the other way
round, as many amateur traders think. Hence, the MA is considered a
lagging indicator, as it shifts according to price movement.
Parabolic SAR
One very interesting thing about Parabolic Stop And Reverse is its
simplicity.

This indicator has three main functions:

1. Provide potential buy/sell signal

2. Provide potential exit signals; and

3. Highlights current trend direction.

The simplest way to understand this indicator is to buy when the dots
are below the candle and sell when the dots are above the candle.

Just as explained with the Blue and Red arrows in the chart. Where
Blue is for buy entry and Red for sell entry.

Hence that's why it's best use in a trending market. Using it in a

choppy market would definitely generate a lot of false signals.
It is a trend following indicator, also popularly used by traders to set
trailing stop losses.

The parabolic SAR effectively operates like a trailing stop-loss. In

uptrends, the SAR works to gradually “lock in” profits (or pull the stop-
loss closer to breakeven) on the basis of its position below price. The
reverse is the case for a downtrend.
CANDLESTICKS

Candlestick was invented by Homma Munehisa who is widely known

as the father of candlestick chart pattern.

The success of a technical trader is hinged on the ability to

appropriately interpret Japanese candlesticks pattern.

Candlesticks are long bar with shapes that respond to up and down
movement in the market.

A technical trader can look at his chart and use the shape of
candlestick that form at any particular point in time to tell a story about
price movement at that time. This is because Japanese candlesticks
are the language of the financial market. If it can be mastered then
chart interpretation becomes much easier.

ANATOMY OF CANDLESTICKS

A Japanese candlestick consists of Open, High, Low, and Close

(OHLC) and the chosen period the candle represent.
Whenever the close of a candle is above the open then the candle is
said to close bullish on the timeframe under consideration.

In other words, if the close is below the open then the candle is bearish
on the timeframe.

Note that a candle might close bearish on a smaller timeframe and

remains bullish on a higher timeframe this and many more we are
expected to understand while trading the Japanese candlesticks
pattern.

IMPORTANCE OF CANDLESTICKS

Candlesticks are as important as we said earlier because it is the

visual representation of price movement in the market.

Most traders use only candlesticks pattern to trade and because of

their mastery of it overtime, they are successful but most traders use it
together with technical analysis to create a confluence before
executing.

WHAT IS A SHADOW
A shadow sometimes called wick is simply a retracement of price back
to the previous level.

This is a consequence of further change in demand and supply mix in

the market. For instance, in a bullish market where the buyers are in
control, supply may be more at certain price level thereby making price
drop drastically lower. This retracement leaves a long tiny rope like
shape on top of the bar called shadow or wick.

It gives us vital information about price movement at that point in time.

If the shadow is short, it means that most of the trading was confined
around the open and the close.

THE DOJI CANDLESTICK PATTERN

A doji is a pattern that shows equality in the opening and closing price
in the market. The buyers are not in control neither the sellers. In
summary, we can say there is indecision in the market.
As you can see from the diagram above that opening price is the same
as the closing price.

What does it mean when we see this in a market?

It simply means that the trend is coming to an end and reversal is
imminent. The higher the timeframe, the more valid a doji is.
See example below:

Note how the market turned after the formation of a doji at the low of
the market structure.
DRAGONFLY DOJI
This is a bullish candlestick pattern in which the open high and close
are about the same.

This illustrates clear dominance of buyers over sellers in the market.

The buyers want to push the price higher.

It is characterized by a long wick and a tiny bar up where the opening
price and closing price on that candle are almost inseparable.

THE GRAVESTONE DOJI

It is the bearish form of the dragonfly doji. It shows sellers dominance
over buyers.
This result in decrease in price.it is characterized by long upper tail and
very close high and close price. Appearance of this pattern at
resistance is an indication of trend reversal in the opposite direction.
THE MORNING STAR

This is a bullish reversal pattern that is formed at the support zone in a

downtrend. It consists of three candles that combine to form the
pattern.

A bearish candle, followed by a smaller bullish or bearish candle that

close below the close of the bearish candle and a bullish candle that
fully engulf the other two candles.

This pattern exactly captures how buyers took control of the market
when it appears at the support. It’s considered as a powerful price
reversal pattern
The chart above captures price reversal at the formation of morning
star at the bottom of the chart in a bearish trend.

Whenever the middle tiny candle appears in form of a doji, it shows

that there is a clear indecision between buyers and sellers but
confirmation comes at the completion of the pattern with the bullish
candle.

Open a long position upon confirmation.

THE EVENING STAR PATTERN

The evening star is a bearish reversal pattern usually found at the top
of the chart i.e. RESISTANCE. It’s a pattern that suggests that buyers
are overwhelmed by the sellers and price is pushed down.
It is characterized by a fully formed bullish candle followed by a small
candle and then a fully formed bearish candle.

Open a short position upon confirmation.

THE HAMMER

The hammer is formed when the opening and closing prices are almost
the same with a long wick or tail at the bottom of the head.

It resembles a hammer in shape.

This is another reversal candlestick especially when it is formed at the

support of a downtrend market.
It shows clearly the appearance of more buyers that overwhelm the
buyers at the demand zone in a down trending market.

Enter in a long position upon confirmation.

THE SHOOTING STAR

Shooting star is a bearish reversal candle that is usually seen at the

resistance in an uptrend market.

It gives us a lot of clue as to the trend reversal. I love to see this candle
from a higher timeframe like H4 or DAILY CHART.

When this candle forms at a resistance or near resistance, it should be

taken as a high probability trade set up which mark the end of an
uptrend.
Upon the confirmation of shooting star, traders enter in a short
position.

It is very easy to identify this pattern and I have used it several to spot
high probability trade.

THE TWEEZERS TOP AND BOTTOM

The tweezers top is a bearish reversal pattern seen at the top or

resistance of an uptrend market.

It is characterized by two candles.

The first is a bullish candle that give us impression that the price is still
going up but followed by a bearish candle that immediately signal the
presence of sellers in greater number than the buyers.

This action pushes down the price lower.

Open a short position upon confirmation

The tweezers bottom occurs at the bottom of a downtrend market.

It also consists of two candles.

The first is a bearish candle that shows that price is tending south but
immediately resisted in equal or greater measure by buyers who
pushes up the price.

Open a long position upon confirmation.

THE HARAMI PATTERN (THE INSIDE BAR)

Harami in Japanese means pregnant.
It consists of two candlesticks. It is considered as a reversal and
continuation pattern.
The first large candle is called the mother candle and the second
candle that must close inside the mother candle fire the set up to be
considered HARAMI.

If it occurs at the resistance then it's a bearish reversal but if it is clearly

seen at support it is a bullish reversal.
CLASSIC TECHNICAL CHART PATTERN

One of the ways to make trading fun is a clear understanding of chart

pattern.
There are many traders who will not master anything else other than
chart patterns which have proven to be a successful trading system.

DOUBLE TOP
Double top is a reversal pattern that can be spotted on resistance of
uptrend market. If you are trading from H1 of H4 timeframe, you can
look for double top on 15M or 30M charts.

You can also find double top on higher time frame like daily or weekly.
The higher the time frame from which double top is spotted the more
powerful it has usually proven to be.
The good thing about double top is that you can predict the reversal or
the continuation almost to the exact pips when there are not too many
fluctuations in the market.
DOUBLE BOTTOM
I always prefer to trade reversal from downtrend to uptrend whenever
double bottom is formed from lower time frame.

This pattern like double top is very easy to find because what you are
looking for is a support zone that has been hit before and it's been
tested again to form double bottom.
It happens a lot in a downtrend which signal reversal. It can also be
spotted inside of the uptrend which adds more validity to the trade set
up.
HEAD AND SHOULDER

This pattern is so named because it forms one head and two

shoulders. One of the best ways I have traded reversal is spotting
head and shoulder pattern.
It can easily be spotted in uptrend.

How should you trade head and shoulder?

Most aggressive traders like to enter from the top i.e. the head but I
always advice that we should be patient to allow the neck to be broken,
find a retest before entry for a shot position.

The danger of making aggressive entry from the top (head) is that,
there may be continuation of the uptrend and stop loss could be hit.
I like to see the right shoulder complete at around 50% Fibonacci
retracement.
INVERSE HEAD AND SHOULDER
This forms an opposite pattern to head and shoulder.
You can spot this in a downtrend which signals a reversal.

You can trade it with confidence when you allow the neck of the
shoulder to be broken before looking for long entry position.

RISING WEDGE
Rising wedge can either be a reversal or continuation pattern.
It is formed after an uptrend leading to reversal. Sometimes it could
also breakout to the upside for continuation of the uptrend but most
often it breakout to the downside.

FALLING WEDGE
Falling wedge look at a wooden wedge turn downside. It’s more of a
reversal than continuation pattern spotted in an uptrend market.

It’s usually brakes out to the upside for continuation. Most classic
pullback you spot in Forex charts forms a falling wedge pattern that
when there is a breakout then there is a continuation of an uptrend.
HARMONIC PATTERNS

Harmonic patterns are used to set target prices, stop losses and limit
orders.
It is an application of set of Fibonacci sequence. I find these patterns
useful because they are sometimes precise in their accuracy and work
best with proper position sizing.

This is because the D extension that serve as the entry point is usually
a range of values within the Fibonacci sequence.

Entries are therefore based on objective approach based on

mathematical formula that takes its root from Fibonacci sequence.
We make use of Fibonacci retracement and extension.
The most important Fibonacci retracement levels are:

0.38%
0.5%
0.618%
0.786%
0.886%

The most important extensions are

1.27%
1.618%
2.0%
2.618%

Let us start examining these patterns and how we can apply them in
our trading.

You don’t need to compulsorily memorize the ratio of Fibonacci

retracements and extensions for each pattern.

Instead make use of the cheat sheet to get the ratios and from there
know the name of the pattern that is formed.
When trading Harmonic pattern, you should get in the trade at point D.
Just as shown in the image below.
Every harmonic pattern is measured in a particular ratio of extension
and retracement; XABCD.

Below is the cheat sheet containing the ratios of retracement and

extension for the entire major pattern.
TYPES OF TRADERS

SCALPERS
Scalp traders jump in on each trade only to catch small gains on each
trade.
These types of traders are often not interested in the big move the
market has to make; all they do is to monitor the chart have multiple
trade entries and exit trades quickly once in profit.
This best suit those who can spend several hours on chart daily without
distractions.
These set of traders get into the market and exit based on predefined
rules. Most times with the use of some oscillating indicators.
DAY TRADERS
The day traders will enter and exit their trade within the same day.
They’re neither scalper nor a swing trader. Day trading also involves a lot
of time in analysis, executing and monitoring trade(s).
These traders like staying with a bias of the market, and then react in
line with their bias till the day is over.
It is also very important to keep up with any high impact news and
maybe stay out of the market or protect profit when such news is being
released.

SWING TRADERS
This trading style is best suitable for those who have full time job or
school.
Swing trading requires one to hold trade for days with a lot of patience.
Buy from a swing low and sell at a swing high, always placing the high
time frame trend into consideration.

Since it attracts huge profit, a swing trader will also apply huge stop loss
in order to give room for market fluctuations.
POSITION TRADERS
This is longest term trading.
It involves holding trades for several months to a year.
A very good understanding of fundamental is highly required; positioned
trader should understand how economic data affect the country’s
economy.
Position trading also requires the ability to ignore popular opinion
because a single position trade will often hold through both bull and bear
markets. For example, a long position trade may need to be held through
an entire year when the general public is convinced that the economy is
in a recession. If you are easily swayed by other people, then position
trading is going to be difficult for you.

NOTE: You’ve to determine the type of trader that you are.

No matter what style you choose or have in mind to choose, make sure it
fits your personality. Do not become a scalper because a famous
successful trader is a scalper; you just might get burnt in the long run.
Know yourself and stick with the style that best fits your lifestyle.

CREATING A TRADING SYSTEM

Trading system is a fixed process, systematic approach used to enter in
a trade and close out.
This is highly fundamental to your trading career. Make sure you create
a system you understand the basics and how it came about, stick with it
and master it.
You must have heard this phrase a lot “No strategy is a holy grail”. This
is true, but creating your own trading system gives you a hedge over all
others. Because you should know why it work and the market condition
where it should work best. There are times you’ll have losing streaks,
stay put and trust the process. Every trading system does experience
weeks or month of losing streaks. The idea is to trust the process during
these ups and downs.
Follow these 10 steps to forming your first trading strategy by Galen
Woods:

STEP 1: FORM YOUR MARKET IDEOLOGY

Before you jump into creating your own trading strategy, you must
develop an idea of how the market works. Most importantly, you need to
answer this question.

Why do you think you can make money from the markets?
Form your market ideology by reading widely. Read about both technical
and fundamental analysis.

Avoid get-rich-quick claims.

Think about demand and supply.

Doubt theories that claim that people are perfectly rational.

Your ideology will define every step that follows. Give it the attention it
deserves.

Regardless, I urge you to follow one principle in your first trading

strategy.

Keep it as simple as possible.

You don’t want to be overwhelmed by a complex strategy right from the

start. Moreover, a trading strategy with more moving parts is harder to
manage and improve.

STEP 2: CHOOSE A MARKET FOR YOUR TRADING STRATEGY

Forex? Equities? Options? Futures?

If you choose to trade forex, understand what you are buying and selling
with a currency quote. Make sure you learn about the different models of
forex brokers. Know how the margin is calculated.
Or if you choose to trade equities, you must know what a share means.
You must know the difference between a blue-chip and a penny stock.

The point is there’s a lot to learn about each market. But you cannot start
to learn in-depth until you choose your trading market.

Although I recommend futures trading for intraday traders, the choice is

yours. The only rule is that you must understand the market you choose
to trade.

STEP 3: CHOOSE A TRADING TIME FRAME

Before you gain any trading experience, it’s hard to decide on a trading
time frame. You will not know if you are more suited to quick scalping or
daily swing trading.

Should you trade the 5-minute time frame or the daily charts?

Hence, you can start by considering your circumstances. If you have

time to watch the market for extended periods, try intraday trading.

When you trade fast time frames, you get fast feedback to shorten your
learning time. Even if you end up with longer timeframes, what you learn
from intraday price action will still be useful.

Of course, if you are not able to watch the market for extended periods,
start with end-of-day charts. With sustained effort, you can learn enough
to decide if swing trading is for you.
Choose Your Trading Time Frame

STEP 4: CHOOSE A TOOL TO DETERMINE THE TREND (OR LACK

OF)
You don’t trade when you see a Pin Bar. You trade when the market is
rising, and you use a bullish Pin Bar to trigger your trade.

You don’t trade when you see a Gimmee Bar. You trade when you judge
that the market is going sideways, and you use a Gimmee Bar to enter
the market.

Decide on a tool to help you judge the market context. (i.e. trending or
not, up or down)

You can choose price action tools like swing pivots and trend lines. You
can also use technical indicators like moving averages and MACD.

STEP 5: DEFINE YOUR ENTRY TRIGGER

Even with the right market context, you need an objective entry trigger. It
will help you enter the market without hesitation.

Both bar and candlestick patterns are useful triggers. If you prefer
indicators, oscillators like the RSI and stochastic are good options too.

Stochastic for Swing Trading

STEP 6: PLAN YOUR EXIT TRIGGER
You need to plan how to exit when things go wrong. The market can go
against you, causing you losses beyond your imagination. Having a stop-
loss is critical.

You also need to plan how to exit when things go your way. The market
will not go your way forever. Hence, you need to know when to take
profits.

STEP 7: DEFINE YOUR RISK

Once you have your entry and exit rules sorted out, you can work on
limiting risk.

The primary way to do so is by position sizing. For a given trading setup,

your position size determines how much money you are putting on the
line.

Double your position size and you will double your risk. Watch your
position size carefully.

STEP 8: WRITE DOWN YOUR TRADING RULES

At this stage, your trading strategy is simple. You might be able to
memorize the trading rules. However, you must still write down your
trading rules.

Having a written trading plan is a robust method to ensure discipline and

consistency.
It also provides a record of your trading strategy. You will find it useful
when you are trying to refine it.

STEP 9: BACKTEST YOUR TRADING STRATEGY

With your written rules, you can now back-test the strategy.

If you have a discretionary trading strategy, back-testing can be an

arduous process. You need to replay the market price action and record
your trades manually.

If you have a mechanical trading strategy and a coding background, you

can speed up this stage.

Nonetheless, looking through the trades one by one is a great way to

develop your market instinct. Doing so can also help you think of ways to
improve your trading strategy.

STEP 10: PLAN HOW TO IMPROVE YOUR TRADING STRATEGY

Your first trading strategy will not be profitable. But it’s okay. Your trading
strategy is a living object. It is not static.

With your growing experience and knowledge, your trading strategy will
improve.

But let’s not leave this to chance. Plan how you will obtain feedback and
improve your trading strategy.
Forward test your trading strategy. Plan to take good notes of your
market observations. Record your trades and keep your chart images in
good order.

Avoid drastic changes to your trading strategy.

For this final step (which might take forever), remember that your aim is
to achieve positive expectancy with every trade. Not positive profits for
each trade.

Let statistics work for you. Don’t force your will on the market.

CONCLUSION
Follow the 10 steps above, and you will find yourself with a basic trading
strategy.

This strategy is not the Holy Grail. But it is formed with your experience
and according to your trading style.

Keep working on it, and you will stand a chance to succeed.

By GALEN WOODS (tradingsetupsreview.com)
I find this advice really helpful while writing this book, so I had to feature
His article in this book. You should take them serious and follow each
step with a practical approach.
MONEY MANAGEMENT

Trading just like any other business requires proper money management
skill to gain long-term.
There is no holy grail. It isn't wise to try to find the perfect system or
indicator that will keep you out of losing, because losing is part of this
business, like spending in raw material in any other kind of business.
Instead, you can focus on one indicator/system that will keep you in the
market when good moves happen. With good Money Management and a
good risk to reward ratio, the odd will be in your favor.

The main purpose of money management is to avoid risk of ruin.

Neglecting your money management principle as well as emotional
trading, increases risk and decreases your reward.
Practice money management rules on a demo account or open a trading
account and start implementing what you've learned with low lot sizes.
Here are the top three rules of money management

1. Risk only 1% of your account

This is a trite rule which almost every forex trader knows about, but they
don't follow it strictly. Funny huh?
The rule states: risk not more than 1% of your equity in a position (i.e.
per trade).
For example, if you were trading with a mini lot size of 0.10 and your
risked amount is $100, this means that your stops are placed around 100
pips from your entry. If you scale down your lot size to 0.01 or micro lot,
then your stops can be placed 1000 pips from your entry. But if you trade
with 1 lot, then your stop loss has to be no more than 10 pips

From the above, we can see how we have arrived at different risk levels
using the same 1% rule. The 1% rule can also be applied to the broader
equity, meaning that, at any point in time, the open positions risk is not
more than 1% of the entire account balance. This would mean that the
total net loss of the open positions (regardless of how many open
positions you have) is no more than $100, based on a $10,000 account
balance. Some traders use 2%, 5% or more but this entirely depends on
how much of risk you are prepared to take.

2. Risk to Reward
Risk is the amount of money you may lose in a trade. And remember the
1% rule as stated above!
When we find a trade set up, the first thing we need do is to find a place
to place our stop loss. Secondly, we choose our position size in the way
that if market hit our stop loss, we lose only 1% of the trading account.

For example,
We found a trade on EURUSD that has 10pip stop loss.
The account size is $10,000
If EURUSD hits the stop loss, we should lose -$100.
This means 10pips equals $100 in a $10,000 if 1% rule is strictly
followed.

You need not to be scared about the calculation process, because we've
got you covered. There is an automated process to calculate all of these
by using (https://www.myfxbook.com/forex-calculators/position-size)

Reward is the profit we stand to make if the trade goes in our favor.
The ideal risk to reward is 1:2, because for every winning trade, you can
recover the losses from the previous losing trade and still make a profit
as well.

Following the example, we used above.

We have a $10k account risking one percent means losing -$100.
If in the next trade, we have a win which potentially means twice of what
we stand to lose (+$200). Then we will not only recover what we lose in
the previous trade but also make profit (+$100)

3. GOAL SETTING
One big reason traders often time end up ignoring money management
rule is due to emotions which tend to grow stronger to risk your equity.

Often times traders aim for unrealistic goals. Doubling invested capital in
one or few days.
True, while there are some traders who do achieve such goals; it could
be that they are more experienced and trading higher equity. On the
other hand, some amateurs get this result based on luck, which I term
money soon gone. Because often time, greed of increasing lot size do
set in. This would make the account return to its normal state or even
blown. Funny as it sounds, it's TRUE.

Set a realistic goal based on calculation on the expected return per

trade. By having a realistic goal, be it daily, weekly or even monthly, you
would be able to better equip yourself emotionally by sticking to the rules
outlined.
Here is how to calculate your expectancy per trade
Expected Profit Per Trade (Expectancy)= (%win by Average win) -
(%win by Average win)

Let’s Assume percentage win/loss= 55%/45% respectively.

While the Risk to Reward is 1:2

Using the example of $10,000 account

Average loss= 1% by $10,000= $100
Average win= 2% by $10,000= $200

Expected Profit Per Trade (Expectancy) = (55% by Average win) -

(45% by Average win)

55% ($200) – (45% ($100)

$110-$45= $65 per trade.

You can use the format above to determine your expected profit per
trade. It’s not necessary to get the same result as with the example
above, what is important is to make sure the answer is positive. As far as
its positive, the trading system plus proper money management would
make you money in the long run.
A profitable trader is not one who doesn’t lose trade; rather one who
keeps his wins above his losses.

We will never know which trade will be a winner and which one a loser,
never. So money management should be applied in every single trade,
regardless of what you think the outcome of the trade will be.
Even with a system that is right 90% of the time, you could end up broke
if you do not apply a sound money management technique.

TRADE MANAGEMENT
Trade management refers to everything a trader actively does after a
trade is executed to maximize the potential profit and minimize the risk.
Once you’re in a trade, the ability to react, manage and control profit/loss
makes you a good trade manager.
Selection, Timing and management are crucial.
Before you get in a trade you should know what you’re trading.
Pay attention to each pair, understand its movement, when it moves best
and where to get in.
Most pairs move best during London and New York Session, and move
slowly during Asian session.
You should select the timing that best suits your personality. Because
some like it fast while some like it slow. Whichever style you love, just
play your cards right!

I believe in this phrase a lot “Trade it smart!”

Now let me tell you what this means to me-
It means locking in profit once your position is floating in blue(profit),
because we cannot tell what may happen the next minute. So, it is wise
to lock in a little of your profit rather than lose a chunk of your trading
account.
When applying this rule you should be careful not to place the stop too
close to the current market price in order not to get stopped out
prematurely. You could use a percentage trailing stop loss on pc or
desktop or move stop loss once a major support or resistance is broken.
Another tip of not getting stopped out prematurely is using a regulated
broker. There are many things we consider before selecting a good
broker. We have analyzed this above that’s why I recommend the one I
personally use.

FACT - If you do not have a system that is right 100% of the time you
should use Money Management & also understand trade management
(meaning you should use it because such a system does not exist),
regardless of how big or small your trading account is. We will never
know the outcome of the next trade, and this one trade could be the last
one if you do not apply Money Management. Using Money Management
is not an option; it is a must if you want to achieve your trading goals.
You need to do whatever you need to do to be able to trade the next
day, week, or year.
If you want to be in this business for the long haul, apply proper trading
sizing techniques.