Investing In Forex

INVESTING IN FOREX MANUAL

Page 1
 Investing In Forex

Table of Contents

The Basics .................................................................................................................................. 5

History of the Forex Market ...................................................................................................... 7

Money ................................................................................................................................... 7

The Modern Forex Market .................................................................................................... 8

EuroDollar .......................................................................................................................... 9

Structure .................................................................................................................................. 10

The Basics ............................................................................................................................ 10

How it works ....................................................................................................................... 10

Parts of the deal .............................................................................................................. 12

Comparisons .................................................................................................................... 12

The Exchange Rate .......................................................................................................... 13

Understanding Spreads ................................................................................................... 14

Quotes ............................................................................................................................. 15

Margin ............................................................................................................................. 15

Leverage .......................................................................................................................... 16

Risk ...................................................................................................................................... 16

Spot Trading ........................................................................................................................ 17

Terminology ........................................................................................................................ 17

Major Currencies ..................................................................................................................... 19

Japanese Yen ....................................................................................................................... 19

United States Dollars........................................................................................................... 21

Swiss Franc .......................................................................................................................... 22

Euros ................................................................................................................................... 22

Pounds Sterling ................................................................................................................... 23

Australian Dollars ................................................................................................................ 24

Page 2
 Investing In Forex

Most Traded Currencies ...................................................................................................... 24

Market Analysis ....................................................................................................................... 29

Fundamental Trading .............................................................................................................. 30

Monitoring Events ............................................................................................................... 32

Technical Trading..................................................................................................................... 33

Fundamental or Technical? ..................................................................................................... 35

Practice .................................................................................................................................... 37

Practicing the Trade ............................................................................................................ 37

Basic Steps........................................................................................................................... 39

Orders.................................................................................................................................. 40

Types of Order ................................................................................................................. 41

Economic Fundamentals ......................................................................................................... 44

Inter-Market Fundamentals ................................................................................................ 44

Benefits of Inter-Market Fundamentals .......................................................................... 44

Where can I get this information? ...................................................................................... 45

Economic Indicators ................................................................................................................ 46

What are Economic Indicators? .......................................................................................... 46

The Importance of this data ................................................................................................ 47

Important Indicators ........................................................................................................... 47

GDP .................................................................................................................................. 48

Production ....................................................................................................................... 48

PMI .................................................................................................................................. 48

PPI .................................................................................................................................... 49

CPI .................................................................................................................................... 49

Durable Goods ................................................................................................................. 49

ECI .................................................................................................................................... 49

Retail Sales....................................................................................................................... 50

Page 3
 Investing In Forex

Housing Starts.................................................................................................................. 50

RSI........................................................................................................................................ 56

Trends.................................................................................................................................. 57

Review of Basic Chart Patterns ........................................................................................... 58

Symmetrical Triangles ......................................................................................................... 58

Ascending Triangle .............................................................................................................. 59

Descending Triangles .......................................................................................................... 59

Glossary ............................................................................................................................... 61

Page 4
 Investing In Forex

The Basics

Forex is the common name for the Foreign Exchange Market, although it can also be
called the FX market. It’s the largest and one of the most important financial markets in
the world.

The Forex Market is simply a platform where different currencies are traded with one
another. Money has long been a token which can be exchanged for goods and services,
as countries have their own currencies and international trade is common the Foreign
Exchange Market exists to make this possible.

Currencies are a commodity and the forex market is just like the stock market, on the
forex market currencies are being sold and brought. However unlike the stock market
this is an international market which never sleeps. It’s possible to make trades 24 hours
a day. All of the currencies are traded in real time.

When trading in currencies there will always be two transactions taking place at exactly
the same time. This is because one currency will always be exchanged with another; to
buy one currency another currency must first be sold. This makes it a unique trade,
currency is both what you are buying and what you are paying with.

Because the Forex market trades currencies in real time it is possible for people to make
trades and profit out of their transactions. If someone can correctly identify that a
certain currency will increase in value then this currency can be purchased and then sold
when it increases in value. The time for this change in value might be very short, or very
long.

The forex market is open five days a week, 24 hours a day. It’s based in Sydney, Tokyo,
New York and London. Anyone over the age of 18 is able to trade on the Forex markets.
Although the majority of trades are done by large financial institutions and governments
individuals can also use the market.

Forex trading can sound very confusing especially if you know nothing about it. Even if
you don’t have any experience or knowledge of the economy then you will still be able
to enjoy and maybe even profit from the Forex market.

Page 5
 Investing In Forex

The foreign exchange market is a unique type of market which is used to hedge currency
risk, enable international trade and even as a form of investment.

This book will show you the basics of the Forex market and how you can use it to make a
profit. However as with any other form of investment the returns are not guaranteed,
there are plenty of risks with the foreign exchange market. Exchange rates can change
very quickly, and it can be very difficult even for experts to guess which way they will
move and when.

If you’re a motivated person then there are plenty of opportunities for you to invest in
the forex market.

Page 6
 Investing In Forex

History of the Forex Market

Money

Money has been around in some shape or form since Ancient Egypt. In fact even before
that man has been trading and battling to get what they want. Money was adopted as a
token to easily exchange for goods and services.

In ancient times markets were very small, and so there was never a need for a foreign
exchange market. When globalization and international trade started to become more
and more of an issue then the foreign exchange market took off. Until world war one the
foreign exchange markets didn’t get that much attention, and as a result of fixed
exchange rates the markets remained very stable.

After world war one however the markets opened up and became much more volatile.
There are also a number of people that speculate in order to try and make a profit.

After 1973 most of the industrialized countries switched to a floating exchange rate
which made the forex market even more volatile.

The Forex market is also known as the Foreign Exchange Market, or simply as FX. This is
a market where foreign currencies are traded with one another. Banks and other
financial institutions will buy and sell foreign currency. These transactions normally
result in one party purchasing a certain amount of one currency in exchange for another.

There is a need for the foreign exchange market because there are so many different
currencies all around the world. The modern FX market started during the 1970’s and
was a result of many countries gradually adopting floating exchange rates rather than
their fixed regimes.

The Forex market is a unique market, it is without a doubt one of the most liquid and
largest financial markets anywhere in the world. Governments, corporations,
speculators, central banks, large banks, and various other institutions can all deal on the
Forex Market. As this market is international it is huge. The average daily turnover in
2007 was around $3 Trillion. Since then the market has continued to grow at a steady
rate.

Page 7
 Investing In Forex

There will always be a need to deal with foreign currencies which is why this market
exists. The FX Market can be used to hedge currently risk, invest, and make foreign trade
possible.

The Modern Forex Market

The Breton woods agreement was established in 1944, this fixed a large number of
national currencies against the dollar. This also fixed the USD rate to $35 per ounce of
gold.

A college Professor called Milton Friedman tried to borrow pounds sterling from a
Chicago bank in 1967. However the bank refused the loan because they thought that he
would use it to short the British currency. The reason why the bank refused the loan was
because of the Bretton-Woods Agreement.

The idea of the Bretton Woods Agreement was to stabilize currency markets by reducing
the possibility of speculation. Until the Bretton Woods Agreement the gold standard was
used. Although the gold standard worked for some countries, it had a tendency to create
boom and bust economies. When a country became more powerful they would import
lots of products which would reduce their gold reserves. As the currency was based on
gold this would cause the interest rates to shoot up, and economic activity would grind
to a halt.

This recession would make that countries products look dirt cheap to the rest of the
world, which would cause other countries to quickly snap up their products. This will
inject wealth into the country and the process will repeat time and time again. The Gold
standard may seem like a good idea on paper, however in practice it isn’t sustainable.

At the end of World War II the Bretton Woods Agreement was founded. This was
created with the intention of stabilizing the international foreign exchange market. The
participating countries agreed to fix the value of their currency against the dollar. This
had a kick on effect of making the Dollar a very important currency, one that many other
currencies are compared against.

Page 8
 Investing In Forex

In 1971 the Bretton Woods agreement was scrapped because the dollar was no longer
exchangeable for gold. In 1973 the major industrialized countries let the currency prices
be dictated by supply and demand. Currency was now free to flow over borders
unhindered. The prices were floated every day, and the volatility of the markets was
increasing. Trade liberalization and globalization made forex markets even more
important.

In the 1980’s forex transactions were typically around $70 billion per day, however by
the year 2000 this was over $3 trillion per day.

EuroDollar

The Eurodollar market, which simply means US dollars which are kept in banks outside
America were another reason why the Forex Market became such a big market. The
same can be said for any other currencies which are deposited in other countries banks.

The EuroDollar market was created in the 50’s as a result of Soviet Union oil profits
being deposited in USD into banks outside of the USA. They did this because they
thought that America may try to freeze their assets if they deposited in US Banks. This
created a huge pool of US Dollars outside of America. The Government of the US tried to
present this by creating laws restricting the lending of money to foreigners.

EuroDollar markets became very popular because they offered better returns and had
fewer regulations. Since the 1980’s many US companies started to borrow money in
offshore EuroDollar markets.

London is the capital of this offshore dollar market and in the 1980’s many British banks
started to lend dollars instead of just pounds so that they could enhance their global
presence. London has a very convenient location as it operates when both Asian and
American markets are open which makes it a very important centre for this market.

Page 9
 Investing In Forex

Structure

Before you can start to use the forex market you need to understand how it works.
Although this might seen quite complicated at first, after a few trades it will become like
second nature.

The Basics

- The first currency that’s listed in the currency pair will be called the base
currency

- The US Dollar is normally the base currency. It’s normal to see the US Dollar
traded against other currencies. This other currency is called the counter
currency

- The currencies are always quoted in pairs. USD/JPY for example is the prices for
US Dollars and Japanese Yen. If USD/JPY is 2.5 then $1 will get you ¥2.5.

- If a quote increases then this means that the base currency has increased in
value, and the counter currency has fallen in value. If the USD/JPY rate increases
to 2.6 then the dollar is stronger since it can now buy a greater number of yen.

How it works

The main reason why anyone would want to take part in Forex trading is so that they
can make a profit, of course there are plenty of other reasons.

Today over 95% of the trading on the Foreign Exchange market is done purely for
speculative reasons. Speculative reasons simply mean that the sole purpose of the
investment is to profit from potential exchange rate movements.

The other reasons for forex trading include hedging currency risk, and various other
reasons. If you are interested in trading on the forex market then you will almost

Page 10
 Investing In Forex

certainly be trading on the internet. These are examples of non-delivery trades. The
currencies are not actually traded, but contracts are agreed and then performed.

As 95% of the market is speculative there is little intention of anyone actually holding
the real currency. The contract simply ends by offsetting it which will cause a profit or a
loss for both parties.

Page 11
 Investing In Forex

Parts of the deal

The forex deal is simply a contract that the market maker and the trader have to agree
upon. The contract will contain the following information:

- The pairs of currencies which will be traded, in other words which currency will
be brought, and which currency will be sold

- The amount of currency that is involved, this is also known as the nominal or
face

- The rate – This is the agreed exchange rate between both of the currencies.

Some deals will also mention a time frame; however most people only do day trades.
These can be compared to spot or current time trading which is where each deal only
lasts for a single day. It is however possible to renew some deals for a certain amount of
time.

The forex deal is an obligation to buy and sell a certain amount of currency at a specific
exchange rate.

The forex market is unique; you are trading currency and receiving currency. This means
that forex trading is always done in pairs. If the EUR/USD spot rate is 1.5, then 1,000
Euros would cost $1,500.

Now assume that in one year the EUR/USD rate now increases to 1.51, this means that
the euro is now more valuable against the dollar. The individual could then sell his Euros
and get $1,510 which means he’s made a huge profit of $10.

Obviously the potential gains (and losses) are much bigger than that, especially when
you’re dealing with huge amounts of money.

Comparisons

Although many people think that if they make a profit then they have done well, that
might not always be the case. In order to find out whether or not they have made a

Page 12
 Investing In Forex

reasonable profit they must first compare it to the sort of profits that they could expect
to make from other forms of investments.

The return on investment (or ROI) needs to be compared to other less risky forms of
investment. For you to be able to justify the extra risk that you will have to put up with
on foreign exchange markets you will need to get a big enough reward.

Long term government bonds are normally seen as a risk free form of investment
because the chance of default is minimal. Of course there is no such thing as a
completely risk free investment.

You should only trade when you think that the currency you are purchasing is going to
increase in value compared to the currency that you have sold. If it does then you will
sell back the currency and make a profit.

It’s also possible to do an open trade; this is where you bought or sold a certain pair but
have not yet completed the other half of the deal.

As we’ve already mentioned estimates show that approximately 95% of deals on the FX
market are for speculative purposes. This means that the person actually doing the trade
has little intention to actually have the currency. Instead they were just using the
exchange rate movements to try to make a profit.

The Exchange Rate

Currencies are all traded in pairs, the rate at which they can be exchanged for one
another is known as the exchange rate. Most trades use the USD as the base. The other
important currencies include the Japanese Yen, Euro, British Pound, and the Swiss Franc.
We will look at these currencies in more detail later on in the book. Some people also
regard the Australian Dollar as being an important currency for foreign exchange trades.

The first currency will be known as the base currency, and the second will be called
either the quote currency or the counter currency. The base currency is the
denominator and the quote currency is the denominator.

The exchange rate simply shows the buyer how much of the quote currency must be
paid in order to get one of the base currency.

Page 13
 Investing In Forex

The investor can also use this exchange rate to calculate how much money they will
receive when they come to sell one unit of the base currency. For example if the
exchange rate for EUR/USD is 1.50 then this means that to get €1 an investor will have
to pay $1.50 because in this case EUR is the base currency.

Understanding Spreads

Spreads are another thing that you will have to be aware of when trading on the foreign
exchange market. There are differences between the Buy and Sell prices, or the Bid and
Ask prices. This is just the difference between the selling price (the price that the market
maker sells the currency to their customers), and the price that they buy the currency
from their clients.

You can actually see this very easily, if you look at any one of the popular currency
exchange services they will have a bid and an ask price. These are different and this is
how they make their money.

If you buy currency and then sell it straight away without there being a change in the
rate of exchange then you will still lose money because of the spread.

The amount of currency that you receive when you well a unit of base currency will
always be lower than the amount required purchasing the currency. This is why in order
to make a profit or even to break even you must wait until the exchange rates move.

Take this simple example your bank may have the following bid/ask spread for EUR/USD:

Bid: 1.4975

Ask: 1.5025

This means that there is a spread of 500 percentage in points (pips). This is a very extreme
example and the spreads are not normally that large. A typical spread will be around 5 pips.
Smaller spreads are better because the exchange rates do not have to move as much to
make a profit.

Page 14
 Investing In Forex

Quotes

The quote is the price of a certain currency when compared to the base currency. There
are actually two different types of quote in the Forex market.

Direct Quote

This is the price for $1 compared to other currencies such as Canadian dollars, or
Japanese Yen

Indirect Quote

This is the price of 1 unit of the currency compared to USD

It’s the market maker who creates the quote; this is the price that the market maker will
honor when the deal comes to an end. If any rates are quoted against other currencies
rather than the dollar then these will be known as cross rates because the calculation
still involves the dollar. GBP/JPY is an example of a cross rate.

For example the GBP/JPY rate is worked out by looking at the GBP/USD and USD/JPY
rate. So even if you are trading in other currencies, dollars will still be used as the base
rate. Let’s take a look at the example.

GBP/USD = 1.5

USD/JPY = 120

GBP/JPY = 120 x 1.5 = 180

Margin

If you experience a loss then you will have to pay to cover it. In order to make sure that
the market functions properly banks and online trading platforms normally require some
form of collateral to make sure that you can meet any losses. The margin is the
minimum security in forex markets. This is simply a deposit that should cover any losses
as a result of current trades.

Page 15
 Investing In Forex

Leverage

It’s very common to use leveraged financing in forex trading; this makes it possible for
traders to use credit to maximize their returns. The collateral for the loan is kept in the
form of a margin from the initial deposit. This makes it possible for investors to be able
to control $100,000 in investments for just $1,000 in some cases.

There are five different ways that individuals can trade in the forex market, each of
which will be looked at in more details later on in the book. These include:

- The spot market

- Contracts for difference

- Forwards/Futures

- Options

- Spread Betting

Risk

No form of investment is risk free, even investing in bank accounts has a certain amount
of risk. That is why we all receive interest. For higher levels of risk we need to have
higher rewards, in other words a larger ROI.

There’s no denying that forex trading can be very profitable, however there are also a
number of risks involved including:

- Exchange Rate Risks

- Credit Risks

- Event Risks

Page 16
 Investing In Forex

Spot Trading

Spot transactions are pretty simple transactions where one currency is exchanged for
another. The spot rate is quite simply the current market rate which is sometimes
known as the benchmark price.

You do not need to immediately settle spot transactions, the settlement date will be the
second business day after the date of the deal.

When using spot trading, the currency is purchased for immediate delivery rather than
for future delivery.

Terminology

The terms used in forex markets are the same as the majority of other financial markets,
the difference however is that because currency trading involves buying and selling at
the same time that it can become very confusing. That’s why it’s such a good idea to
make sure you’re completely sure about the terms.

Long Position

If you are taking a long position then this means that you have purchased a currency
pair. When you are taking a long position you purchase the currency pair and wait for
the prices to change so that you can make a profit. Taking a long position means that
you will have to sell the currencies that you have purchased. If you buy at different price
levels then this will be known as adding to longs, or simply as getting longer.

Short Position

A short position or a short is where you sell a security that you have never really owned.
Selling a stock short means that you have to borrow stock from a third party and pay a
lending brokerage fee. In terms of the foreign exchange market this means that you buy
the counter currency and sell the base currency.

Page 17
 Investing In Forex

When you sell a currency pair in this case it’s known as going short. You will always be
waiting until the price of the pair moves lower so that you will be able to purchase the
currency back later at a profit. If you sell at different price levels then it’s known as
adding to shorts of getting shorter.

Selling high and then buying low is a very popular strategy in currency exchange
markets. Currencies can rise and fall in value relative to each other on a long term and
minute to minute basis which makes these strategies useful.

Many forex traders utilize short positions to make the most out of falling currency prices
and to profit from it.

Page 18
 Investing In Forex

Major Currencies

There are many currencies throughout the world; however the majority of trades are
carried out between the major ones. So what are the most important currencies that
you need to be aware of?

The important currencies include:

- Japanese Yen (JPY)

- US Dollar (USD)

- Swiss Franc (CHF)

- Euro (EUR)

- British Pounds (GBP)

- Australian Dollars (AUD)

Japanese Yen

Symbol: ¥

Name: Yen (円)

Code: JPY

Yen is Japan’s domestic currency; it’s the third most important currency in regards to
currency trades on the foreign exchange markets. The Yen comes just after Euros, and
the dollar. It’s a popular reserve currency just after the Euro, US Dollar and GB Pounds.

The Japanese Yen is pronounced as you might expect everywhere in the world, except of
course in Japan itself. In its native country it’s actually officially pronounced as ‘en’,
that’s an interesting fact for you.

Page 19
 Investing In Forex

The Japanese Yen is an ancient currency which was introduced in 1872 by the Meiji
government; it was based very closely on European systems. In 1871 a new currency act
adopted decimalization, with rin, sen and yen. The legal definition of the value of the
Yen was initially 1.5g of gold, or 24.26g of silver. In current prices, 1.5g of gold is worth
around 4715 yen. This saw Japan use the gold standard, towards the end of 1953 the
Sen and Rin were actually taken out of circulation.

During and just after the Second World War the Yen lost a lot of value, in 1949 to try and
stabilize the currency the value of the yen was tied to the dollar at ¥360 per $1. This was
done as part of the Bretton Woods System, and the exchange rates remained fixed at
that level until 1971. By 1971 the US had already abandoned the gold standard and
started levying surcharges on imports. This paved the way for floating exchange rates
which were common in 1973.

Page 20
 Investing In Forex

United States Dollars

Symbol: $

Name: United States Dollar

Code: USD

The United States Dollar is the currency of the United States of America. According to
the Coinage Act of 1792 one dollar is worth around 27g of silver, although the exact
weight will depend largely upon the purity of the silver. Dollar is a very popular name for
other countries currencies which is why it is commonly referred to as US$ or USD to
avoid any confusion. The Dollar is a decimal currency which is divided into 100 cents.

The Dollar is the most important currency in international trade, and is the most traded
currency on the Forex markets. The Dollar is a fiat currency, however a number of other
countries use it as their official currency, and some also use it unofficially.

Each dollar is made up of 100 cents, a cent is given the symbol ¢. There are various other
denominations, for example 4 quarters, ten dimes and 1,000 mills are all equal to one
dollar. The only denomination in current use is the cent, a dime is simply the name
given to a 10 cent coin. One dollar coins and notes are both very popular; however notes
always seem more popular in America.

Since 1914 all currency has been issued by the Federal Reserve, The banknotes are
printed by the Bureau of Engraving and Printing and the coins minted by the United
States Mint.

Page 21
 Investing In Forex

Swiss Franc

Symbol: Fr.

Name: Franc

Code: CHF

The Franc is the currency of Switzerland and Liechtenstein; it is also used in a few other
countries on an official and unofficial basis. The bank notes are issued by the Swiss
National Bank, and the coins issued by Swiss mint.

The Swiss version of the franc is the only franc which is still used in Europe. The Rappen
(Rp) is one hundredth of a franc. The Swiss Franc is the fifth most important in foreign
exchange market trades after the Euro, Dollar, Yen and pound.

Euros

Symbol: €

Name: Euro

Code: EUR

The Euro is the single currency of the European Union; it’s currently adopted by 16 of
the member states, with 11 contemplating whether or not they want to adopt it. The
countries currently using the Euro as their official currency include:

- Belgium

- Cyprus

- Netherlands

Page 22
 Investing In Forex

- Spain

- France

- Germany

- Belgium

- Austria

Five more European countries also use the Euro as their currency, some of these without
a formal agreement. Around 327 million Europeans use the Euro every day.

In November 2008 there was over€751 billion of Euros in circulation; this is equal to
around $953 billion. This makes it the biggest combined value of cash in circulation. The
Euro zone is seen as being the second biggest economy in the world.

The currency was officially named the Euro on 16th December 1995, and was released at
the start of 1999 to replace the European Currency Unit. Coins and banknotes were
produced and released at the start of 2002.

Pounds Sterling

Symbol: £

Name: Pounds Sterling

Code: GBP

The Pound Sterling is the official currency of the United Kingdom, its overseas territories
and its crown dependencies. There are other currencies such as the Falkland Islands
Pound and Gibraltar pound which are separate currencies that are pegged to the pound.

Sterling is the third biggest reserve currency after both the dollar and the euro. The
pound is the fourth most important currency on foreign exchange markets.

Page 23
 Investing In Forex

Australian Dollars

Symbol: AU$ (or just $)

Name: Australian Dollars

Code: AUD

The Australian dollar is the official currency of the Commonwealth of Australia; this is
used throughout the region and in independent areas such as Kiribati and Tuvalu. Within
Australia it is almost always shown as the dollar sign $. Internationally it may be shown
as A$ or AU$.

The Australian dollar is divided into 100 cents. It’s the sixth most internationally traded
currency in the world being just behind the euro, yen, dollar, pound, and Swiss franc.
Around 6% of the worlds forex transactions are carried out in Australian dollars. This
currency is so popular because the interest rates in Australia are quite high, and the
foreign exchange market is not regulated as much as many other countries. Having
Australian Dollars in your portfolio has a number of benefits because of its close
relationship with many Asian markets.

Most Traded Currencies

Page 24
 Investing In Forex

Some currencies are more popular than others on forex markets. Dollars have
traditionally been very important, but what other currencies are traded regularly?

The Top ten traded currencies are:

Currency Code and Symbol % daily share (approx)

1 United States Dollars USD $ 86%

2 Euros EUR € 37%

3 Japanese Yen JPY ¥ 17%

4 Pound Sterling GBP £ 15%

5 Swiss Franc CHF Fr 7%

6 Australian Dollar AUD $ 7%

7 Canadian Dollar CAD $ 4%

8 Swedish Krona SEK kr 3%

9 Hong Kong Dollar HKD $ 3%

10 Norwegian krone NOK kr 2%

If you look at the table above then you should be able to notice that the United States
dollar is the most commonly traded currency on the forex market.

Page 25
 Investing In Forex

Common Currency Trades

In order to make trading currencies easier they are organized into currency pairs. This is
because in order to trade currencies on the forex market one currency must be sold in
order to purchase another one.

Forex markets normally use abbreviations or nicknames to refer to the pair of currencies
being traded rather than the individual currencies themselves.

Most of the popular currency trades use the US dollar on one side of the deal. The major
currencies are identified by using the ISO codes for each individual currency. A list of
these can be found in the previous chapters.

Cross Currency Pairs

Even though most of the currency trades take place using dollars in one part of the pair,
there are various other cross currency pairs which provide an alternative to trading in
Dollars.

Although these currency pairs are quoted independently they are still worked out by
using the USD pairs. Crosses are designed to make it possible for investors to trade in
particular currencies.

The most popular currency trades include the other popular currencies other than the
USD, including the Japanese Yen (JPY), Euro (EUR), and Great British Pound (GBP).

These major currency pairs are the most liquid and also the most popular traded
currency pairs on the forex market. Around 90% of trades on the Forex market are
between these pairs.

The majors include:

- EUR/USD

- GBP/USD

- USD/JPY

- USD/CHF

- AUD/USD

Page 26
 Investing In Forex

- USD/CAD

GBP/USD is one of the oldest currency pairs and has its very own name. GBP/USD is
known as Cable, this is named because of a cable which ran under the Atlantic Ocean to
synchronize the exchange rate.

Page 27
 Investing In Forex

There is however plenty of other abbreviations and nicknames given to common

currency trades which are useful to learn if you want to trade currencies.

Currency Pair Nickname

AUD/USD Aussie

USD/CAD Beaver

USD/JPY Gopher

USD/CHF Swissy

USD/CAD Loonie

NZD/USD Kiwi

GBP/JPY Geppy

EUR/USD Euro

Page 28
 Investing In Forex

Market Analysis

If you are serious about making money by investing in the forex market then it is
important to do your homework and make sure that you analyze the market properly.

Some popular things to bear in mind include:

- Overnight developments – Try to find out about any information that might
affect the forex markets, also discover who said what and how you think the
currency pairs will react.

- Updates – If there are any movements in the other major markets such as oil or
US Treasury yields then try to get to the bottom of it and decide whether or not
it will affect currency pairs.

- What’s expected – If there are any expected press releases or market events
then try to stay ahead of the game. Monitor the event calendars to make sure
that you work out what’s going to happen and when. Any announcement,
however small can make a lot of difference.

- Current events – Try to stay up to date about current events. If there are any
elections, scandals, potential military conflicts, or policy changes then this may
affect certain foreign exchange rates.

Page 29
 Investing In Forex

Fundamental Trading

There are two main strategies that people use when investing on the forex market. One
of these is known as fundamental analysis. This method is where you study the current
events and look at both the political and financial changes which can result in economic
changes. Most of the investors that are using this technique are interested in long term
trades in order to create returns on their initial investment.

Forex markets can be affected by a number of different factors, including political

changes, economic conditions and environmental concerns. By researching these
various factors you will stand a much better chance of being able to predict the future
and try to determine which way the exchange rates will move.

However there are some problems with using fundamental trading, for example if there
is little activity then the exchange rates are still going to move. This will make it
impossible to find any useful information which makes it very difficult to predict the
future. There are actually two main different forms of fundamental analysis, trade flows
and capital flows.

Capital Flows

The demand of a certain currency can be tracked over time; this is called the balance of
payments. Capital flows are simply the net amount of currency which is being brought or
sold through investments. Demand for foreign currency can be in the form of joint
ventures, foreign direct investments (FDI), fixed income market investments and equity
market investments. Most of these are physical flows of capital into a country. These
flows of capital are useful tools as they make it possible to identify the economic growth
and financial stability of that specific country. By choosing stable currencies the chances
of making a profit is much greater.

Trade Flows

Page 30
 Investing In Forex

Another type of fundamental analysis is known as trade flows, this is where the imports
and exports of a specific nation are monitored. This is so that the investor can then use
this information to value the currency.

The forex market is largely influenced by international trade. Importers need to sell
currency in order to purchase goods and services from international markets.

Countries that have trade deficits normally suffer from currency devaluations, but
countries with trade surpluses normally experience an increase in value of their
currency. This is a particularly useful way to try and predict how a currency will perform
in the future.

Page 31
 Investing In Forex

Monitoring Events

In order to use fundamental trading effectively you must make sure that you follow the
important global events. There are a large number of different international events that
can affect their international investments.

There are many different events that can affect the forex markets, including political
relations, and financial events. The recent banking crisis for example has had a major
effect on the forex trading markets.

Page 32
 Investing In Forex

Technical Trading

One of the most popular ways to trade on the forex market is to use technical analysis,
it’s often seen as one of the most advanced and accurate methods of trading on the
forex market.

This technique uses all of the information available on the particular currency pair to
attempt to accurately predict which currency pairs will move and in which direction. It
makes use of all of the available information, and also bears in mind the influence of
certain markets and the forex trading community as a whole.

Even if forex trading is new to you then you should already know a thing or two about
forex charts. These often move in certain trends which make it easy to identify what is
going to happen and when it’s going to happen. Technical analysis makes it possible to
use the forex markets at their best.

The most important thing about technical trading is that you make sure you know about
trends. If you are aware of trends then you will find it much easier to identify any
potential movements and also stand a much better chance of making a profit.

Trends

This is what forex trading is all about; the important part of it is to be able to identify the
trends. In order to identify these trends you must be able to use a number of tools that
are part of your technical analysis tool kit. These are commonly referred to as technical
indicators.

If you can use these tools correctly then you will already have a head start on the
majority of other traders who are looking to invest in the forex market.

Although many traders experience success when using technical analysis it’s very
important to fully understand that it is in no way a magic tool which will guarantee
success. Using these tools is not a miracle way to make your portfolio profitable. You
must also be careful how you look after your money; this will ensure that you won’t be
left with nothing in your trading account as a result of any bad decisions.

Page 33
 Investing In Forex

Two of the most popular technical indicators include RSI and MACD. MACD is Moving
Average Convergence Divergence, and RSI is Relative Strength Index,

The MACD shows the difference between the 12 day exponential moving average and
the 26 day moving average. The trigger line I often shown as the 9 day moving average.
This means if the MACD is above the line then it’s a signal to buy, and if it passes below
it then it’s a signal to sell.

RSI is a very useful tool which is used to study the activity of the markets. It effectively
monitors the market to look at whether the market is overbought or oversold. The RSI
helps the trader to understand the direction that the forex market will move in. If the
RSI number is high then this means that the market is overbought. If the number is low
then this means that the market is oversold.

Page 34
 Investing In Forex

Fundamental or Technical?

In the last two chapters we’ve looked a little at both technical and fundamental trading
analysis. However we never really looked at which one you should use. There are
reasons for and against each method. And in all honesty the actual method that you
choose will depend on your personal preferences. There is no right and wrong answer in
many circumstances.

Fundamental Analysis

Fundamental analysis is where a lot of news and information is studied which may affect
the future of certain countries and so affect the state of their currencies. If you ever hear
anyone talking about the fundamentals of a country then they are almost certainly
talking about the economic fundamentals, and how they can use them to make trading
easier and more profitable.

Fundamental analysis utilizes:

- Economic Data Reports

- Interest Rate Levels

- International Trade Flows

- FDI and other flows of capital

- Monetary policy

Technicals

Technical’s is talking about technical analysis which involves looking at charts of the
market, studying trends, and using mathematical calculations to try to identify trends
and predict what the market is going to do next.

Almost all currency traders will use some form of technical analysis when they are
trading. Even people that trade based on gut instinct are likely to have some form of
technical analysis to find out what is going to happen next. Almost all traders will at least
know the technical price levels. The majority of traders will at least be aware of technical
analysis even if they don’t use it themselves.

Page 35
 Investing In Forex

For a long time traders have been debating which technique works better? However you
don’t actually have to pick between he two techniques. It is possible to combine both
technical and fundamental analysis and use something that combines both of the
techniques together.

Both fundamental and technical analysis have their merits, and so using a system that
incorporates both of them will create a much more beneficial system.

It’s important to look at a variety of macroeconomic factors including the interest rates,
and growth rates. However currencies do not move in a straight line, they fluctuate on a
minute by minute basis. There are a number of short term price fluctuations which you
may be able to use to your advantage. Some of these methods may even make it
possible to make fairly substantial profits.

Technical analysis is a really useful way of being guided through the process; it also helps
you to find out about bigger price moves which will allow you to work much more
accurately.

By using both together then you will find it much easier to make accurate decisions. For
example when you use fundamental analysis you may predict that USD/JPY is going to
fall, however how do you know when you should act to make the biggest profits. And
how do you know where it is that you should cut your losses.

This is where technical analysis comes in, it can be used to refine the entry and exit
points to make sure that you maximize your profits and minimize the chances of making
a loss. You will also be able to use this analysis to determine whether you should reduce
positions or add to them.

Sometimes you will discover that forex markets are driven much more by fundamentals
than other factors. These can include central bank comments, and various other
economic data. Fundamentals can make technical analysis much more useful.

At other occasions you may notice that technical developments are a much more
powerful force than fundamentals.

Page 36
 Investing In Forex

Practice

If you want to start trading on the forex market then you need to get some experience.
As with anything else getting experience without exposing yourself to risk can be very
difficult. You will learn much more if you spend time playing with the forex market.

If you’re serious about learning how to trade currency then you would do well to open
your very own practice account. A practice account is a form of free account which
makes it possible to play with currency trades without actually putting any of your cold
hard earned cash at risk.

Practice accounts are very useful because instead of containing your own money they
have virtual money in them. Although you won’t be able to make any real money from
them you can use it to make sure that you fully understand how the market works and
how you can use it to your advantage.

This practice account will make it possible for you to determine how the prices change
at certain times of the day, how the forex market reacts to information, and how the
different currency pairs might be different.

A practice account is a fantastic way to get some experience of the forex market by
actually getting personally acquainted with it. It’s also a really great way to try out a
broker’s platform before you decide which broker you will actually pick. The flexibility of
a broker’s platform is very important to consider when choosing your broker.

However there are quite a few differences between practice accounts and the real thing.
For example it’s never possible to actually emulate the emotions of risking your real
money on the forex market. In order to get the most out of a practice account it is
important to treat your virtual money just like it’s the real thing.

Practicing the Trade

Once you’ve signed up for a practice account from one of the many online forex brokers
and you want to start practicing trades then you should find this a very beneficial way to
ensure that you learn about the forex market.

Page 37
 Investing In Forex

You can trade in two different ways, you can either trade at the current price using your
broker’s online platform, or you can use orders.

Page 38
 Investing In Forex

Basic Steps

Although every online forex broker has a different system they all follow similar designs
and are actually fairly easy to use. To use many of the online platforms follow the
following steps.

1. You first need to specify how much of a certain currency you want to buy or sell

2. Now click on the button to buy or sell the currency and this will execute the
trade.
The trading platform should then confirm whether or not the trade was a
success. If the trade did go through then you will see that your status is updated
immediately to show the results of this new trade.

If the trade did not go through because the trading price changed before the
broker received your request then you will receive another response showing
this. If this happens then you will have to start again from step one.

It’s nothing to worry about if the trade does fail because of a change in prices,
it’s very normal for prices to change very quickly for some markets and in some
conditions. This can be slightly worse on the internet due to latency which will
delay the time that your broker finds out about your proposed trade by a split
second.

If your trade fails because it was larger than your margin then you will either
need to negotiate and increase your margin, or reduce the size of your trade.
You have to be very accurate with what you are doing, nobody knows if you
meant to click sell instead of buy.

Page 39
 Investing In Forex

Orders

Another important tool on the forex market are orders. An order is like a trade which is
waiting to happen.

You must take orders very seriously, it’s important to make sure that you enter them
accurately. If the price action triggers the execution of one of your orders then you are
entered into the market, you are not given an option.

Many currency traders are using orders to cash in on market movements when they are
not at their computers. The forex market is open 24 hours a day five days a week, so
there are lots of times when you will be away from your computer.

Many traders are amateurs and still do a full time day job; in this case you will find
orders are much more valuable. Orders are how you can act in the market without
having to actually e present at your computer and making decisions. You can make
decisions beforehand and then have them acted out should changes allow it.

Of course orders are also popular with experienced currency traders, they are often
used to:

- Protect the profits and to minimize losses

- Create a useful trading strategy for both entry and exit

- Profit from short term fluctuations in price

- Reduce the risk in volatile and uncertain markets

- Trade when nobody is available

Trading with orders is extremely important especially for volatile markets and those that
are notoriously difficult for anyone to predict. Orders will help you to profit from short
term movements in the markets and will also make it possible to limit your exposure to
movements.

Page 40
 Investing In Forex

Of course the use of orders certainly does not guarantee that you will trade risk free,
however it does offer additional protection that you will not e able to find elsewhere.

Orders should be part of any well thought out forex trading strategy, if you don’t use
orders then you probably haven’t thought very much about your strategy and that could
cause major problems.

Types of Order

There are a number of different types of order which can be purchased on the forex
market. Of course it’s up to your broker as to which orders they actually offer, not all
orders are available from online brokers. If you want to have a particular type of order
then you will need to make sure that your broker offers it.

Add this to your list of questions to ask prospective brokers so that you can ensure that
you get the type of service that you are looking for.

Take Profit Order

Take profit orders have a very attractive sounding name; they can be used to lock in
profits when you are in an open position. For example if you are in a long GBP/USD trade
at 1.8840 then a take profit order will instruct the currency to be sold should the price
rise to over a certain threshold. These take profit orders are designed to sell or buy
currency when it falls (or rises) to a certain amount and so are very useful. This means
that you don’t have to spend your whole life at your computer checking whether or not
it’s a good time to sell or buy

These orders can even be completed when you’re asleep so that you don’t have to
worry about missing any great opportunities.

Page 41
 Investing In Forex

Limit Orders

Limit orders are similar to take profit orders. These are set to trigger a trade when the
price is at a more favorable price than the current price. If you create a limit order to buy
then the threshold price will be under the current market price. If the limit order is to
sell then it will be set at a higher price than the current market price.

Stop Loss Orders

These are the orders that people don’t want to know about, they sound very depressing.
A stop loss order is actually something that’s critical to ensuring that you don’t end up
losing too much money. Stop loss orders will close out any open position that is costing
you money.

In other words stop loss orders can be used to protect your money and prevent you
suffering from any substantial losses. Stop loss orders will limit any losses as a result of
unfavorable market changes.

Stop loss orders may not be as exciting as take profit orders, but they are equally
important to ensuring your survival.

Trailing Stop Loss Orders

Every trader has different strategies, one popular strategy is to get rid of losing positions
as quickly as possible and allow the winning positions to continue.

Trailing stop loss orders are designed just with that intention in mind. The idea is that
the order will allow winning trades to continue to run until you wait for a reversal in
your fortunes. When the market does reverse then the order will automatically take you
out without you having to decide when to exit.

Trailing stop loss orders are stop loss orders that are set to a certain number of pips
difference to the rate that you entered at. Trailing stop orders will adjust the order rate
as the price of the market moves; however it will only work in the direction of your
trade.

Page 42
 Investing In Forex

One cancels the Other Orders (OCO)

One Cancels the Other orders, or OCO’s are where a take profit order and stop loss
order are combined and work together. These are the ultimate way to insure your
position in the forex market and make absolutely sure that you make as much money as
possible.

OCO orders are the best insurance policy for anyone who is in an open position. When
one of the orders is triggered the other order is automatically cancelled.

Page 43
 Investing In Forex

Economic Fundamentals

We’ve already taken a look at fundamental analysis and how it can be beneficial and
profitable for anyone investing in the forex market. We will not go into the exact
fundamentals that you can study to try and guess which way the forex market will move.

The economic Fundamentals include:

- Trade

- Production

- Growth

Fundamentals can also include various other types of data including trade data and GDP,
however when using these to make comparisons it can be very difficult to find common
ground to make your comparisons.

Inter-Market Fundamentals

Inter-market fundamentals are of special interest to investors, these include:

- Equity Trends

- Commodity Prices

- Interest Rates

- Volatility

Although these inter-market fundamentals may not seem anything like the traditional
fundamental factors they are a very useful way to find out certain facts about a country
and try to work out how healthy their currency is.

Benefits of Inter-Market Fundamentals

The biggest benefit of inter-market fundamentals is that they are very accurate, they are
all exchange traded. Take interest rates as an example, they are available instantly. Most

Page 44
 Investing In Forex

Inter-Market fundamentals are available real-time which makes it much more valuable
than many of the other types of fundamental.

There are two important things that you need to know about inter-market fundamentals
before you can consider using them:

1. The Yields are available from a wide range of investments including equities,
deposits and bonds

2. If one country has higher yields then this should strengthen the currency of that
country.

Forex transactions always take place in pairs, and this means that any movement will be
relative to one another. The fundamentals will only be useful if they are compared to
the same fundamentals from another country.

Consider this example, if the yields in AUD are higher and have always been traditionally
higher than in USD for the last couple of years. Then this will create a fundamental
differential. This should cause the AUD to be pushed up relative to the USD.

Where can I get this information?

There are plenty of places where you can get fundamental data and work out which
currencies are worthy of your investment. Your forex broker should have a solution to
help you do this. There are also a number of websites that cater specifically for people
looking to find out about fundamental information to help with their analysis.

Page 45
 Investing In Forex

Economic Indicators

When you’re first starting out on the forex market then you might not know an awful lot
about it. In order to maximize your chance of making a profit it will be beneficial to
spend time learning about a few of the economic indicators which can be used to assist
you.

What are Economic Indicators?

Economic indicators are simply small bits of economic and financial information which is
published by governments and private sector industries on a regular basis.

These are statistics which are a great help for market observers to try and study en
economy. Almost anyone investing in any financial market will value these economic
indicators and make the most out of them.

This does of course cause a problem, because so many people follow these economic
indicators there will be lots of people waiting to act on the exact same information. This
means that economic indicators have the power to quickly change prices and volume.

The best news however is that you don’t need any form of economics degree to
understand these economic indicators. Just remember a few simple guidelines and you
will find it possible to use this information to make valuable decisions.

Economic Calendars

You should do your homework and make absolutely sure you know when a new
economic indicator will be released. You will be able to find a variety of these calendars
on the internet, including at the Federal Reserve’s website.

It’s important to follow these calendars as they will help you to consider their impact on
the forex market and make it possible to trade around them.

If the USD has been falling in value over the last few weeks then many traders will short
USD positions to benefit from this. However if you know that at the end of next week
the US government is going to release employment statistics then this may change the
value of the currency. If the employment report is promising then it could change what

Page 46
 Investing In Forex

happens next.

The Importance of this data

If you’re a forex trader then you should be able to decide which information is
important. Although you don’t need to understand every single thing about the release
it is important to understand important information.

If there are any important reports being released then try your hardest to get your head
around them and decide what they will mean for the economy.

You should be able to identify the indicators which can be used to measure the growth
of a country’s economy, these are normally GDP. And also measures of inflation
including CPI and employment reports.

There are lots of different types of economic indicators, but not all of them can change
market prices or affect economies. The indicators which can change the economy can
change over time.

For a country which experiences problematic economic growth but does not suffer from
inflation then traders may not think that inflation information is so important. Instead
they may switch to using employment information or Gross Domestic Product
information. If the country’s economy changes then the importance of these economic
indicators can also change.

Look out for the unexpected

Don’t just pay attention to the market information, also work out whether or not this
information was expected. If the information is very different to what people expected
then the market may become volatile which could create lucrative opportunities.

Although it is important to keep an eye out for anything unexpected you do need to be
patient. Don’t risk making decisions too quickly, if the report is different to the
expectations then make sure you think carefully.

Important Indicators

Page 47
 Investing In Forex

There are a number of important economic indicators which can be used to assess the
health of a countries currency.

GDP

GDP or Gross Domestic Product is simply the sum of all of the goods and services which
are produced inside a country. This includes production from domestic and foreign
countries. GDP is useful as it helps traders to understand the pace that the economy is
expanding or shrinking. It’s a very broad indicator which can be used to look at the
growth and economic output of a certain country.

Production

Some traders find that a measure of changes in production of factories, utilities and
mines can be a useful measure of capacity utilization. In other words this measure will
help traders to find out how well the resources in a country are being used.

Major economies are still made up of around one quarter manufacturing; this is why it’s
so important to make sure you study the health of the factories and capacity utilization.

PMI

PMI or Purchasing Managers Index is released by the Institute for Supply Management
(Previously known as the National Association of Purchasing Managers). This is a
monthly composite of manufacturing conditions in nations.

This index includes information on backlogs, inventory, prices, export, import,

employment, and new orders. It’s also divided into non-manufacturing and
manufacturing sections.

Page 48
 Investing In Forex

PPI

PPI or Producer Price Index measures the average differences in selling prices that are
received by domestic producers in industries.

PPI’s are useful for economic analysis in terms of finished goods, crude goods and
immediate products.

CPI

CPI or Consumer Price Index is a measure of the average price paid by customers for a
certain basket of goods and services.

CPI is a very well known piece of data which is useful at looking whether the country is
growing or expanding.

Durable Goods

Durable Goods orders are a measure of the new orders which are placed with domestic
manufacturers for future and immediate delivery of goods.

Durable goods are defined as any product which will last over three years; these are the
opposite of consumable items

Some individuals and companies put off purchasing durable goods when the economic
climate is tough. This can be a useful measure of the health of the economy, and is a
great way to measure customer demand.

ECI

ECI or Employment Cost Index looks at a measure of the number of jobs at large
companies. This looks at over 500 different industries throughout America.

Page 49
 Investing In Forex

Retail Sales

Retail sales are a measure of the total receipts from retail stores. These are calculated by
taking samples which represent all of the sizes and types of businesses throughout the
country. This is a useful indication of consumer spending patterns and is normally
adjusted for holidays and seasonal variations.

Retail sales will include both nondurable and durable products sold, and also include
services and taxes. It does not include the sales taxes which are collected from the
consumer.

Housing Starts

This is a very useful statistic and is a measure of the number of residential houses which
started to be built during each month.

Starting construction on a home is where the foundations are started to be excavated. It

only includes residential houses and is not concerned with commercial buildings.

This is a useful statistic because housing is one of the first things to react to changes in
interest rates. Significant changes in interest rates can change the number of houses
being built.

This is quoted as a percentage change compared to a previous month. The new report is
available during the middle of the next month.

Page 50
 Investing In Forex

All Currencies are Unique

When you research forex market and start to find out how to invest on it then you will
find out lots of information about technical analysis. While the technical analysis is an
important part of trading on the forex market there are plenty of other things to
consider.

Many people spend a very long time searching for technical analysis tools and then
apply them equally to all of the various currency trades.

This is where many first time forex traders make a mistake and look for a single magic
trick to make the most out of everything. Once you have traded on the forex market for
some time then you will start to notice that all of the different currency pairs are in fact
different and behave in very different ways. In fact many people say that currency pairs
each have their very own personalities.

Because of these different personalities it is important to treat each currency pair

differently. The USD/JPY and USD/GBP are actually different and should be treated as
such.

You shouldn’t look for some form of magic solution to help you with the currency
trading markets because there’s no such thing. Instead you need to customize your
approach depending on the currency that you are dealing with. Different technical
strategies must be applied to each individual currency pair.

The most common currency traded pair is the EUR/USD (Euro/US Dollar) this makes up
around 28% of daily trades on the forex market. EUR/USD is even more popular as a
result of cross market trades including Euro/GBP and EUR/JPY. As we’ve already noticed
even when using cross pairs the bases will still be calculated by using the USD rates.

When trading in some currencies it’s beneficial to use short term indicators, however
with otters these can expose yourself to more risk. If you are interested in EUR/USD
then you may find that MACD (Moving average convergence divergence) is a useful tool.

The next popular currency traded pair is USD/JPY, this accounts for around 17% of the
daily trades on the forex market. USD/JPY is often seen as a very sensitive currency pair.
Even though China is often seen as the Asian powerhouse nowadays, the USD/JPY
currency pair is still very popular.

Page 51
 Investing In Forex

Review of Technical Analysis

We’ve spent quite a lot of this book looking at technical analysis; we’ll spend more time
looking at some of the useful tools which can make forex trading so much easier.

MACD Indicator

MACD stands for Moving Average Convergence Divergence and is a very useful technical
analysis indicator. It’s almost certainly one of the most popular indicators used by
anyone trading on the forex market.

Although it’s so popular it’s also gets misunderstood fairly often. Many novices refer to
MACD as an average of an average. While that is partly true there’s actually much more
to it than that.

Before we can start to look at exactly what the MACD indicator is and what it can be
used for it is first important to try to understand it mathematically.

You need to first have at least a basic understanding of histograms, reference lines and
signal lines. There are many different financial charting programs out there, all of which
work in slightly different ways. Some use the equations for signal lines and reference
lines in the opposite way to others.

The equations for these lines are as follows:

Signal Line = 12 Day Exponential Moving Average (EMA) – 26 Day EMA

Reference Line = 9 Period EMA of Signal Line

Histogram = Signal Line – Reference Line

Take a look at the chart below to get a better understanding of the buy and sell signals
that you need to be aware of.

Page 52
 Investing In Forex

Sell Signal

Buy Signal

As you can see from the chart above the buy signal is generated when the signal line is
above the reference line.

A sell signal is when the signal line crosses down through the reference line. The
histogram shows the strength of the trend.

It’s actually pretty much common sense if you think about it, as all traders will want to
purchase low and sell high to maximize their profits.

The MACD was designed and created by Gerald Appel; he claims that it works much
better in rising market conditions compared to falling markets. It’s much more reliable if
buy signal crossovers occur below the histogram, and sell signals above the histogram.
This is a widely accepted fact by anyone that uses the MACD.

The histogram also has many other uses; it can be used as a momentum oscillator. The
signal line shows the difference between the 12 and 26 day EMA. This is worked out by
taking one away from the other.

This is useful because the difference in these averages should show the direction of
change of prices. The signal line makes it much easier to identify these changes by
amplifying them and highlighting them.

Page 53
 Investing In Forex

Key:

Red – 12 Day EMA

Blue – 26 Day EMA

Orange – MACD Signal line

The MACD signal line amplifies the difference which makes it much easier to spot the
signals and also much easier to act upon them.

The 9 Day EMA or the reference line lags slightly behind the signal line. This lagging
effect is beneficial. Whenever there is any change in direction this lagging effect causes
crossovers.

The MACD histogram was created by Dr Alexander Elder, and amplifies the difference
between the signal line and the reference line. The histogram will actually measure the
rate of change of prices.

Most of the popular charting software allows you to put certain indicators over the top
of the chart. Lines can be added to create zones of oversold and

Page 54
 Investing In Forex

overbought.

It’s also possible to use combined charts, as seen below. These combine MACD with RSI
(which we will look at in more detail in a second.

Page 55
 Investing In Forex

RSI

RSI stands for Relative Strength Indicator. This is a lagging momentum indicator which
can be used to compare the strength of recent gains and recent losses.

The main purpose of RSI is to determine whether a security (in this case a currency) is
oversold or overbought.

If the RSI is below 30 then this will normally mean that it’s oversold. However if the RSI is
above 70 then this can show that the currency is overbought.

The Stochastic Oscillator is used to measure the links between the closing prices and the
ranges. The Stochastic RSI on the other hand tracks the values of RSI over time. The
Stochastic RSI can be used to track changes in RSI and is an indicator of an indicator.

((Current RSI – Lowest RSI) / (Highest RSI – Lowest RSI)) x 100

The Stochastic RSI then gives a result in percent.

A chart showing both RSI and Stochastic RSI can be seen below.

Page 56
 Investing In Forex

Trends

Trends can also be used as another way to determine the direction of price changes.
Peaks and troughs can identify a trend. Falling peaks are a downtrend, and rising peaks
are an uptrend. The strength is shown by the slope of the line.

In order to make sure that trends are correct moving averages are used. These are a very
useful way to help you decide a trading strategy.

Page 57
 Investing In Forex

Review of Basic Chart Patterns

By now hopefully you have lots of different tools that you can use to ensure that your
forex trades are as profitable as possible.

Of course the foreign exchange market is something that you will always be learning
about, no matter how experienced you become. One thing that can help you to make
decisions is Chart Patterns.

It’s useful to understand about chart patterns as they will help you to spot potential
opportunities and problems before they actually happen. If you can successfully predict
the future then you will be able to make much higher profits.

There are dozens of different types of chart patterns, we will cover some of the most
common examples and also show you exactly what they mean.

The goal of studying chart patterns is to try and spot any potential big movements
before they actually happen. If you can spot them before anyone else then you stand to
make a lot of money. Chart formations make it much easier to identify what the market
is going to do next.

Symmetrical Triangles
This is a type of chart where the price’s high and prices’ low slopes converge together so
that it looks like a triangle. When this occurs then the market is making higher lows and
lower highs. This will mean that buyers and sellers are not pushing the prices enough in
order to make a clearly definable trend. In other words buyers and sellers are pushing
with equal force, if there was ever a fight then both would draw.

This is officially known as consolidation. As the two lines get closer together there will be
a breakout. Although it’s not known who will win it’s useful to know.

Page 58
 Investing In Forex

Ascending Triangle
Ascending triangles are formed when there is a slope of higher lows, but a resistance to
pass a certain level. This means that there is a form of barrier which buyers are not able
to pass through for some reason. Although this is the case, they are able to slowly push
the prices up which can be seen by higher lows.

The chart above indicates that buyers are starting to improve their strength because
they are making higher lows. However they are not able to pass past a certain point.
They keep on piling on the pressure which will mean eventually a breakout will occur. Of
course whether buyers can manage it, or whether the resistance is too strong remains to
be seen.

Normally the buyers will manage to win and break out and overcome the resistance.
However that’s not always going to happen. There are plenty of occasions when the
opposite happens. Sometimes the resistance is just too strong.

Descending Triangles

Page 59
 Investing In Forex

Descending triangles are actually the opposite of ascending triangles. This isn’t actually
that surprising when you stop and consider the name!

Descending triangles is where prices are gradually falling and making lower highs,
however it is not able to fall past a certain level.

If you look at the chart shown above then you will notice that the price is gradually
falling, and sellers are starting to beat buyers.

Normally the price will break the restriction if it can overcome the resistance and
continue to fall.

Page 60
 Investing In Forex

Glossary

Base Currency = the currency that you are comparing against, the base currency will
equal one unit. If the counter currency is 1.5 then 1 base currency would equal 1.5
counter currency.

Counter Currency (or Quote Currency) = The other currency in the equation

EUR = Euro – The currency of the European union, currently adopted by 16 of the
member states

Forex = Foreign Exchange Market (or FX) – The market where foreign currencies are
traded

GBP = Great British Pounds – The currency of the United Kingdom

GDP = Gross Domestic Product

ROI = Return on investment – The return or profit on your initial investment. This is
normally quoted as a percentage of the amount that you initially invested and can be
used to compare the rate of return against other risk free forms of investment

Spot Trading = Currency is traded for immediate delivery

USD = United States Dollars – The currency of the United States of America

RSI = Relative Strength Index

MACD = Moving Average Convergence Divergence

OCO = One Cancels the Other Orders

Page 61
 Investing In Forex

INVESTING IN FOREX MANUAL

Page 62