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Description

Forex For Beginners What you need to know to get started

And everything in between

com Forex For Beginners © 2013 Anna Coulling

No part of this book may be reproduced or transmitted in any form,

or any information storage and retrieval system,

without prior permission of the Author

Your support of Author’s rights is appreciated

Disclaimer Futures,

and spot currency trading have large potential rewards,

You must be aware of the risks and be willing to accept them in order to trade in the futures,

Never trade with money you can’t afford to lose

This publication is neither a solicitation nor an offer to Buy/Sell futures,

The information is for educational purposes only

No representation is being made that any account will or is likely to achieve profits or losses similar to those discussed in this publication

Past performance of indicators or methodology are not necessarily indicative of future results

The advice and strategies contained in this publication may not be suitable for your situation

You should consult with a professional,

The author shall not be liable for any loss of profit,

or any other commercial damages including,

Who This Book Is For

? If you are new to the world of forex (foreign exchange) trading,

It has been written with one objective in mind

To explain in a simple,

everything you need to understand,

The book assumes you have little or no knowledge of how the forex market works,

or the principles and methodology that you need to follow in order to make money consistently

And consistency is the key here

Because if you can be consistent as a trader,

Forex For Beginners,

Everything is explained in simple and clear terms,

with hundreds of examples and charts to help you learn quickly

Not only will you discover how to trade,

but also how to get going quickly with your new found knowledge,

using the most popular FREE trading platform in the world,

In short,

from complete novice to placing your first trade

What This Book Covers

? Forex For Beginners is a straightforward guide to getting started in the extraordinary world of forex trading

The book describes how and why we have a forex market,

as well as the mechanics of placing trades

Different analytical approaches are also included,

along with understanding the importance of volume and price

From there,

the book moves on to explain the concepts of margin and leverage,

position sizing and money management

The book then pulls it all together in order to help you get started,

and in the final section describes key elements of the MT4 platform,

Throughout,

If you want a book that takes you from novice,

Table of Contents Foreward An introduction to the book,

and what I hope you will gain from reading it

Forex For Beginners is just that

I have made no assumptions about your knowledge of trading,

I remember what it was like when I first started trading

People make assumptions when teaching or writing,

and from there comes confusion

This is not to say this is a basic book

There are some complex ideas and principles included,

but I hope explained in a simple,

It defines what I believe is the correct way to approach this market

Some may disagree,

but my views are based on many years of experience

It is this experience that I would like you to benefit from as you begin your own successful trading journey

Chapter One : An Introduction To The Forex Market If you are new to the world of trading currencies,

then the forex market can seem a daunting place

In this chapter,

I explain how the market works,

who are the market participants,

and how you can join in and profit by trading currencies

This lays the foundations and explains some basic concepts

Chapter Two : The Principle Currencies Explained Here we start to dig down into the most popular currencies,

as I explain their personalties,

and some of the factors which drive these major currencies

These are the currencies that will form the basis of your forex trading career

Chapter Three : The Currency Quote Currency quotes can be extremely confusing for new traders,

even more so since the introduction of the fifth decimal place

In this chapter I explain every aspect of currency quotes,

the bid and ask to the reasons yen currency pairs are quoted differently to all the others

In addition,

I also explain the significance of the spread in relation to your approach to the market

Chapter Four : Forces That Drive The Foreign Exchange Markets Here I introduce the principle forces that drive this market

Some of these are

! The forex market is one of the most manipulated,

and it pays to know who is doing what,

Chapter Five : Trading Approaches Most forex traders only ever consider two approaches to the market,

I use three,

and here I explain how and why

Relational analysis completes the picture and gives you a three dimensional view of the market which few traders ever consider

Chapter Six : The Power Of Volume Price Analysis (VPA) This approach to trading has formed the cornerstone of my own trading career,

I have used it in every market I have traded,

and I hope that in introducing you to the concepts here,

It is powerful,

When used in conjunction with the MT4 platform,

it provides forex traders with a unique approach,

and a technique to truly read the market and price action,

And in case you want to learn more,

I have written a complete book on the subject,

Chapter Seven : The Mechanics Of Trading This may sound like a chapter to skip perhaps

! I could have called this chapter The Mathematics Of Trading

Here I explain all the underlying maths of the trading account in terms of leverage and margin,

and more importantly position sizing and risk management

You may need to read this chapter two or three times

I make no apology for this

It is the one area that most forex traders fail to understand

Remember,

Understand the detail,

and the rest will fall into place

Chapter Eight : Risk And Money Management This is the easy part of risk

The financial part

Here I explain how to quantify and manage the risk on every trade

If you could distill the essence of successful forex traders,

much of that success could be traced back here

I explain in detail the rules you need to follow in order to manage the financial risk correctly

Chapter Nine : Your Trading Plan If having a trading plan with rules was all you needed to succeed,

then the world would be full of successful traders

It isn’t

Many books will tell you that

your trading plan should have entry and exit rules,

set up rules and all sorts of other ‘mechanical rules’ to follow

Not here I’m afraid

There are one or two rules that you must have,

but these are for your money management

Everything else is discretionary

Chapter Ten : The Psychology Of Trading The markets are driven by fear and greed,

and in many ways trading is in fact a mind game

It is not about making or losing money,

Manage your mind better than others around you,

In this chapter I explain how the mind works in the way it does,

and from there I introduce some simple concepts which will help you to manage your emotions as you begin trading

Chapter Eleven : Choosing Your Broker Few forex traders ever understand what the broker does,

and then complain when things go wrong

In this chapter I explain the various category of broker,

the good the bad and the ugly,

and the questions you should ask,

It is a minefield,

and with even large brokers going bust,

Chapter Twelve : Choosing Your Currency Pairs In an earlier chapter,

we looked at the individual currencies and their characteristics

Here I explain the currency pairs,

and the importance of the cross currency pairs as alternatives to the once traditional major currency pairs

I also introduce the concept of the currency matrix,

which will help you to identify the true strength or weakness of a currency

Chapter Thirteen : Let’s Get Started A long chapter

This is where we put it all together with some real trades,

which I have written up in real time and included in this chapter

It’s all here as I walk you through every step from the initial analysis,

This will give you a real sense of the complete process from start to finish,

! In this chapter you will also discover the power of trading using multiple charts in multiple timeframes,

which can also be applied to a currency strength indicator

Chapter Fourteen : Getting Started With The MT4 Trading Platform

Now that you are ready to go,

and what better choice is there for a novice than the MT4 MetaTrader platform

This is the world’s number one platform for forex traders,

It could be summed up in one word

! It is also free to use and widely available from most forex brokers

Moreover,

if you decide to change brokers,

you have no new platform to learn

Here I explain the principle features,

personalize your trading platform and charts,

Free Trading Resources Here you will find a list of some of the best free sites for forex traders,

as well as acknowledgements to those people and companies who have kindly allowed me to use images or content from their site

Glossary A list of some of the more common terms and trader slang used in the forex trading world

Testimonials Dear Anna,

I want to thank you so much for providing retail traders with a wonderfully written,

! I just finished your “A Complete Guide to Volume Price Analysis” and found it thoroughly enjoyable,

I had been introduced to some of these concepts before ( “volume spread analysis”) but have to tell you that your style and approach is a lot easier to comprehend,

and a lot easier to actually put into practice

JK Dear Ms Coulling,

I found your book on Amazon by chance,

after having typed in Trading using Volume Price Analysis

Got the book this week,

and I am already half way through it

Your exposition of the volume behavior in the market and how different price bars relate to volume is fantastic

It truly is an eye opener

I have been interested in the Wyckoff approach for a while,

but have not found something as clear as your book

Thanks for writing such a great book

SG Hi Anna,

Made up my mind

I want to learn “forex trading” – after many months searching online you’re the only authentic person I come across

Ali Hello Anna,

Just found your site and am starting to dig in – seems like an endless source of knowledge – thank you for your effort to put it up

I am new to forex – still study the bits

My tendency is for buff trading-price action

Question is: how do you identify the psychology of the market

! I am very much impressed with your articles and your success story in the FX world

I am a beginner

You may also call me a newbie

as I only know the operation of the MT4

- platform

I will try all my best to learn,

I really enjoy it and wish the best in your trading

But I still continue to ask to be shown how to get the USD index install in my system

And are you still trading the forex fixed odd

Which broker do you use for that

Thanks for your time

Kevin Hi Anna,

Love your Covered believer

Regards Gordon

Hi Anna,

Your site(s) are absolutely brilliant

! Really informative and well written

Kind regards

Rich Hello Anna I am enjoying your many websites and wish that I had found you a long time ago

I appreciate your writing style and content

Please include me on the list for your book

How often do you publish your newsletter

? Best wishes James Hi Anna you are a daisy amongst weeds

! thank you for your reply – I think I will stick to initial path for a while yet since travelled so far down this route

your site is excellent – I wish I had found you sooner

! thank you for sharing such valuable information – it really is priceless,

comprehensive – I too am interested in your book

Ann Hi Anna Very useful thoughts as usual,

thank you – I presume the hammer candle is a “reversal” indicator – i

you could have the reverse situation after a period of increasing prices

? Regards Alex How I use the CFTC cot data

I suggest you check out this video

She’s worth bookmarking in my opinion

] One of my favourite analysts whom I frequently check for her across the Pond perspective is Anna Coulling and her thoughts today are worth reading: Gold Forming Strong Pennant on Daily Chart

Hi Anna,

Great to meet you at the traders expo

I will keep an eye on your web site

Hi Anna,

I have followed your website and Facebook page for a while now and I find your work really helpful – thanks

! I see gold has now broken through the triple top resistance of $1,425 – so I’ve bought GLD LEAPS and Gold June 2011 futures today – but now I see your comment about buying on strength – have I jumped the gun and bought too early do you think

Foreward [At age 106] People are always worried about the economy and the world,

especially since the financial crisis of 2008 and Europe’s sovereign debt crisis in 2011

I feel that people should learn to be optimistic because life goes on,

and sometimes favorable surprises come out of the blue,

whether due to new policies or scientific breakthroughs Irving Kahn We all dream of financial freedom

Of giving up our job

Perhaps it is a job we hate,

and yet one we have to do in order to support our family

But what if we could provide a better life for our family,

? More time together and a better quality of life

This is the dream for many people,

and there is absolutely nothing wrong with this dream

It is a laudable ambition,

and one that I wholeheartedly endorse

There are many ways to fulfill this dream,

and achieving it through trading in the foreign exchange markets is just one

However,

so have the number of opportunistic marketers,

using every marketing trick to part ever hopeful novice traders from their money

They will stop at nothing

I’m sure you have come across them already

Wild promises of untold riches,

and a lavish lifestyle can all be yours,

for just a few minutes work a week

All you have to do is grab the opportunity,

and all your dreams will be fulfilled

Unfortunately this has led to the foreign exchange market having a very tarnished reputation,

It is getting better,

as the market gradually starts to mature,

and these schemes and wild claims are seen as nothing more than scams

Which in short is what they are

They are there for one reason and one reason only

To make money for the marketer,

The majority of these people do not trade,

They have little or no knowledge of the market,

have never written a word of market analysis,

and are all peddling worthless rubbish which will not only leave you poorer,

but with nothing of value whatsoever

This in itself is immensely sad,

because in life it is hope that keeps us going

Once hope is gone,

Depressing isn’t it

these practices extend well beyond the internet marketing scams,

where sharp practice and simple price manipulation are commonplace

through a combination of trader education,

and a tightening of the rules by the various regulatory authorities

? First I hope that in some ways this book,

If your hopes and dreams have been dented

Help is at hand because this book is the antithesis of this overblown marketing hype

It is as far removed as it is possible to be from this view

Second,

it is priced at an extremely low price,

To put in place those first stepping stones on your road to becoming a forex trader

Finally,

if you have had your hopes dashed I would like this book to help rebuild that hope,

However,

let me make one thing clear from the start,

The foreign exchange market is complex,

This book should be one of many that you read,

as your knowledge builds and grows

Education and learning never stops

Unfortunately,

the forex market is promoted as one that is ‘easy’

Easy to get started,

and finally easy to make money

The first is certainly true

You can get started as a trader,

All you need is a credit card,

and one of the many online brokers will then be happy to open an account,

The market is open twenty four hours a day,

so wherever you are in the world you will always be able to access this market,

It is always there,

The second is also true

It is very easy to trade

After all,

the only decision you have to make is very simple

Is the price going to go up or down

In other words,

it is like the simple pack of cards,

and all you are being asked to do,

is to guess whether the next card is higher or lower than the last

The third and last statement is most certainly not true

It is not easy to make money

In fact,

and anyone who tells you otherwise can be assumed to be one of the marketers I referred to earlier

However,

provided you have the right education and are prepared to study,

Forex For Beginners is your first step

The purpose of this book is to teach you,

are the essential building blocks to longer term trading success in the forex markets

After all,

if you were learning any other skill,

whether as a hobby or as a profession,

you would start by understanding the basics,

and then build on that knowledge,

using more sophisticated techniques

This is the approach here

This is a book designed primarily for the novice

Someone who knows very little,

but is keen to learn from someone who has traded for many years and is happy to pass on that experience

This book covers all the basics and much more,

in what I hope is a simple and clear way

As you will see once you start to read,

I have firm beliefs in what you need to know and understand in order to become a successful forex trader

I also believe anyone can succeed,

provided they take the right approach to the market

This book will provide you with the solid foundations,

as your knowledge and experience grows

I have written it in what I hope is a logical way,

with each chapter building on the last until at the end of the book we put it all together

It is a journey,

where everything is explained and puts into context the decisions and processes that you will need to understand,

before you press that all important buy or sell button

If you are familiar with any of my other books,

you will already know that volume price analysis lies at the core of my trading methodology

this approach just makes sense

It is what I fervently believe will help you to succeed as a forex trader,

and to fulfill your hopes of a more secure financial future for you and your family

It is the one I have used for many years,

And you will discover why as we get started

It is also perfectly suited to the MT4 trading platform

which also has the added bonus of being free

many of you may be wondering who I am,

and why you should believe anything in this book

Here is a little about me,

and details of some places where you can check out my references

Who Am I

? I began my own trading career back in the early 1990’s,

before the days of the internet,

and started trading index futures using price and volume

In those days there were no online brokers,

and all the data came in via a satellite feed

Orders were placed by phone with the broker,

and then executed and filled on

It was very stressful,

not least because of the time delay in getting filled,

or when the data feed broke down,

I have traded virtually every market and every instrument,

and indeed came to the forex market last of all

This trading experience has given me the grounding I needed to succeed,

which is what I want to share with you in this book

My trading philosophy is,

very simple and akin to the ubiquitous KISS,

except my version is Keeping it Super Simple

! I’ve also found over the years,

that the best results come from having an approach that is uncomplicated,

not least because the markets are complex enough

Trading may not be easy,

My trading techniques are based on chart analysis,

backed by my view of the broader fundamentals and related market sentiment,

which provide the framework against which the markets move each and every day

It is I who make the decision to trade

As I say in my webinars and live trading rooms,

there are only two risks in trading

The first is the financial risk,

and the second is the risk of the trade itself

Nothing else

The first is easy to quantify and manage

This is pure and simple money management,

which I cover in detail for you

The second,

is much more difficult to assess

This is what we need to quantify every time we open a new position or consider taking a position in the market

What is the risk on the trade

? What is the probability of success

? Am I taking on too much risk and how do I measure that risk

this is what I want to share with you in this book

I want to arm you with the knowledge,

skills and tools so that you too can become a confident,

consistent and profitable trader

Like me,

you too will be able to make your own discretionary trading decisions based on your analysis of the price and market activity,

coupled with the underlying fundamental and relational picture

This is the approach I also use in number of leading financial internet expert contributor to FXStreet,

one you will find my weekly forecasts as

my market analysis which is taken by a sites and magazines

At present I am an of the world’s leading forex portals

Here well as market analysis on gold,

com/technical/currencies-forecast/ I also host the London MeetUp group on behalf of FXstreet,

so if you are in London at any time,

I would be delighted to meet you in person

The group meets monthly and you can find further details here www

com/London-Forex-Group-MeetUp-FXstreet/ I write daily market analysis and commentary on my personal site,

Here you will also see that,

I have been invited to speak by the CME and Working Money and,

I contribute articles to a variety of publications including Your Trading Edge

I have published over 50 web sites,

all of which have free content on a variety of trading and investing topics

I have a dedicated forex Facebook page which you can find at www

com/learnforextrading and a strong following on Twitter at www

I also provide regular market analysis and content for Investing

Bullbearings,

SeekingAlpha and Forexspace

Alternatively,

and begin our forex trading journey together

Chapter One An Introduction To The Forex Market Remember,

it [the market] is designed to fool most of the people most of the time Jesse Livermore (1877-1940) Of all the financial markets,

the forex market is perhaps the least well understood,

and yet it impacts us all every single day of our lives,

in a myriad of different ways

Whatever we buy or sell,

no matter how small or incidental,

will in some way have been influenced by what we call the forex market,

or more accurately foreign exchange

Perhaps the simplest and most visual example is when we travel abroad

The first thing we do,

either at the airport or before,

is to change some of our own currency to that of the country where we are traveling

If we are in Europe and traveling to another European country,

then this is less of a problem since the introduction of the so called ‘single currency’,

A German traveling to Italy has no such worries,

since both countries use the same currency

But once he or she travels to the UK or the USA for example,

then euros need to be exchanged for US dollars

This is the principle of the foreign exchange markets,

and the small electronic boards that you see at international airports,

are simply visual reminders that currency exchange rates affect us all

Whether we are traveling,

buying products from overseas,

using base commodities such as oil and petrol,

or consuming imported foodstuffs,

foreign exchange rates between countries around the world

Every country in the world has its own currency

It is the quoted exchange rate of one country’s currency against another,

which is the simple principle on which the forex market is built

I make no apology by starting with the basics,

as these are the building blocks of your knowledge,

so let me begin by answering the five most asked questions in forex trading which are as follows: What is forex trading

Why do we have a forex market

? Who are the the main participants

What Is Forex Trading

? Forex trading is short for foreign exchange trading and,

represents the market in which one country’s currency is quoted against that of another

It therefore provides the basis for anyone in the world,

companies and private individuals to agree a rate of exchange between one currency and another

Without these market rates being quoted,

parties wanting to exchange their currency,

would be forced to agree a rate for each transaction on an individual basis

In other words,

there would be no agreed standard by which to set these rates

An interesting feature of the forex market is that it has no centralized exchange,

As a result all trading is conducted over the counter (OTC),

which simply means that it is not conducted in a regulated environment,

and indeed is often referred to as ‘off exchange’ trading

The forex market allows businesses,

investors and traders to take advantage of the change in currency rates by taking a view as to the likely future direction of one currency,

As a result all currency rates are quoted in pairs,

with one country quoted against another

To answer the question,

like a stock market for example,

where you as a trader take a view on the future direction of the price

In the forex market,

you are simply taking a view on exchange rate movements between two currencies,

Just like any other market,

if you are right then you make money,

and if you are wrong then you lose money

Why Do We Have A Forex Market

? The primary purpose of the forex market is to provide an easy and straightforward way for companies to conduct international trade,

to convert from one currency to another easily and quickly

It is one of the largest financial markets in the world,

and every day turns over in excess of 5 trillion US dollars,

dwarfed only by the bond markets

a US based company is importing goods from the UK,

they can then pay for those goods in the currency of the exporter,

in this case the British Pound,

and the forex market would provide the relevant exchange rate on the day of the transaction

Alternatively,

the company may decide to fix the future rate in advance by buying the exchange rate on a forward contract,

in order to avoid any currency fluctuations on the order

In effect this ‘fixes’ the exchange rate

can help to fix the price for the goods,

the company may also lose out on potential savings should the currency rate move in their favor

This is a judgement that each company makes when dealing in the forex market,

whether to fix a rate in the future,

or to exchange at the current prevailing rates,

with advantages and disadvantages for both approaches

The modern exchange rate system of today was created in the 1970’s when countries gradually moved to free floating exchange rates,

from the previous fixed rate system

Under the fixed rates system,

exchange rates were pegged using an artificial system known as Bretton Woods

Over the last century there have been many attempts to ‘anchor’ currency exchange rates for many reasons,

not least to try to help countries have a rate which is ‘fixed’ against some other tangible asset

The Bretton Woods agreement,

and the Marshall plan of the 1950’s before it,

were attempts to ‘fix’ exchange rates globally,

In simple terms a price would be agreed for gold,

against which any currency exchange rates would then be quoted accordingly

All of these attempts ultimately failed,

and following the collapse of the Bretton Woods agreement in the early 1970’s,

the US dollar was established as the ‘de facto’ global reserve currency,

and is now referred to as the currency of ‘first reserve’

It is the most widely held currency (after the home currency),

As you would expect,

it is considered to be an extremely ‘safe currency’,

as it is the currency of the largest economy in the world,

and backed by the US Federal Reserve

The gold standard was an attempt to peg currencies to gold,

using an artificial model based on the price of gold,

set at a fixed price per ounce within the agreement

All of these agreements,

and the demise of the Bretton Woods agreement,

really ushered in the free floating currency model,

which has been more or less adopted across the globe

In the forex markets today,

most exchange rates are left to ‘float free’,

market forces then pushing these rates higher and lower

Some countries do still peg their currencies,

most notably to the US dollar,

but for the purposes of this book,

and the countries and currencies we are going to concentrate on here,

these exchange rates are all considered to be free floating

Who Are The Main Participants

? In simple terms there are five broad groups of players in the forex market,

each of whom has very different trading objectives and strategies

It is important to understand their role in order to gain a deeper understanding of what drives prices,

and why the forex markets react to the stream of daily news and analysis

The major groups are as follows,

and we will look at each of these in turn in detail: Market makers Multinationals Speculators Central banks Retail traders If we start with the market makers,

in contrast to all the other participants in the forex market,

these are the only ‘non customers’ and are there in order to provide a service to their paying clients

In general,

these are the major retail banks,

with the big three of Deutsche Bank (20%),

UBS (12%),

and Citigroup (11%) continuing to dominate the market

Between them they account for almost 45% of turnover on a daily basis

These international banks are the only organizations large enough to manage the multi billion dollar transactions involved in the corporate world,

and in effect create the market prices which are quoted on a daily basis

whilst it is true to say that the above statement is generally correct,

in the last few years we have seen the market makers move way from their traditional role,

and diversify into proprietary trading themselves,

as well as trading on behalf of their clients,

along with offering retail brokerage accounts to the small trader and speculator

This blurring of once traditional roles in the market is likely to continue,

as the profits to be made from trading in forex continues to increase exponentially,

an opportunity that these large banks can no longer ignore

Of the three banks above,

Deutsche Bank is the only one (to date) who has entered the retail

However,

they subsequently withdrew in 2011,

having failed to attract enough customers in an increasingly competitive market

do not be surprised to see one of the other market markers come in at the retail level in future

They simply will not be able to resist

the forex market was almost a backwater for many banks,

who simply offered this as a ‘minor service’ to some of their larger clients

In the last ten years,

this has changed dramatically,

as the forex market moved into the mainstream of the trading arena,

with mass market appeal and consequently large profits to be made by the banks themselves

Next we have large corporate companies who are the bread and butter of the forex world

In many ways this group are seen as the most logical players,

requiring currency exchange for ‘real’ business purposes,

such as paying for imports and receiving payments for exports,

hedging future prices for large consumable items,

and finally for major mergers and acquisitions

A well run finance department can save a large blue chip company millions of pounds or dollars a year,

simply by ensuring that purchases and payments are either fixed,

or made at optimum times to maximize potential savings or additional profits,

through the simple mechanism of an exchange rate

These are magnified as a result of the volume involved

As a general rule,

corporates are relatively conservative in their buying and selling decisions

They rarely speculate in exchange rates,

preferring to fix rates and hence fix their costs or profits,

rather than speculate on future exchange rates and run the risk of increased costs,

foregoing (generally) the chance of increased profits

The third major group of forex participants are the speculators,

and in many ways these are the most interesting,

and come in many shapes and sizes

Their primary aim is to make a profit from their analysis of the market,

and they have no interest in acquiring real holdings of the currency,

but simply ‘bet’ on which way the market is likely to move in the future

The biggest players in this group include proprietary traders (banks trading their own money),

commodity trading advisors (CTA’s) and currency overlay managers

These trading groups are high risk traders,

and are happy to take on excessive leverage in order to make huge profits

Equally however,

they are also subject to large losses,

and it is this group that is responsible for the majority of intraday moves in the forex markets

The fourth group are the central banks of the world who are responsible for managing the economy,

with each National Bank responsible for its own currency

In general,

central banks do not like to see their currency being used for speculative purposes,

and as a result are not averse to stepping into the market in order to manipulate their own currency to reduce harmful volatility,

which in turn could damage the reputation or economic stability of the country as a result

The Bank of Japan,

frequently intervenes in this way,

particularly where any strength in the Japanese Yen is likely to damage Japanese exports,

which in turn makes them more expensive to overseas buyers

The Swiss National Bank is another

The role of the central bank is to manage monetary policy to ensure economic stability and to remove volatile currency fluctuations wherever possible,

which is easier said than done for some countries

Finally we come to the last group of traders in the forex market,

and we could equally be classified as small speculators,

as we have no interest in holding the currency we are buying or selling

We are simply looking to make a profit from our analysis of the market

Unfortunately,

we come at the bottom of this list and are also the smallest,

and generally provide a constant new supply of funds to the bigger market players

If this sounds a little depressing,

This book will level the playing field for you,

and by the time you have finished reading,

will have nothing to fear from these 200 lb

! (I like gorillas but not these ones

How Are Prices Derived

? The prices we see quoted on our screens every day come from one principle source,

but arrive in front of us in very different ways

In simple terms,

it is the major retail banks outlined above who effectively set the central exchange rates,

by virtue of their interbank trading,

and this is often referred to as the interbank liquidity pool

This group of banks,

act as the central exchange for the forex market,

and whilst they are regulated as a bank,

they are unregulated as far as the provision of currency rates is concerned,

and are able to influence market prices to suit their own investment and trading needs

Indeed,

the nirvana for any bank is to earn income from what is called ‘off balance sheet’,

and this is where the forex market delivers in abundance,

with millions in profit every day

All that is required is for the bank to set up a forex dealing desk,

along with a proprietary trading group,

starts rolling into its coffers

! The interbank liquidity pool is the starting point for the market,

and from here the rates are then delivered via a number of live feeds through a variety of channels

The most expensive live feeds come from three major providers,

EBS and www

and represent the professional end of the market

These feeds are generally way beyond the budget and pocket of the small retail trader,

costing thousands of dollars a month

I have never subscribed,

nor indeed have I ever felt the need to subscribe

I have managed perfectly well using simple feeds (both free and paid) and happily made money,

if you do trade using one of these,

you will effectively be trading at the ‘central exchange’ along with the major banks

Here you will be receiving the latest quotes,

the tightest spreads and access to the deepest pool of liquidity,

as well as the ability to see the depth of the market at any time

Whilst it is possible for individual traders to subscribe to these feeds directly,

it is much more likely that you will become a client of a broker who is using one of these feeds to provide live prices to their own platform,

and this is the price you are likely to see quoted on your trading screen

However,

it is important to note that as the broker is now ‘making a market’,

the price quoted by one broker may be very different from that quoted by another,

as each is able to present the price they wish at any time

In addition,

the price they quote may be very different from that being quoted in the interbank market

Many of these brokers are in fact trading against you,

and along with market manipulation,

represents one of the many challenges we face as forex traders every day

Some smaller brokers may not even be able to afford to subscribe to these feeds directly,

or have sufficient funds to establish their own platform and to meet the minimum capital requirements under the various regulatory rules

These brokers are known as ‘white label’ for the larger brokerage companies,

in effect adding a further layer to the prices quoted,

removing you as the trader still further from the real price action in the interbank pool

The interbank liquidity pool is dominated by the following major banks,

who between them control around 80% of the forex market:

Deutsche Bank

In every other business we have wholesalers and then we have retailers

A wholesaler is generally a company that buys in volume and therefore gets the best price

The goods or services are then broken up into smaller order sizes,

and bought at a higher price by the retailer,

who then sells the product in single quantities to the end user

This is the way most markets operate,

with the wholesaler making a profit in selling to the retailer at a higher price,

and the retailer then selling to the consumer at a higher price still,

once again making a profit on the sale

The forex market works in much the same way

Prices from the Interbank pool follow the same principles

This group of ten major banks effectively sets the wholesale rates for the rest of the market,

with every ‘retailer and distributor’ (large or small broker) in the chain quoting a rate,

which then allows them to make a profit

is how prices arrive on the screen,

but I will cover this in much more detail when we look at the different types of brokers,

and how they manipulate the prices quoted on your screen

Now if the last sentence might surprise you,

and indeed the forex market is the most manipulated of all the financial markets,

and it’s not hard to see why

There is simply too much money to be made

Whilst there are many types of manipulation,

the one that is perhaps the worst is that by the Interbank market makers themselves,

and before we all cry ‘not fair’,

if we were in their position we would do the same

Here is a group of ten banks who effectively control a market of several trillion dollars a day,

and which has no central exchange

It would be unreasonable to think otherwise

And this is what they do,

generally using the stream of economic news and comment from around the world to push the market back and forth,

triggering stop losses and forcing traders into weak positions

That’s the bad news

The good news is that with the MT4 platform,

we have the perfect weapon to fight back,

Volume reveals activity,

and provided you understand the volume price relationship and how to interpret what this is telling you,

then you can literally see the market makers at work

Now you might ask,

if we see a price move where the market makers are not joining in,

If we see a move where they are joining in,

It really is that simple,

and it’s all revealed for you in the volume price relationship

What I call Volume Price Analysis,

After all,

the market makers can manipulate the prices as much as they like,

but the one activity they cannot hide is volume,

which is why this technique is so powerful

In addition,

both volume and price are what we call leading indicators

In other words they are at the leading edge of the market,

so a double whammy if you like

If all this sounds a little overwhelming,

I will show you how in a later chapter,

and if you are keen to learn more,

I have written a complete book on the subject,

not surprisingly called ‘A Complete Guide To Volume Price Analysis’

and I hope will become one of yours too

Where Do I Fit In

as small retail forex traders we are at the bottom of the heap,

and are generally considered by the rest of the market as ‘fair game’ both by the institutional banks and market makers,

! The forex market is a voracious beast,

which requires fresh money every day

With such huge sums being made,

it is no surprise that it often attracts the worst kind of business practice and outright profiteering,

which can leave new traders disillusioned and substantially less well off than when they started

This was one reason I wrote this book

To help to level up the trading playing field

The market makers have had it too easy for too long,

as retail traders we have the tools to fight back

The tools we have are free and part of the MT4

Learn how to use them and you will be amazed at what they reveal

No longer can the market makers hide their activities,

and once you have read this book,

you will be able to see them at work,

Finally,

just to wrap up this introductory chapter,

let me round off by explaining some of the other basic concepts,

before moving on in the next chapter to look at currency pairs and how they are quoted

Who Am I Trading Against

? Although we are perhaps getting a little ahead of ourselves in asking and answering the above question at this stage,

Is it simple,

complex and who offers these prices for us to see

? And the answer is the retail forex broker

Twenty years ago,

trading in the foreign exchange markets would have been extremely difficult,

but the internet has changed all that

Now you can find hundreds of brokers,

all offering a very popular platform known as MT4 (MetaTrader 4) which is free,

who will open an account for you and have you trading in minutes

I hope that answers that particular question,

which then leads on logically,

? And indeed this is a question which even seasoned forex traders have difficulty answering,

and is often one that new traders don’t like to ask

Let me answer it here for you,

and the answer also introduces a further aspect

Trading in currencies can be done in many different ways,

After all,

we are simply changing our currency from that of one country to another

It just so happens that we do this at the airport and use physical cash

But the process is the same

Let me take the second part first

As you might expect there are several ways to trade in the forex market,

but the two most popular are using what we call the spot market and the futures market

There are others,

but these are the two principle ones,

and the one we are going to focus on for the remainder of this book is the spot market

You can think of the spot market as a cash market if you like,

and it’s called the spot market as prices are settled

In other words,

Think of this in just the same way as you might buy a stock or share

Here you are buying and selling your stocks or shares with real cash and as soon as you buy or sell,

It’s the same with the spot forex

which you can think of in this way

There are some nuances to this simple statement,

which I explain later in the book when we look at how transactions are ‘settled’ after the order is complete,

it’s effectively fixed ‘on the spot’

The futures market on the other hand is very different,

and here you are buying and selling a ‘defined contract’,

which has a settlement date in the future

The futures market is also very different in another respect

It has a central exchange,

and all the buying and selling is executed through the exchange in the same way as when you buy or sell stocks and shares

To answer our first question then

Who am I trading against

we are often trading against our broker (although not always as you will see later),

and in the futures market we are trading against someone who has taken an opposite position in the market

In the futures market,

then I am matched with someone who has sold,

In other words,

and conversely if I lose then he or she wins

The futures exchange sits in the middle and manages all this trading on our behalf,

In the spot market this is very different,

and here we are often trading against our broker,

or they are trading against us

! This leads to the next question which is whether this raises a conflict of interest,

This is why it is so important to ask the right questions,

and also to understand the different types of brokers in the market

Some will be trading against you directly,

whilst others will pass your orders through electronically with no dealer intervention

A key difference and one I will explain in the section where we look at the various types of brokers and how they work

But for now,

and for the remainder of this book,

we will be focusing solely on the spot forex market,

and using charts and examples from the MT4 platform

Forex Market Hours One of the many beauties of trading the forex market is that it is one that is open twenty four hours a day,

This means that even if you have a full time job,

or are in a different part of the world,

It rarely if ever closes,

and unlike many of the physical stock exchanges,

never closes on public holidays,

with virtually the only days being Christmas Day and New Year’s Day

The remainder of the year the

For traders in the Northern Hemisphere,

the forex market opens on a Sunday evening and finally closes late on Friday night,

before reopening on Sunday evening once again,

as a new trading week starts afresh

This is all shown in Fig 1

Here you can see the cycle that the forex market takes,

as first one major trading centre opens,

If we move from right to left,

the first market to open is New Zealand,

followed shortly after by Sydney,

00 pm GMT

These are joined two hours later by the first major Asian centre Tokyo,

The markets then trade together until 7am GMT when the European forex market opens,

with London following an hour later,

and consequent deep liquidity as a result

The Asian markets close,

leaving the UK and European markets to trade together until the open of the New York market at 1pm GMT

before Europe closes at 3pm GMT followed by the UK at 4pm GMT,

leaving the US market to trade on until the NY close at 9pm GMT,

West Coast closing between 9 and 11 GMT,

before the cycle repeats itself once again with the Sydney open

At this point let me try to put this into some sort of context for you

Many forex traders mistakenly believe that the currencies that are traded most heavily remain the same,

whatever the time of day or night

In other words,

a currency that is traded heavily in the London session,

is also traded heavily in the Tokyo session

However,

nothing could be further from the truth

This is a key point as we move deeper into the book,

and in particular as you start to consider your own approach to the market,

which will be heavily influenced both by the time you have available,

but also where you are in the world

I am privileged to live in a timezone which makes it very easy for me trade in the markets when they are at their most active,

and in those currencies which are heavily traded

You will often hear this referred to as ‘deep liquidity’ and in fact I used this term above

All this means is a market which is very active,

and you can think of this in terms of

- volume

! Volume is activity and activity is volume

You may not be so fortunate,

and you may also have work and family commitments which restrict your trading time further

The choice of which currencies to trade,

then becomes an important consideration

This decision has to fit into your work/life balance,

as well as allowing you access to those currencies and currency pairs when they are at their most heavily traded

Let me explain

In Fig 1

and for two distinct times during the 24 hour session

The first is for the Tokyo session,

and the second is for the London session

Each pie chart shows the percentage of trading in a variety of currency pairs,

and just to explain what each is,

the EUR is the euro and the GBP is the British pound

Let’s take a look at each chart in turn

that the red slice dominates this trading session,

with the US dollar and the Japanese yen responsible for 78% of the volumes traded in the session

If we a