basic education booklet

8/2/2019 Basic Education Booklet

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TOKYO INFO SOLUTIONS (P) LTD

BASIC EDUCATIONIN TRADINGFOREIGN EXCHANGE


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TABLE OF CONTENTS

CHAPTER 1 INTRODUCING FOREX MARKET

CHAPTER 2 TECHNICAL ANALYSIS

CHAPTER 3 FUNDAMENTAL ANALYSIS

CHAPTER 4 RISK MANAGEMENT

CHAPTER 5 TRADING FOREX WITH MT4


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CHAPTER 1

INTRODUCING FOREX TRADING

I. THE MARKETThe currency trading (foreign exchange, FX) market is the biggest and fastestgrowing market on earth. Its daily turnover is more than 2.5 trillion dollars.The participants in this market are central and commercial banks, corporations,institutional investors, hedge funds, and private individuals like you.

II. WHAT HAPPENS IN THE MARKET?Markets are places where goods are traded, and the same goes with Foreignexchange. In Foreign exchange markets, the "goods" are the currencies of variouscountries (as well as gold and silver). For example, you might buy euro withUS dollars, or you might sell Japanese Yen for Canadian dollars. It's as basicas trading one currency for another.

Of course, you don't have to purchase or sell actual, physical currency: youtrade and work with your own base currency, and deal with any currency pairyou wish to.

III. FX MARKET PARTICIPANTSA. BanksThe inter bank market caters for both the major i ty of commercialturnover as well as enormous amounts of speculative trading every day.It is not uncommon for a large bank to trade bi l l ions of dol lars on adai ly basis. Some of this trading activity is undertaken on behalf ofcustomers, but a large amount of trading is a lso conducted byproprietary desks, where dealers trade to make the bank profi ts.The inter bank market has become increasingly competitive in the lastcouple of years and the god-like status of top foreign exchange tradershas suffered as the equity guys are back in charge again. A large part

of the inter bank trading takes place on electronic broking systems thathave negatively affected the traditional foreign exchange brokers.


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B. Inter bank BrokersUntil recently, foreign exchange brokers were doing large amounts ofbusiness, facil itat ing Inter bank trading and matching anonymouscounterparts for comparatively small fees. Today, however, a lot of thisbusiness is moving onto more eff ic ient electronic systems whichfunction as a closed circuit for banks only.

Sti ll , the broker box providing the opportunity to l isten in on theongoing inter bank trading is seen in most trading rooms, but turnoveris noticeably smaller than just a year or two ago.

C. Customer BrokersFor many commercial and private cl ients, there is a need to receivespecialized foreign exchange services. There are a fair number of non-banks offering dealing services, analysis and strategic advice to suchclients. Many banks do not undertake trading for private clients at all,and do not have the necessary resources or inclination to supportmedium sized commercial clients adequately.The services of such brokers are more s imilar in nature to otherinvestment brokers and typically provide a service-oriented approach totheir clients.

D. Central BanksThe nat iona l central banks play an important role in the foreignexchange markets. Ultimately, the central banks seek to control moneysupply and often have off ic ia l or unoff ic ia l target rates for the ircurrencies. As many central banks have very substantial foreignexchange reserves, the intervention power is significant. Among themost important responsibilities of a central bank is the restoration of anorderly market in times of excessive exchange rate volatil ity and the

cont rol of the infl at ionary impac t of a weakening currency.Frequently, the mere expectation of central bank intervention issuf ficient to s tabi li ze a currency, but in the event of aggress iveintervention the actual impact on the short term supply/demand balancecan lead to the desired moves in exchange rates. Central banks do notalways achieve their objectives, however. If the market participantsreally want to take on a central bank, the combined resources of themarket can easily overwhelm any central bank. Several scenarios of thisnature were seen in the 1992-93 ERM collapse and in more recent timesin South East Asia.


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E. Hedge FundsHedge funds have gained a reputat ion for aggress ive currencyspeculation in recent years. There is no doubt that with the increasingamount of money some of these investment vehic les have undermanagement, the size and liquidity of foreign exchange markets is veryappealing. The leverage available in these markets allow such funds tospeculate with tens of billions of dollars at a time, and the herd instincttypical in hedge fund circles means that having Solos and friends onyour back is less than pleasant for a weak currency and economy. It isunlikely, however, that such investments would be successful i f theunderlying investment strategy was not sound and therefore it is arguedthat hedge funds actually perform a beneficial service by exploiting andexposing unsustainable financial weaknesses, forcing realignment tomore realistic levels.

F. Commercial CompaniesThe international trade exposure of commercial companies is thebackbone of foreign exchange markets. Protection against unfavorablemoves is an important reason why these markets are in existence,although i t sometimes appears to be a chicken and egg s ituation?Commercial companies often trade in sizes that are insignif icant to

short-term market move; however, as the main currency markets canquite easi ly absorb hundreds of mil l ions of dollars without any bigimpact. But it also clear that one of the decisive f actors determining thelong-term direction of a currency's exchange rate is the overall tradeflow.

Some multinational companies can have an unpredictable impact whenvery large positions are covered however due to exposures that are notcommonly known to the majority of market participants.

G. Investors and SpeculatorsAs in all other efficient markets, the speculator performs an importantrole taking over the risks that commercial participants do not wish to beexposed to. The boundaries of speculation are unclear, however, asmany of the above-mentioned part ic ipants also have speculativeinterests, even some of the central banks.The foreign exchange markets are popular with investors due to thelarge amount of leverage that can be obtained and the ease with whichposit ions can be entered and exited 24 hours a day. Trading in acurrency might be the "purest" way of taking a view on an overall localmarket expectation, much simpler than investing in il l iquid emergingstock markets. Taking advantage of interest rate d ifferentials is another


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popular strategy that can be eff iciently undertaken in a market withhigh leverage.

The investor's goal in Foreign exchange trading is to profit from foreign

currency movements.

More than 95% of all Foreign exchange trading performed today is for speculativepurposes (e.g. to profit from currency movements). The rest belongs tohedging (managing business exposures to various currencies) and other activities.

Foreign exchange trades (trading onboard internet platforms) are non-deliverytrades: currencies are not physically traded, but rather there are currencycontracts which are agreed upon and performed. Both parties to such contracts(the trader and the trading platform) undertake to fulfill their obligations: oneside undertakes to sell the amount specified, and the other undertakes to buy it.

As mentioned, over 95% of the market activity is for speculative purposes, sothere is no intention on either side to actually perform the contract (thephysical delivery of the currencies). Thus, the contract ends by offsetting itagainst an opposite position, resulting in the profit and loss of the partiesinvolved.

IV. COMPONENTS OF A FOREX TRADEA Foreign exchange deal is a contract agreed upon between the trader and themarket-maker (i.e. the Trading Platform). The contract is comprised of the

following components:

The currency pairs (which currency to buy; which currency to sell)

The principal amount (or "face", or "nominal": the amount of currencyinvolved in the deal)

The rate (the agreed exchange rate between the two currencies).

Time frame is also a factor in some deals, but this chapter focuses on Day-Trading (similar to "Spot" or "Current Time" trading), in which deals have a lifespanof no more than a single full day. Thus, time frame does not play into the

equation. Note, however, that deals can be renewed ("rolled-over") to the nextday for a limited period of time.

The Foreign exchange deal, in this context, is therefore an obligation to buyand sell a specified amount of a particular pair of currencies at a pre-determined exchange rate.

Foreign exchange trading is always done in currency pairs. For example, imaginethat the exchange rate of EUR/USD (euros to US dollars) on a certain day is1.1999 (this number is also referred to as a "spot rate", or just "rate", for short). If

an investor had bought 1,000 euros on that date, he would have paid 1,199.00 USdollars. If one year later, the Foreign exchange rate was 1.2222; the value of theeuro has increased in relation to the US dollar. The investor could now sell


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have USD 23.00 more than when he started a year earlier.

Trade only when you expect the currency you are buying to increase in valuerelative to the currency you are selling. If the currency you are buying does

increase in value, you must sell back that currency in order to lock in theprofit. An open trade (also called an "open position") is one in which a traderhas bought or sold a particular currency pair, and has not yet sold or boughtback the equivalent amount to complete the deal.

It is estimated that around 95% of the FX market is speculative. In otherwords, the person or institution that bought or sold the currency has no plan toactually take delivery of the currency in the end; rather, they were solelyspeculating on the movement of that particular currency.

A. Exchange rateBecause currencies are traded in pairs and exchanged one against the otherwhen traded, the rate at which they are exchanged is called the exchangerate. The majority of currencies are traded against the US dollar (USD), which istraded more than any other currency. The four currencies traded mostfrequently after the US dollar are the euro (EUR), the Japanese yen (JPY), theBritish pound sterling (GBP) and the Swiss franc (CHF). These five currencies makeup the majority of the market and are called the major currencies or "theMajors". Some sources also include the Australian dollar (AUD) within the group ofmajor currencies.

The first currency in the exchange pair is referred to as the base currency.The second currency is the counter currency or quote currency. The counter orquote currency is thus the numerator in the ratio, and the base currency is thedenominator.

The exchange rate tells a buyer how much of the counter or quote currencymust be paid to obtain one unit of the base currency. The exchange rate alsotells a seller how much is received in the counter or quote currency when sellingone unit of the base currency. For example, an exchange rate for EUR/USD

of 1.2083 specifies to the buyer of euros that 1.2083 USD must be paid to obtain 1euro.

B. SpreadsIt is the difference between BUY and SELL, or BID and ASK. In other words, thisis the difference between the market maker's "selling" price (to its clients)and the price the market maker "buys" it from its clients.

If an investor buys a currency and immediately sells it (and thus there is nochange in the rate of exchange), the investor will lose money. The reason for

this is "the spread". At any given moment, the amount that will be received inthe counter currency when selling a unit of base currency will be lower than


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currency. For instance, the EUR/USD bid/ask currency rates at your bankmay be 1.2015/1.3015, representing a spread of 1,000 pips (percentage inpoints; one pip = 0.0001). Such a rate is much higher than the bid/askcurrency rates that online Foreign exchange investors commonly encounter,such as 1.2014/1.2017, with a spread of 3 pips. In general, smaller spreads arebetter for Foreign exchange investors since they require a smaller movement in

exchange rates in order to profit from a trade.

C. Prices, Quotes and IndicationsThe price of a currency (in terms of the counter currency), is called "Quote".There are two kinds of quotes in the Foreign exchange market:

Direct Quote: the price for 1 US dollar in terms of the other currency,e.g. Japanese Yen, Canadian dollar, etc.

Indirect Quote: the price of 1 unit of a currency in terms of US dollars,e.g. British pound, euro.

The market maker provides the investor with a quote. The quote is the pricethe market maker will honor when the deal is executed. This is unlike an"indication" by the market maker, which informs the trader about the marketprice level, but is not the final rate for a deal.

Cross rates: any quote which is not against the US dollar is called "cross". Forexample, GBP/JPY is a cross rate, since it is calculated via the USdollar. Here is how the GBP/JPY rate is calculated:

GBP/USD = 1.7464;USD/JPY = 112.29;Therefore: GBP/JPY = 112.29 x 1.7464 = 196.10.

D. MarginBanks and/or online trading providers need collateral to ensure that theinvestor can pay in the event of a loss. The col lateral is cal led the"margin" is a lso known as minimum secur ity in Foreign exchange

markets. In practice, i t is a deposit to the trader's account that isintended to cover any currency trading losses in the future.

Margin enables private investors to trade in markets that have highminimum units of trading, by al lowing traders to hold a much largerposition than their account value. Margin trading also enhances the rateof profit, but similarly enhances the rate of loss, beyond that takenwithout leveraging.

E. LeverageLeveraged financing is a common practice in Foreign exchange trading,and allows traders to use credit, such as a trade purchased on margin,


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account i s prov ided by the in it ial depos it . This can create theopportunity to control USD 100,000 for as little as USD 1,000.

There are five ways private investors can trade in Foreign exchange,directly or indirectly:

The spot market Forwards and futures

Options

Contracts for difference

Spread betting

Please note that this book focuses on the most common way of tradingin the Foreign exchange market, "Day-Trading" (related to "Spot").Please refer to the glossary for explanations of each of the five waysinvestors can trade in Foreign exchange.

F. Interest Rate DifferentialsDifferent currencies pay different interest rates. This is one of the maindriving forces behind foreign exchange trends. It is inherently attractiveto be a buyer of a currency that pays a high interest rate while beingshort a currency that has a low interest rate.

Although such interest rate differentials may not appear very large, thesignificance is much greater in a highly leveraged position. But it is byno means a certainty that the currency with the higher interest rate will

be s trongest. I f the reason for the h igh interest rate is runawayinflation, this may undermine confidence in the currency even morethan the benefits perceived from the high interest rate.

V. HOW DOES ONE PROFIT IN THE FOREIGNEXCHANGE MARKET?Obviously, buy low and sell high! The profit potential comes from thefluctuations (changes) in the currency exchange market. Unlike the stockmarket, where share are purchased, Foreign exchange trading does not requirephysical purchase of the currencies, but rather involves contracts for amountand exchange rate of currency pairs.

The advantageous thing about the Foreign exchange market is thatregular daily fluctuations - in the regular currency exchange markets, oftenaround 1% - are multiplied by 100.


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Formula : EUR / USD, GBP / USD , AUD / USD

Profit / Loss = (Selling Price Buy Price) x Contract Size x Amount of Lot

Formula : USD / JPY and USD / CHF

Profit / Loss = (Selling Price Buy Price) x Contract Size x Amount of Lot

Liquidation Price


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Foreign exchange Trading Scenario

Scenario 1 Trading the Rising Price

Action You believe the British Pound will strengthen against the USdollar. It is a long term view, so he takes a small position to allowfor wider swings in the rate:

You buy British Pound We quote GBPUSD at Bid 1.7750 and Ask1.7754,which means that you can sell 1 BritishPound for 1.7750 USD or buy 1 BritishPound for 1.7754 USD.

In this example you buy British Pound

100,000, at the quote price of 1.7754 (askprice) per British Pound.

The market turns Later the market turns in flavor of theBritish Pound and the GBPUSD is nowquoted at Bid 1.7824 and Ask 1.7827.

Now you want to sell yourBritish Pound and get theprofit

You sell British Pound at a Bid price of1.7824.

The profit is calculated asfollows:

Sell price-buy price x size of trade(1.7824 minus 1.7754 ) mult ip liedby 100.000 = $700 Profit

Scenario 2 - Trading the Falling Price

Action On the other hand, you believe that the British Pound will weakenagainst the dollar, you'll want to sell GBPUSD. You believe theBritish Pound will strengthen against the US dollar. It is a longterm view, so he takes a small position to allow for wider swingsin the rate:

You sell British Pound We quote GBPUSD at Bid 1.7750 and Ask 1.7754,which means that you can sell 1 British Pound for1.7750 USD or buy 1 British Pound for 1.7754 USD.

In this example you sell British Pound 100,000, atthe quote price of 1.7750 (bid price) per British

Pound.The market turns Later the market turns in favour of the British

Pound and the GBPUSD is now quoted at Bid


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Please take note that trading GBP 100,000 as we have done in our examples, doesnot mean that you have to put up British Pound 100,000 yourself. It means thatyou have to deposit 1.0% on a 1:100 leverage of British Pound 100,000, whichis 1,000 GBP. Since StarPac's base currency is USD, so you only need 1,000 USD

on margin as a guarantee for the future performance of your position.

Maintenance MarginMost trading platforms require a "maintenance margin" be deposited bythe trader parallel to the margins deposited for actual trades. The mainreason for this is to ensure the necessary amount is avai lable in theevent of a "gap" or "slippage" in rates. Maintenance margins are alsoused to cover administrative costs.

When a trader sets a Stop-Loss rate, most market makers cannotguarantee that the stop-loss will actually be used. For example, if themarket for a particular counter currency had a vertical fall from 1.1850to 1.1900 between the close and opening of the market, and the traderhad a stop-loss of 1.1875, at which rate would the deal be closed? Nomatter how the rate s lippage is accounted for , the trader wouldprobably be required to add-up on his initial margin to f inal ize theautomatically closed transaction. The funds from the maintenancemargin might be used for this purpose.

Stop-loss discipline As you can see from the descr ipt ion above, there are s ignif icantopportunities and risks in foreign exchange markets. Aggressive tradersmight experience profit/loss swings of 20-30% daily. This calls for strictstop-loss policies in positions that are moving against you.

Luckily, there are no daily l imits on foreign exchange trading and norestrictions on trading hours other than the weekend. This means thatthere will nearly always be an opportunity to react to moves in the maincurrency markets and a low r isk of get ting caught without the

opportunity of getting out. Of course, the market can move very fastand a stop-loss order is by no means a guarantee of getting out at thedesired level.

But the main r isk is really an event over the weekend, where allmarkets are closed. This happens from time to time as many importantpol i tical events, such as G7 meetings, are normally scheduled forweekends.

But for speculative trading, we would always recommend the placementof protective stop-losses. With StarPac Trader Internet Trading you caneasily place and change such orders whi le watching developmentgraphical ly on your computer screen - which we bel ieve is a unique


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VI. HOW A FOREIGN EXCHANGE SYSTEMOPERATES IN REAL TIMEOnline foreign exchange trading occurs in real time. Exchange rates areconstantly changing, in intervals of seconds. Quotes are accurate for the time theyare displayed only. At any moment, a different rate may be quoted. When atrader locks in a rate and executes a transaction, that transaction is immediatelyprocessed; the trade has been executed.

A. Up-to-date exchange ratesAs rates change so rapidly, any Foreign exchange software must display themost up-to-date rates. To accompl ish this, the Foreign exchangesoftware is cont inuous ly communicating with a remote server that providesthe most current exchange rates. The rates quoted, unlike traditional bankexchange rates, are actual tradable rates. A trader may choose to "lock in" to

a rate (called the "freeze rate") only as long as it is displayed.Foreign exchange on the Internet:In general, the individual Foreign exchange trader is required to fulfill twosteps prior to trading:

Register at the trading platform

Deposit funds to facilitate trading

Requirements vary with each trading platform, but these steps bear furtherdiscussion:

B . Reg i s t e r i ngRegistration is done online by the individual trader. There are various formsused in the industry. Some are quite simple, where others are longer andmore time-consuming. In part, this can be attributed to governmental orother authorities' requirements, though some Foreign exchange platforms requiremore information than is actually needed. Some even require a face-to-face meeting, or to obtain hard copies of required documents such as apassport, or driver's license.

The key requirements for registration are the trader's full name, telephone, e-mail address, residence, and sometimes also the trader's yearly income or capital(equity) and an ID number (passport / driver's license / SSN / etc.). Typically, theForeign exchange platform is not required to run a thorough check, but rely onthe registrant to be truthful. Nevertheless, each Foreign exchange platformconducts certain routines, in order to check and verify the authenticity of the detailsprovided.

Registrants are required to declare that funds used for trading are not inquestion, and are not the result of any criminal act or money launderingactivity This is mandatory as part of a global anti money laundering effort


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C . Depo s i t i n g f u n d sNew registrants must deposit funds to facilitate trading. However, themajority of the Foreign exchange platforms today require that, in addition tofunds used for actual trading, an add itional amount be deposited. Oftencal led "maintenance margin" or "activity collateral", its purpose is for the

platform to have an additional guaranteeing. Some of the platforms thatrequire an additional deposit do pay interest on the collateral, which is"frozen" under the trader's name.

StarPac Trader Trading Platform does NOT require any addit ionalguarantee, and al lows trading with 100% of the amount deposited.StarPac Trader is able to provide these advantages because it assures"guaranteed rates and Stop-Loss". That means that there will never be anyadditional requirement for funds as a result of a "gap" that causes you to surpassthe Stop-Loss.

CHAPTER 2

TECHNICAL ANALYSIS

I. OVERVIEWTechnical Analysis is the study of past price and activity history in orderto predict future price movements. The basic premise of technicalanalysis is that the price discounts al l information avai lable in themarket and that pattern in price movements tend to repeat themselves.

Another important foundat ion of technical analys is i s that pricemovements are not random, but tend to trend in some direction most ofthe time. Although this seems an obvious fact to anybody that has everlooked at a chart, it is in fact a hotly disputed idea in certain academiccircles. But then again, maybe that is why they are academics ratherthan traders...

The best practical introduction you can have to technical analysis is via

the StarPac Internet Trader, where the system allows you interactionover the Internet with state-of-the-art technical analysis resources. In


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addition, our daily analysis, freely available to members, describes themost recent technical levels seen in the main currency markets.

A. TECHNICAL ANALYSIS IS BASED ON THREE BELIEFS:1. ACTION IN THE MARKETThis means that the actual price is a reflection of everything that isknown to the market that could affect i t, for example, supply anddemand, polit ical factors and market sentiment. The pure technicalanalyst is only concerned with price movements, not with the reasonsfor any changes.

2. PRICE MOVE IN TRENDSPrices can move in one of three directions, up, down or sideways. Oncea trend in any of these directions is in effect it usually will persist. The

market trend is simply the direction of market prices, a concept whichis absolutely essential to the success of technical analysis. Identifyingtrends is quite simple; a price chart will usually indicate the prevail ingtrend as characterized by a series of waves with obvious peaks andtroughs. It is the direction of these peaks and troughs that constitutesthe market trend.

3. HISTORY TENDS TO REPEAT ITSELFTo a technical analyst, the human characteristics of the market might

be irrational but nonetheless they exist. Because investors' attitudesoften repeat, investors' actions in the marketplace often repeat as well.I.e., patterns of price movement will develop on a chart that a technicalanalyst believes have predictive qualities.

Technical analysis is always primari ly concerned with price trends.Anything that can influence the price trend is of interest to a technicalanalyst. As an example, many technical analysts monitor surveys ofinvestor enthusiasm. These surveys attempt to gauge the generalattitude of the investment community to determine whether investors

are bearish or bullish.

A number of technical indicators have been used in StarPac Trader 4.When analyzing the indicators, one can come to the conclusion aboutfur ther movements of the quoted products for a more detai leddescription of the indicators, analyzing price charts and volumes oftrading.

B. SUPPLY AND DEMANDThere is nothing mysterious about support and resistance: it is classic

supply and demand. Remembering 'Econ 101' class, supply/demandlines show what the supply and demand will be at a given price.


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The supply l ine shows the quantity (i.e., the number of shares) thatsellers are willing to supply at a given price. When prices increase, thequantity of sellers also increases as more investors are willing to sell atthese higher prices. The demand line shows the number of shares thatbuyers are wil l ing to buy at a given price, when prices increase, thequantity of buyers decreases as fewer investors are will ing to buy at

higher prices.

At any given price, a supply/demand chart shows how many buyers andsellers there are. In a free market, these lines are continually changing.Investor's expectations change, and so do the prices buyers and sellersfeel are acceptable. A breakout above a resistance level is evidence ofan upward shift in the demand line as more buyers become will ing tobuy at higher prices. Similarly, the failure of a support level shows thatthe supply line has shifted downward.

The foundation of most technical analysis tools is rooted in the conceptof supply and demand. Charts of prices for financial instruments give usa superb view of these forces in action.

C . TRADERS' REMORSEFollowing the penetration of a support/resistance level, it is common for

traders to question the new price levels. For example, after a breakoutabove a resistance level, buyers and sel lers may both question theval id ity o f the new pri ce and may dec ide to sel l. Thi s c reatesphenomena I refer to as "traders' remorse" where prices return to asupport/resistance level following a price breakout.

The price action following this remorseful period is crucial. One of twothings can happen. Either the consensus of expectations will be that thenew price is not warranted, in which case prices will move back to theirprevious level; or investors wil l accept the new price, in which case

prices wil l continue to move in the direction of the penetration. If,following traders' remorse, the consensus of expectations is that a newhigher price is not warranted, a classic "bull trap" (or "false breakout")is created.

Similar sentiment creates a bear trap. Prices drop below a support levellong enough to get the bears to sel l (or sel l short) and then bounceback above the support level leaving the bears out of the market.

A good way to quantify expectations following a breakout is with thevolume associated with the price breakout. If prices break through the

support/res istance level with a large increase in volume and thetraders' remorse period is on relatively low volume, it implies that the


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Conversely, if the breakout is on moderate volume and the "remorseful"per iod is on increased volume, i t implies that very few investorexpectations have changed and a return to the original expectations(i.e., original prices) is warranted. Resistance becomes support, when aresistance level is successfully penetrated, that level becomes a supportlevel.

II. CHARTS AND DIAGRAMSForeign exchange charts are based on market action involving price. Chartsare major tools in Foreign exchange trading. There are many kinds of charts, eachof which helps to visually analyze market conditions, assess and create forecasts,and identify behavior patterns.

Most charts present the behavior of currency exchange rates over time. Rates(prices) are measured on the vertical axis and time is shown of the horizontal axis.

Charts are used by both technical and fundamental analysts. The technicalanalyst analyzes the "micro" movements, trying to match the actualoccurrence with known patterns. The fundamental analyst tries to findcorrelation between the trend seen on the chart and "macro" eventsoccurring parallel to that (political and others).

WHAT IS AN APPROPRIATE TIME SCALE TO USE ON A CHART?It depends on the trader's strategy. The short-range investor would probably selecta day chart (units of hours, minutes), where the medium and long-rangeinvestor would use the weekly or monthly charts. High resolution charts (e.g. -minutes and seconds) may show "noise", meaning that with fine details in view, it issometimes harder to see the overall trend.

The major types of charts:

A. BAR CHARTHis chart shows three rate s for ea ch t ime unit selected: the High, theLow, the Closing (HLC). There are also bar charts including f ou rra tes (OHLC, wh ich inc ludes the Open ing rate for the t imeinter val). This chart provides clearly, vis ibl e inf ormat ion abouttrading pr ices range during the time period (per unit) selected.

High HighUpper shado

Close open


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Open closeLower shado

Low low


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B. CANDLESTICK CHARTThis kind of chart is based on an ancient Japanese method. The chartrepresents prices at their opening, high, low and closing rates, in aform of candles, for each time unit selected.

The empty (transparent) candles show increase, while the dark (full)ones show decrease.

The length of the body shows the range between opening and closing,while the whole candle (including top and bottom wicks) show thewhole range of trading prices for the selected time un

High High

L ow L ow

O p e nClose

O pen C lose

Rea l Body

Lower shadow

U p p e r hadow

19


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PATTERN RECOGNITION IN CANDLESTICK CHARTSPattern recognition is a field within the area of "machine learning".

Alternatively, it can be defined as "the act of taking in raw data and taking an

action based on the category of the data". As such, it is a collection ofmethods for "supervised learning".

A complete pattern recognition system consists of a sensor that gathers theobservations to be classified or described; a feature extraction mechanismthat computes numeric or symbolic information from the observations; and aclassification or description scheme that does the actual job of classifying ordescribing observations, relying on the extracted features.

In general, the market uses the following patterns in candlestick charts:

Bullish patterns: hammer, inverted hammer, engulfing, harami, haramicross, doji star, piercing line, morning star, morning doji star.

Bearish patterns: shooting star , hanging man, engulfing, harami,harami cross, doji star, dark cloud cover, evening star, evening doji

Open

Close

open

Close

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BEARISH TYPESHOOTING STAR BEARHOW TO IDENTIFY

1. An uptrend is under way2. The first day is a white day3.Prices gap open on second day with a small real body at the lower

end of the trading range4. Upper shadow usually at least twice as long as the real body5. No lower shadow

Engulfing line

Shooting Star

Engulfing line

Hanging man

Hammer Doji

21


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The Shooting Star bear pattern occurs during an uptrend and indicates an end tothe upward move. The Shooting Star pattern looks exactly the same as theInverted Hammer bull. The difference of course is the preceding days candlestickand that the Shooting Star bear occurs at market tops. The market gaps openabove the previous day's close, rallies to a new high then loses strength and closes

near its low for the day. This action, following a gap up, can only be considered asbearish. The length of the shadow will help determine its strength. Certainly, itwould cause some concern to any bulls that have profits. Confirmation of the trendreversal would by an opening below the body of the Shooting Star bear, a blackcandlestick, and a large gap down or by a lower close on the next trading day.

The Shooting Star bear pattern is very similar to the Gravestone Doji bear. Withthe Gravestone Doji bear the open and close are identical whereas the ShootingStar bear has a small real body at the upper end of the trading range. TheGravestone Doji bear has a higher reliability associated with it than a Shooting Starbear. SELL SIGNALHANGING MAN BEARHOW TO IDENTIFY

1. Occurs at the top or during an uptrend2. Small real body at the upper end of the trading range and should be above

the trend.3. Lower shadow at least three times as long as the real body4. No (or almost no) upper shadow

A Hanging Man bear occurs at the top of a trend or during an uptrend. The marketis considered bullish because of the uptrend. In order for the Hanging Man bear toappear, the price action for the day must trade much lower as in a sharp sell off,than where it opened, then rallies to close at or near its high for the day. Thissignifies the potential for further sell-offs. This is what causes the long lowershadow which shows how the market just might begin a sell off or further sell offs.If the market opens lower the next day, there would be many participants withlong positions that would want to look for an opportunity to sell. Since thereliability for a Hanging Man bear pattern is low, a black candlestick or a largedown gap can confirm the trend reversal on the next trading day and by a lowerclose.

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The Hanging Man bear is a single candlestick pattern and is very similar to theDragonfly Doji bear. With the Dragonfly Doji bear the open and close are identicalwhereas the Hanging Man bear has a small real body at the upper end of thetrading range. The Dragonfly Doji bear is considered more bearish than a HangingMan bear and has a higher reliability associated with it than a Hanging Man bear.

SELL SIGNALENGULFING BEARHow to identify

1. An uptrend is under way2. A long white day occurs

3.The second day is a black day that completely engulfs the realbody of the first day

With the Engulfing bear pattern an uptrend is in place when a small white bodyday occurs with not much volume. The next day, prices open at new highs andthen quickly sell off. The sell-off is sustained by high volume and finally closesbelow the open of the previous day. Emotionally, the uptrend has been damaged.

If the next (third) day's prices remain lower, a major reversal of the uptrend hasoccurred. Confirmation of the trend reversal would be with a black candlestick, alarge gap down or by a lower close on the next trading day would confirm thetrend reversal.

The Engulfing bear pattern is also the first two days of the Three outside Downbear pattern. Because of this, the Engulfing bear pattern is not considered asreliable as the Three Outside Down bear pattern. SELL SIGNAL

HARAMI BEARHow to identify

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1. An uptrend is under way2. A long white day occurs3. The second day is a black day where the real body is

Completely engulfed by the real body of the first day4. The tops or bottoms of the real bodies can be equal, but

Both tops and both bottoms cannot be equal

For a Harami bear, an uptrend is in place and is perpetuated with a long white dayand high volume. The next day prices open lower and stay in a small rangethroughout the day, closing even lower creating a black candlestick but still withinthe previous day's body. This is a signal that the current uptrend is losing strength.In view of this sudden deterioration of trend, traders should become concernedabout the strength of this market, especially if volume is light. It certainly appearsthat the trend is about to change. Confirmation on the third day would be a lowerclose.

The Harami bear pattern is also the first two days of the Three inside down bearpattern. SELL SIGNALDOJI STAR BEARHow to identify

1. An uptrend is under way

2. First day is a long white day3. Second day is a Doji that gaps in the direction of the previous trend4. The shadows of the Doji should not be excessively long

A Doji Star bear is a warning that a trend is about to change. It is a long white realbody that should reflect the previous trend. In an uptrend, the market buildsstrength on a long white day and gaps open on the second day. However, thesecond day trades within a small range and closes at or near its open. This

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scenario generally shows erosion of confidence in the current trend. Confirmationof the trend reversal would be with a black candlestick, a large gap down or by alower close on the next trading day would confirm the trend reversal.

The Doji Star bear pattern is also the first two days of the Evening Doji Star bear

pattern. SELL SIGNALDARK CLOUD COVER BEARHow to identify

1. An uptrend is under way2. The first day is a long white body which is continuing the

uptrend3. The second day is black body day with an open above the

high of the previous day (that's the high not the close)4. The second black day closes within and below the midpoint

of the previous white body

The Dark Cloud Cover bear is a reversal pattern and the counterpart of the

Piercing Line bull pattern. The Dark Cloud Cover bear pattern only occurs in anuptrend. Typical in an uptrend, a long white candlestick is formed. The next daythe market gaps higher on the opening however that is all that is remaining to theuptrend. The day after the market drops to close well into the body of the whiteday, in fact, below its midpoint. Anyone who was bullish would certainly have torethink their strategy with this type of action. Like the Piercing Line bull asignificant reversal of trend has occurred. SELL SIGNAL

EVENING STAR BEARHow to identify

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1. An uptrend is under way2. First day is a long white day3. Second day is a small day that gaps in the direction of the

previous trend4. The third day is a black day and gaps down5. It appears after or during an uptrend

The Evening Star bear takes place after or during an uptrend and is assisted by along white candlestick. The next day prices gap higher on the open, trade within asmall range and close near their open. This small body shows the beginning of

indecision and lack of confidence in the current trend. This scenario generallyshows the potential for a sell off, as many positions have been changed. The nextday the prices gap lower on the open and then close still lower. A significantreversal of trend has occurred. Confirmation of the trend reversal is the black thirdday. SELL SIGNALEVENING DOJI STAR BEARHow to identify

1. An uptrend is under way2. First day is a long white day3. Second day is a Doji that gaps in the direction of the previous trend4. The third day is a black day

With an Evening Doji Star bear, the market is in an uptrend and the market buildsstrength on a long white day and gaps open on the second day. The second dayhowever trades within a small range and closes at or near its open creating a Doji.This scenario generally shows erosion of confidence in the current trend.Confirmation of the trend reversal is the black third day. The Evening Doji Starbear pattern is the third day to the fully developed Doji Star bear pattern.

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The psychology behind this pattern is similar to that of the Evening Star bear,except that the Evening Doji Star bear is more of a shock to the previous trendand therefore is more significant because of the Doji. The evening Doji Star bearhas also been referred to as the Southern Cross bear. SELL SIGNALBULLISH TYPEDOJI STAR BULLHOW TO IDENTIFY

1. A downtrend is under way2. First day is a long black day3. Second day is a Doji that gaps in the direction of the previous trend4. The shadows of the Doji should not be excessively long

A Doji Star bull is a warning that the trend is about to change. The first day is along black real body that should reflect the previous trend. In a downtrend the

market continues to lose strength on a long black day and gaps open on thesecond day. The second day trades within a small range and closes at or near itsopen. This scenario generally shows the potential for a rally, as many positionshave been changed. Confirmation of the trend reversal would be with a whitecandlestick, a large gap up or by a higher close on the next trading day wouldconfirm the trend reversal.

The Doji Star bull pattern is also the first two days of the Morning Doji Star bullpattern. BUY SIGNAL

HAMMER BULLHow to identify

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1. Occurs during a downtrend2. Small real body at the upper end of the trading range3. Lower shadow at least twice as long as the real body4. No (or almost no) upper shadow

The Hammer bull occurs at the bottom of a trend or during a downtrend and is sonamed because it is hammering out a bottom. The market is considered bearishbecause of the downtrend. The market opens and then sells off sharply. However,the sell-off is abated and the markets returns to, or near, its high for the daywhich causes the long lower shadow. The failure of the market to continue the

selling reduces the bearish sentiment, and most traders will be uneasy with anybearish positions they might have especially if the real body is white. If the close isabove the open, causing a white body, the situation is even better for the bulls.Since the reliability for a Hammer bull pattern is low, a white candlestick or a largegap up can confirm the trend reversal on the next trading day and by a higherclose.

The Hammer bull is a single candlestick pattern and is very similar to the

Dragonfly Doji bull. With the Dragonfly Doji bull the open and close are identicalwhereas the Hammer bull has a small real body at the upper end of the tradingrange. The Dragonfly Doji bull is considered more bullish than a Hammer bull andhas a higher reliability associated with it than a Hammer bull. BUY SIGNAL

DRAGONFLY DOJI BULLHow to identify

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1. A downtrend is in place2. A Doji at the upper end of the trading range3. Lower shadow extremely long4. No upper shadow

The Dragonfly Doji bull is very similar to the Hammer bull. With the Dragonfly Dojibull the open and close are identical whereas the Hammer bull has a small realbody at the upper end of the trading range. The Dragonfly Doji bull is consideredmore bullish than a Hammer bull and has a higher reliability associated with it thana Hammer bull.

The Dragonfly Doji bull is a single candlestick pattern and occurs at the bottom ofa trend or during a downtrend and is so named because it is hammering out abottom. The market is considered bearish because of the downtrend. The marketopens and then sells off sharply. However, the sell-off is abated and the marketreturns to or near, its high for the day which causes the long lower shadow. Thefailure of the market to continue the selling reduces the bearish sentiment, andmost traders will be uneasy with any bearish positions they might have. If themarket opens higher the next day, there would be many participants with shortpositions that would want to look for an opportunity cover these positions.

Confirmation of the trend reversal would be with a white candlestick, a large gapup or by a higher close on the next trading day would confirm the trend reversal. BUY SIGNAL

III. SUPPORT & RESISTANCE

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Think of prices for financial instruments as a result of a head-to-headbattle between a bull (the buyer) and a bear (the seller). Bulls pushprices higher, and bears lower them. The direction prices actuallymove shows who win the battle.

SUPPORT - A price level below the current market price, at which buying interestshould be able to overcome selling pressure and thus keep the price from goingany lower

RESISTANCE - A price level above the current market price, at which sellingpressure should be strong enough to overcome buying pressure and thus keep theprice from going any higher.

When investor expectations change, they often do so abruptly. Note too, that the

breakout above the resistance level was accompanied with a significant increase involume.

The development of support and resistance levels is probably the most noticeableand reoccurring event on price charts. The penetration of support/resistance levelscan be triggered by fundamental changes that are above or below investorexpectations (e.g., changes in earnings, management, competition, etc.) or byself-fulfilling prophecy ( Investors buy as they see prices rise).

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The cause is not as significant as the effect--new expectations lead to new pricelevels.

IV. TREND LINESThe concept of trend is absolutely essential to the technical approach to marketanalysis. All the tools used by chartist support and resistance levels, price pattern,moving averages and trend lines and etc have the sole purpose of helping tomeasure the trend of the market for the purpose of participating in that trend.

TREND HAS THREE DIRECTIONSMost people tend to think of markets as being always in either an uptrend or adowntrend. The fact of the matter is that market move in three directions: up,down and sideways. It is important if this distinction because for at least a third of

the time, a price moves in flat or sideways. This type of sideways action reflects aperiod of equilibrium in the price level where forces of supply and demand are in astate of relative balance. We define sideways trend as trend lessmarket.

These type of changes is often not constant, news and rumor based. Suchchanges may create a trap in a bull or bear market.

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There are 3 decisions confronting the trader? Whether to go long, short or donothing with the market. When a market is rising, the buying strategy ispreferable. When it is falling, the second approach would be correct. However,when the market is moving sideways, the third choice? Stay out of the market - itis usually the wisest.

You can see that, by changing the number of days or weeks as a time frame, thechartist can better determine the direction and duration of the trend.

Markets are made up of several different kinds of trends, and it is the recognitionof these trends that will largely determine the success or failure of your long andshort-term investing.

LINE STUDIESIn technical analysis, linesand various geometricfigures to be plotted in pricecharts or in indicator chartsare called line studies.Those include the

Support/Resistance Linesand Trend Lines describedabove, along with:

V. FIBONACCI INSTRUMENTSLeonardo Fibonacci was an important mathematician who was born in Italy aroundthe year 1170. It is rumored that Fibonacci discovered the relationship of whatare now referred to as Fibonacci numbers while studying the Great Pyramid ofGaza in Egypt.

Fibonacci numbers are a sequence of numbers in which each successive number isthe sum of the two previous numbers: 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144,233, 377, 610, etc. These numbers possess an intriguing number ofinterrelationships, such as the fact that any given number is approximately 1.618times the preceding number and any given number is approximately 0.618 timesthe following number.

Side ways

Up trend

Down trend

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These numbers are interrelated with a series of curious correlations. For example,each number in the series is approximately 1.618 times more than the previousone, and each preceding one makes approximately 0.618 of the consequent one.

There are several widespread instruments of technical analysis based on Fibonacci

Numbers. The general interpretation principle of these instruments consists in thefact that, when the price approximates to lines built with their help, the changes intrend development should be expected.

FIBONACCI RETRENCHMENTSFibonacci Retrenchments are displayed by first drawing a trend line between twoextreme points, for example, a trough and opposing peak. A series of ninehorizontal lines are drawn intersecting the trend line at the Fibonacci levels of0.0%, 23.6%, 38.2%, 50%, 61.8%, 100%, 161.8%, 261.8%, and423.6%. (Some of the lines will probably not be visible because they will be offthe scale.)

After a significant price move (either up or down), prices will often retrace asignificant portion (if not all) of the original move. As prices retrace, support andresistance levels often occur at or near the Fibonacci Retrenchment levels.

Technical Indicator

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A technical indicator is a series of data points that are derived by applying aformula to the price data of a security. Price data includes any combinationof the open, high, low or close over a period of time. Some indicators mayuse only the closing prices, while others incorporate volume and openinterest into their formulas.

VI. MOVING AVERAGE - MAA Moving Average is an indicator that shows the average value of a security's priceover a period of time. When calculating a moving average, a mathematicalanalysis of the security's average value over a predetermined time period is made.

As the security's price changes, its average price moves up or down.

There are five popular types of moving averages: simple (also referred to asarithmetic), exponential, triangular, variable, and weighted. Moving averages canbe calculated on any data series including a security's open, high, low, close,volume, or another indicator. A moving average of another moving average is alsocommon.

The only significant difference between the various types of moving averages isthe weight assigned to the most recent data. Simple moving averages apply equalweight to the prices. Exponential and weighted averages apply more weight torecent prices. Triangular averages apply more weight to prices in the middle of thetime period. And variable moving averages change the weighting based on thevolatility of prices

The most popular method of interpreting a moving average is to compare therelationship between a moving average of the security's price with the security'sprice itself. A buy signal is generated when the security's price rises above itsmoving average and a sell signal is generated when the security's price falls belowits moving average.

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This type of moving average trading system is not intended to get you in at theexact bottom nor out at the exact top. Rather, it is designed to keep you in linewith the security's price trend by buying shortly after the security's price bottomsand selling shortly after it tops.

The critical element in a moving average is the number of time periods used incalculating the average. When using hindsight, you can always find a movingaverage that would have been profitable (using a computer, I found that theoptimum number of months in the preceding chart would have been 43). The keyis to find a moving average that will be consistently profitable. The most popularmoving average is the 39-week (or 200-day) moving average. This movingaverage has an excellent track record in timing the major (long-term) marketcycles.

The length of a moving average should fit the market cycle you wish to follow. Forexample if you determine that a security has a 40-day peak to peak cycle, theideal moving average length would be 21 days calculated using the following

formula:

You can convert a daily moving average quantity into a weekly moving averagequantity by dividing the number of days by 5 (e.g., a 200-day moving average isalmost identical to a 40-week moving average). To convert a daily moving average

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quantity into a monthly quantity, divide the number of days by 21 (e.g., a 200-daymoving average is very similar to a 9-month moving average, because there areapproximately 21 trading days in a month).

Moving averages can also be calculated and plotted on indicators. The

interpretation of an indicator's moving average is similar to the interpretation of asecurity's moving average: when the indicator rises above its moving average, itsignifies a continued upward movement by the indicator; when the indicator fallsbelow its moving average, it signifies a continued downward movement by theindicator.

Indicators which are especially well-suited for use with moving averagepenetration systems include the MACD, Price ROC, Momentum, and Stochastic.

Some indicators, such as short-term Stochastic, fluctuate so erratically that it isdifficult to tell what their trend really is. By erasing the indicator and then plotting

a moving average of the indicator, you can see the general trend of the indicatorrather than its day-to-day fluctuations.

Whipsaws can be reduced, at the expense of slightly later signals, by plotting ashort-term moving average (e.g., 2-10 day) of oscillating indicators such as the12-day ROC, Stochastic, or the RSI. For example, rather than selling when theStochastic Oscillator falls below 80, you might sell only when a 5-period movingaverage of the Stochastic Oscillator falls below 80.

Calculation:SIMPLE

A simple, or arithmetic, moving average is calculated by adding the closing price ofthe security for a number of time periods (e.g., 12 days) and then dividing thistotal by the number of time periods. The result is the average price of the securityover the time period. Simple moving averages give equal weight to each dailyprice.

Where:

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EXPONENTIAL An exponential (or exponentially weighted) moving average is calculated byapplying a percentage of today's closing price to yesterday's moving averagevalue. Exponential moving averages place more weight on recent prices.

Because most investors feel more comfortable working with time periods, ratherthan with percentages, the exponential percentage can be converted into anapproximate number of days. For example, a 9% moving average is equal to a21.2 time period (rounded to 21) exponential moving average.

The formula for converting exponential percentages to time periods is:

You can use the above formula to determine that a 9% moving average isequivalent to a 21-day exponential moving average:

The formula for converting time periods to exponential percentages is:

You can use the above formula to determine that a 21-day exponential movingaverage is actually a 9% moving average:

TRIANGULARTriangular moving averages place the majority of the weight on the middle portionof the price series. They are actually double-smoothed simple moving averages.The periods used in the simple moving averages varies depending on if you specifyan odd or even number of time periods.

The following steps explain how to calculate a 12-period triangular movingaverage.

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1. Add 1 to the number of periods in the moving average (e.g., 12 plus1 is 13).

2. Divide the sum from Step #1 by 2 (e.g., 13 divided by 2 is 6.5).3. If the result of Step #2 contains a fractional portion, round the resultup to the nearest integer (e.g., round 6.5 up to 7).

4. Using the value from Step #3 (i.e., 7), calculate a simple movingaverage of the closing prices (i.e., a 7-period simple moving average).5 Again using the value from Step #3 (i.e., 7) calculate a simplemoving average of the moving average calculated in Step #4 (i.e., amoving average of a moving average).

VARIABLEA variable moving average is an exponential moving average that automaticallyadjusts the smoothing percentage based on the volatility of the data series. Themore volatile the data, the more sensitive the smoothing constant used in themoving average calculation. Sensitivity is increased by giving more weight given tothe current data.

Most moving average calculation methods are unable to compensate for tradingrange versus trending markets. During trading ranges (when prices move sidewaysin a narrow range) shorter term moving averages tend to produce numerous falsesignals. In trending markets (when prices move up or down over an extendedperiod) longer term moving averages are slow to react to reversals in trend. Byautomatically adjusting the smoothing constant, a variable moving average is ableto adjust its sensitivity, allowing it to perform better in both types of markets.

A variable moving average is calculated as follows:

Where:

The variable moving average was defined by Tushar Chande in an article thatappeared in Technical Analysis of Stocks and Commodities in March, 1992.

WEIGHTEDA weighted moving average is designed to put more weight on recent data andless weight on past data. A weighted moving average is calculated by multiplyingeach of the previous day's data by a weight. The following table shows thecalculation of a 5-day weighted moving average.

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The weight is based on the number of days in the moving average. In the aboveexample, the weight on the first day is 1.0 while the value on the most recent dayis 5.0. This gives five times more weight to today's price than the price five daysago.

VII. RELATIVE STRENGTH INDEX RSIThe Relative Strength Index ("RSI") is a popular oscillator. It was first introducedby Wiles Wilder in an article in Commodities(now known as Futures)Magazine inJune, 1978. Step-by-step instructions on calculating and interpreting the RSI arealso provided in Mr. Wilder's book, New Concepts in Technical Trading Systems.

The name "Relative Strength Index" is slightly misleading as the RSI does notcompare the relative strength of two securities, but rather the internal strength ofa single security. A more appropriate name might be "Internal Strength Index."Relative strength charts that compare two market indices, which are often referredto as Comparative Relative Strength.

When Wilder introduced the RSI, he recommended using a 14-day RSI. Sincethen, the 9-day and 25-day RSI have also gained popularity. Because you can varythe number of time periods in the RSI calculation, I suggest that you experimentto find the period that works best for you. (The fewer days used to calculate theRSI, the more volatile the indicator.)

The RSI is a price-following oscillator that ranges between 0 and 100. A popularmethod of analyzing the RSI is to look for a divergence in which the security is

making a new high, but the RSI is failing to surpass its previous high. Thisdivergence is an indication of an impending reversal. When the RSI then turnsdown and falls below its most recent trough, it is said to have completed a "failureswing." The failure swing is considered a confirmation of the impending reversal.

In Mr. Wilder's book, he discusses five uses of the RSI in analyzing commoditycharts. These methods can be applied to other security types as well.

Tops and Bottoms.The RSI usually tops above 70 and bottoms below 30. It usually forms these topsand bottoms before the underlying price chart.

Chart Formations.

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The RSI often forms chart patterns such as head and shoulders or triangles thatmay or may not be visible on the price chart.

Failure Swings(also known as support or resistance penetrations or breakouts). This is where theRSI surpasses a previous high (peak) or falls below a recent low (trough).

Support and Resistance.The RSI shows, sometimes more clearly than price themselves, levels of supportand resistance.

Divergences. As discussed above, divergences occur when the price makes a new high (or low)

that is not confirmed by a new high (or low) in the RSI. Prices usually correct andmove in the direction of the RSI.

For additional information on the RSI, refer to Mr. Wielders book.

Calculation

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The RSI is a fairly simple formula, but is difficult to explain without pages ofexamples. Refer to Wilder's book for additional calculation information. The basicformula is:

Where:

VIII. STOCHASTIC OSCILLATORThe Stochastic Oscillator is displayed as two lines. The main line is called "%K."The second line, called "%D," is a moving average of %K. The %K line is usually

displayed as a solid line and the %D line is usually displayed as a dotted line.

There are several ways to interpret a Stochastic Oscillator. Three popular methodsinclude:

1. Buy when the Oscillator (either %K or %D) falls below a specificlevel (e.g., 20) and then rises above that level. Sell when the Oscillatorrises above a specific level (e.g., 80) and then falls below that level.

2. Buy when the %K line rises above the %D line and sell when the%K line falls below the %D line.

3. Look for divergences. For example, where prices are making a seriesof new highs and the Stochastic Oscillator is failing to surpass itsprevious highs.

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CalculationThe Stochastic Oscillator has four variables:

1. %K Periods.This is the number of time periods used in the stochastic calculation.

2. %K Slowing Periods.

This value controls the internal smoothing of %K. A value of 1 isConsidered a fast stochastic; a value of 3 is considered a slowstochastic.

3. %D Periods.This is the number of time periods used when calculating a movingaverage of %K. The moving average is called "%D" and is usuallydisplayed as a dotted line on top of %K.

4. %D Method.The method (i.e., Exponential, Simple, Time Series, Triangular,

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Variable, or Weighted) that is used to calculate %D.

The formula for %K is:

For example, to calculate a 10-day %K, first find the security's highest-high andlowest-low over the last 10 days. As an example, let's assume that during the last10 days the highest-high was 46 and the lowest-low was 38--a range of 8 points.If today's closing price was 41, %K would be calculated as:

The 37.5% in this example shows that today's close was at the level of 37.5%relative to the security's trading range over the last 10 days. If today's close was42, the Stochastic Oscillator would be 50%. This would mean that that the securityclosed today at 50%, or the mid-point, of its 10-day trading range.

The above example used a %K Slowing Period of 1-day (no slowing). If you use avalue greater than one, you average the highest-high and the lowest-low over thenumber of %K Slowing Periods before performing the division.

A moving average of %K is then calculated using the number of time periodsspecified in the %D periods. This moving average is called %D.

The Stochastic Oscillator always ranges between 0% and 100%. A reading of 0%shows that the security's close was the lowest price that the security has tradedduring the preceding x-time periods. A reading of 100% shows that the security'sclose was the highest price that the security has traded during the preceding x-time periods.

IX. GAPSGaps are spaces left on the bar chart where no trading has taken place.Gaps can be created by factors such as regular buying or selling pressure,earnings announcements, a change in an analyst's outlook or any other type ofnews release.

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An up gap is formed when the lowest price on a trading day is higher than thehighest high of the previous day. A down gap is formed when the highest priceof the day is lower than the lowest price of the prior day. An up gap is usually asign of market strength, while a down gap is a sign of market weakness. Abreakaway gap is a price gap that forms on the completion of an importantprice pattern. It usually signals the beginning of an important price move. Arunaway gap is a price gap that usually occurs around the mid-point of animportant market trend. For that reason, it is also called a measuring gap. Anexhaustion gap is a price gap that occurs at the end of an important trend andsignals that the trend is ending.

CHAPTER 3FUNDAMENTAL ANALYSIS

Fundamental analysis deals with the factual influences on the market and thetrader will aim to predict economic developments and the impact on the directionof foreign exchange rates.

Frequently, there is an almost hostile atmosphere between technical andfundamental traders, disrespecting the other's approach. This is clearly wrong, asthere are merits to both approaches and the combination of the two will often give

Gap

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excellent results. The great advantage of technical analysis is the ability to fine-tune and accurately time market entries and exits, while the fundamentalapproach will deal better with the longer term directional views.

Many aspects are taken into consideration when applying fundamental analysis.

Many of the monthly and quarterly economic statistics give good indications of thestrength of the economy. This indicates probable future changes in short and long-term interest rates that are of great significance to foreign exchange trends.Generally, high short-term interest rates will be supportive for a currency, unlessconfidence is undermined by fears of strong inflationary pressures.

International trade and investment flows are followed closely to assess theimplications for the relative strength of buying and selling for commercial and cashtransactions.

Political events, such as elections or cabinet appointments can often have

significant impact on foreign exchange markets, depending on the perceived policyimpact on the economy.

Monetary policy is also followed very closely, including the indicators shaping suchpolicy decisions. Money supply, central bank interventions and short-term interestrates are all significant factors for fundamental analysts.

Trading currencies is probably the purest way of taking a view of a country'soverall economic situation. Events in South East Asia in the second half of 1997clearly showed the consequences when confidence in a local economy collapses

and the most efficient way to profit from such expectations is shorting thecurrency involved.

The overall stronger economic situation in the US compared to Continental Europelikewise resulted in a substantial appreciation in the US currency during 1997. But,to return to the Fundamental vs. Technical argument, the rally in the US dollaralso resulted in clearly bullish technical, underlining the fact that the twoapproaches are by no means contradictory.

ECONOMICAL TERMSGross Domestic Product:GDP Equals the total income of everyone in the economy and the total expenditureon the economy's output of goods and services.

Initial Jobless Claims:Weekly initial jobless claims are the amount of people who have put in claims forunemployment.

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Consumer Price Index:The change in consumer prices determined monthly by the U.S. Bureau of LaborStatistics, often cited as a general measure of inflation.

Business Inventories:The change in business inventories determined monthly by the U.S. Bureau ofCensus.

Personal Income Source: is the income received by persons from all sources,that is, from participation in production, from both government and businesstransfer payments, and from government interest.

Industrial Production:The Industrial Index is compiled by 2 sub groups, Products and Materials. Productsinclude Final Products and Intermediate Products. Materials include Durable,Nondurable and Energy indices.

US Unemployment Rates:The unemployment rate represents the number unemployed as a percent of thelabor force.

Durable Goods New Orders:Durable Goods manufacturers shipments and orders - seasonally adjusted millionsof dollars.

National Association of Purchasing Managers Index NAPM:The NAPM Indices compare the changes in various market areas on a month-to-month basis.

Chicago Purchasing Managers Index NAPM:The Chicago Purchasing Managers Index is a monthly index of regional(Midwestern) manufacturing activity. Compiled by the Purchasing Managers

Association of Chicago, the index is released on the last day of every month forthat month. An index reading higher than 50 means manufacturers reportingimproved business outnumbered those reporting deteriorating conditions.

PPI Producer Price Index:Producer Price Index (PPI) Measure average changes in prices received.

Consumer Confidence:A commonly accepted measure of consumer sentiment published monthly by theConference Board.

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Retail Sales:Adjusted Estimated Monthly Retail and Food Services Sales by Kinds of Business.

Leading Economic Indicators:An index measuring the percent change in 10 factors, such as average

manufacturing weekly hours, and money supply.

Employment Cost Index:An index measuring the change in cost of labor free from the influence ofemployment shifts among occupations and industries.

U.S. Non-farm productivity:An index measuring the percent change in U.S. non-farm productivity of thecurrent quarter over the previous quarter.

U.S. Trade Balance:An index measuring the balance of payments for US goods, or total trade balance.

CAPACITY UTILIZATION:Calculated for the manufacturing, mining and electric and gas utilities industries.For a given industry, the utilization rate is equal to an output index divided by acapacity index. Output is measured by seasonally adjusted indexes of industrialproduction. The capacity indexes attempt to capture the concept of sustainablepractical capacity, which is defined as the greatest level of output that a plant canmaintain within the framework of a realistic work schedule, taking account ofnormal downtime, and assuming sufficient availability of inputs to operate themachinery and equipment in place.

TREASURY BILL, BOND, NOTENegotiable debt obligations issued by the U.S. government and backed by its fullfaith and credit. Treasury bills are short-term securities with maturities of one yearor less. Treasury notes are intermediate-term securities with maturities of 1 to 10years. Treasury bonds are long-term securities with maturities of 10 years longer.

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FEDERAL RESERVE SYSTEMThe central bank of the United States which has regulated credit in the economysince its inception in 1913, Includes the Federal Reserve Bank, 14 district banksand the member banks of the Federal Reserve.

Note:

Every Based on the below opposite in condition translates in opposite of $ US

E.g: Condition is UP - $ US is UP then Condition is DOWN - $ US is DOWN

Condition is DOWN - $US is UP then Condition is UP - $ US is DOWN

INDICATORS ECONOMICNo Indicators Condition $ US

1. Average Earning Up Up

2. Balance of Payment Up Up

3. Budget Deficit Down Up

4. Business Inventories Down Up

5. Capacity Utilization Up Up

6. Car Sales Up Up

7. Chicago PMI (Purchasing Management Index) Up Up

8. Construction Spending Up Up

9. Consumer Price Index (CPI) Down Up

10. Consumer Credit Up Up

11. Consumer Confident Index Up Up12. Consumer Spending Down Up

13. Cost Of Living Up Up

14. Current Account Up Up

15. Deflasi Up Up

16. Discount Rate Up Up

17. Durable Goods Orders Up Up

18. Economic Monetary System (EMS) Up Up

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19. Factory Orders Up Up

20. Federal Budget Up Up

21. Federal Reserve Fund Up Up

22. Gross Domestic Product Up Up

23. Gross National Product Up Up

24. Housing Start Up Up25. Industrial Production Up Up

26. Jobless Claims Down Up

27. Leading indicators Up Up

28. Money Supply(M1,M2,M3,M4) Up Up

29. National Association purchasing Manager ( NAPM) Up Up

30. Non Farm Payroll Up Up

31. Personal Expenditure Up Up

32. Personal Income Up Up

33 Prime Rate Up Up

34. Producer Price Index (PPI) Down Up

35. Public Sector Dept Repayment Up Up36. Retail Sales Up Up

37. Trade Balance Up Up

38. Trade Deficit Down Up

39. Unemployment Rate Down Up

40 Unit Labor Cost Down Up

41. Value Added Tax Down Up

42. Whole Sale Price Index Up UpCHAPTER 4RISKS MANAGEMENT

Although Foreign exchange trading can lead to very profitable results,there are substantial risks involved: exchange rate risks, interest rate risks,credit risks and event risks.

Approximately 80% of all currency transactions last a period of seven days or less,with more than 40% lasting fewer than two days. Given the extremely short

lifespan of the typical trade, technical indicators heavily influence entry,exit and order placement decisions.

There are some ways of risk management:

I.CUT LOSS

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Example:

Open Sell GBPUSD at 1.9900 and then the Price Move up andRunning at 1.9930. We take Cut Loss by closing the position at1.9930, so we get Loss of 30 points.

I I . HEDGINGExample:

Open Buy GBPUSD at 1.9900 and then the Pr ice Move Up andrunning at 1.9930. We take Hedging Position by Open NewPosition with Sell GBPUSD at 1.9930, so we get 2 differentposition that is 1 Buy GBPUSD and 1 Sell GBPUSD.

I I I . AVERAGINGExample:

Open Sell GBPUSD at 1.9900 and then the Price Move Up andrunning at 2.0000. We take Averaging by Open New Position SellGBPUSD at 2.0000, so we have 2 same positions that is SellGBPUSD at 1.9900 and Sell GBPUSD at 2.0000.

CHAPTER 5TRADING FOREIGN EXCHANGEWITH META TRADER 4

T rad i ng on l i n eThe trading platform operates 24 hours a day just as the global Foreign

exchange market runs around the clock.

However, many online Foreign exchange market makers require thedownload and installation of software specific to their own trading platform.Consequently, accessibility is limited to those terminals that have the software.Since Foreign exchange trading is borderless, and may be performed at any giventime, it is obviously advantageous to have access to trading from as manylocations as possible. StarPac Trader Trading Platform is a fully web-based

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system, which means trading can be conducted from any computerconnected to the internet. Traders are only required to log-in, ensure theyhave available funds to trade, or make new deposits, and commence trading.

The Trading Platform: real-time softwareThe main feature of any Foreign exchange trading platform is r eal timeaccess to exchange rates, to deal and order making, to deposits andwithdrawals, and to monitoring the status of positions and one's account.

The StarPac Trader Trading Platform system uses web services to continuouslyfetch the most current exchange rates. The most recent data displays withoutthe need for a page refresh. This includes account status screens such as "Trade",which updates continually to reflect changes in rates and other real timeelements.

Transaction processing and storage

As soon as a transaction is executed, the relevant data is processed securelyand sent to the data server where it is stored. A backup is created on adifferent server farm, to ensure data integrity and continuity. All of thishappens in real time, with no human intervention.

HOW TO OPEN NEW POSITION

Click for new position

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HOW TO PUT LIMIT ORDER

Click here for

limit order

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HOW TO OPEN DEMO ACCOUNT

Click here to set limit or

stop order

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HOW TO MAKE CHART

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basic education booklet

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