at yourFINGERTIPS

FOREX

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CONTENTS ORDER TYPES

Instant ExecutionPending OrderBuy LimitSell LimitBuy StopSell Stop

FUNDAMENTAL ANALYSISEconomic IndicatorsGross Domestic ProductUnemploymentInterest RatePolitical & Policy Statements… not to mention actionsIn Short – the Economic Calendar

TECHNICAL ANALYSISChartsTrendsChartingChannelsSupport and ResistanceSupport Becoming ResistanceTechnical IndicatorsRelative Strength IndicatorMoving AveragesFibonacci Retracements

AN INTRODUCTION TO FOREX

WHY FOREX?The ScaleTiming & LocationLiquidity & StabilityTransparencyThe OfferingBroker Benefits

ESSENTIAL FOREX TERMINOLOGYBalance & EquityLotsPips & CurrenciesHow to Profit in Forex TradingComputing the Pip Value to Evaluate Profit/LossSpreadsLeverageMargin

TRADING PLATFORMS

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Nowadays, individuals and entities active in the various financial markets can profit each time such an exchange takes place without being directly involved in the transaction itself. They can either be invested in a commercial entity through shares or stocks; they can invest in indices that track the value of assets or asset groups; they can buy futures to trade on assets without actually buying or selling the asset, but merely being contracted to do so; and so forth. In fact, hardly a year goes by without some new form of financial instrument being created to enable more people to be involved in more ways in the world’s financial trade. And in Forex (FOReign currency EXchange) they invest in the relative values of national currencies.

Compared to other trading markets, Forex exhibits the largest daily turnover; and since there is no central clearinghouse for all those Forex deals (such as the New York Stock Exchange for shares), you can trade around the clock – whenever a market is open in any financial capital in the world. You need no more than a PC or mobile with a connection to the internet.

When opening an account, ensure charges are low and that you’re getting the leverage required, so that your profits will be amplified to a considerable return; because fluctuations in the Forex market are relatively small. Your broker will provide access to free software, there should be no commissions, and what you earn is yours.

FOREXAN INTRODUCTION TO

EVER SINCE THE DAWN OF CIVILIZATION, HUMANS HAVE BEEN BUSY EXCHANGING THINGS – PROPERTY, FOOD, MONEY AND EVEN IDEAS.

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Foreign exchange trading is attractive because it involves one of the most exciting global financial markets, providing optimal trading opportunities around the clock. Aside from returns and improved pricing that is among the lowest in the industry, easy access to information and analysis ensure you have a higher degree of success versus any other trading venue. A 24-hour market that operates five days a week provides maximum flexibility; and the variety of assets includes, not only currencies, but also commodities, indices and even shares.

THE SCALE As mentioned, the most pertinent characteristic of the Forex market is its size – the entire bulk of the world’s money is the basic asset, subdivided into its respective currencies.

The amount of physical money in the world is estimated to number approximately $5 trillion; but if you add to that physical money, money accessible in checking accounts, savings accounts, institutional money, market funds, and deposits, the number is at least 15 times that. Of those funds, anywhere between the equivalent of $3-5 trillion exchanges hands on a daily basis. That is more than 20 times the amount of daily trading volume of the world’s largest stock market.

FOREX ?WHY

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TIMING & LOCATION Every country has its currency to pay for commodities and services while implementing its own fiscal policy. As such, the actual Forex market does not really exist as a centralized entity, but rather as a global marketplace that can be accessed whenever markets are open anywhere around the world. In simpler terms, that means you can trade Forex nearly 24-hours a day, 5-days a week. There is no central clearinghouse to limit or hinder your trading activities, and liquidity is readily accessed.

LIQUIDITY & STABILITY Unless the basis of the entire global monetary system breaks down completely, the forex market’s size, turnover, and ample levels of participation comprise the foundation of a very established market. Thanks to its size, no single force can influence it disproportionately , and prices are a totally transparent reflection of supply and demand, as determined by market forces.

TRANSPARENCY Forex trading in its current form is a culmination of modern technology and the instant, unmediated access that every trader has to the market and the information that motivates it. Investors – through their brokers – get access to the software that enables them to open, alter and close positions independently. There are no intermediaries to delay or alter their requests – orders are simply placed instantly and reliably by the traders themselves.

Beyond that, the internet has become a great equalizer regarding access to the information that moves the markets. In Forex, we are dealing primarily in national currencies, and these are determined by central banks. The policies, current affairs and announcements that guide them are readily available to anyone with an internet connection to major news sources; and there are very few dealings behind closed doors that do not become instantly accessible to even the smallest retail trader. In addition, educational material on how to read the information and process it is also readily available – as basic as this eBook, and as advanced as scholarly articles on how to program trading robots in advanced (and free) trading platforms.

Thus, the worlds of fundamental analysis (based on real-world events) and technical analysis (based on investor sentiments and actual market dynamics) are opened to the wider public, rather than to those ‘in the know’ or others with advanced economic degrees.

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THE OFFERINGForex traders invest in the relative values of national currencies by trading on currency pairs. Each pair is valued according to the momentary exchange rate between those two currencies. Some commodity pairs are valued against the dollar (such as gold and silver) in the form of a CFD (Contract For Difference), in which a contract is made between two parties for remuneration based on value variance between the start and end dates of the contract. CFDs enable traders to invest on the values of shares, indices and – again – commodities, such as crude oil, copper, corn, coffee, etc.

BROKER BENEFITS Besides free access to trading platforms and educational materials, Alvexo provides a plethora of daily news, signals, market reviews and expert analysis. All these are aimed at maximizing client returns.

The most salient aspect of trading Forex through a regulated Forex broker is leverage – an investment that the broker makes alongside you to increase

your profits. Since fluctuations in Forex can be very small (several hundredths of a cent at a time), one would need to invest huge amounts in each transaction to see a recognizable gain. Forex leverage is usually measured in denominations of 100 – 100:1, 200:1, 400:1, and possibly higher. What this means is that for every dollar the client invests, the broker magnifies the amount invested by the leverage multiple. This in turn multiplies the profit by the same leverage factor, making it easier to make money … but also to lose it.

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BALANCE & EQUITYIn Forex, the amount of money one has at all times keeps changing due to the momentary fluctuations of one’s open positions (trades). We therefore differentiate between one’s balance and one’s equity. Balance is the amount of funds first deposited into an investing account net of the profits and losses of all closed positions. Equity takes this measure one step further, giving a real-time account of the funds available in the account, including the profits and losses of existing open positions. In simpler terms, this is the account balance plus open profits and minus losses of open positions that have not yet been closed.

LOTSThe size of each position a trader opens (the value of the transaction) is measured in lots – the basic measuring unit of volume that traders deal in. Whether one is buying or selling, one standard lot is always equal to 100,000 units of the base currency in a pair. In the EUR/USD (euro versus the US dollar) pair, that would be 100,000 euros. The actual value of that lot then changes in line with the price fluctuations of the pair.

Besides the standard lot, one may also trade in, mini-lots, which are equal to 10,000 units, or micro-lots, which are equal to 1,000 units.

ESSENTIAL FOREX

TERMINOLOGY EQUIT

YBALA

NCE

PROSPERITYWEALTH

LINE

DROP

PIPS

MICRO

LOTSINDEX

SAVIN

GSIND

IVIDU

ALS

ACCOUNTING

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NUMBERS MADE EASY

CHECK THEM OUT

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EQUITY

BALANCE

PROSPERITYWEALTH

LINE

DROP

PIPS MICRO

LOTSINDEX

SAVINGSINDIVIDUALS

ACCOUNTING PIPS & CURRENCIESAt present, there are over 180 national currencies in circulation, not all of them tradable on Forex markets. Deducting those, there is still a huge number of possible currency-pair variations. In Forex, we do not trade all of these instruments, but offer relevant instruments based on user demand and potential trade volume (about 50 pairs is average). Of these, there are the major pairs, which constitute about 85% of Forex transactions in the world – EUR/USD, USD/JPY, GBP/USD, AUD/USD, USD/CHF, NZD/USD and USD/CAD.

As seen above, each pair is designated by two sets of currency abbreviations – one on the left, the base currency, and one on the right, the counter currency. The value of the pair equals the amount of units of counter currency you can exchange for one unit of base currency.

Thus, in the EUR/USD pair, a value of 1.4 means that for 1 euro, you can get or must pay 1.4 US dollars. Forex values are typically detailed to the fourth place after the decimal point, or 0.0001 of a dollar, in this case, or 1/100th of a US cent. Each shift in that 4th place after the decimal point is called a Pip, and the pip’s value changes from one currency to the next – in EUR/USD it represents 1/100th of a cent, but in USD/CHF it represents 1/100th of a Swiss centime.

A drop in AUD/USD from 0.9823 to 0.9751 represents a drop of 0.0072, or 72 pips.

Incidentally, in Japanese yen, the pip represents the number in the second place after the decimal point. A rise in USD/JPY from 102.32 to 103.03 represents a rise of 0.71, or 71 pips.

EUR EUROUSD U.S. DOLLARJPY JAPANESE YEN GBP BRITISH POUND CHF SWISS FRANCAUD AUSTRALIAN DOLLARCAD CANADIAN DOLLARNZD NEW ZEALAND DOLLAR

EACH FOREX ASSET IS REPRESENTED BY A 3-LETTER ABBREVIATION, FOR EXAMPLE:

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HOW TO PROFIT IN FOREX TRADINGA rise or fall in the value of a currency pair reflects a movement in the comparative values of the two currencies. A rise reflects a rise in the value of the base currency or a drop in the value of the counter currency. In both cases, more counter currency will be needed to equal one unit of the base currency. Thus, if the value of EUR/USD rises, this reflects either a rise in the euro’s value or a drop in the dollar’s. Conversely, a drop in the pair’s value represents a drop in the value of the base currency or a rise in the value of the counter currency.

To gain from a pair’s increasing value, the trader invests in a buy order – an order to buy the pair. Obviously, the pair’s value and the investor’s return increase in conjunction. However, one can also invest in a sell order – an order to sell whose value rises alongside the pair’s decline. This operation is akin to selling something you do not actually have: you take a loan that is indexed to an asset, but neglect to buy the asset. After the asset’s value has dropped, you return the loan. You are left with the difference – in the case of selling and buying back lower, a reward of the difference between the two prices.

COMPUTING THE PIP VALUE TO EVALUATE PROFIT/LOSS As mentioned above, a pip is equal to one hundredth of a percent of the base currency in a pair. The profit/loss of a transaction is calculated once a position has been closed. Depending on the time period a position is held open, rollover fees may be incurred.

TO CALCULATE THE PIP VALUE OF A TRANSACTION’S PROFIT/LOSS,

SIMPLY MULTIPLY THE CHANGE IN PIPS BY THE SIZE OF THE POSITION

AND DIVIDE BY THE VALUE OF THE PAIR AT THE CLOSING POINT OF

THE POSITION.

EXAMPLE:OPEN EUR-USD POSITION OF 10,000 UNITS AT 1.1338 AND CLOSE IT AT 1.1472.THE PROFIT = 1.1472-1.1338 = 0.0134 PIPSTHE TRADING VOLUME WAS 10,000 UNITS OF EUROS. THE PROFIT = 0.0134 X 10,000/1.1472 = EUR 116.81

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LEVERAGEIn order to increase our potential gains to substantial levels, Forex brokers trade alongside us, leveraging our investment by a factor of (usually) hundreds. The ratio is expressed as the leverage amount relative to 1, for example 50:1, 100:1, 400:1 and so forth.

For the above example, a client receiving leverage of 100:1 would only have had to invest EUR 100. The broker would provide leverage of 100:1 (100 x 100 = 10,000) to obtain the required EUR 10,000 position. The entire profit, however, would belong to the client. However a word of caution – just as the client is credited with the entire profit, the client is also liable for the entire loss. In the above scenario, had the value dropped instead of rising by the same amount, the client would have lost the entire EUR 100 deposit plus an additional EUR 16.81, both which would be deducted from his/her equity.

MARGIN

In Forex we set aside a portion of marginable funds (balance) to open a trading position. By providing margin, the broker enables clients to take larger positions at a fraction of the equity necessary to open the position without leverage. Each asset has different margin requirements necessary for the client to open a position in that asset. The client must set aside a specific amount of margin to trade upon – the required margin or margin deposit. With several positions opened, these accumulate into used margin. But remember, used margin is a dynamic number; it changes in light of the profit or loss values of the open positions. This is necessary so that the investor will have the required equity to cover potential losses.

Usable margin is what the investor will have left over to direct to other positions. This figure is calculated by subtracting the used margin from the balance.

Once usable margin equals zero, an investor will be stopped out, or prevented from opening new positions. If you have less funds than required to cover outstanding losses you will receive a Margin Call, which is a request to deposit more funds to the balance. Failing this, the system begins to close open positions. Unfortunately, the system cannot predict if a losing position might swing to profit from loss.

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SPREADSBrokers like Alvexo do not charge transaction fees or commissions on Forex trades. Instead, there is a 'spread' – the difference between the rate at which investors buy and sell a currency. Like a bank or currency change point in most tourist havens, values of currencies are quoted in pairs – the first number being the bid price for selling a currency, and the second – the ask price at which one can buy a currency. The buy price is usually higher than the sell price, and that is how a broker profits.

However, remember that – just like a bank or money changer – spread is a function of supply and demand, a trader’s account and turnover. The more one trades, the narrower the spread. Thus, higher level accounts requiring higher deposits and larger turnovers usually provide much tighter spreads.

TRADING PLATFORMSOnline Forex trading is a straight-through process. That means that clients accesses a platform using free software and execute the trades on their own without having to depend upon the transparency or availability of a broker. Execution is instantaneous, and investors have full control over their investment portfolio.

Platforms are either web, desktop or mobile-based. A web-based platform like Alvexo’s WebTrader can be accessed from any computer with an internet connection; it requires no downloads. Software-based platforms, such as MetaTrader-4, require downloaded software applications. These programs are usually for more experienced traders and offer more advanced features. For mobile devices, such as smart phones and tablets, brokers offer downloadable applications that can be either scaled-down versions of PC-based platforms or native applications like Alvexo’s Mobile Trading App, which is 100% functional.

Once an account has been opened, investors are able to access that same account on any of these platforms, with the account information stored on the broker’s servers. Account history, information on open positions and other information can be accessed using any one of the above platforms. Also, each platform can perform any of the basic orders and provides access to rudimentary technical indicators and charting tools. With properly regulated brokers, transactions (trading, as well as depositing or withdrawing funds) must be secured by industry-regulated encryption methods.

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THE TWO BASIC CATEGORIESOF ORDERS IN FOREX TRADING ARE:INSTANT EXECUTION OR PENDING ORDERS

At the most basic level, a Forex position can be either long (to buy) or short (to sell). A long position will be profitable if the close rate is higher than the open rate; a short position will be profitable if the close rate is lower than the open rate.

Beyond these, a trader can also specify for each order a stop-loss (SL) or take-profit (TP) order, both of which will close a position if the required value is reached. In the former case, the purpose is to minimize losses, and in the latter – to safely set aside a pre-determined profit. In a long position, the stop-loss must be below the opening price and the take-profit above. In a short position, the stop-loss must be above the opening price and the take-profit below that same price.

An instant execution order is one that is opened the moment the trader clicks on the buy or sell button. To perform such an order, the trader selects an asset, picks the volume (in lots), chooses SL & TP levels (optional) and clicks on ‘buy’ or ‘sell’. One may also specify a maximum deviation from the order price. This is especially useful in volatile markets, where fluctuations are very swift.

After placing the order, a confirmation window will display the position number, its volume and its opening exchange rate. An unsuccessful order will be indicated by a similar window without the order number but with a comment explaining the error that caused the order to be rejected.

ORDERTYPES

INSTANT EXECUTION

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In a pending order, the trader places a future order that will be executed only when a certain asset value is attained. Pending orders can be:

BUY LIMITA buy limit order is a pending buy order that will execute a long position at a price that is lower than current market value. This is beneficial if the price of an asset first drops to (or through) the specified value but then rises again.

SELL LIMITConversely, a sell limit order is a pending sell order that will execute a short position at a price that is higher than current market value. It is beneficial if the price of an asset rises to (or through) the specified value but then drops again.

BUY STOPA buy stop order will execute a long position at a price that is higher than current market value. However here, the prices must continue to rise for a profit to be made as, after all, it is a buy order (long position).

SELL STOPFinally, a sell stop order executes a sell position that is lower than current prices, and pays only if the asset price then continues to fall.

PENDING ORDER

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SOMETIMES REFERRED TO AS QUANTITATIVE ANALYSIS, FUNDAMENTAL ANALYSIS INVOLVES EXAMINING THE NON-MARKET RELATED FORCES DIRECTLY INFLUENCING A SPECIFIC ASSET. REGARDING SHARES IN A COMPANY, THESE WOULD INCLUDE THE FIRM’S FINANCIAL PERFORMANCE, ITS SIZE, MECHANICS, AND EARNINGS OUTLOOK. WITH FOREX, THEY WOULD INCLUDE A COUNTRY’S MONETARY POLICY, ITS TRADE BALANCE, EMPLOYMENT, SOCIO-ECONOMIC MAKEUP AND GENERAL ECONOMIC HEALTH.

Fundamental analysis may be quantitative or qualitative. Quantitative analysis refers to data that is measurable, whereas qualitative refers to more abstract terms, such as the personality and interaction of decision makers and national character.

The most accessible data used by fundamental analysts are the basic quantitative economic indicators of a country like GDP, employment and interest rates.

GDP measures the value of all goods manufactured and services produced in a country and serves as an excellent indicator of an economy’s health. However, more interesting to Forex traders is the change in GDP and whether it exceeds or disappoints expectations.

ECONOMICINDICATORS

GROSS DOMESTIC PRODUCT

Employment and unemployment can often be derived from several data sources. In the USA, for example, employment figures are published by the Bureau of Labour Statistics. However, these statistics only reflect the number of people collecting unemployment benefits; it does not include those who have simply left the labour market or are no longer eligible. Another employment figure in the USA is Non-Farm Payroll – where the Department of Labour Statistics reports the number of people employed in non-farm, non-household and non-profit related professions. Once again, the published number will not necessarily influence a traders’ sentiment toward a currency as much as whether the number does or does not live up to analyst expectations.

UNEMPLOYMENT

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Described by some as the intrinsic value of a currency, the central bank sets interest rates of an economy based on the health or risks to the outlook. Monetary policy, which is a fancy word for interest rate policy, determines how investors value a currency. The Central Bank can target specific objectives, including exchange rates, unemployment and inflation by moving the interest rates. This is not to be confused with government spending, which is a matter of fiscal policy. Higher interest rates will encourage people to save while lower ones will encourage them to spend. Higher rates will attract foreign depositors (who will receive greater returns for their excess capital) and lower rates will encourage industrial investors (lower long-term borrowing costs).

INTEREST RATE

As stated, often the actual value of an indicator is less important than its expectations and results regarding those expectations. In recent years, especially in the wake of the financial meltdown of 2008 and the inability of the European Union and parts of Asia to recover, quantitative easing has become an integral measure of how much a government (or central bank) is willing to invest in an economy’s recovery. Declarations of further financial asset purchases by central banks, or plans to raise interest levels or lower them into negative territory are sufficient measures to send traders scurrying towards or away from a currency pair.

POLITICAL & POLICY STATEMENTS

Often, statements are not enough, and actual deeds influence currencies, indices and commodities as well. Clearly, oil being produced in many of the planet’s most incendiary locations may threaten its supply and raise prices. On the other hand, instability around the globe and in the financial markets will chase investors towards safe-haven assets like gold. Gold prices could influence the price of the Australian dollar, since the Australian economy is so tightly bound with the demand for and price of gold, one of the nation’s major exports.

… NOT TO MENTION ACTIONS

To help keep up with many of these events (at least those we know of ahead of time), Forex traders rely deeply upon the Economic Calendar – a listing of events that influence Forex markets.

These include announcements of national economic data, such as employment, GDP, inflation, interest rates, purchasing managers’ indices and more. Economic calendars will include histories and expectations along with the date and times of future announcements.

IN SHORT:THE ECONOMIC CALENDAR

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TECHNICAL ANALYSIS, AS ITS NAME SUGGESTS, IS THE ANALYSIS OF AN ASSET’S HISTORICAL TRENDS AND THE ATTEMPT TO DISCERN A PATTERN THAT CAN INDICATE FUTURE MOVEMENTS. MANY TRADERS WILL PREFER TECHNICAL ANALYSIS BECAUSE IT IGNORES THE MARKET FORCES AT WORK BEHIND AN ASSET AND CONCENTRATES ON WHAT THEY CONSIDER IMPORTANT: THE IMMEDIATE MARKET REACTION AS DRIVEN BY THE TRADERS THEMSELVES. IT IS, IN FACT, THE SIMPLE STUDY OF THE SUPPLY AND DEMAND FOR AN ASSET AND ITS VALUE IN CONSEQUENCE, INFERRING THAT THE UNDERLYING FUNDAMENTAL DATA HAS ALREADY BEEN FACTORED INTO THESE. THIS IS ESPECIALLY CONVENIENT FOR SHORT-TERM INVESTMENTS, RATHER THAN LONG TERM.

Another reason to prefer technical analysis is that, although, fundamental indicators are easier to understand – since they take their input from real world events that influence the economy – translating those inputs into market predictions is in itself a very complex affair.

118.780

118.780

225.500

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50.580

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Forex trading platforms and most asset reporting sites provide information using either line charts or candlestick charts.

Candlestick charts are popular because they provide much more information: within a prescribed time period (the width of the candle), each candle displays the asset’s opening, closing, maximum and minimum prices. Opening and closing prices are provided by the top and bottom of the candle; and each candle, having two wicks (one on either side), also provides the maximum price during the time period (the top wick – its shadow) and minimum price (the bottom wick its tail). Candles are usually green if the asset’s price rose during the time period, and red if it fell.

CHARTS

LINE CHART

CANDLE STICK CHART

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A trend is a fixed general movement in an asset's value. If the value increases over a certain time frame, the trend is rising; if over that time frame the value dropped, the trend is falling. This is true, even if within the time frame measured there are several upward or downward movements.

What is more relevant, trends are what enable beginner and even veteran traders to successfully identify trade opportunities. Most of the time (some estimates range as high as 70% of the time) an asset will be relatively stable in a sideways trend, with prices moving within a relatively narrow range.

DIRECTIONAL TRENDS TEND TO OCCUR ONLY 30% OF THE TIME.TWO THINGS TO REMEMBER THOUGH ARE THAT:

nobody expects to make winning trades all of the time – do not trade if you cannot discern a trend, and even a stable asset can be zoomed in upon until a trend is discernible.In general, once a trend is recognized, beginner traders would be well advised to invest with the trend. There are more than enough seasoned speculators who are trading against the trend, which can be a riskier strategy.

TRENDS

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EUR/CHF RISING TREND CHART

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Assets will often move within a channel, or two parallel trend lines that describe an asset's higher price bounds and lower ones, with peaks rarely rising above one line or troughs falling below another. A channel can be the first indication of a trend. The two channel lines can rise (an ascending channel, where highs and lows are higher than the previous ones) or fall (a descending channel, where highs and lows are lower than the previous ones).

TREND LINES CAN BE SUPERIMPOSED ON A CHART USING CHARTING TOOLS. SELECT THE TREND LINE AND SIMPLY CONNECT THE PEAK OR TROUGH PRICES.

CHANNELS CHARTING

CHARTING

AUD/USD CHANNEL CHART

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The breaking of support and resistance levels indicates a change in market perception on the part of traders. When that happens, support and resistance will be found momentarily at equal levels – a sign that the market is changing and that the support level is becoming the resistance level (or vice versa) and a new resistance level (or – conversely – support) is being sought. In this case, traders are well advised to wait for rates to drop below the old support level and place a short position – in anticipation of the new support level being defined, since chances of values rising above the new resistance level are low. If this happens repeatedly, though, a downward moving channel may be forming – once again, an opportunity for placing a short position.

It is important to take note, however, that in an upward or downward trending channel, breaking support or resistance can also mean that the trend is accelerating.

SUPPORT BECOMING RESISTANCE CHARTING

Once trend lines are drawn connecting the upper prices and the lower prices of an asset, it is possible to discern the two most important trend lines for any asset – its support and resistance levels – the price below and above which an asset’s price will not fall or rise, respectively. These are generally dictated by the mass public of traders, who will not pay more for, or even hold on to an asset they consider over-priced by its nearing or crossing its resistance level, on one hand. Support, on the other hand, reflects a price that traders considers as the asset’s rock-bottom price – perhaps even under-priced – and one that is bound to rise.

SUPPORT AND RESISTANCE CHARTING

Support and resistance levels are useful in identifying a trend. When the asset reaches support, traders begin buying; demand gradually overtakes supply and the asset rises towards resistance. When it reaches resistance, traders stop buying, perhaps even selling; supply overtakes demand and prices fall towards support.

EUR/USD SUPPORT AND RESISTANCE CHART

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As in fundamental analysis, technical analysis too has its indicators, or mathematical models for analysing past and present asset behaviour and predicting the future. Since an in-depth explanation of their mechanics is beyond the scope of this introductory manual, we will concentrate on three main indicators and describe their use in very general terms. A more detailed explanation for these and others may be found in our advanced trading academy.

The relative strength index (RSI) measures the strength of rises and falls in value in order to gauge if an asset is overbought or oversold, and hence to determine possible trend reversals. When opening this indicator (by simply selecting it) an additional chart will appear under that of the asset (rather than superimposed over it), showing RSI values between 30 and 70, and a relevant line chart. Generally speaking, an RSI value below 30 indicates that an asset is oversold and therefore undervalued. Expect a falling trend to reverse upwards. An RSI value above 70 indicates that an asset is overbought and therefore overpriced. Expect a rising trend to reverse downwards.

RELATIVE STRENGTH INDEX TECHNICAL INDICATORS

TECHNICAL INDICATORS

USD/CAD RSI CHART

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Moving averages make it clearer to spot a trend by filtering out the noise of price fluctuations caused by forces that are extraneous to the pure dynamics of the market. A simple moving average is created by generating averages for advancing periods of time – for each value, a measurement is made for the n days preceding that specific value (n1 = average for days x to y, n2 = average for days (x+1) to (y+1), n3 = average for days (x+3) to (y+3) ….).

Moving averages are applied by selecting the tool from the trading platform’s indicators menu, and then specifying a periodicity for the MA. A line will be superimposed over the asset’s chart displaying the asset’s price movement without the ‘noise’ of small fluctuations. The shorter the period, the closer the MA will be to the original chart (though lagging); the longer the period, the flatter the line becomes.

When superimposing 2 moving averages, one of a short-term periodicity and one of a long-term periodicity, crossover points between the two serve to confirm a trend reversal.

MOVING AVERAGES TECHNICAL INDICATORS

NZD/USD MOVING AVERAGES CHART

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Perhaps one of the more unusual indicators for the novice trader to understand is the one named for the 13th century Italian mathematician who identified a sequence of numbers whose pattern reoccurs inexplicably throughout nature. Leonardo Fibonacci defined a sequence of numbers in which each number is the sum of the two numbers preceding it (0, 1, 1, 2, 3, 5, 8, 13, 21 …). Thus, the ratio of each number to the one preceding it is 61.8% - the golden ration which closely resembles the Aristotelian Golden Mean. To the same extent that the ratio appears in nature, it also applies to financial markets, and traders use them to predict trend reversals.

When selecting this retracement from amongst the trading platform’s technical indicators, the width of a channel defined by the user will be divided into percentages – 0.0%, 23.6%, 38.2% 50.0%, 61.8% & 100.0%, and lines will extend along the chart dividing it in accordance.

FIBONACCI RETRACEMENTS TECHNICAL INDICATORS

XAU/USD FIBONACCI RETRACEMENTS CHART

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