TiG Trading Basics

TIG Trading Basics

Version 1.0 September 2011

THE BASICS OF TRADING - AN INTRODUCTORY GUIDE

Having a good grasp on the main aspects of the financial trading world is fundamental to becoming a successful trader. This guide covers the key aspects which we consider to be most important for you to understand.

Page 1

The Indicator Guys | www.theindicatorguys.com v

TiG Trading Basics

Table of Contents
Disclaimer .............................................................................................................................................................. 4 Policies ..................................................................................................................................................................... 5 Getting Started ..................................................................................................................................................... 6 PC Requirements ............................................................................................................................................ 6 Choosing a brokerage or financial spread betting company .................................................. 6 Choosing a charting platform.................................................................................................................. 6 A word of warning ......................................................................................................................................... 6 1. Understanding the Financial Markets ................................................................................................. 7 The Foreign Exchange Market ................................................................................................................. 7 Components of the Foreign Exchange Market ............................................................................ 7 The Stock Market ........................................................................................................................................... 8 Components of the Stock Market ...................................................................................................... 8 The Commodities Market ........................................................................................................................... 9 The Futures Market .................................................................................................................................... 10 Other Types of Financial Market ......................................................................................................... 11 2. Understanding Trading Charts ............................................................................................................ 12 Common Chart Types ............................................................................................................................... 12 Line Charts................................................................................................................................................. 12 Hi Lo Bar Charts ...................................................................................................................................... 13 OHLC Bar Charts ..................................................................................................................................... 14 Candle Charts ........................................................................................................................................... 15 Advanced Chart Types ............................................................................................................................. 16 3. Understanding Price Action................................................................................................................... 17 Identifying Price Trends .......................................................................................................................... 17 Trend Characteristics................................................................................................................................ 17 Trend Trading ............................................................................................................................................... 18 Counter Trend Trading ............................................................................................................................ 18 Trend Lines .................................................................................................................................................... 19 Trend Continuation .................................................................................................................................... 20 Trend Reversal ............................................................................................................................................. 21 Trend Significance ...................................................................................................................................... 22 Trend Confirmation using an Anchor Chart .................................................................................. 23 4. Understanding Technical Analysis .................................................................................................... 24 Support and Resistance ........................................................................................................................... 24 Candle Patterns ............................................................................................................................................ 26 The Concept of Value ................................................................................................................................ 27
Page 2 The Indicator Guys | www.theindicatorguys.com v

TiG Trading Basics

Moving Averages......................................................................................................................................... 28 MACD ................................................................................................................................................................ 29 RSI ....................................................................................................................................................................... 30 Other Technical Analysis Indicators ................................................................................................. 31 Convergence / Divergence / Confluence ........................................................................................ 32 5. Understanding Trade Management ................................................................................................... 33 Placing a Trade with your Broker ....................................................................................................... 33 Types of Order ............................................................................................................................................. 34 Setting Your Entry, Target and Stop .................................................................................................. 35 Risk Management and Position Sizing ............................................................................................. 36 Trade Management .................................................................................................................................... 37 Big Bars vs Small Bars .............................................................................................................................. 38 Market Scanning and Screening .......................................................................................................... 39 Performance Measurement .................................................................................................................... 40 Trading Psychology ................................................................................................................................... 41 In Summary ......................................................................................................................................................... 42 Contact Us ........................................................................................................................................................... 43

Page 3

The Indicator Guys | www.theindicatorguys.com v

TiG Trading Basics

Disclaimer
THE PRODUCT IS PROVIDED AS IS WITHOUT WARRANTY OF ANY KIND. THE ENTIRE RISK OF THE PRODUCT IS ASSUMED BY YOU. THE RISK ASSOCIATED WITH THE RESULTS AND PERFORMANCE OF THE PRODUCT IS ALSO ASSUMED BY YOU. We are not brokers nor in any way authorised by the FSA. We do not and cannot give any investment advice. We are not engaged in rendering any investment or other professional advice. If you want investment advice, seek a licensed or registered investment advisor. There are no representations of potential earnings made by us or by you. Only those persons financially prepared should invest. Any and all trades posted in private or public, of any kind, should be viewed as hypothetical paper trades and without merit; and if they were accurate, they may never be able to be duplicated in the future. Your attempt to duplicate any posted trades may be hindered by the inherent delay in receiving a post AND executing that post, market liquidity, AND your own trading issues, including, but not limited to slippage, commissions, trading software, internet outages, psychological factors. The information contained in this document or any service or product we may provide in the future has been obtained from sources believed to be reliable, however, there is no guarantee to its accuracy or its completeness. We do not accept responsibility for typographical or verbal errors, omissions or failure to transmit information in a timely fashion. The information contained in this document is for educational, entertainment and news purposes only, reflecting the current personal opinion of us and is NOT designed, construed or believed in any manner to be Trading Advice. The information in this document is strictly for Educational Purposes. Past performance is no guarantee of future results. You hereby agree that ANY and ALL trading decisions you make are your own and reflect your own personal level of risks and trading skills. You also acknowledge and agree that you are aware of the risk parameters involved in trading and that the leveraged nature of Trading Futures, Equity CFDs, Options, Forex Exchange and Spread Betting can cause losses greater than your account balance. You further agree to accept full, complete and sole responsibility for any and all results in your trading account. There have been no promises, guarantees or warranties suggesting that any trade will result in a profit or will not result in a loss. Opinions are current opinions only and past results are not indicative of future results. It is your sole responsibility to know and define the risk before trading. You also hereby agree that you will not hold us liable or responsible in any way for any losses you incur in any trading account. We disclaim any responsibility for any adverse consequences that might arise directly or indirectly from the use of any material contained in or from this document or any product purchased via our site or by any contact in any form with any individual associated with The Indicator Guys Limited. Distribution and/or re-transmission of any of the content provided by us in any form or by any medium is expressly prohibited. The Indicator Guys Limited does not recommend or endorse specific transactions or trading methodologies or any advice concerning the value of or advisability of trading Futures, Equity CFDs, Options, Forex Exchange and Spread Betting. This service is designed to assist you and provide tools for the understanding of technical analysis of the financial markets. This is an educational document designed solely to assist you in developing your own personal methodology if you so desire, JUST AS FREELY AVAILABLE TECHNICAL ANALYSIS BOOKS FROM THE LIBRARY or BOOK STORE WOULD ASSIST YOU. Internet Trading Risks In addition, there are risks associated with utilizing an Internet-based deal execution trading system including, but not limited to, the failure of hardware, software, and Internet connection. Since The Indicator Guys Limited does not control signal power, its reception or routing via Internet, configuration of your equipment or reliability of its connection, we cannot be responsible for communication failures, distortions or delays when trading via the Internet. Your dealer employs backup systems and contingency plans to minimize the possibility of system failure, and trading via telephone are always available. Disclosures and Transfers We do not disclose personal information to third parties, except when one or more of the following conditions is true: * We have the individuals permission to make the disclosure; * The disclosure is permitted by law or mandatory professional standards; * The disclosure is reasonably related to the sale or other disposition of all or part of our business or assets; * The personal information to be disclosed is publicly available; * The party to whom the disclosure is made controls, is controlled by, or is under common control with The Indicator Guys Limited; * The disclosure is reasonably necessary for the establishment or maintenance of legal claims; or * The disclosure is to persons or entities for whom we are providing services, provided the disclosure is consistent with the purpose for which the personal information was obtained. Copyright 2011 The Indicator Guys Limited

Page 4

The Indicator Guys | www.theindicatorguys.com v

TiG Trading Basics

Policies
Privacy and Security Policy The Indicator Guys web site uses security measures to protect against the loss, misuse, and alteration of the information under our control. We do not store credit card details nor do we share customer details with any 3rd parties. We store the information in a database in a secure environment at our data centre. We will never share, sell, or rent individual personal information with anyone without your advance permission or unless ordered by a court of law. Information submitted to us is only available to employees managing this information for purposes of contacting you or sending you e-mails based on your requesting information. Delivery Policy All indicators, systems and software products purchased through our site, or otherwise, must be securely linked to a named account on one of our partner charting platforms. This must be done before the product can be delivered to, or installed by, the purchaser and the purchaser will not be able to operate their product without this step having been completed first. In order for us to securely link the product correctly as required, each customer will need to have an active account with one of our charting platform partners. In some platforms our delivery method allows us to detect a customer account number automatically. However, where this is not possible a request will be sent via email, and you will need to forward your charting platform customer account number to us. This should be sent to support@theindicatorguys.com along with your name and the name of your chosen charting platform. (e.g.) Name: Jenny Smith, Platform: TradeStation, Account ID: 123456 Once we have received this information, we can then securely link your product and deliver it to you electronically via return of email. We aim to accomplish this within 24hours during weekdays, but please allow longer if your request is made over a weekend or during a public holiday. Refund / Cancellation Policy Unless specifically stated on our website or within our sales materials, we generally do not offer refunds with any of our products. This is mainly due to the amount of time we have to spend setting up, delivering and supporting products during each sale, which makes it very impractical and uneconomical for us to do so. In the event that we do offer a Money Back Guarantee with any of our products however, we will always honour this commitment. We will aim to issue all refunds promptly, usually within 24hrs of receiving their request, but please allow longer if your request is made over a weekend or during a public holiday. Copyright 2011 The Indicator Guys Limited

Page 5

The Indicator Guys | www.theindicatorguys.com v

TiG Trading Basics

Getting Started
Before you start trading, please make sure you have everything you need to trade. This includes a compatible charting platform, brokerage and dedicated trading PC. Before you install your new indicator, please make sure that your operating system and charting platform are installed and running properly. Also take some time to become familiar with your charting platform.

PC Requirements
We recommend a computer with the following minimum technical specification: CPU: RAM: Hard Drive: Monitor: Operating System: Internet: 1.8 GHz Dual Core 1GB of RAM 1GB of available hard-disk space Resolution of 1280x768 or greater Windows XP, Vista, 7 High speed reliable ISP, with an ADSL or cable modem.

Choosing a brokerage or financial spread betting company

For more information about choosing a brokerage or financial spread betting company please contact us at support@theindicatorguys.com.

Choosing a charting platform

For more information about choosing a charting platform or upgrading from your current platform please contact us at support@theindicatorguys.com.

A word of warning
At TiG we are fully aware that trading the financial markets is not always an easy task. It can be very risky and highly stressful. The markets can do whatever they want whenever they want, meaning there is no certainty in trading other than prices going up and down over time. We strongly recommend that all customers first use our indicators with a practice trade account. Most online brokerages can offer you some form of demo account. Our indicators analyze past data in order to indicate something which has been happening in the market. There is absolutely no guarantee that the markets will continue to produce the same results once you enter into a trade. There are literally hundreds of books published on the psychology of trading and how the mind works to manipulate the data that charts and indicators produce. We believe that all traders should practice using our indicators, placing trades based on the indicators using a demo trade account, until the trader feels happy that they can use them effectively to help them in their real trading decisions.

Page 6

The Indicator Guys | www.theindicatorguys.com v

TiG Trading Basics

1. Understanding the Financial Markets

The Foreign Exchange Market
Each country has its own national currency and each national currency has a value in relation to another one. So whilst 1 British Pound might be worth 1 Dollar and 60 cents in United States Dollars, it might also be worth a whopping 130 Japanese Yen at the same time! These values fluctuate all the time and one currency can be bought or sold against the other, depending on how you think their relative values will change in the future. This creates what is known as the Foreign Exchange Market. It is also often referred to as the Forex Market or FX for short. Components of the Foreign Exchange Market The FX Market consists of Currency Pairs, which represent the value of one currency against another. For example the pair GBPUSD represents the Great British Pound against the US Dollar. The base currency is always listed first and always has a value of 1. The secondary currency is listed second and its value will vary with time. So GBPUSD=1.6133 means that 1 British Pound is worth 1.6133 US Dollars. And EURGBP=0.8929 means that 1 Euro is worth 0.8929 British Pounds. Simple enough, right? If you took the view that the British Pound was going to increase in value against the US Dollar, then you would want to BUY the GBPUSD and wait for its price to rise before selling it to make a profit. Similarly, if you took the view that the Euro was going to decrease in value against the British Pound, then you would want to SELL the EURGBP and wait for its price to drop before buying it back to make a profit. In the world of trading there is always a Buyer and a Seller in any transaction. This means that you can either Buy or Sell a currency depending on your outlook. Incidentally, you dont have to own anything beforehand in order to Sell it in trading, as you can effectively borrow it first! When you are trading, Buying is also called Going Long and Selling is also called Going Short. If you think a currency is going to rise, you are said to be Bullish about that currency. Conversely, if you think a currency is going to fall you are said to be Bearish about that currency.

Page 7

The Indicator Guys | www.theindicatorguys.com v

TiG Trading Basics

The Stock Market

Once a company reaches a certain size it can offer shared ownership to private investors in the form of Shares. These are bought and sold in the Stock Market, through a small number of established Stock Exchanges, where each company is given a symbol (or stock ticker), such as GOOG (for Google) or AAPL (for Apple Computers). Some of the major stock exchanges include the New York Stock Exchange (NYSE), the American Stock Exchange (AMEX) the London Stock Exchange (LSE) and the Tokyo Stock Exchange (TSE). If you have confidence in the value of a company increasing over time, you may want to buy some shares in that company. Likewise, if you think the value will decrease over time, you may wish to sell some shares. Stocks are also commonly referred to as Equities, as they effectively represent equity stakes in companies. Components of the Stock Market The Stock Market consists of companies whose shares are priced depending on their perceived value at any one time. You can Buy or Sell these shares depending on your outlook on the prospects of the company. For example, if Apple Inc. (AAPL) is trading at $320.00 per share and I think they are about to become a much more valuable company, based on the launch of their latest iPhone or iPad, then I might buy some stock and hold onto it until the price goes higher. This is also called Going Long Apple. I can Go Short Apple by selling it instead, if I think the stock is currently overvalued and is due to drop in price soon. If my Long position makes a profit I am happy with (e.g. it moves up to $350.00) I can Sell to Close my position (this is not quite the same as going Short the stock; instead this is simply closing your position). If my Short position makes a profit (e.g. it moves down to $280.00, I can Buy to Cover my position (again, this is not quite the same as going Long the stock, this is simply closing your position). Not only can you trade individual stocks, but you can also trade stocks which relate to the overall value of a Market Sector (such as the Energy sector or the Technology sector). You can even trade a list of the top stocks on a particular exchange, which are often grouped together and termed an Index, such as the FTSE100 Index, the Dow Jones 30 Index or the S&P 500 Index. Trading indices has become a very popular method amongst traders who want to simply take a general view. Once again you are said to be Bullish or Bearish about Stocks, Indices, or whatever you are looking at, depending on your outlook.

Page 8

The Indicator Guys | www.theindicatorguys.com v

TiG Trading Basics

The Commodities Market

Commodities are generally raw physical products such as grains, metals or oil, which can be bought and sold in standardized lots, depending on a persons outlook about the value of that commodity. They can be traded through a commodities exchange such as the Chicago Board of Trade (CBOT) or the London Metal Exchange (LME). Please also refer to the information about the Futures Market.

Page 9

The Indicator Guys | www.theindicatorguys.com v

TiG Trading Basics

The Futures Market

Trading Futures is a way of securing an asset at todays prices, but not actually taking ownership of it until a future date. Transactions are conducted by way of Contracts, traded on a Futures Exchange, such as the NYSE Euronext exchange or the InterContinental Exchange (ICE Futures Europe). Commodities and Futures are traded in much the same way as stocks, but there are a few subtle differences to get used to. For example, they are always based around a Contract which has a fixed Expiry Date; they are traded at particular times of day which depend on their exchanges, and their hours tend to be a little more sporadic than stocks. Also, keep in mind that the cost of data tends to be higher than with Stocks or Forex. For these reasons it is probably best to start out trading Stocks and Forex first, before moving on to look at Commodities and Futures, as and when your experience, time and money allows.

Page 10

The Indicator Guys | www.theindicatorguys.com v

TiG Trading Basics

Other Types of Financial Market

There are also Money Markets (for short term borrowing and lending), Insurance markets (for protecting against risks), Bond Markets (which provide financing through Government Bonds), Derivatives Markets (for Futures Contracts and Options), and so on. However, many of these markets can be too complicated for beginner traders to need to worry about. We would suggest that the four main types of market (FX, Stocks, Commodities and Futures) introduced in this guide above, will provide more than enough scope to build your experience. They are also listed in order of our general view of their relative complexity - so we would suggest Foreign Exchange as the easiest place to start, followed by Stocks, then Commodities and Futures Contracts as you become more advanced and proficient in your trading. Ultimately you should decide what you are most comfortable trading based on your interests, and start getting a feel for it.

Page 11

The Indicator Guys | www.theindicatorguys.com v

TiG Trading Basics

2. Understanding Trading Charts

Common Chart Types
Trading charts are used by traders to display both historical and current market prices, before deciding when and what to trade. There are several different styles of chart available and each can be displayed using a variety of resolutions (timeframes), depending on how detailed a view you wish to see. On a trading chart, Time is displayed along the horizontal axis, while Price is displayed on the vertical axis. Line Charts

One of the simplest forms of trading chart is a Line Chart, where the price is simply displayed as a line which moves from point-to-point as it changes over time, as in the example shown.

Page 12

The Indicator Guys | www.theindicatorguys.com v

TiG Trading Basics

Hi Lo Bar Charts

Instead of plotting a continuous line, the price movement can instead be represented by a series of Bars in a Hi Lo Bar Chart. Each bar represents a specific period of time which, in the example shown, is one day. The bar is plotted between the highest price and the lowest price the market reaches within that specific period of time. If the bar closes lower than it opened, then it can be automatically painted red, and if the bar closes higher than it opened, then the bar can automatically be painted green. This gives a general indication of the direction of movement which occurred during the formation of each bar.

Page 13

The Indicator Guys | www.theindicatorguys.com v

TiG Trading Basics

OHLC Bar Charts

In order to gain a little more information about price movement, an OHLC Bar Chart can be used. The small tabs on either side of the bar represent the opening price (on the left) and the closing price (on the right) of that particular bar. So you can now see where the price starts (Open), where it finishes (Close), how high it goes (High) and how low it goes (Low) during the formation of the bar. OHLC stands for Open-High-Low-Close. Again, each bar can be set to a particular resolution, which can be anywhere from a minute, to a day, or even a month in duration.

Page 14

The Indicator Guys | www.theindicatorguys.com v

TiG Trading Basics

Candle Charts

Candle Charts, also known as Candlesticks, are a very popular choice of charting type. They are an evolution of OHLC Bars, which now have a wider mid-section running between the Open and the Close prices, and then two very thin lines extending out to the High and the Low prices. The mid-section is called the Body of the Candle, and the two thin lines are called the upper and lower Wicks (or Shadows). Again, candles can be coloured to show which direction the price travelled as it was formed. So a green candlestick may indicate that price moved up, whereas a red candlestick may indicate price moved down. Candles are also sometimes displayed with Hollow bodies to show price rising, and Solid bodies to show price falling.

Page 15

The Indicator Guys | www.theindicatorguys.com v

TiG Trading Basics

Advanced Chart Types

The most commonly used type of chart is a time based chart, which displays Price against Time, as shown in each of the examples we have covered above. However, several other ways of presenting Price on a trading chart have been devised and, although they are generally a little more advanced in nature, it may be of interest for you to at least be aware of them. Examples of such charts include Tick, Volume, Range, Momentum, Kagi, Kase, Renko, Point and Figure and Line Break Charts. Details of how each of these can be used in trading are beyond the scope of this guide, but may be available in more advanced training materials to follow.

Page 16

The Indicator Guys | www.theindicatorguys.com v

TiG Trading Basics

3. Understanding Price Action

Identifying Price Trends
Now that we understand how a trading chart is generated, the next thing to be aware of is the Identification of Trends. Trends are extremely important in trading as they show us what the price of an instrument is currently doing. There are only 3 states a market can ever be in: Trending Up (Uptrend), Trending Down (Downtrend) or Sideways/Ranging (No Trend). Trends can be identified by looking at the recent highs and lows on a chart.

A High is formed when the price climbs to a certain point, and then clearly retreats back down from that point. A Higher High (HH) or Lower High (LH) is simply a high which is higher or lower than the previous high. A Low is formed when the price drops to a certain point, and then clearly retreats back up from that point. A Lower Low (LL) or Higher Low (HL) is simply a Low which is lower or higher than the previous low.

Trend Characteristics
An Uptrend is characterised by a series of Higher Highs and Higher Lows, where each new High or Low formed is above the level of its previous counterpart. A Downtrend is characterised by a series of Lower Highs and Lower Lows, where each new Low or High formed is below the level of its previous counterpart. A Sideways or Ranging Market is characterised by not showing a clear trend either way. This can also be traded, but using a different approach to that of a defined trend.

Page 17

The Indicator Guys | www.theindicatorguys.com v

TiG Trading Basics

Trend Trading
It is crucially important for traders to have a good basic understanding of what Trends are and how to read them. Recognising which of the three states the market is currently in (trending up, trending down, or moving sideways) is a huge part of the battle when it comes to making accurate price predictions and coming out on top. Without this fundamental understanding, you will put yourself at a great disadvantage to those who have it, so we highly recommend that you take the time to grasp the key points of Trend Identification.

It may seem like a trivial thing, or not particularly glamorous, but for exactly this reason it is often overlooked by new traders, and this can mean struggling for a long time, trying to figure out what is really happening in the markets. Dont follow the crowd and rush into trading, but instead take your time to get things right from the start. You will reap the rewards in the longer term.

Counter Trend Trading

As the name implies, the process of Counter Trend Trading involves taking trades in the opposite direction to the trend. Counter Trend Trading is sometimes also known as Fading the trend. The counter trend trader tries to spot and take advantage of Pullbacks in the trend, or even anticipate and trade Trend Reversals. This is generally a much more difficult way to trade and we do not recommend that beginners attempt it, as accurate timing is paramount in Counter Trend Trading.

Page 18

The Indicator Guys | www.theindicatorguys.com v

TiG Trading Basics

Trend Lines
Trend Lines are lines drawn on a chart which connect a series of lows in an uptrend, or a series of highs in a downtrend. They are useful as an indication of where future highs or lows may occur, if the trend continues.

When a trend line is broken, this does not immediately signal the end of the trend, but instead gives a warning that the trend may be about to end, or change direction.

Page 19

The Indicator Guys | www.theindicatorguys.com v

TiG Trading Basics

Trend Continuation
If a market has been clearly trending in a particular direction, but stops doing so for a period of time, perhaps opting to move sideways for a while instead, or take a rest, this raises a question: Will the next move be a continuation of the same trend or the beginning of a new trend in the opposite direction? Traders often try to anticipate the markets next move by observing a variety of typical Continuation Patterns.

Examples of these include Triangles, Flags and Channels. Such patterns can regularly and easily be drawn on a trading chart using simple lines for illustration. Once such a pattern has been identified and highlighted, a trader can then look for the point at which the pattern is broken as a method of anticipating the markets next move. This point is commonly referred to as a Breakout.

Page 20

The Indicator Guys | www.theindicatorguys.com v

TiG Trading Basics

Trend Reversal
When a market switches from trending up to trending down, this is called a Trend Reversal. Traders often try to anticipate trend reversals by watching out for the formation of typical Reversal Patterns. For example, if a market makes a high at exactly the same level as the previous high, this can be referred to as a Double Top pattern. It can often be a sign that the market has moved as high as it is going to move for the moment, and the next trend is likely to be down. Where two matching lows occur, this can be referred to as a Double Bottom.

Another form of trend reversal pattern is the Head and Shoulders Top pattern. In an uptrend, this involves price making a High, followed by a Higher High, then a third (Lower) High at the same level as the first one. Once again this can often signify that the trend is complete and a change of direction is taking place. Similarly, a Head and Shoulders Bottom would involve a Low, followed by a Lower Low, then a third (Higher) Low at the same level as the first one.

Page 21

The Indicator Guys | www.theindicatorguys.com v

TiG Trading Basics

Trend Significance
Now that you understand what Trends are and have a good grasp of the key points needed, it is important to consider the significance of a particular trend. When you look at a trading chart, there will always be a number of trends in play at the same time, so you need to recognise what you are looking at and also what you are looking for. For example, a markets trend on a daily chart may be completely different to its trend on an hourly chart, and different again to its trend on a five minute chart. In this case, we can consider the daily chart to show the Long Term (Major) Trend, the hourly chart to show an Intermediate (Medium) Trend, and the 1 minute chart to show the Short Term (Minor) Trend. This may sound complicated at first, but it is actually very useful to us. Of course, the significance of each timeframe will depend on what level you are monitoring your trade from. For example, if I am monitoring a long term investment on a weekly basis, then I might use a monthly chart to show me the Major Trend. Being aware of more than one trend can give you a much better picture of your market while you are trading and greatly increase your probability of success.

Page 22

The Indicator Guys | www.theindicatorguys.com v

TiG Trading Basics

Trend Confirmation using an Anchor Chart

Following on from this, the idea of using an Anchor Chart in your trading is a very useful one to grasp. When you are trading from a particular chart, it means using a Higher Timeframe Chart (also known as a lower resolution chart) to give you a view of the bigger picture. So if I am trading on a 5 minute chart for example, then I might use a 60 minute chart as my anchor to gauge the bigger picture and then try to trade only in the direction of the greater trend. If I am trading on a daily chart, I might also keep my eye on a weekly chart of the same instrument, for the same reason. It is always important to remember however, that you must make your detailed decisions on the chart you have chosen to trade. The anchor chart is only there to help guide you, and not to directly impact your specific trades. You can use the table below as an approximate rule of thumb for which anchor chart to use with your trading chart.

Anchor Chart Weekly Daily 240 minute 60 minute 15 minute 5 minute Daily 240 minute

Trading Chart Daily 240 minute 60 Minute 15 minute 5 minute 1 minute 240 minute 60 Minute

Page 23

The Indicator Guys | www.theindicatorguys.com v

TiG Trading Basics

4. Understanding Technical Analysis

Support and Resistance
You will often hear Support and Resistance referred to as the markets Floors and Ceilings. They are ways of describing the horizontal levels which can be observed on a chart, when the price refuses to move any further beyond them, for a certain period of time. Resistance can be observed at market highs, while Support will occur at market lows. The more times a Support or Resistance level is reached, without getting broken, the stronger and more significant it becomes. The second touch of the same level on a chart will establish the Support or Resistance line, the third touch will confirm it, and all subsequent touches will serve to strengthen it even further in traders minds.

The precise levels reached can sometimes fluctuate a little around a particular Support or Resistance line, meaning it becomes more of a zone than a line. This is fine, although generally speaking the more precisely the levels line up with each other, the stronger the Support or Resistance is considered to be. Once a Support level has been breached, it will often then begin acting as a Resistance level, and once a Resistance level has been overcome, it will often then begin acting as Support. Sometimes, despite huge fluctuations in market prices, strong levels of Support and Resistance can remain intact for weeks, months and even years to come. This gives Support and Resistance levels a high level of importance in trading, thanks to their inherent predictability. In other words, once a level has been established, trades can be taken from this level with a relatively high probability of achieving a successful outcome.

Page 24

The Indicator Guys | www.theindicatorguys.com v

TiG Trading Basics

There will always be plenty of traders monitoring strong levels of Support and Resistance, which is the reason they can be so effective to trade around. In fact, Support and Resistance levels are one of the key staples of successful financial trading, along with a good understanding of Trends. Getting to grips properly with these two areas alone can have a huge impact on your success, as you develop your skills as a financial trader.

Page 25

The Indicator Guys | www.theindicatorguys.com v

TiG Trading Basics

Candle Patterns
There is much written and spoken about candle patterns, all of the different types and how significant or important they each are. However, there are only three categories of candle that you should ever concern yourself with, and these are: Bullish Candles, Bearish Candles and Indecisive Candles. In a similar way to the trend only ever being up, down or sideways, candles can only ever take one of those three forms. Candle patterns can be very useful both as a visual guide to what is happening in the market, and as an indicator of what may occur next.

As you can see from the examples above, Bullish Candle Patterns involve a general bias towards the Buyers in the market, while Bearish Candle Patterns have a general bias towards the Sellers. Indecisive Candle Patterns show no significant bias either way and indecision will often occur at a turning point in the market, as the pressure moves from the Buy Side to the Sell Side. In this sense, it is always important to consider candle patterns within the context of which they occur. Long Wicks on candles show that price levels were tested but rejected, and this can be a strong indication that a directional move is imminent. If you look at any trading chart you will often see these Long Wicks present at key turning points in the market. These are called Rejection Candles. Just like Trends or Support and Resistance, Candle Patterns are a key area for traders to have a good grasp on. Whilst they are not really enough to trade from on their own, it is when you combine a basic understanding of Candle Patterns with the other key areas that we have mentioned, that you are starting to build up a full picture of essential trading knowledge in a very useful and powerful way.

Page 26

The Indicator Guys | www.theindicatorguys.com v

TiG Trading Basics

The Concept of Value

The Concept of Value is an important one to consider in trading. It is something that should have an influence over every decision we take, seeing as it is bound to have a significant effect on our results. If you hold the view that a market is trading below its Real Value, then this suggests that you should have a bias towards Buying. Similarly if you think something is priced above its Real Value, then this is a strong argument towards Selling. So how does anyone know what the Real Value of anything is? The answer is that they dont, as Value is a relative concept which depends on the viewpoint of the entire marketplace. However, in order to keep things on a relatively even keel and take a general view on the Value of a financial instrument, the easiest approach is to consider its Price History. We can use this history to envisage what level of price is most likely to be ahead, and this way of thinking lays the foundation for many of the Indicators used in Technical Analysis, as we will see below. Of course, there will always be many other factors which can have an impact on the Price and the Value of an instrument at any one time, but looking deeper into this really means venturing into the realm of Fundamental Analysis, which is somewhat beyond the scope of this guide. Fundamental Analysis will take into account everything from Economic Data to Industrial Data and Company Data and may also have a bias towards areas like Demographics and News reports. There is scope for combining the two analysis methods together, as a lot of traders do, but for now we will stay focused and stick to the subject of Technical Analysis.

Page 27

The Indicator Guys | www.theindicatorguys.com v

TiG Trading Basics

Moving Averages

Moving Averages are commonplace in trading and serve as a guide to the Historical Price Level during a set time period. For example, a 20-period moving average (20MA) will always display an average price level which has been calculated over the last 20 bars. You can chose any time period you like to view a Moving Average of price. Popular time periods used for Moving Averages include 10, 20, 50 and 200 Bar Periods. It may be useful to have a Short, Medium and Long Term Moving Average on your charts, as a guide to the general price trends in play at any one time. This can work in a similar, yet perhaps slightly cruder way, to the use of an Anchor Chart. Moving Averages can provide a very useful indication of an instruments value, relative to its historical average. You simply need to look at the position of the current price in relation to the Moving Average line itself, to get a sense of whether a market is currently trading at Overbought or Oversold Levels.

Page 28

The Indicator Guys | www.theindicatorguys.com v

TiG Trading Basics

MACD

The highly popular MACD Indicator is a derivative of the Moving Average Indicator, which has been developed over the past forty years or so. MACD stands for Moving-Average-ConvergenceDivergence, and it takes the use of Moving Averages to a somewhat more advanced level. Rather than acting as a simple indicator of price levels, it plots the difference between two Moving Averages of price (which you can select yourself). This is called the MACD Line. It then plots a Moving Average of its own value as a second line (the Signal Line). Finally, a Histogram illustrates the difference between these two lines in a very clear and precise way. Traders who understand how to use it correctly can infer various types of information about the market, including the Direction, Strength, Duration and Momentum of the current trend. This makes the MACD a very interesting trading tool.

Page 29

The Indicator Guys | www.theindicatorguys.com v

TiG Trading Basics

RSI

RSI stands for Relative Strength Index. It is a type of Momentum Oscillator, which is designed to detect the speed and size of price movements over a specified time period, in order to measure the Strength of the Trend during that time. It plots a line which fluctuates on a scale of 0 to 100. Traders can use this line to determine how strong or weak the trend is at a given point, with the most notable points being towards the extreme ends of the scale. Two horizontal lines are often drawn to mark off the levels at which the trader will interpret the market as Overbought or Oversold, after having endured significant trend strength or weakness. These may typically be at 80 and 20, or 70 and 30. When these particular levels are hit, this is the signal from which a trader can make their Buy or Sell decisions. The RSI is designed to help pinpoint Market Extremes. Signals tend to be less frequent and more accurate than other similar indicators.

Page 30

The Indicator Guys | www.theindicatorguys.com v

TiG Trading Basics

Other Technical Analysis Indicators

There are countless Technical Analysis Indicators on the market today, some of which have undoubtedly proven to be more effective and useful to traders than others. However, we would always suggest that the key thing is to develop your foundations, by understanding the key principles of operation of the trading marketplace first, before relying on any kind of technical indicator for help and support. Once you have this foundation, the key points of which have all been covered in these training materials, then you can start to see exactly where and how each different type of indicator might be of use to you and how they might fit in with your approach to trading. Knowing exactly how to use your technical indicators correctly is also a very important part of the equation. This is exactly why we provide technical manuals with each and every indicator that we sell. This way we can ensure our customers get the most out of our products and dont feel left in the dark! Examples of other popular indicators include: ATR Average True Range ADX Average Directional Index Bollinger Bands CCI Commodity Channel Index DMI Directional Movement Index Keltner Channel Pivots Stochastics Volume

Page 31

The Indicator Guys | www.theindicatorguys.com v

TiG Trading Basics

Convergence / Divergence / Confluence

These are three technical sounding names, which are actually relatively simple to understand. They are often used in technical analysis when comparing the reading of a Technical Indicator with that of a Price Chart. Convergence relates to the two readings moving towards each other, whereas Divergence relates to the two readings moving apart from one another.

Confluence relates to the two readings moving together, in perfect alignment and agreement. When the readings of a Technical Indicator are clearly Convergent or Divergent with its Price Chart, this can be taken as a sign that a change in market sentiment may be on its way. Take a quick look at the examples given in the chart shown above, for instance.

Page 32

The Indicator Guys | www.theindicatorguys.com v

TiG Trading Basics

5. Understanding Trade Management

Placing a Trade with your Broker
Before you can trade, your broker will offer you two different prices. One is called the Ask, which is the price at which you can Buy an instrument. The other is called the Bid, which is the price at which you can Sell an instrument.

When you first initiate a trade this is known as Opening a Position and when you end it this is known as Closing a Position. The price movement which has occurred between Opening and Closing your position will determine your Profit or Loss, and this will be displayed in your trading account. Once you have made a decision to place a trade, there are various ways you can go about executing it. If you are placing a Long trade you will be Buying an instrument and then Selling it later on. If you are placing a Short trade you will be Selling Short an instrument, and Buying to Cover this position later on. However, there are many different Types of Order you can place with a broker and it is important to understand at least the key types, which are Market Orders, Limit Orders and Stop Orders.

Page 33

The Indicator Guys | www.theindicatorguys.com v

TiG Trading Basics

Types of Order
Market Orders (execute right now) are instructions to place an order at the current best price the market can offer you. They will always be processed, but the price you want may vary slightly from what you are looking for, depending on how many other traders are trying to trade the same thing at the same time. Limit Orders (execute if the price goes anywhere past this point) are instructions to place an order at your own specific price level only. If the order can be filled here, or perhaps as the market moves even more in your favour, then it will be. However, if your specified price cannot be attained and the market moves away, then your order will not be placed. Limit Orders can be useful for both entering and exiting trades. Finally Stop Orders (execute if price hits this level) are only processed once the market has reached a specific level, and they will then look for the best available price. A Buy Stop is placed above the current price and a Sell Stop is placed below the current price. They can be used to establish new positions, to limit a loss or even to protect your profits. Stop Orders are therefore one of the most important and popular types of order.

Page 34

The Indicator Guys | www.theindicatorguys.com v

TiG Trading Basics

Setting Your Entry, Target and Stop

Your Entry Price will obviously depend on which of the above types of order you decide to use. If you use a Market Order then you will get an entry price close to the price at the time you press the button to execute. If you use a Stop Order you will get an entry price close to that which you have specified. If you use a Limit Order then you will get the exact entry price that you specify. Your Target Price can be predetermined and set by you at the time you place your trade. This will depend on what you are looking to gain from the trade, and is a non-essential component of placing a trade. If you are looking to make the same amount or even double or triple the amount in profit as you are risking, then you can account for this here. If you have a predetermined price level you are hoping to reach then this will be set as your Target Price. Alternatively, if you are using an Exit Strategy such as a Trailing Stop Loss, a Trend Line Break, or even just monitoring the trade visually, then you may not want to set a Limit Price at all. Your Stop Loss Price could also be considered as non-essential, but we would certainly advise that you never trade without one. The whole point of using a Stop Loss is that it limits your Exposure to Risk, should the markets turn against you. You must be aware that markets doing the unexpected is a fact of trading and this means the Risks to your Capital are always inherently high. Your Stop Loss is your key tool for use in Risk Management. It can be set at a fixed level, using a Fixed Stop Loss. It can also be pre-programmed to follow the market as it moves a certain distance away, in the form of a Trailing Stop Loss.

Page 35

The Indicator Guys | www.theindicatorguys.com v

TiG Trading Basics

Risk Management and Position Sizing

Risk management is one of the corner stones of trading success, and should be ignored at your own peril! The amount of money that must have been wasted over the years in coming up with the best approach to managing your risk is enough to make your head spin, I am sure. But heres how it stands. The current, time-tested, most solid approach to risk management that you will hear from all the top traders out there who make money consistently is this: Never, ever, risk more than 3% of your trading account on any one trade. You may in fact be better off risking 1% or 2% as you build up your level of knowledge and experience. On top of this, most successful traders would advise against risking more than 30% of your trading account in the market at any one time. This means that if your risk per trade is 3% you should never be in more than 10 trades at once. For 1% or 2% per trade I would still suggest no more than 10 trades at once, giving you a maximum risk to your account of 10% or 20%. Now, although this may sound a little bit draconian at first, the logic behind it is relatively simple. Trading is a game of probability, not certainty. Even if you think you have the most sure fire trade setting up that you could ever imagine seeing, the worst can still happen and you can still lose all your money. By only risking a small percentage of your account, you are allowing yourself room to be wrong several times in a row, and still come back from this into a profitable position. In principle, with a level of risk set to 3%, you would need to be wrong a total of 34 times without ever being right in order to wipe out your entire account! In reality, it is actually less than this once you have accounted for Brokerage Commissions and Price Slippage (where you do not get your orders filled at the exact price you want). However, it will still allow you a great enough margin for error, in order to survive a long run of bad luck. And this is absolutely essential if you want to make it as a successful financial trader. So, in summary, once you know what Percentage you will risk per trade, and you have found a sensible position to place your Stop Loss order in the market, you now can calculate exactly how much of Stock A or Currency B you wish to purchase. This process is what traders refer to as Position Sizing.

Page 36

The Indicator Guys | www.theindicatorguys.com v

TiG Trading Basics

Trade Management
Trade management is simply the process of managing all the trades you are actively running, once they have been entered into the markets. If you are using an Online Broker you will have a trade management screen, with your own personal login details, which you can manage all of your positions from. From here, you can enter Working Orders, which may be Limit Orders or Stop Orders, and then just wait for the market to reach the correct price to automatically trigger them. You can also enter Market Orders for instant trading of course. You can then manage your Active Positions, which may involve adjusting your Stop Loss price as required or cancelling trades manually when you feel you have good reason to do so.

Page 37

The Indicator Guys | www.theindicatorguys.com v

TiG Trading Basics

Big Bars vs Small Bars

It is often said in trading, that the Small Bars belong to the professionals and the Big Bars belong to the amateurs. How much truth there is in this is difficult to quantify, although it doesnt sound especially far-fetched to me. Generally speaking, you should be looking to enter your trades around Small Bars, rather than Big Bars for a number of reasons. Not least of these is the fact that it keeps your Risk Level low. The smaller the bar you enter on, the closer you can position your Stop Loss. Entering on a Big Bar means your Stop Loss, if placed below the bar will already be a significant distance away from your entry point. Not only this, but the larger the bar, the greater the Volatility in the market and your stop position will need to account for this too. I realise this may sound easier than it is, but it is one of the key things you will need to aspire to as you progress in trading.

Page 38

The Indicator Guys | www.theindicatorguys.com v

TiG Trading Basics

Market Scanning and Screening

Market Scanning is the process of searching through charts for Instruments to trade. Whilst this can be done manually with just a few charts, if you are looking through a high volume of charts, it can make good sense to use an Automated Scanner which can be programmed to do the hard work for you. Once you have isolated the instruments which are of interest for you to look more closely at, these can be kept in a Watch List, so that you can work through them in detail, or keep a close eye on them for a period of time. Instrument Screening is the process of organising a list based on set criteria. For example, if I have a list of stocks I wish to sort by Volume, then I would usually click a button to put them in order from the largest down to the smallest. This is another great advantage of modern computing and it can be a huge time saver for traders of all types.

Page 39

The Indicator Guys | www.theindicatorguys.com v

TiG Trading Basics

Performance Measurement
Keeping a journal of your trades is something that comes highly recommended, especially while you are new to trading. It allows you to store and review each of your trades so that you can observe what you are doing correctly and what you are doing incorrectly. It is often the case that the things you are doing incorrectly can limit your progress and success, until you view them in a more objective fashion such as this and people are often surprised at the insights their journals can give rise to.

Page 40

The Indicator Guys | www.theindicatorguys.com v

TiG Trading Basics

Trading Psychology
The final thing to mention here is Trading Psychology. It is a huge subject, beyond the scope of this guide, and there are some excellent books available to read. This is something I suggest you to do alongside your trading as you build your experience. Even if you are Demo Trading (without risking real money in the markets) when you start out, building up your knowledge of how successful traders view the markets and handle their daily challenges can offer you huge support and help you to build your confidence enormously. This can be absolutely invaluable, as now you are starting to get a good idea of what trading is all about, and once you have the right set of tools for the job, then the level of success you will reach in trading will all come down to you and your mind set!

Page 41

The Indicator Guys | www.theindicatorguys.com v

TiG Trading Basics

In Summary
We hope you have enjoyed reading this guide and that it has provided you with a good solid foundation for getting started on the road to Trading Success! Dont forget to keep your eyes on our website or your email inbox for the latest trading tools, tips and techniques. Happy Trading! -The Indicator Guys

Page 42

The Indicator Guys | www.theindicatorguys.com v

TiG Trading Basics

Contact Us
MORE INFORMATION HAVING PROBLEMS?

If you would like more information about The Indicator Guys or to see more of our products and services please visit our website or contact us by email. We try to respond to all enquiries within 24 hours. Email: info@theindicatorguys.com Web: http://www.theindicatorguys.com

If you are having problems with a recent purchase please dont hesitate to contact our support team via email or simply visit our dedicated support site where you can log a ticket or use our online support services to solve your problem. Email: support@theindicatorguys.com Web: http://support.theindicatorguys.com

Page 43

The Indicator Guys | www.theindicatorguys.com v