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TABLE OF CONTENTS
CHAPTER 1
FOREX PRIMER

pg. 5

CHAPTER 2
THE BASICS

pg. 17

CHAPTER 3
FUNDAMENTAL ANALYSIS

pg. 23

CHAPTER 4
TECHNICAL ANALYSIS

pg. 31

CHAPTER 4
THE PSYCHOLOGY OF TRADING

pg. 47

Risk Warning: CFDs and Foreign Exchange (FX) traded on margin carry a high degree of risk. As such they may not be suitable for all investors. Investors should ensure they fully understand the risks associated with leveraged CFD and FX trading
before deciding to trade because you can lose some or all invested capital. Investors may choose to seek independent
advice and should not risk more than they are prepared to lose.

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CHAPTER 1

FOREX PRIMER

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THE FOREX MARKET


The Forex Market is the giant of Global Financial Markets and by
far the biggest, with it out stripping the Bond, Equity and Commodity Markets. This is due to the incredible scale of the Forex
Market with over US$ 4 trillion traded on a daily basis.
Most tourists would have come across the word foreign exchange when they dealt with a bank or bureau de exchange.
Or entrepreneurs who are involved in international commerce
could be active in the Forex Market as part of their normal process of importing and exporting goods and services.
Although both tourism and commercial based transactions account for a large amount of foreign exchange transactions the
largest percentage by far relates to speculative business. In fact
some 90% of all foreign exchange (also known as FX) business is
speculative. What we mean by this is that an individual or a business will open and close a FX position with a view of generating
a profitable outcome.
However this is not always the case and on occasions loss will
occur. In both cases wins and losses are represented as debits
and credits on an investors online account. As an investor who
owns an online trading account Forex Trader never needs to
take physical delivery of currency or remit foreign currency. The
reason for this is that an investor will never take possession of
the actual physical currency.
The Forex Market is not traded on any global exchange but is described as an over the counter market or in short (OTC). An OTC
market has one major characteristic, that being all transactions
take place directly between two parties.
An OTC market lends perfectly adapts to advances in modern
technology and is well suited to the internet age. Investors are
therefore able to access this large, dynamic and exciting market
from wherever there is reliable internet access.

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WHAT MAKES THE FOREX MARKET UNIQUE?


THERE ARE SEVERAL KEY FEATURES OF THE FOREX MARKET THAT GIVES IT INHERENT ADVANTAGES OVER OTHER FINANCIAL MARKETS SUCH AS
EQUITIES AND BONDS.
LIQUIDITY - Due to the enormous scale of the Forex Market and the volumes that are traded on a daily basis a great deal of liquidity is created. Liquidity is a traders best friend in any market. The reason is that, every person or organisation willing to sell a
currency has to have a counter-partner looking to purchase that same currency. High levels of liquidity ensures that buyers and
sellers in most cases can find the appropriate match.
LEVERAGE - An investor uses leverage to amplify the effect of an open position. This is achieved by borrowing funds from their
broker so as to increase the open exposure. The majority of equity markets make available leverage levels of 1:2. Forex Brokers
however can typical offer levels of leverage in excess of 1:100 and in some cases 1:500. The scale of this leverage allows an investor to capitalize on both small and large moves in the Forex Market. There is a flip side being that high levels of leverage can
also magnify the size of an investors loss.
ACCESS TO ALL - At ACFX it is easy and free to open a live trading account. ACFX accepts all respectable payment providers and a
new client can be underway and trading in no time at all.
THE FOREX MARKET NEVER SLEEPS - The Forex market being off exchange can be traded around the clock. Apart from weekends,
25th December and the 1St January one can trade the Forex Markets day or night.
Daily news releases such as the United
States Non-Farm Payrolls, Australian Monetary Policy Meeting Minutes or the German ZEW data will add volatility to the market. As these major news events are continuously and consistently happening every day or night one could realistically never
leave their trading terminal.
COMMISSION FREE - On our entry point market making account ACFX will not charge its clients any transaction commission. A client will see an all in price where cost of doing business is charged as a spread. The spread is the difference between the price an
investor would sell at and the price an investor would buy at. This is also known as the bid and offer price. There may be a case
where an investor is charged a small fee for hold a position overnight. This is known as the Swap and relates to interest charged
for leveraged positions held overnight.
RISK MANAGEMENT - At times the forex market can become overly volatile such as the 2015 Swiss Franc event. An investor is able
to manage this risk by placing both automated stop and profit targets. Furthermore ACFX has taken the bold move to guarantee that an investors negative open position will never exceed the value of the account equity on deposit.

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WHAT TO TRADE?
AN OVERVIEW: THE FOREX MARKET IS DOMINATED BY FOUR MAJOR CURRENCY TRADING PAIRS. THESE ARE EURUSD, GBPUSD, USDJPY AND USDCHF. OTHER
MAJOR PAIRS INCLUDE AUDUSD, NZDUSD AND USDCAD.
The trading of Cross Currencys is also very popular. A Cross Cur- Furthermore the ACFX MT4 platform does not exclusively offer
rency pair is a trading instrument that does not include a US Dol- Forex products. Our clients are able to trade well known and
lar component. For example EURGBP, AUDNZD and CADJPY.
highly traded equity CFDs, Commodities, Metals and Indices.
The movements in cross currency exchange rates can give an ACFX is proud to be one of very few MT4 brokers to offer this
active trader valuable insights on the strength and weaknesses highly traded instrument to its clients.
of underlying moves in currency majors. For example if the Euro
is weakening against the Pound Sterling, Swiss Franc, Australian
Dollar and New Zealand Dollar then there is a good chance that
weakness will be found in the EURUSD currency pairing.
The ACFX Metatrader 4 (MT4) platform offers more than just the
currency majors. Exotic instruments such as PLNJPY, NOKSEK
and USDCNH are also available to clients.

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WHO ACTUALLY TRADES IN THE FOREX MARKET?


IT ALWAYS NEEDS TWO PARTIES TO MAKE A MARKET. THIS WILL INCLUDE A BUYER AND A SELLER. THERE IS NO DIFFERENCE IN THE FOREX MARKET.
In the Forex Market the buyers and sellers could be individuals, businesses, investment banks, hedge funds, multi-national corporations and government organizations such as Central Banks.

BUSINESS MODELS
ACFX operates and offers their clients two distinct business models under one roof. This allows the client the freedom to choose a
business model that is appropriate and most suitable to a clients needs. These well-known business models are the:
MARKET MAKING BUSINESS MODEL - In the case of the Retail Forex
Market one side of the trade is the investor and the other is
ACFX being broker of choice.
ACFX provides the pricing required to allow the investor to
participate in Forex Market activity. Additionally, ACFX operates as a market maker by providing bid and ask pricing to
the investors to trade from.

STRAIGHT THROUGH PROCESSING MODEL - In this case ACFX provides pricing direct through a well-respected selection of
global liquidity providers. The STP model is also known as the
Agency model. In the STP model, the investor acts as the client
through the ACFX MT4 trading terminal, and is able to transact
on prices quoted directly from our liquidity providers. In return
for acting as the link to the liquidity providers ACFX charges a
brokerage fee that is calculated on the volume transacted.

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WHEN CAN I TRADE IN THE FOREX MARKET?


THE FOREX MARKET NEVER SLEEPS: The Forex Market is the only market that it is kept open 24 hours a day and 5 days a week.
As the London and European trading sessions close, the New
York session is already in full swing; as traders switch off their
computers in the United States the Asian and Australian Markets
get into gear.
TRADING SESSIONS: The business day in all financial sectors be it
London, Tokyo or New York is usually based on the 8 hour shift.
However as the Forex Market is not traded on any particular exchange, a market participant who resides in London has no legal,
physical or regulatory obstacle stopping him/herfrom trading
into the New York and even Tokyo sessions.
This is especially advantageous to European Forex Traders who
are keen to trade the afternoon volatility that is created by United States data releases such as the all-important Federal Reserve
Open Market Committee (FOMC) events and the Non-Farm Pay
roll (NFP) numbers.

In todays computerized world this task is easier to accomplish as trade management software will automatically look
after the currency position, limit the size of the potential loss,
set profit targets and execute new positions.
Therefore it became a necessity and standard practice over
the years for banks to pass on executional trading orders
across the world and across time zones. In this way a Cable
Trader who is sweating on an open position of GBPUSD can
pass on sell and buy orders to his colleagues in New York. If
the Market did not trade through these levels during New
York trading hours then the order would be passed onto Tokyo. From there would move onto Hong Kong, Singapore,
the Gulf and then back to Europe.
However the trading hours of a London Dealing Desk had
to accommodate the ending of the Asian trading session.
Therefore a Forex Trader could not work the standard and
well known 9 am to 5 pm day but had to shift their morning
so that it overlapped the Asian session.

Most global banks operate full branches in all the major financial centres of the world. Before the advent of automated trade
management systems investors need a method to manage open
positions and handle pending orders.

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FOREX MARKET CENTER

TIME ZONE

OPENS (GMT)

CLOSES (GMT)

STATUS

Frakfurt Germany

Europe / Berlin

07:00 AM
18 - March - 2015

03:00 PM
18 - March - 2015

Open

London - UK

Europe / London

08:00 AM
18 - March - 2015

04:00 PM
18 - March - 2015

Open

New York - USA

America / New York

12:00 PM
18 - March - 2015

08:00 PM
18 - March - 2015

Open

Sydney - Australia

Australia / Sydney

09:00 PM
18 - March - 2015

05:00 AM
19 - March - 2015

Closed

Tokyo - Japan

Asia / Tokyo

11:00 PM
18 - March - 2015

07:00 AM
19 - March - 2015

Closed

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NOT ALL SESSIONS ARE CREATED EQUAL - The London Session is by


far the largest market in terms of Forex Volumes accounting for
some 37% of the global trading volumes. Whilst trading in the
New York session accounts for around 18% of global volume.
London

41.00%

New York

19.00%

Singapore

5.70%

Japan

5.60%

Hong Kong

4.10%

Not only does the London session dominate the Forex Market in
terms of global volumes, but also experiences much larger price
movements and daily ranges than its counterparts in New York
and Tokyo.
The extent of large price movements during this session has
been a turning point for many trading strategies which are based
around the London Open. These strategies attempt to take advantage of large congestion break out trades that follow the
close of the Asian session and the London open.

PAIR

TOKYO

LONDON

NEW YORK

EUR/USD

76

114

92

GBP/USD

92

127

99

USD/JPY

51

66

59

AUD/USD

77

83

81

NZD/USD

62

72

70

USD/CAD

57

96

96

USD/CHF

67

102

83

EUR/JPY

102

129

107

GBP/JPY

118

151

132

AUD/JPY

98

107

103

EUR/GBP

78

61

47

EUR/CHF

79

109

84

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MARKET ACCESS THROUGH A CLICK OF AN INVESTORS MOUSE

HOW CAN I PROFIT FROM TRADING IN THE


FOREX MARKET?

The internet revolution has transformed the world of investing and trading, it has brought the markets to the masses.
The days when investor have to call a broker to place a trade
are long gone. With respect to the Forex Markets the changes enforsed over the years have been extraordinary.

A currency pair is split into two different components. These


are simply called the Base Currency and the Counter Currency.

In the mid 1990s the Forex Markets was the preserve of investment banks, business and rich individuals. However with
the introduction of internet to the general public, scores of
companies around the world came into existence offering
internet based trading platforms.
With no need to go to an office, exchange or dealing floor;
todays traders can now trade from their own home office
or even from their mobile phones. With ACFX, the world of
trading has become so accessible investor can trade anywhere, anytime.

The Base Currency always relates to the first currency and the
counter currency to the second in a pairing. A little confused?
If investor chooses to trade GBPUSD the Base Currency is GBP
(Pound Sterling) and the Counter Currency is USD (United
States Dollar).
If for example, after analysing charts an investor comes to the
decision that the British Pound looks cheap where as the US
Dollar is rather expensive; and to take advantage of the potential benefit of an appreciation in the Pound, the investor
would buy the GBPUSD currency instrument.

HOW DOES ACFX MANAGE CLIENT PROFITS AND LOSSES?


To take this scenario a little further, an investor has 1000 of equity in his/her bank account. Assuming that, other than the
spread there are no other transaction costs at that very moment, the investor decides to pull the trigger and buy 1000 of the
ACFX GBPUSD CFD at 1.4700 at leverage of 1 to 1. A few hours later and with much happiness the investor exits the trade at
1.4950.
In terms of profit and loss position lets do
OPENING POSITION
The investor buys GBPUSD @ 1.4700
The investor purchases 1000 @ 1.4700 and agrees to transfer USD 1,470.00.
CLOSING POSITION
The investor sells GBPUSD @ 1.4950
The investor sells 1000 @ 1.4950 and agrees to receive USD 1,495.00.
The investor can see the net movement in the Base Currency and in this case the British Pound equates to zero.
However the net movement in US Dollar terms is:

USD 1,495.00 1,470.00 = USD 25.00


The net US Dollar difference USD 25.00 will be credited to investors trading account.

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ACFX MT4 OFFERS ITS CLIENTS TIGHTER PRICING

ISNT TRADING RISKY?

It is generally accepted that the standard Forex Pip value is set


at four decimal places. However some pairs such as USDJPY are
limited to two places.

Trading the Forex Markets could be risky but so is crossing a


busy road with eyes closed whilst listening to music on the
MP3 player. With ACFX we always make sure we provide our
clients full support, education, tools and a demo account to
prepare them prepare for their trading journey.

ACFX strives to give tighter pricing and therefore the ACFX


MT4 quotes all prices in terms of five and three decimal places.
FOR EXAMPLE the current EURUSD rate is 1.06105 and the
USDJPY is quoted at 121.117.

This includes learning how to use a trading platform and being familiar with all order types. Additionally, there is education and training that can be undertaken before one decides
to trade on a live account. ACFX brings to all its clients a demo
platform where an investor can simulate opening and closing
positions and testing strategies without risking their capital.

GUARANTEED STOP LOSS

WHY DO FOREX MARKET EXCHANGE RATES MOVE?


We live in a world where interest, inflation and growth rates
vary from country to country. Big cartels such as the Organization of the Petroleum Exporting Countries, (OPEC) dictate the
supply and therefore the price of Oil. Geo-political issues affect
the markets (e.g. the Ukrainian crisis, or a general election in
the UK or Germany). Maybe bad weather destroyed the wheat
harvest, and this results to a spike in the price of bread.
Additionally, prices move because global events are always in
a state of flux. This has a direct impact not only on demand and
supply but more importantly our expectations.

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Also available to the traders are methods to limit the size of


the loss that will negatively impact their trading account, by
setting physical stop loss levels. ACFX protects an investors
trading account by using automated margin stops, which stop
a trading account from going into negative territory if a certain level is hit. Furthermore ACFX offers all clients negative
balance protection. This is useful in the unlikely event that
market volatility is so great the liquidity dries up and the price
slashes like a knife through investors stop and margin level
without being automatically triggered. Such an event occured
when the Swiss National Bank decided to no longer support
the Euro with no warning.
ACFX offers our clients the ability to trade nonstandard mini
and micro lots which limit losses and allow investors to experience a realistic trading experience without taking the risk of
losing a significant amount of capital.

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CHAPTER 2

THE BASICS

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ACCOUNT OPENING
Opening a trading account with ACFX has never been easier. By visiting our website and selecting the START TRADING
button an investor is only a few clicks away from gaining access to the dynamic world of Forex.
The application form is unobtrusive and is in line with all the modern guidelines of our European Union regulator.
An investor can invest funds into a wide range of base currencies. Deposits are accepted from a wide variety of globally accepted and respected payment providers.
In the unlikely event that an investor has difficulty in completing the account opening process ACFX offers all our
clients LIVE 24/5 CUSTOMER SUPPORT through our LIVE CHAT function. Alternatively an email can be sent to our support
team at support@acfx.com .

WHAT IS A PIP?
The pip can be described as the smallest incremental movement for a currency, which is usually the fourth decimal place (It can
sometimes though be the second).
EXAMPLE:
If EURUSD is quoted at 1.0615 and then moves to 1.0616 that means that the EURUSD exchange rate increased by 1 pip.

WHAT IS THE SPREAD?


As with all tradable markets there is a cost to buy and sell a given
financial instrument. Most markets quote this price as a spread.
In simple terms the bid is the price a counterparty is willing to
buy a financial instrument from an investor. Whereas an offer is
the price a counterparty is willing to sell a financial instrument
to an investor.

The spread is the cost of doing business. The provision of


advanced charting and complex trade management systems to clients is an extremely expensive undertaking. If
one then adds in the cost of employing skilled and highly
educated technicians to run the platform, investors can
imagine that running a Forex brokerage firm is a very serious and expensive business.

It is only logical that the counterparty is going to aim to purchase


the instrument at a lower price than it would want to sell it.
This difference in bid/sell and offer/buy is called the spread.

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TRADING TERMS LONG AND SHORT


The Forex Market allows market participants to either purchase or sell a currency pair. When a trader for example buys
GBPUSD, the Pound (GBP) can be described as LONG United States Dollar (USD) can be described as SHORT.
The act of going long, would imply that the investor wishes that the Base Currency appreciates in value and the Counter Currency depreciates. Investors are therefore effectively taking a financial bet that the Counter Currency will lose value.

EXAMPLE:
An investor decides to buy GBPUSD and open a position of UK1,000.00 at a rate of 1.4750. By entering into this transaction
the investor has obliged him/herself to purchase UK1,000.00 and sell USD 1,475.00.
If subsequently the exchange rate rises to 1.4800, the result for the investor would be that now he/she can receive more US
Dollars for every 1 Pound Sterling. In simple mathematic terms:
OPENING POSITION
The investor buys GBP 1,000.00 and sells 1,475.00 @1.4750.
CLOSING POSITION
The investor sells GBP 1,000.00 and buys 1,480.00 @ 1.4800.
This produces a profit of USD 5.00.
To go short would imply that the investor believes that the Base Currency is overpriced and the Counter currency is
under-priced.
For example an investor takes a view to short GBPUSD
OPENING POSITION
The investor sells GBP 1,000.00 and buys 1,475.00 @1.4750.
CLOSING POSITION
The investor buys GBP 1,000.00 and sells 1,470.00 @ 1.4700.
This produces a profit of USD 5.00.

To GO FLAT means that the size of the long positions equals the size of short positions. This leaves the investor perfectly hedged
but does run the risk of building up considerable swap fees if positions are not liquidated.
FLAT HOWEVER CAN ALSO MEAN THAT INVESTOR HAVE NO OPEN LONG OR SHORT POSITIONS.

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WHAT IS MARGIN AND LEVERAGE?


LEVERAGE
By means of leverage an investor is able to control a much
larger position than their equity balance would allow. This is
possible because brokers such ACFX offer beneficial leverage
terms.
SO WHAT IS LEVERAGE? Leverage is a powerful tool that allows traders to take the maximum benefit from price moves in
the Forex Market.
Leverage is effectively a loan made to a trader by the Forex
Broker. This loan is automatically activated by the MT4 Trade
Manager as soon as an investor opens position an open. ACFX
offers their customers a leverage of up to 1:500.
SO WHY DO INVESTORS NEED LEVERAGE?

LETS RECALL A PREVIOUS EXAMPLE


An investor buys GBP 1,000.00 and sells 1,475.00 @1.4750.
A standard lot of has a value of 100,000. Therefore without
leverage the investor would need GBP 100,000 to open a position of 1 Lot in GBPUSD.
However with a leverage level of 1:100 and account balance of GBP 1,000.00 allows the investor is able to open
and control a position of GBP 100,000.00.
A move from 1.4750 to 1.4800 equals to 50 pips, which generate a return of just USD 500.

This sounds all good, but leverage is a double edged sword. It


will magnify the size of ones profit but also ones loss.

MARGIN
You can think of margin as a loan from your brokerage. Margin trading allows you to buy more than you would be able to
normally buy.
BACK TO OUR PREVIOUS EXAMPLE
To open a position of 1 Lot of GBPUSD at a leverage level if
1:100 requires a GBP 1,000.00.
The Margin calculation being:
Position size = 1 Lot valued at GBP 100,000.00
Leverage = 1:100

MARGIN CALCULATION = POSITION / LEVERAGE


Margin = GBP 1000 or (GBP 100,000 / 100)

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PROFIT AND LOSS

ORDER TYPES

STOP LOSS

MARKET ORDER

The ACFX MT4 PLATFORM allows a market participant


to decide, before entering the trade, where the exit level
should be placed.

A market order or instant execution, allows the investor to


open a Forex Market position at the next best available price.
This order type is used if the investor wants to gain immediate access to the Forex Market.

This is a key component it the management and mitigation of risk. It consequently limits the potential for excessive
losses being generated. The stop loss order would automatically action a trading order that flattens a position and
crystalizes the loss.

TAKE PROFIT

LIMIT ORDER
A limit order is an order to buy or sell at a specific price or better. A buy limit order can be only executed at the limit price or
lower, and a sell limit order can be only executed at the limit
price or higher.

At times, markets can move in a slow pace. Other times, extreme market volatility could take an open position into the
the price target area only for the move to fade eventually.

This means that if the investor is of the opinion that the current buy level maybe higher than where they wish to enterthen they can use a limit order to open the position at a level
that offers better value for the investor.

A take profit order can be placed at a certain price level, it


will then be automatically trigerred by the MT4 platform.
This takes out the stress of trying to manually flatten a position in a fast moving market.

STOP ORDER

Knowing that a stop loss order protects the investor from


exaggerated losses and a take profit has predetermined a
level to crystalize profits, the investor can in theory walk
away from their trading terminal.

A stop loss order is not just used as a means to limit ones


downside risk. A buy stop can be placed above the current
price and a sell stop beneath the current price.
The question most inexperienced traders will ask is:
WHY WOULD I WANT TO BUY SOMETHING AT A HIGHER
PRICE AND SELL IT AT A LOWER PRICE?
The answer is simple market dynamics. Traders are always
looking for clues on where the price action will head to.
Sometimes these clues give a positive result and sometimes
create a loss. In trading, the key to making money is being
patient. Therefore it is sometimes better for the price action
to confirm traders hunch by the price action moving higher
or lower before investor decides to enter a trade.
By adopting such a strategy, the investor is able to avoid
some of the pitfalls of false breakouts and fake breakdowns.

TRADING TIME FRAMES


There is not one type of trader and not all traders have the same profit or time thresholds. Some traders use advance algorithmic models that enter and exit the markets automatically at a fraction of a second as they attempt to take small bites out of the
bid and offer spread.
Other traders are scalpers who look to trade off both momentum and key support and resistance areas to generate profits.
These trades can last for the period of seconds to a couple of hours.
There are also Swing Traders who look to try to take chunks out of the prevailing trend or position traders who look to fade
moves to key daily, weekly and monthly levels. These trades could last a few hours or could be rolled daily and last weeks.
Some investors are end day closing data such as hedge funds and the longer term money managers who look to take positions
that could last from days to months.
The Forex Market has lots of different market participants who all have different trading styles and time horizons. However all
these different traders interact with one another. The ultimate shared goal ofcourse is to effectively make profit.

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CHAPTER 3

FUNDAMENTAL ANALYSIS
AS AN INVESTOR CAN USE A VARIETY OF METHODS TO COME TO AN INVESTMENT DECISION. THE
TWO MOST WIDELY USED AND POPULAR METHODOLOGIES IS FUNDAMENTAL AND TECHNICAL
ANALYSIS.
LETS TAKE A LOOK AT THIS FIRST BY STARTING WITH FUNDAMENTAL ANALYSIS.

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FUNDAMENTAL ANALYSIS
A trader or investor who takes a Fundamental approach to active investing, will focus on economic numbers.
A trader who uses fundamental approach to trading, could take a short term view by following todays or the last few sets of
data.
The trader can have a longer term view by taking in a broad picture of macro-economic, geo-political, legislative and regulatory
news and data.
As a participant in the Forex Market, a trader should not limit themselves to focussing on the events of one country. The Forex
Market is the leading indicator of Global money flow and as such what may seem an inconsequential piece of news from one
part of the planet could have huge global ramifications.
This was the case in 2013 when the Cyprus government took a political and budgetary decisions to liquidate its small holding of
Gold. Due to the financial crisis the markets took the Cyprus governments decision to sell its entire Gold position as a signal that
the same would follow from the Italian and Portuguese governments who hold substantial positions of Gold.
The study of Fundamental Analysis is to focus on the macro-economic indicators which allows investors to build a picture of
the state of a nations economic wellbeing. By understanding the trend in the data and being able to take a longer term views,
investors are able to gain a perspective of what the future could hold.
Fundamental analysis is however not just a case of collection lists of data samples. There is a need to and requirement to be able
to read through the news and between the lines of statements made by prominent Central Bankers, politicians and business
leaders.

WHICH DATA IS IMPORTANT?


All data is important, some data though gain greater importance at certain times. In recognition of the above ACFX employs a
team of highly skilled and experienced market analysts who will alert our clients focus to what they need to know.
There are however some consistently important news and events which are repeated on a weekly, monthly, quarterly and yearly
basis.
There is a whole list of data sets which come out on a daily basis. ACFX as an aid to our clients provides a free to access economic
calendar which lists forthcoming releases and provides data on prior releases.
LETS EXPLORE WHAT DATA THE MARKET WILL GIVE US!

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NON-FARM PAYROLLS
The king of the data sets we previously mentioned is the
Non-Farm Payrolls number, or more commonly known as
the NFP.
The NFP number is released monthly on the first Friday of a
new month. The NFP accounts for the total number of Paid
US Workers of any business.
The NFP has an overbearing impact on the market and can
cause large amounts of volatility in all liquid asset classes
and the forex market.
The NFP ,being released early in the month, gives traders
and investors an early warning of economic changes and
as such is a valuable tool in helping one decide if new risk
should be taken or if current exposure management should
be changed.

A productive and healthy economy is an attractive economy


to both investors who would like to inject fresh capital into the
economy, as well as the Forex Market where traders will flock
to purchase a sought after currency.
There is also a flip side of course, where declining growth numbers indicate that the country is going through a slowdown. A
slowdown which could be due to some cyclical or structural
problems of the countrys economy. There is another problem
called runaway growth where economic bubbles are created
and eventually collapse; such as in the US subprime crises
which created a growth expansion that was fuelled by a lax
rules on credit.

INFLATION
Inflation in an economic context occurs when underlying data
indicate that the trend in prices for goods and services experiences a sustained increase over a predefined time period.

The NFP is an important barometer on the current positioin


of the United States economy and is a leading indicator on
possible changes to consumer spending.

Governments, Central Banks, business, traders and investors


monitor data releases for the Consumer Price Index (CPI) and
the Producer Price Index (PPI), which are released regularly, on
a monthly and quarterly basis.

FOR EXAMPLE

Inflation is viewed negatively by the general public as it limits their purchasing power. The reason being that it erodes the
value of a given currency. However some inflation is needed to
ensure that an economy grows at a consistent and sustainable
level.

If the market consensus expects 241K new vacancies to


have been filled in December, whilst the November number is 235K, this means that the market is expecting an improvement in the outlook for Jobs.
If the actual release was for instance 230K then the market
will be disappointed as the actual release missed the consensus target and the prior months number.
The above scenario would also disappoint the Federal Open
Market Committee (FOMC) which is the body managing the
United States interest rate policy. A jobs number that shows
contraction could lead to a decision to reduce interest rates
or put into discussion the possibility of an interest rate cut.
The very idea that the FOMC could be contemplating a cut
in interest rates would add a great deal of volatility into
global markets. Thinking of the Forex Market, the above
would result in the US Dollar will declining as investors will
exchange the Green Back for currencies that have higher
interest rate yields.
There are other important data sets and news release such
as the Federal Open Market Committee Statement also
known as the FOMC. The unemployment rate is also closely
watched, as is inflation date such as the Core CPI.

GROSS DOMESTIC PRODUCT (GDP)


The GDP is the monetary value of all the finished goods and
services produced within a countrys borders in a specific
time period, the GDP is calculated on an annual basis.
The GDP is a barometer of a countries health. The reason
being that rising numbers would indicate that a country is
producing more and more goods and services.

During periods when the inflation rate is rising at a decreasing speed or when prices are actually falling, can have a detrimental effect on the growth and therefore impact on the Gross
Domestic Product.
The reason being that during periods of falling or negative inflation (also known as deflation) both the general public and
businesses could put off the purchase of goods and services.
The resulting drop off in demand could lead to a reduction in
the rate of economic growth.
In recent years the Central Banks of developed nations such
as the United States Federal Reserve, the Bank of England and
the European Central Bank have managed inflation targets of
between 2-3%. If the rate of inflation data begins to indicate
that increasing prices are above and beyond this threshold,
the Central Bank will raise interest rates. The action of raising
interest rates has the effect of reducing the money supply in
the economy. This under normal circumstances should lead to
some of the heat being taken out of an economy that is growing too quickly. In turn the drop off in demand causes the inflation rate to fall back into target levels.
The rate of interest has a direct link to the value of a currency.
An increase in interest rates will make a currency more attractive to invest in. This is due to the higher interest yield an investor will receive for a deposit if compared to a currency that has
a lower rate of interest.
Traders and investors therefore attempt to anticipate increases
in the rate of interest before it happens. By doing this a trader
will benefit from the appreciation in the value of the affected
currency.

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UNEMPLOYMENT RATE
Economic data that is derived from readings of the labour
market has a huge impact on the financial markets. The most
important data sets originate from the United States with the
Non-Farm Payrolls (NFP) data dominating all other releases.
These other releases being the Unemployment Claims and
Average Earnings data.
The labour data are hugely important as they can be directly
linked to the health of an economy. As such a buoyant labour
market is an indication that an economy is growing with the
labour force being economically productive and contributing to a countries economic activity.Whereas increasing and
high levels of unemployment is a strong indicator that the
economy is suffering from a drop off in demand and then
associated with a fall in growth levels.
In times of rising or full employment the Central Bank will
seek to curb a tendency for inflation to get out of control by
increasing interest rates and reducing the money supply.

The trade balance numbers are made available on monthly


basis. Traders not only look for the absolute number in the
monthly Balance of Trade number but are also interested in
the trend of the numbers, and ofcourse if the latest release is
higher or lower than market expectations.
A positive trade balance is a reflection of good economic health
as a surplus would bring external revenues to the economy,
which will further bolster company earnings which In turn
feeds through to the labour force through salary increases.

STATEMENTS, SPEECHES, SUMMITS, CONFERENCES AND THE MINUTES OF PRIOR MEETINGS


In recent years some of the most important and influential figures in the global economy are the governors and senior board
members of the Central Banks.
THE MAJOR CENTRAL BANKS ARE THE:
UNITED STATES FEDERAL OPEN MARKET COMMITTEE (FOMC)
EUROPEAN CENTRAL BANK (ECB)
BANK OF ENGLAND (BOE)
BANK OF JAPAN (BOJ)
BANK OF CANADA (BOC)
SWISS NATIONAL BANK, (SNB)
RESERVE BANK OF AUSTRALIA (RBA)

Whereas at times when the labour market is shrinking and


the economy is experiencing a contraction the Central Bank
will reduce the interest rates as a means to increase the money supply and stimulate the economy through an expansion
of credit.

CONSUMER DATA
Demand and sentiment based data releases give important
and significant insights on the health of an economy. Consumer led demand has an overbearing hold on economic activity. Through employment and the income that is received
for production,s citizens contribute by purchasing goods
and services.
When consumer based data and sentiment indicators begin
to trend lower or higher the Central Bank is alerted so that it
can bring the economy back into balance through means of
implementing effective interest rate policy. The Central Bank
will of course also simultaneously monitor other important
economic indications such as GDP growth, the labour market and inflation.
Traders therefore wil be in anticipation of changes in monetary policy monitoring important economic data releases
such as, Retail Sales, Durable Goods Orders, Consumer Confidence, Consumer Sentiment and the German ZEW and iFO.

BALANCE OF TRADE
The Balance of trade is a very simple calculation which measures the difference between the value of all the goods and
services that a country will import against those that are exported.
A country is said to have a surplus if the value of its exports
surpasses the value of its imports. On the other hand a country is said to be in deficit if the value of its imports surpasses
the value of its exports.

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RESERVE BANK OF NEW ZEALAND (RBNZ)


Statements and speeches by the managers and key members
of these Central Banks can have a large and immediate impact
on the financial markets. The reasons being that this key individuals are the decision makers who are able to influence and
change monetary policies.
The financial markets use the terms dovish and hawkish or
Doves and Hawks with respect to the intentions of the intentions of key Central Banks with respect to monetary policy.
A Central Banker who is a Dove is inclined to want a relaxation
of monetary policy and a reduction of interest rates. Whereas a
Central Banker who is a Hawk is inclined to want a tightening
of monetary policy and an increase of interest rates.

DO NEWS RELEASES MATTER TO TECHNICAL TRADERS?


The subject of Technical Analysis will be greatly expanded
upon in a dedicated chapter of its own. However this trading
method warrants a mention here due to the impact of fundamental news flow on the price action.
Through the application of Technical Analysis a trader is able,
with a degree of certainty, to predict the possible direction of
the price action or the market conditions that will follow. A
technical trader can do this by monitoring historical price action and then by employing Technical Analysis to expand his
view into the future.
This can happen through the identification of certain relevant
price points such as support and resistance levels. Or the formulation of a trading plan around certain well known and
identifiable market patterns such as double tops, double

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bottoms, converging triangles, head and shoulders patterns.


The techniques that can be applied to technical trading are
endless with individual traders constantly looking for an edge;
hoping that this will give them a winning strategy. However all
technical studies, no matter how robust, cannot stand in the
way of strong market news that can drive the market in one
direction or another.
FOR EXAMPLE
A trader may have a technical view to sell EURUSD on pull
backs to the 8 period daily moving averages. This method
maybe profitable however on a given Friday once a month the
Bureau of Labor Statistics announce the monthly United State
Non-Farm Payrolls Number. If in this instance the NFP number falls below expectations the US Dollar would weaken and
therefore invalidate a shorting strategy for EURUSD.
Ultimately the price action may send EURUSD lower. However
market volatility during news releases can cause problems
when entering the market.
For this reason it is only logical that a technical trader would
be aware of pending news releases and would consequently
prepare a trading plan in such a way to allow for the resulting
market volatility.
ACFX understands the need for its clients to always be informed. To this end ACFX offers to all its clients, an economic
calendar, live news feeds, forex calculators and up to date market analysis.

SENTIMENT INDICATORS AND THEIR MARKET IMPACT


The global market cannot be neatly separated into Forex, Equities, Commodities, Bonds and Metals. There are relationships
and colorations between all these markets. At some points in
time these relationships become stronger and at other times
the relationships become detached.
As a trader, it is important to view the markets as a living organism that has mood swings that shift from depression to euphoria in a short space of time. These market mood swings can
be termed as market sentiment.
It is important for traders to understand the inter market relations and from these deduce the best way to manage, take on
or reduce risk.

FOR EXAMPLE
Would a EURUSD Trader be more inclined or less inclined to go
long with the Euro if EURGBP was falling? Probably not enough
data is available to make a fair assessment. However if an investor noticed that the price movement was also in a downward
direction in say EURAUD, EURCAD then he or she would probably think twice about placing that long trade.

The very action of falling or rising prices in different currency


pairings or across different markets will give rise to negative or
positive sentiment. It is for investors to gauge through market
sentiment the validity and the strengths in the market.

CORRELATIONS
Many traders are happy to trade one currency pair or financial
instrument without being concerned with the implications
that are happening around them in the wider market. Many
of these traders are very skilled at following and trading one
financial instrument and are able to enjoy a profitable career
by being so extremely specialized and focussed.
However one financial instrument does not move independently from the broader global financial market. As any seasoned market professional knows, many financial instruments
move in parallel with the other. A bullish day for USDJPY will
usually lead to a bullish day for USDCHF. In fact if one was to
compare the two charts side by side it would be hard to differentiate between USDJPY and USDCHF.
This similarity in the price activity of different financial instruments is often referred to a correlation. The definition of a correlation is the relationship between two variables that can be
measured through statistical analysis.
Some financial instruments such as USDJPY and USDCHF are
positively correlated. That is to say that a move in one direction for USDJPY will be confirmed by a similar move in USDCHF. Inversely a negative correlation describes a relationship
between two financial instruments which move in opposite
directions. A good example of this the US Dollar Index ($dxy)
and EURUSD. On a statistical basis if $dxy moves higher then
consequently the EURUSD will move lower.
The degree of correlations however will vary. USDJPY and USDCHF will not experience the exact same percentage moves
over a given period of time and $dxy and EURUSD will not experience in percentage terms a move that is equal and opposite. However the correlation will be derived over a set period
of time and will produce a data output of between 1.00 and
-1.00. A result of 0.80 to 1.00 would be considered highly correlated and -0.80 to -1.00 to be highly negatively correlated.
Currencies and other financial instruments are correlated because prices are ultimately moved by a multitude of factors.
This can be economic factors such as growth, employment, inflation or interest rates. There are also political, legislative and
geopolitical factors. International trade plays an important
role in driving global financial markets. Countries which are
exposed and reliant on cross border trade will have their currencies affected by the demand and supply of these resources.
For example Canada is recognized as a major producer of energy commodities and most notably Crude Oil. Therefore there
is a high degree correlation between the price of Oil and the
value of USDCAD.
Understanding that correlations exist between different financial instruments is important as it allows an active trader to
have an insight of the true direction the money is flowing. As
Oil is getting weaker is it that wise to be selling USDCAD at an
area of resistance?

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OTHER NOTABLE CORRELATIONS


THE AUSTRALIAN DOLLAR
Australia is the third largest producer of precious metals and one of the biggest
producers of Gold. Therefore it should not be a surprise that correlation between
AUDUSD and Gold is usually above 0.80.
Gold is recognized as a safe haven asset. This usually means that in time of crisis due
to economic or politically instability investors seek out the shelter that Gold gives.
Commodities and metals such as Gold act as a store of wealth that have the longevity to outlast these times of uncertainty.
Investing in Gold has one big drawback; although like other financial instruments
Gold has the potential to appreciate in value, unlike currencies, Gold cannot be
deposited at a bank for the purpose of receiving interest. Therefore if an investor
wishes to benefit from the safe haven quality of Gold and at the same benefit from
an interest rate yield they could chose to purchase the Australian Dollar instead.

JAPANESE YEN AND CANADIAN DOLLAR


Japan is one the largest global importers of Oil. On the other hand Canada is one
the largest producers and exporters of Oil.
As the price of Oil increases and decreases the fates of the Japanese and Canadian
economies also changes. Japan which is heavily reliant on Oil imports will experience a direct economic benefit from a reduction in the price of Oil. This is because
the Japanese economy is heavily reliant on export driven manufacturing economy.
Lower Oil prices will mean that Japanese manufacturers will pay less for energy. This
in turn will result in a lower cost of production and more competitive export prices.
On the other hand an increase in the price of energy commodities will benefit exporters of crude oil. Therefore an increase in the price of Oil will act as a boost to the
Canadian economy and therefore the Canadian Dollar.

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CHAPTER 4

TECHNICAL ANALYSIS

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TECHNICAL ANALYSIS
An approach to trading that solely relies on the historical research of price movements is defined as Technical Analysis. Through the
analysis of price movements a trader or investor aims to identify key price patterns, important price points and other important relationships. It is through the correct application of technical analysis that a trader or investor can make assumptions and predictions on the
possible future price action.
CHARTS
CHARTS HAVE BECOME A MAJOR COMPONENT AND TOOL IN THE STUDY OF TECHNICAL ANALYSIS.
A chart is a graphical representation of the price action. Charts are useful to traders as they give the price action a visual order
that is easier to interpret. Further visual representation allows a trader to identify relationships between certain price points
through the application of trend lines, horizontal support and resistance levels, moving average and more complicated market
studies such as Stochastics, Bollinger Bands, MACD and RSI.

CHART TYPES
ACFX OFFERS TO OUR CLIENTS THE OPTION TO USE THREE WELL KNOWN AND POPULAR CHART STUDIES. THESE BEING:

CANDLESTICK CHARTS

BAR CHARTS

LINE CHARTS

All chart options allow our clients to choose a range of standard time frames from 1 minute to monthly. The ACFX Metatrader4
chart package also allows our clients to further customize their charts by choosing different colour schemes and back ground
designs.

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LINE CHART
Also known as Line on Close is probably one of the least used
method of chart types. The reason for is that its graphical representation of the price action as a sequence of closing prices
gives the least information. However this very simplicity does
give it a big advantage over other chart types. This being that
the lack of noise that a Line chart produces takes away some
of the psychological pressure a trader or investor experiences.
Furthermore this simple graphical representation does make it
much easier for the eye to identify price patterns which could be
lost in the noise of other chart types.

BAR CHART
Bar Charts have been popular for many years within the West
and as such are the second popular chart type in use. A Bar Chart
gives a trader four important price points over a specific period
of time. These being the open, high, low and close.
Traders and investors look at the structures created by bar chart
patterns for a means to predict the future direction of prices.

CANDLESTICK CHARTS
Candlestick Charts are by far the most popular chart study. Although very similar to Bar Charts, Candlesticks give a trader an
additional visual clue on how the last period closed. It does this
by creating what is called a body between the opening and
closing price. If the closing price posted a higher value than the
opening price for the period the body will be shaded green. If
conversely the closing price posted a value that is lower than the
opening price the body will be shaded red. The prices that fall
outside the candle body are called the wicks. The top of the wick
represents the highest price the instrument traded to during a
predetermined time scale and the bottom of the wick being the
lowest price.

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WHAT TIME FRAMES SHOULD I TRADE?


This is a question which is depended on how much time an investor has available to trade. A short term trader could choose 1,
5, 15 and 30 minute time frames from ultra-fast tick charts. Whereas longer term traders could decide to concentrate on 1 hour,
4 hour, Daily, Weekly and Monthly times frames.
Many traders choose to adopt a top down approach. This approach allows, through the implementation of multiple time frame
analysis, the trader to choose one or two time frames to ascertain the most likely direction for future price action. The entry and
stop targets are then taken off a lower time frame. Popular techniques, amongst others, would be the adoption of a daily and 4
hour time frame, a 4 hour and 1 hour or a 1 hour and 5 minute time frame.
The possibilities and options are numerous and can be customized to an investors individual trading style, risk appetite and time
they have available to trade.

SUPPORT AND RESISTANCE, WHAT THEY ARE AND HOW TO USE THEM
Imagine an investor stood in the middle of an alley surounded by tall brick walls. If one was to throw a tennis ball at one of the
walls with sufficient power it would not be a surprising if the ball was to bounce back and forth between each wall. In this case
the two walls offer a solid boundary that repels the tennis ball.
On a chart, support and resistance have a similar effect to price action. In this case however, instead of two horizontal walls a
trader will look for an area to place a price floor and and a price ceiling. Support and resistance both act as boundaries against
the current price level. Support being the boundary floor and resistance being the boundary ceiling.
Unlike two solid brick walls horizontal support and resistance act as areas where the price may struggle to trade above or beneath. Traders tend to observe the price action around the key support and resistance levels. They want to examine whether
the price action can sustain a move and therefore close above or below these key levels; or whether the price action be pulled
back into the prior range.
By understanding the relationship of support and resistance levels to the current price structure, a trader is able to make informed decisions and plan their trading. A trader could for instance create a plan where they buy at support or sells at resistance.
Alternatively a trader may create a plan which buys breakouts above resistance and sells break downs beneath support.

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BULL POSITION

BEAR POSITION

A bull or long position seeks to profit from rising prices in certain


securities. When prices rise, a bull position becomes profitable. If
prices fall, the bull position is not profitable. A bull or long position is the most well-known type of position and is what is typically used in buy and hold investing.

A bear position attempts to profit in a market by betting that


prices will fall for certain securities. The short seller borrows
securities in the hopes that prices will decline. When the price
drops, the investor makes a profit on the price change. When
the price rises, the investor loses money.

TREND LINES. WHAT ARE THEY AND HOW TO USE THEM?


If a trader studies a chart long enough, they will notice that price action tends to rise and fall along a consistent line. An uptrend
can be defined as a series of higher highs and higher lows, there is a certain degree of predictability to identifying key turning
points that the price action will follow. The same can be said of a down trend. When the price action is trending lower a trader
would expect to see a series of lower lows and lower highs. Once again a trader could probably gauge by eye when a corrective
rally will lose its momentum and begin to move back in the direction of the dominant trend.
The flow of market action during the trend cycle can be defined by visual means through the use of the most basic yet one of
the most effective chart studies. The trend line. A trend line is a simple process of connecting two swing points during and up
trend and then extending this line into the future. The same process can occur during the down trend, where the investor would
connect two consecutive high swings. In both cases if the price action is trending in one direction then the investor should see a
rising trend line that connects rising lows during an uptrend, and a falling trend line that connects lower highs.
As if by financial alchemy, the investor can now with some predictability work out through visual means, where the price action
should naturally pullback to. This type of price movement is especially useful to swing traders whose aim it is to participate in
moves by buying into weakness during an uptrend and selling into strength during a down trend.
Trend lines do not always give investors the exact point of entry on the third pullback. This is because other traders are aware that
swing traders will look to add positions at these levels and try to hunt for their stops. Therefore an investor may see some volatility around the third intersection of price and trend line support, and resistance with a series fake outs and false moves that could
keep investor the investor guessing.
A trend line break could also give the investor an early clue that a trend is about to change. A break beneath an uptrend line can
be viewed as bearish if the price action on the first pull back fails to break above or sustain a move above the uptrend line. Alternatively a break above a down trend line can be viewed as bullish if the price action on the first pull back fails to break beneath
or sustains a move below the downtrend line.
The understanding of how a financial instrument reacts to a move to or through a trend line is a difficult task as it requires a detailed understanding of short term price patterns and price exhaustion or continuation analysis. Investors must also be able to
master the correct placement of stops around these levels, to ensure that the market volatility does not prematurely take them
out of a profitable trade.

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TRADING WITH INDICATORS


For some time now the use of technical indicators has been very
popular amongst traders and financial analysts. The ACFX Metatrader 4 platform, offers a wide variety of indicators to our clients.
Indicators are useful as they enable chart users, through the application of both simple and complicated programs to gain a market view that side steps the perceived complexity of price action
analysis.
The use of indicators has both positive and negative aspects.
From a positive view point, the user of this chart functions

interpret the price action very quickly and through these tools gather a picture of how the instrument could move over the coming periods. Furthermore the simplicity of the data outputs allow a trader
to build a standardize strategy around these technical indicators.
From a negative aspect these indicators are all derived from price
and therefore lagging. A skilled technical trader who applies pure
price action analysis should be quick in entering the trade and nimble in managing the position.

MOVING AVERAGES
A moving average is a technical indicator which is used to take away some of the volatility of raw price action. This is achieved
by calculating the average closing price over a set amount of periods. This process is repeated over subsequent periods, with the
net result being a line that shadows the price action. Moving averages cannot be used to predict future price actions as they are
a lagging indicator.
The most common use of a moving average, is for reasons of quick visual identification of a trend. For example if an instrument is
trading above a 100 period moving average, over a set period, then it can be said that the price action is positive.
If a trader now adds the 50 period moving average to the chart, a variety of scenarios can be created based on the interaction of
the price action and both averages.
If the shorter 50 period moving average crosses above the 100 period moving average then it is said to be bullish and is defined
as a Golden Cross. As moving averages are lagging indicators, the price action will almost certainly be above the 100 period average at the time the cross over takes place.
If the shorter 50 period moving average crosses below the 100 period moving average, then it is said to be bearish and is defined
as a Black Cross. As moving averages are lagging indicator the price action will almost certainly be below the 100 period average
at the time the cross over takes place.

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A moving average can act as a leash that a dog walker will use to control his pet. As the dog gets over excited it will pull at the
leash as it moves away from the owner. At the point where the leash tightens as the dog struggles to move too far away the
walker pulls the dog back towards him.
Price action that trades away and becomes increasingly extended from the moving average is very much like the over excited
dog. Whereas the moving average is the leash that brings the price action back to a place where it feels most comfortable.
If for example the price action is trending higher, extended from the 50 period and 100 period moving averages, there is a tendency for upward momentum to lose energy. Eventually either the price action trades back down to meet the average, or in a
sideways fashion that allows the average to catch up with the price action.

TYPES OF MOVING AVERAGES


THE ACFX METATRADER 4 PLATFORM OFFERS A VARIETY OF FEATURES AND CHART STUDIES. THIS NOT ONLY INCLUDES THE
STANDARD SIMPLE AVERAGE BUT ALSO OTHER MORE EXOTIC VERSIONS SUCH AS THE EXPONENTIAL, SMOOTHED AND LINEAR
WEIGHTED AVERAGES.

SIMPLE MOVING AVERAGE


The Simple Moving Average (SMA) uses a very straightforward
method to calculate the average line. This calculation being
the simple average calculated over X periods. For example the
SMA for 20 periods of closing prices is just that. Take the closing price for the last consecutive periods, add them together
and then divide by 20.

EXPONENTIAL MOVING AVERAGE


The Exponential Moving Average (EMA) are viewed by many
traders and investors as being more reliable than a Simple
Moving Average. However both average types are very popular, the benefits of using one average over the other though has
yet to be proven.
The reason why EMAs are deemed as being more reliable is

because greater weight is given to more recent price data outputs. The more recent the data, the more relevant and therefore more useful. The sum of weighting should always equal
to 100. An SMA on the other hand gives all values the same
weighting.
SMA are deemed to have a problem which is referred to as
barking twice. This is used when the SMA react at the start
of the moving average period when a new data output is included in the equation, and once at the end when this same
data output falls out of the equation.
An EMA slope can be recognized with greater ease. This is because the slope EMA should point up when the price closes
above the average and down when the price closes below the
average. This tendency usually follows the most recent price
closely, which means that the EMA is much quicker to react
when compared to an SMA and the nature of the price action.

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SMOOTHED MOVING AVERAGE

LINEAR WEIGHTED MOVING AVERAGE

The Smoothed Moving Average (SMMA) similar to the EMA is a


weighted average. It is also very similar to the SMA. The difference between the SMMA and the SMA is how it treats the oldest data output. With the SMA, the oldest data output is simply
subtracted from the SMA calculation. However in the case of
the SMMA the previous smoothed average value is subtracted.

The Linear Weighted Moving Average (LWMA) gives higher


weighting to more recent data outputs. A data output is obtained by multiplying the closing prices by the position occupied in the data set. The data output is then added together
and then divided by the sum of the number of time periods.

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TECHNICAL OVERLAYS
BOLLINGER BANDS
The Bollinger Band chart overlay was created by John Bollinger. Bollinger Bands work in conjunction with the moving average. Bollinger Bands are designed to act as volatility bands which envelope a moving average above and below. Bollinger Bands are calculated by the use of a standard deviation. The Bollinger Bands will expand as volatility increases and contract as volatility decreases.
The Bollinger Band overlay that can be found on the ACFX Metatrader 4 platform consists of three components. A Simple 20 period
moving average of closing prices. An upper and lower band that uses a standard deviation of 2. The bands use the same look back
period of the average.
Bollinger Bands can also be used to provide trading signals in the form of double tops and double bottoms. Furthermore Bollinger
Band contraction can be used as a warning signal of a potential break out or break down.

PARABOLIC SAR
The Parabolic SAR (PSAR) system was created by Welles Wilder. He referred to it as the Parabolic Time/Price System. SAR means stop
and reverse. Wilder is a well-respected writer on technical trading and wrote about the Parabolic SAR indicator in his book New
Concepts in Technical Trading Systems, that was published in 1978. This book also introduced other well-known technical indicators
such as the RSI, ATR and Directional Movement Index.
The indicator is actually a trading system. The indicator is designed to plot SAR points under the price action during an uptrend and
above the price action during a down trend.
A signal to stop and reverse will be given if the current candle breaks below or above the Parabolic SAR indicator. When this occurs
a new SAR point will be painted in the opposite direction of what was the prevailing trend.
As the SAR follows the price action it is considered a trend following indicator. The SAR comes into its own as an indicator that allows
a trader to stay in a trade during strong trending markets. Without the PSAR indicator a trader maybe influenced to cut a trade early,
due to psychological stress caused by normal market volatility.

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The PSAR will continually rise during an uptrend and continually fall during a down trend. Furthermore the PSAR will act as a trailing
stop which stops a trader from increasing the stop value.

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PIVOT POINTS
PIVOTS POINTS AND PIVOT POINT ANALYSIS IS A POPULAR AND WELL KNOWN TECHNICAL TRADING TOOL. THE USE OF PIVOT LEVELS WAS FIRST USED AT EXCHANGES BY PIT TRADERS. TRADING ON THE FLOORS OF MAJOR EXCHANGES IS TYPICALLY VERY FAST PACED. TRADERS ON THE FLOORS DID NOT HAVE THE USE
OF TECHNICAL CHARTS AND MODERN COMPUTER SYSTEMS. THEREFORE THERE WAS A REQUIREMENT TO CREATE A LEADING INDICATOR THAT WOULD MAP OUT
THE KEY DAILY LEVELS FOR THE FLOOR TRADERS.

SIMPLE PIVOT POINTS

Simple pivot point levels are calculated by taking the previous days high, low and close and by use of a simple arithmetic equation
which helps create predictive levels for the day ahead.
The calculation is shown below:

PIVOT POINT (P) = (HIGH + LOW + CLOSE)/3

SUPPORT 1 (S1) = (P X 2) - HIGH

SUPPORT 2 (S2) = P - (HIGH - LOW)

RESISTANCE 1 (R1) = (P X 2) - LOW

RESISTANCE 2 (R2) = P + (HIGH - LOW)

As the Pivot Point is based on the previous days data, the levels created are set in place for the whole days trading. A day trader
would look to buy a financial instrument and keep the position up to R1.
At R1 the day trader has three decisions to take:
1.
2.
3.

CLOSE LONG POSITIONS AND BOOK PROFITS.


CLOSE LONG POSITIONS AND ENTER A SHORT AGAIN R1.
ALLOW THE PRICE ACTION TO BREAK ABOVE R1 AND HOLD THE POSITION UNTIL IT TESTS R2.

Shorts will mirror longs with the trader looking for tests and fades of S1 and S2.
THERE ARE OTHER MORE EXOTIC VERSIONS OF THE PIVOT POINT. THESE INCLUDE THE FOLLOWING.

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FIBONACCI PIVOT POINTS


Fibonacci Pivot Points are similar to Simple Pivot Points. The Fibonacci Pivots use the same high, low and close levels; however they
include a Fibonacci element into the calculation.
THE CALCULATION IS SHOWN BELOW:

PIVOT POINT (P) = (HIGH + LOW + CLOSE)/3

RESISTANCE 1 (R1) = P + {.382 * (HIGH - LOW)}

SUPPORT 1 (S1) = P - {.382 * (HIGH - LOW)}

RESISTANCE 2 (R2) = P + {.618 * (HIGH - LOW)}

SUPPORT 2 (S2) = P - {.618 * (HIGH - LOW)}

RESISTANCE 3 (R3) = P + {1 * (HIGH - LOW)}

SUPPORT 3 (S3) = P - {1 * (HIGH - LOW)}

MOVING AVERAGE CONVERGENCE DIVERGENCE


The Moving Average Convergence Divergence (MACD) was created by Gerald Appel in the late 1970s. The MACD is a very simple but
at the same time one of the most useful indicators that is available to traders.
The MACD makes use of two trend following Moving Averages and creates a momentum indicator, by simply subtracting one average from the other. The end product of creating the MACD oscillator is an indicator that can be used for both trend following and
momentum analysis.
The MACD oscillates around a zero line with the moving averages converging, crossing or diverging around this level.
THE CALCULATION OF THE MACD IS AS FOLLOWS:

MACD LINE: (12-DAY EMA - 26-DAY EMA)

SIGNAL LINE: 9-DAY EMA OF MACD LINE

MACD HISTOGRAM: MACD LINE - SIGNAL LINE

HOW TO INTERPRET THE MACD


As the name implies the MACD highlights the degree of convergence and divergence between moving averages. According to Appels interpretation of the MACD, convergence happens as the two averages move closer together. Conversely divergence occurs
as the two averages move apart from each other. The shorter length moving average is more responsive than the longer period
moving average.

CENTRE LINE CROSS OVERS


The centerline is placed at the zero value. The MACD will oscillate above the centerline. Crossovers of the centreline will also indicate
that the short length average is above or beneath the longer average. If the MACD crosses above the zero line, then the short moving average should be above the long moving average. If the MACD crosses below the zero line, then the short moving average
should be below the long moving average.
Positive and negative crossovers will also give an indication of the current trend; a positive cross indicating an uptrend and a negative cross indicating a down trend. Furthermore the separation of the moving averages from each other, can be interpreted as an
increase in positive or negative momentum depending on the direction the crossover took place.

SIGNAL LINE CROSSOVERS


Signal line crossover occurs when the fast EMA crosses the slow EMA. A positive cross over happens when the short length moving
average crosses the long length moving average from below. A negative crossover occurs when the short length moving average
crosses the long length moving average from above.

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DIVERGENCES
Divergences typically occur when both moving averages converge with each other. The convergence signifies a decrease of
positive or negative directional momentum. Whereas the divergence signifies a lack of commitment to push prices higher
or lower.
During an uptrend one would expect to see the MACD in
step with the price action. As the financial instrument proceeds to print new highs, the MACD will also reach higher
levels. However during the exhaustion phase of the trend,
the MACD could come out of gear with the underlying
price action and consequently stop printing higher values.

This is a warning sign that the trend is reaching levels


of exhaustion which could lead to a corrective pullback.
A similar scenario could occur during a down trend. As the
financial instrument proceeds to print new lows the MACD
will also reach lower levels. However during the exhaustion
phase of the trend, the MACD could come out of gear with
the underlying price action and stop printing lower values.
This is a warning sign that the down trend is reaching levels of exhaustion which could lead to a corrective pullback.

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THE RELATIVE STRENGTH INDEX


The Relative Strength Index (RSI) was developed by J. Welles Wilder. The RSI is classed as a momentum oscillator. Its function is to
measure the speed and change in price movements.
The RSI has a range of 0 to 100. Traditionally and according to Wilder levels above 70 are considered overbought and levels beneath
30 oversold. However these levels can be adapted to suit the investors trading strategy.
THE CALCULATION OF THE RSI IS:

100
RSI = 100 - __________
1 + RS
RS = AVERAGE GAIN / AVERAGE LOSS
INTERPRETATION
The RSI can print multiple false signals during very strong trending markets. There can also be times when the RSI remains in overbought and oversold areas for a considerable time. This phenomenon can occur when the momentum oscillator becomes embedded in extreme areas during strong trending markets.
The use of RSI divergences are extremely useful when used as a filter to identify valid and non-valid overbought and oversold trade
set ups. As discussed in the section that focussed on MACD divergences, very similar set ups occur when using the RSI.
Furthermore although RSI could signal profitable trade sets off extreme overbought and oversold levels, divergences on the whole
can offer safe trade set ups that lead to much larger corrective moves in the price action.
As with all indicator based trading, the paramount importance is once the oscillator moves into an extreme area; entry should only
be taken if the price action begins to show signs of exhaustion.

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CHAPTER 5
THE PSYCHOLOGY OF TRADING

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THE PSYCHOLOGY OF TRADING


The path to become a master of trading requires the student to become well versed in the subjects of both fundamental and technical
analysis. Furthermore a great deal of awareness is required to both the current trading environment and market sentiment. It is only
possible to come to a conclusion regarding through a thorough understanding of the current market conditions that it is possible to
come to a conclusion regarding the direction the price action will move in during the period of interest.
However , having a good understanding of the mechanics that give the market its form and catalysts is not enough to master trading.
The reason is that humans are emotional machines and trading can be a very stressful occupation that brings these emotions to the
forefront. For example a day trader who employs a high volume scalping strategy, could have feelings of euphoria and depression in a
short space of time. Much like a football player who scores an equalizing goal for his team but only to see the opponents snatch a winner
in the dying moments of the match; emotions of joy and despair are amplified.
For a trader to be successful there is a need to conquer ones emotions, especially because a trader might suffer many confidence sapping
losses. In fact some trading strategies have been created with a goal to accept many tiny losses which are wiped out by a smaller amount
of large wins. An emotional person who will trade on such a system would soon begin to question their ability and their strategy.
All traders need to hurdle what has been described as a wall of fear and greed. In fact an old Wall Street phrase about the market, sais
that the market has two emotions. Fear and greed. Although this sounds as a very simple way to describe the market participants state
of mind, the inability to conquer these emotions will have a negative effect on an investors equity position.

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GREED, FEAR AND HOPE

To be a successful in the financial markets a trader will need to:

The catch phrase during the years of the well respected and
now retired head of the Federal Reserve Mr. Alan Greenspan
was irrational exuberance. Traders feel the need to make huge
profits in the shortest period of time possible. The sharp market operators sense that a big move is about to happen, they
therefore minimize their risk and book profits according to a
well thought out plan.
Less experienced traders, do not always anticipate moves tlike
that. Fearing that they have missed a great opportunity they
jump onto the trade. Soon, the find themselves into the black
as their unrealized profit begins to rise. However this trader did
not have an entry plan and certainly did not have an exit plan.
The possible outcome to such a trade is therefore in a state of
flux. This trader may get lucky and close the position for the
maximum profit available. It is however more likely that the
greed takes hold as this trader gets excited and feels an emotional high as his unrealized profit increases dramatically.
The market then begins to fluctuate. The trader reinforces the
positive feeling about this trade by telling himself, dont worry,
its just another consolidation. Then the price slips lower so
the trader sets an imaginary stop under the current price action. The trader anxiously watches the market as the price action ticks down ever so closer to his soft stop. His stop is then
breached. He tells himself the market is wrong, this is just a
minor correction but the market moves lower.
The trader now places another soft stop just above the entry
price. The price action inevitably heads lower and before he has
time to contemplate what is happening, a profitable trade is
now in debit.
With his position now underwater a sense of fear and hope
takes control of what should be a rational trader. This trader
now is hoping that the selloff has run its course. He tells himself that if the position goes back into profit he will close the
trade with a small win. Then he thinks about the opportunity
he missed in booking a large profit and that next time he will
not repeat the same mistake.

DEFINE THEIR TRADING STRATEGY.


HAVE A DISCIPLINED APPROACH TO TRADING.
HAVE ACHIEVABLE EXPECTATIONS
BE PATIENT
USE TESTED MONEY & TRADE MANAGEMENT TECHNIQUES
DEFINE THE TRADING STRATEGY
Consistent profits can only occur through the consistent application of a proven and well thought out trading strategy. Trading off hunches and estimates might work on occasion but in
the long run will surely grind down the value of an investors
equity.
A trading strategy must be thoroughly researched, be based
on logic and well thought out. How the execution of the strategy must be clearly stated and documented in a step by step
process.
All the components that are used to create a trading strategy must be of value. Integrating indicators and components
which make the strategy unnecessarily complicated will slow
down and cloud a traders decision process.
The strategy ultimately is written to allow a trader to benefit
from their knowledge. This can only be achieved if the trading
strategy clear states:

WHAT EVENT OR EVENTS WILL TRIGGER THE TRADER INTO


TAKING ACTION?
WHAT IS THE EXACT ENTRY LEVEL?
WHAT IS THE STOP LOSS LEVEL?

However a simple transaction of buying low and selling higher


has turned into an emotional roller coaster and a story that has
an unscripted ending.
ALL THIS COULD HAVE BEEN AVOIDED IF OUR TRADER HAD A TRADING PLAN
IN PLACE, WHICH WOULD PREDEFINE THE STRATEGY, ENTRY, TAKE PROFIT
AND STOP LOSS. IT IS ONLY THROUGH A TRADING PLAN THAT A TRADER CAN
CONQUER HIS EMOTIONS.

THE TRADING PLAN


A well written and detailed trading plan will go a long way to
easing the anxiety that a trader will feel about trading. Furthermore a strategy that is logical, robust and that has been tested,
will give the trader a chance to pull the trigger and enter the
trade when the trade set up presents itself.

WHEN DOES A TRADER TAKE PROFIT?


HAVE A DISCIPLINED APPROACH TO TRADING
Formulating a great trading strategy will not be enough if a
trader does not have the discipline to follow the trading rules.
The market will always give a trader another opportunity;
therefore chasing a moving market or trying to second guess
the market and ignoring the rules of the strategy lead to the
traders equity balance to be damaged or exposed to greater
risk.
Furthermore ignoring rules such as tampering with margin or
stop loss and take profit levels during the trade will lead to uncertainty and inconsistence results.
Trading requires the discipline to enter and manage the trade
according to predefined rules.

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AIM FOR ACHIEVABLE EXPECTATIONS


Trading is a race between knowledge and capital. During the
learning period it is the goal of a new trader to learn as much as
he/she can. This may require reading books, attending seminars
and training, practicing on demo accounts, formulating trading
strategies and test strategies on demo account.
However a learning process has no value if a new trader does not
test these ideas on the market with a live account. A trader can
only sharpen his or her knowledge through live trading.
This leads to a race between knowledge and equity. The more
knowledgeable and experienced a trader becomes the less likely
that losses will be incurred and the more likely that profits will be
booked. At some point in time a new trader will cross that magical line where the trading knowledge and experience leads to
profits being booked on a regular basis as well as a consistent
trading style.
A traders expectations should also be in line with what the market will give back to the investor. Traders need to be able to place
both stops and take profits which are in line with underlying market volatility.
FOR EXAMPLE
Placing a 10 pip stop on a trade, when trying to trade a daily
swing, would probably lead to a loss. This is due to the fact that
daily market volatility has a tendency to move through the stop.
A stop needs to be placed at a relevant level which allows the
trade to develop.
Furthermore a trader who aims to take 120 pips on daily positions
whilst the average range is 80 pips will lead to disappointment.
IT IS THE DUTY OF THE TRADER TO UNDERSTAND THE FINANCIAL INSTRUMENT
AND HOW IT TYPICALLY MOVES.

MANAGE RISK
Trading is all about managing risk. The management of risk sets a
trader apart from a gambler playing roulette at a casino.
Trade position sizes should be limited to the amount a trader is
willing to lose. The idea being that one trade should not be sufficient to wipe out an equity balance.
A trader needs to aim to incur acceptable losses and consistent
gains. The risk to reward ratio should preferably be biased to
booking profits that are larger than losses.
In terms of hard and fast rules, how much a trader should risk on
any given trade is very much down to their risk appetite and experience. However stop loss levels could vary between 0.5 5%
however many professional trades will risk at the most no more
than 2%.
Risking more could mean that a trader is over leveraged or has
misread the market. Sitting on a position that is 5% underwater
does beggar the question of how wrong must to a trader be to
be right?

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IN CONCLUSION
TO BECOME A SUCCESSFUL TRADER ONE REQUIRES TO TAKE A LONG JOURNEY THAT TAKES COMMITMENT, DEDICATION AND DISCIPLINE.
THE MARKET WILL NOT ALWAYS GIVE THE TRADER WHAT HE/SHE WISHES FOR. THERE WILL BE TIMES WHEN EUPHORIA IS FOLLOWED BY
FEELING OF REGRET, FRUSTRATION AND PAIN.
A TRADER NEEDS TO BE ABLE TO MANAGE EMOTIONS AND TRADE TO A PLAN. A FAILURE TO FOLLOW THE RULES WILL ULTIMATELY LEAD TO
A PROMISING TRADING CAREER ENDING PREMATURELY.
THIS EBOOK HAS BEEN WRITTEN TO GIVE TRADERS WHO ARE NEW TO THE MARKET AS MUCH INFORMATION AS POSSIBLE IN THE SHORTEST SPACE OF TIME.
READING THIS EBOOK SHOULD GIVE A TRADER THAT IS NEW TO THE MARKET THE BASIC GUIDELINES TO APPROACHING WHAT CAN BE A
VERY EXCITING AND REWARDING PROFESSION.
HOWEVER IT IS UP TO THE TRADER TO GO OUT AND FIND AS MUCH INFORMATION AS POSSIBLE ON TRADING. BE IT BOOKS, ONLINE
VIDEOS, CHAT ROOMS OR BY SUBSCRIBING TO THE DETAILED NEWS LETTERS SENT OUT TWICE DAILY FOR FREE TO ALL OUR CLIENTS.
THERE IS ALSO A WEALTH OF KNOWLEDGE TO BE FOUND ON THE ACFX ACADEMY WEBSITE. FURTHERMORE OUR INVESTMENT RESEARCH
DEPARTMENT IS ALWAYS AVAILABLE TO ASSIST OUR CLIENTS WHERE POSSIBLE.
SO WHAT IS HOLDING YOU BACK?
WITH ACFX YOU CAN.

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