FX Trading Steps

8/14/2019 FX Trading Steps

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4 FX Trading Steps4 FX Trading Steps

Prepared by :Prepared by :

Forex Trading ConsultantForex Trading Consultant

http://www.tradesteps4x.com/



Step # 1 : Finding PairsStep # 1 : Finding Pairs

Includes identifying which pairs you will be trading.Includes identifying which pairs you will be trading.

Looking at things such as correlation, spread, and how active the pairLooking at things such as correlation, spread, and how active the pairtrades will help you determine if the pair fits your trading style.trades will help you determine if the pair fits your trading style.



Are they correlatedAre they correlated

Correlation means that the pairsCorrelation means that the pairsmove in relationship to eachmove in relationship to each

other. For example, if theother. For example, if theEUR/USD goes up, then it is likelyEUR/USD goes up, then it is likelythat the GBP/USD will go up. Thisthat the GBP/USD will go up. Thismeans that they are positivelymeans that they are positivelycorrelated. If you look at thecorrelated. If you look at theEUR/USD and the USD/JPY, youEUR/USD and the USD/JPY, youwill notice that they move inwill notice that they move in

opposite directions or that theyopposite directions or that theyare negatively correlated. Oneare negatively correlated. Onegoes up while the other goesgoes up while the other goesdown.down.

Trading pairs that are correlatedTrading pairs that are correlatedis like trading one pair when itis like trading one pair when it

comes to risk. If you have acomes to risk. If you have aposition in the EUR/USD andposition in the EUR/USD andGBP/USD, it is really like havingGBP/USD, it is really like havingone trade and you may be takingone trade and you may be takingtoo much risk by buying both sincetoo much risk by buying both sincethey move together.they move together.





Most Active TimeMost Active Time

Right is a chart of Right is a chart of the currency pairsthe currency pairsand when they areand when they aremost active. Itmost active. Italso shows thealso shows thetimes they aretimes they aremost activelymost actively

traded. This willtraded. This willhave an impact onhave an impact onthe pairs you maythe pairs you maybe trading. If yoube trading. If youcan only tradecan only tradeduring certainduring certaintimes of the day,times of the day,you can see whichyou can see whichones are the mostones are the mostactive and may beactive and may bethe best ones forthe best ones foryou to trade.you to trade.



Step # 2 : EvaluatingStep # 2 : Evaluating

Includes the evaluation process of fundamental and technical analysis.Includes the evaluation process of fundamental and technical analysis.

Understanding the importance of the fundamental data and theUnderstanding the importance of the fundamental data and thetechnical charting are key to knowing when to enter and exit yourtechnical charting are key to knowing when to enter and exit yourpositions.positions.



Fundamental AnalysisFundamental AnalysisIf fundamental analysis tells usIf fundamental analysis tells us what towhat to buy,buy,

then technical analysis indicatesthen technical analysis indicates whenwhentoto buy.buy.

When most people think aboutWhen most people think aboutfundamental analysis, they think aboutfundamental analysis, they think aboutreading balance sheets and incomereading balance sheets and incomestatements. Unlike the stock market,statements. Unlike the stock market,where this data is critical to understandwhere this data is critical to understandthe strength of a company, the currencythe strength of a company, the currencymarket relies on macroeconomic eventsmarket relies on macroeconomic events

to show the strength of a currency. Into show the strength of a currency. Inthe currency market, it is the study of the currency market, it is the study of other factors that might dictate what theother factors that might dictate what theprice of a currency “should” be.price of a currency “should” be.

Evaluating the fundamentals of theEvaluating the fundamentals of thecurrency market involves more of acurrency market involves more of a

macroeconomic view and looking atmacroeconomic view and looking atmajor international and national events.major international and national events.

Evaluating interest rates, economic strengths or weaknesses, politics, and other news eventsEvaluating interest rates, economic strengths or weaknesses, politics, and other news eventsof different countries helps identify the strength of the currency. As with other markets, theof different countries helps identify the strength of the currency. As with other markets, thebasic principle of supply and demand drives the currency market. If the demand for a specificbasic principle of supply and demand drives the currency market. If the demand for a specificcurrency increases, that currency will rise in value. If the demand decreases, the value of currency increases, that currency will rise in value. If the demand decreases, the value of

that currency will decrease. When a currency price moves, there should be fundamentalthat currency will decrease. When a currency price moves, there should be fundamentalreasons to explain why the price moved in a certain direction.reasons to explain why the price moved in a certain direction.



some of the fundamental factorssome of the fundamental factorsthat can influence the price of a currency that can influence the price of a currency

Interest rates

Different interest rates between countries can affect the exchange rates between currency

pairs. For example, if the Japanese government raises its interest rate, then foreigners might

flock to the Yen denominated investments to earn a higher return on the Japanese Yen than

what they can earn in their own country. This will raise the price of the yen relative to other

foreign currencies. If Japan lowers its interest rates, then the opposite effect might take

place. Regardless of the country or currency, if a currency has a higher interest rate or ratesare increasing, it will have a positive effect on the value of that currency.

Economy

The strength or weakness of a certain country’s economy will lead to a longer-term trend in

the price of its currency relative to others. If the U.S. economy is strong, then you will seethe USD strengthen. If it is weak, the dollar will weaken.

Political Environment

A country’s political environment can move the price of its currency. A political crisis (such

as war) can lower the price of a country’s currency because of uncertainty surrounding the

crisis. As people flock to safer currencies, the value of its currency will go down.



some of the fundamental factorssome of the fundamental factors

Economic Announcements

One factor that simplifies the fundamental

process of the currency market is the readily

available information. Most of the information we

need, fundamentally speaking, is announced on a

set schedule. Professional currency traders are

constantly analyzing the upcoming events and are

already trading as if the announcements havebeen made. What we need to look out for, is the

occasion when the announcement is made and it

is different from what the analysts expected.

In those cases, there can be a dramatic move in

the currency market. Below is a screen shot of

the economic calendar that is available on ourwebsite. You can see that it gives you the date

and the time that an announcement is coming

out. It also shows you the currency affected and

what the event is that will be announced.

Because there can be volatility associated with

some announcements, you may want to avoid

them altogether.




Economic Announcements

One factor that simplifies the fundamental

process of the currency market is the readily

available information. Most of the information we

need, fundamentally speaking, is announced on a

set schedule. Professional currency traders are

constantly analyzing the upcoming events and are

already trading as if the announcements havebeen made. What we need to look out for, is the

occasion when the announcement is made and it

is different from what the analysts expected.

In those cases, there can be a dramatic move in

the currency market. Below is a screen shot of

the economic calendar that is available on ourwebsite. You can see that it gives you the date

and the time that an announcement is coming

out. It also shows you the currency affected and

what the event is that will be announced.

Because there can be volatility associated with

some announcements, you may want to avoid

them altogether.




Clearly, a change in the balance of payments has a direct effect on currency levels.

Therefore, FX traders should keep on top of economic data relating to this balance and

understand the implications of changes in the balance of payments.

For example, recall the trade flow between the U.S. and Canada during 2004. During this

time, the U.S. imported more goods from Canada than it exported to Canada. This caused a

trade deficit with Canada. In this case, the deficit caused the U.S. dollar to decrease in

value since the U.S. needed to sell the dollar to buy the Canadian dollar. This added a

supply of USD which caused the value to go down.

Capital Flow

Capital flow shows the impact of capital being moved from one currency to another to

increase the return on investment. Capital flow measures the net amount of a currency

that is being purchased or sold due to capital investments. If this is positive, it means that

foreign investments coming into a country exceed investments going out. If this isnegative, it implies that foreign investments coming into a country are less than those

going out.

Interest rates are a primary force for moving investments into or out of a country .For example, if a certain country is lowering their interest rate and another is raising

interest rates, money will move out of the currency that is being lowered and into the

one that is being increased.



Technical AnalysisTechnical Analysis

INDICATORSINDICATORS

Technical indicators help makeTechnical indicators help makespecific entry and exitspecific entry and exitdecisions. Regardless of thedecisions. Regardless of theindicator used, you mustindicator used, you mustunderstand how it works andunderstand how it works andhave the confidence to followhave the confidence to followthe signals.the signals.

The indicators used are basedThe indicators used are basedon historical data and show upon historical data and show upeither on or below the priceeither on or below the pricechart. Although thesechart. Although theseindicators are helpful inindicators are helpful inunderstanding when to buy andunderstanding when to buy and

sell, they are not perfect insell, they are not perfect ingetting you in and out everygetting you in and out everytime. Use them to develop yourtime. Use them to develop yourtrading system and they willtrading system and they willhelp you become a successfulhelp you become a successfulcurrency trader.currency trader.




IMPORTANCE ORDER IMPORTANCE ORDER

The order of importanceThe order of importancefor evaluating charts asfor evaluating charts asfollows:follows:

Trend IdentificationTrend Identification Support and ResistanceSupport and Resistance IndicatorsIndicators

By following this order of By following this order of importance you will beimportance you will beable to properly evaluateable to properly evaluatecharts and know when tocharts and know when tobest enter and exit yourbest enter and exit yourtrades.trades.




Trend IdentificationTrend Identification

It is important to rememberIt is important to rememberthe phrase, “The Trend isthe phrase, “The Trend isYour Friend”. By tradingYour Friend”. By tradingwith the trend, you arewith the trend, you areputting yourself in the bestputting yourself in the bestpossible position to bepossible position to be

successful. The trendingsuccessful. The trendingnature of the currencynature of the currencymarket makes it essential tomarket makes it essential tofollowing this rule.following this rule.

Remember the size of thisRemember the size of thismarket. We want to be themarket. We want to be thefly on the elephants back.fly on the elephants back.By following the trend, youBy following the trend, you

will allow the market carrywill allow the market carryyou like the elephant doesyou like the elephant doesthe fly.the fly.

EUROUSDEUROUSD

Take a look at how the following will help you better evaluate your chartsTake a look at how the following will help you better evaluate your charts

and find proper entry and exit points.and find proper entry and exit points.



Up and Down TrendsUp and Down Trends

In the chart EUROUSD above, you can see the price of theIn the chart EUROUSD above, you can see the price of thecurrency pair has been making lower highs and lower lows.currency pair has been making lower highs and lower lows.This would indicate that the pair is in a downtrend.This would indicate that the pair is in a downtrend.

As long as the trend continues to make these moves, you willAs long as the trend continues to make these moves, you willwant to anticipate a continuation of this trend. When youwant to anticipate a continuation of this trend. When youbegin to see this pattern being broken, you will look for abegin to see this pattern being broken, you will look for areversal of the trend.reversal of the trend.

A downtrend is defined as a periodA downtrend is defined as a period

when price moves in a series of when price moves in a series of

lower highs and lower lows.lower highs and lower lows.

An uptrend is defined as a periodAn uptrend is defined as a period

when price moves in a series of when price moves in a series of

higher highs and higher lows.higher highs and higher lows.

The trend is simply defined as :The trend is simply defined as :

the direction the currency pair is moving over a certain time period.the direction the currency pair is moving over a certain time period.

It could be minutes, hours, days, weeks, or months, depending on the time frameIt could be minutes, hours, days, weeks, or months, depending on the time frameyou are evaluating. Remember, there are three ways the currency market willyou are evaluating. Remember, there are three ways the currency market will

trend: up, down, and side-ways.trend: up, down, and side-ways.



Support and ResistanceSupport and Resistance

SupportSupport

Support is the price area where the currency pair will stop its downward movementSupport is the price area where the currency pair will stop its downward movement. This is. This isan area where you will look to buy the pair as it bounces up off of the support floor. Thisan area where you will look to buy the pair as it bounces up off of the support floor. Thissupport can be either price support (horizontal) or trending support (diagonal). The more thesupport can be either price support (horizontal) or trending support (diagonal). The more thearea of support is tested, the stronger the area becomes. Many traders look for these areasarea of support is tested, the stronger the area becomes. Many traders look for these areasand place buy orders to enter at the support, which makes these support areas evenand place buy orders to enter at the support, which makes these support areas evenstronger.stronger.

ResistanceResistance

Resistance is the price area where the currency pair will stop its upward movementResistance is the price area where the currency pair will stop its upward movement. This is. This isan area where you will want to look to sell the pair as it bounces down off of the resistancean area where you will want to look to sell the pair as it bounces down off of the resistanceceiling. This resistance can be either price resistance (horizontal) or a trending resistanceceiling. This resistance can be either price resistance (horizontal) or a trending resistance(diagonal). The more the area of resistance is tested, the stronger the area becomes. Many(diagonal). The more the area of resistance is tested, the stronger the area becomes. Manytraders look for these areas and will place sell orders to enter at the resistance which makestraders look for these areas and will place sell orders to enter at the resistance which makes

these resistance areas even stronger.these resistance areas even stronger.

The idea of support and resistance is one of the most critical concepts you will learn learn.The idea of support and resistance is one of the most critical concepts you will learn learn.These are areas where traders have psychologically placed price targets, both high and low.These are areas where traders have psychologically placed price targets, both high and low.

The price will tend to bounce up or down off of support or resistance levels.The price will tend to bounce up or down off of support or resistance levels.

Support is like the floorSupport is like the floor, and once hit, it will tend to bounce upward., and once hit, it will tend to bounce upward.

Resistance is like the ceilingResistance is like the ceiling and once hit, will tend to bounce downward.and once hit, will tend to bounce downward.

You need to be able to identify areas of both support and resistance, so you can know whereYou need to be able to identify areas of both support and resistance, so you can know wherethe price is likely to go. Remember, this is an area of support or resistance, not an exactthe price is likely to go. Remember, this is an area of support or resistance, not an exactprice.price.



USDJPYUSDJPY

Support and ResistanceSupport and Resistance





Because MAs use historical data, they lag the market and only show the changes after theBecause MAs use historical data, they lag the market and only show the changes after theprices have changed. There are multiple types of moving averages that can be used.prices have changed. There are multiple types of moving averages that can be used.Simple, exponential, and weighted are the most common.Simple, exponential, and weighted are the most common. A simple moving average A simple moving average(SMA) is the most common and is derived by taking the closing price of the last number of (SMA) is the most common and is derived by taking the closing price of the last number of

time periods and adding them together, then dividing by the number chosen.time periods and adding them together, then dividing by the number chosen. Don’t worry about the calculations because the charting will do it automatically for you.Don’t worry about the calculations because the charting will do it automatically for you.

Indicators

The Stochastic indicator was created by George

C. Lane and was designed to help project

future price movement. This is primarily anindicator to be use in a non-trending currency

pair, to project a potential change in direction

or momentum. This oscillating indicator moves

between a low of 0 and a high of 100. The area

below 20 is considered oversold and the area

above 80 overbought.

There are two primary signals that come fromusing the stochastic indicator. First, when the

Stochastic lines move below 20 or above 80 and

then reverses and comes out of the areas.

Second, when the two stochastic lines (%k and

%d) cross each other, regardless of where they

are located on the chart.

STOCHASTIC INDICATOR (SI)(SI)



Signal #1Signal #1

When the stochastic indicator moves below the 20 line on the graph and thenWhen the stochastic indicator moves below the 20 line on the graph and thenturns and rises above the 20 line, this is a bullish signal. When the stochasticturns and rises above the 20 line, this is a bullish signal. When the stochasticindicator moves above the 80 line on the graph and then turns and falls belowindicator moves above the 80 line on the graph and then turns and falls belowthe 80 line, this is a bearish signal. This is a more conservative signal, becausethe 80 line, this is a bearish signal. This is a more conservative signal, becauseyou are waiting for confirmation. The price of the currency will be moving inyou are waiting for confirmation. The price of the currency will be moving inthe direction you are looking to trade before you get into the position. As longthe direction you are looking to trade before you get into the position. As longas you trade with the trend, this will often be a good entry signal. Theas you trade with the trend, this will often be a good entry signal. Thedownside to this signal is it will be delayed and you will get in after thedownside to this signal is it will be delayed and you will get in after thecurrency pair has already begun to move.currency pair has already begun to move.

Signal #2Signal #2

This signal occurs sooner and more often than the first signal. This is a moreThis signal occurs sooner and more often than the first signal. This is a more

aggressive trade and often times gives false signals or whipsaws. Theaggressive trade and often times gives false signals or whipsaws. Thedifference is you don’t wait for it to move above the 80/20 line, you take thedifference is you don’t wait for it to move above the 80/20 line, you take thesignal as soon as the %K line and %D line cross. This could be anywhere on thesignal as soon as the %K line and %D line cross. This could be anywhere on thegraph regardless of whether or not it is above or below the 80/20 line. Whengraph regardless of whether or not it is above or below the 80/20 line. Whenthe faster %K line crosses above the slower %D line, it is a bullish signal. Whenthe faster %K line crosses above the slower %D line, it is a bullish signal. Whenthe faster %K line crosses below the slower %D line, it is a bearish signal.the faster %K line crosses below the slower %D line, it is a bearish signal.Furthermore, you will only take a position when trading with the trend of theFurthermore, you will only take a position when trading with the trend of the

currency.currency.

STOCHASTIC INDICATOR(SI)(SI)

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FX Trading Steps