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Margin FX Trading Services - Learn More about Margin FX (updated on 2 May 2012)

This document is provided for your reference and convenience only and is subject to the terms and conditions applicable to the Margin FX Trading Services. In the event of inconsistency or conflict between this document and such terms and conditions, such terms and conditions will prevail.

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Content

This guide aims at providing information on the technical analysis of the Margin FX Trading Platform.

Basics of Margin FX

Introduction to ‘Technical Analysis’

Indicators

Overlays

Trend Lines

Candlesticks

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The terms “margin” and leverage” refer to the same principle, from different perspectives. Both mean that you may trade with a greater amount than you have deposited.

For example, if the Bank offers you a maximum leverage of 20:1, this means that if you have HKD$10, you may leverage it up to trade HKD$200.

In other words, you must hold 5% of your open position as margin.

The advantage of margin trading is that you may earn greater returns on your trades. However, you may incur greater losses.

Margin and Leverage

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Margin and Leverage

When you trade on margin, you are in essence borrowing the money to place the trade. The margin is the amount of funds that you are required to deposit as a percentage of the value of the position they wish to open, also known as initial margin.

For the HSBC Margin FX Trading Services, if you meet the suitability profile, you will be offered a maximum leverage ratio of 20:1.

Please see the table below for an example of the relationship between margin level and leverage level.

Leverage Level 5:1 10:1 20:1

Margin Level 20% 10% 5%

Maximum Exposure $50,000 $100,000 $200,000

* Based on a deposit of $10,000

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Margin Call

Margin call refers to the notification to you when the net asset value of your account falls to the level which is at specific percentage above the close-out level. You are required to either deposit more funds in order that you have sufficient margin to cover the position, or close some of the positions.

In our Margin FX Trading Platform, the margin call will be issued when the net asset value of your account falls within 20% above the close-out level.

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Closeout

The Margin FX platform has a unique feature whereby the customer’s positions are automatically liquidated when a certain threshold has been breached.

The closeout is to protect customers from unlimited losses and thereby protecting HSBC from credit exposure. The closeout will be automatically triggered when the net asset value falls below 50% of the margin required to maintain all of the customers open positions.

When this occurs, the platform will close all of the customers’ open positions simultaneously.

As each position is calculated on a collateral sub-account level, closeout will only occur at the collateral account level. Assume you have both USD and HKD collateral account. If the Net Asset Value (NAV) of USD collateral account reaches the close-out level while the NAV of HKD account is still above the level, the automatic closeout will take place in the USD account only. It enables the customer to maintain the HKD activities.

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Content

Basics of Margin FX

Introduction to ‘Technical Analysis’

Indicators

Overlays

Trend Lines

Candlesticks

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Technical Analysis is an attempt to predict future price movements by analyzing past price movements.

The basic premises of technical analysis, suggested by Charles Dow – Dow Theory, are:

• Price quickly incorporates latest news • Price movements are not completely random• “What” is more important than “Why”

Different markets require the use of different indicators.

Technical analysis is not a science and it does not guarantee how prices will move in the future.

Introduction to Technical Analysis

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Content

Basics of Margin FX

Introduction to ‘Technical Analysis’

Indicators

Overlays

Trend Lines

Candlesticks

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Right click the graph

Choose Add Study from the list

Click the drop down box from the pop up box.

Choose which type of indicators/overlays you want to show from the list (shown in the image)

How to show indicator/overlay on the graph?

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Histogram showing the market momentum of a recent number of periods VS a larger number of previous periods (by default, 5 vs 34 periods).

Activity of the market for the current period compared to the momentum of a longer period.

Use signal for buying and selling decisions.

Awesome Oscillator

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Signals

Saucer - Occurs if (and only if) the bar chart is above/below the 0-line, and the bar chart has reversed its direction from downward to upward/downward (concave). The saucer occurs if, in any three columns, the second column is lower than the first and coloured red and the third column is higher than the second and coloured green.

Nought line crossing - Occurs when the bar chart crosses the 0-line in a positive/negative direction. That is, it passes from the area of negative/positive values to that of positive/negative values.

Two pikes - Occurs when a pike below/above the 0-line pointing downwards/upwards is followed by another downward/upward-pointing pike that is somewhat higher/lower (closer to the 0-line). This is the only signal to buy that falls below/above the 0-line

Awesome Oscillator

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An indicator used in technical analysis as an objective value for the strength of trend. ADX is non-directional so it will quantify a trend's strength regardless of whether it is up or down.

0-25 Range market

25> Trending market

Average Directional Index (ADX)

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An indicator in technical analysis to measure volatility

Does NOT indicate price direction

Price range for the past default period

Average True Range (ATR)

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Variation of a price from its statistical mean.

Designed to reveal cyclical tendencies.

The CCI fluctuates above and below zero, with approximately 70 to 80 percent of CCI values falling between -100 and +100. Large positive values (above 100) can indicate that prices are unusually high compared to average prices and hence overbought. Large negative values (below -100) can indicate prices are unusually low and hence oversold.

Commodity Channel Index (CCI)

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Indicator to identify overbought and oversold situation and fro trend signals.

MACD cuts the zero line

MACD cuts the signal line

Moving Average Convergence/Divergence (MACD)

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Momentum indicators show how fast rates are changing. When momentum slows, this is taken to mean that there might be a change in direction.

Momentum

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Oscillator designed to measure the rate of price change

Calculates the number of periods over which the closing prices should be compared

Rate of Change (ROC)

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Depicts the relative changes between the higher and lower prices.

<20 – Oversold signal

>80 – Overbought signal

Relative Strength Index (RSI)

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Standard deviation statistically measures the difference between the closing prices and the average prices over a number of time periods.

It is a good indicator of the volatility of the target exchange rate. The higher the standard deviation, the higher the volatility.

Standard Deviation

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Stochastic RSI is an oscillator that varies between 0 and 1, and represents the level of the RSI indicator relative to its range over n periods.

<0.20 – Oversold signal

>0.80 – Overbought signal

Stochastic RSI

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Stochastic is an oscillator. They consist of two curves called the %K line and the %D line. They measure where the closing price is in relation to the total price range of the selected number of periods.

n, specifying the number of periods to consider in the calculation of the %K line

m, specifying for the %D line the number of periods over which the %K line should be averaged.

Stochastic

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Identifies where the closing price is relative to the total price range of n periods.

It is an oscillator that is similar to the stochastic oscillators, but is plotted upside-down in the negative range.

-80 -100, oversold

0 -20, overbought

Williams % Range

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Content

Basics of Margin FX

Introduction to ‘Technical Analysis’

Indicators

Overlays

Trend Lines

Candlesticks

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A n–period SMA in the middle.

An upper band which is the n-period SMA plus K standard deviations, where K is a constant.

An lower band which is the n-period SMA minus K standard deviations, where K is a constant.

Bollinger Bands

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It helps to smooth the price curve for better trend identification.

Exponential Moving Average (EMA)

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Ichimoku Kinko Hyo is a Japanese phrase that translates to "equilibrium chart at a glance". It is used to define market trends, levels of support and resistance, and to generate signals of purchase and sale.

More generally, it is used to illustrate where prices are likely to go and when to trade.

Ichimoku Kinko Hyo

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Components

Tenkan-Sen(Conversion Line ) = (Highest High + Lowest Low) / 2, for the past x periods

Kijun-Sen (Base Line) = (Highest High + Lowest Low) / 2, for the past y periods

Chikou Span (Lagging Span) = Today's closing price plotted y periods behind

Senkou Span A = (Tenkan-Sen + Kijun-Sen) / 2, plotted y periods ahead

Senkou Span B = (Highest High + Lowest Low) / 2, for the past z periods, plotted y periods ahead

The cloud, known as the Kumo, is the space between Senkou Span A and Senkou Span B.

Ichimoku Kinko Hyo

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The letters SAR in Parabolic SAR stand for Stop And Reverse.

Parabolic refers to the parabolic-shaped series of dotted lines that are calculated and overlayed on the underlying price curve.

These lines serve as exit indicators, and can tell you where to set your trailing stops.

Parabolic SAR

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STARC (Stoller Average Range Channels) show three lines which create a channel around an ordinary moving average. These three lines are:

An n–period Simple Moving Average (SMA).

An upper band, which is the n-period SMA plus an m-period Average True Range (ATR) multiplied by a constant K.

A lower band, which is the n-period SMA minus an m-period ATR multiplied by a constant K.

Stoller Average Range Channels (STARC Bands)

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Content

Basics of Margin FX

Introduction to ‘Technical Analysis’

Indicators

Overlays

Trend Lines

Candlesticks

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2 successive periods of higher highs and higher lows is a short term up trend (STUT)

2 successive periods of lower highs and lower lows is a short term down trend (STDT)

Short Term Trends

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Peaks and Troughs

Peak is the highest point between an STUT and an STDT

Trough is the lowest point between an STUT and an STDT

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Successive higher peaks and higher troughs is a medium term up trend

Medium Term Trends

Successive lower peaks and lower troughs is a medium term down trend

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Resistance, if broken, often becomes support (and vice versa)

Number of times prices “bounce off”

Generally, Support & Resistance lines at whole numbers will be more significant than others

Support and Resistance Lines

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Content

Basics of Margin FX

Introduction to ‘Technical Analysis’

Indicators

Overlays

Trend Lines

Candlesticks

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Each candle has attached meaning

Candles tell us who is ‘in control’ of the market

White candles tend to follow white candles in uptrends

Black candles tend to follow black candles in downtrends

Opposite candles show change in control

Candlesticks

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Candle Formation

The ‘Body’ is the part of the candle which lies between the open and the close

The ‘Shadow’ is any price protrusion past the open and close

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Candle Patterns : Pin Bar

Conditions

Body position• At /near top for bullish pin bar• At /near bottom for bearish pin bar

Shadow length relative to body• Body no greater than 1/3 candle length• Shadow at least 2/3 candle length

Strengthening Conditions

Length • Longer candles yield stronger signals

Colour • Preferably same colour as trade direction

Close • “Strong” close (i.e. at extreme of candle)

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Candle Patterns : Marubozu

Conditions

“Long” candle• Relative to other candles in recent past

Shadow length relative to body• Very small shadows

Strengthening Conditions

Length• Longer candles yield stronger signals

Colour• Always same colour as trade direction

Close• “Strong” close (i.e. at extreme of candle)• No shadow on close

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Candle Patterns : Inside Pattern

Conditions

First candle long candle (Marubozu)

Second candle inside first candle

Strengthening Conditions

Length• Longer first candles• Smaller second candle

Colour• First candle always same colour as trade direction• Second candle same colour as trade direction

Close• Second candle closes at or very near close of first candle• Second candle pin bar or similar (shadow confirms trade direction)

Position• Second candle in bottom half of first candle (for shorts)• Second candle in top half of first candle (for longs)

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The End