The 10 Keys to Successful Trading
Technical Analysis Applications for the Currency Markets
The 10 Keys to Successful Trading
Technical Analysis Applications for the Currency Markets
TABLE OF CONTENTS
Chapter 1: What is the FOREX?
Chapter 2: A Trader’s Vocabulary.
Chapter 3: Reading Candlestick Charts.
Chapter 4: Types of Orders.
Chapter 5: Introduction to Everest Charting Software. (Omitted)
Chapter 6: The 10 Keys to Successful Trading. (Omitted)
Key 1: Equity Management
Key 2: Buy and Sell Signals
Key 3: Bulls vs. Bears - Introduction to Highs, Lows, Support
Key 4: Price Swings
Key 5: Fibonacci Ratios
Key 6: Trends and Trendlines
Key 7: Trading Trends with Fibonacci Ratios
Key 8: Trading Trend Reversals or “The King’s Crown”
Key 9: Trading Consolidation with Fundamental
Key 10: Protective Stop Losses and Murphy’s Law in Trading
Chapter 7: Let’s Get Started! (Omitted)
Chapter 8: 3-Phase Post Training. (Omitted)
Chapter 9: DealBook FX Dealing Station Software Manual. (Omitted)
Chapter 10: Recommended Reading. (Omitted)
A Traders Mission And Goal
It is the mission of the trader to become a financially successful long-term
trader. This can be achieved when the trader adopts and accepts The 10 Keys
of Successful Trading. The trader must commit to live by the three disciplines
that create the successful trader.
1. The trader must believe in The 10 Keys to Successful
Trading and merge them into his personality. His
success is dependent on creating a trading plan, and
maintaining the discipline to TRADE THE PLAN!
2. The trader must commit himself to continued education
and learn as much as he can about technical analysis and
the psychology of successful trading. He must use logic,
and not his emotions, in trading. The trader must learn to
trade in control, not out of control!
3. The trader must map out a sound plan of equity
management to insure a return on his investment. A
successful plan is to trade no more than 20% of a margin
account and risk no more than 5 to 10% of that account on
any single trade.
Levels Of A Trader
LEVEL ONE: Beginner Trader - To study and paper trade for a
minimum of one month with imaginary money, gaining the
experience required to establish a track record of profitable
LEVEL TWO: Advanced Beginner - To trade one or two lots with
real money, working through emotions and establishing a track
record of making money.
LEVEL THREE: Competent Trader - To trade in control with
equity management, achieving a financial return.
LEVEL FOUR: Proficient Trader - To trade based on my belief,
education, and experience and achieves a financial return.
LEVEL FIVE: Expert Trader - To mechanically execute profitable
trades with no emotion.
CHAPTER 1 - WHAT IS THE FOREX?
FOREX = FOReign EXchange
You can trade 24 hours a day
The FOREX is larger than all other financial markets COMBINED
The Foreign Exchange (FOREX) market is a cash (or “spot”) interbank market
established in 1971 when floating exchange rates began to materialize. This
market is the arena in which the currency of one country is exchanged for those
of another and where settlements for international business are made.
The FOREX is a group of approximately 4500 currency trading institutions,
including international banks, government central banks and commercial
companies. Payments for exports and imports flow through the Foreign
Exchange Market, as well as payments for purchases and sales of assets. This
is called the “consumer” foreign exchange market. There is also a “speculator”
segment in the FOREX Companies, which have large financial exposures to
overseas economies participate in the FOREX to offset the risks of international
Historically, the FOREX interbank market was not available for small speculators.
With a previous minimum transaction size and often-stringent financial
requirements, the small trader was excluded from participation in this market. But
today market maker brokers are allowed to break down the large interbank units
and offer small traders the opportunity to buy or sell any number of these smaller
Commercial banks play two roles in the FOREX market:
(1) They facilitate transactions between two parties, such as companies
wishing to exchange currencies (consumers), and
(2) They speculate by buying and selling currencies. The banks take positions
in certain currencies because they believe they will be worth more (if “buying
long”) or less (if “selling short”) in the future. It has been estimated that
international banks generate up to 70% of their revenues from currency
speculation. Other speculators include many of the worlds’ most successful
traders, such as George Soros.
The third category of the FOREX includes various countries’ central banks, like
the U.S. Federal Reserve. They participate in the FOREX to serve the financial
interests of their country. When a central bank buys and sells its or a foreign
currency the purpose is to stabilize their own currency’s value.
The FOREX is so large and is composed of so many participants, that no one
player, even the government central banks, can control the market. In
comparison to the daily trading volume averages of the $300 billion in the U.S.
Treasury Bond market and the approximately $100 billion exchanged in the U.S.
stock markets, the FOREX is huge, and has grown in excess of $1.5 trillion daily.
The word “market” is a slight misnomer in describing FOREX trading. There is no
centralized location for trading activity (“pit”) as there is in the currency futures
(and many other) markets. Trading occurs over the phone and through the
computer terminals at hundreds of locations worldwide. The bulk of the trading is
between approximately 300 large international banks, which process transactions
for large companies, governments and for their own accounts. These banks are
continually providing prices (“bid” to buy and “ask” to sell) for each other and the
broader market. The most recent quotation from one of these banks is
considered the market’s current price for that currency. Various private data
reporting services provide this “live” price information via the Internet.
There are numerous advantages for parties wishing to trade in the FOREX.
Liquidity: In the FOREX market there is always a buyer and a seller! The
FOREX absorbs trading volumes and per trade sizes which dwarfs the
capacity of any other market. On the simplest level, liquidity is a powerful
attraction to any investor as it suggests the freedom to open or close a
position at will 24 hours a day.
Once purchased, many other high-return investments are difficult to
sell at will. FOREX traders never have to worry about being “stuck”
in a position due to lack of market interest. In the 1.5 trillion U.S.
dollar per day market, major international banks a “bid” (buying) and
“ask” (selling) price
Access: The FOREX is open 24 hours daily from about 6:00 P.M.
Sunday to about 3:00 P.M. Friday. An individual trader can react to news
when it breaks, rather than waiting for the opening bell of other markets
when everyone else-has the same information. This allows traders to take
positions before the news details are fully factored into the exchange
rates. High liquidity and 24 hour trading permit market participants to take
positions or exit regardless of the hour. There are FOREX dealers in every
time zone, in every major market center (Tokyo, Hong Kong, Sydney,
Paris, London, United States, etc.) willing to continually quote buy and sell
Since no money is left on the market “table,” this is what is referred
to as a “Zero Sum Game” or “Zero-Sum Gain.” Providing the trader
picks the right side, money can always be made
Two-Way Market: Currencies are traded in pairs, for example dollar/yen,
or dollar/Swiss franc. Every position involves the selling of one currency
and the buying of another. If a trader believes the Swiss franc will
appreciate against the dollar, the trader can sell dollars and buy francs
(“selling short!’). If one holds the opposite belief, that trader can buy
dollars and sell Swiss francs (“buying long”). The potential for profit exists
because there is always movement in the exchange rates (prices).
FOREX trading permits profit taking from both rising and falling
currency values in relation to the dollar. In every currency trading
transaction, one of the sides of the pair is always gaining and the
other side is losing.
Leverage: Trading on the FOREX is done in currency “lots.” Each lot is
approximately 100,000 U.S. dollars worth of a foreign currency. To trade
on the FOREX market, a “margin account” must be established with a
currency broker. This is, in effect, a bank account into which profits may
be deposited and losses may be deducted. These deposits and
deductions are made instantly upon exiting a position.
Brokers have differing margin account regulations, with many
requiring a $1,000 deposit to “day-trade” a currency lot. Day-trading
is entering and exiting positions during the same trading day. For
longer-term positions, many require a $2,000 per lot deposit. In
comparison to trading in stocks and other markets, which may
require a 50% margin account, FOREX speculators excellent
leverage of 1% to 2% of the $100,000 lot value. The trader can control
each lot for I to 2 cents on the dollar!
Execution Quality: Because the FOREX is so liquid, most trades can be
executed at the current market price. In all fast moving markets, slippage
is inevitable in all trading (stocks, commodities, etc.), but can be avoided
with some currency broker’s software, which informs you of your exact
entering price just prior to execution. You are given the option of avoiding
or accepting the slippage. The huge FOREX market liquidity offers the
ability for high quality execution.
Confirmations of trades are immediate and the Internet trader has only to
print a copy of the computer screen for a written record of all trading
activities. Many individuals feel these features of Internet trading make it
safer that using the telephone to trade. Respected firms such as Charles
Schwab, Quick & Reilly and T.D. Waterhouse offer Internet trading. They
would not risk their reputations by offering Internet service if it were not
reliable and safe. In the event of a temporary technical computer problem
with the broker’s ordering system, the trader can telephone the broker 24
hours a day to immediately get in or out of a trade.
Internet brokers’ computer systems are protected by “firewalls” to keep
account information from prying eyes. Account security is a broker’s
highest concern. They have taken multiple steps to eliminate any risk
associated with transacting on the Internet.
A FOREX Internet trader does not have to speak with a broker by
telephone. The elimination of the middleman (broker salesman)
lowers expenses and makes the process of entering an order faster
and has eliminated the possibility for misunderstanding.
Execution Costs: Unlike other markets, the FOREX does not charge
commissions. The cost of a trade is represented in a Bid/Ask spread
established by the broker. (Approximately 4 pips)
Trendiness: Over long and short historical periods, currencies have
demonstrated substantial and identifiable trends. Each individual currency
has its own “personality,” and each offers a unique historical pattern of
trends, providing diversified trading opportunities within the spot FOREX
Focus: Instead of attempting to choose a stock, bond, mutual fund or
commodity from the tens of thousands available in those markets, FOREX
traders generally focus on I to 4 currencies. The most common and most
liquid are the Japanese Yen, British Pound, Swiss Franc and the new
EURO. Highly successful traders have always focused on a limited
number of investment options. Beginning FOREX traders usually will
focus on one currency and later incorporate one to three more into their
Margin Accounts: Trading on the FOREX requires a margin account.
You are committing to trade and take positions today. As a speculator
trader you will not be taking delivery on your product that you are trading.
As a Stock Day Trader, you will only hold a trading position for a few
minutes to a few hours, and then you need to close out your position by
the end of the trading session.
All orders must be placed through a broker. To trade stocks you will need
a stockbroker and to trade currencies you will need a Forex currency
broker. Most brokerage firms have different margin requirements. You
need to ask them their margin requirements to trade stocks and
A margin account is nothing more than a performance bond. All traders
need a margin account to trade. When you gain profits, they place your
profits into your margin account the same day you profited. When you lose
profits, they need an account to take out the losses you incurred that day.
All accounts are settled daily.
A very important part of trading is, taking out some of your winnings or
profits. When the time comes to take out your personal gains from your
margin account, all you need to do is contact your broker and ask them to
send you your requested dollar amount, and they will send you a check.
They can also wire transfer your money.
READING CANDLESTICK CHARTS
In the Seventeenth century, the Japanese developed a method to analyze the
price of rich contracts. This technique is called “candlestick charting. Steven
Nison is credited with popularizing the candlestick chart and has become
recognized as the leading authority on the interpretation of the system.
Candlesticks chart the price fluctuations of a product. A candlestick can
represent any period of time. A currency trader’s software can provide charts
representing anywhere from five minutes to one week per candlestick.
Candlestick charts do not involve any calculations. They simply chart price
movements in a given time period. Each candlestick displays four important
pieces of information, which show the price fluctuations during the time period of
the candle. In much the same way as the more widely-known bar chart, a candle
give us the opening price, the closing price, the highest price and the lowest price
of the time period. Candlesticks are easier to use because they more clearly
demonstrate the relationship between the opening and closing prices.
Because candlesticks display the relationship between the open, high, low and
closing prices, they cannot be used to chart securities that have only closing
The interpretation of candlestick charts is based on patterns. Currency traders
use primarily the relationship of the highs and lows of the candlewicks over a
given time period. However, some patterns can be identified to anticipate price
movements. There are two types of candles: the bullish pattern candle and the
bearish pattern candle.