CONTENTS

Topic Page
Market And Trading Terminologies 3
Trading Long and Short 4
Risks Involved In Trading And Investing 4
Three Chart Types 6
Fundamental & Technical Analysis 8
Important & Key Fundamentals For Each Pair 9
What Is Technical Analysis? 14
Doji 15
Hammer & Hanging Man 15
Inverted Hammer & Shooting Star 17
Engulfing Patterns 18
Morning Star & Evening Star Patterns 19
Tweezer Top & Tweezer Bottom Patterns 20
Spinning Tops 20
Piercing Line & Dark Cloud Cover Patterns 21
Moving Averages 22
Chart Patterns 24
Symmetrical Triangles 24
Ascending Triangles 29
Descending Triangles 34
Double Top 36
Double Bottom 37
Triple Top 38
Triple Bottom 39
Head & Shoulders 40
Reverse Head & Shoulders 41

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 Flags & Penants 42
Wedges 44
Six Steps To Setting Up Your System 49
How To Test Your System 51
What Should Be In Your Trading Plan 52
Market Psychology 54
Being A Consistent Trader And Increasing Profitability 55
Money Management 56
Risk Reward 57

Market and Trading Terminologies

• Bull Market - Any market in which prices are trending higher Bear Market - Any
market in which prices are trending lower.
• Margin - The amount of equity contributed by a client as a percentage of the current
market value
• Margin Call - A brokerage firm’s demand on a client for additional equity in order to bring
margin deposits up to a minimum required level. If the client fails to deposit more equity
into the account.
• Buy Long - Investors or traders who have bought stock with the expectation of rising
prices.
• Sell Short - Investors or traders who have sold the stock with the expectation of falling
prices.
• Forex - Foreign Exchange. Profits are made by buying and selling currency pairs.
• Indices - A proxy for the overall stock market or segments of the stock market.
• Rally - A steep rise in the price of a stock or the stock market as a whole.
• Plummet - A steep drop in the price of a stock or the stock market as a whole.
• Spread - The difference between the bid (sell) and offer (buy) prices of an instrument.
• Bonds - A bond represents debt on which the issuer of the debt usually promises to pay
the owner of the bond a specific amount of interest for a defined amount of time and to
repay the loan on the maturity date.
• Stop Loss - When trading or investing a stop loss is set at the amount of points or
monetary value in terms of loss that a trader or investor is willing to take on a position.
• Position - Long or short stock or options in an account.
• Scalping - Quick entry and exit on a position.
• Futures Trading - In finance a futures contract (more colloquially, futures) is a
standardized contract between two parties to buy or sell a specified asset of
standardized quantity and quality for a price agreed upon today (the futures price or
strike price) with delivery and payment occurring at a specified future date, the delivery

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 date. The contracts are negotiated at a futures exchange, which acts as an intermediary
between the two parties. The party agreeing to buy the underlying asset in the future, the
"buyer" of the contract, is said to be "long", and the party agreeing to sell the asset in the
future, the "seller" of the contract, is said to be "short". The terminology reflects the
expectations of the parties—the buyer hopes or expects that the asset price is going to
increase in the near future, while the seller hopes or expects that it will decrease in the
near future

Trading Long and Short

There are two basic types of positions: a long and a short. When a trader is long he or she wins
when the price increases and loses when the price decreases. When a trader is short he or she
wins when the price decreases and loses when the price increases

Risks Involved in Trading and Investing

Risk is the possibility of losing part or all of the initial investment or the likelihood of making a
profit that is less than what is anticipated. Investing on the stock market is riskier than some
other investments. The reason for this is that prices rise and fall all the time as market and
economic outlooks change all the time however if risk is managed appropriately trading and
investing on the stock market can be very profitable. It is important to note that trading and
investing will not make you rich overnight and should be treated just like any other business.

The risk appetite for each individual is different taking into consideration that the higher the risk,
the higher the return.

‘Forex trading is a SKILL that takes TIME to learn

Skilled traders can and do make money in this field. However, like any other occupation or
career, success doesn’t just happen overnight.

Forex trading isn’t a piece of cake (as some people would like you to believe). Think about it, if it
was, everyone trading would already be millionaires. The truth is that even expert traders with
years of experience still encounter periodic losses.

Drill this in your head: there are NO shortcuts to Forex trading. It takes lots and lots of TIME to
master.

There is no substitute for hard work and diligence. Practice trading on a DEMO ACCOUNT and
pretend the virtual money is your own real money.

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Do NOT open a live trading account until you are trading PROFITABLY on a demo
account
If you can't wait until you're profitable on a demo account, at least demo trade for 2 months.
Hey, at least you were able to hold off losing all your money for two months right? If you can't
hold out for 2 months, cut your hands off.

Concentrate on ONE major currency pair.

It gets far too complicated to keep tabs on more than one currency pair when you first start
trading. Stick with one of the majors because they are the most liquid which makes their
spreads cheap.

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Three Chart Types
Line Chart
A simple line chart draws a line from
one closing price to the next closing
price. When strung together with a
line, we can see the general price
movement of a currency pair over a
period of time.

Bar Chart
A bar chart also shows closing prices,
while simultaneously showing
opening prices, as well as the highs
and lows. The bottom of the vertical
bar indicates the lowest traded price
for that time period, while the top of
the bar indicates the highest price
paid. So, the vertical bar indicates the
currency pair’s trading range as a
whole. The horizontal hash on the left
side of the bar is the opening price,
and the right-side horizontal hash is
the closing price. Bar charts are also
called “OHLC” charts, because they
indicate the Open, the High, the Low,
and the Close for that particular currency. Here’s an example of a price bar:

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Candlestick charts

They
show the same information as a bar chart, but in a prettier, graphic format. Candlestick bars still
indicate the high-to-low range with a vertical line. However, in candlestick charting, the larger
block in the middle indicates the range between the opening and closing prices. Traditionally, if
the block in the middle is filled or colored in, then the currency closed lower than it opened.

In order to create a candlestick chart, one must

have a data set that contains open, high, low and
close values for each time period one wants
displayed. The hollow or filled portion of the
candlestick is called "the body" (also referred to as
"the real body"). The long thin lines above and
below the body represent the high/low range and
are called "shadows" (also referred to as "wicks"
and "tails"). The high is marked by the top of the
upper shadow and the low by the bottom of the
lower shadow. If the stock closes higher than its
opening price, a hollow or green candlestick is
drawn with the bottom of the body, representing
the opening price and the top of the body representing the closing price. If the stock closes
lower than its opening price, a filled or red candlestick is drawn with the top of the body
representing the opening price and the bottom of the body representing the closing price.

Fundamental & Technical Analysis

Fundamental analysis is a way of looking at the market through economic, social and political
forces that affect supply and demand. (Yada yada yada.) In other words, you look at whose
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economy is doing, well, and whose economy sucks. The idea behind this type of analysis is that
if a country’s economy is doing well, their currency will also be doing well. This is because the
better a country’s economy, the more trust other countries have in that currency.

For example, the U.S. dollar has been gaining strength because the U.S. economy is gaining
strength. As the economy gets better, interest rates get higher to control inflation and as a
result, the value of the dollar continues to increase. In a nutshell, that is basically what
fundamental analysis is.

Technical analysis is the study of price movement. In one word, technical analysis = charts. The
idea is that a person can look at historical price movements, and, based on the price action, can
determine at some level where the price will go. By looking at charts, you can identify trends
and patterns which can help you find good trading opportunities

The most IMPORTANT thing you will ever learn in technical analysis is the trend! Many, many,
many, many, many, many people have a saying that goes, “The trend is your friend”. The
reason for this is that you are much more likely to make money when you can find a trend and
trade in the same direction. Technical analysis can help you identify these trends in its earliest
stages and therefore provide you with very profitable trading opportunities

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Important & Key Fundamentals for Each Pair

USD
1. Non-Farm Payrolls (NFP)
• measures the change in the number of people employed during the previous
month, excluding the farming industry. Job creation is the foremost indicator of
consumer spending, which accounts for the majority of economic activity.
• This occurs on the first Friday of every month.
• It measures unemployment change
• 8 announcements in one, the two key ones being the Unemployment rate &
the number of jobs created
- the market first reacts to the number of jobs created, followed by the
Unemployment rate

2. ADP Non-Farm Change

o Occurs 2 days before NFP
o It’s a predictor of NFP report

3. ISM Purchasing Managers Index (PMI)

• Less than 50% weakens the dollar
• more than 50% strengthens the dollar (but not much)

4. Interest Rates
o Occur every second month o An increase
gives strength to the dollar

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 o Unchanged or unwinding down of balance
sheet will weaken the currency
o Unwinding up gives strength to the currency o
A decrease in rates will weaken the currency

5. GDP (Gross Domestic Product) o measures the annualized change in the inflation-
adjusted value of all goods and services produced by the economy. It is the broadest
measure of economic activity and the primary indicator of the economy's health.

o Usual Effect: Actual > Forecast = Good for currency

o Frequency: Released monthly. There are 3 versions of GDP released a

month apart - Advance, second release and Final. Both the advance
the second release are tagged as preliminary in the economic calendar.

6. GDP (QOQ)
• If positive, it gives strength to dollar
• If negative, it weakens currency
• Occurs every 3 months

7. Housing & Building Permits

• Positive give strength to dollar
• Negative weakens the dollar

8. New Home Sales

• measures the annualized number of new single-family homes that were sold during
the previous month. This report tends to have more impact when it's released ahead
of Existing Home Sales because the reports are tightly correlated.
• A higher than expected reading should be taken as positive/bullish for the
USD, while a lower than expected reading should be taken as negative/bearish
for the USD

GBP
1. Interest Rates o Occur every two months & controlled by the Bank of England
(BOE) o An increase gives strength to the
pound o A decrease in rates will weaken the
pound

2. Manufacturing Purchasing Managers' Index (PMI)

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 • measures the activity level of purchasing managers in the manufacturing sector. A
reading above 50 indicates expansion in the sector; below 50 indicates contraction.
• Traders watch these surveys closely as purchasing managers usually have early
access to data about their company’s performance, which can be a leading indicator
of overall economic performance.
• A higher than expected reading should be taken as positive/bullish for the GBP,
while a lower than expected reading should be taken as negative/bearish for the
GBP.

3. Construction PMI
• Occurs every month
• Less than 50% weakens the pound big time, meaning there is a contraction in the
economy.
• More than 50% strengthens the pound (but not much)

4. GDP (QOQ)
• If positive, it gives strength to pound
• if negative, it weakens pound

5. Manufacturing Production (MOM)

• measures the change in the total inflation-adjusted value of output produced by
manufacturers. Manufacturing accounts for approximately 80% of overall Industrial
Production.
• A higher than expected reading should be taken as positive/bullish for the GBP,
while a lower than expected reading should be taken as negative/bearish for the
GBP.

6. The Queen’s Speech

• Occurs annually
• Buy the pound, it always strengthens as the economic world has full trust in whatever
the Queen says.

JPY
1. Interest Rates o Occur every two months & controlled by the Bank of Japan (BOJ) o An
increase gives strength to the yen o A decrease in rates will weaken the yen.

2. Retail Sales
• Occur every 2 months
• Positive results give strength to the yen Negative results weaken the yen.

3. Gross Domestic Product (GDP) (QOQ)

• measures the change in the inflation-adjusted value of all goods and services
produced by the economy.
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 • It is the broadest measure of economic activity and the primary indicator of the
economy's health.
• A higher than expected reading should be taken as positive/bullish for the JPY, while
a lower than expected reading should be taken as negative/bearish for the JPY.

EUR
1. Interest Rates
• The six members of the European Central Bank (ECB) Executive Board and the 16
governors of the euro area central banks vote on where to set the rate. short term
interest rates are the primary factor in currency valuation.
• A higher than expected rate is positive/bullish for the EUR, while a lower than
expected rate is negative/bearish for the EUR.

2. Manufacturing Purchasing Managers' Index (PMI)

• measures the activity level of purchasing managers in the manufacturing sector. A
reading above 50 indicates expansion in the sector; below indicates contraction.
• Traders watch these surveys closely as purchasing managers usually have early
access to data about their company’s performance, which can be a leading indicator
of overall economic performance.
• A higher than expected reading should be taken as positive/bullish for the EUR, while
a lower than expected reading should be taken as negative/bearish for the EUR.

3. The Consumer Price Index (CPI)

• measures the change in the price of goods and services from the perspective of the
consumer. It is a key way to measure changes in purchasing trends and inflation.
• A higher than expected reading should be taken as positive/bullish for the EUR, while
a lower than expected reading should be taken as negative/bearish for the EUR.

4. Unemployment Change
• measures the change in the number of unemployed people during the previous
month.
• A higher than expected reading should be taken as negative/bearish for the EUR,
while lower than expected reading should be taken as positive/bullish for the EUR.

NB: Elections & Interest Rates can change the trend.

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What is Technical Analysis?
Technical Analysis is the forecasting of future financial price movements based on an
examination of past price movements. Like weather forecasting, technical analysis does not
result in absolute predictions about the future. Instead, technical analysis can help investors
anticipate what is "likely" to happen to prices over time. Technical analysis uses a wide variety
of charts that show price over time. Technical or chart analysis, is based upon the study of the
market/price action.

Bullish candlesticks indicate the market is moving in an upward trend. An easy way to
remember this is by picturing an actual bull: bulls’ horns go up just like the market will when you
spot this type of candlestick you want to identify a full-bodied candlestick with small wicks

Bearish candlesticks indicate the market is moving in a downward trend. Need an easy way to
remember this? Think of a bear trying to swat down a bee hive for some honey; only you’re a
trader and to you’re trying swat some pips into your P/L statement to help you see returns
sweeter than honey!
Here are a few of bearish & bullish formations/patterns that frequently pop up on the charts

Prior Trend
For a pattern to qualify as a reversal pattern, there should be a prior trend to reverse. Bullish
reversals require a preceding downtrend and bearish reversals require a prior uptrend. The
direction of the trend can be determined using trendlines, moving averages, or other aspects of
technical analysis.

Reversal Candlesticks, Patterns & Formations

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Doji
Doji candlesticks have the same open and close price or at least their bodies are extremely
short. The doji should have a very small body that appears as a thin line. Doji suggest
indecision or a struggle for turf positioning between buyers and sellers. Prices move above and
below the open price during the session, but close at or very near the open price. Neither
buyers nor sellers were able to gain control and the result was essentially a draw.

If a doji forms after a series of candlesticks with long hollow bodies (like white marubozus), the
doji signals that the buyers are becoming exhausted and weakening. In order for price to
continue rising, more buyers are needed but there aren’t anymore! Sellers are licking their
chops and are looking to come in and drive the price back down.
Keep in mind that even after a doji forms, this doesn’t mean to automatically short. Confirmation
is still needed. Wait for a bearish candlestick to close below the long white candlestick’s open.

Hammer & Hanging Man

The hammer and hanging man look exactly alike but have totally different meaning depending
on past price action. Both have cute little bodies (black or white), long lower shadows and short
or absent upper shadows.

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The hammer is a bullish reversal pattern that forms during a downtrend. It is named because
the market is hammering out a bottom. When price is falling, hammers signal that the bottom is
near and price will start rising again. The long lower shadow indicates that sellers pushed prices
lower, but buyers were able to overcome this selling pressure and closed near the open.

Word to the wise… just because you see a hammer form in a downtrend doesn’t mean you
automatically place a buy order! More bullish confirmation is needed before it’s safe to pull the
trigger.

Recognition Criteria
1. The long shadow is about two or three times of the real body.
2. Little or no upper shadow.
3. The real body is at the upper end of the trading range.
4. The color of the real body is not important.

The hanging man is a bearish reversal pattern that can also mark a top or strong resistance
level. When price is rising, the formation of a hanging man indicates that sellers are beginning
to outnumber buyers. The long lower shadow shows that sellers pushed prices lower during the
session. Buyers were able to push the price back up some but only near the open. This should
set off alarms since this tells us that there are no buyers left to provide the necessary
momentum to keep raising the price.

Recognition Criteria
1. A long lower shadow which is about two or three times of the real body.
2. Little or no upper shadow.
3. The real body is at the upper end of the trading range.
4. The color of the body is not important, though a black body is more bearish than a white
body.

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Inverted Hammer & Shooting Star
The inverted hammer and shooting star also
look identical. The only difference between
them is whether you’re in a downtrend or
uptrend. Both candlesticks have petite little
bodies (filled or hollow), long upper shadows
and small or absent lower shadows.

The inverted hammer occurs when price has

been falling suggests the possibility of a
reversal. Its long upper shadow shows that
buyers tried to bid the price higher. However,
sellers saw what the buyers were doing, said
“oh hell no” and attempted to push the price
back down. Fortunately, the buyers had eaten
enough of their Wheaties for breakfast and still
managed to close the session near the open.
Since the sellers weren’t able to close the
price any lower, this is a good indication
that everybody who wants to sell has already sold. And if there’s no more sellers, who is left?
Buyers.

The shooting star is a bearish reversal pattern that looks identical to the inverted hammer but
occurs when price has been rising. Its shape indicates that the price opened at its low, rallied,
but pulled back to the bottom. This means that buyers attempted to push the price up, but
sellers came in and overpowered them. A definite bearish sign since there are no more
buyers left because they’ve all been murdered.

1. Bullish Shooting Star - When you see this: BUY in the

direction of the trend at the opening of the next candle or when
it meets the criteria of the Bullish Shooting Star.

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 2. Bearish Shooting Star - When you see this: SELL in the
direction of the trend at the opening of the next candle or when
it meets the criteria of the Bearish Shooting Star.

Engulfing Patterns
1. Bullish Engulfing Pattern - After the Bullish Engulfing
Candle appears in the direction of the trend, BUY at the
opening of the next candle with a protective stop loss order
approximately 10 pips beyond the lows of the wicks.

2. Bearish Engulfing
Pattern - When you see this:
After the Engulfing Bearish Candle appears in the
direction of the trend, SELL at the opening of the next
candle with a protective stop loss order approximately 15
pips beyond the HIGHS of the wicks.

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Morning Star & Evening Star Patterns
1. Morning Star Pattern - When you see this: BUY in
the direction of the trend at the opening of the next
candle or when it meets the criteria of the Bullish Morning
Star. Close of the Bullish candle must be beyond a 60%
u-turn.

2. Evening Star -
When you see this: SELL in the direction of the trend
at the opening of the next candle or when it meets the
criteria of the Bearish Evening Star. Close of the
bearish candle must be beyond a 60% uturn.

Twizzer Top & Twizzer Bottom Patterns

1. Twizzer Bottom - When you see this: BUY in the direction
of the trend at the opening of the next candle or when it meets
the criteria of the Tweezer Bottom.

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 2. Twizzer Top - When you see this: After you have two
candles that have met the criteria of a Tweezer Top, SELL at
the opening of the next candle with a protective stop loss
order approximately 15 pips beyond the highs of the wicks.

Spinning Tops
Candlesticks with a long upper shadow, long lower shadow
and small real bodies are called spinning tops. The color of
the real body is not very important. The pattern indicates the
indecision between the buyers and sellers.

The small real body (whether hollow or filled) shows little

movement from open to close, and the shadows indicate
that both buyers and sellers were fighting but nobody could
gain the upper hand. Even though the session opened and
closed with little change, prices moved significantly higher
and lower in the meantime. Neither buyers nor sellers could gain the upper hand, and the result
was a standoff. If a spinning top forms during an uptrend, this usually means there aren’t many
buyers left and a possible reversal in direction could occur.

If a spinning top forms during a downtrend, this usually means there aren’t many sellers left and
a possible reversal in direction could occur.

Piercing Line & Dark Cloud Cover Pattern

1. Bullish Piercing Line - When you see this: BUY in the
direction of the trend at the opening of the next candle or
when it meets the criteria of the Bullish Piercing Line. Close
of the bullish candle must be beyond a 60% u-turn of the
bearish candle.

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 2. Dark Cloud Cover - When you see this: SELL in the
direction of the trend at the opening of the next candle or
when it meets the criteria of the Bearish Dark Cloud Cover
formation. Close of the bearish candle must be beyond a
60% u-turn of the bullish candle.

Moving Averages
A moving average is simply a way to smooth out price action over time. By “moving average”,
we mean that you are taking the average closing price of a currency for the last ‘X’ number of
periods.

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Simple Moving Average (SMA)

A simple moving average is the simplest type of moving average (DUH!). Basically, a simple
moving average is calculated by adding up the last “X” period’s closing prices and then dividing
that number by X. Confused??? Allow me to clarify.

If you plotted a 5 period simple moving average on a 1 hour chart, you would add up the closing
prices for the last 5 hours, and then divide that number by 5. Voila! You have your simple
moving average.

If you were to plot a 5 period simple moving average on a 30 minute chart, you would add up
the closing prices of the last 150 minutes and then divide that number by 5.

Just like any indicator out there, moving averages operate with a delay.
Because you are taking the averages of the price, you are really only seeing a “forecast” of the
future price and not a concrete view of the future. Disclaimer: Moving averages will not turn you
into Ms. Cleo the psychic!

Exponential Moving Average (EMA)

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Exponential moving averages (EMA) give more weight to the most recent periods. In our
example above, the EMA would put more weight on Days 3-5, which means that the spike on
Day 2 would be of lesser value and wouldn’t affect the moving average as much. What this
does is it puts more emphasis on what traders are doing NOW.
When trading, it is far more important to see what traders are doing now rather than what they
did last week or last month.

SMA vs. EMA

First, let’s start with an

exponential moving average.
When you want a moving average
that will respond to the price
action rather quickly, then a short
period EMA is the best way to go.
These can help you catch trends
very early, which will result in
higher profit. In fact, the earlier
you catch a trend, the longer you
can ride it and rake in those
profits.

The downside to the choppy

moving average is that you might get faked out. Because the moving average responds so
quickly to the price, you might think a trend is forming when in actuality; it could just be a price
spike.

With a simple moving average, the opposite is true. When you want a moving average that is
smoother and slower to respond to price action, then a longer period SMA is the best way to go.

Although it is slow to respond to the price action, it will save you from many fake outs. The
downside is that it might delay you too long, and you might miss out on a good trade.

In fact, many trading systems are built around what is called “Moving Average Crossovers”.
Later in this course, we will give you an example of how you can use moving averages as part
of your trading system.

Chart Patterns
Remember, our whole goal is to spot big movements before they happen so that we can ride
them out and rake in the cash! Chart formations will greatly help us spot conditions where the
market is ready to break out.

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Here's the list of patterns that we're going to cover:

1) Symmetrical Triangles
2) Ascending Triangles
3) Descending Triangles
4) Double Top
5) Double Bottom
6) Triple Top
7) Triple Bottom
8) Head and Shoulders
9) Reverse Head and Shoulders
10) Flags and Pennants
11) Wedges

1. Symmetrical Triangles

• Consist of lower highs and higher lows

• Place entry orders above the lower highs and below the higher lows

Symmetrical triangles are chart formations where the slope of the price’s highs and the slope of
the price’s lows converge together to a point where it looks like a triangle. What is happening
during this formation is that the market is making lower highs and higher lows. This means that
neither the buyers nor the sellers are pushing the price far enough to make a clear trend. If this
was a battle between the buyers and sellers, then this would be a draw.

Eventually, the symmetrical triangle resolves itself and often with an explosive breakout in the
direction of the preceding trend.

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Symmetrical Triangles in Uptrends / Bullish

The majority of the time, a Symmetrical Triangle in an uptrend will breakout to the upside. A
high volume breakout is more reliable than a low volume breakout.

Symmetrical Triangles in Downtrends / Bearish

Symmetrical Triangles in downtrends will typically breakout to the downside. However, an

increase in volume is not required for a successful breakout. In fact, a significant increase in
volume might be considered suspect. Although, volume should start to increase as the
downside move continues.

Identifying and Drawing Symmetrical Triangles

Triangles are usually quite easy to see on a chart. Especially when the lines have already been
drawn in. To identify a Symmetrical Triangle pattern on your own, remember that it has to have
at least four points: two points at the top to draw the downward slanting trendline and two points
at the bottom to draw the upward slanting trendline. Connecting the high point and the
subsequent lower high forms the top part of the triangle. Connecting the low and the
subsequent higher low forms the bottom part of the triangle.

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Symmetrical Triangles in uptrends are bullish, while Symmetrical Triangles in downtrends are
bearish.

For a bullish Symmetrical Triangle pattern, the first point (the point farthest left, i.e., the earliest
point) is at the top. For a bearish pattern, the first point is at the bottom. A triangle can have
more than four points.

Measured Moves (Minimum Profit Targets)

To determine your projected minimum profit target, measure the distance between points 1 and
2. This is the widest part of the triangle and is often referred to as the base. For example: if the
top of the base (point 1) was $56 and the bottom of the base (point 2) was $50, the base would
be $6. This is your measured move. To project your minimum profit target, identify at what price
the stock broke thru the triangle. For this example, let’s say $54. Then add $6 to the breakout
price of $54 and you have you minimum projected profit target of $60. (See image below.)

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Failures and Stop-Out Points

There are different failure points based on how you enter the trade. If you enter the trade after a
breakout, you should use a move below the apex point as your failure point and exit the trade.
(The image below depicts a Symmetrical Triangle in an uptrend for illustration.

If you get in before a breakout occurs in anticipation of one, a move below the last point of the
triangle (e.g., point 4 in a four pointed triangle or point 6 in a six pointed triangle, etc.) should be
your failure point and you should consider exiting the trade. (The image below depicts a
Symmetrical Triangle in an uptrend for illustration.)

For the more experienced chart pattern trader, you might choose to stay in a little longer if you
believe the pattern is being ‘re-drawn’ into a new pattern such as a larger triangle, or a bullish
flag or even a wedge. This can makes sense if your early entry was near the bottom of the
pattern and staying in a little longer still keeps your risk within your level of tolerance.

The use of the word ‘Symmetrical’ in describing the Triangle is used loosely and is more of a
way of distinguishing it from an Ascending Triangle and Descending Triangle. The Symmetrical
Triangle doesn’t have to be symmetrical per se’, but as stated earlier, it does have to have two
converging trendlines -- the top line slanting downward and the bottom line slanting upward so
that they eventually come together to form a right sided triangle.

Since this pattern is a continuation pattern, it’s most profitable to trade this in the direction of the
preceding trend. You can get in after a breakout has occurred or you can choose to get in early
in anticipation of a breakout taking place. Either way, pay attention to the volume and your
failure points and the Symmetrical Triangle will become a trusted pattern in your trading.

25
26
 2. Ascending Triangles

• Consist of higher lows and a resistance line.

• It usually means that the price will break the resistance line and go higher but you should
place entry orders on both sides just in case the resistance line is too strong.
• Place your entry orders above the resistance line and below the higher lows.

This type of formation occurs when there is a resistance level and a slope of higher lows. What
happens during this time is that there is a certain level that the buyers cannot seem to exceed.
However, they are gradually starting to push the price up as evident by the higher lows.

The Ascending Triangle is a variation of the

Symmetrical Triangle. The difference is that the
Ascending Triangle has a flat line on top (i.e.,
horizontal trendline) instead of a downward
slanting trendline like in the Symmetrical
Triangle. The bottom of the pattern has an
upward slanting trendline. The two lines
eventually come together to form a flat-topped,
right-sided triangle.

The Ascending Triangle is a continuation pattern. It’s generally considered bullish and is most
reliable when found in an uptrend.

In ascending triangles, the market becomes overbought and needs to consolidate. As prices try
to advance, they are turned back by selling. Buying then re-enters the market and prices soon
reach their old highs. Resistance is met again and they are turned back once more. Resistance
occurs at approximately the same high price each time (horizontal trendline), while new buying
on the pullbacks, serve to lift the support levels higher (upward slanting trendline).

27
This bullish price action often leads to an upside breakout in the direction of the preceding trend,
as the old highs are taken out and prices are propelled even higher as new buying comes in.
Volume usually diminishes during the formation of the pattern, but explodes on the breakout.

Ascending Triangles in Uptrends / Bullish

As in the case of the Symmetrical Triangle, Ascending Triangles in uptrends are bullish and the
breakout is generally accompanied by a marked increase in volume. Low volume breakouts
should be watched carefully as they are more prone to failure. Ascending Triangles in
downtrends are less reliable and are therefore not a part of the classic Chart Patterns set-ups.

Identifying and Drawing Ascending Triangles

Ascending Triangles are also quite easy to see on a chart. To identify an Ascending Triangle
pattern on your own, remember that it has to have at least four points: two points at the top to
draw the horizontal trendline and two points at the bottom to draw the upward slanting trendline.
Connecting the two, approximately same, high points forms the top (flat) part of the triangle.
Connecting the low and the subsequent higher low forms the bottom part of the triangle.

Ascending Triangles in uptrends are bullish.

28
 For a bullish Ascending
Triangle pattern, the first
point (the point farthest left,
i.e., the earliest point) is at
the top. And just like
Symmetrical Triangle, an
Ascending Triangle can
have more than four points.
The image to the right has
six.

Measured Moves (Minimum Profit Targets)

To determine your projected minimum profit target, measure the distance between points 1and
2. This is the widest part of the triangle and is often referred to as the base.

For example: if the top of the base (point 1) was $70 and the bottom of the base (point 2) was
$63, the base would be $7. This is your measured move.

To project your minimum profit target, identify at what price the stock broke thru the Ascending
Triangle. (This is easy to predict even if it hasn’t yet broken out because the breakout point is
essentially the high of the pattern (i.e., the flat trendline at the top). So if the breakout price is
$70, then add $7 to that price and you get your minimum projected price target of $77. (See the
image below.)

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Failures and Stop-Out Points
There are different failure points based on how you enter the trade.

If you enter the trade after a breakout, you should use a move below the apex point as your
failure point and exit the trade. A secondary failure point could be placed at the last point (or
point 4 in this example). (See the gray dotted line showing this scenario.) This additional failure
point is usually only used if the breakout and subsequent trading has not extended beyond the
length of the pattern (i.e., apex) and the risk levels are still within your tolerance. (The image
below depicts an Ascending Triangle in an uptrend for illustration.)

If you get in before a breakout

occurs in anticipation of one, a
move below the last point of the
triangle (point 4 in this example)
should be your failure point and
you should consider exiting the
trade. For the more experienced
trader, you might choose to stay in
a little longer if you believe the
pattern is being ‘re-drawn’ into a
new pattern such as a larger
ascending triangle or a rectangle. If this is the case, use the bottom of the base (point 2) as the
failure point and exit below there. (See the gray dotted line that shows this scenario.)This can
makes sense if your early entry was near the bottom of the pattern and staying in a little longer
still keeps your risk within your level of tolerance. (The image below depicts an Ascending
Triangle in an uptrend for illustration.)

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 Since this pattern is a continuation
pattern, it’s most profitable to
trade this in the direction of the
preceding trend. And remember,
it’s most reliable when found in
uptrends. In fact, the Ascending
Triangle has an astounding
success rate, breaking out to the
upside 70% of the time.

You can get in after a breakout has occurred or you can choose to get in early in anticipation of
a breakout taking place. This high probability pattern is a great bullish indicator.

31
 3. Descending Triangles

• Consist of lower highs and a support line.

• Usually mean that the price will break the support line and go lower but you should place
entry orders on both sides just in case the support line is too strong.
• Place your entry orders above the lower highs and below the support line.

As you probably guessed, descending triangles are the exact opposite of ascending triangles
(we knew you were smart!). In descending triangles, there is a string of
lower highs which forms the upper line. The lower line is a support level in
which the price cannot seem to
break. The Descending Triangle is
basically the reverse of an
Ascending Triangle. The flat line
(horizontal trendline) is on the
bottom and a descending trendline
defines the top part of the pattern.
The two lines come together to
form a flat- bottomed, right-sided
triangle. The Descending Triangle
is a continuation pattern and is
generally considered bearish. It is most reliable when found in a downtrend.

In the Descending Triangle, prices drop to a point where they are considered oversold.
Tentative buying comes in at the lows and prices perk up. The higher prices however attract
more selling and the old lows (horizontal trendline) are re-tested. Buying once again lifts prices,
although resulting in a lower high (downward slanting trendline). New selling comes in and
pushes it back down.

In the chart below you can see that the price is gradually making lower highs which tell us that
the sellers are starting to gain some ground against the buyers. Now most of the time, and we
did say MOST - the price will eventually break the support line and continue to fall.

32
However, in some cases the support line is too strong, and the price will bounce off of it and
make a strong move up.

The good news is that we don’t care where the price

goes. We just know that it’s about to go somewhere.
In this case we would place entry orders above the
upper line (the lower highs) and below the support
line.

In this case, the price did end up breaking the support

line and proceeded to drop rather quickly. (*note- The
market tends to fall faster than it rises which means
you usually make money faster when you are short).

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 4. Double Top

• Happens after an extended uptrend.

• Formed by 2 peaks that can’t break a certain level. This level becomes a resistance line.
• Place our short entry order below the low point of the valley in between the 2 peaks.

A double top is a reversal pattern that is formed after there is an extended move up. The “tops”
are peaks which are formed when the price hits a certain level that can’t be broken. After hitting
this level, the price will bounce off it slightly, but then return back to test the level again. If the
price bounces off of that level again, then you have a DOUBLE top!

In the chart above you can see that two peaks or “tops” were formed after a strong move up.
Notice how the 2nd top was not able to break the high of the 1st top. This is a strong sign that a
reversal is going to occur because it is telling us that the buying pressure is just about finished.

With double tops, we would place our entry order below the neckline because we are
anticipating a reversal of the uptrend.

Looking at the chart you can see that the price breaks the neckline and makes a nice move
down. Remember, double tops are a trend reversal formation. You’ll want to look for these after
there is a strong uptrend.

5. Double Bottom

• Happens after an extended downtrend.

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 • Formed by 2 valleys that can’t break a certain level. This level becomes a support line.
• Place our long entry order above the high point of the peak in between the 2 valleys.

Double bottoms are also trend reversal formations, but this time we are looking to go long
instead of short. These formations occur after extended downtrends when two valleys or
“bottoms” have been formed.

You can see from the chart above that after the previous downtrend, the price formed two
valleys because it wasn’t able to go below a certain level. Notice how the 2nd bottom wasn’t
able to significantly break the 1st bottom.

This is a sign that the selling pressure is about finished, and that a reversal is about to occur. In
this situation, we would place an entry order above the neckline.

The price breaks the neckline and makes a nice move up. Remember, just like double tops,
double bottoms are also trend reversal formations. You’ll want to look for these after a strong
downtrend.

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 6. Triple Top
The Forex chart price trading
pattern known as the Triple Top is a
relatively rare reversal pattern that
generally accurately indicates a
move towards major reversal in the
current direction of the trend or
issue it represents.

The triple top pattern is similar in

appearance to the head and
shoulders patterns, in that it is
represented by a series of three
high highs and lows, except that
with the triple top all three highs will be of an approximate level (as opposed to slightly ‘dipped’
middle high position of the head and shoulders chart pattern.)

The appearance of the triple top indicates the existence of a uptrend, which is currently in the
process of transforming into an downtrend, the prolonged uptrend having run out of steam and
traders interest having begun to decline.

As with a triple bottom, it is generally thought that the longer a particular trend takes to fully
develop, the stronger the significant change in price once breakout occurs. Typically triple tops
and bottoms take around four months to develop, and are considered one of the slowest types
of chart patterns to fully mature.

With a triple top the support level can be

imagined by drawing a line at the base
level of the lows and usually traders
choose to enter into short position once
the price level falls through this support
level.

36
 7. Triple Bottom

A Triple Bottom chart pattern is very similar in presentation to a head and shoulders bottom in
that it contains three lows, albeit all occurring at an equal level. Like the head and shoulders
bottom, the triple bottom is also as a reversal pattern.

The appearance of the triple bottom indicates the existence of a downtrend, which is currently in
the process of transforming into an uptrend and is one of the patterns that takes the longest to
fully develop, with an average formation time of around four months, however, there is a strong
train of thought which decrees that the longer a trend takes to develop, the stronger the
significance of the price move once breakout does occur.

As the triple bottom is potentially easily confused with other, similar patterns, such as the double
bottom, or head and shoulders bottom and because true triple bottoms are quite a rare
occurrence, many experts in the field have been known to advise to wait for signs of a breakout
through the confirmation point before assuming that the emerging pattern is a true triple bottom.

Once the trend has been confirmed, a breakout should be accompanied by a burst in volume,
although the majority of triple bottoms witness a pullback following breakout that result in a
fallback to the breakout price.

37
 8. Head & Shoulders

• Happens after an extended uptrend.

• Formed by a peak, followed by a higher peak, and then another lower peak. A neckline
is formed by connecting the low points of the two troughs or “valleys”. Place your
short entry order below the neckline.
• We calculate our target by measuring the distance between the high point of the head
and the neckline. This is the approximate distance that the price will move after it breaks
the neckline.

A head and shoulders pattern is also a trend reversal formation. It is formed by a peak
(shoulder), followed by a higher peak (head), and then another lower peak (shoulder). A
“neckline” is drawn by connecting the lowest points of the two troughs. The slope of this line can
either be up or down. In my experience, when the slope is down, it produces a more reliable
signal.

In this example, we can

visibly see the head and
shoulders pattern. The
head is the 2nd peak
and is the highest point
in the pattern. The two
shoulders also form
peaks but do not
exceed the height of the
head.

With this formation, we look

to make an entry order
below the neckline. We can
also calculate a target by
measuring the high point of
the head to the neckline.
This distance is
approximately how far the
price will move after it
breaks the neckline.

You can see that once the

price goes below the neckline it makes a move that is about the size of the distance between
the head and the neckline.

38
 9. Reverse Head & Shoulders

• Happens after an extended downtrend.

• Formed by a valley, followed by a lower valley, and then another higher valley.
• A neckline is formed by connecting the high points of the 2 peaks.
• Place your long entry order above the neckline.
• We calculate our target by measuring the distance between the low point of the head
and the neckline. This is the approximate distance that the price will move after it breaks
the neckline.

The name speaks for itself. It is basically a head and shoulders formation, except this time it’s in
reverse. A valley is formed (shoulder), followed by an even lower valley (head), and then
another higher valley (shoulder). These formations occur after extended downward movements.
Here you can see that this is just like a head and shoulders pattern, but it’s flipped upside down.

With this formation, we would place a

long entry order above the neckline.
Our target is calculated just like the
head and shoulders pattern. Measure
the distance between the head and
the neckline, and that is approximately
the distance that the price will move
after it breaks the neckline.

You can see that the price moved up

nicely after it broke the neckline. “the
price kept moving even after it
reached the target.”

39
 10. Flags & Pennants
Both Flags and Pennants can be categorized as continuation patterns.

The consolidation part of the pattern usually represents only a brief pause in an otherwise
powerful market. They are typically seen right after a big, quick move – either up or down. The
market then usually takes off again in the same direction. Research has shown that Flags and
Pennants are some of the most reliable chart patterns to trade. And they can be found in some
of the most explosive price moves.

Flags: Bullish in Uptrends

Flag patterns in uptrends are bullish. They are typically referred to as simply ‘Bull Flags’. Bull
Flags are characterized first by a sharp upward price move. This can be one big day or multiple
days of progressive price action. The steepness of the move can sometimes look almost like a
straight line up (like a flagpole). The consolidation that follows is identified by a short series of
lower tops and lower bottoms that slant against the trend. The trendlines that can be drawn on
the top of the pattern and the bottom of the pattern run parallel to one another (like a downward
sloping rectangle). Volume typically diminishes during this ‘time-out’, but then explodes higher
as it breaks out.

Pennants: Bullish in Uptrends

Pennants in uptrends are bullish. Pennants look very much like small symmetrical triangles. But
the characteristic, near straight-up, ‘pole-like’ move that precedes the pennant part, makes its
identification unmistakable. The pause after the sharp move higher is defined by two converging
trendlines that form a small right sided triangle. Just like in the Flagging patterns, volume should
dry up during the pennant part and then explode higher on the breakout.

Pennants: Bearish in Downtrends

Pennants in downtrends are bearish. Bear Pennants look like upside down Bull Pennants. In the
Bear Pennant, there’s a big move to the downside, followed by a short consolidation pattern that
looks like a small triangle. The market then breaks out to the downside in the same dramatic
way that set the pattern up in the first place. Volume drops off during the pennant part, but then
quickly picks up on the breakout.

Identifying and Drawing Flags and Pennants

Flags and Pennants are some of the easiest patterns to spot on a chart. And just like all the
other patterns described so far, you need a minimum of four points to draw a Flag or Pennant:
two points at the top of the pattern and two points at the bottom. Remember, the defining lines

40
of a Flag run parallel to each other. The Flag part should also slant against the trend. The
defining lines of a Pennant converge to form a small triangle that points to the right.

Flags in uptrends are bullish while Flags in downtrends are bearish.

In both bullish or bearish Flags, the first point should be the point farthest left, i.e., the earliest
point. In uptrends, the first point of the Flag, should be at the top of the pattern. In downtrends,
the first point of the Flag should be at the bottom.

The same is true for bullish and bearish Pennants. In Bull Pennants, the first point should be the
point farthest left and at the top. In Bear Pennants, the first point should be the point farthest left
and at the bottom.

41
 11. Wedges

Wedges signal a pause in the current trend. When you encounter this formation, it signals that
forex traders are still deciding where to take the pair next. Wedges could serve as either
continuation or reversal patterns.

Rising Wedge

A rising wedge is formed when price consolidates between upward sloping support and
resistance lines.

Here, the slope of the support line is steeper than that of the resistance. This indicates that
higher lows are being formed faster than higher highs. This leads to a wedge-like formation,
which is exactly where the chart pattern gets its name from!

With prices consolidating, we know that a big splash is coming, so we can expect a breakout to
either the top or bottom.

If the rising wedge forms after an uptrend, it’s usually a bearish reversal pattern.

On the other hand, if it forms during a downtrend, it could signal a continuation of the down
move.

42
Either way, the important thing is that, when you spot this forex trading chart pattern, you’re
ready with your entry orders!

In this first example, a rising wedge

formed at the end of an uptrend. Notice
how price action is forming new highs,
but at a much slower pace than when
price makes higher lows.

See how price broke down to the

downside? That means there are more
forex traders desperate to be short than
be long!

They pushed the price down to break

the trend line, indicating that a
downtrend may be in the cards.

Just like in the other forex trading chart

patterns we discussed earlier, the price
movement after the breakout is
approximately the same magnitude as
the height of the formation.

Now let’s take a look at another example of a rising wedge

formation. Only this time it acts as a bearish continuation
signal. As you can see, the price came from a downtrend
before consolidating and sketching higher highs and even
higher lows.

43
 In this case, the price broke to the down side and the
downtrend continued. That’s why it’s called a continuation
signal yo! See how the price made a nice move down that’s
the same height as the wedge?

A rising wedge formed after an uptrend usually leads to a REVERSAL (downtrend) while a
rising wedge formed during a downtrend typically results in a CONTINUATION (downtrend).

Simply put, a rising wedge leads to a downtrend, which means that it’s a bearish chart pattern!

Falling Wedge

Just like the rising wedge, the falling wedge can either be a reversal or continuation signal.

As a reversal signal, it is formed at a bottom of a downtrend, indicating that an uptrend would

come next.

As a continuation signal, it is formed during an uptrend, implying that the upward price action
would resume. Unlike the rising wedge, the falling wedge is a bullish chart pattern.

44
 In this example, the falling wedge serves as a reversal
signal. After a downtrend, the price made lower highs
and lower lows.

Notice how the falling trend line connecting the highs is

steeper than the trend line connecting the lows.

Upon breaking above the top of the wedge, the pair

made a nice move upwards that’s approximately equal
to the height of the formation. In this case, the price rally
went a few more pips beyond that target!

Let’s take a look at an example where the falling wedge

serves as a continuation signal.

Like we mentioned earlier, when the falling wedge forms

during an uptrend, it usually signals that the trend will
resume later on.In this case, the price consolidated for a bit
after a strong rally. This could mean that buyers simply
paused to catch their breath and probably recruited more
people to join the bull camp.

Hmm, it looks like the pair is revving up for a strong move.

Which way would it go?

See how the price broke to the top side and went on to
climb higher?If we placed an entry order above that falling
trend line connecting the pair’s highs, we would’ve been
able to jump in on the strong uptrend and caught some pips!

45
 A good upside target would be the height of the wedge
formation.

If you want to go for more pips, you can lock in some profits
at the target by closing down a portion of your position, then
letting the rest of your position ride.

“DON’T BE GREEDY!”
If your target is hit, then be happy with your profits.

Six Steps to Setting Up Your System

Step 1: Timeframe

The first thing you need to decide when creating your system is what kind of trader you are. Are
you a day trader or a swing trader? Do you like looking at charts every day, every week, every
month, or even every year? How long do you want to hold on to your positions? This will help
determine which time frame you will use to trade. Even though you will still look at multiple time

46
frames (go back to 7th grade if you forgot), this will be the main time frame you will use when
looking for a trade signal

Step 2: Find indicators that help in identifying a new trend

Since one of our goals is to identify trends as early as possible, we should use indicators that
can accomplish this. Moving averages are one of the most popular indicators that traders use to
help them identify a trend. Specifically, they will use 2 moving averages (one slow and one fast)
and wait until the fast one crosses over or under the slow one. This is the basis for what’s
known as a “moving average crossover” system.
In its simplest form, moving average crossovers are the fastest ways to identify new trends. It is
also the easiest way to spot a new trend. Of course there are many other ways traders’ spot
trends, but moving averages are one of the easiest to use.

Step 3: Find Indicators that help confirm the trend

Our second goal for our system is to have the ability to avoid whipsaws, meaning that we don’t
want to be caught in a “false” trend. The way we do this is by making sure that when we see a
signal for a new trend, we can confirm it by using other indicators.

Step 4: Define your risk

When developing your system, it is very important that you define how much you are willing to
lose on each trade. Not many people like to talk about losing, but in actuality, a good trader
thinks about what they could potentially lose BEFORE thinking about how much they can win.

The amount you are willing to lose will be different than everyone else. You have to decide how
much room is enough to give your trade some breathing space, but at the same time, not risk
too much on one trade. You’ll learn more about money management in a later lesson. Money
management plays a big role in how much you should risk in a single trade.

Step 5: Define Entries and Exits

Once you define how much you are willing to lose on a trade, your next step is to find out where
you will enter and exit a trade in order to get the most profit.
Some people like to enter as soon as all of their indicators match up and give a good signal,
even if the candle hasn’t closed. Others like to wait until the close of the candle.
In my experience, I have found that it is best to wait until a candle closes before entering. I have
been in many situations where I will be in the middle of a candle and all my indicators match up,
only to find that by the close of the candle, the trade has totally reversed on me!

47
It’s all really just a matter of trading style. Some people are more aggressive than others and
you will eventually find out what kind of trader you are.
For exits, you have a few different options. One way is to trail your stop, meaning that if the
price moves in your favor by ‘X’ amount, you move your stop by ‘X’ amount.

Another way to exit is to have a set target, and exit when the price hits that target. How you
calculate your target is up to you. Some people choose support and resistance levels as their
targets. Others just choose to go for the same amount of pips on every trade. However you
decide to calculate your target, just make sure you stick with it. Never exit early no matter what
happens. Stick to your system! After all, YOU developed it!

One more way you can exit is to have a set of criteria that, when met, would signal you to exit.
For example, you could make it a rule that if your indicators happen to reverse to a certain level,
you would then exit out of the trade.

Step 6: Write down your system rules and Follow them

This is the most important step of creating your trading system. You MUST write your trading
system rules down and ALWAYS follow it. Discipline is one of the most important characteristics
a trader must have, so you must always remember to stick to your system! No system will ever
work for you if you don’t stick to the rules, so remember to be disciplined. Oh yea, did I mention
you should ALWAYS stick to your rules?

How To Test Your System

The fastest way to test your system is to find a charting software package where you can go
back in time and move the chart forward one candle at a time. When you move your chart
forward one candle at a time, you can follow your trading system rules and take your trades
accordingly. Record your trading record, and BE HONEST with yourself! Record your wins,
losses, average win, and average loss. If you are happy with your results then you can go on to
the next stage of testing: trading live on a demo account.

48
Trade your new system live on a demo account for at least two months. This will give you a feel
for how you can trade your system when the market is moving. Trust me, it is a lot different
trading live than when you’re backtesting.

After two months of trading live on a demo account, you will see if your system can truly stand
its ground in the market. If you are still getting good results, then you can choose to trade your
system live on a REAL account. At this point, you should feel very confident with your system
and feel comfortable taking trades with no hesitation. At this point, YOU’VE MADE IT!

What Should Be In Your Trading Plan?

Trading plans can be as simple or complex as you want it, but the most important thing is that
you actually HAVE a plan and you FOLLOW the plan. With that said, here are some of the
essentials that every trading plan should have.

1. A trading system

This is the heart of your trading plan. This system should be one that you have thoroughly
backtested, and have traded for at least two months on a demo account.

49
Include all the necessary information about your system such as: time frames you use, criteria
for entries and exits, how much you risk during each trade, which currency pair(s) you trade and
how many lots you trade.

Example: I am an intra-day trader and I trade off of the 10 minute charts. I enter when there is a
moving average crossover and all my indicators support the direction. I only trade the EUR/USD
and I risk no more than 2% of my account on each trade. For now, I trade 5 mini lots and will
increase my lot size according to my 2% money management rules.

2. Your trading routine

This is a crucial part of your plan because it will determine three very important things: when
you will analyze the market and plan your trades, when you will actually watch the market to
take trades, and when you will evaluate your actions during your trading day.

3. Your mindset

Ask any trader out there and they will all tell you that one of the hardest things to do when
trading is to take out your emotions from it. This section of your trading plan will describe what
frame of mind you will be in when you are trading.

Example
I will see what is on the charts and not what I want to see.
No matter how biased I am towards a direction, I will make sure to trade only what my eyes see
and not what my feelings tell me.
I will not get “revenge” on the market if I lose on a trade.
I will not beat myself up if I make a losing trade. Instead I will take it as a learning experience
and move on.

4. Your weaknesses

Yes, we all have our weaknesses. We just don’t like talking about them. But ask yourself this,
“How will you ever get better, if you don’t admit to what you need to work on?” This section will
be an objective way to keep track of things that you need to work on in order to become a better
trader.

Example
I tend to overtrade.

50
Whenever I lose on a position, I get upset and immediately try to get “revenge” on the market. I
tend to exit early on trades.
I don’t stick to the rules of my system every time.
I don’t stick to my money management rules every time

5. Your goals

“To make a lot of money” is not a good goal. Sit down and really think about what you want to
accomplish as a trader. Do you want to trade for a living? How much return can you realistically
expect from trading based on your knowledge and experience? Your goals don’t even have to
be about making money. Maybe you would like to be more disciplined or gain more confidence.
These goals can be personal. What do YOU want to get out of this? Use these goals as your
motivation when times get tough. These goals will be your vision, and you must always keep
your eyes on the prize!

6. Your trading journal

This will be a valuable tool to helping you become a better trader. Make sure you log all your
trades and why you took them. Later down the road you can look back and evaluate your trades
and see how you are progressing. I’ve looked back at my trade journal and have seen just how
much I’ve grown as a trader. My first entries were very basic and as I’ve progressed, my trades
make more sense to me now. I’ve gained a lot of confidence throughout my career and by
looking back at my trades, I’ve really been able to evaluate myself and see if I am getting closer
to my goals. This tool will help you tremendously in the long run, so take a few minutes each
day and log your trades. You’ll be happy you did!

Market Psychology
Simple Rules of the Game
Trading can be highly successful if the rules are followed or highly disastrous if the rules are not
followed. Every trader should have their basic set of rules that they adhere to. Below are a few
basic rules to remember:

Stick to your time horizon - You define your time horizon. If you are a day trader, then make
sure you close out your positions by end of day. A loss-making position carried into the next
trading day is more likely to go into more losses and hardly ever into profit. Also carrying trades
overnight is dangerous as anything can occur. If you have a longer time span, do not close out
loss-making trades the next day. It will come into the money during your defined time span if
you have analyzed the trade correctly.

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Find a strategy that works for you - There are many strategies out there but develop a
strategy that works for you and stick to the strategy. There is no Holy Grail in trading. Keep
emotions in check: When trading try not to allow your emotions to come into play as it can
hinder your judgments. Some of the emotions to keep in check are fear, greed and hope.

Calibrate your positions - The leverage you put on in a position is very important. If you have
strong conviction trades backed by full analysis you should put more leverage on those trades
(add to a winning trade). If you run high leverage on weak conviction, the position is sure to give
you high losses. If you have lost money in previous trades, don’t use high leverage to make up
for the losses; it will only lead to more losses. If you have made money in your previous trades
use those profits as a means of leverage on your future trades. For example, if you have made
Rx as trading profits, you can afford to risk Rx for future trades. You can also put away your
profits in the bank if you believe that you may not make as much money in future trades

Take profits, Cut losses - Trading is all about closing out positions. You are not an investor,
you are a trader. If you see profits you take it and then look for the next trade if you are
undecided if the trade will continue in your favor. If you are running losses on your positions, cut
the losses to live for another day. There is always a next day in trading. Sometimes a positive
attitude can keep you in a dead end position which can have disastrous consequences. Always
remember, cut your losses and let your profits run.

Learn to handle stress - Trading is stressful and emotional. You are risking money to make
money and that is a highly stressful activity. You will need to handle the stress and the emotions
that come along with positions running into losses or profits. There are many ways to handle
stress and you will have to find your own way. If you cannot handle stress, stop trading, it’s not
meant for you.

Becoming A Consistent Trader And Increasing Profitability

• Think of trading as a business and have a trading plan.
• Make sure that the strategies you select, match your personality so you can follow them.
• Have a realistic expectation of what your returns are. Include all the costs associated
with your trading business. Have an idea for your risk/reward ratio.
• Don’t confuse trading with gambling.
• If you are increasing your position, make sure that your strategy warrants it.
• Have trading rules and follow them. Think about them as contingency plans because
when your emotions are very high, the tendency is that you make very poor decisions
that can cost you your account.
• Be flexible to the market conditions. When you see the market as it is, you have a much
better chance of managing your portfolio and increasing your profits.
• Take responsibility for your results. Taking responsibility does not mean that you have
control of everything that happens. It means that you have a choice of how to react to
the things that happen.

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 • Find out why you are in the trading business. If it is for the excitement of it, find other
hobbies or activities that you can get your excitement from.
• Keep track of your performance. This is a way of objectively looking at how you are
doing, what you did right or wrong and what you learned.
• Be gentle with yourself. One of the most important things that people don’t handle is
their Emotional Risk. When emotions run high, the quality of decisions goes down. It is
very important to learn how to react to your emotions and thus increase your profits.

Money Management
The first thing to know before a trader can actually determine his or her position size is the stop
level for the trade. Stops should not be set at random levels. A stop needs to be placed at a
logical level, where it will tell the trader that he or she was wrong about the direction of the
trade. Traders should not place a stop where it could easily be triggered by normal movements
in the market.

Once the trader has a stop level, he or she now knows the risk. For example, if the trader knows
his or her stop is 50 points (or assume 50 cents in stock or commodity) from the entry price, the
trader can now start to determine his or her position size. The next thing the trader needs to look
at is the size of his or her account. If the trader has a small account, the trader should risk a
maximum of 1-5% of his or her account on a trade.

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Risk and Reward
A ratio is used by many traders to compare the expected returns of a trade to the amount of risk
undertaken to capture these returns. This ratio is calculated mathematically by dividing the
amount the trader stands to lose if the price moves in the unexpected direction (i.e. the risk) by
the amount of profit the trader expects to have made when the position is closed (i.e. the
reward)

Let's say a trader purchases 100 shares of XYZ Company at R20 and places a stop-loss order
at R15 to ensure that his or her losses will not exceed R500. Let's also assume that this trader
believes that the price of XYZ will reach R30 in the next few months. In this case, the trader is
willing to risk R5 per share to make an expected return of R10 per share after closing his or her
position. Since the trader stands to make double the amount that he or she has risked, he or she
would be said to have a 1:2 risk/reward or 2:1 risk/reward ratio on that particular trade. The
optimal risk/reward ratio differs widely among trading strategies. Some trial and error is usually
required to determine which ratio is best for a given trading strategy but the most common
risk/reward ratio is 1:2 or 2:1 as some prefer to call it. The trader is willing to risk 1 to make 2

The most important part of trading as many would say is to get the “entry” and “exit” strategy
correct as entering the market too early or too late can lead to partial or total losses or it can
minimize the potential profit. There are only two sides to the market and that is either the “right
side” or the “wrong side”. Planning and strategizing and sticking to the plan and strategy will
ensure the trader is on the “right side” more often than he or she is on the “wrong side”.

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