Copyright Information REPRODUCTION AND OR TRANSLATION OF ANY PART OF THIS WORK BY ANY MEANS ELECTRONIC OR MECHANICAL INCLUDING PHOTOCOPYING BEYOND THAT PERMITTED BY COPYRIGHT LAW WITHOUT PERMISSION OF THE PUBLISHER IS UNLAWFUL. Copyright © 2006 Oleg A. But & 5emas-forex-trading-system.com Revision 2.12: February 2007 Author : Oleg Alexandrovich But Website : 5emas-forex-trading-system.com E-Mail : TABLE OF CONTENTS Copyright Information i Disclaimer and Risk Warnings 1 U.S. Government Required Disclaimer 2 PREFACE 3 WHAT IS FOREX? 4 FOREX (FOReign EXchange Market) 4 Currency Symbols: 4 Currency Exchange Rate 5 Leverage 6 How a Transaction Is Carried Out 7 Swaps 8 The Reasons for the Popularity of FOREX 10 Liquidity 10 Flexibility 11 Lower transaction costs 11 Price stability 11 Margin 11 Classification Features of the FOREX Market 12 By the type of operations 12 By the territorial feature 12 THE MAIN MARKET PARTICIPANTS 13 Commercial banks 13 Companies making foreign investments 14 Central banks 14 Currency exchanges 15 Currency brokerages 15 Private persons 15 THE MAIN CONCEPTS OF THE FOREX MARKET 16 Bid 17 Ask (or offer) 17 Spread 17 Margin trading 17 Margin 17 Leverage 17 Currency Rate 18 Lot 18 Storage 18 MINI-FOREX – FOREX TRADING WITH $100 DEPOSIT 18 WHAT WE NEED TO ACCESS THE MARKET AND TRADE IT 20 We Need an Internet Connection 20 We Need a Brokerage 21 ii We Need Specialized Software to Access the Market 22 Types of software for working in financial markets 22 Types of Orders 23 Market Order 23 Pending Order 24 Stop Loss 25 Take Profit 25 Speed of Order Execution 26 HOW TO FORECAST MARKET BEHAVIOR 27 Fundamental Analysis 27 Common detailed Fundamental Analysis for an index: 30 Explanation of the elements of the forecast: 32 Technical analysis 33 Complex Trading Systems 35 Trading Systems created by advanced traders 35 The basic advantages of this approach are: 36 The basic disadvantages of this approach: 37 Trading Systems offered by financial companies 37 5 EMAS FOREX SYSTEM 38 Description of the system 38 The purpose of using this system 39 General Money Management Rules for the 5 EMAs FOREX System 41 Lot management for medium risk/aggressive traders: 43 The risk for various currency pairs: 43 Examples of multiple exit points for different pairs 43 What Tools Are Used In This System? 48 Description of Technical Indicators used in the System 48 Support and Resistance 48 Supply and demand 50 Traders’ remorse 51 Resistance becomes support 52 Moving Averages (MAs) 53 Exponential Moving Average (EMA) 54 (MACD) Moving Average Convergence/Divergence 56 (RSI) Relative Strength Index Technical Indicator 59 Ways to use Relative Strength Index for chart analysis: 59 Williams’ Percent Range Technical Indicator (%R) 60 BROKERAGE AND TRADE TERMINAL 61 Recommended Brokerage 61 Link to Recommended Brokerage 62 ABOUT METATRADER 4 63 Downloading and Installing MetaTrader 4 64 Downloading MetaTrader 4 64 Installing MetaTrader 4 64 iii Configuring MetaTrader 4 64 Starting MetaTrader 4 for the first time 65 Opening a demo account 66 Adjusting the workspace of MetaTrader 4 68 Setting up Chart Windows and Indicators 71 TRADING RULES FOR THE 5 EMAS FOREX SYSTEM-“DAY-TRADING” 79 The Main Set of Rules (fundamental) 79 The Main Rules (technical) 80 Entry Rules for Short Positions: 80 Entry Rules for Long Positions: 81 Exit Rules for Short Positions 83 Exit Strategy №1 (Trailing Stop 1) 84 Exit Strategy №1 (Trailing Stop 2) 85 Exit Strategy №2 (Moving Averages) 87 Exit Strategy №3 (Using Divergences) 88 Exit Rules for Long Positions 90 Exit Strategy №1 (Trailing Stop 1) 91 Exit Strategy №1 (Trailing Stop 2) 92 Exit Strategy №2 (Moving Averages) 94 Exit Strategy №3 (Using of Divergences) 95 Ideal technical conditions for opening positions 97 Ideal technical conditions for short positions 97 Trade 1 (USD/CHF) 98 Trade 2(USD/CHF) 98 Trade 1 (USD/JPY) 99 Trade 2 (USD/JPY) 100 Trade 1 (EUR/USD) 101 Trade 2(EUR/USD) 102 Ideal technical conditions for long positions 103 Trade 1 (USD/CHF) 103 Trade 2 (USD/CHF) 104 Trade 1 (USD/JPY) 105 Trade 2 (USD/JPY) 106 Trade 1 (EUR/USD) 107 Trade 2 (EUR/USD) 108 When Not To Enter the Market (“No Trade” Rules) 109 The exceptions based on fundamental events (news) 110 Trade 1 (EUR/USD long) 111 Trade 1 (description) 111 Trade 2 (USD/CHF short) 112 Trade 2 (description) 112 The exceptions based on technical conditions 113 Trade 1 (USD/JPY short) 113 Trade 2 (USD/CHF long) 114 Classic example of when you should not open a position. 114 iv Detailed Analysis of Trades 117 Finding trade opportunities 119 Calculation of profit from all 7 trades 130 Conclusion for the 5 EMAs FOREX SYSTEM – “Day-Trading” 131 TRADING RULES FOR 5 EMAS FOREX SYSTEM-“SCALPING” 132 Introduction 132 Main Rules 132 Scalping the trend of the 60-minute timeframe. 132 Short Position 133 Long Position 134 Conclusion 135 An alternative way to scalp profits 135 Divergence on 15-min chart 136 Short Position 136 Long Position 136 Conclusion for 5 EMAs FOREX SYSTEM – “Scalping” 137 DISTRIBUTION OF THIS E-BOOK IS STRICTLY PROHIBITED Reward for Reporting Offenders v Disclaimer and Risk Warnings Trading any financial market involves risk. This e-book and the website 5emas-forex-trading-system.com and its contents are neither a solicitation nor an offer to Buy/Sell any financial market. The contents of this e-book are for general information purposes only (contents shall also mean the website 5emas-forex-trading-system.com and any email correspondence or newsletters related to the website). Although every attempt has been made to assure accuracy, we do not give any express or implied warranty as to its accuracy. We do not accept any liability for error or omission. Examples are provided for illustrative purposes only and should not be construed as investment advice or strategy. No representation is being made that any account or trader will or is likely to achieve profits or losses similar to those discussed in this e-book. Past performance is not indicative of future results. By purchasing the e-book, subscribing to our mailing list or using the website you will be deemed to have accepted these terms in full. Oleg A. But (author), Adam Burgoyne (publisher), the website, e-book, and its representatives do not and can not give investment advice or invite customers to engage in investments through this e-book. We do our best to insure the website is available 24 hours per day but we cannot be held liable if for any reason the site is not available. The information provided in this e-book is not intended for distribution to, or for use by, any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation or which would subject us to any registration requirement within such jurisdiction or country. 1 Hypothetical performance results have many inherent limitations, some of which are mentioned below. No representation is being made that any account will or is likely to achieve profits or losses similar to those shown. In fact, there are frequently sharp differences between hypothetical performance results and actual results subsequently achieved by any particular trading program. One of the limitations of hypothetical performance results is that they are generally prepared with the benefit of hindsight. In addition, hypothetical trading does not involve financial risk and no hypothetical trading record can completely account for the impact of financial risk in actual trading. For example: the ability to withstand losses or to adhere to a particular trading program in spite of trading losses are material points which can also adversely affect trading results. There are numerous other factors related to the market in general and to the implementation of any specific trading program, which cannot be fully accounted for in the preparation of hypothetical performance results, all of which can adversely affect actual trading results. We reserve the right to change these terms and conditions without notice. You can check for updates to this disclaimer at any time without notification. The content of 5emas-forex-trading-system.com and this e-book are copyright and may not be copied or reproduced. U.S. Government Required Disclaimer Commodity Futures Trading Commission Futures and Options trading has large potential rewards, but also large potential risk. You must be aware of the risks and be willing to accept them in order to invest in the FOREX, futures and options markets. The past performance of any trading system or methodology is not necessarily indicative of future results. 2 Preface The 5 EMAs FOREX SYSTEM actually consists of two trading systems: a Day-Trading System and a Scalping System. The main part of the 5 EMAs FOREX SYSTEM that I will be focusing on in this book is the “Day-Trading” system because our main goal is to earn 25-35 pips per day (these and other terms that may be new to you are explained in some detail later in this book). Because a trading day in the FOREX market is 24 hours, it is reasonable to call it a day-trading system. In fact, most, if not all FOREX trading systems can be considered to be day-trading systems. A Day-Trading system is a system with one rule: you should not leave positions opened overnight; however, the FOREX market is open on an ongoing, 24-hour basis. In the FOREX market, near the end of the trading day, “swaps” are calculated. We shall be learning about this later but it would be one good reason not to leave a position open overnight: due to the calculation of negative swaps, unless you thoroughly understand how they work and their impact on your trading account. Again, I titled the main part of the 5 EMAs FOREX SYSTEM “Day- Trading”, yet with the flexibility to leave your positions overnight, it could be called a short-term trading system, too. Well, what can I say? I will call the main part of the 5 EMAs FOREX SYSTEM a Day-Trading system because: Our main goal is earning 25-35 pips per day and this is possible because we have 24 hours to do it. My comment “with the flexibility to leave your positions open overnight” depends totally on market conditions at the time and whether your positions are in profit. 3 At the end of the day, there is no reason not to leave a position open overnight if it is in profit and there is a strong trend in our direction. What is FOREX? FOREX (FOReign EXchange Market) The Foreign Exchange Market is the arena where a nation's currency is exchanged for that of another at a mutually agreed rate. The FOREX market was formed in the mid ‘70s, when international trade was changed from a system of fixed rates to a system of free-floating rates of exchange. In fact, every country’s currency is considered merchandise, like wheat or sugar; it is the same medium of exchange, like gold and silver. Since the world changes faster and faster every year, the economic conditions of every country (e.g. labor productivity, inflation, unemployment, etc.) are ever more dependant upon the level of development of other countries, and this, in turn, impacts the value of a country’s currency in relation to the currencies of other countries. This is the main reason why there are rate fluctuations. Currency Symbols: EUR Euro NZD New Zealand Dollar USD US Dollar SEK Swedish Krona GBP British Pound DKK Danish Krone JPY Japanese Yen NOK Norwegian Krone CHF Swiss Franc SGD Singapore Dollar AUD Australian Dollar ZAR South African Rand CAD Canadian Dolar Table 1 4