THE FIRST BATTLE, Forex Art of War
Most traders don't recognize their first battle. But since it is a battle of vision, it must be won.
If you are going to win in trading, you have to understand how the game is really played. The Forex culture fosters the belief that “if you have enough information, if you manage your risk well, and if you are disciplined, you will win.”
That is absolutely TRUE. But it’s also like telling someone who is overweight “if you eat right and exercise, you will lose weight.”
Is that a STRATEGY for losing weight? No. When an objective is truly important, you will take the time to consider everything that can affect your success. Even when you have a good plan, it is a “starting point.”
As you put your plan into practice, you discover critically important information about yourself. Such as, you will find it’s better to not go to the store hungry. You might also discover that you continue to eat after you are no longer hungry.
Personally, I discovered that even though I won’t jog, I won’t walk, I won’t stretch, I will get beat up for an hour in Muay Thai Kick Boxing. Go figure. When I moved from my former residence and could no longer practice the same discipline, I had to find something else that I “would” do. “Eventually” I discovered that I’ll walk endlessly on the treadmill if the TV is on. Bingo.
When I came to Forex trading in 2004, my advantage was my experience with self-discipline. How do I get myself to make good choices? How do I consistently make good choices? If our goal is to lose weight, our greatest difficulty is going to be dealing with “how we feel.” We want something that is not good for us. The same is true with Forex trading. You are going to find out sooner or later that your emotions will prevent you from making money if you don’t have a strategy for making good decisions in spite of your emotions. So this is your first and most important choice. “Do what you feel like doing.”
Or…
“Learn to make good decisions regardless of the emotions you experience.” I also like to think of this as operating proactively instead of reactively. Those are your two choices.
One is easy and results in no profit and the loss of all of your money. The second requires an effort and can enable you to reach your goal.
Make the right choice and you move forward. Make the wrong choice, and you end up repeating the same activity over and over again for months or years. This was Einstein’s definition of insanity, but people do it anyway. If you are ready to make the right choice, I wrote this book for you.
The Forex "culture" encourages an ineffective vision of Forex trading. For this reason it is vital for your success that you begin by reading the eBook: 8 Things They Don’t Tell You About Forex Trading. In that book, I explain why the Forex culture is the way it is, why traders lose their money, and that it is totally unnecessary.
A Brief Overview of Forex Art of War
Forex Art of War is a holistic strategy that takes into consideration all variables that have the potential of affecting your success. While my work began in 2004, that part of the strategy began in October, 2009. In March 2010, I began testing the strategy with traders with great success over the next year. That strategy and what happened became documented in my 232 page book, Forex Art of War. Shortly after publishing my book, I recognized the need for more of a step by step process, and divided the strategy into three levels. Those have now developed into THE FIRST BATTLE, followed by SEIZE THE HIGH GROUND,
followed by Sun Tzu – RULES OF ENGAGEMENT. There are three levels. The first level (where you are now) is about becoming proficient with tools, language, and basic logic. The second level is about what determines your probability of winning, how to control those elements, balance them with your personality and end up with a great entry and exit
a process of separating your emotions from your decisions. I refer to it today as "good execution. As I publish the 4th Edition of this book, I now have reopened the Sun Tzu members site where I assist those who would like a little more structure and guidance in the process.
Getting Started
The goal of this book is to provide you with the tools and basic knowledge, so that you can build a solid foundation for high probability trading.
Be sure to check in regularly with me on Facebook. Each morning, Mon-Thur 8AM-11AM ET, you will find me on Facebook talking about how I trade, and working with traders that are brand new and traders that are very skilled. I am always applying the same logic and waiting for the same setup. I will answer any question that you write to me there. Don't wait for Facebook to tell you when I write something. Even traders who regularly interact on my page often do not get notified of my posts on their newsfeed. So I suggest you
bookmark my page.
Feel free to email me at vance@forexartofwar.com with any thoughts or questions!
This guide is intended to show you the fastest and most efficient way to get started trading the Forex. I’m not going to explain trading in a traditional sequence. Instead, we are going to get right into the charts, and you can learn as you go. The information is presented in the order it will be used. If you need charts or a trading platform, we provide those for free. We include videos that explain their use. It’s fine if you already have your own charts and trading platform. You will find charts, trading platform and video tutorials at our download page.
Forex Art of War is a holistic strategy for winning that takes into account everything that affects your ability to make consistent profit. I consider this book (The First Battle) to be the first level of knowledge, skill, and application. To illustrate: Before you can express an idea in a sentence, you must be able to write the words. To write words you must first learn the letters and basic rules for spelling.
For now, just practice the basics.
Here are the specific learning goals of Level 1:
· Vocabulary such as PIPs and Stop Loss
· Basic trading logic that teaches trends, barrier, entry and exit
· Implementing a simple trading plan, setting the trade on auto-pilot and leaving it alone
I have been trading and training others for more than eight years. I have worked with
thousands of aspiring traders, and had the privilege of working with some truly great traders. I love what I do because it is challenging and because I can help people to improve. People who strive to reach further in their life inspire me.
There are literally tens of thousands of pieces of information you “can” learn about the Forex market. I’m only going to focus on the essential things that you "need" to learn. I believe that you cannot make “more” profit until you learn to make “some” profit. So that is an important principle applied in this book and the subsequent training.
Basic Logic
As traders, we are anticipating what will happen in the future. How do we do this?
There is a simple logic in trading. Logic can be viewed and defined in many ways. I like to keep things simple. When I refer to logic, I’m referring to information from the past that can be used to anticipate what is likely to happen in the future.
Human behavior is repetitive. When you look, you see it everywhere. We tend to shop at the same places, and buy the same food. We know when traffic will be congested on our roadways. While I have written extensively on this subject, suffice it to say that not only do we repeat the same behaviors over and over again, we have difficulty changing a behavior even when we make a conscious effort. Just remember your struggle the last time that you set out on a new diet or exercise program.
There is a deeper reason for our human frailty. The same mathematical sequence we see everywhere in nature is also in us.
That is why we can rely on historical information to anticipate what is “likely” to happen in the future. Grocery stores even set prices based on your behavior.
When I talk about repetitive patterns, I’m not just talking about patterns you hear about like trends, head and shoulders, candle patterns, double tops, etc., etc. I’m talking about patterns throughout the entire decision process. We know traders like to trade trends.
Where do they like to get in? Where is the best place for you to get in? Where is the best place to put your stop loss and profit target?
There are patterns (logic) for all of these decisions.
So as buyers buy and sellers sell in the Forex market, they create patterns. These patterns show us what traders are doing over and over again. So when we see the pattern next time, we know what is likely to happen again.
The Forex
I’m going to be brief in my explanations because there is so much that you “don’t need to know.”
Forex is short for Foreign Exchange. It’s the largest market in the world. I think of money as the life blood of business and the Forex as the circulatory system. It is a network of 1000’s of banks around the world with no central location. No one is in charge. The purpose of the Forex market is to determine a fair price of exchange between two
currencies. The price is determined using the principle of supply and demand. If there are more buyers at any given moment, price is moving up. If there are more sellers, price is moving down.
What is the Forex to me? A stream of data. To me, that’s all it is. It is a stream of data (for real). That data comes into my software and tells me what price is doing. What else do I need to know? Not much.
Trading Software
Trading software takes in the data feed about buying and selling around the world and can be used in many different ways.
In 2001, platforms became very stable so that we were able to trade from our personal computers. So the industry or retail Forex trading (you and me) is still in its infancy.
Brokers or dealers provide most of the data feeds, charting software and trading platforms. These should be free of charge. Most brokers are willing to supply these to you in hopes that you will eventually trade a live account with them. Be sure you only open a practice account, NOT a live account. You can get everything you need from my download page. Do not open a real money account until you “actually” know how to trade.
If you open a live account prematurely, even if you intend not to trade it, there is a 90% chance (at least) that you will trade it and that you will lose all of your money. Again, make sure you read my free eBook, 8 ThingsThey Don’t Tell You About Forex Trading.
I prefer Accucharts. Metatrader is also a good charting software program. You can get free charting software at our download page. They are the same charts I use in my trading. For those of you who are MAC users, you will need to use Windows Parallels or a program like it to take full advantage of the tools available to a Forex trader. I know MAC users don’t like to hear it, but MAC is only 10% of the PC market, so those who write software write it for the bigger market first. The good news is that programs work pretty well using Parallels. My suggestion for MAC users would be to get an inexpensive stand-alone PC. You can use web based software on MAC but functions will be limited.
With modern software, you can execute trades directly from your charts. I prefer to have my charting software on my desktop and execute my trades using the web based trading
platform. I recommend a desktop trading platform for new traders because it has functions that enable you to learn details you don’t know. You can also get the same GTS Pro
platform I use for free on our download page. Keep in mind that you will need to register for a user code in order to open the trading platform and charting software.
Later, all you will need to do is execute orders, and you can move to a web based platform where execution will be even faster. Once again, we do not benefit financially from you trading a live account with a broker. It’s okay if you already have your own software. I have regular hours on Facebook, so it is easy to find me or a member of our team and ask us questions.
Please make a note that user codes expire every 30 days. So your charts and trading platform will become inaccessible when a code expires. Simply register for a new user code, use that new code to login to your charts and trading platform, and you are good to go again.
Charts usually display military time as 00:00-23:00. To calculate the time, just subtract 12 hours. So if you see it is the 14:00 candle and you are not familiar with military time, subtract 12 hours and you know that is 2PM.
Until you are more skilled, I recommend you set your charts to GMT -4:00 in the Spring and GMT -5:00 in the Fall (when US changes time). This will make it easier for you to read
other trader posts, and make it easier for others to review something you share. For example, one of our traders writes that they entered the trade at 13:00, unless your charts are set to the same time zone, you won’t understand or see what they are seeing.
If you do prefer a different time zone, that's okay, because what I'm showing you will work for any time zone or charts.
I recommend Fibonacci retracement tool settings of 23.6, 38.2, 50, 61.8 and 76.4. These are used to measure the natural retracement areas of price waves, and will be important later.
Give yourself time to practice and become familiar with the charts and trading platform. I’m going to give you a specific method (rules) in this guide so that you can practice. This will help you develop proficiency with the tools, a familiarity with the vocabulary we traders use, and you’ll be going through the motions of applying good trading logic.
Market Language
There is definitely a vocabulary or language to trading; a few words and terms. I think the fastest way to learn is to begin using the charts and trading platform. You find out quickly what you don’t know or are not sure about.
When you come across a word or term you don’t know, just ask or look it up. I’ll briefly define most of the words and terms that are important.
Currencies are traded in pairs. So when we trade, we trade a pair such as the EUR/USD. The currency on the left is the “base” currency. The currency on the right is the “quoted” currency. So that means when you look at a EUR/USD chart, you are “seeing” the Euro value move up and down on the chart. The price on the right side of the chart is the USD. So that chart is telling you how much US Dollars it takes to buy one Euro.
You don’t really need to know that to trade, though.
All you need to know is this: If you buy and price goes up, you make money. If you buy and price goes down, you lose money. If you sell, and price goes down, you make money. If you sell and price goes up, you lose money. Buying or selling is the exact same thing because of the great liquidity in this market. That just means that there are always buyers and sellers available. That is very different from stocks where price could be plummeting and you cannot close the trade because there are no buyers.
What you need to know is this: buying and selling is the same exact action.
Another thing you need to know is that price movement is measure in PIPs. Just think of it as a currency measurement just like quarters, nickels, dimes and pennies. Only it is even smaller. In US Dollars, a PIP is one 10,000th of a cent (it was pointed out to me there are
actually no pennies in the US, we just got in the habit of calling it a penny).
Now you don’t need to know all of that. All you need to know is that a PIP is the last two digits (decimal places) on the chart. As I write this, the EUR/USD is at 1.3882. That means that the exchange rate is one dollar, thirty eight cents, and eighty two pips for one Euro. So as Forex traders, we are only watching the value in PIPs. You don’t even need to know what PIP stands for. It used to represent Price Interest Percentage. It has become popular to call it Percentage in Point.
While you are new, stick with US Dollar pairs. It will save you confusion. For example, if you are trading the EUR/GBP (called a cross pair), there is no US Dollar in the pair. If you were from the US, you would need to determine the actual PIP value in US Dollars. No need to concern yourself with that now.
Keep in mind that there are so many things that you can learn about this market. But if you want to learn fast, focus on only the essentials . Then learn the other stuff as you go. Keep trading as simple as possible!
I think it is useful for even a new trader to know that most of the volume in the Forex market is the US Dollar, Euro, Great British Pound, and Yen. USD 40%, Euro 20%, Pound 12%, and Yen 8%. Those are approximate enough to show you that 80% of all movement in this market is in those four pairs, with much greater volume with the EUR and USD.
The Yen tends to be a little more erratic. So when you are new, avoid that currency. Currently there are some intervention issues going on around the Yen. An intervention is when a central bank, a group of central banks, or policy makers take action to alter the price of a currency.
Setting up Your Charts
For a new trader, I recommend practicing with EUR/USD, GBP/USD, and then minor pairs AUD/USD and NZD/USD. You don’t need a lot of pairs to practice. I would have liked to
recommend the USD/CHF, but recently the Swiss central bank began to intervene on behalf of their currency, as well.
In my book, Forex Art of War, I show you a method that uses primarily longer term charts (4hr and daily). When we have a four hour trend, I believe that your best read on the “entire” market is going to be the 4hr charts. Having said that, trading the 4hr and daily charts are difficult for most traders because they come to the market expecting more
opportunities than the market offers. It get proficient, you need lots of practice. This is why I give you a method in the back of this book that relaxes the rules a bit, and focuses on a setup that give you more opportunity.
When you are newer, I think the most important thing to do is practice. You need to develop basic market proficiency with tools, logic and language.
· Tools such as charts and trading platform
· Language such as PIPs and Stop Loss
· Basic trading logic that teaches trends, barrier, entry and exit
This is what you need to “get down” in the first level, as I see it. Be careful not to take on too much at once or you will be easily overwhelmed. Just focus on getting proficient at those three areas first. As soon as you have the basics down, you can choose to get involved with Seize the High Ground, which is the second level, helping you to master the exact trading setup and conditions you are looking for.
To accomplish this, I’m going to give you something to practice.
First setup your charts so that you have EUR/USD, GBP/USD, AUD/USD, and NZD/USD. Set each chart to be 30 minute candles. If you are using the same charts I use, you can download a “workspace” at our download page. A workspace tells your charting software “what” to load. I suggest downloading the workspace file on your desktop. This is what you will click on to launch your charts each time. If you have the “workspace” file, you are ready to go. All pairs and moving averages are already installed on the charts.
There are also videos at our download page that show you how to operate your charts and trading platform.
I recommend 30 minute candles because they will give you more opportunity to practice. Always keep in mind that a trader does not look for a way to enter a trade. A trader
waits until the right opportunity presents itself and then strikes. There is a very big difference. Make this a part of your mindset at the very beginning.
I have important reasons for recommending the following. Place a 21 and 55 EMA on each of the charts (already done for you in the “workspace”). These are called exponential
moving averages. It doesn’t really matter how or why they work. All that matters is how we are going to use them.
Now you have four 30min charts with 21 and 55 EMAs.
I recommend 2500 candles to begin with. If you are using web based charts, you might be limited, which is ok.
I recommend “candlestick charts.” They are the most common charts being used. Once you get to know me, you will see that I’m always just watching what the trend is doing, watching what everyone else is doing, and based on what they do, I form high probability conclusions. So if most traders are using candlestick charts, that’s what I want to be using, too. That’s simple logic.
Here are the reasons I ask you to setup your charts in this way:
· More trading opportunities
· Learn to follow a trend
· Learn to see a pullback
· Learn to see a barrier
· Learn to enter and exit trades
If you are ever going to make profits trading Forex, you have to be able to successfully execute this logic. So even though we are not focusing on making profits right now, you are going to be applying much of the logic that does make you profits. Your chart should look something like this.
You can adjust the colors however you like. I have a black background for both panes, but you can use whatever you want. Some traders prefer to use different colors for candles. Some need to use different colors because of the unique way their eyes (brains) process information. Whatever the case, it really doesn’t matter what the colors are, as long as you know what they represent.
About Candles
The time of the chart is on the bottom, left to right. On my chart, you see blue and red candles. The blue candles represent buyers and the red candles represent sellers. We could make these candles represent any time frame.
When you see a completed red candle, that means there were more sellers than buyers in that 30 minute period. Candles have bodies, wicks, and tails. A candle is created by the high, low, open and close prices. So at the arrow, that is the tail (vertical line extending from the body down), and the lowest point of that tail is
the lowest price that candle reached during that period.
The vertical line on the top of the candle is the wick. The rectangular part of the candle is called the body. If the body is blue, then the candle began (opened) on the lowest part of the body, and ended (closed) at the highest part of the body. If the candle is red, then price opened on the highest part of the body and closed at the lowest part of the body. These are quite a few details that I am throwing out at you, but it is information you need to know. So let’s think about some of that. If there were three blue candles in a row, which way does price have to be going? It can only be going up. The inverse is true of red candles.
Sometimes it will be necessary for you to find out what the high, low, open or close is. You can eye ball this, but the more accurate way to do it is to use the cross hairs and Display Data Box. On most charts, when you left click, and line up the vertical axis on any candle, a box will pop up. That box will tell you all of the specific information you might want about that candle. It will also tell you the positions of moving averages and other indicators.
The TREND
As I mentioned in the beginning, all of our decisions are based on logic. That logic is the result of a study of historic patterns that are created by buyers and sellers. There are chart patterns, candle patterns, indicator patterns, and even other not so well known patterns.
The most repeated pattern on the charts is what we call a “trend.” In trader speak, a trend is when you see price moving in a particular direction. In this picture on the left, price is “trending” down.
The reason we want to know about the trend and learn to recognize it first is because MOST traders want to trade in the direction of the trend. So YOU should be looking to trade in the direction of the trend.
A trend is any clear price move up or down. In this picture (right), price is not trending, it is “sideways.”
In this picture to the left, I want to bring your attention to something else. The more experience you get, the less you will need to rely on indicators. The yellow lines are the 21 and 55 EMAs. They are moving averages. 90%+ of the time, they are going to give you an accurate read on the trend direction. That’s good enough when you are learning how trading works. So trending is easy for you. If the faster moving average is on top, you only buy. If the faster moving average is on the bottom, you only sell. Note that the “faster moving average” changes direction faster.
Don’t overcomplicate this. Even some of the most skilled and successful traders use moving averages. Why? Because it gives them something “definitive” on which to base decisions. The more experience you get, the more you will appreciate the value of good definition. So we can see in this picture that price is making a steady move down. We can also just look at the moving averages and see that they are apart and down. That’s all we need to see for now.
· Trend
· Pullback to barrier
· Entry and exits
· Sticking with your plan So far we have explored “trend".
Pullbacks
The barrier is just as important as the trend. We said that “traders like to trade in the direction of the trend.” We also know from repeated observation that traders like to enter that trend when price “pulls back.” Because of this market psychology, you will see a pattern repeating over and over again. You will see a “trend,” you will see a pullback, and then you will see price push again in the direction of that trend. Look at the picture below. Follow the white lines. Price trends and pulls back, trends and pulls back… So the next key is “how do we know WHEN” to get back on in the direction of the trend?
Barriers
We know from looking at charts for years and tens of thousands of hours that traders like to enter a trend at a good barrier. Barrier is also called support or resistance. Resistance is a barrier that is above price, and Support is a barrier that is below price. So you will need to know how to draw horizontal lines on your charts (guidance on drawing tools is
available in our videos from our download page). When price trends and then goes sideways, as you see on the left, this is called “consolidation.”
There is another type of barrier (support or resistance) that is called “historic barrier.” This refers to a price “area” where price has trouble going below or above. I write “price area” because it is usually not a specific price, but a “range” of support or resistance.
Historic Barriers: As you can see, I am using a rectangle to show this “area” where price has struggled to get above or get below “in the past.” You are looking for “multiple touches.” This takes some practice. So practice.
Whether it is a historic barrier, or consolidations, both are barriers, both are support or resistance. Our goal is to anticipate where price is likely to “bounce.”
I’m going to share one more technique that you will need to practice for identifying barriers. Remember to visit our forums we have created for you for help with all of these lessons. I can still remember how nice it was to have community when learning these techniques.
The Fibonacci Retracement Tool
Once you see your trend, and that trend “begins” to “pullback,” this is where we will look for our trade. The word pullback is also called “retracement.” Retracement refers specifically to the Fibonacci Retracement Tool levels. A pullback can refer to any reversal of price. In the beginning of this
book, I gave you
Fibonacci settings of 23.6, 38.2, 50, 61.8, and 76.4. This is what that tool looks like all by itself. We start at the beginning of the trend, and then draw it to the end of the trend. It is extremely valuable because there are
First you need a trend. When that trend “starts to pullback,” that’s when you can use the Fibonacci retracement tool. From here on out I’ll refer to it as the “Fib tool.” Once we draw it, I’ll refer to it as “Fib.” As you can see if you follow the arrows, price is going “sideways,” and then it begins to “trend down.” In a downtrend, we would want to “sell.” But we want to sell when price pulls back to a good barrier (green). The Fib can be one “confirmation” that we have a good barrier.
The Fib is always drawn from the left to right. You know it is time to think about drawing a fib because price begins moving back up. You’ll see the opposite color candles like the one at the white arrow. The previous candle was blue at one point.
You start the Fib where the trend begins down.
23.6% and 38.2% are natural profit taking levels, and 50% and 61.8 are correction levels. No need to get more into it than that at this time.
I suppose I could write a book on why this works, but the historical pattern is this: 38.2, 50, 61.8, and 76.4 can be barriers indicating where price will turn. I don’t pay attention to the 23.6 barrier as a potential place for a trade. All too often it moves to 38.2 anyway. So I would like to see price move back to 38.2 before I consider a trade.
Now you have two things to look for as a barrier. 1. A Fibonacci retracement level 2. A historic barrier. Keep in mind that at this level (in this book), you are learning these key things
· Proficiency with Charts and Trading Platform
· How to see a trend
· How to see when price is “pulling back.”
· How to enter and exit a trade.
· Sticking with your plan
Once you have the basics down, your next focus should be "defining the right high
probability setup for you." Most traders spend years of wasted time at this level, making the mistakes of thinking that "if I just know enough about the market, I will succeed." This is just a mistake. Your second level can be accomplished in a single month if you know what your job is at that second step. He's exactly what you should do next:
1. See new price waves clearly
2. Understand all of the parts of a high probability setup
3. Choose a setup that has the potential of winning 70% or more 4. Balance each part
5. Define your setup completely
That's what you want to learn to do after you have mastered the content in this little eBook. Be sure and ask any questions on my Forex Art of War Facebook page.
I tend to focus on this exact information on my Facebook page Monday-Thursday 8AM-11AM ET, and answer any question that is asked of me. You can certainly review and ask questions at different hours. We'll address any questions when we are there.
What you are learning in this book are the “building blocks” of what I am writing about every day.
Look at how the trend moves up (faster moving average is above), and then begins to a pullback the other way (back down). As it does, I draw a fib from the start of the trend to the top of the trend. Now I’m looking for price to come down and reach at least the 38.2 Fib level. When price reaches my barrier, I can buy. Just do the best you can drawing your Fib for now where you think the trend starts up. When you are ready, in the next level, I’ll give you rules that will enable you to draw your Fibs with even greater precision.
The best barrier is when you get “two” barriers lining up at the same time. So take a look at the picture above again, and then look at this picture below. In the picture below, notice the barrier with the three white arrows. This was the former resistance area that price broke above. It is “easy” to see. Then you can see at the green arrow that this barrier coincides with the former barrier. When two barriers coincide, this is called “confluence.” This is something that you will consider at the second level, because confluence can increase your probability of success.
For now, just look for a historic barrier like you see at the three white arrows OR a 38.2-76.4 Fib level). In other words, you only need “one” barrier to practice (at this time). Do your best not to focus on winning trades right now. Comparing this to baseball, you are not attempting to “get on base” right now. You are just learning to “swing the bat.” Once you get the basics down, we’ll practice getting on base.
Entry and Exits
Entry is about where you enter the trade. I’ll keep entry and exit very simple so that you can move very fast to the next level of trading.
We will be entering right at our barrier. So when you see price trending, you will look for the 38.2, 50%, 61.8, 76.4 or a former barrier to enter. We will ignore 23.6% at a place for entering a trade. As you see here, the moment price pulls back to 38.2, we buy. That is the green line, and I suggest you just use a green line from now on to illustrate your buy point. At this level, simply buy or sell 10 contracts (also called lots). In the next level, we’ll learn how to limit our risk by a specific percentage. For now, just buy or sell 10 contracts in your practice account.
An “exit” is your profit target and stop loss. First let’s discuss your stop loss. For now, simply place your stop loss 30 pips away from your entry. Again, do not be concerned with winning or losing. I’m teaching you good form for “swinging a baseball bat,” so to speak. We are just practicing good form while learning the basics. So if you are buying, as in this picture, your stop loss is placed 30 PIPs below your entry price. If you were selling, your stop loss would be placed 30 PIPs above your entry price.
It is important that you enter your stop loss immediately on the trading platform. You must always be in the habit of doing this. The stop loss limits your overall risk in every trade. It is crucial you do this for many reasons. The most important reason is this, and I suggest you write it down and pin it up on your wall. “Each trade must be thought of as a random event.” What that means is that “anything can happen.” No matter how smart or knowledgeable we get, no matter how great our trading setup is, at any given moment, anything can happen. An oil pipeline can get attacked. Fears of a bank collapse can emerge. A bank can make a surprise announcement. The possibilities are endless. We don’t have to monitor everything that is happening in the world. We just have to trade our plan and always know that there is no way we can ever prepare for every possibility. Nor do we need to. We make money from a “series of trades,” not a single trade. This is reality. This is just how it is. It is only natural to be disappointed when we lose and excited when we win. But in time, this will change. It will be a while, but it will change. So you MUST ALWAYS trade with a stop loss limiting your risk.
For our target, let’s also keep this really simple. Your plan would be to overcome the spread, and then make 15 PIPs. We’ll discuss “the spread” on the next page.
On my trading platform, for example, the fixed spread is 3 PIPs. So if my entry price for this buy trade is 1.3853 (green line), price must move 3 PIPs to 1.3856, then 15 more PIPs to 1.3871 (blue line) to reach the target.
Don’t worry about your “total risk” at this time. Later we will limit our risk to 2-5% maximum of our equity when we trade. This adds more complication to your practice. For now, when you trade, just buy or sell 10 contracts (lots).
The trading platform I recommend for practice is called the GTS Pro (you can use any trading platform you like). It offers many helpful functions when you are newer to trading. Notice the floating EUR/USD box I have in the front of the trading platform (green
rectangle). You will observe a price on the left and the right side. On the left you have the “bid” and “sell” price at 1.3595. Bid and Sell mean the same thing. On the right, you have the “ask” and “buy” price at 1.3598. They mean the same thing. The “spread” is the difference between the bid and ask price, or the difference between the sell and buy price. When you execute a trade, price will need to first move the amount of the spread before you get to zero (breakeven, written as BE by many traders).
When you are actually taking trades, be very sure to enter your stop loss in the trading station as quickly as possible. To reinforce how ridiculous it is to trade without a stop loss, imagine a NASCAR driver speeding around the race track without wearing a helmet. Or a parent leaving their two year old to play by the street while they go in to make tea. That’s how outrageous it is. If anyone tells you different, you now know how absurd they are. If price is “too close” to your stop loss, the trading platform will not allow you to enter an automatic stop loss (usually the amount of the spread or closer). You would need to
manually close the trade when the stop price is reached. The same is true for the profit target. In the trading platform, a profit target is called a “limit”.
Now I’m going to give you a rule you do not need to understand at this time (might hurt your head to try), but you absolutely must use it or you will wonder what is happening to you at times. Trades will close, and you will be wondering what happened. I know, I’ve been doing this for many years.
Read carefully and pin it to your wall:
This illustration above is a buy trade. So we don’t do anything at all. The rule doesn’t apply to buy trades. The rule only applies to sell trades. Let’s walk through a trading setup again, and then show how we would do things differently for our stop loss and limit in the trading platform.
The fast moving average is on the bottom, so we can only sell. We draw the fib from the top to the bottom of the trend (what I refer to as a price advance).
[For a sell, a Fib always starts at the top of the chart and is drawn down and to the right]. When price “pulls back” to your 38.2 barrier, you can sell ten contracts (green line). Your stop loss is placed just above the next barrier (in this case next Fib level). The spread [in this case] is 3 PIPs, so your trade reaches breakeven price at 1.3587.
The total risk is the difference between the stop loss price and the breakeven price (18 PIPs). This difference is also what is known as our “total risk.” Price must move now in the direction of your trade 18 PIPs in order to reach your target (1.3569).
We now must enter the stop loss and limit order in our trading platform. What is our rule? WHEN IN A SELL TRADE YOU MUST ADD THE SPREAD TO YOUR STOP LOSS AND LIMIT WHEN TYPING IT INTO YOUR TRADING PLATFORM.
What does that mean? First of all, don’t change anything on your chart – only on your trading platform. So the stop loss you type into the trading platform would be 1.3605 +3 or 1.3608. Your limit order would be 1.3569 +3 or 1.3572. That’s what you type in the trading platform. Make sure you know the rule and know what to do. The reason for this is
higher). So when your chart price is at your target price (1.3569), the buy price will be at 1.3572. Easy really, just follow the rule if you don’t understand.
WHEN IN A SELL TRADE YOU MUST ADD THE SPREAD TO YOUR STOP LOSS AND LIMIT WHEN TYPING IT INTO YOUR TRADING PLATFORM.
Keep in mind that different currency pairs have different spreads. The spread might even change for the pair you are trading. Be sure to check the spread each time you trade if you are not trading with fixed spreads. Fixed spreads usually do not change without notice from your dealer.
The final piece is "sticking with your plan." One day, you want to be so detached from the outcome of the trade that trading is just like setting a timer. If the noodles take 13 minutes, you set the timer, focus on something else, and come back when the timer goes off. The goal of the Forex Art of War program is "developing the skill to make consistent profit." I believe that you cannot make "more" until you first learn to make "some." Focusing only on consistent profit, and knowing how to do that is the fastest path to real success.
So when you take a trade here using the information in this book, you want to set your stop loss and profit target in the trading platform, and once you do that, your job is over. Price is either going to hit your stop, or hit your target. So practice this over and over. If you find yourself making changes during the trade, the I suggest that you turn your computer off and come back later. You are training your mind to understand that there is nothing for you to do. You'll see what I mean. The mind thinks that there is something to do. You need to train yourself that once you place your entry and exits points, your job is over.
In summary, trading is a marathon, not a sprint. You must become proficient at language, basic tools, and basic logic. Once you do, then you will be ready for more. Always
remember “it’s not about what the market does, it’s about what you do.” Always keep in mind that your success depends on your ability to make good decisions, not on what you see happening in the market. Do not chase trades. Learn to let the trade come to you. When you downloaded this free eBook, we also added you to our mailing list. We do not email you every day, but when we do, our goal is to provide valuable information that will help you reach your goal of consistent profit.
Email me with any questions: vance@forexartofwar.com I wish you the very best on your journey!
Level 1 Trading Plan Trend
If faster moving average is above slower moving average, only buy. If faster moving average is below, only sell.
Barrier
Need only one barrier
Can use Fibonacci retracement levels 38.2-76.4 Can use historic support or resistance
Entry
Enter when price reaches your barrier.
Exits
1 hour chart or under: Minimum range of movement 20 PIPs. Stop Loss 30 pips below your buy price, or 30 pips above sell price. Profit Target: 15 PIPs after spread
4 hour or Daily Chart: Range of movement 40 PIPs. Target 30 PIPs, Stop loss 60 PIPs. Conservative exits: price must have room to reach target prior to breaking trend high or low Aggressive: target can exceed high or low of trend
Take one trade at a time Trade 10 Contracts (Lots)
Remember: when in a sell trade, add the spread to the stop and limit order price “when typing them into the trading platform.” Do not change any prices on your chart.
Tools and Resources Page
At the download page, you will find all of the tools I have mentioned in this book. Whether you use my charts or someone else's, you need to have the basic tools. At the download page you will find:
· Charting software
· Trading platform software
· Instructional videos
· Workspace that tells your charts what to load
· Demo codes to run your charts and trading platform
Note: If you are a MAC user, to take full advantage of Forex trading software, you will need to acquire a program like Windows Parallels or get an inexpensive stand-alone PC. You can use web based software if it is your only options, though functionality will be somewhat limited (MAC is only 10% of the PC market).
Be sure to ask us any questions on Facebook. You can find me there Monday-Thursday 8AM-11AM ET. By 8:30AM I provide some analysis about what I see. It is titled “What Will Price Do?” It is very helpful to our team for you to click “like” on any information you find useful there, as well as interact with questions and comments.
The Next Step
Where to go from here?
After you learn the basics, your second step is to master high probability trading, and your third step is to master execution.
You can think of the second step as "the market," and the third step as "you."
This is all part of the Forex Art of War principles, based on the teachings of Sun Tzu. Sun Tzu said, "if you know yourself and you know your enemy, in 100 battles, you will never be in any danger."
Here are a few thoughts about what you will need to learn in the future.
I divide this into three levels because each level has a specific focus, with all three sharing the common goal of consistent profit. 1. Basics 2. High Probability Trading 3. Execution At the second step, you need to learn things like:
1. Seeing new price waves clearly
2. Understand all of the parts of a high probability setup
3. Choose a setup that has the potential of winning 70% or more 4. Balance each part
5. Defining your setup
The third step, you need to learn the following: 1. Create a great trading plan
2. Learn to trade that plan, regardless of what you are thinking or feeling 3. Document your trades well
4. Evaluate what you are seeing well and where you are prone to mistakes 5. Adjust your plan
When you are trading the right setup for you, and through the process, know yourself and your method well, you will be able to make consistent profits. From there, experience with your method will teach you "when" you can get "more."
