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A Three Dimensional Approach To Forex Trading Answer’s the question - where is the market going next? Using the power of relational, fundamental and technical analysis By Anna Coulling www.annacoulling.com A Three Dimensional Approach To Forex Trading © 2013 Anna Coulling - All rights reserved All rights reserved. No part of this book may be reproduced or transmitted in any form, or by any means, electronic or mechanical, including photocopying, recording, or any information storage and retrieval system, without prior permission of the Author. Your support of Author’s rights is appreciated. Disclaimer Futures, stocks, and spot currency trading have large potential rewards, but also large potential risk. You must be aware of the risks and be willing to accept them in order to trade in the futures, stocks, and forex markets. Never trade with money you can't afford to lose. This publication is neither a solicitation nor an offer to Buy/Sell futures, stocks or forex. The information is for educational purposes only. No representation is being made that any account will or is likely to achieve profits or losses similar to those discussed in this publication. Past performance of indicators or methodology are not necessarily indicative of future results. The advice and strategies contained in this publication may not be suitable for your situation. You should consult with a professional, where appropriate. The author shall not be liable for any loss of profit, or any other commercial damages including, but not limited to special, incidental, consequential, or other damages. Who this book is for This book is meant, above all, for anyone whose primary goal is to become a master forex trader, written by someone with over 16 years trading experience. If you are new to forex trading, A Three Dimensional Approach to Forex Trading will get you going faster than any other book on the market. If you already have some forex trading experience, this book will give you new skills and a deeper understanding of the inner workings of the forex market. In short, this book will give you the techniques and knowledge to become a confident and successful forex trader. What this book covers A Three Dimensional Approach to Forex Trading will give you an entirely different perspective on how to trade the forex market. This book also encompasses everything you need to know about the forex market. It is the first book to comprehensively cover this market from three different angles. These are technical, fundamental and relational analysis, which when combined, provide a powerful methodology which will give you unparalleled confidence in your trading decisions. Table of Contents Foreward An introduction to the forex market and why it’s all about money flow and sentiment, which can only be seen by taking a three dimensional approach. And why there are only two risks in trading. Chapter One : Assessing Market Sentiment Market sentiment is one of the keys to understanding money flow as traders and investors move between fear and greed and back again. This is revealed in the four capital markets and their relationships with the forex market at their heart. In this chapter discover how to interpret money flow for yourself, quickly and easily. Chapter Two : Bonds & Bond Yields Bonds are the least understood by forex traders and rarely, if ever watched. Yet the bond market underpins the cost of money and consequent risk appetite and is therefore vital to understanding market mood. Here you will learn about the power of bond yields and the clear message they are sending you, as a forex trader. Chapter Three : Commodity Markets Explained Why the commodity market is the fulcrum of the financial markets. The place where real currencies are converted into real goods. It is where money meets the real world of economic supply and demand. It’s a market full of clues for forex traders if you know where to look. This chapter will teach you how and where. Chapter Four : Equity Markets Explained Just like commodities, equities signal risk, return and money flow. It is where changes in the broader economic cycle and risk sentiment are reflected in specific currencies. As one of the few cash markets it also provides a real insight into money flow and volume. Chapter Five : The Forex Market Revealed This is the market where global politics and money collide creating a market of intrigue and political chicanery played out at the highest levels. Here you will be discover what few forex traders ever realize. This chapter alone will surprise you. Chapter Six : The Bond & Commodity Relationship One of the most complex of relationships which most traders ignore. Multi-faceted and constantly changing according to the economic cycle, this relationship reveals where we are in the economic cycle and, as a consequence, the likelihood of impending interest rate changes. Changes which will ultimately reflect interest rate differentials in currency pairs with consequent strength and weakness. Chapter Seven : Bond & Equities A non linear relationship, connected to the economic cycle. But one which is also heavily influenced by sudden and unexpected market shocks. This is a pivotal relationship and one that few forex traders ever appreciate. Chapter Eight : Bonds & Currencies A key money to money relationship. Differential bond yields can and do cause huge shifts in money flow as central banks also indulge in the carry trade. This can result in great trends which retail forex traders can also exploit. Chapter Nine : The US Dollar The king of currencies, and still the currency of first reserve. The US dollar remains the lynchpin of the global economy. It underpins every capital market. As forex traders this is the one currency we need to understand and track. This chapter will tell you all you need to know about the US dollar. Chapter Ten : Indices & Market Internals Cross market and relational analysis can provide forex traders with some powerful insights into market sentiment, risk and money flow. The key is to know which indices and markets to follow. The price action on these instruments can help support and validate trading decisions in all time frames. Chapter Eleven : Secondary Perspectives This chapter considers aspects of relational analysis with associated analytical techniques, such as ratio analysis. This chapter also explains how to interpret the Commitment of Traders Report (COT), the Gold Oil Ratio, and how they can be used in forex trading. Chapter Twelve : The Fundamentals of Global Economies If you don’t understand the economic powerhouses of the world you cannot trade forex with any degree of confidence. This chapter takes a detailed look at countries and their economies which currently dominate the forex markets and why. Chapter Thirteen : The Next Generation The economic powerhouses in waiting. The emerging powers and their associated currencies are explained in detail. After all, it’s not always the majors that offer the best trading opportunities. Chapter Fourteen : Asia Pacific Economies Whilst Western economies continue to struggle, Asia Pacific booms. Once again this offers forex traders some unique opportunities, provided you understand the economies of these countries. Chapter Fifteen : Economic Cycles & Their Drivers This is the world of global market cycles, interest rates, inflation and deflation, and is the business of forecasting and managing economies around the world. Understanding the economic cycle can give some great perspectives on where and why currencies are moving. Chapter Sixteen : Economic Indicators Explained Whether we like it or not, economic releases are a fact of life and can blind side even the best technical trader. This chapter covers the most important economic indicators and fundamental news releases which drive the markets. It also explains their significance, their impact and their relevance which all depend on where we are in the economic cycle. This chapter also explains why the Rating Agencies are losing their power. Chapter Seventeen : An Introduction to Technical Analysis The third element of market analysis. This final element completes the three dimensional approach. Technical analysis is an art, not a science and in this chapter you will discover why. Chapter Eighteen : Technical Indicators One of the problems many traders face is knowing which indicators to use and when. With hundreds to choose from it can be a very difficult decision. Here we cover some of the more popular, and also explain why volume and price are the most powerful. The methods revealed will revolutionize your trading. Chapter Nineteen : Technical Analysis Techniques The most useful technical analysis techniques explained in detail and how they can be used to determine market direction. Chapter Twenty : In The Currency Jungle In the final chapter of the book, I explain the characteristics of each currency, as well as a variety of major, cross and exotic currency pairs. Just as in the jungle, there are hidden dangers awaiting, and in today’s forex world, even more so. Here you will discover which currencies to consider and why, and how their personalties change, once they become a pair. In addition you will also discover the power of the currency matrix. You will now have the skills and knowledge to become a master forex trader in your own right. Please keep in touch and let me know how you you get on. Acknowledgments & Trader Resources List of the chart providers used in this book along with details of free resources for forex traders. Testimonials Hi Anna, Made up my mind.. I want to learn “forex trading” – after many months searching online you’re the only authentic person I come across!! Can you help me?? Regards, Ali Hello Anna, Just found your site and am starting to dig in – seems like an endless source of knowledge – thank you for your effort to put it up. I am new to forex – still study the bits. My tendency is for buff trading-price action. Question is: how do you identify the psychology of the market? Hello Ms Anna....! I am very much impressed with your articles and your success story in the FX world. I am a beginner...You may also call me a newbie..as I only know the operation of the MT4 - platform...none of others...Since, it is my beginning...I will try all my best to learn, as much as I can, from anywhere in the world...Kind regards, - MBZ Hi Anna That was really a nice and wonderful update of the market. I really enjoy it and wish the best in your trading. But I still continue to ask to be shown how to get the USD index install in my system. And are you still trading the forex fixed odd. Which broker do you use for that. Thanks for your time. Kevin Hi Anna, Love your Covered Call website. Lucid and wise. I’m now a believer.................. Regards Gordon Hi Anna, Your site(s) are absolutely brilliant! Really informative and well written.......... Kind regards. Rich Hello Anna I am enjoying your many websites and wish that I had found you a long time ago. I appreciate your writing style and content. Please include me on the list for your book. How often do you publish your newsletter? Best wishes James Hi Anna you are a daisy amongst weeds !! thank you for your reply – I think I will stick to initial path for a while yet since travelled so far down this route......thanks again Anna Hi Anna, your site is excellent – I wish I had found you sooner!! thank you for sharing such valuable information – it really is priceless, well written and comprehensive – I too am interested in your book. Ann Hi Anna Very useful thoughts as usual, thank you – I presume the hammer candle is a “reversal” indicator – i.e. you could have the reverse situation after a period of increasing prices? Regards Alex How I use the CFTC cot data - I’ve been a follower of Anna Coulling for a while now. I suggest you check out this video. She’s worth bookmarking in my opinion. [...] One of my favourite analysts whom I frequently check for her across the Pond perspective is Anna Coulling and her thoughts today are worth reading: Gold Forming Strong Pennant on Daily Chart. Hi Anna, Great to meet you at the traders expo . I will keep an eye on your web site. Hi Anna, I have followed your website and Facebook page for a while now and I find your work really helpful – thanks! I see gold has now broken through the triple top resistance of $1,425 – so I’ve bought GLD LEAPS and Gold June 2011 futures today – but now I see your comment about buying on strength – have I jumped the gun and bought too early do you think? Regards Alex Foreward [At age 106] People are always worried about the economy and the world, especially since the financial crisis of 2008 and Europe’s sovereign debt crisis in 2011. I feel that people should learn to be optimistic because life goes on, and sometimes favorable surprises come out of the blue, whether due to new policies or scientific breakthroughs. Irving Kahn If the marketing hype is to be believed, trading foreign exchange (forex) is not only the easiest market to trade, but is also the place which offers the fastest route to untold riches and personal financial freedom. Open and accessible 24 hours a day, a trader only needs a laptop and internet connection to start making money with little, or no effort. One email I recently received promised I could make thousands of pips by just trading a few minutes a day. Forex is a vast market with daily volumes now approaching 5 trillion dollars. It’s no wonder so many traders are drawn to it like moths to a flame. And, in many ways forex is the easiest market in which to participate. Not only are there hundreds of brokers to choose from, but opening an account can be done in minutes, sometimes with just a credit card. The trading process too is very simple. All you have to decide is whether a currency pair is going up or down. What could be easier? This is the way the forex market is promoted. A market where anyone can make a lot of money, just from working a few hours a week. It is sold as the ultimate get rich quick scheme. All you have to do is open an account, start trading, and your financial troubles will be over. It can become your personal ATM machine allowing you to live your dream. Ever since the foreign exchange markets were catapulted from relative obscurity in the late 1990's and into the public eye, they have been promoted to the mass retail market in this way. A fast way to make money. No experience required. However, the sad fact is that over 80% of trading accounts are usually in loss, and these are not my figures but come from the CFTC. The internet has also resulted in an avalanche of so called 'experts', all offering traders a promise of untold wealth by revealing some “secret” of how this market works, and usually at vast expense. Let me save you some money, right now. There are no secrets, just as there are no short cuts. Moreover, many of these theoretical 'experts' have never traded anything in their life. In addition there has been an explosion in the numbers of forex brokers of dubious quality and murky accounting procedures. Many of these have since moved offshore allowing them to continue their sharp practices which have blighted the industry. The regulatory authorities have struggled to cope with the avalanche, as increasing numbers of prospective traders are lured in with the prospect of easy money, a better life for their families and a secure future. If all of this has echoes of the wild west, lawless and unregulated, then this is exactly what it is. It is changing slowly, but only slowly, which is why so many traders continue to be seduced by cheap marketing gimmicks and hype. If this sounds depressing, and you have read the first few paragraphs with a sinking feeling – don't worry. Help is at hand because I've written this book especially for you. The purpose of this book is to give you a detailed and deep understanding of how the forex markets really work. This book also includes my own unique trading approach based on the simple principle of combining, not just technical and fundamental analysis, but also relational analysis. In other words, it looks at related and linked markets which then have a powerful effect on currencies. This three dimensional approach is one I have used for many years, and is based on the simple principle that you cannot trade successfully if you do not understand a market’s true sentiment and risk profile, which in turn will identify the money flow. As traders we just have to ‘follow the money’. Armed with this knowledge, I believe it will change your approach to trading FOREVER. It is a book I have wanted to write for a very long time. Furthermore, the trading techniques you will discover here are further reinforced by the use of price behaviour in multiple time frames. Your trading perspective will suddenly move from a linear, one dimensional approach, to one based on three dimensions, where all the factors driving the price on your chart are revealed and the relationships and linkages become self apparent. This will also help in your day to day trading decisions because trading is all about money flow and sentiment, and your success will depend on whether you are trading with the money flow or against it. Furthermore, money flow reveals risk and market sentiment and traders who understand these prime market drivers can suddenly see 'inside the markets'......this alone will take your trading to a new, consistent and professional level. From a technical perspective, price action and volume (market activity) are the only leading indicators we have for forecasting future market behaviour. After all, the chart is the prism through which we see all three elements. The price chart contains it all, opinion from every investor, speculator, government and central bank. However, when price is coupled with volume we have the ultimate combination in forecasting future market direction. In other words, the price chart with volume, validates our relational and fundamental analysis. Volume is pure market activity. It is the buying and the selling, the supply and the demand, being driven through the markets on a second by second basis by traders and investors. Volume is the tangible result of their hopes, fears, greed, panic and complacency. A way to imagine these emotions is what happens during an auction. Imagine for a moment it is a wet and cold day in the middle of winter with few potential buyers in the room. The auctioneer starts with an opening price, which is quickly lowered, as no bids are forthcoming. The price is lowered again, and one bid is made. With no other interest the item is sold. Now take another example where the auction room is full. The auctioneer opens the bidding and a bidding war begins with the price climbing very quickly, driven higher by the volume of buyers and demand for the item. Two things are self evident from this analogy. Firstly, that demand drives price, and secondly demand is revealed in terms of volume, which in the case of the auction is the number of people bidding for the item. I accept this is not a perfect analogy, but it does explain the importance of volume in trading, and why it is so powerful when read in conjunction with price. In my three dimensional approach fundamental news is a fact of trading life, and whether we like it or not, the markets, governments and central banks all take note of this constant stream of economic releases. Much of this data is, of course, just statistics, and as the famous saying goes, ' there are lies, damned lies and statistics'. As traders we do need to understand both the macro and micro aspects of economies, economics and why central banks and governments behave in the way they do. We need to understand the decision making processes of the central banks as they are the prime drivers of the forex market. A classic example of this is the current bout of 'currency wars', where central banks (on behalf of their governments) around the world are actively engaged in devaluing their currency in an effort to protect struggling export markets. This competitive devaluation is being carried out by a combination of very low interest rates and deliberate market intervention. In other words, self-preservation is the name of this game. Central bank attempts at currency manipulation simply reflect what lies at the heart of this largely speculative market, namely identifying and profiting from individual currency strength and weakness. Having read so far, you may be wondering whether this book is for you. Perhaps you have already started to trade in this market using a short term scalping approach – how will this book help you? Well, my answer is simply this....regardless of the time frame you are trading (and this applies to whatever market or instrument you are trading), if you have a deeper understanding of the technical, fundamental and relational drivers, it can only make you a better trader, since your decisions will be based on a three dimensional view and understanding, rather than on just one or two dimensions. It doesn’t matter whether you are trading on a 1 minute or a one day chart, these same principles apply. As I explained earlier the markets are all about money flow and risk sentiment, and the forex market is the perfect expression of this concept. It is also the reason why the forex market sits at the centre of the financial markets and underpins the other three capital markets, namely commodities, bonds and equities. Every decision by every investor or speculator is about money, risk and return. The forex market is the largest of all the markets by some measure, and is unique in the sense that it offers the quickest mechanism for cash conversion and asset transfer. But this is not all you will discover in this book. You will also learn that the forex market is unique. Because it is the ONLY market where one instrument – a currency – can be bought and sold against a huge range of other currencies, adding a layer of complexity which is not found in other markets or instruments. After all, if you were trading a stock or share, all the buying and selling in the cash market is done through that instrument. So buyers and sellers in a stock such as IBM, only ever buy and sell shares in IBM. A hedge fund selling a large block of IBM shares may decide to sell these in small size orders, but ultimately there is only one market and instrument with which to sell these shares. This is not the case for buyers and sellers of currency. A large bank who wants to trade in US dollars, can do so in a multitude of ways. First, the bank could simply sell Euros to buy US dollars. A straightforward sell on the EUR/USD. But, if the trade size were significant, the bank may decide to sell against another currency, the EUR/GBP for example, and then to sell the GBP against the USD. This achieves the same result, but hides the true nature of the buying and selling from view. This is what makes the forex market both unique and complex, and why trading using one chart and one time frame can be dangerous. If you are new to forex trading, what you have read so far may seem daunting, and at odds with how forex trading is marketed. However, once you understand the key drivers for this market it will all start to fall into place. Learning to trade is like any other skill. It has to be broken down into its key components, which you learn individually, before rebuilding the whole and adding each element back into its correct place. If you think of it in much the same way as any other learning process, this will be broken down into various modules, which you then study, before moving on to the next one. This is the approach I advocate for all types of learning, but particularly when learning about the forex market, because of its underlying complexity. The key is to take one small element at a time, and concentrate on this until you feel comfortable, and then to move on to the next piece of the puzzle. If you are working full time, then this is even more important as your time will be limited, so you need to break the task down into small manageable topics which you can then study in bite size pieces, before moving on to study the next element. A few hours each evening will soon build up your knowledge. In putting together the structure for this book I have tried to bear this in mind, and present the topic in logical sections, which can be read independently, each section then building onto the next. Each topic then becomes part of the complete picture as the pieces of the puzzle fit together in an ordered way. This is what this book is all about. Helping traders acquire the right knowledge and tools which will enable them to identify the market’s true sentiment. After all, markets move on sentiment, since virtually every decision in the market is about risk and return, and is made by people, and their desire to either protect their assets, or increase their yield. It is this knowledge which will then reduce the risk of any trade you take. At this point, many of you may be wondering who I am and why you should believe anything in this book. So, here is a little bit about me and details of some places where you can check out my references. I began my own trading career back in the early 1990's, before the days of the internet, and started trading index futures using price and volume. In those days there were no online brokers and all the data came in via a satellite feed. Orders were placed by phone with the broker, and then executed and filled on the floor of the exchange. It was very stressful, not least because of the time delay in getting filled and when the data feed broke down. Since those heady days I have traded virtually every market and every instrument, and indeed came to the forex market last of all. This trading experience has given me the grounding I needed to succeed, which is what I want to share with you in this book. My trading philosophy is, in essence, very simple and akin to the ubiquitous KISS, except my version is Keeping it Super Simple! I’ve also found over the years, that the best results come from having a system that is uncomplicated, not least because the markets are complex enough. Trading may not be easy, but it is straightforward. My trading techniques are based on chart analysis, backed by my view of the broader fundamentals and related market sentiment, which provide the framework against which the markets move each and every day. It is I who make the decision to trade - no one else. As I say in my webinars and live rooms, there are only two risks in trading. The first is the financial risk and the second is the risk of the trade itself. Nothing else. The first is easy to quantify and manage. This is pure and simple money management and which I plan to cover in detail in a future book. The second, the risk of the trade itself, is much more difficult to assess. This is what we need to quantify every time we open a new position or consider taking a position in the market. What is the risk on the trade? What is the probability of success? Am I taking on too much risk and how do I measure that risk. In a nutshell, this is what I want to share with you in this book. I want to arm you with the knowledge, skills and tools so that you too can become a confident, consistent and profitable trader. Like me, you too will be able to make your own discretionary trading decisions based on your analysis of the price and market activity, coupled with the underlying fundamental and relational picture. This is the approach I also use in my market analysis which is taken by a number of leading financial internet sites and magazines. At present I am an expert contributor to FXStreet, one of the world’s leading forex portals. Here you will find my weekly forecasts as well as market analysis on gold, silver, oil and the indices. http://www.fxstreet.com/technical/currencies- forecast/ I write daily market analysis and commentary on my personal site, www.annacoulling.com. Here you will also see that, over the years, I have been invited to speak by the CME and Working Money and, in addition, I contribute articles to a variety of publications including Your Trading Edge. I have published over 50 web sites, all of which have free content on a variety of trading and investing topics. I have dedicated Facebook pages and I also have a strong following on Twitter. I also provide regular market analysis and content for www.investing.com, www.bullbearings.com, www.seekingalpha.com and www.forexspace.com I am also one of NinjaTrader’s educational partners, a company I have worked with closely for some time. It is a company I am delighted to be associated with, as I believe they offer an excellent trading platform, and their customer support is second to none. In addition to using the NinjaTrader platform, I also have accounts with FX brokers using the immensely popular Metatrader MT4 platform. For more complex strategies I have an account with Interactive Brokers, the largest US electronic broker. Many of the chart examples in this book are from the NinjaTrader platform. I use all of these platforms in my online and offline trading webinars, workshops and seminars, and I would love to see you there. You can find further details on my personal site at www.annacoulling.com Finally, I would also like to express my thanks to www.investing.com for allowing me to reproduce their charts throughout this book, and without whose help, it would have been impossible to reproduce charts of the more exotic currencies and markets.