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JWPR014-FM JWPR014-Ponsi June2,2007 18:15 CharCount=0 Forex Patterns and Probabilities i JWPR014-FM JWPR014-Ponsi June2,2007 18:15 CharCount=0 Founded in 1807, John Wiley & Sons is the oldest independent publish- ingcompanyintheUnitedStates.WithofficesinNorthAmerica,Europe, AustraliaandAsia,Wileyisgloballycommittedtodevelopingandmarketing printandelectronicproductsandservicesforourcustomers’professional andpersonalknowledgeandunderstanding. TheWileyTradingseriesfeaturesbooksbytraderswhohavesurvived the market’s ever-changing temperament and have prospered—some by reinventing systems, others by getting back to basics. Whether a novice trader, professional, or somewhere in between, these books will provide theadviceandstrategiesneededtoprospertodayandwellintothefuture. For a list of available titles, please visit our web site at www. WileyFinance.com. ii JWPR014-FM JWPR014-Ponsi June2,2007 18:15 CharCount=0 Forex Patterns and Probabilities Trading Strategies for Trending and Range-Bound Markets ED PONSI iii JWPR014-FM JWPR014-Ponsi June2,2007 18:15 CharCount=0 Copyright(cid:2)C 2007byEdPonsi.Allrightsreserved. PublishedbyJohnWiley&Sons,Inc.,Hoboken,NewJersey. PublishedsimultaneouslyinCanada. 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LimitofLiability/DisclaimerofWarranty:Whilethepublisherandauthorhaveusedtheir besteffortsinpreparingthisbook,theymakenorepresentationsorwarrantieswithrespectto theaccuracyorcompletenessofthecontentsofthisbookandspecificallydisclaimany impliedwarrantiesofmerchantabilityorfitnessforaparticularpurpose.Nowarrantymaybe createdorextendedbysalesrepresentativesorwrittensalesmaterials.Theadviceand strategiescontainedhereinmaynotbesuitableforyoursituation.Youshouldconsultwitha professionalwhereappropriate.Neitherthepublishernorauthorshallbeliableforanylossof profitoranyothercommercialdamages,includingbutnotlimitedtospecial,incidental, consequential,orotherdamages. Forgeneralinformationonourotherproductsandservicesorfortechnicalsupport,please contactourCustomerCareDepartmentwithintheUnitedStatesat(800)762-2974,outsidethe UnitedStatesat(317)572-3993orfax(317)572-4002. Wileyalsopublishesitsbooksinavarietyofelectronicformats.Somecontentthatappearsin printmaynotbeavailableinelectronicformats.FormoreinformationaboutWileyproducts, visitourwebsiteatwww.wiley.com. LibraryofCongressCataloging-in-PublicationData: Ponsi,Ed,1961– Forexpatterns&probabilities:tradingstrategiesfortrending& range-boundmarkets/EdPonsi. p. cm.–(Wileytradingseries) Includesindex. ISBN978-0-470-09729-8(cloth) 1.Foreignexchangemarket. I.Title. II.Title:Forexpatternsand probabilities. HG3851.P65 2007 332.4(cid:3)5–dc22 2007001693 PrintedintheUnitedStatesofAmerica 10 9 8 7 6 5 4 3 2 1 iv JWPR014-FM JWPR014-Ponsi June2,2007 18:15 CharCount=0 ToMom,whotaughtmethatanythingispossible. ToDad,whotaughtmethevalueofhardwork. v JWPR014-FM JWPR014-Ponsi June2,2007 18:15 CharCount=0 vi JWPR014-FM JWPR014-Ponsi June2,2007 18:15 CharCount=0 Contents Preface xv Acknowledgments xvii About the Author xix PART I The World’s Most Dynamic Trading Market 1 CHAPTER 1 Getting Started in Forex 3 FromStockstoForex 4 GettingtoWallStreet 4 WelcometotheJungle 5 FootballandForex 5 StockMarketHeadaches 6 WelcometoForex 9 ANewBeginning 10 CHAPTER 2 All About Forex 11 TheCanadianDollarandtheU.S.Dollar 11 TheEuroandtheU.S.Dollar 12 TradingTerminology 13 AnEasyWaytoUnderstandtheExchangeRate 23 CHAPTER 3 Questions and Answers 25 WhyDoestheBigMoneyTradeForex? 25 WhyIsForexSuddenlySoPopular? 26 vii JWPR014-FM JWPR014-Ponsi June2,2007 18:15 CharCount=0 viii CONTENTS HowDoTradersMakeMoneyintheForexMarket? 26 WhyDoCurrenciesTradeinPairs? 27 HowCanITradeTwoCurrenciesatOneTime? 28 HowIs24-Hour-per-DayTradingPossible? 28 HowIstheTradingDayStructured? 29 GreenwichMeanTime 30 CHAPTER 4 Technical Analysis and the Forex Market 33 TheTheorybehindTechnicalAnalysis 33 StatisticalSurvey 34 FearoftheUnknown 34 TradingPatternsandTechnicalIndicators 35 ThePsychologybehindtheMarket 36 MovingBeyondTechnicalAnalysis 38 Trends 39 ProperOrder 39 FibonacciTechniques 41 CHAPTER 5 Things You Need to Know Before Trading Forex 43 The“TripleThreat”Trader 43 GainingExperience 44 WhichPairtoTrade? 45 CommodityCurrencies 46 Don’tLimitYourself 47 TradingandKarma 49 Schadenfreude 50 PART II Trading Strategies for Trending Markets 51 CHAPTER 6 Understanding Trends and Tendencies 53 TradingConditions 53 TheImportanceofMaintainingObjectivity 55 BeginwithaTendency 57 PuttingtheTrendtoWork 59 JWPR014-FM JWPR014-Ponsi June2,2007 18:15 CharCount=0 Contents ix Self-FulfillingProphecy 59 TakeMetotheRiver 60 HowtoDetermineIftheMarketisTrending 61 CHAPTER 7 The Anatomy of a Trend 63 WhyTrendsForm 63 Don’tFighttheTrend 66 CHAPTER 8 Forex Multiple Time Frame Strategy 69 WhyDoesItWork? 70 CombiningFibonacciandTrend 71 OverboughtDoesNotEqual“Sell” 73 PickingTopsandBottoms 75 TheEntrySignal 76 PlacingtheStop 76 GettingOut 77 WelcometotheRealWorld 79 TweakingtheExits 79 ExecutingthePlan 81 Second-Guessing 82 BringingItHome 83 TheDevil’sAdvocate 83 WhentoStayOut 84 ReloadingtheTrade 85 FantasyversusReality 87 PhantomSignal 89 TemporarySuccessandFailure 89 TheStopRun 91 CHAPTER 9 The FX-Ed Trend Technique 99 TrendsAreSelf-Sustaining 99 DifferenceofOpinion 100 BigMoneyatWork 100 TheCommonDenominator 100 LongorShort 101