It does not matter whether you are new to EQMarkets or you have some experience in trading, you can always learn something new. There are ten in-depth lessons, prepared by EQMarkets that will help you to get an idea of EQMarkets trading world. Beginners can learn fundamentals and move on intermediate level.
Every lesson gives opportunity to learn one topic starting with schemes, indexes and ending with trading way of thinking, support system creation and basic concepts of money management.
These lessons will teach you how to be prepared for every market situation. Our highly professional experts used all trading methods and techniques to design these lessons.
In the beginning of the lessons topics cover introduction into the matter, and continue with principals of practice and theory of trading.
Our motto is Information is power. Thus we are deeply convinced it’s important to have educated traders that can trade successfully and efficiently, assessing risks and estimating the profits. These lessons will be of extreme use for you and will help to learn more about EQMarkets. Enjoy your studying!
EQMarkets lessons consist of:
- Basics – Currency Market Movements
- Key terms
- How to Place Orders
- Technical Analysis: How to Interpret Charts
- Support and Resistance. The Concept of Moving Averages
- Trends and Trend lines
- Indicators – The Trend Followers
- Indicators – The Oscillators
- Trading Way of Thinking
- Money Management
Welcome to our EQMarket lessons! From now on you will become a member of global financial markets family! On EQMArket’s platform you can make purchase and sale operations with currencies, the way like investor is purchasing stocks. The future of global financial markets depends on you!
In order to indentify a particular country’s economy next movements, traders use all kind of data, among which are gross domestic product (GDP), imports and exports, employment and unemployment level, growth, debt, and many other aspects. Together they are called basics.
Market changes in supply and demand determine the value of currencies. For example, when there is a great demand in the world in Dollars, Dollar raises in value. In case there is too much supply of Dollars on the market, or for some reason, there is no need in them, then Dollar falls in price.
Value of the Currency Pairs
Trade in the world’s currencies pairs represents correlation of rise or drop in one currency’s value amid another. Global currencies have three-character currency codes, and the trailing currency of any pair is known to be the base currency. The price shows the amount of the base currency to be the same as a unit of the leading currency.
For instance, when the price for EUR/USD pair is 1.4000, it means you can exchange 1.4 US Dollars for 1 Euro. In case the Euro increases in value, the EUR/USD price increases as well, since US Dollars are in demand to buy Euro. It works the same way with the Euro, when it falls in value, the EUR/USD pair price will fall as well, since there is a less need in US Dollars to equal Euro.
There are also other aspects of currency pair value apart from the leading currency value. If the base currency value changes, it obviously affects this correlation. Using the same example, in case the US Dollar increases in value, then the EUR/USD pair will fall, and therefore there is a less need in Dollars to buy Euro. Thus, if value of the US Dollar falls, the price of EUR/USD pair would increase, there is a more need in US Dollars to equal each Euro.
Furthermore, rise and drop in value of the currency pair proportionally depends on its leading currency value. In the same way, the same currency pair raises and drops in value in an inverse proportion to its base currency rises or drops in value.
So in case a trader expects growth of the US economy and rise in value of the US Dollar along with it, then he perhaps want to sell the EUR/USD pair, as it will most likely fall in price provided such market situation. If the European economy is expected to grow, as well as the Euro value, trader would rather buy the EUR/USD pair.
Dependency of the Interest Rates
Among other aspects that affect currency value is the interest rate, the one that the central bank of a particular country establishes for using its money. These interest rates are fast-changing, so it is better to keep up with them.
For instance, if the US Federal Reserve (also known as the Fed) reduces its interest rate, then normally the US Dollar value will fall as well, making the EUR/USD pair increase. In case the Fed increases interest rates, the US Dollar will also increase, making the EUR/USD pair fall.
If European Central Bank (ECB), the Fed’s analogue in the EU, increases its interest rate, typically the value of the Euro will rise as well, making the EUR/USD pair rise in price. Likewise, when ECB reduces its interest rate, normally the Euro will also fall in value, making the EUR/USD pair fall.
Central banks are always balancing as the market changes. If there is a high increase in a country’s currency value, then its exports rise in price, causing its importers to abandon them. Sometimes, interest rates are used to boost the economy, but if they are low however, then there can be an inflation scenario. It means in order to slow the growth, they have to be increased again.
Foreign investments can most likely be attracted by higher interest rates (this is the reason why the country’s currency rises in value along with the interest rates). At the same time, lower interest rates boost lending within the country and, as a result, economic growth as well.
To keep on track with the world of financial markets you have to use specific terms and concepts in order to understand how to trade efficiently. Here are some basic terms you need to know while trading.
In stock and futures market they are referred as tick or point. The pip shows certain per cent of the interest point. It is commonly believed to be the smallest unit in trading. You can find a pip in the most right digit in the price quote.
Lots and Leverage
Trade currencies are formed in lots. The price for the entire lot is 100 000 units of a certain currency and mini lot costs 10 000. As average trader cannot afford such high amounts, EQMarkets brokers propose Leverage service to allow even a small trader to trade in the market.
This lesson covers information how to place the order. But before we start, we need to learn specific terms. Bid is the price the trader is willing to pay, Ask is the price the seller wants, the difference between them is called Spread.
If you believe that price will rise, then it is better to buy a long position. Likewise, in case you think that the price will drop, it is better to sell and enter the short position. Thus, the trick is to cover certain positions by buying back at lower price.
Firstly, we will introduce the basic order type – market order. It is better to place this order in case you want to enter into position right now. Provided the market is moving too fast, there is a high possibility that the price for your order will change. Slippage shows the difference between actual price and the price you expected.
If you don’t desire to assume risk and spoil your order, then it is better to place a pending order. If you choose it, it means you expected certain market conditions.
It exists four types of pending orders:
- Buy Limit– the case when you believe that the price will rise after falling till a certain level. You should apply the Buy Limit when the price asked equals to the pending order.
- Buy Stop– you can use it if you think that price will grow after it breaks above certain level. You can put this kind of order at the Ask price.
- Sell Limit – in case you consider that the price will fall till a certain level. Normally this order can be applied if the bid price reaches the pending order.
- Sell Stop – when you believe that the price will drop below certain level. You can put it at the bid price.
There are also other types of pending orders. The Stop Loss is mostly used by the traders. It is better to close your positions automatically and stop your losses if the price is moving in the wrong direction.
For instance, if you have a long position, you will perhaps place the stop loss below your entry. This action will save you in case the price suddenly falls. If you have a short position, you will put the stop loss above the entry.
The trailing stop makes the system more flexible. If the price moves in the right direction, the stop loss follows the price.
Take Profit is another popular type of pending order. With this order you can automatically close your position as soon as you reach the price you wanted. This kind of order helps to protect a trader from unexpected market movements. The profit you take on a long position must be higher than the current price, and on the short position it should be below the current price.
To understand the mechanism of functioning of the market to the full extent, just imagine the market as a battle between two opponents: those, who are pushing the price higher (known as bulls) and those, who desire to see prices lower (known as bears). This battle explains the way the market is moving.
Technical analysis represents all sorts of price charts over the time. Technical Analysis interprets financial price movements by using past price movements.
Three types of price charts are as follows:
- The Line Chart– is the simplest type of the price chart. The line chart shows closing prices of each day. Although this type of chart won’t show you the opening price or changes on the market.
- The Bar Chart– the vertical line of the bar chart connects the highest and the lowest value of the price, a horizontal line to the right shows the closing price, while opening price is marked with a line to the left of the bar. Looking at the size of the bar it is possible to estimate how was the battle.
- Candlestick bar– is a price chart most often used in technical analysis. This chart dates back the 12th century, when it was used in Japan in forecasting the price on rice. It has an outstanding accuracy. This type of chart explains the market situation. Candlesticks can explain how the closing and the opening price are formed. Both sides of each candlestick represent the highest and the lowest prices during the period. When the opening and closing price is at the same level and the candle does not have body at all, it is also can be referred to as “doji”, a special type of candle.
A candlestick signifies a certain period. The periods are changing, it can lasts from 1 minute and up to 1 month. It is better to choose a certain timeframe according to trading manner you follow in order to understand the market better. For instance, if you apply scalping, you will most probably choose the smallest timeframes, in case you are into long-term trends, you will use the longest timeframes.
In case you have a long timeframe, you can better see how the price changes on the market and see which direction the price is about to go next. Thus, you will choose if you are going to be with those, who are pushing the price higher and those, who desire to see prices lower. If you use shorter timeframes, you can change the strategy you have chosen while observing the market in the higher timeframe. If you are with those, who are pushing the price higher, then you are going to look for long signals in order to buy. If you are the one, who desires to see prices lower, you will want to sell short.
In case the price is increasing, then the traders are carrying out purchases. Sooner or later those, who are pushing the price higher, will lock in profits. All the while those, who want prices shorter, are waiting to enter into short positions. We can say that resistance level is set up if the sellers leave the buyers behind.
Likewise, in case the price is felling it means that those, who want to sell, dominate over those, who want to buy. At some point the sellers will certainly cover their short positions and take the profit. Meanwhile those, who want the price lower, will be waiting for an opportunity to buy. When the price drops, it means those who want the price short will likely want to enter long. We can point out that support level is set up when the buyers leave the sellers behind.
As you remember from the lessons above, pending orders are mostly used among the traders. This kind of orders is able to influence the markets to a certain extent since they have double function – to be either support or resistance until the set level drops.
There are many forms of support and resistance, as a trader you should know them as many as possible. In case the price is at such a level, it will most probably drop or rise.
It is better to imagine the levels as horizontal curves in order to understand the price changes.
It is of first importance to understand the concept of moving averages.
Being a trader it is essential for you to know the concept of moving average as it is a very common term in technical analysis. It is an indicator that helps to see the average value of several periods. There a few types of moving averages, e.g. closing price average.
There are several strategies that can be applied to moving averages.
There are many ways how you can deal with moving averages. In order to understand how to act on the market, i.e. buy or sell, traders often compare the current price with its moving average. Traders should decide whether the price will drop or rise after it reaches the moving average. If the price is not near the moving average, you should be aware that the trading will be at risk, as in the end the price will approach its average.
We will continue to study aspects and key concepts of technical analysis. This lesson covers one of the most important concepts – trends.
Market has trends that can go in three main directions: up, down and sideways.
Each trend type has highs and lows movements. E.g. uptrend has a tendency to go high and has higher highs and higher lows. Hence, downtrend is apt to have lower highs and lower lows. In general, in case of sideways trend, the price is within a reach.
Trend lines are the essential components that show trends on the chart.
Trends can be figured by drawing trend lines. Trend lines connect the highs of the support level and the lows of the resistance level. If you are interested where resistance will go, it is better to connect highs in one line. Likewise, in case you wish to know which direction support will choose, you should connect lows.
If the price is in the resistance and support range, you can trade within this band. Also the trend lines could become support and resistance levels.
If the price exceeds the bounds of support or resistance level, trader should better following the direction the price went for. However, many of such movements are not credible, so the trader must be on the alert.
There are some ways how to identify false breaks beyond the level.
If the price breaks beyond a support level, most probably it will go in the same direction again, but you should know that the second time the price will have resistance trend. Usually when the price moves the second time, the most successive entries into short positions are done, unlike the first price movement, since it works as re-test.
The Trend line Break System
In order to use trend lines practically, you can use trading systems. The simplest trading system is the trend line break system. In case there is an uptrend, you should connect the lows. If you see that the price extends beyond uptrend and goes down, you could enter into short position.
Same way it works for the downtrend. If it is a case of downtrend, you just connect the tops in one line. When the price rises, it is better exit from short position, in case you entered. Provided you did not start trading, it is better to enter into long position.
You already know that there is a wide range of trading tools that you can use in order to trade efficiently and profitably. To read price charts correctly and to forecast where the price will go next, you should be able to use indicators – technical analysis tools that help to monitor price. There are two groups of the indicators: trend-following indicators and oscillating indicators.
Trend-following indicator shows the price that tends to go in one direction or the other. Oscillating indicator can be applied when the price is in a range. It is of primal importance to get an understanding which indicator you should use in one or other scenario.
Most popular trend-following indicators are:
ADX (Average Directional Index) is a trend-following indicator that gives you general understanding what it is better to apply – a trend-follower or oscillator. When ADX is over 30, it is defined that trend-followers are better to use. But if ADX is lower than 30, it is better to apply oscillator.
If the ADX is going up, it means that trends are strengthening; correspondingly if ADX is dropping it is a sign that trends are becoming low and a trading range might develop soon. You should keep in mind that ADX does not show which direction the trend is about to go, but its endurance.
MACD (Moving Average Convergence Divergence) is a trend-following indicator that shows the relationship between a short- term and a long-term moving average. You can identify uptrend if you see that the red line goes above the blue line. Downtrend has opposite conditions – when the red line is under the blue one.
In addition to the red and blue lines there are also curve of green color that indicates how endure the trend is.
Therefore, we have learnt that when the price goes down, the red line falls below the blue one. When the downtrend is about to take place, green line is starting to go higher. For example, when the price hikes, the trend is losing its strength. The trend will continue to lose its strength until the next red candle appears on the chart. However, you should remember that when the price falls to low, and at the same time on the chart oscillator did not reach that low. When such a situation happens it is often referred to as bullish divergence. It is also a sign that the trend is about to end.
Momentum is an indicator that defines changes in closing prices. Same way MACD chart works. Traders mostly apply it to define the reversal points since the momentum indicates weakness of the trend.
It is better to keep in mind how to understand momentum. In case the momentum goes below zero, then it immediately rises right after bullish divergence, it signifies a long entry. At the same time when the momentum rises above zero and goes down right after that, it means there could be short entry.
Linear Regression is an indicator that responds to the changes of price. When the price goes in other direction from the line of linear regression, and then the price reverses to normal value with the same linear regression line, sometimes the trading can be in a fast counter-trend.
Values of oscillators are ranging within a certain band and help to figure out when the price is the highest and it is going to turn back.
Stochastics is an oscillator that has fast and slow lines with the range 0-100. If stochastics has the level above 80, it means people are starting to buy more. In case the indicator shows less than 20, people are inclined to sell. When the red line is crossing the blue one from the above, it means that positions of those, who push the price higher, are stronger than those who want the price lower. In the opposition, when red line goes over the blue from the below, it signifies that the positions of those, who push the price higher are weaker than those, who want the price short.
In case stochastics indicator is above 20, it is better to enter long, when it turns back from oversold position. If the stochastics approaches 80, most probably the market movements come to an end. Provided such a scenario it is better to keep out of the trading. If you see that stochastics indicator is moving up and down, it is a sign to close all the long positions.
If there is a situation when the indicator is under 80 once more, it is recommended to enter into short position. However, if the stochastics indicator approaches rather to 20 than to 80, you should consider entering into short positions. Once they crossed, you should better to close all short. Immediately after that it is better to pay attention to the stochastics value. If you see that the value is more than 20, the trading reverses once more that means you better enter into long position.
RSI (the Relative Strength Index) possess almost the same characteristics as stochastics indicator. Both indicators show values for overbought and oversold positions, but values themselves differ. When the RSI indicator is at 30, it means an oversold position and when it is more than 70 – overbuying.
Given that RSI with above 30, it is better to enter into long position. In case the indicator is under 70, short position is recommended. As well you should consider that if the indicator is above the level of 50, it is an uptrend, if RSI is under 50 – a downtrend.
CCI (Commodity Channel Index) is another type of oscillator with the range from -300 to +300. The indicator with the value above +200 means overbought condition. If the CCI is under the level of +200, the indicator shows oversold position.
When you notice that the CCI is under -200, it would be a good idea to enter into long position. In this manner, when the indicator is above +200, entering short is welcome. When there is a scenario that the indicator is approaching zero, and then out of sudden turns to go up, not down, entering into long position is desirable. Likewise, if you notice that the CCI is near zero level, after it came from the negative values and then it goes back down to minus, it means you should consider to enter into short position.
Fractals we apply along with the other tools and indicators in order to understand market movements. Fractals can help you to define trend, which means to define where the price is going to move. Usually fractals are taking place when there is a higher high near two lower highs. Or in situation when on the chart you notice lower low together with the two higher lows. You can use fractals to define the future place of the reversal points. This indicator works best with its match – alligator indicator.
Alligator indicator earned its name due to similarity with alligator’s teeth. Between the “teeth” is an average. As alligator opens his mouth, it signifies the beginning of the new trend, which we will likely to follow. It goes like that till the moment, when we notice that the alligator is going to close his mouth.
Being aware of the tools and indicators of the technical analysis is of great service to the trader. The experienced traders always keep their emotions under control in order not to influence their logic and common sense while trading. Investors pushed by their emotions move financial markets. You probably heard it every now and then that the investors fear to slide in oil or gold drops in price as investors fear. Eventually it is very important to understand what moves markets behind the scene. By learning this you should also master how to keep control over your own emotions and fears.
When prices have tendency of rising, market participants are focused on the trend. People want to figure out what to do with the trend. They focus their attention on market movements, forgetting about their deposit amount. Passion is overwhelming them making them think of potential profits as something they already have.
You should take into consideration that it is less risky to enter into young trend than the mature one. But those who were from the beginning of the trend can be still at risk since all in all they should take profit.
There is also an aspect that is referred to as “the greater fool” theory. The thing is that there is always someone, who buys at a higher price from a seller who thinks for the certain reasons that the trend will lose its strength pretty soon. Once you become the seller, you start to think that someone will be buying after you, at even higher price.
Fear is the main emotion trend on the market. Investors, traders experience it on a daily basis. Traders are having jitters when the prices are about to drop. The process of rising of price is much slower than their dropping due to fear issues of the market participants. Such situations are very common on the market. Those, who have long positions, want to sell as soon as possible. Correspondingly, those who have short positions, add more orders as prices fall. As soon as traders cover their short positions, the price becomes a little bit higher and traders start to build up hopes that turn out to be false ones.
You need to practice in order to keep your emotions, including fear, under control. You would be able to get a profit in an unsteady market scenario, only when you pick up market movements making rational judgments.
See how emotions move the market
Support and resistance determine the market. When resistance level is going down, it means that those, who push the price higher, are stronger than those, who want the price low. If you notice that the resistance line moves up, we can estimate that those, who want the price to be low, have more power. Likewise, in case the support does not change, it means the price a little bit falls causing “take-profit”. In the opposite case, you can expect that those, who have short positions, are going to enter, closing long positions.
Momentum is another indicator. Pessimism usually reflects on the chart in the form of consecutive periods of declines in systematic work of the market. To define what direction the trend will choose, you can use information provided by trend-following and oscillators.
Volume can also give you an idea of the market mood. You can consider that the trend is going to change or that there can be some disturbance on the market, when the volume falls out of sudden.
Try to hold your emotions under control
The key to the successful trading is the ability to keep your emotions under control. You have to listen to yourself and define what emotions you feel in certain situations in order to control them. In case you have not quite stable emotions and they drive your decisions, it is better to revise your behavior scheme. Sometimes emotions rather make an impact on the trading steps you take than the pre-arranged plan.
The situations below will help you to define for yourself whether you are driven by your emotions while trading. Look if there is an example that reminds you yourself.
- Fear – when you exit the position in order to see that you were right about the direction of the trend;
- Greed – when you remain in the position for a long time, failing to see that market is due to move down;
- Fear – when you exit the position while losing just because you want to return later when the trend is constantly moving up;
- Greed – when you remain in the position while losing huge amounts while considering that trend will turn back in your favor (that is quite unlikely to happen);
- Fear – when you go into a trend too late, since you were not sure about the direction and was afraid to lose;
- Greed – when you come into the trend too early that you do not know yet which direction the market will move to.
In case you saw yourself in above-mentioned situations, perhaps it is a high time to revise your trading style. It is recommended before entering any positions to set up tasks, objectives and stops and then just follow them. Once fear, drama or hysteria overwhelms you, you cannot think rational and as a result you are losing money.
We have learned different types of market instruments, indicators, and trading strategies. Now we are going to talk about money itself. You would achieve a success on stock market only by doing proper money management. Our profit consists of money management that takes about 50% of its success, 40% is the way of thinking, 8% goes for exits in the proper time and 2% – for entries.
Working Trading System
An efficient trading system consists of the following factors:
- Standards of entering trades
- Indexes to confirm entry signs
- Standards of exiting trades (or remaining them)
- Rules on how to set stops
- Rules on how to set targets
- Technique on how to estimate risky positions
- Method of thinking of and evaluating trades
Basics of the money management
It is generally accepted rule that when you open a position, you should not put under risk more than 2% of your account balance in a position. It works in case when the stop-loss was activated, the worst ever situation. You can easy calculate your potential risk knowing your balance.
If trading strategy involves using bigger stops, in such case you can apply smaller lots. Likewise, if you think you can trade with bigger amount, in such a case you can apply smaller stops and smaller timeframes.
It is better to earn small profit on a regular basis, than to gamble big gains irregularly while losing big sums not for the benefit of your balance. Commonly, beginners trade too much, making use of almost all the money they have on the account. It is wise to keep in mind that big positions are difficult to keep, especially when the market is not on your side.
The good piece of advice is not to risk more than 6% of the account equity to open positions.
Risk-to-reward ratio is a factor that each trader should calculate while doing money management. You can estimate it by defining the difference between the expected profit and the amount exposed to get this profit. 1:1 ratio is the risky one and it is better to stay out of the trade. You can trade with the ratio of 1:2 the lowest. When you will become more experienced in defining ratios of 1:3, 1:5 and more, then you will start to get a profit. You will see the progress in your trading activity and will start to enjoy profits, when you arrange money management and learn to estimate risk/reward ratio correctly.