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GATEWAY TO TRADING

Introduction to trading

Trading is very simple, but not easy at all. If that statement doesn’t make sense to you, you’ve
probably heard of trading but don’t have much experience with it. Our educational project “The
Trader’s Journey” aims to guide novice traders through everything they need to know, from the very
basics and first steps in the markets to advanced topics with an emphasis on imparting practical
experience. We won’t make any promises, trading is really simple, but your path to success in this
business will not be easy and will require a lot of time and effort. It’s up to you how you approach it
and if you are willing to do something for your success. Unfortunately, most people who try their luck
in this industry started trading without dedicating their time to studying and therefore lost all their
money right at the beginning. If you don’t want to belong to this group, you have come to the right
place. Do you think you have what it takes to be a successful trader? Let’s find out!

As in any other industry, the basis of success in trading is an honest study of the basics, supported by
the gradual acquisition of experience and the development of your skills and abilities. In this
introductory section, we’ll show you what trading actually is, how and why to get started, what your
prerequisites should be, and what you’ll need to learn before you can use specific strategies and apply
them in the real market. We’ll cover a few basic terms from our glossary, and at the end you’ll try out
a trade to get an idea of what trading actually involves.

Table of Contents

• What is trading?

• What Trading Involves?

• Investing vs Trading

• Who Can Become a Trader?

• Expected Earnings of Traders

• Where to Start?

What is trading?

The word ‘trading’ can have a fairly broad meaning, but essentially, it is the buying and selling of
various financial assets to make a profit based on fluctuations in the prices of those assets. You can
trade virtually any financial asset that has a financial value and as a trader you can then speculate on
the rise or fall of that value. At the same time, you may have a myriad of financial assets at your
disposal.

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What Trading Involves?

Trading is about understanding and integrating several key areas. True mastery requires many hours
of hard work. It is a very immersive activity that is a cycle of skill development, mental preparation
and application of acquired knowledge. It also involves analysing results, looking for room for
improvement, and correcting possible mistakes and shortcomings. If you want to become an active
trader, it will be a never-ending process of learning and improving your skills with one goal, and that
is consistency in attitude, in preparation, in daily routine and ideally, of course, in profitable trades.

Investing vs Trading

Many people confuse trading with investing, but there are some basic differences. The difference
between trading and investing is, among other things, how you make a profit and whether or not you
become the owner of the asset.

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The investor’s goal is to purchase a financial asset at a favourable price with the expectation of its
appreciation in the long term. They anticipate that the market price will increase over time, allowing
them to profit from the price difference when they sell the asset at a higher price. Additionally,
investors may earn regular returns from owning the asset itself. For example, shareholders may
receive dividends (if the company distributes them) and can participate in company governance
through voting rights associated with their shares. Bondholders, on the other hand, receive regular
annual interest payments in the form of coupons.

Traders, on the other hand, seek to make a profit through speculation, usually in the short to medium
term. Due to their higher volatility (a measure of the fluctuations in the price of financial assets),
currency pairs and derivatives are suitable for these short-term trades. In these, the trader does not
own the asset and can trade in either direction (long/short) without problems.

In a long position, traders speculate on the asset’s value increasing. They aim to enter the position at
a low price (buy) and exit at a higher price.

When speculating on a decline in the value of an asset (short position), they enter the position at the
highest possible price (sell) and exit the position at the lowest possible price.

Another advantage of these instruments, which is mainly used by retail traders, is the use of leverage.
Leverage allows you to open large positions with very little equity thanks to borrowed capital.
Borrowed capital thus multiplies asset price movements and increases potential profits. At the same
time, however, it is important to remember that higher potential profits are also associated with
higher potential losses.

In the example below, you can see how much money you would need if you were to open a trade of
1 lot (base unit) on the EURUSD currency pair. Without leverage, you would need $100,000, with
100:1 leverage you would only need $1,000.

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Who Can Become a Trader?

Anyone can become a trader. According to FTMO data, traders come from diverse backgrounds—
regardless of education, nationality, location, family wealth, or gender. One of the appealing aspects
of markets is their non-discriminatory nature; outcomes are determined solely by one’s attitude and
ability.

Most people think that only someone who knows macroeconomics and microeconomics, excels in
mathematics and is great at chess can become a trader. The reality is that you need slightly different
qualities and skills to become a successful trader. As we have already mentioned, a willingness to
learn new things is essential. The very important qualities of any trader should be perseverance and
mental toughness, discipline, humility and an open mind.

Persistence is one of the key qualities of a trader. It is common to have good and bad periods, even
when your results are already consistent and long-lasting. You can’t trade without losses, and the
claim by some “trading gurus” that their success rate is close to 100% is unrealistic hogwash. Getting
used to the fact that as a trader, you will sometimes have to endure a series of five or ten losing trades
in a row will not be easy. It will require a very large dose of patience, perseverance and mental
toughness. But we, with the help of our performance coaches, will help you through these challenging
periods.

We must not forget discipline in all its forms. That is why there are so many successful traders among
athletes who have been taught discipline from a young age and take it for granted. You probably know
yourself that without a disciplined approach you cannot become a top expert in any field, and trading
is of course no exception. Discipline is certainly not a 100% guarantee of long-term success, but it is
a prerequisite without which you will never climb out of mediocrity. Discipline will help you avoid the
phase where you constantly change your approach and strategy because you feel that “it’s not
working”.

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Unfortunately, humility is lacking in many traders who fail to be profitable in the long run, but always
look for mistakes in someone else. The results of a forex trader are influenced by a myriad of factors
over which he or she cannot have 100% control. Such an environment creates room for error. A good
trader must be aware of this and should be able to admit his mistakes to himself and ideally always
learn from them. A humble trader doesn’t feel that he knows everything, doesn’t overestimate his
abilities, and is also able to keep his emotions in check.

Psychological well-being is one of the most important factors leading to success in forex trading,
which is why we devote an extensive chapter to it in our course. There, you will of course also learn
about the importance and self-knowledge and self-development, which our psychologists will
certainly help you with in the later stages when you are already trading.

Curiosity and the willingness to learn new things are then closely related to all of the above. Indeed,
when a trader has enough humility, he or she realizes that success in forex trading requires constant
learning, improving one’s skills and knowledge. A trader can then be persistent enough, but without
enthusiasm and interest in the subject, even this persistence quickly fades, because if something is
done just for the money, it will not work in the long run.

Expected Earnings of Traders

Most traders only become interested in education after they have lost their first money in the markets
or, in the worst case, lost all their capital in their trading account. This is a valuable (and often very
expensive) lesson that needs to be remembered well.

Most traders lose money in the beginning; that’s a hard fact. The 90/90/90 rule states that 90% of
traders will lose 90% of their invested capital within 90 days. You may have seen campaigns by various
influencers claiming to make thousands of dollars a day from exotic beaches with just a few minutes
of work. Dispel these notions immediately and permanently, because having excessively high
expectations is a recipe for long-term failure. A trader who expects immediate and substantial
earnings from forex trading will sooner or later experience disappointment and frustration. This isn’t
to say you should set small, easily achievable goals; rather, you need to be realistic.

Where to Start?

If you’re like most people, you’re probably eager to open your first trade. We’ll get to that shortly to
satisfy your curiosity. However, before diving into real trading, we recommend starting in a simulated
environment to familiarise yourself properly and understand the essentials.

Before transitioning to real trading after studying our materials, practice with mock trading on a demo
account. At FTMO, we offer a demo account through our Free Trial. Here, you can familiarise yourself
with the trading platform, execute trades under real market conditions without risking your money,
observe how the markets function, and gain insights into trading practices such as setting Stop Losses
(the maximum acceptable loss per trade) and Take Profit levels (the desired profit).

In a demo account, you’ll also learn how to interpret charts and test basic strategies. Take your time—
preparation in a demo account should not be underestimated.

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Trader’s Dictionary

Table of Contents

• Educational cards

• Forex

• Currency Pair

• Leverage

• Margin

• Lot

• Pip

• Bid

• Ask

• Spread

• Long

• Short

• Buy

• Sell

• Market Order

• Limit Order

• Stop Order

• Stop Limit Order

• Stop Loss

• Take Profit

• Trailing Stop

• Candlestick Chart

• Volatility

• Broker

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• Modern Prop Trading

Educational cards

In order to navigate the world of trading, you should learn some important concepts and terms that
you are bound to encounter sooner or later. In this part of the lesson, we will introduce you to the
most basic terms – you can find a full list of them in our glossary, which we are preparing on our
website.

Forex

Forex

Short for FOReign EXchange, it is a decentralised global market where all the world’s currencies are
traded. It operates as an over-the-counter market, meaning there is no centralised location. As the
largest and most liquid market globally, it boasts a daily trading volume exceeding $7.5 trillion (as of
2022).

Currency Pair

A currency pair consists of two different currencies, with one quoted against the other. The first
currency of the pair is known as the base currency, while the second is the quoted currency, acting as
the benchmark. For instance, in the EUR/USD pair, the euro (EUR) is the base currency, and the US
dollar (USD) is the quoted currency. The exchange rate of a currency pair indicates how many units of
the quoted currency are required to purchase one unit of the base currency. When you open a long
position on the EUR/USD currency pair, you are speculating on an increase in the value of the euro
and/or a decrease in the value of the US dollar. Conversely, when you open a short position on this
currency pair, you are speculating on a decrease in the value of the euro and/or an increase in the
value of the US dollar.

Leverage

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Financial leverage involves using borrowed capital to amplify the size of a trader’s trading account
and positions. It allows traders to execute trades with significantly more capital than they have in
their account, potentially increasing both profits and losses.

Margin

Margin, in simple terms, is a deposit or advance held by a broker or company where a trader has an
account. It enables traders to open positions on currency pairs (or other offered instruments) and
serves as assurance that they have enough funds to cover potential losses.

Lot

A lot is a standardised measure of the quantity of a financial instrument available for trading. The size
of a lot varies depending on the specific market and the asset being traded, but typically represents
a specific number of units of an asset. In forex trading, the standard lot size is 100,000 units of a
particular currency.

Pip

Pip (Price Interest Point, or Points in Percentage) is the fundamental unit of currency movement in
Forex, representing 1/10,000th of the currency rate. For instance, if the EUR/USD price shifts from
1.1000 to 1.1001, this reflects a movement of 1 pip.

Bid

The price at which a trader is willing to buy a particular asset.

Ask

The price at which a trader is willing to sell an asset.

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Spread

The difference between the buy (bid) and sell (ask) prices.

Long

Long position means buying an asset with the expectation that its price will rise (speculating on the
price rise). Thus, the trader buys with the intention of selling later at a higher price and thus making
a profit.

Short

Short position means selling an asset with the expectation that its price will fall, thus speculating on
a fall in price. The trader is therefore selling now with the intention of buying back later at a lower
price and making a profit.

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Buy

An order to buy a financial asset to speculate on the appreciation/increase of the exchange rate/price.

Sell

An order to sell a financial asset, to speculate on the depreciation/decline of the exchange rate/price.

Market Order

A Market order means the trader will execute the trade at the best available price at the time of
placing the order.

Limit Order

A trader places a Limit order to execute a trade at a more favourable price than the current market
price of the selected instrument. When seeking to open a long position, the trader enters a Limit
order below the current price; thus, the price must first drop to or below the specified level for the
buy order to be executed. Conversely, for a short position, the trader enters a Limit order above the
current price. However, the order may not execute even if the price briefly touches the specified level,
especially if there are multiple orders at that price.

Stop Order

A trader uses a stop order when anticipating the continuation of current price movements. For a long
position, the trader places a Stop order above the current price, and for a short position, below it.
Once the price reaches this predetermined level, a buy (for a long position) or sell (for a short position)
order is triggered. Essentially, a stop order acts as a market order, executed at the best available price.
Therefore, traders must consider potential slippage, especially in low liquidity or volatile markets.

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Stop Limit Order

A Stop Limit order is a combination of Stop and Limit orders, and is basically an improved version of
a Stop order. As we have already mentioned, the Stop order is subject to negative slippage in low
liquidity and volatile markets. A Stop Limit order solves this problem by triggering the Limit price
when the Stop level is reached, which is the “worst” price a trader is willing to accept. Again, the
trader has to take into account that the order may not be executed even if the price reaches the Stop
level but no longer reaches the Limit level.

Stop Loss

A Stop Loss order is a type of Stop order used to close a position when the price does not move as
anticipated by the trader. It represents the maximum loss the trader is willing to accept on a trade.
For a long position, the Stop Loss is typically placed below the entry price. As the trade progresses in
the trader’s favour, the Stop Loss can be adjusted to lock in profits by setting it at a price higher than
the current market level. The process is reversed for a short position.

Take Profit

A Take Profit order is a limit order designed to close an open position that is moving in the direction
of the trader’s trade entry. It specifies the price at which the trader aims to secure profits or exit the
market, even if at a loss. For a long position, this order is typically placed above the entry price, while
for a short position, it is placed below. Similar to a Stop Loss, the Take Profit level can be adjusted as
the trade progresses.

Trailing Stop

A specific type of Stop Loss order is the Trailing Stop, used by traders to protect their profits. Unlike
the conventional Stop Loss, it is a dynamic order that adjusts according to the asset’s price movement
in the trader’s favour. It activates only when a predetermined profit level is reached. For instance, if
a trader sets a Trailing Stop at 25 points, once this profit threshold is achieved, the Stop Loss will
adjust to the Break Even level. Subsequently, it continues to move with each further favourable

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movement in the asset’s price direction. If a Take Profit is not set, the trade remains open until the
price moves 25 points in the opposite direction to the trader’s position.

Candlestick Chart

Candlesticks provide a visual depiction of price fluctuations. On a candlestick chart, traders can
observe the trading range within a specified timeframe, displaying the open, close, low, and high
prices. The colour of the candlestick indicates whether the price has increased or decreased during
that period, with the difference between the open and close prices represented by the chosen colour.

Volatility

Volatility represents the degree of volatility of a given price or asset price. It also reflects the degree
of uncertainty and risk associated with an investment. The greater the volatility, the greater the price
range over which the exchange rate/price fluctuates.

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An example of a market with high volatility:

An example of a market with low volatility:

Broker

A company that arranges trades in the financial markets for traders in return for a commission.

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Modern Prop Trading

Modern prop trading firms are companies whose goal is to seek out novice traders and provide them
with the tools, education, and environment to experiment with their trading skills. To this end,
modern prop trading firms have each developed their own way to objectively identify and educate
potential prospective traders from among prospective traders, without risk of financial loss on the
part of their clients.

First trade execution

As we mentioned in the introduction, trading is basically very simple. You will not need any specific
skills to execute the trade itself. However, before each trade you should make sure you know why you
are entering it, at what price and what position size you will choose. The size of the position will
determine the size of your profit or loss.

It’s crucial to set a Stop Loss to prevent excessive losses and a Take Profit to secure your desired profit.
Typically, for long-term profitability, your Take Profit should exceed your Stop Loss, ensuring that
profits outweigh losses.

First Implementation of the Trade

In this example, we will show a simplified example where you can try entering an order based on
which direction you think the price will move. When you want to speculate on a rising price, click on
Buy, when you want to speculate on a falling price, click on Sell. Then watch what happens. You don’t
need to set Stop Loss and Take Profit in this example, they are set automatically.

SellBuy

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FINANCIAL MARKETS

Introduction to Financial Markets

Financial Markets and Institutions are a big term. There are a lot of components within financial
markets and a lot of things to cover. This is why we have prepared a complete guide for you where
you are going to learn about the basics and more advanced concepts as well.

Table of Contents

• What are financial markets and institutions?

• World’s biggest centralized exchanges

• Structure of a decentralized exchange

o Decentralized market

o Main characteristics of a decentralized exchange

• What is an OTC (over-the-counter) market?

• Forex

• Comparison for the retail trader

o Centralized market

o Decentralized market

What are financial markets and institutions?

A financial market is a place that provides the ability to exchange different financial assets. Through
this exchange, you can buy and sell assets such as foreign currencies, stocks, bonds, commodities etc.,
in exchange for money. A capital market is one of the main parts of the financial market. Investors
and issuers meet at the exchange every day. Issuers gain funds at the exchange of their own business,
while investors can gain ROI (Return on investment). The exchange takes the form of a double-sided
auction, where the final price of the traded instrument decides the state of supply and demand. The
price thus obtained is called a course.

World’s biggest centralized exchanges

NYSE – New York Stock Exchange (USA) – The largest exchange in the world as measured by the
market value of securities traded
NASDAQ – National Association of Securities Dealers Automated Quotations (USA)
Euronext – European New Exchange Technology (Europe)
FWB – Frankfurter Wertpapierbörse – Frankfurt Stock Exchange (Germany)

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LSE – London Stock Exchange (United Kingdom)
TSE – Tokyo Stock Exchange (Japan)

All the above-mentioned institutions are so-called centralized exchanges – being characterized by the
settlement of a transaction between the buyer and the seller. It is the central place where the price
is determined, settlement of trades is called the clearing.

On the contrary, a decentralized exchange is not physically or logically linked to one particular place.
The market, therefore, operates on the basis of a link between the participants, without a central
authority.

Structure of a decentralized exchange

Decentralized market

Decentralization is the very process of distributing the decision-making powers of central authorities.
Decentralization is one of the most attractive attributes of cryptocurrencies, which cannot be
controlled by any central entity. For example, in peer-to-peer systems, it is Bitcoin which requires no
central authorities for its transactions. Unlike centralized exchanges and exchange bureaus, their
decentralized “sisters” are just a kind of interface that connects two people who want to make a shift
and the rest is on these participants.

Main characteristics of a decentralized exchange

• Allows its clients to have control over their own resources

• Does not have a central server that could become the target of cyber attacks

• Not controlled by an individual or a narrow group of people

• Respects the privacy of its clients and does not require lengthy forms of registration or
fulfilment of KYC (know your customer) standards

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The decentralized exchanges also include the foreign exchange market. In regards to forex, we use
the term OTC.

What is an OTC (over-the-counter) market?

OTC (over-the-counter) market is a decentralized market without a central physical position, where
market participants trade with each other through various means of communication, such as
telephone, email, and proprietary e-commerce systems. In the OTC market, traders act as market
makers by stating the prices at which they buy and sell securities, currencies or other financial
products. A trade can be made between two participants in the OTC market without others being
aware of the price at which the transaction was completed. In general, the OTC market is usually less
transparent than stock exchanges and is also subject to less regulation. The OTC market is primarily
used to trade bonds, currencies, derivatives, and structured products.

Forex

The currency market is the largest and most liquid financial market in the world. Trading is allowed 24
hours a day, 5 days a week through repeating Asian, European, and North American sessions. Thanks
to the boom in online trading, it is available to almost everyone.
The average daily trading volume is around “$7.5 trillion” (In 2022. Source: bis.org), which is about
10 – 15 times more than the daily volume of trades on the world’s stock markets. The currency market
is decentralized, there is no specific trading floor such as NYSE for trading stocks.
Forex, therefore, has the character of an OTC (over-the-counter) market. It works on the basis of the
connection between dealers and traders.

Comparison for the retail trader

Centralized market

The centralized market is characterized by high standardization in terms of the size of traded contracts,
trading hours, and a uniform price for all participating brokers. The market is heavily regulated and
completely transparent. It offers a wide range of products but is highly capital demanding.

Decentralized market

A decentralized market is characterized by different trading conditions, contract sizes, and trading
hours among brokers. Even the prices of the same instruments may vary between brokers. However,
the great competition between brokers means lower costs for traders and this comes with the so-
called leverage effect

Instruments traded in the Financial Markets

In this lesson, we will take a look at instruments traded in financial markets and institutions. These
are namely stocks, currency pairs, stock indices, commodities, and cryptocurrencies. What are their
specifications and what should you know about them? Let’s find out!

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Table of Contents

• Stocks

o Why are stocks traded?

o Types of stocks

o How to trade stocks

• Currency pairs

• Stock indices

• Commodities

• Cryptocurrencies

Stocks

A stock is a security that the owner becomes a shareholder of the company. A shareholder has
different rights. E.g. he/she is entitled to participate in the profit of the company in the form of
dividends but also to participate in the management of the company, inter alia, by being entitled to
vote at the general meeting or to participate in the liquidation balance of the company in the event
of a liquidation.

Why are stocks traded?

Firstly, there is an incentive for companies to raise capital by selling shares on the stock exchange.
Investor motivation is to evaluate their resources. The company’s liabilities are guaranteed by
shareholders only by their stake, which is the share price multiplied by the quantity purchased.

Types of stocks

We distinguish stocks in terms of form on:

• Paper shares – physical documents

• Dematerialized shares – shares entered into electronic records

Then the shares in the name of the natural or legal person, or shares of the owner/bearer, are
anonymous and no longer used today.

How to trade stocks

Stocks can be traded on stock exchanges but also through CFDs.The stocks are traded entirely online.
Examples of significant shares: Microsoft, Apple, etc. For certain shares, we use the term blue chip.
These are the shares of the largest and most profitable companies, being traded on the stock market
exchange, having stable growth, and paying dividends on a regular basis.

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Currency pairs

Currency pairs are traded on the foreign exchange (also known as Forex), which is the biggest market
with a “$7.5 trillion” daily volume (In 2022. Source: bis.org). A currency pair consists of two
currencies, where one currency is called the base currency and the other is the quote currency.

We trade currencies in such a way that we speculate on the strengthening of one currency against
the other currency. We can explain the relationship of currencies to the EURUSD currency pair, which
is the most popular and most frequently traded pair. In this case, the base currency is the euro and
the quote currency is the US dollar.

What does the EURUSD rate at the 1.12 level mean?

This indicates that 1.12 USD is required to buy 1 euro. The rate is always the unit of the base currency.

Currency pairs are divided into 3 categories – majors, minors (or crosses), and exotics.
Other examples of currency pairs: USDJPY, AUDUSD, EURCHF.

Currency pairs are characterized by high liquidity and often volatility too, depending on the
fundamentals. Price usually moves up to 1-2% daily.

Stock indices

The stock index is the sum of many different instruments traded on one exchange. The stock index is
an indicator of the development of a given segment or economy of the country as a whole. Most
often, we have stock indices that reflect the value of shares traded on a given stock exchange. For
example, the most famous stock index of the Frankfurt Stock Exchange – DAX, is composed of a share
price by 40 most important selected German companies. (BMW, Adidas, BASF, Bayer, Lufthansa,
Siemens).

Examples of stock indices: Dow Jones Industrial Average, S&P 500, FTSE 100.

The value of stock indices varies based on the movement of all shares that are contained in the index.

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In general, indices are a stable investment instrument. As a rule, they are not volatile just as any
individual stock titles can be. Therefore, investment in indices is gaining increasing popularity among
investors.

Commodities

We can describe commodities as goods traded in markets without quality differences. Deliveries from
different suppliers are mutually substitutable. For example, a commodity cannot be a car that is
produced by many different means and at different prices. The most well-known traded commodities
are crude oil, gold, and natural gas, but also coffee, corn, orange juice etc.

There are two types of traders on the market – the first (also being a minority) only speculates on
price development, while others are really buying that particular commodity.

For example, Starbucks secures its coffee supply a year in advance through the exchange.

For commodities, we need to take greater risks – their price depends on climate change, global
resource outages, trade wars, etc. It is important to understand that some commodities are correlated
to the certain currency of a particular economy. Correlation of price developments between currency
pairs and commodities:

• Crude oil – Canada

• Gold, iron ore – Australia

• Dairy products – New Zealand

• Natural gas – Qatar

There is also a need to monitor world affairs, macroeconomic data, population growth demands, etc.

Cryptocurrencies

Cryptocurrencies are a type of digital currency or, in other words, electronic money. The biggest
problem or for someone else, the advantage is that electronic money is not regulated. The most
famous is Bitcoin; others are Dash, EOS, Ethereum, Ripple, Litecoin, etc. The price changes of cryptos
are very steep – e.g. Bitcoin in 2021 ranged from $29,000 to $64,000.

Trading Terminology

Table of Contents

• Forex

• Lot

• Leverage

• Margin

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• Hedging

• Pip

• Bid

• Ask

• Spread

• Trading strategy

• Volatility

• Trading approach

o Scalpers

o Day traders

o Swing traders

o Position traders

• Broker

• Limit/Market orders

• Stop Loss/Take Profit

• Reward to risk ratio – RRR

• Trading sessions

Forex

Forex stands for FOReign EXchange. Forex is also known as forex trading, currency trading, foreign
exchange market or FX. It is an international trading system for the exchange of major and minor
currencies, i.e. the foreign exchange market, whose mid-range courses are considered
as official world courses.

Lot

Lot is a measurement that we use in forex trading. One lot equals one hundred thousand units. So if
we buy 1 lot in EURUSD, our investment is worth $100,000. If you go long 1 lot on EURUSD, one pip
equals $10 of price fluctuation. Because EURUSD can move fifty to a hundred pips a day, this can be
a lot for traders with smaller accounts.

Because of that, brokers allow opening positions smaller than 1 lot, namely:

• A mini lot, which is ten thousand units.

• A micro lot, which is one thousand units.

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• A nano lot, which is a hundred units.

Leverage

The principle of leverage is using a small amount of equity supplemented by substantially larger
amounts of foreign capital to finance the investment. This practice can magnify profits but also losses.
Leverage is, therefore, a tool that increases the size of the maximum position that you can open as a
trader.

For a better understanding, let’s give an example:

• Suppose a trader has a balance of $1,000 in his account, and his broker provides a leverage of
1:500. $1,000 * 500 would be equal to a maximum size of $500,000 per position. In other
words, the trader can trade orders 500 times greater than the deposit. And this is the basic
pillar of understanding leverage. If leverage 1:500 is utilized, the trader will earn $500 instead
of $1 for the same investment. Of course, it is important to emphasize that losses can be
equally rapid.

Margin

The required amount of funds needed to participate in the market.

Trading on margin with leverage is a process in which a broker allows a trader to borrow money (either
from a broker or from an investment bank) and purchase a particular instrument. Margin is the
difference between the total value of an investment and the amount provided to the trader.

Let’s take a look at a practical example on the platform:

• When we open 1 lot of EURUSD pair, the margin is what we must hold on the trading account.
For this example, when the leverage is 1:100, it is a minimum of $1,000.

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Hedging

In finance, the notion of hedging means creating a position in a particular market to minimize risk
from another position. There are many different tools through which you can hedge. Some examples
are insurance contracts, forwards, swaps, options, many different over-the-counter derivatives, and
arguably the most popular are futures contracts.

Futures exchanges arose in the 18th century to allow transparent, standardized and effective hedging
against the movement of prices of agricultural commodities.

Pip

Currency pairs increase or decrease by the value traditionally measured in the so-called PIPs (Price
Interest Point, or Points in Percentage). PIP is defined as a “percentage of one percent”, or 0.01%.

Traditionally, forex prices have been quoted in a certain number of decimal places – more often to
four decimal places – and initially, the PIP was moving by one point in the last decimal place. Most
brokers now dimension forex instruments in one extra decimal place, which means that PIP is no
longer the last decimal place.

The exceptions you’ll notice include currency pairs with a Japanese yen – for these pairs, one pip value
is the second decimal place, while the price mostly has three decimals.

We’ll give you an example:

Let’s say you buy a currency pair EURUSD for 1.11510 and later, you close your position at 1.11520.
The difference between the two prices is: 1.11510-1.11520 = 0.00010-in other words, the difference
is just one PIP. The price of the financial instrument is always stated in two values:

Bid

The bid represents the price of demand – i.e. the price for which the contract can be sold at a given
moment.

Ask

Ask represents the price of the offer – i.e. the best price at which the contract can be purchased at
the moment. The retail trader, therefore, always gets a less advantageous price.

Spread

The difference between supply (ask) and demand (bid) is called a spread. It is, therefore, the
difference between the price claimed by the seller of the instrument and the price at which the buyer
is willing to buy. The spread is the expense that a trader must consider while trading.

Trading strategy

The absolute necessity for every trader is the so-called trading strategy.

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Each trader has his own financial objectives and acceptable level of risk, which influences the choice
of the financial instrument that he/she buys or sells, as well as the settings of input and output limits,
profit with stop loss, and analysis of a possible market direction.

All these factors combined set a specific trading strategy and give a trader an edge. This edge is an
important part of any trading strategy. If a trader does not have an edge, then he/she hardly achieves
favourable results in his/her trading.

Volatility

Volatility indicates the fluctuations in the value of an asset or its rate of return over a given period of
time and expresses the risk of investing in an asset. Volatility is an essential heartbeat for a trader
because it moves the price of the instrument up and down. When the volatility is zero, the trader
cannot make any profit or loss.

Trading approach

The trading approach is the same as a trading strategy. It differs for every trader.

Scalpers

This is probably the hardest one you can pick. Why?

Scalpers are in and out of the markets very quickly; their trades last from minutes to sometimes just
a few seconds. Because of that, you are required to focus 100% during the whole trading session.
Scalpers also miss a lot of trading opportunities and rely solely on the big winner they are able to
catch once in a while. This is something that can be very demanding on your psychology as you lose
a lot and no one likes losing. So why do people choose to be scalpers if it is so hard?

There are two major reasons for that.

The first one is the returns. Being in and out of the market means you are getting many opportunities
in the market every day. Swing traders, for example, have to wait several days for the right opportunity
and they quite often sit at their hands and wait.

Scalpers do the exact opposite. Even though their win rate is usually lower, they can easily
compensate for it with the reward to risk ratio and the number of opportunities they get.

The second reason, which is not often talked about, is freedom. Scalpers and day traders, whom we
are going to talk about next, don’t really care about long term movements in the market. Because of
that, they trade during their currently active session, which can be 4, 8, or 10 hours long. Once they
are done, they don’t have to care about the market until their next trading session. This reduces the
stress of babysitting any long-term positions which could disrupt your sleep and generally stress you
out.

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Day traders

Day traders are similar to scalpers in a lot of things.

They also watch markets in their predetermined sessions, but usually, they want to watch the market
the whole day. They are not interested in quickly being in and out of the trades, but they much rather
capture a bigger intraday move. For that reason, they only open a handful of positions, yet sometimes
they even stay flat for a whole day. Although day traders are required to watch the market for longer,
the approach tends to be more relaxed with high focus only required when the market trades around
their desired level.

Day traders usually hold trades for a few hours. As they try to capture the bigger moves, they know
they have to give the market room to breathe. They generally do not hold positions overnight, but
sometimes they do as they try to capture even bigger intra-week moves.

Swing traders

Swing traders are looking to capture intra-week moves. They hold positions for a couple of days,
sometimes weeks. Swing trading is very popular among beginner traders because it doesn’t require
much chart time and analysis. You can prepare for your trades in the morning and thanks to alerts
and limit orders, you let the market do its thing with very low input.

This sounds like a piece of cake, right? Are there any downfalls?

Yes, there are. Swing trading requires an extreme amount of patience as you often have to wait for
several days for the market to give you your desired setup. And the real work begins once you enter
the position. Because you are holding the position for a longer time, you must be ready for swings in
price and sometimes disrupted sleep. Also, since you are taking fewer trades, building your track
record will take much longer.

Position traders

You will hardly become a position trader early in your trading career. Position traders are also called
investors. They hold their trades for weeks, months, or years and they usually follow large
fundamental sentiments. A big amount of capital is required to become a position trader.

Broker

A brokerage firm is a legal entity that provides its customers with access to the capital market, thus
acting as a necessary third party for buying and selling securities. It facilitates secure transactions on
behalf of its customer, who executes their own trades on his/her trading account.

A Forex broker is a company registered in the commercial register dealing with the mediation of
access to trading on financial markets, especially in forex. The broker company generates profits by
charging spreads and trading commissions.

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Forex broker provides its customers with the trading platform (software for access to financial
markets), monitors current market events, issues, and opinions, and communicates ideas for trading
in the form of comments, fundamental or technical analysis, etc.

When choosing a forex broker, paying attention to market capitalization, company history, number of
active clients, registration, license, and security of finances is recommended.

Limit/Market orders

When you place a market order, you are going to get filled immediately at the best available price.
One of the biggest problems with market orders is the risk of slippage during high-impact news and
the fact that you always pay the spread.

On the other hand, the limit order says that you only want to get in the market at one desired price
and nothing else. Limit orders are considered a patient approach, their disadvantage is the fact that
traders might get too patient and miss their desired fill.

Stop Loss/Take Profit

Stop Loss and Take Profit are very straightforward. Stop Loss gets traders out of a trade when it goes
against them. Traders place Stop Losses at various technical levels or fixed-point values. Using a Stop
Loss prevents traders from unexpected spikes in price, which could result in significant losses.

Take Profit is in the same order as Stop Loss but on the opposite side. Take Profit gets traders out of
a winning trade at a predetermined price.

Reward to risk ratio – RRR

The reward to risk ratio is very simple. It is how much you risk compared to how much you can gain.

If you risk $100 to gain $300, your reward to risk ratio is three to one. If you are risking $100 and you
have a fixed $100 reward, you need to be right over 50% of the time to be profitable. With two to one
reward to risk ratio, you only need to be right 40% of times to make money. The higher reward to risk
ratio you have, less the percentage strike rate you need to be a profitable trader.

The equity simulator on our website is a great tool you can use to show the expectancy of your trading
based on strike rate and reward to risk ratio.

Trading sessions

There are three major trading sessions in trading forex:

• Asian

• European

• North American

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All of these sessions provide opportunities in the different markets as the volume changes throughout
the day. If you are trading an Asian session, trading a pair like EURGBP doesn’t make much sense. But
looking at AUDJPY should bring great trading opportunities.

The European and North American sessions have the highest volume, and markets are moving across
the board in these sessions.

• Financial Markets

CFD – Contracts For Difference

Table of Contents

• What is a contract for difference (CFD)?

• History and pros/cons of CFDs

• Long term holdings of CFDs

• The main reasons to trade CFDs

• CFD vs Futures

o How about commissions?

What is a contract for difference (CFD)?

CFD is an agreement between the buyer and the seller, which obliges the seller to pay the buyer a
difference between the asset’s current value and the asset’s value at the time of contract closure. If
the buyer went long and the difference in price is negative, then the buyer pays the seller and vice
versa. CFDs are financial derivatives that allow us to speculate on the price development of the
underlying asset without the need to own the underlying asset. It is a so-called derivative that covers
a wide variety of financial instruments traded on both stock exchanges and OTC markets around the
world. The term “financial derivative” is based on the meaning of the English word “derive”. It is,
therefore, a kind of derivative of a particular asset. In our case, it is a derivative of the selected
financial instrument traded on one of the world exchanges. We also call this financial instrument an
underlying asset, which can be a stock, index, commodity, currency pair, cryptocurrency, etc. The price
of derivatives is fully dependent on the price of the underlying asset.

History and pros/cons of CFDs

For CFDs, it is 1990 when the first derivative was created by the famous London broker Smith New
Court. It was a financial product that bore all the benefits of trading stocks without the need for their
physical possession while minimizing their disadvantages. Compared to shares, it was several times
cheaper and allowed to take short positions without the need for the previous borrowing of shares.
At the end of 1990, a company called GNI was allowed to trade CFD contracts directly on the London
Stock Exchange by forwarding instructions over the Internet.

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CFD trading is very popular and is offered by many brokerage companies. CFDs are traded to profit
from price differences between sales and purchases. CFDs are, therefore, among the financial
derivatives that are always linked to their subject underlying financial asset. The specific type of
underlying asset is levied by each intermediary company (brokers, banks, etc.) according to its
capabilities. This is often the currency pair, stocks, equity indices, commodities, bonds, interest rates,
etc., traded on a world exchange.

The main con is that there are no standard contract terms for CFDs, each provider can use its own,
but the substantial part usually remains unchanged. Lack of regulation is the main reason why CFD
trading is banned in the United States.

However, as we are not a broker, even traders from the US can trade CFDs with FTMO. CFD thus
constitutes a contractual arrangement between the seller’s party and the buyer’s party, as we already
mentioned.

Long term holdings of CFDs

Holding open CFDs for a longer period is possible, but it should be remembered that even though
CFDs do not expire, the trader can be charged swaps for overnight holding. The size of a swap is based
on the interest rates of central banks of the countries whose currencies we trade. The larger the
difference in rates, the larger the swap. A swap is positive when a long position is held in the currency
with the higher interest rate, while it is negative when the trader is in a short position on the currency
with the higher interest rate. Thus, a swap differs for different currency pairs. Its size also depends on
the broker (liquidity provider).

The norm is that swap charging takes place at 10 PM British time, but this differs from broker to broker,
and it is always necessary to verify the specific terms of your account.

The main reasons to trade CFDs

CFDs are available with many brokers who also provide classic investment products. Since you have
never owned an underlying asset for CFD contracts, you can trade markets that are otherwise non-
negotiable for a retail trader, such as indexes. With CFD contracts, you can benefit from a rising price
and the price declines. Most stock CFDs can also be shorted, and you don’t need to borrow stocks as
you normally would for traditional investments. CFD trading can be made extremely fast. It depends
on the broker’s execution time. You should know that a good trading platform has a live market data
feed, and various automated trading systems can work their logic on these data changes immediately.

CFD contracts are traded with leverage, so you don’t need high initial capital to speculate on short-
term volatility fluctuations. This means that you only need a fraction of the position value to open
the order, and you can use some of your capital for other purposes, such as scalping other CFDs.
However, you should remember that while leverage reduces the margin needed to open a trade,
profits, if any, may be significantly higher than when trading without leverage. Obviously, the same
applies to losses too. You should also remember that even if you do not physically buy the underlying
asset, you are exposed to the underlying markets, and there are different risks involved.

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CFD vs Futures

Let’s say that we want to trade the very popular German DAX on futures markets. Due to the large
volatility, the intra-day margin is around €13,000 per contract (dates from 2018). The intra-day margin
is the reserve deposit on the account for opening the trade. If we hold the position overnight, the
margin reaches far beyond €21,000.

How about commissions?

The commissions for trading CFDs used to be greater than on Futures, but today the situation is
unclear. For example, FTMO clients can access CFD contracts on stock indices, crypto or futures with
zero commission. However, the truth is that trading Futures is still much more difficult financially
because of paying for the data feed and platforms.

It is important to consider that most retail traders don’t have €21,000 to spare for trading DAX from
the beginning. This is where the best advantage of CFD comes in place instead of the futures. Dividing
the positions enables us to trade DAX with much smaller capital requirements. From the risk-taking
perspective, having the possibility to trade DAX through CFD is yet more significant.

In the last column of the table above, we can see the DAX position sized 0.2 lots traded through CFD.
The beauty of CFDs is in the possibility of working with multi-contracts while having a small capital. If
we were to trade the highest position of 0.2 lots while having two different profit targets, CFD would
allow us to enter twice by 0.1 lots each and set the required parameters separately.

Finally, it’s important to mention that trading the futures indexes through CFDs isn’t suitable for all
markets and this is due to the associated costs. This is predominantly for short-term traders who
target smaller profits. Talking about the DAX index, the ratio between the spread and the daily range
is actually very good. This makes DAX an ideal market to be traded through the CFD. Other optimal
markets for day trading CFDs would be Nasdaq or gold.

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FOREX

What is Forex and how it differs from other markets

Welcome to a new section, this one is about why we are all here, FOREX. We will start with basics
first, but as we progress, we will go much more in-depth, so after we will finish this series, you will
know everything about forex trading. This lesson will look at what forex is and compare it to the other
markets.

Table of Contents

• What is forex?

• Forex vs other markets

• Forex compared to stocks

o Fees

o Trading hours

o Immediate execution

o Market restrictions

o Market manipulation

o Number of products

• Forex compared to futures

What is forex?

Forex, short for FOReign EXchange, is a decentralized global market where all world currencies trade.
It is an over-the-counter (OTC) market, which means that there is not one centralized place. In other
words, forex is a decentralized market. As the market is open twenty-four hours a day, five days a
week, it becomes extremely liquid over time. It is the biggest market in the world, with over $6.6
trillion in daily volume (in 2019).

For comparison, the US stock market has an average daily trading volume of around $480 billion USD.
Due to the size of the forex market, even players such as banks cannot easily manipulate the prices.
Banks and large institutions are the big players in the forex game. Retail traders make up only around
2-3% of that daily volume. Each forex trade involves two currencies because we are betting on the
value of one currency against another.

In the EURUSD, which is the most traded currency pair in the world, the euro is the base currency,
and the US dollar is the quoted currency. If the EURUSD pair’s price is 1.12, it means that one euro is

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equal to one US dollar and twelve cents. If, for example, the number increases, this means the euro
is getting stronger than the US dollar and vice versa. Trades can be closed within minutes of opening,
but can also be held for months.

Forex vs other markets

So why should we trade forex? We already described all the different markets in previous videos, so
now let’s compare them to forex. There are pretty much three major markets that are traded, forex,
stocks, and futures.

Forex compared to stocks

Fees

Fees are the first great advantage of forex trading. Because most brokers make money due to the
spreads, which are usually very tight anyway, we can trade forex with very low commissions and fees.
We are not mentioning swaps which can add additional costs for holding positions overnight, but
swaps can also be positive, where a trader is actually paid for holding a trade.

Trading hours

Forex is traded 24 hours a day, five days a week. This is different from stocks which are only active
during the trading hours of stock exchanges. Of course, this applies not only to US stocks, which are
the most liquid and popular but also to other markets.

Immediate execution

With forex, in most cases, we are getting executed at prices we see at our broker’s trade window. In
trading stocks, this is the case only at the big blue-chip stocks. If we decide to trade less liquid
companies, we will have a hard time getting in and out of a trade once we start trading with a more
significant account.

Market restrictions

In the stock market, several rules prohibit traders from trading freely. From 1938 to 2007, an Uptick
Rule required short sales to be conducted at a higher price than the previous trade. Several other
rules and regulations often happen in the stock and futures markets, such as limit up and limit down,
which we could see during the Covid-19 crash in March 2020.

Market manipulation

All markets are manipulated. Even in forex, we could see a lot of headlines where major banks were
fined by the SEC for manipulating their client’s orders. But in general, the forex market is much harder
to manipulate due to the huge daily volume of over $6.6 trillion. In the stock market, many penny
stocks that are very popular amongst traders are very often manipulated with pump and dump
schemes or insider trading.

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Number of products

On the New York Stock Exchange, there are around 2,600 listed companies and another 3,800 listed
on Nasdaq. If we add Asian and European stocks to the mix, we look at a very long list of products.
But it is not realistic to trade all of them. We would likely lose focus because of trying to find new
opportunities constantly. Compared to that, we have 28 majors and crosses in forex. Of course, forex
brokers offer exotics and CFDs, but it’s still much less than stocks.

Forex compared to futures

Higher liquidity, 24-hour trading, low fees, no expiration and over $6.6 trillion daily volume is
something we won’t find in the futures market. Also, if we are interested in trading popular futures
products such as S&P 500, crude oil or gold, we can still participate in those markets through CFDs
that are offered by forex brokers. One of the significant advantages that futures markets have over
forex is transparency due to futures markets’ centralized nature. This gives us access to real trading
volume data that we can’t see on Forex. An account at a forex broker can be opened with as little as
$100. For trading futures we can start with $100 too, but then we can open much smaller positions
because of bigger margin requirements.

Forex Market Structure and Participants

Forex is a huge market which attracts a lot of different participants. Who are they and what is their
motivation to trade forex? Let’s find out!

Table of Contents

• Who is trading forex and why?

• Forex brokers

• Market participants

o National or central banks

o Investment companies and hedge funds

o Corporations and commercial companies

o Speculators and investors

Who is trading forex and why?

So now that we know what forex is and its unique characteristics compared to futures and stocks, we
will talk about the structure of the forex market, brokers and participants.

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One of the main advantages of trading in the OTC market is that it is not controlled by any individual
or group of people. For example, there can be a case where the New York Stock Exchange just shut
down one day, this cannot happen in the forex market. On the other hand, the forex market is less
transparent as we cannot see the volume or depth of the market.

Forex brokers

In the forex market, there are two types of brokers, A-book and B-book brokers.

The A-book brokers are preferred by forex traders because they use an electronic communication
network (ECN) or straight-through processing (STP) that gives their clients direct access to the market
as the trades are passed right to the liquidity source. The B-book brokers operate as market makers.
Orders are processed in-house by the broker. In other words, orders placed by traders are not visible
anywhere other than the broker’s trading platform. There isn’t any external liquidity pool and brokers
often act as a counterparty to their clients’ trade. Because they win when their clients lose, this always
stirs up a discussion about market manipulation and some other lawful practices.

This is not so true as every broker who is regulated has to act in a regulatory standard and they don’t
want to manipulate prices simply because they would lose all their clients sooner or later due to the
huge competition in the forex broker industry.

Every licenced broker can fill the trades internally through the B-book model or pass them to the real
market as an A-book. That’s why we might be thinking that we are trading on an ECN broker, but in
fact, we are not. If we want to find out what type of broker we are trading, we can ask the customer
support of our broker, or we can try to open a trade during high-impact news.

A-book brokers will more likely give us slippage because they send orders to the real market, where
order books are very thin during news releases.

B-book brokers will fill us out immediately as they take the other side of our trade.

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Market participants

Now that we know the structure of the forex market and the types of brokers, we will cover the
different participants.

Banks, funds, institutions and small retail traders meet every day. The large participants do not
speculate about the prices, they more often use forex trading for hedging purposes. Let’s now have a
deeper look at each participant and what their intentions are in the market.

National or central banks

These banks determine the exchange rates based on supply and demand for the currencies. The large
banks are also called the interbank market. They make the bid and ask spread, and they take huge
amounts of transactions every day for themselves or their customers. Deutsche Bank, JPMorgan, Citi,
HSBC, Bank of America or Goldman Sachs are the most famous ones.

Investment companies and hedge funds

Investment companies and hedge funds are also one of the big players in the forex market. They
diversify their capital which is easily done thanks to the high liquidity of the forex market. They also
use the forex market to exchange currencies for international payments.

Corporations and commercial companies

Corporations and commercial companies are doing business in the forex market because many
companies are importing and exporting goods worldwide. They have to make payments in different
currencies, and because of that, they exchange a large sum of money every day at the forex market.

For example, if Tesla wants to buy parts in Switzerland, they have to exchange their US dollars for
Swiss francs first.

Speculators and investors

Speculators buy and sell currencies to profit on the exchange in the future. We can separate
speculators as large and small ones. Large ones are usually smaller hedge funds or proprietary trading
companies. Small ones are the retail traders. From over $6.6 trillion, which is the daily volume in the
forex market, retail traders make only around 2-3%. A carry trade is a popular vehicle for making
money for larger speculators. Carry trade is using a currency with a lower interest rate to buy a
currency with a higher interest rate.

What is traded in Forex? Currencies and Correlations

There is a large number of currencies we can trade. This can easily confuse newer traders. In this
lesson, we will look at currencies we can trade in the forex market and put them into different
categories. When we are trading forex, all currency pairs have the same structure. For example, if we
have EURUSD, the euro is called the base currency, and the dollar is the quote currency.

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For the currency pair USDJPY, USD is the base currency, and JPY is the quote currency. If we are going
to open the broker window with available instruments, we will see the names of currency pairs and
prices. For example, when we see EURUSD trading at 1.3, we will need 1.3 units of the quote currency
to buy 1 unit of the base currency. To simplify things, we need 1.3 US dollars to buy 1 euro. Most of
the world’s countries are using their own currency. But businesses are done all around the world, so
there is a high demand for a lot of these currencies. As we have many currency pairs in the world, we
separate forex pairs into three brackets.

Majors, minors (also called crosses) and exotics.

Table of Contents

• Majors

• Minors/Crosses

• Exotics

• Correlations

Majors

Majors are the most traded and liquid currency pairs. All of them are paired with the US dollar since
the US dollar makes more than 80% of all trades in the forex market. So which currencies are the
majors? The most traded currency pair is EURUSD, nicknamed Fiber. The Euro currency’s nickname
Fiber has the least known explanation. Still, many say that it comes from the fact that the paper used
for euro banknotes consists of pure cotton fiber, making it more durable and giving it a unique
feel. Next is the British pound, GBPUSD, also called the Cable. The name Cable comes from the fact
that in the 19th century the exchange rate between the US dollar and the British pound was

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transmitted across the Atlantic by a large cable that ran across the ocean floor between the two
countries. AUDUSD, we call Aussie, NZDUSD, is called Kiwi.

All these mentioned pairs start with foreign currency first and US dollar second. The last three majors
work the opposite; the US dollar is first and the foreign currency is second. We have the Canadian
dollar, USDCAD, which we call Loonie. The Loonie refers to the one Canadian dollar coin and derives
its nickname from the picture of a solitary loon on the reverse side of the coin. The others
are USDCHF, called Swissy and USDJPY, called Ninja. These seven currency pairs are so-called
majors. EURUSD is the most liquid and traded currency. In the second place, we have USDJPY.

Minors/Crosses

These pairs are not quoted with US dollars but against each other. EURGBP, AUDJPY, NZDCHF and so
on. These pairs are usually less liquid but offer a great opportunity for traders who don’t want to be
exposed to the US dollar.

Exotics

Exotics include currencies from all over the world. We can find Polish zloty, Hungarian forint, Hong
Kong dollar, Swedish crown, Czech crown and many more. These are usually less liquid than crosses
and more suitable for longer-term positions than day trading.

Correlations

Some of the major currencies are tightly correlated with both indices and commodities. The Canadian
dollar is positively correlated with crude oil because Canada is a significant oil producer and
exporter. That means that an increase in oil prices usually means an increase in the Canadian dollar
value. Transfer this to trading forex trading, when oil prices go up, the USDCAD goes down. Similarly,
the Australian dollar and gold have a positive correlation because Australia is a significant gold
producer and exporter. Both gold and the Japanese yen are viewed as safe havens in times of
uncertainty, and these two are also positively correlated. Meanwhile, gold and the US dollar typically
have a negative correlation. When the US dollar starts to lose its value amid rising inflation, investors
seek alternative stores of value, such as gold. We also should be mindful when trading majors itself.

If we are going long on EURUSD and going long on GBPUSD as well, we are expressing the opinion
that the US dollar should weaken and those currencies strengthen. But if the US dollar gains strength,
both the euro and pound will most likely go down due to a strong inverse correlation to the US dollar,
which can be seen in the chart below. The blue line represents EURUSD, the orange line GBPUSD, and
the Dollar Index’s green line.

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We should always pay attention to correlations because putting too much money on several tightly
correlated assets can result in more considerable losses than anticipated.

Forex Trading Hours and Sessions

Forex is a unique market because of its high liquidity, and size and because it is traded 24 hours a day
5 days a week. Because of that, traders can trade at any time of the day that suits them and their
schedule. It doesn’t matter if you are an early bird or you like to stay long awake during the night.
One thing is sure; the forex market will always be open. Just not at weekends.

But there is a little catch.

Although we can trade at any time we want, there are certain nuances and characteristics for different
times of day. For example as we travel from Asia to Europe, we need to know what time is there and
how many hours we have to add or subtract on our watches. To not cause any confusion, all the times
that we will mention in this video, we are going to base on London time with GMT+0.

Table of Contents

• Trading hours

• Asian session

• European session (London)

• North American session (New York)

• Days of the week

• Trading hours of CFDs

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Trading hours

Every week on Sunday, the Forex market opens at 9 PM GMT, which makes the start of the Sydney
session. Two hours later, the Tokyo session starts at 11 PM. To ease things up, we can merge these
together and call them an Asian session (sometimes called Tokyo session). Asian session ends at 8
AM. In Europe, we have Frankfurt and London sessions with Frankfurt starting at 7
AM and London starting at 8 AM. But once again to make things easier, we will call it a European
session (sometimes called the London session). At 12 PM North American session (sometimes
called the New York session) starts and it goes alongside the European session until 4 PM. This is
called the European/North American overlap, and it usually brings a lot of trading opportunities as
there is the highest volume traded during those hours. After London closes at 4 PM, the New York
runs till 9 PM, and once it is completed, the Asian session starts again and the whole cycle repeats. As
time changes during the year, there are also slight changes to trading hours, so we should always keep
up with what’s happening.

Asian session

The Asian session has the lowest volume of the three trading sessions. But this doesn’t mean that
we cannot find any opportunities there. Besides traders that live in Asia, this trading session can also
attract European traders who like to trade during the night or Americans that just got home from
work and want to spend late afternoon trading. The Asian session is mostly controlled by the Japanese
economy, the third biggest globally. The Japanese yen is the third most traded currency, with around
20% of all transactions. During the Asian session, around 20% of the daily volume is traded. Besides
Japan, we have countries such as Singapore, New Zealand and Australia which participate in the
market. Because of that, currency pairs such as AUDJPY, AUDNZD or NZDJPY are the best ones to
trade. Macroeconomic releases from New Zealand, Australia and Japan also cause high volatility,
which every trader should pay attention to.

European session (London)

London was always one of the most important business centres globally due to its strategic place
between Europe and America. Nowadays, London is one of the leading financial hubs in the world.
That’s why the European session is called the London session because the city accounts for the
majority of total business volume. The European session makes up over 30% of traded volume alone

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at the Forex market. One of the key reasons to trade during the European session is that we can trade
both European and American macroeconomics releases, which bring significant volatility to the
markets. Thanks to high liquidity, traders can benefit from very low spreads optimal for scalpers and
day traders. Since the European session is the first high liquid session of the day, many new trends
are forming during the London open. Markets usually move right after the open and slow down
during the London lunch hours as large participants take small breaks before New York kicks in. During
the European session, not only are major currencies moving, but we often see high volatility in
minors as well. The currency pair EURGBP, and GBPJPY are extremely popular crosses that offer high
volatility and plenty of trading opportunities.

North American session (New York)

The North American session is the last trading session for the given day. North American session is
sometimes called New York because of the city’s importance as the world’s financial
hub. Because over 80% of the traded volume involves the US dollar, there is no wonder that
the North American session brings a significant amount of volatility every day. Also, most of the key
fundamental events happen during the North American session. Namely, these can be the non-farm
payrolls – NFP, Federal Open Market Committee – FOMC, unemployment rates or consumer price
index – CPI. North American session slows down around London close at 4 PM, but we can find
opportunities in the market even after that. Although money usually flows to the US index market
once the European session is finished, such as S&P500, Dow Jones or Nasdaq. Same as the European
session, the North American session offers tight spreads and the right conditions for intraday trading.

Days of the week

Now that we covered separate sessions let’s look at different days of the week. Markets open on
Sunday evening London time, but there is usually a minimal volume during that time. Monday
morning also tends to be slow until the North American session starts and markets really start to pick
up. Tuesday usually offers double the volatility of Monday, and it makes it one of the best days to
trade during the week, with Wednesday and Thursday. Fridays are interesting days as they have
lower volumes, but there are many macroeconomic events during Friday. For example, NFP, which is
every first Friday of the month, can offer many opportunities, but some traders prefer to skip those
entirely, as markets tend to be less predictable during these events. After London closes on Friday,
volumes usually dry up.

Trading hours of CFDs

Besides currency pairs, many brokers offer CFDs for indices and commodities to trade as well. For
equity indices, they differ based on the country they are from. European indices such as DAX or
Stoxx open at 1 AM and trade until 10 PM London time. US indices such as SP500, Nasdaq or Dow
Jones trade 23 hours a day with a break between 10 PM and 11 PM. But for US indices, we have
something that is called a pit session. The name of pit sessions comes from trading pits, representing
the time period from 2:30 PM till market close. These are hours when US traders are awake, bringing

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large amounts of volumes to the market. Commodities such as crude oil and gold trade 23 hours a
day with the highest volume during the North American session due to trading in the futures market.

Technical, Fundamental, Sentiment and Statistical Analysis. Which one is best?

There are two types of analysis that we know, technical and fundamental analysis. Those are the
most popular that traders use either together or separately. Besides that, there are two more types
of analysis that are not so often talked about, sentimental and statistical analysis. We are going to
cover all four of these and take a look at some pros and cons of them.

Table of Contents

• Technical analysis

• Fundamental analysis

• Sentimental analysis

• Statistical analysis

Technical analysis

Technical analysis is based on historical patterns and behaviours of given instruments. When traders
use technical analysis, they look at historical price development and, based on that, decide possible
future price movements. One of the key arguments of technical analysis is that tools such as support
and resistance, Fibonacci numbers, pivot points or moving averages are watched by many investors,
so the price levels attract a lot of supply and demand. But because no two traders in the world are
100% the same, technical analysis tends to be very subjective. As we already mentioned, there are a
lot of different tools and patterns traders can use. Usually, there are two main camps of traders, those
that use various indicators and those that trade pure price action. And, of course, some traders use

most popular indicators are the moving averages, MACD, RSI, Ichimoku Cloud a mix of both.

The or stochastic. They are usually based on different types of moving averages and give traders
signals based on previous behaviour. For example, the RSI indicator shows overbought and oversold
conditions in the chart.

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It looks back at price development and determines if an asset is too expensive or cheap. On the other
hand, price action traders use different candlestick formations or levels of support and resistance,
which they draw on the charts themselves instead of looking at any indicator. They also use different
patterns such as head and shoulders, cup and handle, triangles or flags to determine future price
movements. The main pros of using technical analysis are that it’s often easier than fundamental
analysis, as everything we need is right on the chart. It is relatively easy, gives all information to all
traders and gives precise entry, Stop Loss and exit points based on various technical things. The
cons of technical analysis are that markets rarely behave in a textbook manner. Due to many different
factors that happen in the market, technical levels are often not that accurate, which causes traders
to get often stopped out before the anticipated move. Besides that, many technical indicators lag
behind the price, so traders often get signals to buy or sell at already established moves.

Fundamental analysis

The fundamental analysis determines the value of different instruments based on financial and
economic data. In other words, fundamental traders follow different economic, social and political
aspects that determine supply and demand. They can, for example, go long on the Japanese yen
against the British pound based on the belief that Japan might have a better economic situation
compared to Great Britain. Therefore, the Japanese yen should have more value. But with markets,
things are not always easy like that. Fundamental analysts must watch inflation, interest rates,
government decisions, central banks’ decisions, and macroeconomic events that come out almost
daily. Their best friend is a macroeconomic calendar that informs them about upcoming events where
data releases are perfectly planned.

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One of the main pros of fundamental analysis is that it can be less subjective than technical analysis. It
determines the value of a given instrument and can predict price movements before they happen
compared to technical indicators that lag behind the price. On the other hand, the fundamental
analysis gives traders just ideas but does not signal where to enter and exit trades. There are too
many factors that can affect fundamental analysis, and retail traders are usually the last to access
critical economic releases.

Sentimental analysis

The sentimental analysis looks at the behaviour of different participants in the financial markets. It
examines if there are more buyers or sellers in the market. The Commitments of Traders (COT) reports
are the main indicator of sentimental analysis. Commitments of Traders (COT) reports are published
weekly by the Commodity Futures Trading Commission (CFTC). The reports show open positions by
all the subjects that must report their positions at CFTC. These are positions of big institutional
subjects. These big players report their positions every Tuesday evening, and the report is published
every Friday at 3:30 PM Eastern time. The COT reports show approximately 70 – 90% of open
positions at futures markets.

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These reports aim to provide transparency to the futures market and prevent price manipulation.
Although these reports are from the futures market, we can use this information in spot currencies
and CFD trading since spot forex pairs go hand to hand with currency futures, and the futures
commodities, metals and indices are the same as their CFD counterparts. The pros of sentimental
analysis are that it gives us a very clear idea of what is going on in the market. We can find out what
large and small participants are doing in minutes. But there is no definitive answer there. Sometimes
large players can be wrong, and the retail crowd can be right. Also, when we see a large institution
positioning in some instrument, it can mean that they just started accumulating a big position, so it
can take weeks or months before an anticipated move happens.

Statistical analysis

Statistical analysis works very closely with technical analysis, but instead of watching different tools
and indicators, traders use statistics of previous market behaviour to develop strategies that require
very low human interaction. For example, our FTMO Statistical application shows traders meaningful,
historical data-based probabilities of market behaviour that they can use to their advantage.
Statistical analysis is very useful as it can remove many emotions from trading. On the other hand,
backtesting different strategies requires significant time and dedication. Besides that, market
conditions are constantly changing, so if we backtested specific price behaviour that was occurring
for the last five years, there is no certainty that it will continue to happen in the future.

So what type of analysis is best to use?

All of them. We know that it sounds like a lot to digest, but if we want to be professional traders, we
should be able to utilize all the different aspects of trading. All professionals do is watch key technical
levels while being aware of upcoming macroeconomic events, the positioning of large players, and
statistical probabilities of things happening in the past.

Margin Trading

In this lesson, we will look at something closely related to trading itself, and if you don’t understand
this, blowing up your account will be inevitable. It is trading with a margin. In this lesson, we will cover
margin and all the other things that will help you efficiently manage your trading business. Because

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forex trading is much more than just buying and selling currencies, you must be aware of all the
nuances that can happen to your account.

Table of Contents

• Margin trading

• Account balance and equity

• Floating and Realised PnL

• Margin call and stop out level

Margin trading

You can enter positions bigger than your account balance, thanks to margin trading. So, in theory, you
do not need a large amount of money to make a large amount of money in forex
trading. Unfortunately, this can be a double-edged sword for many new traders since they can lose a
large amount of money even faster. You can think about margin as collateral for your broker, which
lets us open the larger position, and your margin is used to cover any losses that might occur. The
margin requirement is the percentage amount of margin you must provide when opening a new
position. This differs at different brokers.

For example, if you have a 2% margin required on EURUSD, it would mean that for 1 lot, which equals
$100,000, you need $2,000 in your margin account to be able to open this position. This 2% or two
thousand dollars cannot be used for anything else as long as your position is opened. Once you
close the position, these two thousand dollars will be released. Required margin is sometimes also
called entry margin, or initial margin, all the same. The required margin is calculated by multiplying a
notional value and margin requirements. Using the EURUSD example, you multiply one hundred
thousand by zero point zero two, which is the 2% margin requirement and you will get two thousand
dollars. If you have multiple positions open at the same time, you might see the term used to margin
or total margin. This is simply all margin you are currently using to maintain all positions opened.

The opposite of that is the free margin. These are money that is not locked up in any position, so you
can freely use them to trade. When your free margin is at zero or less, you will receive a Margin call
saying that you should deposit more money and, of course, cannot open any new positions. Free
margin is sometimes called available margin. The margin level displays the percentage ratio between
your equity and the used margin. For example, if your equity is $5,000 and the used margin is $1,000,
the margin level is 500%.

Account balance and equity

The account balance represents funds which you have deposited to your trading account. It is simply
the money you have in your account. So, if you deposit ten thousand dollars to your trading account,
your balance is $10,000. If you open a new trade, your account balance won’t change until that
position is closed. The only times when your account balance change is when you add more funds, if
you close opened positions, or if you hold a trade overnight. As the first two cases are very

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straightforward, holding positions overnight can get a bit complex. Overnight in forex is called a
rollover; during the rollover, a swap is calculated.

Swap is a fee that is either charged or paid to you at the end of the trading day. The balance increases
if you are paid swap and decrease if you are charged swap. Equity represents the current value of
your trading account. If you have no positions open, your equity equals your trading account
balance. But, if you have a ten thousand dollar account balance and currently have opened trade that
is on a $1,000 profit, your equity is $11,000. The same goes for negative, if the trade would be running
in $1,000 loss, your equity would be $9,000. Equity will constantly fluctuate until all positions are
closed. So, it is a real-time calculator of your profits and losses, compared to a balance that only shows
profits and losses from closed positions.

This is why we at FTMO care about your account’s equity when you undergo our evaluation process or
trade on an FTMO account. It is because the balance does not display a real amount of funds on the
account. For example, if you have a $100,000 account, but currently sitting in a floating loss of
$90,000, you have only $10,000, not $100,000 as your account balance states.

Floating and Realised PnL

Floating and Realised PnL is closely tied with balance and equity. Floating PnL shows profit or loss in
your equity. This is the profit or loss of trades you have currently open. So, if you went long gold at
1,900, but the price is currently sitting at 1,880, it means that you are down 20 points, your floating
PnL would be negative depending on your position size. If one point is worth $1, you are down $20,
if it’s worth $100, you are down $2,000. If you are down these 20 points and you decide to close the
trade, it becomes a realised loss. And If you would be up 20 points, it becomes a realised
profit. Realised PnL represents gains or losses that have been converted into your account balance. In
trading and everything else, profit is not real until it is realised. Unrealised profits are theoretical
paper profits.

Margin call and stop out level

The margin call represents a specific percentage level. When this level is reached, you won’t be able
to open any new positions. The margin call level is determined automatically in your trading
platform. For example, if your margin call level is 100%, it means, that if your margin level reaches
100%, you won’t be able to open any new position as your account is under margin call. Although a
lot of traders think that margin call means that their trades are getting closed. That is not correct.

The margin call gives the trader a warning. Stop out level is the specific percentage level, where, if
your margin is equal or below, your broker starts closing your positions until the margin level is greater
than the stop out level.

If we say that stop out level is 70%. It means that if the margin level falls below 70%, stop out will
automatically occur, and positions with the largest floating loss, will be liquidated. The process is
repeated until the margin level increases above 70%.

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To recap this, a margin call is just a warning that traders receive when they breach the margin call
level. Stop out happens when the stop out level is breached and positions start to get liquidated.

And how to avoid a margin call?

Avoiding a margin call is not hard, all you need to do is follow proper risk management. This includes
using stop losses that will get you out of the trade, way before a margin call. But it can occur… in some
rare situations where stop losses might not help. During high-impact news and flash crashes, traders
could experience slippage, which means that your Stop Loss fills at a much worse price than you
expected. These situations cannot be 100% avoided. But traders can prevent them by watching the
macroeconomic calendar and using smart money management.

TECHNICAL ANALYSIS

Japanese Candlesticks

Candlestick patterns are one of the most common price action techniques. There are literally
hundreds of different candlestick patterns we can find online. Do we need to know all of them? Of
course not. We have picked the most common and important ones we should know. They are easily
spotted on Japanese candlestick charts.

Table of Contents

• What are Japanese candlesticks?

• The benefits of using candlestick patterns while trading price action

o Long day bullish

o Long day bearish

o Short day bullish

o Short day bearish

o Bullish marubozu

o Bearish marubozu

o Bullish closing marubozu

o Bearish closing marubozu

o Bullish opening marubozu

o Bearish opening marubozu

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o The spinning top

o The doji candlestick pattern

o Long-legged Doji

o Gravestone Doji

o Dragonfly Doji

o Bullish engulfing

o Bearish engulfing

What are Japanese candlesticks?

Japanese candlesticks belong to the most popular methods of technical analysis. Searching for
specific candlestick patterns was first used in the 18th century in Japan at the rice exchange. These
were the very beginnings of technical trading.

The benefits of using candlestick patterns while trading price action

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Among the greatest advantages of candlestick patterns are their simplicity and informational value.
After a brief familiarization, the trader can quickly analyze market developments and determine what
is happening in the market. Are buyers stronger than sellers, or vice versa? Can we expect the trend
to cease, or on the contrary, could it gain in strength again? In fact, candlestick patterns can reveal
the psychology of traders. Various candlestick shapes can suggest whether buyers or sellers are
stronger. A typical example can be seen in the graph below.

Long day bullish

Starting with the easiest one, long day bullish candlestick. Long day bullish candlestick consists of just
one candle with a long body and short wicks. This candlestick usually shows strength and it can be
used as a “breakout” candle at the beginning of a trend. Traders don’t use long day bullish candlestick
as entry or exit signals but more as a confluence with their ideas.

Long day bearish

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Long day bearish candlestick is represented by a big sell candle body and small wicks. It signals a
weakness in the market and the fact we should start looking for the possible start of a downtrend.
Long day candlesticks are simple. They can give us clues about what might happen next, but as we
mentioned before, they should not be used as entry and exit signals alone.

Short day bullish

The short bullish day candlestick is an easy to spot pattern. It consists of one candlestick. Short day
candlestick is defined by its length. How short must the candle be? This is not 100% defined, so we
should always use our discretion and review past trading periods to have a comparison. Short day
candlestick is not used as an entry/exit signal. The short day candlestick pattern signals the fact that
the price stayed in the range during a trading period and we can expect an expansion soon. They can
be found in the larger patterns providing relevance.

Short day bearish

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This is the opposite of a short bullish day candlestick. Same as his bullish colleague, this candle is
common but not so worthy on its own. We should always wait to spot it in a larger context and think
about what are buyers or sellers trying to achieve in current market conditions.

Bullish marubozu

A very simple and powerful candlestick pattern is called marubozu. Spotting marubozu candlestick is
one of the easiest things we can do. It signals a real long body without an upper or lower wick. Bullish
marubozu candlestick shows us one pretty obvious thing, the buyers stepping in the market.

There are two situations where we can make a trading decision with a bullish marubozu candlestick:

• If we spot bullish marubozu in an uptrend, trend continuation is likely.

• If a bullish marubozu occurs in the downtrend, a reversal is likely to happen.

Bearish marubozu

Bearish marubozu has the same two uses as bullish one, they are just reversed.

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• If bearish marubozu happens in a downtrend, the trend is likely to continue.

• If bearish marubozu occurs in the uptrend, reversal is likely to happen.

The smart thing to do after we see a marubozu candle is to wait for further confirmation in term of
another candlestick patterns, support and resistance or indicators.

Bullish closing marubozu

There is only one small difference from a bullish marubozu: a lower wick. This candlestick suggests
that we had some sellers trying to step in after the candle opened but buyers were much stronger
and closed higher. If a bullish closing marubozu appears in an uptrend, it gives us a signal of
continuation. Another great location of bullish closing marubozu is at a key support area where we
can expect the price to rise higher.

Bearish closing marubozu

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Bearish closing marubozu is a bearish candlestick pattern which is signalled with a small upper wick
and a big bearish body. There are 2 locations where we should be watching for bearish closing
marubozu. In a downtrend, this signals that trend is likely to continue and at a key resistance level
where we can expect a new move down to begin.

Bullish opening marubozu

Even though bullish opening marubozu has a small upside wick, it is a very bullish signal in the market.
It shows the fact that buyers took control straight from the open and even though they met some
sellers at the top, the bullish bias prevails.

Bearish opening marubozu

Bearish opening marubozu signals strong conviction from sellers in the market. Although there is a
small lower wick, we can notice a price rally right after the candle opens. Bearish opening marubozu
in a downtrend signals continuation; in an uptrend, it can signal a possible trend reversal.

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The spinning top

The spinning top candlestick pattern is a neutral candlestick. By neutral, we mean the fact that it
doesn’t matter that much if the candlestick closes bullish or bearish, the important factor is the
candlestick closing location. The spinning top candlestick pattern has a single candle with a small body
and long wicks. It signals indecision in the market, the general rule of thumb is that if we see the
spinning top candlestick at the resistance level, it’s a short reversal signal. Vice versa, spotting the
spinning top candlestick at the support area signals a long reversal.

The doji candlestick pattern

Similar to the spinning top candlestick, doji is an indecision candlestick pattern. We can recognize a
doji candle with a very small body with an open and close that are virtually equal. A doji is often found
at the tops and bottoms of trends, so it is considered as a sign of possible reversal of the movement.
That being said, more complex doji patterns can also be used in trend continuation. Although doji is

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an indecision candlestick pattern, there are three different variations that are going to help us make
more educated trading decisions, there are long-legged doji, gravestone doji, and dragonfly doji.

Long-legged Doji

A long-legged doji is very similar to the spinning top candlestick. Compared to regular doji, it is a much
more dramatic candle with long upper and lower wicks. Long-legged doji is the same as the spinning
top candlestick, it signals indecision in the market and a possible reversal in play.

Gravestone Doji

Gravestone Doji is a bearish candlestick pattern. It shows us the fact that buyers tried to step in, but
sellers strongly overcame them and pushed the price back to open. In an uptrend, gravestone doji
indicates that the market is ready to turn around. In a downtrend, we can use a gravestone doji as
our continuation signal.

Dragonfly Doji

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Dragonfly doji is a bullish candlestick pattern. It shows us the fact that sellers tried to step in, but
buyers strongly overcame them and pushed the price back to open. In a downtrend, dragonfly doji
indicates that the market is ready to turn around. In an uptrend, we can use dragonfly doji as our
continuation signal.

Bullish engulfing

A bullish engulfing is the first 2 candlestick patterns we have. It forms with a small red candle on the
left and a big green candle on the right. The big green candle on the right has to completely
overlap/engulf the candle on the left.

Bearish engulfing

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Bearish engulfing forms with a small green candle on the left and a big red candle on the right. The
big red candle on the right has to completely overlap/engulf the candle on the left.

Types of Trading Charts

Watching the market fluctuations and volatility in real-time is an essential skill to acquire. There are
several ways to display data on the chart, from a simple candlestick chart to Renko or Heikin Ashi.
What are the specifics of these charts and how do they differ? You will find out in this lesson.

Table of Contents

• Types of trading charts – candlestick chart, Renko, Heikin Ashi

o Candlestick charts

o Bar charts

o Renko

o Heikin Ashi

o Conclusion

Types of trading charts – candlestick chart, Renko, Heikin Ashi

The ways of displaying data on our price chart are pretty much endless. This is why we will never find
two traders that do and watch exactly the same things in their trading. Although most traders are
using candlestick charts which we covered in the previous video, there is more depth in those as
well. Besides candlestick charts, we will also have a look at different graphical representations of price
charts such as bar charts, Renko or Heikin Ashi charts.

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Candlestick charts

We have covered Japanese candlesticks in the previous lesson, so we will do just a quick recap
now. They are the most popular methods of charting and viewing technical analysis. The anatomy of
a candlestick consists of the body and the wick. If the candle closes above the open, we have a bullish
candlestick. If the candle closes below the open, we look at a bearish candlestick. Wicks represent
the highest and lowest points where the market traded.

As we can see in the image below, we have two candlestick charts next to each other in our FTMO
cTrader platform.

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Although they look the same, there is one significant difference between them. The chart on the left
is based on time and the chart on the right is not. The chart periodicity is the main function we can
control when setting up our candlestick chart. The time periodicity is the most popular and common
amongst traders. Most trading platforms will allow us to set up charts based on minutes, hours, days,
weeks, and seconds. The most popular charts used by traders are 1-minute, 5-minute, 15M, 30M,
60M, 4-hour, daily, weekly and monthly charts. Although we can set up our chart with any setting we
want, using those popular timeframes works simply because many traders are also watching them. If
we use something like a 40-minute or 3-hour chart, the candlestick patterns on our chart might have a
lower weight as no other traders see them. The non-time-based charts are less common, but they
still can give traders valuable information. Our traders can use tick and range charts in our FTMO
cTrader platform, these two are also the most popular non-time-based charts. In the tick chart, one
tick represents one transaction. In other words, one tick is made when the market fluctuates by the
minimal price increment.

If we take a look at EURUSD, which is quoted in five decimal places. One tick would equal 0.00001 or
1 pipette. In the range bar, every bar will end once the range between its high and low equals the
chosen range. This means that every bar will have the same bar range and close either at high or
low. Using a range of tick charts can eliminate noise and display trends in a much clearer picture as
we will get rid of time periods when markets are not moving and staying range-bound. This can be
clearly seen when we compare this DAX four-hour chart with the 100 range chart in cTrader. We can
notice that both uptrend and downtrend were much cleaner on the range chart once we
eliminated the time factor and put our focus on price rotations.

Bar charts

The only difference between the candlestick and the bar chart is the visual representation.

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Bar charts, often called OHLC charts, are represented as vertical bars with two notches that represent
the open and close of the bar. Compared to Japanese candlesticks, bar charts might be a little less
clean for new traders when it comes to candlestick patterns. On the other hand, they might present
a little cleaner picture when it comes to marking out support and resistance.

Renko

Renko is similar to the range and tick charts. It eliminates the time factor from trading and changes
the visuals of our chart completely. We won’t see candlesticks anymore, but we will be looking at
bricks instead. The name Renko came from the Japanese renga, which stands for brick.

The Renko chart prints a new brick when the market moves more than the brick size away from the
previous brick. Let’s say we define that one brick signifies a movement of 5 pips. So, until the market

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moves these 5 pips in one direction (from the close of the last brick), no more bricks will be
drawn. Renko charts are not only great for filtering out noise but also for marking out support and
resistance areas.

Heikin Ashi

Heikin Ashi is another chart representation that comes from Japan. It means “average bar” and
although this is not something we need to know, here we can have a look at how the Heikin Ashi
candle is calculated. The Heikin Ashi is constructed the same way as the candlestick chart but has a
different calculation method. We can set up a Heikin Ashi chart as we want, on the specified time,
range or tick.

Heikin Ashi filters out the movements and makes a much easier approach to trend following. The
downside of it is that we might miss some valuable information as it might smooth out the chart a
little too much. But it is a great tool for both entries and trade management.

Conclusion

To conclude this chapter, the best thing we can do is to play with different charts and settings and
find what suits us the best, that is always the smartest approach. Regular time-based candlestick
charts will always be the most popular as they are used by traders worldwide. But tick charts, range
charts, Renko or Heikin Ashi, can be utilized in our strategy and bring a lot of use to our personal
trading.

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Market Environment – Ranges vs Trends

Hello traders, in this lesson, we will have a look at different types of trading environments.

Table of Contents

• Market environments – range vs trend

o Trends

o Ranges

Market environments – range vs trend

Recognizing these early on and adjusting our trading strategy to them is one of the most important
things to do. Trading ranges and trends require almost diametrically different approaches. But before
we go into that, let’s cover some basics and demonstrate how they look.

Trends

Simply put, the trend is when the price is going either up or down. To give this more technical
explanation, an uptrend is represented by higher highs and higher lows. If we look at the chart that
shows higher highs and higher lows, we can see that lows and highs are made by a pattern of
three candlesticks next to each other.

These are called swing highs and swing lows.

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A swing low is made when the price makes a low on the second candle, and the first and third candles
are not exceeding that low. The same goes for swing high, which is made when the price makes high
on the second candle, and the first and third candles are not exceeding that high. So as we can see
in this example of an uptrend, when the price slows down and creates a pullback lower, a swing low
is made, and the price moves higher.

Lower lows and lower highs represent a downtrend.

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In a downtrend, we look for short-term rallies that create swing highs, which usually offer an
opportunity to sell.

When are trends changing?

If we are in an uptrend and the last swing low that lets to a highest high is broken, we can consider a
trend change or at least a pause.

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The same goes for the downtrend, if the last swing high, which lets the lowest low, is broken, we can
look for buying opportunities or at least a slowing down. Although these examples look very
straightforward, things are more complicated in real markets. Swing highs and lows are often violated,
yet the price continues in its direction. There are several reasons why this might happen, and it is
something that we will cover in future videos. In a trending market, we can use different indicators to
help us stay in the trends. The most popular ones are moving averages, Ichimoku cloud, and MACD,
and they are used for building different trend following strategies.

Ranges

In ranging markets, price is bouncing between specific highs and lows. The high is acting as resistance
and the low is acting as support.

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Ranging markets are also called sideways or bracketing markets. When we are in the ranging markets,
we are not looking to capture moves but rather use mean-reverting strategies. Mean-reverting
strategies work on the assumption that the underlying asset will eventually return to the mean once
it deviates from it.

Our mean can be anything, from moving average, volume-weighted average price, or price level. From
this mean, we calculate standard deviations. Once the price reaches those standard deviations, we
can bet on a return to the mean. The problem with mean-reverting strategies is that the market can
start trending, and we will get caught on the wrong side of the market. One of the most popular
mean-reverting indicators is Bollinger Bands, RSI or stochastic. So is it better to follow trends or mean-
reverting? That is up to you and our personal preference. In general, markets are more ranging than
trending, but a lot of money can be made in huge trends.

Support and Resistance

In this lesson, we will look at one of the most popular trading strategies that are part of many trading
systems used by traders worldwide.

Table of Contents

• Support and resistance

o Horizontal support and resistance

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o Diagonal support and resistance

o Dynamic Support and Resistance

Support and resistance

So what is support and resistance trading?

If you ever saw support or resistance drawn on the chart, most traders use straight or diagonal lines
to do so. But this might not be the best representation, as support and resistance do not represent
exact price points but zones. Why do they work? Simply because they are visible to a lot of traders
and trading algorithms. So, when the market reaches those zones, there will be a lot of participation.

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This is why higher time frames support and resistance zones, like those at four-hour, daily or weekly,
will play more significance to price movement than one-minute or five-minute SR zones. We can think
about resistance as a ceiling above the price and support as a floor below the price. Both of these
hold the price until they are broken. The common misconception that you might read before is that
support and resistance zones are stronger with the number of touches they have.

This is not true, and it is due to the fact that traders place pending orders at those levels and with
more and more touches, these pending orders get consumed, so the market has an easier and easier
path to break through eventually.

Horizontal support and resistance

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Marking out horizontal support and resistance is the most popular price action trading strategy, which
can be used in both ranging and trending environments. When we are looking to trade support and
resistance, there are two situations we might find ourselves in. The first is trading them from the same
side, in other words, we are buying support and selling resistance. In this case, we don’t want to trade
zones that have too many touches. We have to bear in mind that if the price revisits the zone for a
second or third time, there will be a lot of resting orders, above resistance and below support, from
traders who are either already in the trade with their stop-loss placed above or below. But also
breakout traders that anticipate levels to break. Because of that, markets often tend to probe these
areas, causing both traders to stop out from their positions and trapping the breakout traders. We
should always be mindful of this when we are placing our orders.

The second type of horizontal support and resistance trade is when we are trading the inverse of a
level. This means that we are going long on prior resistance and going short on prior support. With
these trades, the more touches the level had before it flipped, the more significant it is. So, in other
words, if we are going long on a level that was previously a resistance with four touches, it will be
much more significant than a level with two touches. When we are marking the support and
resistance on our chart, we should always start with the bigger picture on higher time frames like
weekly or daily and then progress to shorter-term time frames. Other price points that can act as
significant support and resistance levels are round numbers, pivot points, and opening prices of a
new weekly, monthly or yearly candle.

Diagonal support and resistance

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Diagonal support and resistance, also known as trend lines, are commonly used among
traders. Compared to horizontal levels, they can be more subjective as they can be drawn by
connecting two or more price swings. When we are drawing trend lines, we should always focus on
the most apparent levels that show a clean path of ongoing trends. Like the horizontal support and
resistance areas, these can be traded from the same side and inverse once they break. The more
touches the trendline has, the weaker it becomes and is more likely to break. We can also use
trendlines during pullbacks in trends as a guide when pullback might be over, and we can continue
the trend.

Dynamic Support and Resistance

The last support and resistance levels we can plot on our chart is a dynamic one. These come from
different indicators, with the most popular ones being different types of moving averages. The most
common ones are fifty, one hundred, and two hundred moving averages that are plotted on daily and
weekly time frames. Many traders and investors watch these, so we can assume that prices will react
to them once they are tested. Other dynamic support and resistance indicators are the volume-
weighted average price, Bollinger Bands or Ichimoku cloud.

and Demand Trading

Hello traders, in this lesson, we will look at supply and demand trading strategy and how we can
benefit from it.

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Table of Contents

• Supply and demand trading

o Limit orders and market orders.

o How to identify supply and demand zones

o What makes a good supply and demand zone

o How to trade supply and demand zones

Supply and demand trading

The supply and demand trading strategy is a type of price action trading strategy similar to horizontal
support and resistance. It comes from supply and demand dynamics that we can find in the financial
markets and anywhere in the world.

For example, Apple released a new iPhone, but this time it would be a special edition with limited
devices to sell. There will be a lot of buyers or demand who will drive prices higher. On the other hand,
if Apple released a new iPhone with unlimited pieces to sell and got bad reviews, there would be an
enormous supply to sell but no demand to buy. Because of that, they will have to drive prices lower
until they find buyers willing to buy. This is the same in financial markets where prices rise once
aggressive buyers overcome sellers; in other words, demand overcomes supply. Or vice versa when
aggressive sellers overcome buyers or supply overcome demand. One of the common misconceptions

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many traders assume is that when markets move quickly in one direction, it is because there are more
buyers than sellers.

This is not true since for every buyer there has to be a seller and vice versa. When the price goes up
or down, there is no supremacy on either side, but the amount of aggressivity or willingness to buy
or sell for higher or lower prices. If we look at this idea from a more advanced perspective, traders
can place two types of orders in the market.

Limit orders and market orders.

Let’s say we have an instrument that is priced at $100 and there are limit orders above and below the
price.

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At 101 we have 5 limits orders to sell, at 102 we have 10 orders to sell. Below the price, there is 5 to
buy at 99 and 10 to buy at 98. For the market to move higher or lower there has to be someone who
will buy 5 contracts to move to 101 and 15 contracts to move the price to 102. If aggressive buyers
want to move prices higher, the limit sellers above the price start to pull their orders from the order
book, and the price will keep climbing higher. When there is obvious aggressivity from either side,
supply and demand zones are created. If we want to understand why these zones give us trading
opportunities, we have to think about who moves the markets. We, as retail traders, do not move
markets. The institutions, banks, and large funds do move markets. Compared to us, these market
participants cannot just execute their orders wherever they want. They need enough liquidity in the
order books not to get significant slippage. That is why they use areas of consolidation for entering
the market. More often than not, they cannot execute all orders at once, so when prices drive away
from the consolidation zone, they still have unfilled orders inside. That is why markets often react
once zones are revisited.

How to identify supply and demand zones

If we want to identify supply and demand zones, we have to look at consolidations before the large
expansions. The demand zones are found in consolidations before a large move up. The supply zones
are found in consolidations before the large move down. The larger and more aggressive the move,
the more significant Supply or Demand zone is.

What makes a good supply and demand zone

Besides a large move from the zone, we look for a few other factors that give us confluence for
trades. Zones on higher time frames will always carry more value than those on lower time frames.

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The time market spends outside of the zone is also necessary; we don’t want to see the market being
crazy all over the place going back and forth.

What we prefer to see is a nice rounded retest into the zone.

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How to trade supply and demand zones

There are two ways to trade supply and demand zones, first one is a set and forget approach when
we put a limit order at the top of the demand zone or bottom of the supply zone. This gives us more
freedom from looking at charts, but of course, we might get quickly taken out when the price spikes
through the zone.

The second approach is to wait for the initial reaction and enter with a market order. Our stop loss
should always go to the other side of the zone, and we can target the next supply or demand zone or
support and resistance area. Entering the market is entirely up to our approach, and we should test
what suits our trading style best.

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Chart Patterns Trading

In this lesson, we will focus on technical patterns.

Table of Contents

• Chart Patterns Trading

o Head and shoulders pattern

o Inverse head and shoulders pattern

o Cup and handle patterns

o Ascending triangle

o Descending triangle

o Falling wedge

o Rising wedge

o Double top pattern

o Double bottom pattern

o Flags

o Bull flag

o Bear flag

Chart Patterns Trading

Now that we have covered horizontal and diagonal support and resistance, we can look at chart
patterns as they are a combination of both. Chart patterns are one of the oldest parts of technical
analysis and price action trading. They were proven many times as a functional way to help technical
traders identify the next market direction. That being said, a trader should not forget about the
context and current market conditions while making decisions in trading.

Head and shoulders pattern

The Head and shoulders pattern is believed to be one of the most reliable reversal patterns. It starts
after a long bullish trend when the price rises to the peak and pulls back. Shortly after, the price rises
again to a significantly higher peak but declines again. Finally, the price goes up for the third time but
only reaches a level of the first high. After that, it pulls back and completes the pattern, which signals
that an uptrend is ending and the price is about to decline. The first and third peaks are the shoulders,
and the second peak is the head. The support level where the price bounces from is called a neckline
and is often used as entry-level on a break.

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Inverse head and shoulders pattern

As with other patterns, there is also an inverse head and shoulders, which occurs after an extended
downtrend and indicates that price will go up.

We can notice on both charts that breaking off a neckline would give us a great trading opportunity.
In the second case, we could even use a neckline retest as a second entry.

Cup and handle patterns

A cup and handle pattern is a bullish continuation pattern. It consists of two parts – a
cup and a handle. Once a cup is completed, the handle is formed on the right side of it. If it is followed

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by a breakout on a resistance line and traders consider it a signal for an uptrend. The pattern can only
be recognized on the long term charts because of the longer time requirement of forming a pattern.

As we can see, identifying and trading a ‘cup and handle’ pattern is nothing complicated. Once we
enter the trade on a retest of resistance, we can place our stop loss below the low of a handle and let
the trade do its work.

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Ascending triangle

Both ascending and descending triangles are one of the most popular patterns among traders. To
really help us understand this pattern, we should take a look at it from more of a logical perspective.
The ascending triangle is formed when the price is unable to break a resistance but at the same time,
it is forming higher lows.

As we may notice in the example above, the price is bouncing from resistance but is unable to make
a lower low on each bounce. This is giving us a bullish signal that a possible break is about to happen.

Descending triangle

Inverse to the ascending triangle, the descending triangle is visible when the market is bouncing
from support but it is unable to make higher highs.

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Falling wedge

A falling wedge is a bullish reversal pattern which happens most of the time when the price is pushing
lower but we can see divergence at one of our oscillators. This means that even if the price is going
lower, sellers are getting exhausted and we can expect a reversal to happen soon.

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Rising wedge

Reversal of falling wedge, the price is pushing higher, but we can find weakening clues in our oscillator.

Double top pattern

The double top pattern is usually made as a topping formation at the end of the trends. It is a bearish
reversal pattern which is characterized by the peak which is shortly followed by the second one at the
same or very similar price point. Once the price breaks the support made below the highs, the double
top pattern is valid. We use the same term “neckline” which is also used with the head and shoulders
pattern. We can either enter the trade once the neckline is broken or wait for the retest of the
neckline.

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Double bottom pattern

The opposite of the double top is the double bottom pattern which is made at the bottom of the
downtrend. The double bottom is characterized as two bottoms at an equal or similar price level.
Same as with the double top pattern, we can enter either at the break of the “neckline” or its retest.

Flags

Flags are technical patterns which can be understood as a pause in the underlying trend. Flags are
spotted as consolidation after a fast trend in the market and they signal the continuation after the
breakout. As with all chart patterns, we have a bull and bear flag.

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Bull flag

Bear flag

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Fibonacci Trading

In this lesson, we will have a look at Fibonacci retracement numbers and the meaning behind them.

Table of Contents

• Fibonacci retracements

o Fibonacci extension

Fibonacci retracements

The Fibonacci retracements are one of the most popular tools in technical analysis. They came up
from the Fibonacci sequence of numbers. These are 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144… If we
divide two numbers next to each other from number three and above, we will gain a certain ratio we
can use from Fibonacci retracement levels. Fibonacci retracement levels can then be used as
horizontal support and resistance areas. And they are created by using a Fibonacci retracement tool
which is available with pretty much every trading software and plotting it from key swing highs and
swing lows. Once we plot those, we will see 23.6, 38.2, .50, 61.8, and 100% retracement numbers.

Why do these numbers work?

There is no magic behind that; it is simply because dozens of traders watch them, so we tend to see
a reaction once the price reaches them. The most important ones are 38.2, 50 and 61.8% retracement
levels. The 61.8% retracement is also called the golden ratio, and it is the most important one. A 50%
retracement is not technically a Fibonacci number, but it is used because it works.

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As we can see on this chart, this is a daily EURUSD chart where we plotted a Fibonacci retracement
tool on key swing highs and swing lows. Once the price starts its retracement, we could find a buying
opportunity between 61,8 and 50% retracement. Another way of using Fibonacci numbers is with a
Fibonacci extension.

Fibonacci extension

This Fibonacci extension can predict future support and resistance levels in trending markets. This
extension tool is pulled from major swing moves, and it is beneficial with instruments in price
discovery. In other words, instruments that are beyond their previous all-time high.

If we take this NASDAQ chart, we can see that the Fibonacci extension was pulled from the whole
2020 March crash. It could show us important levels of support and resistance in play after NASDAQ
broke its all-time high. In conclusion, Fibonacci retracement and extension can be useful, but it is not
the holy grail in trading. These levels oftentimes get front-run or broken through, so practising good
risk management is always the key.

Technical Indicators

Using technical indicators in trading is a never-ending discussion among traders. Some would say they
are useless, some can’t imagine trading without them. Understanding the technical indicators is
something every trader should master, regardless if he or she decides to use them or not. We picked
the top 11 technical indicators, which in our opinion are the best and they can improve your trading
significantly.

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Table of Contents

• Technical Indicators

• MACD Indicator

▪ How to trade with MACD Indicator?

o MACD Divergence

o What is divergence?

• RSI Indicator (Relative Strenght Index)

o RSI Divergence

• ADX Indicator

• Ichimoku Cloud

o Kijun Sen (red line)

o Tenkan Sen (blue line)

o Chikou Span (green line)

o Ichimoku Cloud / Senkou Span

o Ichimoku Cloud Trading Strategy

o Kijun Sen

o Tenkan Sen

o TK Cross

o Chikou Span

o Cloud

• On Balance Volume (OBV)

o OBV Trading Strategy

o OBV Divergence

• Stochastic Oscillator

• Parabolic SAR

• Average True Range (ATR)

o How to trade using the ATR indicator?

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• Moving Average Crossover

o How to trade a moving average crossover?

• Volume Weighted Average Price (VWAP)

• How to use VWAP?

• Bollinger Bands Indicator

Technical Indicators

Technical indicators are mathematical calculations based on price or volume. They are used mostly
by technical traders, in other words, those who trade by using technical analysis. Technical indicators
provide traders with additional information on what market conditions are right now and the
potential direction of the next move. If you are an experienced trader, you most likely know that
hundreds of indicators are available on trading platforms. You certainly don’t need to use all of them,
rather, you should be able only to add those which are working for you or fitting your trading plan to
maximize profit potential in your strategy or trading system.

MACD Indicator

MACD is the acronym for Moving Average Convergence Divergence, it’s a trend following technical
indicator that shows a difference between two lines, the MACD line and the Signal line. The MACD
line is calculated by subtracting a 26-day exponential moving average from a 12-day exponential
moving average. The signal line is a 9-day exponential moving average of MACD itself. The histogram
gets bigger as 2 lines diverge and disappear when they cross each other.

How to trade with MACD Indicator?

When MACD crosses the Signal line, it is perceived as the start of a new trend. Falling below the
Signal line indicates the signal to sell and rising above it suggests that it is time to buy.

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MACD Divergence

MACD is also one of the preferred indicators to use in spotting a divergence in the market.

What is divergence?

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We talk about MACD Divergence when the price of the traded instrument starts moving in a direction
that is different from MACD, a reversal of the current trend is likely to occur. We can see divergence
both on MACD Histogram and also the MACD line.

As you can notice on the chart below, the price of GBPUSD is going higher, but at the same time,
MACD is showing us lower. This is what we call MACD Divergence. Let’s have a look at a few more
trading examples.

Divergence can be spotted on any instrument and any timeframe. You can see how many nice and
working examples we have on the above AUDJPY 30-minute timeframe.

RSI Indicator (Relative Strenght Index)

RSI stands for Relative Strength Index, it is a momentum oscillator, but it measures the velocity and
magnitude of price movements on a scale from 0 to 100. Generally, when the RSI shows a reading at
70 and above, we can assume that the instrument is being overbought, and the price should go to

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the downside. Readings at 30 and below suggest that the instrument is oversold, and we should see
the price going higher.

RSI can be used to confirm trends. If a downward trend is occurring, the instrument should be found
fluctuating between 10 and 50, if RSI breaks out of that level, it often corresponds with the break of
a price as well. The same goes for an uptrend, except the instrument moves between 50 and 90.

RSI Divergence

If both RSI and price experience trends but in opposite directions, divergence can signal a price
reversal same as with divergence on MACD. One thing worth mentioning is that during strong trends,
divergence is likely to appear without breaking the trend.

ADX Indicator

Staying with the oscillators, we will talk a bit about the Average Directional Index also known
as ADX. Unlike to RSI and MACD, ADX doesn’t determine if the trend is bullish or bearish, but it shows

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the strength of a current trend. Once you add the ADX indicator to your chart, you will see it
fluctuating between 0 and 100, whereas readings below 20 generally mean a weak trend, and
if ADX is above 50, it means the trend is strong.

On the chart above, you can notice how the price was in consolidation at the same time as ADX
indicator was fluctuating around level 20; once the price started trending higher, ADX broke 50 levels
and gave the signal of a strong trend which indeed followed. From this example, you can see that ADX
is a useful indicator for determining if the market is ranging or starting a new trend.

The stronger the trend, the higher the ADX indicator value, regardless of the direction of the trend.

You can notice here on Dow Jones how ADX indicator started rising rapidly, confirming the new
downtrend’s strength. Before we look at another indicator, here is a 4-month trading range in Bitcoin
and a great example of how ADX would help you identify the current trading environment.

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Ichimoku Cloud

This is one of the more complex indicators, with a strong fanbase of traders who would swear on this
indicator. Frankly, many of them don’t need anything else besides the Ichimoku Cloud for their
trading. Ichimoku Cloud is a momentum indicator that determines the direction of the trend but also
calculates future levels of support and resistance. This makes it unique because it is one of the few
indicators which is not lagging behind the price.

Does this seem like one big mess? No need to worry. Let us explain everything you see in the chart
above.

Kijun Sen (red line)

Also known as the baseline, which is calculated by averaging the lowest low and the highest high for
the last 26 periods.

Tenkan Sen (blue line)

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Also known as the conversion line which is calculated by averaging the lowest low and the highest
high for the past 9 periods.

Chikou Span (green line)

Also known as the lagging line. This shows the closing price plotted 26 periods behind.

Ichimoku Cloud / Senkou Span

Every cloud is made of two lines which are used as borders for the cloud. The first line is calculated
as the average of Tenkan Sen and Kijun Sen and plotted 26 periods ahead. The second line is calculated
by averaging the lowest low and the highest high for the last 52 periods and plotted 26 periods ahead.

Ichimoku Cloud Trading Strategy

Let’s have a look at the above GBPCAD 4-hour chart and break down separate parts of the Ichimoku
Cloud.

Kijun Sen

We watch Kijun Sen as our indicator of the general direction of the price. You can think about it similar
to the moving average – if the price is above Kijun Sen it means bullish. If the price is below, it means
bearish.

Tenkan Sen

Similar to Kijun Sen, but Tenkan Sen is also indicating market conditions. If Tenkan Sen is moving up
or down, the market is trending. If Tenkan Sen is moving horizontally, it signals that the market is
ranging.

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TK Cross

Crossover of Kijun and Tenkan Sen. This generally means there is a change of direction in the market
and when Tenkan is above Kijun Sen, we are in a bullish market. If the opposite happens, we are in a
bearish market.

Chikou Span

This one is simple. If Chikou Span is above the price – this is a bullish signal. If it is below, that’s bearish.

Cloud

The cloud acts as support and resistance. If you take a look at the chart above, you can see that the
price is currently trading above the cloud. This means that if we are going lower, we can use both
cloud levels as support areas. From looking at the GBPCAD chart above, you can see that we recently
had a bullish TK Cross, Chikou Span is trading above the price and we are above the cloud. This seems
like a decent buying opportunity, right?

As you can see, the price indeed went up and we were able to catch this great long trade. Also, pay
attention to the bearish TK cross (orange) and the change of direction of the trend.

On Balance Volume (OBV)

Made by Joe Granville in the 1960s, On Balance Volume (OBV) is a technical indicator which helps
traders make decisions about future price movement based on the previous trading volume of the
asset. OBV indicator is watching the volume of trades and also if the push of the price is higher or
lower. On Balance Volume is used in technical analysis to determine buying or selling pressure in the
market.

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OBV Trading Strategy

On Balance Volume Trendline strategy is a simple way to use a trendline on OBV and monitor the
current price action. As you can see from the example below, the price of EURUSD was in
consolidation, which is something that can confuse a lot of traders. But if you would add the OBV
indicator to your chart, you can notice that OBV broke above the down steep trendline, which
signalled the end of consolidation and higher prices.

In another example, you can see how using the OBV indicator would help us prevent getting into the
bad trade on a trendline fakeout.

OBV Divergence

Another way how to use OBV is watching for divergence – same as with other oscillators we described
above.

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Stochastic Oscillator

Another oscillator is called Stochastic. It comes from the Greek word stochastics, meaning able to
guess. The Stochastic oscillator can be used for any type of trading such as scalping, day trading but
also long-term swing trading. Same as RSI, Stochastic shows overbought and oversold conditions, but
it will also give you buy/sell signals for crosses which are made from %K and %D lines.

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You can see the pretty decent signals on a Daily AUDJPY but also on a 5-minute chart of Gold.

Parabolic SAR

Trend following is definitely one of the most popular trading strategies traders all over the world use.
To be able to define trends in the financial markets, it is definitely a useful skill to have. That’s why we
have a variety of technical indicators to help us and Parabolic SAR is one of them. Parabolic SAR (SAR
means “stop and reverse”) is the indicator which is not only showing a trend direction but also signals
when it ends and reverses. You can see how Parabolic SAR is displayed on the chart. Dots above the
candles mean that we are in the bearish trend and vice versa.

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Average True Range (ATR)

Average True Range is probably one of the most popular indicators among retail traders. ATR
measures market volatility, which is a very important factor in trading. Every trader should be aware
of current market conditions and volatility. We don’t want the market to be too volatile because in
that case, it is hard to predict the next move. But on the other hand, when the market stalls, we
cannot benefit from that as well.

To represent real volatility in the market, we have to look at the previous data we have. ATR indicator
is measuring:

1. Distance between current high and current low.

2. Distance between previous close and current high.

3. Distance between previous close and current low.

After that, it takes an average price of past trading days which represents the volatility in the market.

How to trade using the ATR indicator?

ATR can be used in several ways. One of the most popular is to use the ATR with stop-loss placement.
For example, if the ATR indicates 4.7 pips in EURUSD / H1 timeframe, you can assume that the market
should not exceed this value once you are entering a long trade – example marked on the chart below.

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As you can see, the market did not exceed hourly ATR and continued higher.

There are also several indicators on TradingView, like this one which calculates previous values of ATR
to be used as dynamic S/R and also entry/exit signals on the ATR level break.

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Moving Average Crossover

Moving averages are technical indicators which probably every trader knows. First, let’s cover what a
moving average is: Moving average is a lagging indicator which is helping traders to “smooth” out the
price and reduce noise in trading. It is one of the most popular trend-following indicators, which is
commonly available.

The following are different MA types:

• Simple Moving Average

• Exponential Moving Average

• Weighted Moving Average

• Hull Moving Average

• Smoothed Moving Average

All of these are calculated a little bit differently, but we are not covering it in this article. Let’s have a
look at how they are presented on the live chart.

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How to trade a moving average crossover?

To be quite honest, trading a moving average crossover is easy as it gets. One of the most popular
crosses is 50 and 200 moving average crossover, called the golden cross or the death cross.

• A golden cross happens when 50 moving average crosses 200 moving average upwards and
continues above the 200 moving average.

• Death cross happens when 50 moving average crosses 200 moving average downwards and
continues below the 200 moving average.

Volume Weighted Average Price (VWAP)

VWAP is heavily used amongst traders who trade according to Auction Market Theory and use Volume
profiles in the day trading. If you have no idea what we are talking about, make sure to read our article
about Market Profile trading here.

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How to use VWAP?

The VWAP gives traders average price throughout the day based on price and volume. We plot VWAP
on a chart and use it on intraday timeframes such as 5 minutes with VWAP is giving us dynamic S/R
levels. The popular rule between a lot of traders who trade intraday is that they only long when the
price is above VWAP and short when below.

Bollinger Bands Indicator

John Bollinger, the father of Bollinger Bands, developed this technical indicator in the 1980s. Bollinger
Bands are calculated by a moving average with the standard deviation above and below the median
line.

Bollinger Bands use the same principle as RSI and other oscillators with the overbought/oversold
arguments. When the price reaches the upper Bollinger Band, we can assume that the market is

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overbought. We can assume that the market is oversold when we reach the lower Bollinger Band.
The median line can be used as “balance” and also the target for your trades.

Divergence trading

In this lesson, we will cover divergence trading.

Table of Contents

• Divergence trading

o What is divergence trading?

o Regular divergence

o Hidden divergence

Divergence trading

There is a popular saying in trading that all we have to do to be profitable is to buy low and sell
high. Unfortunately, in real trading, things are rarely easy like that. Although we will hardly sell the
absolute top or buy the absolute bottom, we can use divergences to spot possible reversals very early
and also use them to manage our existing positions.

What is divergence trading?

The divergence can be spotted by comparing price action with different oscillators. When the market
is going up, and the price is making a higher high or going down, the price makes a lower low, the
indicator should also make higher highs and lower lows. But when there is a divergence, we can see
that an uptrend price is making higher highs, and the indicator is making lower lows. Same for a

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downtrend, the price is making lower lows, but the indicator is making higher highs. It is up to us what
indicator we decide to use.

The most popular ones are RSI, MACD or Stochastics.

Compared to indicators such as moving averages or Bollinger Bands which are lagging indicators,
divergences are considered a leading indicator. This means that we can catch reversals near-absolute
tops and bottoms and get great risk to reward setups.

Sounds great, right?

It is great, but like anything in trading, divergence trading is not some hidden secret to the
markets. We will often find out that divergences appear in strong trends, but the price is still going in
one direction. This is why divergences are best to use once the market slows down after a strong
directional move where we can spot a weakening momentum. There are two types of
divergence: Regular and hidden.

Regular divergence

Regular divergences are used for possible trend reversals. There is a bullish and bearish regular
divergence.

The bullish divergence can be spotted when the price makes lower lows, but the oscillator makes
higher lows. This can be a possible signal of a downtrend reversal. As we can see in the example, a
price makes lower lows that are not confirmed on the MACD indicator; therefore, we can look for a
trend reversal.

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Opposite to that is a regular bearish divergence. When the price is making higher highs, but the
oscillator makes lower highs, we can spot the regular bearish divergence. This can be a signal of a
reversal in an uptrend. As we can see in the example, a new high in price is not represented by a new
high in the oscillator, in this case, the RSI.

After spotting a regular divergence, we don’t need to always jump right in the trade. More often than
not, the better choice is to wait for other confirmations like watching a price action or technical
indicators.

Hidden divergence

Compared to regular divergences, hidden divergence can signal possible trend reversals and a trend
continuation. As trend trading can oftentimes be easier than trying to catch tops and bottoms, hidden
divergence is a useful tool we can use. A hidden bullish divergence can be found in an uptrend.

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We can spot a hidden bullish divergence when the price makes a higher low and the oscillator makes
a lower low. Hidden bearish divergence is presented when the price makes a lower high and the
oscillator makes a higher high. Here is the recap of what we learned in today’s lesson, as we can see
on the table.

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Regular divergences are useful for trend reversals, and hidden divergences can signal trend
continuation. It is always well advised to use other trading confluence tools rather than just trading
these divergences blindly. We can use anything from indicators or price action.

How to spot breakouts and fakeouts

In this lesson, we will cover how you can trade breakouts and fakeouts.

Trading breakouts and fakeouts

Breakout trading is a popular trading strategy followed by many traders and trading algorithms. There
are two ways you can spot a breakout, the first one is by using price action, and the second is by using
technical indicators that measure volatility.

What is volatility?

Volatility measures price fluctuations over certain time periods. When there is high volatility, markets
go back and forth very quickly; when there is low volatility, markets are trading in tight ranges. During
times of low volatility, we can expect breakouts to occur. Bollinger Bands, Keltner or Donchian
Channels are the most popular indicators to measure volatility. They measure volatility based on
different indicators such as moving averages or Average true range. Another way of looking at
volatility is by using price action. You can use horizontal support and resistance or different chart
patterns to spot a possible breakout. Breakout trading can be considered an impatient approach as
breakout traders often use stop or market orders to chase rising volatility.

This can work, but very often, we can see false breaks above and below existing ranges. These false
breaks happen for one simple reason, above and below every easily recognizable price range, you can
find two types of orders. If we take a look at an example of horizontal resistance, which was already
tested in the past, above it, we can find stop-loss orders from traders who are already short and also
buy stop orders from traders that are anticipating a breakout.

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Because both of these essentially buy orders, they bring a large amount of liquidity, in other words
resting orders, to the market. Large market participants often use this liquidity and absorb all the buy
orders with their large sells. This will result in a false breakout above the resistance and continuation
down. Not becoming a victim of these false breakouts is not that hard; all you need to do is not put
your stop-loss to obvious places where there is a high likelihood of other traders having their stop-
loss. Another thing is trying to have a little more patient approach rather than having a “fear of
missing out”, and after you see a breakout outside of any tight range, wait to see if new prices will be
accepted or not.

Of course, there will be situations where you will miss out on the breakout, but more often than not,
waiting for the breakout and placing a limit order to an area where the breakout occurred can be a
smarter play.

Multiple timeframe analysis

It is often said that being well prepared for the trading day is a battle half won. This cannot be far
from the truth. We cannot jump to an empty chart, start trading right away and think we can profit.
We need to have a plan. A trading plan. In this lesson, we’ll look at how to draw a simple trading plan
directly on the chart and how we can implement it right away to start trading.

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Table of Contents

• Multiple timeframe analysis

o Weekly chart

o Daily chart

o Execution chart

Multiple timeframe analysis

All traders are different, we will hardly find two traders with the same strategy and view on the
markets. Knowing that, we know we cannot satisfy everyone’s opinion but it’s ok. In this article, we
are going to break down the chart of GBPUSD which is a heavily traded pair and we’ll use a simple
price action with horizontal and diagonal support and resistance and also a volume profile to easily
spot areas of heavy distribution and path of least resistance. All of our steps are going to be explained
in depth so no worries, we are sure they are really easy to follow. Because the preparation is best
done when markets are calm, weekends are best suited for the job.

Weekly chart

Since the majority of traders specialize in intra-day and intra-week trading, we are not going to a
higher timeframe than weekly. Of course, monthly, quarterly or yearly charts can uncover some macro
directional details but for intraweek and intraday trading you do not need to pay too much attention
to them.

When looking at the weekly chart, we should always ask ourselves questions such as:

• Where is the market going?

• What has been the general direction of the last few weeks?

• What happened last week? Was the market trending or ranging?

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As we can see in the above chart, the weekly timeframe functions as our broad navigation. Before
drawing any lines to the chart, we should take a look at the price movement alone. After this
observation, we can notice GBPUSD broke out from a 2-month long trading range at the end of July.
The price was ranging during the past two weeks, which signals that some bigger move might be
coming soon. After this, we can draw support and resistance lines using price action. When marking
out our weekly chart, there is no reason to go thousands of pips above and below the market price,
as there is a very little chance the price is going to reach there during the following week.

We used purple colour to mark out our weekly levels. We simply marked out support and resistance
levels using price action. Because we are looking at Forex, where the volume is calculated by the
executed bid/ask movement, we put more emphasis on the price action rather than volume. Trading
indices or commodities, doing things another way around, might be better for those assets.

Daily chart

Looking at a daily chart gives us a more detailed look at the actions of previous days.

We are going to examine the past trading week and ask questions such as:

1. What was the direction last week?

2. Was the market in range or trending? Should we look for a trend continuation or a mean
reversion?

3. Is the market over-extended?

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4. If we could only use a daily chart for trading, which direction would we say the market will go?

5. What are the macroeconomic events planned for next week and at what time and day they
are?

In responding to these questions, we can mark out our chart with lines.

We marked out daily levels with the blue line, and once again we marked out the most recent levels
where the price bounced from. We also boxed out the recent trading range with shaded grey colour,
for reference, we also shaded the areas from the past with a similar price behaviour, as we can notice
from the past examples. Every time GBPUSD was in a very tight range like this one, we had a big
expansion shortly after. This gives us a clue that we can expect more of a trending movement next
week.

Execution chart

This is completely up to us. Some traders like to enter their trades on H4, H2, H1 or whatever time
frame is suitable. For this example, we use H1 timeframe for marking out levels and also entering and
exiting potential trades. Our intraday/execution chart should be revisited not only during the
weekend but also in the morning before we start trading, these levels change pretty often so there
might be a need to adjust them accordingly.

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We marked out our hourly levels in orange, and we also added arrows for better visualisation of
possible movements, this is not necessary, but it can help, especially in the learning stage. We also
added two possible scenarios for trades to unfold. One for a short trade and one for a long. We are
ready to tackle the market next week with this being marked out. We must be mindful of our levels
and macroeconomic releases coming into the new trading day. Of course, we can use indicators or
anything else to mark out our levels, it’s completely up to us. The main takeaway from this article is
to understand the bigger picture of the market, what it’s trying to do and where it’s trying to go, and
more importantly, being prepared for every piece of movement. And as we can see, the market did
this right after the opening. Take a look at how it bounced and stopped in front of our levels and how
it followed our plan.

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STATISTICAL ANALYSIS

Backtesting a trading strategy

There are countless ways of making money in forex. But how can we ensure that our strategy will
work in the long run? The truth is that we can never know 100% as markets are ever-changing
organisms. The good news is that we can get very close to profitability thanks to backtesting. In this
lesson, we will take a look at backtesting basics and show you how you can make the most of it to
gain confidence in trading.

Table of Contents

• Guide to forex backtesting – gain confidence in trading strategy

• Types of backtesting

• Don’t forget about forward testing

• Important backtesting statistics

• How many trades should be backtested?

Guide to forex backtesting – gain confidence in trading strategy

One thing connects all professional traders – they have 100% trust in their trading strategy. If we want
to join this elite club of traders, we must know what to expect from our trading strategy. This is quite
a complicated task since none of us can see the future, but thanks to the historical data, we can easily
see how we would have performed in the past. If we can find out that our trading strategy performed
well in the last couple of years, there is a very small chance it won’t work in the future.

So what is backtesting?

While we backtest, we put our strategy to the test on historical data. This can be done over the last
few months, but we can also go 10 or 20 years back. It all depends on our appetite and how robust
we want our backtest to be. Although backtesting can be very time-consuming, it is relatively easy.
All we need is a trading platform with enough historical data and a simple Excel sheet where we will
document all trades.

Types of backtesting

There are two types of backtesting, manual and automated.

Manual backtesting is as straight as it gets. We need to open the platform and look daily for valid
trading setups we would trade in real-time. After every trade, we log it into our spreadsheet and carry
it on. This can be quite a long process; most importantly, we must be 100% true to ourselves. One of
the mistakes traders make with backtesting is they try to “curve-fit” strategy so it would bring a
positive expectancy. An example of this can be when the trading setup would present itself in the

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middle of the night where we won’t be able to execute it, or our Stop Loss would get hit by spread
and we completely ignore this fact and register the trade as profitable anyway. We must realize that
we are only hurting ourselves by doing this as we will lose money in the live market conditions.

The second type of backtesting is fully automated. We often need knowledge of some programming
language for this type of backtesting. It is mostly Python, MQL or C++. You can also use some third-
party online software. A huge advantage of automated backtesting is that it completely removes all
the daily emotions and time we need to spend on historical data. The downside of it is that we need
to invest quite some time in learning the programming language or understanding third-party online
software.

Don’t forget about forward testing

Another type of testing that is just as important as backtesting, is forward testing, also called walk
forward testing or paper trading. Compared to backtesting, where we look at historical data, in
forward testing we use real time market data to test our strategies.

This type of testing is very important, because it allows us to see trading examples as they happen in
real time. By doing so, we can eliminate some of the shortcomings that result from backtesting, such
as historical bias or curve-fitting, while also being able to observe how our strategy reacts to news
and macro data releases.

Important backtesting statistics

When we are running a backtest, these are the most important statistics we should keep track of.

• Time and date of entry

• Entry and exit price

• Position size and % risk on our trading account

• MAE – maximal adverse excursion

• MFE – maximal favourable excursion

• Average RRR ratio

• Strike rate

• Maximum drawdown

• Long/short ratio

• The success rate on different instruments

If possible, adding the screenshot to all the trades in our backtest is also good. This way, we can easily
come back to it later.

How many trades should be backtested?

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Some traders might test the first ten trades, and if they see their strategy works, they decide it is just
enough and give up on further backtesting. This is definitely not a good approach as we don’t have a
robust data sample. To be really sure our trading system is stable and robust, we need a sample size
of at least 100-200 trades. This way, we will gain much more confidence in our trading. Although
trading in the real market is always different from testing the strategy on the demo, we will gain much
more confidence knowing that our strategy has a positive expectancy over the long run.

Statistical Application

Table of Contents

• Statistical Application

o Market Analysis

o Symbol Analysis

o Range Analysis

Statistical Application

Statistics are a boring, necessary evil for many traders, but experienced traders know very well how
to use them to their advantage. In the next part of our Academy, we’ll take a look at one of our
applications that focuses on statistics. Statistics and probability are the cornerstones of technical
analysis. For traders who want to achieve consistent results over the long term, statistics are an
integral part of their approach to trading. FTMO works diligently to offer all its traders the most
consistent and integrated experience. We offer several applications within our Client Area, including
the Statistical Application.

The Statistical Application was designed to provide you with user market statistics and useful
knowledge about trading symbols or the particular market. When you visit your Client Area you’ll find
the Statistical Application in the app menu. The app is divided into two main parts. Market Analysis
shows some interesting statistics of all symbols traded at FTMO. In Symbol Analysis you can find more
specific information about the individual symbols. FTMO have collected data for the past 52 weeks to
provide you with useful market insights to learn how each symbol is likely to behave.

Market Analysis

In the Market Analysis section we share weekly statistics of our symbols. In the first table you will find
the most popular symbols traded at FTMO. You can see that XAUUSD is the most popular symbol
followed by US30.cash and currency pair EURUSD in third place.

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It means that these symbols are predominant in regards to trading volume compared to others. In
the Trending Symbols section you can find the change in popularity for each symbol. According to this
table, you can see that last week the popularity of XAUUSD increased by 4.57% followed by other
currency pairs which are USDJPY and USDCHF.

The next statistics you can find in the market analysis is the highest absolute and relative gain. The
gain in this statistics is the increase in price compared to last week. You can choose whether you want

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to see the highest gains in absolute numbers or relative numbers which measure the percentage
change.

The highest absolute and relative gap table measures the difference between last week’s session close
and this week’s session open. The difference between the close price and the open price is the gap.

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The highest absolute and relative range table measures the difference between last week’s high
and low and displays the highest values. A range of a symbol indicates how volatile the symbol is so
if you’re looking for some action in the market this table is for you.

At the very end we’ve added a table with some interesting facts about the largest gaps range and
gains recorded over the past 52 weeks.

Symbol Analysis

In the Symbol Analysis section you can access a wide range of information of the individual symbol
you are interested in. You can find a drop-down box showing all symbols available at FTMO. For each
symbol there are several available metrics. Current Gap shows the gap size for the current week.

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Average Gap Size shows the average gap for the past 52 weeks. Current Gain or Loss is a change in
price compared to last week. Average Range shows the average weekly range for the past 52 weeks.

Range Analysis

In the Range Analysis section you’ll find detailed statistics about the previous sessions range of your
chosen symbol. This is useful to analyse the volatility of the underlying active. You’ll also find
probabilities on how likely the symbol may break out from this range. This is useful to estimate
whether the symbol will remain in a range or break out of range.

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Lastly we have included a Gap Analysis, which shows you gaps of symbols on a weekly basis. Holding
trades overnight or over the weekend can be very risky and if you are not sure what the risk of holding
that asset can be you can check the Statistic Application for the average gap values.

FUNDAMENTAL ANALYSIS

Fundamental Indicators

In this lesson, we will cover the most important fundamental indicators.

Table of Contents

• Fundamental indicators

o Employment reports

o Gross domestic product (GDP)

o Trade balance

o Consumer price index (CPI)

o The purchasing managers index (PMI)

o Interest rate decisions

o Central bank statements

Fundamental indicators

Compared to technical analysts, fundamental traders look at various economic indicators and reports
to better understand future market directions. Even though most retail traders focus on technical
analysis, understanding the fundamentals is always helpful. Especially for swing traders, if we look at
the bigger picture and in the longer time horizon, markets are most often moving based on
fundamental drivers. There are dozens of different fundamental indicators for different countries and

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we certainly do not have to know all of them. Here are the most important ones that tend to have an
impact on the markets.

Employment reports

Employment reports include employment change, unemployment rates, number of jobless

individuals applying for government support, level of payrolls and other job-related data. The most
famous employment report is the US NFP which is normally released on the first Friday of every new
month.

Gross domestic product (GDP)

Changes in the GDP can have a large impact on foreign currency. An increase in GDP tells us that the
economy is strengthening, and currency could rise. A decrease in GDP indicates a weakening economy,
therefore the possibility of failing prices in the currency.

Trade balance

Trade balance represents the difference between the imports and exports of the subject economy
and affects the demand for that country’s currency. There are two possible outcomes – a deficit,
which means the country is importing more than exporting and a surplus which is the opposite.

Consumer price index (CPI)

The consumer price index tells us prices of products on a consumer level and it is also a key indicator
of inflation. Changes in CPI can directly influence monetary policy as it is mandatory for most major
central banks to control inflation. An increase in inflation usually indicates an interest rate rise, while
lower CPI readings indicate lower interest rates.

The purchasing managers index (PMI)

The purchasing managers index shows the activity of purchasing managers and can act as a leading
economic indicator. PMI indicates strength or weakness in the manufacturing sector.

Interest rate decisions

Interest rates are part of the central bank’s monetary policy. The leading indicators include activities
and speeches by bank officials that are regularly watched by traders. Interest rate changes by central
banks are very important in the valuation of currencies. If banks set high-interest rates, their
currency usually attracts foreign assets from countries with lower interest rates.

Central bank statements

Most central banks issue statements to describe their monetary policy and why they did or did not
make any changes. These statements affect the markets, especially if the changes are unexpected.
We use the terms hawkish and dovish in the central bank’s decisions. Central banks are hawkish when
they want to tighten monetary policy by increasing interest rates or reducing balance sheets. Being

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hawkish means strong economic growth. Dovish is the opposite when banks reduce interest rates or
increase quantitative easing to stimulate the economy. Being dovish means weak economic growth.

Economic Calendar

This lesson will introduce you to the Economic calendar, also known as a macro calendar.

Economic calendar

It’s a calendar covering key global macroeconomic and political upcoming events. Basically, it tells us
when key economic events like GDP, inflation, and central bank meetings occur. Macroeconomic news
announcements are very often connected with higher volatility in the market. Thus, the
macroeconomic calendar gives us a hint of potentional turbulence on the market. Therefore, it should
be checked by the trader each day before trading. The economic calendar teaches traders to plan.

For example, if we are waiting for the trend to be changed or technical formation to be broken or
finished, it can be just important news which moves the markets in a new direction. For example,
according to FSSI, the central bank meeting was the news with the highest average impact of 150 pips
on the FX market in 2020. Higher volatility after a news release usually lasts from 30 minutes to 2
hours. The higher volatility related to a news release may look attractive and sometimes creates an
illusion of a big potential profit. However, the news release can be connected with big jumps in price,
and higher spreads, which could unexpectedly hit stop loss or cause price slippage. Therefore,
watching the economic calendar and awareness of key economic events should be part of each
money management.

Let’s have a look at how the economic calendar works.

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There are a lot of economic calendars available on many websites. It’s up to us which one we prefer
to use. Mostly it’s a force of habit for each trader. In this lesson, we will look at the macroeconomic
calendar available at forexfactory.com. In the upper left corner, we can see the ordinary workday
calendar. At this place, we can select the day or a week of our interest. In the first column, titled date,
there is the date when the news is released (in other words, by clicking on the day, we can see which
news is released that day and what we can expect).

In the second corner, there is the time of the news release. Clicking on it, we can select our time zone
and time format and turn on or turn off daylight saving time. The next column shows the currency
impacted by the event. Generally, if the news is related to the eurozone economy, it influences the
euro. If its news says something about the U.S. economy, it impacts the USD and so on. The column
titled impact is a significant one. It shows the expected impact of the news on the currency. The more
important the news, the bigger impact in terms of volatility is expected. Colours distinguish the
strength of the expected impact. The news marked by the red factory are those with the highest
expected impact on the currency, that is, with the highest volatility. The news marked with the orange
factory is expected to have a medium impact on the currency, and the yellow one usually has the
lowest impact. Bank holidays are marked white.

The next column tells the name of the news, which is released.

The sixth column, titled detail, offers a detailed description of the news. By clicking on it, we can read
more about the news, for example, the source of the data, the frequency of publishing this news, a
detailed description of this news explaining its link to the economy and, most importantly, the effect
of the news on the currency. Specifically, it says that if the indicator’s released value is higher than
the expected value, whether it is positive or negative for the currency.

Finally, the column titled actual provides us with the economic indicator’s latest released value. This
value is compared with the forecasted value. The difference between the forecasted value (in the next
column) and the actual value is the information markets are interested in, which is the source of
volatility. The penultimate column, titled previous, shows the previous value of the indicator. Clicking
on the last column, graph, the chart with historical values pops up. We can select a date range in the
upper right corner of the chart.

Another useful tool is the filter in the upper right corner. We can customize the calendar and select
the news we are interested in; for example, we want to see only the most important news (marked
red) or the news coming only from the selected country (let’s say the USA). If we are more metals or
energy traders, we should switch the calendar in the navigation panel.

FTMO also offers an economic calendar on its website. It takes data from the Forex factory and is very
useful for FTMO clients because it marks restricted events. Also, you can watch our YouTube videos
explaining the most important economic events and their impact on the market.

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Naturally, reading the economic calendar may look difficult in the beginning, but it needs just a little
bit of practice. Start watching the calendar every day and check the market reaction to the most
important events. Most of the events are published every month. After several months of watching,
everybody can master it.

Risk-on VS Risk-off

Risk on and risk-off are part of fundamental analysis and reflect on the sentiment of traders. What
they mean and how we can interpret them in our trading? We will explore that in this lesson.

Table of Contents

• Risk-on vs risk-off

o Risk-on

o Risk-off

o Trading during risk-on

o Trading during risk-off

o Predicting the risk-on and risk-off

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Risk-on vs risk-off

Risk-on and risk-off are market sentiments where traders and investors either take or do not take a
risk in the financial markets. We can often hear on the news that we are in risk-on or risk-off market
conditions. Understanding what this means can help us trade and choose the right instruments to
trade.

Risk-on

When markets are in a risk-on environment, market participants feel optimistic about the economy,
so they go long on riskier assets. These are stocks, high-yielding bonds or currencies like AUD, NZD,
CAD from majors or NOK, ZAR, TRY from exotics. In commodities risk-on instruments are oil or copper.

Risk-off

When market participants are pessimistic about the economy or they expect some uncertainty in the
market with a negative impact, they shift from risky assets towards so-called safe havens. Typical risk-
off assets are US Treasury bonds or German bonds. For forex traders, these are the Japanese yen and
the Swiss franc which often time rally during the risk-off sentiment as traders are unwinding carry
trades. Carry trade means borrowing a safe-haven asset at a low-interest rate and then buying a high-
yielding (riskier) asset in other markets.

Why are the Japanese yen and Swiss franc considered safe-haven currencies? Because they are from
countries that own a large amount of foreign currency assets so they can sell those assets and bring
to reduce risk. The US dollar is also considered a safe-haven asset. Especially because during risk-off
sentiment traders exit their stock and other risky positions back to the US dollar. In a commodity
market, gold is considered to be a safe-haven asset.

Here is the recap of instruments and directions we should be choosing during different environments.

Trading during risk-on

Long – stocks, commodity currencies (AUD, NZD, CAD), exotics, oil

Short – bonds, US dollar, yen, Swiss franc

Trading during risk-off

Long – US bonds, German bonds, US dollar, yen, Swiss franc, gold

Short – stocks, commodities, non-commodity currencies

Predicting the risk-on and risk-off

One of the great charts to predict risk appetite are VIX and dollar index.

VIX have a negative correlation with the S&P 500, which means if VIX is up, S&P500 is down.

This means that when VIX is up we look for risk-off sentiment in the market and vice versa.

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The dollar index is another great sentiment indicator as it tracks the performance of US dollar against
all major currencies. When dollar is going up, we are looking for risk-off sentiment, when the dollar
is going down we are looking for a risk-on sentiment. This is simply because all stocks and other risky
instruments are cashed out back into the dollar.

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Market Correlations

Understanding market correlations can provide us with an edge in the markets in terms of seeking
new opportunities. Besides, knowing what assets are correlated can significantly reduce our exposure
as we can diversify and deploy our resources elsewhere. This lesson will cover everything we need to
know about market correlations.

Table of Contents

• Market correlations

o Equity indices and safe-haven assets

o Canadian dollar and crude oil

o The Australian dollar and Canadian dollar

o Equity indices and AUDUSD

o Gold and USDJPY

Market correlations

Besides correlations in forex, there are also some interesting correlations in commodities and indices
markets. Since FTMO is offering these instruments as well in the form of CFDs, we will cover them in
this article. Also, bear in mind that correlations very often break and they are more obvious on larger
timeframe horizons. If we are focusing solely on day trading or short term trading, we can see that
correlation between different assets is getting stronger and weaker. Correlation should be viewed as
a factor of possible confluence, not a be-all and end-all.

Equity indices and safe-haven assets

This is something we spoke about in our risk-on vs risk-off article. When equities and equity indices
go down, fear prevails in the markets. This means that traders and investors move their assets into
safe havens such as gold, yen or bonds.

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In this case, we are talking about a negative correlation since one asset is going up and the second is
going down, often with a high degree of mirroring.

Canadian dollar and crude oil

Crude oil is very important for the Canadian economy. Because of that, prices of crude and Canadian
dollar are positively correlated. In the forex trading world, it means that rising prices in crude oil are
equal to falling prices of USDCAD.

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The Australian dollar and Canadian dollar

Both Australian and Canadian economies are heavily dependent on commodities. Australia is
connected with precious metals (iron ore, gold) and Canada with crude oil. Thanks to that, we can
see a strong inverse correlation between AUDUSD and USDCAD.

Equity indices and AUDUSD

Due to the Australian economy’s dependence on export, there is a positive correlation between AUD
and equity indices as they reflect the strength of the world’s economy. If the Australian dollar is rising,
we can see a positive correlation with the global economy. The most popular index to watch is the
S&P500.

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Gold and USDJPY

There is a high negative correlation between gold and USDJPY. If gold goes up, USDJPY usually falls.

This is due to the fact that both gold and Japanese yen are considered safe-haven assets, therefore,
when there is a fear in the markets, traders tend to move their capital into gold and Japanese yen.

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SENTIMENT ANALYSIS

How to read COT

Forex trading is a zero-sum game, for every winner, there has to be a loser. Take a guess who is more
likely to be profitable. Retail traders or big banks and hedge funds? Well if you guessed that banks,
you are right. Retail traders are at a disadvantage with the amount of information we have in the
markets. Luckily for us, there is a way to follow what the big players are doing. In this lesson, we are
going to take a look at the Commitments of Traders reports and how they can help with our trading.

Table of Contents

• Commitments of Traders reports

o What is the Commitments of Traders reports?

o What subjects can we find in the Commitments of Traders reports?

o Where are the Commitments of Traders reports published?

o Conclusion

Commitments of Traders reports

What is the Commitments of Traders reports?

Commitments of Traders (COT) reports are published weekly by the Commodity Futures Trading
Commission (CFTC). The reports show open positions by all the subjects that must report their
positions at CFTC. These are positions by big institutional subjects. These big players report their
positions every Tuesday evening, and the reports are published every Friday at 3:30 pm EST (9:30 pm
CE(S)T). The COT reports show approximately 70 – 90% of open positions in futures markets. These

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reports aim to provide transparency to the futures market and prevent price manipulation. Although
these reports are from the futures market, we can use this information in spot currencies and CFD
trading since spot forex pairs go hand to hand with currency futures and commodity, metals and index
futures are the same as their CFD counterparts.

What subjects can we find in the Commitments of Traders reports?

Commercials are the most important players in the markets as they often hedge their holdings and
tend to have the most insight into the movement of future prices. In a healthy trend, we should watch
commercial positionings going with the trend.

Large Speculators – trading firms and hedge funds who speculate on the markets to gain profits.
These tend to be right most of the time, but there are some exceptions to that.

Small Speculators – private investors and retail traders don’t have to report their positions to CFTC.

Where are the Commitments of Traders reports published?

The original version of the COT reports can be found on the CFTC website.

There is also more interactive version to display data, such as barchart.com.

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As we can notice on the above chart of Canadian dollar futures, commercial participants (red line)
were heavy long in both early 2016 and mid-2017; both of this information signalled big trend moves
in the market for the following months ahead. As this showed us the strength of the Canadian dollar,
we could use this as a trend move of USDCAD short.

Conclusion

The Commitments of Traders reports are a great tool to help us understand the market sentiment,
but these reports should serve us only as a beneficial advantage to our analysis and there should be

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discretion exercised while using them. When we are watching the reports, it is generally perceived
not to look at low time frames but to rather stick with daily/weekly time frames and look for big
extremes where we can find a big difference between commercial and small speculator’s positioning.

PUTTING IT TOGETHER

How to build a robust trading strategy

A trading strategy is an essential aspect of successful trading. Many traders learn technical or
fundamental analysis and want to jump into the markets right away, but there are a few things you
have to figure out before doing that. What type of trader are you? What markets are you going to
focus on? These crucial steps are what we will cover in this lesson.

Table of Contents

• How to build a robust trading strategy

o What type of trader are you?

o Choosing the right markets to trade

o Building a trading strategy

• Conclusion

How to build a robust trading strategy

There is a huge amount of markets you can dive into. Not to mention you can approach trading as a
day trader, scalper, or swing trader. Once you’ve decided on these things, it is time to select a strategy
that will get you in and out of the market.

What type of trader are you?

This should be the first question you ask yourself because it will influence not only the number of
markets you will actively trade but also your trading strategy. There are four types of traders. Scalpers,
Day traders, Swing Traders, and Position traders.

Scalpers and day traders focus on short intraday timeframes. The only difference between them is
that scalpers take a lot of trades during the day and day traders rather hold positions for intraday
swings. This trading approach requires a high focus during a trading session. Therefore, it might not
be suitable for someone with a full-time job. But if you have a full-time job and still want to be a day
trader/scalper, you can choose a market that moves the most during certain trading hours when you
are free. This is one of the biggest pros of choosing this type of trading style, you don’t have to watch
the market the whole day. All you have to do is pick a certain time during the day that has a large

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influx of volume and you should be able to find an actionable setup almost every day. If you have less
time, you may focus rather on swing trading.

Swing trading is done at higher timeframes and generally requires less focus during the day. Most
swing traders analyze charts once a day and only watch their positions every few hours. Swing trading
requires a large amount of patience as you will only find an actionable setup once every few days.
Also, because you often hold positions overnight, you have to be prepared for more risk due to
expected and unexpected macroeconomic news releases.

Position traders, also called investors, hold trades for months or sometimes years. This is something
that requires a large sum of capital and you will hardly become a position trader early on in your
career.

Choosing the right markets to trade

If you take a look at our FTMO platform, there are Forex, Indices, Commodities, Crypto, and Bonds.
All of these combined make over 100 different instruments you can trade. Would you be able to trade
all of them?

Of course not! Being able to keep up with such a huge amount of instruments constantly is unrealistic.

This is why you should narrow your choice depending on your trading style. If you decide to be a
swing trader, you should pick a handful of instruments to always have something to trade. Most swing
traders trade anything between 10-20 instruments which they analyze once a day and then narrow
their focus on those that offer them good trading setups. If you decide to become an intraday trader,
you don’t need to watch 10-20 instruments. In fact, most intraday traders focus only on one or two.

And what instruments should you be watching?

That is completely up to you. We have recently published a video about instruments traded in the
financial markets so you can learn all the useful insights about different instruments there!

https://www.youtube.com/watch?v=aA9kLnJTJTA&t=12s

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Once you have chosen the right set of instruments and want to focus on a more intraday approach,
you need to ensure you will be available to trade them at the right time of the day.

https://www.youtube.com/watch?v=ilFcYzuj5wI

If you decide to swing trade, this is not so much of a concern as you will set up limit orders that will
fill throughout the whole trading day.

Building a trading strategy

First, you should ask yourself whether you want to focus on Technical or Fundamental
Trading. Fundamental Analysis tries to predict the value of an asset based on micro and macro
fundamental events. If you are doing a fundamental analysis on Forex you might be looking at the
economies of two countries and the currency you trade. When trading indices like SP500, you pay
attention to the overall risk-on and risk-off environment. It is always important to keep up with all
major economic releases such as NFP, FOMC, or CPI.

Technical Analysis is based on watching the price of an instrument and looking for different patterns
and behaviours that happened in the past, so they might happen again in the future. Although most
traders try to only focus on one type of analysis and completely ignore any other, the truth is the mix
of both (or more) will bring you the greatest success in trading. Once you’ve decided on what type of
analysis you want to use in your trading, it is time to set up exact rules for entering and exiting your
trades. Every robust trading strategy should have exact rules on when to enter and when to get out
of a trade. You can use pretty much anything for getting in and out of trades.

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As an example, we can use a simple strategy that is looking at horizontal support and resistance levels
paired with 200 Simple Moving Average. In the example above price bounced off 200MA and closed
above, this can be used as our entry trigger with stop loss below the low and target at prior resistance.
Your trading strategy can be pretty much anything, but you must know what you do in each step.
Once you have your trading strategy, you can go through historical data and backtest it.

Conclusion

Building a robust trading strategy is a must. As traders, we have to know the exact steps of what to
do throughout the trading day, and our strategy is our guide for that. The information in this article
may be useful for you if you wish to focus on intraday or swing trading, figure out what trading hours
you are going to pay attention to in the market, and what fundamental or technical practices you will
use.

Risk management

It goes without saying that risk management is the most important part of trading. Although most
traders think they are losing money in trading because of flaws in their trading strategy, the truth is
that in most cases they are not using proper risk management. In this article, we will cover everything
you need to know about risk management in trading and how you can become a better trader.

Table of Contents

• Risk management

o Undercapitalization

o Risk per trade

o Drawdowns

o Reward to risk ratio

o Unexpected risks

Risk management

Proper risk management in trading is what separates it from gambling. Even though we can never be
sure of what markets are going to do next, by using proper risk management, we can cover our
potential losses and aim for wins that will make us profitable in the long run.

Undercapitalization

The first and biggest problem of bad risk management is undercapitalization. Because many
brokerage firms offer deposits as small as $50, many traders come into trading with $1,000 and think
they can double or triple their capital very quickly. This leads to opening too big of positions where a

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short losing streak can cost them a whole trading account. At FTMO, we are well aware of this and
that’s why we provide traders an initial balance of up to $200,000. This way, we can keep our risk per
trade very small while still potentially achieving large gains.

Risk per trade

How much should we be risking per one trade? In most textbooks and online education programs,
we can learn that we should not be risking more than 2% per one trade. Although the answer to this
is more complicated, let’s start by saying that 2% risk per trade is a good base to start with. As we can
see from the below chart, keeping our risk at 2% per trade would only cost us approximately 20% of
our account on 10 consecutive losses which should not happen in the first place for traders with
robust trading strategy.

However, if we decide to risk 10% per trade we would be down over 60%, and that would be a deep
hole to dig ourselves out of.

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As we can see above, the percentage required to go back to break even, as calculated from the
remaining balance, can be dangerously huge. Making 25% of our account back is not easy but it is still
doable compared to the 150% required to break even after a 60% drawdown. Risk should differ based
on strategy because there are no two organic traders with the same trading style. If we are a scalper
or day trader who takes 5 trades every single day, should we risk 2% per trade? Absolutely not. With
this amount of trades, risking 2% is simply too much as we can experience large drawdowns very
quickly. Daytraders and scalpers usually risk only 0.5-1% per trade. On the other hand, if we are a
swing trader who only takes 1-2 trades per week, the 2% risk might be too small. If we know that the
next trade will come up in a few days, we can probably bump our risk a little. But we must not go too
crazy, in general, the rule of thumb is that the risk per trade should not be over 5%, an exception to
this could be if we are taking a long term investment.

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Drawdowns

We all hate them but the truth is they are inevitable in trading and we must be well prepared for
them.

As we can see in the above table, if we have a trading strategy with a 60% probability win rate, there
is still a 70% chance we will get four consecutive losses in a row. But things can be even more drastic
if we are the type of trader with a 40% win rate, there is over 50% chance that we will have 8
consecutive losses in a row. Does that mean we cannot be profitable? Absolutely not! As we can see
from our equity simulator, there is no single occasion from 50 different simulations that we would
end up with a negative balance after 100 trades.

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From all the projected simulations, the highest number of consecutive losses could be 12 and this
brings an important question we should ask ourselves: Are we able to sustain 12 losses in a row? This
is something we have to take into consideration when we are building our trade plan. It is not an easy
process, but once we finish it, we will know exactly what to expect from our trading strategy.

Reward to risk ratio

The last piece of the puzzle is the reward to risk ratio. The reward to risk ratio tells us how much we
win compared to our risk. If we are taking the trade with a 3:1 reward to risk ratio, it means that for
every $100 of our risk we aim a potential reward of $300.

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This chart shows the sequence of 10 trades with a 50% of win rate and random distribution of wins
and losses. As we can see, although we won only 50% of the time, we still ended up with a $10,000
gain. In real trading, things are not always that easy, as we might not get a fixed 3:1 reward to risk
ratio for every trade. In general, taking trades under the 1:1 reward to risk ratio can be quite tricky as
we are essentially losing more than we are winning. Because of that, our system would need to
compensate for it with a very high win rate.

Another important factor with our reward to risk ratio, which we have to realize is how we manage
our winners. If we are taking a trade with 2:1 RRR but decide to close half of our position once we are
at 1R profit and then close the rest at 2R, our win is only 1.5R instead of 2.

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To practice this notion, we take a trade with $200 risk and $400 gain, at $200 unrealized PnL we close
half of our position which is $100, the rest of our position is closed at that 2R target but instead of
$400, it is only $200. As we can see, we have won $300 instead of $400 which equals to a 1.5R instead
of the original 2. This scaling out of trades can turn against us once we hit a streak of consecutive
losses as our prior wins were not that significant.

Unexpected risks

The last thing in the risk category is risks that very few traders think about. These are risks that we
really do not expect to happen, but they still can occur. Unexpected news releases, gap risks with
holding positions during the market close, internet disruptions in the middle of the trade, psychology
and other factors can come to us at any time of the day. That is why we should always be prepared
for them and have a plan for what to do once they happen.

Developing a Trading Plan: Comprehensive Guide

Table of Contents

• What is a Trading Plan?

• Things you need to consider

o Why Do You Want to Trade?

o Time Commitment

o Risk Tolerance

o What is your unique strength?

o Skill level

o Your Lifestyle

• Writing Down Your Trading Plan

o Define Your Goals and Objectives

o Choose Your Market and Instruments

o The Methodology

o Money Management and Rules for Trading

o Develop a Routine

o Continual Learning and Improvement

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o Psychohygiene

• Example of a Simple Trading Plan

o Goal

o Expectations, Constrictions and Weekly Goals

o Market and Instruments

o Example Strategy Description

o Routine

o Testing

o Conclusion

What is a Trading Plan?

A trading plan is a comprehensive framework that guides all trading activities, ensuring consistent
and disciplined trading practices. It includes your trading goals, strategies, risk management, and
evaluation methods. A well-structured trading plan answers the “what, when, how” of your trading
activities.

Things you need to consider

Why Do You Want to Trade?

First of all – understanding your motivations and setting clear expectations is crucial in developing a
trading plan.

• Making a Living: Are you aiming to trade as your primary source of income?

• Some Extra Money: Are you trading to earn supplemental income?

• Skill Development: Are you trading to enhance your skills and knowledge?

Time Commitment

Your lifestyle and daily schedule largely define how much time you can afford to dedicate to trading
activities. Is it realistic to do this during your regular job? Is it a good idea to trade during your working
hours? Do you have time in the morning before your regular job, or in the evening after putting your
children to bed?

• Analysis: How much time can you dedicate to market analysis?

• Monitoring and Execution: How often can you monitor the markets, and how quickly can you
execute trades when opportunities arise?

• Journaling: Can you consistently document your trades?

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• Evaluation and Learning: How often will you review your performance and seek improvement?

Risk Tolerance

Evaluate how much risk you are willing to take. This will influence your trading style and the
instruments you choose.

• Experience: Do you already have some experience in trading or investing? What suits you
better – having a high win rate with smaller profits or win just from time to time but if so, the
profit is big.

• Financial Situation: How much do you have in savings? Would potential losses significantly
impact your lifestyle?

Understanding and managing your risk is crucial. By the way, this is why the FTMO Challenge exists —
to help traders keep their expenses and losses under control while testing, refining, and utilizing their
trading strategies in real market conditions, with real emotions of trading.

What is your unique strength?

Consider Your Personal Qualities. Reflect on the personal attributes you can bring to your trading
approach. By cultivating qualities like diligence, the ability to learn from mistakes, patience, discipline,
emotional control, and adaptability, you can enhance your trading performance and increase your
chances of achieving long-term success.

Skill level

Assess your current trading skills and knowledge objectively. Is it in line with the trading style you
would like to trade? For example, most traders rely on technical analysis based on historical price
movements or its combination with fundamental analysis. At a bare minimum, you should have
objective methods for defining support and resistance levels, trends, and market congestions. This
includes at least a few tens of hours of observing the markets, both live and through backtesting.

Your Lifestyle

Assess your lifestyle to determine how much time you can realistically devote to trading. Your
available time will help dictate your trading style:

• Scalping: Requires constant attention and quick decision-making. Suitable for those who can
dedicate significant time daily.

• Intraday Trading: Involves opening and closing trades within the same day. Less intense than
scalping, but still requires regular monitoring.

• Swing Trading: Trades last several days to weeks. Requires less frequent monitoring, suitable
for those with limited daily availability.

• Long-term Investing: Involves holding positions for months or years. Not ideal for active
traders due to fees and leverage constraints.

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The typical FTMO Trader holds positions for a few hours to a few days. That means the majority of
them utilize intraday or swing strategies. Let’s try and explore two options:

Karl has a regular job and trading is his side job, that he would like to finance his holiday with and gain
some skill in the meantime. His regular job is 9 to 5. He decided to wake up at 7:00am and spend 30
to 60 minutes analyzing the markets. As monitoring the situations on significant levels and reacting
to them would be too disturbing and he could miss the opportunities, he relies on placing limit orders
to ensure trades are executed at desired prices and sets stop-loss and take-profit orders to manage
risk.

During the day, Karl relies on notifications from his trading app to monitor price movements. In the
evening, he reviews his trades and journals his observations to refine his strategy.

Monica has a busy schedule, so she prefers swing trading while monitoring the 1-day candles. She
reviews the markets on Sunday evenings and sets alerts for key support and resistance zones. When
the market reaches these zones, she receives a notification.

With plenty of time to make her decisions, Monica reviews the market conditions in her free moments
and decides her next steps, whether to enter a trade with a market order or set a limit order for
execution at a specific price.

_________________________________________________________________________________
___

Writing Down Your Trading Plan

Now let’s begin with creating your actual trading plan. Don’t worry if it isn’t perfect on the first
attempt; feel free to refine it until it fits your needs. Remember, you probably won’t have a flawless
plan right away. It’s crucial to ensure that the rules and conditions you set are realistic and something
you can consistently follow to the letter.

If you need a bit of inspiration, see the example plan below.

1. Define Your Goals and Objectives

• Describe Your Vision: Describe your vision of the final state if the plan works out well.

• Objective: Outline the one main, most important, measurable goal.

• Financial Goals: Specify your target returns and acceptable risk levels.

• Time Horizon: Determine the validity period of this plan and when it will be reviewed.

• Risk Tolerance: Assess your comfort with potential losses.

2. Choose Your Market and Instruments

• Considerations: Take into account the ease of risk management, volatility, liquidity,
and broker selection.

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• Markets: Decide whether to trade stocks, forex, commodities, cryptocurrencies, etc. It
is a good idea, and our recommendation, to pick something you have some relation
with or familiarity with.

• Instruments: Select specific instruments within those markets that align with your
strategy.

3. The Methodology

• Mechanical vs. Discretionary: Decide whether to use a mechanical trading system

with predefined rules, a discretionary approach that relies on your judgment, or a
combination of the two.

• Your Trading Strategy

• There can be more than one trading strategy in your plan.

• A comprehensive topic on methods of trading strategy development is covered

in later lessons of FTMO Academy. For now, note that the methodology of
analysis and trade execution is just one part of the entire trading plan.

• Timeframe: Choose according to your selected trading style. A popular method

is using two or more timeframes: the main (higher) timeframe for establishing
directional bias and defining key levels, and a second (lower) timeframe for a
detailed overview and seeking confirmation.

• Entry Criteria: Identify conditions for entering trades (timeframe, technical

indicators, chart patterns, fundamental analysis).

• Exit Criteria: Set rules for exiting trades: profit targets and stop-loss levels.

• Position Sizing: Determine the amount of capital to risk on each trade.

4. Money Management and Rules for Trading

• Before achieving success in the markets, traders need to learn how to protect their
capital first.

• Stop-Loss Orders: Always implement stop-loss orders to limit potential losses.

• Risk-to-reward: Deciding when to take your profit is a crucial part of successful trading.
Will you exit the whole position when reaching a fixed risk-to-reward ratio, take partial
profits at discretionary levels, or trail a small portion for a big home run? In all cases,
your RRR (risk-to-reward ratio) should be aligned with the win rate that you
determined from backtesting.

• Risk per Trade: Define the percentage of capital to risk on each trade.

• Daily Goal and Maximum Daily Drawdown: Set daily profit targets and loss limits.

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• Maximum Drawdown: Define a maximum loss threshold that triggers a reassessment
of your strategy.

5. Develop a Routine

• Market Analysis: Conduct regular market analysis based on your trading style.

• Trade Journaling: Document all trades, including rationale, entry/exit points, and
outcomes.

• Performance Review: Periodically review your trading performance to identify areas

for improvement.

6. Continual Learning and Improvement

• Education: Stay updated with market trends, new strategies, and trading tools.

• Review and Adjust: Regularly refine your strategy based on performance reviews and
changing market conditions.

• Optimization: Identify and integrate methods for improving various aspects of trading.

7. Psychohygiene

• Maintaining mental and emotional well-being is crucial for sustained success in

trading. Trading is often extremely immersive, but it is of utmost importance to keep
a distance. Omitting these aspects can lead to burnout, poor decision-making, and
ultimately hinder your trading performance.

• Regular Exercise: Engage in physical activities of your choice. Exercise helps to reduce
stress and improves focus.

• Start your day with a 30-minute jog or a morning yoga session to clear your
mind before you begin trading.

• Breaks and Off-Chart Time: Schedule regular breaks during your trading day to
prevent burnout and maintain sharp decision-making skills.

• Take a 10-minute break every hour to stretch, walk around, or meditate. This
can help you reset and avoid fatigue.

• Hobbies and Leisure Activities: Spend time on hobbies and activities you enjoy
outside of trading. This provides a healthy distraction and keeps you mentally fresh.

• Dedicate time in the evening to reading, painting, or playing a musical

instrument to unwind and detach from the trading environment.

• Social Interaction: Maintain a healthy social life by spending time with family and
friends. Socializing can provide emotional support and reduce stress.

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• Plan weekly meet-ups with friends or family dinners to ensure you have a
support system and time to relax.

• Mindfulness or Meditation: Utilize these techniques to improve concentration and

emotional regulation.

• Incorporate a 10-minute meditation session into your daily routine to enhance

your focus and reduce anxiety.

• Healthy Sleep Routine: Ensure you get adequate sleep each night to maintain optimal
cognitive function and emotional stability.

• Establish a consistent sleep schedule, aiming for 7-8 hours of sleep per night.

• Diet and Nutrition: Follow a balanced diet to support overall health and energy levels
throughout the day.

• Incorporate nutritious meals and snacks, such as fruits, vegetables, and whole
grains, to maintain steady energy and focus.

By incorporating these Psychohygiene practices into your routine, you can maintain a healthy work-
life balance, reduce stress, and improve your overall trading performance.

_________________________________________________________________________________
___

Example of a Simple Trading Plan

Goal

• Achieve a 15% annual return with a maximum drawdown of 10% of initial capital.

• Target an average monthly return of +1.25%.

• Revise the plan if a 10% drawdown is reached.

Expectations, Constrictions and Weekly Goals

• The method below wasn’t backtested and it serves for illustrative purposes. It would likely be
better to anticipate a lower win rate while allowing profits to run by trailing the trending
market.

• However, let’s suppose that our method has a 50% win rate with a fixed RRR of 2:1.

• While risking 0.5% of capital on each trade, the monthly plan would be reached with less than
2 good trades. However, with a 50% win rate, there is almost a certainty that you can
experience a series of losses, such as 6 losses in a row. Be sure to account for that possibility.

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• Since our trading strategy doesn’t provide an excessive number of signals, we do not need
measures to prevent overtrading. Instead, we trade every situation that fits the defined
conditions. There will be good months and bad months, but that is just part of the process.

Market and Instruments

• Trade one major forex pair: EUR/USD.

Example Strategy Description

The idea of this strategy is to enter a trending market during a pullback move against its direction on
a lower timeframe, while speculating that key market structure levels will hold and the market
direction will realign with the stream of the higher timeframe trend.

• Entry Criteria:

• On a 1-week timeframe

• Price action is trending.

• Waiting for the break of a significant low.

• On a 1-day timeframe

• Price action is generally following the trend of 1W.

• Waiting for a price to pull back to a SR zone, enter there and bet on the
continuation of the trend.

• The position always follows the direction of the 1W trend.

• Position Sizing: Risk 0.5% of total capital on each trade.

• Entry Setup: Set a limit order in the middle of the predefined support / resistance zone.

• Exit Criteria:

• Stop Loss Order: At the previous significant swing high/low on 1D chart

• Take Profit Order: Upon reaching a profit target of 2:1 reward-to-risk ratio.

Routine

• Pre-Market Preparation: The trading strategy doesn’t need much attention.

• 1W: Friday evening, Sunday evening, or Monday morning: update the weekly chart by
assessing the trend and highlighting significant levels that invalidate it or confirm its
continuation.

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• 1D: Around the end of market hours each day, assess the trend on the daily chart or
perform daily technical analysis during the evening.

• Execution: Set a limit order at the defined level if all the conditions align.

• Journaling: Record all trades in a spreadsheet, noting reasons for entry and exit, and
outcomes. Always keep a screenshot of the situation.

Testing

• Backtesting: Test the strategy on the last 5 years of historical data or until having at least 100
situations analyzed.

• Paper Trading: Implement the strategy in a demo account for 3 months.

Conclusion

Building a trading plan involves understanding your motivations, defining clear goals, choosing the
right market and instruments, developing a robust strategy, and managing risk effectively. Regular
analysis, disciplined execution, and continual learning are key to long-term success.

How to Create a Trading Idea

Table of Contents

• Basic elements

o Time Restrictions: Duration of Trades vs Your Daily Schedule

o Time Restrictions: Sessions

o Instruments

o Correlation

o Liquidity

o Volatility

o Personal Affinity

• Strategy: Methods and Rules

o Sets of Tools Used for Analysis

o Support and Resistance

o Confirmation

• Types of trading strategies

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o 1. Trend Following – Breakout Strategy

o 2. Trend Following – Holding Level Strategy

o 3. Range-Bound – Breakout Strategy

o 4. Range-Bound – Holding Level Strategy

• Putting it all together

o Before Backtesting: Chart Observation

o Hypothesis Development for Your Trading Strategy

o Describe the Situation You Will Be Spotting on the Chart

o Timeframe or Combination of Timeframes

o Support and Resistance (SR) Level Definition Methodology

o Type of Strategy and Market Conditions

o Confirmation: With or Without?

o Risk Management

• Conclusion

Basic elements

The foundation of any trading strategy begins with the generation of an idea, which could come from
market analysis, news events, or a broader economic perspective. Ideas can be driven by fundamental
factors (e.g., economic reports, earnings), technical indicators (e.g., chart patterns, volume analysis),
or a combination of both. Understanding the context and aligning your trading plan with the current
market environment is critical.

Time Restrictions: Duration of Trades vs Your Daily Schedule

The duration of a trade defines your strategy and risk profile. Different trading styles require different
levels of commitment and timing du:

• Scalping: Extremely short-term trades (minutes or seconds) aimed at small but frequent
profits. Scalping requires constant monitoring, high liquidity, and precision in timing.

• Day Trading: Positions are opened and closed within a single trading day. The goal is to
capitalize on intraday price movements, avoiding overnight exposure to risk.

• Swing Trading: Medium-term trades, often lasting from days to weeks, where traders attempt
to capture price swings in trending markets.

• Position Trading: Long-term trades that can last for months or even years, often ignoring
short-term fluctuations in favor of macro trends.

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• Investing: The longest horizon, where positions are held for years. Investors typically focus on
the intrinsic value of assets, aiming for growth over time.

Time Restrictions: Sessions

Market sessions (e.g., London, New York, Asian sessions) influence trading strategies. Some
instruments are more liquid or volatile during specific sessions, which impacts timing. For instance, a
trader focusing on high volatility and liquidity might prefer to trade during the overlap of the London
and New York sessions.

Instruments

The selection of instruments is key to matching your strategy with the markets you trade. You can
start with one:

• CFDs (Contracts for Difference): A popular derivative allowing traders to speculate on price
movements without owning the underlying asset. CFDs offer flexibility, leverage, and a wide
range of markets, but they come with a higher risk profile due to leverage.

• Futures: Contracts to buy or sell an asset at a future date for a fixed price. Used by both
speculators and hedgers, futures often require a deeper understanding of the market and
larger capital due to the standardized contract sizes.

• Options: Provide the right but not the obligation to buy/sell an asset at a predetermined price.
Options allow more strategic flexibility but require a more complex understanding of market
movements.

• Stocks: Shares in a company, providing ownership and typically traded over longer periods,
though can be used in shorter-term strategies like day trading.

• ETFs (Exchange-Traded Funds): Baskets of assets that trade like stocks, offering diversification.
They are generally better suited for longer-term investors or swing traders.

Correlation

Understanding the correlation between different instruments is crucial for risk management. For
example, a trader might avoid holding multiple positions in highly correlated assets (e.g., gold and
silver) to minimize exposure to the same market risks.

Liquidity

Liquidity is vital in trading because it affects how easily you can enter or exit a position. Highly liquid
instruments, like major currency pairs or blue-chip stocks, are favoured in short-term strategies, while
less liquid instruments may be suited for longer-term holdings.

Volatility

Volatility reflects price movement and is essential in determining a strategy. High volatility is preferred
in scalping and day trading because it provides more opportunities for profiting from fast trends

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within shorter timeframes, but it also increases the risk of slippage or taking more stop losses on
otherwise legitimate strategies. Lower volatility may be better suited for swing or position trading.

Personal Affinity

Your personal affinity for a particular trading style or instrument plays an important role. Some traders
thrive on fast-paced action (scalping, day trading), while others prefer taking a more methodical, long-
term approach (swing trading, investing).

Strategy: Methods and Rules

Having a clear, well-defined strategy is essential for success. A strategy should outline specific
methods and rules for:

• Entry: What signals will trigger the entry of a trade (e.g., a moving average crossover or price
hitting a key level)?

• Exit: When and how to exit the trade, including stop-loss orders and profit-taking strategies.

• Risk Management: Position sizing and risk/reward ratios to ensure consistent and sustainable
trading.

Lets see how to determine them.

Sets of Tools Used for Analysis

Different tool sets are employed depending on the trading style:

• Technical Analysis (TA): Predominantly used in short-term strategies like scalping and day
trading, where traders rely on price patterns, volume, and indicators to make quick decisions.

• Fundamental Analysis: More relevant for longer-term strategies, such as investing or position
trading, where traders assess the intrinsic value of an asset based on economic data, earnings
reports, or geopolitical events.

• Sentiment Analysis: Gauging the overall mood or sentiment in the market, often derived from
news, social media, or surveys. This can help in aligning trades with broader market
psychology.

Support and Resistance

A critical element of technical analysis, support and resistance levels help traders identify where the
price may reverse or pause. Key factors include:

• Chart Structure: Identifying zones of support and resistance using historical structure of the
data on the chart.

• Volume: Analyzing volume at certain price levels to confirm the strength of support or
resistance.

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• Candle Patterns: Using specific candlestick formations (e.g., dojis, hammers) to determine
entry/exit points.

Confirmation

Confirmation is necessary to increase the probability of success when trading around

support/resistance levels. Common confirmation tools include:

• Time: Waiting for a candle to close above/below a certain level before entering a trade.

• Formations/Patterns: Identifying classic chart patterns like head and shoulders, double
tops/bottoms at support/resistance levels to confirm direction.

Types of trading strategies

In trading terminology, we can classify strategies based on market conditions and key levels in the
market. The two primary market conditions are:

1. Trending Markets: Where the price is consistently moving in one direction, either up (bullish
trend) or down (bearish trend).

2. Range-Bound Markets (Consolidation): Where the price fluctuates between a defined

support and resistance level, without breaking out in either direction. Markets are bracketing
for most of the time.

Additionally, within these market conditions, we can identify key price levels that traders focus on:

1. Breakout Levels: A significant price level that, when breached, indicates a potential
continuation of the trend or a start of a new trend. In a trending market, this is usually a level
that the price breaks through to continue the trend.

2. Holding Levels (Support/Resistance): A level where the price is expected to hold, either
rebounding back from this level (support in a downtrend or resistance in an uptrend) or
continuing within a range.

Given these definitions, we can classify trading strategies into four main categories:

1. Trend Following – Breakout Strategy

• In this strategy, traders look for a continuation of the existing trend by identifying key breakout
levels. When these levels are breached, it signals that the trend is likely to continue.

• Ideas for execution:

• Go long (buy) when the price breaks above a key resistance level in a bullish trend,
expecting the upward movement to continue.

2. Trend Following – Holding Level Strategy

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• Here, traders anticipate that the trend will resume after a pullback to a key support or
resistance level. The expectation is that the level will hold, and the trend will continue.

• In a bullish trend, a trader might buy when the price pulls back to a support level, expecting
the price to rebound and continue the uptrend.

3. Range-Bound – Breakout Strategy

• This strategy involves identifying a range-bound market and waiting for a breakout from the
range. Traders enter a position in the direction of the breakout, anticipating a new trend to
begin.

• A trader might enter a long position when the price breaks above the resistance level of a
consolidation range, expecting a bullish trend to start.

4. Range-Bound – Holding Level Strategy

• In this approach, traders aim to profit from the price remaining within the range. They buy at
support and sell at resistance, expecting these levels to hold.

• A trader might buy near the support level within a consolidation range and sell as the price
approaches the resistance level, anticipating that the price will remain within the range.

Putting it all together

Creating a successful trading strategy requires balancing simplicity with effectiveness. Traders often
use a combination of technical analysis, charting, and backtesting to ensure their approach is robust,
adaptable, and profitable. Here’s a structured approach to developing a trading strategy, using the
principles you’ve outlined.

Before Backtesting: Chart Observation

Before diving into backtesting using historical data, it’s essential to manually analyze charts and draw
at least 20 situations that fit the criteria of your strategy. This manual analysis has several benefits:

• Familiarization: It helps you visually understand how your strategy would have worked under
real market conditions.

• Pattern Recognition: You train yourself to recognize potential trade setups by seeing them
form across different charts.

• Adaptability: By manually checking charts, you can refine your entry and exit criteria before
spending tens or even hundreds of hours on actual backtesting.

Hypothesis Development for Your Trading Strategy

When creating a hypothesis for your trading strategy, it’s essential to clearly define the parameters
that will guide your decision-making process. Below is an expanded and refined explanation of the
key elements to consider when formulating your hypothesis:

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Describe the Situation You Will Be Spotting on the Chart

• Clearly outline the specific market situations or patterns you plan to identify. Will you focus
on breakouts, pullbacks, reversals, or range-bound behavior? Define the conditions you’re
looking for, such as a consolidation zone break, reaction at key levels, or a moving average
cross.

• Example: “I will be spotting breakouts above key resistance levels after a period of
consolidation and will execute my trades on the retest of those broken key levels.”

Timeframe or Combination of Timeframes

• Specify the timeframe(s) you will be using for trade setups. Are you focusing on a single
timeframe, like daily or hourly charts, or are you combining multiple timeframes for better
confirmation and Risk-to-Reward Ratio?

• Example: “I will use the 1-hour chart for spotting overall market direction and the 15-minute
chart for fine-tuning entry points.”

Support and Resistance (SR) Level Definition Methodology

• Define your methodology for identifying support and resistance levels. Will you rely on
horizontal levels, Fibonacci retracements, moving averages, or trendlines? Ensure that your
method for defining these levels is consistent and objective.

• Example: “I will define SR levels based on the most recent swing highs and lows, as well as
significant pivot points visible on the daily timeframe.”

• There is a lot of different approaches to define the SR levels or zones that increase in
complexity and demand for traders skill and attention. Refer to Technical analysis.

Type of Strategy and Market Conditions

• Clarify the type of strategy you’re developing (trend-following, mean-reversion, breakout, etc.)
and specify the market conditions in which it is designed to perform. Does your strategy work
best in trending markets, range-bound conditions, or highly volatile environments?

• Example: “This is a breakout strategy designed to perform in trending markets after a

consolidation phase, where volatility is expected to increase.”

Confirmation: With or Without?

• Decide whether you will require additional confirmation before entering a trade. Confirmation
can come in the form of candlestick patterns (e.g., engulfing patterns or pin bars), volume
spikes, or other technical indicators like moving averages or oscillators.

• Example: “I will enter trades only if there is confirmation in the form of a bullish engulfing
candle after a breakout, accompanied by an increase in volume.”

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Risk Management

• Define your risk management rules, including the placement of your initial stop-loss, how
you’ll manage the trade as it progresses, and whether you will trail the stop-loss or move it
based on new price action. Also, specify where your target will be and if you plan to take
partial profits.

• Initial Stop-Loss: Determine where you’ll place your stop based on recent price action (e.g.,
just below the last swing low for a long trade).

• Trailing Stop: Will you trail your stop-loss to lock in profits as the trade moves in your favor?
If so, how will you trail it—based on new SR levels, a moving average, or another rule?

• Target: Specify how you will determine your profit target. Will you aim for a fixed risk-reward
ratio (e.g., 1:2) or target a specific level like a key resistance or support area?

• Partials: Will you take partial profits at certain points? For example, you might close 50% of
your position once the price reaches a 1:1 risk-reward ratio.

• Example: “The initial stop-loss will be placed just below the SR level. I will trail the stop-loss
using the 20-period moving average once the trade is 1:1 in profit. The target will be the next
significant resistance level, and I will take partial profits (50%) when the price reaches a 1:2
risk-reward ratio.”

Conclusion

Developing a clear and detailed hypothesis for your trading strategy is essential for maintaining
consistency and discipline. By defining the specific market conditions, timeframes, confirmation
criteria, and risk management rules, you create a structured approach that is easier to test, refine,
and execute.

As a trader, you can start by mastering historical price action and market structure. As your skills
improve, progressively integrate more advanced tools like volume profile, footprint charts, and DOM
to gain deeper insights and enhance your trading edge. Each of these methods builds on the previous,
allowing for more nuanced and precise market analysis as you become more experienced.

How to Backtest Trading Strategies

One thing connects all professional traders – they have 100% trust in their trading strategy. If we want
to join this elite club of traders, we must know what to expect from our trading strategy. This is quite
a complicated task since none of us can see the future, but thanks to the historical data, we can easily
see how we would have performed in the past. If we can find out that our trading strategy performed
well in the last couple of years, there is a very small chance it won’t work in the future.

Table of Contents

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• What is backtesting

• Two methods to backtest

• Variables to Consider for Backtesting

• How to backtest a trading strategy?

o Choose a Backtesting Platform or Tool

o Set a few clear rules for your strategy

o Collect Historical Data

o Run the Backtest

o Analyse the Backtest Results

• Statistics – what to look for

o Expected Return

o Profit Factor

o Average Win/Loss

o Sharpe Ratio

o Average Risk-Reward Ratio (RRR)

o Win Rate

o Max Drawdown

• Optimising the Strategy

• Out of Sample and Forward Testing

• Review and Refine

What is backtesting

Backtesting is the process of evaluating a trading strategy using historical data to determine how it
would have performed in the past. This allows you to assess the viability of your strategy before
applying it to live trading.

This can be done over the last few months, but we can also go 10 or 20 years back. It all depends on
our appetite and how robust we want our backtest to be. Although backtesting can be very time-
consuming, it is relatively easy. All we need is a trading platform with access to the historical data and
a simple spreadsheet where we will document all trades.

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Two methods to backtest

Algorithmic (automated) testing is highly precise, eliminating any bias or subjective judgement that
can occur with manual trading. While it may take some time to program, it allows you to easily
optimise rules and run new backtests or a batch of them quickly. If you’d like to learn more about
algorithmic testing and trading, you can see the course offered by freeCodeCamp.

Manual backtesting is quite an exhaustive process that can easily consume tens to hundreds of hours.
To make the most of your time, it’s advisable to first define your strategy conceptually and then
examine around 20 instances on the charts that would have triggered a trading opportunity. This
initial exploration helps you understand the key elements to include in your backtesting spreadsheet.
On the other hand it offers a significant advantage in that it allows your brain to fully engage with and
believe in the strategy. By manually testing, you’re not just running numbers—you’re actively learning
to spot visual cues, patterns, and their variations in the market. This hands-on approach deepens your
understanding of market behaviour and helps you gain confidence in your strategy. Over time, this
process not only reinforces your trading rules but also hones your ability to recognise profitable
opportunities in real-time trading.

Variables to Consider for Backtesting

We cover the specifics of optimisation in another lesson, but here are a few examples to consider:

• Risk to Reward Ratio vs. Win Rate: This involves balancing small, consistent profits against
the potential for larger gains by capturing trends that occasionally result in significant returns.
However, this must be contrasted with the frequency of winning trades versus losing ones. A
higher risk-to-reward ratio might mean fewer winning trades, leading to potentially longer
losing streaks. Conversely, a lower risk-to-reward ratio might result in more frequent wins but
with smaller profits. Understanding how often you will win and anticipating possible winning
and losing streaks is crucial for managing expectations and maintaining psychological
resilience during trading.

• Confirmation Methods and Their Frequency: Experimenting with different types of

confirmation signals is essential to determine which are most effective in various market
conditions. Additionally, consider testing combinations of multiple confirmation signals to see
if they provide stronger or more reliable trade setups.

• Timing of Market Movements: Analyse the time it takes for the market to move after your
trade is triggered. Sometimes, you can expect immediate reactions. However, in other
situations, patience may be required. Understanding the typical timing and volatility of market
movements can help you set more appropriate stop-loss and take-profit levels.

• Fixed Risk to Reward Ratio vs. Discretionary Targets: Decide whether to use a fixed risk-to-
reward ratio, such as 2:1 for every trade, or apply discretionary targets when you anticipate
certain various levels to be reached. Alternatively, you could use techniques like trailing stops
to lock in profits.

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• Scaling In and Out: Consider strategies for gradually increasing or reducing your position size
to manage risk and maximise returns.

Remember to keep your rules simple to ensure they are easy to execute and replicate over time.

Here’s a step-by-step guide on how to backtest a trading strategy:

How to backtest a trading strategy?

1. Choose a Backtesting Platform or Tool

• For Manual Backtesting: You can manually backtest using a spreadsheet like MS Excel
or Google Sheets. This involves going through historical data, applying your strategy
rules and recording the results.

• The easiest way is to open your platform, set your charts with all the
visualisations and indicators and scroll back in time.

• Then scroll forward candle by candle, to avoid any bias, to not let your brain
convince you about the made up situations.

• annotating your chart, highlighting situations and taking screenshots.

• Collect the data to the spreadsheet so you can count the statistics in the end.

• Automated Backtesting: Use software or trading platforms that allow for automated
backtesting, such as MetaTrader and TradingView or advanced trading platforms with
specialised backtesting modules like NinjaTrader, Amibroker or Tradestation.

2. Set a few clear rules for your strategy

• Timeframe: Specify the timeframe or their combination on which your strategy will be
applied (e.g., daily, 4-hour, 15 minute).

• Entry and Exit Rules: Clearly outline the conditions under which you will enter and exit
trades. These rules should be specific and objectively observable, such as “Buy when
the whole body of a 30-minute candle closes above a key resistance zone if a market
is trending in the uptrend on 1-day time frame and the distance between stop loss
level and nearest resistance is in a ratio of at least 2:1.

• Risk Management: Define how much you will risk per trade, where you will place stop-
loss orders, and how you will determine position size.

• For more information see our lesson on How to create a trading plan and strategy.

3. Collect Historical Data

• Select the Market and Timeframe: Choose the currency pairs, stocks, or other
instruments you want to test, and ensure you have historical data for the appropriate
timeframe.

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• Find and Download Accurate Market Data: You need to obtain high-quality historical
price data from a reliable source, considering that CFD brokerages and prop trading
firms often have varying conditions in terms of pricing, fees, and spreads. Depending
on how far back you need to go and the timeframe you’re interested in, you may need
to pay for the data or find it available for free from trading platforms or financial
websites.

• Data sets:

• In-Sample Data: This is the portion of historical data used to develop, optimise,
and fine-tune your trading strategy. During this phase, you adjust parameters
and test different variations to improve the strategy’s performance. The risk
with in-sample data is overfitting, where the strategy becomes too closely
tailored to the historical data and may not perform well in new, unseen data.

• Out-of-Sample Data: This is a separate set of historical data that was not used
during the backtesting and/or optimisation process. It is reserved for testing
the strategy after development to ensure that it performs well under different
market conditions.

4. Run the Backtest

• Manual Backtesting Steps:

• Start with Historical Data: Use a charting platform to go back in time and
simulate trades as close to if you were trading in real-time as possible.

• Apply Your Strategy: For each trading signal (buy/sell), record the entry price,
stop-loss, take-profit levels, and any other relevant details.

• Track the Outcome: Move forward bar by bar (candle by candle) and record
the outcome of each trade (profit/loss).

• Log Results: Keep a detailed log of each trade individually in a spreadsheet or

other tool, noting all important observations.

• Automated Backtesting Steps:

• Input Your Strategy: Enter your strategy’s rules into the backtesting software.

• Run the Backtest: The software will simulate trades based on your strategy
over the selected historical period.

• Analyse Results: The software will generate a report showing the performance
metrics of your strategy, including total profit/loss, win rate, drawdowns, and
other key statistics.

• Basic data to collect into your spreadsheet or database:

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• Instrument (for backtests performed on more instruments)

• Time and date of entry

• Entry by market or limit order

• Entry price

• Exit price

• Entry pattern and timeframe (if applicable)

• Exit pattern and timeframe (if applicable)

• Position size and % risk on your trading account

• MAE – maximal adverse excursion (measured by pips/ticks, percentually or by

Reward-to-Risk Ratio)

• MFE – maximal favourable excursion (measured by pips/ticks, percentually or

by Reward-to-Risk Ratio)

• Result of the trade measured in Reward-to-Risk ratio or the amount of

ticks/pips

• Notes for the trade – level of conviction, emotional aspects

If possible, adding the screenshot to all the trades in your backtest is also good. This way, you can
easily come back to it later.

5. Analyse the Backtest Results

• Win Rate: Calculate the percentage of winning trades versus losing trades.

• Risk-Reward Ratio: Evaluate the average reward relative to the average risk for each
trade.

• Profitability: Assess whether the strategy is profitable over the long term.

• Maximal Drawdown: Look at the maximum drawdown, which is the largest peak-to-
trough decline in your portfolio during the backtest period.

• Consistency: Check if the strategy performs consistently over different market

conditions or time periods.

• Monte Carlo Analysis: Use Monte Carlo analysis to simulate various potential trading
scenarios by randomising the sequence of trades in your backtest. This helps assess
the robustness of your strategy across different sequences of winning and losing trades,
allowing you to identify potential weaknesses and enhance the overall resilience of
your strategy.

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• Equity Curve Simulator: You can also simulate a variety of possible outcomes using our
tool, which will show you potential equity curve scenarios based on your win rate, risk-
to-reward ratio, and initial capital.

• Statistical significance: Some traders might test the first ten trades, and if they see
their strategy works, they decide it is just enough and give up on further backtesting.
This is definitely not a good approach as we don’t have a robust data sample. To be
really sure our trading system is stable and robust, we need a sample size of at least
100-200 trades. This way, we will gain much more confidence in our trading. We will
gain much more confidence knowing that our strategy has a positive expectancy over
the long run.

Statistics – what to look for

A key component of any trading strategy is understanding probabilities and statistical metrics, such
as the expected return of a trade or win/loss ratio. Traders often backtest their strategies using
historical data to refine their approach. Based on the collected backtest data, you should review
following metrics:

Expected Return

• The expected return is the average amount of profit or loss a trader can anticipate from a
trade, calculated by multiplying the probability of each outcome by its respective return, and
then summing them up.

• This metric helps traders evaluate whether a strategy is likely to be profitable in the long run.
Positive expected returns suggest that the strategy is statistically favourable over time, even
if individual trades result in losses.

Profit Factor

• Profit factor is the ratio of the total profits to total losses over a specific period or set of trades.
A profit factor greater than 1 indicates that the strategy is profitable overall.

• This ratio provides insight into the overall efficiency of a trading strategy by comparing how
much profit is made for every dollar lost. It’s a simple way to measure profitability.

• A profit factor of 2 means the strategy makes $2 in profit for every $1 lost.

Average Win/Loss

• The average win/loss is the average size of winning trades compared to the average size of
losing trades.

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• This metric helps traders understand the potential magnitude of wins compared to losses. A
strategy with a high average win/loss ratio can remain profitable even if the win rate is
relatively low.

• For instance, an average win/loss ratio of 3 means that, on average, winning trades are three
times larger than losing trades.

Sharpe Ratio

• The Sharpe ratio is a risk-adjusted measure of return, showing how much excess return is
received for the additional volatility (risk) taken by the trader. It is one of the most commonly
used metrics in finance to compare different strategies.

• The Sharpe ratio allows traders to evaluate whether a strategy’s returns are due to smart
trading or simply taking on too much risk. A higher Sharpe ratio indicates better risk-adjusted
returns.

• A ratio above 1 is generally considered good, while above 2 is excellent.

Average Risk-Reward Ratio (RRR)

• The average risk-reward ratio (RRR) compares the potential risk of a trade to the potential
reward. It’s calculated by dividing the expected profit of a trade by the expected loss.

• This ratio helps traders assess whether a trade is worth taking. Even with a low win rate, a
favourable risk-reward ratio can lead to profitability if the rewards of winning trades
significantly outweigh the losses.

• A risk-reward ratio of 1:2, for example, means the potential reward is twice the potential risk.

Win Rate

• The win rate is the percentage of winning trades out of the total number of trades executed.

• While a high win rate can be desirable, it’s not the only factor for profitability. A strategy with
a lower win rate but higher average win size (compared to losses) can still be profitable.

• For example, a win rate of 60% means 60 out of every 100 trades are profitable.

Max Drawdown

• Max drawdown (MDD) is the largest peak-to-trough decline in the value of a trading portfolio
during a specific time period. It measures the maximum percentage loss from a portfolio’s
high point (peak) to its lowest point (trough) before recovering. The max drawdown is a critical
risk metric used to evaluate the downside risk in a trading strategy.

• Max drawdown gives traders insight into the worst-case scenario in terms of capital loss during
a trading strategy. A large drawdown can indicate higher risk exposure, while a smaller

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drawdown suggests a more conservative approach. It is particularly useful in risk management,
as it helps traders and investors understand the potential loss before a recovery is expected.

Optimising the Strategy

• Starting Over: It’s important to save your backtests so you can revisit and refine them without
starting from scratch. To save time, it’s advisable to first observe the market and estimate
which parameter variations would be beneficial to include in the backtest, as starting over can
be time-consuming.

• Parameter Tweaking: Adjust the parameters of your strategy (e.g., different confirmation
patterns, stop-loss levels) to see if performance improves. Be cautious of over-optimising by
adding too many conditions, which can lead to curve-fitting—a strategy that works well on
historical data but poorly in live trading.

• Multiple Markets: Test your strategy on different currency pairs or assets to ensure it’s robust
across various markets or to determine if it’s better suited to a specific one.

Out of Sample and Forward Testing

• Out-of-Sample Testing: Evaluate the performance on data that wasn’t used during the
backtesting process. This helps ensure that your strategy is not overfitted to historical data
and can perform well in real market conditions. The process is the same as for backtesting.

• Paper Trading: After backtesting, consider paper trading (simulated trading with a demo
account) to see how the strategy performs in real-time conditions before committing real
money.

Review and Refine

• Ongoing Analysis: Regularly review and refine your strategy as you gain more data and
experience. Market conditions change, and a strategy that worked in the past may need
adjustments to remain effective

Forward Testing of Trading Strategies

Forward testing, also known as paper trading or walk-forward testing, is a crucial step in validating a
trading strategy under real market conditions without risking actual money. It bridges the gap
between theoretical expectations, backed by data, and practical application in a live market
environment.

By carefully executing forward testing, traders can validate their strategies and build the confidence
necessary to transition to live trading. In this guide, we will focus specifically on manual forward
testing to ensure hands-on experience and deeper insights into your trading approach.

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While forward testing, you will encounter additional conditions that are not easy to simulate using
the historical data on which your backtest was likely based. These elements include:

• Filled and Unfilled Orders: Orders may not always get filled at the expected price, affecting
both trade entries and exits.

• Slippage: The difference between the expected price and the actual price at which a trade is
executed can lead to unexpected losses or smaller profits.

• Spread: The difference between the bid and ask price can vary, impacting your trade costs and
profitability.

• Trading Fees: Commissions and fees can add up, reducing your overall returns.

• Swap Fees: Holding positions overnight may incur swap fees, which can affect the profitability
of longer-term trades.

• Mental Aspects (in a Reduced Form): Emotions like fear, greed, and impatience, while
minimized in forward testing, can still influence decision-making and your final decision
whether the strategy is tradeable for you and fits your daily schedule.

Table of Contents

• 1. Prerequisites

• 2. Selecting a platform and broker

• 3. Set Up Your Trading Environment

• 4. Trade as You Would in Real Life

• 5. Evaluate Psychological Impact

• 6. Adjust and Refine Your Strategy

• 7. Transition to Live Trading

• Key Points to Remember:

1. Prerequisites

• Trading Playbook: Before beginning forward testing, you should have a well-prepared trading
playbook. This should include your notes, screenshots, and ideas gathered throughout your
trading studies. It serves as your personalized guide to executing trades based on your strategy.
If you need help creating one, we have an entire lesson dedicated to it.

• Trading Journal: Keeping a trading journal should be your top habit. This journal is where you
track your performance in a consistent and organized manner. It can be tedious, but it’s
essential for maintaining a clear record of your trades. Our lesson on maintaining a journal

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will guide you on how to do this effectively. Remember, your journal should provide statistics
that align with your backtesting results.

• Additionally, you can use the parallel trading journal to compare executed trades with
those you missed—whether due to hesitation, absence from the computer, or any
other reason.

• This adjustment maintains the clarity of the original point while incorporating the
added detail about misinterpreted visual cues and chart patterns.

• See our lesson on how to keep a trading journal for more tips and information.

• Backtest and Trading plan: While backtest focuses on the data and statistics, the trading plan
should describe the whole trading process for trading a backtested method. The expectations
of a positive outcome, based on its statistics, should help you maintain a consistent approach.
By relying on the data and strategy you’ve developed, you can stay disciplined and avoid
deviating from your plan during both favourable and challenging market conditions.

• See our lesson on preparing a backtest and a trading plan.

2. Selecting a platform and broker

When selecting a platform for forward testing, it’s advisable to choose one that closely resembles the
platform you’ll use with your actual broker once you transition to live trading. The choice is relatively
straightforward, as the options available to retail traders are not overly numerous.

• Demo Accounts: Many brokers, such as FTMO, offer demo accounts, with the vast majority of
traders utilizing MetaTrader 4 or 5. These platforms are popular among traders due to their
extensive community support, with numerous plugins and customization options available.
Although MetaTrader dominates, a smaller group of traders prefer cTrader for its superior
design and out-of-the-box functionality.

• Paper Trading Platforms: TradingView is a leading web-based trading platform that runs
directly in your web browser. Even its free version is highly suitable for paper trading, providing
a virtual account and detailed performance statistics.

3. Set Up Your Trading Environment

• Mimic Real Trading Conditions: Set up your demo account or paper trading account to reflect
the same conditions you would use in live trading, including your starting capital, leverage,
and the currency pairs or assets you plan to trade.

• Check the Rules: all the rules and parameters from your backtested strategy should be clearly
defined and described in your trading plan. This includes your entry/exit criteria, stop-loss and
take-profit levels, position sizing and restrictions that will tell you when to stop trading and
evaluate your progress.

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• Test flight: Ensure you’re familiar with the tools you’ll be using to set up your trades, such as
position sizing tools or calculators, and the platform’s functions for entering and closing trades.
Take the time to get comfortable with the size of your account, as it directly influences your
trading decisions regarding position sizes and affects your mental state during open
positions—whether they are profitable or losing.

4. Trade as You Would in Real Life

• Follow Your Strategy: Execute trades according to the rules of your strategy exactly as you
would if you were trading with real money. This is crucial for gaining an accurate
understanding of how the strategy performs under live conditions.

• Record Each Trade: Keep a detailed trading journal, noting down the entry and exit points, the
rationale behind each trade, and the outcome. Include screenshots of annotated charts if
possible to visualise market conditions at the time of the trade.

5. Evaluate Psychological Impact

• Real Emotions: Even though no real money is at risk, try to approach forward testing with the
same emotional discipline you would use in live trading. This helps you understand how you
might react to losses, wins, and market fluctuations.

• Recognize Behavioural Patterns: Note any tendencies to deviate from your strategy, such as
holding onto losing trades too long or taking profits too early. Forward testing is an excellent
time to develop strong trading habits.

6. Adjust and Refine Your Strategy

• Analyse Results: After sufficient trades and time, analyse the performance. Compare it with
your backtested results to identify any discrepancies or areas of improvement.

• Make Adjustments: Based on your observations, you may need to tweak certain aspects of
your strategy. For instance, you might adjust stop-loss levels, entry criteria, or position sizing
to better fit live market conditions.

• Retest if Necessary: If significant changes are made, you might need to return to backtesting
and then forward testing again to ensure the revised strategy is still viable.

• Project the niumners using equity curve generator, estimate how many stop losses in a row is
expectable, prepare your head

7. Transition to Live Trading

After successfully completing forward testing, it’s time to transition to a live or prop trading account.
The key difference between demo/paper trading and live trading is the presence of real risks and
profits. While starting with demo or paper trading is a good idea, it’s important not to delay too long
before moving to a live account, where your actions have tangible financial outcomes and fully
introduce the emotional aspects of trading.

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• Small Scale Start: Begin live trading with a small portion of your capital, such as around $200
USD or an equivalent amount. This approach should allow you to properly size your trades on
a small variety of instruments and further validate your strategy under real-money conditions.

• How Fast to Transition to Live?

The speed at which you transition to live trading depends on the average number of situations
your strategy generates within a given timeframe. A good threshold is to experience between
20 to 100 situations (trades) before making the move to live trading.

• If your strategy generates fewer situations per day, week, or month—such as those
based on higher time frames or more complex strategies—testing may take longer.
However, if you encounter no issues with execution or trade management, you may
consider shortening the process.

• The timing also depends on your personal need for assurance. If you’re confident in
your strategy’s performance, you can transition sooner. However, if you need more
reassurance, extend your testing period to ensure consistency across various market
conditions.

• Be cautious, though, of falling into the trap of endless testing, where some traders
never progress to live trading because they continually test without taking action.

• Consider Prop Trading: The smallest FTMO challenge, for example, is priced to be an attractive
alternative to the live brokerage account, limiting your risk on your own capital while providing
a structured environment for live trading.

• Scale Up Gradually: As you gain confidence and see consistent results in your live trading,
gradually increase your position sizes and capital allocation. This is where the real big profits
can be made, but it’s crucial to prepare yourself mentally for the challenges that come with
sizing up.

Key Points to Remember:

• Discipline: Treat forward testing with the same seriousness as live trading to develop strong
habits.

• Journaling: Keep a detailed record of each trade to track your performance and identify areas
for improvement.

• Patience: Allow sufficient time for your strategy to be tested across different market
conditions.

• Consistency: Apply your strategy consistently without deviation to ensure reliable results.

By carefully conducting forward testing, you can refine your strategy and build confidence before
risking real capital.

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TRADING PLATFORMS

MetaTrader 4 Guide

[Download FTMO MetaTrader 4 HERE]

Choosing a trading platform is a very important step for every trader. It is a working tool that must be
transparent enough, but at the same time it must offer a lot of features and tools that will make the
trader’s job easier. In the following parts of our FTMO Academy, we will take a closer look at how to
handle and to manipulate the trading platforms on which our FTMO Traders can trade.

Table of Contents

• MT4 on PC

• Login

o Navigator

o MarketWatch

o Chart window

o Terminal

o Trade

• MT4 on Android

o Login

o Bottom bar

o Quotes tab

o Chart Tab

o Trade tab

o History Tab

o Chat tab

o Opening a trade

o Closing the trade

• MT4 on iPhone

o Login

o Quotes tab

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o Chart Tab

o Trade tab

o History Tab

o Open a trade

o Close a trade

MT4 on PC

Once downloaded and installed, the first time you open the app, you can see the Market Watch tab
with a list of selected investment tools and the Navigator tab.

Login

There are two ways to log in to your FTMO account. In the right lower corner, there is a connection
tab. Click on it and press login. There you can put your login credentials from the FTMO Client Area,
and after a successful connection, you are logged in.

Navigator

If you have already used MetaTrader 4 with a different server, you need to search for the FTMO server
in the Navigator window. You can open it by clicking the View in the main menu or by pressing CTRL+N
(Command+N on Mac). In the Navigator window, you can switch between different accounts and also
quickly add technical indicators, expert advisors and scripts. To login to a new server, right-click on
the Accounts tab and select Open an Account. There you can add a new broker and select an
existing trade account, where you enter login credentials from the Client Area.

MarketWatch

This window shows you the real-time quotes of Bid and Ask prices for each financial instrument that
you can trade. You can open it by clicking on the View in the main menu or by pressing CTRL+M
(Command+M on Mac). By right-clicking it, you can add additional data such as the current spread,
high/low, time of last change, etc. By right-clicking it you can also show or hide all instruments, see
the specifications of chosen instruments, open a new chart window or enter a new order for the
selected instrument.

Chart window

The chart window is the most important tool for technical traders. Open it by right-clicking on the
selected instrument, or by dragging the symbol into the chart window space. By opening the chart,
we get access to the new toolbar called”Charts”. There you can zoom in and zoom out the chart (also
by dragging the mouse sideways on the time scale), change the graphical representations to bars,
candles or lines, scroll to the end on tick incoming or shift to the end of the chart from the right border,
add indicators, change the timeframe or set and save templates of your chart. You can also do all this
by right-clicking in the chart window, where a small help window will open. In this window you can

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find properties, where you can change chart visuals, modify different colours and use some additional
settings in the common tab.

The last option on the toolbar is the line which is used for drawing trendlines, horizontal and vertical
lines, channels, Fibonacci retracements, making notes or arrows in your charts, and for using the
crosshair for better navigation.

Terminal

Terminal gives you snapshots of what is going on in the market and in your account. You can open it
by clicking on the View in the main menu or by pressing CTRL+T (Command+T on Mac). On the Trade
tab you can see the Balance, Equity, Margin and details of opened and pending orders. The Exposure
tab displays summary information on the volumes of each currency for all open positions. The
Account history tab displays closed positions and cancelled pending orders. The News tab is used for
following the market events and trends. The Alerts tab shows information about created alerts for
signalling what you want to signal.

The Mailbox tab is for an internal mailing system, which brokers can use for additional communication.
The Market tab is a secured service from where you can purchase trading robots, technical indicators,
and scripts. Article tab shows you many articles that can help you with your trading. The Codebase
tab allows you to access the code base published at MQL4.community right from the client terminal.
The Experts tab is used for Expert Advisors, and the Journal tab shows all performed operations and
events.

Trade

There are several ways to open a trade in MT4. By right-clicking on the instrument in the
MarketWatch window and by choosing New Order is one of the options, but the easiest way is to

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press the F9 key. In the small window you can set the volume in lots, the Stop Loss and Take
Profit levels, the method of execution – market or pending order (Buy Stop, Sell Stop, Buy Limit, Sell
Limit) and the price at which you want to enter the market with a pending order. If you did not set
the Stop Loss and Take Profit beforehand, you can modify it in the chart by dragging from the actual
price.

If the price moves in the desired direction, you can set a Trailing Stop by right-clicking on your open
position and by choosing the number of points.

Closing a trade without limit orders is also possible. Go to the Terminal tab, and right-click on the
trade that you want to close, and click on “close order” or press the X symbol on the right side.

MT4 on Android

Many traders use the ability to trade via their mobile phones. Some say that it is not the most
convenient way to analyse and trade, but a lot of people love this way of trading and it suits them. The
Metatrader 4 application is divided into two parts, the main bar and the bottom bar.

Login

For a login to your server, go to the main bar and choose Manage Account. You can log in there to
your FTMO trading account with your login credentials.

Bottom bar

The bottom bar has six different options that can also be found in the main bar.

Quotes tab

The quotes tab shows real-time Bid and Ask prices of the selected financial instruments. You can add
symbols by clicking on the plus and choosing an instrument. By taping the pencil, you can modify your
quotes in some order or delete some symbols.

Chart Tab

This tab is used for viewing a chart of the selected instrument. You can apply different indicators and
objects there. By pressing on the chart, you can change the timeframes and the general settings of a
specific chart.

Trade tab

The Trade tab displays your current balance, equity, and margin information on your current positions.
It also shows your open trades.

History Tab

The History tab shows you a history of your trades, pending orders and past trades. You can select
the period of trading by pressing the calendar and by selecting a specific period. To see more details
about your trade, click on it and take a look.

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Chat tab

The Chat tab gives you access to MQL trading communities.

Opening a trade

To open a new trade, go to the Quotes tab, select the instrument, choose the new order to set your
stop loss and take profit and click on the sell or buy button. You can choose from different types of
orders, such as limit orders or stop orders and set the parameters for them.

Closing the trade

Go to the Trade tab, choose the order you want to close and swipe it from right to left. You will need
to select the closing order icon, and in the next window you will need to confirm it. If you want to
close a part of your order, repeat the same process but reduce the size you want to close.

MT4 on iPhone

On the iPhone, MT4 is even more simple, and everything is managed by five icons on the bottom of
the display.

Login

To login to your server, go to the Settings tab and click on “new account” and enter your login
credentials.

Quotes tab

This tab shows a real-time Bid and Ask prices of financial instruments. If you want to add a symbol,
click on the plus and use the search bar. By pressing the pencil button you can modify your existing
symbols. You can also change the view settings from simple to advanced.

Chart Tab

This tab is used for viewing a chart of the selected instrument. By pressing the indicator or the object
icon, you can apply different indicators and objects. Timeframes can be changed in the upper left
corner, and you can also quickly execute trades in the upper right corner.

Trade tab

The Trade tab displays your current balance, equity, and margin information on your current positions,
and it also shows all open trades.

History Tab

The History tab shows a history of your trading account. At the upper part of your screen, you can
filter trades by the symbol or custom periods.

Open a trade

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To open a new trade, go to the quotes tab, select the instrument, and select trade. Then set your stop
loss and take profit and click on the sell or buy button. You can also choose from different types of
orders such as the limit order, or stop order and set the parameters for these orders.

Close a trade

Go to the Trade tab, choose the trade that you want to close, hold on to it, and select close order.
There you will choose the closing order button. If you want to close just part of the position, you need
to specify the number and then hit the close button.

MetaTrader 5 Guide

[Download FTMO MetaTrader 5 HERE]

As we said in the previous article, choosing a platform is a very important step for every trader. Every
trader is suited to something different, and each of us has different preferences.

In today’s article, we will take a look at the MetaTrader5 platform. At first glance, it is a simple upgrade
of the MetaTrader4 platform, but the opposite is true. MetaTrader 5 brings changes and
improvements in virtually all areas compared to MT4. For traders focusing on developing and using
automated trading systems it means that MT5 is faster and more efficient in testing strategies by using
a multithreaded approach and the ability to test multiple currencies at once.

MT5 focuses more on social trading and copying trades, but the main difference of MT5 compared to
MT4 is its focus on multi-asset trading. MT4 is primarily designed for Forex and CFD trading only, but
MT5 also allows you to connect to centralized markets such as commodity and stock exchanges and
therefore allows you to trade directly in stocks, commodities, etc.

Table of Contents

• MT5 on PC

o Login

o Navigator

o MarketWatch

o Chart window

o Toolbox

o Trade

• MT5 on Android

o Login

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o Bottom bar

o Quotes tab

o Chart Tab

o Trade tab

o History Tab

o Chat tab

o Opening the trade

o Indicator

o Closing the trade

• MT5 on iPhone

o Login

o Quotes tab

o Chart Tab

o Trade tab

o History Tab

o Open a trade

MT5 on PC

Once downloaded and installed, the first time you open the app you can see, similar to the MT4
version, the Market Watch tab with a list of selected investment tools and the Navigator tab.

Login

There are two ways to log in to your FTMO account. In the right lower corner, there is a connection
tab. Click on it and press login. There you can enter your login credentials from the FTMO Client Area,
and after a successful connection, you are logged in.

Navigator

If you have already used MetaTrader 5 with a different server, you need to search for the FTMO server
in the Navigator window. You can open it by clicking on the View in the main menu or by pressing
CTRL+N (Command+N on Mac). In the Navigator window, you can switch between different accounts
and also quickly add technical indicators, expert advisors and scripts. Compared to MT4, where we
have 61 analytical tools, of which 30 are indicators, in MT5 we have 82 analytical tools (38 of which
are indicators).

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To login to a new server, right-click on the Accounts tab and select Open an Account. There you can
add a new broker and select an existing trade account, where you enter the login credentials from
the Client Area.

MarketWatch

This window shows the real-time quotes of Bid and Ask prices for each financial instrument that you
can trade. You can open it by clicking on the View in the main menu or by pressing CTRL+M
(Command+M on Mac). By right-clicking it, you can add additional data such as the current
spread, high/low, time of last change, etc. By right-clicking it you can also show or hide all instruments,
see the specifications of chosen instruments, open a new chart window or enter a new order for the
selected instrument.

Chart window

The Chart window is the most important tool for technical traders. Open it by right-clicking on the
selected instrument, or by dragging the symbol into the chart’s window space. By opening the chart,
we get access to the new toolbar called “Charts”. There you can zoom in and zoom out the chart (also
by dragging the mouse sideways on the time scale), change the graphical representations to bars,
candles or lines, scroll to the end on tick incoming or shift the end of the chart from the right border,
or save the picture of your chart.

The last thing on the toolbar is the line, which is used for drawing trendlines, horizontal and vertical
lines, channels, Fibonacci retracements, making notes or arrows in your charts, and for using the
crosshair for better navigation.

By right-clicking anywhere in the chart window a small help window will open. In this window you
can find properties, where you can change chart visuals, modify different colours and use some

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additional settings in the common tab. In addition, there are more options in the timeframe settings,
there are 21 of them in MT 5 (9 in MT 4).

Toolbox

Toolbox is the same as the Terminal in MT4. It gives you snapshots of what is going on in the market
and in your account. You can open it by clicking on the View in the main menu or by pressing CTRL+T
(Command+T on Mac). The Trade tab shows the Balance, Equity, Margin and details of open and
pending orders. The Exposure tab displays the summary information on the volumes of each currency
for all open positions. The History tab displays closed positions and cancelled pending orders. The
News tab is used for following the market events and trends.

The Mailbox tab is for an internal mailing system which brokers can use for additional communication.
The Calendar tab displays information about some important releases. The Market tab is a secured
service where you can purchase trading robots, technical indicators, and scripts. The Alerts tab shows
information about the alerts you have set. The Articles tab takes you to many articles that can help
you with your trading. The Codebase tab allows accessing the code base published at the MQL5
community right from the client terminal. The Experts tab is used for Expert Advisors, and the Journal
tab shows all performed operations and events.

Trade

There are several ways to open a trade in MT5. Right-clicking on the instrument in the MarketWatch
window and choosing New Order is one of the options, right-clicking on the chart and going on the
Trading tab, where you can set the limit orders as well, but the easiest way is to press the F9 key.

In the small window you can set the volume in lots, the Stop Loss and Take Profit levels, the method
of execution – market or pending orders and the price at which you want to enter the market with a
pending order.

You can also use a quick market order once you press ALT + T, which will open the Bid-Ask window on
the upper left corner. You need to accept the

Terms and Conditions in the tools tab here to access the one-click trading feature.

In MT5 traders have more options for filling orders, i.e., in addition to Fill or kill (filled only in the
specified volume, or canceled) also Immediate or cancel (available volume filled, rest canceled) or
Return (partial fill of order, rest not canceled). For pending orders, Stop Limit orders are also available
(only Stop and Limit orders can be placed in MT4).

If you did not set the Stop Loss and Take Profit beforehand, you can modify them in the chart by
dragging the price from the actual price level.

If the price moves in the desired direction, you can set a Trailing Stop by right-clicking on your position
in the trade and choosing the number of points.

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Closing a trade without limit orders is also possible. Go to the Terminal tab, and right-click on the
trade that you want to close and click on Close Order or press the X symbol on the right side.

MT5 on Android

Trading via mobile phones is quite popular today. Some say that it is not the most convenient way to
analyse and trade, but a lot of people love this way of trading, and it suits them.

The Metatrader 5 application is divided into two parts, the main bar and the bottom bar.

Login

To login to your server, go to the main bar and choose Manage Accounts. You can log in there to your
FTMO trading account with your login credentials.

Bottom bar

The bottom bar has six different options that can also be found in the main bar.

Quotes tab

The first tab are the Quotes that show real-time Bid and Ask prices of the selected financial
instruments. If you want to add a new symbol, click on the plus and choose a specific financial
instrument. If you want to modify your quotes in some order or delete some symbols, tap the pencil
and modify it.

Chart Tab

This tab is used for viewing a chart of the selected instrument. You can apply different indicators and
objects there. By clicking on the chart, you can change the timeframes and the general settings of a
specific chart.

Trade tab

The Trade tab displays your current balance, equity, and margin information on your current positions.
It also shows your open trades.

History Tab

The History tab shows a history of your trades, pending orders and past trades. You can select the
trading period by pressing the calendar and selecting a specific period. To see more details about your
trade, click on it and take a look.

Chat tab

The Chat tab is used for creating and engaging in the MQL 5 trading communities.

Opening the trade

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For opening a new trade, go to the Quotes tab, select the instrument, choose the New Order to set
your Stop Loss and Take Profit and click on the sell or buy button. You can choose from a different
type of orders and set the parameters for them.

If you want to open a trade with just one click, go to Settings and enable it. Be careful that you must
accept the conditions of One-Click trading.

Indicator

If you want to use an indicator for your trading, go to the Chart tab and select the function icon, where
you can choose from various indicators that you can modify and apply to your chart for a specific
instrument.

Closing the trade

Go to the Trade tab, choose the order you want to close and swipe it from right to left. You will need
to select the closing order icon and in the next window you will need to confirm it. If you want to
close a part of your order, repeat the same process but reduce the size you want to close.

If you want to modify your order, swipe the instrument again but now click on the icon with a small
pencil there for editing. There you can change your Stop Loss or Take Profit.

MT5 on iPhone

The Metatrader 5 application is controlled at the bottom bar and everything is managed from 5 icons.

Login

To login to your server, go to the Settings tab and press New Account and enter your login credentials.

Quotes tab

This tab shows real-time Bid and Asks prices of financial instruments. If you want to add a symbol,
click on the plus and use the search bar. By pressing the pencil button, you can modify your existing
symbols. You can also change the View settings from simple to advanced.

Chart Tab

This tab is used for viewing a chart of the selected instruments. By pressing the indicator or the object
icon, you can apply different indicators and objects. Timeframes can be changed in the upper left
corner, and you can also quickly execute trades in the upper right corner.

Trade tab

The Trade tab displays your current balance, equity, and margin information on your current positions,
and it also shows all open trades.

History Tab

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The History tab shows historical positions, orders, and deals. By clicking on the clock icon in the upper
right corner, you can filter your trade history by symbols and different time periods.

Open a trade

To open a new trade, go to the quotes tab, select the instrument, and select Trade. Then set your
Stop Loss and Take Profit and click on the Sell or Buy button. You can also choose from different types
of orders and set the parameters for them.

If you want to open a trade with one click, go to the chart tab and click on the upper right icon to
enable the One-Click trading. Be careful as you first have to accept the Terms and Conditions of One-
Click trading.

Close a trade

Go to the Trade tab, choose the trade that you want to close, hold on to it, and select Close Order.
There you will choose the closing order button. If you want to close only a part of the position, you
need to specify the value and then hit the Close button.

cTrader Guide

[Download FTMO cTrader HERE]

We’ll repeat it again, but the choice of a platform Is a very important step for every trader. Everyone
is suited for something different and each of us has different preferences.

In the third part of this section we will take a look at the cTrader platform. It is a state-of-the-art
platform, and, according to many traders, this is evident at a glance when comparing it to MT4 and
MT5. It is a popular alternative to the MT4 and MT5 platforms, but for traders used to MetaTrader
the environment may seem a little bit confusing. Compared to MetaTrader, cTrader contains many
features and tweaks already in the basic setup and there is no need to download them from the
Internet.

Table of Contents

• cTrader on PC

o Login

o Workspace

o Watchlist

o Trade Watch

o Active symbol panel

o Open a trade

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o Trailing stop

o Close a trade

o Technical Indicator

o Chart window and modification

• cTrader on Android

o Login

o Menu

o Watchlists

o Positions

o Order

o Price alerts

o History

o Transactions

o Charts

• cTrader on the iPhone

o Login

o Menu

o Popular markets

o Positions

o Order

o Price alerts

o History

o Transactions

o Charts

cTrader on PC

cTrader offers modern user interface with chart settings, advanced backtesting and also trading tools
and much more.

Login

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After downloading and installing the platform, the first time you open the cTrader, you have a login
to your demo or real account. You will do it with cTrader ID and password, which you will find in the
FTMO Client Area.

Workspace

When you log in to the cTrader software, you will see the default workspace. In the layout tab, you
can control the surroundings panels around your chart. If you want to save your changed workspace,
just click on My Workspace and save it.

Watchlist

On the left, you have a window with the Watchlist, which has all the popular instruments. If you want
to create your own watchlist, click on Create a New Watchlist and modify it as you want it. If you want
to see the chosen instrument in the chart, just drag it into the centre of the workspace, where all the
charts of a chosen instrument are or just right-click on it, and select New Chart.

Next to the Watchlist is the All Symbols tab where you can see all the instruments that you can trade.
There are many more instruments to trade, like majors, minors, cryptocurrencies, indices, CFDs,
commodities etc.

Trade Watch

Below the chart is the Trade Watch, where you see your open positions, pending orders, history of
closed orders, defined price alerts, your transactions history, and your notes in the journal. In the first
four tabs you can also see the account stats.

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Active symbol panel

In the active symbol panel, you can learn information about chosen instruments such as Bid and Ask
spread, depth of the market, current news events, symbol information, market hours, and trading
history. At the top of the symbol panel, you can also open new positions.

Open a trade

If you go to the Watchlist and right-click on the instrument you want to trade, a window will appear
where you can choose a “Create New Order” option. In the new window, you will see your Bid and
Ask prices for selling or buying an instrument for opening short or long trades.

First, you have to decide if you want to open a market order, a limit order, a stop order, or a stop-limit
order. Then you can choose if you are going long or short and set the volume of the specific
instrument measured in lots. Below the quantity, you can set your limits on the order.

Here you can set your Stop Loss and Take Profit for closing your trade. You can also add some
comments there. You can also use the chart on the right to quickly drag and drop your Stop Loss and
Take Profit and see your potential loss and profit. This feature is very useful in quick decision-making,
and it is something that MetaTrader does not offer.

If you want to open a trade with just one click, just click anywhere in the chart to allow this feature
to work, and then place a buy or a sell trade. You can modify the settings of the One-Click order in
the settings found in the Quick Trade tab.

Trailing stop

If the price moves in the desired direction and you want to automatically shift your Stop Loss to a
higher level, just right-click on your position in the trade, select Stop Loss, and set the Trailing Stop
below.

Another tool for this is the small shield icon for the advanced Stop Loss and Take Profit orders. If you
left-click on it, you can set up scale-out Take Profits, and automatic Break Evens. Bear in mind that
this advanced feature only works when your cTrader is turned on.

Close a trade

To close a trade, you have to go to the Trade Watch where you have your position, right-click on it,
and close it. If you want to close just some volume of your position, double left-click on it and specify
the amount you want to close. You can also press the small x button on the right side of the position.

You might have noticed two additional buttons between the X and the shield button. The double
arrow will double your existing position, and the u-turn icon will immediately close your positions and
open one in the opposite direction. These buttons can sometimes cause more bad than good, so be
careful when you are using them.

Technical Indicator

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To apply an indicator, go to the Indicator icon. Simply select the indicator, and the window will appear,
and you will choose desired settings. When you modify the settings of the indicator, click OK, and it is
done. If you want to remove it, right-click on it and choose to delete it in the upper right corner.

Chart window and modification

The drawing and windows toolbar is on the right side next to the chart. There you can adjust your
windows, add different lines, text, and so on. You can change the timeframes on the left side, save
your template, manage your indicators, and change the chart visualisation. If you click on time
periodicity next to the symbol name, you can change your chart type based on time, ticks, range or
renko charts. In the main menu on the left, there are also options for copy trading, algo trading, trade
analytics and settings.

cTrader on Android

The popularity of trading and managing accounts via mobile phones has been growing rapidly in
recent years. This is certainly no exception with cTrader, although some traders say that it is not the
most convenient way to analyse trades.

Login

Once you open the cTrader platform, you will be asked to log in. You do it by filling in the email you
used for the FTMO registration.

Menu

The home screen has six different tabs, which you change by swiping left and right. You have two
options below, the main one is called Trade, and the second one is called Blotter, and it displays all
new economic events.

The menu can be accessed by pressing the menu button in the upper left corner. You can make a new
order, create a price alert, find and add symbols, open settings, sign out or switch between different
accounts.

Watchlists

If you click on the Watchlists tab, you can create different watchlists and open new positions. New
watchlists can be created by clicking on the small arrow button, and new symbols can be edited when
you scroll down and click on add symbols. Existing symbols can be modified by clicking on the pencil
button. In this tab, you can create different watchlists and also open new positions.

Positions

In the positions tab, you can see your currently opened trades. If you press the new trade button on
the lower right side, you can quickly open a new trade. The newly opened trade is in the positions
tab, where you can modify it by closing partial profits, setting Stop Losses, and Take Profits. You can
also open the chart for a given instrument and see the details of the instruments.

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Order

The next tab shows your pending orders. If you create a new buy limit order and create it below the
market, you can see it in the orders tab.

Price alerts

The price alerts allow you to see your active price alerts and create new ones. If you press the plus
button on the lower right side, you can create a new price alert.

History

The History tab shows your profits and losses (P&L) from all your executed trades. If you scroll down,
you can see realised P&L of your whole account. You can click on each trade to show details.

Transactions

The transactions tab shows deposits and withdrawals on your trading account.

Charts

If you go to the Watchlist tab after you click on the instrument of your choice, you can see the quick
execution bar chart, market sentiments, depth of market, economic calendar, instruments specs,
market hours, and your trading statistics.

If you enlarge the chart, you can use the bottom bar for changing time-frames, different chart
visualisations, adding indicators, drawing tools, and making new orders.

cTrader on the iPhone

Login

Once you open the cTrader platform, you will be asked to log in. Similar to the Android version, you
can fill in the email you used for the FTMO registration in the iPhone version of the platform.

Menu

The home screen of the platform on iPhone has seven different tabs, which you change by swiping
left and right. The first tab can be accessed by pressing the menu button in the upper left corner.
There you can make a new order, create a price alert, find and add symbols, open settings, sign out
or switch between different accounts.

Popular markets

If you swipe to the next tab, you will see the popular markets. In this tab, you can create different
watchlists and also open new positions.

New watchlists can be created by clicking the plus button, and new symbols can be edited when you
scroll down and click on Add Symbols. Existing instruments can be modified by clicking the Pencil
button. In this tab, you can create different watchlists and also open new positions.

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Positions

In the Positions tab, you can see your currently open trades. If you press the new trade button on the
upper right side, you can quickly open a new trade. The newly open trade is now in the Positions tab,
where you can modify it by closing partial profits, setting Stop Losses and Take Profits. You can also
open the chart for a given instrument and see the details of the instruments.

Order

The next tab shows your pending orders. If you create a new buy limit order and create it below the
market value, you can see it in the Orders tab.

Price alerts

The Price Alerts allow you to see your active price alerts and create new ones. If you press the Price
Alert button in the upper right corner, you can create a new price alert.

History

The History tab shows your profits and losses (P&L) from all your executed trades. If you scroll down,
you can see all realised P&L of your whole account. You can click on each trade to show detail.

Transactions

The transactions tab shows deposits and withdrawals on your trading account.

Charts

If you go to the Popular Markets tab after you click on the instrument of your choice, you can see the
quick execution bar charts, market sentiments, depth of the market, economic calendar, instruments
specs, market hours and your trading statistics. If you maximize the chart, you can use the bottom bar
for changing time frames, different chart visualisation, adding indicators, drawing tools and making a
new order.

EVALUATION PROCESS

Minimum Trading Days

Table of Contents

• Minimum Trading Days

o Trading Day

Minimum Trading Days

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Before you can trade on a demo FTMO Account, we need to see how you can manage risk. Because
of this, we have developed Trading Objectives. There are four basic Trading Objectives you need to
know to become an FTMO Trader and to trade up to $200,000 on your demo FTMO Account. The first
rule is called Minimum Trading Days.

The Minimum Four Trading Days rule is one of the special Trading Objectives in our Evaluation Process.
We have developed this Trading Objective to determine the trader’s ability to manage risk seriously.
By passing this Trading Objective, traders prove their trading consistency and the ability to generate
profits steadily.

Lastly, we also want to avoid ‘one lucky trade’ situations.

Trading Day

A trading day is defined as ANY day in the CE(S)T timezone during which the trader executes at least
one trade. If you were to hold a position over multiple days, it would still be considered as one trading
day. This is because you need to have at least one new position opened on each trading day.

You do not have to trade for 4 days consecutively, you just simply have to complete at least 4 Trading
Days in total by the end of the trading period. The good news for all our FTMO Traders is that the
Minimum 4 trading days Trading Objective is present only during the Evaluation Process – FTMO
Challenge and Verification. Once you start trading on the FTMO Account, we want you to trade as
comfortably as possible and therefore no minimum trading days rule is required anymore.

Maximum Daily Loss

Before you can trade on a demo FTMO Account, we need to see how you can manage risk. Because
of this, we have developed Trading Objectives. There are four basic Trading Objectives you need to
know to become an FTMO Trader and to trade up to $200,000 on your demo FTMO Account. The
second rule is called Maximum Daily Loss.

The Maximum Daily Loss is one of the most important Trading Objectives. We have developed this
rule so that traders can become experienced risk managers with habits of professional traders. We
could call this trading objective “trader’s daily Stop Loss”. For a Normal risk account type, the limit is
set at 5% of the initial balance.

Let’s take the Normal risk account with the 5% limit as an example. If you have a $200,000 FTMO
Account, you must never exceed the total equity loss of $10,000 in one day. That means if you had a
losing streak and the total loss would result in -$8,000 in one trading day, your permitted loss for the
rest of the day would be $2,000 before exceeding the limit. Bear in mind that the Maximum Daily
Loss works with your equity, and therefore both floating losses and your closed positions are included
in the calculation. The limit is inclusive of commissions and swaps.

Be careful, as the Maximum Daily Loss resets at midnight CE(S)T! Let’s say you had a great start to the
week and your Monday trading session resulted in a closed profit of $4,000. Your Maximum permitted

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Loss for the rest of the day is now at $14,000. If you would now open a new trade which would go
into a $13,000 floating loss, then up until 11:59 PM, you would be still staying within the limit, because,
as mentioned previously, your permitted loss for the rest of the day is $14,000.

However, the Maximum Daily Loss resets at midnight CE(S)T, so at 12 AM on Tuesday your permitted
loss is by default reset to $10,000. If you would still be carrying the $13,000 floating loss, you would
exceed the limit as the profits made the previous day no longer count in a new day.

The Maximum Daily Loss resets at midnight CE(S)T, which means you should use the FTMO timezone
converter to check when exactly the Maximum Daily Loss resets in your local time. For example in
Tokyo time, which is at GMT+9, the Maximum Daily Loss limit will reset exactly at 7 AM Tokyo time.

The Maximum Daily Loss is a rule that is beneficial to both FTMO and traders, because it clearly
defines risk for the company and gives all traders plenty of room to trade with a reasonably adjusted
risk.

Maximum Loss

Before you can trade on a demo FTMO, we need to see how you can manage risk. Because of this, we
have developed Trading Objectives. There are four basic Trading Objectives you need to know to
become an FTMO Trader and trade up to $200,000 on your demo FTMO Account. The third rule is
called Maximum Loss.

The calculation of the Maximum Loss is similar to the Maximum Daily Loss. The only difference is that
it’s not limited to one day but the entire duration of the testing period. We have developed this rule
to protect our money, and at the same time we want to guide our clients and FTMO Traders to get
used to following the rules of money management and risk management.

This rule can also be referred to as the account Stop Loss. The Maximum Loss limit simply states that
the equity on your trading account must not drop below 90% of the initial account balance at any
given time during the account duration. That means that on the Normal risk account you cannot lose
more than 10% of your initial balance.

Please bear in mind that we’re talking about the account equity and just as the value of your closed
positions, floating losses or profits are also always included in the calculation. It must also be taken
into account that the limit is inclusive of commissions and swaps.

The rule remains the same during all three stages, so with a $100,000 Normal risk account, for
example, your equity can never be less than $90,000.

As mentioned previously, for the calculation we use equity, not balance of your account. So even if
your balance would be $92,000, but you had a floating loss of $2,001, the limit would be exceeded.

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This 10% breathing space gives traders enough freedom to prove that their strategy is suitable to
meet the conditions of the Evaluation Process and the demo FTMO Account. It is a buffer that should
keep the trader in the game even if there were some initial losses.

Profit Target

Before you can trade on a demo FTMO, we need to see how you can manage risk. Because of this, we
have developed Trading Objectives. There are four basic Trading Objectives you need to know to
become an FTMO Trader and trade up to $200,000 on your demo FTMO Account. The fourth rule is
called Profit Target.

Profit Target is one of the special Trading Objectives of our Evaluation Process. In order to successfully
complete this Trading Objective, you will need to prove that you can steadily grow your trading
account from the chosen initial balance. During the FTMO Challenge in the Normal risk account, the
Profit Target is set to 10% of the initial balance. In the Verification step, the Profit Target is always
reduced to 50% compared to the first step.

A Profit Target means that a trader reaches a profit in the sum of closed positions on the assigned
trading account anytime within the unlimited Trading Period. Be reminded that in order to secure the
Profit Target, all of your positions must be closed. For example, during a $100K FTMO Challenge with
the Normal risk setup, you would need to have a final balance of $110,000 in order to successfully
meet this Trading Objective. In the Verification step, your final balance would need to be at least
$105,000

The Profit Target is present only in the Evaluation Process. Once you pass the Verification and start
trading on the demo FTMO Account, we want you to trade as comfortable as possible, and therefore
there is no longer any Profit Target whatsoever.

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