Whenever you trade in the forex markets (except when you use a limit order) you will pay a spread – the difference between the bid and the ask price. This ought to make it easy to compare spreads among different forex brokers, but unfortunately it isn’t quite that easy . . . brokers employ one of a number of different execution models, and in order to make meaningful comparisons it is necessary to understand a little more about these.


ECN Brokers

An ECN is an ‘electronic communications network’, and is how banks and liquidity providers interact to exchange currencies. ECN brokers provide direct access to this interbank market, where spreads are extremely narrow, and charge a commission for doing so.

Quite often these brokers are keen to identify themselves as such, as there is some perception that the ECN model provides greater transparent and removes the potential for conflicts of interest (the broker makes their profit from the fixed commission they charge, and so have no motivation to game the spread in any way). However, interbank spreads are extremely sensitive to market volatility and liquidity shortages, and can become prohibitively wide during events such as news releases.

Dealing Desk Brokers

Brokers who operate a dealing desk model act as an immediate counter party to their client’s trades, and therefore control the bid-ask spread, and the spread is how they make their money. Because they make their profits from the inflated spread they do not charge commissions. Often, dealing desk brokers choose to provide ‘fixed spreads’, which means that the spread that you will be charged is guaranteed at a certain amount regardless of how wide or narrow the ‘floating spread’ in the underlying market may be.

STP Brokers

An STP or ‘straight-through-processing’ broker occupies the middle ground between the two models described above. An STP firm will pool the the best bids and offers from its liquidity providers, inflate this spread, and then enable you to trade at these prices. There is no dealing desk intervention and prices are based upon (though inflated from) those found in the interbank market; the spreads are therefore always floating and never fixed, and no commissions are charged.

And important first step when comparing brokers is therefore to identify which of the above categories a firm falls into. Then you can begin comparing them with similar companies to determine which will be the most suitable. Remember, however, that trading fees are by no means the most important priority when choosing a broker.




In order to begin trading you will need to find a forex broker. The job of the broker is to connect you to an underlying market that you wouldn’t otherwise be able to access, so that you can transact your trades there. Your choice of broker is extremely important, so make sure you take the necessary steps to a range compare forex brokers and find one that is well suited to your trading style.

Here’s a list of five key things that you should consider when choosing a forex broker:

  1. Check to see if your broker of choice is registered with a regulatory agency such as the National Futures Association (NFA) or Commodity Futures Trading Commission (CFTC) in the US or the Financial Service Authority (FSA) in the United Kingdom. If they aren’t registered with these agencies or a similar agency in the country in which they are based then the broker is probably not a safe choice.
  2. Review the trading conditions for the broker. Do they operate under a dealing desk or market-making model? Are fixed spreads available, and how wide are the spreads compared to other brokers? If trading with direct access into the interbank market, how competitive are the broker’s commission charges and other account fees?
  3. What level of leverage is available from the broker, and does it suit your strategy, your appetite for risk, and your financial goals? Excessive use of leverage causes many traders to go bust, so try to choose a broker who offers you an appropriate amount for your needs rather than simply the one with the most leverage. For new traders, “micro accounts” can be a good way to start out as the allow smaller lot sizes – does the broker offer these?
  4. If your trading strategy requires you to hold positions overnight, does the broker credit or debit interest on any rollover from one day to the next? The costs of paying interest on leveraged short positions can soon add up in your brokerage account.
  5. If premium services are important to your trading plan, can your broker provide these at a competitive price? Check the availability of charting, news feeds, and market commentary, along with any other tools you may need.

You can compare a wide range of forex brokers on this site, and they also have some of the most detailed and in-depth reviews that I have been able to find online. They only list two brokers that serve clients in the US, so if you’re wanting to open an account from there then I suggest looking at sites like, which list stock brokers that also offer forex trading.


Forex stands for foreign exchange, and is the world’s largest financial market in terms of trading volumes, with transactions worth trillions of dollars taking place every single day. In basic terms, the forex market is how both companies and individuals convert money from one currency into another.


Unlike with stocks or bonds, there is no centralised exchange for transactions in the forex market, so instead currencies are traded through an international network of banks, brokers, and dealing desks, commonly known as the ‘interbank market’. Trading in forex is possible at any time of day or night during the week, as currency trading occurs twenty-four hours per day around the world’s financial centres.

Everything from interest rates, inflation, and government policy, to employment figures and demand for imports and exports can influence the value of a currency, causing prices to rise or fall. Forex prices are always quoted in pairs, representing how much of one currency can be purchased with another at that time.

Both the susceptibility of the forex markets to a wide range of pricing factors and global events, along with the huge volumes of currencies exchanged, mean that the forex markets are often highly volatile, providing unparalleled opportunities for short term traders to profit.


Once you have decided what market you want to trade, then you will need to decide upon the vehicle through which you want to do this. When you need a vehicle through which to enter the markets, there are a wide variety of products, mostly derivatives, from which you can choose. Derivatives are so called because their price is ‘derived’ from that of the underlying market. When you trade derivatives you do not actually end up owning anything (as you would if you bought shares in a company) – you just enter into a contract to pay or receive money based on price movements in the market from which the contract is derived.

Futures Contracts

Futures contracts are one of the most widely traded forms of derivatives and have now become one of the most popular vehicles used for market speculation. They are transparently priced (unlike options), exchange-traded and very liquid (the turnover in FTSE futures, for example, is far greater than that of all the constituent stocks in that index), and increasingly affordable (with the introduction of ‘e-mini’ electronic contracts such as the YM and the ES).

The easiest way to explain how futures contracts work is probably to explain how they came about:

It used to be the case that a producer, such as a grain farmer, would roll up at a market place such as the Chicago Board of Trade with a big cart of grain that he would aim to sell. Those who intended to buy grain that day would stand and watch the grain merchants setting up, and watch the numbers arriving to buy grain, and would instinctively begin to weigh up the balance of supply and demand. If they could see that there were many merchants with plentiful stock, but fewer buyers, then they would go into their negotiations with the aim of running the prices down – if a merchant wouldn’t lower his price, then there were plenty more that the buyer could go to who were desperate to sell their stock.

This was deemed somewhat unfair on the merchants, and the solution was an early form of futures contract. Rather than turning up with his latest grain harvest, a merchant would arrive at the marketplace with a contract stipulating that he would agree to deliver a specified amount of grain on a specified date, at a particular price. The buyer in this contract would agree to take delivery of the commodity at the agreed price and on the agreed date. The agreed price would typically be the trading price of the commodity (i.e. the underlying cash market) on the settlement date.

The main difference that you will note between Futures and Options contracts is that the buyer of the former is obligated to take delivery at the settlement date, whereas the buyer of the latter has the option to take delivery, and may choose not to exercise this option. A futures contract, however, will state whether there is to be a physical or cash settlement. In practice this means that you don’t want to be holding on to a futures contract around the time of its expiry unless you happen to want several hundred barrels of crude oil delivering to your doorstep or thirty ‘lean hogs’ running around your driveway (an amusing image though that may seem). As well as converging with the underlying market on the settlement date, futures are subjected to periodic ‘true-ups’ in which their price is adjusted. The contract should in fact make all of the following specifications:
• The underlying asset or instrument.
• Whether cash or physical settlement.
• The amount and units of the underlying asset per contract.
• The currency in which the futures contract is quoted.
• The grade of the deliverable.
• The delivery month.
• The last trading date.
• Other details such as the tick size.
Futures contracts are now available on pretty much any underlying market or security that you care to imagine, from single stocks to commodities and currencies. Some have become so well established that it is now possible to write options on the price of the future (that would be a derivative of a derivative, right?). As trading moved off the floors there arrived the ‘e-,Mini’ electronically traded contracts such as the YM (Dow30) and the ES (S&P500), which are ideally suited to small independent traders because they allow smaller position sizes to be established. The mini-sized Dow, for instance, is worth just $5 per point, compared to $50 for the ‘Big Dow’ future.


Options are one of the most complicated speculative vehicles, and you will need to progress your understanding far beyond the short explanation we give here before you consider trading with them. None of the strategies we give in this course are intended for options trading, though some of them could be adapted for this.

An option is a derivative and is a contract that gives the holder the right to buy or to sell a security, provided that it reaches a specific price before a specific date. The specified price at which the underlying security may be traded is known as the ‘strike price’, and the date until which the contract remains valid is the ‘expiration date’ (after this date options become totally worthless). To make a profit from an option, you will need it to move in your favour by more than the amount of the premium.

An option to sell is known as a ‘Put’, and an option to buy is a ‘Call’. Unfortunately it gets a bit more complicated than this, as there are both long and short variations of puts and calls, each with their own subtly different outcomes. If you thought that an instrument’s price was set to increase, for example, you could purchase a long call option or you could sell a short put.

The price of the contract is determined by the price of the underlying market from which it is derived, plus a ‘premium’ based on the amount of time until the contract expires. The premium is collected by the writer of the option. Most options used as tradable instruments are those that trade on exchanges, through which the price can be tracked.

NB. Later on we will refer to the Arms Index (or Trading Index), which is an indicator of sentiment based upon order flows of advancing and declining issues on the NYSE – in other word Put and Call options. Often, this is simply called the ‘Put/Call Ratio’. We will also avoid trading on options expiration days in some setups.

Exchange Traded Funds

Exchange traded funds are a form of derivative often used for longer term speculation in a pool or ‘basket’ of securites. In some respects, they are rather like a ready-made portfolio, and may contain stocks, commodities, currencies, or bonds. In many respects, ETFs are not dissimilar to investment trusts or mutual funds.

Apart from diversification of an investment across a range of different securities, other advantages to ETFs include lower tax efficiency, lower costs compared to similar products, and transparent, continuous pricing (many similar products can only be bought or sold at the daily close).

ETFs are typically used by the speculating public looking for managed investment solutions, and are not really of any use for active trading.

Contracts for Difference (CFDs)

CFDs were a UK development of the 1990s that has since spread to other parts of the world (though not the USA, where they are classed as an ‘over the counter’ derivative and are not permitted). A CFD is a contract between two parties – a buyer and a seller – stipulating that the one will pay to the other the difference between the current value of an asset, and its value at the time the contract is settled. If the difference is positive, then the seller pays the buyer; if it is negative the buyer pays the seller. CFDs have no expiry date, and the settlement is therefore at the discretion of the buyer. This fact aside, there are no standard contract terms, with some providers charging fixed execution fees or commissions, and others charging the bid-ask spread.

Because CFDs do not involve actual ownership of the underlying equity, they have the advantage that they are not subject to UK Stamp Duty and can be traded on margin.

Though futures contracts are exchange traded, CFDs carry the advantages of smaller contract sizes, no expiry dates, and the fact that they mirror exactly the price movements of the underlying instrument.

Financial Spread-betting

The concept of financial spread betting, which is a derivative, developed in the UK following the success of CFDs as an over-the-counter product, and allows you to spread-bet on the movement of a financial instrument. Your earnings from spread-betting are completely tax-free.

The ‘spread’ in question here is the difference between the bid and the ask price that we discussed earlier. However, the betting company will further increase this spread, as (assuming you place a winning trade), this is how they make their money (rather than charging a commission).

In the UK, financial spread-betting is almost certainly the best way forward for new traders. Opening a spread-betting account will give you instant, one-shop access to a wide variety of markets in which to develop your trading skills. In addition to the tax advantages, it provides the possibility of trading a much smaller account size and risking much smaller sums of money. If you hold a single Dow Futures contract and it moves just twenty points against you, this will represent a loss of £62. If you were spread-betting at the minimum size, an identical adverse move might cost you just £10. Most spread-betting companies will provide you with free access to a basic browser-based charting package.

A few words of caution –

• Associated products with names like ‘binary bets’ and ‘bungee bets’ should most definitely be avoided.
• The charts these companies provide often have glitches – make sure that you are aware of these so they do not affect your trading.
• When you determine your entries and exits you will need to factor in the spread – if you have a two point spread, price will need to move twelve points in order to hit a ten point target (and just eight points to take out a ten point stop-loss).
• If you’re trading a large position size you will pay more in spread than you would pay a broker in commission – spread-betting is no longer an economical option.

Covered Warrants

Covered (or ‘naked’) warrants are perhaps best described as ‘longer-term options’. Like a traded option, a covered warrant entitles the holder to buy or sell the underlying asset at a specified price at or before the expiry (or ‘strike’) date, which is usually measured in years rather than months. Once again, for this privilege you must pay a ‘premium’, and your liability is limited to this, although covered warrants are considered a leveraged product.

Covered warrants tend to be issued by financial institutions, and the issuer will normally hedge their exposure with a position in the underlying market.


Almost anything with a liquid price, from shares in a new company to soybean meal, from raw aluminium to Patagonian currency (whatever that is!), is probably trade-able somewhere in the world, through some vehicle, on some exchange. So, with such a bewildering array of instruments on offer, how do you set about deciding exactly what to trade? Let’s start by taking a look at some of the different types of instruments on offer:

Stocks and Shares

Because they are sometimes insufficiently liquid, a large proportion of individual stocks are not ideally suited to short term trading strategies. One or two of the day-trading setups we cover (such as the opening gap) could be played in the very heavy stocks, but with the super-liquid indices sitting there, why bother? Individual stocks really come into their own when used as part of longer-term investment strategies such as the Dual MA setup described in the Swing Trading section.

Stocks and shares are a method of equity participation – when you buy shares in a company’s capital stock, you attain ownership of a fraction of that business. Typically, you will receive a certificate of this ownership. Shares are simply the units into which a company’s total stock is divided. There are different classes of shares, each of which have specific rules, privileges, and values.


Unlike shares, which are an equity security, the various forms of bond are debt securities. They are issued by institutions in order to raise equity – often governments who wish to finance current expenditure. Essentially they are a loan contract: the issuer of the bond is a borrower (debtor), and the holder is the lender (creditor). The date at which the loan must be settled (along with any interest) is when the bond is said to ‘mature’. With ‘perpetuity’ or ‘Consol Bonds’ there is no fixed maturity date.

Bonds are typically a vehicle for very long term investment (usually between 10 and 30 years), rather than something you’re likely to actively trade. However, movements in the bond markets provide important fundamental information when considering directions in the stock markets (we’ll explore this in a much later setup).


An index is simply a group of stocks, and its price is determined by the total price of its constituent stocks. Any change in an index represents the net change in the price of its constituent stocks. The FTSE100, for example, contains one hundred of the UK’s largest stocks, and if the price of all of these stocks rises on a given day, then the value of the FTSE index will rise also. If most of the stocks rise but a small group, the retail sector for example, declines, then the value of the index would most likely still rise – just one sector alone would have to decline very significantly in order to ‘outweigh’ and drag down the whole index.

Many of the strategies we will cover are intended for trading the indices, in particular the FTSE100, the DOW30 (or Dow Jones Industrial Average), and the S&P500 (or ‘Standard and Poors’). Unlike its constituent stocks, which you can physically buy and own, an index doesn’t really exist in any literal sense (it’s just the total price of a group of stocks), so there is no way that you can buy or own ‘the FTSE’ as such – you will need to trade one of a number of derivative products whose price is determined by that of the index – more on this shortly . . .


You might well expect that the price of a commodity such as lumber or corn would be dictated almost entirely by fundamental factors such as the weather or consumer demand. Commodities are, after all, very real-world things that people need, and are subject to all the changeability of the real world – droughts, plagues, collapsed mines, and political takeovers. You’ll be surprised to learn then, that commodities often trend beautifully, and can be traded according to specific strategies with relative ease. You don’t need to know anything about the state of coffee farming in Kenya to trade coffee! If something is truly capable of moving a market then the first place that this will be reflected is in price, and someone who knows nothing whatsoever about coffee will be able to relate to these movements on a price chart and begin to draw some conclusions.

Nevertheless, this doesn’t stop lots of people trading commodities of fundamental data alone, and though such speculators are often very well informed, they frequently miss time their entries into the markets, providing easy pickings for the disciplined technical trader.

Forex (Currencies)

The currency or ‘forex’ markets are not something that we will cover in this course beyond a brief introduction here. Why? Forex can be very difficult to trade, especially as a beginner. Learning to trade with consistently profitable results is never a breeze, so why not give yourself a break and steer clear of the difficulties of forex until you have gained some experience in an easier market?

Here are some of the reasons (some of which may sound rather cynical) why the forex markets are not a good place for you when starting out:

All forex pairs (that’s the value of one currency against another – the dollar against the yen, for example) are traded with spreads rather than commissions. In the first instance this is the bid/ask spread, and it is what the banks and institutions pay – they have no ‘brokerage’ fee to pay as forex is an interbank market, which means that the banks are the market makers. If you want to participate in this market you will have to do so through a broker, who will have been quoted a wider spread by the bank, and this he will pass along to you. The broker probably won’t charge you any commission, but instead he will widen the spread even further to ensure a profit for himself, so by the time that you’re quoted the spread it may have been inflated from something negligible to somewhere in the region of 5 pips (a ‘pip’ is an abbreviation of ‘price interest point’, and is the minimum permissible movement in a currency pair, rather like ‘ticks’ in other markets).

You will need to factor in spreads when you place stops and targets. If you buy at the top of a five point spread, then to exit this position you must sell at the bottom of the spread, which is already five points away from where you have entered at the top. If you have a stop placed ten points from your entry at the top of the spread then this stop is only actually five points from where the bottom of the spread is – just a five point move against you will result in you being stopped out for a ten point loss. If none of this makes any sense to you yet, then that’s another good reason not to trade forex!

The interbank market is de-centralised (it doesn’t trade anywhere in particular on an exchange) and it is not regulated – this means that those with the real muscle in the big investment banks can do pretty much whatever they please. Like ferreting out your stops to create liquidity for their own orders (they can see exactly where they are because the stops are on their order books). De-centralisation also means that there is no authoritative data source, and that there are no market internals such as volume to confirm your trading decisions. Why would you choose to trade a market where you don’t have all this valuable information at you fingertips?

For some reason there is currently a great deal of romance attached to forex trading, and millions of amateurs hand trillions of pounds over to the markets each year. Take a quick glance around the trading forums online and you will see how popular the Forex markets are with amateur traders, and also how many of them are frustrated with their inability to turn a profit. Try not to become one of them!


Price charts show the movement of a financial instrument over a period of time. The timeframe, shown along the bottom axis, can vary from a single tick (the minimum upward or downward movement in price) to hourly, daily, or even yearly timeframes.


A line chart is the most basic form of chart. This shows nothing more than just the closing price of the instrument at the end of each period. So, if we are looking at a one-hour timeframe chart, the line will just plot the closing price at the end of each hour.

bar chart

Bar charts display more information than this. For each period a bar line will be plotted. The top of the bar will show the highest level that price reached within the period, and the bottom of the bar will show the lowest. A marker on the left shows the opening price, and a marker on the right shows the closing price. This allows us to see not only where price ended up at the close of the period, but also the key aspects of the movements it went through to get there.


The price of an instrument will always move in one of three ways – upwards, downwards, or sideways. These types of movement are easy to recognise on a chart of historical price action, but recognising them as they unfold can be tricky!


In an uptrend the market moves in a clear upward direction for a sustained period.



In a downtrend the market moves in a clear downwards direction for a sustained period.



A sideways ‘trend’ is when the market is not really trending at all, but moving sideways in a series of small up and down movements.

sideways trend

When price moves sideways, as in the last example above, this may also be referred to as a ‘trendless’, ‘ranging’, or ‘choppy’ market.
Even within a clearly defined up or down trend, there will always be short periods in which price moves briefly in the opposite direction. These periods are known as ‘retracements’, ‘consolidations’, or ‘back-filling’. They occur when the consensus of the market is to re-evaluate the trend, and they are often associated with profit-taking.

The price of an instrument will spend approximately 40% of its time in a trending state – the remainder is spent in sideways movements.

Trends have three phases:

• Accumulation – where market makers and institutional traders set up a market movement, often with an enormous buy or sell order worth millions of dollars. Within the exchanges there exists an established pecking order in which different ‘locals’ (like Scalper C in our earlier example) participate in and aim to profit from the accumulation phase. Those lowest in the pecking order will be left with the difficult task of trying to ‘sell’ the move to the public.

• Public participation – when speculators start to spot an opportunity and a rapid and obvious price movement occurs as they get with the trend.

• Excess – the final stage of a trend where the last members of the public jump aboard a sinking ship, just as the experts take profits and exit with massive counter-orders that fire off a reversal.