LESSON 1 - Jargon Buster
Before getting started let's make sure we all speak the same language. We encourage you to read this page at least once and then come back later if you miss something or need a refresher. This page is regularly updated.
1 - THE BASICS
FX, Forex or foreign exchange market
The largest market in the world with $5 trillion daily volume where international companies, banks and speculators exchange currencies. Most of the transactions in this market are done for none profit reasons by large international companies (think BMW buying Indian rupee to purchase Indian steel to produce its new 5 series) or by individuals exchanging currencies to make purchases abroad or go on a holiday. Only a small portion of the FX market is speculative in nature, thus making it an excellent market for traders or speculators to profit in.
A Forex Broker, also known as a retail broker, or currency trading broker, is a financial institution that allows traders to set up a margin trading account and lets you to trade online through the Metatrader 4 trading platform.
MetaTrader 4 (MT4)
Worlds most popular trading platform that is excellent for trading bots.
Trading robot, Bot Expert Advisor (EA)
Is a computer program that can automatically or semi-automatically execute and manage your trades based on your pre-determined trading rules. Expert Advisor (EA) is the name for the bots given on MetaTrader 4 trading platform
A Technical analysis tool for MT4 that can be used by trading bots or human traders
Virtual Private Server (VPS)
Online computer that allows you to run your MT4 and your bots 24/7 without the need of your computer switched ON or connected to the internet. A must have if your computer is not ON and connected to the internet 24/7
Currency pair (also known as a market symbol)
All forex transactions are done in pairs. To buy GBP you must simultaneously sell something else. If you’re selling (giving) USD to BUY (get) GBP you just traded LONG GBPUSD currency pair.
Majors and Cross-pairs
The most traded currencies pairs are called the Majors. They constitute the largest share of the foreign exchange market, about 85%,
The Majors are: EUR/USD, USD/JPY, GBP/USD, AUD/USD, USD/CHF, NZD/USD and USD/CAD
All the majors include the USD and it is represented ( either sold or bought) in about 85% of all the FX transactions thus trader must always monitor the developments surrounding the US.
Any other currency pair that is not a major is called a Cross pair (sometimes a minor). The lower daily volume means that trading these pairs is more difficult but at the same time, it can be more rewarding due to the fact that these currency pairs can move a lot faster thus increasing the potential return.
Some of the most popular Cross pairs are: EUR/JPY, GBP/JPY, GBP/CHF, GBP/AUD, GBP/CAD, EUR/AUD, EUR/CAD, AUD/JPY, CAD/JPY, EUR/GBP
Experienced forex traders will call currencies by their nicknames:
Cable - Nickname for British Pound (GBP)
Aussie - Nickname for Australian Dollar (AUD)
Kiwi - Nickname for New Zeland dollar (NZD)
Swissy - Nickname for Swiss frank (CHF)
Looney - Nickname for Canadian Dollar (CAD)
Contract for Difference (CFD)
CFD is a contract between you and your broker with a bet on a financial instrument price change without owning the underlying financial asset. CFD’s are mostly used in trading GOLD (XAU/USD pair), equity markets and most recently in Bitcoin trading.
The advantage of trading Bitcoin CFD over buying Bitcoin in an exchange is that you can go both LONG and SHORT (sell bitcoin) and you don’t need to worry about somebody stealing your bitcoin since you don’t own the Bitcoin (just the CFD)
2 - TRADING TERMS
Base currency vs Quoted currency
Base currency is the first currency in the currency pair, for example, EUR/XXX
Quoted currency is the second currency in a currency pair, for example, XXX/JPY
LONG and SHORT, Bullish and Bearish
When you go LONG you buy base currency against the quoted currency. If someone is LONG he/she is thought to be BULLISH and is expecting the price to rise
When you go SHORT you sell the base currency against the quoted currency. If someone is SHORT he/she thought to be BEARISH and is expecting the price to drop
Is a currency unit measurement. 1 lot = 100,000 units of the base currency
For example, 1 lot trade on USDJPY means you have transacted $100,000
A pip, short for point in percentage, is a very small measure of change in a currency pair It is usually $0.0001 for U.S.-dollar related currency pairs or a 1/100th of 1%,
A minimum change in price, up or down.
Leverage and Margin
Leverage is the ability to use something small to control something big. In forex trading, it means you can have a small amount of capital in your account controlling a larger amount in the market. Margin is the amount of capital that your broker requires from you to open a position.
For example, with 100:1 leverage to control a $100,000 (lot) position your broker will require a $1,000 margin.
Is the amount of capital in your account that is available to open new positions.
You get this when the amount of money in your account cannot cover your possible loss. It happens when your equity falls below your used margin. If a margin call occurs, some or all open positions will be closed by the broker at the market price.
If you use proper risk management by risking only a small % of your account per trade, you will never experience a margin call.
Refers to the absolute value of your trading account during the time when any open positions have been factored into the equation.
One single risk unit that a trader is using. It can be calculated in % of trading account or in $,£,€
3 - FORMULAS
% Risk per trade
This is the core principle of how DARA controls the risk. Each trade will represent a small % risk on your account.
For example, If you risk 1% per trade and you have $10,000 in your account. The risk on each trade is $100. If the trade doesn't work out as expected you lose $100 or 1% of your trading account.
Risk:Reward ratio (R:R)
This is the ratio between how much reward you expect to get from this trade vs the amount you risked.
For example, if your Risk: Reward ratio is 1:2 for each $100 you risk your reward is $200
Having a positive Risk: Reward ratio means that even if you lose the majority of your trades you still can make a great profit.
Win Rate (Win %)
Measured in % dividing the winning trades by the number of all the trades you took.
Positive Expectancy - (PE)
Key indicator of future profitability that will show you what is your expected average return per trade measured in R.
The PE formula is ((Reward+1) X Win Rate)-1 = PE
For example, if you Reward per trade is 2R and your win rate is 50% your PE = ((2+1) X 50%) = 0.5
Thus you should expect to gain 0.5R per trade on average.
PE of 0.5 is considered very good.
Profit Factor (PF)
Another profitability formula but it can only be calculated after the trades are closed. The formula for Profit factor is
All winning trades/All losing trades = PF
Profit factor of 2.0 is very adequate.
Is a reduction of your trading capital after series of losing trades. This is calculated in % terms of your overall trading capital measuring the distance from the peak of your trading capital minus relative trough
This is the amount of time it takes you to recover from the drawdown to create a new peak on your equity.
Return to Drawdown ratio
Important measurement for determining the volatility of your trading system over a specific time frame typically 1 year. A good Return to Drawdown ratio to aim is 2:1 that means over a 1 year when you returned 40%, your max drawdown did not exceed 20%
A mathematical principle to grow your trading account over time by reinvesting the profits thus increasing the return on each trade. Compound interest works so well because you let your money work for you. However, 90% of your trading journey will be slow and “boring” because compound interest only really kicks in once your trading account reaches a certain size. This also one of the main reasons you need to trade for growth not income as withdrawing profit from your small trading account will put you multiple steps back.
4 - THE MARKETS
Stop Loss (SL)
Price at which the trade is no longer valid and is closed for a Loss ( Or Break-Even, or Profit)
Take Profit (TP)
Price at which the trade will hit is price target and will be closed for a profit
Price that is equal to the order entry price. When the trade is closed for Break-Even the trade outcome could be slightly negative due to possible negative swap
BID-ASK and SPREAD
When you buy a currency pair, you will use the offer or ASK price. When you sell, you will use the BID price.
The difference between the BID and ASK is called the Spread.
Price difference between requested entry price and actually filled price. The slippage is a natural process that occurs because there is a time delay between you sending the order and the broker executing the order in the market. For the most part, slippage should not be an issue for you. It can only be an issue during news announcements when the volatility is high.
Correlation is a statistical measure of how two currencies move in relation to each other. Currency correlation, tells us whether two currency pairs move in the same, opposite, or totally random direction, over some period of time. Currency correlation changes over time but historically EURUSD and USDCHF have a very strong negative correlation. (when EURUSD is rising, USDCHF is falling and vice versa). Since 85% of FX deals involve USD, a lot of currency pairs will move in the same direction. Thus it is a very important aspect to take into account when you place multiple trades at the same time. You might in fact be exposing yourself to large correlation risk without realizing it.
Trading or investing in assets that are not correlated with each other. The core principle of diversification is to reduce risk by spreading it across multiple uncorrelated assets.
A safe haven currency is a currency that investors and traders believe is stable enough to keep its value compared to other currencies, the U.S. dollar (USD), Japanese yen (JPY) and Swiss franc (CHF) are often considered to be safe haven currencies.
Risk ON, Risk OFF
Risk-on, risk-off in trading describes a process where traders move to riskier potentially higher yielding investments and then back again to supposedly lower yielding investments which are perceived to have a lower risk.
SWAP (or Rollover)
A forex swap rate is defined as an overnight or rollover interest (that is earned or paid) for holding positions overnight in foreign exchange trading. You can find the swap rates in MT4 market watch symbols properties.
Orders vs Trades
A single trade signal can have multiple orders typically 2 or 3. Each order will have different Take Profit levels (marked TP1, TP2, or TP3) and for a different purpose. Typically trades 1st order (TP1) is used to control the risk level and reduce the drawdown. While the 2nd order or 3rd order is used to gain the maximum profit.
Market orders vs Pending orders
Market orders is an order to Buy or sell at the best available market price right now.
Pending orders are orders that are placed in the market and will be executed only if price moves to a specific price level.
There are two types of pending orders:
Limit Entry order - A limit entry is an order placed to either buy below the market or sell above the market at a certain price.
Stop Entry order - A stop entry order is an order placed to buy above the market or sell below the market at a certain price.
Time given to your pending orders to fill. If your Pending order is not filled during the allocated time it will be cancelled automatically by your broker.
Good Till Cancelled (GTC)
You Pending orders will be kept in the market until cancelled
Method of simultaneously holding a Short and Long position on the same currency pair. Although this trade setup may sound strange because the two opposing positions offset each other. Oftentimes this kind of “hedge” arises when a trader is trading multiple trading strategies with different time horizons and profit targets.
For example, You can be Long with a trend following strategy and Short with a counter-trend strategy for a quick smaller target. Both strategies can work independently not interfering with each other.
Sadly, traders in the US are not allowed to hedge.
First In First Out (FIFO)
Trading rule forced on US-Based traders. When you open 2 or more orders on the same currency pair the rule requires you to close the First order before closing the 2nd order.
5 - TRADING METHODS
Technical analysis vs Fundament analysis
Technical analysis is the art of analysing the charts,
Fundamental analysis is analyzing the financial data and looking at the overall strength/weakness of the countries (or companies ) economy
While both method practitioners will argue that their side is better, the truth is each of them serve a different purpose. Technical analysis is a short to a medium-term analysis of what is likely to happen next week or next month. While Fundamental analysis is a longer-term projection what investors should expect next year to happen.
Technics, methods and strategies that give a trader an advantage in the markets
Short time trading style by going in and out of the market multiple times per day targeting 5-10 pips. Since each trade will cost you on average 2-4 pips the only person who is getting rich using this trading method is your broker.
Day trader (moron)
Short time trading style trader by going in and out of the market multiple times per day and closing all the positions at end of the day. 95% of all day traders lose money.
Medium-term trading style analyzing the charts using technical analysis and holding trades for few days to few weeks.
Placing orders before and/or around news announcements and economic reports. Unprofitable endeavour for retail traders due to bots and slippage.
END OF THE DAY TRADING
Trading the markets by looking at the daily close charts at 5 PM ET ( 10 PM UK time)
All the price action that happens within the daily candle.
Gambling system that is doubling up ( or increasing ) the risk on each trade after a losing trade. All Martingale systems sooner or later will fail due to simple mathematical rules. 99% of retail trading bots are based on Martingale systems as they can show perfect curve fitted results sometimes for months or even years before the inevitable crash that will give you a margin call.
Characteristics of a Martingale system are - No SL used, holding on to losing trades while closing winners quickly, adding orders to losing trades. Avoid Martingale like a plague.
Curve-fitting (or Over-Optimization)
Method of fitting the trading system to work on a specific past price data. Curve-fitted systems will never work in a real live market as by curve-fitting a trading system you just hide the potential problems and lures a trader into a false sense of safety.
Is decision-based trading, where the trader decides which trades to make, based upon the information available at the time. The advantage of discretionary trading is that it is adaptive to current market conditions and personal preference.
Rule-based trading, where the decision to make a trade is based entirely upon the trading system. System trading decisions are absolute and do not offer the opportunity to decline to make a trade based on the trader's discretion.
DARA trading method
Uses the strengths of both trading approaches decision-based discretionary and rule-based Systematic trading. With DARA looking after the trading system rules and sending the trader notifications every time the strategy rules are met it is then up to the trader to use his discretion, his market knowledge and personal risk preferences to take the trade or not.
6 - TECHNICAL ANALYSIS
The most popular charting method that cleary and visually represents 1 bar ( 1 candle) price action (Open, Close, High and Low)
Distance Measurement from candles high to candles low. Typically measured in pips or % of ATR
Candle body size
Distance Measurement from candles open to candles close. Measured in % of the overall candles size
Candlestick with a small body and long tail on one side
Candlestick that engulfs previous candles body
Candlestick with a small body and long wicks on both sides
Double top/Double bottom
Price area that has been hit and rejected at twice.
Price area that has been Supporting or Rejecting the market price multiple times ( 2 or more)
When a currency pair is moving in the same direction for an extended period of time.
Important stand out price level on the chart that has been rejected by the market
Simple series of numbers that create ratios describing the natural proportions of just about anything in our universe.
In trading, Fibonacci retracements and extension levels are used calculate potential entry/SL/TP levels. Most popular Fibonacci levels are 0.236 0.382 0.500 0.618, 0.786, 1.382 1.618
Satoshi DARA uses 0.786 Fibonacci level for Entries and 1.382 and 1.618 for Take profits.
Simple Moving Average (SMA)
Is a popular technical indicator. Simply put it is the currency pairs average price over x periods. It is calculated by adding up the last x period currency pairs closing prices and then diving that number by x
Exponential Moving Average (EMA)
Is a more popular type of Moving Average as it puts more emphasis on the most recent price action. In trading, the most recent price action is always the most important. DARA uses EMA’s with periods of 8, 25, 50
Is a volatility type of indicator that uses the simple moving average ( typically 20 period) and price deviation (Upper Bollinger band and Lower Bollinger band) from the simple moving average (Middle Bollinger band). The Bollinger band indicator is a great indicator for counter-trend strategies to identify overextended extreme moves in one direction. Satoshi DARA uses the Bollinger bands indicator.
Average True Range (ATR)
Is a key indicator to measure market volatility over a specific period of time( typically 20 days)
ATR indicator on daily chart will show you the average amount of pips this currency moves in a typical day thus we widely use this indicator for DARA to calculate Entry/SL and TP distances.
Trend following strategy
Strategy that work on an idea that financial markets tend to move in trends - up, down for an extended period of time. Trend following strategies typically have a lower win rate ( losing more trades than winning) as while trends can last for a long period they don't happen as often as most traders think. But when a strong trend have been established it typically yields a very high reward per trade and the winning trades are kept open for days, weeks and months. Trendy Jibe is a trend following strategy.
Counter trend strategy
Trading Strategy that is based on taking the opposite side once the market has made an extreme move on either side. Counter trend Strategy typically employs a hit and run tactic by taking profits quickly. Satoshi is a counter-trend Strategy.