Trading and investing should be handled very differently.

First and foremost I am a trader, but I am also an investor.
For instance, I invest in physical gold among other hard assets. However, for the purpose of explaining the difference between trading and investing, gold provides a great analogy.

Paper gold should be traded no differently than Forex. Wait for price action setups and buy and sell accordingly with appropriate stop losses and targets. It’s as simple as that!

However, in the physical market, since you should be buying gold with zero margin, you can afford to hold onto it longer as it should be part of a longer-term investment strategy.

You may ask: why do I purchase physical gold? After all, it does not even pay income like some other assets.

This is the way I see it: as I am writing these words, central banks around the world are printing money and, consequently, debasing the value of money. Gold in many ways is an insurance policy against bad government, printing money, inflation, deficits, and war.

In the end, even though I think gold prices are headed higher, that does not mean that gold will not enter into a multi-year bear market as we saw in 2012-2013. I cannot afford to hold paper gold that long as that would be bad trading: there is a cost implication to holding paper gold.

The paper markets are handled much differently than the physical markets and you can’t have your long-term vision be skewed by your short term trades, or vice-versa.

 

I will provide more clarity in this lesson about the role of gold and other assets. Remember, a trader and investor are two different things, and you must understand the difference.

Important Economic News

As we mentioned several times throughout the course of these lessons, watch out for important economic news. Not paying attention to important events happening across the globe could have negative effects on your trading.

For instance, the chart below shows a bearish price action setup on the AUD/NZD 4hr chart: a pin bar while hitting the long-term resistance level. Price then retested this value area before going lower to rest on the 20ema. The price then produced two low liquidity candles that were mainly the result of market indecision prior to an important news announcement.

Once the news came out, the Aussie dollar became super bullish by a much higher than expected CPI number. There is no way to know this and therefore, one must always practice proper money and risk management. I like to say “When in doubt, stay out”.

What does all this economic data—interest rates, GDP, manufacturing numbers, etc.—really mean, in the final analysis?

Without going into too much detail, they technically represent how well a country’s economy is performing, and as such, a currency could be greatly impacted by this news, much like an earnings announcement impacts the stock price of a public company listed on the stock exchange. In other words, it’s all about sentiment and how people react to market news and economic data.

Therefore, governments and media tend to be biased to the upside due to their own self-aggrandizing and self-serving agenda. If a politician were to reveal how bad the economy truly is, do you really think that he would get re-elected? No. Instead, all major government-reported statistics are calculated much differently than in the past.

For instance, the CPI index currently uses a variety of new concepts such as hedonics and substitutions to distort the picture and to provide data that shows less inflation than is the reality. Inflation is a hidden tax—but no agent wants to reveal this.

While government reported CPI and unemployment numbers continue to be relatively low, alternative statistics from Shadow Stats present these important statistics as they were once calculated—and so a much different picture emerges. If CPI is a lot higher than the official numbers, who is really paying for this inflation?

The truth may surprise you. Continue reading to receive your “red pill” economic education.

 

 

Understanding Currencies

Although learning economics it is not a prerequisite to becoming a successful trader, understanding economic principles will provide you with more in-depth knowledge of how the markets work. In the long run, it will make you a much more informed trader to know the product (currencies) you are actually trading.

Prior to 1971, our monetary system operated under the Bretton Woods Agreement: most currencies maintained a fixed exchange rate to the US dollar, and in turn the US dollar was tied to gold. In this context, it would be impossible for central banks to print money since gold is inherently finite and thus limited in supply.

Below is a 1928 US five-dollar bill that acted as a claim cheque on gold. Under the Gold Standard Act, the value of the dollar was linked to approximately 1.5 grams of gold. In other words, had we still been able to make claim on its convertibility today, this 5$ bill would be worth over 68 times its face value, at approximately $344. The US dollar has lost 98% of its purchasing power since 1928. Let’s see why.

Fast-forward to 1971—the year that everything changed. US president Richard Nixon suspended the gold convertibility of the US dollar. This meant that the US dollar had now become a fiat currency—in other words, “monopoly money”.

Under this new monetary system, currencies operated under a floating exchange rate that varied in value in relation to one another at any given time. This event gave birth to the Forex market. The foreign exchange market operates in a free-floating environment, and this is why you are able to become a Forex trader today.

Although currencies are “floating around” relative to one another, central banks around the world often intervene to influence the exchange rate. Keep an eye on these “agents,” as they are the major key players who influence the Forex markets in an effort to manipulate currencies against one another, mostly for economic and political reasons. They want to preserve the status quo.

Today, just about every major central bank is printing money “out of thin air”. Although the agents have expressed claims that this money is being printed to stimulate the economy, this is false and misleading. Here are some of the major factors that are influencing the agents to print “trillions” in money every year:

  1. To cheapen their currency to boost exports;
  2. To lower interest rates to entice debt servitude;
  3. To wipe out pre-existing debt/obligations by inflation.

When a country prints money, it expands the money supply. Consequently, this debases the value of the dollar and creates inflation, which is the main reason why prices go up every year. However, in reality prices are not going up; it is merely the value of the dollar going down.

In the 1950 and 60’s gasoline was priced approximately a dime per litre. That dime (equivalent in much of the world) which could have been used to buy one litre of gasoline actually contained 80% of pure silver (0.06oz of silver). Fast-forward to today: that same pre1965 “silver” dime can still provide you with one litre of gasoline. Why? Because 0.06oz of pure silver at today’s spot silver price of anywhere between $19-$22 equals to $1.14 – $1.32— the price of one litre of gas in Canada today.

When you measure oil with something real like gold or silver, the prices have not really changed. On the other hand, when you measure it with paper fiat currency, the value does change, and dramatically so. Therefore, governments around the world battle in “currency wars” in order to cheapen their currency and compete more competitively on the global markets.

The more a country exports, the more excess surpluses a country can have, meaning that there is more money flowing into the country than out. Since the 1980’s, the US has been in a trade deficit (imports>exports) and many prominent free-thinking economists can attest that this fact alone has largely contributed to the fact that the US is the largest debtor nation in the history of the world ($17 trillion+).

Despite the enormous debt that the US has been allowed to accumulate, it continues to grow. This is due to a variety of reasons, however the largest reason is because the US dollar is the reserve currency of the world. US dollars are needed to buy oil anywhere in the world. And since other countries cannot print US dollars, they receive it when they trade with the US.

These US dollar surpluses are then held at foreign central banks, which in turn buy US treasury bonds to earn interest. When other countries buy treasury bonds, they help push down interest rates (supply and demand). If no one wants to buy bonds, then interest rates must rise to entice investors. However, as of late, foreign countries have been scaling back on their US bond purchases.

To counteract this, the US Federal Reserve has been stepping in to buy its own debt with printed money from their quantitative easing programmes (which the media had relabelled as an effort to stimulate the economy) to artificially suppress the interest rates instead of raising the interest rates to entice investors. In this situation, it provides a false impression to investors that money is cheap and that going into debt is a viable, if not a downright economically intelligent, move, while in reality these low interest rates are not real. Also, by forcing the interest rates down, this provides the US (and consequently other countries and investors) to rack up more debt than what is economically sound.

The Agents of the Fed are covering up this story by manipulating the markets and providing you with a false vision of what is really happening and, in my opinion, this is destroying the middle class of the “real world”.

Who exactly are the Agents of the Fed? They operate in the largest banks in the US, the so-called Magnificent Five: JP Morgan, City Bank, Bank of America, Goldman Sachs and Morgan Stanley. These banks unofficially operate as the trading desk for the Federal Reserve and carry out the derivative trades that manipulate the market.

In theory, the Fed acts like the broker for these banks and currently has very little oversight. Despite what is commonly understood about the Fed, the Fed is neither technically private nor completely run by the government. It is a quasi-governmental entity as it follows orders from the Exchange Stability Fund (ESF) which is secretly controlled by the US treasury.

The ESF, is an emergency “slush” fund which is normally used for foreign exchange intervention (i.e. protecting the value of the dollar from financial attacks). However, in reality the ESF not only controls the Fed, but also the monetary policies of the US (and indirectly the world) through government spy agencies and the military. Another group worth noting is the Working Group (Aka the Plunge protection team) who’s aim is to provide confidence in the markets and as a result intervene in the markets through all type of stocks, futures and derivatives. The plunge protection team offloads its financial terrorism trades to the New York Fed who does the dirty work for the Fed.

Lower interest rates mean that money is cheap to borrow and consequently more money is created through the process of fractional reserve banking at individual retail banks. Fractional reserve banking creates money from nothing, due to low liquidity reserve requirements. A 100$ deposit in the bank allows banks to lend out thousands of dollars, and this tremendously helps increase the money supply and, therefore, inflation. Inflation helps make pre-existing debt manageable while the value of currency is debased. If you had ten thousand dollars of debt in the 1950’s, that would have been significant; in today’s world, however, it’s practically a trifle! The same goes for social obligations that the government must pay (i.e. social security): it makes it easier to pay these obligations when the value of money goes down.

In the end, the interest rate is the most critical factor for a country’s economy and currency. It can help boost an economy, but it can also destroy it. Given the current monetary scheme under which the US is operating, sentiment and confidence is absolutely key in the markets. Remember that the US dollar has no backing, which has allowed money to expand at an unparalleled level in the last few decades; never would this have been possible under a gold standard. In other words, it does not matter how illogical and irrational the markets are and for how long, if the psychology of the market participants continue to favour this system, the markets will go up.

However, when sentiment reverts, markets will plunge, thus creating abnormally extreme market volatility in much quicker timeframes than ever before, creating the opportunity for traders to make vast amounts of money. Welcome to the dream world of Forex!

Conclusion

I thank you for taking this advanced course on Forex price action and markets. I wish you all the best of luck with your trading.

Once you have some screen time under your belt, you will start recognizing patterns that occur often on the charts. These patterns usually occur repeatedly, and eventually they start to “speak” to you as if in a language which only you and other traders can understand (the price action source code).

Like learning any language, it takes time to develop and master. When you start trading, just remember that the odds are against you. Not only are you learning how to read the charts, but you will be facing fierce competition.

The two main forces you will battle in the markets are the Agents of the Fed (banks, institutions, etc.) and the machines (robot algorithm traders). However, defeating them can be achieved.

Free your mind, focus on what is taught in this course, and don’t look back. Most of you will be beaten down before you can stand up on your own two feet, execute trades without emotions, and not be affected by losses.

I hope that you have gained some valuable information that will make you successful in the markets and in turn increase your personal and economic standard of living. If this course has had a positive impact on your trading or on you in any way, I would love to hear from you.

Knowing that I have helped someone to become a better trader provides me with the energy to continue teaching. Likewise, if you feel that there is something missing in these lessons, please contact me