Getting Started in Currency Trading

Acknowledgments xv
Introduction xvii
About This Book xvii
How This Book Is Organized xvii
Disclaimer xix
PART 1
THE FOREIGN EXCHANGE MARKETS
Chapter 1
The FOREX Landscape 3
Introduction—What Is FOREX? 3
What Is a Spot Market? 3
Which Currencies Are Traded? 4
Who Trades on the Foreign Exchange? 4
How Are Currency Prices Determined? 5
Why Trade Foreign Currencies? 5
What Tools Do I Need to Trade Currencies? 8
What Does It Cost to Trade Currencies? 8
FOREX versus Stocks 8
FOREX versus Futures 9
Summary 10
Chapter 2
A Brief History of Currency Trading 11
Introduction 11
Ancient Times 11
The Gold Standard 1816–1933 12
The Fed 12
Securities and Exchange Commission 1933–1934 14
The Bretton Woods System, 1944–1973 14
The End of Bretton Woods and Floating Exchange Rates 15
International Monetary Market 15
Current Perspective 16
Arrival of the Euro 16
Summary 18
Chapter 3
Spot or Futures FOREX? 19
Introduction—Futures Contracts 19
Currency Futures 20
Contract Specifications 20
Currencies Trading Volume 21
U.S. Dollar Index 22
Summary 22
PART 2
GETTING STARTED
Chapter 4
The Regulatory Environment 25
Regulation Today 25
The Commodity Futures Trading Commission (CFTC) 26
National Futures Association 26
Commodity Futures Modernization Act of 2000 27
The Patriot Act 27
The CFTC Reauthorization Act of 2005 27
Summary 28
Chapter 5
The FOREX Lexicon 29
Currency Pairs 29
Major and Minor Currencies 29
Cross Currency 30
Exotic Currency 30
Base Currency 30
Quote Currency 30
Pips 30
Ticks 31
Margin 31
Leverage 32
Bid Price 32
Ask Price 32
Bid/Ask Spread 32
Quote Convention 32
Transaction Cost 33
Rollover 33
The Trader’s Nemesis 33
Summary 34
Chapter 6
The Calculating Trader 35
Leverage and Margin Percent 36
Pip Values 36
Calculating Profit and Loss 37
Calculating Units Available 44
Calculating Margin Requirements 46
Calculating Transaction Cost 47
Calculating Account Summary Balance 50
For Futures Traders 52
Summary 53
Chapter 7
Selecting the Right FOREX Broker for You 55
Broker-Dealer Due Diligence 55
Demo Accounts 56
Market Maker, ECN, or IB? 56
Introducing Brokers 57
Platform Capabilities 58
Trading Tools 58
Order Execution and Accounting 60
News 60
Chat 60
Platform Stability and Backbone 62
Historical Data 62
Data Feed 63
Third-Party Offerings 63
Orders 63
Margin Requirements 64
Order Backup 64
Account Minimums 64
Pairs, Crosses, and Exotics 65
Deposits and Withdrawals 65
Transaction Costs 65
Trading Hours 66
Customer Service 66
Documentation 68
Requoting 68
Financials 68
Rollovers and Interest 69
FOREX Broker-Dealers 69
Popular Broker-Dealers 70
The Big Three 73
For the Professional 74
Fraud, Scams, and Off-Exchange 74
Summary 76
Chapter 8
Opening a FOREX Account 77
Account Types 78
Opening the Account: Steps 78
Summary 81
Chapter 9
Pulling the Trigger 83
Orders 83
Market Orders 84
Limit Orders 84
Stop Orders 85
Combination Orders 86
Specialty Orders 86
Order Placement Walk-Through 86
Order Execution 86
Order Confirmation 87
Transaction Exposure 87
Summary 88
PART 3
THE TOOLS OF THE TRADE
Chapter 10
Fundamental Analysis 93
Supply and Demand 93
Interest Rates 94
Balance of Trade 94
Purchasing Power Parity 97
Gross Domestic Product 98
Intervention 100
Other Economic Indicators 100
Forecasting 102
Chapter 11
Technical Analysis 107
Overview 107
Bar Charts 108
Trend Lines 110
Support and Resistance 111
Recognizing Chart Patterns 111
Reversal Patterns 112
Continuation Patterns 113
Candlestick Charts 115
Point and Figure Charts 117
Charting Caveat—Prediction versus Description 119
Indicators and Oscillators 120
Relative Strength Indicator 120
Momentum Analysis 121
Moving Averages 123
Bollinger Bands 123
Indicator Caveat—Curve-Fit Data 126
Swing Analysis 126
Cycle Analysis 128
Advanced Studies 128
The Technician’s Creed 129
Summary 130
Chapter 12
The Toolbox Approach 131
General Principles 131
A KIS Toolbox 132
The Goodman Swing Count System 133
GSCS Rules 133
“3C” Stands for Carryover, Compensation, and Cancellation 136
The Nofri Congestion Phase Method 138
Pugh Swing Chart Formations 139
A Moving Average and Oscillator Battery 140
Contrary Opinion 142
Volume 142
Open Interest 142
Heuristics 143
Summary 144
Chapter 13
The FOREX Marketplace 145
Organizing Your Bookmarks 146
Cross-Category Services 147
Portals, Forums, Reviews 147
Charting and Technical Services 150
FOREX Education 152
Trading Signals and Software 153
News, Announcement Services, and Calendars 154
Live Data Streams 157
Historical Data 157
System Development Tools 159
FOREX Managed Accounts 161
Peter Panholzer 163
Odds and Ends 164
Summary 166
PART 4
THE COMPLETE FOREX TRADER
Chapter 14
Psychology of Trading 169
The Trading Pyramid 169
Fear and Greed, Greed and Fear 170
Profiling 171
The Attitude Heuristic 171
Characteristics of Successful Traders 172
Summary 173
Chapter 15
Money Management Made Simple 175
Breaking Even—The Belgian Dentist 175
Expectations 176
Trader Profiles 176
Parameters for Trader Profiles 178
The Trade Campaign Method (TCM) 179
Calculating TCM Profit and Loss 179
Stop-Loss Orders—A Brief Discussion 181
Selecting Markets 181
Summary 182
Chapter 16
Tactics and Strategy 183
Trending and Trading Markets 183
Market Environments (ME) 184
Directional Movement (DM) and Volatility (V) 185
Price and Time Rhythm (PR and TR) 185
Thickness (T) 188
Shape (S) 190
Pretzels (PZ) 190
ME Applications 190
The Three Chart System 193
The Dagger Entry Principle 193
Sitting on Your Hands 194
Time Filters 195
Trading the News 196
Going Against the Crowd 196
Trading Methods 197
The Flyer 197
Bathtub Analysis 198
Summary 198
Chapter 17
When and How to Regroup 199
Common Trading Errors 199
Performance Review 201
Heuristics Review 202
When to Say Uncle 202
Summary 202
Chapter 18
For the Record 203
Type of Records 203
The Rogers Method 205
The SnagIt Tool 205
Planning Records 206
Summary 206
PART 5
EXTRA FOR EXPERTS
Chapter 19
Options and Exotics 209
Options 210
An Options Primer 210
Basic Options Terms 211
The Pros and Cons of Options 212
The Four Basic Options Strategies 213
Purchasing and Writing Options 214
Advanced Options Strategies 214
The Retail FOREX Options Landscape 214
Options for Trading 216
Options for Money Management 216
Exotics 218
Trading Exotics 219
Summary 220
Chapter 20
The Final Frontiers 221
Rollovers 221
Hedging 222
Arbitrage 223
Pros and Cons of Arbitrage 227
Artificial Intelligence 228
Complexity Theory Models 228
The Trend Machine 229
Automated Trading and Robots 229
A Last Word 231
Appendix A 233
How the FOREX Game Is Played 233
Appendix B 237
Retail FOREX Regulations—CFTC Reauthorization
Act of 2005 237
Appendix C 243
List of World Currencies and Symbols 243
Appendix D 249
Major Currency Cross Rates 249
Appendix E 251
Euro Currency Unit 251
Appendix F 253
Time Zones and Global Banking Hours 253
Appendix G 255
Central Banks and Regulatory Agencies 255
Appendix H 259
Resources 259
Glossary 265
Index 277