Table of Contents
Introduction 1
About This Book 2
Conventions Used in This Book 2
What You're Not to Read 3
Foolish Assumptions 3
How This Book is Organized 4
Trading the World's Largest Financial Market 4
Moving Currencies: Driving Forces Behind Forex Rates 5
Developing a Trading Plan 5
Executing a Plan 5
The Part of Tens 5
Icons Used in This Book 5
Where to Go from Here 6
Trading the World's Largest Financial Market 7
Currency Trading 101 9
What Is Currency Trading? 9
Speculating as an enterprise 10
Currencies as the trading vehicle 10
What Affects Currency Rates? 11
Fundamentals drive the currency market 12
Unless it's the technicals that are driving the currency market 12
Or it may be something else 13
Developing a Trading Plan 13
Finding your trading style 14
Planning the trade 14
Executing the Trading Plan from Start to Finish 15
What Is the Forex Market? 17
Getting Inside the Numbers 18
Trading for spot 19
Speculating in the currency market 19
Getting liquid without getting soaked 20
Around the World in a Trading Day 20
The opening of the trading week 21
Trading in the Asia-Pacific session 22
Trading in the European/London session 23
Trading in the North American session 23
Key daily times and events 24
The U.S. dollar index 26
Currencies and Other Financial Markets 26
Gold 27
Oil 28
Stocks 28
Bonds 29
Getting Started with a Practice Account 29
Who Trades Currencies? Meet the Players 31
The Interbank Market Is "The Market" 31
Getting inside the interbank market 32
Bank to bank and beyond 33
Hedgers and Financial Investors 34
Hedging your bets 35
Global investment flows 37
Speculators 38
Hedge funds 39
Day traders, big and small 40
Governments and Central Banks 41
Currency reserve management 41
The Bank for International Settlements 43
The Group of Seven 43
The Mechanics of Currency Trading 45
Buying and Selling Simultaneously 45
Currencies come in pairs 46
The long and the short of it 49
Profit and Loss 51
Margin balances and liquidations 51
Unrealized and realized profit and loss 52
Calculating profit and loss with pips 52
Factoring profit and loss into margin calculations 54
Understanding Rollovers and Interest Rates 54
Currency is money, after all 54
Value dates and trade settlement 55
Market holidays and value dates 56
Applying rollovers 57
Understanding Currency Prices 58
Bids and offers 59
Spreads 59
Executing a Trade 60
Trading online 60
Orders 62
Moving Currencies: Driving Forces Behind Forex Rates 69
Getting to Know the Major Currency Pairs 71
The Big Dollar: EUR/USD 72
Trading fundamentals of EUR/USD 72
Trading behavior of EUR/USD 75
Tactical trading considerations in EUR/USD 78
East Meets West: USD/JPY 79
Trading fundamentals of USD/JPY 79
Price action behavior of USD/JPY 82
Tactical trading considerations in USD/JPY 85
The Other Majors: Sterling and Swissy 86
The British pound: GBP/USD 86
Safe haven or panic button: USD/CHF 88
Price action behavior in GBP/USD and USD/CHF 90
Tactical trading considerations in GBP/USD and USD/CHF 91
Minor Currency Pairs and Cross-Currency Trading 95
Trading the Minor Pairs: USD/CAD, AUD/USD, and NZD/USD 96
Trading fundamentals of USD/CAD 96
Trading fundamentals of AUD/USD 99
Trading fundamentals of NZD/USD 101
Tactical trading considerations in USD/CAD, AUD/USD, and NZD/USD 103
Cross-Currency Pairs 106
Why trade the crosses? 107
Calculating cross rates 108
Stretching the legs 109
Trading the JPY crosses 110
Trading the EUR crosses 111
Looking at the Big Picture 113
Currencies and Interest Rates 114
The future is now: Interest rate expectations 115
Relative interest rates 116
Monetary Policy 101 117
Looking at benchmark interest rates 118
Easy money, tight money 118
Identifying monetary policy cycles 119
Watching the central bankers 122
Interpreting monetary policy communications 124
Managing expectations 126
Official Currency Policies and Rhetoric 127
Currency policy or currency stance? 127
Calling the shots on currencies 129
Currency market intervention 131
Geopolitical Risks and Events 134
Understanding and Applying Market News, Data, and Information 137
Sourcing Market Information 138
The art of boarding a moving train 138
Taking the pulse of the market 139
Analysts, economists, and strategists: What's the difference? 141
Rumors: Where there's smoke, there's fire 142
Putting Market Information into Perspective: Focusing on Themes 143
Driving fundamental themes 143
Analyzing technical themes 147
Reality Check: Expectations versus Actual 148
The role of consensus expectations 149
Pricing in and pricing out forecasts 150
When good expectations go bad 151
Anticipating alternative outcome scenarios 151
Getting Down and Dirty with Fundamental Data 153
Finding the Data 154
Economics 101 for Currency Traders: Making Sense of Economic Data 155
The labor market 155
The consumer 156
The business sector 156
The structural 157
Assessing Economic Data Reports from a Trading Perspective 157
Understanding and revising data history 158
Getting to the core 159
Market-Moving Economic Data Reports from the United States 160
Labor-market reports 160
Inflation gauges 163
Gross domestic product (Relevance: High) 164
Trade and current account balances 165
Leading economic indicators (Relevance: Low) 166
Institute for Supply Management and purchasing managers reports 166
Consumer sentiment reports 167
Personal income and personal spending (Relevance: Medium) 168
Retail sales (Relevance: High) 168
Durable goods orders (Relevance: Medium) 169
Housing-market indicators 169
Regional Federal Reserve indices 170
The Fed's Beige Book (Relevance: High) 171
Major International Data Reports 172
Eurozone 172
Japan 173
United Kingdom 174
Canada 174
Australia 175
Switzerland 175
New Zealand 175
Cutting the Fog with Technical Analysis 177
The Philosophy of Technical Analysis 178
What is technical analysis? 178
What technical analysis is not 178
Forms of technical analysis 179
Finding support and resistance 179
Waiting for confirmation 181
The Art of Technical Analysis 182
Bar charts and candlestick charts 182
Drawing trend lines 183
Recognizing chart formations 185
Fibonacci retracements 196
The Science of Technical Analysis 198
Momentum oscillators and studies 198
Trend-identifying indicators 202
Developing a Trading Plan 205
Training and Preparing for Battle 207
Finding the Right Trading Style for You 207
Real-world and lifestyle considerations 208
Making time for market analysis 209
Technical versus fundamental analysis 209
Different Strokes for Different Folks 210
Short-term, high-frequency day trading 211
Medium-term directional trading 214
Long-term macroeconomic trading 216
Developing Trading Discipline 219
Taking the emotion out of trading 220
Managing your expectations 221
Keeping your ammunition dry 222
Identifying Trade Opportunities 225
Developing a Routine for Market Analysis 225
Performing Multiple-Time-Frame Technical Analysis 226
Identifying Relevant Support and Resistance Levels 231
Trend lines 232
Highs and lows 232
Congestion zones 232
Retracements 233
Looking for Symmetry with Channels and Retracements 233
Drawing price channels 233
Finding support and resistance with Fibonacci retracements 235
Listening to Momentum 237
Factoring momentum analysis into your routine 237
Looking at momentum in multiple time frames 238
Trading on divergences between price and momentum 239
Using momentum for timing entry and exit 240
Trading on Candlestick Patterns 242
Building a Trade Strategy from Start to Finish 243
Risk-Management Considerations 247
Managing Risk Is More Than Avoiding Losses 247
Market liquidity, volatility, and gap risk 248
Leverage amplifies gains and losses - and expectations 251
Knowing your margin requirements 252
We have a winner here! Protecting your profits 253
Placing your orders effectively 253
Applying Risk Management to the Trade 256
Analyzing the trade setup to determine position size 256
Doing the math to put the risk in cash terms 258
Devising the trading plan in terms of risk 258
Choosing Your Trading Broker 261
Different business models of brokers 261
Financial risks of brokers 262
Technology Issues and Contingency Planning 263
Executing a Plan 265
Pulling the Trigger 267
Getting into the Position 267
Buying and selling at the current market 268
Averaging into a position 268
Trading breakouts 272
Making the Trade Correctly 277
Buying and selling online 277
Placing your orders 279
Managing the Trade 281
Monitoring the Market while Your Trade Is Active 282
Following the market with rate alerts 282
Staying alert for news and data developments 283
Keeping an eye on other financial markets 284
Updating Your Trade Plan as Time Marches On 286
Trend lines move over time 287
Impending events may require trade plan adjustments 289
Updating Order Levels as Prices Progress 290
Increasing take-profit targets 290
Tightening stop-loss orders to protect profits 291
Closing Your Position and Evaluating Your Trading Results 293
Closing Out the Trade 294
Taking profit and stopping out 294
Setting it and forgetting it: Letting the market trigger your order 296
Squaring up after events have happened 297
Exiting at the right time 298
Getting out when the price is right 299
Assessing Your Trading Strategy 299
Identifying what you did right and wrong 300
Updating your trading record 301
The Part of Tens 303
Ten Habits of Successful Currency Traders 305
Trading with a Plan 305
Anticipating Event Outcomes 306
Staying Flexible 306
Being Prepared for Trading 306
Keeping Technically Alert 307
Going with the Flow/Trading the Range 307
Focusing on a Few Pairs 308
Protecting Profits 308
Trading with Stop Losses 308
Watching Other Markets 309
Ten Beginner Trading Mistakes 311
Running Losers, Cutting Winners 311
Trading without a Plan 312
Trading without a Stop Loss 312
Moving Stop-Loss Orders 312
Overtrading 313
Overleveraging 313
Failing to Adapt to Changing Market Conditions 313
Being Unaware of News and Data Events 314
Trading Defensively 314
Keeping Realistic Expectations 314
Ten Rules of Risk Management 315
Trade with Stop-Loss Orders 315
Leverage to a Minimum 316
Trade with a Plan 316
Stay on Top of the Market 316
Trade with an Edge 316
Step Back from the Market 317
Take Profit Regularly 317
Understand Currency Pair Selection 317
Double-Check for Accuracy 318
Take Money Out of Your Trading Account 318
Ten Great Resources 319
Technical Analysis of the Financial Markets John Murphy 319
Japanese Candlestick Charting Techniques Steve Nison 320
Elliott Wave Principle A. J. Frost Robert R. Prechter, Jr. 320
Technical Analysis Explained Martin J. Pring 320
Technical Analysis For Dummies Barbara Rockefeller 321
The Book of Five Rings Miyamoto Musashi 321
Reminiscences of a Stock Operator Edwin Lefevre 321
Market Wizards: Interviews with Top Traders Jack D. Schwager 322
Thirty Days of Forex Trading Raghee Horner 322
Come into My Trading Room Alexander Elder, MD 322
Index 323
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