Forex Made Simple: A Beginner's Guide to Foreign Exchange Success

272 Pages·2011·8.46 MB·English

by  Kel Butcher

FOREX MADE SIMPLE: A
BEGINNER'S GUIDE TO
SHAREMARKET SUCCESS
Table of Contents
Chapter 1: History of foreign exchange
Introduction of the gold standard
Major influences on foreign exchange since World War II
The Bretton Woods Accord
The Nixon Shock
The Smithsonian Agreement
Free-floating currencies
Currency reserves
The European Community and the introduction of the euro
Recent growth of foreign exchange markets
Interest rate volatility
International business operations
Increased international trade and the use of currency hedging
Automated dealing systems
The internet and retail traders
Chapter summary
Chapter 2: Major currencies, economies and central banks
Major world currencies
The United States dollar
The euro
The Japanese yen
The British pound
The Australian dollar
The Swiss franc
The Canadian dollar
Central banks
Monetary policy
Interest rates
Open market operations
Reserve requirements
Central banks and the foreign exchange market
Repurchase agreements
Foreign exchange intervention
The rise of central banks
US Federal Reserve System
European Central Bank
Bank of Japan
Bank of England
Reserve Bank of Australia
Swiss National Bank
Bank of Canada
Chapter summary
Chapter 3: The foreign exchange markets and major participants
Forex market participants
The inter-bank market
Companies and businesses
Hedge funds
Investment management firms
Retail foreign exchange brokers and traders
Various currency markets
The forwards and swap market
Swaps
Currency futures
The spot market
Chapter summary
Chapter 4: Retail forex dealers and market makers
Forex market structure
Retail forex dealers
Market makers or dealing desks
Retail forex dealers or non-dealing desks
Choosing a retail forex dealer that suits you
Are they regulated? If so, in which country?
What is their capitalisation?
How user-friendly and reliable is their trading platform?
What customer support do they provide?
What types of accounts do they offer?
What leverage is offered and what is their margin call policy?
Chapter summary
Chapter 5: The mechanics of trading forex
Trading forex is trading money
The mechanics of forex trading
Base and quote (or counter) currencies
Currency pairs
Long or short?
Understanding pips
Lot sizes
Example 1
Example 2
Example 3
The bid/offer spread
How the trader and the dealer can both make a profit
Fractional pips
Margin and leverage
When to trade forex
Chapter summary
Chapter 6: How to place a forex trade
Placing a trade
Opening a trade at market
Using stop and limit orders to enter a trade
Rollover
The carry trade
Chapter summary
Chapter 7: Currency futures
The mechanics of trading currency futures
Long or short?
Novation
Standardised contracts and specifications
Delivery (or maturity) date
Settlement
Contract size
Understanding tick values
E-micro currency futures
Bid/ask spread
Margin and leverage
Spot forex and currency futures compared
OTC versus regulated exchange
Lot sizes and specifications
Pips and ticks
Brokers, dealers and market makers
Liquidity and transparency
Leverage and margin
It’s all about choice
Chapter summary
Chapter 8: Macro economics and how it affects forex
Economic theory
Purchasing power parity theory
Balance of payments theory
Real interest rate differential theory
Economic data and indicators that affect foreign exchange values
Economic indicators
Gross domestic product
Balance of trade
Industrial production
Durable goods orders
Construction indicators
Retail sales
Consumer confidence index
Institute for Supply Management Index
Conference Board Leading Economic Index®
Inflation indicators
Consumer price index
Producer price index
Commodity Research Bureau Futures Index
Employment indicators
Non-farm payrolls
Employment Cost Index
Important economic indicators for the major global economies
Important economic indicators for the Eurozone
Important economic indicators for Japan
Important economic indicators for the United Kingdom
Important economic indicators for Australia
Important economic indicators for Switzerland
Important economic indicators for Canada
Chapter summary
Chapter 9: Money management for forex
Swinging for the fences
Defining losses
Setting stop-loss levels
How much capital can you afford to lose?
Using leverage and position sizing
Leverage and small accounts
Chapter summary
Kel Butcher

First published 2011 by Wrightbooks an imprint of John Wiley & Sons
Australia, Ltd
42 McDougall Street, Milton Qld 4064
Office also in Melbourne
Typeset in 11.5/13.4 pt Berkeley © Kel Butcher 2011
The moral rights of the author have been asserted National Library of Australia
Cataloguing-in-Publication data: Author: Butcher, Kel.
Title: Forex made simple: a beginner’s guide to foreign exchange success / Kel
Butcher.
ISBN: 9780730375241 (pbk.)
Notes: Includes index.
Subjects: Foreign exchange. Foreign exchange market. Foreign exchange
futures. Investments—Computer network resources. Electronic trading of
securities.
Dewey Number: 332.45
All rights reserved. Except as permitted under the Australian Copyright Act 1968
(for example, a fair dealing for the purposes of study, research, criticism or
review), no part of this book may be reproduced, stored in a retrieval system,
communicated or transmitted in any form or by any means without prior written
permission. All enquiries should be made to the publisher at the address above.
Cover design by Peter Reardon Pipeline Design <www.pipelinedesign.com.au>
Printed in Australia by Ligare Book Printer 10 9 8 7 6 5 4 3 2 1
Disclaimer
The material in this publication is of the nature of general comment only, and
does not represent professional advice. It is not intended to provide specific
guidance for particular circumstances and it should not be relied on as the basis
for any decision to take action or not take action on any matter which it covers.
Readers should obtain professional advice where appropriate, before making any
such decision. To the maximum extent permitted by law, the author and
publisher disclaim all responsibility and liability to any person, arising directly
or indirectly from any person taking or not taking action based upon the
information in this publication.
The secret of success is constancy of purpose.
Benjamin Disraeli
Acknowledgements
My thanks as always go to the staff at Wrightbooks, and in particular Kristen
Hammond, for all the help and support in getting this book from concept to book
in a short space of time. I would also like to thank FXCM for the use of various
screen shots in this book. Glen Larson at Genesis FT deserves special mention
for the development of the world’s best charting program, Trade Navigator.
I am always honoured to be able to write a book and can’t do it without the
support of my wife, Cate, and my boys, Jesse and Ollie, and the input and shared
experiences of the hundreds of traders and other market participants that I have
spoken and corresponded with over many years.

About the author Kel Butcher is a private
trader, entrepreneur and investor. Kel
has more than 20 years’ experience in
financial markets, trading shares,
futures, options, warrants and CFDs. He
works as a consultant to a managed
fund, a boutique trading company and a
share-trading software developer. Kel is
a regular contributor to YourTradingEdge
magazine and is the author of A Step-by