Table Of Content

Getting Started in CURRENCY TRADING Winning in Today’s Hottest Marketplace Michael Duane Archer John Wiley & Sons, Inc. S E C O N D E D I T I O N FM.qxd 5/6/08 3:08 PM Page i FM.qxd 5/6/08 3:08 PM Page iv Getting Started in CURRENCY TRADING Winning in Today’s Hottest Marketplace Michael Duane Archer John Wiley & Sons, Inc. S E C O N D E D I T I O N FM.qxd 5/6/08 3:08 PM Page i Copyright © 2008 by Michael D. Archer. All rights reserved Published by John Wiley & Sons, Inc., Hoboken, New Jersey Published simultaneously in Canada A first edition of this book was co-authored by Michael D. Archer and Jim L. Bickford and published by John Wiley & Sons, Inc. in 2005. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Dan- vers, MA 01923, (978) 750-8400, fax (978) 750-4470, or on the web at www.copyright.com. Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, (201) 748-6011, fax (201) 748-6008, or online at http://www.wiley.com/go/permissions. Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the ac- curacy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose. No warranty may be created or extended by sales representatives or written sales materials. The advice and strategies contained herein may not be suitable for your situation. You should consult with a professional where appropriate. Neither the publisher nor author shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages. For general information on our other products and services or for technical support, please con- tact our Customer Care Department within the United States at (800) 762-2974, outside the United States at (317) 572-3993 or fax (317) 572-4002. Wiley also publishes its books in a variety of electronic formats. Some content that appears in print may not be available in electronic books. For more information about Wiley products, visit our web site at www.wiley.com. Library of Congress Cataloging-in-Publication Data Archer, Michael D. (Michael Duane) Getting started in currency trading : winning in today’s hottest marketplace / Michael Archer.—2nd ed. p. cm.—(Getting started in) Includes index. ISBN 978-0-470-26777-6 (paper/website) 1. Foreign exchange market. 2. Foreign exchange futures. I. Title. HG3851.A739 2008 332.4’5—dc22 2008019033 Printed in the United States of America 10 9 8 7 6 5 4 3 2 1 FM.qxd 5/6/08 3:08 PM Page ii For my children, Brandy, Jonathan, Stephen, and Anthony FM.qxd 5/6/08 3:08 PM Page iii FM.qxd 5/6/08 3:08 PM Page iv Contents 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 v FM.qxd 5/6/08 3:08 PM Page v 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 vi CONTENTS FM.qxd 5/6/08 3:08 PM Page vi 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 Contents vii FM.qxd 5/6/08 3:08 PM Page vii 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 viii CONTENTS FM.qxd 5/6/08 3:08 PM Page viii 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 Contents ix FM.qxd 5/6/08 3:08 PM Page ix 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 x CONTENTS FM.qxd 5/6/08 3:08 PM Page x 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 Contents xi FM.qxd 5/6/08 3:08 PM Page xi 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 xii CONTENTS FM.qxd 5/6/08 3:08 PM Page xii