Currency Trading for Dummies

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