Business/Investing
g Easier!
Making Everythin
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2nd Edition
2nd Edition
Forex markets can be one of the fastest and most volatile
financial markets to trade. Money can be lost or made in a
matter of seconds, and forex markets are always moving. So
how do you keep up? This hands-on, friendly guide shows
you how the forex market really works, what moves it, and
how you can actively trade in it — without losing your head!
• All the world’s a stage — get an easy-to-follow introduction to the
global forex market and understand its size, scope, and players
• Show me the money — take a look at the major fundamental and
economic drivers that influence currency values and get the knowhow to interpret data and events like a pro
• Prepare for battle — discover different types of trading styles and
make a concrete strategy and game plan before you act on anything
• Pull the trigger — establish a position in the market, manage the
trade while it’s open, and close out on the most advantageous terms
Open the book and find:
• Currency trading conventions
and tools
• Key characteristics of
successful traders
• Trading pitfalls to avoid and risk
management rules to live by
• How major currencies
typically trade
• Why it’s important to be organized
and prepared
• The 411 on buying and selling
simultaneously
• Tips for understanding rollovers
and interest rates
Currency Trading
Your plain-English
guide to currency trading
g
n
i
d
a
r
T
y
c
n
e
r
r
u
C
Learn to:
• Grasp currency quotes
Go to Dummies.com®
for videos, step-by-step examples,
how-to articles, or to shop!
• Capitalize on the foreign
exchange market
• Manage risk and reward
• Use the forces that drive
currency movements
$24.99 US / $29.99 CN / £16.99 UK
Brian Dolan has worked for more than 20 years in the forex market as a
currency trader and analyst. As the Chief Currency Strategist at FOREX.com,
Brian oversees fundamental and technical analysis and is a frequent resource
for the financial media on currency developments.
• Identify key traits of
individual currency pairs
ISBN 978-1-118-01851-4
Brian Dolan
Dolan
FOREX.com
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Currency
Trading
FOR
DUMmIES
‰
2ND
EDITION
Currency
Trading
FOR
DUMmIES
‰
2ND
by Brian Dolan
EDITION
Currency Trading For Dummies,® 2nd Edition
Published by
Wiley Publishing, Inc.
111 River St.
Hoboken, NJ 07030-5774
www.wiley.com
Copyright © 2011 by Wiley Publishing, Inc., Indianapolis, Indiana
Published by Wiley Publishing, Inc., Indianapolis, Indiana
Published simultaneously in Canada
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Library of Congress Control Number: 2011930128
ISBN: 978-1-118-01851-4
Manufactured in the United States of America
10 9 8 7 6 5 4 3 2 1
About the Author
Brian Dolan is the chief currency strategist at GAIN Capital Group, and
a 20-plus year veteran of the interbank currency market. Brian provides
research and market analysis to trading clients of GAIN Capital and FOREX.
com, the retail division of GAIN Capital Group.
Brian analyzes the G10 currency markets with a blend of fundamental and
technical analysis to provide actionable trading strategies.
A frequent commentator on currency-market developments and outlooks for
major news media including the Wall Street Journal, Reuters, Bloomberg, Dow
Jones, CNN Money, and MarketWatch.com, Brian has also appeared regularly
as a currency analyst on financial TV networks CNBC, Bloomberg Television,
Fox Business News and BNN in Canada.
In addition, he has written numerous articles on currency trading, risk management, and technical analysis for trading and investment journals such as
Currency Trader, Active Trader, SFO Magazine, Technical Analysis of Stocks &
Commodities, and Futures.
Prior to joining GAIN Capital, Brian was a vice president at Bank Julius Bär,
where he advised hedge funds and high-net-worth individuals on currencies. He spent the first 12 years of his FX career trading major currency pairs
in the interbank market in New York at some of the world’s largest banks,
including Credit Suisse, Dai-Ichi Kangyo Bank, and American Express Bank,
as well as two years in Bermuda as a proprietary trader at Butterfield Bank.
Brian is a graduate of Dartmouth College.
Dedication
To Brigid, for her love and for hanging in there through the ups and downs;
and to Frank and Catherine, for inspiring me to create a work for the future,
just as you are. In memoriam to my mother Peg, father Chuck, and sadly
missed brother Tim, who taught me that life is not a dress rehearsal.
Acknowledgments
My efforts to translate a career’s worth of currency trading experience into
a book would be extremely thin were it not for the many lessons I garnered
from colleagues in the market over the years. Readers of this book will benefit from the experience I’ve gained from many of you. Thanks to Mark Galant,
for founding GAIN Capital and offering me the opportunity to write this book.
To the trading team at GAIN: Tim O’Sullivan, Anthony Piccolo, Paul Spirgel,
Rob Voorhees, Mike Goret, Damon Gallo, and Alan Viola — it’s an honor and
pleasure to work with some of the best in the business. To Glenn Stevens and
Samantha Roady, for setting the whole process in motion and encouraging
me to go the full distance. To Christa Conte and Henry Feintuch of Feintuch
Communications, for getting the word out to the media and then some. To
my research team for picking up the slack while I wrote: Eric Viloria, CMT;
Chris Tevere, CMT; Kathleen Brooks; and Dan Hwang. To Susan Hobbs for her
fine editing assistance that made me get to the point, clearly. To McLean D.
Giles for his technical review. And to the editors and staff at Wiley Publishing,
especially Stacy Kennedy, for organizing the book in the first place.
Publisher’s Acknowledgments
We’re proud of this book; please send us your comments at http://dummies.custhelp.com.
For other comments, please contact our Customer Care Department within the U.S. at
877-762-2974, outside the U.S. at 317-572-3993, or fax 317-572-4002.
Some of the people who helped bring this book to market include the following:
Acquisitions, Editorial, and
Media Development
Composition Services
Project Coordinator: Patrick Redmond
Project Editor: Susan Hobbs
Layout and Graphics: Corrie Socolovitch
Acquisitions Editor: Stacy Kennedy
Proofreaders: Cara L. Buitron, Melissa Cossell
Copy Editor: Susan Hobbs
Indexer: Steve Rath
Assistant Editor: Erin Calligan Mooney
Editorial Program Coordinator: Joe Niesen
Technical Editor: McLean D. Giles
Editorial Manager: Jennifer Ehrlich
Editorial Supervisor and Reprint Editor:
Carmen Krikorian
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Jennette ElNaggar
Art Coordinator: Alicia B. South
Cartoons: Rich Tennant
(www.the5thwave.com)
Publishing and Editorial for Consumer Dummies
Diane Graves Steele, Vice President and Publisher, Consumer Dummies
Kristin Ferguson-Wagstaffe, Product Development Director, Consumer Dummies
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Kelly Regan, Editorial Director, Travel
Publishing for Technology Dummies
Andy Cummings, Vice President and Publisher, Dummies Technology/General User
Composition Services
Debbie Stailey, Director of Composition Services
Contents at a Glance
Introduction ................................................................ 1
Part I: Trading the World’s Largest Financial Market...... 7
Chapter 1: Currency Trading 101..................................................................................... 9
Chapter 2: What Is the Forex Market? ........................................................................... 19
Chapter 3: Who Trades Currencies? Meet the Players ............................................... 35
Chapter 4: The Mechanics of Currency Trading .......................................................... 49
Part II: Driving Forces behind Currencies ..................... 75
Chapter 5: Looking at the Big Picture ........................................................................... 77
Chapter 6: Understanding and Applying Market News and Information ................ 101
Chapter 7: Getting Down and Dirty with Fundamental Data .................................... 117
Chapter 8: Getting to Know the Major Currency Pairs ............................................. 141
Chapter 9: Minor Currency Pairs and Cross-Currency Trading............................... 165
Part III: Developing a Trading Plan ........................... 181
Chapter 10: Training and Preparing for Battle ........................................................... 183
Chapter 11: Cutting the Fog with Technical Analysis ............................................... 201
Chapter 12: Identifying Trade Opportunities ............................................................. 231
Chapter 13: Risk-Management Considerations .......................................................... 251
Part IV: Executing a Plan ......................................... 269
Chapter 14: Pulling the Trigger .................................................................................... 271
Chapter 15: Managing the Trade.................................................................................. 285
Chapter 16: Closing the Position and Evaluating Your Results ............................... 297
Part V: The Part of Tens ........................................... 307
Chapter 17: Ten Habits of Successful Currency Traders .......................................... 309
Chapter 18: Ten Beginner Trading Mistakes .............................................................. 315
Chapter 19: Ten Rules of Risk Management ............................................................... 319
Chapter 20: Ten Great Resources ................................................................................ 323
Index ...................................................................... 327
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
Part I: Trading the World’s Largest Financial Market ....................... 4
Part II: Driving Forces behind Currencies........................................... 5
Part III: Developing a Trading Plan ...................................................... 5
Part IV: Executing a Plan ....................................................................... 5
Part V: The Part of Tens ........................................................................ 5
Icons Used in This Book ................................................................................. 6
Where to Go from Here ................................................................................... 6
Part I: Trading the World’s Largest Financial Market ...... 7
Chapter 1: Currency Trading 101 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9
Defining Currency Trading ............................................................................. 9
Speculating as an enterprise .............................................................. 10
Currencies as the trading vehicle ...................................................... 11
Information Affects Currency Rates ............................................................ 12
Fundamentals drive the currency market ........................................ 12
Unless the technicals are driving the currency market .................. 13
Or it may be something completely different .................................. 14
Developing a Trading Plan ........................................................................... 14
Finding your trading style................................................................... 14
Planning the trade................................................................................ 15
Executing the Trading Plan from Start to Finish ....................................... 16
Chapter 2: What Is the Forex Market? . . . . . . . . . . . . . . . . . . . . . . . . . . .19
Getting Inside the Numbers ......................................................................... 20
Trading for spot ................................................................................... 20
Speculating in the currency market .................................................. 21
Getting liquid without getting soaked ............................................... 22
Around the World in a Trading Day ............................................................ 22
The opening of the trading week ....................................................... 23
Trading in the Asia-Pacific session .................................................... 24
Trading in the European/London session ........................................ 25
Trading in the North American session ............................................ 25
Key daily times and events ................................................................. 27
The U.S. dollar index ........................................................................... 28
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Currency Trading For Dummies, 2nd Edition
Currencies and Other Financial Markets .................................................... 28
Risk on or risk off? ............................................................................... 29
Gold ....................................................................................................... 30
Oil ........................................................................................................... 30
Stocks .................................................................................................... 31
Bonds..................................................................................................... 32
Getting Started with a Practice Account .................................................... 32
Chapter 3: Who Trades Currencies? Meet the Players . . . . . . . . . . . . .35
The Interbank Market Is “The Market” ....................................................... 35
Getting inside the interbank market.................................................. 36
Bank to bank and beyond ................................................................... 37
Hedgers and Financial Investors ................................................................. 38
Hedging your bets ................................................................................ 39
Global investment flows ...................................................................... 41
Speculators ..................................................................................................... 42
Hedge funds .......................................................................................... 43
Day traders, big and small .................................................................. 44
Governments and Central Banks ................................................................. 45
Currency reserve management .......................................................... 45
The Bank for International Settlements ............................................ 47
The G-7 and the G-20 ........................................................................... 47
Chapter 4: The Mechanics of Currency Trading. . . . . . . . . . . . . . . . . . .49
Buying and Selling Simultaneously.............................................................. 49
Currencies come in pairs .................................................................... 50
The long and the short of it ................................................................ 54
Profit and Loss ............................................................................................... 55
Leverage amplifies risk and reward................................................... 55
Margin balances and liquidations...................................................... 56
Unrealized and realized profit and loss ............................................ 56
Calculating profit and loss with pips ................................................. 57
Factoring profit and loss into margin calculations.......................... 58
Understanding Rollovers and Interest Rates ............................................. 59
Currency is money, after all ............................................................... 59
Value dates and trade settlement ...................................................... 60
Market holidays and value dates ....................................................... 61
Applying rollovers ............................................................................... 62
Understanding Currency Prices .................................................................. 63
Bids and offers ..................................................................................... 64
Spreads.................................................................................................. 64
Executing a Trade .......................................................................................... 65
Trading online ...................................................................................... 65
Orders ................................................................................................... 67
Table of Contents
Part II: Driving Forces behind Currencies ..................... 75
Chapter 5: Looking at the Big Picture. . . . . . . . . . . . . . . . . . . . . . . . . . . .77
Currencies and Interest Rates...................................................................... 78
The future is now: Interest rate expectations .................................. 79
Relative interest rates ......................................................................... 79
Monetary Policy 101 ...................................................................................... 81
Looking at benchmark interest rates ................................................ 81
Easy money, tight money .................................................................... 82
Unconventional easing ....................................................................... 83
Watching the central bankers ............................................................ 84
Interpreting monetary policy communications ............................... 86
Official Currency Policies and Rhetoric...................................................... 87
Currency policy or currency stance? ................................................ 88
Calling the shots on currencies ......................................................... 89
Currency market intervention............................................................ 91
Financial stability ................................................................................. 94
Debts, deficits, and growth ................................................................. 94
Gauging credit risk............................................................................... 95
Geopolitical Risks and Events ...................................................................... 96
Gauging risk sentiment ....................................................................... 98
Risk on or risk off? ............................................................................... 98
Chapter 6: Understanding and Applying
Market News and Information. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .101
Sourcing Market Information ..................................................................... 102
The art of boarding a moving train.................................................. 102
Taking the pulse of the market ........................................................ 103
Rumors: Where there’s smoke, there’s fire .................................... 105
Putting Market Information into Perspective: Focusing on Themes .... 105
Driving fundamental themes ............................................................ 106
Analyzing technical themes .............................................................. 110
Reality Check: Expectations versus Actual .............................................. 111
The role of consensus expectations ................................................ 112
Pricing in and pricing out forecasts ................................................ 113
When good expectations go bad...................................................... 114
Anticipating alternative outcome scenarios .................................. 114
Chapter 7: Getting Down and Dirty with Fundamental Data . . . . . . .117
Finding the Data ........................................................................................... 118
Economics 101 for Currency Traders: Making
Sense of Economic Data .......................................................................... 119
The labor market ............................................................................... 119
The consumer .................................................................................... 120
The business sector .......................................................................... 121
The structural..................................................................................... 121
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Currency Trading For Dummies, 2nd Edition
Assessing Economic Data Reports from a Trading Perspective ........... 122
Understanding and revising data history ....................................... 122
Getting to the core ............................................................................. 123
Market-Moving Economic Data Reports from the United States ........... 124
Labor-market reports ........................................................................ 124
Consumer-level data reports ............................................................ 127
Business-level data reports .............................................................. 130
Structural data reports ..................................................................... 132
Major International Data Reports .............................................................. 135
Eurozone ............................................................................................. 135
Japan.................................................................................................... 136
United Kingdom ................................................................................. 137
Canada ................................................................................................. 137
Australia .............................................................................................. 138
New Zealand ....................................................................................... 138
China.................................................................................................... 138
Chapter 8: Getting to Know the Major Currency Pairs . . . . . . . . . . . .141
The Big Dollar: EUR/USD............................................................................. 142
Trading fundamentals of EUR/USD .................................................. 142
Trading behavior of EUR/USD .......................................................... 145
Tactical trading considerations in EUR/USD .................................. 147
East Meets West: USD/JPY.......................................................................... 149
Trading fundamentals of USD/JPY ................................................... 149
Price action behavior of USD/JPY .................................................... 152
Tactical trading considerations in USD/JPY................................... 154
The Other Majors: Sterling and Swissy ..................................................... 156
The British pound: GBP/USD ............................................................ 156
Safe haven or panic button: USD/CHF ............................................. 158
Price action behavior in GBP/USD and USD/CHF........................... 160
Tactical trading considerations in GBP/USD and USD/CHF ......... 162
Chapter 9: Minor Currency Pairs and Cross-Currency Trading . . . . .165
Trading the Minor Pairs .............................................................................. 165
Trading fundamentals of USD/CAD.................................................. 166
Trading fundamentals of AUD/USD ................................................. 169
Trading fundamentals of NZD/USD .................................................. 170
Tactical trading considerations in USD/CAD,
AUD/USD, and NZD/USD ................................................................ 172
Trading the Scandies: SEK, NOK, and DKK .............................................. 175
Swedish krona — “Stocky” ............................................................... 175
Norwegian krone — “Nokkie” ........................................................... 175
Danish krone — “Copey” .................................................................. 176
Cross-Currency Pairs .................................................................................. 176
Why trade the crosses? ..................................................................... 177
Stretching the legs ............................................................................. 178
Trading the JPY crosses ................................................................... 179
Trading the EUR crosses................................................................... 180
Table of Contents
Part III: Developing a Trading Plan............................ 181
Chapter 10: Training and Preparing for Battle . . . . . . . . . . . . . . . . . . .183
Finding the Right Trading Style for You ................................................... 183
Real-world and lifestyle considerations .......................................... 184
Making time for market analysis ...................................................... 185
Technical versus fundamental analysis .......................................... 185
Different Strokes for Different Folks .......................................................... 186
Short-term, high-frequency day trading.......................................... 187
Medium-term directional trading..................................................... 189
Long-term macroeconomic trading ................................................. 191
Trading on Auto-Pilot .................................................................................. 194
Potential inputs to drive an EA system ........................................... 195
Caveat emptor on models ................................................................. 195
Developing Trading Discipline ................................................................... 196
Taking the emotion out of trading ................................................... 197
Managing your expectations ............................................................ 198
Keeping your ammunition dry ......................................................... 199
Chapter 11: Cutting the Fog with Technical Analysis . . . . . . . . . . . . .201
The Philosophy of Technical Analysis...................................................... 202
What is technical analysis?............................................................... 202
What technical analysis is not ......................................................... 203
Forms of technical analysis .............................................................. 203
Finding support and resistance ....................................................... 204
Waiting for confirmation ................................................................... 206
The Art of Technical Analysis .................................................................... 207
Bar charts and candlestick charts ................................................... 207
Drawing trend lines ........................................................................... 209
Recognizing chart formations .......................................................... 210
Fibonacci retracements .................................................................... 219
The Science of Technical Analysis ............................................................ 221
Momentum oscillators and studies ................................................. 222
Trend-identifying indicators ............................................................. 225
Trading with clouds — Ichimoku charts ........................................ 227
Chapter 12: Identifying Trade Opportunities . . . . . . . . . . . . . . . . . . . . .231
Developing a Routine for Market Analysis ............................................... 231
Performing Multiple-Time-Frame Technical Analysis ............................. 232
Identifying Support and Resistance Levels .............................................. 236
Trend lines .......................................................................................... 236
Highs and lows ................................................................................... 238
Congestion zones ............................................................................... 238
Fibonacci Retracements.................................................................... 239
Ichimoku levels .................................................................................. 239
Looking for Symmetry with Channels ...................................................... 240
Drawing price channels..................................................................... 240
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Currency Trading For Dummies, 2nd Edition
Listening to Momentum .............................................................................. 241
Factoring momentum analysis into your routine .......................... 242
Looking at momentum in multiple time frames ............................. 243
Trading on divergences between price and momentum .............. 243
Using momentum for timing entry and exit.................................... 245
Trading on Candlestick Patterns ............................................................... 245
Building a Trade Strategy from Start to Finish ........................................ 246
Chapter 13: Risk-Management Considerations . . . . . . . . . . . . . . . . . .251
Managing Risk Is More Than Avoiding Losses......................................... 251
Leverage amplifies gains and losses — and expectations ............ 252
Knowing your margin requirements ............................................... 253
Market liquidity, volatility, and gap risk ......................................... 254
We have a winner here! Protecting your profits ............................ 257
Placing your orders effectively ........................................................ 258
Applying Risk Management to the Trade ................................................. 261
Analyzing the trade setup to determine position size .................. 261
Doing the math to put the risk in cash terms ................................ 262
Devising the trading plan in terms of risk ...................................... 263
Choosing Your Trading Broker .................................................................. 265
Different business models of brokers ............................................. 265
Financial risks of brokers.................................................................. 266
Technology Issues and Contingency Planning ........................................ 267
Part IV: Executing a Plan .......................................... 269
Chapter 14: Pulling the Trigger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .271
Getting into the Position ............................................................................. 271
Buying and selling at the current market ....................................... 271
Averaging into a position .................................................................. 272
Trading breakouts ............................................................................. 277
Making the Trade Correctly ....................................................................... 281
Buying and selling online .................................................................. 282
Placing your orders ........................................................................... 283
Chapter 15: Managing the Trade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .285
Monitoring the Market while Your Trade Is Active................................. 286
Following the market with rate alerts ............................................. 286
Staying alert for news and data developments .............................. 287
Keeping an eye on other financial markets .................................... 288
Updating Your Trade Plan as Time Marches On ..................................... 290
Trend lines move over time.............................................................. 291
Impending events may require trade plan adjustments ............... 293
Updating Order Levels as Prices Progress ............................................... 294
Increasing take-profit targets ........................................................... 294
Tightening stop-loss orders to protect profits .............................. 295
Table of Contents
Chapter 16: Closing the Position and Evaluating Your Results . . . . .297
Closing Out the Trade ................................................................................. 298
Taking profit and stopping out ........................................................ 298
Setting it and forgetting it: Letting
the market trigger your order ...................................................... 301
Squaring up after events have happened ....................................... 301
Exiting at the right time .................................................................... 302
Getting out when the price is right .................................................. 303
Assessing Your Trading Strategy .............................................................. 303
Identifying what you did right and wrong ...................................... 304
Updating your trading record .......................................................... 304
Part V: The Part of Tens ............................................ 307
Chapter 17: Ten Habits of Successful Currency Traders . . . . . . . . . .309
Trading with a Plan ..................................................................................... 309
Anticipating Event Outcomes .................................................................... 310
Staying Flexible ............................................................................................ 310
Being Prepared for Trading ........................................................................ 310
Keeping Technically Alert .......................................................................... 311
Going with the Flow/Trading the Range ................................................... 311
Focusing on a Few Pairs.............................................................................. 312
Protecting Profits......................................................................................... 312
Trading with Stop Losses ........................................................................... 312
Watching Other Markets............................................................................. 313
Chapter 18: Ten Beginner Trading Mistakes. . . . . . . . . . . . . . . . . . . . .315
Running Losers, Cutting Winners .............................................................. 315
Trading without a Plan................................................................................ 316
Trading without a Stop Loss ...................................................................... 316
Moving Stop-Loss Orders ........................................................................... 316
Overtrading .................................................................................................. 317
Overleveraging ............................................................................................. 317
Failing to Adapt to Changing Market Conditions .................................... 317
Being Unaware of News and Data Events ................................................. 318
Trading Defensively..................................................................................... 318
Keeping Realistic Expectations.................................................................. 318
Chapter 19: Ten Rules of Risk Management . . . . . . . . . . . . . . . . . . . . .319
Trade with Stop-Loss Orders ..................................................................... 319
Leverage to a Minimum .............................................................................. 320
Trade with a Plan ......................................................................................... 320
Stay on Top of the Market .......................................................................... 320
Trade with an Edge...................................................................................... 320
Step Back from the Market ......................................................................... 321
Take Profit Regularly ................................................................................... 321
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Currency Trading For Dummies, 2nd Edition
Understand Currency Pair Selection......................................................... 321
Double-Check for Accuracy ........................................................................ 322
Take Money out of Your Trading Account ............................................... 322
Chapter 20: Ten Great Resources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .323
Technical Analysis of the Financial Markets, by John Murphy ............. 323
Japanese Candlestick Charting Techniques, by Steve Nison................. 324
Elliott Wave Principle, by A. J. Frost and Robert R. Prechter, Jr........... 324
Technical Analysis Explained, by Martin J. Pring ................................... 324
Technical Analysis For Dummies, by Barbara Rockefeller .................... 325
The Book of Five Rings, by Miyamoto Musashi ....................................... 325
Reminiscences of a Stock Operator, by Edwin Lefèvre .......................... 325
Market Wizards: Interviews with Top Traders, by Jack D. Schwager... 326
The Secrets of Economic Indicators, by Bernard Baumohl .................. 326
Come into My Trading Room, by Alexander Elder, MD .......................... 326
Index ....................................................................... 327
Introduction
T
he forex market was forever the private domain of hedge funds, global
banks, multinational corporations, and wealthy private investors the world
over. But this all changed a few years ago when the Internet-based technological revolution of online trading spread over to the forex markets. Today, tens
of thousands of individual traders and investors all over the world are discovering the excitement and challenges of trading in the forex market.
No question about it, forex markets can be one of the fastest and most
volatile financial markets to trade. Money can be made or lost in a matter
of seconds or minutes. At the same time, currencies can display significant
trends lasting several days to weeks and even years. Most importantly, forex
markets are always moving, providing an accessible and target-rich trading
environment.
In contrast to stock markets, which are more familiar and relatively intuitive to most investors,, the forex market somehow remains more elusive and
seemingly complicated to newcomers.
I’ve spent my career in the forex market as a trader at some of the world’s
largest financial institutions. I’ve written Currency Trading For Dummies to
pull back the curtain and strip away the mystique of the currency market.
In this book, I show you how the forex market really works, what moves
it, and how you can actively trade it. I also provide you with the tools to
develop a structured game plan you need to trade in the forex market and
not lose your shirt. I cover
✓ Getting a handle on the forces that drive currency movements
✓ Understanding forex market trading conventions and strategies
✓ Interpreting economic data and official statements
✓ Finding sources of data and market intelligence
✓ Gauging market psychology, sentiment, and positioning
✓ Identifying key traits of individual currency pairs
✓ Utilizing technical analysis to spot trade opportunities
✓ Developing a regimented and disciplined approach to trading currencies
✓ Focusing on risk management to minimize losses and keep more of
your gains
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Currency Trading For Dummies, 2nd Edition
About This Book
If you’re an active trader looking for alternatives to trading stocks or futures,
the forex market is hard to beat. Online trading innovations over the past
decade have made it accessible, both technologically and financially.
But as an individual trader, gaining access to the forex market is only the
beginning. Just because you’ve got the keys to a Formula One race car
doesn’t mean you’re ready to compete in a Grand Prix. First, you have to
understand how the car works. Then you have to figure out some of the tactics and strategies the pros use. And then you have to get behind the wheel
and practice, developing your skills, instincts, and tactics as you go.
To succeed in the forex market, you’re going to have to do the same. This
book gives you the no-nonsense information you need, with the perspective,
experience, and insight of two forex market veterans.
Whether you’re an experienced trader in other markets looking to expand
into currencies, or a total newcomer to trading looking to start out in currencies, this book has what you need. Best of all, it’s presented in the easy to use
For Dummies format. Divided into easy-to-follow parts, this book can serve as
both your reference and troubleshooting guide.
Note: Trading foreign currencies is a challenging and potentially profitable
opportunity for educated and experienced investors. However, before deciding to participate in the forex market, you should carefully consider your
investment objectives, level of experience, and risk appetite. Most important,
don’t invest money you can’t afford to lose. The leveraged nature of forex
trading means that any market movement will have an equally proportional
effect on your deposited funds; this may work against you as well as for you.
(To manage exposure, employ risk-reducing strategies such as stop-loss
or limit orders.) Any off-exchange foreign exchange transaction involves
considerable exposure to risk, including, but not limited to, leverage, creditworthiness, limited regulatory protection, and market volatility that may substantially affect the price or liquidity of a currency or currency pair. Using an
Internet-based trading system also involves risks, including, but not limited
to, the failure of hardware, software, and Internet connection.
Conventions Used in This Book
I keep the conventions to a minimum in this book. Here are the ones I use:
Introduction
✓ Italics are used for emphasis or to highlight new words or phrases.
✓ Boldfaced text indicates key words in bulleted lists or the key steps of
action lists.
✓ Monotype font is used to refer to Web addresses and e-mail addresses.
Also, when you see references to eastern time (ET), that means whatever
time it is in New York City. Part of the year, that’s eastern standard time
(EST) and part of the year it’s eastern daylight time (EDT).
What You’re Not to Read
This book is designed to be an easy-access reference guide to currency trading. I cover each subject in its entirety in individual chapters, and the information doesn’t depend on what comes before or after. That means you’re
able to jump around to the subjects you want to focus on and skip those you
feel comfortable with already or just aren’t interested in.
I highly recommend that complete beginners to trading in financial markets
peruse the whole book to get a solid idea of all that’s involved. Experienced
traders from other markets will probably want to focus more on the specific
conventions and traits of the forex market — but you may also find the technical and fundamental insights as applied to currencies enlightening for your
forays into trading this market.
No matter your background, you can skip paragraphs marked with the
Technical Stuff icon without giving up an understanding of the primary subject. Also, sidebars supplement the primary text — you can skip them without missing the main point.
Foolish Assumptions
Making assumptions is always a risky business, but knowing where I’m
coming from may help put you at ease. Obviously, not all these assumptions
will apply to you, but at least I’ll have it all out in the open. In writing this
book, I assume that:
✓ You’ve heard about currency trading and you’re looking to find out
more about what’s involved before you try it.
✓ You’re intrigued by the international dimensions of the forex markets
and you want to find out how to profit from currency movements.
✓ You’re seeking to diversify your trading activities or hedge your
investments.
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Currency Trading For Dummies, 2nd Edition
✓ You want to discover more about technical analysis and how it can be
used to improve trading results.
✓ You understand that trading currencies carries the risk of losses.
✓ You’re prepared to devote the time and resources necessary to understand what’s involved in currency trading.
✓ You have the financial resources to pursue margin trading, meaning that
you’ll never risk more than you can afford to lose without affecting your
lifestyle.
✓ You aren’t gullible enough to believe the infomercials that promise easy
money by trading currencies.
✓ You understand that there is a big difference between gambling and
speculating.
These assumptions should serve as a healthy reality check for you before
you decide to jump in to currency trading actively. A lot of it is similar to
being a weekend golfer and being disappointed when your play doesn’t reach
pro-level scores. But when you think about it, why should it? The pros are
out there practicing and playing all day, every day — it’s their full-time job.
Most people can only hope to get a round in on the weekend or get to the
driving range for a few hours a week. Keep your perspective about what’s
realistic for you, and you’ll be in a much better position to profit from
actively trading.
How This Book is Organized
I’ve divided Currency Trading For Dummies into five parts. In this section, I lay
them all out for you.
Part I: Trading the World’s
Largest Financial Market
This part introduces you to the global forex market and gives you an idea
of its size and scope. You find out who the players are and what their styles
and motivations are. I also look at the impact of other financial markets on
currencies. This part is also where I cover the nitty-gritty of currency trading
conventions and tools so you know exactly how and what you’re trading.
Introduction
Part II: Driving Forces behind Currencies
In this part I look at the major fundamental and economic drivers that influence currency values. Also, whether it’s economic data out of the United
Kingdom or a political spat in the land down under (that’s Australia, mate!),
the forex market moves in response to developments from around the world.
I show you how to interpret the data and events like a pro, factoring in
market psychology and positioning. I also draw on my years of experience to
offer insights that clue you in to how major currencies typically trade so you
can know what to expect before you take the plunge.
Part III: Developing a Trading Plan
The military has an old saying: “Proper planning prevents piss-poor performance.” The forex market is pretty much always open and constantly
moving. To swim in this ocean and avoid the sharks requires an organized
and disciplined approach to trading. In this part, I detail different trading
styles, highlight concrete strategies, and provide a game plan for spotting
trade opportunities and being prepared to act on them. I introduce you to
my preferred technical analysis tools and my approach to using them. I also
explore risk-management considerations and rules in depth, because what
you don’t know can cost you.
Part IV: Executing a Plan
In this part, I walk you through the various ways of establishing a position
in the market, how to manage the trade while it’s open, and how to close
out the position on the most advantageous terms. I also look at the learning
curve of a trader and suggest techniques to move you up your curve faster.
Part V: The Part of Tens
Here I offer a series of lists of key characteristics of successful traders, trading pitfalls to avoid, risk management rules to live by, and resources to continue your trading education.
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Currency Trading For Dummies, 2nd Edition
Icons Used in This Book
Throughout this book, you see icons in the margins, highlighting certain
paragraphs. Here are the icons I use and what they mean:
Theories are fine, but anything marked with a Tip icon tells you what currency
traders really think and respond to. These are the tricks of the trade.
Paragraphs marked with the Remember icon contain the key takeaways from
this book and the essence of each subject’s coverage.
Achtung, baby! The Warning icon highlights potential errors and misconceptions that can cost you money, your sanity, or both.
You can skip anything marked by the Technical Stuff icon without missing out
on the main message, but you may find the information useful for a deeper
understanding of the subject.
Where to Go from Here
This book is set up so you can jump right in to the topics that are of greatest
interest to you. If you’re an absolute newcomer to trading in general and currencies in particular, I recommend reading Parts I and II to build a foundation
for the other topics. If you have more experience with trading, use the table
of contents and index to find the subject you have questions about right now.
This book is a reference — keep it by your computer, and turn to it whenever
you have a question about currency trading.
Part I
Trading the
World’s Largest
Financial Market
I
In this part . . .
ntroduce you to the global currency market with an
eye to demystifying it. I begin with an overview of the
currency market and how it’s the ultimate traders’ market. Next, I run you through a global currency trading day,
so you know what to expect. I also examine how currencies and other financial markets are interconnected. Then
I show you who the major players are and look at their
strategies and motivations for trading in the currency
market.
Chapter 1
Currency Trading 101
In This Chapter
▶ Looking at currency trading as a business
▶ Getting a sense of what moves currencies
▶ Developing trading strategies to exploit opportunities
▶ Implementing the trading plan
T
he foreign exchange, or forex, market has exploded onto the scene and is
the hot new financial market. It’s been around for years, but advances in
electronic trading have now made it available to individual traders on a scale
unimaginable just a few years ago. But just because currency trading is more
accessible doesn’t mean it’s widely understood.
I’ve spent my professional career in the forex market and I can’t think of a
better traders’ market. In my opinion, nothing quite compares to the speed
and exhilaration of the forex market or the intellectual and psychological
challenges of trading in it. I’ve always looked at my work as essentially doing
the same thing every day, but no two days are ever the same. Not many
people can say that about their day jobs, and I wouldn’t trade it for the
world, no pun intended.
Defining Currency Trading
At its heart, currency trading is speculation about the value of one currency
versus another. The key words in that last sentence are speculation and currency. I think that looking at currency trading from those two angles is essential.
On the one hand, currency trading is speculation, pure and simple, just like
buying an individual stock or any other financial security in the hope that
it will make a profitable return. On the other hand, the securities on which
you’re speculating are the currencies of various countries. Viewed separately, that means currency trading is both about the dynamics of market
speculation, or trading, and the factors that affect the value of currencies.
Put them together and you’ve got the largest, most dynamic and exciting
financial market in the world.
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Part I: Trading the World’s Largest Financial Market
Throughout this book, I approach currency trading from those two perspectives, looking at them separately and blending them together to give you the
information you need to trade in the forex market.
Speculating as an enterprise
Let me first tell you what speculating isn’t; speculating is not gambling, and
it’s not investing. Gambling is about playing with money, even when you
know the odds are stacked against you. Investing is about minimizing risk
and maximizing return, usually over a long time period (months or years).
Speculating, or active trading (I use the terms interchangeably from here out),
is about taking calculated financial risks to seek a profitable return, usually
over a very short time horizon (minutes, hours, or days). You may be more
familiar with speculating or active trading as day trading, but in the 24-hour-aday forex market it can very easily turn into overnight trading, too.
Speculating as an enterprise refers to treating your trading as a serious business venture. In my experience, many newcomers to the forex market enter
it too lightly and don’t appreciate the patience and diligence required to be
successful. I hope you’ll take to heart the following attributes I think define a
successful trader in any market:
✓ Dedication (time and energy)
✓ Resources (technological and financial)
✓ Discipline (emotional and financial)
✓ Decisiveness (intellectual and psychological)
✓ Perseverance (risk management and opportunism)
✓ Knowledge (economic, political, and market dynamics)
But even if you possess all those traits, there’s no substitute for developing a comprehensive trading plan (see Chapters 11, 12, and 13, as well as
“Developing a Trading Plan” later in this chapter). You wouldn’t open a business venture without first developing a business plan (at least I hope not!). So
you shouldn’t expect any success in trading if you don’t develop a realistic
trading plan and stick to it. Think of trading as if it were your own business,
and approach it as you would a business enterprise, because that’s what it is.
Above all, try not to take your trading results too personally. Financial markets are prone to seemingly irrational movements on a regular basis, and the
market doesn’t know or care who you are or what your trade idea is.