Currency Trading for Dummies

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