Forex on Five Hours a Week E-Book

Raghee Horner

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Serie: Wiley Trading Series
• Sprache: Englisch

Seitenzahl: 355

Veröffentlichungsjahr: 2009

Beschreibung

A top forex trader reveals how to ease into this market and excel

Trading the forex market has become one of the most popular forms of trading, mainly because of its twenty-four-hour access and the fact that there is always a bull market available in this arena. But not everyone is interested in quitting their jobs and spending all day trying to make a living trading. That's where Forex in Five Hours a Week comes in. This book shows readers how they can master a few techniques, focus their efforts on their choice of time frame, and profit in the forex market. Readers with a day job and little time to dedicate to the market will learn all they need to know to capture consistent profits

Leseprobe

Table of Contents

Title Page

Copyright Page

Preface

Acknowledgements

CHAPTER 1 - Making Money in Up and Down Markets

FILL IN THE BLANKS

A BULL IS ON THE LOOSE!

SHORTING

EMPLOYEE MINDSET

CONFESSIONS OF A CHART JUNKIE

ANALYZING THE MARKET

IDENTIFY THE TREND

TIME FRAMES

CHAPTER 3 - The Wave

SINKING, SOARING, OR SIDEWAYS?

MARKET CYCLES

A WISH

MARKET MEMORY

TRADE WITH PRICE

CHAPTER 4 - Objectivity

INDICATORS

ORDER ENTRY

STOP LOSS

RISK MANAGEMENT

TRENDLINES, SUPPORT, AND RESISTANCE

STATIC AND DYNAMIC LINES

CHAPTER 5 - The Magic of Lazy Days Lines

FIBONACCI ANALYSIS

LAZY DAYS LINES AT WORK

USING LAZY DAYS LINES

THE WAVE IN ACTION

REAL-LIFE LAZY DAYS LINES

CHAPTER 6 - The Only Entries You Need

MOMENTUM TRADING

SWING TRADING

SHORT CYCLE SET-UPS

INSIDE THE RANGE

CHAPTER 7 - Around the World

WHO’S AWAKE?

FINANCIAL CENTERS YOU NEED TO KNOW

PRIME TIME!

PIP MOVEMENT

A DAY WITH THE EUR/USD

TIME OUT!

CHOOSING YOUR TRADING TIME

CHAPTER 8 - Market Pulse

U.S. DOLLAR INDEX AND USD/CAD

U.S. DOLLAR INDEX AND AUD/USD

CHAPTER 9 - Trading Psychology

STAY IN BALANCE

THE ROLE OF EXPERIENCE

TRADING FOR REAL

THE PSYCHOLOGY OF MARKET CYCLES

THE PSYCHOLOGY OF NEWS

THE PSYCHOLOGY OF TIME

THE PSYCHOLOGY OF NUMBERS, ENTRIES, AND EXITS

CHAPTER 10 - Psychological Numbers

USING THE HERD

THE 200 SMA

52-WEEK HIGHS AND LOWS

CHAPTER 11 - Trading Edge

THE RIGHT SIDE OF THE CHART

CONSUMER CONFIDENCE

RISK APPETITE

SELL THE NEWS

CHAPTER 12 - Is My Broker Friend or Foe?

THE 2 PERCENT QUESTION

STOP LOSS PLACEMENT

TRIAGE

TRADING TRUTHS

CHAPTER 13 - Embracing Automation

CHARTING TOOLS

PROFIT TARGETS

FIFTEEN-MINUTE SET-UPS

CHAPTER 14 - Raghee Recommends

Final Thoughts

Very Special Offers for Book Buyers

Index

Copyright © 2010 by Superior Management, LLC, d/b/a In Touch Marketing, and Raghee Horner. All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey. Published simultaneously in Canada.

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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 accuracy 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.

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Library of Congress Cataloging in Publication Data:

Horner, Raghee.

Forex on five hours a week: how to make money trading on your own time / Raghee Horner. p. cm. - (Wiley trading series)

Includes index.

eISBN : 978-0-470-57278-8

1. Foreign exchange market. 2. Foreign exchange futures. 3. Speculation. I. Title.

HG3851.H668 2010

332.4’5-dc22 2009044762

Preface

Forex on Five Hours a Week is about having a life! But more than that, it’s about challenging assumptions. Somewhere along the line, we were taught that for something to be effective means it must be time consuming. We’ve mistaken time spent for effectiveness. If we decided to buck the trend, it’s dismissed as laziness, akin to looking for a shortcut. This attitude comes from an employee mindset. I’ve been an employee for a total of 22 months of my adult life. I don’t say this to brag. I’m quite unemployable, as my luck would have it. Consequently, I was basically shoehorned into figuring out how to make a living without I clocking in and collecting a paycheck each week.

I am not going to bore you with all the details as to how I discovered I could make a living trading the markets. The bottom line is that along the way, making every rookie mistake that could be made (twice), I learned that the markets are just an extension of human behavior and nothing nearly as sophisticated or complicated as Wall Street would have Main Street believe.

I’ve been lucky enough to be able to share with you what I do each day, and I don’t take this privilege for granted. As I have traveled the globe teaching and talking about the markets, it dawned on me that far too many traders and would-be traders were addicted. They’re market junkies. I’ve heard stories about traders who arise in the early hours of the morning to trade; traders who have laptops in their bathrooms; traders who spend upwards of 16 hours a day analyzing charts and creating systems. I’m not going to belabor all the stories I’ve been told, but trust me, the list goes on and on, and, frankly, they get stranger and stranger. Is this what trading is, an addiction?

If more time spent trading and analyzing yielded better results, heck, I would do it. But it doesn’t. Bottom line is that just as many traders stink today as they did 20, 30, 50 years ago, and there are more traders in the markets now than ever before. Present-day traders have sophisticated equipment, unprecedented access to data, order flow, and transparent order entry. I’m smiling right now as I think back when I began as a high school student with paper chart, ruler, and pen.

While a teenager, in my initial trading stage, I realized I was a part-time trader. And in reality, so are most traders. If we wanted a job, I’m sure there are easier ways to make a living and not put ourselves through the meat grinder of being a trader. If you’re reading this because you think it will be easy, kindly close this book and put it back from where you found it. But let me say, it ain’t hard!

So what exactly is Forex on Five Hours a Week? It’s about understanding that more is not better. Better is better. Forex on Five Hours a Week will show you how to analyze the market, how to use visual and objective tools, and then formulize a plan to trade successfully. This is not daytrading, which I don’t do. This is not investing, although many of the strategies in this book could help you with that facet of your portfolio. This is about grasping a few concepts that if properly understood and applied, can yield healthy and consistent returns.

The forex market offers the best order entry, leverage, and access of any market. This market is available 24 hours a day and can most likely fit your schedule. This is not about being a full-time trader. My goal is to allow you to fit trading into your current schedule. That means quick, accurate analysis that you can repeat over and over again.

This book is as much a written text as it is a complete course. I’ve included links and charting examples, which allow me to walk you through the concepts in this book. I’m especially happy about that because this makes it easier for me to show you additional examples of the strategies I use, such as working across multiple time frames and pairs. I also invite you to join me at my blog at ragheehorner.com where I discuss the markets on a daily basis and share videos and color charts of set-ups and price action that I am watching. It’s just another way of keeping in touch after you complete this book.

The Forex on Five Hours a Week approach is as much about streamlining your market analysis as it is about challenging assumptions. There are going to be ideas that I will share with you that challenge the norm and perhaps are 180 degrees from what you have heard or even have been doing! This does not stem from some desire of mine to zig when everyone else is zagging.

They continue to seek out the most popular, most used, most known tactics and tools. Why? Is there safety in numbers? Not in this case. If you are with the majority in this game, you’re losing. So, if you find that most traders are doing things a certain way, whether that be trade management, entries, risk management, whatever . . . then you probably don’t want to do it the same way. I often adhere to my 90 percent rule, which put simply says, “If everyone is doing it, it’s probably wrong.”

Forex on Five Hours a Week readers will use the psychology of the market to their advantage; after all, that is what you are tracking, analyzing, and watching on a price chart. This is external psychology. Never forget that you are trading reactions, fear, greed, and uncertainty. This alone will take you past the charts and make trading a much more natural activity. And that’s when you will find that trading is just a natural extension of human nature.

Yours in Trading,

Raghee Horner

Acknowledgments

I finished writing this, my third book, today, and I can’t help but be grateful and think back on the series of coincidences and the people who got me here. I am lucky to be surrounded by a family who supports me, friends that make me smile, and partners that demand the best of me. And most of all the students who push me to be better and whom I always hope to be better for. You inspire me every day and make teaching a joy. I am a better trader and person today, and I can’t help but think that you all have a little something to do with that.

Success is just a series of coincidences that we can seldom see coming but must be ready for regardless . . . and that seems to be the inside joke of life.

To the love of my life, Herbie, who knows that love doesn’t mean doing everything for me but making me feel that I can do anything. Thanks for believing in me when I have doubts, holding my hand when I lose my step, and knowing when to let me run. There isn’t a day you don’t make me feel loved.

To my sister, Nila, the smartest, funniest, bravest, most generous, and most beautiful human being in my life. I don’t know what I ever did to deserve you, but it must have been grand. You are my hero, my confidante, and the best reason I can think of that the world is a good place.

To my Ma, who gave me the best two gifts ever: life and my little sister. You have always been all my reasons, Mama.

I never feel alone when I am tackling new projects, and it’s the people whom I have been fortunate enough to meet and call friends who allow me to keep doing what I love to do.

To my partners Dale, Sasson, Brenda, Victoria, and Jeffrey, the team behind the success of Raghee.com. You all never give up on me and have the patience of saints. Thank you for your support and may we continue to find success as a team!

To David Pugh, my editor at John Wiley & Sons. Thanks for your trust, brainstorming sessions, and support. Most of all, thanks for letting me take yet another whack at this.

To my good friend, Marilyn McDonald. You are not only brilliant but most importantly a good person whom I am lucky to call friend. Year af ter year I continue to be amazed by the ideas you come up with and the integrity with which you execute them.

To my genius friends at Autochartist, Erik Voges and Ilan Azbel. I am honored to work with you both. You two are about two feet smarter than I am! I love the ways your minds work. You have created and improved upon one of my favorite pieces of software, and your PowerStats keep me playing the game at the right time. And special thanks to Yvette and Marita for your daily assistance and support.

Speaking of geniuses, I have to thank Chris Kryza of Divergence Soft ware. You changed my trading for the better and continue to help me find ways I can streamline and optimize my trading. And you do it better than anyone, my friend! Thank you for all the help throughout the years.

And how can I forget my Facebook buddy, Jimmy Jones? Thanks for my GRaB plug-in upgrade! Truly above and beyond!

The Internet has made the world smaller and information available to more people, and, even better, it has allowed more people to get involved and share their two cents’ worth. I have to mention a few sites here that I not only contribute to but also use day to day and thank them for the great information they provide.

To the staff at BabyPips.com, can I just say that I am a huge Queen Cleopiptra fan? Brilliant! Thanks for the support and for emphasizing that learning to trade can be fun.

To Trading Markets and Eddie Kwong, who were the first people to publish my articles online long before the books and seminars, you allowed me to share my ideas, and look where it took me! Thank you.

To eSignal. I don’t take my charting lightly, and you guys are my pipeline to the markets and have been for over a decade. I cannot tell you how it floored me when you included my name on the Trading with the Masters page! Sometimes I still don’t know what I am doing up there, but I must admit, I love it. Special thanks to Scott Wilks, my eSignal rep for all these years.

To Francesc, Maud, and Noemi at FXStreet. Thank you for letting me share my ideas at the site with my chats and Chartology blog. I want to add that the Fibo and Pip comic strips were generously contributed from the good folks at FXStreet and Fibo and Pip creator, Josep Giro.

To Tim Bourquin. It seems like a million years ago, but Tim, that in terview for TraderInterviews.com was the first I ever gave and that’s some thing I will never forget. I look forward to the Forex and Traders Expo talks each year. Thanks, buddy!

To the International Securities Exchange (ISE) and Steve Meizinger, whom I love talking options with and who has single-handedly taught me more about options than I ever thought I would be able to absorb in this lifetime . . . and made it fun! I love presenting for the ISE and appreciate the opportunity.

As I tend to do from time to time, I worry my editor David and my partner Sasson, as they get a bit concerned with me because of my loose relationship with the concept of a deadline. I’m getting better, aren’t I? As always, there’s nothing a cattle prod cannot solve. So in this case, I think I have to thank some people who didn’t necessarily even know they were a help in writing this book, or rather getting this book done and out the door!

To Tim Salem, aka CVJ. I have enjoyed our chats and e-mails. You were able to give me so much valuable insight into what I can offer traders and how I can do it better. Thanks for your honesty.

To Sam and Cole Flournoy. I know I’ll be reading about all the great things the two of you will be doing very, very soon! You both inspire so much with your smarts and drive. I am lucky to know both of you. I must say here and now that everyone who has an iPhone should have the Forex on the Go app!

To one of my best friends, Pam Curry. There’s nothing like having a girlfriend to complain to and a house to hide from the world at. You’re a force of nature, and mom to three of my favorite kids on the planet. When ever I was feeling a little lazy and unfocused, I thought of you and all that you squeeze into 24 hours and promptly went back to work. I’m in awe of all you do, my friend. You make it look easy.

To my dearest and closest friend, Melissa Young Orndorff. You never make friends again like the ones you made when you were 12. You make me smile and laugh out loud no matter what is going on around me. In all my life I’ll never find another you: You’re an angel. I don’t know what I would do without you. And, of course, I have to give a shout-out to Mr. Peeps!

To Anna Dupras. Ups and downs, no doubt. Laughter always. No matter what, I can’t say enough how proud of you I am.

To my cousin, Bobby Choudhuri, who has been the example and the inspiration for more than I can even explain. You’ve always encouraged me, and better than that, you were the example. You’re one of my best teachers, Dada.

To my Dad. I lost you when I was 15, but the older I get I think I finally get it. It took me a while to realize that you never really left but became the promise and hope that guided me. You came from nothing and gave everything. Your girls, your “pride” and your “joy,” hope that we’ve made you proud.

And finally, to old friends, whom I’ve never forgotten, and the memories that make me smile and no doubt make me the person I am today. As kids we just don’t know where we’re going. We’re living for recess and a good snack in our lunch bag. One day rolls into another and the years go by so slowly. Then all of sudden 10, 15 years have flown by, and then you wonder where all your buddies went, because you didn’t stop to see what road they were heading down. It happens. But not long after, it seems everyone’s on the same road again. That’s the cool part. Thank God for Facebook! Hey there, Paul Washburn! We gotta sit down and listen to some records, buddy!

CHAPTER 1

Making Money in Up and Down Markets

Learn the rules or the game is over before it started.

2006 “Fxstreet.com. The Forex Market.” All Rights Reserved.

People like to buy. That seems to simply be a fact of human behavior . One of the things that most traders and investors look for are markets that are heading up and will continue going higher. I can no more tell the future than anyone on Wall Street, and my guess is that your crystal ball is at the repair shop as well. So what can we do? Given the widespread preference for buying, the best thing to do is find a market where you can find a bull market no matter what. That’s the forex market.

This is where the U.S. dollar comes in. The six most popular pairs in the forex market are either U.S. dollar-correlated majors or U.S. dollar-based commodity currencies also known as “comm dolls.” You didn’t think I was going to let you sound like a newbie now, did you?

Let’s briefly discuss the difference. U.S. dollar-correlated majors are the euro/U.S. dollar, the U.S. dollar/Japanese yen, the British pound/U.S. dollar, and the U.S. dollar/Swiss franc. The four pairs trade against the U.S. dollar. The reason these are “correlated” is that the movements of these pairs have a strong relationship to the U.S. dollar, which we can track with the U.S. dollar Index. We’ll talk in the next section about the relationships in detail, but for now keep in mind that the forex is a game of comparison. Is the U.S. dollar gaining or losing ground to another nation’s currency?

If it seems as though I am spending an inordinate amount of time driv ing this point home it is because I think far too many traders forget that trading forex is a very tangible thing. It personally affects our everyday lives and the everyday finances of corporations and banks. Our world and collective economies are not isolated, and the global economy is now more intertwined than ever. Anyone who for a moment bought into the theory that somehow the U.S. economy was dislocated from Europe, Asia, and the BRIC countries (Brazil, Russia, India, China) should now know different af ter witnessing a cataclysmic global slowdown. My point here is that forex, the relationship between different currencies, is at the heart of the world wide financial system and the more you understand this relationship the better overall trader you will become. Now who said forex trading couldn’t make you a better person?

FILL IN THE BLANKS

In case you’re new to forex, here’s the one line synopsis of what the foreign exchange market is: How many will I get for ?

How many yen will I get per U.S. dollar? How many U.S. dollars will I get per euro?

So basically depending upon the strength or weakness of the U.S. dollar you may be able to get more or less of another currency in exchange. I think of it as the airport analogy. Let’s say we all jump on a flight to Paris and upon landing we look to exchange our pocketful of U.S. dollars for euros. The forex rate will dictate what we get.

Traders and investors track, analyze, and use this price movement to determine whether they feel this rate will go higher or lower.

That brings us to commodity currencies or “comm dolls.” Maybe you have heard a little about what these pairs are and how they behave. My take is a little different, so let’s start with the basics. Generally speaking, commodity currencies are just what their name would suggest: a currency pair that has a strong correlation back to a particular commodity. Simple, right? Well, not so fast.

The Australian dollar/U.S. dollar, New Zealand dollar/U.S. dollar, and U.S. dollar/Canadian dollar are the three pairs you will most commonly call “comm dolls.” Let’s use the U.S. dollar/Canadian dollar or “canada” as an example. The “canada” has a relationship to the energies complex, meaning crude oil, heating oil, natural gas. It moves, however, with a strong correlation to crude oil. Why? Well, consider that the country of Canada is one of the world’s leading exporters of crude oil (from www.eia.doe.gov/pub/oil_gas/petroleum/data_publications/company_level_imports/current/import.html).

You better bet the supply and demand of crude affects the Canadian economy. But is that the end of the story for commodity currencies? No, not even close. You see this pair has a correlation to the U.S. dollar as well. Remember it’s the U.S. dollar/Canadian dollar pair. We not only have to consider the impact of crude oil on the Canadian dollar itself but also how the U.S. dollar is moving against the Canadian dollar.

I am going to go into great depth later on about these relationships and my Forex Market Pulse. For now, though, think about this: Does crude oil affect the Canadian economy alone? I think we have seen what high crude oil prices have done to the U.S. economy as well. So bottom line? All pairs that have a relationship back to the U.S. dollar will have a certain amount of impact from crude oil. And that means that all U.S. dollar pairs can be considered comm dolls to a certain extent. Now that’s not something you will hear from most traders, but I’m here to tell you that’s the way it is.

So, there’s always a bull market somewhere in the forex. When you consider all the different countries, commodities, and the relationship they have with one another, it’s easy to begin to understand that while some currencies are being beaten down, others are rallying in comparison or are considered safe haven currencies. This is why you will always find that some pairs are heading lower while others are ripe for buying.

A BULL IS ON THE LOOSE!

One of the more appealing aspects of the forex market, beyond the 24-hour always open trading, is the fact that there’s always a bull market somewhere amongst the pairs. The idea of buying a stock or futures contract or a forex pair is much more familiar to most people, especially since most of us are already familiar with investing. Investing and trading do have two completely different mindsets. For investors, the whole idea is ownership: to own more shares of a company or mutual fund or even ETF (electronically traded funds). Most people incorrectly believe that trading is buying low and selling high . . . wrong! That is actually investing. Now, of course, investors do hope that their holding will increase in value, but that is sec ondary to ownership.

Traders don’t own anything; in fact, they don’t want to because the goal in trading is to profit from price movement. Instead of owning, traders control shares, contracts, lots, or pairs with leverage. Now what does all this have to do with playing U.S. dollar strength or weakness? Traders un derstand that in order to profit from price movement they must buy and short. That’s right, “short.” After all, trading means making money in up and down markets. If you were only to play one side of the market you would consistently miss opportunities to benefit from when the U.S. dollar moves a pair lower.

Consider this move. The U.S. dollar gains strength on the euro. The resulting move on the chart would be weakness, a sell-off and even a downtrend in the EUR/USD (euro/U.S. dollar). In order to profit from this relationship a trader would have to short or sell the EUR/USD. Here’s an other example, one that has hit closer to home for most people. Crude oil has been on a rollercoaster as of late, reaching new highs and selling off to significant lows. In fact, over the course of less than six months, crude oil has moved over $100. Crude oil has a strong correlation to the commodity currency of the U.S. dollar/Canadian dollar (USD/CAD). The USD/CAD is affected by U.S. dollar movement but as with all forex analy sis, you must consider the other side of the pair, in this case the Canadian dollar. The Canadian dollar or “loonie” is affected by crude oil prices be cause Canada is a huge exporter of oil. When oil strengthens, this helps the loonie strengthen. If oil weakens, it can take the loonie down with it. So as the crude oil market sells off, the loonie has been weakening against the U.S. dollar, which results in a downtrend on the chart of the USD/CAD. The only way to benefit from that movement in the forex would be to short the USD/CAD and profit from the weakness.

SHORTING

The real value in trading has always been the fact that traders can profit in both up and down markets. This has always been one of those ideas that people have a hard time wrapping their brains around. Even though I spent a good deal of time telling you that you can always find a bull market in forex, that’s not where I want you to stop looking for opportunities. I’ll let you in on a little secret. Gravity applies to the markets too. Prices always fall quicker than they rise. It’s a function of fear and panic. And, yes, you can profit from it. But before you think of me as some heartless trader preying upon fear, remember that trading and investing must have participants willing to sell. I’m not sure where this concept blipped off the radar, but it’s one that the general public doesn’t seem to get: For every buy there is a sell. The reason prices move higher or lower is based upon where the transaction takes place. However, there still must be a buyer and seller willing to do a deal in order for a trade to take place.

Let’s discuss it in terms that most people can visualize, the housing market. When a house goes up for sale you have a seller, that’s the current homeowner. This homeowner is hoping that there is demand—and lots of it! More demand for the house, and the price at which they can sell (think of it as where the trade will be done at) will be higher. Less demand, and the price at which they will likely sell will be lower. The stock, futures, and forex markets work the same way. When there are plenty of homes for sale and not as many buyers, that’s a buyer’s market. If you were to plot that on a chart, the trend for home prices would be down. Now take that same scenario and apply it to a stock. Let’s use IBM. If IBM came out with a bad earnings report, or if a new product line flopped, or a problem was found in server design—any one of the myriad of issues that can hurt a company and a stock—the value of IBM would likely go lower over concern for what these issues mean to IBM sales and profits. What if you could profit from prices heading lower? We all know we can profit from prices moving higher as good news is discounting into a stock and both traders and investors buy in expectation of more success, profits, and sales from IBM. But what if events go the other way?

I’m going to warn you that you may need to reread this until you get the mechanics of what I am going to explain implanted in your mind. It may take some time to click, but once it does, it’s going to open a whole new world to you and your trading opportunities. I remember the first time I was introduced to the concept of shorting. It was foreign and took me a week to understand. Conceptually it made sense, but it wasn’t until I understood order flow that it made total sense. I began to see why it was such an important concept and a viable position to take in a downtrending market. Funny enough, I actually thought for a short while that it was illegal until my broker walked me through what I am about to explain to you. Remember that while you read this, until people are willing to sell and short the market as we know it, it would not exist. I’m not trying to be dramatic, it’s just plain fact.

I could just say that when you are shorting a market (stocks, futures, or forex) you’re selling it at a higher price and buying it back at what you hope to be a lower price for a profit. But selling something you don’t own doesn’t necessarily make sense, does it? And for those of you who are already familiar with shorting, I am probably preaching to the choir, but come along for the ride here regardless. You may find out a few things about order flow you didn’t know before.

I am going to use a stock example again, because time and teaching literally thousands of traders has taught me that using this as a frame of reference seems to be one that most people feel comfortable with, and the mechanics apply to any market. Let’s take our old friend IBM again. Big Blue is heading lower, and as a trader you understand that one of your options would be to take a short position in IBM with hopes that it will head lower still from your selling price. How, who, and why?

The how of shorting is basically a process by which your brokerage will allow you to borrow shares of IBM. So that’s where you get the stock to sell: You are getting it, borrowing it, from your broker! Next is taking these borrowed shares of IBM and selling them into the market. Who will buy it from you? The markets are divided into two groups, buyers and sellers, also known as the bid and ask, respectively. Buyers bid on a stock they want to buy and like all buyers they would like to pay as little as possible. The ask, or sellers, are on the other side. They own what the buyers want, and of course they would like to sell it for as high a price as they can get. How much they will get for it depends upon whether it’s a buyer’s or seller’s market, just like real estate.

Imagine two lines of traders, one of buyers and one of sellers. These two groups are lined up by placing the bidder or buyer who is willing to pay the most for IBM at the front of the “buyer’s line” and the seller who is willing to sell for the least amount at the front of the “seller’s line.” The difference between the highest bid and the lowest ask is the spread. Starting to make sense?

At the front of each line are the two participants that are closest to being able to get a deal done. So who gets their price? Well, that’s determined by the overall direction of the market. The seller will have the advantage if prices are heading higher (more demand) while the buyer will have the advantage if prices are heading lower (more supply). In the trading world this balance can go back and forth from moment to moment. Since we are talking about shorting, we’ll assume that the overall market psychology is bearish. This means that the overall direction of the market is heading lower and that the buyers are able to have their way, which means that the trades are generally being done at lower prices.

So since you are shorting and you have your borrowed shares of IBM, you are on the ask or “seller’s line.” You have a price that you would like to sell these shares for, and your hope is that you can find a buyer and that prices will head lower after you sell your shares.

So how do you profit from such a position, and why would anyone buy it from you? The first part is easy. Since you borrowed the shares from your broker, all the broker expects is that you return the shares to them. It’s much like borrowing a book from the library. The library made you get a card so you are “approved” to borrow a book, and they expect you to return it. The broker in this case is typically going to let you have those shares borrowed out for pretty much as long as you need them. When you sold IBM, you collected a certain price per share from the buyer knowing that at some point you are going to need to buy some IBM sooner or later to return what you borrowed. Let me say that again, because here is often where the wheels fall off the wagon for a lot of folks.

You sold your borrowed shares of IBM into the market, and the buyer of those shares gave you, for sake of keeping this simple, $100 per share. Now you have this $100 per share, and that’s half the equation here of this short position. Now based on your analysis you think that prices should headlower,andbygolly,theydo!$98...$93...$88...$87...$84...until they level off at your target of $80. So you sold at $100 and prices sold off to $80—a $20 difference. Remember, your broker wants their shares back at some point, and you’ve decided today’s the day and $80 is the price. So you execute another order. Your first order was a SELL. Your second order is a BUY. This will allow you to realize the $20 profit and return the shares of IBM back to your broker, thus closing out your short position. You sold these shares at 100 and are buying them back at 80, so the difference is yours.

I had also mentioned the “Why?” Why would someone buy these shares from you? Well, that’s what is so wonderful about the markets. There are always going to be contrary opinions. Without them there would be no mar ket. When I think I see a buying opportunity, there is someone out there who thinks that I am out of my mind and that there is a selling opportu nity. Without both sides of the equation, buyers and sellers, there would be no market; there would be no investing, no trading, nothing! So next time you hear about someone shorting the market, remember, there had to be a buyer for that trade to be done and without both types of market partic ipants there would be no liquidity. We’ll talk later about liquidity and how the forex is the most liquid market on the planet and why that’s so impor tant to us as traders. For now though, I hope your mind is starting to see the opportunity in playing both sides of the market.

And by the way, my shorting example of IBM has nothing to do with anything happening in the market. I have been an investor in IBM for many years. It is the first stock I ever owned. My father, a proud IBMer, worked for them until the day he passed away.

CHAPTER 2

Perspective my friends, keep your trading in perspective!

2007 “Fxstreet.com. The Forex Market.” All Rights Reserved.

I don’t know about you, but I have never wanted to work on Wall Street, or in an exchange, or for a bank, or be a fund manager, or manage other people’s money for that matter (by the way, I tried it and hated it). That’s not to say those are not important or fulfilling jobs. It’s just that I have never been much of an employee. I’ve always wanted to work for myself, and that really is just my way of saying I want to dictate when and how hard I work. You’re probably not that different from me. Who doesn’t want that freedom? That’s what trading is to me, freedom. There are plenty of ways to make a good living in this world. But I can’t throw a 90 mile-an-hour fast ball, I can’t sing or dance, and I always kick myself for not thinking of putting bird seed in a balloon and selling it as a stress relieving grip ball. Oh well.

So it ain’t just the money! Trust me when I tell you that trading is the hardest way to make an easy living I can think of.

I am a part-time trader. I think that people who are employed as traders are professional traders or full-time traders, but there goes your freedom out the window. I have never been great at answering to anyone as my mother will attest. And I do like to sleep in from time to time, as a few of my friends will attest when they have called me in the morning only to wake me up!

So really by that definition I am a part-time trader and darn proud of it. Does that mean that I treat my trading as a hobby? Definitely not! But consider that forex, which is the main topic of this book, is a 24-hour market. I don’t know about you, but I like to sleep, cook, train, golf, play a little Wii, read a book, maybe write a book, talk with friends, do a little blogging, dive, ride my motorcycle, go out to lunch with friends, go fishing, travel, you know, have a life! So obviously there are going to be times that I can’t be in front of my computer and more often, don’t want to be!

Let me tell you now that I was not always so enlightened. When I first started getting into trading, I was totally addicted. Addicted to the action, the charting, getting my hands on everything and anything trading related, and going at it 16 hours a day. No joke. And I’ll tell you the whole tale later, but suffice to say, I’m a chart junkie. My trading wasn’t better with my eyes glued to dual monitors. My friendships weren’t better, and I’m pretty sure my husband thought I had lost my mind. Although he still might be holding that opinion.

So I eventually unplugged and embraced the life of a part-time trader. You can and should do the same.

There are a few things that will make it clear once you understand them. Just a few simple things are all you are going to need. I will show you how to use time frames to your advantage as well as the prime trading times for each pair. I’m going to lay it all out for you.

The forex is a 24-hour market, so do full-time traders ever sleep?

Okay, so now you may be thinking, “Raghee, won’t I miss trades if I only watch the market part-time?”

And I will answer, “Yeah. You, me, and everyone else.”