Getting Started in Currency Trading E-Book

Michael D. Archer

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Serie: The Getting Started In Series
• Sprache: Englisch

Seitenzahl: 573

Veröffentlichungsjahr: 2012

Beschreibung

The definitive introduction to FOREX trading Getting Started in Currency Trading, Fourth Edition is both an introduction and a reference manual for beginning and intermediate traders. Starting with a description of the Foreign Exchange (FOREX) market and a brief history, the book includes an invaluable section made up of relevant FOREX terms clearly defined using examples. The FOREX market has grown substantially and evolved dramatically in recent years, and this new edition is designed to help the reader to adapt and take advantage of these changes. Including coverage of how to open a trading account, a step-by-step walk through the physical processes of placing and liquidating currency orders, and information on trading strategy and tactics complete with fundamental and technical analysis, the book has everything needed to assist the trader in the decision making process. * New edition is revised and expanded to take into account all of the recent changes in the currency market * Now includes a step-by-step introduction for the new trader and additional material on regulation * FOREX arithmetic calculations are presented in a clear, easy to understand way * Recommendations, guidelines, and caveats appear throughout the book This new edition of Getting Started in Currency Trading contains significant new information, including a chapter on computers and FOREX, managed FOREX, and new information about regulation, alongside the author's successful trading plan, designed to help the reader put it all together.

Leseprobe

Contents

Cover

Series

Title Page

Copyright

Dedication

Acknowledgments

Introduction

About This Book

The Fourth Edition

How This Book Is Organized

You Are Here

Website

Disclaimer

Part 1: The Foreign Exchange Markets

Chapter 1: The World of FOREX

Introduction—What Is FOREX?

What Is a Spot Market?

Which Currencies Are Traded?

Who Trades on the Foreign Exchange?

How Are Currency Prices Determined?

When Do Currencies Trade?

How Is Money Made in FOREX?

Why Trade Foreign Currencies?

What Tools Do I Need to Trade Currencies?

What Does It Cost to Trade Currencies?

FOREX versus Equities

FOREX versus Futures

Summary

Chapter 2: A Brief History of Currency Trading

Introduction

Ancient Times

The Gold Standard, 1816 to 1933

The Federal Reserve

Securities and Exchange Commission, 1933 to 1934

The Bretton Woods System, 1944 to 1973

The End of Bretton Woods and the Advent of Floating Exchange Rates

International Monetary Market

Into the Millennium

Arrival of the Euro

The CFTC and the NFA

Summary

Chapter 3: Five FOREX Markets

Introduction—Spot, Futures, Forwards, Options, Spread Betting

Currency Futures

Contract Specifications

Currencies Trading Volume

U.S. Dollar Index

Volume and Open Interest

Where to Trade Currency Futures

FOREX Futures

Summary

Chapter 4: Regulation: Past, Present, and Future

Introduction

Regulation in the FOREX Market

Regulation Past

Regulation Present

Regulation Future

Summary

Part 2: Getting Started

Chapter 5: The Language of FOREX

Introduction

Currency Pairs

Major and Minor Currencies

Cross Currency

Exotic Currency

Base Currency

Quote Currency

Pips

Ticks

Margin

Leverage

Bid Price

Ask Price

Bid-Ask Spread

Quote Convention

Market Maker and ECN

Transaction Cost

Rollovers

Correlation

Summary

Chapter 6: FOREX by the Numbers

Introduction

Pips

Profit and Loss

Margin

Leverage

The Bid-Ask Spread

Profit Threshold

For Futures Traders

Summary

Chapter 7: A Guide to FOREX Trading Platforms

Introduction

Trading Platform Features

More Trading Platforms

Professional FX Platforms

Trading Platform Checklist

A Kid in the Candy Store

Summary

Chapter 8: Selecting a FOREX Broker

Introduction

Broker-Dealer Due Diligence

Demo Accounts

Market Maker or ECN?

Costs

Liquidity Providers

Customer Service

Trading Pair Palette

Financial Stability

Complaint and Error Resolution

Account Options

Games Brokers Play

Top Broker-Dealers

Popular Broker-Dealers

The Big Four Broker-Dealers

For the Professional and Non-U.S. Trader

Spread Betting

Fraud, Scams, and Off-Exchange

Broker-Dealer Checklist

Summary

Chapter 9: How to Open a FOREX Account

Introduction

The Demo Account

The Live Account

Redundancy

Summary

Chapter 10: Making the Trade

Introduction

Orders

Market Orders

Limit Orders

Stop Orders

Combination Orders

Specialty Orders

Order Placement

Order Execution

Order Confirmation

Open Orders

Open a Demo Account

Summary

Part 3: The Trader’s Arsenal

Chapter 11: The FOREX Marketplace

Introduction

Portals and Forums

Broker-Dealer Reviews

Educational Resources

News and Calendars

Management Tools

System Development Tools

Data Services

Programming Services

Advisory Services

References, Periodicals, and Books

Fun Stuff

Summary

Chapter 12: Technical Analysis

Introduction

Bar Charts

Trendlines

Support and Resistance

Recognizing Chart Patterns

Reversal Patterns

Continuation Patterns

Candlestick Charts

Point and Figure Charts

Charting Caveat—Prediction versus Description

Indicators and Oscillators

Relative Strength Indicator

Momentum Analysis

Moving Averages

Bollinger Bands

Indicator Caveat—Curve-Fit Data

Wave and Swing Analysis

Cycle Analysis

Trading Systems

The Technician’s Creed

The Technician’s Caveat

Summary

Chapter 13: News Trading

Introduction

Fundamental Analysis

Fundamental Problems

Fundamental Factors

A Fundamental Discussion

Forex News

Key News Releases

Reality versus Expectation

News Trading

Shockwave Analysis

Strategy and Tactics of News Trading

Summary

Part 4: Winning Is the Name of the Game

Chapter 14: Trading Spaces

Introduction

Charts, Bars, and Trading Spaces

Trading Profiles

Selecting a Trading Profile

The Market as a Process

Summary

Chapter 15: Setting Up Shop

Introduction

The Plan Components

The Trading Platform Plan

Pre-Trade Plan

Trading Session Plan

Pulling the Trigger

Post-Trade Plan

Summary

Chapter 16: A Simple System

Introduction

General Principles

A KIS Toolbox

A Simple System

Not So Simple

Pairs to Trade

Summary

Part 5: The Goodman Method of Trading

Chapter 17: Goodman Wave Theory

Introduction

The Basic Market Paradigm

Goodman Wave Theory

The Basic Goodman Setup

Summary

Chapter 18: The Propagation Trade Setup

Introduction

The PTS

Summary

Chapter 19: The Dagger, the Waltz, and the Line

Introduction

The Belgian Dentist

Enter the Dagger

Waltzing the Trade

The Line! The Line!

Summary

Chapter 20: The Proactive Trader

Introduction

Laydowns

Bathtub Analysis

The Propagation Lens

Looking Inward and Outward

Multiple 3-C Counts

Stations

Ghost Trading

Sitting On Your Hands

Summary

Chapter 21: The 30-Trade Campaign Program

Introduction

Capital Allocation

The Tracks of Your Trades

Pre-Trade Checklist

Diagnostics

Characteristics of Successful Traders

Summary

Chapter 22: Goodmanisms

Goodmanisms

Summary

Part 6: Over the FOREX Rainbow

Chapter 23: Tools for Traders

Introduction

Techniques

Time Studies

Fear and Greed, Greed and Fear

Summary

Chapter 24: Options and Exotics

Introduction

Options

A Primer on Options

Basic Options Terms

Options: Pros and Cons

The Four Basic Options Strategies

Purchase or Write Options?

Advanced Options Strategies

The Greeks

The Retail FOREX Options Landscape

Options or Spot FOREX?

Risk Management with Options

Exotics

Trading Exotics

Summary

Chapter 25: Managed FOREX

Introduction

Why Managed FOREX?

Pros and Cons

Types of Managers

Types of Managed Accounts

Trading Methods

Performance Analysis

Two Methods of Performance Analysis

The Due Diligence Process

Costs and Fees

Spotlight on Managers

Research and Resources

Summary

Chapter 26: Computer Trading

Introduction

Technical Analysis

Expert Advisors

Automated Trading, Agents, and BOTS

Get On My Cloud

High-Frequency and Ultra-High-Frequency Trading

Into the Future of FOREX

The Trend Machine

Grid and Pac Man Programs

Arbitrage

Pros and Cons of Arbitrage

Summary

Appendix A: List of World Currencies and Symbols

Appendix B: Time Zones and Global FX Trading Hours

Appendix C: Central Banks and Regulatory Agencies

Appendix D: Resources

Periodicals

Books

Websites

Online FOREX Tour

Glossary

About the Author

Index

Getting Started in Currency Trading, Third Edition by Michael D. Archer

Getting Started In Forex Trading Strategies by Michael D. Archer

Getting Started In Asset Allocation by Bill Bresnan and Eric P. Gelb

Getting Started In Chart Patterns by Thomas N. Bulkowski

Getting Started In Internet Auctions by Alan Elliott

Getting Started In Mutual Funds, Second Edition by Alvin D. Hall

Getting Started In Stocks by Alvin D. Hall

Getting Started In Estate Planning by Kerry Hannon

Getting Started In a Financially Secure Retirement by Henry Hebeler

Getting Started In Online Personal Finance by Brad Hill

Getting Started In REITs Richard Imperiale

Getting Started in Rebuilding Your 401(k), Second Edition by Paul Katzeff

Getting Started In Security Analysis by Peter J. Klein

Getting Started In Global Investing by Robert P. Kreitler

Getting Started In ETFs by Todd K. Lofton

Getting Started In Futures, Fifth Edition by Todd Lofton

Getting Started In Candlestick Charting by Tina Logan

Getting Started In Project Management by Paula Martin and Karen Tate

Getting Started In Value Investing by Charles Mizrahi

Getting Started In Financial Information by Daniel Moreau and Tracey Longo

Getting Started In Emerging Markets by Christopher Poillon

Getting Started In Technical Analysis by Jack D. Schwager

Getting Started In Hedge Funds, Third Edition by Daniel A. Strachman

Getting Started In Fundamental Analysis by Michael C. Thomsett

Getting Started in Options, Eighth Edition Michael C. Thomsett

Getting Started In Real Estate Investing by Michael C. Thomsett and Jean Freestone

Getting Started In Rental Income by Michael C. Thomsett

Getting Started In Six Sigma by Michael C. Thomsett

Getting Started in Stock Investing and Trading by Michael C. Thomsett

Getting Started In Swing Trading by Michael C. Thomsett

Getting Started In Annuities by Gordon M. Williamson

Getting Started In Bonds, Second Edition by Sharon Saltzgiver Wright

Getting Started In Retirement Planning by Ronald M. Yolles and Murray Yolles

Copyright © 2012 by Michael Duane Archer. 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: Archer, Michael D. (Michael Duane) Getting started in currency trading / Michael Duane Archer. — 4th ed. p. cm. — (Getting started in) Includes bibliographical references and index. ISBN 978-1-118-25165-2 (paper); ISBN 978-1-118-28198-7 (ebk); ISBN 978-1-118-28408-7 (ebk); ISBN 978-1-118-28493-3 (ebk) 1. Foreign exchange market. 2. Foreign exchange futures. I. Title. HG3851.A739 2012 332.4’5— dc23

2011046014

To my favorite “uncle” and best friend, Jim Pacha

Acknowledgments

I wish to thank my mentor, the late Charles B. Goodman, for sharing with me his remarkable market theories, methods, and holistic approach to trading. Unsung in his own time, Charlie was to me the greatest of all the market mavens.

Thanks also to my mentoring students and GoodmanWorks Trading Room members, especially Matthew Cheung, Theunis Hattingh, and Trip Reilly. I have learned much by teaching them. Bradley Sutherland of Najibi Capital was most helpful in giving me a preview of his firm’s lead-edge grid trading system.

Finally, to the memory of the co-author of the first edition of Getting Started in Currency Trading, Jim Bickford. You are missed each and every day.

M.A.

Introduction

About This Book

This book is intended to introduce the novice investor to the exciting, complex, and potentially profitable realm of trading world currencies on the FOReign EXchange markets (FOREX). It also serves as a reference guide for stock and futures traders who wish to explore new trading opportunities. My primary focus is on the rapidly expanding and evolving online trading marketplace for spot currencies, generally referred to as retail FOREX.

Currency trading has a wide appeal in today’s global economic and investment climate. Currencies allow the investor to participate in the financial and economic fortunes and misfortunes of different countries and different regions. As I write these words, there is a seesaw battle between the debt crisis in the European Union and the one in the United States. As news and sentiment ebb and flow, so does the euro/U.S. dollar (EURUSD) currency pair. While the risks are substantial, the rewards are also potentially enormous. There is opportunity every trading session in FOREX. A market does not need to be in a sustained trend to have profit potential. It requires only movement and volatility.

Unlike equities and stocks, a currency trade is a spread between one currency and another currency. You are simultaneously buying one and selling the other. While trends in currencies can be very long, they ultimately trade in very wide bands as interest flows back and forth between the two members of the pair. Barring a country’s collapse, a currency’s price at least in the longer term has always come back. Some FOREX trading systems, particularly grid and Pac Man programs, aim to take advantage of this band phenomenon.

Because critical events occur so frequently in the global economy of the twenty-first century, a buy-and-hold strategy can be frustrating and costly irrespective of the investment instrument. Carefully nursed profits can vanish with the next news announcement, flash crash, or crisis. The traditional investment pyramid is composed of classes— preservation, savings, investment, and speculation, typically denominated with specific investment instruments such as cash and gold, bonds and savings, equities, and commodities. In today’s environment, trading becomes a class unto itself for the astute investor, seizing good profits before they disappear. Trading currencies becomes a near-perfect fit for the times.

Figure I.1 The New Investment Pyramid

From the beginning, I emphasize currency trading may not be to everyone’s disposition. The neophyte investor must be keenly aware of all the risks involved and should never trade on funds deemed necessary for day-to-day living. Currency trading is a form of speculation—attempting to profit by absorbing a risk that already exists. This differs from gambling in which one creates a risk in order to take it. Savings and conservative investment should be covered before considering speculation of any kind, including trading.

If you have some experience with leveraged markets such as futures or options, you owe yourself a look at FOREX. Those who have never traded will find it the most laissez-faire of all financial adventures.

The Fourth Edition

From the writing of the first edition in 2004 to the publication of this fourth edition in 2012, the retail FOREX industry has evolved enormously. Regulation, almost nonexistent in 2004, has now expanded to the point where many participants consider it overdone and more burdensome than productive. But at least for the retail currency market participant increased regulation has made the currency markets more palatable.

Many small, boutique FOREX brokers are no more; either dissolved because they could not meet new financial requirements or they were absorbed by larger firms. Selection is less, but quality is higher. Customer service, a bugaboo for years, has made great strides as the major players strive to attract new clients and keep existing clients from seeking greener pastures.

Tools for trading have increased and improved. In 2004, almost every brokerage had its own trading platform and most of them had significant problems. Today, there are fewer than half a dozen standardized platforms and all of them are very stable and feature-rich. If you like a platform but dislike the broker, it is easy to change the latter and keep the former. The technology for online trading, while still not perfect, is much more stable and robust.

But the bottom line has not changed. Most new traders do not last long and are shown the door quickly. It is the purpose of this fourth edition of Getting Started in Currency Trading to assist you, dear reader, in not being one of those statistics. To that end, I have organized the material to be more of a step-by-step introduction, easing you in to the biggest game in town, slowly but surely. I have also included more material on my own trading approach, the Goodman Method. It is a holistic approach that incorporates a simple-to-learn method—Goodman Wave Theory—with built-in money management and procedural guidelines.

This edition includes a chapter on managed FOREX for those who like the idea of participating in the currency markets but who do not wish to do the trading themselves.

How This Book Is Organized

There are six main parts to this book:

1. Part 1—The Foreign Exchange Markets The World of FOREX, A Brief History of Currency Trading, Five FOREX Markets, Regulation: Past, Present, and Future I open the book with a brief overview of the FOREX markets, an event-by-event-based historical overview of currency trading, and the five primary methods for participating in the currency markets as a retail trader. I hope to dispel any myths the reader has about FOREX while encouraging a slow approach to learning and a healthy skepticism of the get-rich-quick fallacy. Currencies may be traded in five different forms although spot trading predominates. Retail FOREX regulations are playing catch-up after years of benign neglect.

2. Part 2—Getting Started The Language of FOREX, FOREX by the Numbers, A Guide to Trading Platforms, Selecting a FOREX Broker, How to Open a FOREX Account, Making the Trade Every major industry has its own gamut of highly specialized terms or jargon, and currency trading is no exception. You must thoroughly comprehend this jargon before attempting to initiate any trades. With a little familiarization, the language of currency trading will become second nature. I review the major trading platforms and assist the new trader in selecting a reputable online currency dealer. The steps to open an account—beginning with a demo account—are explained and the problems to be avoided noted. The actual step-by-step processes of initiating and liquidating a trade are examined in detail with a complete explanation of each order type. The new trader can at this point open an account and at least become familiar with the day-to-day operations of a broker, the intricacies of a trading platform, and the fascinating movement of currency prices. This section must be understood before the reader proceeds to the later sections and commences actual trading.

3. Part 3—The Trader’s Arsenal The FOREX Marketplace, technical Analysis, News Trading Historically, there have been two major schools of thought in analyzing markets, whether they are stocks, commodity futures, or currencies: fundamental analysis and technical analysis. Most traders—especially at the retail level—use technical analysis: the study of the actual price movements as depicted by charts and indicators. While an understanding of fundamentals—unemployment statistics and banking policy, for example—is useful, it is difficult to apply in the hurly-burly of everyday trading. More critical is how the market reacts to such information. Each currency has a multitude of standing news reports that often sharply affect the price of currency pairs. Understanding these reports and how to make them work for you instead of against you is where the fundamental rubber hits the FOREX road. The popularity of currency trading has spawned a very large third-party industry and a wealth of trading products and services. A full chapter is devoted to those offerings.

4. Part 4—Winning Is the Name of the Game Trading Spaces, Setting Up Shop, A Simple System Understanding trading as a process instead of an activity is critical to success. I have mentored students in FOREX for over a decade and where they most often fail is in not having a coherent plan to approach trading. You can trade currencies at many levels. Where you fit in depends a lot on your schedule—how much time you can devote to trading and your individual preferences and propensities. Guerillas are very short-term traders, often using charts with five-minute bars. Scalpers may have a slightly longer perspective and trade 15-minute bars. Day traders typically use one-hour bars, and position traders use one-day charts. Deciding early in your career where you fit is important. Mixing profiles is a mistake many new traders make. Part of getting the process right is being well organized. Because the markets run 24 × 7, except for weekends, you need to be able to keep track of what has occurred while you were away. A variety of forms are provided to help you set up shop the right way and be fully prepared for battle from the outset. It will take some time before you know what trading methods and tools you will want to use. To get you into the swing of things while you study and learn, I offer a simple system that allows you to at least trade and learn at the demo account level. It will also give you a foundation as you study the vast array of available methods for trading FOREX.

5. Part 5—The Goodman Method of Trading Goodman Wave Theory, The Propagation Trade Setup, The Dagger, the Waltz, and the Line, The Proactive Trader, A 30-Trade Campaign Program, Goodmanisms Charles B. Goodman was a commodities trader who mentored me in my formative trading years. He had his own approach to trading, which incorporated a method—Goodman Wave Theory, a money management scheme—the Dagger, the Waltz, and the Line, and a wonderful approach to the issue of process in trading. While I have written some very complex computer trading systems using artificial intelligence and nonlinear models, I have yet to find a method better than Goodman Wave Theory. The trader can put it to work quickly yet drill very deep as he progresses. I detail in this section the method, the money management scheme, and his process teachings. You may or may not decide to use his method. But his money management and process, tracking, and organizational ideas are universal and may be applied no matter what specific method you may ultimately use to trade FOREX. Mr. Goodman’s general advice to all traders is offered in Goodmanisms, brief comments, analogies, metaphors, and pointed statements he made to emphasize the holistic nature of trading in general and his methods in particular.

6. Part 6—Over the FOREX Rainbow Tools for Traders, Options and Exotics, Managed FOREX, Computer Trading No matter how successful a trader you become, there is always room for improvement! The variety of techniques traders use is legendary. Here I hope to pique your interest in some I have found of value and others my students have been successful using. You are encouraged to explore for more. Currency options are now becoming a serious contender to the most popular FOREX venue, spot trading. Exotics are currency pairs with a member from a small country such as Turkey or Poland. They can be riskier than the major pairs such as EURUSD, but also quite lucrative for the astute participant. After dabbling in FOREX, some traders decide they appreciate the value of currency trading but do not have either the time or desire to do it on their own. Hiring a professional money manager may appeal to them. There are a number of venues within this space and, like trading itself, a right and wrong way to approach it and participate in it. Computers and FOREX trading are like bacon and eggs, a natural match. Beyond placing orders and following the markets online, there are multiple avenues to computer trading. Some traders use a fully automated strategy; others develop their own methods and tools to assist their trading. Looking in to the future, there are a number of developments, which all FOREX participants should at least be aware.

7. Appendixes Reference information, including currency symbols, information on trading times and zones, and pointers to additional FOREX resources is included in the appendixes. A comprehensive glossary of terms completes Getting Started in Currency Trading. The author’s attempt has been to make this book an all-in-one introduction as well as a handy computer-side reference guide for day-to-day trading operations. Alas, only you, dear reader, may judge the level of my success.

You Are Here

Throughout the book you will see bolded paragraphs beginning with the phrase YOU ARE HERE. The purpose of these is to serve as a check on your work and your progress, noting where in the steps toward FOREX mastery you should be at that time.

Key ideas are emphasized and useful supplemental information is provided along the way as Tips.

Website

This edition of Getting Started in Currency Trading offers a Getting Started companion area on the author’s website, www.goodmanworks.com.

You can find many of the tables and forms in this book in downloadable format in Documents. You may customize them to your own needs and either print or work with them in MS Word or MS Excel.

All charts in this book will also be found in the Documents subsection of Getting Started. They are provided in .jpg format so you may manipulate them and study them in close detail.

A What’s New section keeps readers up to date on the ever-changing retail FOREX landscape. The Getting Started Blog offers additional learning ideas from the author and provides an informal question-and-answer forum.

I am always happy to hear from readers with comments, suggestions or constructive criticism. If something is unclear or you wish to dig deeper, do not hesitate to e-mail me. If I am occupied it may take a few days to respond—but you will hear back from me.

Disclaimer

Neither the publisher nor the author is liable for any financial losses incurred while trading currencies. FOREX is the ultimate caveat emptor enterprise.

Michael Duane Archer Steamboat Springs, Colorado January 30, 2012

Part 1

The Foreign Exchange Markets

Chapter 1

The World of FOREX

Introduction—What Is FOREX?

YOU ARE HERE—Before you can test the waters with a demo account, learning basic information about the FOREX markets is essential. Part 1 will accomplish this task with discussions of history, terminology, and regulations.

Foreign exchange is the simultaneous buying of one currency and selling of another. Currencies are traded through a broker or dealer and are executed in currency pairs, for example, the European Euro and the U.S. Dollar (EUR/USD) or the British Pound and the Japanese Yen (GBP/JPY). If you buy the GBP/JPY, you are long the GBP and short the JPY; if you sell the GBP/JPY, you are short the GBP and long the JPY. An account is typically funded with the currency of your resident country. A few FOREX brokers offer the option of funding with a non-local currency.