Forex Trading Secrets: Trading Strategies for the Trading...FOREX TRADING SECRETS TRADING STRATEGIES...

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Transcript of Forex Trading Secrets: Trading Strategies for the Trading...FOREX TRADING SECRETS TRADING STRATEGIES...

Forex Trading Secrets: Trading Strategies for the Forex MarketJAMES DICKS
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To be successful you have to have a mentor. Someone who can inspire you, someone that will listen to you, someone that will give you sound advice whether you want to hear it or not. If you don’t have a mentor, that some- one to help you get to the top, then keep looking. For me it’s My Uncle Jack. I know there were many times that he felt I was not listening but I always was. Thanks for everything you do, this book is dedicated you.
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Contents
Part 1 The Basics 1
1 What You Must Know to Get Started 3 Back to the Basics: A History of the FOREX 3 FOREX versus Stocks 7 FOREX versus Futures 9
2 Major Currencies and Pairs 11 The U.S. Dollar 11 The Euro 12 The Australian Dollar 12 The Canadian Dollar 13 The British Pound 13 The Swiss Franc 14 The Japanese Yen 14 The New Zealand Dollar 15 The Dollar Index 15 The Dow Jones Industrial Average (DJIA) 16 Gold CFDs 16 Crude Oil 17 Cross-Rate Currency Pairs 17 Exotic Currency Pairs 18 Chinese Yuan or Renminbi 18 Swedish Krona 18 Norwegian Krone 19 The Iraqi Dinar 19
3 Anyone Can Learn the FOREX 21 FOREX 101 21 Opening a Position 21 Trading on Margin 23 Managing a Position 23 Closing a Position 24 Pips and Lots 24 The Lot 27 Order Types 27 Where Is the Market Going? 29 Stops and Targets 32 Spreads and Swaps 33 Technical versus Fundamental 34
4 Preparing Yourself Adequately before Jumping into the Market 37
FOREX Trading Accounts 37 Choosing a Broker 38 Tools 47 Who Trades the FOREX? 49 What Kind of Trader Am I? 50 Trading Techniques 51 The Trader’s Levels of Ascension 55
Part 2 Money Management 59
5 The Secret to Making Money 61 Are You Really Fit to Trade in the FOREX Market? 61 Trading Plans 62 Rules and Discipline 67 How the Market Works 73 Rules for Working with the Market 74 Paper Trading 77
6 How to Keep Your Profits 81 Money Management 81 Managing Risk 86 Leverage and True Leverage 87 Overtrading and Overconfidence 89 Overleveraging 91 Trade Expectations 92
vi CONTENTS
Part 3 Trading Psychology 93
7 Mastering Emotions 95 Trading Psychology 95 Emotions of Trading 99 How to Get Out of a Bad Trade 105 Become a Pro 110
8 Mind over Matter for Huge Profits 113 Affirmations 113 Power of Networking 117
Part 4 Fundamental Analysis 121
9 Economics 123 What Does Economic Release Mean? 123 Fundamental Analysis 123 Dow Theory 125 Fundamental Indicators 127 Japan’s Monetary Policy 137 FOREX Currency Carry Trade 139 Interventions 140 Gross Domestic Product (GDP) 142 Trading the News 143 What Are Contrarian Indicators? 145
Part 5 Technical Analysis 147
10 Technical Indicators 149 Technical Analysis 149 Types of Charts Showing Price Action 150 Trend Indicators 162 Market and Volatility Indicators 168 Understanding Oscillators 173 A Unique Indicator: Ichimoku Kinko Hyo 176 Divergences 177
11 Technical Patterns 181 Candlesticks 181 Chartism Patterns 185 Reversal Patterns 186 Continuation Patterns 192
CONTENTS vii
Elliott Waves 203 Harmonic Price Patterns 208 Fractals 214 Trading Naked (Only Price Action) 215
12 Support and Resistance 217 Support 217 Resistance 218 Trendlines 219 Moving Averages 219 Other Indicators 220 Entering Positions 221 Exiting Positions 222 Pivot Points: Do They Work? 222 Psychological Levels 226 Using Multiple Time Frames 228 Trend Is Your Friend 231
13 Automated Trading 233 Expert Advisors and Automatic Programming
Interfaces (APIs) 233 Advanced Robots: Neural Networks in the FOREX 235
Part 6 Building Your Portfolio 239
14 Secrets to FOREX Diversification 241 FOREX Options 241 Spot FOREX Options 246 FOREX Futures 247 FOREX Exchange-Traded Funds (ETFs) 248 Contracts for Difference (CFDs) 249 Commodities 250 Indices (Securities) 251
15 My Favorite Ways to Trade 253 Breakouts 253 Channeling 258 Hedging 261 Basic Oscillator-Based Strategy 262 Basic Moving-Average Crosses 263 Trading Gaps 264 Daily High-Low 265
viii CONTENTS
CONCLUSION 269
APPENDIX 273
GLOSSARY 289
BIBLIOGRAPHY 299
INDEX 301
CONTENTS ix
Preface
There are many books on the market that cover the subject of FOREX trad- ing. But I believe that until now, there has never been a book on this unique topic that has so vividly described the subject of the FOREX—a universe completely of its own. The FOREX market is an anonymous entity that bears many faces, and each individual who participates in it leaves a foot- print that just might change the course of their personal circumstances based on their individual hopes and dreams for success.
This book was written with several purposes in mind. First of all, this book is designed to inform and educate the potential FOREX trader about a field that is growing exponentially around the world and is reaching mil- lions of individuals from all walks of life. It is a market that was reserved for a select few just a decade ago but now is in the hands of anyone, even those without a formal financial education. For this reason, it is very important to include a qualified point of view from a real trader’s perspec- tive, a trader who has already traveled through all the steps and experienced numerous pitfalls but now wants to share this information with you to help you avoid or, at the very least, minimize any potential negative impact through education and solid money management techniques.
This book also is intended to provide an overview of all the fundamen- tals involved in the FOREX and of the trading process so that any new trader can easily obtain all the tools needed to ensure a quick start. It is also aimed at the intermediate trader who has already started the process but could use some guidance and additional tools, with an emphasis on the importance of a solid money management program and the right mind-set to develop a successful trading career.
Written from the insider’s perspective of an experienced FOREX trader who has gone through every step until reaching a stable and consistent success, this book is focused on pointing out the potential hazards that every trader will encounter at some point. In the beginning, it will offer
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solutions to help you understand how to mitigate many of the risks involved by centering on dedicated attention to the preliminary preparation, educa- tion, and training needed to become a true professional in this field.
The overview includes a history of the FOREX and its basics, as well as a thorough description of all the fundamental, technical, and psycholog- ical aspects and how they merge and interact in the market’s behavior.
Finally, some of the preferred trading systems are described in detail and discussed as additional elements to help you practice and build your trading toolbox.
I hope that you will enjoy this book and its concepts. May it bring you a step closer to becoming a consistent winner and an educated and confi- dent FOREX trader.
xii PREFACE
xiii
Acknowledgments
As you so often read on the acknowledgments page, the author takes a few brief lines to say thanks. A page of appreciation is in nearly every book and this one is no different; primarily because a project like this is just impos- sible to successfully complete without the combined effort of an entire team. For me I must give thanks first.
I can do everything through Him who gives me strength. — Philippians 4:13
We cannot do it on our own. It is the strength that comes through Jesus Christ that allows us to master the difficult situations of life and to succeed where all human wisdom sees only failure.
I was reading through my first book’s acknowledgments (FOREX Made Easy:Six Ways to Trade the Dollar) and noticed that some of my same team is still with me and assisted on this project, so thanks to all. I also noticed that my family is now even bigger; I would not have been able to complete this book if it were not for my absolute significant other, my beautiful wife of more than 10 years. Thanks, Deb, for all the trust and con- fidence you gave me each and every day. In my last book, I was able to get my son James’ name in the book, so I better add my daughter Jacqueline to this one; I love you both dearly.
I, of course, will simply not be able to thank everyone individually for their help, but for the handful of constant contributors I will try.
When working to get a book such as this completed it takes lots of reading by lots of people. Jack Lott has been there every step of the way. Thanks Jack for being such a great friend and team member. I know you have read through this book a few hundred times and everyone reading it will appreciate your effort, as I do. I am already looking forward to the next
project. Michael Thomas has done his fair share of reading of this book and his specific attention to the FOREX strategies will have the reader’s appre- ciation and understanding. Thanks for all your help and friendship. I would like to give a special thanks to Caroline for her help in getting this project moving and off the ground.
Finally and certainly not least, thanks to my publisher McGraw-Hill and the entire team for their dedication of getting this book to you.
xiv ACKNOWLEDGMENTS
Disclaimer
The information in this book is for educational purposes only. I am not giv- ing advice or specific financial recommendations. You must seek guidance from your personal advisors before acting on this information. Trading can result in losses. I accept no responsibility for any losses you may incur. Do not invest more than you can afford to lose.
NFA- AND CFTC-REQUIRED DISCLAIMERS
Trading in the Foreign Exchange (FOREX) market is a challenging oppor- tunity where above-average returns are available for educated and experi- enced investors who are willing to take above-average risk. However, before deciding to participate in FOREX trading, you should carefully consider your investment objectives, level of experience, and risk appetite. Do not invest money you cannot afford to lose.
FOREX futures and options trading have large potential rewards but also large potential risk. You must be aware of the individual risks and be willing to accept them to invest in FOREX futures and options markets. Don’t trade with money you can’t afford to lose. This book is neither a solic- itation nor an offer to buy/sell FOREX futures or options. No representation is being made that any account will or is likely to achieve profits or losses similar to those discussed in this book. The past performance of any trading system or methodology is not necessarily indicative of future results.
There is considerable exposure to risk in any foreign exchange transac- tion. Any transaction involving currencies involves risks, including, but not limited to, the potential for changing political and/or economic conditions that may substantially affect the price or liquidity of a currency.
Moreover, the leveraged nature of foreign exchange 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. The
xv
possibility exists that you could sustain a total loss of your initial margin funds and be required to deposit additional funds to maintain your position. If you fail to meet any margin call within the time prescribed, your position will be liquidated, and you will be responsible for any resulting losses. Investors may lower their exposure to risk by employing risk-reducing strategies such as stop-loss and limit orders.
CFTC RULE 4.41
Hypothetical or simulated performance results have certain limitations. Unlike an actual performance record, simulated results do not represent actual trading. Also, since the trades have not been executed, the results may have under- or overcompensated for the impact, if any, of certain mar- ket factors, such as lack of liquidity. Simulated trading programs in general are also subject to the fact that they are designed with the benefit of hind- sight. No representation is being made that any account will or is likely to achieve profit or losses similar to those shown.
xvi DISCLAIMER
Introduction
What is FOREX? FOREX (also known as FX) is the contracted name of FOReign EXchange, an international trading market where banks, busi- nesses, and public and private investors of all the countries in the world can obtain and exchange their respective currencies so as to perform commer- cial transactions or simply speculate. This market functions in a different way from the stock market; the stock exchange has a fixed daily schedule for opening and closing, whereas the FOREX is open 24 hours a day, five days a week nonstop. FOREX activities start on Sunday afternoon at 5 p.m. Eastern Time (ET) and close on Friday at 4 p.m. ET. This continuous activ- ity is possible because there are always open markets around the world, and today there is no need for the traders to be physically present at the exchange location because the funds can be traded electronically from any country.
The main markets involved in the FOREX are New Zealand, Sydney, Tokyo, China, Frankfurt, London, Zurich, and New York. The FOREX market is the largest in the world, where more than $3.2 trillion is being transacted every day (traditional daily turnover was reported to be over US $3.2 trillion in April 2007 by the Bank for International Settlements. Source: Triennial Central Bank Survey, BIS, December 2007), which is many times larger than the combined volume of all U.S. equities and futures markets, and thus the FOREX is also the market that possesses the greatest liquidity. Late in 2008, with all the uncertainty in the equities mar- kets, the FOREX daily turnover surpassed US $6.5 trillion in a day. This market will continue to attract more and more investors.
Currency trading used to be an exclusive activity reserved to govern- ment central banks and commercial and investment banks. In recent years, the market has opened up and become available to smaller investors and speculators, thanks to computers and the Internet.
There is a broad electronic network that allows central banks from all over the world to share their quotes and actual currency rates. This is known
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as the Interbank. In this way, central banks are able to exchange and convert their currencies one into another in real time. The currencies that are traded most commonly are the U.S. dollar, the Japanese yen, the euro, the British pound, the Swiss franc, the Canadian dollar, and the Australian dollar. The Interbank’s activity being continuous, and thanks to decentral- ization from any physical location or exchange, access to real quotes and the speed at which transactions can be performed are greatly increased.
When you are transacting on the FOREX market, you are simultane- ously buying one currency and selling another. Currencies are always traded in pairs, for example, pound sterling/U.S. dollar (GBP/USD) or U.S. dollar/Canadian dollar (USD/CAD).
You would be executing a trade when there is an expectation that the currency you are buying increases in respect to the one you are selling. If the value of the currency you have bought effectively increases, you then would sell the position and take a profit. Currency pairs are composed of a base currency, which is the first on the quote, and a counter currency (also called the quote or payment currency), which appears as second on the quote. When the U.S. dollar is the base currency, quotes are given in $1 USD per counter currency, for example USD/CAD or USD/JPY.
The role of the FOREX in the world economy is very important because there is always an increasing need of currency exchange owing to the development of technology, communications, and general international commerce. Countries need the FOREX market to be able to sell their prod- ucts to other…