FOREX simplified Behind the Scenes of Currency Trading MaRilyn MCDOnalD FOREX simplified Behind the Scenes of Currency Trading Even a thousand-mile journey begins with a first step. I would like to thank my extremely supportive partner and husband, Patrick Nouvion, without him, this book would never have been written. I would also like to thank my parents for raising me to believe I can be or do whatever I like; my angelic son for understanding all the times mom was working and unable to check out his latest video game level; Todd Crosland for believing in me and giving me the opportunity to grow; and count- less others for helping me along my path. Table of Contents xi Preface xiii Introduction 1 Chapter One: Why Choose Forex? 7 Chapter Two: What You Need to Know About Forex Trading 7 Swap – What Is It and Why Does it Matter? 8 Be Aware of Fraudulent Schemes 13 Chapter Three: The Majors 13 The U.S. Dollar 15 The Euro 16 The Japanese Yen 17 The Swiss Franc 19 Chapter Four: Fundamen- tal vs Technical Analysis 20 Fundamental Analysis 24 Technical Analysis: A Beginners Guide 33 Chapter Five: Making or Breaking News 36 So, You Want to Trade the News 37 What Exactly Happens To The Market? 38 The Players 40 So, You Still Want To Trade The News? 42 Now, More News! 43 The Final Headline 45 Chapter Six: Automated Trading 46 What is Automated Trading? 46 Why Use Automated Trading? 48 How To Write an Expert Advisor 49 How To Test the Expert Advisor 51 Chapter Seven: Mentally Preparing to Trade 53 Be Sure to Check Your Emo- tions at the Door 54 What About Using a Managed Account? 56 Final Warning, Forex is Not for Everyone 59 Chapter Eight: Make Your Plan 60 Elements to Consider 60 Essentials of a Trading Plan 62 How Much Should You Trade? 64 What Are The Most Active Times To Trade? 64 What Pairs Should You Trade? 66 How Do I Choose Take-Profit and Stop-Losses? 68 How Far Back Do You Look? 69 What Time Frames Should You be Looking At? 69 What Should My Daily Goal Be In Profit or Losses? 70 Being Out of the Market Can Be a Good Move 71 How Long Should You Use a Demo Account Before You Go Live? 72 How is a Demo Different Than a Live Account? 72 Check the Crosses and Relative Pairs 76 Getting Stopped Out on a Chart 77 Trading Like a Girl 79 Conclusion 81 Appendix A: Common Indicators Defined 81 Bollinger Bands 82 Standard Deviation 83 Moving Average Convergence/ Divergence (MACD) 83 Parabolic SAR 84 Double Exponential Moving Average (DEMA) 85 Triple Exponential Moving Average (TEMA) 85 Momentum 86 Commodity Channel Index 87 Relative Strength Index (RSI) 88 Stochastic Oscillator 89 Fibonacci Line Studies 91 Appendix B: Finding Pat- terns in Your Charts 95 Appendix C: More About News: The Business Cycle 97 Candlestick Patterns 109 Appendix D: More News to Trade 109 The Business Cycle 108 Gross Domestic Product GDP 109 Indices of Leading, Lagging and Coincident Indicators 111 The Employment Situation 112 Industrial Production and Capacity Utilization 114 Institute for Supply Manage- ment Indices 115 Manufacturers’ Shipments, Inventories, and Orders 116 Manufacturing and Trade Inventories and Sales 117 New Residential Construction 117 The Conference Board’s Consumer Confidence and University of Michigan Consumer Sentiment Indices 118 Advance Monthly Sales for Retail Trade and Food Services 119 Personal Income and Outlays 120 Consumer and Producer Price Indices 123 Glossary 131 About the Author xi PREFACE Let me introduce myself. My name is Marilyn and I am a currency trader. Not only am I a trader, but I have been working in the trading industry for a number of years. I am a Series 3 Licensed Futures Broker, currently working for a Forex brokerage, and I have also spent a number of years working for a company that produces and sells technical analysis soft- ware. The point of this is not to impress you, not at all. The point is that I have been exposed to the theories and heard the sales pitches; heck, I have even given some of them (not proud of that, by the way). I have also seen what and who lies behind some of those theories and pitches. I like to equate my experience to the city of Las Vegas. It is shiny and beautiful, and everything sparkles. However, give it a little time and you start to notice the cracks in the façade. You notice that the sequins may be a little cheap and tattered, and everything isn’t really as it seems. In reality, the entire place is set up to do one thing—take your money. Don’t get me wrong, the buildings are beautiful; but, if you just look at the outside, you can get the wrong picture if you are not careful. The best example of this is the predominant myth that trading is easy. So many people get into the trading game, and specifically the Forex market, because they think it is easy. They believe that this will be the way they can make their fortune and retire. I am sure you have heard the claims of ordinary people who have made their fortune in mere weeks or months. How about losses? In fact, the Wall Street Journal recently xii Forex Simplified quoted the CEO of a leading Forex brokerage as saying, “If 15% of the Forex traders were successful, I would be surprised.” The reality is that trading, especially Forex, takes discipline. It takes a certain level of commitment and it involves risk. Lots of risk. The reason I wrote this book is not to frighten you away from the cur- rency trading realm. It is simply to give you a behind the scenes look at what happens here. I want to tell you what other people don’t. I am not going to sell you my fabulous system. I will not tell you what and when to trade. If this is what you are after, then please put this book down and pick up another. There are plenty of others who will sell you what you want to hear. When you are sick of the gloss and sales pitches, then come back and take a walk with me, behind the scenes in the cur- rency market. xiii Introduction If I held a mirror to the individual investors in the current foreign ex- change trading market, the reflection would be a growing gamut of Forex traders with diverse demographics. This is because the Forex market is the largest financial market in the world with over $1.9 trillion in for- eign currencies changing hands every day. Considering this depth and breadth, you might expect the Forex trader population to be a melting pot of people from a variety of backgrounds. Here in the United States, this lucrative market was traditionally reserved for the large banks and the big boys. Individual U. S. citizens were not able to trade foreign currencies before 1999; but, with the change in fed- eral law and regulation by the Commodities Futures Trading Commis- sion (CFTC) in 2000, all of this began to change. U.S. traders have discovered what Asian and European traders have known for a long time—the average person can do well trading Forex. Forex is entering more and more home offices, small independent mon- ey management firms and the lives of men and women every day. In fact, currency trading by individuals in the United States is growing by about 50 percent per year. Widespread availability of high-speed Internet access is another fac- tor that has leveled the playing field between the establishment and the small traders. Today, it is easy to download and install a trading platform that provides access to real-time currency prices, a demo or test account xiv Forex Simplified to begin and train with, and charting and technical analysis assistance. This means that traders from varied walks of life can participate. And it doesn’t require a small fortune to get started. In fact, you can find every- thing you need for free on the Internet. My friend and fellow trader, Ed Ponsi, who is also president of FX Edu- cator, says Forex trading is for “anyone and everyone.” Ed, who is also a money manager and consultant, continues, “Trading is so democratic now. Anyone can learn how to trade with the opportunities that are available today. There is so much money out there now, with the huge influx of capital into hedge funds, that anyone with a good track record and the right mental attitude can get a piece of the action.” It is with that brand of encouragement from Forex advocates like Ed Ponsi that even novice traders are diversifying their portfolios by enter- ing the Forex market. Male and female, single or married, work-at-home moms, 43-year-old males with over 20 years of trading experience, they are all taking the initiative to trade Forex. The firm I work for, Interbank FX, is seeing men and women, old and young, from all over the world become Forex traders. We have customers in over 135 countries and are opening over 40,000 demo accounts every month. All of our business is done over the Internet; and, on the Internet no one knows that you are not a member of the old guard. Some of our customers are women who supplement their household in- come by making small trades a few hours a week. I also know of college students and recent graduates who have jumped into Forex because it offered them an opportunity to expand their already independent, tech- nology savvy lifestyle with a small, startup fund. “I think today’s trader is a tech-savvy, independent thinker, the kind of person who takes the initiative,” says Ponsi. “Traders have always been an independent breed, with little patience for the constrictions of the nine- to-five job. Today’s technology gives them the means to raise the level of their knowledge as high as they desire, without limits.”