Brian DolanFOREX.com

Learn to:• Grasp currency quotes

• Capitalize on the foreign exchange market

• Manage risk and reward

• Use the forces that drive currency movements

• Identify key traits of individual currency pairs

Currency Trading

2nd EditionMaking Everything Easier!™

Open the book and find:

• Currency trading conventions and tools

• Key characteristics of successful traders

• Trading pitfalls to avoid and risk management rules to live by

• How major currencies typically trade

• Why it’s important to be organized and prepared

• The 411 on buying and selling simultaneously

• Tips for understanding rollovers and interest rates

Brian Dolan has worked for more than 20 years in the forex market as a

currency trader and analyst. As the Chief Currency Strategist at FOREX.com,

Brian oversees fundamental and technical analysis and is a frequent resource

for the financial media on currency developments.

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ISBN 978-1-118-01851-4

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Your plain-Englishguide to currency tradingForex markets can be one of the fastest and most volatile financial markets to trade. Money can be lost or made in a matter of seconds, and forex markets are always moving. So how do you keep up? This hands-on, friendly guide shows you how the forex market really works, what moves it, and how you can actively trade in it — without losing your head!

• All the world’s a stage — get an easy-to-follow introduction to the global forex market and understand its size, scope, and players

• Show me the money — take a look at the major fundamental and economic drivers that influence currency values and get the know-how to interpret data and events like a pro

• Prepare for battle — discover different types of trading styles and make a concrete strategy and game plan before you act on anything

• Pull the trigger — establish a position in the market, manage the trade while it’s open, and close out on the most advantageous terms

Currency Trading

Dolan

2nd Edition

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Currency Trading

FOR

DUMmIES‰

2ND EDITION

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01_9781118018514-ffirs.indd ii01_9781118018514-ffirs.indd ii 5/31/11 3:11 PM5/31/11 3:11 PM

by Brian Dolan

Currency Trading

FOR

DUMmIES‰

2ND EDITION

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Currency Trading For Dummies,® 2nd Edition

Published byWiley Publishing, Inc.111 River St.Hoboken, NJ 07030-5774www.wiley.com

Copyright © 2011 by Wiley Publishing, Inc., Indianapolis, Indiana

Published by Wiley Publishing, Inc., Indianapolis, Indiana

Published simultaneously in Canada

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About the AuthorBrian Dolan is the chief currency strategist at GAIN Capital Group, and a 20-plus year veteran of the interbank currency market. Brian provides research and market analysis to trading clients of GAIN Capital and FOREX.com, the retail division of GAIN Capital Group.

Brian analyzes the G10 currency markets with a blend of fundamental and technical analysis to provide actionable trading strategies.

A frequent commentator on currency-market developments and outlooks for major news media including the Wall Street Journal, Reuters, Bloomberg, Dow Jones, CNN Money, and MarketWatch.com, Brian has also appeared regularly as a currency analyst on fi nancial TV networks CNBC, Bloomberg Television, Fox Business News and BNN in Canada.

In addition, he has written numerous articles on currency trading, risk man-agement, and technical analysis for trading and investment journals such as Currency Trader, Active Trader, SFO Magazine, Technical Analysis of Stocks & Commodities, and Futures.

Prior to joining GAIN Capital, Brian was a vice president at Bank Julius Bär, where he advised hedge funds and high-net-worth individuals on curren-cies. He spent the fi rst 12 years of his FX career trading major currency pairs in the interbank market in New York at some of the world’s largest banks, including Credit Suisse, Dai-Ichi Kangyo Bank, and American Express Bank, as well as two years in Bermuda as a proprietary trader at Butterfi eld Bank. Brian is a graduate of Dartmouth College.

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DedicationTo Brigid, for her love and for hanging in there through the ups and downs; and to Frank and Catherine, for inspiring me to create a work for the future, just as you are. In memoriam to my mother Peg, father Chuck, and sadly missed brother Tim, who taught me that life is not a dress rehearsal.

AcknowledgmentsMy efforts to translate a career’s worth of currency trading experience into a book would be extremely thin were it not for the many lessons I garnered from colleagues in the market over the years. Readers of this book will ben-efi t from the experience I’ve gained from many of you. Thanks to Mark Galant, for founding GAIN Capital and offering me the opportunity to write this book. To the trading team at GAIN: Tim O’Sullivan, Anthony Piccolo, Paul Spirgel, Rob Voorhees, Mike Goret, Damon Gallo, and Alan Viola — it’s an honor and pleasure to work with some of the best in the business. To Glenn Stevens and Samantha Roady, for setting the whole process in motion and encouraging me to go the full distance. To Christa Conte and Henry Feintuch of Feintuch Communications, for getting the word out to the media and then some. To my research team for picking up the slack while I wrote: Eric Viloria, CMT; Chris Tevere, CMT; Kathleen Brooks; and Dan Hwang. To Susan Hobbs for her fi ne editing assistance that made me get to the point, clearly. To McLean D. Giles for his technical review. And to the editors and staff at Wiley Publishing, especially Stacy Kennedy, for organizing the book in the fi rst place.

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Publisher’s Acknowledgments

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Contents at a GlanceIntroduction ................................................................ 1

Part I: Trading the World’s Largest Financial Market...... 7Chapter 1: Currency Trading 101 ..................................................................................... 9Chapter 2: What Is the Forex Market? ........................................................................... 19Chapter 3: Who Trades Currencies? Meet the Players ............................................... 35Chapter 4: The Mechanics of Currency Trading .......................................................... 49

Part II: Driving Forces behind Currencies ..................... 75Chapter 5: Looking at the Big Picture ........................................................................... 77Chapter 6: Understanding and Applying Market News and Information ................ 101Chapter 7: Getting Down and Dirty with Fundamental Data .................................... 117Chapter 8: Getting to Know the Major Currency Pairs ............................................. 141Chapter 9: Minor Currency Pairs and Cross-Currency Trading............................... 165

Part III: Developing a Trading Plan ........................... 181Chapter 10: Training and Preparing for Battle ........................................................... 183Chapter 11: Cutting the Fog with Technical Analysis ............................................... 201Chapter 12: Identifying Trade Opportunities ............................................................. 231Chapter 13: Risk-Management Considerations .......................................................... 251

Part IV: Executing a Plan ......................................... 269Chapter 14: Pulling the Trigger .................................................................................... 271Chapter 15: Managing the Trade .................................................................................. 285Chapter 16: Closing the Position and Evaluating Your Results ............................... 297

Part V: The Part of Tens ........................................... 307Chapter 17: Ten Habits of Successful Currency Traders .......................................... 309Chapter 18: Ten Beginner Trading Mistakes .............................................................. 315Chapter 19: Ten Rules of Risk Management ............................................................... 319Chapter 20: Ten Great Resources ................................................................................ 323

Index ...................................................................... 327

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Table of Contents

Introduction ................................................................. 1About This Book .............................................................................................. 2Conventions Used in This Book ..................................................................... 2What You’re Not to Read ................................................................................ 3Foolish Assumptions ....................................................................................... 3How This Book is Organized .......................................................................... 4

Part I: Trading the World’s Largest Financial Market ....................... 4Part II: Driving Forces behind Currencies........................................... 5Part III: Developing a Trading Plan ...................................................... 5Part IV: Executing a Plan ....................................................................... 5Part V: The Part of Tens ........................................................................ 5

Icons Used in This Book ................................................................................. 6Where to Go from Here ................................................................................... 6

Part I: Trading the World’s Largest Financial Market ...... 7

Chapter 1: Currency Trading 101 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9

Defi ning Currency Trading ............................................................................. 9Speculating as an enterprise .............................................................. 10Currencies as the trading vehicle ...................................................... 11

Information Affects Currency Rates ............................................................ 12Fundamentals drive the currency market ........................................ 12Unless the technicals are driving the currency market .................. 13Or it may be something completely different .................................. 14

Developing a Trading Plan ........................................................................... 14Finding your trading style ................................................................... 14Planning the trade................................................................................ 15

Executing the Trading Plan from Start to Finish ....................................... 16

Chapter 2: What Is the Forex Market? . . . . . . . . . . . . . . . . . . . . . . . . . . .19

Getting Inside the Numbers ......................................................................... 20Trading for spot ................................................................................... 20Speculating in the currency market .................................................. 21Getting liquid without getting soaked ............................................... 22

Around the World in a Trading Day ............................................................ 22The opening of the trading week ....................................................... 23Trading in the Asia-Pacifi c session .................................................... 24Trading in the European/London session ........................................ 25Trading in the North American session ............................................ 25Key daily times and events ................................................................. 27The U.S. dollar index ........................................................................... 28

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Currency Trading For Dummies, 2nd Edition xiiCurrencies and Other Financial Markets .................................................... 28

Risk on or risk off? ............................................................................... 29Gold ....................................................................................................... 30Oil ........................................................................................................... 30Stocks .................................................................................................... 31Bonds ..................................................................................................... 32

Getting Started with a Practice Account .................................................... 32

Chapter 3: Who Trades Currencies? Meet the Players . . . . . . . . . . . . .35

The Interbank Market Is “The Market” ....................................................... 35Getting inside the interbank market .................................................. 36Bank to bank and beyond ................................................................... 37

Hedgers and Financial Investors ................................................................. 38Hedging your bets ................................................................................ 39Global investment fl ows ...................................................................... 41

Speculators ..................................................................................................... 42Hedge funds .......................................................................................... 43Day traders, big and small .................................................................. 44

Governments and Central Banks ................................................................. 45Currency reserve management .......................................................... 45The Bank for International Settlements ............................................ 47The G-7 and the G-20 ........................................................................... 47

Chapter 4: The Mechanics of Currency Trading. . . . . . . . . . . . . . . . . . .49

Buying and Selling Simultaneously .............................................................. 49Currencies come in pairs .................................................................... 50The long and the short of it ................................................................ 54

Profi t and Loss ............................................................................................... 55Leverage amplifi es risk and reward................................................... 55Margin balances and liquidations ...................................................... 56Unrealized and realized profi t and loss ............................................ 56Calculating profi t and loss with pips ................................................. 57Factoring profi t and loss into margin calculations .......................... 58

Understanding Rollovers and Interest Rates ............................................. 59Currency is money, after all ............................................................... 59Value dates and trade settlement ...................................................... 60Market holidays and value dates ....................................................... 61Applying rollovers ............................................................................... 62

Understanding Currency Prices .................................................................. 63Bids and offers ..................................................................................... 64Spreads .................................................................................................. 64

Executing a Trade .......................................................................................... 65Trading online ...................................................................................... 65Orders ................................................................................................... 67

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xiii Table of Contents

Part II: Driving Forces behind Currencies ..................... 75

Chapter 5: Looking at the Big Picture. . . . . . . . . . . . . . . . . . . . . . . . . . . .77

Currencies and Interest Rates ...................................................................... 78The future is now: Interest rate expectations .................................. 79Relative interest rates ......................................................................... 79

Monetary Policy 101 ...................................................................................... 81Looking at benchmark interest rates ................................................ 81Easy money, tight money .................................................................... 82Unconventional easing ....................................................................... 83Watching the central bankers ............................................................ 84Interpreting monetary policy communications ............................... 86

Offi cial Currency Policies and Rhetoric ...................................................... 87Currency policy or currency stance? ................................................ 88Calling the shots on currencies ......................................................... 89Currency market intervention ............................................................ 91Financial stability ................................................................................. 94Debts, defi cits, and growth ................................................................. 94Gauging credit risk ............................................................................... 95

Geopolitical Risks and Events ...................................................................... 96Gauging risk sentiment ....................................................................... 98Risk on or risk off? ............................................................................... 98

Chapter 6: Understanding and Applying Market News and Information. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .101

Sourcing Market Information ..................................................................... 102The art of boarding a moving train.................................................. 102Taking the pulse of the market ........................................................ 103Rumors: Where there’s smoke, there’s fi re .................................... 105

Putting Market Information into Perspective: Focusing on Themes .... 105Driving fundamental themes ............................................................ 106Analyzing technical themes .............................................................. 110

Reality Check: Expectations versus Actual .............................................. 111The role of consensus expectations ................................................ 112Pricing in and pricing out forecasts ................................................ 113When good expectations go bad...................................................... 114Anticipating alternative outcome scenarios .................................. 114

Chapter 7: Getting Down and Dirty with Fundamental Data . . . . . . .117

Finding the Data ........................................................................................... 118Economics 101 for Currency Traders: Making

Sense of Economic Data .......................................................................... 119The labor market ............................................................................... 119The consumer .................................................................................... 120The business sector .......................................................................... 121The structural..................................................................................... 121

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Currency Trading For Dummies, 2nd Edition xivAssessing Economic Data Reports from a Trading Perspective ........... 122

Understanding and revising data history ....................................... 122Getting to the core ............................................................................. 123

Market-Moving Economic Data Reports from the United States ........... 124Labor-market reports ........................................................................ 124Consumer-level data reports ............................................................ 127Business-level data reports .............................................................. 130Structural data reports ..................................................................... 132

Major International Data Reports .............................................................. 135Eurozone ............................................................................................. 135Japan.................................................................................................... 136United Kingdom ................................................................................. 137Canada ................................................................................................. 137Australia .............................................................................................. 138New Zealand ....................................................................................... 138China .................................................................................................... 138

Chapter 8: Getting to Know the Major Currency Pairs . . . . . . . . . . . .141

The Big Dollar: EUR/USD ............................................................................. 142Trading fundamentals of EUR/USD .................................................. 142Trading behavior of EUR/USD .......................................................... 145Tactical trading considerations in EUR/USD .................................. 147

East Meets West: USD/JPY .......................................................................... 149Trading fundamentals of USD/JPY ................................................... 149Price action behavior of USD/JPY .................................................... 152Tactical trading considerations in USD/JPY ................................... 154

The Other Majors: Sterling and Swissy ..................................................... 156The British pound: GBP/USD ............................................................ 156Safe haven or panic button: USD/CHF ............................................. 158Price action behavior in GBP/USD and USD/CHF........................... 160Tactical trading considerations in GBP/USD and USD/CHF ......... 162

Chapter 9: Minor Currency Pairs and Cross-Currency Trading . . . . .165

Trading the Minor Pairs .............................................................................. 165Trading fundamentals of USD/CAD .................................................. 166Trading fundamentals of AUD/USD ................................................. 169Trading fundamentals of NZD/USD .................................................. 170Tactical trading considerations in USD/CAD,

AUD/USD, and NZD/USD ................................................................ 172Trading the Scandies: SEK, NOK, and DKK .............................................. 175

Swedish krona — “Stocky” ............................................................... 175Norwegian krone — “Nokkie” ........................................................... 175Danish krone — “Copey” .................................................................. 176

Cross-Currency Pairs .................................................................................. 176Why trade the crosses? ..................................................................... 177Stretching the legs ............................................................................. 178Trading the JPY crosses ................................................................... 179Trading the EUR crosses ................................................................... 180

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xv Table of Contents

Part III: Developing a Trading Plan ............................ 181

Chapter 10: Training and Preparing for Battle . . . . . . . . . . . . . . . . . . .183

Finding the Right Trading Style for You ................................................... 183Real-world and lifestyle considerations .......................................... 184Making time for market analysis ...................................................... 185Technical versus fundamental analysis .......................................... 185

Different Strokes for Different Folks .......................................................... 186Short-term, high-frequency day trading.......................................... 187Medium-term directional trading..................................................... 189Long-term macroeconomic trading ................................................. 191

Trading on Auto-Pilot .................................................................................. 194Potential inputs to drive an EA system ........................................... 195Caveat emptor on models ................................................................. 195

Developing Trading Discipline ................................................................... 196Taking the emotion out of trading ................................................... 197Managing your expectations ............................................................ 198Keeping your ammunition dry ......................................................... 199

Chapter 11: Cutting the Fog with Technical Analysis . . . . . . . . . . . . .201

The Philosophy of Technical Analysis ...................................................... 202What is technical analysis? ............................................................... 202What technical analysis is not ......................................................... 203Forms of technical analysis .............................................................. 203Finding support and resistance ....................................................... 204Waiting for confi rmation ................................................................... 206

The Art of Technical Analysis .................................................................... 207Bar charts and candlestick charts ................................................... 207Drawing trend lines ........................................................................... 209Recognizing chart formations .......................................................... 210Fibonacci retracements .................................................................... 219

The Science of Technical Analysis ............................................................ 221Momentum oscillators and studies ................................................. 222Trend-identifying indicators ............................................................. 225Trading with clouds — Ichimoku charts ........................................ 227

Chapter 12: Identifying Trade Opportunities . . . . . . . . . . . . . . . . . . . . .231

Developing a Routine for Market Analysis ............................................... 231Performing Multiple-Time-Frame Technical Analysis ............................. 232Identifying Support and Resistance Levels .............................................. 236

Trend lines .......................................................................................... 236Highs and lows ................................................................................... 238Congestion zones ............................................................................... 238Fibonacci Retracements.................................................................... 239Ichimoku levels .................................................................................. 239

Looking for Symmetry with Channels ...................................................... 240Drawing price channels..................................................................... 240

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Currency Trading For Dummies, 2nd Edition xviListening to Momentum .............................................................................. 241

Factoring momentum analysis into your routine .......................... 242Looking at momentum in multiple time frames ............................. 243Trading on divergences between price and momentum .............. 243Using momentum for timing entry and exit.................................... 245

Trading on Candlestick Patterns ............................................................... 245Building a Trade Strategy from Start to Finish ........................................ 246

Chapter 13: Risk-Management Considerations . . . . . . . . . . . . . . . . . .251

Managing Risk Is More Than Avoiding Losses ......................................... 251Leverage amplifi es gains and losses — and expectations ............ 252Knowing your margin requirements ............................................... 253Market liquidity, volatility, and gap risk ......................................... 254We have a winner here! Protecting your profi ts ............................ 257Placing your orders effectively ........................................................ 258

Applying Risk Management to the Trade ................................................. 261Analyzing the trade setup to determine position size .................. 261Doing the math to put the risk in cash terms ................................ 262Devising the trading plan in terms of risk ...................................... 263

Choosing Your Trading Broker .................................................................. 265Different business models of brokers ............................................. 265Financial risks of brokers .................................................................. 266

Technology Issues and Contingency Planning ........................................ 267

Part IV: Executing a Plan .......................................... 269

Chapter 14: Pulling the Trigger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .271

Getting into the Position ............................................................................. 271Buying and selling at the current market ....................................... 271Averaging into a position .................................................................. 272Trading breakouts ............................................................................. 277

Making the Trade Correctly ....................................................................... 281Buying and selling online .................................................................. 282Placing your orders ........................................................................... 283

Chapter 15: Managing the Trade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .285

Monitoring the Market while Your Trade Is Active ................................. 286Following the market with rate alerts ............................................. 286Staying alert for news and data developments .............................. 287Keeping an eye on other fi nancial markets .................................... 288

Updating Your Trade Plan as Time Marches On ..................................... 290Trend lines move over time.............................................................. 291Impending events may require trade plan adjustments ............... 293

Updating Order Levels as Prices Progress ............................................... 294Increasing take-profi t targets ........................................................... 294Tightening stop-loss orders to protect profi ts .............................. 295

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xvii Table of Contents

Chapter 16: Closing the Position and Evaluating Your Results . . . . .297

Closing Out the Trade ................................................................................. 298Taking profi t and stopping out ........................................................ 298Setting it and forgetting it: Letting

the market trigger your order ...................................................... 301Squaring up after events have happened ....................................... 301Exiting at the right time .................................................................... 302Getting out when the price is right .................................................. 303

Assessing Your Trading Strategy .............................................................. 303Identifying what you did right and wrong ...................................... 304Updating your trading record .......................................................... 304

Part V: The Part of Tens ............................................ 307

Chapter 17: Ten Habits of Successful Currency Traders . . . . . . . . . .309

Trading with a Plan ..................................................................................... 309Anticipating Event Outcomes .................................................................... 310Staying Flexible ............................................................................................ 310Being Prepared for Trading ........................................................................ 310Keeping Technically Alert .......................................................................... 311Going with the Flow/Trading the Range ................................................... 311Focusing on a Few Pairs .............................................................................. 312Protecting Profi ts ......................................................................................... 312Trading with Stop Losses ........................................................................... 312Watching Other Markets ............................................................................. 313

Chapter 18: Ten Beginner Trading Mistakes. . . . . . . . . . . . . . . . . . . . .315

Running Losers, Cutting Winners .............................................................. 315Trading without a Plan ................................................................................ 316Trading without a Stop Loss ...................................................................... 316Moving Stop-Loss Orders ........................................................................... 316Overtrading .................................................................................................. 317Overleveraging ............................................................................................. 317Failing to Adapt to Changing Market Conditions .................................... 317Being Unaware of News and Data Events ................................................. 318Trading Defensively ..................................................................................... 318Keeping Realistic Expectations .................................................................. 318

Chapter 19: Ten Rules of Risk Management . . . . . . . . . . . . . . . . . . . . .319

Trade with Stop-Loss Orders ..................................................................... 319Leverage to a Minimum .............................................................................. 320Trade with a Plan ......................................................................................... 320Stay on Top of the Market .......................................................................... 320Trade with an Edge ...................................................................................... 320Step Back from the Market ......................................................................... 321Take Profi t Regularly ................................................................................... 321

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Currency Trading For Dummies, 2nd Edition xviiiUnderstand Currency Pair Selection ......................................................... 321Double-Check for Accuracy ........................................................................ 322Take Money out of Your Trading Account ............................................... 322

Chapter 20: Ten Great Resources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .323

Technical Analysis of the Financial Markets, by John Murphy ............. 323Japanese Candlestick Charting Techniques, by Steve Nison ................. 324Elliott Wave Principle, by A. J. Frost and Robert R. Prechter, Jr. .......... 324Technical Analysis Explained, by Martin J. Pring ................................... 324Technical Analysis For Dummies, by Barbara Rockefeller .................... 325The Book of Five Rings, by Miyamoto Musashi ....................................... 325Reminiscences of a Stock Operator, by Edwin Lefèvre .......................... 325Market Wizards: Interviews with Top Traders, by Jack D. Schwager ... 326The Secrets of Economic Indicators, by Bernard Baumohl .................. 326Come into My Trading Room, by Alexander Elder, MD .......................... 326

Index ....................................................................... 327

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Introduction

The forex market was forever the private domain of hedge funds, global banks, multinational corporations, and wealthy private investors the world

over. But this all changed a few years ago when the Internet-based technologi-cal revolution of online trading spread over to the forex markets. Today, tens of thousands of individual traders and investors all over the world are discov-ering the excitement and challenges of trading in the forex market.

No question about it, forex markets can be one of the fastest and most volatile financial markets to trade. Money can be made or lost in a matter of seconds or minutes. At the same time, currencies can display significant trends lasting several days to weeks and even years. Most importantly, forex markets are always moving, providing an accessible and target-rich trading environment.

In contrast to stock markets, which are more familiar and relatively intui-tive to most investors,, the forex market somehow remains more elusive and seemingly complicated to newcomers.

I’ve spent my career in the forex market as a trader at some of the world’s largest financial institutions. I’ve written Currency Trading For Dummies to pull back the curtain and strip away the mystique of the currency market.

In this book, I show you how the forex market really works, what moves it, and how you can actively trade it. I also provide you with the tools to develop a structured game plan you need to trade in the forex market and not lose your shirt. I cover

✓ Getting a handle on the forces that drive currency movements

✓ Understanding forex market trading conventions and strategies

✓ Interpreting economic data and official statements

✓ Finding sources of data and market intelligence

✓ Gauging market psychology, sentiment, and positioning

✓ Identifying key traits of individual currency pairs

✓ Utilizing technical analysis to spot trade opportunities

✓ Developing a regimented and disciplined approach to trading currencies

✓ Focusing on risk management to minimize losses and keep more of your gains

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2 Currency Trading For Dummies, 2nd Edition

About This BookIf you’re an active trader looking for alternatives to trading stocks or futures, the forex market is hard to beat. Online trading innovations over the past decade have made it accessible, both technologically and financially.

But as an individual trader, gaining access to the forex market is only the beginning. Just because you’ve got the keys to a Formula One race car doesn’t mean you’re ready to compete in a Grand Prix. First, you have to understand how the car works. Then you have to figure out some of the tac-tics and strategies the pros use. And then you have to get behind the wheel and practice, developing your skills, instincts, and tactics as you go.

To succeed in the forex market, you’re going to have to do the same. This book gives you the no-nonsense information you need, with the perspective, experience, and insight of two forex market veterans.

Whether you’re an experienced trader in other markets looking to expand into currencies, or a total newcomer to trading looking to start out in curren-cies, this book has what you need. Best of all, it’s presented in the easy to use For Dummies format. Divided into easy-to-follow parts, this book can serve as both your reference and troubleshooting guide.

Note: Trading foreign currencies is a challenging and potentially profitable opportunity for educated and experienced investors. However, before decid-ing to participate in the forex market, you should carefully consider your investment objectives, level of experience, and risk appetite. Most important, don’t invest money you can’t afford to lose. The leveraged nature of forex 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. (To manage exposure, employ risk-reducing strategies such as stop-loss or limit orders.) Any off-exchange foreign exchange transaction involves considerable exposure to risk, including, but not limited to, leverage, credit-worthiness, limited regulatory protection, and market volatility that may sub-stantially affect the price or liquidity of a currency or currency pair. Using an Internet-based trading system also involves risks, including, but not limited to, the failure of hardware, software, and Internet connection.

Conventions Used in This BookI keep the conventions to a minimum in this book. Here are the ones I use:

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3 Introduction

✓ Italics are used for emphasis or to highlight new words or phrases.

✓ Boldfaced text indicates key words in bulleted lists or the key steps of action lists.

✓ Monotype font is used to refer to Web addresses and e-mail addresses.

Also, when you see references to eastern time (ET), that means whatever time it is in New York City. Part of the year, that’s eastern standard time (EST) and part of the year it’s eastern daylight time (EDT).

What You’re Not to ReadThis book is designed to be an easy-access reference guide to currency trad-ing. I cover each subject in its entirety in individual chapters, and the infor-mation doesn’t depend on what comes before or after. That means you’re able to jump around to the subjects you want to focus on and skip those you feel comfortable with already or just aren’t interested in.

I highly recommend that complete beginners to trading in financial markets peruse the whole book to get a solid idea of all that’s involved. Experienced traders from other markets will probably want to focus more on the specific conventions and traits of the forex market — but you may also find the tech-nical and fundamental insights as applied to currencies enlightening for your forays into trading this market.

No matter your background, you can skip paragraphs marked with the Technical Stuff icon without giving up an understanding of the primary sub-ject. Also, sidebars supplement the primary text — you can skip them with-out missing the main point.

Foolish AssumptionsMaking assumptions is always a risky business, but knowing where I’m coming from may help put you at ease. Obviously, not all these assumptions will apply to you, but at least I’ll have it all out in the open. In writing this book, I assume that:

✓ You’ve heard about currency trading and you’re looking to find out more about what’s involved before you try it.

✓ You’re intrigued by the international dimensions of the forex markets and you want to find out how to profit from currency movements.

✓ You’re seeking to diversify your trading activities or hedge your investments.

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4 Currency Trading For Dummies, 2nd Edition

✓ You want to discover more about technical analysis and how it can be used to improve trading results.

✓ You understand that trading currencies carries the risk of losses.

✓ You’re prepared to devote the time and resources necessary to under-stand what’s involved in currency trading.

✓ You have the financial resources to pursue margin trading, meaning that you’ll never risk more than you can afford to lose without affecting your lifestyle.

✓ You aren’t gullible enough to believe the infomercials that promise easy money by trading currencies.

✓ You understand that there is a big difference between gambling and speculating.

These assumptions should serve as a healthy reality check for you before you decide to jump in to currency trading actively. A lot of it is similar to being a weekend golfer and being disappointed when your play doesn’t reach pro-level scores. But when you think about it, why should it? The pros are out there practicing and playing all day, every day — it’s their full-time job. Most people can only hope to get a round in on the weekend or get to the driving range for a few hours a week. Keep your perspective about what’s realistic for you, and you’ll be in a much better position to profit from actively trading.

How This Book is OrganizedI’ve divided Currency Trading For Dummies into five parts. In this section, I lay them all out for you.

Part I: Trading the World’s Largest Financial MarketThis part introduces you to the global forex market and gives you an idea of its size and scope. You find out who the players are and what their styles and motivations are. I also look at the impact of other financial markets on currencies. This part is also where I cover the nitty-gritty of currency trading conventions and tools so you know exactly how and what you’re trading.

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5 Introduction

Part II: Driving Forces behind CurrenciesIn this part I look at the major fundamental and economic drivers that influ-ence currency values. Also, whether it’s economic data out of the United Kingdom or a political spat in the land down under (that’s Australia, mate!), the forex market moves in response to developments from around the world. I show you how to interpret the data and events like a pro, factoring in market psychology and positioning. I also draw on my years of experience to offer insights that clue you in to how major currencies typically trade so you can know what to expect before you take the plunge.

Part III: Developing a Trading PlanThe military has an old saying: “Proper planning prevents piss-poor per-formance.” The forex market is pretty much always open and constantly moving. To swim in this ocean and avoid the sharks requires an organized and disciplined approach to trading. In this part, I detail different trading styles, highlight concrete strategies, and provide a game plan for spotting trade opportunities and being prepared to act on them. I introduce you to my preferred technical analysis tools and my approach to using them. I also explore risk-management considerations and rules in depth, because what you don’t know can cost you.

Part IV: Executing a PlanIn this part, I walk you through the various ways of establishing a position in the market, how to manage the trade while it’s open, and how to close out the position on the most advantageous terms. I also look at the learning curve of a trader and suggest techniques to move you up your curve faster.

Part V: The Part of TensHere I offer a series of lists of key characteristics of successful traders, trad-ing pitfalls to avoid, risk management rules to live by, and resources to con-tinue your trading education.

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6 Currency Trading For Dummies, 2nd Edition

Icons Used in This BookThroughout this book, you see icons in the margins, highlighting certain paragraphs. Here are the icons I use and what they mean:

Theories are fine, but anything marked with a Tip icon tells you what currency traders really think and respond to. These are the tricks of the trade.

Paragraphs marked with the Remember icon contain the key takeaways from this book and the essence of each subject’s coverage.

Achtung, baby! The Warning icon highlights potential errors and misconcep-tions that can cost you money, your sanity, or both.

You can skip anything marked by the Technical Stuff icon without missing out on the main message, but you may find the information useful for a deeper understanding of the subject.

Where to Go from HereThis book is set up so you can jump right in to the topics that are of greatest interest to you. If you’re an absolute newcomer to trading in general and cur-rencies in particular, I recommend reading Parts I and II to build a foundation for the other topics. If you have more experience with trading, use the table of contents and index to find the subject you have questions about right now. This book is a reference — keep it by your computer, and turn to it whenever you have a question about currency trading.

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Part I

Trading the World’s Largest

Financial Market

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In this part . . .

Introduce you to the global currency market with an eye to demystifying it. I begin with an overview of the

currency market and how it’s the ultimate traders’ mar-ket. Next, I run you through a global currency trading day, so you know what to expect. I also examine how curren-cies and other financial markets are interconnected. Then I show you who the major players are and look at their strategies and motivations for trading in the currency market.

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Chapter 1

Currency Trading 101In This Chapter▶ Looking at currency trading as a business

▶ Getting a sense of what moves currencies

▶ Developing trading strategies to exploit opportunities

▶ Implementing the trading plan

The foreign exchange, or forex, market has exploded onto the scene and is the hot new financial market. It’s been around for years, but advances in

electronic trading have now made it available to individual traders on a scale unimaginable just a few years ago. But just because currency trading is more accessible doesn’t mean it’s widely understood.

I’ve spent my professional career in the forex market and I can’t think of a better traders’ market. In my opinion, nothing quite compares to the speed and exhilaration of the forex market or the intellectual and psychological challenges of trading in it. I’ve always looked at my work as essentially doing the same thing every day, but no two days are ever the same. Not many people can say that about their day jobs, and I wouldn’t trade it for the world, no pun intended.

Defining Currency TradingAt its heart, currency trading is speculation about the value of one currency versus another. The key words in that last sentence are speculation and cur-rency. I think that looking at currency trading from those two angles is essential.

On the one hand, currency trading is speculation, pure and simple, just like buying an individual stock or any other financial security in the hope that it will make a profitable return. On the other hand, the securities on which you’re speculating are the currencies of various countries. Viewed sepa-rately, that means currency trading is both about the dynamics of market speculation, or trading, and the factors that affect the value of currencies. Put them together and you’ve got the largest, most dynamic and exciting financial market in the world.

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10 Part I: Trading the World’s Largest Financial Market

Throughout this book, I approach currency trading from those two perspec-tives, looking at them separately and blending them together to give you the information you need to trade in the forex market.

Speculating as an enterpriseLet me first tell you what speculating isn’t; speculating is not gambling, and it’s not investing. Gambling is about playing with money, even when you know the odds are stacked against you. Investing is about minimizing risk and maximizing return, usually over a long time period (months or years). Speculating, or active trading (I use the terms interchangeably from here out), is about taking calculated financial risks to seek a profitable return, usually over a very short time horizon (minutes, hours, or days). You may be more familiar with speculating or active trading as day trading, but in the 24-hour-a-day forex market it can very easily turn into overnight trading, too.

Speculating as an enterprise refers to treating your trading as a serious busi-ness venture. In my experience, many newcomers to the forex market enter it too lightly and don’t appreciate the patience and diligence required to be successful. I hope you’ll take to heart the following attributes I think define a successful trader in any market:

✓ Dedication (time and energy)

✓ Resources (technological and financial)

✓ Discipline (emotional and financial)

✓ Decisiveness (intellectual and psychological)

✓ Perseverance (risk management and opportunism)

✓ Knowledge (economic, political, and market dynamics)

But even if you possess all those traits, there’s no substitute for develop-ing a comprehensive trading plan (see Chapters 11, 12, and 13, as well as “Developing a Trading Plan” later in this chapter). You wouldn’t open a busi-ness venture without first developing a business plan (at least I hope not!). So you shouldn’t expect any success in trading if you don’t develop a realistic trading plan and stick to it. Think of trading as if it were your own business, and approach it as you would a business enterprise, because that’s what it is.

Above all, try not to take your trading results too personally. Financial mar-kets are prone to seemingly irrational movements on a regular basis, and the market doesn’t know or care who you are or what your trade idea is.

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