Table of Contents Title Page Dedication Copyright Page Introduction Acknowledgements Part - Exploring the World of Money Chapter - Why Trade Foreign Currency? Chapter - How Forex Started Chapter - Understanding Money Jargon Part - Deciphering Money Differences Chapter - Why Currency Changes Value Chapter - Looking for Safety—Developed Country Currencies Chapter - Taking More Risks—Emerging Country Currencies Part - Trading Basics Chapter - Using Technical Analysis Chapter - Exploring Fundamental Analysis Chapter - Forex and Your Overall Investing Plan Chapter 10 - Identifying the Trends and Your Trades Chapter 11 - Risk Management Strategies Chapter 12 - Developing Your Trading Strategies Part - Tools for Trading Chapter 13 - Trading Platforms, Hardware, and Software Chapter 14 - Putting Your Forex Trading on Autopilot Chapter 15 - How to Place Orders Chapter 16 - Managing Your Trade Chapter 17 - Evaluating Your Results Part - Trading Options Chapter 18 - Avoiding Money Fraud Chapter 19 - Using Mini Accounts Chapter 20 - Trading with Standard Accounts Chapter 21 - Managed Forex and Trading Systems Chapter 22 - Forex Trading Using Options Chapter 23 - Setting Up Your Trading Business Chapter 24 - Finding Information About Forex Appendix A - Glossary Appendix B - Websites Appendix C - U.S Regulatory Agencies Appendix D - Prime Trading Times Index To all my friends at GFT, the best forex dealing company in the world! ALPHA BOOKS Published by the Penguin Group Penguin Group (USA) Inc., 375 Hudson Street, New York, New York 10014, USA Penguin Group (Canada), 90 Eglinton Avenue East, Suite 700, Toronto, Ontario M4P 2Y3, Canada (a division of Pearson Penguin Canada Inc.) Penguin Books Ltd., 80 Strand, London WC2R 0RL, England Penguin Ireland, 25 St Stephen’s Green, Dublin 2, Ireland (a division of Penguin Books Ltd.) Penguin Group (Australia), 250 Camberwell Road, Camberwell, Victoria 3124, Australia (a division of Pearson Australia Group Pty Ltd.) Penguin Books India Pvt Ltd., 11 Community Centre, Panchsheel Park, New Delhi—110 017, India Penguin Group (NZ), 67 Apollo Drive, Rosedale, North Shore, Auckland 1311, New Zealand (a division of Pearson New Zealand Ltd.) Penguin Books (South Africa) (Pty.) Ltd., 24 Sturdee Avenue, Rosebank, Johannesburg 2196, South Africa Penguin Books Ltd., Registered Offices: 80 Strand, London WC2R 0RL, England Copyright © 2011 by Gary Tilkin and Lita Epstein All rights reserved No part of this book shall be reproduced, stored in a retrieval system, or transmitted by any means, electronic, mechanical, photocopying, recording, or otherwise, without written permission from the publisher No patent liability is assumed with respect to the use of the information contained herein Although every precaution has been taken in the preparation of this book, the publisher and author assume no responsibility for errors or omissions Neither is any liability assumed for damages resulting from the use of information contained herein For information, address Alpha Books, 800 East 96th Street, Indianapolis, IN 46240 THE COMPLETE IDIOT’S GUIDE TO and Design are registered trademarks of Penguin Group (USA) Inc ISBN : 978-1-101-54512-6 Library of Congress Catalog Card Number: 2011904911 Interpretation of the printing code: The rightmost number of the first series of numbers is the year of the book’s printing; the rightmost number of the second series of numbers is the number of the book’s printing For example, a printing code of 11-1 shows that the first printing occurred in 2011 Most Alpha books are available at special quantity discounts for bulk purchases for sales promotions, premiums, fund-raising, or educational use Special books, or book excerpts, can also be created to fit specific needs For details, write: Special Markets, Alpha Books, 375 Hudson Street, New York, NY 10014 ISBN : 978-1-101-54512-6 http://us.penguingroup.com Introduction Foreign currency trading gives you the opportunity to participate in the world’s largest and most liquid market, known as forex More than $3.9 trillion U.S dollars exchange hands daily The forex market moves rapidly, with currency prices changing by the second No single event, individual, or institution can rule this market It’s truly uncontrollable by any single entity because of its large liquidity Some traders see very large profits from trading in this market, but always remember that the market is highly speculative and volatile While you can make a lot of money on a trade, you can also lose a lot on a trade Take the time to learn how to research your potential trades using both the fundamental and technical analysis tools we introduce to you in this book Develop your own strategies for trading and test those strategies using demonstration accounts before you start trading your own money Remember, though, you should never trade forex unless you’re using money you can afford to lose Forex is a high-risk endeavor! How We’ve Organized the Book You start exploring the world of foreign currency trading by learning how forex got started and how it operates today Then you explore how currencies differ from country to country Next, we explore the trading basics We then introduce you to the tools for trading We’ve organized this book into five parts: Part 1, Exploring the World of Money, looks at why you should consider trading forex, then delves into how the forex market got started and introduces you to the language of money Part 2, Deciphering Money Differences, gives you the opportunity to learn why currency values change and how the foreign exchange markets work Then we’ll take a closer look at the safest currencies to trade—currencies of the developed world We’ll also explore the more exotic currencies—emerging nations whose currencies may be worth considering once you understand the foreign currency market, its risks, and how to trade in it Part 3, Trading Basics, introduces you to the basics of technical and fundamental analysis to help you research your potential trades Then we explore how you develop an investing plan and identify trends and trades Finally, we explore the various risks you must take in order to trade in the forex market Part 4, Tools for Trading, starts with the basic computer hardware and software you need to trade, then goes on to explore how you can develop your own money strategies, as well as the basics for actually placing your trades Part 5, Trading Options, starts with how to avoid money fraud, then explores the various ways you can trade forex: with mini accounts, standard accounts, managed forex, and trading systems We then describe how to set up your trading business and how to find the resources you need to operate that business Extras We’ve developed a few helpers you’ll find in sidebars throughout the book: DEFINITION Helps you learn the language of forex trading H hedge funds holders holiday risks Hong Kong, HKD (Hong Kong dollar) horizontal axis (x-axis), charts hyperinflation I IBRD (International Bank for Reconstruction and Development) IMF (International Monetary Fund) improving trading strategies India, INR (Indian rupee) inflation, currency value changes Inflation Report and the Quarterly Bulletin initial deposits, brokers interbank market interest rate swaps interest rates currency value changes monitoring risks International Bank for Reconstruction and Development (IBRD) internationalization, investments and savings International Monetary Fund (IMF) Internet access intrinsic values, currency pairs investment-management firms investments, internationalization J–K–L Japan, JPY (Japanese yen) joint ventures journaling laws of supply and demand legal risks leverage risks Libor (London Interbank Offered Rate) limit orders limited liability companies line charts liquidity risks London Interbank Offered Rate (Libor) long call options long position long put options long-term traders losses calculating tracking M macroeconomic conditions, tracking managed accounts managed float managed float regimes managing trades open positions setting rate alerts margin accounts margin calls margins performance bond requirements, brokers market (forex) currency pairs AUD (Australian dollar) CAD (Canadian dollar) CHF (Swiss franc) choosing CNY (Chinese renminbi) EUR (euro) GBP (British pound) HKD (Hong Kong dollar) intrinsic values JPY (Japanese yen) MXN (Mexican peso) NZD (New Zealand dollar) PLN (Polish zloty) purchasing SGD (Singapore dollar) tracking United States Fibonacci ratios fundamental traders market structure modern developments origins portfolio risks practice researching resources risks spotting reversals technical traders time investment traders trading flow twenty-four hour access versus futures versus stocks United Kingdom market makers market orders market reversals, spotting market sentiment market-moving economic releases Australia Canada EU (European Union) Great Britain Japan monitoring New Zealand Switzerland United States Math World McAfee’s AntiVirus Plus medium-term traders MetaTrader system Mexico, MXN (Mexican peso) Millman, Gregory mini accounts loss potential Mirror Trader monetary policies, monitoring money-market conditions, tracking MoneyTec Traders Community Forum monitors (computers) MT4 mutual funds versus hedge funds N Nasdaq Composite Index National Futures Association (NFA) National Futures Association’s Background Affiliation Status Information Center network interfaces New Zealand, NZD (New Zealand dollar)) news feature (DealBook® 360) NFA (National Futures Association) Nikkei Index Ninja Trader Nixon, Richard M Norton AntiVirus O offer prices oil prices, monitoring online trading open orders open positions monitoring market moving news monitoring political news open trades positions operating systems options at-the-money call expirations long call long put out-of-the-money prices exercise expiration dates strike time value volatility put risk management Delta forecast Gamma forecast Rho forecast Theta forecast Vega forecast risk reversal strategy selling short call positions short put positions straddle strategy strangle strategy strategies vertical strategy order cancels orders orders limit market open order cancels stop stop-limit trailing stop out-of-the-money option P payroll (employment reports) performance bond margins pips Pisano, Leonardo Poland, PLN (Polish zloty) political news, monitoring political risks portfolio risks positions short call short put power supplies price patterns channels gaps wedge prices bid double bottoms double tops offer options exercise expiration dates strike time value volatility pips strike target pricing FX swaps spot transactions professional forex managers profits calculating tracking Push Bottom Pips put options long Q–R quoting exchange rates, spot transactions RAM memory rate alerts, setting RBA (Reserve Bank of Australia) RBNZ (Reserve Bank of New Zealand) regulation standard accounts regulatory agencies regulatory risks Relative Strength Index repos request for quote (RFQ) requotes Reserve Bank of Australia (RBA) Reserve Bank of New Zealand (RBNZ) resistance levels, technical analysis results, evaluating journaling retail brokers RFQ (request for quote) Rho forecast, options risk management counterparty risks exchange rates fraud regulatory agencies resolving problems interest rates leverage liquidity risks market risks mini accounts loss potential options Delta forecast Gamma forecast Rho forecast Theta forecast Vega forecast political risks regulated entities strategies leverage limit orders reversal stop-loss orders volatility risks risk reversal strategy, options risks RSI Roller Coaster Strategy S S corporations S&P 500 safety, standard accounts SARB (South African Reserve Bank) savings, internationalization scams regulatory agencies resolving problems SDRs (special drawing rights) securities, derivatives security, computers security, fraud regulatory agencies resolving problems selling options short call position short put position short sells short-term traders signal generators Singapore, SGD (Singapore dollar) Smithsonian Agreement SNB (Swiss National Bank) software sole proprietorships South Africa, ZAR (South African rand) South Korea, KRW (Korean won) special drawing rights (SDRs) speculators spot forex market spot transactions pricing quoting exchange rates spreads brokers SSL-encryption standard accounts brokers determining profits regulation safety Standard & Poor’s state authorities Statistics Pocket Book stock market monitoring versus forex stock options at-the-money call expirations long call long put out-of-the-money prices exercise expiration dates strike time value volatility put risk management Delta forecast Gamma forecast Rho forecast Theta forecast Vega forecast risk reversal strategy selling short call position short put position straddle strategy strangle strategy strategies vertical strategy stop orders stop-limit orders stop-loss orders straddle strategy, options strangle strategy, options Strategy Runner strike price Summary of Commentary on Current Economic Conditions support levels, technical analysis swaps buying currency foreign currency options FX interest rate pricing selling Swiss National Bank (SNB) Switzerland, CHF (Swiss franc) T Taiwan, TWD (Taiwan dollar) target prices, managing technical analysis charts bar candlestick consistency dedication focus line tick price patterns channels gaps wedge resistance levels support levels tracking trends, drawing lines technical traders versus fundamental traders Thailand, THB (Thai baht) Theta forecast, options third-party licensing agreements tick charts Tilkin, Gary time value, option prices trade balance, monitoring trade day trade flows traders trades managing ADX (Average Directional Index) Bollinger Bands monitoring other financial markets open positions rate alerts target price timing online placing tracking entry and exit points strategies, improving trading business corporate structure developing plan positioning with IRS trading hours Australia Canada EU (European Union) Great Britain Japan New Zealand Switzerland United States trading platforms account summaries automated trading researching starting traders Capital Market Services charting platforms DealBook® dealing rates direct deal ECN model forecast software forex indicators Forex.com FX Solutions hardware Internet access Mirror Trader Ninja Trader open orders open positions RFQ (request for quote) signal generators software Strategy Runner trading systems trailing stop orders transactions currency swaps foreign currency options forward exchange rates setting exchange rates FX swaps interest rate swaps spot pricing quoting exchange rates Treaty of Maastricht trends drawing lines spotting double bottoms double tops Fibonacci ratios market reversals RSI Roller Coaster Strategy U UK gilt unemployment rate uninterruptible power supply (UPS) Union Carbide Corporation United Kingdom forex market GBP (British pound) United States, USD (U.S dollar) United States Mint V Vega forecast, options vertical axis (y-axis), charts vertical strategy, options video cards volatility, option prices volatility risks W–X–Y–Z Wall Street Journal, The wedge price patterns World Bank writers x-axis (horizontal axis), charts y-axis (vertical axis), charts ZoneAlarm ... it is the currency in the transaction that is fixed to one unit The terms currency in the transaction is the foreign currency being quoted (priced) to one U.S dollar When you hear a quote, the. .. currencies were pegged to the U.S dollar) Today the currencies of developed countries float, but many of the emerging countries still peg the value of their currency to the U.S dollar or to a basket of... price The selling price is the price at which the sellers want to sell, and the buying price is the price at which the buyers want to buy These are also known as the bid and offer prices, where the