Table of Contents Title Page Copyright Page Dedication Preface WHY NOT TRADE FOR A LIVING? TRADING FOR RETURNS WHY THIS BOOK? Author’s Note Acknowledgements CHAPTER - Exploring the Currency Market WHAT IS FOREX? FOREX ROOTS FOREX PARTICIPANTS FOREX VERSUS EXCHANGE MARKETS TRADE MECHANICS ORDER TYPES MARGIN AND LEVERAGE EARNING INTEREST SELECTING A CURRENCY DEALER CHAPTER - Principles of a Bargain Hunter LIVE YOUR LIFE LEARN TO READ PRICE ACTION NEVER PAY FULL PRICE MANAGE YOUR RISK MANAGE YOUR PROFIT CHAPTER - Reading Price Action UNDERSTANDING SUPPLY AND DEMAND IDENTIFYING SUPPORT AND RESISTANCE TRADING PRICE ACTION CHAPTER - Managing Risk ALWAYS USE A STOP ORDER BEWARE OF OVERTRADING REDUCING YOUR TRANSACTION COSTS STOP THINKING ABOUT LOSSES IN PIPS MANAGING RISK THROUGH POSITION SIZE MANAGE RISK CONSISTENTLY BE CONSERVATIVE WITH TRAILING STOPS IS LOSING 70 PERCENT OF YOUR TRADES BAD? KNOW WHEN TO TAKE A BREAK CHAPTER - Managing Profit COMMON PROFIT MANAGEMENT TECHNIQUES THAT INCREASE VOLATILITY IDENTIFYING PROFIT TARGETS IDENTIFYING PROFIT TARGETS WITH FIBONACCI RATIOS USING TRAILING STOPS AUTOMATING PROFIT WITH LIMIT ORDERS CHAPTER - Bargain Hunting Along the Edge DETERMINING TRENDS IDENTIFYING A BARGAIN DAY LOCATING A SUPPORT AND RESISTANCE ZONE MANAGING RISK MANAGING PROFIT EXAMPLE TRADES CHAPTER - Bargain Hunting with Price Action IDENTIFYING A BARGAIN DAY WITH PRICE ACTION MANAGING RISK MANAGING PROFIT EXAMPLE TRADES CHAPTER - Bargain Hunting with the Commodities Channel Index THE TRADITIONAL CCI TRADE THE BARGAIN HUNTER’S CCI TRADE MANAGING RISK MANAGING PROFIT EXAMPLE TRADES CHAPTER - Bargain Hunting with Fundamental Data WHY TRADE NEWS? WHAT NEWS IS WORTH TRADING? WHICH CURRENCY PAIR SHOULD YOU TRADE? UNDERSTANDING MARKET REACTIONS TRADING A FUNDAMENTAL EVENT CHAPTER 10 - Achieving Consistency: Simple Steps Every Trader Can Take STOP SEARCHING FOR THE HOLY GRAIL FIX YOURSELF FIRST ARE YOU REALLY GOING TO EARN 100 PERCENT A MONTH? CONSIDER LONG-TERM TRADING SPECIALIZE DEVELOP A WRITTEN TRADING PLAN KEEP A TRADING JOURNAL DEMO TRADE PROPERLY AFTERWORD About the Author Index Founded in 1807, John Wiley & Sons is the oldest independent publishing company in the United States With offices in North America, Europe, Australia and Asia, Wiley is globally committed to developing and marketing print and electronic products and services for our customers’ professional and personal knowledge and understanding The Wiley Trading series features books by traders who have survived the market’s ever changing temperament and have prospered—some by reinventing systems, others by getting back to basics Whether a novice trader, professional or somewhere in-between, these books will provide the advice and strategies needed to prosper today and well into the future For a list of available titles, visit our Web site at www.WileyFinance.com Copyright © 2010 by Ryan O’Keefe All rights reserved Published by John Wiley & Sons, Inc., Hoboken, New Jersey Published simultaneously in Canada No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, (978) 750-8400, fax (978) 646-8600, or on the web at www.copyright.com Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, (201) 748-6011, fax (201) 748-6008, or online at http://www.wiley.com/go/permissions Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose No warranty may be created or extended by sales representatives or written sales materials The advice and strategies contained herein may not be suitable for your situation You should consult with a professional where appropriate Neither the publisher nor author shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages For general information on our other products and services or for technical support, please contact our Customer Care Department within the United States at (800) 762-2974, outside the United States at (317) 572-3993 or fax (317) 572-4002 Wiley also publishes its books in a variety of electronic formats Some content that appears in print may not be available in electronic books For more information about Wiley products, visit our Web site at www.wiley.com Library of Congress Cataloging-in-Publication Data: O’Keefe, Ryan, 1978Making money in forex : trade like a pro without giving up your day job / Ryan O’Keefe p cm.—(Wiley trading series) Includes index eISBN : 978-0-470-60904-0 Foreign exchange market Foreign exchange futures Investment analysis Speculation I Title HG3851.O42 2010 332.4’5—dc22 2009041766 DEMO TRADE PROPERLY Would you attempt to fly a Boeing 747 without years of proper training and experience? Even if you had the proper experience, would you shut down three of the four engines in flight to practice emergency procedures? Of course not Commercial pilots spend hours in simulators practicing procedures and situations that are too dangerous to practice in an actual airplane From wind shear to engine fires, many seasoned pilots will break a sweat wrestling a crippled, and fake, airplane safely back to the ground The point of a realistic simulator is to build real-world experience without placing people and machines in jeopardy For traders, demo accounts are a valuable simulator for building your skills or trying new strategies in live market conditions Unfortunately, the use of demo accounts has been cheapened by the notion that they are some kind of game or useful only to learn dealer’s software, but nothing could be further from the truth You get what you put into the use of a demo account, and in this section I have some suggestions for getting the most out of trading fake money Start with an account that matches the amount of risk capital you plan to trade Many dealers allow you to fund the demo account with a variable level of capital If you only plan to trade with $10,000, trade a demo account with $10,000 in it If you don’t take this seriously, you won’t get a realistic view of what may happen to your risk capital when you begin trading live money If you open a demo account with $10,0000 and open a number of impulsive or risky trades you know wouldn’t be taken in a smaller live account, you might as well be flying loops in a 747 simulator It might be fun, but it serves no useful purpose toward training you to be a professional trader Trade the demo account as though your bills depended on it making a profit You should follow your trading plan and meticulously record each trade in a trading journal Remember, the point of using a demo account long term is to build you into a professional trader before you put live money at risk, so run a demo account the same way you would run a live money account Your demo account is an apprentice phase on the road to becoming a professional trader It’s a safe training zone where you won’t any real damage, but you will influence your trading skills, so learn as much as you can and take each trade seriously As an illustration of this point, I mentored one student who demo-traded successfully for four months before he opened a live account His first month with live money netted over 250 pips, trading part time around his day job Because he took demo trading and the apprentice phase seriously, he was able to transition to live money without a single hiccup Configure the account’s leverage and margin requirements similarly to what you intend to trade with live money Margin and leverage have a big impact on how many trades you can maintain at once, position sizes, and profit and loss Margin and leverage also affect rollover interest and the spread, since pip value will change with higher or lower leverage The closer you can get a demo account to represent your live account, the more comfortable you’ll be trading live money Finally, if you are completely new to trading, I recommend demo trading for at least six months The market goes through various cycles between ranging and trending markets, and you should gain enough experience in those six months to understand how to trade any potential market condition Additionally, you should show a profit over those six months If you don’t, continue to demo trade until you can consistently show a profit There is no reason to think you’ll make money with a live account if you can’t with a demo CLOSING BELL This chapter is probably easy for a lot of readers to dismiss However, I encourage you to read this chapter every couple of months to remind yourself of the emotional and organizational pitfalls that can keep you from achieving consistency I wanted you to see with this chapter what I see through my web site I regularly speak to traders who are struggling to achieve a consistent result, and frankly, it isn’t because they are greedy or scared Most of them simply lack the discipline to the same thing every day, and they risk too much money on the trades they take If you are struggling, I know the advice in this chapter can help you get organized and build some discipline into your trading routine It is time to reflect on why you haven’t achieved consistency Look inward and identify what you could change about yourself before you start using the methods in this book If you don’t change your bad habits, nothing in this book or any other will help you become a professional trader I encourage you to become a specialist, write down your trading plan, and start keeping a trading journal Try it for at least six months and see how your trading improves I think you’ll be pleasantly surprised AFTERWORD The Final Closing Bell I thought it would be appropriate to end this book with one final closing bell On October 21, 2007, I published my first blog about trading on my personal web site, I decided to share my experience as a long-term trader because I was sick and tired of reading material dedicated to day trading I wanted to show people that they could trade currency and still have a life that didn’t involve staring at a chart for 10 hours a day Apparently the idea has caught on Two years later my blog is read by over 1,300 traders a month I’ve met many interesting people trading currency in nearly every corner of the globe, and now I’ve written this book Though the content and structure of this book have changed throughout the writing process, the message I want to get across hasn’t: You can learn to trade currency, even if you work full-time or are unable to day trade for whatever reason Each chapter in this book was dedicated to explaining details behind a principle of bargain hunting or it shared a price action-based trading method The book focuses on support and resistance because price action is one indicator you can always rely on Price always knows where it is going, and your job is to read it correctly Trading on price action can be applied to any currency pair and any chart time Frankly, you could take the same lessons about support and resistance in this book and apply them to trading stocks or futures Supply and demand are universal across the financial markets Finally, I wanted to write a book to help traders I couldn’t reach through my web site, I hope the discipline and strategies in this book help you Take what you believe is useful and craft it into your own trading style At the end of the day the only right way to trade is one that earns a profit If you need some help along the way, visit my web site at www.ryanokeefe.com I have posted numerous sample trades from my own account as well as several educational lessons that are completely free Finally, you can reach me by e-mail at ryan@ryanokeefe.com I might be slow to respond, but I will respond; I get a lot of e-mail these days I wish you the best of luck and continued success trading the spot currency market! About the Author Ryan O’Keefe is a private spot currency trader who has studied, traded, and written about the currency market since his introduction to currency futures at age 17 Although he has been around the currency markets his entire adult life, Ryan is not your typical Wall Street type He has never worked in the financial industry and doesn’t hold a degree in economics or finance Originally an Internet developer and e-commerce manager, Ryan learned to trade the spot currency market around the demands of his career and family His long-term trading style resonates with retail currency traders who are trying to trade around their day jobs and offers them an alternative to short-term or “day trading” styles so prevalent in trading today Through his blog at www.ryanokeefe.com he is visited by over 1,300 traders every month Ryan is committed to helping traders who work full-time learn to trade the spot currency market through trade examples, videos, and webinars He regularly presents an educational webinar, “Trading Currency around Your Day Job,” which is focused on long-term trading strategies Ryan has mentored traders one-on-one and currently writes a blog for one of the largest independent currency web sites FXStreet.com Ryan trades from a quiet lake house around various interests in writing, aviation, technology, and real estate He is a hack golfer, bass guitarist, and private pilot He lives in the Pacific Northwest with his wife Christine and their toy poodle, Daisy Index Analytical thinkers Ask Price AUD/JPY (Australia dollar/Japanese yen) example trade AUD/JPY (Australia dollar/Japanese yen) example long trade AUD/USD (Australia dollar/U.S dollar) example trades AUD/USD (Australia dollar/U.S dollar) example short trade Australian Securities and Investments Commission (ASIC) Bargain day defining identification Bargain hunter principles See Principles of a bargain hunter Bargain hunting along the edge See also Sitcom System example trades identifying a bargain day profit management risk management summary support and resistance zone, locating trends determination Bargain hunting goal Bargain hunting with Commodities Channel Index See also Commodities Channel Index example trades profit management risk management summary trade trade, traditional Bargain hunting with fundamental data currency pair to trade question events and currencies they affect, major fundamental expectations meets fundamental data effects market reactions, understanding news is worth trading, what pairing strength with weakness reports, key fundamental summary trading a fundamental event trading on news question U.S data reigns supreme valuation errors Bargain hunting with price action See also Hull moving average; Price action, reading example trades examples identifying profit management risk management steps, key summary Bid price Breakeven stop loss Bretton Woods monetary system British Bankers Association (BBA) Candle patterns Carry trade Central banks as forex participants influence of list of Character Chasing a breakout Commitments of Traders (COT) Commodities Channel Index (CCI) See also Bargain hunting with Commodities Channel Index breakouts default measurements definition profit management risk management trade trade, traditional Consistency, achieving analytical thinkers character demo trade properly discipline elevator pitch excuse making, quit family support financially stable, be fix yourself first long-term trading consideration measuring monthly earnings expectations personality traits and trading searching for the Holy Grail, stop specialize summary trading journal workaholics and “A Type” personalities written plan development (See Written plan development) Contract flexibility Cost-of-carry premium Countertrend days CSOWR See Currency Strength or Weakness ratio Currency dealers attributes capitalization product offering regulation retail selecting trading platform Currency lots Currency market, exploring See also Foreign exchange market dealer selection earning interest margin and leverage order types (See Order types) summary trade mechanics (See Trade mechanics) Currency pair trade question eliminating influence of U.S dollar pairing strength with weakness Currency pairs Currency quotes, understanding Currency Strength or Weakness ratio Demo trade properly Discipline Discount window Elevator pitch Entering at the top of a rally or sell off EUR/JPY (European euro/Japanese yen) example trade EUR/USD (European euro/U.S dollar) example trades Events and currencies they affect, major fundamental Exchange markets versus forex contract flexibility regulation trading hours trading restrictions transaction costs transparency volume Exploring currency market See Currency market, exploring Family support Fibonacci ratios (sequence): charting software to draw extension ratios profit management profit targets identification with retracement ratios risk-to-reward ratio and swing low and swing high types Financial Services Authority (FSA) Financially stable, be Floating exchange rate system start Floating profits Flow of forex market participants chart Foreign exchange market: defined exchange markets versus (See Exchange markets versus forex) feature, key lot sizes participants roots trading hours Forex See Foreign exchange market Fundamental reports, key GBP/JPY (Great Britain pound/Japanese yen) example trade GBP/USD (Great Britain pound/U.S dollar) example trade Golden ratio Government regulations effecting trading business Hull moving average (HMA): bargain day definition and bargain hunting with price action and configuring defining function of reason for simulating as trend indicator websites discussing weighted moving average versus Indicators offer false sense of security Influence of U.S dollar, eliminating Institutional traders Interbank definition institutional traders and largest members examples member advantage retail currency dealers and retail speculators and trading and transaction costs and number of Interest discount rate earning federal funds rate rates and central banks Intervention Leverage, defining LIBOR See London Interbank Offered Rate Limit orders London Interbank Offered Rate Long-term trading consideration Managing profit See Profit management Managing risk See Risk management Margin, defining Margin and leverage currency dealer selection and effect of margin on available account balances relationship between requirements of risk effects on Margin call Margin call Market orders Market reactions, understanding fundamental data meets expectations question valuation errors National Futures Association (NFA): capital reporting of currency dealers to as major regulatory agency rules website of News effect on trading See Bargain hunting with fundamental data NZD/USD (New Zealand dollar/U.S dollar) example trade Order types entry orders fill at best price option limit orders market orders stop orders (See Stop orders) Overtrading Participants, forex central banks flow of institutional traders interbanks (See Interbanks) retail currency dealers retail speculators Percentage in points (pip) Personality traits and trading Position size: risk management sizing rules Price action, reading learning summary supply and resistance identification (See Supply and resistance) support and resistance identification trading (See Price action trading) understanding supply and demand (See Supply and demand, understanding) Price action trading See also Bargain hunting with price action bargain day identification learning to place effective entry orders rejections identification, strong support and resistance zone identification turnabouts identification Pricing in/priced into Principles of a bargain hunter full price, never pay live your life price action, learn to read profit, manage your risk, manage your summary trend as friend question Profit management bargain hunting with Commodities Channel Index bargain hunting with price action breakeven stop loss Fibonacci ratios (See Fibonacci ratios) introduction limit orders, automating profit with moving your stop to breakeven scaling out Sitcom System and targets identification techniques that increase volatility, common trailing stops usage written trading plan and rules for Pullback days Pullbacks Reading price action See Price action, reading Retail currency dealers Retail speculators Risk management bargain hunting with Commodities Channel Index bargain hunting with price action break taking time consistency importance losing 70% of your trades affect losses, effect of increased risk on losses in pips, stop thinking about overtrading position size Sitcom System stop order usage (See Stop orders) summary supercharging a small account trailing stops, conservative with transaction costs reduction written trading plan and rules for Risk-to-potential ratio See Risk-to-reward ratio Risk-to-reward ratio: disciplined Fibonacci ratios planning with profit targets profit management risk management scaling out support and resistance winning percentage changes Rollover Scaling out Sitcom System: bargain day identification and definition example trades using fundamental trade versus process for creating and managing trade along edge of price action profit management risk management support and resistance support and resistance location and trends Slippage Specialize Spot market definition Spread Standard, mini, and micro lots Steps every trader can take, simple See Consistency, achieving Stop gunning Stop orders breakeven placing protective risk management and trailing stops, conservative with trailing stop usage usage Strong rejections identification Supply and demand, understanding calendar websites collecting fundamental data effect of fundamental shocks influence of central banks institutional interest, measuring strength, measuring fundamental support and resistance as synonymous with trading Support and resistance: bargain days and breakeven or trailing stops daily ranges usage drawing horizontal lines usage identifying key zones usage levels long-term profit targets identification with round numbers usage strong rejections and as synonymous with supply and demand trailing stops and trend lines usage turnabouts and weekly ranges usage zones identification zones location Swap rates, posting of Trade mechanics currency lots currency pairs long versus short percentage in points rules understanding currency quotes workings of Trade news question worth trading question Trading a fundamental event Trading for a living question Trading for returns Trading hours Trading journal, keep a Trading plan, develop a written Trading session timetable Trailing stops: conservative with usage Transaction costs Trend lines Trends determination Turn candle Turnabouts identification Uptick rule U.S data reigns supreme USD/CAD (U.S dollar/Canadian dollar) example trades USD/CAD (U.S dollar/Canadian dollar) example long trade USD/CHF (U.S dollar/Switzerland franc) example trade USD/JPY (U.S dollar/Japanese yen) example trades USD/JPY (U.S dollar/Japanese yen) example short trade Valuation error Workaholics and “A Type” personalities Written trading plan development components entry rules position sizing rules profit management rules risk management rules rules examples what to trade when to trade ... DETERMINING TRENDS IDENTIFYING A BARGAIN DAY LOCATING A SUPPORT AND RESISTANCE ZONE MANAGING RISK MANAGING PROFIT EXAMPLE TRADES CHAPTER - Bargain Hunting with Price Action IDENTIFYING A BARGAIN DAY. .. PRICE ACTION MANAGING RISK MANAGING PROFIT EXAMPLE TRADES CHAPTER - Bargain Hunting with the Commodities Channel Index THE TRADITIONAL CCI TRADE THE BARGAIN HUNTER’S CCI TRADE MANAGING RISK MANAGING... Library of Congress Cataloging -in- Publication Data: O’Keefe, Ryan, 197 8Making money in forex : trade like a pro without giving up your day job / Ryan O’Keefe p cm.—(Wiley trading series) Includes