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Forex Investement and Security

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Forex Investement and Security Investment and Securities Trading Simulation An Interactive Qualifying Project Report submitted to the Faculty of WORCESTER POLYTECHNIC INSTITUTE in partial fulfillment of the requirements for the Degree of Bachelor of Science by Jean Friend Diego Lugo Greg Mannke Date: May 1, 2011 Approved: Professor Hossein Hakim Abstract: Investing in the Foreign Exchange market, also known as the FOREX market, is extremely risky. Due to a high amount of people trying to invest in currency movements, just one unwatched position can result in a completely wiped out bank account. In order to prevent the loss of funds, a trading plan must be followed in order to gain a maximum profit in the market. This project complies a series of steps to become a successful FOREX trader, including setting stop losses, using indicators, and other types of research. 1 Acknowledgement: We would like to thank Hakim Hossein, Professor, Electrical & Computer Engineering Department, Worcester Polytechnic Institute for his guidance throughout the course of this project and his contributions to this project. 2 Table of Contents 1 Introduction .............................................................................................................................. 6 1.1 Introduction ....................................................................................................................... 6 1.2 Project Description ............................................................................................................. 9 2 Background ................................................................................................................................... 10 2.1 History of Forex....................................................................................................................... 10 2.2 Introduction to Corporate Structure ......................................................................................... 16 2.3 Corporate Finance ................................................................................................................... 20 2.4 Stock Market Basics ................................................................................................................ 23 2.5 Currency Parings: .................................................................................................................... 27 2.6 Choosing a Trading Platform: .................................................................................................. 29 2.7 Trading Indicators ................................................................................................................... 30 2.7.1 Indicator Signs ................................................................................................................. 31 2.8 Momentum Indicators ............................................................................................................ 33 2.8.1 ROC Indicator ................................................................................................................. 37 2.8.2 RSI Indicator ................................................................................................................... 38 2.8.3 Stochastic Indicator ......................................................................................................... 39 2.8.4 Ultimate Oscillator Indicator ........................................................................................... 41 2.8.5 Williams % R Indicator ..................................................................................................... 42 2.8.6 Awsome Oscillator ........................................................................................................... 43 2.9 Trend Indicators ..................................................................................................................... 44 2.9.1 CCI indicator ..................................................................................................................... 47 2.9.2 Simple Moving Average .................................................................................................... 48 2.9.3 Weighted Moving Average ................................................................................................ 49 2.9.4 Exponential Moving Average ............................................................................................ 51 2.9.5 MACD indicator ................................................................................................................ 52 2.9.6 Parabolic SAR Indicator .................................................................................................... 53 2.9.7 ADX Indicator .................................................................................................................. 54 2.9.8 Candlestick trend reversal indicators ................................................................................. 55 2.10 Volume Indicators................................................................................................................. 56 2.10.1 Chaikin Money Flow ........................................................................................................ 57 2.10.2 Force Index ..................................................................................................................... 58 3 2.10.3 Money Flow Index ........................................................................................................... 60 2.10.4 Ease of Movement .......................................................................................................... 61 2.11 Volatility Indicators ............................................................................................................... 62 2.11.1 Chaikin Volatility ............................................................................................................. 63 2.11.2 Average True Range ........................................................................................................ 64 2.11.3 Volatility Ratio ................................................................................................................ 65 2.11.3 Bollinger Bands ...............................................................................................................66 2.12 Price Chart patterns .............................................................................................................. 67 2.12.1 Fibonacci Retracement.................................................................................................... 70 2.12.2 Pivot point indicator........................................................................................................ 71 2.8 Fundamental Analysis: ............................................................................................................ 71 2.9 Importance of Stop Losses: ..................................................................................................... 74 2.10 Resources available for the modern trader: ............................................................................. 76 3 Methodology ................................................................................................................................. 77 4 Implementation ............................................................................................................................ 79 4.1 Choosing Indicators ................................................................................................................. 79 4.2 Selecting a platform ................................................................................................................ 83 4. 3 Trading Resources .................................................................................................................. 84 5 Results and conclusion ................................................................................................................... 87 6 Citations ....................................................................................................................................... 89 7 Appendices.................................................................................................................................... 90 Appendix A: Indicator Research (Example of Technical Analysis) ................................................ 90 Appendix B: EURO UPDATES (Examples of Fundamental Research) ........................................... 94 Appendix C: Barron’s Review of Trading Platforms ................................................................... 102 Appendix D: Example of a Trading Journal ............................................................................... 103 Appendix E: Example of a Gartman letter ................................................................................ 106 Appendix F: Example of a Henry Lui weekly market outlook ..................................................... 114 4 List of figures: Figure 2.1: standard stock chart ........................................................................................................ 26 Figure 2.2: Currency Correlation chart ............................................................................................... 28 Figure 2.3: indicator and price chart divergence ................................................................................. 32 Figure 2.4: moving average crossover ............................................................................................... 33 Figure 2.5: Momentum indicator
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