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Technical Analysis of the Currency Market ffirs.qxd 3/14/06 1:48 PM Page iii Technical Analysis of the Currency Market Classic Techniques for Profiting from Market Swings and Trader Sentiment BORIS SCHLOSSBERG John Wiley & Sons, Inc. ffirs.qxd 3/14/06 1:48 PM Page vi ffirs.qxd 3/14/06 1:48 PM Page i Technical Analysis of the Currency Market ffirs.qxd 3/14/06 1:48 PM Page ii Founded in 1807, John Wiley & Sons is the oldest independent publishing company in the United States. With offices in North America, Europe, Aus- tralia, 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. ffirs.qxd 3/14/06 1:48 PM Page iii Technical Analysis of the Currency Market Classic Techniques for Profiting from Market Swings and Trader Sentiment BORIS SCHLOSSBERG John Wiley & Sons, Inc. ffirs.qxd 3/14/06 1:48 PM Page iv Copyright © 2006 by Boris Schlossberg. 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: Schlossberg, Boris. Technical analysis of the currency market : classic techniques for profiting from market swings and trader sentiment / Boris Schlossberg. p. cm.—(Wiley trading series) ISBN-13: 978-0-471-74593-8 (cloth) ISBN-10: 0-471-74593-6 (cloth) 1. Foreign exchange futures. 2. Foreign exchange market. 3. Speculation. I. Title. II. Series. HG3853.S35 2006 332.4'5—dc22 2005031905 Printed in the United States of America. 10987654321 ffirs.qxd 3/14/06 1:48 PM Page v To my partner Kathy without whom none of this would be possible ffirs.qxd 3/14/06 1:48 PM Page vi ftoc.qxd 3/14/06 1:48 PM Page vii Contents CHAPTER 1 FX 101 1 CHAPTER 2 Is It All Just Random? 25 CHAPTER 3 The Secret to Trading 29 CHAPTER 4 Show Me the Data! 41 CHAPTER 5 Trend Is Your Friend? 59 CHAPTER 6 Gauging Range 79 CHAPTER 7 Fibs Don’t Fib 99 CHAPTER 8 Patterns and Antipatterns: Know Your Mark 113 CHAPTER 9 Know Yourself, Know Your Setup 143 CHAPTER 10 Setups! Setups! Setups! 161 Glossary 185 Index 207 vii ftoc.qxd 3/14/06 1:48 PM Page viii flast.qxd 3/14/06 1:49 PM Page ix Technical Analysis of the Currency Market flast.qxd 3/14/06 1:49 PM Page x ccc_techanal_ch01_1-24.qxd 2/28/06 8:14 AM Page 1 CHAPTER 1 FX 101 now this. Technical analysis will not make you rich. It will not turn $1,000 into $1 million in a matter of weeks. It will not allow you to Kdesign a computer system that will automatically generate income while you luxuriate on the golf courses of Florida or snorkel in the azure blue waters of Cozumel. Like every worthwhile endeavor in life, success in trading requires dedication, persistence, and a never-ending desire to excel. Technical analysis is only a tool—albeit a very good one—that if used properly can greatly sharpen and improve your trading in the currency market, but it cannot by itself make you a successful trader. This book is about the practical application of technical analysis to the foreign exchange (FX or forex) markets. In it, I show you the key ad- vantages as well as some of the limitations of this trading discipline. This book alone cannot guarantee success, but I can assure you of one thing: Your chances of winning will increase markedly if you learn to how to use technical analysis to trade FX. Before turning to the business at hand, however, it’s critical to under- stand how the FX market works and, more importantly, how it differs from all other financial markets that you may have traded. TWO TRILLION REASONS TO TRADE The FX market is the biggest financial market in the world. By the time you read this book its volume will have reached more than $2 trillion 1 ccc_techanal_ch01_1-24.qxd 2/28/06 8:14 AM Page 2 2 TECHNICAL ANALYSIS OF THE CURRENCY MARKET per day in notional turnover. That’s right—you didn’t misread the num- bers. The FX market trades 2 trillion with a T, not 2 billion with a B, dol- lars per day. Consider that the New York Stock Exchange (NYSE)—the biggest stock market in the world—processes only $60 billion worth of transactions on its busiest trading days of the year, and you can appre- ciate the scope and the size of the FX enterprise (see Figure 1.1). Currency trading dwarfs all other markets in size, but it is a quiet giant of the finance field. Most financial media treat FX as an exotic after- thought rather than as the marquee financial market in the world. I am al- ways amazed to flip open the finance section of the Wall Street Journal and see a tiny two-inch-square story buried deep on page C5 summarizing the day’s action in the FX markets, while the front page of the finance sec- tion is entirely devoted to stocks and bonds. Guess what? Though few investors realize this fact, the currency mar- ket has far more impact on the value of your overall investment portfolio than the quotidian events at Dell, General Motors (GM), or Wal-Mart. In a global economy, every major corporation is a multinational enterprise by necessity, and the direction of currencies can often affect these compa- nies’ profit margins more than any other input factor. Why do you think the FX market is so large? Because all of these multibillion-dollar corpora- tions are its main customers. FIGURE 1.1 FX—A Growing Market ccc_techanal_ch01_1-24.qxd 2/28/06 8:14 AM Page 3 FX 101 3 MARKET RULES The only rule in the FX market is that there are no rules. Want to short with impunity to mercilessly drive down the value of the currency? Go right ahead. No artificial uptick sale rules will ever stop you. Your next-door neighbor’s cousin overheard on the golf course that the Federal Reserve will announce a surprise rate hike next week? Feel free to empty out your bank account and load up on the trade. No one will come after you if you are proven right. In the FX market there is no such thing as insider trading. In fact, key European economic data such as German unemployment fig- ures are often leaked to the press before their official release dates. Suppose you are an institutional trader and a customer calls you to sell “one yard” ($1 billion worth) of euros in exchange for dollars right away. Suppose further that instead of executing the customer’s order first, you decided to sell some EUR/USD from your firm’s proprietary account, secure in the knowledge that the size of the customer’s order will push the market lower by at least 15 points. Try that kind of front-running on the floor of the New York Stock Exchange or in the pits of the Chicago Mer- cantile Exchange (CME) and you’ll wind up fined, unemployed, and possi- bly even jailed.
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