FOREX TRADING SECRETS TRADING STRATEGIES FOR THE FOREX MARKET JAMES DICKS New York Chicago San Francisco Lisbon London Madrid Mexico City Milan New Delhi San Juan Seoul Singapore Sydney Toronto Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved. Except as permitted under the United States Copyright Act of 1976, no part of this publication may be reproduced or distributed in any form or by any means, or stored in a database or retrieval system, without the prior written permission of the publisher. ISBN: 978-0-07-174709-7 MHID: 0-07-174709-5 The material in this eBook also appears in the print version of this title: ISBN: 978-0-07-166422-6, MHID: 0-07-166422-X. All trademarks are trademarks of their respective owners. Rather than put a trademark symbol after every occurrence of a trademarked name, we use names in an editorial fashion only, and to the benefit of the trademark owner, with no intention of infringement of the trademark. 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This page intentionally left blank Contents Preface xi Acknowledgments xiii Disclaimer xv Introduction xvii Part 1 The Basics 1 1 What You Must Know to Get Started 3 Back to the Basics: A History of the FOREX 3 FOREX versus Stocks 7 FOREX versus Futures 9 2 Major Currencies and Pairs 11 The U.S. Dollar 11 The Euro 12 The Australian Dollar 12 The Canadian Dollar 13 The British Pound 13 The Swiss Franc 14 The Japanese Yen 14 The New Zealand Dollar 15 The Dollar Index 15 The Dow Jones Industrial Average (DJIA) 16 Gold CFDs 16 Crude Oil 17 Cross-Rate Currency Pairs 17 Exotic Currency Pairs 18 Chinese Yuan or Renminbi 18 Swedish Krona 18 Norwegian Krone 19 The Iraqi Dinar 19 v vi CONTENTS 3 Anyone Can Learn the FOREX 21 FOREX 101 21 Opening a Position 21 Trading on Margin 23 Managing a Position 23 Closing a Position 24 Pips and Lots 24 The Lot 27 Order Types 27 Where Is the Market Going? 29 Stops and Targets 32 Spreads and Swaps 33 Technical versus Fundamental 34 4 Preparing Yourself Adequately before Jumping into the Market 37 FOREX Trading Accounts 37 Choosing a Broker 38 Tools 47 Who Trades the FOREX? 49 What Kind of Trader Am I? 50 Trading Techniques 51 The Trader’s Levels of Ascension 55 Part 2 Money Management 59 5 The Secret to Making Money 61 Are You Really Fit to Trade in the FOREX Market? 61 Trading Plans 62 Rules and Discipline 67 How the Market Works 73 Rules for Working with the Market 74 Paper Trading 77 6 How to Keep Your Profits 81 Money Management 81 Managing Risk 86 Leverage and True Leverage 87 Overtrading and Overconfidence 89 Overleveraging 91 Trade Expectations 92 CONTENTS vii Part 3 Trading Psychology 93 7 Mastering Emotions 95 Trading Psychology 95 Emotions of Trading 99 How to Get Out of a Bad Trade 105 Become a Pro 110 8 Mind over Matter for Huge Profits 113 Affirmations 113 Power of Networking 117 Part 4 Fundamental Analysis 121 9 Economics 123 What Does Economic Release Mean? 123 Fundamental Analysis 123 Dow Theory 125 Fundamental Indicators 127 Japan’s Monetary Policy 137 FOREX Currency Carry Trade 139 Interventions 140 Gross Domestic Product (GDP) 142 Trading the News 143 What Are Contrarian Indicators? 145 Part 5 Technical Analysis 147 10 Technical Indicators 149 Technical Analysis 149 Types of Charts Showing Price Action 150 Trend Indicators 162 Market and Volatility Indicators 168 Understanding Oscillators 173 A Unique Indicator: Ichimoku Kinko Hyo 176 Divergences 177 11 Technical Patterns 181 Candlesticks 181 Chartism Patterns 185 Reversal Patterns 186 Continuation Patterns 192 viii CONTENTS Elliott Waves 203 Harmonic Price Patterns 208 Fractals 214 Trading Naked (Only Price Action) 215 12 Support and Resistance 217 Support 217 Resistance 218 Trendlines 219 Moving Averages 219 Other Indicators 220 Entering Positions 221 Exiting Positions 222 Pivot Points: Do They Work? 222 Psychological Levels 226 Using Multiple Time Frames 228 Trend Is Your Friend 231 13 Automated Trading 233 Expert Advisors and Automatic Programming Interfaces (APIs) 233 Advanced Robots: Neural Networks in the FOREX 235 Part 6 Building Your Portfolio 239 14 Secrets to FOREX Diversification 241 FOREX Options 241 Spot FOREX Options 246 FOREX Futures 247 FOREX Exchange-Traded Funds (ETFs) 248 Contracts for Difference (CFDs) 249 Commodities 250 Indices (Securities) 251 15 My Favorite Ways to Trade 253 Breakouts 253 Channeling 258 Hedging 261 Basic Oscillator-Based Strategy 262 Basic Moving-Average Crosses 263 Trading Gaps 264 Daily High-Low 265 CONTENTS ix CONCLUSION 269 APPENDIX 273 GLOSSARY 289 BIBLIOGRAPHY 299 INDEX 301 This page intentionally left blank Preface There are many books on the market that cover the subject of FOREX trad- ing. But I believe that until now, there has never been a book on this unique topic that has so vividly described the subject of the FOREX—a universe completely of its own. The FOREX market is an anonymous entity that bears many faces, and each individual who participates in it leaves a foot- print that just might change the course of their personal circumstances based on their individual hopes and dreams for success. This book was written with several purposes in mind. First of all, this book is designed to inform and educate the potential FOREX trader about a field that is growing exponentially around the world and is reaching mil- lions of individuals from all walks of life. It is a market that was reserved for a select few just a decade ago but now is in the hands of anyone, even those without a formal financial education. For this reason, it is very important to include a qualified point of view from a real trader’s perspec- tive, a trader who has already traveled through all the steps and experienced numerous pitfalls but now wants to share this information with you to help you avoid or, at the very least, minimize any potential negative impact through education and solid money management techniques. This book also is intended to provide an overview of all the fundamen- tals involved in the FOREX and of the trading process so that any new trader can easily obtain all the tools needed to ensure a quick start.