Investing as a Business 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 ________________________ Gabriel McCormick ________________________ Devin Kehler Date: March 11, 2012 Approved: ___________________________ Hossein Hakim, Advisor Table of Contents List of Figures ................................................................................................................................ vi List of Tables ................................................................................................................................ vii 1. Introduction ................................................................................................................................. 1 1.1 Project Description ................................................................................................................ 2 2. Background ................................................................................................................................. 3 2.1 Common Forex Terms .......................................................................................................... 7 2.1.1 Pip ................................................................................................................................... 7 2.1.2 Leverage ......................................................................................................................... 7 2.1.3 Lot Size ........................................................................................................................... 8 2.1.4 Bid Price ......................................................................................................................... 9 2.1.5 Ask Price......................................................................................................................... 9 2.1.6 Spread ............................................................................................................................. 9 2.1.7 Short/Long .................................................................................................................... 10 2.1.8 Currency Pair ................................................................................................................ 10 2.1.9 Margin Call ................................................................................................................... 11 2.1.10 Stop Loss .................................................................................................................... 11 2.1.11 Take Profit .................................................................................................................. 11 2.1.12 Currency pairs............................................................................................................. 12 3. Methodology ............................................................................................................................. 13 [ii] 4. Execution .................................................................................................................................. 14 4.1 Choosing a Broker ............................................................................................................... 14 4.2 Technical Indicators ............................................................................................................ 18 4.2.1 Trend Lines ................................................................................................................... 19 4.2.2 Pivot Points/Camarilla Pivots ....................................................................................... 20 4.2.3 Moving Average Convergence/Divergence ................................................................. 23 4.2.4 Bollinger Bands ............................................................................................................ 24 4.2.5 Moving Averages ......................................................................................................... 25 4.2.6 Parabolic SAR .............................................................................................................. 26 4.2.7 Stochastic ...................................................................................................................... 27 4.2.8 Fibonacci Indicators ..................................................................................................... 28 4.2.9 Relative Strength Index ................................................................................................ 29 4.2.10 Commodity Channel Index ......................................................................................... 31 4.2.11 Ichimoku Kinko Hyo .................................................................................................. 31 4.2.12 Relative Vigor Index .................................................................................................. 33 4.2.13 True Strength index .................................................................................................... 33 4.2.14 Average true Range .................................................................................................... 34 4.2.15 Camarilla Equation ..................................................................................................... 35 4.2.16 Average Directional Index .......................................................................................... 36 4.3 Fundamental Analysis ......................................................................................................... 37 [iii] 4.3.1 Gross Domestic Product ............................................................................................... 38 4.3.2 Inflation/Deflation ........................................................................................................ 39 4.3.3 Consumer Price Index .................................................................................................. 40 4.3.4 Interest Rates ................................................................................................................ 41 4.3.5 Retail Sales ................................................................................................................... 42 4.3.6 Unemployment Rates ................................................................................................... 44 4.3.7 Industrial Production .................................................................................................... 45 4.3.8 Consumer Confidence Index ........................................................................................ 47 4.3.9 ISM Manufacturing Index ............................................................................................ 48 4.3.10 Interpreting Macroeconomic Issues ............................................................................ 50 4.4 Programming and Robot-Based Trading............................................................................. 54 4.5 Important Resources ............................................................................................................ 60 4.6 Starting an Investment Company ........................................................................................ 61 4.6.1 Location ........................................................................................................................ 61 4.6.2 Legal Structure ............................................................................................................. 63 4.6.3 Important Regulatory Authorities ................................................................................. 64 4.6.4 Licensing ...................................................................................................................... 66 4.6.5 Performance Indicators ................................................................................................. 66 5. Results ....................................................................................................................................... 68 5.1 Trading Strategy .................................................................................................................. 68 [iv] 5.1.1 Devin Kehler................................................................................................................. 68 5.1.2 Gabriel McCormick ...................................................................................................... 71 5.2 Company Parameters........................................................................................................... 73 6. Conclusion and Recommendations ........................................................................................... 76 7. Bibliography ............................................................................................................................. 79 Appendix A: Trading Journal ....................................................................................................... 88 A.1 Gabriel McCormick ............................................................................................................ 88 A.2 Devin Kehler .................................................................................................................... 107 Appendix B: Programming Projects ........................................................................................... 120 B.1 Group project ...................................................................................................................