Essentials of Foreign Exchange Trading

Contents
Preface xi
Acknowledgments xv
Chapter 1 Introduction to Foreign Exchange Trading 1
Trading Money to Make Money 2
Striking Gold 3
Buying and Selling at Retail 4
Big and Liquid, Like the Ocean 5
Open 24/5 7
Playing in the Majors 9
Leveraged to the Hilt 12
The Players 13
What Moves the Forex Markets? 15
What to Expect from This Book 17
Chapter Summary 19
Chapter 2 Basic Foreign Exchange Trading Mechanics 21
Anatomy of a Currency Pair 22
Going Long and Selling Short 24
Market Orders—On the Spot 27
Entry Orders—Waiting until the Price Is Right 27
Stopping Losses with Stop Losses and Trailing Stops 28
Profi t Limits—When You’re in the Money 31
Exit with Caution 31
Trade Size—Lots and Lots of Lots 32
Leveraging Margin and Leverage 33
Margin Call—Insuffi cient Funds 34
Pips—The Currency of Currency Trading 37
Spreading the Wealth—Spreads or Commissions? 39
Interest—Giving and Receiving 41
Hedging—Two Sides of the Same Coin 44
Chapter Summary 45
Chapter 3 Technical Analysis—Tools for Trading Foreign Exchange 49
Introduction to Technical Analysis—
Interpreting Price Action 50
Basics of Bars and Candlesticks 52
Keeping Time with Chart Timeframes 57
Support for Resistance (and Support) 59
The Trend Will Set You Free 64
How Trendy—Lines and Channels 67
The Magic of Moving Averages 72
Seeing Patterns in the Candles 78
Currency Charts Take Shape 82
Indicators of Change 88
Pointing the Way with Pivot Points 95
Fibonacci’s Magic Numbers 96
Riding the Elliott Wave 98
Getting to the Point & Figure 99
Chapter Summary 100
Chapter 4 Fundamental Analysis—What Drives the
Foreign Exchange Markets 103
Introduction to Fundamental Analysis—Basic Economics 104
A Healthy Interest in Global Bank Rates 105
Carried Away with Trading 108
Indication of Things to Come—Economic Indicators 110
No News Is Bad News for News Traders 121
Chapter Summary 124
Chapter 5 Foreign Exchange Trading Methods and Strategies 127
Rules to Trade By 128
Position Trading—Settling in for the Long Term 130
Swing Trading—Riding the Waves 134
Day Trading—In and Out, Day In and Day Out 137
Trend Trading—Going with the Flow 140
Range Trading—Between a Rock and a Hard Place 147
Breakout Trading (and Fading)—Shooting for the Stars 150
Pattern Trading—Playing with Shapes 158
Fibonacci and Pivot Point Trading—Magic Numbers and
Self-Fulfi lling Prophecies 161
Elliott Wave Trading—Two Steps Forward, One Step Back 166
Divergence Trading—Separate Paths 170
Multiple Timeframe Trading—Timing Is Everything 172
Point & Figure Trading—Pointing Out Breakouts 175
Carry Trading—In the Interest of Interest 179
News Trading—All the News That’s Fit to Profi t From 183
Contrarian Trading—The Majority Doesn’t Rule 184
Backtesting—History Repeats Itself 187
Autotrading—Robots for Hire 190
Chapter Summary 192
Chapter 6 Important Elements of Successful Foreign
Exchange Trading 195
The Boring Side of Success 196
A Risky Business 196
Fatter Is Healthier (But Only for Trading Accounts) 197
Risk and Reward 198
Fix Your Fractions 200
Trailing Stops—Loyal Followers 201
Size Matters 202
Position Overload 205
Measuring Risk with a Trendline 208
Great Expectations 209
Psychologically Speaking 210
Plan the Trade and Trade the Plan 214
Chapter Summary 216
Index 219