Table of Contents

Introduction 1

About This Book 1

Foolish Assumptions 3

Icons Used in This Book 3

Beyond the Book 4

Where to Go from Here 4

Part I: Getting Started with Currency Trading 5

Chapter 1: Currency Trading 101 7

What Is Currency Trading? 7

Speculating as an enterprise 8

Currencies as the trading vehicle 8

What Affects Currency Rates? 10

Fundamentals drive the currency market 10

Unless it’s the technicals that are driving the currency market 11

Or it may be something else 11

Developing a Trading Plan 12

Finding your trading style 12

Planning the trade 13

Executing the Trading Plan from Start to Finish 14

Chapter 2: What Is the Forex Market? 17

Getting Inside the Numbers 19

Trading for spot 19

Speculating in the currency market 19

Getting liquid without getting soaked 20

Around the World in a Trading Day 21

The opening of the trading week 21

Trading in the Asia-Pacific session 22

Trading in the European/London session 23

Trading in the North American session 24

Key daily times and events 25

The U.S. dollar index 26

Currencies and Other Financial Markets 28

Gold 28

Oil 29

Stocks 29

Bonds 30

Getting Started with a Practice Account 31

Chapter 3: Who Trades Currencies? Meet the Players 33

The Interbank Market Is “The Market” 33

Getting inside the interbank market 34

Bank to bank and beyond 35

Hedgers and Financial Investors 37

Hedging your bets 37

Global investment flows 39

Speculators 40

Hedge funds 41

Day traders, big and small 43

Governments and Central Banks 44

Currency reserve management 44

The Bank for International Settlements 45

The Group of Twenty 46

Chapter 4: The Mechanics of Currency Trading 47

Buying and Selling Simultaneously 47

Currencies come in pairs 48

The long and the short of it 52

Profit and Loss 53

Margin balances and liquidations 53

Unrealized and realized profit and loss 54

Calculating profit and loss with pips 54

Factoring profit and loss into margin calculations 55

Understanding Rollovers and Interest Rates 56

Currency is money, after all 56

Value dates and trade settlement 57

Market holidays and value dates 58

Applying rollovers 59

Understanding Currency Prices 61

Bids and offers 61

Spreads 62

Executing a Trade 62

Trading online 62

Orders 65

Part II: Driving Forces behind Currencies 71

Chapter 5: Looking at the Big Picture 73

Currencies and Interest Rates 74

The future is now: Interest rate expectations 75

Relative interest rates 76

Monetary Policy 101 77

Looking at benchmark interest rates 78

Easy money, tight money 78

Unconventional easing 80

Watching the central bankers 81

Interpreting monetary policy communications 82

Official Currency Policies and Rhetoric 84

Currency policy or currency stance? 84

Calling the shots on currencies 85

Taking a closer look at currency market intervention 88

Financial stability 91

Debts, deficits, and growth 91

Gauging credit risk 92

Geopolitical Risks and Events 94

Gauging risk sentiment 95

Risk on or risk off? 95

Chapter 6: Understanding and Applying Market News and Information 99

Sourcing Market Information 100

The art of boarding a moving train 100

Taking the pulse of the market 101

Rumors: Where there’s smoke, there’s fire 103

Putting Market Information into Perspective: Focusing on Themes 104

Driving fundamental themes 104

Analyzing technical themes 108

Reality Check: Expectations versus Actual 110

The role of consensus expectations 111

Pricing in and pricing out forecasts 112

When good expectations go bad 112

Anticipating alternative outcome scenarios 113

Chapter 7: Getting Down and Dirty with Fundamental Data 115

Finding the Data 116

Economics 101 for Currency Traders: Making Sense of Economic Data 116

The labor market 117

The consumer 118

The business sector 118

The structural 119

Assessing Economic Data Reports from a Trading Perspective 120

Understanding and revising data history 120

Getting to the core 121

Market-Moving Economic Data Reports from the United States 122

Labor-market reports 122

Consumer-level data reports 125

Business-level data reports 128

Structural data reports 130

Major International Data Reports 133

Eurozone 133

Japan 134

United Kingdom 135

Canada 136

Australia 136

New Zealand 137

China 137

Chapter 8: Getting to Know the Major Currency Pairs 139

The Big Dollar: EUR/USD 140

Trading fundamentals of EUR/USD 140

Trading behavior of EUR/USD 143

Tactical trading considerations in EUR/USD 146

East Meets West: USD/JPY 147

Trading fundamentals of USD/JPY 148

Price action behavior of USD/JPY 152

Tactical trading considerations in USD/JPY 154

The Other Majors: Sterling and Aussie 155

The British pound: GBP/USD 155

The new kid in town: Trading the Aussie 157

Understanding Forex Positioning Data 159

How to interpret the data 159

The FX fix 160

Forex and regulation 160

Chapter 9: Minor Currency Pairs and Cross-Currency Trading 163

Trading the Minor Pairs 163

Trading fundamentals of USD/CAD 165

Trading fundamentals of NZD/USD 167

Tactical trading considerations in USD/CAD, AUD/USD, and NZD/USD 169

Trading the Scandies: SEK, NOK, and DKK 171

Swedish krona — “Stocky” 172

Norwegian krone — “Nokkie” 172

Danish krone — “Copey” 173

Cross-Currency Pairs 173

Why trade the crosses? 174

Stretching the legs 175

Trading the JPY crosses 176

Trading the EUR crosses 177

Part III: Developing a Trading Plan 179

Chapter 10: Training and Preparing for Battle 181

Finding the Right Trading Style for You 181

Real-world and lifestyle considerations 182

Making time for market analysis 183

Technical versus fundamental analysis 183

Different Strokes for Different Folks 184

Short-term, high-frequency day trading 185

Medium-term directional trading 187

Long-term macroeconomic trading 189

Trading on Auto-Pilot 192

Potential inputs to drive an EA system 192

Caveat emptor on models 193

Using social media for trading: The power of the crowd 194

Developing Trading Discipline 195

Taking the emotion out of trading 196

Managing your expectations 197

Keeping your ammunition dry 198

Chapter 11: Cutting the Fog with Technical Analysis 201

The Philosophy of Technical Analysis 202

What is technical analysis? 202

What technical analysis is not 203

Forms of technical analysis 203

Finding support and resistance 204

Waiting for confirmation 206

The Art of Technical Analysis 207

Bar charts and candlestick charts 207

Drawing trend lines 209

Recognizing chart formations 210

Fibonacci retracements 220

The Science of Technical Analysis 221

Momentum oscillators and studies 221

Trend-identifying indicators 225

Trading with clouds — Ichimoku charts 227

Chapter 12: Identifying Trade Opportunities 229

Developing a Routine for Market Analysis 229

Performing Multiple-Time-Frame Technical Analysis 230

Identifying Support and Resistance Levels 234

Trend lines 235

Highs and lows 236

Congestion zones 236

Fibonacci retracements 237

Ichimoku levels 237

Looking for Symmetry with Channels 238

Drawing price channels 238

Listening to Momentum 239

Factoring momentum analysis into your routine 240

Looking at momentum in multiple time frames 241

Trading on divergences between price and momentum 241

Using momentum for timing entry and exit 243

Trading on Candlestick Patterns 243

Building a Trade Strategy from Start to Finish 244

Chapter 13: Risk-Management Considerations 249

Managing Risk Is More Than Avoiding Losses 249

Leverage amplifies gains and losses — and expectations 250

Knowing your margin requirements 251

Market liquidity, volatility, and gap risk 252

We have a winner here! Protecting your profits 255

Placing your orders effectively 256

Applying Risk Management to the Trade 259

Analyzing the trade setup to determine position size 259

Doing the math to put the risk in cash terms 260

Devising the trading plan in terms of risk 261

Choosing Your Trading Broker 263

Different business models of brokers 263

Financial risks of brokers 265

Technology Issues and Contingency Planning 265

Part IV: Executing a Trading Plan 267

Chapter 14: Pulling the Trigger 269

Getting into the Position 269

Buying and selling at the current market 270

Averaging into a position 271

Trading breakouts 275

Making the Trade Correctly 279

Buying and selling online 280

Placing your orders 281

Chapter 15: Managing the Trade 283

Monitoring the Market while Your Trade Is Active 284

Following the market with rate alerts 284

Staying alert for news and data developments 285

Keeping an eye on other financial markets 286

Updating Your Trade Plan as Time Marches On 288

Trend lines move over time 289

Impending events may require trade plan adjustments 290

Updating Order Levels as Prices Progress 291

Increasing take-profit targets 292

Tightening stop-loss orders to protect profits 293

Chapter 16: Closing the Position and Evaluating Your Results 295

Closing Out the Trade 296

Taking profit and stopping out 296

Setting it and forgetting it: Letting the market trigger your order 299

Squaring up after events have happened 299

Exiting at the right time 300

Getting out when the price is right 301

Assessing Your Trading Strategy 301

Identifying what you did right and wrong 302

Updating your trading record 302

Part V: The Part of Tens 305

Chapter 17: Ten Habits of Successful Currency Traders 307

Trading with a Plan 307

Anticipating Event Outcomes 308

Staying Flexible 308

Being Prepared for Trading 308

Keeping Technically Alert 309

Going with the Flow/Trading the Range 309

Focusing on a Few Pairs 310

Protecting Profits 310

Trading with Stop Losses 310

Watching Other Markets 311

Chapter 18: Ten Rules of Risk Management 313

Trade with Stop-Loss Orders 313

Leverage to a Minimum 314

Trade with a Plan 314

Stay on Top of the Market 314

Trade with an Edge 314

Step Back from the Market 315

Take Profit Regularly 315

Understand Currency-Pair Selection 315

Double-Check for Accuracy 316

Take Money out of Your Trading Account 316

Chapter 19: Ten Great Resources 317

Technical Analysis of the Financial Markets 317

Japanese Candlestick Charting Techniques 318

Elliott Wave Principle 318

Technical Analysis For Dummies 318

The Book of Five Rings 318

Market Wizards: Interviews with Top Traders 319

Come into My Trading Room 319

Zero Hedge 319

BabyPips.com 320

Forex Factory 320

Appendix: Trading Strategies 321

What’s Your Sign? Determining Your Trader Type 321

Looking at Trading Strategies Based on Trader Type 322

Strategies for the scalper 322

Strategies for the swing trader 329

Strategies for the position trader 340

Index 343

About the Author

Kathleen Brooks is research director at FOREX.com. She produces research on G10 and emerging-market currencies, providing her clients with actionable trading ideas. Brian Dolanhas more than 20 years of experience in the currency market and is a frequent commentator for major news media.