Currency Trading For Dummies®, 2nd Editionby Brian Dolan

Currency Trading For Dummies®, 2nd Edition

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About the AuthorBrian Dolan is the chief currency strategist at GAIN Capital Group, and a 20-plus year veteran ofthe interbank currency market. Brian provides research and market analysis to trading clients ofGAIN Capital and FOREX.com, the retail division of GAIN Capital Group.

Brian analyzes the G10 currency markets with a blend of fundamental and technical analysis toprovide actionable trading strategies.

A frequent commentator on currency-market developments and outlooks for major news mediaincluding the Wall Street Journal, Reuters, Bloomberg, Dow Jones, CNN Money, andMarketWatch.com, Brian has also appeared regularly as a currency analyst on financial TVnetworks CNBC, Bloomberg Television, Fox Business News and BNN in Canada.

In addition, he has written numerous articles on currency trading, risk management, and technicalanalysis for trading and investment journals such as Currency Trader, Active Trader, SFOMagazine, Technical Analysis of Stocks & Commodities, and Futures.

Prior to joining GAIN Capital, Brian was a vice president at Bank Julius Bär, where he advisedhedge funds and high-net-worth individuals on currencies. He spent the first 12 years of his FXcareer trading major currency pairs in the interbank market in New York at some of the world’slargest banks, including Credit Suisse, Dai-Ichi Kangyo Bank, and American Express Bank, aswell as two years in Bermuda as a proprietary trader at Butterfield Bank. Brian is a graduate ofDartmouth College.

DedicationTo Brigid, for her love and for hanging in there through the ups and downs; and to Frank andCatherine, for inspiring me to create a work for the future, just as you are. In memoriam to mymother Peg, father Chuck, and sadly missed brother Tim, who taught me that life is not a dressrehearsal.

Author’s AcknowledgmentsMy efforts to translate a career’s worth of currency trading experience into a book would beextremely thin were it not for the many lessons I garnered from colleagues in the market over theyears. Readers of this book will benefit from the experience I’ve gained from many of you. Thanksto Mark Galant, for founding GAIN Capital and offering me the opportunity to write this book. Tothe trading team at GAIN: Tim O’Sullivan, Anthony Piccolo, Paul Spirgel, Rob Voorhees, MikeGoret, Damon Gallo, and Alan Viola — it’s an honor and pleasure to work with some of the bestin the business. To Glenn Stevens and Samantha Roady, for setting the whole process in motionand encouraging me to go the full distance. To Christa Conte and Henry Feintuch of FeintuchCommunications, for getting the word out to the media and then some. To my research team forpicking up the slack while I wrote: Eric Viloria, CMT; Chris Tevere, CMT; Kathleen Brooks; andDan Hwang. To Susan Hobbs for her fine editing assistance that made me get to the point, clearly.To McLean D. Giles for his technical review. And to the editors and staff at Wiley Publishing,especially Stacy Kennedy, for organizing the book in the first place.

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IntroductionThe forex market was forever the private domain of hedge funds, global banks, multinationalcorporations, and wealthy private investors the world over. But this all changed a few years agowhen the Internet-based technological revolution of online trading spread over to the forexmarkets. Today, tens of thousands of individual traders and investors all over the world arediscovering the excitement and challenges of trading in the forex market.

No question about it, forex markets can be one of the fastest and most volatile financial markets totrade. Money can be made or lost in a matter of seconds or minutes. At the same time, currenciescan display significant trends lasting several days to weeks and even years. Most importantly,forex markets are always moving, providing an accessible and target-rich trading environment.

In contrast to stock markets, which are more familiar and relatively intuitive to most investors, theforex market somehow remains more elusive and seemingly complicated to newcomers.

I’ve spent my career in the forex market as a trader at some of the world’s largest financialinstitutions. I’ve written Currency Trading For Dummies to pull back the curtain and strip awaythe mystique of the currency market.

In this book, I show you how the forex market really works, what moves it, and how you canactively trade it. I also provide you with the tools to develop a structured game plan you need totrade in the forex market and not lose your shirt. I cover

Getting a handle on the forces that drive currency movements

Understanding forex market trading conventions and strategies

Interpreting economic data and official statements

Finding sources of data and market intelligence

Gauging market psychology, sentiment, and positioning

Identifying key traits of individual currency pairs

Utilizing technical analysis to spot trade opportunities

The secrets behind Copy Trading - how to make top traders work for you

Focusing on risk management to minimize losses and keep more of your gains

About This Book

If you’re an active trader looking for alternatives to trading stocks or futures, the forex market ishard to beat. Online trading innovations over the past decade have made it accessible, bothtechnologically and financially.

But as an individual trader, gaining access to the forex market is only the beginning. Just becauseyou’ve got the keys to a Formula One race car doesn’t mean you’re ready to compete in a GrandPrix. First, you have to understand how the car works. Then you have to figure out some of thetactics and strategies the pros use. And then you have to get behind the wheel and practice,developing your skills, instincts, and tactics as you go.

To succeed in the forex market, you’re going to have to do the same. This book gives you the no-nonsense information you need, with the perspective, experience, and insight of two forex marketveterans.

Whether you’re an experienced trader in other markets looking to expand into currencies, or a totalnewcomer to trading looking to start out in currencies, this book has what you need. Best of all,it’s presented in the easy to use For Dummies format. Divided into easy-to-follow parts, this bookcan serve as both your reference and troubleshooting guide.

Note: Trading foreign currencies is a challenging and potentially profitable opportunity foreducated and experienced investors. However, before deciding to participate in the forex market,you should carefully consider your investment objectives, level of experience, and risk appetite.Most important, don’t invest money you can’t afford to lose. The leveraged nature of forex tradingmeans that any market movement will have an equally proportional effect on your deposited funds;this may work against you as well as for you. (To manage exposure, employ risk-reducingstrategies such as stop-loss or limit orders.) Any off-exchange foreign exchange transactioninvolves considerable exposure to risk, including, but not limited to, leverage, creditworthiness,limited regulatory protection, and market volatility that may substantially affect the price orliquidity of a currency or currency pair. Using an Internet-based trading system also involvesrisks, including, but not limited to, the failure of hardware, software, and Internet connection.

Conventions Used in This BookI keep the conventions to a minimum in this book. Here are the ones I use:

Italics are used for emphasis or to highlight new words or phrases.

Boldfaced text indicates key words in bulleted lists or the key steps of action lists.

Monotype font is used to refer to Web addresses and e-mail addresses.

Also, when you see references to eastern time (ET), that means whatever time it is in New YorkCity. Part of the year, that’s eastern standard time (EST) and part of the year it’s eastern daylight

time (EDT).

What You’re Not to ReadThis book is designed to be an easy-access reference guide to currency trading. I cover eachsubject in its entirety in individual chapters, and the information doesn’t depend on what comesbefore or after. That means you’re able to jump around to the subjects you want to focus on andskip those you feel comfortable with already or just aren’t interested in.

I highly recommend that complete beginners to trading in financial markets peruse the whole bookto get a solid idea of all that’s involved. Experienced traders from other markets will probablywant to focus more on the specific conventions and traits of the forex market — but you may alsofind the technical and fundamental insights as applied to currencies enlightening for your foraysinto trading this market.

No matter your background, you can skip paragraphs marked with the Technical Stuff icon withoutgiving up an understanding of the primary subject. Also, sidebars supplement the primary text —you can skip them without missing the main point.

Foolish AssumptionsMaking assumptions is always a risky business, but knowing where I’m coming from may help putyou at ease. Obviously, not all these assumptions will apply to you, but at least I’ll have it all outin the open. In writing this book, I assume that:

You’ve heard about currency trading and you’re looking to find out more about what’sinvolved before you try it.

You’re intrigued by the international dimensions of the forex markets and you want to findout how to profit from currency movements.

You’re seeking to diversify your trading activities or hedge your investments.

You want to discover more about technical analysis and how it can be used to improvetrading results.

You understand that trading currencies carries the risk of losses.

You’re prepared to devote the time and resources necessary to understand what’sinvolved in currency trading.

You have the financial resources to pursue margin trading, meaning that you’ll never risk

more than you can afford to lose without affecting your lifestyle.

You aren’t gullible enough to believe the infomercials that promise easy money by tradingcurrencies.

You understand that there is a big difference between gambling and speculating.

These assumptions should serve as a healthy reality check for you before you decide to jump in tocurrency trading actively. A lot of it is similar to being a weekend golfer and being disappointedwhen your play doesn’t reach pro-level scores. But when you think about it, why should it? Thepros are out there practicing and playing all day, every day — it’s their full-time job. Most peoplecan only hope to get a round in on the weekend or get to the driving range for a few hours a week.Keep your perspective about what’s realistic for you, and you’ll be in a much better position toprofit from actively trading.

How This Book is OrganizedI’ve divided Currency Trading For Dummies into five parts. In this section, I lay them all out foryou.

Part I: Trading the World’s Largest Financial MarketThis part introduces you to the global forex market and gives you an idea of its size and scope.You find out who the players are and what their styles and motivations are. I also look at theimpact of other financial markets on currencies. This part is also where I cover the nitty-gritty ofcurrency trading conventions and tools so you know exactly how and what you’re trading.

Part II: Driving Forces behind CurrenciesIn this part I look at the major fundamental and economic drivers that influence currency values.Also, whether it’s economic data out of the United Kingdom or a political spat in the land downunder (that’s Australia, mate!), the forex market moves in response to developments from aroundthe world. I show you how to interpret the data and events like a pro, factoring in marketpsychology and positioning. I also draw on my years of experience to offer insights that clue you into how major currencies typically trade so you can know what to expect before you take theplunge.

Part III: Developing a Trading PlanThe military has an old saying: “Proper planning prevents piss-poor performance.” The forex