InsiderTechniquesToProfitable
ForexTrading!
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4
9
11
Tableo fC ontents 13
15
Chapter1: StockMarket101 16
MakingDecisionsInTheBeginning 18
Chapter2: StockMarketTrends 20
TheMarketOutlook 21
23
Chapter3: AnIntroductiontoForex 25
ForexFunctionality 29
ForexToday 33
Chapter4: UnderstandingCurrencyConversion 35
CurrencyExpression 36
ForexTrending 41
41
Chapter5: UnderstandingStatistics 48
Chapter6: ForexVolatilityandMarketExpectation 52
Chapter7: AspectsOfTheTrade 52
53
Market-MakersAndSellingShort 54
Chapter8: RiskManagement 55
57
Chapter9: BuzzWords
Margins,Spreads,AndOtherCondiments
Chapter11: OtherTradingOptions
Chapter12: InReview
TheBasicTrade
TheForeignExchangeMarket
CareersInTheMarket
ProtectingYourInvestments
Chapter13: OneFinalOption
Chapter1: StockMarket101
In a ny b usiness or money making v enture, preparation and foreknowledge a re
the k eys t o s uccess. Without t his sort of insight, the attempt t o make a
profitable financial decision c an o nly e nd in d isaster a nd failure, r egardless o f
your level o f m otivation and determination or t he amount o f m oney you plan
toinvest.
In the stock m arket, t his r ule applies to t he nth degree, as y ou a re investing
your own money in what could b e considered a h igh r isk w ager, and you a re
playing with fire if y ou do n ot have a t least a g eneral background k nowledge of
how it functions. Since h aving a background in any a rea is h elpful in g uiding
you d own a p ath in t hat p articular region, the m ore s olid y our basis o f
investment k nowledge is, the more likely y ou are t o profit from any attempt t o
tradeont heopenm arket.
In many ways, trading on t he s tock market can be compared to driving – you
do not h ave t o b e an e xpert t o g et behind the wheel o f a c ar, t hough y ou a re
expected to have some p revious k nowledge a bout b asic t raffic laws, including
moving v iolations, s afety regulations, and other legal v ehicular infractions,
which a re learned t hrough either specific study and c oursework or e ven
through some form o f simple e xposure ( such as t he y ears you have spent
ridingwithy ourparentsa ndotherswhohavedrivenfory ears).
You s hould b e a ble t o c omprehend t he basic t ools used to n avigate a c ar
(where the b reak pedal is located versus t he g as, a nd how to use the r earview
mirror,forexample),evenifyouhavenevertouchedas teeringw heel.
The same is t rue in e ntering the w orld o f the s tock market. W hile you do not
have t o k now a ll the t erminology (you w ill not b e s hort s elling or d etermining
your own long and short p ositions a t first, s o you do not have to understand
these references c ompletely, t hough you should b e a ware of them), y ou should
certainly b e v ersed in the basic functionality of trading stocks, bonds,
securities,ando thercommodities.
And just like s omeone w ho is b ehind the w heel of a car and getting r eady to
touch the g as p edal for the first time, you should start o ut with caution and
work your way in slowly. A first time d river will first s et t he m irrors to his o r
her o wn liking, t hen put t he c ar in g ear, look for any interfering t raffic, and
ease o nto t he g as p edal, n ever flooring it and testing the engine c oming o ut o f
theg ateo nt hefirsta ttempt.
Likewise, when y ou s elect your first investment, y ou s hould choose s omething
stable w ith little fluctuation and n ot invest a large s um o f money o n this first
venture.
When a person is learning t o drive, h e o r she w ill be a ccompanied b y a nother
individual who is more experienced and can a ssist them in making b etter
driving decisions and o ffering c orrections that w ill aid in learning t o handle
the c ar more efficiently. In t he s tock market, there are s tockbrokers and other
experts w ho c an give y ou input a nd advice t o help you in b uilding y our
knowledge o f t he commodities in which y ou a re interested, e ssentially
“steering”y outowardbetterstockm arketb uyingands ellingdecisions.
You c ould s pend hours and hours r esearching t he stock m arket a nd its
functionality, learning h ow to b ecome involved in the trade and who to contact
to get in the g ame, e specially if your interest lies in the Foreign Exchange
Market, which g oes far beyond the level o f complication of t he domestic s tock
market. However, in this b ook, y ou will find all the b asic information y ou need
tog etstartedd ownthep atht otradings uccess.
All o f t he leg work and t ough research has b een done for y ou, collecting the
data and knowledge into one source from w hich you can gain enough insight
to m ake you a successful trader o n t he open m arket. A ll y ou have t o d o is r ead
in o rder to g ain knowledge a nd w isdom, s tep by step t hat w ill bring y ou t o a
heady level o f s uccess. I n t his e book, you w ill find all such h elpful information,
allb roughttogetherino nes inglesourcefore aseofr eference.
HowInvestmentWorks
Any time you a re g oing to be p utting y our money into a fund; it is a good idea
tostartb yunderstandingw haty oua reb uyinginto.
The stock market is a complicated e ntity, a nd d oing minimal business in
trading requires a fair a mount o f basic knowledge, a s w ell a s the
understanding and a cceptance of the high r isk factor. T he m ore you know in
advance r egarding t he functionality of t he system, t he less likely it is t hat y ou
willt akeah eavyhit,endingindevastatingloss.
First of all and p robably m ost important in the trading business, y ou s hould
understand w hat s tocks actually are. When y ou b uy or sell a s tock o n t he o pen
market, y ou s hould keep in mind that you a re dealing w ith r eal o bjects, not
pieces of p aper; you a re buying and s elling real parts of a p articular c ompany,
itsp roduct,o rsomeotherv ariousc ommodity.
Owning a “share” means t hat you have a ctually bought into the company o r
productinvolveda ndb ecomeap artialownero ft hatcommodity.
Of course, you c ould b e o ne of millions of shareholders, a s m ost c ompanies
and products are b roken into minute pieces of the whole, but y ou are still
considereda ninvestorinthatcompanyorp roductuntilyousellyourshares.
Think of it a s p aying for a t ank o f gas in the car t hat y our parents bought for
you t o drive. Y ou m ay h ave even bought t he o il filter that h as b een put o n t he
car, and y ou may feel that this investment makes y ou part o wner. However,
when you look at the o verall c ost o f t he c ar, y ou have r eally c ontributed very
little to t hat a mount. H owever, a s long a s you c ontinue t o invest in the g as for
the c ar a nd t ake c are of t he m aintenance n eeds, you c an claim p art ownership
ofthecar.
Because the value of a c ompany and its products or services can fluctuate
continuously, t he value of t he s tocks y ou hold w ill not be the same from d ay to
day and c an sometimes even c hange hourly. W hen the p rice p er s hare d rops
and is considered low, it is a n ideal time t o p urchase. T his is t he least
expensive way t o b egin your trading venture, and w orking w ith a s tock broker
will allow you t o gain m ore information a s to w hat s tocks a re ripe for t he
purchaseata nyg iventime.
In d oing s o, y ou b ecome a stockholder, and t he v alue o f y our h oldings will
fluctuate from day to d ay. Y our g amble ( and hope!) is t hat the value of t he
company o r product in w hich you h ave invested will increase or r ebound from
the low price at which y ou made y our p urchase. This is the goal of all t raders
andmeanst haty ourstockwillb ecomem orevaluable.
As the value of y our securities increases, so does y our net w orth. W hen the
price of the stock in y our possession reaches a high p oint, it is time to s ell,
making a profit on y our original investment. Ideally, you w ill always sell y our
holdings for a reasonably higher p rice than t he purchase amount a nd s hould
never s ell w hen t he current value of t he stock is b elow y our initial purchase
price.
It is important t o make s ure that you d o not p urposely t ake a n et loss because
therea replentyo fo ccasionsw henyoucouldb eforcedt ot akealoss.
For e xample, if you purchase s hares o f a c ompany a t t wenty d ollars e ach, you
should never sell t hem for e ighteen dollars a piece. If p ossible, y ou want to
hold o ff u ntil t hey are e ach worth p erhaps forty d ollars, in essence d oubling
your money. Of course, t his is just an example, and not a ll s tocks w ill ever
doubleinvalue,butt heillustrationism eaningful.
There are other, more c omplex w ays to invest in t he stock m arket. H owever,
much like learning to r ide a bicycle, y ou do not w ant t o m ake your first
attemptw ithoutt rainingwheels.
MakingD ecisionsI nT heBeginning
Let u s return t o driving as a reference. W hen y ou first start d riving, y ou w ill
not enter the h ighway a nd take the car a t speeds of sixty and seventy m iles p er
hour. I nstead, y ou w ill stay in r esidential a reas o r a t least on t he access r oad,
wherethereislesspressuretom aintains uchah ighs peed.
In t he stock m arket, y ou w ill also want to stay away from a ny expensive s tocks
or e xtremely volatile investments u ntil y ou h ave b ecome extremely
comfortablewiththep rocesso ft rading.
There a re s mall investment opportunities r eferred t o as “ penny s tocks”, w hich
will h elp y ou t ry o ut your sea legs and g et a feel for h ow t he stock market
works p rior t o investing large s ums of m oney a nd risking a b ig financial loss.
These p articular s tocks c ost literally pennies or small d ollar amounts a nd
typically o nly fluctuate fractions o f a cent o n a ny g iven day, making t hem
extremelys afefort hosejusts tartingo ut.
Once you get the hang o f it and can better judge the market trends, y ou c an
comfortably move on to more c omplicated a nd a dventurous areas o f t he
market. It is like r emoving the t raining wheels from your b icycle or e ntering
the freeway t he first time at a n h our o f the d ay w hen t here is no traffic to
contendw ith.
Be a ware t hat, just like y ou may fall off your bike once o r t wice and end up
with s ome scrapes a nd bruises, y ou m ay lose money in a n investment here
and there. This is very typical, and investing in t he s tock m arket is a lot like
gambling. I n p oker, y ou cannot e xpect to w in every hand, a nd t he s ame is true
inthew orldofinvestments.
Learning t o watch t he market trends, though, is s imilar t o watching other c ars
as you join t raffic a nd d etermining the correct speed a nd proximity to o ther
cars for o ptimal safety. Such diligent s tudy c an h elp y ou improve your
statisticsd rasticallyina s horttime.
Chapter2: StockMarketTrends
Understanding stock m arket trends can make y our job of earning money in
the m arket much simpler. In c ontrast, if y ou know little or n othing about these
trendscancauseseriousloss.
BullsA ndB ears
As y ou d ig d eeper into t he m arket a nd learn more a bout the way it functions,
you w ill begin to h ear c ertain t erms about m arketing t rends that seem to b e
repeated o ver and over again. M arket trends a re variable and volatile, b oth on
ad ailyb asisa ndoverextendedp eriodsoft ime.
In the past, for e xample, the U nited S tates has h ad devastating stock m arket
crashes, but due t o the freedom o f a c apitalist society, the American economy
hasalwayseventuallyr ebound.
What d oes it mean for the market or a p articular s tock t o r ebound? Assuming
that t he v alue of a c ompany or its stock h as plummeted to a level that s eem
unrecoverable, leaving it p ractically worthless, it m ay feel as though t hat
company is in d anger o f bankruptcy a nd falling off the scope o f the free trade
marketsa ltogether.
All o f a s udden, h owever, the founder of t hat company m ay introduce a n ew
product o ver w hich consumers go w ild. Everyone w ants one, and this product
may be in short s upply u pon its introduction, causing a r ace t o the d epartment
stores helves.
When s uch a move o ccurs, the law of s upply a nd demand w ill t ake o ver,
making the company valuable o nce again. T he s tock price for that c ompany’s
shares will recover, and t he r esulting gain in v alue would be considered a
rebound – a r eturn t o t he o riginal s tatus ( or better) p rior to t he devastating
loss.
The m arket trends either u p o r down, and there are specific r eferences to
strong c hanges in the m arket v alues t hat you may frequently hear. If s everal
different a reas of the m arket a re in a s teep downward slide, with v alues
dropping rapidly (perhaps even t en or t wenty p ercent in a few d ays), it is
referredt oasab earmarket.
You can r emember this reference as t hough y ou a re in the extremely
dangerous p osition of b eing chased b y a bear – if y ou are in possession o f
several stocks o r o ther c ommodities w orth a goodly s um, y ou h ave a s erious
chance of losing a great d eal o f value that c ould translate t o a loss o f net w orth
shouldyouchoosetos ell,anditc anb easimilar,verydangerouss ituation.
Your best bet in these c ases is t o either sell b efore p rices d rop b elow y our
original purchase price o r t o hold onto t he shares until the m arket rebounds.
However, w hen t he bear m arket r eaches a low point, it c an b e an ideal t ime to
get into t he g ame, a s it is r are for prices t o drop b elow t his p oint. Then, if you
patiently await t he recovery o r rebound of the market, y ou can make a g reat
dealo fmoneyfromabearm arket.
Theseo ptionswillb ediscussedinm ored epthinlaterchapters.
At t he same t ime, a b ull m arket is a strong g eneral upward t rend for m any
stocks. You m ight c ompare this t o t he running of t he b ulls in Pamplona, S pain,
every y ear. Y ou are safer if you are indoors when the running o ccurs, a nd b y
the same token, if y ou o wn s tock during a b ull market, you are in a p rime
position t o increase y our n et worth a nd sell y our s hares, making a great deal
of money. This is another idea w ill b e further e xplored in g reater d etail
furthero ninthisebook.
TheMarketOutlook
By taking note of various changes in the status of d ifferent available s tock
options,y ouwilllearnhowt os potearlym arkett rends,g ivingy oua c lueto
the future of a p articular commodity, a nd this c an o nly a dd t o your c hances for
profitability.
Prediction is a big part o f t he game when working in t he s tock market, since
you c an n ever be completely certain in w hat d irection the m arket w ill swing at
anygivent ime.
However, y ou can make a n e ducated guess, m uch t he same w ay a
meteorologist forecasts the weather. W hile he o r she is not r ight 100% o f t he
time, the forecast is u sually quite c lose t o t he actual outcome o f t he w eather
because the meteorologist is a s cientist w ho has s tudied weather t rends a nd
can pick o ut d etails that a ssist in m aking that e ducated g uess. W ith a little
time and seasoning, y ou can a ttain the same level o f e xperience and intuition
withint hestockmarket.
Once you h ave become more c omfortable functioning in the same world as the
stockbrokers and d ay traders, a nd y ou feel confident ( or at least less n ervous
or a wkward) making s uch important financial decisions, you m ay d ecide to
make y our move t oward the F oreign E xchange M arket ( more c ommonly
known a s F orex), and the goal o f t his b ook is to p repare y ou to o perate within
theboundariesoft hismorecomplexe ntity.
Next, w e w ill d iscuss s ome o f t he p roperties of F orex a nd h ow m uch m ore
complext hiss tockmarketentitycanb et hana s tandardd omesticmarket.
The F oreign Exchange Market is incredibly volatile, a nd there a re a lot more
factors t o consider w hen placing a n o rder on this m arket than on a domestic
market. The following chapter is a n introduction to t he e xciting and
somewhats caryworldo ftheForeignExchangeM arket,orForex.
Chapter3: AnIntroductiontoForex
Forex is t he nickname for t he F oreign E xchange Market. I n the U nited States,
there are s everal branches of the stock m arket, each w ith t heir o wn n ame. F or
instance, some s tocks trade on t he D ow Jones, o thers on N asdaq. Of c ourse, a ll
stock market transactions in the United States take place on the N ew Y ork
Stock E xchange (NYSE). I n other countries the s ame is t rue. T here may b e
oneo rm ored istinctm arkets.
However, international t rade takes p lace o n t he market t ermed the F oreign
Exchange Market, or F orex. Several c ountries across the world in almost e very
time zone p articipate in trade on Forex, w ith m ultiple currencies being u tilized
and stocks a nd c ommodities from all participating countries b eing offered for
trade.
Because there a re s o m any n ations and t ime zones involved, Forex d oes not
function a s a “ business day” entity like m ost domestic stock markets. I t
remainso penfortrade24hoursaday,5daysaweek.
Of course, t hese additional h ours increase t he r isk factor intensely for t hose o f
us who are human a nd o bviously c annot m onitor o ur investments 2 4 hours a
day. T his means t hat the value of your h oldings could p otentially plummet
overnight, w hile y ou sleep, b ecause other countries a re s till trading while you
areinadreamworld.
Again, it is like a car – there a re m any moving p ieces under the h ood, a nd just
becausey oucannots eethemd oesn otm eant heyarenotfunctioning.
This is o ne reason for several s afety options, like limit orders, w hich w e w ill
discuss later. This is a lso why it is s trongly r ecommended that your first
attempts t o make m oney on t he s tock m arket are not t ransactions t hat take
place w ithin t he Foreign Exchange Market b ut o n a standard n ine-to-five
domestictradingm arket.
In our car a nalogy, t his would be c omparable t o h aving a sked s omeone w ho
hasneverdriveno revenc hangedt heoilinac art or ebuildt heengine.
ForexF unctionality
While the functionality o f F orex is the same as a domestic stock e xchange, t he
commodities a nd prices are m ore v olatile, and there a re additional factors to
take into c onsideration besides the t ypical risks associated w ith a d omestic
market.
You w ill h ave to c ontend with not o nly t he v alue of your stocks a nd your
currency, but a lso the foreign c urrencies involved in any trades or e xchanges
on Forex, a s w ell a s the inconsistencies o f values of particular goods a nd
services a cross international b orders. I t is like d riving a c ar w ith a s tandard
transmissiona so pposedtoa na utomatic.
On t he d omestic front, t he w ork is m ostly d one for y ou, a nd a ll y ou h ave to d o
is navigate, much like a n a utomatic t ransmission. H owever, s hifting gears is
quite similar to having to c onstantly take part in t he c urrency conversion. I t
canb edistracting,anditcertainlyc omplicatest heactofdriving.
Because the financial s ituation of many countries is not a s secure a s that of t he
United S tates, t his c an p ose a formidable p roblem in determining w here t o
invest your m oney a nd what to e xpect next in the international m arket.
Knowing w hat countries a nd currencies a re involved in Forex can a ssist y ou by
allowing you t o m ore c losely m onitor t he financial s ituation in the n ations
withwhichyouwillb einteracting.
TheHistoryO fF orex
When foreign t rade b egan, it was not an international t rade m arket. I t was
borne out o f t he Bretton W oods a greement in 1944, w hich s et forth that
foreign c urrencies w ould be fixed a gainst the dollar, w hich was valued at $ 35
pero unceo fgold.
This p recedent was first p ut into p ractice in 1967, w hen a b ank in C hicago
refused t o fund a loan t o a p rofessor in s terling p ound. O f c ourse, his intention
was to s ell the currency, which h e felt was p riced t oo h igh against t he d ollar,
thenb uyitb acklaterw hent hevaluehaddeclined,t urningaq uickp rofit.
After 1971, w hen t he dollar w as no longer convertible t o gold a nd t he
domestic market w as stronger, the B retton W oods agreement was a bandoned,
and t he currency c onversion process b ecame m ore v ariable. This a llowed for
a s tronger b acking in the foreign markets, a nd t he United S tates and E urope
began a strong t rade relationship. I n the 1 980s, t he market h ours and u sage
was extended t hrough the u se of c omputers a nd t echnology to include t he
Asiant imezonesasw ell.
At this time, foreign exchange equaled a bout $ 70 billion a d ay. T oday, a bout
twenty years later, the trade level h as s kyrocketed, with t rade e qualing c lose
to$ 1.5t rilliondaily.
Originally, t rading a cross international lines was m ore d ifficult, w ith s everal
different c urrencies involved across Europe. Though t he major players in t he
European market w ere deeply involved in a nd v eterans of international t rade
by the time o ther markets joined in, t here w ere m ore currencies to keep track
of– t hefranc,thep ound,thelira,a ndm anymore– thanwasreasonable.
With t he b irth of the European Union in 1992, t he w heels w ere set in m otion
to c reate a single c urrency t hat w ould b e used across most of E urope, a nd the
Eurow asfinallyestablishedandputintocirculationin1 999.
ForexToday
While some c ountries have still n ot accepted the currency as t heir o wn ( such
as Britain, who s till u ses t he s terling p ound), the process of c urrency
conversion h as b een s implified without the large number of v arious
currencies that were previously dealt w ith. Instead o f dozens of currencies,
the main c ountries t rade in five – U.S. d ollars, Australian d ollars, B ritish
poundss terling,t heE uro,andt heJapaneseY en.
Today, t he F oreign E xchange Market is international and worldwide. The
market is open 2 4 h ours a day, 5 d ays a week, t o accommodate all o f the time
zones for a ll of t he m ajor players. These n ow include most o f E urope, the
UnitedStates,a ndA sianm arkets,especiallyJapan.
Even Australia h as joined t he international t rading m arkets, a nd s ince such
nations a re h alfway a round t he w orld from some o f the o ther t op players, t ime
zonesobviouslym ustbet akenintoconsideration.
Another completely separate b ut p erhaps m ore important concern w ith
trading in F orex is u nderstanding h ow trade w orks in m ultiple c urrencies.
How can y ou compare the value of a s tock a cross international lines if t he
values are e xpressed in two separate, n on-equivalent c urrencies? And h ow d o
youm easureg ainsa ndlossesw henc onversionrateisc onstantlyc hanging?
Chapter4: UnderstandingCurrency
Conversion
When you b egin t rading on F orex, y ou have to learn h ow to c onvert c urrencies
and note t he difference in values, as well as how currencies are exchanged
between international lines. T his m eans studying n ot only domestic market
trendsandcurrencyv alues,b uta lsothoseo fforeignm arkets.
WorkingW ithM ultipleC urrencies
Since F orex is the Foreign E xchange Market, you obviously c annot expect
everyone within the market t o trade in U .S. dollars ( and w hy n ot, you m ight
ask? – but remember that n ot everyone covets the U.S. dollar). W ith s o many
variables a nd volatile c urrencies being exchanged, h ow can you know a g ood
buy o r s ell when y ou see o ne w ithout c omplete awareness o f t he value o f
foreignc urrency?
The first step is to find a s ource that w ill give y ou a basic idea o f the c urrent
exchange rate b etween y our d omestic currency a nd the foreign currency in
question. You should d o this as a base listing for any currency that w ith which
youmightb ecomeinvolved.
Of c ourse, this will not b e c onsistent d own to t he c ent o r fraction o f a
particular c urrency t hroughout a n e ntire business day, but a t least you w ill
have y our s tarting p oint from w hich t o b egin, a lmost like North o n a compass.
Such s ources c an b e found all o ver t he Internet, as w ell as t hrough m any
brokers,botho nlinea ndinperson.
CurrencyExpression
It is also g ood to u nderstand the m eans b y which currency c onversion is
expressed. T he c omparison is u sually made in a r atio k nown a s the c ross-rate.
In this configuration, the two c urrencies a re listed in a n XXX/YYY ratio, with
theX XXp ositionreferredtoast hebasec urrency.
The b ase currency is usually expressed a s a w hole number, while t he YYY
position is e xpressed as the decimal t hat m ost closely matches t he b ased
currency rate. I t is s ort of like making reference to miles p er g allon or
rotations per minute o n a c ar – a d irect c omparison of one t o t he other in t he
formofa ratio.
The s mallest fraction, o r d ecimal, in w hich a c urrency c an b e traded, is called a
pip and this is u sually the degree to which a cross-rate is expressed. F or
example, if t he British p ound s terling can b e t raded in thousandths, t he
currency w ill b e expressed t o the third decimal p lace. The U.S. d ollar is often
expressedtotheh undredtho fac ent(thefourthdecimalp lace).
In o ne c ross-rate expression e xample, one U .S. dollar may be e quivalent to
117.456 Japanese yen. This ratio w ould be e xpressed a s 1.000/117.456. T he
base c urrency is a lmost always e xpressed a s a s ingle u nit ( as in o ne dollar as
opposed t o ten dollars), and frequently that u nit of measurement is t he U.S.
dollar. S ince the whole n umber v alue ( or big figure, as it is r eferred t o) of the
secondary currency, o r the c urrency in t he YYY position in terms of conversion
changes so infrequently, often o nly the decimal portion of the n umber is
mentionedint heF oreignE xchangeMarket.
Therefore, in the r atio above, you m ay h ear t hat the yen is t rading a t .456, w ith
no m ention at a ll o f the 1 17 whole yen that is s hown in the r atio. T his is
because t he e xchange rate m ay v ary from 117.456 t o 117.423, b ut n ot to
119.024.
Experiencing a change in the b ig figure – the w hole number ahead of the
decimal – unless it w as o nly because t he number was a lready w ithin a few
thousandths, w ould represent m uch too large a s hift in v alue for a s ingle
trading period and w ould be a rare o ccurrence that could cause t he entire
markett om akea d rasticswingino nedirectiono rt heo ther.
The most c ommon currencies found in F orex are the U .S. dollar, the British
pound sterling, the Euro, t he Japanese yen, and t he Australian d ollar. I n t he
past, t here w ould h ave b een m any m ore c urrencies to keep t rack of (such as
the franc, the lira, or t he Deutschmark). However, with t he c onsolidation o f
most of the E uropean market trading on F orex t o the E uro, m any currencies
havebeene liminated,m akingt radeo nF orexforotherlandslesscomplicated.
If you purchase a c ommodity in a p articular currency, and t hat c urrency’s
value falls a gainst the U.S. d ollar, y ou c an actually m ake money by s elling that
same commodity in d ollars. T he s ame is t rue in r everse should the value o f a
foreign c urrency increase against a U .S. dollar. Of course, y ou c an o nly take
advantage o f such a situation s hould t he commodity be traded in b oth
currencies a nd b oth markets in question. We w ill d iscuss this p rocess, as w ell
as o ther w ays to t ake advantage o f the F oreign Exchange M arket (like
arbitrage)inm oredepthinfuturechapters.
Once you a re a ble to d iscern a b ase value o f each p articular c urrency and its
conversion r ate against others t raded o n Forex, y ou will be able t o more
closely m onitor t he c hange in c urrency c onversion, including its inconsistency
andvolatility.
Such ideas will not seem s o “foreign”, and you will be c aught up and
knowledgeable right along w ith t he p ros. T hen, you w ill n eed t o learn how to
read,u nderstand,andu ltimatelyinterpreta dditionalmarkettrends.
ForexT rending
Following charts, listening to the a dvice of market a nalysts and c hartists, and
learning to m ake educated p redictions y ourself will h elp y ou keep track of
various m arketing t rends. T he next c hapter w ill e xplain m ore a bout using the
statisticsthatarep ublishedt oforecastt hen extm oveonthestockm arket.
Will it b e a c lear, calm day w ith little activity, or is t here a s torm b rewing with
winds o f c hange and u ncertainty? H ow c an y ou tell what w ill h appen w ith
yourh oldingst hefollowingd ayore venfurtherintot hefuture?
Simply learning to r ead market t rends can r emove a lot o f natural
apprehension and u ncertainty for beginning traders. In fact, s ometimes t he
best first s tep to entering t he market is to w atch s hows about it or r ead the
financial s ections o f the newspaper t hat detail t he trends and e xpected
outcomes.
The following chapter will e xplain more about how to interpret the s tatistics
andbasict rends.
Chapter5: UnderstandingStatistics
You have n ow b ecome somewhat familiar w ith h ow t he stock market w orks,
and y ou understand to a p oint what is involved in trading o n t he F oreign
Exchange Market. Now, y ou w ould like t o know how to gauge market t rends in
order t o profit from your business ventures on t he o pen m arket. W e a re n o
longer discussing p enny stocks a nd playground games. You want the real
goods.
The n ame o f the g ame is s tatistics, a nd t he first rule is that y ou m ust b e aware
there is n o such t hing as a s ure t hing on t he stock m arket. W hile you can
never be 100% s ure at a ny g iven time o f the next m ove that w ill b e made on
the m arket a s a whole, b eing able to read statistics and interpret them will
placeyoua heado fthepackinregardst o“guessing”w hatwillh appennext.
Investing is a lot like gambling. I f y ou can k eep track of t he cards t hat h ave
already been p layed, you a re more informed, s tatistically, regarding what is
likely to b e dealt n ext, meaning you c an place a bet w ith greater insight t han
someonewhoh asn ocluew hathasalreadybeenplayed.
With the open market, if y ou h ave information a s t o w hat has a lready occurred
overthepastfewdays,months,oreveny ears,youarea gainplacedina b etter
position to more logically c onclude w hat will happen next. Y ou simply learn
thep atternandfollowittot hee nd,reapingt hefinancialr ewards.
ChartsAndChartists
Wait, d id you think y ou w ere g oing to h ave t o research and m ap o ut t he
market’s p ast a ll by yourself? Of c ourse not! T here are p eople w ho g et paid t o
do that s ort of w ork. They m onitor the market h ourly, daily, w eekly, m onthly,
and y early s o t hat they c an provide big-time t raders w ith the s ame k nowledge
mentionedbefore.
The m ore an investment company k nows a bout t he market, t he more m oney
they can make. T he same is true for stockbrokers. They make money when
you make money, a nd they want t o d o the best they can t o m ake sure that you
makeintelligentdecisions.
The best p art of this is that you h ave a ccess t o the same information a s these
VIP c lients. C hartists, who are e ssentially market a nalysts t hat p ublish their
findings in easy to r ead charts, p roduce what is referred to a s a c andlestick
chart. These charts a re b asically a c ombination o f a line graph and a b ar graph
that s how the t rend of various stocks, indexes, o r o ther interests o ver a
specifiedp eriodo ftime.
Therefore, you can easily determine if t he commodity is on an uptrend o r if it
is t aking a d ownturn, w hen t he last m ajor c hange occurred, a nd h ow long it is
predictedthatt hes tocko rb ondw illc ontinueont hecurrentp ath.
You can a ctually find information on most c ommodities a nd their m arket
trends for y ears in the p ast, and s ome even a ll t he w ay back to their
introduction t o t he open market. Using this information can help y ou d ecide
whether it is a good idea t o b uy o r s ell the s tocks o r securities in w hich you
haveinterest,orifitisbettert oh oldofffora p eakinthem arkettrend.
UnderstandingMarketTrends
Understandably, a s e conomies vary, t he value of v arious c ommodities can
change. T his is because, w hen a n e conomy is strong and flourishing, a nation
is wealthier and h as m ore p urchasing power. Along w ith t hat p ower comes a
highervaluefortheitemspurchased.
In o ther w ords, if people have m ore m oney t o spend a nd a re spending a
greater a mount o f t hat m oney a t Walmart s tores, the value of s tock a t Walmart
is going to m ultiply at a considerable r ate. Therefore, s tockholders b ecome
wealthier in t erms of a ssets, simply because t he shoppers a re d riving t he
marketwitht heirpurchasingp ower.
When s tockholders are w ealthy, a nd the v alue o f their holdings is on the r ise,
they continue t o purchase s tock, w hich a gain, pumps t he e conomy. A strong
upwardt rendinthes tockm arketisane xcellents ignforanye conomy.
However, there a re a lso things t hat affect the market in a negative fashion,
causing s tock v alues t o p lummet. For example, w arfare r arely has a positive
effect o n t he stock m arket. O n September 11, 2 001, when t errorists attacked
the W orld Trade C enter in N ew York City, t he e conomy o f t he U nited States
took a h uge dive, a nd the n ation w as t hreatened w ith a depression. Some
analysts were s ure t hat it would n ever p roperly r ecover. The same t hing
typically happens any time t here is a n attack or a ct of w ar within a nation.
However, the c ritics proved t o b e wrong, a nd t he U nited States p roceeded to
rebound,orr ecoverfromab add owntrend,ina strongm anner.
This q uick r ecovery o ccurred mostly b ecause the p eople of the United S tates
continued t o push and s pend, forcing money a nd w ealth back into t he
economy. I n watching the reaction of the s tock market, y ou c an learn to r ead
trendsbasedo nw orlde vents.
Oil p rices c ommonly a ffect the stock market, as well. Especially on t he F oreign
Exchange Market, y ou w ill find trends vary depending on many c urrent events.
You w ill also n ote that, o ver time, the principle value (or face v alue) of
currency m ay p urposely b e revised by a nation in t erms of currency
conversion.
This is referred t o a s d evaluation, w hich will be discussed in greater detail in
thefollowingchapter.
Chapter 6 : Forex Volatility a nd M arket
Expectation
Volatility, o r t he tendency for fluctuation t hat can affect y our e arnings within
the s tock market, is typical w ithin a domestic m arket b ut e ven more e vident
and m uch s tronger on the F oreign Exchange M arket. What factors a ffect t he
valueo fcurrencyo nForex,andist hereanyw aytocontrolt his?
DevaluationA ndR evaluation
As mentioned in the p revious c hapter, devaluation refers to t he purposeful
decline in value o f a currency in r elation t o other c urrencies as c harged by a
governmententity.
For example, if t he U. S. d ollar is w orth ten units of a foreign c urrency t hat is
then d evalued b y t en p ercent, the U . S. d ollar is now e quivalent t o only n ine
units o f the foreign currency. T his m akes a ny items p urchased in t he foreign
currency more expensive for those trading in U . S. d ollars, a s t he exchange r ate
is lowered. I t a lso makes items in t he foreign country less e xpensive to trade
inU.S .d ollars.
An opposite c hange in value c an a lso occur, r aising the v alue of t he foreign
currency. This is r eferred to as r evaluation. W hile it m ay s eem t hat p urposely
adjusting the value of a n ation’s c urrency is “cheating”, o r t aking an unfair
advantage b y making foreign products cheaper t o purchase and increasing t he
value o f e xports, there a re r egulations in place to prevent the manipulation o f
exchange r ates for such purposes. The charter o f t he I MF (International
Monetary Fund) a ssists in p rohibiting s uch occurrences and enforcing the
policy.
There are w ays in which y ou can t ake a dvantage of devaluation a nd
revaluation, which w ill be d iscussed later o n. H owever, what happens w hen
the v alue of a foreign c urrency c hanges due to market fluctuation r ather than
purposeful reductions or increases b y a federal g overnment or federal b ank?
Whate ffectdoa ppreciationa ndd epreciationhaveo nthes tockmarket?
AppreciationAndDepreciation
Depreciation can b e e asily related t o t he life of a c ar. As s oon a s you d rive a
new car o ff t he lot, t he value is a lmost c ut in half. This is extreme
depreciation. H owever, over the n ext few years, the c ar c ontinues to lose value
ata moregradualpace. T hisisc onsideredt obedepreciationasw ell.
Currency a ppreciation and depreciation a re c hanges in the v alue of t he
currency that are d riven by m arket forces rather t han b y g overnment
mandate.
For example, in an a ttempt t o r epay certain loans, in 1 998 t he Central B ank of
Russia announced t he coming devaluation o f t he ruble. The e xchange rate,
which w as currently six r ubles p er U.S. dollar, would over a p eriod o f time
changeto9 .5r ublesperd ollar,e ffectivelya depreciationo f34%.
However, prior to the c hange, t here was a widespread p anic w ithin t he former
Communist nation, a nd t he value of the r uble dropped due to many p eople in
Russia opting t o trade in their securities p rior to m aturity. I n a single d ay,
following the announcement, the Russian ruble w as d epreciated b y a n
amazing25%.
The s ame s ort of c risis o ccurred in the 1920’s with the c rash of the U.S. stock
market. I n t hat t ime, a nationwide panic s et in, a nd people rushed t o t he
banks t o w ithdraw cash that was not available or to trade in s ecurities a nd
stock o ptions that w ere n ot m atured. In running t o the b ank, p eople a ctually
causedt hec rashratherthanescapedit.
On t he flip side o f the c oin, t oo fast o f an a ppreciation sets up a country for
inflation, o r an increase in the r etail value of p roducts s old to the p ublic based
on currency v aluation. While inflation is bound to occur, it can be minimally
temperedt hroughtheu seo ft hecurrencyv aluation.
Appreciation can b e related t o a vehicle a s well. Often, men e njoy taking o ld
cars and restoring them t o t heir original b eauty. In doing s o; t hey d rastically
increasethevalueo fthev ehicleo rappreciateit.
The ever c hanging r ates of c urrency c onversion a nd volatility o f the market
create an inherent market risk, or a d ay to d ay p otential t o experience loss due
to fluctuation in s ecurities p rices. T here is n o way to diversify this type o f risk,
asitisa lwaysg oingtoa ffectinvestmentt oac ertaind egree.
However, s ome r isk can b e offset by particular types o f investments o r ways o f
investingthatarem oresecureorprotected.
We will take a look at long and s hort positions, s hort selling, stop orders, and
other ways t o protect y our investments from d rastic loss in a dditional
chapters. These o ptions include the ability t o p reset your purchase or s ell
price for a specific c ommodity, a s w ell a s u sing v arious p redetermine o rder
levelstop laceordersandc ompletet ransactions.
Of c ourse, do n ot delude yourself into thinking t hat you can r id y ourself o f a ll
possible r isk factors o n the market. T here is always a cloud h anging o ver y our
head waiting t o burst, and all it t akes is o ne little pinprick. You m ust always
exercise caution, t hough t he idea o f playing t he s tock market entails d anger
andexcitementinherently.
The n ext c hapter w ill h elp y ou g et a grasp on r eality a nd w hat is involved in
balancingyourriskfactorw ithagroundinginreality;y oure gow ithyourid.
Chapter7: AspectsOfTheTrade
You a re now v ersed in t he functionality of the stock m arket a nd have d ecided
that y ou a re willing to a ccept the risk factors involved. However, y ou w ant t o
know everything y ou c an about balancing t hat risk w ith intelligent investment
options. H ow c an y ou b e sure t hat t he risks y ou t ake are m ore likely t o b e
rewardinginthelongrunthand estructive?
Longa ndShort
One of the m ost important parts o f m aking m oney on the stock market is to
determine y our p osition. T he long p osition is b asically the purchasing
position – you are a bout t o take on a long-term c ommitment for o wnership o f
some stock, s ecurity, or other t raded c ommodity. T he s hort position, b y
contrast, is the selling position – you a re shortly going to dispose of t he s ame
sorto fo wnershipandanyr esponsibilityt owardit.
The best t ime t o t ake u p t he long position is w hen s tock p rices are low. T his
will g et you into the market at a reasonable price and increase your c hances
for p rofitability a s new offerings g o up in p rice a nd o lder investment o ptions
recoverorr ebound.
In fact, as others take the long position a nd p urchase a t t he s ame t ime you do,
this w ill a ctually drive t he v alue o f s ecurities u p through the s tandard rule of
supplyanddemand,causingt heb eginningofwhatc ouldb ea b ullmarket.
You may e quate this w ith the e nd o f the month a t a car d ealership. The prices
tend to drop o n any cars left o n t he lot for s ale, a nd the dealer is m ore o ften
willingtob argainb ecauseh eo rshew antslessinventoryont helot.
Likewise, w hen stock p rices are low, s ome will p anic and dump all of their
holdings a t t hese low prices, thinking that their shares w ill n ever recover t he
value. Thiscano nlybeo fa ssistancetoy ou.
When prices are h igh, it is likely time t o t urn around a nd s ell y our s hares to
bring in a profit, not losing anything o n u nrealized gain (profit that cannot be
counted in liquid assets o r c ash b ecause it is s till invested in a v olatile stock
option).
You s hould never sell for a p rice that is below your c ost, as this brings negative
equity and loss of funds. Y ou s hould always sell for t he g reatest a mount o f
profitthatyoufeeliss afe.
In other words, if y ou buy a s ecurity a t fifteen d ollars per s hare, and it quickly
rises to twenty-five d ollars per s hare, y ou may v ery well feel t hat it could hit
thirtyd ollarspersharew ithina w eek.
However, you m ust determine if y ou a re willing to risk losing your already
secured e arnings of t en d ollars per share to wait t hat long, s hould t he p rice
actuallyfall,s oy oumaydecidet os ellatthec urrenth ighp rice.
Market-MakersAndS ellingS hort
What if the s tock values are up incredibly h igh, but y ou d id n ot get in on that
particular commodity a nd o wn n o shares? Your first s tep s hould b e to visit a
market-makerort omakead ealwithabrokerforas horts ell.
A market-maker is literally a stockbroker w ho purchases keeps a c ertain
amount o f s hares o f several securities o r stocks on h and, w hich a re p urchased
duringa timew henthem arketr atesa relow.
The firm will t hen turn a round and sell t hose shares t o an individual at t hat
low price, r egardless o f t he market r ate, in e ffect m aking its o wn m arket (thus
the name). T he individual who p urchases from the firm can immediately s ell
the commodities o n the o pen m arket at m arket r ate (which is h igher), m aking
anincrediblea mountofprofitinas hortperiodo ftime.
A s hort sell is another o ption for a q uick p rofit. I n this scenario, you will
borrow a particular n umber o f shares from a stockbroker t o sell when t he
market v alue is high. Your job is to t hen wait for the s tock price t o g o d own,
purchase t he s ame q uantity of s tock, and return the holdings to t he broker,
keepingthep rofitfromt hes ale,m inusthebrokerfees.
The w ay t hat a c ar d ealer works with t rade-ins is very similar. T hey w ill
purchase t he c ar from y ou a t a v ery low p rice, t hen turn a round a nd sell it on
thelotfora h ighp rofitm argin.
One of t he m ost positive a spects of a short sell is t hat y ou n ever actually take
possession o f the s tock. Because you h ave sold shares for a h igh p rice, you
have already p rofited, and in t he w orst-case scenario, the p articular s tocks will
notd ropinprice.
Rather than return the s tocks to the b roker from w hom they w ere b orrowed,
you c an s imply pay back t he amount for w hich they were o riginally purchased,
alongw itht hepremium.
How c an y ou b e sure that you w ill not o vershoot t he b est p rice options or m iss
a good r ate because y ou a re unavailable t o place a buy order or s ell o rder w ith
your broker? I s there a way to set limits on y our t rades? Next, we w ill d iscuss
wayst op rotectyourinvestmentsandlimityourriskfactors.
Chapter8: RiskManagement
One o f the most important a spects o f p rotecting your investments is balancing
your r isks with r eassurances. T here are s everal w ays t o d o this, a nd we will
discussthoseinthischapter.
LimitOrdersA ndB alancingRisks
A limit o rder is a standing a mount at which y ou h ave agreed t o b uy o r s ell a
particular security or o ther c ommodity. F or instance, y ou have designated t o
your stockbroker that you will n ot s ell X Security u ntil its value r eaches a
minimum value of Y d ollars. At t he s ame t ime, y ou w ill n ot purchase t he same
X S ecurity if it e xceeds a v alue o f Z. S etting limits for t he p rice y ou p ay for a
particular s ecurity, as w ell a s t he price y ou w ill a ccept t o s ell it, p rotects you
andyourinvestmentins everalways.
First of all, y ou a re m aximizing your g ains, b ut mostly, you a re avoiding loss.
Any loss t hat occurs w ith limit orders will a lways b e unrealized loss, o r a loss
thatisnotmeasurableinliquidassetsorc ash.
In other words, until you s ell t he stock a nd reap the n et loss, it w ill n ot a ffect
your n et worth. S ince y ou h ave set a limit t hat d oes n ot allow y our
commodities t o b e s old for less than the original cost, y ou c annot possibly
havealossinyournetworth.
At the same t ime, you are a lso a ssuring at least a certain a mount o f p rofit by
settingyours ellp ointh ighe noughtoreapthatp articularp rofit.
Another w ay t o protect y our assets is t o h edge. T his means that you create
and sell a futures contract s tating t hat, w hen your shares reach a certain v alue
inthefuture,y ouw ills elly ourholdingsa tt hispredeterminedprice.
When t hat p rice is r eached, t he o rder w ill b e p rocessed and t he t ransaction
completed. Of course, if y ou e ver c hange your mind about a limit that y ou
have s et, you can place a s top order with your broker, which d esignates that
younolongerw isht ot radeatthes pecifieddollara mount.
You c an also buy o n margin. This is v ery s imilar to short s elling, b ut instead of
borrowing stocks t o sell, y ou are e ssentially borrowing money to purchase
stocksonyourownwhenthemarketvalueisdown.
Then, w hen t he value of the s ecurities y ou have p urchased r ises and you are
able t o sell for a profit, y ou r epay the loan and keep the excess from the sell,
minust heb rokerfees.
Of course, a ll d ealings with a s tockbroker incur a p remium, o r fee for services
rendered, a nd it is nearly impossible to trade without a b roker o r b roker
service. However, online s ervices are often less e xpensive than live agents, but
youcanr esearcht odeterminew haty ourb esto ptionis.
HowD oIH andleaWhipsaw?
No, w e are n ot referring t o a nything in the garage, the b edroom, o r a c ountry
band. A whipsaw is market t rend that defies the o dds. It can b e thought o f as
the“ fenderb ender”.
D espite how c areful y ou a re a s you learn to drive a car and become
coordinated,sometimesyouc annotdoanythingt oavoidbeingr ear-ended.
Whipsaw is a term for what h appens when e verything points t oward a specific
direction in market trend, causing y ou t o buy ( if it looks a s though p rices are
going to rise) or s ell (if it s eems t hey are about t o fall), t hen t he opposite e ffect
occurs.
For e xample, if you purchase a security at five dollars p er share because the
stock seems to h ave fallen a s far as it c an g o a nd a ppears to b e s tarting an
upward trend, t hen unexpectedly, the s tock plummets to one d ollar per s hare,
this is c onsidered a w hipsaw e ffect. If this h appens to y ou, as it s urely w ill if
youp layt hem arketlonge nough,t heb estt hingtodoiswaitito ut.
The s tock w ill do o ne o f t wo t hings – it will either dissolve e ntirely, a nd t he
company w ill go bankrupt ( this is what y ou do not want to happen), or it will
rebound, a nd you c an opt t o wait for a c hance to t urn a profit o r you c an get
outass oona sthepurchaserateisreached.
Whipsaws a re n ot t he e nd o f the w orld, and n o o ne c an expect to gain w ith
every s tock m arket p urchase. H owever, if y ou find t hat you are involved in
several of t hese instances, you s hould seriously reconsider y our investment
options.
You may be r eading the signs incorrectly, or y ou c ould be picking bad s tocks.
You should s eek a dvice for a ny future investments y ou expect to make p rior to
purchasinganyfurthers tockso rsecurities.
Another w ay to overturn a bad investment like this is to proceed w ith an o ffset
transaction–a p urchaseo rs ellthatoffsetsthelosso fap revioustransaction.
You c ould either purchase additional s tock in the s ame c ompany a t the lower
price if you e xpect it to recover, o r y ou c an opt for a nother hot commodity t hat
is about t o e xplode in p rice, e ither of which will help y ou o ffset your loss. You
could a lso sell shares o f a s ecurity in w hich you have a large amount of
unrealized g ain – gain t hat c annot be m easured in liquid a ssets or cash d ue to
increase in value o f stock and s ecurity h oldings – in o rder t o replace the lost
cashv alue.
All of these a re v iable o ptions to recover a loss, but w aiting for t he s hare v alue
to rebound is always the first choice. I t avoids the loss of funds already
invested, r etains the o ption to p ursue profit, a nd r educes the r isk of further
investmentintot hemarket.
As you grow a nd learn a bout these v arious options, you will n eed to feel more
comfortable w hen s urrounded b y financial g urus a nd geeks w ho s peak what
soundslikeg ibberish,mutteringw ordsyouh aveneverheardleftandright.
The following c hapter w ill take y ou through some of the meanings o f t he
major “ buzz” w ords u sed in t he s tock market a nd t he international financial
district.
Chapter9: BuzzWords
Now t hat y ou know a little m ore a bout t he stock m arket, and y ou h ave decided
to t ry your h and a t investment, y ou should b e m ore concerned with
understandingthejargonyouwillhearo nt hetradingr oomfloor.
The words you are searching are inside this book. To get more targeted content, please make full-text search by clicking here.
QT Academy - Insider Techniques To Profitable Forex Trading
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