The Forex Trading Manual: The Rules-Based Approach to Making Money Trading Currencies (PROFESSIONAL FINANCE & INVESTM) - Hardcover

PAZ

Hardcover

ISBN 10: 0071782923 ISBN 13: 9780071782920

Publisher: McGraw Hill, 2012

Synopsis

How to get your share of the $4.5 trillion Forex market

Forex trading and driving a car are both risky endeavors. Each requires the ability to manage multiple factors at once, be vigilant of the changing environment, and adapt when necessary. And both activities get much easier with time―if you follow the right set of rules.

In The Forex Trading Manual, Javier Paz draws the parallel between driving and trading, illustrating how success in the forex market is simpler to achieve than you think. The key to becoming a proficient trader requires starting the process with the right basic knowledge, adopting sensible expectations, and having precise step-by-step instructions.

The Forex Trading Manual supplies everything you need to get started. Beginning with important forex terminology, risk management, and basic technical and fundamental analysis, it follows with a rules-based trading strategy, a precise trading plan, and a chapter devoted to trader psychology. Learn how to:

• Master MT4, the most popular forex trading platform software
• Select trade entry and exit points that have a high probability of turning a profit
• Set sensible performance targets and trade exposure rules
• Customize whatever trading strategy you are currently using to fit a robust trading plan
• Condition yourself mentally by aligning your habits, thought patterns, feelings, and goals to match those of a proficient forex trader

The forex market is huge―an estimated 4.5 trillion U.S. dollars changed hands daily during 2011―and is suited for trading during periods of economic uncertainty. Tens of millions of individual traders―from stay-at-home parents to young professionals and the self-employed―have already made the move to trading forex.

The Forex Trading Manual will be your trusted guide every step of the way as you begin this exciting journey.

Praise for The Forex Trading Manual

“Javier has written a guide for Forex that is like no other. . . . If you want to understand how the world of Forex works, then you must read this book.”
―Casey Stubbs, founder of WinnersEdgeTrading.com

“The Forex Trading Manual has hit the ball out of the park―a real home-run. We have long needed explicit instructions on the trading plan all the gurus say we need, and here it is..”
―Barbara Rockefeller, author of Technical Analysis for Dummies, founder of Rockefeller Treasury Services

“This book is excellent. . . [it is] oriented towards the practice of trading. Contrary to most other related books, it gives excellent advice on how to start and make progress. In it I have found inspiration for my own tries.”
―Arnaud Jeulin, Founder of forexticket.com and mataf.net

“An excellent guide for those looking to take their forex trading to a higher level. . . . [and a] valuable addition to any forex trader’s bookshelf.”
―James Chen, CTA, CMT, Director of Technical Research and Education, FXDD, and author of Essentials of Foreign Exchange Trading and Essentials of Technical Analysis for Financial Markets

“A great resource for investors looking for education that integrates the theory of forex trading with application on the industry’s best-practice trading platform.”
―John Jagerson, founder of LearningMarkets.com and author of All About Investing in Gold

“It coaches readers on how to trade consistently with a disciplined approach and how to recondition your trading habits if you’re an experienced retail trader in search of better results.”
―Dean Popplewell, Chief Currency Analyst at OANDA and editorial director of MarketPulseFX, OANDA’s forex blog

“A concise, detailed, no-nonsense resource. . . . Highly recommended.”
―Jamie Coleman, Managing Editor, ForexLive.com

About this title

About the Author

JAVIER H. PAZ is a veteran forex trader and a recognized online trading industry expert. As senior analyst for the Boston-based Aite Group, Javier evaluates trends in the active trading industry and is regularly quoted in the financial media (Wall Street Journal, Reuters, and Bloomberg). He has also served in trading industry events as keynote speaker, judge, and panelist. Prior to the Aite Group, Javier launched ForexDatasource.com, ran the institutional desk of retail FX broker IBFX, and worked as an analyst in the fixed income and derivatives desk of Credit Suisse First Boston and BankBoston.

Excerpt. © Reprinted by permission. All rights reserved.

The Forex Trading Manual

The Rules-Based Approach to Making Money Trading Currencies

By Javier H. Paz

The McGraw-Hill Companies, Inc.

Copyright © 2013 Javier H. Paz
All rights reserved.

ISBN: 978-0-07-178292-0

Contents

Acknowledgments
Introduction
CHAPTER 1 Similarities Between Driving and Trading
CHAPTER 2 Important Terminology in Forex Trading
CHAPTER 3 Securing a Trader's Permit
CHAPTER 4 The Trading Simulator
CHAPTER 5 Technical Analysis
CHAPTER 6 Fundamental Analysis
CHAPTER 7 Your First Trading Strategy
CHAPTER 8 Following Your Trading Plan
CHAPTER 9 Mental Conditioning
CHAPTER 10 Trading Resources
CHAPTER 11 Maximizing Profitable Trades
CHAPTER 12 Final Thoughts
APPENDIX A How to Open a Practice Account
APPENDIX B Trade Size Table
Notes
Index

Excerpt

CHAPTER 1

Similarities Between Driving and Trading

The forex driver analogy

The fear of driving under adverse weather conditions can have a paralyzingeffect on new drivers. Picture a 15-year-old boy inside a car that is parked infront of his house, grasping the steering wheel with excitement. He is monthsaway from getting his driver's license and being able to offer a ride home tocute and excitable girls. This happens to be an insecure teen, one who is proneto thoughts of remote risks. He now imagines himself driving on the freeway on arainy day next to a semitrailer truck that is dumping copious amounts of wateron his car's windshield. There is zero visibility at 60 miles per hour. Hisheart rate is accelerating; his eyes are fixed ahead. His grip on that steeringwheel has suddenly gotten pretty tight.

To a lot more people than you might imagine, learning forex trading can be asscary as the thought of sharing the road with a water-gushing truck was to thisboy. What could we tell our imaginary 15-year-old to stop him fromhyperventilating? We can start by reminding him that those scenarios areeveryday occurrences, but in very few instances do they actually lead toaccidents. The key to keeping one's wits about one in that situation can be assimple as (1) gradually slowing down, (2) not making sudden lane changes, and(3) turning on the hazard lights.

Driving cars is an activity that most adults have adopted. Yet, nobody would saythat being behind the wheel is always easy. Driving requires concentration andcoordination. We concentrate on the road, on other vehicles, and on drivingconditions. Like big computers, drivers are expected to calculate in real timethe distance to the car in front of them, keep open the possibility that anotherdriver might do something foolish, and so on.

As drivers, we are also required to maintain a delicate coordination among oureyes, our left hand on the wheel, our right hand on the stick, and our foot onthe right pedal. Some people would argue that the reason we drive automatic carsis so that we can hold a phone to send that important text or Twitter update:"omg, I just crashed [??] [??]."

Learning to trade forex also requires concentration and coordination. You willlearn to shut out life's distractions and the noise from news headlines and tofocus on charts that will tell you whether or not to place a trade. You willalso learn how to set the proper trade size, take-profit levels, and stop-losslevels.

Lack of patience is one of the biggest enemies that we will work on defeating.In fact, some of you are probably already wondering when I will get to "the goodstuff." By design, I am starting this book with some mental conditioning beforewe jump to the technical chapters. For those of you who have watched TheKarate Kid, this is a wax on, wax off, moment.

Forex driving school

This book will teach you how to become a proficient forex driver in what Ibelieve is the proper sequence. Each chapter prepares you for the next lesson,so I strongly recommend that you read the book in order.

It's been a while since I was in driving school. One of the few things Iremember about the experience was sitting in a driving simulator while mydriving instructor, a guy in his fifties with a receding hairline who spoke witha soft, monotone voice, went through the lesson. In retrospect, I think each ofthe students in my class had faith that we could get through driving schoolrelatively easily. After all, if those in the previous generation had gottentheir driver's licenses this way, so could each of us. Likewise, I need you tokeep this type of open mind on the idea that this book can be your drivingschool for trading forex.

Like driving school, learning forex will require reading and practicing over thecourse of several months. But even though it will take some time for you tomaster the material, I hope the knowledge you get will make it a fun,predictable, and profitable experience.

By the end of this book, you will be surprised at how much you have learned, andyou will feel empowered to go out and try forex trading on a practice account. Iencourage you to trade daily, for 20 to 30 minutes each time (or more, ifpossible).

Basic competency and expert handling

There is something to be said about managing our own expectations of what we canachieve as forex traders, both initially and over time. Many forex traders havequite high return expectations (see Figure 1-1).

Two of every five respondents in a 2010 Forex Datasource survey expected to earna monthly profit of more than 10 percent. This figure is surprisingly high,considering that most traditional investments today have a hard time offering a10 percent return per year. The 10 percent per month figure should alsobe taken with caution. With higher-than-average return comes higher-than-averagerisk of loss. Achieving that type of return is possible, but it is not as easyor quick as many traders initially expect. In Figure 1-2, a separatesurvey of global traders commissioned by CitiFX Pro (a Citibank unit) showswhether these high expectations of forex traders were achieved. About 27 percentof respondents lost money for the year, and a select 11 percent of tradersreported an annual return of more than 100 percent; the majority of traders weresomewhere in between.

So what should be your expected trading performance? This is a trick question.Setting a return target is secondary to becoming a proficient, disciplinedtrader.

When the State of Utah granted me a driver's license at age 16, it didn't expectme to be ready to race cars in Formula 1 events or to do crazy turns and jumpsthe way a Hollywood stunt driver would. My license was the last step in aprocess where I had shown a basic understanding of and proficiency atdriving a car under normal conditions.

When the state grants driver's licenses, it has no certainty that all newdrivers will be proficient drivers. Our society, from state agencies toinsurance companies, has developed a fairly sophisticated system for educating,authorizing, and insuring drivers. It has also devised methods for removing,temporarily or permanently, drivers who are considered to be dangerous. Thus, itcould be said that our society takes calculated risks on the driving population.

The goal of this book is to help you take calculated trading risks and become aproficient trader. With additional time, education, and dedication, a proficienttrader becomes an expert trader.

The ranks of forex traders are growing

Aite Group estimates that the number of people who are interested in forextrading (those with live and practice trading accounts) grew to more than 28million worldwide, with much of the growth taking place in Europe and Asia (seeFigure 1-3).

People in Japan have taken on forex trading the most strongly. The FinancialFutures Association of Japan reports that, as of March 2012, there are more than3.9 million forex trading accounts in Japan. In an October 2009 article, therespected business journal Financial Times reported that Japanese forextraders included "everyone from housewives to full time workers who have givenup their day jobs to focus on currency trading."

Growth of retail forex in the United States has been considerable, but it hasbeen somewhat slower than in other parts of the world. There are clear signsthat FX trading is growing in the United States as well, however. Each year,Inc. magazine recognizes the fastest-growing privately held firms in theUnited States. These companies typically show three-year revenue growth rates inexcess of 100 percent. Every year from 2004 through 2011, Inc.recognized at least one U.S. forex trading firm in its prestigious list: FXCM(2004, 2005, 2006, 2010), Global Futures & Forex (2006, 2007, 2008), FXSolutions (2007, 2008), Gain Capital (2007, 2008, 2009), CMS Forex (2007, 2008,2009), Interbank FX (2008, 2009), Forex Club (2010), and Boston Technologies(2011).

It is also interesting to observe that if the forex trading business depended ona good economy to thrive, we would not have seen these firms post record revenuegrowth during the 2007 to 2011 period.

Virtually all of this forex trading growth has taken place since 2005, althoughits roots date back to the late 1990s. What do traders find attractive in forextrading? One-third of the traders surveyed by CitiFX Pro believed that forextrading offers the best potential return in both up and down markets (seeFigure 1-4). Stock and bond markets are acting in unpredictable waysassociated with changing economic and political conditions.

The forex market has thrived regardless of whether the global economy wasbooming or was in the midst of a severe crisis. Forex trading is also attractivebecause people who trade it find it interesting and convenient to trade—itis open 24 hours per day for 5.5 days a week.

CHAPTER 2

Important Terminology in Forex Trading

Let's move closer to trading and start to get technical. If you are already atrader, I recommend that you skim over my definitions of terms (like leverage,margin utilization, and so on) and make sure that your foundation of thesetrading terms is rock solid. If you are completely new to trading, then payclose attention.

The experience of driving a car is measured using some technical terms that maynot be understood by those who do not drive. For example, if we asked a 12-year-oldkid to define the meaning and use of mph, rpm, or psi, the kid wouldprobably struggle a bit.

We measure travel speed and distance in miles per hour (mph). When we press thegas pedal, we measure rotational speed within the engine in terms of revolutionsper minute (rpm). And we measure tire pressure in terms of pounds per squareinch (psi). There are recommended numeric ranges for each of these measures.

In this chapter, we explain a few key concepts that will allow a new forextrader to appreciate what forex trading is all about. Very importantly, this iswhere we will cover how we measure trading profit and loss.

What is forex?

Forex is the name given to a very large market that involves buying one currencyand selling another currency simultaneously. An exchange of currencies occursanytime a person or entity in one country goes through the process of acquiringthe currency of another country to

* Buy goods or services from a foreign company

* Hedge (protect) a foreign investment or trade receivable

* Buy foreign securities

* Borrow money from foreign investors

* Pay for meals and transportation while on a vacation abroad

* Speculate on changing foreign currency rates

Since the end of the Cold War era (approximately 1991), international trade andinvestment have increased at an extremely rapid pace. Money flowing withininternational money and capital markets is now measured in the hundreds oftrillions of U.S. dollars. The daily trading volume of the forex market, asmeasured by the Bank for International Settlements and Aite Group, has risenfrom US$1.2 trillion per day in 2001 to approximately US$4.5 trillion in 2011.

Currency trading can be dated back thousands of years ago, originating in a needto exchange diverse commodities like grain, spices, and wine outside of a localor national region. However, it was only in the late 1990s that, throughadvances in trading technology and the Internet, individuals gained the abilityto participate in this very large and fast-growing market. Although $4.5trillion trades daily in forex markets, Aite Group estimates that more thanUS$350 billion per day changes hands in the retail part of the FX market.

Currency pairs

In many markets, there are thousands of securities that someone could trade. Notso in forex markets, where the task of deciding what to trade is much simpler.Currency trading occurs in pairs, that is, currency pairs. There are sevencurrency pairs that people trade the most: EURUSD, GBPUSD, USDJPY, USDCHF,USDCAD, AUDUSD, and NZDUSD.

For example, EURUSD represents the value of one euro measured in U.S. dollars.If the current price of EURUSD is 1.3203, this means that for every euro, we getone dollar, 32 cents (or pennies), and three hundredths of a penny. When you goto a bank to exchange dollars for euros, you never get these hundredths of apenny (called pips), but when you trade forex, these pips matter a great deal.

Just to solidify the concept of currency pairs, let's do one more example. TheUSDJPY pair represents the value of one U.S. dollar measured in Japanese yen. Ifthe current price of USDJPY is 89.95, this means that for every U.S. dollar, weshould get 89 yen and 95 cents.

In these two examples, the U.S. dollar appears in different positions within thepair. The first three letters of a currency pair represent the basecurrency, while the latter three letters represent the quotecurrency. It is a good idea to memorize the order of the currency pairs,because they follow conventions or common usages.

You would not say that your vehicle was traveling at 45 miles per "half anhour." Similarly, most forex traders would not quote the value of the U.S.dollar measured in euros, or USDEUR. It just isn't proper. Likewise, we wouldnever quote yen measured in U.S. dollars, or JPYUSD. The most practical approachis to commit to memory the currency pairs in Table 2-1. The seven mostcommon currency pairs are those that trade against the U.S. dollar—inother words, they all have "USD" in the currency pair.

There are also FX trading instruments called "cross-currency" pairs in which theU.S. dollar is not one of the two currencies in the pair. The most common ofthese "crosses" appear in Table 2-2.

Most of the Forex trading volume occurs in a few currency pairs, as shown inTable 2-3. Approximately 73 percent of all trading is done in the ninecurrency pairs listed in Table 2-3.

Pips: the basis of forex trading measurements

In the previous section, I mentioned that a pip (which stands for percentagein point) is one of the smallest measures of change in currency prices.

For example, when the price of EURUSD (the euro-dollar pair) moves from 1.3345to 1.3346, we are talking about a 1-pip movement. Similarly, when the price ofUSDJPY (the dollar-yen pair) moves from 89.21 to 89.22, we are also talkingabout a 1-pip movement.

So what is the relevance of pips? Most forex traders measure their trading gainsand losses in pips. The value of pips may vary depending on the (1) currencypair, (2) current price of the pair, and (3) type of trading account: standardaccount or mini account.

Many people start trading forex using so-called mini accounts, with a startingdeposit of $250 to $2,500. For mini accounts, the pip value averages a littlemore than $1.00. Standard accounts have minimum deposits of $2,500 or higher,and the average pip value is a little more than $10.00. But it is important tonote that not all currency pairs have the same pip value—see Table 2-4.

Table 2-4 shows the pip value (in U.S. dollars) for many currency pairs andcrosses, based on December 30, 2011, prices. In practical terms, you want tobecome familiar with the pip value for the specific currency pairs that youwould like to trade. Most people trade the euro against the dollar. Somethinginteresting to note is that the EURUSD pip value is always $10 ($1 ifyou have a mini account). There are three other major currencies that have anever-changing pip value of $10 against the dollar: GBPUSD, AUDUSD, and NZDUSD.

The pip value for the yen, the Swiss franc, and the Canadian dollar will changeover time, as will the pip value of currency crosses. To find the precisecurrency pip value at any given time, there are pip-value calculators on theInternet that you can use.

Please note that most pip values range between $9 and $12, but there is onepair, EURGBP, that has a pip value of $15.53 and possibly higher. What thismeans is that you need to be careful when you are setting your profit target andstop-loss levels in euro sterling. For a regular pair, setting a 20- or 30-pipprofit target or stop-loss level will be around $200 to $300, but in EURGBP, a20- to 30-pip target/stop-loss level represents $350 to $450.

Making money buying or selling

This section covers the simple mechanics of buying and selling currencycontracts, which includes how money is made or lost trading currencies.

For a proficient forex trader, a basic task is to determine the currency pricedirection over a certain period: will the price of a currency pair go up ordown? You also need to determine how much the currency price might go up ordown, and possibly how long it might take to get to the target price.

For example, if you believe that the price of EURUSD will rise (the euro will goup and the dollar down), you would buy EURUSD and wait to see if themarket confirms your expectation. So, let's say you buy one standard contract(also called one standard lot) of euro dollar at, say, 1.3240. Let'sfurther say that the price on this contract rises to 1.3255, at which point youdecide to close the trade. The resulting profit is +15 pips (1.3255 - 1.3240 =0.0015). The dollar value for that 15-pip gain would be $150 (15 pips x $10standard lot pip value x 1 standard lot). If you are trading 2 standard lots,then the same 15-pip gain represents a $300 gain (15 x $10 x 2).

Now let's consider what happens if you are wrong about the direction of the eurodollar. Let's say you buy three mini lots of EURUSD at 1.3240, and youdecide to allow a maximum loss of 20 pips for the trade. This time, the dollarstrengthens, and EURUSD drops 20 pips, triggering a loss for the trade. How muchdid you lose on this trade? The calculation would be

-20 pips x $1 mini lot pip value x 3 mini lots = -$60

In a different example, let's say that you believe the price of euro dollar willfall over the foreseeable future, so you sell EURUSD (sell euros and buyU.S. dollars). But wait a minute. You don't own euros in real life, so you askyourself how it is that you can sell them if you don't already own them. Well,when trading forex, it is possible to make money if the price of a currency pairgoes up or down, whether you own it in real life or not. When you trade forex,you are trading contracts, not crisp bills of domestic or foreigncurrency.

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Excerpted from The Forex Trading Manual by Javier H. Paz. Copyright © 2013 by Javier H. Paz. Excerpted by permission of The McGraw-Hill Companies, Inc..
All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
Excerpts are provided by Dial-A-Book Inc. solely for the personal use of visitors to this web site.

Edition details

• Publisher: McGraw Hill
• Publication date: 2012
• ISBN 10: 0071782923
• ISBN 13: 9780071782920
• Binding: Hardcover
• Language: English
• Number of pages: 240