<s> Getting Started in
CURRENCYTRADING
The Getting Started In SeriesGetting Started in Online Day Trading by Kassandra BentleyGetting Started in Asset Allocation by Bill Bresnan and Eric P. GelbGetting Started in Online Investing by David L. Brownand Kassandra BentleyGetting Started in Investment Clubs by Marsha BertrandGetting Started in Stocks by Alvin D. HallGetting Started in Mutual Funds by Alvin D. HallGetting Started in Estate Planning by Kerry HannonGetting Started in Online Personal Finance by Brad HillGetting Started in 401(k) Investing by Paul KatzeffGetting Started in Internet Investing by Paul KatzeffGetting Started in Security Analysis by Peter J. KleinGetting Started in Global Investing by Robert P. KreitlerGetting Started in Futures by Todd LoftonGetting Started in Financial Information by Daniel Moreauand Tracey LongoGetting Started in Emerging Markets by Christopher PoillonGetting Started in Technical Analysis by Jack D. SchwagerGetting Started in Hedge Funds by Daniel A. StrachmanGetting Started in Options by Michael C. ThomsettGetting Started in Real Estate Investing by Michael C. Thomsettand Jean Freestone ThomsettGetting Started in Tax-Savvy Investing by Andrew Westham and Don KornGetting Started in Annuities by Gordon M. WilliamsonGetting Started in Bonds by Sharon Saltzgiver WrightGetting Started in Retirement Planning by Ronald M. Yollesand Murray YollesGetting Started in Online Brokers by Kristine DeForgeGetting Started in Project Management by Paula Marting and Karen TateGetting Started in Six Sigma by Michael C. ThomsettGetting Started in Currency Trading Michael Archer and Jim Bickford
Getting Started in
CURRENCYTRADINGWinning in Today’sHottest Marketplace
Michael D. ArcherJim L. Bickford
John Wiley & Sons, Inc.
Copyright © 2005 by Michael Archer and Jim Bickford. All rights reserved.Published by John Wiley & Sons, Inc., Hoboken, New Jersey.Published simultaneously in Canada.No part of this publication may be reproduced, stored in a retrieval system, or transmittedin any form or by any means, electronic, mechanical, photocopying, recording, scanning, orotherwise, except as permitted under Section 107 or 108 of the 1976 United States CopyrightAct, without either the prior written permission of the Publisher, or authorization throughpayment of the appropriate per-copy fee to the Copyright Clearance Center, 222 RosewoodDrive, Danvers, MA 01923, 978-750-8400, fax 978-646-8600, or on the web atwww.copyright.com. Requests to the Publisher for permission should be addressed to thePermissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030,201-748-6011, fax 201-748-6008.Limit of Liability/Disclaimer of Warranty: While the publisher and the author have used theirbest efforts in preparing this book, they make no representations or warranties with respect tothe accuracy or completeness of the contents of this book and specifically disclaim any impliedwarranties of merchantability or fitness for a particular purpose. No warranty may be created orextended by sales representatives or written sales materials. The advice and strategies containedherein may not be suitable for your situation. You should consult with a professional whereappropriate. Neither the publisher nor the author shall be liable for any loss of profit or anyother commercial damages, including but not limited to special, incidental, consequential,or other damages.For general information about our other products and services, please contact our CustomerCare Department within the United States at 800-762-2974, outside the United States at317-572-3993 or fax 317-572-4002.Wiley also publishes its books in a variety of electronic formats. Some content that appears inprint may not be available in electronic books. For more information about Wiley products, visitour web site at www.wiley.com.ISBN-10 0-471-71303-1ISBN-13 978-0-471-71303-6Printed in the United States of America10 9 8 7 6 5 4 3 2 1
Contents
AcknowledgmentsIntroduction
xixiii
About This BookHow This Book Is OrganizedDisclaimer
xiiixiiixv
PART 1
THEN AND NOWChapter 1Getting Started
3
What Is FOREX?What Is a Spot Market?Which Currencies Are Traded?Who Trades on the Foreign Exchange?How Are Currency Prices Determined?Why Trade Foreign Currencies?What Tools Do I Need to Trade Currencies?What Does It Cost to Trade Currencies?FOREX versus StocksFOREX versus Futures
3344557888
Chapter 2History of Currency Trading
11
Ancient TimesThe Gold Standard, 1816–1933The “Fed”Securities and Exchange Commission, 1933–1934The Bretton Woods System, 1944–1973The End of Bretton Woods and Floating Exchange RatesInternational Monetary MarketCommodity Futures Trading CommissionNational Futures Association
v
111112131415151516
CONTENTS
vi
Commodity Futures Modernization Act of 2000Regulation in Other CountriesThe Arrival of the Euro
161717
Chapter 3Currency Futures and the IMMFutures ContractsCurrency FuturesContract SpecificationsCurrencies Trading VolumeU.S. Dollar Index
212121222324
PART 2
WHAT EVERY TRADER MUST KNOWChapter 4FOREX TermsCurrency PairsMajor and Minor CurrenciesCross CurrencyBase CurrencyQuote CurrencyPipsTicksMarginLeverageBid PriceAsk PriceBid/Ask SpreadQuote ConventionTransaction CostRolloverPutting It All TogetherThe Trader’s Nemesis
272727282828282929303030303131313132
Chapter 5Selecting a FOREX Broker
33
Caveat EmptorBroker Services
3334
Contents
vii
Broker PoliciesAvoiding Fraudulent Operations
3639
Chapter 6Opening an Online Trading Account
41
Account TypesRegistrationAccount ActivationIdentification Confirmation
41424242
Chapter 7Mechanics of FOREX Trading
45
Order TypesOrder ExecutionOrder ConfirmationTransaction Exposure
45474849
Chapter 8The Calculating Trader
51
Leverage and Margin PercentPip ValuesCalculating Profit and LossCalculating Units AvailableCalculating Margin RequirementsCalculating Transaction CostCalculating Account Summary BalanceFor Futures TradersIn Review
515253606263666869
PART 3
HOW TO BEAT THE MARKET (MAYBE)Chapter 9Fundamental AnalysisSupply and DemandInterest RatesBalance of TradePurchasing Power ParityGross Domestic Product
737374747778
viii
CONTENTSInterventionOther Economic IndicatorsForecasting
808082
Chapter 10Technical Analysis
87
OverviewBar ChartsTrend LinesSupport and ResistanceRecognizing Chart PatternsReversal PatternsContinuation PatternsGapsCandlestick ChartsPoint and Figure ChartsIndicators and OscillatorsRelative Strength IndicatorMomentum AnalysisMoving AveragesBollinger BandsSwing AnalysisAdvanced StudiesInto the FutureThe Technician’s Creed
87889091919293959698101101102104104107108109109
PART 4
THE BUSINESS OF TRADINGChapter 11Money Management and Psychology
113
The Trading TriangleMoney Management FactorsRisk/Reward RatioAd Hoc Adjustment of Limit OrdersEarly LiquidationMore Ideas on Setting StopsTrade Capital AllocationTrading Psychology
113114114115115116116117
ContentsFear and Greed, Greed and Fear!Characteristics of Successful Traders
ix117118
Chapter 12Trading Tactics
121
Trading StrategyTrading TacticsEclectic ApproachSelecting Markets to TradeSelecting Trading ParametersTrading MatricesDagger Entry RuleMarket Timing
121126128128130130132132
Chapter 13What to Do If Things Go Wrong
135
Evaluating Your PerformanceCommon Trading MistakesCorrecting ErrorsWhen to Say “Uncle”
135136137138
Chapter 14Record Keeping
139
Daily Trade Plan and EvaluationWeekly Trade Plan and EvaluationThe Tax Man
139139140
PART 5
ADVANCED TOPICSChapter 15Advanced TopicsRolloversHedgingOptions TradingArbitrageAdding ComplexityPros and Cons of ArbitrageFurther Studies
143143144145146150151151
x
CONTENTS
Appendix AList of World Currencies and Symbols
153
Appendix BExchange Rates
159
Appendix CEuro Currency Unit
163
Appendix DTime Zones and Global Banking Hours
165
Appendix ECentral Banks and Regulatory Agencies
167
Appendix FResources
171
Glossary
175
Index
183
About the Authors
191
Acknowledgments
We would like to thank our personal friends Susan L. Cress and Gregory R. Morrisfor their meticulous assistance in design layout, organization, and editing. It is notsurprising to find out that both have become avid small-cap FOREX traders sincetheir involvement in editing this book.
xi
Introduction
About This BookThis book is intended to introduce the novice investor to the exciting, complex,and sometimes profitable realm of trading world currencies on the foreignexchange markets (FOREX). It also serves as a reference guide for stocks andfutures traders who wish to branch out into new securities opportunities. Ourprimary focus is on the rapidly expanding and evolving online trading marketplace for spot currencies.From the very beginning we must emphasize that currency trading maynot be to everyone’s disposition. The neophyte investor must be keenly aware ofall the risks involved and should never trade on funds he or she deems necessaryfor survival. If you have some experience with leveraged markets such as futuresor options, you owe yourself a look at FOREX. Those who have never tradedwill find it the “purest” of all speculative adventures.
How This Book Is OrganizedThere are six main parts to this book:1. Part 1—Then and NowGetting Started; History of Currency Trading; Currency Futures andthe IMMWe open the book with a questions-and-answer overview of thecurrency market in which we hope to dispel any myths the reader mayhave. We then proceed to a brief history and the current regulationssurrounding the currencies market.2. Part 2—What Every Trader Must KnowFOREX Terms; Selecting a FOREX Broker; Opening an OnlineTrading Account; Mechanics of FOREX Trading; The CalculatingTraderxiii
xiv
INTRODUCTION
Every lucrative industry has its own gamut of highly specializedterms, and currency trading is no exception. You must thoroughlycomprehend these terms before attempting to initiate any trades. Witha little familiarization, the jargon of currency trading will become second nature.We will assist the new trader in selecting a reputable online currency dealer and explain the steps involved in opening a tradingaccount. The actual step-by-step processes of initiating and liquidatinga live market order are examined in detail with a lengthy explanation ofeach order type.Currency trading requires some minimal record keeping. Thenovice investor will be pleased to know that the mathematics of tradingand calculating profit or loss involves nothing more than simple, fourfunction arithmetic—addition, subtraction, multiplication and division—and that we have kept division examples to a minimum.This section must be understood before the reader proceeds tothe later sections.3. Part 3—How to Beat the Market (Maybe)Fundamental Analysis; Technical AnalysisOnce the trader understands the mechanics of trading, he or shemust develop a trading strategy. In Part 3, we assist the trader in formulating his own personalized trading schemes and tactics. Historically,there have been two major schools of thought in this endeavor: fundamental analysis and technical analysis. We explore the advantages anddisadvantages of both schools in the chapters in this section.4. Part 4—The Business of TradingMoney Management and Psychology; Trading Tactics; What to Do IfThings Go Wrong; Record Keeping.In this section, we expose the trader to the psychology of tradingand the stresses that may accompany same. We place much emphasison money management and psychology—two key topics that are vitalto success but are often neglected in the search for the holy grail of trading methods.5. Part 5—Advanced TopicsA single chapter covers Rollovers, Hedging, Options Trading, Arbitrage,Adding Complexity, and Pros and Cons of Arbitrage.
Introduction
xv
This section is optional for the novice trader though investorswith some trading experience will find it informative.6. AppendicesOur appendices section is very much a ready reference of FOREXspecific information.We attempted to make Getting Started in Currency Trading an all-in-oneintroduction as well as a handy computer-side reference guide. Only you, thereader, may judge the level of our success therein.
DisclaimerNeither the publisher nor the authors are liable for any financial losses incurredwhile trading currencies.
1Part
Then and Now
1Chapter
Getting Started
What Is FOREX?Foreign exchange is the simultaneous buying of one currency and selling ofanother. Currencies are traded through a broker or dealer and are executed incurrency pairs; for example, the Euro dollar and the US dollar (EUR/USD) orthe British pound and the Japanese yen (GBP/JPY).The Foreign Exchange Market (FOREX) is the largest financial market inthe world, with a volume of over $1.95 trillion daily. This is more than threetimes the total amount of the stocks and futures markets combined.Unlike other financial markets, the FOREX spot market has neither aphysical location nor a central exchange. It operates through an electronic network of banks, corporations, and individuals trading one currency for another.The lack of a physical exchange enables the FOREX market to operate on a 24hour basis, spanning from one time zone to another across the major financialcenters. This fact—that there is no centralized exchange—is important to keepin mind as it permeates all aspects of the FOREX experience.
What Is a Spot Market?A spot market is any market that deals in the current price of a financial instrument. Futures markets, such as the Chicago Board of Trade, offer commoditycontracts whose delivery date may span several months into the future.3
THEN AND NOW
4TABLE 1.1
Major FOREX Currencies
Symbol
Country
Currency
USD
United States
dollar
EUR
Euro members
Euro
JPY
Japan
yen
GBP
Great Britain
pound
CHF
Switzerland
franc
CAD
Canada
dollar
AUD
Australia
dollar
Settlement of FOREX spot transactions usually occurs within two businessdays. There are also futures and forwards in FOREX, but the overwhelmingmajority of traders use the spot market. We will discuss the opportunities totrade FOREX futures on the International Monetary Market.
Which Currencies Are Traded?Any currency backed by an existing nation can be traded at the larger brokers.The trading volume of the major currencies (along with their symbols) is givenin descending order: the U.S. dollar (USD), the Euro dollar (EUR), theJapanese yen (JPY), the British pound sterling (GBP), the Swiss franc (CHF),the Canadian dollar (CAD), and the Australian dollar (AUD). All other currencies are referred to as minors.FOREX currency symbols are always three letters, where the first twoletters identify the name of the country and the third letter identifies the nameof that country’s currency. (The “CH” in the Swiss franc acronym stands forConfederation Helvetica). See Table 1.1.
Who Trades on the Foreign Exchange?There are two main groups that trade currencies. About five percent of daily volume is from companies and governments that buy or sell products and servicesin a foreign country and must subsequently convert profits made in foreign currencies into their own domestic currency in the course of doing business. This isprimarily hedging activity. The other 95 percent consists of investors trading forprofit, or speculation. Speculators range from large banks trading 10,000,000
Getting Started
5
million currency units or more and the home-based operator trading perhaps10,000 units or less.Today, importers and exporters, international portfolio managers, multinational corporations, speculators, day traders, long-term holders, and hedgefunds all use the FOREX market to pay for goods and services, to transact infinancial assets, or to reduce the risk of currency movements by hedging theirexposure in other markets.A producer of Widgets in the United Kingdom is intrinsically long theBritish pound (GBP). If they sign a long-term sales contract with a company inthe United States, they may wish to buy some quantity of the USD and sell anequal quantity of the GBP to hedge their margins from a fall in the GBP.The speculator trades to make a profit by purchasing one currency andsimultaneously selling another. The hedger trades to protect his or her marginon an international sale (for example) from adverse currency fluctuations. Thehedger has an intrinsic interest in one side of the market or the other. The speculator does not.
How Are Currency Prices Determined?Currency prices are affected by a variety of economic and political conditions,but probably the most important are interest rates, international trade, inflation, and political stability. Sometimes governments actually participate in theforeign exchange market to influence the value of their currencies. They do thiseither by flooding the market with their domestic currency in an attempt tolower the price or, conversely, buying in order to raise the price. This is knownas central bank intervention. Any of these factors, as well as large market orders,can cause high volatility in currency prices. However, the size and volume of theFOREX market make it impossible for any one entity to drive the market forany length of time.
Why Trade Foreign Currencies?In today’s marketplace, the dollar constantly fluctuates against the other currencies of the world. Several factors, such as the decline of global equity marketsand declining world interest rates, have forced investors to pursue new opportunities. The global increase in trade and foreign investments has led to manynational economies becoming interconnected with one another. This interconnection, and the resulting fluctuations in exchange rates, has created a hugeinternational market: FOREX. For many investors, this has created excitingopportunities and new profit potentials. The FOREX market offers unmatched
6
THEN AND NOW
potential for profitable trading in any market condition or any stage of the business cycle. These factors equate to the following advantages:• No commissions. No clearing fees, no exchange fees, no governmentfees, no brokerage fees.• No middlemen. Spot currency trading does away with the middlemenand allows clients to interact directly with the market maker responsible for the pricing on a particular currency pair.• No fixed lot size. In the futures markets, lot or contract sizes are determined by the exchanges. A standard-sized contract for silver futures is5000 ounces. Even a “mini-contract” of silver, 1000 ounces, representsa value of approximately $6,000.00. In spot FOREX, you determinethe lot size appropriate for your grubstake. This allows traders to effectively participate with accounts of well under $1,000.00.• Low transaction cost. The retail transaction cost (the bid/ask spread)is typically less than 0.1 percent under normal market conditions. Atlarger dealers, the spread could be as low as 0.07 percent. This will bedescribed in detail later.• High liquidity. With an average trading volume of over $1.95 trillionper day, FOREX is the most liquid market in the world. It means thata trader can enter or exit the market at will in almost any market condition.• Almost instantaneous transactions. This is a very advantageous byproduct of high liquidity.• Low margin, high leverage. These factors increase the potential forhigher profits (and losses) and are discussed later.• A 24-hour market. A trader may take advantage of all profitable market conditions at any time. There is no waiting for the opening bell.• Online access. The big boom in FOREX came with the advent ofonline (Internet) trading platforms.• Not related to the stock market. A trader in the FOREX marketinvolves selling or buying one currency against another. Thus, there isno correlation between the foreign currency market and the stock market. A bull market or a bear market for a currency is defined in terms ofthe outlook for its relative value against other currencies. If the outlookis positive, we have a bull market in which a trader profits by buyingthe currency against other currencies. Conversely, if the outlook is pessimistic, we have a bull market for other currencies and traders takeprofits by selling the currency against other currencies. In either case,there is always a good market trading opportunity for a trader.
Getting Started
7
• Interbank market. The backbone of the FOREX market consists of aglobal network of dealers. They are mainly major commercial banksthat communicate and trade with one another and with their clientsthrough electronic networks and by telephone. There are no organizedexchanges to serve as a central location to facilitate transactions the waythe New York Stock Exchange serves the equity markets. The FOREXmarket operates in a manner similar to that of the NASDAQ market inthe United States; thus it is also referred to as an over-the-counter(OTC) market.• No one can corner the market. The FOREX market is so vast andhas so many participants that no single entity, not even a central bank,can control the market price for an extended period of time. Eveninterventions by mighty central banks are becoming increasingly ineffectual and short-lived. Thus central banks are becoming less and lessinclined to intervene to manipulate market prices. (You may rememberthe attempt to corner the silver futures market in the late 1970s. Suchdisruptive excess is not possible in the FOREX markets.)• No insider trading. Because of the FOREX market’s size and noncentralized nature, there is virtually no chance for ill effects caused byinsider trading. Fraud possibilities, at least against the system as awhole, are significantly less than in any other financial instruments.• Limited regulation. There is but limited governmental influence viaregulation in the FOREX markets, primarily because there is no centralized location or exchange. Of course, this is a sword that may cutboth ways, but the authors believe—with a hardy caveat emptor—thatless regulation is, on balance, an advantage. Nevertheless, most countries do have some regulatory say and more seems on the way.Regardless, fraud is always fraud wherever it is found and subject tocriminal penalties in all countries.Traditionally, investors’ only means of gaining access to the foreign exchange market was through banks that transacted large amounts of currenciesfor commercial and investment purposes. Trading volume has increased rapidlyover time, especially after exchange rates were allowed to float freely in 1971.
What Tools Do I Need toTrade Currencies?A computer with reliable (and preferably fast) Internet access and the information in this book are all that is needed to begin trading currencies.
8
THEN AND NOW
What Does It Cost to Trade Currencies?An online currency trading account (a “mini-account”) may be opened for as little as $100. Do not laugh—mini-accounts are a good way to get your feet wetwithout taking a bath. Unlike futures, where the size of a contract is set by theexchanges, in FOREX you select how much of any particular currency you wishto buy or sell. Thus, a $3,000.00 grubstake is not unreasonable as long as thetrader engages in appropriately sized trades. FOREX mini-accounts also do notsuffer the illiquidity of many futures mini-contracts, as everyone feeds from thesame currency “pool.”
FOREX Versus StocksHistorically, the securities markets have been considered, at least by the majorityof the public, as an investment vehicle. In the last ten years, securities have takenon a more speculative nature. This was perhaps due to the downfall of the overall stock market as many security issues experienced extreme volatility becauseof the “irrational exuberance” displayed in the marketplace. The implied returnassociated with an investment was no longer true. Many traders engaged in theday trader rush of the late 1990s only to discover that from a leverage standpoint it took quite a bit of capital to day trade, and the return—while potentially higher than long-term investing—was not exponential, to say the least.After the onset of the day trader rush, many traders moved into the futuresstock index markets where they found they could better leverage their capital andnot have their capital tied up when it could be earning interest or making moneysomewhere else. Like the futures markets, spot currency trading is an excellentvehicle for the pattern day trader that desires to leverage his or her current capitalto trade. Spot currency trading provides more options and greater volatility while atthe same time stronger trends than are currently available in stock futures indexes.Former securities day traders have an excellent home in the FOREX market.There are approximately 4,000 stocks listed on the New York Stock Exchange. Another 2,800 are listed on the NASDAQ. Which one will you trade?Trading just the seven major USD currency pairs instead of 7,800 stockssimplifies matters significantly for the FOREX trader. Fewer decisions, fewerheadaches.
FOREX Versus FuturesThe futures contract is precisely that—a legally binding agreement to deliver oraccept delivery of a specified grade and quantity of a given commodity in a distant month. FOREX, however, is a spot (cash) market in which trades rarely
Getting Started
9
exceed two days. Many FOREX brokers allow their investors to “roll over” opentrades after two days. There exist FOREX futures or forward contracts, butalmost all activity is in the spot market facilitated by rollovers.In addition to the advantages listed, FOREX trades are almost always executed at the time and price asked by the speculator. There are numerous horrorstories about futures traders being locked into an open position even after placing the liquidation order. The high liquidity of the foreign exchange market(roughly three times the trading volume of all the futures markets combined)ensures the prompt execution of all orders (entry, exit, limit, etc.) at the desiredprice and time.The caveat here is something called a requote which we will discuss in alater chapter.The Commodity Futures Trading Commission (CFTC) authorizes futuresexchanges to place daily limits on contracts that significantly hamper the abilityto enter and exit the market at a selected price and time. No such limits exist inthe FOREX market.Stock and futures traders are used to thinking in terms of the U.S. dollarversus something else, such as the price of a stock or the price of wheat. Thisis like comparing apples to oranges. In currency trading, however, it’s always acomparison of one currency to another currency—someone’s apples to someoneelse’s apples. This paradigm shift can take a little getting used to, but we will giveyou plenty of examples to help smooth the transition.We must reiterate: There is always some risk in speculation regardless ofwhich financial instruments are traded and where they are traded, regulated orunregulated.
Summary
• FOREX means “Foreign Exchange.”• The FOREX market is a $1.95 trillion-a-day financial market, dwarfing everything else including stocks and futures.• There is no centralized exchange or clearing house for currency trading.• The FOREX market is less regulated than other financial markets.• The top four traded currencies are: the U.S. dollar (USD), the European dollar (EUR), the Japanese yen (JPY), and the British pound(GBP).• Access to the FOREX markets via the Internet has resulted in a greatdeal of interest by small traders previously locked out of this enormousmarketplace.
2Chapter
History ofCurrency Trading
T
his material may not seem very relevant to trading currencies today, but alittle perspective never hurts.
Ancient TimesForeign exchange dealing may be traced back to the early stages of history, possibly beginning with the introduction of coinage by the ancient Egyptians, andthe use of paper notes by the Babylonians. Certainly by biblical times, theMiddle East saw a rudimentary international monetary system when the Romangold coin aureus gained worldwide acceptance followed by the silver denarius,both a common stock among money changers of the period.By the Middle Ages, foreign exchange became a function of internationalbanking with the growth in the use of bills of exchange by the merchant princesand international debt papers by the budding European powers in the course oftheir underwriting the period’s wars.
The Gold Standard, 1816–1933The gold standard was a fixed commodity standard: participating countriesfixed a physical weight of gold for the currency in circulation, making it directly11
THEN AND NOW
12
redeemable in the form of the precious metal. In 1816 for instance, the poundsterling was defined as 123.27 grains of gold, which was on its way to becomingthe foremost reserve currency and was at the time the principal component ofthe international capital market. This led to the expression “as good as gold”when applied to Sterling—the Bank of England at the time gained stability andprestige as the premier monetary authority.Of the major currencies, the U.S. dollar adopted the gold standard late in1879 and became the standard-bearer, replacing the British pound when Britainand other European countries came off the system with the outbreak of WorldWar I in 1914. Eventually, though, the worsening international depression ledeven the dollar off the gold standard by 1933; this marked the period of collapsein international trade and financial flows prior to World War II.
The “Fed”As an investor, it is essential to acquire a basic knowledge of the Federal ReserveSystem (the Fed). The Federal Reserve was created by the U.S. Congress in1913. Before that, the U.S. government lacked any formal organization forstudying and implementing monetary policy. Consequently, markets were oftenunstable and the public had very little faith in the banking system. The Fed is anindependent entity, but is subject to oversight from Congress. This means thatdecisions do not have to be ratified by the president or anyone else in the government, but Congress periodically reviews the Fed’s activities.The Fed is headed by a government agency in Washington known as theBoard of Governors of the Federal Reserve. The Board of Governors consists ofseven presidential appointees, who each serve 14-year terms. All members mustbe confirmed by the Senate, and they can be re