istraded against a second foreign currency—for example, EUR/GBP.cross rate
same as cross currency pair.
currency any form of money issued by a government or central bank and used as legaltender and a basis for trade.currency pair the two currencies that make up a foreign exchange rate—for example,EUR/USD.currency risk the probability of an adverse change in exchange rates.day trader speculators who take positions in currencies that are then liquidated priorto the close of the same trading day.dealer an individual or firm that acts as a principal or counterpart to a transaction.Principals take one side of a position, hoping to earn a spread (profit) by closing outthe position in a subsequent trade with another party. In contrast, a broker is an individual or firm that acts as an intermediary, putting together buyers and sellers for a feeor commission.deficit a negative balance of trade or payments.deliverytraded.
an FX trade where both sides make and take actual delivery of the currencies
depreciation
a fall in the value of a currency due to market forces.
derivative a contract that changes in value in relation to the price movements of arelated or underlying security, future, or other physical instrument. An option is themost common derivative instrument.devaluation the deliberate downward adjustment of a currency’s price, normally byofficial announcement.economic indicator a government-issued statistic that indicates current economicgrowth and stability. Some common indicators are employment rates, gross domesticproduct (GDP), inflation, and retail sales.end of day order (EOD) an order to buy or sell at a specified price. This orderremains open until the end of the trading day, which is typically 5 PM EST.
GLOSSARY
178
European Monetary Union (EMU) the principal goal of the EMU is to establish asingle European currency called the Euro, which will officially replace the national currencies of the EU member countries in 2002. On Janaury 1, 1999, the transitionalphase to introduce the Euro began. The Euro now exists as a banking currency andpaper financial transactions and foreign exchange are made in Euros. This transitionperiod will last for three years, at which time Euro notes and coins will enter circulation.On July 1, 2002, only Euros will be legal tender for EMU participants, the nationalcurrencies of the member countries will cease to exist. The current members ofthe EMU are Germany, France, Belgium, Luxembourg, Austria, Finland, Ireland, theNetherlands, Italy, Spain, and Portugal.Euro the currency of the European Monetary Union (EMU). A replacement for theEuropean Currency Unit (ECU).European Central Bank (ECB) the central bank for the new European MonetaryUnion.Federal Deposit Insurance Corporation (FDIC) the regulatory agency responsiblefor administering bank depository insurance in the United States.Federal Reserve (Fed)
the central bank for the United States.
First In First Out (FIFO) open positions are closed according to the FIFO accounting rule. All positions opened within a particular currency pair are liquidated in theorder in which they were originally opened.flat/square dealer jargon used to describe a position that has been completelyreversed—for example, you bought $500,000 then sold $500,000, thereby creating aneutral (flat) position.foreign exchange (FOREX, FX)of another.
the simultaneous buying of one currency and selling
forward the prespecified exchange rate for a foreign exchange contract settling atsome agreed future date, based upon the interest rate differential between the two currencies involved.forward points the pips added to or subtracted from the current exchange rate to calculate a forward price.fundamental analysis analysis of economic and political information with the objective of determining future movements in a financial market.futures contract an obligation to exchange a good or instrument at a set price at afuture date. The primary difference between a future and a forward is that futures aretypically traded over an exchange (exchange-traded contacts, ETC), whereas forwardsare considered over the counter (OTC) contracts. An OTC is any contract not traded onan exchange.FX Foreign exchange.G8 the eight leading industrial countries that meet annually to evaluate and coordinate economic policy: the United States, Germany, Japan, France, the United Kingdom,Canada, Italy, and Russia.
Glossary
179
going longspeculation.
the purchase of a stock, commodity, or currency for investment or
going short
the selling of a currency or instrument not owned by the seller.
gross domestic product (GDP) total value of a country’s output, income, or expenditure produced within the country’s physical borders.gross national product (GNP)investment or work abroad.
gross domestic product plus income earned from
good ’til canceled order (GTC) an order to buy or sell at a specified price. This orderremains open until filled or until the client cancels.hedge a position or combination of positions that reduces the risk of your primaryposition.“hit the bid” acceptance of purchasing at the offer (ask) price or selling at the bidprice.inflation an economic condition whereby prices for consumer goods rise, erodingpurchasing power.initial margin the initial deposit of collateral required to enter into a position as aguarantee on future performance.interbank rates the foreign exchange rates at which large international banks quoteother large international banks.intervention action by a central bank to affect the value of its currency by enteringthe market. Concerted intervention refers to action by a number of central banks tocontrol exchange rates.kiwi slang for the New Zealand dollar.leading indicators
statistics that are considered to predict future economic activity.
leverage also called margin. The ratio of the amount used in a transaction to therequired security deposit.LIBOR the London Inter-Bank Offered Rate. Banks use LIBOR when borrowingfrom another bank.limit order an order with restrictions on the maximum price to be paid or the minimum price to be received.liquidation the closing of an existing position through the execution of an offsettingtransaction.liquidity the ability of a market to accept large transactions with minimal to noimpact on price stability; also the ability to enter and exit a market quickly.long position a position that appreciates in value if market prices increase. When thebase currency in the pair is bought, the position is said to be long.lot a unit to measure the amount of the deal. The value of the deal always correspondsto an integer number of lots.
GLOSSARY
180
the required equity that an investor must deposit to collateralize a position.
margin
margin call a request from a broker or dealer for additional funds or other collateralto guarantee performance on a position that has moved against the customer.market maker a dealer who regularly quotes both bid and ask prices and is ready tomake a two-sided market for any financial instrument.market risk
exposure to changes in market prices.
mark-to-market process of reevaluating all open positions with the current marketprices. These new values then determine margin requirements.maturity
the date for settlement or expiry of a financial instrument.
net position the amount of currency bought or sold that has not yet been offset byopposite transactions.offer
the rate at which a dealer is willing to sell a currency. See ask price.
offsetting transaction a trade that serves to cancel or offset some or all of the marketrisk of an open position.one cancels the other order (OCO) a designation for two orders whereby when onepart of the two orders is executed the other is automatically canceled.open order an order that will be executed when a market moves to its designatedprice. Normally associated with good ’til canceled orders.open position an active trade with corresponding unrealized profits and losses, whichhave not been offset by an equal and opposite deal.order
an instruction to execute a trade at a specified rate.
over-the-counter (OTC) used to describe any transaction that is not conducted overan exchange.overnight position a trade that remains open until the next business day.pip the smallest unit of price for any foreign currency. Digits added to or subtractedfrom the fourth decimal place, that is, 0.0001. Pips are also called points.political risk exposure to changes in governmental policy that will have an adverseeffect on an investor’s position.position the netted total holdings of a given currency.premium in the currency markets, describes the amount by which the forward orfutures price exceed the spot price.price transparencyaccess.
describes quotes to which every market participant has equal
profit/loss or P/L or gain/loss the actual realized gain or loss resulting from tradingactivities on closed positions, plus the theoretical “unrealized” gain or loss on open positions that have been mark-to-market.quote
an indicative market price, normally used for information purposes only.
Glossary
181
quote currency the second currency in the currency pair. Price chenges in the currency pair are expressed in terms of the quote currency.rally
a recovery in price after a period of decline.
range the difference between the highest and lowest price of a future recorded duringa given trading session.rate the price of one currency in terms of another, typically used for dealing purposes.resistance a term used in technical analysis indicating a specific price level at whichanalysis concludes people will sell.revaluation an increase in the exchange rate for a currency as a result of central bankintervention. Opposite of devaluation.risk exposure to uncertain change, most often used with a negative connotation ofadverse change.risk management the employment of financial analysis and trading techniques toreduce and control exposure to various types of risk.rollover process whereby the settlement of a deal is rolled forward to another valuedate. The cost of this process is based on the interest rate differential of the two currencies.round trip the buying and selling of a specified amount of currency.settlement the process by which a trade is entered into the books and records of thecounterparts to a transaction. The settlement of currency trades may or may not involvethe actual physical exchange of one currency for another.short position an investment position that benefits from a decline in market price.When the base currency in the pair is sold, the position is said to be short.spot price the current market price. Settlement of spot transactions usually occurswithin two business days.spread
the difference between the bid and offer prices.
square
purchase and sales are in balance and thus the dealer has no open position.
sterling slang for British Pound.stop-loss order order type whereby an open position is automatically liquidated at aspecific price. Often used to minimize exposure to losses if the market moves against aninvestor’s position. As an example, if an investor is long USD at 156.27, he or she mightwish to put in a stop-loss order for 155.49, which would limit losses should the dollardepreciate, possibly below 155.49.support levels a technique used in technical analysis that indicates a specific priceceiling and floor at which a given exchange rate will automatically correct itself.Opposite of resistance.swap a currency swap is the simultaneous sale and purchase of the same amount of agiven currency at a forward exchange rate.
GLOSSARY
182market slang for Swiss franc.
swissy
technical analysis an effort to forecast prices by analyzing market data, that is, historical price trends and averages, volumes, open interest, and so forth.tick a minimum change in time required for the price to change, up or down.transaction cost the cost of buying or selling a financial instrument.transaction date the date on which a trade occurs.turnovervolume.
the total money value of all executed transactions in a given time period;
two-way price when both a bid and offer rate is quoted for an FX transaction.unrealized gain/loss the theoretical gain or loss on open positions valued at currentmarket rates, as determined by the broker at its sole discretion. Unrealized gains/lossesbecome profits/losses when position is closed.uptick
a new price quote at a price higher than the preceding quote.
uptick rule in the United States, a regulation whereby a security may not be soldshort unless the last trade prior to the short sale was at a price lower than the price atwhich the short sale is executed.U.S. prime rate the interest rate at which United States banks will lend to their primecorporate customers.value date the date on which counterparts to a financial transaction agree to settletheir respective obligations, that is, exchanging payments. For spot currency transactions, the value date is normally two business days forward. Also known as maturitydate.variation margin funds that a broker must request from the client to have therequired margin deposited. The term usually refers to additional funds that must bedeposited as a result of unfavorable price movements.volatility a statistical measure of a market’s price movements over time characterizedby deviations from a predetermined central value (usually the arithmetic mean).whipsaw slang for the condition of when any securities market begins moving laterally and exhibits very little volatility.yard
slang for a billion.
Index
Account summary balance, calculating,66–68Ad hoc adjustment of limit orders,115Advanced studies, 108. See alsoTechnical analysisAdvanced topics in currency tradingarbitrage, 146–151definition of, 175examples, 146–150pros and cons of, 151further studies, 151hedging, 144–145options trading, 145rollovers, 143–144Appreciation, definition of, 175Arbitrage, 146–151definition of, 175examples, 146–150pros and cons of, 151Ask price, 30At best, definition of, 175At or better, definition of, 175Available currency pairs, 36Balance of trade, 74–76definition of, 175Bank of England (BOE), 74Bank of Japan (BOJ), 74Bar charts, 88–90definition of, 175Base currency, 28definition of, 175Bear market, definition of, 175Bid/ask spread, 30definition of, 175
Bid price, 30definition of, 175Big figure quote, definition of, 176BOE (Bank of England), 74BOJ (Bank of Japan), 74Bollinger, John, 104–107Bollinger bands, 104–107Book, definition of, 176Book makers, 39Bretton Woods System (1944–1973),14–15, 176Broker, definition of, 176Broker, selectingavoiding fraudulent operations, 39–40broker policiesavailable currency pairs, 36margin account interest rate, 37margin requirement, 36minimum trading size requirement,36miscellaneous policies, 37rollover charges, 37trading hours, 37transaction costs, 36broker servicescharting packages, 34chat rooms, 35mini-accounts, 35news services, 35online assistance, 35online trading platform, 34paper trading, 35overview and cautions, 33, 38–39Bucket shops, 39Bull market, definition of, 176Bundesbank, definition of, 176
183
184
INDEX
Cable, definition of, 176Calculationscalculating account summary balance,66–68calculating margin requirements,62–63calculating profit and lossnon-USD cross rates (base/USD),59–60non-USD cross rates (USD/quote),58–59USD is the base currency (loss),57–58USD is the base currency (profit),56–57USD is the quote currency (loss),55–56USD is the quote currency (profit),53–55calculating transaction cost, 63–65calculating units available, 60–62for futures traders, 68leverage and margin percent, 51overview, 51pip values, 52–53summary, 69Candlestick charts, 96–98definition of, 176Cash market, definition of, 176Central banks, 168–170definition of, 176CFTC (Commodity Futures TradingCommission), 9Charting packages, 34Chartist, definition of, 176Chat rooms, 35Cleared funds, definition of, 176Clearing, definition of, 176Closed position, definition of, 176Collateral, definition of, 176Commission, definition of, 176Commodity Futures Modernization Act(2000), 16–17, 33Commodity Futures TradingCommission (CFTC), 9,15–16
Confirmation, definition of, 176Consumer price index (CPI), 81Contagion, definition of, 177Continuation patterns, 93–94Contractdefinition of, 177specifications, 22–23Contrary opinion, exercising, 125Corrective waves, 107Counter currency, 177Counterparty, definition of, 177Country risk, 177CPI (consumer price index), 81Cross currency, 28Cross currency pair, definition of, 177Cross rate, 177Currencieslist of, 153–158major, 4trading. See Currency tradingCurrency, definition of, 177Currency futures and the IMM(International Monetary Market)contract specifications, 22–23currencies trading volume, 23–24currency futures, 21–22futures contracts, 21U.S. Dollar Index, 24Currency pairs, 27definition of, 177selecting, 128–129Currency risk, definition of, 177Currency tradingadvanced topics. See Advanced topicsin currency tradingbusiness of tradingmoney management andpsychology. See Moneymanagement and psychologyrecord keeping. See Record keepingtrading tactics. See Tactics ofcurrency tradingwhat to do if things go wrong.See What to do if things go wrongcentral banks and regulatory agencies,167–170
Indexcharacteristics of successful traders,118–119common trading mistakes, 136–137correcting errors, 137–138currencies and symbols, list of,153–158Euro currency unit, 163–164evaluating your performance, 135exchange rates, 159–161introduction tocurrency futures and the IMM.See Currency futures and the IMMhistory of. See History of currencytradingoverview of currency market.See Overview of currency marketresources, 171–174time zones and global banking hours,165–166trying to beat the marketfundamental analysis. SeeFundamental analysistechnical analysis. See Technicalanalysiswhat every trader must knowcalculations. See CalculationsFOREX terms. See Foreignexchange, terminologymechanics of FOREX trading.See Mechanics of FOREX tradingopening an online trading account.See Opening an online tradingaccountselecting a FOREX broker.See Broker, selectingwhen to say “uncle,” 138Dagger entry rule, 132Daily trade plan and evaluation, 139Day trader, definition of, 177Dealer, definition of, 177Deficit, definition of, 177Delivery, definition of, 177Depreciation, definition of, 177Derivative, definition of, 177Devaluation, definition of, 177
185
Divine Ratio, 108Dow, Charles, 99Durable goods, 81Duration, 130Early liquidation, 115–116EBS, 40ECB (European Central Bank), 74Eclectic approach to trading, 128Economic indicator, 177Elliott, Ralph N., 109Employment cost index, 81End of day (EOD) order, 177Euro currency unit, 163–164arrival of, 17–18definition of, 178European Central Bank (ECB), 74, 178European Monetary Union (EMU), 17,163, 178Exchange rates, 159–161Fear and greed, 117–118Federal Deposit Insurance Corporation(FDIC), 178Federal Open Market Committee(FOMC), 13Federal Reserve, 12–13, 74, 178Fibonacci number series, 108First In First Out (FIFO), 178Flag/square, definition of, 178Floating exchange rates, 15Forecasting, 82–86Foreign exchange (FOREX, FX), 3definition of, 178terminology. See also Glossaryask price, 30base currency, 28, 175bid/ask spread, 30, 175bid price, 30cross currency, 28, 177currency pairs, 27, 177leverage, 30, 179major and minor currencies, 27margin, 29–30, 180margin calls, 32, 180pips, 28, 180
186
INDEX
Foreign exchange (continued)putting it all together, 31–32quote convention, 31quote currency, 28, 181rollover, 31, 181ticks, 29, 182trader’s nemesis, 32transaction cost, 31, 182trading. See Currency tradingForward, definition of, 178Forward points, definition of, 178Fraudulent operations, avoiding, 39–40FRB (Federal Reserve Board), 13Fundamental analysisbalance of trade, 74–76definition of, 178forecasting, 82–86gross domestic product (GDP), 78–80interest rates, 74intervention, 80miscellaneous economic indicatorsconsumer price index (CPI), 81durable goods, 81employment cost index, 81housing starts, 81industrial production (IP), 80producer price index (PPI), 80purchasing managers index, 80retail sales, 81purchasing power parity (PPP), 77–78supply and demand, 73–74Futurescalculations, 68contract, 21, 178currency trading versus, 8–9FX. See Foreign exchangeG8, 178Gann, William D., 108Gaps, 95–96GFD (good for the day) orders, 46Glossary, 175–182Going long, definition of, 179Going short, definition of, 179Golden Mean, 108Gold standard (1816–1933), 11–12
Greed and fear, 117–118Gross domestic product (GDP), 78–80,179Gross national product (GNP), 179GTC (good ‘til canceled) orders, 46, 179Hedging, 144–145, 179History of currency tradingancient times, 11Bretton Woods System (1944–1973),14Commodity Futures ModernizationAct (2000), 16–17Commodity Futures TradingCommission (CFTC), 15–16end of Bretton Woods and floatingexchange rates, 15Euro, arrival of, 17–18Federal Reserve System, 12–13gold standard (1816–1933), 11–12International Monetary Market(IMM), 15National Futures Association (NFA),16in other countries, 17Securities Act (1933) and SecuritiesExchange Act (1934), 13–14summary, 19timeline, 18“Hit the bid,” definition of, 179Housing starts, 81IMM (International Monetary Market).See International MonetaryMarket (IMM)Indicators and oscillatorsBollinger bands, 104–107momentum analysis, 102–104moving averages, 104overview, 101relative strength indicator (RSI),101–102swing analysis, 107–108Industrial production (IP), 80Inflation, 179Initial margin, 179
IndexInstitute for Supply Management, 80Institutional FOREX, 40Institutional market makers, 40Interbank rates, definition of, 179Interest rates, 74International Monetary Market (IMM),15, 21currency futures and. See Currencyfutures and the IMMIntervention, 80, 179IP (industrial production), 80Keene, James R., 98Kiwi, definition of, 179Leading indicators, definition of, 179Leverage, 30, 51, 179LIBOR (London inter-bank offered rate),179Limit entry orders, 46Limit orders, 45–46definition of, 179Liquidation, definition of, 179Liquidity, definition of, 179Long position, definition of, 179Lot, definition of, 179Major and minor currencies, 27Margin, 29–30definition of, 180requirements, 36, 62–63using too much of, 136Margin account interest rate, 37Margin calls, 32definition of, 180Market closing, 133Market environment, identifying,122–124three-chart system, 124time frame, 123–124Market expectation, knowing, 126Market maker, definition of, 180Market opening, 133Market orders, 45Market risk, 180Market sentiment, gauging, 125
187
Market state, identifying, 122Market timingday of week, 133market closing, 133market opening, 133overview, 132–133time of day, 133Mark-to-market, definition of, 180Matrices, trading, 130–132Maturity, definition of, 180Mechanics of FOREX tradingbasic order typeslimit entry orders, 46limit orders, 45–46market orders, 45stop-loss orders, 46take profit orders, 46esoteric order typesGFD (good for the day), 46GTC (good ‘til canceled), 46OCO (one cancels the other), 46order confirmation, 48–49order execution, 47–48overview, 45summary, 50transaction exposure, 49–50Mini-accounts, 35Minimum trading size requirement, 36Momentum analysis, 102–104Money management and psychologyad hoc adjustment of limit orders, 115characteristics of successful traders,118–119early liquidation, 115–116fear and greed, 117–118money management factors, 114more ideas on setting stops, 116risk/reward ratio, 114–115trade capital allocation, 116–117trading psychology, 117trading triangle, 113Moving averages, 104National Association of PurchasingManagers (NAPM), 80National Futures Association (NFA), 16
188
INDEX
Net position, 180News services, 35OCO (one cancels the other) orders, 46definition of, 180Offer, definition of, 180Offsetting transaction, definition of, 180OHLC (open/high/low/close) bar chart,88–89Online assistance, 35Online brokers and dealers, 172–173Online trading platform, 34Opening an online trading accountaccount activation, 42account types, 41–42identification confirmation, 42–43overview, 41registration, 42Open order, definition of, 180Open position, definition of, 180Options trading, 145Ordersconfirmation, 48–49definition of, 180execution, 47–48GFD (good for the day), 46GTC (good ‘til canceled), 46limit entry orders, 46limit orders, 45–46market orders, 45OCO (one cancels the other), 46overview, 45, 50stop-loss orders, 46take profit orders, 46transaction exposure, 49–50Oscillators and indicatorsBollinger bands, 104–107momentum analysis, 102–104moving averages, 104overview, 101relative strength indicator (RSI),101–102swing analysis, 107–108Overnight position, definition of, 180Over-the-counter (OTC), definition of,180
Overview of currency marketcost of trading currencies, 8currencies traded, 4determining currency prices, 5Foreign Exchange Market (FOREX), 3futures versus currency trading, 8–9groups that trade currencies, 4–5reasons to trade foreign currencies,5–7spot market, 3–4stocks versus currency trading, 8summary, 9tools needed to trade currencies, 7Paper trading, 35Pips, 28, 52–53definition of, 180Point and figure (P&F) charts, 98–100advantages of, 100algorithm for, 100Political risk, 180Position, definition of, 180PPP (purchasing power parity), 77–78Premium, definition of, 180Price movement, 122–123Price transparency, definition of, 1890Prime rate (U.S.), 182Producer price index (PPI), 80Profit and losscalculatingnon-USD cross rates (base/USD),59–60non-USD cross rates (USD/quote),58–59USD is the base currency (loss),57–58USD is the base currency (profit),56–57USD is the quote currency (loss),55–56USD is the quote currency (profit),53–55definition of, 180Psychology. See Money management andpsychologyPugh, Butron, 89
IndexPurchasing managers index, 80Purchasing power parity (PPP), 77–78Quote, definition of, 180Quote convention, 31Quote currency, 28, 181Rally, definition of, 181Range, definition of, 181Record keepingdaily trade plan and evaluation, 139taxes, 140weekly trade plan and evaluation,139–140Regulation, 7, 167Relative strength indicator (RSI),101–102Requoting, 38Resistance, 181Resources, 171–174Retail market makers (RMMs), 40Retail sales, 81Retracement waves, 107Revaluation, 181Reversal patterns, 92–93Riskdefinition of, 181management, 181Risk/reward ratio, 114–115RMMs (retail