currency depreciation or“rewarded” with inflows and appreciation.Not only has this meant that the volume of capital led to excessiveexchange rate volatility and chronic misalignment (Harvey 1995), but italso has created a deflationary bias in the system through the necessity ofpleasing international investors with high interest rates and conservativeeconomic policies (Davidson 1992–1993; Grabel 1993).No true system has evolved to take the place of Bretton Woods. Instead,most developed country currencies float against one another (with onemajor exception, as explained below), whereas those of developing nationsare pegged, most often to the dollar. For the developed countries, whichcontinue to dominate trade and finance, the post–Bretton Woods era hasbeen a managed float within which currency prices are set primarily bymarket forces, but central bank intervention still exists.What triggers intervention depends on the economic and politicalobjectives of the nation in question. One would think that this might create the potential for a great deal of conflict, but generally speaking, therehave been more problems associated with market-initiated movements ofthe exchange rates, especially those associated with capital flows andspeculation.In fact, beginning with the Plaza Agreement in 1985, the central banksof France, Germany, Japan, Great Britain, and the United States haveworked within broad guidelines to cooperate in introducing some stabilityinto foreign exchange markets.The major exception to market-determined rates among the developedcountries has been the European Monetary System. It has operated as a minipegged system anchored to the Deutsche mark since 1979 and appeared to bemoving toward a single-currency area until developments in 1992.Just as in Bretton Woods, events made it clear that fundamental disequilibria existed and that changes in either macroeconomic policies orpegged rates were necessary.Again similar to events in the early 1970s, agreement over what shouldbe done was not easily had, and soon the massive force of speculationpushed policymakers to quickly choose which paths they would follow. By
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1993, this had included extensive realignments and periods of floating andexchange rate bands so wide that they were “nearly tantamount to floating”(Henning 1994, p. 242). Whether this can be considered a success, onlytime will tell.Ironically, the major issues that have plagued international monetarysystems and agreements in the 50 years since the end of the World War IIhave been precisely those feared by Keynes in the early 1940s. In fixed-rateregimes, efficient means of realigning currencies remain elusive. Either thesolutions tend to be deflationary, when they force deficit countries to contract their economies, or politically unpalatable, when they require currency devaluation.Perhaps Keynes was correct when he saw the only viable means asplacing the burden of adjustment on the surplus economy [a solution todayurged by Paul Davidson (1992–1993)]. Meanwhile, capital flows haveproven to be disruptive in both fixed- and flexible-rate systems, their “discipline” severely limiting policy choices in both circumstances. Successhas been just as elusive regarding the World Bank and its work with lessdeveloped nations’ economies.Not surprisingly, the failures in both arenas have their roots in economic theory. Modern policymakers are convinced that market liberalization is the key to economic growth, so efforts to control capital flowsdirectly or to plan or protect the economies of emerging states are unlikelyto be forthcoming.
GLOSSARYAnnual report The yearly year-end report of accounting companies sendout to their shareholders.Ask (offer) price Ask is the market selling price, the price at which themarket is prepared to sell a specified currency in a foreign exchange contract or cross-currency contract. At this price, the trader can buy the basecurrency. In the quotation, it is shown on the right side of the quotation, forinstance, 1.4527–1.4532.Base currency This is the first currency in a currency pair, a currencyagainst which the exchange rate is applied. Usually, it stands first in thecodes of currency rates. It shows how much the base currency is worth asmeasured against the second currency. For instance, if the USD/CHF rateequals 1.6215, then one USD is worth CHF1.6215.Bear An investor who has taken a short position and believes prices willmove lower.Bear market A market in which prices are declining.Bid price Bid is the market buying price, the price at which the market isprepared to buy a specified currency in a foreign exchange contract orcross-currency contract. At this price, the trader can sell foreign exchange.It is shown in the left side of the quotation, for example, 1.4527–1.4532.Big figure quote A currency rate without the last two digits. Examples: Ina USD/JPY rate of 122.05/122.10, the big figure is 122. In a EUR/USDrate of 0.9325/0.9330, the big figure is 0.93.
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Blank check A shell company with no operating business that goes public with the interest of investing in another unspecified business.Blind pool Similar to blank check, except that an ordinary blind pool general lies specify what industry it plans to invest in.Bull One who expects the market to rise.Bull market A market in which prices are rising.Business day Any day on which commercial banks are open for businessin the principal financial centers of the countries where currencies aretraded.Cash settled The closing out of currency contracts with the exchange ofcash based on the difference in the value of when the position was openedand the value of when it was closed rather than the delivery of currency.Churning When a broker trades an account excessively to generate commissions.Cleared funds Funds unencumbered and freely available and sent in tosettle a trade.Closed position Exposures in foreign currencies that no longer exist. Theprocess of closing a position is the selling or buying of a certain amount ofcurrency to offset an equal amount of open positions. This will “square” theopen position.Commissions The one-time fee charged by a broker to a customer afterbuying or selling a financial product, that is, stocks, commodities, or currencies. This process is also known as a round turn.Confirmation A notification sent by a dealer to a customer describing theterms of a trade.Counter currency The second listed currency in a currency pair.Cross-currency pairs A foreign exchange transaction in which one foreign currency is traded against a second foreign currency.Cross-rate An exchange rate between two non-U.S. currencies.Currency symbolsAUD Australian dollarCAD Canadian dollarEUR EuroJPY Japanese yenGBP British poundCHF Swiss franc
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Currency trading The act of exchanging the legal tender of one countryfor another.Customer The party that executes an agreement with a broker.Currency pair The two currencies that make up a foreign exchange rate,for example, USD/CHF.Daily cutoff The point in time for each business day selected by a brokerto signify the end of the business day.Day order Any order that is placed for execution during only one tradingsession. If the order cannot be executed that day, it is automatically canceled.Day trading Establishing and liquidating the same position or positionswithin one day of trading, thus ending the day with no established positionin the market.Delivery The tender and receipt of an actual commodity, financial instrument, or cash in settlement.Delivery cutoff The point in time that signifies the end of a trade date.The trade date of any contract entered into after the daily cutoff shall be thenext business day.Dollar value The amount of lawful currency of the United States that atany moment in time would be generated by the conversion of the relevantforeign currency into U.S. dollars at the broker then-prevailing exchangerates for buying or selling such foreign currency.Eligible foreign currencies Those foreign currencies which the broker, inits sole discretion, may agree from time to time to buy from or sell to itscustomers.Equity The amount currently held in a customer’s account calculated as ifall the opened positions would be closed at the current market quotes. Theaccount is composed of unrealized gains less unrealized losses and plus orminus storage.Euro zone The group of 12 countries that have combined their currenciesinto a single currency (euro). They still have separate sovereignties but alsohave a combined central bank (ECB) that handles economic policy issuesfor them as one group.Fair market value The price for a financial instrument that is determinedin an open-market environment between a willing buyer and a willing seller.Filled trade A trade that is fully executed on behalf of a customer’saccount pursuant to an order. Once filled, an order cannot be canceled,amended, or waived by the customer.
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Floating profit (loss) Unrealized profit (loss) in an open position.Free margin Available funds in a client’s account not currently beingused to support existing trading positions, which can be used to open newpositions.Foreign currency The legal tender issued by and acceptable for the payment of obligations under the laws of one or more countries.Foreign exchange contract A spot contract for the purchase or sale of aforeign currency.Foreign exchange rate The price relationships between two currenciesthat are freely determined by the forces of supply and demand.Foreign exchange trading Buying and selling foreign currencies.Fundamental analysis Analysis based on economic and political factors.Gross basis Open positions calculated without the benefit of any nettingbetween long and short positions.Good till Canceled (GTC) Order A trade order placed for a specificamount of time to buy or sell a foreign currency.Initial margin requirement or opening margin requirement The minimum margin required to establish a new open position.Leverage The ratio of the amount used in a transaction to the requiredsecurity deposit (margin).Limit order An order to buy or sell foreign currency or pairs of currencies at a specified price or exchange rate. A limit order to buy generally willbe executed when the ask price equals or falls below the price or exchangerate specified in the limit order. A limit order to sell generally will be executed when the bid price equals or exceeds the price or exchange rate specified in the limit order. Customers should note, however, that marketconditions often may prevent execution of an individual customer’s limitorder despite other dealing activity at that price level.Liquidating order An order to close out one or more open positions.Long position In foreign exchange trading, when the base currency in thepair is bought, the position is said to be long in that currency. It is understood that when the base currency in the pair is long, the second currencywill be short.Loss Loss incurred as a result of a transaction.Lot A unit to measure the amount of a deal. The value of the deal alwayscorresponds to an integer number of lots.
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Margin The amount of cash or other eligible collateral that the brokerrequires a customer to deposit or maintain in the customer’s account in connection with the customer’s trading activity.Margin call A demand for the deposit of additional margin as describedin a customer agreement.Market order An order to buy or sell the identified currency or pairs ofcurrencies at the current market price. An order to buy is executed at theask price, and order to sell is executed at the bid price.Market rate/quote The current quote of a currency pair.Market value The dollar value, determined by the current foreignexchange rates, that a customer would receive if the position were liquidated for immediate delivery in the relevant market.Mark to market The process of recalculating the value of the open positions in a foreign currency trading account, assuming that all open positions were liquidated at current market rates.Maturity The date on which payment of a financial obligation is due.Notice of withdrawal A request by a customer to withdraw funds fromthe customer’s account.Offer (ask) See Ask (offer) price.One Cancels the Other (OCO) Order Two orders that are linked. If oneorder is executed, the other is canceled.Open position Any deal that has not been offset by an equal and oppositedeal.Opening transaction An order that, when executed, establishes a longposition or short position or increases an existing position.Order Generally, an instruction by a customer (or customer’s authorizedagent) to a broker to attempt to execute a trade for the customer’s account.Overnight position Trader’s open long or short position that is not closedby the end of a trading day.Pip/point The smallest unit of price for any foreign currency [e.g., forUSD/CHF one point (or pip) equals 0.0001 Swiss francs and for USD/JPYone point (or pip) equals 0.01 Japanese yen].Position An interest in the market, either long or short. Once an investorhas bought or sold to enter the market, he or she has taken a position.Posted margin That part of the margin balance that is posted to the broker in support of the customer’s open position and unrealized losses.
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Profit/Loss (P/L) or gain/loss The actual gain or loss in U.S. dollarsresulting from trading activities on closed positions, plus the theoreticalgain or loss on open positions that have been marked to market.Quote A simultaneous bid and offer in a currency pair.Rally An upward movement of prices after a decline. The opposite of areaction.Range The high and low prices or high and low bids and offers recordedduring a specified time.Reaction A decline in prices after an advance. The opposite of a rally.Realized gain/loss The actual gain or loss resulting from closing an openposition.Resistance A significant price level which has been tested and found toact as a strong price ceiling.Rollovers The process of extending an existing market position throughone or more spot settlements.Scalp Scalping normally involves establishing and liquidating a positionquickly, usually within the same day, same hour, or even within a few minutes. A day trader is a scalper.Short margin A client’s account condition when equity becomes smallerthan the amount required to keep the positions open.Short position Selling a currency in which you have no position in anticipation of it falling in value. At that point you will be able to “cover” yourshort by buying back the currency at a lower price. (If physical delivery ofthe currency is involved, the short seller will need to borrow the currencyin order to make the delivery to the buyer.) In foreign exchange, when thebase currency in the pair is sold, the position is said to be short in that currency. It is understood that when the base currency in the pair is short, thesecond currency will be long.Spot contract A contract where settlement is in two business days.Spot rate The rate of exchange between two foreign currencies for spotvalue (normally settlement in two business days), generally quoted either inU.S. terms (price of one unit of foreign currency expressed in U.S. dollarsand cents) or in European terms (price of one U.S. dollar expressed in unitsand decimals of the foreign currency).Spread The difference between the ask (offer) and bid prices in a marketquote. The spread is the reason why a newly opened position’s mark to market, or valuation, likely will be negative. If a trader buys a particular cur-
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rency, he or she will pay the ask (offer) price, but the current mark to market will be based on what the marketplace is presently paying for this currency. That price would be found on the bid side of the market quote, 5 pipslower than where the trader just bought the currency.Stop/loss order An order to buy or sell at a specified foreign exchangerate away from the current market for the purpose of liquidating an openposition during market conditions in which the open position has declinedin value. Execution of such an order can occur at rates below (or above) thespecified foreign exchange rate.Storage The charge or recompense associated with a rollover.Support A significant price level which has been tested and found to actas a strong price floor.Technical analysis Analysis of market price action. Technical analysisstudies historical price changes with the aim to forecast future price movements. By studying price charts and a host of supporting technical indicators, traders in effect let the market tell them which way it is most likely totrend. The whole purpose of charting the price action of a market is to identify trends in the early stages of their development and then trade in thedirection of those trends. One of the two types of analysis used to analyzethe currency market.Tick Refers to a change in price, either up or down. Also called one pip onthe FOREX.Trade date With respect to any contract, the date on which the contract isentered into between the broker and customer, except in the case of anycontract entered into after the daily cutoff following but before the next relevant business day, in which case the trade date shall be the next followingbusiness day.Trend The general direction of the market.Unrealized gain/loss The theoretical gain or loss on open positions valuedat current market rates, as determined by the broker in its sole discretion.Unrealized gains/losses become profits/losses when the position is closed.Used margin The amount in a client’s account required to support all thecurrent positions.Value date With respect to any contract, the applicable settlement datespecified in the confirmation that relates to the particular contract. A valuedate must fall on a business day in the countries of the traded currencies.Volume The number of transactions made during a specified period oftime.
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BIBLIOGRAPHYBank of America. “2001 Annual Report.” Bank of America May 01, 2002.<http://s1.mobular.net/ccbn/7/27/29/>Elliott, R. N. Nature’s Law – The Secret of the Universe. Commodity Traders Club,Phoenix, AZ., 1995.Knox, Noelle. “N.Y. Attorney General Widens Investigation.” USA Today Apr 11,2002: B.01Vickers, Marcia and Mike France, Emily Thornton, David Henry, and HeatherTimmons “How Corrupt Is It?” BusinessWeek May 13 2002: 36.Luca, Cornelius. Technical Analysis Application in the Global Currency Market.2nd ed. New York Institute of Finance, New York, NY, 2000.Luca, Cornelius. Trading in the Global Currency Makret.-2nd ed. New York Institute of Finance, New York, NY, 2000.Plocek, Joseph E. Economic Indicators. New York Institute of Finance, New York,NY, 1991.Shimizu, Seiki. The Japanese Chart of Charts. Tokyo Futures Trading PublishingCompany, Tokyo, Japan, 1996.Waggoner, John and Thomas Fogarty. “Scandals Shred Investors’ Faith” USAToday May 2, 2002: A.01
CHARTS, FIGURES AND CREDITSeSignal, 3955 Point Eden Way, Hayward, CA 94545. <http://www.esignal.com>4X Made Easy/GlobalTec Solutions, 5010 Addison Circle, Addison TX 75001.
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Forex Capital Markets FXCM, Financial Square 32 Old Slip 10th Floor, New York,NY 10005.Cover photo by Peter Burg. Burg Photographix <http://www.burgphoto.com>
Index
Balance, account, 162Balance of payments, 195“Balkanizing” controls, 196Bank of America, 10–12, 14Banks, 12 (See also Central banks)Bar charts, 83Base currency, 17, 24, 157Bearish candlestick patterns, 84Bearish engulfing line, 84Benchmarks, 183Black-Scholes model, 36–37Bodies, candlestick, 83Bollinger, John, 104Bollinger bands, 104, 106, 107Box sizes, adjusting, 174Breakout, 68Bretton Woods Accord, 13, 193–198Brokers, 46Browser, 46Bullish candlestick patterns, 84Bullish doji star, 85Bullish engulfing line, 84Business of trading, 185–191incorporating, 188–191tax issues for, 186–188
AAccount balance, 162Account equity, 162Account ID, 159Accounts window, 161–162ADX (average directional index), 107Alert services, 30, 32, 80Alternation, rule of, 138American-style options, 37American terms, European terms vs., 37Analysis, 29–34fundamental, 23, 29–34fundamental vs. technical, 33–34technical (see Technical analysis)Announcements, 150–151Annual reports, 30Ascending triangle, 63–65Asset-protection planning, 190–191At Market feature, 166Automobile sales, 79Average directional index (ADX), 107BBack trading, 112Backtesting, 143
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“Buy” exchange rate, 158Buy signal, 100, 101Buying:at dip bottoms, 151–153executing buy order, 158CC Corporations, 189Cable television, 44Calculator, 45Call options, 36, 37Candlestick charts, 83–86Capacity utilization, 79Capital, 140currency transactions related to, 197internationalization of, 195–197Catastrophic events, 145Caterpillar, 180Central banks, 194, 196, 197Chair, workstation, 45Change Order Rate box, 171–173Channel pattern, 91, 94Chart interval, 86–90Charting, 47–48Children, shifting income to, 190Churning bar, 70, 72Cisco Systems, 7–9Close Position box, 169–170Color, window, 176Combination waves, 138Commissions, 46, 161Commodity Research Bureau (CRB),77–78Completing trades, 166Computer equipment, 44–45Consolidation, 57Construction, 79Consumer price index (CPI), 77Consumer sentiment, 79Consumer spending, 75, 78–79Continuance, 55, 91Corporations, 188–191Correction, 58Corrective waves, 132, 135–138CPI (consumer price index), 77CRB (see Commodity Research Bureau)CRB index (see Futures index)
INDEX
Credit Suisse, 14Cross-currency pairs, 17Crown (see Head and shoulders)Currencies:under Bretton Woods, 194–197fluctuation of, 180free-floating, 180Currency options, 35–42and acceleration of profits, 41–42advantages of trading, 37European and American, 37–38exotic, 38–41and lock in profits, 40, 41pricing of, 36–37Currency pairs, 15–17, 19behavior of, 150in Dealing Rates window, 157, 174price and pip values of, 24Currency risk, 183–184Customizing trading screen, 173–175DDaily chart, 86–88, 149–150Dark cloud cover, 84Davidson, Paul, 198Dealers (tax category), 186Dealing Rates window, 157–159, 174, 175Dealing station, 46 (See also Tradingstation)Dean Whitter, 14Default currency pair, 159Deflators, 77Delete Order box, 173Demo trading account, 156, 157Descending triangle, 65–67Developing nations, 193, 196–197DI (directional index), 107Diagonal triangle, 136Digital options, 38, 39Dip bottoms, 151–153Directional index (DI), 107Directional movement index (DMI),107, 108Discipline, 140–141Discount rates, 74Diversification, 8, 10DMI (see Directional movement index)
INDEX
Doji, 85Doji star, 85Dollar (as international currency), 194, 195Double bottom, 68–70Double doji, 85Double no-touch options, 39, 40Double one-touch options, 39–41Double three waves, 138Downtrend trading, 58, 60Downtrends/downswings, 91, 93, 97Dragonfly doji, 86Durable goods, 77EECI (see Employment cost index)ECNs (electronic communicationsnetworks), 46Economic data release, 74–75Economic fundamentals, 73–80consumer spending indicators, 78–79economic indicators, 74–75employment indicators, 78inflation indicators, 76–78leading indicators, 79–80Economic indicators, 74–75Education, 48, 5089-day moving average, 115, 11689-time-frame moving average, 110Electronic communications networks(ECNs), 46Elliott, R. N., 135Elliott waves, 135–138Emotional involvement, 7–9Employment cost index (ECI), 74–75Employment indicators, 78ENRON, 2–4Entry orders:canceling, 173changing, 171–173placing, 170–171Equality, rule of, 138Equity, account, 162eSignal, 47, 48European Monetary System, 197European-style options, 37European terms (inverse terms), 37–38Evening star, 85
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Exchange rates, 158under Bretton Woods, 194–197floating, 180fluctuations in, 180real-time, 46Executable quotations, 46–47Exercise price, 37Exiting a position, 159Experts, listening to, 4–6Exponential moving averages, 101Exponentially smoothed moving average,112, 114Exposures, hedging/nonhedging, 182Extended wave, 136Extent of corrective wave, 138FFailure (impulse waves), 136–137Falling broadening formation, 67Fibonacci, Leonardo, 125Fibonacci circle, 130–134Fibonacci extensions, 128, 130Fibonacci rectangles, 127Fibonacci retracements, 128, 129, 152Fibonacci sequences, 125–127Fibonacci spiral, 127, 128Fibonacci time, 129, 13115-minute chart, 86, 87Financial factors, 74Financial risks, 179First Boston, 14Five-wave structure, 136Flat waves, 138Floating exchange rates, 180Font size, 175–176Foreign exchange market (FOREX),10–14, 197analyzing, 23definition of, 12free-floating, 13–14history of, 13major participants in, 14making profits on, 23–24reasons for trading on, 19as two-way market, 25–27volume in, 19–23Foreign exchange options, 182
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FOREX (see Foreign exchange market)FOREX Alerts, 32Forward transactions, 180–1824X Made Easy, 23, 47–50France, 21, 197Free floating, 14, 180Fully-hedged portfolios, 183–184Fund managers, 183Fundamental analysis, 23, 29–34Futures, 181Futures index (CRB index), 77–78GGarmen-Kohlhagen model, 37GDP (see Gross domestic product)Germany, 21, 197GNP (see Gross national product)Goals, realistic, 146Going short, 58Gold standard, 13, 194Golden ratio/number, 126Goldman Sachs, 14Government spending, 75Gravestone doji, 86Great Britain, 197Gross domestic product (GDP), 74, 75,77Gross national product (GNP), 75, 77HHammer, 84Hanging man, 84Head and shoulders, 70–72Hedges/hedging, 12, 183–184High offer, 158Hong Kong, 21Horizontal triangles, 137, 138Housing starts, 79HSBC, 14IIMF (see International Monetary Fund)Implicit deflator, 77Impulse waves, 135–136“In the money,” 36“Income shift” strategy, 190Incorporating, 188–191
Indicators, 103–124Bollinger bands, 104, 106, 107directional movement index, 107, 108for entry, 151momentum, 119, 120moving-average convergence/divergence,116, 118, 119moving averages, 110–117rate of change, 122, 123relative strength index, 119, 120, 122stochastic, 107, 109, 110volume, 122, 124Industrial price index (JoC), 78Industrial production, 79Information, sources of, 75Interest, 161Interest rate B, 158Interest rate S, 158Interest rates, 22, 76Interface language, 177, 178Intermediate support and resistance, 95, 98International Monetary Fund (IMF), 13,194International monetary system, 194–198Internationalization of capital, 195–197Internet browser, 46Internet Currency Trading System, 46Internet service provider (ISP), 45Intrinsic value, 36Inverse terms (see European terms)Investment managers