the current priceof USD/JPY is 120.00/05, then a limit order to buy USD 119.80 would meanthat the trader would receive an execution at 119.80 or better if pricestraded down that far.liquid and illiquid markets A liquid market is one in which changes insupply and demand have little impact on the asset’s price. It is characterized by many bids, offers, and players/traders; low volatility; and tightspreads. Illiquid markets have fewer players, larger spreads, and usuallyless volume.liquid assets Those assets, usually short-dated assets like Treasurybills, that can easily be turned into money.liquidation The process of closing out long or short positions by offsetting transactions. Also refers to the process of selling all assets of a bankrupt company to pay off first creditors and then shareholders.liquidity The ability of a market to absorb large transactions with minimal to no impact on price.
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GLOSSARY
London Interbank Offered Rate (LIBOR) The rate at which majorinternational banks lend to one another. It is widely used as the benchmark for short-term interest rates.London International Financial Futures Exchange (LIFFE) Exchange made up of the three largest futures exchanges in the UnitedKingdom.long (position)currencies.
Refers to the ownership of securities, commodities, or
loonie Term for Canadian dollar.MACD.
See moving average convergence/divergence.
margin A percentage of the total value of a transaction that a trader isrequired to deposit as collateral. Buying on margin refers to investing withborrowed funds, and the margin requirement serves essentially as goodfaith deposit.margin call A call by a broker or dealer to raise the margin requirement of an account by seeking additional funds for deposit. The call istypically made after one or more securities have significantly declined invalue.market maker A broker-dealer firm that trades a particular financial instrument and is willing to buy and sell at the quoted bid and ask prices.The firm lists buy and sell prices to attract customers.market order An order to buy or sell at the best price available in themarket at present.market risk The risk associated with investing in the market that hasnot been hedged through other instruments.maturity
The date that the security is due to be redeemed or repaid.
mine and yours Terms used to signal when a trader wants to buy(mine) and sell (yours). As in, “Mine at 03,” meaning that a trader is buyingEUR/USD at 1.2003, or “Yours at 00,” meaning that the trader is selling at1.2000.momentum The term has two meanings: (1) a trading style by whichtraders go with the direction of the current trend; and (2) a technical indicator that measures the rate of change of an asset over a given time frame.
Glossary
199
money market Highly liquid markets for short-term investing in monetary instruments and debts, typically maturing in less than one year. Because of relatively small yields due to the short-term nature of theinstruments, transactions occur in large amounts and thus participantsare mainly banks and other large financial institutions.moving average An average of a number of specified historical time periods from the point on the chart. Moving averages offer an indication ofthe clear direction and slope of the trend in the market.moving average convergence/divergence (MACD) The MACD indicator relies on plotting the difference between two moving average lines—typically 12- and 26-day EMAs—as well as a signal line, which is usually the9-day EMA of the MACD itself. If the signal line—the line used to denotethe rate of change—is sloping upward, this suggests that momentum isbullish; if downward, the indication is that momentum is bearish.negative or bearish divergence Occurs when two or more indicatorsor chart patterns do not yield the same analysis as price direction.net worth The difference between the values of assets and liabilities.For public companies this is referred to as shareholder’s equity.off-balance sheet Refers to financing or the raising of money by a company that does not appear on the company’s balance sheet, such as interest-rate swaps and forward rate agreements.offer
The price (or rate) at which a seller is willing to sell.
offsetting transaction When a trader enters an equivalent but opposite position to an already existing position, thereby balancing his positions. An offsetting transaction to an initial purchase would be a sale.one cancels other order (OCO order) An if-then order that cancelsthe other part of the same order once it is executed. An OCO order for along EUR/USD position at 1.2000 with 1.2100 limit sell and 1.1900 stopwould cancel the 1.1900 stop if the 1.2100 limit exit was executed, andvice versa.open order An order to buy or sell that remains valid until it is executed or canceled by the customer. An order that is executed when theprice of a share or currency reaches a predetermined price.options Tradable contracts giving the right, but not the obligation, tobuy or sell commodities, securities, or currencies at a future date and at a
200
GLOSSARY
prearranged price. Options are used to hedge against adverse price movements or to speculate against price rises or falls.order An instruction by a customer to a broker/dealer to buy or sell at acertain price or market price. The order remains valid until executed orcanceled by the customer.overbought A term used to characterize a market in which asset priceshave risen at a pace that is above typical market acceleration, and hencemay be due for a retracement.overnightness day.
A position that remains open until the start of the next busi-
oversold The opposite of overbought; exists when the price of a market declines at an abnormally fast rate, and hence is due for an upwardreversal.over-the-counter market A market not regulated by a central exchange such as the New York Stock Exchange or the Chicago MercantileExchange. The spot forex market is an example of an over-the-countermarket.parabolic stop and reversal (SAR) Best used in trending markets,parabolic SAR specifies where traders should place their stops. If parabolic SAR is above the market rate, the recommendation is to short; if it isbelow, the recommendation is to go long.pegging When a country fixes the exchange rate to another country’scurrency, usually to achieve price stability. Most countries that peg theircurrencies do so against the U.S. dollar or the euro.pip Standing for percentage in point, a pip is the smallest amount an exchange rate can move, typically 0.0001.point and figure (P&F) Unlike conventional bar, candlestick, and linecharts, point and figure charts completely disregard the passage of time,opting to display only changes in prices.political business cycle A theory that explains changes in the economy as a result of political tactics before and after elections. Politicianswill often expand the economy prior to elections to gain voter support,and implement reforms just after the elections to avoid punishment bythe polity.
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Glossary
political risk Risk that changes in government policies will negativelyimpact an investor. Political risk is especially prevalent in emerginggrowth markets without a long history of political stability.positioninvestor.
The amount of currency or security owned or owed by an
premium The amount added to the spot price of a currency to get theforward or future price.price transparency Refers to the degree of access to information regarding bids and offers and respective prices. Ideally, every investor/trader would have equal access to all information in the marketplace.pure float An exchange rate system in which there is no central bankintervention and the exchange rate is entirely determined by the marketand speculation.quote The offer price of a security.rate
The price of one currency in terms of another (exchange rate).
realized and unrealized profit Realized profits are made from thecashing in of profitable positions, while an unrealized profit is a gain froman increase in the price of an asset that has not yet been cashed in.rectangle Similar to the consolidation portion of a flag pattern, a rectangle is a continuation pattern denoting a trading range characterized bystrong support and resistance lines. Unsurprisingly, rectangles are oftenknown as trading ranges, consolidation zones, or congestion areas.Relative Strength Index (RSI) An oscillator that measures the size ofrecent upward trends against the size of downward trends within thespecified time frame. High RSI scores—above 70 or perhaps 80—indicatethat the currency is oversold, and hence due for a reversal. Alternatively,low RSI scores indicate that the currency is overbought, and hence duefor a fall in price.repurchase (repo) Involves the sales of securities now for cash withthe promise made by the borrower to the lender of repurchasing those securities later at the implicit interest rate known as the repo rate. Thus arepo agreement is a temporary transaction in the money market. Any security can be used in a repo; so Treasury or government bills, corporate
202
GLOSSARY
and Treasury/government bonds, and stocks/shares may all be used as securities involved in a repo.resistance A price level that a currency pair has had trouble breakingthrough, and hence consolidation is expected. If the resistance lineholds and the currency pair retraces, the sellers have outnumbered thebuyers; on the other hand, buyers have outnumbered sellers if the resistance level is broken, and price may continue higher as a new trend triesto establish itself.retracements Denotes a temporary reversal in the overall trend of themarket to accommodate excessive acceleration or deceleration of assetprice movement. Synonymous with correction.revaluation An increase in the exchange rate for a currency as a resultof central bank intervention. Opposite of devaluation.revaluation rates Generally, in the FX market, the revaluation ratesare market rates at 5 P.M. EST. Any profit or loss is marked to the marketand the trader will start the next day with the position valued at the priorday’s closing rate.reversal A pattern that suggests a potential shift or deceleration of thecurrent trend. A reversal of an up move will be reflected in a downwardprice movement.risks Uncertainty in the possible outcomes of an action (i.e., possiblereturns on an investment). Risk is most commonly measured from thevariance of possible outcomes. Higher risks are associated with higherrates of return, in order to induce investment in riskier ventures.risk capital The capital that an investor does not need to maintainhis/her living standard.risk management Strategies and tactics the trader employs to avoidsubstantial risks to his portfolio.rollover Rolling forward to another date the value of the position and inthe process accounting for the interest rate differential of the two currencies. In the FX market rollover interest is paid daily 365 days per year. Because settlement is two days forward, on Wednesdays the rollover interestis accrued for three days to account for the weekend.rounding top and bottom Similar to a cup with handle pattern, arounding top signifies a rounded resistance line and a bearish overall
203
Glossary
trend. Alternatively, a rounding bottom is a bullish pattern for which thebottom curve can serve as a support line. Both patterns are best suited tolonger-term analyses.RSI.
See Relative Strength Index.
settlement The actual finalization of a contract in which the goods, securities, or currencies are paid for or delivered and the transaction is entered in the books.short position The selling of a borrowed security, commodity, or currency. Traders sell when they expect prices to fall.spike (high or low) A significantly lower low or higher high within adata series. Points where a currency spikes often signify a potential reversal in the direction of the trend, and hence can be valuable tools in analyzing a chart.spot market A market in which commodities, securities, or currenciesare immediately delivered.spot price
The current market price.
spread The difference between the bid and offer price that is offered bya market maker.sterling
Refers to the UK currency, the pound.
stochastics Like RSI, stochastics are a momentum indicator that indicates overbought/oversold levels. High levels (above 70 or 80) are indications to enter short orders; low levels (below 30 or 20) are indications tobuy. Like all oscillators, stochastics work best as a momentum indicatorthat measures the price of a security relative to its high/low range over aset period of time. The indicator fluctuates between 0 and 100, with readings below 20 considered oversold (bullish) and readings above 80 considered overbought (bearish).stop order (stop-loss order) An order used to hedge against excessive loss in which a position is liquidated at a specific prearranged price.support The opposite of resistance, a point on the chart where a currency pair has repeatedly held its value. When a currency pair tests support but does not break through it, buyers have outnumbered sellers;alternatively, sellers have gained control of momentum if support is broken and the currency pair continues to plunge downward.
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GLOSSARY
swap When a trader exchanges one currency for another, holding it foronly a short period. Swaps are typically used to speculate on interest ratemovements. Price is calculated using the interest rate differentials between the two currencies.swap spread The difference between the negotiated and fixed price ofthe swap. The size of the spread depends on market supply and participating parties’ quality of credit.swing high/low A point on the chart that represents a relative peak orbottom in price. Technical traders often use swing highs and lows as reference points to place stop or entry orders at those levels.Swissie
Refers to the Swiss franc.
symmetrical triangle Also referred to as a coil, usually forms duringa trend as a continuation pattern. It contains at least two lower highsand two higher lows. At the time these points are conjoined, the linesconverge as they are extended and the symmetrical triangle takesshape.technical analysis A technique used to try to predict future movementsof a security, commodity, or currency, based solely on past price movements and volume levels. It examines charts and historical performance.tick A minimum price movement in the futures markets.ticker Depicts current or recent history of a currency, usually in theform of a graph or chart.tomorrow next (tom/next)today for delivery tomorrow.
When a trader buys and sells a currency
trade price response This term advises that price reaction to a certainlevel is critical. If this level breaks, then the recommendation would be torun with the market direction (i.e., buy a break above resistance level; sella break below a support level). However, if a price stalls at this level andis rejected, then the recommendation is to go with this also (i.e., sell at aresistance level that is tested and holds; buy at a support level).transaction costs The costs that are incurred by a trader when buyingor selling securities, commodities, or currencies. These costs include broker commissions and spreads.transaction date
The date a trade occurs.
Glossary
205
trend line A straight line drawn across a chart that indicates the overalltrend for the currency pair. In an upward trend, the line is drawn underneath and acts as a support line; the opposite holds true for a downwardtrend. Once the currency breaks the trend line, the trend is considered tobe invalid.triple top A pattern in which a currency has reached a price three timespreviously, yet has been unable to sustain movements beyond those threepeaks. A triple top signifies a strong resistance level.turnover The number or volume of shares traded over a specific timeperiod. The larger the turnover, the more active the market.two-way price A price that includes both the bid and offer price. TheNational Association of Securities Dealers (NASD) requires that marketmakers have both bid and ask prices for any security, currency, or commodity in which they make a market. This is called a two-sided market.uptick A price quote that is higher than the preceding quote for thesame currency.uptick rule A regulation pertaining only to the stock market, requiringthat if a security is to be traded short, the price in the trade prior to theshort trade has to be lower than the price of the present short trade.U.S. prime rate The interest rate at which the major U.S. banks lend tomajor clients.value date
The date that payment is exchanged between two parties.
variance Measures the volatility of a data set/data points from themean. It is calculated by adding the squares of the standard deviationsfrom the mean and dividing by the number of data points (i.e., taking theaverage of the standard deviations).variation margin A call by a broker to increase the margin requirementof an account during a period of extreme market volatility.volatility The tendency of prices/variables to fluctuate over time. It ismost commonly measured using the coefficient of variation (the standarddeviation divided by the mean). The higher the volatility, the higher therisk involved.volume The number of shares or contracts traded for a certain securityor on an exchange during a period. The FX market does not report volume.
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GLOSSARY
weekly charts Charts for which each candlestick or bar encapsulatesdata for the currency pair for the prior week.whipsaw Term used to describe sharp price movements and reversals inthe market. An example of a whipsaw would be when shortly after atrader opens a long position the currency pair plummets and then just asquickly recovers its value.yard Term for a billion units of currency, as in “I am selling a yard ofsterling.”
Index
AAppel, George, 87Arithmetic scaling, 155–157Ascending triangle, 128,130–131Aspray, Thomas, 87AUD/JPY pair, 37, 38–39AUD/USD pair, 35, 36Average Directional Index(ADX)/Directional MovementIndex (DMI), 71–72
BBar charts, 41–43Base currency, 7Bear flags, 123–127Bearish candles chart,44Bearish engulfing patterns,45–46Bid/ask spread, 8–10Bollinger bands, 72–77scalping to trend with,172–173trend detection/exhaustionwith, 162–164trend trading with, 164–167,170–172volatility stop with, 167–170
Breakout patterns, in candlestickcharts, 45–46Buffett, Warren, 35Bull flags, 123–128Bullish candle chart, 44Bullish engulfing patterns,45–46
CCAD/JPY pair, 37Candlestick charts, 43–58breakout patterns, 45–46indecision patterns, 46–49reversal patterns, 50–56Carry trades, 13–15Central banks, as FX traders,5–6CHF/JPY pair, 39Cohen, Steve, 158Commodity Channel Index (CCI),91–96Commodity currencies, 35–36Confidence, in trading, 184Corporations, as FX traders,5Countercurrency, 7Crosses, 37–38Currencies:commodity, 35–36major, 32–35207
208DDark Cloud Cover pattern, 49–50Data display, 41–58bar charts, 41–43candlestick charts, 43–58line charts, 41, 42Dealer intervention, 9Decentralization, of FX markets,6–7Demonstration trading accounts,evaluating of, 19–24Dennis, Richard, 153Descending triangle, 131–132Diamond patterns, 135–137Doji candles, 46–48Double top and double bottompatterns, 114–117. See alsoTriple top and bottompatternsDragonfly doji candle, 48
INDEX
Fibonacci sequence, 99–112background, 99–102pros and cons of, 102–108trading with, 108–112Flag and pennant patterns,123–128Foreign exchange markets, see FXmarketsFX markets. See also Trademanagementbid-ask spread and dealer-basedmarket, 8–10decentralization and, 6–7demonstration tradingaccounts, 19–24fundamentals of trading and,15–19leverage and, 10–15market structure and, 4–6quotation conventions, 7–8rules and regulations of, 3–4traders on, 5trading volume on, 1–2
EEconomic growth, as tradingfundamental, 17Economic news, as tradingfundamental, 15–19EUR/CHF pair, 37–39EUR/GBP pair, 37EUR/JPY pair, 37, 39EUR/USD pair, 32, 33–35Evening star/morning starcandlestick, 53–54, 55Exponential moving average(EMA), 65–66
GGallacher, William, 64Gartman, Dennis, 106, 153GBP/CHF pair, 39GBP/JPY pair, 37, 39GBP/USD pair, 32Geometric scaling, 156–157Ghost patterns, in CCI, 94–95Gravestone doji candle, 47
HFFalling wedge, 132, 133,134
Hammer/hanging mancandlestick, 51–53Harami candlestick, 50–51,52
209
Index
Head and shoulder patterns,137–138Hedge funds, as FX traders,5
IIndecision patterns, incandlestick charts, 46–49“Inside day,” 50Interest on account, debits andcredits for, 15, 20Interest rates:carry trades and, 13–15range trading and, 38–40as trading fundamental,17–18
JJapan, regulation in, 3
K
MMajor currencies, 32–35Margin, on stock trades,10Margin call, in FX market,11–13Market Maker’s Edge, The(Lukeman), 110, 112Market Wizards (Schwager), 16,143Morning star/evening starcandlestick, 53–54, 55Moving averageconvergence/divergence(MACD), 87–91in setup example,173–176Moving averages, 64–71exponential moving average,65–66moving average crossover,66–69simple moving average (SMA),64–65three SMA filter, 69–71
Kovner, Bruce, 16NLLambert, Donald, 91Lane, Dr. George C., 79–81Leverage, 10–11carry trades and, 13–15margin calls and, 11–13Line charts, 41, 42Long-legged doji candle,47Lucas, Edouardo, 100Lucas sequence, 100Lukeman, John, 110, 112
National Futures Association(NFA), 3–4Nisson, Steve, 43NZD/USD pair, 35
OObservation, randomness theoryand, 25–27Oscillators, 79–97Commodity Channel Index(CCI), 91–96
210Oscillators (Continued)moving averageconvergence/divergence(MACD), 87–91, 173–176Relative Strength Index (RSI),82–86, 176–179stochastics, 79–81
PPatterns and antipatterns,113–141diamonds, 135–137double tops and doublebottoms, 114–117flags and pennants, 123–128head and shoulders, 137–138reverse head and shoulders,138–141triangles, 128–132triple tops and bottoms and theantipattern, 117–123wedges, 132–135%D, 80%K, 80Percentage in point (pip), 7–8“Phi,” 100, 102. See also FibonaccisequencePickers, 9Pip (percentage in point), 7–8Political stability, as tradingfundamental, 18–19Pressing the trade, 152–155Price channels, trend lines and,60–63Price data, randomness of,25–27
QQuotation conventions, 7–8
INDEX
RRandomness, 25–27Range trading, 30–32, 79–97Commodity Channel Index(CCI), 91–96crosses and, 37–38interest rates and, 38–40moving averageconvergence/divergence(MACD), 87–91,173–176Relative Strength Index (RSI),82–86, 176–179stochastics, 79–81Relative Strength Index (RSI),82–86in setup example, 176–179Reversal patterns, in candlestickcharts, 50–56Reverse head and shoulderspatterns, 138–141Rising wedge, 133–135Rosen, Adam, 83
SSarnoff, Tom, 183Scaling, 155–157Scalping, 9Scalping to trend, in setupexample, 172–173Schwager, Jack D., 16, 143,158Science Askew (Simanek),100–102Self-knowledge evaluation,143–150Setup examples, 161–184MACD turn, 173–176Relative Strength Index,176–179
211
Index
scalping to trend,172–173trading pure trend withBollinger bands, 170–172trend detection/exhaustionwith Bollinger bands,162–164trend detection with threesimple moving averages,180–181, 182trend trading with Bollingerbands, 164–167volatility stop, 167–170Shooting star/reverse hammercandlestick, 51–53Simanek, Donald, 100–102Simple moving average (SMA),64–65. See also Threesimple moving average(SMA) filterSTC Capital, 158Stochastics, 79–81Stock Market Wizards(Schwager), 158Swiss franc, 32, 33Symmetrical triangle,128–129
T10 percent solution,157–159Three Advancing WhiteSoldiers candlestick,54–56Three Black Crows candlestick,54–56, 57Three simple moving average(SMA) filter, 33–35, 69–71in setup example, 180–181, 182Trade balance, as tradingfundamental, 18
Trade management, 143–160. Seealso FX markets; Setupexamplesarithmetic scaling,155–157pressing the trade,152–155self-knowledge and,143–150success factors and,181–18410 percent solution,157–1592:1 reward/risk ratio,150–152Trading houses, as FX traders,5Trend line break patterns, in CCI,95Trend trading, 29–30, 59–78Average DirectionalIndex/DirectionalMovement Index,71–72basic questions of, 74–76Bollinger bands, 72–77Bollinger bands, in setupexamples, 164–167,170–172currencies for, 32–36moving averages, 64–71trend lines, 60–64Triangle patterns, 128–132Triple top and bottom patterns,117–1232:1 reward/risk ratio, 150–152
UUnited Kingdom:pound of, 32–33regulation in, 3
212United States, regulationin, 3USD/CAD pair, 35, 36USD/CHF pair, 32USD/JPY pair, 32, 39
INDEX
WWedge patterns, 132–135Wilder, J. Welles, 71, 82Winner Take All (Gallacher), 64Wood, Ken, 91, 93–95
VZVolatility stop, insetup example,167–170
Zero line reject patterns, in CCI,95–96
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