An Introduction to Forex Trading - A Guide for... (PDF) (2024)

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An Introduction toForex Trading – A Guide for BeginnersBy Matthew Driver

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Editor: Matthew Driver Cover Design andIllustrations: Matthew Driver Published by Wells GrayPress Great BritainCopyright © Matthew Driver 2011All rights reserved.No part of this publication may be reproduced, storedin a retrieval system, or transmitted in any form or by anyother means electronic, mechanical, photocopying orotherwise, without prior permission in writing from thepublisher.This book is sold subject to the condition that it shallnot, by way of trade or otherwise, be lent, re-sold, hiredout or otherwise circulated without the publisher’s priorconsent in any form of binding or cover other than that inwhich it is published and without a similar conditionincluding this condition being imposed on the subsequentpurchaser.

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DisclaimerInvestments in financial products are subject to market risk. Forexinvestments are highly speculative and any investment should only be done withrisk capital. Prices rise and fall and past performance is no assurance of futureperformance. Accordingly, the author makes no warranties or guarantees inrespect of the content. You should obtain individual financial advice based onyour own particular circ*mstances before making an investment decision on thebasis of information included in this book.Investment lessons, comments and/or opinions presented in this publicationare solely those of the author and contributors quoted. You are advised toconduct your own independent research before making a decision. In addition,you are advised that past performance is no guarantee of future priceappreciation.While we have tried to ensure that all of the information provided in thisbook is up-to-date and accurate we accept no responsibility for any use made ofthe information provided. You agree not to hold the author or publisher liable fordecisions that are based on information from this book.

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Table of ContentsChapter 1: An Introduction to Forex TradingChapter 2: Forex EssentialsChapter 3: Analysing the Forex MarketChapter 4: Forex ChartsChapter 5: Technical Trading TechniquesChapter 6: Common Chart PatternsChapter 7: Moving AveragesChapter 8: Indicators and OscillatorsChapter 9: FibonacciChapter 10: Trading CycleChapter 11: Advanced Chart PatternsChapter 12: TimeframesChapter 13: Trading StrategyChapter 14: The Carry TradeChapter 15: Ready to TradeChapter 16: Trading SystemsChapter 17: Some final thoughts

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Chapter 1: An Introduction to Forex TradingThe Forex market can offer fantastic opportunities to traders from all walksof life. It is possible to make good returns on your investment, and many peoplesuccessfully manage to turn their trading activity into full time jobs or goodsecond incomes.The chance to profit from the relatively small fluctuations and changes inthe values of currencies means anyone can have a go at trading and with the vastarray of conventional and online tools/applications that are currently available; itis relatively easy to get started, and begin trading.Designed for Forex beginners, the aim of this book is to provide acomprehensive understanding of how the Forex market works, how it is possibleto make profitable returns, and to introduce many of the technical terms andtools that are essential for everyday trading activity.1.1 Early WarningIt is best to get the warnings out of the way, so that you are aware of themand can then decide whether Forex trading is right for you. As with any type offinancial trading there are risks involved and it is important to understand theserisks, as you can then develop strategies and learn methods that can help toreduce them.‘Warning: Forex Trading carries a high level of risk to your capital withthe possibility of losing more than your initial investment and may not besuitable for all investors. Ensure you fully understand the risks involved and seekindependent advice if necessary’.It is likely that anyone considering trading in the Foreign Exchange (Forex)Markets will have come across the above statement, at one time or another andthose that haven’t yet, soon will. It is a warning that you will quickly come torecognise in the course of day-to-day trading and it is also an extremelyimportant message to remember.

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The truth is that there are risks associated with Forex trading, as with anytype of trading, and it is important to understand and accept these risks, beforeprogressing. Failure to understand the risks and prepare for what is involvedwith trading is likely to lead to financial losses. However, by taking thenecessary time to learn and understand how and why the market works as itdoes, and acquainting yourself with essential trading knowledge, willconsiderably increase the chances of success.There are many books and resources available that will try and tell you thatthey have discovered the perfect trading setup or offer promises of guaranteedreturns. This is not one of those books! There is no ‘magic setup’ or ‘guaranteedstrategy’ out there – as much as we all wish that there was! Even institutionaltrading houses with advanced quantification strategies, and teams of analystswill struggle to predict market movements correctly 100% of the time.Forex trading must be approached in the same way as one would approachany other job. A successful trader is defined as ‘one whose losses over the long-term are overall less than their gains’. Losses are a fact of life and every trader atsometime or other will experience them. The best tool available for maximisingreturns and minimising losses is ‘market knowledge’, and it is this that we havetried to encapsulate within this book.1.2 What is the Forex Market?The global Foreign Exchange Markets also known as Forex or FXrepresents the platform by which currency from one country can be exchangedinto the currency from another. The value of currencies around the globeconstantly fluctuate depending upon a whole variety of factors, and will rangeupwards or downwards depending upon the economic stability or instability ofthe countries which issue them. It is these fluctuations in value that present theopportunities to make money.Put simply, this means that if a countries economy is performing well, thenit is likely to result in an increase in the value of the currency of that country.Alternatively, if an economy is performing badly then this is likely to lead to areduction in the value of that currency.

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Key Lesson: Whilst there are obviously many different factors that caninfluence currency values, many of which we will consider later in this book, insimple terms the aim for traders is to identify when and how these fluctuations incurrency price are likely to occur, and then trade accordingly.1.3 Size of the MarketThe Forex market is huge in size. Close to $4 trillion worth of currency istraded daily, making it by far the largest financial market operating in the world.Of this, approximately $1.5 trillion is traded by retail traders, trading the Forexspot market.The total Forex market value represents many different activities, whichwill require the exchange of one currency into another. Businesses makingoverseas purchases or dealing with foreign suppliers and customers;international mergers and acquisitions; and, interbank dealing and transfers allrequire money to be transferred around the globe and converted into differentcurrencies. This is achieved using the Forex markets.1.4 Market StructureThe trading of stocks and shares is predominately conducted throughcentralised exchanges, which means that the price at which securities can bebought and sold, is controlled and manipulated by a few dominant institutions.There is, therefore, little opportunity to seek a range of prices for buying andselling within the market place.The Forex market, however, operates using a distinctly decentralisedstructure. Many institutions and organisations can offer currency transactions ata variety of different prices. This means that there is the opportunity for a varietyof quotations amongst dealers and the chance to buy and sell at a range of prices.This type of decentralised organisation can initially seem confusing,however, by its nature, it actually provides considerable opportunity for retail

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traders. The competition that exists between institutions and market playersactually ensures that the best possible pricing deals are available all of the time.In the Forex market there is still a degree of structure amongst participantsand it is useful to understand how the main elements of the market interact: 1. Atthe top of the Forex structure is the InterBank Market. This comprises theworld’s largest banks and some of the smaller regional institutions that tradedirectly between each other using two standard systems; the ElectronicBrokering Services (ECB) or the Reuters Dealing 3000 spot matching. Boththese systems allow the larger institutions to transact easily between themselves,with minimal costs and maximum efficiency.2. The next level of the structure comprises: Hedge Funds; Retail MarketMakers; and, Business Institutions. This tier of participants utilise foreignexchange mechanisms, either as part of global business operations, or forspeculative investment purposes. Operating at this level requires strategicpartnerships, where transactions will generally be directed through commercialbanking partners. As such, the costs participants incur, in order to transact, arehigher than those experienced at the institutional level, but still more favourablethan the terms available to most retail traders.3. At the lower end of the Forex hierarchy are the Retail Traders. A diversegroup, retail traders range from day traders who will trade everyday placingmultiple transactions, to irregular participants who only trade now and again.The value of transactions at this level is equally varied, encompassing allbudgets. Costs of trading are higher and the terms of activity less favourablesince there are two levels above the retail trader charging fees on everytransaction.Access to the currency markets in the past was much more complicated andcostly, but with the introduction of internet based retail brokerage it is now mucheasier to actively participate within the marketplace. This means that there hasnever been a better time to begin to learn how to trade Forex.1.5 Forex v. StocksMany of the techniques used to trade the foreign exchange markets are

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equally applicable for the trading of stocks and shares. As a Forex trader youwill find that the skills learned and developed in order to effectively trade, can beeasily applied to trade other financial securities. Despite this though, Forextrading does have some distinct advantages over the trading of other financialinstruments, particularly in terms of the possibility for larger returns oninvestments.The main differences of trading Forex over stocks include:- 24hr market (No matter what the time of day or night you can trade aroundthe clock owing to the global nature of the Forex market).- Commission Free Trading- Liquidity (The Forex market is extremely liquid owing to its sheer size. Thismeans that there are always buyers and sellers active in the marketplace).- Stops (Most brokers provide guaranteed stops when trading).- Leverage (Traders can apply leverage to trades in order to maximise potentialreturns).- Identifiable Trends- Easy access to Market News1.6 Making Money from Forex TradingThe objective for anyone trading the foreign exchange markets is toexchange one currency for another, in the hope that the price of the currencybought will increase in value, compared to the value of the currency sold.The way this is achieved in Forex trading is through the use of a currencypair. A trade will always be based upon two currencies, known as the currencypair. This is because every time you make a foreign exchange transaction youare essentially buying one currency and selling another. Each pair will always bepresented in a similar format. The first currency in the pair is known as the base