Download - handbk+on+forex+trading+sample
-
7/25/2019 handbk+on+forex+trading+sample
1/31
-
7/25/2019 handbk+on+forex+trading+sample
2/31
i
Handbook On
T R A D I N G
FOREX
Nicholas Tan
An Easy Guide To Proftable Currency Trading
-
7/25/2019 handbk+on+forex+trading+sample
3/31
ii
First Published May 2007
Reprinted June 2008
Reprinted June 2009
Published and distributed by:
Rank Books
Blk 1002 Toa Payoh Ind Pk
#07-1423 Singapore 319074
Tel: 65-62508180 Fax: 65-62506191
Website: www.rankbooks.com
Email: [email protected]
ISBN 978-981-05-7936-4
Cover Design and Typeset: Nathania Fransiska Susilo
All Rights Reserved. No part of this publication may be reproduced or copiedin any form or by any means - graphic, electronic or mechanical, includingphotocopying, recording, taping or information retrieval systems - withoutwritten permission of Rank Books.
Conditions of Sale: This book is sold subject to the condition that it shall not,by way of trade or otherwise, be lent, resold, hired out or otherwise circulatedwithout the publishers prior consent in any form of binding or cover other than
that in which it is published and without a similar condition including this condition
being imposed on the subsequent purchaser.
While every reasonable care is taken to ensure the accuracy of informationprinted, no responsibility can be accepted for any loss or inconvenience causedby any error or omission. The ideas, suggestions, general principles, examplesand other information presented here are for reference and educationalpurposes only. This book is not in anyway intended to give investment adviceor recommendations to trade. The author or publisher shall have no liability forany loss or expense whatsoever relating to investment decisions made by thereader.
Acknowledgement:Special thanks to OANDA Corporation for granting the publisher the right toreproduce the charts which appeared in this book.
-
7/25/2019 handbk+on+forex+trading+sample
4/31
iii
This book is dedicated to
all my students, past and present,
who have given me
the confidence and inspiration
to write this handbook.
Dedication
-
7/25/2019 handbk+on+forex+trading+sample
5/31
iv
Nicholas Tan has more than 13 years of experience in the
treasury departments of major banks. Armed with a degree
in business administration from the National University of
Singapore in 1989, he started as an assistant dealer. Working
his way up to Vice President, he made millions for the bankshe worked for. Since 2002, Nicholas has been trading his
own account and has coached numerous individuals on forex
trading. With five years of personal trading and 13 years trading
for banks in Singapore, Nicholas has a wealth of experience
and knowledge in forex trading.
About the Author
-
7/25/2019 handbk+on+forex+trading+sample
6/31
v
The forex market may be the biggest market in the world, but
not many people know of it or even trade it as compared to
the stock market. Forex trading is an exciting alternative to the
stock market. This market was once confined to banks and
high net worth individuals but with the advent of the internetand broadband, retail forex trading is now within the reach of
many individuals. With a deposit of less than US$3000, which
enables you to trade an amount of US$200,000, and online
brokers providing 100 times leverage on the margin deposit
in many cases, forex trading has become the playground of
many small time retail players.
The aim of this book, Handbook on Forex Trading, is to provide
you with the knowledge and skills while guiding you through
forex trading. You will learn how the forex market works, the
basics of charting, how to trade, and when the best time to
trade is. By explaining to you the FX terms and basics involved
and guiding you through opening an online trading account,
teaching you various useful chart patterns and technical
indicators and infusing you with money management and
trading discipline, this book is an invaluable help in shortening
your learning curve and giving you a jumpstart on your road to
forex trading.
This book will cover the following and more:
1. Introduction to the forex market
This will give you an understanding of what forex is, as
Preface
-
7/25/2019 handbk+on+forex+trading+sample
7/31
vi
well as the main players involved in this forex market. To
get you started in FX trading, you will be introduced toFX basics and terms, as well as the fundamentals and
news that move forex rates.
2. How to understand basic chart patterns and technical
indicators
Condensed into three chapters in this section is heaps
of information on chart patterns and candlestick patterns
useful for forex trading. An additional chapter will guide
you on the technical indicators the majority of FX traders use.
3. When the best time to trade is
In this section, you will put your new knowledge into a
practical plan. You will learn to combine chart patterns
with technical indicators to eke out synergies. You will
learn about the various currency pair characteristics and
when is the best time to trade these currency pairs.
4. Getting started in forex trading
Heres where you can get help and tips on choosing
and opening an online forex trading account, be it a
standard account or a mini account. In another section,
you will learn to use the various types of forex orders.
Free sources of information and their websites will be
provided to get you started as well.
5. How to manage risk and increase your profitLearn how to increase your winning percentage in forex
trading and about the importance of discipline in forex
trading.
Filled with real charts and proven trading techniques, this
practical handbook will show you how to trade profitably.
Master these techniques of trading and enjoy the great
rewards that await you in the forex market!.
-
7/25/2019 handbk+on+forex+trading+sample
8/31
vii
Chapter 1 Introduction to Foreign ExchangeChapter 2 Understanding FX Basics
Chapter 3 What Moves FX Rates?
Chapter 4 Basics of Charting
Chapter 5 Chart Patterns
Chapter 6 Using Technical Indicators in FX Trading
Chapter 7 Putting It All TogetherChapter 8 When Is the Best Time to Trade?
Chapter 9 Choosing an Online Broker
Chapter 10 Money Management
113
23
35
49
77
101113
135
149
Contents
-
7/25/2019 handbk+on+forex+trading+sample
9/31
viii
-
7/25/2019 handbk+on+forex+trading+sample
10/31
INTRODUCTION TO FOREIGN EXCHANGE
1
chapter 01introduction to foreign exchange
-
7/25/2019 handbk+on+forex+trading+sample
11/31
HANDBOOK ON FOREX TRADING
2
inside this chapter:- What is forex?
- The FX marketplace- Main players in the FX market
- What are the attractions of trading FX?
- Is FX suitable for you?
-
7/25/2019 handbk+on+forex+trading+sample
12/31
INTRODUCTION TO FOREIGN EXCHANGE
3
chapter01introduction to
foreign exchange
What is Forex?
Foreign Exchange, or FX as it is commonly referred to,
involves the simultaneous buying of one currency andthe selling of another. Currencies are traded in pairs,
for example US Dollar/Japanese Yen (USD/JPY). When
you buy US dollars, you are selling Japanese Yen in
exchange for the US dollars. You can buy your currency
from the moneychangers or go to the banks. This is the
FX marketplace you are familiar with. For the majority
of us, our knowledge of FX extends only to changing
currency when we need it or when we want to go to
another country. By changing currency, you are playing
a part in this market. However, FX is much more than
this, and it is a huge marketplace of which we only know
a fraction. Hopefully, by the end of this book, you will
know enough of FX to trade in it.
-
7/25/2019 handbk+on+forex+trading+sample
13/31
HANDBOOK ON FOREX TRADING
4
The FX Marketplace
At the core of the FX market, there is a network of banks,
which trade against one another. This is known as the
interbank market. This interbank market accounts for
the bulk of daily FX volume, which amounts to US$3.2
trillion daily. The banks trade directly among themselves
through a network of dealing stations. Each bank has
a unique code through which other banks can make
contact and connect directly with to carry out theirtrades. They can conduct their trading through an
electronic broker called the Electronic Broking System
(EBS). Banks will conduct their buying and selling by
placing their buy orders and sell orders in the electronic
broking system, where buy and sell orders of the same
price are matched. If prices cannot be matched, they
will be put in the queue. Prices will remain in the queue
till they are matched or withdrawn.
Retail
Trader B
Retail
Trader A
Retail
Trader C
Online
Broker
Hedge
Fund B
Money
Changer
Bank C
Bank A
Bank D Bank BHedge
Fund AEBS
Fig 1.1 The FX marketplace and its participants.
-
7/25/2019 handbk+on+forex+trading+sample
14/31
INTRODUCTION TO FOREIGN EXCHANGE
5
In the interbank market, this buying and selling of currency
continues 24 hours a day from Monday to Friday. Ina week, starting from Monday, the market will open
with Australia and move on to Asia, when Tokyo, Hong
Kong, and Singapore come in. When Europe comes in,
activities will move over to Europe as Asia calls it a day.
New York will join in when it opens, and when New York
officially closes at 5 p.m. New York time, it is the end of
a day in foreign exchange. After the close of New York,
it is back to Australia again to start another day cycle.
This continues till New York closes on Friday evening at
5 p.m. This will end a week in FX. If we were to convert
all these into Singapore time, the FX market would have
started at 6 a.m. Singapore time on Monday, with trading
continuing through till 6 a.m. of Saturday morning. When
there is daylight savings in Europe and USA, the hours
will be from Singapore 5 a.m. on Monday morning to5 a.m. of Saturday morning. Daylight savings starts in
March and ends in October.
Fig 1.2 A daily cycle in the FX.
Sydney/Aust
0500 0700050003000100230021001900170015001300110009000700
Tokyo/HK/Singapore
Europe/London
New York
Day 1 Day 2
SINGAPORE TIME
-
7/25/2019 handbk+on+forex+trading+sample
15/31
HANDBOOK ON FOREX TRADING
6
This goes on for 363 days a year. There are only two
holidays a year for the FX market. They are New YearsDay and Christmas Day. For these two holidays, the
majority of trading centres in the world are closed so
there is no trading. At other times, when there is a holiday
in one country, it may not be the case with another
country. FX trading in the world will continue as usual
with other trading centres. If there is a public holiday
in Tokyo, there is still the FX market in Hong Kong and
Singapore to make up the numbers. Just in case you
might wonder, if the United States is closed for a holiday,
Canadian centres like Montreal and Toronto will still be
opened to trade. Liquidity, of course, would be lower
without Uncle Sam.
Main Players in the FX MarketBanks and Central Banks
The main players in this big FX market are the banks.
Banks employ many traders to trade on the banks
proprietary accounts. These proprietary traders trade
currency to generate profit for the bank. Banks also act
on their customers orders to buy one currency against
another for commercial and trading purposes.
Governments and their central banks also buy and sell
currency to hold as reserves. For example, when one
central bank decides to reduce their US dollar holding
and wants to increase their Japanese yen holding, the
central bank will sell US dollars against the Japanese yen.
-
7/25/2019 handbk+on+forex+trading+sample
16/31
INTRODUCTION TO FOREIGN EXCHANGE
7
In this way, the central bank increases its holding of yen
and reduces its US dollar holding. They might want to dothis if they think the US dollar will weaken. What they are
trying to do is to protect the countrys reserves.
Another reason why central banks are active in the FX
market is to moderate the strength or weakness of their
countrys currency. The Monetary Authority of Singapore
(MAS), which is the central bank of Singapore, tries to
intervene in the FX market when they think the Singapore
dollar movement is excessive. Similarly, the Peoples
Bank of China will try to sell the yuan when the yuan
appreciates too much against the US dollar.
Investment Funds and Hedge Funds
In the FX market, there are hedge funds speculatingin currency value. They will buy or sell a currency if
they think it will appreciate or depreciate in value over
time. One of the most famous of this hedge funds is
the Quantum fund, whose major shareholder is George
Soros. Mr Soros made his name in the 1990s, with the
most famous example being his bet against the Bank
of England. He made a cool USD two billion out of
speculating on the Sterling pound depreciation. Most
big hedge funds will, to a certain extent, speculate
in currency. FX is the biggest market in the world in
terms of volume turnover. The FX market is able to
accommodate their large trading size, which may not
be possible in the equity market or futures market.
-
7/25/2019 handbk+on+forex+trading+sample
17/31
HANDBOOK ON FOREX TRADING
8
Companies
Companies have a part to play in the FX market. Letsconsider the example of Singapore Airlines: SIA will need
to pay for the cost of purchasing Boeing airplanes. SIA
would have to buy US dollars from a bank to pay for
their airplane purchase unless Boeing agrees to accept
payment in Singapore dollars. But if Boeing were to
accept payment in Singapore dollars, they will still need
to convert the money to US dollars. Boeing will need to
pay their US workers in US dollars. Similarly, an exporter
in Singapore will receive their payment either in US
dollars or Singapore dollars. If they were to receive their
payment in US dollars, they will need to convert it to
Singapore dollars.
Retail TraderNot least of all, there is the small retail trader, who is
out to make some money from FX trading. Not too long
ago, FX was out of access to the small retail trader. It
was the arena of the banks and other big participants.
However, with the rise of the Internet and fast and
cheap broadband, the scenario has changed. The small
retail player is now able to participate in this FX market
without handicap compared to the big players. Brokers
are able to provide this continuous price feed to small
retail players at a low and affordable cost. Brokers have
gone online with their own trading platforms. These
sophisticated online trading platforms are able to offer
quick access to prices and information. This has brought
-
7/25/2019 handbk+on+forex+trading+sample
18/31
INTRODUCTION TO FOREIGN EXCHANGE
9
FX trading to the small retail trader in the late 1990s.
The number of brokers has mushroomed in recentyears. As a result of this, costs have decreased for the
small retail FX trader. Today, most online brokers offer
commission free trading for their clients. The spread
has also narrowed to two to three pips for the major
currency while in the past it used to be five to seven
pips. There is no better time to get started in FX trading.
(more explanation of pips in page 19).
What are the Attractions of Trading FX?
There are many reasons for you to get hooked on FX
trading.
1. The market is open 24 hours a day. As the market
is opened 24 hours a day, you will be able to find
a time window to trade. When you are free, after
all your work has been done, you can switch on
the computer, login to your online trading platform
and start trading. It could be in the evening for the
busy office worker. From 8 p.m. to 11 p.m. there
will be opportunities to make some money. Unlike
the stock market, when the office worker wouldhave to juggle his office duty and watch the stock
prices during office hours, FX allows him to watch
and trade the market without distraction during his
free time. For a housewife out to make some extra
income, FX is another alternative besides the stock
market when their children are in school.
-
7/25/2019 handbk+on+forex+trading+sample
19/31
HANDBOOK ON FOREX TRADING
10
2. The daily volume for the FX market totals USD 1.7
trillion a day. That is more than the volume of NYSE,NASDAQ, and the London equity market combined.
There is no reason for you to worry about a lack of
liquidity.
3. Unlike stocks, the four major currency pairs
account for a substantial amount (70%) of the FX
volume. You just have to concentrate on the four
major currency pairs. Time spent on analysis will
be confined to the four major currency pairs. You
do not have to waste time analysing countless
companies.
4. There is a good daily range to keep you happy as
well. The usual daily range for Euro/USD is close
to 100 pips. Only on a few days a month will thedaily range be less than 100 pips. Even when the
daily range falls below 100 pips, it will have at least
80 pips.
5. Unlike Singapore stocks, where short selling is
prohibited, in FX there is equal opportunity in both
long and short. There is no restriction on short
selling. You can short a currency pair and hold it
for as long as you want so long as your margin is
able to support it.
-
7/25/2019 handbk+on+forex+trading+sample
20/31
INTRODUCTION TO FOREIGN EXCHANGE
11
6. Small capital with great leverage is provided. Most
FX trading platforms provide great leverage foryou to trade currency. Most platforms need you to
put up only a 2% margin deposit. That is as good
as 50 times leverage. Many brokers will provide
100 times leverage. At this ratio, you only need a
margin of USD 1,000 to short USD 100,000 against
the Japanese yen.
7. When using online trading platforms, your trade
execution is almost instantaneous. Once you
submit your buy or sell market order, the platform
will report back to you in a second or two on your
order execution. Your brokers platform is likely to
provide news information and charting as well. You
do not need to incur additional monetary cost to
subscribe to news and charting software. By justputting up a margin deposit with your broker, you
will be ready to start trading.
Is Forex Suitable for You?
Unlike the stock market, forex has higher risks to the
new investor. To a new forex investor, the product itselfis new. His knowledge of forex is next to nothing. Little
is reported in the newspapers daily except when there
is a major event.
-
7/25/2019 handbk+on+forex+trading+sample
21/31
HANDBOOK ON FOREX TRADING
12
There are few or no rumours in the market for the trader
to depend on. Even if there are any rumours, the forexmarket would be very fast to factor in these rumours.
Passed down rumours would not be fast enough for
those further down the line to profit from it. Real trading
skill is needed. Charting skill and knowledge would come
in handy.
The forex rate movement is fast and at time furious
and as a result, stress level is higher than that in the
stock market. It is certainly not for the faint-hearted. As
forex trading involves leverage, profits and losses are
magnified. One would have to be disciplined to control
losses and not let losses ruined his financial standing.
-
7/25/2019 handbk+on+forex+trading+sample
22/31
UNDERSTANDING FX BASICS
13
chapter 02understanding FX basics
-
7/25/2019 handbk+on+forex+trading+sample
23/31
HANDBOOK ON FOREX TRADING
14
inside this chapter:- The spot FX market
- Transaction and settlement date- Rollover
- Currency pairs
- Reference and quote currency
- Pips
- Bid and offer
- Spread
- Profit and loss
-
7/25/2019 handbk+on+forex+trading+sample
24/31
UNDERSTANDING FX BASICS
15
chapter02understanding
FX basics
The Spot FX Market
When we trade the FX, it is usually the spot market that
we are involved in. The rate that we see changing almostevery second on our brokers online trading platform is
the spot price. It is also referred to as the cash rate.
Transaction Day and Settlement Date
When we purchase or sell a currency pair at the rate we
see and trade, there is an exchange date or settlement
date. The day you trade is the transaction day. The day
of settlement is two trading days after the transaction
day. Taking the example of the USD/JPY, if we purchase
USD/JPY on 3 Jan 2007 (Wed), the settlement will be
on the 5 Jan 2007 (Fri), which is two trading days later.
Saturday and Sunday are not trading days, so if the
-
7/25/2019 handbk+on+forex+trading+sample
25/31
HANDBOOK ON FOREX TRADING
16
transaction date is on a Friday, the settlement date will
be on a Tuesday.
Rollover
After your transaction, if you do not close or square
your position on that same day, but instead choose to
close your position one day later, there will be a different
settlement date. Your opening positions settlementdate would not be the same as your closing position
settlement date. Your broker will roll over your opening
position settlement date to the next day so that both
your opening and closing position settlement date is the
same. You will either have to pay interest or earn interest
depending on your position. If you bought a currency
that pays a higher interest rate than the currency you
sold, you will earn interest. If you are holding a currency
that has a lower interest than the one you sold, you will
have to pay interest.
Currency Pairs
The four majors
Currencies always trade in pairs. You buy one currency
and sell the other currency in the pair. There are many
pairs of currencies, but these pairs are the most highly
traded. (See Table 2.1). These four majors alone account
for 70% of the USD 1.7 trillion daily volume.
-
7/25/2019 handbk+on+forex+trading+sample
26/31
UNDERSTANDING FX BASICS
17
The Four Major Currency Pairs Symbols
1. Euro Currency/US Dollar EUR/USD
2. Great Britain Pound/US Dollar GBP/USD
3. US Dollar/Swiss Francs USD/CHF
4. US Dollar/ Japanese Yen USD/JPY
Other currency pairsBesides the four majors, there are many other currency
pairs. They are sometimes referred to as the minor
currency pairs. Here are some examples:
Asian Currency Symbols
1. Australian Dollar/US Dollar AUD/USD
2. US Dollar/Singapore Dollar USD/SGD
3. US Dollar/Korean Won USD/KWR
4. US Dollar/China Yuan USD/CNY*
* Some brokers use CNY, while some brokers use RMB
Others Symbols
1. US Dollar/South African Rand USD/ZAR
2. US Dollar/Mexico Peso USD/MXN
3. US Dollar/Swedish Krona USD/SEK
Table 2.1 Highly traded currency pairs.
Table 2.2 Minor currency pairs.
-
7/25/2019 handbk+on+forex+trading+sample
27/31
HANDBOOK ON FOREX TRADING
18
Cross currency pairs
Cross currency pairs are currency pairs that do notinvolve the USD. Some examples are:
Euro Cross Currency Pairs Symbols
1. Euro Currency/Japanese Yen EUR/JPY
2. Euro Currency/Swiss Francs EUR/CHF
3. Euro Currency/Great Britain Pound EUR/GBP
Other Cross Currency Pairs Symbols1. Malaysian Ringgit/Singapore Dollar MYR/SGD
2. Singapore Dollar/Thai Baht SGD/THB
3. Australian Dollar/NZ Dollar AUD/NZD
4. Great Britain Pound/Japanese Yen GBP/JPY
Reference and Quote Currency
USD/JPY
Sell
USD
Buy
USD68 70
reference currency quote currency
bid price ask price
119.68/70
Fig 2.1 USD/JPY example.
Table 2.3 Cross currency pairs.
-
7/25/2019 handbk+on+forex+trading+sample
28/31
UNDERSTANDING FX BASICS
19
In the example on the USD/JPY, the USD is called the
reference currency while the JPY is called the quotedcurrency. The reference currency is the first of the two
currencies while the quoted currency is the second
currency of the pair. Profit or loss is always in the quoted
currency. The transaction amount is usually denominated
in the reference currency. Example: USD 100,000/
Japanese Yen 11,970,000. The transaction amount is
USD 100,000. Profit and loss would be in Yen amount.
Pips
The smallest movement is one pip. In EUR/USD terms,
one pip is equivalent to 0.0001. In most currency pairs, it
is the fourth decimal placing. However, in USD/JPY, one
pip is equivalent to 0.01. For Yen related currency pairs,
one pip is the second decimal placing.
Bid and Offer
Your online broker will quote you a price. E.g. 119.68/70.
When you want to buy USD/JPY, you will have to buy at
the asking price or the ask price. This would be 119.70.
When you want to sell, it will be at the bid or buying
price. This would be 119.68.
-
7/25/2019 handbk+on+forex+trading+sample
29/31
HANDBOOK ON FOREX TRADING
20
Spread
The difference between the bid and ask price is the
spread. In the above example 119.68/70, the spread
would be two pips. The spread is the price you pay to
your online broker. Most online brokers do not charge
any commission on FX trading. Instead, they earn their
money from the spread when you trade. Thus, when
choosing any online broker, it would be an important
consideration to look at the spread. The narrower the
spread, the more you would save and also the faster for
you to breakeven on your trade.
Profit and Loss
Unrealized/Realized Profit and Loss
If your position is still open and losing money, it isconsidered as unrealized loss. If your position is making
money, it is considered as an unrealized profit.
Once you close your position, there will be a profit or
loss; this is called the realized profit or loss.
Using the EUR/USD as an example:
Buy EUR/USD @ 1.3101 Buy EUR 10,000 Sell USD 13,101
Sell EUR/USD @ 1.3102 Sell EUR 10,000 Buy USD 13,102
Difference 0 USD 1 Profit
-
7/25/2019 handbk+on+forex+trading+sample
30/31
UNDERSTANDING FX BASICS
21
When you are trading on a size of EUR 10,000, the profit
and loss for every pip would be USD 1. If you are tradingon a size of EUR 100,000, every movement in pip would
cost you USD 10.
Below is another example on the USD/JPY:
Buy USD/JPY @ 118.01 Buy USD 10,000 JPY 1,180,100
Sell USD/JPY @ 118.02 Sell USD 10,000 JPY 1,180,200
Difference 0 JPY 100 Profit
In the above two examples, I have used the difference
of one pip to illustrate what one pip would mean to your
bottom line; your profit and loss. However, in trading, due
to the spread quoted and earned by the online broker,
you would need more than one pip to make a profit. If
your online broker quotes you a spread of two pips forEUR/USD, you would only make a profit if the EUR/USD
were to advance more than two pips.
In fact every time you enter into a position, you will notice
that you are making a loss on your entry position. This
is due to the spread. The trading software will calculate
your profit and loss in real time. Assuming you close the
position immediately and the rate remains unchanged,
you would lose two pips when you sell out. If you refer
back to the section on spread, when the spread of USD/
JPY is two pips, 119.68/70, you need to buy at 119.70. If
-
7/25/2019 handbk+on+forex+trading+sample
31/31
HANDBOOK ON FOREX TRADING
22
you want to sell immediately, assuming that USD/JPY
rate remains unchanged, you would have to sell at119.68. That is why you always start your position with an
unrealized loss. That unrealized loss is equivalent to the
spread of the currency pair. In this case, the unrealized
loss would be two pips.