The Sensible Guide to Forex – Safer, Smarter Ways to Survive and Prosper from the Start

<p>Read This First xix</p>
<p>Currency Risk: Every Investor s Dilemma xix</p>
<p>Currency Risk and How to Fight It xx</p>
<p>The Solution xx</p>
<p>Some Background xxi</p>
<p>Why Any Trader or Investor Needs This Book xxii</p>
<p>What This Book Offers xxiv</p>
<p>Why Listen to You, Cliff? xxv</p>
<p>Visit thesensibleguidetoforex.com for Additional</p>
<p>Online Content xxviii</p>
<p>Acknowledgments xxxi</p>
<p>CHAPTER 1 Three Must–Know Forex Facts 1</p>
<p>Fact 1: Everyone Needs Forex Diversification Even if You</p>
<p>Don t Trade Actively 2</p>
<p>You re Exposed: Cover Your Assets 2</p>
<p>Even Long–Term Buy–and–Hold Investors Need Forex Diversification 3</p>
<p>Fact 2: Potential for Better Risk–Adjusted Returns 4</p>
<p>Forex Markets Often Provide Advanced Warnings of Changes in Other Markets 4</p>
<p>Forex Needn t Be Any Riskier Than Other Markets 4</p>
<p>No Uptick Rule: Just as Easy to Profit in a Falling Market as in a Rising One 5</p>
<p>Low Correlation to Other Financial Markets 7</p>
<p>The Most Flexible Hours 7</p>
<p>Forex Markets Offer the Best Liquidity 8</p>
<p>No Centralized Exchange with Specialists Holding Monopoly Power to Regulate Prices 9</p>
<p>Less Slippage 9</p>
<p>The Best Risk/Reward Potential 9</p>
<p>The Lowest Startup and Trading Costs 10</p>
<p>Fact 3: You Can Do This 11</p>
<p>How Can I Compete against the Pros and Big Institutions? 11</p>
<p>How David Beats Goliath: More on What This Book Will and Won t Do 12</p>
<p>What s the Catch? 14</p>
<p>Most Traders Fail within Their First Two Years 14</p>
<p>CHAPTER 2 Forex Basics 17</p>
<p>Basics of Currencies and Currency Pairs 17</p>
<p>Trade Only the Most Liquid Currencies 18</p>
<p>The Major Currencies 18</p>
<p>Risk versus Safe Haven Currencies: Definition and Ranking 19</p>
<p>Currencies Trade in Pairs and Why That Matters 20</p>
<p>Price Movements Are Always Relative to Another Currency 20</p>
<p>It s Just as Easy to Profit in Bear Markets as in Bull Markets 21</p>
<p>How to Read a Forex Pair Price Quote 22</p>
<p>Summary of Currency Pair Basics 24</p>
<p>Why It s Just as Easy to Profit from Falling Prices 25</p>
<p>Size Matters: Types of Currency Pairs 29</p>
<p>The Major Currency Pairs: The Most Liquid 29</p>
<p>More on Risk and Safe Haven Currencies 29</p>
<p>The Signs of the Crosses: Divine Revelations about Currency Strength 30</p>
<p>Walk on the Wild Side: The Exotics 32</p>
<p>Pips: The Universal Currency of Currencies 32</p>
<p>Calculating Pip Values 33</p>
<p>Three Ways to Limit Risk: Lot Size Usually the Easiest 33</p>
<p>Leverage and Margin: Their Relationship and Impact on Risk 35</p>
<p>Leverage: Greater Risk and Reward 35</p>
<p>Permitted Leverage Varies with Place and Time 35</p>
<p>How Margin, Lot Size, and Leverage Interact 36</p>
<p>The Importance of Adequate Capital 36</p>
<p>Margin Calls: Your account s Circuit Breaker 37</p>
<p>Order Types 38</p>
<p>Exit Orders: Ways to Close a Position 42</p>
<p>The Three Facets of Risk and Risk Control 44</p>
<p>The Core Four: The Most Important Skills for Success 45</p>
<p>Trader Psychology 46</p>
<p>Risk and Money Management (RAMM) 48</p>
<p>Technical and Fundamental Analysis 48</p>
<p>CHAPTER 3 Technical Analysis (TA) Basics 49</p>
<p>Candle Chart Basics 50</p>
<p>Candle Anatomy and Meaning 50</p>
<p>Relationship between Body, Wick, and Its Significance 52</p>
<p>Support and Resistance (S/R) Basics 54</p>
<p>Candle Chart Time Frames: Length Matters 59</p>
<p>Different Time Frames, Different Trading Techniques, and Styles 59</p>
<p>Different Time Frames, Different Trends 60</p>
<p>Identifying Support and Resistance (S/R) to Buy Low, Sell</p>
<p>High, or Vice Versa 62</p>
<p>Definitions of S/R Are Reversed for Long and Short Positions 63</p>
<p>The General Rule for Identifying Low–Risk High–Yield Trades 64</p>
<p>Finding S/R Is Key to Identifying and Executing Low–Risk High–Yield Trades 64</p>
<p>Good Risk Management Requires Good TA 66</p>
<p>Think of S/R as Zones or Areas 66</p>
<p>So Stick to Trading Longer Time Frames They re Safer 67</p>
<p>Reasons to Consider Using Multiple Entry and Exit Points 68</p>
<p>Once Broken, Resistance Becomes Support and Vice Versa 68</p>
<p>Don t OD on TA 69</p>
<p>Why Specialize in a Few Currency Pairs and Time Frames? 69</p>
<p>What Determines Whether a Currency Is a Risk or a Safe Haven? 70</p>
<p>CHAPTER 4 Technical Analysis: Types of Support and Resistance (S/R) 73</p>
<p>Price Levels 74</p>
<p>For Lowest Risk, Enter Near Strong Support 75</p>
<p>What Makes Some S/R Points Stronger Than Others? 76</p>
<p>Longer Time Frames Offer More Reliable S/R Indicators 77</p>
<p>Check Shorter Time Frames to Detect Interim S/R Levels 77</p>
<p>Trends and Trend Lines 80</p>
<p>Trends Vary with Time Frame 80</p>
<p>Defining Trends, and Constructing Trend Lines 80</p>
<p>Types of Trend Lines 81</p>
<p>Single Uptrend or Downtrend Lines 82</p>
<p>Channels: Better Than Single Trend Lines 83</p>
<p>Moving Averages (MAs) 87</p>
<p>Fibonacci Retracements (Fibs): These Fibs Don t Lie 93</p>
<p>Applying Fibs to Your Charts 94</p>
<p>Fibs within Fibs 96</p>
<p>Bollinger Bands (BBs): Use as S/R in Range–Bound Markets 98</p>
<p>Support/Resistance (S/R) for Flat or Gently Sloping Trends: The Bollinger Bounce 99</p>
<p>Bollinger Bands Don t Provide Meaningful S/R with Strong Trends 100</p>
<p>Introduction to Japanese Candle Chart Patterns 101</p>
<p>More Key Points about Japanese Candle Patterns 107</p>
<p>Context and Timing Matter 107</p>
<p>Introduction to Western Chart Patterns 108</p>
<p>Classic Western Reversal Patterns 108</p>
<p>Beware False Breakouts, Shake Outs, and Other Fake Outs 111</p>
<p>Other Reversal Patterns to Know 112</p>
<p>Classic Western Continuation Patterns 113</p>
<p>We Repeat: False Breakouts Happen 115</p>
<p>Other Continuation Patterns 116</p>
<p>Patterns That Can Be Continuation or Reversal 116</p>
<p>The Underlying Logic of Chart Patterns 116</p>
<p>The More S/R Indicators, the Better 119</p>
<p>Multiple Mutually Reinforcing S/R Indicators: An Example 119</p>
<p>CHAPTER 5 Trader Psychology and Risk and Money Management (RAMM) 123</p>
<p>RAMM: Preserving Capital Is Your Top Priority 124</p>
<p>The Inner Game: Trader Psychology Basics 125</p>
<p>Lesson 1: Seek Trading Styles and Methods That Fit You 126</p>
<p>Lesson 2: Basics of the Trader s Mindset Minimizing and Accepting Risk 128</p>
<p>Lesson 3: Dealing with Losing and Winning Streaks 129</p>
<p>Why Trade Longer Time Frames 130</p>
<p>Seek Safer Trading Styles 130</p>
<p>As with Driving, Speed Kills 131</p>
<p>A More Level Playing Field 132</p>
<p>More and Better Information Means Better Trade Decisions 134</p>
<p>Trends Are More Reliable in Longer Time Frames 134</p>
<p>Ideal Trends For Long–Term Investors 136</p>
<p>Other Technical Indicators Are Better in Longer Time Frames 137</p>
<p>Publicly Available Fundamental Data and Analysis Matters in Longer Time Frames 137</p>
<p>Lower Trading Costs 138</p>
<p>Start Out with Longer Duration Trades 138</p>
<p>Content Quality: The Sign of a Quality Broker 139</p>
<p>The Essence of Good RAMM 140</p>
<p>The Three Pillars of RAMM 141</p>
<p>Account Size and Affordable Loss per Trade 142</p>
<p>Setting Stop Losses: Basic Technique and Psychology 142</p>
<p>Where to Set Stop Losses: Two Criteria 142</p>
<p>More Capital Allows Wider Stop Losses and a Wider Choice of Low–Risk Trade Opportunities 143</p>
<p>Balancing Risk versus the Need to Win 144</p>
<p>Method 1: Recent Range 145</p>
<p>Method 2: Average True Range (ATR) 145</p>
<p>So How Much Capital Is Enough? 146</p>
<p>Leverage and Margin 147</p>
<p>Position Sizing 147</p>
<p>Avoid Having Too Many Open Positions 148</p>
<p>Entries Near Strong Support, Exits Near Strong Resistance 148</p>
<p>Entries 148</p>
<p>Exits: Use Trailing Stops to Protect and Maximize Gains 149</p>
<p>Entries and Exits: Single versus Multiple 149</p>
<p>Risk–Reward Ratios (RRRs) 150</p>
<p>Example: How 1:3 RRRs Make Winners Out of Losers 150</p>
<p>Example: How 1:2 Risk–Reward Ratios Make Winners Out of Losers 152</p>
<p>Applying 1:3 RRR: An Example 154</p>
<p>Acceptable RRR Can Vary with Market Conditions 155</p>
<p>More on Stop Loss Orders: An Example of Using ATR to Gauge Volatility and Place a Fixed or Trailing Stop Loss Order 156</p>
<p>If You Fail to Plan, You Plan to Fail 158</p>
<p>What s Your Rationale for Taking This Trade? 158</p>
<p>No. 1: Plan Every Trade and Record It in a Journal 160</p>
<p>Sample Trade Rationale as Recorded in Journal 162</p>
<p>No. 2: Your Overall Business Plan 165</p>
<p>What Conditions Do You Need for Success? 166</p>
<p>Safety in Numbers: Build a Team 166</p>
<p>CHAPTER 6 Essentials of Fundamental Analysis 169</p>
<p>Using Fundamental Analysis (FA) and Technical Analysis (TA) Together 171</p>
<p>An Overview of FA: Main Fundamental Drivers of Forex Trends 175</p>
<p>Overall Risk Appetite 176</p>
<p>Short–Term Interest Rates 183</p>
<p>Macroeconomic Data and Indicators 189</p>
<p>Example: EURUSD Uptrend Reverses in Late 2009 as Data Show Europe Slows, U.S. Grows 189</p>
<p>Geopolitics 193</p>
<p>Capital and Trade Flows 193</p>
<p>Merger and Acquisition (M&amp;A) Activity 194</p>
<p>Short–Term Illiquidity: A Lack of Buyers and Sellers 195</p>
<p>Government and Central Bank Special Interventions in Times of Crisis 196</p>
<p>News Trading: Day Trading Based on Short–Term Fundamentals 197</p>
<p>What News Traders Watch 197</p>
<p>FA Basics: Easy to Understand and Hard to Apply 199</p>
<p>Therefore, Get Thee to an Analyst 200</p>
<p>Combining FA and TA: An Example 200</p>
<p>CHAPTER 7 Pulling It All Together with Trade Examples 205</p>
<p>Identifying and Executing Low–Risk, High Potential</p>
<p>Yield Trades 205</p>
<p>Begin Your Search On Longer Time Frame Charts, Then Zoom In 205</p>
<p>Consider the Fundamental Context 206</p>
<p>Initial Screening on Longer Time Frame Charts 206</p>
<p>Second Screening 208</p>
<p>Third Screening to Monitor Trade Progress 209</p>
<p>Types of Trades 210</p>
<p>Trade Example 1: A Swing Trade 211</p>
<p>Initial Screening 211</p>
<p>Second Screening 213</p>
<p>RRR Evaluation 214</p>
<p>Conclusion: We Take the Trade 216</p>
<p>Trade Postmortem: What Happened 217</p>
<p>Trade Example 2: A Breakout Trade 218</p>
<p>First Screening 218</p>
<p>Second Screening 220</p>
<p>RRR Evaluation 221</p>
<p>Conclusion: Know When to Walk Away 222</p>
<p>Trade Postmortem: Was I Right? 223</p>
<p>More Key Trader Psychology: Distinguishing between Good Trades and Winning Trades 224</p>
<p>CHAPTER 8 Technical Analysis: Basic Momentum Indicators 227</p>
<p>Double Bollinger Bands (DBBs ) Use as Momentum Indicators 229</p>
<p>DBB Basics 231</p>
<p>The Four Rules for Using Double Bollinger Bands 232</p>
<p>Combine DBBs with a Leading Indicator 236</p>
<p>DBBs: Conclusion and Summary 237</p>
<p>Moving Average Crossovers 237</p>
<p>Price Crosses Over or Under a Moving Average 238</p>
<p>The More Indicators in Our Favor, the Better 239</p>
<p>How Many Indicators Should You Use? 240</p>
<p>But RAMM Is Key 240</p>
<p>Moving Averages Cross Each Other 241</p>
<p>Examples of Simple Trading Systems Using MA Crossovers 242</p>
<p>Welcome to Back Testing 244</p>
<p>Oscillators 244</p>
<p>How They re Used to Generate Buy/Sell Signals 246</p>
<p>When to Use Oscillators 248</p>
<p>Other Oscillators to Consider 248</p>
<p>Designer Genes 249</p>
<p>Moving Average Layering Indicates Trend Strength 249</p>
<p>The Stronger the Trend, the Clearer the MA Layering 249</p>
<p>CHAPTER 9 Technical Analysis: Future Study 255</p>
<p>Catch a Wave: Timing or Cycle Indicators 255</p>
<p>Meet the Fibonaccis 256</p>
<p>. . . And the Ganns 256</p>
<p>Catch the Most Popular Wave: Elliott Wave Theory and More 256</p>
<p>Combining Technical Indicators: Which Ones and How Many? 257</p>
<p>Your Tool Kit Needs a Gang of Four 258</p>
<p>Apply Indicators to Each Time Frame When Screening Trades 259</p>
<p>Back Testing: Learning from the Past 260</p>
<p>Back Testing Software: Play It Again, Sam 260</p>
<p>A Manual Back Testing Example 261</p>
<p>Back Testing Is a Tool, Not a Solution 265</p>
<p>Intermarket Analysis: Reading Intermarket Correlations and Divergences 265</p>
<p>Background 266</p>
<p>Currencies versus Equities: The S&amp;P 500 as Forex Indicator 267</p>
<p>Risk Currencies versus Safe Haven Currencies 268</p>
<p>Why These Relationships Matter 268</p>
<p>They Give You a Fast, Big Picture 269</p>
<p>Divergences from Normal Correlations Can Be Significant 269</p>
<p>The USD versus Equities 271</p>
<p>The USD and Stocks: Correlation, but Not Causation 272</p>
<p>Currencies versus Currencies: How They Correlate 273</p>
<p>Warning: The U.S. Dollar Index Isn t a Substitute for Studying Charts 275</p>
<p>Currencies versus Commodities 277</p>
<p>Gold as a Barometer of the USD or EUR 277</p>
<p>Other Currency versus Commodity Correlations 282</p>
<p>Thinking Like a Pro, One Step Beyond Technical Analysis 284</p>
<p>Mind Games 284</p>
<p>Learn to Think Like These Pros 285</p>
<p>CHAPTER 10 Alternatives to Traditional Methods 287</p>
<p>Auto–Trading Systems: Welcome to the Machine 287</p>
<p>Currency Funds: Forex ETFs, ETNs, and More 289</p>
<p>Managed Accounts: Should You Seek Professional Help? 291</p>
<p>CHAPTER 11 Newer, Smarter Methods 295</p>
<p>Follow the Leaders: Forex Social Networks and Trading 295</p>
<p>What Are Forex Social Networks? 296</p>
<p>What Is Social Trading? 297</p>
<p>How It Works: The Highest Form of Flattery 297</p>
<p>Risks of Social Trading 298</p>
<p>Rewards of Social Trading 305</p>
<p>The Growth of Social Trading 307</p>
<p>How eToro and Currensee Compare 307</p>
<p>Great Tool, but Requires Skill to Use 311</p>
<p>An Auspicious Start 312</p>
<p>Do Your Homework Before You Decide Which to Use 312</p>
<p>Consider Market Conditions in Choosing Strategy and Risk Tolerance 313</p>
<p>Binary Options: Trading Made Easier 316</p>
<p>Background 318</p>
<p>How They Work 319</p>
<p>Pros and Cons 320</p>
<p>CHAPTER 12 Forex for Income: The Smartest Oxymoron 323</p>
<p>Ride Long–Term Forex Trends for Lower Risk, Higher Income 324</p>
<p>Why Income Investors Neglect Currency Diversification 325</p>
<p>Long–Term Trends for Long–Term Investors 327</p>
<p>Case Study: Canada 2000 2011: Applying Forex Trends to Equities Investing 328</p>
<p>The USD versus the CAD: Guess Which Has No Debt/GDP Problem 328</p>
<p>Equities: Canada Is Not Japan 329</p>
<p>Be Aware of Tax Withholdings and Credits 332</p>
<p>For Further Investigation: Online Resources 332</p>
<p>The Carry Trade: Using Direct Forex Trades as an Income Vehicle 333</p>
<p>Differences between Forex Carry Trade and Traditional Long–Term Buy–and–Hold Instruments 334</p>
<p>The Key to Carry Trading 336</p>
<p>Carry Trade Steps 338</p>
<p>CHAPTER 13 Now What? Next Steps 341</p>
<p>Where You ve Been 341</p>
<p>Where You re Going 342</p>
<p>APPENDIX A Recommended Free Online</p>
<p>Resources 347</p>
<p>Forex Sites 347</p>
<p>Thesensibleguidetoforex.com 347</p>
<p>BabyPips.com 347</p>
<p>DailyForex.com 348</p>
<p>DailyFX.com 348</p>
<p>Forex.com 349</p>
<p>ForexCrunch.com 350</p>
<p>ForexFactory.com 350</p>
<p>ForexMagnates.com 350</p>
<p>Forexpros.com 350</p>
<p>FXstreet.com 350</p>
<p>Bkassetmanagement.com 351</p>
<p>Other Favorite Financial Sites 351</p>
<p>BusinessInsider.com 351</p>
<p>Investopedia.com 351</p>
<p>SeekingAlpha.com 352</p>
<p>Wall Street Sector Selector (wallstreetsectorselector.com) 353</p>
<p>Individual Analysts 353</p>
<p>Fundamental Analysis 353</p>
<p>Technical Analysis 354</p>
<p>APPENDIX B How to Calculate Pip Values and Examples 355</p>
<p>Definition 355</p>
<p>Calculation 355</p>
<p>Example: EURUSD 356</p>
<p>Handy Rule of Tens 357</p>
<p>Example USDCAD 357</p>
<p>Example USDJPY: Rule of Tens Doesn t Apply with the JPY 358</p>
<p>APPENDIX C Forex Trading Time Zones, Liquidity, and Why These Matter 359</p>
<p>Three Major Trading Sessions and Why They Matter 359</p>
<p>Markets Tend to Follow Each Other 362</p>
<p>What Stops the Follow–Through? 363</p>
<p>1. News or How It s Interpreted 363</p>
<p>2. Technical Resistance: The News Is Already Priced In 363</p>
<p>The Prior Session Is Most Influential 363</p>
<p>Beware Holiday Catch–Up Sessions 364</p>
<p>APPENDIX D More on Leverage and Margin 365</p>
<p>APPENDIX E How the Mathematics of Loss Demands Keeping Losses Per Trade Low 367</p>
<p>APPENDIX F Choosing a Forex Broker 371</p>
<p>Suggested Search Terms to Find Broker Reviews 371</p>
<p>Criteria to Consider 371</p>
<p>APPENDIX G Low Correlations to Other Markets via Social Trading Means There s Always a Bull Market Somewhere 375</p>
<p>Trade Leader Noncorrelations to the Markets 376</p>
<p>Market Correlations 376</p>
<p>Looking at the Trade Leaders 377</p>
<p>Diversification of Approach 378</p>
<p>Notes 379</p>
<p>About the Author 385</p>
<p>Index 387</p>