Forex Manual

ForexConfidential
SECTION
THE FX MARKET
(PAGE 2)
(PAGE 10-13)
I. What is the FX Market?
(PAGE 3-4)
II. Why Trade FX?
3
3
3
3
3
3
4
4
4
4
4
Enormous Liquidity
No Slippage
Market Transparency
Trending Markets
24-hour Access
Low to Zero Transaction Cost
High Leverage
Low account Minimums
No Bear-Only Market
Above Average Profit Potential
III. Brief History of the FX Market
4
5
5
6
6
(PAGE 7-9)
IV. Market Structure

Overview
Interbank
Market Hours
Markets within the FX Market
V. Key Players in FX Market

Commercial and Investment Banks
Central Banks
The Federal Reserve (Fed)
The European Central Bank (ECB)
Bank of England (BoE)
Swiss National Bank (SNB)
The Bank of Japan (BOJ)
Bank of Canada (BoC)
Corporations
Hedge Funds and International Funds
FX Funds
Individuals
10
10
10
10
11
11
12
12
12
12
13
13
13
(PAGE 14)
VI. International Overview
(PAGE 4-6)
Gold Exchange Standard
Bretton Woods Accord
Smithsonian Agreement
Free-Floating System
ONE
14
(PAGE 14)
VII. FX Regulations
CFTC
NFA
14
14
14
(PAGE 15)
7
7
7
7
8
VIII. Your Role in the FX Market
15
(PAGE 15)
IX. How Can Forex be Accessed?
www.forexconfidential.com
15
ForexConfidential
SECTION 1
THE FX MARKET
Part I. What is the FX Market?
The Foreign Exchange market, also referred to as the
Forex or FX market, is the largest market in the
world with over $1.5 trillion changing hands daily and
soon expected to top $2 trillion. Compare that to the
New York Stock Exchange at $28 billion, the equities
market at $191 billion, and the daily value of the futures
market at $437.4 billion, and you will clearly see that the
FX market alone is approximately three times the total
amount of the US Equity and Treasury markets
combined.
Unlike other financial markets, the Forex market has no

physical location and no central exchange. It operates
through an electronic network of banks, corporations,
institutional investors, and individuals trading one currency for another. The lack of a physical exchange enables the Forex market to operate on a 24-hour basis,
spanning from one time zone to another, across the
major financial centers around the world.
The FX market plays a key role in transferring financial
payments across borders and moving funds and purchasing power from one currency to another. This international market plays an extensive and direct role in
national economies and has a major impact that
affects our lives and our prosperity. The movement of

different currencies between countries determines a
very important price the exchange rate. It is the
exchange rate that allows the currencies to be traded
for profit.
There are two major reasons to buy and sell currencies:
1) About 5% of daily turnover is from companies and
governments that buy or sell products and services in
foreign countries, then profits made are converted back
into their domestic currency.
2) The other 95% is trading for profit or speculation,
which translates to the tremendous profit- potential in
this highly lucrative market.
Trading for speculation in the FX market has increased
tremendously throughout the years as institutions and
individuals recognize the high profit potential in this
highly lucrative market. Although speculative trading is
increasing, not everyone involved in Forex is a
speculator. Therefore, there is far less risk of
manipulation within the FX market. Even in the case of
central bank intervention, the overall effect on the FX
market is relatively insignificant. Forex is a genuine
market in which the prices of currencies are solely
determined by the forces of supply and demand. As a
result, all market participants, including individual
traders, are well-protected from artificial manipulation of
prices. Unfortunately, this protection for traders does
not extend to other markets. In the equity market,
everyone is a speculator, including individuals and
corporations. When everyone is speculating for profit,
manipulation of prices is inevitable. Consequently,
traders in the equity market suffer immensely when
prices are manipulated by various institutions.
Until recently, large international banks dominated the
FX market, only allowing access via telephone trading
to major corporations, large funds, and high net worth
individuals. This little known, underexposed, foreign
exchange currency market can now be traded online
and is available to the general public with a minimal
capital investment of $300. Individual investors now
have the opportunity to trade in the largest and most
liquid financial market in the world.
ForexConfidential
SECTION 1
THE FX MARKET
Part II. Why Trade FX?
Foreign exchange is by far the preferred market choice
for aggressive traders. The FX market offers
unparalleled liquidity, no slippage, market transparency,
trending markets, 24-hour access, low to zero
transaction cost, high leverage, low account minimums,
no bear-only market, and most importantly, above
average profit potential.
Enormous Liquidity
The FX market is the most liquid market in the world. It
can absorb trading volumes and per-trade sizes that
may overwhelm any other market. Trading essentially
consists of two parts: opening a position and closing of
that position. Liquidity, which is highly correlated with
volume, qualitatively evaluates how easily traders can
enter and exit positions. A liquid market enables
participants to execute large volume transactions with
little impact on market prices. On the simplest level, the
enormous liquidity alone is powerful enough to attract
any investor to the FX market, as it suggests the
freedom to open or close a position at will. In addition,
technical analysis, the study of price movements,
operates better in liquid markets. Illiquid markets make
it much more difficult to accurately determine entry and
exit points.
No Slippage
Traders in illiquid markets may experience delays and
subsequently, suffer from slippage. In these markets,
there may be delays in the execution of traders orders
and thus, market orders could potentially be filled at a
different price from the market rate when the order was
initially placed. Furthermore, traders may experience
difficulty in exiting or selling positions, which greatly
compromises the ability to clear profitable trades. In the
FX market, there is absolutely no slippage traders
will always get in and out at the price they placed their
orders. This is due to the tremendous amount of volume
that the FX market generates.
Market Transparency
Market transparency is highly desired in a trading
environment. It is a condition in which market
participants are able to observe the detailed information
in the trading process. Ultimately, the greater the

market transparency, the more efficient the market
becomes. The FX market offers the highest level of
market transparency out of all financial markets.
Informed traders are better off than uninformed traders
because most financial markets could be exploited by
those with private information. Traders in all financial
markets rely on market transparency because it allows
them to see a transparent spread, which enables them
to employ their premeditated strategies while still
flexible enough to accommodate an ever-changing
marketplace. With the transparency of information,
traders can exercise their risk management strategies
in accordance to their fundamental and technical
approaches.
For example, in the case of Enron, inaccurate reporting
by officers of the company resulted in the downfall of
the company and losses of many shareholders. Markets
where this could occur are considered a poor trading
market. Furthermore, market transparency ensures the
ability to trade from live, executable prices. Markets that
do not offer executable prices and force traders to
absorb slippage, obviously compromise traders profit
potential.
Trending Markets
Although currency prices in the FX market may be
volatile, they generally repeat themselves in cycles,
creating trends. The trends can be analyzed by traders
using technical tools. Since technical analysis
statistically works better in markets characterized by
cycles and trends, traders benefit from this attribute of
Forex. The entire premise of technical analysis is based
on the study of price movements. Through this analysis,
traders can identify trends and capture key entry and
exit points at which they should execute their trades
and maximize their profit potential.
24-hour Access
Forex is a true 24-hour, 6 days a week, market. FX
trading begins each day in Australia and moves around
the globe as the business day begins in each financial
center first to Tokyo, then London, and New York.
ForexConfidential
SECTION 1
THE FX MARKET
Unlike any other financial market, investors can respond to currency fluctuations caused by economic,
social, and political events at the time they occur regardless if it is daytime or nighttime. The only breaks in
trading occur during a brief period over the weekend. A
trader is able to put on a trade during the London session, follow it during the New York session, and close
the trade in the middle of the following day during the
Tokyo session. This type of market access is invaluable
to a market participant who needs to react quickly to
global events.
Low to Zero Transaction Cost
The amount of cost to execute trades has dropped
considerably in recent years. Transaction costs include
all the expenses to actually execute a trade. Because
transaction costs reduce profits, the lower the
transaction costs, the more beneficial it is for the trader.
Markets that have centralized exchanges tend to have
higher transaction costs due to exchange and clearing
fees associated with trading. Active stock and futures
traders often see substantial portions of their gross
profits going to broker commissions, exchange fees,
and data/chart feeds. Transaction costs can also be
increased with faulty executions. As regards the FX
market, there are minimal to no brokerage fees and
zero exchange and clearing fees since it is an over-thecounter market.. What you see is what you get, allowing
you to make quick decisions on your trades without
having to account for fees that may affect your
profit/loss or slippage.
High Leverage
The FX market provides traders with access to much
higher leverage than other financial markets. FX traders
can benefit from leverage in excess of 100 times their
capital versus the 10 times capital that is typically
offered to professional equity day traders. In the FX
market, the margin deposit for leverage is not a down
payment on a purchase of equity; instead, it is a
performance bond, or good faith deposit, to ensure
against trading losses. This is very useful to short-term
day traders who need the enhancement in capital to
generate quick returns.
Low Account Minimums

Many individuals believe that entering the highly
lucrative foreign exchange market requires large initial
trading capital. This was indeed true prior to 1996,
without the integration of online trading into the FX
market. Today, individuals can get Started with a miniaccount for as little as $300.
No Bear-Only Market
One of the biggest advantages of trading FX is that
there is no fear of a bear-only market. In many markets,
high-return investments can often be difficult to sell after
they are bought. However, in Forex, the major currency
pairs always have buyers and sellers; hence, the FX
investor should never worry about being stuck in a
trade due to lack of market interest.
Above Average Profit Potential

There is no question that speculative trading in Forex
offers huge profit potential. It is an exciting way to earn
exceptionally high returns on ones investment capital.
Part III. Brief History of the FX Market
ForexConfidential
SECTION 1
THE FX MARKET
The Foreign Exchange market, (FX or Forex) as we
know it today, originated in 1973. However, money has
been around in one form or another since the time of
the Egyptian Pharaohs. While the Babylonians are
credited with the first use of paper bills and receipts,
Middle Eastern moneychangers were the first currency
traders exchanging coins of one culture for another.
During the middle ages, paper bills emerged as an
alternative form of currency besides coins. These paper
bills represented transferable third party payments of
funds, which made foreign exchange much easier and
less cumbersome for merchants and traders.
From the infantile stages of Forex during the Middle
Ages to World War I (WWI), the Forex market was
relatively stable and without much speculative activity.
After WWI, it became very volatile and speculative
activity increased ten fold. Speculation in the Forex
market was not looked on as favorable by most
institutions and the public in general. The Great
Depression and the removal of the gold standard in
1931 created a serious lull in Forex activity. From 1931
until 1973, the Forex market went through a series of
changes. These changes greatly impacted the global
economies at the time. There was little if any
speculation in the Forex market during these times.
Gold Exchange Standard
The Gold Exchange Standard, which prevailed
between 1876 and WWI, dominated the international
economic system. Under the gold exchange standard,
currencies gained a new phase of stability as they were
supported by the price of gold. It abolished the age-old
practice in which kings and rulers arbitrarily debased
money and triggered inflation.
However, the gold exchange standard had its
weakness. As an economy strengthened, it would
import heavily from abroad until it ran down its gold
reserves required to back its money. As a result, money
supply would shrink, interest rates would rise, and
economic activity would slow down to the extent of
recession. Ultimately, prices of goods would bottom out,
appearing attractive to other nations. Consequently, this
would cause a rush in buying sprees that would inject
the economy with enough gold to increase its money

supply, drive down interest rates, and recreate wealth
into the economy. Such patterns prevailed throughout
the gold standard until the outbreak of WWI, which
interrupted trade flows and the free movement of gold.
Several other major transformations occurred after the
Gold Exchange Standard, leading to the birth of the
current FX market: the Bretton Woods Accord,
Smithsonian Agreement, and the Free-Floating System.
Bretton Woods Accord
The first major transformation, the Bretton Woods
Accord, occurred toward the end of World War II. A total
of 44 countries, including the United States, Great
Britain, and France met in New Hampshire in July 1944,
to design a new economic order.
The design of the Bretton Woods framework was to

have the United States become an anchor for all free
world currencies. The accord aimed at installing
international monetary stability by preventing money
from fleeing across nations and restricting speculation
in the world currencies. Major currencies were pegged
to the dollar, which was in turn tied to gold at a value of
$35 per ounce. The dollar was the primary reserve
currency and member countries were able to sell
currency to the Federal Reserve in exchange for gold at
the present rate. In addition to these interventions, the
International Monetary Fund (IMF) and the International
Bank for Reconstruction and Development (World
Bank) were established to ensure that the Bretton
Woods system would operate effectively.
ForexConfidential
SECTION 1
THE FX MARKET
Once the Bretton Woods Agreement was founded, the
participating countries agreed to try and maintain the
value of their currency with a narrow margin against the
dollar and a corresponding rate of gold as needed.
Countries were prohibited from devaluing their
currencies to their trade advantage and were only
allowed to do so for devaluations of less than 10%.
Trading under the Bretton Woods system had unique
characteristics. Since exchange rates were fixed,
intense trading took place around devaluation or
revaluation, known as creeping pegs. Speculation
against the British pound in 1967 demonstrated
creeping pegs patterns. Despite all the efforts by the
Bank of England and other central banks to support the
pound, the pound was devalued. This failure was
monumental because it was the first time that the
central bank intervention failed under the Bretton
Woods system. The failure of the central bank
intervention continued with the dollar in the following
years. As the Bretton Woods system was highly
dependant on a strong US dollar, the dollar began to
experience pressure in 1968, causing extreme
speculation on the future of this system. The Agreement
was finally abandoned in 1971, and the US dollar would
no longer be convertible into gold.
Smithsonian Agreement
After the Bretton Woods Accord came to an end, the
Smithsonian Agreement was signed in December of
1971. This agreement was similar to the Bretton Woods
Accord, but it allowed for a greater fluctuation band for
foreign currencies.
The Smithsonian Agreement strived to maintain fixed
exchange rates, but to do so without the backing of
gold. Its key difference from the Bretton Woods system
was that the value of the dollar could float in a range of
2.25%, as opposed to just 1% under Bretton Woods.
Ultimately, the Smithsonian Agreement proved to be
unfeasible as well. Without exchange rates fixed to
gold, the free market gold price shot up to $215 per
ounce. Moreover, the U.S. trade deficit continued to
grow, and from a fundamental standpoint, the US dollar
needed to be devalued beyond the 2.25% parameters

established by the Smithsonian Agreement. In light of
these problems, the foreign exchange market was
forced to close in February of 1972.
In 1972, the European community tried to move away
from their dependency on the dollar. The European
Joint Float was established by West Germany, France,
Italy, the Netherlands, Belgium, and Luxemburg. Both
agreements made mistakes similar to the Bretton
Woods Accord and by 1973, collapsed.
Free-Floating System
The collapse of the Smithsonian agreement and the
European Joint Float in 1973 signified the official switch
to the free-floating system. This occurred by default as
there were no new agreements to take their place.
Governments were now free to peg their currencies,
semi-peg, or allow them to freely float. In 1978, the freefloating, system was officially mandated.
The value of the US dollar was to be determined
entirely by the market, as its value was not fixed to any
commodity, nor was the fluctuation of its exchange rate
confined to certain parameters. While this did provide
the US dollar, and other currencies by default, the agility required to adapt to a new and rapidly evolving
international trading environment, it also set the stage
for unprecedented inflation.
Europe tried to gain independence from the dollar by
creating the European Monetary System in July of
1978. This, like all of the earlier agreements, failed in
1993.
The major currencies today move independently of
other currencies. The currencies are traded by anyone
who wishes to trade. This has caused a recent influx of
speculation by banks, hedge funds, brokerage houses,
and individuals. Central banks intervene on occasion to
move or attempt to move currencies to their desired
levels. The underlying factor that drives todays Forex
market, however, is supply and demand. The freefloating system is ideal for todays markets.
ForexConfidential
SECTION 1
THE FX MARKET
Part IV. Market Structure
Overview
Unlike other financial markets, the Forex market has no
physical location and no central exchange; hence, it is
considered an over-the-counter (OTC) market. The FX
market operates through an electronic network of
banks, corporations, institutional investors, and
individuals trading one currency for another. Forex
traders and market makers are all linked to one another
round the clock via computers, telephones, and faxes
where currency denominations, amounts, settlement
dates, and prices are negotiable. The lack of a physical
exchange enables the Forex market to operate on a 24hour basis, spanning from one time zone to another,
across the major financial centers around the world.
The FX market is organized into a hierarchy, which
consists of participants with different ranking. The
standards that determine the participants positions are
credit access, volume of transactions, and level of
sophistication; those with superiority in these measures
receive priority in the FX market. At the top of the
hierarchy is the interbank market, which generates the
highest volume in trades.
Interbank
Interbank is a credit-approved system where banks
trade on the sole basis of their credit relationships with
one another. In the interbank market, the largest banks
are able to trade with each other directly, via interbank
brokers or through electronic brokering systems such
as Reuters and EBS. While all the banks can see the
rate that everyone is dealing at, each bank has a specific credit relationship with the other bank and trade at
the rates being offered.
Other institutions in the market, such as corporations,

online FX market makers, and hedge funds trade FX
through commercial banks. However, many banks
(community banks and banks in emerging markets),

corporations, and institutional investors do not have
access to these rates because they do not have
established credit relationships with large commercial
banks. Subsequently, these smaller participants are
obligated to trade FX through a large bank, and often,
this equates to much less competitive rates. The rates
become less and less competitive as it trickles down the
hierarchy of participants. Eventually, the customers of
banks and foreign exchange agencies receive the least
competitive rates. However, in the late 1990s,
technological advances have eliminated the barriers
that existed between the interbank and end-users of
FX. Since 1996, retail clientele can connect directly to
market makers via online trading. Average traders can
enjoy the competitive rates and trade alongside the
worlds largest banks.
The FX market is no longer reserved for big

corporations; it is now made available to all types of
consumers. Furthermore, the boundless opportunity to
trade foreign exchange awaits all aspiring corporations
and individual traders.
Market Hours
The spot FX market is unique to any other market in the
world since trading is available. 24 hours a day.
Somewhere around the world, a financial center is open
for business, and banks and other institutions exchange
currencies every minute of the day with only minor gaps
on the weekend. The FX market opens at 5 pm (EST)
on Sunday and close at 1 pm (EST) on Friday.
The major financial centers around the world overlap
due to their time zones. The International Date Line is
located in the Western Pacific. Each business day
begins in Wellington, New Zealand, then Sydney,
Australia, followed by the Asian financial markets
starting with Tokyo, Japan, Hong Kong, China, and
finally Singapore. Only a few hours later, markets will
open in the Middle East. When the markets in Tokyo
are starting to wind down, Europe opens for business.
ForexConfidential
SECTION 1
THE FX MARKET
Finally, New York and other major U.S. centers start their day. Towards the late afternoon in the United States, the
next day arrives in the Western Pacific areas and the process begins again. Hence, the FX market is opened 6
days a week, 24 hours a day.
Markets within the FX Market

Although spot trading accounts for 48% of all FX
transactions worldwide, the three main markets, Tokyo,
London, and New York, represent almost 70% of the
worlds FX volume. Foreign exchange activity does not
flow evenly, and throughout the course of the
international trading day, there are certain markets
characterized by very heavy trading activity in some (or
all) currency pairs. At other times, the same markets
are characterized by light activity in some (or all) currency pairs. Foreign exchange activity tends to be the
most active when markets overlap, particularly the U.S.
markets and the major European markets; i.e., when it
is morning in New York and afternoon in London.
As Japans economy has dwindled over the past
decade, Japanese banks have been unable to commit
to FX, the large amounts of capital they once did in the
1980s. Despite this, Tokyo is the first major market to
open, and many large participants use it to get a read
on dynamics or to begin scaling into positions.
Approximately 10% of all FX trading volume takes place
during the Tokyo session. Trading can be relatively thin.
ForexConfidential
SECTION 1
THE FX MARKET
Hedge funds and banks have been known to use the
Tokyo lunch hour to run important stop and option
barrier levels. Japanese yen, New Zealand dollar, and
Australian dollar pairs tend to be the biggest movers
during Tokyo hours as other currencies are quite thin
and usually remain constant.
London is by far the most important and influential FX

market, with approximately 30% of all worldwide
transactions. Most big banks dealing desks stem from
London and the market is responsible for roughly 28%
of the total world spot volume. London tends to be the
most orderly market due to the large liquidity and ease
of completing transactions. Most large market
participants use London hours to complete serious
foreign exchange deals.
New York is the second most important market that

represents approximately 16% of total worldwide market volume. In the United States spot market, the majority of deals are executed between 8am and 12pm, when
European traders are still active. Trading often becomes slower in the afternoon as liquidity dries up. In
fact, there is a drop of over 50% in trading activity since
California never served to bridge the gap between the
U.S. and Asia. As a result, traders tend to pay less
attention to market development in the afternoon. New
York is greatly affected by the U.S. equity and bond
markets, thus the pairs will often move closely in
tandem with the capital markets.
ForexConfidential
SECTION 1
THE FX MARKET
Part V. Key Players in the FX Market
With the advances of technology and especially the
opening on the Internet, the foreign exchange market
has expanded from simple foreign exchange and bank
transactions to a more speculative nature. Today, an
increasing number of FX transactions are trading for
profit or speculation, which translates to the tremendous
profit-potential in this highly lucrative market. There are
five major players in the FX market;
Commercial/Investment Banks, Central Banks,
Corporations, Hedge/International Funds, and
individuals.
Commercial and Investment Banks
Commercial and investment banks account for the
largest portion of FX trading volume. The lnterbank
market caters to both the majority of commercial
turnovers as well as enormous amounts of speculative
trading everyday. Their primary role in the FX market is
essentially selling currencies, as other participants
execute trades through them. Banks trade currencies
because it is highly lucrative and it limits their credit
exposure on Letters of Credit. Banks gain profits by
acting on their clients behalf and making trades. About
three quarters of all foreign exchange trading is
between banks. They generate billions of dollars worth
of currency in a days volume.
Below is a list of the top financial institutions in the
world as rated by Euromoney Magazine in their May,
2001 edition.
Central Banks
Central banks play a significant role in the FX market as
they can influence spot price fluctuations. Central banks
generally do not speculate in currencies, but they use
currencies to promote acceptable trading conditions to
their banking industries by affecting money supply and
interest rates through open market operations or the
active trading of government securities. Central banks
also often attempt to restore order to volatile markets
through interventions. The reasons for central bank
interventions may be a result of a variety of factors: to
restore stability, protect a certain price level, slow down
currency movements, or to reverse a trend. An example
would be the recent intervention by the Bank of Japan
to push down the value of the yen. On the surface, this
may disturb many traders to make their investment
decisions. However, it has been proven time and again
that central banks can only influence currency values
for short periods. Over time, the markets adjust to the
changes, creating trend formations that may be very
beneficial to traders. Trend strategies may guide FX
traders to take advantage of these trends in the market.
Central banks normally keep sizeable amounts of
foreign currencies on hand; hence, their influence is so
great that the mere mention of central banks
interventions would violently move the market. As their
investments are generally more long-term, central
banks trades are quite profitable. The major central
banks include: The Federal Reserve, European Central
Bank, Bank of England, Swiss National Bank, Bank of
Japan, and Bank of Canada.
The Federal Reserve (Fed):
The Federal Reserve Board (Fed)
is the central bank of the United
States. They are responsible for
setting and implementing monetary
policy. The board consists of a 12-member committee,
which comprise the Federal. Open Market Committee
(FOMC). The voting members of the FOMC are the
seven Governors of the Federal Reserve Board, plus
five Presidents of the twelve district reserve banks. The
FOMC holds 8 meetings per year, which are widely
watched for interest rate announcements or changes in
10
ForexConfidential
SECTION 1
THE FX MARKET
growth expectations. The Fed has a high degree of
independence to set monetary authority. They are less
subject to political influences, as most members are
assigned long term positions that allow them to remain
in office through periods of alternate party dominance in
both the Presidency and Congress. The U.S. Treasury
is responsible for issuing government debt and for
making fiscal policy decisions. Fiscal policy decisions
include determining the appropriate level of taxes and
government spending. The U.S. Treasury is the actual
government body that determines dollar policy. That is,
if. they feel that the USD rate in the foreign exchange
market is under- or overvalued, they are in the position
of giving the NY Federal Reserve Board the instructions
to intervene in the FX market by physically selling or
buying USD. Therefore, the Treasurys view on dollar
policy, and changes to that view, is very important to
the currency market.
The European Central Bank (ECB):
The European Central Bank (ECB)
is the governing body responsible
for determining the monetary
policy of the countries participating
in the European Member Union
(EMU). The Executive Board of the EMU consists of the
President and Vice President of the ECB and four other
members. These individuals along with the governors of
the national central banks comprise the Governing
Council. The ECB is set up so that the Executive Board
implements the policies dictated by the Governing
Council. New monetary policy decisions are typically
made by a majority vote in biweekly meetings, with the
President having the casting vote in the event of a tie.
The primary objective of the European Central Bank is
to maintain price stability. ECB is considered inflation
paranoid as it has strong German influence. ECB aand
the ESCB are independent institutions from both national governments and other EU institutions, giving
them total control over monetary and currency policy.
The European central bank is a strict monetarist and
much more likely to keep interest rates high. Two edicts
of monetary policy are: to keep a harmonized Consumer Price Index (CPI) below 2% and an M3 annual
growth (Money supply) around 4.5%. Refinance rate is
the main weapon used by the
ECB to implement EU monetary policy. ECB watches

the fiscal discipline of its members closely. ECB is
considered an untested central bank and doubts linger
as to how they will react to any future crisis. The ECB
keeps close tabs on budget deficits of the individual
countries as the Stability and Growth Pact states that
they must be kept below 3% of Gross Domestic
Production (GDP). The ECB does intervene in the FX
markets, especially when inflation is a concern.
Comments by members of the Governing Council
frequently move the EUR and are widely watched by FX
market participants.
Bank of England (BoE):
The Bank of England (BoE) is the
central bank of the United Kingdom. The bank was founded in
1694, nationalized in 1946, and
gained operational independence
in 1997. The BoE is committed to promoting and maintaining a stable and efficient monetary and financial
framework as its contribution to a healthy economy. In
1997, parliament passed the Bank of England Act, giving the BoE total independence in setting monetary
policy. Prior to 1997, the BoE was essentially a governmental organization with very little freedom. Treasurys
role in setting monetary policy diminished markedly
since 1997. However, the Treasury still sets inflation
targets for the B0E, currently defined as 2.5% annual
growth in Retail Prices Index (RPI), excluding mortgages (RPIX). The treasury is also responsible for making key appointments at the Central Bank. The BoEs
nine member Monetary Policy Committee (MPC) is
responsible for making decisions on interest rates.
Although the MPG has independence in setting interest
rates, the legislation provides that in extreme
circumstances the government may intervene. The
Bank of Englands main policy tool is the minimum
lending rate or base rate. Changes to the base rate are
usually seen as a clear change in monetary policy. The
BoE most frequently affects monetary policy through
daily market operations (the buying/selling of
government bonds). The BoE is infamous for attempting
to influence exchange rates through impure market
interventions.
11
ForexConfidential
SECTION 1
THE FX MARKET
Swiss National Bank (SNB):
The Swiss National Bank is the
central Bank of Switzerland. The
Swiss National Bank enjoys 100%
autonomy in determining the nations
monetary and exchange rate policies. In December
1999, the SNB shifted from a monetarist approach to an
inflation-targeting one (2% annual inflation target). Discount rate is the official tool used to announce changes
in monetary policy; however, it is rarely used as the
bank relies more on the 3-month London Interbank Offer Rate (LIBOR) to manipulate monetary policy. The
LIBOR is the rate at which major international banks
lend to one another; it primarily serves as a benchmark
for short-term interest rates. SNB officials often affect
the Franc spot movements by making remarks on liquidity, money supply, and the currency itself. Intervention is frequent; however, most often intervention is
used to enforce economic policy. It is also used in open
market operations, such as raising or lowering interest
rates, to affect the value of its currency. As a country
where international trade has been the primary source
of the countrys economic development, its preference
is for a weaker franc, in order for its exports to remain
competitive. SNB is highly regarded and the franc is
considered by most market participants to be the
worlds best managed currency.
The Bank of Japan (BOJ):
The Bank of Japan (BoJ) is the key
monetary policymaking body in
Japan In 1998 the Japanese
government passed laws giving the
BoJ operational independence from the Ministry of
Finance (MoF). It was given the complete control over
monetary policy. However, despite the governments
attempts to decentralize decision-making, the MoF still
remains in charge of foreign exchange policy. The MoF
is considered the single most important political and
monetary institution in Japan. MoF officials frequently
make statements regarding the economy, which have
notable impacts on the yen. The BoJ is responsible for
executing all official Japanese FX transactions at the
direction of the MoF. However, it is important to note
that the Bank of Japan does possess total autonomy
over monetary policy and can have significant indirect

impacts on foreign exchange rates. The BoJs main
economic tool is the overnight call rate. The call rate is
controlled by the open market operations and any
changes to it often signify major changes in monetary
policy. Since the introduction of a floating exchange rate
system in February 1973, the Japanese economy has
experienced large fluctuations in Forex rates, with the
yen on a long rising trend. The reason for the yens
strength, despite the excessive problems that have
plagued the Japanese economy, is the fact that Japan
has a trade surplus accounting for 3% of GDP. This is
the highest of the G-7 countries and therefore creates a
strong inherent demand for the currency for trade
purposes, regardless of their economic conditions. The
Japanese government is notorious for directly
intervening on behalf of the yen through market
interventions. BoJ interventions are frequent and
violent. As an export-driven country, there are strong
political interests in Japan for maintaining a weak yen in
order to keep exports competitive. Accordingly, the BoJ
has been known to go into the market and sell off the
yen when its rate is perceived to be too strong.
Bank of Canada (BoC):
The Bank of Canada (BoC) is the
central bank of Canada. The
Governing Council of the Bank of
Canada is the board that is
responsible for setting monetary policy and is an
independent Central bank that has a tight reign on its
currency. This council consists of seven members: the
Governor and six Deputy Governors. The BoC does not
have regular periodic policy setting meetings.
Instead, the council meets on a daily basis and may
make changes in policy at any time. Due to its tight
economic relations with the United States, the Canadian dollar has a strong connection to the US dollar.
Corporations
Corporations which comprise a diverse group of small
and large corporations, importers/exporters, financial
service firms, and consumer service firms, were the
major traders in currencies for many years.
12
ForexConfidential
SECTION 1
THE FX MARKET
Corporations main interests in foreign exchange are to
perform transactions related to cross border payments.
Multinational corporations may need to make payments
to foreign entities for materials, labor,
marketing/advertising costs, and/or distributions, which
would require the exchange of currencies. The primary
focus of multinational corporations in the marketplace is
to offset risk by hedging against currency depreciation,
which would affect future payments. Now, however, a
minority has begun to use the marketplace as a
speculative tool; meaning, they enter the FX market
purely to take advantage of expected currency
fluctuation. This group of corporations using the FX
market for speculative purposes is growing, and as very
active participants, they have a great impact on spot
market prices. Corporations approach to trading tends
to be longer-term since they use the market for covering
commercial needs, hedging, and speculations.
Hedge Funds and International
Funds
Global fund managers, hedge, large mutual, pension,
and arbitrage funds that invest in foreign securities and
other foreign financial instruments are relatively small.
Although they may be small when compared to other
market participants, they are the most aggressive.
These groups can have substantial impacts on spot
price movements as they are constantly re-balancing
and adjusting their international equity and fixed income
portfolios. These portfolio decisions can be influential
because they often involve sizable capital transactions.
A majority of the hedge funds are highly leveraged and
actively seeking to profit in whichever way possible.
Despite the highly criticized, sometimes devious nature
of hedge funds, they are valued by traders because
they often push the markets to retract from extreme
levels. Hedge funds are used by high net worth
individuals investing a minimum of $1 million. One of
the best known Hedge Funds is the George Soros
Quantum Group of Funds that made a billion dollar
profit by shorting the British pound in 1992.
International Funds are non-currency funds consisting
of large capital, which exert substantial influence on the
FX market. With more and more funds delegated to
hedging activities, international funds are becoming a
main driver of international capital and equities trends,

which in turn, greatly affects the Forex market.
FX Funds
Funds that invest in the FX are commonly called Global
Macro funds. These funds depending on size tend to
take different positions in the FX market. Many large
funds tend to carry large trade positions, exploiting
global interest rate differentials. Others tend to seek out
opportunities to take advantage of misguided economic
policies or currencies that overshoot their real value; by
entering large positions, they are bethng on a return to
equilibrium. Others simply gauge global events and
take a longer-term view on which currencies will
strengthen or weaken in the next six to eight months.
Fund participation in the FX market has risen sharply in
recent years and its total trading share is now around
20%. There is no doubt that with the increasing amount
of money some of these investment vehicles have
under management, the size and liquidity of the foreign
exchange market is very appealing. While relatively
small compared to other market participants, when
acting together, they can have a profound effect on the
currency spot movements.
Individuals
Retail spot currency trading is the new frontier of the
trading world. Up until 1996, foreign exchange trading
was only available to large banks, institutions, and
extremely high net worth individuals. Prior to online
retail FX dealers, individuals could not realistically
participate in the FX market from a speculative
standpoint. The interbank market operated as a tight
circle; it acted somewhat like a specialist, as it
manipulated the fates of tiers 2 and 3 to accommodate
its own needs. Accordingly, individual traders looking to
trade FX could not find a market maker capable of
providing competitive spreads, fair quotes, and
equitable customer service.
With the advancement of technology, the internet, and
online trading platforms, retail clients are provided with
access to trading that is highly comparable to the
offerings of the interbank market. Spreads are slightly
wider at 5 pips on most currency pairs, as opposed to
13
ForexConfidential
SECTION 1
THE FX MARKET
the interbank standard of 3 pips, but execution is
unsurpassed. Now retail clients and multinational
institutions can participate in the FX market on a highly
equitable playing field.
Part VII. International Overview

The International Monetary Fund (IMF) is a
cooperative organization that 182 countries have
voluntarily joined. It exerts an international influence
over world monetary issues, including the foreign
exchange market. However, it has no effective
authority, either by law or implied, over the domestic
policies of its members.
Part VII. FX Regulations

For many years, the retail online foreign exchange
industry languished due to the lack of a regulatory
environment to uphold investor protection. In December
of 2000, however, Congress passed and the President
signed the Commodities Modernization Act. The Act
finally regulated the foreign exchange industry and
placed its oversight under the auspices of the
Commodities Futures Trading Commission
(www.cftc.gov).
CFTC
The Commodity Futures Trading Commission (CFTC)
was created by Congress in 1974 as an independent
agency with the mandate to regulate commodity futures
and option markets in the United States. The agency
protects market participants against manipulation,
abusive trade practices, and fraud. Through effective
oversight and regulation, the CFTC enables the markets to better serve their important functions in the nations economy, providing a mechanism for price recovery and a means of offsetting price risk. The CFTC sets
forth many of the guidelines that the National Futures
Association is required to follow.
NFA
The National Futures Association (NFA) officially began
its operations on October 1, 1982, with the goal of
maintaining the integrity of the futures marketplace. All
companies trading in futures must become NFA
members. Those companies that are not registered with
the NFA are subject to closure by the CFTC. The
passage of the Commodities Modernization Act requires that any company trading online forex be registered with the NFA. The NFA has many capital requirements and makes sure companies maintain high bookkeeping and ethical standards in order to be registered.
With the passage of the Modernization Act, the NFA
required forex market makers to register as Futures
Commission Merchants (FCMs).
14
ForexConfidential
SECTION 1
THE FX MARKET
Part VIII. Your Role in the FX Market
Part IX. How Can Forex be

Accessed?
At the most basic retail level, one can access Forex at
any airport currency booth. For a service fee and a
mark-up of 5-10%, one can buy or sell currencies. In
fact, for many individuals, a trip to the currency
exchange booth overseas is their first introduction to
Forex.
You may not realize it, but you already play a role in the
foreign exchange market. Do you have some currency
in your pocket or wallet? Do you have a checking or
savings account? Do you have a mortgage? Do you run
a business? Do you hold stocks, bonds, or other
investments with a value expressed in a specific
currency? A yes response to any of the above
questions already makes you an investor in the
currency markets.
Investors wishing to speculate in the FX market can

now access Forex through dealers offering margin
accounts as small as $300, with a price spread that is
as little as 4-5 pips. High net worth individuals,
corporations, or fund managers with private banking
relationship should be able to trade through their banks,
while corporate clients requiring the actual delivery of
currencies would create a credit relationship with a
Forex dealer.
When you decide to hold assets in the currency of one

country, you are investing in that countrys currency and
economy. At the same time, you are also electing not to
hold the currencies of other nations. For example, when
you hold most of your portfolio (stocks, bonds, bank
accounts, etc.) in US dollars, you are relying heavily on
the integrity and value of the US dollar and economy,
including the government that governs it. Concurrently,
you are choosing not to hold the Japanese yen, British
pound, or the euro.
Almost all businessmen, businesswomen, and travelers
actively trade currency. If you travel overseas, you
would generally exchange your own currency for the
currency of the country you are visiting. In view of this, it
is not surprising that more and more prudent investors
are deciding to diversify their portfolios by holding
assets in multiple denominations within the FX market.
15
ForexConfidential
SECTION
TWO
CURRENCY TRADING BASICS
(PAGE 17)
(PAGE 24-27)
I. What is Trading?
17
(PAGE 17-24)
II. How a Forex Trade Works?

What are ISO Codes
Currency Pairs
How to Calculate which Currency is
Increasing or Decreasing in Value
EUR/USD
USD/JPY
Hard and Soft Currencies
Chart Reading Basics
Trends
Lot Sizes and Margin
Lot Sizes
Margin
Risk Management
Determining Position Size
What is PIP?
Calculating Profit/Loss
Calculating pip values when the dollar
is the counter currency
Calculating pip values when the dollar
is the base currency
Bid/Ask Spread
Position Trading
100 K Account vs. Mini-Account
17
17
17
18
18
18
20
20
20
20
20
20
20
21
21
21
22
22
22
23
III. Types of Transactions

Spot Transactions
Outright Forward Transactions
Futures Transactions
Swap Transactions
Option Transactions
Settlement and Delivery
Volumes & Open Interest
Interest Rollover
Trader A buying GBP/USD at 1.5755
How to Estimate Interest Rollover
GBP/USD
USD/JPY
Triple Rollover on Wednesday
24
24
24
25
25
25
26
26
26
27
27
27
27
27
(PAGE 28-29)
IV. Types of Orders

Market Order
Limit Order (Take Profit Order)
Stop-Loss Order
Entry Order
Limit Entry Order
Stop Entry Order
28
28
28
28
28
29
(PAGE 29)
V. Proper Phone Etiquette
29
(PAGE 30)
VI. Fundamental Analysis

Vs. Technical Analysis
30
16
ForexConfidential
SECTION 2

currencies to help you get accustomed to the trading
language.
Part I. What is trading?

Trading is a unique form of speculation in order to
generate profit. It can be a part-time or full time
business, a profession or just a lifetime passion. You
can trade almost anything from various commodities,
stocks, bonds and of course, currencies. Currency
trading is not gambling; rather it is a game in which a
trader, applying different fundamental or technical
analysis, makes a risk-calculated and educated trading
decision.
Making logical trading decisions and developing a
sound and effective trading strategy is an important
foundation of trading. Successful trading is often
described as optimizing your risk with respect to your
reward or upside. Any trading strategy should have a
disciplined method of limiting risk while making the most
out of favorable market moves.
Part II. How a Forex Trade Works?

To begin trading in the FX market, you must familiarize
yourself with how currencies are handled and traded.
Hard and soft currencies are traded in pairs and
through ISO codes. There are five different types of
transactions and six different ways to execute a trade.
Additionally, it is very important to understand some
common terms surrounding a trade which include: lot
sizes and margin, PIP, bid-ask spread, position trading,
settlement-delivery, volume, and open interest.
ISO Codes
Currencies in the FX market are not referred to by their
full names; instead, they are identified by standardized
codes or ISO Codes, developed by the International
Organization for Standardization. ISO abbreviations are
used widely on charts and trading platforms, but they
are rarely used in conversations among traders.
Traders or the media may refer to the currencies by
their nicknames during everyday conversations.
Throughout our training materials, we interchangeably
use the full names, ISO codes, and nicknames of
The table below lists the ISO codes and nicknames for
the most commonly traded currencies:
Currency Pairs
In the Forex market, currency trading is always done in
currency pairs, such as USD/CAD or USD/JPY,
reflecting the exchange rate between the two
currencies. An exchange rate is merely the ratio of one
currency valued against another currency. For instance,
the USD/JPY exchange rate specifies how many US
dollars are required to buy a Japanese yen, or
conversely, how many Japanese yen are needed to
purchase a US dollar.
In a pair of currencies, the first currency is known as the
base (dominant) currency, and the second one is
referred to as the counter or quoted (subordinate)
currency. In the USD/JPY example, the US dollar is the
base currency that we wish to trade, while the Japaneseyen is the counter currency that the exchange rate is
quoted in. In simple and practical terms, the currency
pair is a structure that can be bought or sold. The base
currency acts as the basis for all transactions,
regardless if it is buying or selling. When you buy a
currency pair, it is implied that you are buying the first
(base) currency and selling the second (counter or
quoted) currency. Alternatively, a trader sells the
currency pair when he/she anticipates that the base
currency will depreciate relative to the quoted currency.
17
ForexConfidential
SECTION 2

How to Calculate which Currency is
Increasing or Decreasing in Value
Always remember that the simplest way to remember
which currency is increasing or decreasing in value is to
view rate changes from the perspective of the base
currency. If we look at a chart and see an exchange
rate increasing, it means that the value of the base
currency is appreciating (getting stronger). Conversely,
if we look at a chart and see an exchange rate
decreasing, it represents that the value of the base
currency is depreciating (getting weaker). The diagram
below may help you to have a more lucid understanding
of this relationship.
USD/JPY:
In the USD/JPY pair, the US dollar acts as the base
currency while the Japanese yen acts as the quoted
currency. Therefore, the dollar (base currency) is the
basis for buying and selling in trading. If you think that
the Japanese government is going to weaken the yen in
order to strengthen their export industry, you would buy
the currency pair. By buying the pair, you are buying
dollars in anticipation that they will increase in value
against the yen. On the other hand, if you believe that
Japanese investors are pulling money out of US
financial markets and repatriating funds back to Japan,
you would sell the pair. By selling the pair, you expect
the yen to strengthen against the dollar.
Hard & Soft Currencies
Alongside the US dollar, four major currencies dominate
trading in the Forex market by nature of their popularity
and activity. According to a recent survey on 300 major
traders by Greenwich Associates, the trading volume on
the euro, Japanese yen, British pound, and Swiss franc
accounts for over 70% of North American activity.
According to currency market expert, Cornelius Luca, in
his book Trading in the Global Currency Markets,
second edition, market share for the five major
currencies after the introduction of the euro is estimated
at:
The following is a couple of examples to help you grasp

these key concepts:
EUR/USD:
In the EUR/USD pair, the euro acts as the base
currency while the US dollar acts as the quoted
currency. Therefore, the euro (base currency) is the
basis for buying and selling in trading. If you anticipate
that the stock market will fall and cause the USD to
depreciate, you will buy the currency pair. By buying the
EUR/USD pair, you are buying euros in anticipation that
the euro will appreciate against the USD. If you choose
to sell the pair, you are then buying the US dollars,
expecting it to climb against the euro.
18
ForexConfidential
SECTION 2

Other tradable currencies include the Canadian,
Australian, and New Zealand dollars. Each of these
accounts for 3-7% of the total market volume and they
are often referred to as minor currencies. Together,
the majors and minors constitute all hard currencies
that are currently traded in Forex. Soft currencies are
currencies such as the Argentine peso, the Russian
ruble, the Hong Kong dollar, and the Polish zloty.
These are not tradable or recognized outside their
country of origin.
As mentioned before, currencies are often referred to

by their nicknames. Similar to currencies, it is important
to familiarize yourself with the common names of the
currency pairs. There is a specific trading terminology
that is used frequently to describe each currency pair.
In the spot FX market, currency pairs can be divided

into two categories: dollar-based currency pairs and
cross-currency pairs. Dollar-based currency pairs are
those that consist of the US dollar and another
currency, while cross-currency pairs are those with
neither of its currencies being the US dollar. The most
actively traded dollar-based currency pairs are the
EUR/USD, USD/JPY, GBP/USD, and the USD/CHF.
The most actively traded cross-currency pair is the
EUR/JPY. Normal daily movement on just these five
pairs can be anywhere from 50 pips on a slow day to
over 100, 200, even 300 pips on a very active day. (See
definition of pips below.)
19
ForexConfidential
SECTION 2

Chart Reading Basics
Charts are used to show the correlation between the
value of the base and quoted currencies. The following
charts are in the format in which you would see them on
an actual computer screen. In these charts, the
changing currency is the quoted currency.
Trends
Trend is a term used to describe the persistence of
price movements in one direction over a period of time.
Trends move in three directions: up, down and
sideways. An uptrend signifies the strengthening of the
base currency, while a downtrend represents the
weakening of the base currency. A sideways trend
occurs when markets bounce back and forth between
support and resistance levels, the lowest and highest
points within a given period, resulting in less significant
price movements. It is estimated that 70% of the time,
markets will fluctuate randomly or move between
support and resistance levels. The rest of the time,
market behavior is characterized by persistent price
movements trends that break through support and
resistance levels. It is highly possible to increase your
ability to capitalize on trends by locating trend signals,
identifying specific entry points within the trend, and
using risk management techniques to limit losses. More
information on trends and strategies is discussed in
section 4: technical analysis.
Lot Sizes and Margin

The FX market attracts many new traders because
currency trading can be conducted on a highly
leveraged basis. Every trader should have a thorough
understanding of lot sizes and margin requirements

before trading in order to employ proper risk
management.
Lot Sizes
In Forex, one million dollars worth of a currency is
generally accepted as a minimum round lot and is often
referred to as one dollar or one buck. Single orders,
in excess of a million dollars, are regularly traded by
large institutions and corporations. However, smaller
size orders are available to individual FX traders. For
example, some dealers offer sizes in half-dollar (.5) and
quarter-dollar increments (.25), while others offer sizes
of approximately $200,000 USD (.2), $100,000 USD
(.1), $50,000 USD (.05), and even $10,000 USD (.01).
An advantage of currency trading is that most brokers
will allow you to trade 100 times the value of your
deposit. Therefore, if you deposit $2,000 into your
account, you would be able to trade $200,000 worth of
currency units. This is referred to as trading on margin,
which is also common with stockbrokers; however,
stockbrokers leverage is typically 50% greater than
your investment. Hence, if you invest $2,000 with a
stockbroker, you would be able to trade with a market
value of only $3,000.
Margin
Margin is a monetary deposit that you provide as
collateral to cover any losses. All dealers establish their
own margin policy based on a percentage of the lot
size. Normal margins range from 1% to 5%. For
example, if the margin for day trading is 1% (100:1) with
a dealer that offers lot sizes of $200,000, you may open
a one-lot position with $2,000 in your account. The
requirements for margin vary with account size, and
may be changed from time to time at the sole discretion
of the dealing desk, based on volume traded and
market conditions. As the account size and the ability to
trade more lots increase, the margin percentage may
also increase.
Risk Management
For the purpose of risk management, traders must have
position limits. This number is set relative to the money
20
ForexConfidential
SECTION 2

in a traders account. Risk is minimized in the spot FX
market because the online capabilities of the trading
platform will automatically generate a margin call if the
required margin amount exceeds the dollar value of the
account as a result of trading losses. All open positions
will be closed immediately regardless of the size or the
nature of positions held within the account. This
advanced feature is very beneficial for traders. In the
futures market, on the other hand, if the price moves
against your position, it may be liquidated at a large
loss, making you liable for any resulting deficit in the
account.
Determining Position Size
Prior to starting up your trade station, an assessment
should be made of the maximum account loss that is
likely to occur overtime, per lot. For example, assume
you have determined that the worst case scenario is to
lose 20 pips on any trade. This translates into
approximately $200 per $100,000 position size. Further
assume that the $100,000 position size is equal to one
lot. Six consecutive losing trades would result in a loss
of $1,200 (6 x $200); a difficult period but not an
unrealistic one over the long run. This scenario would
translate to a 12% loss for an account that has a trading
capital of $10,000. Therefore, even though it may be
possible to trade 5 lots or more with a $10,000 account,
this analysis suggests that the resulting drawdown
would be too great - 60% or more of the capital would
be wiped out. Traders should have a sense of this
maximum loss per lot and determine the amount he/she
wishes to trade for a given account size that will yield
tolerable drawdown.
What is a PIP?
A pip (price interest percentage) is the smallest
increment a price moves and it determines the profit or
loss of a trade. It is simply a base point value to the
right of the decimal point of the quoted currency that
is used to measure changes in exchange rates (the
difference between the rates of the currency).
A few examples of where the pip is located within the
exchange rate are listed below. The one-digit for pip
values is underlined and highlighted in red for each

example.
For instance, the US dollar moves from 1.6000 to

1.6004 in the cable/dollar pair, it has moved 4 pips.
When you have an open position, each upward or
downward pip movement in the market price can be
either a profit or a loss, depending on which currency
(base or quoted) you bought and which one you sold.
Calculating Profit/Loss
Many Forex retail brokers assign a fixed dollar value
per pip that varies according to the lot size and the
makeup of each currency pair. For example, the pip
value may be $10 per pip on each $100,000 lot of cable/dollar, while only $6.50 per pip on each $100,000 lot
of dollar/franc. Other dealers offer a floating pip value
that is calculated according to the lot size of each currency pair and the fluctuating exchange rate. For example, notice how the pip value on a 15,000,000 lot of
dollar/yen is calculated based on a one-pip movement
from 120.00 to 120.01:
The value of a pip is determined by the currency pair

and the rate at which the pair is trading. For currency
pairs where the dollar is not the base currency
(EUR/USD, AUD/USD, NZD/USD, GBP/USD), each pip
has a fixed value of $10. For example, if you are trading
EUR/USD and the market moves 10 pips in your favor,
21
ForexConfidential
SECTION 2

then your profit would be exactly $100. On the other
hand, when a currency other the dollar is the counter
currency (USD/JPY, USD/CHF USD/CAD) the pip value
in dollar terms fluctuates based on prevailing market
rates.
Although most online trading platforms with reputable
brokers offer live Profit/Loss tracking whereby profits
and losses are calculated and re-calculated every time
the exchange rate changes, it is fundamental for a
trader to have an understanding of the value of a pip.
The table below gives you an idea of the dollar value
attached to each pip:
then those 100,000 Euros would be worth 114,700

dollars (10 US dollars more) when the market price
moves to 1.1470. The trader could choose to close
the position out and take this $100 profit.
Conversely, lets say the trader initially sold 100,000
euros by buying 114,600 dollars when EUR/USD
was trading at 1.1460. If the market price moves to
1.1470 and the traders chooses to close the position,
he/she would have to buy back the 100,000 Euros
with 114,700 dollars. The loss on the trade would be
$100.
Calculating pip values when the
dollar is the base currency
When the USD is the base currency, the value of a
pip will fluctuate according to the exchange rate of
the currency pair.
For example, if the current exchange rate for
USD/CAD is 1.3300, then one dollar is worth 1.33
Canadian Dollar; hence, 100,000 dollars are worth
133,000 CAD. If the market price of USD/CAD
moves up by one pip to 1.3301, then I dollar will be
worth 1.3301 CAD; hence, one lot of 100,000 dollars
equal 133,010 CAD.
In this particular case, a one pip fluctuation is valued
at $10 Canadian Dollar or $7.52 USD when the
USD/CAD price is 1.3301. The calculation is simple,
since at this time I USD=1.3301, then 10 CAD= 7.52
USD. Simply divide 10 by 1.3301.
Calculating pip values when the

dollar is the counter currency
If the current exchange rate for EUR/USD is 1.1460,
then one euro is worth 1.1460 US dollars.
Consequently, 100,000 euros are worth 114,600 US
dollars. If the market price moves one pip to 1.1470,
then one euro is now worth 1.1470 US dollars. This is a
pretty small change in the value of the euro (one
thousandth of a dollar to be exact) but this can be
substantial when we are talking about a lot of euros,
100,000 Euros are now worth 114,700 dollars.
If a trader had bought 100,000 euros by selling
114,600 dollars when the market price was 1.1460,
If a trader closes out a position at a one pip profit

when the USD/CAD market price is 1.3301, he/she
automatically locks in a 10 CAD profit which is
equivalent to $7.52 at that time. At a different market
price, however, such as 1.3200, those 10 CAD will
have a value of $7.58.
Bid/Ask Spread
All FX quotes include a two-way price, the bid and ask.
The bid price is always lower than the ask price. The
bid is the price at which a market maker is willing to buy
(and traders can sell) the base currency in exchange for
22
ForexConfidential
SECTION 2

the counter currency. The ask is the price at which a
market maker will sell (and a trader can buy) the base
currency in exchange for the counter currency. The
difference between the bid and the ask price is referred
to as the spread, which can be recovered with a
favorable currency movement.
In the above example, the bid price for EUR/USD is

1.1797, which indicates the price at which a trader can
sell the currency pair. The ask price is 1.1801,
indicating the price at which a trader can buy the
currency pair. The difference between the bid and the
ask price gives us a 4-pip spread in this example. The
4-pip spread represents the cost of the transaction. It is
important to note that since the FX market is a
decentralized market, the spreads that a trader receives
for a given currency pair will vary according to the
market maker one trades with. Generally, there is an
average of 4-5 pips on the major currency pairs and 520 pips on the cross currency pairs.
Position Trading
The objective of currency trading is to exchange one
currency for another in the anticipation that the market
rate or price will change, thus, increasing the value of
the currency bought relative to the one sold. In trading
language, a long position is one in which a trader buys
a new currency at one price and aims to sell it later at a
higher price. When a trader buys a currency and the
price appreciates in value, the trader must sell the
currency back in order to secure the profit. A short
position is one in which the trader sells a currency in
anticipation that it will depreciate. If a trader sells a
currency and the price depreciates in value, the trader
must buy the currency back in order to secure the profit.
While a long position is to buy and a short position is to
sell, an open trade or position is one in which a trader
has either bought or sold a currency pair and has not
sold or bought back the equivalent amount to effectively
close the position.
23
ForexConfidential
SECTION 2

l00K Account vs. Mini-Account
You may choose to open a regular (l00K) account or a mini account. As a novice trader, we recommend that you
begin trading with a mini-account once you are ready to trade live. As you have developed a disciplined trading
system, you may choose to proceed to a regular account. Below is a chart that illustrates the differences between
the two accounts.
Part III. Types of Transactions

There are several types of transactions that take place
in the FX market. These transactions are Spot, Outright
Forward, Futures, Swap, and Option. According to the
Bank for International Settlements, market share for
these five transactions are estimated at: Spot = 48%,
Swap = 39%, Forwards = 7%, Options = 5%, Futures =
1%
Spot Transactions
This type of transaction accounts for almost half of all
FX market transactions. The exchange of two currencies at a rate agreed on the date of the contract for delivery in two business days (except for USD/CAD, which
is the next business day).
Outright Forward Transactions

One way to deal with the foreign exchange risk is
to engage in forward transaction. In this transaction,
money does not actually change hands until an agreed
upon future date. A buyer and seller agree on an
exchange rate for any date in the future and the
24
ForexConfidential
SECTION 2

transaction occurs on that date, regardless of what the
market rates are then. The date can be a few days,
months, or years in the future.
enables customers to trade on a margin basis, and pay

margin on a daily basis when the position is marked to
the market.
Futures Transactions
Foreign currency futures are forward transactions with
standard contract sizes and maturity dates for
example, 500,000 British pounds for next November at
an agreed rate. These contracts are traded on a
separate exchange set up for that purpose.
Option Transaction
To address the lack of flexibility in forward transactions,
the foreign currency option was developed. An option is
similar to a forward transaction. It gives its owner the
right to buy or sell a specified amount of foreign
currency at a specified price at any time up to a
specified expiration date.
Swap Transactions
The most common type of forward transaction is the
currency swap. In a swap, two parties exchange
currencies for a certain length of time and agree to
reverse the transaction at a later date. The purpose of a
swap transaction is to manage liquidity and currency
risk, by executing foreign exchange transactions at the
most appropriate moment.
For example: selling US dollars for euros value spot
and agreeing to reverse the deal at a later date commonly I day, 1 week, I month, or 3 months. Effectively,
the underlying amount in each currency is simultaneously borrowed or lent the long lent and the short
borrowed.
For a price, a market participant can buy the right, but

not the obligation, to buy or sell a currency at a fixed
price on or before an agreed upon future date. The
agreed upon price is called the strike price.
Depending on whichthe option rate or the current
market rateis more favorable, the owner may exercise the option or let the option lapse, choosing instead
to buy/sell currency in the market. This type of transaction allows the owner more flexibility than a swap or
futures contract.
In all of these transactions, market rates might change.
However, the buyer and seller are locked into a contract
at a fixed price that cannot be affected by any changes
in the market rates. These tools allow the market
participants to plan more safely, since they know in
advance what their FX will cost. It also allows them to
avoid an immediate outlay of cash.
Since currency risk is replaced by interest rate risk,

such transactions are conceptually different from spot
transactions. They are, however, closely linked because
foreign exchange swaps are often initiated to move the
delivery date of a foreign currency originating from spot,
or outright forward transactions to a more optimal
moment in time. It is by using swaps that traders can
hold a position without ever being delivered. This
25
ForexConfidential
SECTION 2

Settlement and Delivery
The Spot market is traded on a two-business day value
date. It requires a two-day settlement between the
banks as they may be in different time zones (the only
exception is the Canadian dollar, where 24 hours is the
requirement). For instance, for trades executed on
Monday, the value day (day of delivery) is Wednesday.
Volume & Open Interest
Volume consists of the total amount of currency traded
within a specific period, usually one day. Of course,
traders are more interested in the volume for a specific
currency. A high trading volume suggests that there is
high interest and liquidity in a market. Also, some chart
patterns require heavy volume for successful
development. A low trading volume is a warning sign to
traders to be extra careful. In a low-volume market,
rates can be all over the map and make it harder to get
the price one wants.
Open interest is the net outstanding position in a
specific instrument. It normally represents the difference
between the outstanding long (buy) positions and the
outstanding short (sell) positions.
Volume and open interest are difficult to quantify in
most of the foreign exchange markets because about
97% of the markets are decentralized. Volume figures
can be calculated in the foreign exchange futures
markets because these transactions take place on
centralized trading floors, and all trades go through
clearinghouses. However, futures transactions (pure
futures and options on futures) only account for about
3% of the worlds foreign exchange activity. The other
97% of currency trading takes place in the spot, swap,
forwards, and cash options markets, where trading is
completely decentralized. Hence, volume is impossible
to measure with any precision and can only be roughly
extrapolated from futures market data.
encounter inflation, in which prices of goods and

services are rising rapidly. Along with rapid economic
growth and inflation, interest rates may often rise as a
result. In turn, raised interest rates increase the cost of
the currency and thus, decrease the overall demand for
goods and services. The decreased demand will inhibit
prices from continuing to rise at an excessive, rapid
pace. Conversely, economies facing recessionary
periods may require economic stimuli to encourage
consumer spending, which in turn expedites economic
growth. A cut in interest rates may make money more
accessible and cheaper to borrow. The decreased
interest rate would enable entrepreneurs to borrow
capital with less financial stress. Therefore, a cut in
interest rates would ideally revitalize the economy and
cease the economic recession or, to a greater extent,
depression.
Rollover charges are determined by the difference
between the interest rates of the two corresponding
countries. The greater the interest rate differential
between the currency pair, the greater the rollover
charge will be. It takes place when the settlement of a
trade is rolled forward to the next value date. As
mentioned above, trades must be settled in two
business days in the FX market. If a trader sells
100,000 euros on Tuesday, the trader must deliver
100,000 euros on Thursday, unless the position is rolled
over. Traders that hold a position overnight pay interest
on the currency they borrow, and earn interest on the
currency they purchase. Typically, interest rollover
charges are applied at 5pm (17:00) New York time
(9pm GMT; 10pm GMT when New York is operating on
daylight savings time from late March to late October) in
coordination with the international trading day.
For the FX trader, interest rollover charges can have a
small impact on their overall profit and loss from
exchange rate speculation. To illustrate how interest
rollover charges work, consider the following example:
Interest Rollover
Interest rollover fees are a function of the interest rates
established by the various central banks and federal
authorities used to regulate the official policy of the
currency. Economies that are growing rapidly may
26
ForexConfidential
SECTION 2

Trader A buying GBP/USD at 1.5755.
In this case, Trader A is borrowing US dollars, and
hence will pay interest on the borrowed funds. Trader A
is, however, earning interest on the British pounds that
have been purchased. If the Bank of England which
regulates the pound offers a higher interest rate than
the Federal Reserve which regulates the US dollar
the client has an opportunity to earn interest.
Alternatively, if the Federal Reserve issues a higher
interest rate on the US dollar than the Bank of England
offers on the British pound, then the client will
experience a net interest payment.
Because banks can lend to each other at rates different
from what the central bank lends to them, the rollover
calculations can never be reduced to an exact science.
Like the currency exchange rate, the rollover interest
rates are subject to market conditions, and hence can
fluctuate as well.
How to Estimate Interest Rollover
Since interest rates raise the cost of the currency it is
more expensive to borrow currencies with a high
interest rate a central banks interest rate policy can
be used to adjust the economy to its respective needs.
However, since the interest rollover charge is generally
quite small, it should not serve as the core of a trading
strategy. The following is a sample calculation of
interest rollover:
Suppose the Bank of England has an official interest
rate of 3.5%, while the Federal Reserve has an official
interest rate of 1%. Consequently, a client who is buying
GBP/USD will earn interest, since he/she is only paying
1% while earning 3.5%. Because interest rates are
quoted on a yearly basis, it is divided down to a daily
basis that can be applied for daily interest rollover
charges. Although there are 365 days in a year,
financial transactions in a year are rounded off to 360
days. For instance, in the United States, 1% of the
principal balance for the whole year is divided by 360.
The following is the equation to calculate the amount for
interest rollover:
(No. of Lots) x (No. of Units per Lot) x (Annual Interest

Rate Differential / 360) x (No. of Days)
GBP/USD
Trader A buys 2 contracts of GBP/USD on Thursday
and closes them on the next day
Contract Value: GBP 100,000
Opening Price: 1.6770
Yearly Interest Rate Differential: GBP 3.5% - USD 1% =
2.5%
Calculation: GBP 100,000 x 2 x (2.5%/360) x 1 = 13.88
USD/JPY
Trader A sells 3 lots of USD/JPY on Monday and closes
them on the next day
Lot Value: USD 100,000 or JPY 12,200,000
Opening Price: 110.00
Yearly Interest Rate Differential: USD 1% - JPY 0% =
1%
Calculation: USD 100,000 x 3 (-1%/360) x I = -8.31
Triple Rollover on Wednesday
Since there is a two-day settlement period in foreign
exchange, the transactions that are opened on
Wednesday at 5 pm which is the Thursday trading
day should not get settled until Saturday. Of course,
banks are closed during the weekend, so the
transaction cannot effectively be settled until Monday
(which begins on Sunday at 5 pm New York time).
Therefore, for positions opened and held overnight on
Wednesday, rollover fee is charged for the following
Monday as well, meaning an extra two days of fees for
the weekend. As a result, rollover fees are tripled in the
FX market on Wednesday. It is important to understand
that every transaction has a value day. If the deal is not
27
ForexConfidential
SECTION 2

closed on the same day, the trade is subject to rollover
charges.
Part IV. Types of Orders

When placing an order in the FX market, you can
choose from the 4 different options available. This
includes: market, limit, stop-loss, and entry orders.
Market Order
A market order is an order to buy or sell a currency pair
at the current market price. One of the key advantages
of trading in a spot market is that market orders are
guaranteed when dealing with a reputable broker, as
the vast liquidity of the market ensures that there are
always buyers and sellers.
Limit Order (Take Profit Order)
A limit order allows a client to specify the rate at which
he will take profits and exit the market. Essentially, it
defines the amount of profit that the trader is looking to
capture on this particular trade. Lets assume a trader
has an open position where he is long (meaning he has
bought) GBP/USD, he would place a limit order at
1.5900; if the market reached that rate, he would be
taken out of the market, and his profit from the trade
would immediately be reflected in his balance.
Alternatively, a trader could place a limit order to an
existing sell position.
Stop-Loss Order
A stop-loss order works like a limit order, but in an
opposite fashion: it specifies the maximum loss that a
trader is willing to accept on a given position. For
example, if a trader is long USD/JPY at 121.50 with a
limit at 121.70, he may wish to maximize the loss he is
willing to accept by placing a stop-loss order at 121.30.
In such a case, if the market reached 121.30, he would
be stopped out of the position and would have suffered
a loss no greater than 20 pips.
Entry Order
All entry orders are essentially contingent orders: they
will only be filled if the market reaches that rate. For
example, suppose you are trading USD/JPY, and the
current quote is 120.50 120.55. You can place an

entry order to buy at 120.15 so that your order will only
be filled if the market reaches 120.15. Ultimately, there
are two types of entry orders: limit entry orders and stop
orders.
Limit Entry Order
Limit entry orders are classified as entry orders
whereby the rate specified is either below the current
market rate if it is a buy order, or alternatively, above
the market rate if it is a sell order. Limit entry orders are
often conducive to strategies pertaining to range-bound
markets, whereby clients can place orders to buy at the
bottom of the range and sell at the top.
Suppose the current market rate to sell EUR/USD is at
1.0800, and to buy is at 1.0804. There are two types of
limit entry orders that a trader could place in such a
situation:
1. A trader could place an order to sell at a price above
the current market rate, for instance, sell at 1.0820. If
the sell rate in the spot market reaches 1.0820, the sell
order would be activated. In this case, the trader
expects that the market will reach 1.0820 and then
reverse its direction.
2. A trader can place a limit entry order to buy at a price
that is below the current market rate. For instance, a
trader could place a limit entry order to buy at 1.0790.
His order would only be activated meaning it would
only begin to affect his P/L if the buy rate reached
1.0790. The trader is expecting a reversal of the trend
after the market reaches the rate he/she specified. In
other words, the trader will profit if the market bounces
off the 1.0790 level.
Since both buy and sell limit entry orders assume the
reversal of a trend, they are most commonly used by
traders who believe the market is trading within an
upper and lower range, and that it will not break out of
this range.
28
ForexConfidential
SECTION 2

Stop Entry Order
Stop entry orders rely on rationale that is the opposite
of limit entry orders. If a trader wishes to buy at a price
above the current market rate, or, alternatively, sell at a
price below current market price, then he is placing a
stop entry order. Stop entry orders are conducive to
breakout strategies, whereby the trader believes that if
the specified rate is reached, the trends movement is
confirmed and thus will continue in that direction.
Suppose the current market rate for the USD/JPY is at
117.04; in other words, traders can enter the market to
sell at 117.04, and can buy at 117.09.
There are two types of stop entry orders that a trader
could place in such a situation:
1. The trader could place an order to sell at a price
below the current market rate. So, for instance, he
could place an order to sell at 116.75; if the sell rate in
the spot market reaches 116.75, the sell order would be
activated. In this case, the trader expects that the
market will reach this level; it will break out and continue in this direction.
2. The trader can place a stop entry order to buy at a
price that is above the current market rate. For instance, if the trader placed an order to buy at 117.85,
his order would only be activated meaning it would
only begin to affect his PIL if the buy rate reached
117.85. In this example, the trader is expecting a breakout if the market reaches the rate he/she specified. In
other words, the trade will break through the 117.09
level.
Since both buy and sell stop entry orders assume a
breakout, they are most commonly used by traders who
believe the market will make a big move.
Part V. Proper Phone Etiquette

Although most trades are placed online, traders always
have the option of calling the dealing desk to place an
order. It is important for spot traders to get their point
across quickly and accurately, leaving no room for
interpretation or error. Lets take a look at a typical spot
trade:
Please give me a price on USD/JPY (or USD/CHF, or
EUR/USD, or GBP/USD) for (the number of lots you
want to trade) lot(s).
Example:
Trader says, Please give me a price on USD/JPY for 3
lots.
The dealer will respond with a 2-way price quote. For
example, he may quote USD/JPY at: 125.10-125.15
(but he will probably just say 125.10-1 5).
Dealer replies, 125.10-15.
So you can either buy USD/JPY at 125.15, or you may
sell USD/JPY at 125.10.
To buy USD/JPY you can say any of the following: 15,
I buy, I buy at 15, mine, or mine at 15.
To sell USD/JPY, you can say any of the following: 10,
I sell, I sell at 10, yours, or yours at 10.
Trader states, I buy at 15.
You would normally have 3-5 seconds to respond
(sometimes more, sometimes less) prior to a price
change, depending on market volatility. If no response
is given and the price changes, the dealer will say
change, price change, off, or your risk. In this
case, you may ask for a price again. If you do respond
with a buy or sell, the dealer will say, done or indicate
to you that your trade is executed. You can also state to
the dealer that you would like your stop-loss at_____
and a limit at _____
Dealer responds, Done.
Trader says, Place a stop-loss at 124.80 and a limit at
126.00.
Dealer answers, Got it. The dealer will hang up.
29
ForexConfidential
SECTION 2

Below is another example of sentences that may be used in a telephone conversation with the dealer.
Part VI. Fundamental Analysis

vs. Technical Analysis
There are two primary approaches of analyzing financial markets: fundamental analysis and technical analysis. Fundamental analysis is based on economic theories that examine underlying economic conditions.
Events, such as political environments, are used in fundamental analysis to determine forces of supply and
demand. On the other hand, technical analysis uses
historical price
and volume data to predict future market movements.

There is an ongoing debate as to which methodology is
more successful. Day or swing traders prefer to use
technical analysis, focusing their strategies primarily on
price action, while position traders use fundamental
analysis focusing their efforts on determining a
currencys proper current as well as future valuation.
One clear point of distinction is that fundamental
analysis studies the causes of market movements,
while technical analysis studies the effects of market
movements.
30
ForexConfidential
SECTION
THREE
FUNDAMENTAL ANALYSIS
(PAGE 32-33)
I. How the Economy Works?

Theories Used to Analyze the Economy
Purchasing Power Parity (PPP)
Balance of Payments Model
Asset Market Model
Factors that Affect the Economy
Economic Factors
Confidence Factors
Approaches to Analyze the FX Market
32
32
32
32
32
33
33
33
33
(PAGE 33-34)
II. Fundamental Analysis

Two Main Factors in Fundamental
Analysis
Trade Flows
Capital Flows
Physical Investments
Portfolio Investments
33
34
34
34
34
34
(PAGE 34-37)
III. Factors Moving the FX Market

G7 Meeting
Inflation
Gross Domestic Product (GDP)
Interest Rates
Nominal and Real Rate of Interest
Producer Price Index (PPI)
Consumer Price Index (CPI)
Personal Income and Personal
Consumption Expenditures
Trade Deficits
Industrial Production
Unemployment Rates
Business Inventories
Durable Goods Orders
Retail Sales
Housing Starts
34
35
35
35
35
35
35
36
36
36
36
36
36
36
37
37
(PAGE 37-41)
IV. Profiles on the Major Currencies

US Dollar (USD)
Overview of the US Economy
USD Trading Aspects
Euro (EUR)
Overview of the European Monetary
Union Economy
EUR Trading Aspects
Japanese Yen (JPY)
Overview of the Japanese Economy
JPY Trading Aspects
Great British Pound (GBP)
Overview of the British Economy
GBP Trading Aspects
Switzerland
(Confederatio Helvetica FrancCHF)
Overview of Swiss Economy
CHF Trading Aspects:
Canadian Dollar (CAD)
Overview of the Canadian Economy
CAD Trading Aspects
37
37
37
38
38
38
38
39
39
39
40
40
40
40
40
40
41
41
41
(PAGE 41)
V. Tips for Trading

with Fundamental Analysis
41
(PAGE 42)
VI. Tips to Interpret

Economic Indicators
42
31
ForexConfidential
SECTION 3
Part I. How the Economy Works?
FX traders should have a proper understanding of the
trading and investment environment. This requires
some understanding of the economy and how it
operates. An economy moves in cycles. Each cycle
includes a period of economic expansion leading to a
peak, followed by a period of economic contraction
leading to a trough. After economic activity has reached
a trough and bottomed out, a new cycle begins again
with economic recovery and expansion. A period of at
least six consecutive months of economic contraction is
generally called a recession and if the downturn is
extremely severe, as in the early 1930s, it is called a
depression. The price movements of the major
currencies follow these economic circular trends,
forming well-defined patterns that can be tracked and
predicted by fundamental and technical analysis.
Theories Used to Analyze the
Economy
Several theories are utilized as tools to analyze the
economy. These include: the purchasing power parity
theory, balance model, and asset model.
Purchasing Power Parity (PPP)
The PPP theory asserts that exchange rates are
determined by the relative prices of similar baskets of
goods sold in different countries. It is expected that
changes in inflation rates are to be offset by equal but
opposite changes in the exchange rate.
For example, a can of Pepsi costs 1.5 euros
in France and $1.25 in the U.S. Based on
the PPP theory, the 1.5 (euros) divided by
1.25 (USD) equals to 1.2. If the current
exchange rate for EUR/USD is more than
1.2, the exchange rate overstates current
market values and should depreciate until it reaches to
the PPP value, which is 1.2. On the other hand, if the
current exchange rate is less than 1.2, the exchange
rate understates current market values and should
appreciate until it reaches the PPP value. Therefore, the
theory postulates that the two currencies will eventually
move towards the exchange rate at which one euro can
buy 1.20 US dollar.
Every few years, the OECD (Organization for Economic

Cooperation and Development) publishes PPP values
for all currencies. These values, in turn, are used by
traders to anticipate exchange rates. PPP is a long term
indicator and does not take into account short term
fluctuations based on market news or rumors. Another
weakness is that it assumes goods are easily tradable
with no costs to trade such as tariffs, quotas, or taxes.
In addition to ignoring the costs to trade, this theory only
accounts for goods and neglects services, where room
for value differentials is significant. From empirical
evidence, we learn that PPP is only applicable to longterm (3-5 years) price movements, when prices
eventually correct themselves towards parity.
Balance of Payments Model
This model suggests that a foreign exchange rate must
be at its equilibrium level the rate that produces a
stable current account balance. The theory asserts that
if a country has a trade deficit, its currency will
depreciate. The cheaper currency renders the nations
goods (exports) more affordable in the global market
while making imports more expensive. The combination
over time, forces imports to decline and exports to rise
thus stabilizing the trade balance and the currency
towardf equilibrium. In other words, the Balance of
Payment Model is hinged on the theory that a currency
will move as a result of a nations global trading
position. Those countries that run a trade deficit will
have their currency decline, while those with a surplus
will have their currency appreciate.
Critics of the Balance of Payment Model state that it
does not take into consideration the flow of funds into
financial assets, but focuses solely on the trade of
goods and services from one country to another. This
explains why a country like the United States, with a
large trade deficit, did not have its currency suffer
markedly in recent years.
Asset Market Model
The explosion in trading of financial assets has
reshaped the way analysts and traders view currencies.
The basic premise of this theory is that the flow of funds
into other financial assets of a country (i.e. equities and
32
ForexConfidential
SECTION 3
bonds) increases the demand for that nations currency.
Advocates point out that the proportion of foreign
exchange transactions stemming from cross bordertrading of financial assets has dwarfed the extent of
currency transactions generated from trading in goods
and services through import and export. Since the asset
market approach views currencies as asset prices
traded in an efficient financial market, it asserts that
currencies are increasingly demonstrating a strong
correlation with asset markets.
This helps explain the currency phenomena during the
1990s, when the Japanese stock market and yen
depreciated while the U.S. stock market and US dollar
appreciated a condition that was contrary to what the
previous theories suggest, given the low level of
Japanese interest rates relative to U.S. rates. In this
case, interest rates did not have a strong influence. The
price of comparable goods did not drive the market
prices. The factor that exerted the greatest influence
over the market was the net flow of funds into the
investment sector. It is this variable that affected the
demand for currencies to be bought and sold, one over
the other.
Factors that Affect the Economy
Forex is a perfect market for applying trading strategies
and disciplined methods of limiting risk while taking full
advantage of favorable market conditions. A trader
must learn how to analyze the market in order to become successful. There are a lot of factors that can
cause a nations currency to fluctuate. The key concept
is that the movement of currencies is based on supply
and demand, which is influenced by both economic
factors and confidence factors.
Economic Factors
Economic factors examine specific demand stemming
from purchases, goods, services, or assets. Currencies
are affected by changes in interest rates of a country,
which in turn, affect inflation. If the currency value goes
down, it costs more to import goods from another
country; hence, the cost of living goes up, leading to
inflation.
Confidence Factors
Confidence factors are general, and often nonquantitative, explanations for a past or prospective
move. They include political events, market sentiment
about the management of a countrys currency, or
hunches concerning other players in the market.
Political events can fall under this category. For
example, if the leader of a country is suddenly removed
from office or, worse yet, assassinated, the worlds
confidence in that countrys currency is, at least in the
short-term, sure to suffer.
Approaches to Analyze the FX
Market
There are two distinct methods to analyze financial
markets: fundamental analysis and technical analysis.
Fundamental analysis is based on underlying economic
conditions, while technical analysis uses historical
prices to predict future movements. There is an ongoing
debate as to which methodology is more successful.
Technical traders focus their strategies primarily on
price action, while fundamental traders focus their
efforts on determining a currencys proper current and
future valuation.
Part II. Fundamental Analysis

Fundamental analysis focuses on the economic,
political, and social forces that dictate supply and
demand in the market. It is a method that attempts to
predict price action and identify market trends by
analyzing economic indicators, government policy, and
societal factors within a business cycle framework.
Fundamental analysts pay close attention to the causes
of currency movements by studying the various asset
markets, growth rates, gross domestic product (GDP),
interest rates, inflation, unemployment rates, political
events, social developments, and macroeconomic
indicators. Political events that impact the level of
confidence in a nations government, the climate of
stability, and the level of certainty have a great influence on the FX market. All this information is combined
to assess current and future market performance. Thus,
fundamental analysts need to constantly stay current
with news and announcements, as these can indicate
33
ForexConfidential
SECTION 3
potential changes to the economic, political, and social
environment. By studying reports and events,
fundamental analysts examine the underlying reasons
for the fluctuation of the exchange rate, in either the
past or the future, towards one direction or the other.
They endeavor to do this before the rest of the market
participants, placing themselves in a good trading
position to earn profits.
Two Main Factors in Fundamental
Analysis
There are two main factors that impact exchange rate
movements from a fundamental perspective: trade
flows
and capital flows.
Trade Flows
One factor affecting exchange rates between two
respective countries is the trade balance. Trade balance shows the net differences between a nations imports and exports. It is, by definition, the merchandise
trade balance the net difference between the value
of merchandise being exported and imported into a
particular country. When an economys imports are
more than its exports, the trade balance is said to be in
deficit. If an economys exports are more than its
imports, the trade balance is in surplus. Trade balances
are important as they indicate a redistribution of wealth
among countries. Generally, trade deficits negatively
impact the value of a currency by forcing money to flow
out of the country. Conversely, positive trade balances
cause appreciation in the countrys currency.
Capital Flows
Capital flows take the form of both physical and portfolio
investments. They measure the net amount of a
currency that is being purchased or sold in capital
investments. This provides a recording for an
economys incoming and outgoing investment flows. A
positive capital flow balance implies that foreign inflows
into a country exceed outflows. A negative capital flow
balance indicates that there are more physical or
portfolio investments bought by domestic investors than
foreign investors.
Physical Investments
Physical Investments are actual foreign direct
investments by corporations, such as investments in
manufacturing, real estates, and local acquisitions. All
these transactions require foreign corporations to sell
their local currency and purchase the foreign currency,
which leads to movements in the Forex market. These
movements represent the underlying changes in actual
physical investment activity. Global corporate
acquisitions are extremely important to currency
movements as they involve more cash than stock.
Portfolio Investments
As technology advances, investing in global equity
markets has become increasingly feasible.
Subsequently, the dynamic stock market in any part of
the world serves as an ideal potential for all, regardless
of the, geographic location. As a result, a strong
correlation has developed between a countrys equity
market and its currency. If the equity market is rising,
investment dollars enter the country to seize the
opportunity. Conversely, if the equity market is falling,
domestic investors sell their shares of local publicly
traded firms and invest in other nations.
Part III. Factors Moving the FX Market

Each week, economic statistics and indicators are
released by various nations governments, professional
organizations, and academic institutions. Economic
indicators are snippets of financial and economic data
published by various agencies of the government or
private sector. These statistics, which are made public
on regularly scheduled intervals, enable market
observers to monitor the pulse of the economy. Hence,
they are religiously followed by almost everyone in the
financial markets. Since so many people are ready to
react to the same information, economic indicators in
general have tremendous potential to generate volume
and to move prices in the markets.
Most economic indicators can be divided into two
categories: leading and lagging indicators. Leading
indicators are economic factors that change before the
34
ForexConfidential
SECTION 3
economy starts to follow a particular pattern or trend.
They are used by traders to predict changes in the
economy. Lagging indicators are economic factors that
change after the economy has already begun to follow
a particular pattern or trend.
Economic indicators may range from interest rates and
central bank policies to natural disasters. The
fundamentals are a dynamic mix of distinct plans, erratic behaviors, and unforeseen events. Therefore, it is
better to get a handle on the most influential contributors to this diverse mix than it is to formulate a list that
includes all of the indicators, as that is merely impossible. Some indicators are more significant than others,
with respect to their influence on the FX market, but
most closely looked at is the data related to interest
rates and international trade. Below is a brief overview
of some of the major economic news, events, reports,
and announcements that can have a significant effect
on currency market movement:
G7 Meetings
There are periodic meetings of financial leaders from
the United States, Great Britain, Germany, Japan,
France, Italy, and Canada who gather to discuss world
monetary policies. Recently, Russia has taken part in
this forum as an observer; hence, this group is
sometimes referred to as the G-8.
Inflation
Price index numbers are used to assess inflation.
Inflation is a rise in the general level of prices in an
economy. When the price of goods rises, there is a
general increase in prices, which constitutes inflation.
This price level increase has a direct impact on currency exchange rates. If the general price level falls, it
is called deflation. The currency of countries with low
inflation will normally rise in value, while the currency of
countries with high inflation will fall.
Gross Domestic Product (GDP)
The Gross Domestic Product (GDP) is the sum of all
goods and services produced by both domestic and
foreign companies in the economy in a year. GDP is a
good indicator for the pace at which a countrys
economy is growing or shrinking as it measures the

countrys economic output and growth.
In order to measure the performance of an economy,
economists are usually most interested in the real rate
of change of GDP. Real GDP is calculated by adjusting
nominal GDP for inflation or deflation. When real GDP
increases from the previous year, the currency becomes stronger.
Interest Rates
Interest rates are charged by various financial
institutions. For example, the Prime Rate is an interest
rate charged by banks to reputable customers and the
Federal Funds Rate is an inter-bank rate for borrowing
reserves to meet margin requirements. If there is an
uncertainty in the market in terms of interest rates, any
developments regarding interest rates could have a
direct affect on the currency markets. Generally, when a
country raises its interest rates, the countrys currency
will strengthen in relation to other currencies as assets
are shifted to gain a higher return. The timing of interest
rate moves is usually known in advance.
Nominal and Real Rate of Interest
The rate of interest reflects the cost of borrowing
money. Since the rate of inflation affects the purchasing
power of money, the rate of interest is affected by it.
Just like GDP can be adjusted for the effects of inflation, interest rates can also be adjusted for inflation.
The rate of interest is categorized as nominal and as
real rate of interest.
The nominal rate of interest is the rate of interest
advertised or stated in a financial contract. The real rate
of interest is the rate of interest that is adjusted for the
loss in purchasing power due to inflation. To calculate
the real rate of interest, subtract the rate of inflation
from the nominal rate of interest.
Rate of Inflations - Nominal Rate of Interest = Real Rate of Interest
Producer Price Index (PPI)

The Producer Price Index (PPI) measures the average
changes in selling price as indicated by domestic
35
ForexConfidential
SECTION 3
producers for their output in various industries. The FX
market tends to focus on the PPI for seasonally
adjusted finished goods on a monthly, quarterly, semiannual and annual basis. PPI is an accurate precursor
of the important Consumer Prices Index (CPI) figure.
Consumer Price Index (CPI)
The Consumer Price Index (CPI) is a primary indicator
of inflation that measures the average price for goods
and services most commonly used by a typical
household. By definition, it is a measure of the average
price level paid by urban consumers (80% of
population) for a fixed basket of goods and services. It
reports price changes in over 200 categories. Items
included in the CPI reflect prices of food, clothing,
shelter, fuel, transportation, health care and all other
goods and services that people buy for day-to-day
living. These items are divided into seven categories
(housing, food, transportation, medical care, apparel,
entertainment, and other), each of which is weighted by
its relative importance. The CPI also includes various
user fees and taxes directly associated with the prices
of specific goods and services.
Personal Income and Personal
Consumption Expenditures (PCE)
The PCE, constituting the largest component of GDP,
represents the change in the market value of all goods
and services purchased by individuals. Personal income represents the change in compensation that individuals receive from all sources including: wages and
salaries, proprietors income, income from rents, dividends and interest, and transfer payments (Social Security, unemployment, and welfare benefits). The release of these two figures gives the savings rate, which
is the difference between disposable income (personal
income minus taxes) and consumption, divided by
disposable income. The ever-declining savings rate has
become a key indicator to watch as it signals consumer
spending patterns.
Trade Deficits
When the export value is smaller than import value, the
result is a trade deficit. This renders an outflow of
currency, which in turn makes a currency weaker.
Industrial Production
Industrial Production is the quarterly measure of the
change in the amount of goods and services produced
per unit of input. It incorporates labor and capital inputs.
The unit cost of labor component is a useful indicator of
any emerging wage pressures. The importance of
productivity has grown over the past few years since
the Federal Reserve has begun attributing its growth
trend to relatively low levels of inflation. When this figure increases, the currency becomes stronger.
Unemployment Rates
The unemployment rate is calculated with the number
of people unemployed in the labor force represented
in a percentage. The labor force is the sum of people
who are employed and those who are receiving
unemployment benefits. Although it is a highly
proclaimed figure (due to simplicity of the number and
its political implications), the unemployment rate gets
relatively less importance in the market because it is
known to be a lagging.
Business Inventories
Business inventories and sales figures consist of data
from other reports such as durable goods orders,
factory orders, retail sales, and wholesale inventories
and sales data. Inventories are an important component
of the GDP report because they help distinguish which
part of total output produced (GOP) remains unsold.
When inventories of unsold output are high, it means
the economy is slowing down and the currency is
becoming weaker.
Durable Goods Orders
Durable Goods Orders measures the new orders
placed with domestic manufacturers for delivery of hard
goods. A durable good is defined as a product that
lasts an extended period of time (three years and over)
during which its services are extended. These include
large ticket items such as capital goods (machinery,
plant and equipment), transportation, and defense orders. They are extremely important in that they anticipate changes in production and thus, signal turns in the
economic cycle. Rising figures are often supportive to a
currency in the short term.
36
ForexConfidential
SECTION 3
Retail Sales
The retail sales report measures total receipts of retail
stores and includes the retail sales for both durable and
non-durable goods. It reflects broad consumer spending
patterns and is adjusted to normal seasonal variation,
holidays, and trading-day differences. This is a true
indicator of the strength of consumer expenditure.
Rising figures are often supportive to a currency in the
short term.
sustains a large trade deficit of approximately $500

billion, which makes the U.S. rely heavily on capital
flows. Hence, the dollar is a capital flow dominated
currency.
Housing Starts
The Housing Starts report measures the number of
residential units on which construction is begun each
month. A start in construction is defined as the
beginning of excavation of the foundation for the
building and is comprised primarily of residential
housing. Rising figures are often supportive to a
currency in the short term.
Part IV.
Profiles on the Major Currencies
It is essential to have a general understanding of the
economic characteristics of the major currencies.
Alongside the US dollar, trading in the FX market is
dominated by 5 other major currencies: the euro,
Japanese yen, British pound, Swiss franc, and the
Canadian dollar.
US Dollar (USD)
Overview of the U.S. Economy
The United States (U.S.) has the
largest and most technologicallyadvanced economy in the world.
This leading industrial power
absorbs 71% of world net foreign savings. Being
responsible for 20% of total world trades, the U.S. is the
largest trading partner for many countries. Its primary
trading partners include: Canada 22.4%, Mexico 13.9%,
Japan 7.9%, UK 5.6%, and Germany 4.1%. With
roughly 40% of its capital market assets coming from
foreign investment, the U.S. equity is the most liquid in
the world. Regardless of its high liquidity, the U.S.
The U.S. Central Bank, the Federal Reserve (Fed), has

full independence in setting monetary policy to achieve
maximum non-inflationary growth. There are primarily
three policy signals that the Federal Reserve
manipulates to assert control over the countrys
economy. These are: the Discount Rate, Fed Funds
Rate, and Open Market Operations.
The Discount Rate is an interest rate at which the Fed
charges commercial banks for emergency liquidity
purposes. Although this is more of a symbolic rate,
changes in it imply clear policy signals. The Discount
Rate is almost always less than the Fed Funds Rate.
Fed Funds Rate is clearly the foremost interest rate. It
is the rate at which depositary institutions charge one
another for overnight loans. Changes are made in the
Fed Funds rate when the Fed wishes to send clear
monetary policy signals. Generally, announcements of
changes in this rate create a large impact on all bond,
stock, and currency markets.
The Federal Open Market Committee, also known as
the FOMC, holds the responsibility to make decisions
on monetary policy. It is this committee that makes the
crucial decisions on interest rate announcements, which
are made eight times per year. There are twelve
37
ForexConfidential
SECTION 3
members altogether and they include the president of
the Federal Reserve Bank of New York, the seven
members of the Board of Governors, and the remaining
four seats carrying a one-year term each are rotated
among the presidents of the 11 other Reserve Banks.
USD Trading Aspects
The US dollar is involved in over 90% of all
currency trades. The Treasury and Federal
Reserve have favored a strong dollar for the
past two decades, and occasionally,
interventions are applied to support this
policy. Prior to 9/11, the USD was considered one of
the worlds safest currencies to trade. It still is the safest
currency to some extent, however, the States vulnerability to terrorism has somewhat diminished this belief.
Many emerging market countries peg their local currencies to the dollar in efforts to stabilize their own economy. Most of the worlds raw materials trade, even if it
does not involve the U.S., is charged in USD. Since the
interest rate differentials between U.S. treasuries and
foreign government bonds are useful tools to determine
potential currency movements, market participants
closely follow the US Dollar Index that depicts the
strength of the currency. It is important to closely monitor USD/CAD prior to important U.S. economic announcements as the pair often provide early indications
of potential market reactions. The value of the dollar
against one currency is sometimes impacted by the
exchange rate of another currency pair that may not
even involve the dollar. To illustrate, a sharp rise in the
yen against the euro (falling EUR/JPY) may cause a
general decline in the euro, including a fall in EUR/USD.
For more information on the US dollar, refer to section
7: Tools & Resources.
Euro (EUR)
Overview of the European Monetary
Union Economy
The European Union (EU) developed as an institutional
framework for the construction of
a united Europe. The EU consists
of 15 member countries that
share the euro as a common
currency. The EU has a single monetary policy dictated

by the. European Central Bank (ECB). The decision
making body is the Governing Council which consists of
the Executive Board and the governors of the national
central banks. The Executive Board consists of the ECB
President, Vice-President, and four other members.
These same 15 countries constitute the European
Monetary Union (EMU). The EMU is the worlds second
largest economic entity with a GDP valued over 8 trillion
USD in 2002. The EMU is both a trade and a capital
flow driven economy, therefore, trade is very important
to the economies within the EMU. The EMU exports
account for 19% of total world trade while imports
account for 17%. It is primarily a service-oriented
economy since services in 2001 accounted for
approximately 70% of the total GOP.
EUR Trading Aspects:

The EUR/USD is the most liquid currency
pair in the world and its movement is used
as the primary gauge of both general
European and U.S. strength/weakness. The
EUR/USD exchange rate is sometimes
impacted by movements in cross exchange rates (nondollar exchange rates), such as the EUR/JPY or EUR/
GBP pairs. For instance, positive news in Japan could
potentially cause a significant drop in the
EUR/USD pair following the drop in the EUR/JPY
38
ForexConfidential
SECTION 3
exchange rate. Even though USD/JPY may also be
declining, euro weakness will spill onto a falling
EUR/USD. The EUR/USD rate serves as an indicator of
movements in other currency pairs. There is a strong
negative correlation between EUR/USD and USD/CHF,
reflecting a consistently similar relation between the
euro and Swiss franc. Since the Swiss economy is
highly dependently on the EU economy, an upward
spike in the EUR/USD is often accompanied by a
downward dip in USD/CHF, and vice versa.
EUR/JPY and EUR/CHF are very liquid currency pairs
that are usually the indicator for general Japanese or
Swiss strength/weakness. The EUR/USD and
EUR/GBP crosses are great trading currencies, as they
move systematically, have very little gapping, and have
tight spreads. Since the EU is comprised of so many
governments under parliamentary coalitions, it is highly
susceptible to political instabilities, which in turn affects
the value of the EUR. Political instability may include
threats to coalition governments in France, Germany, or
Italy. Political or financial instability in Russia may also
cause devaluation of the EUR because of the
substantial amount of German investment in Russia.
Devaluations of the euro due to political instability in the
EU are often fully manifested in the EUR/USD
exchange rate. FX traders should pay close attention to
comments by members of the Central Bank Governing
Council and trade EUR crosses accordingly. For more
information on the euro, refer to section 7: Tools &
Resources, page 88.
Japanese Yen (JPY)
Overview of the Japanese Economy
Japan has the third largest
economy in the world, with a GDP
valued over 4 trillion USD in 2002,
and is a key member of the G7
Japan is one of the largest exporters in the world and is responsible for over 400 billion
USD in exports per year. Its large industrial base
(almost 40% of GDP) and limited natural resources
create a high dependence on imported raw materials
from foreign countries. The primary trade partners for
Japan in terms of imports and exports are the U.S. and
Japan is also the largest creditor (lender and investor)

in the world; however, exporters tend to keep the majority of their profits invested in U.S. assets. Japans economy tends to be both capital and trade flow driven as
international investors contribute to a high influx of currencies into Japans equity and fixed income markets.
Furthermore, Japan attracts substantial amounts of
inflows into its markets.
JPY Trading Aspects
The Japanese yen is a key indicator for
Asian strength or weakness. This being
said, economic crises or political
instability in other Asian economies can
often have dramatic impact on the yen
spot movements. The yen is closely
monitored by the single most important political and
monetary institution in Japan, the Ministry of Finance
(MoF). Despite Japans gradual measures to
decentralize decision-making, the MoFs influence in
guiding the currency is more significant than the
influence of the ministries of finance of the U.S., U.K.,
or Germany on their countries. The Bank of Japan
(BoJ) is also a very active participant in the FX market.
Together, the two parties guide the movement of the
yen through interventions. There are three main factors
behind the BoJ and the MoF intervention: when the JPY
moves by 7 or more JPY in under 6 weeks, when the
yen is getting very strong, especially when it reaches
above the 115 level, and when market participants hold
positions in the opposite direction. The JPY is easily
influenced by political speeches, particularly those
pertaining to intervention. Generally, the JPY tends to
trade in an orderly fashion during Japanese and London
hours, but this trading pattern becomes variable in the
U.S. hours. However, the most dangerous time to trade
JPY is during lunchtime in Japan (10-11pm EST)
because at this time, the market becomes illiquid and
prone to volatility. FX traders should closely monitor
banking stocks as movements in banks can often lead
to movements in the yen.
USD/JPY is one of the most popular major currency
pairs in the FX market. The USD/JPY exchange rate is
39
ForexConfidential
SECTION 3
sometimes impacted by movements in cross exchange
rates such as EUR/JPY. For example, a rising USD/
JPY could be a result of an appreciating EUR/JPY,
rather than direct strength in the dollar. Therefore, it is
important to pay close attention to potential EUR/JPY
price movement when trading the USD/JPY pair.
Great British Pound (GBP)
Overview of the British Economy
The United Kingdom (U.K.) is the
worlds fourth largest economy,
with a GDP valued over 1.4 trillion
USD in 2001. It is also a key
member of the G7. The U.K. has a
service oriented economy, with manufacturing representing only one-fifth of national output. Their capital
market systems are one of the most developed in the
world; hence, their finance and banking have become
the strongest contributors to the GDP. The U.K. is also
one of the largest producers and exporters of natural
gas in the EU. The energy production industry accounts
for 10% of the nations GDP. Its largest trading partner
is the EU, which accounts for over 50% of all the countrys import and export activities.
GBP Trading Aspects
The GBP has always played a significant
role in the FX market and accounts for
approximately 6% of the worlds currency
trading volume. Although its presence is
not as evident in other currencies, it
maintains a strong presence when compared to the
euro and USD. Because of the intimate trading relationship between the U.K. and EU, moves in the EUR/GBP
pair often leads to fluctuations in GBP/USD. A rise in
EUR/GBP (depreciating in sterling) could lead to a like
decline in GBP/USD. News or speeches by political
figures indicating that the U.K. is closer to joining the
euro will usually put pressure on GBP, causing it to
depreciate in value. Conversely, reports indicating that
the U.K. may not join the single currency project will
cause the GBP to appreciate in value. Since the largest
energy companies worldwide are located in the U.K.,
GBP is positively correlated to energy prices.

Switzerland
(Confederatio Helvetica Franc - CHF)
Overview of the Swiss Economy
Switzerland is the nineteenth
largest economy worldwide and
the only major currency that does
not belong to the G7.
Switzerlands stable economy has
a per capita GPD that is greater than any other Western
European economy. It has a prosperous tourism industry and the worlds most advanced banking system.
Similar to the British economy, the back bone of the
Swiss economy stems from banking and insurance sectors. The two, combined, comprise over 70% of the
countrys total GDP. It is important to note that, with the
sophisticated banking system, Switzerland has become
the worlds largest destination for offshore capital, which
totals over $2 trillion in offshore assets. Since the country lacks significant natural resources, its economy is
highly dependent on services and manufacturing businesses. International trade has always been the foundation and primary source of the countrys economic
development.
CHF Trading Aspects:
J Switzerlands neutral political status makes
the CHF a safe currency to trade. During
international chaos involving countries
outside of Europe, the Swiss franc is the
second safest choice against the US dollar.
In 1990, the franc broke its historically high
exchange rate against the US dollar. However, its
strength decreased significantly in. 1991, when it suffered adjustment periods. The trend in Swiss franc is
highly dependent on outside events and international
economic stability, as opposed to domestic economic
news. Since the law requires that the franc be 40%
backed by gold, the CHF is strongly correlated to the
prices of precious metals. In regards to currency pairs,
the USD/CHF is relatively illiquid and tends to gap;
therefore, most active trading of the CHF occurs in
EUR/CHF. Due to the lack of liquidity in USD/CHF,
40
ForexConfidential
SECTION 3
price movements typically follow those in EUR/USD and
EUR/CHF. Because of the close proximity of the Swiss
economy to the EU, the Swiss franc is positively
correlated to the euro. This relationship is most evident
in the inverse relationship between USD/CHF and
EUR/USD. To illustrate, a sudden move in EUR/USD is
most likely to cause an equally sharp move in USD/
CHF in the opposite direction. FX traders tend to favor
USD/CHF because they can use EUR/USD and
EUR/CHF as leading indicators for trading USD/CHF.
Evidently, news of Switzerland joining the European
Union (EU) would have negative impact on the CHF as
the euro would overpower the CHF. At the present,
economists and politicians remain uncertain on the
long-term fate of the Swiss franc. Whether it is capable
of maintaining its independence from the euro continues to be a debate.
CAD Trading Aspects:

The Canadian economy is highly dependent
on gold and oil so price movements in these
commodities greatly affect the value of the
CAD. Additionally, since the United States is
the biggest trading partner of Canada, the
U.S. economy exerts a strong influence on
the CAD. The USD/CAD rate often moves as a result of
sentiment encompassing the U.S. economy. In the first
half of 2003, the CAD peaked a six-year high, exceeding the 0.75 USD mark. FX traders should closely follow
the interest rate differentials between the cash rates of
Canada and the short-term interest rate yields of other
industrialized countries. These differentials can be good
indicators of potential money flows as they indicate how
much premium the Canadian dollar (loonie) will yield in
short-term fixed income assets, or vice versa.
Canadian Dollar (CAD)

Overview of the Canadian Economy
Canada is the second largest
country in the world but had a
GDP of only 700 billion USD in
2001, making it the seventh
largest world economy. Canada is
also one of the leading members
of the G7 countries. Economically and technologically,
the nation has developed in parallel with the United
States. As an affluent, high-tech industrial society, Canada closely resembles the U.S. in its market-oriented
economic system, pattern of production, and high living
standards. The United States accounts for more than
85% of Canadas exports and produces three-quarters
of its imports. The Canadian economy is highly dependent on natural resources such as gold and oil; Canada
is the worlds fifth largest producer of gold and the fourteenth largest producer of oil. In 1997-98, the government recorded a surplus for the first time in 28 years
and the following year marked the first back-to-back
surplus in almost 50 years.
Part V. Tips for Trading with

Fundamental Analysis
Fundamental analysis is a very effective and efficient
method to forecast economic conditions, but not
necessarily exact market price movements. Two people
can look at the exact same economic data and come up
with two completely different conclusions about how the
market will be influenced by it. Therefore, is it important
to study the fundamentals and see how they best fit
your trading style before casting yourself into a
particular mold regarding any aspect of market analysis.
For example, when analyzing an economists forecast
of the upcoming US dollar or employment report, you
begin to get a fairly clear picture of the general health of
the economy and the forces at work behind it. However,
you will need to come up with a precise method as to
how best to translate this information into entry and exit
points for a particular trading strategy.
Furthermore, it is vital to stay current with public
announcements and news that can suddenly move an
exchange rate hundreds of pips in a matter of minutes.
These are the 3 tips that may protect you from
undesired losses:
41
ForexConfidential
SECTION 3
1. Always tune in to a live news source or channel
during active trading. It is important to take note of the
tremendous amount of data that is released at regular
intervals. Identify the news source that can provide you
with the latest breaking events and live broadcasts of
scheduled speeches and reports by industry leaders.
you know what economists and other market pundits

are forecasting for each indicator. Once again, market
expectations for all economic releases are published by
various sources on the Web and you should post these
expectations on your calendar along with the release
date of the indicator.
2. Know when all scheduled announcements will take

place that may influence your trading. Know exactly
when each economic indicator is due to be released. A
calendar of these reports is usually available from FX
Trainers online resource links or can be found in most
investment newspapers. Keep a calendar that contains
the date and time of these events on your desk or near
your trading station. Developing this positive habit will
also help you make sense out of price action that might
otherwise be unanticipated and erratic.
Do not act too quickly should a particular economic

indicator fall outside of market expectations. Each new
economic indicator released to the public contains
revisions to previously released data. For example, if
durable goods rise by 0.6% this month, while the market is anticipating them to fall, the unexpected rise could
be the result of a downward revision to the prior month.
Look at revisions of older data. In this case, the
previous months durable goods figure might have
originally been reported as a rise of 0.6%, but now,
along with the new figures, is being revised lower to
perhaps a rise of only 0.1%. Therefore, the unexpected
rise in the current month is likely the result of a
downward revision to the previous months data.
3. Get out of the market prior to any major

announcement if you are a short-term, technical trader.
If you must hold on to a longer term position, reevaluate your stop loss orders before these
announcements are made. If it is mathematically sound,
tighten your stop loss orders.
Part VI.
Tips to Interpret Economic Indicators
The key is to understand that economic indicator
forecasts come from a variety of sources, and all
sources have a measure of subjectivity. Here are a few
guidelines to help you track, organize, and make trading
decisions based on the economic data.
Identify whether the economic data falls within market
expectations. The reason the market sometimes moves
contrary to what many people expect is a result of the
clash between expectations and reality. The market
measures an economic statistic not only by the direction
in which it moves, but by whether the number
corresponds to the expectations. If unemployment
moves up by one-tenth of a point but the market
expected a one-fifth increase, the market could easily
rally with surprised relief. Therefore, it is important that
Have a basic understanding of what particular aspect of

the economy is being presented in the data. For
instance, you should recognize that the GDP is
measuring the growth of the economy versus the CPI
and PPI which are measuring inflation. Over time, you
will become familiar with the nuances of each economic
indicator and what part of the economy they are
measuring.
Pay attention to which indicators the markets are
focusing on. During some periods, certain indicators are
more important than others. Although most economic
indicators are created with equal importance, some may
have acquired much greater potential to move the
markets than others. Therefore, know which indicators
are more important during the time you are making your
trading decisions.
Lastly, do not succumb to paralysis by analysis. Given
the multitude of factors that fall under the heading of
The Fundamentals, there is a danger of information
overload. Sometimes traders fall into this trap and are
unable to pull the trigger on a trade. This is one of the
42
ForexConfidential
SECTION 3
reasons why many traders turn to technical analysis. To
some, technical analysis is seen as a way to transform
all of the fundamental factors that influence the markets
into one simple tool, prices. However, trading a
particular market without good fundamental knowledge
about the exact nature of its underlying elements is
rather risky. Achieve a balance between being
uninformed and overwhelmed with economic data; be
an informed FX trader who has enough knowledge of
the underlying economic factors to make educated
forecasts of market price movement.
43
ForexConfidential
SECTION
TECHNICAL ANALYSIS
(PAGE 46)
Four
(PAGE 51-60)
I. Technical Analysis vs.

32
Overview
Two Major Forms of Technical Analysis
46
46
(PAGE 47-47)
II. Trends
47
47
47
47
48
48
Types of Trends
Uptrend
Downtrend
Sideways Trend
Classifications
of Trends
(PAGE 48-50)
III. Rally & Consolidation Phases

Continuation Patterns
Channel or Rectangle
Triangles
Wedge
Trend Reversal Patterns
Head and Shoulders
1-2-3 Tops and Bottoms
Double or Triple Tops and Bottoms
48
48
48
49
49
49
50
50
50
IV. Chart
Scaling of Charts
Choosing the Proper Time Period
Day or Intraday Trading
Swing Trader
Position Trader
Three Methods of Plotting Charts
Bar Charts
Line Chart
Candlestick Chart
Common Candlesticks
Candlestick Patterns
Doji
Bearish Engulfing Pattern
Bullish Engulfing Pattern
Piercing Line Pattern
Dark Cloud Pattern
Shooting Star Pattern
Morning Star Pattern
Even Star Pattern
Harami Pattern
Hammer Pattern
Hanging Man Pattern
51
51
51
51
52
53
53
54
55
56
57
57
57
57
58
58
58
59
59
59
60
60
60
44
ForexConfidential
SECTION
TECHNICAL ANALYSIS
(PAGE 61-62)
Four
(PAGE 66-67)
V. Pattern Interpretation
Principle 1 - Patterns take on
Significance from their size and depth
61
61
Principle 2 - Do not wait for Perfect Pattern 61

Principle 3 - Combine Pattern Trading
with Other Techniques
Identifying Support and Resistance
Drawing Trend Lines
Moving Averages (MA)

Simple Moving Average
Weighted Moving Average
Exponentially Smoothed Moving Average
Application of Moving Averages in Trading
1. Determine entry and exit points
2. Determine direction of trend
3. Determine strength of trend
Most Commonly Used Moving
Bollinger Bands
Methods of interpreting Bollinger Bands
1. Breakouts
2. Overbought & Oversold Indicators
Relative Strength Indicator (RSI)

Moving Average Convergence
and Divergence (MACD)
66
66
67
61
(PAGE 68)
61
62
(PAGE 62-66)
VI. Technical Indicators
VII. Oscillators
62
63
63
63
63
64
64
64
64
65
65
66
66
66
VIII. Stochastics
Application of Stochastics in Trading
1) Detect overbought and oversold
Conditions
2) Divergence
3) Trade Signals
Rate of Change (ROC)
68
68
68
68
68
68
(PAGE 69-70)
IX. The Basic Theories

Fibonacci Retracement
Application of Fibonacci
Retracement Levels in Trading
Factors to consider when using the
Fibonacci Levels:
Elliott Wave Theory
69
69
69
70
70
(PAGE 72)
X. Tips for Using

Technical Analysis
72
45
ForexConfidential
SECTION 4
TECHNICAL ANALYSIS
Part I. Technical Analysis vs.
Technical analysis concentrates on the study of
market action while fundamental analysis focuses on
the economic forces which cause prices to move.
Both of these approaches attempt to achieve the
same goal, that is, to determine the direction prices
are likely to move. The only difference between the
two is that they approach. the market from different
angles. In essence, a fundamentalist studies the
cause of market movement, while a technician
studies the effect.
On the surface, technicians may appear to ignore the
fundamentals that drive market movement. It may
seem that they are so absorbed by charts and data
tables that they become ignorant of the underlying
factors that move the market. However, a technical
trader will explain to you that all the fundamentals are
already represented in the price. In other words, the
charts that depict price movements are actually a
visual form that illustrates the fundamentals. All
economic data are translated into patterns and
trends of market prices that could easily be used for
making important trading decisions. Basically,
technical traders look at the charts to identify the
trends in order to predict future prices.
The bottom line when using any type of analysis,
technical or fundamental, is to stick to the basics.
The basics are the methods that work for you and
have been proven to work over a long period of time.
After finding a trading system that works best for you,
other methods and strategies could be gradually
incorporated as tools into your trading toolbox.
Part II. Technical Analysis Overview

Technical analysis is the study of historical price
action and volume data for the purpose of forecasting
future market trends. This type of analysis focuses
on the chart formations to analyze major and minor
trends. It helps to identify buying/selling opportunities
by assessing the extent of market reversals.

Technical analysis can be used on an intraday 5
minute, 15 minute, hourly, weekly, or monthly basis.
Technical analysis is based on 3 assumptions listed
in the table below.
Depending on the level of complexity, technical

analysis may involve price charts, volume charts, and
many other mathematical representations of market
patterns. As you advance in your technical trading
skills, technical indicators and mathematical ratios
may be added to the charts to form a more
comprehensive analysis of the market. Therefore,
rather than merely relying on price charts,
technicians may also use other tools in aid of
forecasting future market values.
Currencies rarely spend much time in tight trading
ranges and have the tendency to develop strong
trends. Over 80% of volume is speculative in nature
and as a result, the market frequently overshoots and
then corrects itself. A technically trained trader can
easily identify new trends and breakouts, which
provide multiple opportunities to enter and exit the
market.
Two Major Forms of Technical
Analysis
Technical analysis can be further divided into two
major forms:
Quantitative Analysis: uses various statistical
properties to help assess the extent of an
overbought/oversold currency.
Chartism: uses lines and figures to identify
recognizable trends and patterns in the formation of
currency rates.
46
ForexConfidential
SECTION 4
TECHNICAL ANALYSIS
trend is an overall directional price movement in a
pre-defined time interval. It is estimated that 70% of
the time, markets will fluctuate randomly or move
between support and resistance levels. The rest of
the time, market behavior is characterized by
persistent price movements trends that break
through support and resistance levels.
The concept of trends forms the basis of the
technical approach. Basically, the sole purpose of
charting the price action of a market is to identify
trends in early stages of their development for the
purpose of trading in the direction of those trends. In
fact, most of the techniques used in this approach
are trend-following in nature; their intent is to identify
and follow existing trends. Once a trend is defined, a
sound strategy can reasonably predict its direction
and duration. As a result, profits are accumulated
and maximized, while losses are minimized.
Types of Trends
One of the first things you will hear in technical
analysis is this saying: Never go against the trend;
the trend is your friend. Prices can move in one of
three directions, up, down or sideways. Once a trend
is established in any of these directions, it usually
will continue for some period. Based on the direction
of movement, there are three types of trends: 1)
Uptrend, 2) Downtrend, and 3) Sideways Trend.
Uptrend
An uptrend is a succession of higher highs and

higher lows. It indicates a bull market in which the
base currency is appreciating in value. In essence,
an uptrend can be considered intact until a previous
relative low point is broken. A violation of this
condition serves as a warning that the trend may be
over. Once an uptrend is confirmed, traders should
enter a buying position; in other words, go long on
the currency pair.
Downtrend
A downtrend is defined as a succession of lower lows

and lower highs. It indicates a bear market in which
the base currency is depreciating in value. Generally,
a downtrend can be considered intact until a previous
relative high is exceeded. Once a downtrend is
established, traders should enter a selling position,
which is also known as shorting the currency pair.
Sideways Trend
47
ForexConfidential
SECTION 4
TECHNICAL ANALYSIS
A sideways trend indicates a highly volatile market in
which prices are moving within a narrow range. In
other words, the value of currencies is not
appreciating or depreciating in value.
Classifications of Trends
There are three classifications of trends: primary,
intermediate, and short-term.
Rally & Consolidation Phases

Currency price movements can usually be put
into two main categories, a rally phase and a
consolidation phase (also known as congestion).
During the rally phase, buyers of one side of a
currency pair have the upper hand over sellers,
since it is their enthusiasm that strengthens the
currency they have chosen to buy. During the
consolidation phase, the enthusiasm of both
buyers and sellers of both sides of a currency
pair becomes more balanced, as neither one is
able to win out over the other. Eventually, one
will dominate and another rally phase will
commence in either direction.
Obviously, every purchase must be offset by a
sale, and visa versa. However, if buyers are
enthusiastic, they are more willing to accept a
higher price which increases the value of the
bought currency. If sellers are pessimistic, they
are more likely to only be willing to accept a lower
price, which decreases the value of the sold
currency. Technical traders can notice these
price struggles as buyers and sellers battle.
These battles between buyers and sellers appear
in reoccurring patterns or formations that can be
seen within their charts. These patterns can also
be categorized into two groups, continuation
patterns and trend reversal patterns, which

naturally correlate with the two above-described
phases.
Continuation Patterns
Continuation patterns reflect a gap or pause in
trading that the market needs during sharp
trends. Such periods of consolidation are
usually quite short and often slope against the
original trend. In contrast, breakouts occur in
the same direction as the original trend. Lets
review, several common continuation patterns
that can enhance your technical analysis.
Although these patterns are normally
considered bar patterns, we can also view them
with candlestick charts.
Channel or Rectangle
A channel or rectangle is a pattern in which parallel
lines can be drawn through or against price bar or
candle highs and lows. Channels can be in several
directions: horizontal (also called a rectangle),
inclining, or declining. This pattern is easy to spot
since it can be viewed as a brief sideways trend. If it
occurs within an uptrend and breaks out on the
upside, it is called a bullish rectangle. If the
congestion occurs with a downtrend and breaks out
on the downside, the formation is called a bearish
rectangle.
Traders frequently trade on the breakout of the

channel or test the breakout by placing a small risk
stop order inside or on the other side of the channel.
Upon breakout, the market will most likely move in
the direction of the original trend.
48
ForexConfidential
SECTION 4
TECHNICAL ANALYSIS
When a channel follows a strong rally phase, we
refer to this as a flag formation since the rally phase
resembles a flagpole and the consolidation phase
(channel) that follows it resembles a flag. A flag
pattern is very reliable and often easy to see in the
early stages of its formation.
Triangles
A triangle is a pattern in which the slope of price
bar or candle highs and lows are converging to a
smaller pricing area or point so as to outline the
shape of a triangle. Triangles can either be
symmetrical, ascending, descending, or
expanding. The ascending triangle is recognized
by a flat resistance line and an upward sloping
support line. The descending triangle is identified
by a flat support line and downward sloping
resistance line. The much less common expanding
triangle is a mirror image of a symmetrical triangle,
but the tip of the triangle, not the base, is next to
the original trend. Traders frequently trade on the
breakout of a triangle or test the breakout by
placing a small risk stop order inside the triangle.
When a triangle follows a strong rally phase, we

refer to this as a pennant formation since the rally
phase resembles a flagpole and the consolidation
phase (triangle) that follows it resembles a
pennant flag that tapers to a point.
A wedge is a pattern that is similar to a triangle in
appearance because it also has converging trend
lines coming together at the tip. However, wedges
are distinguished by a noticeable slant in either

direction.
There are several breakout-based approaches to

trading wedges. The most common approach is to
give a bias to the same direction of the overall trend
when the wedge is pointed in the opposite direction
of the trend.
Below is an example of a falling wedge in a
downtrend:
Trend Reversal Patterns

Like most good things in life, all good trends must
come to an end. In Forex, this is not unfavorable
since we can simply reverse directions and go the
other way. Fortunately, there are several trend
reversal patterns that often signal the beginning of a
new trend, or, at the very least, a strong countertrend move. Lets review three common trend
reversal patterns that can enhance your trade
system. Again, although these patterns are normally
considered bar patterns, we can also view them with
candlestick charts.
Head and Shoulders
Head and shoulders is a bar pattern that signals a
trend reversal. In an uptrend, the market begins to
49
ForexConfidential
SECTION 4
TECHNICAL ANALYSIS
slow down and forces of supply and demand are
generally achieving equilibrium. Sellers come in at
the highs (left shoulder) and push the market down
until the bearish force slows down (beginning
neckline). Buyers soon return to the market and
ultimately push through to new highs (head).
However, the new highs are quickly turned back and
the downside is tested again (continuing neckline).
Short-term buying reemerges and the market rallies
once more, but fails to take out the previous high
(right shoulder). Buying subsides and the market
turns back to the downside again. The pattern is
complete when the market breaks the neckline. Head
and Shoulders can be in an uptrend or inverted in a
downtrend.
Below is an example of a head & shoulders pattern in
an uptrend:
Below is an example of a 1-2-3 top:
Double or Triple Tops and Bottoms

Double or Triple Tops and Bottoms is another bar
pattern that signals a trend reversal. In an uptrend,
prices rally to a new high, pull back for an indefinite
time period, rally to the same high price area again
whereupon they reverse once again. This rally and
pull-back action can occur two, three or more times,
forming a double or triple top.
Part IV. Charts

The most basic building blocks of technical analysis
are price charts. Charts help traders determine ideal
entry and exit points for a trade. They provide a
visual representation of the historical price action of
1-2-3 Tops and Bottoms
1-2-3 tops and bottoms is a bar pattern that signals
a trend reversal. In an uptrend, the market hits a
new high (#1 top), pulls back to a short-term
support level (#2 point), and resumes an upward
move to a high that is below the #1 high point (#3
point), whereupon it reverses once again. In a
downtrend, the preceding definition is inverted. The
pattern is complete when the market breaks the #2
point.
whatever is being studied. Depending on their level

of sophistication, charts can help with much more
advanced studies of the markets.
50
ForexConfidential
SECTION 4
TECHNICAL ANALYSIS
Scaling of Charts
Pricing on FX Charts is always displayed on the vertical or Y axis, either to the right or left side.
Pricing information is plotted on an arithmetic scale which plots each price variance with the same
vertical distance; hence, the distance from 1.1400 EUR/USD to 1.1450 EUR/USD is the same as
1.1500 EUR/USD to 1.1550 EUR/USD.
Choosing the Proper Time Period
A day or intraday trader trades in very short time frames of minutes and hours. So, an FX day trader
usually sets up a screen page or pages with a daily, 120, 60, 30, 15, 10, 5, or 1 minute chart.
Below is a sample 5 minute chart for day or intraday trading:
51
ForexConfidential
SECTION 4
TECHNICAL ANALYSIS
Often, an FX swing trader uses data from previous weeks and months to open positions on Monday or
Tuesday with a goal of closing these positions by Thursday or Friday. So, an FX swing trader normally sets up
a screen page or pages with weekly, daily, 120, or 60 minute charts.
Below is a sample daily chart for swing or momentum trading:
52
ForexConfidential
SECTION 4
TECHNICAL ANALYSIS
A position trader opens and holds positions in the market for weeks or even months at a time. When trading
with this style, the trader is not as concerned about the daily noise in the market. So, an FX position trader
sets up a screen page or pages with monthly, weekly and daily charts.
Below is an example of a weekly chart for position trading:
Three Methods of Plotting Charts

With technical analysis gaining wider acceptance,
technicians have developed more than one way of
physically representing market data on charts.
Most charting methods plot prices on the vertical
(Y-axis) and the time period on the horizontal (Xaxis). Time frames can be anywhere from one
minute all the way to one month. There are three
widely used methods of plotting charts; they
include bar, line, and candlestick charts.
Bar Chart
This method portrays pricing action using vertical

bars. The bar represents the trading range for the
stated time period. The bars themselves usually
53
ForexConfidential
SECTION 4
TECHNICAL ANALYSIS
have at least one horizontal mark. The top of the bar records the highest price and the bottom records the
lowest price. A mark, extending to the left, records the opening price and a mark, extending to the right,
records the closing. One advantage of bar charts is that they can provide a lot of visual information on a
single page.
54
ForexConfidential
SECTION 4
TECHNICAL ANALYSIS
Line Chart
Usually on a line chart, the openings, highs, and lows are ignored. Only the closing price is plotted. A
continuous line, with various peaks and valleys, joins the closing prices. The line chart offers less visual
information than other charts; however, it can be more helpful in some respects. For example, since the
highs and lows are ignored, most of the market noise (short-term price fluctuations) is eliminated. This makes it
much easier to spot trends and reversal patterns.
55
ForexConfidential
SECTION 4
TECHNICAL ANALYSIS
These vertical lines on the top and bottom are also
referred to as the upper shadow and the lower
shadow. The rectangle itself is known as the body,
which represents the pricing activity between the
opening and closing prices.
Candlestick Chart
This method was developed in Japan many centuries

ago and basically provides the same information as
bar charts. A candlestick or candle consists of a
vertical rectangle, and often, a vertical line on top of
the candle (wick) and a vertical line below the candle
(tail).
If the opening price is higher than the closing price,

the opening price is recorded at the top of the body
and the closing price at the bottom; the candle is
displayed in a solid red body. When the opening
price is lower than the close, the opening price is
recorded at the bottom of the body and the closing
price at the top; the candle is displayed with a solid
blue body. The biggest advantage of using
candlesticks is that they can make it easier to spot
certain price patterns that may not be as apparent in
other charts. The disadvantage, of course, is that
candlesticks take up a lot more horizontal space,
giving a smaller view of market activity.
56
ForexConfidential
SECTION 4
TECHNICAL ANALYSIS
Common Candlesticks
There are 5 different types of candlesticks that are
extremely common in the FX market. These
candlesticks are as follows:
A shows the high and low with no shadows.
B shows when the opening and closing prices
are identical.
C shows a very small trading range.
D shows the opening and closing near the high.
E shows the opening and closing near the low.
Candlestick Patterns
The information displayed in candlestick charts is
identical to bar charts. Each one contains the
opening, high, low, and closing prices. However, it
is the way that candles are displayed that makes
them unique and gives them different interpretive
powers. While they can be used for any time
period, candlesticks are used most often with daily
price data. The most commonly used time scale
for candlestick charts is 5 minutes 1 day. It is
important to familiarize yourself with the various
candlestick patterns. These patterns possess
specific forecasting characteristics that indicate
buying/selling opportunities.
A doji implies that the market has an unclear or

undecided direction. Buyers and sellers are in
equilibrium (equally strong). Opening and closing
prices are equal; hence, a true doji has a horizontal
line instead of a body. The color of the doji may be
blue or red. A doji provides signals of potential
market tops or bottoms. A doji formation is
significant if it appears after a long blue candle in
an uptrend or a long red candle in a downtrend. If
there are two doji formations (double-doji), that
means that the market is about to reverse.
Bearish Engulfing Pattern

The bearish engulfing
pattern is a trend reversal
pattern, which typically
occurs after a significant
uptrend. It is formed when a
red candle engulfs a blue
candle. This indicates that
sellers have gained control
Bearish Engulfing of the
market. The significance of
the bearish engulfing pattern is dependent on the sizes of the two involved candles; the smaller the blue candle and the larger the red
candle, the more significant the signal. Generally, it is a
sell signal once a currency pair closes in this formation.
57
ForexConfidential
SECTION 4
TECHNICAL ANALYSIS
Piercing Line Pattern
The piercing line pattern is a
bullish signal. It shows that
there is strong buying power
at lower levels and that the
downward pressure is
beginning to subside. The
more the blue candle pierces
into the red candle, the more
significant the bullish signal.
Bullish Engulfing Pattern

The bullish engulfing
pattern is a trend reversal
pattern that usually appears
after a dramatic downtrend.
It indicates that the
downward momentum may
be at an end. The formation
of this pattern involves a red
candle that is engulfed by a
blue candle. The longer the
blue candle, the more significant the trading signal is. Typically, it is perceived as a
buy signal.
Dark Cloud Pattern

A dark cloud cover is a bearish
signal. This reversal pattern
indicates that the buying
pressure is weakening. The
formation consists of the body
of a red candle closing within
the previous blue candle. The
deeper the second candle
covers the first candle, the
stronger the signal.
58
ForexConfidential
SECTION 4
TECHNICAL ANALYSIS
Shooting Star Pattern
A shooting star is a reversal
pattern that typically occurs
after gaps. This is a bearish
signal that has a long wick
and a small body. It is
usually located near the end
of the trading range. This
pattern shows that, the
market has met with a
strong selling pressure after it
rallied. The color of the body can be either blue or red.
More often it signals a downtrend reversal, as opposed
to an uptrend reversal, is in the making.
Evening Star Pattern

The evening star pattern is a bearish
signal that occurs in an uptrend. It
indicates that the market has hit a wall
of sellers after a rally. This formation
also involves three candles: a blue
candle, followed by a small red or
blue, then a long red candle. The last
red candle does not touch the body of
the second candle. Traders should
not trade until confirming the close of the third candle.
Morning Star Pattern

The morning star is a bullish
signal reversal pattern that
occurs in a downtrend. This
formation involves three
candles: a long red candle, a
small red or blue candle, and
a blue candle. The last blue
candle usually has a long
Morning Star body that does
not touch the body of the second candle and closes well into
the body of the first candle. It is very important that traders wait for the third candle to close prior to buying.
59
ForexConfidential
SECTION 4
TECHNICAL ANALYSIS
Harami Pattern
The harami pattern is a reversal
formation that signifies a
weakening trend. It is
comprised of two candles: the
first candle has a long body,
while the second has a smaller
body that is within the first
candle and is in a different color
than the first candle. The
smaller the second candle, the
stronger the reversal signal
Hanging Man Pattern
The hanging man pattern
appears after a rally and is
typically viewed as a bearish
signal. Because the currency
pair was not able to close higher
than its opening price, the hanging man indicates weakening
market sentiment. Prior to opening a new position, it is important
to wait for the next candlestick to close. The next candlestick must close below the hanging mans body in
order to confirm the trend reversal.
Hammer Pattern
The hammer formation appears
after a significant downtrend and
is typically viewed as a bullish
signal. It is particularly important
if it occurs after a number of
down days. Traders may buy
Hammer once a hammer formation
appears, aspiring for an
imminent trend reversal. It is even
more effective when a currency reaches a double bottom and a strong support line is in place.
60
ForexConfidential
SECTION 4
TECHNICAL ANALYSIS
Pattern Interpretation
There are 3 principles that should help increase
your ability to successfully interpret the market data
displayed within price patterns.
Principle I Patterns take on
Significance from their Size and
Depth
The larger a pattern becomes, the greater its
significance. Remember that patterns give us a
visual picture of the battles fought between buyers
and sellers. The bigger the battle and the longer it
takes, the more exhausted the losing side becomes
and the greater the probability for a new price
movement.
Principle 2 Do not wait for Perfect
Patterns
Novice traders will often miss out on great trade
opportunities because a price formation is not a
perfect match to the ones in the course. What they
fail to grasp is that pattern interpretation is not perfect
science. Experienced traders do not wait around to
trade perfect patterns. They know that pattern
interpretation is a subjective technique that must be
adaptive. As a result, seasoned traders have their
eyes wide open to a greater number of excellent
opportunities available to them in the Forex market.
Principle 3 Combine Pattern Trading with other Techniques
A trader can be profitable trading high-probability
patterns alone. However, when you combine other
techniques, you can increase the probability of your
success immensely.
Part V. Identifying Support &

Resistance
trend. These peaks and troughs are more commonly

referred to as support and resistance levels.
Support and resistance levels are points where a
chart experiences recurring upward or downward
pressure. Support is enough buying pressure to halt
a decline in prices for an extended period. A support
level is usually the low point in any chart pattern
(hourly, weekly or annually). In contrast, resistance is
enough selling pressure to halt an increase in prices
for an extended period. A resistance level is the high
or the peak point of the pattern. These points are
identified as support and resistance when they show
a tendency to reappear. The area in between these
levels is called a channel. As prices move between
the support and resistance level, they are moving
within the channel. It is best to buy or sell near
support or resistance levels that are unlikely to be
broken.
Once these levels are broken, they tend to take up

the opposite role. Thus, in a rising market, a
resistance level that is broken, could serve as a
support for the upward trend, whereas in a falling
market; once a support level is broken, it could turn
into a resistance.
As a technical trader, identifying support and

resistance along with the prevailing trend is the most
important aspect of technical analysis.
Prices move in a series of peaks and troughs. The
direction of these peaks and troughs determine the
61
ForexConfidential
SECTION 4
TECHNICAL ANALYSIS
The following chart shows rising support and
resistance levels in an uptrend.
connecting two points or more. The validity of a

trading line is partly correlated to the number of
connection points. Yet, it is important to note that
points must not be too close together.
This diagram is a trend line drawn by connecting

three successive low points in an uptrend.
There are several guidelines that are applicable
when using support and resistance levels. These
guidelines are listed in the table below.
Part VI. Technical Indicators

Drawing Trend Lines
A common approach to analyzing a prevailing trend
is to use trend lines. Thus, FX traders should have
a basic understanding of how to draw trend lines
right on their charts.
Trend lines are simple, yet helpful tools in confirming
the direction of market trends. An upward straight
line is drawn by connecting at least two successive
lows. Naturally, the second point must be higher than
the first. The continuation of the line helps determine
the path along which the market will move. An
upward trend is a concrete method to identify support
levels. Conversely, downward lines are charted by
Technical indicators are mathematical equations

applied to a price, time, or volume measurement that
produce a numerical result. This numerical result is
often represented in a graph or chart that shows a
moving line or changing value. There are a number
of indicators that are commonly used worldwide.
There are two types of technical indicators: trendfollowing and oscillators.
1) Trend-following indicators are known as
lagging indicators, which means they
typically turn after trends reverse. They are
most useful when markets are trending, but
when the markets are rallying or flat, they
may give false signals.
62
ForexConfidential
SECTION 4
TECHNICAL ANALYSIS
2) Oscillators are considered leading
indicators and typically turn before price
reversals. They work best in rallying or
choppy markets, but give false signals in
trending ones.
Moving Averages (MA)
Moving averages (MAs) are trend-following
indicators that are the most popular among all
technical indicators. They are lines overlaid on a
chart indicating long term price trends, with short
term fluctuations smoothed out. An MA tells the
average price in any given point over a defined
period of time. They are called moving because they
reflect the latest average, while adhering to the same
time measure. Moving averages are important
technical indicators because they eliminate minor
fluctuations and provide traders with a clear depiction
of price over a length of time. MAs are widely used
because they are easy to understand and calculate.
A weakness for moving averages is that they lag the
market. In other words, they follow market changes
and do not necessarily signal a change in trends. To
overcome this issue, shorter periods such as 5- to
10-day MAs are used. Moving averages with a
shorter time frame are more reflective of the recent
price action rather than older data that 40 or 200-day
moving averages illustrate.
There are three kinds of mathematically distinct
moving averages: Simple MA, Weighted MA, and
Exponentially Smoothed MA.
Simple Moving Average
The simple moving average is the most basic of all
moving averages. A simple moving average assigns
equal weight to each price point over the specified
period. The FX trader defines whether the high, low,
or closing price is used and these price points are
added together and averaged. This average price
point is then added to the existing string and a line is
formed. With the addition of each new price point, the
sample set drops off the oldest point. In short, it is
the average of a specified number of prices for a

specific period of time.
Weighted Moving Average
This indicator does not assign equal weight to all
values in the data series; it can either assign more
weight to the front or back. A front-weighted moving
average gives greater weight to the newest data
and a back-weighted moving average gives greater
weight to the oldest data. However, a weighted
moving average is most often used with giving more
emphasis to the latest data. A weighted MA
multiplies each data point by a weighting factor,
which differs from day to day. These figures are then
added and divided by the sum of the weighting
factors. Essentially, a weighted MA enables the
trader to effectively smooth out a curve while having
the average more responsive to current price
changes.
Exponentially Smoothed Moving
Average
Among the 3 types of moving averages,
exponentially smoothed moving averages (EMA) are
the most commonly used. Instead of assigning equal
weight to all data, it puts an emphasis on the most
recent data. The exponentially smoothed MA
considers data in the entire life of the instrument.
Since it is mathematically smoothed, it generates a
more stable moving average line. The mathematics
behind this indicator is relatively more complex than
the previous two types of moving averages. The
EMA multiplies a percentage of the most recent price
by the previous periods average price.
63
ForexConfidential
SECTION 4
TECHNICAL ANALYSIS
Application of Moving Averages in
Trading
1. Determine entry and exit points
Moving averages may be used by combining two
averages of distinct time frames. For example, a 5day MA may be paired with a 20-day MA or a 10-day
MA with a 40-day MA. A buy signal is indicated when
the fast moving average (one with the shorter time
frame) crosses and closes above a slow moving
average (one with the longer time frame).
Conversely, a sell signal is indicated when the fast

moving average crosses and closes below a slow
moving average.
2. Determine direction of trend
An upward moving average signifies an uptrend. A
downward moving average signifies a downtrend.
3. Determine strength of trend
The steep slope of a moving average indicates a
strong trend. The flat slope of a moving average
indicates a weak trend
64
ForexConfidential
SECTION 4
TECHNICAL ANALYSIS
Most Commonly Used Moving
Averages
Moving averages are frequently viewed as support or
resistance levels that are used in reference points.
200-day, 100-day, 50-day, 20-day, and 10-day
moving averages are the most widely used in
technical analysis. While a longer term moving
average can help to define and support a particular
trend, shorter term moving averages can provide
lead signals that a trend is ending before prices dip
below your longer term moving average line. For this
reason, most traders will plot several moving
Bollinger Bands
Bollinger Bands is another trend-following indicator
used to identify extreme highs or lows in relation to
market price. Sometimes currency prices appear to
remain in a range for extended periods of time. Some
people use an upper boundary and a lower boundary
to define the range. The upper boundary is
averages on the same chart.

For example, price movements above the 200-day
exponentially smoothed MA are perceived as bullish,
meaning that the market consists of more buyers
than sellers. Conversely, price movements below the
same MA would be considered bearish, meaning that
there are more sellers than buyers in the market.
There are various combinations of moving averages
as their time interval matters (days or minutes). The
longer the time frame is, the more accurate the trend.
calculated as a moving average of a chosen period

plus 5% of the price, and the lower boundary is the
moving average minus 5%. These boundaries have
the drawback of being too narrow to accommodate
price levels when volatility is high, and too wide when
volatility is low.
65
ForexConfidential
SECTION 4
TECHNICAL ANALYSIS
A better solution, Bollinger Bands, establishes
trading parameters, or bands, based on the moving
average and a set number of standard deviations
around this moving average. While the upper
boundary is a chosen moving average plus X number
of standard deviations, the lower boundary is the
moving average minus the same number of standard
deviations. Bollinger bands are very similar to moving
averages but are correlated with price actions of the
currency, rather than a fixed percentage amount.
Because standard deviation is a measure of volatility,
Bollinger Bands are dynamic indicators that adjust
themselves (widen and contract) based on the
current levels of volatility in the market being studied.
Generally, the higher the volatility, the wider the band
is; the lower the volatility, the narrower the band is.
John Bollinger, the inventor of the Bollinger Bands,
recommends using a simple 20-day moving average
and 2 standard deviations. A simple moving average
is recommended because the sensitivity is less
intense, which equates less market noise.
The Bollinger Bands include 3 lines: the upper band,
lower band, and the centerline. The centerline is
simply the moving average, also known as the pperiod in the Bollinger Bands. The upper and lower
bands are, respectively, the center line plus or minus
twice the standard
deviation; this
statistically implies
that 95% of price
movement should be
contained between
the two bands.
When prices reach the upper or lower boundaries of
a given set of Bollinger Bands, this is not necessarily
an indication of an imminent trend reversal. It simply
means that prices have moved to the limits of the
established parameters. Therefore, traders should
use another study in combination with Bollinger
Bands to help them determine the strength of a
trend.
Methods of Interpreting Bollinger

Bands
1. Breakouts
When the price breaks above the upper band or
below the lower band, some traders believe that it is
an indication that currency price is in the midst of a
breakout. Consequently, these traders would take a
position in the direction of the breakout.
2. Overbought & Oversold Indicators
When the price touches the upper band, it may be
interpreted as a sell signal because it is assumed
that the currency pair is overbought, and may revert
to the middle of the moving average band.
Alternatively, when the price touches the lower band,
it is interpreted as a buy signal because it is
assumed that the currency pair is oversold and may
spring back towards the top of the band.
Oscillators
Oscillators are derived from the underlying currency
to provide signals regarding overbought and oversold
conditions. Since the market fluctuates, prices tend
to overshoot or overextend. The most common
oscillators are described below.
Relative Strength Indicator (RSI)
The most popular oscillator is the relative strength
indicator. It was created by J. Welles Wilder Jr. to
measure the strength or momentum of a currency
pair. This indicator is calculated by comparing a
currency pairs current performance against its past
performance or its up days versus its down days.
RSI is plotted on a vertical scale that measures from
0 to 100. An RSI above 70 indicates an overbought
condition, which in turn indicates a sell signal. An RSI
below 30 represents an oversold condition, which
66
ForexConfidential
SECTION 4
TECHNICAL ANALYSIS
implies a buy signal. Moreover, a sell signal is
indicated when the market price is high and the RSI
value begins declining. Conversely, a buy signal is
indicated when market price is low and the RSI value
begins to rise.
This theory underlying this indicator implies that
prices cannot rise or fall forever. By studying the RSI,
traders can determine with a reasonable degree of
certainty when a reversal will take place. However,
be very cautious of trading on RSI values alone.
From time to time, an RSI can remain at very high or
low values for quite sometime without prices
reversing their course. During these times, the RSI is
simply illustrating that the market is quite strong or
weak but shows no signs of changing its course.
The RSI can be adjusted to various levels of time
sensitivity. Depending on the style of trading, the RSI
can be manipulated to suit the traders needs. For
instance, a 5-day RSI is very sensitive and tends to
give many signals that may not all be sustainable. On
the other hand, a 20-day RSI tends to be relatively
less choppy and give fewer signals. Long-term or
position traders may find that shorter time frames
used for an RSI will yield too many signals, and
perhaps lead to over-trading. However, shorter time
frames are probably ideal for day traders who are
seeking to capture the shorter-term price fluctuations.
Finally, look for divergences between market prices
and the RSI. If the RSI turns up in a slumping market
or turns down during a bull run, this could be a good
indication that reversal is about to take place. Wait for
a confirmation before you act on divergent indications
for your RSI studies. A
divergence between
the RSI oscillator and
the current market
price trend is an accurate indicator that a
market turning point Is
imminent. However, to
be on the safe side,
wait for confirmation before you act on divergent

indications from RSI values.
Moving Average Convergence and
Divergence (MACD)
MACD, developed by Gerald Appel, has become
another popular oscillator used in the FX market. It
is simply a more detailed method of using moving
averages to identify trading signals from price charts.
In essence, MACD is the difference between a
shorter period exponentially smoothed MA and a
longer period exponentially smoothed MA. This
indicator is used to confirm trends and to indicate
reversals and overbought/oversold conditions. The
MACD is composed of two lines on the charts and
are displayed as crossovers that give buy and sell
signals. The MACD line is usually a solid line that
signifies the difference between two MAs with
different time periods. The Signal line is usually a
dashed line that represents the MACD smoothed
with another exponentially smoothed MA. Generally,
the MACD plots the difference between a 26-day
exponential MA and a 12-day exponential MA.
Application of MACD in Trading
1) Crossovers
The most common way to use the MACD is to buy or
sell a currency pair when it crosses the signal line or
zero. A buy signal is indicated when the MACD
rallies above the signal line and a sell signal is
denoted when it falls below the signal line.
2) Overbought
Whenever the MACD rises, or when the shorter
moving average moves away significantly from the
longer moving average, the currency pairs price
movements are likely to start slowing down and soon
return to more middle-ranged levels.
3) Divergences
When the MACD diverges from the trend of the
currency price, this may signal a trend reversal. For
instance, if the MACD turns positive and makes
higher lows while prices are still sinking, this could be
67
ForexConfidential
SECTION 4
TECHNICAL ANALYSIS
a strong buy signal. Conversely, if the MACD makes
lower highs while prices are aspiring, this could
signify a strong sell signal
Stochastics
This popular indicator examines the strength and
momentum of a currency pairs price action by
measuring the degree by which a currency is
overbought or oversold. Stochastics provide a trader
with information about the closing price in the current
trading period relative to the prior performance of the
market being analyzed. The stochastic formula is
established on the basis that prices tend to close
near the upper part of the trading range during an
uptrend and close near the lower part of the trading
range during a downtrend. When using the formula,
one attempts to identify the points in the rising
market where the closes are grouped nearer to the
low prices than high prices, which would signal a
trend reversal is in progress. Vice versa, in a falling
market, stochastics attempt to identify closes
grouped nearer to the high prices, which would also
signal a trend reversal in progress.
Stochastics are measured and represented by two
separate lines. They are both plotted on a scale from
o to 100. The different values on this scale suggest
different market behaviors. While high values
indicate a bullish market, low values imply a bearish
market. It is important to note that stochastics do not
work well in choppy or sideways markets. When
prices are fluctuating in a narrow range, the
stochastics value lines may cross too many times,
indicating that the market is moving sideways.
Furthermore, stochastics are most useful in
measuring the strength of a trend. When prices are
making new highs or lows and the stochastics are
moving in the same direction, the trend is very likely
to continue.
Application of Stochastics in Trading

1) Detect overbought and oversold
conditions
Readings above 80 represent strong upward
movements and overbought conditions. On the other
hand, readings below 20 indicate strong downward
movements and oversold conditions.
2) Divergence
Divergence occurs when the stochastic values are
flattening out or moving in the opposite direction of
prices. Divergences can be used as reliable
indicators of possible trend reversals. Therefore,
many traders close their current positions and/or
enter new positions in the opposite direction from the
direction of the current trend that is believed to be
terminating.
3) Trade Signals
Stochastics can be a very useful indicator for timing
the market. One of the most important buy and sell
signals for technical analysis is when the stochastics
value lines cross. Strong overbought signal is
indicated when the currency pair makes a new high
and the lines cross the 80 level. Conversely, the
currency pair is severely oversold and ready to
reverse when it makes a new low and the lines cross
below 20 to confirm that low.
Rate of Change (ROC)
ROC is one of the simplest indicators to utilize, while
being as effective as other indicators. It compares
the current price (or todays price) with the price of x
time periods ago. The result is displayed as a
continuous value that fluctuates below and above the
median. Although the jaggedness of the ROCs
appearance makes it difficult to spot trend reversals,
it is a useful tool for trend analysis.
The 12-day ROC is an excellent short-to-intermediateterm overbought/oversold indicator. The higher the
ROC, the more overbought the currency; the lower the
ROC, the more likely a rally will take place. However, as
with all overbought/over-sold
68
ForexConfidential
SECTION 4
TECHNICAL ANALYSIS
indicators, it is prudent to wait for the market to begin
correcting (i.e., turn up or down) before placing your
trade. A market that appears overbought may remain
overbought for some time. In fact, extremely
overbought/oversold readings usually imply a
continuation of the current trend. The 12-day ROC
tends to be very cyclical, oscillating back and forth in
a fairly regular cycle. Often, price changes can be
anticipated by studying the previous cycles of the
ROC and relating the previous cycles to the current
market.
The Basic Theories
In addition to the technical indicators, successful
traders incorporate basic theories into their trading
strategies. These theories enrich a traders trading
skills, allowing them to make logical and sound
decisions. There are two fundamental theories that
are commonly used: Fibonacci Retracement Theory
and Elliott Wave Theory.
enter and exit positions. The most commonly used

levels are 38.2%, 50%, and 61.8%.
Application of Fibonacci
Retracement Levels in Trading
Fibonacci levels are used by drawing a trend line
between two significant points recent top and
bottom prices then inserting retracement levels.
For example, the red lines in the chart show the high
and low points from which the retracement levels are
measured. The blue lines represent the
corresponding Fibonacci retracement levels. When
price moves to one of the levels and stops, it is likely
that the correction may be over and the trend will
likely resume. If it is a downtrend, the retracement of
the correction would be up. If it is an uptrend, the
retracement would be down.
Fibonacci Retracement
Fibonacci retracement levels are a sequence of
numbers discovered by the noted mathematician
Leonardo da Pisa during the twelfth century. These
numbers describe cycles found throughout nature
and when applied to technical analysis, can be used
to find pullbacks in the FX market.
Fibonacci retracement involves anticipating changes
in trends as prices near the lines created by the
Fibonacci studies. After a significant price move
(either up or down), prices will often retrace a
significant portion (if not all) of the original move. As
prices retrace, support and resistance levels often
occur at or near the Fibonacci Retracement levels.
Fibonacci retracement levels can easily be displayed
by drawing a trend line between a perceived high
point to a perceived low point. By taking the
difference between the high and low, the user can
insert the percentage ratios to achieve the desired
pullbacks. These levels represent areas where the
pullback may subside; thus, signaling opportunities to
Typically, these levels can be used to signal the

prices at which traders should exit and enter
positions. For example, an uptrend began to develop
at the price of 1.1050 for EUR/USD. Fibonacci
retracement levels were applied and the 38.2%,
50%, and 61.8% appeared at 1.1410, 1.1607, and
1.1806. The market continued in an uptrend and
pulled back a little at the retracement levels. It is the
perfect timing to exit a position when the market
retraces at these levels. After the market retraces
slightly, it resumes to its uptrend. Once the trend
broke the 61.8% level, a trader would anticipate that
the price will now move towards the 50% and enter
another long position. Theoretically, a trader could
69
ForexConfidential
SECTION 4
TECHNICAL ANALYSIS
exit before retracement occurs and enter new positions once the currency pair resumes its uptrend.
Factors to consider when using the

Fibonacci Levels:
The longer the time frame, the more significant
the retracement level.
If there are two different levels that are close
together, such as a 50% of a monthly chart and
a 61.8% of a daily chart, this enhances the
importance of that level.
Rates must close well beyond these retracement
levels to signify that the levels have been broken.
If there is a confirmation of the support or
resistance in other studies, such as RSI or
MACD, this increases the probability that the
correction will end at these levels.
Elliott Wave Theory

Ralph Nelson Elliott, an engineer from the 1930s,
claimed that the Dow Jones Index along with other
related markets, move in rhythms or waves similar
to the ocean tides which moves from low tide to high
tide. According to Elliotts 5-wave theory, market
trends often develop in five identifiable waves.
Waves number 1, 3, and 5, move in the direction of
the current trend and waves number 2 and 4 move
counter-trend. In addition, Elliott asserted that
under normal circumstances, wave number 5
appears similar to wave number 1. He observed
that wave number 3 is usually the longest wave.
Finally, he stated that wave number 4 should not
touch the top of wave number I in an uptrend.
70
ForexConfidential
SECTION 4
TECHNICAL ANALYSIS
crucial to determine the role of a wave in relation to
the greater wave structure. Thus, the key to Elliot
Waves is to be able to identify the wave context in
question. Ellioticians also use Fibonacci
retracements to predict the tops and bottoms of
future waves.
The diagram of the Impulse Wave is the basic
building block of the Elliott wave structure.
Elliott classified price movements in patterned waves
that can indicate future targets and reversals. Waves
moving with the trend are called impulse waves,
whereas waves moving against the trend are called
corrective waves. The Elliott Wave Theory breaks
down impulse waves and corrective waves into five
primary and three secondary movements
respectively. The eight movements comprise a
complete wave cycle. Time frames of wave cycles
can range from 15 minutes to years and decades.
The challenging part of Elliott Wave Theory is
figuring out the relativity of the wave structure. A
corrective wave, for instance, could be composed of
sub-impulsive and corrective waves. It is therefore
The diagram below shows the corrective patterns

that consist of various wave sequences.
71
ForexConfidential
SECTION 4
TECHNICAL ANALYSIS
The diagram below shows a unique type of corrective
patterns.
Part VII. Tips for Using Technical

Analysis
As in all other aspects of trading, be disciplined when
utilizing technical analysis. Too often, a trader will fail
to sell or buy into a market even after it has reached
a price that his or her technical studies identified as
an entry or exit point. This is because it is hard to
screen out the fundamental realities that led to the
price movement in the first place.
For example, you are long USD/JPY and have
established your stop loss at 30 pips below your
entry point. However, an unanticipated factor causes
the USD to depreciate in value; subsequently, the
USD/JPY pair goes past your stop loss level. You
might be inclined to hold this position just a bit
longer, in the hopes that it turns back into a winning
trade. It is very hard to make the decision to cut your
losses and even harder to resist the temptation to
book profits too early on a winning trade. Leaving
your position open will only increase your risk of
losing more. A common mistake is to ride a loser too
long in the hopes it comes back and to cut a winner
way too early. If you use technical analysis to
establish entry and exit levels, be very disciplined in
following through on your original trading plan.
This is not to say that you should go to the other

extreme. Do not get too caught up in the
mathematics involved in putting together each study.
It is much more important to understand how and
why studies can and should be manipulated based
on the time periods and sensitivities that you
determine are ideal for the currency you are trading.
These ideal levels can only be determined after
applying several different parameters to each study
until the charts and studies begin to reveal the
details behind the details.
72
ForexConfidential
SECTION
MONEY MANAGEMENT Five
(PAGE 74-79)
I. What is Money Management
74
74
Principle 1:
Always Start with a Demo Account
Principle 2:
Trade with Sufficient Risk Capital
Principle 3:
Establish Maximum Exposure
75
76
(PAGE 80-81)
II. Trading Psychology
Principle 4:
Limit Your Losses - Use A Stop Loss
Principle 5:
Let the Profits Run
Principle 6:
Maintain Proper Risk vs. Reward Ratio
Principle 7:
Dont Fight the Trend
Principle 8:
Add to Winning Trades and Never Add to
Losing Positions
76
77
77
77
78
Losing Attitudes
Attitude #1: Fear
Attitude #2: Greed
Attitude #3: Revenge
Attitude #4: Carelessness
80
80
80
80
81
Winning Attitudes
Attitude #1: Confidence
Attitude #2: Determination
81
81
81
(PAGE 81)
Principle 9:
78
Understand the Market Discount Mechanism
Principle 10:
78
Diversify With Multiple Currency Pairs
Principle 11:
78
Never Chase Trades
Principle 12:
Know When to Leave a Trade
Principle 13:
Approach Trading as a Business
Business/Trading Plan
Research the Market
Record Activities with Trading Journals
80
III. Demo Account to

Real Trading Account
81
79
79
79
79
79
73
ForexConfidential
MONEY MANAGEMENT
& TRADING PSYCHOLOGY
Part I. What is Money Management?

When you first begin to trade, you will most likely start
with short-term day trading methods and eventually
work towards becoming a sound technical trader. Shortterm trading can be a lot like hitting singles and doubles
and stealing bases to win a baseball game. You can
win a lot of games with this method, but only if you have
good defense. In trading, good defense is good money
management.
Money management is the implementation of financial
policies that attempt to preserve trading capital while
protecting profits. Seasoned traders know that proper
money management must be the cornerstone of any
trading system. Without it, you are destined to lose
most, if not all, of your trading capital.
A superior money management plan is based on sound
economic and mathematical principles. There are 13
time-tested principles that may help you establish and
master good money management techniques.
SECTION 5
Principle 1:
Always Start with a Demo Account
It is always tempting to start implementing your trading
system once you have finished or even while you are
still reviewing this course. However, it requires time and
skills to take full advantage of all your tools supplied by
the company. As a novice trader, we highly recommend
practicing and honing your skills before using real cash.
We are all familiar with the saying, Practice makes
perfect. Allow yourself enough time to digest and
absorb the various trading strategies and concepts
before risking real money. You can maximize your profit
potential so much more if you spend some time to
exercise your trading principles in a demo account.
It is highly beneficial for all novice traders to begin
trading with a demo account. The only difference
between a demo account and a real trading account is
the fact that the figures in the demo account do not
represent real cash. In other words, you do not have to
deposit real cash to act as a trading capital. Besides the
74
ForexConfidential
MONEY MANAGEMENT
cash factor, there really is no difference between the

two accounts. In fact, real live data are used for the
trading account as well as for the demo account. For
instance, Trader A and Trader B are both trading online.
Trader A is trading with a demo account and Trader B
with a regular trading account. The executable prices
that Trader A would see on the trading platform with the
demo account are exactly identical to the prices of
Trader Bs trading platform with the real account. Both
accounts are developed a strong trading system that
works in a demo account, it is bound to succeed in a
real account.
Brokers provide all traders a free demo account to
practice. During this time, familiarize yourself with the
setup of the trading platform. Make sure you master the
skills to open and close a position, to enter various
types of orders (stop-loss and limit orders), and to
execute all basic functions in the trading platform. Using
a demo account may buy you time to practice. all the
other 12 principles of money management and learn
how to take advantage of the charts.
Principle 2:
Trade with Sufficient Risk Capital
When establishing a trading account, never use funds
that you cannot afford to lose. In other words, ensure
that the money you might lose will not affect your life.
This means that you should not borrow funds to trade.
Currency trading involves risk the possibility of loss.
Losses are part of the game for all traders, but even
more so for newer traders as they tend to experience
higher percentages of losing trades. If you use essential
or borrowed funds, you will find yourself changing your
entire trading system, especially after a small floating or
an actual loss. Traders with insufficient risk capital
cannot afford to lose; therefore, they frequently change
their risk-to-reward ratios of good trades and find
themselves making unnecessary stops.
To avoid the above scenarios from happening to you, it
is important to seriously consider how much capital you
will need. This component to determine the amount
of initial trade capital required for a trading system to
operate effectively is perhaps the most important and
SECTION 5
the most overlooked application of risk and money

management. Most often traders fail when they are
misled by the false belief that a winning trading strategy
will always produce a net profit. What these traders fail
to consider are the two parameters which most often
consume a traders capital: consecutive losing trades
and maximum drawdown.
Lets consider an example of two traders, A and B, both
using the same trade system. When determining the
percentage of the initial trading capital to risk on trades,
the two traders differ; Trader A only risks 1 percent on
every new position while Trader B risks 5 percent. Lets
assume that both traders begin trading simultaneously
and both generate 20 consecutive losses immediately.
Trader A would have only lost 20 percent of his/her
trading capital while Trader Bs initial trading capital
would have been wiped out. Even if the subsequent
trades are highly profitable, Trader B would be left with
an empty account but Trader A may pretty well regain
his/her full trading capital and perhaps generate a profit.
This table illustrates how many consecutive losing

trades (CL) it takes to completely empty an account,
based on the percentage of capital risked per trade (R),
which is assumed to be constant for all trades.
There is always a probability that any trading system
will generate as many consecutive losing trades or percent drawdown as required to completely exhaust any
amount of trading capital. The mathematical equations
that arrive at this conclusion are relatively complex. The
important thing is that however small the chance of
experiencing such drawdown is, this probability exists.
75
ForexConfidential
MONEY MANAGEMENT
FX traders can start a mini account with as low as $300;

however, to fully capitalize on trading, it is desirable to
apply the 6 % test. The 6 1/2 test is a useful tool to
decide how much to start trading. The test poses a
simple question: if you experience a 50% drawdown
after 6 months of trading, will you have enough left to
continue trading? If the answer is yes, you probably
have enough to begin trading; if the answer is no, you
should probably wait. For instance, a novice trader
wants to open a mini account with $500. The math is
simple. After experiencing a 50% drawdown, the trader
would be left with $250 in the account. Is $250 sufficient
to trade? Even if the trader is very modest and only
opens one lot at a time, he/she is already risking 40% of
the capital in one trade. For a novice trader, $250 is too
small of a trading capital and the trader would easily be
margined out. Therefore, we recommend that novice
traders should invest more than $300 dollars as their
initial trading capital in mini accounts.
Principle 3:
Establish Maximum Exposure
It is vital to establish a daily, weekly, and even monthly
maximum exposure amount that you are willing to
accept. It is highly recommended that traders working
with limited risk capital should never exceed more than
5-10% of their total risk capital as their daily maximum
exposure. For traders working with larger amounts of
risk capital, especially professional Forex fund
managers, the daily maximum exposure should never
exceed more than 2-5% of their total risk capital.
Principle 4:
Limit Your Losses Use A Stop
Loss
Limiting losses is essential to becoming a successful
FX trader. Way too often, traders say they will exit a
trade when it goes 200 pips against them, then when
they are down 200 pips, they say they will exit when it
goes down another 100 pips. Before you know it, they
are down 1000 pips, or even worse, get margined out.
Unfortunately, the scenario mentioned above is
extremely common amongst novice traders, especially
since FX spot trading is such highly margined. In order
to keep this from happening to you, you must develop
and implement strict disciplinary measures that ensure
SECTION 5
you exit losing positions before they turn into disasters.

Allowing losses to get out of hand is one of the biggest
reasons why traders fail.
An effective way of limiting losses is to enter a stop
loss. When you place your trade, you may choose to
enter a stop loss that protects you from losing too
much. Determine how many pips you are willing to risk
for that trade. Enter the amount into the system and you
are set. If the market price moves in the direction that is
unfavorable to you, the stop loss will kick in and exit the
position if the specified rate is reached. In the diagram
below, the current market price for the USD/JPY is
109.87. Because it is a shorting position, the stop loss
must be greater than the current exchange rate. For
day traders, an average of 30 pips is recommended for
stop loss orders because it accommodates short-term
price fluctuations but is effective when a strong trend
develops in the opposite direction. In this example, the
rate that is 30 pips above 109.87 is 110.17. If the
market price for USD/JPY were to reach 110.17, the
position would be stopped out.
The stop loss order is a highly effective tool for limiting

losses because it does not let your emotions get in the
way. Rather than allowing you to have the leeway to
make irrational decisions when the market rate is
moving in the unfavorable direction, it exits the position
76
ForexConfidential
MONEY MANAGEMENT
immediately, thereby, limiting the maximum loss that

you may experience for that trade. For more information
regarding stop loss orders, refer to section two:
Currency Trading Basics.
Principle 5:
Let the Profits Run
Many traders have no problems limiting their losses, but
have difficulty letting their profits run. They insist on
exiting trades at the first sign of profits. As time passes,
they see that their small profit could have been
substantially larger had they held on longer to their
position. Early exits can be problematic for traders and
is a leading cause of mediocre results.
SECTION 5
position at 1.6700 instead, he would have made a profit

of 800 pips or $8000, which is more than 5 times the
original amount gained. Therefore, when strong trends
are identified in charts and when the favorable price
movements are supported by strong economic data, let
your profits run.
Principle 6:
Maintain Proper Risk vs. Reward
Ratio
A good risk vs. reward ratio is an essential part of any
trade process. A major problem for novice traders is
simply the fact that they do not take this into account.
Risk is the maximum value you are willing to lose and
reward is the amount of profit that you will be content
with.
Does it make sense to risk $400 in order to gain $200?
Many beginners seem to think so, but lets do the math.
Even if your trade method is 60% successful, you will
still lose more than you gain. You have to be more
successful, at least 70%, to show a profit. Generally,
the minimum risk vs. reward ratio should be 1:2, 1:3,
1:4, or even 1:5, meaning that for every dollar you risk
in a trade, you expect to make 2, 3, 4, or even 5 dollars
in return. Poor traders will often take 3:1 or worse and
wonder why they are not making money. When you
have such a low risk/reward, you may have many
successful trades but your first string of losses will eat
up your capital.
Consider the example above. The GBP/USD has begun

an uptrend in early September, 2003. Lets say a
position trader bought one lot at 1.5900. At the first sign
of a slight downturn, he closed the position at 1.6050 to
pocket his profit. On the surface, the 150 pips or $1500
(150 pips x $10) profit seems to be marvelous;
however, if he had held on to his position for a couple
more weeks and exited at the rate of 1.6700, he would
have made a much larger profit. If he had closed his
Principle 7:
Dont Fight the Trend
You have probably heard the saying The trend is your
friend a thousand times, but do you actually follow it?
You would be amazed by how many new traders fail
because they insist on trading against the trend. When
you think about it, short-term trading really is a simple
game. If there are more buyers than sellers, you buy; if
there are more sellers than buyers, you sell. In essence, trending markets are depicting who is in control
and fighting the trend is almost always a losers game.
77
ForexConfidential
MONEY MANAGEMENT
Principle 8:
Add To Winning Trades and Never
Add to Losing Positions
Another important aspect of a good money
management plan is adding to open trades. Only add to
a winning position and to do so with no more than half
the number of lots currently being traded. Do not add
equal or more lots than you originally started with to
maximize your profit. Of course, if your original position
started out with the lowest number of lot size possible,
you may add the equal amount. However, do not be
tempted to add 5 lots to an original 2 lot position, even if
it is a winning one.
One of the biggest mistakes novice traders make is the
continual buying of a losing position. Why do traders do
this? It is usually due to a belief that the market is about
to reverse or has already reversed and is now moving
in the direction they originally anticipated. Many traders
will justify it by saying they are just averaging down and
getting a more favorable price, but in reality they are
dooming themselves to failure. As short-term traders,
capital preservation is most important and putting too
much at risk jeopardizes success. If you are right, the
market should prove you correct within a reasonable
short amount of time. If you are wrong, you should
absorb the loss and move on. So, we repeat: never add
to a losing trade.
Principle 9:
Understand the Market Discount
Mechanism
A key concept that novice traders have a hard time
grasping is the fact that markets are forward looking
and have a discount mechanism in place. Traders who
do not understand this concept often become
discouraged and quit because the market doesnt
make any sense. How many times have you seen market participants expecting some sort of good economic
number that comes in as expected and the market sells
off? Novice traders get burned trading these situations
because they do not understand that the market already
knew it was coming. Understanding that all markets are
forward looking is crucial to trading success and will
help you demystify markets and their movements.
SECTION 5
Principle 10:
Diversify With Multiple Currency
Pairs
Always limit your rise by diversification. You can diversify your trading by opening positions in different currency pains. Diversification accomplishes two investment goals: spreading of rise and increasing profit potential. If one currency trade in another currency pair
can recover the first loss and leave you with additional
profit.
However, not all currency pairs give us true diversification. Some pairs mirror each other so often that, in essence, you are merely working twice as hard on the
same basic trade strategy with no real diversification.
For example, the USD/CHF moves in a very similar
fashion to the EUR/USD. Therefore, make sure the
currency pairs you choose to diversify with have economies that are fundamentally different from each other.
Principle 11:
Never Chase Trades
It is 1:00 am and you see a nice trade setting up on
your charts. You mark it down in your notebook and
decide to trade it tomorrow If it sets up. When you
wake up the next morning, you see the trade did exactly
what you thought it would; the pair is now 150 pips past
your entry. What do you do? Poor traders cannot
stand the fact that they have missed the trade and will
enter the market regardless of the fact that it has gone
many points past their entry point. The result is typical.
They end up getting in just as momentum changes and
incur large losses. Markets are always moving especially in foreign exchange. Missing trades is a part of
trading; accepting it and having the discipline not to
chase will save you grief and money.
78
ForexConfidential
MONEY MANAGEMENT
Principle 12:
Know When to Leave a Trade
If the reason you entered a trade disappears, there is
no reason to stay in the trade. Many novice traders will
see their reason evaporate and stay in the position until
they are stopped out. Poor traders do not like to admit
they are wrong and continually trading their way out of
it. This repeated behavior is obviously detrimental to
their profit/loss and often results in catastrophes. On the
other hand, good traders condition themselves to get
out by implementing smart trading strategies. If their
reason reappears, they can always reenter the trade at
a more appropriate time without having to be exposed
while they wait.
Principle 13:
Approach Trading as a Business
Trading is a business and should be taken seriously.
Like any other business, always start with a business
plan, a thorough research of the market, and records of
business activities.
SECTION 5
Research the Market

To become a successful trader, you will require forking
out some time and effort to study the history, markets,
and new trading techniques. This will enable you to
increase your market comprehension and rapidly
advance your trading techniques and skills. Knowledge
is power; the more knowledge you have, the more
successful you will become.
Record Activities with Trading
Journals
Trading journals are tremendous assets to any
successful traders. A good trading journal should
include: thoughts at the moment of trade, trade logic,
and price and outcome information. When reviewed
periodically (monthly or quarterly), the journal will give
you insights into your trading habits and will allow you
to quickly pinpoint problematic areas and address them
before they become detrimental.
Business/Trading Plan
Trading is not a hobby or a quick scheme to get rich. It
is a serious business for people who are willing to
devote the time, effort, and capital necessary for
success
Successful trading requires constant planning. Good
traders are always mindful how their positions are
holding. Generally, we recommend traders to begin
their trading career with a trading plan that outlines:
what you plan to trade, how you plan to trade, what
style to trade, what strategies to trade, how to handle
winningllosing trades, and goals for the day, the week,
and the month. Writing down these key questions and
answers will benefit you in many ways as it will help
solidify these concepts and should make you a more
disciplined trader.
79
ForexConfidential
MONEY MANAGEMENT
SECTION 5
their trading system which, in turn, will lead to greater

success.
Part II. Trading Psychology
Attitude #2: Greed

The FX market offers the potential for making huge
profits in a relatively short period of time without the
appearance of performing much work. Vast fortunes
seem to be only moments away! This is where greed
enters the picture. Traders begin to envision unrealistic
returns from their trading. Greed can emerge when you
are in a winning trade. You simply want more and so
you convince yourself that the market will keep on going
in your favor, It can also surface when you are in a
losing trade and convince you that the market will turn
around anytime to give you your profits.
Trading is definitely one of the most challenging tasks a
person can undertake as it requires constant mental
toughness in the face of a constantly changing
emotional environment. To be successful, a trader has
to achieve a mental state of total control. Traders can
do this by focusing on winning and losing attitudes.
Losing Attitudes
Attitude #1: Fear
Traders must first identify and confront their fear. The
most common anxiety is the fear of failure, which
distorts our perception. It narrows the amount of
information we can process and drastically limits the
choices that we perceive are available. It is the main
reason why the majority of traders cut their profits short
and let their losses run.
How can this paralyzing emotion be controlled? First,
focus on applying your trade system, mentally practicing the mechanics of the trade. Second, always remember that trading is not about proving anything to anybody. Third, give yourself permission from the very
beginning to make some mistakes as you develop your
trading skills. Fourth, truly accept the reality that all
good trading systems have losses and temporary drawdown periods. Finally, you must learn to completely
trust your ability to respond to whatever information the
market offers you. Traders who take these proactive
steps toward controlling their fears will be more apt to
stick to
To exterminate greed, first and foremost, you must

always be on the lookout. First, never think that you are
immune; consider putting notes near your trade station
to remind you. Second, periodically review your trading
performance and see how often you altered or
abandoned your trading system as each variant
signifies greed. Third, be careful that you never think in
terms of what you can buy with a certain number of pips
or amount of profit which will lead you away from your
original trading system.
Attitude #3: Revenge
At times, a trader can lose more than he/she intended
to risk. You may be willing to take responsibility for what
you originally intended to risk on a trade. However, you
may not want to take responsibility for losing more.
When the market took more than you agreed because
you have deviated from you original trading system, you
may be compelled to get it back.
The best way to overcome this negative attitude is to
remember that the market does not have feelings nor
can it pre-determine its actions. Take responsibility for
all of your trading decisions, even those decisions that
seem to be irrational afterwards. In addition, refuse to
succumb to feelings of anger towards yourself or the
market when things do not go your way.
80
ForexConfidential
MONEY MANAGEMENT
Attitude #4: Carelessness

Traders are most vulnerable to carelessness after
experiencing a large profit or a large loss. After a large
profit, especially when this profit is a series of winning
trades, you may feel invincible. When you feel that you
have figured out how the market usually works and
where it will most likely move next, you will become
careless about your trading system. Being overconfident leads you to pay less attention to details and
eventually become careless. A large loss can be just as
problematic. The negative emotions generated by a
series of losing trades can easily lead to carelessness
and a loss of motivation. This often leads to further
losses instead of regaining your loss capital and
additional profit. Therefore, be extra careful during
times of large profits and large losses. During these
periods, try to take a break from trading and reenter the
market with your original trading system.
SECTION 5
Attitude #2: Determination

Traders must possess the intensity to do whatever it
takes to win at trading. This will include continual
studying, practicing, and applying proven concepts. It
also means sticking to your trading system and not
allowing a momentary impulse, based on fear or greed,
to control or alter your decisions.
All trading, especially day trading requires the ability to
continue trading even when results have not been
good. Due to the dynamic nature of markets and trading
systems, bad times are frequently followed by good
times. Conversely, good times are frequently followed
by bad. Some of a traders greatest winners will follow a
string of losers. This is why it is extremely important for
traders to be determined to apply their methods and
stick to their system. Ultimately, with persistent
determination, one can overcome all obstacles.
Winning Attitudes:
Attitude #1: Confidence
The first attitude required for successful trading is
confidence. We are not referring to being arrogant or
cocky like many traders can be. The confidence we are
referring to is the mental state of anticipating good
results based on a proven system, hard work, and
discipline.
New traders can begin to develop this healthy confidence by taking enough time to correctly practice
trade their system, thereby proving to themselves that
their system really works. The easiest method to build
your confidence is to use the free demo account provided by a broker. During this time, you can practice
placing orders and following the rules of your system
while the market is open so you can watch the prices
change. Additionally, records of your winning and losing
trades will also be provided. When you achieve consistent profit in this manner for at least three to four weeks,
you would have built the confidence to begin live trading
with real money.
Part III. Demo Account to Real

Trading Account
After you have practiced and mastered the 13 principles
of money management in a demo account, you have
reached the halfway point in becoming an FX Trader.
Throughout your time trading with the demo account,
you might have identified times at which you have
experienced the losing and winning attitudes mentioned
above. Again, be mindful of these concepts in order to
maximize your trading skills. Once you feel very
confident while trading with the demo account, you may
open up a real trading account and begin making real
profits. Remember, the real account is identical to the
demo account, except it is trading with real money.
There is nothing to be anxious about as long as you
exercise your established trading system in a
disciplined manner.
The next section will help you set up your trade station,
be it your demo or real trading account.
81
ForexConfidential
GLOSSARY
82
ForexConfidential
GLOSSARY
TOOLS & RESOURCES

Account: A record of transactions of goods and
services owed to one person by another.
American options. Sometimes also refer to as Average

Rate Option.
Adjustable Peg: An exchange rate system where a

countrys exchange rate is pegged (i.e. fixed) in
relation to another currency. The official rate may be
changed from time to time.
Ask Rate: The lowest price that shares will be offered

for sale, such as the bid/ask spread in the foreign
exchange market.
ADX (Average Directional Index): Unlike most

oscillators, ADX does not attempt to gauge the direction of
the trend; instead, it works to gauge the strength of the trend.
ADX operates on a scale of 0 to 100; the
higher the oscillator, the stronger the trend.
Agent: An intermediary or person hired to carry out
transactions on behalf of another person.
Aggregate Demand: Total demand in an economy,
consisting of government spending, private/consumer
and business investment.
Aggregate Risk: Total amount of exposure a bank has
with a customer for both spot and forward contracts.
All or None: Refers to requests for a broker to fill an
order completely at a predetermined price or not at all.
Refers to both buy and sell orders.
American Option: An option that can be exercised
anytime during its life. The majority of exchange-traded
options are American.
Anonymous trading: Visible bids and offers on the
market without the identity of the bidder and seller being
revealed. Anonymous trades allow the high profile
investors to execute transactions without the scrutiny
and speculation of the market.
Appreciation: A currency is said to appreciate when it
strengthens in price in response to market demand.
Arbitrage: When a price differential arises, creating an
opportunity to profit through buying and selling.
Arbitrage is a riskless opportunity to profit, as there is
no uncertainty involved. In regards to the foreign
exchange market, arbitrage arises when a profit can be
made through differentials in exchange rates. Arbitrage
opportunities in the foreign exchange market are rare.
Ask Size: The number of shares a seller is willing to sell

at his/her ask rate.
Asset Allocation: The diversification of ones assets
into different sectors, such as real estate, stocks,
bonds, and forex, to optimize growth potential and
minimize risk.
Asset Swap: An interest rate swap used to alter the
cash flow characteristics of an institutions assets in
order to provide a better match with its liabilities.
At Best: An instruction given to a dealer to buy or sell
at the best rate that is currently available in the market.
At Par Forward Spread: When the forward price is
equivalent to the spot price.
At the Price Stop-Loss Order: A stop-loss order that
must be executed at the requested level regardless of
market conditions.
Attorney in Fact: A person given the right or authority
to act on behalf of another to carryout business
transactions and implement documents.
Authorized Dealer: A financial institution or bank
authorized to deal in foreign exchange.
Automatic Exercise: A procedure implemented to
protect an option holder where the Option Clearing
Corporation will automatically exercise an in the
money option for the holder.
Away From the Market: When the bid on an order is
lower (or the ask price is higher) than the current market
price for the security.
Back Testing: The process of designing a trading
strategy based on historical data. It is then applied to
fresh data to see if and how well the strategy works.
Most technical analysis is tested with this approach.
Ascending Triangles: A bullish continuation pattern

that is shaped like a right triangle consisting of two or
more equal highs forming a horizontal line at the top.
Balance/Account Balance: The net value of an

account.
Asian Option: An option whose payoff depends on the

average price of the underlying asset over a certain
period of time. These types of option contracts are
attractive because they tend to cost less than regular
Balance of Payments: A record of all transactions

made by one particular country with others during a
certain time period, It compares the amount of
economic transactions between a country and all other
83
ForexConfidential
GLOSSARY
TOOLS & RESOURCES

countries. This includes trade balance, foreign
investments, and investments by foreigners.
changes so infrequently that dealers often omit them in

quotes.
Balance of Trade: Net flow of goods (exports minus its

imports) between two countries.
Bilateral Grid: An exchange rate system which links all

of the central rates of the EMS currencies in terms of
the ECU.
Back Office: Refers to the administrative arm of

financial service companies, who carry out and confirm
financial transactions. Duties include: accounting,
settlements, clearances, regulatory compliance and
record maintenance.
Balance of Payments: Record of all transactions, such
as trade balances and capital flows, carried out by a
country with the rest of the world within a certain period.
Bank Notes: Paper issued by the central bank,
redeemable as money and considered to be full legal
tender.
Bar Chart: On a daily bar chart, each bar represents
one days activity. The vertical bar is drawn from the
days highest price to the days lowest price. Closing
price and opening price are represented by ticks on the
bar.
Base Currency: In general terms, the base currency is
the currency in which an investor or issuer maintains its
book of accounts. In the FX markets, the US Dollar is
normally considered the base currency for quotes,
meaning that quotes are expressed as a unit of $1 USD
per the other currency quoted in the pair. The primary
exceptions to this rule are the British Pound, the Euro
and the Australian Dollar.
Basis Point: Measure of a bonds yield equal to
1/100th. A 1% change in yield is equal to 100 basis
points and 0.01% is equal to one basis point.
Bear Market: Any market that exhibits a declining
trend. In the long run they have a down turn of 20% or
more.
Bear Trap: A bear trap occurs when prices break below
a significant level and generate a sell signal, but then
reverses direction and hence invalidate the sell signal.
Bear traps serve as opportunities for reversal traders,
whereas trend/momentum traders will suffer losses due
to the change in direction.
Bollinger Bands: An indicator that allows users to

compare volatility and relative price levels over a period
time. This indicator consists of three bands designed to
encompass the majority of a securitys price action: a
simple moving average in the middle; an upper band 2
standard deviations away from the simple moving
average (usually set to a time frame of 20); and a
corresponding lower band that is also 2 standard
deviations away from the moving average. Since the
band width is a function of standard deviation, assets
with greater volatility will have wider bands.
Bonds: Bonds are debt instruments used to raise
capital, which are issued for periods greater than one
year. Bondholders are loaning money (investing in debt)
to companies and governments, at the end of which
they will be paid a specified interest rate. Bond prices
are inversely related to interest rates, as interest rates
rise, bond prices fall. There are numerous types of
bonds, including treasury bonds, notes, and bills;
municipal bonds and corporate bonds.
Breakaway Gap: A price gap which occurs in the
beginning of a new trend, many times at the end of a
long consolidation period. It may also appear after the
completion of major chart formations.
Break-Even Point: The price of a financial instrument
at which the option buyer recovers the premium.
Bretton Woods Accord (1944): This accord
established a fixed exchange rate regime, whose aim
was to provide stability in the world economy after the
Great Depression and WWII. This accord fixed the
exchange rates of major currencies to the US dollar and
set the price of gold to $35. The accord required central
bank intervention to maintain the fixed exchange rates.
The US Central Bank was required to exchange dollars
for gold, which eventually led to the demise of this
system, when the demand for the dollar declined, as
well as the gold reserves, forcing Nixon to stop the
exchange of dollars for gold, effectively ending the
system in 1971.
Bid: The price an investor is willing to pay for an asset.

Bid/Ask Spread: The difference between the bid and
the ask price.
Big Figure: Refers to the first number to the left of the
decimal point in an exchange rate quote, which
Broken Dates: Deals that are undertaken for value

dates that are not standard periods, e.g. 1 month. The
standard periods are 1 week, 2 weeks, 1,2,3,6, and 12
months. Terms also used are odd dates, or cock dates,
or broken period.
84
ForexConfidential
GLOSSARY
TOOLS & RESOURCES

Broker: Individual or firm acting as an intermediary to
bring together buyers and sellers typically for a
commission or fee.
Bull Market: A market where prices are rising or are
expected to rise.
Bull Trap: The opposite of a bear trap; occurs when
indicators suggest an uptrend, but the market reverses
its momentum and begins to fall again.
The rest of the range is marked by two shadows the

upper shadow and the lower shadow. The candlestick
encapsulates the open, high, low and close of the
trading period in a single candle. *lf the close is above
the open, the actual candle is either hollow or blue in
color. *lf the close is below the open, the actual candle
is filled in or red in color.
Capital Markets: Markets in which capital (stocks,
bonds, etc.) are traded. Usually for medium or long term
investing.
Bundesbank: Germanys Central Bank.

Buy a Bounce: A recommendation to instigate a long
trade if the price bounces from a certain level.
Buy Break: A recommendation to buy the currency pair
if it breaks the current level specified.
Buying Rate: Rate at which a bank is prepared to buy
foreign exchange. Also known as the Bid Rate.
Buying/Selling FX: Buying and selling in the foreign
exchange market always happens in the currency which
is quoted first. Buy dollar/mark means buy the
dollar/sell the mark. Traders buy when they expect a
currencys value to rise and sell when they expect a
currency to fall.
Buy Stops Above: A recommendation to enter the
market when the exchange rate breaks through a
specific level. The client placing a stop entry order
believes that when the markets momentum breaks
through a specified level, the rate will continue in that
direction.
Cable: Term used to describe the exchange rate
between the US dollar and the British Pound.
Call: (1) An option that gives the holder the right to buy
the underlying instrument at a specified price during a
fixed period. (2) A period of trading. (3) The right of a
bond issuer to pre-pay debt and demand the surrender
of its bonds.
Calendar Spread: An option position comprised of
purchase and sale of two option contracts of the same
type with different expiration dates at the same exercise
price.
Candlestick Charts: Identical to a bar chart in the
information conveyed, but presented in an entirely
different visual context. A type of chart which consists of
four major prices: high, low, open, close. The body of
the candlestick bar is formed by the opening and
closing prices. To indicate that the opening was lower
than the closing, the body of the bar is left blank. If the
currency closes below its opening, the body is filled.
Carry: The interest cost of financing securities or other

financial instruments held.
Carry Trade: An investment position of buying a higher
yielding currency with the capital of a lower yielding
currency to gain an interest rate differential.
Cash Settlement: A procedure for settling futures
contracts where the cash difference between the future
and the market price is paid instead of physical delivery.
Central Bank: A banking organization, usually
independent of government, responsible for
implementing a countrys monetary policy and for
printing money.
Central Rate: Exchange rates against the ECU
adopted for each currency within the EMS. Currencies
have limited movement from the central rate according
to the relevant band. Channel: An upwards or downwards trend whose
boundaries are marked by two straight lines. A break
above/below the channel lines signals a potential
change in the trend.
Clearing: Refers to the settlements/confirmations of
trades.
Close a Position (Position Squaring): Refers to
getting rid of a position, either by buying back a short
position or selling a long position.
Closing Purchase Transaction: The purchase of an
option identical to one already sold to liquidate a
position.
Commission: A fee charged by broker or agent for
carrying out transactions/orders.
Confirmation: A written document verifying the
completion of a trade/transaction to include such things
as date, fees or commissions, settlement terms and the
price.
85
ForexConfidential
GLOSSARY
TOOLS & RESOURCES

Confirmation on a Chart: A subsequent indicator or
chart pattern, following an initial alert to a trade
opportunity, which serves to legitimize the initial alert.
Confirmation of a trade is believed to reduce the risk
associated with that trade.
Contagion: Term used to describe the spread of
economic crises from one countrys market to other
countries within close geographic proximity. This term
was first used following the Asian Financial Crisis in
1997, which began in Thailand and soon spread to
other East Asian economies. It now is used to refer to
the recent crisis in Argentina and its effects on other
Latin American countries.
exchanging it for currency B, investing currency B for

the duration of the loan, and, after taking off the forward
cover on maturity, showing a profit on the entire set of
deals.
Cover on a Bounce: A recommendation to exit trades
on a bounce out of a support level.
Cover on Approach: A recommendation to exit trades
for profit on approach to a support level.
Continuation: Represents an extension of the trend.

The trend continues to have momentum, and hence it
moves onwards without reversal.
Credit Checking: Before making a large financial

transaction, it is imperative to check whether the
counterparty has enough available credit to carry
out/honor the transaction. Credit checking refers to the
process of verifying that the counterparty has enough
credit. The check is initiated after the price has been
determined.
Contract (unit or lot): The standard trading unit on

certain exchanges. A standard lot in the forex market is
$100,000.
Credit Netting: Agreements that are made having to continually re-check credit, established between large banks and
institutions.
Convertible Currency: Currencies that can be

exchanged for other currencies or gold.
Cross Rate: Refers to the exchange rate between two

countries currencies. Cross rates usually refer to pairs
quoted that do not include the domestic currency. For
example, in the U.S., the EUR/JPY rate would be called
a cross rate.
Correction: The term used for the rationale that a

directional movement would have a partial reversal due
to the fact that momentum tends to overshoot itself;
hence there will be a correction of the trend to bring
the asset back to a fairer market valuation.
Correlation: A statistical measure referring to the
relationship between two or more variables (events,
occurrences etc.). A correlation between two variables
suggests some causal relationship between these
variables. Typically, the Swiss Franc is closely
correlated with the German Mark.
Cost of Carry: When an investor borrows money to
sustain a position. There is a cost for borrowing derived
from the interest parity condition, which is used to
determine the forward price.
Counterparty: A participant, either a person or an
institution, involved in one side of a financial
transaction. With such transaction there is an
associated risk (counterparty risk) involved that the
counterparty will not be able to meet the terms outlined
in the contract. This risk is usually default risk.
Country Risk: The risk that a government might default
on its financial commitments/contracts, which typically
causes harm to other areas of the financial sector, as
well as those in other countries.
Cup with Handle: Named after the resemblance the

formation on the chart bears to a cup and handle; this
pattern offers explanation into where a bullish trend can
begin. Once the pattern begins to curve upward and
reaches the cup line, the asset is believed to be bullish
and set for a rise.
Currency: Notes and coins issued by the central bank
or government, serving as legal tender for trade.
Currency (Exchange Rate) Risk: Risk associated with
drastic changes/fluctuations in exchange rates in which
one could incur a major loss.
Daily Charts: Charts that encapsulate the daily price
movement for the currency pair traded. Since the
currency market operates 24 hours a day, the daily
chart typically runs from 5 PM New York time to the
same time on the following day.
Day Trading: Refers to the process of entering and
closing out trades within the same day or trading
session.
Dealer: One who places the order to buy or sell. A
dealer differs from an agent in that it takes ownership of
the asset, and thereby is exposed to some risk.
Covered Interest Rate Arbitrage: An arbitrage

approach which consists of borrowing currency A,
86
ForexConfidential
GLOSSARY
TOOLS & RESOURCES

Dealing Systems: On-line computers which link the
contributing banks around the world on a one-on-one
basis
Declaration Date: The latest day or time by which the
buyer of an option must indicate to the seller his
intention to the option.
Delivery Date: The date of maturity of the contract,
when the exchange of the currencies is made. This date
is more commonly known as the value date in the FX or
Money markets.
Deficit: An excess of liabilities over assets, of losses
over profits, or of expenditure over income.
Deposit: Refers to the process of borrowing and
lending money. The deposit rate is the rate at which
money can be borrowed or lent.
Depreciation: The decline in the value of an asset or
currency.
Derivative: A security derived from another and whose
value is dependent on the underlying security from
which it is derived. Examples of derivatives are futures
contracts, forward contracts and options. Underlying
securities can include stocks, bonds or currencies.
Derivatives can be traded and are usually used to
hedge portfolio risk.
Descending Triangles: A bearish continuation pattern
indicating distribution consisting of two or more
comparable lows forming a horizontal line at the bottom.
Descending triangles are bearish patterns that indicate
distribution. The definitive bearish signal of a
descending triangle is when support on the lower rung
of the triangle is broken.
Devaluation: When the value of a currency is lowered
against the other, i.e. it takes more units of the domestic
currency to purchase a foreign currency. This differs
from depreciation in that depreciation occurs through
changes in demand in the foreign exchange market,
whereas devaluation typically arises from government
policy. A currency is usually devalued to improve the
balance of trade, as exports become cheaper for the
rest of the world and imports more expensive to
domestic consumers.
through changes in the interest rate to attract/detract

capital flows or through the buying and selling of the
currency. This system is contrasted with a Pure Float in
which there is no central bank intervention and the
exchange rate is entirely determined by the market and
speculation.
Double Top and Bottom: A double top and bottom
implies an upper limit - the top - and a lower limit - the
bottom - which the currency pair has touched twice but
has failed to penetrate. Accordingly, the asset can be
expected to trade within this range, or, if there is a
breakout, the movement is expected to be substantial.
Dow Theory: One of the first ideas that formed the
beginnings of technical analysis, the Dow Theory holds
that all major trends can be sub-divided into three
phases: entrance, whereby savvy market participants
enter the market; acceleration, whereby a slew of
additional participants see the trend and enter the
market, thereby accelerating the trend; and
consolidation, a period characterized by the initial
participants exiting their trade.
Durable Goods Order: An economic indicator which
measures the changes in sales of products with a life
span in excess of three years.
Economic Indicator: An economic statistic used to
indicate the overall health of an economy, such as
GDP, unemployment rates, and trade balances. These
are used in fundamental analysis of foreign exchange
markets to speculate against the direction of an
exchange rate.
Economic Exposure: When the cash flow of a country
is vulnerable to changes in the exchange rate.
Economic and Monetary Union (EMU): The
irrevocable fixing of exchange rates between member
currencies and their replacement by a single European
currency, the euro. The euro is to be issued by a future
European central bank, to be independent of political
control and federal in nature. All countries which fulfill
the five convergence criteria in 1998 will proceed to
EMU in 2000. The UK and Denmark have secured optouts from EMU. Swedens joining is subject to
ratification by parliament.
Direct Quotation: Quoting in fixed units of foreign

currency against variable amounts of the domestic
currency.
Efficient Markets: Markets where assets are traded in

which the price is indicative of all current and relevant
information and thus it is impossible to have
undervalued assets.
Dirty Float (Managed Float): An exchange rate system

in which the currency is not pegged, but is managed
by the central bank to prevent extreme fluctuations in
the exchange rate. The exchange rate is managed
Elliot Wave Theory: A theory based on the notion that

the market moves in waves, which consist of trends
followed by partial corrections. The Elliot Wave Theory
stated that there are 5 waves within an overall trend.
87
ForexConfidential
GLOSSARY
TOOLS & RESOURCES

Envelopes: While Bollinger Bands place boundary lines
based on standard deviation, envelopes place lines at
fixed percentage points above and below a moving
average line. The upper and lower limits specify entry
and exit points for traders.
End of the Day (Mark to Market): Accounting
measure, referring to the way traders record their
positions. There are two ways that a trader can record
his positions: the accrual system in which only cash
flows are recorded and the mark to market method, in
which the value of an asset is recorded at the end of
each trading day at the closing rate or value.
Equilibrium: A price region that suggests a balance
between demand and supply for a currency pair in the
marketplace.
Euro:The new monetary unit of the European
Monetary Union used by twelve countries in the
European Union. It is now the legal tender of those
countries as of January 2002. Those countries include
Germany, France, Belgium, The Netherlands,
Luxembourg, Spain, Portugal, Italy, Austria, Ireland,
Finland and Greece.
European Monetary Union: An institution of the EU,
whose primary goal is to establish a single currency (the
euro) for the entire EU.
European Monetary System: A system designed to
stabilize if not eliminate exchange risk between member
states of the EMS as part of the economic convergence
policy of the EU. It permits currencies to move in a
measured fashion (divergence indicator) within agreed
bands (the parity grid) with respect to the ECU and
consequently with each other. Italy and the UK are
currently not part of the system. Only Germany and the
Benelux are within the current narrow band.
Exercise Notice: A formal notification that the holder of
an option wishes to exercise it by buying or selling the
underlying stock at the exercise price.
Exercise Price (Strike Price): The price at which an
option may be exercised.
Expiry Date: The last day on which the holder of an
option can exercise his right to buy or sell the
underlying security.
Exposure: The total amount of money loaned to a
borrower or country. Banks set rules to prevent
overexposure to any single borrower. In trading
operations, it is the potential for running a profit or loss
from fluctuations in market prices.
Exponentially Weighted Moving Average (EMA):

While the simple moving average distributes weight
equally across the data series, exponentially weighted
moving averages place greater weight to more recent
data. As a result, they are more recent asset
movement, as opposed to assuming an unbiased view.
Factory Orders: An economic indicator which refers to
the total orders of durable and non-durable goods. The
non-durable goods orders consist of food, clothing, light
industrial products and products designed for the
maintenance of the durable goods.
Federal Deposit Insurance Corporation: A regulatory
agency of the U.S. created to oversee that bank
deposits are insured against bank failures. It was
created in 1933 to restore confidence in the banking
system. It insures up to US $100,000 per banking
institution.
Federal Reserve/Fed: The central bank of the United
States, responsible for monetary policy.
Fibonacci Numbers: Derived from a sequence of
numbers in which each successive number is the sum
of the two previous numbers, Fibonacci numbers are
used frequently in hypothesizing which rates assets will
gravitate towards. Namely, there are four popular
Fibonacci studies: arcs, fans, retracements, and time
zones. The use of Fibonacci numbers is widespread in
the currency market. The red lines may be used as
short-term support and resistance levels, while the blue
lines represent long- term levels.
Fill or Kill: An order which must be entered for trading,
normally in a pit three times, if not filled is immediately
cancelled.
Fixed Exchange Rate: When the exchange rate of a
currency is not allowed to fluctuate against another, i.e.
the exchange rate remains constant. Typically, under
fixed exchange rate regimes, currencies are allowed to
fluctuate within a small margin. Fixed exchange rate
regimes require central bank intervention to maintain
the fixed rate.
Fixed Interest Rate: An interest rate used for loans,
mortgages and bonds that remains at the same rate
throughout the period.
Flag and Pennant: Shaped like a flagpole with a
pennant, this formation is characterized by an upward
movement with a large slope followed by a period of
consolidation. It is considered a bullish pattern overall,
as the pattern is expected to continue rising.
Flat/Square: To either have no positions or positions
that cancel each other out.
88
ForexConfidential
GLOSSARY
TOOLS & RESOURCES

Floating Rate Interest: An interest rate that is allowed
to adjust with the market; the opposite of a fixed interest
rate.
Foreign Currency Effect: Refers to how changes in the
exchange rate affect the return on foreign investment.
Forward Contract: A deal in which the price for the
future delivery of a commodity is set in advance of the
delivery. The forward rate is obtained by adding the
margin to the spot rate. It is used to hedge against
adverse fluctuations in the exchange rate that can affect
the amount of profit or loss at that future date.
Forward Rate: Forward rates are quoted in terms of
forward points, which represent the difference between
the forward and spot rates. In order to obtain the
forward rate from the actual exchange rate the forward
points are either added or subtracted from the
exchange rate. The decision to subtract or add points is
determined by the differential between the deposit rates
for both currencies concerned in the transaction. The
base currency with the higher interest rate is said to be
at a discount to the lower interest rate quoted currency
in the forward market. Therefore the forward points are
subtracted from the spot rate. Similarly, the lower
interest rate base currency is said to be at a premium,
and the forward points are added to the spot rate to
obtain the forward rate.
Forward Spread (forward points or forward pips):
Forward price used to adjust a spot price to calculate a
forward price. It is based on the current spot exchange
rate, interest rate differential, and the number of days to
delivery.
Front Office: Refers to the sales personnel (trading and
other business personnel) in a financial company.
Fundamental Analysis: The analysis of economic
indicators and political and current events that could
affect the future direction of financial markets. In the
foreign exchange market, fundamental analysis is
based primarily on macroeconomic events.
G7: The seven leading industrial countries: The United
States, Germany, Japan, France, United Kingdom,
Canada, and Italy.
Gap: The price gap between consecutive trading
ranges (i.e. the low of the current range is higher than
the high of the previous range).
Gold Standard: The original system for supporting the
value of currency issued. The way that the price of gold
is fixed against the currency means that the increased supply
of gold does not lower the price of gold, but causes prices to
increase.
Golden Cross: An intersection of two consecutive

moving averages which move in the same direction and
suggest that the currency will move in the same
direction.
Good Until Cancelled: An instruction to a broker that
unlike normal practice, the order does not expire at the
end of the trading day, although normally terminates at
the end of the trading month.
Gross Settlement: A process where full payment of
each transaction is made, rather than clearing a group
of transactions as currently occurs in the FX market. A
method designed to eliminate capital risk.
Gross Domestic Product: Total value of a countrys
output, income or expenditure produced within the
countrys physical borders.
Gross National Product: Gross domestic product plus
factor income from abroad - income earned from
investment or work abroad.
GTC (Good-till-Cancelled): Refers to an order given by
an investor to a dealer to buy or sell a security at a fixed
price that is considered good until the investor cancels
it.
Hard Currency: A currency whose value is expected to
remain stable or increase in terms of other currencies.
Head and Shoulders Pattern: A pattern resembling
two peaks (the shoulders) with a higher peak between
the two shoulders (the head). The neckline, or the
bottom boundary that both shoulders reach, is regarded
as a key point traders can use to enter/exit positions.
Hedge/Hedging: Strategy to reduce the risk of adverse
price movements on ones portfolio and to protect
against the volatility of the market. Hedging typically
involves selling or buying at the forward price or taking
a position in a related security. Hedging becomes more
prevalent with increased uncertainty about current
market conditions.
High/Low: Refers to the daily traded high and low price.
Historical Volatility: A measure of the change in price
over a specified time frame. Higher volatility suggests
that the asset is more likely to trade within a wider
range, while reduced volatility suggests the asset will
trade in a tighter range.
IMF: International Monetary Fund, established in I 946
to provide international liquidity on a short and medium
89
ForexConfidential
GLOSSARY
TOOLS & RESOURCES

term and encourage liberalization of exchange rates.
The IMF supports countries with balance of payments
problems with the provision of loans.
IMM: International Monetary Market, part of the Chicago
Mercantile Exchange, that lists a number of currency
and financial futures.
Implied Volatility: A measurement of the markets
expected price range of the underlying currency futures
based on the traded option premiums.
Implied Rates: The interest rate determined by
calculating the difference between spot and forward
rates.
In-the-Money: A call option is in-the-money if the price
of the underlying instrument is higher than the
exercise/strike price. A put option is in-the-money if the
price of the underlying instrument is below the
exercise/strike price.
Inconvertible Currency: Currency which cannot be
exchanged for other currencies because this is
forbidden by the foreign exchange regulations.
Index Linking: The process of linking wages, social
benefits payments, prices, interest rates or loan values
to an economic index, usually of prices.
Indicative Quote: A market-makers price which is not
firm.
Industrial Production Index: A coincident indicator
measuring physical output of manufacturing, mining and
utilities.
Inflation: Refers to the increase in prices (price level)
and wages over time that decrease purchasing power. It
is calculated from changes in the price index, usually a
consumer price index, or a GDP deflator.
Initial Margin: The percentage of the price of a security
that is required for the initial deposit to enter into a
position. The Federal Reserve Board requires a
minimum of 50% initial margin. For futures contracts,
the market determines the initial margin.
Interbank Rate: The rate at which the major banks
(Deutsche, Citibank, Bank of Tokyo) trade in foreign
exchange.
Interest Parity: Theory that says that the difference in
interest rates across countries should be equal to the
difference between the forward and spot rate.
Inter-dealer Broker: A specialist broker who acts as an
intermediary between market-makers who wish to buy
or sell securities to improve their book positions, without

revealing their identities to other market-makers.
Interest Arbitrage: Switching into another currency by
buying spot and selling forward, and investing proceeds
in order to obtain a higher interest yield. Interest
arbitrage can be inward, i.e. from foreign currency into
the local one or outward, i.e. from the local currency to
the foreign one. Sometimes better results can be
obtained by not selling the forward interest amount. In
that case some treat it as no longer being a complete
arbitrage, as if the exchange rate moved against the
arbitrageur, the profit on the transaction may create a
loss.
Interest Parity: One currency is in interest parity with
another when the difference in the interest rates is
equalized by the forward exchange margins. For
instance, if the operative interest rate in Japan is 3%
and in the UK 6%, a forward premium of 3% for the
Japanese Yen against sterling would bring about
interest parity.
Interest Rate Options: An agreement permitting a
party to obtain a particular interest rate, issued both
OTC and by exchanges.
Interest Rate Cap: An agreement that provides the
buyer of a cap with a maximum interest rate for future
borrowing requirements.
Interest Rate Collar: A combination of a cap and a
floor to provide maximum and minimum interest rates
for borrowing or lending.
Interest-Rate Swaps: The process of changing the
form of debts held by banks or companies, in which
they trade debts/loans fixed rates for floating rates (or
vice versa) in another country.
Intervention: Action by a central bank to enter the
market and affect the value of its currency. Concerted
intervention refers to action by a number of central
banks to control exchange rates.
lntra-Day limit: Limit set by bank management on the
size of each dealers Intra Day Position.
Intra-Day Position: Open positions run by a dealer
within the day, usually squared by the close.
Inverted Market: Where short term instruments are
trading at premiums to long term instruments.
J Curve: A term describing the expected effect of
devaluation on a countrys trade balance. It is
anticipated that import bills rise before export orders
and receipts increase.
90
ForexConfidential
GLOSSARY
TOOLS & RESOURCES

Jawbone: Announcements and statements by
politicians or monetary authorities to influence decisions
by business, consumer, or trade union sectors, often
associated with forecasts and policy implications.
Jurisdiction Risk: (1) The risk inherent in placing funds
in the Centre where they will be under the jurisdiction of
a foreign legal authority. (2) The risk in making a loan
subject to the laws of another country.
Kappa: A measure of the sensitivity of the price of an
option to a change in its implied volatility.
Key currency: Small countries, which are highly
dependent on exports, orientate their currencies to their
major trading partners, the constituents of a currency
basket.
date or in respect of an un-matured forward or spot

transaction.
LIBOR: Stands for the London Interbank Offer Rate,
and is the rate at which major international banks lend
to one another. It is widely used as the benchmark for
short-term interest rates.
Life of Contract: The period between the beginning of
trading in a particular future and the expiration of
trading.
Limit Down: The maximum price decline from the
previous trading days settlement price permitted in one
trading session.
Limit Move: A price that has advanced or declined the
permissible limit permitted during one trading session.
Kiwi: Slang for the New Zealand dollar.

Ladder: Dealers analysis of the forward book or deposit
book showing every existing deal by maturity date, and
the net position at each future date arising.
Lagging Indicator: A measure of economic activity
which tends to change after change has occurred in the
overall economy, e.g. CPI.
Last Trading Day: The day on which trading ceases for
an expiring contract.
Lay Off: To carry out a transaction in the market to
offset a previous transaction and return to a square
position.
Leading Indicators: Such statistics as unemployment
rates, CPI, Federal Funds Rate, retail sales, personal
income, discount rate and the prime rate, that are used
to predict economic activity.
Leads and Lags: The effect on foreign trade payments
of an anticipated move in the exchange rate, normally
devaluation. Then payment of imports is faster and
export receipts is slowed down.
Left-hand Side: Taking the left hand side of a two way
quote i.e. selling the quoted currency. See Right-hand
Side.
Leverage: In options terminology, this expresses the
disproportionately large change in the premium in terms
of the relative price movement of the underlying
instrument.
Liability: In terms of foreign exchange, the obligation to
deliver to a counterparty an amount of currency either in
respect of a balance sheet holding at a specified future
Limit order: An order with restrictions on the maximum

price to be paid or the minimum price to be received. As
an example, if the current price of USD/YEN is
102.00/05, then a limit order to buy USD would be at a
price below 102. (i.e. 101.50)
Liquid and Illiquid Markets: A liquid market is one in
which changes in supply and demand have little impact
on the assets price. It is characterized by many bids,
offers and players/traders, low volatility and tight
spreads. Illiquid markets have less players and larger
spreads.
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 accept large
transactions with minimal to no impact on price stability.
Local: A futures trader who normally trades on an
exchange on his/her own account.
Locked Market: A market is locked when the bid price
equals the asked price.
Long (Position): Refers to the ownership of securities,
commodities or currencies, in which there is no intent to
sell due to speculation that the price will rise.
Ml: Cash in circulation plus demand deposits at
commercial banks. There are variations between the
precise definitions used by national financial authorities.
M2: Includes demand deposits, time deposits, and
money market mutual funds excluding large CDs.
91
ForexConfidential
GLOSSARY
TOOLS & RESOURCES

M3: In the UK it is M1 plus public and private sector
time deposits and sight deposits held by the public
sector.
Matching: The process of ensuring that purchases and

sales in each currency, and deposits given and taken in
each currency, are in balance by amount and maturity.
M4: In the US it is M2 plus negotiable CDs.
Maturity: The date that the security is due to be

redeemed or repaid.
MACD (Moving Averages Difference Oscillator): The

MACD indicator relies primarily on plotting two moving
average lines - typically 12 and 26 day EMAs - and
plots the rate of change between the two. If the signal
line - the line used to denote the rate of change - is
rising upward, this suggests that momentum is bullish; if
downward, the indication is that momentum is bearish.
Mid-price or Middle Rate: The price half way between

the two prices, or the average of both buying and selling
prices offered by the market makers.
Mine and Yours: Terms used to signal when a trader
wants to buy (mine) and sell (yours).
Maintenance Margin: The minimum margin which an

investor must keep on deposit in a margin account at all
times in respect of each open contract.
Minimum Price Fluctuation: The smallest increment of

market price movement possible in a given futures
contract.
Make a Market: A dealer is said to make a market

when he or she quotes bid and offer prices at which he
or she stands ready to buy and sell.
Minimum Reserve: Reserves required to be deposited

at central banks by commercial banks and other
financial institutions; sometimes referred to as
Registered Reserves.
Managed Float: When the monetary authorities

intervene regularly in the market to stabilize the rates or
to aim the exchange rate in a required direction.
Margin: A percentage of the total value of a transaction
that a trader is required to deposit as collateral. Buying
on margin refers to investing with borrowed funds, and
the margin requirement insures against heavy losses.
Margin Call: This is a call by a broker or dealer to raise
the margin requirement of an account. The call is
typically made after the value of a security (securities)
has significantly declined in value.
Marginal Risk: The risk that a customer goes bankrupt
after entering into a forward contract. In such an event
the issuer must close the commitment, running the risk
of having to pay the marginal movement on the
contract.
Market Amount: The minimum amount conventionally
dealt for between banks.
Market Maker: A broker-dealer firm that owns shares of
a security 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 a stock at the
best available price.
Market Risk: The risk associated with investing in the
market that cannot be hedged or avoided.
Marry: Where a dealer is able to match two customer
deals which off set one another.
MITI: Japanese Ministry of International Trade &

Industry.
Momentum: The term has two meanings: (I) a trading
style by which traders go with the direction of the
current trend; and (2) a technical indicator which
measures the rate of change of an asset over a given
time frame.
Monetarism: A school of economics which believes
that strict control of money supply is the principal tool
for implementing monetary policy, especially against
inflation. Policies include cuts in public spending and
high interest rates.
Monetary Base: Currency in circulation plus banks
required and excess deposits at the central bank.
Monetary Easing: A modest loosening of monetary
constraint by changing interest rate, money supply, and
deposit ratios.
Monetary Policy: A central banks management of a
countrys money supply. Economic theory underlying
monetary policy suggests that controlling the growth of
the amount of money in the economy is the key to
controlling prices and therefore inflation. However,
central banks monetary capability is severely limited by
global money movements. This forces them to use the
indirect tool of exchange rate manipulation.
Monetary Union: An agreement between countries to
maintain a fixed exchange rate between their
currencies. This is a process which the EMS is intended
to lead to, especially after the Maastricht Treaty.
92
ForexConfidential
GLOSSARY
TOOLS & RESOURCES

Money Market: Highly liquid markets for short-term
investing in monetary instruments and debts, typically
maturing in less than one year. Because of large
transaction cost relative to potential interest,
transactions occur in large amounts and thus
participants are mainly banks and other large financial
institutions.
Money Supply: The amount of money in the economy,
which can be measured in a number of ways. See
definitions of M1-M4.
Moving Averages: An average of a number of
specified historical time periods from the point on the
chart. Moving averages offer an indication of the clear
direction and slope of the trend in the market. Since
moving averages measure historical data, they are a
lagging indicator; in other words, the information they
reveal is not predictive, but rather can be used to gauge
momentum in the marketplace. Exponential moving
averages (EMAs) work to reduce the lag of the overall
moving average by placing a greater premium on more
recent data when calculating the average.
Naked Intervention: A central bank type of intervention
in the foreign exchange market which consists solely of
the foreign exchange activity. This type of intervention
has a monetary effect on the money supply and a long
term effect on foreign exchange.
Narrow Money: Limited definition of money to include
cash or near cash, i.e. Ml or MO.
Nearby Contracts: The closest active futures contracts,
i.e. those that expire the soonest.
Negative or Bearish Divergence: Occurs when two or
more indicators or chart patterns do not yield the same
analysis.
Netting: A process which enables institutions to settle
only the net positions with one another at the end of the
day, in a single transaction, not trade by trade.
Net Position: The number of futures contracts bought
or sold which have not yet been offset by opposite
transactions.
Net Worth: The difference between the values of
assets and liabilities. For public companies this is
referred to as shareholder equity.
Next Best Price Stop-loss Order: A stop-loss Order
which must be executed after the request level was
reached.
Nominee Name: Name in which a security is registered
and held in trust on behalf of the beneficial owner.
Note: A financial instrument consisting of a promise to

pay rather than an order to pay or a certificate of
indebtedness.
Odd Lot: A non standard amount for a transaction.
Off-Balance Sheet: Financing or the raising of money
by a company that does not appear on the companys
balance sheet, such as Interest Rate Swaps and
Forward Rate Agreements.
Offer: The price (or rate) at which a seller is willing to
sell at.
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 (O.C.O. Order): An order
that thrOugh its execution cancels the other part of the
same order.
Open Interest: The total number of outstanding option
or futures contracts that have not been closed out by
offset or fulfilled by delivery.
Open Outcry: A public auction method of trading
conducted by calling out bids and offers across a
trading ring or pit and having them accepted.
Open Market Operations: Central Bank operations in
the markets to influence exchange and interest rates.
Open/Open Position: An order that has yet to be
executed and is still valid. An open position puts a
trader at risk if the market prices rise or fall, i.e. the
trader is vulnerable to movements in the exchange rate.
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 the price of a share or
currency reaches a pre-determined price.
Options: These are tradable contracts giving the right,
but not obligation, to buy or sell commodities, securities
or currencies at a future date and at a pre-arranged
price. Options are used to hedge against adverse price
movements or to speculate against price rises or falls.
Holding options is riskier than holding shares, but offers
potentially higher returns.
Order: An instruction by a customer to a broker/trader
to buy or sell at a certain price or market price. The
order remains valid until executed or cancelled by the
customer.
93
ForexConfidential
GLOSSARY
TOOLS & RESOURCES

Overbought: A term used to characterize a market in
which asset prices have risen at a pace that is above
typical market acceleration, and hence is due for a
retracement.
Overnight: A position that remains open until the start
of the next business day.
Oversold: The opposite of overbought; exists when the
price of a market decelerates at an abnormally fast rate,
and hence is due for an upwards reversal.
OTC (Over-the-Counter): A market conducted directly
between dealers and principals via a telephone and
computer network rather than a regulated exchange
trading floor. These markets have not been very
popular. They were never part of the Stock Exchange
since they were seen as unofficial. Each OTC firm
operates a market in the shares of a restricted list of
(generally small and little-known) companies.
Sometimes the dealer simply puts would-be buyers and
sellers together but does not take a position in the
shares himself. These days OTC trading is seen as
consumer-friendly, meaning that it is interested in
getting the buyer and seller the best possible price.
Some see this as what share-trading is all. about.
However, market makers, many of whom create market
movements purposefully, feel they are being elbowed
out by OTC, and that speculation, arbitrage and smarttrading are undermined by the new market.
Out-of-the-Money: A put option is out-of-the-money if
the exercise/strike price is below the price of the
underlying instrument. A call option is out-of-the money
if the exercise/strike price is higher than the price of the
underlying instrument.
Outright Deal: A forward deal that is not part of a swap
operation.
Overhang: A holding of foreign exchange that is
temporarily unable to be converted from the reserve
currency into other reserve assets.
Overheated (Economy): Is an economy where highgrowth rates are placing pressure on production
capacity resulting in increased inflationary pressures
and higher interest rates.
Overnight Limit: Net long or short position in one or
more currencies that a dealer can carry over into the
next dealing day. Passing the book to other bank
dealing rooms in the next trading time zone reduces the
need for dealers to maintain these unmonitored
exposures.
Oscillators: Quantitative methods designed to provide

signals regarding the overbought and oversold
conditions.
Package Deal: When a number of exchange and br
deposit orders have to be fulfilled simultaneously.
Parabolic SAR (Stop and Reversal): Functioning best
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 is below, the recommendation is to go long.
Paris: A term for USD FRF Spot Rate.
Parities: The value of one currency in terms of another.
Parity Grid: A term used in the context of the European
Monetary System which consists of the upper, central
and lower intervention points between member
currencies.
Payment Date: A system where a currency moves in
tine with another currency, some pegs are strict while
others have bands of movement.
Pegging: When a country fixes the exchange rate to
another countrys currency, usually to achieve price
stability. Most countries that peg their currencies do so
against the US dollar or the Euro.
Pip (Points): The smallest amount an exchange rate
can move, typically .0001.
Point & Figure (P&F): Unlike conventional bar,
candlestick, and line charts, Point & Figure charts
completely disregard the passage of time, opting only to
display changes in prices. The chart instead
emphasizes on illustrating (1) reversals in trends and (2)
solid support and resistance lines.
Put/Call Ratio: Calculated by dividing the number of
put options traded by the number of call options traded
for a particular asset, the put/call ratio offers explanation
into expectations of the options market.
Position: The amount of currency or security owned or
owed by an investor.
Position Clerk: A clerk who assists the dealer in
recording a dealers position and ensures that all deal
tickets are completed and transferred to the back office
or input into the books in a position keeping system.
Position Limit: The maximum position, either net long
or net short, in one future or in all futures of one
currency or instrument combined, which may be held or
controlled by one person.
94
ForexConfidential
GLOSSARY
TOOLS & RESOURCES

Pre-Spot Dates: Quoted standard periods that fall
between the transaction date and the current spot value
date.
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.
Ratio Spread: Buying a specific quantity of options and

selling a larger quantity of out of the money options.
Ratio Calendar Spread: Selling more near-term
options than longer maturity options at the same strike
price.
Reaction: A decline in prices following an advance.
Primary Reserves: Gold related monetary reserves,

being gold, SDR, etc.
Real: A price, interest rate or statistic that has been

adjusted to eliminate the effect of inflation.
Prime Rate: (1) The rate from which lending rates by

banks are calculated in the U.S. (2) The rate of discount
of prime bank bills in the UK.
Realignment: Simultaneous and mutually coordinated

revaluation and devaluation of the currencies of several
countries. An activity that mostly refers to EMS activity.
Principal: A dealer who buys or sells stock for his/her

own account.
Realized and Unrealized Profit: Unrealized profit is a

gain from an increase in the price of an asset that has
not been cashed in. Realized profits are made from the
cashing in of the unrealized gain.
Producer Price Index: An economic indicator which

gauges the average changes on prices received by
domestic producers for their output at all stages of
processing.
Profit Taking: The unwinding of a position to realize
profits.
Reciprocal Currency: A currency that is normally

quoted, as dollars per unit of currency rather than the
normal quote method of units of currency per dollar.
Sterling is the most common example.
Proxy Hedge: A term to describe when it is necessary

to hedge against a currency where there is no market
but it follows a major currency, the hedge is entered
against the major currency.
Rectangle: Similar to the consolidation portion of a flag

pattern, a rectangle is a continuation pattern denoting a
trading range characterized by strong support and
resistance lines. Unsurprisingly, rectangles are often
known as trading ranges, consolidation zones, or
congestion areas.
Purchasing Power Parity: Model of exchange rate

determination stating that the price of a good in one
country should equal the price of the same good in
another country, exchanged at the current rate. Also
known as the law of one price.
Reinvestment Rate: The rate at which interest earned

on a loan can be reinvested. The rate may not attract
the same level of interest as the principal amount.
Put Option: A put option confers the right but not the
obligation to sell currencies, instruments or futures at
the option exercise price within a predetermined time
period.
Put Call Parity: The equilibrium relationship between
premiums of call and put options of the same strike and
expiry.
Repurchase Agreement: Agreements by a borrower

where they sell securities with a commitment to
repurchase them at the same rate with a specified
interest rate.
Repurchase (REPO): Repos are short-term money
market instruments. The trader sells a security
(government security) and buys it back only after a
short period of time, typically only overnight. Repos are
primarily used to raise short-term capital.
Quote: The offer price of a security.

Rally: A recovery in price after a period of decline.
Range: The difference between the highest and lowest
price of a future recorded during a given trading
session.
Rate: The price of one currency in terms of another
(exchange rate).
Reserve Currency: A currency held by a central bank

on a permanent basis as a store of international
liquidity, these are normally Dollar, Deutschemark, and
Sterling.
Reserves: Funds held against future contingencies;
normally a combination of convertible foreign currency,
gold, and SDRs. Official reserves are to ensure that a
government can meet near term obligations. They are
an asset in the balance of payments.
95
ForexConfidential
GLOSSARY
TOOLS & RESOURCES

Reserve Requirement: The ratio of reserves to
deposits, expressed as a fraction prescribed by national
banking authorities, including the United States.
Resistance: A price level at which a currency pair has
had trouble breaking, and hence consolidation is
expected. If the resistance line holds and the currency
pair retraces, the sellers have outnumbered the buyers;
on the other hand, buyers have outnumbered sellers if
the resistance level is broken, and momentum may
allow for a strong continuation of the trend.
Retail Price Index: Measurement of the monthly
change in the average level of prices at retail, normally
of a defined group of goods.
Retracements: Synonymous with the term correction;
used to denote a temporary reversal in the overall trend
of the market to accommodate for excessive
acceleration or deceleration of asset price movement.
Reversal: Process of changing a call into a put.
Revaluation: An increase in the exchange rate for a
currency as a result of central bank intervention.
Opposite of Devaluation
Revaluation Rates: The market rates that are used by
traders in the evaluation of the gains and losses in their
accounts each day.
Reversal: A pattern that suggests a potential shift or
deceleration of the current trend. A reversal of an up
move will be reflected in a downward price movement.
Right-hand Side: To do a deal on the right hand, side of
a two way quote, normally to buy the currency and sell
dollars. See Left-hand Side.
Ring: An area on a trading floor where futures or
equities are traded.
Risks: Uncertainty in the possible outcomes of an
action, i.e. possible returns on an investment. Risk is
most commonly measured from the variance of possible
outcomes. Higher risks are associated with higher rates
of returns, typically in order to induce investment in
riskier ventures.
Risk/Return: The relationship between the risk and
return on an investment. Usually, the more risk you are
prepared to take, the higher the return you can expect.
Depositing your money in a bank is safe and therefore a
low return is regarded as sufficient. Investing in the
stock market exposes you to more risk (from, capital
losses) and so investors will expect a higher return.
Risk Capital: The capital that an investor does not

need to maintain his/her living standard.
Risk Factor: The risk factor (delta) indicates the risk of
an option position relative to that of the related futures
contract.
Risk Management: Term to describe when a trader will
use analysis and other trading techniques to avoid
substantial risks to his portfolio.
Rollover: Refers to a process of reinvesting in which at
the expiry, the settlement is postponed until a later date.
The cost of the process is measured by the interest rate
differential between the two currencies.
Rounding Top and Bottom: Similar to a Cup and
Handle pattern, a rounding top signifies a rounded
resistance line and a bearish overall trend. Alternatively,
a rounding bottom is a bullish for which the bottom
curve can serve as a support line. Both patterns are
best-suited to longer-term analyses.
Round Trip: Buying and selling of a futures or options
contract.
RSI (Relative Strength Index): An oscillator that
measures the size of recent upward trends against the
size of downward trends within the specified time frame.
High RSI scores - above 70 or perhaps 80 - indicate
that the currency is overbought, and hence due for a
reversal. Alternatively, low RSI scores indicate that the
currency is oversold, and hence due for a fall in price.
Same Day Transaction: A transaction that matures on
the day the transaction takes place.
Scalping: A strategy of buying at the bid and selling at
the offer as soon as possible.
SDR: Special Drawing Right. A standard basket of five
major currencies in fixed amounts as defined by the
IMF.
Selling Rate: Rate at which a bank is willing to sell
foreign currency.
Seller/Grantor: Also known as the option writer.
Serial Expiration: Options on the same underlying
futures contract which expire in more than one month.
Series: All options of the same class which share a
common strike price and expiration date.
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.
96
ForexConfidential
GLOSSARY
TOOLS & RESOURCES

Settlement Risk: Risk associated with the nonsettlement of the transaction by the counter party.
Short: The selling of a borrowed security, commodity or
currency. Traders sell when prices are expected to fall.
Short Contracts: Contracts with up to six months to
delivery.
Short Covering: Buying to unwind a shortage of a
particular currency or asset.
Short Forward Date/Rate: The term short forward
refers to a period up to two months, although it is more
commonly used with respect to maturities of less than
one month.
Short Position: A contract to sell securities,
commodities or currencies at a future date and at a
prearranged price. At the expiry date, if the spot price is
below the contract price, the holder of the contract will
make a profit and if the spot price is above the contract
price, then there is the potential to make a huge loss.
Spread: The difference between the bid and offer price

that is offered by a market maker. (1) The difference
between the bid and ask price of a currency. (2) The
difference between the prices of two related futures
contracts. (3) For options, transactions involving two or
more option series on the same underlying currency.
Square: Purchase and sales are in balance and thus
the dealer has no open position.
Squawk Box: A speaker connected to a phone often
used in broker trading desks.
Squeeze: Action by a central bank to reduce supply in
order to increase the price of money.
Stable Market: An active market which can absorb
large sale or purchases of currency without major
moves.
Standard: A term referring to certain normal amounts
and maturities for dealing.
Sidelined: A major currency that is lightly traded due to

major market interest being in another currency pair.
Stand by Credit: An arrangement with the IMF for draw

downs on a need basis. The term is sometimes more
generally used.
SITC: Standard International Trade Classification, a

system for reporting trade statistics in a common
manner.
Sterilization: Central Bank activity in the domestic

money market to reduce the impact on money supply of
its intervention activities in the FX market.
SOFFEX: Swiss Options and Financial Futures

Exchange, a fully automated and integrated trading and
clearing system.
Sterling Index: An index based on the movement of

sterling against the major currency.
Sterling: Refers to the UK currency, the Pound.
Soft Market: More potential sellers than buyers, which

creates an environment where rapid price falls are
likely.
Sovereign Immunity: Legal doctrine which means that
the state cannot be sued or have its assets seized.
Spike (high or low): A significantly lower low or higher
high within a data series. Points where currency spikes
often signify a potential reversal in the direction of the
trend, and hence can be valuable tools in analyzing a
chart.
Spot: (1) The most common foreign exchange
transaction. (2) Spot or Spot date refers to the spot
transaction value date that requires settlement within
two business days, subject to value date calculation.
Spot Market: A market in which commodities, securities
or currencies are immediately delivered.
Spot Price/Rate: The current market price.
Stochastic: Like RSI, stochastics is 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 to
buy. Like all oscillators, stochastics work best as a
momentum indicator that measures the price of a
security relative to its high/low range over a set period
of time. The indicator fluctuates between 0 and 100,
with readings below 20 considered overbought (bearish)
and readings above 80 considered oversold (bullish)
Stop Order (Stop-Loss Order): An order used to
hedge against excessive loss in which a position is
liquidated at a specific, prearranged price.
Straddle: The simultaneous purchase/sale of both call
and put options for the same share, exercise/strike price
and expiry date.
Stagflation: Recession or low growth in conjunction
with high inflation rates.
97
ForexConfidential
GLOSSARY
TOOLS & RESOURCES

Strap: A combination of two calls and one put.
Strike Price: Also called exercise price; the price at
which an options holder can buy or sell the underlying
instrument.
volume levels. It examines charts and historical

performance.
Technical Correction: An adjustment to price not
based on market sentiment but technical factors such
as volume and charting.
Strip: A combination of two puts and one call.

Supply Side Economics: The concept is that tax cuts
will boost investment leading to an increase in the
supply of goods in the economy. To be compared with
demand led Keynesian economics.
Support: The opposite of support; a point in a chart
where a currency pair has repeatedly had trouble falling
beneath. When a currency pair tests support but does
not break it, buyers have outnumbered sellers;
alternatively, sellers have gained control of momentum
if support is broken and the currency pair continues to
plunge downward.
Support Levels: When an exchange rate depreciates
or appreciates to a level where (1) technical analysis
techniques suggest that the currency will rebound, or
not go below; (2) the monetary authorities intervene to
stop any further downward movement.
Swap: When a trader exchanges one currency for
another, holding it for only a short period. Swaps are
typically used to speculate on interest rate movements.
It is calculated using the interest differentials between
the two currencies.
Swap Price: A price as a differential between two dates
of the swap.
Temporal Accounting: Method of determining

accounting exposure which translates all balance sheet
items at the current rate of exchange, not the one at the
time the cost was incurred.
Terms of Trade: The ratio between export and import
price indices.
Threshold of Divergence: A safety feature for the EMS
which creates an emergency exit for currencies which
become the singular focus of various adverse forces.
The threshold of divergence indicates when the specific
country with the pressured currency should take
additional steps other then simple central bank
intervention in the foreign exchange markets.
Thin Market: A market in which trading volume is low
and in which consequently bid and ask quotes are wide
and the liquidity of the instrument traded is low.
Thursday/Friday Dollars: A U.S. foreign exchange
technicality. If the bank leaves the funds overnight and
transfers them on Friday by means of a clearing house
cheque, then clearance is not until Monday, the next
working day. Higher interest rates for this period are
thus available.
Tick: A minimum price movement.
Ticker: Depicts current or recent history of a currency,
usually in the form of a graph or chart.
Swissy: Market slang for Swiss Franc.

Symmetrical triangle: Also referred to as a coil, usually
forms during a trend as a continuation pattern. It
contains at least two lower highs and two higher lows.
At the time these points are conjoined, the lines
converge as they are extended and the symmetrical
triangle takes shape. One can also think of it as a
contracting wedge, wide at the beginning and narrowing
over time.
Synthetics: Options or futures that create a position
that is able to be achieved directly but is generated by a
combination of options and futures in the relevant
market. In foreign exchange, a SAFE combines two
forward contracts into a single transaction where
settlement only involves the difference in values.
Technical Analysis: A technique used to try and
predict future movements of a security, commodity or
currency, based solely on past price movements and
Tight Money: A condition where there is a shortage of

credit as a result of monetary policy restricting the
supply of credit normally through raising interest rates.
TIFFE: Tokyo International Financial Futures Exchange.
Time Decay: The decline in the time value of an option
as the expiry approaches.
Time Value: That part of an option premium which
reflects the length of time remaining in the option prior
to expiration; the longer the time remaining until
expiration, the higher the time value.
Today/Tomorrow: Simultaneous buying of a currency
for delivery the following day and selling for the spot
day, or vice versa. Also referred to as overnight.
98
ForexConfidential
GLOSSARY
TOOLS & RESOURCES

Tombstone: Colloquial term for announcement in a
publication that a loan or bond has been arranged.
or commodity in which they make a market. This is

called a two-sided market.
Trade Date: The date on which a trade occurs.
Two-Tier Market: A dual exchange rate system where

normally only one rate is open to market pressure, e.g.
South Africa.
Trade Deficit/Surplus: The difference between the

value of imports and exports. Often only reported in
visible trade terms.
Trade-weighted Exchange Rate: The changes in the
exchange rate against a trade weighted basket
including the currencies of the countys principal trading
partners.
Traded Options: Transferable options with the right to
buy and sell a standardized amount of a currency at a
fixed price within a specified period.
Trade Price Response: This term advises that price
reaction to a certain level is critical. If this level breaks,
then the recommendation would be to run with the
market direction (i.e. Buy a break above resistance
level; sell a break below a support level). However, if a
price stalls at this level and is rejected, then the
recommendation is to go with this also (i.e. Sell at a
resistance level that is tested and holds, buy at a
support level).
Transaction: The buying or selling of securities
resulting from the execution of an order.
Transaction Costs: The costs that are incurred by a
trader when buying or selling currencies, stocks or
commodities. These costs include broker commissions
or spreads.
Transaction Exposure: Potential profit and loss
generated by current foreign exchange transactions.
Trend Lines: A straight line drawn across a chart that
indicates the overall trend for the currency pair. In an
upward trend, the line is drawn below, and acts as a
support line; the opposite holds true for a downward
trend. Once the currency breaks the trend line, the trend
is considered to be invalid.
Triple Top: A pattern in which a currency has reached
a price three times previously, yet has been unable to
sustain movements beyond those three peaks. A triple
top signifies a strong resistance level.
Turnover: The number or volume of shares traded over
a specific time period. The larger the turnover, the more
commissions a broker will be making.
Two Way Price: A price that includes both the bid and
offer price. The NASD requires that market makers
have both bid and ask prices for any security, currency
Two-Way Quotation: When a dealer quotes both

buying and selling rates for foreign exchange
transactions.
Uncovered: Another term for an open position.
Under Reference (Order): Before finalizing a
transaction, all the details should be submitted for
approval to the order giver, who has the right to turn
down the proposal.
Under-Valuation: An exchange rate is normally
considered to be undervalued when it is below its
purchasing power parity.
Undo: A colloquial term for reversing a transaction, e.g.,
a spot sale by means of a forward purchase or if done
in error, a spot purchase.
Unload: Term for sale of assets or unwinding positions
either to limit loss or to undermine other market
participants positions.
Unwind: Selling of assets and or instruments to square
a position.
Uptick: A price quote that is higher than the preceding
quote for the same currency.
Uptick Rule: A regulation requiring that if a security is
to be traded short, the price in the trade prior to the
short trade has to be lower than the price of the present
short trade.
U.S. Prime Rate: The interest rate that the major U.S.
banks lend to major clients.
USDX: Currency index which consist of the weighted
average of the prices of ten foreign currencies against
the U.S. dollar.
U.S. Quote: Exchange rate quotation on a reciprocal
basis. Also known as an American Quote.
Value at Risk: The expected loss from an adverse
market movement.
Value Date: For exchange contracts, it is the day on
which the two contracting parties exchange the
currencies which are being bought or sold. For a spot
transaction, it is two business banking days forward in
99
ForexConfidential
GLOSSARY
TOOLS & RESOURCES

the country of the bank providing quotations which
determine the spot value date. The only exception to
this general rule is the spot day in the quoting center
coinciding with a banking holiday in the country(ies) of
the foreign currency(ies). The value date then, moves
forward a day. The enquirer is the party who must make
sure that his spot day coincides with the one applied by
the respondent. The forward months maturity must fall
on the corresponding date in the relevant calendar
month. If the one month date falls on a non-banking day
in one of the centers, then the operative date would be
the next business day that is common. The adjustment
of the maturity for a particular month does not affect the
other maturities that will continue to fall on the original
corresponding date if they meet the open day
requirement. If the last spot date falls on the last
business day of a month, the forward dates will match
this date by also falling due on the last business day.
Also referred to as Maturity Date.
Variation Margin: A call by a broker to increase the
margin requirement of an account during a period of
extreme market volatility.
Variance: Measures the volatility of a data set/data
points from the mean. It is calculated by adding the
squares of the standard deviations from the mean and
dividing by the number of data points, i.e. taking the
average of the standard deviations.
Vega: Expresses the price change of an option for a
one per cent change in the implied volatility.
Velocity of Money: The speed with which money
circulates or turnover in the economy. It is calculated as
the annual national income: average money stock in the
period.
Vertical (bear or bull) Spread: The sale of an option
with a high exercise price and the purchase (in the case
of a bull) or the sale (in the case of a bear) of an option
with a lower exercise price. Both options will have the
same expiration date.
Visible Trade: Trade in merchandise goods as
compared with capital flows and invisible trade.
Volatility: Refers to the tendency of prices/variables to
fluctuate over time. It is most commonly measured
using the coefficient of variation (the standard deviation
divided by the mean). The higher the volatility, the
higher the risk involved.
Volume: The number of shares or contracts traded for a
certain security or an exchange during a period.
applied to the counterpartys account from which funds

may be paid into or withdrawn, as a result of a
transaction.
Warrant: It is a right but not obligation, to buy shares in
a company at a future date and at a prearranged price.
Warrants are tradable options.
Weekly Charts: Charts for which each candlestick or
bar encapsulates data for the currency pair for the past
week.
Whipsaw: Term used to describe sharp price
movements and reversals in the market. A whipsaw
would be if shortly after you bought a stock, the price
plummeted.
Wholesale Money: Money borrowed in large amounts
from banks and institutions rather than from small
investors.
Wholesale Price Index: It measures changes in prices
in the manufacturing and distribution sector of the
economy and tends to lead the consumer price index by
60 to 90 days. The index is often quoted separately for
food and industrial products.
Window-dressing: Where financial institutions or
companies raise funds for specific reporting dates such
as year ends to give the appearance of high liquidity.
Working Balance: Discretionary element in the
monetary reserves of a central bank.
Working Day: A day on which the banks in a currencys
principal financial centre are open for business. For FX
transactions, a working day only occurs if the bank in
both (all relevant currency centers in the case of a
cross) are open.
World Bank: A bank made up of members of the IMF
whose aim is to assist in the development of member
states by making loans where private capital is not
available.
Yard: Term for a billion JPY.
Yield Curve: The graph showing changes in yield on
instruments depending on time to maturity. A system
originally developed in the bond markets that is now
broadly applied to various financial futures. A positive
sloping curve has lower interest rates at the shorter
maturities and higher at the longer maturities. A
negative sloping curve has higher interest rates at the
shorter maturities.
Vostro Account: A local currency account maintained

with a bank by another bank. The term is normally
100

Forex Manual

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Forex Manual

Uploaded by

Copyright:

Available Formats

ForexConfidential

I. What is the FX Market?

II. Why Trade FX?

III. Brief History of the FX Market

IV. Market Structure

V. Key Players in FX Market

VI. International Overview

VIII. Your Role in the FX Market

IX. How Can Forex be Accessed?

Unlike other financial markets, the Forex market has no

affects our lives and our prosperity. The movement of

in the trading process. Ultimately, the greater the

Low Account Minimums

Above Average Profit Potential

Part III. Brief History of the FX Market

the economy with enough gold to increase its money

The design of the Bretton Woods framework was to

needed to be devalued beyond the 2.25% parameters

Other institutions in the market, such as corporations,

(community banks and banks in emerging markets),

The FX market is no longer reserved for big

Markets within the FX Market

London is by far the most important and influential FX

New York is the second most important market that

ECB to implement EU monetary policy. ECB watches

over monetary policy and can have significant indirect

main driver of international capital and equities trends,

Part VII. International Overview

Part VII. FX Regulations

Part IX. How Can Forex be

Investors wishing to speculate in the FX market can

When you decide to hold assets in the currency of one

II. How a Forex Trade Works?

III. Types of Transactions

IV. Types of Orders

V. Proper Phone Etiquette

VI. Fundamental Analysis

CURRENCY TRADING BASICS

Part I. What is trading?

Part II. How a Forex Trade Works?

CURRENCY TRADING BASICS

The following is a couple of examples to help you grasp

CURRENCY TRADING BASICS

As mentioned before, currencies are often referred to

In the spot FX market, currency pairs can be divided

CURRENCY TRADING BASICS

Lot Sizes and Margin

understanding of lot sizes and margin requirements

CURRENCY TRADING BASICS

values is underlined and highlighted in red for each

For instance, the US dollar moves from 1.6000 to

The value of a pip is determined by the currency pair

CURRENCY TRADING BASICS

then those 100,000 Euros would be worth 114,700

Calculating pip values when the

If a trader closes out a position at a one pip profit

CURRENCY TRADING BASICS

In the above example, the bid price for EUR/USD is

CURRENCY TRADING BASICS

Part III. Types of Transactions

Outright Forward Transactions

CURRENCY TRADING BASICS

enables customers to trade on a margin basis, and pay

For a price, a market participant can buy the right, but