FX TRADING

REFERENCE
G U I D E
 TABLE OF CONTENTS
I. What is the FX Market? 2
II. Why Trade FX? 3
Enormous Liquidity 3
No Slippage 3
Market Transparency 3
Trending Markets 3
24-Hour Access 3
Low to Zero Transaction Cost 4
High Leverage 4
Low Account Minimums 4
No Bear-Only Market 4
Above Average Profit Potential 4
THE FX MARKET
V. Key Players in FX Market 10
Commercial and Investment Banks 10
Central Banks 10
The Federal Reserve (Fed) 10
The European Central Bank (ECB) 11
Bank of England (BoE) 11
Swiss National Bank (SNB) 12
The Bank of Japan (BOJ) 12
Bank of Canada (BoC) 12
Corporations 12
Hedge Funds and International Funds 13
FX Funds 13
Individuals 13

III. Brief History of the FX Market 4 VI. International Overview 14

Gold Exchange Standard 5
Bretton Woods Accord 5
VII. FX Regulations 14
Smithsonian Agreement 6
Free-Floating System 6 CFTC 14
NFA 14
IV. Market Structure 7
VIII. Your Role in the FX Market 15
Overview 7
Interbank 7
Market Hours 7 IX. How Can Forex be Accessed? 15
Markets within the FX Market 8

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 equi-
ties 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 pur-
chasing power from one currency to another. This in-

ternational 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 impor-
tant 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 trad-
ing is increasing, not everyone involved in Forex is a
speculator. Therefore, there is far less risk of manipula-
tion 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 eq-
uity market suffer immensely when prices are manipu-
lated 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.
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 The FX Market
Part II. Why Trade FX?
Foreign exchange is by far the preferred market choice
for aggressive traders. The FX market offers unpar-
alleled liquidity, no slippage, market transparency,
trending markets, 24-hour access, low to zero transac-
tion 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, oper-
ates 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 – trad-
ers 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 envi-
ronment. It is a condition in which market participants

are able to observe the detailed information in the trad-
ing process. Ultimately, the greater the market transpar-
ency, 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 flex-
ible enough to accommodate an ever-changing market-
place. With the transparency of information, traders
can exercise their risk management strategies in accor-
dance 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 statisti-
cally 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, trad-
ers 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.
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 The FX Market
Unlike any other financial market, investors can re- Low Account Minimums
spond to currency fluctuations caused by economic, Many individuals believe that entering the highly lucra-
social, and political events at the time they occur re- tive foreign exchange market requires large initial trad-
gardless if it is daytime or nighttime. The only breaks in ing capital. This was indeed true prior to 1996, without
trading occur during a brief period over the weekend. A the integration of online trading into the FX market.
trader is able to put on a trade during the London ses- Today, individuals can get started with a mini-account
sion, follow it during the New York session, and close for as little as $300.
the trade in the middle of the following day during the
Tokyo session. This type of market access is invaluable No Bear-Only Market
to a market participant who needs to react quickly to One of the biggest advantages of trading FX is that
global events. there is no fear of a bear-only market. In many mar-
kets, high-return investments can often be difficult to
Low to Zero Transaction Cost sell after they are bought. However, in Forex, the major
The amount of cost to execute trades has dropped currency pairs always have buyers and sellers; hence, the
considerably in recent years. Transaction costs include FX investor should never worry about being “stuck” in
all the expenses to actually execute a trade. Because a trade due to lack of market interest.
transaction costs reduce profits, the lower the trans-
action 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 Above Average Profit Potential
are minimal to no brokerage fees and zero exchange There is no question that speculative trading in Forex
and clearing fees since it is an over-the-counter mar- offers huge profit potential. It is an exciting way to earn
ket.. What you see is what you get, allowing you to exceptionally high returns on one’s investment capital.
make quick decisions on your trades without having
to account for fees that may affect your profit/loss or
slippage.
Part III. Brief History of the FX Market
High Leverage
The FX market provides traders with access to much
higher leverage than other financial markets. FX trad-
ers 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 perfor-
mance 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 gener-
ate quick returns.


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 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 activ-
ity. 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 institu-
tions 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, Smith-
sonian Agreement, and the Free-Floating System.
Bretton Woods Accord
The first major transformation, the Bretton Woods Ac-
cord, 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 inter-
national 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.
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 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 curren-
cies 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 Agree-
ment 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 estab-

lished 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 Eu-
ropean 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
free-floating system was officially mandated.
The value of the US dollar was to be determined en-
tirely 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 today’s Forex
market, however, is supply and demand. The free-float-
ing system is ideal for today’s markets.
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 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 indi-
viduals trading one currency for another. Forex trad-
ers 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 physi-
cal 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 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 estab-
lished 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 1990’s, technological ad-
vances 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 on-
line trading. Average traders can enjoy the competitive
rates and trade alongside the world’s largest banks.
The FX market is no longer reserved for big corpora-
tions; it is now made available to all types of consum-
ers. 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 Singa-
pore. 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.
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 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 Tokyo: 7:00pm – 3:00am EST

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
world’s FX volume. Foreign exchange activity does not
flow evenly, and throughout the course of the inter-
national trading day, there are certain markets charac-
terized 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. mar-
kets and the major European markets; i.e., when it is
morning in New York and afternoon in London.
As Japan’s 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 1980’s.
Despite this, Tokyo is the first major market to open,
and many large participants use it to get a read on dy-
namics or to begin scaling into positions. Approximate-
ly 10% of all FX trading volume takes place during the
Tokyo session. Trading can be relatively thin.


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 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: 3:00am to 11:00am EST
London is by far the most important and influential
FX market, with approximately 30% of all worldwide
transactions. Most big bank’s 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 partici-
pants use London hours to complete serious foreign
exchange deals.

New York: 8:00am – 5:00pm EST
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.
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 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 tremen-
dous profit-potential in this highly lucrative market.
There are five major players in the FX market; Com-
mercial/Investment Banks, Central Banks, Corpora-
tions, Hedge/International Funds, and individuals.
Commercial and Investment Banks
Commercial and investment banks account for the
largest portion of FX trading volume. The Interbank
market caters to both the majority of commercial turn-
overs as well as enormous amounts of speculative trad-
ing everyday. Their primary role in the FX market is es-
sentially 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 day’s
volume.
Below is a list of the top financial institutions in the
world as rated by Euromoney Magazine in their May,
2001 edition.
10
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 condi-
tions to their banking industries by affecting money
supply and interest rates through open market opera-
tions 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 mar-
kets 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’ interven-
tions would violently move the market. As their invest-
ments 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 set-
ting 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
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 The FX Market
watched for interest rate announcements or changes
in 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. Trea-
sury 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 Treasury’s 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 imple-
ments the policies dictated by the Governing Council.
New monetary policy decisions are typically made by
a majority vote in biweekly meetings, with the Presi-
dent 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
and 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 Con-
sumer Price Index (CPI) below 2% and an M3 annual
11
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 King-
dom. 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, parlia-
ment passed the Bank of England Act, giving the BoE
total independence in setting monetary policy. Prior to
1997, the BoE was essentially a governmental organiza-
tion with very little freedom. Treasury’s role in setting
monetary policy diminished markedly since 1997.
However, the Treasury still sets inflation targets for the
BoE, currently defined as 2.5% annual growth in Retail
Prices Index (RPI), excluding mortgages (RPIX). The
treasury is also responsible for making key appoint-
ments at the Central Bank. The BoE’s nine member
Monetary Policy Committee (MPC) is responsible
for making decisions on interest rates. Although the
MPC has independence in setting interest rates, the
legislation provides that in extreme circumstances the
government may intervene. The Bank of England’s
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 opera-
tions (the buying/selling of government bonds). The
BoE is infamous for attempting to influence exchange
rates through impure market interventions.
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 The FX Market
Swiss National Bank (SNB):
The Swiss National Bank is the cen-
tral Bank of Switzerland. The Swiss
National Bank enjoys 100% au-
tonomy in determining the nation’s
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 Inter-
bank Offer Rate (LIBOR) to manipulate monetary
policy. The LIBOR is the rate at which major interna-
tional banks lend to one another; it primarily serves as
a benchmark for short-term interest rates. SNB offi-
cials 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 curren-
cy. As a country where international trade has been the
primary source of the country’s 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 world’s 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 gov-
ernment passed laws giving the BoJ
operational independence from the Ministry of Finance
(MoF). It was given the complete control over mone-
tary policy. However, despite the government’s attempts
to decentralize decision-making, the MoF still remains
in charge of foreign exchange policy. The MoF is con-
sidered the single most important political and mone-
tary institution in Japan. MoF officials frequently make
statements regarding the economy, which have notable
impacts on the yen. The BoJ is responsible for execut-
ing 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 mon-
12
etary policy and can have significant indirect impacts
on foreign exchange rates. The BoJ’s 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 yen’s 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 govern-
ment is notorious for directly intervening on behalf of
the yen through market interventions. BoJ interven-
tions 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 Gov-
erning Council of the Bank of
Canada is the board that is respon-
sible 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 Cana-
dian 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.
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 The FX Market
Corporations’ main interests in foreign exchange are
to perform transactions related to cross border pay-
ments. Multinational corporations may need to make
payments to foreign entities for materials, labor, mar-
keting/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 deprecia-
tion, which would affect future payments. Now, how-
ever, 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 fluctua-
tion. 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
13
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, exploit-
ing 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 bet-
ting 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 trad-
ing 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 stand-
point. 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 cus-
tomer 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
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 The FX Market
to the interbank standard of 3 pips, but execution is
unsurpassed. Now retail clients and multinational in-
stitutions can participate in the FX market on a highly
equitable playing field.
Part VI. International Overview
The International Monetary Fund (IMF) is a coopera-
tive organization that 182 countries have voluntarily
joined. It exerts an international influence over world
monetary issues, including the foreign exchange mar-
ket. However, it has no effective authority, either by law
or implied, over the domestic policies of its members.
14
Part VII. FX Regulations
For many years, the retail online foreign exchange
industry languished due to the lack of a regulatory en-
vironment 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 Commod-
ities 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 manipula-
tion, abusive trade practices, and fraud. Through ef-
fective oversight and regulation, the CFTC enables the
markets to better serve their important functions in the
nation’s economy, providing a mechanism for price re-
covery 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 pas-
sage 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 book-keeping
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).
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 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.

Investors wishing to speculate in the FX market can

You may not realize it, but you already play a role in
the foreign exchange market. Do you have some cur-
rency 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 in-
vestments 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.
now access Forex through dealers offering margin ac-
counts as small as $300, with a price spread that is as
little as 4-5 pips. High net worth individuals, corpora-
tions, or fund managers with private banking relation-
ship should be able to trade through their banks, while
corporate clients requiring the actual delivery of cur-
rencies 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 country’s currency
and economy. At the same time, you are also electing
not to hold the currencies of other nations. For ex-
ample, when you hold most of your portfolio (stocks,
bonds, bank accounts, etc.) in US dollars, you are rely-
ing 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 Japa-
nese yen, British pound, or the euro.

Almost all businessmen, businesswomen, and travel-

ers 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 inves-
tors are deciding to diversify their portfolios by holding
assets in multiple denominations within the FX market.

15
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 TABLE OF CONTENTS
CURRENCY TRADING BASICS
I. What is Trading 17
II. How a Forex Trade Works 17
What are ISO Codes? 17
Currency Pairs 17
How to calculate which currency is 18
Increasing or Decreasing in Value
EUR/USD 18
USD/JPY 18
Hard & Soft Currencies 18
Chart Reading Basics 20
Lot Size and Margin 20
Lot Sizes 20
Margin 20
Risk Management 20
Determining Position Size 21
What is a PIP? 21
Calculating Profit/Loss 21
Calculating pip values when the dollar 22
is the counter currency
Calculating pip values when the dollar 22
is the base currency
Bid/Ask Spread 22
Position Trading 23
100K Account vs. Mini-Account 24
SECTION 2
III. Types of Transactions 24
Spot Transactions 24
Outright Forward Transactions 24
Futures Transactions 25
Swap Transactions 25
Option Transaction 25
Settlement and Delivery 26
Volume & Open Interest 26
Interest Rollover 26
Trader A buying GBP/USD at 1.5755 27
How to Estimate Interest Rollover 27
GBP/USD 27
USD/JPY 27
Triple Rollover on Wednesday 27
IV. Types of Orders 28
Market Order 28
Limit Order (Take Profit Order) 28
Stop-Loss Order 28
Entry Order 28
Limit Entry Order 28
Stop Entry Order 29
V. Proper Phone Etiquette 29
VI. Fundamental Analysis 30
vs. Technical Analysis
 Currency Trading Basics
Part I. What is trading? language.

Trading is a unique form of speculation in order to gen- The table below lists the ISO codes and nicknames for
erate profit. It can be a part-time or full time business, the most commonly traded currencies:
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 famil-
iarize 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 trad-
ers. Traders or the media may refer to the currencies
by their nicknames during everyday conversations.
Throughout our training materials, we interchange-
ably use the full names, ISO codes, and nicknames of
currencies to help you get accustomed to the trading
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 curren-
cies. An exchange rate is merely the ratio of one cur-
rency 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) cur-
rency. In the USD/JPY example, the US dollar is the
base currency that we wish to trade, while the Japanese
yen 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) curren-
cy 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.

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 Currency Trading Basics
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 repre-
sents 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.
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 cur-
rency 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
USD/JPY:
In the USD/JPY pair, the US dollar acts as the base
currency while the Japanese yen acts as the quoted cur-
rency. 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 or-
der 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 finan-
cial 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 domi-
nate 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 curren-
cies after the introduction of the euro is estimated at:
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 Currency Trading Basics
Other tradable currencies include the Canadian, As mentioned before, currencies are often referred to by
Australian, and New Zealand dollars. Each of these their nicknames. Similar to currencies, it is important
accounts for 3-7% of the total market volume and they to familiarize yourself with the common names of the
are often referred to as “minor” currencies. Together, currency pairs. There is a specific trading terminology
the majors and minors constitute all hard currencies that is used frequently to describe each currency pair.
that are currently traded in Forex. Soft currencies are
currencies such as the Argentine peso, the Russian ru-
ble, the Hong Kong dollar, and the Polish zloty. These
are not tradable or recognized outside their country of
origin.

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 cur-
rency, 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
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 Currency Trading Basics
Chart Reading Basics
Charts are used to show the correlation between the
value of the base and quoted currencies. The follow-
ing 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 side-
ways. 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 move-
ments. 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 manage-
ment 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 cur-
rency trading can be conducted on a highly leveraged
basis. Every trader should have a thorough understand-
20
ing 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 ac-
count, 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 col-
lateral 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 ex-
ample, 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 discre-
tion 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
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 Currency Trading Basics
in a trader’s account. Risk is minimized in the spot FX example.
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 posi-
tions 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. For instance, the US dollar moves from 1.6000 to
1.6004 in the cable/dollar pair, it has moved 4 pips.
Determining Position Size When you have an open position, each upward or
Prior to starting up your trade station, an assessment downward pip movement in the market price can be
should be made of the maximum account loss that is either a profit or a loss, depending on which currency
likely to occur over time, per lot. For example, assume (base or quoted) you bought and which one you sold.
you have determined that the worst case scenario is
to lose 20 pips on any trade. This translates into ap- Calculating Profit/Loss
proximately $200 per $100,000 position size. Further Many Forex retail brokers assign a fixed dollar value per
assume that the $100,000 position size is equal to one pip that varies according to the lot size and the makeup
lot. Six consecutive losing trades would result in a loss of each currency pair. For example, the pip value may
of $1,200 (6 x $200); a difficult period but not an be $10 per pip on each $100,000 lot of cable/dollar,
unrealistic one over the long run. This scenario would while only $6.50 per pip on each $100,000 lot of dol-
translate to a 12% loss for an account that has a trad- lar/franc. Other dealers offer a floating pip value that
ing capital of $10,000. Therefore, even though it may is calculated according to the lot size of each currency
be possible to trade 5 lots or more with a $10,000 pair and the fluctuating exchange rate. For example,
account, this analysis suggests that the resulting draw- notice how the pip value on a 15,000,000 lot of dollar/
down would be too great - 60% or more of the capital yen is calculated based on a one-pip movement from
would be wiped out. Traders should have a sense of 120.00 to 120.01:
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 incre-
ment 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 differ-
ence 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
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 trad-
ing EUR/USD and the market moves 10 pips in your
favor, then your profit would be exactly $100. On the

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 Currency Trading Basics
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 pre-
vailing market rates.
Although most online trading platforms with repu-
table 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:
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. Conse-
quently, 100,000 euros are worth 114,600 US dollars.
If the market price moves one pip to 1.1461, then one
euro is now worth 1.1461 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 114,610 dollars.
If a trader had bought 100,000 euros by selling
114,600 dollars when the market price was 1.1460,
then those 100,000 Euros would be worth 114,610
22
dollars (10 US dollars more) when the market price
moves to 1.1461. The trader could choose to close the
position out and take this $10 profit.
Conversely, let’s 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
1.1461 and the traders chooses to close the position,
he/she would have to buy back the 100,000 Euros with
114,610 dollars. The loss on the trade would be $10.
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 cur-
rency pair.
For example, if the current exchange rate for USD/
CAD is 1.3300, then one dollar is worth 1.33 Cana-
dian 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 1 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 1 USD=1.3301, then 10 CAD= 7.52 USD.
Simply divide 10 by 1.3301.
If a trader closes out a position at a one pip profit when
the USD/CAD market price is 1.3301, he/she auto-
matically locks in a 10 CAD profit which is equivalent
to $7.52 at that time. At a different market price, how-
ever, 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 the counter currency. The ask is the price at which
a market maker will sell (and a trader can buy) the base
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 Currency Trading Basics
currency in exchange for the counter currency. The dif-
ference 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
Position Trading
currency pair. The difference between the bid and the
The objective of currency trading is to exchange one
ask price gives us a 4-pip spread in this example. The
currency for another in the anticipation that the market
4-pip spread represents the cost of the transaction. It is
rate or price will change, thus, increasing the value of
important to note that since the FX market is a decen-
the currency bought relative to the one sold. In trading
tralized market, the spreads that a trader receives for a
language, a long position is one in which a trader buys
given currency pair will vary according to the market
a new currency at one price and aims to sell it later at
maker one trades with. Generally, there is an average of
a higher price. When a trader buys a currency and the
4-5 pips on the major currency pairs and 5-20 pips on
price appreciates in value, the trader must sell the cur-
the cross currency pairs.
rency back in order to secure the profit. A short posi-
tion is one in which the trader sells a currency in antici-
pation 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
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 Currency Trading Basics
100K Account vs. Mini-Account
You may choose to open a regular (100K) 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%
Outright Forward Transactions
Spot Transactions One way to deal with the foreign exchange risk is to
This type of transaction accounts for almost half of all engage in a forward transaction. In this transaction,
FX market transactions. The exchange of two curren- money does not actually change hands until an agreed
cies at a rate agreed on the date of the contract for upon future date. A buyer and seller agree on an ex-
delivery in two business days (except for USD/CAD, change rate for any date in the future and the transac-
which is the next business day). tion 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.
24
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 Currency Trading Basics
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.
Swap Transactions
The most common type of forward transaction is the
currency swap. In a swap, two parties exchange cur-
rencies 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
1 day, 1 week, 1 month, or 3 months. Effectively, the
underlying amount in each currency is simultaneously
borrowed or lent – the ‘long’ lent and the ‘short’ bor-
rowed.
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 opti-
mal moment in time. It is by using swaps that traders
can hold a position without ever being delivered. This
enables customers to trade on a margin basis, and pay
margin on a daily basis when the position is marked to
the market.
25
Option Transaction
To address the lack of flexibility in forward transac-
tions, 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.
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 which—the option rate or the current
market rate—is 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 transac-
tion 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 partic-
ipants 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.
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 Currency Trading Basics
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 spe-
cific 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 mar-
kets 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 world’s
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 extrapo-
lated from futures market data.
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
26
currency. Economies that are growing rapidly may
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 acces-
sible 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 be-
tween the interest rates of the two corresponding coun-
tries. 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 inter-
national 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:
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 Currency Trading Basics
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. Alter-
natively, 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 bank’s 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 inter-
est 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 buy-
ing 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 bal-
ance 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 Inter-
27
est 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 1 = -8.31
Triple Rollover on Wednesday
Since there is a two-day settlement period in foreign ex-
change, 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 posi-
tions opened and held overnight on Wednesday, roll-
over 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
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 Currency Trading Basics
transaction has a value day. If the deal is not 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 in-
cludes: 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. Let’s 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
28
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 con-
ducive 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 in-
stance, 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 speci-
fied. 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.
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 Currency Trading Basics
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 trend’s 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 be-
low 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 ac-
tivated. 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 in-
stance, 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 P/L – if the buy rate reached
117.85. In this example, the trader is expecting a break-
out 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.
29
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. Let’s 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 125.10-15).
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.
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 Currency Trading Basics

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 finan-
cial markets: fundamental analysis and technical analy-
sis. 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 cur-
rency’s proper current as well as future valuation. One
clear point of distinction is that fundamental analysis
studies the causes of market movements, while techni-
cal analysis studies the effects of market movements.

30
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 TABLE OF CONTENTS
FUNDAMENTAL ANALYSIS
I. How the Economy Works? 32
Theories Used to Analyze the Economy 32
Purchasing Power Parity (PPP) 32
Balance of Payments Model 32
Asset Market Model 32
Factors that Affect the Economy 33
Economic Factors 33
Confidence Factors 33
Approaches to Analyze the FX Market 33
II. Fundamental Analysis 33
Two Main Factors in Fundamental Analysis 34
Trade Flows 34
Capital Flows 34
Physical Investments 34
Portfolio Investments 34
III. Factors Moving the FX Market 34
G7 Meeting 35
Inflation 35
Gross domestic product (GDP) 35
Interest Rates 35
Nominal and Real Rate of Interest 35
Producer Price Index (PPI) 35
Consumer Price Index (CPI) 36
Personal Income and Personal 36
Consumption Expenditures (PCE)
Trade Deficits 36
Industrial Production 36
Unemployment Rates 36
Business Inventories 36
Durable Goods Orders 36
Retail Sales 37
Housing Starts 37
SECTION 3
IV. Profiles on the Major Currencies 37
US Dollar (USD) 37
Overview of the U.S Economy 37
USD Trading Aspects 38
Euro (EUR) 38
Overview of the European Monetary 38
Union Economy
EUR Trading Aspects 38
Japanese Yen (JPY) 38
Overview of the Japanese Economy 39
JPY Trading Aspects 39
Great British Pound (GBP) 40
Overview of the British Economy 40
GBP Trading Aspects 40
Switzerland 40
(Confederatio Helvetica Franc-CHF)
Overview of the Swiss Economy 40
CHF Trading Aspects: 40
Canadian Dollar (CAD) 41
Overview of the Canadian Economy 41
CAD Trading Aspects: 41
V. Tips for Trading with 41
Fundamental Analysis
VI. Tips to Interpret Economic 42
Indicators
 Fundamental Analysis
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 oper-
ates. An economy moves in cycles. Each cycle includes
a period of economic expansion leading to a peak, fol-
lowed 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 eco-
nomic recovery and expansion. A period of at least six
consecutive months of economic contraction is gener-
ally 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 funda-
mental 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 deter-
mined 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 appreci-
ate 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.
32
Every few years, the OECD (Organization for Eco-
nomic 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 long-term (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 depreci-
ate. The cheaper currency renders the nation’s 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 towards
equilibrium. In other words, the Balance of Payment
Model is hinged on the theory that a currency will
move as a result of a nation’s 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
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 Fundamental Analysis
bonds) increases the demand for that nation’s currency.
Advocates point out that the proportion of foreign
exchange transactions stemming from cross border-
trading 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 1990’s, 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 be-
come successful. There are a lot of factors that can cause
a nation’s 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.
33
Confidence Factors
Confidence factors are general, and often non-quantita-
tive, explanations for a past or prospective move. They
include political events, market sentiment about the
management of a country’s currency, or hunches con-
cerning 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 world’s confidence in that country’s
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 ongo-
ing debate as to which methodology is more success-
ful. Technical traders focus their strategies primarily
on price action, while fundamental traders focus their
efforts on determining a currency’s proper current and
future valuation.
Part II. Fundamental Analysis
Fundamental analysis focuses on the economic, politi-
cal, 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. Fundamen-
tal 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 nation’s government, the climate of stability, and the
level of certainty have a great influence on the FX mar-
ket. 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 potential changes
to the economic, political, and social environment.
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 Fundamental Analysis
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, to-
wards 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 respec-
tive countries is the trade balance. Trade balance shows
the net differences between a nation’s imports and ex-
ports. 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 economy’s imports are more than its exports,
the trade balance is said to be in deficit. If an economy’s
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 country’s 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 economy’s
incoming and outgoing investment flows. A positive
capital flow balance implies that foreign inflows into a
country exceed outflows. A negative capital flow bal-
ance indicates that there are more physical or portfolio
investments bought by domestic investors than foreign
investors.
Physical Investments
Physical Investments are actual foreign direct invest-
ments by corporations, such as investments in manu-
34
facturing, 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 move-
ments represent the underlying changes in actual physi-
cal 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 mar-
kets 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 country’s 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 pri-
vate 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
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
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 Fundamental Analysis
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 funda-
mentals are a dynamic mix of distinct plans, erratic be-
haviors, 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 inter-
national trade. Below is a brief overview of some of the
major economic news, events, reports, and announce-
ments 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 some-
times referred to as the G-8.
Inflation
Price index numbers are used to assess inflation. Infla-
tion is a rise in the general level of prices in an econo-
my. When the price of goods rises, there is a general in-
crease 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 defla-
tion. 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 country’s econo-
my is growing or shrinking as it measures the country’s
economic output and growth.
35
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 adjust-
ing 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 institu-
tions. 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 borrow-
ing 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 country’s currency
will strengthen in relation to other currencies as assets
are shifted to gain a higher return. The timing of inter-
est 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 purchas-
ing power of money, the rate of interest is affected by it.
Just like GDP can be adjusted for the effects of infla-
tion, 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 ad-
vertised 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.
Producer Price Index (PPI)
The Producer Price Index (PPI) measures the aver-
age changes in selling price as indicated by domestic
producers for their output in various industries. The FX
market tends to focus on the PPI for seasonally adjust-
ed finished goods on a monthly, quarterly, semi-annual
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 Fundamental Analysis
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 house-
hold. 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, trans-
portation, 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, trans-
portation, medical care, apparel, entertainment, and
other), each of which is weighted by its relative impor-
tance. 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.
36
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 impor-
tance 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 unem-
ployment 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, fac-
tory 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 (GDP) remains unsold.
When inventories of unsold output are high, it means
the economy is slowing down and the currency is be-
coming 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) dur-
ing 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.
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 Fundamental Analysis
Retail Sales a large trade deficit of approximately $500 billion,
The retail sales report measures total receipts of retail which makes the U.S. rely heavily on capital flows.
stores and includes the retail sales for both durable and Hence, the dollar is a capital flow dominated currency.
non-durable goods. It reflects broad consumer spend-
ing patterns and is adjusted to normal seasonal varia-
tion, 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.

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 begin-
ning 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.

The U.S. Central Bank, the Federal Reserve (Fed), has

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, Japa-
nese yen, British pound, Swiss franc, and the Canadian
dollar.
US Dollar (USD)
full independence in setting monetary policy to achieve
maximum non-inflationary growth. There are primarily
three policy signals that the Federal Reserve manipu-
lates to assert control over the country’s 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 pur-
poses. 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.

Overview of the U.S. Economy
The United States (U.S.) has the
largest and most technologically-ad-
vanced 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. sustains
37
Fed Funds Rate is clearly the foremost interest rate. It is
the rate at which depositary institutions charge one an-
other 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
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 Fundamental Analysis
members altogether and they include the president of currency. The EU has a single monetary policy dictated
the Federal Reserve Bank of New York, the seven mem- by the European Central Bank (ECB). The decision
bers of the Board of Governors, and the remaining four making body is the Governing Council which con-
seats carrying a one-year term each are rotated among sists of the Executive Board and the governors of the
the presidents of the 11 other Reserve Banks. national central banks. The Executive Board consists
of the ECB President, Vice-President, and four other
USD Trading Aspects members. These same 15 countries constitute the Euro-
The US dollar is involved in over 90% of all currency pean Monetary Union (EMU). The EMU is the world’s
trades. The Treasury and Federal Reserve have favored second largest economic entity with a GDP valued over
a strong dollar for the past two decades, and 8 trillion USD in 2002. The EMU is both a trade and a
occasionally, interventions are applied to sup- capital flow driven economy, therefore, trade is very im-
port this policy. Prior to 9/11, the USD was portant to the economies within the EMU. The EMU
considered one of the world’s safest currencies exports account for 19% of total world trade while
to trade. It still is the safest currency to some imports account for 17%. It is primarily a service-ori-
extent, however, the States’ vulnerability to terrorism ented economy since services in 2001 accounted for
has somewhat diminished this belief. Many emerging approximately 70% of the total GDP.
market countries peg their local currencies to the dollar
in efforts to stabilize their own economy. Most of the
world’s 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 gov-
ernment 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. EUR Trading Aspects:
The EUR/USD is the most liquid currency
Euro (EUR) pair in the world and its movement is used
as the primary gauge of both general Eu-
Overview of the European Monetary Union ropean and U.S. strength/weakness. The
EUR/USD exchange rate is sometimes
Economy
impacted by movements in cross exchange rates (non-
The European Union (EU) was
dollar exchange rates), such as the EUR/JPY or EUR/
developed as an institutional frame-
GBP pairs. For instance, positive news in Japan could
work for the construction of a
potentially cause a significant drop in the EUR/USD
united Europe. The EU consists of
pair following the drop in the EUR/JPY exchange
15 member countries that share the euro as a common

38
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 Fundamental Analysis
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 correla-
tion between EUR/USD and USD/CHF, reflecting
a consistently similar relation between the euro and
Swiss franc. Since the Swiss economy is highly depend-
ently 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 govern-
ments under parliamentary coalitions, it is highly sus-
ceptible 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 respon-
sible 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
39
the U.S. and China. 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. Japan’s economy tends to be both capital
and trade flow driven as international investors con-
tribute to a high influx of currencies into Japan’s 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 move-
ments. The yen is closely monitored by the single most
important political and monetary institution in Japan,
the Ministry of Finance (MoF). Despite Japan’s gradual
measures to decentralize decision-making, the MoF’s
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 move-
ment of the yen through interventions. There are three
main factors behind the BoJ and the MoF interven-
tion: 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. Gener-
ally, 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
sometimes impacted by movements in cross exchange
rates such as EUR/JPY. For example, a rising USD/JPY
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 Fundamental Analysis
could be a result of an appreciating EUR/JPY, rather
than direct strength in the dollar. Therefore, it is impor-
tant 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
world’s 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 produc-
tion industry accounts for 10% of the nation’s GDP. Its
largest trading partner is the EU, which accounts for
over 50% of all the country’s import and export activi-
ties.
GBP Trading Aspects
The GBP has always played a significant
role in the FX market and accounts for
approximately 6% of the world’s 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 depre-
ciate 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.
40
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 be-
long to the G7. Switzerland’s stable
economy has a per capita GPD that is greater than any
other Western European economy. It has a prosper-
ous tourism industry and the world’s 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 country’s total GDP. It is important
to note that, with the sophisticated banking system,
Switzerland has become the world’s largest destination
for offshore capital, which totals over $2 trillion in off-
shore 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
country’s economic development.
CHF Trading Aspects:
Switzerland’s neutral political status makes the
CHF a safe currency to trade. During inter-
national 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 signifi-
cantly 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, 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
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 Fundamental Analysis
franc is positively correlated to the euro. This relation-
ship 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.
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 stan-
dards. The United States accounts for more than 85%
of Canada’s 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
world’s 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.
41
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 senti-
ment 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.
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 economist’s 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. How-
ever, 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 unde-
sired losses:
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 Fundamental Analysis
1. Always tune in to a live news source or channel dur-
ing 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.
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 Trad-
ing Post’s 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.
3. Get out of the market prior to any major announce-
ment if you are a short-term, technical trader. If you
must hold on to a longer term position, re-evaluate
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 direc-
tion 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 ex-
pected a one-fifth increase, the market could easily rally
with surprised relief. Therefore, it is important that
42
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.
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 month’s durable goods figure might have origi-
nally 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 revi-
sion to the previous month’s data.
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 mea-
suring 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 mea-
suring.
Pay attention to which indicators the markets are focus-
ing 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 mar-
kets 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
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 Fundamental Analysis
reasons why many traders turn to technical analysis.
To some, technical analysis is seen as a way to trans-
form all of the fundamental factors that influence the
markets into one simple tool, prices. However, trading
a particular market without good fundamental knowl-
edge about the exact nature of its underlying elements
is rather risky. Achieve a balance between being unin-
formed 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.

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 TABLE OF CONTENTS
TECHNICAL ANALYSIS
I. Technical Analysis vs. 46 IV. Charts 50
Fundamental Analysis Scaling of Charts 51
Overview 46 Choosing the Proper Time Period 51
Two Major Forms of Technical Analysis 46 Day or Intraday Trading 51
Swing Trader 52
II. Trends 47 Position Trader 53
Three Methods of Plotting Charts 53
Types of Trends 47 Bar Chart 54
Uptrend 47 Line Chart 55
Downtrend 47 Candlestick Chart 56
Sideways Trend 47 Common Candlesticks 57
Classifications of Trends 48 Candlestick Patterns 57
Doji 57
III. Rally & Consolidation Phases 48 Bearish Engulfing Pattern 57
Bullish Engulfing Pattern 58
Continued Patterns 48 Piercing Line Pattern 58
Channel or Rectangle 48 Dark Cloud Pattern 58
Triangles 49 Shooting Star Pattern 59
Wedge 49 Morning Star Pattern 59
Trend Reversal Patterns 49 Evening Star Pattern 59
Head and Shoulders 50 Harami Pattern 60
1-2-3 Tops and Bottoms 50 Hammer Pattern 60
Double or Triple Tops and Bottoms 50 Hanging Man Pattern 60

SECTION 4
 TABLE OF CONTENTS
TECHNICAL ANALYSIS
V. Pattern Interpretation 60
Principle 1 - Patterns take on Significance 60
from their Size and Depth
Principle 2 - Do not wait for Perfect 60
Patterns
Principle 3 - Combine Pattern Trading 60
with Other Techniques
Identifying Support and Resistance 60
Drawing Trend Lines 61
VI. Technical Indicators 61
Moving Averages (MA) 62
Simple Moving Average 62
Weighted Moving Average 62
Expontentially Smoothed Moving Average 62
Application of Moving Averages in Trading 63
1. Determine entry and exit points 63
2. Determine direction of trend 63
3. Determine strength of trend 63
Most Commonly Used Moving Averages 64
Bollinger Bands 64
Methods of interpreting Bollinger Bands 65
1. Breakouts 66
2. Overbought & Oversold Indicators 66
SECTION 4
VII. Oscillators 65
Relative Strength Indicator (RSI) 65
Moving Average Convergence and 66
Divergence (MACD)
VIII. Stochastics 67
Application of Stochastics in Trading 67
1) Detect overbought and oversold 67
conditions
2) Divergence 67
3) Trade Signals 67
Rate of Change (ROC) 67
IX. The Basic Theories 68
Fibonacci Retracement 68
Application of Fibonacci 68
Retracement Levels of Trading
Factors to consider when using the 69
Fibonacci Levels:
Elliott Wave Theory 69
X. Tips for Using 71
Technical Analysis
 Technical Analysis
Part I. Technical Analysis vs. Fundamental
Analysis
Technical analysis concentrates on the study of market
action while fundamental analysis focuses on the eco-
nomic 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 funda-
mentalist 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 deci-
sions. 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.
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 turnarounds. Technical analysis can
be used on an intraday 5 minute, 15 minute, hourly,
46
weekly, or monthly basis.
Technical analysis is based on 3 assumptions listed in
the table below.
Depending on the level of complexity, technical analy-
sis may involve price charts, volume charts, and many
other mathematical representations of market patterns.
As you advance in your technical trading skills, techni-
cal 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 cor-
rects itself. A technically trained trader can easily iden-
tify 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 proper-
ties 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.
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 Technical Analysis
Part II. Trends An uptrend is a succession of higher highs and higher
lows. It indicates a bull market in which the base cur-
A trend is an overall directional price movement in rency is appreciating in value. In essence, an uptrend
a pre-defined time interval. It is estimated that 70% can be considered intact until a previous relative low
of the time, markets will fluctuate randomly or move point is broken. A violation of this condition serves as
between support and resistance levels. The rest of the a warning that the trend may be over. Once an uptrend
time, market behavior is characterized by persistent is confirmed, traders should enter a buying position; in
price movements – trends – that break through support other words, go long on the currency pair.
and resistance levels.
Downtrend
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 exist-
ing 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 analy-
sis is this saying: “Never go against the trend; the trend
is your friend”. Prices can move in one of three direc-
tions, up, down or sideways. Once a trend in is estab-
lished 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) Down-
trend, and 3) Sideways Trend.
Uptrend
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 estab-
lished, traders should enter a selling position, which is
also known as shorting the currency pair.
Sideways Trend

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 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, inter-
mediate, and short-term.
Part III. 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 pessimis-
tic, they are more likely to only be willing to accept a
lower price, which decreases the value of the sold cur-
rency. Technical traders can notice these price struggles
as buyers and sellers battle. These battles between
buyers and sellers appear in re¬occurring patterns or
formations that can be seen within their charts. These
patterns can also be categorized into two groups, con-
tinuation patterns and trend reversal patterns, which
naturally correlate with the two above-described phases.
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Continuation Patterns
Continuation patterns reflect a gap or pause in trading
that the market needs during sharp trends. Such peri-
ods 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. Let’s
review several common continuation patterns that can
enhance your technical analysis. Although these pat-
terns 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 paral-
lel lines can be drawn through or against price bar or
candle highs and lows. Channels can be in several di-
rections: 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 down-
trend and breaks out on the downside, the formation is
called a bearish rectangle.
Inclining Rectangle Declining Rectangle
Horizontal 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 break-
out, the market will most likely move in the direction
of the original trend.
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 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.
guished by a noticeable slant in either direction.
Triangles
A triangle is a pattern in which the slope of price bar There are several breakout-based approaches to trading
or candle highs and lows are converging to a smaller wedges. The most common approach is to give a bias to
pricing area or point so as to outline the shape of a the same direction of the overall trend when the wedge
triangle. Triangles can either be symmetrical, ascending, is pointed in the opposite direction of the trend.
descending, or expanding. The ascending triangle is
recognized by a flat resistance line and an upward slop- Below is an example of a falling wedge in a downtrend:
ing support line. The descending triangle is identified
by a flat support line and downward sloping resistance Falling Wedge In a Downward Trend
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.

Trend Reversal Patterns

Ascending Triangle
Symetrical Triangle
Descending Triangle
Expanding 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 distin-
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 counter-trend move. Let’s 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 slow down
and forces of supply and demand are generally achiev-
ing equilibrium. Sellers come in at the highs (left shoul-
der) and push the market down until the bearish force
slows down (beginning neckline). Buyers soon

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 Technical Analysis
return to the market and ultimately push through to Below is an example of a 1-2-3 bottom:
new highs (head). However, the new highs are quickly
turned back and the downside is tested again (con-
tinuing neckline). Short-term buying re¬emerges 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:

Double or Triple Tops and Bottoms

Double or Triple Tops and Bottoms is another bar pat-
tern that signals a trend reversal. In an uptrend, prices
rally to a new high, pull back for an indefinite time pe-
riod, 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.

1-2-3 Tops and Bottoms

1-2-3 tops and bottoms is a bar pattern that signals a Double Top
trend reversal. In an uptrend, the market hits a new
high (#1 top), pulls back to a short-term support level Enter the market near the top or wait until it
breaks a 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
Part IV. Charts
definition is inverted. The pattern is complete when the
market breaks the #2 point.
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 whatever
is being studied. Depending on their level of sophistica-
tion, charts can help with much more advanced studies
of the markets.

50
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 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 informa-
tion 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:

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 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:

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 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 Bar Chart

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 (X-axis). 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.

This method portrays pricing action using vertical bars.

The bar represents the trading range for the stated time
period. The bars themselves usually have at least one
horizontal mark. The top of the bar records the highest

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 Technical Analysis

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 infor-
mation on a single page.

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 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.

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 Technical Analysis
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).
56
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 rep-
resents the pricing activity between the opening and
closing prices.
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 advan-
tage of using candlesticks is that they can make it easier
to spot certain price patterns that may not be as appar-
ent in other charts. The disadvantage, of course, is that
candlesticks take up a lot more horizontal space, giving
a smaller view of market activity.
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 Technical Analysis
Common Candlesticks
There are 5 different types of candlesticks that are ex-
tremely 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 vari-
ous candlestick patterns. These patterns possess specific
forecasting characteristics that indicate buying/selling
opportunities.
Doji
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A doji implies that the market has an unclear or unde-
cided 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.
Doji
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 of the market. The sig-
nificance 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.
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 Technical Analysis
Shooting Star Pattern
A shooting star is a reversal pat-
tern 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
Bearish Engulfing with a strong selling pressure after
it rallied. The color of the body
can be either blue or red. More often it signals a down-
trend reversal, as opposed to an uptrend reversal, is in
the making.
Bullish Engulfing Pattern
The bullish engulfing pattern
is a trend reversal pattern that Shooting Star
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.

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
Bullish Engulfing
candle usually has a long 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.

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 Technical Analysis
Hammer Pattern
The hammer formation appears after
a significant downtrend and is typi-
cally viewed as a bullish signal. It is
particularly important if it occurs
after a number of down days. Traders
may buy once a hammer formation
appears, aspiring for an imminent
trend reversal. It is even more effec-
Morning Star tive when a currency reaches a double bottom and a
strong support line is in place.

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 for-
mation also involves three candles:
a blue candle, followed by a small
red or blue, then a long red candle. Hammer
The last red candle does not touch
the body of the second candle and
closes well into the body of the first Hanging Man Pattern
blue candle. Traders should not trade until after con- The hanging man pattern appears
firming the close of the third candle. after a rally and is typically viewed as
a bearish signal. Because the currency
pair was not able to close higher than
Evening Star
its opening price, the hanging man
indicates weakening market senti-
ment. Prior to opening a new posi-
tion, it is important to wait for the
next candlestick to close. The next candlestick must
close below the hanging man’s body in order to confirm
the trend reversal.

Hanging Man

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 Technical Analysis
Part V. Pattern Interpretation
There are 3 principles that should help increase your
ability to successfully interpret the market data dis-
played within price patterns.
Principle 1 – Patterns take on Significance from
their Size and Depth
The larger a pattern becomes, the greater its signifi-
cance. 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.
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 usu-
ally 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.

Principle 2 – Do not wait for Perfect Patterns

Novice traders will often miss out on great trade op-
portunities 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 pat-
terns alone. However, when you combine other tech-
niques, you can increase the probability of your success
immensely.
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.

Identifying Support & 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 direc-

tion of these peaks and troughs determine the trend.
These peaks and troughs are more commonly referred
to as support and resistance levels.

60
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 Technical Analysis
The following chart shows rising support and resistance
levels in an uptrend.
There are several guidelines that are applicable when
using support and resistance levels. These guidelines are
listed in the table below.
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 connect-
ing two points or more. The validity of a trading line is
61
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.
Part VI. Technical Indicators
Technical indicators are mathematical equations ap-
plied to a price, time, or volume measurement that pro-
duce 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 indica-
tors that are commonly used worldwide. There are
two types of technical indicators: trend-following and
oscillators.
1) Trend-following indicators are known as lag-
ging 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.
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 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 (MA’s) are trend-following indica-
tors 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 aver-
ages are important technical indicators because they
eliminate minor fluctuations and provide traders with a
clear depiction of price over a length of time. MA’s 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 MA’s 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 aver-
ages illustrate.
There are three kinds of mathematically distinct mov-
ing averages: Simple MA, Weighted MA, and Exponen-
tially Smoothed MA.
Simple Moving Average
The simple moving average is the most basic of all mov-
ing 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 addi-
tion 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.
62
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 com-
monly 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 period’s average price.
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 Technical Analysis
Application of Moving Averages in Trading
1. Determine entry and exit points
Moving averages may be used by combining two aver-
ages of distinct time frames. For example, a 5-day 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).
63
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.
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 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 aver-
age line. For this reason, most traders will plot several
moving averages on the same chart.
Bollinger Bands
Bollinger Bands is another trend-following indica-
tor 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
64
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 draw-
back of being too narrow to accommodate price levels
when volatility is high, and too wide when volatility is
low.
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 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 Methods of Interpreting Bollinger Bands
percentage amount. Because standard deviation is a
measure of volatility, Bollinger Bands are dynamic 1. Breakouts
indicators that adjust themselves (widen and contract) When the price breaks above the upper band or below
based on the current levels of volatility in the market the lower band, some traders believe that it is an indica-
being studied. Generally, the higher the volatility, the tion that currency price is in the midst of a breakout.
wider the band is; the lower the volatility, the narrower Consequently, these traders would take a position in
the band is. the direction of the breakout.

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 rec-
ommended 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 p-period 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 move-
ment 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 sim-
ply 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.
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.
Part VII. 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 indi-
cator. 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 pair’s
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

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 Technical Analysis
above 70 indicates an overbought condition, which in
turn indicates a sell signal. An RSI below 30 represents
an oversold condition, which implies a buy signal.
Moreover, a sell signal is indicated when the market
price is high and the RSI value begins declining. Con-
versely, 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, trad-
ers 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 sen-
sitivity. Depending on the style of trading, the RSI can
be manipulated to suit the trader’s 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-trad-
ing. 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 a reversal is about to take place. Wait
for confirmation before
you act on divergent
indications from your
RSI studies. A diver-
gence between the RSI
oscillator and the current
market price trend is an
accurate indicator that
a market turning point
66
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 over-
bought/oversold conditions. The MACD is composed
of two lines on the charts and are displayed as cross-
overs that give buy and sell signals. The MACD line is
usually a solid line that signifies the difference between
two MA’s 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 mov-
ing average moves away significantly from the longer
moving average, the currency pair’s 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 cur-
rency price, this may signal a trend reversal. For in-
stance, if the MACD turns positive and makes higher
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 Technical Analysis
lows while prices are still sinking, this could be a strong
buy signal. Conversely, if the MACD makes lower
highs while prices are aspiring, this could signify a
strong sell signal.
Part VIII. Stochastics
This popular indicator examines the strength and
momentum of a currency pair’s price action by measur-
ing 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 sepa-
rate lines. They are both plotted on a scale from 0 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 impor-
tant to note that stochastics do not work well in chop-
py 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 side-
ways. Furthermore, stochastics are most useful in mea-
suring 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.
67
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, read-
ings 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 sig-
nals 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 today’s price) with the price of x time
periods ago. The result is displayed as a continuous
value that fluctuates below and above the median. Al-
though the jaggedness of the ROC’s 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 intermedi-
ate-term 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 indicators, it is pru-
dent to wait for the market to begin correcting (i.e.,
turn up or down) before placing your trade. A market
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 Technical Analysis
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, oscil-
lating back and forth in a fairly regular cycle. Often,
price changes can be anticipated by studying the previ-
ous cycles of the ROC and relating the previous cycles
to the current market.
Part IX. The Basic Theories
In addition to the technical indicators, successful
traders incorporate basic theories into their trading
strategies. These theories enrich a trader’s 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.
Fibonacci Retracement
Fibonacci retracement levels are a sequence of num-
bers discovered by the noted mathematician Leonardo
da Pisa during the twelfth century. These numbers
describe cycles found throughout nature and when ap-
plied 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 Fibo-
nacci 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 enter and exit positions.
The most commonly used levels are 38.2%, 50%, and
61.8%.
68
Application of Fibonacci Retracement Levels in
Trading
Fibonacci levels are used by drawing a trend line be-
tween 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.
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% ap-
peared 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 posi-
tion 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 an-
ticipate that the price will now move towards the 50%
and enter another long position. Theoretically, a trader
could exit before the retracement occurs and enter new
positions once the currency pair resumes its uptrend.
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 Technical Analysis
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 impor-
tance 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 resis-
tance in other studies, such as RSI or MACD, this
increases the probability that the correction will
end at these levels.
69
Elliott Wave Theory
Ralph Nelson Elliott, an engineer from the 1930’s,
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 Elliott’s 5-wave theory, market trends of-
ten 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 addi-
tion, 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 1 in an uptrend.
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 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. El-
lioticians 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, where-
as 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 move-
ments 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 figur- The diagram below shows the corrective patterns that
ing out the relativity of the wave structure. A corrective consist of various wave sequences.
wave, for instance, could be composed of sub-impulsive
and corrective waves. It is therefore

70
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 Technical Analysis
The diagram below shows a unique type of corrective
patterns.

Part X. Tips for Using Technical Analysis

As in all other aspects of trading, be disciplined when This is not to say that you should go to the other
utilizing technical analysis. Too often, a trader will fail extreme. Do not get too caught up in the mathemat-
to sell or buy into a market even after it has reached a ics involved in putting together each study. It is much
price that his or her technical studies identified as an more important to understand how and why studies
entry or exit point. This is because it is hard to screen can and should be manipulated based on the time pe-
out the fundamental realities that led to the price riods and sensitivities that you determine are ideal for
movement in the first place. the currency you are trading. These ideal levels can only
be determined after applying several different param-
For example, you are long USD/JPY and have estab- eters to each study until the charts and studies begin to
lished your stop loss at 30 pips below your entry point. reveal the “details behind the details”.
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 fol-
lowing through on your original trading plan.

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 TABLE OF CONTENTS
MONEY MANAGEMENT
I. What is Money Management? 74 II. Trading Psychology 80
Principle 1: 74 Losing Attitudes: 80
Always Start with a Demo Account Attitude #1: Fear 81
Principle 2: 75 Attitude #2: Greed 81
Trade with sufficient Risk Capital Attitude #3: Revenge 81
Principle 3: 76 Attitude #4: Carelessness 81
Establish Maximum Exposure
Winning Attitudes: 80
Principle 4: 76 Attitude #1: Confidence 81
Limit Your Losses- Use a Stop Loss Attitude #2: Determination 81
Principle 5: 77
Let the Profits Run III. Demo Account to 81
Principle 6: 77
Maintain Proper Risk vs. Reward Ration Real Trading Account
Principle 7: 77
Don’t fight the Trend
Principle 8: 78
Add to Winning Trades and Never Add
to Losing Positions
Principle 9: 78
Understand the Market Discount Mechanism
Principle 10: 78
Diversify With Multiple Currency Pairs
Principle 11: 78
Never Chase Trends
Principle 12: 79
Know When to Leave a Trade
Principle 13: 79
Approach Trading as a Business
Business/ Trading Plan 79
Research the Market 79
Record Activities with Trading Journals 79

SECTION 5
 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 eventu-
ally work towards becoming a sound technical trader.
Short-term 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.
74
Principle 1:
Always Start with a Demo Account
It is always tempting to start implementing your trad-
ing 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 sup-
plied by the company. As a novice trader, we highly rec-
ommend 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
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 Money Management & Trading Psychology
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 B’s 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.
Trading Post provides 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 ex-
ecute 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 essen-
tial or borrowed funds, you will find yourself chang-
ing 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 capi-
tal 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
75
important and 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 trader’s capital: consecu-
tive losing trades and maximum drawdown.
Let’s consider an example of two traders, A and B,
both using the same trade system. When determin-
ing 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. Let’s 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 B’s initial trad-
ing 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 per-
cent 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.
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 Money Management & Trading Psychology
FX traders can start a mini account with as low as
$300; however, to fully capitalize on trading, it is desir-
able to apply the 6 ½ test. The 6 ½ 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 suf-
ficient 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 recom-
mend 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 manag-
ers, 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
76
and implement strict disciplinary measures that ensure
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 dia-
gram 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 devel-
ops 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 mov-
ing in the unfavorable direction, it exits the position
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 Money Management & Trading Psychology
immediately, thereby, limiting the maximum loss that
you may experience for that trade. For more informa-
tion 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.
Consider the example above. The GBP/USD has begun
an uptrend in early September, 2003. Let’s say a posi-
tion 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 po-
77
sition 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 let’s do the math.
Even if your trade method is 60% successful, you will
still lose more than you gain. You have to be more suc-
cessful, 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 suc-
cessful trades but your first string of losses will eat up
your capital.
Principle 7:
Don’t 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 loser’s game.
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 Money Management & Trading Psychology
Principle 8:
Add To Winning Trades and Never Add to Losing
Positions
Another important aspect of a good money manage-
ment 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 posi-
tion started out with the lowest number of lot size pos-
sible, 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 trad-
ers 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 aver-
aging 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 discour-
aged and quit because “the market doesn’t make any
sense”. How many times have you seen market partici-
pants expecting some sort of good economic number
that comes in as expected and the market sells off? Nov-
ice traders get burned trading these situations because
they do not understand that the market already knew it
was coming. Understanding that all markets are for-
ward looking is crucial to trading success and will help
you demystify markets and their movements.
78
Principle 10:
Diversify With Multiple Currency Pairs
Always limit your risk by diversification. You can
diversify your trading by opening positions in differ-
ent currency pairs. Diversification accomplishes two
investment goals: spreading of risk and increasing profit
potential. If one currency trade becomes unprofitable,
many times a winning trade in another currency pair
can recover the first loss and leave you with additional
profit.
However, not all currency pairs give us true diversifica-
tion. 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 US dollar/Swiss franc moves in a very
similar fashion to the euro/US dollar. 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 exact-
ly 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.
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 Money Management & Trading Psychology
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.
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 in-
crease 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 success-
ful traders. A good trading journal should include:
thoughts at the moment of trade, trade logic, and price
and outcome information. When reviewed periodi-
cally (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 hold-
ing. 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 winning/
losing 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
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 Money Management & Trading Psychology
Part II. Trading Psychology
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 emo-
tional 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 dis-
torts our perception. It narrows the amount of infor-
mation 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 practic-
ing the mechanics of the trade. Second, always re-
member 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 draw-
down periods. Finally, you must learn to completely
trust your ability to respond to whatever information
the market offers you. Traders who take these proactive
80
steps toward controlling their fears will be more apt to
stick to their trading system which, in turn, will lead to
greater success.
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 go-
ing 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.
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. How-
ever, 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.
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 Money Management & Trading Psychology
Attitude #4: Carelessness
Traders are most vulnerable to carelessness after experi-
encing 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 care-
less about your trading system. Being over-confident
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 los-
ing 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. There-
fore, 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.
Winning Attitudes:
Attitude #1: Confidence
The first attitude required for successful trading is con-
fidence. We are not referring to being arrogant or cocky
like many traders can be. The confidence we are refer-
ring 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 confi-
dence 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
Trading Post. During this time, you can practice plac-
ing 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 trad-
ing with real money.
81
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 sys-
tems, bad times are frequently followed by good times.
Conversely, good times are frequently followed by bad.
Some of a trader’s greatest winners will follow a string
of losers. This is why it is extremely important for trad-
ers to be determined to apply their methods and stick
to their system. Ultimately, with persistent determina-
tion, one can overcome all obstacles.
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 ex-
perienced 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.
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Currency Basics
an introduction to the basics
of FOREX currency
 Currency Basics
Corporate Address: Suite 310 - 885 Dunsmuir Street, Vancouver, BC, V6C 1N5 Canada Phone: 604.909.3750

FX Traders should be familiar with the following currency trading basics:

- ISO Codes
- Buying & Selling
- Currency Pairs
- Determining Your Position Size
- Money Management

ISO CODES BUYING & SELLING

Currencies in the FX market are not referred to by their All trades result in the buying of one currency and the
full names; instead, they are identified by standardized selling of another, simultaneously.
codes called ISO codes, developed by the International
Organization for Standardization.
Buying (“going long”) the currency pairs implies
buying the first, base currency and selling an equivalent
ISO abbreviations are used widely on charts and trading amount of the second, quote currency (to pay for
platforms, but they are rarely used in conversations the base currency). It is not necessary to own the
among traders. Traders or the media my refer to quote currency prior to selling, as it is sold short. A
the currencies by their nicknames during everyday trader buys a currency pair if he/she believes the base
conversations. Throughout our training manuals, we currency will go up relative to the quote currency, or
interchangeably use the full names, ISO codes, and equivalently that the corresponding exchange rate will
nicknames of currencies to help you get accustomed go up.
to the trading language. The table below depicts the
ISO codes and nicknames for the most trades result in
commonly traded currencies. Selling (“going short”) the currency pair implies
selling the first, base currency, and buying the second,
quote currency. A trader sells a currency pair if he/she
ISO Names believes the base currency will go down relative to the
quote currency, or equivalently, that the quote currency
Currency Name ISO Code Nickname
will go up relative to the base currency.
Euro EUR --
Great British Pound GBP cable
US Dollar USD green back An open trade or position is one in which a trader has
Swiss Frank CHF swissy either bought or sold one currency pair and has not sold
Japanese Yen JPY -- or bought back an adequate amount of that currency
Canadian Dollar CAD loonie pair to effectively close the trade. When a trader has an
New Zealand Dollar NZD kiwi open trade or position, he/she stands to profit or lose
Australian Dollar AUD aussie from fluctuations in the price of that currency pair.

1
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 Currency Basics
Corporate Address: Suite 310 - 885 Dunsmuir Street, Vancouver, BC, V6C 1N5 Canada
CURRENCY PAIRS
An exchange rate is simply the ratio of one currency
valued against another. The first currency is referred
to as the “base currency” and the second as
the counter or “quoted 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.
Base Currency Quoted Currency
MONEY MANAGEMENT
It’s extremely important to follow proper money
management techniques to achieve your overall goal
of becoming a profitable trader. Setting stop loss
orders is the first rule in proper money management
techniques.
2
Phone: 604.909.3750
DETERMINING YOUR POSITION
SIZE
Prior to starting up your trade station, an assessment
should be made of the maximum account loss that is
likely to occur over time, per lot.
For example, assume you have determined that the
worse case scenario is to lose 20 pips on any trade.
This translates to approximately $200 per $100,000
position size. Further assume that the $100,000
position size is equivalent to one lot. Six consecutive
losing trades would result in a loss of $1,200 (6x
$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.
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Interest Rollover Basics
an introduction to the basics
of interest rolllover
 Interest Rollover Basics
Corporate Address: Suite 310 - 885 Dunsmuir Street, Vancouver, BC, V6C 1N5 Canada
FX Traders should be familiar with the following interest rollover basics:
- What is interest rollover?
- Triple rollover on Wednesday
- How to estimate a rollover
What is 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 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 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 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 5 p.m. New York time (9 p.m. GMT; 10 p.m. GMT
1
Phone: 604.909.3750
when New York is operating on daylight savings time
from late October to late March) 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.
*Note: On Wednesdays, the amount added
or subtracted to an account as a result of
rolling over a position tends to be around three
times the usual amount. This “3-day” rollover
accounts for settlement of trades through the
weekend period.
Triple Rollover on Wednesday
Since there is a two-day settlement period in foreign
exchange, the transactions that are opened on
Wednesday at 5 p.m. — 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 p.m. 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 closed on
the same day the trade is subject to rollover charges
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 Interest Rollover Basics
Corporate Address: Suite 310 - 885 Dunsmuir Street, Vancouver, BC, V6C 1N5 Canada Phone: 604.909.3750

Example: rates are quoted on a yearly basis, it is divided down

To illustrate how interest rollover charges work, to a daily basis that can be applied for daily interest
consider the following example: rollover charges.

A trader buying GDP/USD at 1.5755. 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
In this case, a trader borrows US dollars, and hence balance for the whole year is divided by 360. The
will pay interest in borrowed funds. The trader is, following is the equation to calculate the amount of
however earning interest in the British pounds that interest rollover:
have been purchased. If the Bank of England — which
regulates the pound — offers a higher interest rate
than the Federal Reserve — which regulated the
US dollar — the client has an opportunity to earn
(No. of lots) x (No. of Units per Lot) x
interest.
(Annual Interest Rate Differential/360) x (No. of Days)
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 new interest payment. Because
GDP/USD
banks can lend each other at rates different from
what the central banks lends to them, the rollover A trader buys 2 contracts of GDP/USD on Thursday
calculations can never be reduced to an exact and closes them the next day.
science. Like the currency exchange rate, the rollover
interest rates are subject to market conditions, and Contract Value: GDP 100,000
hence can fluctuate as well.
Opening Price: 1.6770
Yearly Interest Rate Differential (%): GDP 3.5 - USD 1 =
How to estimate interest rollover 2.5
Since interest rates raise the cost of currency — it Calculation: GDP 100,000 x 2 x (2.5%/360) x1 =
is more expensive to borrow currencies with a high 13.88
interest rate — a central bank’s interest rate policy
can be used to adjust the economy to its respective
USD/JPY
needs. However, since the interest rollover charge is
generally quite small, it should not serve as the core Trader A buys 3 lots of USD/JPY on Monday and
trading strategy. closes them the next day.

Example: Lot Value: USD 100,000 or JPY 12,2000,000

The following is an example of a sample calculation of Opening Price: 110.00
interest rollover: Yearly Interest Rate Differential (%): USD 1 - JPY 0 =
1
Suppose the Bank of England has an official interest Calculation: USD 100,000 x 3 x (-1%/360) x1 = -
rate of 3.5%, while the Federal Reserve has an official 8.31
interest rate of 1%. Consequently, a client how is
buying GDP/USD will earn interest since he/she is
only paying 1% while earning 3%. Because interest

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Spread & Margin Basics
an introduction to the basics
of spread and margins
 Spread & Margin
Corporate Address: Suite 310 - 885 Dunsmuir Street, Vancouver, BC, V6C 1N5 Canada Phone: 604.909.3750

FX Traders should be familiar with the following everyday FX Orders:

- Margin
- Bid/Ask Spread
- Lot Sizes and Margin
- PIPs

Margin
A Margin is a monetary deposit that you provide as Example
collateral to cover any losses. All dealers establish their The following USD/JPY price quote is an example of
own margin policy based on a percentage size. Normal bid/ask notation:
margins range from 1% to 5%.

USD/JPY: 116.10/15
Example
If the margin for day trading is 1% (100:1) with a
The first component (before the slash) refers to the
dealer that offers lot sizes of $200,000, you may open
bid price (what you obtain in JPY when you sell USD).
a one-lot position with $2,000 in your account. The
In this example, the bid price is 116.10. The second
requirements for margin vary with account size, and
component (after the slash) is used to obtain the ask
may be changed from time to time at the sole discretion
price (what you have to pay in JPY if you but USD). In
of the dealing desk, based on volume trading and
this example, the ask price is 116.15.
market conditions. As the account size and ability to
trade more lots increase, the margin percentage may
also increase In the example above, the spread is 0.5 or 5 pips. A
“pip” is the smallest unit of measurement denoting
price movement. One basis point (0.0001 or 0.01%)
Bid/Ask Spread but depends on the currency pair in reference. Unlike
All FX quotes include a two-way price, the bid and ask. the USD/JPY, most currency pair quotes are carried out
A currency exchange rate is typically given as a bid price to the 4th decimal place (example: USD/CAD may be
and an ask price. The bid price is always lower than quotes at 1.4517/22), in which case 5 pips represents
the ask price. The bid is the price at which a market a difference of 0.0005. Although a pip may seem small,
marker is willing to buy (and the traders can sell) the a movement of one pip in either direction can translate
base currency in exchange for the counter currency. The into thousands of dollars in gains or losses in the inter-
ask is the price at which a market maker will sell (and bank market.
traders can buy) the base currency in exchange for the
counter or quoted currency. The ask price represents
The 5 pip spread represents the cost of the transaction.
what has to be paid in the quoted currency to obtain
It is important to note that since the FX market is
one unit of the base currency. The difference between
a decentralized market, the spreads that a trader
the bid and the ask price is referred to as the spread,
receives, for a given currency pair will vary according to
which can be recovered with a favourable currency
the maker one trades with. Generally, there is an
movement.

1
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 Spread & Margin
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average of 4-5 pips on the major currency pairs and 5-
20 pips on the cross currency pairs.
Lot Sizes and Margin Requirements
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 the minimum round lot and is
often referred to as one “dollar” or one “buck.” Single
orders, in excess of a million dollars, are regularly
trader by large institutions and corporations.
However, smaller size orders are available to individual
FX traders. For example, some dealers offer sized in
half-dollar (0.5) and quarter dollar (0.25), while others
offer sizes of approximately $200,000 USD (0.2),
and $100,000 USD (0.1), $50,000 (0.05), and even
$10,000 (0.01).
An advantage of currency trading is that most brokers
will allow you to trade 10 times the value of your
deposit. Therefore, if you deposit $2,000 into your
2
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account, you would be able to trade $200,000 worth of
currency unity. 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
stock broker, you would be able to trade with a market
vale of only $3,000.
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).
Example
Below are a few examples of where the pip is located
within the exchange rate. The one-digit for the pip
values are underlined and highlighted red for each
example:
USD/JPY = 125.00 the number of yen to buy one dollar
USD/CHF = 1.5000 the number of franc to buy one dollar
EUR/USD = 1.1000 the number of US dollars to buy one euro
GDP/USD = 1.6000 the number of US dollars to buy one cable
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Types of Orders
an introduction to the various
types of orders
 Types of Orders
Corporate Address: #310 – 885 Dunsmuir Street, Vancouver, BC V6C 1N5 Canada Phone: 604.909.3750
FX Traders should be familiar with the following everyday FX orders:
- Market Orders
- Entry Orders
- Limit Entry Orders
- Limit Orders
- Stop Entry Orders
- Stop-Loss Orders
Market Orders
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 the spot market is that market orders are
guaranteed when dealing with a reputable broker, and
the vast liquidity of the market ensures that there are
always buyers and sellers.
Entry Orders
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 entry orders.
Limit Entry Orders
Limit entry orders are classified as entry orders whereby
the rate specified below the current market rate if it is a
sell order. Limit 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.
1
Example
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) They could place an order to sell at a price above
than the current market rate, for instance, sell at
1.0820. If the sell rate in the spot market reaches
1.0820, their sell order would be activated. In this case,
the trader expects that the market will reach 1.0820
and then reverse its direction.
(2) Traders can place an 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 (Profit/Loss) — if the buy rate
reached 1.0790. The trader is expecting a reversal of
the trend after the market reaches the rate 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.
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Limit Orders
A limit order allows a client to specify the rate at which
they 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.
Example
Let’s assume a trader has an open position where he is
long (meaning he has bought) GDP/USD, he would like
to place a limit order at 1.5900; if the market reached
that rate, he would be taken out of the market, an 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 Entry Orders
Stop entry orders rely on rationale that is the opposite
of limit entry orders. If you wish to buy at a price
below currency market price, then you are placing a
stop entry order. Strop entry orders are conducive to
“breakout” strategies, whereby the trader believes that
if the specified rate is reached, the trend’s movement is
confirmed and this will continue in that direction.
Example
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 buy at 117.09.
There are two types of stop entry orders that a trader
could place in such a situation.
2
1) They could place an order to sell at the price below
the current market rate. So, for instance, they could
place an order to sell at 116.75; if the sell rate in the
spot market reaches 116.75, their 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) Traders 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 P/L (Profit/Loss) — 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
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.
Stop-Loss Orders
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.
Example
If a trader is long or buying USD/JPY at 121.50 with a
limit of 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 reaches 121.30, he would
be stopped out of the position and would have suffered
a loss no greater than 20 pips.
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Trading Glossary
an introduction to the terms
used in Forex Trading
 Trading Glossary
Corporate Address: Suite 310 - 885 Dunsmuir Street, Vancouver, BC, V6C 1N5 Canada Phone: 604.909.3750

Welcome to the Trading Post Trading Glossary. Here you will find many of the terms you will need to trade in the
Forex Market today.

A American Option: An option that can be exercised

Account: A record of transactions of goods and services
owed to one person by another.
Adjustable Peg: An exchange rate system where
a country’s exchange rate is “pegged” (i.e. fixed) in
relation to another currency. The official rate may be
changed from time to time.
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 be-
ing revealed. Anonymous trades allow the high profile
investors to execute transactions without the scrutiny
and speculation of the market.

ADX (Average Directional Index): Unlike most oscil-
lators, 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.
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. Arbi-
trage 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 oppor-
tunities in the foreign exchange market are rare.
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.
Asian Option: An option whose payoff depends on
the average price of the underlying asset over a cer-
tain period of time. These types of option contracts are
attractive because they tend to cost less than regular
American options. Sometimes also refer to as Average


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 Trading Glossary
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Rate Option.
Ask Rate: The lowest price that shares will be of-
fered for sale, such as the bid/ask spread in the
foreign exchange market.
Ask Size: The number of shares a seller is willing to
sell at his/her ask rate.
Asset Allocation: The diversification of one’s 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 institution’s 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 regard-
less of market conditions.
Attorney in Fact: A person given the right or au-
thority to act on behalf of another to carryout busi-
ness 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.

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B
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.
Balance/Account Balance: The net value of an ac-
count.
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 eco-
nomic transactions between a country and all other
countries. This includes trade balance, foreign invest-
ments, and investments by foreigners.
Balance of Trade: Net flow of goods (exports minus
its imports) between two countries.
Back Office: Refers to the administrative arm of fi-
nancial 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 cer-
tain 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 day’s activity. The vertical bar is drawn from the
day’s highest price to the day’s 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 main-
tains 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
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pair. The primary exceptions to this rule are the British
pound, the euro and the Australian dollar.
Basis Point: Measure of a bond’s 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.
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
changes so infrequently that dealers often omit them in
quotes.
Bilateral Grid: An exchange rate system which links
all of the central rates of the EMS currencies in terms of
the ECU.
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 security’s price action: a
simple moving average in the middle; an upper band 2
standard deviations away from the simple moving aver-
age (usually set to a time frame of 20); and a corre-
sponding 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 capi-
tal, which are issued for periods greater than one year.

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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 estab-
lished 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.
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.
Broker: Individual or firm acting as an intermediary to
bring together buyers and sellers typically for a com-
mission 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.
Bundesbank: Germany’s Central Bank.
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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 for-
eign 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
currency’s 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 spe-
cific level. The client placing a stop entry order believes
that when the market’s momentum breaks through a
specified level, the rate will continue in that direction.
C Central Rate: Exchange rates against the ECU adopted
Cable: Term used to describe the exchange rate be-
tween 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 dur-
ing a fixed period. (2) A period of trading. (3) The right
of a bond issuer to pre-pay debt and demand the sur-
render 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 exer-
cise 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

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currency closes below its opening, the body is filled.
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 trad-
ing period in a single candle. *If the close is above the
open, the actual candle is either hollow or blue in color.
*If 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.
Carry: The interest cost of financing securities or other
financial instruments held.
Carry Trade: An investment position of buying a high-
er 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 deliv-
ery.
Central Bank: A banking organization, usually inde-
pendent of government, responsible for implementing a
country’s monetary policy and for printing money.
for each currency within the EMS. Currencies have lim-
ited 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 posi-
tion.
Commission: A fee charged by broker or agent for
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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.
Confirmation on a Chart: A subsequent indicator or
chart pattern, following an initial alert to a trade op-
portunity, 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 eco-
nomic crises from one country’s market to other coun-
tries 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 Ameri-
can countries.
Continuation: Represents an extension of the trend.
The trend continues to have momentum, and hence it
moves onwards without reversal.
Contract (unit or lot): The standard trading unit on
certain exchanges. A standard lot in the Forex market
is $100,000.
Convertible Currency: Currencies that can be ex-
changed for other currencies or gold.
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 vari-
ables. 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 de-
termine the forward price.

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Counterparty: A participant, either a person or an
institution, involved in one side of a financial transac-
tion. 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.
Covered Interest Rate Arbitrage: An arbitrage ap-
proach which consists of borrowing currency A, ex-
changing 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.
Credit Checking: Before making a large financial
transaction, it is imperative to check whether the coun-
terparty 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.
Credit Netting: Agreements that are made to avoid
having to continually re-check credit, usually estab-
lished between large banks and trading institutions.
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 US, the EUR/JPY rate would be called a
cross rate.
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.
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Currency (Exchange Rate) Risk: Risk associated
with drastic changes/fluctuations in exchange rates in
which one could incur a major loss.
D distribution. The definitive bearish signal of a descend-
Daily Charts: Charts that encapsulate the daily price
movement for the currency pair traded. Since the cur-
rency market operates 24 hours a day, the daily chart
typically runs from 5 p.m. 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 ses-
sion.
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.
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 inten-
tion 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 lend-
ing 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

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securities can include stocks, bonds or currencies. De-
rivatives can be traded and are usually used to hedge
portfolio risk.
Descending Triangles: A bearish continuation pattern
indicating distribution consisting of two or more com-
parable lows forming a horizontal line at the bottom.
Descending triangles are bearish patterns that indicate
ing 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 domes-
tic 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 do-
mestic consumers.
Direct Quotation: Quoting in fixed units of foreign
currency against variable amounts of the domestic cur-
rency.
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 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 ad-
ditional participants see the trend and enter the mar-
ket, thereby accelerating the trend; and consolidation,
a period characterized by the initial participants exiting
their trade.
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Durable Goods Order: An economic indicator which
measures the changes in sales of products with a life
span in excess of three years.
E Euro: The new monetary unit of the European Mon-
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 mar-
kets 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 irrevo-
cable fixing of exchange rates between member cur-
rencies 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 opt-
outs from EMU. Sweden’s joining is subject to ratifica-
tion by parliament.
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 underval-
ued assets.
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.
Envelopes: While Bollinger Bands place boundary lines
based on standard deviation, envelopes place lines at
fixed percentage points above and below a moving av-
erage line. The upper and lower limits specify entry and
exit points for traders.
End of the Day (Mark to Market): Accounting mea-
sure, referring to the way traders record their positions.
There are two ways that a trader can record his posi-
tions: the accrual system in which only cash flows are

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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.
etary 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 mem-
ber states of the EMS as part of the economic conver-
gence 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 underly-
ing security.
Exposure: The total amount of money loaned to a
borrower or country. Banks set rules to prevent overex-
posure to any single borrower. In trading operations, it
is the potential for running a profit or loss from fluctua-
tions 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 move-
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ment, as opposed to assuming an unbiased view.
F
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 regula-
tory agency of the US created to oversee that bank de-
posits 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 trad-
ing, normally in a pit three times, if not filled is imme-
diately 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

Phone: 604.909.3750
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.
Floating Rate Interest: An interest rate that is al-
lowed 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 invest-
ment.
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 ad-
verse 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 be-
tween 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.
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 Trading Glossary
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G Hard Currency: A currency whose value is expected to
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 direc-
tion.
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 country’s
output, income or expenditure produced within the
country’s 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.
H

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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 bot-
tom 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 ad-
verse price movements on one’s 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.
I
IMF: International Monetary Fund, established in 1946
to provide international liquidity on a short and medium
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 Chica-
go Mercantile Exchange, that lists a number of currency
and financial futures.
Implied Volatility: A measurement of the market’s
expected price range of the underlying currency futures
based on the traded option premiums.
Implied Rates: The interest rate determined by calcu-
lating 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
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 Trading Glossary
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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 forbid-
den 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-maker’s 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 secu-
rity that is required for the initial deposit to enter into a
position. The Federal Reserve Board requires a mini-
mum 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-mak-
ers.
Interest Arbitrage: Switching into another currency
by buying spot and selling forward, and investing pro-
ceeds 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
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Phone: 604.909.3750
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 inter-
est 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 debt’s/loan’s 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.
Intra-Day limit: Limit set by bank management on
the size of each dealer’s 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
J Curve: A term describing the expected effect of de-
valuation on a country’s trade balance. It is anticipated
that import bills rise before export orders and receipts
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increase.
Jawbone: Announcements and statements by politi-
cians or monetary authorities to influence decisions by
business, consumer, or trade union sectors, often as-
sociated with forecasts and policy implications.
Jurisdiction Risk: (1) The risk inherent in placing
funds in the Centre where they will be under the juris-
diction of a foreign legal authority. (2) The risk in mak-
ing a loan subject to the laws of another country.
K
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 de-
pendent on exports, orientate their currencies to their
major trading partners, the constituents of a currency
basket.
Kiwi: Slang for the New Zealand dollar.
L
Ladder: Dealers analysis of the forward book or depos-
it 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
11
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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 ei-
ther in respect of a balance sheet holding at a specified
future 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 pre-
vious trading day’s settlement price permitted in one
trading session.
Limit Move: A price that has advanced or declined the
permissible limit permitted during one trading session.
Limit order: An order with restrictions on the maxi-
mum price to be paid or the minimum price to be re-
ceived. 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 im-
pact on the asset’s price. It is characterized by many
bids, offers and players/traders, low volatility and tight
spreads. Illiquid markets have less players and larger
spreads.
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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 trans-
actions with minimal to no impact on price stability.
Local: A futures trader who normally trades on an ex-
change 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.
M event the issuer must close the commitment, running
M1: Cash in circulation plus demand deposits at com-
mercial banks. There are variations between the pre-
cise definitions used by national financial authorities.
M2: Includes demand deposits, time deposits, and
money market mutual funds excluding large CDs.
M3: In the UK it is M1 plus public and private sector
time deposits and sight deposits held by the public sec-
tor.
M4: In the US it is M2 plus negotiable CDs.
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.
Maintenance Margin: The minimum margin which an
investor must keep on deposit in a margin account at
12
Phone: 604.909.3750
all times in respect of each open 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.
Managed Float: When the monetary authorities inter-
vene 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 transac-
tion 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 bank-
rupt after entering into a forward contract. In such an
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.
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.
Maturity: The date that the security is due to be re-
deemed or repaid.
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Mid-price or Middle Rate: The price half way be-
tween 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).
Minimum Price Fluctuation: The smallest increment
of market price movement possible in a given futures
contract.
Minimum Reserve: Reserves required to be deposited
at central banks by commercial banks and other finan-
cial institutions; sometimes referred to as Registered
Reserves.
MITI: Japanese Ministry of International Trade & In-
dustry.
Momentum: The term has two meanings: (1) a trad-
ing style by which traders go with the direction of the
current trend; and (2) a technical indicator which mea-
sures 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 bank’s management of a
country’s money supply. Economic theory underlying
monetary policy suggests that controlling the growth of
the amount of money in the economy is the key to con-
trolling 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 cur-
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Phone: 604.909.3750
rencies. This is a process which the EMS is intended to
lead to, especially after the Maastricht Treaty.
Money Market: Highly liquid markets for short-term
investing in monetary instruments and debts, typically
maturing in less than one year. Because of large trans-
action 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 defi-
nitions of M1-M4.
Moving Averages: An average of a number of speci-
fied historical time periods from the point on the chart.
Moving averages offer an indication of the clear direc-
tion 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.
N
Naked Intervention: A central bank type of interven-
tion in the foreign exchange market which consists
solely of the foreign exchange activity. This type of in-
tervention 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. M1 or M0.
Nearby Contracts: The closest active futures con-
tracts, 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.
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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 as-
sets 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 reg-
istered 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.
O Order: An instruction by a customer to a broker/trader
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 company’s
balance sheet, such as Interest Rate Swaps and For-
ward 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 op-
tion or futures contracts that have not been closed out
by offset or fulfilled by delivery.
Open Outcry: A public auction method of trading con-
ducted by calling out bids and offers across a trading
14
Phone: 604.909.3750
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 ex-
ecuted 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 cur-
rency reaches a pre-determined price.
Options: These are tradable contracts giving the
right, but not obligation, to buy or sell commodi-
ties, 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.
to buy or sell at a certain price or market price. The
order remains valid until executed or cancelled by the
customer.
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 direct-
ly between dealers and principals via a telephone and
computer network rather than a regulated exchange
trading floor. These markets have not been very popu-
lar. 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 (gener-
ally small and little-known) companies. Sometimes the
dealer simply puts would-be buyers and sellers togeth-
er 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
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seller the best possible price. Some see this as what
share-trading is all about. However, market makers,
many of whom create market movements purpose-
fully, feel they are being elbowed out by OTC, and that
speculation, arbitrage and “smart-trading” are under-
mined 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 un-
derlying 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 high-
growth rates are placing pressure on production capac-
ity 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 deal-
ing rooms in the next trading time zone reduces the
need for dealers to maintain these unmonitored expo-
sures.
Oscillators: Quantitative methods designed to provide
signals regarding the overbought and oversold condi-
tions.
P tickets are completed and transferred to the back office
Package Deal: When a number of exchange and /or
deposit orders have to be fulfilled simultaneously.
Parabolic SAR (Stop and Reversal): Function-
ing 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
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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 an-
other.
Parity Grid: A term used in the context of the Euro-
pean Monetary System which consists of the upper,
central and lower intervention points between member
currencies.
Payment Date: A system where a currency moves in
line with another currency, some pegs are strict while
others have bands of movement.
Pegging: When a country fixes the exchange rate to
another country’s 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 com-
pletely 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 sup-
port 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 explana-
tion 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 dealer’s position and ensures that all deal
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 cur-
rency or instrument combined, which may be held or
controlled by one person.
Pre-Spot Dates: Quoted standard periods that fall be-
tween the transaction date and the current spot value
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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.
Primary Reserves: Gold related monetary reserves,
being gold, SDR, etc.
Prime Rate: (1) The rate from which lending rates by
banks are calculated in the US (2) The rate of discount
of prime bank bills in the UK.
Principal: A dealer who buys or sells stock for his/her
own account.
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.
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.
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.
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.
Q
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Phone: 604.909.3750
Quote: The offer price of a security.
R
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 ses-
sion.
Rate: The price of one currency in terms of another
(exchange rate).
Ratio Spread: Buying a specific quantity of options
and selling a larger quantity of out of the money op-
tions.
Ratio Calendar Spread: Selling more near-term op-
tions than longer maturity options at the same strike
price.
Reaction: A decline in prices following an advance.
Real: A price, interest rate or statistic that has been
adjusted to eliminate the effect of inflation.
Realignment: Simultaneous and mutually coordinated
revaluation and devaluation of the currencies of several
countries. An activity that mostly refers to EMS activity.
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.
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.
Rectangle: Similar to the consolidation portion of
a flag pattern, a rectangle is a continuation pattern
denoting a trading range characterized by strong sup-
port and resistance lines. Unsurprisingly, rectangles are
often known as trading ranges, consolidation zones, or
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congestion areas.
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.
Repurchase Agreement: Agreements by a borrower
where they sell securities with a commitment to repur-
chase them at the same rate with a specified interest
rate.
Repurchase (REPO): Repos are short-term money
market instruments. The trader sells a security (gov-
ernment security) and buys it back only after a short
period of time, typically only overnight. Repos are pri-
marily used to raise short-term capital.
Reserve Currency: A currency held by a central bank
on a permanent basis as a store of international liquid-
ity, 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.
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 al-
low 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 correc-
tion; used to denote a temporary reversal in the overall
trend of the market to accommodate for excessive ac-
celeration or deceleration of asset price movement.
Reversal: Process of changing a call into a put.
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Revaluation: An increase in the exchange rate for a
currency as a result of central bank intervention. Op-
posite 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 equi-
ties 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 pos-
sible 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 fu-
tures 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 inter-
est rate differential between the two currencies.
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 Trading Glossary
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Rounding Top and Bottom: Similar to a Cup and
Handle pattern, a rounding top signifies a rounded re-
sistance 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 - in-
dicate 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.
S
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.
Settlement Risk: Risk associated with the non-settle-
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Phone: 604.909.3750
ment 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, commodi-
ties 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.
Sidelined: A major currency that is lightly traded due
to major market interest being in another currency pair.
SITC: Standard International Trade Classification, a
system for reporting trade statistics in a common man-
ner.
SOFFEX: Swiss Options and Financial Futures Ex-
change, a fully automated and integrated trading and
clearing system.
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 analyz-
ing a chart.
Spot: (1) The most common foreign exchange trans-
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action. (2) Spot or Spot date refers to the spot trans-
action value date that requires settlement within two
business days, subject to value date calculation.
Spot Market: A market in which commodities, securi-
ties or currencies are immediately delivered.
buy. Like all oscillators, stochastics work best as a mo-
mentum 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 read-
ings below 20 considered overbought (bearish) and
readings above 80 considered oversold (bullish)

Stop Order (Stop-Loss Order): An order used to

Spot Price/Rate: The current market price.
hedge against excessive loss in which a position is liqui-
dated at a specific, prearranged price.
Spread: The difference between the bid and offer price
that is offered by a market maker. (1) The difference
Straddle: The simultaneous purchase/sale of both call
between the bid and ask price of a currency. (2) The
and put options for the same share, exercise/strike
difference between the prices of two related futures
price and expiry date.
contracts. (3) For options, transactions involving two or
more option series on the same underlying currency.
Stagflation: Recession or low growth in conjunction
with high inflation rates.
Square: Purchase and sales are in balance and thus
the dealer has no open position.
Strap: A combination of two calls and one put.
Squawk Box: A speaker connected to a phone often
used in broker trading desks. Strike Price: Also called exercise price; the price at
which an options holder can buy or sell the underlying
instrument.
Squeeze: Action by a central bank to reduce supply in
order to increase the price of money.
Strip: A combination of two puts and one call.
Stable Market: An active market which can absorb
large sale or purchases of currency without major Supply Side Economics: The concept is that tax cuts
moves. will boost investment leading to an increase in the
supply of goods in the economy. To be compared with
demand led Keynesian economics.
Standard: A term referring to certain normal amounts
and maturities for dealing.
Support: The opposite of support; a point in a chart
where a currency pair has repeatedly had trouble fall-
Stand by Credit: An arrangement with the IMF for
ing beneath. When a currency pair “tests” support but
draw downs on a “need” basis. The term is sometimes
does not break it, buyers have outnumbered sellers;
more generally used.
alternatively, sellers have gained control of momentum
if support is broken and the currency pair continues to
Sterilization: Central Bank activity in the domestic plunge downward.
money market to reduce the impact on money supply
of its intervention activities in the FX market.
Support Levels: When an exchange rate depreciates
or appreciates to a level where (1) technical analysis
Sterling Index: An index based on the movement of techniques suggest that the currency will rebound, or
sterling against the major currency. not go below; (2) the monetary authorities intervene to
stop any further downward movement.
Sterling: Refers to the UK currency, the pound.
Swap: When a trader exchanges one currency for
another, holding it for only a short period. Swaps are
Stochastic: Like RSI, stochastics is a momentum in-
typically used to speculate on interest rate movements.
dicator that indicates overbought/oversold levels. High
It is calculated using the interest differentials between
levels (above 70 or 80) are indications to enter short
the two currencies.
orders; low levels (below 30 or 20) are indications to

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Swap Price: A price as a differential between two
dates of the swap.
Swissy: Market slang for Swiss Franc.
Symmetrical triangle: Also referred to as a coil, usu-
ally 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 con-
tracting 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 settle-
ment only involves the difference in values.
T Time Decay: The decline in the time value of an option
Technical Analysis: A technique used to try and
predict future movements of a security, commodity or
currency, based solely on past price movements and
volume levels. It examines charts and historical perfor-
mance.
Technical Correction: An adjustment to price not
based on market sentiment but technical factors such
as volume and charting.
Temporal Accounting: Method of determining ac-
counting 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
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Phone: 604.909.3750
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 US 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 curren-
cy, usually in the form of a graph or chart.
Tight Money: A condition where there is a shortage of
credit as a result of monetary policy restricting the sup-
ply of credit normally through raising interest rates.
TIFFE: Tokyo International Financial Futures Exchange.
as the expiry approaches.
Time Value: That part of an option premium which re-
flects the length of time remaining in the option prior to
expiration; the longer the time remaining until expira-
tion, 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.
Tombstone: Colloquial term for announcement in a
publication that a loan or bond has been arranged.
Trade Date: The date on which a trade occurs.
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 includ-
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ing the currencies of the county’s principal trading normally only one rate is open to market pressure, e.g.
partners. South Africa.

Traded Options: Transferable options with the right to Two-Way Quotation: When a dealer quotes both buy-
buy and sell a standardized amount of a currency at a ing and selling rates for foreign exchange transactions.
fixed price within a specified period.

Trade Price Response: This term advises that price

U
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 recom- Uncovered: Another term for an open position.
mendation is to go with this also (i.e. Sell at a resis-
tance level that is tested and holds, buy at a support
Under Reference (Order): Before finalizing a trans-
level).
action, all the details should be submitted for approval
to the order giver, who has the right to turn down the
Transaction: The buying or selling of securities result- proposal.
ing from the execution of an order.
Under-Valuation: An exchange rate is normally con-
Transaction Costs: The costs that are incurred by sidered to be undervalued when it is below its purchas-
a trader when buying or selling currencies, stocks or ing power parity.
commodities. These costs include broker commissions
or spreads.
Undo: A colloquial term for reversing a transaction,
e.g., a spot sale by means of a forward purchase or if
Transaction Exposure: Potential profit and loss gen- done in error, a spot purchase.
erated by current foreign exchange transactions.
Unload: Term for sale of assets or unwinding posi-
Trend Lines: A straight line drawn across a chart that tions either to limit loss or to undermine other market
indicates the overall trend for the currency pair. In an participant’s positions.
upward trend, the line is drawn below, and acts as a
support line; the opposite holds true for a downward
Unwind: Selling of assets and or instruments to square
trend. Once the currency breaks the trend line, the
a position.
trend is considered to be invalid.

Uptick: A price quote that is higher than the preceding

Triple Top: A pattern in which a currency has reached
quote for the same currency.
a price three times previously, yet has been unable to
sustain movements beyond those three peaks. A triple
top signifies a strong resistance level. 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 pres-
Turnover: The number or volume of shares traded
ent short trade.
over a specific time period. The larger the turnover, the
more commissions a broker will be making.
US Prime Rate: The interest rate that the major US
banks lend to major clients.
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 USDX: Currency index which consist of the weighted
or commodity in which they make a market. This is average of the prices of ten foreign currencies against
called a two-sided market. the US dollar.

Two-Tier Market: A dual exchange rate system where

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US Quote: Exchange rate quotation on a reciprocal
basis. Also known as an American Quote.
V Visible Trade: Trade in merchandise goods as com-
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 cur-
rencies which are being bought or sold. For a spot
transaction, it is two business banking days forward
in 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 ap-
plied by the respondent. The forward month’s 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.
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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.
pared 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 devia-
tion 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.
Vostro Account: A local currency account maintained
with a bank by another bank. The term is normally ap-
plied to the counterparty’s account from which funds
may be paid into or withdrawn, as a result of a transac-
tion.
W
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 move-
ments and reversals in the market. A whipsaw would
be if shortly after you bought a stock, the price plum-
meted.
Wholesale Money: Money borrowed in large amounts
from banks and institutions rather than from small
investors.
Wholesale Price Index: It measures changes in pric-
es in the manufacturing and distribution sector of the
economy and tends to lead the consumer price index
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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.
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.

Working Balance: Discretionary element in the mon-

etary reserves of a central bank.

Working Day: A day on which the banks in a curren-

cy’s 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.

Y
Yard: Term for a billion JPY.

Yield Curve: The graph showing changes in yield on

instruments depending on time to maturity. A system

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