Archer - Getting Started in Currency Trading (Wiley, 2005).pdf

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CURRENCY
TRADING
Winning in Today’s
Hottest Marketplace
Michael D. Archer
Jim L. Bickford
John Wiley & Sons, Inc.
Getting Started in
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Copyright © 2005 by Michael Archer and Jim Bickford. All rights reserved.
Published by John Wiley & Sons, Inc., Hoboken, New Jersey.
Published simultaneously in Canada.
No part of this publication may be reproduced, stored in a retrieval system, or transmitted
in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or
otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright
Act, without either the prior written permission of the Publisher, or authorization through
payment of the appropriate per-copy fee to the Copyright Clearance Center, 222 Rosewood
Drive, Danvers, MA 01923, 978-750-8400, fax 978-646-8600, or on the web at
www.copyright.com. Requests to the Publisher for permission should be addressed to the
Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030,
201-748-6011, fax 201-748-6008.
Limit of Liability/Disclaimer of Warranty: While the publisher and the author have used their
best efforts in preparing this book, they make no representations or warranties with respect to
the accuracy or completeness of the contents of this book and specifically disclaim any implied
warranties of merchantability or fitness for a particular purpose. No warranty may be created or
extended by sales representatives or written sales materials. The advice and strategies contained
herein may not be suitable for your situation. You should consult with a professional where
appropriate. Neither the publisher nor the author shall be liable for any loss of profit or any
other commercial damages, including but not limited to special, incidental, consequential,
or other damages.
For general information about our other products and services, please contact our Customer
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ISBN-10 0-471-71303-1
ISBN-13 978-0-471-71303-6
Printed in the United States of America
10987654321
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Contents
Acknowledgments
xi
Introduction
xiii
About This Book
xiii
How This Book Is Organized
xiii
Disclaimer
xv
PART 1
THEN AND NOW
Chapter 1
Getting Started
3
What Is FOREX?
3
What Is a Spot Market?
3
Which Currencies Are Traded?
4
Who Trades on the Foreign Exchange?
4
How Are Currency Prices Determined?
5
Why Trade Foreign Currencies?
5
What Tools Do I Need to Trade Currencies?
7
What Does It Cost to Trade Currencies?
8
FOREX versus Stocks
8
FOREX versus Futures
8
Chapter 2
History of Currency Trading
11
Ancient Times
11
The Gold Standard, 1816–1933
11
The “Fed”
12
Securities and Exchange Commission, 1933–1934
13
The Bretton Woods System, 1944–1973
14
The End of Bretton Woods and Floating Exchange Rates
15
International Monetary Market
15
Commodity Futures Trading Commission
15
National Futures Association
16
v
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vi
CONTENTS
Commodity Futures Modernization Act of 2000
16
Regulation in Other Countries
17
The Arrival of the Euro
17
Chapter 3
Currency Futures and the IMM
21
Futures Contracts
21
Currency Futures
21
Contract Specifications
22
Currencies Trading Volume
23
U.S. Dollar Index
24
PART 2
WHAT EVERY TRADER MUST KNOW
Chapter 4
FOREX Terms
27
Currency Pairs
27
Major and Minor Currencies
27
Cross Currency
28
Base Currency
28
Quote Currency
28
Pips
28
Ticks
2 9
Margin
29
Leverage
30
Bid Price
30
Ask Price
30
Bid/Ask Spread
30
Quote Convention
31
Transaction Cost
31
Rollover
31
Putting It All Together
31
The Trader’s Nemesis
32
Chapter 5
Selecting a FOREX Broker
33
Caveat Emptor
33
Broker Services
34
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Contents
vii
Broker Policies
36
Avoiding Fraudulent Operations
39
Chapter 6
Opening an Online Trading Account
41
Account Types
41
Registration
42
Account Activation
42
Identification Confirmation
42
Chapter 7
Mechanics of FOREX Trading
45
Order Types
45
Order Execution
47
Order Confirmation
48
Transaction Exposure
49
Chapter 8
The Calculating Trader
51
Leverage and Margin Percent
51
Pip Values
52
Calculating Profit and Loss
53
Calculating Units Available
60
Calculating Margin Requirements
62
Calculating Transaction Cost
63
Calculating Account Summary Balance
66
For Futures Traders
68
In Review
69
PART 3
HOW TO BEAT THE MARKET (MAYBE)
Chapter 9
Fundamental Analysis
73
Supply and Demand
73
Interest Rates
74
Balance of Trade
74
Purchasing Power Parity
77
Gross Domestic Product
78
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