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FOREXTRADINGSECRETSTRADING STRATEGIESFOR THE FOREX MARKETJAMES DICKSNew York Chicago San Francisco Lisbon LondonMadrid Mexico City Milan New Delhi San JuanSeoul Singapore Sydney Toronto

Copyright 2010 by The McGraw-Hill Companies, Inc. All rights reserved. Except as permitted underthe United States Copyright Act of 1976, no part of this publication may be reproduced or distributed inany form or by any means, or stored in a database or retrieval system, without the prior writtenpermission of the publisher.ISBN: 978-0-07-174709-7MHID: 0-07-174709-5The material in this eBook also appears in the print version of this title: ISBN: 978-0-07-166422-6, MHID:0-07-166422-X.All trademarks are trademarks of their respective owners. Rather than put a trademark symbol after everyoccurrence of a trademarked name, we use names in an editorial fashion only, and to the benefit of thetrademark owner, with no intention of infringement of the trademark. Where such designations appear inthis book, they have been printed with initial caps.McGraw-Hill eBooks are available at special quantity discounts to use as premiums and sales promotions,or for use in corporate training programs. To contact a representative please e-mail us atbulksales@mcgraw-hill.com.This publication is designed to provide accurate and authoritative information in regard to the subjectmatter covered. It is sold with the understanding that neither the author nor the publisher is engaged inrendering legal, accounting, or other professional service. If legal advice or other expert assistance isrequired, the services of a competent professional person should be sought.—From a Declaration of Principles jointly adopted by a Committee of the American Bar Association anda Committee of Publishers.TERMS OF USEThis is a copyrighted work and The McGraw-Hill Companies, Inc. (“McGraw-Hill”) and its licensorsreserve all rights in and to the work. Use of this work is subject to these terms. Except as permitted underthe Copyright Act of 1976 and the right to store and retrieve one copy of the work, you may notdecompile, disassemble, reverse engineer, reproduce, modify, create derivative works based upon, transmit, distribute, disseminate, sell, publish or sublicense the work or any part of it without McGraw-Hill’sprior consent. You may use the work for your own noncommercial and personal use; any other use of thework is strictly prohibited. Your right to use the work may be terminated if you fail to comply with theseterms.THE WORK IS PROVIDED “AS IS.” McGRAW-HILL AND ITS LICENSORS MAKE NO GUARANTEES OR WARRANTIES AS TO THE ACCURACY, ADEQUACY OR COMPLETENESS OF ORRESULTS TO BE OBTAINED FROM USING THE WORK, INCLUDING ANY INFORMATIONTHAT CAN BE ACCESSED THROUGH THE WORK VIA HYPERLINK OR OTHERWISE, ANDEXPRESSLY DISCLAIM ANY WARRANTY, EXPRESS OR IMPLIED, INCLUDING BUT NOTLIMITED TO IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS FOR APARTICULAR PURPOSE. McGraw-Hill and its licensors do not warrant or guarantee that thefunctions contained in the work will meet your requirements or that its operation will be uninterrupted orerror free. Neither McGraw-Hill nor its licensors shall be liable to you or anyone else for any inaccuracy,error or omission, regardless of cause, in the work or for any damages resulting therefrom. McGraw-Hillhas no responsibility for the content of any information accessed through the work. Under no circumstances shall McGraw-Hill and/or its licensors be liable for any indirect, incidental, special, punitive, consequential or similar damages that result from the use of or inability to use the work, even if any of themhas been advised of the possibility of such damages. This limitation of liability shall apply to any claim orcause whatsoever whether such claim or cause arises in contract, tort or otherwise.

To be successful you have to have a mentor. Someone who can inspire you,someone that will listen to you, someone that will give you sound advicewhether you want to hear it or not. If you don’t have a mentor, that someone to help you get to the top, then keep looking. For me it’s My UncleJack. I know there were many times that he felt I was not listening butI always was. Thanks for everything you do, this book is dedicated you.

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ContentsPreface xiAcknowledgments xiiiDisclaimer xvIntroduction xviiPart 112The Basics 1What You Must Know to Get Started 3Back to the Basics: A History of the FOREXFOREX versus Stocks 7FOREX versus Futures 9Major Currencies and Pairs 11The U.S. Dollar 11The Euro 12The Australian Dollar 12The Canadian Dollar 13The British Pound 13The Swiss Franc 14The Japanese Yen 14The New Zealand Dollar 15The Dollar Index 15The Dow Jones Industrial Average (DJIA)Gold CFDs 16Crude Oil 17Cross-Rate Currency Pairs 17Exotic Currency Pairs 18Chinese Yuan or Renminbi 18Swedish Krona 18Norwegian Krone 19The Iraqi Dinar 19v163

CONTENTSvi3Anyone Can Learn the FOREX 21FOREX 101 21Opening a Position 21Trading on Margin 23Managing a Position 23Closing a Position 24Pips and Lots 24The Lot 27Order Types 27Where Is the Market Going? 29Stops and Targets 32Spreads and Swaps 33Technical versus Fundamental 344Preparing Yourself Adequately before Jumpinginto the Market 37FOREX Trading Accounts 37Choosing a Broker 38Tools 47Who Trades the FOREX? 49What Kind of Trader Am I? 50Trading Techniques 51The Trader’s Levels of Ascension 55Part 256Money Management59The Secret to Making Money 61Are You Really Fit to Trade in the FOREX Market?Trading Plans 62Rules and Discipline 67How the Market Works 73Rules for Working with the Market 74Paper Trading 77How to Keep Your Profits 81Money Management 81Managing Risk 86Leverage and True Leverage 87Overtrading and Overconfidence 89Overleveraging 91Trade Expectations 9261

CONTENTSPart 378Trading Psychology93Mastering Emotions 95Trading Psychology 95Emotions of Trading 99How to Get Out of a Bad TradeBecome a Pro 110105Mind over Matter for Huge ProfitsAffirmations 113Power of Networking 117Part 49viiFundamental Analysis113121Economics 123What Does Economic Release Mean? 123Fundamental Analysis 123Dow Theory 125Fundamental Indicators 127Japan’s Monetary Policy 137FOREX Currency Carry Trade 139Interventions 140Gross Domestic Product (GDP) 142Trading the News 143What Are Contrarian Indicators? 145Part 5Technical Analysis14710Technical Indicators 149Technical Analysis 149Types of Charts Showing Price Action 150Trend Indicators 162Market and Volatility Indicators 168Understanding Oscillators 173A Unique Indicator: Ichimoku Kinko Hyo 176Divergences 17711Technical Patterns 181Candlesticks 181Chartism Patterns 185Reversal Patterns 186Continuation Patterns 192

CONTENTSviiiElliott Waves 203Harmonic Price Patterns 208Fractals 214Trading Naked (Only Price Action)21512Support and Resistance 217Support 217Resistance 218Trendlines 219Moving Averages 219Other Indicators 220Entering Positions 221Exiting Positions 222Pivot Points: Do They Work? 222Psychological Levels 226Using Multiple Time Frames 228Trend Is Your Friend 23113Automated Trading 233Expert Advisors and Automatic ProgrammingInterfaces (APIs) 233Advanced Robots: Neural Networks in the FOREXPart 61415Building Your Portfolio239Secrets to FOREX Diversification 241FOREX Options 241Spot FOREX Options 246FOREX Futures 247FOREX Exchange-Traded Funds (ETFs)Contracts for Difference (CFDs) 249Commodities 250Indices (Securities) 251My Favorite Ways to Trade 253Breakouts 253Channeling 258Hedging 261Basic Oscillator-Based Strategy 262Basic Moving-Average Crosses 263Trading Gaps 264Daily High-Low 265248235

CONTENTSCONCLUSION 269APPENDIX 273GLOSSARY 289BIBLIOGRAPHY 299INDEX 301ix

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PrefaceThere are many books on the market that cover the subject of FOREX trading. But I believe that until now, there has never been a book on this uniquetopic that has so vividly described the subject of the FOREX—a universecompletely of its own. The FOREX market is an anonymous entity thatbears many faces, and each individual who participates in it leaves a footprint that just might change the course of their personal circumstancesbased on their individual hopes and dreams for success.This book was written with several purposes in mind. First of all, thisbook is designed to inform and educate the potential FOREX trader abouta field that is growing exponentially around the world and is reaching millions of individuals from all walks of life. It is a market that was reservedfor a select few just a decade ago but now is in the hands of anyone, eventhose without a formal financial education. For this reason, it is veryimportant to include a qualified point of view from a real trader’s perspective, a trader who has already traveled through all the steps and experiencednumerous pitfalls but now wants to share this information with you to helpyou avoid or, at the very least, minimize any potential negative impactthrough education and solid money management techniques.This book also is intended to provide an overview of all the fundamentals involved in the FOREX and of the trading process so that any newtrader can easily obtain all the tools needed to ensure a quick start. It is alsoaimed at the intermediate trader who has already started the process butcould use some guidance and additional tools, with an emphasis on theimportance of a solid money management program and the right mind-setto develop a successful trading career.Written from the insider’s perspective of an experienced FOREX traderwho has gone through every step until reaching a stable and consistentsuccess, this book is focused on pointing out the potential hazards thatevery trader will encounter at some point. In the beginning, it will offerxi

xiiPREFACEsolutions to help you understand how to mitigate many of the risks involvedby centering on dedicated attention to the preliminary preparation, education, and training needed to become a true professional in this field.The overview includes a history of the FOREX and its basics, as wellas a thorough description of all the fundamental, technical, and psychological aspects and how they merge and interact in the market’s behavior.Finally, some of the preferred trading systems are described in detailand discussed as additional elements to help you practice and build yourtrading toolbox.I hope that you will enjoy this book and its concepts. May it bring youa step closer to becoming a consistent winner and an educated and confident FOREX trader.