Secret Forex. by the editors of market publications

Transcription

1 Secret Forex Trading Techniques by the editors of market publications

2 Inside Front cover (blank)

3 Secret Forex Tr ading techniques Secret Technique #1: 3 Secret Technique #2: 3 Secret Technique #3: 5 Secret Technique #4: 5 Secret Technique #5: 6 Secret Technique #6: 6 Secret Technique #7: 8 Secret Technique #8: 9 Secret Technique #9: 9 Secret Technique #10: 10 Secret Technique #11: 10 Glossary of Forex Terms: 15 Copywrite 2004 by Auckland Financial Publishing, Ltd. All rights are reserved. Permission to reprint material contained within this publication without the prior written consent of the publisher. The accuracy of the information and data contained within this publication are deemed reliable but not guaranteed. The publishers, authors and editors of material in this publication are not registered investment advisors and do not purport to offer personalized investment related advice; the publishers, authors and editors do not determine the suitability of the advice and recommendations contained herein for any reader. Each reader must separately determine whether such advice and recommendations are suitable and whether they fit within each person s goals and portfolio. The risk factor is high in currency trading and only risk funds should be used in such trading. A person who does not have extra capital that they can afford to lose should not trade in any currency market. No safe trading system has ever been devised and no one can guarantee profits or freedom from loss. The information contained herein is subject to change without notice and was obtained from sources believed to be reliable, but is not guaranteed as to accuracy or completeness and in some cases may contain errors. Any techniques or methods presented are those that could have worked in the past but may not be indicative of future results. Any reader using information found in this publication for trading purposes is responsible for his or her own actions. Results can and do vary between individuals. The publishers, editors and authors of material in this publication DO NOT endorse the trading of futures or options contracts; in fact, they suggest NOT trading futures or options contracts. Any reference to futures or options contracts is for educational value only and NOT to be used for trading futures or options. Each reader is encouraged to perform their own due diligence on any company they intend to do business with prior to any purchase or opening any account.

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5 A fundamental trading strategy consists of strategic assessments in which a certain currency is traded based on virtually any criteria excluding the price action. These criteria include, but are not limited to, the economic condition that the country the currency represents... monetary policy of the given country... interest rates... political or military events... and other elements that are fundamental to economies. The focus of fundamental analysis is Forex lies on the economic, social and political forces tat drive supply and demand of a given currency. There is no single set of beliefs that guide fundamental analysis, yet most fundamental analysts look at various macroeconomic indicators such as economic growth rates, interest rates, inflation, and unemployment. Several theories prevail as to how currencies should be valued. By itself, fundamental analysis can be very difficult to implement when dealing with commodities, currencies and other margined products. The reason for this is that often fundamental analysis does not provide specific entry and exit points, and therefore it Hypothetical performance results have many inherent limitations, some of which are described below. No representation is being made that any account will or is likely to achieve profits or losses similar to those shown. In fact, there are frequently sharp differences between hypothetical performance results and the actual results subsequently achieved by any particular tading program. One of the limitations of hypothetical performance results is that they are generally prepared with the benefit of hindsight. In addition, hypothetical trading does not involve financial risk, and no hypothetical tading record can completely account for the impact of financial risk in actual trading. For example, the ability to withstand losses or to adhere to a particular trading program in spite of trading losses are material points which can also advearsely affect actual trading results. There are numerous other factors related to the markets in general or to the implementation of any specific trading program which cannot be fully accounted for in the preparation of hypothetical performance results and all of which can adversely affect actual tading results. Auckland Financial Publishing or the FOREX Forecaster has had little or no experience in trading actual accounts for itself or for customers. Because there are no actual trading results to compare to the hypothetical performance results customers should be particularly wary of placing undue reliance on these hypothetical performance results.

6 can be difficult for risk to be controlled when utilizing leverage techniques. What is more, Forex traders who follow fundamental analysis, as we generally do, are making longer-term trades. In general terms, currency prices are a reflection of the balance between supply and demand for currencies. Interest rates and the overall strength of the economy are the two primary factors that affect supply and demand. Economic indicators (for example, GDP, foreign investment and the trade balance) reflect the overall health of an economy. Therefore, they are responsible for the underlying changes in supply and demand for that currency. A tremendous amount of data is released at regular intervals, and some of this data can be useful when predicting the relative movement of currency values. Data that is related to interest rates and international trade is analyzed very closely. Overall, I believer the best Forex trading systems seem to be those that use fundamental analysis to determine which markets to trade... and a simple trend-following system to time entry and exit points. Forex Technical Analysis Probably the most common overall method for analyzing currency markets, especially popular with short-term traders, is Technical Analysis. The difference between Forex technical and Forex fundamental analyses is that Forex technical analysis ignores fundamental factors and only looks at the price action of the market. In that fundamental data can often only provide a long-term forecast of exchange rate movements, Forex technical analysis has become the primary tool to successfully analyze and trade shorter-term price movements, as well as to set profit targets and stop loss. Forex technical analysis primarily consists of a variety of Forex technical studies, each of which can be interpreted to predict market direction or to generate buy and sell signals. In this special report, we will look at a number of trading techniques that use various forms of technical analysis.

7 Secret Technique #1: Trade the Monthly Trends The really big money in Forex trading is made by trading the long-term trends, NOT the short-term swings in the market. The truth that the big-money traders have long known is that currencies move in enormous, sweeping mega-trends over longer periods of time. That is why The Forex Forecaster uses longer-term fundamental position trading or trend analysis as its underlying strategies. Here is what veteran trader Jesse Livermore (in the early 20th century) says about the importance of patience in trading: After spending many years in Wall Street and after making and losing millions of dollars I want to tell you this: It never was my thinking that made the big money for me. It always was my sitting. Got that? My sitting tight! It is no trick at all to be right on the market. You always find lots of early bulls in bull markets and early bears in bear markets. I ve known many men who were right at exactly the right time, and began buying and selling stocks when prices were at the very level which should show the greatest profit. And their experience invariably matched mine that is, they made no real money out of it. Men who can both be right and sit tight are uncommon. I found it one of the hardest things to learn. Secret Technique #2: Simple Trend-Following Believe it or not, over the years one of the best, simplest and most effective Forex trading technique is nothing more than simple trend-following, based on the work of the pioneer trader Dick Donchian. Traders look for break-outs from a channel and then, depending upon the trend, go either long or short a market. There are a wide variety of complex systems and mathematically-derived signals that you can use to identify a trend, but over time a simple Moving Average seems to work as well as any of them for example, a 20-day or a 50-day moving average. A trader will typically enter a trade if a market moves above the highest high within

8 a set period of time (for example, 20 days) or below the lowest low. However, there is this caveat: Most breakouts don t result in real trends! That means, if you use a trend-following system, you have to be prepared for most of your trades to take a small loss. The reverse of that is that your winning trades... that is, break-outs that result in a real trend... must make up for all of the small losses, and then some, for this approach to be successful. One piece of good news for Forex traders: Recent analysis of trend-following systems, such as those based on simple moving averages, reveals that they often work better with currency markets than they do with commodities. This may be because currencies often trend better than many other markets, and, logically enough, trend-following systems would be expected to perform better in markets that trend strongly. If you believe in the trend-in-your-friend tenet of technical analysis, moving averages are very helpful. Moving averages tell the average price in a given point of time over a defined period of time. They are called moving because they reflect the latest average, while adhering to the same time measure. A weakness of moving averages is that they lag the market, so they do not necessarily signal a change in trends. To address this issue, using a shorter period, such as 5 or 10 day moving average, would be more reflective of the recent price action than the 40 or 200-day moving averages. Alternatively, moving averages may be used by combining two averages of distinct time-frames. But whether you are using a 5- and 20-day MA, or a 40- and 200-day MA, buy signals are usually detected when the shorter-term average crosses above the longer-term average. Conversely, sell signals are suggested when the shorter average falls below the longer one. There are three kinds of mathematically distinct moving averages: Simple MA; Linearly Weighted MA; and Exponentially Smoothed. The third choice is sometimes the preferred one among traders because it assigns greater weight for the most recent data, and considers data in the entire life of the instrument. However,

9 many traders find that use of a simple M.A. works remarkably well for identifying trends. Secret Technique #3: Support & Resistance Support and resistance levels are points where a chart experiences recurring upward or downward pressure. A support level is usually the low point in any chart pattern (hourly, weekly or annually), whereas 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. It is best to buy/sell near support/resistance levels that are unlikely to be broken. Once these levels are broken, they tend to become the opposite obstacle. 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. This technique is often used by day traders. Secret Technique #4: Lines & Channels 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 could move. An upward trend is a concrete method to identify support lines/levels. Conversely, downward lines are charted by connecting two points or more. The validity of a trading line is partly related to the number of connection points. Yet it s worth mentioning that points must not be too close together. A channel is defined as the price path drawn by two parallel trend lines. The lines serve as an upward, downward or straight corridor for the price. A familiar property of a channel for a connecting point of a trend line is to lie between the two connecting points of its opposite line.

10 Secret Technique #5: Buy On Dips, Sell On Rallies This may seem self-evident, but it s actually difficult to do in the midst of a rapidly shifting market. But if you use longer-term charts or longer moving averages, you should be able to identify major trends in a given currency pair. The problem, then, is when to time your entry and exit points... and for that, you should consider the old-fashioned but time-proven strategy of buying on dips and selling on rallies. No market goes straight up or straight down, and you can maximize your profits significantly if you enter a market a little ahead. Secret Technique #6: Scale Trading Scale trading (also sometimes known as interval trading ) is a trading technique, pioneered in the commodities markets, that uses common price oscillations in a pre-defined range or scale to formulate trades. Typically, this approach to trading maps out in advance when to buy and when to sell certain commodities trading in the lower end of their historical trading range, preferably at or below the cost of production or close to previous major turning points. It is a method for discipline trading that is, in a sense, an offshoot of fundamental position trading. Some experts believe that since financial assets such as currencies, bonds and stock indices do not have a cost of production and can be subject to devaluation (or crashes), it is not advisable to use scale trading techniques in these markets. I disagree... provided that the trader already has solid fundamental reasons for entering in a specific currency trade. I believe that what a modified scale trading technique adds to the overall strategy is disciplined, focused trading. In traditional scale trading, the trader does the following: 1. Identifies a commodity that is trading within 30% or so of its historic lows.

11 2. Determines, based on fundamental analysis, whether or not this commodity is likely to reverse and eventually rally. 3. Works out a detailed buying plan, in advance, and based on the amount of capital in his account, for trading this commodity. Depending upon how much capital he wishes to risk, he sets a scale for buying this commodity at pre-determined prices. For example, when buying gold, he may decide that he can afford to buy gold every $25 down. As a result, if gold is trading at $400 an ounce, and he believes gold is going up, he will plan on buying a new contract at $375, $350, $325, $300, etc. 4. Whenever his commodity contract rises above a certain price level, he takes profits on that contract. For example, if gold falls from $400 an ounce to $350 an ounce, and then rallies to $450 an ounce, he would sell the contract he acquired at $350 when gold goes back up to $ and sell the contract he acquired at $375 an ounce when gold hits $ Repeats the process over and over again. Now, you can trade currencies this way... entering and existing Forex contracts according to a fixed, mechanical scale... but it is much more difficult to do so. I recommend, instead, that you use the scale trading buying technique to discipline your trading, not as a mechanical system. I like the principle underlying scale trading that a trader should work out, in advance, the WORST CASE SCENARIO and have prepared, in advance, what he will do under any circumstance. Before you enter any Forex trade, therefore, I believe you should assume that the trade will go against you at first. You should therefore work out what you will do as the market goes against you. Will you add to your position? If so, then I believe you should fix a scale, as in scale trading. Let s say you re trading the Euro. You believe the Euro is going higher. The EUR/USD Forex contract

12 is now $ You might say that you will initiate a trade at $ and then add a new Forex contract every 10-cents lower at $ $ $0.9500, etc. You base this scale on how much money you can afford to lose... AND you include a stop (mental or actual) at which you will throw in the towel and write off the trade. Why trade this way? Because the potential profits are greatly magnified if you are right (of course, your potential losses are as well). For example, if you acquired one Forex contract at and the Euro soared to $1.3000, you would theoretically bank $10,000 in profits. However, if the Euro went against you at first, and you acquire a new position at $1.15, then, if the Euro shot back up to $1.35, your profits would be $30,000, not $10,000. That s because the gains from the position at $1.15 would be $20, plus the gains on the original position at $1.25. Secret Technique #7: Trading Interest Rates If there is an uncertainty in the market in terms of interest rates, then any developments regarding interest rates can have a direct affect on the currency markets. Generally, when a country raises its interest rates, the country s currency could rise in value in relation to other currencies as assets are shifted to gain a higher return. Higher interest rates make the cost of a currency rise. Interest rates hikes, however, are usually not good news for stock markets. This is due to the fact that many investors will withdraw money from a country s stock market when there is a hike of interest rates, causing the country s currency to fall in value compared to other currencies. Thus, knowing which effect prevails can be tricky, but usually there is an agreement among traders in the field as to what the interest rate move will do. PPI, CPI, and GDP have proven to be the indicators with the biggest impact. The timing of interest rate moves is usually known in advance. It is generally known that

13 these moves take place after regular meetings of the BOE, FED, ECB, BOJ, and other central banks. We often print the interest rates of these central banks in the pages of The Forex Forecaster. A savvy fundamental trader may try to trade changes in the interest rates of the central banks. Secret Technique #8: Trading The International Balance of Trade The trade balance portrays the net difference (over a period of time) between the imports and exports of a nation. When imports become more than exports, the trade balance shows a deficit (this is considered unfavorable). For example, at the moment, the U.S. is posting the greatest balance of trade deficits of any nation in world history, some $500 billion a year. This has coincided with the U.S. dollar plummeting in value vis a vis the Euro and other currencies. If Euros are sold for other domestic national currencies, such as U.S. Dollars, to pay for imports, the value of the currency could depreciate due to the flow of dollars outside the country. On the other hand, if trade figures show an increase in exports, money will flow into the country and increase the value of the currency. In some ways, however, a deficit in and of itself is not necessarily a bad thing. A deficit is only negative if the deficit is greater than market expectations and therefore will trigger a negative price movement. Secret Technique #9: Using Stochastics The stochastic indicator measures the position of a currency pair vis a vis its most recent trading range and its high and low during a specified number of days or weeks. Stochastics are what traders use when referring to an overbought or oversold market. Stochastics are represented by two different lines on charts, known as %K and %D, and are plotted on a scale ranging from 0 to 100. Anything above 80 is generally considered to represent a strong upward

14 movement while, at the same time, a level below 20 is taken to represent a strong downward movement. Stochastics are used by traders to evaluate the strength of a trending market and are not useful in sideways markets. They measure the strength of a trend... and, as such, can also be used to identify likely tops and bottoms. As a rule of thumb, when stochastics are making new highs or lows... and so are prices... it s a good indicator that a trend may continue. However, if stochastics are moving in the opposite direction from prices, then it may be a sign that a trend is dying out and a reversal may be on the horizon. Secret Technique #10: Using Fibonacci Retracement Sequences Leonardo de Pisa, better known by his nickname of Fibonacci, was a 13th century mathematician who discovered a series of numbers often found in nature and now widely used: trading. The sequence is determined by the sum of the previous two numbers... thus, 1,1,2,3,5,8,13,21,34, etc. Forex traders sometimes use Fibonacci sequences to determine support and resistance. The most common sequences are 38.2, 50 and 61.8%. For example, in a steeply rising market, there often occurs a sharp sell-off. If such a sell-off hits the magic Fibonacci number of 61.8% of the recent high, and then starts back up again, many technicians take that as a sign that the upward trend will continue. There are many trading techniques that have arisen out of the Fibonacci retracement sequences. Secret Technique #11: Limiting Your Risk 10 Forex trading for beginners should be done in low-monetaryrisk environments, such as simulated trading or paper trading.

15 Once beginners start trading with real money, good ways to start are mini Forex accounts with little money at risk. Beginners should attempt trading, real or simulated, only after they are thoroughly familiar with both Forex markets and currency trading fundamentals. The Forex Forecaster is a good way to get started. Also, trading, in all its forms should be approached with a plan, just as any business should be where money is at stake. This plan should include (but not be limited to) money management, entry and exit signals, and other rules about Forex trading that affect trading returns. Back-testing If you want to use your own system trading, then back-testing your system with historic; data is one of the most important things to do before starting to trade with real money. In backtesting, you go through historical data and place simulated trades according to the rules of your trading system. The profitability of this back-testing method should partly tell you whether your system has potential. Remember, though, that historical returns are no guarantee of future return on any system. Paper Trading Next step in currency trading for beginners should be a paper trading phase, where the rules of the currency trading system are tried out with actual, live data. However, you place trades on paper, with no actual money at risk. Paper trading simulation should show you some insights into how the markets actually behave in real trading situation. For example, you may find, in a real-time situation that the market moves so quickly that you are unable to place trades at the price points you desire. This slippage is especially important for currency day traders that usually have very narrow profit margins on any single trade. Also with some online trading firms, you can 11

16 open a demo trading account and place simulated trade with the company s online system, as you would do on real-time trading, but with no real money at risk. Learning with Mini Forex Accounts Currency trading for beginners with mini Forex trading accounts places real money at risk. Therefore, beginners should be confident on their trading strategy and plan before attempting to trade with mini Forex accounts. Full back-testing and paper trading your system should give you some insight whether your trading system has any potential before opening a mini Forex account. Mini Forex accounts allow for the lowest margin requirements, meaning that you can open a Forex trading account for far less than $1,000 dollars and place trades for less than $100 margin. Currency trading for beginners should only involve extremely low-leverage, low monetary risk positions. In addition many Forex trading companies offer, for a small fee, guaranteed stops that make the trading safe for a beginner. Limit your positions Many Forex traders advise that you never risk more than 1% of your trading capital in any one trade. Unfortunately, many beginning traders start with so little money, that would not allow them to make any trades. But the principle is still valid: Never, ever, ever put your eggs in one basket. Always under-trade. Use mini contracts if you have a small account. Trade for the long haul. NOTE: Calculating Profit & Loss 12 Although online trading platforms now automatically perform the profit and loss calculations for you in real time, it is important to understand how these equations are arrived at. Equations for calculating the major currency pairs are as follows:

17 The equation for EUR/USD, GBP/USD, and AUD/USD [direct currency pairs] is as follows: P / L = (closing rate opening rate) x lot size x number of lots The equation for USD/JPY, USD/CHF and USD/CAD [indirect currency pairs] is as follows: P / L = (closing rate opening rate) / closing rate x lot size x number of lots In a 100,000 units/contract size account, 1 pip results $10 profit/ loss in EUR/USD, GBP/USD, AUD/USD, approximately $9 in USD/JPY, and $8 in USD/CHF. In a 10,000 units/contract size account, 1 pip results $1 profit/loss in EUR/USD, GBP/USD, AUD/USD, approximately $0.9 in USD/JPY, and $0.8 in USD/CHF. Calculation Example: The current bid/ask price for EUR/USD is /1.2323, meaning to purchase every unit of Euro, you need units of U.S. Dollar or sell every unit of Euro, you need units of U.S. Dollar. Let s assume that you decide the U.S. Dollar is undervalued against Euro. To profit from your strategy, you would buy U.S. Dollar (sell Euro) at Thus when the price of U.S. Dollar rises, you would sell U.S. Dollar (purchase Euro) for a profit. You sold 100,000 units of Euro at Some time later, EUR/USD price is at / just like you expected. So you decide to sell U.S. Dollar (purchase Euro) or close your position for a profit. 13

18 In this scenario, your profit is = 40 pips. Equation: ( [closing rate] [opening rate]) x 100,000 [unit / lot] x 1 [lot] = $400 [profit] 14

19 Glossary of Forex Terms A Accrual - The apportionment of premiums and discounts on forward exchange transactions that relate directly to deposit swap (Interest Arbitrage) deals, over the period of each deal. Appreciation - A currency is said to appreciate when it strengthens in price in response to market demand. Arbitrage - The purchase or sale of an instrument and simultaneous taking of an equal and opposite position in a related market, in order to take advantage of small price differentials between markets. Ask (Offer) Price - The price at which the market is prepared to sell a specific Currency in a Foreign Exchange Contract or Cross Currency Contract. At this price, the trader can buy the base currency. In the quotation, it is shown on the right side of the quotation. For example, in the quote USD/CHF /32, the ask price is ; meaning you can buy one U.S. dollar for Swiss francs. B Bear Market - Someone who believes the prices/market will decline. Bid - The price that a buyer is prepared to purchase at; the price offered for a currency. Bretton Woods Accord of An agreement that established fixed foreign exchange rates for major currencies, provided for central bank intervention in the currency markets, and set the price of gold at U.S. $35 per ounce. The agreement lasted until Bull Market - A market characterized by rising prices. 15

20 Broker - An agent who handles investors orders to buy and sell currency. For this service, a commission is charged which, depending upon the broker and the amount of the transaction, mayor may not be negotiated. C Cable - Dealers slang for the Sterling/US Dollar exchange rate. Call Rate - The overnight Interbank interest rate. Cash Market - The market for the purchase and sale of physical currencies. Convertible Currency - Currency which can be freely exchanged for other currencies or gold without special authorization from the appropriate central bank. Counter Party - The customer or bank with whom a foreign deal is made. The term is also used in interest and currency swaps markets to refer to a participant in a swap exchange. Cross Rate - An exchange rate between two currencies, usually constructed from the individual exchange rates of the two currencies, measured against the United States dollar. Currency Risk - The risk of incurring losses resulting from an adverse change in exchange rates. Currency Swap - Contract which commits two counter-parties to exchange streams of interest payments in different currencies for an agreed period of time and to exchange principal amounts in different currencies at a pre-agreed exchange rate at maturity. Currency Option - Option contract which gives the right to buy or sell a currency with another currency at a specified exchange rate during a specified period. 16 Currency Swaption - OTC Option to enter into a currency swap contract.

21 Currency Warrant - OTC Option; long-dated (more than one year) currency option. D Day Trading - Refers to opening and closing the same position or positions within one day s trading. Dollar Rate - When a variable amount of a foreign currency is quoted against one U.S. Dollar, regardless of where the dealer is located or in what currency he is requesting a quote. The exception is the Sterling/US Dollar rate (cable) which is quoted as variable amount of U.S. Dollars to one Sterling. E EMS - Abbreviation for European Monetary System, an agreement between member nations of the European Union to maintain an alignment between the exchange rates of their respective currencies. European Monetary Unit - The principal goal of the EMU is to establish a single European currency called the Euro, which will officially replace the national currencies of the member EU countries in Currently, the Euro exists only as a banking currency and for paper financial transactions and foreign exchange. The current members of the EMU are Germany, France, Belgium, Luxembourg, Austria, Finland, Ireland, the Netherlands, Italy, Spain and Portugal. F Federal Reserve (Fed) - The Central Bank of the United States. Fixed Exchange Rate - Official rate set by monetary authorities for one or more currencies. In practice, even fixed exchange rates are allowed to fluctuate between definite upper and lower bands, leading to intervention. 17

22 Flat / Square - To be neither long nor short is the same as to be flat or square. One would have a flat book if he has no positions or if all the positions cancel each other out. Floating Rate Interest - As opposed to a fixed rate, the interest rate on this type of deal will fluctuate with market rates or benchmark rates. One example of a floating rate interest is a standard mortgage. Foreign Exchange Swap - Transaction which involves the actual exchange of two currencies (principal amount only) on a specific date at a rate agreed at the time of the conclusion of the contract (short leg), at a date further in the future at a rate agreed at the time of the contract (the long leg). Forward - A deal that will commence at an agreed date in the future. Forward trades in forex are usually expressed as a margin above (premium) or below (discount) the spot rate. To obtain the actual forward forex price, one adds the margin to the spot rate. The rate will reflect what the forex rate has to be at the forward date so that if funds were re-exchanged at that rate there would be no profit or loss (i.e. a neutral trade). The rate is calculated from the relevant deposit rates in the 2 underlying currencies and the spot forex rate. Unlike in the futures market, forward trading can be customized according to the needs of the two parties and involves more flexibility. Also, there is no centralized exchange. Fundamental Analysis - Thorough analysis of economic and political data with the goal of determining future movements in a financial market. G GTC - Good Till Cancelled. An order left with a Dealer to buy or sell at a fixed price. The order remains in place until it is cancelled by the client. 18

23 H Hedging - The practice of undertaking one investment activity in order to protect against loss in another, e.g. selling short to nullify a previous purchase, or buying long to offset a previous short sale. While hedges reduce potential losses, they also tend to reduce potential profits. High/Low - Usually the highest traded price and the lowest traded price for the underlying instrument for the current trading day. I Initial Margin - The required initial deposit of collateral to enter into a position as a guarantee on future performance. Interbank Rates - The Foreign Exchange rates at which large international banks quote other large international banks. L Limit Order - An order to buy at or below a specified price or to sell at or above a specified price. Long Position - A market position where the Client has bought a currency he previously did not hold own. Normally expressed in base currency terms. M Margin - Customers must deposit funds as collateral to cover any potential losses from adverse movements in prices. Margin Call - A demand for additional funds. A requirement by a clearing house that a clearing member (or by a brokerage firm that a client) brings margin deposits up to a required minimum level to cover an adverse movement in price in the market. Market Maker - A dealer who supplies prices and is prepared to buy or sell at those stated bid and ask prices. A market maker runs a trading book. 19

24 0 Offer - The price, or rate, that a willing seller is prepared to sell at. One Cancels Other Order (O.C.O. Order) - A contingent order where the execution of one part of the order automatically cancels the other part. Open Position - Any deal which has not been settled by physical payment or reversed by an equal and opposite deal for the same value date. Over The Counter (OTC) - Used to describe any transaction that is not conducted over an exchange. Overnight Trading - Refers to a purchase or sale between the hours of 9.00 pm and 8.00 am. on the following day. P Pip (or Points) - The term used in currency market to represent the smallest incremental move an exchange rate can make. Depending on context, normally one basis point ( in the case of EUR/ USD, GBD/USD, USD/CHF and.01 in the case of USD/JPY). Political Risk - The uncertainty in return on an investment due to the possibility that a government might take actions which are detrimental to the investor s interests. Q Quote - An indicative market price, normally used for information purposes only. R Resistance - A price level at which you would expect selling to take place. 20 Risk Capital - The amount of money that an individual can afford to invest, which, if lost would not affect their lifestyle.

25 Rollover - Where the settlement of a deal is rolled forward to another value date based on the interest rate differential of the two currencies. S Settlement - Actual physical exchange of one currency for another. Short - To go short is to have sold an instrument without actually owning it, and to hold a short position with expectations that the price will decline so it can be bought back in the future at a profit. Spot - A transaction that occurs immediately, but the funds will usually change hands within two days after deal is struck. Spread - The difference between the bid and offer (ask) prices; used to measure market liquidity. Narrower spreads usually signify high liquidity. Stop Loss Order - An order to buy or sell at the market when a particular price is reached, either above or below the price that prevailed when the order was given. Support Levels - A price level at which you would expect buying to take place. T Technical Analysis - An effort to forecast future market activity by analyzing market data such as charts, price trends, and volume. Tomorrow to Next - Simultaneous buying and selling of a currency for delivery the following day and selling for the next day or vice versa. Two-Way Price - Rates for which both a bid and offer are quoted. 21

26 U US Prime Rate - The interest rate at which U.S. banks will lend to their prime corporate customers. V Value Date - Settlement date of a spot or forward deal. Variation Margin - An additional margin requirement that a broker will need from a client due to market fluctuation. Volatility - A statistical measure of a market or a security s price movements over time and is calculated by using standard deviation. Associated with high volatility is a high degree of risk. W Whipsaw - slang for a condition of a highly volatile market where a sharp price movement is quickly followed by a sharp reversal. Y Yard - Slang for a billion. 22

27 inside back cover (blank) 23

28 by the editors of market publications