CONTENTS AT A GLANCE Introduction Preface CH 1. Driving and Trading Similarities The Forex Driver Analogy Forex Driving School Basic Competency and Expert Handling Trading for Income The number of Forex Drivers is growing fast CH 2. Basic Concepts Related to Forex Driving What is Forex? Currency Pairs Pips The Basis of Forex Trading Measurement Making Money Buying or Selling The Spread What Brokers Charge for a Trade CH 3. Getting a Driver s Permit: Trading on Paper Friends Don t Let Friends Google and Trade Live Getting a Learner s Permit for Trading Forex Benefits of a Practice Account Patience Feeling Mentally and Emotionally Ready Setting Performance Targets Copyright 2010 Javier H Paz Page 1
CH 4. Get Inside the Driving Simulator: The Trading Platfom The MT4 Trading Platform Lot The Basic Contract in Currency Trading Margin Required Sample Trade Margin Level Margin Call CH 5. Understanding Road Signs: Basic Technical Analysis Chart Types Candlestick Chart Explained Support and Resistance Lines Basic Technical Indicators CH 6. Driving to Work Your First Trading Strategy A Trading Strategy: Taking Calculated Risks and Getting Back Home in One Piece Your First Forex Trading Strategy: The VT Pivot Roadmap Opportunity Identification What to Look For Opportunity Confirmation Odds Measurement Getting Into a Trade When to Pull the Trigger Putting This Strategy in Practice Nine Trading Days CH7. Following Dad s Driving Rules (Your Trading Plan) Trading Goals Trading Discipline Currency Traded Copyright 2010 Javier H Paz Page 2
Trading Schedule Trading Strategy Routine Before a Trade Technical Indicators Trade Size and Risk Management Trade Frequency Trade Duration Charts Focus Trade Journal Mental Conditioning Risk Mitigation CH 8. Mental Conditioning Becoming a Proficient Driver or Trader The Mind s Power to Accept or Reject Change John Assaraf s Neural Reconditioning Process The 30-Day Trader Reconditioning Plan CH 9. Final Thoughts Return on Investment Risk Appendix I - How to Open a Practice Account Appendix II Trade Size Tables Copyright 2010 Javier H Paz Page 3
INTRODUCTION This book is intended for individuals of different ages and from all walks of life who are open to learning new ways of rapid wealth creation. Since the late 1990 s, a new generation of people discovered foreign currency (Forex) trading as a way to generate substantial wealth. These people take speculative currency trades online, a few minutes a day, while some of them do so for a living. In many ways, we are talking about a new generation of investors. Some traded stocks before, others were involved in real estate, and some were completely new to investing because Forex trading did not require from them large sums of capital to get started. These pioneers did not have anything charted for them. They were trailblazers who became fascinated with a market they did not yet understand, and some had costly lessons to show for it. I call these people Forex Drivers. Throughout this book, I will use an analogy of trading Forex being similar to the effort required to learn to drive a car. I think too many Forex beginner/intermediate books get too technical and fail to explain something this type of trading in familiar terms. Why name this book? The trading plan is one of the strengths of this book, but I introduce it on Chapter 7 once I have covered the basic concepts of trading. But I want you to think of the as the document that helps you pass the test to become a proficient Forex Trader. Chapters 1-6 give you a base on Forex trading including one trading strategy that is very effective. Chapter 7 summarizes the rules you learned in the first 6 chapters in a coherent Trading Plan that can be as the name of the book suggests your Forex trading guide. Chapter 8 will help you understand the nature of making money as a trader and how it differs from the traditional ways society teaches us to make money. Chapter 9 contains some concluding thoughts on two important subjects: return on investment and risk. Copyright 2010 Javier H Paz Page 4
PREFACE I like the title of the 1994 Harrison Ford film Clear and Present Danger ; it evokes a sense of urgency in those who hear of it. I read a March 2010 report that was shocking to me and helped me realize that this book you are about to read might be more meaningful than what I originally thought a few months ago when I contemplated writing it. We live in a time when we would do well to realize that decisions that were taken in Washington D.C. and other world capitals over decades will impact people in their 30 s and 40 s in ways that are more severe than we have been led to believe. The only question is whether we will be prepared for it or not. If we are lucky, we may have two to three years to gain a new kind of money producing skill. And I am NOT talking about the end of world by any means I am referring to the sobering reality that it is very wise to time very soon when good-paying jobs are more scarce than they are today, when taxes are also higher, and real estate values continue to decrease, and traditional passive investments like bonds and stocks lose a big part of their value due to poor economic fundamentals. What exactly will trigger these problems? Global investors are starting to lose confidence on the ability of governments to pay back 100% of what they have borrowed and are likely to borrow in the near future. The United States government collects a very vast sum of income from taxes but it spends much more than what it earns. So the government is in a position of dependence. It has to borrow from global investors to make up the difference. It so happens that after borrowing so much for many years, indebted nations are starting to discover that global investors are not as eager to lend money as before. China, for example, is a vast lender of the capital that comes from exports. During the summer of 2010, Chinese officials have announced intentions to lend less money to the U.S. and to lend more to Japan and South Korea. One of the largest bond funds in the world, Pimco, has announced its desire to own less US government debt. Of course, the US government hopes that nothing will cause investors to lose their nerve. It has borrowed so much money over the years that it is easy to assume it will always be easy to borrow some more. But the situation is very fragile. The current pace of distrust could speed up in a matter of days once it starts, and it would likely spread to other parts of the world very quickly. It is hard to speculate on how this national debt financial crisis actually unfolds, but I illustrate next a potential timeline of troubling events only to highlight that now is the time to learn to trade currencies. Forex trading can withstand the crisis and its aftermath, and knowledgeable traders can profit handsomely as the traditional economy is in turmoil. Copyright 2010 Javier H Paz Page 5
Stage 1. U.S. Public Debt continues to accumulate due to expansion of US government and of US debt ceiling. This debt is financed by a) the US Federal Reserve (it prints large amounts of US dollars), b) by everyday people, and c) by global investors. Stage 2. Fears continue to mount that the US might have a new recession, something that could lead to higher unemployment, more home foreclosures, lower consumer spending, lower tax revenues for the government, and more investor money. The global media publishes multiple reports that large global investors are selling larger than normal amounts of US public debt. Stage 3. The US dollar comes under pressure along with all U.S. debt instruments (bills, notes, and bonds), something unprecedented in modern global finance. Whereas the United States always was the lender of last resort, there is no entity large or credible enough to be the lender of last resort for the United States. During this stage, the market has to come to grip with the need to lower the US debt burden through inflation, that is, by the US Federal Reserve printing money at a very rapid rate. This printing of money leads inevitably to a period of high inflation and high interest rates to try to contain it. The market has also to estimate the exposure of banks and corporations to cheaper value of US holdings. The fire sale of many US assets leads to sharp drops in the US dollar, which also makes the costs of imports soar and causes inflation to rise. Faced with lack of financing, many companies and banks shut down. Needless to say, unemployment rises sharply. Stage 4. The government starts to control the situation by nationalizing the banking and housing sector, at least. Drastic cuts in services and public government size are instituted. But there is also a large safety net in place to prevent social unrest during the transition period to a new normal. During this period of stabilization, the US export market starts to gain more life due to the cheaper US dollar relative to other currencies. But the global investors and US investors no longer have as much trust on the US dollar or US government debt. As a result, the US Fed must set interest rates very high (20% or higher) to attract investors again. At these interest rate levels, the normal economy continues to contract, although not as brutally as initially. During Stage 4, people who were complacent about the impending debt crisis may find themselves poorly prepared to earn a living outside of their normal career. Conversely, people who learned Forex trading would be able to profit as the dollar dropped in value. What I have just described sounds (and will be) pretty dramatic, even unconceivable to some that live in denial. But just to put things in perspective, I will refer to the March 2010 report by the Bank for International Settlements (BIS) that I read and increased my anxiety over what is to come. The BIS is a non-governmental entity that studies global trends in finance and economy. The writers of this report are reputable economists without political affiliation whose only goal is to Copyright 2010 Javier H Paz Page 6
report what they see. I was shocked to hear how blunt the message was especially considering that most economists are mild mannered and even boring about what they write about. 1 These are some of their words in this March 2010 report: Our examination of the future of public debt leads us to several important conclusions. First, fiscal problems confronting industrial economies are bigger than suggested by official debt figures As frightening as it is to consider public debt increasing to more than 100% of GDP, an even greater danger arises from a rapidly ageing population. A key fact emerging is that over the past three years public debt has grown rapidly in countries where it had remained relatively low before the crisis. This group of countries includes not only the United States and the United Kingdom but also Spain and Ireland. Unless action is taken almost immediately, there is little hope that these deficits will decline significantly in 2011. Even more worrying is the fact that most of the projected deficits are structural rather than cyclical in nature. [meaning that the shortage of government income is not temporary]. It is essential that governments not be lulled into complacency by the ease with which they have financed their deficits thus far. Second, large public debts have significant financial and real consequences. Third, we note the risk that persistently high levels of public debt will drive down capital accumulation, productivity growth and long-term potential growth. Finally, looming long-term fiscal imbalances pose significant risk to the prospects for future monetary stability. The graph to the side from the BIS report projected the size of US debt if no action was taken (red), if some cuts were made (green) and if some dramatic cuts were made (blue). I ask myself if this U.S. debt problem may be averted without a crisis. Then I remind myself something else. 1 Bank For International Settlements, BIS Working Paper No. 300, The Future of Public Debt: Prospects & Implications, by Stephen Cecchetti, M.S. Mohanty, and Fabrizio Zampolli, Monetary and Economic Department, March 2010. Copyright 2010 Javier H Paz Page 7
Will a problem that requires massive sacrifice and resolve get fixed if no one in power has the commitment to tackle it head on? If not enough is done about it, which is the logical conclusion, we are effectively living on borrowed time My message here is not watered down because we really would gain peace of mind by being more prepared... by having a skill to make money with money, regardless of the economic climate. I remain an optimist because I trust the materials in this book will give you reason to think that despite the delicate financial situation of governments, Forex trading can provide a way for everyday people to generate wealth during troubled times. You are fully capable to master the materials taught in this book and to develop this moneymaking skill of Forex trading beyond what you may imagine at this point. Copyright 2010 Javier H Paz Page 8