Forex Trading for Maximum Profit

Reader off this book will read it for one simple reason: You want to trade Forex successfully, which is to say you want to be a profitable Forex trader. I'm not going to lose sight of this fact. nIn fact, I can tell you why I chose to take on the painstaking effort of writing my book.About four years ago, more than a few of my students wanted to trade Forex and I did not have a book or course to recommend to them. I did visit many bookstores in an effort to find even one book that I felt provided would-be Forex traders a methodology they could follow. My search yielded no results. Let me tell you what I did find. I found books that discussed the history of the Forex, books that discussed the interbank relationship, books that discussed the pairs and fundamentals of the Forex market, and finally books that discussed all the patterns and indicators you could use in the Forex market. I call the last type of book "glossary" books because that's all that they are: A collection of definitions and descriptions with no step-by-step methodology.
Chapter 1: Trading ForeX"You may be asking yourself, "Why haven’t I heard of this market before now?" If this trading market is relatively new to you, don’t feel like you are alone. Let’s explore what every trader or investor needs to know about Forex. The foreign exchange or “Forex” (also called the spot market) is the largest market on the planet. This is an irrefutable fact. Its average $1.5 trillion to $2 trillion traded per day is almost 100 times that of the $25 billion of the NYSE. And while we will be discussing this in depth later, remember, size has its advantages. The Forex market may seem like a new market to those of us in the United States but in actuality this market has been around for many years. There are two developments that brought Forex trading to life and to the United States. First was the decision that led to the free-floating market we trade today. The catalyst was President Richard M. Nixon’s decision to abandon the gold standard in 1973 (...)"

Foreign exchange market

The foreign exchange market (currency, forex, or FX) trades currencies. It lets banks and other institutions easily buy and sell currencies.
The purpose of the foreign exchange market is to help international trade and investment. A foreign exchange market helps businesses convert one currency to another. For example, it permits a U.S. business to import European goods and pay Euros, even though the business's income is in U.S. dollars.
In a typical foreign exchange transaction a party purchases a quantity of one currency by paying a quantity of another currency. The modern foreign exchange market started forming during the 1970s when countries gradually switched to floating exchange rates from the previous exchange rate regime, which remained fixed as per the Bretton Woods system.
The foreign exchange market is unique because of
its trading volumes,
the extreme liquidity of the market,
its geographical dispersion,
its long trading hours: 24 hours a day except on weekends (from 22:00 UTC on Sunday until 22:00 UTC Friday),
the variety of factors that affect exchange rates.
the low margins of profit compared with other markets of fixed income (but profits can be high due to very large trading volumes)
the use of leverage


competition, notwithstanding market manipulation by central banks. According to the Bank for International Settlements, average daily turnover in global foreign exchange markets is estimated at $3.98 trillion. Trading in the world's main financial markets accounted for $3.21 trillion of this. This approximately $3.21 trillion in main foreign exchange market turnover was broken down as follows:
$1.005 trillion in spot transactions
$362 billion in outright forwards
$1.714 trillion in foreign exchange swaps
$129 billion estimated gaps in reporting

The Bailout Irony

As the US Congress puts the finishing touches on a $700 Billion plan intended to resuscitate the ailing financial sector, analysts remain hard at work assessing the potential implications. The consensus- unchanged from when the plan was first unveiled- is strongly negative, especially as far as the Dollar is concerned. When combined with the government’s other initiatives, the bailout will add nearly $1 Trillion to America’s national debt. Additionally, the Federal Reserve Bank would have to print money to bridge a shortfall in the government’s borrowings, thereby stoking the fires of inflation. Ironically, the Dollar’s best chance to avoid a continued decline is if the bailout plan fails in its stated aim, and the American economy implodes, pulling the global economy down with it. The Wall Street Journal reports:
Investors have already begun to cut their exposure to emerging-market and other higher-yielding currencies, and this trend could continue even if the dollar is no longer the bedrock of safety it once was.

Forex is a Global Game

One of the advantages of trading currencies (compared to other types of securities) is that forex markets operate continuously from 6PM (US Eastern time) Sunday to 4PM Friday. However, some traders may find this overwhelming. After all, if the markets never close, how should one decide when to trade? Let’s begin with a quick overview. London dominates worldwide forex trading, with New York in second place, followed by Tokyo and Sydney. Investopedia points out that the best time(s) to trade are when these markets overlap, due to a surge in liquidity, and hence, volatility. The best such overlap is between London and New York, due to the popularity of the Euro/USD pair. During these times, the "Pip" spread can widen from 30 to 70. However, since Tokyo dominates trading in Asian currencies, its overlap with Sydney is also a prime time to trade. Forbes reports:
When more than one of the four markets are open simultaneously, there will be a heightened trading atmosphere, which means there will be greater fluctuation in currency pairs.

Commentary: Dollar Rally- Fact or Fiction?

Over the last month, the Dollar has rallied tremendously, rising over 7% against its main adversary, the Euro. The price of gold, which serves as an inverse proxy for investor confidence in the USD, has fallen dramatically. As a result, many analysts have proclaimed that the Dollar has (permanently) bottomed out, and are busying themselves preparing projections for how high the Dollar will rise. But is the Dollar rally sustainable?
In the short-term, I would argue the answer is yes. The bubbles in the various sectors of commodity markets seem to have partially deflated, with oil and certain food staples well below the record highs they touched earlier in the year. As a result, inflation may soon begin to abate, and return to a comfortable level as early as 2009. More importantly, the US economy was among the first to be affected by the credit and real estate crises. Some analysts have argued that the worst developments have already come to pass. The crisis has since spread to the global economy, with other countries sharing in some of the burden. The result is that the US economic and monetary cycle is probably ahead of most of its peers. Accordingly, by the time the full impact of the crisis is felt by the rest of the world, the US should firmly be on the path to recovery. As other Central Banks move to ease their respective monetary policies, the Fed should be in a position to hike rates, providing further support for the Dollar.
As a result of this belief, US capital markets have received a sudden inflow of capital. This trend has been further buoyed by the notion that the US is the safest place to invest in times of crisis is gaining traction among investors. If the credit crisis continues to spread, this notion will no doubt be reinforced.
The long-term picture is of course more nuanced. The US will hardly emerge from the current crisis unscathed, and the ultimate cost of the credit crisis could exceed $1 Trillion. In addition, the US is unlikely to be shamed into changing its nasty habit of spending more than it saves. Accordingly, the twin deficits, those permanent thorns in the side of the Dollar, will probably persist. In addition, recent history suggests that investors are slow to absorb the lesson that There is No Such Thing as a Free Lunch. Despite the horrible collapse of the dot-com bubble, investors piled willy-nilly into the real estate market, with the result speaking for itself. Analysts are already speculating where the next bubble will occur; perhaps in alternative energy?
In conclusion, while the near-term prospects of the Dollar are surprisingly bright, the long-term prognosis is less so. There is no indication that the structural weaknesses in the US economy that led to the credit crisis and the multi-year decline in the USD that preceded it, will abate following its resolution. The future is inherently unpredictable, but I would expect the Dollar to continue declining once the global economy is back on track, perhaps in 2010.

The Conspiracy of Intervention

Yesterday, the Forex Blog published a commentary piece exploring the rally in the Dollar that is currently under way. While the rally is strongly grounded in fundamentals (falling commodity prices, the spread of the credit crisis to the rest of the world), some traders are nonetheless crying foul. They claim that the European Central Bank (with or without the assistance of the US) furtively intervened in forex markets to the tune of 10 Billion Euros. Even if their claim is true, it is unlikely to have meaningfully contributed to the Dollar rally, since the amount in question is quite small. Central Bank intervention would require an expenditure of at least $100 Billion to be even partially successful. Japan, for example, has spent nearly $1 Trillion (if its foreign exchange reserves are any indication) holding down the Yen over the last decade. Besides, the Dollar rally is unsurprising, given certain recent economic developments and the benefit of hindsight. Minyanville.com reports:
Whenever global liquidity tightens relatively speaking, it is very US$ supportive. Obviously, there are always time lags between economic events until the the market perceives them. So as a result of weak demand in the US, lower imports, the demand for oil declines, and that led to a tightening of global liquidity which led to the strong dollar

Euro Hurt by Slowing Economy, Inflation

The Euro has dropped almost 10% against the Dollar in a matter of mere weeks and everyone is wondering why. Setting aside the factors which favor the Dollar generally (irrespective of the Euro) because they were explored in previous posts, let’s instead examine those factors weighing specifically in the Euro. First, the recent decline in commodity prices is causing European inflation to abate. The Euro had previously derived significant support from the ECB’s hawkish stance towards fighting inflation. With lower prices, however, the need for further rate hikes may have evaporated. Second, the Euro-zone economy is looking increasingly fragile. Based on the most recent data, it actually contracted in the second quarter. Truth be told, the ECB hasn’t yet turned its attention from inflation to the economy, but if both prices and economic growth continue to slow, the Central Bank may be forced to loosen its monetary policy. In fact, the perceived inevitability of this fate may already be propelling traders to dump the Euro. Money and Markets reports:
While upping his concern for the euro economy, European Central Bank President Trichet has maintained his focus on rising prices. The latest predictions…however, point towards inflation having already peaked…