Trading Course

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On-Line Manual For Successful Trading

CONTENTS

Chapter 1. Introduction 7

1.1. Foreign Exchange as a Financial Market 7

1.2. Foreign Exchange in a Historical Perspective 8

1.3. Main Stages of Recent Foreign Exchange Development 9

The Bretton Woods Accord 9

The International Monetary Fund 9

Free-Floating of Currencies 10

The European Monetary Union 11

The European Monetary Cooperation Fund 12

The Euro 12

1.4. Factors Caused Foreign Exchange Volume Growth 13

Interest Rate Volatility 13

Business Internationalization 13

Increasing of Corporate Interest 13

Increasing of Traders Sophistication 13

Developments in Telecommunications 14

Computer and Programming Development 14

Chapter 2. Kinds Of Major Currencies

and Exchange Systems 15

2.1. Major Currencies 15

The U.S. Dollar 15

The Euro 15

The Japanese Yen 16

The British Pound 16

The Swiss Franc 16

2.2. Kinds of Exchange Systems 17

Trading with Brokers 17

Direct Dealing 18

Dealing Systems 18

Matching Systems 18

2.3. The Federal Reserve System of the USA and

Central Banks of the Other G-7 Countries 20

The Federal Reserve System of the USA 20

The Central Banks of the Other G-7 Countries 21

Chapter 3. Kinds of Foreign Exchange Market 23

3.1. Spot Market 23

3.2. Forward Market 26

3.3. Futures Market 27

3.4. Currency Options 28

Delta 30

Gamma 30

Vega 30

Theta 31

FOREX. On-line Manual For Successful Trading iv

Chapter 4. Fundamental Analysis 32

4.1. Economic Fundamentals 32

Theories of Exchange Rate Determination 32

Purchasing Power Parity 32

The PPP Relative Version 33

Theory of Elasticities 33

Modern Monetary Theories on Short-term Exchange

Rate Volatility 33

The Portfolio-Balance Approach 34

Synthesis of Traditional and Modern Monetary Views 34

4.2. Economic Indicators 35

The Gross National Product (GNP) 35

The Gross Domestic Product (GDP) 35

Consumption Spending 36

Investment Spending 36

Government Spending 36

Net Trade 36

Industrial Production 36

Capacity Utilization 36

Factory Orders 37

Durable Goods Orders 37

Business Inventories 37

Construction Indicators 37

Inflation Indicators 38

Producer Price Index (PPI) 39

Consumer Price Index (CPI) 39

Gross National Product Implicit Deflator 39

Gross Domestic Product Implicit Deflator 39

Commodity Research Bureau’s Futures Index (CRB Index) 39

The “Journal of Commerce” Industrial Price Index (Joc) 40

Merchandise Trade Balance 40

Employment Indicators 40

Employment Cost Index (ECI) 41

Consumer Spending Indicators 41

Auto Sales 41

Leading Indicators 42

Personal Income 42

4.3. Financial and Sociopolitical Factors 43

The Role of Financial Factors 43

Political Events and Crises 44

FOREX. On-line Manual For Successful Trading v

Chapter 5. Technical Analysis 45

5.1. The Evolution and Fundamentals of Technical

Analysis Theory of Dow 45

Price 45

Volume and Open Interest 47

5.2. Types of Charts 49

Line Chart 49

Bar Chart 50

Candlestick Chart 51

5.3. Trends, Support and Resistance 53

Kinds of Trends 53

Percentage Retracement 55

The Trendline 55

Lines of Support and Resistance 57

5.4. Trend Reversal Patterns 59

Head-and-Shoulders 59

Signal Generated by the Head-and-shoulders Pattern 59

Inverse Head-and-Shoulders 61

Double Top 61

Signals Provided by the Double Top Formation 62

Double Bottom 63

Triple Top and Triple Bottom 63

The opposite is true for the triple bottom 64

Rounded Top and Bottom Formations 65

Diamond Formation 65

5.5. Trend Continuation Patterns 67

Flag Formation 67

Pennant Formation 67

Triangle Formation 70

Wedge Formation 75

Rectangle Formation 76

5.6. Gaps 78

Common Gaps 78

Breakaway Gaps 78

Runaway Gaps 79

Trading Signals for Runaway Gaps 79

Exhaustion Gaps 80

FOREX. On-line Manual For Successful Trading vi

5.7. Mathematical Trading Methods (Indicators) 81

Moving Averages 81

Trading Signals of Moving Averages 83

Oscillators 84

Stochastics 85

Moving Average Convergence-Divergence (MACD) 86

Momentum 87

The Relative Strength Index (RSI) 88

Rate of Change (ROC) 89

Larry Williams %R 90

Commodity Channel Index (CCI) 90

Bollinger Bands 93

The Parabolic System (SAR) 93

The directional movement index (DMI) 93

Chapter 6. The Fibonacci Analysis and Elliott Wave Theory 95

6.1. The Fibonacci Analysis 95

6.2. The Elliott Wave 96

Basics of Wave Analysis 96

Impulse Waves—Variations 98

The Diagonal Triangles 100

Failures (Truncated Fifths) 102

Chapter 7. Foreign Exchange Risks 104

7.1. Exchange Rate Risk 104

7.2. Interest Rate Risk 106

7.3. Credit Risk 107

7.4. Country Risk 108

Glossary And Foreign Exchange Terms 109

Bibliography 141