Insider’s Guide To Forex Trading
By: Saravanan Shanmugam
Tags: Forex Traders, Forex Brokers, Forex Trading, Forex, Forex Signals

Insider's Guide To Forex Trading

Discover All Of The Insider Techniques That

The Pros Are Using With Great Success

What the Stock Market is All About

In any business or moneymaking venture, preparation and

foreknowledge are the keys to success. Without this sort of

insight, the attempt to make a profitable financial decision

can only end in disaster and failure, regardless of your level

of motivation and determination or the amount of money

you plan to invest.

In the stock market, this rule applies to the nth degree, as

you are investing your own money in what could be

considered a high-risk wager, and you are playing with fire if

you do not have at least a general background knowledge of

how it functions. Since having a background in any area is

helpful in guiding you down a path in that particular region,

the more solid your basis of investment knowledge is, the

more likely you are to profit from any attempt to trade on

the open market.

In many ways, trading on the stock market can be

compared to driving – you do not have to be an expert to

get behind the wheel of a car, though you are expected to

have some previous knowledge about basic traffic laws,

including moving violations, safety regulations, and other

legal vehicular infractions, which are learned through either

specific study and coursework or even through some form of

simple exposure (such as the years you have spent riding

with your parents and others who have driven for years).

You should be able to comprehend the basic tools used to

navigate a car (where the brake pedal is located versus the

gas, and how to use the rearview mirror, for example), even

if you have never touched a steering wheel.

The same is true in entering the world of the stock market.

While you do not have to know all the terminology (you will

not be short-selling or determining your own long and short

positions at first, so you do not have to understand these

references completely, though you should be aware of

them), you should certainly be versed in the basic

The functionality of trading stocks, bonds, securities, and other

commodities. And just like someone who is behind the

wheel of a car and getting ready to touch the gas pedal for

the first time, you should start with caution and work

your way in slowly. A first-time driver will first set the

mirrors to his or her liking, then put the car in gear,

look for any interfering traffic, and ease onto the gas pedal,

never flooring it and testing the engine coming out of the

gate on the first attempt. Likewise, when you select your

first investment, you should choose something stable with

little fluctuation and not invest a large sum of money on this

first venture.

When a person is learning to drive, he or she will be

accompanied by another more experienced individual

and can assist them in making better driving decisions and

offering corrections that will aid in learning to handle the car

more efficiently. In the stock market, there are

stockbrokers and other experts who can give you input and

advice to help you in building your knowledge of the

commodities in which you are interested, essentially

“steering” you toward better stock market buying and selling

decisions.

You could spend hours and hours researching the stock

market and its functionality, learning how to become

involved in the trade and who to contact to get in the game,

especially if your interest lies in the Foreign Exchange

Market, which goes far beyond the level of complication of

the domestic stock market. However, in this book, you will

find all the basic information you need to get started down

the path to trading success. All of the leg work and tough

research has been done for you, collecting the data and

knowledge into one source from which you can gain enough

insight to make you a successful trader on the open market.

All you have to do is read to gain knowledge and

wisdom, step by step that will bring you to a heady level of

success. In this ebook, you will find all such helpful

information, all brought together in one single source for

ease of reference.

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How Investment Works

Any time you are going to be putting your money into a

fund; it is a good idea to start by understanding what you

are buying into. The stock market is a complicated entity,

and doing minimal business in trading requires a fair amount

of basic knowledge, as well as the understanding and

acceptance of the high-risk factor. The more you know in

advance regarding the functionality of the system, the less

likely it is that you will take a heavy hit, ending in devastating loss.

First of all and probably most important in the trading

business, you should understand what stocks are.

When you buy or sell a stock on the open market, you

should keep in mind that you are dealing with real objects,

not pieces of paper; you are buying and selling real parts of

a particular company, its product, or some other various

commodity.

Owning a “share” means that you have bought into

the company or product involved and become a partial

owner of that commodity. Of course, you could be one of

millions of shareholders, as most companies and products

are broken into minute pieces of the whole, but you are still

considered an investor in that company or product until you

sell your shares.

Think of it as paying for a tank of gas in the car that your

parents bought for you to drive. You may have even bought

the oil filter that has been put on the car, and you may feel

that this investment makes you part owner. However, when

you look at the overall cost of the car, you have before

contributed very little to that amount. However, as long as

you continue to invest in the gas for the car and take care of

the maintenance needs, you can claim part ownership of the

car.

Because the value of a company and its products or services

can fluctuate continuously, the value of the stocks you hold

will not be the same from day to day and can sometimes

even change hourly. When the price per share drops and is

considered low, it is an ideal time to purchase. This is the

least expensive way to begin your trading venture, and

working with a stockbroker will allow you to gain more

information as to what stocks are ripe for the purchase at

any given time.

In doing so, you become a stockholder, and the value of

your holdings will fluctuate from day today. Your gamble

(and hope!) is that the value of the company or product in

which you have invested will increase or rebound from the

low price at which you made your purchase. This is the goal

of all traders and means that your stock will become more

valuable.

As the value of your securities increases, so does your net

worth. When the price of the stock in your possession

reaches a high point, it is time to sell, making a profit on

your original investment. Ideally, you will always sell your

holdings for a reasonably higher price than the purchase

amount and should never sell when the current value of the

stock is below your initial purchase price. It is important to

make sure that you do not purposely take a net loss because

there are plenty of occasions when you could be forced to

take a loss.

For example, if you purchase shares of a company at twenty

dollars each, you should never sell them for eighteen dollars

apiece. If possible, you want to hold off until they are each

worth perhaps forty dollars, in essence doubling your

money. Of course, this is just an example, and not all

stocks will ever double in value, but the illustration is

meaningful.

There are other, more complex ways to invest in the stock

market. However, much like learning to ride a bicycle, you

do not want to make your first attempt without training

Wheels.

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Making Decisions In The Beginning

Let us return to driving as a reference. When you first start

driving, you will not enter the highway and take the car at

speeds of sixty and seventy miles per hour. Instead, you

will stay in residential areas or at least on the access road,

where there is less pressure to maintain such a high speed.

In the stock market, you will also want to stay away from

any expensive stocks or extremely volatile investments until

you have become extremely comfortable with the process of

trading.

There are small investment opportunities referred to as

“penny stocks”, which will help you try out your sea legs and

get a feel for how the stock market works prior to investing

large sums of money and risking a big financial loss. These

particular stocks cost pennies or small-dollar

amounts and typically only fluctuate fractions of a cent on

any given day, making them extremely safe for those just

starting.

Once you get the hang of it and can better judge the market

trends, you can comfortably move on to more complicated

and adventurous areas of the market. It is like removing

the training wheels from your bicycle or entering the

freeway the first time at an hour of the day when there is no

traffic to contend with.

Be aware that, just like you may fall off your bike once or

twice and end up with some scrapes and bruises, you may

The lost money in investment here and there. This is very

typical, and investing in the stock market is a lot like

gambling. In poker, you cannot expect to win every hand,

and the same is true in the world of investments. Learning

to watch the market trends, though, is similar to watching

other cars as you join traffic and determining the correct

speed and proximity to other cars for optimal safety. Such

diligent study can help you improve your statistics drastically

in a short time.

Stock Market Trends

Understanding stock market trends can make your job of

earning money in the market much simpler. In contrast, if

you know little or nothing about these trends can cause

serious loss.

Bulls And Bears

As you dig deeper into the market and learn more about the

way it functions, you will begin to hear certain terms about

marketing trends that seem to be repeated over and over

again. Market trends are variable and volatile, both on a

daily basis and over extended periods. In the past,

for example, the United States has had devastating stock

market crashes, but due to the freedom of a capitalist

society, the American economy has always eventually

rebound.

What does it mean for the market or a particular stock to

rebound? Assuming that the value of a company or its stock

has plummeted to a level that seems unrecoverable, leaving

it practically worthless, it may feel as though that company

is in danger of bankruptcy and falling off the scope of the

free trade markets altogether. All of a sudden, however, the

founder of that company may introduce a new product over

which consumers go wild. Everyone wants one, and this

product may be in short supply upon its introduction,

causing a race to the department store shelves.

When such a move occurs, the law of supply and demand

will take over, making the company valuable once again.

The stock price for that company’s shares will recover, and

the resulting gain in value would be considered a rebound –

a return to the original status (or better) before the

devastating loss.

The market trends either up or down, and there are specific

references to strong changes in the market values that you

may frequently hear. If several different areas of the

The market is in a steep downward slide, with values dropping

rapidly (perhaps even ten or twenty per cent in a few days),

it is referred to as a bear market. You can remember this

reference as though you are in the extremely dangerous

position of being chased by a bear – if you are in possession

of several stocks or other commodities worth a goodly sum,

you have a serious chance of losing a great deal of value

that could translate to a loss of net worth should you choose

to sell, and it can be a similar, very dangerous situation.

Your best bet in these cases is to either sell before prices

drop below your original purchase price or hold onto the

shares until the market rebounds. However, when the bear

market reaches a low point, it can be an ideal time to get

into the game, as it is rare for prices to drop below this

point. Then, if you patiently await the recovery or rebound

of the market, you can make a great deal of money from a

bear market. These options will be discussed in more depth

in later chapters.

At the same time, a bull market is a strong general upward

trend for many stocks. You might compare this to the

running of the bulls in Pamplona, Spain, every year. You are

safer if you are indoors when the running occurs, and by the

same token, if you own stock during a bull market, you are

in a prime position to increase your net worth and sell your

shares, making a great deal of money. This is another idea

That will be further explored in greater detail further on in this

Ebook.

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The Market Outlook

By taking note of various changes in the status of different

available stock options, you will learn how to spot early

market trends, giving you a clue to the future of a particular

commodity and this can only add to your chances for

profitability. Prediction is a big part of the game when

working in the stock market, since you can never be

completely certain in what direction the market will swing at

any given time.

However, you can make an educated guess, much the same

The way a meteorologist forecasts the weather. While he or she

is not right 100% of the time, the forecast is usually quite

close to the actual outcome of the weather because the

meteorologist is a scientist who has studied weather trends

and can pick out details that assist in making that educated

guess. With a little time and seasoning, you can attain the

The same level of experience and intuition within the stock

market.

Once you have become more comfortable functioning in the

The same world as the stockbrokers and day traders, and you

feel confident (or at least less nervous or awkward) making

such important financial decisions, you may decide to make

your move toward the Foreign Exchange Market (more

commonly-known as Forex), and the goal of this book is to

prepare you to operate within the boundaries of this more

complex entity. Next, we will discuss some of the properties

of Forex and how much more complex this stock market

The entity can be a standard domestic market.

The Foreign Exchange Market is incredibly volatile, and there

are a lot more factors to consider when placing an order on

this market than on a domestic market. The following

The chapter is an introduction to the exciting and somewhat

The scary world of the Foreign Exchange Market, or Forex.

An Introduction to Forex

Forex is the nickname for the Foreign Exchange Market. In

the United States, there are several branches of the stock

market, each with its name. For instance, some

stocks trade on the Dow Jones, others on Nasdaq. Of

course, all stock market transactions in the United States

take place on the New York Stock Exchange (NYSE). In

other countries the same is true. There may be one or more

distinct markets.

However, international trade takes place on the market

termed the Foreign Exchange Market or Forex. Several

countries across the world in almost every time zone

participate in trade on Forex, with multiple currencies being

utilized and stocks and commodities from all participating

countries being offered for trade. Because there are so

many nations and time zones involved, Forex does not

function as a “business day” entity like most domestic stock

markets. It remains open for trade 24 hours a day, 5 days a

week.

Of course, these additional hours increase the risk factor

intensely for those of us who are human and obviously

cannot monitor our investments 24 hours a day. This means

that the value of your holdings could potentially plummet

overnight, while you sleep, because other countries are still

trading while you are in a dream world. Again, it is like a

car – there are many moving pieces under the hood, and

just because you cannot see them does not mean they are

not functioning.

This is one reason for several safety options, like limit

orders, which we will discuss later. This is also why it is

strongly recommended that your first attempts to make

money on the stock market are not transactions that take

place within the Foreign Exchange Market but on a standard

nine-to-five domestic trading market. In our car analogy,

this would be comparable to having asked someone who has

never driven or even changed the oil in a car to rebuild the

engine.

Forex Functionality

While the functionality of Forex is the same as a domestic

stock exchange, the commodities and prices are more

volatile, and there are additional factors to take into

considerations besides the typical risks associated with a

domestic market. You will have to contend with not only the

value of your stocks and your currency but also the foreign

currencies involved in any trades or exchanges on Forex, as

well as the inconsistencies of values of particular goods and

services across international borders. It is like driving a car

with a standard transmission as opposed to an automatic.

On the domestic front, the work is mostly done for you, and

all you have to do is navigate, much like an automatic

transmission. However, shifting gears is quite similar to

having to constantly take part in the currency conversion. It

can be distracting, and it certainly complicates the act of

driving.

Because the financial situation of many countries is not as

secure as that of the United States, this can pose a

The formidable problem in determining where to invest your

money and what to expect next in the international market.

Knowing what countries and currencies are involved in Forex

can assist you by allowing you to more closely monitor the

The financial situation in the nations with which you will be

interacting.

The History Of Forex

When foreign trade began, it was not an international trade

market. It was borne out of the Bretton Woods agreement

in 1944, which set forth that foreign currencies would be

fixed against the dollar, which was valued at $35 per ounce

of gold. This precedent was first put into practice in 1967

when a bank in Chicago refused to fund a loan to a professor

in the sterling pound. Of course, he intended to sell the

currency, which he felt was priced too high against the

dollar, then buy it back later when the value had declined,

turning a quick profit.

After 1971, when the dollar was no longer convertible to

gold and the domestic market was stronger, the Bretton

Woods agreement was abandoned, and the currency

conversion process became more variable. This allowed for

a stronger backing in the foreign markets and the United

States and Europe began a strong trade relationship. In the

In the 1980s, the market hours and usage was extended through

the use of computers and technology to include the Asian

time zones as well. At this time, foreign exchange equalled

about $70 billion a day. Today, about twenty years later,

the trade level has skyrocketed, with trade equaling close to

$1.5 trillion daily.

Originally, trading across international lines was more

difficult, with several different currencies involved across

Europe. Though the major players in the European market

were deeply involved in and veterans of international trade

by the time other markets joined in, there were more

currencies to keep track of – the franc, the pound, the lira,

and many more – than was reasonable. With the birth of

the European Union in 1992, the wheels were set in motion

to create a single currency that would be used across most

of Europe, and the Euro was finally established and put into

circulation in 1999.

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Forex Today

While some countries have still not accepted the currency as

their own (such as Britain, which still uses the sterling pound),

the process of currency conversion has been simplified

without the large number of various currencies that were

previously dealt with. Instead of dozens of currencies, the

main countries trade in five – U.S. dollars, Australian dollars,

British pounds sterling, the Euro, and the Japanese Yen.

Today, the Foreign Exchange Market is international and

worldwide. The market is open 24 hours a day, 5 days a

week, to accommodate all of the time zones for all of the

major players. These now include most of Europe, the

The United States, and Asian markets, especially Japan. Even

Australia has joined the international trading markets, and

since such nations are halfway around the world from some

of the other top players, time zones obviously must be taken

into consideration.

Another completely separate but perhaps more important

concern with trading in Forex is understanding how trade

works in multiple currencies. How can you compare the

value of stock across international lines if the values are

expressed in two separate, non-equivalent currencies? And

how do you measure gains and losses when the conversion rate

is constantly changing?

Understanding Currency Conversion

When you begin trading on Forex, you have to learn how to

convert currencies and note the difference in values, as well

as how currencies are exchanged between international

lines. This means studying not only domestic market trends

and currency values but also those of foreign markets.

Working With Multiple Currencies

Since Forex is the Foreign Exchange Market, you obviously

cannot expect everyone within the market to trade in the U.S.

dollars (and why not, you might ask? – but remember that

not everyone covets the U.S. dollar). With so many

variables and volatile currencies being exchanged, how can

you know a good buy or sell when you see one without

complete awareness of the value of foreign currency?

The first step is to find a source that will give you a basic

idea of the current exchange rate between your domestic

currency and the foreign currency in question. You should

do this as a base listing for any currency that with which you

might become involved. Of course, this will not be

consistent down to the cent or fraction of a particular

currency throughout an entire business day, but at least you

will have your starting point from which to begin, almost like

North on a compass. Such sources can be found all over the

Internet, as well as through many brokers, both online and

in person.

Currency Expression

It is also good to understand how

currency conversion is expressed. The comparison is usually

made in a ratio known as the cross-rate. In this

configuration, the two currencies are listed in an XXX/YYY

ratio, with the XXX position referred to as the base currency.

The base currency is usually expressed as a whole number,

while the YYY position is expressed as the decimal that most

closely matches the based currency rate. It is sort of like

making reference to miles per gallon or rotations per minute

on a car – a direct comparison of one to the other in the

form of a ratio.

The smallest fraction, or decimal, in which a currency can be

traded, is called a pip and this is usually the degree to which

a cross-rate is expressed. For example, if the British pound

sterling can be traded in thousandths, the currency will be

expressed to the third decimal place. The U.S. dollar is

often expressed to the hundredth of a cent (the fourth

decimal place).

In one cross-rate expression example, one U.S. dollar may

be equivalent to 117.456 Japanese yen. This ratio would be

expressed as 1.000/117.456. The base currency is almost

always expressed as a single unit (as in one-dollar as

opposed to ten dollars), and frequently that unit of

measurement is the U.S. dollar. Since the whole number

value (or big figure, as it is referred to) of the secondary

currency, or the currency in the YYY position in terms of

conversion changes so infrequently, often only the decimal

The portion of the number is mentioned in the Foreign Exchange

Market.

Therefore, in the ratio above, you may hear that the yen is

trading at .456, with no mention at all of the 117 whole yen

that is shown in the ratio. This is because the exchange rate

may vary from 117.456 to 117.423, but not to 119.024.

Experiencing a change in the big figure – the whole number

ahead of the decimal – unless it was only because the

The number was already within a few thousandths, would

represent much too large a shift in value for a single trading

period and would be a rare occurrence that could cause the

entire market to make a drastic swing in one direction or the

other.

The most common currencies found in Forex are the U.S.

dollar, the British pound sterling, the Euro, the Japanese

yen, and the Australian dollar. In the past, there would

have been many more currencies to keep track of (such as

the franc, the lira, or the Deutschmark). However, with the

consolidation of most of the European market trading on

Forex to the Euro, many currencies have been eliminated,

making a trade on Forex for other lands less complicated.

If you purchase a commodity in a particular currency, and

that currency’s value falls against the U.S. dollar, you can

make money by selling that same commodity in

dollars. The same is true in reverse should the value of a

foreign currency increase against a U.S. dollar. Of course,

you can only take advantage of such a situation should the

commodity be traded in both currencies and both markets in

question. We will discuss this process, as well as other ways

to take advantage of the Foreign Exchange Market (like

arbitrage) in more depth in future chapters.

Once you can discern a base value of each particular

currency and its conversion rate against others traded on

Forex, you will be able to more closely monitor the change in

currency conversion, including its inconsistency and

volatility. Such ideas will not seem so “foreign”, and you will

be caught up and knowledgeable right along with the pros.

Then, you will need to learn how to read, understand, and

ultimately interpret additional market trends

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Forex Trending

Following charts, listening to the advice of market analysts

and chartists, and learning to make educated predictions

yourself will help you keep track of various marketing

trends. The next chapter will explain more about using the

statistics that are published to forecast the next move on

the stock market. Will it be a clear, calm day with little

activity, or is there a storm brewing with winds of change

and uncertainty? How can you tell what will happen with

your holdings the following day or even further into the

future?

Simply learning to read market trends can remove a lot of

natural apprehension and uncertainty for beginning traders.

Sometimes the best first step to entering the market to watch shows about it or read the financial sections of

the newspaper that detail the trends and expected

outcomes. The following chapter will explain more about

how to interpret the statistics and basic trends.

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Understanding Statistics

You have now become somewhat familiar with how the stock

market works, and you understand to a point what is

involved in trading on the Foreign Exchange Market. Now,

you would like to know how to gauge market trends in order

to profit from your business ventures on the open market.

We are no longer discussing penny stocks and playground

games. You want the real goods.

The name of the game is statistics, and the first rule is that

you must be aware there is no such thing as a sure thing on

the stock market. While you can never be 100% sure at any

given time of the next move that will be made on the market

as a whole, being able to read statistics and interpret them

will place you ahead of the pack in regards to “guessing”

what will happen next?

Investing is a lot like gambling. If you can keep track of the

cards that have already been played, you are more

informed, statistically, regarding what is likely to be dealt

next, meaning you can place abet with greater insight than

someone who has no clue what has already been played.

With the open market, if you have information as to what

has already occurred over the past few days, months, or

even years, you are again placed in a better position to

more logically conclude what will happen next. You simply

learn the pattern and follow it to the end, reaping the

financial rewards.

Charts And Chartists

Wait, did you think you were going to have to research and

map out the market’s past all by yourself? Of course not!

Some people get paid to do that sort of work. They

monitor the market hourly, daily, weekly, monthly, and

yearly so that they can provide big-time traders with the

same knowledge mentioned before. The more an

investment company knows about the market, the more

money it can make. The same is true for stockbrokers.

They make money when you make money, and they want to

do the best they can to make sure that you make intelligent

decisions.

The best part of this is that you have access to the same

information as these VIP clients. Chartists, who are

essentially market analysts that publish their findings in

easy to read charts, produce what is referred to as a

candlestick chart. These charts are a combination

of a line graph and a bar graph that shows the trend of

various stocks, indexes, or other interests over a specified

period. Therefore, you can easily determine if the

The commodity is on an uptrend or if it is taking a downturn,

when the last major change occurred, and how long it is

predicted that the stock or bond will continue on the current

path.

You can find information on most commodities and

their market trends for years in the past, and some even all

the way back to their introduction to the open market.

Using this information can help you decide whether it is a

good idea to buy or sell the stocks or securities in which you

have interest, or if it is better to hold off for a peak in the

market trend.

Understanding Market Trends

Understandably, as economies vary, the value of various

commodities can change. This is because, when an

economy is strong and flourishing, a nation is wealthier and

has more purchasing power. Along with that power comes a

higher value for the items purchased. In other words, if

people have more money to spend and are spending a

greater amount of that money at Walmart stores, the value

of the stock at Walmart is going to multiply at a considerable

rate. Therefore, stockholders become wealthier in terms of

assets, simply because the shoppers are driving the market

with their purchasing power. When stockholders are

wealthy, and the value of their holdings is on the rise, they

continue to purchase stock, which again, pumps the

economy. A strong upward trend in the stock market is an

excellent sign for any economy.

However, some things negatively affect the market, causing stock values to plummet. For

example, warfare rarely has a positive effect on the stock

market. On September 11, 2001, when terrorists attacked

the World Trade Center in New York City, the economy of

the United States took a huge dive, and the nation was

threatened with a depression. Some analysts were sure that

it would never properly recover. The same thing typically

happens any time there is an attack or act of war within a

nation. However, the critics proved to be wrong, and the

United States proceeded to rebound or recover from a bad

downtrend, vigorously. This quick recovery

occurred mostly because the people of the United States

continued to push and spend, forcing money and wealth

back into the economy. In watching the reaction of the

stock market, you can learn to read trends based on world

events.

Oil prices commonly affect the stock market, as well.

Especially on the Foreign Exchange Market, you will find

trends vary depending on many current events. You will

also note that, over time, the principal value (or face value)

of a currency may purposely be revised by a nation in terms

of currency conversion. This is referred to as devaluation,

which will be discussed in greater detail in the next paragraph

Chapter 6: Forex Volatility and

Market Expectation

Volatility, or the tendency for fluctuation that can affect your

earnings within the stock market are typical within a

domestic market but even more evident and much stronger

on the Foreign Exchange Market. What factors affect the

value of the currency on Forex, and is there any way to control

this?

Devaluation And Revaluation

As mentioned in the previous chapter, devaluation refers to

the purposeful decline in the value of a currency concerning

other currencies as charged by a government entity. For

example, if the U. S. dollar is worth ten units of a foreign

currency that is then devalued by ten per cent, the U. S.

The dollar is now equivalent to only nine units of the foreign

currency. This makes any items purchased in the foreign

currency more expensive for those trading in U. S. dollars,

as the exchange rate is lowered. It also makes items in the

foreign country less expensive to trade in U. S. dollars.

An opposite change in value can also occur, raising the value

of the foreign currency. This is referred to as revaluation.

While it may seem that purposely adjusting the value of a

nation’s currency is “cheating”, or taking unfair

advantage by making foreign products cheaper to purchase

and increasing the value of exports, there are regulations in

place to prevent the manipulation of exchange rates for such

purposes. The charter of the IMF (International Monetary

Fund) assists in prohibiting such occurrences and enforcing

the policy.

There are ways in which you can take advantage of

devaluation and revaluation, which will be discussed later

on. However, what happens when the value of a foreign

currency changes due to market fluctuation rather than

purposeful reductions or increases by a federal government

or federal bank? What effect do appreciation and

depreciation have on the stock market?

Appreciation And Depreciation

Depreciation can be easily related to the life of a car. As

soon as you drive a new car off the lot, the value is almost

cut in half. This is extreme depreciation. However, over the

next few years, the car continues to lose value at a more

gradual pace. This is considered to be depreciation as well.

Currency appreciation and depreciation are changes in the

value of the currency that is driven by market forces rather

than by government mandate. For example, in an attempt

to repay certain loans, in 1998 the Central Bank of Russia

announced the coming devaluation of the ruble. The

exchange rate, which was currently six rubles per the U.S.

dollar, would over some time change to 9.5 rubles per

dollar, effectively a depreciation of 34%.

However, before the change, there was a widespread panic

within the former Communist nation, and the value of the

The ruble dropped due to many people in Russia opting to trade

in their securities before maturity. In a single day,

following the announcement, the Russian ruble was

depreciated by an amazing 25%.

The same sort of crisis occurred in the 1920s with the crash

of the U.S. stock market. At that time, a nationwide panic

set in, and people rushed to the banks to withdraw cash that

was not available or to trade in securities and stock options

that were not matured. In running to the bank, people

caused the crash rather than escaped it.

On the flip side of the coin, too fast of an appreciation sets

up a country for inflation or an increase in the retail value of

products sold to the public based on currency valuation.

While inflation is bound to occur, it can be minimally

tempered through the use of the currency valuation.

Appreciation can be related to a vehicle as well. Often, men

enjoy taking old cars and restoring them to their original

beauty. In doing so; they drastically increase the value of

the vehicle or appreciate it.

The ever-changing rates of currency conversion and volatility

of the market create an inherent market risk, or a day to

day potential to experience a loss due to fluctuation in

securities prices. There is no way to diversify this type of

risk, as it is always going to affect investment to a certain

degree. However, some risk can be offset by particular

types of investments or ways of investing that are more

secure or protected.

We will take a look at long and short positions, short selling,

stop orders, and other ways to protect your investments

from drastic loss in additional chapters. These options

include the ability to preset your purchase or sell price for a

specific commodity, as well as using various predetermine

order levels to place orders and complete transactions.

Of course, do not delude yourself into thinking that you can

rid yourself of all possible risk factors on the market. There

is always a cloud hanging over your head waiting to burst,

and all it takes is one little pinprick. You must always

exercise caution, though the idea of playing the stock

market entails danger and excitement inherently. The next

chapter will help you get a grasp on reality and what is

involved in balancing your risk factor with a grounding in

reality; your ego with your id.

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Aspects Of The Trade

You are now versed in the functionality of the stock market

and have decided that you are willing to accept the risk

factors involved. However, you want to know everything

you can about balancing that risk with intelligent investment

options. How can you be sure that the risks you take are

more likely to be rewarding in the long run than destructive?

Long and Short

One of the most important parts of making money on the

The stock market is to determine your position. The long

The position is the purchasing position – you are about

to take on a long-term commitment for ownership of some

stock, security, or other traded commodity. The short

position, by contrast, is the selling position – you are shortly

going to dispose of the same sort of ownership and any

responsibility toward it.

The best time to take up the long position is when stock

prices are low. This will get you into the market at a

reasonable price and increase your chances for profitability

as new offerings go up in price and older investment options

recover or rebound. As others take the long position

and purchase at the same time you do, this will actually

drive the value of securities up through the standard rule of

supply and demand, causing the beginning of what could be

a bull market.

You may equate this with the end of the month at a car

dealership. The prices tend to drop on any cars left on the

lot for sale, and the dealer is more often willing to bargain

because he or she wants less inventory on the lot. Likewise,

when stock prices are low, some will panic and dump all of

their holdings at these low prices, thinking that their shares

will never recover the value. This can only be of assistance

to you.

When prices are high, it is likely time to turn around and sell

your shares to bring in a profit, not losing anything on

unrealized gain (profit that cannot be counted in a liquid

assets or cash because it is still invested in a volatile stock

option). You should never sell for a price that is below your

cost, as this brings negative equity and loss of funds. You

should always sell for the greatest amount of profit that you

feel is safe.

In other words, if you buy a security at fifteen dollars per

share, and it quickly rises to twenty-five dollars per share,

you may very well feel that it could hit thirty dollars per

share within a week. However, you must determine if you

are willing to risk losing your already secured earnings of ten

dollars per share to wait that long, should the price actually

fall, so you may decide to sell at the current high price.

Market-Makers And Selling Short

What if the stock values are up incredibly high, but you did

not get in on that particular commodity and own no shares?

Your first step should be to visit a market-maker or to make

a deal with a broker for a short sell. A market-maker is

a stockbroker who purchases keeps a certain

amount of shares of several securities or stocks on hand,

which are purchased during a time when the market rates

are low.

The firm will then turn around and sell those shares to an

The individual at that low price, regardless of the market rate, in

effect making its market (thus the name). The

The individual who purchases from the firm can immediately sell

the commodities on the open market at market rate (which

is higher), making an incredible amount of profit in a short

period.

A short sell is another option for a quick profit. In this

scenario, you will borrow a particular number of shares from

a stockbroker to sell when the market value is high. Your

job is to then wait for the stock price to go down, purchase

the same quantity of stock, and return the holdings to the

broker, keeping the profit from the sale, minus the broker

fees.

The way that a car dealer works with trade-ins is very

similar. They will purchase the car from you at a very low

price, then turn around and sell it on the lot for a high-profit

margin.

One of the most positive aspects of a short sell is that you

never actually take possession of the stock, meaning that

you are never in a position to lose money. Because you

have sold shares for a high price, you have already profited,

and in the worst-case scenario, the particular stocks will not

drop in price. Rather than return the stocks to the broker

from whom they were borrowed, you can simply payback

the amount for which they were originally purchased, along

with the premium.

How can you be sure that you will not overshoot the best

price options or miss a good rate because you are

unavailable to place a buy order or sell order with your

broker? Is there a way to set limits on your trades? Next,

we will discuss ways to protect your investments and limit

your risk factors.

Risk Management

One of the most important aspects of protecting your

investments is balancing your risks with reassurances.

There are several ways to do this, and we will discuss those

in this chapter.

Limit Orders And Balancing Risks

A limit order is a standing amount at which you have agreed

to buy or sell a particular security or other commodities. For

instance, you have designated to your stockbroker that you

will not sell X Security until its value reaches a minimum

value of Y dollars. At the same time, you will not purchase

the same X Security if it exceeds a value of Z. Setting limits

for the price you pay for a particular security, as well as the

The price you will accept to sell it protects you and your

investment in several ways.

First of all, you are maximizing your gains, but mostly, you

are avoiding loss. Any loss that occurs with limit orders will

always be an unrealized loss or a loss that is not measurable in

liquid assets or cash. In other words, until you sell the stock

and reap the net loss, it will not affect your net worth. Since

you have set a limit that does not allow your commodities to

be sold for less than the original cost, you cannot possibly

have a loss in your net worth. At the same time, you are

also assuring at least a certain amount of profit by setting

your sell point high enough to reap that particular profit.

Another way to protect your assets is to hedge. This means

that you create and sell a futures contract stating that, when

your shares reach a certain value in the future, you will sell

your holdings at this predetermined price. When that price

is reached, the order will be processed and the transaction

completed. Of course, if you ever change your mind about a

limit that you have set, you can place a stop order with your

broker, which designates that you no longer wish to trade at

the specified dollar amount.

You can also buy on margin. This is very similar to short

selling, but instead of borrowing stocks to sell, you are

essentially borrowing money to purchase stocks on your own

when the market value is down. Then, when the value of

the securities you have purchased rises and you can

sell for a profit, you repay the loan and keep the excess

from the sell, minus the broker fees. Of course, all dealings

with a stockbroker incur a premium or fee for services

rendered, and it is nearly impossible to trade without a

broker or broker service. However, online services are often

less expensive than live agents, but you can research to

determine what your best option is.

How Do I Handle a Whipsaw?

No, we are not referring to anything in the garage, the

bedroom, or a country band. A whipsaw is a market trend

that defies the odds. It can be thought of as the “fender

bender”. Despite how careful you are as you learn to drive a

car and become coordinated, sometimes you cannot do

anything to avoid being rear-ended.

Whipsaw is a term for what happens when everything points

toward a specific direction in the market trend, causing you to

buy (if it looks as though prices are going to rise) or sell (if it

seems they are about to fall), then the opposite effect

occurs.

For example, if you purchase a security at five dollars per

share because the stock seems to have fallen as far as it can

go and appears to be starting an upward trend, then

unexpectedly, the stock plummets to one dollar per share,

this is considered a whipsaw effect. If this happens to you,

as it surely will if you play the market long enough, the best

The thing to do is wait it out. The stock will do one of two things

– it will either dissolve entirely, and the company will go

bankrupt (this is what you do not want to happen), or it will

rebound, and you can opt to wait for a chance to turn a

profit or you can get out as soon as the purchase rate is

reached.

Whipsaws are not the end of the world, and no one can

expect to gain with every stock market purchase. However,

if you find that you are involved in several of these

instances, you should seriously reconsider your investment

options. You may be reading the signs incorrectly, or you

could be picking bad stocks. You should seek advice for any

future investments you expect to make before purchasing

any further stocks or securities.

Another way to overturn a bad investment like this is to

proceed with an offset transaction – a purchase or sell that

offsets the loss of a previous transaction. You could either

purchase additional stock in the same company at the lower

price if you expect it to recover, or you can opt for another

The hot commodity that is about to explode in price, either of

which will help you offset your loss. You could also sell

shares of a security in which you have a large amount of

unrealized gain – again that cannot be measured in liquid

assets or cash due to an increase in value of stock and security

holdings – to replace the lost cash value.

All of these are viable options to recover a loss but waiting

for the share value to rebound is always the first choice. It

avoids the loss of funds already invested, retains the option

to pursue profit, and reduces the risk of further investment

into the market.

As you grow and learn about these various options, you will

need to feel more comfortable when surrounded by financial

gurus and geeks who speak what sounds like gibberish,

muttering words you have never heard left and right. The

Some commodities areBuzz Words

Now that you know a little more about the stock market,

and you have decided to try your hand at investment, you

should be more concerned with understanding the jargon

you will hear on the trading room floor. Although you

probably will not find yourself amid a group of screaming

stockbrokers on Wall Street (and these days, most of the

trading is done by computer anyway), knowing that learning

to talk the talk is part of walking the walk.

Margins, Spreads, And Other Condiments

Okay, so it is margins, not margarines, but it sounds very

similar. To understand the stock market, especially

on Forex, you need to speak not a language meant for

common communication, but the language of trade. For

instance, when you think of a margin, for many this means a

variable – like the “margin of error” in a statistic.

However, in trade, it refers to the sum of money borrowed

from a broker to purchase stocks when the market

is on a downtrend. Then, when the value begins its next

upswing, you sell the stock at the higher price, pay back the

margin (along with the premium accrued), and retain the

profit.

When you buy on margin, the money lent by the stockbroker

is referred to as a margin account. The margin account is

provisionally based on the value of the stock. Occasionally, if

the value of the stocks purchased should drop too low for

the safety margin set forth by the broker, the agent will

request that more money be deposited into the margin

account to make up for the loss. This is referred to as a margin

call.

In some trades, the market value does not come into play.

For instance, a forward trade is set up between two

individuals or two companies outside the open market. It

involves a process of negotiation and an eventual

compromise in price. There is usually a bid made – the offer

to buy a commodity at a certain price – and an asking price

or offer – the price for which the other business entity is

willing to sell the securities or other holdings. The difference

between these two purchase numbers is referred to as the

spread.

If the spread cannot be narrowed and eventually closed, no

deal can be made. This agreed-upon price is called the

forward price, and all details involved in the trade process

when this type of transaction takes place are detailed in a

contract and referred to as forwarding points. Usually, the

The forward price is outlined as available for a particular date,

and should the transaction not be completed on this date

(referred to as the transaction date), then the trade must be

renegotiated.

Jobbers, Yards, And Other “Brit” Terms

One of the major foreign markets that Americans trading on

Forex will encounter is that of the British. While several

other terms relating to the stock market will be similar

because of the common language, there are some specific

terms that are very different in the British trading

vocabulary.

For example, in the United States, stockbrokers who hold

onto securities purchased at low prices for

selling them to clients in a higher-priced market (so that the

The client can turn around and resell them for the profit on the

open market) are called market-makers. However, in

Britain, this type of investor is simply referred to as a

“jobber”.

Another term you will want to be familiar with is “yard”.

This does not refer to a green patch of land, a measurement

in inches, or even 36 of something. The term is used about the quantity of currency rather than value and is

equivalent to one million units of the currency in question.

In other words, you can have a yard of dollars or a yard of

yen, and though it is the same quantity of bills, coins, or

whatever physical currency is used, it is not necessarily

equivalent in value.

In Britain, they do not use the Euro, and they do not use the

U.S. dollar. They have chosen to still use the pound

sterling, a currency that has been used in the country for

hundreds of years. However, Britain is currently on a path

to make the conversion to the Euro within the next five

Years.

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Open And Shut

In the stock market, there are various types of orders that

can be placed to help protect you from making a bad

investment or to limit the amount you pay for a certain

security or another commodity. For instance, if you have

made a bad investment and do not want to reinvest in a

particular security, you should sell all shares of that stock,

regardless of taking on a small loss. This action is referred

to as closing a position. On the contrary, if you are doing

well with your investment, you might participate in a

rollover, simply reinvesting any earnings in additional shares

of the stock or security.

An open order is exactly what it sounds like, meaning that

the order remains pending until it is either executed by your

stockbroker or cancelled by you as the client. A stop order

would cancel any pending orders you have placed with your

stockbroker. You also have options like One Cancels the

Other Orders. These allow you to have interest in several

commodities, leaving orders with your stockbroker to buy all

of them, should they drop to a certain price. Then, should

one of those reach this preset low price, your stockbroker

will follow your direction and invest your money in that

particular security, followed by a cancellation of all additional

orders.

When a broker gives you an estimate on the price for a

particular stock or commodity, it is considered a quote. A

quote is never completely accurate and is usually referred to

as a spot price, as the value of a security can change within

a few seconds. However, it is as close to accurate as can be

expected. When you put in an order, the broker then

processes the fill, or completion, of that order. The actual

value at which the trade is completed is called the fill price.

The completion of a trade or purchase, referred to as a

settlement, can also be called the execution of a transaction

or realization of an order. As you see, there are a lot of

terms to take into consideration, and we have not even

begun to consider terms used in some of the tougher areas

of the market.

Next, we will consider some specialized, more complex

trading options that you can use on Forex to take advantage

of the volatility of the market and the constantly varying

exchange rates.

Expert Trading Options

After spending a lot of time buying and trading on both

domestic and foreign markets, you will find that the process

becomes easier and almost intuitive. You no longer have to

work so hard to determine currency conversion or find the

next big explosive commodity. It will be like second nature

for you.

What, then, becomes the next big challenge for someone

trading on the open market? What keeps things from

becoming monotonous and boring? First of all, there is

always something new and different happening on the

Foreign Exchange Market. Remember, it operates 24 hours

a day, and you never know what you will find when you

wake up in the morning. However, there are various ways

that you can take advantage of the variance in currency

conversion and a lag in time between markets that can

affect trading values.

Arbitrage

There are some commodities that are traded in multiple

currencies on multiple markets on Forex. Although

computers have made worldwide communication almost

lightning-fast these days, all of these markets can trade

together with fairly equivalent values for the securities

shared across currencies.

However, the system is not perfect, and the value may rise

or fall in one country and currency before the same change

in value reaching across another border. Seasoned traders

have learned to take advantage of this lag in the market

trending by using a process called arbitrage. In this

transaction, you purchase the particular stock or security on

the market with a lower price while simultaneously selling

the same in a market where the value is higher. The

process is a bit complex, so we will use an example. Let’s

say that one U.S. dollar is equivalent to .5 British pounds,

meaning that everything is going to be twice as expensive in

British pounds.

Now, let’s take a look at the price of a stock that is traded

on both markets. If they were equivalent, then the stock

would trade for two dollars in the United States and one

pound in Britain. However, if something happens and the

stock value drops in Britain, it is six hours ahead of the

United States, and this drop may not hit the American

market immediately.

If the value of the stock drops in Britain to .8 pounds, the

purchase price is now below that of the price in dollars due

to the currency conversion. In this case, arbitrage would

take place when you bought shares of the stock in on the

British market in pounds and sold it on the U.S. market in

dollars, benefiting from the slow communication of the fall in

The value of the stock. In effect, you will make $.40 per stock.

The volatility of Currency Conversion

Another way to take advantage of the ever-shifting value of

each currency is to trade based on the changing

rates. What exactly does this involve? You must closely

watch the changing conversion rates. When a currency

conversion rate changes drastically, it is time to make a

move. This is very similar to arbitrage, but the area is much

riskier due to high volatility. For instance, if you have

purchased stock in the scenario above on the U.S. market

for two dollars a share, and suddenly the British pound gains

value, dropping to a conversion of only half a pound for

every two dollars, you would want to sell your shares on the

British market because the value of a pound is higher and

now has greater purchasing power.

One piece of advice to keep in mind, though, is that it is best

to immediately dispose of all liquid assets in foreign

currency, usually on the same day. This is referred to as

tomorrow next because it takes two to three business days

for foreign currency to be delivered, and by exchanging the

currency for value in stocks on the same business day, you

avoid having to take delivery of the currency altogether.

Other Trading

Options

Besides the expert options described above, there are other

nontraditional ways to make money on the stock market. In

considering these options, however, you should consider

making a career trading stocks and securities. Some

types of trading are simply not for the faint of heart, and

that means you must have a complete motivation and an

adventurous spirit to take part in these areas of the market.

The chances of taking a giant hit and experiencing a great

loss are multiplied.

Day Trading

Day traders take on some of the greatest market risks of all.

Because day traders work with investments that change

drastically within hours, they are by nature playing in the

lion’s den. These stocks are extremely volatile, and for

most, day trading is a quick way to lose a great deal of

money. It is difficult to make a great deal of cash in this

manner, and it is even more difficult to forecast the outcome

of these day trade stock options. You cannot be certain of

the overnight position (the net value at which a stockbroker

or day trader will open the following morning).

And in Forex, there is little room for day trading, as the

The market never shuts down during the workweek. In these

cases, the day trader has to set a time limit for him- or

herself to get out, selling all shares, so that he or she can

sleep soundly while the world spins round and start the next

day fresh.

Day trading is very dangerous and is not recommended to

newcomers. It is not recommended at all, and

most people who partake of this volatile part of the industry

are extremely seasoned in trading on the open market, do

not consider the risk factors carefully enough before

entering this branch of the market, or have enough money

that they simply wish to try this form of investment and do

not care if they lose a goodly sum.

Secondary Markets

Secondary markets are interesting in that they are created

by the government to help redistribute money that is used

for loans. Fannie Mae and Freddie Mac are two of the major

corporations from which stocks are purchased on a

secondary market.

Here is how it works. When a person purchases a home, he

or she requests a loan from the bank, usually for about

eighty per cent of the cost of the house. This is granted, and

the house is purchased by the bank for the individual or

family, who begins to pay off the loan to the bank.

Meanwhile, to assure that money is available at that bank

for the next person who needs a mortgage loan, Fannie Mae

or Freddie Mac, two entities originally established by the

United States government, will purchase the loan from the

bank. Therefore, the money is returned to the bank for use

in the future.

What do these agencies then do with the deficit they have

acquired? They sell it. On the secondary market, they

break up the loan into shares that are backed by the

The mortgage itself and sell those shares, recovering the money

from investors. Eventually, those securities mature,

probably about the same time that the original loan is paid

off to the bank, and the investors reap the benefits of their

investment with the interest earned.

Another way to take advantage of a volatile international

The stock market is to make a swap. This is the exchange of

securities or bds to take advantage of lower

interest rates. For example, if a business entity in Britain is

in possession of one security, and another in Japan is in

possession of different security, the two commodities may

be beneficially traded or sold to each other to save

on the interest rates, if the currently held bond or security is

kept at a lower interest rate in the opposing market.

For example, let’s say one business owns a

bond “A” that is paying out only two per cent interest in its

current market and another is holding bonds “B” in its

market at three per cent interest. If bond A is actually

paying out three per cent on the foreign market, and bond B

can be cashed in for four per cent on the first market, both

parties can make more money on the trade of bonds. They

can mutually benefit from a sale of the securities to each

other due to a gain of more interest.

If that seems confusing, then perhaps a swap is not in your

near future. This is more often processed between

businesses on the foreign market rather than individual

parties, though with the correct broker, it could be

accomplished. However, should you work the deal, you

need know little except that you are looking at a higher

profit margin than previously and your broker will take care

of the rest.

If you determine that you should have stock options as a

business, you will probably decide to hire a fulltime

consultant for all your financial needs, including the handling

of your shareholdings. When businesses are large

enough and present a strong enough trading presence within

the market, especially on Forex, you will find that there are

entire departments dedicated to maintenance on the stock

Options.

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In Review

After shovelling through piles of information and taking in so

much knowledge, you probably feel like you are swimming in

terminology and cannot remember just where to begin. The

best way to retain knowledge is through repetition, and

having a quick reference guide is never a bad idea, either.

The following pages are a brief overview of the in-depth

discussions in this book, allowing you to quickly reference a

topic in a bind.

The Basic Trade

A share is a holding of a company that varies in value based

on the desire or need for that particular company’s goods or

services. As a shareholder, your net worth increases and

decreases based on taking a short position (selling) when

values are high and a long position (buying) when prices are

low. As long as the stock or security is in your possession,

the change in value is considered unrealized gain or loss

because you cannot measure it in liquid assets (cash).

When most commodities traded on the market are on a

strong upward trend for some time, this is referred to

as a bull market. Should value take a sharp downward

swing and continue on that path, it is called a bear market.

If no such trend is recognized, and the value of stocks and

securities is fairly even, this is referred to as flat.

The Foreign Exchange Market

The Foreign Exchange Market is the stock exchange on

which several different countries across several different

time zones trade their domestic and international

commodities in various currencies. Currency is the

denomination or monetary division used in a particular land

(such as the U.S. dollar or the Euro). When multiple

currencies are in use, they are typically expressed as a ratio

called a cross-rate that shows the amount of a second

currency that is equivalent to the first listed. Determining

what the equivalent is would be referred to as currency

conversion.

Several countries in Europe, which have now consolidated

their currencies to agree on the Euro (since 1999) trade on

Forex, as it is called for short. Britain, which to this point

has opted to continue using the pound sterling, also takes

part in international trade, as well as the United States,

Japan, and Australia. Each of these countries utilizes its

currency for standard trading purposes, with options for

investment in foreign currencies. Determining whether or

not this is worthwhile depends on the currency conversion

rate.

The value of a nation’s currency is determined by its

government and federal bank (the Federal Reserve, better

known as the FED, is the federal bank of the United States).

Purposeful change in the rate of conversion by a government

is referred to as valuation – devaluation is taking value and

strength from the currency, and revaluation adds strength

and purchase power to the currency. If the same change to

the rate of conversion occurs naturally through events and

the volatility of the market is then called appreciation and

depreciation.

Careers In The Market

Without the assistance of professionals, it is nearly

impossible to trade on the open market. Market analysts

track trends in the stock market that affect the value of

shareholdings. They use such information and basic history

to help predict the outcome of different aspects of the

market in the future.

Other individuals, referred to as chartists, create charts and

graphs that interpret all the data – various numbers,

statistics, percentages, etc – into an easy to read candlestick

The chart that tracks the trends of specific commodities on the

market.

A stockbroker is an individual or a company that assists you

in making your investments. A broker can aid you in

making smart financial decisions, helping you track and

place your orders, and following trends in the market.

A market-maker does the same job as a stockbroker, with

the exception that this individual or company retains an

investment in a particular variety of securities and bonds

that can be sold in short order to a client for a lower price so

that the client can make money by immediately selling the

same shares at the higher market price.

Other individuals can assist with loans, allowing you to buy

on margin. This involves the opposite approach – borrowing

money to purchase a stock or security that is at a low

The market value so that the client can later resell the

The commodity at a higher price.

Protecting Your Investments

There are several ways to protect your investments. By

placing limit orders, you guarantee to the best of your ability

that you will not lose money on the market and virtually

guarantee at least a minimal profit. However, if you change

your mind about those limits, you can always place a stop