Cooking_In_The_Forex(1).pdf

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Cooking In The Forex

ÐThe Forex can make your wildest dreams come trueÈBUT it is not a

get rich quick scheme...it requires work, study, continuous education,

discipline and perseveranceÑ. Scott Barkley

Thank you for taking the time to download this Cooking In The Forex

e-book. First, let me say that I want you to succeed. Like most traders, when I first saw the

Forex market I said to myself:

ÐHow hard can this beÈ.you buy low and you sell high. This is a cakewalk.Ñ

Several thousand dollars in the hole later, I realized that it was not the cakewalk that I

envisioned. I expect you are there also.

There are literally hundreds of Forex Training books out there. I have read most of them. I

picked up lots of pieces along the way. That is one of the problems with trading. As I explain

to my students, the Forex is like getting a 5000 piece jigsaw puzzle everyday, with all the

pieces mixed up and someone has taken away the box cover. You must figure out what the

puzzle is by putting one piece at a time into the puzzle and then suddenly, one piece goes in

and you suddenly know what the box cover looks like. All of the books I have read and all the

traders I have met have contributed their pieces of the puzzle.

This is a Cookbook for the Forex. I spent 15 years in the Restaurant

Industry. In those days I was an avid collector of recipe books; but I

noticed one thing about all cookbooks. In order to justify the high cost

of the cook book, they went on and on about how to make a dish and at

the end they could have told you how to do it in one page. Frankly, I

donÓt need three pages to tell me how to scramble eggs.

That is the thought process behind this little book. The Forex, while complex, is NOT THAT

HARD, and NOT THAT COMPLICATED. There are lots of books on the market to tell you just

how hard it is. This book is designed to distill the major pieces into a simple Ðeasy to digestÑ

system. I have trained hundreds of successful traders. Many have gone on to far loftier

trading heights than I can ever attain. I say that with pride since the greatest thing a Mentor

can do is point to a student who does better than they do. EVERY successful trader I have

ever met, sat under their tutelage, taught or interviewed can tell you EXACTLY how they trade,

what indicators they use and how they executeÈ in less than a minute. Whatever system they

¨ Rio Financial Group 2006

are using, it is always the KISS principle (Keep It Simple). So if you are looking for

complicated systems and complicated answers skip this book.

However, if you are looking for some simple pieces to the puzzle that hopefully will take you to

the next level then read on.

If you are a moderately experienced or experienced trader, skip the

first part. It is boring but necessary for those just starting.

When it comes to successful Forex trading, there are two basic strategies used by the majority

of traders: fundamental analysis and technical analysis.

Fundamental Analysis

In fundamental analysis, Forex traders look for causes that might trigger market fluctuations.

These may include political activities, financial policies, growth rates and other factors.

As you can imagine, fundamental analysis of the Forex market can be fairly difficult. For that

reason, most traders use fundamental analysis only to predict long-term trends.

But a few use fundamental analysis for short-term trades. They review different currency value

indicators that are released several times throughout the day, such as:

Consumer Price Index

Purchasing Managers Index

Non-farm Payrolls (the mother of all Fundamental Announcements)

Retail Sales

Durable Goods

In addition, there are meetings held that provide quotes and commentary which may affect

markets. These meetings, such as those of the Federal Trade Commission, Federal Open

Market Committee, and Humphrey Hawkins Hearings, often discuss interest rates, inflation and

other issues that have the ability to affect currency values.

Examining the meeting reports and commentary can help Forex fundamental analysts to better

understand long-term market trends, and also allow short-term traders to profit from

important activities and events.

If you decide to follow a fundamental analysis strategy, be sure to keep an economic calendar

that shows when these reports are released. Your broker may also be able to provide you with

real-time access to this kind of information via the internet.

Technical Analysis

The more popular strategy for Forex traders is the technical analysis.Technical analysis of

Forex trading includes the use of graphs, charts and other methods of measuring past data to

see the indication of the rise and fall of currencies.

In other words, to spot trends.

This is similar to technical analysis for equity trading, except for the timeframe--Forex markets

are open 24 hours a day. Because of this, some forms of technical analysis that factor in time

must be modified so they will work with the 24-hour Forex market.

Note: this e-book is for those interested in TECHNICAL ANALYSIS. Fundamental

analysis is for the BIG institutional trader and is not addressed in this e-book.

¨ Rio Financial Group 2006

Into the Kitchen Î or what the heck is all this Forex

trading stuff about

In 1967, a Chicago bank refused a college professor by the name of

Milton Friedman a loan in pound sterling because he had intended to

use the funds to short the British currency. Friedman, had perceived

sterling to be priced too high against the dollar, wanted to sell the

currency, then later buy it back to repay the bank after the currency

declined, thus pocketing a quick profit. The bank's refusal to grant the

loan was due to the Bretton Woods Agreement, established twenty

years earlier, which fixed national currencies against the dollar, and set

the dollar at a rate of $35 per ounce of gold.

The Bretton Woods Agreement, set up in 1944, aimed at installing international monetary

stability by preventing money from fleeing across nations, and restricting speculation in the

world currencies Prior to the Agreement, the gold exchange standard--prevailing between 1876

and World War I--dominated the international economic system. Under the gold exchange,

currencies gained a new phase of stability as they were backed by the price of gold. It

abolished the age-old practice used by kings and rulers of arbitrarily debasing money and

triggering inflation.

But the gold exchange standard didn't lack faults. As an economy strengthened, it would

import heavily from abroad until it ran down its gold reserves required to back its money. As a

result, money supply would shrink, interest rates rose and economic activity slowed to the

extent of recession. Ultimately, prices of goods had hit bottom, appearing attractive to other

nations, which would rush into buying sprees that injected the economy with gold until it

increased its money supply, and drive down interest rates and recreate wealth into the

economy. Such boom-bust patterns prevailed throughout the gold standard until the outbreak

of World War I interrupted trade flows and the free movement of gold.

After the Wars, the Bretton Woods Agreement was founded, where participating countries

agreed to try and maintain the value of their currency with a narrow margin against the dollar

and a corresponding rate of gold as needed. Countries were prohibited from devaluing their

currencies to their trade advantage and were only allowed to do so for devaluations of less

than 10%. Into the 1950s, the ever-expanding volume of international trade led to massive

movements of capital generated by post-war construction. That destabilized foreign exchange

rates as set up in Bretton Woods.

The Agreement was finally abandoned in 1971, and the US dollar would no longer be

convertible into gold. By 1973, currencies of major industrialized nations became more freely

floating, controlled mainly by the forces of supply and demand which acted in the foreign

exchange market. Prices were floated daily, with volumes, speed and price volatility all

increasing throughout the 1970s, giving rise to new financial instruments, market deregulation

and trade liberalization.

In the 1980s, cross-border capital movements accelerated with the advent of computers and

technology, extending market continuum through Asian, European and American time zones.

Transactions in foreign exchange rocketed from about $70 billion a day in the 1980s, to more

than $1.5 trillion a day two decades later.

Free Floating Currencies

In 1971 and 1972 two more attempts at free-floating currency against the U.S. dollar, namely

the Smithsonian Agreement and the European Joint Float. The first was just a modification of

the Bretton-Woods accord with allowances for greater fluctuation, while the European one

aimed to reduce dependence of their currencies on the dollar. After the failure of each of these

agreements, nations were allowed to peg their currencies to freely float, and was actually

¨ Rio Financial Group 2006

mandated to do so by 1978 by the IMF. The free-floating system managed to hold out for

several years, but many denominations had failed against the strong currencies.

The Euromarket

A major catalyst to the acceleration of foreign exchange trading was the rapid development of

the euro-dollar market; where US dollars are deposited in banks outside the US. Similarly,

Euromarkets are those where assets are deposited outside the currency of origin. The

Eurodollar market first came into being in the 1950s when Russia's oil revenue-- all in dollars -

- was deposited outside the US in fear of being frozen by US regulators. That gave rise to a

vast offshore pool of dollars outside the control of US authorities. The US government imposed

laws to restrict dollar lending to foreigners. Euromarkets were particularly attractive because

they had far less regulations and offered higher yields. From the late 1980s onwards, US

companies began to borrow offshore, finding Euromarkets a beneficial center for holding

excess liquidity, providing short-term loans and financing imports and exports.

London was, and remains the principal offshore market. In the 1980s, it became the key

center in the Eurodollar market when British banks began lending dollars as an alternative to

pounds in order to maintain their leading position in global finance. London's convenient

geographical location (operating during Asian and American markets) is also instrumental in

preserving its dominance in the Euromarket.

The Birth of Euro

Although Europeans were already very comfortable with the concept of Forex trading, much of

the rest of the world were still unfamiliar with the territory. The establishment of the European

Union in 1992 gave birth to the euro seven years later, in 1999. The euro was the first single-

currency used as legal currency for the member states in the European Union. It became the

first currency able to rival the historical leaders in the Foreign Exchange market and create the

stability that Europe and the Forex market had long desired.

Working in the kitchen (Forex Market)?

The Foreign Exchange market, also referred to as the "Forex" or "FX"

market is the largest financial market in the world, with a daily

average turnover of US$1.9 trillion -- 30 times larger than the

combined volume of all U.S. equity markets.

"Foreign Exchange" is the simultaneous buying of one currency and

selling of another. Currencies are traded in pairs, for example

Euro/US Dollar (EUR/USD) or US Dollar/Japanese Yen (USD/JPY).

There are two reasons to buy and sell currencies. About 5% of daily

turnover is from companies and governments that buy or sell

products and services in a foreign country or must convert profits made in foreign currencies

into their domestic currency. The other 95% is trading for profit, or speculation.

For speculators, the best trading opportunities are with the most commonly traded (and

therefore most liquid) currencies, called "the Majors." Today, more than 85% of all daily

transactions involve trading of the Majors, which include the US Dollar, Japanese Yen, Euro,

British Pound, Swiss Franc, Canadian Dollar and Australian Dollar.

¨ Rio Financial Group 2006

Distribution of Currency Pairs

EUR/GBP

EUR/OTH

EUR/CHF

OTHER

EUR/JPY

USD/EUR

29%

USD/OTH

17%

USD/AUD

USD/CAD

USD/CHF

USD/JPY

20%

USD/GBP

11%

Source: Stocks & Commodities Dec 03Ó

A true 24-hour market, Forex trading begins each day in Sydney, and moves around the globe

as the business day begins in each financial center, first to Tokyo, London, and New York.

Unlike any other financial market, investors can respond to currency fluctuations caused by

economic, social and political events at the time they occur - day or night.

The FX market is considered an Over The Counter (OTC) or 'interbank' market, due to the fact

that transactions are conducted between two counterparts over the telephone or via an

electronic network. Trading is not centralized on an exchange, as with the stock and futures

markets.

Understanding Forex Rates

Reading a foreign exchange quote may seem a bit confusing at first. However, it's really quite

simple if you remember two things: 1) The first currency listed first is the base currency and 2)

the value of the base currency is always 1.

The US dollar is the centerpiece of the Forex market and is normally

considered the 'base' currency for quotes. In the "Majors", this

includes USD/JPY, USD/CHF and USD/CAD. For these currencies and

many others, quotes are expressed as a unit of $1 USD per the second

currency quoted in the pair. For example, a quote of USD/JPY 110.01

means that one U.S. dollar is equal to 110.01 Japanese yen.

When the U.S. dollar is the base unit and a currency quote goes up, it means the dollar has

appreciated in value and the other currency has weakened. If the USD/JPY quote we previously

mentioned increases to 113.01, the dollar is stronger because it will now buy more yen than

before.

The three exceptions to this rule are the British pound (GBP), the Australian dollar (AUD) and

the Euro (EUR). In these cases, you might see a quote such as GBP/USD 1.7366, meaning that

one British pound equals 1.7366 U.S. dollars.

¨ Rio Financial Group 2006

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