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Master Trading the Financial Markets: Trade with the Best
Master Trading the Financial Markets: Trade with the Best
Master Trading the Financial Markets: Trade with the Best
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Master Trading the Financial Markets: Trade with the Best

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This is not a get rich quick book. This book will afford both novice and experienced retail (trading from home on a computer) traders alike a comprehensive understanding of the financial markets. The author principally targets the novice on-line trader but areas of the book also provide seasoned traders with new insights into the financial markets as well as alternative trading strategies. In simple to understand concise language, enhanced by relevant graphics, all the key trading tools available for on-line traders are explained in such detail that novice traders should be able to master trading the financial markets effectively and seasoned traders reassess their trading styles for the better. The book concentrates on mastering the currency markets and the binary options markets, however it also contains chapters on bond trading, futures, stocks, indices and options in detail. The book lays open the myth that the forex markets are a mystery and the author uses his 30 years’ experience as an investment banker to cut through the noise and provide a sharpened view of how the financial markets should be traded.

The nine chapters fully illuminate the following topics.

Chapter 1 Mastering Forex Fundamentals
Chapter 2 Mastering Candlestick Charts
Chapter 3 Mastering Technical Analysis
Chapter 4 Mastering Fundamental Analysis
Chapter 5 Mastering Complex Trading Tools
Chapter 6 Getting a Trading Edge
Chapter 7 Mastering Other Asset Classes
Chapter 8 Mastering Binary Options
Chapter 9 Central Banks and the European Union

LanguageEnglish
PublisherPhilip Cooper
Release dateNov 28, 2015
ISBN9781311442123
Master Trading the Financial Markets: Trade with the Best
Author

Philip Cooper

Philip was born and educated in the United Kingdom. He joined Citibank in London before moving to Athens where he worked as a foreign exchange trader for both Citibank and Chase Manhattan Bank. Philip was then posted to Citibank's Middle East North African Training Centre in Athens/Beirut as the operations manager and a foreign exchange trainer.After returning to the United Kingdom Philip joined Union Bank of Switzerland as the Head of Learning and Development and introduced trading simulations as a safe way for new traders to trade. He was later appointed Head of Learning and Education for UBS in North America. He subsequently left the bank and went into partnership with two colleagues and set up a successful financial training company (New Learning Developments) in New York City. At New Learning Developments he developed relationships with all the major investment banks such as Goldman, Lehman, JP Morgan, and other major financial institutions such as The Federal Reserve Bank, Chase, Citibank, ABN-AMRO and the World Bank.Returning to London he worked as a training consultant to financial services institutions and the Ministry of Defence. After which he moved to Greece where he wrote books teaching English as a second language as well as developing knowledge databases for on-line brokerage houses.He returned to London in 2012 where he works with autistic children, conducts webinars on foreign exchange and develops on-line retail educational databases for trading brokers. He has written a children’s book, two fictional short stories, and a poetry book all available on www.smashwords.com. He recently had two financial books, Competing in the Financial Markets and Mastering Options, published by Business Expert Press in New York www.businessexpertpress.com also available on www.amazon.com. The Gladio Protocol is his first novel.

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    Book preview

    Master Trading the Financial Markets - Philip Cooper

    Master Trading the Financial Markets

    Trade with the Best

    By

    Philip Michael Cooper

    Published by Philip Cooper at Smashwords

    Copyright 2014 Philip Cooper

    This book is licensed for your personal enjoyment only and may not be re-sold or given away to other people. If you would like to share this book with another person, please purchase an additional copy for each person you want to share it with. If you’re reading this book and did not purchase it, or it was not purchased for your use only, then you should return it to the retailer and purchase your own copy. Thank you for respecting the hard work of this author.

    About the Author:

    Philip was born and educated in the United Kingdom. He joined Citibank in London before moving to Athens where he worked as a foreign exchange trader for both Citibank and Chase Manhattan Bank. Philip was then posted to Citibank's Middle East North African Training Centre in Athens/Beirut as the operations manager and a foreign exchange trainer. After returning to the United Kingdom Philip joined Union Bank of Switzerland as the Head of Learning and Development and introduced trading simulations as a safe way for new traders to trade. In 1993 he was appointed Head of Learning and Education for UBS in North America. He later left the bank and went into partnership with two colleagues and set up a successful financial training company (New Learning Developments) in New York City. At New Learning Developments he developed relationships with all the major investment banks such as Goldman, Lehman, JP Morgan, and other major financial institutions such as The Federal Reserve Bank, Chase, Citibank, ABN-AMRO and the World Bank. In 1999 he returned to London where he worked as a training consultant to financial services institutions and the Ministry of Defence. In 2001 he went to Greece where he wrote books to teach English as a second language as well as developing knowledge databases for on-line brokerage houses. He returned to London in 2012 where he works with autistic children and conducts webinars on foreign exchange and on-line retail trading. He has also written a childrens book, two fictional short stories, several books on currency trading and now writing his first novel, a political thriller set in Greece titled Operation Gladio.

    Contents

    Chapter 1 Mastering Forex Fundamentals

    Chapter 2 Mastering Candlestick Charts

    Chapter 3 Mastering Technical Analysis

    Chapter 4 Mastering Fundamental Analysis

    Chapter 5 Mastering Complex Trading Tools

    Chapter 6 Getting a Trading Edge

    Chapter 7 Mastering Other Asset Classes

    Chapter 8 Mastering Binary Options

    Chapter 9 Central Banks and the European Union

    Chapter 1 - Mastering Forex Fundamentals

    This chapter, is full of helpful hints, tips and examples, which will provide the reader with the necessary terminology, theoretical skills and knowledge to get started trading on-line through a Forex broker, using a demo account.

    Before money became the official standard of exchange people exchanged goods and services through a barter system. It wasn’t until the establishment of paper money and a set of standard characteristics for money in all countries was introduced, that a refined international commerce system was developed.

    Early examples of money were gold and silver coins and when paper money began circulating it was backed by the concept that the holder of paper could at any time request convertibility into gold. If a dollar holder found that his dollar holdings were falling in value he could exchange them for gold and essentially reduce the amount of dollars in circulation which in turn stabilized the dollar and caused it to appreciate. The exchange into gold from dollars was then reversed. Although the gold standard seemed and sounded ideal nevertheless it ended in the 1930’s. Why did it end?

    Read on to find out! The answer is to the question posed above is ‘leverage’. In the early 30’s people could not afford to purchase items such as fridges, cars and houses with the cash they had. However, the institution of mortgage loans, credit cards, personal loans and making monthly payments which nowadays we take for granted, was unknown prior to the 1930’s. The amount of circulating money equalled the total gold reserves plus the total credit issued.

    At Bretton Woods in 1944 a new international monetary system was established. This system set a gold based value for the dollar and the British Pound and linked all other currencies to the dollar. Gold was set at $35 an ounce and the International Monetary Fund was founded with a purpose to help member countries who needed monetary assistance. As economies grew after the war the supply of dollars in Europe was soon worth more than the amount of gold in the USA.

    In 1965 the Euro dollar market was formed. Euro dollars were dollars held by non-US banks outside the USA therefore they were not regulated by the US. As these dollars were not regulated they bore a higher risk premium and their yield was higher than domestic dollars. It was from this liquid market that Forex forwards and Forex swaps were born.

    In the early seventies due to the pressure on the dollar convertibility into gold was suspended and the German Mark was allowed to revalue. Later the price of gold was again fixed but this time at $38 per ounce. In 1963 the dollar was under immense pressure again and it was devalued by 10%. The Bretton Woods system had finally collapsed and the dollar was allowed to freely float against other currencies. The era of fixed exchange rates had ended and the era of floating exchange rates was ushered in. With it came the European Monetary System (EMS), formed in 1979 where European currencies were floated in a tight band against the dollar and this eventually led to the introduction of the single currency in 1999.

    Without fixed exchange rates the currency markets have been very volatile in between periods of relative calm. Foreign exchange trading is nourished by these periods of volatility because it is only under these conditions that traders can make a lot of money.

    Nowadays in addition to the thousands of traders working for large financial institutions, corporations and central banks, there are thousands of traders who are starting to trade on-line using brokers trading platforms. This book is designed to help new and junior traders trade the foreign exchange market with confidence and ultimate success.

    Trading is a many faceted business and for those who believe that to make a lot of money all you need to do is read a couple of newspapers and learn to recognise a couple of charts, think again, it’s not that easy. Forex trading is about buying and selling currencies. To make a profit you must buy low and sell high. This doesn’t really sound complicated. However, there are issues that you need to think about in order to be successful in what can be a very risky market. To be a successful trader in the world’s largest and most liquid financial market, you need to have a good trading education.

    One good place to start is at a business school. Most business schools in Europe and the United States have courses which specialise in trading courses for the financial markets. These classes offer a newbie trader the opportunity to achieve the skills and the knowledge necessary to start trading in earnest in the foreign exchange market.

    The schools generally cover all the technical analysis skills and knowledge such as charting as well as the economic issues related to fundamental analysis. Knowing how to read the trade signals that a chart shows is one of the most vital skills a trader will acquire and will maximise the opportunity of earning a lot of money.

    Choose a school that offers simulated trading using dummy trading accounts. No matter how good the teacher is and how well you understand what you have been taught there is nothing like experiencing the real thing, so practising trading on a simulated trading platform is a very important part of a trader’s education. Some schools which are well funded even allow their students to trade on a real live Forex mini-account. These mini-accounts can be funded for as little as $25 so there is very little risk of losing a lot of real money. However, it does allow the student to experience the emotions and the excitement of the real trading world which is something that a simulated trading station can’t give you.

    After graduating from a business school, traders who become professional traders working in the large trading rooms of financial institutions will be provided with further education by their institution. Those who become retail traders and trade from the comfort of their own homes can obtain further education through reading the appropriate books like the one you are reading now or through the web seminars that most on-line brokers offer for those opening an on-line trading account.

    The knowledge a trader needs is so vast and ongoing that you should probably do all the things mentioned above. When trading it is better to be fully educated rather than under educated, so attending seminars and reading books on trading should become part of your trading strategy.

    It’s worth remembering that proper knowledge will give you more chances to profit from trading. Trading in the foreign exchange market is very different from trading in regulated exchanges such as stock, futures or options exchanges. There are no clearing houses where trades are guaranteed and there is no mechanism for adjudicating disputes. The forex market is a network of dealers that sit in the trading rooms of banks and large corporations all over the world or a network of retail traders such as you. The Forex market is open 24 hours a day except for Saturdays, Sundays and bank holidays. It is the biggest, most liquid, and self-regulated market in the world where business is done on a metaphorical handshake and the daily volume is on average $3.2 trillion a day.

    The foreign exchange market is not one market; it is made up of many markets which are situated around the world in various time zones. These markets are connected to one another by very sophisticated electronic communications networks so that an exchange rate quoted in Tokyo is transparent to market participants in Europe and America.

    The Forex market is open 24 hours a day because it spans three major time zones; The European time zone, the American time zone and the Far Eastern time zone. If a market in any one of these time zones is operational a trader sitting in another time zone can trade currencies.

    The largest foreign exchange markets centres in the world are London, which trades the highest daily volume, followed by New York and then Tokyo which is the third largest. Other big Forex centres in Europe are Frankfurt, Paris and Amsterdam. In America the biggest Forex centres are New York and Chicago, while in the Far East, Hong Kong, Singapore, Tokyo and Sydney are the main Forex centres.

    Unlike American stocks which you are unable to trade when the New York Stock Exchange closes, the dollar doesn’t cease to be traded simply because the New York Forex market has closed, it will continue to be traded in the Far East and then on into Europe.

    There is an actual order of centre openings. The first Forex centre to open is Australasia, followed by Tokyo, Hong Kong, Singapore, all of which are in the far eastern time zone. Then Europe opens and London centre starts trading just before the far eastern time zone has closed down. Lastly New York opens at 1pm London time and the two trading centres overlap for about 4 hours. Just before New York closes the far eastern markets are already starting to trade in the following day.

    The first thing a newbie trader must understand is the jargon used in trading especially the terminology used in the actual exchange rate itself. A trader needs to understand and recognise each component part of an exchange rate. The exchange rate is made up of four main components:

    The first component is called the big figure and this is the big number before the decimal point. The second component is the basis points or pips as they are called. These are the numbers which come after the decimal point. Most exchange rates are just like the GBP/USD exchange rates are quoted to four decimal places like this (1.5815-1.5820) with the final decimal place being 1/100th of 1 percent. Therefore the smallest change to an exchange rate is one pip or one basis point. If for example you purchased 1 million sterling against the dollar at a rate of 1.5820 each one pip change would be 1,000,000 x 0.0001 = 100 sterling. The only exception to this rule is the Japanese Yen which is quoted to only 2 decimal places like this USD/JPY 98.40. A rate denotes how many units of a currency are in 1 unit of the base currency. Therefore, a rate of GBP/USD 1.5820 denotes that for every pound sterling there are 1.5820 dollars.

    The third and fourth components are the bid side and the offer side. The bid side of an exchange rate is the left hand rate which in our GBP/USD example is 1.5815. This is the rate that the person quoting the rate buys the base currency at. So as a trader you will sell sterling at 1.5815. The offer side rate is the right hand side of the rate which in our example is 1.5820 and is the rate at which the person that quotes the rate sells the base currency. As a trader you will buy sterling at 1.5820 at the offer rate.

    Leverage means the trader is trading currencies with money which has been borrowed from the broker, whether it is a Forex, futures or options broker. Foreign exchange brokers offer traders leverages of 1:100 or 1:200, and some brokers’ even offer 1:400. At a leverage of 1:100 you can make a trade (buy or sell a currency) which is 100 times greater than the money you have in your account with a broker. The cash you have in your broker account is called margin and a broker will always require, at a leverage of 1:100 that you always have at least a balance of 1% of the total of your outstanding trades in your margin account. If you are losing money on the trade and your equity has fallen below the margin requirement threshold you must replenish your account or the broker will close out the trade.

    Margin requirements on futures and options are generally higher, typically between 5 and 20 percent of the value of the trade. As with Forex margins the value of the outstanding trades are revalued to market rates continually and if the balance in the margin account drops below the margin requirement the account should be topped up or the broker will close out the trades.

    Exchange traded instruments such as options, futures and commodities are priced per contract or per lot. For example the British Pound contract on the currency futures exchanges is a standard 62,500 pounds. To buy or sell 2 million pounds for a hedging strategy you would have to buy 32 lots or contracts (62,500x32=2,000,000) to cover the hedge. To learn the value of the individual contracts on the exchanges visit the web site of the Chicago Mercantile Exchange (www.cmegroup.com).

    Quoting: Foreign currency exchange rates are always quoted as a price which represents one currency against another currency in a currency pair. For example the EUR/USD rate might be quoted as 1.2890. The currency which is designated on the left (in this case the EUR) is called the base currency and the currency designated on the right (in this case the USD) is the counter currency.

    The base currency always has a value of ‘1 unit’. So for example if the EUR/USD rate is 1.2890 this means that every 1 unit of Euro equals 1.2890 units of dollars. Therefore, if you are expecting the value of the Euro to go up against the value of the counter currency, in other words you believe there will be more units of the counter currency per unit of the base currency, you would buy the base currency and sell the counter currency. For example if you bought 10,000 Euro at 1.2890 you would be selling 12, 890 dollars and taking a long position in Euro. If on the next day the Euro had risen to 1.2910, and you sold your 10,000 Euros, you would receive back 12, 910 dollars making you a profit of 20 dollars.

    On the other hand if GBP/USD was 1.5920 and you were expecting the pound sterling to fall against the dollar you would sell pound sterling, take a short position on sterling, and buy dollars. Later if the GBP/USD rate had fallen to say 1.5900 you could buy back the sterling at a profit of 20 pips.

    Forex quotes are always two priced. For example the EUR/USD is being quoted as 1.2970 -1.2980. The quote on the left is called the bid price and the dealer quoting this price is saying that they buy euro (the base currency) at that price. The price on the right is called the offer price and the dealer quoting that price is saying that they sell euro (the base currency) at that price. The difference between the bid and the offer price is called the bid/offer spread.

    Foreign exchange rates are, except for the Japanese Yen, always quoted to four decimal places. As for example the EUR/USD 1.2950. The Japanese yen however is quoted like this, USD/YEN = 85.40.

    The last decimal place in a price is called a pip. A rate that changed from 1.2950 to 1.2952 would have changed by 2 pips. A pip is 1/100 of 1 percent. The price of a currency pair can move between 20 and 50 pips in a normal days trading, however, if the market is volatile there could be as much as a 200 to 300 pip movement in price.

    Taking a Position: A long position is a term which means that an investor has bought a currency because he believes that it will appreciate over the short or long term. The investor expects the currency to rise in value over time and therefore if that happens he will be able to sell at a higher price than he paid for it.

    For example a trader believes that sterling will appreciate over the next few days. At 9am the rate is 1.5038/1.5040, and he buys 5 million sterling pounds against the dollar at the quoted offer rate of 1.5040. Below is his position.

    The position is showing a $1,000 loss (Each pip movement is worth 5,000,000 x 0.0001 = $500) because the investor has to sell the sterling at the market bid rate 1.5038 which is 2 pips less than what he bought the sterling. By mid-morning the rate has moved to 1.5042/1.5044, in other words the pound sterling has appreciated by 2 pips. So the 2 pip movement gives the investor a $1,000 profit. His position is now.

    Later in the afternoon the market rate is 1.5048/1.5050. The investor calculates that he has made 8 pips on his trade. So he has made a profit of 8 pips x $500. This is his position.

    The trader sells the 5million sterling and gets back $7,524,000 dollars, $4,000 more than he paid for the sterling in the morning.

    A short position is exactly the opposite of a long position. Here the investor sells a currency which he believes is going to lose value over the short or long term. If, as the investor believes, the currency decreases in value he will be able to buy it back more cheaply than when he sold it. For example an investor believes that sterling is going to depreciate against the dollar. The GBP/USD rate is 1.5030/1.5032 and the investor sells 4 million sterling pounds at 1.5030 the market bid rate. His position is.

    Now the investor is hoping that the market offer rate drops below 1.5030 so that when he buys the sterling back it will be cheaper. Later the GBP/USD rate has moved to 1.5022/1.5024. His position looks like this.

    The investor can now buy back the 4million sterling at 1.5024 in exchange for fewer dollars than he originally received when he sold the sterling.

    A trade is made up of two separate orders; a buy order and a sell order, and any one of them can be used to enter a trade or to exit a trade. There are at times however different types of orders to facilitate the exit of a trade.

    If you have entered a trade with a buy order then the trade will be exited with a sell order. The opposite is true if you enter a trade with a sell order. You will exit the trade with a buy order. So for example if a trader felt that the market would go up he would transact one buy order to enter the trade and one sell order to exit the trade. Or, if he felt the market would go down he would execute a sell order to enter the trade and a buy order to exit the trade.

    There are many types of orders that traders can use in a variety of permutations to make trades. Below are the most common orders that traders use.

    Market orders are orders to buy or sell a contract at the most recent best price, whatever that price is. In a lively market, market orders will always be executed, although not necessarily at the precise price that the trader wanted.

    Limit orders are orders to sell or buy a contract at a particular price or at a price better than the specific price. It depends on where the market is moving whether or not an order gets filled. However, if they are filled it will always be at the chosen price or at a better price than the chosen price.

    Another type of market order is a stop order. They are orders to buy or sell a currency at the best obtainable price, but they are only executed if the market reaches a price stated by the trader. When or if the trigger price is reached the order will always be filled although not automatically at the exact price the trader wanted. Stop orders are triggered when the market trades at the trigger price or when it has moved past the trigger price.

    Have a Game Plan: Statistics say that 90 percent of traders lose money in forex trading, 7 percent break even and only 3 percent make money. So if there is such a high rate of casualties what are they not doing that they should be doing?

    Firstly, trade with money that you can afford to lose. Not with money that you have set aside to loans and bills. Your trading judgement will always be objective if you trade money you can afford to be without.

    Learn to stand firm and don’t take your profits too early. Holding on to profitable positions and riding the trends will maximize your gains. Keep your losses small by closing out a losing position immediately you realise you are wrong. Don’t forget to place stop orders for all your trades as in this way you won’t suffer heavy losses.

    Never overtrade no matter how confident you are and no matter how long your winning streak is. It won’t last and if you over gear yourself the end of a winning streak could break you.

    Discipline yourself to half your capital outlay each time you add to a winning position. Don’t make the mistake of doubling up otherwise you will have a top heavy pyramid that could come crashing down around you if the market turned against you. When things get tough and you are on a losing streak take a break and recharge yourself. Never put all your eggs in one basket. This could be disastrous. Split your capital into ten equal parts and give yourself more opportunity for success.

    It is also dangerous to add to a losing position by averaging. You cannot be certain up to what price the market will go against you. To average you have to double the capital used each time which is foolish. A good trader will cut his loss immediately. Be wise and remove profits from your trading account and put your winnings in a safe place. If you don’t the chances are good you will lose all your profits again.

    If your broker makes a margin call that means that you have made a mistake and have let your position run against you. You must be able to admit you were wrong and close out your losing position before the margin call is made.

    Prepare a game plan and stick to it. Decide what you are going to do when you are wrong and what you are going to do when you are right. Finally, decide on how much capital you are going to risk on every trade.

    In the world of finance and investment, hedging is not an extraordinary word. The term hedge essentially means that something is used to protect you against something that could hurt you. If we talk about hedging in the financial world we can say that we use a hedge to protect our investments against the risk of them losing value. A hedge is in effect a type of insurance that helps reduce financial risk.

    Different types of hedging instruments are available for investors, with the common ones being forex swaps, forex forwards, interest rate swaps, futures and options.

    The objective of hedging is to reduce the risk instead of earning extra money. Therefore, what needs to happen is that the investor invests in two products that are negatively correlated. In this way any gains and the losses offset each other and the risk is minimized.

    It makes sense that, the higher the risk, the higher the opportunity but also the greater can be the loss. As the risk is reduced by hedging, so is the potential for attaining the highest possible earnings. On the other hand, as the risk is reduced, then the potential for losing your investment is reduced as well.

    For example a British importer of Japanese cars has contracted to pay for the cars he is buying in Japanese yen and take delivery of the cars in two months’ time. What could happen to the dollar in the intervening two months before the cars are delivered to the importer and he has to pay for them? Essentially two things could happen.

    The sterling pound could appreciate against the yen and the importer would make a foreign exchange profit. On the other hand the sterling pound could depreciate against the yen and the importer could make a substantial loss. The importer has a currency risk.

    The importer is in the business of buying cars not in the business of speculating on exchange or currency risks. So if the importer locks in a rate today by buying the yen forward to coincide with the delivery date of the cars, the importer will achieved two advantages. Firstly he knows exactly how many dollars are needed to buy the yen and he also knows the price level at which to sell the cars at a profit. He doesn’t make a profit but on the other hand he has hedged himself and he won’t lose his investment in the cars.

    The science of scalping is a trading strategy which is essentially very quick in and out trading where the scalper steadily increases the balance of his account. Scalping traders only keep an open position for a few seconds or up to a few minutes. There is a very fine line between scalping and day trading suffices to say that scalping is the risky side of day trading.

    Scalping is highly risky because the scalper is only in the trade for a short time and because they want to make a lot of money they use a high leverage so that just a few pips maybe a 1 to 5 pip profit gives them a reasonable monetary profit. In addition scalpers have a number of trades open at the same

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