Kel Butcher - Forex Made Simple: A Beginners Guide to Foreign Exchange Success

Kel Butcher

First published 2011 by Wrightbooks

an imprint of John Wiley & Sons Australia, Ltd

42 McDougall Street, Milton Qld 4064

Office also in Melbourne

Typeset in 11.5/13.4 pt Berkeley

Kel Butcher 2011

The moral rights of the author have been asserted

National Library of Australia Cataloguing-in-Publication data:

Author: Butcher, Kel.

Title: Forex made simple: a beginners guide to foreign exchange success / Kel Butcher.

ISBN: 9780730375241 (pbk.)

Notes: Includes index.

Subjects: Foreign exchange. Foreign exchange market. Foreign exchange futures. InvestmentsComputer network resources. Electronic trading of securities.

Dewey Number: 332.45

All rights reserved. Except as permitted under the Australian Copyright Act 1968 (for example, a fair dealing for the purposes of study, research, criticism or review), no part of this book may be reproduced, stored in a retrieval system, communicated or transmitted in any form or by any means without prior written permission. All enquiries should be made to the publisher at the address above.

Cover design by Peter Reardon Pipeline Design

Printed in Australia by Ligare Book Printer

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Disclaimer

The material in this publication is of the nature of general comment only, and does not represent professional advice. It is not intended to provide specific guidance for particular circumstances and it should not be relied on as the basis for any decision to take action or not take action on any matter which it covers. Readers should obtain professional advice where appropriate, before making any such decision. To the maximum extent permitted by law, the author and publisher disclaim all responsibility and liability to any person, arising directly or indirectly from any person taking or not taking action based upon the information in this publication.

The secret of success is constancy of purpose.

Benjamin Disraeli

Acknowledgements

My thanks as always go to the staff at Wrightbooks, and in particular Kristen Hammond, for all the help and support in getting this book from concept to book in a short space of time. I would also like to thank FXCM for the use of various screen shots in this book. Glen Larson at Genesis FT deserves special mention for the development of the worlds best charting program, Trade Navigator.

I am always honoured to be able to write a book and cant do it without the support of my wife, Cate, and my boys, Jesse and Ollie, and the input and shared experiences of the hundreds of traders and other market participants that I have spoken and corresponded with over many years.

About the author

Kel Butcher is a private trader, entrepreneur and investor. Kel has more than 20 years experience in financial markets, trading shares, futures, options, warrants and CFDs. He works as a consultant to a managed fund, a boutique trading company and a share-trading software developer. Kel is a regular contributor to YourTradingEdge magazine and is the author of A Step-by-Step Guide to Buying and Selling Shares Online and 20 Most Common Trading Mistakes and How You Can Avoid Them . He also featured in The Wiley Trading Guide .

Passionate about money management, risk management and position-sizing techniques, Kel acts as a mentor and coach to fellow traders. He can be contacted by email at .

When hes not trading, Kel enjoys snowboarding, mountain bike riding and surfing. He lives on the NSW Central Coast with his wife Cate and his two sons Jesse and Ollie.

Preface

Derived from the words foreign and exchange , forex (often abbreviated simply to FX) is the practice of trading currencies or money. The foreign exchange market, also referred to as FOREX, Forex, retail forex, FX, margin FX, spot FX or just spot, is the largest financial market in the world. Daily trading volumes are approaching US$4 trillion a day thats more than three times the total of the worlds stocks and futures markets combined.

The forex market is an over-the-counter (OTC) market. This means that, unlike stock markets and futures markets, there is no central exchange or specific place where trades occur and orders are matched. Instead, forex dealers and market makers are linked around the globe and around the clock by computer and telephone, creating one huge electronic market place.

Once the domain of the large hedge funds, major corporations and international banks, the forex market has become available to retail traders mostly because of the internet, which has allowed the development and evolution of online trading platforms, so that many firms have been able to open up the foreign exchange market to retail clients. These online platforms not only allow instant execution into the market, but also provide charts and real-time news services. This allows traders to keep abreast of news unfolding around the globe as it happens. The result has been a huge surge in volume of currencies traded as retail clients become aware of the benefits of trading a market that trades virtually continuously from Monday morning Australian time until early Saturday morning Sydney time.

The forex market allows you to actively engage in online trading using broker platforms to buy and sell currencies. The use of leverage when trading in the forex market means that a small amount of money can be used to control much larger positions than would be possible without the use of leverage. But while leverage can help magnify returns, it also magnifies losses when they occur.

Before throwing yourself head first into real money trading you should take the time to familiarise yourself with the principles of foreign exchange trading and ensure you have a full understanding of how it all works. It is also important to understand the evolution of foreign exchange and some of the key milestones in the development of this market into what it is today. So, lets get started.

Chapter 1: History of foreign exchange

The roots of modern-day currency trading can be traced back to the Middle Ages when countries with different currencies began to trade with each other. Payments for these transactions were generally made in gold or silver bullion or coins by weight. Transactions were made through money-changers operating in the major trading centres and market places. Their main roles were to weigh the bullion or coins with a degree of precision and to determine the authenticity of the coins being exchanged.

Over time, a system of transferable bills of exchange evolved for use by traders and merchants, reducing the need for them to carry around large amounts of gold or silver bullion or coins.

Introduction of the gold standard

As economies began to expand and international trade grew, so too did the need to make transactions simpler and add stability to the exchange of currencies around the globe. Payments made using gold and silver were not only cumbersome, but were also affected by price changes caused by shifts in supply and demand.

The Bank of England took the first steps to stabilise its countrys currency. The Bank Charter Act of 1844 established Bank of England Notes, which were fully backed by gold, as the legal standard for currency.

In 1857, US banks suspended payments in silver, which it had used since the introduction of a silver standard in 1785, as silver had lost much of its appeal as a store of value. This had a disastrous effect on the financial system and is seen by many as a contributing factor to the American Civil War. In 1861 the US government suspended payments in both gold and silver, and began, through the government central bank, a government monopoly on the issue of new banknotes. This gradually began to restore stability to the countrys financial system, as the banknotes began to be accepted as a single store of value unlike the supply of gold and silver, the supply of these notes could be regulated.