There are plenty of books out there proclaiming to "tell all" or to "reveal the secrets" to foreign exchange (or forex) trading. There are plenty of "gurus" offering advice and suggestions on how to trade the market successfully. But how many of these people have any real industry experience in trading foreign exchange? Not many, I can tell you that right now. I'm Bradley Gilbert, and I worked on the front line for eighteen years at some of the biggest investment banks in the world-and I made over $70 million in that time. Do I have your attention yet? So, if you really want to make money trading FX, follow me! This book has been written to give you, the retail trader, a real and practical guide to trading the forex markets. Based on my own personal experiences, incorporating the same skills and strategies used by commercial interbank traders and hedge funds, I can help you up your game in the markets. Believe me, running with the "big dogs" is a lot more fun and a lot more rewarding than running against them-and understanding this is a key part to your future success. Once you have completed the book, you'll feel more like you're a part of the market instead of a random speculator. Seeing the market through a new set of eyes will help you to take advantage of the many opportunities the market presents day after day, week after week. Good luck and happy trading!

FX INSIDER

Investment Bank Chief Foreign Exchange Trader With more than 20 years' experience as a MarketmakerBy Bradley Gilbert

BALBOA PRESS

Copyright © 2012 Bradley Gilbert
All right reserved.
ISBN: 978-1-4525-0655-5

Contents

About the Author.....................................................ixAcknowledgements.....................................................xiDisclaimer...........................................................xiiiPreface..............................................................xvIntroduction.........................................................xixChapter 1: The World Of Foreign Exchange.............................1Chapter 2: Currencies: The Inside Story..............................14Chapter 3: Know Your Markets.........................................29Chapter 4: Capital: Risk Management..................................35Chapter 5: Technical Analysis........................................41Chapter 6: Fundamental Analysis......................................60Chapter 7: Trading Strategies........................................80Chapter 8: Order Types & Putting Them On.............................98Chapter 9: Developing & Planning Trades..............................110Chapter 10: Managing Positions Once they're Live.....................121Chapter 11: Trading Psychology.......................................125Chapter 12: How to Set Up your Trade Station.........................131Chapter 13: Choosing a Trading Platform..............................137Conclusion...........................................................141Glossary.............................................................143

Chapter One

THE WORLD OF FOREIGN EXCHANGE

The Evolution of Forex & Professional Trading

Forex = Foreign Exchange, FX, Spot FX, Currency Trading Market

People have been borrowing, lending and exchanging money for centuries, and as long as trade and investment continues in a world where sovereign governments control national currencies, they must continue to do so. The foreign exchange market exists to facilitate this conversion of one national currency into another.

I won't bore you to tears with a detailed history of foreign exchange, as this book is purely about trading and the history behind the market isn't relevant, anyway. Put simply, the Forex market began to emerge in 1978 when the worldwide currencies were allowed to `float' according to supply and demand.

Originally it was limited to banks and central banks. This was mainly due to the counterparty and credit risks involved with transacting in the market. Each bank was given a credit rating by an independent ratings agency, and this would be used to set credit lines with other banks in the market. If you had a bad credit rating, you didn't get to trade with many, if any, banks at all. When I first started at Citibank in 1990, we wouldn't trade with any institution that had a credit rating below AAA-minus. We had to check the credit rating of irregular counterparties before every trade to make sure they could settle the transaction when the deal matured. This process was still being carried out into the late nineties.

The central banks at this stage were primarily focused on maintaining economic stability and didn't get involved in the market unless absolutely necessary. They would intervene directly in the market when there was excessive volatility or extreme one-way moves in their currencies.

Then, during the eighties, corporations that were clients of the banks started speculative trading outside their normal foreign exchange operations. The market began to evolve rapidly as the number of players in it grew exponentially. Trading at this stage was conducted through brokers over phones, and the deals were confirmed via telex. Access to the market involved paying exorbitant brokerage fees and large spreads, making it largely inaccessible to the man on the street.

Then, around 1995, there was progressive development and reform of the financial sectors. These factors, combined with the development of information and communication technologies and the establishment of an international banking and settlements system, led to massive and rapid expansion of the foreign exchange market.

It was at this time the Bank of International Settlements (BIS) centralised all clearing operations in the market. If you dealt with a bank you didn't have credit with, the counterparty name would be automatically switched to a bank you did have credit with. This removed a lot of the counterparty and credit risks that were previously hindering the growth of the market. Trading was now being conducted over electronic broking networks and this had a huge impact on the volume and speed of trading. Trade processing was faster, more efficient and a lot more accurate, and it enabled all financial institutions to trade in the market, regardless of their credit rating.

Then, during the late nineties, a number of the larger banks developed trading platforms targeting smaller banks who wanted to reduce their costs. By transacting directly with the bigger banks, the smaller banks could eliminate all brokerage costs. It turned out to be a booming business and led to rapid development of trading (broking) platforms.

Through the success of these trading platforms, the larger banks expanded their market to include the retail sector. By 2005 the new trading platforms gave the retail trader access to the market with the same speed, pricing and execution that commercial traders have, without any of the costs.

On top of this margin, lending facilities enabled investors with very little capital to trade vast sums of money. You could leverage your capital up to 500:1, making it possible to make large amounts of money in a very short period of time. It was the perfect market, and it was now officially open to the retail market.

Foreign Exchange Today

The Forex market today is the largest global financial market in the world. Its growth has been unprecedented and continues to be unequalled by any other trading market. This can be credited to the ease of access to the market and the fact that the principles and conventions applied in the Forex market are universal.

Participants now include banks, central banks, currency speculators, corporations, hedge funds and many other financial institutions. They are connected over an electronic network, which allows them to trade the currencies of most countries of the world. Foreign currencies are simultaneously bought and sold across global markets and traders' investments increase or decrease in value based upon currency movements.

One of the big appeals of the Forex market today is that it is open for investors of all levels, and you can work from anywhere at any time as long as you have access to the Internet. The Forex market also responds to real time events and news, creating ongoing volatility and trading opportunities. You can profit in both rising and falling markets. Also, unlike the stock markets, you don't have to wait for a bell to ring to start and finish trading. The markets open 5am Monday morning in Sydney and close at 5pm Friday night in New York. You can basically trade around the clock.

The wholesale market itself has not changed much in the past ten years; it's just become a whole lot more efficient. Technology advances have reduced the head count of many of the larger trading teams, and since the global financial crisis, the risk appetites of many of the banks have been curtailed somewhat.

They have channelled a lot of their resources into...