Trade_Book.pdf

Chapter 1.

INTRODUCTION

1.1 MAIN WORLD FINANCIAL MARKETS

1.2 GENERAL FOREX MARKET DATA

Chapter 2.

FUNDAMENTAL ANALYSIS

2.1 FACTORS INFLUENCING THE EXCHANGE RATE

2.2 GENERAL ECONOMICAL QUESTIONS AND BANKING

SYSTEM

CENTRAL BANKS

MONETARY UNITS

THE TOTAL PRODUCT(Gross Domestic Product-GDP)

Chapter 3. TECHNICAL ANALYSIS

3.1 SUBSTANTIVE PROVISIONS

3.2 CLASSICAL METHODS

3.3 MATHEMATICAL METHODS

3.4 FIBONACCI NUMBERS AND ELLIOT WAVE THEORY

Chapter 4.

STOCKJOBBING PSYCHOLOGY

4.1. TRADING RESULTS ANALYSIS

4.2 ASSOCIATION OF ALL GIVEN AND VARIOUS KINDS OF

ANALYSIS

4.3 MANAGEMENT OF THE CAPITAL AND TRADING

TACTICS

Chapter 1.

Introduction

1.1 MAIN WORLD FINANCIAL MARKETS

1. The market of the exchequer obligations (fixed incomes). The exchequer obligations act

as the goods in this market let out by corresponding state institutes of the countries, the

state exchequers and the Ministries of Finance. As a rule, the profitability depends on a

term of repayment and a discount rate valid in the country.

2. The precious metals market (commodities). The goods in this market are precious and

rare metals (silver, gold, platinum, a palladium, etc.). As it is known from the past,

practically all currencies have passed a stage of maintenance with that or another

precious metal, from silver (silver dollar) and up to gold maintenance. Investment of

funds of precious metals in the market allows to get profit, concerned to quotations of the

prices on precious metals, because precious metals always can "be exchanged" for money.

Investor always can place available precious metals in the banks and receive credit using

"metal" deposits for realization of the other purposes. At a rise in prices of precious

metals placed on deposit. The investor’s property grows and the incomes received from

the credit only increase his capital.

3. The share markets (Stocks). Stocks of the companies are the goods in this market. The

formation of the share markets has started in the beginning of the last century – the

market of stocks of the companies. The investment of funds in this segment of the

financial market is attractive to the investor for two reasons. Firstly, investing funds in

the stocks of this or another company, the investor acquires the right for reception of

share of the company profit – dividends, so to speak that usually make up to 10 % of the

invested funds sum. Secondly, the cost of the gained stocks can increase (at successful

development of the company). Thus, profitability from investments into stocks has two

components - the dividend and a difference between price of the stock and current price

of the stock. Trade in stocks is carried out at regional stock exchanges, such as, the New

York stock exchange, the Tokyo stock exchange, the Frankfurt stock exchange, the

London stock exchange, etc.

4. The international currency market FOREX (currency). The goods in this market are

currencies of various countries. It is the youngest and most roughly developing of all

segments of the financial markets. Profitableness of investment in this market depends on

change of currencies quotations. Attractiveness of investment in this market is concerned

to quickness of transaction fulfillment and additional bank service (crediting of

transactions with a credit leverage 1:100) also can make tens or even hundreds annual

interest rates.

1.2. GENERAL FOREX MARKET DATA

At the end of 70th of the previous century after fixed rate system of national currencies in

relation to US dollar was canceled formation of currency FOREX market has started. (Foreign

Exchange Operations – set of operations on sale and purchase of foreign currency, and granting

of loans on concrete conditions, (the sum, the exchange rate, and the period with execution for

the certain date). The basic participants of the currency market are: commercial banks, currency

stock exchanges, the central banks, the firms carrying out the foreign trade operations,

investment funds, the broker companies and private persons. FOREX today is the global market

incorporated by a uniform communication network which opens on Monday morning in New

Zealand and gets closed on Friday night in the USA. FOREX trade is divided on some trading

sessions.

Operating time of FOREX (round the clock) GMT(Winter time)

Region

City

Open Time

Close Time

ASIA

TOKYO

HONK KONG

SINGAPOUR

23:00

01:00

08:00 – 09:00

09:00 – 10:00

EUROPE

FRANFURT

LONDON

06:00

10:00

14:00 – 15:00

18:00 – 20:00

AMERICA

NEW YORK

CHICAGO

13:00

14:00

20:00 – 21:00

21:00 – 22:00

05:00 – 06:00

06:00 – 07:00

The American and Asian sessions are the most aggressive, and great volume of

operations belongs to the European session. New Zealand and Australian sessions are the

quietest. The main currencies which are shared on the basic volume of all operations in the

FOREX market today are: Euro (EUR), Japanese Yen (JPY), Swiss franc (CHF) and English

Pound (GBP) and US dollar (USD). The daily volume of conversion operations in the world

makes about 2 billion US dollars. In the London market it was necessary about 32 % of turnover,

on a share of the markets of the USA - 20 %, Germany - 10 %. Operations with US dollar make

70 %. About 15 % volume in FOREX market today is on a share of electronic brokers. The

daytime volume of operations of the largest international banks (Deutsche Bank, Barclays Bank,

Union Bank of Switzerland, City Bank, Chase Manhattan Bank, Standard Chartered Bank)

reaches billions of dollars. (Spot) operations or current conversion operations are transactions of

currency sale and purchase of refer to as actual execution (value) which is carried out for the

second working day after the day the transaction was made. According to the data for 1998,

about 40 % of all Forex-activity fell at the Spot-market.

VELLINGTONE

SYDNEY

21:00

22:00

Typical transaction volumes in interbank trade make 10 million dollars, but due to margin

trade system, the output on the market is accessible also to the individuals with small capital. The

brokers rendering margin trade services, demand entering of the mortgaging deposit and enable

the client to make operations of currency sale and purchase for the sums, 40 - 50, sometimes a

100 times bigger, than plased deposit. The risk of losses is assigned to the client. The deposit

serves as the maintenance insuring the broker.

PACIFIC

Sources of the information about condition of the financial markets - systems of real time

delivering the data on quotations of currencies, and also financial and economic news from the

international agencies, REUTERS, DOW JONES, CQG, BLOOMBERG, TENFORE, etc.

Currency Rates

Currency Rate - is the price of monetary unit of one country, expressed in monetary units

of the other country, at the sale and purchase transactions. Such price can be established

proceeding from a parity of supply and demand of certain currency according to conditions of

the free market, or to be strictly regulated by decision of the government or its main financial

body, usually Central Bank.

Quotation - It is a cost of one currency unit (named base currency), expressed in terms of

another currency (named quoted or counter currency). The base currency enters the first, quoted -

the second, in designation of quoted currency pairs (for example, USD/CHF). The quotation will

consist of two figures. The first figure - (Bid) - the price client can sell the base currency at; the

second - (Ask or Offer) - the price client can buy the base currency for quoted. The difference

between these rates is known as (spread). The size of spread depends on the considered pair

currencies, from the sum of the transaction and from a condition of the market.

The minimal change of the quotation refers to - as (Point, Pip) item. Different tools

(currency pairs) are quoted with different accuracy, with different quantity of decimal signs in

the quotation. The majority of currencies quoted to within 0.0001, for example, yen and its cross-

rates - to within 0.01. As the senior figures of the quotation (Big Figure) get changed slowly, the

quotation, as a rule, is given in abbreviated form: CHF 1.2380/84 for example, USD/CHF

1.2380/1.2384.

Example:

Quote: USD/CHF 1.2380/84 means, that

the client can sell dollars at the price - 1.2380 Swiss francs for 1 USD;

The client can buy dollars at the price - 1.2384 Swiss francs for 1 USD;

spread

points;

base

currency

USD,

quoted

CHF.

quote GBP/USD 1.8430/33 meaning, that

the client can sell pounds at the price of 1.8430 dollars for 1 GBP;

the client can buy pounds at the price of 1.8433 dollars for 1 GBP;

spread

poins;

base currency - GBP, quoted - USD.

The direct and inverse quotation The direct quotation - quantity of national

currency for one unit of foreign currency. The inverse quotation - quantity of a foreign currency

for national currency unit.

Use of the direct and inverse quotation has a historical substantiation. The basic world

reserve currency is American dollar therefore quotations for the majority of currencies are used

such as USD/JPY, USD/CHF, I.e. the dollar is base currency. However in the quotation of pound

sterling (GBP/USD) the pound is base currency, and dollar - quoted. The European currency of

euro is also quoted to American dollar as a base currency (EUR/USD). It frequently should be

known in information systems currencies reduce USD, i.e. USD/CHF designate as CHF, and

GBP/USD designate as GBP.

Cross-countries-rates are parity between two currencies following from their rate in

relation to the third currency rate. Cross rates with US dollar are frequently used at world

market operations, as the US dollar is not only the basic reserve currency, but also currency of

the deal in the majority of currency transactions

Example:

EUR/CHF = (USD/CHF) * (EUR/USD)

Spot-Rate – The currency price of one country, expressed in currency of the other country,

established at the moment the transaction made, under the currency swap condition by banks-

contractors for the second working day from the date of the transaction making.

The spot-rate reflects, how high the national currency rated at the moment of operation

carrying out outside following country

Basic rules of curreny pairs composing

1. EUR always represents itself as base currency.

2. GBP always represents itself as base currency, except for a case with EUR

3. JPY always represents itself as counter currency.

Cross rates (without USD)

EUR/USD

EUR/GBP

GBP/USD

EUR/CHF

USD/CHF

EUR/JPY

USD/JPY

GBP/CHF

USD/CAD

GBP/JPY

AUD/USD

Margin Trade

As against currency transactions with real delivery or real exchange, the Participants of

FOREX, especially if they have a small capital, use trade with insurance deposit - margin or

leverage trade. Each operation at margin trade necessarily has two stages: purchase (sale) of

currency under one price and then obligatory sale of it (purchase) at another (or at the same) the

price. The first action is defined as opening of position, and the second - closing of position. The

real delivery of the currency does not occur at opening of a position, and the participant who has

opened a position, brings an insurance deposit serving as an indemnification of possible losses

guarantee. The insurance deposit comes back, and there is a calculation of the profit or losses,

which are usually equivalent to the size of insurance deposit after position closing. Thus the

deposit is frequently a hundred times less than that sum given the participant for use in this

trading operation. Operation at margin trade necessarily consists of two parts: position opening

and closing. For example, at the predicting rise in price (amplification) of yen in relation to

dollar we want to buy a cheaper yen for dollars now and to sell it back when it becomes more

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