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Overview
For Beginners

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Forex Revolution
An Insider's Guide to the Real World of Foreign Exchange Trading
Peter Rosenstreich • FT Prentice Hall © 2005 • 304 pages

Life Advice / Personal Finances / Investing / Trading

Economics / Financial Markets

Take-Aways
• The Foreign Currency Exchange, known as Forex, is the biggest market in the world.
• Foreign exchange trading is very risky and requires complete dedication.
• Although no central regulatory body governs the Forex markets, various national jurisdictions regulate
aspects of foreign currency trading.
• Every foreign exchange trade involves a purchase and a sale - a long and a short.
• U.S. stock market regulations limit your ability to "go short," but no such regulations exist in the Forex
market.
• Because currency values are often a matter of national pride and prosperity, national leaders look with
suspicion on the activities of Forex traders.
• When you are trading currencies, consider fundamental factors first, then work your way into the details
of technical factors.
• Never trade without a strategy.
• Beware of brokers and other intermediaries who promise fast, low-risk gains.
• There is no reward without risk, and Forex investing is highly risky.

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 Recommendation
Author Peter Rosenstreich’s short, concise guide is a neophyte’s introduction to the world of foreign
exchange trading. Its chief virtue is that it warns against trading if you don’t have a strategy and some
level of technology. Its chief vice is the suggestion that it is realistic for individual investors to expect to
make money in the foreign exchange markets. The author cautions against the risks of the market (and
gives good advice on spotting the most egregious frauds), but even to suggest that an individual retail
trader equipped with an Internet connection, a news feed, a research source and a charting service can
hope to succeed in Forex investing is a bit misleading. Perhaps, it would have been more enlightening if
the author had discussed the competition that confronts the potentially foolhardy neophyte, in terms of
equipment, technology and expertise. That said, readers will gain an elementary - but not really an insider’s
- acquaintance with the ABCs of the Forex markets and will learn the names of key agencies and approaches.
getAbstract.com finds that the book’s most useful attributes include references to further reading that
should deter novices from attempting to trade their own money in the foreign exchange markets. For solid
basics, read on - but zip your wallet.

Summary

Forex Fundamentals

The Foreign Currency Exchange (called Forex) is the world’s largest market. It trades approximately $1
trillion daily, far more than any stock exchange. It is a 24-hour operation, opening late on Sunday, New York
time, and trading wherever the sun shines until the close of the New York markets at 5 p.m. on Friday. Forex
observes no holidays. Almost every day at almost every hour, foreign currency is trading somewhere on the
planet.

“Most traders in the Forex market today have one ambition - to make money fast.”

What makes Forex special? First, immense risk - thanks in part to the power of leverage. An individual with
only $1,000 to trade can, through leverage, trade $100,000. But trading risk is not the only thing that makes
the foreign exchange market special. Whole countries are at risk in these markets and, in recent years,
traders have attracted the wrath of political leaders because their relentless pursuit of profit has caused
chaos in national economies.

Currency and Politics

The value of a nation’s currency always has been an important element in determining its strength. In
ancient times, when currencies were gold and silver coins stamped with the face of the local king, rulers
attempted to make more coins than their silver supplies allowed by mixing silver with base metals, like lead.
But currency traders made life difficult for kings, withdrawing real silver coins from circulation, melting
them and hoarding the silver, leaving only worthless alloys to circulate. A variant of that old trick occurred in
the twentieth century.

“There is a lot of money to be made, but the risks are real.”

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 In the early 1900s, the gold standard prevailed. Countries could only issue as much currency as they could
back with gold. But the gold standard was problematic and tended to exacerbate recessions and depressions.
In the wake of the Great Depression and WWII, the western countries established an international economic
system called Bretton Woods. This system aimed to set up a stable international financial order anchored to
gold and the U.S. dollar. Essentially, it depended on the full faith and credit of the United States. Currency
values were stipulated according to the ability of the U.S. to exchange dollars for gold. The parties had
a more or less implicit understanding that creditors would not demand this exchange. Therefore, like
kingdoms of old, the U.S. had a virtual license to print money. It spent far beyond the levels that its gold
stock justified. Eventually, other countries began to demand gold. In 1971, facing the prospect of draining
Fort Knox, President Richard Nixon closed the gold window. For all practical purposes, this withdrew the
U.S. from the Bretton Woods system and launched the era of floating currency rates.

“Forex has suffered in the past from scandals and fraud.”

No centrally mandated currency values exist in a world of floating rates. Currencies’ values fluctuate
constantly in response to politics, economic trends and market moves that may often be entirely random.
This environment is highly conducive to speculative trading, and has given speculative traders the
power to exercise discipline over governments. When governments say that their currency should be
worth a particular number of dollars, yen or euros, the speculators analyze fundamental and technical
circumstances, and make their own judgments. If they disagree with a government’s official position, they
sell or buy the currency. If enough speculators sell or buy, no single government or central bank has the
financial strength to withstand them. Recent history provides numerous examples of governments that ran
up the white flag when faced with sustained speculative assaults.

Trading Basics

The basic concepts used in foreign exchange trading are:

• Spot - A spot trade is an exchange of currencies that settles immediately. Think of the transaction that
occurs when a foreign tourist exchanges currency.
• Quotes - Every foreign-exchange quote has two sides: the base and the counter. The base currency is the
currency for sale and the counter currency is the amount required to buy one unit of the base currency.
Thus, a USD/JPY 106 quote means that one U.S. dollar is worth 106 Japanese yen. Every currency quote
has a buy and a sell side.
• Dollar to foreign currency quotes - Offers that propose to buy foreign currencies for dollars are expressed
with abbreviations, such as USD/JPY, for a dollar yen quote, offering dollars for Japanese yen. Other
abbreviations for dollar trades include: USD/CHF for Swiss francs; USD/CAD, for Canadian dollars;
AUD/USD, for Australian dollars; and EUR/USD, for euros. The GBP/USD is a cable or sterling quote,
with British pounds offered for U.S. dollars. (The term cable dates from the time when a transatlantic
cable linked the London and New York markets.)
• Euro to foreign currency quotes - These quotes are also expressed in abbreviations, including EUR/GBP,
a euro sterling quote offering euros for British pounds; EUR/JPY, offering euros for yen; and EUR/CHF,
offering euros for Swiss francs.

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 • Cross rates - The world’s most widely traded currencies are the U.S. dollar, the euro, the Japanese
yen, the Swiss franc, the Australian dollar, the Canadian dollar and the British pound sterling. Trades
involving these currencies account for nine-tenths of all Forex trading. The most important are the dollar
and the euro, but some trades, called "cross rates," do not involve either one. Thus, a GBP/JPY, which
offers British pounds for yen, is a cross rate. There are many potential cross rate trades since there are
many currencies in the world - although some currencies are quite illiquid.
• Pips - This is the smallest price increment in which a currency can trade. For example, traders calculate
the Japanese yen to two decimal points, so a pip on Japanese yen is .01. But traders calculate the euro to
four decimal points, so the pip on a euro is .0001. A yen move from 100 to 100.03 is a three-pip move. A
euro move from 1.0030 to 1.0070 is a 40-pip move.
• Bid/Ask - The bid is the amount offered to buy a currency; the ask is the amount demanded to sell.
• Lot - This is a standard share or contract unit of $1,000, leveraged 100 to one, thus controlling $100,000.
A mini-lot is a unit of $100 leveraged 100 to one, controlling $10,000.
• Position - This is a participant’s market profile. Every position has a long and a short side because every
foreign exchange involves buying one currency and selling another.
• Market order - An order to buy or sell at the current market prices.
• Limit order - This order to sell is executed when the price rises or falls to a predetermined limit. The two
types of limit orders are GTC (good until canceled) and GFD (good for the day).
• Stop - These limit orders become market orders when the price hits a certain level. Stops allow traders
to control their risk and avoid getting caught in runaway market moves. In volatile markets, stops may
result in premature liquidation of positions.
• Stop-limit - This combines the features of the stop and the limit order. Instead of becoming a market
order, a stop order becomes a limit order.
• Derivatives - Derivatives are contracts that define certain trades, positions and exchanges under
various circumstances. Derivatives often involve a great deal of leverage and can be used prudently or
imprudently. The most prudent use is to hedge, or protect against financial risk, by incurring offsetting
risks. The most imprudent use is undisciplined speculation.

Regulation of Foreign Exchange

Although the foreign exchange market has no central regulatory body, it is not completely unregulated
because national or regional regulators oversee it, including the Swiss Banking Commission (SFBC), the
Investment Dealers Association of Canada (IDAC); the Securities and Futures Commission of Hong Kong
(SFC); the Australian Securities and Investment Commission (ASIC); the U.S. Commodities Futures Trading
Commission (CFTC) and the National Futures Association, also in the U.S. (NFA). The CFTC does not set
rules governing Forex trades, but the National Futures Association does. This self-regulating organization
includes most of the firms in the industry. It is very imprudent to trade or to do business with firms that are
not NFA members.

“Take some elementary steps to protect yourself and your money.”

The most important categories of firms and intermediaries in the Forex markets are:

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 • Forex member dealers - These are the Forex equivalents of stock market specialists and market makers.
Do not deal with them unless they are registered Futures Commission Merchants.
• Introductory Broker (IB) - The introductory broker advises and provides technical aid. The IB relies on a
futures commission merchant to execute trades. Introductory brokers must register with NFA and pass
its examination.
• Commodity-trading advisor (CTA) - These advisors provide expertise and counsel on currency and
commodity trading. CTAs also register with the NFA and pass an exam.
• Managed accounts - Very similar to mutual funds, managed accounts are pools of money which
managers trade on behalf of investors.
• Interbank - The Interbank market is an informal affair that involves trades among institutions such as
commercial banks, investment banks, central banks and the like.

Trader Beware

The foreign exchange market is highly risky and very demanding. Because it is a 24-hour market, moves
may happen at any hour in any part of the world. This market demands unsleeping study and concentration.
Before trading, carefully study the rhythms of the market. At 4:00 a.m. Eastern Standard Time, the London
market opens and trading becomes active. At 9:00 a.m. when New York opens, there is another surge of
trading. At 11 p.m. Eastern Standard Time, after Tokyo’s market closes, the overall market quiets a bit.

“I love Asia: it smells of raw capitalism.”

Every Forex trader needs to develop a strategy that takes into account both fundamental and technical
factors. Forex traders must walk a fine line. They need to pay attention to the news to be well informed,
yet trading in reaction to the news risks being far behind the market because the market takes most news
into account before it reaches the retail trader. Every foreign-exchange trader needs research from several
sources and a charting package to keep track of price moves.

“As the world draws ever closer together over the next two decades, the question every
investor should ask himself is how he should handle the change.”

Forex still holds great potential for fraud and abuse. Traders need these tips:

• Caveat emptor - If a deal looks too good to be true, it’s probably not true.
• Check out any firm before you give it any money - Do not believe guarantees. Shun firms that promise
high returns with low risk.
• Do not trade on margin - Margin trading is extremely dangerous because your losses can be far greater
than the dollars you have committed.
• Beware of firms that say they trade in the "Interbank market" - Fraudulent firms frequently make this
claim, but the only participants in the Interbank market are banks, investment banks, large institutions
and central banks. Moreover, the Interbank market is not a place or an organization. It is a lose network
of transactions and negotiations among large dealers.
• Beware of the Internet - The Internet is a cheap way to advertise and allows perpetrators of fraud to reach
a large population of victims.

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 • Beware of ethnic scams - People from certain ethnic communities can be particularly vulnerable to
currency fraud, especially when offered "jobs" as "account executives." Such "jobs" often require the
applicant to invest his or her own cash.
• Cut your losses - Accepting losses is difficult. Most people wait for the market to move back in their favor.
It usually does not. If you can’t take losses, don’t trade.
• Don’t get greedy - Remember Wall Street’s favorite axioms: "Trees don’t grow to the sky" and "Bulls
get rich, bears get rich, but pigs get slaughtered." Define return goals on each trade. Use stops and limit
orders to protect gains and minimize losses.

“Always remember that there is no such thing as a free lunch.”

Control your emotions! - Emotions can derail even the best traders.

About the Author

Peter Rosenstreich is a principle and foreign exchange trader with the New York investment firm Rose
Stevons & Company. He is registered with the National Futures Association (NFA) as a Commodity Trading
Advisor (CTA).

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