FOREX Investment and Trading

[Pages:153]FOREX Investment and Trading

An Interactive Qualifying Project Report submitted to the Faculty of

WORCESTER POLYTECHNIC INSTITUTE in partial fulfillment of the requirements for the

Degree of Bachelor of Science By

Edgar Buenrostro Alberto Mateo Adrian Ramirez

Date: September 25th, 2012

Approved By: Professor Hossein Hakim

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ABSTRACT

The principal objective of this paper is to exhibit the most feasible method to establish a Forex firm successfully. The intent of this project is to provide a detailed explanation of the currency trading market for all kinds of audience.

Thus, it provides the essentials of the Forex market as well as samples of trades from the group, in which is possible to appreciate the common risks and mistakes a person is susceptible to while trading. In addition, it includes an explanation of the methodology utilized by the group such as the use of

technical and fundamental analysis. Furthermore, automated trading is introduced.

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Acknowledgement

We would like to thank Hossein Hakim, Professor, Electrical & Computer Engineering Department, and Michael Radzicki, Professor of Economics, Worcester Polytechnic Institute for their guidance throughout the course of this project and their contributions to this project.

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Table of Contents

Abstract.........................................................................................................................................................ii Acknowledgement..........................................................................................................................................iii Table of Figures ......................................................................................................................................... vii Chapter 1. Introduction .......................................................................................................................... 1

1.1 Project Description.............................................................................................................................. 2 Chapter 2. Background ........................................................................................................................... 4

2.1 History of Financial Markets ............................................................................................................... 4 2.2 Types of Markets................................................................................................................................. 4

2.2.1 Stock Market ................................................................................................................................ 5 2.2.2 Bond Market ................................................................................................................................ 5 2.2.3 Derivatives Market....................................................................................................................... 5 2.3 Emergence of the Foreign Exchange Market...................................................................................... 6 2.3.1 What is Forex? ............................................................................................................................. 9 2.4 Forex Trading .................................................................................................................................... 11 2.4.1Trading Terms ............................................................................................................................. 13 2.4.2 Technical Analysis ...................................................................................................................... 15 2.4.3 Fundamental Analysis ................................................................................................................ 18 2.4.4 Automated Trading .................................................................................................................... 21 Chapter 3. Methodology....................................................................................................................... 26 Chapter 4. Project Execution ................................................................................................................ 28 4.1 Trading Plan ...................................................................................................................................... 28 4.1.1 Trade Set Ups ............................................................................................................................. 29 4.2 Risk Management ............................................................................................................................. 32 4.3 Money Management ........................................................................................................................ 32

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4.4 Technical Indicators Research........................................................................................................... 34 4.5 Fundamental Indicators Research .................................................................................................... 54 Chapter 5. Establishing a FOREX Firm................................................................................................... 67 5.1 Corporate Structure .......................................................................................................................... 67

5.1.1 Different ways you can legally structure your company ........................................................... 67 5.1.2 Establishing your company in US vs off-shore ........................................................................... 71 5.2 Money Management ........................................................................................................................ 73 5.2.1 Different ways you can set up the money management aspect of your company ................... 73 5.3 Licenses and Regulations .................................................................................................................. 75 5.3.1 Regulating agencies ................................................................................................................... 75 5.3.2 Types of license needed............................................................................................................. 75 5.4 Marketing.......................................................................................................................................... 78 5.4.1 Marketing of a firm .................................................................................................................... 78 5.4.2 Marketing for the Company....................................................................................................... 81 Chapter 6. Results ................................................................................................................................. 84 6.1 Introduction to Results ................................................................................................................... 853 6.2 Team Program................................................................................................................................... 85 Chapter 7. Conclusion & Recommendations ........................................................................................ 87 Citations......................................................................................................................................................................90 Appendices.................... ............................................................................................................................... 91 Appendix A. Macroeconomic Issues that Influenced the FOREX Market .............................................. 91 Appendix B. Sample Gartman Letter ................................................................................................... 123 Appendix C. SUMMARY OF PIPS/DOLLAR MADE SINCE TERM B ......................................................... 130 Adrian's Trades ................................................................................................................................. 130 Alberto's Trades ................................................................................................................................ 138

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Edgar's Trades ................................................................................................................................... 139 Appendix D. Code of Program.............................................................................................................. 142

Ignition Bar EA................................................................................................................................... 142

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Table of Figures

Figure 2-1. Peaks and Troughs / Resistance and Support Levels ................................................................ 16 Figure 4-1. Entry above 200MA .................................................................................................................. 30 Figure 4-2 Ignition Green Bar...................................................................................................................... 30 Figure 4-3 RSI Graphs.................................................................................................................................. 35 Figure 4-4 Stochastic Graph ........................................................................................................................ 37 Figure 4-5 MACD Graph .............................................................................................................................. 39 Figure 4-6 Average True Range Graph ........................................................................................................ 40 Figure 4-7 Bollinger Bands Graph ............................................................................................................... 42 Figure 4-8 Basic Wave Pattern .................................................................................................................... 43 Figure 4-9 Price Envelope Graph................................................................................................................. 46 Figure 4-10 Commodity Channel Index Indicator Graph ............................................................................ 49 Figure 4-11 ADX Graph............................................................................................................................... 52 Figure 6-1. Trading Graph ........................................................................................................................... 86 Figure 6-2. Program Report ........................................................................................................................ 86

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Chapter 1. Introduction

Barter was the form of exchanged used in the early days. This kind of exchanges are still used today, known as commodities. Livestock was often used as a unit of exchange. However, as farmers started growing, people started to use crops for barter. A farmer could ask another farmer to trade a pound of apples for a pound of bananas. This type of action, we can say was the first domino that fell in order to start the development of markets such as the futures market. Also as a result of this currency started to appear. Cowry shells became the alleged form of money in starting in China.

It was in China that they also started to develop metal currency. They used tools of metal, like knives and spades, and from this models round coins were developed. The Chinese coins were usually made out of base metals which had holes in them so that you could put the coins together to make a chain. Chinese coins relied on base metals, but this was later developed in Europe to the use of scarce metals like gold and silver which had a lot of intrinsic value.

As these currencies started to developed and their values started to be pegged to these metals, it later turned out to be changed and then the value was tried to be controlled by the countries. Later the foreign exchange market, the mechanism by which currencies are valued relative to one another, and exchanged, was developed. An individual or institution buys one currency and sells another in a simultaneous transaction. The exchange rate is determined through the interaction of market forces dealing with supply and demand.

Traders generate profits, or lose, by speculating whether a currency will rise or fall in value compared to another currency. The value is a reflection on the condition of that country's

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