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An Abstract

Spot Forex is the financial instrument of the 21st Century. With over $1.5 trillion traded on a daily basis, projections are a whopping $8 trillion daily in under a decade! Choose to ignore this market, and you choose to live in a very small hole under a very large rock. With institutions bidding for contracts into the emerging markets and a new wealth being created out of the latent cashmines of India, China, Indonesia and a dozen other developing nations, ignoring the proliferation of the need for hard currency and growing speculation in the global foreign exchange market, would a crime tantamount to economic suicide. The world's most traded, but least understood market, is at a crossroads for all who have captured a vision of this ultimate trading vehicle. Spot forex is the purest form of supply and demand factors in action. If you dare to risk the world, then you dare to win the world!

John C. Ebert, March 1997.

CONTENTS SECTION

bulletIntroduction

bulletSection A: The Facts

bulletSection B: Mechanics of Investing and Trading

bulletSection C: Some humble opinions

bulletAppendices

INTRODUCTION

Acknowledgements

I would like to begin with the sacred ritual of sincerely expressing heartfelt thanks to a number of people who have influenced the course of the development of this book. First and foremost, I thank my wife, who has supported in me in realizing this dream to fruition. My deepest appreciation goes out to Mark Newland in providing impetus and encouragement to me to write this book. To all the strange and wonderful characters who flowed in and out of my world, I owe you countless words of gratitude. Without you, the oddball personalities, the decent and forthright folk, and the crooks and con artists, who involved yourselves in my world of forex, this book and its secrets could have never been revealed to the public at large.

To the oddball personalities, I wish you many more centuries of oddball living. To the decent and forthright folk, I wish you peace of mind and security in your golden years. And to the crooks and con artists, I wish you your befitting comeuppance and a very cold cell.

A little prattle

The Golden Rule states unequivocally: "They who possess the Gold, Make the Rules". We are also vividly aware of the phrase: "Money makes the world go round". Therefore, it is a most natural assumption that those who control the money, control their own destiny, and the destinies of those around them. FOREX, an acronym for Foreign Exchange, is fast rising as the topic of all topics in the financial arena, where stakes are not merely high, but astronomical. It is an arena in which the strongest wills and greatest financial minds are often reduced to wet napkins, crushed underfoot by the irresistible momentum of a trillion and half dollars turning over in circulation every twenty-four hour cycle! Welcome to mankind's most awesome creation, cold hard cash! Welcome to the 21st century world of FOREX.

The purpose of my book, besides to make some of that cold hard cash, is to bring together numerous disparate and often conflicting ideas and viewpoints revolving around the concept of forex trading, better known as foreign currency trading. In the age of Internet and World Wide Web, access to information of almost any kind, form or type is virtually unlimited. However, time and again, whenever the subject of forex has been broached, often by first-time investors, new brokers and even investment bankers, asking what appeared to me to be ludicrously simple questions, I discovered a severe void of freely accessible information on the subject matter.

There were virtually no sources of information to refer to such simple queries. Even as I researched and dug deep, deep, deep, I was often surprised at the dire scarcity of information. Inasmuch as books and general reading matter on the topic of forex, virtually nothing of any basic explanatory nature existed. Instead, tomes of complicated and highly involved theoretical economics on the subject of money ruled the roost. The subject matter, when it was addressed, was often treated as a subsection or an aside, which tended to deal specifically with other more popular or commonly-accepted forms of investments, such as commodity futures, stocks and bonds, money markets, and interest-rate backed instruments.

Specific to forex, an ever-increasing spiral of complexities evolved into derivatives of money-backed instruments such as swaps, cash forwards, currency futures and options, Prime Bank Guarantees (PBG's), etc. Simple questions on forex proper appeared to be answerable in relatively disparate unrelated terms.

We are now very familiar with the powerful but complex relationships that exist within the ecosystem we inhabit. Through books, television and multi-media, we have learned about biological controls, over-exploitation of natural resources, desertification of rain-forest areas and toxification of food webs. We have learned of how these events put at risk the intricate mechanisms of an interlinked and fundamentally bonded system of ecological relationships between man and his environment. The average nine-year old child could put forth a fairly strong case for recycling natural resources. Yet, it appears that we know close to nothing about the common denominator of the human economic system, money, and its relationship with the economy and our lives. Today, we live in a global market. The glory days of the greenback are over. Money is no longer synonymous with the US Dollar.

We are a society, which has developed a vast panel of experts on certain economic issues that we take for granted:- insurance underwriters, who provide us with peace of mind through highly complex underwriting equations and formulae to safeguard our lives and property; lawyers, who counsel us on our individual rights, investment portfolios and business liabilities; CPA's, who guide us on tax-related matters and provide us with support to keep our economic records straight and accounted for. Ironically, the most basic denominator in all these inter-related human economic activities is the mighty Dollar, or Franc or Krona or Cruizeiro.

Money, in its most basic form, cash, is the ultimate divisor of all things economic:- from the second home in tax-sheltered Isle of Mann, to the recent purchase at the local Safeway store in Fremont, California; from Taiwanese bond investments by German bankers to Italian Lira currency forward purchases by the chief buyer for Harrod's in London, for the latest Milanese fashion line; from a letter of credit drawn up by an American wholesale coffee importer for their trading partners in Mexico City, to the international money order sent by a school teacher in HongKong to relatives in Pasay City, Philippines; from even the taxicab fare to Orly Airport, Paris to the eventual airfare purchase with American Express traveller's cheques for the flight back to Chicago, Illinois; et cetera.

In each case, all aspects of these transactions or activities, are measurable in the form of a common denominator, the unit of currency transacted in its cash form. This base cash form is sometimes known as Spot - not to be confused with Rover or Fido or any of their canine friends - where prices are negotiated by the buyer and seller "on the spot". This is the unit in a complex stream of transactions that enable governments and nations to interact economically. Despite its obvious, if not blatant, importance in the general scheme of things, there is a tremendous deficit of essential information on the largest and fastest growing financial instrument on the planet. Though this book is not intended to be the Holy Bible of spot forex trading, nor would I ever presume to be such an authority, I do hope it will serve as a guide through the complex world of money, with specific reference to the spot forex marketplace.

The style of this book is not technical, except where absolutely unavoidable to explain an idea or methodology. I wrote this book to be read easily and digested on face value. Reading between the lines is something I hope will not be necessary. There is no examination to pass or a treatise to write when you complete this book. It is hoped by the author, that this book - besides making this author lots of filthy lucre ie, $$$$$ - will appeal to a broad spectrum of readers, interested to find out more about forex. They could be first-time investors, veteran stockbrokers, those with an interest to become forex brokers, currency traders in futures and options looking at spot forex as an alternative vehicle, general interest readers, international business majors or even investment advisors and fund managers searching for new vehicles for portfolio diversification. In short, this book is written "especially for you".

The spot forex market is a $1.5 trillion a day marketplace, a figure that inundates the total trading volume, dollar-wise, for the New York Stock Exchange (NYSE), which reported a record daily average trading volume of 347 million shares as of 27th December 1995. It would require approximately eight to ten weeks of such trading volume on the NYSE to match a single day's trading activity on the spot forex market. This is the extent of the magnitude of the subject matter that we are attempting to deal with. The status of the spot forex market will remain elusive and also very exclusive to a most elite group of forex trading experts, like the firm, Yamane Prebon, and individuals like George Soros, so long as this information, or rather the paltry lack of it persists. George Soros, testified before Congress in 1993 on allegations of unfair speculative practices in 1992, and it was evident that there existed no panel of experts on the subject he was testifying on. Congress was reduced to gormless ridicule and shown up to be the truly clueless wonders in a global economy by an ebullient George Soros, who openly challenged Congress to step forth and attempt a fair explanation of the mechanics of spot forex trading. In that instant, no one in Congress was able to take up the gauntlet.

However, today, this should no longer be the case because of the unrestricted availability of information. The problem, though, is the considerable legwork required to bring together all the salient information about an extremely lucrative but still misunderstood market, into some coherent, comprehensive and comprehensible form. This book, I hope will be the candlestick in the dark for many being introduced to the spot forex market for the first time. Just as the landing on the moon in July 1969 by Neil Armstrong, served as "a great step for mankind" in paving the road to a new understanding of our universe, so I hope by the same token (though hardly on such a grand scale) that this book will serve as your introduction into the universe of spot forex, and that it will illuminate your way to a better appreciation of spot forex trading in general.

The Nature of Contents

Your initial introduction to spot forex may have been through a friend or business partner, or a broker or investment advisor. Right now, you are searching for basic information, a starting point of reference. This should be your first stop. Alight and survey the surroundings of your new environment. Are you comfortable with what you find? Are you grasping the fundamental concepts of how forex works? Is what your investment advisor or broker saying to you making sense? Do you feel that you have begun to accumulate useful information to assist you in making an intelligent and responsible decision? Do you need more information? Each chapter in this book is designed to deal with specific issues concerning forex. In addition, there is a vast appendix and bibliography of sources to refer to for more in-depth investigation into the subject matter.

The subject matter we will cover is essentially in three parts. Section A, is a factual discourse of barebone elements in the spot forex market that make it unique. Chapter One, The Early Days, shares some of the initial experiences of my totally unprepared entry into the spot forex marketplace. Some new brokers and investors to the unregulated forex industry may relate to the challenges of adjusting to this market. Chapter Two, titled R & D: Research and Definitions, will tackle basic topics such as "What is Spot Forex?" and "How does forex relate to other money-backed instruments currently being traded?". Here, we deal with instrument types such as cash forwards, swaps or arbitrage, currency futures and options. Chapter Three is titled The Good Ol' Days. It is a little background history of the evolution of spot forex. It deals with the origination of the IMF and Gold Standard and the transition to the "dirty float". Lastly, in Chapter Four, The Marketplace, we begin dealing with the more technical questions of mechanics and transactions. We will be discussing the interbank system, aspects of spreads and mark-ups, dealers and the twenty-four hour challenge to traders.

In Section B, we begin to investigate the issues of how and where to invest and trade spot forex. Chapter Five, entitled Anecdotes, is a bizarre look into the world of traders, from the best and worst I have encountered and some highlights I have witnessed in trading. I also delve into the conflict between dealers and traders as well as a miscellany of the topsy-turvy nature of trading as a lifestyle. Chapter Six is called Checking Out Your Broker. We discuss what to look for in a forex brokerage and broker/trader. What are the key questions to ask and what are the key qualities you should expect. I also included a section called Schemes, Scams and Boiler Rooms, to point out investor traps and the shark-infested hunting grounds of unscrupulous brokerages and dealers. I discuss my own trading experiences in Chapter Seven, entitled P.M.S. - Performance and My Strategy. Here, I discuss my own performance, my maximum drawdown and maximum gains. I will talk about general strategies I use and the philosophy I have evolved for myself. Again, however, I do wish to remind the reader that the objective of this book is not to delve into the issue of trading techniques or analysis. This book is in no manner, form or fashion intended to be a trading manual in spot forex trading. There are many far better sources to refer to and I provide a select list of those sources I have personally found useful. I also briefly discuss my most used trading strategy, cross-rating as a safer alternative, as well as hedging spot and futures.

The final part, Section C, is my pet passion, delving into the legal quandaries and technology that this market has yet to master. Chapter Eight is called Regulate The Market. I am strongly in favour of regulation, and I state my reasons why I believe it is necessary and why I do not believe it will happen in any concerted manner on a global basis for some time. There will be some discussion over the various alternative forms of licensing currently available and the need for protection of client funds. Finally, Chapter Nine, Looking into the crystal ball, is a summary of my conclusions and forecast of trends in spot forex trading that I believe it will evolve. These may be the ramblings of a madman, but who is to say which forces will triumph to shape this marketplace.

There are some appendices that deal with side issues in forex. Appendix One, entitled Basic Computation, explains the simple calculation of direct and indirect transactions and how to derive the point value of indirect currencies. This is a must for any trader. Appendix Two deals with how interest rate calculations on open positions are derived and calculated. The section is entitled, surprisingly, Open position interest rate calculations. For quick reference purposes, Appendix Three, Tic-values-at-a-glance is a complete table of tic values for the indirect major currencies. Appendix Four, Bibliography, is a sourcebook of fundamental and technical information for the student interested in researching the book subject matter. Second-hand knowledge is always somewhat diluted and hence, I am a firm believer in reaching to the source for specifics. Herein lie the true stars of trading strategies and technical know-how. There are experts in specific areas of currency swaps and options trading. Although, some of these books were developed more specifically for trading in stocks or commodity futures, there are universally valuable lessons about the mental insight of trading in general. I also include websites on forex analysis, clearing services among other useful tidbits for the self-trader.

On a final note, I hope my readers make as much money from their trading as I hope to make with this book! Remember, there is never a bad trade or investment made when the original intentions were pure. There is only bad information, bad people and bad reasons for investing! Get the facts, then decide to work with the right people, and have a gameplan!

Used by permission of Ebert Associates International, copyright © 1997. All rights to this material are reserved. Materials are not to be distributed to other web locations for retrieval, published in other media, or mirrored at other sites without written permission of Ebert Associates International. Updated on 2nd November 1998.

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