Unlocking the Secrets of Currency Movements

Brian Dolan Chief Currency Strategist November 17, 2007

Forex trading involves a substantial risk of loss and is not suitable for all investors. Past results are not indicative of future results.

Disclosures
This seminar is a service offered to existing and prospective FOREX.com clients. It will discuss risk management concepts and strategies and does not include the recommendation or endorsement of any particular security, chart pattern or investment strategy by FOREX.com. The concepts and strategies discussed may not be suitable for all investors. It is important that investors consider the information presented in light of their individual circumstances and objectives, including personal risk tolerances and investment goals. Currency symbols shown herein are for illustrative purposes only. FOREX.com and/or its employees and/or directors may have positions in currencies referenced herein, and may, as principal or agent, buy from or sell to clients. Please note that the price and volume data, screen samples, and chart patterns illustrated in this seminar are for illustrative purposes only. The discussions or illustrations of particular currencies herein should not be construed as an offer to sell or a solicitation of an offer to buy any currency. FOREX.com does not recommend the use of technical analysis as a sole means of investment research. At FOREX.com we recommend that investors define their goals, risk tolerance, time horizon, and investment objectives in addition to researching possible investment choices through multiple channels. Use of technical analysis may result in increased frequency of trading and, therefore, significantly higher transaction costs than a fundamental approach. Short selling is an advanced trading strategy involving significant risks, and must be done in a margin account. Increasing leverage increases risk. For more information please refer to your Account Agreement. Forex trading carries a high level of risk and is not suitable for all investors. Placing Contingent orders (such as stop or limit) might not necessarily limit the risk of loss.

Forex trading involves a substantial risk of loss and is not suitable for all investors. Past results are not indicative of future results.

Understanding Currency Movements

Currency Pairs:
EUR/USD USD/JPY GBP/USD USD/CHF

Fundamental factors behind trading behavior Price action characteristics Tailoring the use of technical approaches Tactical trading considerations
Forex trading involves a substantial risk of loss and is not suitable for all investors. Past results are not indicative of future results.

Understanding Currency Movements EUR/USD

Fundamentals:
Liquidity--Most actively traded currency pair 27% of daily global volume (source: 2007 BIS Survey of Forex Markets) Global asset allocation--Eurozone 2nd largest economic bloc, EUR as a reserve currency Anti-dollarPrimary foil to the US dollar Liquidity improved by cross-currency flows (EUR/JPY, EUR/CHF, EUR/GBP)

Forex trading involves a substantial risk of loss and is not suitable for all investors. Past results are not indicative of future results.

Understanding Currency Movements EUR/USD

Price action:
Tendency to trade tick-by-tick; price gaps are rare, usually news/data driven Cross-currency flows are typically counter-trend in dollar-based moves Prolonged, seemingly inconclusive tests of technical levels Well-suited for very short-term trading around a core position

Forex trading involves a substantial risk of loss and is not suitable for all investors. Past results are not indicative of future results.

EUR/USD Price Action

Forex trading involves a substantial risk of loss and is not suitable for all investors. Past results are not indicative of future results.

Understanding Currency Movements EUR/USD

Technical approaches:
Deep liquidity favors use of momentum oscillators (MACD) Longer-term studies are preferred due to plodding price action Divergences between price and momentum are frequent; check DMI Trendline analysis to confirm breakouts and divergences

Forex trading involves a substantial risk of loss and is not suitable for all investors. Past results are not indicative of future results.

Understanding Currency Movements EUR/USD

Tactical trading considerations:
Is it a dollar-move or a Euro move? Be patient, especially if GBP and CHF are confirming Use orders to take advantage of backing and filling Allow for greater margin of error on breaks of technical levels

Forex trading involves a substantial risk of loss and is not suitable for all investors. Past results are not indicative of future results.

Understanding Currency Movements USD/JPY

Fundamentals:
JPY is the third major currency bloc volume (source: 2007 BIS Survey of Forex Markets) 13% of daily global

Politically sensitive to trade, proxy for Asia MOF routinely involved in currency markets Massive savings/investment pool; asset managers tend to move as a group
Forex trading involves a substantial risk of loss and is not suitable for all investors. Past results are not indicative of future results.

Understanding Currency Movements USD/JPY

Price action:
Prone to trends or sideways movements, then rapid adjustments Highly directional on breakouts, minimal pullbacks or backing-and-filling Tends to respect technical levels with fewer false breaks Resting orders from asset managers frequently define highs/lows, reversals
Forex trading involves a substantial risk of loss and is not suitable for all investors. Past results are not indicative of future results.

USD/JPY respecting technical levels

Forex trading involves a substantial risk of loss and is not suitable for all investors. Past results are not indicative of future results.

Understanding Currency Movements USD/JPY

Technical approaches:
Trending behavior suggests trend following tools instead of momentum: DMI Moving averages (21 & 55 period) Parabolic SAR Ichimoku analysis Candlestick patterns critical to spotting reversals/breakouts Trendline analysis is very effective, channels form frequently
Forex trading involves a substantial risk of loss and is not suitable for all investors. Past results are not indicative of future results.

USD/JPY technical approaches-Candlesticks

Forex trading involves a substantial risk of loss and is not suitable for all investors. Past results are not indicative of future results.

Ichimoku-One Glance Cloud Chart

Forex trading involves a substantial risk of loss and is not suitable for all investors. Past results are not indicative of future results.

Understanding Currency Movements USD/JPY

Tactical trading considerations:
Trendline break-outs can be actively traded Stop losses* can be kept tight to technical levels Favor a 30-point reversal for stop loss on breakouts Be aware of EUR/JPY levels and JPY-cross flows, look for similar tech levels
*Placing contingent orders will not necessarily limit your losses
Forex trading involves a substantial risk of loss and is not suitable for all investors. Past results are not indicative of future results.

Understanding Currency Movements GBP/USD

Fundamentals:
2nd largest economy in Europe, 12% of daily global volume (source: 2007 BIS Survey of Forex Markets) Acts as a volatile USD-alternative, explosive reactions to UK-based data/news Bank of England monetary policy; MPC minutes and consumer/housing data Higher leverage cost for margin trading
Forex trading involves a substantial risk of loss and is not suitable for all investors. Past results are not indicative of future results.

Understanding Currency Movements USD/CHF

Fundamentals:
Extremely illiquid only 5% of daily global volume

(source: 2007 BIS Survey of Forex Markets)

Reputation for safe-haven status in times of geo-political tension Highly dependent on cross-border trade with EU SNB active in currency, mostly concerned with EUR/CHF
Forex trading involves a substantial risk of loss and is not suitable for all investors. Past results are not indicative of future results.

Understanding Currency Movements GBP/USD & USD/CHF

Price action:
Prices tend to be jumpy even in normal markets One-way traffic in highly directional markets, minimal backing and filling False breaks of technical levels, stop loss zones are common Frequently forms spike reversals of 30-40 points
Forex trading involves a substantial risk of loss and is not suitable for all investors. Past results are not indicative of future results.

GBP/USD volatility leads to false breaks

Forex trading involves a substantial risk of loss and is not suitable for all investors. Past results are not indicative of future results.

Understanding Currency Movements GBP/USD & USD/CHF

Technical approaches:
Trendline analysis favors using longer time frames (> hourly) Momentum useful, but need to filter with DMI when overdone Look for spike reversals and breaks of parabolic support and resistance Williams %R to identify potential reversal areas
Forex trading involves a substantial risk of loss and is not suitable for all investors. Past results are not indicative of future results.

Understanding Currency Movements GBP/USD & USD/CHF

Tactical trading considerations:
Reduce position size and adjust stop loss* levels due to greater volatility Allow a greater margin of error for breakouts Leading indicator for EUR/USD and overall dollar direction Quick on the trigger stops

resting stop loss* entry orders; trailing

*Placing contingent orders will not necessarily limit your losses

Forex trading involves a substantial risk of loss and is not suitable for all investors. Past results are not indicative of future results.

EUR/USD tends to lag in breakouts

Forex trading involves a substantial risk of loss and is not suitable for all investors. Past results are not indicative of future results.

GBP/USD tends to lead the way in breakouts

Forex trading involves a substantial risk of loss and is not suitable for all investors. Past results are not indicative of future results.

Cable can lead by hours or minutes

Forex trading involves a substantial risk of loss and is not suitable for all investors. Past results are not indicative of future results.

EUR/USD following Cable on a breakout

Forex trading involves a substantial risk of loss and is not suitable for all investors. Past results are not indicative of future results.