Trading, Investment and PortfolioManagementBY:ERIK PAULSONVISHAL K. RATHIHTAY AUNG WINSubmitted: February 2017Approved by:PROFESSOR HOSSEIN HAKIMPROFESSOR MICHAEL J. RADZICKIAn Interactive Qualifying Project Report submitted to the faculty of WORCESTERPOLYTECHNIC INSTITUTE in partial fulfillment of the requirements for the degree ofBachelor of Science in Electrical and Computer Engineering.

AbstractThe goal of this project was to become familiarized with the forex market and develop profitable tradingsystems. The first few sections of the report will cover the background knowledge about the forex marketessential to trade. The background section covers the important forex terminologies, several marketanalysis techniques, and different forex trading platforms. After the background section, the report talksabout the methodology to develop trading systems. Next, the report goes into details of each member’strading system as well as the performance of each system along with the trades executed. Finally, thereport ends with a conclusion section which talks about the things learned in this project and fewrecommendations for future projects.I

AcknowledgementsWe would like to thank the following people and institution:Our student partner, Rohit R. Raney, from Northeastern University who is currently pursuing a Bachelorof Science degree in Management Sciences. He helped us when he was a part of our team in A term 2016.We would like to thank our advisors for this project, Professor Hossein Hakim and Professor Michael J.Radzicki. They provided us with much guidance and advice, and our project would not have been what itis without them.Finally, we would like to thank Worcester Polytechnic Institute for making this IQP project possible.II

Table of ContentsAbstract . IAcknowledgements. IIList of Figures . V1. Introduction . 1Project Description. 22. Background . 32.1 Financial Markets and Asset Classes . 32.1.1 Stocks . 32.1.2 Bonds . 42.1.3 Cash Equivalents . 42.1.4 Commodities . 52.1.5 Currencies . 52.1.6 Real Estate. 62.2 The Forex Market . 72.2.1 Why do we decide to trade Forex? . 82.2.2 Why do we mainly trade EUR/USD? . 82.3 Forex Terminology . 92.4 Order Types . 142.4.1 Market order . 142.4.2 Limit order. 142.4.3 Stop Order . 142.5 Market Behavior . 152.6 Fundamental Analysis . 192.6.1 US Employment Report. 192.6.2 Gross Domestic Product . 202.6.3 Retail Sales . 212.6.4 Trade Balance. 212.6.5 Key terms in fundamental analysis . 232.6.6 Using news to trade the forex market . 262.6.7 Analysis of Past News Releases Effects on the Market . 272.7 Technical Analysis . 30III

2.7.1 Technical Indicators . 302.8 US Dollar Index (USDX) . 452.9 Trading Platforms . 472.9.1 TradeStation vs. MetaTrader vs. fxTrade . 472.10 Risk Management . 502.11 Money Management . 513. Methodology . 523.1 Individual Trading Strategies. 543.1.1 Erik’s Trading Strategy . 543.1.2 Vishal’s Trading Strategy . 573.1.3 Htay’s Trading Strategy . 644. Conclusion . 724.1 Recommendation for further research . 74References . 76Appendices. 79Appendix A . 79Vishal’s Trades . 79Erik’s Trades . 86Htay’s Trades. 87Appendix B . 90IV

List of FiguresFigure 1 FOREX trading hours[10] . 7Figure 2 FOREX line chart . 10Figure 3 FOREX bar chart . 10Figure 4 FOREX candlestick chart . 11Figure 5 Upward trending FOREX chart example . 15Figure 6 Downward trending FOREX chart example. 16Figure 7 FOREX Volatile market example . 16Figure 8 FOREX sideways market example . 17Figure 9 Using support and resistance lines to trade sideways market . 18Figure 10 EUR/USD after interest rates announcement. 27Figure 11 EUR/USD after nonfarm payroll report. 28Figure 12 EUR/USD after Boston FED president speech . 29Figure 13 Fast and slow simple moving averages (SMA) [15]. 31Figure 14 Exponential and simple moving averages [16] . 33Figure 15 Example chart with MACD indicator [17] . 35Figure 16 Example chart of center line crossover [17] . 36Figure 17 Example chart of signal line crossover [17] . 37Figure 18 Example chart of overbought/oversold conditions [18] . 38Figure 19 Example chart with RSI indicator [20] . 40Figure 20 Example of bullish and bearish divergence using RSI [20] . 41Figure 21 Example using Bollinger bands [21] . 43Figure 22 Weights of each currency in the US dollar index . 45Figure 23 Example USDX chart. 46Figure 24 EUR/USD chart . 46Figure 25 Overall account growth and equity growth . 55Figure 26 Example trade 1 . 56Figure 27 Example trade 2 . 56Figure 28 Support lines on the market data chart . 58Figure 29 Resistance lines on the market data chart. 59Figure 30 Example short term buy trades using the trading strategy . 60Figure 31 Short trades during the March 2016 ECB interest rates decision. 61Figure 32 Monthly performance 1 . 62Figure 33 Monthly performance 2 . 62Figure 34 Overall account and equity growth . 63Figure 35 Average time for all trades executed . 63Figure 36 Example trade which lasted only 11 minutes with 11 pip profit . 67Figure 37 EUR/USD 15 minute chart showing clear resistance and support levels. 68Figure 38 EUR/USD 30 minute chart showing clear resistance and support levels. 68Figure 39 1-hour EUR/USD chart displaying the resistance/support, MACD, SMAs, market entries, exitsand trend line . 69Figure 40 4-hour EUR/USD chart displaying resistance and support level and indicators . 69Figure 41 Overall account growth and equity growth of second demo account . 70Figure 42 depicting the total profit on third demo account . 71V


1. IntroductionTrading and Investments have a long history. Barter System is a very good example of an old system whichinvolved trading. This system has been used for centuries and long before the money was invented. Peopletraded services and goods for other services and goods in return. In ancient times, this system involvedpeople in the same area trading goods amongst themselves.In the modern world which is technologically advanced, the original barter system has vanished but theconcept of the barter system still exists. People have discovered newer ways of trading but the idea is stillthe same. Trading and Investments are mostly done through the internet these days.In addition to having such a long history, trading and investing are useful skills for individuals that wouldlike to save and accumulate wealth. Different reasons to increase the savings can be retirement plans,college funds for children, traveling, etc. The social security Act established in 1935 in the United Statescurrently provides financial safety to Americans after their retirement but this act can be removedanytime in the future. In fact, it is predicted that it might be repealed in the near future because the socialsecurity administration is expected to run out of money. In this scenario, people will want to ensure thesecurity of their finances for their retirement. One of the best ways to do this is to trade and invest moneyin different financial assets, including stocks, bonds, options, futures, foreign exchange currencies (forex)or commodities. While there are some similarities between trading in the stock market and trading forex,they are sufficiently different such that strategies must be developed to be specialized for one or theother.This project will focus on trading in the context of the forex market, in particular trading of the EUR/USDcurrency pair due to the fact that it generally has the largest average movement during a time periodwhich is most convenient for those living in the United States. First, some general but importantdefinitions related to finance will be discussed. Then an elaboration on the choice of forex for the focusof this project will take place, followed by important terminology particular to forex. Next, the types oftrading orders will be discussed and then market behavior guidelines and the methods used to analyzethe market, i.e. fundamental analysis and technical analysis. Finally, the individual trading strategies willbe discussed for the members of this project.1

Project DescriptionThe goal of this project will be to develop a manual trading strategy that generates profitable trades inthe Forex market. The first step to achieving this goal will be to understand the different financial marketsespecially the Forex market. Therefore, the group will make efforts to get the background knowledge inorder to achieve the project goals. Once, the group becomes familiarized with the Forex market and theterminologies associated, demo trading accounts will be set up on MetaTrader and FXTrade tradingplatform to practice trading. Each member of the group will develop a personal trading strategy whichthey will use to make trades. The goal will be to learn from each and every trade made in order to becomea better trader. This report will start off with the subject knowledge first and then will go into details ofthe trading strategies developed and the outcomes which followed.2

2. Background2.1 Financial Markets and Asset ClassesAsset classes may be defined as a group of securities which behave similarly and are subject to the samelaws. There are three main asset classes, namely: equities (or stocks), fixed income (or bonds), and cashequivalents (or money market instruments). Other than these main three, some professionals considerother things as asset classes such as currencies, commodities, real estate, and others. [1]2.1.1 StocksStocks, equities, or shares are essentially different ways of representing the same thing, that is, partialownership of a company.[2] When one owns stock in a company they are known as a shareholder (usuallyquite small), and the more stock one has in a given company, the more of the company one owns. This issimply a relatively efficient way of raising capital for the company. Being a shareholder provides severalbenefits including (but certainly not limited to) a share of the company’s earnings, and this is what enablestraders to make money.Most stocks are traded on exchanges which have historically been physical locations, but today, exchangesare mostly implemented electronically in computer networks. The stock market is a mechanism to simplifythe linking of buyers and sellers. Some examples of exchanges are the NYSE, and the NASDAQ which arethe two largest exchanges in the US. In particular, the NYSE is regarded as the most prestigious exchange,wherein a large number of trades are made in person on a trading floor. In contrast, the NASDAQ tradesthrough electronic networks, as previously mentioned.Stock prices change continually as a result of market driving forces which often, cannot be predicted. Butin general, they change because of supply and demand, that is, when a stock is in high demand, the priceof the stock moves up. Conversely, when the stock is in low demand, i.e. more people want to sell thanbuy the stock, then the price falls. The price movement of a particular stock can be thought of as anindicator as to what the investors believe the company is worth, which is indirectly a reflection of its valueand expected growth.3

2.1.2 BondsBonds exist as a result of large organizations’ need to borrow money. But typically banks cannot providesuch large sums of lending money, so they sell bonds to a public market. This way the buyer of the bondis essentially lending money to the seller of the bond, with the understanding that the money will be paidback by a certain date (maturity) with interest payments at a certain rate (called coupons). Bonds do nothave the possibility of making large percent returns of money as stocks do, but they are very low-risksecurities known as fixed income securities since the buyer knows how much money he will make if heholds it until the maturity date - that is - the date by which the issuer has to repay the amount borrowed.By the definition of a bond, it is debt, thus buying it makes one a creditor, rather than a shareholder as instocks. This contributes to the reduced risk because, in the event of bankruptcy, the bondholder has ahigher claim to the assets of the company and so they will be paid before a shareholder.[3]While bonds often appear less attractive than stocks (due to their low returns), they have some veryimportant uses. Clearly, for a retiree, the risk associated with stocks may be undesirable and so theirwealth should shift into bonds. Going to university is another example of a period of time where financialrisk must be reduced and investing in bonds would be appropriate.2.1.3 Cash EquivalentsCash equivalents are investments securities which have high credit quality and highly liquid. These areanother of the three main asset classes and can serve as an indicator of the health of a company’s financialsystem. A particular company's’ ability to generate cash and cash equivalents can help analysts estimatewhether it is a good investment choice. This is because it reflects the company’s ability to settle itspayments in a short amount of time. The five types of cash equivalents are Treasury bills, commercialpaper, marketable securities, money market funds and short-term government bonds.Treasury Bills are securities issued by the U.S. Department of Treasury. When these are issued, it isequivalent to saying that the company is lending money to the government. These bills can be providedin values of 1,000 to 5 million. The difference between the purchase price and the redemption valuebecomes the yield. [4]4

Commercial papers are used by large companies to settle short term debts such as the company's’ payroll.It is a promise to pay the face amount by the specified maturity date on the note.Marketable securities are assets and instruments that are easily converted into cash, making themextremely liquid. These are liquid because maturities often occur within one or fewer years. Additionally,these are not affected significantly by the rate at which they are traded.Money market funds are similar to checking accounts with higher interest rates from the depositedmoney. They provide organizations with efficacious tools to manage their money given that they aretypically more stable in relation to mutual funds as an example. Also, its share price stays at a fixed 1 pershare.Short-term government bonds are provided as funds for government projects by the government. Theymake use of the country’s domestic currency when issued and investors must consider political, inflation,and interest rate risks when investing in these types of bonds.2.1.4 CommoditiesCommodities consist of all of the basic goods that are used in commerce. This can include fundamentalfood items such as cocoa and coffee, or metals used in industry and precious metals. The same principlesof buying low and selling high with any investment, apply to commodities as well. However, commoditiesare leveraged significantly and trade by contract sizes instead of shares and this makes investing in gold,grains, oil, etc. much easier. [5]2.1.5 CurrenciesCurrencies are accepted forms of money used for making exchanges within the respective country of thecurrency - and the asset class of focus for this report. For example, the official currency of the UnitedStates of America is the US Dollar (USD), that of Great Britain is the British Pound (GBP), and for theEuropean Union - the Euro (EUR). There are some digital currencies such as bitcoin, dogecoin, and others,however, the exchange rates of these currencies can vary significantly in short amounts of time.Currencies are traded on the Foreign Exchange Market (FOREX market) where they are always traded inpairs by the ratio of the two currencies’ value. For example, the EUR/USD currency pair might be traded5

at 1.10 which means that the Euro is currently valued as being worth 1.10 US Dollars. The value ofcurrencies can vary by large amounts in relatively short periods of time based on any number of factors.This, combined with very high volume, liquidity, and leverage, makes the FOREX market an attractiveoption for traders.Exchange rates of currencies may be floating or fixed; floating if the value of the currency changesaccording to FOREX market changes, and fixed if the value is based on a different currency like gold or acurrency basket. The value of EUR/USD for example is floating since both the Euro and US Dollar arefloating currencies.There are as many tradeable currency pairs as there are currencies in the world and they are separatedinto major currency pairs and minor ones. The major currency pairs are those that trade the most volumeagainst the US Dollar which are EUR/USD, GBP/USD, USD/JPY, USD/CHF, AUD/USD, and USD/CAD. Theminor currency pairs are those which are not traded with the US Dollar - the higher volume ones consistof individual currencies from the major pairs, such as EUR/GBP, GBP/JPY, EUR/CHF. Additionally, there areexotic pairs which are not as liquid and possess much larger spreads such as the USD/HKD.[6]2.1.6 Real EstateReal estate is property consisting of land and the structures, resources, vegetation, etc. that are on it. Itmay be grouped into three categories. The first category, residential real estate can include undevelopedland, houses, condos, and townhouses. The second category, commercial real estate, can include officebuildings, warehouses, or retail stores. The third category, industrial real estate are factories, mines, orfarms.Real estate must be differentiated between ‘personal property’ and ‘real property’. Personal Propertyconsists of movable assets, unlike real property which is fixed to a location permanently. Personalproperty includes intangible items such as financial investments but also physical items such as clothes,vehicles, electronics, and washing machines. Real property, on the other hand, is real estate that is anyproperty which is physically attached to a piece of land. It is also important to note that it is specificallyland which has been modified through lawful human actions. To clarify, renters and leaseholders, forexample, do not own real estate since they only own the rights to occupy land or buildings.6

The most common type of real estate investments is becoming a homeowner. However, since the pricesof purchasing a home are often beyond what someone can afford, they borrow money in the form of amortgage. Mortgages can be either fixed rate or variable rate - in the former case, they generally havehigher interest rates than their variable rate counterpart, making them more expensive in the short term.This is because they are protected from substantial future scheduled payment increases. Variable ratemortgages simply do not have this protection.[7]2.2 The Forex MarketThe foreign exchange market, or more commonly known as the Forex market, is a global decentralizedmarket for the trading of currencies. This is the largest, most liquid financial market in the world with anaverage daily trading volume exceeding over 5.3 trillion. Forex trading allows the trader to buy and sellcurrencies at current or determined prices. The trading process is conducted electronically over-thecounter (OTC), which means that all transactions occur via the internet. [8] The market is open 24 hoursa day, five and a half days a week and currencies are traded worldwide in the major financial centers ofLondon, New York, Tokyo, Zurich, Frankfurt, Hong Kong, Singapore, Paris, and Sydney - across almostevery time zone. This means even though the US forex market opens from 8 AM to 5 PM only, we can stilltrade forex on another market which is open. For example, when the trading session in the U.S. ends, theforex market begins in Tokyo and Hong Kong.[9]Figure 1 FOREX trading hours [10]The foreign exchange market does not determine the relative values different currencies but set thecurrent market price of the value of one currency as demanded against another. That price is mainlydetermined by supply and demand. A currency's value fluctuates as its supply and demand fluctuates, justlike anything else. An increase in supply or a decrease in demand for a currency can cause the value ofthat currency to fall. A decrease in the supply or an increase in demand for a currency can cause the valueof that currency to rise. Many factors influence the price of the currencies, including current interest7

rates, econ

of this project will take place, followed by important terminology particular to forex. Next, the types of trading orders will be discussed and then market behavior guidelines and the methods used to analyze the market, i.e. fundamental analysis and technical