The word diversification has a slight positive connotation to it.…
I know, I know. I’m an advocate of value investing for stocks, and that’s my approach for investing. I debated with myself whether to write this post or not, and decided to go along with it because a) it’s a great book, b) maybe some of you are looking for some huge risk huge reward investing.
Investing in currencies is great. Unlike companies, currencies don’t “bankrupt”, and major currencies have far greater liquidity than stocks. You can still analyze stocks like countries. And while companies’ stocks can only be traded on the market hours of the listed market, spot forex and futures can almost be traded round the clock.
The book I’m introducing to you today is called Day Trading the Currency Market by Kathy Lien. Kathy is a managing director of FX Strategy for BK Asset Management and maintains a blog at http://www.kathylien.com/site/. You can buy her book at Amazon. Again, this is not a sponsored post. I recommend books only if it’s good enough to make it.
So without further ado, I want to borrow five strategies from the book to give you a sneak peek of the book’s contents. If you like these strategies, you can consider reading this book. Disclaimer: while this book I’m reviewing is published 2006, I believe its key concepts still apply today. The latest edition, the second edition, of this book is published in 2008.
1. Utilize Economic Release Data To Your Advantage
As of 2004 (and still applicable today IMO), the top market-moving indicators for dollar in order are unemployment (Nonfarm payrolls), interest rates (FOMC rate decisions), trade balance, inflation, retail sales, GDP, and current account. The author points out that the ranking importance of economic data can change over time, as noted in 1992 that unemployment was ranked 3rd most important, but has been 1st ever since 1997. You can visit Yahoo by clicking here for economic data release dates, times, and results, or call your broker who hopefully uses Reuters and Bloomberg to give you live updates on these data.
2. Get Familiar with Risk Management
Before engaging in any trade, always ask yourself, “Is the risk worth it?”. Establish a risk-reward ratio and ask yourself how much you are looking to gain and how much you are willing to lose. For example, if you estimate that you will gain $10 and willing to lose $5, you have a risk-reward ratio of 1:2. If you are limited by the funds you can invest, always go for the lowest risk-reward ratio (duh).
3. James Bond, Without the 7
As humans, we tend to think in round numbers. The author has identified that many times, a currency pair would “bounce off of double zero support or resistance levels intraday despite the currency trend” (Kathy Lien) and it usually offers an attractive risk-reward ratio. This is irrational, because it’s more in part psychologically, and so it works. Here is a long strategy that she proposes (exact word for word from book):
a) First, locate a currency pair that is trading well below its intraday 20-period simple moving average on a 10- or 15-minute chart.
b) Next, enter a long position several pips below the figure (no more than 10).
c) Place an initial protective stop no more than 20 pips below the entry price.
d) When the position is profitable by double the amount that you risked, close half of the position and move your stop on the remaining portion of the trade to breakeven. Trail your stop as the price moves in your favor.
4. What Channel Are You Watching?
A channel is when we draw a trend line and draw a line parallel to the trend line and find that most of the price activity are contained within the two trend lines. Usually the lines just touch the highest / lowest points of the price activities and these activities are usually contained within a narrow channel. We are looking for a breakout from either direction of the channel. This is best used prior to a major economic event (some ideas listed in #1) or prior to opening of a major financial market.
Another strategy the author proposes exact word for word:
a) First, identify a channel on either an intraday or a daily chart. The price should be contained within a narrow range.
b) Enter long as the price breaks above the upper channel line.
c) Place a stop just under the upper channel line.
d) Trail your stop higher as the price moves in your favor.
5. In A Relationship With Commodities
Certain currencies have a strong correlation with certain commodities, namely gold and oil. Take AUD (Australian Dollar) and Gold for example.
The reason for this correlation is that Australia is the world’s third largest producer of gold, and it’s a country known to rely on exporting commodities (insert personal opinion: of course, things can change so this may not hold true forever!). The author states that since commodity prices are generally leading indicators for currencies, you can guess what is going to happen to AUD after seeing what happens to gold.
So there you go, five simple strategies that you can start using immediately. There are more advanced strategies you can use, and you may need to have a basic understanding of some technical terms, but in general it’s a book that isn’t too difficult to comprehend with a bit of homework on your own part. My two cents? The book’s strategies are focused more on technical analysis than fundamental analysis, and its technical strategies are more specific and are more applicable for immediate usage. The book covers other topics as well, including the Forex market’s brief history (such as Bretton Woods and George Soros), the characteristics of major currency pairs, and more.
Once again, if you were intrigued with this post, or if you have so much money you don’t mind risking some money for some fast and exciting cash and want to learn more about this topic, you can buy the book by going to Amazon.
If you’re a Forex trader, what other simple strategies can we use to our advantage?