Table of Contents

Title Page

Copyright Page

Preface

FOREIGN EXCHANGE—THE FASTEST-GROWING MARKET OF OUR TIME

HISTORICAL EVENTS IN THE FX MARKET

DIFFERENT WAYS TO TRADE THE FX MARKET

WHAT MOVES THE CURRENCY MARKET?

WHAT ARE THE BEST TIMES TO TRADE FOR INDIVIDUAL CURRENCY PAIRS?

WHAT ARE THE MOST MARKET-MOVING ECONOMIC DATA?

WHAT ARE CURRENCY CORRELATIONS AND HOW DO TRADERS USE THEM?

HOW TO TRADE LIKE A HEDGE FUND MANAGER

SEASONALITY IN THE CURRENCY MARKET

TRADE PARAMETERS FOR DIFFERENT MARKET CONDITIONS

TECHNICAL TRADING STRATEGIES

FUNDAMENTAL TRADING STRATEGIES

PROFILES AND UNIQUE CHARACTERISTICS OF THE MAJOR CURRENCY PAIRS

Acknowledgements

CHAPTER 1 - Foreign Exchange—The Fastest-Growing Market of Our Time

EFFECTS OF CURRENCIES ON STOCKS AND BONDS

COMPARING THE FX MARKET WITH FUTURES AND EQUITIES

DIFFERENT WAYS TO TRADE FX

WHO ARE THE PLAYERS IN THE FX MARKET?

CHAPTER 2 - Historical Events in the FX Market

BRETTON WOODS: ANOINTING THE DOLLAR AS THE WORLD CURRENCY (1944)

END OF BRETTON WOODS: FREE MARKET CAPITALISM IS BORN (1971)

PLAZA ACCORD—DEVALUATION OF U.S. DOLLAR (1985)

GEORGE SOROS—THE MAN WHO BROKE THE BANK OF ENGLAND

ASIAN FINANCIAL CRISIS (1997-1998)

INTRODUCTION OF THE EURO (1999)

CHAPTER 3 - What Moves the Currency Market in the Long Term?

FUNDAMENTAL ANALYSIS

TECHNICAL ANALYSIS

CURRENCY FORECASTING—WHAT BOOKWORMS AND ECONOMISTS LOOK AT

CHAPTER 4 - What Moves the Market in the Short Term?

NOT ALL ECONOMIC RELEASES ARE CREATED EQUAL

RELATIVE IMPORTANCE OF ECONOMIC DATA CHANGES WITH TIME

GROSS DOMESTIC PRODUCT—NO LONGER A BIG DEAL

HOW CAN YOU USE THIS TO YOUR BENEFIT?

RESOURCE

CHAPTER 5 - What Are the Best Times to Trade for Individual Currency Pairs?

ASIAN SESSION (TOKYO): 7 P.M.-4 A.M. EST

U.S. SESSION (NEW YORK): 8 A.M.-5 P.M. EST

EUROPEAN SESSION (LONDON): 2 A.M.-12 P.M. EST

U.S.-EUROPEAN OVERLAP: 8 A.M.-12 P.M. EST

EUROPEAN-ASIAN OVERLAP: 2 A.M.-4 A.M. EST

CHAPTER 6 - What Are Currency Correlations and How Do Traders Use Them?

POSITIVE/NEGATIVE CORRELATIONS: WHAT THEY MEAN AND HOW TO USE THEM

IMPORTANT FACT ABOUT CORRELATIONS: THEY CHANGE

CALCULATING CORRELATIONS YOURSELF

SAMPLE CORRELATIONS RESULTS

CHAPTER 7 - Seasonality—How It Applies to the FX Market

SEASONALITY IN JANUARY

SUMMER SEASONALITY

OTHER CASES OF SEASONALITY

INCORPORATING SEASONALITY INTO YOUR TRADING

CHAPTER 8 - Trade Parameters for Different Market Conditions

KEEPING A TRADING JOURNAL

HAVE A TOOLBOX—USE WHAT WORKS FOR THE CURRENT MARKET ENVIRONMENT

STEP ONE—PROFILE TRADING ENVIRONMENT

STEP TWO—DETERMINE TRADING TIME HORIZON

RISK MANAGEMENT

PSYCHOLOGICAL OUTLOOK

CHAPTER 9 - Technical Trading Strategies

MULTIPLE TIME FRAME ANALYSIS

FADING THE DOUBLE ZEROS

WAITING FOR THE REAL DEAL

INSIDE DAY BREAKOUT PLAY

THE FADER

FILTERING FALSE BREAKOUTS

CHANNEL STRATEGY

PERFECT ORDER

HOW TO TRADE NEWS RELEASES

20-100 SHORT-TERM MOMENTUM STRATEGY

HIGH-PROBABILITY TURN STRATEGY

CHAPTER 10 - Fundamental Trading Strategies

PICKING THE STRONGEST PAIRING

LEVERAGED CARRY TRADE

COMMODITY PRICES AS A LEADING INDICATOR

USING BOND SPREADS AS A LEADING INDICATOR FOR FX

FUNDAMENTAL TRADING STRATEGY: RISK REVERSALS

USING OPTION VOLATILITIES TO TIME MARKET MOVEMENTS

FUNDAMENTAL TRADING STRATEGY: INTERVENTION

USING EQUITIES TO TRADE FX

TRADING THE CORRELATION WITH FUNDAMENTALS

TRADING THE CORRELATION WITH TECHNICALS

CHAPTER 11 - How to Trade Like a Hedge Fund Manager

PROPERLY DEFINING THE TRADING STRATEGY

THE ART OF ENTERING AND EXITING

TEST DRIVE

GETTING INTIMATE

SELF-REFLECTION

CHAPTER 12 - Profiles and Unique Characteristics of Major Currency Pairs

CURRENCY PROFILE: U.S. DOLLAR (USD)

CURRENCY PROFILE: EURO (EUR)

CURRENCY PROFILE: BRITISH POUND (GBP)

CURRENCY PROFILE: SWISS FRANC (CHF)

CURRENCY PROFILE: JAPANESE YEN (JPY)

CURRENCY PROFILE: AUSTRALIAN DOLLAR (AUD)

CURRENCY PROFILE: NEW ZEALAND DOLLAR (NZD)

CURRENCY PROFILE: CANADIAN DOLLAR (CAD)

About the Author

Index

Founded in 1807, John Wiley & Sons is the oldest independent publishing company in the United States. With offices in North America, Europe, Australia and Asia, Wiley is globally committed to developing and marketing print and electronic products and services for our customers’ professional and personal knowledge and understanding.

The Wiley Trading series features books by traders who have survived the market’s ever changing temperament and have prospered—some by reinventing systems, others by getting back to basics. Whether a novice trader, professional or somewhere in-between, these books will provide the advice and strategies needed to prosper today and well into the future.

For a list of available titles, visit our Web site at www.WileyFinance.com.

Copyright © 2009 by Kathy Lien. All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey.
Published simultaneously in Canada.

No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, (978) 750-8400, fax (978) 646-8600, or on the web at www.copyright.com. Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, (201) 748-6011, fax (201) 748-6008, or online at http://www.wiley.com/go/permissions.

Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose. No warranty may be created or extended by sales representatives or written sales materials. The advice and strategies contained herein may not be suitable for your situation. You should consult with a professional where appropriate. Neither the publisher nor author shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages.

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Library of Congress Cataloging-in-Publication Data:

eISBN : 978-0-470-46627-8

1. Foreign exchange futures. 2. Foreign exchange market. 3. Speculation. I. Lien,
Kathy, 1980-. Day trading the currency market. II. Title.
HG3853.L54 2009
332.4’5 - dc22
2008034576
.

Preface

Since the first edition of Day Trading the Currency Market, which was published in 2005, the foreign exchange market has changed dramatically. The most notable change is the fact that daily average volume now exceeds $3 trillion, a 70 percent jump over the past three years. As a direct result of this surge in interest, more participants have flooded the markets with different ways to trade currencies.

The popularity of the Day Trading the Currency Market book has encouraged me to give the second edition a twist—this time I have added swing trading strategies!

After having taught seminars across the country on how to trade currencies, I have received a lot of good feedback about the book (thank you!), and I hope that everyone will enjoy the new techniques in the second edition just as much as you have enjoyed the strategies and lessons in the first!

The original book focuses heavily on fundamentals, but the new edition includes chapters on trading methodologies, statistical analysis, and, of course, additional strategies.

I have also added comprehensive sections on how to trade like a hedge fund manager and the impact of seasonality in the currency market.

If you are picking up a copy of Day Trading and Swing Trading the Currency Market for the very first time, you will not be disappointed. As a trader first and an analyst second, in this book I focus on what matters most to currency traders. The first edition has been one of the top resources for those looking for a good primer on how the currency markets work—the technical and fundamental drivers as well as actionable trading strategies.

There is something for everyone in this book, as it is designed for both the beginner and the advanced trader. In this book, I try to accomplish two major goals: to touch on the basics of the FX market and the currency characteristics that all traders, particularly day traders, need to know, as well as to give you practical strategies to start trading. Day Trading and Swing Trading the Currency Market goes beyond what other currency trading books cover and delves into such interesting topics as the top market-moving indicators for the U.S. dollar and what currency correlations are and how to use them. Here’s a brief road map to whet your appetite on the topics covered in this book.

FOREIGN EXCHANGE—THE FASTEST-GROWING MARKET OF OUR TIME

If you are wondering whether you should get into the FX market, take a look at some of the reasons why the largest market in the world has always been the market of choice for the big players such as hedge funds and institutional investors. Learn about why the FX market has exploded over the past three years and the advantages that the FX spot market has over the more traditional equities and futures markets—something that the most seasoned traders of the world have known for decades.

HISTORICAL EVENTS IN THE FX MARKET

How can you trade the currency market without knowing some of the major milestones that helped to shape the market into what it has become today? There are countless events that are still talked about and brought up despite the many years that have passed since they occurred. This chapter covers Bretton Woods, the end of the Bretton Woods, the Plaza Accord, George Soros and how he came to fame, the Asian financial crisis, the launch of the euro, and the bursting of the technology bubble.

DIFFERENT WAYS TO TRADE THE FX MARKET

Over the past few years, the FX market has evolved significantly. Many products have been introduced as alternative ways to invest in or trade currencies. Foreign exchange spot is the oldest of these markets and represents the underlying asset for a lot of the new derivative products. Options, futures, and forwards are the next oldest, but forwards are generally limited to a nonretail audience. An entire book can be dedicated to the differences between all of the new derivative products, but for the purpose of this new edition, I provide some basic descriptions as well as general advantages and disadvantages (there may be many others that are not included in this new section).

WHAT MOVES THE CURRENCY MARKET?

What moves the currency market is probably one of the most common questions asked by new traders. Currency fluctuations can be dissected into short-term and long-term movements. Chapter 3 covers some of the more macro longer-term factors that impact currency prices. This chapter was thrown in to keep traders from losing sight of the bigger picture and how these longer-term factors on both a technical and a fundamental basis will always come back into play regardless of the shorter-term fluctuations, which are covered in Chapter 4. We also explore the different valuation models for forecasting currency rates, which can help more quantitative fundamental traders to develop their own methodology for predicting currency movements.

WHAT ARE THE BEST TIMES TO TRADE FOR INDIVIDUAL CURRENCY PAIRS?

Timing is everything in currency trading. In order to devise an effective and time-efficient investment strategy, it is important to note the amount of market activity around the clock in order to maximize the number of trading opportunities during a trader’s own market hours. This section outlines the typical trading activity of major currency pairs in different time zones to see when they are the most volatile.

WHAT ARE THE MOST MARKET-MOVING ECONOMIC DATA?

For day traders, knowing which pieces of U.S. data move the market the most can be extremely valuable. System traders need to know when it is worthwhile to turn their systems off, while breakout traders will want to know where to place their big bets based on what economic releases typically set off the largest movements. This section, with updated data, not only ranks the importance of U.S. data, but it also reports on the knee-jerk reaction in pip values and whether there is usually a follow-through over the remainder of the day.

WHAT ARE CURRENCY CORRELATIONS AND HOW DO TRADERS USE THEM?

Everything in the currency market is interrelated to some extent, and knowing the direction and strength of the relationships between different currency pairs can be an added advantage for all traders. When trading in the FX market, one of the most important facts to remember in creating a strategy is that no currency pair is isolated. Knowing how closely correlated the currency pairs are in your portfolio is a great way to measure exposure and risk. Many traders may find themselves thinking that they are diversifying their portfolio by investing in different currency pairs, but few realize that many pairs actually have a tendency to move in the same direction or opposite to each other historically. The correlations between pairs can be strong or weak and last for weeks, months, or even years, which makes learning how to use and calculate correlation extremely important. New correlations have been added for this edition.

HOW TO TRADE LIKE A HEDGE FUND MANAGER

This new chapter on how to trade like a hedge fund manager is really about the steps to developing a successful trading strategy. Having worked with many money managers and been involved in the process of launching managed fund products, I have realized that all money managers work in a similar way. Their strategies may be different, but the way they go about developing these strategies is not. This section includes the five steps to thinking and trading like a hedge fund manager.

SEASONALITY IN THE CURRENCY MARKET

Most traders attempt to analyze the future direction of currencies by using either fundamental or technical analysis or, if they’re feeling particularly crafty, a combination of both. However, many traders may not realize that the clearest way to analyze past price behavior may be to look at price activity itself, without the noise of indicators. One way to do this is through seasonality, which may be a concept familiar to many stock traders. This new chapter discusses seasonality in the currency market.

TRADE PARAMETERS FOR DIFFERENT MARKET CONDITIONS

The most important first step for any trader, regardless of the market that you are trading in, is to create a trading journal. However, the FX trading journal is not just any trading journal. Aside from the typical listing of your trade ideas and executed trades with targets and stops, the FX trading journal also teaches you how to create a currency pair checklist that takes approximately 10 minutes to fill out and gives you a near-immediate insight on the exact technical picture for each currency pair. Trading effectively means having a game plan, and we systematically dissect a game plan for you in this chapter, teaching you how to first profile a trading environment and then know which indicators to apply for that trading environment.

TECHNICAL TRADING STRATEGIES

This is the meat of the book for advanced traders. This section covers some of my favorite trading strategies for day and swing traders. Each strategy comes with rules and examples. Three new strategies have been added to this chapter, including how to trade news, how to effectively time market turns, and how to capture a new shift in momentum. Many of these strategies exploit specific characteristics of the FX market that have been observed across time. There are strategies for all types of traders—range, trend, and breakout.

FUNDAMENTAL TRADING STRATEGIES

The fundamental strategies chapter is more for medium-term swing traders who go not for 15 to 20 points but for 150 to 200 points or more. This section will teach you how to trade off commodity prices, fixed income instruments, and option volatilities. It also covers intervention-based trades, macro-event-driven trades, and the secret moneymaking strategies used by hedge funds between 2002 and 2004, which is the leveraged carry trade.

PROFILES AND UNIQUE CHARACTERISTICS OF THE MAJOR CURRENCY PAIRS

The final chapter of this book is probably one of the most valuable. This updated material goes over the unique characteristics of each major currency pair: when they are most active, what drives their price action, and which economic data releases are most important. A broad economic overview and a look into each central bank’s monetary policy practices are given.

I hope you enjoy the book!

Acknowledgments

Thank you to my wonderful team for their invaluable research and support:

Boris Schlossberg

Richard Lee

Sam Shenker

Melissa Tuzzolo

Daniel Chen

Bosco Cheng

Jenny Tang

Vincent Ortiz

John Kicklighter

Ehren Goossens

And others:

Kristian Kerr

Randal Nishina

The Entire Staff at FXCM

CHAPTER 1

Foreign Exchange—The Fastest-Growing Market of Our Time

The foreign exchange market is the generic term for the worldwide institutions that exist to exchange or trade currencies. Foreign exchange is often referred to as “forex” or “FX.” The foreign exchange market is an over-the-counter (OTC) market, which means that there is no central exchange and clearinghouse where orders are matched. FX dealers and market makers around the world are linked to each other around the clock via telephone, computer, and fax, creating one cohesive market.

Over the past few years, currencies have become one of the most popular products to trade. No other market can claim a 71 percent surge in volume over a three-year time frame. According to the Triennial Central Bank Survey of the foreign exchange market conducted by the Bank for International Settlements and published in October 2007, daily trading volume hit a record of $3.2 trillion, up from $1.9 trillion in 2004. This is estimated to be approximately 20 times larger than the daily trading volume of the New York Stock Exchange and the Nasdaq combined. Although there are many reasons that can be used to explain this surge in activity, one of the most interesting is that the timing of the surge in volume coincides fairly well with the emergence of online currency trading for the individual investor.

EFFECTS OF CURRENCIES ON STOCKS AND BONDS

It is not the advent of online currency trading alone that has helped to increase the overall market’s volume. With the volatility in the currency markets over the past few years, many traders are also becoming more aware of the fact that currency movements also impact the stock and bond markets. Therefore, if stocks, bonds, and commodities traders want to make more educated trading decisions, it is important for them to follow the currency markets as well. The following are some of the examples of how currency movements impacted stock and bond market movements in the past.

Lesen Sie weiter in der vollständigen Ausgabe!

Lesen Sie weiter in der vollständigen Ausgabe!

Lesen Sie weiter in der vollständigen Ausgabe!

Lesen Sie weiter in der vollständigen Ausgabe!

Lesen Sie weiter in der vollständigen Ausgabe!

Lesen Sie weiter in der vollständigen Ausgabe!

Lesen Sie weiter in der vollständigen Ausgabe!

Lesen Sie weiter in der vollständigen Ausgabe!

Lesen Sie weiter in der vollständigen Ausgabe!

Lesen Sie weiter in der vollständigen Ausgabe!

Lesen Sie weiter in der vollständigen Ausgabe!

Lesen Sie weiter in der vollständigen Ausgabe!

Lesen Sie weiter in der vollständigen Ausgabe!