Day Trading and Swing Trading the Currency Market

12/01/2008 11:58 am EST

Focus: STRATEGIES

Kathy Lien

Managing Director and Co-Founder BKForex LLC, BK Asset Management

Since the first edition of her book, Day Trading and Swing Trading the Currency Market was released in 2005, Kathy Lien has become much more familiar to the trading public. I am familiar with her seminars and interviews, but this is my first time reviewing one of her books. The book starts with a review of the growth of the interest in the currency markets over the past few years. For much of the past thirty years, the public was only able to trade currencies in the futures markets, as the cash markets were accessible mainly only to institutions. The discussion of how this market has changed with the influx of individual traders and the way it works are handled well, as it presents a review of the historical events that have impacted the FX markets since WWII. These chapters are a good lead in, as Kathy then discusses what factors move the currencies on both a long- and a short-term basis. An interesting table is included that reviews which economic reports cause the most dramatic moves in the euro. It is noted that this list has changed over the years, but the information will benefit the new trader as it should help them better deal with the high volatility that often accompanies the release of various reports.

With the broad marketing of FX trading as 24/7, the chapter that looks at what the best times to trade specific currency pairs is quite important. Many novice traders make the mistake of trading during the very quiet time periods and only later realize that the lack of activity during these periods increases their risk significantly. Also, many do not realize which currency pairs have a high or low correlation, which can also severely impact their results. If a trader takes a position in two different pairs for greater diversification, they are often disappointed when the high correlation of the pairs they choose makes them less diversified rather than more. There is also a chapter on seasonality, a topic rarely discussed in other FX books, but some of the seasonal patterns that Kathy discusses are eye opening. For example, would you buy a currency in January if you knew that over the past eleven years it had been down 82% of the time for the month? I don’t think so. This is some very interesting data that could help both novice and more experienced traders.

Before spending some considerable time discussing the rules for various trading strategies that Kathy finds useful, she outlines why a trading journal is essential and which information it should contain. Although you may have seen some of the trading setups before, each one is accompanied by her strict rules for stop loss placement, as well as exiting the trade. She clearly believes (as I do) that consistent discipline is needed in order to trade successfully. Also included are the rules for one method that she uses to trade news releases. These strategies are clearly explained and could be easily applied to both demo and real-time accounts. Though the technical strategies section makes up almost a fifth of the book, she also then spends a fair amount of time discussing fundamental strategies. Later chapters also include using the movement of commodities and equities to determine the direction of a currency.

The book concludes with a chapter on “How to Trade Like a Hedge Fund Manger,” which is broken down into five sections that are designed to guide you in the right direction and to put you in a proper frame of mind. In her conclusion, Kathy shares her insights into each of the major currency pairs. This includes not only the economic forces that help drive a currency such as the euro up or down, but also monetary and economic data that is likely to influence them. This is well thought out and reveals in a concise manner the key information that a professional trader such as Kathy follows on a regular basis. Though this book contains a wealth of information for the novice trader, a concluding chapter to bring together the wide range of topics covered could have been helpful. For someone who is already trading FX, the benefits from the book might be more subtle, but they could provide additional insight into the processes that Kathy uses to analyze the forex markets.

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