Introduction
·
One increasingly popular way of capitalizing on
the up & down movements in the financial markets is through currencies.
·
In currency trading we can turn headlines into
trading opportunities
·
It is best to stick with the most actively
traded currencies
·
Forex vs Stocks
o The
high amount of leverage available to forex traders magnifies profits &
losses, which is why the holding period of currency investments tends to be
shorter than equity investments.
Chapter 5 - Movers & Shakers
·
When there’s news of political instability,
currency traders usually sell first and ask questions later.
·
Central banks physically intervene in the
foreign exchange market by buying & selling their currency.
·
On a given day, a currency pair typically moves
by 100 pips throughout the day but when central banks intervene, it can move
anywhere from 150 pips to 300 pips in a matter of minutes.
·
Usually, fundamentals (or the reason for the
previous move) eventually catchup and resumes its prior trend.
·
Interest rates
o Interest
rate changes are the most important long-term drivers for currencies
o When
investors move their funds into countries with highest interest rates (to get
better yields on the deposits), the value of that currency increases.
·
Knowing the potential impact of their comments,
the central bank officials are usually vague. Therefore, traders have to read
between the lines and interpret their message.
·
For example, approx. a week before the Reserve
Bank of Australia raised rates in April, Central Bank Governor Glenn Stevens
said that he did not think rates were at “normal levels” yet. The AUD/USD began
to raise and, in the end, we learned that his comments were a direct precursor
to the 25bp point hike in April.
·
Top 3 market-movers:
o Employment
reports
§ Strong
job market > greater spending > higher growth > positive for country’s
currency
§ In
US, Non-Farm Payroll report can trigger a big reaction in EUR/USD.
§ It
can move by 100 pips in one or two hours.
o Retail
sales
§ Strong
consumer spending – good for currency
§
o Manufacturing
& service sector data
§ PMI
– Purchase Manager’s Index (in US, ISM – Institute for Supply Management
Report)
§ >
50 indicates expansion and growth = gain in currency
§ <
50 indicates economic contraction =weakness in currency
·
Traders have to be particularly careful when
trading news because when large surprises emerge, sharp movements can occur,
which makes it extremely important to limit your exposure and manage your risk.
·
If there is no news or economic data released,
the currency market will take its cue from the stock indices.
·
If stocks are down materially, that is usually
synonymous with risk aversion, which encourages forex traders to seek safely in
low-yielding currencies and reduce exposure to high-yielding ones.
Chapter 6 – Investor vs Trader
·
A strategy can involve holding a position for a
few minutes or holding it for days.
·
Successful traders do not fit their
personalities to their trading activities but rather find approaches that are
in-line with their personalities.
·
There are traders who prefer to hang-out and
wait for the perfect opportunity and others who cannot resist being in the
market and participating even if it means smaller profits
·
No matter how much discipline you possess, if
you are trading contrary to your natural impulses you will eventually sabotage
your trading plan and will fail.
Chapter 7 – What Winners Do
·
Stay with the trend, bag the winners and know
when to get out.
·
T1-T2 method – Target 1 & Target 2
o
Have two target profits. When you reach target
1, close half the position. And let the rest of your position run your course
upto or beyond your target 2. You can add a trailing stop to benefit from the
favorable trend.
·
Better to have 7 in 10 wins with less profit
that 1 in 10 wins with a huge profit. The later is more like gamble and you
will end up losing. Former give you mental peace.
·
If the trend has become overextended, avoid
chasing the price move. Chasing price is the most dangerous thing to do.
Chapter 8 – So You’re an Investor?
Slow and Steady wins the race
·
Bollinger Band method is great to find trends
·
If a currency pair is trading between the upper
or lower Double Bollinger Bands, then it is in trend.
Chapter 9 – So You’re a Trader?
·
Trade based on news release can be risky because
the markets are exceptionally volatile after the release and brokers could
widen their spreads
·
Sifting through the headlines
o Is
the news important?
o Is
the surprise large enough?
§ Rule
of thumb – if the surprise is greater or less than 5% of forecast, it is
considered a big surprise (sometimes 2%)
§ Wait
5 minutes before getting into a trade
o Is
the surprise in-line with the market’s sentiment?
Chapter 10 – Risky Business –
Protecting your money in Uncertain Times
·
Deciding whether a trade is worth the risk or
not:
o How
deep is the retracement or dip?
§ Deep
correction increases the risk of currency pair breaking its uptrend
o Is
there a good fundamental reason behind the decline in the currency pair?
o Could
tomorrow’s news release hurt the trade?
o What
is the general sentiment in the market?
o Which
key levels could affect the trade?
·
Timing
o Beginning
of the Asian trading session is typically the quietest times
o Major
currencies usually trade in very tight ranges between end of NY trading session
(4.00 PM ET) and the beginning of the European trading session (2.00 AM ET)
o During
this time more “fake-outs” may occur rather than a true break-out.
o Is
it the right time of day for my trading strategy?
o Is
it the best currency pair to trade?
Chapter 11 – The Top 10 mistakes
1. Trading
out of boredom or anger
2. Having
unrealistic expectations
3. Taking
highly correlated trades
4. Failing
to use a stop
5. Taking
unnecessary risks
6. Being
too patient with losers and not patient with winners
o It
is generally smarter to bag a small profit early and leave open a part of the
position in case a large trend emerges
7. Being
a “Possum Trader”
o Having
a losing trade and deciding to shut-off your computer or walking away with hope
that it will turn around if you stopped watching. – losses may become greater
8. Taking
on too much leverage
9. Over-optimizing
your strategy
o If
someone is showing you back tested results with a 1,000 % return, you should be
highly skeptical because they have probably over-optimized their robot/strategy
to show you perfect trading record. Back-tested strategy may be difficult to
replicate in reality.
10. Becoming
a demo billionaire
o Just
because you can make a 500% return in your demo account doesn’t mean you can
replicate the same in your live account.
Chapter 13 – Getting Down to
Business
·
Start the day fresh
o Catchup
on news flow ever start of day
·
Plan the trades
o Have
a short-term trade plan and long-term trade plan
·
“Watch the downside, the upside will take care
of itself”
Chapter 14 – Crash, Burn &
Learn
·
Keep a trading log
o Excel
sheet with
§ Running
tally of trades
§ Currency
pair traded
§ Strategy
used
§ Time
entered
§ Price
entered
§ Stop
§ Profit/loss
§ Notes/comments
– helps to review and improve
·
Stick to currencies with small spreads
·
Use the right stop, or a trailing stop to pocket
profits
Terms
·
Alpha – “excess” return that a manager earns
above & beyond a benchmark index like S&P or a risk-free investment
such as treasuries.
·
Base Currency & Counter Currency: E.g.
EUR/USD – EUR is base currency, USD is counter currency
·
Nick names:
o USD
– buck, greenback
o AUD
– aussie
o CAD
– loonie
o NZD
- kiwi
o GBP
– pound, sterling, cable
·
PMI – Purchase Manager’s Index (in US, ISM –
Institute for Supply Management Report)
·
Best time to trade:
o US
& European market overlap 12.00 and 17.00 GMT
§ 7.00
AM EST to 12.00 PM EST
o Tokyo
& European overlap
·
Fundamental Analysis – aims to determine the
overall trends
Technical Analysis – pinpoints exact entries & exits
