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Bulkowski's Book Review: Day Trading the Currency Market

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As of 02/19/2019
  Industrials: 25,891 +8.07 +0.0%
  Transports: 10,618 +49.99 +0.5%
  Utilities: 743 +4.68 +0.6%
  Nasdaq: 7,487 +14.36 +0.2%
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Tom's Targets    Overview: 02/14/2019
26,000 or 24,600 by 03/01/2019
10,900 or 9,900 by 03/01/2019
755 or 725 by 03/01/2019
7,700 or 7,050 by 03/01/2019
2,825 or 2,650 by 03/01/2019

Written by and copyright © 2005-2019 by Thomas N. Bulkowski. All rights reserved. Disclaimer: You alone are responsible for your investment decisions. See Privacy/Disclaimer for more information. Some pattern names are the registered trademarks of their respective owners.

This page reviews Kathy Lien's book, Day Trading the Currency Market.

About the Author

According to the book jacket flap, Kathy Lien is the Chief Currency Strategist at Forex Capital Markets where she provides technical and fundamental research reports, commentaries, and trading strategies. Before that, she worked as an associate in cross-markets and foreign exchange trading at JPMorgan Chase. She has appeared on CNBC and has been quoted on CBS MarketWatch and Reuters. Stocks & Commodities, CBS MarketWatch, Active Trader, Futures, and SFO have published her work. Lien has a bachelor degree in finance from NY University.

Inside the Book

What first struck me about her book is the quality of the writing. The way the words are phrased, how she develops the narrative, and the tone all suggest that "I know what I'm talking about" without her having to say so. It is a refreshing change from other books written by less talented writers.

The book is about the Forex market (FX). Lien begins the first chapter by comparing the FX market to other types of markets such as equities and futures. The Forex market is the largest in the world, trades continually with low transaction costs, customizable leverage up to 200 times (for miniature accounts, otherwise 100x), and is well suited to technical analysis. "For technical analysts, currencies rarely spend much time in tight trading ranges and have the tendency to develop strong trends," she writes. "Technical analysis works well for the FX market and a technically trained trader can easily identify new trends and breakouts which provide multiple opportunities to enter and exit positions." The FX market has a more streamlined and reliable order entry system so error and transaction costs are minimized. "The over-the-counter structure of the FX market eliminates exchange and clearing fees, which in turn lowers transaction costs. Costs are further reduced by the efficiencies created by purely electronic marketplace that allows clients to deal directly with the market maker, eliminating both ticket costs and middlemen," she writes.


Chapter 2

Chapter 2 takes a historical look at the FX market and it is a fascinating read. It covers the Bretton Woods standard in 1944 that created the framework for governing the international economy. The Smithsonian Agreement in 1971 tried to maintain fixed exchange rates while eliminating the gold standard but also allowing the value of the dollar to float in a wider range (2.25% from under 1%). That agreement lasted about 6 months.

Then came the Plaza accord (1985), which allowed the value of the dollar to decline against other currencies. The U.S. failed to honor its commitment to reduce its budget deficit arguably sending Japan into a 10-year recession while the U.S. prospered under the agreement.

Next, Lien takes a wonderful trip down memory lane and discusses how George Soros "broke the bank of England" (1992). George bet $10 billion on short positions against the British pound, suggesting that the currency would be devalued. The bank of England tried to fend off the attack by raising interest rates and making the pound look more attractive to investors, but when other speculators and traders jumped on board the Soros train, the wheels came off the pound and it tumbled. The currency dropped almost 15% against the deutsche mark and 25% against the dollar over a 5 week span, giving Soros a $2 billion profit.

She discusses the Asian financial crisis that started in 1997 and resulted in once-high regarded currencies imploding upon themselves. Then the Euro appeared in 1999 and all was right with the world again. Well, sorta.

Chapters 3 and 4

Chapter 3 shows the various factors that move currencies over the long term and chapter 4 examines the short term. Page 58 is where the good stuff begins with her analysis of the dollar in 2004 and what moves it during the first 20 minutes after an announcement.

1. Unemployment (nonfarm payrolls, avg range: 124 pips)
2. Interest rates (FED rate decisions, avg range: 74 pips)
3. Trade balance: 64 pips
4. Inflation: 44 pips
5. Retail sales: 43 pips
and so on.

She shows the daily effects of these announcements, too, and cautions that they change over time. In 1992, for example, the trade balance announcement moved markets the most during the first 20 minutes after the announcement.

Chapter 5

The next chapter discusses the best times to trade the various markets. She shows a table of average pip ranges from 2002 to 2004, separated by currency pair, for the various time frames. She also explores the volatility of the currency pairs because a currency that has the heart beat of a dead animal is useless as a trading vehicle. She shows graphs of the various currency pairs versus the daily trading range for each market.

Chapter 6

Chapter 6 is a brief look at the correlation between currency pairs. Why is this important? Because trading two correlated pairs is like having a double position in one pair.


Chapter 7

Chapter 7 is "Trade parameters for different market conditions," and even though I trade stocks and not the Forex, her trading journal piqued my interest. She creates a table of currency pairs, their price and whether they are trending or range bound. She differentiates the two by looking at the ADX, Bollinger band crosses, moving average crosses, RSI, and Stochastics. The behavior of the 10 entry grid will tell you if you should concentrate in trading a particular currency pair by using range bound tactics (selling at peaks, buying at valleys) or trending (buying-n-riding, sellin' and chillin').

Lien walks you through the trading environment (range or trend), the anticipated hold time, and risk management. She also says that "Whether you are trading Forex, equities, or futures, there are 10 trading rules that successful traders should live by:

  1. Limit losses.
  2. Let profits run.
  3. Keep position sizes reasonable.
  4. Know risk-reward ratio.
  5. Be adequately capitalized.
  6. Trade with the trend.
  7. Never add to losing positions.
  8. Know market expectations.
  9. Learn from mistakes
  10. Set a max loss or retracement of profits.

Chapters 8 and 9

These two chapters are where she opens her toolbox and lets you take a peak. She begins with "multiple time frame analysis," "fading the double zeros" (00 -- as in round numbers as they apply to the Forex market), "waiting for the real deal" (trading after false breakouts), inside days, fading, strategies for eliminating false breakouts, trading channels, and using moving averages that line up in "perfect order."

Then she discusses fundamental setups in chapter 9. "Picking the strongest pairing," "leveraged carry trade," watching for significant events, using commodity prices and bond spreads as leading indicators, risk reversals, "option volatilities to time market movements," and government intervention. Combined, the two chapters amount to about 70 pages of trading setups and information.

Chapter 10

The last chapter in the book takes an in-depth look at the major currency pairs, covering the "broad economic overview," "monetary and fiscal policy makers," "important characteristics," and "important economic indicators." That discussion takes over 60 pages and occupies another large portion of the book's real estate.

-- Thomas Bulkowski


See Also

Written by and copyright © 2005-2019 by Thomas N. Bulkowski. All rights reserved. Disclaimer: You alone are responsible for your investment decisions. See Privacy/Disclaimer for more information. Some pattern names are the registered trademarks of their respective owners. Q: How do you save a man from drowning? A: Take your foot off his head.