Knowledge of how currency market works and some degree of trading is a must for nearly everybody, as everybody is exposed to the currency risk to some degree, no matter you are a foreign products consumer, overseas traveller, or a investor. Based my personal practice of global tactical asset allocation portfolio management, and a forex trading overlay, I think monitoring the currency market is even more important than the stock market, as currency market is a crucial input to the stock market, and currency return played an important role in international investment.
The Little Book of Currency Trading is a book I’d like to recommend. It is very easy to read, has some very practical advice and tips. Here are things I’ve learned from this little book.
1, Four ingredients consist of the formular of successful currency trading: knowledge of the currency market, trading strategy, risk management, and a bit of luck. With these you can go a long way.
2, Different pairs has different volatilities, or we can say each pair has its average daily trading range. Konwing this is important to set profit target and stop loss.
3, Time zone matters. Three trading zones, Tokyo, London, and New York. For North America traders, the worst time is the beginning of asian trading time, ie. 8pm est; the best trading time is 7-12 in the North America morning. Trends showed up in the beginning of the asian trading time may not last to the europe and americal trading time.
4, Combining long term trading and short term trading. Long term trading uses double bollinger bands; short term trading is mainly around news.
5, ADX above 25 as trend confirmation.
6, T1-T2 or half-half exit strategy.
7, Double Bollinger bands strategy, this is the most valuable part of the book.
8, For short term news trading, always wait 5 minutes after the news, to see the price is above or below SMA50.
9, High probabiliy trade has all factors line up, including fundamentals, technicals, and market sentiment. It’s very necessary to make a checklist for each trade entry: (1)chart review from left to right, determine the trend; (2)chart review bottom up, check horizontal support and resistance; (3)check fundamental, especially the central bank policy; (4)check economic date or news schedual in the coming 24 hours; (5)check market sentiment.
10, Diversify trades. Avoid correlated currencies, such as AUD and NZD.
11, Avoid unnecessary risk, such as hold a position over weekend.
12, Make a trading diary, deeply review each trade, learn something from each loss trade!
13, Treat trading as a business, not a hobby. Good business needs well prepared plan! And good execution!