The Little Book of Currency Trading E-Book

Kathy Lien

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Serie: Little Books. Big Profits
• Sprache: Englisch

Seitenzahl: 206

Veröffentlichungsjahr: 2010

Beschreibung

An accessible guide to trading the fast-moving foreign exchange market The foreign exchange market, or forex, was once dominated by global banks, hedge funds, and multinational corporations, but that has all changed with Internet technology and the advent of online forex brokers. Now, hundreds of thousands of traders and investors around the world can participate in this profitable field. Written by forex expert Kathy Lien, The Little Book of Currency Trading will show you how to effectively invest and trade in today's biggest market. Page by page, she describes the multitude of opportunities possible in the forex market, from short-term price swings to long-term trends, and details practical products that can help you achieve success, such as currency-based ETFs. * Explains the forces that drive currencies and provides strategies to profit from them * Reveals how you can use various currencies to reduce risk and take advantage of global trends * Examines financial vehicles that can help you make money without having to monitor the market every day The Little Book of Currency Trading opens the world of currency trading and investing to anyone interested in entering this dynamic arena.

Leseprobe

Contents

Introduction

Chapter One: When Lightning Strikes

The Worst Decade Ever

The Eurozone Feels the Squeeze

The Rise of Currencies

Turning Headlines into Opportunities

Chapter Two: Rubles and Bahts and Euros—Oh, My!

Waking Up the “Local” Investor

Dabbling in Foreign Markets

Small-Business Owners and Financial Officers

What’s Your Agenda?

Chapter Three: The A to Zs of Forex

Chapter Four: Step Right Up

Picking the Right Products

Finding a Broker

Deciding What To Trade

Chapter Five: Movers and Shakers

The Big Stories

The Direction of Interest Rates

Economic Data

Market Sentiment

Technicals Matter, Too

Chapter Six: The Investor versus the Trader

Meet Andrew and Steven

The Waiting Game of Taxi Drivers

Are You Jack Shephard or John Locke?

Chapter Seven: What All Winners Do

Stay with the Trend

Bag Your Winners Quickly

Know When to Say No

Chapter Eight: So You’re an Investor?

Bollinger Band Basics

Knowing When the Trend Has Exhausted

Finding Value within a Trend

Getting into a New Trend

Chapter Nine: So You’re a Trader?

Riding Momentum

Sifting through the Headlines

How Fast and Furious Trading Works

Chapter Ten: Risky Business

Sticking with High-Probability Trades

If You’re a Short-Term Trader . . .

The Key Is Yours

Chapter Eleven: The Top 10 Mistakes

Chapter Twelve: Greetings from Nigeria, Please Help!

The Signal Provider Scam

The Trading System Scam

Managed Accounts or Managed Funds Scams

More Scammers . . . Bucket Shop Brokers or Referring Parties

Trust No One but Yourself

Chapter Thirteen: Getting Down to Business

Trading Is Not Your Hobby

Start the Day Fresh

Ready, Set, Plan!

Know Your Loss Limit

Chapter Fourteen: Crash, Burn, and Learn

Lesson 1: Stick to Currencies with Smaller Spreads

Lesson 2: Use the Right Stop

Lesson 3: Pick the Right Time to Trade News

A Warning about Fitting to Perfection

Chapter Fifteen: Start Smart

Author’s Disclaimer

Little Book Big Profits Series

In the Little Book Big Profits series, the brightest icons in the financial world write on topics that range from tried-and-true investment strategies to tomorrow’s new trends. Each book offers a unique perspective on investing, allowing the reader to pick and choose from the very best in investment advice today.

Books in the Little Book Big Profits series include:

The Little Book That Still Beats the Market by Joel Greenblatt

The Little Book of Value Investing by Christopher Browne

The Little Book of Common Sense Investing by John C. Bogle

The Little Book That Makes You Rich by Louis Navellier

The Little Book That Builds Wealth by Pat Dorsey

The Little Book That Saves Your Assets by David M. Darst

The Little Book of Bull Moves by Peter D. Schiff

The Little Book of Main Street Money by Jonathan Clements

The Little Book of Safe Money by Jason Zweig

The Little Book of Behavioral Investing by James Montier

The Little Book of Big Dividends by Charles B. Carlson

The Little Book of Investing Do’s and Don’ts by Ben Stein and Phil DeMuth

The Little Book of Economics by Greg Ip

The Little Book of Commodity Investing by John R. Stephenson

The Little Book of Sideways Markets by Vitaliy N. Katsenelson

The Little Book of Currency Trading by Kathy Lien

Copyright © 2011 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, [phone], fax [phone], 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, [phone], fax [phone], or online at 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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ISBN 978-0-470-77035-1 (cloth); 978-1-118-01841-5 (ebk); 978-1-118-01840-8 (ebk); 978-1-118-01839-2 (ebk)

To my family, loved ones, and all of those who have inspired me!

Introduction

I have always considered myself lucky. When I was 10 years old, my mother’s favorite performer from Hong Kong was doing a retirement concert in Atlantic City. The concert hall was packed with what must have been more than 1,000 people. When we took our seats, the performer told us that there would be a surprise giveaway of memorabilia from her past performances. When I was picked, I screamed in delight at winning a gorgeous antique watch. A few years later, I won a sweepstakes for a free Hawaiian vacation. I graduated college when I was just 18 years old, landed one of the first jobs that I’ve ever interviewed for, got out of the stock market before the technology bubble burst, met the man of my dreams at 23, and was never at risk of losing my job during the global financial crisis.

Lady Luck has certainly smiled on me and I won’t take her for granted, but being lucky was not the only thing that got me where I am today. I doubt that New York University’s Stern School of Business would have let me graduate college at an age when most people graduate high school just because of luck. Being smart, having a strong work ethic, recognizing opportunities when they appear, and knowing how to grab them is just as important as being lucky. In other words, luck needs to be combined with skill.

Over the past few years, we’ve all had to deal with financial crises. A lot of people lost their shirts and many are still struggling to recover. Those who survived without great loss are lucky. But should we be content with just being lucky? After all, some people not only survived but thrived during the financial crisis. When a crisis hits, you can sit back and watch in shock as your money evaporates or you can go on the offensive and take advantage of the opportunities in front of you. The key is to recognize those opportunities and know how to act on them when they appear.

One increasingly popular way of capitalizing on the up and down movements in the financial markets is through currencies. Between 2004 and 2010, the daily turnover or volume in the forex market more than doubled from $1.9 trillion to $4 trillion. Before the technology boom, investing and trading in the forex market was limited to institutional investors, hedge funds, and other deep-pocketed players. However, that changed when foreign exchange brokers brought their platforms online and made the market available to individual traders. Since then the number of people trading forex has exploded and it is only expected to grow. Many people have already discovered forex trading—it may be time for you to learn why the market has become so popular, too.

Foreign exchange movements touch everyone’s lives in one way or another. Whether you’ve traded forex before or not, you’ve bought and sold currencies. If you’ve traveled abroad or bought something on eBay from a seller in another country, that counts! Or if you are a small-business owner, you trade forex when you buy and sell products imported from other countries.

Maybe you think you’re exempt from needing to know about forex trading because you invest solely in U.S. stocks. But that’s not true anymore. If the companies you invest in have any foreign operations or payables and receivables in different currencies, you’re still exposed to currency risk. As a result, it is important for any trader or investor to stay on top of exchange rates and to know how much currencies are worth.

Of course, the sharp increase in foreign exchange trading activity is not just due to people following currencies. Investors and traders are participating in the market for speculation, hedging, investment, and other transactional purposes.

There are many different ways to trade currencies; one of the best ways to get started is to trade what you know. Big stories and headlines in the financial markets that affect equities will generally affect currencies. So if you hear a story that is bad for a country’s economy or gives foreign investors cause to be nervous, then there is a chance that investors will panic and bail out of the currency. When people panic, they always sell first and ask questions later. If the news is significant enough, it might also have a lasting impact on the currency. The Little Book of Currency Trading is dedicated to teaching you some skillful ways of turning headlines into trading opportunities.

Currencies can also move in one direction for a very long time; this book will illustrate ways to find opportunities to join the trend and when to pick tops and bottoms using a trading tool that I developed that clearly indicates whether a currency is in a trend or range. More seasoned traders will know that skillfully managing the trade is just as important as finding a good place to enter, so we’ll spend time talking about how to bag the winners.

The forex market also has many unique characteristics that can make it riskier than other markets. I will show you how to manage the risk and how to find the best trades. Relying solely on luck can be dangerous and therefore I strongly believe that everyone should only take trades that are supported by as many variables as possible. The secret to being successful in currency trading and life is to take things seriously—treat your trading like a business and not a recreational hobby. It takes practice to really learn how to trade currencies well, and having a strong work ethic will help.

With knowledge of the market, a good strategy, solid money management, and a little bit of luck, you will be on your way to thriving in the forex market.

Chapter One

When Lightning Strikes

Financial Crises and the Rise of Currency Trading

Do you know someone who’s been struck by lightning? What about someone who’s been struck by lightning twice? According to the National Weather Service, the odds of someone being struck by lightning in a given year are 1 in 750,000. That makes it extremely unlikely that a person will be struck by lightning once, much less twice. However, because lightning aims for the tallest object in a given area, it’s not at all uncommon for it to hit the same place more than once. For that reason, lightning rods are placed atop city skyscrapers to attract the bolts and absorb the hit.

Lightning rods attract lightning just like financial markets attract greed, which inevitably brews disaster. Given the right conditions, disasters in the financial markets—like lightning—can hit more than once and investors must be prepared.

Back in 2007, Nassim Nicholas Taleb wrote what became a very famous book called The Black Swan: The Impact of the Highly Improbable. Taleb describes a Black Swan as an extremely rare event that catches people by surprise, has a major impact, and is then rationalized as if it had been expected to happen all along. Unfortunately, as we’ve all seen, Black Swan events have become much more common in recent years. As bubbles in the economy begin to reach their breaking points, it is important for investors to identify ways to deflect risk and possibly capitalize on those events because fortunes are at stake. In fact, two of the world’s most famous global investors made their fortunes when other people were panicking and running for the exit.

In 1992, at the ripe young age of 62, George Soros gambled that the U.K. would not be able to maintain high interest rates necessary to keep the British pound within the tight currency band mandated by Exchange Rate Mechanism (ERM). Soros believed the weak economy and high unemployment would force the U.K. to abandon the ERM and cut rates. He turned his speculation into action by establishing a massive $10 billion short position in the British pound through the use of as many different instruments as he could find. Of course, Soros was not the only one selling the pound. As speculation grew about the U.K. abandoning the ERM, no one wanted to hold pounds. What separated Soros from other investors was that when most people were on the defensive, selling pounds and squaring their exposures into the madness, Soros was on the offensive, attacking the pound until the Bank of England cried uncle. A month later, Soros’s Quantum Fund cashed in and banked approximately $2 billion in profit.

The second financial legend is Sir John Templeton, who took a very different approach from that of George Soros. Founder of the world’s largest equity fund, the Templeton Growth Fund, Templeton was a deeply religious man and a contrarian at heart. He loved to buy the crashes and come in during what he called times of “maximum pessimism.” For example, Templeton swooped into Ford when the automaker appeared to be headed for bankruptcy in 1978 and poured money into Peru when it was awash with communists in the 1980s. However, he was not always a buyer. In 2000, when everyone else was buying technology stocks, he shorted dozens of technology companies. Templeton liked to get in when the underlying fundamentals were extremely out of line with the perceptions of the reality. Those opportunities don’t come along every day, but when they do, they can present enormous opportunities.

The Worst Decade Ever

Time magazine labeled the first 10 years of the twenty-first century as the worst decade ever. Apart from wars and environmental catastrophes, there were two market crashes: the dot-com bubble at the beginning of the decade and the global financial crisis at the end. The global financial crisis wiped out the savings of families around the world, plunged millions of people into unemployment, and claimed a number of Wall Street’s oldest institutions including Lehman Brothers, Merrill Lynch, and Bear Stearns. Most people did not imagine that a company like Lehman, that was established in 1850 and survived two World Wars and the Great Depression, could be pushed into bankruptcy during our lifetime. There are countless stories of individual investors who lost 50 to 90 percent of their retirement funds. The debacle in one way or another affected the lives of every American. Yet, believe it or not, a handful of savvy investors profited handsomely during this period when most were losing their shirts.

The subprime crisis that began in 2007 eventually morphed into the global financial crisis. The origin of the crisis was the popping of the technology bubble, which led Alan Greenspan, the Federal Reserve chairman at the time, to stimulate the economy by cutting interest rates aggressively. Unfortunately, he left interest rates too low for too long, creating housing and credit bubbles. Money was flowing into the U.S. economy from spigots as the Dow Jones Industrial Average raced from 8,000 in 2003 to a high 14,000 by 2007. The low cost of borrowing encouraged Americans to refinance their current homes, trade up, or buy investment property—and in some cases, all of the above.

Many of you may have participated or at least had ringside seats to the hysteria—even if it was only watching TV shows like Flip This House on A&E or Flip That House on the Discovery Channel. At the time, everyone from your local barber to taxi drivers was dabbling in real estate and believed to the core that in the long term, you could never lose money on housing. Boy, were they wrong. By 2005, real estate had accounted for 70 percent of the rise in net household wealth and an astounding 50 percent of overall growth in the U.S. economy in the first half of that year. Between 2001 and 2005, more than half of the private sector payroll jobs created were in housing related sectors. Who could blame the average American when house prices in places like Phoenix, Arizona, were rising as much as 45 percent a quarter. But when things got bad, they became very bad very quickly. When the housing bubble burst, prices in some states fell nearly 50 percent from their peak levels in 2006. Between the middle of 2007 and the beginning of 2009, U.S. stocks also dropped more than 50 percent. By March 2009, Americans lost more than $15 trillion in total net worth. The housing market bubble is exactly what Sir John Templeton would have called “maximum optimism.”

In retrospect, many of us would wonder, how could we have not seen the warnings signs. With banks willing to lend to almost anyone, and average Americans overloading on debt, how could it have gone on forever? At the time, the bursting of the technology bubble was still in recent memory, which should have reminded us about the consequences of excesses. Although the subprime crisis created the largest housing bubble ever, it was certainly not the only one in recent history.

In the past 40 years alone, there were two housing bubbles in the United States, one that peaked in 1979 and another in 1989. Between 1987 and 1991, the housing bubble in Japan also collapsed, pushing the country into a long period of zero growth and what the Japanese referred to as the “Lost Decade.” In 1998, the housing market in Hong Kong collapsed after the central bank raised interest rates from 8 to 23 percent to defend the currency during the Asian financial crisis. These bubbles may have occurred outside U.S. borders but they had global ramifications and made headlines across the world. Unfortunately, most U.S. homeowners and investors missed these all-too-obvious warning signs.

In fairness, a small number of experts, including Templeton just before he passed away, warned that the bubble would eventually burst, but their contrarian views were written off and fell on deaf ears. The crisis wiped out individual investors, mutual funds, hedge funds, and investments banks, but for those who anticipated the collapse, knew that bubbles eventually become deflated, and took speculative positions, fortunes were made. The biggest winner that we know of was John Paulson of Paulson & Company. The soft-spoken Harvard MBA and hedge fund manager was convinced that subprime mortgages would falter and began to warn his investors in 2006 that the housing bubble was bound to pop. His hedge fund made significant bets in anticipation of a collapse and by September 2007, his funds were up an average of 340 percent.

At a time when almost everyone else was losing money, Paulson and his investors raked in billions. In performance fees alone, Paulson’s nine funds earned more than $2.5 billion between September 2006 and September 2007. Other winners in this period included Philip Falcone of Harbinger Capital Partners and Jim Simons of Renaissance Technologies LLC, both of whom collected more than $1 billion in performance fees, with Simons’s $6 billion Medallion fund returning more than 50 percent. While all three of these funds bet successfully on the collapse in the housing market, other market players found alternative paths to making money from the subprime crisis.

Citadel Investment Group, one of the world’s largest hedge funds, returned more than $800 million by purchasing distressed debt that no one else was willing to buy. For example, they took over the energy trades of Amaranth Advisors and acquired stakes in companies such as E*Trade.

Finally, the third set of funds that made money during the subprime crisis were high frequency trading outfits that focused on ultra short-term trading opportunities. Focusing on the very short term made them less exposed to the big moves in the market. Contrary to popular belief, the subprime crisis did not produce just losers, particularly among those who anticipated the crisis, picked up bargains, or focused on very short-term opportunities.

The Eurozone Feels the Squeeze

One crisis has led to another and now we are faced with new troubles in Europe. In response to the global financial crisis, central banks around the world increased spending to stimulate their economies and as a result drove their fiscal deficits to double-digit levels. Although many countries, including the United States and the United Kingdom, also have heavy debt burdens as a percentage of GDP, the Eurozone was punished when news broke that Greece’s budget deficit, at 13 percent of GDP, was twice as large as previously estimated. They had fudged the numbers and were forced to admit the real state of their finances.

This triggered a series of warnings and then downgrades by rating agencies as investors grew concerned about the country’s high borrowing costs and ability to meet upcoming debt payments. European policy makers let the problems exacerbate, to the criticism of many investors, before finally stepping in with a massive rescue plan that was worth nearly USD$1 trillion. Unfortunately, the ambitious plan failed to stabilize the markets even after the European Central Bank broke all the rules and started to buy government bonds and provide unlimited liquidity. Yet the euro remains at very weak levels (having fallen as much as 20 percent between January 2010 and June 2010) while credit spreads for countries such as Portugal, Ireland, Spain, and Greece hit record levels. At the time of publication, it is still unclear how the sovereign debt crisis will play out and the magnitude of its impact.

Even if the markets stabilize, individual countries have pledged to aggressively reduce their budget deficits, which means spending cuts and tax increases that should curtail Eurozone growth as the belt buckles in Europe get tighter and tighter. It is too early to count the losers against the winners on this, but those who anticipated the move would have come out on top once again. Some funds have bought credit default swaps on Spanish, Italian, and Irish debt as a sort of insurance in the case of default. Just think—investors who shorted euros when Greece’s troubles began in late 2009 could have made as much as 20 percent by the end of June 2010.

The subprime and the sovereign debt crisis showed us how we cannot focus solely on what is happening in our own little part of the world because, as we have seen, the problems in one country like the United States could destroy the economies of other countries. As the world’s largest trading partner, it is easy to understand why everyone else would be affected by the troubles in the United States, but in recent years, problems in other countries also had a ripple effect on other parts of the world. Countries as far away as Australia have complained about the impact of the European debt crisis on their local economy. Even big and mighty China has found Europe and Greece’s problem nerve-racking, illustrating just how interconnected the world really is.

The Rise of Currencies

The two most recent crises have focused attention on the foreign exchange market. In many ways, currencies are one of the best confidence indicators for a country. When foreign investors are optimistic about the outlook for a country, they tend to buy the currency and use those funds to invest in domestic stocks or bonds. However, when they grow concerned for economic, political, or social reasons, they will sell their foreign holdings, dump the currency, and move the money home. When this happens on a large scale, it can cause a major move in the currency and force the government to address the situation.