From the February 01, 2010 issue of Futures Magazine • Subscribe!

Essentials of foreign exchange trading

Essentials of Foreign Exchange Trading
By James Chen
John Wiley & Sons, Inc.
$39.95; 221pages

Author James Chen states upfront that the contents of “Essentials of Foreign Exchange Trading” are not meant to be an exhaustive tome that covers all aspects of forex trading. He succeeded on that score, but he went too far to the other end of the pendulum by covering all topics very briefly without sufficient detail. The end result is a very basic book on FX trading suitable for novices with no knowledge or experience.

The book is written in a simple to read style. Chen writes clearly and his writing is easy to understand. Each chapter follows in a logical and organized fashion and the charts are large and easy to read. The book begins with a brief history and description of FX trading and covers the major players. The author then reviews the mechanics of FX trading by reviewing currency pairs, types of orders, margin calls, lot size, leverage, commissions, interest and hedging.

One chapter is devoted to technical analysis, which the author claims is a “comprehensive discussion of technical analysis as it is applied to foreign exchange trading.” That claim is way off the mark. First, the discussion of over a dozen common technical indicators and basic chart patterns – candlesticks, point-and-figure – cannot possibly be comprehensive in 50 pages. Second, there was only a mild tie-in to FX trading. The discussion could easily have been about trading equities and nothing would have been lost in translation regarding technical analysis. None of the chart examples showed real charts or any time frame. They just illustrated a particular point about a trend line or support or resistance or whatever was being discussed. Real charts over specific time frames with an explanation of the meaning of the indicators and patterns would have been much more educational in all respects.

The book also focuses on fundamental analysis, and the author spends many pages reviewing 13 basic key economic indicators of the U.S. dollar such as GDP (Gross Domestic Product), the employment situation summary, retail sales, Consumer Price Index and several more. However, there is no explanation of how the FX trader can use this information to become an astute trader. There also is a brief discussion of carry traders and global interest rates. The author makes an interesting closing statement at the end of that chapter: “The more a trader learns about fundamental market drivers, the better the trader will be prepared for the often unpredictable nature of the foreign exchange markets.” I don’t see how anyone can be prepared for unpredictable markets no matter what knowledge they have. That’s what Black Swans are all about.

While explaining FX trading methods, Chen briefly covers day-trading, swing trading and position trading, trend trading, stochastics, Fibonacci retracements and head-and-shoulders pattern, pivot points, Elliott Wave Theory, backtesting and autotesting. Again, as in other chapters the discussion is elementary and superficial.

The book also covers the important elements of successful FX trading. Topics covered include managing risk, preserving capital, having a consistent trading discipline, having a trading plan, focusing on risk vs. reward, putting in trailing stops, and being careful about position sizing. Another chapter bringing together all the basic principles in a case study format with an actual FX trade would have been welcomed. But, alas it was not included.

In summary, the discussion of most subjects is short and sweet – a few pages long – and there is not enough depth for the reader to grasp the full value of many items. Surprisingly, the author did not include a glossary, bibliography, useful Internet sites for further insight or any footnotes. There are so many informative books, software packages and Internet sites on FX that have come out in the past two years that it is unfortunate that none were listed in an Appendix for further study.

After reading this book, most readers will probably say to themselves “that was interesting, but what do I specifically do now, and where do I go to get more detailed information about FX trading, education, and strategies.” That question will have to be answered by other books and resources. For those interested in a more in-depth coverage of FX trading, I recommend another Wiley book by Abe Cofnas: “The Forex Trading Course: A Self-Study Guide To Becoming a Successful Currency Trader.”

Leslie N. Masonson is author of “All About Market Timing” and “Day Trading on the Edge.” Reach him at .

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