From the December 01, 2011 issue of Futures Magazine • Subscribe!

The Little Book of Currency Trading

The Little Book of Currency Trading:
How to Make Big Profits in the World of Forex
By Kathy Lien
John Wiley & Sons, Inc.
$119.95, 198 pages

This book is a perfect primer on trading currencies for beginners. The author’s goal is to provide readers with the ways to turn the headlines into trading opportunities, as well as how to manage risk.

Lien, an experienced currency trader and strategist, lays out a logical framework for understanding the world of forex by explaining the basics in simple terms. Each chapter flows easily into the next one, and the book can be read and understood in less than two hours. Of course, it will take the reader a much longer time to become a profitable and proficient trader.

The author begins her discussion of forex by the using the alphabet where 26 terms are defined by a word corresponding with every letter of the alphabet. Each term usually is accompanied by an example.

Lien recommends that a trader decide which forex vehicle to use depending upon whether he/she plans to invest, trade or hedge. She explains the differences between futures, spot and ETF vehicles, as well as discussing the advantages. In addition, the author highlights the importance of selecting an appropriate broker, and provides 11 questions to ask prospective candidates.

She states that one way to take advantage of financial market volatility is to trade the vast and very liquid currencies. Especially during a crisis, smart traders can make some good money by being opportunistic. This means that new traders must find and implement an effective trading strategy and use a specific trading plan. They need to determine upfront how much money to risk on each trade and when to buy and sell.

Economic, political and financial events impact Forex prices, as well as the direction of interest rates. That is why it is extremely important for traders to use both fundamental and technical analysis to provide the best odds of being profitable. In addition, the trader needs to realize that psychology plays as important a role as does the strategy used. That is why she urges readers to find a specific strategy that fits their personality; otherwise the results could be costly in many respects. That also means it is critical for traders to find the greatest possible edge they can, and then stay with the trend.

One way of accomplishing that is to use specific technical indicators such as the weekly ADX coupled with a 20-wma, or the Double Bollinger Bands (one set at 20-period moving average with two standard deviations, and one set at 20-period moving average with one standard deviation). The later indicator is fully explained with a few chart examples.

Lien recommends taking profits along the way and her method for accomplishing this is illustrated with examples. She suggests using the Bollinger Bands to pinpoint entry and exit points. Good exits separate the winning from the losing traders. The goal is to capture as much of the trend as possible while limiting the risk. By taking some profits early on, the trader can build confidence.

The chapter on the top ten trading mistakes provides well-known, costly errors including failing to use stops, using too much leverage, trading out of boredom, paper trading and over-optimizing your strategy. Although this is common knowledge among successful traders, she emphasizes the importance for new or unsuccessful traders to learn and not repeat these potentially costly blunders. Another chapter deals with avoiding Forex scams, and provides a useful ten-item checklist to assist in the process.

In summary, this is an easy book to read and understand. It is written in a crisp and conversational style and there are no wasted words. Surprisingly, there is no bibliography for further study, or an index. Nevertheless, this book provides an excellent first step for new traders in the world of Forex.

Leslie N. Masonson is the author of Buy DON’T Hold and All About Market Timing, Second Edition. Reach him at lesmasonson@yahoo.com.

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