Risk Warning

Forex Trading on margin carries a high level of risk, and may not be suitable for all traders. The high degree of leverage can work against you as well as for you. Before deciding to trade forex you should carefully consider your trading objectives, level of experience, and risk appetite. It is possible that you could lose some or all of your initial capital and therefore you should not trade money that you cannot afford to lose. You should be aware of all the risks associated with forex trading, and seek advice from an independent financial advisor if you have any doubts. Having said that, anyone with a sound mind can trade Forex but he must be aware of the risks involved as highlighted above.

Friday, April 24, 2009

My date with Kathy Lien

Wow, last night I had a date with Kathy Lien, yes the real Forex analyst Kathy Lien and not some look alike with the same name! OK, I was not alone but with another 300 or so men (and ladies) at her Forex Masterclass in Kuala Lumpur. You see, she was in Singapore over the weekend for the Asia Trader and Investor Conference and stopped over here to meet her clients. She was formerly with FXCM but is now with GFT, a Forex broker with an office in Singapore.

As this talk was sponsored by GFT, I was expecting a lot of sales talk but no, there was only one slide she showed that had the GFT account offer. She did had several slides on Foresight-AI, a forecasting tool marketed by GFT but it was nothing pushy at all. She also had some slides promoting a GFT website, FX360, for Forex news and commentary and again it was done without any sales pitch. Most of the evening was devoted to Forex trading itself and it was definitely not for beginners as she went straight into some trading strategies. (Didn't she called it Forex Masterclass?) Here's a summary of what she covered for those interested and were not able to see her in person.

1. The Five-Minute Momo Trade. Trading on the 5 minute chart using MACD to confirm momentum. You can get details of this in
Investopedia here.

2. Using Bollinger Bands to pick Tops and Bottoms. Has the 1 deviation Bollinger Bands together with the normal 2 deviations BB to define Buy and Sell Zones.

3. Trading the First Break using the Bollinger Bands above.

4. Trading the Retrace using the same Bollinger Bands above.

5. The Perfect Order. No, this is not the long or short order that made you a lot of profit but all the SMA's lining up in the right order according to their durations.

The most interesting part of the evening was on Trading the news. While most Forex gurus will advise traders not to trade the news, Kathy gives TWO strategies to trade the news. One is Proactive Trading (i.e. enter before the news is released) and the other, Reactive Trading (i.e. after the news is released). The first requires a lot of work but big pips reward while the second is easier but with comparatively smaller pips reward.

Finally she gave some words of wisdom on Trading Lessons. Not bad overall, considering that it is totally free except for the parking fee.

Kathy has just published her new Forex book, Day Trading & Swing Trading the Currency Market and I was surprised that she was not even promoting this book at the gathering. Maybe I got there a bit late and her book has already sold out or she is making more than enough in the Forex market. I picked up my copy last weekend at Kinokuniya but you can get almost 40% discount from Amazon but check the shipping charges.

I have not gone through the book yet but from my browsing, I believe it is worth a read. It has great background information on the Forex market, the major currency pairs and on Fundamental Analysis but there is not much on Technical Analysis so you'll need something else for that. There's a chapter on Technical Trading strategies but this assumes knowledge of the technical indicators employed. Many of the trading strategies given in her talk are also included here. I'll give a more detail review of her book after I have read it but at 290 pages, it'll take some time!

If you need a book on Technical Analysis to complement Kathy's book, I would recommend Technical Analysis for Dummies. Though it is not specifically written for the Forex market, it covers all the basic technical indicators and most of them are applicable to the Forex market.

Meanwhile, happy trading.

Ronald Kwok

Thursday, April 16, 2009

The Golden Rule of Forex Trading

Last week I was at a Bible study class and the priest there mentioned that Hillel, a famous rabbi was asked to sum up the Torah in one sentence and he said "Do not do to others what you would not want done to yourself." This sounds very much like the Golden Rule said by Confucius rather than by a rabbi. So in the same vein I would like to give you the Golden Rule of Forex Trading in just one sentence.

"Enter the market near the beginning of a trend after it has started and exit before it reverses or soon after." How does it sound? Very simple, right? And that's just what every trader will want to do but it is easier said than done. It is even simpler and more obvious on hindsight when you look at charts that have happened but try doing that during a live market.

So all the study of the charts and technical analysis is to enable one to make an early entry once a trend has started, wait for the trend to continue, the longer the better; and exit before the trend reverses or soon after the trend has reversed. Note that we are not trying to catch the trend when it first starts and exit at the highest (or lowest) point to harvest the maximum number of pips. This is call trying to catch the tops and bottoms and it is too difficult since we do not have a crystal ball to see when the trend will start and when it will end. It would be great if we can get just maybe 70% or 60% of the trend since we are depending mainly on lagging indicators which can only show the trend after it has started or reversed.

The Forex market will set traps along the way and the common ones are known as retracement and false breakout. A retracement is a price movement in the opposite direction after the trend has started, after which the price will continue in the direction of the trend. Depending on which point you enter the market and the stop loss set, you may be stopped out during a retracement. It is most frustrating to see the price continuing in the original direction again after you have been stopped out during a retracement and counting what could have been your profit.

A false breakout is a false trend so to speak. It looks as if a new trend is forming but after a while, the "trend' reverses and move back to where it was or even in the opposite direction. If you get stopped out in this case, it does not feel as bad as in the retracement since the stop loss prevented you from suffering a higher loss while in the other case, the stop loss prevented you from making a profit. It is because of this that there are some gurus who propose not setting a stop loss at all or set at some ridiculously high values. But for beginners, it is always a must to set a stop loss since you will be knowing before hand exactly how much your loss will be if the price moves against you and you can calculate you risk reward ratio from this. Most importantly, this will protect your capital in case you lose your internet connection for whatever reasons. And there can be many reasons.

So for newbies, the advice is always to trade with the trend or as they say, "the trend is your friend" and "trend till it bends". That's Forex trading in a nutshell. Looking at old charts and in hindsight, even a blind man can show you the trend; the challenge is how to identify a trend in the midst of the ongoing price action.

(By the way, what Hillel actually said was "What is hateful to you, don't do to others. This is the whole Torah; the rest is commentary." So this post is the whole Forex Trading and the rest will be commentary!)

Ronald Kwok