So you'd like to...

Trade foreign exchange

A guide by Jackal (New Hampshire)

Products sampled from this guide:
This column brings up some thoughts about trading currency. It is written for somebody with university education, maybe in economics or computer science. What I am hinting at is that you should already have an analytical mind. If you don't have an analytical mind I can't give you any useful guidance. So this guide is not for people who want to get rich quick with some easy solution.


MONEY MANAGEMENT
You need to limit your exposure and not over trade. In my view it is not useful to read any book on money management because it is so obvious. However, many people fail and that is due to psychology.


YOUR OWN PSYCHOLOGY
If you start out and have an analytical mind you might think that you're pretty rational. That is unlikely. Trading brings out sides in you that are totally irrational. So you need to get some control over yourself. What has helped me is a set of books by Brett Steenbarger (Enhancing Trader Performance: Proven Strategies From the Cutting Edge of Trading Psychology, The Psychology of Trading: Tools and Techniques for Minding the Markets, and The Daily Trading Coach: 101 Lessons for Becoming Your Own Trading Psychologist). These books contain material for a decade to work on. The more you can master yourself the higher the chances of success. These books are written by an academic psychiatrist but I believe he has now joined some trading house. He also has a nice blog but it is no longer updated. There are other books out there, but to me Steenbarger's somewhat academic approach is preferred. Here people can differ in opinion.


BASIC CHARTS
The most common chart nowadays is the candlestick chart. You should buy Japanese Candlestick Charting Techniques, Second Edition by Nison. I haven't found anything else useful on candlesticks. Most other books are just repetitions. The technique is supposed to be a Japanese, but if you go to amazon.japan it will be this book that is the bestseller. You also need a book on different kinds of chart patterns. Encyclopedia of Chart Patterns isn't very good, but it does the job.


INDICATORS
Indicators are various derivatives of the price and sometimes volume. I am not keen on the myriad of indicators, but I do think that you should pay attention to two kinds of indicators:
1. Momentum. I like RSI, but they are all very similar. Read the section in High Probability Trading Strategies: Entry to Exit Tactics for the Forex, Futures, and Stock Markets.
2. Moving average. Bollinger on Bollinger Bands is my recommendation


SYSTEMS
Some authors argue for mechanical systems because they largely removes the role of your emotions. However, I don't think it is really possible to find or develop a mechanical system that is profitable over the longer run. So you need to learn to exercise judgment. You can and should use some systematic approach and High Probability Trading Strategies: Entry to Exit Tactics for the Forex, Futures, and Stock Markets is a great example of how a system could look like.


ELLIOTT WAVES
You definitely need to read Elliott Wave Principle: Key To Market Behavior. This is the best book on the subject, but I wish the author would publish a revised edition based on having an additional three decades of experience. You also need to have a bit more on price projections using Fibonacci. Fibonacci Trading: How to Master the Time and Price Advantage is a good choice. To better learn the method you should subscribe to Prechter's intraday service for currencies. He also has monthly and weekly publications but I find them relatively useless if you want to learn the methodology. Also useful to read some newsgroups focusing on Elliott Waves. I use dailyfx.


WORLD AFFAIRS
It does help tremendously to follow world affairs. Well, at least it does for me because I've been interested in world affairs for 20 years. Then you begin to see patterns that the market is slow to pick up. So read Financial Times as well as more specialised publications. Barbara Rockefeller has a daily morning newsletter that I find very interesting. It is good for beginners too because it focuses your attention on what the pros look at. World affaors is a whole different topic and I will not recommend any books. Maybe I will cover the topic in another column.


HOW TRADERS THINK
You can learn from a mentor, ie somebody already skilled in trading. However, I will assume you don't know any such people. Here books can help. Read One Good Trade: Inside the Highly Competitive World of Proprietary Trading and The Invisible Hands: Top Hedge Fund Traders on Bubbles, Crashes, and Real Money. These books are great for understanding. The books are very different. Read both.


HOW THE CURRENCY MARKET WORKS
This is important and hardly anything is written about the topic. The book Beat the Forex Dealer: An insider's look into trading today's foreign exchange market isn't really good, but it is still the best on the topic so I recommend it.


CONTINUOUS LEARNING
Try to pick up interesting books over time. Some books that I've found interesting but haven't done anything about are Harmonic Trading, Volume One: Profiting from the Natural Order of the Financial Markets, Reading Price Charts Bar by Bar: The Technical Analysis of Price Action for the Serious Trader, and The Commitments of Traders Bible: How To Profit from Insider Market Intelligence. But be aware that this area is a minefield because there are so many snake oil peddlers out there. I normally look at the author's website to get a feel for what kind of person he (not many she!) is. To get a good overview of technical analysis you might also consider buying a textbook. Technical Analysis: The Complete Resource for Financial Market Technicians (2nd Edition) is the best I've come across.

I have created a list called "Useless forex and technical analysis book" here on amazon. Have a look at that list if you want to see what kind of books to avoid.

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5.  Encyclopedia of Chart Patterns  by Thomas N. Bulkowski
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