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Updated: February 27, 2011 17:20 IST

Getting started with forex trading

D. Murali
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Before you place your first forex trade, take your time to really learn about how the market works, because the foreign exchange market has been around for a very long time and will continue to remain active for decades to come, advises Kathy Lien in ‘The Little Book of Currency Trading: How to make big profits in the world of forex’ (www.wiley.com).

She foresees that between now and the next 10 years, the number of instruments will increase, along with the growth in the volume of currency trading. “Regulators around the world have taken steps to make the market safer for investors and, as a result, we will probably see more people trade forex.”

The author adds that as long as you are willing to approach forex trading with the seriousness and the discipline of a business, you are ready to tread ahead confidently. “Knowledge of the market, a good strategy, solid money management, and a little bit of luck will go a long way.”

Confidence indicator

The opening chapter notes that 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, observes Lien. “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.”

Stating that a large part of the growth in forex dealing could be attributed to individual investors discovering the opportunities in trading, especially in the wake of a crisis, Lien instructs that we can witness more crises, large and small, in various parts of the world over the next 10 years.

She counsels that when the crises occur, you will have the choice of being on the offence or the defence. And that the key to ‘turning headlines into opportunities’ is in not getting caught up in the madness and being able to think rationally about whether the price of the asset is appropriate given the risks and valuations.

Real estate tourism

It may be of interest to read in a chapter sub-titled ‘Forex isn’t as foreign as you think’ that it has become common for investors to dabble in real estate in different countries, in addition to holding money in foreign banks. An example Lien mentions is of how the Chinese who are flush with cash make trips to the US, Canada, or Australia, to visit property, as part of global ‘real estate tourism’!

She says that outside of the US, foreign property investment is extremely popular. “I attended a property expo in Australia once where Americans were selling land and homes in Florida at discounted rates.” When a currency is weak, there tends to be more property investment by foreigners, the chapter informs. “When it is strong, foreign investors will shy away because of the increased premium created by the higher exchange rate.”

Trading log

Of immense value is the chapter on ‘becoming a better trader’ which begins by reminding that failure is a critical part of success. No matter how much thought we have put into our trading plan and no matter how well we have analysed the data and charts, markets can trip us up and stop us out at any given time, cautions Lien. “The important thing is to learn from our mistakes because as Carl Jung, the father of analytical psychology once said, ‘Knowledge rests not upon truth alone, but upon error also.’”

A ready takeaway for beginners is the suggestion to keep a trading log. Start a simple Excel spreadsheet with a running tally of your trades, noting the currency pair that you traded, the strategy that you used, the time that you entered the trade, the price that you entered at, the stop, your profit or loss, and a column for special notes – such as, ‘that was a bad trade,’ or ‘should have stayed in the trade longer’ – guides the author. “These notes to yourself will become extremely useful when you review your trades and find room for improvement.”

Compulsory addition to currency traders’ shelf.

**

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