Kathy Lien’s Day Trading and Swing Trading the Currency Market: Technical and Fundamental Strategies to Profit from Market Moves has become something of a classic. In this third edition (Wiley, 2016) “all of the content has been updated with new chapters and strategies.” Although I haven’t compared it point by point with the second edition, there are some obvious differences (beyond replacing the longer chapters with bite-size pieces and updating many of the charts). For instance, the chapter on seasonality has been dropped in the new edition. Unfortunately, as is usually the case with a new edition, some old material remains, which can be jarring. Do we really care, for example, how FX dealers changed their ranking of the importance of economic data between 1992 and 1997?
Nitpicking aside, Lien’s book offers both an excellent overview of the FX market and a set of time-tested trading strategies. One such strategy involves the use of double Bollinger bands. Since currencies trend, the standard Bollinger bands (the 20-period moving average with two standard deviation bands above and below the moving average) don’t work as overbought and oversold levels. Lien adds a second set of bands, at one standard deviation from the moving average. Using the bands to pick tops and bottoms, for a long trade she has six rules, beginning with three entry rules: “Look for the currency pair to be trading between the lower first and second standard deviation Bollinger Bands. Look for a close above the first standard deviation Bollinger Band. If so, BUY at close of candle or 4 pm NY time.” (p. 103)
Another suggestion is to use one- and three-month option volatilities of currency pairs to time foreign exchange spot movement. “As a guideline, there are two simple rules to follow. The first one is that if short-term option volatilities are significantly lower than long-term volatilities, one should expect a breakout, though the direction of the breakout will not be defined by this rule. Lastly, if short-term option volatilities are significantly higher than long-term volatilities, one should expect a reversion to range trading.” (p. 192)
Anyone who’s brave enough to venture into the FX market needs guidance. Lien’s book may not turn a rank novice into a profitable currency trader, but it’s a good place to start. It also provides clearly written, valuable information for traders in markets that intersect with the currency market—and that’s just about every market. Bonds and commodities are obviously linked to currencies, but equity markets are also dependent on currency moves, as CEOs always remind their investors when reporting earnings that were negatively affected by currency headwinds. So it behooves traders and investors alike to learn something about how the currency market works.