Book Review > FX Trading - An Australian Guide To Trading Foreign Exchange

For the majority of us, the Foreign Exchange (FX) market has generally held little more than a passing interest unless preparing to embark on an overseas holiday. Additionally, due to highly publicised events such as the National Australia Bank’s FX trading scandal, it has gained a reputation for being the “wild west” of the trading world. However, with an average turnover in excess of US$2 trillion per day, the FX market is the world’s largest financial market and is more than 10 times the size of the combined global equities markets. Due to its sheer size and the “ferocity of competition”, the FX market is highly transparent and has extremely low transaction costs compared to other markets. Historically it has shown less volatility than the equities market thus making it no more risky than trading equities. The authors assert that because of the combination of low trading costs, tremendous liquidity and the ability to trade on margin, the amount of risk involved in FX trading is largely up to you.

Douglas, Pontikis and Lovrencic claim that the potential of massive profits in the FX market will attract many readers to their book. In response to this claim, the book cleverly begins with a short chapter on money management, which briefly outlines the goals of protecting capital and maximising profits through appropriate trade selection, position sizing and exit strategies.

Chapters 2, 3 and 4 cover the basics of the FX market and introduce readers to the history and structure of the foreign exchange market, key terms and jargon, quotation conventions as well as the calculation of profit or loss on FX trades and local media reporting of FX trades.

Next, chapter 5 identifies the major participants in the FX market and discusses the roles that each of them play. The growing popularity of FX trading within the “retail trader” group has resulted in an ever-increasing number of FX trading platforms from which they can choose. Chapter 6 guides reader decision-making for the selection of trading platforms and online brokers, covering aspects such as trade size available, margins, spread widths, charting services, as well as how the Margin FX Broker makes money.

A comprehensive discussion of the economic factors influencing the FX markets is the focus of chapter 7, which covers the following:
* Supply and demand and the Balance of Payments
* Interest rates and Inflation
* Asset prices and Commodity prices
* Government budget and Fiscal policy
* Credit ratings and Currency controls
* Politics, Industrial Relations and Market Sentiment
* Data Releases.

A basic overview of Technical and Fundamental analysis of the FX markets is discussed in Chapters 8 and 9 respectively. The authors acknowledge that a comprehensive discussion of these topics is beyond the scope of this book and have provided the reader with a list of references and internet sources of economic information. Institutional FX is discussed in Chapter 10, covering the major players, market makers and price discovery, currency arbitrage and the new generation of FX broking and trading.

In Chapter 11, the authors discuss a small sample of FX trading strategies such as pivot points, forward rolls, forward points and carry trades. A brief overview of trading options over currency pairs is also covered. The final chapter of the book returns to the topic of Money Management and the importance of developing a stringent set of rules. As an example, the authors discuss the Fixed Fractional Method – one of the most popular and simple methods of money management.

I found the book to be well written and logically set out. At appropriate points, the authors provide book references and web sites that the reader might find helpful in conducting his/her own study. They also use appropriate examples, diagrams and easy-to-follow calculations to tie the discussion together. An appendix of world currency codes and a subject index are also included. My only criticisms are that I would like to have seen a more comprehensive table of contents and a glossary of terms.

Overall, the authors provide a good mixture of easy-to-understand text, diagrams and some calculations making it easy for the reader to determine whether the FX markets and trading have a place in his/her portfolio. For under $30, this book is a cost-effective way to start building your knowledge of the FX market.

Vimal Mehta is a member of the AIA.