Kathleen Brooks - Kathleen Brooks on Forex: A Simple Approach to Trading Foreign Exchange Using Fundamental and Technical Analysis

Since you opened this book then I guess you are interested in foreign exchange, have traded it and want to hone your skills and increase your chances of making a profit. I have been working, learning and trading in foreign exchange for the bulk of my career and over the years I have developed my own philosophy for understanding the largest asset market in the world. Its not your standard approach, but I think that it will strike a chord with traders and that is why I want to share it with you in this book.

There are two main ways of analysing foreign exchange:

1. Using fundamental analysis; and
2. Using technical analysis.

Most people in the markets either look at fundamental analysis or technical analysis. But when I first started out in FX, restricting myself to looking at only one of either fundamental and technical factors didnt seem right to me. I always felt that something was missing. These approaches were either way too complex or they were too prescriptive. I wanted something that I could grasp and that made sense to me.

That was when I decided to ditch the dogmatic strategies that pervade the FX market and forge an approach of my own. In the course of my learning about FX I found that I understood the markets best by using neither technical analysis nor fundamental analysis in isolation, but by using them together.

I believe that fundamental factors politics, economics and even society cause currency prices to move the way they do (and sometimes in the strangest ways), but throughout the day the smallest price movements are usually based upon technical factors. So youll get no fundamental or technical purist rhetoric here: my approach is to combine the two. It works for me and I hope by reading about it youll pick up some ideas for your own trading.

My aim in this book is to teach you my approach to trading the FX market. I assume you already have some knowledge of trading this market I wont go over the basics, such as giving you an intricate history of a pip, or explaining what a currency cross is. Plenty of pages (both in print and on the web) can give you this information and help you to take your first steps into trading. The website Baby Pips (www.babypips.com) is one of my favourites; it provides a great overview for the novice FX trader. Investopedia (www.investopedia.com) is another useful resource for an early introduction to the foreign exchange market.

So, rather than presenting you with another FX 101 I hope to provide a fresh way to view the FX market. This should help you with setting up and executing your trades.

I am a firm believer in learning from observation so this book is packed full of real-life examples and trading set-ups from my recent analysis of the foreign exchange market. Some things deserve a little context or explanation, but I have tried to show more than tell.

The first two parts of this book will look at fundamental and then technical analysis separately before I show you how I combine the two in part C. Part D shows you how I execute my trading strategy in the market using my tried and tested risk management techniques.

It was 2006 and I had just joined the forex trading desk at BP as a junior trading analyst. I was a novice, in fact extremely novice, probably the least experienced person that had ever walked on to the BP trading floor. Hence I was not only a young female on a desk full of men but I didnt even have a finance or economics degree. In sum I was totally clueless.

The patience of the traders, the chief dealer and my direct boss, the head of the analytics desk, was amazing. They got me up to scratch on bids and offers, what a pip was and how to trade. They also taught me how fundamentals impact the market. The crossover between central banks, economic data and even politics gripped my imagination and has determined my career path ever since.

In spite of this valuable tuition, when I started out there were a few things I just couldnt understand. Firstly, why was the dollar in such a steep decline? It had been heading south for years against the pound, the yen and the euro. I didnt understand why the dollar would always falter what about the mean-reversion and efficient markets I had spent months learning about? Also, why did the dollar always seem to fall on good economic news out of the US?

If the currency was a reflection of the state of the economy then the US must be in deep economic trouble. But back then growth in America was quite strong and the financial crisis was still ahead of us.

Hence I would write long treatises about how oversold the dollar was, but I could never make a winning trade. I grasped economics and the markets fairly quickly, but something wasnt right. The dollar continued to go against me and I wanted to know why. That was when I learned a bit more theory about the importance of central banks, relative interest rate strategies, changing global growth dynamics and the concept of the safe haven.