Currency Strategy

Posted by Allison on 13 April 2009, 10:55

Trading in the foreign currency exchange market it easy; trading successfully and profitably is difficult.  There is so much volatility and fluctuation in this enormous market that an individual trader can very quickly lose a great deal of money.  Currency Strategy:  The Practitioner's Guide to Currency Investing, Hedging, and Forecasting is written especially for the currency trader who wants to maximize profit and minimize risk by using a successful new trading approach to make the most of market opportunities.    

A focus on what works

Twenty years ago, foreign currency exchange traders were a relatively small and exclusive group of people, all working under traditional theories of macroeconomics as the best approach to making a profit on the currency market.  The world is an entirely different place at the present, with incredibly fast and frequent changes in the currency market now considered normal rather than unusual.  Traditional theories of macroeconomics simply cannot keep up with this tremendously rapid pace of change, so many traders are turning to a new approach to the foreign currency exchange market.

Currency Strategy:  The Practitioner's Guide to Currency Investing, Hedging, and Forecasting contains clear and easily understood explanations for why the traditional view of currency markets does not work any longer, and presents a new and innovative approach to this volatile market that is based on real world experience in this new market environment.  The combination of new thinking with deep expertise makes the concepts set forth in this book well worth reading and considering.

According to the author, Callum Henderson, the only way to invest successfully in the foreign currency exchange market is to find a way to deal with the rapid and often wild fluctuations that result from even the smallest hint of a crisis or changing economic situation.  The old models do not work well in these circumstances, so Henderson recommends a different approach that was developed based on practical experience in the market.  He uses some of the classic, proven tools that are still effective for predicting fluctuations and managing them successfully when they do occur, blending them with new techniques that are better suited to the modern currency market.

Mathematical models and practical advice

Currency Strategy:  The Practitioner's Guide to Currency Investing, Hedging, and Forecasting is an excellent resource for combining structured mathematical models with practical advice that comes from years of experience and knowledge.  It is a wide ranging book, providing a comprehensive look at how to be successful in the foreign currency exchange market.

Some of the topics covered include:

Traditional models of exchange rates – This is an examination of traditional fundamental analysis, going into plenty of detail about the weaknesses and strengths of this approach in the modern currency markets.  Areas of discussion include parity in purchasing power (tradable goods, non-tradable goods, misalignments, pricing strategy, etc.); monetary, balance of payments, portfolio balance, and interest rate approaches (practice vs. theory, interest rate differentials, fixed vs. floating exchange rates, productivity, etc.).

Framework for the economics of currencies – Even slight differences among currencies can influence fluctuations and other market movements, so today's currency trader needs to understand the importance of a more structured framework for the economics of currencies.  Areas of discussion include currency differences in efficient/inefficient markets; the interrelationship of speculation and exchange rates; the basics of currency economics; the J-curve; and the like.

Flow models and technical analysis – Flow charts and technical analysis are traditional tools of the foreign currency exchange market.  To fully understand their role in the modern currency market, it is important to review and understand the practice and theory of these tools.  Areas of discussion include short term, medium term, option, and speculative flows; the basics of technical analysis; the science and art of creating charts; and differing perspectives on technical thinking.

Exchange rates and predictive models – A variety of approaches to setting exchange rates means there are an even greater variety of outcomes that could occur from fluctuations and interactions between different currencies.  Areas of discussion include an explanation of fixed exchange rates, floating exchange rates, and the impact they have; a model for predicting crises and triggering events in fixed exchange rate currencies; and a model for predicting crises and triggering events in floating exchange rate currencies.

Effective management of currency risk for corporations – Managing currency risk is the key to success in the foreign currency exchange market for corporations and large corporate entities.  Areas of discussion include differing types of currency risk; effectively measuring and managing currency risk; strategies for hedging from the corporate perspective; benchmarks and best practices for managing currency risk.

Effective management of currency risk for general investors – The general investor has different needs when it comes to managing currency risk.  Areas of discussion include determining the level of acceptable risk; determining whether or not to hedge; reducing overall currency risk; and selected active strategies for currency risk management.

Effective management of currency risk for currency speculators – Currency speculators are often viewed in negative terms because of the potentially huge influence their activities can have on the stability of currency markets.  Areas of discussion include the realities of currency speculation compared to the myths of currency speculation; typical types of speculators such as proprietary dealers, hedge funds, and the like; why currency speculation occurs; and how currency speculators actually operate.

A new framework for application to the different currency risk profiles – The new framework for approaching foreign currency exchange markets can be applied to each of the currency risk profiles (corporate, general investor, and speculator).  For each of these different profiles, the new model and framework for understanding the economics of currencies are examined more closely.  Hedging, trading, forecasting, and optimization are among the key activities discussed.

Emerging markets – The fastest growing arena of the foreign currency exchange market is in emerging markets, particularly India and China but also including Latin America and parts of Europe.  There is tremendous potential for profit in these volatile emerging markets, but the risks can be very high.  Areas of discussion include developments in emerging markets between 2003 and 2006; in depth examination of China and its currency; in depth examination of India and its currency; and overall review of trends and patterns across global emerging markets.

A new edition with updated information

It is worth noting that the new edition of Currency Strategy:  The Practitioner's Guide to Currency Investing, Hedging, and Forecasting emerged at a key developmental point in the foreign currency exchange market.  Emerging markets have always been a tremendous growth (and high risk) area of trading, but the dramatic rise of China and India are eclipsing anything previously seen in the currency market.  The timing of publication for this new edition is excellent given the current global economic environment.

The updated information in this edition includes:

  • Looking at continuing expansion of emerging markets currency as a distinct class of assets
  • The increasing importance of currencies from the EM
  • Expansion and greater freedoms in the Asian NDF markets
  • Generally explosive growth across multiple Asian currencies
  • Status and trends of currencies from Latin America
  • European currencies that are emerging and developing
  • Overall growth markets for currency trading around the globe

Final thoughts

The modern currency trading market has changed a great deal over the last decade or so, necessitating development of new approaches and strategies.  Currency Strategy:  The Practitioner's Guide to Currency Investing, Hedging, and Forecasting offers a fresh look at combining classic, proven technical analysis and other evaluation tools, with an innovative new approach to trading in the foreign currency exchange market.  Of particular importance are the currency risk management strategies for corporations, general investors, and currency speculators within the new approach suggested by the book's author.

This book presents a detailed and specific discussion of some of the newest expert thinking in the currency trading market.  It would be an excellent addition to the library of anyone involved in (or thinking of becoming involved in) the foreign currency exchange market.

Direct link to this book at Amazon