Trading Book Reviews

Book Review: Essentials of Foreign Exchange Trading

A pretty good basic overview and description of the retail forex market

[easyazon-link asin=”0470390867″][/easyazon-link]This review of [easyazon-link asin=”0470390867″]Essentials of Foreign Exchange Trading[/easyazon-link] has been a long time coming. The book is part of Wiley’s “Essentials Series”, which as I understand it covers a wide array of business-related topics. Wiley published my own book, [easyazon-link asin=”047179063X”]The Essentials of Trading[/easyazon-link], as well, but my editor and I came up with that title together without any influence (that I’m aware of) of the “Essentials” books. When I found out about this book being published I was initially a little surprised, thinking it might have spun off from my title, but that clearly isn’t the case (the lack of “The” as the beginning does differentiate).

The book was provided to me by the author, James Chen, for review several months back. It took me a while to go through as I didn’t read it straight through and was focused on other things at the time. On top of that it’s taken me quite a while to actually get to the writing even though the book has been sitting on my desk for quite some time starring at me.

I’m a bit mixed on Essentials of Foreign Exchange Trading. In terms of a basic overview and description of the retail forex market I think it does a pretty good job. Chen covers all the bases from a brief overview of how we got to where we are in terms of market structure, the basics of forex pricing and trading mechanics, and overviews of technical and fundamental analysis. This is something you would certainly expect from someone who works for a broker.

There are also a number of different trading strategies discussed. That ranges from the different time frames (day, swing, position) to the broad styles of trading (trend, range), and incorporates some of the methodologies (breakouts, chart patterns, Fibonacci, pivot points, Elliott Wave, etc.) as well as discussions of topics like carry and news trading. While some basic strategies are introduced, this is not the type of book which outlines a specific strategy or set of strategies. Instead it provides an overview of the different approaches one could take to trading forex.

I do have a few issues with the book, however. You may consider them a bit nitpicky.

First, Chen discusses “stop loss” and “profit limit” orders in a way which suggests they are somehow different than stop and limit orders, which they aren’t. This could confuse some new traders.

Second, the subject of margin isn’t covered quite as fully as I’d like to have seen. Margin call is explained, but the actual margin requirement (initial and maintenance) are not well defined. Given how frequently this confuses new traders, it would have been good for there to have been a more thorough discussion of the subject.

Third, Chen actually talks about “hedging” in a way which suggests it can be a useful strategy (which perhaps shouldn’t be surprising given he works for a broker). The book was written prior to the NFA’s rules in opposition to this practice (see No more hedging for forex traders), but that is only for US brokers. Those in other countries can still employ “hedging”, which is something I have long argued is at best something which has no net impact on one’s account and at worst actually costs the trader money for no net advantage being provided (see Forex Hedging Continued).

I’m also not that keen on the way the author categorizes news trading as being a fundamental approach. It really isn’t. News traders are merely trying to profit from the market’s reaction to data releases. They don’t really care about the meaning of the release in the wider fundamental picture, just how it compares to market expectations. Call it basically a play on market psychology.

I do like the way Chen includes sidebar type boxes introducing and explaining important people and topics in forex trading (or just trading in general). One of them even covers one of my favorite set-ups, the narrow Bollinger Band one he calls a “squeeze”. My first ever published article back in 1994 was on the use of Bollingers to look at the trend situation of a market, and I’ve written about the narrow Band set up and its usefulness many times since.

I also think the author does a fairly good job of talking (at least in brief) about important subjects related to developing a strategy and implementing a trading plan, and the pitfalls traders can fall into. I don’t care for his discussion of risk/reward, because it presents an overly one-sided view of trader performance, but otherwise I think Chen has done a reasonable job of hitting the major high points.

Overall, I found Essentials of Foreign Exchange Trading a pretty quick, easy read. It will probably sound self-serving for me to say that I think my own book, The Essentials of Trading, is a better overall book for new traders, but I do honestly believe that to be the case. I will admit, however, that Chen’s book, because of it’s market-specific focus, does cover forex related subjects better.

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