At the heart of Kathleen Brooks? trading philosophy is the principle that fundamental factors - in politics, economics and society - cause currency prices to move in the medium to long term, but throughout the day price movements are best anticipated by looking at technical factors. Building a trading plan around the two sets of indicators works for her. By reading about how she does her pre-trade market analysis (or ?the homework?), forms a trading plan and puts the plan into action, readers will see how to apply this principle in practice in their own trading.
In her new book Kathleen challenges currency trading aficionados to have a look at her path in discovering FX trading, providing them with a clear introduction to the FX market, practical demonstrations of the indicators she uses, as well as examples of how she plans and executes profitable trades. The most enticing aspect of the book is the way she fuses technical and fundamental analysis. She clearly states that, in order to extract the most from the market, one has to delve deep into both of these coherent approaches. While not getting into discretionary/systemic trading details she also outlines the most important aspects of risk management that every FX trader should adhere to.
In her opinion the fundamental backdrop needs to come before technical analysis, as one has to pick the correct market direction first. On the other hand the technical side provides great buy and sell signals which give a trader proper timing to enter the market. Kathleen does not entrench her reader?s mind, in fact quite the opposite - the breakdown into bits and pieces and the suggestion that every person thinks differently and sees different patterns on the charts is winning us over to support this notion. Freedom of mind is essential to every trader and Kathleen does not provide us with a holy grail, nor a finite solution ? she pushes readers to work on their own to achieve a style suitable to their personality.
In this exclusive interview Kathleen Brooks tells FX Trader Magazine the reasons she decided to write this book, and gives us her thoughts regarding some fundamental FX market issues.
We are quite intrigued by your background ? you started from English Literature, you then walked into a foreign exchange dealing room and ended up as Research Director at Forex.com and now you just published a book on Forex. How did this leap happen and what is your ultimate goal?
I think most people who have worked in the FX market will agree that whatever degree you do will not be a perfect fit for working in the FX market. Some people think that an economics or finance degree should make them expert traders ? wrong. Politics, economics, social factors all drive the FX market along with technical analysis, which is a mix that is not often included in degree courses. Studying literature and classics at a top university gave me deep analytical skills, and taught me to always look below the surface and search for patterns, themes and drivers of action ? fairly similar to what you have to do as an analyst of the FX market!
My background was actually what helped me get my initial FX job in BP. The chief dealer wanted someone who had 1, strong communication skills and 2, someone who could write well. I ticked those boxes and the BP FX traders brought me up to speed on the markets, which I will always be grateful for. In terms of what I will do next, who knows! I see the world as full of opportunities and I don?t want to commit to one thing when there are so many interesting paths out there. I think finance will always be my focus, but my passion is breaking financial concepts down to easily digestible chunks for the average person. I want to help make financial markets more democratic, less of a boys? club and accessible to the average person.
Your book makes Forex Trading sound simple. Is this the way you feel about it? And is this why you decided to write and share your fusion method, which combines fundamental and technical analysis?
Forex trading is not simple; in fact it is very complex. That is why you need a simple approach to break it down, and understand the most important parts. You start with the simple stuff: understand what a pip is, a stop loss is, how to place a trade etc., then you build up your fundamental and technical knowledge layer by layer until you can formulate strategies and, hopefully, make profitable trades. If you try to learn everything at once the FX market can be overwhelming, that is why I advocate a simple approach in my book.
Some top traders believe that only professional traders have the right tools to trade news and market events, and that retail traders will always come too late. Do you agree with this view?
Of course it would be great if all retail traders could have access to Bloomberg terminals and have access to vast amounts of data at the press of a few keys. However, retail traders are in a much better position than they were 5 + years ago. The internet and social media offer a huge amount of information for traders including economic data releases, trade ideas etc. Added to this, a lot of forex providers also offer very advanced charting packages on their platforms, which helps the retail client play catch up with professional traders.
Do you feel that forex trading impacted your thought process and analytical skills over the years?
It makes you nimble and trains your brain to think of 10 things at once. When you trade FX you often trade a few currencies at the same time, you may also look at stocks and commodities too, so you have to store a lot of information and remember plenty of details like buy and sell levels, technical support and resistance, economic data etc. The sheer weight of information means that you also learn to prioritize and disregard information that is not directly related to your trade.
What would be, in your opinion, the ideal plan that European policymakers should implement to save the single currency idea?
Probably ease back on austerity and make the currency bloc truly unified so that unemployed people in Spain could find jobs in Northern Europe. If the massive problem of unemployment, especially amongst the young, is not addressed then I don?t see a future for the euro project. Currencies are very social things ? if there is wide-scale social unrest in the currency bloc that is the biggest risk to the euro?s survival in my view.
Since Mr. Mario Draghi assumed the presidency of the ECB on November 1st 2011 the ECB?s monthly press conference has become somewhat of a tsunami for currency traders. What is your opinion on what he has accomplished at the helm of the ECB so far?
He can control the FX market with the power of his words, rather than having to take expensive action. His veiled concern at the rate of EURUSD in the February ECB meeting caused the currency cross to drop 700 pips in the following weeks. That highlights the power Draghi has over market, it also shows his skill as the second most important central banker in the world.
What do you think about the extreme monetary policy measures announced by the Bank Of Japan at the beginning of April?
I think they have taken risky action. As we have seen in the US, QE can take some time to work. It has taken 4 years of QE from the Fed to boost the US economy, so the BOJ better hope they have not run out of ammunition. Overall, if the policy is designed to weaken the yen, then the BOJ needs to get Japanese investors involved in selling the yen for us to see another leg higher in USDJPY.
How about the ?Carney effect? on GBPUSD? If you had to pick a direction would you be bullish or bearish on the Cable in these next couple of months?
I think the ?Carney effect? has been priced into Cable since he was first announced as Governor late last year. Further QE could be more difficult to achieve than the market thinks because of 1, some MPC members are doubtful of the impact of more QE on the UK economy, and 2, Carney does not have a deciding vote on the MPC, so just because he may be in favour of more easing does not mean it is going to happen. This could support the downside in GBPUSD around 1.48. There is a risk that the Cable could strengthen at the start of Carney?s reign if he does not push through more easing.
How would you explain the recent decoupling in risk sentiment ? Stock Markets are rallying across the Globe, commodities and commodity currencies are falling to the USD. Is King Dollar back?
I think it?s down to the US. US stocks are rallying because the US economy looks in its healthiest state for many years. However, commodities are also under pressure because of the commodity boom in the US, which could see the US become a net oil exporter in the coming years. This is weighing on commodity prices and hurting currencies like the Aussie and the NZD.
As you mention in your book some people trade Gold like a currency. What?s your view on this ? is Gold a currency?
Obviously gold is not a currency in the traditional sense of the word; it is not the average unit for exchange these days. However, from 2008 to the end of 2011 one of the pillars propping up gold was QE and the prospect of currency debasement, especially the dollar. However, since then the market has focused on the hunt for yield, which has hurt the price of gold. It has been under sustained selling pressure, as it does not offer any yield to investors. Thus, you could argue that in recent years gold has been treated like a currency with an interest rate of 0% and no prospect of rates ever going higher.
As every trader knows, it?s difficult to control one?s emotions. How do you manage your own discipline? Do you use some special tactics?
I have two rules ? firstly, no one will die in this trade. Secondly, as long as I stick to my risk management rules, which I explain in my book Kathleen Brooks on Forex, then I should feel comfortable in any trade.
We have now reached the summer months during which many traders start scaling down their books. What?s your opinion on the FX markets thinned liquidity impact during these months? Do you cut back on trading?
It depends, in recent years we have seen some big fundamental shifts during the summer months on both sides of the Atlantic, which has led to lots of volatility and trading opportunities. This summer the focus is on the Fed and the potential for a tapering of QE purchases, thus economic data over the coming months has the potential to cause some large moves in the market. This summer could present lots of opportunities for FX traders, so don?t stray too far from your trading desk!
What is your average trade duration? What was the best trade you ever made? And the worst one (if you wish to talk about it)?
I am a short term trader. I usually hold trades for a number of hours, sometimes a few days, but never over the weekend. The risk for the retail trader is that the market gaps over the weekend on the back of something unexpected, which takes you out of your trade and hurts your capital base, ouch?
Because I am quite short term, there isn?t one stand out bad trade or good trade. I recently had a bad call on AUDJPY, I thought it was a sell on a rally to 99.50 ? a prior high ? but it never got there and sold off at 99.00. I was annoyed at myself for missing that? A recent good call was a short term bounce in GBPUSD from 1.5010 lows, a huge support level for this cross.
Recently surveys are indicating that the number of women interested in FX trading is growing. What do you think is the reason for this and do you have some special advice for women traders?
I think it is growing far too slowly. The FX market is very male dominated; even platforms look very male, mostly because they are designed by men. I think the only way the saturated FX market will grow is if it attracts female clients. This will require a different type of sales technique, perhaps a different approach to research and also a complete overhaul of some FX trading brands. Some are very masculine; they need to be more appealing to females. I am no branding expert, so I?m not sure of the moving parts that need to get us there, but to me it seems like too good an opportunity to miss, especially as female disposable income grows and women want to manage their own money directly and not through husbands or partners.