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Let’s Talk About Currencies-With Kathy Lien
Corporate Digest | 22 March 2013
By: Louis Kent Lee
Articles (199) Profile

The forex market is the largest financial market in the world. With a daily volume of over $3 trillion a day, it is hard not to pay attention to the possible movements and trading opportunities apparent in this market. It is also difficult to ignore the fact that you can be trading 24 hours a day, six days a week, which beats the trading hours imposed in the stock markets. But how different is the currency market as compared to the stock market? Shares Investment is fortunate enough to have an exclusive interview with Kathy Lien, one of the biggest names in the forex market to take an inside scoop of this market.

Shares Investment: A lot of people have been harping on the pound’s weakness right now after it got downgraded. We’ve also seen the power of political action or inaction, which could impact the respective currencies, how do you identify an entry point in such circumstance?

Kathy: You are right that the fundamentals will be a call for a weaker pound, you know we have a lot of event risks coming up in the next couple of months, particularly the chance of more easing from the Bank of England, which could be a catalyst for the pound to move lower. For me personally, I like to sell on weaknesses instead of strength, because in the forex market, if we get into a trending mode in a currency pair, it can move so quickly and aggressively over a period of time, which was very well shown in the GBP/USD sell off. It’s also good to then use the technicals to spot any renewed strength or weaknesses in the currency pair to help you get into the move rather than waiting for any relief rally.

Shares Investment: That’s interesting, considering how people tend to do the opposite and sell on strength in the stock market instead.

Kathy: it’s different because in the stock markets you have proper valuations for companies, be it based on valuation techniques or models. But in the Forex market, overvalued and under-valued doesn’t have any significant implications for the currency itself. In fact, sentiment and momentum is a far greater factor than over-valued or under-valued when traders in the forex market think about selling on rallies and buying on weaknesses.

Shares Investment: Interestingly, many experts have fervently been asking investors to park their money into equities right now. What are your views on this?

Kathy: I think that equity traders need to be a little cautious about the equity market. Yes we had a massive rally lately and it’s attractive to many right now, but I think it’s important for investors to take a step back and to pay attention to the economic fundamentals be it the US, Singapore or Australia. I mean, yes, stocks are moving higher but the economy is not exactly at its all-time high performing stage. In the US for instance, we still have to worry about the potential government shut down on 27 March, as well as the continued concern on the debt ceiling, and this, coupled with other problems we see around the world such as Europe, are all problems that makes the outlook for the global economy a little bit uncertain as before. Therefore, I think people actually have to consider whether or not the stock market deserves an all-time high kind of valuation performance.

Shares Investment: With the huge constant inflow of market related news, what are the ones you pay attention most to?

Kathy: I think the most important news would be the comments from the central bankers, because at the end of the day, the kind of data or news which would have the most impact on the currency market would be such comments on whether or not it’s a monetary easing measure or a tightening measure. Essentially, that’s what traders are betting on. Therefore what’s the most telling then, is what the central bankers say themselves, and that’s going to be comments from central bankers, statements or minutes that come out of central bank meetings.

Shares Investment: So do you combine this kind of news with your technical indicators or strategies to determine good entry points?

Kathy: Yes. What I like to do is handicapping on economic data or what a central bank will do or say, so I will look at my technical chart and I will look for a good entry point to join the move, for example, let’s say we have a significant fibonnaci level, and I think that tomorrow a central bank may be dovish, so what I’ll do is to sell on the break of a fibonnaci level, and use the impending action as a catalyst to push my trade further. That’s how I combine my technical and fundamental strategies.

Shares Investment: Among the many technical indicators available out there in the market, which are the ones you are most in favour of?

Kathy: The ones that I am most in favour of would be the double Bollinger bands, which I’ve written a lot about and they basically help me identify trends and ranges in the market as well as entry and exit points. If I’m looking for trading on news oppurtunities, I actually key off the daily chart, which these Bollinger bands can be applied upon.

Shares Investment: Rounding it up, what would be the advice you would give to a person new to Forex?

Kathy: I think that when it comes to trading currencies, I normally advise newbies to stick with one pair. EUR/USD is the pair with the most liquidity and it’s the one pair that most people trade. Try to understand the Euro as much as possible from a fundamental and technical basis, where such material are already a handful of out there in the internet. Also, identification of whether or not you are interested in short term trading or long term trading is important, as there isn’t any one strategy that fits all. Thus, knowing what kind of a trader you are is extremely crucial as the strategies that you will look at, understand, and possibly use will differ accordingly.

Louis is a qualified accountant with the ACCA, and is the Research Editor at Shares Investment magazine.

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