kathy lien

Tips & Trading Strategies for the Currency Market Kathy Lien Chief Strategist

Disclaimer Leveraged foreign exchange and options trading carries a significant level of risk, and may not be suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to invest in foreign exchange you should carefully consider your investment objectives, level of experience, and risk appetite. You should be aware of all the risks associated with foreign exchange and option trading, and seek advice from an independent financial advisor if you have any doubts. The contents provided in this seminar are subject to change at any time without notice. There is no guarantee that the systems, trading techniques, FX PowerCourse, trading methods, indicators or other information presented at this seminar will result in profits or not result in losses. The content is provided for informational purposes only and is not intended as a trading recommendation.

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FX – A Growing Market •

FX: Average Daily Volume of $1.9 trillion

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Volume Surged 57% Over Past 3 Years

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NYSE Volume of $50 Billion

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At Least 4 to 5 Times the Size of the US Futures Market

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Volume Expected to Exceed $3 Trln in 2007 K

6 Reasons Why we Love the FX Market More Than Stocks • No commissions, pay only the spread • Simple bet – Dollar /Anti Dollar • No Enrons • They pay us interest every day if we are on the carry side • 24 hours: We Can Trade at 2 AM or 2 PM • Liquid like the ocean - $20 Million Up B

FXCM Execution Advantage

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Mechanics Of Trading

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Always Trade With Stops

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Know Your Rolls

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Understand The Reports

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Fundamental Vs. Technical Analysis

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Trading Major Trends in FX The Power of Long Term Trading USD/JPY Rally 9/05- 12/05 Daily vs. Hourly Candles

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Trading Major Trends in FX •Can be a Very Rewarding and Lucrative Strategy •Profit From the “Big Picture” Analysis •Make Only One or Two Trades •Make Money From Capital Appreciation AND Interest Income

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Macro in FX – What Drives the Trade? 1. 2. 3. 4. 5.

Interest Rates Economic Performance Politics Trade and Capital Flows Merger and Acquisition

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Macro in FX – What Drives the Trade?

1. Interest Rates •

Global Capital Markets Seek Yield First and Foremost

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All Currencies Carry a Yield

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The Spread in Yield in Combination with Leverage Creates the #1 Macro Trade in the World – the CARRY TRADE

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Trading FX For the Long Term Can Be Very Profitable

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Trading FX For the Long Term Can Be Very Profitable

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Trading FX For the Long Term Can Be Very Profitable

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What Drives Long Term Trends in FX? #2 Economic Growth GDP- Strong Growth Attracts Capital to the Country Employment – Critical to GDP Growth and Consumer Spending Inflation – Can be Very Harmful to Currency Values (Extreme Case – Post WWI DEM = 1 Trillion) B

Fundamental Factors Case Study- GDP Growth US/EZ 2005

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Fundamental Factors Case Study- Unemployment Rate SZ/EZ 2005

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Fundamental Factors Case Study- CPI Gages Canada vs. Japan 2005

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What Drives Long Term Trends in FX? #3 Political Environment Elections – FX Markets Generally Prefer Free Market Proponents (Fiscal Prudence Most Important) Referendum – Can Have Significant Impact on Public Policy and Long Term Economic Ramifications Scandals – Markets Dislike Politcal Instability (Capital Flight)

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Political Factors Case Study – Europe Rejects Constitution 2005

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Political Factors Case Study – Canadian Government Survives No Confidence Vote 2005

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Political Factors Case Study – European Vs. Japanese Elections 2005

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Macro in FX – What Drives the Trade?

4. Trade and Capital Flows •

Some Countries are More Affected by Trade Flows (AUD, CAD, NZD)

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Some Countries are More Affected by Capital Flows (USD, GBP)

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Critical to Understand the Difference and Watch Proper Gauges (TIC)

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Trade Flows vs. Capital Flows Case Study 2 NZD Trade Deficit Grows to 9% GDP

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Macro in FX – What Drives the Trade?

5. Merger and Acquisitions •

Temporary but Very Powerful Factor

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Dealflow is Time Sensitive Not Price Sensitive

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Can Trump Other Economic Data in the Short Term

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M&A Flow Case Study 2 GBP Refuses to Fall as Data Deteriorates 05-06/06 UK economic data deteriorates sharply especially in manufacturing , but cable stays steady as demand for UK corporate assets holds firm

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Fundamentals 101 – All You Ever Need To Know To Trade FX In Summary: If Economic Growth Is Strong => Interest Rates Will Rise And That Should Attract Capital Which Will Be POSITIVE For The Currency. BUT Watch Out For Large UNFUNDED Trade Balance Deficits And Any Signs Of Political Turmoil Which Will Lead To A Drop In Investor Confidence And Will Be NEGATIVE For The Currency.

Finally Always Monitor Central Bank Speak And Consider Carefully What Monetary Authorities Say. They Move Markets.

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Trading Tip: Pair Strong With Weak

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Turn To The Carry Use Only Currency Pairs With High Interest Rate Differential (i.e. NZD/JPY AUD/JPY, GBP/CHF etc.) Trade ONLY on The Side of The Carry. Buy The Pair Cheap and Capture Rolls and Capital Appreciation Using Daily Charts Look for Pair to Come Out of the Sell Zone on Bollinger Band “Bands” Place Stop At Swing Low Target 1 = Amount Of Risk Trail Rest By 20 SMA Stay in the Trade as Long as Possible

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Turn To Carry Example in GBP/JPY

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Turn To Carry Example in GBP/JPY Trade 1 Enter at 203 Stop at 201 Target 1 = 205 +200 Points Target 2 = 208 +500 Points Trade 2 Enter at 205 Stop at 203 Target 1 = 207 +200 Points Stop to Break –Even 23 Days of 2 Points of Interest = Additional 46 Points Total Profit = 946 Points K

Setups, Setups, Setups! Seven Day Extension Fade – Statistical Significance Trading Rules • • • • •

Look for 7 consecutive bars of weakness (where each bar’s close is below the prior) Buy at the open of the next bar Place stop at the low of the seventh bar minus 10 pips First target is amount risked, move stop on remaining half to breakeven Second target is three times the amount risked

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Seven Day Extension Fade – NZD/USD

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Seven Day Extension Fade – EUR/USD

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Seven Day Extension Fade – USD/CHF

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Seven Day Extension Fade – GBP/USD Hourly

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Seven Day Extension Fade – Failed Trade - 17 pips

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Where to Find Clear and Accurate Trading Ideas

Fit Your Trading to Your Personality

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Trading Styles are as Vast as a Buffet • Very Short Term - Scalp trading • Intraday - Momentum trading • Long Term – Trend trading

• Range Trades • Reversal Trades • Breakout Trades • Retracement to trend Trades

Intelligent Tools From DailyFX.com

Intelligent Tools From DailyFX.com • The Pairs to Range Trade • Picking Tops and Bottoms • Hedging Radar • Dynamic Carry Trade Index • Trading the News

The Pairs To Range Trade This Week • Why Range Trade? • Range Trading Occurs 70% of the Time • Provides Consistent Profits in Low Volatility Conditions

The Pairs To Range Trade This Week 1. Uses Technical and Fundamental Filters 2. Technical's Include: S/R, Fib Analysis etc. 3. Fundamentals Include: Careful Analysis of Event Risk

The Pairs To Range Trade This Week

The Pairs To Range Trade This Week

Picking Tops and Bottoms 1. Picking Turn Trades Can be Dangerous and Frustrating 2. Simple Overbought and Oversold Measures are not Enough 3. Yet Taken Properly these Trades Can be Very Lucrative

Picking Tops and Bottoms Applies a Systematic Approach to Gauging the Highest Probability • • • • • •

JPercentile Indicator – Relative Positioning Elliot Wave Count Pivot Points Volatility (3M) Statistical Significance Risk Reversals

Picking Tops and Bottoms

Picking Tops and Bottoms

Picking Tops and Bottoms

Picking Tops and Bottoms

Hedging Radar • What is Hedging? - Buying and Selling the Same Currency Pair at the Same Time • Why Hedge? • Continuous Position in the Market • 2 Positions but 1 Margin

Hedging Radar 1. The Lower the ATR, the Less Risky the Currency is for Hedging** 2. Entry Zone = Profit Targets: Go both long and short at the market, if the price is within the Entry Zone. Target for the long order is the top of the entry zone. Target for the short order is the bottom of the entry zone. 3. Stop Levels are Key Support and Resistance Points: Use discretion with these levels. Place the actual stops a few pips above the higher level and a few pips below the lower level. The break of these levels signals that the ranges have been broken and the hedging strategy should no longer be implemented.

Hedging Radar

Hedging Radar

Hedging Radar

What happened? Price went up and reversed (profit on the long side taken at 2.4211 ) Price came back down (profit on the short side at 2.3975 )

Dynamic Carry Trade Index • Why Trade the Carry? • Most Successful Strategy Over Last 3 Years • Generates Positive Interest Every Day

Dynamic Carry Trade Index 1. Uses a Portfolio Approach to Diversify Risk 2. Dynamically Adjusts Allocation to Maximize Yield 3. Changes Allocation Based on Change in Monetary Policy or Major Event Risk

Dynamic Carry Trade Index

12 /31 /1 4/3 999 0/ 2 8/3 000 1 12 / 200 /31 0 /20 00 4/3 0/ 20 8/3 01 1 12 / 200 /31 1 /20 0 4/3 0/ 1 20 8/3 0 1/ 2 12 200 /31 2 /2 4/3 002 0/ 2 8/3 003 1/ 12 200 /31 3 /2 4/3 003 0/ 2 8/3 004 1 12 / 200 /31 4 /2 4/3 004 0/ 2 8/3 005 1 12 / 200 /31 5 /20 05 4/3 0/ 20 8/3 0 1/ 6 2 12 0 /31 06 /20 06

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DailyFX Dynamic Carry Trade Index Equity Curve

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Trading the News 1. News is the KEY Driver of Price 2. Important News will have Continuation that can Last for Hours or even Days 3. Success in News Trading Depends on Preparation

News Moves Markets 1. Economic Releases 2. Central Bank Speak 3. Geo-Political Events

Trading the News 1. Shows the Past Three Event and its Price Reaction 2. Uses Highly Disciplined Approach for Both Entry and Exit 3. Provides Possible Scenarios for both Upward and Downward Surprises

News Moves Markets

Trading the News

Trading the News

Trading the News Durable Goods -7.8%a vs. -3.0%e Ex trans -3.1% vs -0.2%e

60 pips in 12 hours

Why Wait? Get these Ideas on a DAILY Basis! Free Access to DailyFX+ March 24 -March 30th

Thank You, Good Luck And Good Trading