Forex

On interest rates: The whole 'game' of forex is about finding a currency where your wealth can be parked without losing its value. This means that its purchasing power will not be eroded by inflation. So if you were an international investor you are looking for a currency that has the biggest gap between inflation and interest rates, the so-called 'real' interest rate. In most countries, that is a positive return. It has not always been the case and that is why central banks have tried (successfully) to 'tame' inflation, at least for the time being.

But like everything, it depends on your time perspective on markets. So if a central bank is worried about inflation, they will raise interest rates. This will cause short term inflows to the currency, especially from those looking for 'carry trades', because they can benefit from a gap between a high yield currency and a low yield currency and at the same time have capital appreciation because the currency gets stronger. Extreme examples would be long Turkish lira or Brazilian real and short Japanese yen.

However, inflation and subsequent high interest rates can have a negative effect on an economy if overdone. So it begs the question - do exchange rates affect inflation and therefore interest rates, or is it the other way round? So long term, an investor might not like the economic risk, despite high interest rates.

Economic data: Yes, of course there is a never ending stream and these 'indicators' are supposed to tell you in which direction a country's economy is going - although they are actually giving you history lessons of where the economy has been! Although economic data is released by all OECD countries on a regular monthly basis, everyone watched the US. Why? It is by far the world's biggest economy. Non-farm payrolls has to be the most watched and seems to have the biggest effect if the numbers are out of line with the consensus. Other than that, I would say that CPI (inflation figures), The FOMC (where interest rate policy is manifested), trade balance and capital flows (although in the case of the US they are always 'bad') and the Purchasing Managers Index, which shows relative confidence by people in industry as to the future of the economy. Other countries may have a different emphasis: In Europe, because of the anti-inflationary stance of the European Central Bank, inflation indexes are very important. In a country like Japan, which manipulates the exchange rate for the benefit of its exporters, trade figures are paramount.

Money Management is very important. I can only comment on my own proprietary system and say that I cannot imagine anyone having the faintest chance of making profits without it!

How many hours to trade? Well, you are either in or your not. Professionals are watching the markets all the time, with a special pager that they can carry around with them. CNBC is better than anything else out there, but ultimately, you would need a Reuter terminal, which would cost you a fortune, but worth every penny. (A Bloomberg terminal is also a possibility). What do you do to be successful? mmmm....not enough space here and besides, telling people this is my living.

Highly Educated? No formal qualifications with me, but 35 years in the business has been worth several degrees. Are quants with PhD s better traders? No, I don't think so, because if you haven't learnt how to handle the psychology of trading, no amount of theory will help you. Having said that, traders who can think in terms of probabilities have the best chance of being successful. I would say that being able to see the global economic picture will help you be a better forex trader, although you will find that you will be not doing that many forex trades. Also, to get your head around options will give you an entirely different vehicle to profit from forex trading.

I don't want this to sound like a plug, but having a mentor is far better than trying to learn forex trading from books. Having said that, I recommend (apart from Dirk's excellent book, BWILC), "The Disciplined Trader-Developing Winning Attitudes" by Mark Douglas, "The Education of a Speculator" by Victor Niederhoffer and to ground yourself in technical analysis, "The Technical Analysis of the Financial Markets" by John J. Murphy.