“About $2 trillion are exchanged every day in the global currency markets—about 60 times the volume of trading on the New York Stock Exchange—with the most active trading occurring between the U.S. dollar, the Euro, the Japanese yen, the British pound, and the Swiss franc. Spot currency prices move in the markets based on factors of interest rates, but interest rates between two nations, rather than one side of a currency pair.
In order to understand a currency pair combination, both sides of the pair must be considered from a two-nation perspective. How does the second nation calculate and factor interest, and what are the market instruments that track the various rates that trade every day in order to track a trade throughout the various markets? Inside the Currency Market outlines the two-sided currency pair trade from a whole host of perspectives as it relates nation-to-nation, addressing currency pairs from the eight major countries. And it answers a key question: what are the components, the constituent factors comprising the second side of a currency pair equation, and how should those factors be considered in terms of a trading strategy?
Throughout these pages, author Brian Twomey shows how currency movements are impacted by a variety of factors, including interest rates, trade balances, inflation levels, monetary and fiscal policies, and the political climate. He also discusses fundamentally driven trades based on interest rate differentials and trade imbalances as well as technical trades involving chart patterns, trends, and trading ranges. And he reveals how successful traders use both fundamental data and a variety of technical tools to trade within this market—as well as describing both the underlying dynamics that drive the market and the strategies that can help you capture consistent profits in it. Inside the Currency Market explains virtually every element of this market and can function as a desk reference that puts everyday events into context for traders.
The currency market continues to generate interest and attract new retail traders due to the many opportunities available within it. This book will show you how to successfully operate within this arena by making the most informed trading decisions possible.”
Interview with the Author:
FX Trader Magazine Book Review
Brian Twomey is a technical analyst, 8-year expert trader, 6-year freelance currency trading writer who has researched, studied, traded and written about the foreign exchange markets extensively for many years from a whole host of perspectives. He is best known as the last person to interview Welles Wilder yet the vast majority of his writings had the foundations to teach traders and market professionals a certain market perspective, a trading style or an approach such as carry trades, technical chart congestion or his professional article about Bank Maintenance Periods in the February Newsletter of the European Banking Federation. Twomey can now add author to his long credentialed list.
His Bloomberg Press/John Wiley book Inside the Currency Market: Mechanics, Valuation and Strategies is more than an excellent resource for traders and investors, it is literally a comprehensive reference guide that expertly explains, in a clear manner, how currency pairs are affected by economic and technical factors, interest rates and monetary policies and tracks the 8 major pairs as they trade from market to market in all their various formats.
What makes Inside the Currency Market a comprehensive reference guide is the depth and detail with which Twomey approaches a vast array of topics including detailed charts – so readers can clearly see for example how interest rates, bond prices or yield curves affect currency pairs. Twomey perfectly defines what a currency pair comprises as well as their purpose.
We spoke with Brian Twomey to better understand his comprehensive approach to his book and the markets.
FXTM: What motivated you to write the book?
Brian Twomey: I’ve read about 26 trading and market books over my 8 years and not one book addressed nor defined for example the all encompassing word that drives currency pairs, interest rates and how interest rates affect each nation and respective currency pairs traded in the markets. Prior books taught a trading style or market perspective but not one book has ever been written that encompasses all the factors that drive currency pairs from nation to nation. My objective to write Inside the Currency Market was to teach market participants how to become a professional trader, how to view the market from a professional context, how to truly understand central banks and to define my Know Thy Nation Rule.
FXTM: What is the Know Thy Nation Rule?
Brian Twomey: The Japanese Yen for example was once an easy pair to trade among the majors because we knew we could easily predict its market movements. But that was when USD/ JPY traded at say 118 and a 100-pip move up or down didn’t change the balance for the Japanese. Today, USD/JPY at 76, trading this pair presents a different challenge because the Yen doesn’t have the free rein movement that it once had. It became very stubborn as a pair. If a trader follows my Know Thy Nation Rule, one would know the economic factors that affect the Japanese economy, how the Yen trades in its own market as well as the various forms it takes in other markets and the opportune times to enter and exit a trade. Know Thy Nation affects trade of AUD/USD vs NZD/USD because NZD/USD always outperforms AUD/USD, yet AUD/USD is more popular among traders. It is all outlined in Inside the Currency Market.
FXTM: How did you gain your extensive market knowledge?
Brian Twomey: I’m completely self taught in all my market approaches. I began trading 8 years ago and started just like everybody that enters this business. I didn’t know a Yen from a Euro, the difference between AUD and NZD or what a cross pair was or reason for its connection as a currency pair. Through many years of extensive research, study and practice, I became proficient in not only my ability as a trader but I set out early on to know and understand every facet about the currency market, currency pairs and factors that make pairs move from a fundamental and technical perspective. I’m not only quite happy with my accomplishments but I brought my many years of knowledge and research to market participants in Inside the Currency Market. What assisted in the time factor was my years as a part-time adjunct Political Science college teacher. When I wasn’t teaching class, I studied the markets.
FXTM: The book covers many topics from stock markets to repurchase agreements, to trade weight indices to Libor to forward points. What was the methodology in that nation-to-nation coverage?
Brian Twomey: I would like to mention that “forward points” has never been written previously to the depth and detail that I did. I not only bring a clear discussion but I calculated forward points to a yield curve for the first time in any publication. The purpose for multi-topics was to introduce and expose traders and investors that reside in Canada for example to know and understand how the Swiss or Australian markets operate, times of trade, interest rates and Libor so a trader would understand movements of AUD/CAD or CAD/CHF. It was my hope to outline for traders the
complete international financial system in order for traders to understand what they do. Secondly, many traders and commentators equate a currency pair to stock market movements because it’s easy to report and easy for traders to determine direction of a currency pair. I disagree. I believe the currency market is a self-contained market where each currency pair can be valued against another. Many pairs are US dollar pairs and can be valued against non dollar pairs.
FXTM: What would you like traders and investors to know and gain from your book?
Brian Twomey: I outlined a complete guide for traders in a nation-by-nation approach to bring an understanding not only of markets but hopefully an understanding of currency pair trading on a daily basis. A chart is only one side of the currency pair story but not the complete story since other factors must be considered. Secondly, Inside the Currency Market is the guide that will hopefully live on for many years to come since rarely does anything change in the international financial system. It is a book for traders, written by a trader but also slated to academics, researchers and anybody who wishes to become more proficient in their capabilities by understanding what they do.
The currency market is attractive to the trader due to its huge liquidity, lack of brokerage and its 24 hour action. Traders turning to the forex market for the first time have much to learn because what at first sight appears to be a simple market is in fact complex and access to good information is essential. The first priority is to understand the second side of a currency pair which in turn leads to an understanding of the underlying factors which cause the movements of currencies. This book by Brian Twomey provides this learning curve in an easy to read style.
The book has both considerable breadth and depth. Starting with an historical perspective of currency markets, it goes on to provide a foundation for the theory of interest and money. Successive chapters discuss the role of trade weighted indices and open market valuation, with each major currency nation addressed in detail. There is a detailed discussion of the role of LIBOR which affects most open market interest rates and is thus one of the basic factors affecting price movement in currency pairs.
The interaction of stock, bond and currency markets is developed in some detail. Bonds and yields move currency prices and not the equities market per se, but the equity market provides an indication of risk and an overall assessment of the environment which results in the value of the local currency. So equity markets have a role in providing an insight into the direction of bond prices and yields. There is some detailed discussion of the effects of equity markets on currency movements and this includes a broad discussion of the Australian Securities Exchange.
There are many books on trading the forex market but this book by Twomey will appeal to the novice as well as experienced traders since it provides considerable depth of information and allows the trader to understand the underlying factors which move currency markets.
-Bill Dodd of the Australian Investors Association
For those who are intellectually curious and who want to know more about the currency market than they’ll ever need to become a halfway decent trader Brian Twomey’s Inside the Currency Market: Mechanics, Valuation, and Strategies (Bloomberg/Wiley, 2012) is a fascinating if sometimes overwhelming book.
Twomey begins not with the definition of a pip but with an analysis of Bank of International Settlements (BIS) reports (which, by the way, are available online). The second chapter, entitled “Currency Trading Beyond the Basics,” lives up to its billing. It deals with such topics as margin in various countries, rollover rates and LIBOR, swap points, and purchasing power parity.
Twomey supplies formulas where necessary, charts where helpful as he takes the reader on a journey through trade weight indices, short-term interest rates and money market instruments, LIBOR, government bonds and yield curves, swaps and forwards, stock and bond markets, currency cycles and volatility. The journey is also geographical, encompassing markets in all the major crosses. And it includes a series of recommended trade strategies.
The final chapter is on technical analysis but, once again, not just the run-of-the-mill fare. He describes volume and open interest, COT reports, Bollinger bands, simple moving averages, Ichimoku, the Baltic dry index, the IMF and special drawing rights, pivot points, and currency correlations and trend lines.
This post is beginning to sound like a laundry list, but it’s the only way I can convey the breadth and the sometimes unexpected content of Twomey’s book. The book is definitely not for those who want a “dummies” introduction or who are looking for instructions on how to get rich quick in the forex market. It’s also not for those in search of some light reading for a rainy afternoon. Inside the Currency Market is for the serious student who wants to go beyond simple buy and sell signals to understand the range of market factors that influence currency prices.
-Brenda Jubin author of Reading the Markets: Insights from Financial Literature