Book Review: The Foreign Exchange Matrix
The Foreign Exchange Matrix: A new framework for understanding currency movements was written by two authors ? Barbara Rockefeller and Vicki Schmelzer. You may remember my review of Barbara?s other book. It would not be a big exaggeration to say that I am Barbara?s fan when it comes to foreign exchange writing. This book?s main topic is perhaps the best she can write about, so you may expect a lot of interesting and useful information here. Vicki Schmelzer is new to book-writing but has more than 25 years of experience in FX. For The Foreign Exchange Matrix, she contributes her knowledge of intermarket analysis in relation to currency trading.
Usually, when doing my book reviews, I write a bit about the contents of the book, then point out the weak and the strong sides of the piece and then come up with a sort of a suggestion of whether it is worth your money and, more importantly, time. In this case, I would like to start off by stating that the book is worth buying and reading. There are only two reasons to avoid it:
You already know a lot about ins and outs of the modern foreign exchange market.
You trade on such a short term that any fundamental knowledge of the market is irrelevant; basically it means that you can trade without even knowing, which market you are trading on.
So, what will a mindful reader learn from The Foreign Exchange Matrix? Definitely, not some fancy trading strategy, and not anything at all about taking profitable trading decisions. Instead, a reader will learn more about the inner mechanics of various factors that drive currency rates in today?s market. Here is a list of the essential points explained in this book:
The currencies are moved by a variety of factors and their influence is not constant. In different conditions the same factors may demonstrate forces of opposite directions on the same currencies. The picture of all these numerous factors is multidimensional (hence the word Matrix in the book?s title) and relations between these factors are not linear. The overall matrix of dependencies is so complex in the world of FX trading that hardly any price movement can be attributed to just one event or just one macro indicator, or any other single market driver.
Risk factors have always been quite important, even more so nowadays. The book provides some ways to measure the overall ?riskiness? of the markets. The authors then proceed to explaining how different types of risk affect the modern Forex market.
Interest rates are the primary drivers of long-term currency prices. The book explains why, how and what mediums to watch in order to analyze currency pairs based on interest rates.
The possibility of making correct forecasts in the Forex market is discussed in a separate chapter, where various market theories are dissected.
Forex market is traded mostly OTC and is decentralized with no total accurate volume and positions data available. The book describes the way to measure the volume and current positions that would at least somehow reflect the real situation in the market.
A lot of blog posts, analysis articles and journal issues are written about inter-market dependencies and correlations. Generally, the correlations of other markets with Forex are very volatile and even when they exist they tend to be quite weak. The authors offer many examples and statistics on this matter.
It is probably a bad book to try to learn technical analysis from, but Barbara gives a short overview of the TA techniques employed in FX and talks about how traders using those techniques may affect prices. You may well skip the technical analysis chapter if you are fluent in it.
The influence of high-frequency trading (HFT) and other types of algorithmic trading is in a constant growth in the foreign exchange market. Nevertheless, it is still significantly less notable than in equities. An overview of the effects of HFT on ?normal? traders is provided in a dedicated chapter.
The three final chapters of the book are dedicated to one issue ? the reserve currency status of the US dollar. Everything you ever wanted to learn about reserve currency status, its nature, drawbacks, advantages, consequences and requirements is concentrated in the last part of The Foreign Exchange Matrix. These final three chapters are highly recommended for reading, especially if you, for some reason, believe in a soon end of the USD as the base for the global foreign exchange reserves.
Advantage and Reasons
The single most important advantage of this book is that it offers a consolidated source of all the vital fundamental knowledge regarding the modern FX market. Whether you are a new trader, an experienced speculator or a financial specialist from other industry, reading The Foreign Exchange Matrix will lead you to in-depth understanding of the price-forming processes responsible for the observable Forex dynamics.
Other reasons to read the book include:
Well-referenced statements. You will be able to follow many citations and explanations back to the sources for even more useful reading and research.
A lot of curious anecdotes from the history of world central banking and financial trading to learn from in a non-boring way.
Myth-busting. Forex industry and global finances are ridden with myths and delusions. Barbara and Vicki do their best to dismantle many of such misconceptions.
While it is a great book, a definite must-read for any Forex trader, there are some minor disadvantages I would like to point out:
It was published in early 2013 and written in late 2012, but could already benefit from some updates. In a few years, it will contain a lot of outdated information.
The book lacks some detailed explanations and examples. Of course, it cannot contain everything, but it could really get improved from a major increase in size.
It does not explain any of the basic Forex or finance-related concepts and terms, which it uses in abundance. A newbie trader without significant background in economics will struggle with some paragraphs.
Overall, it is an enlightening and, more often than not, exciting read. It is one of those rare books that I can wholeheartedly recommend to every visitor of this blog. Reading it is well worth those 8?12 hours of your life.
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