Will Cyprus Forex Broker Accounts be Subjected to a "Wealth Tax"?

While we eagerly wait the outcome of this socialist experiment gone wrong in Cyprus, we would like to again remind the public that where you deposit your money is incredibly important.You need to know that it’s safe and that the brokers holding it are the most regulated and under the heaviest scrutiny in the forex industry. Trading is hard enough as it is, why expose your funds to unnecessary risk?

The United States is the most heavily regulated Forex industry in the world. All brokers must register with the Commodity Futures Trading Commission and are members of the National Futures Association.

Brokers have daily, monthly, and quarterly operational reporting requirements, detailing customer funds on deposit, # of retail and ECP forex customers that are active, whether they are US or foreign domiciled, and the percentage of non discretionary accounts that were profitable vs non-profitable among other things. Unaudited financial statements are filed monthly and audited financial statements are filed annually. Failure to comply with these NFA requirements can result in severe disciplinary actions as well as substantial fines and penalties.

A lot of traders get so caught up in trading, they completely forget about whether or not their account deposit is safe. We think it's better to be safe then to be sorry.

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AUD/USD & NZD/USD Trade Update

Our NZD/USD hit both targets yielding 27 pips and 62 pips respectively. With the average being 44.5, it more then covers the 23 pips we lost on AUD/USD.

The NZD trade portrays the importance of setting targets. If we hadn't planned our exit, we could have easily given back most of our gains by now. Nailing a big move and making a lot of pips makes us no money if we just sit in the trade and watch it reverse against us.

With the AUD/USD trade, we realized that if the pair hit 1.0340, there was a good chance it would hit 1.0400 quickly after. Sure enough, after better then expected employment numbers last night the Aussie was propelled to 1.0400 by "risk on" sentiment generated by the advancing U.S. stock market. This trade is a great example of why we feel it's necessary to pick a point on the chart where we can say we are "wrong" and no longer want to be in the trade. Clearly defining the risk on every trade is the key to our success.

Forex Trading: AUD/USD & NZD/USD

We just shorted the AUD/USD & NZD/USD this morning due to the candlestick patterns and attractive risk to reward ratios.

This is a 1 hour chart of NZD/USD. We shorted at .8250 with a stop above the swing high with a first target of .8225 and second target of .8190. If the first target is hit we'll move the stop to break-even.

The rationale behind the trade: Continued trend of USD strength exhibited in February, commodity currency weakness across the board so far this morning, the bearish engulfing candlestick pattern just put in on this 1 hour chart, and a continuation of a descending channel on the 4 hour chart.

The Aussie has run up over 200 pips since it put in a swing low at 1.0120 and the pair has not put in a decent retracement since then, so we feel it has more "room" for a push lower and our targets are a little more ambitious - 1.0245 and 1.0200

As always, we fully recognize that we could easily be wrong - the key to trading profitably is to not lose much on trades that go against us and to let our winners run. That's why it's important to ALWAYS define the risk taken on EVERY trade!

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Forex Trading: USD/CAD

USD/CAD has been in a strong uptrend recently; but the pair gave up some gains after Friday's positive NFP report and strong Canadian economic data.

USD/CAD Negative
- 50.7K Canadian jobs added versus expected 7.8K and previous -21.9K
- Canadian unemployment rate fell from 7.1% to 7.0%
- Good U.S. NFP report - Actual: 236K, Previous 162K, Previous revised down to 119K
(Note: institutional investors who want to speculate on the U.S. economic recovery while still getting some carry can buy the CAD as a proxy for the USD)
- Risk On: The CAD held up the best against the USD, with the Aussie & Kiwi close behind due to the increase in risk appetite stemming from the good economic data.

USD/CAD Positive
- The U.S. unemployment rate beat expectations and improved to 7.7% from 7.9% - this caused expectations to change about QE due to some of the stimulus being tied to a 6.5% unemployment rate target. This caused significant USD strength across the board against all of the major currencies except the Canadian dollar for the reasons listed above.

The 4 hour chart of USD/CAD below shows a clear break from the channel. This could turn into a sideways trading range or lead to a retracement.















The Daily chart below outlines the the support levels below in case the pair begins retracing, with a strong support range of 1.0100 - 1.0050

Forex Trading: AUD/USD Update

AUD/USD is behaving as we expected it might (read here) and we believe that next move will be to the downside. On the daily chart you can see the 1.0150 level was clearly broken, and the suckers wiped out. The plunge should occur next, thoroughly frustrating current long positions and those shorts who have been stopped out by the 185 pip rip up slightly past 1.0300. This speculation is supported by a very strong U.S. Dollar in the month of February and would line up with a "correction" in the market that everyone seems so sure we'll get. (Side note: when we do get it, everyone is going to begin calling it the start of a new "bear market" and after the people who bought the dips get wiped out, we expect the equity markets to rip up to fresh all time highs.)

This 4 hour chart below shows a good risk to reward setup, with 1.0290 acting as overhead resistance, and and .618 fib and highlighted area providing (short term) support at 1.0185. If we get below 1.0150 again we think price should hit parity fairly soon after that.

The Mercenary Creed

The Mercenary Creed comes directly to you from www.mercenarytrader.com, a website every trader should have bookmarked.


I. Thou Shalt Heed the Price Action.
II. Thou Shalt Respect the Risk.
III. Monitor Thy Equity Curve.
IV. Thou Shalt Go For the Jugular.
V. Thou Shalt Focus on Making Money.
VI. Thou Shalt Go Short as Well as Long.
VII. To Thine Own Self Be True.


I. Thou Shalt Heed the Price Action.

The seasoned trader knows that “prices move first, fundamentals come second.” Conviction is my ally, intution my guide — yet only price confirms and validates. I know that charts, in essence, are simple abstractions… a complex interplay of forces, reduced to two dimensions in a tightly defined space. As a Mercenary I walk the middle path, heeding price action without deferring to it.

II. Thou Shalt Respect the Risk.

When I was a child, I traded as a child, not giving proper respect to risk. But now I am a Mercenary, and so now I trade like a Mercenary, giving risk its proper due. My trading capital is my life force; like an aviator’s fuel or an ocean diver’s air supply, I shall monitor it with passion and precision. First I shall survive, for only then can I thrive; as Sun Tzu instructed, I shall wait by the side of the river for the bodies of my enemies to float by. In respecting the risk, I shall continue on as my enemies falter… and in surviving my opportunities shall multiply.

III.. Monitor Thy Equity Curve.

The Mercenary respects the wisdom of his forebears. As such I pay heed to the oldest wisdom of all: When trading poorly, decrease risk and exposure; increase risk and exposure when trading well. I will maintain a constant vigilance over critical aspects of emotion and performance: How I am feeling; how I am trading; how attuned I am to the rhythm of the market; and, most vitally, whether my precious capital reserves are waxing or waning. In this I shall trade at my biggest when doing my best, trade at my smallest when doing my worst, and prosper through the great long stretch of days.

IV. Thou Shalt Go For the Jugular.

In monitoring my equity curve I shall ‘earn the right to swing’. Like Babe Ruth I shall retain the capacity for grand slams; like Ted Williams I shall “wait for a good pitch to hit.” When profits are strong and opportunity is great, I shall emulate the palindrome and maximize my good fortune to the hilt. The gambler takes foolishly outsized or unwarranted risks, while the grinder stays forever miniscule. As neither gambler nor grinder, but Mercenary, I shall trade patiently and carefully at all times, respecting risk all the while… and then, when the time is right, I shall take a defined portion of my gains and knock the #$#@ing cover off the ball.

V. Thou Shalt Focus on Making Money.

The fool cares more about being “right” than making money, and cocktail party glory is the soothsayer’s deep desire. I leave such foolishness to the chattering classes, cultivating instead a ruthless focus on making money. I shall feel no attachment to the “big call,” no hesitation in the urge to change my mind, and above all else no love for the position. Ego is indulgence and indulgence costs money; for the Mercenary, to be “right” means nothing while profit means everything. P&L is my Alpha and Omega, risk-adjusted return my northern star.

VI. Thou Shalt Go Short as Well as Long.

The Mercenary embraces that old trading truth, “There is only one side to the stock market… not the bull side or the bear side, but the right side.” As a flexible market participant, I shall cultivate the talent and the temperament to prosper in all market environments — up, down or flat. I shall transcend the tyranny of the “long-only” mentality, and shut my ears to institutionalized helplessness. I shall know the mountains and the valleys, going long or short with ease — always remembering that “the wolf careth not, how many the sheep be.”

VII.. To Thine Own Self Be True.

As Polonius instructed Laertes, I so instruct myself: “To thine own self be true.” The Mercenary lives unburdened and unyoked, free from troublesome earthly masters; I take my living from the markets as a fisherman takes from the sea. I will embrace this extraordinary freedom, and with it an extraordinary responsibility… the responsibility to live life to its fullest. I will travel where I wish, do what I choose, live in the manner I see fit, and support the causes near and dear to me; in word and deed I shall be free, an encouraging example for my fellow men in chains.

The last time the Dow was here

If you watch prices of equity indices on CNBC while trading forex, you know that the Australian Dollar (AUD) and New Zealand Dollar (NZD) typically share a reasonably strong correlation with the U.S. stock market (albeit currently weaker than usual.) Thus, it can be reasonably inferred that when the U.S. stock market enters a bear market (whenever that may be) it should bring the Aussie and Kiwi down with it.


From Zerohedge:

• Dow Jones Industrial Average: Then 14164.5; Now 14164.5
• GDP Growth: Then +2.5%; Now +1.6%
• Americans Unemployed (in Labor Force): Then 6.7 million; Now 13.2 million
• Labor Force Particpation Rate: Then 65.8%; Now 63.6%
• Americans On Food Stamps: Then 26.9 million; Now 47.69 million
• Size of Fed's Balance Sheet: Then $0.89 trillion; Now $3.01 trillion
• US Debt as a Percentage of GDP: Then ~38%; Now 74.2%
• US Deficit (LTM): Then $97 billion; Now $975.6 billion
• Total US Debt Oustanding: Then $9.008 trillion; Now $16.43 trillion
• US Household Debt: Then $13.5 trillion; Now 12.87 trillion
• Consumer Confidence: Then 99.5; Now 69.6
• S&P Rating: Then AAA; Now AA+
• VIX: Then 17.5%; Now 14%
• 10 Year Treasury Yield: Then 4.64%; Now 1.89%
• EURUSD: Then 1.4145; Now 1.3050
• Gold: Then $748; Now $1583
• NYSE Average LTM Volume (per day): Then 1.3 billion shares; Now 545 million shares

Article Link here

The Success Indicator

One of the biggest differences between muppets and professional traders is consistency. It's one thing to have a couple winning trades in a row. It's another thing entirely to win 60% of 500 trades over the course of a year while always taking risk to reward ratios of at least 1:1.

So how do we achieve consistency? The answer has nothing to do with trading - and everything to do with YOU. Like it or not, the habits and characteristics of your personal life do not disappear when you sit down to trade. You can't magically "decide" to be strictly disciplined if you have little discipline in your personal life. You also won't have the patience to wait for your prime setup if you can't even be patient with those around you.

The path to becoming a patient and disciplined trader must be walked upon every moment - whether you're trading or not.

I've been making a conscious effort to embrace the characteristics of the ideal "successful person" listed below and I can tell you from firsthand experience that it has had a positive impact on my trading performance.

It's easy to waste money on gimmicks that don't work. It's so much harder to make changes that can make a real difference. I know, it's not easy. But it's never easy if it's worth it.

These aren't the rips you're looking for

The U.S. stock market is in a clearly defined uptrend. The #1 rule of technical analysis is to respect clearly defined trends at all times. I can fade trends and try to short the top pip; but I have to respect the trend, which means realizing that the majority of the time I'm going to be wrong and that I have to always protect myself with a stoploss.

That said, the best risk to reward ratios are found at turning points in the market. I'm a huge fan of Paul Tudor Jones. The man nailed the move in 1987. The key to picking tops and bottoms is to have very specific criteria that must be met before an entry is made - and realizing it might take a couple of shots.

Everyone keeps talking about the how the U.S. Dollar is going to really strengthen when the stock market collapses soon and the sad reality is that they are trading that bias - against what the tape is telling us. I'll trade what I see. If the stock market nose dives, I'll be shorting the Euro and commodity currencies in a heartbeat. But all I see from the tape is equity markets that are in a strong uptrend due to QE and an "improving" U.S. economy (which is the reason for a strong USD/JPY today.) The S&P 500 dropped over 11.50 points today, and ripped right back thanks to it being a POMO day. The tape is telling me that the S&P 500 and Dow Jones are going to all time highs, and that if we see a drop in equities, it will most likely be a good opportunity to BTFD.

Chances are, these are not the rips down you're looking for.

Forex Trading: AUD/USD and NZD/USD

NZD/USD
The Aussie and Kiwi should be interesting pairs to trade over the next couple weeks due to the increase in volatility and the current disconnect between the U.S. stock market and the U.S. Dollar. With the sequestration scheduled to come into effect tomorrow and little optimism that the Republicans and Democrats will reach a deal, it could have a positive affect for both equities and the USD.

Let's look at some charts. This is a daily chart of the NZD/USD with the 200 SMA and 200, 100, 50, & 20 EMAs. I want to draw your attention to the trendline support, which was broken slightly (which trendlines often are because muppets typically put their stop losses and sell stops below them.) Price moved right to 0.8225 (study price reaction at 00, 25, 50, 75 levels) where the 200 EMA helped provide support.  Price then rebounded to the open of the large down candle (2/26). Price often encounters new supply and demand at the opening/closing price of daily candles.

So what does this mean? The trend on the 4 hour chart is down. Trend continuation on the 4hr chart and a breakout of the channel to the downside on the daily chart is the scenario that makes the most sense to us. Remember, we've had a small break of the channel to nab the sell stops and stop losses, then a rip up to squeeze the new traders who entered with sell stops. A rip down would frustrate the most amount of traders at this point, that's why we consider it the most likely scenario.

Even though we have developed a bias, it's important to note that we are often wrong - just as all traders are. The important thing is to not get hurt badly when we're wrong and to let trades ride and make a lot of money when we're right. So what's the purpose of performing analysis when we're wrong a good deal of the time?

Dwight Eisenhower said it best, "plans are useless, but planning is everything."

If you understand the current chart and the possible scenarios, it makes it easier to adjust for the constant changes in market variables.




On to AUD/USD. We've noticed that a lot of "high profile" traders on twitter have been saying that 1.0150 is support on AUD/USD. Similarly to the situation in NZD/USD, there are probably already stop losses and sell stops accumulating below 1.0150. There will probably also be buyers at 1.0150. We think the most likely scenario is a move to 1.0150 (buyers enter), then a move lower to squeeze the buyers, trigger stop losses, and trigger sell stops. After that's done, a short move higher to squeeze the traders who entered with sell stops, and then a move lower to parity.

This is one of the most common scenarios we see played out in the market. Day after day, week after week, month after month.

Once I can pin point bids and offers on a chart and know the levels where traders should get hurt, it becomes easier for me to find entries with great risk to reward ratios.

Forex Trading: Market Update

The market was decidedly in "risk on" mode today after good economic data was released and Ben Bernanke reiterated his commitment to Quantitative Easing (QE) until the unemployment rate dropped. The uptrend in equities since March 2009 has remain intact, and bullish sentiment is still not at extreme levels. With the distance we are away from all time highs in the Dow Jones and S&P 500, we think the most likely scenario is a break to all time highs. This should trip a lot of stop limits, buy stops, and bring in more money off the sidelines. At some point there will be a correction; but unless the issue is serious enough to create the beginning of a multi-year downtrend, it will most likely be a dip, providing a good buying opportunity.

The main reason the U.S. stock market has been so well bid over the last couple of years has been QE - and Bernanke reaffirming his commitment to easing gives the bulls a green light to continuing buying. That's what matters more then the "economic realities" bears claim exist. Maybe they are right; but it doesn't matter. When it comes to the markets, price is the only reality there is.

To the FX market: there's been a notable divergence, as the U.S. Dollar Index has remained well bid in the month of February, even as equity markets have pushed higher. There are two possibilities: either the correlation between risk on/off and the U.S. Dollar is breaking down, or the break in the correlation is only temporary in which case the equity markets will soon rip down or the USD will weaken substantially. This question may be answered this Friday (March 1st) when President Obama's sequestration is scheduled to go into effect.

Sequester Update

If you're a trader who's interested in market commentary and current events, DYDD (Doing Your Due Diligence) is a website worth checking out. The following post below was written by Robert P Lehman and can be found here. You can follow bob on twitter here.

Sequester Update
Well, the days tick by and there is really little of substance to report, although the political game playing continues in SIZE. The deadline for the Sequester is March 1, 2013 and it appears that nothing will be done to avoid it. I alluded to that in the addendum to my last post on the Sequester, it appears the Republicans have concluded they can win this fight.

The Republicans efforts around the upcoming Sequester thus far have been limited to pointing to Bob Woodward’s account that Jack Lew, current nominee to become Treasury Secretary, came up with the idea of the Sequester. The beauty of the idea, supposedly, was that a Congressional Super Committee would be “forced” to come to an agreement or face painful cuts to sacred cows of the Republicans (defense department) and the Democrats (discretionary spending). According to Woodward’s book, the White House was gleeful about the “genius” of their idea. That glee has apparently diminished and the President and his acolytes, have been treating the idea like an ugly stepchild. Meanwhile, the republicans seem to delight in reiterating that the idea was the President’s to begin with.

The White House’s recent strategy is to attack, and some might say strike fear amongst the electorate regarding the impact of Sequester. A parade of Cabinet leaders have been paraded on news shows warning of the harsh consequences of allowing the Sequester to be implemented. They paint a dire picture, but hosts have frequently countered with confusion as to how the Sequester impact can possibly be severe. Political commentators have suggested that the Administration will make cuts where they can be easiest to put on television, specifically reducing staffing in certain major airports. The thought is that doing so would increase pressure of recalcitrant Republicans, but the strategy poses risks Equity markets seem largely indifferent to the debacle.

At 11th hour, Sens P. Toomey and Inofe are looking to move a bill forward to allow President special authority to allocate cuts. No idea if this comes to fruition.

Famous Quote

“All a trader needs to know to make money is to apprise conditions. The big money was not in the individual fluctuations but in the main movements that is, not in reading the tape but in sizing up the entire market and its trend. And right here let me say one thing: After spending many years in Wall Street and after making and losing millions of dollars I want to tell you this:

It never was my thinking that made the big money for me. It always was my sitting.“ - Livermore

Forex Trading: GBP/USD

The GBP has been the second weakest of the major currencies recently, only being outperformed in the race to the bottom by the Yen. We recognize that the GBP is in oversold territory (RSI below 30) and realize the possibility for a corrective move higher; but we believe that both the technical and fundamental views point to a lower GBP in the medium term.

The fundamental argument can be easily supported by browsing through the last 6 months worth of GBP economic data on Forex Factory's Calendar. Once the "Olympic Effect" wore off, the GBP numbers began to miss expectations. One of the main problems in the U.K. is the punitive tax rates. This problem has decreased general competitiveness and productivity and caused an exodus of businesses and employees in the finance and banking sectors. As Zerohedge reports here, jobs have become so scarce that it's even difficult to obtain a part-time job as a coffee barista.


Technically speaking, this is a clear breakout from the triangle pattern shown below.

The .50 fib retracement drawn here on the monthly chart had held really well until we recently broke through it.

Here's a closer shot of price action (a weekly chart) with multiple bounces off of the .50 fib

On the daily chart we have a clear break from the bottom of the range (1.5660) and a resulting 580 pip drop that occurred with very little consolidation. This suggests that there's scope for consolidation even though price has been dropping quickly so far and we feel trades to the downside still offer good risk to reward ratios.

As per our previous post on the GBP/USD we've highlighted an attractive setup that we'll look to play if the GBP begins to strengthen. The key arguments for GBP strength are:

- This is a "buy the rumor, sell the news" scenario. The rumors of a downgrade started flying when GBP/USD was trading above 1.6000 and now the UK's credit rating has just been downgraded.

- If the Euro keeps selling off, then EUR/GBP should continue its descent, giving the GBP underlying strength across the board.

- The variables we consider before taking a trade are always in motion; but right now we're looking at 1.5425 and 1.5500 as attractive resistance levels to sell into GBP strength should it run the price inefficiency beginning at 1.5315

Forex Trading: GBP/USD

GBP/USD has just spiked up as the .382 fib retracement at 1.5250 held. There's a price inefficiency from 1.5315 to 1.5415 that price may move through very quickly if it breaks above the swing high of 1.5325.

GBP/USD has come down from 1.6350 to put in a fresh yearly low at 1.5130 - a move of over 1200 pips!! It has made the move down with really no corrective move and very littler consolidation, so there's plenty of scope for a bounce at these levels.

EUR/GBP is also beginning to drop along with EUR/USD (currently down 500 pips from a high of 1.3700) due to political risk & negative growth revisions. If it continues dropping it will contribute to GBP strength as the Euro is the #2 most liquid currency in the world (think of the cross effect EUR/GBP has on GBP/USD in terms of volume traded.)

Below, a picture perfect example of a price inefficiency.

Update: Moodys downgraded the U.K.'s credit rating on Friday after the U.S. equity markets closed causing the GBP to drop sharply against its peers and gap lower 100 pips on Sunday's open. It just goes to show you that good setups are never guaranteed to work. We all have losing trades; but managing risk is what sets the successful traders apart from everyone else.

It still remains an attractive setup that we'll look to play if price makes its way back up to 1.5315

New Zealand Dollar - Time for Intervention

Moments ago Royal Bank of New Zealand's Wheeler said the Kiwi was overvalued and that the RBNZ stood ready to intervene in the currency if necessary. The RBNZ members have long since been annoyed by what they consider to be an extremely high exchange rate due to speculation; but this is the first time they've mentioned the possibility that they may intervene in the FX market.

The Kiwi pairs have been trading at high levels recently and this announcement has surprised the market. There's plenty of room to the downside, and it seems probable that NZD/USD will come under significant selling pressure during the upcoming European and US sessions.

The important thing to know about NZD/USD is that it isn't as liquid of a currency pair compared to USD/CAD or AUD/USD. If this pair starts moving down and picks up momentum, the lack of liquidity could cause a sharp move down if carry trades begin to be unwound. The lack of liquidity can make it costly to unwind large trades, and this kind of comment could cause traders to start unwinding their trades now to avoid getting stuck in a nasty situation later on if NZD/USD dumps.

Biases

The Day Trader's List of Common Mistakes

I like to write lists. Not only do I find the process therapeutic; but it often results in the realization of things not previously considered. So here's a list of the common mistakes that I make.



Having an emotional reaction to a news event. (The unexpected comments out of the G-20 and G-7 meetings recently have been annoying.)
 *Solution: I'm a day trader and usually don't hold positions overnight. When something unexpected happens that causes price to violently react, I find it's best more often then not to sit on my hands. I will go immediately flat if I believe my positions are in danger, and have found (the hard way) that it's best not to trade unless I see a highly attractive setup, and then to only play it with 1/2 or 1/4 of my normal position size. When price is more volatile then usual, I find myself eager to "get some action." Resisting and literally sitting on my hands has been the best solution for my P&L.


Not cutting losers fast enough. Everyone who trades has probably heard the "cut your losers short" phrase, and mostly thought to themselves that it was good advice but utterly failed when trying to implement it.
 *Solution: I don't struggle with this issue very much anymore, simply because I've gone to an intraday-only policy for holding positions on my main account. By forcing myself to go flat at the end of the day, I now ask myself, "What do I expect to get out of this position before I'm forced to cut it at the EOD?" If the answer is less than what I could get for right now, I simply cut it. Using time in conjunction with a TP is how I make it easy for myself to cut my losers short.


Chasing a move.
*Solutions: There are plenty of ways to skin a cat. I occasionally play breakouts myself. However, I've found it's risky to play breakouts when I'm strictly trading intraday. I always like to sell into strength and buy into weakness while playing in the direction of the trend. Look at any chart and you'll see a lot of candles closing in either direction. If there's that much volatility, then chances of getting a good entry are higher if you buy on the "x"th bear candle and sell on the "x"th bull candle. There's a plethora of more variables to consider; but I've found that adopting this mentality has been a big help for my trading. It also typically yields better risk to reward setups.


Overtrading.
*Solution: Go play golf. If I'm not feeling patient enough to wait for my setups, I leave the computer before I do damage to my account. Being patient and maintaining discipline is literally 90% of what it takes to be successful at playing this game. That's your answer for why so many people fail. It's so hard to be perfect in these categories and it only takes one slip to kill an account.



Not taking profit fast enough.
*Solution: It happens, we all get greedy. My general rule of thumb is that it's better to take profit too soon and be extra careful when trading a counter-trend setup and let winning positions run a little if they are with the trend. The key is to get all of your levels mapped out (horizontal S&R.)


Over-leveraging.
*Solution: Don't do it. It's the hardest thing NOT to do. Ultimately we are all trading to try and make money, and the allure of a quick return is powerful. All I can tell you is that every trader I've seen who hasn't had a solid risk management system has been wheeled out of the trading floor on a stretcher sooner or later. The best advice that I've gotten is to repeat in my head that if I over-leverage, my account is as good as blown up. The WORSE thing that can happen to a trader is to over-leverage and make money. That provides positive reinforcement to a potentially fatal habit.

Forex Trading: Market Update

New Zealand Retail Sales q/q just came in: Actual: 2.1%, Exp: 1.3% and previous -0.4%. The Core retail sales came in slightly lower; but still above the consensus estimate: Actual: 1.5%, Exp: 1.4%, Previous -0.3%.

The Kiwi ripped on the news, which was to be expected because there was evidence of strong short interest entering just prior to the news. (Check the 1m candles - did not correlate with risk appetite across the board.) The economic data releases out of New Zealand has been so bad over the last quarter, that the sentiment of short term forex traders was decidedly negative. As we know, when sentiment becomes this lopsided, there's attractive risk and reward to be found in fading it. Especially when fading it means trading with the trend!

From a technical view, we are in an uptrend on the daily and 1hr chart and are now breaking out of an ascending triangle on the weekly chart. Graphs are located here.

It's important to note that at some point, the equity markets around the world will probably capitulate, and commodity currencies will sell off hard against safe haven currencies (primarily the USD.) It's also important to note that THIS HASN'T HAPPENED YET. It can be deadly to base a trade on a theory of what might happen, without seeing evidence of that already beginning to occur. I heard a lot of people on CNBC shorting the market last fall and telling the world the stock market was going to sell off due to fiscal cliff concerns. Guess what, it didn't happen. When the carnage does finally begin to occur, I have a feeling everyone will KNOW the bloodbath has begun. If it's really that apparent, it should be easy to identify and jump on. Until then, I'm going to remain patient and play the price action that I see in front of me.

When in doubt of what to do, I usually refer to the popular saying on Wall Street, "If you're early, then you're wrong."

Note: I would not be surprised if this is a false breakout on NZD/USD and we run up to 86.00 or 87.00, causing the shorts to cover and new longs to enter the market before a sharp reversal. It seems like that course of action would cause the most pain to market participants as a group, so it seems logical that it would happen.

Forex Trading: Market Update

EUR/USD continues to drop since yesterday's comment out of the ECB that it's "worried Euro strength will hurt recovery in the crisis states." This comment caused the 1.3500 figure to hold and the Euro currently trades underneath the 1.3400 figure. The German finance minister Schaeuble and central banker Weidmann came out with comments of their own in an attempt to support the Euro; but to no avail. The Germans would like a weaker Euro as it would be better for their exports; but they realize the consequences of the Euro weakening - that equities will most likely follow suit causing the crisis in the periphery countries to reemerge.

Although USD/JPY dropped substantially on comments from the G-20, risk appetite didn't decrease, and the US 10 yr came under selling pressure yesterday. USD/JPY has since rebounded and if it starts to take off again, there is little resistance until the 95.00 figure - a key psychological number.

Know the Signs of the Coming Capitulation

Since the recent move in USD/JPY driven by comments out of the G-7, I've been noticing several divergences in the equity, bond, and FX markets.

First, it's important to realize that one of the main drivers powering equity indices up around the globe over the last couple of months has been the weakening yen. Since Nov. 14th, USD/JPY and the other yen pairs have ripped up (EUR/JPY has been the most bid.) This has in turn caused Japanese stocks to rip higher (a weaker yen is good for exports.) In turn, the rise in Japanese stocks has bled over into other equity markets, and particularly the rise in EUR/JPY has lifted EUR/USD which has a strong correlation with the E-mini S&P. (Again, look at EUR/USD starting Nov. 14th)

So from this chain of events, you can infer that when the yen pairs begin to strengthen it will cause equity markets around the world to start selling off. As some equity indices are currently trading at recent record highs, once the selling starts it should lead to sharp moves down with significant follow through. The key currency pairs to watch are USD/JPY (I'm guessing we'll need to see 400-500 pips of downside before equities really unravel) and EUR/USD. In the bond market, it's important to watch the U.S. 10 year treasury note. The yield change on the US 10 yr is fairly well correlated with movements in USD/JPY. When the yield increases, (more demand for US bonds) USD/JPY goes up. (money flows out of JGB 10 yrs and flowing into US 10 yrs.) The stock market you want to watch is the Japanese market. If it's down big in the Asia session, and that carries over into other Asian equity indexes, look for follow through in the European and US sessions.

Now, you'll notice that I specifically said "when" the yen pairs begin to strengthen. This 100+ pip move lower in USD/JPY may be it - or it may not be. We'll have to wait for confirmation. The trick to profiting from big moves net-net is to not LOSE money playing them BEFORE they happen. Instead, know exactly what to look for so you don't jump on a false break and can quickly jump on the real move when you see it.

Current Divergences
We need to wait for confirmation that this move down in the Yen will be sustained. The yield change on the U.S. 10 year has not confirmed this yet. EUR/USD has not confirmed this yet. Equity markets have not confirmed this yet. The move down in USD/JPY is showing significant divergence from correlations that have held well in recent history. The question is, will the other factors begin to catch up or will the USD/JPY snap back?

"90% of Forex Traders Lose Money"

"90% of Forex Traders lose money" is an often quoted statistic in our industry. No one knows the exact number; but I would guess that less than 2.0% of all Forex traders can consistently pull money out of the market over a time horizon of 5+ years.

Why do traders fail? Retail forex trading is different than trading stocks. The reason is that you're buying and selling contracts. Include the spread and/or commission you pay on every trade and you have a zero-minus game. You need to average a 50% win rate + the spread + 1 unit in order to book a profit. Contrast that to trading or investing in equities. Stock prices increase in valve over a long time horizon due to growth and inflation. You need not look farther than historical charts of the Nasdaq, Dow Jones, and S&P 500 indices. Equity traders/investors on the buy side have the scales slightly tipped in their favor.

The reality is that 100% of forex traders fail at some point or another. What separates the successful traders from the rest of the crowd is their tenacity to wade through their initial failures and develop a profitable methodology and to finally be able to control their emotions.


Control
The first question you should ask yourself is, "if almost all forex traders fail, what difference(s) define me as a superior trader?" Most forex traders start out thinking that they can be "better" then other traders and are really just kidding themselves. A lot of forex traders are competitive individuals who have previously been successful at some kind of activity, be it business ventures, sports, chess, poker, etc. So be honest with yourself, what makes you think you'll be able to succeed where people more competitive and intelligent than yourself have failed? What's your superior edge?

While it's true that we trade against competitors (other market participants,) most traders fail to realize that trading is primarily an internal struggle. Trading successfully ultimately depends on whether or not you can control yourself. Think about prominent people in the news like CEOs and politicians who get embroiled in scandals due to a single moment of weakness after exhibiting a lifetime of discipline and control. It only takes one deviation from controlled behavior to severely damage or destroy your trading account. Patience and control are the two essential virtues that differentiate the majority of traders who fail between the 2.0% that succeed. Possessing these virtues is your edge.

Your Methodology
Successful traders have a system or a methodology. That is to say their approach to the market is consistent. The best traders use systematic approaches, going through mental and/or physical checklists before executing a trade. A profitable trading system or methodology is defined by an individual trader knowing that if they use good risk management techniques and maintain control of themselves, then that method of trading will make money. A trademark of unsuccessful traders is that they don't have an exact methodology, they don't know exactly what they're looking for. 


Click here for details on private mentoring for forex traders.

The market is poised for a major change. Are you ready for it?

Courtesy of Darkstar at www.orderflowtrading.com

Article link


Darkstar posted on January 20, 2013 12:55

We've all heard the age old wisdom about markets changing over time and the need to test a system in multiple environments. If you started your trading career in the last 3 or 4 years, you've probably assumed that those market sages were referring to the day to day oscillation between ranging and trending markets. However, those of us who have been at this for a long time know better... and today I would like to explain what the wise traders of old really meant.

In a previous article I discussed my expectations for the pending congressional debt ceiling fight, and while it remains to be seen how that will all play out, there is one thing I'm absolutely sure of; when it's over, there will be a dramatic shift in the factors that drive market activity.

Why? Well, the economy is poised to transition to the next phase of the business cycle, and markets behave differently depending on which phase the economy is in.

For those who don't know, the business cycle is defined as the recurring and fluctuating levels of economic activity that an economy experiences over a long period of time. The five stages of the business cycle are growth (expansion), peak, recession (contraction), trough and recovery. We can plot a representation of this cycle as follows:


If you were to ask an American "Average Joe", you would find he is of the opinion that the united states has been in a perpetual state of recession since the housing crisis of 2008.

However, according to the National Bureau of Economic Research - which is the official arbiter of when a recession begins and ends - the US recession ended in June of 2009. Since that time we have been in a period of recovery.

Of course, by definition, the recovery can only last until the economy eclipses the previous peak in Gross Domestic Product (GDP). At that point the business cycle transitions to the expansion phase and continues on until the development of a new peak.

This is important to understand because the previous GDP peak was eclipsed back in mid 2012. So technically the economy is already in the expansion phase of the cycle. And as soon as these lingering political issues like the fiscal cliff and debt ceiling are wrapped up, the market will be joining the party.
So what is it that will change?

In a nutshell, the big change will be in the relevance of data and interest rates.

For the last several years, markets have been dominated by the dynamic known as "Risk-On/Risk-Off" or RORO.

Unless you've been banging around trading with indicators, or hiding under a rock, you already know that RORO was the movement of capital in and out of risk assets based on the likelihood that some systemic risk would bring about the end of the world.

From the Housing crisis, to the banking crisis, to the sovereign debt crisis, it seemed like we were always moving from one potential catastrophe to another. As information came out about each of those crises, the end would look more or less likely.

All one had to do to make money was follow the news related to the crisis of the day. When things looked good, buy risk assets like AUD, Equities, or Junk Bonds. When things looked bad, you could sell those assets or buy USD, Treasuries, or Utility Stocks for some quick profits.

For many of us it was a fun time, but sadly it's all coming to an end. With Europe and the banking system stabilized, the housing market returned to life, and global GDP expanding, were quickly running out of potential crises to worry about.

And in case you haven't noticed, the RORO correlations have completely broken down.

Since at least the beginning of the year, economic data has returned as the primary market driver, and that dynamic is likely to become far more apparent after the debt ceiling issue is resolved. Although, it may not be in the way you would assume...

At the moment, the data is being interpreted through the prism of the recovery phase. Good data prints for employment, inflation, and capacity utilization are all seen as moving us farther away from recession. As such, this good data is providing a huge boost to equities, commodities, and other growth assets. However, this isn't likely to last either.

One thing you need to understand is that the expansion phase is marked by sustained GDP growth. With that sustained growth expected in the system, the natural inclination for market participants will be to spend every spare dollar they have on growth assets. As a result, growth assets should be poised to enter a state of perpetual price appreciation.

The only problem is; interest rates. When interest rates rise, it has a dampening effect on economic activity. So anything that shows an increase in the probability of a rate hike will be seen as a negative for growth assets.

This sets up a dynamic where asset prices will rise every day, unless something happens that has the potential to increase interest rates. And that "something" will be the strength of economic data.

The first of many examples of this new dynamic will likely come in the form of good employment numbers tanking the US equity market.

From an economics perspective, this makes no sense because higher employment means more people with money to spend. More money to spend means better corporate earnings and a virtuous circle of growth. That should INCREASE the value of stocks.

It's not going to happen though. The stock market is actually going to drop, because good employment will mean a hastened end to the Federal Reserve's Quantitative Easing program, or QE as it's commonly known.

See the Fed told us in their last policy statement that they would begin unwinding QE when the unemployment rate reaches ~6.5%. So the closer we get to that number, the more the market will worry about the end of QE.

As most of you know, QE was implemented because the Fed had already lowered interest rates to 0%. The lowering of interest rates typically has a simulative effect on growth, but the economy was in such bad shape, that even at 0% things weren't getting any better. QE allowed the Fed to effectively lower interest rates below 0% in order to increase the simulative effect.

So if the point of QE was to stimulate growth, it only stands to reason that when it ends, growth will suffer.

How much it will suffer is open to debate, but the one thing we can all be sure of is that growth won't be as good without it. That will lower the implied value of stock market assets and lower the price people are willing to pay for them.

Now I'm not sure exactly when this is going to occur, so don't just go shorting good employment numbers willy-nilly. That's a recipe for disaster. No, the point I'm trying to get at is that you need to keep an eye out for this transition of focus. When you see the above happen, you'll know that we have entered an environment dominated by the Feds interest rate cycle and that its time to adjust your trading behavior accordingly.

For order flow traders, this transition isn't likely to cause much consternation. After all, we just follow the flow of orders and no matter which way they flow, were happy to go along for the ride. However, traders of the technical and fundamental variety are likely to see serious losses over the next several months while they figure out how and why the world has changed.

And that's ultimately what those old market sages were trying to warn us against.

Forex Trading: AUD/USD

AUD/USD
The RBA kept rates on hold yesterday; but left the door open for a future rate cut, saying: "The inflation outlook, as assessed at present, would afford scope to ease policy further, should that be necessary to support demand." As historically, the RBA has never cut interest rates past 3.00% before, and interest rates are currently at 3.00%, I wonder if they are even considering a rate cut. I think the more plausible likelihood is that they've watched in complete shock as Japanese government officials have effectively depreciated their currency simply by jawboning. Could it be that the RBA is finally realizing that communication tools are an effective path to lower what they have long deemed a "high exchange rate?"

The rate statement, combined with retail sales: Actual: -0.2%, Est: 0.3%, Previous -0.1% (revised to -0.2%) has pushed the AUD/USD to test the recent swing low at 1.0360 where it currently trades. If this currently downward momentum breaks the swing low from December at 1.0345 then a lower low has been put into place, which is a significant bearish signal. The first real range of support below current levels is the 200 SMA converging with a 0.618 fib retracement at 1.0315 with the big figure below it. A close on the daily chart below a previous spike low at 1.0287 should open the door for a further move to the downside.

AUD/USD Range of Support: 1.0315 - 1.0290

Forex Trading: GBP/USD

The GBP/USD rebounded from support during the European session and now appears to be consolidating. The pair has been propped up by the EUR/GBP cross rate, due to weakness in the Euro and European equities across the board. GBP/USD has come down from the 1.6300 area while EUR/GBP has gone straight up, so a consolidation in the GBP/USD over the next couple of days seems plausible. Also, the GBP has depreciated substantially against the commodity currencies recently (GBP/AUD: 714pips, GBP/NZD: 1325pips, GBP/CAD: 582pips.) If the U.S. equity markets start unwinding (down around 1.0% atm), then the commodity currencies should start depreciating against the GBP - giving GBP/USD support.

There's a small price inefficiency that has not been filled yet from 1.5750 - 1.5810. If this price inefficiency is not filled, and price moves below the .618 fib retracement at 1.5675 serving as support, it would be a clear break of the consolidation and opens the door for a move down to 1.5500.

Forex Trading: NZD/USD

This is a weekly chart of NZD/USD where an ascending triangle is clearly visible. Ascending triangles usually break higher, rather then lower, because the offers holding price action down eventually get overwhelmed after being tested several times. Here's an example - when price gets rejected for the 2nd time at a level and pushed down, offers begin to build up at that level. When price is trading at say, .8200, and there are very few sellers below .8450-.8475 (where offers are clustered), there's no point in selling at the current level for a longer term trade because price isn't likely to go lower since most of the large traders who want to sell have their offers 250 pips higher then where price currently is. The lack of sellers causes the price to be bid up, until price arrives back at the horizontal line of the ascending triangle and meets the offers (resistance).

(Note: if the price is going up, it's unwise to assume it's due to increased buying power. It may just be a lack of sellers. I know it sounds like a technicality, but it's important to recognize the difference.)

Here we have a Daily chart, where I have outlined a series of higher lows, which signify an uptrend. Note that this triangle on the weekly chart has been compressed into a very small range. A breakout of the triangle is imminent. A breakout to the upside is likely; but we believe there's a chance this could be a false break due to the overbought conditions of equity markets around the world. False breaks typically look like normal breakouts, but they typically just serve to flush out the stops of everyone who was short the pair and to get a lot of "buy stop" orders triggered. Once that is accomplished, price usually rips in the other direction. The key to trading a breakout without getting hurt by false breaks is to get long entries in good places and to get a stop-loss in front of that entry as soon as reasonably possible.

Below is the 60 minute chart with some notations. This is a particularly strong uptrend on the hourly chart driven by fundamental news flow. Absent some highly compelling fundamental reasons to short this pair, the dips should be bought and played for a break of the ascending triangle on the weekly chart.

 

Forex Trading: Market Update

EUR/USD EUR/JPY USD/JPY
The Euro pushed higher against the Dollar today as there was USD weakness across the board except against the Yen. The Yen pairs were being sold, pushed higher by USD/JPY in expectations of the senate passing the bill to extend the debt ceiling. When the bill passed, USD/JPY immediately pushed higher (from 91.55 to 91.80 in 6 minutes.)

The move higher in EUR/USD was more from the USD weakness than Euro strength today, which can be proven by looking at the cross rates. In the European & US sessions EUR/GBP traded sideways/down, EUR/NZD & EUR/CAD fell, and EUR/AUD traded sideways. It's worth a note that this is the second day in a row the European equity indices have fallen. Most notably the FTSE MIB down around (-3.50%) yesterday and the Ibex (-2.45%) today. EUR/USD could be vulnerable to a pullback IF (and that's a big IF) we see some USD strength come into the market.

NZD/USD
Yesterday we had a rate statement where the RBNZ chose not to cut rates due to strong HPI data. That gave the currency strength throughout today, and was further bolstered after RBNZ's Wheeler made positive remarks about the economy in a speech today. Ironically, Wheeler wants a much lower exchange rate but regularly causes the Kiwi to strengthen with his remarks. If he possessed adequate knowledge about how the markets functioned, he would realize that he could cause his currency to depreciate simply by jawboning without actually having to take concrete steps to devalue it. He's scheduled to give a speech on currencies on Feb. 20th. Maybe he'll figure it out by then.

AUD/USD
We just had Chinese PMI released, and there was a surprising divergence between the government's PMI number and HSBC's PMI number.

8:00pm CNY Manufacturing PMI                       Actual 50.4,   Est. 51.1,   Previous 50.6

8:45pm CNY HSBC Final Manufacturing PMI      Actual 52.3,   Est. 52.1,   Previous 51.9

Out of both numbers, we think the government's PMI number carries more weight, because they are typically suspected of tweaking the number to slightly above positive, and would probably not release a print lower than the consensus estimate unless they wanted to keep the number they were releasing and the actual number in the same ballpark. This should cause the Aussie to further weaken across the board going into February's RBA rate decision. AUD/USD is currently in an uptrend, and may be forming a bottoming pattern above the 200 day EMA on the daily chart. If the bottoming pattern does hold, then we favor the Aussie higher through the 1.0650. The number to watch on the downside is the .618 fib at 1.0370. If that breaks, then 1.3050 should follow quickly and the 200 day SMA at 1.0315 should temporarily serve as support.

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Trading foreign exchange on margin carries a high level of risk, and may not be suitable for all investors. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. For full details see our Risk Disclosure Statement. 

RBNZ backs up kiwi dollar jawboning with $199 mln sell down

Straight from the Business Desk over at "Scoop News" for anyone who trades NZD/USD:


Thursday, 31 January 2013, 11:37 am
Article: BusinessDesk

RBNZ backs up kiwi dollar jawboning with $199 mln sell down

Jan. 31 (BusinessDesk) - The Reserve Bank is putting its money where its mouth, selling down its holdings of New Zealand dollars last month as governor Graeme Wheeler continues to call the currency overvalued.

The bank sold a net $199 million in December when the trade-weighted index was an average 73.92, adding to the $64 million sold in November, according to Reserve Bank figures published yesterday. That's the biggest monthly sale since mid-2008 when the kiwi dollar plunged going into the global financial crisis.

Wheeler today said the kiwi dollar, which recently traded at 83.59 US cents and 75.17 on a trade-weighted basis, is overvalued and is the main reason inflation is tracking below the bank's target band.

Mike Jones, currency strategist at Bank of New Zealand in Wellington, said the central bank is backing up its heightened rhetoric with some action, and is signalling a TWI at 75 is too high.

"The bank is walking the talk by selling the kiwi dollar a little more aggressively," Jones said.

Since taking the Reserve Bank reins in September last year, Wheeler has criticised the strength of the kiwi dollar, calling it overvalued and saying it's holding back the economic recovery. He has previously ruled out intervening in currency markets, which he says wouldn't have a sustainable influence on the kiwi.

The central bank last intervened in currency markets in 2007 when it sold more than $2 billion to ease the last peak in the kiwi dollar.

The bank manages foreign exchange reserves to allow for efficient intervention and crisis management, and had an intervention capacity of $9.14 billion, as at Dec. 31.

The last major monthly movement in the Reserve Bank's foreign reserves was $525 million of net purchases in March 2011 in the wake of the Canterbury earthquake when then-governor Alan Bollard made an emergency cut to the official cash rate. The TWI was an average 67.72 that month, 11 percent weaker than the average sale last month.

Jones said the central bank has been running more of its foreign exchange programme unhedged, which is more expensive than running a hedged programme.

"The bank made a whopping big profit in the GFC, but since then, it's been haemorrhaging cash to fund its net short positions," he said. "They're hoping they can smooth the peaks and troughs, and can make some money to offset currency costs."

Article Link

What Will Happen When the Markets Crash?

What will happen when the market crashes?
This has as much to do with the currency markets as it does equity markets, because when stocks begin selling off in a fervor led by high frequency trading (HFT) algorithms that jump in front of orders and accelerate the sell off, the currency markets will follow suit. What does this mean for us the FX market? The textbook answer derived from the crises last year is that when the stock market drops money will flow into the "safe haven" currencies such as the USD, Yen, and Franc.

However, since the market last had a substantial drop the possible scenarios of what might happen in the event of a future sell off have changed dramatically due to recent actions taken by central banks. The question that needs to be asked is: in the next major crisis, will the safe haven currencies of choice be the same as last year? We don't think so.

When it comes to the Yen, why would investors choose to put their money into a currency that they know the Japanese are dead-set on destroying? Various market participants have told us that Japan's economy will ultimately implode, with Kyle Bass's prediction of this event happening 18 to 24 months from now being a fan favorite.

The Swiss National Bank has been directly intervening in the FX market to keep their currency weak and has even gone so far as to have some Swiss banks implement capital controls (customers are CHARGED interest rates on their deposits.)

That leaves the U.S. Dollar. With quantitative easing expected to come to an end in 2014 and interest rates set to rise sometime in the next 12 months after that, we believe that the U.S. dollar will be the primary beneficiary of the next crisis.


So when will the markets crash?
Trying to call the top or bottom of a market and trading it before receiving confirmation from price action is one of the most common ways traders lose money and/or blow up their accounts. My philosophy for trading turns in the market is simple: if I know what I'm looking for when a major turn in the market happens, then I'll know when I see it. Playing a move prior to letting price action confirm my hypotheses has rarely ended well for me.

So for everyone frantically trying to call the top of this market on CNBC, please just chill out. When we get a large exogenous shock, whether it's from political BS in Washington, people realizing the economic reality of the continuing Eurozone crisis, or Israel taking out Iran's nuke sites, it will show up in price action. Trying to trade an event that may or may not even happen is gambling. It's not trading.

Australian Dollar - Pressure to Cut Rates

Written by Enda Curran - Wall Street Journal

SYDNEY--Australia's Prime Minister Julia Gillard added pressure on the central bank to cut rates in a speech to be delivered Wednesday saying that managing the strong Aussie dollar is beyond the control of the government.

"We cannot control a number of factors that have kept our dollar strong, like the weakness in the global economy, the close-to-zero interest rates of many nations and the increasing view that Australia is something of a safe haven," Ms. Gillard will say, according to extracts of a speech she is scheduled to deliver later Wednesday in Canberra.

Her remarks will add to pressure on the Reserve Bank of Australia, or RBA, to again cut rates in an effort to ease the strength of the currency, which is making Australian exports less competitive and hurting areas of the economy such as manufacturing and retail. The RBA is scheduled to meet on Feb. 5 to decide on rates after 1.75 percentage of cuts since November 2011 failed to dampen demand for the Aussie dollar. Rates in Australia remain high by international standards for developed nations at 3.00%.

Ms. Gillard's remarks are out of step with some members of the bank's board who argue that more aggressive action needs to be taken to moderate the currency. In an exclusive interview with Dow Jones Newswires last week, RBA board member Heather Ridout said that the economy needs more "active management" from policymakers to offset the impact of the strong currency.

In the speech, Ms. Gillard says there was likely to be little immediate respite for local businesses from the strong exchange rate.

The article is located here

Forex Trading: Arbitrage

The USD continued to gain or consolidate against most of the major currencies. Notably, GBP/USD and NZD/USD have been under pressure since the market opened Sunday night (currently down 84 and 54 pips respectively.) The Euro has been trading sideways against the U.S. Dollar as the demand for Euros in terms of GBPs has been propping the Euro side of the equation up. [Remember the concept of arbitrage: if EUR/GBP moves up by relatively the same amount that GBP/USD moves down, then EUR/USD will remain constant (in practical terms this means consolidation.) ΔEUR/GBP+ΔGBP/USD=ΔEUR/USD] There are computerized automated systems all over the world that are in and out of trades in milliseconds and profit from performing arbitrage to keep this equation in balance. Once you understand the concept of arbitrage, it's easier to identify which side of the equation is driving price action.


In fact, you don't even need to look at a EUR/USD chart to see how price action is unfolding! You can tell how price is moving on a chart of EUR/USD simply by watching the EUR/GBP and GBP/USD charts.

So when will EUR/USD move and in what direction? For the last couple of trading days there seems to be both broad strength (broad = key!) in the U.S. Dollar and the Euro across the board. I'll be looking for one of them to start exhibiting weakness against the other major currencies (GBP, AUD, NZD, CAD), and then I'll know whether its the USD or the Euro I want to short against the other.

Forex Trading - Market Update

The Aussie and Kiwi continued falling today as the bloodbath in Apple's stock continued and the S&P briefly broke a couple points above the psychologically important 1500 figure and then got hammered back down and closed unch.

AUD/USD
There appeared to be two main drivers to the Aussie weakness today. First, there was strength in the Euro across the board. The EUR/AUD cross was up approximately 185 pips on the day, putting downward pressure on AUD/USD (closed 105 pips down on the day.) Second, the weekly U.S. unemployment number beat the consensus estimate by a wide margin - for the 2nd print in a row. Actual: 330K, Est: 359, Previous: 335. This has caused some market participants to adjust the predictions for the next NFP report and unemployment rate print on Friday, February 1st. This in turn affects speculation about when QE might end. Remember, a lower then expected unemployment print means that our stimulus addicted market will get its last fix sooner then expected. To understand what that means for the currency markets think about the effects that QE has previously had and simply reverse them: a weaker USD and higher commodity prices (stronger AUD, NZD, CAD.)

Additional factors from Monday included the lower than expected CPI reading and the RBA's Treasurer saying that another rate cut was possible. China's HSBC manufacturing PMI came in better than previous on Wednesday (actual 51.9, previous 51.5) but market participants were expecting it to come in better, so it didn't have much of an impact.

EUR/USD
Remains locked in its trading range of 1.3400 - 1.3250, and seems to have been driven up today more from the arbitrage affect of strong demand for EUR/JPY than from fundamental demand for EUR/USD. The SNB seems to have temporarily stopped selling Francs to buy Euros, but the franc pairs deserved to be watched closely in case SNB's Jordan gives his traders the green light again.

USD/CAD
Appears poised for a continued move to the upside if the Canadian CPI number tomorrow comes in lower then expected. The US New Home Sales number is also coming out at 10:00 AM EST and usually has a decent impact on the CAD as well. (Canada exports a lot of the raw materials used in construction and manufacturing). The CAD is already significantly weak after a surprise dovish stance from the BOC on Wednesday, and took a slight breather today as the Aussie ripped down today so it has decent potential to the upside on Friday.

Forex Trading - Market Update

The HSBC Flash Manufacturing PMI reading out of China came in better than generally expected at 51.9, with a previous print of 51.5. There was little initial reaction. However, at 9:00 P.M. on the dot risk took off like a rocket, which coincidentally was somewhat quelled an hour later by North Korea threatening to launch an actual rocket.

EUR/USD & GBP/USD still remain stuck in their respective ranges (1.3400 - 1.3250 and 1.5900 - 1.5800), but exhibited signs of weakness today as the IMF cut both the Eurozone's and the U.K.'s growth forecast. If EUR/USD drops to 1.3250, our target is 1.3150 based on the price inefficiency. If the Euro does break down tomorrow morning over the PMI numbers due to be released (here) then it's reasonable to expect EUR/GBP to follow it down, and give some support to GBP/USD. (Perhaps a bounce off of the .50 fib at 1.5790?) Also, if you're trading EUR/USD make sure you keep an eye out for government intervention in the EUR/CHF and EUR/JPY.

As we stated in yesterday's blog post, the best high yielding currency to go long in a 'risk on' play would probably be the Kiwi. Sure enough, AUD/NZD continues to barrel to fresh lows instilling strength in NZD/USD and keeping downwards pressure on AUD/USD. The first major piece of event risk that should impact the AUD/USD tomorrow is the German PMI at 3:30 A.M. If that print is bad, European equities could start to dump (especially after the downgraded growth forecasts today.) That could in turn bleed over into the U.S. stock market session. Speaking of stocks, keep an eye on Apple (you can check the futures here.) It's unknown what effect the massive dumpathon in AAPL is going to have on U.S. stocks at 9:30 A.M. tomorrow; but I imagine it won't be pretty. The futures don't look good at the moment (track them here) and the gap lower could cause margin calls. Lastly, keep in mind that the 8:30 A.M. weekly U.S. unemployment number could generate another "omg QE is ending" moment if it comes in much better than expected.

Forex Trading - Market Update

Market Update
The U.S. stock market made fresh five year highs today as the uptrend in price action continues. Unless a meaningful catalyst arises which sparks a sell off, the market should continue grinding higher. There are plenty of potential catalysts out there, but it's dangerous to trade them before they come to fruition.


Currencies
Australian CPI has come in lower than expected:  Actual 0.2%, Expected 0.4%, Previous 1.4%. That should make AUD/USD the best currency pair to short if the market turns lower. Alternatively, NZD/USD should be the most attractive pair to go long if the market goes higher. Stops have accumulated above the swing highs on the daily charts in both of these currency pairs, so if the market begins to explode to the upside it would be dangerous to short these pairs before the stops get wiped out. Also, it pays to keep an eye on USD/JPY and the Japanese stock market. If Japanese stocks begin selling off, risk appetite in Asia should be dampened quickly leading to selling pressure on the Aussie and Kiwi. (Remember, there almost as many retail FX traders in Japan then in the rest of the world combined! They can have a significant impact on price!)


Potential Catalysts This Week
- U.S. political strife. The House Republicans are scheduled to vote their "no budget, no pay" bill through tomorrow. If Harry Reid says the bill has no chance of passing the Senate, traders may begin to price in gridlock.
- Earnings. (Apple reports tomorrow.)
- Chinese or German Flash Manufacturing PMI. (The print would have to be very bad.)
- US unemployment claims: Last week's print was 34K better than estimated. If we see another really good print the market could focus on the 6.5% unemployment rate tied to the end of QE.
- A possible flare up in the dispute between China and Japan over the Senkaku islands.

Bank of Japan Votes to Expedite Japan's Economic Collapse

In a move derived from an attempt to win political points and the ignorance of monetary history, members of the Bank of Japan decided to embark on an open ended asset purchasing program and adopt a 2% inflation target. The vote was 7-2 in favor of the measures, as apparently a minority on the council realized that actually reaching a 2% inflation level would cause a rise in interest rates and make the process of refinancing their debt completely unsustainable. Also, there's the small issue of the entire Japanese banking system collapsing as banks are the primary holders of JGBs.

Why the Euro is Going Lower - Round 2

In my last article located here, I had shorted EUR/USD with a stop at 1.3375. As usual when getting stopped out, I asked myself what had gone wrong. My conclusion was that price action can easily give misleading signals when multiple central banks are intervening in the market and distorting prices. (Points finger at the BOJ and SNB.)

I still like EUR/USD lower to 1.3150. After I got stopped out, I analyzed the situation and re-shorted the Euro at 1.3370 and now have my stop loss in front of my entry so that I won't lose money if various central banks around the world decide they want to continue buying European government bonds and price rips up towards Ashraf Laidi's 1.3500 EUR/USD party.


What To Watch For
I'll be keeping a close eye on the following currency pairs:
EUR/CHF - Will the SNB continue selling francs?
USD/JPY - If this pair continues to climb then it's a positive for equities (Japanese stocks rip higher and the effect bleeds over into the other stock markets.)
EUR/JPY - If USD/JPY goes higher than what's everyone's favorite yen cross? So far it's been EUR/JPY. When you have such a parabolic move in a particular currency pair such as the Yen, arbitrage plays a very distinct role. >> (check out EUR/USD, EUR/JPY, and USD/JPY going back to 11/14/2012)


Why the Euro is going lower - Round 2
My three fundamental reasons behind originally shorting the Euro:

1. There's far too much complacency in the market. I don't see an obvious reason for the correction; but with equity markets pushing record highs, the VIX plunging to lows, and general sentiment being complacency, I think the most amount of people would get hurt by the markets falling - therefore I consider it likely. The negative effect on risk appetite should cause EUR/USD to fall.

2. I thought the hyperactive traders buying Euros and selling francs over at the SNB would take it down a notch. Not so. EUR/CHF spiked up from 1.2370 on 1/17 to 1.2570 on 1/18, a 200 pip rise corresponding with EUR/USD's re-test of 1.3400. It just so happens that when a central bank begins devaluing their currency with a passion, it can give price action a parabolic shape.

3. Issues of a Cypriot bailout make media headlines. Again. The spread between the German and Spanish 10 yr bonds has narrowed substantially in 2012. I believe mean reversion in the near term is likely, as investor continue to pile into European stocks and bonds on the trumpeted declaration that the Eurozone is saved.



Alternative Scenario
The uptrend continues and the Euro rips higher. Be careful.


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