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Archive for July, 2009

Walking in the Dead Zone

The story in the Forex Markets going into this week: Range bound trading. It’s been relentless. While that’s been the story for the last few weeks, that range got even smaller in the last week. Take a look at the Forex Chart for the EUR/USD Currency Pair below:

Forex Chart July 26th 2009

That last candle is actually for the Asian Session for Monday the 27th of July (It’s still Sunday here in the States). You can see that the price has rebounded down from resistance about 1.4200 (yet again) and is now on the way down to support. It’s still too early to tell right now where things will go. We’ll have a better picture once the news starts properly later on.

That underscores what is moving the markets…and on a day to day basis as well: News. The S&P 500 rallied to over 9000, the highest since January. In this earnings season, we have had a good chunk of positive numbers from companies; certainly more positive than the negative ones. That has generally been bad for the Dollar, and good for the other majors. As you can also see on the charts, we have not dropped back to 1.4000. It might be range bound trading, but the price range is certainly higher than it was a couple of weeks ago. However, the earnings have generally been in line with what most investors expected. Companies have been doing all they can do rein in costs. People have been let go, practices changed etc. What we have seen is mostly the end result of that i.e. higher earnings. However, those earnings will have to start coming from increased production and sales for this Stock Rally to have real legs. Some analysts think the whole thing is bogus. They expect this boost to show itself for what it truly is shortly. Something real has to happen with the economy or equities could start to head down again.

I think that point was highlighted by some of the other news that came out last week. The GDP report for Britain was pretty bad. They haven’t seen such numbers since the seventies. The UK isn’t coming out of this recession with any real conviction anytime soon. There is some talk of further Quantitative Easing to provide stimulus, though some are against that approach. If they go ahead with it, it should be negative for the Pound. However, with the general air of positivity that is in the air (if that is still the case at the time), measures like that might actually help the Pound more than hurt it, as it might be perceived as a sign that the UK authorities are still willing to do more to ensure that growth occurs. It is worth taking that into consideration when looking at trades.

Things are traditionally slow in the summer in the trading world. I guess traders have to go on holiday as well. However, we are still in the middle of a crisis, so things could happen differently this year. In any case, I have had to adjust my trading style because of all the ranges we are having to deal with. So last week, I traded up and down with the markets…and did quite well. I used four-hour charts and look for short-term opportunities where I could. It seems to be the only way to get any action these days, unless you want to wait it out.

That is the BEST THING to do if you are not 100% on point with your Money Management. Trying to navigate without Targets and Stop Losses is truly suicidal in this environment. If in doubt…wait!

Forex Trends: long termers getting screwed

One of the reasons the forex market is so attractive to traders is that it “trends well”. That point was listed as one of the important points that made forex trading more advantageous than Equities, for instance. What that means is that the Major Currency Pairs tend to have a fairly clearer direction of movement i.e. The current trend is easier to spot.

Well, all that has gone to hell with the economic crisis. With the demise of a clear trend in the currency markets, Currency Funds have suffered greatly. A couple of examples, as seen on Bloomberg, are John W. Henry and FX Concepts Inc. FX Concepts is the largest Currency Hedge Fund. By May this year, it had lost 5.4 percent. John Henry lost 2 percent. What’s crazy is that last year they managed a 76 percent gain. They are getting whipped.

All this is because of the ups and downs in the markets. By the end of June, the Dollar Index stood at a 1.4 percent change (loss) from where it was at the start of the year. So, if you couldn’t see all the motion we have had all through that period, you would only be able to see the small change that has occurred in that price. Anyone who had bet on Dollar strength or weakness at the start of the year is not going to have any real profit to show for it.

The end result is that more and more traders have to resort to shorter time-frames for their trades…at least till the trend resurrects. More attention now has to be paid to the numbers as they come out; more fundamental analysis with a shorter term outlook. I mean days (in some cases less), instead of weeks. The other option is to wait it out.

There’s been much volatility as well. Somedays, things just happen to destroy your idea of where a particular pair is going. Check out the chart below:

Forex Trading Chart July 8

On the 8th of July, the USD/JPY Forex Pair fell to a four-month low. There was no US economic data out that day. Though there was some sell-off in the EUR/JPY and GDP/JPY pairs, that alone could not account for the fairly drastic fall. There were a group of other factors. In any case, such a move was highly unexpected. All of this just serves to add to the unpredictability that currently permeates the markets.

We all need to be even more careful than usual, at least until this storm passes.

It’s July…any forex seasonality plays?

We’re in the middle of July. I think July is an important month because it highlights some of the strongest seasonal occurrences in the Forex Markets. That is the fact that, in 9 out of the last 11 years, the USD/JPY and USD/CAD Forex Currency Pairs have ended the month of July higher than they started it. That’s a pretty high percentage of the time. Such numbers are important and should be a factor you consider when planning your trades.

There is just so much to look at when you are trading, it’s sometimes a bit overwhelming. I mean there you are, checking out news updates, looking at your Ichimoku indicators and doing your Fibonacci Analysis. It’s hard to work out where things are going, even with all of these tools, particularly in such an environment as we have now with the crisis throwing everything off balance. Now, we have something else that has to be examined. Man, making money is hard.

So, why do these Seasonal Effects occur and how can we profit off them? Look at the examples I mentioned above; USD/JPY and USD/CAD. For the Yen, it is quite hard to explain exactly why this occurs…it might have something to do with the calendar (e.g. July is the end of the first quarter in Japan). For the Canadian Dollar, a similar problem exists…there seems to be no single reason why it happens that way. The GBP/USD Currency pair usually does very well in September. Some think this might be due (at least to some extent) to the traders returning from the August Summer Holidays. Still, working all of this out…it doesn’t always add up. It’s puzzling.

However, seasonality is one of those things you don’t have to spend too much time trying to figure out. Just use it. For instance, if we know that in the month of July, the USD/JPY pair “tends to” gain in value, then we would be a bit more careful of entering longer term Sell trades with that pair. Right now, the Yen is exhibiting some strength because of all the uncertainty we have had coming back into the markets. While this is happening for a perfectly good reason and should be played for profit, you would do well to note that we still have a substantial amount of July left. There is plenty of time for the Dollar to turn the tables on the Yen.

All of that, just so it can be lost again. What do I mean? Well, the month of August is typically a very good month for the Yen. In most cases, all the gains made by the Dollar (and others such as the Euro and Pound) tend to be wiped out in August. The Yen comes back strong usually. Other seasonal trends to note: The commodity currencies (Canadian, Australian and New Zealand Dollars) tend to lose value in July, the US Dollar gains in January.

Once again, seasonality is just another tool to be added to the box. It shouldn’t be the sole basis for the trades you make, but it should be considered to help work out just how risky certain trades might be. We’ll see how this particular July in 2009 eventually turns out…exception or rule.

Happy Trading.

Forex Trading…unreasonable expectations

My path as a forex trader has been…interesting. Like many others, I was lured in by the prospects of easy money. The way I figured it, next to winning the lottery, Forex trading was the fastest and easiest way to make a mint. All I had to do was program my own system, which was going to be a cinch, because I had the inside track. Hurrah for me! Of course it didn’t work that way.

Many forex traders come in with such unreasonable expectations. There’s nothing really wrong with that. We’re human beings. We live to learn. Us Forex Traders…those of us who have been here a while…we have all learnt painful lessons. It’s like growing up. You put your hands in fire and get burnt. The next time you are more careful. Simple.

The difference here is that anyone – well, almost anyone – that can open a forex account and start trading should be smarter than the average child. So, how come they all still make the same mistakes as the others that have come before? Well, with children, the adults often discourage dangerous behavior. It’s curiousity that gets them into trouble. So, in the cases where they are out there without supervision, they might have to get hurt and learn the hard way.

Well, in the world of Investments and Trading, including Forex, too many of the “adults” don’t discourage harmful behavior. Infact, they actively encourage it. They help to perpertuate the myth that one can take short cuts and get rich. I am sure a few people will get lucky and hit the jackpot with little or no work, but it’s no strategy to base your trading career one. “On-the-job” training is a requirement in Trading, but some pre-education is needed as well.

I suppose we traders have to take some responsibility. If we weren’t all looking for quick money, we wouldn’t fall so easily for the seductive information that is out there. We wouldn’t buy every system that comes out promising riches without any work. We would take more time to learn and grow. We would see the false prophets for what they are. It’s just that things aren’t black and white in real life. Fire burns, so you don’t touch it. But Forex Trading can make you rich. Systems can make you rich. You can’t really tell people not to trade because it’s dangerous. So, the people with the authority…they aren’t really lying when they tell you some of the wonderful things. They underplay the negatives and exaggerate the positives. It’s irresponsible of them, but there you have it.

So, back to the responsbility thingy. Ultimately, your financial destiny is in your hands. You need to test everything that is out there before you trust it. Get some training! If you won’t buy a book, check out Babypips.com. They are great for online information and training.

Happy Trading.

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