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When risk is not worth it

Check out the chart below. This is a chart of the Forex pair EUR/CHF (Euro against the Swiss Franc).

Forex Chart Dec 11

You can see that, in general, the pair has spent the best part of the last 4 months moving sideways. That’s not to say it has been a smooth ride though. I have highlighted a number of candlesticks on the chart. You can see the ridiculous levels of volatility on those days.

This pair has behaved terribly…from a daily chart perspective. If you had attempted to make a short term play on this pair on any of those days, incorporating any sensible level of risk management, chances are that you’d have been stopped out (then, just to make you feel worse, the price would probably have headed back and hit you target).

There’s just so much volatility, it’s almost pointless trying. You see this sort of behavior mostly with “exotic” currency pairs (think USD/TRY, USD/ZAR etc). Volume is so low that smaller amounts of people can cause violent moves like we see on this graph.

One of the main advantages touted about forex trading is liquidity…so much volume that no single person or group can overly influence the direction of a given pair (on purpose or not). There’s also a greater chance of stability, in general. All that goes out of the window for pairs like these.

There are other reasons why such instability could occur. In any case, the end result is the same: violent moves that can leave you bruised.

This underscores the negative side of setting stops. You have to pick your pairs carefully and ensure you give enough room so you don’t get stopped out of trades unnecessarily.

Sometimes, you just have to wait.

Possibly related posts: (automatically generated)

The problem with systems

This can be summed up in one word…Patience. That’s it. You just have to wait till the stars align before you plunge. This can be a pain, especially if you’re an active trader in a market like this.

Sticking to your system demands that you do not take action until certain conditions have been met. In my case, that may mean when an oscillator shows oversold or overbought conditions, for instance, in addition to other technical signals. I also have to look at the markets to work out the general direction.

The latter part is where the problem really lies…direction; especially when it changes everyday, as it seems to be doing lately. When things are calm, you can usually count on a trade to play out in a certain way once it has been triggered. Either this will happen and you can do that, or that will happen and you can do this.

Now, fundamentals change everyday. The power of economic news has grown seemingly exponentially during this recession. It’s a kind of chaos.

The offshoot of that is that system traders (who, honestly, are the ones that can truly be profitable over the long term) have to show extreme discipline to keep making money.

I still have to try to work out the fundamental direction of the pairs I trade, even if it’s on a much shorter timeframe (for instance, a day instead of a week). I still have to scan the charts to search for my entry signals. I now have to pay much more attention to potential deal-breakers on the calendar.

I have to make sure that I have the wisdom to NOT pull the trigger if there are variables I can’t account for. Most important of all…when I do pull trigger, I can’t compromise on MONEY MANAGEMENT.

I have recently been stopped out of a few trades that later reversed and continued in the direction of the trend. This happened because I could only risk 5% of my account. It hurt when that happened, but I would never consider increasing my risk exposure.

If you can’t enter a trade with a reasonable level of risk (less than 5%…in general) then it isn’t worth it.

IF IT FEELS LIKE GAMBLING, YOU ARE NOT DOING IT RIGHT.

The recession is slowly passing away. The waters should calm down a bit soon. Till then, stay sharp.

Happy Trading.

Possibly related posts: (automatically generated)

Coming back to interest rates…

Major Progress rarely occurs in one major move. Mostly, the whole thing happens in waves. You take a step forward, then stop and look around; you consolidate. you take stock of your situation, and try to work up enough momentum to take another step. You might even have to give back some ground if you are unable to consolidate…for instance, if the step taken was a major one and covered a lot of ground.

This is what we are seeing in the markets. Over the last few months things have been tentatively moving upwards. The tide has turned, surely. Earlier on in the year, when we had all that bad news coming hard and fast, it was really difficult for things to head up. Any bad news was reason to sell-off and head for the hills.

That has now changed. Most are now convinced that we have seen the bottom. The news is now more positive, and the trend is up. Now, any good news is reason to go on a spending spree. Yay!

This brings us to the Dollar. For most of this recession, the Dollar has been a safety play, like the Yen. Dodgy situation = Buy Dollar…because your dough is safer in US Assets etc etc. This held true, even as it became evident that the situation in the US was not better than in Europe (for instance), and that the US was probably not going to lead the way out of the downturn.

The question always was “When will the US Dollar really start trading on Economic fundamentals?” i.e. If things stay bad in the US, will the Dollar continue to rise because of risk? Also, will the dollar continue to fall if risk increases and the US economy gets better?

Well, as things get better we will most probably – have already started to – settle into the standard mode of operation…Interest rates. Currencies with higher interest rates will start to see more investment. The reason is two-fold. First, higher interest rates mean higher return on investment. That is standard.

However, the second reason is quite important in this environment. Having the guts to raise rates means that you are confident that your economy is really recovering. That just makes your currency an even rosier prospect. Just look at how the Australian Dollar has performed after they raised rates this week – though it was already doing well.

With the US economy not doing so great, investors have had no reason to believe that the Federal Reserve will raise interest rates (exiting other quantitative easing strategies as well) here in the US anytime soon. They have traded accordingly. However, The FED Chairman, Ben Bernanke – Helicopter Ben as he is called, apparently because of his predisposition towards said strategies – hinted that they are also considering an exit, like Europe and others. Thus, the rush to sell dollars has been temporarily stalled.

No one expects the FED to do anything until we really start to see improvement in Job numbers in America. So, I guess the dollar is still likely to keep falling, if not as drastically as before.

I yearn for the old days…the days when my currency pairs weren’t so sensitive to daily news and rhetoric. I think we’re on the way back though. Just a wee bit more time.

Happy Trading.

End of week Dollar movement…interesting

So, last week Job numbers for the US were released. It was a big announcement. No one can ever really be sure what these figures will turn out to be, but we often have indicators that experts can look to. In this case, the figures came out substantially better than most people thought they would be. Hurray for the US economy! It means that, though job losses continue (number of unemployed still at 9.4% nationwide), the rate of loss is considerably slower. That, in this nasty climate, is good news.

What was interesting was the way the Forex Market – well, the Dollar – reacted to the news. The set up was the same as it has been during this crisis. If the figures are about what people expect, then the current trend of dollar would continue, with no fundamental boost, positive or negative. If the figures were better, then that would be a bullish sign for the economy. That would mean a move away from safety; a move to higher yielding currencies i.e. a move away from the Dollar. If the figures were bad, then the dollar would gain strength. Simple.

Not!! We had really good figures (relatively speaking). I, along with most other traders, looked at our charts expecting losses in the dollar. We instead found a strong dollar. The dollar gained on all the other majors. Also, the dollar gained on the Yen. In the past we have seen that when there are bullish signs, the dollar loses against everyone else but gains against the Yen. When things are bearish, the dollar gains on everyone else but loses against the Yen. One can infer that the Yen is even more of a safety play than the Dollar. So, when the Dollar gains on the Yen AND everyone else, in a substantial move, it is safe to say that it based mostly on Dollar strength.

It is baffling. Suddenly, traders think that bullish signs in the US economy should impact the dollar positively? Why now? Why should there be a shift from the risk trade to fundamental? It is suspicious.
Though the move was major(ish), the trend against the dollar is not broken yet. More will have to happen for the Greenback for the bias to change. In any case, We will have to see what happens this week.

The trend is (still) your friend

When the markets become as they have been lately, traders get frustrated. Ranges can test the patience of even the most disciplined of us, and make us do the silliest things. We can often try to impose our will on the charts. “Up! Up!!” like that’s going to make a difference. With all of this going on, it can be easy to lose sight of what is going on in the background. This is current chart of the EUR/USD Forex Pair:

Forex Chart Aug 02

What can we see? We were in an uptrend on this currency pair from a few months ago. While that trend has stalled somewhat, it has not been broken completely, from a technical perspective. The occurences last week have also helped to reinforce the bias, which is still up. The 50-Day moving average has finally caught up with the current price (it has been moving upwards) and the price has bounced off of it. There was also considerable volume behind the move as well, so that’s pretty powerful. The news has seemed to be doing all the market moving, but that’s no reason to ignore the technicals. We could be well on the way out of this range now.

This week, there is a ton of news coming out, in addition to the 3 interest rate decisions for this week (Australia, Europe and Britain). It’s going to be another week of paying close attention to the news to get a general feel for the state of the economies and mood of investors. That said, we are still bearish the US Dollar at the moment, as more risk comes back into the markets. There indications that the news might be getting better as well. The IMF did not help the dollar either last week, by claiming that it is over-valued. It’s not looking good for the Greenback.

There are a few things to note though. The Kiwis are not particularly keen to see their currency gain strength excessively. They may intervene, so I would be careful about that one. Also, Britain is still suffering. That’s one place where the revelations are not so encouraging. The Government might still have to engage in more quantitative easing. The currency popped up last week against the dollar, but that was mostly due to dollar weakness. If things don’t pick up, the pound might start moving decisively in a different direction from the Euro, which is doing just fine.

Look for the dollar to continue losing steam this week, baring some horrible, cataclysmic event. We have had a few of those though, so tread softly…

Happy Trading

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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