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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)

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.

Forex Holiday Madness

We have the American Independence Day Celebration at the end of this week. Yay!! Yay for clogged highways. Yay for flight delays. Yay all round. Yay for a 4 day Trading week with an ECB rate decision, Employment numbers, Non-farm Payrolls, PMI, as well as Retail Sales from the World’s biggest economies. It’s going to be a pretty volatile trading week in the Forex Markets.

I talked about intervention in my last post. I mentioned that the Swiss had engaged in that substantially earlier on this year to stem the strength of their own currency. Well, they did the same again last week. This time they bought both the EUR/CHF and the USD/CHF. Take a look the graph below and you can see just how drastic an effect such an action can have, in the short term.


What this chart also shows is that trends are powerful things. It will take more than this sort of action on the part of one group (in this case, the Swiss National Bank) to unhinge an overall trend, start a new one. You can see that the dollar has lost substantial value against the Swiss Franc in the couple of days following the action of the Swiss National Bank. A little pullback is usually expected after such a move, but there are other factors at play here.

Most newsworthy is the statement coming out of China. They are making the call for a new reserve currency again. They did this before, but didn’t follow through with more words or action when Geithner visited some weeks ago. Infact, they seemed to take a step back. So, it’s a bit strange that they are back on that again. It was enough to make the dollar lose some more steam. I am not sure how far they will go down this path though. While the need to diversify out of Dollars is important and valid for them, China has something to lose if they keep pushing this line during a global recession such as we have now. In the short-term, they are still linked to the United States. If the dollar loses too much value, there won’t be a lot left to spend on products. China likes powerplays though, so we might continue to see more of this sort of behavior if they think they will gain some preceived leverage from it.

The Brazilian Real, meanwhile, continues to gain and gain. It’s performance this month is second only to the pound against the dollar. Check out this story on Bloomberg which talks about an IPO in Brazil that is helping to fuel this. Stocks there are doing great. Thus, the Brazilian Central Bank is still buying dollars, to reduce the speed of growth of the Real, and also to develop it’s foreign currency reserves.

However, if the trend is still dollar weakness, then it’s going to take more than buying dollars to stop it. The trend for this week is still for dollar weakness to continue. The Volatility index has dropped considerably this week. There are still signs that the economy is recovering. The dollar should still be on the way down. Expect to see more action from the Swiss if the Franc gains too much against the dollar though.

Happy Trading

On Chocolate and Intervention

An interesting concept in the world forex markets is that of Currency Intervention. That word has been thrown around a lot during this crisis at various parties…the Japanese, the Swiss, the EU, the Swiss again, more recently. So, what is intervention? More importantly, what are it’s effects?

Intervention occurs when a party with some power (think central banks, govenrments…even individuals) takes some action to influence (increase or decrease) the value particular currency against another. Obviously, there is some perceived value to be gained by the party who engages in this act, even if it doesn’t work out that way eventually.

“Verbal” intervention is a kind of warning shot, or statement of direction. It’s an expression of desire, or a stand on the part of the person or group with the power to influence things. This statement, on it’s own, is able to have significant impact on the value of a currency. Good examples of these might include those statements from Central Bank Officials in certain situations. For instance, in recent months we have seen the Brazilian Real and the South African Rand (amongst others) gain substantially in value against the dollar. While having a decent currency value might be good on some levels, a really strong currency can do a lot of harm, for instance to exports (A stronger currency means other countries have to convert more of their money to buy your products). Such a rise has caused concern. The South Africans haven’t done much, but they have said that some “steps” might have to be taken. While this isn’t the actual policy decision, it does indicate that they are willing to go through with some form of intervention to prevent their currency from continually strengthening. That, in itself, could help slow things down.

The Brazilians have actually been going through with it though. At the end of May 2009, they actively bought dollars against the Real to reduce the value of their currency. Exports again, their reason. In such a situation, it’s understandable. The effect is also limited. No one got their knickers in a twist over that. This was not the case with the Swiss. Switzerland is no stranger to Financial controversy (read the history of the Swiss Banking System). Earlier in 2009 (March, I think) they showed that, when it really comes down to it, it’s every one (or every European) for themselves. How? Well, they suddenly offloaded a bunch off their own currency (Need I say, Exports). This caused it to lose value…violently…against the dollar, but also against the Euro, which is where the trouble came in. Switzerland is part of Europe. This inherently selfish act was bad for it’s neighbors. More consideration was expected from them. But no. The Swiss were looking out for themselves. Talk about Self-Preservation.

Some countries go pretty far down the path of intervention. One of the most controversial…the Chinese. They have an “interesting” approach to this issue. When a consumer buys a product that is manufactured in China, the producers are paid in Dollars. These producers get the Chinese Central Bank to convert their Dollars to Yuan. This is a sale to the Central Bank by the Local Bank where the money is deposited. This process creates an excess of Dollars in the Chineses Central Bank. To balance this, the rules of trade say that the Chinese should sell the Dollars on the Currency Markets and buy the Yuan back. In this way, the Yuan gains it’s value back on the dollar until equilibrium is reached. Ah, if only things were that simple. They are not. The Chinese have no interest in seeing the Yuan gain value. So, they take the path less travelled. They take those dollars and buy US Based assets (All that talk of China owning a good chunk of American…this is where is stems from). The Dollar doesn’t lose value against the Yuan. To make up for this, they print more Yuan. Good times. They do have to worry about inflation though. However, that is something they can live with. It is for this reason that there was a bit of an uproar when Barack Obama’s new team came in. This policy has made it easier for China to weather this crisis. At the G20 meeting, also earlier this year, some people expected that China would get scolded…or at least some remarks about this. It didn’t happen.

The Europeans have been talking intervention in recent weeks as well. All of these strong gains against the dollar are starting to worry everyone just a little bit. It’s just comments from here and there for now. Intervention is not something to be taken likely. However, there is also some talk that the Swiss might be back at it again. That won’t go down well with the rest of Europe. I wonder if any of the European family have decided to boycott Swiss chocolate. Hmmm.

The thing is, intervention doesn’t always work. In fact, more times than not, its effects are only for the short term (let’s not talk about China). It tends to create a quick drop or rise, then the trend continues. This has happened a number of times. Sometimes, this small hiccup is enough for the instigators, I suppose. However, as a long term strategy, it would require more cooperation to succeed properly. The different countries would do better working in tandem. Unfortunately, it’s quite difficult for them to agree on this.

Like I said, it’s every man for himself…

But what does strength mean?

Once I became old enough to understand currencies, it became apparent to me that, from the point of view of the average person, a strong currency is what you want. I guess it kind of tallied with going out to England on holiday. With a stronger currency, there were more video games. With a weaker currency, I found that my luggage was noticeably lighter.

That view has changed as I have grown older. You don’t want to have a currency that is so weak that you need millions of units to buy anything bigger than a pack of crisps (just ask folks from Zimbabwe). However, there are downsides to having a really strong currency. Exports are a major point.

Currency strength is an interesting concept…Check this


Recently, faith in the Dollar has been put to the test. There have been doubts about the US and it’s ability to come out of this thing on top…doubts about America’s “AAA” rating. Then the job numbers came out today, and the US Dollar bounced back in style, gaining up to 1.8 % on the Euro at the end of what would have been a pretty horrible week, otherwise. What gives?

Over the last couple of weeks, as the global economy continues to move upwards (I think we can all agree that, at the very least, the bottom is in), we have seen a huge backlash against the strength of the US Dollar. The sentiment has flipped. Previously, we had people being pessimistic, and only coming out to play when there was significant good news. Now, everyone is getting in, and only slowing down when there is significant bad news.

So, yes the dollar’s weakness is, to a large extent, the by-product of confidence. The Volatility index has dropped considerably recently. It’s all good. However, there are other factors at play. This has been more evident in certain currency pairs than others.

Take the British Pound. It was clear that the drop in the Pound against the Dollar was much more extreme than circumstances demanded. At various instances in the last few months of the year, there was some back-and-forth between the UK and the rest of Europe as to who would fare better as the recession became more contracted. The UK suffered more, in the long run…and so did the pound. While fighting the trend when trading is not exactly a good idea, the pound was always going to stage a major comeback once all the negativity was reduced. And so it has…in a big way.

Last week, both the Pound and the Euro were helped along by their respective central banks. Why? Because there was no rate-cut. This is a signal that the banks think that whatever action they have taken is enough…that there is no need to do more. It means that things are getting better in their eyes. That was a big boost. Any rate-cut would have meant potential currency weakness. That didn’t happen. Instead, both currencies rose in value.

The same goes for the Commodity currencies. Australia, New Zealand and Canada…none of their economies took as much of a beating as the US. Once the dust settled, commodity prices were always going to rise, as was Oil. It has reached over a 7 month high now (Gas costs are starting to hurt my wallet again. oh, well. It was good while it lasted). Commodity prices will continue rise as well.

What we have been seeing here is normalization. The dollar got much too strong, not because of any real merit on it’s part, but simply because it was the safer choice. Now, it is no longer necessarily the only one. There was a bit of an uproar because of all the talk about the US losing it’s “AAA” Credit Rating. The fact is that things will not go back to normal here, or anywhere else for that matter, for some time yet. But things are getting better…everywhere. Naturally, people (particularly those who ran here in fear) will come out of US-based assets and spread them round. At some point, things will balance out.

Some normality returned because of the numbers out of the US. Though the unemployment is at historic lows, the rate of loss was just not as bad as people thought it would be. End result: The US will still be a leader on the way out of this thing. Forex Traders flocked back to the Dollar…some of their senses restored after good old-fashioned mob-mentality took over for a moment.

The US dollar might still have some value to lose before it returns to a reasonable level, but any sudden moves should be off the table…for now.

Happy Trading

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