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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.

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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.

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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.

Bounce…

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

Forex Heroes…Brazilian Real et al

It’s all getting a bit old now. The Forex Markets have been relatively predictable lately. The dollar is getting pounded. Everyone’s getting more confident in the economy…yada yada yada. But I guess that’s what is happening. People are just going to have to get used to the idea of a weaker dollar in the short term.

All the majors have been taking advantage of the fall of the dollar, including the yen. The dollar managed to fight back against the yen a little bit last week, but faltered. A steep drop followed. There are just too many speculators getting in on the action now. As I said, this is it, in the short-term.

There’s not much evidence that the US Dollar’s status as the preferred reserve currency has been crushed completely; however, there is some cause for worry. The main issue now: rumblings that Standard and Poor will drop the US’s AAA rating. It hasn’t been announced officially, but many see it as a foregone conclusion. Investors and traders can take a hint. They won’t wait for the sh*t to hit the fan. They are offloading the dollar as fast as they can.

It won’t go on forever. We should expect some pullback soon. If there is a major drop again early in the week, then a retracement should follow. The rate of the fall will slow. There just won’t be anybody left to sell the Greenback.

The guys that have benefited the most from this fall – in fact, from this whole economic meltdown – would have to be the outliers. I am talking about the South African Rand, the Brazilian Real and others like that. The Rand has climbed a whopping 11% against the Dollar in this month of May alone! It is now at the highest point it has been since early 2003.

The currency is strengthening so much that the Brazilian Central Bank is having to buy dollars to curb it. There’s good reason for this. They are afraid. While a strong currency shows some positive signs, especially in this case (where it is a result of investment in Brazilian stocks and other assets), there is cause for concern as regards exports. A strong currency means foreign countries have to pay more for Brazilian exports. That can only continue for so long, before they start looking elsewhere for other options. So they are buying dollars, and talking the Real down as well. This will also help to decrease the quantity of trigger-happy speculators out there who are interested in trading the Real against the Dollar.

When the people with the power to effect currency values (in this case, the central bank) start making comments that indicate they are willing to take strong action to change the trend, traders pay attention. You can often see this sometimes when a Central Bank announces a decision on whether or not to change the current interest rate. The markets might react in a particular fashion once the decision is announced, but the comments might change that. If a bank cuts rates (an action that would normally reduce the value of a currency in normal circumstances i.e. not these days), but then announces that it will be raising them shortly to address another issue. The currency might not fall as much, as traders will read the INTENT of the bank and might act on that instead. It’s just an example to highlight the fact that comments can be extremely important.

With that in mind, note that there will be 4 Central Bank meetings this week. Europe, England, Canada and Australia will be making rate decisions. These boys have all whipped the dollars ass this week. Changes to rates are not expected by any of their Central Banks. However, we come back to those comments again. What they say will be important. If there is negative talk, we could see some pullback in the trend. The dollar has fallen to pretty much everyone’s projected targets. Any excuse will do to gain, even if it’s just a little bit. That said, a further fall seems to be the more likely scenario this week. Not much further though.

Happy Trading.

Opportunities for minor Forex Currencies

One of the interesting things about the global economic meltdown is the opportunity it has presented for some currencies that would have been somewhat…well around the fringes, if you know what I mean.

Case in point – the Norwegian Krone. Do you know about the Norwegian Krone? Well, you’re not alone if you don’t. It’s only recently risen up the ranks because of all the uncertainty surrounding major currencies. All the regular names have suffered and recovered as this thing has moved along, but currencies like the Krone have definitely benefited more from the problems we have all been experiencing.

That’s the thing about upheavals; they shake things up. It’s really all about safety. America has been viewed as a safe place to put your money…whether that’s the US Dollar, or US based assets. The Japanese Yen has also done quite well. You might not gain too much in terms of return (interest rates are rubbish in Japan), but the risk is also low. So, when things have been bad, the US Dollar and the Yen have gained. When things have done well, the US dollar has suffered, except against the Yen. That’s because, the dollar is a higher yielder than the Yen. This is the way it has been.

Last week, we saw something different between the Dollar and the Yen. There is some consensus that the rate of things getting worse has reduced – whether that translates to things getting better is an open question – so the risk-takers have been out there, putting their money into the higher yielders…places where they will get more return in interest etc. This means the US Dollar has taken a beating, rightfully. At the end of last week, the Euro was at a 2-month high against the Greenback. Not a problem, right? Expected, right? Fine. Well, look the the Dollar Yen Forex pair. You would expect the Dollar to have strengthened against the yen. There should have been somehthing. No change would have been fine. It would have seemed pretty negative for the Dollar, but that would have been acceptable…sort of. Instead, the Yen is at a 9-week high against the dollar. That is a major indictment of the US economy.

The US is deteriorating in Creditworthiness. You know those folks out there that tell us what ranks as a great investment? Well, there is talk that they might be dropping the US from it’s “AAA” Credit Rating. That’s saying the US is in trouble. That’s saying that it might not be such a good place to stick your money ‘cos they can’t vouch for it 100%. That’s not good. It’s a double whammy. First, the Risk takers are coming back in, so safety is not such a huge concern; then now, the US is losing it’s badge as a safe place for investment. The Forex trading chaps agree. The dollar gained against pretty much nobody. This trend is even more likely to continue in the short term.

I started out this post talking about obscure currencies. Well, the Krone has been doing well. The Brazilian real has been doing great as well. Also, the South African Rand is another one. It’s time to start looking at the so-called Majors, and start “diversifying your portfolio” as regards to the Forex Pairs you trade. Keep that in mind as you do more trading.

This week in Forex Trading: It’s a holiday on the Monday in the US, so not much activity in the US; but there will be plenty elsewhere. The IFO surveys are coming out for Europe on Monday. The ECB is starting to worry about the strength of the Euro. It seems that a stronger Euro might make a recovery in Europe harder. We saw some reflection of this in the last couple of months, with the Swiss National Bank actually letting the value of the Franc fall against the Euro to help themselves and their exports. We might see the ECB officials making statements to this effect this week, so the strength of the Euro might wane a little. Maybe it will work more against the Pound, which has erased it’s losses against the Euro in recent times. So, we might see the Pound gaining more against the Euro.

We’re expecting some numbers in the US; the Consumer Confidence Index on Tuesday…also Durable goods and GDP on Friday. If some of these numbers can show that the US is doing better, then that might help the US Dollar against the Yen, IF there hasn’t been much negative news elsewhere.

Happy trading.

“Once bitten, twice shy” resonates pretty strongly with forex traders – most investors, in fact – in the current environment we find ourselves in. Things are starting looking up, in general, but some have been badly burned. This can produce fear, and the unwillingness to open positions. Paralysis, one might call it. However, there are opportunities currently. More and more forex traders have been taking them lately…against the US Dollar.

Just take a look at the Volatility index, courtsey of Yahoo Finance:

Yahoo finance Volatility Index

See how much it has fallen in the last week. That’s fear leaving the market, slowly being replaced by growing confidence. The mood is bullish…enough to allow the market shrug off some bad news.

The effect is evident on our Forex Pairs. EURUSD, GBPUSD, AUDUSD, NZDUSD etc. They are all up. The general consensus at the moment is that they will continue to rise, as long we don’t get any major negative news. However, since we have established previously that this thing is not completely over yet, there will still be some bad news to come. Care is still required.

How much care though? Some longer term traders – along with learner traders – have lost money in this environment. The quote “Nothing ventured, nothing gained” comes to mind. You have to put your money where your mouth is, or you’ll never make progress. The key is MONEY MANAGEMENT. If you ensure that you only risk 2-5% of your account per trade, then chances are that you will have many-an-opportunity to make some profit.

Don’t get greedy, even when things seem good.

Happy trading

Forex for this week…the saga continues

Forex Image

At the start of Monday last week, it was clear the markets were riding high off the new wave of positivity that has captured investors. Some negetive numbers were even shaken off by this hugely positive outlook. The Risk Aversion trade was no where to be found. It seemed like there was some agreement among everyone that we were going to get out of this thing. I thought it might be the beginning of the end for the dollar, at least in the short term.

Not so. The Dollar fought back before the end of the week. I suppose there was good reason. While there is much hope that things are getting better (I should really say that the rate of getting worse is less), there are still issues. Some economists have urged caution. The recent rally in the Equity markets will not continue indefinitely. There will likely be another dip before we go back up. So it’s no surprise that bad news is still there.

The GDP numbers out of Europe were pretty bad…I’m talking a Growth rate that is the worst on record. What a way to bring everyone back down to earth. That overshadowed some not so bad news…like the fact the consumer prices rose slightly. The result of this was a beating at the hands of the dollar. The Single Currency did gain on the Swiss Franc though. It’s an interesting offshoot of steps the Swiss National Bank has been taken to devalue it’s currency. There was a bit of an uproar about this some time ago, but it seems everyone has forgotten. The Pound is in a similar situation as the Euro. Both of these forex pairs (EURUSD and GBPUSD) seem to be the most susceptible to news this week. We will have to watch carefully for any more disappointing news.

The Commodity pairs all got drubbed as well. A combination of dodgy economic data and a stall in Commodity prices. The Yen was the most triumphant currency for the week, gaining on everyone, in spite of the bad news on their economy. The Risk Averse trade is still helping the Yen, but we’ll see how much longer this lasts. There is a load of news for the Yen this week as well. A reaction is guaranteed.

It’s back to watching the news events closely. No telling where things are going to go…

The beginning of the end for the Dollar…in the short term anyway

You know the scene I’m thinking about. The one where a former great leader is surrounded by the same people off of whom’s misery he has derived his wealth and power for a long period of time. Now, he lies there, beaten and bloody. Everyone of them wants a piece of him. The poor guy has no where to go. He might not be responsible for everything that went wrong in their lives, but he’s an easy target now, so he gets it.

That dude is the US Dollar right now. The mighty dollar has benefited quite a bit from all the stuff that’s being going on. Falling Equity prices, poor commodity prices, cheap oil,bad economic news (even the ones in the US)…all round fear. It’s all been good for the Dollar. While we have seen some forex market pairs fight back over the last few weeks, last week was quite important.

A couple of things happened that could signal a more powerful shift in trading sentiment. First of all, you have the job numbers in form of Non-Farm Payrolls. They came in at 539,000 jobs. Now that’s lot, no lie. However, it was significantly less than the 590,000 that experts had estimated. This is good. Very good. We then have the results of the Obama Administration Stress tests which were quite interesting. There has been a lot of debate about these tests. There was skepticism by some about whether they were anything more that a PR stunt to cover up what was really going on. No one was really sure what metric would be used to score these institutions. It just didn’t add up. At the end of the day, the tests turned out alright. Some clarity was brought to bear on the financial system. In fact, the results were pretty much what people expected, in terms of the institutions that need help and those that don’t. No major surprises. It has boosted confidence, and it seems pretty clear that there will be no more major bank failures.

The US Government seems to have a plan on how to tackle the issues with the problem companies. If a company is not viable, then it must be restructured. Think Chrysler. Buy outs, Bankruptcy etc. The options are being used. I think more people (myself included) are fully convinced now that these money-sucking pits (supposed companies) will be allowed to fail if that is what it takes. Companies have been given deadlines to raise certain amounts of money, as proof that they can survice. If they don’t, then further steps will be taken. The Administration is now the strict parent. I am not entirely sure that putting a deadline on a drive for funds will work as intended, but it seems alright to investors…at least for now.

So it was a two-hit combo against the dollar last week. For this week, we have retail sales numbers to look forward to. Those are expected to be better. Mind you, this optimism is of the cautious variety. No one wants to jump the gun. However, it seems like the dollar will keep taking a beating. Commodities are on the rise. Oil is going up. Risk appetite is rising. Investors are starting to walk with a skip in their steps. It’s all good.

So, unless the dollar can make like Popeye and suddenly starting whooping everyone’s ass, I think the dollar will lose more ground. Popeye needs spinach to do his magic. Spinach here would be negativity. We are seeing less and less of that these days.

Happy trading.

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