Markets Shrug Off Geopolitical Tension

by Marc to Market

The US dollar is trading heavier against the euro, sterling and yen, but is somewhat firmer against the dollar-bloc in mostly subdued activity.  

Full liquidity will not return until next Tuesday. 

Sterling is trading at new 4-year highs today. After the strong employment data, more participants are looking for a test on the $1.70 level and above. For its part, the euro has built a base this week near $1.3800 and appears poised to return to last week high just above $1.3900.  

There have been three developments from the Europe to note.  First, excess liquidity appears to have risen in the Eurosystem.  At 132 bln euros yesterday, it is the highest since mid-March.   This may help stabilize EONIA.  One of the consequences of this is that the ECB is more likely to be able to sterilize the SMP holdings next week after failing to do so this week.  

Second, EU March auto sales rose for the seventh consecutive month.  The 10% increase brings it to 1.49 mln units.  UK sales rose 18%, and this accounted for about a third of the EU increase.  Recall that in 2012, the UK surpassed France as the second largest EU car market after Germany.  German sales increased 5.4%, encouraged by an increase in discounts.  

Third, France appears to have won a sympathetic hearing from EU about marginally slowing its deficit reduction efforts.  It is not exactly clear what this really means, as France has consistently overshot its deficit targets and has received forbearance more than once.  Moreover, Finance Minister Sapin promises that the fiscal targets will be respected.  Note that next Wednesday, France is to provide details of its long-term deficit reduction intentions.  

The main news from the Asia was China's announcement of a cut in required reserves for "qualified" rural banks.  The effect of this was to push down money market and swap rates.  Blunting this was the PBOC draining operations.  This week, it drained about CNY44 bln after injected about CNY55 bln last week. Some banks are looking for a cut in the required reserves for large banks later in the quarter (May or June). The dollar initially rose to its highest level against the yuan (~CNY6.2295) since March 21 before pulling back to finish little changed on the day (~CNY6.2190).

Against the yen, the dollar remains within yesterday's trading ranges.  Although as widely expected, the government did trim is economic assessment in light of the sales tax increase.  However, anecdotally, it seems that the economy is withstanding the increase better than expected.  This is what the finance minister indicated yesterday, and this appears to have been confirmed by the Reuters "Tankan" survey, which found the largest jump in sentiment among the large manufacturers since August 2007.   This coupled with anecdotal reports of businesses raising prices in excess of the retail sales tax would seem to undermine the likelihood of additional policy responses anytime soon.  

The highlights from the weekly MOF flow data include foreign investors returning to sell Japanese equities, after last week's hiatus after four weeks prior of selling.  The equity sales were more than offset by purchases of bonds and money market instruments. After having a voracious appetite last year for Japanese shares, foreign investor demand has cooled considerably and thus far this year, foreign investors have been net sellers.   They have sold a weekly average of JPY169.5 bln.  For their part, Japanese investors bought foreign bonds for the first time in four weeks.   They have sold a weekly average of JPY337 bln of foreign bonds this year.   

In the North American session, there will be some interest paid to the weekly initial jobless claims.  Recall last week, they fell to new cyclical lows of 300k and the smoothed 4-week average (316k) is approaching the cyclical low set last September (~305k).  Additional declines this week and it will likely spark talk of greater than 200k increase in April non-farm payroll.  

At the same time, Yellen was very clear yesterday: there remains a large gap between the Fed's objectives and the economic performance, especially the labor market conditions.  She suggested (for the first time?) that it may take until the end of 2016 to reach the Fed's inflation and employment targets.  She also continued to warn that inflation risks were still to the downside.  

Lastly, we note that the US, EU, Ukraine and Russia are to meet today.  However, a diplomatic solution seems unlikely at this juncture.  Indeed, the diplomatic effort, including by Germany exploring back-channels, has failed.  Another round of sanctions seems increasingly likely.  Putin appears to be betting that Europe and the US will not have the stomach for a sustained tough sanction regime.  Already reports suggest that many European businesses are cautioning against imposing new sanctions.   

Nevertheless, the markets do not seem to be particularly worried ahead of the long holiday weekend.  Gold remains heavy, straddling the $1300 area, nearly 2% off last Friday's high.  The euro remains firm, having made a marginal new high for the week.  The rouble is posting some corrective upticks after slipping earlier in the week.  Russian stocks are little changed, and Russian bonds are firmer.    

How To Create A Technical Trading Strategy!

There are several great trading strategies out there. Many traders become mesmerized by the "next great strategy" that they read on a website or  view online. Beginning Forex traders will even spend money looking for an elite strategy. FXConnection wants you to know that building a strategy can be fun, easy and painless! This post will teach you how.

First, look for an entry signal to buy or sell the specific pair that you are making the technical strategy for. It is important that you tailor this strategy for the specific pair and time frame that you are trading because pairs respond differently. The entry signal to buy or sell could be an indicator or price action.

Second, develop money management rules. Risk management is essential for successful trading. Decide where you will place your stop losses and how much capital you will risk every trade.

Third, determine when you want to close a trade. You might have different rules in place for when to close a long trade and when to close a short trade.

Fourth, determine what type of market condition the strategy works well in. For example, Range-Trading Strategies perform poorly in volatile markets, while Trend-Trading Strategies perform poorly in ranging markets.

Fifth, conduct some back testing. Find out what the average winning and losing trade were. Remember that back testing is not always indicative of future performance.

Finally, remember this. It is important to keep your strategy as simple as possible. You should be able to write out your trading strategy so that another trader could follow it without any problems. Happy Trading!

The USD/JPY Continues to Rise, but Can the Trend Continue

This past week has shown a huge positive gain for the USD/JPY pair as there was a very large increase in Core Goods inflation, backing the BoJ's financial measures, only pushing the Yen's value down even further as it continues to fight for that 2% inflation goal and the USD is said to continue higher against the Yen setting record levels and gaining over 20% against the Yen's value.

However, as we look at the USD/JPY chart below, is the dollar looking to go even higher against the Yen?Over the course of just a few days the dollar has made incredible gains, making profits for many traders.

Looking at the chart below  there are several key features that need to be noticed first and foremost.

First, looking at the Bollinger Bands set on this chart, we can see that the last candlestick drawn fell below the first deviation band level, quickly dropping downwards, looking like it found a bit of support at the 104 level before buyers stepped back in and took control of the market.  However, the Bollinger Bands show that this market is looking as though is is very top heavy, with the USD/JPY oscillating between the first and second deviation, and still looking for some sort of support.  This floor may come a bit before the 104 level, as the middle band seems to be near that general vicinity consequently the pair may find a good floor right around where the middle band of the Bollinger Bands rests.   

The interval between the upper bands and lower bands and the middle blue bands indicate the amount of volatility this pair may contain.  The interval between the lower second deviation band and the middle band is much larger than in other parts of the chart, indicating a possibly high level of volatility that this pair may contain.

Notice how wide the band actually is in the most recent areas of the chart which also questions the actual strength of the USD/JPY and whether or not it will hold this level when the markets open on Sunday. This large interval points to a high level of volatility that we see recently with this pair.

Another level that should be noted is the 103.208 level which marked the previous high the market established several months ago and is noted on the chart above by the black horizontal line.  Since as of recently this pair blasted through this 103.208 resistance level and has not really looked to form some sort of support, it may not surprise traders to see a decline to this level in the near future to form a bottom for the continuing push upwards in the future.

Ultimately though, the whereabouts with the pair in the future is unknown, though some factors point upwards while others point to a possible pullback.  However, constantly keeping up with the market is paramount as is analyzing your trades before executing them.  Proper risk mitigation is key in this subject area as the USD/JPY possibly continues higher in the coming days and increases its volatility, becoming overbought and concerning traders. Or this pair may even look to drop down and find support somewhere else, though where exactly is not known.

Managing your risks in any market whether the it continues higher or breaks down is an absolute must for smart trading and lessening your risks you take when investing in currencies.

  

Determine Your Trade Risk Before Placing Your First Trade Of 2014

Every trader has his own tolerance for risk. If you have just picked up Forex in 2014 or are a reoccurring trader who is struggling in the market, smaller lots are recommended. We recommend you start with micro lots or mini lots. When you make profits several weeks in a row, and when you feel comfortable with bigger risks, you can move to bigger lot sizes. As world renowned poet Maya Angelou once said that one is not born with courage. One develops it by doing small courageous things—in the way that if one sets out to pick up a 100-pound bag of rice, one would be advised to start with a five-pound bag, then 10 pounds, then 20 pounds, and so forth, until one builds up enough muscle to lift the 100-pound bag. In some ways courage is needed in trade risk. So it might be awhile until you are ready to trade a standard lot. 

Several factors affect how much of your account size you should be willing to risk. We recommend you risk no more than 2% of your account at first (1% would be better). Risk, in this context does not mean the size of the trade you put on. Rather it is the maximum loss you will tolerate before closing the trade. If you have a $5,000 account, we recommend you hold your losses to $100 per trade. That way, you can lose 50 trades in a row before all your money is gone. You are unlikely to lose more than 5-10 trades in a row, so this should keep you alive for a while. When you have more experience, you can risk a bit more, but at first, keep the losses small. Happy trading in 2014! 

Write Out Your Trading Strategy!

Do you ever find yourself altering your trading strategy so that you can enter a trade? If so, ask yourself the following question: Is my strategy written out? Many traders begin live trading in the Forex market without writing out their trading strategy.

Before you begin trading you should comprehensively write out your trading strategy. Any trader should be able to pick up your strategy and easily follow it. When writing out your strategy remember to consider the following things: Time frame trading? Type of market? Win expectancy? Best pairs to trade? Anything pertinent to your strategy.

Writing out your trading strategy will allow you to consistently follow it! Happy Trading!

Coaching Tip Of The Week: Keep Trading Simple

Do you find yourself moving from strategy to strategy? If so, then maybe you are caught in the cycle of doom that so many traders are caught in. Many traders who are beginners in Forex constantly try new things that they read on the internet, books, Youtube, and magazines. There are searching for that “new thing” that will give them an edge on the market. Many of these traders believe that the more complex a strategy is the more pips they will be able to gain. However, in actual practice, successful Forex trading is relatively simple.

Trading is as much about money management as it is about a particular strategy or set of rules you follow. Bottom line:  A strategy is only as good as its trader.

In order to consistently win, you need to know your system, but more importantly – know yourself. The simpler your strategy is, the more likely you will be to make money with it. Your strategy should have detailed and definite rules for entry and exit. It should also include what pair(s) you will trade, what time of day you will trade, and what profit and draw down you expect.

What is the Taper, and How Does it Effect my Trading?

Fears of high volatility and price corrections in the Forex, equities, and bond markets are due to the recent "Taper" speculation set in by Fed Chairman Ben Bernanke. You ask, what is "Tapering" and why is it important? Tapering refers to the method used by the Fed to gradually decrease their monthly purchases in their recent stimulus buyback program, better known as quantitative easing (QE3). QE3 started back in the Fall of 2012, allowing the Fed to purchase $85 billion in Treasury Bonds and Mortgage Backed Securities. The purpose of this stimulus package is to promote growth in the economy by lowering interests rates.

Looking at the markets performance over the past year we can see how QE3 effected the equities.

With the Fed pumping US Dollars into the economy, the market became more comfortable with risk in equities causing this bullish uptrend and high returns. However with a possible "Tapering" ahead, we can assume that a significant correction to the downside may come. As the Fed gradually decreases the supply of US Dollars, investors will want to hold more dollars, causing an increase in demand for US Dollars with a decrease in demand in the equities market. For the Forex market, the USD will play a pivotal role in the speculation. Theoretically we can expect a spike in the USD due to speculation of decrease the supply of US Dollars in the economy (tapering).

Speculators are predicting for tapering to start in the Q1 of 2014. Therefore expect prices to correct themselves now for the events expected to happen later. 

A Strong Foundation is Key

Many new traders to the markets make the mistake thinking that since they read a few articles on trading and now how to read the prices on a chart that it's time to start trading. It may sound crazy, but the mistake happens more than you may think. This one of the contributing factors to why 90% of people who start trading fail. They think that everything is a get rich quick deal, and they end up forgetting how important it is to EDUCATE yourself in the markets. As an up and coming trader it is important that you develop a strong foundation in education for trading and how to analyze the markets.
The two basic types of analysis for understand and predicting price movements are:

• Fundamental Analysis: In Forex, this type of analysis is used to measure the different contributing factors to supply and demand of these currencies. With stocks you look at the measurements of the company, but in Forex you look at the economic reports of different countries. A few may include GDP, inflation, trade balance, political events and more. Events you may see on the evening news can help you to earn money in the Forex Markets. .
• Technical Analysis: Every chart tells a story, and like many believe that history repeats itself. The technical side of trading involves analyzing price patterns and using charting techniques to create profit opportunities. 

It is important to not only educate yourself, but apply what you learn in sync with a demo account that allows you to trade with "play money." By doing this you will be able to realize how the markets work and at the same time continuing your education. 

Example of Technical Analysis

Dollar Weaker Than Expected Due To Slow Start To US Holiday Season

The amount of of shoppers over the Black Friday weekend saw record highs, however, the amount of spending showed the first decline since 2009. American consumer spending has dropped almost 2.9% this season. What does this mean for the dollar? It does not have the strength that many think it does. This can be seen in the futures prices for the USD. It is in a down trend since the initial spike after Black Friday weekend!

Where is the Market?

Are the markets all that randomized?  Some would argue that the markets move cyclically and oscillate essentially between different levels whereas others would argue that the market is based a lot off random movements, some by perception, other movements by different factors indirectly or directly affecting the economy.

The whole idea behind the fundamental and technical analysis is simple: take human emotions out of the equation and there shouldn't be any economic crises.  Sure, markets can get "unpredictable" and theories such as the Random Walk Hypothesis developed by Burton Malkiel at Princeton.  Essentially, he argues that the market is just as predictable in trending as the flipping of a coin.  Heads, well it looks like the market is up today; tails, we're down.  

There are many individuals that believe this theory, as I am sure, part of it is to be believed though are markets truly just all randomized movements?  Try arguing the Random Walk Hypothesis to Ralph Elliot, the creator of the Elliot Wave.

This strategy he developed, a strategy, is based on social behavior and places movements in the market based on this behavior.  It is a very simple strategy, impulse and corrective wave patterns.  Depending on the sequence and the occurrence of these waves, this tells the trader where the market may be residing at during one of the many stages or levels.  Its almost trying to predict the general location of the market, like Heisenburg's uncertainty principle, except for the market since the trader never fully knows where the exact placement of the market is in relation to the waves and when he does seem to know the market movement he doesn't know where it resides on the exact Elliot wave.

Needless to say, the Elliot Wave and similar strategies have been successful numerous times yet still the market has that twinge of uncertainty about it, whether it be the ECB announcing dovish policies for the Euro or the Fed's whole "To taper or not, that is the question."  The market has a certain level of plain, old-fashioned unpredictability to it and especially in highly-volatile, highly-liquid markets there is a larger element of risk that anyone should be aware of.

The markets are completely unpredictable as some would say, yet others would argue right back that not only are the markets sometimes predictable, but during those levels of predictability, profits can be made.  And those that do find accurate predictions, make a nice profit.

One must take risks to earn rewards...

The markets are always full of risk, but doesn't mean you shouldn't take risk. Remember to use proper risk management techniques to minimize magnitude of losses and multiply gains. Don't be like this guy and miss out on trade opportunities...

The Pros of Trading Currencies vs Stocks

When the everyday person comes across the topic of investing or trading in the markets, the first thing that comes to mind is the Stock Market. Why? Because it is the mainstream asset we see in commercials, movies, advertising, and what most people talk about. Therefore its normal to have a bias towards starting in this market since it is what you have been exposed to the most. If you are someone who is or looking to start trading and investing yourself (a "Retail Trader"), I'm here to tell you that the stock market is not the way to go unless you are looking for long term plays.
I have been on wall street and seen how large banks and hedge funds make it extremely difficult for the Retail Traders (us) to turn a profit. I have also experienced it myself. Large banks compete each day, buying and selling different stocks in the with hundreds of thousands of dollars per trade. They do this to be the largest holders of these specified stocks to help make the stock liquid to route to hedge funds. Because of these constant high end purchases, high price swings occur, creating higher volatility and risk for the retail trader in the short term (intraday, weekly). The Forex Market allows retail traders to avoid this manipulation of prices.
The foreign exchange market, commonly known as the Forex Market, is the largest financial market in the world. The Forex market has an average daily trading volume of over $5 trillion compared to the largest stock exchange in the world, the New York Stock Exchange (NYSE), which has a daily trading volume of $60 billion. The Forex Market offers many advantages that other markets don't, or may not on a consistent basis:


1) No Commissions  
2) Trade in any direction of the market without special capital requirements
3) 24 Hour Market
4) Leverage
5) High Liquidity 
6) Globally Connected
7) Low Capital requirements to open an account. 

To the right you can see a comparison of the some of the differences in trading Stocks vs. Forex.