Tag Archives: Forex Trading

Each quarter the US forex brokers who fall under the regulation of the Commodity Futures Trading Commission (CFTC) - which is most of them – report profitability figures (see the most recent tallies posted by Forex Magnates here). This has been going on since 2010, with reported figures back to 2009. On average, these reports have shown that just about 30% of active accounts (those doing at least 1 trade) make money in any given quarter. The CFTC put this reporting requirement in to provide a bit of transparency as to the reality of performance among traders, but in some ways they have actually muddled things a bit. Let me explain.

First of all, the broker-reported figures are for accounts, not traders. Granted, for most people that is the same thing. As I discussed in a recent post, however, some traders have multiple accounts and the evidence suggests that these are among the better performers. If that is indeed the case, then the broker-reported figures actually overstate how many traders make money each quarter. It’s not likely by a huge factor (probably just a couple percentage points at most), but it is one way these figures belie reality.

The second, and to my mind more significant, problem with these quarterly figures is they provide no indication of whether there is any consistency of profitability. As I documented in Starting to detail forex profitability data, this is something very important to keep in mind because the reality is that most traders don’t get the job done consistently.

According to my research, only about half of all accounts (keeping to the comment measurement of the broker-reported figures) had at least 1 winning quarter during the 3+ year period of my study. Of those who had at least 1 profitable quarter, only about 43% were able to follow that up with another winning quarter in the next three month period. That means we need to take the 30% figure mentioned above and cut it in half (and then some) to get at some sense of reality where consistent profitability is concerned.

Taking it a step further, less than half of those who were able to generate multiple winning quarters were able to produce back-to-back winners more than 50% of the time. That means even among those who are part of the about 15% able showing back-to-back winning performance there is very little consistency of performance.

If we were to continue extending the consistency question to include higher levels of repeat performance we would see lower and lower percentages. In other words, it’s only a small fraction of active forex traders who consistently make money. It’s a hard game to win. Keep that in mind as you decide on how you will approach it.

As a change of pace, I thought I’d use this post to do a little bit of market analysis looking at the market from a different perspective than the ones most often used. This type of analysis focuses more on time spent (or volume transacted) at certain levels rather than looking at simple progression of where it’s been over time as we generally see in bar and candlestick charts.

The chart below shows how EUR/USD has traded since February. Each of the clusters you see represents the distribution of trading over one month’s time. I won’t go too far into the details, but suffice it to say that the fatter a month’s distribution at a given price level, the more days the market traded at that prices, and the thinner the distribution the fewer days the market traded at that level. Think of it this way. If the market spends a lot of time at a price level it indicates agreed upon value in which both buyers and sellers are willing to transaction. Where the market doesn’t not spend much time it indicates rejection by one side or the other – value not agreed upon.

What we can see above is a trio of short, fat distributions for February, March, and April that indicate pretty narrow range trading. Then, in May, we have a long, thin distribution indicating a trend move lower. June was again mainly a consolidative month, but July started off with a trending action, then transitioned into more of a ranging set-up.

The July distribution indicates that things changed in EUR/USD near the beginning of the month and previously accepted value between about 1.2400 and 1.2700 suddenly became rejected. The market then move down to where valued was agreed upon below 1.2400.

Let’s put this in some common parlance. Think of the thin distribution of prices between 1.2350 and 1.2500 or so as a key resistance zone for EUR/USD. Selling interest far exceeded buying interest the last time the market moved through that zone. If the market can work back up there and hold the move it would tells us things have shifted and that buyers are starting to be more interested.

The concern I have, though, is that we don’t have as clear a rejection area to the downside to indicate a price level the sellers clearly found too low and/or where the buyers became much more aggressive. We have to go back to June 2010 to find the last time the market was down this low. Back then there was a final rejection near 1.1900. I think the risk, therefore, is that EUR/USD makes another move down to test those prior rejection lows.

The struggle, though, will be breaking away from the 1.2300 area. As the chart above shows, the market spent a lot of time around there in May/June of 2010. That makes it a significant attraction zone, which we’ve been seeing play out this month. If the market can start to develop more value below 1.2200, though, the odds for a run at 1.19 will increase.

There’s a bit more nuance to this type of market analysis, of course. If you find it interesting, you can learn more about it here.

The so-called "commodity" currencies (those that tend to be correlated with the major global commodity markets) have been very interesting of late. As you can see from the charts below, the Bollinger Bands for AUD/USD, NZD/USD, and USD/CAD all go VERY narrow before this week's break. In fact, the Bands were the narrowest they've been in years, which is generally an indication to expect something explosive to be forthcoming. AUD/USD and NZD/USD both certainly made big threats to do just that earlier this week when they broke down.

AUDUSD Chart

 

Notice too that the Normalized Average True Range (N-ATR), has also gotten very low. This tells us that not only have the daily closes been narrowly spaced (as indicated by the narrow Bollinger Bands), the daily high/low ranges have been getting increasingly small. The implication is that not only can we expect a directional move, we can expect the ranges to expand as well.

NZDUSD Chart

 

We can see a similar sort of move (in the opposite direction) in USD/MXN. The Mexican currency is another one that tends to be very sensitive to commodity and overall risk market moves.

USDMXN Chart

 

It's interesting to note, though, that we actually saw USD/CAD break down prior to the breakdowns in AUD/USD and NZD/USD. It then reversed back up into the range in the move that saw the other two pairs fall out of their narrow ranges.

USDCAD Chart

 

We've now seen all of the breaks reversed to a large degree. The risk there is of a fake-out break which sees the market completely turn and go out the other end of the prior range and develop a new trend in that direction. In this case, it would mean AUD/USD and NZD/USD moving higher, while USD/MXN and USD/CAD would go lower.

Right now I think the charts all suggest a stronger dollar moving forward, meaning a continuation of the AUD/USD and NZD/USD breakdowns (especially given the AUD/USD double top) and a general extension of the USD/MXN uptrend that is highlighted by the blue trend line on that chart. USD/CAD would then be expected to break above 1.0050 and continue higher. The implication here would be that stocks and interest rates would fall, along with the commodity markets in the weeks to come.

If there's to be a fake-out break, though, USD/CAD may be the canary in the coal mine. The Canadian currency is the one that has performed best of late. If that market cannot overcome the resistance in the 1.0050 area, then the prospects for a fake-out break will be quite good and all our stock-invested retirement accounts will likely be much better off.

 

Ain't it always the case that an exchange rate rallies into your trip, then starts falling after you've spent the lion's share of the money? GBP/USD did that to me. It was looking so good early in January when the rate was down the low 1.50s, but by I time I left for my trip to England last week the rate was looking at testing 1.60. What day did the market peak? The day I checked out of my longest hotel stay, of course (insert your favorite string of curse words here).

What's even more annoying is that GBP/USD really looks like it's set up for a tumble.

On the weekly chart below we can see the clear support along the line going back to the lows from September 2010 near 1.5300. That was broken during the last leg down, but the market quickly reversed back higher. It hasn't been able to push those gains to even create a test of the November peak, however, so the pattern of lower highs and lows since the 2011 highs remains in place.

GBPUSD Chart

 

These lower highs are also building a head-and-shoulders type of pattern on the chart. If we consider the peak of the pattern to be about at 1.6735, that gives us over 1400 pips in downside projection using the head-to-neckline measurement. A simple target would thus be about 1.3900. This is quite aggressive given the likely support above 1.4000 based on the 2010 lows, but it does provide a fair bit of scope as to the type of damage that could be done should GBP/USD manage a sustained break of 1.5300.

So what's the catalyst for that kind of action? The BoE has already announced GBP50bln of additional QE. That has largely already been priced in and the market isn't looking for any big additions at this point. The biggest risk factor at this point is a crank back up of the risk-off market psychology that would drive the dollar higher. If we see the S&P 500 fail to overcome the 2011 highs as part of the current rally, that becomes a very real risk.

This couldn't have happened a bit sooner?

 

Over the last couple months, the Eurozone turmoil has dominated every market in the world.  This has made it difficult for traders to determine what move to make next.  The markets have shown mostly choppy cycles that have seemed to last weeks as everyone waits to see what will unfold next in EU.  That, coupled with the time of year, forces us as traders to make a determination of turning risk on and off (risk off means not trading).  In this sort of scenario, I'm a large propenent of dialing back risk or going completely risk off.  Conserving equity is a key component of trading and limiting market exposure for my investors is important if there is any uncertainty.

In my trading, I will most likely look to trade at a reduced risk through December 16 and then not trade again until the second or third week of January due to holiday periods.  So many traders and institutions take this time off, and the markets will be trading on lower volume which can make trading conditions even more difficult than 'normal'.  Sometimes this is difficult for traders and investors to "sit on the sidelines", but there is no reason to chase a market that is going to be on low volume and there will be plenty of trading opportunities in 2012 and the years to come.  As a professional trader, I'm in this for the long haul, so a big picture point of view is always the way I try and see things.

 

Adam at Forex Blog has posted a critique of a Wall Street Journal article which discusses the pending loss of primary reserve currency status for the US dollar. The WSJ article, written by Barry Eichengreen, provides some very interesting information about the use of the dollar in global trade and financial transactions. For example, 85% of foreign-exchange transactions world-wide are trades of other currencies for dollars, and the dollar is the currency of denomination of half of all international debt securities, though in the latter case I'd ask what share of those debt securities are actually US government and related agency debt. Eichengreen believes, however, that the dollar will lose preeminence in the next 10 years.

Here are his reasons why:

1) Changes in technology mean exchanging less prominent currencies is less difficult and expensive than it was.

2) The dollar will soon have real rivals with the euro and Chinese yuan as the most likely candidates.

3) The dollar is at risk of losing its safe-haven status.

Let me address these points individually.

Changing Technology
I've been around long enough to remember when trading was done by telephone, not online. The technology has come along in leaps and bounds in the last decade or so. It's not just better tech, though, that makes for lower costs. It's also the fact that as forex market volumes have increased, and there's become more competition in the brokering and dealing arena, spreads have come down significantly. That's where you get the real cost savings.

It's worth noting, though, that as transaction costs have declined, we haven't seen any real marked shift in currency reserves. The dollar is still just about the same proportion of global reserves now as it has been for years. Technological improvements, as Adam notes in his piece, don't really impact the supply and demand for a currency. Maybe just a bit on the margins.

Rival Currencies
There have always been rivals to the dollar for the top spot. When the euro was launched it was immediately viewed by some as a challenger for the crown (though obviously not by those who thought the Euro Zone would blow apart). Why else do you think the SWIFT code for the exchange rate to the dollar was chosen to be EUR/USD rather than USD/EUR? It's been a dozen years now, though. As Adam notes, the euro suffers from being comprised of diverse parts. The debt and equity markets are fragmented among the constituent countries, countries with different credit and economic profiles. This makes for a much more shallow market for global investors to park their cash.

As for China, until the yuan is fully floated, it's not even a debate. Even if the yuan were freely floating right now, it would still be a big ask for it to challenge the dollar for prime reserve currency status. The Chinese financial markets are in their infancy. It will take much more than just 10 years for them to get big enough to be able to support major capital flows. Even the Asian Development Bank doesn't see the yuan as being a major factor in the currency reserve area. Adam notes that they forecast it will only account for 3-12% of international reserves by 2035.

What about the Swiss franc or the Japanese yen? Switzerland is too small an economy for the franc to ever be a major reserve currency. The Japanese economy is obviously a major one, but a key factor in being a prime reserve currency is having a balance of payments deficit. Japan does not have that (though things could change as the population there continues to age). This is also something that works against the yuan.

Loss of Safe-Haven Status
Eichengreen makes the point that recent economic and fiscal developments have caused the world to rethink the stability of the US markets and economy, putting the country's ability to sustain its track record of paying its obligations in doubt. It's a fair point. As Adam commented, though, this is old news, and is also of concern for the likes of the Yen and the Euro as well. The financial crisis didn't only do damage to the US system.

I disagree, however, with Adam calling the yen a, if not the, premier safe-haven currency now. Yes, the yen absolutely benefits greatly when the markets go into flight-to-quality mode. That, however, is related to the carry trade where yen are being borrowed to fund investments in other currencies. Scared investors bail out of those investments, meaning they convert their money back to yen and pay off the loans they took out. This is not the same as capital flowing into yen-denominated securities the way it flows into US Treasury securities in a panic.

For all the issues with deficits and the like, the US Treasury market remains the place risk averse money goes. So long as that remains the case, the dollar will remain the primary safe haven currency. There may be times when other currencies step in to the spotlight, as the franc has done recently on geopolitical developments, but those are transitory periods and not the real panic situations.

The Bottom Line
The dollar is not going to lose its position at the top of the heap any time soon. That's not to say there won't be variation in its exchange rate values, because there most certainly will be. That's also not to say countries and companies won't diversify their holdings, because they will as suits their needs. It's just that no major alternatives are going to be viable in the near future.

While the water cooler chit-chat at most companies is about the “America’s Got Talent” finalists, office banter at Currensee headquarters in the North End of Boston is more like “saw you went long on the EUR/USD, so I went short” (delivered with a knowing grin)… Most of the Pips (inside word for employees) here at Currensee are trading on a regular basis so that we can better understand what traders really need from our platform.

So what else is life like here at Currensee? Well, for starters, we have some of the most talented, hard-working people I’ve had the pleasure of working with. Everyone is focused on making sure that the platform is as good as it possibly can be as we ramp up for launch later this year, it’s a rare day that someone, regardless of department, won’t come up with an idea to improve a widget, or streamline registration, or make Currensee even more valuable to traders. Whether at headquarters or the Israeli office or down in New York with business development, we’re all focused on making sure that Currensee is the home base for Forex traders the world over.

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Be sure to read the full risk disclosure before trading Forex.  Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results.

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Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results. Investor returns may vary from Trade Leader returns based on slippage, fees, broker spreads, volatility or other market conditions.

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Our Marketing department has been naughty. Very naughty.

I asked them to 'get creative' on how to tell the message about Currensee and the benefits of trading together. The result? Let's just say there's a bundle of creativity in what they came up with.

Introducing our new video, Currensee.com: Forex Trading, It's a Beautiful Thing.

Here at Currensee, we are changing the Forex game and our video shows the fun and innovative side of this exciting market we love. Some people say "It's not work if you're having fun." We say "It's only fun if you love what you do."

I hope you have as much fun watching the video as we had producing it.

Happy viewing. :)

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Be sure to read the full risk disclosure before trading Forex.  Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results.

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Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results. Investor returns may vary from Trade Leader returns based on slippage, fees, broker spreads, volatility or other market conditions.

The Currensee team is heading to Vegas.

Since there's no sight of summer here on the East Coast, we thought, why not head to the desert in early August and get a taste of that good, dry heat?

The best part is that we'll be joining thousands of Forex traders and hundreds of forex businesses on the floor of Caesars Palace for the Money Show's Forex & Options Expo. It's their inaugural show, as they've added Options this year, and they are billing this year's event as the way to "learn strategies to succeed in the two most-explosive trading markets of 2009." Now that's hot.Picture 22

So, if you're planning to come to the show, be sure to stop by and see us. We plan to unveil some nifty new features, offer live tours and even send you off with an entry to our sweepstakes (queue juicy prize music), that we'll be announcing shortly. Can't come to the show? We're happy to set up your very own private tour in the privacy of your own home. Just get in touch and we'll hook you up. And, be sure to stay-tuned for the sweepstakes details and your chance to win.

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Be sure to read the full risk disclosure before trading Forex.  Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results.

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Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results. Investor returns may vary from Trade Leader returns based on slippage, fees, broker spreads, volatility or other market conditions.

It's not often you get the unique opportunity to build a product from scratch. Work with smart people, push the limits of technology and build a truly innovative product that creates excitement in the marketplace. Our private beta continues to be an amazing journey and we are now really starting to see what happens when we connect our vision with the reality of real users. Doesn't get much better than that.

I want to share with you the memo I sent to all Currensee traders yesterday in conjunction with our latest release. Why? At Currensee, it's important to us that we're open and transparent - the same way we want our traders to be open and transparent about their trades and their performance. We know the Forex industry can often have a bad rap, sometimes for good reason. We know you've heard them. Get rich quick promises, behind the scenes schemes, even the old bait and switch. We think this really stinks and that's why we're changing the game. If you're tired of the same old Forex same old and ready to experience the Forex trader network that will change the way you trade, go ahead and request your invitation to our private beta. And now for a word from, well, me.

Memo to all Currensee members, May 27, 2009:

First off, let me start by saying thank you. Your participation in the Currensee private beta has been amazing and your continued feedback and dedicated usage of the site brings new insights and ideas to help us grow the platform. Our ability to move quickly and make considerable progress with the product is largely due to your ongoing suggestions and willingness to partner with us along the way. Our vision of providing a trader network where active traders like you can share real trades, strategies, celebrate their successes and gain new insights into the market is truly coming alive before our eyes.

As I’m writing this note, I am humbled by the overwhelming response to our private beta. We have thousands of traders who are eager to join Currensee and it is an exciting challenge to build an exclusive Forex trader network. We continue to invite new traders join our network everyday – that means new traders for you to connect with, learn from and share ideas with. We’ve found that members who have 5-7 traders on their virtual trading team tend to have the best experience on the platform. So, we encourage you to reach out and invite the new traders that join our community and look at the market the way you do.

Now, let me tell you a bit about a release that’s going in tonight (live as of May 28th) and some of the new features and improvements you’ll notice when you log in later today. First off, we made a series of performance improvements to the positions table and to the dashboard page. We know how important the positions table is to your Currensee experience and we strive to ensure it loads quickly and accurately each time you view the site. Our work here is never done and the positions table is something we continually monitor and make enhancements to on a go-forward basis. We also improved the sorting of your Virtual Trading Team in the top left of the dashboard and you’ll now see anyone who’s currently logged in at the top of the list. For those of you using Internet Explorer, we’re working on improving the IE7 experience and are addressing several IE8 issues. These will continue to improve in the coming weeks.

We also heard from you that you’d like to see more dynamic content on the platform. Well, we’re happy to announce the roll-out of exclusive new content from Thomson Reuters. As a member of the Currensee community, you’ll have access to news feeds that are updated three times daily. They include: Market Opens providing general news, Economic Events and a commentary on the major currency pairs. You will be able to create discussions on this commentary to get the community’s take on these new market analysis tools. In addition to the Thomson Reuters content, you will also begin to see the long-overdue Help feature, giving you access to more information about the features of the platform. We are conducting a special webinar with our Co-Founder and VP, Product Development, Asaf Yigal on Monday, June 1, 2009 at 4pmEST. Asaf will walk through the new Thomson Reuters features and discuss the enhancements that were included in the latest release. Space is limited, so be sure to save your seat today:

Monday, June 1st at 4pm EST
https://www2.gotomeeting.com/register/293373202

Let me close by thanking you once again. We believe that we are creating a trader network that will change the world of retail Forex trading by creating a rich experience for traders to share and collaborate while making trading more fun and exciting. We know that you have endured some bumps and frustrations along the way and we appreciate you hanging in there with us. I also wanted to send out a special apology for anyone on my virtual trading team that that made the mistake of following my numerous losing trades last week. It was a brutal week for most of our traders but at least we have each other, right?

Please do not hesitate to reach out to me at dave@currensee.com with your comments, questions or suggestions – whatever they may be. We may not be able to make every improvement immediately but I assure you, we will be listening!

Happy trading!
Davesignature

Dave Lemont
CEO Currensee

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Be sure to read the full risk disclosure before trading Forex.  Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results.

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Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results. Investor returns may vary from Trade Leader returns based on slippage, fees, broker spreads, volatility or other market conditions.