Tag Archives: trading

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.

There is a massive amount of attention being given to LIBOR these days. The London Interbank Offer Rate is something the majority of folks probably never heard of, but now it's front page news. Really, the financial industry didn't need this latest indication of greed and corruption added to the laundry list of the last few years, even if many folks in the business where under no illusions that LIBOR was cleanly derived each day. There may have been no actually damage done (one blogger I read ran some number suggesting that any given back could only influence LIBOR by something like a tenth of a basis point - meaning 1/1000th of a percentage point), but the banks are rightly being slapped with fines for their funny business.

LIBOR isn't the only rate that gets played with, though. And I'm not just talking about overnight interest rates for other currencies (EURIBOR, etc). There are fixings multiple times per day in the forex and gold markets (and probably others I'm not aware of). The main ones for exchange rates are at 8:55am in Tokyo and 4pm in London. These fixings are to set the exchange rate for commercial transactions.

Now, the forex market fixings are different than the survey type approach of LIBOR, but that doesn't mean they cannot be subject to shannanigans. The London afternoon fix tends to be the more important as it comes in the US morning and near the end of the European trading day. That makes it a major focal point for activity from the two biggest trading regions. As a result, it is not unusual at all to see some dramatic moves in the forex market heading up to 4pm London/11am NYC, move that can reverse rapidly after the fix time passes. It's not hard to imagine market players buying or selling to move the rate toward where they want it at the fix, then unwinding those trades immediately after. It's rather like the process of running stops.

There are also key times related to options and futures expirations. The 10:00am NYC currency options daily expiration is the most noteworthy of them (Click here for more info). This is not as big a deal on a day-to-day basis as the London fix, but on days when there is a particularly large volume of options expiring in a certain currency pair there can be some interesting price activity. This is seen to be driven by those either trying to defend a strike price (keep the market from going there) or get the market to hit that strike.

As I said, these market manipulations aren't the same as those related to LIBOR. They will never be prosecuted, because the parties trying to move prices around are actually taking some risk in doing so (what if the market moves against them?). That said, it very much behoves the forex market participant, especially one operating in shorter time frames, to be aware of these key times of day and what can happen around them.

Despite yesterday’s surge in investor confidence that provided Asian markets a boost, things appeared to have fallen a bit flat this morning. As reality set in that Spain’s bond yields have hit record-breaking highs and Greece’s electoral success might not be enough to negate prior monetary upset, investor’s optimism wasted no time in fizzling out.

Bloomberg reported early this morning a slip of 0.8 percent in Japan’s Nikkei 225 Stock Average, 0.1 in Hong Kong’s Hang Seng Index, and 0.7 in China’s Shanghai Composite Index. Tim Riordan of Australian hedge fund Parker Asset Management Ltd., elucidated how he sees European problems increasing, as opposed to reaching a resolution. With bond yields hitting 7.29 percent, Spain is becoming somewhat of the elephant in the room. Riordan states that this is could really be a red flag indicating a downward spiral should be reason for caution.

Borrowing costs of this caliber can be indicative of a country potentially in need of a bailout in the near future. Despite the notion of this possibility, European markets were able to rise Tuesday. Currently, the strongest fear amongst investors seems to be a contagion of Spain’s monetary battles over to Italy, who’s facing issues of its own.

A few weeks back I happened upon a very economically fitting Warren Buffett quote assuring American’s they needn’t fear a recession relapse lest things in Europe get out of control and leech into the US economy. If investors’ uneasiness over debt spilling across Europe is foreshadowing for imminent future fiscal events, will Buffett’s words prove true?

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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.

I bet right about now Jamie Dimon at JP Morgan is quite pleased to have the Facebook fiasco all over the news to take some of the spotlight off his little derivatives problem. As I write this (Tuesday morning), JPM is up 5% and FB is down nearly the same amount on the day. Personally, I think there’s way too much being made of the whole Facebook IPO story - though I do think the NASDAQ system problems is an interesting story, especially after the BATS failed IPO a little while back - but admittedly the rest of the news has gotten rather stagnant. I actually begged CNBC via Twitter on Friday to talk about something, anything, but Facebook, but struggled to come up with a good alternate subject.

Naturally, there’s a blame game going on as to whose fault it is the stock has taken a dive. We can never really know how things would have turned out if the NASDAQ system had functioned properly, but that won’t prevent folks from trying to do so. Finding someone to blame, of course, is a favorite pastime these days. Traders certainly do it when they take losses. After all, it can’t be my fault I lost money on my position. It must be those evil banks, unethical brokers, or speculators gone wild (unless, of course, they are moving prices the direction I want).  Yes, I am a speculator. Obviously, I’m talking about the other speculators, though – especially the ones with computers faster than mine. Yeah, the high frequency guys. It’s all their fault! They’re preventing me from moving out of the 99% and in to the 1%. Something really needs to be done about them.

Thankfully, today we’ve returned to the on-going back and forth between European central bankers and political leaders over what to do about the mess. It’s kind of refreshing after the all-Facebook-all-the-time chatter. Everybody seems to want Greece to stay in the euro, but it looks like we won’t find out until the middle of June as to whether the Greek people share that view. You’ll notice the German rhetoric on the subject of austerity and whatnot has cooled considerably. Could that be because suddenly they aren’t doing all that great either and the weak euro that’s coming out of all this actually tends to help Germany more than most on the export side of things?

Then there’s the on-going question of whether the US can remain out of the fray and avoid too much in the way of economic damage from all the European issues. I’m moving to England in the fall to start work on a PhD, so you know I’m looking for the dollar to go on a fantastic run higher to make my greenbacks go farther. Unfortunately, the UK retained the pound rather than join the euro. The photo going around of David Cameron with arms raised celebrating Chelsea’s performance against Bayern Munich in the Champions League final on Saturday (at last an English team beat a German one in penalties!)  alongside a much less enthused Angela Merkel could just as easily represent the British feeling about having their own currency through all the mess.  I’m hoping the Bank of England decides to do more QE. That ought to sink the pound.

In the meantime, back to my charts.

Oh look! There’s a cup-and-handle setting up on the weekly USD Index chart. Maybe the markets will help me get cheaper pounds without the QE.

cup and handle USD chart

 

What do you get when you combine a handful of the best Forex industry professionals, educators, and analysts; a roomful of enthusiastic traders looking to improve their strategy; and the beautiful locale of Barcelona, Spain? The 2012 International Traders Conference, of course!

It’s no secret that one of the best ways to increase your Forex trading success is by learning as much about the industry as possible, and at the ITC, the emphasis falls primarily on education. Here, attendees will not only have the opportunity to experience FX professionals presenting a variety of fast-paced and highly informative talks, but they will actually get to see them in action by participating in live trading sessions.

The conference is hosted by Fxstreet.com, one of the world’s top 10 currency trading portals that offers users unbiased information to help them achieve success in Forex investing. Maud Gilson, Communication Manager at FXstreet, is once again in charge of organizing the event.

“The ITC is so different because it’s not like a typical expo or workshop where there’s only one or two speakers – it’s an entire 3 day event with six experts. There are no commercial presentations, no booths, no products – it’s purely educational,” explains Gilson.

Because they are in collaboration with the entire Forex industry, from start-ups to investment banks, it was no problem for FXstreet to build a roster of multiple internationally renowned foreign exchange professionals to lecture at the event.

To be sure they ran the gamut of varied Forex topics, the speakers were selected based on their expertise in different areas of trading, such as technical analysis, strategies, and psychology. Each of their speeches runs roughly an hour in length and divulges information on topics such as high frequency finance, where coach and technical analyst Richard Olsen shares with audiences how to leverage new insights. Walter Peters, PhD and founder of Australia’s FXJake, will explain the side effects of indicator-free trading and how it can be used to ones advantage.

Coach and Technical Analyst David Pegler will be giving a straightforward explanation of utilizing price action, market fractals, and Fibonacci numbers to increase trading success. Giving a genre of lecture new to the event this year is Steve Ward, owner of High Performance Global Ltd. In it, he scrutinizes the “traders brain” and explains the psychology and neuroscience behind Forex investing.

“I think the live trading is the best part; the traders are so passionate becomes a much more involved and interactive experience than just something you would listen to,” says Gilson.

To ensure each guest get the most out of the event, it is offered only to 70 participants. This way, small groups of between six and eight attendees will be able to interact directly with each speaker in a live trading session. By having the opportunity to work with various FX professionals, each guest will be exposed to a rich and varied assortment of trading strategies.

“The live trading goes on for 3 hours everyday where the speakers project their computers on a big screen and everyone has a laptop to engage in live trading. Guests will even be able to take some trades together with the speakers,” Says Maud.

Traders of all different experience levels can benefit from ITC Barcelona, and aside from being an intensive learning experience, the conference is also a strong networking tool. Previous attendants rave about the welcoming and interactive atmosphere of the event, which takes place at the beach front Barceló Atenea Mar. Since space is very limited, anyone interested in participating is strongly advised to register soon, as the event fills up quickly. For more information and to register for the ITC, visit the their website here >> ITC Barcelona 2012. (To receive a discount of $190 USD/150€, add coupon code: mp_currense)

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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.

A question came up during the webinar last week regarding stop hunting. One of the attendees was curious about it, no doubt having heard the term bandied about among retail traders. This gets brought up on a fairly regular basis, mostly by folks who saw their stop get hit in a market that quickly reverses back in the direction of their trade (see Stop-hunting is NOT the problem some people say). Let me try to clarify things.

A definition
First, let me explain what exactly stop hunting (running) means.

Basically, what we’re talking about here is one or more market participants attempting to manipulate prices such that the market reaches a level where preset orders are believed to reside in order to trigger those orders. Notice I didn’t specifically say “stop” orders there. They could be stops or limits. It doesn’t really matter. Those attempting to hunt those orders are just looking to get them triggered for their own purposes.

Why stop hunt?
So what are those purposes?

Imagine there are a bunch of buy orders residing at 100. What is likely to happen if the market hits 100 and triggers those orders? The market will probably go higher, right? If you know (or think) those orders are there and have the ability to push the market in that direction, can you see how you might want to trip those buy orders and then sell into the subsequent market move either to take profits on a long position or to sell at a better price?

This sort of thing has been going on for many, many years. Stories have come out of the futures trading pits (and probably from stock exchange floors too) for ages. It also happens in the inter-bank market where the primary pricing of forex rates is done.

Where retail forex is concerned, stop hunting is generally talked about more in terms of brokers manipulating prices. The fact that some retail brokers act as counter-party to their customers trades (market-making or dealing desk brokers) rather than acting as middle men (ECN or Straight Pass Through brokers) is seen as incentivizing said brokers to move prices against their customers to trigger their stop loss orders so the broker can profit from customer losses.

The reality
Back in the early days of retail forex there probably were unsavory brokers who manipulated prices to their advantage, and may still be in certain corners of the globe. Things have gotten much tighter in recent years, though, so if you stick with a reputable firm you’ll be free of that sort of abuse. In fact, as much as some like to bad-mouth the new regulations put in place in the US by the NFA and CFTC, part of what they have done is to put brokers under a spotlight to ensure these sorts of things don’t happen, and are punished if they do. In fact, one forex forum member put it to the test and found no evidence of stop hunting by retail forex brokers.

In other words, if you get stopped out on a price spike, it’s not your broker stop-hunting you. They get their prices from the inter-bank market, so if there was stop hunting being done it was almost certainly happening at that level.

Stop hunting will continue to go on in the markets, but it’s not something you should worry about. If you trade for any length of time you will inevitably fall victim to an adverse price move that takes you out of a trade only to see it reverse. There are any number of things that can make that happen. Where you are concerned, it’s either bad luck or bad stop location. A lot of those who claim they were stop-hunted just placed their stop too close to the market and either don’t realize it or don’t want to take the blame for poor decision-making.

 

Month and quarter ends are always interesting times in the market, with all kinds of capital flows offering the potential to move markets. This time of year in particular we also have Japanese fiscal year end to add to the mix. As we near the finish this quarter, though, I’d like to take a look at what might be coming our way in the next one. Specifically, I want to take a look at the research I’ve done on forex seasonal trading patterns to see what’s ahead for the market.

April is not a very strong month for the USD. In fact, statistically it has been one of the worst. Looking at data back to the early 1980s, we can see that in general terms the dollar has fallen about 60% of the time and lost about 0.5% in value against the other major currencies (I’m not specifically using the USD Index here, but close). The pattern is even stronger since the introduction of the euro. Going back to 1998, the dollar has been down 61.5% of the time for an average annual loss of 0.72%. Only December has a more negative pattern.

One thing that is worth noting, though, is that we would expect to see a positive transition over the next few weeks. We can see that on the chart below, which looks at the 1-month forward returns on a week-by-week basis (measuring 7-day periods, not calendar weeks).

USD rolling returns chart

The featured area is the next 4 weeks, with week 14 representing April 1 to April 7. We can see we start April off in a period of strong negative indications for the dollar, a pattern which began a couple weeks ago. That shifts from negative to positive as we get into the middle part of April, though.

As for what to play on the other side, the pound is the major currency with the best April statistics. The GBP been up in general terms nearly 70% of the time during the month since the euro launch for an average 0.45% gain.

We would therefore expect GBP/USD to have a strong positive bias heading into April and that is indeed the case, as the weekly returns chart shows.

GBPUSD rolling returns chart

Notice here, though, that the pattern shift is much more swift, if also more abbreviated.

This seasonal bias information isn’t a suggestion to go out and get long GBP/USD, though. These biases are just that, biases. There are no sure things and even when the market does move in line with tendencies it can do so in a very choppy fashion. As such, you would likely be better off using this information to help shade your trading – like perhaps being more aggressive on trades you do in the direction of the bias and less so against it.

It’s all about putting the odds as far in your favor as possible. This sort of data, if used prudently, can help you do that.

Now, as to what this means for the global markets…

That’s a bit trickier now that we aren’t seeing the same market patterns that we were seeing in the past whereby the dollar and stocks and interest rates all had pretty well-defined relationships. As a result, we need to be aware of whether the market is in “risk” mode whereby stocks and commodities are rising and the dollar is falling, or in the recent mode whereby the dollar and US Treasury yields have moved together, mainly as a function of whether the market sees more QE coming from the Fed. I personally don’t expect anything like that, but Bernanke has done is best to keep the markets thinking he’s inclined to maintain an accommodative monetary policy and doesn’t want to see long-term rates rising too much.

 

 

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I had the opportunity recently to meet with an accounting professor at a UK university.

Wait!

Before you let her primary specialization turn you away, I should say that this particular professor has been doing a fair bit of research into the impact of networks on individual performance. One of her papers looks at securities analysts in particular, but she has also done research into other types of performers, like corporate CEOs. The bottom line is that the quality of one's network is a major explanatory factor in how well an individual performs in their defined role.

Currensee is, at its core, a network of traders. The linkage is clear.

Note, however, that I specifically used the term "quality" and not "size". A massive network isn't necessarily a valuable one. That means you probably aren't doing yourself a whole lot of good "friending" everyone you come across, or who sends you an invitation. This doesn't just apply to trading, by the way. (Are all your Facebook "friends" really of any meaningful value to you beyond the vanity of the number?)

The value of a network comes down to the value of the information which comes to you through that network. Again, note that I did not use the term "quantity" here either. We are all bombarded with vast amounts of information each day. The key to success in trading, as in life, is to get the right information at the right time.

In academia the word "informed" has come to be used to refer to consistently profitable traders or investors. Basically, the idea there is that after you factor out simple luck in terms of explaining performance you have some set of market participants who make money based on their own decision-making. These participants have some kind of informational advantage over the losing traders and investors.

Makes sense, right?

The question, though, is do these "informed" folks have more information? Or do they have better information? In some cases it might be the former. In other cases it might be the latter.

Now for the real twist.

Is that more/better information a function of actual information transmission from one's network and/or information sources? Or is it a function of better information processing abilities by the individual – meaning they create through their analysis new information that is not available to others?

That latter question opens up an ability debate, one which could then be extended to the nature vs. nurture discussion made quite famous by the film Trading Places as well as by Richard Dennis and his Turtles (I actually met a new batch of Turtles recently). But I digress.

The research suggests that ability is less important than one's network. That would imply the key to trading success could be primarily a function of developing a strong network rather than in trying to figure out some holy grail trading system.

So what do you think? Are winning traders better at processing information? Or are they receiving better information from their networks?

 

The sharp upturn in stock prices since the start of the current calendar year has taken most investment professionals by surprise.  Indeed, consensus opinion contained in the lengthy annual investment tomes released by brokerage houses just weeks ago, predicted that the major stock market indices would remain volatile and tread water into the summer, as concerns over the state of the global economy alongside the seemingly never-ending crisis in the euro-zone, was expected to keep investors’ natural bullish appetite in check.

Further, gains of the magnitude enjoyed during the opening weeks of 2012 were not envisaged until the second half of the year, by which time it was contended, that the large concerns weighing on market sentiment would have diminished, as if by magic.

Needless to say, the notion that directional changes in stock prices can be anticipated beforehand with such precision is decidedly naïve, yet Wall Street strategists continue to engage in this fruitless pursuit year after year regardless.  However, just as the upturn in equity prices has left bewildered strategists with egg on their faces, the stock market’s behaviour has presented technical analysts – the students of historical price patterns – with the opportunity to step forward and salivate over a supposedly bullish market development – a ‘Golden Cross.

A ‘Golden Cross’ is said to occur when the stock market’s 50-day moving average of closing prices rises above its 200-day moving average and, is considered by technical analysts to be a portent of future price strength.  Absent a major market setback, the S&P 500 should register the alleged bullish signal to much fanfare by the time this column is published but, is the ‘Golden Cross’ really worthy for inclusion as an input that helps guide tactical positioning?

There have been 43 ‘Golden Crosses’ since January 1928, and the signal has been followed by twelve-month returns of more than nine per cent on average or two percentage points above the long-term mean.  The signal has delivered positive twelve-month returns on 32 occasions or almost three-quarters of the time and, has been followed by above-average returns over the subsequent year on 23 occasions or more than half the time.

The historical record appears to suggest that the so-called ‘Golden Cross’ does deliver respectable returns on an annual horizon, though the incidence of above-average returns is not much better than a coin-toss, while the frequency of loss – at more than one-in-four – is not significantly below long-term experience.

More importantly, the strength of the signal appears to depend on whether it is associated with a recession-induced decline or not.  There have been 15 signals through the past eight decades that were registered as equity prices were recovering from a recession-induced bear market and, the average twelve-month return subsequently recorded has been an impressive 19 per cent or twelve percentage points above the long-term mean.

Further, a recession-recovery signal has been followed by above-average twelve-month returns on thirteen occasions or more than 85 per cent of the time and, has resulted in negative returns just once way back in 1938.  Thus, the historical record confirms that the ‘buy’ signal heralded by the ‘Golden Cross’ is worth heeding when it is associated with a recession-induced stock market decline but, can the same be said for the remaining 28 non-recession signals?

The answer would appear to be no.  Of the 28 non-recession ‘Golden Crosses,’ only ten or little more than one-third were followed by above-average twelve-month returns and, a further ten signals saw negative returns over the subsequent year – an incidence of twelve-month loss that is higher than the historical stock market record.

The erratic performance of the non-recession signals is such that the returns subsequently delivered lag the stock market’s historical mean return over any short-term period worthy of note, including three-, six-, nine-, and twelve-month horizons.  On an annualised basis, the signal’s performance lagged returns that could have been generated by chance over the respective short horizons by three to four percentage points.  In a nutshell, ‘Golden Crosses’ that are not associated with an economic downturn do not work and, have no place in the toolbox of seasoned investors.

Unfortunately, human beings are hard-wired to detect patterns and associations – even when none exist – in an effort to find order amid the endless chaos.  This evolutionary quirk allows investment strategists and technical analysts to issue precise short-term forecasts that satisfy our hunger for order and placate our natural optimism.

The bullish signal emitted by the non-recessionary ‘Golden Cross’ is a classic example of such nonsense and, investors who act on such misguided advice should know that in evolutionary terms, they are behaving little differently than a moth who chases a flame.

Previously posted on www.charliefell.com

 

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.