Making trades as a long term investment?

I believe that the dollar is going to crash within the next 8years. I want to short sell USD (most likely against SGD), however am I likely to incur any costs from holding the position for such a long time?

I intend to make a trade that will survive a temporary appreciation of the dollar should things go against me in the short term. If I opened an account with £1000, 1:100 leverage, what’s the most I could put into a single trade that would allow my account to survive a 10% appreciation of the dollar without a margin call wiping out the account?

It seems everyone plays forex as a short term game, but is there any reason trades can’t be played long term?
Any advice appreciated!

I think the dollar will be destroyed no more than 3 years. just look at the final end of this growing American economy slumped. penganghuran continue to grow not comparable to employment, compounded by government’s budget deficit continues to increase, as well as the debt was paid off.

If you want to survive a 10% USD appreciation it’s a question of doing some math. If you figure that you would get a margin call when your equity drops to about half your initial margin requirement (confirm this with your broker as rules can vary) then you can trade a position about 5 times the size of your account balance.

0.5 = X - .9X

Solving for X you get 5, so you could put on a £5000 trade. This does not, however, account for carry interest.

Thanks, that gives me a fair idea of how much I can put into a single trade.

You mentioned carry interest- is that something which will always cost me the longer I keep the position open(So short selling the dollar as a long term investment unprofitable)?

If you think USD is gonna have a bear you should try carry trade. Try AUDUSD in buy. Ask your broker if they pay interests. If you deposit 1000 USD in a mini acc i recomend you to trade no more than 0.2 lots and put a SL of 1000 pips (10000 pipets in a 5 digit acc) So, the avg swap in buy for audus is 1.11 multiplied by 0.2 (numer of lots)= 0,222 USD per day you will receive. 0.222* (265 days * 8 Years)= 648,24 USD of swap gain if you close it in a price just like you’ve opened. If USD falls more than expecte you’ll gain extra pips. Be careful with this strategy, it may blow off your account if it goes against your intentions.

Carry can either work in your favor or against you. If you are long the currency with the higher rate (assuming a sufficiently wide spread), the carry will be positive.

Thanks for the advice guys.

For the record, I’ve just put 2000 GBP into an OANDA account.

My trades are:
Short USD/SGD 10000
Long AUD/USD 5000

This is a long term trade for me, but damn I can’t stop watching the graphs!

Just make sure you have it factored into your risk management figuring that those are both short USD positions. Anything that impacts the dollar will impact both trades.

Yes, I’m purely betting that the dollar will fall, so I thought I’d diversify between two currencies. The AUD because Australia has low debt and has a lot of valuable minerals in demand for an expanding China. The SGD because of the established long term trend against the dollar an providing services for a developing Asia.

Btw, I’ve not bothered with any stop loss as even if things go the wrong way in the short term my whole bet is based on the dollar falling eventually.

If a default is averted on August 2nd, I may get a little burnt short term but any measures they make are likely to only be postponing an inevitable crash.

Rogue… love your enthusiasm man! i have a few comments… mostly a little constructive criticism to help you better put your trade in perspective. Hope you don’t mind

I’m gonna go ahead and guess you are young. Best guess would be early 20’s… but would be very surprised to hear your over 35. Lucky guess? maybe i’m psychic? nahh… I tend to find absolute statements such as yours from inexperienced, particularly younger, inexperienced traders. and there’s no necessarily anything wrong with that! heck… some guys really do nail it hard and correctly. but coming from a more experienced trader who’s been around a little bit…here’s my suggestions:

I happen to agree with your long view on the dollar here… but believing something will decrease in value and shorting it until it does is hard enough. Putting a specific time on WHEN it will go down is next to impossible. Think about why you are in the trade in the first place. You arn’t in it because “the U.S. empire has been around for 240 years… that’s too much of a good thing…times up. go short!”

you are in the trade because of certain events you have seen come to pass, and you believe that the attitudes and patterns of behavior that caused those previous events come to pass will continue to make the same types of choices. A very reasonable thought process, and one that every trader needs. HOWEVER, ask yourself the hard questions that all fall under “what could happen that would cause this trade to move against me?”

You did identify one near-term possibility with the debt ceiling crisis…but there are many more than that…

In this case, just a few possible ideas are:

  1. The U.S. fed starts to tighten up money supply… most likely via an interest rate rise. This is almost 100% guaranteed to happen within 8 years at least a few times…probably both up and down. an increase in rates will push your position against you, at least for the short term. The last time the U.S. fed started an interest rate hike was in 2004, and that marked a 4% decline in the SGD vs the USD. If a 10% move would wipe you out, Are you prepared to turn on your computer and see 40% of your capital disappear over a 2 month period? (cuz that’s how long it took last time once the U.S. announced it’s first rate hike of that particular decade) Will you get shaken out? Think about it… close your eyes… imagine seeing every day your account lose, on average, $13 quid, for 60 straight days?

  2. China growth “bubble” pops…causing a short term (months… maybe a year or so?) decline in asian markets, currencies and bonds in particular. To deal with this and stimulate continued economic expansion… asian countries as a whole may start reducing interest rates, or even jumpstarting their own version of Qualitative Easing. Don’t think it could happen? google “china real estate bubble” or “china economic bubble”

  3. Trade war or around singapore. Singapore… like many other small, non-dominant nations in the world rely very heavily on imports. They also rely very much on outsiders contributions in the form of capital, entrepreneurs, and raw materials. Should economic trouble start…say…in the U.S… there is a small possibility that the U.S. could take a protectionist view. This could severly cripple the entire world economy. If the worlds largest importer were to even MENTION that it may cut back on imports from asian countries…then singapore WOULD be affected, at least in the short run. In fact, any trade war in the area could affect things. Indonesia in particular would be a country who may try to disturb the current smooth (and absolutly necessary) inflow of raw goods and products to singapre.

  4. Real war next to singapore. This could also happen if any of the territorial pissing contest between indonesia and cambodia, or any other nation in that region for that matter, went from the posturing and occassional skirmishs to actual war. No one wants to live next to live OR work next to live ammo rounds or flying shrapnel, and this, although very unlikely, could devestate singapore for a while.

  5. Any war in the asian area of the world - again, Singapore is so reliant on outsiders contributions to thrive that ANY war in the east would likely discourage investment, at least for a short time. Not likely? consider north korea, cambodia, taiwan/china pressures…etc. 8 years is a long time… definately long enough for some lunatic with a gun to kill another countries leader in the name of his country… or plenty of time for jealous neighbors to make thriving singapore work harder for it’s thriving. And lets face it…when a war breaks out (because it will someday in the east, as it will everywhere else someday), people would prefer to have their money in a bank run by a nation that is more likley to stomp than get stomped.

  6. The overestimation of the U.S. citizens unrest over the next 8 years. Is there a storm acoming? yes. Is it hear yet? possibly. is it going to piss a lot of people off? absolutly. Will it piss off enough people in enough ways for actual political instability, mass riots in the streets on a regular basis, and general unrest in most major cities and areas…? maaaaybe. Will even the rioting, the unrest, and political instability be large enough to alter the consumer culture of the american people? I doubt it.
    What would have to happen in germany for the germans to suddenly adobt a socialistic culture like the greeks? or what would have to happen for the U.K. to suddenly abolish the monarchy completely? It is very difficult to change deep seeded cultural ideals.

And i’m not even going to start in on Australia! :wink:

Now, all that being said… I AGREE WITH YOU! I strongly believe the USD will decrease in comparison to the AUD and the SGD over 8 years. HOWEVER, any one of these events could easily spike the USD up against the AUD or the SGD a factor of 10% in just a few months. Some are unlikely, but some…are very likley (u.s. interest rate hike for example)

What if two happen at the same time? Yes… you would get unlucky… and possibly stopped out. But the certainty and confidence of your statements above lead me to believe you DON’T have a plan for the 20% chance things don’t go your way… or don’t go your way long enough to margin out… before going your way again altogether.

8 years is a long time man. 8 years ago, NO ONE would have seen the possible end of the Euro (not really anyway). Who would have guessed SINGAPORE or AUSTRALIA would have such a great chance to thrive? 10 years ago…the phrase “war on terror” DID NOT EXIST. And if another true global slowdown occurs… The Dollar, the Yen, and the Euro are the only 3 currencies that have the liquidity to absorb a worldwide flight from uncertainty. Last time that happened was recent… started around mid 2007… and when it did…the SGD LOST about15% of it’s value in 5 months against the USD. If you took the same trade in the spring or early summer of 2008, a full year AFTER the global crisis had started, you would have lost everything you are putting in on this trade. Think the AUD would have diversified that risk? It lost 33% of it’s value in only 3 months.

There are only two universals in war, and i find this in business and economics as well. 1. Hope is not a plan. 2. The enemy gets a vote. If you have no risk management parameters, no stops…no scaling in or out…no concept of the possibility of something going wrong… then you are investing in HOPE. And two…the enemy gets a vote. What if the U.S. becomes so overwhelmed by inflation, that it suddenly announces an interest rate hike of 1% over 12 months to encourage foreign governments to buy U.S. bonds. What if congress pressures the fed to do something about inflation…and do it soon? that absolutly could happen, and you could get crushed. You could be 100% right on…and still lose it all.

And the enemy gets a vote. In this case, the enemy to your trade would be anything that disrupts the direction of SGD and AUD appreciating, and USD depreciating. Gold sells off like it did recently, you get clobbered. war around singapore breaks out: you get clobbered. war WITH singapore breaks out: you get vaporized overnight. U.S. announces interest rate hikes: you get clobbered… U.S. announces protectionist import policy: you get clobbered. China declares war on taiwan, or takes north koreas side if NK tries to get down the SK. you get hurt…maybe clobbered. World experiences more severe double dip recession… you probably get clobbered, maybe vaporized.

Now…here’s what I think someone like you should do to make sure that crap DOESNT mess up your trading profits.

  1. Once the trade starts to go your way…I would say if you double up for sure…but i would recommend before even that: move a stop loss to break even. Then, if the U.S. announces a rate hike, or the euro falls apart and everyone bails out and jumps into the dollar and/or yen… you don’t lose.

  2. If the macro picture changes… look for ANY POSSIBILITY for you to reduce risk. NEVER insisit "i’m right, and I know it, so minor development be damned…i’m holding on tight. That’s a losers attitude. ask yourself “how will this influence SHORT TERM perceptions the the USD, AUD, and SGD.” Since you are so leveraged, a change in perception could alter currency values by up to 30% in just a few months. It doesn’t even need to make any long term difference… if it freaks people out even in the short term… you could get clobbered.

Again your 100% right…and still lose it all, because you had no plan for a sudden, unexpected, seeminly illogical currency swing against your position.

  1. Decide where you will take profits. What do you mean by “crash”? define it. put a number on it. Keep in mind this… in 1992, the british pound was “broken” by speculators shorting it…becaues of the high inflation rate and low interest rates in the U.K at the time. It is called “black wednesday”…yet…the GBP only dropped 30% in value to the U.S…and it took a full 6 months to get there. Furthermore, it ralled back up, and recovered half the loss over the next 4.5 years. It never went lower until about 8-9 years later. Then… it just moved up, and up, and up, eventually exceeding the previous high before the 1992 crash!
    Until the recent 2008 financial crapstorm that is.

Point is… where are YOU going to take profits? if you held this, shooting for a 50% move… which it sounds like would increase your capital by 500%… and only having enough to accept a 10% move against you… you would still be holding if this was 1992 instead of now… it NEVER went that far…in almost 20 years. Furthermore, there would be a time that you’d be down about 25% of your capital… after about 15 years of being in the same trade!

I hope your getting this… I wrote this book just for you dude :slight_smile:

If you want to trade successfully, you need to think like a successfull trader. A successful trader ALWAYS believes he is right… AND, has a plan for when he isn’t. A losing trade ALSO always believes he is right…but he has no plan for when he isn’t…and that’s why he’s a losing trader. Not necessarily because he has bad ideas…but because he has no plan that accounts for cutting losses, reducing risk, or taking profits.

Hope this helps…

Jay

Thanks a mill for the advice, you’ve given me a lot to think about.
I closed my positions over the weekend as I need to give some thought to what you’ve said. Also I envisaged congress coming up with a last minute bandaid solution to the problem, and I considered what if recent losses in the value of the dollar were simply due to anticipation of a default which might reverse once a default is averted. Even if my plan is sound, I could choose a better place to jump in, well at least see how the market is responding post Aug 2nd. So my positions are closed and I’m down the price of the spread(about 10quid).

Short term verses long term:
It seems forex is mostly played as a short term game, with most traders relying on technical analysis. The problem is how can we compete with quantitive analysts armed with computer algorhythms that predict the shape of a graph mathematically. I’m a good chess player- but I wouldn’t fancy my chances against a computer. With respect to fundamental analysis, I presume there are people out there who get the information before we do- they genuinely have the chance to make money. The rest of us shmucks can only jump on the bandwagon and hope to jump off before it crashes. However it seems there is a gap in the market with respect to the long term. A quantitive analyst’s algorhythm does not have imperial decline factored into the equation, I noticed that some chess programs have a weakness in that they can’t see certain things far ahead which are obvious to a human player. Traders trading day-to-day are not looking long term either. So I suspect long term as being an uncapitalised gap in the market where perhaps I shmuck like me without algorhytms or inside information can get an edge.

Certainty:
You mentioned overconfidence and certainty. I think i get what you mean, my view is that nothing is certain in economics whether you’re an expert or not- there are just too many variables and complex interactions. However, if something is more likely than not, in a cost/benefit/risk assessment, isn’t such a gamble logical?
The received wisdom I got was that if a trader is right 60% of the time he can make a profit. I am not CERTAIN about the depreciation of the dollar but I’m at least 60% sure.

Btw, I have no debt or outgoings, about £10k in savings so I’m seeking to put my eggs in a few baskets. I certainly wouldn’t let all my savings ride on my short sell dollar plan. Right now my money is an ISA and a savings account getting 2% interest when inflation is 4% WTF! I feel I’m a mug for having my money in the bank and should be doing something proactive with it! I guess I’m looking for a hand-full of more often than not scenarios I can divvy my money between. Investing in property with my girl friend would seem like an obvious solution but I see a UK house price crash looming on the horizon.
Due to inherent unpredictability, if my plan short selling dollar succeeds- I would maintain my humility and consider myself lucky, and if I blow the account I’d consider myself unfortunate; but only blame myself if a better decision were possible at the time on the information available to me. Everything we do in life is a cost/benefit/risk assessment.

Interest rates:
I know you quoted this as just one of many possibilities, but I suspect on this issue America will go the way of Japan with long term low interest rates to stimulate the economy. The inevitable alternative is to simply print more money as opposed to increase interest rates- what do you reckon? They’ve done it before and they’ll do it again I suspect.

Vulnerability in the SGD:
Thanks for those points I’d never considered that, perhaps a solution to short sell the dollar against a large basket of currencies, I’m not sure what they would be but hell I could short sell against just about every other currency which might diversify the risk?

Collapse of the American empire:
I know that this message is by no means new, and historians such as Toynbee made predictions about Western decline and turned out to be wrong at least by orders on the time scale so as to make their predictions useless in practical terms. I don’t envisage rioting in the streets or civil war, what I see is an inexorable and steady decline in living standards. The British empire didn’t crash but once it was on a downturn things kept going. Dammit the Brit psyche is still scarred with cynicism and pessimism to this day! The American psyche’s spirit of optimism I suspect is a product of success as opposed to the cause of it and I can see things going back to business as usual once congress puts a bandaid on the problem perhaps allowing a sense of denial to go a little further but damn are people going to be pissed when they find that aren’t top of the food chain anymore. The way I see it, American hegemony is based on things such as: Creative spirit, sheer military strength, hollywood propaganda, great virtues of freedom and democracy. However the underlying ingredient to much of this is money, what if the money isn’t there?

China’s bubble bursting:
I think there is an overestimation on how far China can develop, as economic development needs economic freedom, which in China’s case will always be constrained by limited political freedom. However all the BRIC countries are on the up, and they will at least be in a position where they cannot be pushed around. Also they are starting to make some technological innovations. Much of America’s leverage had been based on technological creativity and military bullying power, hence the dollar is the stable currency, take away those factors and the dollar looks a whole lot cheaper.

War in Asia:
Now the idea of war is one that can work both ways, in that it could affect America for the worse too. China’s culture is based on conservatism and preservation, not on conquering and expansion- compared to the West they have been very reserved in meddling militarily in international affairs. The West has occasionally meddled in the affairs of others for the common good, but more often than not for it’s own interests. If anyone is going to cause a ruck it’ll be the West under the mantle of “freedom and democracy”.

As for the other points you’ve mentioned I’m currently researching and staying out of the market. With what you’ve said taken on board I think I might still go ahead with my plan but diversify my risk between many currencies and reduce the size of the trade so I can tolerate a 15% temporary rise as opposed to 10%.
Bottom line is:
I think the depreciation of the dollar is more likely than not.
I’d rather be wrong and pay the price than be right and not be rewarded.
I don’t wanna be kicking myself down the line saying “**** I knew that was going to happen”.

Once again thanks for the pointers and any criticism appreciated!

Ok, fine. Good. you seem to have a proficient grasp of risk, and pobabilities of being correct… and again, you and I both agree that a decline in USD vs AUD and SND is likely over the next 8 years… but you need to account for 1 more thing: managing the trade once you are in it.

For example…where are you going to take profits? this is the most important part. Period, bar none.

Based on your goal and approach to this trade idea, here is a suggestion:

I would pick a specific technique to trail a stop, and use this as my target.

I suggest this because this idea is excellent for long term trend following (such as what your wanting to do). Essentially, a trailing stop is what you want because as long as the trade is going in your favor…you are moving a stop loss order down, down the price ladder (or up in the case of AUD/USD).

here is a visual of how one particular trailing stop would have worked in the USD/SND market:

Uploaded with ImageShack.us

Each of these candles is a MONTH… so this is a monthly time frame. The way it works is it calculates the average range of each monthly range…and multiplies that by 3. So… it’s a 3 X ATR (average true range) trailing stop loss.

The purplish pink dots would be a 3 ATR stop. So… as the trade moves your way…from 1.75 to 1.35…you get all the money…but when it makes a sudden adverse move against you… you still manage to keep the lionshare of your profits. 3/4 of them in fact.

Then, if price resumes its downward march…you can re/enter at a break of the previous low… This is a low risk way to trade a trend. and how I would recommend you do so.

Hope this helps!

Jay

^
Ok cool, I’m acquainted with trailing stop loss but I’ve yet to find how to do a 3 X ATR trailing stop loss.
I take it about 1000pips TSL would be sufficient?

FYI, After closing my original trades at the cost of a spread due to anticipating a short term appreciation of the dollar after August 2nd, I thought why not make a trade if I think the dollar will rise? So I went short AUD/USD 1000units. I watched the graphs and they were going the opposite way, AUD was rising, so I panicked and closed the trade at a meagre loss. Shortly after AUD fell about 500pips.
Lesson: Knowing something will happen is flawed without knowing when and how much.

Then Friday 5th I jumped in with both feet, my reasoning was that the dollar had retracted most it’s losses against most currencies to a level about a month prior to August 2nd- when a default was on the horizon but not imminent. I traded 5000 against the AUD, 5000 against SGD and a few thousand against random currencies. Then Saturday it was announced that America would be downgraded to AA. Excellent timing! so I thought- and sure enough I found several sources anticipating fall in the dollar as a result. Unfortunately I’d jumped into an economic maelstrom- somehow everyone thought they’d stick with what they knew and went mad buying US treasuries, and the dollar went up and AUD went down another 400 pips.
Lesson: Some currencies are more risk averse than others

While the AUD was falling I found out it was due to a feared decrease in global demand for Australian commodities and was consequently risk averse. I considered closing the position, but reasoned that demand for such commodities would return in the fullness of time. I read up on safe haven currencies and quickly put 5000units short USD/CHF. The trend of appreciating CHF continued and my gains in CHF gave me a net gain against losses in AUD. I thought I had found a good balance between pro and anti risk currencies until the SNB announced it might try to push down the value of CHF. I thought I’d see what would happen and the next thing I knew my USD/CHF position was down 300pips! I realised that I didn’t have any idea of the market forces involved and bailed out, closing the position putting a 120pound dent in my account.
Lesson: When dealing with forces you don’t understand(such as government intervention on mass psychology) bail out.

I noticed that the SGD hadn’t fared too badly against the dollar during the turmoil and put another 10000units short USD/SGD. In light of my losses from trading USD/CHF, I may have fallen into the trap of upping the ante to win back losses. I reasoned that if my available margin falls below £1000 I’ll put another £1000 into the account to prevent a margin call. I have more need to put your advice on trailing stop losses in to action.

My current trades are:
AUD/USD 5000 long
NZD/USD 2000 long
USD/SGD 15000 short
And a bunch of other currencies at a few hundred each for my own education in currency movements as opposed to hedging.

I’ve moved away from diversification and put most of my bet against SGD, reasoning that this is a game I need to research on a daily basis and be willing to close a position at short notice should catastrophic news come out. However I’d consider downsizing my short USD/SGD position if there was a credible safe haven currency to diversify it with. I gather government meddling is an issue with the CHF and also JPY so there really is no safe haven currency right now and people are likely as ever to go USD in times of crisis. How might I hedge against that. The obvious answer seems to be gold, but I dubious about the value of gold considering it’s appreciated 7fold in the last 10years with no fundamental justification.

Btw as for take profit, I’d be hoping for a 25-30% depreciation in the dollar

Cheers!

update for the purposes of of providing testament of crash and burn newbie syndrome!

From what I’ve seen over the last few weeks, the main flaw in my plan is the way the market behaves to risk aversion. Even when bad U.S. data comes out people may go with what they know and buy U.S treasures. I checked out what happened in 2008 with the crash- AUD/USD fell 35%! Now there’s talk of a double dip recession- the SGD is risk averse enough without having AUD in there!

At lunchtime(GMT) I kept an eye on the news feeds and the jittery reports were coming out, I reasoned that the AUD and NZD were bad choices in the first place(here we go again!) and closed the positions- making a loss of about 60pips.

A few hours later began questioning myself as the rising dollar trend continued. I bailed on my remaining SGD position out of sheer fear. So I’m back to square one- 240quid poorer and a little more aware of the emotions involved in this game.

I think I appreciate now why you say it’s important to have an exact plan- because I didn’t have an exact plan, fear made me close the SGD position. Also there were time my positions were several hundred pips ahead which would’ve been better times to bail out (as I was considering closing the AUD and NZD positions anyway), but when you’re winning there’s less incentive to close the position due to greed. I guess that is why you said the most important thing is a set plan of when to exit.

I’ve never gambled in my life, and I thought that would put me in good stead. But I’ve learnt that my lack of experience of the emotions involved make a strict plan of what to do from the outset massively important. Otherwise greed, fear and denial.

For the meantime I’m going to spectate from a distance, and do some pondering…

Rogue, man, If I ever write a book on trading, I’m totally gonna quote the last two posts. Classic. Honestly. I couldn’t make stuff up as good as this. It’s these emotions, and lack of planning, and lack of a true understanding of auction market dynamics that makes trading difficult.

There is so much I would like to say to these two posts, but let me cover just the basics, and some very simple suggestions. First off, I applaud you for making your first venture into the capital markets a public one… and I think about 98% of readers of this thread will identify with your mistakes here.

First of all, a plan is absolutly necessary. Every ssuccessful trading plan I know always consists of three things minimum: A plan of entry, a plan of taking profits, and a plan of taking losses… such as what triggers an entry order, at what point will a trade be closed for a loss, and what point will a trade be closed for a profit. These are absolutely crucial. A study was conducted on decision making in trading, and it was found that making a trade affects the same regions of the brain that are affected when a drug addict takes their drug of choice, or when a gambler makes a bet. This is NOT the recipe for objective decision making! So, a premade plan is about as necessary as oxygen for a trader to be successful.

Second of all, in spite of your preconceived notions regarding what makes markets move… it actually all boils down to Econ 101: Supply, and Demand. If there is more demand at a price level than supply…price will move up. If there is more supply at a price level than demand, price will move down. News and economic events DO have an impact, as it will influence the amount of demand or amount of supply for some market participants, and eventually all market participants, however, for weeks, months, and even years, these “fundamental” concepts can be out of alignment with the reality of market movement.

Also, you need to “know your opponent”. The majority of the activity in the forex market are corporate entities who are HEDGING, not SPECULATING. For example, I have a brother in law that is CFO for a 500 million dollar wood products company. This company is canadian based, yet half of their facilties and employees are in the united states. He has to hedge in the USD/CAD market at specific price points because he is trying to make sure they can make PAYROLL, and BUY RAW MATERIALS, and convert PROFITS FROM SALES from one currency to another, without losing their profit margins. He explained once to me that his company was buying or selling USD/CAD currency pair at specific price points to insure they could maximize ROI… NOT because his company believed that the USD was going to gain in value to the CAD, or some such thing like this.

In other words, he doesn’t care one bit what the news or world economic events are… he needs to make payroll in two different currencies for several thousand employees. So he has fixed points in the market where he is buying or selling millions of USD and CAD. Regardless of what happens, he must hedge to maintain profit margins. He does this, and so do the MAJORITY of forex participants. Here is a quote from one of the most prominent swiss banks in the world, and the one i believe that is responsible for 5% - 10% of the entire foreign currency transactions in the world these days:

“According to Deutsche Bank, ‘passive’ players – such as corporate treasurers who are looking to hedge currency risk or to facilitate their core business, not to make a profit – account for more than 50 per cent of currency flows.” By definition, these passive players are not out to make a profit, and exchange currencies only because it is necessary to simply conduct business."

So, with this being known, if a large corporate or even government entity such as Bank Of Japan decides has an order to buy or sell 200 million in the AUD/USD at a price that is about 20 pips under current market price… and say AUD just announced a worse than expected employment number… well, you may have price spike down about 20 pips as 120 million AUD/USD are sold due to a panic reaction… I can guarantee you that this spike down will reverse! Why? simple… 20 pips down, there is more demand than supply… the entity that is providing the market demand is NOT going to change because an economic report. period. it’s not. They need to buy AUD/USD at that price…regardless of the news.

Now, what if ANOTHER, SEPERATE entity has ANOTHER large order to fill… say, 10 pips below the first entity. Say 80 million in AUD/USD. And what if a third corporate entity has to fill 135 million in AUD/USD just a few pips below that one?

Well, i can tell you in spite of the bad news… aud/usd won’t move down much more than 20 - 35 pips, and at that point…with all the “speculators” who were scared, and wanted to sell out having done so… well, there is nothing left in the marketplace to push price down, but there are massive resting buy orders to support price, and the only speculators left are those who are willing to buy at those price points… the speculators will push price up, since the large corporate entities with their resting (limit) buy orders have absorbed, for now… all of those speculators who wish to sell.

With simply no one left who is willing to sell, and large blocks of buy orders where price currently is… the market will rise. simple as that.

THIS is what moves the market my friend. not the news. The assumption that an economic report or situation is going to change a market place hedging entity is simply completely false. And this is the majority of the marketplace :slight_smile:

I personally base my entire trading methodology off of determing where these large blocks of orders are, and put my own order just a pip or two above or below them, knowing that there is a high probability that these large resting orders will overcome the short term speculation price movments, and I will have correctly choosen a turning point in the market. This provides me a high probability trade, with relatively little risk, and relatively large reward potential.

I do this with confidence because I know a simple fact: The forex market is dominated by entities who hedge. Their orders sit in the marketplace until completely filled, regardless of economic change. Because they are responsible for the majority of orders in the market, are the “traders” who have the greatest influence on price direction. Therefore, I look to identify where they place their orders in the market,and I know that these places will provide a likely market turning point.

But I digress…

Point is, you came into this game with some preconcieved notions, and a lack of understanding of how you would handle your own emotions, as well as if your ideas of how the market work…actually match up to how the market works!

We ALL make the same mistakes in the beginning. I KNOW I did. The primary reasons you haven’t succeeded are twofold:

  1. You didn’t have a plan on how you would handle exiting the market…either with a profit, or a loss.

  2. You didn’t (or don’t) have an accurate understanding of what are the dominating forces that drive short term market direction (short term being anything less than 3 - 6 months)

If you can gain a proficient understanding of these two concepts, and have a way to apply them successfully in the market, you will make a fortune. Otherwise, you will simply second guess yourself, be confused as to why this happened when you expected that to happen, and you will then make emotional decisions that will result in a loss.

Since you seem to have a longer term perspective, I would recommend a book: Trend Trading by Michael Covel. Brilliant book, with real examples of real traders who trade long term concepts successfully. I don’t follow this methodology, but it works now, and those that do follow it well can make 20% - 50% per year… year in, year out.

Another book I recommend is “Market Wizards”. It is bit old, but it interviews about 15 of the most successful traders of all time. Some have obtained returns that AVERAGE over 100% per year, for 10+ years running. I recommend this because it is an absolute classic, and it will give you a great idea of how some of the best traders make their decisions in the marketplace. One in particular credits 50% of his 100 million dollar success to one simple concept: When news comes out, wait to see how the market responds. If it responds counterintuitive to what you would expect, trust the price change, not the news. He has said he made over $50 million trading off this idea alone… so much for markets doing what is expected!

Don’t believe this statement? just check the 10 year U.S. bond futures market today. Check out the september expiration contract… look at how price has moved up since the “S&P downgrade” of the u.s. bond market. In fact, the biggest rally was on the day of the downgrade!

Hope this gives you some direction in what to consider. Read both those books, starting with market wizards. Gain a better understanding of market dynamics. Come back and practice for 3 months to a year with a very small amount of real capital while you master your emotions, and develop a plan to trade… and then grow your own personal fortune.

Welcome to trading. Good Luck!

Jay

Also Rogue…your thread got me thinking, and I’ve decided to expand on my post above on another thread. It is geared toward pointing you in the direction of how the forex market really trades:

hint: 55% of total forex volume is made by traders who have large orders at various price points in the market, and they honestly couldn’t care less what the news is one way or the other…and in fact, this group of traders who make up the majority of forex trades actually hopes their order NEVER gets filled :wink:

heres a link to my post:

http://forums.babypips.com/newbie-island/40291-welcome-forex-now-meet-your-opponent.html#post275606

we all know that price change is due to a sum total of the market participants as they exit or enter a trade… so just be mindful of the MAJORITY that pay almost NO ATTENTION to world events. These “big boys” can make trading news driven market moves a bit frustrating, particularly when they “decide” to buy 100 million in EUR/USD just minutes after bad euro news comes out, and just a few pips below where price was before the bad news :wink:

Jay

Thanks Jay, I just got the original Market Wizards and Trend Following(I assume this was the book you were recommending by Michael Covel as I could not find “Trend trading”).
Due to my day job I’m spending the next 7 weeks in a gated compound in the middle east with nothing but a large reading list to amuse me. I’ll be starting with what you’ve recommended.

With respect to your comments on “knowing your enemy”, I think I’ve been viewing currency market in the same way as stocks and shares and see now that they are very different. As for Hedging- thanks, I’d never thought about that, that complicates things for sure, I can see how their positions would often be the exact opposite to speculators.

I’m also still confused by the action of the markets- Obama announces that he’ll devalue the dollar by 457billion$ by printing money to create fake jobs(another form of QE as far as I can see), and the dollar rises in value?
Perhaps short selling long term US bonds might be a more direct way of executing my strategy. However I guess it’d still be subject to many of the previously mentioned pitfalls.

Once again thanks for the advice, I’ll be checking out your other posts.
I’ll be back…

One of the most fundamental concepts to understand in the markets is that news…by and large…is simply, irrelevent. What is relevent is to what degree (if any) the news alters the perceptions of various market participants.

The real reason for the USD increase isn’t because obama announced a job stimulus… it’s because the majority of people are more focused on something more fundamental… that the EURO may not even exist as a currency in the not-so-distant future…or more precisely: is a greek/spanish/italy/etc. bankruptcy on the horizon?

The USD is a “hedge against adversity” If the world was about to fall apart…the U.S. dollar is about the only currency that has the ability to absorb a high influx of scared money without creating an “insta-bubble”. It is also the only currency that is backed by an economic engine that is able to absorb more “death and destruction” in the financial world and keep on chugging right along.

Lets face it…if i thought the financial world was about to be turned up side down… there are only 3 currencies big enough to be considered “reserve currencies” for the world: the yen, the euro, and the dollar.

Lemme think… the entire euro MAY become financially insolvent. The Japanese seem to have even bigger problems than the U.S… and they regularly try to deflate their currency value… and the finanacial engine that runs the world is the U.S. economy… if it goes down, the rest go down anyway.

Yea…ok… from this angle, the U.S. dollar is a sweet play. And it just so happens that this is the exact play that the worlds big players are making right now.

And don’t forget man… I said you can make a fortune when good/bad news comes out, and the market actually does the opposite of what you think it should…

based on this little tidbit of trading knowledge…you should be long the dollar now…no? Obama makes a statement that should tank it…but it goes up? Sounds like time to buy :). And as you can see… the move up in the dollar has been relentless.

Forget fundamentals my friend… supply and demand is all that actually matters… and if information is already priced in (world investors expecting the U.S. to stimulate in some way…therefore…this risk is already priced in… but the euro is an unknown quantity, and therefore looks scary to be in compared to USD) then you can expect massive moves in the market…dispite what the news may seem to be saying.

Don’t trade the news…trade how the market REACTS to the news…this is where all the money is :slight_smile:

Jay

If you want to learn about long term trading, visit the “equity millipede” thread in FF.