Hi guys
This is my thread space where everyone is welcome to join in and discuss trades and trading philosophies.
I’ve noticed a lot of varying philosophies on this site. Most follow the typical small retail trader philosophy of candlestick pattern trading. A few have a broader market vision that marks a higher level of conceptual trading, hopefully this thread can be a place where constructive discussion can lead to better trades being made by the participants.
I’ll get the discussion started.
To figure out what direction to be making a trade, one must take a top down approach to analyzing the pair. At the top, we have the big market drivers of each of the currencies. These are the global macro economic positions that each of the currencies are operating within. The economic growth, unemployment rate, and inflation of the country falls under this category. Under the global macro framework, we have to analyze how the central bank will respond with their monetary policy.
Monetary policy is the single biggest factor that moves the forex market, long story short is that it determines the supply of that particular country’s currency. If the macro economic themes of the country is positive, the central bank typically responds with a tighter monetary policy that shrinks the supply of that particular currency, which drives the value of that currency higher.
The next theme to analyze after central bank policy is, for lack of a more specific term, called “market sentiment”. This is essentially the markets mood determined by daily information flow that can cover any significant global event such as geo-political crisis, commodity price fluctuations, natural disasters etc. For instance if a large earthquake hits Japan, the markets mood is going to be in a “risk off” situation where equities may sell of and capital flows back into the country in order to finance infrastructure repairs. This would suggest that yen appreciates in this scenario.
The last theme to analyze is the charts, otherwise known as the “technicals”. This is the least important of the analysis to be made and should take the least amount of your time. The price of a currency operates within the framework of the first three themes. The direction of the currency’s bias and trend should be decided by your analysis of the global macro data and by the interpretation of the central banks policy. The only purpose of the technical analysis is to determine appropriate time to enter into that directional bias, and where to take profit and to cut losses.
The technicals are very subjective, price action patterns can be interpreted as bearish by one trader and bullish by another. There are no hard and fast rules, a general knowledge of horizontal support and resistance lines, trend lines, and a basic knowledge of the RSI indicator is really all the technical analysis you need. The idea is to use the techs to “sell high” when the global macro data is indicating a bearish bias, and vice versa for a bullish scenario.
I’ll talk a bit about a solid short trade I’m in and why I’m in it. The eurgbp short.
This pair has been trending down for about a year now. The global macro data for the Euro Zone has been dragging the euro down as the unemployment rate throughout the eurozone is just hideous, the GDP growth has only been moderate at best, problems from the 2012 credit crisis are still simmering in the background, and now recently Europe has been exposed to geo-political turmoil with Russia over Ukraine. These issues are resulting in the low inflation numbers we have been seeing out of the area for quite a few months, forcing the ECB to lower interest rates and taking other unconventional measures. The easier central bank policy from the ECB will continue to push the euro lower over the coming months ahead.
The UK’s situation has contrasted sharply with the euro zone. It’s employment rate is half of the euro zone’s, its inflation is steady, it’s GDP is on path for solid growth, and as a result the BOE’s policy response will be the exact opposite of the ECB’s. The first interest rate hike by the BOE is expected to be in the 1st quarter of 2015. This created a situation where the two central banks policies are diverging, a scenario which typically sees a nice trending response by the currency pair.
A critical hurdle that the UK needed to clear in order for the pound to continue strengthening against the euro was the Scottish vote for independence that occurred in the middle of last month. With Scotland voting to stay in the UK, a lot of risk behind the pound was removed and the pair should continue on downwards.
Now that the global macro data has been analyzed, and the central bank response has been interpreted. I’ll move onto the technicals of the trade.
First order of business was to establish a line if resistance that showed influence in history. This line I decided would be 0.7890.
Then I went to the hourly chart. Waited for it to be tested, it was actually tested twice. Then I noticed the hourly trend line having been formed, and waited for the break down of that trend line to be my short entry. I shorted at 0.7860.
The SL is 50 pips. I expect the pair to continue moving down for sometime now, ultimately to 0.7500. However my take profit level for this trade will be 0.7700, a cool 160 pips. I will reassess the trade at that level to see if I want to play it down to 0.7500 or if another bounce up is likely, whereupon I can short again at a higher price.
So there you have it, top down analysis starting from the all important global macro data, the central bank analysis, sentiment analysis, and lastly the basic tech analysis. No trade is ever a for sure win, but everything is lined up nicely and a trade like this will win 70% of the time.
Post saved
Post saved.
Next trade - gbpusd long.
UK has two key economic data releases this week, the CPI and their employment numbers. The employment data is likely to be decent, and this supportive of the pound. The real dynamic information however came over the weekend with members of the federal reserve expressing a willingness to hold back on rate increases even through next year. The dollar’s bull trend has been losing momentum over the last few sessions, and the UK is one of the few economies that’s doing just as well as the US. The gbpusd should stabilize and is likely to test higher over this week.
Currently the pair is in a range, and currently price is at the bottom of this range. I’ve longed at 1.6060 with a 50 pip stop and a 100 pip target.
Is the economy and reactive monetary policy really pulling the strings? Ever consider that maybe there are organic long term intermarket cycles, that produce the economic environments we experience? Does price represent our unified subconscious? Is the market itself dictating our global economic scenario? I don’t think we know the answers to these questions. The question is, what do YOU believe? :48:
[QUOTE=“atrwilder;660707”]Is the economy and reactive monetary policy really pulling the strings? Ever consider that maybe there are organic long term intermarket cycles, that produce the economic environments we experience? Does price represent our unified subconscious? Is the market itself dictating our global economic scenario? I don’t think we know the answers to these questions. The question is, what do YOU believe? :48:[/QUOTE]
Does monetary policy pull strings? A simple proof that monetary policy does prove a framework for the economy is to look at inflation before central banks began inflation targeting, and to look at inflation post inflation targeting.
Lets take the Australia for example. Below is its historical inflation data starting from the 50’s
The bank began targeting a specific inflation rate as a goal for their monetary policy, around 2%, in the early 90’s. From the graph you can see the bank has been successful in keeping the economies inflation near their goal for most of the time since, whereas before the inflation target, it was hitting the double digits frequently. The inflation rate is the pulse of an economy, if the central bank can control this, which there is enough data now to prove that they can, then they can have a huge impact on the overall economy and therefore the market.
The very means by which the central bank utilizes to target the inflation rate are essentially fundamental mechanisms of currency supply. That being the case, it’s a hard argument to make that the central bank policy doesn’t pull strings in the forex market when they control one half of the variables in supply and demand curve. There are most certainly limitations to central bank policy, and under extraneous circumstances the markets will entirely follow the beat of its own drummer, but by and large, the beat the foreign exchange market follows is the one the central bank is drumming.
I also wouldn’t be able to argue that price represents human kinds unified subconscious. The uneven distribution of global wealth assures that this is not the case. You can have one large entity, hedge fund, individual investor, who can have an opposing view to 90% of the other market participates, but through sheer account size, can outweigh the other market participants and move the market against the value of what the collective perception of “fair value” is. In a scenario like this, the assets price is then more accurately described as a reflection of a single persons perspective, rather then a collective group’s “subconscious”. Small cap stocks are a great example of this.
Interesting response. Thank you for solid communication.
The point I am making is that monetary policy is a response to inflation/disinflation and can influence the market because I mean who wants to trade against the Central Banks right. But lets say for example monetary policy was to do nothing. Do you think that the intermarket cycles would stop? Can you say for sure that the long term relationship and patterns between global bonds, stocks, commodities and currencies would stop? I don’t think so. Central Banks do play a role in helping to entice market participants to fight greed/fear. But I believe there is an underlying natural force that ultimately dictates the major market reversals and overall longterm profile.
Let me see if I can clarify a little. Our global economic scenario changes right, yes it does. Well what is the catalyst for these changes? Human behavior…wars, changes in economic data based on human actions. Another catalyst is the market itself (also human psychology), the long term global intermarket cycle specifically. There is a pattern there and this is by far the most impactful variable to the global economy, market prices themselves. For example based on the long term intermarket cycle, stocks may be due to drop in prices. Stocks are not going to wait for economic data to synchronize with whats about to happen. Stocks will just drop and then economic data all of sudden registers the impact. This is not always the case but I’m just trying to depict a probable situation, and the logic behind my beliefs.
GlobalMacro did you learn your lesson not to try to catch falling daggers? 
Today’s trade is usdcad long. The loonie has been weakening on global growth concerns which have spilled over to the oil market, which the currency is correlated to. Oil supply has increased over the last few months as the Libyan oil comes back online, this is also occurring while demand for oil has decreased as expectations for global growth have been cut. The affects of reduced demand and increased supply can be clearly seen in the oil charts as it has been in a free fall.
The pairs failure to fall despite a failed attempt at the resistance line at 1.1270 indicates that this will be broken soon. Even more significant is that it failed to fall further despite the Feds doveish FOMC minutes released last week and doveish comments from Fed members over the weekend. My entry is at 1.1225 with a 50 pip stop and a 125 pip TP.
Here is the daily usdcad chart with the usoil ticker overlaid behind it. The resistance at 1.1270 is going to be targeted until oil finds a bottom, once this line is cleared it should be a quick ride to 1.1350.
[QUOTE=“GlobalMacro;660687”]Next trade - gbpusd long.
UK has two key economic data releases this week, the CPI and their employment numbers. The employment data is likely to be decent, and this supportive of the pound. The real dynamic information however came over the weekend with members of the federal reserve expressing a willingness to hold back on rate increases even through next year. The dollar’s bull trend has been losing momentum over the last few sessions, and the UK is one of the few economies that’s doing just as well as the US. The gbpusd should stabilize and is likely to test higher over this week.
Currently the pair is in a range, and currently price is at the bottom of this range. I’ve longed at 1.6060 with a 50 pip stop and a 100 pip target.[/QUOTE]
This trade hit SL as the UK CPI had a big miss. Prime example of how data moves the markets. The lower CPI reduces the markets expectations of the central bank raising rates, which are being expected sometime at the beginning of next year. A pushed back timeline for the first rate hike naturally weakens the currency. The employment numbers today out of the UK ought to be solid, which will probably see the pound bounce higher as a result. Don’t get caught trying to short it now.
It’s worth noting that falling oil price have contributed dramatically to the lower CPI. Lower oil prices is a good thing for consumers as they have more money to spend elsewhere. Food prices dropping was another factor. This may be the result of Russia food import sanctions against Europe which has driven prices lower as food exporters can’t sell all their produce without the Russian demand.
Along with the usdcad long, another trade I am in is a short euraud position at 1.4510.
More euro zone data came in weak last night proving further evidence of stimulus need from the ECB. Draghi can not cut interest rates any lower then they are, so the next move the market will be expecting is broad based bond purchases. Euro is 100% in a bear mode right now. The Aussie has also been weakening due to iron ore prices falling and concerns about chinas growth hits the markets, but in comparison, Australia’s economy is in much better shape then the euro’s and with the Feds reducing expectations for quicker hikes, the higher yielding Aussie should begin to stabilize, pushing euraud lower.
SL for this trade is 50 pips, TP is 100.
Currently a double top is indicating strong resistance at 1.4585.
[QUOTE=“GlobalMacro;660894”]Today’s trade is usdcad long. The loonie has been weakening on global growth concerns which have spilled over to the oil market, which the currency is correlated to. Oil supply has increased over the last few months as the Libyan oil comes back online, this is also occurring while demand for oil has decreased as expectations for global growth have been cut. The affects of reduced demand and increased supply can be clearly seen in the oil charts as it has been in a free fall.
The pairs failure to fall despite a failed attempt at the resistance line at 1.1270 indicates that this will be broken soon. Even more significant is that it failed to fall further despite the Feds doveish FOMC minutes released last week and doveish comments from Fed members over the weekend. My entry is at 1.1225 with a 50 pip stop and a 125 pip TP.
Here is the daily usdcad chart with the usoil ticker overlaid behind it. The resistance at 1.1270 is going to be targeted until oil finds a bottom, once this line is cleared it should be a quick ride to 1.1350.[/QUOTE]
This trade hit TP for 100 pips. My euraud short I closed at break even, it got to 60 pips profit then came back to my entry and I don’t want to see if it retraces further.
Today’s crazy move with the dollar losing 150 pips to most currencies in a brief time period is testament to how unbalanced the positioning is in the dollar right now. When everyone is long on dollar, it is going to be extremely sensitive to bearish news, which occurred today.
I’m curious to see if anyone here knows why the Japanese yen is a “safe haven” currency. Why is it that when global market sentiment is pessimistic, the yen appreciates? I can add to the discussion but I want to see if anyone else wants to take a stab at it first.
This is starting to look like 2008. Equity markets are plunging on ebola fears and economic figures that are suggesting global slowing. Oil is decimated. This is a no brainer to long usdcad. Long again at 1.1310. TP will be 180 pips, SL will be 50 pips.
S&P just getting destroyed here. The bull trend for it is now officially over.
The usd selling off a few hours ago provided a good pullback for a re-entry to long.
Hi Global,
We are talking of someone who encountered the ‘Asian Currency Crisis’ and decided to push interest rates up, kind of similar to the doctor hitting you with one of those little hammers on the knee, and wow - sent the stock market into a spiral and triggered a reaction that is still very much in the mind of the Fed today, and still being felt in the lives of ordinary people over twenty years later.
Or is it because of that very folly, is it because ordinary people, investors/savers, who went through that turmoil, people who are renowned for being canny savers who have used their hard earned savings to invest outside of the folly, but in times of turmoil - home is best.
[QUOTE=“peterma;661883”]
Or is it because of that very folly, is it because ordinary people, investors/savers, who went through that turmoil, people who are renowned for being canny savers who have used their hard earned savings to invest outside of the folly, but in times of turmoil - home is best.[/QUOTE]
There you go. There are a few theories floating around out there but the one that makes the most sense would be the one that recognizes the nature of Japan’s economy and the nature of its investors.
Japan is an extremely wealthy country (was the worlds number 2 economy by GDP up until a few years ago), with a savvy and affluent population when it comes to growing their money. Due to it being an island nation without an abundance of natural resources, and one that is already fully developed, the opportunities for domestic growth are much less then what can be found abroad. When you have wealthy corporations and a wealthy populous looking for yield, you get a country which collective investment portfolio is HEAVILY weighed towards foreign holdings (which means a portfolio heavily denominated in foreign currency).
A risk positive environment of solid global growth, strong emerging market performance, and loose monetary conditions is indicated by rising equity markets over the globe. In this type of environment, portfolio flows are strongly outflowing from Japan for the reasons mentioned above.
When this sentiment is soured for any reason (growth concerns, political turmoil, or military conflict), naturally the investor reaction is towards capital protection. Since the Japanese investment portfolio is so heavy into foreign investments during normal market conditions, the affect of “bringing the money back home where it’s safe” is huge and is where the “safe haven” flow affect comes from.
Rebalancing foreign investments back into the domestic markets requires the japanese corporations, funds, and investors to buy back the yen in order to repatriate the portfolios. This affect has become so well established at this point, that it creates its own anticipatory flows from speculators which accentuates the moves when they do occur.
Good post, the day after your original post the WSJ ran an article on this very subject.
In Currency Markets, The Safest Haven Is Yen, Not the Dollar - MoneyBeat - WSJ