Forex Education Perspective: April 2016

Forex Market Commentary

Good traders usually do not move with the crowd; they use their own judgement and take their own opinions and make their own strategies to suit their own lifestyles. Some people like to day trade while others like to trade over a weekly horizon and then there are others who wish to trade long term over stretches of weeks. It all really depends on the temperament of the trader. there is nothing wrong with trading over a short or longer time horizon. it is all down to the individual to choose.

Jesse Livermore b. 1877 d. 1940 was one of those unique characters whose lifestyle and trading methods carry a huge undertone for the moral that I am trying to show.

Immensely talented, the young 'boy plunger' gained a reputation for consistent short tactics, made his first $1000 by the age of fifteen years and became banned from most 'bucket shops' in Boston by the time he was eighteen years. Thereafter, he went to New York City and continued his short-selling strategies at legitimate trading houses, earned his first $3million in 1906 after the great San Francisco earthquake and he made $100 million in 1929 shorting stocks during the great Wall Street crash.

Yet, when the great trader started to listen to other people he quickly lost his money. The fortune he gained in 1906 was lost in 1908 after some bad advice he received to trade cotton which was a market unknown to him as he was a stock trader. Thereafter, painstakingly he rebuilt his fortune towards the great success of 1929 but once again in 1932 he was thought to have listened to people and entered into long commodity trades which never bore fruit as the markets grinded sideways in attrition.

The moral of this story is easy to comprehend

Jesse Livermore made money when markets trended and were volatile like in 1906 and the years leading up to 1929. But when markets went flat as in 1907 and after 1929 the great trader lost money

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In currency trading we thrive on information that moves markets on a dime. Day traders will eagerly await the US NFP reports or FOMC releases like a Bible and week traders will watch their moving averages and other technical information signals to decide when to enter and exit a trade. But the one rule that almost every currency trader agrees on is that when the markets are grinding sideways; do nothing at all! Moreover, since currency markets move in both directions up and down then absolutely the great 'boy plunger' would have made a good currency trader. That is provided the trader doesn't have to listen to other peoples advice!

Today, as I write the USD is in trouble in the short term. Traders were not happy with the FOMC and the inertia of the Japanese Central Bank and so the USD slipped a little where before it exhibited strength. Doubtless it was the Apple earnings report that spooked traders into dumping the Dollar more than anything. But a contrarian trader like Jesse Livermore who tended to take longer term trades would have stepped aside and waited for the market oscillation to wave in favor of the Dollar again. After all; he mastered his entry points in the stock market and the great thing about forex is that you have less sideways grinding action and more frequent wave oscilliation moving price up and down. So doubtless Jesse Livermore would have become a great currency trader moving against the crowd. Keeping in mind the movement of interest rates he would have positioned himself with ease. But woe unto anyone that listens to the so called pundit telling them where to enter a trade. Are you waiting for a golden cross? Are you waiting for a Doji? Whatever the trigger you use, stick with your plan because woe unto he or she that changes plans frequently when trades are entered.

Entering a long trade on the Dollar or a short trade on the Dollar is neither wrong nor right; it all depends on the tactic horizon you have chosen whether for a short term or longer term objective. Choose your own tactics and if they go wrong keep your same framework without listening to others too much.

Pieter Bergli - Trader X16

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Forex Market Commentary

This has been a seismic week! But were not going to talk about the slowing US economy now at 0.5% growth. We're not going to focus on the languid Euro zone because we already knew that at some point the US economy had to slow down and take a breather. Indeed, we are going to talk about a far more dangerous event that's looming dangerously right ahead in the shape of China. Moreover, the worse thing is that if the event horizon ever does reach the tipping point, probably very few smart traders will be prepared for it.

Yes, the Googles of the world, the Microsofts and the Apples and a whole host of US brand names largely failed to impress fund managers and investors with their meager earnings reporting this week. But in any case we were expecting this earnings debacle anyway particularly since half the SP 500 companies have exposure to earnings in foreign markets where the brunt of the global slow down is occurring. Moreover a slow down in the Dow and SP 500 is not a bad thing after all as the USD slows down it's rapid pace of appreciation against the other world currencies. The opportunity cost for institutional money going back into negative bond yields in Europe or Japan, or unconvincing Euro equities, isn't really an alternative prospect for fund managers to take money out of ETFs or US bonds and the USD. So the USD is not going to tank and neither is the SP 500 even if it goes through a mild correction. The FOMC release on Wednesday was key for a hawkish undertone that seems to point that whilst the threat of global risks to the US economy seems mitigated, and whilst US inflation seems under control, still there are all the possibilities for a 25 basis point rate hike in June 2016. Even with a slow-down to an annual rate pf 0.5% GDP growth still the fundamentals for the US economy are sound. Therefore, the USD is not going to tank immediately even if there is a gentle correction and side-ways trading in US equities in the weeks ahead. An equities correction was overdue and the USD needed a breather before it resumes its next wave up with a long march.

Now, coming to the new area of concern that raised itself this week and its nothing to do with Apple stocks falling suddenly and a looming correction in US equities. China once again has got traders nervous. Just when we thought

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that China would manage to grapple with it's huge
problems of corporate debt then along came a spider and showed us a lot more information that has the potential to hit global markets once again. It's that ugly! Currently Chinese debt levels have ballooned to and incredible 237% of GDP. Now putting that into perspective, that is double the debt level at the time of the Lehman's crash in 2008. We already saw what a sneeze China caused in global equities markets last year 2015 and now add this to the Brexit problem and we certainly have two large areas of global risk over the next coming months in case we see a stampede of investors heading out of the UK and Chinese economies. Such developments would be unwelcome as it would lead global money to bid the Dollar and flood into US bonds which will then drive yields lower. The last thing we want to hear about is a US specter of deflation. We only need to look at Japan in the last 30 years to understand the risks of deflation that can appear when bond yields slip into negative territory. What would it take to spark off the China stampede? Very little indeed. China is attempting structural reforms in the banking market but will it be too late because investors are fickle? The whispers going round the trading floors right now are making large bond traders take a closer look at China once again in making the very first short positions. Once initiated, a large trader tends to develop the idea by watching other large traders, and a few shorts could lead to more whispers and even more shorts rapidly building up until the next IMF warning literally brings the whole house down and with it; even the US equities markets as demonstrated last summer 2015. It's that bad. Forget the Apple story this week; there's another story over the horizon looming ahead.

Altogether this week the USD took a beating and so far this year has depreciated about 4% against a basket of major currencies unlike last year where it appreciated by about 20%. Moroever, the COT figures show that some speculators are trying to short the USD now. Such short positions may be a short term move to capitalize on the traditional weakness of USD in Q1. Traditionally May is always a good year for the USD and as soon as the equities markets adjust and ease off the selling pressure we should see the USD coming back to the fore byt the end of May 16.

A completely new global macro trading scenario may unfold as follows:

Short Chinese/ Emerging Market equities and debt + long US equities and debt

= collapse of Chinese markets
= global contagion whereby global equities tank and flight to safety in US Treasury occurs and bids up USD in the process
= Dow comes under pressure and plunges 2000-3000 points before consolidation in a month
= US debt markets become saturated on the long end 10-30 year.
= Investors begin to move out of Treasuries and swoop to grab bargain US equities.
= US strengthens once again in the entire process.

The traditional havens for flight to safety like the CHF and Gold are fast losing relevance in the modern world and in the event of any crisis triggered by Brexit, or on a larger scale, China would lead to international investors piling into the only security worth holding - US treasuries because of the sheer scale of currency movement that may occur and would dwarf nominal value of bullion and CHF trades.

The result would be the next deflationary demise whereby China becomes the may-have been story of the new century. China is fast sinking into a copy cat scenario along the manner of Japan in the 90's and still Japan cannot emerge out of the asset deflationary spiral.

In my global macro analysis the major barometers I am look at for 2016 are as follows:

US Dollar - 93.054 -0.710 -0.91% - the global base currency (hedge funds are neutral at the moment waiting fresh signals from the US Fed on 1-2 25 bp rate hikes later this year. USD needed to pause as GDP slowed down for Q1 16 but Q3 should see GDP expansion and thereby push forwards the USD again. If the China crisis part 2 emerges this year there will be a stampede for US products)

EUR/USD - 1.14535 +0.00951 +0.84% - the 2nd liquid currency
(hedge funds are neutral at the moment with revised shorting if a spike to the 1.20 mark and a China crisis could sink the Euro to the 1.05)

GBP/USD British Pound 1.46110 -0.00060 -0.04% - the 3rd liquid currency

(hedge funds may shortif GBP breaches 1.50 but a Brexit volatility will increase nerves and widen uncertain trading ranges)

30 DAY FED FUND May    99.6375   0.000   0.00% the basis for US rates
(hedge funds are shorting at every spike)

DJI 17773.64     -57.12 -0.32% the body for US equities
(hedge funds are buying at every dip as the market corrects itself after this week's disappointing earnings season for Q1 16 and GDP data. But a China crisis has the ability to push the Dow down 2000 points just like that whereas a stumbling Apple was shrugged off - hedge fund traders are selling deep out of the money calls but very reluctant to sell puts commanding very high premium now)

SP 500    2065.30     -10.51 -0.51% the core engine for US equities
(hedge funds are buying at every dip but nervous now the China whisper is spreading around the top trading units - straddles are coming into play)

VIX 16.90 + 0.4 - 2.50% - the volatility of US stock options

Crude Oil WTI - 46.02 -0.01 -0.02% - a barometer of world trade
(hedge funds are shorting at any possible test of the 50 mark and this week saw some strong gains in WTI as a result of short term Dollar weakness. A China crisis has the ability to sink crude oil in line with the Goldman Sachs prediction to 25 Dollars a barrel - volatility is creeping back into the crude market)

Gold - 1292.995 +27.420 +2.17% - a hedge against inflation
(hedge funds are going to short the next challenge in the 1300 area but a China crisis could lead Gold over the 1300. Gold has gained dramatically this week over 60 Dollars in an impressive showing as USD came under pressure thus presenting investors with a chance to buy gold cheap. Hpwever, in the longer run the USD will continue to grow and gold will thereby sink in price over the longer term.)

Forex Education Perspective

Saturday 30 April 2016

If Jesse Livermore Was A Forex Trader.

Global FX Weekly - 28 April 2016 - China Crisis Part 2