Happy Trading 2006

I wanted to wish everyone a happy trading experience in 2006!

Popularity: 1%

Trading in the Zone: The 5 Fundamental Truths

I finished reading "Trading in the Zone" by Mark Douglas yesterday.  For those of you who haven’t heard of it or read it, I would highly recommend it.  Douglas doesn’t offer any specific strategies to becoming a successful trader but advises that the first step to becoming a successful trader is to accept the psychological realities of trading. 

A lot of what he advises, I have consciously accepted but the goal is for my subconscious to fully accept it so that it actually becomes part of who I am.  Our beliefs are engrained in our minds and a lot of these beliefs don’t allow us to think like successful traders.  The process by which we can start to think like successful traders involves "deactivating" these engrained beliefs and activate new beliefs.  The new belief will take form and become part of our subconscious.

He mentions the importance of the 5 fundamental truths which we must train our minds to accept:

1.    Anything can happen
2.    You don’t need to know what is going to happen next in order to make money
3.    There is a random distribution between wins and losses for any given set of variables that define an edge
4.    An edge is nothing more than an indication of a higher probability of one thing happening over another
5.    Every moment in the market is unique 

Here are his 7 principles of consistency:

1.    I objectively identify my edges
2.    I predefine the risk of every trade
3.    I completely accept the risk or I am willing to let go of the trade
4.    I act on my edges without reservation or hesitation
5.    I pay myself as the market makes money available to me
6.    I continually monitor my susceptibility for making errors
7.    I understand the absolute necessity of these principles.  I never violate them. 

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The Future of the Dollar

There is an article in the latest issue of Newsweek that doubts the US Dollar will be able to remain bullish in 2006 for several reasons:

1.    US record trade deficit
2.    End of interest rate hikes in the US with the start of interest rate hike cycle in Eurozone and Japan
3.    China’s inability to continue its USD buying spree due to political reasons and possible Yuan revaluation
4.    US Manufacturers statement that the USD must decline by 12 percent due to rising energy prices
5.    Gulf Coast rebuilding costs
6.    Growing toll of the Iraq war

There’s a lot facing the dollar in 2006 but that’s also what "experts" thought at the start of 2005.

http://www.msnbc.msn.com/id/10513234/site/newsweek/ 

Popularity: 4%

Week 4 Performance Review

Yet another week with low volume where we see Friday prices positioned at the low or high for the week with the advantage going to the USD:

Ranges for the week

EUR/USD: 1.1778-1.1931 (currently 1.1788)
GBP/USD: 1.7129-1.7408 (currently 1.7189)
USD/CHF: 1.3050-1.3197 (currently 1.3182)
USD/JPY: 116.17-118.16 (currently 117.84) 

Week 4 was another losing week for me (-15 pips, -$242, 4 winning trades, 6 losing trades)

After 4 weeks of trading, I’m still up 123 pips and $1100.  If I were trading full-time, the $1100 wouldn’t be enough to cover a majority of my expenses this month and I’d probably be homeless.  That is why I’m holding on to my full-time job for now until I can see consistent returns.

This week my charts got "fatter" as I added more indicators and moving averages. 

In week 1 and 2, I was in "Raghee Horner" mode and my charts only had the wave and MACD indicators.   Weeks 1 and 2 just so happened to be my most profitable.  I wasn’t comfortable with just going through the motions of using only her strategy so in weeks 3 and 4, I’ve been experimenting more with EMA’s (8,21,50,100,200), CCI (Thanks Andrei), candlestick patterns, and other indicators like momentum, stochastics, RSI, and bollinger bands.  Weeks 3 and 4 might have been a good week to take a sabbatical to just watch the charts and train my eye to spot patterns as they emerge as Andrei mentioned in one of his helpful comments this week.

In the meantime, I’m reading a lot and trying to learn as much as possible.  I followed others advice and picked up a copy of "Trading in the Zone: Master the Market with Confidence, Discipline, and a Winning Attitude."  I’ve also been lightly reading, "The Candlestick Course" by Steve Nison and "Day Trading the Currency Market" by Kathy Lien.  Lien’s book is much better than I thought and has given me additional insight into the market that I otherwise would have missed.

Happy New Year!

Popularity: 4%

Trading the Markets Intraday Newsletter

It’s quiet and thin out there tonight….  USDJPY was bid up through the 118 level and then collapsed and fell 100 pips on no volume. This is end of year no volume moves and there isn’t much to do at this point except wait out the long holiday weekend — preferably flat so it can be enjoyed instead of wondering how a position is going to open up the next day — and get ready for 2006.

Popularity: 3%

Forex Carry Trades

Carry trades entail going long on a high yielding currency and shorting a low-yielding currency. 

For example, New Zealand currently has interest rates at 7.25%.  Japan has a 0% interest rate in place.  To execute the carry trade, one would go long on the NZD/JPY currency pair.  At the close of each day, you would profit 7.25 percent or 725 basis points.  This assumes that the spot rate remains static.  If the NZD/JPY pair is in an uptrend, you profit from the interest and the capital appreciation.

Carry trades are said to work best when investors are in risk-seeking mode or low risk aversion.  Inversely, they are least profitable during times of high risk aversion.  

This is hindsight and correct me if I’m wrong but if you had gone long on the NZD/JPY back in the beginning of 2005 and exited at the December high, you would have gained an estimated 1200 pips plus the interest of carrying the trade. 

1 lot trade

Capital Appreciation: 1300 pips x 8.50 = $11,500
Interest: About $14 a day x  240 days = $3,360

The pair has since retraced about 900 pips. 

$14 a day in interest isn’t alone worth it for the average day-trader which is why carry trade strategy is one of the favorite amongst global macro hedge funds and investment banks.  The interest alone for an investment bank with high leverage could be quite lucrative.

Popularity: 3%

Today’s Trade the Markets Videos

I haven’t had time to watch these yet.  I’ve been quite busy.  Check them out though.  Their only 10 minutes long altogether:

Hubert’s Video Link:

http://clicks.aweber.com/z/ct/?iQ4Zulvt6xYv_xXbDs.PwQ

John’s Video Link:

http://clicks.aweber.com/z/ct/?0xcG8Nu87MDOkIpmLsHvhQ

Popularity: 3%

What is an inverted yield curve?

I’ve been hearing a lot about the inverted yield curve on Bloomberg radio the last couple of days so now is the best time than any to mention it. 

An inverted yield curve occurs when long-term interest rates have lower yields than short-term interest rates.  It’s actually a pretty rare occurrance, the last being about 5 years ago.  What does this say about the economy? History says that there could be an oncoming recession. 

Here’s a little more from investopedia:

These yield curves are rare, and they form during extraordinary market conditions wherein the expectations of investors are completely the inverse of those demonstrated by the normal yield curve. In such abnormal market environments, bonds with maturity dates further into the future are expected to offer lower yields than bonds with shorter maturities. The inverted yield curve indicates that the market currently expects interest rates to decline as time moves further into the future, which in turn means the market expects yields of long-term bonds to decline. (Remember that as interest rates decrease, bond prices increase and yields decline.)

You may be wondering why investors would choose to purchase long-term fixed-income investments when there is an inverted yield curve, which indicates that investors expect to receive less compensation for taking on more risk. Some investors, however, interpret an inverted curve as an indication that the economy will soon experience a slowdown, which causes future interest rates to give even lower yields. Before a slowdown, it is better to lock money into long-term investments at present prevailing yields (because future yields will be even lower).

What does an inverted yield look like compared to a normal yield curve? (Click thumbnail for full-size image)

Left: Inverted Yield Curve    Right: Normal Yield Curve 

 

 

 

 

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Day Trading the Currency Market

I was browsing Kathy Lien’s book, "Day Trading the Currency Market" today in the bookstore.  The book was just released on December 2nd, 2005 so it may very well be the newest book related to Forex out there.  I know Kathy from her articles on the market that are on dailyfx.com and tradingmarkets.com.  I believe her official title is Currency Strategist.

The book is a little over 225 pages and contains the standard chapters on fundamental analysis, historical events in Forex, and technical analysis.  It was refreshing to see some new content unrelated to other forex books such as the chapters on What Moves the Currency Market in the Long Term, What Moves the Currency Market in the Short Term, What are the best times to trade for individual currency pairs, trade parameters for different market conditions, and profiles of the major currency pairs.  She also includes her recommended trading systems, one of which I am about to mention:

Here are her strategy rules for entering a Long Position:

1.    Locate a currency pair trading well below its intraday 20 SMA on a 10- or 15-minute chart.

2.    Next, enter a long position several pips below the figure (no more than 10)

3.    Place an initial protective stop no more than 20 pips below the entry price

4.    When the position is profitable by double the amount that you risked, close half of the position, and move your stop on the remaining portion of the trade to breakeven.  Trail your stop as the price moves in your favor.

Reverse the strategy rules for a short position.

There are conditions for using this strategy, the most important being that no major economic numbers should be released during this setup.  

She states that this strategy should work best for pairs with tighter trading ranges, cross, and commodity currencies.  This strategy does work for the majors but under quieter market conditions. 

Popularity: 3%

Trade the Markets Newsletter

Here is today’s Trade the Markets Newsletter:

The currency markets have been consolidating today with some obvious trends in place as the dollar index pushes its way higher. Cable short looks great but the play I’m taking is going long USDCHF at these levels (1.3170) and long USDJPY at these levels (117.38). For scalp trades you can use a 30 pip stop with targets at 3192-3212 on usdchf and targets of 117.80 on usdjpy. I’m looking at a longer term trade (a few days) and will be starting out with a 60 pip stop and targets of 1.3230 and 118.30 respectively.

Popularity: 3%

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