Emotions are a trader’s worst enemy

The content of this newsletter is for general information and educational purposes only.

You can’t trade with them, and you must trade without them. If you can't keep your emotions in check while trading, you will lose money and lots of it. We want to help minimize this by understanding the two most common emotions interfering with trading results:

FEAR AND GREED

Fear is the most ever-present of the trading emotions, followed in a close second by its partner, greed. I am sure you have often heard that these two are the emotions that drive the market. When you are a trader, you are always under the influence of at least one of these two emotions, even if you don't have any trades on.

Fear and greed are both held in our minds at the same time. Fear motivates retreat. Greed motivates attack. Since they are conflicting emotions, they will immobilize a person until one or the other dominates and overcomes the other. The strongest emotion always wins, and both emotions are necessary, as fear without greed does not move forward. If you had only fear, you would have no reason to trade. If you had only greed, you would have no force to protect you against excessive loss. History shows that, in trading and investing, we need in some form both fear and greed. We need to properly balance and moderate these two emotions.

We can begin by scaling fear back to healthy caution, and scaling greed back to realistic levels, until we get to our best trading zone. You maintain a realistic hunger for profits, while you also maintain a cautioned alertness to danger. Desire and caution hold your hands while you trade.

The Fear of Losing
The strongest and easily manipulated form of fear is your fear of admitting that you are wrong - fear of having your ego bruised. This fear can cause people to do incredibly irrational things. Most people would rather lose thousands of dollars than admit they are wrong. It is easy to feel ashamed of trading losses, and live denying the problem exists. Without taking the steps to address this problem, it will continue in the future. If you start falling into this cycle, consider working with a personal trading coach. Trading, like business, isn’t personal. The market doesn’t care who makes the money, and money doesn’t care who makes it either.

Impact of Fear and Greed on Your Trading
If you are in a position and the market is going up: Greed is telling you to buy more, and fear is telling you to take profit. If it is going down, fear of being wrong makes you hold onto a losing position, and then greed may convince you to buy more; so, it will be easier for you to come back.

If you are not in a position, and the market is going up: Fear is telling you that you're missing out, but it's your greed that causes you to get in just after the greatest increase, just when it is about to reverse its direction.

If you are not in a position and the market is going down: Greed is telling you to get in as the price is low, while fear reminds you that you'll miss out on this opportunity if you don't act fast. Perhaps if we just felt fear, or just felt greed, we would be able to control our emotions a little better. But it is often impossible not to listen, when both of these emotions whisper into our ears at the same time.

To be a winner in the markets, you can never trade from emotion, and the only way to eliminate emotion is to have the discipline to follow your own plan. It’s said most traders never plan a trade, never mind have the discipline to follow one. If you want to become one of the few market winners, you must ‘plan every trade and trade every plan.’

“For many traders, it’s more important to be right than to make money, these traders will hold on to a loss until the pain of losing is greater than the pain of being wrong.” -- Mark Douglas

China Sells Dollars

Courtesy of our valued member Steve Bishop.

Reuters reported important statements by Zhou Xiaochuan, governor of the People’s Bank of China. He was interviewed this morning at a central bankers conference in Frankfurt. Apparently, Zhou said, "All central banks are trying to diversify. …We have had a very clear diversification plan for several years."

Miller Tabak & Co estimates that China now has over $1 trillion in foreign exchange reserves. Apparently, some $700 billion of these are held in U.S. dollars or dollar-denominated securities. The U.S. dollar came under immediate selling pressure.

Brian Dollan, research director at Forex.com, a unit of the currency-trading firm Gain Capital of New Jersey said, "The prime beneficiaries will be the euro, yen, pound and the Australian dollar." (Interestingly, the last two mentioned have just raised their interest rates.) As far as America is concerned, a weak dollar is inflationary in the medium-term. A weak dollar, in itself, could therefore lead to an increase in U.S. interest rates, as we have forecast, to stem inflation just when a recession looms.

The stagflation we have warned of may be nearer at hand that even we had thought.

Important to know for trading commodity currencies such as CAD and AUD

I looked at the daily futures chart for crude oil. Please note the positive divergence on MACD and Stochastics on the attached daily chart. This is important for trading commodity currencies such as CAD and AUD. These nice charts are available for free at: http://www.stockcharts.com/

By the way, this is a great site for looking at oil, gold, currency futures etc. The charts can be decorated with any indicator. I love it.

Greetings from,

Christoph Lahrs
Albany, CA

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Economic Outlook Commentaries

Hi Peter.

I like reading Bank Research occasionally and I was reading an interesting December outlook from ANZ. ANZ is one of the largest companies in Australia and New Zealand and a major international banking and financial services group, which is among the top 50 banks in the world. Their Economic Outlook is published quarterly and it details the latest views on the international and Australian economies. You can find these economic commentaries at the following link: http://www.anz.com/aus/corporate/EcoComm/Outlook.asp

I find these comments interesting to note, since there is a lot of question going on about how the expected US slow down might affect the rest of the world. The issue of oil reserve surplus in different nations is also interesting to consider in terms of what might happen to currencies in the future. This all serves more a wider view into the future. This is interesting for me in particular in light of what might happen to the extremely undervalued Yen. More and more countries are complaining about the low value of the Yen.

Bank Research is nicely available for free at: www.actionforex.com
Once you are on this site, go to the left side for ‘Forex Analysis’ and click on ‘Bank Research’. You will find links to several banks. I like ANZ and also ISKE BANK for interesting reading and forecasting.

Greetings,

Christoph Lahrs
Albany, CA

JP Morgan Sees CAD Weakness in 2007

Peter

Thank you for being the best mentor on the internet. If I had trusted you from day one, I most likely would have the $200,000 I lost with other brokers back by now. But once you get burned for that kind of scratch, you learn not to trust people in this business. Thanks to you and Seth’s PM Preview, I am starting to get some back and learning to trust again. I have included some bad CAD new for all those naysayers.

“JP Morgan continues to expect USD/CAD to rise further than consensus in 2007 as oil stabilizes and Canada’s balance of payments deteriorates.” JP Morgan is forecasting USD at C$1.1600 in December 2006, C$1.1400 in June 2007 and C$1.1800 in December 2007.

Thank you.

Constantine

Carry Trade explained by CTA Chris Lori

What is a Carry Trade?
A Carry Trade is a strategy in which an investor sells a certain currency with a relatively low interest rate and the funds are used to purchase a different currency yielding a higher interest rate. A trader using this strategy attempts to capture the difference between the rates, which can be substantial depending on leverage used.

What is Your Risk?
The risk is the possibility of the currency cross rate moving against your position.

Short Term Interest Rates
JAPAN = 0.25%
SWISS = 1.50%
EURO = 3.25%
CAN = 4.25%
UK = 4.75%
US = 5.25%
AUS = 6.00%

Other factors to consider:
- Banks and Hedge Funds can borrow at near zero IR’s in Japan, or at low rates in Switzerland.
- They can lend anywhere in the world that offers higher yields – i.e. US Mortgages etc.
- This can fuel asset bubbles in spite of CB’s effort to control growth and over-heating of the economy.
- What happens to the Carry Trade when the market focus becomes diverted? Say, back to double deficit, or some other factor we are not presently considering?
- Oh, that will never happen! It’s going to the moon!

More factors:
- When was the last time the world saw the carry to this extreme?
- Watch the Bank of Japan to hint at tightening, which could spark an unwind.
- An unwind occurs when Carry Traders buy back Yen. Look at December 14-15, 2005.

Current JPY Speculation:
- Yen is undervalued relative to fair market value estimates.
- Part of Yen’s decline has been a function of Monetary Policy. Only 1 rate hike this year, lagging all others.
- IR spreads have moved against Yen.
- 2007 could see rate hikes in Japan and moves back into the currency.
- This could also be fueled by weakness in foreign regions and a move out of speculative carry positions.

Please see the link below for EUR/JPY weekly chart example with 1 year rate spread. We see a nice increase in evaluation of this pair along with the correlation between the interest rate differential (blue line) and the cross rate evaluation (orange line), which is reflected in the carry trade.

More carry trade examples with strategies that can be employed can be found in the guest AM Review from November 6, 2006. http://www.forexmentor.com/

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Canadian Economy

Article from SFO Magazine on the Canadian economy, courtesy of Bruno Petit from Belgium (our valued member).

Canada Data Reduce Chances Of Rate Cut -- November 03, 2006
After a tepid summer, Canada's job market showed signs of heating up again in October, a development likely to advance the impression of continued policy tightening at the Bank of Canada, and further invalidate any notions that the central bank is preparing a move toward easier policy settings.

Statistics Canada said that employment rebounded with a 50,500 gain in October, building on the previous month's 16,200 increase which, in turn, had followed three months of net job losses.

October's gains helped push the nation's unemployment rate down from September's 6.4% to 6.2% in October, just a shade higher than the three-decade low of 6.1% reached earlier this year.

Consensus expectations had called for the creation of about 18,000 new Canadian jobs in October, with the unemployment rate remaining at 6.4%.

Beyond the headline numbers, details of the October report were also uniformly solid, with full-time employment accounting for all of the gains, and private-sector job gains taking the lead over the public sector.

According to most analysts, October's employment figures are the latest evidence pointing to rebounding Canadian economic growth in the last quarter of 2006, following a disappointing July-September period.

That's an evolution also expected to reduce pressure on the Bank of Canada to move to a more accommodative monetary policy bias, and to back the impression of a prolonged period of stand-pat policy from the central bank, suggested in its recently released Monetary Policy Report from mid-October.

"This basically ices the idea that the Bank of Canada can ease rates anytime soon," said Marc Levesque, chief strategist for North American foreign exchange and fixed income at TD Securities in Toronto. "There's absolutely nothing in this report to convince the Bank of Canada that they need to start cutting rates."

EUR/JPY pair showing clear posture to drop

Peter:
Just wanted to get this off quickly to you. I have been looking over the charts, as Saturday closed markets afford me time to study. I think you are aware of this pair's poise at the moment.

Here are two attached charts (weekly and daily chart) showing clear posture to drop for the EUR/JPY pair. My niece, who is gripped by "trading fever," is calling me every day. She called me this Saturday morning to tell me how she can hardly stand the fact that the markets are closed over the weekend.

Greetings,

Christoph Lahrs
Albany, CA
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I have manged to grab 300+ pip from the USD/CAD pair

Hi Peter.

Thanks for your guidance on the USD/CAD pair to date. I decided to stick to what you were saying about the noise on this pair regarding the fundamental announcements, and sat on me hands.

Today, I have managed to grab 300+ pips from this pair. Your explanations are so clear and precise. I hope everyone else has managed to do the same.

Thanks once again. You are the man.

Regards,

Dave Rutledge
UK

The euro and Australian dollar will weaken against the U.S. currency

Courtesy of our valued member Alex from New Zealand

Nov. 3 (Bloomberg) -- The euro and Australian dollar will weaken against the U.S. currency as the Federal Reserve remains vigilant on inflation, according to Morgan Stanley. The euro, which has gained 7.8 percent against the U.S. dollar this year, will weaken to its lowest level since April, according to a research note written by a team of currency strategists at New York based Morgan Stanley.

The European Central Bank left its target rate unchanged at 3.25 percent during yesterday's policy meeting. Morgan Stanley expects the Federal Reserve Open Market Committee policy makers to hold its target rate steady at 5.25 percent.

“We see the FOMC holding rates steady in December but maintaining a hawkish bias,” wrote New York-based strategist Sophia Drossos. In a telephone interview, Ms. Drossos said the FOMC isn't going to begin reducing its target rate for overnight loans between banks. Central banks have kept the rate steady at three consecutive policy meeting after increasing it 17 straight times since June 2004.

“We don't think the Fed will have the room to cut rates given that growth will hold up relatively well,” she said. “Dollar weakness is overextended.”

The euro rose against the dollar yesterday after European Central Bank President Jean-Claude Trichet pledged “strong vigilance” against inflation while leaving the benchmark interest rate unchanged.

Australian Dollar
The 12-nation currency, which traded at 1.2783 at 5:31 p.m. in New York yesterday, has strengthened since Oct. 26, the day before a U.S. government report showed economic growth had slowed in the third quarter to a 1.6 percent annual rate from 2.6 percent in the second quarter. The euro closed at $1.2694 before that announcement.

The Australian dollar has gained 4.13 percent against the U.S. currency this month, to a nearly six-month high. It will fall to 0.74 by the end of the year from its current 0.77, Morgan Stanley said. Twenty-four of 25 economists surveyed by Bloomberg News last week said they expect the Reserve Bank of Australia to raise the overnight cash rate target a quarter percentage point to 6.25 percent on Nov. 8. Morgan Stanley has twice this year bet on the euro to drop to $1.24, in July and August, from $1.28. It reached $1.248 on Oct. 13, before strengthening to the current price.

Fed policy makers on Oct. 25 kept the benchmark interest rate unchanged for a third straight policy meeting. They meet next to set rates on Dec. 12. Interest-rate futures show traders see about a 16 percent chance the central bank will cut the benchmark interest rate by a quarter-percentage point to 5 percent in January. At the start of last week, traders saw 10 percent odds the Fed would raise rates in January to 5.5 percent.

US Dollar Condition

Dear Peter and ForexMentor family.

I have been following the story about the US Dollar for a while now, and I think we should all be concerned for the long term as far as I can see. The stories about the dollar are getting more and more noticeable everywhere, and they are now getting into the main stream media more and more. Jim Rogers (famous investor and author) was quite clear in an interview from Korea on Bloomberg.com. He basically says that what the US has been doing with the money supply is getting to a dangerous point (deficit and inflated dollar). You cannot thin the value of the dollar forever without grave consequences for the whole world and in particular for the US. Now there is also more and more open talk about recession. So far the official spinners have been able to maintain an outwardly polished image for the dollar by choosing what data to report and what not to report, but they will not be able to do this forever. The elections will be over for sure, the party will also be over soon! There are now more and more National Banks talking about putting their reserves into euro and yen. The latest have been Russia, Switzerland and there is also talk from Saudi Arabia and China. This is not good for the dollar.

Yen to Rise as Central Banks Buy Currency, ABN Says By Chris Young
Oct. 31 (Bloomberg) -- The yen will appreciate as central banks join the Swiss National Bank in raising their holdings of the currency to take advantage of its lower value and prospects for higher Japanese interest rates, said ABN Amro Holding NV.

The Swiss central bank is the latest to signal renewed interest in the yen as it trades near the weakest this year against the dollar and a record-low versus the Euro. Russia's central bank this month said it was considering lifting its holdings of yen, potentially reversing a trend that has seen the currency shrink as a proportion of central bank reserves.

Different Currencies
The United Arab Emirates, the second-largest Arab economy, may reduce its holdings of dollars by almost half in an effort to reduce its dependence on the weakening U.S. currency, the country's central bank governor said.

The bank wants to eventually lower the share of dollars in its foreign currency reserves to a range of between 50 percent and 90 percent, Sultan Nasser al-Suwaidi told reporters yesterday in Abu Dhabi. The U.A.E. official said 98 percent of foreign reserves holdings of about $25 billion are currently held in dollars.

The Canadian dollar may have a little hard time going very high given the coming meekness of the dollar and the ongoing value of commodities, which will likely appreciate in the long run. There is a lot of talk about the commodity topic. This issue will impact the Australian and the Canadian dollar in particular in the future.

Greetings from,

Christoph Lahrs
Albany, CA

November 2, 2006
The government announced plans to increase taxes on foreign investors who own the country’s income trusts. They were not impressed, and down went the loonie (up for the FX USD/CAD, that is) – the biggest one-day slide since June 16, and the lowest level in two weeks – making it the worst performer Wed. (Nov. 1/06.) among the 16 most actively traded currencies.

The reasoning here is this new tax measure will reduce portfolio inflows into the nation’s equity market. According to RBC Capital Markets Ltd. (part of Canada’s biggest bank), international investors hold 22% of the income trust funds, with a market capitalization of over C$200 billion.

Canada’s currency has been on the decline for the past two months, due in part to falling oil prices – one of the nation’s main exports.

Source: Bloomberg News

November 1, 2006
Oil and gas drilling contractors expect to be laying off workers next year, as low natural gas prices are discouraging the search for new sources in Western Canada.

Lower oil prices are helping to keep the Canadian dollar in check versus overseas currencies – this because Canada is a big oil exporter, and changes in crude oil prices affect its currency.

Translation: This is all loonie-negative.