Forex Training Blog

The U.S. Conference Board’s monthly measure of consumer confidence produced a reading of 46, versus 56.5 in January - its lowest level since last April. Economists had expected a reading of 55.  Such results paint a bleak picture forthe Canadian economy, given that 75% of its exports are destined for the U.S.market.

Submitted by Peter R. Bain, Tue., Feb. 23/10:

Trading is about probabilities – price will ‘probably’ do this or that, based on evidence and sound judgment.  You have to put your emotions in your hip pocket.After all, this is a business, and should be treated as such.

Every business has good and bad inventory. Some of it has to be thrown out, just as some trades will go wrong, and they have to be forgotten about (although lessons learned remembered for posterity).

When you have a bad trade, jump up on your chair, and scream at the top of your lungs, ‘NEXT!’  Very empowering.  Puts you in the driver’s seat.

You should initially be striving to achive 20 pips a day and, as long as your win-to-loss ratio is high (seven out of 10), you will be well on your way to trading success.

Lots of apartments available in the new city of Ordos in the province of Inner Mongolia.  Many apartments sit empty – a possible sign of a real estate Bubble produced by the massive infrastructure spending initiated by the Chinese Government to deal with the global economic meltdown.

Investors are still worried about the European situation regarding the national debt in Greece and beyond.  Add to that the Fed raising the discount rate last week, and you have legitimate concern over the robustness of the recovery.  Commodity prices softened, and investors took some money off the table.  That didn’t help either.

Investors have been cashing out of commodity funds, after pumping record sums into these asset classes in 2009.  To date, this year, more money has shifted away from these vehicles than any of the other eight major groups that fund-tracker EPFR Global tracks.

Why?  Concerns over central banks reining in credit, China’s latest moves to calm speculative fever, a robust U.S. dollar (in which most commodities are priced), and sufficient stockpiles – to wit, inventories of oil are high, and demand is anemic, at best.  Refineries ended 2009 with the lowest capacity-use level in two decades.  Translation: there’s lots of oil around, and crude could very well be over-priced.  

First it was the Greek crisis.  Then, it was China’s move to cool an overheated credit market.  Banks were ordered to boost their reserves for the second time this year.

Hal Vogel is certainly not surprised by all the market turmoil.  He is a Wall Street veteran, who owns his own investing and consulting firm.  He strongly believes that the market is primed for a trip south, envisioning a sizeable correction of sorts, or perhaps something even worse.  Collapse?  Crash?  You pick your choose.

He attributes the market rebound of 2009 to the influx of government capital into the financial system.  People climbed on board, thinking the worst was over, and anticipating better corporate earnings ahead.  Better they were, and then some, as companies slashed costs.

A significant rally from the lows of last March ensued, but now what?  Assuming the economy picks up, and absorbs the credit unloaded by the central banks, interest rates will rise, and money will flow less freely into speculative markets, as credit is diverted to the expansion of real businesses.

Alternatively, the recovery could stall, in which case credit would stay where it is in the liquid markets, and a W-shaped recession would follow.

Mr. Vogel is aligned with the second scenario, pointing out that there is a distinct lack of credit expansion by U.S. commercial banks.  He sees a down leg in the market and an extended period of disappointing stock market performance.  Of course, things could get a whole lot worse, especially if commercial bank lending remains anemic, in which case a crash might very well be in the cards.  

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Traders who trade the forex are looking to make as much money as possible with the least amount of their own money.  This is called ‘leverage.’  They benefit from very high liquidity, combined with low margin requirements.

Margin is ‘your money.’ It is amount of money you commit to your trading account at a broker as insurance, in case you incur losses from your trading.  Of course, you can lose it all, if you’re not careful with your money management – i.e., use of stops, and not risking more than 2% of your trading capital on any one trade(s).

Stop loss refers to the total amount of money you are prepared to risk on any given trade(s).

Leveraging refers to that amount of money that a broker will let you ‘play with’ – usually expressed as a ratio, the most common being 100:1.  In this instance, with just US$1,000. in your trading account, you would be able to trade with US$100,000.  This ‘borrowed money’ is depicted as lots, and is traded by placing ‘positions.’

If you are given a choice as to which level of leverage to use, be careful not to go too high, so as to protect your capital, and not get wiped out.

Where you are required to deposit one percent of the total transaction value as margin, and you intend to trade one mini lot of USD/CHF, which is equivalent to US$10,000., the margin required would be US$100. Thus, your margin-based leverage would be 100:1 (10,000:100).  Of course, you can do the math, if the CFTC gets their way, and reduces leverage to 10:1 (which is a safer way of trading, by the way).

Just remember that you should monitor your trading in terms of pip movements, which are magnified by the concept of leveraging. A small price movement, expressed in pips, can represent a substantial sum of money, the higher the leverage. Accordingly, profits/losses can be sizeable, further reinforcing the notion that 10:1 leverage is not a bad thing.
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Last week, a report out of London warned that low interest rates are drawing money into oil, gold, copper and the exchange-traded funds that are tied to them.  As a consequence, we could be faced with yet another bubble set to burst just as soon as the central banks start jacking up their rates.

Trouble for commodities is trigger-happy investors who pile into the U.S. dollar at the slightest hint of fear, as we saw recently with concerns over debt-ridden Greece, Spain and Portugal and a possible bond default by Athens.  A rising USD precipitated a fall-off in oil, copper and gold prices.

Data shows U.S. unemployment claims increase.  Also, during the Apr. 08 to Mar. 09 time period, there were ~ a million more jobs lost than previously reported.

Commodity prices plunge, with oil down 5%, copper off 3.2%. Oil consumption among OECD countries, which dominate world oil consumption, remains below levesl from a year ago.  Supplies have been growing faster than demand.

S&P500 adds to its woes, dropping 3.1%, bringing losses to 7.6% since its peak in January – representing the worst correction since the rally began in March.

The New York Attorney General is suing Bank of America (BoA) and two of its top executives for an ‘enormous fraud’ on taxpayers and shareholders over the bank’s 2008 acquisition of Merrill Lynch.

Translation:  Investors flock to the U.S. dollar, sending it to a seven-month high, the loonie to the lowest level since November, and giving a boost to the USDCAD pair.

Forex trading strategies should always take into consideration leverage.  If the leverage is reduced to 10:1, according to CFTC’s better wishes, it would cost 1000 units of currency to control 10,000 units of currency, for a mini account. So, yes, if a person were to go nuts, and have 10 positions on all at once, obviously you’d be margined out.

So, definitely, people who over-leverage (or at least use leverage very aggressively) are going to have to pay close attention to this. All the other moderators in the LiveConnect room do NOT let their leverage exceed 1% in total overall risk of all open positions.

So, really, even if leverage were to be reduced to 10:1, it’ll have no effect on the way we trade. This is why it’s just so terribly critical that traders really understand how important a role that risk plays in trading, and incorporate risk management strategies as part of their overall forex trading strategies. Undisciplined traders are going to continue to try to hit the big homer by using lots of leverage and, although it can work out at times, eventually (at least in my experience of over 30 years) their account will be toasted and roasted.

Vic Noble
www.forexmentor.com

Major Canadian bank is warning that U.S. housing prices are in for a double-dip decline.  Related equities that have already priced in a recovery in that sector will suffer as a result.  Sectors from forestry to banking could be caught up in the downturn, according to that bank.

The bank reasons that any semblance of stabilization in the U.S. housing sector Is just really a reflection of a badly damaged market being unduly influenced by temporary tax incentives.  Accordingly, a sustainable rebound is not likely.

The bank anticipates further weakness, noting that supply will continue to outpace demand, mortgage rates will head higher, and the government’s homebuyers’ tax credit will finally expire.

The bank sees a further decline in prices of five to 10 percent over the next two years.

There are close to two million mortgages that are more than 90 days delinquent.  Another 2.3 million properties are in foreclosure,  Add that to the mix, and you have an inventory of more than eight million units on the market - a record high, representing 16 months of supply.  And, as if that is not enough bad news, 10 million households are now in a ‘negative home equity’ position of worse than 20 percent.

Translation: many homes are now worth at least one-fifth less than their owners paid for them during the sub-prime housing bubble.  ‘Strategic defaults’ may be the only option for some people, wherein they simply walk away from their mortgages.  All of these factors make a recovery in the housing market seem implausible, especially given the fact that there are 24 million Americans now out of work.

Peter Bain
www.forexmentor.com