Forex Training Blog

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
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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
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The old saw of buying stocks and holding them is being severely tested.  The world’s leading stock indexes all ended the first month of 2010 in red territory.  Investors withdrew more money from U.S. equity funds in the final days of January than in any single week since mid-2008.  Emerging-market equity funds suffered their worst withdrawals in six months.

The bear market rally appears to have peaked, and equities appear to be in the midst of a major downturn.  Rallies are choppy, and fade on light volume.  As selling dissipates, no new buyers are stepping up to the plate.

According to Mr. Husebye, a market veteran and technical analyst, equities are in for a 50-60% correction to the downside from here, taking out the lows of March, 2009.  He further asserts that gold will plummet below US$700., and that copper and other base metals will plunge.  He goes on to say that the Canadian dollar, which is heavily commodity-sensitive, will slip below 87 cents (U.S.) by mid-year.

Robert Prechter, a well-known U.S. forecaster, has already gone on record as declaring that the next phase of the bear market may already have begun.  He is an Elliott Wave proponent - a theory that Mr. Husebye also subscribes to.  Such theorists are warning that the worst is yet to come.

Mr. Husebye’s call is for moving into U.S. dollars and government bonds.

Peter Bain

Economic reports from both Canada and the United States were better than expected Friday, but investors weren’t buying it, sending stock markets down on both sides of the border.

Amidst worries about fiscal turmoil in Europe and dropping technology stocks, stock markets in the U.S. dropped Friday, pushing the S&P 500 to its worst monthly decline since February 2009.

China moved to rein in lending at its big banks, and Japan’s credit rating has been cut to negative from stable by Standard & Poors.

Amidst worries about fiscal turmoil in Europe and dropping technology stocks, stock markets in the U.S. dropped Friday, pushing the S&P 500 to its worst monthly decline since February 2009.

China moved to rein in lending at its big banks, and Japan’s credit rating has been cut to negative from stable by Standard & Poors.

China moved to rein in lending at its big banks, and Japan’s credit rating has been cut to negative from stable by Standard & Poors.

Robert Prechter, who predicted the crash of ‘87, is calling for another big leg down for stocks as part of a bear market that began in  1999.  He was previously quoted by Reuters as saying that the 2007-2009 crisis in the markets and the U.S. recession presaged a severe longer economic slump.  He told Reuters that he sees the economy  struggling for years to come, suggesting that we may have begun the next phase of the bear market.  He further indicated that the S&P 500 could drop below the 666 mark hit in March from 1092 at the close last Tuesday.

Meanwhile, the S&P/TSX composite index has fallen six percent since eclipsing the 12,000 mark earlier in the month as commodities, including gold and oil, have softened, and the Canadian dollar has suffered too.  Who could have guessed?  The Big Dogs have been calling for a weaker Canadian dollar for quite some time now (translation, stronger USDCAD pair).

Peter Bain
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What an oxymoron!  When you are trading currencies, just when you think you know which way to pull the trigger, price throws off another clue that maybe you have it figured wrong.  Find out in today’s lesson how to know what price’s next move is.

Check out today’s lesson at this link:
http://www.forexmentor.com/forex-trading-videos/

This is just one of the many no-nonsense strategies, techniques and tips you will find when you become a member at Forexmentor.

See you at the bank – and at the top. 

Peter Bain
www.forexmentor.com

Ever wonder if you can make it in this business called forex trading?  Well, think no longer because today I’m going to show you how one of our members figured out which pair to trade, and how he engineered his entry/exit points.  Not rocket science – just plain ole common sense, which isn’t common these days.  Follow Ben’s lead, and you too will become a rockin’, sockin’ currency trader.  Check it out.

Here’s the link:  http://www.forexmentor.com/forex-trading-videos/ 

Go get ’em tiger!  See you at the bank, and at the top.

Peter Bain
www.forexmentor.com