Fixed Ratio Money Management
It's been a while since I last blogged about Money Management, what many consider to be the most important yet overlooked subject in trading. As one of the three (3) pillars of trading success (the other two being Mind and Method), I therefore feel that I have an obligation to share more of my thoughts on the matter.
A personal favourite money management system of mine is outlined in great detail in Ryan Jones' book The Trading Game: Playing by the Numbers to Make Millions. In this book, he teaches 'Fixed Ratio' money management (what I will refer to as FRMM). Some FX traders assert that this is the best money management system for forex traders.
An important bit to note, Mr. Jones argues that FRMM will help any trading system as long as it is profitable over time. So, I would argue that trading using price action and support & resistance using pivot points (Mafia or otherwise) fits this requirement nicely. :-)
So, let's start putting FRMM into practice:
1. To show that this would work even for you small retail traders, let's assume that we begin trading with USD100 in our account.
2. Then, we need to pick how many pips profit we need to achieve before we start trading with more lots. Let's target an "easy" 200 pips a month or 10 pips/day for 20 trading days in a month.
3. Now we're ready to launch our trading terminal and start... just about. Before we start trading, we need to determine our trade size. Using 10:1 leverage, given that we have USD100 in our account, we therefore should be trading 1,000 units or 1 micro lot (USD0.10/pip) per trade. So, our daily target is 10 pips or USD1.00 per day . We will only increase to 2 micro lots after gaining 200 pips. After that, when we gain another 200 pips, we trade 3 micro lots... so on and so forth.
A personal favourite money management system of mine is outlined in great detail in Ryan Jones' book The Trading Game: Playing by the Numbers to Make Millions. In this book, he teaches 'Fixed Ratio' money management (what I will refer to as FRMM). Some FX traders assert that this is the best money management system for forex traders.
An important bit to note, Mr. Jones argues that FRMM will help any trading system as long as it is profitable over time. So, I would argue that trading using price action and support & resistance using pivot points (Mafia or otherwise) fits this requirement nicely. :-)
So, let's start putting FRMM into practice:
1. To show that this would work even for you small retail traders, let's assume that we begin trading with USD100 in our account.
2. Then, we need to pick how many pips profit we need to achieve before we start trading with more lots. Let's target an "easy" 200 pips a month or 10 pips/day for 20 trading days in a month.
3. Now we're ready to launch our trading terminal and start... just about. Before we start trading, we need to determine our trade size. Using 10:1 leverage, given that we have USD100 in our account, we therefore should be trading 1,000 units or 1 micro lot (USD0.10/pip) per trade. So, our daily target is 10 pips or USD1.00 per day . We will only increase to 2 micro lots after gaining 200 pips. After that, when we gain another 200 pips, we trade 3 micro lots... so on and so forth.
4. Should the broker give is 100:1 leverage, our margin requirement is simply 1% per micro lot traded, which comes up to USD10.
5. So, here's how FRMM would work:
Month 1: USD100 + (200 pips x USD0.10/pip = USD20 ) Total: USD120
We start with USD100 in our trading account and after 1 month of trading we gain 200 pips, and now have USD120 in our trading account. We are now at the next level. If our account balance has not reached USD120, we still trade 1 micro lot.
Month 2: USD120 + (200 pips x USD0.20/pip = USD40) Total: USD160
We now start month two with USD120 and gain 200 pips profit trading 2 micro lots. We now have USD160 in our trading account and are now on the next level. If the account has not reached USD160 we remain trading 2 micro lots.
Month 3: USD160 + (200 pips x USD0.30/pip = USD60) Total: USD220
We now start month three with USD160 and gain 200 pips profit trading 3 micro lots. We now have USD220 in our trading account and are now on the next level. If the account has not reached USD220 we remain trading 3 micro lots.
Month 4: USD220 + (200 pips x USD0.40/pip = USD80) Total: USD300
You now start month four with USD220 and gain 200 pips profit trading 4 micro lots. We now have USD300 in our trading account and are now on the next level. If the account has not reached USD300 we remain trading 4 micro lots.
Month 5: USD300 + (200 pips x USD0.50/pip = USD100) Total: USD400
You now start month four with USD300 and gain 200 pips profit trading 5 micro lots. We now have USD400 in our trading account and are now on the next level. If the account has not reached USD400 we remain trading 5 micro lots.
RESULTS:
Month 6: USD400 + (200 pips x USD0.60/pip = USD120) Total: USD520
Month 7: USD520 + (200 pips x USD0.70/pip = USD140) Total: USD660
Month 8: USD660 + (200 pips x USD0.80/pip = USD160) Total: USD820
Month 9: USD820 + (200 pips x USD0.90/pip = USD180) Total: USD1,000
Month 10: USD1,000 + (200 pips x USD1.00/pip = USD200) Total: USD1,200
What is incredible is that by just gaining an average of 10 pips a day, FRMM grows our account size asymmetrically. We've just turned USD100 turned into USD1,200 in 10 months! Yahoo! We don't need to bank mega pips daily, though that would be more than welcome. 10 measly pips a day on average and we're good. We can play around with the formula, to be more conservative than the above example. We can add more pips profit in the formula. For example, we can choose to increase the number of lots traded after gaining 400 pips instead of 200 pips. This would naturally mean slower growth.
Now, how realistic is 10 pips a day? In the above example, we start of trading 1 micro lot, i.e. USD0.10/pip with a daily target of 10 pips or USD1.00. Let's fix our risk per trade at 1% of equity, i.e. a stop-loss of 10 pips which works out to be USD0.10/pip x 10 pips = USD1.00. Risking 1% of equity per trade, let's target a nice reward:risk of 2:1 on every trade, i.e. we risk 10 pips for a gain of 20 pips.
Let's see how we perform if we do 10 trades a day as follows:
#1 - Lost: -10
#2 - Lost: -10
#3 - Lost: -10
#4 - Win: +20
#5 - Win: +20
#6 - Lost: -10
#7 - Lost: -10
#8 - Win: +20
#9 - Lost: -10
#10 - Win: +20
Total = +20 pips
We can see that we only need to win 4 out of 10 trades (40% win rate) and we will be up 20 pips for the day. Nice!
If you really suck at trading and suffer 10 straight losses however, you will be down 100 pips or USD10.00. You will need to turn off your trading platform and re-think your trading method/strategy. Remember, FRMM will only help trading systems that are profitable over time.
So, do try setting up an FRMM plan before you start your next live trade!
EUR/JPY Analysis - Monday 21 December 2009
The daily analysis indicates a flat correction up to 130.78, the weekly points to a crucial reversal point at 130.71, whereas the monthly says a flat correction down to 127.02 with a bearish potential for a fall to 125.78.
So, it's a case of "up before going down".
The EJ H1 Mafia chart below confirms this scenario with EJ having bounced off WS1. So, we're looking at EJ going up to the convergence of MPP and WPP circa 130.75-131.17.
The EJ H4 chart shows that a corrective move to MPP & WPP would involve violating the downward trendline. This is no biggie in my opinion for EJ is still ranging within two major bullish and bearish trend lines. The bears case is affirmed also by the volatility pivot which sits nicely in between the MPP and WPP.
Looking forward to another great week trading!
So, it's a case of "up before going down".
The EJ H1 Mafia chart below confirms this scenario with EJ having bounced off WS1. So, we're looking at EJ going up to the convergence of MPP and WPP circa 130.75-131.17.
The EJ H4 chart shows that a corrective move to MPP & WPP would involve violating the downward trendline. This is no biggie in my opinion for EJ is still ranging within two major bullish and bearish trend lines. The bears case is affirmed also by the volatility pivot which sits nicely in between the MPP and WPP.
Looking forward to another great week trading!
RTFX Daily Market Comments - Monday 21 December 2009
| EUR-USD | Current fall is near an end of wave around 1.4260 zone, a rally should then procede to above 1.4411. Fall below 1.4186 would cancel this scenario. |
| USD-CHF | While above 1.0409 - 1.0379 zone a corrective upmove could test 1.0463 or 1.0488. After which it should resume its downtrend. |
| GBP-USD | One more dip to 1.6097 - 1.6046 is likely followed by a grind higher to 1.6196 - 1.6243. After which it can resume its downtrend. |
| USD-JPY | It should try higher up to 90.6275 - 91.1913. Entry point 90.0637 or 89.6375. After this rise, a correction is expected. |
| USD-CAD | It looks more likely that it would rise to 1.0715 from 1.0645 or 1.0618. After which a downside move is expected. |
| NZD-USD | It should try higher up to 0.7122 - 0.7140. Entry point 0.7103 or 0.7087. After this rise, a correction is expected. |
| AUD-USD | It should try higher up to 0.8910 - 0.8942. Entry point 0.8877 or 0.8859. After this rise, a correction is expected. |
| EUR-JPY | It should test 130.9890 area after which a sell off down to 127.9983 or extended to 126.4907 area is expected. |
| EUR-CHF | Current fall is near an end of wave around 1.4897 zone, a rally should then procede to above 1.5015. Fall below 1.4844 would cancel this scenario. |
| EUR-GBP | It may attempt a test higher to 0.8890 - 0.8900 after which weakness may set it to a drift down to below 0.8860 limit. |
| EUR-CAD | One more dip to 1.5258 - 1.5212 is likely followed by a grind higher to 1.5339 - 1.5375. After which it can resume its downtrend. |
| EUR-NZD | While below 2.0215 - 2.0245 it might drop to 2.0102 or 2.0041. |
| EUR-AUD | It looks more likely that it would rise to 1.6198 - 1.6301 from 1.6090 or 1.6038. After which a downside move is expected. |
| GBP-CHF | Current fall is near an end of wave around 1.6770 zone, a rally should then procede to above 1.6920. Fall below 1.6704 would cancel this scenario. |
| GBP-JPY | It may attempt a test higher to 146.2010 - 147.0173 after which weakness may set it to a drift down to 144.1973 limit. |
| GBP-CAD | It is likely to fall towards 1.7173 - 1.7117 as its corrective rally could falter in 1.7276 - 1.7322 area. Stop above 1.7436 zone. |
| GBP-AUD | It looks more likely that it would rise to 1.8255 - 1.8387 from 1.8113 or 1.8047. After which a downside move is expected. |
| CAD-JPY | It looks set for gains to 85.5227. Supports at 83.9160 and 83.5267. A break of 82.3093 will damage this bullish structure. |
| NZD-JPY | It should test 65.3790 area after which a sell off down to 63.3360 or extended to 62.4450 area is expected. |
| AUD-JPY | It should test 82.1810 area after which a sell off down to 79.1923 or extended to 77.9147 area is expected. |
| XAG-USD | It should test 17.3470 area after which a sell off down to 17.1140 or extended to 16.9620 area is expected. |
| XAU-USD | It should test 1121.8340 area after which a sell off down to 1100.0106 or extended to 1088.1193 area is expected. |
RTFX Weekly Market Comments - Monday 21 December 2009
| EUR-USD | It looks set to visit further lower territory down to around 1.4298 - 1.4169. Its corrective attempts should fail ahead of 1.4298 - 1.4593. Stop loss above 1.4851 zone. |
| USD-CHF | While below 1.0469 - 1.0527 it is more likely to fall further towards 1.0362 or 1.0314. Premature rise above 1.0527 could see it rising above 1.0624 zone. |
| GBP-USD | Market should not go lower than 1.6097 - 1.5992. After this move down it should go up to 1.6277 - 1.6351 area. |
| USD-JPY | Corrective dips should ideally halt near 89.3355 or 88.8087 for one more thrust upwards towards 90.6275 - 91.3927 area or 92.4463 in extention. Fall below 87.2783 puts it back on a downward path. |
| USD-CAD | While below 1.0703 - 1.0753 it is more likely to fall further towards 1.0561 or 1.0461. |
| NZD-USD | Prefer a fall to 0.7087 or 0.7017. Then a correction to 0.7204 is anticipated. A clear break of 0.6924 is again bearish. |
| AUD-USD | Market should not go lower than 0.8859 - 0.8754. After this move down it should go up to 0.9041 - 0.9118 area. |
| EUR-JPY | It should try higher up to 130.1465 - 131.0273. Entry point 129.2657 or 128.5050. After this rise, a correction is expected. |
| EUR-CHF | Market should not go lower than 1.4929 - 1.4859. After this move down it should go up to 1.5046 - 1.5091 area. |
| EUR-GBP | Market should not go lower than 0.8866 - 0.8805. After this move down it should go up to 0.8965 - 0.9002 area. |
| EUR-CAD | Market should not go lower than 1.5120. After this move down it should go up to 1.5511 area. |
| EUR-NZD | It may meet resistance in 2.0162 - 2.0179 zone for a drift down to 2.0050 zone, after which bounce to 2.0291 is anticipated. |
| EUR-AUD | It is likely to fall towards 1.5962 - 1.5829 unless a corrective rally breaks the 1.6170 resistance. Stop above 1.6236 zone. |
| GBP-CHF | It looks more likely that it would rise to 1.7007 from 1.6768 or 1.6682. After which a downside move is expected. |
| GBP-JPY | Market should hold major support at 143.0290 before rising towards 147.4667 or even 149.1033 limit. |
| GBP-CAD | No comment! |
| GBP-AUD | Current rise seems to be over near 1.8217 or 1.8365 for a retracement towards 1.8069 - 1.7948 area. |
| CAD-JPY | Market should hold major support at 83.2687 before rising towards 85.5560 or even 86.3680 limit. |
| NZD-JPY | Market should hold major support at 63.1106 before rising towards 65.1347 or even 66.0423 limit. |
| AUD-JPY | Market should hold major support at 77.6876 before rising towards 81.8187 or even 83.1673 limit. |
| XAG-USD | One more dip to 17.1705 - 16.9657 is likely followed by a grind higher to 17.6757. |
| XAU-USD | Current fall is near an end of wave around 1090.6235 zone, a rally should then procede to above 1137.5536. Fall below 1069.3452 would cancel this scenario. |
EUR/JPY Analysis - Friday 18 December 2009
Flat correction down spiked to a low of 127.40 by the time I am writing this. As Nostromo indicates, we should expect a recovery now with the caveat that there is bearish potential for a fall to 125.72.
Although it cannot be seen from the screenshot below, the level mentioned above is circa the convergence of WS2 and MoS1 (125.70).
On the H4 chart, we can see where EJ briefly plunged and violated the support line.
Although it cannot be seen from the screenshot below, the level mentioned above is circa the convergence of WS2 and MoS1 (125.70).
On the H4 chart, we can see where EJ briefly plunged and violated the support line.
EUR/JPY Analysis - Thursday 17 December 2009
Flat correction down as per the weekly and monthly technical analysis underway as I write this.
Break of the support trendline (as see below) will confirm.
Chart below confirms WS1 128.10 as a good target should the support line fails.
Now, just go out there and make some dough!!!
Break of the support trendline (as see below) will confirm.
Chart below confirms WS1 128.10 as a good target should the support line fails.
Now, just go out there and make some dough!!!
EUR/JPY Analysis - Wednesday 16 December 2009
Nostromo's daily technical analysis is now out of sync with the weekly & monthly view. Daily indicates flat correction up to 131.00 whilst the weekly and monthly indicates a flat correction down to 128.72-78 with warnings of bearish potential as far down as 125.78.
Per Mafia, daily bias is up. For as long price holds above DPP, flat correction up to convergence of WPP (131.17) and DR2 (131.32) looks good.
Just wanted to share the H4 view. EJ still "contained" unless we see a breakout of some key levels.
Happy pipping!
Per Mafia, daily bias is up. For as long price holds above DPP, flat correction up to convergence of WPP (131.17) and DR2 (131.32) looks good.
Just wanted to share the H4 view. EJ still "contained" unless we see a breakout of some key levels.
Happy pipping!
EUR/JPY Analysis - Tuesday 15 December 2009
Another flat correction down to 128.72-128.99 is expected today, with the daily, weekly and monthly technical analysis lining up.
The Mafia stochs have crossed, but EUR/JPY is still skirting along the support line. Should this line be violated, EJ could very well correct to WS1 at 128.10 (which is sandwiched by DS2 at 128.45 and DS3 at 127.75).
Above MoR1, we should see DR1 at 130.68 (conservatively).
P.S. Just remember, today is Gotobi! ;-)
The Mafia stochs have crossed, but EUR/JPY is still skirting along the support line. Should this line be violated, EJ could very well correct to WS1 at 128.10 (which is sandwiched by DS2 at 128.45 and DS3 at 127.75).
Above MoR1, we should see DR1 at 130.68 (conservatively).
P.S. Just remember, today is Gotobi! ;-)
EUR/JPY Analysis - Monday 14 December 2009
It's been a while since I wrote and/or commented on an analysis piece. So, here I've used RTFX's excellent RF Tradertip Nostromo for EUR/JPY this coming Monday, 14 December 2009.
Interestingly enough the daily, weekly and monthly scenarios are in sync (and this is not necessarily always the case). Having failed to climb towards WPP (132.46) on Friday, we're now expecting a flat correction down to 128.72-129.49. After this fall, a recovery is expected.
Looking at the EJ H1 chart, I am in agreement with the analysis. I've also re-introduced our old friend, the Volatility Pivot indicator, which rather interestingly is at 129.58, a mere 9 pips above the highest flat correction level.
Going into the week, I'm perfectly squared and looking for optimal trade entries near pivots as always.
Interestingly enough the daily, weekly and monthly scenarios are in sync (and this is not necessarily always the case). Having failed to climb towards WPP (132.46) on Friday, we're now expecting a flat correction down to 128.72-129.49. After this fall, a recovery is expected.
Looking at the EJ H1 chart, I am in agreement with the analysis. I've also re-introduced our old friend, the Volatility Pivot indicator, which rather interestingly is at 129.58, a mere 9 pips above the highest flat correction level.
Going into the week, I'm perfectly squared and looking for optimal trade entries near pivots as always.
TheFXSpot: Long-Held Correlations Break - For How Long?
Written by Vicki Schmelzer (Source: iMarketNews.com)
NEW YORK, Dec. 11 (MNI) - Long-held correlations broke down further Friday, with the dollar, U.S. interest rates, and stocks all rising at the same time, almost like "the good ol' days," analysts said.
This was in sharp contrast to the trend of the last few years, where the dollar typically fell as U.S. stock and commodity prices rose and vice versa, they said.
It was not that many years ago that a currency would be in hot demand if its economy were rebounding and its stock market was deemed undervalued, but that was before "the carry trade" took over as the dominant play for many global investors.
From 2005 to early 2008, market players went short low-yielding currencies and bought high-yielding currencies and held these positions, with little impetus to take profit.
The euro and other currencies rose versus the dollar and the yen and emerging market currencies soared, prompting global central banks to intervene to prevent excessive currency strength.
Stocks and commodity prices rose and the dollar fell, sometimes for months at a time without a larger correction.
In the wake of Lehman's bankruptcy in September 2009 and again in March 2009, when the market fretted the prospects of a global depression, the dollar rose across the board on safe-haven demand and stock and commodity prices collapsed -- but the correlation stayed the same.
Direction shifted later in 2009, as risk appetite improved, but up until recently, the game plan of shorting the dollar and going long stocks and commodities continued to be profitable.
Things may have shifted last week, when better-than-expected November non-farm payroll data started players thinking that a positive payroll reading may be around the corner.
A much-improved U.S. jobs picture would increase the chance of the Federal Reserve moving forward its tightening cycle.
This week, U.S. Treasury yields have nudged higher, with the 10-year yield breaking above late October levels (3.575%) to post a high of 3.585% Friday before stabilizing at lower levels.
As the greenback followed yields higher, widespread profit-taking was seen in commodities and emerging markets, especially those countries with commodity exposure.
Next Wednesday's Federal Reserve statement will be closely eyed for any inkling that the Fed might push forward the process of normalizing U.S. monetary policy.
Any larger shift in U.S. Treasury yields, in response, would have spillover implications for the dollar, stocks and commodities, analysts said.
Eonomists at HSBC maintained that the FOMC statement will likely keep the phrase that fed funds will stay low for an "extended period," for three reasons, i.e. "low rates of resource utilization, subdued inflation trends and stable inflation expectations."
The Fed will eventually need to provide guidance on the "potential use of large-scale reverse repos and term deposits to drain reserves, factors which have received more attention of late," HSBC said.
"But doing so in the statement risks sending an unwanted signal on the likely timing of such moves," the economists said.
Therefore, the Fed "may prefer to continue to communicate its thinking on these matters through Fed speeches rather than explicit policy statements," they said.
U.S. 10-year yields closed around 3.55%, down from an earlier high near 3.585%.
Earlier, the 10-year U.S. Treasury yield tested yield resistance at 3.575%, the high from October 26 and also a high from August 21.
With the "double top" in play, a "daily close above this level would be bearish for bonds and project additional gains in yields toward a key resistance trendline drawn off the highs from June and August at 3.65%," said George Davis, chief technical analyst at RBC Capital Markets.
Above that, additional yield resistance is found at 3.72% (Aug. 12 peak), followed by 3.86% (Aug. 7 peak). Yield support is found at 3.39% and 3,18% (double bottom), he added.
In other markets, the euro was trading at $1.4622, on the low side of a $1.4587 to $1.4776 range.
In recent sessions, the euro has been weighed by a combination of rising U.S. yields and concerns about Greece defaulting on its debt.
JP Morgan Chase strategists said the euro "is a buy based on the exaggerated fears of a sovereign risk event, but the timing of re-entering longs is poor given the ongoing back-up in yields."
Their technical analysts maintained that "the euro is still at risk of extending the downside to $1.45 and even the $1.43 handle, where a new base has to form in order to prevent a complete reversal of the long-term dollar bear-trend."
JPMC continued to look for broader dollar weakness throughout 2010 and saw the euro then pressing higher.
The strategists have a March 10 forecast of $1.55 for the euro and a June 10 forecast of $1.62.
On the U.S. stock front, the S&P 500 closed up 0.37 at 1106.41, after trading in a 1101.44 to 1108.38 range. The index posted a 2009 high of 1118.67 December 4, in the wake of upbeat November U.S. non-farm payroll data.
NYMEX January light sweet crude settled down $0.67 at $69.87 per barrel after trading in a $69.46 to $71.20 range.
The front contract last settled below $70 on October 7.
Technical analysts saw scope for crude to retest the late September lows near $65.05.
Spot gold settled at $1114.75/oz, on the low side of a $1110.05 to $1141.90 range.
The precious metal is down 9.1% from the life-time high of $1226.10, posted December 3 and is closing in on initial support at 1100/1102, lows from mid-November.
** Market News International New York Newsroom: 212-669-6430 **
NEW YORK, Dec. 11 (MNI) - Long-held correlations broke down further Friday, with the dollar, U.S. interest rates, and stocks all rising at the same time, almost like "the good ol' days," analysts said.
This was in sharp contrast to the trend of the last few years, where the dollar typically fell as U.S. stock and commodity prices rose and vice versa, they said.
It was not that many years ago that a currency would be in hot demand if its economy were rebounding and its stock market was deemed undervalued, but that was before "the carry trade" took over as the dominant play for many global investors.
From 2005 to early 2008, market players went short low-yielding currencies and bought high-yielding currencies and held these positions, with little impetus to take profit.
The euro and other currencies rose versus the dollar and the yen and emerging market currencies soared, prompting global central banks to intervene to prevent excessive currency strength.
Stocks and commodity prices rose and the dollar fell, sometimes for months at a time without a larger correction.
In the wake of Lehman's bankruptcy in September 2009 and again in March 2009, when the market fretted the prospects of a global depression, the dollar rose across the board on safe-haven demand and stock and commodity prices collapsed -- but the correlation stayed the same.
Direction shifted later in 2009, as risk appetite improved, but up until recently, the game plan of shorting the dollar and going long stocks and commodities continued to be profitable.
Things may have shifted last week, when better-than-expected November non-farm payroll data started players thinking that a positive payroll reading may be around the corner.
A much-improved U.S. jobs picture would increase the chance of the Federal Reserve moving forward its tightening cycle.
This week, U.S. Treasury yields have nudged higher, with the 10-year yield breaking above late October levels (3.575%) to post a high of 3.585% Friday before stabilizing at lower levels.
As the greenback followed yields higher, widespread profit-taking was seen in commodities and emerging markets, especially those countries with commodity exposure.
Next Wednesday's Federal Reserve statement will be closely eyed for any inkling that the Fed might push forward the process of normalizing U.S. monetary policy.
Any larger shift in U.S. Treasury yields, in response, would have spillover implications for the dollar, stocks and commodities, analysts said.
Eonomists at HSBC maintained that the FOMC statement will likely keep the phrase that fed funds will stay low for an "extended period," for three reasons, i.e. "low rates of resource utilization, subdued inflation trends and stable inflation expectations."
The Fed will eventually need to provide guidance on the "potential use of large-scale reverse repos and term deposits to drain reserves, factors which have received more attention of late," HSBC said.
"But doing so in the statement risks sending an unwanted signal on the likely timing of such moves," the economists said.
Therefore, the Fed "may prefer to continue to communicate its thinking on these matters through Fed speeches rather than explicit policy statements," they said.
U.S. 10-year yields closed around 3.55%, down from an earlier high near 3.585%.
Earlier, the 10-year U.S. Treasury yield tested yield resistance at 3.575%, the high from October 26 and also a high from August 21.
With the "double top" in play, a "daily close above this level would be bearish for bonds and project additional gains in yields toward a key resistance trendline drawn off the highs from June and August at 3.65%," said George Davis, chief technical analyst at RBC Capital Markets.
Above that, additional yield resistance is found at 3.72% (Aug. 12 peak), followed by 3.86% (Aug. 7 peak). Yield support is found at 3.39% and 3,18% (double bottom), he added.
In other markets, the euro was trading at $1.4622, on the low side of a $1.4587 to $1.4776 range.
In recent sessions, the euro has been weighed by a combination of rising U.S. yields and concerns about Greece defaulting on its debt.
JP Morgan Chase strategists said the euro "is a buy based on the exaggerated fears of a sovereign risk event, but the timing of re-entering longs is poor given the ongoing back-up in yields."
Their technical analysts maintained that "the euro is still at risk of extending the downside to $1.45 and even the $1.43 handle, where a new base has to form in order to prevent a complete reversal of the long-term dollar bear-trend."
JPMC continued to look for broader dollar weakness throughout 2010 and saw the euro then pressing higher.
The strategists have a March 10 forecast of $1.55 for the euro and a June 10 forecast of $1.62.
On the U.S. stock front, the S&P 500 closed up 0.37 at 1106.41, after trading in a 1101.44 to 1108.38 range. The index posted a 2009 high of 1118.67 December 4, in the wake of upbeat November U.S. non-farm payroll data.
NYMEX January light sweet crude settled down $0.67 at $69.87 per barrel after trading in a $69.46 to $71.20 range.
The front contract last settled below $70 on October 7.
Technical analysts saw scope for crude to retest the late September lows near $65.05.
Spot gold settled at $1114.75/oz, on the low side of a $1110.05 to $1141.90 range.
The precious metal is down 9.1% from the life-time high of $1226.10, posted December 3 and is closing in on initial support at 1100/1102, lows from mid-November.
** Market News International New York Newsroom: 212-669-6430 **
Interbank FX (IBFX) Introducing Intraday Hedging
In a very interesting development, IBFX has apparently found a loophole in NFA's ruling regarding hedging. Read on:
Dear Valued Customer,
We will be introducing Intraday Hedging into the demo accounts on Dec 10th, with plans to introduce Intraday Hedging to the live accounts on or around Dec 20th. What this means to your account:
- You will be able to place both long and short orders in the same currency pair during the course of the day.
- Just before swap at approximately 5 pm Eastern Time if you are still in your hedge, the trades will be netted out, please see the example below.
We recommend that you test your experts and trading strategies that use hedging thoroughly on a demo account before using them on your live account.
Example #1:
At 10:11:00 Eastern you open a 2 lot long on the EUR/USD at 1.4730 (ticket #1).
At 13:01:01 Eastern you open a 2 lot short on the EUR/USD at 1.4733 (ticket #2).
Just before swap, at approximately 17:00 Eastern, ticket #1 is closed out at 1.4733 and ticket #2 would show 0 lots with an open and close price of 1.4733.
Example #2:
At 10:11:00 Eastern you open a 1 lot long on the EUR/USD at 1.4730 (ticket #1).
At 13:01:01 Eastern you open a 2 lot short on the EUR/USD at 1.4733 (ticket #2).
Just before swap, at approximately 17:00 Eastern, ticket #1 is closed out at 1.4733. The remainder of ticket #2 would allocate to a new trade ticket of 1 lot short at 1.4733. Swap would be charged to this new ticket for that symbol’s rate for one lot.
Example #3:
At 10:11:00 Eastern you open a 5 lot long on the EUR/USD at 1.4730 (ticket #1).
At 13:01:01 Eastern you open a 2 lot short on the EUR/USD at 1.4733 (ticket #2).
Just before swap, at approximately 17:00 Eastern, 2 lots of ticket #1 would close at 1.4733. Ticket #2 would show 0 lots with an open and close price of 1.4733. The remainder of ticket #1 would allocate to a new trade ticket of 3 lots long at 1.4730. Swap would be charged to this new ticket for that symbol’s rate for three lots.
Dear Valued Customer,
We will be introducing Intraday Hedging into the demo accounts on Dec 10th, with plans to introduce Intraday Hedging to the live accounts on or around Dec 20th. What this means to your account:
- You will be able to place both long and short orders in the same currency pair during the course of the day.
- Just before swap at approximately 5 pm Eastern Time if you are still in your hedge, the trades will be netted out, please see the example below.
We recommend that you test your experts and trading strategies that use hedging thoroughly on a demo account before using them on your live account.
Example #1:
At 10:11:00 Eastern you open a 2 lot long on the EUR/USD at 1.4730 (ticket #1).
At 13:01:01 Eastern you open a 2 lot short on the EUR/USD at 1.4733 (ticket #2).
Just before swap, at approximately 17:00 Eastern, ticket #1 is closed out at 1.4733 and ticket #2 would show 0 lots with an open and close price of 1.4733.
Example #2:
At 10:11:00 Eastern you open a 1 lot long on the EUR/USD at 1.4730 (ticket #1).
At 13:01:01 Eastern you open a 2 lot short on the EUR/USD at 1.4733 (ticket #2).
Just before swap, at approximately 17:00 Eastern, ticket #1 is closed out at 1.4733. The remainder of ticket #2 would allocate to a new trade ticket of 1 lot short at 1.4733. Swap would be charged to this new ticket for that symbol’s rate for one lot.
Example #3:
At 10:11:00 Eastern you open a 5 lot long on the EUR/USD at 1.4730 (ticket #1).
At 13:01:01 Eastern you open a 2 lot short on the EUR/USD at 1.4733 (ticket #2).
Just before swap, at approximately 17:00 Eastern, 2 lots of ticket #1 would close at 1.4733. Ticket #2 would show 0 lots with an open and close price of 1.4733. The remainder of ticket #1 would allocate to a new trade ticket of 3 lots long at 1.4730. Swap would be charged to this new ticket for that symbol’s rate for three lots.
Minibahn Mafia Azzuri Template
During a relatively quiet market, I created another template for the Mafia. I call it "The Mafia Azzuri". The M5 and M15 templates can be downloaded HERE.
The Wait Is Over: Here It Is... The Minibahn Mafia!
Please note that The Mafia is designed to be used by more ADVANCED TRADERS, and I make no apologies to aspiring traders that do not possess the 3M's and 3C's (mind, method, money management, competency, contacts and capital) who in all likelihood will get all confused.
Timeframes
M5 and M15.
Money Management
Sound money management is essential to sustainable and profitable trading. Though I shall not cover in great lengths on the subject, I will share my own money management technique.
On any given trading day, my daily equity at risk is capped at 3%. I further divide this into 10 to 20 trades, meaning that I risk only 0.15% to 0.3% of my equity on any given trade.
Trading Rules
1. This is an ADVANCED intraday trading strategy adapted for trading using the M5 and M15 charts. The indicators you will need as well as the template I use can be downloaded here: http://www.ircforex.com/indicators/602-minibahns-indicators
(a) b-clock_(h-m-s).mq4
(b) Stoch Candle OverBought-Sold.mq4
(c) OnChart_Stochastic_Channel_(FL_MTF).mq4
(d) Pivots_Daily_vMB1.0.mq4
(e) Pivots_Monthly.mq4
(f) Pivots_Weekly.mq4
(g) OnChart_Stochastic_Channel_(FL_MTF)_vM5.mq4
(h) Bands.mq4
2. Determine bias by observing the day's opening price relative to the daily pivot point. If price opens ABOVE the daily pivot point, then bias is bullish/long. If price opens BELOW the daily pivot point, then bias is bearish/short.
3. Look at the "slow" stochs (360,180,180 on M5 and 120,60,60 on M15) firstly. If the %K (green) line is above the the %D (red) line, bulls are in control... therefore, look for opportunities to buy support. Naturally, it's best to wait for the crossover AND when both lines are above the 20% level of the stoch channel. For shorts, wait for the opposite signal.
4. Use the "fast" stochs (30,10,10) to time your entries and exits.
5. Good entries at e.g. D3, W1 or Mo1 levels will present opportunities to perform multiple trades... to continuously enter and exit until the "slow" stochs signal a reversal.
Remember:
- If price is at PP, watch for a move back to R1 or S1.
- If price is at R1, expect a move to R2 or back towards PP (shorts outperform longs approx. 58% to 42%).
- If price is at S1, expect a move to S2 or back towards PP (longs outperform shorts approx. 56% to 44%).
- If price is at R2, expect a move to R3 or back towards R1 (shorts outperform longs approx. 83% to 17%).
- If price is at S2, expect a move to S3 or back towards S1 (longs outperform shorts approx. 83% to 17%).
- If there is no significant news to influence the market, price will usually move from P to S1 or R1.
- If there is significant news to influence the market price may go straight through R1 or S1 and reach R2 or S2 and even R3 or S3.
- R3 and S3 are a good indication for the maximum range for extremely volatile days but can be exceeded occasionally (at R3, shorts outperform longs approx. 97% to 3%; and at S3, longs outperform shorts approx. 97% to 3%).
- Pivot lines work well in sideways markets as prices will most likely range between the R1 and S1 lines.
- In a strong trend, price will blow through a pivot line and keep going.
- Once support or resistance is broken, the level in question becomes its opposite, i.e. former support becomes resistance and former resistance becomes support.
** It is important to understand, however, that these are probabilities and not certainties.
6. Stop-losses (SL) are totally unnecessary if you've adhered to all of the above rules. Also, should you be caught by premature reversal trades... employ the standard cost-averaging techniques. Step back, take a look at the next two pivot levels and calculate the appropriate trade size and R:R to re-set the positive expectations.
6. Stop-losses (SL) are totally unnecessary if you've adhered to all of the above rules. Also, should you be caught by premature reversal trades... employ the standard cost-averaging techniques. Step back, take a look at the next two pivot levels and calculate the appropriate trade size and R:R to re-set the positive expectations.
Well, that's it in a nutshell. Please feel free to review the trading logs posted here to further familiarise yourself with the strategy... and remember, practice makes perfect. Should you require further clatification, you'll most probably find me here (http://www.ircforex.com/chat/) most weekdays.
End of Another Productive Week
It's the end of another productive week. For my EJ M5 sub-account, the 10 day return works out to be 145.3% from 333 trades executed, with 321 wins and 12 losses for a win rate of 96.4%.
Looking forward to the weekend for I am in need to rest and sleep. Hoping to come out charging again next week. :-)
Who's Screwing Who? Forex Brokers Lose Too!!
This was reported some time back, and totally forgot to blog about it. It's commonly thought that Forex Brokers hold the keys to money making machines, are 'evil' and are out to screw their own clients. It would surprise many therefore, to learn that many U.S. Forex Brokers actually LOST money in July 2009. Anyhow, here's the full article... enjoy!
Source: Forex Magnates
July was a bad month for all brokers. With the exception of GFT, Oanda and MB Trading all brokers lost money that month. It’s also very interesting to see that Gain Capital lost over $12 million dollars – I’m not aware of any reason behind that. It is in-line however with the $50 million loss so far that Gain reported couple of weeks ago in its IPO registration documents.
Stuttgart Banker Divining Currencies Is World’s No. 1
By Bo Nielsen (Source: Bloomberg)
Oct. 5 (Bloomberg) -- During the most volatile period for global foreign exchange in more than 15 years, a state-owned bank in southern Germany bested the currency forecasters at the biggest banks and trading firms.
Gernot Griebling, head of bond and economic research at Stuttgart-basedLandesbank Baden-Wuerttemberg, and his team of five currency strategists beat competitors at 46 firms to become the most-accurate forecasters for the six quarters ended on June 30, according to data compiled by Bloomberg. They outshone analysts at bigger firms by holding fast to such views as an early call for the dollar’s decline against the euro in the first half of 2008, even when their predictions went against the mainstream.
“Your track record has nothing at all to do with the number of people working for you,” says Griebling, 48, who navigates global currency markets from the glass-and-concrete headquarters of LBBW, a firm with less than a quarter of the employees and less than a third of the assets of its German rival Deutsche Bank AG, the world’s biggest currency trader. “You have to have the courage to stick to your conviction, to deviate from the consensus view.”
Griebling predicts that the dollar will trade at about $1.42 per euro until mid-2010 compared with $1.4625 today, as investor concerns over rising U.S. deficits and debt offset optimism about the prospects for an economic recovery.
Ranking Method
The ranking was based on quarterly predictions made at the beginning of both 2008 and 2009 for seven major exchange-rate pairs. Scotia Capital, part of Toronto-based Bank of Nova Scotia, Canada’s third-biggest bank, was second overall, followed by BofA Merrill Lynch Research in New York and Toronto-Dominion Bank’s TD Securities unit in Toronto. Frankfurt-based Deutsche Bank came in fifth, while Zurich-based UBS AG, the second- biggest currency trader, was No. 22.
LBBW prevailed at a time when financial turmoil and an economic slump sparked the most-violent swings for major currencies since at least 1992, as measured by JPMorgan Chase & Co.’s benchmark JPMorgan Volatility Index. The dollar plunged in the first half of 2008, only to rally later in the year as the collapse of Lehman Brothers Holdings Inc. in September froze credit markets and sent investors flocking to the safety of the greenback. The yen rallied in the second half of 2008 as traders reversed risky bets funded in the currency. In 2009, the dollar and yen started out strong against other major currencies and then weakened as central bank actions and $2 trillion spent by governments around the world on fiscal stimulus efforts helped to stabilize the global economy.
‘Spectacular Misses’
The dollar weakened 4.5 percent versus the euro in 2009 through today. The yen also fell 3.6 percent against the European currency to 131.34 yen in the period and was little changed against the dollar at 90.64.
The turbulence made even the top forecasters prone to missing the mark: The average margin of error of the 10 top- ranked firms was 6.6 percent compared with 3.5 percent when Bloomberg last ranked currency strategists in 2006, a year characterized by global growth and stable financial markets.
“It was a very difficult time to be a forecaster,” says Daniel Tenengauzer, head of global foreign exchange strategy at BofA Merrill Lynch in New York. “We had some spectacular successes and some spectacular misses.”
Tenengauzer, 41, predicts that the dollar will weaken to $1.50 per euro by year-end and then strengthen to $1.28 by the end of 2010 as the Federal Reserve begins a series of rate increases to keep inflation in check.
Discerning the Trend
While no one foresaw the scale of last year’s market moves, some forecasters, such as Griebling’s team at LBBW, were able to correctly discern the broad trends that guided currencies.
As 2008 began, the U.S. dollar was strengthening against the euro. The dollar was $1.4592 per euro on Jan. 1, 2008, compared with $1.4967 per euro on Nov. 23, 2007, its weakest ever. A Bloomberg survey of 43 forecasters published on Dec. 27, 2007, when the euro-dollar rate was $1.4626, showed that analysts expected the dollar to continue strengthening through September 2008. The strategists cited a narrowing deficit in the U.S. current account, which is the broadest measure of trade, and predicted that the threat of inflation would keep the Fed from cutting benchmark rates.
Griebling and his team didn’t share that bullish view. The LBBW forecasters had been tracking the decline in the U.S. housing market. They predicted that the deepening slump’s impact on consumer spending and growth would be bigger than most market participants expected and would curb the dollar. In 2007, the housing downturn had already triggered $80 billion in writedowns at financial firms, a figure that would grow to more than $1.3 trillion within two years.
Borne Out
“We had been big bears on the U.S. economy and the dollar for a long time,” Griebling says. LBBW predicted that the dollar would strengthen against the euro in the second half of 2008 as the U.S. recession would drag down euro-zone economies.
LBBW’s view was borne out: First, the dollar lost value against major currencies in the first half of 2008, with the greenback touching $1.6038 per euro in mid-July. Then, the U.S. currency surged in the latter part of the year, reaching $1.2330 per euro in October. The dollar ended 2008 at $1.3971 per euro, not far from Griebling’s year-end forecast of $1.39 per euro.
What LBBW and most other currency forecasters failed to predict was the magnitude of the currency swings and the unprecedented financial turmoil that brought them about.
Not Foreseen
No one foresaw the severity of the deterioration in the U.S. economy and credit markets in the first half of 2008 that would lead the Fed to cut rates four times between January and April and prompt the government-brokered takeover of Bear Stearns Cos. by JPMorgan. Nor did anyone foresee Lehman’s September 2008 collapse, the U.S. bailout of insurer American International Group Inc. a month later and the rounds of global rate cuts soon afterward, all of which sent investors stampeding back into the dollar.
LBBW wasn’t immune to the turmoil roiling financial markets. The bank, predicting a “substantial loss” for 2009, last week said it will shed about 2,500 jobs, or a quarter of its workforce, by 2013 and slash assets by 40 percent as part of a reorganization plan. It posted a loss of 2.1 billion euros in 2008.
Some analysts were thrown off track by the roller-coaster market. Gerry Celaya, chief strategist at Redtower Asset Management, entered 2008 as the biggest dollar bull among strategists in the Bloomberg survey, forecasting a $1.30 euro- dollar rate for June 2008.
Wrong Reasons
Celaya, who placed third overall in the 2006 ranking, slid to number 40 on this year’s list after the U.S. economic rebound he was betting on in 2008 didn’t materialize.
“We were surprised by how consistently bearish people were about the dollar in the first half of 2008,” Celaya, 44, says. “And when the dollar strength finally came, it was for all the wrong reasons.”
Callum Henderson, Singapore-based global head of currency strategy atStandard Chartered Plc, came closest to predicting the dollar’s swings against the euro. In January 2008, he forecast a euro-dollar rate of $1.49 by March, making him among the biggest dollar bears in the Bloomberg survey. His $1.38 prediction for where it would stand at the end of September was among the most bullish for the U.S. currency.
Past Patterns
In making his forecasts, Henderson says he studied the greenback’s moves during similar periods: 1989 to 1992 and 2002 to 2004. Both times, the dollar weakened as the U.S. economy lost steam before surging against major currencies as recession damped global growth, forcing central banks to cutrates. Those patterns told him the dollar would slump initially in 2008 and then rally.
“As soon as the global credit crisis happened, we knew there was going to be a dollar rally, but no one could have foreseen the speed with which it happened,” says Henderson, 44.
Some market watchers searched for new ways to gauge currency relationships in late 2008 as the flight to quality sent investors pouring into the dollar.Henrik Gullberg, a strategist at Deutsche Bank in London, abandoned his standard forecasting measures and instead looked at weekly data on the amount of dollar reserves being held at the Fed by foreign central banks.
Flight to Quality
Gullberg discovered that from late 2008 through the beginning of 2009, the dollar tended to gain against major currencies when foreign central bank accounts at the Fed rose and vice versa, even though that hadn’t been the case historically.
“We followed safe-haven flows very carefully; there was nothing else driving currency markets,” says Gullberg, 36. “The only thing that mattered was risk aversion. All other models went out the window.”
The financial turmoil in late 2008 also prompted traders to get out of so-called carry-trade bets, in which they borrowed funds in yen and U.S. dollars at low rates and then invested them in currencies of countries such as Australia, where returns were higher. The Dollar Index, a gauge of the greenback’s performance against the euro, yen, pound, Canadian dollar, Swedish krona and Swiss franc, had its biggest weekly gain since 1992 in October 2008.
“This was a huge structural change,” says Camilla Sutton, director of currency strategy at Scotia Capital in Toronto. “It became pretty clear that the de-leveraging was impacting currencies.”
Revisiting Risk
The period of dollar and yen strength lasted from July 2008 to March 2009, when signs of stability in the global economy persuaded investors to venture back into stocks and bonds denominated in foreign currencies.
As of mid-September, most of the top forecasters predicted that the dollar would weaken at least through the middle of next year amid rising U.S. deficits and debt, and that investors would gravitate to more attractive investment opportunities elsewhere.
Sutton, 38, sees the greenback losing value as the U.S. Treasury swamps the market with bonds to fund $12.8 trillion in pledges to prop up the economy. The euro-dollar rate will return to $1.60 and the dollar will fall to 85 yen by the end of 2010, she says. Standard Chartered forecasts the dollar at $1.58 by the end of next year.
Deutsche Bank’s Gullberg says the correlation between central bank reserves and the dollar has been broken as stability returned. Now, using models that look at traditional gauges such as interest rates, he foresees declines in the dollar to as low as $1.60 per euro by year-end as investors seek out higher-yielding assets in other currencies, and as the Fed resists raising rates anytime soon to ward off the threat of inflation.
“Dollar strength is dependent on an aggressive Fed, and so far there has been very little sign of that,” Gullberg says.