Which Forex System?: March 2012

Friday, 30 March 2012

The Holy Grail of Forex

How many times have you seen Forex traders (new and old) on forums on the internet searching for the “Holy Grail” of Forex—the one tried and true strategy, system or automated trading program which will bring them success time and again—and never fail? And how many times do you see other traders contesting that there is no Forex Holy Grail, and that these traders are just kidding themselves? Well, the fact is, those traders who say there is no holy grail are partially right, but not entirely. If you’re looking for a perfect system, you’re not going to find it—but that doesn’t mean there isn’t a Holy Grail of Forex—it’s just not what you’re probably thinking it is.

There is no such thing as a foolproof system, and there are a couple of reasons for this. The first is simply that it’s statistically impossible since there is always some degree of chaos in the markets and in life. The second reason is that change happens, sometimes suddenly, sometimes gradually, but nothing can stop it, which means all systems will eventually fail unless they are adjusted.

Of course, if your system has recently failed, that may be what you’re out searching for the Holy Grail (or maybe you’re a newbie Forex trader, and you don’t even have a working system yet). The fact is, though, you aren’t going to find it—the next system you find will fail eventually, and the next one, and the next one. But during all this time, you’re getting distracted looking for new Forex systems instead of focusing on the real Holy Grail—which is you.

You are the one ingredient in your trading method over which you have relatively complete control. Of course even that is never going to be perfect, but by honing your self discipline, taking time to practice, and accepting that adaptation is always necessary in Forex and in life, you can improve your odds of success. That system you were using which was working well and suddenly broke one day is something you may be able to fix. Instead of going on a wild goose chase looking for the perfect system somewhere else, why not figure out why your perfectly adequate system has stopped working? It may be as simple as looking at the changes in the market and making some adjustments to compensate. Or perhaps you’ll figure out that what changed wasn’t your system or the market, but you!

It takes time, faith, introspection, and dedication, but you’ll often get further by taking a deeper look at the system in which you’ve already invested your hard work than you will trying to build something entirely new from scratch. Does that mean that you won’t have to build a new one? Not necessarily, but there’s a good chance you won’t. Many Forex traders use variations on one trading method for many, many years (of course, this may not suit everyone). And either way, by analyzing what you’ve got instead of panicking, you’ll be developing positive personal attributes which will help you succeed at Forex in the future.

http://www.forexnewbies.com/the-holy-grail-of-forex/

Wednesday, 28 March 2012

A List Of The Best Forex Tips

You should know how your trading software works and what issues that software can exhibit. All software may have problems, even the most respected and established brands. Learn all you can about any known glitches your software might contain. This will help you to prepare for any potential problems. It would be to your disadvantage to find out important information cannot be accepted when you’re in the midst of a valuable trade.

Once a stop point is in place, never change it. Determine your stop point before you begin the trade, and stick to it. A stop point should not be moved for any reason. Doing so will only significantly increase your risk of losing money.

For Forex trading, a mini account is a good starter account. As it limits the losses you can incur, it is an excellent way to practice real Forex trading. This probably isn’t as exciting as a full-fledged trading account, but you need to learn to walk before you can learn to run.

Forex trading news is not hard to find; it can be found on any form of media, 24 hours a day. News channels, Twitter and the internet are good resources to look at. You will be able to find the information everywhere. When it comes to trading money, the news is widespread due to the high demand of information.

When trading on the Forex Market, don’t let the positions of other traders influence the position that you choose. Forex traders, like any good business person, focus on their times of success instead of failure. Regardless of a traders’ history of successes, he or she can still make mistakes. Determine trading by your plans, signals and research; do not rely on the actions of other traders.

You may think the solution is to use forex robots, but experience shows this can have bad results. Despite large profits for the sellers, the buyers may not earn any money. You need to figure out what you will be trading on your own. Make logical decisions, and thing about the trade you want to go with.

Open up a mini account when you start trading. A mini account resembles a practice account in some ways but you use real money and make real trades. This simply allows you to test drive the market to see which trading techniques work best for you, so that you can see what will provide you with the best profits.

Use everything to your advantage in the Forex Market, including the study of daily and four-hour charts. There are charts available for Forex, up to every 15 minutes. The thing is that fluctuations occur all the time and it’s sometimes random luck what happens. Cut down on unnecessary tension and inflated expectations by using longer cycles.

Forex trading is the real deal, and should be taken seriously. People who are interested in it for fun are sure to suffer. If that was what they were looking for, they should just gamble at a casino.

Beginners should never go against the trend. Also, don’t pick your limits against the market. Relax, and ride the trends to higher profits. If you try to go against the trends, you are going to be way too stressed.

If you are new to the game, keep it very simple. Creating a complicated trading system for yourself will just lead to getting confused and losing money. As a biginner, start with the methods that you understand. Build on them as you gain experience. This will help you keep focus and allow your business to grow naturally and successfully.

When you first start trading it’s important to go slow, no matter how successful you become right away. Desperation and panic can have the same effect. Make sure to maintain control over your feelings; you will need to make logical decisions, rather than letting your emotions determine your actions.

Don’t be coerced in to paying for trading systems that use “black box” methods. Around 98 percent of these systems are a total scam. The systems often contain limited information about actual trading strategies and the past profits they quote are usually unverifiable.

After a while, you may begin to make a staggering profit with what you have learned. Until you become an expert, you should use the advice in this article to make a small, but secure amounts of profit.

http://www.forex-for-retirement.com/3417/a-list-of-the-best-forex-tips

Monday, 26 March 2012

Simon Denham's Daily Market Comment

This week has got off to a good start for the markets but a bad start for our Dave with his party embroiled in a nasty backlash that could really damage him, his party and the coalition which up until now has done well to survive. But whilst politicians continue to use unhelpful rhetoric towards business and in particular the banks they fail to keep their own houses in order and most importantly fail to learn from other recent mistakes of a similar nature. It wasn’t long ago that the current business secretary was found boasting to journalists that he could bring down the government, a comment which won’t have as much effect as what was unveiled over the week end could possibly have.

Whilst the Tories are embroiled by the recent comments made by their ex co-treasurer, the FTSE has commenced the session by attempting to claw back some of the losses from last week, but already it seems to have given up the ghost. We opened over 20 points higher, but have been quick to reverse these gains as the market is roughly flat at the time of writing. Last week’s sell off doesn’t look to be attracting the buyers in their masses just yet, and whilst we’ve seen retracements last a short while so far this year this one just seems to have been a little more prolonged. Clients have been buying into this dip expecting the bounce to happen and considering the strength of the rally so far in 2012 it’s not an unreasonable view to think that we could see another run higher in this final week of the quarter.

But we are all too aware of the hurdles in the way. Oil prices are one of them and they remain stubbornly high with the tensions in the Middle East ongoing. The prices at the pump are really starting to bite as £100 to fill up most cars now is a considerable sum of money for cash strapped families that are reliant on driving everywhere. It doesn’t look like oil prices are going to crash at any point either and here in the UK a fuel duty rise is due in August. Our George would have done his sums for last week’s budget taking into account that duty is due to rise later on in the summer and so it will be almost impossible for him to reverse such a hike. £100 to fill up the tank might soon become £125 or even higher at this rate.

There is little in the way of economic data today although US Fed Chairman Ben Bernanke is making a speech at a business conference today and there is US pending home sales this afternoon.

The euro managed to end the week positively against the dollar, as weak US data revealed new home sales declined for a second consecutive month. The single currency was also helped on as French growth estimates were revised upwards and also talks of EU policy makers combining two rescue funds to make money more available to debt stricken countries. This morning the euro is trading slightly lower against the dollar at 1.3250 and sees support at 1.3190 and resistance sits at 1.3290.

As more news about Iran hit the news wires, demand for gold as a hedge in times of havoc was boosted. This resulted in the yellow brick spiking, closing the session at 1661.4, 18.4 bucks up on the day, which also received assistance from the weaker US dollar. It still seems that bargain hunters aren't using their full force after the drop from February 29th high of 1790.0, so will it need to break the resistance of 1670.0 before any real buying power is seen? Currently the precious metal is trading at 1665.9.

Crude prices were driven higher on Friday after a report showing Iranian oil exports had dropped by 300,000 barrels a day caused fear in the energy markets. Investors showed their belief that it was just a matter of time before issues in the Middle East bared its teeth again and Friday's report showed that this was the case. At time of writing, Brent is trading at 124.86.

http://www.capitalspreads.com/simon-denhams-daily-market-comment

Friday, 23 March 2012

Simon Denham's Daily Market Comment

There’s just a little bit of nervousness starting to creep into the markets and this week has proved that the global economy is still relatively fragile. In the US impressive economic data has been one of the driving factors behind the recent rally, but just recently that has been counter acted by the slowdown in China. Yesterday’s data did not help the bulls and the big fear is that we see 2012 pan out in a similar way to 2011. The year commenced with optimism that the recovery would continue, but equity markets struggled to gain traction and then the European debt crisis really started to flare up which has caused another recession in Europe and negative growth for the UK. In the US where equity markets have been the most impressive, the jobs data is proving strong, however it’s yet to really translate into the corresponding growth you’d expect as a result. On top of this the assistance from central banks that has seen vast stimulus has assisted in this recovery, but with so much liquidity sloshing around and incredibly low interest rates you would expect things to be a great deal rosier. As this correction gathers pace this morning the selling is having a respite, although the worry is that investors have slightly had the blinkers on and we could see 2012 turn into a bit of a 2011 with another trigger for further selling being perhaps the next domino to fall in Europe. Certainly Asian markets this week have been a great deal more cautious than their European and US counterparts with some suffering losses of over 2%.

Individuals and companies are continuing to deleverage. Debt is now a really bad word and so everyone is doing as much as they can to reduce their debts which is affecting investment and spending. This is why, as mentioned already this week, George’s gamble in his budget is that the cuts in corporation tax and lifting more people out of tax will actually get businesses and people spending again. It’s a throw of the dice that we will only see settle in a year or so, so we have to wait to see whether or not the gamble has paid off.

At the open this morning the FTSE is trading at 5850 so just in the black. Whilst we saw a little recovery from the lows yesterday the theme of the past few days has definitely had a risk aversion feel about it so the question is whether this move to the downside has further to go. So far it has not matched the sell off of some 3.5% at the beginning of this month, and if it did it would bring us down to the mid 5700s, but if the momentum for the bears does build and we see a bigger correction of 5-10% then we could be seeing downside targets of 5650 to 5350. Over the medium term the 5700 area is quite a major support area and considering that so far this year retracements have been met rather quickly by buying the feeling is that we might not see a double digit percentage correction.

The theme of the economic data this week has been US housing and we end with new home sales today. The pace of sales is being capped by the number of new homes available for sale being at a record low and rather like in London, the lack of property on the market is inflating prices somewhat.

On the currency markets, the recent move to the downside in risk assets has strangely led to a fall in the dollar whose recent run of form seems to have come to an end. At the same time the euro has not exactly suffered a great deal from the sell off in equities meaning that currency market movements this week have been slightly out of sync with what you’d expect to happen. This morning EUR/USD is at 1.3265 and on the bid at the time of writing as it tests the day’s highs. Near term support and resistance is seen at 1.3185, 1.3160, 1.3130 and 1.3280, 1.3310 respectively and for now it just seems that momentum is with the bulls.

Gold too has seen some pressure to the downside. You would have expected the recent risk aversion and dollar weakness to boost the price of the yellow brick, but no such luck for the bulls who are starting to get a little nervous about the precious metal’s inability to return to its highs.

http://www.capitalspreads.com/simon-denhams-daily-market-comment

Thursday, 22 March 2012

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Forget About Money; Focus on Trading

By Nial Fuller

One of the primary differences between Forex traders who consistently lose money and Forex traders who consistently make money is that losing Forex traders are much more fixated on the money they can make from trading, rather than actual trading itself. In contrast, traders who pull consistent money in the markets are much more focused on being good traders rather than how much money they can make. You see, if you want to make money in the markets on a regular basis, you have to understand that controlling your risk per trade is crucial.

Successful traders understand this point, and so they contain their risk per trade to a level that does not allow them to become emotional, and in fact they actually forget about the money for the most part, and so they are much more concentrated on being excellent traders. So, if you want to focus more on your trading and relieve the emotional tension you feel in your trading, you simply need to dial-down your risk per trade to a level that cuts the emotion from coming into play, then you will have nothing left to focus on but becoming a master Forex trader, and the sky will then be your limit.

How to Forget About the Money

OK, I know it’s one thing for me to say “You have to forget about the money and focus on the trading”, but it’s another thing for you to actually do it. In the name of providing specific and practical information in my articles, rather than general information that does little to help you actually evolve as a trader, I’m going to give you some specific things you can do to put your focus on your trading and take it away from the money.

Here we go:

*Don’t trade the markets to buy something specific or to quit your job – Let’s be honest here, you probably are interested in trading because you hate your job and you want to trade from the beach with pretty girls (or guys) serving you drinks all day. It’s a nice dream, but it’s not reality, at least not yet. Most beginning or struggling traders skip learning the actual process of trading and instead go right to thinking about what could be the final outcome IF they are successful. This is backwards thinking, and unless you forget about buying a Ferrari right now, you are never going to have that Ferrari. Like anything else in life, you have to pay your dues when learning to trade, you have to put in time to actually learn how to trade, you have to be disciplined enough to manage your risk on EVERY trade you take, and you have to not over-trade. If you do these things you have a good chance at achieving your desires from trading, but there’s no sense in gambling your money in hopes that you get consistently lucky enough to just skip over all the “hard-work” aspects of trading. Luck always runs out, developing life-long trading skills and positive trading habits does not.

*Make sure you actually have genuine passion for trading – Now, I’m not going to act like trading is not a super sweet way to make money, because if you do what I mentioned in the above point, it is. But, you should not only be trading to make money, you should genuinely enjoy the challenge of becoming a successful trader, and you should have a strong interest in markets and economies, otherwise you won’t be able to maintain enough focus on your trading to stick around very long. Many people fool themselves into thinking they are interested in trading in the early-going, but it’s mainly because they are just focused on getting rich and not on the actual process of trading. So, make sure your intentions are in the right place and you aren’t just trading to gamble your money in hopes of “hitting it big”; go to Vegas if you want to do that.

*Trade with a Forex trading strategy you really enjoy – If you want to focus on your trading more than the money, you obviously need a trading strategy or system that you really enjoy using. However, many traders buy trading systems that sound good or that look good back-tested over a perfect set of data, but in reality these systems or strategies end up being a heap of confusing junk. In short, if it hurts your eyes and makes you frustrated or confused to look at some trading system that tells you to use 5 indiciators, Elliot wave theory, and the proper star alignment, it’s probably going to cause you to spiral out of control and start gambling your money. Look for a simple trading strategy like Forex price action trading, that is built on simple and logical chart-reading skills.

*Don’t flip-flop between strategies after deciding on one – This point is related to the previous one, because many traders start out trading with a confusing trading method and so they switch to another one, which is not necessarily a bad thing, but when you constantly flip-flop from trading one method to the next it can cause you to give up focusing on your trading and start focusing on the money. Another thing many traders do is give up on a trading strategy that is actually genuine and effective only because they hit a few losing trades in a row. Don’t do this; you see every trading method will have losing trades; losing is part of winning the race of Forex trading. So, if you are happy with your Forex trading strategy and it has proven effective in the past, don’t throw it away just because you hit a few losers. If you are actually following a good trading method and not over-trading it, there’s no reason to change strategies.

*Focus more on risk than reward – Perhaps the most important thing you can do to focus more on your trading than on the money you can make, is to focus more on risk per trade than reward. I know this article is about NOT focusing on the money, but you do need to focus more on your risk than your reward, because if you are mainly fixated on the potential reward per trade, you will end up risking more than you should. In short, if you manage and contain your risk effectively on EVERY trade, so that the money you have on the line does not make you emotional, you will naturally be more focused on the process of trading since you won’t be worried about losing a lot of money. I firmly believe that if you focus on the risk then the rewards will “take care” of themselves.

*Know your risk tolerance and NEVER go over it – To wrap up this lesson, I want you guys to do one extremely important exercise for yourselves. Sit down with a pen and paper and write out all your life’s current expenses, don’t hold anything back. Then look at your monthly income. Now, after your expenses are all paid for, and you’ve put aside some money for your retirement or for anything else you might need, do you have any money left over? In essence, do you have any “fun money” that you could use for entertainment? If so, this is the money you should risk in the markets; not your child’s college fund money. This exercise plays into the task of determining your risk tolerance per trade. You need to decide how much money you are 100% OK with losing on any one trade, and NEVER risk more than that. THIS is the KEY to focusing on your trading and becoming a master Forex trader as opposed to focusing on the money, which almost always ends up in you becoming an emotional wreck of a trader.

http://www.dailyforex.com/forex-articles/2012/03/Forget-About-Money-Focus-on-Trading/11359

Wednesday, 21 March 2012

Simon Denham's Daily Market Comment

With the focus in the UK being on the Chancellor today an eye will also be kept on the gilt market to see how bond traders receive his annual budget. The leaks suggest that in an attempt to appease to his coalition partners he is going to raise the lower tax rate band and pay for it by cutting down on tax avoidance and introducing a mansion tax. The move to raise the level at which tax is first paid on income is a costly move and has to be paid for somehow which in some part will come from a new tax of expensive homes, but the Chancellor also has a little wriggle room in that he is ahead of his deficit reduction targets. These are the headline grabbing measures that are due to try and cover up a reduction in the 50p tax rate next year. The plan to introduce this in a year’s time rather than right now is simply going to make many of these top earners defer their income into next year so they pay the lower rate then. So if he wants the cash now then he’d be better off cutting the rate now and at the same time sending that message to business leaders and enterprise that the UK will reward success.

On the other hand there are arguably more important measures that don’t tend to get the headlines as they aren’t the vote winners/losers. Corporation tax, which the Chancellor announced reductions of a year ago could once again be reduced in an effort to attract businesses and encourage start ups.

All these measures cost money and so we can also expect some more spending cuts to be thrown in. As mentioned the bond markets will be the ones to watch to see whether traders believe the Chancellor can afford these things and keep on track with his deficit reduction plans. At least there’ll be one other bit of bright news in the form of an upgrade to growth forecasts from the Office of Budget Responsibility, a whopping revision upwards from 0.7% to 0.8% for the year.

The FTSE has opened flat this morning following yesterday’s little sell off and at the time of writing it's hovering around the 5900 mark. Yesterday’s sell off so far looks once again to be a buying opportunity for the bulls but with the index continuing to fail around the mid 5900s and yet to break through 6000 the bias looks to be in favour of resistance levels. On the one hand investors have to consider the fact that now even mining stocks are voicing their concern about the Chinese economy, but on the other the US is still showing signs of a recovering economy that could be sustainable. These two counteracting factors are causing the indices to go sideways.

Whilst all eyes will be on today’s budget, this morning we do get the release of the Bank of England minutes as well as Public Sector Net Borrowing. PSNB which fell last month as annual tax receipts came in more than expected is due to show a rise today as government spending is due to ramp up ahead of the end of the tax year. For the BOE minutes which showed a widening split in the MPC last time round with a 7-2 vote it will be interesting to see whether that dove-hawk split has got wider. Then later we get existing home sales from the US which is expected to continue higher in a similar fashion to how it has been so far this year.

The bounce in risk assets this morning is assisting the euro which is higher so far in today’s session. EUR/USD is at 1.3255 at the time of writing having been a little higher already. The recent little uptrend just seems to have come up against resistance around 1.3290 which is where the pair failed earlier in the month. There was concern earlier in the week about rising Portuguese bond yields, but yesterday those concerns were out to rest as the yields fell back.

Gold still hasn’t seemed to get back into rally mode even though a little dollar weakness has set in recently. At 1653 this morning the yellow brick just can’t seem to attract the buyer back following its sharp falls and as it continues to hover below its 200 day moving average a seed of doubt about the longer term upward trend might growing in the mind of the bulls.

http://www.capitalspreads.com/simon-denhams-daily-market-comment

Tuesday, 20 March 2012

Consistency is the Key to Successful Forex Trading

The Forex market is in a constant state of flux. Its liquidity is the very thing that helps Forex traders turn profits when they get it right. It may be difficult to consider that in such a volatile market, consistency is the key to successful trading. How can you remain consistent when the market appears to do the unexpected on a daily basis? The fact is that all the indicators in the world will not tell you what the market will do. As a result, new traders should be wary of becoming frustrated with what they believe the market should do.

The first lesson any Forex trader should learn is that this unpredictable market is impossible to forecast for the majority of the time. Any consistencies, trends or indicators you spot are simply patterns that increase the probability of you trading successfully on the Forex market and do not guarantee the direction the market will take. Consequently, you should expect consistency from your trading strategy not from the market itself.

The key is to focus on consistency not profits and to go into the Forex trading market with realistic expectations. Patience is another necessity when learning how to trade Forex. Opportunities arise every day but that does not mean you should act on every single one. Focus on your trade plan and the opportunities you feel are most favourable and manageable for the time and experience you have.

Your trading plan should be consistent. If you trade to your plan consistently, you are more likely to learn how to progress as well as avoid your emotions influencing your decision. A string of losing trades may have nothing to do with the profitability or effectiveness of your trading strategy.

You should stick with your trading strategy through good and bad times. Each trade is independent from the last. Just because you have had a string of winning trades does not mean your next trade will follow suit. Control the risk and only trade when signals align. A consistent approach to price is important too. Indicators can tell you about what has happened before and together may allude to future movements, but the price must be your sole focus.

Become consistent in all aspects of your trading plan, only trading when probabilities are clearly on your side. Whether through thorough testing, record keeping or monitoring, your trade decisions should always be made to your satisfaction whether they end in profit or loss.

http://www.financial-news.co.uk/4170/2012/03/consistency-is-the-key-to-successful-forex-trading/

Monday, 19 March 2012

Simon Denham's Daily Market Comment

It’s budget week and already there are leaks ahead of Wednesday when the Chancellor probably has his last chance to really try and give the economy a boost before the next general election. There’s almost certainly going to be an element of what he gives with one hand he takes with another by giving a little bit away here and then taking something back in an attempt to appease all members of the coalition. It’s guaranteed that the opposition will try to grab the headlines if George does reduce the contentious 50p tax rate claiming that he is pandering to the rich, but other measures are expected to try and give lower income earners a boost whilst at the same time preventing people from avoiding stamp duty on the purchase of homes.

These though are hardly jaw dropping measures to boost growth and whilst the politicians will bicker over who’s worse or better off as a result, the real difference can be made by building things. By speeding up construction projects and making it easier to start such things will be the near term tonic that the UK so desperately needs to give the economy a kick start. The private sector is showing signs of life as indicated by the PMI surveys which still remain in expansion territory, but to be able to take up the slack from the public sector job losses the flat lining economy needs more of a pick up. Wednesday is a big day for our Chancellor and it’s more important than ever for him to get things right. If we do benefit from a pick up in activity and normalisation of growth on the continent then we want to be best positioned to take full advantage.

The FTSE is commencing the week on the back foot as the index continues to hover sideways and simply cannot seem to overcome the near term resistance levels. The 6000 mark still hasn’t been overcome and this morning’s sell off so far was not expected ahead of the open. Even the German Dax which has seen considerable strength in the last few weeks is seeing a bit of selling pressure early on. The Dax though still remains in a solid short term uptrend however important support levels are not seen for some time until below 7000, if this selling starts to pick up momentum. It’s hard to see this as being the start of a possible larger sell off since every time any correction has taken place in the past few months, it has been met very soon after by buying. For the FTSE over the near term support is seen at 5915, 5890 and then 5860 whilst resistance is seen at 6000, 6020 and 6050.

Economic data really is thin on the ground today with nothing major to report so we have to wait until tomorrow when we get UK inflation numbers.

FX traders long of the euro enjoyed a rally against the dollar on Friday, after the University of Michigan consumer sentiment index fell, as did industrial production. The poor data figures were enough for traders to lose their appetite for the US currency. The single currency jumped around 140 pips to 1.3186, although that has proven to be short lived as the pair has fallen nearly quarter of a percent this morning, trading at 1.3145. The expectation is that if the Fed avoids a third round of quantitative easing, favour will be back with the dollar in no time.

The gains in the price of gold were rather thin on Friday, with a weakening US dollar putting a low ceiling on any hike. The reason behind the small rally was a proposed doubling in the import duty on gold to 4% in India - the largest consumer in the world - by the Finance Minister Pranab Mukhejee. So by the end of the session the yellow brick was showing an extra 1.9 dollars at 1659.1, which at time of writing has been cleaned off, as gold is trading at 1656.2.

The usual suspects were behind the drive in crude prices on Friday, with a lower US dollar and higher equity markets helping black gold post a gain. Additionally, energy investors were kept optimistic by the news that US inflation was on track as consumer prices rose less than initial estimates. At time of writing, Brent crude trades at 125.23.

http://www.capitalspreads.com/simon-denhams-daily-market-comment

Friday, 16 March 2012

Simon Denham's Daily Market Comment

US markets continue their climb with the S&P hitting its highest level in almost four years. Yet European indices and certainly in the case of the FTSE, still don’t seem to be following their lead. The London market is lagging behind its counterparts stubbornly refusing to break through resistance and still the 6000 level remains elusive. Investors have been given a little bit of a reality check as mining stocks struggle to make any significant gains on the back of the warnings surrounding the Chinese economy and these are the real growth story shares, the heavyweights that have been behind much of the rally thus far. Since the FTSE has a large chunk of miners in it, the index is heavily reliant upon them.

The market has literally gone sideways this week and some of the thin volume could be contributed to it being Cheltenham week. Today is Gold Cup day at the race festival and so it’s unlikely that we’ll see volumes pick up and there is not a huge amount to write home about when it comes to economic data releases. But there is the release of US consumer prices at lunchtime and then we end the week with Michigan confidence figures. Since the rally is being purely driven by the Dow and S&P the bulls are expecting them to carry on higher.

The German Dax does seem to be making best attempts to follow the US indices higher as it is now firmly above the 7000 level at 7150 this morning. For the FTSE we’re flat to slightly lower on the open at 5940 and as mentioned if it wasn’t for the mining sector just keeping the index in check, we would probably be sailing above 6000.

In the absence of any major market moving news and with many people off at the races, the headlines are filled with an ex-Goldman banker’s revelations about the firm’s business practices and treatment of its clients. In this day and age of banker bashing this is going to do little for the banking sector to ingratiate itself with an ever critical public. As mentioned in this comment before investment banking is going through a big overhaul including mass redundancies. It is not hugely surprising to see one of these people mention something about their take on the working environment in some parts of the industry, but this is not a time where such bad PR is going to do much help.

Currency markets are rather flat this morning and for now the single currency is still managing to hold onto the 1.3000 level against the dollar. There still seems to be a slight shift towards the dollar at the moment although this morning the greenback bulls are just taking a breather. EUR/USD is at 1.3080 at the time of writing so traders will be focusing on support and resistance seen at 1.3000, 1.2970 to the downside and 1.3120, 1.3155 to the upside.

For USD/JPY which has seen impressive gains in the last few weeks a big top looks to have formed in early trade yesterday around the 84.00 level. At the time of writing USD/JPY is at 83.50 and near term support and resistance is seen at 83.15, 82.80, 82.60 and 83.85, 84.20 respectively.

Gold seems to have found some support around the 1640 level and is at 1655 this morning. Considering how much geopolitical tension is built into the price of oil it is a surprise to see this hasn’t translated into strength for the yellow brick. The real worry for the bulls is that the recent recovery of the dollar has been signalling a possible end to the amazing rally in gold over the past decade or so. Many bulls still believe this is merely a blip as part of the next big move higher, but that can only really come if the Fed becomes more bearish and gives greater hints that QE3 is on the way.

Brent continues to hover near its highs and is at 123.20. As mentioned the price is still loaded with geopolitical tension and consumers and businesses are wishing that these tensions are eradicated, which if they are could see the black stuff decline sharply. With prices at the pump creeping ever higher the squeeze for motorists is becoming a real problem and will affect the wider economy if it continues.

http://www.capitalspreads.com/simon-denhams-daily-market-comment

Thursday, 15 March 2012

How a Currency Can Change the World

By James B. Stanley

The currency market often sees many swings on the worlds' most often used currencies. This article will walk through the implications these movements can have on their economies.

One of the most interesting aspects of the Forex market is the global implication carried behind each and every quote.

While a price may move quickly, and at times, feel fleeting; it’s often easy to forget that these prices carry heavy repercussions throughout our economies – even if your nations’ currency isn’t in the quote.

A great example of that is Japan.

Traditionally a heavy exporter, Japan’s economy is very much driven by their trade balance and the world economy continuing to purchase Japanese goods. As Yen gets more expensive compared to other currencies, it makes purchasing those goods more expensive for foreign consumers. This can be extremely prohibitive to the Japanese economy, and the companies that are trying to sell goods to those foreign consumers.

Let’s run through a very basic analogy to see how Japan is affected with a strong Yen by taking a closer look at one of Japan’s key industries and one that many of us are probably already familiar with: The Automotive industry.

Let’s say that one of the large automobile manufacturers in Japan is in the process of expanding into the United States; and has seen business from the United States become an increasingly important part of their growth strategy. If they were only able to sell cars to Japan, they wouldn’t be able to sell enough to recoup all of their overhead expenses, meaning that as a company they would take a loss without their American business; so this strategy of distributing cars to the United States is critical to their continued growth, success, and prosperity as a company.

Let’s assume that in year one, when the exchange rate of the USDJPY was at an even 100.00 level, it cost our fictitious company $20,000 or ¥2,000,000 to produce their base model automobile. This still allowed for them to pay shipping and selling expenses ($5,000 per unit, or ¥500,000 per unit) to get the total cost of the automobile – before being sold, to $25,000 or ¥250,000.

This allows them to sell the car for $30,000 or ¥3,000,000 and garner a profit of $5,000 or ¥500,000 per unit. Each car sold puts $5,000 to their bottom line.

Let’s fast forward a year, and let’s say that we’ve seen the exchange rate move down to ¥75.00 per $1. This means the yen has strengthened 25% and business has just gotten much more difficult for exporters in Japan.

While it cost the same ¥2,000,000 to produce the automobile as last year, and the same ¥500,000 to ship and sell the product; the exchange rate has made a large difference to our company.

If they want to use the same price points as the year before, they may be forced to take a loss. Since the Yen is now more expensive against the dollar, our company will probably be looking at a reduced profit.

Notice that while production costs and the selling price remained the same as the year before, the change in the exchange rate means that what was previously a ¥500,000 gain is now a ¥250,000 loss.

A change of ¥750,000 in only one year has taken place for each automobile sold, and this is solely because the Japanese are looking at a more expensive yen.

This can have a grave impact on an economy, particularly one that relies on continually exporting goods.

As you can imagine, this is not a strong business strategy that many Japanese companies are interested in entertaining over the long-term, so it’s time to look at some alternative business strategies.

Let’s say that our company wants to ensure themselves of a profit. So they do the math and they see that they can gleam a profit if they raise the price to $35,000.

Raising the price to $35,000 per car means they could possibly profit ¥125,000 per unit. This is half of what the profit was from the year before; but we have to anticipate another effect entering into the equation; and that’s the consumer.

Consumers notice that the same car that cost $30,000 the year before now costs $35,000 – an increase of almost 15%. Now customers are looking at other makes, other models, and any other car where they can get more for their money.

Not only do you, as a company, have to contend with decreasing demand from consumers scared away by higher prices (the term sticker-shock comes to mind); you also have to deal with your own shareholders that are unhappy that profit has decreased so greatly while sales have remained constant.

So while the price of $35,000 might bring the company a profit, it may not be a requisite option as it can upset both consumers, and your own shareholders. So the company explores even higher price points.

A selling price of $40,000 could potentially pacify shareholders, so you entertain that option as well.

Notice that the profit realized by the company is the same profit realized a year earlier; only we’ve had to increase the price of the car by 33% to realize the same amount!

The big question is – do you think you would be able to sell the same number of cars for $40,000 that you had for $30,000? What about $35,000?

The answer, most likely, is no.

The fact of the matter is that consumers are price conscious, and changes in prices such as what we looked at above, changes of 15% or 30% can often cause consumers to look to other products or manufacturers.

This is one of the primary reasons that Japanese stocks have fared so poorly when their currency has strengthened so much. The below chart illustrates the Japan 225 CFD (based on Japanese stocks) since the opening of the year 2000. In April of 2000, Japanese stocks hit a ‘High-Water Mark,’ of 20,833 as shown on the chart below:

The above chart shows a stark down-trend, accented by the economic recovery that eventually became the Financial Collapse of 2008. The part that would perplex many traders is to notice the chart of the USDJPY currency pair over the same period.

Keep in mind, as the Yen is the counter-currency in this pair, decreases in price denote strength.

From the above 2 charts, the relationship that becomes clear is that as the Yen has strengthened, we’ve seen investors selling Japanese stocks.

The big reason that this takes place is because reality isn’t nearly as flexible as what we had prescribed in our analogy. Consumers care about prices; and when prices increase they will often look elsewhere to other manufacturers, other products, or other markets to fulfill their needs.

While the economy of Japan holds hope on this most recent rally, it’s important to keep in mind the multiplier effect that can be carried by movements in their currency.

If they are able to effectively devalue their currency – they have the luxury of being able to reduce prices and become more competitive; stealing sales away from American and German auto manufacturers. This can lead to increases in corporate profits, which can lead to increases in stock market valuations.

But if they have to stare into the face of a constantly appreciating currency unit, the future is not bright, for Japan or any other export nation.

http://www.watoday.com.au/business/daily-forex/how-a-currency-can-change-the-world-20120315-1v421.html

Wednesday, 14 March 2012

Simon Denham's Daily Market Comment

The rally continues for stock markets led by US indices which are basking in their own mini recovery. Things couldn’t be better there for the incumbent President ahead of elections in November as only a year ago it looked like Obama was one of the most unpopular people in the country. Now that unemployment in the US is falling, the economy is growing and looks set to avoid a double dip recession and stock markets are rallying this will help confidence across the board, almost certainly guaranteeing his re-election. The shorter than normal FOMC meeting last night struck a bullish tone and fuelled the rally in the Dow which was already posting decent gains early on in the session. The recent rally can be attributed to the ongoing promise of stimulus from central banks should it be needed and whilst last night didn’t open the door for QE3 in the US, investors are happy that they’ve seen it before and they’ll see it again if growth starts to take a dip. We know that interest rates across the pond are going to remain at their record low levels into 2014 and that policy is likely to rub off over here where it seems inconceivable that when inflation is falling, the BOE or ECB will want to hike interest rates.

So the Dow’s rally not only took it firmly above and beyond the 13000 mark, but it recorded its highest level since 2007. That really is remarkable as it takes us back to pre Lehman times. This morning we are seeing this bullishness translate into gains for European equity markets as the FTSE has opened up some 20 points at 5975. Our quote even hit as high as 6000 and this will be the next target for the bulls. The impressive recovery by indices since their little retracement last week has brought those resistance levels and highs for the year back in to focus. The 5950-75 area has been the big hurdle for the FTSE and so as we trade around and above here the focus is on the next targets of 6000, 6030/45 and then 6100. To the downside support is seen at 5950 the near term upward trend line, 5915 and then 5870/50.

Quite a bit of data to get our teeth into today with unemployment numbers from the UK this morning where the data is expected to show tentative signs that the UK labour market continues to stabilise. Whilst we’re a long way off from the sort of job creation and falling unemployment that the US is currently enjoying, there are indications from other employment surveys that there are jobs in the services and manufacturing sectors which just remain in expansion mode. The thing that is counter balancing this is the public sector job cuts and so claimant counts are due to rise by some 6000 but the overall rate is expected to stay at 8.4%, still at its highest level since 1995.

Other data includes EU industrial production which is expected to rise as overall the manufacturing looks to be stabilising, however it’s a very different story for both core Europe and the periphery. Then later at lunch time the US releases its current account balance.

The recent dollar strength has really been the theme of FX markets recently. This has largely been to the detriment of the euro and Yen where EUR/USD has been grinding lower and USD/JPY has been adding to its impressive rally. As the equity markets have been rallying with risk appetite increasing in the past we would expect this to translate into dollar weakness, however this has not been the case recently and the dollar’s recovery indicates a shift in sentiment towards the US. The single currency is still holding onto the 1.3000 level trading at 1.3040 this morning but the bears might want to test the recent lows around 1.2980. For USD/JPY which is at 83.30 at the time of writing 83.50 and 83.75 are the next targets for the bulls.

As a result of the continued recovery of the dollar gold has really suffered and is well below the 1700 level at 1668 this morning. These are the recent lows and so bulls will be hoping to see some support for the yellow brick, but for as long as the Federal Reserve keeps saying that QE3 is on the back burner, the sentiment towards gold will struggle to get any more bullish. Now back below its 200 day moving average things are starting to look a little bearish for the metal.

http://www.capitalspreads.com/simon-denhams-daily-market-comment