Market full of riddles - staying on course, is right.

Volatility centered around Bernanke's testimony, risk sold off when he failed to signal fresh stimulus and rebounded on the subdued outlook and his willingness to act if necessary.

That's what took place but does anyone know what this really means? Yeh. Nah.

Will there be any form of QE? I don't see how.

The current Operation Twist II runs until the end of the year so will there be urgency for the Fed to deliver additional QE.? Answer - simply is - an emphatic no. In particular when the CPI perked up a little on a 1.7% print and considering the skyrocketing landscape of Agricultural Commodities the CPI is unlikely to soften any time soon, if at all the rest of year.

The Fed and Treasury are hellbent on POMO until infinity with its grotesque budget deficit. We also saw Net TIC Flows (Treasury International Capital) come in at a whopping $101.7 BLN. Why is this important? Many participants refuse to pay attention to it as they fail to understand it. It is one of the major events in the market, as it is seen by most participants as the Government resource for offsetting the current Trade Deficit. Question remains; is this massive international capital inflows into U.S paper front running the Fed and Treasury on 30 year debt? Maybe. The Fed will be loving every minute of it..so why disrupt it?

So how to make money? Glad you asked, as the landscape is riddled with riddles it is hard to say. However as depicted in this entry Muddling Through The Chop I made a case the second half of year will be more bullish than not. Quite likely will not make sense to many as market continues to grind higher. The main element behind my thinking is that Central Banks have no alternative and no solution other than stimulate.

My greatest fear is the pop-rally will only be short lived until say Mid August. China is the main player that has capacity to catch the market off guard and has plenty of room to move in its current stimulatory cycle - and it is in a stimulatory cycle.

TNX - Likely double bottom trading at 1.5% rising 37 basis points on the day (+2.53%)
VIX - Down 3.63% to 16.52 for the day and no end to the complacency.

How fearful am I of an epic crash? Very!!

I will post a chart on current SPX/TNX spread. This disconnect is a monster and needs to be tread with cautiously. Stocks and Bonds are two separate asset classes and they are both going up in tandem in bubbly fashion. Bigegr than Ben Hur - you betcha

Until that mess is resolved - and it will be resolved. For short term opportunities, you will need to be quick and nimble for rest of week. I can post ideas but it really is up the reader to interpret them correctly as I am simply unable to click the buttons for you!

Until next time.

Euro plummets and awaits suckers

The first trade set up I have posted on this blog. I am not going into the fundamentals as you can entertain yourselves with previous entries and we shall stick purely on the technical aspects.

I am a very simple chartist - primarily I like to work off a pressure line i.e,. support becoming resistance and vise versa. I like to focus on mis pricings, the upside or downside surprises based on the economic calendar. But on this entry, we shall determine what EUR/JPY is trying to tell us and whether we can execute a profitable trade.

Firstly we have a very big week in the Chinese markets next week and it would be handy if you keep this somewhere as a reference point as I expect volatility next week by the buckets.

From IFR:

*Markets speculate the PBOC was pre-empting weak data with today's rate cut.
*Heavy data flow beginning week of July 8.
*CPI expected to fall from 3% y/y to 2.3%, PPI exp to drop from -1.4% y/y to -1.9%.
*Exports anticipated to have fallen from y/y rate of 15.3% to 10.2%, GDP exp 7.7% from 8.1%.
*Equity market near 3-year lows cast doubt on whether soft landing can be engineered.
On to EUR/JPY

The above is a 4 HR chart of EUR/JPY. Apart from fundamentals this chart doesn't spell any buy signals to me on the premise of being oversold. On the contrary if you are short, you would book some profits here based on a 14 RSI reading of 10 which is extremely oversold and hedge the remainder for a sucker bounce in case it manifests into a reversal. The bounce will likely be a  sucker bounce providing position is appropriately hedged I would place a limit sell and add to the existing position approximately 3-5 pips outside that support line band in view of becoming resistance at 99.75/80.

Opening fresh trades on Fridays should be immediately eliminated unless booking profits, so the above example is seeking to open a trade Monday/Tuesday. The trend is at best of times very difficult to qualify in ranging markets, but to keep it simpler than simple I implement a 200 moving average and use an above/below rule. So in EUR/JPY instance the bears are in control so you don't want to mess with them.  If our limits are not hit and the instrument continues to plummet, so what. The main fact we have remained disciplined in our approach in order to get involved at the best possible price should be the strategy here.

Good Luck.

Muddling through the chop.

This post is primarily for my own purposes; if you find uses to integrate into your trading strategy then you are welcome. Usual Caveats apply.


The main motivation behind this post is to define where markets will trade in the coming months. Remember I do not day trade, I trade themes based on macroeconomic events. The macroeconomic picture is muddled and very difficult to define at this point, but we shall attempt to crack it and see how we go. 


Firstly with slow growth, high unemployment and limited room for manoeuvre regarding macroeconomic policy space, structural reforms are the short-run remedy to spur growth and boost confidence.

We see a graph by the OECD that confidence in the U.S has picked up but at plateau levels and difficult to determine where US confidence will go from here considering the nations government debt profile.

In Europe, business and household confidence is weak, financial markets are tight and the adverse impacts of fiscal consolidation on near-term growth may be significant, particularly in countries hardest hit by the euro crisis.


Recovery in the healthier economies, is not strong enough to offset flat or negative growth elsewhere in Europe.


Adjustments in the euro area are now taking place in an environment of slow or negative growth and deleveraging, prompting risks of a vicious circle involving high and rising sovereign indebtedness, weak banking systems, excessive fiscal consolidation and lower growth.

As we are already aware the situation in Europe is very poor and there is no end in sight.

However, as global growth expectations have come under pressure as economic momentum has considerably weakened. In the absence of a genuine European shock from here one can expect U.S and China to lead the global economy in the second half of 2012.

Softer US economic data in recent months has largely been the result of statistical implication of a warm winter. Signs of improvement in housing, falling energy prices and OK consumer demand suggest the recovery hasn't completely fallen off the proverbial cliff.


Commodity markets are currently heavily oversold on the double whammy of slower growth momentum [as per China] A stimulus policy in China will be favourable to commodities but will highly impact input costs and hence the falling value of Chinese exports. The latter should be seen in early 2013 as China stimulates which leaves room for a multi month commodity rally until early 2013, on the proviso of no other European shocks.

It can be easily argued the U.S 10 year bond yield has traded into cyclical lows at 1.44%. My personal belief taking global debt swallor into consideration with little impact on reforms will eventually trade vastly lower and we shall eventually see a re-make of Japan's JGB market. However a move into the shaded areas as yields revert to their mean is also a highly probable scenario, in particular if China decides on a stimulus policy. There is a clear disconnect between USD and U.S 10 yr yields and this disconnectness will continue as flows from debt to risk will be the story.

References -
-OECD economic outlook http://www.oecd.org/document/18/0,3746,en_2649_37443_20347538_1_1_1_37443,00.html
-ANZ research quaterly http://www.anz.com/resources/d/d/dd076e004babd2058c3eeec96010cd62/ANZ-Research-Quarterly-June-2012.pdf?CACHEID=dd076e004babd2058c3eeec96010cd62

Painful Market in Explosive Volatility

This environment is extremely painful. I have been lucky to close most my positions now only hold a small AUD short for a continued commodity rout for various reasons I won't go into right now. Gold is on the cusp of a technical bear market and periphery yields are blowing up, swaps are uneasy; in fact everything is a mess. This market is not one to pre empt as the EURUSD is trading in typical bear-market action. Traders are extremely unhappy having to sell at yearly lows; due to yield spreads - Macro & Real Money accounts are forced to sell.

If you are not already set in a profitable position then taking a position now in hope for a reversal/squeeze play is akin to going to the casino and playing roulette. You are effectively gambling against the house and the house in this instance is the 'establishment' or the banking fraternity. Don't tempt fate, you may get your 20-30 pip pop but the political environment in Greece is breeding market uncertainty in some cases to the extreme. Uncertainty over bank-runs, uncertainty over contagion, uncertainty whether yield blow-outs will deteriorate. 

It gets better - we will have no clear view of the political landscape in Greece for another month. So if all due diligence is correctly aligned, stay risk averse. The volatility is explosive and should be respected not played with like a toy unless gambling urges overcomes you or you are far-smarter than the market. Obey the chart and look at its trend.

I must stress though, there is scope for a decent squeeze and gamblers do occasionally win at the casino. Analysing recent COT data nothing suggests net-shorts are dominating the market this may change this weekend though. Friday is usually squeeze day so maybe for a very small outlay it may pay off but above all staying risk averse in an environment of uncertainty is where the money is. Fading risk-bounces should be at the forefront of your trading strategies.

Embrace Drawdowns they are part of Trading

Managing Drawdowns is a traders nightmare. It happens to all of us and it skews your ability to think clearly. The beginner becomes desperate to hunt for the next kill to make up for endless losses. It is particularly difficult when a great system has a drawdown right from the set go unawares of the profit curve is around the corner.

 Beginners would not have a clue how to manage drawdowns; it should be part of a 'five year plan' and estimate your drawdowns over five years. If you are unable to estimate this vital statistic I suggest you fine tune your risk management techniques get to know your system; no matter how simplistic it may be and find out what the drawdowns are likely to be and prepare for them. It is imperative to try and forecast your trading business your profits and losses in terms of percentage. You need to keep atop of everything and drawdowns is one of them. It is the most psychologically challenging task of a trader to comprehend and execute correctly.

Some tips to manage drawdowns.

Hedge

Hedging can be the difference between an empty account and a funded account. When you hedge, you prevent further losses. Say you take a bad trade of lot size 1, and you are on -150 pips. And let us say you have a $300 account. This means that half of your capital is on the ropes and things are not looking good. 

Do Not think the market can not wipe you out in one night because IT CAN. 

The first thing to do is to hedge. Take an opposite position of the same lot size.

Doing this, means you have frozen the losses. IT DOESN'T MEAN YOU ARE IN PROFIT. It just means that you are not in fatal danger anymore.

When the price moves to the oversold/bought position you close the hedge immediately and take advantage of the oscilations by moving into other markets. This WILL NOT WORK WITH VOLATILE MARKETS PERIOD. AVOID VOLATILITY DURING DRAWDOWNS IF YOU RESPECT YOUR ACCOUNT.

Reduce position sizes

When you have forecasted your losses you are very well prepared to dramatically reduce your position size in a timely manner for more accurate risk-adjusted returns and losses in line with your system.

If your average starting position is $10k and experienced a 10% drawdown and forecast a further 20% drawdown it is imperative to slash your position sized to approximately a third of average position size. SO now your average starting position should be $3k instead of $10k.

Only incrementally increase position sizes by approximately 10% when profit chart improves.

These are the two main strategies but to recap drawdowns must be viewed within a larger framework. One reason that drawdowns affect traders so acutely is because they aren’t viewing their trading in its entirety – over a long period of time. Many traders tend to focus on trades in isolation instead of seeing them as part of a “pool of trades” executed over an extended period of time. This mindset causes losses to be felt more deeply, as opposed to the mindset that see losses as small instances in the grand scheme of things. 

It’s imperative to understand how these emotions affect our trading behavior. Becoming too elated over the success of any one trade often leads to a feeling of invincibility and WRECKLESNESS. This is a very dangerous state to be in, as it easily causes sloppy trading decisions and the taking of unacceptable levels of risk, which can result in large losses and a new career change. Conversely, dejection over failed trades can lead us towards desperation and anxiety, which often results in poor trading decisions based upon a need to validate our feeling of personal competence.

The latter feeling is also counterproductive because it has a tendency to make us question our trading methodology. We may ask ourselves “Maybe my system is flawed”, or “I was following all of my rules with discipline, why hasn’t it worked?”. Most of the time, if you’ve done your planning and executed it properly and stuck to your trading plan with discipline, it’s not your particular trading methodology that is flawed. The simple fact is that every method will have a certain percentage of drawdown. 

Sometimes those losses come one after another in a seemingly endless fashion. But, nine times out of ten, the upswing is usually just around the corner, if only the trader will have the courage to persevere through the losing streak. Sadly, it is during these losing streaks that many traders decide to hang it up and abandon trading altogether. As stated above, traders should focus on profiting over the long run, instead of trying to enrich themselves on individual trades.

Introduction

I am not much of a Blogger perhaps I like to keep some things to myself; perhaps my thoughts are a tad off-center for the normal Joe to comprehend..or perhaps I am on a different orbit. Whatever the rate may be, this is my first ever Blog.

A little about me - I have traded different prop desks for National Australia Bank. If you think this Blog is established  to purely NAB-bash you are mistaken. They gave me the opportunity in  Financial Services and have traded and led desks in London, New York & Singapore. Mainly in prop FX hedge funds I am eternally grateful. I now run my own private fund for friends and family which will remain anonymous. If anyone is interested in joining the fund they are welcome to contact me direct and I will forward detailed information. I am not interested marketing my own fund, never will be - there is no monetary point - I don't depend on fees to make my money, got it? I have been a professional trader since 1995 so you do the math on how many trades, how many Bull Markets, Bubbles, Crashes and Bear Markets I have executed - I know nothing else. Hopefully this Blog will able to highlight the many pitfalls of foreign exchange trading. The explosive popularity of this get-rich scheme and remarkable community growth is worrying.  I am certain most are deluded in the fact of becoming an overnight millionaire utilising some outdated Expert Advisors. You Fools.

I am up front and non conformative;  at times you will want to hit me over the head with a hammer at the end of the day I am one of the happiest blokes alive with a positive outlook surrounded by those closest to me; but mostly I shall attempt to assist new traders to avoid losing their house, their lives, their wives, their husbands and their children.

From time to time I will post a trade set-up and instrument levels to keep an eye on; mostly my focus will be managing risk, managing psychology - managing the trade from inception to the end like a professional, using macro-events and technical analysis. We may need to hedge we may straddle the position..stay tuned...

There will be the odd tirade, rave & rant whenever I get the urge and do it often on my twitter account @Calvofx where I post trades live.

Yes the aesthetics of the blog will be improved over time so you children shall have some pictures to look at and not this bland ol' background.

If there is a topic you would like discussed in detail, feel free to state what it may be; I will be happy to look into it.

That will be all for now.