January 2005 issue of CTM is now available!

Very Timely! I am going to read it on Sunday and may recommend certain articles.

European-U.K. session may tell what market thinks

As I post yesterday, I bought EUR/USD @1.3170 which was U.K-U.S. session's low. After that, EUR/USD ever tried to test 1.3140 when U.K. session was over but failed. The current rate is 1.3190.

No profit taking for yesterday. I suspect if there will be a profit taking in today's European-U.K. session. Although EUR/USD still hold 1.3140 for now, I admit that I originally thought there should have been an profit taking upward move for EUR/USD in yesterday's U.S. session since it had already fallen for 6 days and NFP would come out within 24 hours. Yes, in my previous post I ever declared a good NFP # should not benefit dollar bulls too much. But now I doubt a bad NFP # should not benefit dollar bears too much either. Anyway, the market behavior tells the market sentiment. So EUR/USD does possible continue to fall after a brief spike high as the aftermath of a bad NFP #. The reason is quite simpe, otherwise we should have already seen a profit taking for EUR/USD.

I read an article yesterday from WSJ Chinese version (still free). One fx trader said the key to conclude whether U.S. current account deficit is still a usable execuse in 2005 for long-term dollar bears would be what market behaves in U.S. trade balance data release (Nov, 2004), on Jan 12, Wed. I agree with that. I make an analogy, what market will respond to NFP # today is based upon how it behaves before U.S. session.

1. If EUR/USD breaks through 1.3215 before 13:00 GMT, I will hold yesterday's position and lift its s/l order to breakeven; Besides, I will place an buy stop entry order at an appropriate level beyond the current rate at that time with an s/l order for it 20 pips below; If a good NFP # release, I will close yesterday's position as soon as possible and cancel the new buy stop entry order, then wait and see what will happen;
2. If EUR/USD is in range trading between 1.3215 and 1.3140, I will close yesterday's position no matter whether it is in profit or loss; Then wait for data, good to buy and bad to sell;
3. If EUR/USD breaches 1.3130 (which may induce stop loss selling below 1.3140), my yesterday's position will be stopped out automatically; I will place an sell stop entry order at an appropriate level below the current rate at 13:00 GMT with an s/l order for it 20 pips above; If a bad NFP # release, I will rush into market to buy EUR/USD but be very cautious to any possible new dollar buying by the underlying force which has bought dollar for 6 days and be ready to close that new-build position at any moment; Unless I see heavy selling of EUR/USD after that, I will not follow it.

One example of trading plan with analysis

After 5 day's consective fall, EUR/USD is going to test 1.3140 resistance in European session today. Current low is 1.3173. I don't know if dollar bulls will manage to break through 1.3140 on Thu, but there are still no obvious profit taking activities for medium-term dollar bulls and those short-term ones who are riding the train. Besides, long-term dollar bears are just silently watching the correction. Of course, it is not wise for long-term dollar bears to enter the market build new positions before tomorrow's NFP. With a good NFP, they can enter the market in a more preferable level. However, why medium-term and short-term dollar bulls are so aggressive or risk-seeking at this time? Do they think it is a good excuse to protect their positions that good NFP will comfort Uncle Greenspan to lift rate 50 bps in Feb? They have to expect, if a bad NFP comes out, all the market participants, including long, medium and short terms will sell dollar together and the next available price for dollar bulls to quit may be far away.

That is scenario I. Is there scenario II that it is the long-term dollar bears who are paring their positions making and protecting the dollar correction (in this case, call it dollar reverse more appropriately)? But if long-term dollar bears sell EUR/USD, who are buying at a still high level? After all majority of medium-term and short-term players are defined more by their usable capitals, not by their IQs.

Let me show my plan for EUR/USD today (ending at 22:00 GMT).

1. I won't touch before U.S. session open;
2. If rate dives below 1.3140 but followering flows little (judged by the width of 5 min's bar), I will buy around there and set s/l order @1.3090;
3. If rate dives below 1.3140 aggressively (some stop loss orders under which should be triggered), I will wait to see if 1.3100 can hold (which might be briefly breached by the aftermath of 1.3140 stops hunting), if 1.3100 can hold after earthquake I will buy there and set s/l order @1.3060; I omit the solution for that rate dives aggressively below 1.3100, I think the possibility is little;
4. If rate doesn't test 1.3140 at all before London market close (16:00 GMT) today, I will set buy limit day order @ U.K./U.S. session low and set s/l order @1.3130.

T2W's Knowledge Lab

T2W's Knowledge Lab

I read an informative article in Trader2Win's forex forum called FX Market Participants written by GammaJammer, member of T2W, MoneyTec and maybe EliteTrader as well, and found a cluster of such kind of articles in T2W's Knowledge Lab yesterday. For now I don't have enough time to read all of them. Hope can get some useful information from the lab later.

What Fed really worry about?

Let's look at excerpts from the statement.

A number of participants cited the recent depreciation of the dollar on foreign exchange markets, elevated energy costs, and the possibility of a slowing in underlying productivity growth as factors tending to boost the upside risks to their inflation outlook, though, on net, they saw the risks to stable underlying inflation as still balanced.

The recent decline in the dollar would raise import prices and diminish competitive pressures on many industries. Besides, a number of participants expressed doubts that domestic and global financial imbalances would be reduced in the near-term.

Oil prices had fallen of late, though, they were still considerably higher than they had been in the spring.

In addition, productivity growth had slowed appreciably in the most recent quarter and unit labor costs had increased, raising questions about cost pressures going forward.

Some participants believed that prolonged period of policy accommodation had generated a significant degree of liquidity that might be contributing to signs of potentially excessive risk-taking in financial markets.

Well, upside risks of inflation outlook were worries of only some or a number of participants of FOMC Dec's meeting. Mr. Greenspan should not belong to that group of pessimists. Do you thing so? :)

NFP # still significant now?

The latest two NFP number, Nov's and Dec's of 2004, both were not bad but dollar's corrections vs euro after the number release were both easily defeated by dollar shorts re-entry. There were two reasons for that. First, it seemed no matter whether NFP number was good or bad, Fed would keep hike rate in a 'measured' pace. Second, even when market's consensus was Fed funds rate would continue to rise maybe to 3.75%, dollar had still been aggressively sold across the board since the mid-Oct. Well the excuse of dollar shorts were the current account deficit of U.S.. I say it was an excuse because before U.S. presidential election, the harm of current account deficit was as severe as after that and even though Kerr had been the president, this problem could not been changed; on the other hand, in the very near term, net capital inflow to U.S. was still able to balance the current account deficit. There was no possibility of dollar crisis then. I suspected the recent dollar drop in fx market was because the dollar shorts, maybe hedge funds leading them, simply fulfilled their plans to make better revenues in the last quarter for the whole 2004. Only to push dollar downward was much easier than upward as there were obvious excuse and U.S. govt obviously possessed a 'weak dollar' policy.

EUR/USD dived to 1.3384 and GBP/USD dived to 1.8979 in yesterday's Asian market, a very thin market since only Hongkong, Singapore and some Middle East Market opened their markets. Stop orders under 1.3500 for EUR/USD and under 1.9100 for GBP/USD were swept away for sure. However, I doubt there were no large amount of stop orders under 1.3400 for EUR/USD and under 1.9000 for GBP/USD. Otherwise, the rush under such levels could have been much more than 16pip and 21pip. And shortly after the breaches of 1.3400 and 1.9000, euro and pound sterling rised also wildly back to 1.3572 and 1.9156 in the afternoon of Hongkong local time or moring of Middle East local time. I merely want to illustrate that from the above elaboration, for example for EUR/USD, if there were stop orders, they more likely clustered around 1.3500 instead of 1.3400 and their owners were more likely medium-term euro longers who bought euro between 1.3500 and 1.3600. After Monday's dive, I opin no old medium-term euro longers for now. For long-term euro longers, their tolerance to hold their longs in a correction of EUR/USD seems far below 1.3400 and possibly around 1.3250.

Dec's ISM index well fell in consensus, 58.6 vs 58.5, although its employment index was at 52.7 vs Nov's 57.6. It may shade the coming Dec's NFP number. From today to Friday, there will be no other index important than these two. In the first paragraph, I doubt NFP were not and maybe will be not the excuse for long-term players. And in the second paragraph, I suppose long-term euro longers are not going to reduce their positions until EUR/USD dives below 1.3250. From the above deduction, I expect the history in Nov and Dec of 2004 will repeat if EUR/USD holds 1.3250 before the release, a good NFP number will only give a good opportunity for long-term euro longers to add more long positions and for medium-term players to build their new euro long positions at a preferable level. A bad NFP number will be worse for dollar.

Eurusdtrader.com and news trading

Jimmy, the founder of eurusdtrader.com

My first news trading was in 2003 when U.S. Army began to invade Iraq. I remember that was a Friday and the Army would face an intensive resistance of Iraqi National Guards and a first time real battle in the weekend. The outcome can hardly be expected. But I suddenly had an opinion that whether U.S. Army or Irais took a big defeat, the fx rate of U.S. Dollar would change largely (in short-term). Because none of the market participants, whoever were small or big ones, was able to predict who would be the winner just like me, they would rush into the market to respond to the outcome of the battle on the next Monday, Australian local time. So I bought EUR/USD with a tight stop loss order and a rather distant take profit order, and bought USD/JPY with the same two types of order as well in the last minute of Friday's market open time. EUR/USD and USD/JPY have negative correlation to some extent. As such, I would make a profit no matter what direction U.S. Dollar would like to take on the next Monday. I really made profit finally. I ever posted the idea for this case in a Chinese fx traders' forum and received appreciation from other members. I thought some of other members did also already find this trick independently. For myself, my background is in Science instead of Economics or Finance. Since I only had less than 1/2 year fx trading experience then, although I heard of some indicators like GDP, CPI, PPI, PMI, ISM, NFP, etc., I didn't know the importance of those indicators to fx market. I didn't know some of them can also throw a bomb into the market as an clear outcome of an expected counterbalanced battle.

Occasionally, I found eurusdtrader.com in MoneyTec forum. The founder of the site, Jimmy, whose major was in finance, had 20-year trading experience in banks. Jimmy introduced this trick -- to straddle spot price with one entry buy and the other entry sell right before economic indicator release or treasury/central bank official's speech or Fed/ECB/MPC rate decision and minutes. The most important contribution of Jimmy was he did a thorough statistic work on spot fx rate behaviors after a group of economic indicators release. This group included a lot of current economic indicators of different countries like U.S., U.K., Eurozone, Canada, etc.. His research quantified different intensities of spot fx rate move of different economic indicators release and classified those indicators into tradable ones and intradable ones. I don't want to repeat in this post what Jimmy showed to the public in his website. Everyone who is interested in Jimmy's work please visit Jimmy's site by yourself. Jimmy ever held an online course how to do news trading and advised individual traders to trade news real time by an IM-like software.

Because online retail fx dealers lose much money when they used guaranteed stop order as an advertisement attracting investors from equity market to join in fx online trading, besides NFP number which was ever the key factor influencing market expectations on Fed's rate decision, always came out far from what market had expected in 2004, they finally all abandoned stop order guarantee. This policy change almost killed this type of news trading (or Jimmy called it pseudo news trading -- simply to straddle spot fx rate) immediately.

Pseudo news trading and easy money are all gone now. One must really understand the fundamental factors and at the same time possess an timely and accurate feeling on the market current sentiment to do real news trading. Please read page 18~24 in Oct's issue of Currency Trader Magazine to learn relevant knowledge -- a very nice article by Barbara Rockefeller. It seems Jimmy also change his services accordingly. He gets CTA certificate and expands his managed account program. He also begin a new traing program which I see from the topics of lectures with more fundamental contents than before. Anyway, that is reflecting the reality.