Forex Education -

Why year-end markets are full of opportunity (and danger)

Timing is everything There are certain times in the markets that present risks and opportunities. In the market, different times have different characteristics. This is true on a day to day basis. For example, at the end of the US and before the Asian session the market becomes particularly illiquid and flash crashes can move the market hundreds of points on very little. This is a vulnerability that occurs at certain times. In a similar way, the end of the month and end of financial years have influences on different currencies too. This article will focus on year-end markets and both the risks and opportunities that lie within them. ForexLive Buying gold on the last day of the year One of the best ways to end the year is to consider buying Gold at the end of December in anticipation of the strong pattern of buying Gold, which takes place with a surprising regularity, in the month of January. Over the last few years this seasonal pattern has shown particular strength. If you include the months for February and March too there has only been negative returns once, in 2013. This year presented a really good opportunity to take advantage of this pattern as there were also strong fundamental reasons to buy Gold. The concern over the US-China trade war accelerated as President Trump became more and more vocal in his combative stance. The market feared that a hostile trade war between the US and China, which constitute around 40% of the entire world's GDP, would spark a global slowdown in growth. The result was that Gold was bought as a safe haven currency into year-end as US equities plummeted. Cryptocurrencies had also declined during the year as an alternative safe haven and Gold technicals looked good with a close above the highs of $1244. It was a great year start for Gold as usual. Japanese financial year end in March At the end of the Japanese financial year, which is at the end of March, many Japanese firms look to consolidate the years profits. As Japanese firms move their profits they bring them back home by buying the Japanese Yen. These Yen flows are typically seen in the last couple of weeks into March and end around three days before the end of the month. One of the best times to see these Yen flows coming into the market is around the London Fix. The London Fix starts at around 1600GMT each weekday and this is when a number of FX transactions occur out of London. The characteristic of these transactions at this fixing timing is that they are not run by speculators, but they are normal businesses who are having their money exchanged for purchases and employers etc. In this instance there can be an uptick in JPY buying as Japanese firms repatriate their profits. This JPY repatriation is not necessarily an easy phenomenon to trade, but it still serves to offer some explanation for strange JPY moves into Japanese year end and traders should be particularly aware of trading any JPY pair in the last two weeks of March around the London fix. The January effect There are strong tax and psychological reasons that mean a number of stocks show what is known as 'the January effect'. This is simply reference to a widely anticipated cyclical pattern in stock markets that occurs for a number of reasons. Sometimes, investors are simply closing their profits for the year and some investment firms are wanting to ensure they book their year-end profits and so they close their positions going into November and December. There is also a tax incentive and losing trades can be closed at year end to offset any tax implications of winning trades already booked. The impact seems to be seen most acutely in small caps. One study conducted by the firm Salomon Smith and Barney between 1972 and 2002 found that the stocks of the Russell 2000 index outperformed stocks in the 1000 index during the month of January. The interesting thing to note was that the outperformance was around 0.82%, but the stocks underperformed during the rest of the year. The usefulness of this fact has been questioned by some due to the necessary transaction costs in trying to capitalize on it. However, possessing strong fundamental reasons to purchase a stock at this time means that you potentially benefit from a year-end tail wind. Year-end USD demand starts in November At the end of the year there is demand for USD and typically speaking November is good month for broad USD strength. Over the last 5 years the Bloomberg Dollar Index (BBDXY) has increased +1.6% during November and that increases to +1.8% if you go back over the last 10 years. The conventional wisdom is that USD buying takes place in December, whereas there is greater evidence of USD buying in the month of November as opposed to December. The year-end oil effect Oil has a very strong year-end effect and it tends to have a period of depreciation at the end of the year.  In the month of October Oil prices have fallen 13 times and that general pattern of weakness has often flowed through to the months of November and December. By contrast, the months of February through to April are typically strong seasonal times for Oil. Therefore, traders should be particularly alert as we approach year end for fundamental reasons to short Oil as a strong seasonal pattern may give you a tail wind. Similarly, although this article is about year-end markets, it is worth pointing out that February should be considered for potential long US Oil positions. This year, that trade has already played out well for the month of February as OPEC cut their oil production levels, Venezuelan and Iran sanctions further hit supply and US oil rigs numbers steadily fell. It proved to be an excellent example of a strong seasonal pattern reinforced by good fundamentals. So, there you have it, year-end markets offer opportunities and risks, so look out for these characteristics for the end of 2019. This article was written by the ADSS Research Team.  

Video: Why central banks keep getting it wrong

Why central banks got it wrong last year Central banks wildly overestimated the landscape in the global economy and markets. They can't raise rates because consumers and businesses can't survive in the world that central banks want to live in and they don't understand how market psychology trumps their models. Want to know when we've got a new video out? Click here to subscribe to our YouTube channel . ForexLive

Video: Trump and Soros share the same secret behind their wealth

Trump and Soros' secret to riches There is power in truth but there might be more power in what isn't real. George Soros and Donald Trump both found a way to exploit the same thing and it has critical implications for what's coming next in the foreign exchange market. Want to know when we've got a new video out? Click here to subscribe to our YouTube channel. ForexLive

Sizing up market expectations in trading is more important than you think

A lot about trading is about anticipating what to expect ForexLive One of the beauties of trading is that every trader has their own unique style and approach when going about their business in the market. Each and every one of us has their own trading compass. But even so, one of the most important skills to have as a trader is learning to read other compasses as well. And that means learning to gauge what other traders are doing or saying in the market; as essentially, that is what makes up market expectations in trading. I remember about six years ago witnessing price action after the US non-farm payrolls was released, there was plenty of whipsaw and price volatility between 300-400 pips. Fast forward to today, you'll be surprised to see a reaction in currencies that amounts to 50-60 pips on the same data release. So, what has changed since six years ago? The main factor that is different now is that the market's attention has moved away to focus on other details and market expectations have also changed as a result. Back then, the labour market wasn't as tight as it is now and markets are weighing up the possibility of the Fed normalising policy further as QE comes to an end. The non-farm payrolls data was at the forefront of that as it not only presented key measures such as the jobs print and unemployment rate (labour market conditions) but it also contained wages data (used to scrutinise inflationary pressures).Now, it's already a given that labour market conditions are holding up well in the US economy. Hence, there is almost little to no significance placed on the jobs print and any minor changes in the unemployment rate. The only key data is wages but with the Fed already confidently hiking to reach near neutral rates, it's not exactly the blockbuster data it was two years ago. Knowing what to expect ahead of economic data releases One of the more common mistakes retail traders make is to attach a particular significance and expectation to upcoming economic data releases and central bank speeches. Instead of focusing on whatever scale/indicator that tells how "important" the data release is, knowing the background and expectations ahead of the data will help you position yourself better ahead of said particular release. That's one of the reasons I put lengthy paragraphs in describing those details in my economic data preview posts. It not only helps those new to the trading game pick up on the focus and expectations of markets but it also helps to write these stuff down to get better clarity of the situation. A perfect example of the importance of knowing what markets are expecting and what to expect from a data release has been UK economic data over the past three months. For instance, retail sales back in May surprised to the upside and the pound got a good jolt higher from the release. Meanwhile, the exact same data point also saw a sizable upbeat reading in November but produced a <10 pips reaction. So, what gives? Prior to September, the two key focus areas of markets are a possible BOE rate hike in the summer and Brexit. Negotiations between the UK and EU on the latter wasn't moving much but markets weren't panicking or thinking about any no-deal scenario just yet as it seemed like talks would somehow produce a positive outcome around September to October. Hence, the immediate and key focus of markets at the time was on the BOE. That is why solid economic data which helped to support the notion that the economy was doing well helped to give the pound a bigger lift as markets looked to price in an increased chance of a BOE rate hike. As for recent data releases, we have all come to know now that Brexit developments continue to cast a large shadow over developments in the UK economy and the BOE's plans. Hence, regardless of whether the data is good or bad, there is no certainty in saying that the data holds any significance towards UK economic outlook or the BOE's capacity to hike rates. This is because everything gets thrown out the window if there is a no-deal Brexit and further uncertainty will still continue to cloud the near-term outlook for the pound as there is still no clear outcome that will materialise from recent Brexit talks. And that is why recent economic data releases don't matter as much. They're very much secondary to what the impact of Brexit developments can bring towards the currency and the economy. Understanding what the market is saying I'm going to be talking about this in relation to more of a knee-jerk reaction from markets towards economic data releases. Even when you anticipate and expect certain releases to produce a volatile reaction, how do you know which side markets will take after? One of the more common plays in the rule book is "buying the rumour, selling the fact". We've all seen this happen plenty of times in markets but what exactly does that mean? I'll use the Fed's most recent decision as a good example of this. As we entered December, markets were pricing in a lesser chance of the Fed hiking rates in its most recent meeting; falling from ~80% to ~65% ahead of the FOMC meeting. However, this was how the dollar performed in the build up from 3 December to 14 August: It was the second best performing major currency despite the fact that markets were anticipating the Fed to turn more dovish in their commentary as they deliver yet another rate hike. Markets were preparing for a "buy the rumour, sell the fact" scenario as they bought the dollar up in anticipation of another rate hike but are looking prepared to sell the dollar as the Fed turned more dovish. However, there was a twist in the tale as we entered the Fed decision week. The dollar came under selling pressure as markets then changed their focus and started pricing in a rather dovish Fed to follow. This was the dollar's performance on 17 and 18 December, before the decision was made on 19 December: The dollar was the second-worst performing major currency as it slumped against the major currencies bloc with markets anticipating that the Fed would pull off a dovish hike and possibly signal a pause to the tightening policy. The Canadian dollar was beaten down worse mainly to oil worries as it fell below $50 at the previous week's close. When decision time came, the Fed and Powell were indeed a tad more dovish but offered no signals that they would pause the tightening cycle any time soon. The immediate market reaction was to cover the earlier shorts and instead buy up the dollar. Although markets eventually settled on a renewed focus of a dovish Fed, the immediate reaction shows the importance of anticipating and understanding what markets are saying before any economic data releases. In doing so, it will help give you an edge to your trading and understand why markets move the way they do. Summary In my view, the best way to go about sizing up market expectations is to be unbiased about it. We all have our views on each individual currency pair but it is important to be honest to yourself in gauging what the market is saying especially. After all, the number one rule in trading is that the market is never wrong. So, hope this article helps you understand a little bit more about why it is important to stay abreast with any developments - big or small - that are happening to economies/politics and why we should always take note of what the market is saying, regardless of whether or not it goes against fundamentals, technicals, and any other analysis. Always be aware if economic data releases are preliminary or final readings (the former tends to have the biggest impact more often than not)Try and anticipate the key theme that the market is focusing on ahead of data releases i.e. post-ECB meeting, plenty of talks about 'downside risks' hence Eurozone growth-related data like PMIs become even more sensitiveFor central bank speakers, try and find out what the speeches will be related to; a Draghi speech on regulatory risks isn't as crucial as a Praet speech on markets and policyAlways prepare for the unexpected as we can all have certain views going into the economic data releases but never be too attached to them and be ready for the unexpected, and that includes central bank speeches too

How to trade a surprise news release

Trading strategies: Trading news releases Trading a news release can be another useful tool to have in your trading inventory. However, there is a right way, and a wrong way to trade a news announcement. This article will aim to guide you how to recognise key news that can be traded, how to enter, where to place your stops and where to take profit. Recognizing key news The first aspect of trading news releases is learning how to recognise important news vs unimportant news. Every day there are literally hundreds and hundreds of data points, interviews, blog posts, and analysts comments on the breaking news. However, opportunities to trade a news release may only come once or twice a week. So, the first step to taking these opportunities is to recognise the significant news. How do you do this? Well, you do this by understanding what the market is focusing on. This is best explained through an example. At the time of writing one of the best examples is the British Pound. The United Kingdom is in the middle of intense negotiations regarding it's withdrawal from the eurozone. The market is pricing in a chance of a Brexit 'no deal' and the GBP has a year long high of net GBP short position. The market is heavily biased short on the nervousness that the UK doesn't achieve a decent Brexit deal with the EU. Therefore, the market is sensitive to any positive news about the Brexit negotiations. So, during this period of negotiating headlines are moving the GBP quickly and sharply. This is a great time for headline trades. How to enter Now we have our intense GBP situation outlined, we now know which headlines are tradable. Specifically, it will be any news release that indicate how the Brexit negotiations with the EU are going. There have been a considerable number of such headlines over the last few weeks. However, it is no good seeing these headlines at the end of the day for trading them directly. No, these headline trades need to be entered within the first 5 minutes of the news being released. In the chart above Michel Barnier surprised the markets on the 29th of August stating that the EU was prepared to offer a deal with Britain, 'like no other country'. This was clearly a very bullish development for the GBP and the GBPUSD spiked over 150+ points on the announcement. The key was to get into this move within the first 5 minutes of Barnier's comments. If you had in the example above you could have netted 50+ points. Another example on the GBPUSD pair is when Barnir again gave the markets a jolt claiming that he saw a Brexit deal 'doable within 6-8 weeks'. Once again you would have wanted to enter the market within the first 5 minutes, preferably sooner to make it worth the risk. In this example you could have again netted around 50+ points.How to place your stops This is key, since some of these candles are very large. You don't want to be risking so much in case you get your analysis wrong. Sometimes, you will too. Therefore, a sensible place to position your stops is to put it below the 50% point of the 5 minute candle. That will help limit your risk, but also give a little breathing room. If you have got your analysis wrong and simply entered on the wrong news, your loss will be limited. Have a look at the chart below to see an example fo where you could place your stop. The other alternative of course, is to place your stop below the bottom of the 5 minute candle. However, this is only really advisable in a situation where you think the news is likely to have significant follow through in the coming few sessions. For example, when a bank surprises markets with an interest rate hike or cut.How much profit to take In this kind of trade you want to monitor it very closely and don't get too greedy. You can take a set number of points, or look for weakness on the 1 minute chart and take your profit when you see some topping price action. You need to keep it your mind that by it's very nature the trade is likely to be short-lived as markets pull back and don't move in a straight line. This technique is very short term and you are simply trying to trade the spike.  In the example above, you would have been stopped out if you had held the trade during the session. However, if you had exited you could have entered on a retracement at the confluent fib and 100 MA level. So, it is always worth considering taking profit and then re-entering the trade from a better level if you think sentiment is likely to last through the session. There you have it, how to trade surprise news releases. The final piece of this puzzle is to make sure that you have fast access to the news. A live squawk is the best solution for this and both Ransqauwk and Livesquawk provide good, reliable services in this area. To trade the news headlines, these additions will be critical in giving you a time edge.For two free weeks of Livesquawk, go to the link below and use the code 'forexlive'!sign_upForexLive

Trading strategies: trading risk events

How to navigate a path through an upcoming risk event A risk event is any market event that the market is anticipating. For example, this could be an anticipated rate statement, a speech from a central banker, or a long awaited trade deal announcement like Brexit or Nafta. There are two key ways to trade risk events and that is by trading into them and/or out of them.  Trading into a risk event  The first aspect to be aware of in trading risk events is to be aware of the calendar of events that is coming up for the next week. These are widely available and most brokers have their own calendar you can access. Every Friday each risk event for the coming week will have the expected readings published so you can know what the market is expecting for the up coming release. These expected readings are compiled from the opinions of experts as to what they are expecting from the up coming releases. Your next job is to interpret the expected upcoming data in line with the market context or central banks outlook. For example, consider the following hypothetical situation. If you have the jobs number coming out for Australia in the next week and it is expected to be a higher reading than previously and you also know that the Reserve Bank of Australia has stated that their focus is on an increasing jobs number in order to be sure of an interest rate rise, then you can be confident that the market will be buying AUD into that data announcement. The reason the market would be buying AUD into the risk event would be because it is expected to be a positive reading. The positive reading would confirm the RBA's criteria for raising interest rates and the AUD would be bid on these expectations alone.  To take these kind of trade you need the expected positive figure to agree with the general positive outlook of the currency, as in the example above. You want to ensure there is a match with the  expected reading that is in line with the general outlook for the currency. e.g. trade positively expected readings with positive outlooks for a country. You can also do the vice versa. So, in order to effectively trade into a risk event look at what the central bank is focusing on and the underlying fundamentals. Once you have this information you are ready to start considering trading into risk events.  A final step in preparation  Now that you think you have a risk event to trade you can start to read other analyst and financial commentators to get a feel for what the market is thinking. Try to read from a few different sources to get a good feel about what the market is thinking about the upcoming risk event and the different scenarios that may occur from the data release. You will now have a really good feel for the market anticipation of the event you have chosen.  Entry  Now simply enter the market at a logical place where you can define and limit your risk. The actual entry price is not the most important thing. However, you need to enter the market before the actual risk event is released and you want to make sure that your risk is sensible.  Exit  You can now exit the trade before the announcement or move your stop loss and try to play for more out of the risk event.  Trading out of a risk event  The way to trade out of a risk event is where there is a substantial deviation from what the market was expecting. A good example of this was found on the 17th of August on the USD/CAD chart when there was a significant deviation for Canada's CPI reading. It was expected to be 2.5% y/y and instead it was released as 3.0% y/y. This was a significant surprise for the markets, and at the time increased the probability of a Bank of Canada rate hike in their September meeting. Now that you have your surprise deviation you are in a good position to trade. You could have entered short on a retrace of the spike down.  A similar way of trading out of a risk event is when the market is heavily expecting one outcome, but that outcome changes. A recent example of this can be seen below when the US was widely expected to impose tariffs on $200 bln worth of Chines imports into the US. The market was expecting these tariffs to take effect, but then there was a surprise announcement that the US would start negotiating with China again. The market responded very quickly and went from a risk off bias to a risk on bias instantly. AUD/JPY gained very quickly on the announcement as a good proxy for 'risk on' trading. For savvy traders who are tuned into the sentiment and , quite literally, into the news could have profited from the resulting move. These kind of statements that are squawked really need to be responded to within the first few minutes to be profitable for a trader on a very short term basis  The key aspect of trading into and out of risk events is having a good grasp of what the market is expecting from a certain event. By aligning yourself with the market expectations you are going to have a decent grasp of future direction. A key aspect of executing these strategies is having a good technical grasp of how to limit your losses, while offering yourself decent gains. ForexLive

The greater the story, the greater the bubble

The greater fool theory explains almost every bubble Some things have an intrinsic value. The most-obvious example is a stock with a dividend. The absolute floor for an equity is its dividend and so long as their is a profitable business behind it, the value is a multiple of that dividend. Other things don't have an intrinsic value. This includes virtually everything that doesn't produce a yield. Oftentimes, prices of those things rise and fall based on future expectations of what profits or yield might be. In other cases, there is an estimation of utility. Oil, for instance, can be refined into gasoline which can be used to move things or for dozens of other uses. Oftentimes there is a dispute about utility or a dispute about future profitability, which can lead to a dispute about prices. One way to resolve this is a model but oftentimes that's so fraught with assumptions that it's useless. So how do you establish prices? Obviously, via the market. This is when storytelling, which is another way of saying a sales job, takes over. Cryptocurrencies are an obvious example. A Bitcoin has no yield but it has some utility. To some, that utility is replacing the US dollar as a global transparent currency. To others, it's a way to facilitate transactions. And for others still, it's a handy tool for criminal transactions. How you price it then, depends on how you view the future utility. Or does it? Another way to price it is simply looking at how others view it. You might believe that all of those utilities are baseless but if you believe that others are buying it because they believe those things, then it's rational to buy. That reasoning is why I argued more than a year ago that Bitcoin wasn't a real currency but that it was still going higher. The only trade on BitCoin is the hype trade. The fundamentals don't matter. The only thing that matters is how enthusiastic the true believers are. I also touched on that here: This is all called the greater fool theory. The idea is that something can always rise so long as there is another person who believes it will. You can argue that Bitcoin was simply a great story. It was full of buzzwords about transparency, trust, tracking, efficiency plus it was just complicated enough that it wasn't accessible yet alluring in the way that all technical innovations are. The price essentially tracked the rise in its exposure. As more people learned about it, a certain portion invested. The problem is that eventually you run out of people. For crypto, a month or so before the top, I remember talking to a distant relative who is an absolute blowhard. He had just bought some and I told my wife that had to be the beginning of the end. Other people were telling stories about their grandparents were asking them how to buy crypto. In comments this week, Ethereum founder Vitalik Buterin touched on this: Making buy/sell decisions based on what you hear from people on the street sounds ridiculous but some of the most famous traders are just that. Joe Kennedy, John F Kennedy's father, famously said he sold his entire stock portfolio before the 1929 crash because a shoeshine boy gave him some stock tips. And he figured that when the shoeshine boys have tips, the market was too popular for its own good. Here's how John Maynard Keynes explained the Greater Fool Theory: Imagine a beauty pageant, where the judges knew that, because beauty was in the eye of the beholder, the contest would be decided on the judge's perception of beauty. Someone who wanted to predict the outcome would have to assess the judge's perceptions, not the contestant's beauty. As a result, your vote for the winner would not depend on who you thought was prettiest. Instead, your vote would depend on how you thought the judges would vote. How do you trade a bubble? In anything where there is no intrinsic value, utility or there is so much uncertainty that it's impossible to evaluate, there is no real analysis of the market. Instead, you are simply evaluating what other people think. The great bubble at the moment is in marijuana stocks. The story is that it will be legalized. That's already happened in Uruguay and in October it will happen in Canada. That set off a bonanza of speculation about how companies will make a mint selling marijuana. Pot stocks have absolutely soared. It started last year in Canada with some producers rising 10x in a few months. A second wave of the bubble has kicked off on the belief that marijuana will eventually be legalized globally. It ramped up with the Nasdaq listing of Tilray; it's the first US listing of a pot company and it's average a 15% gain per day since it's was launched. Someone who bought on the IPO, or in early Aug, is up more than 500%. Here's the problem. Marijuana is extremely easy to grow. It's called weed because you can grow it in a ditch. Sure, the quality might vary but if you could grow a lower-quality iPhone in your back yard, then Apple wouldn't be a trillion dollar company. But in a bubble that doesn't matter. Marijuana legalization is a great story. People undoubtedly spend a lot of money on pot and companies could make money doing it. It's not a story I believe yet it's compelling enough that fools around the world are going to believe it. ForexLiveHere's the Google search trends chart for 'weed stocks'. The lesson is simple. When you're evaluating some assets, you don't necessarily need to be able to make sense of them. You are just evaluating the story. If it's compelling enough, the asset will continue to rise until the supply of fools is exhausted. Simply: The price you should buy something isn't always its intrinsic value, or utility -- it's what you think someone else will pay for it.

17 things we should have learned since the financial crisis

The global economy doesn't work the way we thought I stumbled across an aged but relevant post from Mark Dow about 15 things global macron investors should have learned from the great financial crisis and the aftermath. It's a good list and I pretty much agree with all of it, including this one: "Oil matters less. It didn't help the consumer as much as forecast when it fell, and didn't hurt GDP as much as others suggested, either. Oil intensity of GDP or share of consumption basket is far lower than the levels most observers-consciously or unconsciously-had anchored on." If you look at them as a whole, the lesson is that the short-term narrative is often overblown. Frequently, one part of the economic equation changes (commodity prices, fx prices or politics) and we're led to believe that changes the result. In reality, it doesn't so the lesson is to look past almost everything. To his 15 lessons, I'll add two: 1) The economic impacts of FX moves are overrated. The global economy doesn't react to FX changes the way most thought. Drops in many currencies haven't led to big (or sometimes even small) pickups in manufacturing and exports. Companies can hedge and absorb much more FX pain than thought and investment decisions are rarely made based on the current prevailing FX rate. 2) Where's the inflation? Starting from Day 1 of the financial crisis when interest rates were first lowered, there were people howling about the coming inflation. It's not here and even with a much better economy and still-low rates, it doesn't appear to be coming. Globalization, offshoring and automation are the dominant economic themes of our time and they're all deflationary. What would you say we should have learned by now?ForexLive

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