Forex Education -


Why you get huge currency moves at this time of day

Huge, huge moves in currencies in the past few minutes: AUD/JPY falls further (and its not the only Turkey)Yen surgingAUD collapsing The thing about this time of day, and I repeat this over and over again, is the forex market is at its thinnest for liquidity for the entire 24 hour cycle. The only active FX markets are NZ and Australia. So, if it rains, it can easily pour. Its an uncommon event, but it does happen in this susceptible time slot. The AAPL news earlier kicked of a bout of risk aversion: Apple has cut its Q1 revenue guidance Apple commentary on China's economy ... sharp contraction in market Apple citing China economic weakness was a particular barb for the AUD. If China economic weakness is news to you … well it should not be. Knowing that is essential background information. The AAPL announcement was then the catalyst.  ForexLive

Four trading rules from 330 years ago prove that some lessons never change

Joseph De La Vega understood the riddle of markets in 1688 Computers and the information age have changed nearly everything about how we trade but so many parts of the decision on whether to buy or sell are unchanged. The above scene is from the interior of the Amsterdam stock exchange where stocks began trading in 1611. Seventy-seven years later, Joseph De La Vega wrote perhaps the first detailed book on how to trade stocks in 1688. It's titled Confusion de Confusiones and much of it is as relevant today as it was 330 years ago. Originally written in Spanish, it was translated to English in 1957 and still remains little known. As the translated introduction reports, De La Vega compared the life on the exchange to a labyrinth and said participants moved in a world of darkness which nobody wholly understood. He said no pen was able really to describe in all its intricacies. The title describes how every rational action was tied to an irrational one. He calls it a 'gambling hell'. The book is written in an usual style where the voice of the author is given to a variety of characters but several passages stand out, including four principles on how to speculate: "The first principle [in speculation] : Never give anyone the advice to buy or sell shares, because, where perspicacity [keenness of understanding] is weakened, the most benevolent piece of advice can turn out badly. The second principle: Take every gain without showing remorse about missed profits, because an eel may escape sooner than you think. It is wise to enjoy that which is possible without hoping for the continuance of a favorable conjuncture and the persistence of good luck. The third principle: Profits on the exchange are the treasures of goblins. At one time they may be carbuncle stones, then coals, then diamonds, then flint-stones, then morning dew, then tears. The fourth principle: Whoever wishes to win in this game must have patience and money, since the values are so little constant and the rumors so little founded on truth. He who knows how to endure blows without being terrified by the misfortune resembles the lion who answers the thunder with a roar, and is unlike the hind who, stunned by the thunder, tries to flee. It is certain that he who does not give up hope will win, and will secure money adequate for the operations that he envisaged at the start. Owing to the vicissitudes [volatility], many people make themselves ridiculous because some speculators are guided by dreams, others by prophecies, these by illusions, those by moods, and innumerable men by chimeras." In a separate pass he describes bulls ("lovers") and bears ("contremine"). "The bulls are like the giraffe which is scared by nothing … They love everything, they praise everything, they exaggerate everything," he writes. "The bears, on the contrary, are completely ruled by fear, trepidation, and nervous ness. Rabbits become elephants, brawls in a tavern become rebellions, faint shadows appear to them as signs of chaos," De La Vega writes. Ultimately, he says it's best to drink from both cups but that the natural inclination in stocks is higher with the occasional fall. "Experience has shown that usually the bulls are victorious and the bears lose out," he wrote. His optimism was well-placed for time. The Dutch East India company's shares rose steadily for more than 200 years, albeit with plenty of volatility. By some measures, it was the largest company in history. Perhaps my favorite line from the book is this one, the idea that you can never quit once you're involved in markets. "It is a great error to assume that you can withdraw [temporarily] from the Exchange or that you can gain peace of mind when you cease to meet with the other speculators. If ill fate pursues you persistently, it can reach you just as well in the rocks and the forests, where lightning may strike you and wild beasts may attack you. . . . Moreover, it is foolish to think that you can withdraw from the Exchange after you have tasted [the sweetness of the honey]. . . . He who has [once] entered the [charmed] circle of the Exchange is in eternal agitation and sits in a prison, the key of which lies in the ocean and the bars of which are never opened. . . ." Here's an online version of Confusion de Confusiones.

Knowing the different types of risk will keep you out of bar room brawls in the markets

Anyone can get in a bar room brawl. It is those that stay out of them that survive. Adam's post about the EURCHF floor breaking prompted me to take a look back on what I wrote on that day.  The post that sticks out is the one I wrote that reminded me of the importance of not only understanding how to define risk, but also understanding the three types of risk we as traders face each day.  The three types of risk are: Market riskEvent riskLiquidity risk.Market risk is the risk we all face when the market is open.  Will the price go higher or will it go lower from the action of traders.  Event risk is the risk from things like economic releases, central bank decisions, scheduled speeches.  Most events are on a schedule. so we as traders can be aware of the risk - and avoid it if it is "too risky".  However, there are events that are random and not scheduled.  No one expected Elon Musk tweet about going private, but it sure had a price impact.  A Trump tweet, a natural disaster, a stock market plunge are other events that increase our trading risk. Sometimes we can expect random event risk (i.e., Turkish lira risk might be an event that might make you more cautious about trading). Liquidity risk is risk from gapping markets as a result of less liquidity in the market (from your broker). Generally speaking, liquidity risk is high when event and market risk is high.   The levels of risk in the three types can vary.   When risk is sky high and more random, trading can be like getting in a bar room brawl.   I like to say that anyone can get in a fight in a bar.  It is not that hard when alcohol, testosterone, pride, and verbal insults, all collide to create a volatile cocktail.   The other thing about bar room fights, however, is apart from the fact you might be arrested, and charged with lots of stuff, you may also think you know the enemy, but there is a lot of uncertainty as well.  A glass pitcher or pint glass can be an equalizer as could the goons in the corner who were high school buddies with the little guy you know you can take.  So it is just not a good idea. In trading there are times when we want to avoid the bar room fights.   The EURCHFs plunge was one of those times (assuming you were not in the fight as a result of a pre-existing position), where staying out was the best decision. Market risk, event risk and liquidity risk was simply sky high.    Anyway, CLICK HERE to read the post and remember, bar room fights, rarely pay off in the end.    ForexLive

I have a rule of thumb when it comes to trading around nuclear war

With all the talk about North Korea One of two things is going to happen: Nuclear warThis will all blow over If there's nuclear war, or even conventional war, the Korean peninsula will be in very rough shape. Possibly Japan and places beyond too. It would be an unbelievable tragedy and a major destabilizing force in markets. That said, nuclear war isn't in the cards. It's just stupid talk from stupid politicians. Donald Trump is narcissist but he's not going to vaporize millions of people to feel powerful. And Kim Jong-Un isn't suicidal, so he's not going to launch an attack. So it will all blow over, like it always does, and this bid in the Swiss franc, yen, gold and other safe havens will fade. So the rule of thumb is to always bet against nuclear war. When it doesn't happen, you make a bit of money. If it does happen, we're all done for anyway.

What's your #1 trading rule?

I've heard plenty. Warren Buffet, for example, has only two, apparently: 1. Don't lose money 2. See rule 1 Huh. I ask in reference to the AUD and the Australian trade balance data. The data came in at a huge surplus. Good news, right? And yet the AUD pop was met with instant sellers - which indicates to me the thing is offered and the best bet is for lower. I.e the thing to pay attention t is not the data but the market response to the data. But ... here's the thing, since then its been a big fat nothing going on. And it brings to me my #1 trading rule ... only trade active markets. Which, right now, is not what we've got here. Thoughts, comments. All welcome!

What is the most-inspiring trading mantra?

Do you have a motto or saying that you apply to your trading? All through life we can probably remember those single moments where a word or phrase given to us by more experienced people stuck in the mind and became part of our make up. I can pick out a handful of events during my life that helped mould me and my way of thinking into who I am now. I was fortunate enough to learn from, and be guided by, some of the brightest traders in the business and there's one saying that sticks out relating to trading; "Trading is not about learning how to win, it's about learning how not to lose" That one line has been the backbone behind my whole trading persona. Another big defining event in my life was very early in my City career when things weren't going too well. I was suffering from a lack of confidence due to not wanting to make any mistakes dealing with such huge amounts of money, and I was only working in the back office matching trades and doing reco's. Two traders took me aside one day and told me that they had every faith in me, that I had yet (up to that point) to make any mistakes, and that I should have more confidence in what I was doing. That day was a game changer in my life. Getting that arm around the shoulder as a youngster made me who I am today, and for that I'll be forever grateful. I'm sure Greg has had many life defining moments. I'd imagine on his gravestone he'd have;  "Defined and limited his risk until the final stop out" Adam thinks he has the worst trading mantra but it's one that's saved him and many others time and time again. So the question to you, dear readers, is what saying or experiences have defined your life and your trading? Is there a motto or saying pinned to your wall or stuck near your monitor that you turn to in times of need? Let us know in the comments.

Fed shouldn't mechanically follow policy rules: Yellen. Should traders?

Cheapshot II The testimony is always fun to watch.  It pays to stir the pot if you are a politician especially when speaking to a Fed chair.  Heck, they really don't have control over what the Fed does.  I personally think that is a good thing. So the question was asked "What would the world have to look like to apply a rules based approach to  conducting monetary policy?" It is these questions which make you want to fire back, "What would the world have to look like to balance a budget?" but that aside, the answer was ultimately answered with the following: "The Fed shouldn't mechanically follow policy rules".    And this was the look of disgust....    In trading, I like to look at a set of indicators to determine bullish or bearish bias.  If enough people do the same, it defines and limits risk.  So I try to use tools that traders use because I believe smart traders lean against levels for entry, exit and confirmations. If you follow what I write, you get the idea....Systematic right? (more on that in a second). The Fed will lean against levels as well.  Employment. An Inflation target.  But that does not mean it is totally systematic. Back to trading.  I lean against levels from tools but it does not mean you have to do the trade/to act (i.e, be systematic)  Why the caveat? Because there is a thing called risk and there is a thing called fear.  Fear is a function of risk and if fear is increased, people typically don't do well - myself included. Think of golf.  Put water in front of a player and the ball finds the water (at least for me).   But....risk can be defined against the technical levels,why override it?  Because that is just market risk from the supply and demand flows. When it is just that "market risk" traders lean against levels, and either you lose a little or make more than a little.  However, there are other risks like event risk and liquidity risk.   Event risk include economic indicators. It also is a Yellen testimony that goes on and on.   Event risk is a carefully worded question that backs the chair in a corner....a cheapshot.  It is a surprise comment or even misinterpreted comment.  The liquidity risk will tend to also increase when event risk increases.  Think choppy markets.   If event and liquidity risk is high or higher, it should influence your trading (it does mine). I am more cautious/patient. I may even choose to "not play".  There are better times when risk is just "market risk".  If I do play, trades might only be for a brief moment i.e., If it works good. If it doesn't get out and I will look to put the toe in at precise levels.  Trade size might also be lower as a result of increased risk.   I think that is what the chair was saying.  A system is ok, but it is not the answer. There are other risks in "the world we live in" that does have an impact.  To have things rules based might not take into consideration some higher risks "over here" - like banking, commodity producers, China. Now the Fed has made the mistake in the past with regard to systematic ways of doing things. I think there was a 6.5% unemployment target rate at one point (CLICK HERE for that reminder). You also don't want to be too sensitive to "stuff out there".  But there are some things.... I have made mistakes too (and so will you).  Every Unenjoyment....I mean unemployment....Day is a recipe for a trading disaster. Event and liquidity risk is simply too high and hard to quantify.  Testimony day can be like a slow unemployment day. So trade if you must, but understand that you don't have to, or if you do, be more patient, pick your "systematic levels" but don't be so systematic you forget that risk is increased too.   

Resolution #1 - Keep a list (and 9 more great pieces of advice)

So says entrepreneur and Virgin boss Richard Branson Says Branson: "It's New Year's Resolution time. If you are still debating whether to set one, then pick up a pen and go for it. If you are wondering how to stick to your resolution, I have one simple tip: write it down. Ever since I was a young boy I have made lists of goals and resolutions. It's how I make sense of the ideas in my head, the suggestions I receive, and the progress we are making. What's more, if I didn't write down all of my ideas and resolutions, I might forget them!" 1.            Write down every single idea you have. No idea is too small, and no idea is too big either. 2.            Always carry a notebook. You need somewhere to write your ideas down, and while using a folder on your phone is better than nothing, a piece of paper is far more memorable. 3.            Find a list method that works for you. Doodles, bullet-points, charts what suits you best? I I find a combination of short phrases and scribbled pictures works best for me. 4.            Make a list of small, manageable tasks to complete every day. Cut your day up into chunks, and you'll get lots more done. 5.            Mark off every completed task. There are few more satisfying things than ticking off a job well done. 6.            Make your goals measurable so you know if your plans are working. There's no point setting targets if you don't know if you are hitting them. 7.            Set far off, outlandish goals. Resolutions shouldn't just have short-term endpoints. What do you want to have achieved in five years' time? How about 50 years? 8.            Include personal goals in your lists, not just business. There's no real separation between work and life, it's all just living. The same goes for lists. 9.            Share your goals with others. You can help motivate each other further and hold each other to account. But remember that, in the end, you are doing this for yourself. 10.          Celebrate your successes then make new lists of new goals. The cycle should continue as you make more and more progress. I have boxes and boxes of old notes, filled with old lists, and I'm busy making more. More from Branson here

12 great forex trading axioms

12 of my favourite saying about trading forex Some are sayings, some are rules. The trend is your friendEveryone has a plan until they get punched in the faceMen who pick bottoms get smelly fingers Beware of complex ideas. More trades have been ruined by making them too complex rather than too simple.Half of everything (or more) we believe will be obsolete in the next 45 yearsThere's always another tradeIf you start to see conspiracies, stop tradingPhysical health, mental health and good trading are brothersTime is on your side, You haven't "missed" anythingIf you feel 'hope', you're in a bad tradeNever take tipsLiving to fight another day is the most important trade


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