Archive for July, 2009:
New NFA Rules And Forex Trading
NEW NFA Regulations will kill your forex trading.Game over for anyone trading with an NFA regulated broker… no more, no less… it is as simple as that. No doubt you have already heard about the various NFA directives that threaten to end profitability for many forex traders…The latest batch are kicking off after the market closes this Friday and it is one of those blows that will kill any forex trader who hasn’t yet been terminated by their previous directive.
What a way to end the career of so many forex traders that use NFA regulated Forex brokers.Unless you have been living on Mars, you must know about the little “favors” the NFA has done for Forex traders! It has already been a few weeks since the NFA forced their first new directive on brokers and hurt so many traders… the latest batch will become “law” after the market closes this Friday and if your trading was not killed by the last rule they implemented, it WILL be this time! 3 new “rules” will take you from being a potentially profitable forex trader to a certain losing forex trader:
Directive #1: No way to have long (buy) and short (sell) orders open at the same time
Directive #2: No way to open orders with StopLoss and TakeProfit levels set
Directive #3: No way to close the order(s)that YOU want to close
Ok… I would like to review each of these elements in detail. Please over this carefully since it is your money at stake here:
Directive #1: No way to have long (buy) and short (sell) orders open at the same time. This is often referred to as “hedging” and, if you listen to the NFA, is a very bad thing to do. If, however, you step back and consider things sensibly and rationally, you can see immediately that hedging is not a bad thing at all – it is actually a very useful way to operate your trading account. What this rule actually means for you is that you are no longer able to trade your account with multiple strategies on the same currency pair.
Perhaps you trade several EAs (Expert Advisors), perhaps several manual strategies, perhaps a combination of manual and automated systems. If so, it would be very common to find some strategies / EAs trading long positions and some trading short positions – until the “experts” at the NFA decided that the whole idea of trading in two directions was bad for you and banned the concept!
Directive #2: No way to open orders with StopLoss and TakeProfit levels set. One of the most fundamental aspects of trading is money management and the best way to achieve that is with correctly placed StopLoss orders to accompany each trade opened. Another important aspect of money management is being able to take a profit on an open trade. Once again, the NFA disagree with long-held principles of trading because one of their new rules (takes effect this
weekend) will not allow StopLoss and TakeProfit orders to be specified… you must choose one or the other! I am sure that this little revelation will send you searching for your crystal ball so that you can accurately predict which type of order you will require before actually placing each new trade.
Directive #3: No way to close the order(s)that you want to close. The final gem of an idea thought up for you by your caring, sharing NFA is something referred to FIFO (First In, First Out)…What that means is this: assume that you were trading EURUSD and opened a long position… the market moves up and looks like it will continue so you open another long position. Now price starts to decline so you want to close the 2nd order before it turns into a loser and let the initial order run in the hope that the upward move will resume, after all, you can always close the initial order later if the need arises…
Sorry – that is not allowed! The new rule means you would be forced to close the initial order before you could close the second order. So, once the markets re-open on Sunday, the face of trading for vast numbers of people will have changed very much for the worse! If your current broker is registered (and therefore regulated) by the NFA then there is a very, very high probability that any EAs that you might be using will cease to function. Depending upon the order types used, there is still a slight possibility that an EA might continue to function if it was the sole trading system used on a particular currency pair, but, under the new rules there is no safe way of simultaneously running multiple EAs on the same currency pair – even if they were all trading in the same direction as the FIFO rule prevents an EA from monitoring and managing its own positions.
Remember: This does not just affect traders using EAs – anyone trading more than one manual strategy is also going to find things incredibly difficult from next week. To quote from the US national anthem “…the home of the brave and the land of the free (unless you trade Forex!)”
To HELL With This… THE Solution!
You have really only got 2 options – you either stop trading forex or you adjust. The bottom line is this… life is all about adjusting. Nothing is static in life… you have got to overcome those issues that eventually hit you head on! When judging any broker’s performance, you need to take into account 8 criteria: Service, reliability, spread, slippage, ease of opening an account, reputation, suitability for the small trader AND MT4 compatibility.
Remember – it is not just about the spread… or the slippage… or the service – it is about a whole range of characteristics that are KEY to your forex trading success.
I know… many people might think “Damn, do I have to open a new forex account now “… YES, my friend – you do, unless you want to stay behind and suffer the bitter consequences. Do something about it now – do not just sit and wait for the new NFA rules to hit your FX trading account. From Sunday the 2nd of August 2009 You Can Kiss Your Forex Trading Profits GOODBYE! The clock is ticking and, to be honest, if I were you I would NOT want to have my FX trading account with an NFA regulated Forex broker come Sunday the 2nd of August 2009.
If you have not opened a Forex trading account yet and wish to do so now OR, if you have an account with an NFA regulated broker, then it is time to act…There are over 80 forex brokers in the market… most are CRAP. Most will scam you out of your hard earned cash. A few will be good… even fewer will be great, reliable and consistent.
US Dollar Currency Profile
Know the US Dollar intimately as a currency trader. It is important for you as currency trader to have a good grasp of the general economic characteristics of the most commonly traded currencies. US Dollar is the most heavily traded currency in the global economy.
You should know as a trader what moves the currencies particularly the pairs that you are interested in trading. Traders need to also know the difference between the expected and the actual data. Some currencies tend to track commodity prices while others may move in complete contrast.
Expectations are what move the markets in the short term. Short term traders need to closely monitor the expectation of the currency markets. News or data that is in line with the expectations has less of an impact on currency movements than unexpected news or data. The correlation between the currency markets and news is very important.
US GDP is approximately five times the size of Germany, three times the size of Japan and seven times the size of UK. United States is the world’s leading economy. The US economy is now a service oriented economy with almost 80% of GDP coming from real estate, finance, health care, transportation and business services.
United States capital markets are the most efficient markets in the world. United States has the world’s most liquid and deep equity and fixed income markets in the world. The manufacturing sector is still formidable and US Dollar is particularly sensitive to the development within the sector. Cheap capital formation is what drives any company or any economy and United States capital markets help in cheap capital formation.
The import and export volume of US also dwarfs the countries. This maybe due to the sheer size of US as true import and export represent only 12% of the GDP. Foreign Direct Investments (FDI) into the US is equal to almost 40% of the total net inflows for United States. Investors from all over the world purchase US assets due to their liquidity and safety.
Current Account Deficit & US Dollar
However, United States is running a large CA deficit for more than a decade now. US economy is facing the paradox of the twin deficits. One is the Budget Deficit and the other is the Current Account (CA) deficit. During the present financial crisis, the budget deficit has ballooned. Almost a trillion dollars have been added to the budget deficit. This is going to fuel inflation when the economy recovers. There are dangers of high inflation returning. Inflation can make the US Dollar weak in the long run.
Due to the high CA deficit; United States need to attract a few billion dollars of capital inflows daily in order to prevent the decline in the value of US Dollar. In other words, the Current Account (CA) deficit is being financed by the Capital Account (KA) surplus. The large CA deficit makes the US Dollar highly sensitive to changes in the capital flows.
United States is a member of the World Trade Organization (WTO). This means that United States is heavily committed to the free trade idea. A weaker US Dollar will help boost US exports whereas a stronger US Dollar makes the US exports expensive and US imports cheap. US trade is equal to roughly 20% of the world trade. United States is the trading partner of many countries across the globe.
Leading import sources for United States are: China, Mexico, Japan, Canada and European Union (EU). Leading export markets for United States are: Japan, European Union (EU), United Kingdom, Canada and Mexico. The growth and political stability in countries that are leading export markets for US are important. For example, Canada’s demand for US exports will fall that will have a ripple effect on US growth should Canada growth slow.
FED & US Dollar
You should understand the role of monetary and fiscal policy in strengthening or weakening the US Dollar or that matter any other currency is important. Who makes the monetary policy in any country? It is the Central Bank of that country. The Federal Reserve Board (FED) is responsible for making the monetary policy of United States. Through its Federal Open Market Committee (FOMC), FED sets and implements the monetary policy. The voting members of FOMC are the seven governors of FED plus five presidents of the district reserve banks. The meetings of FOMC are widely watched by the analyst for interest rate announcements and changes in growth expectations. Eight meeting of FOMC are held every year.
FED uses the monetary policy to control inflation, unemployment and balanced growth. FED has a high degree of independence in setting the monetary policy. FED has the mandate for long run price stability and sustainable economic growth. In other words, fighting inflation and unemployment are the two most important jobs of FED Chairman. The most important tool used by FED is its Open Market Operations.
Monetary policy uses control of interest rate to increase or decrease the money supply in the economy to achieve its growth objective. FED controls the short term interest rate through its open market operations. It involves FED’s sale or purchase of government securities that includes treasury bills, notes and bonds. Increase in FED’s purchases lowers the interest rates while selling of these securities raises the interest rate.
Federal Fund Rate is the key policy target of the FED. It is the interest rate at which the banks lend overnight to one another in the overnight interbank market. The primary interest rate that is affected by these operations is the Federal Fund Rate. The market then adjusts the other short term and long term interest rates accordingly. FED does not directly sets the Federal Fund Rate. It establishes a target rate through the open market operations.
US Treasury & US Dollar
The other main pillar of economic policy is the fiscal policy. Who controls the fiscal policy? The governments in almost all the countries! Fiscal policy means the amount of taxes and government spending for a given year. The US fiscal policy is in the control of US Treasury. In fact it is the US Treasury that actually determines the US Dollar policy.
You should always try to watch the US Treasury views as changes to that view is very important for the currency markets. For example, US Treasury can give instructions to the New York Federal Reserve Board to intervene in the forex markets by actually buying or selling US Dollars if the US Treasury feels that the US Dollar is under or overvalued.
EUR/USD, USD/JPY, GBP/USD and USD/CHF are the most heavily traded currency pairs in the global currency markets. These currency pairs represent the most frequently traded currency pairs in the global markets. Over 90% of all currency deals involve the US Dollar. As you can see, all these currency pairs involve US Dollar on either side of the pair. So the most important economic data for the global currency markets is the US Dollar fundamentals.
Gold & US Dollar
The relationship between Gold and US Dollar is very important for you to understand. There is an almost perfect negative correlation between the US Dollar and the gold prices. The US Dollar moves in opposite direction to the gold. This inverse relationship stems from the fact that gold is measured in US Dollars.
When US Dollar depreciates due to global economic uncertainty like the present, gold appreciates. Similarly when the US Dollar will appreciate on the news of US economic recovery, gold prices will go down. Gold is commonly viewed as the ultimate safe haven commodity by the investors all over the globe. You must know that the gold prices are going up right now and have reached very high levels. Gold trading and currency trading can be a very powerful combination.
United States was known to have one of the safest and the most developed capital markets in the world. As the risk of severe United States instability was considered to be very low, US Dollar was considered one of the premier safe haven currencies in the world prior to September 11.
US Dollar reserves were very popular among the foreign countries and foreign investors. US Dollar was considered to be very safe. Almost 76% of the global currency reserves were in US Dollar. This allowed United States to attract investments from all over the world at a discounted rate of return. However, due to the present United States financial crisis, foreign investors and the Central Banks are not so sure about the US Dollar due to the increased US uncertainty. The decreasing interest rates and continuing recession is forcing foreign investors to think of other alternatives.
China & US Dollar
China pegs its currency to US Dollar. China has been accused by the United States many times of using this practice to keep its national currency artificially weak in order to boost its exports. There are many other developing and emerging countries that peg their local currencies to US Dollar. China is a very active participant of the global currency markets because its maximum float per day is controlled within a narrow band based on the previous day’s closing US Dollar rates. Any fluctuations beyond this band will invite intervention by the Chinese Central Bank that may include buying and selling US Dollars. Important countries that peg their currencies to US Dollar are China and Hong Kong.
EU represents a market as large as US with its own single currency Euro. The emergence of Euro is also threatening the US Dollar as the world’s premier reserve currency. Euro has provided an alternative to the US Dollar. With the passage of time, it is feared that Euro will emerge as a strong challenger to the dominance of US Dollar. Recently a group of countries like China, France and others have called for the introduction of a new global reserve currency by the IMF that should replace the US Dollar. If this happens in the next few years, it may have far reaching implications of the US Dollar and the US economy.
Many analysts fear a major devaluation of US Dollars in the near future due to the present financial crisis in the United States. Many central banks have already begun to diversify their foreign exchange reserves by reducing their US Dollar holdings and increasing their holdings in Euro and the gold. The US markets are the largest markets in the world and the investors all over the world are very sensitive to the yields offered by the US assets. Money flows where the returns are high. Interest rate differentials can be a very strong indicator of potential currency movements. The interest rate differentials between the US Treasuries and foreign bonds are followed by the professional forex traders with keen interest.
US Dollar Index
It is important that you follow the US Dollar index because when the market analysts are talking of general US Dollar weakness, they are referring to this index. The USDX is a futures contract traded on the New York Board of Trade (NYBOT). Market participants closely watch the US Dollar Index as an indicator of overall US Dollar strength or weakness.
The US Stock and Bond markets also impact US Dollar. Cross border merger and acquisitions involve big forex transactions and are also very important for forex traders to watch. The following economic indicators are important for the US Dollar: Employment, Nonfarm payrolls, Consumer Confidence, Retail Sales, Consumer Price Index, Produced Price Index, GDP, International Trade, Employment Cost Index, Industrial Production, TIC Data etc.
Comments from China Temporarily Saves Risk Appetite
Risky assets were able to find a base due to some encouraging words out of China . However, market sentiment remains fragile and could tip either way at any time. Summer markets at their finest. The theme of a rise and fall in risk appetite was consistent with our view of tentative sentiment in the market, where any change in recovery expectation would prompt traders to turn to the dollar in the…
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Sterling slides against the Dollar as investors take precaution with risky assets
The British Pound, which often tracks UK equities, stumbled to the day’s low
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China: PBoC tries to calm financial markets
To calm fears about imminent monetary tightening, the Peoples Bank of China (PBoC) yesterday evening released a statement in which it reiterated that the monetary stance will remain unchanged and it is not planning to reintroduce lending controls across the board. However, the statement does not exclude that PBoC could make monetary policy less accommodative by continuing to remove liquidity from the interbank market. Major change in monetary policy is unlikely to happen this year. Details
Japan: Resilient consumer despite weak labour market
The Japanese consumer appears to be resilient despite a continued deterioration in the labour market. Apparently there has been a major positive impact on private consumption from tax cuts currently being implemented as part of the stimulus package. Economic data for May suggest that Japan already returned to substantial positive growth in Q2 09. Economic data currently indicate 2%-3% q/q AR GDP growth in Q2. Details Another batch of economic data was released overnight. JMMA manufacturing PMI
ECB preview: It could be a non-event
We are confident that the ECB will leave the refinancing rate unchanged at 1.0%. We expect the ECB to keep rates unchanged for a prolonged period before they begin to hike. The focus will therefore be on the press conference. We will look for signs that the ECB rhetoric is becoming more positive, but we don’t expect much. We do not anticipate the ECB to announce additional measures or top up on already announced measures. All in all, this might be a relatively dull ECB meeting – for a change.
Japan: Recovery in industrial production continues
Industrial production in June increased for the fourth month in a row and for Q2 as a whole industrial production has rebounded sharply by about 9% q/q. The outlook for industrial production remains very strong. Inventories continue to decline and production plans suggest industrial production will jump another 9% q/q in the current quarter. Today’s industrial production data is consistent with GDP growth exceeding 4% q/q AR in both Q2 and Q3. However, considerable slack remains in the economy
US: June Durable Goods Orders
After two consecutive monthly increases, durable goods orders dropped 2.5% in June. The decrease was predominately due to a 12.8% drop in transportation equipment as orders fell for aircraft and autos. In total, orders rose 0.2% in 2Q09, compared to shrinking 8.4% in 1Q09. Excluding transportation, durable goods orders rose 1.1%, following a 0.8% increase in May. Orders for primary metals, machinery and electrical equipment lead the rise, compensating for the decline in computers and
US: Recession Probability Drops Again
Our monthly recession probability model turned in April, and the sharp drop is now confirmed by our quarterly model. Recent improvement of the LEI and ISM manufacturing series confirms economic recovery. Recession Probability Downshifts in the Second Quarter Economic recovery prospects have improved. The probability of recession two quarters from now has downshifted sharply over the previous quarter. As evidenced in the top graph, the latest probability calculation from our model is consistent
