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December 29, 2015

Currency Markets offer some of the Best Trading Opportunities

By EconMatters


Markets Going Nowhere

The last several years equities markets have been best characterized as buying the dips and selling the rips. The past three years the currency markets have probably offered the best trending opportunities when taken into context that the Central Banks purposefully telegraphed traders for market direction in helping them weaken the Japanese Yen and the European Euro currencies. 

There have been strong Central Bank coordinated Trending Trades in both the Japanese Yen and the European Euro the last three years. Why not be involved in a market where the power brokers who run the market tell you ahead of time which direction they are going to move the market in the future? Imagine if Casinos told you in advance what the next card from the deck in a game of Blackjack was going to be? This is essentially what has transpired over the last three years in the currency markets.

Forex Markets Support Many Different Trading Strategies

Besides the trending plays, the currency markets offer many support and resistance opportunities, scalping setups, and technical breakout – (buy and sell stop) entry setups. The currency markets like many markets these days are dominated by technical price action trading mainly because of the preciseness of the algo`s and their programmed responses to price and key technical levels.

Protective Stops

With this in mind it only reinforces the use and benefit of utilizing stops to protect investment and trading capital, and to maximize your trading edge from an efficiency standpoint. Don`t try to average into or scale into a position. If the market breaks a level where your stop is placed, it is going to go lower or higher from there, you are better off just cutting the loss right there, and reevaluating the merit of the original trading idea. Stops are especially important in the Forex market given the fact that many traders take full advantage of the leverage opportunities offered through various types of trading platforms from, for example, UK Forex Brokers. A run away trade can liquidate many a trading account, and you have to have capital to stay in the game. It is one of the few things traders can control in markets, their defined risk profile.

Poker Analogy

The stop forces you as the trader to complete the trade, now move onto the next play like a hand in poker. This is one of the great things about a game like poker it forces the players to end the hand rather quickly with finality. It should be no surprise that a game like poker has so much similarities to decisions that come into play for financial markets, because after all financial markets are one giant strategic game. Just instead of poker chips, financial markets utilize digital currency in the form of numbers and P/L scorecards. Stops are essential for currency markets!

Master these 2 Forex Crosses: EUR/USD and USD/JPY

Master two currency crosses like the EUR/USD and USD/JPY and see how geo-political events, risk on versus risk off, economic data and reports, Central Banks Meetings and Statements, Bond Market Relationships to these currency crosses, commodity moves relationships to bonds and the crosses, and how this all revolves around the funding mechanism of carry trades. If you are new to trading currencies just put these two currency cross charts on your trading screen and watch them every day for three months in relation to the economic news and market behavior and you will start to understand the patterns of the crosses.

Risk-Off Relationships

After a while you will be able to understand and act real quickly that in a risk off day you buy the yen against the US Dollar as some carry is unwound. It doesn`t even matter if any carry is being taken off, the algos are programmed to automatically move this currency relationship on a risk off market day. If crude oil is spiking or has a bid, then buy the Euro against the US Dollar. These are types of relationships that you will learn to recognize in the Forex arena and they will eventually become reflexive trading opportunities with relatively manageable risk reward setups.

Bond Yields

If US Bond yields are spiking, then buy the US Dollar against the Euro. However, here is the tricky part, if bond yields are orderly rising, and money is flowing out of US Bonds into US Equities, then you can also buy the US Dollar against the Japanese Yen. The Japanese Yen is often a funding currency from a carry trade standpoint for US Equities. Conversely, if US Bond yields are spiking and this is viewed as a Risk Off event, and US Equities are selling off, then you short the US Dollar against the Japanese Yen as carry trades are being unwound, and capital is going to cash or money market funds. This may seem confusing at first but stick with the vanilla relationships and as you progress in an understanding of the currency markets in relation to the financial markets, geo-political events and Central Bank policies even the most complex relationships become relatively easy to predict and take advantage of with enough screen watching experience.

Malcolm Gladwell`s 10,000 Hours for Master Level Knowledge

Just keep in mind that you will have to pay your dues, think in terms of the book Outliers, where author Malcolm Gladwell says that it takes roughly ten thousand hours of practice to achieve mastery in a field. Yes one has to have some aptitude for pattern recognition, and be capably smart, but trading and investing is not exactly rocket science. However, the psychological aspects of discipline, avoiding going on tilt, and sticking to one`s edge are often severe obstacles for many an aspiring trader. Keep in mind that the markets are an uphill climb for retail traders and investors.

Information Disadvantage

You are at an information disadvantage on a daily basis. Goldman Sacks for example can just look at the order flow from their clients and know at 2:00 am in the morning the day is going to be a major risk off day, and the same for J.P. Morgan. These investment banks really have to be leaning the wrong way to lose money in any market. It doesn`t take any skill at all to know ahead of time a risk off day, and to front run client and clearing trades from the details of order flow in the system which they are privy too unlike retail traders. The statistics bear out the fact that retail trading is a specialized talent and skillset with over 95% of all retail traders consistently losing money.

Myriad of Reasons Most Traders Fail

This is due to many factors from being poorly capitalized to not having a trading mentor to stay in the game long enough to master the skills necessary for being profitable to having the mental makeup necessary for avoiding going on tilt. But the currency markets are easier to trade from a predictability standpoint compared to many other markets once one learns the relationships. The currency markets are highly liquid instruments, especially the main crosses I have recommended for traders getting their feet wet trading. Can you imagine all the shorts who got their heads torn off trying to short that GoPro stock based upon a fundamental valuation standpoint, lots of funny business in IPOs with small trading floats! Moreover, after they have finally had their short positions margined off and their trading accounts vaporized, then the GoPro stock drops like $70 dollars.

In Conclusion

To sum up, learn the major crosses and give the currency markets a try, just always utilize stops to protect your capital, and study some good technical analysis trading books until you master 4 or 5 nice vanilla price action trading setups. Maybe you have the right stuff to be part of the 5% of the retail crowd who can be profitable traders in the financial markets. But don`t be afraid of the Forex markets in and of themselves. They are probably much easier to trade once you master the fundamental relationships of these funding markets that buttress all financial assets then trying to predict whether Twitter will ever learn how to monetize its platform.

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