Interview with senior analyst markets-what makes a successful Forex trader?

In a recent interview with our analyst Snr. markets on axis economic source, Ltd., I asked a simple question. What made a successful trader in the Forex market? Told me that this could be summarized in three basic rules:

Rule # 1 makes a trading plan
Rule # 2 implementation of the plan
Rule # 3 to change the draft Middle

Our analyst markets Snr. MBA in international finance, is a member of The Professional risk managers International Association (PRMIA) has traded and analyzed financial markets for over 15 years.

Went to say that you are always able to hear the "experts" talk about the trillion dollars traded in the Forex market. What they don't tell you is that 90% of traders all loose their money. It is a zero sum game. For every winner, there are a lot more people losing their money and the market is unforgiving. Told me that from experience, the main reason that most traders loose their chapters is uncertainty about what they do. So, you are going to be better organized and better prepared than the other guy. Not your diligence and put together a marketing strategy that comfortable and set it in stone. You should approach your trading as a business, not a hobby.

As soon as your trading plan is established, it is vital that you know your system like the back of your hand. You can obtain this discipline by trading demo. Demo trade your system until it becomes second nature, so that you can do in your sleep. Then do it again and again. Additional experience and knowledge will give you the confidence to trade your system run by the numbers, regardless of what makes your purchase. Is not such a hurry to lose your money. Then, when you pull the trigger, let's trade either hit your stop loss, target, or break even point. From our experience, this allows overall commercial model your House breath, as the saying goes. The percentages involved with the strategy you need time to pan and is a long haul should worry about anyway.

Above all, Do not over leveraged. Use proper money management is at the very least, if not more important than your trading system. Never risk more than 3% of your account on each trade. In this way you can loose 6 out of 10 jobs and still make money. Remember, this is a game of numbers. Thus, if trading an account $ 10,000 and we are sure that with your system you can loosely 60% of the time and is still in profit. It is not uncommon to encounter a four transactions defeats. Experienced operators have similar or even more losing streaks. Why is successful is because they use low leverage.

Our "managed account" generally only risk 2% profit per trade and deal with only 3% if we're nice profit for the month. Please note that this gets exponentially more difficult to recuperate your account as losses mount and increasing leverage when you're negative is the fast track to great losses which are fatal. This is where your trade discipline comes in the game that has been forged by sufficient demo trading. Strict adherence to prudent risk management will keep you in the game.
Our analyst markets Snr. could not overstress that you need to have realistic expectations about your trading. Think of it as the difference between venture capital and gambling money. I am not going to go a Vegas casino and if you can view your negotiated in any way as your gambling, the chances are great that you too will bring home broke.

Which brings us to the issue of the use of robots. We do not work. If they did, no one is trading live and all lived large. Remember, it is a zero sum game, so why would anyone sell you their money making machine for $ 100 when they could use to get rich?

Finally, our analyst markets Snr. believes that unless your using a commercial strategy news-press, specifically designed for trade during economic news, it is wise to stay off the market during these times. Have experience of that negotiation on days with major economic news holds greater risk than benefit.

Good trading!

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Dollar rises after Bernanke interview

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Interview with dollar Daze: avoid provisions entail currency risk

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Today, we bring you an interview with Mike Hewitt of Dollar Daze, whose “belief is that the paper currencies of the world are presently undergoing a devaluation.” Below, Mr. Hewitt shares his thoughts on the US Dollar, Chinese Yuan, inflation, and why you should be paying attention to Gold and other commodities.

Forex Blog: I would like to begin by asking about your background. What interested you in the US Dollar, to the extent that you decided to blog about it on a regular basis?

I first began investing in earnest around the top of the dot.com era in the late-90’s. At the time, I spent much time perusing the various mainstream media financial sites. I invested primarily into the heavily advocated technology stocks. Additionally, I worked at Nortel which at that time was Canada’s premier company, representing everything the so-called ‘New Economy’ entailed.

In 2005, I decided it was time to begin documenting articles of interest and place down some of my own thoughts and conclusions. Through several incarnations, this developed into what DollarDaze is today.

Of course we all know how the ‘New Economy’ ended. Like many of my peers, my investments plunged. While in terms of percentage the losses were staggering, fortunately since I was beginning, the actual dollar amounts involved were quite modest. From that early experience I decided that my understanding of how economics and markets worked needed to change.

I began reading various books and came across a chapter on central banking and fiat currency. For the first time in my life, I realized that gold did not back paper money – not the US dollar, not the British pound or even the Euro. No modern currency is backed by anything tangible. This topic became of great interest to me and I sought out any additional material I could addressing this issue.

Forex Blog: You blogged recently about the dilemma faced by the People’s Bank of China, whereby it desperately wants to limit its exposure to the US Dollar but that any attempts to actually do so would almost certainly cause the value of its reserves to fall? Can you elaborate on this, and explain what you believe to be the PBOC’s most likely course of action?

Beginning in late 2004, the PBOC began buying US debt at an impressive rate, and actually surpassed Japan as the largest holder in mid-2008. A large accumulation of any currency becomes a burden for the holder as they cannot be quickly unwound without driving the underlying currency down and precipitating the very capital loss that the holder is attempting to avoid. China’s situation today shares many eerie parallels to that of France in the 1930’s.

Following the events of WWI, France experienced a decade of currency instability. This ended when the French government mandated the French central bank to buy foreign exchange on the market to avoid excessive currency appreciation. This effectively pegged the French franc to the British pound sterling and U.S. dollar.

Through a process of maintaining an undervalued currency, France recorded trade balance surpluses. At one point it was estimated that the Banque de France held more than half of the world’s volume of foreign reserves.

When the Bank of England suspended their obligation to sell gold at a fixed price in response to a collapse of the banking system in continental Europe, the result was an immediate and sharp devaluation of the British pound. The central bank of France held an estimated £62 million in paper (at that time equivalent to over 450 tonnes of gold). In order to stem their capital losses when the pound sterling dropped, the central bank of France added fuel to the fire by liquidating much of their paper position.

Roll the clocks forward to the new millennium and we see a very similar scenario, but with different players. The Chinese government has enforced a pegged currency through the purchase of foreign reserves. But the important question is whether the end-game will be the same as before.

From what sources are available, the PBOC appears to be both gradually reducing their exposure to US denominated debt and perhaps more importantly, cycling out of longer-term US debt into short-term paper. Perhaps the PBOC can strategically use Bernanke’s QE2 as an opportunity to further reduce their exposure without instilling a panic flight from the US dollar.

Forex Blog: On a related note, I enjoyed your analysis of the “Growth of Global Currency in Circulation” and was surprised to learn that the Chinese Yuan is being printed at an even faster rate (relatively) than the US Dollar. With this in mind, do you think that calls for the Chinese Yuan to appreciate are unreasonable?

The PBOC has been expanding their money supply at a higher rate than the US Federal reserve for many years now. Much of the explosive growth in China is being fuelled by monetary expansion.

I would be hesitant to speculate on any fiat currency which is being produced in great quantities as being a source of strength. Yes, there are factors suggesting that the Chinese yuan is undervalued, but at the same time, the economy of China is not immune to the negative effects of an inflation induced boom caused by monetary expansion.

Interestingly enough, China experimented with paper money around 800 AD and fully abandoned it six centuries later following several boom-bust cycles. The first issue of official paper notes in Europe from a chartered bank was in 1661 by the Bank of Sweden.

Forex Blog: The Federal Reserve Bank has been accused of (inadvertently) stoking the ongoing currency war through the expansion of its Quantitative Easing (QE2) program. Given that all Central Banks continuously expand their money supplies, do you think accusation is fair? More importantly, do you think that the Dollar will continue to decline as this policy is gradually implemented?

I recently compiled statistics comparing expansion of the monetary bases for different currencies. The three largest are shown below.

As one can readily see, the monetary base of all three currencies are increasing, but it puts into perspective just how truly large the actions of the Federal Reserve were to the crisis of 2008. This chart doesn’t include any data from the QE2 program.

While these increases are not directly inflationary, they do present an enormous potential for currency debasement. These reserves can be thought of as being similar to what a major new discovery of a mineable deposit would have to the price of the metal. The price of the metal is only indirectly affected until the newly mined metal reaches the market, at which point it will plunge.

Forex Blog: You have criticized the Fed for its “ardent” fight against deflation. If you look at the experience of Japan over the last 20 years, it would seem to prove that deflation is associated with currency appreciation but economic stagnation? Do you think that deflation in the US would follow a different form?

I believe it important to be very specific with what we mean by saying ‘deflation’. Originally, the term ‘deflation’, and its counterpart, ‘inflation’, referred to changes in the money supply. At present, the term ‘deflation’ relates to decreasing prices. I think this change in definition obfuscates the issue because prices may decrease for various reasons – increased supply relative to demand, price wars, technological advances in production, or efficiencies in distribution – all affect price.

When stating Japan experienced deflation over the last 20 years, I speculate that this definition has been further restricted. Instead of now referring to general price levels, it is concerned primarily with asset prices. This continues to confuse the issue by further removing the cause-effect relationships of increasing supply on the overall economy.

At the peak of the Nikkei at the end of 1989, there was approximately ¥38.5 trillion yen in circulation. Twenty year later, that figure has more than doubled to ¥82.7 trillion. To me, that is inflation.

I would speculate that the US will begin a similar route, but holding the privileged status of being the ‘de facto’ reserve currency of the world, this will affect the global economy.

Forex Blog: The series of long-term currency charts that are displayed on your home page suggest that you subscribe to the Purchasing Power Parity (PPP) school of currency analysis. Is this a reasonable assessment?

I hope to update those charts to reflect the historical trend of different currencies relative to gold. The reason being is that they are currently based on CPI statistics from the BLS. Given that I do believe government statistics such as the CPI to be inaccurate of the real world, I am not entirely satisfied with these charts.

I hold that gold, being a material that functions well as a store of value, provides a much more objective standard to use as a measuring tool.

Forex Blog: Do you think that gold represents the best long-term hedge (aka store of value) in the context of the US Dollar’s continued decline? How do you reconcile the rise in Gold with the fact that inflation in the US is at a 50-year low?

I simply do not buy into the notion that the inflation rate, as measured by the CPI, is an effective method. While the fundamental notion of measuring a ‘basket of goods’ throughout time seems as a good methodology, the various manipulations through which this calculation is subjected (geometric weighting, hedonics, substitution) removes any credibility.

I know that I am paying more for groceries, gas, utilities and other general living expenses than I was before. John William’s site Shadow Government Statistics calculates the CPI the way it was done in previous years and finds the rate to be around 8-10%. That figure feels much more in line with my own personal observations.

Gold is moving up because its monetary value is being realized by a growing portion of the populace concerned with what the increasing money supply will do to the dollar.

Forex Blog: What is your medium-term prediction for the US Dollar. In other words, how will QE2, currency wars, renewed appetite for risk, etc. affect the Dollar after the next few years?

I advocate a strong fundamental position in vehicles which function well as a store of value, such as gold.

I would hesitate holding any position which is exposed to currency risk, particularly long-term bonds. These massive purchase programs by the US Federal Reserve are exerting an enormous downward pressure on interest rates. The Fed is called the buyer of last resort. They may soon find themselves to be the only buyer.

Equities are feeling more and more akin to participating at a casino. In the not too distant history, the purpose of buying a stock was to receive a dividend. Nowadays, it seems like greater fool theory is the rule. Like the flipping of over-priced condos, the goal is simply to find someone willing to pay a higher price to unload on.

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Interview with Marc Chandler, "you win in the discipline".

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Today, we bring you an interview with Marc Chandler, the global head of currency strategy for Brown Brothers Harriman. Previously he was the chief currency strategist for HSBC Bank USA and Mellon Bank. Marc is a prolific writer and speaker whose essays have been published in the Financial Times, Barron’s, Euromoney, Corporate Finance, and Foreign Affairs. He is also the contributing economic editor for Active Trader Magazine and to TheStreet.Com. Below, he shares his thoughts on fundamental analysis versus technical analysis, the false Euro rally, Japanese Yen intervention, and other subjects.

Forex Blog: I would would like to begin by asking you to briefly explain your approach to analyzing the forex markets. Do you prefer technical or fundamental analysis, or a combination of both?

I’ve been analyzing currencies for a while, more than 20 years. I tend to think of myself as a fundamentalist, that is I look at macroeconomics, I look at policy, but at the same time, I’m a strategist, so I’m not just forecast GDP or trade. Ultimately, my goal is try to see where the currencies are going themselves, like the Euro or the Yen, or the Canadian Dollar. I find that technical analysis helps me quantify the risk at what level do I admit I’m wrong. And that’s very important. I think that often times, one would think that with economists, it’s always about being right. And I think that with trading and strategy, risk management is the most important thing. I find that technical analysis tells me where I should put my stop in effect – where I should admit that I’m wrong, unlike fundamentalists that say any level of US GDP or trade balance, the Dollar could be all over the place. Tehcnicals help me identify, help me fine-tune that a bit. I think that trading is so difficult that I need to use all of the possible tools that I have had at my disposal. It’s not just fundamental knowledge, but also studying psychology and price action.

Forex Blog: As head of currency research for Brown Brothers Harriman, it looks like you cover most of the major currencies, as well as a handful of emerging/exotic currencies. What do you think about the macroeconomic gulf that is forming between the “G4? economies (US, UK, Eurozone, Japan) and the emerging market economies (along the lines of debt, GDP growth, etc.)? Do you think that this division is reflected in forex markets?

Most of my career, I’ve focused on the major currencies, but to tell you the truth, it’s kind of blurry what’s an emerging market, especially with all that’s come to light during this crisis. Mexico, for example, Israel and South Korea are OECD countries and yet MSCI and some of these other investment agencies might consider them emerging market, so the line is really blurry.

For example, recently, the Bank of Japan intervened and they bought a lot of US Dollars. But it’s not clear to me – because the Chinese currency is so closely tied to the US Dollar – it’s not clear to me that maybe Japan wasn’t just as concerned, or even more concerned with the Yen against the RMB – since China is its biggest trading partners – as with the Yen against the Dollar. But they had to intervene on Dollar/Yen because of the way the foreign exchange market works and because China’s currency is not convertible.

While I tend to focus on the major countries, I don’t really know how to do the job and think about the world and global capital markets without recognizing and integrating what’s going on in many of the major emerging markets.

Forex Blog:  Do you develop your own macroeconomic forecasts or do you simply plug in the data that your economist colleagues have developed?

 Brown Brothers doesn’t really have a global economist- they’re not that kind of bank. So when it comes to GDP, for example, I will not have a formal forecast for it. I will have a guess of it and I’ll shy one way or the other from the broad market consensus. So for example, the broad market consensus for Q3 US GDP is about 1.9%. I would think of myself as a little bit above there. The important thing for the markets is instead of forecasting GDP as the end result, my end result is the Dollar or the Euro. And I would be looking at GDP, at relative economic strength as one of the inputs in an informal exchange rate model.

I would say that the emerging markets typically grow faster than the industrialized, mature economies. I find that faster emerging market growth – to me that’s more like a “dog bites man” story.  This crisis, unlike past crises, from 1995-2002, these were emerging market crises: East Asia, Latin America…this is among the first crises that originated in industrialized countries.

Many of the emerging market economies have strong domestic demand, so they were able to compensate for the weakness in foreign demand. But they’ve also benefited from the terms of trade: higher commodity prices than manufactured goods prices. I think in general, that many people look at the debt levels of advanced, industrialized countries and worry that the US is becoming Greece or Argentina. I think that kind of thinking is misguided. It confuses things. It confuses cyclical comparisons with structural developments. I think there’s no doubt that the US is not Argentina. The Dollar is a major reserve currency. Most trade is invoiced in US Dollars – even when Australia sells iron ore to China, it’s probably invoiced in US Dollars and paid in US Dollars – not Argentinian Pesos or Mexican Pesos or whatever the current threat to the US Dollar is.

Forex Blog: Based on this, then, you don’t see any inherent contradiction between the Dollar’s strength and the gap in growth fundamentals between the US and emerging markets?

Since the opening up of China, for example, in the late ‘70s, China has definitely grown faster than the US. I’d say that’s also true form many Latin American countries like Brazil. Of course they grow much faster than the US, Europe, and Japan. But sometimes what determines currencies are not relative growth differentials. If you think about what’s happened since Lehman’s collapse, the Japanese Yen has been the strongest currency, and I don’t think that’s because of strong  Japanese economic fundamentals. I think it has to do more with the unwinding of carry trades – Japan being a current account surplus country – that seems to be more telling than saying they have a booming economy, which of course they don’t. There’s no free lunches; the reason Brazil, Turkey, and South Africa offer higher interest rates is to compensate investors for some of the risk (political risk, inflation risk, maybe even historic risk – that you couldn’t depend on these counties in the past, and the market has to anticipate issues going forward). For example, Brazil (Real) is one of peoples’ favorite currencies, and the budget deficit is at an 8 month high, and they are approaching a current account deficit. So when I hear about fundamentals, it kind of begs the question, ‘Well, which fundamentals should be reflected, and what happens if the fundamentals are pointing in contradictory directions?’

Forex Blog: Is there a particular (emerging) currency that you think is not getting enough attention? 

I’m looking for an opportunity to buy the Brazilian Real, although I think it could weaken first. I also like India – I think they’re the tortoise compared to the rabbit of China. I like Malaysia. I like Columbia. I like China. We generally think that in the emerging market space, Asian currencies over time, will appreciate against the US Dollar. They have favorable dynamics, pulled into the Chinese economic orbit, still tied to the US tech cycle, strong underlying economic fundamentals, and pressure to raise interest rates.

Forex Blog: On your financial blog, Marc to Market, a recent post was entitled, “The Yen Conundrum.” Can you elaborate on the contradiction between weak Japanese fundamentals and the strong Yen? Do you expect the trends in capital flows that are arguably behind the Yen’s appreciation will reverse anytime soon?

To me, the Yen’s strength is kind of like a thermometer – a temperature check for a sick patient. I suspect that the Yen’s strength is a function of the deleveraging taking place in the world. When the deleveraging stops, I will be more confident that the Yen has peaked. I’m not sure that is the case yet. I think intervention kind of caught some people by surprise. They spent a lot of money to get the kind of advance they got. They got 3-Yen advance – about a 5% move. The big picture is that it might lose some strength, but gradually.

Forex Blog: Speaking of the Yen, the Bank of Japan recently “intervened” on its behalf. Do you expect that this is only the beginning of a long program of intervention? Given the poor track record of the Swiss National Bank (in terms of the Franc), do you think that other Central Banks may follow suit?

This was a unilateral intervention. There are people who say that this opens up a Pandora’s Box for other countries to intervene, but I don’t think so. I think that those Central Banks that were inclined to intervene have already been intervening, like some Asian Central Banks and like Brazil. They continue to intervene. I think that it’s unusual for a G7 country to intervene. I don’t think that any other G7 country will intervene, though earlier this year and last year, though Switzerland did intervene quite actively and aggressively as part of their quantitative easing. With Japan, it does depend on the Yen/Dollar. However, the Japanese Yen intervention was quite large, and usually the first intervention is the biggest intervention. It’s been a week now, and they haven’t been in. Since that Thursday, the low that we’ve been at was 85.25 and we’re just above there right now. But it does not appear that they are sterilizing intervention, though it’s hard to tell because of the volatility caused by it being the end of the fiscal half year. Generally speaking, I think that the Japanese are not committing yet- they bought just short of 20 Trillion Yen – about $2 Billion – and I don’t think that’s enough yet to have really changed the general tide in Dollar/Yen. I think the deleveraging process has more ways to work and it’s bigger than 20 Billion Dollars.

Forex Blog: When the Euro rallied in the beginning of the summer, a number of forex commentators (myself included) declared a paradigm shift, whereby investors would stop worrying about risk and instead focus on the fundamentals. Ultimately, this shift never materialized, and the Euro appears to have resumed its decline. What is your assessment of the Euro’s recent performance, and what can we expect for the immediate future?

I think that the Euro’s bounce over the summer was a function of people taking a step back from the abyss. In the spring, it maybe looked like the Eurozone would collapse and members would drop out. When people realized that the Euro would survive and institutions would be reformed, the Euro bounced back a bit.

I think that we’re kind of caught now between problems in Europe – I think that risk assessment is fundamental. I do think that most recently, the widening of the spreads in Europe has not read to new Euro weakness, that being said, it might be preventing a serious Euro rally. We’re still about 2 cents below where we were in August. On the other hand, the Dollar has stood on 2 legs. One is bad things in Rest of World (ROW) and the other is good things here. But those good things have faded, and quite quickly in Q2. And so my equilibrium level for the Euro if there is such a thing is probably a bit higher than at the beginning of the year, about 1.33 – 1.35 to the Dollar.

You also have to look at restructuring of Euro debt, and ask, ‘How did Greece live beyond its means.’ The answer is that they were buying lots of goods and German Banks were happily lending them the money to do so. In fact, 70% of Greek debt is owned by non-residents. Going forward, the problems can only be overcome by stronger growth, which doesn’t seem likely at the moment. Still, assuming that interest rate differentials (between Germany and the rest of the EU) narrow, we will see the Euro strengthen.

Forex Blog: I recall a Bloomberg News video segmentin which you highlighted the 200-day moving average as an important forex indicator, especially for investors with a long-term outlook. Could you explain this for the benefit of my readers? Are there any other basic technical analysis indicators that you think fundamental analysts should pay attention to?

First I just want to say that we must appreciate time frame. For example, most fund managers have a medium time frame, and it doesn’t make sense for them to look at daily bar charts. That’s really just false symbolism, noise.

I like the 200 day Moving Average because it gives you a sense of trend. I think I remember the Bloomberg story that you’re referring to. I was looking at 250 day Moving Averages, and the idea of what some people call Golden Crosses. The idea is that the 50-day Moving Average has gone below the 250 Day Moving Average, in the Swiss Franc and the Pound. If you look at the Euro/Dollar exchange rate, the last time this happened was when the Euro was launched in 1999, and it led to a large sell-off. As I aid though, you have to ultimately look at time frame.

Forex Blog: I haven’t read your book, but I’m intrigued by the title: “Making Sense of the Dollar: Exposing Dangerous Myths about Trade and Foreign Exchange.” Are there any particular foreign exchange myths that are especially pertinent and that you’d like to share?

The thesis of my book is that US Dollar expansion strategy is more robust than friends and enemies insist. For example, I look at the current account deficit. People say it makes us poorer but I show that’s not really the case. People think that companies service foreign demand through exporting, but they should be looking at sales from US affiliates, which have been 4 times as much as exports. In other words, build locally sell locally.

Forex Blog: What is your advice for (forex) investors that want to beat the market during these uncertain times?

Well I think that forex investor is an oxymoron, but anyway, there is a misconception that traders win by being right more than they are wrong. I think you win through discipline. That means honoring your stops and limiting your losses. Entry and exit levels are less important than discipline.

I started looking at currencies around the time the Plaza Accord was signed, and since then, I can’t remember ever seeing certainty in the currency markets. You can make a case for bonds and stocks being connected with the business cycle, but the forex connection is more elastic, more variable. I think that this is an advantage for currency traders because it means they are accustomed to uncertainty.

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