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Fundamental Forecast for Euro: Bullish
- The Euro remained in favor as weak data has already been priced in (see last week’s forecast).
- Weakness in the commodity currencies has seen a continued pivot to Europe.
- Slight rebound in November CPI diminishes chance of outright dovish ECB action in December.
The Euro was a top performer the last week of November, capping off a strong final three weeks of the month. After a batch of weak inflation data prompted the European Central Bank to cut its main refinancing rate to an all-time low of 0.25% on November 7, the Euro has been in full-on recovery mode (the EURUSD produced its monthly low that day at $1.3296; it closed the month at 1.3591).
It wasn’t just against the US Dollar the Euro performed well, this past week (+0.24%) or since the November 7 close (+1.65%). The Euro added +1.38% against the Japanese Yen this week and +4.90% in November; and +1.06% against the Australian Dollar this week and +4.56% in November.
The rebound seen by the Euro has been, in part, due to stability in incoming price and growth data. The November CPI estimate came in at +0.9% versus +0.8% expected, a rebound from +0.7% in October (y/y). Euro-Zone Economic Confidence climbed to 98.5 in November, the highest reading since August 2011 (99.0). On the other hand, the German labor market unexpectedly lost 10K jobs in November. The short-term fundamental momentum for the region is slightly improved, despite some weakness in the core.
We thus maintain that, in light of the Euro’s performance in recent weeks, absent a further deterioration in data, negativity regarding the European continent has been priced in. It should be considered a positive sign for the Euro that non-Euro using countries are seeing their currencies appreciate as alongside; it speaks well to market participant’s outlook on the entire region’s growth.
The ECB’s December policy meeting this Thursday will help clarify the prevailing view on growth in the region. Many market observers have correctly pointed to the dramatic contraction in the ECB’s balance sheet over the past year as a reason for sluggish growth. The ECB’s balance sheet has declined by -24.4% in the 52-weeks ending November 22, 2013; to contrast, the Federal Reserve’s balance sheet has grown by +36.9% over this same period.
Similarly, excess liquidity in the Euro-Zone – the amount of surplus funds in the region’s financial system – has fallen to €159B, below the ECB’s implied €200B threshold for additional accommodative policy. At the last ECB policy meeting, President Mario Draghi noted that while another LTRO would relieve any liquidity concerns, in absent of a crisis (sovereign yields are significantly lower than they were this time last year), there’s little reason to just hand capital to the banks.
On October 3, I suggested that“If loan growth remains weak, but another crisis does not come into play, then the ECB might experiment with a BoE-style Funding for Lending scheme, targeted at small- and medium-sized enterprises.” Heading into the ECB meeting, reports from Germany (via Reuters) suggest that the ECB is “considering a new long-term liquidity operation available only to banks that agree to use the funding to lend to businesses.”
Ultimately, if the ECB announces a FLS-like LTRO, it could prove supportive for the Euro. A headline suggesting that a liquidity injection hitting the region could initially weigh on the currency – just as LTRO1 and LTRO2 did in December 2011 and February 2012, respectively. However, these measures could support faster employment growth, a rebound in the housing market, and a healthier service sector over the coming year – just as the Bank of England’s FLS did from July 2012 to November 2013. In that case, Euro weakness might be short-lived – any further dovish policy action might be priced out for at least the 1Q’14. –CV
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The Japanese yen was among biggest losers on the Forex market this week and this month. It looks like traders believe that Japanese policy makers will inevitably add monetary stimulus, weakening the currency further.
The week started poorly for the yen, which was falling due to risk appetite. The minutes of the latest Bank of Japan monetary policy meeting showed that some members of the Board were concerned that the inflation target will not be achieved at the determined date. Such view continued to hurt the yen even after data showed that inflation accelerated.
The Japanese currency sank as much as 6.3 percent versus the pound over month. The UK currency was very strong because of signs of stable growth. The yen was also down 4.1 percent against both the dollar and the euro during November.
USD/JPY rose from 101.28 to 102.40 and EUR/JPY advanced from 137.23 to 139.10 during this week. Both currency pairs gained 1.1 percent. GBP/JPY jumped from 164.32 to 167.60, rising as much as 2 percent.
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Gold at 4-Month Lows on Strong USD- GDP, NFPs to Drive December Open
Fundamental Forecast for Gold:Neutral
Gold nudged higher this week with the precious metal advancing 0.66% to trade at $1251 ahead of the New York close on Friday. The end of November trade marks the largest decline in five months as taper expectations and strength in the greenback kept prices under pressure. Price action was lackluster this week amid the shortened holiday schedule and a quiet economic docket with the pace set to pick up as we open up December trade.
Aside from the flurry of central bank rate decisions next week from the likes of the RBA, ECB, BoE and the BoC, traders will be focused on US economic data with the preliminary read on third quarter GDP & the November non-farm payrolls report on tap. Consensus estimates are calling for an upward revision from last month’s blowout GDP print of 2.8% q/q to 3.1% q/q. The November employment report is also expected to show continued strength in the labor markets with estimates calling for a read of 183K as unemployment ticks down to 7.2% from 7.3%. The risk to gold remains to the downside on stronger US data as the case for continued Fed accommodation becomes more difficult to warrant against the improving economic outlook. However, with expectations for US metrics to remain rather frothy heading into the close of the year, weaker prints could set-back or even diminish expectations for a shift in policy at the December FOMC meeting, thereby limiting the downside for gold prices in the near-term.
As we continue to look to broader central bank policy for cues, it’s also important to note that China, which is expected to overtake India as the biggest consumer of gold this year, saw a pickup in demand this week as the price of gold hit fresh 4 ½ month lows at $1239. “Chinese buying” has largely been a supportive headline for the metal with trading volumes in world’s second largest economy hitting 7-week highs. However with the current central bank outlook and strength in greenback, rallies in bullion remain at risk as we head into the open of December trade with price action over the next few sessions likely to set the tone for the close of the year.
From a technical standpoint, gold prices rebounded off key support this week at a confluence of Fibonacci levels at 1233/34 with the extreme lows making a clean reversal off of an Andrew’s pitchfork bisector dating back to the August high. Divergence has been identified on the daily momentum signature and the risk for a correction into the open of December trade has us looking higher in the near-term for possible short entries. Topside resistance targets are eyed at $1256 and $1268/73 with a break above this threshold risking a more meaningful correction higher. A break/close below $1233 puts the larger trend back into focus with support targets noted at $1209 and $1179/81. With the USDOLLAR trading at resistance below 10,650, we will watch price action in the greenback closely with the December opening range likely to offer further clarity on a directional bias heading into the close of 2013. – MB
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Daily Chart
Crude oil is ascending slowly after remaining at almost the same positions during yesterday’s session, thus it gained almost 60 pips from its opening, however due to strong pressure in the area of line 2 / 8 (red line), it would be very risky to buy this below as the testing of these levels can lead to a price drop again. However, we can say that crude oil is showing signs of exhausting due its downward trend that we see in the bottom window of the oscillators and trend strength. However, the goal of 90.63 or even 90.00 dollars a barrel is not ruled, therefore be cautious today.
4-Hour Chart
In 4-hour chart we can see that cude oil after a crush on line 2/8 (red line), where it crosses the two uptrend lines, has been experiencing a small rebound and now is facing resistance on the green line 3/8 which becomes the basis of its range of the same trend line that could eventually do fall back to the line at least of 1/8 Murrey. Even if the price could penetrate these levels, it will find a second resistance at 93.50 and 93.75 where the neutral line 4/8 is located. Therefore, we do not find a signal that allows us to make a decision at least today.
1-Hour chart
Finally, although in the 4-hour chart we see a bullish trend started from the line 4/8 (blue line) that becomes a major support area, this time we noticed that crude oil is finding strength at the line of 6/8 (red line), which also becomes an area of strong reverse. We also have the orange top line of its trading band and finally a few pips above its weekly pivot. All this makes us believe that the CL may fall below these levels again to close at least in his area range, ie on the line 4/8. For the same reason we see no clear opportunity for purchase or sell, we can only wait until the opening of the next session.
If you have any questions or suggestions, please contact me right through: Email:antonio.inga@analytics.instaforex.com
DISCLAIMER No information published constitutes a solicitation, offer, or recommendation, to buy or sell any investment instrument, to effect any transactions, or to conclude any legal act, whatever its nature. The information published and opinions expressed are provided on an only for information only and is subject to change without notice, delimiting the company responsibility for decisions originating from the same, and they cause any kind of profit, loss or damage.
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Performed by Antonio Inga Guerra, Analytical expert InstaForex Group © 2007-2013 |
Talking Points:
A look back at the past week of Forex trading using movements in the US Dollar Index:
US Dollar 1-Hour 17:00 11/24 to 12:00 11/29 EST
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The Dow Jones FXCM US Dollar Index set a new 2-month this week before declining close to the weekly open and just above 10,600.
The US Dollar set the first new high on Monday despite a slow news day. Then, the greenback declined in overnight trading between Monday and Tuesday on the release of BoJ Minutes. The minutes showed dissent from three board members regarding the inflation forecast language. However, those dollar losses were soon erased and the greenback set the weekly high at the start of the NY session on Tuesday.
Then, a sharp decline in dollar trading commenced on disappointing US consumer confidence through the rest of Tuesday’s trading. The US Dollar touched a four day low on Euro strength; German talks between parties had ended with a coalition deal.
The US Dollar saw the final rally of the week on Wednesday morning, when the Michigan Confidence release and the Chicago Purchasing Manager release were each announced better than expected. But that rally was reversed on Aussie strength, following the release of strong capital expenditures.
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Charts created by Benjamin Spier using Marketscope 2.0
– Written by Benjamin Spier, DailyFX Research. Feedback can be sent to bbspier@fxcm.com .
Euro has been see-sawing a bit today on low volume, and as the end of the month approaches. However, the 17-nation currency is getting some help from the latest economic data. Jobless claims are down and inflation is up, and that has some hoping that the ECB won’t resort to negative deposit rates.
The latest economic data out of the eurozone indicates that the 17-nation currency region continues to improve — albeit at a slow pace. Eurostat reports that inflation is at 0.9 per cent, which was a little higher than expected. On top of that, instead of remaining steady, the unemployment rate ticked lower to 12.1 per cent.
These numbers still indicate that recovery in the eurozone is quite slow. However, improvements are being made, and there are hopes that, perhaps, the ECB won’t resort to cutting its benchmark to the point that there are negative deposit rates. The interest rate is already at a 0.25 per cent low, and there are hopes that things can improve without weakening the euro further.
Even with the improvements, though, there are some hurdles to overcome, and the risk of deflation remains.
At 15:53 GMT EUR/USD is up to 1.3611 from the open at 1.3605. EUR/GBP is down to 0.8319 from the open at 0.8324. EUR/JPY is up to 139.3140 from the open at 139.1215.
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EURUSD rose yesterday and closed at 1.3603. The market has been quiet during the last trading day of November even after most of the US banks are opened after the Thanksgiving holiday in the United States. EURUSD remained steady just about the 1.3600 level, after the CPI Flash Estimate year over year rose 0.9 percent in November. Yesterday the Consumer Price Index in Germany year over year rose 1.3 percent. Market had expected a 1.2 percent rise. Due to the lack of news and the low liquidity on the market we don’t expect large moves for the session ahead, but investors should be fully aware that any potentials comments may bring irregular volatility. Support for the EURUSD is seen at 1.3520 and resistance is seen at 1.3620. The HotForex Traders Board shows that 64 percent of the traders are short on the EURUSD.
The price zone of 1.3400-1.3460 represented a valuable supply zone that kept the price below for months. However, a significant bullish rejection was expressed around 1.3100 leading to a bullish breakout pattern.
According to the final readings of the European Statistical Office disclosed two weeks ago, the European inflation was at 1.1% in September, in line with preliminary projections, while it settled at 1.3% in August. This constituted to the recent bullish jump that took place on October 22.
Previous daily candlesticks represented indecision around 1.3800 which initiated bearish retracement towards 1.3450 which failed to provide strong support, and then 1.3280 was tested shortly after.
Price zone of 1.3280 - 1.3300 provided strong demand for the pair pushing it higher above 1.3400 – 1.3450 (prominent technical levels). Persistence of the current movement to push above 1.3450 level allows the pair to reach the next supply level around 1.3640 where the price action should be watched.
Price level of 1.3640 corresponds not only to a prominent high established on October 7, but also to the upper limit of the ongoing bullish channel depicted on the chart.
Based on the market analysis, there is a valid sell entry around 1.3600-1.3640 with SL as daily closure above 1.3670.
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Performed by Michael Becker, Analytical expert InstaForex Group © 2007-2013 |
Talking Points:
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The Canadian Dollar rose nearly twenty pips against the US Dollar on news that the Canadian economy expanded at the fastest pace in two years in the third quarter.
Canada Gross Domestic Product grew by 0.7% (real) in Q3, up from 0.4% in the second quarter. On a monthly basis, the economy expanded by 0.3% in September, beating expectations for 0.2% growth and consistent with the 0.3% expansion in August. Canadian GDP grew by 2.3% from September 2012, according to Statistics Canada. Domestic demand increased 0.5% in the third quarter, while exports fell by 0.5% after three quarters of export growth.
In October, the Bank of Canada did not mention the possibility of a rate increase for the first time in more than a year, and Governor Poloz said this month that he would like to see inflation higher. The BoC also mentioned worse than expected economic activity as a reason for its accommodative stance. Better than expected economic growth may dissuade the BoC from further pursuing accommodative policy, and the release was therefore positive for the Loonie.
USD/CAD has fallen to a new 2-day low and past support at 1.0568, which was the August high, and the pair may next see support by the first monthly pivot support point at 1.0528.
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USD/CAD 1-Minute: November 29, 2013
Chart created by Benjamin Spier using Marketscope 2.0
– Written by Benjamin Spier, DailyFX Research. Feedback can be sent to bbspier@fxcm.com .
The Great Britain pound slipped today, following the advanced to multi-year highs, as Britons’ confidence unexpectedly worsened in November. Losses were limited as the housing market demonstrated good performance.
The GfK consumer confidence index slipped by one point to -12 in November, while it was expected to improve to -8. Meanwhile, the Nationwide House Price Index increased 0.6 percent this month. British lenders granted 67,701 mortgages in October, the biggest number since February 2008, up from 66,891 in September.
GBP/USD was down from 1.6340 to 1.6336 as of 11:06 GMT today following the rally to 1.6373 — the highest rate since August 2011. GBP/JPY slid from 167.18 to 167.09 after touching 167.88 — the strongest price since October 2008.
If you have any questions, comments or opinions regarding the Great Britain Pound,
feel free to post them using the commentary form below.
AUD/USD Elliott Wave
For the last few days the AUD/USD pair has been trading downwards, ending diagonal inside the last .v wave (coloured black) of the bigger c wave (coloured blue) has been developing. Yesterday, during the Asian session we could obesrve ascending movement from 0.9112 towards the 0.9148 level and we can consider this move as the end of the ii wave (coloured purple). Therefore, during the European and New York session this major currency did not manage to hold around the highs and price has retraced back to 0.9067 level. At the moment the AUDUSD pair is trading around 0.9067 and we are expecting to see more bearish movements before price turns higer in the c wave (coloured red). In accordance with our wave rules and taking into account that wave 5 should retrace 61.8% of wave 3, we can define the potential targets with measuring wave 3 with take profit at 0.8995 (61.8% of wave 3). To reduce the risk, we can use invalidation point at 0.9150 level as stop loss.
Support and Resistance
(S3) 0.8993 (S2) 0.9033 (S1) 0.9068 (PP) 0.9108 (R1) 0.9143 (R2) 0.9183 (R3) 0.9218
Trading forecast
Proceeding from Elliot Wave rules today, the trend is expected to begin the downwards movements. That is why short position at level 0.9100 with stop loss at 0.9150 and take profit at 0.8995 are recommended.
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Performed by Nicola Delic, Analytical expert InstaForex Group © 2007-2013 |
The New Zealand dollar fell today after a report showed a drop of building permits last month, but the currency pared losses later and now trades near its opening level.
The seasonally adjusted number of new dwellings, including apartments, fell 0.6 percent in October after rising 1.4 percent in the prior month. The ANZ business confidence index rose from 53 in October to 61 in November. The report said that there was “a lift in business confidence measured right across the board”, but warned:
However, it wasn’t all one-way traffic in this month’s results. The improvement in some survey questions was marginal, while the gloss was taken off a handful of other indices.
NZD/USD traded at 0.8120 as of 10:44 GMT today after falling from 0.8115 to 0.8083. NZD/JPY was near 83.05 following the drop from 83.03 to 82.78.
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Danish economic growth eased in the third quarter, the latest figures published by Statistics Denmark revealed Friday.
The gross domestic product expanded 0.4 percent quarter-on-quarter in the third quarter, decelerating from 0.6 percent growth in the second quarter. Economists had projected 0.3 percent increase.
The economy stagnated in the first quarter, while the previous estimate showed 0.2 percent contraction for the period.
In the September quarter, private consumption edged down 0.1 percent from the previous quarter. Government spending rose 0.6 percent and investment surged 3.9 percent.
The GDP grew 0.5 percent year-on-year in the third quarter. In the first three quarters, GDP rose 0.1 percent compared with the same period last year.
Published: 2013-11-29 08:28:00 UTC+00
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Talking Points
Understanding candlestick charts continues to be the backbone of price action analysis for the Forex market. Once traders understand the basics, they can then begin to compile a series of candles to form patterns to confirm potential changes and market direction. Often candle patterns are also used to confirm an existing idea. Today we will review the Three Inside Down pattern and how it can be used in your trading.
Three Inside Down Pattern
TheThree Inside Down candle pattern is actually a continuation of the Harami. Pictured above,we can see that this pattern is broken into three distinct candles. First again we have a large engulfing candle. This blue candle represents the end of bullish momentum as trading pauses with an inside bar creating the Harami. The third candle confirms the markets new downward bias with price breaking to lower lows. Not only should the body of candle number three closes below the second candle, It should close beneath the first candle as well.
This pattern is considered a strong candle for the fact that traders get an extra candle for market confirmation. As price moves toward lower lows traders can then look for new selling or retracement opportunities.
Let’s look at a current example.
Learn Forex – AUDUSD Daily & Three Inside Down
(Created using FXCM’s Marketscope 2.0 charts)
Uses in Trading
Above we can see an effect Three Inside Down pattern on the AUDUSD daily graph. After a strong bullish move, the AUDUSD consolidated with an inside candle. The third candle confirmed the markets direction, with a break of price support. After its creation, the market put in its current high then quickly descended 556 pips to for a higher low on the chart.
Traders looking to take advantage of the Bullish Three Inside Down pattern can add it into any existing trending market plan to identify changes in market direction. Traders may even trade independently it with an inside bar breakout strategy. Regardless of the method taken, traders should track their progress with a trading journal and periodically review how candle analysis is working in their trading.
—Written by Walker England, Trading Instructor
To contact Walker, email wengland@fxcm.com. Follow me on Twitter at @WEnglandFX.
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Talking Points:
Traders continue to flock to the Forex market in droves. Many of these traders are brand new to markets, and Foreign Exchange is the first venue they’ve looked at; while others are coming from equity or futures markets because the flexibility in FX make it more of a ‘pure trader’s market.’
Regardless of whether you’re just starting to trade or if you’ve been around the market for a while, it often behooves us to have a strategy. Without a strategy, we essentially have to ‘guess’ which positions might work out for us each trading day, in hope that the market cooperates.
The strategy is the process; and it’s the process that will allow you to reach your goals in the arena of trading. What follows are the four most pertinent components of the process traders should look to take into account in order to find long-lasting success in markets.
Fundamental Analysis
We covered this topic in depth in the article, How Fundamentals Move Prices in the FX Market.
Future price movements are often shaped by economic data. When the NFP number gets announced, or when the European Central Bank decides to cut rates; you’ll see this take place very quickly in numerous markets. Traders scramble to price in this ‘new’ information, and if the data was compelling enough, these prices changes can put in longer-term moves (new trends).
This type of thing happens in all markets; but what makes Foreign-exchange different is the realm of impact each of these data prints can bring.
As an example, The European Central Bank cut rates 25 basis points on November the 7th of this year. We explained the motivation behind a weak currency in the article, The Nucleus of the Forex Market. This would normally be bearish for an economy; with lower rates of return, there is less incentive for foreign investors to deposit capital. And surely, as this news came in the market the Euro was punished lower by over 200 pips.
Fundamental data can bring MASSIVE volatility to markets; but will it last?
Created with Marketscope/Trading Station II
After the ECB shocked markets with the November rate cut, the Euro continued to move lower until it hit a price of 1.3300 (marked with the black line in the above graphic); at which point, prices began to reverse and move higher. As of this writing, EUR/USD is over 250 pips higher than this 1.3300 level of resistance.
So, the ECB cut rates and prices moved over 200 pips lower, only to reverse at 1.3300. Price on EUR/USD then moved higher by 250 pips (and higher than the pre-ECB rate cut level).
What does this tell us about fundamental analysis in the FX market?
Fundamental data (and their accompanying announcements) can spark price movements in the Forex market. But these fundamental announcements are unpredictable… and even if we could predict these events, there would be no way to know exactly how the market will price them in.
This is where the trader needs to incorporate additional tools into their approach; and we’ll talk about some of those below.
Technical Analysis
Fundamentals alone aren’t enough for the FX trader; and we discussed this premise in-depth in the article The Potent Combination of Fundamentals and Price Action.
For a few different reasons, Technical Analysis has a much more prominent role in FX as opposed to other markets. Surely, Technical Analysis is used by stock and futures traders; but in FX we’re dealing with entirely different subject matter.
As an example – a 10% movement in a day for a single stock can be considered a ‘great day.’ Movements of 5% or more are extremely common, especially when markets are pricing in new information (like earnings). Movements of 20% or more are less common, but they happen with regularity.
If a currency were to move 20% in a day, much bigger issues are at stake. In the above example, we looked at a 200+ pip movement in the EURUSD, which I described as ‘massive.’ And, in relative scope – this was a massive move.
But 200 pips in the EURUSD is really only about a 1.5% move
Created with Marketscope/Trading Station II
With currencies, much more is at stake than just one single company, in one single economy. We’re talking about the foundation by which our entire civilization is founded upon. Daily volatility of 5% or more in a developed nation’s currency could wreak havoc on that economy, and any economy that wanted to trade with them.
So, in general – price movements are smaller in FX…. But we also have more leverage to work with. This isn’t ‘just’ a good thing, because leverage can amplify gains AND losses; but this speaks to the flexibility that I mentioned at the beginning of this article.
As a trader, when I want to turn up the leverage on a position, it’s my right to do so in the FX market. In stocks, that option isn’t even available as maximum leverage is capped at four times account equity.
But, because these price movements are, in general, smaller than what we might see in other markets; traders often place a higher importance on technical analysis in seeking out trades or positions.
Technical Analysis is the art of using the chart, and past prices in an effort to find trade setups; so, technical analysis is really just a way of examining the past; and there are a lot of different ways of doing so.
Some traders prefer to use indicators like Moving Averages, or RSI; and these can be good if used correctly. But what often happens is that a trader finds that an indicator can help, so they automatically think that two must be better; and if two is better, why not three?
A wise trader once told me that any indicator is really just a fancy moving average; and this is truth. Indicators are based on past prices; they just use their own mathematical formula to derive the indicator value. Because of this, Price Action is often considered to be one of the more ‘clean’ manners of examining past prices. Price Action strips out the mathematical formula and focuses solely on price.
In the previous example of the EURUSD reaction after the ECB rate cut, do you remember where price had made its miraculous turn-around? The turnaround in EURUSD happened right after 1.3300 came into play; a perfect example of price action at work. The price of 1.3300 is considered a ‘Psychological Whole Number,’ that can often exhibit elements of support and/or resistance; similar to EURUSD at 1.3000, although 1.3300 wouldn’t be considered ‘as round’ as 1.3000.
But Price Action can do a lot more than just show us psychological levels on charts. We could’ve used price action to trade that EURUSD setup very proficiently.
The Potent Combination of Fundamentals and Price Action
Created with Marketscope/Trading Station II
Price action can be used to find and grade trends, find support and resistances levels, and also trigger into positions.
If you’d like to get more familiar with Price Action, our article Four Simple Ways to Become a Better Price Action Trader can be a very non-threatening, simple way of getting started.
So, to recap: Fundamentals help shape future price movements; and technical analysis can help explain past price movements. Between these two analytical systems, we can begin to focus on the highest-probability strategies and setups.
But this will not remove risk; and until a trader learns to manage their risk, the probability of profitability (long-term) will remain miniscule – and because of that, Risk Management isn’t just a preference, it’s a necessity.
Risk Management
An inevitable part of trading is losing. Because you cannot predict the future, you will, at least on occasion, be wrong. And if you aren’t managing your risk, one losing position can wipe away the gains from many winners. As long as this risk impacts the trader, the trader will struggle to find consistent profitability.
So, before a trader can ever find consistent profitability, they first have to learn how to lose properly.
We write about this subject heavily at DailyFX; and there is one over-riding reason why this will continue to happen: Risk management matters.
We even wanted to prove this to ourselves, and this is where the Traits of Successful Traders research comes from. David Rodriguez spent a considerable amount of time analyzing over 12 million trades placed by real traders on live platforms through FXCM. These were positions triggered with the goal of making a profit, and the results speak very loudly.
The Number One Mistake that Forex Traders Make is faulty risk-reward. In some currency pairs, the results were just shocking. In GBPJPY, for instance, traders won in 66% of their trades. That’s two out of every three trades! But this winning percentage doesn’t matter much when these traders were losing, on average $2.34 for every $1 made (122 pip average loss, 52 pip average win).
Winning Percentage isn’t the only factor of profitability…
Image taken from The Number One Mistake Forex Traders Make
Traders can look to prevent the number one mistake by simply using a stop and limit order to enforce a minimum 1-to-1 risk-to-reward ratio.
So, if you set a stop of 50 pips look for at least 50 pips on the limit or profit target of the trade. And just like we outlined in How to Lose Properly, set your risk at the outset of a trade based on fundamental and technical analysis. If the position moves against you, so be it; but do not throw good money after bad money by widening your stop in the ‘hope’ that the position comes back.
One of the most difficult things about trading is dealing with losses. It’s almost inhuman to be comfortable with losing, no matter how inevitable it may be. This is why trading psychology is so important…
Trading Psychology
One of the most difficult aspects of trading to master isn’t fundamental or technical analysis; it’s our own psychology. We covered this concept in-depth over the past month, and we recapped much of this work in The Forex Trader’s Guide to Speculation Psychology.
As human beings, we generally look at success based on how often we are right. But, just like we saw above, those traders in GBPJPY that are winning 66% of the time; they might feel successful but they’re STILL losing money.
If we reverse the above ratios; where traders are winning 33% of the time (1 out of 3), but winning 152 pips on each win, and losing 52 pips on each loss – let’s take a look at the average results:
In the above graphic, you can see how a 33% winning ratio can amount to a profitable strategy.
The trader achieving these statistics, winning 33% of their trades with an average win of 152 pips and an average loss of 52 pips is averaging a 48 pip net profit for every three trades that they’re placing. This trader is making money.
But do they feel like they’re making money? They’re failing two out of every three trades. Most human beings, despite being profitable, would feel like they’re losers, or inadequate in some way because they can only win one out of every three trades that they’re placing.
This is where the importance of a Positive Outlook comes into play; enabling the trader to look at the bigger picture, losing properly when they are wrong, and focusing on managing winning trades while the losers manage themselves.
– Written by James Stanley
James is available on Twitter @JStanleyFX
To join James Stanley’s distribution list, please click here.
Would you like to get better with Price Action? Please feel free to take our 15 minute course on the topic. You’ll first be asked to sign the guestbook, which is completely free; and then you will be met with the video-based lesson via Brainshark.
Price Action Presentation via Brainshark
We’ve recently begun to record a series of Forex Videos on a variety of topics. We’d greatly appreciate any feedback or input you might be able to offer on these Forex videos:
Forex – Secrets of Profitable Forex Traders
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Exclusive newsline by InstaForex is your reliable assistant in the Forex world.
Top Forex analysts with immense experience in Forex trading, dozens of comprehensive analytical reviews daily, various subjects and types of analysis. Moreover, economic calendar by InstaForex Company can help you be in the middle of informational flow.
Exclusive newsline by InstaForex is your reliable assistant in the Forex world.
Top Forex analysts with immense experience in Forex trading, dozens of comprehensive analytical reviews daily, various subjects and types of analysis. Moreover, economic calendar by InstaForex Company can help you be in the middle of informational flow.
Exclusive newsline by InstaForex is your reliable assistant in the Forex world.
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Talking Points:
- USDOLLAR Retains Range During Holiday Trade; Threatening Bullish Formation
- Pound Eyes 1.6400 as Bank of England (BoE) Removes Funding-for-Lending Scheme (FLS)
USDOLLAR Daily
Chart – Created Using FXCM Marketscope 2.0
The Dow Jones-FXCM U.S. Dollar Index (Ticker: USDollar) bounced back from trendline support to retain the range-bound price action from earlier this week, but the upward momentum appears to be coming to an end amid the bearish break in the Relative Strength Index.
The RSI divergence suggests that the dollar will resume the series of lower highs paired with lower seen since July, and a more bearish outlook may take shape in December should the fundamental developments coming out of the U.S. economy undermine the Fed’s scope to taper the asset-purchase program at the last meeting for 2013.
In turn, a closing price below range support (10,604-15) should bring up the downside targets in the coming days, and we may see a more meaningful run at the 10,300 region as the dollar appears to be carving a near-term top.
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GBPUSD Daily
The dollar weakened against three of the four components, led by a 0.40 percent rally in the British Pound, and the GBPUSD may continue to mark higher highs over the near-term amid the shift in the policy outlook.
With the Funding for Lending Scheme (FLS) set to expire next year, it seems as though the Bank of England (BoE) is making more apparent that it will implement its exit strategy ahead of schedule, and the policy meeting on December 5 may heighten the bullish sentiment surrounding the sterling should the central bank strike a more hawkish tone for monetary policy.
In turn, the GBPUSD may continue to work towards the next topside objective coming in around the 1.6400 handle, and the technical outlook may turn increasingly bullish over the near-term as the BoE moves away from its easing cycle.
— Written by David Song, Currency Analyst
To contact David, e-mail dsong@dailyfx.com. Follow me on Twitter at @DavidJSong.
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