forex trading

Short Covering – A Powerful Market Dynamic

Forex Kong Got something to say?

I’m sure you’ve heard the phrase “short covering” many times, but as with many of these “industry terms” you may not know / understand “exactly what that means” – or how it may affect you.

Not to insult anyone’s intelligence ( as many of you may know ), but “short covering” is a simple principle wherein traders who have taken a “short position” ( meaning that they are betting that the market will move lower ) see the market start moving against them ( so the market continues higher ) and then need to “buy back” the shares they originally “sold short”.

In this instance – for a loss.

These aren’t what you would call “new buyers” by any means. These are trades / traders that where originally “bearish” but then had the market turn against them, and in turn are “forced” to buy back the shares at a higher price – or risk even further losses should the market continue even higher.

A “short covering  rally” occurs when a few “shorts” start covering ( buying back the shares they sold short ) which manifests as “more buying” in the markets, pressuring more shorts to cover their positions, snowballing into a massive spike in “short covering” as bearish market participants jump ship as to “get out” before the market moves any further against them.

In this case, the “short covering rally” ( which we are clearly seeing today ) is merely a case of timid / frightened bears with little conviction – quickly buying back their shares for fear of greater losses, thusly “propelling” prices higher as the massive amount of shares “sold short” are quickly bought back.

A snowball effect if you will, quickly reversed as the larger macro trend re asserts itself.

Don’t be fooled.

This is not “renewed interest in buying”.

 

 

 

 

 

 

Money Where My Mouth Is – I'm Short SP 500 At 1940

Forex Kong 7 Comments

I might be a little early but…….you know me. This is nothing new. I’m always early.

Fact of the matter is…….this “bounce” in risk has looked incredibly weak, and considering we’ve “supposedly” come so far so fast ( with The SP now retracing 61.8% of the recent fall ) now is as good a time as any to start staggering orders “short risk” once again.

Aside from the SP 500 short, I’ve now “begun” starter positions in several currency pairs including short AUD/JPY ( set for even greater profits than the last trade ) as well CHF/JPY and GBP/JPY with trades in several other pairs to follow.

Short and sweet here today as the outline / plan ( presented only a few short days ago ) is playing out as expected.

There’s not enough “upside potencial” at this point to really get concerned about “perfect entries short”. If it’s not today……then perhaps a couple more points tomorrow – who cares.

We are on the other side of the mountain, and we don’t want to miss the slide.

More trades, weekly reporting and daily real time commentary at the Members site: www.forexkong.net if you’re interested in making any money over the next few months.

Global Appetite For Risk – SP 500 To Fall Hard

Forex Kong Got something to say?

So the SP 500 ( and global appetite for risk in general ) has got a couple more points left, before she turns and makes the next “larger leg” lower, then even lower still. I hope you’re prepared for a couple of ugly months.

Here is what we are looking at for The SP 500 and “global appetite for risk” over the coming months:

SPX_Oct_21_Forex_Kong

SPX_Oct_21_Forex_Kong

I know you don’t want to hear it but…….unfortunately after the countless number of posts, the never-ending supply of supporting data, and finally the “exit of The Fed” – you’ve had ample warning. This market has no possible chance of holding up on its own, and its VERY LIKELY that come late January The Fed will make reference to “QE 5” or which ever “QE” we’re on to next.

Survival here is key, as there will be significant buying opportunities come February – pending that you’re not so deep underwater with current positions that perhaps you’ve got a little cash to deploy AT THE LOWS.

Let’s imagine that markets “scream back” after this correction leading into late January, and by April of next year you’re “almost break even”.

Lots of pain to endure in the meantime, let alone profits to be booked ( if you currently have any ).

This thing was built on pillars of sand – you knew that.

Now the waves are coming in.

 

 

 

 

Sell High – Have You Ever Actually Done It?

Forex Kong Got something to say?

Selling at the highs is impossible for you.

That’s because you didn’t buy at the lows.

You MUST get this turned around.

It takes time for sure, but it’s one of the many “revelations” I’ve experienced on the long path to becoming a successful trader.

Once you “finally” get this flipped around ( and you will – if you just put in a little effort ) you’ll start to view markets in an entirely different light.

You’ll start “dreaming” of massive pullbacks in bull markets, or huge “upward spikes” in bear markets as these serve as “opportunities” – not setbacks.

The entire thing gets “turned upside down” once you are “finally” on the right side of the trade, and when you can “actually say” you indeed bought the lows……then in turn – sold the highs.

A very, very rare occurence. Bravo!

The Weekend Report – Ideas Of What To Expect

Forex Kong Got something to say?

We find ourselves in an interesting spot now, with respect to “where markets are headed next” as……the major “risk indices” have put in “swing lows” – suggesting that new daily cycles are now underway.

At the very least we know “things are set to bounce” but “to what degree” remains to be seen so we need to keep an open mind, and get our heads wrapped around a couple different scenarios, as well take into consideration “whatever else we can” in order to formulate a plan.

Regardless of near term market direction, we can also see that “volatility” has certainly picked up, providing for all kinds of intraday opportunities and short-term trading.

Forex trading is back!

Scenario 1:

Personally, I don’t feel the market has yet come to a “capitulation type moment” and would first entertain that perhaps we get another couple of “up days” early in the week, a fast roll over and a further dive to test the recent lows.

It would be from “there” that I would imagine the stronger and larger bounce higher in risk.

Scenario 2:

Off to the races first thing Monday morning markets start ripping higher, then higher, then higher still – squeezing every single short and pressing to the near term / all time highs.

I feel this is “less likely” from both a fundamental as well technical perspective, but considering these markets and the “desperation” of Central Banks to keep confidence in the system – I can’t rule out some completely ridiculous “media induced” rally closer to the highs.

SPX_Oct_19_Forex_Kong

SPX_Oct_19_Forex_Kong

Please envision the exact same chart / scenario for The Nikkei.

Either way you look at it – you’ve really got to make some solid trade decisions here. One could choose to just “sit this leg out” and be very prepared for the tiniest suggestion that things are heading lower again – then jump on the train headed in the “direction of the trend”. Or you could certainly “take a stab” at a few long ideas, just with the understanding that you are trading against the trend, and that your time may be short. Perhaps too short.

For me it’s “almost” to late already to be chasing any “short-term trades” following risk higher, as the “downtrend” in most currency pairs ( JPY related for example ) is still intact.

Take AUD/JPY for example – 150 pip counter trend move over the past two days only brings the pair to the upper portion of its downward facing trading channel, and still has it “burgundy” on a 4H as well “gold” on the 1H. It could just as easily turn lower over the next 24-48 hours and continue on its way down.

In fact considering the large moves higher in SP 500 over the past few days – the currency market “so far” has done nothing to suggest ” a major low is in” and that we should just “switch to the long side” so……..I’m gravitating towards the first scenario, and plan to sit tight Monday / Tuesday ( unless of course things are already moving ) planning to “stay short risk in theory” and look for the absolute best entries I can in re shorting JPY related pairs.

Appreciate that I am nearly 100% cash at this moment as well.

The U.S Dollar

USD is giving us no clear signals as to which direction she’s headed next week and “as per usual” the correlation with “risk” is muddled.

The Dollar has fallen from its highs yes…..but hasn’t really gone anywhere in any “big way” as it’s still trading “gold/amber” on a 1H chart.

USD_1H_Forex_Kong

USD_1H_Forex_Kong

Unfortunately this doesn’t provide for any “aggressive trades” in USD short of keeping a very watchful eye on GBP/USD, EUR/USD, USD/CHF as well USD/CAD for possible entry “if / when” USD breaks below the 85.00 area.

Most USD related charts “do look primed” for this trade to come to fruition – but things continue to grind. I see no immediate evidence that USD is “heading back towards the moon” as everything I track still suggests USD is set to fall further.

AUD/USD as well NZD/USD appear to be “impossible trades” regardless of the fact that NZD has likely bottomed here as well so……all we can do another day or two is watch USD, keep an eye on all these pairs – and be ready. ( I still feel AUD as well NZD need to “take a bounce here” – but it sure is a long time coming.)

Trade Ideas

The next leg lower in “global risk” is going to be a whopper – so you’ll want to be fully onboard for that. It’s these “counter trend” moves that will always throw you for a loop as it’s near impossible to gauge the “extent to which” things correct.

If you’re actually bullish then perhaps you’ll see this as an excellent opportunity to buy, although I certainly can’t recommend that.

The big moves ( and the big money )  have clearly been with JPY and I suggest a continued focus on these pairs. We know “without question” that the correlation of “risk off” = JPY strength so the question begs “if it ain’t broken – why fix it”?

This is the most obvious and blatant trade / market dynamic we can put our finger on today so it only makes sense to continue concentrating on it.

We wait for this “upward correction” to take our JPY related pairs as high as they’ll go – then get underneath them again for the next ” and larger” leg lower in risk.

We continue to monitor all USD related pairs ( as I’ve entered long GBP/USD ) for the first signs that indeed USD is heading lower and that these pairs will offer some good trade opportunities.

If we imagine all JPY pairs taking a minimum 150 pip bounce ( and even more likely 200 pip bounces ) then getting under even 5 of them, and seeing things move back to the previous lows ( and then lower even further ) – that’s a good 1000 pips before things have really even moved much!

GBP/JPY as well CAD/JPY and AUD/JPY have already made considerable moves higher, but with downtrends still very much intact.

I imagine we’ll have an answer as early as Tuesday, as to whether it’s worth it chasing a couple trades higher / long risk, or to just “sit it out” and plan for the “major trade” setting up for the next leg down. One way or another – we just want to see those JPY related pairs keep moving higher as to “get back underneath them” for some big wins in the weeks to come.

Please feel free to visit the members website at: www.forexkong.net for weekly reports, daily commentary and real time trade alerts.

Cash Or Crash? – Markets To Make Lower Highs

Forex Kong Got something to say?

I’m 100% cash.

A very, very rare situation for myself as – when trading longer term charts you very often find yourself exposed to at least “one trade or another” while patiently waiting for profits to come. It’s a different style of trading yes….but the rewards are great.

A full cash position here allows me to take a day to observe, regroup and start developing the next couple weeks plan, even if I end up missing a few pips here and there. You can’t look at it that way. You’ve got to just be satisfied with the trades that you take, and keep on moving forward.

I’m very pleased with the last few weeks trading, as my original framework ( basically citing trouble in Japan as “trouble for the planet” ) has been proven sound. We’ve managed to profit greatly.

Interestingly USD has really not even changed trend, as this entire leg of weakness in “global appetite for risk” essentially saw JPY taking the largest inflows.

A 1H chart of $DXY still has USD “bouncing across the top” so a potential “relief rally in stocks” will again allow us to re-evaluate the relationship with USD.

USD_1H_Forex_Kong

USD_1H_Forex_Kong

I’m also eyeing a potential bottom in GBP.

There’s no saying that things won’t continue to slide lower in general, but The SP 500 is getting very close to the 1800 level, where I would have to expect some kind of “bounce” after such a fierce week selling off.

While doing what we can to continue taking advantage of the weakness ( small day trades perhaps – small attempts at “staying short” – but with caution ) what we would ultimately be looking for here “relatively soon” ( short of a full blown market crash ) is some kind of “counter trend bounce”, which I believe will create a “lower high” in SP 500 / risk before we take the next leg lower.

At this point I cant recommend “chasing this lower”, but suggest you keep your eyes on your charts and remain vigilant. There are lots of trades out there, just that it’s a difficult point to make any large commitments.

Enjoying the volatility that is now back in markets, I too will likely be looking for short term “day trades” over the next day or two ( still short risk ), but won’t make any medium term commitments until I see how things play out here over the next few days.

Eyes on USD obviously, as well looking for several trade set ups “if” we see a low / bottom in GBP.

 

 

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Kong Takes Profits – Ready To Re Load

Forex Kong 2 Comments

I’ve finally taken profits on my long standing short AUD/JPY trade, as well “cleaned house” on all outstanding trades.

The last few weeks gains have more than made up for the past 6 months “sitting on my mits” as markets finally makes the anticipated turn lower. Then lower……and in short order….lower still.

Volatility is back.

Forex Trading is back.

 

Stay In The Trade – Or Re Enter On Momentum

Forex Kong Got something to say?

When you are actively trading a given asset or currency pair, you often run the risk of “missing out” on large movements in price, as you’ve taken profits and then try to find the best way to get “back into the trade”.

Obviously I would generally “look for a bounce” in order to re-enter the trade at higher prices when shorting, but what if that “bounce” doesn’t come? You’ve booked profits on only a small portion of the move, and now run the risk of “missing the crash” as you sit on the sidelines “hoping for the ultimate level” to re-enter the trade.

It’s always a tough spot. And I can’t tell you how many points I’ve missed over the years, exiting a trade then watching it go “much further” without me. You can’t catch every single one, and you can never go wrong taking profits.

I employ a simple strategy of “getting under the asset” – placing orders several pips “below current price” when shorting ( and obviously “above” current price when getting long ) with hopes that my orders will get picked up on “further momentum” in said direction. It’s really all you can do.

If you just sit patiently waiting for a bounce, there are times ( such as these last few days with our general position long JPY ) that you may just miss the bigger ride lower, so having a couple of orders in the system “below or above” the current price “should” allow you to participate further, should the move continue.

It’s always tricky looking to “actively trade” as opposed to looking at larger time frames and holding trades longer, and it’s really a matter of preference, but I can say from experience – It’s almost “always” more profitable if you are able to just “stay in the trade”.

 

Selling The Rip – Earnings To Disappoint

Forex Kong 2 Comments

The SP 500 has now broken below a critical area, suggesting that further losses ( over the next several weeks ) will be seen. But of course, right around the time you figure that out – markets also look set to bounce.

This “bounce” ( however great or small ) will only provide greater opportunity to continue shorting – just at higher prices.

Dip buyers will unfortunately be met with “the dip that turned into a dive”.

Regardless of near term price action over the next couple of days, what people need to understand is that we’ve turned a corner, and that as per The Nikkei in Japan ( leading us lower for several days prior to The SP finally rolling over ) any idea of a “new string of higher highs and higher lows” is very likely out of the question.

I don’t expect higher prices in Japanese stocks period so……as nearly every single index globally has now broken below significant lines of support it’s fair to say that indeed – a significant top has finally been reached.

“Selling the rips” now, not “buying the dips”. That’s the road we’re on.

Sinking below 1904 has solidified a much larger and more serious correction ahead, so investors / traders need to be aware that we’re on the other side of the mountain now. This earnings season is also expected to bring disappointement so look ahead to lower stock prices in coming weeks.