how to trade currency

Japanese Economic Story – Trading The Yen

Forex Kong 5 Comments

I am fascinated by Japan’s economic story – and an absolutely huge fan of trading the Japanese Yen (JPY). In fact, I would attribute the majority of my trading profits over the past few years to trades involving the Yen vs the commodity currencies. The moves are usually quite large, and more importantly for me –  the fundamental story keeps me on the right side of the trade.

Japan’s monetary policy is extremely accommodative and “quantitative easing” is more or less a mainstay. 

The Japanese model is well worth studying, as it serves well as a possible pre cursor to what the Americans may soon expect to see – as a result of their “more than accommodative” monetary policy. Some economists project that the U.S is headed down the exact same path as Japan – and advise that the end result may not be exactly…….what’s desired.

Japan’s debt to GDP ratio is now well over 200% if you can get your head wrapped around that. Interestingly (very interestingly) only 5 % of that debt is held by foreign countries, while around 50% of the U.S debt is currently held by foreign countries. This is where things get interesting.

Japan’s conservative Liberal Democratic Party (LDP) is on track for a stunning victory in Monday’s election, returning to power with hawkish former Prime Minister Shinzo Abe at the helm.

An LDP win would usher in a government committed to a tough stance in a territorial row with China, a pro-nuclear power energy policy despite last year’s Fukushima disaster, and a radical recipe of hyper-easy monetary policy and big fiscal spending to end persistent deflation and tame a strong yen.

Short term I see the Yen sitting at a well-known level of support and in all would favor a bounce here, but with the election panning out as it should –  it’s safe to say that the currency wars will continue as Japan is likely be the next country announcing  further monetary stimulus and easing.

How To Trade A Risk Event – Or Not

Forex Kong 20 Comments

My own definition of a risk event (go figure) –  An event that puts you at risk.

We’ve all got our own tolerance for risk,  as a particular event (such as the FOMC announcements tomorrow) that may be considered a “risk event” by one individual, may have absolutely no significance to another. There are many factors to consider – and it really comes down to the individuals circumstances  and/or evaluation at the time.

I for one  – have an extremely high tolerance for risk.

Almost to a point of fault, I have been known to walk down the odd dark street at night just to “see what’s down there”, or perhaps  hail a cab with no real “company name” visible on the door  – however…..

I do not take undo risk with my investment or trading decisions.

The best suggestion I can make centers on the simple question of “whether or not its worth it” as a risk event approaches – and more often than not the answer comes back the same….absolutely not.

  • Could something occur tomorrow that could potentially jeopardize the profits I am currently seeing on the table?
  • Could I find myself deep underwater tomorrow in the case that something completely unexpected occurs?
  • Am I going to miss “something massive”  if I am not fully invested and exposed to the market?

Questions like these are healthy, and can go a long way in preserving  capital in these volatile times – let alone reduce risk considerably.

Consider your risk tolerance. Ask yourself – Is it really worth it….. for a couple of points or two?

An aside – I have little doubt that tomorrow’s FOMC announcements/outcomes will result in markets moving higher, and the dollar getting sacked. However – it may not play out as “matter of fact”. I have 100% confidence that any trade opportunity that is currently available to me – will equally be available to me tomorrow (and likely the next day for that matter). Do I care?….nope…not really.

Kong banks an additional 2% on the day – and back to the ol favorite – 100% hard cold cash.

2013 – Only The Apes Will Survive

Forex Kong 27 Comments

Let’s face it – the markets have become increasingly more difficult to navigate. For the most part, anyone sitting idle for anything more than a week or two max, has likely come out on the receiving end of a “good swift kick in the account” – if you know what I mean. Hedge funds drying up, blogs offering “financial advice” dropping like flies, and the majority of investors left wondering “what the hell to do” next. Well……………….

It’s only going to get worse.

I’m not looking to scare anyone ( as you should already be completely petrified no?) but I see 2013 -14 as likely the most difficult / volatile / dynamic / screwed up / challenging / trading environment I will have faced in my entire career. The number of variables are staggering, and the new “forces that be” (now being the majority of central banks on this planet) are not only locked and loaded – but have more chips than well…..they’ve got a lot of chips.

So…….

You can’t be a bull. You can’t be a bear. Anyone sitting on one side of the fence or the other (for any considerable length of time) will be liquidated like butta. You are going to have to learn to trade like a gorilla – or you will surely be left with “less” – if you currently have anything at all.

I should explain…….

I have no bias. I trade in one direction or the other (avoiding “sideways” at all costs) with 100% conviction. I have absolutely no concern where the market is going – only in that, I am going with it. I don’t cling to any idea what so ever that the “world is a beautiful place” or opposite “the apocalypse is upon us” – zip , nada , zero as it pertains to my account balance.

This is trading like a gorilla.

You will have to evaluate/ re-evaluate  your current “animal character” very soon in that – whatever you’ve been doing has likely not been working….and whatever anyone else is “telling you to do” is suggestive that what “they are doing”  – isn’t working either.

I expect to enjoy these last few weeks of 2012 – and possibly the first few of 2013 before things really start to get complicated. With the printing presses of both Europe and the U.S cranking away and the conflicts in the Middle East broiling, it’s going to take a lot hard work to squeeze out those dollars in 2013 – 14.

I imagine some bulls will make money…. and some bears……..but we gorillas will make more.

Where do you think things are headed in the coming year?

AUD/USD – Risk Set To Explode

Forex Kong Got something to say?

Often currency traders will look  at the Australian Dollar as the ultimate “risk related” currency. Not because the currency is in any way “chancy or risky” unto itself  (in fact the complete opposite) – but more so because of its direct correlation to the price of commodities, and its direct exposure to Asia – as Australia is the world’s second largest producer of gold, and a key trade partner of China .

Australia has substantial gold resources which are located in all States and the Northern Territory but predominantly in Western Australia, South Australia and New South Wales. Approximately two-thirds of all production comes from mines in Western Australia. Gold is one of Australia’s top 10 commodity exports and is worth about $14 billion per year.

When the Aussie Dollar moves, you can almost guarantee that “risk itself” is also on the move – as dollars pour out of safe havens (USD and JPY) and into those currencies/economies where a better return may be realized ( NZD and CAD as well).

With even better than expected employment numbers out tonight – and a relatively rock solid banking system – I see the Aussie above 1.05  – looking to move much higher – MUCH HIGHER.

Aussie looking to move much higher

Aussie looking to move much higher

I am already well in profit on trades long the aussie dollar via AUD/USD as well AUD/JPY – and expect these pairs to continue upward as “risk on” soon hits the markets.

Bank Of Canada Remains Hawkish

Forex Kong 5 Comments

We’ve briefly touched on a few of the “animal characters” you will encounter during your trading career. Bears, bulls, gorillas, snakes and wolves. Here’s a bit on Hawks.

Hawks carefully monitor and control economic inflation through interest-rate adjustments and monetary-policy controls. In general, hawkish investors prefer higher interest rates in order to maintain reduced inflation.

The Bank of Canada today announced that it is maintaining its target for the overnight rate at 1 per cent. The Bank Rate is correspondingly 1 1/4 per cent and the deposit rate is 3/4 per cent.

The global economy has unfolded broadly as the Bank projected in its October Monetary Policy Report (MPR). The economic expansion in the United States is progressing at a gradual pace and is being held back by uncertainty related to the fiscal cliff. Europe remains in recession. Chinese growth appears to be stabilizing. Commodity prices have remained at elevated levels since the October MPR and global inflationary pressures are subdued in response to persistent excess capacity. Global financial conditions remain stimulative, though vulnerable to major shocks from the U.S. or Europe.

In Canada, economic activity in the third quarter was weak, owing in part to transitory disruptions in the energy sector. Although underlying momentum appears slightly softer than previously anticipated, the pace of economic growth is expected to pick up through 2013. The expansion is expected to be driven mainly by growth in consumption and business investment, reflecting very stimulative domestic financial conditions.

This should bode well for long Canadian Dollar trades moving forward as a rise in interest rates is generally seen as good for the currency.

 

Forex Entry Strategy – Kong Size Commitment

Forex Kong 13 Comments

Moving forward with the same general theme that has been discussed here for the last few weeks – it appears that the dollar is now (after a considerably drawn out correction upward) finally on its last legs. Overnight action has seen the EUR take a bit of a pop, and across the board accelerated dollar weakness is really starting to take shape. Gold has essentially traded flat, and U.S equities have formed a large “V type correction” but as well,  are more or less at levels seen two weeks ago.

I have begun my first “set” of currency trade purchases short the U.S dollar (and even smaller buys short the Japanese Yen) against my beloved commodity currencies – the Australian Dollar, the New Zealand Dollar and the Canadian Dollar. So to recap – I am now getting “short” USD/CAD and entering “long” AUD/USD, NZD/USD as well long AUD/JPY, NZD/JPY and CAD/JPY.

With consideration of the volatility in currency markets – a common strategy of mine is what I like to call “buying around the horn”. Meaning – I will place smaller orders several times throughout the coming days as price action moves in the desired direction – as opposed to a larger order at one specific price level with the expectation that I’ve “nailed it” exactly.

This strategy allows me to enter the market with very little risk (with smaller orders to start) and affords me the flexibility to add further to these positions at areas of support (should price dip) or add when momentum picks up (by placing orders above or below current prices) – looking to catch momentum in said direction. If price action stalls or trades sideways – I have only committed a small amount of capital and can relax knowing that I have ample dry powder when things really do start moving.

It is very possible (and even quite likely) that the dollar could move against these “preliminary trades” in coming days – but in approaching it this way – I welcome it! Any further strength in the dollar will only provide additions to my current plan – with a final “averaged entry price” being as good as anyone can expect.

Regardless – the most important element of this type of trade being your commitment. I don’t expect to get it right here this morning, not  in the slightest really – but I have initiated a sequence –  with firm belief in its outcome.

I am committed to the trade.

 

 

 

USD/CAD – Currency Move Expected

Forex Kong Got something to say?

The U.S Dollar and the Canadian Loonie  have been dancing close to parity for quite sometime now. Looking back over the last 2 full months the pair has been ranging within 150 pips or so – and has been a real pain to trade. For the most part this pair “should” be relatively easy to figure out, as the two currencies are generally viewed as opposite in most traders eyes. The U.S Dollar representing a safe haven currency while the Loonie is more often seen as risk related and “commodity related”. As per my general guidelines one would look to buy U.S.D and sell CAD in times when risk is off, and opposing – sell U.S.D and buy CAD in times when risk is on. Interestingly my risk barometer (the SP 500) has taken quite a dip during the same time frame – but has ultimately bounced back to almost exactly the same level as the beginning of October.

So there you have it. Little change in global risk appetite over the past few months.Little change in the difference in value of the U.S Dollar and the Canadian Loonie. Not to mention that often currencies of similar geographic region do tend to “range” more so than they “trend” and are often difficult pairs to trade. Take for example AUD/NZD or EUR/GBP – two other geocentric pairs that I rarely choose to trade.

I do expect a move in USD/CAD is coming very soon, and firmly believe that come December – Fed policy should start to weigh heavy on the U.S Dollar, coupled with accelerated global appetite for risk compounding buying interest in the commodity currencies. These two factors in combination (not to mention the strong economic numbers that we continue to see out of Canada) should bode well for the Loonie likely headed for 1.05 – 1.06 in relatively short order.

Japanese Candle Formations – Excellent Signs

Forex Kong 17 Comments

If you haven’t already looked into japanese candle formations – you need to. I use my knowledge of this type af analysis literally every single day – day in day out on all time frames – everywhere and always.

Looking at the symbol $DXY this morning – one can clearly see a very tall “wick” on the daily chart – with a teeny tiny little body right at the very bottom. Known as an “inverted hammer” or possibly a ” shooting star” – this type of candle formation indicates that “price” (was at one point) at the top of the candles wick, but over the course of only one day ( and in this case even less time) selling pressure has taken price all the way down to the bottom of the formation. This is a very bearish formation – indicating that buying interest has all but dried up , and that the “bears” have more than likely  – taken over. Commonly, traders will wait for the formation of the “next day’s” candle for some form of confirmation but for those of us who are already in the trade (short the dollar) this type of candle serves as indication that “perhaps we where a touch early” but that good things are likely soon to follow.

I would consider –  that the dollar is finally, and I do say finally – as this has been a “grueling correction” to say the least….finally ready to roll over – paving the way for a myriad of trade opportunities including “long” NZD/USD, AUD/USD , EUR/USD, GBP/USD – as well “short” USD/CAD, USD/CHF.

I am currently in all pairs mentioned above as well as holding my “short” JPY’s against everything under the sun.

Which Currency Pair To Choose – To Buy Guns

Forex Kong 3 Comments

First things first. You’ve gotta get a grip on the current “fundamental forces” that are driving a particular currency either up, or down relative to others. For example, if you were told that the U.S FED has plans to continue printing USD  to effectively “manage” their current debt crisis –  to a degree that will eventually drive the price of “things” to infinity. Would you consider this to be a good thing for the currency? Or (fundamentally) a negative?

Ok, now you find out that Australia’s (or Canada’s for that matter) economy is currently pounding on all cylinders…with job creation, and increased housing starts, growing exports of commodities etc – and even talk of “raising” interests rates rattling around the net. Same question – good or bad for the currency “fundamentally”?

I think you’ve just framed your first trade  – solely based on fundamentals! Now these factors change rapidly, and at times  can be 100% completely reversed ( for example when investors are scared – they run back to the “safe havens” – regardless of the poor fundamentals). You wanna know why?

If the world ended tomorrow, or if suddenly we were faced with global panic / fear or whatever……which currency would you rather have in your pocket? I don’t think you’d have much luck “buyin guns” with a bag full of Swedish Krona.

Currency Trading – How Not To Do It

Forex Kong 21 Comments

I wasn’t really planning on getting deep into this – this soon but as the name suggests – I do trade currencies, and I do trade currencies well. You can’t just pick a currency pair, pull up a chart and plan to trade it –  as if it was a common equity. The volatility inherent to currency markets, coupled with the massive leverage offered by brokers is a sure-fire recipe for account liquidation – and the lack of good, solid “tradable” information available on the net ( in my view) is slim to none.

The currency market is designed (like no other if you ask me) to very quickly part the newcomer from his hard-earned dollars  – with the promise of massive gains, and very little start-up capital. This could not be further from the truth. Anyone even considering opening a currency trading account with the piddly “get started now with 2K and a free 50k trading account!” – will be left with zero – likely before close of their first day trading. It takes extremely disciplined trading, and razor-sharp money management rules to successfully navigate the currency world.That, paired with extensive fundamental knowledge of the underlying, and a current bead on daily news flows globally – minimum.

Each individual currency pair exhibits it own unique characteristics that cannot be discounted or disrespected.Volatility in currency trading can wreak havoc on an account, and the leverage offered is so tempting to newcomers that in combination – accounts are likely wiped out daily. I wonder if the brokerages expect anyone to even make it through the first week – building their business models solely on the “minimum required deposit” to open the account – and in turn striping you of it.

In any case…we will certainly peel the onion here over the coming weeks – but as it stands my suggestion to you would be:  Do Not Trade Currency – Until You Know How To Trade Currency.

A question….would you climb into a formula one race car, and hit the track against an armada of seasoned veterans – without first considering where the gas pedals and brakes are?…..I didn’t think so.