psychology of trading

Nikkei Has Topped – There I Said It Dumb Ass

Forex Kong 5 Comments

It’s my belief that the Japanese “Nikkei Index” has indeed topped, and actually did so back around 16,450 at the beginning of the year. Ya, ya , ya – I don’t usually do this / make such bold calls but what the hell…..these days I see every bozo under the sun suggesting things will go up forever so…..you can “take heed” or “take a hike” – trade it as you see fit.

This last “run up to around 15,000” ( where I’ve suggested again, and again, and again we’d see reversal ) has been what some might consider “wave 2” ( if you are an Elliot Wave guy ) leaving open consideration for a much larger “next leg down”.

The Nikkei topped AHEAD OF THE DOW in 2007 in very much the same fashion.

Nikkei_Top_Led_Dow_2007

Nikkei_Top_Led_Dow_2007

Remember this “beauty” from a few months back showing the Nikkei over a 20 year time frame?

*Draw a horizontal line at 15,000 in your mind. That is what we call a very, very, VERY strong line of either support or resistance – considering it’s significance over such a long period of time.

 

Nikkei_Longer_Term

Nikkei_Longer_Term

Japan is a disaster, and when looking at things in this context – so is everything else as…..the Nikkei generally leads.

Perhaps this will shed some light as well….on my views about Central Banking and money printing as ( if you can imagine ) the massive dilution of the Yen ( as well USD ) over the past years, if only to achieve an incremental “short-term rise” in stock prices then……..to see things fall right back to where they started – just with waaaaay more “toilet paper” floating around.

Nothing has really changed, short of an incredible “transfer of wealth” from those already left with very little………to those who’ve already got a lot more than they need.

(P.S….in light of this “bold post” I might as well throw caution to the wind and tell you to run out tomorrow, sell your house, rack up every credit card you can, sell everything you own, leverage everything you’ve got another 500%, then “pre – market” dump every penny on a get rich quick “short play” Nikkei/Dow/whatever”, sit back and just watch the millions pile up.)

Please……..don’t be silly. I’m a single gorilla, with a single opinion and view of these things that for the most part – doesn’t generally fit the status quo.

Don’t be a dumb ass.

I know you’re not.

 

 

 

 

What Do You Know? – I'm All Ears

Forex Kong 1 Comment

Friday’s sell off in U.S Equities certainly took a number of people by surprise now didn’t it?

This in itself “not surprising” as the current state of “passivity” and “complacency” among investors is at or “above” all time highs. People have got this crazy idea in their heads that everything is moving along as planned, the “recovery” is well underway and that essentially ( no matter how many times they change their tune ) the Fed is there to screw you oops – “save you” if things start to get ugly.

I borrowed this chart from the good fellows at Zero Hedge to illustrate an important point.

Realistically – how much further do you think the market can stretch ( considering we are already in one of the longest, overstretched, Fed induced, pump job markets in the history of mankind ) before doing what “markets always do” as illustrated in the chart below?

Markets_Top_Forex_Kong

Markets_Top_Forex_Kong

What could possibly have you think that for “whatever reason” – this time it’s going to be different, with historical data going back to “the beginning of time” showing the “boom and bust cycle” repeat, again , and again , and again?

Tell me! Don’t just read this crummy little blurp and go back to the T.V! You tell me what it is that “you know” that has it that “this time”…yes “THIS TIME” – IT’S GOING TO BE DIFFERENT.

  • It can’t be the Fed…..cuz ( haven’t you been listening? ) the Fed says it’s going to continue with it’s tapering and within the next year END IT’S QE PROGRAM all together….so don’t give me that.
  • It certainly won’t be U.S Corporate earnings as expectations for earnings have come down considerably for the first quarter, and what? You imagine the spring and summer quarters will be any better?
  • It can’t be “global growth” as every estimate from the IMF down to the average joe blow walking down the street knows – global growth “ain’t goin nowhere” anytime soon so…….

So what is it Sherlock? What is it that “you know” that the rest of us don’t, that would have you “buy and hold” now?

5 plus years of full blown money printing and equity pump job to have it that 326,000 MORE Americans stood in the unemployment insurance line last week, and 1 in 5 households in American are currently on food stamps.

I can’t wait to hear back. I seriously “can’t wait” to hear back.

 

China Reserves – Gold And A New Economy

Forex Kong 4 Comments

So holding the world’s reserve currency with no need to justify / verify that anything of “real value” ( such as gold ) stood behind “said currency” sure gave the United States and incredible advantage / gift no?

With a “U.S Dollar system” now in place, and demand for those dollars “world-wide” ( as in order to buy a commodity such as sugar, gas or oil – other countries needed  to convert their local currency to USD first ) U.S Dollar printing and exporting literally “exploded”.

Exploded all right.

With complete and total disrespect for the privileges given, years of gross government spending and expansion, several “senseless wars” and total abuse of the U.S Dollar ( with it’s role as the worlds reserve currency )…things exploded alright.

Into the 17 “Trillion Dollars” The United States currently finds itself in debt.

Now, for the longest time China played right along ( in order to keep trade with the U.S stable ) pegging the Yuan to the U.S Dollar and buying tonnes of U.S government issued bonds as well amassing incredible U.S Dollar reserves in order to purchase commodities for it’s own growing population.

Back in the day China had little choice but to play along as its own economy was really only just getting started.

In 1994 when China pegged the Yuan to USD she lacked the population centers and distribution networks needed for a stronger “consumer-oriented domestic economy” to take hold. China’s only choice at the time ( lacking a large domestic economy ) was to remain focused on the continued strength of its exports, and its unfortunate relationship” with the ever depreciating U.S Dollar.

Well that was then…….and this is “now”.

A few things for you to consider before I wrap this up, and perhaps you’ll see where I’m going with all this….before I even get there.

  • China is currently the world’s largest producer of gold, and has been actively buying gold at record amounts month over month.
  • China’s economy is set to expand by an additional 7.5% in 2014 in comparison to the U.S economy lucky to grow at all, and more likely to continue into recession.
  • China’s central bank has said it no longer sees any benefit in increasing its $3.66 trillion foreign currency reserves, meaning no more U.S bond buying.
  • China currently has bilateral trade agreements ( trade outside of use of the U.S Dollar ) with more than 20 countries including Russia, Australia , Brasil , Mexico , The United Kingdom “and” even the EU!

Please refer to the complete list half way down the page located here at Wikipedia.

So in a nutshell the recent “domestic growth” in China has finally created a “consumer based economy” where in products manufactured in China are now able to be sold in China.To the extent that local businesses now exist and  “prosper” with little reliance on “exporting” and a decreasing reliance on anything to do with “exchange to USD.

We good so far? Makes sense right? Years of internal growth finally culminating in a society / economy able to stand alone and support its own domestic businesses ya? An “export based economy” now looking to become a “consumer based economy”? Pretty straight forward really.

So…..China has literally “warehouse after warehouse stuffed to the rafters” with U.S Dollars that are rapidly depreciating ever day the Fed’s printing presses keep running, with little interest in keeping / using these dollars as every day goes by.

China can now buy and sell any number of goods with a large portion of the industrialized world with little to no concern for the dollar, and has now built a “consumer based economy” of its own capable of supporting growth – with decreasing concern for export.

So…….What is she gonna do with all those U.S Dollars sitting there gathering dust and losing value as we speak?

I’ll wind this up ( I promise ) with one more post outlining what China plans to do about all this….and how it will likely affect things in the West.

The Nixon Shock – Gold, China And USD

Forex Kong 8 Comments

I want to explain something, that I think most of you will find beneficial ( much of the material reworded from Wikipedia ) as well bring it “up to speed” as to what it means in today’s day and age. This might go on for a couple of posts.

After WWII the “international financial powers that be” agreed to create a system wherein the U.S Dollar was placed deliberately as the anchor of the system, with the US government guaranteeing that every US dollar held in reserve – could be exchanged at a fixed rate for gold.

Everyone agreed to use a single currency ( the U.S Dollar ) for international trade, and that those dollars could be exchanged for a “fixed rate of 35 dollars” for an ounce of gold.

This is what is meant by a “gold backed” currency, providing holders of that currency the “confidence” that the pieces of paper in their hands are “actually worth something”…that something being gold.

For every dollar on the planet an equal amount / value in gold, should the holder of that dollar choose to own gold instead.

Got it? Excellent.

This made things “relatively” straight forward as countries around the world “pegged” their local currency to the U.S Dollar, and the U.S Dollar was pegged to the price of gold.

Price “stability” had been established.

So for the first years after World War II, the system worked well as foreigners wanted dollars in order to  spend on American goods such as cars, steel “manufactured” in the U.S.

The U.S. owned over half the world’s official gold reserves ( 574 million ounces at the end of World War II ) so the system appeared secure.

Well….by around 1966 ( due to excessive spending by the U.S for the Vietnam War as well many domestic programs ) the U.S realized that foreign banks reserves had grown to about $14 billion dollars, while the United States had only $13.2 billion in gold reserve. Of those reserves, only $3.2 billion was able to cover foreign holdings as the rest was covering domestic holdings.

essentially the U.S had printed ” a few too many dollars” to cover the actual amount of physical gold held in their vaults.

Soon foreign countries ( holding depreciating USD ) began demanding redemption of these dollars for “real gold”. Switzerland redeemed $50 million, then France acquired $191 million etc until finally on the afternoon of Friday, August 13, 1971 President Nixon “literally pulled the rug out from under the system” ( The Nixon Shock ) and closed the gold window – forbidding foreign holders of U.S Dollars from exchanging them for gold, essentially “sticking foreign holders of U.S Dollars” with a currency now set to be dramatically devalued.

The Nixon Shock unleashed enormous speculation against the dollar as you can imagine. With no gold behind them, the value of “boatloads” of U.S Dollars distributed world wide……..now put into question.

I promise I’ll skip the middle part…and get this up to what’s happening in the world “right now” with China’s movement/interests  in particular.

 

 

 

The Psychology Of Trading – Emotions Take Control

Forex Kong 2 Comments

When you consider the “psychology of trading” what we are really looking at is “plain old human emotion” – and one’s ability to control it.

This is without a doubt, the absolute most difficult aspect of trading you’ll need to conquer in order to be successful as without emotional control, fear and greed will wreak havoc on your mind and your account.

New traders often overlook this.

Caught up in the technical aspects of “timing entries” or “learning a new indicator” it’s very normal for new traders to operate on a “hey I think I’ve got this figured out” type basis, scoring a winning trade even, or seeing “another light come on” as another technical aspect falls into place.

This is all well and good, but I can tell you with certainty – there is “no short-term trade strategy” capable of beating the markets consistently without the one element that generally keeps both fear and greed in check.

Proper money management.

If you want to get your emotions under control, get your money management under control.

To start….trade MUCH smaller than you are currently.

Let me ask you……if you had a handful of change….perhaps 5 dollars worth of nickels lets say – would you really be that “emotionally distraught” if you lost one? How bout two?

Let’s say you even lost 3 or 4 – but then during the same week, you found a couple new ones behind the couch or in a pair of jeans? Would you really be that broken up?

There it is. You’ve got to start looking at your total account balance, and the amount you are flat-out “able to lose” in a given trade / trade plan without crying about it, essentially “removing” fear from the equation.

Consider you’ve already lost the money “before you even enter the trade” as another great way to put fear on its ear. Done. I’m in with a 100 pip stop, If I’m wrong I’m wrong….and I will lose $200.00. Ok mom! Good night. See you in the morning. Done.

Now….if you get this far and then find out that you are consistently losing on your trades, you’ll have to get back to the drawing board on your actual strategy as….it’s not “fear” that’s got the best of you. If you’ve been caught offside, and am now deep underwater well….I’ll bet you where trading to large right?

And….. if you can honestly sit back in your chair any given day and say “I have no freakin idea what the hell is going on out there!” – you stop trading until you do know.

I’ve got a million of these, and could likely write on “forever” but will keep this short enough to stomach in one sitting.

The number one way to get your emotions under control…..is trade smaller, lower expectations of “hitting home runs” and then concentrate on consistency. Small wins, small losses = more time in the game, and more time to observe and further hone your skills.

It’s a long road my friends, but the key is to still have a couple of those nickels left, when you’ve finally put all the puzzle pieces in place.

Then you can start building spaceships.

The Psychology Of Trading – Reader Response #2

Forex Kong 1 Comment

Rob,

I saw fundamental changes / shifts in the market that tipped me off, as well factored in a number of other “broad stroke” indicators – suggesting that markets might stall / move sideways / remain “trendless”.

1. The economic cycle “in general” has become about as stretched as it can stretch (now pushing on to be one of the longest economic cycles in the history of markets!). This has solely been “fueled” by funny money out of Washington.

The Economic Cycle – A Simple Explanation

2. Earnings ( and even more importantly ) “guidance” has been pretty much flat / bad to even “horrible” as U.S companies have done everything they can to show profit, when in reality it’s really about cost cutting / down sizing etc…..( your bottom line might look a bit better too after cutting 300 workers etc….this doesn’t mean “more profits/growth”.

Caterpillar Earnings – What It Means To Me

3. Emerging Markets continue to but up against resistance, and even worse – in the face of a rising dollar ( as suggested via tapering, and now “higher rates” ) will likely “collapse” as they’ve grown so used to the flow of “funny money” coming out of Washington.

Emerging Markets – Update 

4. Proposed reforms in China.

Reflections On China – Where To Next?

Gees…..and the list goes on, with continued unemployment in the U.S, housing going nowhere, Obamacare ( my god ) and continued tensions in the Middle East etc…

All of this most certainly contributed to my “extended holiday” through February and March as these factors ( and many others ) fly in direct opposition to the current mandate from the Fed.

Keep the masses calm. There is no problem. Everything is going as planned. Buy stocks. Go to sleep.

You can’t trade in these types of cross winds. You will be ground to pieces with such conflicting forces pushing and pulling on markets.

Ok enough……

Looks like “part 3” will finally get to the “psychology” of it all….and how a trader can maintain an ounce of sanity through all of this.

For starters……tequilla doesn’t hurt a bit!

 

 

The Psychology Of Trading – Reader Response

Forex Kong 3 Comments

In response to a fantastic line of question from valued reader “Rob” – let’s pull a couple of stops here.

It’s Saturday afternoon…my family and friends have now headed home, and it’s back to business “full-time” for Kong. So what better thing to do than “let loose a bit” after a full two weeks more or less “sitting on the bench”.

After suffering a bit “psychological damage” himself ( alongside the rest of us ), with continued effort actively trading markets these last few months, and in light of one my recent posts “Position Size – When Markets Have No Clue” Rob asks how I may have been able to identify this treacherous market dynamic ( chop ), and manage to keep myself out of harms way.

Excellent question Rob. Absolutely fantastic.

My first tip-off, aside from already having  been very wary of markets going back several months was the complete and total “disregard” markets showed for the taper.

Knowing full well that the fundamental story in the U.S continues to deteriorate , one would have assumed that the “initiation of the taper” would have been the first clue that “the party is over”, and the “free money is ending” right? Apparently not.

Seeing U.S Equities continue to rally in the face of continued negative/poor data “coupled” with the suggestion and “initiation” of tapering told me almost immediately that the puppet still dances and that the Fed was still just as busy behind the curtain.

I never believed they would taper. I still “know” they have done nothing more but generate a media campaign, and if anything are even harder at work propping this ponzi up.

Recognizing this had me immediately trim positions, get to cash , scrap trade plans, get out-of-the-way as…..if I thought the Fed was controlling things when QE was “hip” how do you think I felt seeing things continue to push higher as QE was “supposedly” being cut back.

Bullshit. Total 100% bullshit.

Nothing has changed ( short of a couple of entries / zeros / ones in a couple of computers ) as QE will continue until a scapegoat is found, and an excuse can be made for the bubble bursting – period. Then QE will be doubled.

As well keep in mind that “I too” got caught” getting long the dollar, posting a loss of a % or two regardless of how many times I second guessed / knew in my gut that nothing had really changed.

I too – took the bait.

Then looking at things from a technical perspective, I didn’t get a decent signal from the Kongdictator on even as small a time fram as a 4 H, looking at pairs like USD/JPY trading flat as a pancake for now the entire last 2 months there’s been no question.

Markets have no clue.

I’ll break this into two post….and touch on another point Rob touched on – how this all plays out with traders “psychologically”:

The Psychology Of Trading – Reader Response #2

 

 

 

 

 

Emerging Markets Chart – Update On EEM

Forex Kong 6 Comments

Remember this chart from back in October?

EEM_Emerging_Markets_Oct_2013

EEM_Emerging_Markets_Oct_2013

I had suggested that the emerging markets ETF “EEM” was having trouble breaking out to new highs while the SP 500 was leaving most charts in the dust right?

So……now let’s have a look at it “again” while the SP 500 has “the October highs” way back in the rear view mirror.

In a healthy global economy, shouldn’t those emerging markets be moving higher / breaking out as well?

EEM_Emerging_Markets_March_2014

EEM_Emerging_Markets_March_2014

The “proposed taper” has obviously had an effect on EEM as we’ve discussed here several times before ( U.S dollars pulled out of these emerging economies in preparation for rising rates / economic contraction etc…) so…..the question begs to be asked.

Is the U.S Equities market “literally” the last one to fall?

This very well could be the “elusive blow off top” as not a single data point out of the U.S ( or the planet for that matter ) suggests any kind of meaningful recovery. 

I’m sure I’m guilty (as we all are) in  “seeing what I want to see” but seriously….how far can U.S Equities “diverge” from what’s “really going on”?

Food for thought if nothing else.

Day Trading Blues – Look To The Fundamentals

Forex Kong 7 Comments

With all the data flying around each day – it’s near impossible to put everything in neat little compartments, all organized and understood. We see markets rise on “bad news” and sell off with the good, then do the complete opposite only a week later. We’ve got the “fear of war” one day, then the “celebration of peace” the next. The market is a meat grinder, and unfortunately – you are the beef.

So when the short-term / intraday day action isn’t providing much opportunity – what’s a trader to do?

How can you feel that you’re “moving forward” when the day-to-day grind is doing nothing but frustrating you, and possibly grinding your account to dust?

Step back. Re focus, and look for the things that “you can make sense of” – and start working out from there.

A simple example of what “I’m doing” while I sit idle in a number of trades that are essentially “going nowhere fast”. I ask myself…..Kong….what “do” you know? Where can you focus your energy as to keep this thing moving in the right direction.

I immediately turn to the fundamentals.

Do you agree with me ( after everything you may have read / researched as well ) that China is set to slow in the following year / years?

I can’t be bothered to go over this again but encourage you to read this simple breakdown, then get back here.

We’ll outline some trade ideas next.

5 Ways China Slowdown Will Ripple Across Globe.

Forex Trade Indecision- Doji After Doji

Forex Kong 11 Comments

Considering the number of days we’ve sat “patiently waiting” for markets to make a reasonable move in either direction, as well the amount of time that’s passed since “I’ve made a decent move” I thought it might be of interest to give you a visual representation of what “sideways” looks like to me.

I’ve chosen a chart of GBP/JPY ( Great British Pound vs The Japanese Yen ) as the example.

If you’ve been brushing up on your Japanese Candle Sticks ( which I certainly hope you have ) I’m sure you already know our friend “The Doji”.

Doji – Doji are important candlesticks that provide information on their own and as components of in a number of important patterns. Doji form when a security’s open and close are virtually equal. The length of the upper and lower shadows can vary and the resulting candlestick looks like a cross, inverted cross or plus sign.

GBP_JPY_Doji_Forex_Kong

GBP_JPY_Doji_Forex_Kong

You can’t trade this. It’s impossible and not even worth considering as…..there “is” no clear sense of direction. Each day has the capacity to wipe out traders on “both sides” with wild swings up and down, only to have price settle back to where it began.

What it also suggests is that markets are clearly at a point of “indecision” as neither bulls or bears are able to run to far with the ball.

Hopefully this may put the “entire month of February” in perspective for you as I’ve been “considerably less active” than usual.

Knowing what you know now……can you blame me?

I know when to put on the brakes, and when to step on the gas……

Do you?