Spectrum Forex LLC Blog

November 9, 2009

Using currencies for “buy and hold” investing.

Filed under: General, articles — ntsl283061 @ 8:11 pm

Currencies are not financial instruments which typically come to mind when talking about long term investments. Vast majority of financial advisors suggests a mix of bonds and stocks to their clients, with some cash investments, like money market funds or CD’s thrown into the mix. Such is long standing, conventional wisdom regarding regarding allocating money for a long haul and is almost universally practised on “main street”. The only difference is specific split among  these asset groups, in most cases related to the age of person. Virtually all other forms of investments are considered “derivatives” and not suitable for most people.

These views have been slowly  changing over last few years, if not decades. Explosion of hedge funds have brought alternative forms of investments, other than stocks and bonds, into a vernacular of most individual investors. Today just about everybody with any interest in financial markets knows, at least in principle, what options, futures and commodities are. More and more often these groups of securities are mentioned as separate asset classes with a place of its own in a carefully balanced investment portfolio. Same goes for currencies.

Popularity of spot Forex trading proves that currencies are great trading instruments. Brokers report record numbers of accounts opening every year, trading volumes keep rising and the most liquid markets in the world are becoming even deeper. This is easily noticed when spreads from just few years ago are compared to ones today. In many cases they were cut by half, clearly outcome of increased activity as well as competition for clients among Forex brokers.

One of the characteristics of currencies often talked about is the presence of unusually long and persistent trends. They often last months and years and are the main reason behind inclusion of them into main asset classes. But really, are currencies the kind of financial instrument that could be put away for an indeterminate period of time without more or less active portfolio management? Long term chart of any one currency pair indeed reveals long term trends, but how does it look like on bases of currency baskets, something that would have to be done in order to minimize risks of any one currency exposure? Things get a little different than.

Carrencies since 1970-s-e

This is a chart of how major currencies performed against a basket of peers since 1970. It was compiled and published recently by Financial Times (www.ft.com). Rates used were trade-weighted exchange: “showing the value of a country’s currency in relation to the currencies of a group of countries with which it trades. In the index, each country’s currency is given an importance in relation to the amount of trade it does”. Another way of valuing currencies is by using Purchasing Power Parity Index. Using trade-weighted exchange we can see which currencies outperformed, or underperformed, based n the same criteria. This chart is a little crowded, but individual currencies can be isolated. 

CHF since 1970-s-e

The best performing currency over the period, as measured using trade-weighted exchange, has been Swiss Franc. From 1970 to about 1995 it has just about doubled in relation to all other currencies included here. Since than, however, CHF has been declining slightly. One could generously call it a sideways move. All told, over almost 40 years time span this currency gained about 80% against a basket of currencies of its major trading partners. These are not stellar results, especially considering that last 15 or so years produced a net loss….

Read conclusion of Currencies as long term investment.

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September 27, 2009

Gold-Silver spread.

Filed under: General — ntsl283061 @ 2:31 pm

Gold has been in the news a lot lately. Reasons are many and varied, but mostly because it is around historically, and psychologically, important level of $1000 per ounce. This alone creates tremendous buzz among both media and investors. One can’t avoid hearing and reading about. My personal interest is in precious metals is two pronged: I just closed my gold-silver trade, which lasted few months, a long time for me. Second reason is in the fact that gold is continually used as some kind of proxy for US Dollar, bringing it into sphere on interest for currency traders like myself.

Testing of highs from last year, the $1000 level, comes at very peculiar time. September the 24th market 140th anniversary of market panic in 1869, which was caused by wild price swings in gold. Group of speculators, including Jay Gould and James Fisk, attempted to corner the gold market. Price jumped by about $20 dollars in one day, to a high of over $162, huge swing for that time. In response, federal government flooded the market with metal, crushing the prices to $133 within 15 minutes. Many investors were wiped out, banks failed and country was tossed into depression lasting until 1871. All this time has gone by and not too much has changed- gold is flirting with all time highs, speculators keep trading and government still keeps intervening. Maybe not gold, but financial markets at large. Funny, isn’t it?
Long term gold-silver chart.

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September 26, 2009

CAD trades.

Filed under: General — ntsl283061 @ 4:45 pm

Canadian Dollar became very active yesterday- it fell. Seemingly without any news it started to drop about the same time my last update was posted. And these were not small swings one could consider a noise, but rather large, couple hundred pips moves, pretty much across all pairs. Something Bank of Canada has been gunning for. They have been expressing “concern” and vaguely threatening intervention if CAD stayed at elevated levels. Of course it has never been explained what BoC considers an “elevated level”. Something everybody is expected to figure out without help from the financial authorities.

It is almost certain this drop in Loonie is not courtesy of BoC. Nature of the move was not consistent with the behavior of currencies during intervention by a central bank. Not quite fast and violent enough. Also, there was not big time news or CAD specific announcements, at least I didn’t catch any. Some attributed it to the G-20 meeting in Pittsburgh. USD gathered some strength, pushing everything else down, except for the Yen. For whatever reason this is supposed to be bad for Canadian Dollar. Hmm, let me see. Marginal demonstrations in the rust belt are dragging the Loonie down? I fail to grasp why or how.
Canadian Dollar.

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BoE comments.

Filed under: General — ntsl283061 @ 4:44 pm

Bank of England joins an ever lengthening list of central banks which support weal local currency. Unlike, say, Reserve Bank of New Zealand, or Swiss National Bank, BoE finds itself in much more comfortable position in regards to its desires- Pound is already in shambles and falling even more. BoE governor, Mr. King, expressed content with latest developments, causing farther drop in GBP. Talking the Pound down appears to be one of the favorite activities for them, and one of the very few that actually work, after a fashion. Just how much longer will that last? Who knows? Strange world we live in- everybody wants to have weak currency.

This includes US and the Dollar. Much like expected, FOMC announcement yesterday produced no surprises. Interest rates were left alone at a fraction above zero, and projected to remain depressed, most likely helping USD to gradually keep falling in relation to other currencies. Reaction to the news was relatively subdued, especially when looked at from perspective of hourly charts or higher magnitude. All you can see is a minor price spike- nothing.
GBP-CAD

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Waiting game.

Filed under: General — ntsl283061 @ 4:43 pm

Some time ago I saw this post somewhere on the web-”What do traders need most”. My reply was “Patience and discipline”. I know, because I lack both of them. It is easy to equal trading success to performance of computer, or internet connection, or the broker and, my favorite, the “system”.  Everybody always chases newer and better trading strategy. We almost always forget about the intangible parts of this endeavour, but in the long run they are most important.

Even the best system will not do anybody much good, if one is not patient enough to wait for trades to come to us. It is almost universal fault of traders to force trades during times that given strategy produces no or little activity. This is equally true for longer an shorter term trading methods. For scalpers 3-4 trades a day might be very slow, while others would consider 2 trades a week to be busy. No matter how active one’s style is, periods between trades are always difficult, but we must learn to wait until proper set up, as defined by trading strategy, happens.

Once developed, or purchased, a system should be given long enough run to either prove or disprove itself. Very often people spend a lot time and/or money pursuing perfect strategy, only to discard them after few loosing trades, or sub par periods. While there is no universal length of time by which to judge given approach, past performance should provide some clues. We always should look at the length of loosing periods, depth of draw downs, number of consecutive loosing trades. If in real time use system performance starts to exceed historical extremes, perhaps is time to look for something else. At any rate, without patience ad discipline, trading career will be either short or fruitless.
Patience and Discipline.

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September 23, 2009

Weak Dollar.

Filed under: General — ntsl283061 @ 8:35 am

US Dollar slipped into new lows for the year against many currencies. Euro, Australian Dollar, Swissy and Kiwi all made new annual highs. Markets are not very volatile, most movement seems to done in this persistent, relatively steady pace which is great for long term trend followers. Slightly harder for active traders, like me, to play it, though. Thankfully, shorter time frames, as well as unrelated currency crosses, provide many other trading opportunities.

USD is getting in trouble on the eve of G-20 meeting in Pittsburgh, where it is expected to be high on the agenda. Well, perhaps not the exchange rate of our Dollar, after all people attending this conference are Forex junkies (we hope), but rather  the debt which is denominated in USD. President Obama is expected to face tough questions about our skyrocketing Federal debt, and ways to curb it. His answer? In an interview with CNN, he outlined his “plan” on how countries should manage their deficits. This includes forcing citizens of countries like US to save, while “getting” people in China and Germany to spend more. I’m not good at reading between the line, but isn’t it blaming our debts on other countries, not any “plan”? Perhaps we should start by shrinking our own burden, before developing “plans” for others. With FED meeting tomorrow, next few days should be interesting for USD.
Troubled US Dollar.

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September 21, 2009

Carry trade.

Filed under: General — ntsl283061 @ 5:15 pm

Forex carry trade, after months of obscurity, is making a come back. For those who forgot what it was, carry trade involves borrowing(selling) low interest currencies and buying higher paying ones. Idea is to collect the interest rate differential, on top of price appreciation which this action is expected to bring. For many years Japanese Yen has been the center of attention when it came to the carry trade. Couple of decades of cheap money(abysmal interest rates) led to using JPY as financing mechanism for all kinds of speculative investments. In the end, it all came crushing down last year, an event, or process, known as the “unwind” of the carry trade. During those few months, in tandem with global financial panic, Yen rose to dizzying levels, in some cases registering all time highs. In response, all central banks embarked on interest cutting campaign, putting an end to the carry trade. It fell dormant.

Now that the economy stabilized and central banks are no longer taking new active easing steps, the carry trade is making its way back to spotlight. Granted, the rate differentials are much smaller than they used to be, but they exist. Also, money appears to be flowing into currencies of economies most likely to be first to start raising its benchmarks, such as Australia or New Zealand. This has been already recognized by RBNZ, as one of the reasons for NZD’s recent surge. What has changed is the source of financing for this resurrected activity. Its no longer the Japanese Yen, but the US Dollar. This time around its FED, that fuels insatiable appetite for cheap money. Three months dollar based LIBOR dropped to 0.292%, while similar Yen based instrument is at 0.352%. It is cheaper to borrow dollar. Speculators see it and try to take advantage of. It is hard to say if this particular trend will last but conditions seem ripe for continuation, especially if FED stays with low rates policy.
Forex carry trade.

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Forex news.

Filed under: General — ntsl283061 @ 5:14 pm

Next week rounds up some important events for Forex traders. FOMC interest rate announcement is scheduled for the 23rd. While no big changes in policies are expected, markets will likely react in some form. Over last few weeks most of the major central banks held their periodic meetings. No surprises were recorded, yet markets managed to stage moves of some magnitude, even if those turned out to be large spikes.
As always, I’ll be an observer, rather than participant, unless I already have a trade in, based on other criteria. Central Bank of Norway is another one with interest rates decision this week. Outside of that, G-20 meeting will provide news, so all eyes on Pittsburgh.

I received surprisingly large number of emails following the price action post from yesterday. Thank you. In order to not become repetitious, most of the questions will be answered when updates are made. They should be frequent. I’ll create separate category for this post and updates, so its easily to find and track. Back to central banks, Swiss National Bank news release few days ago is one example of the spikes that happen even without any surprises. Initial reaction turned into sustained move in couple of Franc crosses, most notably GBP-CHF, which simply dropped for the rest of the week. Somewhat of a tradition lately. Most interesting to me was movement of EUR-CHF, because of a trade I had in this cross. More precisely, two buy orders were pending. By now both of them are  filled.
Next week in Forex.

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Highs and lows.

Filed under: General — ntsl283061 @ 5:13 pm

I’m sure everybody heard this term “price action”, as applicable Forex or any other trading instrument. It is used to describe movement of the market and covers number of important elements. Making new highs or lows, congestions, reversals, breakouts and chart formations are included in “price action”. Basically chart without indicators and oscillators shows only “price action”. There is a debate going on among technicians if volume analysis is included in this term.  Some claim that, since it requires additional window in the chart, it is not. Others argue that one could use concept like candle volume, where volume is reflected in price through the width of candle, thus eliminate the need for extra window pane and making volume an integral part of price action. For my purposes it is a secondary consideration, since volume figures are not readily available for Forex trading. I’ll discuss it at another time.

These days trading seems to more and more complex. People are developing automated trading systems and robots, incorporating algorithms  into their methods. Even those who don’t go that far very often rely on oscillators like MACD, CCI, RSI, Bollinger Bands, Gator, Force, Stochastics or any other of the hundreds if not thousands of tools available through charting software of trading platforms. Just choosing one for use can be overwhelming, let alone learning to use it properly. New ones are made available daily, making it even more difficult.
Price action Forex trading.

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US Dollar

Filed under: General — ntsl283061 @ 5:12 pm

New wave of alarmist headlines is sweeping the world of investment letters. This time it is the Dollar Index, which is making new low for the year. Once again, many predict immediate doom and gloom to both USD as well as other financial markets. Well, maybe, but not just yet. According to some, weakening (debasing) of the Dollar is the only way that our government will be able to repay our mountain of debt. If ever. So, unspoken policy of weak USD is a fact. With other nations picking up on it, the process is accelerating and will lead to serious consequences.

That very well may be true, but not just yet, tomorrow or the day after. The Dollar Index (DX), has, in fact made new low for the year when it dropped under 77 level. However, it is still far away from the low of early 2008, before financial crisis exploded in full. The 70.80. or so level is the one to watch. Should USD fall under it, than, yes, long term perspectives are not promising. Until this happens, DX is just another financial instrument making a new price extreme for the year. Nothing more, nothing less. Certainly not a harbinger of some catastrophe. Personally I think that support of 70.80, will prove significant. For now at least. Longer term, though, it is likely to give way, unless we put our fiscal house in order.
Dollar Index.

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