Open Your Eyes

With revived expectations of a bailout package to be voted on this Wednesday evening, it's not hard to spot some double bottoms and double tops on various charts. Okay, maybe not perfect classic formations, but nonetheless, worthy of note.

Obviously, there is no guarantee that the bailout package will be adopted. There is also no guarantee that these formations will complete and activate.

However, it would be foolish to ignore the possibility. Open your eyes, take a look, and find a way to profit from the bills adoption or rejection!

Daily Market Action

Every morning, upon waking, I open up my Forex trading platform and look for any major changes in the world of finance.

This morning, for example, I see that carry trades have had a bounce overnight.

So what, right?

Well, wait a minute here. Bounces represent opportunity. If you look at the 1hr GBPJPY or AUDJPY you'll notice some serious signals. Sure, the CCI, Williams %R and stochastics all moved north in the late evening, but just as importantly the price of these pairs started to show a bottom.

This would have been an excellent place to think about sticking your toe in. I use that phrase to make clear that there is every risk the market will continue to collapse after a false lull. However, those that don't freak out when the talking heads on the tube are mooing up a storm, have the opportunity to pull in some cash.

However, there is a bigger issue that I want to make you aware of. It is very common that the US and Asia will go in one direction while Europe goes in another. It's a natural turnaround point.

Just as Europe may wake up and find a sea change in the markets, so too can we. The end of the day, after Asia has had time to react, before the European markets open, if often a good time to act.

So, to be clear, if you live in Australia or Asia, the close of your markets represents a potential turning point. If you live in the US, you need to stay up until around midnight or so EST to see if the Forex markets will send you some smoke signals about a possible retracement.

Panic In The Streets

Okay, I'm not going to offer any groundbreaking news, we all know what happened to the so-called TARP program.

After the House refused to pass the bill in a bi-partisan manner we saw market participants run for the hills to the tune of a 777 point drop on the DOW. It was quite the day.

Did I forget to mention that the VIX closed at a new high? I even think I saw pieces of the sky fall!

After all of this, I've been watching the carry trades decline precipitously as money was shunted back into Yen as a protective measure.

I don't know about you, but when I see so much hysteria and panic I'm motivated to look for a place to stick my toe into the market. Sure, wait until there are some technical signs to back the decision, but with a tight stop you don't have to put anything significant at risk.

In short, at least with respect to the Forex markets, you control how much risk you are willing to take explicitly. Don't be afraid to look hard at the situation and see if you can find a good risk vs reward ratio. Panic is a sign that it's time to pay attention.

Could the market fall another 700 points? Sure. Could it recover due to some type of new emergency plan? Sure. There's always a winning trade in the Forex markets. Figure out what it is. Find a way to gain entry without much risk. Sit back and see if things change, continue or go sideways.

Shuffle Off To Buffalo

Is it just me or are the Yen based carry trades in stasis?

I might be daydreaming, but it seems to me that the markets are just going to wait around until they find out what happens with the 700 billion bailout program.

Have you looked at the 1 hour AUDJPY or GBPJPY? Unbelievable!

Market Uncertainty

While the government prevaricates on what best to implement in terms of a housing crisis fix, the details of the TARP proposal, financial markets are in a holding pattern.

Nobody wants to simply assume things will go forward as proposed. However, I'm sure nobody wants to stand on the wrong side of a 700 billion tsunami either.

Jim Cramer of Mad Money had an interesting viewpoint on how to deal with the current situation. If the deal falls through the resulting crisis will cause the price of gold to rise. If the deal goes through the resulting inflationary pressure will probably cause the price of gold to rise.

Assuming the TARP program is adopted in a manner similar to that now expected by financial markets, what does that get us? Apparently nobody is sure.

Back To Trading?

During the last few weeks I've been content to play it safe and collect small carry trade positions. However, the markets are starting to act normal, in that they are generally unpredictable but they do seem to adhere to technical indicators a reasonable amount of the time.

It might be time to start trading again.

Prior to the recent market meltdown I was having some success with my trading and had even managed to do some scalping. I've been sharpening up my charts for the last couple of days and am ready to throw myself at the market to see who comes out standing.

Hmm, maybe I should put that another way?

Forex Market Deconstruction

Now that the trading week is over I thought I'd write about a few things that came to mind over the last couple of days.

Current Situation
Everyone is expecting the Fed to come along and put a multi-hundred billion dollar package together with the help of congress. Obviously, this is relieving a lot of the unprecedented pressure on both stocks and various Forex markets. The only fly in the ointment I'd keep an eye on is whether or not things get delayed for any period of time.

The recent explosion in carry trade prices and equity prices is completely dependent on the confidence that has been brought about by a pending solution. Any risk that the solution won't arrive when promised or that it will take longer than promised could lead to some degree of reversal.

The Mighty VIX
Have you heard various pundits talking about the VIX? Basically, it's a measure of volatility. When prices are jumping around quickly the value of the VIX will be quite high. Anyway, people have been referring to a VIX above 30 indicating some type of volatility threshold that might imply we've bottomed. These high volatility periods represent some level of market emotion, such as panic, after which everyone that wanted to sell has sold.

However, we've hit VIX values that should have represented a reversal multiple times. Is the mighty VIX broken? Why did the bounces at those prices represent false rallies?

The answer is simple really. The VIX levels that traditionally have represented a bottom, or an emotional capitulation in the markets, were previous determined during lesser financial stresses. So, various market players assumed the VIX value meant there was a bottom, but they were working on the assumption that bottoms were decided by a static value.

The VIX value needed to call a bottom is variable. It's relative! The size and scope of the problem combined with the sensitivity (or expecations) of those watching the VIX have to be measured together. The expectation of a simple reversal due to a high VIX thwarted it.

So, in the future, when everyone is looking for a 40 or 50 in the VIX, remember that a lesser disaster may be predicted by a lower VIX value. If you sit around waiting for a super high VIX value you might just be left with a pocket full of cash while the market makes it's big reversal.

Did The Carry Trades Bottom?
It would be very easy to sit back, type out y-e-s, and be done with it. Unfortunately, things are much more complex than that. We're certainly going to have some massive relief and subsequent acceptance of risk. However, a bottom will be determined by whether or not other flare ups start to occur. Are any other countries going to end up searching for that last seat when the music stops?

I hope we saw a bottom. I'm playing it like it's a bottom. I'm convinced it will be a local bottom as long as the Fed's plan is adopted.

Other issues are out there though. Will this represent a turning point for the strength of the US dollar? Will it represent a decline in the Japanese Yen? If so, then what might happen to the NZDUSD or GBPUSD? I don't know how the US economy will react, whether or not they'll print money, or whether or not they'll soon start to increase interest rates. However, I do expect the Yen to decline. It's been driven up a lot, and quickly, by people trying to preserve capital. It will go back down when those people start to worry about missing out on an ability to earn.

Expect a bounce downward. Expect it to happen when you think all is well. Expect it to go far enough to shake your resolve. If you do get dumped, expect it to change direction shortly after... ;)

Market Panic To Market Euphoria?

I'm not certain that euphoria is any wiser than panic, but I do know that the Forex world has changed.

The Fed, Congress and the Senate were meeting earlier this evening and are putting together what is touted to be a comprehensive plan to solve the ongoing financial crisis. Basically, by creating an organization to buy and then auction off troubled assets, the fear and uncertainty in the markets will be abated.

Why? Because pricing information will be visible during the auction process and sales to the Fed will happen from organizations that are not in desperate straights. This puts in a floor and establishes a market.

So, what does this mean with respect to Forex markets? If risk aversion is reduced then you can expect the Japanese Yen to be under pressure. What will that do? It will open up the floodgates to the carry traders.

Guess who's been blogging about accumulating carry trade positions during the recent turmoil?

In any case, you do have to watch out for various risks. The markets will overcompensate. They'll reverse. They'll be disappointed because the solution is not as comprehensive as everyone imagined it would be. Who knows?

Congratulations to everyone that has managed to keep some powder dry... but don't get caught napping, the fire sales will be over just about when everyone wakes up and realizes that there is a fire sale -- or sooner! Just don't load up on too much of anything, because somehow the market gremlins are always watching for this situation and they have ways of punishing the unwary.

Long Term Carry Trade Prognosis

With the temporary loan facility made available to AIG by the Fed it seems that the currency markets are getting back a bit more appetite for risk.

The Yen has been dropping and carry trade pairs have floated erratically to more respectable levels. The real question is how the US markets will react tomorrow. I'm expecting the equity markets, the DOW, to do well but I don't know if the carry trades will look appetizing.

If you've been following along you'll know that I put a grid of limit buy orders above the falling prices during the recent crisis. Many of these were struck today shortly after the AIG bailout was announced... allowing me to avoid risk on the way down and letting me catch the upturn without having to be married to my trading platform.

Since I'm feeling smart, which means I'm likely to put in my foot in my mouth at any time, I'll talk about my current thoughts. I am expecting that Asia, most notably China, will be resistant to economic downturn. This will allow countries in the region, again most notably Australia and New Zealand, to grow exports whether or not US and European markets have slowed -- especially since China is very hungry for commodities.

The long term effect of this on Forex markets is that the interest rates in those countries would fall much less than expected or be increased much sooner than expected. Japan, on the other hand, is not known for it's ability to provide commodities. It may find itself more tied to the fates of the US and European markets. If so, and if those areas do drag down the Japanese economy, then the carry trades will be hot properties.

This means that it's time to keep an eye out for long term bottoming activities in the JPY crosses. It might take six days, six months or several years, but keep an eye on economic activity in commodity rich countries. This will give you an early clue as to whether or not this is going to occur. Alternately, keep on eye on the US, because if that economy doesn't implode, everyone running for cover is certainly in the wrong.

Anyhow, since I'm the business of speculating, I guess it doesn't hurt to speculate, does it?

Forex Panic Attack

Well, if it looked like there was some panic last week, it should be very interesting to see what happens during trading this week.

I hope you've kept your powder dry! There should be some Forex fire sales happening before long. The tough part is figuring out when the currency markets are finally starting to turn around again.

Good luck out there...

Forex Carry Trade Bottom?

I'm probably never going to try to call a bottom, but I will point out that there is a difference in behavior since the recent panic drop. Now, we see the Yen based carry pairs bouncing off a resistance point instead of simply dropping as if they are in free-fall.

What am I doing about it?

I'm glad you asked. My current trading activity involves playing with a bit of a gridding strategy. When the price gets down near the recent resistance point I'll place limit buy orders above the price. This means that if the price rises I'll start filling orders. These orders have a small take profit zone so I won't have to worry about accumulating many positions, or risk, but I'll make an okay profit if the price decides to bounce back and forth for a while.

I've booked small amounts of incremental profit this evening in the EURJPY, GBPJPY and AUDJPY markets. Admittedly, the profit is very small per trade. However, if the price continues to rise and fall I'll be able to take that same small slice of profit during each cycle. It adds up!

Interestingly, if the price drops, I'll just extend my grids downward and catch whatever eventual upturn arises.

Don't forget, I like to accumulate long-term carry trade positions at what are apparent low points. I make sure not to overextend my account so that the sum of my open positions are not large enough to put my account at risk. So, if I end up holding on to some grid based trades for the longer term, I am fine with that.

Carry Trade Panic Selling?

Did anyone notice the panic selling out there?

All kinds of carry trades unwound several hundred points in a very short period of time. Speculation in the Forex news rags suggests that losses due to the falling stock exchanges forced people to unwind their carry trades to cover their margins.

In any case, after days of regimented downward movement, the sudden fallout represented a panic moment -- for someone. In the short term, at the very least, this should represent opportunity. I've stuck my toe in.

I certainly don't know if it represents a bottom, but if everyone that wanted out got out, then it won't have much pressure to fall further.

Personally, I'm looking at the Yen based carry trades. Things like the EURJPY, GBPJPY, and the AUDJPY. While the US may eventually recover and raise interest rates, I don't see the Japanese being able to raise interest rates while their currency is appreciating.

How in the world would they compete internationally, exporting products, if they drove their prices up now when everyone else looks to be faltering already?

Have I mentioned lately how important it is to have money on the sidelines so that you can take a poke at raging opportunities? Whether or not you are a fan of his, Jim Cramer also is a proponent of not being fully invested -- which he states is a common joe public trader type of mistake.

Big opportunities offer big profits, but only if the opportunity didn't break you as it was developing.

EURAUD Head And Shoulders?

Are you a Forex carry trader?

Don't look now but the EURAUD has completed two out of three components of a head and shoulders pattern on the hourlies.

You might want to be on the lookout for this over the next several hours. If it activates it could spell a nice downward move for this carry pair.

Carry Trade Accumulation Strategy

As I haven't seen this forex tactic expressed anywhere else I thought I'd blog about it and share it with my small readership.

Are you familiar with trailing stops?

This is when you set a stop loss some number of points below the current price and then allow that stop loss to float when the price moves in a profitable direction.

Well, I'm not going to talk about stop losses, but the idea is similar. What I'm going to describe is a trailing limit order.

Let's say, for example, that you think the GBPJPY is starting to look like a good deal. Instead of jumping on and buying it you may want to set a limit purchase order above the current price. The odds are good, given recent history, that the price will drop further.

Bingo. You can then adjust your limit order and trail the market price by some appropriate level. Be warned that the price could spike, activating your purchase, and then continue dropping. In today's environment you can then save yourself the risk of acquiring a position until the price does show some type of strength.

I'm not aware of any forex trading platform implementing this so you'll have to execute a manual trailing limit order yourself.

Best Forex Trader Return

I see people in various forums asking what the best rate of return is for professional forex traders.

What kind of question is that?

Do you want an annualized answer based on a great trading day? I could boast a fabulous rate of return if I did that, but it wouldn't be meaningful.

How about an annualized rate of return for a trader's best month? No? Maybe some arbitrary consecutive twelve month period? Oh, maybe you wanted a number representing January through December?

Forex trading does not really have a linear behavior that makes it easy to determine what a good rate of return is. Are you a cautious trader? Are you more comfortable taking large risks? Are you trying to accumulate a carry trading position?

Even if you do get someone to tell you what they made over a suitable period of time, you have to realize that past results are not a reliable way to predict the future. Situations change. Economies change on a global scale. Political events that elevate risk levels happen all the time. Just as with stocks, you can never really be sure what will happen.

On a more personal level you are either profitable or you are not. If you are profitable you either have enough of a track record to make a living off it, if you even wanted to, or you don't. If you don't have enough capital to make a living off it, then you can work to build your capital if you are profitable.

Worry about being profitable. Worry about preservation of capital. Don't worry so much about what other people can do or claim to do. This isn't a market that is set up for easy measurement and comparison between participants.

Rest assured, the best rate of return out there is going to be much higher than you or I will be able to earn.