Q&A: Yen currency intervention

Finance ministers and central bankers from the world's developed nations decided late on Thursday night to send a firm message to financial markets that they would not stand by and watch the yen continue to strengthen.



What have the G7 agreed to do?
Finance ministers and central bankers from the world's developed nations decided late on Thursday night to send a firm message to financial markets that they would not stand by and watch the yen continue to strengthen.

The Bank of Japan began selling yen overnight to depress its value. Other central banks are expected to follow suit as their markets open through today, in a rare concerted move.


What prompted them to act?
Since the earthquake and tsunami hit last week, the Japanese currency had been getting stronger, and after London traders went home on Wednesday night it hit its highest level against the US dollar since the second world war at ¥76.25.

Not only is that a damagingly high level for Japan's export-led economy, it risked triggering the "volatility" in currency markets that central bankers hate to see.


But why was the yen strengthening when the Japanese economy is going to be hit by the crisis?
There are three likely reasons. The first is that Japanese insurance firms and other corporations are "repatriating" cash – exchanging their foreign-denominated holdings for yen – to pay for the cost of handling the crisis.

The second reason is the unwinding of the so-called "carry trade" – a popular investment strategy in which traders take advantage of ultra-low interest rates in Japan, by borrowing in yen and reinvesting the proceeds in some other, faster-growing stock market overseas – exchanging the yen for Brazilian real, New Zealand dollars, and so on.

Nervous investors may have started to reverse this bet in recent days, bringing their overseas investments back home, and strengthening the Japanese yen in the process.

A third and more depressing reason for the yen's move is pure speculation — investors betting, George Soros-style - though these days through complex financial instruments - on how the yen would move as a result of the crisis. Japanese deputy finance minister Fumihiko Igarashi said that these speculators are 'like sneaky thieves as the scene of a fire', who are capable of ruining the Japanese economy.


Who's driving the carry trade?
Much of it is overseas traders, but a considerable proportion comes from ordinary Japanese domestic investors – "Mrs Watanabes" as they are colloquially known in the financial markets.

Amid the past week's dramatic events, analysts believe Japanese investors may be showing more of a "home bias" – a tendency to want to hold their savings in their own currency. This is a common reaction in times of crisis, and could bring a wall of money flowing back into the yen.

Overseas investors may also be tempted to reverse the carry trade, if they judge that the knock to confidence from events in Japan – and the Middle East – mean that growth in emerging markets will be weaker than expected.


Why does all this worry the G7?
The wrenching aftermath of the collapse of Lehman Brothers collapse in autumn of 2008 showed that rapid movements in financial markets can very quickly transmit panic throughout the global economy. If the carry trade abruptly unwound, it could cause what economists call a "sudden stop," draining capital from riskier markets around the world, with real consequences for business and consumers on the ground.


What does a stronger yen mean for the Japanese economy?
It's bad news: Japan is heavily dependent on exports for generating even the meagre economic growth of the past few years.


Will the G7 succeed?
So far, the Bank of Japan's buying spree seems to have worked - the dollar was trading at ¥81.83 by Friday morning, more than 7% lower than the peak hit on Wednesday.

Currency intervention tends to work best when the markets are already at a turning point, and the Bank of Japan has intervened a number of times in recent years with limited long-term success.

Even the most brass-necked speculators may feel that trying to bet against every major central bank in the world is not a great plan; but the G7 policy is a high stakes one, because if they are seen to have failed, the consequences for market confidence could be catastrophic, particularly when central banks' aura of omnipotence has already been severely shaken by the credit crunch.


What will happen to the yen when the G7 selling spree is over?
Many analysts believe there are plenty of good reasons for the Japanese currency to weaken anyway, once the immediate crisis is over and there is more certainty about the fate of the nuclear reactors at Fukushima.

The Bank of Japan has already injected more money into financial markets in an extension of its long-running quantitative easing programme, and the costs of the crisis are likely to mean a further painful increase in the Japanese government's debt, which already stands at 200% of GDP. That should keep interest rates ultra-low for the forseeable future.

And while large-scale reconstruction efforts should eventually boost Japanese demand, in the short run widespread factory shutdowns and the loss of industrial capacity in the devastated regions will mean the Japanese economy is extremely weak. None of that will be good for its currency.


What does all this mean for us?
Both the Bank of England and the European Central Bank were edging towards raising interest rates to clamp down on inflation. But with confidence in global markets being severely tested by events in Japan and the Middle East, the return to "normal" monetary policy from current emergency levels is likely to be delayed. City traders have already pushed back their prediction of the first rate rise by the Bank of England from May to August.


Sourced from Heather Stewart

Great Tools for Traders

Forex Factory just launched a great new tool. Trade Explorer enables traders to see basic and also not so basic statistical analysis of their trades, such as average trade return and average drawdown. Here’s a quick look.

It’s important to note that the synchronization with real time data from the brokerage account allows viewing data in real time. So it’s not only historical, anecdotal analysis, but also a t real time tool. I had the chance to examine the system and I must say it works fast – this is valuable when the market moves fast.

60 graphs are available to MT4 traders and quite a few important indicators. For example, the “Open leverage” feature shows how close the trader is to a margin call – what his actual leverage is. This is critical information that isn’t widely available. “Gap” shows how many pips away the order is from the market.

Sourced ForexFactory

Predictable Currency Pairs

Newcomers to forex trading usually start off with the popular pairs: EUR/USD or GBP/USD. While these pairs are OK, these might not always be the best pairs to start trading with. I’m fond of the Australian dollar – AUD/USD, and I find it the most predictable pair. I chose this pair based on my experience and my observations. Using these social indicators, I found that I’m not alone.

The British Pound and the Euro are popular currencies. Many forex traders start with these pairs since they hear about them all the time. You hear about them all the time from brokers who offer low spreads on these pairs. Also on the web, these pairs are talked about very often, sometimes too often.



This talk can be too much, even confusing. Well, there are other pairs out there. Brokers don’t offer the best spreads on them, but we aren’t here for gaining an extra pip on the spread, but making more winning trades.

In my post about the 5 most predictable currency pairs, I ranked AUD/USD at the top of the list, followed by EUR/GBP. This was based on my experience and my constant observation at the markets. More predictable currency pairs obey the rules of technical analysis better than others. A distinct support or resistance line, will be the spot where the currency turns around, or if it breaks the line, it will go further in that direction. Predictable pairs have less false breaks.

Now my observation is supported by Currensee’s social indicators. I took a look at the community’s activity, which is based on real trades, and saw that 91% were winning on AUD/USD, taking long positions. Such a landslide victory means that the this is a very predictable pair, especially when the community was trading with the trend.

As you can see, at the time of writing, EUR/GBP, my second pick wasn’t doing well. Also note that the popular pairs, EUR/USD and GBP/USD made unexpected moves, to say the least. At the time of taking this screenshot, no one was reading these pairs correctly.

As the community grows, more trades will be listed, and these social indicators will be of higher significance. Currently, the community does better with some pairs more than others – the more predictable pairs.

How Buffet Does It?

24 Simple Investing Strategies From The World's Greatest Value Investor!

1. Choose Simplicity over Complexity
   
When investing, keep it simple. Do what's easy and obvious, advises Buffet; don't try to develop complicated answers to complicated questions.


2. Make your Own Investment Decisions
Don't listen to the brokers, the analysts, or the pundits. Figure it out for yourself.


3. Maintain Proper Temperament
>Let's other people overreact to the market, Buffet advises. Keep your head when others do not, and you will benefit.


4. Be Patient
Think 10 years, rather than 10 minutes, advises Buffet. If you aren't prepared to hold a given stock for a decade, don't buy it in the first place.


5. Buy Businesses, Not Stocks
Once you get into the right business, you can let everyone else worry about the stock market.


6. Look for a Company That is a Franchise
Some businesses are what Warren Buffet calls "franchises". They have high walls and deep moats around them. They are More or less unassailable. These are the businesses you want to find.


7. Buy Low-Tech, Not High-Tech
In Buffet's world, successful investing is rarely a gee-whiz activity. It's less often about rockets and lasers and more often about things such as brick, carpets, paint and insulation.


8. Concentrate Your Stock Investments
Avoid what Buffet calls the "Noah's Ark" style of investing - that is, a little of this, a little of that. Better to have a smaller number of investments with more of your money in each.


9. Practice inactivity, not Hyperactivity
There are times when doing nothing is a sign of investing brilliance.


10. Don't Look at the Ticker
Tickers are all about prices. Investing is about a lot more than prices.


11. View Market Downturns as Buying Opportunities
Market downturns aren't body blows; they are buying opportunities. If the herd start running away from a good stock, get ready to run toward it.


12. Don't Swing at Every Pitch
What if you had to predict how every stock in the Standard & Poor's (S&P) 500 would do over the next few years? In this scenario, Warren Buffet - one of the greatest investors of all time - doesn't like his chances. But what if your job was to find only one stock among those 500 that would do well? In this revised scenario, Buffer now likes his odds, which he figures at something like 9 in 10.


13. Ignore the Macro; Focus on the Micro
According to Warren Buffet, the big things - the large trends that are external to the business - don't matter. It's the little things, the things that are business-specific, that count.


14. Take a Close Look at Management
The analysis begins - and sometimes ends - with one key question: Who's in charge here?


15. Remember, The Emperor Wears No Clothes on Wall Street
Wall Street, says Warren Buffet, is the only place where people got to in Roll Royces to get advice from people who take the subway.


16. Practice Independent Thinking
When investing, you need to think independently.


17. Stay within Your Circle of Competence
Develop a zone of expertise, operate within that zone, and don't beat yourself up for missing opportunities that arise outside that zone.


18. Ignore Stock Market Forecasts
Short-term forecast of stock or bond prices are useless, says Warren Buffet. They tell you more about the forecaster that they tell you about the future.


19. Understand "Mr. Market" and the "Margin of Safety"
What makes for a good investor? According to Warren Buffet, a good investor is someone who combines good business judgment with an ability to ignore the wild swings of the marketplace. When the emotions start to swirl, says Buffet, remember Ben Graham's "Mr. Market" concept, and look for a "Margin of Safety".


20. Be Fearful When Others Are Greedy and Greedy When Others Are Fearful
You can safely predict that people will be greedy, fearful, or foolish, says Buffet. yous just can't predict when or in what order.


21. Read, Read Some More, and Then Think
How does Warren Buffet - the world's greatest investor spend his time? By his own reckoning, he spends something like six hours a day reading and an hour or two on the phone. The rest of the time, he thinks.


22. Use All Your Horsepower
How big is your engine, and how efficiently do you put it to work? Warren Buffet suggests that lots of people have "400-horsepower engines" but only 100 horsepower of output. Smart people, in other words, often allow themselves to get distracted from the task at hand and act in irrational ways. The person who gets full output from a 200 horsepower engine, says Buffet, is a lot better off.


23. Avoid the Costly Mistake of Others
Buffet's friend and associate Charlie Munger always emphasizes the study of mistakes so as not to go there.


24. Become a Sound Investor
Buffet says that Ben Graham was about "sound investing". He wasn't about brilliant investing or fads and fashions, and the good thing about sound investing is that it can make you wealthy if you are in not too much of a hurry, and it never makes you poor , which is even better.

sources: James Pardoe, ISBN: 0-07-144912-4

7 Tips for Becoming a Successful Forex Trader

If you’re like most traders who have been at it with forex for at least a year, you’re losing money and beginning to wonder if it’s even possible to make money trading forex. I’m here to tell you that success IS achievable, but it’s going to require some mental conditioning to start thinking like a professional, successful forex trader.

1. Model after someone who’s already done it - You can avoid so much pain by just learning from someone who has been successful already. If you try to get creative and form your own strategy and you haven’t had the experience being successful, you may not trust your strategy or yourself. Don’t underestimate the roles of emotions and self trust in your trading.


2. Adopt a trading strategy that is based on how the market actually works (so you can trust it) - I’ve seen traders too many times who just buy a course/ebook/signals service that is just based on some moving average crossing over another on a chart and expect to make money from it. Other than statistics from the past, there’s nothing that says these strategies have any long term predictive value! If you want something you can trust in and be able to use even through the losing periods knowing that your money is safe, make sure that your strategy is based on the behaviors of the market, fundamentals, market sentiment, and not just some statistical pattern.


3. Learn to put price action into context - Many traders fail because they subscribe to simple rules of thumb that everyone else (i.e. the rest of the market, their competition) can see as well, and they call it an “edge.” For example, many traders think they can make money just by buying when price breaks above the highs of a sideways range. Yea, that might’ve worked 30 years ago in the futures market, but traders aren’t stupid. And neither are brokers- they’re aware of this habit of newbie traders as well as other patterns, and they push the market up just to sell to them at high prices and then price spikes back down giving them a profit. If you want to play breakouts (or other strategies for that matter) make sure that you put the price action into context. If price breaks above the highs, look for confirmation from some really surprising news such as retail sales or a Bernanke press conference that rocked the market.


4. Think like a contrarian - When the market makes a big move after a news event just because it is normally a big deal (e.g. Nonfarm Payrolls), ask yourself, “Is this move really warranted?” If there wasn’t really much of a surprise, or the economy is in terrible shape and this is the only positive news release, it may be a better decision to fade the move and trade in the opposite direction.


5. Think critically and adapt to the market - When the market is fixated on one concept, like the debt crisis in Europe, or if you’re a technical trader: like buying dips in a range, start to think, “what could change this paradigm?” and be ready to take advantage of that change. For example, if the market starts focusing on a recovery in Europe, be ready to start buying Euros heavily before the masses come in, and if price breaks strongly to the downside out of the range, start selling as all the slow turtles who are still stuck to the old paradigm of “buying dips in the range” are getting their stops hit. Remember, the most powerful and profitable thing you can take advantage of in the forex market is the element of surprise. During other times, the market is so big and has so many cunning players that the competition against you is impossible to deal with (which is the main reason why even the majority of traders who are even using good money management lose).


6. View each trade independently and trust your edge - There’s a psychological bias for us to feel more pain from a loss than a win even if they are the same size. This pain causes us to enter at the wrong time, not enter at all, or lose complete trust in the system and skip to another forex trading strategy in search for the “holy grail.” If you can stop yourself and realize that you will have losses no matter what, but your system has an edge that will be profitable over time, you will be able to execute every time a good opportunity comes up and you’ll win over time.


7. Detach yourself from your trades - Remember, YOU are not your trades; YOU are YOU. I remember losing trades in the morning and it would ruin my day and cause me to enter all sorts of bad trades. When I reminded myself that I’m trading forex to make money and not to be some grand master trader that knows everything about the market and is stuck in front of his computer all day and ignoring his friends and the outside world, I felt liberated and I was in the right emotional state to make good trading decisions and then walk away and enjoy life.
   

Source from Kris Matthews

How to Stop Following the Dumb Money in Forex

If you want to achieve forex success and profits you need to stop following the dumb money, which represents the majority of traders. You need to follow the patterns of the small percentage of traders who are dominating this market in terms of profits. These traders are cold, calculated killers who have studied the rest of the market (i.e. their prey) well and hard and no how to react when the market behaves in a certain way.

My intention of this article is to show you how to stop following the flow of dumb money, which is always on the wrong side of the market, and start recognizing valuable, juicy clues that the market leaves behind, in order to generate consistent profits.


Know your prey
’m sorry to keep on with this “predator-prey” depiction of the market, but that’s what it really is. No one is leaving money on the table for you to pick up, so it’s up to you to take it from the market, otherwise you become the prey. A couple ways to spot when the market is about to make a move are what are commonly referred to as a “dead cat bounce” and a key rejection.

A dead cat bounce refers to when price falls violently and doesn’t bounce (no cats were harmed in the writing of this article), but rather maintains a tight sideways range, as the figure below illustrates. Let’s get into the psychology and the mechanics of what’s happening here: If some stimulus, such as bad news, entered the market and caused traders to rapidly sell off a currency, liquidity was probably low during the sell off. In that situation we would expect price to pull back to fill orders that were missed and for traders to “test” nearby support levels to see if there was indeed enough selling pressure. However, if we see no pullback upward in the ensuing session we can expect that selling pressure is indeed very strong and traders are still trying to unload positions.

The second strategy I want to share with you is called a key rejection. Often when you see price in a strong uptrend price will pull back or even change to a negative trajectory. The talent in taking a contrarily trade by selling at high levels is in recognizing and differentiating which signals are indeed turning points and which are just temporary down moves. The way to do this to look at a candlestick chart and see price try to breach a key resistance level but get rejected (as can be seen by price breaking through the level for a very short time period). If the rejection happens a couple of times, it could be an even stronger indicator of a reversal. A key resistance level is often a level that has defined the high or the low of price several times in the past, or is a “psychological” round number level, such as 1.50, 2.0, etc. What’s the underlying psychology/mechanics going on here? Well, a key level is a very important benchmark for traders. If they see price break through it successfully, they may be convinced enough to put more money on a long trade. If it tries to go through and backs down (i.e. gets rejected), it’s likely that some buyers tried aggressively to push the market higher, but the other buyers said, “No,” so sellers get more aggressive.

These two strategies are very effective for analyzing the markets but keep in mind, like in any strategy, the random generation of patterns can deceive you. In order to reduce the probability of that happening I usually combine my technical analysis with fundamental news event analysis. For example, if I hear that the market fell due to the worsening debt crisis in Europe, I’m more likely to sell Euros after the dead cat bounce. Furthermore, if I learn that the rejection of price at a key resistance level after a long uptrend occurs after a better than expected employment number, that’s a powerful indication that despite good news, the market doesn’t have enough pressure to maintain upward momentum.

It’s always important to zoom out and look at the big picture and put your trading indicators/strategies into context. By adopting this style of thinking and these types of behavioral strategies for adapting to and trading the forex market, rather than becoming the hunted, you become the hunter. Happy trading.

by Kris Matthews (http://tradeforexfundamentally.com)

5 Way For Non-Farm Payrolls Trading

The release of the American Non-Farm Payrolls is a circus in the forex market. Here are a 5 notes to watch out for in every Non-Farm Payrolls release during the financial crisis:

1. New traders – stay away: Trading during this volatile period is very risky. Take a break and enjoy the weekend.
2. Action before the release: Strange moves begin in the markets well before the release at 13:30 GMT. This usually reflects the expectations – expectations which aren’t necessarily met, and they can lead to a counter reaction afterwards. Jittery trading intensifies with the release of the Canadian employment figures, an hour and a half before the American ones.
3. Friday effect: Strong moves in a certain direction – either dollar strength or dollar weakness, can be seen hours after the release, usually in the last hour of the London session – between 16:00 to 17:00 GMT. This is the move that will determine the close of the week, and thus have a real long term effect. This is the full reaction.
4. Technical barriers can be broken – support and resistance lines, uptrend support or downtrend resistance lines can be breached around the release of the NFP. This is usually only temporary – the graph returns to normal after a while, and these lines are respected again.
5. Initial reaction is wrong: the initial reaction to the release is in the wrong direction: the knee jerk reaction is usually “normal”: good data yields dollar strength and bad data yields dollar weakness. This is very temporary! We are still in the global crisis, and the risk factor rules. So, minutes after the “normal” reaction, the risk factor kicks in and eventually the opposite happens: good data yields dollar weakness (risk appetite), while bad data yields dollar strength (risk aversion).

These are my tips. I’ll be happy to hear more.

Source: Forex Crunch