How To Make 1000's of Pips by NFX

I've been thinking about this for a while and while I can't say that I've read through every trading strategy here on FF, what I have found through my years of experience is that in order to make real and lasting profits, you need to attune yourself to the Major Fundamental Events (MFE's) that set the trends-and then get in when price is most advantageous.

When I refer to major fundamental events I'm not just referring to the monthly reports, although those can be used along the way. I'm talking about the major shifts, which I'll explain.

One thing before we start though-these MFE's may only happen a couple times per year. That's OK, because these trades are going to yield 1000's of pips. One trade may last for weeks or months.

Also, we're not at the start of an MFE now-we're in the middle of one (dollar weakness).

As you might have guessed, an MFE can be (and usually is) initiated by the Fed although certain earth-shaking events (the Lehman bankruptcy, China's concern about Treasuries)) can certainly do the job. Sometimes several MFE's can occur simultaneously which is great because those tend to build on each other, strengthening the trend.

The 2 keys for doing this successfully are as follows

1. You have to recognize when an MFE has occurred.

2. You have to understand how markets will be affected after the MFE has occurred and the correlations between the different asset classes (currencies, stocks, bonds and commodities).

The MFE we are in now began on March 15, the day of Bernanke's 60 Minutes interview in which he said the Fed was printing money. Go to this page: http://video.google.com/videosearch?...um=4&ct=title# and see the "The Chairman Part 1" video at about 8 minutes in.

Now, I'll tell you. Plenty of people were talking about the Fed printing money before the interview, but the Federal Reserve admitting it on national television is a whole different matter. The dollar bear market began in earnest from there, and you easily could have made 1000's of pips shorting the dollar against the euro, pound and A$ in a couple of weeks.

Now, I'll tell you something else. Plenty of people have been debating me that Bernanke didn't reveal anything new because everyone was well aware that the Fed had already expanded its balance sheet (quantitative or credit easing = money creation). None of the so-called experts picked up on this and it was basically ignored in the Financial press.

To be honest, most "experts" have very little clue about what they are doing when trading currency anyway and the one's who do are highly unlikely to say anything unless they are talking their own book. And don't forget, none of the so-called experts said anything about what would happen to the dollar after Lehman went bust either including such luminaries as Jim Rogers who's been a dollar bear forever (and who got crushed in the 2008 commodity collapse).

The facts bear my idea out. Bernanke going on 60 Minutes was definately an MFE because the dollar has gotten murdered since then. Why did Bernanke go on 60 Minutes? Because the Fed to that point had been totally unable to accomplish its goal of boosting stocks and creating some measure of inflation (making commodities more expensive) by weakening the dollar (to counter the far more dangerous deflationary effects of the financial crisis) with all of its previous balance sheet expansion. The S&P had made a fresh low just one week before. No question they were concerned that all of the actions taken to that time could potentially fail, sending the global economy deep into a depression.

I'll be writing plenty more about this and in the meantime-I welcome your comments.

I'm all ears... doesn't bother me if the thread turns out to be a slow mover either. Llike you said, an infrequent event with a long shelf life only needs to be seen for what it is ASAP to be turned to ones advantage.

Looking forward to your continuing thoughts...

NT, nice post, and no question in my mind about what the effect of fundies (though how long before someone says it's all in the chart?), but are they always events, or more series of evolving conditions?

OK, in this case, printing money was an event, but say take GBPUSD, back to November 2007. Could you point out one specific event that kicked off the bear run down to 1.33? There were certainly the signs; historical highs, recession in US that historically always followed by the UK; weakening of banking worldwide (and 10% of UK GDP dependent on it) so it was certainly possible to predict and many did. Soros was one of them as we all now know. But was there a single event? Or was it more the conditions had built up, and eventually speculation actually kicked off the move?

The pound gained about 1000 pips after another MFE-the September '07 rate cut by the Fed. It range traded for months after that and it didn't break below the support in the 1.93 area until last August. The real decline of the pound began after Lehman, which definitely was another MFE. So if you are talking about shorting it from 2.1 then no, there was no MFE there.

You also have to go in heavy when these occur-it isn't the time for being conservative.

How far things can go is another story. There's no way to know for sure unless something major happens. For example, I put a fib on the entire peak to trough move of AUD/USD. It hit the 50% retrace a few days ago around 7925. The day that Bernanke made his little announcement, A$ was around 6550.

So there was the trade. You have an MFE, you go in heavy, and now you're done.

I suppose the dollar will weaken further but I can't predict the daily ups and downs and especially not the intra-day noise. And neither can anyone else.

I can tell you though-if the dollar does continue to weaken, any trading "system" is going to look like it works, simply because there's a trend. For example, I'm sure we're going to see people touting the old MA cross-over systems because they look good now. But all those will start to look very bad when price starts to range trade, so to me they are useless. Besides, by the time some MA's cross over you're well into profit anyway when you recognize an MFE.

Interesting take on it NT, and my economics skills could definitely do with a sharpening. Particularly on correlations.

Agree that MA systems are a waste of colour but not that all intraday movement is noise, as there is tradeable cause and effect outside of TA & fundies. But let's keep the thread on track... this is about the big ol' trades. Over to you...

There is no doubt that in this fickle market even when people KNOW whats going on (Fed printing money) It often takes a talking head to say it before the players make the move a reality.

However ...

From a TA point of view .... 123 with a trendline break .... 100% target of the height of the pattern. Looks to me like the 3 was in place before the head spoke.

MFE's -- great concept. EUR/USD's in July 08 always interested me.

Your charts are good and I'll tell you why: everyone and their mother has those trendlines. Don't take that as an insult because it's just the opposite; when everyone is looking at the same thing, it works.

Forget about waiting for talking heads. Most of these "heads" ignored what Bernanke said anyway.

I don't know when or what the next MFE will be, but I know there will be one.

Correlations

Pretty straightforward once you realize something:

When you trade spot you're trading pairs-GBP/USD for example. When you buy the pound you are simultaneously selling the dollar. When you're trading currency futures, the contract is listed in euro's or pounds or A$'s-there's no "pair" in futures. However, despite that you're still "selling" the dollar when for example you buy the euro contract because you are trading in dollars and your contract moves against the dollar even though you technically are not "selling" dollars when you buy a euro futures contract.

It's the same thing for any contract which is priced in dollars no matter what the asset classs is. So when you're trading an oil contract (long for example) for all intents and purposes you are buying oil and "selling" dollars-your bet is that oil is going to appreciate against the dollar.

Think of it this way-if oil goes up what does it go up against? The dollar of course. So when oil is appreciating, because it's the biggest futures market among commodities, it tends to put downward pressure on the dollar.

It's the same for the S&P-the S&P is priced in dollars so for all intents and purposes if you are long the S&P you are short dollars.

So think of it this way:

S&P/USD
OIL/USD
GOLD/USD

Or just:

Commodities/USD
Stocks/USD

So on a day like Monday when stocks and commodities rise, the dollar is bound to get murdered.

How about stocks and bonds (Treasuries)?

First, by convention, when people say bonds are up or down they are talking about price.

Second, bond prices and yields move in opposite directions for a very simple reason: If you buy a bond today for $1 that yields 2% and yields go up tomorrow, of course the bond you just bought is going to be worth less simply because it yields less.

Stocks are a risky asset while Treasury bonds (and notes and bills) are "risk free." They're risk free because if held to maturity your principle and interest are guaranteed by the full faith and credit of the U.S. government. So when the market is "risk averse", stocks are sold and bonds are bought. After the Lehman collapse, the market sold stocks and bought risk-free Treasuries because they're backed by "full faith and credit" i.e. risk free.

So in general, stocks and Treasuries are inversely correlated. We saw that after Lehman (a major MFE) and we're certainly seeing that now.

Commodities are a risky asset class also. So when the market is risk-averse commodities are sold.

All this risk aversion places tremendous upward pressure on the dollar. We certainly saw that after Lehman. That's what made it a MFE-things could only go one way after that-stocks and commodities down, Treasuries and USD up.

That's why you want an MFE-things can only move one way after one happens and when you recognize it early, you can absolutely make a killing.

So now you're ready to put it all together. Bernanke admits the Fed is printing dollars and by the simple law of supply and demand, increasing the supply will naturally drive its price down. But what else happens?

Right, stocks and commodities are going to go up. In other words, the Fed can start a stock (and commodity) rally once the market accepts the fact that the Fed is actively trying to depreciate the dollar.

That was the entire purpose of Bernanke admitting the Fed was printing dollars. Bernanke isn't going to sit there and be grilled by the reporter and he can't be forced to say anything he doesn't want to say-he's only going to say exactly what he wants to.

Congratulations on starting a most interesting thread, i for one will be following with interest.

@NewstraderFX:
I think you just started an MFFFE (Major Forex Factory Forum Event) of your own!

Keep it coming, it sures makes for an interesting reading.

Great thread NewstraderFX, I would like to make a comment regarding the quote above.

Based on your second paragraph, I think you are talking about this, but I think it should be clear that the Fed does not physically print money...period. Ben said that what they were doing was "akin" to printing money. Then the stupid program took off with it saying that there was a printing press down the street, leaving the uninformed public to make that assumption that the fed has control over the physcially currency in circulation. This assumption is not true. Money is injected through a fractional reserve system which, as Ben said, was implemented by simply increasing the bank account amount number on the computer, not dealing with billions of dollars in cash.

Anyway, I cannot comment on what Ben was getting at with his statements, and perhaps he did in fact word it the way he did to create the reaction, but I would not have said this interview held any special insight to me....just a thought.

Again, great thread and I look forward to seeing where it goes.

Marsh

Thanks for the props but remember-we may not have another MFE for a while.

On another note-perhaps you saw this article on BB regarding the Chinese

The Chinese are very concerned the value of their Treasury holdings, along with the dollar, will decline. So now, China’s former central bank adviser is saying there are "alternatives" to buying Treasuries (such as the euro and commodities).

That's all well and good but if you were worried about the value of your major holdings going down, wouldn't you be talking their value up??

Talking about buying euros certainly isn't going to help the dollar and talking about diversifying out of Treasuries isn't likely to drive their price up either. Likewise with commods; talking about buying more will only drive their price up (and the dollar down).

Obviously, the Chinese aren't dumb so the question is why would they purposely talk down their biggest holdings?

The profit in your forex account is electronic too. But when you go and wire the money into another account-real money will be transferred.

But the money in the other account has not changed, it is still electronic because is still just a number on a computer. Unless you actually withdraw from that account into cash are you converting from electronic to physical. At this point it should be mentioned that there are not enough physical dollars to account for all the electronic account balances in our country, but that is a whole nother discussion altogether. My main point still stands, that the Fed is not responsible nor capable of printing physical money by any legal means.

Printing, electronic, however you slice it they've credited the commercial banks with dollars they can inject into the system when they are ready.

BTW-they still aren't all that ready yet because they are still holding well over $800B on deposit.

And if all this monetary easing takes us to an inflation level over 4 - 5 % ? The FED would be bound to change the interest rates. The printing of dollars has the near term effect of creating new jobs, but the only thing that remains in the middle term is the inflation. And if the inflation begins to grow rapidly, but the economy doesn't keep up with it, it will backfire. You can always make money by trading the inflation and buying XAU/USD, but you can't say if oil and stocks are going to react the same way, probably not.

Well, that's the point. After an MFE, things can only go one way. Without an MFE, things tend to bounce around.

This seemed more of a warning shot across the bows not to let inflation spiral out of control in the US. Either that, or they're jawboning it down to buy more...
Great info on correlations btw.