Identifying Market Swings - Medium and Long Term Trading

Hello everyone,

I am new to posting to this forum so maybe a quick introduction is in order.

I started my Forex adventures several years ago and it was a lot of blood, sweat and tears. I've read hundreds of books and if there is a system out there, I probably traded it.

I started with trading short time frames using technical analysis, then moved to longer and longer time frames but still using only technical analysis. I traded demo accounts for over a year until I started making some profit, however before I was completely ready I moved to a live account and ended up losing most of it.

Although it wasn't a great feeling, It was money that I could afford to lose and I took it on the chin and went back to demo trading. I felt that I needed more knowledge over what was happening in the markets and why they moved the way they did. So I learned all I could about economic fundamentals. This was the best decision of my life and I haven't looked back since.

Now I am consistently profitable and feel that I have control over my trading. Understanding the economic fundamentals has helped me make money in markets other than forex as it is all tied in together. I've had great results basically making 300% on my original capital in the last 4 months. However I know that there are still more improvements that I can make.

I am position trader and I trade the medium term and long term trends. So I'll hang on to trades anywhere from a few days to a few months. My strength is being able to anticipate market swings before they happen, my weakness is being able to hang on to the winners all the way throughout the trend.

My system is quite simple, I trade daily charts or higher and have almost no indicators. I use trend lines, volume, 1 fib, and market swing statistics. My initial Stop Loss is 1 ATR (Daily) and I go for 200-500 pips profit, sometimes more. The rest is just understanding the fundamentals to identify new opportunities.

Anyways on to the topic of this post, Identifying market swings in the medium and long term. The reason why I wanted to discuss this is because this is the key to low risk / high rewards opportunities and has been the key to my success so far.

OK, so how do we identify market swings?

1. Show me the money! Understanding where money is flowing in different market conditions and why. Is there risk appetite or risk aversion? And why is money flowing into one market / direction and not the other.

2. Identifying what conditions need to change to change the money flow and what the new direction will be.

Simple as that.

Case in point: The USD carry trade

Here is a huge trading opportunity for those that know what they're doing. Carry trades have been traditionally funded using JPY when there is risk appetite in the markets. But after the financial crisis interest rates in the US have been at near 0%, in effect making USD, the preferred currency for funding carry trades. This has caused it to weaken against all currencies, commodities, etc. and one of the major reasons we've seen record prices in gold, oil and other commodities as well as big gains in AUD, NZD, CAD, Brazilian Real, etc.

1. So the money has been flowing out of the US into AUD, NZD, CAD, gold, oil, etc. The reason why is because of low interest rates near 0% in the US.

2. So what needs to change in order to change the flow of money? Simple! The interest rates in the US need to rise higher than the country with the next lowest rates, Japan at 0.1%. In order for this to happen we need to see inflation in the US high enough for the Fed to hike rates by 25 basis points.

Now keep in mind that the markets factor in future events before they happen so we don't need to wait for the Fed to actually hike rates, only that it can be anticipated by the market via improved economic data. So what we're seeing is that the JP economy is in serious trouble with record low interest rates, national deficit of nearly 200% GDP and the most telling fact: while all other countries are winding down QE, Japan is looking inject more ..... there are estimation that it will push the deficit to 250% GDP! It will take Japan at least 15-20 years to recover from this!

So this means that there is a very good chance that the US economy will recover faster than JP and that the Fed will hike rates before the BoJ. Anticipation of this will cause the USD funded carry trades to unwind and the JPY to dramatically weaken against all other currencies.

And for those that have done their homework, the USD has turned around after hitting bottom and is starting to reverse the down trend.

So what does this mean for traders?

To get an idea of what this means, look at AUDUSD, NZDUSD or USDCAD daily charts from March / April 09 to Nov 09. We're seeing the end of the 1st leg of the bull run. Now when the carry trade funding currency shifts then we'll see the next leg of the bull run move the JPY crosses more than any other pairs.

Whew! I guess what I wanted to show was how trend changes can be identified before they happen.

Sometimes I jump the gun a bit early and can often get in a few days before a trend change.

Does anyone else ever do this sort of analysis to get in on trends before they happen? And if so, how do you trade it?

-Razorjack

Hi Razorjack

It seems most of us begin our forex adventures in the shorter time frames, before seeing some light.
I find I am becoming more & more interested in the fundamentals driving these markets - where would you suggest to go for relevant information on market fundamentals ?? (I have little patience for the talking heads on TV!!)
Thanks for the post, found it most interesting - and I hope you continue posting on this thread.

Cheers

Hello Yebisu-san,

I spent almost a year in Japan and had a fantastic time there, so I recognized the name right away.

I agree with you regarding the talking heads on TV. There's something that you have to understand about these "talking heads". As you know in technical analysis you have short term, medium term and long term technical analysis. What you may not know is that you have the same in fundamental analysis.

Short term fundamental analysis covers fundamental impacts over a few days to a few weeks, medium term covers few weeks to several months and long term several months to years

And just as you have short term trends moving in opposite direction to long term trends, you can have short term fundamentals in contradiction to long term fundamentals.

Long term fundamentals change slowly over time, medium term changes slowly but faster than long term and short term fundamentals change much faster than both medium and long term.

The talking heads on TV, of course have to talk about something or else they'll have no viewers, so guess what they talk about? That's right short term fundamentals!

When you start to get a good grip on fundamentals, assess the medium and long term fundamentals and then see how the short term fundamentals fits in. For instance when the short term is in contradiction with the long term, cut your position size by taking partial profit, reducing the position, etc, then when the short term lines up with long term you can add to your position to maximize profits. This way of trading can help you ride the entire movement in a trend by cutting losses and maximizing profits.

Anyways, back to your question. I'd suggest reading everything you can find by Kathy Lien, Victor Sperandeo ( wall street stock trader ) has good books explaining how the Fed works, also read all you can about Macro economics to understand "the big picture", look up InterMarket Analysis to get an understanding of how bonds, stocks, currencies, and commodities like oil and gold are all interlinked and how they impact each other in different market conditions.

Hope this helps.

-Razorjack

I've recently moved over to the Daily chart, from trading the Hourly chart successfully for 3 years ... and it's the best trading decision I've ever made.

My strategy is simple: Reversals bars. I look for inside bars, pin bars (Pinocchio Bars), engulfments bars, and occasionally belt holds while using trendlines for overall direction. I peak at USD index for study and focus my mornings on fundamentals.

Overall, I glance at my charts maybe twice a day and look for reversal points of entry so that I may place a pending entry order. I have so much time for myself lately, it's unreal. No more short time frames for me.

Congratulations Jhig!

Reversals have been the key to my success, when properly identified, this is where you find the highest reward to risk ratios. I use a combination of trendlines, PA, volume and fundamental analysis to anticipate reversals on the weekly trends.

And yes you are right, it leaves you so much free time. And the best part is that you make money while you're out having dinner, playing golf, etc.

I'm still surprised that so many people put so much effort into short term ( 4 HR or less ) technical analysis.

Kind makes you wonder, if 95% of traders are losing money than why do what 95% of the traders are doing?

-Razorjack

Look I know the last post was in July but in case there is anyone who can give me an answer, give it a shot. All right thank you for enlightening us with the power of fundamentals. So, if possible could you give us a book about fundamentals or more importantly what news to listen to except the economic calendar indicators? Feel free to add anything that might be of use.

Trade and Prosper!!!

Two excellent recommendations, especially Victor Sperandeo. Looks like a good thread; using this post to subscribe.

Fundamation is very important but technical is important too. I use both for trading forex.

For Technical I will compare any time frame charts (start 4H. TF) and use differrent indicator

- 4 TF I use ADX
- Daily I use MACD
- Weekly I use MA

That's it.

Hi Razorlight,

Just as a quick introduction, I will be following this thread as I was intrigued by your knowledge of funny-mentals and how they would be applied to medium/long term swings.

I recognised your name from Strat's thread (upon which I am still on the path...) and thought I would say a quick hello. Good luck on your thread

Regards

Fax

Hi Jacob,

I wrote in my post above some reference areas and authors to read up on. Just do an internet search on what I listed and you should find plenty of material.

What I can add to this is that understanding the fundamentals is not just about looking at certain economic indicators like most people think.

Let me put it this way: Would you trade based on what one technical indicator like a moving average or RSI was telling you without knowing what the direction of the trend is? If I tell you RSI is above 50, it's a buy signal, do you buy or not?

You see what I am getting at? You wouldn't do this because you don't know if the trend is up or down and if it's down then there's a good chance you will end up losing on the trade.

It's the same with fundamentals, you can't just look at economic indicators and understand what the markets are doing without knowing "the big picture".

Maybe this will help. Once you get an idea of the fundamentals, follow this method to help you identify new opportunities. You start with the big picture and work your way down:

1. First figure out what the global long term economic conditions are: Is the global economy in a state of risk appetite or risk aversion. Remember to start with the long term, it's the easiest to figure out. Right now, it's in a state of risk appetite and expected to be there for some time.

2. Then figure what these conditions are in the medium term and short term. Are they aligned or are they diverging? For instance right now we have long term risk appetite, but we're seeing medium term risk aversion, with the short term fluctuating between the two.

3. Then if you've done your homework on macro economic and inter-market analysis, you should know which way the money flows in times of risk aversion and risk appetite. This will tell you in which direction you should consider investing in long term and medium term.

4. Then you move down to the next level, if the global economy is in a state of risk appetite, then what is the dominant force moving the markets? Is it the carry trade or are economies in a good enough state to make equities more profitable? I don't think I need to tell you that the economies have been dismal so it's been the carry trade.

5. Then you should have done your homework on the carry trade, look for countries with the lowest and highest interest rates. That is where you've had the major portion of the carry trade, if we look at only the majors then it would be AUDUSD, and to a slight lesser extent NZDUSD, if we want to include exotics then consider the Russian Ruble and Brazilian Real.

6. Now that we know this is the way the money is flowing, then we can identify new opportunities. What needs to change in order to shift the current conditions in the carry trade or current conditions in risk appetite?

7. Once you listed what changes in economic conditions will cause market shifts, then you need to look at how these different possible changes will have different impacts.

For instance in the current conditions:

a) if the US economic recovery will accelerate then we will see a shift in carry trade funding from USD to JPY: Go long on the USD in the medium term and short the JPY in long term.

b) if a) doesn't occur and the USD remains weak, there is a possibility of a coordinated global central bank intervention at the next G7/8 in February. If b) doesn't occur then it's because the global central banks believe that a) is certain to occur soon, so be a bit patient, wait for the opportunity then strike when the economic calendar indicators line up.

c) if we have another sovereign debt crisis or another 9/11 or housing markets collapse, etc then we could see global risk aversion: go long USD on all the USD pairs except USDJPY and USDCHF, short USDJPY, and all the JPY crosses except CHFJPY (basically go long on USD and JPY, except against CHF )

So I just gave you a step by step process, with my analysis of the current global economic conditions. The first 2 opportunities have very good probabilities of occurring soon with 1000s of pips in profit potential.

This is where all the hard work on studying this stuff pays off. Once you can create a list off opportunities like the one above, then guess what?

YOU ARE AHEAD OF THE MARKET! YOU ARE ANTICIPATING MAJOR MARKET SHIFTS BEFORE THEY HAPPEN!

You can anticipate market crashes or shift from a bear market to bull market before it happens. Just imagine how much profit you could have made if you anticipated the US housing market collapse would be followed by the credit crisis in 2007, look at how much the markets dropped! Then not only that, you could also anticipate when the markets were likely to turn around and head back up again in April 2008!

I still don't understand WHY so many traders focus ONLY on short term technical based trading. Technicals are good, I also use technical analysis BUT I use it to time trades to what the fundamentals are telling me.

So I hope I opened up your eyes a bit. Understanding the fundamentals is a lot of work, but there is so much profit potential once you know what, where, why and when markets are moving or are going to move.

Any questions?

-Razorjack

HAHAHAHA!! LOL!

I love the nick!

I agree the technicals are important, I also use technicals but very few, I use only trendlines, volume and 1 fib on the long term swings. I also use a customized statistics indicator that I developed myself to map swing levels.

However, just to be clear, I use technicals to help me time my trades but I am ALWAYS anticipating what the markets are doing or going to do through fundamentals.

Also why H4? I think anything less than Daily is noise, very unpredictable. There are less opportunities but more RELIABILITY and if you've studied position trade management TONS more profit on the dailies and higher.

-Razorjack

Hi Fax,

Welcome! Feel free to participate or ask questions if anything is unclear.

Cheers,
Razorjack

Priceless. Thanks!

Very similar story - using these reversal bars myself with good results!
Tried numerous technical analysis systems for 3 years, then the penny finally dropped that TA is not the answer or the way forward for me.
One quick question if you don't mind - what are "belt holds" (not heard this phrase before) & how do you use and implement them?
Great thread, keep it going.

Hi Razor,

Can you give us and example of how you do your fundamental analysis and what tools you use (source research info). Do you pick a trending pair first and then look at how fundies support it?

Great thread mate! I was just about to email you actually after reading your posts in another thread. Seems there is no need now, subscribed!

Hi Ozziedave,

Can you give us and example of how you do your fundamental analysis and what tools you use (source research info).

Please see post #10, I've explained exactly how I do fundamental analysis, step by step in detail. If this is unclear, then please be a bit more specific on what you don't understand.

For getting the information I need, I watch the news on business channels like CNBC and Bloomberg TV and ignore all the "experts". I read Bloomberg, Reuters, MSNBC, CNN, etc. I also read analysis by certain "experts" like Kathy Lien.

Do you pick a trending pair first and then look at how fundies support it?

The exact opposite. I look at the current market conditions as well as the individual countries' economies and this will tell me where the biggest trends will be.

For instance I explained above that current conditions are pointing to risk appetite with the carry trade as the most dominant force moving the markets. This tells me exactly which currency pairs I should be looking at, those countries with the highest and lowest interest rates.

This is exactly what the financial institutions, hedge funds, banks and all the other big boys will be looking at.

Learn this stuff, do the analysis, get in slightly ahead of the big boys and make a killing!

Here guys,

Just to show everyone that this can be applied practically!

Ok, one more for all the doubters!

Razorjack finally found a thread that combines fundie and technie(which in my opinion is the correct way to trade). Now my question could you take us through the practical process you arrived at going long on usd cad and short aud usd bearing in mind that the long term trends on the weekly/ daily charts are currently opposite your positions. I know that price were at extreme levels and sooner or later a correction was expected particularly against the commodity currencies. So what other factors did you consider. Personally I made some good profits on those two trades you took and have been selling retracements on the yen pairs based on market perception(whether risk appetite or risk aversion mode) with some very good profits.