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Identifying Market Swings - Medium and Long Term Trading

  • #221
  • Feb 13, 2010 2:46pm Feb 13, 2010 2:46pm
hi
i cant understand definition of these two situations (risk appetite and risk aversion)
in forex and how can you determine that medium term is in risk aversion situation or in short term there is a risk appetite ?
can you explain me more or suggest some resources to know more about these situations
regards
h.d
  • #222
  • Edited 8:56pm Feb 13, 2010 8:54pm | Edited 8:56pm
Hi Guys,

I have read the razor thread from the beginning and really appreciate the angle on fundies combined with technicals.

Lets all consider the attached chart.

I respectfully hope to hear/read Razor's view - with respect to the consideration of the 'carry trade' winding down...and any proposed timeline as to when one might consider the U.S to raise rates.

As seen in the chart.....dollar down....and down ....and down...

we are certainly at a crossroad...and the short term looks clearly like reversal..ie....dollar pushing 200 ema...and right here...likely failing.
Attached Image (click to enlarge)
Click to Enlarge Name: dollar_cycles.png Size: 49 KB
  • #223
  • Feb 14, 2010 9:53am Feb 14, 2010 9:53am
Quoting dorostkar
hi
i cant understand definition of these two situations (risk appetite and risk aversion)
in forex and how can you determine that medium term is in risk aversion situation or in short term there is a risk appetite ?
can you explain me more or suggest some resources to know more about these situations
regards
h.d
Hi dorostkar,

Welcome to the thread.

i cant understand definition of these two situations (risk appetite and risk aversion) in forex

Risk appetite is when investors are willing to take risks for greater profit. Risk aversion is when investors are NOT willing to take risks and run to safer investments.

and how can you determine that medium term is in risk aversion situation or in short term there is a risk appetite ?

The same way you can determine that a Moving Average with a period 5 (short term) could point to an uptrend while a Moving Average with a period of 50 (medium term) could point to a downtrend.

can you explain me more or suggest some resources to know more about these situations

Please read through the thread, there are not only explanations but also references to books, websites and other resources.
-Razorjack
  • #224
  • Feb 14, 2010 10:11am Feb 14, 2010 10:11am
http://farm3.static.flickr.com/2712/...694e565075.jpg

Hard to argue with daily 200 ma.
  • #225
  • Feb 14, 2010 10:21am Feb 14, 2010 10:21am
Quoting Stock_Rocket
Hi Guys,

I have read the razor thread from the beginning and really appreciate the angle on fundies combined with technicals.

Lets all consider the attached chart.

I respectfully hope to hear/read Razor's view - with respect to the consideration of the 'carry trade' winding down...and any proposed timeline as to when one might consider the U.S to raise rates.

As seen in the chart.....dollar down....and down ....and down...

we are certainly at a crossroad...and the short term looks clearly like reversal..ie....dollar pushing 200...
I respectfully hope to hear/read Razor's view - with respect to the consideration of the 'carry trade' winding down...and any proposed timeline as to when one might consider the U.S to raise rates.

No problem.

Around 2000-2001, we had the IT bubble pop, and there was in an immediate flee to safe haven investments, that's why we see the USD appreciate.

From 2002 - 2008, we can see George W. and his expansion policies prostituting the USD. There was so much money supply, easy credit and loose monetary conditions that the demand for the USD dropped and that's why we see the big depreciation in the USD.

Then in 2008, with the collapse of the housing market, Lehman Brothers, other financial institutions and banks, there was a global flee to safe havens driving up demand for USD.

From March 2009 to Nov 2009, the USD was the preferred currency for funding carry trades, due to the near zero interest rates. This one of the main reasons for the decline in the USD index.

From Nov 2009 to present, we're seeing the US economy start to pick up steam and accelerate. At the same time there is increasing risk aversion driven by sovereign debt problems initiating unwinding of the carry trade.

As the US economy moves from recovery to expansion, there is a good probability of the Fed raising rates before BoJ, causing further unwinding of the USD funded carry trade and shifting it over to JPY.

Now whether we'll see the USD index rally upwards will depend upon Obama's economic policies and whether the administration will focus on reducing gov't spending, national deficit and money supply.
-Razorjack
  • #226
  • Feb 14, 2010 1:31pm Feb 14, 2010 1:31pm
Quoting Razorjack
and how can you determine that medium term is in risk aversion situation or in short term there is a risk appetite ?

The same way you can determine that a Moving Average with a period 5 (short term) could point to an uptrend while a Moving Average with a period of 50 (medium term) could point to a downtrend.
Hi Razor,

I think this poster actually agrees that it's possible for the risk appetite/aversion scale to have different or opposite readings on different time frames. It seemed to me that the question was more about what tools are in the toolbox, and which are most indicative of risk perception for which time frames. For example:

VIX: short, medium or long?
PM prices: short medium or long?
Commodities: short medium or long?
Equity market indices: short medium or long?
CB rate differentials: short medium or long?
Yield spreads: I suppose it would correlate to the maturity; spreads widening on long term corps vs. long term UST would indicate a flight to safety in the long term.

etc...

Many of the questions on the thread involve this "what's in the fundie toolbox" theme. The short answer of course is that excellent reading list you've provided will list those tools.

I know you've mentioned several such tools, but the "tool list" is kind of scattered throughout the thread as opposed to being in one easily referenced spot. That might be the reason for the repeated questons about this.

  • #227
  • Feb 14, 2010 2:46pm Feb 14, 2010 2:46pm
Quoting capitalist88
Hi Razor,

I think this poster actually agrees that it's possible for the risk appetite/aversion scale to have different or opposite readings on different time frames....
Hi capitalist88,

Yes, I understood that was what dorostkar meant. What I wanted to show was that just as you "adjust" a moving average to suit short term or to medium term, you do the same thing with fundamentals.

Unfortunately the question is not easy to answer as you are suggesting.

Let me see if I can explain this so most readers can understand. If I were to ask you and everyone else on this forum, what technical indicators are to be used for short term, which indicators for medium and which indicators for long term?

Each person would give a different answer. You can use a moving average, stochastic, RSI, etc for short term, medium term or long term.

It's the same thing with fundamentals, you can use employment figures, CPI, interest rates etc for short, medium or long term.

It's up to each user to define how they want to use fundamental indicators and in which time frame.

What I've been writing on this thread is how *I* use the fundamentals to catch changes in the medium and long term trends in advance. Someone else may want to use the exact same fundamentals to ride the short term trends.

Just as each trader has to discover his / her trading style and which technical indicators are best suited, they need to also look at which fundamental indicators are best suited for what they want to achieve.

I hope this makes sense, I just don't know how else to answer this.
-Razorjack
  • #228
  • Feb 14, 2010 4:59pm Feb 14, 2010 4:59pm
Quoting Razorjack
Hi capitalist88,
Yes, I understood that was what dorostkar meant. What I wanted to show was that just as you "adjust" a moving average to suit short term or to medium term, you do the same thing with fundamentals.
.
razor as you know using technical analysis is more simple than funadmental when you use an indictaor only thing you should care is e.g. red line is above green line or histogram bar is above some number and i think this is why many traders stick to technical but fundamental needs more knowledge more experience........
any way tnx for your attention

risk appetite/aversion situation due to what or why traders wants to risk more or what motivates them to risk?

and these situations cause what?

im sorry if my questions is repetitive
  • #229
  • Feb 14, 2010 5:41pm Feb 14, 2010 5:41pm
Quoting dorostkar
razor as you know using technical analysis is more simple than funadmental when you use an indictaor only thing you should care is e.g. red line is above green line or histogram bar is above some number and i think this is why many traders stick to technical but fundamental needs more knowledge more experience........
any way tnx for your attention

risk appetite/aversion situation due to what or why traders wants to risk more or what motivates them to risk?

and these situations cause what?

im sorry if my questions is repetitive...
razor as you know using technical analysis is more simple than funadmental when you use an indictaor only thing you should care is e.g. red line is above green line or histogram bar is above some number and i think this is why many traders stick to technical but fundamental needs more knowledge more experience........

Yes, this is true. However fundamentals and technical analysis provide different views. Technical analysis provides the "when" a price movement could take place.

Where as fundamentals provide "which direction" and "how far" a price movement could take place.

For instance, many traders trade on technical analysis alone, but technical analysis can't warn you of a potential market crash for instance much less allow you to profit from it.

I personally could not trade if didn't use both.

risk appetite/aversion situation due to what or why traders wants to risk more or what motivates them to risk?

Economic conditions, of course. Under certain economic conditions, risky investments can be much more profitable than safer investments. Like for instance in a bull market. Under other economic conditions, safer investments are more prudent, such as during the economic crisis / bear market.

and these situations cause what?

In forex, you have "safe haven" currencies: USD, JPY, CHF

And you have "riskier" currencies: AUD, NZD, CAD, Brazilian Real, etc

In times of risk appetite, money flows from the "safe haven" economies to the "riskier" economies and the "riskier" currencies appreciate against the "safer" currencies.

In times of risk aversion, money flows from the "riskier" economies to the "safe haven" economies and the "safer" currencies appreciate against the "riskier" currencies.

im sorry if my questions is repetitive

No problem, but try to read the thread. It explains all of this. And the references in this thread are also very good at explaining how the global economy works.
-Razorjack
  • #230
  • Feb 15, 2010 6:54am Feb 15, 2010 6:54am
Quoting Razorjack
China's central bank has just raised bank reserve rates by 50 basis points for the SECOND TIME.

This was the news I was waiting for. Let's see how the commodity currencies react!
Hi Razor

I’m still here. I have been busy reading Ashraf Laidi’s book. There is a good chapter on Risk Aversion that has given me a better understanding of the carry trade.

In the meantime, back to AUDUSD. What do you now derive from the way the commodity currencies have reacted to China’s next leg of tightening ?

I would have expected the news to have had a lot more strength in pushing the AUDUSD lower. The fact that it hasn’t and is now testing the high of the last few days tells me investors are shrugging off the news. What is your view ?

Earlier you mentioned that your trailing stop would be somewhere above 0.89. How will you now play this as price nears that level ? Will you cut your position and wait for the medium-term trend to re-assert itself, then look to get back in. Do you prefer to use a hard stop or a mental stop in this situation ?

Thanks.
  • #231
  • Feb 15, 2010 7:25am Feb 15, 2010 7:25am
Quoting Astellas
Hi Razor

I’m still here. I have been busy reading Ashraf Laidi’s book. There is a good chapter on Risk Aversion that has given me a better understanding of the carry trade.

......
In the meantime, back to AUDUSD. What do you now derive from the way the commodity currencies have reacted to China’s next leg of tightening ?

I would have expected the news to have had a lot more strength in pushing the AUDUSD lower. The fact that it hasn’t and is now testing the high of the last few days tells me investors are shrugging off the news. What is your view ?

China released the news of credit tightening after the close of the Asian session and before a long weekend in the US. Today the markets are closed in the US, China and other parts of Asia.

If you look at the volume you will see that it is very thin, so I'm not quite convinced of what's happened so far. I'd like to see how the markets react in the London and New York sessions tomorrow before drawing any conclusions.

I could be wrong, but right now I still can't see risk appetite coming back into the market with all the negative events in the world: Sovereign debts crisis in Europe and Dubai, monetary tightening in China, etc.

Earlier you mentioned that your trailing stop would be somewhere above 0.89. How will you now play this as price nears that level ? Will you cut your position and wait for the medium-term trend to re-assert itself, then look to get back in. Do you prefer to use a hard stop or a mental stop in this situation ?

My stops are around 0.8950. I don't think there is enough volume today to push prices much higher than 0.89.

I ALWAYS use hard stops. If my stops get hit, then I'm out until the next downswing.
-Razorjack
  • #232
  • Feb 15, 2010 8:08am Feb 15, 2010 8:08am
Quoting Razorjack
My stops are around 0.8950. I don't think there is enough volume today to push prices much higher than 0.89.

I ALWAYS use hard stops. If my stops get hit, then I'm out until the next downswing.
Good point.

May I ask you something that I’m not quite clear about regarding volume.

If volume is light then it means that there are fewer orders in the market than normal. This means that price doesn’t have to battle through so many orders as usual in order to move. Therefore, isn’t it possible for price to be more subject to volatility, manipulation and false breakouts during these periods.

Or is that most traders assume ‘range trading’ will be the order of the day when light volume is expected, and so therefore trade accordingly ?

It’s like the quieter Asian session – Sometimes I’ve read that this session typically ranges, and elsewhere I’ve read that it can be volatile due to light volume.

What are your thoughts and experience on this ?
  • #233
  • Feb 15, 2010 8:08am Feb 15, 2010 8:08am
I forgot to mention that EuroZone finance ministers are meeting today and will announce afterwards HOW the EU plans to support Greece.

I suspect that they will mention something to the effect of helping Greece with reforms but nothing about bailouts or guaranteeing loans.

I'd wager that the markets are expecting loan guarantees or something more concrete should Greece default.
-Razorjack
  • #234
  • Feb 15, 2010 8:17am Feb 15, 2010 8:17am
Quoting Astellas
Good point.

May I ask you something that I’m not quite clear about regarding volume.

If volume is light then it means that there are fewer orders in the market than normal. This means that price doesn’t have to battle through so many orders as usual in order to move. Therefore, isn’t it possible for price to be more subject to volatility, manipulation and false breakouts during these periods. ...
Anything can happen during light trading volume, so I couldn't say that the market reacts in a predictable manner.

There are times where you can see alot of volatility and there are times where prices don't move at all.

The longer time periods you trade the less you will be affected by short term / intraday volatility. This is one more reason why I prefer trading the longer time frames.
-Razorjack
  • #235
  • Feb 15, 2010 11:33am Feb 15, 2010 11:33am
Razor,

Fantastic synopsis - greatly appreciated.

You provide an excellent backdrop for new traders, and those wishing to further their understanding of the fundamentals.
  • #236
  • Feb 15, 2010 1:37pm Feb 15, 2010 1:37pm
From a technical point of view, the AUD/USD immediate trend structure remains bullish.
IMO that would be usefull even if trading Daily TF's
Biggest joker
  • #237
  • Feb 16, 2010 2:45am Feb 16, 2010 2:45am
Quoting Razorjack
I think you are focusing too much on the short term and need to get a bit more familiar with the medium and long term.

We had the AUD employment rate unveiled hour and a half ago and prices are moving like if risk of apetite is growing.

This just means there were good numbers and the Aussie economy is getting stronger. This doesn't mean that most investors will be willing to take on greater risk based on these numbers alone.

The RBA raised interest rates Dec 1, this should have been very good for the AUD, but take a look...
Hello Razor,
your job here is inspiring, you are making us study, I'm almost half way on the VIC I book, I wish I had more time to read it, it is eyes opening.

You are absolutelly right I barelly understand mid term trend and Im actually cannot imagine myself taking long term positions yet. The psicology is so different, I don't know how I could put up with the stress to see the trend going 150 pips agains my position. I'm looking forward to learn and I hope you will be here to help us

If I remember correct, short term is days to weeks, mid term is weeks to months and long term is months to years.

How many more days do the riskier currencies need to go up to be considered a mid term risk of apetite?

My long AUDUSD position TP is at 89.94 and then, I might still go up for short period until it reverses, the momentum is set up now, but my analysis might not be valid because is not based on the fundamentals. They are still confusing for me, I will have a more educated answer once i read the second book.

Looking at the weekly and monthly charts, is it possible that the long term investors liquidated their long positions in Oct-Nov last year because the AUD got near the high marks from mid 2008?

You asked me if I see the mid term going down, and I do see it in the attached picture. I hope we make some moeny with the reversal.
Attached Image (click to enlarge)
Click to Enlarge Name: audusd downtrend long term.gif Size: 23 KB
  • #238
  • Feb 16, 2010 2:49am Feb 16, 2010 2:49am
Quoting Razorjack
Thank you, rac.

Yes, this is exactly what I meant.

The point of this thread is for traders to do their own analysis, NOT for me to give my analysis on every single news item that gets released.

BTW, yes, your analysis is correct. Well done!

, thanks for you patience
  • #239
  • Edited 5:48am Feb 16, 2010 4:45am | Edited 5:48am
Quoting rac
Hello Razor,
your job here is inspiring, you are making us study, I'm almost half way on the VIC I book, I wish I had more time to read it, it is eyes opening.
Hi rac,

I'm glad this is helping you see things from a different perspective. This is only the beginning, once you learn the fundamentals enough to "see" the medium and long term trends, it will help you anticipate the reversals.

You are absolutelly right I barelly understand mid term trend and Im actually cannot imagine myself taking long term positions yet. The psicology is so different, I don't know how I could put up with the stress to see the trend going 150 pips agains my position. I'm looking forward to learn and I hope you will be here to help us

This is exactly what I meant.

As for the trend going 150 pips against your position, this is all depends on how you manage your trades.

For instance I shorted AUDUSD from 0.93, unloaded half my position around 0.8660, then was looking to add to my overall position again around 0.88 but I ended up losing ½ percent on that add on because the market didn't turn down and continue. And then my total position got taken out around 89.50.

So yes, technically the market did go 150 pips against PART of my position but overall I still ended up making substantial profit.

Trade management is THE MOST IMPORTANT PART of any trading system, what I find funny is that VERY few traders actually talk about it. Instead it's all about taking entries based on indicators.

This is the beauty of medium and long term trading, that you can not do with short term trading, creative trade management to maximize profits. If you manage your trades properly you can end up making 200%, 300% or higher profit with an initial risk of 0.5%-1% by riding out the entire trend.

If I remember correct, short term is days to weeks, mid term is weeks to months and long term is months to years.

How many more days do the riskier currencies need to go up to be considered a mid term risk of apetite?

It's hard to measure this in days. You can use statistics for this but it isn't very reliable. What I do is use a combination of technical and fundamental analysis. I'll explain further down.

My long AUDUSD position TP is at 89.94 and then, I might still go up for short period until it reverses, the momentum is set up now, but my analysis might not be valid because is not based on the fundamentals. They are still confusing for me, I will have a more educated answer once i read the second book.

Take your time with this and REALLY learn it. Right now you may not have a full grasp of the fundamentals but when you do, it will give you an advantage over purely technical traders. For instance, you can read markets extremes when they go against the fundamentals or "see" a market crash coming and adjust your position size for more profit when the reversal comes.

Looking at the weekly and monthly charts, is it possible that the long term investors liquidated their long positions in Oct-Nov last year because the AUD got near the high marks from mid 2008?

This depends on the the particular investors strategy.

If I took my strategy to trade the LONG TERM (I trade the medium term), I would have unloaded PART of my LONG position around 0.93 during the Dubai Crisis and then look for adding to my overall long position around 0.82, 0.80 and 0.78. I would also trail the stops on my open positions to 0.74.

You asked me if I see the mid term going down, and I do see it in the attached picture. I hope we make some moeny with the reversal.

Actually you are looking at PART of the medium term.

Take a look at the attached chart. Do you see the trend line from Feb/March 2009 to Nov 2009?

THAT is the MEDIUM TERM and it is the 1st leg of the LONG TERM.

Now where you were asking about how long it will be before we see MEDIUM TERM risk appetite in the markets again. Take a look at the gray colored rectangle on the 38.2% of the fib. That is the target I am looking at before seeing it turn to the upside.

Now the price may NOT get there, if the medium term fundamentals turn to the upside very quickly. But to me 0.82 would be a price extreme where investors will feel that prices are low enough to warrant risk taking again.

This is what the CURRENT market conditions are telling me. Now remember that I could be wrong and it could turn upwards a bit later or sooner, this depends on how the fundamentals develop over the next several weeks.
Attached Image (click to enlarge)
Click to Enlarge Name: audusd_20100216.gif Size: 25 KB
-Razorjack
  • #240
  • Feb 16, 2010 12:42pm Feb 16, 2010 12:42pm
Razor,

The analysis of Aud/Usd targeting 38% retracement looks great for long entry.

Im curious of your patience/trade style considering that this price target is weeks away at the least.
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