Reminiscences of A Forex Speculator

Be careful, though. I don't consider myself an intervention specialist, but here is my advice to you and other people who would like to trade JPY interventions based on my experience (I've seen/traded three JPY interventions to date).

1. First wait out until the intervention is over and the market has calmed down a bit (go see charts from previous interventions so you know what to look for).
2. Also, make sure that the yen stays bought after the intervention. If yen weakness happens to coincide with the intervention flows you're in a lot of trouble. Personally I would even go as far as using a currency relative strength indicator just to make sure that the yen isn't weakening versus other pairs other than the one you're trading.
3. And, of course, don't over-commit yourself. Don't under-commit either.
4. Have a little patience. For all the risks you will be taking, don't give away your position for a stupid stop run (yen is very prone to 50+ pip spikes for around a week after the intervention due to ultra-tight stops). Protect your profits, but don't make it too easy for those stop-runners.

Bug,

Thanks for the advice. It's helpful.

I noticed that you said that you were working on a new strategy. Can you say a bit more? I am not asking for your trading plan, but can you say a bit about the questions or circumstances to which you are trying to find answers? Or, perhaps, what's motivating you to make changes?

Heya guys,

Been a bit busy these past few days with a little odd-job I decided to take up before school, so I could put the proceeds from that into the Trading Account.

The EUR/CHF trade was a big wash! I lost my initial risk-free short using my new abilities to pick tops using my stops! It was late and I had a good hunch that the SNB/Swiss Government Meetings would not deliver anything shocking, so before I went to bed, I put a pending sell order beneath the range. It got hit, and I took half off at BE as the participants who were pricing in something radical scrambled for cover. However, it did not have the 'oomph' I thought it would have, and the market quickly retraced to give me a washed trade. (Tact1cal, have you ever considered mobile trading?)

EUR/NZD didn't fare too well either, with the trade being stopped out. The premise behind it was to take advantage of troubles going on in the EuroZone and good economic prospects for New Zealand, but it seems like with the short-selling ban and ECB Interventions, everyone is in a wait-and-see mode regarding EUR/USD, except for reserve managers who've done a good job of keeping that pair contained for the past few weeks.

On Friday we did have USD/JPY dipping to 75.95, but unfortunately (and here's where I pull my hair out) I had not enough margin to get my full position size on! I had buy limits at 76.30 and 76, and intended to risk 10% on each, but could only get 5% on the 76.30 position. I have some positions in NZD/JPY, but they're not as large since it was a scale-in type of trade, which I'm thinking I will bail out on after the intervention if it begins to retrace sharply.

Regarding the USD/JPY, I think it will take quite some firepower for us to see 80 again, so I may put a pending short there for the fade like newyear498. I just hope that it can come back down to fill me in at 76 before intervention though...I was anticipating it for too long for Mr.Market to just hit me in the stomach like that! In an effort to clear up my margin, I had to bail out on my USD/INR (sorry vicky_ag ) carry trade...maybe in the future when I just want some steady returns on a large account I'll consider it, but currently, the margin tie-up is really frustrating. Going to have to see if I can change my funding from CAD to USD.

Thanks for those articles, bug, - I've been hearing about the Chinese situation for quite some time now..wonder if it will be the next big crisis on the radar...Hope your new trading plan is coming along smoothly!

I will be a bit busy this week as I have some family engagements and the girlfriend is coming to visit for the week before we head back to school. I will however try to touch base for Jackson Hole as well as ISM and NFP.

Keep those blotters green!
xXTrizzleXx

You're welcome.

You are asking all the right questions, Cheetah.

I been focusing on identifying trending market conditions for about a year now. Undoubtedly it has been a very interesting journey. Unfortunately it has also been an unprofitable one and that's largely because I have focused on the details, not considering the big picture. With all the recent volatility it has become increasingly clear to me that I cannot hope to make it if I keep ignoring the fact that markets don't always trend. It is rather easier to make money if you're one of the trend following funds featured in Michael Covel's book - these funds have the money and manpower to trade in 100s of markets at the same time. But if you're a small-time retail trader like most of us here you have to stay nimble and be prepared trade any market conditions.

During that time I have also learned about how markets and economies work. The 'why' of price movement is much more clear to me now that I at least know the very basics of liquidity provision. There is no doubt in my mind that I have a lot to learn - my 'read later' bookmarks list proves that. To my great surprise I found a lot of valuable information on or via FF (I guess my thread filtering skills have improved over time).

Coupled with my new-found knowledge and my failure to make money by trading trends only I am now seeking to find a way of determining which price zones are liquid and which ones are not. The idea is to take advantage of liquidity dry spots when price over/undershoots and play the return to a liquidity hotspot*. To filter those 'signals' I am looking into using a combination of objective information that is already on the chart:
1) previous day's open, high and low
2) today's open
3) pivot point + S1-S3, R1-R3 (strictly speaking this is not visible on the chart, but the calculations are very simple and pivot points are widely used, which make them visible to a lot of market participants)
4) market profile - significant peaks & valleys, POCs and session specific moves

Among other things, I will also be doing research on :
- Volatility
- Momentum
- Volume
- Local highs and lows
- Options (focusing on the implementation of high volume put/call levels)
- Futures
- Relative currency strength

*I'm sorry if this sounds a little cryptic to some of the readers here. Even though the underlying principles of liquidity are very simple in nature it cannot be dumbed down to a level where it doesn't sound confusing to people who know nothing about market microstructure.

By pure coincidence I found a blog post on this very topic: Weird USD/JPY Spikes?

This next piece is not related to yen, but worth a read nonetheless.
FTA: Destination, safety; origin, everywhere

Hey can I get your guys take in this subject,

So there still talking about intervening.. saw some news story about this bullshit.. but I watched the dollar rally and the chf held its ground.. I'm doing some short term shorts on the usd/chf.

bunch of rumors floating around this market trying to keep up

There was a short lived risk rally this morning due to Libya, but there's nothing else out there that I know of. As for Japanese authorities talking down the yen - there's nothing new about that and certainly nothing to suggest they are about to intervene.

I wish you well.

Although I am spending most of my time doing research, I still read the news. I will get back to providing my own view of things in due time, but until then I am only able to provide you link to what others have written.

1. Scott Grannis: This market seems way too fearful
2. Nikkei INTERVIEW: Fed's Bullard Against Prolonging Zero-Rate Policy
3. FXLIVE: BOJ’s Shirakawa: Yen rises now would have big negative impact on Japan economy
Pay particular attention to this sentence: BOJ not targeting fx moves, but will take appropriate action with eye on fx moves’ impact on economy
This can only mean the motivation behind Japanese interventions are not related to the fx rate per se, but to corporations' profits (which in turn affects the economy) just as I outlined in one of my previous posts.

4. Adam Hamilton: Gold Overbought EDIT. Now that I've taken a look at the chart of gold I realize that I should've posted this article earlier. It was published last Friday.
5. BBC: Moody's cuts Japan's debt rating on deficit concerns
6. FXLIVE: Japan Crafts New Fund To Sell Yen But Quick Effects Doubted
7. Fail of the Day: Greek 2-year yielding a mere 44.75%, That’s 7.40% higher on the day

Thank you. You as well.

I've completed the first stage of my research, but there's still a lot of work to be done which means that I will continue posting articles I have found interesting/useful without providing my own view of things (maybe just a short comment here and there, but no more). I hope you guys read these articles and find them useful in your own analysis. Otherwise there's no point in me posting them. Let me know.

 

1. A must read from Adam Hamilton: Stock Fear Ceiling
2. Lagarde @ Jackson Hole: World Econ ‘In Dangerous New Phase’; Act Now
3. Japan: Japan EconMin: Intervention is necessary weapon but cannot be used frequently
4. Axel Merk: Much Ado About Debt: Dollar vs. Euro (pay close attention to the accompanying chart of CBs' balance sheets)
5. Bruce Krasting telling it how it is, the CBO edition
6. Why isn't there more news out of Ireland these days? Remember the panic with all the debt and the constant stream of bad news? Well, since Ireland isn't doing as bad anymore, there's no point in covering it, at least so it seems to me. Here's a very short look at Ireland.

Always a relevant read bug. Thanks for sharing. Good to hear something nice about one of the piigs

GBPCHF: To a large degree I wanted to leave some of this position open for the upcoming month.. but there I go closing it..

I don't think I can handle staying short GBP for too long.. I feel in love



On a side note this is my second trade of the week.. I have college classes now plus the hurricane f**ked my shit up.

well third trade if you include closing EURUSD trades today, I'll post that aswell


Actually I'll post all my trades because the CADJPY was pretty sweet trade.. I wish I had more time to trade.. and / or a larger account... I think I need a higher risk system to make up for my small account


Anyways here it is

Heya guys, sorry I've been away for the past few weeks, but school really had me pressed for time, since I've switched majors at the last minute from Physiology to Mathematics (long story). On a good note, it will allow me to fit in some Economics courses into my electives, which I much rather than Physio Labs!

Regarding my past few trades:

 

1. Jackson Hole: Was unable to play
2. US ISM: Break even trade
3. NFP: Limit Order Not Filled

Overall, a washy week to end a rather washy month. The ISM and NFP trades however were interesting from a learning perspective.

Now let's set the trading scene.

The dismal NFP report we got has in effect countered the better than expected Durable Goods and ISM reports, putting question marks over the sustainability of the US economic recovery. It is also raising expectations for possible policy actions coming from the Federal Reserve:

 

1. There is the possibility of Operation Twist Pt. 2 being pursued, whereby the Fed increases the average maturity of its balance sheet.
2. The Fed may lower the interest rate it pays on Bank's excess reserves to stimulate lending.
3. The Fed may bring about QE3 and increase the size of its balance sheet.

From my feel of the situation, I'd assign these scenarios 65/25/10, especially with the bond market beginning to price in the first case. Additionally, I'm also thinking there's a ~40% chance of scenarios 1 and 2 being enacted together. What I don't know, is the effect this will have on the USD, should be bearish I presume as it in essence constitutes easing policy. However, if a large number of participants are positioning in expectation of further asset purchases, they may be in for a disappointment, and this would in essence be dollar-positive. Going to have to read more into it as the event approaches.

This week, and for the month of September, I'm turning my focus to the Eurozone. Among other EUR-pairs, I'd like to be short on EUR/JPY and EUR/USD. We have too many headline risks for me to see upside in this pairing.

For starters we have the German Court ruling on the legality of the bailouts, with the possibility of granting veto powers to parliament in future bailout debates. This would be Euro-negative, as it would be viewed as adding more red tape to an already drawn-out process. We still have the Fins who are asking for collateral for the Greek Bailout, but admittedly, seem willing to compromise somewhat.

The Troika ended it's visit abruptly after a falling out with the Greek Government as to exactly why they have missed their targets for the next tranche of their bailout, and I'm thinking that this renewed uncertainty surrounding Greece, will harm Euro sentiment. In Italy we have Berlusconi's government losing credibility over their austerity package, coupled with the government's need to roll-over large amounts of debt this month. To top it all off, we have the ECB which may be shifting it's policy from a hawkish one to a more relaxed, neutral one, and that should cause a macro shift out of the Euro if this week's ECB conference has no hints of strong vigilance.

I still have my limit orders set at 76.30 and 76 in USD/JPY just in case things get hairy and the new Japan FinMin Azumi decides he wants to flex his muscles.

Due to the risk off sentiment which slowly seems to be creeping on the market place, I have decided to close out all my NZD/JPY positions for a modest gain. The EUR/NZD trade did I placed earlier last month did disappoint me, since I was stopped out by mere pips, before the market rocketed downwards. The work on my market timing will continue to improve.

@bug: Like Tact1cal said, don't for one second feel like you're wasting your time with your articles. It's a real time saver and greatly appreciated, since you have an eye for sorting the wheat from the chaff.

@newyear498: Definitely feel you about having more time to trade - liked the CAD/JPY trade. CHF I'm kind of staying away from until I'm convinced the SNB doesn't try any funny monkey business that will kill any CHF-related positions I've accumulated.

Regards,
xXTrizzleXx

Tact1cal and xXTrizzleXx,
thank you. I've been posting so many links recently that I just had to ask, I'm not looking for praise or anything like that. I don't want to turn into a spammer so I was just checkin' whether people here actually read the stories. Since at least you two do, I'll keep posting them.

Switzerland
The BIG news was released yesterday when the SNB decided to double down. No doubt there will be lots of commentary over the days/weeks to come whether they will succeed, especially with the EZ crisis still worsening. One of the things that was brought up on FTA which I find myself agreeing with is the stupidity of buying German and French bonds with the euros received from selling francs. The franc has been strengthening in part due to the euro crisis and the spread between Germany and the 'others' is used as a gauge for stress in the markets. By putting more downside pressure on German yields, the Swiss are actually putting upside pressure on EZ bond spreads thus potentially increasing the flow of funds from euros into francs. Since the Swiss are doubling down anyway, why not buy Spanish and Italian bonds as well so as not to drive up the spreads? Italy and Spain are too big to fail anyway and if they do fail, it will likely be the end of the current EZ and then it won't matter if you're holding Italian or German debt. If the EZ fails, then it's bad news for the Swiss anyway - they will have to mark down all of their European assets (by that time the Swiss will likely have de-pegged themselves).

Anyway. That's just an observation. Here's some more on the franc and the SNB:
The SNB’s $1 Trillion Worry List
Would Anyone Sell EUR/CHF at the Moment?

Japan
Strong yen may see 46% of makers leave (read the full story for more figures):

Forty-six percent of major manufacturers would relocate their plants and research and development facilities overseas if the yen remained at the level of 76 yen to the dollar for six months or longer, according to a survey conducted by the Economy, Trade and Industry Ministry.
Thirty-two percent of major manufacturers said their operating profit would drop more than 20 percent if the yen stayed at that level for six months or longer.

I find it particularly interesting that Japanese companies are citing actual profit/loss figures and making a straightforward connection with the UJ exchange rate. Although the news piece is revealing, there's not enough substance in there to start expecting immediate action. However, anyone interested in catching intervention flows should check headlines from Japan when the yen starts strengthening again. Start preparing yourself when officials start their 'verbal intervention'. Also, be on the lookout for any and all mentions of specific target levels (like the 80 figure mentioned last time by Toyota).

Europe
Interesting/horrifying read: UBS on what would happen if the EZ collapsed
European banks’ slow run on… themselves
Just out: German High Court Rejects Case Against Bailouts

I found two interesting pieces on EZ which were in Estonian. Here they are via Google Translate. Though the translation is not the best, the first article at least has very relevant charts.
Confidence in the interbank market in decline
Five promises the Greeks have broken

USA
Kocherlakota Says Sept Easing Unlikely (he was one of the three dissenters on the previous FOMC meeting, see the FOMC Minutes for more).
An interesting, but perhaps contrarian look at equity valuations by Scott

Or, if you trust what the people in San Fransisco Fed found, perhaps the above piece is really contrarian. According to the study:

Historical data indicate a strong relationship between the age distribution of the U.S. population and stock market performance. A key demographic trend is the aging of the baby boom generation. As they reach retirement age, they are likely to shift from buying stocks to selling their equity holdings to finance retirement. Statistical models suggest that this shift could be a factor holding down equity valuations over the next two decades. (emphasis mine).

Read all about it here: Boomer Retirement: Headwinds for U.S. Equity Markets?

Trivia
Why Made in China Costs More in China
This is not important as far as trading is concerned, but it's an interesting look at things nonetheless. Helps you connect the dots so to speak.

I agree. As far as 'escaping from deflation' is concerned, QE2 was a success. However, from the employment point of view is was utter failure. Of course, most of the commentators out there pretend like having a dual mandate is possible when in reality it is not. I find it surprising that so few are talking about it. The aim and indeed only achievable goal of monetary policy is to ensure price stability in the intermediate and long term so that economic agents can make decisions without having to worry too much about distortions due to changes in the inflation rate. Deflation and high inflation both distort the allocation of resources. The best any central bank can hope for is a stable but positive rate of inflation. Problems with employment should be left to the government who has much sharper tools. Monetary policy is a blunt tool (a sledgehammer when a scalpel is needed). Why not start by lowering minimum wages, cutting red tape - there are all things the government could do, right now.

So far inflation expectations are, to borrow a phrase from Trichet, well-anchored. But what happens when inflation rises to 4%, 5% or even 6% pa? Will the Fed go down the same road it went in the 70s? Trying to fix the unemployment problem while forgetting about price stability? Personally I'm afraid they will. Over the years the Fed has become increasingly focused on the short run with no regard whatsoever on the long term effects of their policies. I don't have enough information to make a call on the future path of inflation, but if it does go up to the high single digits, I am more than sure the Fed will just ignore them problem.

As far as immediate policy is concerned, I'm inclined to think they will come out with something. Two-day meetings are nothing out of the ordinary, but why announce it beforehand if you're not going to present something once you're done talking?

Crossing my desk yesterday:

Japan Quashes Speculation of Yen Ceiling
TOKYO—Japanese finance ministry officials Wednesday quashed any ideas that Japan would follow the Swiss central bank in trying to place a ceiling on the value of its currency, while the central bank disappointed some in the market by not taking any new monetary-easing measures.
/.../
Mr. Igarashi's comments came after Finance Minister Jun Azumi shrugged off speculation following the action announced Tuesday by the Swiss National Bank. "Switzerland is Switzerland," Mr. Azumi said when asked what he thought of the Swiss move.

(Another) German Currency Blooper
Wednesday, German Chancellor Angela Merkel, no less, said that Switzerland had “de facto pegged its currency to the euro” in a move that shows that big, international currencies are inherently better than small ones.

“The strength of Switzerland becomes its own weakness if it doesn’t fit into the whole global structure. That’s the lesson. And because of that the euro is right,” she said.
Merkel couldn't be more wrong....what a pity that she thinks this is a positive for Europe. Reminds me of the story I saw about Europeans suffering mental illnesses.

Dollar helped by talk Obama to propose corporate tax move
see the next story below for more details

Will Tax Break Lift The U.S. Dollar?

Is the U.S. dollar about to get a boost? Some observers are growing more confident that the U.S. government is going to give companies a tax holiday in an effort to repatriate big profits that are now parked overseas and help stimulate the economy.

Fed’s Evans lets doves fly

Fed’s Evans: I wanna ease until your eyes bleed…


Government bond returns and “back door” QE policy
We found this analysis very interesting. Looking at the member nations of the EU, the German government bond market has been the top performer with a 10.0% return, followed by Ireland and Austria with 9.1% and 7.4% respectively. Investors in Italian government bonds have made 1.0%
/.../
Secondly, European bonds have performed very strongly this year, despite concerns over the ability of governments to fund themselves in capital markets

Interesting article from reuters I picked up off fxlive.(Link)

Looks like the SNB might be using options to leverage their money. Imagine the size of those stops!

"Double-no-touch options with downside barriers at 1.18/1.19 have also been cited that would do the same and would serve to help the SNB."

"The SNB's actions mean it is taking a big gamble that European policymakers will succeed in coming up with a solution to the debt crisis that will help the euro and take some of the pressure off the franc."

That's one hell of a gamble.

That's one hell of a bet. Thanks for the information, Tact1cal. Personally I don't trade CHF pairs at all due to the intervention, but I would love to hear your (or anyone else's) plans regarding CHF.

Heya guys, thanks for the articles, bug!

Switzerland
I've always had these vague notions that a participant's financial clout was somehow related to their proficiency in the markets - always read the contrary, that the big guys make mistakes too, but never really believed it. The SNB has just altered my belief system.

Not only are Hildebrand & Co. doubling down, but as you have highlighted, by buying German and French bonds, they are effectively shooting themselves in the foot! Why they would want to peg themselves to a very unstable system such as the EuroZone is completely beyond me, but maybe they enjoy seeing huge, gaping, red losses on their balance sheets. I am preparing to structure a CHF based trade around this.

Japan
I'm always keeping my ears near to the ground to get possible insights as to the future actions of the BoJ/MoF. The G7 meeting over the weekend provides the small possibility that they will get support for their interventions. If the topic doesn't even make the agenda, it's not unreasonable to assume that we may be in for some JPY strengthening in the coming weeks, as risk aversion flares up. Interestingly enough, I did read of a good portion of corporate and exporter orders being moved up from ~78 to 80. Makes you wonder whether they are anticipating something.

Europe
The situation in Europe is indeed grim, and judging by the Price Action in the past few days, it would have seemed that reserve manager diversification, especially from the Asian Sovereigns has declined significantly - in essence, a major component that was keeping the floor in EUR/USD has been pulled, another important one being the tightening bias of the ECB. With these removed, and the incompetence of the Greek government in meeting it's targets, the EUR is sniffing for downward liquidity.

USA
I'm still having difficulty gauging whether participants are expecting QE3, and this is a vital part of my analysis. Admittedly, I've been swamped with assignments so have not been able to devote as much time as I'd like to the situation.

Japan Quashes Speculation of Yen Ceiling
A wise move on the part of these guys, as it makes very, very little sense to catch falling knives. Their current intervention current strategy has been keeping the USD/JPY rate quite steady..if only they could keep it steady a wee bit higher.

(Another) German Currency Blooper
LOL

Dollar helped by talk Obama to propose corporate tax move
I had the Homeland Investment Act Pt.2 as one of the large global macro moves on my agenda. It will be interesting to see if the idea will gain more traction after the Congressional Recess.

Fed’s Evans: I wanna ease until your eyes bleed…I must say this is making me quite interested in the upcoming FOMC meeting. Central Bank politics is certainly entertaining, especially with the show Juergen Stark put on today!