Reflexivity in the USD

I shall try to show that freely floating exchange rates are inherently unstable: Moreover, the instability is cumulative so that the eventual breakdown of a freely floating exchange rate system is virtually assured. George Soros

My first thoughts when I found myself a few months back re reading this opening sentence for the 9th time on his speculation in currencies I couldnt believe how prophetic his words resonate not only then but even more so today. Then, immediately my second thought was I need to jump on this opportunity of a lifetime and get on board this amazing trade that we have before us that will play out in spectacular fashion on the way up then down.

Some of you know me when I started my first thread late 2012 (Australian Bear Raid) where I was targeting the AUD with a collective theory that this particular currency was going to collapse under the weight of a commodity bubble, the carry trade it took advantage of, and of course the massive inflows of speculative capital seeking high returns from real estate to local stocks in an appreciating currency. I like most of you did very well in this short and have taken my pound of flesh from the land down under. Once I got out of the market to come back to earth and enjoy life once more I waited for a new opportunityThen I found myself a few months ago really intrigued by KING DOLLAR and two crucial chapters from Soros book.

With that being said, I like most here (hopefully) started to believe the dollar story and reluctantly got long at first then started to pile in when the trend kept getting stronger. But of course I wanted to know why and how long this market can fly. This led me to reread probably the most important chapters of the book which in my opinion is a current blueprint for how the dollar will trade for the next year or two;

The fundamental map I will share in the pages that follow are my opinions on what could be a spectacular rise and decline similar to what we saw from 1981-1988 in the dollar.

I will try to frame this thread similar to the Australian bear thread with quality content, extensive excel data points, and the trade setups. As always I welcome both bears and bulls of the dollar to share ideas and thoughts with so that we all can constantly think about our approach in this currency.

Before I layout my bullish case on dollar in the next day or two I wanted to allow those who have not read his book read the chapters I am speaking about. Most of the two chapters are written below and I highly recommend at minimum the serious currency practitioner take to heart the framework Soros lays out in the Reflexivity in the Currency Market chapter. It not only helps me when I decide to plunge in the currency markets, it also gives me a framework in understanding the constant flow chart that is speculative capital shifting around the world.

I look forward to another interesting thread with many here who are not out for the scalp but who are looking to ride macro trends,,,

I tried to copy/paste the two chapters but it did not include his formulas. So, I decided to PDF the written two chapters


Reflexivity in the Currency Market

Reagan's Imperial Circle



If you want the whole book of The Alchemy of Finance by: George Soros via PDF skype me and I will send it.

Great to have you back JP!

I haven't read the PDF yet but reading the Soros quote I couldn't help but wonder (what with various speculation about market manipulation) whether we actually have a freely floating exchange? Even if we don't I'm guessing there is sufficient application for consideration & we can all learn plenty from George.

How big is the whole book pdf?

Hey Dab!

It is wonderful to hear from you as well. I hope you have been doing well in these volatile times. I believe we do to an extent. The majors don't have bands but I do think that governments and other major participants who are part of the collective system (Soros words) have an interest and control prices at certain levels to starve off panic or to adjust issues with economic growth through the trade balance and inflation. It is interesting to note that floating currencies were introduced in 1973 USD was 1971 so for us to have a major case study it would not exist because the sample size honestly is too small. The pdf is 19,148Kb's

Better yet If you just google search "The alchemy of finance pdf" it will be the first result. It might get pulled as most popular books only make a brief appearance in pdf form a few days or weeks. I was lucky enough to find many books for 'free99' through google pdf search and saved a bundle

So here is the basic outline of the charts I am referring to when I talk about a new cycle usd bull market. I understand the 1970-1980's were completely different when it came to interest rates and other matters however just like Paul Tudor Jones when he correlated the upcoming 1987 crash to I believe it was 1928-1929 patterns repeat themselves in the markets over and over...

I will post a full fundamental view on the USD later in the week but the charts below and Soros book leading into Reagan's Imperial Circle chapter leads me to believe we will experience a major boom/bust in the dollar that will be rewarding for all.

(full fed funds chart in pdf at the bottom)

He's back.

You as well!
Subscribed. Welcome back JP.

Interesting thread.

Out of curiosity tho: why did you post this thread in Trading Journals?

Hey guys,

Its great to see so many familiar handles still around FF. Hello Skenobi it's nice to meet you. I don't mind posting in EUR/USD and other main pair threads which I will do as I see many familiar faces there. The reason I created this thread in journal is to not bog down the main threads with long paragraphs and excel downloads where those post are mostly time stamps for their trading and the occasional chart or two.

Also, like most here I am sure we all have daily journals either in a notebook or here at FF which helps us to track and be in synch with markets and I am no different. The added advantage I have found in posting online is you get challenged by opposing views who make you constantly asses why I could be wrong and lend a voice on what they see which is always great.

I will be watching with great interest today as we could see some profit taking coming in on the USD going into Thursday/Friday so its not that unfathomable to see a bit of squeeze higher for EUR/USD AUD/USD and other pairs.

Even though I am not a scalper, I do watch the 1hr/4hr charts to find opportunities to add into positions and I don't think today or tomorrow I will be adding. In fact we could see a minor down week in USD next week as the market is getting a bit head of itself. Also the charts I provided to outline for this USD bull case show that breakout...Two strong weeks...then a minor red bar lower, only to continue that following week.

For those interested in getting long to swing EUR/USD this week I would only suggest you wait until the 50% retrenchment in USD is broken as this will virtually assure we will go lower to possible trade at 98.359-98.846 by Friday. Otherwise you will be sucked in once more and have the pair do a false breakout higher only to not close above key 618% 78% points

Today's fed minutes were in line with what I expected apart from the unlikely to hike in April and the possibility of a July hold as well as I was surprised they would just come out and state that. As I mentioned above I suspected for other reasons that this week would see a down week in the Dollar for one reason being it was WAY over extended since that gap move up earlier this month and not to mention we were possibly in this of buy the rumor sell the fact mode. The opening charts I provided to lay out my bull case also mentioned that either March/June could see a hold on the dollar completing a healthy pullback. Hopefully this is it. I suspect also The trajectory of the dollar for the rest of this month will most likely be subdued as the FED plainly stated hikes are not to be expected next meeting.

Also, on a side tangent I was looking at the EUR/USD thread and MAN! i forgot how itchy fingers ppl are over there. I think that is the worst way to grow an account when you always want to deal. Especially going short the EUR several minutes right after the fed told the world at least two more months then we will see.

I will only be interested to add to longs at the gap level. But will need confirmation on flow and fibs to confirm.

Lastly, one more note from the EUR/USD thread where people are licking their wounds being wiped out or almost wiped I never understood why ppl put in an order a minute or two in a currency when they don't have an inside track into information.

Most day traders generally stay away from the initial reaction if they're going into the news release or economic release flat and will wait for a potential ABC mini wave to get long and short. This buy or sell and pray the news comes out and leveraging everything on it is just bad business.

For those who are building your accounts first I will say when you get big enough seriously consider currency futures as you're getting so much more bang for your buck vs a 10k lot size especially with intra day margin where it can be as low as $500 on EUR at 12.50 every tick move vs what a dollar or two on that same tick move in forex?? Secondly, stay away from news trading unless you have a great system that can pick off the after event trend (M15, M30) otherwise you will be like most who are one step forward two steps back mentality.

Enough ranting back to dollar .

Holy crap what a mini flash crash the dollar just experienced.. Went from 97.42 to 94.765 in two minutes then back to 97.455 a few minutes later..Wow thank god I don't put on full size in initial moves otherwise I would of gotten a few emails from my broker haha

This move really was epic for the dollar. this two minute down move took out 12 days briefly of up moves. I only wish I had orders near that channel breakout zone at 95-96 but l didn't think such a move would occur like that. So much for the subdued trajectory i just stated haha...

It seems based on sentiment that Yellen is to blame for this move for the simple fact it looks like the fed is lost or trapped and are losing so much credibility. Yellen really put her mouth in her foot in her press conf.

I was too much of a wuss to profit from the move. I went short eur/usd and long aud/usd and had orders to scale in either the e/u or the a/u depending on the release. For some reason, I took them off... Ended up going long eur/aud here and there to minimize how strong the eur/usd move was compared to aud/usd.

I have a feeling the Fed knows exactly what it's doing. These lower gas prices are providing a boost to the GDP. Rates don't really need to be raised, since the mentioning of the possibility of rate hikes has already seen the rise of the dollar, which ultimately led to the fall of crude. While most people would find that lower gas prices means lower profits for not only corners stores but the crude processors, the higher dollar means that there is still profit to be made.

Fair point. I hope you're correct and the fed does not act late when it did during the dot com boom. Im all for a strong dollar and am long biased in Dollar futures but I also hope the fed does not cause a recession because they choke off the market by raising rates to late and then doing it by constantly raising to play catch up.

Haven't added to any dollar position yet as this market still looks like it wants to consolidate around that spike low we saw last week. Pretty chop shop if you ask me but one great thing that is coming about is the EUR futures failed at 1.10 like most expected and fundamentally until Greece is solved it should not be trading above 1.11. I might start looking to add to the dollar this week if we can meet certain targets and EUR retail buys start to go square and maybe even start shorting again.

Today is another non directional day at least for the dollar. It has failed twice today alone to break above yesterday’s low (US SESSION FUTURES) of 97.225. What I find interesting is this so far today
· With stocks taking a beating I used to remember that flight to quality where cash was king and dollar would trade upwards. This is a great example how correlations breakdown and markets constantly change.
· The dollar is actually playing out similar to the charts I provided in my opening thesis and I am not as concerned given this is what a trend trader has to experience from time to time. I remember Iin the AUD BEAR RAID thread I was up over 75k in two days only to see it come back to around 30k. For those looking to trade trends I will say you must have the stomach for it and be very desensitized by money. But for those who use trading as an income or trying to build their account swing is the best play.
I wont even consider adding to DXY until we can get some momentum going or it can close above 97.445 which is yesterday’s close. But based on the lack of vol today that is very unlikely.

Those who are trading EUR. It is interesting to note given the selloff in stocks that EUR is holding firm at these levels. For those who trade currency futures will note that US session Hi for yesterday was at 1.0956 and before the US bell rang it bounced off perfectly there to shoot up all the way to 1.1027 apox. As we speak it’s still trading above yesterday’s high. If you’re going short I would caution against this right now until at minimum it trades and close on a 4H below 1.0956 otherwise you will get caught up in these false moves that have happened multiple times today.

The stock market /ES is doing exactly what I thought it would do going into July when I stated that we have a similar chart pattern comparing the dollar to the dow but since bouncing of that 61.8% retrace we should see the selling abate and possible covering coming into the close here. This should keep EUR firm going into US close.


Side note: I was also thinking of trading forex again for shits and giggles and develop a contra strategy to some of these trade explores I see. I can’t believe why people trade at such illiquid times when they not only have to pay a higher spread, but they are waiting several hours for a move and in the mean time are stuck double guessing themselves as a particular pair is trading in a 5 tick range. Seriously, for those who want to develop a system and trade well all I have to say is go where the volatility is. There is no reason to trade certain timzones when there is no action because all it does Is tie up your capital for a longer time than you would normally like and it makes you second guess yourself. No joke, I saw one trade explorer last night during mid day Sydney session buy and sell EUR/USD 12 times in a span of two hours trying to scalp or decide on a direction going into London only to lose on the spread and commission. I looked at his Return since inception and sure enough the account was down over 70%. That’s the one thing you will find with most trade explores here who trade at such terrible time their drawdowns almost always are 50% or more. Ok enough rant.

HAHA again the dollar does a headfake three times today.... Thank god I don't scalp anymore as the annoyance would make me break screens.
It's interesting to note that the dollar is still trading between 61.8%-50.0% since the spike low seen last week to the move hi (99.765) before consolidating lower. So this will be the main S/R zones for Dollar. If we can get a US session close above yesterday's low 97.225 I would be more apt to be a buyer tomorrow on dollars and sell EUR. Otherwise the rest is just noise at the moment.