Trading is a discipline

On hindsight, we are all geniuses. The investor who predicts market behavior correctly after the releases of big news stand to make the money. But, its probably very hard to do that.

The market, being the brain of thousands of investors making decisions to buy / sell at the same time can be very unpredictable, fickle and often both. But, the market is still the most efficient machine to determine what prices of assets should be.

This is the giant machine that I have come to respect and behold.

I used to be a hit and hope, impatient, emotional investor. And hence I have lost a lot of money. And more than what I've planned for.

But I guess this experience in losing has taught me valuable lessons, which I guess I wouldn't internalize as much as if the money was not mine or it was a substantially smaller sum.

Number 1: Be happy to cut losses while they are small. Ironic but I guess this is the most important to me. Its all about the maths, if I can keep my losses contained, I will have a chance of making an net profit at the end of the day. I try to keep my losses limited to 50-100 pips per FX trade.

Number 2: Perceiving the right risk-reward positions gives me a competitive edge. I strive to determine where supply and demand imbalances are and then leave orders at levels which I think are reversal points or, a floor/ceiling in the case of a continuing trend. Technical Analysis is very useful for this. If you ask me, circa 200 pips of an FX profit is pretty decent, or 2-4x your loss limit. You can see a few of these moves within a week in the FX market.

Number 3: Be very patient for the right opportunities. In the market, opportunities will present themselves often. I won't want to chase a price after it has gone higher because I think I've missed out on a good entry. As I said, trading is a discipline, literally.

Number 4: Take profits. 'Nobody ever loses by taking a profit'. Greed is probably the only thing which makes an investor think the price will always continue to go in his favor. In volatile markets like now, I take profits unless there is a good fundamental reason for me to not do so.

Sentiments have changed

The market sentiment has turned for the worst. Dow now trades -160 points or -1.61%. I guess the illiquid situation isn't helping. And also some players (hedge funds story in bloomberg today?) are really putting expressing their bearish views. Dang! On hindight, my sell order at 9460 that wasn't hit really hurt now.

Buy on the rumor, sell on the news.

Just as I have expected, US stocks were well bidded before and just after the release of the ISM manufacturing and New Home Sales data. The Dow traded as high as +60 following getting stuck in the negative zone (-80 at its lowest) as European stock indices were in a dour mood earlier today.

However, it retraced all gains and went back into the red (-20) at the point of writing, as I expected. But my order to sell at 9660 wasn't touched because it just fell out of the offer price. D*mn the huge spread. I got a feeling we won't close too much in the red today anyways (> -40 pts Dow), as buyers will eventually come into the market on bargain hunting, pushing up prices in this still illiquid market.

Well, its true that with these data, the US appears to be well on the cusp of emergence of recession. But then, so is the Eurozone.

So why the massive stock sell off today? Its because of the suspicion that stock valuations are getting ahead of themselves and that we may not recover as promptly as once thought, given the high unemployment in the US and the EZ. To recover quickly, consumption needs to recover at a good pace but that remains to be seen and u/e and credit flow are the bigger headwinds.

Still, the market is trading on news day after day while waiting for more volume/liquidity to return to the market to push us out of the current trading ranges we're seeing (in FX and stocks).

Have a good day ahead!

USDJPY halfway 'house'

USDJPY is currently trading at a critical support level (93.50) - line highlighted in orange, which from the chart below, is about the mid way point of the wild range of 87 (dec 08 low) and 101 (apr high) we've seen since the crisis started.

Being the centre of all the gyrations in the market, this level has the potential to be the pivot point for the pair going forward.

But for now 93.50 acts as an important support level - it being the neckline for the dec - feb double bottom reversal and supports for March and July sell offs according to the chart. Also, a support line can be drawn from the Dec low to current price and it looks like a nice supportive line for the Jan and Jul sell offs.

From a broader picture however, from April till now, the highs for USDJPY has been getting lower and technically, this spells a bearish market. But going into Sep, we might see some buying. ST resistance should come at a near 95 though, the 50 dma.

Elliot wave theory - downard momentum for the USDJPY

Just another note:

The Elliot wave also can be applied to the USDJPY monthly chart. The Elliot wave is made up of 5 mini waves, which stages I've highlighted in the chart above.

Usually, the final wave (5) tends to be stronger as by the commencement of wave 5, the buyers in the market (waves 2 and 4) have already been exhausted, leaving more selling power in the market.

If this were true, wave 5 might have good momentum in the run down towards to 90.

The Rate of Change component also point out that any buying in the previous months has lacked the strength to even come close to overturn the overall downward move, having been capped at the zero level and still heading downwards.

USDJPY's 2 yr downtrend

Discovered something on the USDJPY: below is the monthly USDJPY chart.

I joined the peaks of the pair dating from Q307 till now (2 yrs) and saw that the pair has been strongly resisted by the downward trendline (blue). With the global recession remain until at least 2010, I think this downtrend is likely to remain in place until the end of the year..

In recent months, the pair has been hugging to the resistance line more tightly, but on a month end basis, could not close above it.

The highs were also rather 'obedient' and did not move that much above the trendline.

The largest outbreak was only about 90 pips and was due to the last NFP report and after that, USDJPY 'normalized' downwards. That high was 97.75 vs trendline resistance of 96.84 (Aug).

ADX shows a strong number - 35 and that means a good trend is still in place and will take time to undo.

And IF assuming that the downtrend will remain in play, these are the levels below which the USDJPY should close on a month end basis.

Aug 09 - 96.84
Sep 09 - 95.92
Oct 09 - 94.86
Nov 09 - 93.87
Dec 09 - 92.75

Story of the week

Lets see if the latest theme in FX has got the legs.

With the US enjoying an improvement in residential property sales, better than expected construction of single family homes, GDP outpacing expectations of -1% vs -1.5%, it seems now that the US economy is on the cusp of recovery ahead of the EZ and the UK.

And then, the Fed will raise rates, making dollar assets more attractive that Euro denominated ones as USD yields outperform.

That's why the dollar has seen good strength against the single currency Euro and Sterling Pound. The GBP of course, is still reeling from the BOE's decision to increase the printing of an additional GBP 50 bn for QE - to ease monetary conditions in the UK.

A few banks have been calling for a stronger dollar on the back of the US' recovery story, but none has predict this to happen so soon. In fact, 1.47 - 1.50 is a popular target for the EURUSD pair before analysts see a return to 1.30 by start - mid 2010.

Anyway, let's see how far will the current theme run.

Good support for the EURUSD and GBPUSD should come at 1.40 and 1.63 - the support line of the congestion trading in Jun-Jul 09.

I'd be buying from these levels as I see that there are still headwinds facing the US economy - declining commercial real estate values, rising unemployment and already high valuations of stocks.