Here’s How I Approach Forex
Recent columns have focused a great deal on the Fed
but I believe it will be the economic data going forward that will determine
how and when the Fed acts, not just some gradual 25 bp rise each meeting. The
economy, while strong is not in what an economist would call a sweet spot. This
recovery looks like a recovery but at times does not feel like a recovery.Â
Nom-text book economic scenarios will require non-textbook monetary policy. The
result will likely be a Fed policy governed by each bit of economic data rather
than forecasting out. Enough on that.
What I would like to focus on today is how I approach FX. Long time readers
know my background is “scalping” NYSE stocks, it is how and still is how I make
a good chunk of my income. However, the game is very different now. Years of
experience is what allows me to navigate these narrow markets. The rules are
the same, but there is a great deal of subjectivity thrown into the mix. I
viewed FX as a wonderful complement to my existing skill sets, technically
speaking, but also a way to challenge the intellectual side of me. Doing macro
research on stocks is a waste of time, you have no idea how many ways the
company depreciated their capital expenditures, how many gimmicks they used and
how many felonies were committed while running the biz as well as the accounting
department. Secondly, a companies fortunes can change in a heartbeat. Product
failures, fickle consumers, technological advances etc etc.
Forex (FX), not only has a much better technical tendency, i.e. it charts
real well using basic and advanced technical analysis, but also is impacted by
macro factors. For me this is where the fun part comes in, macro analysis is
almost required, for me at least. Of course in the end, the charts always
dictate entry and exit points. Let’s take a look at a recent trade that was
based on technicals but the larger backdrop was based on macro analysis. A
story behind a technical pattern is pretty powerful.
The entry on a short of the USD/JPY
(betting on a stronger Yen) was really no different than the mechanics of an
HVT trade. Trend is down, so look to sell
rallies into resistance or a break of some support level. This parameter was
met.
The exit was also somewhat based on HVT techniques, slowing momentum. (HVT
techniques simply applied to longer time frames, 60-minute, daily and weekly
charts)Â In this instance however, exiting the trade was also prompted by
further discussions of Bank of Japan (BoJ) coming into the market to
intervene to weaken the Yen. Since March the BoJ had been noticeably
absent, and now that the Yen was approaching levels that might adversely effect
large exporters (105-106), it made sense to lock in profits. If you have ever
been on the wrong side when the BoJ is intervening it is very painful.
^next^
A few days later, I was reading through some research from the Bank of New
York which stated the following:
“Firstly, our own iPFM flow data does show a
slowdown in the pace of inflows since the middle of last week (there has been a
75.7% correlation between our flow data and the performance of the JPY over the
past month). This is hardly surprising given the upcoming quarter end as well
as the associated release of the much watched “tankan” report. Indeed there is
some tentative evidence to suggest that a temporary slowdown in the pace of
investment by foreign investors into Japan’s equity may be a relatively normal
feature of quarter end trading. A study of the weekly MOF flow data (available
back to April 2001) shows that net outflows were seen from Japanese equities in
the week before quarter end on 7 separate occasions (the last was in October
03). On two of the five occasions when net inflows were seen in the week prior
to quarter end (June 03 and March 04) the size of these flows was less than 40%
of the average size seen over the prior weeks of the month.
This type of information will keep me on hold in terms of re-establishing a
short USD/JPY position. The charts will
likely reflect when this “flow” is changing however, for me this is just one
other piece of the puzzle that provided me with a high degree of confidence when
I am establishing FX trade.Â
Please join me each Wednesday afternoon at 1:30 PM PDT, beginning today, for
a web-cast where I do a Q&A as well as describe some recent FX trades I have
taken. It will be very informative and a great way to learn more about Forex
regardless of your level of experience. To sign up, simply go to this link for
login instructions:Â
https://tradingmarkets.compresentation/reg.cfm?event=floyd
As always, feel free to send me your comments and questions.