Sarrafx's Blog

Basically, I think it is impossible to make money trading FX (or any other market) by using technical analysis alone. No matter what indicators, time frame or system you use it cannot work in isolation.

These markets work on so many levels with so many influences, inputs and indicators that to limit oneself to one seems to me a little naïve.

Read more: http://www.sarrafx.com/en/view-blog-article/46/Why-wear-blinkers?

Where can the West find growth?

The release this morning of GDP data for the EU shows that growth is going to remain elusive for developed economies for some time to come.

A further quarter on quarter fall and a year on year figure of -0.6% shows just how dire things remain. German Factory Orders also released this morning were appreciably better than expected but this merely highlights how bad things are in the rest of economy that is inexorably linked by the single currency.

Now that the immediate issues of the debt crisis have been postponed it remains to be seen what can be done to promote the growth that is the only way that a sustainable recovery can be achieved.

Mrs Merkel has said in a number of speeches recently that growth is the key driver for economic recovery. Of course never having had to stimulate the German economy to create growth she doesn’t actually have any practical experience.

Austerity for the foreseeable future is not going to be a sustainable policy and expansion through public spending is the only way that confidence can be promoted. Confidence will lead to investment, investment to growth and growth to recovery.

Interest rate announcements have now become very boring!

Little can/will change for some time to come. It would be interesting to know when Central Bankers would predict when they see rates actually being increased. It has to be measured in years but I would hope less than five! Maybe three?

In the U.S. things are not a lot better than in Europe from the growth perspective but the economy has a very different dynamic. Stimulation has become a byword and the U.S. Treasury is not really into austerity (the debt mountain is a testament to that). I hope that the current generation are not merely providing case studies for future MBA candidates in how they are handling their respective economies.

Real people with real problems are being affected on both sides of the Atlantic! It is truly tragic to imagine that there are youths in Spain and probably other European countries who will NEVER work! Not through an institutional lethargy but simply due to the lack of opportunity. This is the terrible legacy of this crisis and may be the single issue that creates a sufficient groundswell if not to pull the Eurozone apart then to create sufficient support for programmes that create jobs.

It is clearly the responsibility of every politician in every country to support such programmes. The EU centralized in all the wrong ways and also decentralized in all the wrong ways. If there is commitment to this experiment then it needs total commitment, harmony on taxation a single Central Bank and job creation schemes that stretch from Malaga to Oulu and Bruges to Larnaca.

What makes a market?

Yesterday’s blog and subsequent discussion reminded me a lot of how things used to be.

It is important that we share ideas. If it takes someone to be provocative or controversial to get people talking then that is a good thing for us all.

For me it is to understand the mentality and thinking of the participants in these markets but I am also trying to help to broaden the horizons of those who are new to FX or trading in general.

Want to read more? Go to http://www.sarrafx.com/en/view-blog-article/47/What-makes-a-market?

By early 2007, it was estimated that some US$1 trillion may have been staked on the yen carry trade.

The risk in carry trading is that foreign exchange rates may change to the effect that the investor would have to pay back more expensive currency with less valuable currency.

In theory, according to uncovered interest rate parity, carry trades should not yield a predictable profit because the difference in interest rates between two countries should equal the rate at which investors expect the low-interest-rate currency to rise against the high-interest-rate one. However, carry trades weaken the currency that is borrowed, because investors sell the borrowed money by converting it to other currencies.

By early year 2007, it was estimated that some US$1 trillion may have been staked on the yen carry trade.

Since the mid-90's, the Bank of Japan has set Japanese interest rates at very low levels making it profitable to borrow Japanese yen to fund activities in other currencies. These activities include subprime lending in the USA, and funding of emerging markets, especially BRIC countries and resource rich countries.

The trade largely collapsed in 2008 particularly in regards to the yen.

The 2008–2011 Icelandic financial crisis has among its origins the undisciplined use of the carry trade.

Particular attention has been focused on the use of Euro denominated loans to purchase homes and other assets within Iceland. Most of these loans defaulted when the relative value of the Icelandic currency depreciated dramatically, causing loan payment to be unaffordable. This was also true in a number of Eastern European countries.

The US dollar and the yen have been the currencies most heavily used in carry trade transactions since the 1990s. There is some substantial mathematical evidence in macroeconomics that larger economies have more immunity to the disruptive aspects of the carry trade mainly due to the sheer quantity of their existing currency compared to the limited amount used for FOREX carry trades, but the collapse of the carry trade in 2008 is often blamed within Japan for a rapid appreciation of the yen.

As a currency appreciates there is pressure to cover any debts in that currency by converting foreign assets into that currency, so this can be an accelerating effect in currency valuation changes. When a large swing occurs, this can cause a carry reversal. The timing of the carry reversal in 2008 contributed substantially to the credit crunch which caused the 2008 global financial crisis, though relative size of impact of the carry trade with other factors is debatable.

A similar rapid appreciation of the US dollar occurred at the same time, and the carry trade is rarely discussed as a factor for this appreciation.

Today's Risk/Reward trade

Today we see the decision of the German Constitutional Court on the legality of the ESM.

Markets are on the starting blocks to buy Euro assets of every type and see the 1.30 level against the USD as ready to be broken in an instant.

Being contrarian for a moment and looking at the possibilities that the court either finds the ESM illegal (unlikely) or attaches some quite major conditions (possible) where will the Euro trade then.

Technically the Euro looks overbought and even in the case that the court finds unconditionally in favour of the ESM how far can the Euro go?

Then what?

We still have Greece, Spanish banks, unpopular austerity in a number of countries, today’s Dutch elections and many other hurdles to pass. Overnight, Moodys stated that the newly announced bond purchase scheme buys more time but is not the cure for what ails peripheral countries.

So, is not the risk reward trade to be short Euros today? Albeit with a very tight stop loss!

An upside of 1.3000 vs. a downside of at least 1.2480 seems to favour just such a trade.

It remains to be seem what the market actually aspires to but when something seems too good to be true it usually is and there are no one way streets in these markets

I have been involved in FX markets in one form or another for 25 years and believe myself to have seen most things that can occur.

For example I was in charge of the overnight desk at a major trading bank the night that sterling left the ERM! That is the single most incredible market move I have ever seen.

I have executed billion dollar orders manually and seen stop losses get chased by traders because they see that as a legitimate market practice.

In this business you are always learning and as such the retail business is something I have been studying and coming to terms with for a couple of years now.

Read More at http://www.sarrafx.c.../38/Be-yourself

more general explanation of this term can be found in the glossary section of education corner on our website www.sarrax.com.

In the retail foreign exchange market, the term leverage determines the amount of risk an investor is able to take as a multiple of his margin.

Clearly, the higher the leverage, the more at risk his capital (or margin) is at.

For example, an investor places Eur 10,000 in his margin account. At his account opening, he has specified that he wished to trade with a leverage of 1:100.

That is to say he can trade with an open position of Eur 1,000,000 (10,000x100).

If he were to trade Eur/Usd in an amount of Eur 1,000,000, each pip of movement in the price is Usd 100 (Eur 77).

Therefore his total capital would be at risk if the price moved approx. 130 points against him. Obviously it is not prudent to “put all your eggs in one basket” but this simply illustrates the way risk is magnified by leverage.

Equally, were the markets to move in the investors favour, a move of 130 points would double his money.

This is both the beauty and reality of the retail forex market. The key to making money is to be disciplined. Refer to the five golden rules to learn more about discipline

I am Eurosceptic with a capital E!

My views on the Euro were forged as far back as 1992 when the Maastricht treaty was first signed.

I felt like the boy in the children's story of The Kings New Clothes. In the same way that the boy could see that the king was naked, I could see that the single currency was a potential disaster and I was very pleased that my country (U.K.) would not be participating.

I do not consider myself a grand sage or predictor of future events. However the vision of one size fitting all was the most preposterous idea I could think of.

Having studied economics and seen at first hand while trading their currencies how Spain and Italy managed their economies it was clear that they would never be able to manage the fiscal discipline of the German model. Their high inflation, high interest rate economies seem to fit nicely the persona of the people and therefore the image of the country. Equally, the discipline of Germany reflected perfectly the persona of their people and therefore the image of the country.

How this was going to work in one big melting pot was something that has been keenly observed over the past twenty years as it has evolved to where we are today.

Read more - http://www.sarrafx.com/en/view-blog-article/44/The-Big-Picture

So, that was 2012!

What did we learn? Well, as far as I am concerned, I learned that gravity doesn’t exist! What is holding the Euro up? I have now idea.

It seems that with Greece having secured a further bailout, all in the garden is rosy. The Euro is trading up above 1.30 (as I write) and making multi month highs against an ailing JPY. There is something of a paradox here. Of the two major safe haven currencies, the JPY is weaker as their economy struggles and further QE is expected while the other the USD is weaker as their economy is starting to improve (if the revised GDP data is to be believed.)

So, that was 2012! What of 2013?

Well one thing is certain the issue of the Fiscal Cliff will be resolved, like the stars of an old romantic movie, the Democrats and Republicans are acting coy but will get together before the final reel!

Europe will continue to kick the can down the street and muddle along without taking decisive action. I saw this morning that Mr Draghi says that the population of the EU can trust him and the ECB. Trust them to do what is the question!

I am still a believer in my tenet that the Euro is not best solution for what ails the Southern countries and help from the North cannot be expected to last forever. Indeed a Bloomberg Survey just released shows that most economists believe that the continuation of the debt crisis will drag Germany back into recession. Without their help as the major contributor to the various bailout funds what will happen?

That is definitely a question for the New Year.

A topic I have mentioned before but feel no shame in mentioning again is that the action taken by the U.S. at the start of the financial crisis (is it coming up to five years ago?) was not maybe a perfect solution but it was decisive and gave America something to build upon. The EU is still bumbling around in the dark and hoping that doing pretty much nothing is a solution in itself.

I have three wishes for 2013, they won’t come to pass in this year but I would like to see some progress; First the collapse of the Euro (naturally). Guys, it’s not working, please wake up.

Second, some progress in the U.K. to leave the EU. They don’t belong and never will. The populace don’t like it. Brits view sovereignty totally differently to mainland Europeans and will cling to every last vestige before they hand anything to Brussels (or Frankfurt/Berlin).

Finally, can we have our market back? Trading that works technically due to fundamental reasons. That is to say, let’s say goodbye to risk on/risk off and welcome back to currencies and commodities that move due to supply and demand created by economic fundamentals.

I have a trade Idea!

Sell Eur with a TP at parity! I am not sure when it will happen but I know it will.

Trust Me!!!!!!!!!

The up move is overdone and ditto in most of the spaces thus one can expect corrective move.

More or less the pair achieved the closer to the max range of 1.6100-1.6130.

Further gains would be tough to negotiate and thus would prefer a dollar rally.

This is despite the fact that the dollar has broken the trend line in weekly and thus posted one of the bear pictures in the recent months.

However most of the pairs are in critical junctures like Euro near the monthly trend line, Sterling near the channel high drawn and also near the weekly trend line.

This ideally suggest corrective rally for the dollar before next move.

Thus a) the influence of Sterling and Sterling alone b) influence of EURGBP c) the broad dollar action in that order is what is one should look into.

The fulcrum has substantially moved from 1.5880 to 1.5960 and the upside focus is towards the 1.6100-50 area. Only break and close below 1.5960 can potentially threaten the up move.

Intra-day shorts recommended as the RR favours within the ongoing dollar bearish bias.

Strategy : Sell here and 40 Stop Loss:- 1.6208 Take Profit:- 1.5980

Before getting started with a live account using your own funds open a demo or practice account (with Sarrafx). Use that account first of all to navigate around the site and monitor how it functions.

Get to know the platform as you aren't really ready to trade yet understand the functionality you can't do any harm. It is more than "kicking the tyres". Hopefully going forward this will be the engine that drives your profits.

FX margin trading and indeed all FX trading is driven by two major factors; Fundamental Analysis and Technical Analysis.

Forex trading technical analysis is the study of charts of past price movements to determine future price action. Please take a look at our Autochartist funtionality to learn more.

Fundamental Analysis is the study of the effect of global activity on the market. Data releases, political activity, natural disasters etc. all have an effect on the movements of currencies. An active study of various news providers like Bloomberg or Reuters will provide number of links to relevant news stories. Access to a FX economic calendar is also important. Click the link to view ours.

Once you feel comfortable it is time to consider a first trade in the demo account.

As you have gone along certain things will have become clear and they should form the basis of your first trade.

As you learn more about price action you will understand what moves markets. This is something that is impossible to teach or to put a time frame upon.

However once you feel comfortable and that doesn't necessarily mean having a run of successful trades it is time to open a live account.

Trading with your money is VERY different from a demo account.

Discipline is everything!

There are five rules which will help you to become successful in financial trading and currency exchange:

1) Only trade when you feel that its is right to take a position

2) be disciplined with your orders.

3) Make sure all the indicators in your strategy point to making a trade

4) Always stick to your profit taking levels

5) Understand why you lost money on any particular trade.

6) Accept when you are wrong. This article contains a very sensible idea.

So it’s now all about Spain!

It still defeats me that a country getting its house in (some kind of) order prior to asking for a bailout is positive for either risk appetite or the currency.

As relief rallies go yesterdays was pretty impressive but does that really now mean that the market has gone away from the technically significant 1.2930 level?

It seems there is always another potential banana skin on the horizon and already today we have seen dismal growth data from France. The French economy was flat in Q2 and grew at 0.3%YoY. German retails sales for August were also worse than expected.

Back to Spain though and later today we see the results of the stress tests that have been performed on their banks. Additional capital requirements of over Eur 100 bio. are already in the market but this will lead Spain closer to a bailout request.

It is ironic that yesterday’s 5^th austerity package drew appreciation from the market which saw Spanish bond yields drop. Prime Minister Rajoy has said that he won’t ask for a bailout unless bond yields “remained too high”.

The Spanish Government will raid for the first time a decade-old pension reserve fund that invests in government debt to pay for an increase in retirement payments.

The Cabinet agreed to use 3 billion euros ($3.9 billion) from the 67 billion-euro reserve fund, Deputy Prime Minister Soraya Saenz de Santamaria told reporters yesterday in Madrid. It raised pensions 1% in the 2013 budget and indicated it would compensate retirees for above-forecast inflation.

“The reserve fund is there to be used,” Budget Minister Cristobal Montoro said. “Politically, it’s very important” to maintain pensioners’ purchasing power.

The pension reserve invests mostly in Spanish government bonds, and accounts for about 10% of the central government’s outstanding debt. The cache that has been built up since 2000 to safeguard pensions from the aging population is being raided as the 25% jobless rate undermines the welfare system’s revenue.

This adds to pressure for Spain to ask for the bailout since it means less support for Spanish debt. It is clear that if the fund is being drawn upon it won’t then be able to invest in future bond issues.

What conclusions can be drawn from Spain’s 5^th austerity package? Read my views here

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Our management team is experienced in the financial markets having spent, collectively, more than five decades in the business.

Our experience teaches us that not all information is good information and feeling obliged to report readily available data and news to clients is not only wasting their time but is also counterproductive.

Over the past twenty years markets have changed out of all recognition but the dissemination of information has barely changed at all.

With the advent of fax technology every trader could expect to receive numerous missives from his banker/broker each saying roughly the same thing giving fact rather than interpretation.

With the advancement of the web and email together with any number of electronic delivery channels little has changed.

Sarrafx aims to be different. We will never tell you we have an exclusive news item but we will always have exclusive interpretation.

Do not expect to see an email at 8.00 every morning or to see this blog updated at regular intervals.

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We would not expect you to visit our site to see what data is expected to be released today but to see what we believe are the money making opportunities those releases present.

What is not generally available is the incisive interpretation of that data offering our clients money -making opportunities.

The regularity of articles will ebb and flow with the markets. It may be that you will see two or three in a day and nothing for three days.