Essential Reading from the Trading Room
It has been quite a while since C3X begun operations and over 3 months since the Live trading room was launched. We look back and with the help of a few our subscribers (Albert, DaveO and MikeHiggs) we provide important nuggets of information by our traders and by fellow subscribers. Make note that these were chats and live trading room excerpts provided without much editing. This should help new subs who join the room. They do not need to ask questions which have been dealt many times over and have been answered below.
Starters Guide to the Trading Room
Often questions arise in the trading room which have been covered several times before. Reading this will help you to understand the Trading Room better and will help you to run from day 1 rather than ask questions which have been covered over and over again.
Here are some clips from the Trading Room that you should read:
Please note that these direct paste from the Trading room and hence may be just working English (not necessarily grammatically correct)
- 1. Take the stochastics on daily 9 day and 12 day see where is it. above 50 and rising is bullish. Stochs are reliable
- 2. Draw 9 vortex and see if it is bullish crossover
- 3. RSI 9 and 21 day and see the slopes
- 4. Find all MAs (10,20,50,75,100) and then draw declining trend lines from past peaks….see if there are clusters that you can spot…above or close to the price
- 5. last but most imp….if you can draw the yield spread between 10 year JGB and 10 year Bunds and do MAs analysis similar to above on the *spreads* and see if there are reversals in spreads that are coming up
What Drives FX?
It very important that we understand on what drives FX.
It is yield and yield spreads. Everything else is noise. If yields go up, money will flow into the respective country as bond managers who manage billions will try to catch as much spread as possible. This causes money to flow in to the respective currencies like Aussie dollar and the Canadian dollar. Th other ways to look at it is if yield go up, bonds go down which means money flows out of bonds and it goes into risk assets including stocks. To buy risk assets, you need to buy the currency of that country and therefore FX of that country goes up.
These things need to be crystal clear before we start becoming FX traders
It is not about buying and selling and get a high on a few pips
Now when yields go up not always will fx go up. The condition is that CDS spreads of that country should not be rising in other words the country should be safe to invest in. For example Greece, the yields are at some 25% or so but if Greece has its own currency then by logic Greece currency should be best in the world? But given the CDS spread on Greece to Germany of over 1300 bps, Greece currency will be at the rock bottom. This is the core of FX trading. Now for daily stop management, we need to look at noises like macro data etc and even bear junks like CB press release.
Bond data is rarely available freely and therefore it should alert us right away on why bond data is not made available. Bonds are always perceived as hard to understand and boring to trade but they define the future of a country and the FX.
So instead of trading blind take lots of time to understand before you take our pairs. Maybe force your broker to give you live Bond data and also CDS if you can afford from market.
An exercise would be to plot Australian yield with US yield on any duration and then regress it with the AUD/USD pair starting Jan 2010 to May 2011. See how FX behaved in relation to Yield spread.
In terms of what I monitor?
Everything in US and almost everything German, Aus, Yen, UK Gilts all duration. As I said these are not your day trading signals but *trend* definers. Once you get the trend, the next level is to place stops for your day trades either in direction of main trend or on reversals as we did yesterday…am simplifying as much as I can
Comment From Jay Sauls (Subscriber in the trading room)
Which bonds do you monitor most closely? FGBL, FGBM, US 10yr? I assume you then need to look at long term (10 or 30 year) bonds for each country whose currency you want to trade (AUD, JPY, GBP, etc…) BTW This is a great, succinct explanation. I’ve understood currency flows in terms of yield for quite some time, but never seen it explained as concisely
@Jay Simple once you get the hang of money flow. Bonds and risk assets are the only two places where money goes. And the flow of money between these two will define currencies but am sure you would have realised that this trick does not work with YEN bonds that are at zero yield and yet YEN strengthens? and that is the greatest dichotomy of FX today, the only pairs who don’t obey yields.
If you see yesterday chart on Bunds, the moment it broke 135.2 it was hell loose on risk assets as money streamed into risk assets like DAX. Those who were looking would have had an advanced warning and should have made decent money, Trade trends on what you see on the screen and only worry about the next 4 days rather than targets of year end. FX will humble you if you are proud and over smart
usdchf is a key pair which has led to massive USD buying. This has led to usd buying against other currencies triggering USD shorts to cover against other currencies esp. AUD which then has led to strengthening usd index as a whole. Such were the shorts on this pair.
so now when u see usdchf moving up ….it should make you think…..
All about Clusters
How to find clusters? Answered many times: Here it goes:
1. Find confluence of 20,50,100,200 MA on daily
2. Find confluence of 20,50,100,200 MA on weekly
3. Find confluence of downtrends and horizontal trend lines. Horizontal trends indicate if a pair is breaking above the 3M high, then those levels need to be found.
4. Find what bonds are doing for that FX and if they are near key levels.
5. Find what intermarket pairs are doing…for ex AUD/USD is correlated to USD/CAD. So if one of them is near confluence points, then the other pair will also automatically react. So clusters in once will affect the other pairs as well.
Once you find a cluster, you need to evaluate each and every pair related to that, each cluster will affect other pairs..
cluster is defined as confluence of at least 3 lines/parameters/
why do we need to look at clusters? well that is where barrier options stand…these are typically defended by firms with muscle. But there are times when these options will be targeted so clusters are important. Confluence is done by crossovers of daily, weekly and monthly
It is tremendous privilege to know a few hours before hand where risk may go if you judge yield direction in early Europe and then sit back and enjoy the ride… and it is critical to have auction calendar in front of you…also a live twitter feed of happenings in EU and US….change the twitter hash tags to monitor on a live basis..and finally monitor Bloomberg/talkingforex etc
You can trace daily (20,50,100,200), weekly (55,100,200) and see if they coincide with monthly trendlines…if you are able to find one close to the price, then you have a trade on your hand. so now you have our way of finding stops and targets then all the parameters need to be seen like 9stoch, 12 stochs and 21 stochs find slopes on RSI 9,21 again….find if RSI is breaking stochastic RSI…..but again guard core technicals……just helpful in understanding prices….daily vortex 9 day or 12 day is very useful only have one issue….AUD has made a move while CAD is still not made its big move…..they match in their moves…but both derive strength of diff commodities….CAD is oil while AUD is metals, and china and Asia and risk generally therefore AUD will always ultimately fare better than CAD….
Note on Japan when yield spread is rising and hence yen pairs look easy to be shorted..the key is to watch usdjpy…it is the holy grail of yen pairs
How to get started on Forex?
If you like to get started on Forex, here is something you can do.
1. Open up a currency account with the existing brokerage firm, if they have one. If not, check out the forex brokers like FXCM, Forex.com, etc. Non US residents may also have access to Spread Betting firms such as IG Index or Capital Spreads, this can also be a way to access FX markets and Capital Spreads offer a free £10000 demo account to practise with.
2. If you feel you are ready to trade real money, open up a micro account so that you can start trading in 1 lot. 1 pip in 1 lot is $1 move in USD/JPY pair. But before you try real money, use a practise account to get the hang of trading and READ some of the books off the book list (Link TBC)
3. The biggest trap in trading forex is the leverage. If you have never traded any high leveraged financial instruments, please trade small. You can open up an account with $1,000, and once you double your account balance (i.e.,$2,000), you can gradually increase your lot size.
4. I would start risking 1~2% of the entire account. If you are starting out your account balance with $1,000, please make sure that you won’t risk more than $10 at a time. This way, it would take at least 100 consecutive bad trades to wipe you out entirely.
5. Find your favourite pairs and trade it again and again. This way, your trading success would be so much better than trading various pairs.
As an example, here is the method kindly shared by one of our subs Alberto B.
For the new subscribers I would suggest the use of newsfeed like talkingforex.com. I have not trialed MNI yet. I will do it soon.
I use a free currency meter (http://www.currencystrengthmeter.com/) to have e quick idea of which currency is stronger and weaker. In the past I have used the AccuStrength Currency Strength. It’s a paid service. I bought 3 months subscription when there was an offer. I don’t need it anymore because after following C3X I can figure out the intermaket relationship and currency strength much better. Maybe for new subscriber it could be a good help.
I use Twitter when I’m in search of news and I find this instrument very powerful. The other sites I use to look for news and comment I think they are the same of yours . zerohedge, Bloomberg, CNBC. Marketwatch….
On donnaforex forum there is a good thread of price action, there is a good trader (joffie ) that shows some setup. http://www.donnaforex.com/forum/index.php?topic=2209.0
Note: Thanks Alby
Also Keep a bookmark of these CDS spreads on your Bloomberg so that u can see them when u want to
PIIGS combined CDS http://www.bloomberg.com/apps/quote?ticker=.GIPSI:IND
Credit Default Swaps Quotes and Charts http://workforall.net/CDS-Credit-default-Swaps.html#Credit_Default_Swaps_CDS
Alexander Elder. ” A trader who keeps good records is a good trader”
Renato Santos: New day, new chance to start being what you want to be
I’m a consistently successful trader!
I am a consistent winner because:
- I objectively identify my edges.
- I predefine the risk of every trade.
- I completely accept risk or I am willing to let go of the trade.
- I act on my edges without reservation or hesitation.
- I pay myself as the market makes money available to me.
- I continually my susceptibility for making errors.
- I understand the absolute necessity of these principles of consistent success and, therefore, I NEVER violate them.
Read the above statements every day until you have them in your mind. (excerpt from “Trading in the zone” by Mark Douglas)
A good trader does not always make good trades, unless he has 1st overcome his emotions and his MIND.
- We cannot change our beliefs but we can de-energise the negative beliefs once we are aware of the process Understand the basics of technical analysis. You don’t need to be a quant-geek to be successful, but understanding the first ten chapters or so of the classic Technical Analysis of the Futures Markets: A Comprehensive Guide to Trading Methods and Applications by John J. Murphy would be a great start.
- Understand the basics of fundamental analysis. Pay attention to trends in interest rates, commodity prices, prevailing direction of investment flows, among other. When the fundamental and technical outlooks for a currency differ, always side with the techs.
- When the fundamental and technical outlooks for a currency converge, go for it! Take a more aggressive position than normal.
We cannot change our beliefs but we can de-energise the negative beliefs once we are aware of the process
This section would not have been possible without contributions from MikeH, DvO & Alby. Thanks guys.
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